Milardovic and Secretary, Department of Employment
[2019] AATA 213
•7 February 2019
Milardovic and Secretary, Department of Employment [2019] AATA 213 (7 February 2019)
Division:GENERAL DIVISION
File Number(s): 2017/1428
Re:Stephen Milardovic
APPLICANT
AndSecretary, Department of Employment
RESPONDENT
Decision
Tribunal:Member K Parker
Date:7 February 2019
Place:Melbourne
The Tribunal affirms the decision under review.
[sgd]........................................................................
Member K Parker
Catchwords
FAIR ENTILEMENTS GUARANTEE – whether applicant was eligible to receive an advance under the Fair Entitlements Guarantee Act 2012 – applicant’s employment terminated more than six months before appointment of insolvency practitioners – assessment of when applicant’s employment ended – whether employer was insolvent at the time of termination of the applicant’s employment – meaning of insolvency – indicia of insolvency – whether end of applicant’s employment due to insolvency of employer – decision affirmedLegislation
Administrative Appeals Tribunal 1975 (Cth), s 37
Bankruptcy Act 1924 (Cth) (superseded)
Bankruptcy Act 1966 (Cth)
Corporations Act 2001 (Cth), ss 9, 95A, 588E, 588FB, 588FDA.
Fair Entitlements Guarantee Act 2012 (Cth), ss 3, 10, 35
Fair Work Act 2009 (Cth), ss 44, 119Insolvency Act 1874 (Cth) (superseded), ss 108, 109
Cases
Australian Beverage Distributors v The Redrock Co (2008) 26 ACLC 74
Cooper v Commissioner of Taxation (Cth) (2004) 139 FCR 205
Commonwealth v Leahy Petroleum - Retail Pty Ltd (subject to deed of company arrangement) [2005] FCA 1422; 55 ACSR 353
Bank of Australasia v Hall (1907) 4 CLR 1514
Hall v Poolman (2007) 215 FLR 243
Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321
Re Jones and Secretary, Department of Jobs and Small Business [2018] AATA 3652
Jones (Liquidator) v Matrix Partners Pty Ltd Re Killarnee Civil and Concrete Contractors Pty Ltd (In Liq) (2018) 354 ALR 436
Lewis v Doran (2004) 184 FLR 454
Lewis v Doran (2005) 219 ALR 555
Milardovic v Vemco Services Pty Ltd (Administrators Appointed) [2016] FCA 19
Milardovic v Vemco Services Pty Ltd (Administrators Appointed)(No 2) [2016] FCA 244
Sandell v Porter (1966) 115 CLR 666
The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 225 FLR 1Re United Medical Protection Ltd (2003) 47 ACSR 705
Secondary Materials
AR Keay, “The insolvency factor in the avoidance of antecedent transactions in corporate liquidations”, (1995) 21 Monash University Law Review 305
ASIC Regulatory Guide 217, “Duty to prevent insolvent trading: Guide for directors” issued on 29 July 2010
Fair Entitlement Guarantee (Extended operation of the Act in relation to HRL Group of Companies in Administration) Declaration 02/2015 (and Explanatory Statement)
REASONS FOR DECISION
Member K Parker
7 February 2019
introduction
This application was lodged by Mr Stephen Milardovic for review of a decision made by an authorised review officer (ARO) of the Department of Employment (now known as the Department of Jobs and Small Business) (Department) dated 14 February 2017. The decision of the ARO affirmed an earlier decision rejecting Mr Milardovic’s claim for an advance under the Fair Entitlements Guarantee Act2012 (FEG Act) in respect of his employment with his former employer, Vemco Services Pty Ltd (VS).
VS formed part of a group of related companies which the Tribunal will refer to in this decision as the Vemco Group.[1] The Vemco Group comprised Vemco Pty Limited (Vemco), Linepro Pty Ltd (Linepro), Vemco Treasury Pty Ltd (VT), Vemtec Pty Ltd (Vemtec) and Aerial Devices Australia Pty Ltd (Aerial Devices) and VS.
[1] Refer page 1 of letter from PPB Advisory to the Australian Securities and Investments Commission dated 1 September 2017 attached to the Amended Applicant’s Statement of Facts, Issues and Contentions lodged with the Tribunal on 13 November 2017.
The Vemco Group provided a diverse range of services including vegetation management, electrical distribution design, engineering, surveying, construction, specialty fleet, tools and equipment use and training and development. These services are provided to a broad range of customers including utility companies, utility authorities, infrastructure contractors, land developers, councils, and mine and electrical asset owners.[2] The principal activity of the Vemco Group was vegetation management around electricity power lines.[3]
[2] The Secretary lodged with the Tribunal a set of documents pursuant to its obligations under s 37 of the Administrative Appeals Tribunal Act 1975 (Cth) on 18 April 2017 (T-Documents). Refer T-Documents T12/210.
[3] Refer T-Documents at T12/220.
On 23 October 2014, ownership of the business and assets of VS and the other companies in the Vemco Group was transferred from Vemco Australia Pty Ltd (Vemco Australia) to HRL Infrastructure Services Pty Ltd (HRL IS).[4] The Tribunal will refer to this change of ownership as the Acquisition. HRL IS was a wholly-owned subsidiary of HRL Limited.[5] HRL IS and HRL Limited formed part of a group of related companies which the Tribunal will refer to in this decision as the HRL Group.[6]
[4] The date of acquisition of VS is noted by the administrators as being 23 October 2014. Refer T-Documents T21/293.
[5] Refer Note at base of T-Documents T12/202.
[6] Refer T-Documents T12/202, showing the structure of the HRL Group as at 25 May 2016 in an organisational diagram prepared by PPB Advisory.
Mr Milardovic was given a letter of termination by VS on 11 November 2014.
VS was placed into administration on 27 October 2015 and went into liquidation on 2 June 2016.[7] Three insolvency practitioners from PPB Advisory were appointed as both the administrators, and subsequently as the liquidators.[8]
[7] Refer T-Documents T12/194 and email from the Secretary’s legal representative to PPB Advisory dated 20 November 2017 forming Attachment A to the Secretary’s Further Statement of Facts, Issues and Contentions lodged with the Tribunal on 28 November 2017.
[8] Refer paragraph [30] onwards of these Reasons for Decision.
The administrators described the principal activity of VS as follows:[9]
Vemco Services provided executive management, financial operations, human resources and information technology functions to the other Vemco Group entities. It was also a registered training organisation which provided courses in occupational health and safety, relating to the energy and utilities industry.
[9] Refer T-Documents T21/293.
In 2012 a Commonwealth Government scheme was introduced under the FEG Act to provide financial assistance to employees (called an “advance”) who are not fully paid for work performed for insolvents or bankrupts, where the employment ended in connection with the insolvency or bankruptcy and the employee was not able to be paid from other sources.
The primary issue that arose in this application is whether Mr Milardovic met the mandated eligibility condition under s 10(1)(c) of the FEG Act by satisfying any of subsections (i), (ii) or (iii) in respect of the cessation of his employment with VS. Subsection (i) applies if the end of the person’s employee was due to the insolvency of the employer. Subsection (ii) applies if the employment ended less than six months before the appointment of an insolvency practitioner. Subsection (iii) applies if the end of the person’s employment occurred on or after the appointment of an insolvency practitioner for the employer.
In respect of subsection (i), Mr Milardovic and the Secretary of the Department (Secretary) disagreed as to when VS became insolvent and also whether Mr Milardovic’s employment ended “due to the insolvency”. Mr Milardovic considered that that termination date of his employment with VS should be taken as the date upon which the Federal Court of Australia made certain declarations about his entitlement to redundancy and other payments.
The following written submissions were lodged by the parties which the Tribunal has taken into account, together with the evidence presented to it:
(a)“Respondent’s Statement of Facts, Issues and Contentions” lodged on 23 June 2017 (Secretary’s SFIC);
(b)“Applicant’s Statement of Facts, Issues and Contentions” lodged on 25 September 2017 (Mr Milardovic’s SFIC);
(c)“Amended Applicant’s Statement of Facts, Issues and Contentions” lodged on 13 November 2017 (Mr Milardovic’s Amended SFIC);
(d)“Respondent’s Further Statement of Facts, Issues and Contentions” lodged on 28 November 2017 (Secretary’s Further SFIC);
(e)“Applicant’s Further Statement of Facts, Issues and Contentions” lodged on 6 December 2017 (Mr Milardovic’s Further SFIC).
For the reasons set out below, the Tribunal is satisfied that Mr Milardovic does not meet the eligibility condition under s 10(1)(c) of the FEG Act. Accordingly, the Tribunal affirms the decision under review.
legislation
Section 3 of the FEG Act sets out the main objects of the scheme:
The main objects of this Act are:
(a) to provide for the Commonwealth to pay advances on account of unpaid employment entitlements of former employees of employers in cases where:
(i) the employers are insolvent or bankrupt; and
(ii) the end of the employment of the former employees was connected with that insolvency or bankruptcy; and
(iii) the former employees cannot get payment of the entitlements from other sources; and
(b) to allow the Commonwealth to recover the advances through the winding up or bankruptcy of the employers and from other payments the former employees receive for the entitlements.
Section 10 sets out the general conditions of eligibility:
A person is eligible for an advance if the Secretary is satisfied of all of the following:
(a) the person’s employment by a particular employer has ended;
(b)after the commencement of this section, an insolvency event happened to the employer;
(c)the end of the employment:
(i)was due to the insolvency of the employer; or
(ii)occurred less than 6 months before the appointment of an insolvency practitioner for the employer; or
(iii)occurred on or after the appointment of an insolvency practitioner for the employer;
(d)the person is (or would, apart from the discharge of the bankruptcy of the employer, be) owe one or more debts wholly or partly attributable to all or part of one or more employment entitlements;
(e)the person has taken steps, so far as reasonable, to prove those debts in the winding up or bankruptcy of the employer;
(f)if the person was owed any of those debts before the insolvency event happened, the person took reasonable steps before that event to be paid those debts;
(g)when the employment ended, the person was an Australian citizen or, under the Migration Act 1958, the holder of a permanent visa or a special category visa; and
(h)an effective claim (see section 14) that the person is eligible for the advance has been made to the Secretary by or on behalf of the person.
Note:Subdivision B excludes certain persons from eligibility.
The Tribunal notes s 35 of the FEG Act which provides as follows:
For the purposes of deciding:
(a)whether a person is eligible for an advance for the employment of the person by an employer; and
(b) the amount of such an advance;
the Secretary may presume that information relating to the person that is given to the Secretary by an insolvency practitioner for the employer is accurate.
Minister’s Declaration specific to the HRL Group
On 15 December 2015, the Minister for Employment made a declaration under s 49 of the FEG Act specific to a number of the HRL Group companies, including VS (Declaration).[10] In the Declaration, the Minister declared as follows:[11]
[10] This declaration was entitled Fair Entitlement Guarantee (Extended operation of the Act in relation to HRL Group of Companies in Administration) Declaration 02/2015.
[11] Refer [3] of the Declaration.
The [FEG Act] applies in relation to persons who were employed, but are no longer employed, by:
· HRL Limited (Administrators Appointed),
· HRL Technology Pty Ltd (Administrators Appointed),
· Linepro Pty Ltd (Administrators Appointed),
· Aerial Devices Australia Pty Ltd (Administrators appointed),
· Vemco Pty Ltd (Adminstrators appointed),
· Vemco Services Pty Ltd (Administrators appointed),
·Vemtec Pty Ltd (Administrators appointed (together called ‘HRL Group of Companies’).
which are entities in administration under the Corporations Law 2001.
An Explanatory Statement was issued with the Declaration. It states that the Declaration will allow any former employee of entities referred to in it, to make a claim under the FEG Act and receive an advance “if they are eligible”.
background
Initially, Mr Milardovic commenced employment with Vemtec on 8 September 2009.[12] In about September 2012, Mr Milardovic transferred to VS and was employed in the position of “Bid Manager/Senior Estimator”. In Mr Milardovic’s FEG claim form, he said he was involved in cost estimation; tender preparation and submission; and pre-award contract negotiations.[13] He stated he was employed on a full-time basis under the terms of an employment contract.[14]
[12] Refer findings of Mortimer J at [1] of the Reasons for Judgment in Milardovic v Vemco Services Pty Ltd (Administrators Appointed) [2016] FCA 19 (Milardovic FCA No.1) and T-Documents T5/61.
[13] Refer T-Documents T5/60.
[14] Refer T-Documents T5/61. At the time Mr Milardovic submitted his FEG claim, he stated on it that his base weekly salary was $2,427.88 and that he worked 60 hours per week. Mr Milardovic also stated that his working arrangement (i.e. pay increase, pay cut, change of duties, job title or employment status), had not changed in the last six months of his employment with VS.
November 2013 – notice of intended Acquisition
Mr Milardovic gave evidence that in November 2013 a verbal announcement to the employees of the Vemco Group companies was made of the intended Acquisition. Subsequently, written notice was provided by letter entitled “Impending Change of Ownership of Vemco” dated 3 December 2013. The employees were informed that it was due to occur on 30 June 2016.
May 2014 – Mr Milardovic notified that his position was to be restructured
On 7 May 2014 Mr Milardovic was advised by VS that there would be a restructure affecting his position. He was told that the duties of his position would be split into two new positions. He was invited to apply for either or both of those positions. Mr Milardovic did not apply for either position. He stopped working at this time and made a claim for workers’ compensation.[15] He also claimed a redundancy payment which was awarded to him following a subsequent proceeding in the Federal Court of Australia.
[15] On 23 May 2014, Mr Milardovic submitted a claim for workers’ compensation which was challenged at first instance. At the hearing, Mr Milardovic reported that he had received weekly payments from “my last day of work to the court judgment on 25 July 2017”.
October 2014 – settlement of Acquisition occurred
In the s 439A Report, the administrators stated that the settlement of the Acquisition was deferred until October 2014. The deferred settlement was reported to be due to a delay in HRL receiving funds from a federal government grant.[16] The administrators stated:
…In October 2014 [HRL IS], HRL and Zeus (amount others) entered into a share purchase agreement (SPA) pursuant to which [HRL IS] acquired Zeus’s shareholding in the Vemco Companies for circa $36.8m.
The sale terms were essentially the same as those agreed in November 2013. Limited due diligence was completed between November 2013 and October 2014.
[16] Refer T-Documents T12/239.
The administrators reported that based on the due diligence conducted, it was initially expected that the “Vemco Companies” would generate earnings of c$18m per annum, with earnings from the vegetation management with Powercor being a key contributor. The agreed purchased consideration was based on a multiple (3.5 times) of forecast earnings.[17]
[17] Refer T-Documents T12/240.
The “Vemco Companies” subsequently incurred trading losses of about $14m.[18] In a report issued by the administrators under s 439A of the Corporations Act 2001 (Cth) (Corporations Act) dated 25 may 2016 (s 439A Report), the administrators stated that the key terms of the Powercor agreement included a five-year term ending on 31 December 2015, the fixed revenue and the absence of any obligation to renew the agreement. The administrators stated:[19]
In August 2014 (some two months before settling the sale to HRL), Zeus and Powercor amended the vegetation management agreement. Powercorp’s liability for future payments was reduced by a fixed sum of $7m and the definition of maintenance works amended with the intention of reducing Vemco’s costs by an equivalent amount ($7m), this ultimately was not achieved.
There was no corresponding amendment to the Vemco sale agreement or other consideration made for the change in terms of the Powercor agreement.
[18] Refer T-Documents T12/199, 238 & 239. The purchase price was subsequently (in February/March 2015) adjusted by $11m in settlement of a claim in respect of the divergence in the forecast and actual financial performance of the Vemco Group – refer T-Documents T12/241.
[19] Refer T-Documents T12/240-241.
November 2014 - termination of Mr Milardovic’s employment
Mr Milardovic was provided with written notice of termination of his employment with VS on 11 November 2014. This notice is reproduced below in paragraph [66] of these Reasons for Decision, setting out an extract from the decision in Milardovic FCA No.1.[20]
[20] Refer [119] of Milardovic v Vemco Services Pty Ltd (Administrators Appointed) [2016] FCA 19.
In the Secretary’s SFIC, it was contended that the reason provided by VS for terminating Mr Milardovic was that “it believed he was unable to carry out the inherent requirements of his position”.[21]
[21] Refer [9] of the Secretary’s SFIC.
The Secretary stated that the termination occurred against the following factual backdrop:[22]
(a) In May 2014 there was a restructure of some of [VS’s] operations, including the Applicant’s role, which was divided into two roles, being “Senior Estimator” and “Bid Manager”.
(b) The Applicant was invited to apply for either or both roles, or to indicate which role he wanted. The Applicant did neither…
(c) On 13 May 2014, the day after this split was announced, the Applicant took sick leave and did not return to the workplace prior to his termination. Between 13 May 2014 and 11 November 2014, there was ongoing communication between Mr Milardovic and [VS], including in relation to the new roles. Mr Milardovic also lodged a WorkCover claim (on 23 May 2014) seeking compensation for workplace injury…
[22] Refer [10] of the Secretary’s SFIC.
Mr Milardovic considered that he was terminated on the basis that his position had become redundant (and that the redundancy arose from the insolvency of VS). He instituted proceedings in the Federal Court of Australia, claiming (among other things) that he was entitled to receive redundancy and notice payments from VS. This part of Mr Milardovic’s case was successful as set out in paragraphs [45] and [46] below.
October 2015 – administrators appointed
On 27 October 2015, Mr Craig Crosbie, Mr Stephen Longley and Mr Ian Carson of PPB Advisory were appointed joint and several administrators of HRL Limited and 18 of its subsidiaries (including VS) (administrators).[23]
[23] Refer T-Documents T12/194. On 30 October 2015, the administrators were subsequently appointed over a further two subsidiaries. There were a further 21 wholly owned subsidiaries of HRL which were not subject to external administration.
On 19 November 2015, Ms Leah Campbell, Senior Manager, PPB Advisory wrote to the Department to inform it about the appointment of administrators over the HRL Group.[24] Ms Campbell states in her letter that there were eight “employing entities” in the group which employed about 500 employees. Ms Campbell sought advice about the applicable process in relation to ministerial discretion “to get the employees paid through FEG before the second creditors meeting”, which was expected to take place in February/March 2016.[25]
[24] Refer T-Documents T6/87.
[25] Refer T-Documents T6/87.
The Department replied to Ms Campbell on 23 November 2015 requesting further information.[26] In her response on 26 November 2015 Ms Campbell provided an update about the status of the HRL Group as follows:[27]
…
2. At this time, we have received no indication that a Deed of Company Arrangement will be proposed for any entity within the Group (with the exception of Energy Brix Australia Corporation Pty Ltd). Therefore, liquidation is highly likely to occur for the remaining entities within the Group.
3. At this stage it is too early to say whether there will be sufficient realisations (through business sales) to return funds to preferred creditors. We are running an accelerated sale of business process and expect to have the material businesses sold prior to the end of the year (2015).
4. For all employees transferred as part of a business sale, we do not anticipate any payment will be required by FEG.
5. Since our appointment, 133 employees have been made redundant…
6. Future terminations may be required. The timing and number of any further terminations will not be known until the completion of our sale of business process.
[26] Refer T-Documents T6/87.
[27] Refer T-Documents T6/86.
The Tribunal notes that as at 27 November 2015, the total number of employees terminated by the various entities covered by the Declaration was in the order of about 133.[28] It appears that as at 8 December 2015, 30 FEG claims were received across the HRL entities – 12 for Vemco Pty Ltd and eight for Vemtec Pty Ltd. No claims were submitted at that stage in respect of VS.[29]
[28] Refer T-Documents T6/84.
[29] Refer T-Documents T6/83.
December 2015 – asset sale deed executed for the Acquistion
On 24 December 2015, the appointed administrators executed an asset sale deed (Deed) for the Acquisition.[30] The Deed stated that Vemco and Linepro conduct the Business (the description of which was redacted, although the administrators referred to it as the “vegetation business”[31]); Vemco, Linepro, VT and Vemtec owned the Assets; and VS, Linepro and Vemco employed the employees. The administrators reported that the sale was completed on 28 January 2016 and involved the assignment of various trademarks and the novation of key customer contracts.[32] Schedule 2 of the Deed lists of employees of the Vendors. At that time 33 employees were listed as being employed by VS.[33]
[30] Refer T-Documents T7.
[31] Refer T-Documents T12/210.
[32] Refer s 439A Report at T-Documents T12/210.
[33] Refer T-Documents T7/118-120.
The administrators reported that HRL IS acquired the Vemco Group as a source of income, “intended to support the HRL Group’s operation”’.[34] In the s 439A Report, the administrators provided further background in relation to the Acquisition at section 10.2.2, relevantly, that:[35]
In or around early 2013 the Board agreed a strategy to increase the Group’s net earnings via acquisition of another business and the Board identifies the Vemco Companies as a possible target. Board members Gordon Carter and Nigel Barry were also shareholders and directors of the Vemco Companies.
The Board established a committee entitled the ‘Independent Board Committee (IBC)’ comprising all Board members with the exception of Messrs Carter and Barry. We understand the Board empowered the IBC to conduct the due diligence and ultimately decide whether to acquire the Vemco Companies. The IBC did not report to the Board nor did it seek the approval of the Board to enter the acquisition of the Vemco Companies.
The purpose of the IBC was to quarantine Messrs Carter and Barry from any involvement in the decision as to whether or not to acquire the Vemco Companies.
Based on our preliminary investigations, the Board did not stipulate any procedures or governance for the IBC, including rules for the administration of the IBC, minimum requirements for the due diligence (i.e. engagement of independent experts), specifications for the investment/acquisition (i.e. expected rate of return, management capabilities etc.) and accountability of the IBC.
Subsequent to a 6 month due diligence period, terms of sale were agreed in November 2013.
The vendor company, Vemco Australia Pty Ltd, subsequently changed its name to Zeus.
[34] Refer s 439A Report at T-Documents T12/220.
[35] Refer s 439A Report at T-Documents T12/240.
May 2016 – creditors’ report issued by administrators
In the s 439A Report issued on 25 May 2016, the administrators provided information regarding the conduct of the administration of HRL Limited and its subsidiaries (save for a few exceptions), but including VS.
The s 439A Report was prepared on a consolidated basis and also appended individual subsidiary reports (ISR) setting out the circumstances and historical financials for each of the companies.[36] The ISR issued in respect of VS was contained in the T-Documents.[37]
[36] Refer T-Documents T12/194.
[37] Refer T-Documents T21.
In the Executive Summary of the s 439A Report, the administrators stated:[38]
…
This Report has been prepared in accordance with section 439A of the Act and is based on information obtained from the Consolidated Group’s books and records, financial systems, representations from the directors and key management and from our own enquiries and investigations.
Readers should note that this Report is based on our investigations to date. Accordingly, the views formed in this Report are not final and may be subject to change…
[38] Refer T-Documents T12/194.
In the s 439A Report, the administrators recommended to creditors that it would be in their best interest for each Group company to be wound up, and stated:[39]
…
Given that each Group company is insolvent, it is not in the interests of creditors to end the administrations and return control of the Group companies to their respective directors.
[39] Refer T-Documents T12/195.
The administrators summarised their initial findings in section 2.7 of the Executive Summary of the s 439A Report, with a qualification that its conclusions were preliminary, as the investigations into the financial affairs of the Group had not been finalised:[40]
Breaches of director duties: We have identified a number of possible breaches of the Act as well as possible general law breaches…
Reason for failure: the material underperformance of the Vemco Companies as a result of significant unexpected costs incurred in meeting obligations of the Powercor contract, along with continuing loss making activities of other businesses of the Group…
Books and records: We have concerns that the books and records of the Group do not correctly explain the Group’s financial performance and position. Specifically the Vemco Companies and the understatement of the costs to complete long term contracts. The books and records may therefore be deficient and give rise to a presumption of insolvency (refer Section 10.11) in addition to being a possible breach of director duties.
Advisor: The advisor to the Group in the acquisition to the Vemco Companies may have breached its retainer and therefore be liable to pay compensation if it can be demonstrated that the work completed was deficient…
Insolvent trading: There is prima facie evidence that the Group may have traded whilst insolvent from around September 2015. During 2015 the Board had raised additional funds from shareholder loans to assist payment of Group debts. Throughout the period from July 2015 to the date of our appointment, the Board was actively seeking further shareholder loans…
Voidable transactions: We have identified a number of potentially voidable transactions being claims for uncommercial transactions relating to the acquisition of the Vemco Companies…
[40] Refer T-Documents T12/197.
In Section 8.2 of the s 439A Report the administrators stated that the Group directors had provided reports as to affairs (RATA’s) for all of the Group subsidiary companies. The administrators stated that they had included their best estimate of each company’s assets and liabilities as at the date of their appointment, but stated that creditors should be aware that, “values of assets and liabilities held by the Vemco Companies may be subject to variation due to the complex, interdependent trading”.[41]
[41] Refer T-Documents T12/222.
In Section 9 of the s 439A Report, the administrators explained that its preliminary analysis had been based on the audited financial statements for the 2012, 2013, 2014 financial years, the unaudited financial statements for the 2015 financial year and the unaudited year to date management accounts to 27 September 2015. The administrators stated:[42]
…
Based on our preliminary analysis, we suspect there could be material misstatements in the FY15 and YTD September 2015 financial statements provided for our review. These financial statements were provided in draft form and had not been subject to formal review by management.
The potential misstatements:
·are likely to have inflated reported profitability (specifically of the Vemco Companies) by as much as $20m and overstated the asset position of the Group by a similar amount;
·relate to the material understatement of costs to complete the Powercor contract in FY15 and YTD September 2015.
To quantify the impact on the financial statements with precision will require further investigation by a liquidator if appointed.
[42] Refer T-Documents T12/223.
In Section 9.1 of the s 439A Report, the administrators estimated that since the Acquisition, the Vemco Companies had incurred trading losses of about $14m, against an expected profit of $18m.[43] Those losses were reported to have been largely funded by the parent company, HRL Limited, shareholder loans and increasing trade creditors.[44]
[43] Refer T-Documents T12/223.
[44] Ibid.
The administrators made the following conclusions in respect of solvency of the Group:[45]
[45] Refer T-Documents T12/245.
10.7 Insolvency
Our preliminary view is that the Group may have been trading whilst insolvent from August 2015, but most likely from September 2015. The aging of creditors as at the date of our appointment indicates creditor payments were maintained within terms up to August 2015.
During August and September 2015 the Board negotiated additional shareholder loans and continued to seek further funds from shareholders in order to maintain creditor payments within terms. Once the Board exhausted additional shareholder funding it elected to appoint administrators.
A company is insolvent if it is unable to pay its debts as and when they become due and payable. Liquidators are required to demonstrate that a company is insolvent in order to pursue certain recovery proceedings (Section 11).
…
The primary methods of testing solvency are the Cashflow Test and the Balance Sheet Test. Neither of these tests identified prima facie evidence of insolvency between FY09 and FY15. The Group reportedly had sufficient working capital and cash at bank during this period and generally creditors had been paid within terms.
We have concerns that the Group did not maintain accurate accounts from the date of acquisition of the Vemco Companies, in that it did not recognise the total liability to complete the Powercor Contract.
We estimate the Powercor contract on acquisition represented a liability to the Group of c$20m. Recognition of this liability in the Group’s accounts would have resulted in a deficiency of assets to liabilities (negative net equity) as early as October 2014. In that scenario the Group may well have been insolvent on a balance sheet basis since October 2014. However, the mere fact that an entity’s liabilities exceed its assets does not necessarily establish insolvency.
As we have not concluded our investigations, further work will have to be carried out by a liquidator (including possible public examinations – refer Section 11.8) to determine when the Group became insolvent, and to quantify the estimated loss, if any, from insolvent trading.
The Tribunal notes that in Section 7.1.2 of the s 439A Report, the administrators reported that the “Vemco Companies” (which included VS) operated under a “centralised treasury function using a single bank account, effectively pooling all cash funds”, although separate financial statements were reportedly prepared for each company and cash movements between the “Vemco Companies” were recorded in the intra company loan accounts.[46]
[46] Refer T-Documents T12/218.
ISR in respect of VS
The ISR for VS, annexed to the s 439A Report, contained the administrators preliminary conclusions as follows:[47]
…
[VS] may have been insolvent since September 2015 however we have not yet identified any voidable transactions. Further investigations would be conducted by a liquidator.
The majority of external trade creditors were within trading terms at the date of our appointment. However given [VS] relied on the other Vemco companies for the majority of its revenues, we believe it may not have been able to pay its debts as and when they fell due once these revenues became uncertain.
[47] Refer T-Documents T21/294.
January and March 2016 - Federal Court decisions
On 29 January 2016, Mortimer J of the Federal Court declared, in Milardovic v Vemco Services Pty Ltd (Administrators Appointed) [2016] FCA 19 (Milardovic FCA No.1), that VS had contravened s 44(1) of the Fair Work Act 2009 (Cth) (FW Act) by failing to pay Mr Milardovic redundancy pay under s 119(1) of the FW Act.
On 16 March 2016, Mortimer J ordered, in Milardovic v Vemco Services Pty Ltd (Administrators Appointed) (No 2) [2016] FCA 244 (Milardovic FCA No.2), that VS pay Mr Milardovic $26,250 for redundancy pay and $3,774.60 in pre-judgment interest calculated from 11 November 2014. Mortimer J also ordered that VS pay a penalty of $10,000 in respect of its contravention of s 44(1) of the FW Act by failing to pay the redundancy pay to Mr Milardovic.
In the Federal Court proceeding, an issue arose as to whether VS was insolvent as part of the Court’s consideration of whether it should impose a penalty against VS for contravening s 44(1) of the FW Act. The Tribunal notes Mortimer J’s observations as set out below:
[9]The short answer to [VS’s] submissions is that [VS] is not, at the time of making these orders and on the evidence before the Court, an “insolvent company”. In Commonwealth v Leahy Petroleum - Retail Pty Ltd (subject to deed of company arrangement) [2005] FCA 1422; 55 ACSR 353, Finkelstein J said at [5] that “s 553B, which is found in a group of provisions concerned with the proof and ranking of claims in a winding up, cannot be imported into Pt 5.3A, being the Part that deals with administrations.”
[10]Further, in Leahy Petroleum at [16], Finkelstein J also said that if all provable claims are “paid in full and, for one reason or another, there is still a surplus, the company is no longer ‘an insolvent company’ and the surplus is to be applied in discharge of the fines and penalties.” There is no evidence before the Court whether or not this is likely to occur in [VS’s] case. The evidence before the Court is that VS remains under administration. It is not an “insolvent company” for the purposes of s 553B and that provision is not applicable to it.
June 2016 – liquidators appointed
On 2 June 2016, Mr Crosbie, Mr Longley and Mr Carson of PPB Advisory were appointed as liquidators of VS, and other Vemco Group companies, as part of a creditors’ voluntary winding up.[48]
[48] Refer T-Documents T20/286.
On 1 September 2017, the liquidators issued a report to the ASIC under s 508(1)(b)(ii) of the Corporations Act (s 508 Report), in relation to Vemco, Linepro, VS, Vemco Treasury and Aerial Devices (but not Vemtec), detailing the liquidators’ actions and dealings since the date of appointment.[49]
[49] At the hearing, the Tribunal requested production of the s 508 Report. It was subsequently produced as an attachment to Mr Milardovic’s Amended SFIC lodged with the Tribunal after the hearing.
Returning for a moment to the s 439A Report, the administrators identified three possible claims that “a liquidator could pursue”, being:
(a)breach of contract, misrepresentation and/or misleading and deceptive conduct by HRL IS under s 18 of the Australian Consumer Law;
(b)an uncommercial transaction against Zeus pursuant to s 588FB of the Corporations Act, in respect of the Acquisition; and
(c)an unreasonable director-related transaction against Mr Carter and Mr Barry pursuant to s 588FDA of the Corporations Act, in respect of the Acquisition.
The administrators stated that the value of the claims would be the difference between the actual consideration (c$26m) and the adjusted value of the Vemco Companies based on actual financial performance.
In the s 508 Report, the liquidators stated that they had identified two potential claims relating to the acquisition of the Vemco Companies by HRL IS. However, no further detail was provided. The liquidators estimated that the distribution to priority and unsecured creditors of VS would be nil. No further opinion was expressed by the liquidators in relation to the timing of when VS or any of its related entities became insolvent.
Mr Milardovic’s FEG Claim
Mr Milardovic submitted a FEG claim form on 12 September 2016.[50] He claimed an advance of $35,961.52 comprising $26,250 for 10 weeks’ redundancy pay and $9,711.52 for 4 weeks’ payment in lieu of notice.
[50] Refer T-Documents T5.
On 10 October 2016, Mr Milardovic’s FEG claim was rejected by a delegate of the Department on the basis that he did not meet the eligibility condition under s 10(1)(c) of the FEG Act (Original Decision).[51] The Original Decision was made on the basis of the decision-maker being satisfied that the end of Mr Milardovic’s employment occurred more than six months before (a) the appointment of an insolvency practitioner; and (b) the date of insolvency of VS. Reliance was placed upon the advice provided by “the insolvency practitioner” that VS “may have been insolvent from September 2015” and Mr Milardovic’s statement in his FEG claim form that his employment with VS ended on 14 November 2014.
[51] Refer T-Documents T15.
On 21 October 2016, Mr Milardovic sent an email to the Department notifying of his intention to lodge a review of the Original Decision.[52] In this letter, Mr Milardovic stated:
…
Whilst my claim may not meet the eligibility criterion of subsection 10(1)(c)(ii) of the [FEG Act], I believe that it does meet the alternative criterion of subsection 4(2)(c), which pertains directly to subsection 10(1)(c)(i).
The insolvency of [VS] was brought about due to its over-valued purchase by HRL Group. This caused HRL Group to enter into voluntary administration, along with all of its subsidiaries, including the newly acquired Vemco companies.
The purchase of the Vemco companies by HRL caused the end of my employment which was finally, properly characterised by the Federal Court as a forced redundancy. The end of my employment is thus “connected” to the insolvency of [VS] as required for eligibility under subsection 4(2)(c) which directly relates to subsection 10(1)(c)(i).
…
[52] Refer T-Documents T16/271.
Mr Milardovic sent a further letter to the Department dated 26 October 2016.[53] In this letter, Mr Milardovic stated:[54]
…
The conditions of subsection 10(1)(c) are straightforward in most cases. However where the end of employment itself is in dispute, particularly its legality, as was well as whether any entitlement is owed, the “end of employment” is, until a legal conclusion, undefined or ambiguous. Even when an entitlement has finally been determined by a court, there is some remaining ambiguity. In such cases, I believe that it is justified to regard a court declaration date of an entitlement as the “end of employment” for the purposes of the FEG Act.
…
[53] Refer T-Documents T17.
[54] Refer T-Documents T17/272.
Mr Milardovic stated that this interpretation was in keeping with the purpose and spirit of the FEG Act as he believed that “it could not be the intention of the FEG Act to prohibit claims of my specific circumstance”.[55]
[55] Refer T-Documents T17.
Mr Milardovic sought an internal review of the Original Decision under s 39(1) of the FEG Act. On 14 February 2017, a delegate of the Department who undertook the internal review affirmed the Original Decision (Internal Review Decision).[56]
[56] Refer T-Documents T1/10-15.
The decision-maker was satisfied that Mr Milardovic’s employment ended on 11 November 2014 and as at that date, VS was not “insolvent” on the basis that it continued to trade and employ staff for 11 months after Mr Milardovic’s employment ceased. The decision-maker noted the administrators’ opinion that the HRL Group may have been trading whilst insolvent from August 2015, but most likely from September 2015. The decision-maker acknowledged that the purchase (or Acquisition) “may have been a contributing factor to the insolvency if the HRL Group the following year” [i.e. 2015] although “it did not establish that [VS] was insolvent at the time of the acquisition”.
The decision-maker considered that there was no evidence that VS was unable to meet its financial obligations to employees in respect of employee entitlements at the time Mr Milardovic was employed and noted that Mr Milardovic had been paid his accrued entitlement upon termination.
Further, the decision-maker was satisfied that Mr Milardovic’s employment did not end due to the insolvency of VS because the Federal Court had found his position was redundant from at least July or August 2014. The decision-maker noted there was no indication that his employment was terminated because VS could not afford to retain him as an employee, or that it was attempting to reduce costs by making the position of Bid Manager/Senior Estimator redundant. Instead, the decision-maker considered that the available evidence indicated that Mr Milardovic’s employment ended due to a business restructure “with the intention of expanding Vemco Services’ businesses”.[57]
[57] Refer T-Documents T1/12.
CONSIDERATION
A key issue in this case is whether Mr Milardovic’s employment ended due to the insolvency of VS. This requires the Tribunal to determine:
(a)when Mr Milardovic’s employment with VS ended;
(b)whether VS was insolvent at the time Mr Milardovic’s employment with VS ended; and
(c)if so, whether Mr Milardovic’s employment ended due to the insolvency of VS.
In terms of the context of this application, being an assessment made for the purpose of establishing whether an advance should be made to Mr Milardovic under the FEG Act, the Tribunal notes the following general observations of Chief Justice Allsop in the Full Court Federal Court of Australia decision in Jones (Liquidator) v Matrix Partners Pty Ltd Re Killarnee Civil and Concrete Contractors Pty Ltd (In Liq) (2018) 354 ALR 436 (Jones v Matrix):
[112] The protection of employees in the aftermath of the insolvency of businesses is, and has been for many years, a matter of high public policy. The vulnerability of those who work in an employment relationship to the financial consequences of the decisions of business controllers and the economic environment is well-known. It has been consistently addressed in terms of priority in access to funds and latterly by a qualification to the reach and operation of securities over the assets of the business enterprise. That statutory addressing of the question as a Parliamentary response has been informed by considerations of the protection of the vulnerable and of fairness in the operation of the insolvency regime…
In Jones v Matrix, Farrell J made the following observation:
[216]…The preferred position accorded to employees over other unsecured creditors and some secured creditors under the Corporations Law and the introduction of the Fair Entitlements Guarantee Act reflect a long held position of legislatures in the United Kingdom and Australia that it works undue hardship on employees to fail to afford them some priority in the insolvent administration of companies.
When did Mr Milardovic’s employment with VS end?
Mr Milardovic’s first contention was that the Tribunal should find that his employment ended on 29 January 2016, being the date that the Federal Court found that he was denied a redundancy payment and termination notice entitlements by VS.
An account of the events surrounding the cessation of Mr Milardovic’s duties at VS and the issuing of a notice of termination of employment by VS were set out by Mortimer J in Milardovic FCA No.1 under the heading, “Non-Contentious Matters” as follows:
[112] There is no dispute that in May 2014 there was a restructure announced of some of [VS’s] operations, including Mr Milardovic’s bid manager role. That role was divided into two roles – a “Senior Estimator” and a “Bid Manager”. The process by which this occurred is the subject of complaint by Mr Milardovic. It was common ground that Mr Milardovic had been invited to apply for either or both roles, or to indicate which role he wanted. It was common ground that Mr Milardovic neither indicated which role he wanted nor applied for either role. There was, as I set out below, a dispute whether he should have had to apply for a role, or should have been asked to indicate which role he wanted. But the fact is that he formally and informally expressed no interest in either role.
[113]This announcement appears to have been the catalyst for Mr Milardovic to be unable to attend work. He took sick leave the next day and did not return to the workplace prior to his termination.
[114]Mr Milardovic lodged a WorkCover claim on 23 May 2014, which was rejected by the first respondent’s insurer. The claim remains the subject of litigation in the Melbourne Magistrates Court in late October 2015.
[115]After the lodgment of the WorkCover claim, there were some negotiations about Mr Milardovic returning to work. They were mostly conducted between Ms Finnigan and Mr Milardovic. Some of the communications are in writing and are self-explanatory. The lawfulness and appropriateness of many of the first respondent’s communications during this period are disputed by Mr Milardovic and where necessary, I deal with those matters below.
[116]A curious feature of this period, and one on which the applicant places some reliance, is that the first respondent’s return-to-work plans appeared to be based on Mr Milardovic returning to his position of Bid Manager/Senior Estimator: that is, returning to the position which had been abolished in May 2014, and split into two positions. There was evidence that new appointments had been made to each new position. I deal with this in more detail at [271] to [286] below.
[117]In this period, amongst other matters, the first respondent required Mr Milardovic to attend a medical examination. He objected to the lawfulness of this direction and did not attend. His refusal prompted a communication from the first respondent on 31 October 2014, the material parts of which stated:
Further to this it was noted in the same letter that if you decide not to attend the booked medical, we would have no option but to consider the ending of your employment with us given that the most recent medical advice available to us indicates, as you have stated previously, that you are unable to fulfil the inherent requirements of the role.
The Company is now faced with a situation where you have been on leave without pay since 13 May 2014, where we have no information or access to information as to your medical status and fitness to return to work (or prognosis for fitness to return to work), you have failed to comply with a reasonable and lawful direction to attend an independent medical examination and we are no longer able to extend leave without pay indefinitely.
To ensure we take all steps to be fair and reasonable to you in this situation I ask that you respond to this letter in writing outlining any reasons/matters you think we should consider before we make a decision regarding your ongoing employment with us. Can you please respond to me by COB Friday 7th November 2014.
[118]Mr Milardovic replied to this communication on 5 November 2014. The entirety of that response should be reproduced:
I have been subject to a campaign of sustained bullying and harassment from Nigel Barry which has spread to other senior managers, as a result of Nigel’s public actions and his direct encouragement. That bullying is evident also in your correspondence where you have made threats for non-performance of certain actions, despite having already been performed, and your repeated directions to attend an appointment with your doctor in order to obtain a diagnosis.
I repeat: I have already obtained a diagnosis and a prognosis. I note that despite repeated requests you have not specified the relevant common law or section(s) of the relevant legislation which you rely upon to compel me to attend an appointment with your doctor. My legal advice has been that where a medical certificate has already been obtained, such a direction is neither reasonable nor lawful.
Note also that my address is XXXXX XXXXX , not XXXXX . Any future correspondence sent to XXXXX will not be received.
[119]Eventually, Mr Barry on behalf of the first respondent took a decision, acting on a recommendation from Ms Finnigan, that Mr Milardovic’s employment should be terminated. Mr Milardovic was notified of that decision in a letter dated 11 November 2014:
I am writing to advise you of our decision regarding your employment with Vemco Services.
We have concluded the review into your ongoing employment, including taking into consideration the information provided by you in your letter dated 5th November 2014 and this letter is to inform you that unfortunately we can no longer hold your position open.
The reason for this decision is that on the information available to us we are reasonably of the belief that you are unable to carry out the inherent requirements of your position as Bid Manager/Senior Estimator and will be unable to do so for the foreseeable future. As we have previously indicated to you, we are unable to extend the period of leave without pay indefinitely and certainly not in the current circumstances as to your capacity to undertake the duties of your role.
As well, following further consideration with the best information available to us as to your condition, we have considered whether an alternative role might be available, but have concluded that there are no suitable positions available for you.
Your employment will end with immediate effect as the four week notice period requires no payment given the ongoing leave without pay under which you have been employed. Your accrued leave entitlements have already been paid out previously.
Would you please return any company property which you may still have in your possession immediately. You may contact me to make the necessary arrangements for the return of any such property and at the same time, make any arrangements which may be necessary if you have personal property which remains with the company, to be returned to you.
Stephen, we are disappointed that we have been left with no alternative to making this decision and we wish you all the very best for the future. Should you have any questions regarding this matter, don’t hesitate to call me on either XXXXX XXX or XXXXX XXX or if you prefer email XXXXX XXXXX X
[120]It is not in dispute that since his employment has been terminated, Mr Milardovic has not been employed. The nature and extent of his incapacity for work, and its causes, remain in dispute.
The Tribunal notes that when Mr Milardovic was asked on the FEG Claim form, “Question C2: What was the last date you worked for your former employer?” he answered as follows, “14 November 2014”.
Based on the available evidence and specifically, by VS giving Mr Milardovic written notice of termination of employment on 11 November 2014, the Tribunal finds that his employment ended on this date. Until 7 May 2014, Mr Milardovic was either attending for duties at VS (and being paid to do so); and thereafter, until 11 November 2014 (when Mr Milardovic received the termination notice), he was on leave without pay and still employed by VS.
The Tribunal does not accept that any subsequent legal proceeding and declarations made by the Federal Court has any bearing of the determination by this Tribunal as to when the employment Mr Milardovic’s employment ended. This is purely a question of fact arising from the circumstances that led up to the receipt by Mr Milardovic of formal written notice from VS confirming that this employment was at an end. With the greatest of respect to Mr Milardovic, his contention that a subsequent legal proceeding can, in effect, change the events as they occurred by reference to the actions of the parties themselves to the employment relationship, is misconceived and is not accepted by the Tribunal.
Was VS insolvent as at 11 November 2014?
The term “insolvency” is not defined in the FEG Act.
The Tribunal notes that this term has been defined in other Commonwealth legislation including the Corporations Act and the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).
Section 9 of the Corporations Act provides that “insolvent” has the meaning given by s 95A(2) of the Corporations Act. Section 95A(2) provides that a person who is not solvent is insolvent. In turn, s 95A(1) provides that:
A person is solvent if, and only if, the person is able to pay all of the person’s debts, as and when they become due and payable.
The concepts of solvency and insolvency are defined in identical terms in subsections 5(2) and 5(3) of the Bankruptcy Act.
The definition in s 95A of the Corporations Act adopts the “cash flow test” of insolvency focusing on the viability of the business and its liquidity. Put in simple terms, it is necessary to assess “whether the company was actually paying its debtors”.[58]
[58] Refer AR Keay, “The insolvency factor in the avoidance of antecedent transactions in corporate liquidations”, (1995) 21 Monash University Law Review 305.
Historically, in Bank of Australasia v Hall (1907) 4 CLR 1514 the High Court of Australia considered the phrase “debtor unable to pay his debts as they become due from his own moneys” as it appeared in ss 108 and 109 of the Insolvency Act 1874 (Cth). Isaacs J, at page 1543, held as follows:
The Act requires the debtor to be able to pay his debts as they become due. This does not mean that he is always bound to keep by him in cash a sum sufficient to meet all his outstanding indebtedness however distant the date of payment may be. If at the time he makes the assignment, the debtor's position is such that he has property either in the form of assets in possession or of debts, which if realised would produce sufficient money to pay all his indebtedness, and if that property is in such a position as to title and otherwise that it could be realized in time to meet the indebtedness as the claims mature, with money thus belonging to the debtor, he cannot be said to be unable to pay his debts as they become due from his own moneys. In other words, if the debtor can, by sale or mortgage of property which he owns at the time of the assignment, change the form of the property into cash wholly or partly but sufficient for the purpose of paying his debts as they become due, that requirement of the section is satisfied.
The High Court of Australia subsequently considered this same phrase in the context of s 95 of the Bankruptcy Act 1924-1960 (Cth) in Sandell v Porter (1966) 115 CLR 666. Barwick CJ (with whom McTiernan and Windeyer JJ agreed) observed:
[15]…Insolvency is expressed in s. 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.
When the Corporations Act was enacted, the definition of solvency and insolvency was amended to remove the qualification “from his own moneys”. In Lewis v Doran [2004] 208 ALR 385 (Lewis), Palmer J of the Supreme Court of New South Wales held as follows at [116]:
For those reasons I conclude that s 95A of the [Corporations Act] has changed the pre-existing law as to the definition of insolvency as stated in cases such as Sandell v Porter, and that it is no longer necessary in order to assess solvency to ascertain whether the company is able to pay all of its debts “from its own monies”, in the sense discussed in those cases. In my opinion, s 95A requires the court to decide whether the company is able, as at the alleged date of insolvency, to pay all its debts as they become payable by reference to the commercial realities. If the court is satisfied that as a matter of commercial reality the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party.
The Tribunal notes that Lander J in Cooper v Commissioner of Taxation (Cth) (2004) 139 FCR 205 at [61] held that although the definition suggests that the issue of solvency needs to be resolved by having regard to the cash flow of a company, the sum total of its assets and liabilities as disclosed in the balance sheet is not irrelevant.[59]
[59] Refer also [1065]-[1075] in The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 225 FLR 1.
ASIC’s Regulatory Guide on Insolvency
On 29 July 2010 the Australian Securities and Investments Commission (ASIC) issued guidance entitled, “Duty to prevent insolvent trading: Guide for directors” (based on the laws and regulations in force at that time), that deals with insolvency (Regulatory Guide 217).[60] Regulatory Guide 217 stated intention is to help directors understand and comply with their duty to prevent insolvent trading.
[60] Refer
The Tribunal has taken into account the guidance provided on page 8 in relation to determining when a company is insolvent, as set out below. The Tribunal regards the guidance as being consistent with the indicia and principles identified in relevant legal authorities, as referred to further below:
When is a company insolvent?
RG 217.17 Generally, a company is insolvent if it is unable to pay all its debts when they fall due.
Note: See s95A for a definition of ‘solvent person’ and ‘insolvent person’.
RG 217.18 The company’s ability to pay its debts should be determined by reference to the actual circumstances of the company. Determining whether a company is insolvent predominantly involves applying a cash flow test. This requires realistically assessing whether the company’s anticipated current and future cash flows will be sufficient to enable current and future liabilities to be paid as and when they fall due for payment.
RG 217.19 In addition, it may be relevant to look at the financial position of the company as a whole and consider other commercial factors when assessing solvency (commonly referred to as the ‘balance sheet’ test).[61] For example, it may be relevant to consider:
[61] The Tribunal notes that this guidance reflects the observations of Palmer J at [54] in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 188 ALR 114.
(a) the company’s assets and liabilities as a whole, including the company’s ability to collect debts owed to it within agreed terms, and whether arrangements have been negotiated with creditors to defer payment of outstanding debts;
(b) whether additional money can realistically be raised in a timely manner from the issue of additional share capital, or from future borrowings;[62] and
[62] The Tribunal notes that this guidance reflects the observations of Austin J in Australian Beverage Distributors v The Redrock Co (2008) 26 ACLC 74 and the Court of Appeal in Lewis v Doran (2005) 219 ALR 555 (Lewis on appeal) requiring the Tribunal to consider whether the evidence suggests that related entities or persons would provide financial support to the company by advancing funds, for instance, by intra-company loans.
(c) whether there are surplus assets that can be sold in a relatively short period of time to help pay debts without damaging the company’s ability to trade and its ability to pay all its debts when they fall due.[63]
RG 217.20 There are a variety of factors that should be taken into account in considering whether a company is insolvent: see Table 2 in the Appendix for further details.
Note: Insolvency, or a severe shortage of liquid assets to meet debts as and when they fall due, is to be distinguished from a temporary lack of liquidity: Hymix Concrete Pty Ltd v. Garrity (1977) 13 ALR 321[64] and Hall v. Poolman (2007) 65 ACSR 123. A temporary lack of liquidity may be overcome in the short term due to the successful outcome of the company’s normal business activities.
RG 217.21 If a company fails to keep proper financial records, and an insolvent trading claim is made against a director, the court may presume in a civil penalty proceeding (unless the director can prove otherwise) that the company was insolvent for the period of time that the company failed to keep proper financial records: s588E.
RG 217.22 Whether a company is insolvent involves the consideration of complex legal and accounting issues. Directors need to obtain and take into account all relevant information about the company’s financial position and should consider obtaining appropriate advice if they have reasonable grounds to suspect the company is in financial difficulty: see RG 217.39.
[63] The Tribunal notes that that this guidance is consistent with the approach taken in Re United Medical Protection Ltd (2003) 47 ACSR 705, at [56] and [57].
[64] Specifically, the Tribunal notes in Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321 at 328 that consideration was given as to whether the company was suffering from an “endemic shortage of working capital”.
Further, Palmer J in Lewis on appeal identified that when the solvency is to be determined retrospectively, the Tribunal will have the benefit of the wisdom of hindsight. At [108], Palmer J observed:
One can see the whole picture, both before, as at and after the alleged date of insolvency. The court will be able to see whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due and whether it did, or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and common sense, had to be considered as at the date of insolvency. By reference to what actually happened, rather than to conflicting experts' opinions as to the implications of balance sheets, the court's task in assessing insolvency as at the alleged date should not be very difficult.
Giles JA at [103] in Lewis on appeal held that for a retrospective assessment of insolvency, if a liability was “properly unknown or seen in lesser amount at the relevant time”, it may be excluded from consideration.
Of particular relevance to this application, in Hall v Poolman (2007) 215 FLR 243, Palmer J at [64] stated:
[64] …If one member of a group of companies has, as a matter of commercial reality, ready recourse to the assets of another member of the group for payment of the first company’s debts as they fall due, and that recourse will not result in the insolvency of the second company or in merely delaying the insolvency of the first, then the court may have regard to that fact in assessing whether the first company is able to pay its debts as they fall due: Lewis v Doran (2004) 208 ALR 385 ; 50 ACSR 175 ; [2004] NSWSC 608 at [116].
Further, page 12 of Regulatory Guide 217 sets out an Appendix containing a table listing “Indicators of potential insolvency” as reproduced below:
RG 217.56 Table 2 sets out some of the factors that a reasonable person would take into account when determining whether a company is insolvent. Should the financial position of a company display one or more of these indicators of potential insolvency, a director should investigate the financial position of the company, and consider obtaining appropriate advice about the financial position of the company and how any financial difficulties can be addressed.
Note: The list contained in this table is not intended to be exhaustive. There may be other factors that would indicate to a reasonable person that a company may be insolvent.
Table 2: Factors to take into account in considering whether a company is insolvent
Indicators of potential insolvency
·The company has a history of continuing trading losses.
·The company is experiencing cash flow difficulties.
·The company is experiencing difficulties selling its stock, or collecting debts owed to it.
·Creditors are not being paid on agreed trading terms and/or are either placing the company on cash-on-delivery terms or requiring special payments on existing debts before they will supply further goods and services.
·The company is not paying its Commonwealth and state taxes when due (e.g. pay-as-you-go instalments are outstanding, goods and services tax (GST) is payable, or superannuation guarantee contributions are payable).
·Cheques are being returned dishonoured.
·Legal action is being threatened or has commenced against the company, or judgements are entered against the company, in relation to outstanding debts.
·The company has reached the limits of its funding facilities and is unable to obtain appropriate further finance to fund operations—for example, through:
− negotiating a new limit with its current financier; or
− refinancing or raising money from another party.
·The company is unable to produce accurate financial information on a timely basis that shows the company’s trading performance and financial position or that can be used to prepare reliable financial forecasts.
·Company directors have resigned, citing concerns about the financial position of the company or its ability to produce accurate financial information on the company’s affairs.
·The company auditor has qualified their audit opinion on the grounds there is uncertainty that the company can continue as a going concern.
·The company has defaulted, or is likely to default, on its agreements with its financier.
·Employees, or the company’s bookkeeper, accountant or financial controller, have raised concerns about the company’s ability to meet, and continue to meet, its financial obligations.
·It is not certain that there are assets that can be sold in a relatively short period of time to provide funds to help meet debts owed, without affecting the company’s ongoing ability to continue to trade profitably.
·The company is holding back cheques for payment or issuing post-dated cheques.
Many of the above indicia referred to in Regulatory Guide 217 were identified by Palmer J in Lewis at [75] and/or Mandie J in Australian Securities and Investment Commission v Plymin (2003) 175 FLR 124 (Plymin) at [386]. In addition to the indicia listed in Regulatory Guide 217, further indicia were identified by Palmer J in Lewis and/or Mandie J in Plymin as set out below:
(a)whether the company had unpaid workers compensation premiums;
(b)whether the company had received demands from bankers to reduce overdraft and other evidence of deteriorating relations with bankers;
(c)poor relationship with present Bank, including inability to borrow further funds;
(d)inability to raise further equity capital; and
(e)payments to creditors of rounded sums which are not reconcilable to specific invoices
Unfortunately, the degree of particularity of the evidence presented to the Tribunal by both parties to this application allowed for only some of the indicia of insolvency to be properly considered by this Tribunal.
Mr Milardovic contended that:[65]
(a)the s 439A Report applied to VS as the administrators expressly defined the Group as including VS;[66]
(b)VS was dependent upon the companies in the Vemco Group for revenue so it would follow that VS became insolvent, when those companies became insolvent;[67] and
(c)the companies of the Vemco Group must have been insolvent because they brought about insolvency of their HRL parent.[68]
[65] Refer pages 2 and 3 of Mr Milardovic’s Amended SFIC.
[66] Mr Milardovic referred the Tribunal to T-Documents T12/191, Appendix H of the s 439A Report and T12/194 where the administrators state, “Our recommendations and opinions expressed in the Report refer to the remaining 17 companies (Group)”.
[67] Mr Milardovic referred the Tribunal to T12/237 where the administrators state, “The Group primarily failed due to losses incurred by the Vemco Companies in meeting the obligations of the Powercor contract…”
[68] Mr Milardovic referred the Tribunal to T12/223 where the administrators stated, “Prior to the acquisition of the Vemco Companies, the Consolidated Group [HRL Limited and all of its subsidiaries] reported annual net profits and had retained earnings totally c$66m in December 2014…” and “The trading losses of the [Vemco] Companies have been largely funded by the parent company (HRL), shareholder loans and increasing trade creditors”.
Mr Milardovic contended that “Vemco” was insolvent from before October 2014 based on the “combined weight of the administrator’s conclusions”. He characterised the administrators conclusions in the s 439A Report as follows: [69]
(a)the financial records for “Vemco” were incorrect from before October 2014;
(b)Vemco failed the balance sheet test and the cash flow test as from October 2014; and
(c)there were liquidity issues from July 2014.[70]
[69] Refer page 4 of Mr Milardovic’s SFIC. Mr Milardovic does not specify whether his reference to “Vemco” is intended to be a reference to VS or to the Vemco Group. Given that he has referred to VS as Vemco Services elsewhere in his Amended SFIC, the Tribunal understands his reference on page 4 to Vemco to be a referent to the Vemco Group.
[70] Mr Milardovic referred the Tribunal to T-Documents T12/246.
Mr Milardovic contended that when the announcement of the Vemco companies’ “surprise sale” in November 2013 was made, he said it was the belief of several senior executives that the owners were “cashing out” or “winding down” the Vemco Group.[71] The Tribunal notes that no documentary evidence was produced or witnesses called indicating the identity of those senior executives or to prove that at the relevant time they held that view or belief.
[71] Refer page 4 of Mr Milardovic’s SFIC.
Mr Milardovic contended there were other signs that “Vemco” was “soon-to-be insolvent or insolvent” prior to its formal administration, such as:[72]
(a)the one-off $3m dividend payment to Vemco shareholders, in early to mid-2013;
(b)numerous, complex inter- and intra- company loans; and
(c)restructuring in May 2014.
[72] Refer page 4 of Mr Milardovic’s SFIC.
In relation to subparagraph [90(a)], at the hearing, Mr Milardovic gave evidence that in 2012/2013 a client (one of the power utility companies) had raised a query about the sizable dividend payment made to Vemco shareholders. The Special Purpose Financial Report for the financial year ending 30 June 2013 for Vemco Australia Pty Ltd (the previous parent company of VS before the acquisition by HRL IS), was lodged with the Tribunal (Special Purpose Financial Report 2012/2013). This report showed that:[73]
(a)on 15 February 2013 the Directors of Vemco Australia had declared an interim dividend of $1,050,000; and
(b)on 19 June 2013, the Directors of Vemco Australia had declared a final dividend for the year ended 30 June 2013 of $3,000,000.
[73] Refer page 2 of the Special Purpose Financial Report 2012/2013.
This report provided in Note 24 on page 24 as follows:
Company
DIVIDENDS 2013 2012 $ $
Franking Account Balance (tax paid basis) 8,596,290 6,704,404
A fully franked dividend of $1,050,000 at $1,495.30 per share has been paid since the start of the financial year (2012: $1,200,000 at $1,709.40 per share)
Mr Milardovic said he relayed to Mr John McQueen, Chief Financial Officer that a prospective client had referred to the dividend that had been paid to shareholders and had asked whether it meant that the company was not viable. Mr Milardovic said the prospective client sought “an explanation about the financials”. He said that Mr McQueen was “quite angry” and responded to the effect of, “How dare someone insult the integrity of the Vemco Group. We are a proud company. It is quite normal for owners to take large sums of money. It does not indicate the company is doing poorly. It is a one-off thing. They had never done it before and it was to be expected”.
Mr Milardovic gave evidence that the prospective client accepted this explanation, but that Vemco did not get the contract. In response to a question from the Tribunal, Mr Milardovic said that many other businesses had tendered for this contract. Mr Milardovic contended that it was nevertheless an indicator of insolvency. The Tribunal considers that this has limited relevance to the present application as the dividend was raised over a year before the termination of Mr Milardovic’s employment.
In relation to subparagraph [90(b)], the Tribunal considers that the occurrence of “numerous, complex inter- and intra- company loans” does not of itself indicate insolvency. Instead, the Tribunal considers that it would suggest that the individual entities within the Vemco Group and HRL Group had access to funds from other companies in the group which could be used to pay the debts of the individual entity. In fact, the Tribunal considers that it is likely to support a conclusion that a particular individual entity was not insolvent.
In relation to subparagraph [90(c)], at the hearing Mr Milardovic said that only his position was affected by the restructure. He said that the company was “going downhill” and at that time, insolvent. He said the whole restructure was orchestrated to ensure that he would not benefit from assistance from the government. He said that he “could have been left in that position”. The Tribunal asked whether Mr Milardovic had any evidence to support his contention about the reason behind the position restructure, to which he responded, “I don’t know”.
Mr Milardovic also contended that a bid manager and/or estimator would not be required for a company that was being wound down. He claimed that forced terminations were “masked behind benign ‘restructuring’” in order to “to maintain a semblance of calm” and that the Vemco Group had no intention of hiring him after the restructure and did not do so.[74]
[74] Refer page 4 of Mr Milardovic’s SFIC.
There is no evidence before the Tribunal to support a conclusion that the restructure was orchestrated so that Mr Milardovic would not receive an advance under the FEG Act. The Tribunal is satisfied that the restructure took place in an attempt to increase the resources to be applied by VS at the time to tender for new contracts in the hope that the revenue to the Vemco Group would increase.
At the hearing, Mr Milardovic contended that the Vemco Group was “built on” the contract it had with Powercor in terms of its source of revenue. He contended that it was the loss and mismanagement of that contract that brought down the Vemco Group and in turn, the HRL Group. He said the Vemco Group also had smaller contracts with others, but the Powercor contract was the main one.
The administrators report that Powercor contract was a five-year fixed-term contract due to end on 31 December 2015. The contract was not renewed. There was a significant amendment to the contract in August 2014, which was two months before the sale of the Vemco assets and businesses to HRL IS was settled. This amendment reduced Powercor’s liability for future payments by a fixed sum of $7m and to amend the definition of maintenance works which was intended to reduce Vemco’s costs by this same amount, although this was not achieved.
Mr Milardovic said that one of the main reasons he considered that VS was insolvent before October 2014 was that it had misrepresented its records and consequently, under s 588B of the Corporations Act it should be considered insolvent. Mr Milardovic relied upon the following statements by the administrators in the s 439A Report:
[page 5] …Specifically the Vemco Companies and the understatement of the costs to complete long term contracts…
[page 48] Books and records: We have concerns that:
·The books and records of the Group post October 2014 do not correctly explain the Group’s financial performance and position, which may give rise to a presumption of insolvency (refer section 10.11)
·The records of the Vemco Companies prior to October 2014 do not correctly explain the financial position of those companies.
…
[page 62]Our preliminary view is that prior to October 2014, the Group maintained adequate books and records. However, post October 2014 the Group’s books and records did not accurately disclose the liability of the Powercor contract and therefore the Group’s true financial position.
…
[page 54]The Board minutes indicate the Board regularly considered the financial statements, management accounts and the Group’s cash position. However, the Board does not appear to have considered all the facts in assessing the financial information, specifically the forecast servicing requirements provided by Powercor.
In reviewing the financial results and forecasts the Board appears to have been unaware or ignored Powercor’s statements of required works to be completed, particularly for the 2015 calendar year. Whilst it appears Powercor retained the contractual authority to determine the volume of works to be completed, Vemco management elected to report a lower volume of works based on its own assumptions.
We expect a diligent board would consider and evaluate both the merits of management’s assumptions and requirements of Powercor, particularly when reviewing and assessing financial statements and forecasts. It appears the Board has considered the Group forecasts on the basis that the Powercor contract would be renewed and it could therefore negotiate a deferment of outstanding works to be completed and the associated costs.
The manager of the Vemco businesses appears to have considered the above but at his discretion did not seek the consideration or determination of the Board when assessing the costs and future value of the Powercor agreement.
A liquidator will conduct further investigations of the above as well as determine whether the manager of the Vemco businesses, Colin Flannigan, has acted as a shadow or de facto director.
This summary is only preliminary. We consider that the Group’s directors may also have potentially breached their general law fiduciary duties and we recommend a liquidator should carry out further investigations (see Section 11 following).
The Secretary acknowledged that in the s 439A Report, the administrators identified “irregularities”. The administrators found that the group of companies of which VS was a part, “may have been insolvent from August 2015, but most likely September 2015”. The administrators also found that VS “may have been insolvent from September 2015”.[75] The Secretary contended that the administrators were in the best place to judge the solvency of VS and the group of companies it was a part of, and there was no reason for the Tribunal to doubt the administrators’ conclusions.[76]
[75] Refer paragraph 3.1(b)(i) of the Secretary’s Further SFIC. The administrators relied upon the ISR for VS.
[76] Ibid at paragraph 3.1(b)(ii).
At the hearing, the Secretary contended that VS’s decision to split Mr Milardovic’s position into two new positions (which were subsequently filled), was inconsistent with the proposition that VS “had no cash”; or the suggestion by Mr Milardovic that the reason behind his redundancy was to cut costs and liabilities. It was contended that if VS was insolvent at that time, one would expect that Mr Milardovic’s position “would have been abolished altogether”. However, the Tribunal does not consider this is necessarily so. For instance, it is possible that Mr Barry and other directors of the Vemco Group and VS undertook this course as a “last-ditch” attempt to secure further revenue to save a rapidly declining group of companies, irrespective of whether or not it could afford to do so.
The Secretary contended that Mr Milardovic’s suggestion that VS was “cashing out” and “winding down” after the announcement of the intended Acquisition in November 2014 was speculative. The Tribunal agrees, as there was insufficient evidence before the Tribunal for it to make any such finding.
At the hearing, the Secretary’s legal representative acknowledged that the administrators reported (in the s 439A Report) that the group as a whole might have been “balance sheet” insolvent as early as October 2014, and accepted that the administrators had found an issue with the equity in the Group as a whole. Specifically, the administrators stated as follows in the s 439A Report:[77]
…
We have concerns that the Group did not maintain accurate accounts from the date of acquisition of the Vemco Companies, in that it did not recognise the total liability to complete the Powercor contract.
We estimate the Powercor contract on acquisition represented a liability to the Group of c$20m. Recognition of this liability in the Group’s accounts would have resulted in a deficiency of assets to liabilities (negative net equity) as early as October 2014. In that scenario the Group may well have been insolvent on a balance sheet basis since October 2014. However, the mere fact that an entity’s liabilities exceed its assets does not necessarily establish insolvency.
…
[77] Refer T-Documents T12/245.
However, the Secretary contended that:
(a)the analysis was performed in relation to the HRL group-wide balance sheet; and
(b)a negative net equity does not establish insolvency, because s 95A required a cash flow test, not a balance sheet test, to be undertaken in assessing insolvency.
In consideration of the authorities above, as reflected in Regulatory Guide 217, the Tribunal considers that it must focus primarily on a cash flow test in assessing VS’s solvency at or before 11 November 2014.
The administrators apply a cash flow test, albeit in the context of the HRL Group as a whole (of which the Vemco Group forms part), at section 10.8.2 of the s 439A Report:
10.8.2Cash Flow Test
…
The available books and records indicate that the Group:
-was not generally able to pay debts as and when they fell due after August 2015;
-was not forecasting to have sufficient cash available up to and beyond the date of administration;
-held c$5m of working capital on the acquisition of the Vemco Companies which was insufficient to fund the working capital requirements of the acquired businesses.
Short term cash flow
Our review of the Group’s short-term cash flow forecast indicates the Board was aware from around January 2015 that the Group required additional funds in the form of debt or equity to remain solvent. The proceeds from the Vemco settlement deed (c$11m) in March 2015 and subsequent shareholder loans in August and September 2015 totalling c$4m provided temporary cashflow relief.
The Board initially anticipated $11m Vemco settlement proceeds in March 2015 would be sufficient to maintain solvency. However, the ongoing and greater than forecast losses in the Vemco vegetation business exhausted the available working capital by around September 2015.
As indicated in Figure 17 below, liquidity issues first arose around July 2014.
The Group’s insolvency was deferred with the receipt of $11m in March 2015 following a refund from Zeus (vendor of the Vemco Companies) and a $3m shareholder loan made in September 2015.
Figure 17: Working capital and net cash flow
We were unable to locate the November 2014 cash flow records as the Board did not meet or prepare board packs in December 2014. Therefore we have not included the November 2014 results in this chart.
Indications of liquidity and cashflow issues
Working capital is an indicator of assets available to pay debts due within 12 months. A working capital ratio of less than one indicates that a company may not be able to pay its debts as and when they fall due.
Our investigations indicate the Group started experiencing a deficiency in working capital post June 2015. The assessment of liquidity is tabled below:
31 December 2014 30 June 2015 27 [Sept] 2015
$’000 $’000 $’000
Current Assets 62 28 25
Current Liabilities 25 38 47
Working-capital surplus/(def) 37 (10) (22)
Current ratio 1.03 0.75 0.53
A liquidator will investigate these matters further, should the creditors vote to wind-up the Group at the forthcoming Second Meetings.
The administrators reported that that the aging of creditors of the Group as at the date of their appointment (27 October 2015) indicated that creditor payments were maintained within terms up until August 2015.[78] They commented:
During August and September 2015 the Board negotiated additional shareholder loans and continued to seek further funds from shareholders in order to maintain creditor payments within terms. Once the Board exhausted additional shareholder funding it elected to appoint administrators.
…
The primary methods of testing solvency are the Cashflow Test and the Balance Sheet Test. Neither of these tests identified prima facie evidence of insolvency between FY09 and FY15. The Group reportedly had sufficient working capital and cash at bank during this period and generally creditors had been paid within terms.
[78] Refer T-Documents T12/245.
In section 10.8.4 of the s 439A Report, the administrators sought to identify whether the various indicators of insolvency applied to the Group.[79] The administrators’ assessment was made at the time of issuing their s 439A Report and involved an analysis of whether the insolvency indicators applied as at May 2016. This is a different time frame to that which concerned the Tribunal in reviewing this application, being 11 November 2014.
[79] Refer T-Documents T12/249.
The administrators concluded that as at the time of issuing their report, about half of the insolvency indicators applied to the Group at that time. Specifically, the administrators noted in this part of the s 439A Report as follows:
(a)Continuing trading losses – Yes – Trading losses incurred over the last 14 months of operations (i.e. March 2015 to May 2016) depleted the Group’s working capital; and
(b)Liquidity ratio below one – Yes – Liquidity below one since June 2015.
During the hearing, the Tribunal enquired of the parties as to whether the liquidator had issued any further reports, noting that it had foreshadowed in the s 439A Report that a further report would be issued once liquidators were appointed.
Mr Milardovic said he was on the committee of creditors. He reported that the liquidation was underway, but it had not been finalised. He said the liquidators had issued a preliminary report or administration report, but he said he did not think that it contained any “investigative findings” that would assist the Tribunal. The Tribunal called for production of this further report. Mr Milardovic said he did not have it present with him at the hearing. At the request of the Tribunal, Mr Milardovic subsequently lodged this further s 508 Report as an attachment to his Amended SFIC.
After the hearing, the Secretary’s representative made an enquiry with the liquidators to obtain an update (following on from the winding up process which took place after the s 439A Report was issued) as to their opinion about when VS was likely to have been insolvent; and for any information about the financial position of VS in approximately November 2014 (and in the six month period before and after November 2014).
On 27 November 2017, Ms Campbell provided a brief response. Ms Campbell referred back to the opinions about the likely timing of insolvency of “the group” as provided by the administrators in the s 439A Report and the ISR for VS, and stated that “we” had concluded that “the group was likely to be insolvent from September 2015”. Ms Campbell stated:
We do not have detailed records for the time period you have requested. However, the acquisition of the Vemco Group by the HRL Group was finalised in October/November 2014 therefore it is unlikely that the Vemco Group, and specifically Vemco Services Pty Ltd, was insolvent at that time.
It is not clear from Ms Campbell’s letter whether the liquidators were privy to this exchange of correspondence, other than some vague references in her letter to “we” which may (or may not) suggest that the liquidators were consulted about the content of this letter. Nevertheless, the Tribunal considers that if the administrators/liquidators had changed their opinions as previously expressed by them in the s 439A Report or the s 508 Report, it is likely that this would have been conveyed by Ms Campbell to the Secretary’s legal representative in her letter.
Mr Milardovic did not call any former employees from VS or the Vemco Group as witnesses. Neither party made any request for summonses to be issued to the liquidators or former executives of VS to seek further financial information, reports or documents or the Board packs or minutes of meetings of VS, the Vemco Group companies or any other entity. The Tribunal will consider the available evidence, noting that it is less than ideal and at times, has required inferences to be drawn from the information and reports about the financial position of VS, based on the financial position of the Vemco Group and the HRL Group more broadly, relying also on the assumptions as to the accuracy of the information provided by the administrators/liquidators pursuant to s 35 of the FEG Act.
In support of a conclusion that VS was insolvent as at 11 November 2014, the Tribunal notes that the administrators reported that VS relied on the other “Vemco Companies” for “the majority of its revenues”. The administrators also considered that VS may not have been able to pay its debts as and when they fell due once those revenues “became uncertain”. The administrators did not make any observation in the s 439A Report (or later in the s 508 Report issued after they were appointed as liquidators), about when those revenues became uncertain.
As set out in paragraph [23], the administrators reported that in August 2014, the previous owners of the business and assets of the Vemco Group and Powercor agreed to amendments to the vegetation management agreement, part of which reduced the future revenue to the Vemco Group under this contract by $7m. This reduction was meant to be counterbalanced by amendments to the definition of maintenance works intended to reduce the Vemco Group’s costs by an equivalent amount of $7m, but this was not achieved.
What is not certain on the evidence is exactly when this amendment to the Powercor contract had an impact on the financial position of the Vemco Group (and correspondingly, VS) to the degree that the entities within the Vemco Group were unable to pay their debts as they became due, as distinct from reducing their working capital. However, based on the report by the administrators as at 31 December 2014, that the “Consolidated [HRL] Group” reported current assets exceeded current liabilities by $1.56m, the Tribunal considers that this indicates that it was likely to have taken more than an initial period of four months before the impact of the amendments to the Powercor contract rendered the revenues to the Vemco Group “uncertain” resulting in the entities in that Group (including VS) reaching a point where they were unable to pay their debts as and when they became due.
The Tribunal notes that it was not until January 2015 that the Board first raised concerns about the financial performance of the Vemco Group and engaged a forensic accountant to undertake an operational review. It appears from the administrators s 439A Report that the HRL Group was in breach of the “bank financial covenants” from 1 April to 30 June 2015. The Tribunal infers from this that the Group was not in breach of bank financial covenants prior to 1 April 2015.[80] Furthermore, the first mention of a bank sending a letter of forbearance following an event of default occurred in September 2015 (by the Commonwealth Bank of Australia).[81]
[80] Refer T-Documents T12/238.
[81] Ibid.
The Tribunal acknowledges that the books and records of the Group (of which VS was a part) were reported by the administrators as being deficient from October 2014 onwards, giving rise to a presumption of insolvency. Specifically, and as set out in paragraph [101], the administrators reported that the records and books of the Group prior to October 2014 did not:
(a)correctly explain the financial position of those companies (which included VS);
(b)accurately disclose the liability of the Powercor contract; or
(c)accurately disclose the Group’s true position.
However, the difficulty for the Tribunal reaching a conclusion that VS was insolvent as early as 11 November 2014, is that it has the benefit of hindsight in this case and the administrators reported that the Group (which included VS) had paid its external creditors within terms up until August/September 2015. As identified by Palmer J in Lewis on appeal the task before the Tribunal in making a retrospective assessment as to when VS became insolvent is less difficult, as there is evidence (albeit based on the administrators reports following a review of the Group’s financial records) that the Group (which included VS) was paying its external creditors within trading terms, that is, as and when they fell due, until August 2015.
Further, the Tribunal must consider the commercial reality of how the Group operated as a whole. By October 2014 the Acquisition was complete and the Vemco Group (including VS) had access to funds able to be provided by loans from other entities with the HRL Group or Vemco Group. There was a substantial injection of capital into the HRL Group when part of the purchase price (c$11m) for the sale of the business and assets of the Vemco Group was repaid to the HRL Group in March 2015.[82] There were also further shareholder loans in August and September 2015 totalling c$4m that took place, resulting in funds being available to continue to pay the debts of the companies within the HRL Group (including VS) as and when they fell due.
[82] The administrator reported that in January 2015, the HRL Board engaged a forensic accountant to conduct an operational review focussing on the performance of the Powercor contract which revealed the underperformance by the Vemco Group companies in delivery of the vegetation maintenance services to Powercor “in that they did not complete the 2014 cutting program”. Those matters were raised with Zeus in February/March 2015 resulting in a downward adjustment of the purchase price in exchange for a release providing by HRL for all past and present claims.
The Tribunal acknowledges that the HRL Group started to experience a deficiency in working capital as from June 2015, as reported by the administrators. By that time, HRL had a working capital ratio of 0.75 compared to 1.03, as it was as at 31 December 2014. If the working capital ratio for a company drops below one, it is an indicator that it may not be able to pay its debts as and when they fall due. However, the Tribunal returns to the report by the administrator that the majority of external creditors were within trading terms as at the date of their appointment (i.e. on 27 October 2015).
Further, the Tribunal notes the administrators/liquidators reported that creditor payments for the “HRL Group” were maintained within terms up to August 2015 and they had sufficient working capital and cash at bank to July 2015. The administrators acknowledged that the Group “may well have been insolvent on a balance sheet basis since October 2014” (arising from concerns that the “Vemco Companies” did not maintain accounts as from the date of Acquisition). However, the administrators highlighted that the fact that a company’s liability exceeded its assets did “not necessarily establish insolvency”.
The Tribunal notes that the administrators formed an opinion that VS “may have been insolvent since September 2015” following a review of the financial statements referred to in paragraph [40] of these Reasons for Decision. This opinion was not altered as consequence of any further investigations that were undertaken as part of the winding up process.
The Vemco Group’s performance had dropped by November 2014 and December 2014 as it costs of performing the Powercor contract were about $10m above forecasted costs at this time.[83] Further, it was reported that “liquidity issues” first started to arise in July 2014.
[83] Refer T-Documents T12/241.
However, the administrators also reported that “the ongoing and greater than forecast losses in the Vemco vegetation business exhausted the available working capital by around September 2015”. There was also no evidence before the Tribunal that trade creditors or employees were not being paid by any of the Vemco Group companies, including VS at this time. Instead, the evidence suggests that the Vemco Group (including VS) had available to them funds from the significant shareholder loans and/or loans provided by other entities within the HRL Group that enabled them to continue paying creditors and employees, up until about August/September 2015, which is when the administrators considered it was likely that VS became insolvent.
On balance, taking into account the evidence referred to in paragraphs [118118] and [129], the Tribunal finds that VS was not insolvent as at 11 November 2014 when Mr Milardovic’s employment with VS ended. The Tribunal accepts that it is quite possible that VS was balance sheet insolvent at that time. However, VS had access to funds at that time sufficient for it to continue to pay its external creditors within trading terms, according to the reports of the administrators. There was no evidence of VS at that time being unable to pay the wages or other entitlements to its employees. The Tribunal is satisfied that the VS had access to funds through the various company and shareholder loans that took place within the HRL Group and the Vemco Group, enabling it to maintain solvency as at November 2014 and continuing into the first quarter of the 2015/2016 financial year.
Whether Mr Milardovic’s employment ended due to the insolvency of VS?
The Tribunal has found that the insolvency of VS did not take place at or before Mr Milardovic’s employment as VS was terminated. However, if the Tribunal is wrong about this, it has considered whether Mr Milardovic’s employment ended due to the insolvency of VS.
No representatives of VS were called to give evidence at the hearing of this application before the Tribunal about the circumstances surrounding the termination of Mr Milardovic’s employment at VS. Neither party requested that the Tribunal issue a summons to require the attendance of any such representative (for instance, Mr Barry), at the hearing. For this reason, the Tribunal has considered the evidence available to it relating to this event, comprising the account given by Mr Milardovic and the detailed references to evidence given and findings made in relation to this event as part of the Federal Court proceeding issued by Mr Milardovic against VS.
The Secretary contended that there was no contemporaneous evidence, other than evidence of Mr Milardovic’s (unfounded) belief, of any connection between the end of his employment with VS and the insolvency of VS. The Secretary invited the Tribunal to rely upon the findings of Mortimer J in Milardovic FCA No.1 in relation the reasons why Mr Milardovic’s position became redundant, which the Secretary contended bore no relationship to the insolvency.
Mr Barry of VS appeared as a witness and gave evidence in the Federal Court proceeding. Mortimer J referred to evidence given by Mr Barry in relation to a staff meeting that took place in January 2014 at which he sought to explain the structure of the bid management team:
[158] …In evidence Mr Barry agreed he had made the comment, and said he regretted making it. He explained the context in the following way:
The current structure that we have, which is Stephen as the – the bid manager/estimator, there is no possible way we can – we can grow this business. Our aim was to grow it by another two to $300 million in two years and one person is just clearly not able to assist or complete that growth. So in order to grow it we had to change the structure, get more skills in and more capability to the group. And so what I was saying is essentially I can’t ask any more of Stephen, but we have to get more resource, and that was the message, and that’s what this slide bears out.
Mortimer J found as follows:
[162]During his cross-examination, one of the applicant’s answers revealed, in my opinion, just how fixed his perspective was about Mr Barry and his attitude to the applicant. Counsel for the respondents put a question reflecting his instructions about why Mr Barry made the comment he did:
He – he stated that as a means of illustrating that you were working at or near capacity; do you agree with that? That’s – that’s impossible.
[163]Contrary to the applicant’s answer, in my opinion, there is nothing “impossible” about the suggestion that this was the sense Mr Barry was trying to convey. Indeed, I find that was exactly what he was trying to convey. He did so quite thoughtlessly, but there is no doubt in my opinion he intended the comment to reflect his acknowledgment that Mr Milardovic was working too hard and staffing changes needed to be made to the bid management team. That the applicant would find it “impossible” to see the comment in that light demonstrates, in my opinion, how determined the applicant was by early 2014 to put the very worst characterisation on everything Mr Barry said or did.
[164]Mr Barry gave evidence that at the subsequent meeting with Mr Milardovic on 12 March 2014, he apologised to Mr Milardovic.
[165] He also gave the following evidence:
I honestly didn’t believe it was in a context that was offensive. It was – it was a – it was an effort to make a – a point that Stephen, in his role, could not do any more, and we needed to support him by growing that team.
Mortimer J found that a meeting took place on 7 May 2104 at which Mr Milardovic was advised that his position would become redundant and two new positions had been created. He was told he could apply for either role, but each would also be advertised and if he was not successful in being appointed to one of the two roles, he would be given a redundancy payment.[84] The Tribunal notes Mortimer J’s findings as follows:
[190]In his submissions, the applicant described the two new roles as “smaller” roles. Mr Barry dealt with this in cross-examination:
They weren’t smaller roles. We were expanding the business, and those roles were larger than ever.
[191]I accept that evidence. The whole reason for the split of the roles was the expansion of this aspect of [VS’s] business. There is no evidence the roles were “smaller” (and, by inference, less important).
[84] Refer [189] of Milardovic FCA No.1.
At [196] and [197], Mortimer J found as follows (emphasis added):
[196]It is clear from Mr Barry’s evidence that he, together with other responsible senior management within Vemco, considered the restructure of the bid management section of Vemco to be necessary for the development of that arm of the business of the Vemco Group. I accept his evidence that he had formed the view, having seen how hard Mr Milardovic was working, that it was better to split the role into two roles and have two employees perform the tasks. He considered that the roles would grow and expand, as it was clearly hoped [VS’s] tender business also would. Mr Milardovic’s position was made redundant because Mr Barry and others within Vemco consider that necessary to serve the business interests of Vemco.
[197]As to why Mr Milardovic was not simply appointed to one of the two roles, Mr Barry was neither examined nor cross-examined at any length about his reasons for this. He denied it was because Mr Milardovic had made complaints and I accept this evidence. In that sense there is little direct evidence. Mr Milardovic could only give evidence about his own speculation on this matter. I find, on the balance of probabilities, there were likely to have been several reasons for Mr Barry’s decision not to immediately appoint Mr Milardovic to one of the two newly created roles. Some were legitimate business and commercial considerations, such as wishing to ensure the widest and best pool of candidates. I infer that Mr Barry did also consider this was a way to allow Mr Milardovic to leave Vemco’s employment with a redundancy payment in a way which was less controversial than might otherwise have been the case had Mr Milardovic’s performance issues not been satisfactorily resolved. Mr Barry seemed to find Mr Milardovic a difficult person to work with, and found his personality a frustrating one. Again, I find this is likely to have been a factor in Mr Barry’s mind when he considered how to fill the two new roles. While those might be difficult facts for Mr Milardovic to accept, in my opinion they came through very clearly in the evidence of all three witnesses, but especially Mr Milardovic and Mr Barry. Mr Milardovic’s tensions with many Vemco employees are apparent in his own diary entries, with considerable frequency. Of course, from Mr Milardovic’s perspective, the fault always lay elsewhere than with him, and that is not a matter which needs any determination from the Court. What is relevant about Mr Milardovic’s diary entries is that they disclose ongoing tensions between him and other Vemco employees, tensions that no doubt made their way to Mr Barry on some occasions at least, and clearly would have made for a difficult and unhappy workplace on many occasions. I find it is likely Mr Barry had those workplace issues in mind when he chose to throw the two roles open for competitive internal and external appointment…
At [209] Mortimer J referred to Mr Barry’s evidence that VS filled both of the new roles of Bid Manager and Senior Estimator in July and August 2014.
Based on the matters referred to above, the Tribunal is satisfied that Mr Milardovic’s employment did not end due to the insolvency of VS. Instead, it ended as a consequence of Mr Barry’s desire to bolster the tender and bid management capability of VS by splitting Mr Milardovic’s position into two separate roles to allow two staff members of VS to employ their time to focus on the tendering processes with the hope that this would lead to VS winning more contracts, thereby increasing its revenue. The fact that those two new positions were subsequently filled is significant as it is evidence that Mr Barry (and VS) were following through on its stated intention of wanting to bolster this function of its operations.
conclusion
The Tribunal has found that Mr Milardovic’s employment with VS ended on 11 November 2014. The Tribunal has also found that VS was not insolvent at that time. Even if VS was insolvent at that time, the Tribunal has found that Mr Milardovic’s employment did not end due to the insolvency of VS. Instead, has found that it ended due to a desire on the part of his employer to apply more resources and increase capability in tendering for more work in a genuine attempt to increase the revenue of the Vemco Group.
The Tribunal concludes that s 10(c)(i) of the FEG Act does not apply to Mr Milardovic. Nor does s 10(c)(i) or (ii) apply, because Mr Milardovic’s employment was found by the Tribunal to end on 11 November 2014 being more than six months before the date on which the insolvency practitioners (administrators) were appointed (on 27 October 2015). For these reasons, the Tribunal concludes that Mr Milardovic is not eligible for an advance as he does not meet one of the mandatory eligibility criteria under s 10(c) of the FEG Act.
Accordingly, the Tribunal affirms the Internal Review Decision under review in this application.
143.
I certify that the preceding one hundred and forty two (142) paragraphs are a true copy of the reasons for the decision herein of Member K Parker.
[sgd]........................................................................
Associate
Dated: 7 February 2019
Date of hearing: 30 October 2017
Date final submissions lodged: 6 December 2017
Advocate for Applicant: Self-represented
Solicitors for Respondent: Clayton Utz
Advocate for Respondent: Mr Cain Sibley
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