Phillips v Hamilhall Pty Ltd No. Scgrg-97-1375 Judgment No. S6456

[1997] SASC 6456

PHILLIPS  v  HAMILHALL PTY LTD (In Liquidation)

Perry J   (ex tempore)

This is an appeal by the defendant in an action heard in the Civil Division of the Magistrates Court sitting at Adelaide against a judgment pronounced against him in favour of the respondent, Hamilhall Pty Ltd (In Liquidation) (“Hamilhall”) in the sum of $10,929.60.

The learned trial Magistrate found that sum to be due by the appellant to Hamilhall by way of repayment of an advance made by Hamilhall to the appellant in circumstances which I will in due course describe.

Hamilhall is in liquidation, the liquidator being Mr Bruce Carter.  Effectively the action was brought by him in the name of the company.

At the relevant time the appellant was the managing director of Hamilhall.  Although the shareholding in the company was not strictly proved, it is common ground that the appellant held a controlling, if not the sole interest, in Hamilhall either directly or through a related company which he likewise controlled, A.T. Phillips Pty Ltd (“Phillips P/L”).

The appellant, who was 48 years at the time of the trial, had been a builder most of his working life.  He had a wide range of experience in different classes of building work. He commenced in that occupation with a large construction company in Queensland.  Through Phillips P/L he eventually bought the franchise for a steel framed domestic building system marketed in South Australia.

He operated what was effectively one business through the two companies, Phillips P/L selling the kits for homes, and in the event that the purchaser wanted a home erected or other building work carried out on site, Hamilhall, which held a building licence, attended to that side of the operation.

The appellant had a long standing interest in ocean going yachts.  He had sailed around the world with his family in 1983.  After setting up the business in South Australia, he bought a 13 metre steel yacht hull from a ship building company.  He set it up at the back of his factory premises at Lonsdale from which he operated the business of the two companies.

The appellant then proceeded, over a period of time, to fit out the boat. For this purpose he obtained various parts from suppliers.  He paid the major expenses associated with that from his own pocket, but a number of smaller items he paid for through Hamilhall.  His practice was to submit the invoices to a clerk, a Ms Ashton, who, amongst other things, attended to the bookkeeping.  She would write a company cheque in payment.

Most of the cheques she wrote were associated with particular jobs undertaken by the companies for customers.  In such a case she would designate the payment to the particular job.  But on the butts relating to expenditure for the yacht she would, at the direction of the appellant, write “boat”.  There was nothing surreptitious about these payments. They were made quite openly and recorded in the cheque butts of Hamilhall in that fashion.

In about August 1992, the appellant sold out his interest in the business including all the equipment, stock in trade and work in hand to another man.  However, the appellant retained the two companies.  After the sale the business did not fare well and he ended up in litigation with the purchaser.

In about February 1993, the appellant left South Australia, taking the boat with him, it having been completed by then.  Since then he has operated the boat as a charter craft out of various ports.  The appellant now makes his living from chartering or hiring the boat on international trips, largely into remote regions of the world.

Later in 1993, Mr Carter was appointed liquidator of Hamilhall.  His perusal of the books and accounts of the company revealed the payments which had been made on account of parts which went into the boat.

He could see nothing in the records of the company to suggest that the payments formed part of any of the remuneration paid to the appellant as managing director of the company, or for that matter, as any sort of dividend. But neither did he see the payments recorded in a loan account, at least there was no evidence before the learned trial Magistrate to suggest that that was so.

Apparently with little else to go on apart from what I have so far explained, Mr Carter brought the proceedings in the Magistrates Court, referring in the pleadings to the various payments made relating to the construction of the boat.  He claimed alternatively that the moneys represented “advance of funds” by Hamilhall to the appellant, or “moneys had and received” by the appellant for the use of Hamilhall.

In the statement of claim he set out a schedule of the payments made with respect to the construction of the boat, those payments having been made between 26 November 1991 and 28 May 1992.  The total of those payments as set out in the statement of claim, is $11,429.  He made a claim for other payments which he described as “miscellaneous payments made on behalf of Alan T. Phillips”, totalling $4,041.95.  But it appears from that that at the conclusion of the evidence, counsel for Hamilhall conceded that the company could not establish a case with respect to those other payments.  He made the same concession with respect to some of the payments which he alleged had gone into the boat.

In the result, the liquidator's claim was reduced to the amount for which Hamilhall eventually recovered judgment.

At the hearing, the only evidence on behalf of Hamilhall was given by Mr Carter.  He explained the impression he obtained as to the operation of the company as a result of the investigations he had made following its liquidation, and in particular from his perusal of its books and records.  His evidence was in effect that he arrived at the conclusion that the payments with respect to the boat should be regarded as a loan to the appellant, by reason of the fact that there was no evidence to support the view that they were part of the latter's remuneration.

He referred to the fact that no reference was made to the payments in a response made by the appellant to a questionnaire given to him by Mr Carter, in which the appellant described his salary as $20,000 (pa) approximately, with nothing being put against the heading “Allowances”.  Furthermore, at the trial, a copy of the appellant's group certificate issued by Hamilhall for the year ended 30 June 1992, was tendered.  Under the heading “Gross Salary, Bonus, etc” that indicated $17,040, with nothing being shown under the heading “Allowances (give details)”.

An unsigned copy of what purported to be the appellant's personal income tax return for the same financial year was also tendered.  This was prepared on his behalf by tax agents in Brisbane.  It did not disclose any income apart from that set out in the group certificate, and an income from Phillips P/L of $544.  In particular, if the copy was in fact a copy of the return actually lodged for that year, and I am prepared to accede to the arguments of Mr Rochow, who appeared for the respondent, that it should be so treated, it did not reveal the receipt of anything that came within the category of “fringe benefits” or the like.

The appellant gave evidence and also called Ms Ashton who explained the circumstances in which she came to write the cheques in question.  Her evidence did not take the matter any further.

As for the appellant's evidence, he said at one stage:

“It was money I put into my own pocket as reimbursement for my efforts in the company. It was a conscious decision and those cheques, some of those boat notes are in my hand writing.  A very conscious decision that I would draw that money.  Where it was allocated, I had paid technical people to decide that for me.”

In effect, his evidence was that he left it to his accountant to allocate the payments appropriately either as part of his salary, or as what he described as fringe benefits, or as a company dividend.  It is clear from his evidence that the niceties of accounting for the payments was not something that troubled him at the time, or even exercised his mind, and was a matter which he left to others.

Importantly, he said in his evidence that he did not recognise any obligation to pay the money back, and that how ever the payments would be characterised, at no time did he intend the payments to be a loan or an advance from Hamilhall.

The appellant also gave evidence that his salary so called, was lower than some of his employees were drawing, and that he decided to increase his remuneration.  It is important to note that although the learned trial Magistrate described the appellant's evidence as “unsatisfactory”, he qualified this by saying:

“It is difficult to be critical however of Mr Phillips, since the matter has gone on for many years. There is a considerable lack of documentation. However what document there is in my opinion, constitutes clear evidence which is contrary to Mr Phillips' argument.”

Neither that passage nor anything else in the learned trial Magistrate's reasons for judgment indicated that he took an adverse view of the appellant's credit.  On the contrary, the conclusion which the learned trial Magistrate reached appears to him to have been supported simply by the acceptance of a number of contentions put forward by Mr Carter, which were in turn a matter of inference from the documentation which had come into the latter’s hands.  The more important of those contentions for present purposes, were Mr Carter's assertion that he could find no evidence to support the view that the payments were part of the appellant's salary package; that he (Mr Carter) regarded the answer to which I have referred in the questionnaire to be evidence to the contrary; that he could not obtain any confirmation from the Taxation Office that any fringe benefits tax had been paid; and that the boat was no part of the assets of the company.

In my opinion, insofar as the conclusion which he reached was reached on that basis, the learned trial Magistrate erred.  Clearly, it was for the liquidator of Hamilhall to make out the claim.  He could only do so by proof of circumstances from which it would be right to infer an obligation on the part of the appellant to repay the moneys.  However, there is no evidence to support a finding that the appellant ever assumed such an obligation, or that Hamilhall expected him in any way to repay the moneys.

It is true that an accountant such as the liquidator might reasonably look to see whether payments of this kind had been attributed to one or other possible accounting bases.  That is perfectly understandable.  But in my opinion, it was not a permissible process of reasoning to infer from the fact that there was no evidence to support the payments as being part of any sort of salary package of the appellant, that the conclusion must necessarily follow that they were a loan.

One has to have regard to the reality of this business operation.  These two companies were the appellant's alter-ego.  It is not uncommon, as I suspect was the case here, for a lay person in the position in which the appellant was vis a vis the companies to treat the moneys generated in the course of their business operation as moneys which were at his disposal.  Of course, he realised that moneys had to be accounted for, but that was a job for others.

Far from supporting an inference that the appellant accepted an obligation to repay the moneys, I think the evidence established on the balance of probabilities that the defendant never intended to repay the money.  His intention in that respect may be equated with the expectation of the company itself.  His mind was the company's mind.

True it is that the company’s accounting for the payments may well have been unsatisfactory.  True it is that those responsible for preparing the annual accounts of the companies and the tax returns of the companies and of the appellant should have picked up the payments from the cheque butts and seen to it that they were appropriately accounted for.  But the deficiencies in the accounting are deficiencies which one sees time and time again in the accounts of small proprietary companies.

It is not possible to treat a negative failure to account properly for the moneys as positive proof of a loan.  If the appellant now has some explaining to do to the taxation authorities, that is another matter.

Mr Rochow endeavoured to draw some assistance from the remarks of Clark JA in the Court of Appeal of the Supreme Court of NSW in Harkness and Anor v Partnership Pacific Ltd[1]  That was a case concerning a payment which was alleged to be a preference under the Bankruptcy Act.

[1] (1997) 143 ALR 227 at 232.

In the passage cited by Mr Rochow, which I do not pause to repeat, Clark JA was referring to findings as to the state of mind of the corporate payee, which he equated with the belief of the directing minds, that is, of the officers of the company.  He further concluded that if a trial Magistrate, acting on the demeanour of the witnesses, accepts the evidence of the “directing minds” as to their state of mind, it would only be in exceptional circumstances that an appellant court could interfere.  In my opinion, properly understood, that dicta does not assist the respondent.

This was not a case which turned on a question of credit.  It was a case which turned on inferences to be drawn from the records, or lack of them, which existed with respect to the payment in question.

Of course, the appellant gave evidence denying that the payments were intended to be a loan, but the learned trial Magistrate did not decide the case on a question of credit.  He simply preferred arguments as to the construction to be made as to the various documents and the inferences to be drawn from them, as against the arguments raised by the appellant.  I realise, of course, that the ultimate finding involves rejection of the evidence of the appellant.  But it is not possible to say that there was a positive finding against Mr Phillips’s credit when no such positive finding was expressed, and the Magistrate said in his reasons:

“It is difficult to be critical ... of Mr Phillips.”

I think that this was a relatively simple case in which this Court is in just a good a position to judge what inferences should be drawn, both from the records and the evidence of the appellant, as was the learned trial Magistrate.

I have read the evidence of the appellant carefully, and it seems to me that in a situation not untypical of that which applies in the operation of many small proprietary companies, the most that could be made of his evidence was that he was treating the disposal of the moneys generated from the business operations of the two companies as a matter for his discretion, and the question of accounting for the moneys a matter for others.

Mr Rochow also endeavoured to obtain assistance from the well-known principle identified in the judgment of the High Court in Jones v Dunkel and Anor[2], and in particular from the judgment of Menzies J in that case at page 312:

[2] (1959) 101 CLR 298.

“In my opinion a proper direction in the circumstances should have made three things clear:  (I) that the absence of the defendant Hegedus as a witness cannot be used to make up any deficiency of evidence; (ii) that evidence which might have been contradicted by the defendant can be accepted the more readily if the defendant fails to give evidence; (iii) that where an inference is open from facts proved by direct evidence and the question is whether it should be drawn, the circumstance that the defendant disputing it might have proved the contrary had he chosen to give evidence is properly to be taken into account as a circumstance in favour of drawing the inference.”

It was the third of those principles on which Mr Rochow more particularly relied, applying it, though, to the absence from the witness box of a possible witness rather than a party.

In particular, Mr Rochow drew attention to the fact that the accountant or tax agent in Brisbane responsible for the preparation for the unsigned tax return which was tendered in evidence was not called.  He suggested that the proper inference to be drawn from that circumstance was that his or her evidence would not have assisted the case advanced by the appellant.

While I suppose that might be true in a general sense, the difficulty is that the nature of or inadequacy in the instructions given to the accountant was never proved, and indeed, the nature of the instructions given by Mr Phillips was never the subject of cross-examination, except in the most general sense.

If there had been clear evidence that the accountant in Brisbane had been furnished with the cheque heels in question, and if there was clear evidence that he or she had also prepared, for example, the profit and loss account of the company for the period in question, one might then be able to infer that the accountant would necessarily have applied his or her mind to the question of the characterisation of these payments.

But I would not be prepared to assume, simply from what has been proved in this case, that material was placed before the accountant in Brisbane, or tax agent, which necessarily would have obliged him or her to have made a decision as to those matters, or at least sought instructions from Mr Phillips as to how the payments were to be accounted for.

Absent any evidence as to just what it was that was put before the accountant or tax agent, or any proper exploration of that question at the trial, I would not be prepared to bring the principle identified in Jones v Dunkel to bear in order to support the argument which Mr Rochow has put.

Mr Rochow has put everything which could possibly be said in support of the judgment under appeal.  The plain fact of the matter is, however, that at the end of the day, the evidence before the learned trial Magistrate did not prove the liquidator's claim.

The appeal must be allowed and the judgment quashed.

I so order.

I order that the costs both in the court below of defending the action, and the costs of and incidental to the appeal to be taxed, be paid by the respondent to the appellant.

I further order and direct that the sum of $3,000 paid to the credit of the appellant in this action, together with accrued interest, be forthwith paid out to Knox & Hargrave, solicitors for the appellant.