Re O'Brien Real Estate Drouin Pty Ltd
[2024] VSC 327
•24 June 2024
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2021 03934
IN THE MATTER of O’BRIEN REAL ESTATE DROUIN PTY LTD (ACN 602 065 734)
(IN LIQUIDATION)
BETWEEN:
| O’BRIEN REAL ESTATE DROUIN PTY LTD (ACN 602 065 734) (IN LIQUIDATION) & ANOR (according to the attached Schedule) | Plaintiffs |
| v | |
| JOHN EDWARDS | Defendant |
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JUDGE: | Gardiner AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 10 February 2024, last evidence filed 14 March 2023 |
DATE OF JUDGMENT: | 24 June 2024 |
CASE MAY BE CITED AS: | Re O’Brien Real Estate Drouin Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2024] VSC 327 |
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CORPORATIONS — Insolvency — Corporations Act (2001) (Cth) — Div 2 and 3 of Pt 5.7B — Claims for alleged insolvent trading and unreasonable director-related transactions — Defendant a director of company in liquidation which operated a real estate agency under a licensing agreement — Whether debts in relation to fees under the licensing agreement were ‘incurred’ at time of entry into the licensing agreement or at some other time — Finding that the licensing fees and other charges were incurred at time of entry into the licensing agreement at a time before it was demonstrated that the company was insolvent — Other debts including taxation debts shown to have been incurred at times that the company was insolvent in breach of ss 588G and 588M of the Corporations Act 2001 (Cth) — Orders made against the director under s 588M — Voidable transaction claims brought by liquidator under s 588FF(1) seeking orders in respect of unreasonable director-related transactions under s 588FDA — Withdrawals by director from company bank account and no explanation provided as to basis of such withdrawals transactions found to be unreasonable director-related transactions — Orders made against the director under s 588FF.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Tennant of counsel | Aitken Partners Pty Ltd |
| The Defendant in person |
TABLE OF CONTENTS
Introduction
The claims for insolvent trading
The claims for unreasonable director-related transactions
Factual background
Procedural history
The evidence
Plaintiffs’ evidence
Mr Edwards’ evidence
Plaintiffs’ submissions
Mr Edwards’ oral submissions
Applicable principles and legislation
Incurring of a debt
Insolvency
Reasonable grounds to suspect insolvency - s588G(1)
Consideration concerning when the Company became insolvent
When were the debts the subject of the plaintiffs’ claim incurred?
Debts that are not disputed by the defendant or are not the subject of evidence from Mr Edwards
Licensing Agreement fees
Royalties/franchise fees
Marketing contributions and charges
Merchandise
Training and events
At the time the debts were incurred, were there reasonable grounds to suspect insolvency?
Findings on the insolvent trading claims
Conclusion
HIS HONOUR:
Introduction
By originating process filed on 20 October 2021 and amended statement of claim filed on 28 November 2022, the plaintiffs, O’Brien Real Estate Drouin Pty Ltd (ACN 602 065 734) (In Liquidation) (‘Company’) and Jason Stone as liquidator of the Company make claims for insolvent trading under ss 588G and 588M of the Corporations Act 2001 (Cth) (‘Act’) and for voidable transactions arising from unreasonable director-related transactions within the meaning of s 588FDA against John Edwards, the defendant.
The claims for insolvent trading
In the insolvent trading claim, the plaintiffs seek a declaration pursuant to s 588G of the Act that Mr Edwards failed to prevent the Company from incurring various debts totalling $336,296.16 while insolvent and an order pursuant to s 588M of the Act that the Company is entitled to recover that sum from Mr Edwards as a debt due to it. By reason of additional claims made in the amended statement of claim, the debts claimed in respect of insolvent trading increased to $487,323.67 but a number of those claims are now not pressed.
The claims for unreasonable director-related transactions
The declarations sought in respect of the unreasonable director-related transactions the subject of the plaintiffs’ claims under s 588FDA of the Act (‘the FDA claims’) relate to a series of ten payments made by the Company to Mr Edwards. Those payments are evidenced by the bank statements of the Company. I did not understand them to be denied by Mr Edwards and he did not proffer any reason or basis for the making of such payments.
The plaintiffs seek the following declarations in regard to the FDA claims that:
(a)they were unreasonable director-related transactions pursuant to s 588FDA of the Act;
(b)they were insolvent transactions pursuant to s 588FC of the Act;
(c)they were voidable transactions pursuant to s 588FE of the Act; and
(d)they were made within the four years prior to the ‘Relation Back Date’, 1 July 2017. As a result, the plaintiffs seek orders pursuant to s 588FF and, in the alternative, s 1317H of the Act that Mr Edwards pay the plaintiffs $79,395.10, alongside a declaration that Mr Edwards contravened the duties he owed to the Company pursuant to one or other of ss 180, 181, 182 and 183 of the Act.
The FDA claims can be considered collectively. The various categories which comprise the insolvent trading claim require individual consideration by reference to the particular terms of the contracts under which liability was said to arise.
Factual background
The Company was incorporated on 29 September 2014. Mr Edwards was a director from the day of the Company’s incorporation until it was wound up by this Court on 15 July 2020. Rodney Capuano was a director of the Company but resigned on 23 September 2016.
The Company operated a real estate agency business from rented premises in Drouin, Victoria. The business initially operated as a licensee of O’Brien Corporate Pty Ltd (‘O’Brien Corporate’) under a licensing agreement entered into on 17 March 2015 (‘Licensing Agreement’).[1] After the termination of the Licensing Agreement by O’Brien Corporate in August 2019, the Company operated under the business name ‘Edwards Property Solutions’.
[1]The Licensing Agreement itself is undated, however, the date of 17 March 2015 also appears in the Notice of Breach of Franchise Agreement, issued by O’Brien Corporate to the Company. That Notice of Breach is located at page 14 of Mr Stone’s affidavit sworn 10 October 2022.
On 15 November 2018, the Deputy Commissioner of Taxation (‘DCT’) served a creditors statutory demand for $225,872.47 on the Company. The Company did not comply with that demand but the DCT did not make application to wind up the Company relying on such non-compliance.
In March 2018, ABC Photosigns Pty Ltd (‘ABC’) entered into an agreement to provide services to the Company. In breach of that agreement, the Company failed to pay ABC for those services. ABC commenced proceedings in the Magistrates’ Court of Victoria against the Company on 11 October 2019 seeking payment of $30,559.52 from the Company. On 25 November 2019, ABC obtained default judgment against the Company for that sum together with interest and costs. On 8 April 2020, after serving a creditors statutory demand claiming payment for the judgment debt, ABC filed an application for the winding up in insolvency of the Company in this Court. After the commencement of that application, the debt owing to ABC was discharged following a settlement which provided for the payment of $28,000 by the Company to ABC. ABC was given leave to discontinue as plaintiff and O’Brien Corporate was substituted as plaintiff in the winding up.
On 15 July 2020, O’Brien Corporate obtained orders for the winding up of the Company in insolvency and the appointment of Mr Stone as liquidator.
On 6 July 2022, ABC submitted a proof of debt in the liquidation for the amount of $33,100.36, which included the Magistrates’ Court judgment debt and a further Court order for costs dated 5 March 2020.[2]
[2]The plaintiffs note ABC’s claim does not take into account its net recovery of $8,000.00, which occurred after the Company paid it $28,000.00 and after ABC disgorged $20,000.00 to the plaintiffs as an unfair preference. As such, the plaintiffs, , seek to claim pursuant to s 588FI the amount of $25,100.36 for ABC’s claim, calculated as being $33,100.36 minus $8,000.00.
Procedural history
The proceeding was issued pursuant to the Supreme Court (Corporations) Rules 2013 (then in force) which provide that matters proceed by way of affidavit rather than by statement of claim. As has become the practice in the Corporations List in claims for insolvent trading and voidable transactions under Part 5.7B of the Act, orders were made on 26 November 2021 by Efthim AsJ for the filing of a statement of claim and defence to efficiently identify the issues in the proceeding. Despite the Court’s directions, Mr Edwards did not file a defence in response to the original statement of claim and did not file affidavit evidence in the proceeding until shortly before the hearing of this matter.
On 2 September 2022, orders were made by consent granting the plaintiffs leave to file and serve an application for summary judgment. An application for summary judgment was filed on the same day and fixed for hearing on 10 February 2023.
On 11 November 2022, orders were made granting the plaintiffs leave to file and serve an amended statement of claim which made additional claims against Mr Edwards on behalf of creditors for debts said to have been incurred by the Company at times when it was insolvent.
Although the matter was set down for hearing as a summary judgment application, I considered it appropriate for the hearing to be treated as the final hearing of the proceeding. This course, contemplated by r 22.08(1)(d) of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (‘Rules’), was agreed to by the plaintiffs and Mr Edwards.[3]
[3]Transcript of Proceedings, Re O’Brien Real Estate Drouin Pty Ltd (ACN 602 065 734) (In Liquidation) (Supreme Court of Victoria, S ECI 2021 03934, Gardiner AsJ, 10 February 2023) 6 (‘Transcript’).
The evidence
In support of their application, the plaintiffs rely on affidavits of Mr Stone sworn 20 October 2021, 10 October 2022 and 28 November 2022, together with affidavits of Michael Chenoweth, affirmed 18 February 2022, 24 March 2022 and 9 February 2023 and affidavits of David Holland sworn 8 November 2021 and John Leventis sworn 24 February 2023. The plaintiffs also rely on written submissions dated 25 November 2022 and 24 February 2023.
In resisting the application, Mr Edwards relies upon his affidavits sworn 7 February 2023 and 10 March 2023 (respectively, ‘7 February affidavit’ and ‘10 March affidavit’). Mr Edwards did not file written submissions but made oral submissions at the hearing of this matter.
At the hearing of this matter, I directed the parties to file supplementary affidavit material, which resulted in the filing and service of Mr Leventis’ affidavit and Mr Edwards’ 10 March affidavit. The plaintiffs also filed supplementary submissions.
Plaintiffs’ evidence
In his affidavit sworn 20 October 2021, Mr Stone deposes that as a result of his investigations, he formed the view that the Company was insolvent from 1 July 2017. In support of this contention he pointed to the evidence that the Company made trading losses on a consistent basis from 1 July 2016, had insufficient working capital and net deficiencies of current assets, paid its creditors significantly outside of usual trading terms, owed a large debt to the DCT and failed to keep books and records which reflected its financial position.
Mr Stone refers to the Report on Company’s Activity and Property (‘ROCAP’) completed by Mr Edwards. In that document, Mr Edwards stated he was not able to provide any further books and records of the Company as he no longer had access to the Company’s financial records which were maintained on Xero, a cloud-based accounting system. He asserted that Mr Stone had directed the Company’s accountant to cancel the Xero subscription.
Based on the materials available to him, Mr Stone is of the opinion that the Company traded whilst insolvent and in the course of doing so, incurred the debts which are now the subject of this proceeding.
At the hearing of this proceeding, Mr Tennant, counsel for the plaintiffs, indicated that after consideration had been given to Mr Edwards’ evidence, certain of the debts claimed by the plaintiffs were not pressed as Mr Stone’s investigations revealed those debts were no longer outstanding.[4] The insolvent trading claim as of the date of the plaintiffs’ supplementary submissions is comprised of the following debts:
[4]Supplementary submissions were filed by the plaintiffs outlining the position in this regard.
Creditor Date alleged to be incurred and source of liability Amount ABC Under an agreement between the Company and ABC in March 2018. Default judgment was obtained against the Company in the Magistrates’ Court for $30,559.52 together with interest and costs which the Company paid after ABC commenced a winding up proceeding. ABC was the subject of a claim by the liquidator that the payment was an unfair preference which resolved by ABC disgorging $20,000 to the Company. $25,100.36, being the net amount that ABC was entitled to prove for in the winding up pursuant to
s 588FI of the Act.Deputy Commissioner of Taxation (‘DCT’) A Superannuation Guarantee Charge (‘SGC’) debt for $151,171.41. Annexed to these reasons is a schedule produced from the ATO portal setting out how the debts comprising the superannuation guarantee debt accrued over time.[5] This reveals how the debt increased over time on the dates identified until, as at the date of the winding up, the debt was $151,171.41.
A Running Balance Account (‘RBA’) Deficit debt owing at the time of the Company’s winding up for $187,717.67. Annexed to these reasons is an extract of the RBA produced from the ATO portal noting the activity on that account, including the debits and credits applied by the Commissioner, the dates they were applied and the narrative describing the nature of the debit.[6]
$151,171.41.
$187,717.67.
Australia Post Based on a tax invoice dated 3 October 2019, with payment due by 17 October 2019. $71.45. Blueprint Printing Pty Ltd (‘Blueprint’) This debt has been written off by the creditor in its books, however, in the event of a distribution to creditors, Blueprint has indicated it will claim in the liquidation. The debt is based on invoices dated 29 March 2019, 31 August 2019 and 31 October 2019. $664.79. Core Logic Pty Ltd (‘Core Logic’) For property data, information and analytics services provided to the Company. The debt is based on 14 invoices dated between 1 October 2019 and 23 October 2020. Mr Stone only intends to admit $6,587.50 of the debt claimed. DNA Printing Solutions Pty Ltd For signage printing services, based on four invoices issued between 3 December 2019 and 31 January 2020. $2,937.15 Domain Holdings Australia Ltd (‘Domain’) For advertising services provided to the Company, based on account statements dated between 31 January and 29 February 2020. $1,287. Duro-Lenz Pty Ltd For magnetic fitting name badges supplied to the Company, based on invoices issued to the Company between 14 January and 22 February 2019. $79.03. Dynamic Gift International Pty Ltd For the supply of a marquee display package to the Company, based on an invoice dated 16 September 2019. $1,864.50. Evolve Digital Media Pty Ltd For digital media services provided to the Company, based on four invoices regarding debts incurred between September 2018 and March 2019. $3,060. Fuji Xerox Australia Pty Ltd For rental arrears on printing equipment leased to the Company, owing since June 2020. $540. Matthew Campbell Haysom t/as Haysom Creative For photography and animated advertising provided to the Company, based on an invoice issued to it on 4 March 2018. $682. Homely Group Pty Ltd For online advertising services provided to the Company, based on invoices, account statements, unpaid invoice lists and a final notice issued between September 2018 and April 2020. $7,150. LAF (Australia) Pty Ltd (‘LAF’) For commission payable by the Company following the sale of a property, based on an invoice showing that the debt was incurred in February 2020. $2,041.88. Newlitho Pty Ltd t/as Neo Res For printing business cards for the Company based on an invoice said to demonstrate that the debt was incurred in October 2019. $850. O’Brien Corporate For royalties, training fees, marketing fees and ancillary fees based on the Licensing Agreement and invoices dated between 28 February 2018 and 31 July 2019. These are particularised below. $43,540.47. Prospa Advance Pty Ltd Liability under a loan agreement dated 15 October 2019 and a loan statement said to demonstrate that the debts claimed were incurred between 15 October 2019 and 31 July 2020. $47,437.71. Red Energy Pty Ltd For electricity supplied to the Company, based on a disconnection notice regarding debts incurred in December 2019 and an invoice dated 18 June 2020. $2,024.94. Rentokil Initial Pty Ltd For hygiene services provided to the Company, based on invoices demonstrating the debts were incurred between February 2017 and March 2020. $381.81. Viatek South East Victoria (‘Viatek’) For the supply of printer consumables based on an informal proof of debt and an invoice which claim the debt was incurred between April 2019 and August 2019. $1,034. Reapit Agentbox Trading Pty Ltd (‘Reapit’) Liability for licence fees for CRM software, based on invoices and an account statement issued to the Company, said to demonstrate that the debts were incurred from January 2020 to February 2020. $1,100. TOTAL $487,323.67 [5]Exhibit JS-2 to affidavit of Jason Stone, sworn 10 October 2022, 52-60.
[6]Exhibit JS-2 to affidavit of Jason Stone, sworn 10 October 2022, 44-51.
As to Mr Stone’s opinion that the Company has been insolvent since July 2017, Mr Stone states the table below demonstrates that for the financial years from 2017 to the date of his appointment, the Company had a liquidity ratio[7] of less than one, i.e. for every dollar of debt making up its current liabilities, there was only a fraction of a dollar available to pay those debts by the liquidation of the Company’s readily realisable current assets. That fraction ranged from 50 cents in the dollar as at June 2017 to only 20 cents in the dollar on the date that the Company was ordered to be liquidated.
[7]That is, the ratio of current assets available to meet current liabilities.
30 June 2017 30 June 2018 30 June 2019 30 June 2020 15 July 2020 Current Assets $143,928 $92,310 $105,708 $106,441 $104,363 Current Liabilities $287,862 $424,276 $488,982 $514,131 $517,333 Liquidity Ratio 0.50 0.22 0.22 0.21 0.20
Mr Stone states his investigations reveal that the Company was failing to make payments in accordance with trading terms and was regularly receiving demands for payment of outstanding invoices. By 1 July 2017, the Company was unable to meet its taxation liabilities and pay superannuation to its employees. The Company had failed to remit superannuation for its employees of $31,839.21 as at 30 June 2017. This amount increased over time, and, together with substantial interest charges levied by the DCT, $184,017.06 remained unpaid as at the date of the liquidation (‘SGC debt’). As at 1 July 2017, the Company had a RBA debt of $79,003.15, which was never paid in full and ultimately increased to $187,717.67.
In respect of the FDA claims, Mr Stone deposes his investigations reveal that between 6 September 2019 and 15 July 2020 the Company transferred $79,395.10 to Mr Edwards’ bank account as follows:
Date Amount 6 September 2019 $2,000 6 December 2019 $2,000 21 January 2020 $2,500 24 January 2020 $1,000 21 February 2020 $1,500 20 April 2020 $5,500 29 April 2020 $3,801.91 4 June 2020 $5,500 26 June 2020 $3,000 15 July 2020 $53,093.19 TOTAL $79,395.10
It will be seen that a transfer of $53,093.19 took place on 15 July 2020, the date of the winding up order and the liquidator’s appointment. Mr Stone states that no basis or explanation was provided by Mr Edwards as to why such payments were made.
In his 10 March affidavit, Mr Stone provides additional evidence which summarised the position in respect of the Company’s taxation liabilities from 30 June 2017 until it was ordered to be wound up on 15 July 2020. Below is a summary of the Company’s financial position over that time, which incorporates the table appearing at para 22:
30 June 2017 30 June 2018 30 June 2019 30 June 2020 15 July 2020 Trading
Loss$151,957.00 $157,918.00 $85,660.00 $54,965.00 $9,422.00 Current
Assets$143,928.00 $92,310.00 $105,708.00 $106,441.00 $104,363.00 Current
Liabilities$287.862.00 $424,276.00 $488,982.00 $514,131.00 $517,333.00 Liquidity
Ratio0.50 0.22 0.22 0.21 0.20 Superannuation Guarantee Shortfall $31,839.21 $100,041.69 $147,559.38 $173,175.63 $184,017.06 Running
Account Balance Deficit$78,743.91 $67,544.04 $137,094.51 $187,291.79 $189,017.67
In his evidence, Mr Stone deposes as to the debts incurred by the Company in the period 1 July 2017 to 15 July 2020, which remained outstanding as at the second of those dates, the date of his appointment. The debts pursued in the insolvent trading claim as at the conclusion of the hearing of this matter and the filing of supplementary submissions are identified in the table in para 22 above.
Counsel for the plaintiffs, Mr Tennant, indicated at the hearing that ABC still maintained a claim for the debt owed to it but that debt is now less than what it has sought to claim in the liquidation. This arises because ABC received a payment of $28,000 but subsequently disgorged $20,000 as Mr Stone contended it was a voidable transaction by reason of it being an unfair preference. The claim in respect of ABC is now $25,100.36, calculated as the debt owed, minus $8,000.
In his third affidavit sworn 28 November 2022, Mr Stone states that:
(a)on reviewing the DCT documents, he ascertained that there was a small error in the calculation of the RBA deficit debt incurred by the Company during the period 1 July 2017 to 15 July 2020. He deposed that the correct amount is $187,717.67, not $188,248.46, and therefore the overall amount claimed by the plaintiffs in respect of the DCT debt is $338,889.08, not $339,419.90;
(b)the DCT debts incurred while the Company was insolvent are calculated as follows:
(i)RBA deficit debt:
(A)Running Account Balance as at 30 June 2017: $78,743.91
(B)Plus additional debts recorded in the Running Account from 1 July 2017 to 15 July 2020: $244,022.40
(C)Less payments and other reductions recorded in the Running Account from 1 July 2017 to 15 July 2020: $135,048.64
(D)Total: $187,717.67
(ii)SGC debt:
(A)Superannuation guarantee shortfall debt for superannuation payable to 30 June 2020: $183,044.03
(B)Less superannuation guarantee shortfall debt for superannuation payable to 30 June 2017: $31,872.59
(C)Total: $151,171.41; and
(c)he does not intend to admit Telstra to prove in the liquidation as the debt owed is no longer outstanding.
The affidavits of Messrs Chenoweth and Holland are concerned with aspects of service which have no present relevance.
Mr Edwards’ evidence
In his 7 February affidavit, Mr Edwards makes reference to the debts allegedly owed to the Company’s creditors. As to the debts still pressed by the liquidator, he states that:
(a)ABC was paid $23,000 on 3 June 2020 and a further $5,000 on 6 July 2020 pursuant to the agreement between it and the Company ‘to end the liquidation’, and that at the time of his affidavit, ‘there were active court proceedings on foot’;[8]
[8]This proceeding settled following orders made by the Federal Court on 19 January 2022.
(b)he has given what he describes as a ‘director guarantee’ to the DCT, and that debt is recorded on his personal file;
(c)he has not been able to obtain invoices or credit information regarding Australia Post, ZWAB,[9] Core Logic, DNA Printing, Domain and Duro-Lenz;
(d)he believes the debt owing to Dynamic Gift International Pty Ltd (‘Dynamic Gift’) has been paid in full but is unable to confirm this as he no longer has access to the Company’s records;
(e)the debt is owed ‘in error’ to Evolve Digital Media, although he does not elaborate as to why this is so;
(f)as to the debt owing to O’Brien Corporate, there was an ongoing case in the Federal Court, which was dismissed on 19 January 2022;
(g)as to the debt owing to Advance, ‘there was money in O’Brien Real Estate Drouin to pay this before liquidation’;
(h)the debt owing to Viatek was paid at the time the machine the subject of the claim was collected;
(i)the debt owing to Reapit was ‘transferred to Edwards Property Solutions Pty Ltd’, although he does not elaborate as to how this allegedly occurred;
(j)as to the Telstra debt, a credit for $70,572.78 ‘closed the account’;[10] and
(k)he does not provide any response to the debts owing to Haysom and Rentokil.
[9]This is no longer pressed by the plaintiffs.
[10]Mr Stone does not press this claim.
In his 10 March affidavit, Mr Edwards asserts there is no evidence the debts owing to O’Brien Corporate existed, as the plaintiffs have not been able to point to any training events attended by or marketing material or merchandise provided to the Company.
Mr Edwards states that, as the plaintiffs have reduced the claim they made at the commencement of the proceeding by over half, it is an injustice that the Company was placed into liquidation. He also asserts that O’Brien Corporate was managing the Company’s trust and bookkeeping accounts, and left him with a debt of over $90,000, which is the reason the plaintiffs have reduced the amount of the claim.
As to the debts owing to Core Logic, Domain, Dynamic Gift, LAF, and Reapit, Mr Edwards asserts those debts have been ‘transferred’ to Edwards Property Solutions Pty Ltd, and are accordingly not payable by the Company. He does not substantiate this assertion with any evidence.
As to the debt owing to DNA Printing Solutions, Mr Edwards asserts this company was ‘owned by [O’Brien Corporate], which owed the Company a credit that, on an application of a set-off, would reduce the Company’s account to zero’. This assertion was not supported by any evidence.
Mr Edwards contends no debt is owing to Viatek as it collected the printer the subject of that claim from the Company’s premises in Drouin. I understood this to be an assertion that, because the leased item was repossessed by Viatek, the liability for the debt under the equipment lease had been discharged, but again there was no evidentiary support for such contention and in any event, does not go to the liability under the relevant hiring contract.
Mr Edwards refers to a bank statement as at 15 July 2020 and asserts it demonstrates that there was a balance of $25,013.38, an amount ‘more than enough to cover the direct debits of some of the bills’ incurred by the Company. He deposes it records that on 12 August 2020 the liquidators withdrew $20,037.05 from that account.
Plaintiffs’ submissions
In their written submissions, the plaintiffs refer to the terms of ss 588G and 588M of the Act. They observe that the Act does not precisely identify when a debt is ‘incurred’ for the purposes of s 588G; it will depend upon the nature of each transaction.
Mr Tennant referred to several authorities in this regard, including the passages of Standard Chartered Bank of Australia Ltd v Antico (No 2) (‘Standard Chartered’),[11] and Australian Securities and Investments Commission (ASIC) v Plymin (No 1) (‘ASIC v Plymin’)[12] which are extracted at paras 43, 73 and 74 below.
[11](1995) 18 ACSR 1 (Hodgson J) (‘Standard Chartered’).
[12]Australian Securities and Investments Commission (ASIC) v Plymin (No 1) [2003] VSC 123 (Mandie J) (‘ASIC v Plymin’).
The plaintiffs observe that taxation liabilities are debts capable of being incurred within the meaning of ss 588G and 588F of the Act. They contend the authorities confirm taxation debts are incurred on the date they arose by operation of the relevant taxation legislation. The plaintiffs submit that even in the absence of a formal determination or assessment, a debt arises where the taxpayer has performed transactions to generate a tax liability, and the tax can be calculated.[13]
[13]Commissioner of State Taxation (WA) v Pollock (1993) 12 ACSR 217, 224 (Ipp J); Re Overgold Pty Ltd [2019] VSC 624 [12]–[16] (Gardiner AsJ); Walsh Engineering Services Pty Ltd (in liq) v Walsh Group (Aust) Pty Ltd [2021] VSC 206 [38] (Hetyey AsJ).
As to the question of insolvency, the plaintiffs referred to the principles collected in Voidable Transactions in Company Insolvency in regard to s 95A,[14] which have been outlined at para 84 below.
[14]Which provides that a company is ‘solvent’ only if it is able to pay its debts as and when they become due and payable, and a company is ‘insolvent’ if it is not ‘solvent’.
The plaintiffs referred to the observations of Mandie J in ASIC v Plymin,[15] which pointed to factors indicative of a Company’s insolvency:
[15]ASIC v Plymin (n 12). These indicia were approved of and adopted by the Court of Appeal in Quin (in his capacity as liquidator of Roderick Group Pty Ltd (in liq)) v Vlahos (2021) 64 VR 319 (Kyrou, Kennedy and Walker JJA).
(a)continuing losses;
(b)liquidity ratios below 1;
(c)overdue Commonwealth and State taxes;
(d)poor relationship with its current bank, including an inability to borrow further funds;
(e)no access to alternative finance;
(f)inability to raise further equity capital;
(g)suppliers placing the company on cash on delivery, or otherwise demanding special payments before resuming supply;
(h)creditors paid outside trading terms;
(i)issuing of post-dated cheques;
(j)dishonoured cheques;
(k)special arrangements with selected creditors;
(l)solicitors’ letters, summonses, judgments or warrants issued against the company;
(m)payments to creditors of rounded sums which are not reconcilable to specific invoices; and
(n)inability to produce timely and accurate financial information which displays the company’s trading performance and financial position and can be used to make reliable forecasts.[16]
[16]Ibid [386].
As to the notion of ‘reasonable grounds to suspect insolvency’ which the plaintiffs are required to establish under s 588G(1)(c), it was submitted this falls somewhere between a belief that the company is insolvent, and a mere wondering as to whether that is the case.[17] That suspicion may be a ‘positive feeling of actual apprehension…amounting to ‘a slight opinion, but without sufficient evidence’.[18]
[17]Hall v Poolman (2007) 215 FLR 243 [234] (Palmer J) (‘Poolman’).
[18]Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, 303 (Kitto J) (‘Queensland Bacon’).
The plaintiffs contended all the debts claimed in the insolvent trading claims were incurred after 1 July 2017. As at that date, the Company had double the amount of current liabilities than it had in current assets; i.e. its liquidity ratio was 0.50. It had incurred a substantial trading loss of $151,957 for the 2017 financial year, was unable to meet its taxation liabilities and had a RBA deficit debt of $79,003.15. Additional interest of $259.24 was charged to the previous balance of $78,743.91 on 30 June 2017, which was never repaid in full, and the Company was not remitting the appropriate amount of superannuation owing to its employees, resulting in a superannuation guarantee shortfall of $31,839.21 for the period to 30 June 2017.
The plaintiffs submitted that although fees are referred to as payable to O’Brien Corporate in the Licensing Agreement entered into before the Company became insolvent, the debt for the precise amount of the Licensing Agreement fees was only incurred on a monthly basis and there was no pre-existing liability for the precise charges.
The plaintiffs refer to the obligations created by the terms of the Licensing Agreement that:
(a)the Company pay O’Brien Corporate a royalty of 3% of sales revenue monthly in arrears 14 days from the date of invoice;[19]
(b)the Company must pay O’Brien Corporate fees and costs for training, seminars, meetings or conferences provided to the Company’s responsible officer and/or employees;[20]
(c)the Company must participate at its own cost in all promotional activities and market research program as reasonably required by O’Brien Corporate;[21] and
(d)O’Brien Corporate may, with the approval of at least 75% of all O’Brien Corporate Members, establish a marketing fund to which all O’Brien Members must contribute.[22]
[19]Cl 4.3, Sch 2 – Item 11 of the Licensing Agreement.
[20]Cl 11.5 of the Licensing Agreement.
[21]Cl 13.2(1) of the Licensing Agreement.
[22]Cl 13.3 of the Licensing Agreement. ‘Member’ is defined at Item 2, Schedule 2 of the Licensing Agreement as: ‘O’Brien Real Estate Drouin Pty Ltd.
As to royalties, the plaintiffs contend they are only payable based on the Company’s performance in a particular month. If no sales are made, there is no indebtedness to O’Brien Corporate. It was this subsequent action, or positive act, by the Company which resulted in the incurring of the debt.
Mr Tennant sought to distinguish the position in respect of the Licensing Agreement in this matter from that considered by Hetyey AsJ in Re Melbournehomes.com Pty Ltd (in liq) (‘Melbournehomes.com’)[23] on the basis that the terms of the Licensing Agreement relevantly differed from the franchise agreement the subject of consideration in that case.
[23]Re Melbournehomes.com Pty Ltd (in liq) [2020] VSC 854 (AsJ Hetyey) (‘Melbournehomes.com’).
In Melbournehomes.com, the Court considered the question of when unpaid franchise and marketing fees were incurred by a franchisee company in the context of an insolvent trading claim. Melbournehomes.com Pty Ltd (‘Melbournehomes’) operated a rental agency business under a franchise agreement with the franchisor Stockdale & Leggo (Corporate Advertising) Pty Ltd (‘Stockdale & Leggo’). Melbournehomes was wound up in insolvency and the liquidators brought an insolvent trading claim against the director of that company. One of the debts claimed was owed to Stockdale & Leggo in respect of unpaid franchisee and marketing fees, and unpaid future franchise and marketing fees. Hetyey AsJ referred to my reasoning in Overgold,[24] and stated:
Notably, his Honour did not consider that the dates upon which franchise fees were invoiced were especially relevant because the liability to remit those charges was incurred at an earlier time when the franchise agreement was entered into. Further, his Honour held that because the franchise agreement was made before Overgold became insolvent, the franchise fees claimed by Nando’s were necessarily excluded from the liquidator’s insolvent trading claim.[25]
[citations omitted]
[24]Re Overgold Pty Ltd [2019] VSC 624 (AsJ Gardiner) (‘Overgold’).
[25]Melbournehomes.com (n 23) [64] (Citations omitted).
The plaintiffs observed that in Melbournehomes the franchisee company was required to pay a ‘franchise fee in respect of sales revenue for the prior month, or the sum of $1,500 plus GST, whichever is the greater amount.’[26] In his oral submissions, Mr Tennant described the clauses as a ‘formula’ which ‘prescribes that it’s payable every month regardless of what happens in sales the previous month’, with the liability to pay the amount created when the franchisee company signed the franchise agreement. The Licensing Agreement here provides that the royalty is only payable if there is sales revenue.
[26]Ibid [48(a)].
The plaintiffs referred to Hetyey AsJ’s judgment in Melbournehomes.com, submitting that his Honour, in determining that the debt in respect of the monthly franchise fee was incurred upon execution of the franchise agreement, explicitly highlighted the element of the minimum monthly liability under the agreement, regardless of actual sales revenue:
I also do not accept the plaintiffs’ contention that the franchise fees and marketing fees were incapable of being ascertained when the company entered into the Franchise agreement because they were dependent upon sales revenue earned each month by the Company. Clause 5.3(1) is clear that franchise fees and marketing fees were charged as a percentage of revenue, or by reference to the minimum amounts of $1,500 plus GST and $500 plus GST, respectively. In other words, there was a minimum monthly liability capable of being ascertained at the commencement of the Franchise Agreement which was incurred regardless of actual sales revenue. [27]
[27]Ibid [67].
The plaintiffs maintained that, in this case, there was no minimum monthly payment required to be made by the Company under the terms of the Licensing Agreement and the ‘positive act’ of incurring the debt was generating sales revenue.
Mr Tennant made a similar submission in respect of marketing charges, marketing contributions and training costs. The marketing charges fluctuated monthly on a unit basis. In accordance with the marketing undertaken by O’Brien Corporate for the Company in a particular month, marketing contributions were for a limited period, from February 2018 to November 2018. The plaintiffs contended that these were the relevant ‘positive acts’ which resulted in the Company incurring the marketing contributions debts. Moreover, training costs were charged on an attendance basis and the Company only incurred the debt when its officers or employees attended such events.
As such, the plaintiffs submitted that although royalties, license fees, merchandise, marketing charges and contributions, alongside training, event and seminar costs (together, ‘precise costs’) are ‘payable’ to O’Brien Corporate under the Licensing Agreement,[28] the precise costs were incurred on a monthly basis; they were not the subject of any pre-existing liability. The plaintiffs submitted this is to be distinguished from the position in Melbournehomes.com; the terms of the Licensing Agreement differed relevantly from the franchise agreement the subject of consideration in that case, which required the franchisee company to pay a ‘franchise fee in respect of sales revenue for the prior month, or the sum of $1,500 plus GST, whichever is the greater amount.’[29] It was contended that it was a significant difference that the Licensing Agreement did not require the Company to make any minimum monthly payment.
[28]The ambit of the plaintiffs’ original claim also included charges for Google suite, website usage, management of trust accounts, accounting and bookkeeping services and payment on the Company’s behalf of invoices for ‘Bluestar’, but in accordance with ‘Plaintiffs’ Supplementary Outline of Submissions Regarding O’Brien Corporate Pty Ltd Debt’, Submission in O’Brien Real Estate (Drouin) Pty Ltd (ACN 602 065 734) (In Liquidation), S ECI 2021 03934, 24 February 2023, [4]-[5], these are no longer pressed.
[29]Melbournehomes.com (n 23) [48(a)].
In their supplementary submissions dated 24 February 2023, the plaintiffs outline the categories of the O’Brien Corporate debt, which are:[30]
[30]Exhibit JS-2 to affidavit of Jason Stone, sworn 10 October 2022, 336-382, which consists of invoices from 28 February 2018 to 31 July 2019.
(a)royalties/franchise fees, which fluctuated on a monthly basis and were not charged in September 2018 when there was no sales revenue. The amount owing is calculated in this way:
Royalties/franchise fees; Date Invoice Reference Amount 28 February 2018 00002384 Franchise Fees $624.30 31 March 2018 00002554 Franchise Fees $1,042.09 30 April 2018 00002616 Franchise Fees $1,370.06 31 May 2018 00002733 Franchise Fees $1,292.36 30 June 2018 00002796 Franchise Fees $2,469.10 31 July 2018 00002926 Franchise Fees $2,229.98 31 August 2018 00003054 Franchise Fees $1,193.79 30 November 2018 00003335 Franchise Fees $1,311.54 31 December 2018 00003396 Franchise Fees $927.93 31 January 2019 00003430 Franchise Fees $758.88 28 February 2019 00003523 Franchise Fees $215.50 31 March 2019 00003609 Franchise Fees $265.65 30 April 2019 00003657 Franchise Fees $215.62 31 May 2019 00003753 Franchise Fees $1,281 30 June 2019 00003855 Franchise Fees $737.25 31 July 2019 00003926 Franchise Fees $2,558.52 Total $18,493.47 (b)marketing contributions and charges, of which there are two categories, being marketing contributions of $825 per month for the 10 month period from February to November 2018 which totalled $8,250; and fluctuating marketing charges which changed every month based on the marketing undertaken by O’Brien Corporate for the Company in a particular month. No charges were rendered in August or September 2018, and totalled $4,320.
Marketing contributions Date Invoice Reference Amount 1 March 2018 00002422 Marketing Contribution (Radio, Video, YouTube, Billboards, Facebook/Instagram, Digital Targeting, 1 3000 O’Brien Number)
Month – February 2018 & March 2018$1,650 27 March 2018 00002511 Marketing Contribution (Radio, Video, YouTube, Billboards, Facebook/Instagram, Digital Targeting, 1 3000 O’Brien Number)
Month – April 2018$825 27 April 2018 00002589 Marketing Contribution (Radio, Video, YouTube, Billboards, Facebook/Instagram, Digital Targeting, 1 3000 O’Brien Number)
Month – May 2018$825 28 May 2018 00002706 Marketing Contribution (Radio, Video, YouTube, Billboards, Facebook/Instagram, Digital Targeting, 1 3000 O’Brien Number)
Month – June 2018$825 26 June 2018 00002842 Marketing Contribution (Radio, Video, YouTube, Billboards, Facebook/Instagram, Digital Targeting, 1 3000 O’Brien Number)
Month – July 2018$825 25 July 2018 00002899 Marketing Contribution (Radio, Video, YouTube, Billboards, Facebook/Instagram, Digital Targeting, 1 3000 O’Brien Number)
Month – August 2018$825 29 August 2018 00003022 Marketing Contribution (Radio, Video, YouTube, Billboards, Facebook/Instagram, Digital Targeting, 1 3000 O’Brien Number)
Month – September 2018$825 25 September 2018 00003121 Marketing Contribution (Radio, Video, YouTube, Billboards, Facebook/Instagram, Digital Targeting, 1 3000 O’Brien Number)
Month – October 2018$825 30 October 2018 00003198 Marketing Contribution (Radio, Video, YouTube, Billboards, Facebook/Instagram, Digital Targeting, 1 3000 O’Brien Number)
Month – November 2018$825 Total $8,250
Marketing charges Date Invoice Reference Amount 28 February 2018 00002384 Marketing Charges 5 Units x $135 $675 31 March 2018 00002554 Marketing Charges 5 Units x $135 $675 30 April 2018 00002616 Marketing Charges 9 Units x $135 $1,215 31 May 2018 00002733 Marketing Charges 2 Units x $135 $270 30 June 2018 00002796 Marketing Charges 3 Units x $135 $405 31 July 2018 00002926 Marketing Charges 5 Units x $135 $675 31 October 2018 00003224 Marketing Charges 2 Units x $135 $270 30 November 2018 00003335 Marketing Charges 1 Unit x $135 $135 Total $4,320 (c)Merchandise which was supplied by O’Brien Corporate to the Company intermittently between February and November 2018, calculated as:
Merchandise Date Invoice Reference Amount 28 February 2018 00002384 Merchandise $33.60 31 March 2018 00002554 Merchandise $94.40 31 May 2018 00002733 Merchandise $265 30 June 2018 00002796 Merchandise $900 31 October 2018 00003224 Merchandise $253 30 November 2018 00003335 Merchandise $571 Total $2,117 (d)Training and events, the costs of which total $10,360 and are calculated as:
Training and events Date Invoice Reference Amount 1 March 2018 00002413 Josh Phegan Training 22.218 ($115 x 2) (John Edwards & Wendie Kepka) $230 6 March 2018 00002426 February Quarterly Awards (2x $115)
Attendees:
John Edwards & Craig Holowell$230 10 March 2018 00002497 Leading Teams – 10/3/2018
$1600 per person x 1
Attendees: John Edwards$1,600 27 March 2018 00002534 Josh Phegan Training 22.3.18 ($115 x 2)
Attendees:
John Edwards and Craig Holowell$230 8 May 2018 00002647 Awards 03.05.2018
Attendees: $115 x 5 persons (John Edwards, Wendie Kepka, Sam Jose, Cameron Webb, Craig Holowell)$575 17 May 2018 00002683 Josh Phegan Training
($115 x 1 person)
Attendees: Craig Holowell$115 25 June 2018 00002834 O’Brien Summit 2018 – 21.06.18 – 5 x $495
Attendees:
Tim Kingsun, Craig Holowell, Sam Jose, Cameron Webb & John Edwards$2,475 20 July 2018 00002885 O’Brien Real Estate Gala Awards 4th August 2018 (6 x $180)
Attendees:
Sam Jose, Michaela Otene, Tim Kingsun, John Edwards$1,080 8 August 2018 00002969 Training Manuals
Josh Phegan manuals @ $25 each x 1
Tim Kingsun - Drouin$25 14 August 2018 00002982 Josh Phegan Training (26.07.18)
115 x Persons
Attendees: Timothy Kingsun$115 21 September 2018 00003086 Josh Phegan Training (20.09.2018)
115 x Person
Attendees: Timothy Kingsun$115 25 September 2018 00003107 Your Say Billings – 10 October 2018
Attendees: $595 x 1
Cameron Webb$595 31 October 2018 00003266 Josh Phegan Training (25.10.2018)
115 x Person
Attendees: Cameron Webb$115 15 November 2018 00003292 Ladies Brunch event 16 November 2018 (1 x 110)
Attendees: Michaela Otenne$110 11 December 2018 00003368 Christmas Party 11/12/2018 (2 Persons x $140)
Attendees: John Edwards x 2$280 31 January 2019 00003460 O’Brien Real Estate Ignite Conference on the 6th and 7th of February 2018
(3 x $395 per person)
Attendees: Cameron Webb & Kathy Burgstahler$1,185 31 January 2019 00003479 Awards Lunch January 31, 2019
(2 x $120 per person)
Attendees: Cameron Webb, Kathy Burgstahler$240 19 February 2019 00003507 O’Brien Real Estate Ignite Conference on the 6th and 7th of February 2019.
(2 x $395 per person)
Attendees: John Edwards, Dianne Donaldson$790 21 March 2019 00003587 Josh Phegan Training ($115 x 2)
Attendees: Cameron Webb, Crystal Peter
Books: $25 x 1
Attendees: Crystal Peter$230
$25
Total $10,360
The plaintiffs elaborate on the calculation of the debt owing to the DCT in their submissions:
(a)The RBA deficit debt as at 30 June 2017 totalled $78,743.91, plus additional debts of $244,022.40 recorded in the RBA account from 1 July 2017 to 15 July 2020, less payments and other reductions of $135,048.64 recorded in the RBA account from 1 July 2017 to 15 July 2020[31]. This left an RBA deficit debt of $187,717.67 owing at the date of the liquidation; and
(b)SGC debt for superannuation guarantee shortfall debt of $183,044.03 for superannuation payable to 30 June 2020 less superannuation guarantee shortfall debt of $31,872.59 payable to 30 June 2017. This totals $151,171.41.
[31]Thus the amount owing on 30 June 2017 was discharged by subsequent payments but additional debts were incurred.
The plaintiffs contend ABC’s claim does not take into account the net recovery of $8,000 received after being paid $28,000 by the Company but disgorging $20,000 to the plaintiffs as an unfair preference. On an application of s 588FI, once this is deducted from ABC’s claimed debt, the amount can be ascertained by the simple formula: $33,100.36 - $8,000 = $25,100.36.[32]
[32]Corporations Act 2001 (Cth) s 588FI.
The plaintiffs state the balance of the debts claimed are ordinary trading debts incurred by the Company in operating a real estate agency and were incurred at the latest on the date the invoices were generated.
As to the FDA claims, the plaintiffs contend such transactions are voidable pursuant to s 588FE(6A) as they were entered into, or an act was done was for the purpose of giving effect to them, during the period from four years prior to the relation-back date, and when the winding up began. The plaintiffs state the Court may rely on s 588FF(1) to make orders should it be satisfied that an unreasonable director-related transaction is voidable, including that a person pay the Company an amount of money. The plaintiffs refer to the series of payments extracted at para 25 above. The payment of $53,093.19 on 15 July 2020 constituted the entirety of the balance remaining in the Company’s account.
The plaintiffs contend Mr Edwards has not provided any explanation as to why the Company made payments to him, and that there was no legitimate basis for the payment to be made. The plaintiffs submit Mr Edwards was transferring the Company’s money away from its bank account for his own personal benefit so it would not be available to the Company’s creditors.
Mr Edwards’ oral submissions
Mr Edwards, in response to Mr Tennant’s oral submissions, noted the plaintiffs produced a Licensing Agreement with a ‘commencement date that was blurred out and not visible’,[33] as a result of which the Licensing Agreement was null and void. I note that Mr Edwards did not contend the Company did not enter into the Licensing Agreement, rather that the exact date of the Licensing Agreement is not clear. Mr Edwards further highlighted that the document produced by the plaintiffs involved both himself and Mr Capuano, then a joint owner of the Company. Mr Edwards contended that when Mr Capuano left the Company in 2017, a new license agreement was signed. Mr Edwards asserted that, ‘under franchise law, once a director leaves a franchise agreement, a new franchise agreement must be put in place, which there was’.[34] Mr Edwards did not produce any evidence in regard to any alleged new license agreement or identify any legal principle or case law which supported such a contention.
[33]Transcript (n 3) 68, however the evidence suggests it was entered into in about March 2015.
[34]Ibid 72.
During the course of the hearing Mr Edwards stated he was not aware the Company was insolvent. He notes that on 19 September 2019, he deposited $200,000 in cash into the Company’s account. Mr Edward asserts that on around 1 September 2017, ‘there was over $110,000 outstanding at the time that O’Brien Corporate [owed the Company] – and we traced from vendors’…‘$200,000 outstanding in commissions’.[35]
[35]Ibid 84.
In respect of the FDA claim, Mr Edwards contended at the hearing that, from 2017, he had not taken a wage or dividend from the Company and that the balance of the $53,903.19 withdrawn by him on 15 July 2020 was his ‘portion of commissions’. I note there has been nothing placed into evidence to support this contention.
Applicable principles and legislation
The legislative regime providing for insolvent trading claims against directors of companies is contained in Div 3 of Pt 5.7B of the Act. Section 588G of the Act relevantly provides that:
Director’s duty to prevent insolvent trading by company
(1) This section applies if:
(a)a person is a director of a company at the time when the company incurs a debt; and
(b)the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
(c)at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and
(d)that time is at or after the commencement of this Act.
…
(2)By failing to prevent the company from incurring the debt, the person contravenes this section if:
(a)the person is aware at that time that there are such grounds for so suspecting; or
(b)a reasonable person in a like position in a company in the company’s circumstances would be so aware.
…
Section 588G therefore has application if the following conditions are satisfied:
(a)a person is a director of a company when the company incurs a debt;
(b)the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt;
(c)at the time of incurring the debt, there are reasonable grounds for suspecting that the company is insolvent, or would become insolvent as a result of incurring the debt or debts including the debt, as the case may be; and
(d)the time of incurring the debt was at or after 23 June 1993.
Once the threshold requirements of s 588G(1) are satisfied, for a contravention of the section to be established, a plaintiff is required to prove the matters contained in s 588G(2).[36] That is, either the director was aware at the time the debt was incurred that there were such grounds to suspect the company is insolvent, or a reasonable person in their position in a company in the same circumstances would be aware of such insolvency, and the director failed to prevent the company from incurring the debt. It is a fundamental requirement for a party seeking to successfully make a claim for insolvent trading to establish when the debt was incurred and that the company was insolvent at that time.
[36](2021) 64 VR 319, 332 [44] (‘Vlahos’).
The plaintiff bears the onus of establishing a contravention of s 588G. In this regard, s 1332 of the Act provides that, other than proceedings for an offence, it is sufficient if the court is satisfied of the relevant matters on the balance of probabilities.
A contravention of s 588G(2) has civil and criminal consequences for directors. Section 588M(2) of the Act provides that in the civil context, a company’s liquidator may recover from the director as a debt in the amount equal to the loss or damage suffered by the relevant unsecured creditor(s) as a result of the director’s breach of s 588G(2). Section 588M of the Act provides:
Recovery of compensation for loss resulting from insolvent trading
(1) This section applies where:
(a)a person (in this section called the director ) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and
(b)the person (in this section called the creditor ) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and
(c)the debt was wholly or partly unsecured when the loss or damage was suffered; and
(d)the company is being wound up;
whether or not:
(e)the director has been convicted of an offence in relation to the contravention; or
(f)civil penalty order has been made against the director in relation to the contravention.
(1A)This section applies if:
(a)a person (the director) has contravened subsection 588GAB(1) or (2) or 588GAC(1) or (2) relating to disposition of property by a company; and
(b)one or more creditors of the company have suffered loss or damage because of the disposition and the company's insolvency; and
(c) the company is being wound up.
This section applies whether or not the director has been convicted of an offence relating to the contravention or a civil penalty order has been made against the director for the contravention.
(2)The company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.
(3)The creditor may, as provided in Subdivision B but not otherwise, recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage.
(4)Proceedings under this section may only be begun within 6 years after the beginning of the winding up.
Incurring of a debt
To attract the operation of s 588G, there must be the ‘incurring’ of a ‘debt’ at a time when the company was insolvent.[37] The Act does not prescribe when a debt is ‘incurred’ for the purposes of s 588G, save for some specific types of transactions identified in s 588G(1A) of the Act, which have no application here.[38]
[37]See Corporations Act 2001 (Cth) s 588G(1)(b), which states ‘…or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt’.
[38]Melbournehomes.com (n 23) [26].
The terms of contractual obligations are various and when a debt is incurred will depend on the terms of the subject contract, and in particular, when liability in respect of a debt comes into existence. It is therefore necessary to identify, by reference to the terms of the contract, as to precisely when liability is contracted in each case.
The Court of Appeal in New South Wales considered this issue in Hawkins v Bank of China (‘Hawkins’).[39] Gleeson CJ stated:
The words ‘incurs’ and ‘debts’ are not words of precise and inflexible denotation. Where they appear … they are to be applied in a practical and common sense fashion, consistent with the context and with the statutory purposes.[40]
[39]Hawkins v Bank of China (1992) 26 NSWLR 562 (Gleeson CJ) (‘Hawkins’).
[40]Hawkins (n 39) 572 (Gleeson CJ).
In Standard Chartered Bank of Australia Ltd v Antico (No 2),[41] Hodgson J stated:
In my opinion, a company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable. This formulation has three aspects which could cause difficulty in particular cases: first, as to whether the company has a choice whether to do (or omit) the act or not; secondly, as to whether it is the act or omission, or something else, which renders the company liable for the debt; and thirdly, as to whether the company would otherwise (in any event) have been liable for the debt.[42]
[41](1995) 18 ACSR 1 (Hodgson J).
[42]Ibid 57.
In ASIC v Plymin, Mandie J observed:
In the case of a future debt, it may be incurred at the time of entering the contract if it is then an ascertained or ascertainable amount. By the same token, a debt may in appropriate circumstances be incurred within the meaning of the section at a time later than the entry of the contract under which the debt arises or may arise.
…
…I think that it will often be the case, for the purposes of the section, that under a contract for the sale of goods where delivery times are left for future orders or instructions that, as a matter of substance and commercial reality, a debt will be incurred on each occasion when a delivery is ordered.
[citations omitted, emphasis added][43]
[43]ASIC v Plymin (n 12) [516]-[517].
In Harrison v Lewis,[44] Mandie J observed that:
The words “incurs a debt” cannot be disregarded but, because of the aim and intent of the section, the focus must be on the conduct and choice of the alleged insolvent company. It is necessary to identify the time when the conduct and choice of the company caused the debt to be incurred because it is at that time that it must be shown that the director who has failed to prevent the company from incurring the debt had or ought to have had the requisite awareness that there were reasonable grounds for suspecting insolvency.
[emphasis added][45]
[44][2001] VSC 27 (Mandie J).
[45]Ibid [28].
A significant proportion of the plaintiffs’ insolvent trading claim relates to unpaid taxation debts. Section 588F of the Act provides that certain identified types of taxation liabilities are ‘debts’ capable of being incurred within the meaning of s 588G,[46] and states:
[46]See Commissioner of State Taxation (WA) v Pollock (1993) 12 ACSR 217 (Ipp J); Sutherland v Liquor Administration Board (1997) 24 ACSR 176 (Young J); Sands & McDougall Wholesale Pty Ltd (in liq) v Commissioner of Taxation [1999] 1 VR 489, [36] (Charles JA with Brooking and Kenny JJA agreeing); Powell v Fryer (2001) 159 FLR 433, [73] (Olsson J).
588F Certain taxation liabilities taken to be debts
(1)For the purposes of this Part, a company’s liability under a remittance provision to pay to the Commissioner of Taxation an amount equal to a deduction made by the company, after 1 July 1993, from a payment:
(a) is taken to be a debt; and
(b) is taken to have been incurred when the deduction was made.
(2) In this section:
“remittance provision” means any of the following former provisions of the Income Tax Assessment Act 1936:
(aa)section 220AAE, 220AAM or 220AAR;
(a)section 221F (except subsection 221F(12)) or section 221G (except subsection 221G(4A));
(b)subsection 221YHDC(2);
(c)subsection 221YHZD(1) or (1A); (d) subsection 221YN(1);
or any of the provisions of Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953.
(3)This section is not intended to limit the generality of a reference in this Act to a debt or to incurring a debt.
The authorities confirm that taxation debts are incurred on the date they arose by operation of the relevant taxation legislation.[47] Even if there has not been a formal determination or assessment, a debt arises when the taxpayer has engaged in transactions which generate a tax liability and enable the tax to be calculated.[48]
[47]See Powell v Fryer (2001) 159 FLR 433, 443–4, [64]–[73] (Olsson J, Duggan and Williams JJ agreeing); Sands & McDougall Wholesale Pty Ltd (in liq) v FCT [1999] 1 VR 489, 504–5 [36]–[37] (Charles JA, Brooking and Kenny JJA agreeing); Rambaldi v Rice Bar Restaurant [2018] VSC 218, [32]–[33]; Hall v Poolman (2007) 215 FLR 243; Melbournehomes.com (n 23), [41].
[48]Commissioner of State Taxation (WA) v Pollock (1993) 12 ACSR 217, 224 (Ipp J); Overgold (n 24), [12]- [16]; Walsh Engineering Services Pty Ltd (in liq) & Ors v Walsh Group (Aust) Pty Ltd & Ors [2021] VSC 206, [38].
In Overgold, I observed that:
In Shepherd v ANZ, Bryson J was of the view that obligations imposed by law, such as revenue law, can be debts for the purposes of the insolvent trading provisions ‘whether or not acts or omissions which the company chose to be involved in brought them into existence’. The authors of Director’s Duties During Insolvency observe:
The difference in approach between Hodgson J [in Standard Chartered v Antico and Bryson J] [in Shepherd v ANZ] is that whereas Hodgson J considered the act of the company to be determinative, Bryson J focused on the act of the creditor in electing to be treated as a creditor by crystallising a debt due by demanding payment. These two approaches are not entirely inconsistent. In essence, they both consider the substance of the transaction as instrumental, rather than the form of the transaction, in the light of a commercially realistic interpretation of a transaction ‘between two parties’.
In Powell, Olsson J stated:
In my opinion, not only is it well established that a statutory impost is capable of constituting a debt, but it is also the situation that, if, by reason of the normal, ongoing operations of a company (including the mere passive retention of existing staff or premises) it is rendered liable to pay a statutory impost, then it may be properly said that such impost has been ‘incurred’ as a debt, by the entity in question…[49]
[49]Overgold (n 24) [15]-[16].
As has been mentioned, the insolvent trading claims include several categories of debts allegedly incurred under the terms of the Licensing Agreement and other associated agreements the Company had entered into with O’Brien Corporate. The Licensing Agreement, akin to what is commonly known as a franchise agreement, was entered into on or about 17 March 2015. As contended by Mr Tennant, there are features of the Licensing Agreement which bear a close resemblance to that the subject of consideration by Hetyey AsJ in Melbournehomes.com.
In Melbournehomes.com relation to franchise fees, Hetyey AsJ stated:
In my view, the relevant ‘positive act’ by which the Company incurred those fees was not, as contended by the plaintiffs, the generation of sales revenue each month. Instead, it was the execution of the Franchise Agreement which created the contractual obligation to pay those monthly fees. Unlike the position in ASIC v Plymin, the commercial arrangement between the parties here did not involve the drawing down of a commodity at regular intervals pursuant to an agreement, such that a debt was incurred when each draw down occurred. The commercial arrangement between the Company and the Franchisor was more akin to the position in Russell Halpern where the act of committing a company to make periodic payments under a long-term lease was the entry into the lease itself.[50]
[50]Melbournehomes.com (n 23) [68].
In my earlier decision of Overgold, I observed that:
In this proceeding it will be seen that the largest claim by the plaintiffs against Mr Appel is that said to be owed to Nando’s Australia Pty Ltd in respect of Overgold’s obligations under a franchise agreement to be discussed below. There are, according to counsel’s research, apparently no authorities which deal directly with franchise agreement obligations in the context of incurring debts and of course the position will ultimately depend on the terms of the franchise agreement under consideration. Perhaps the most analogous transaction to that of a franchise agreement, where there is a contract which provides for a prospective liability for periodical payments, is that of the obligations incurred under a lease of land.
Liability for rent under a lease is generally regarded as being incurred in the context of insolvent trading as being at the time when the lease was entered into. In Russell Halpern Nominees Pty Ltd v Martin (‘Russell Halpern’), the Full Court of the Supreme Court of Western Australia (Burt CJ with whom Smith J agreed, Olney J dissenting) stated:
[T]he contention is that a debt was incurred from time to time as the rent became payable under the agreement. On that basis the appellant says that it can, under s 556(1) of the Code, recover all rent which became payable under the agreement for the period 1 July 1982 until 25 May 1983. That submission should be dealt with upon the basis that the lease was for a term which had not expired when on 25 May 1983 the appellant sold the premises. So understood, the proposition is that a tenant holding premises for a term ‘incurs a debt’ within the meaning of s 556(1) of the Code upon each and every rent day. I do not think that to be correct. Whatever the expression ‘incurs a debt’ might mean, it is clearly descriptive of an act which when done by the company in the stated circumstances exposes a director of the company and a person who took part in the management of the company when the debt was incurred, [sic] when the act was done, to a criminal liability…In a case such as this, when the term of the lease has not expired and when the landlord is holding the tenant to the agreement so that the tenant, whether in occupation of the leased premises or not, becomes liable to pay rent on the agreed rent days, I do not think that any relevant act on the part of the tenant beyond his entering into the lease in the first instance can be identified. And that being so, I do not think it can be said that a tenant company ‘incurs a debt’ within the meaning of the subsection whenever a present liability to pay rent is created by the tenant’s covenant in the lease operating upon the passage of time . To hold otherwise would be to say that if a company when in all respects financially sound were to enter into a lease for a term of years and at some time thereafter and for reasons which could not be anticipated it were to fall on bad times and be unable to pay its debts, the directors would thereafter and on every rent day within the remainder of the term be guilty of an offence for the reason that on that rent day the company ‘incurs a debt’. I am unable to accept that… [emphasis added]
Russell Halpern is authority for the principle that the only act that satisfies the ‘positive act’ requirement in the context of a lease is the entry into the contract of a lease; a company incurs a debt when it first enters into the lease, it does not incur a separate debt each and every time rent becomes payable under the lease because there is no positive act on the part of the company on those occasions.[51]
[51]Overgold (n 24) [20]–[22].
I shall turn to a consideration of the relevant terms of the Licensing Agreement and the associated agreements later in these reasons when it comes to an analysis of when the debts the subject of the plaintiffs’ claims were incurred having regard to the principles to which I have referred.
Insolvency
The plaintiffs are required to prove in respect of each debt the subject of the insolvent trading claim that the debt was incurred while the company was insolvent or that it became insolvent as a result of incurring the debt.[52]
[52]Corporations Act 2001 (Cth), s 588G(1)(b).
In this context, ‘solvent’ is defined by s 95A of the Act which provides that a company is solvent if, and only if, it is able to pay its debts as and when they become due and payable. A company is ‘insolvent’ if it is not ‘solvent’. Section 588G only applies where the company incurs a debt whilst it ‘is insolvent at that time or becomes insolvent by incurring that debt’. There is a considerable body of case law dealing with the interpretation of this notion in the context of corporate insolvency In Overgold, I summarised the position as follows:
(i)the test of solvency in the Act incorporates ‘the cash flow test’ as opposed to the ‘balance sheet test’;
(ii)in determining insolvency the Court takes into account the financial position of the company as a whole having regard to ‘commercial reality’;
(iii)the test of insolvency is concerned with the ability of the company to pay all its debts rather than merely particular debts when they become respectively due and payable;
(iv)a temporary lack of liquidity does not constitute insolvency, however there is often a very fine line between the two;
(v)the courts have developed some ‘usual indicia’ of insolvency which are a useful guide to assist the court in determining insolvency, although not necessarily determinative;
(vi)the question of whether or not a company is insolvent is ultimately a question of fact to be determined by the court(although it is common to refer to an affidavit given by liquidators on this subject as being an ‘expert report on insolvency’); and
(vii)liability can be established under s 588G(1)(b) without reference to the particular debt incurred, if at the time the debt was incurred, the company was unable to pay other debts.[53]
[53]Overgold (n 24) [24].
In Noxequin Pty Ltd v Deputy Commissioner of Taxation, Barrett J stated:
The emphasis must be upon the extent of cash and other liquid assets (by which I mean assets readily convertible into cash), compared with the quantum of debts due and payable and to become due and payable in the immediate future. A comparison between the two can be made only as at a particular point but a state of solvency requires that, a each such point, the cash and liquid assets be sufficient to cover the debts due and payable and to become due and payable in the immediate future…
The ‘cashflow test’ requires a court to ascertain:
(a)the company’s existing debts and the company’s debts within the near future;
(b)the date each debt will be due for payment; and
(c)the company’s present and expected cash resources and the date each item will be received.
The ‘cashflow test’ entitles a court to take into account assets available to the company which can be realised in order to answer indebtedness although there is a temporal limitation to this. In Hall v Poolman, Palmer J stated:
An asset cannot be taken into account in assessing solvency at a particular time without reference to the time it would realistically take to effect realisation and produce cash. It is no indication of solvency – indeed, it is the opposite – to point to property as available to meet debts falling due next month when, even with the utmost expedition, that property cannot be turned into cash for six months. Realisable property can only be taken into account in assessing solvency “if that property is in such a position as to title and otherwise that it could be realised in time to meet the indebtedness as the claims mature”. [citations omitted][54]
[54]Overgold (n 24) [25]–[27].
In ASIC v Plymin, Mandie J listed 14 general and non-exhaustive indicators of insolvency which were referred to with approval by the Court of Appeal in Quin and Another v Vlahos (‘Vlahos’).[55] These indicators appear at para 43 above. As observed by Hetyey AsJ in Melbournehomes.com, the indicia referred to in ASIC v Plymin, while ‘representing common sense indicators of insolvency’ are ‘not a proxy for the statutory test under s 95A’.[56] In Lewis, Re Damilock Pty Ltd (in Liq) v VI SA Australia Pty Ltd, Mansfield J observed that ‘the absence of one or more of those factors does not, of itself, establish solvency’.[57]
[55]Vlahos (n 36) 332, [44].
[56] Melbournehomes.com (n 23) [107].
[57] (2008) 252 ALR 533, [16] (Mansfield J).
Reasonable grounds to suspect insolvency - s588G(1)
In Vlahos,[58] the Court of Appeal observed in respect of the operation of s 588G(1)(c) of the requirement to establish that at the time that the debt was incurred that there were reasonable grounds to suspect insolvency:[59]
[58]Vlahos (n 36).
[59]Corporations Act 2001 (Cth) s 588G(1)(c): “…at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be”.
As is apparent, s 588G(1) of the Act sets out the circumstances when s 588G applies. Several aspects of s 588G(1) are straightforward and do not require elaboration. However, it is necessary to make three observations about the operation of s 588G(1)(c), which concerns whether there are reasonable grounds for suspecting that the company is insolvent at the time a debt is incurred.
(a) First, the requirement under sub-s (1)(c) is an objective one. The provision calls for an inquiry into the objectively formed state of mind of ‘a director of reasonable competence and diligence, seeking properly to perform his or her duties as imposed by law…and capable of reaching a reasonably informed opinion as to [the company’s] financial capacity. The provision is not concerned with the particular director whose conduct is under scrutiny.
(b) Secondly, the focus of the sub-section is on a specific state of mind, namely ‘suspicion’. This can be contrasted with earlier formulations of analogous provisions, such as that found in s 556 of the Companies (NSW) Code 1981, which required there to be reasonable grounds for expecting a company’s insolvency. A suspicion is ‘less developed and less well formulated than [an] expectation’. A suspicion that something exists is ‘more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to “a slight opinion, but without sufficient evidence”.
(c) Thirdly, where there is material before the Court that is capable of proving actual insolvency, and where the material was available to the director at the time the debt was incurred, a court will generally find that a reasonable person in the position of the director would have concluded that the company was unable to pay its debts as they fell due. However, the court must always ultimately make its own findings, based on all of the facts and circumstances that existed at the time, and without the benefit of hindsight.
If s 588G(1) of the Act is satisfied, so that s 588G applies, then it is necessary to turn to s 588G(2). Under s 588G(2), a person will contravene s 588G by failing to prevent a company from incurring a debt if either:
(a) the person is aware of the existence of grounds for suspecting insolvency; or
(b) ‘a reasonable person in a like position in a company in the company’s circumstances would be so aware’.
The first limb of s 588G(2) of the Act focuses on the subjective knowledge of the person concerned. However, it does not require proof of an actual suspicion by that person; rather, it requires proof that the person was aware of the facts and matters that can be objectively characterised as reasonable grounds for suspecting insolvency.
The second limb of s 588G(2) of the Act calls for an objective analysis. In relation to the second limb, we note the following.
(a) First, in one sense, s 588G(2)(b) provides an alternative to s 588G(2)(a). If it cannot be demonstrated that the relevant person was aware of the facts and matters that can be objectively characterised as reasonable grounds for suspecting insolvency, but a reasonable person in a like position would or ought to have ascertained those facts and matters, then s 588G(2)(b) may be relied upon. But that is not to say that in each case it is necessary to decide whether the relevant person has the subjective knowledge required for the purposes of s 588G(2)(a), before considering s 588G(2)(b). It is permissible for the court to proceed immediately to consider s 588G(2)(b).
(b) Secondly, what a reasonable person in a like position in a company would be aware of will depend on the particular person’s duties as a director or officer of the company.
[citations omitted].[60]
[60]Vlahos (n 36) [216]–[219].
As to s 588G(2), the Court of Appeal in Vlahos stated:
Section 588G(2) of the Act provides that a person contravenes s 588G by ‘failing to prevent’ the company incurring the debt. In ASIC v Plymin, Mandie J explained as follows:
[T]he essence of a failure by a director to prevent a company from incurring a debt is a failure by that director to take all reasonable steps within his power to prevent the company from incurring such debt. The effect of the provisions, shortly stated, is that if the requirements of s 588G(1) are proved in circumstances where either [para] (a) or [para] (b) of s 588G(2) is also proved, a director will be taken to have failed to prevent the company from incurring the debt unless it is proved that the director took all reasonable steps to prevent the company from incurring the debt.
[citations omitted].[61]
[61]Ibid [220].
In Overgold, on the question of the requirement in s 588G(1)(c) of plaintiffs in insolvent trading cases I observed:
…s 588G(1)(c) requires that, for a director to be liable, at the time the company incurs a debt, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent, as the case may be. The cases dealing with the notion of suspicion in the context of defences to voidable preference cases in s 588FG(2)(b) (‘no reasonable grounds for suspecting insolvency’) are apposite. In Queensland Bacon Pty Ltd v Rees the High Court described suspicion (in the context of a preference claim made under a precursor of s 588FG(2)(b)) as: ‘more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to “a slight opinion, but without sufficient evidence”, as Chambers’s Dictionary expresses it’.
The test in s 588G(1)(c) is an objective one; the enquiry is not one concerning the particular director whose conduct is under consideration, rather it is an enquiry into the objectively formed state of mind of a person of ordinary competence. Subsection 588G(1)(c) describes a state of reasonable grounds for suspicion of insolvency and the awareness of a reasonable person in a like position in a company in the company’s circumstances.
The authors of Voidable Transactions in Company Insolvency describe the concept in this way:
‘Reasonable’ in this context imports the standard of reasonableness appropriate to a director of reasonable competence and diligence, seeking properly to perform his or her duties as imposed by law (when viewed as a whole) and capable of reaching a reasonably informed opinion as to a company’s financial capacity…Facts and matters must be shown to exist which would give grounds for a director acting in accordance with that standard to suspect insolvency. In this regard in determining whether s 588G(1)(c) is satisfied, the Court must ascertain firstly, what facts concerning the ability of the company to pay their debts as they fell due were, or should have been, known to the director as a competent director of those companies during the period and secondly would those facts have constituted reasonable grounds for suspicion of insolvency.
After the hearing of this matter, Mr Leventis, a supervisor at PKF Melbourne, the accounting firm where Mr Stone is a partner, instructed a staff member to contact the ATO via its insolvency hotline. Mr Leventis states that the ATO advised the staff member that the debt remained outstanding, and no debt had been recorded on the Company’s Client Activity Centre during Mr Stone’s appointment period.
Mr Edwards did not successfully confront the Company’s prima facie RBA liability nor did he impeach the conclusiveness of the assessment for the SGC liability. I am satisfied that the Company incurred debts for the RBA liability and the SGC liability on the dates identified in the RBA statement and the RBA.
Licensing Agreement fees
As stated above, on or about 17 March 2015, before the Company’s alleged date of insolvency, the Company, as licensee, entered into the Licensing Agreement with O’Brien Corporate as licensor, Mr Edwards and his then co-director Mr Rodney Capuano as guarantors.[73] The plaintiffs contend the debts under the Licensing Agreement were not incurred until February 2018 to July 2019.
[73]Exhibit JS-2 to affidavit of Jason Stone, sworn 10 October 2022, 276-331.
As detailed in the plaintiffs’ submissions filed 27 February 2023, after the hearing of the proceeding the plaintiffs reduced the amount owing under the Licensing Agreement from $76,028.66 to $43,540.47 and elected not to press claims for a number of categories of debt under the Licensing Agreement. The categories of debt they continue to press are:
(a)royalties/franchise fees - $18,493.47;
(b)marketing contributions - $8,250.00;
(c)marketing charges - $4,320.00;
(d)merchandise - $2,117.00; and
(e)training and events - $10,360.00;
I now turn to the relevant terms of the Licensing Agreement in respect of the above categories of debt (‘Licensing Agreement fees’) and consider in turn when such debts were incurred by reference to the principles set out in paras 79 to 81.
Royalties/franchise fees
Clauses 4.1 and 4.2 of the Licensing Agreement provide:-
4.1 Commitment Fee
The [Company] must pay the Commitment Fee to [O’Brien Corporate] in accordance with the terms specified in Item 9(b) of Schedule 2.[74]
4.2 Licence Fee
The [Company] must pay the Royalty to [O’Brien Corporate] in accordance with the terms specified in item 11(b) of Schedule 2.
[74]The ‘Commitment Fee’ is construed as being $5,000 (plus GST) in Item 9(b) of Schedule 2.
Item 11 of Schedule 2 provides for the calculation and payment terms of the Royalty as follows:
(a)Amount: 3% of Sales Revenue
(b)Payment terms: monthly in arrears 14 days from the date of invoice.
The royalties claim is described in the invoices as ‘franchise fees’ and fluctuated on a monthly basis, depending on turnover. The total amount of outstanding royalties and licence fees is $18,493.47.
In my view, on an application of the principles described in Russell Halpern Nominees Pty Ltd v Martin (‘Russell Halpern’),[75] which are subject of consideration by Hetyey AsJ in Melbournehomes.com and in my decision of Overgold, the source of the Company’s obligation to pay royalties was incurred on the occasion that it entered into the Licence Agreement in March 2015. Clause 4.2 of the Licensing Agreement is the source of the Company’s obligation to pay royalties. The Company committed itself to make periodic payments calculated by reference to item 11(b) of schedule 2 to the Licensing Agreement. I do not accept the plaintiffs’ submission that because the precise royalty could not be ascertained until the monthly turnover was known, the debt was only incurred for royalties at the juncture that the precise amount of royalty could be calculated. It is not to the point that the royalties fluctuated from month to month depending on turnover; the question is what is the source of the liability by which that obligation was incurred. I adopt the reasoning of Hetyey AsJ in this regard, which is extracted in para 50 above. I do not regard it as being relevant that in the agreement the subject of consideration in Melbournehomes.com that there was a minimum monthly liability – this just went to the quantum of the liability, not the existence of the liability itself. In my view, the underlying principle discussed in Russell Halpern and applied in Melbournehomes.com and Overgold is that for the royalties claim, that liability was incurred at the time of the entry of the agreement in March 2015, i.e. at a time prior to the plaintiffs’ establishing that the Company was insolvent. As such, the plaintiffs have not sustained a claim for royalties under the Licensing Agreement.
[75](1986) 10 ACLR 539 (Burt CJ, Smith & Olney JJ).
Marketing contributions and charges
The following clauses of the Licensing Agreement are relevant to marketing and advertising debts claimed to have been incurred by the Company:
13.2 [Company]’s marketing obligations
(1) The [Company] must at its cost:
(a)participate in all promotional activities and market research programs as reasonably required by [O’Brien Corporate], including the preparation and production of any catalogues, newsletters and updates in the manner specified in the Operations Manual or by [O’Brien Corporate] in writing.
…
13.3 Marketing Fund
[O’Brien Corporate] may, with the approval of at least 75% of all O’Brien Members establish a marketing fund to which all O’Brien Members must contribute. The amount of the contribution and the terms of the operation of the marketing fund must be specified by [O’Brien Corporate] prior to the establishment of the marketing fund.
13.4 Special Purpose Levy
(1)[O’Brien Corporate] may seek the approval of O’Brien Members to the introduction of a special purpose levy (Special Purpose Levy) by notice. The notice must specify:
(a)the amount of the Special Purpose Levy;
(b)the purpose for which the Special Purpose Levy will be used; and
(c)the term on which the Special Purpose Levy is payable.
(2)If 75% or more of the O’Brien Members consent in writing to pay the Special Purpose Levy, then all O’Brien Members (including the [Company]) must pay the Special Purpose Levy to [O’Brien Corporate] on the terms set out in the notice.
The plaintiffs state there were two categories of marketing debt outstanding at the time of the Company’s liquidation. The first category is monthly marketing contributions of $825 per month for the 10 month period from February 2017 to November 2018, totalling $8,250. The second is four fluctuating monthly charges based on marketing undertaken by O’Brien Corporate, totalling $4,320. As stated in para 56(b) above, the total of the marketing debt is $8,250.
In my opinion, the obligation to O’Brien Corporate for the two categories of marketing debt also came into existence at the time that the Licensing Agreement was entered into in March 2015. Again, the fact that the monthly charges for advertising fluctuated from month to month during the life of the Licensing Agreement is not to the point of when the obligation to pay them was incurred; it was a contractual obligation the only source of which was the Licensing Agreement. Adopting the phraseology of Mandie J in Harrison v Lewis of identification of ‘the time when the conduct and choice of the company caused the debt to be incurred’, [76] results, in my view, in a conclusion that the obligations in respect of marketing came into existence upon entry into the Licensing Agreement.
[76]Harrison v Lewis (n 44) [28].
It was the Licensing Agreement which rendered the Company liable for those charges and not some later event. The obligation in respect of marketing obligations was mandatory (the word ‘must’ describes the nature of the obligation in that regard) and were incurred at the date of entry into the Licensing Agreement. The plaintiffs have not succeeded in respect of the claim for this category of claim under the Licensing Agreement.
Merchandise
From February to November 2018, O’Brien Corporate supplied $2,117 in merchandise to the Company based on specific ad hoc orders. The merchandise was supplied pursuant to cll 8.1 to 8.3 of the Licensing Agreement, which provide:
8.1 List of O’Brien Products and O’Brien Services
(1)[O’Brien Corporate] must specify a list of products and services that are O’Brien Products and O’Brien Services respectively.
…
8.2 [Company]’s Obligations
(1)The [Company] must:
(a)obtain all O’Brien Products and O’Brien Services directly from [O’Brien Corporate]; and
(b)order the O’Brien Products and O’Brien Services in the manner specified by [O’Brien Corporate].
…
8.3 Terms of Trade
The [Company] must acquire the O’Brien Products and the O’Brien Services on the O’Brien Terms of Trade.
In my opinion, the position in regard to merchandise is different to the two previous categories of Licensing Agreement claim. In my view, cl 8 provided for the purchase from time to time of merchandise. O’Brien Corporate was obliged to specify a list of products under cl 8.1(1) which the Company was, in turn, obliged to obtain from O’Brien Corporate. In my opinion, the purchase of the merchandise was a conventional sale of goods arrangement whereby on each occasion that O’Brien Corporate supplied the merchandise, an agreement came into existence with O’Brien Corporate, the supplier of that merchandise. Adopting the rationale of Mandie J in ASIC v Plymin, which is extracted at para 74 above, where he observed the purpose of the insolvent trading provisions:
…that under a contract for the sale of goods where delivery times are left for future orders or instructions that, as a matter of substance and commercial reality, a debt will be incurred on each occasion when a delivery is ordered.[77]
I consider that on each occasion that merchandise was supplied that a debt was incurred by the Company.
[77]ASIC v Plymin (n 12) [517].
The invoices in respect of the supply of merchandise ranged in date from February to November 2018, after the time that I consider that it was established that the Company was insolvent and continued to be insolvent.
I would allow the claim in respect of merchandise for $2,117.00
Training and events
Clause 11.5 the of the Licensing Agreement provides as follows in respect of payment for training, meeting and conferences for Mr Edwards and the Company’s employees:
The [Company] must:
(1)pay to [O’Brien Corporate] in advance the fees prescribed by [O’Brien Corporate] for providing any training to the Responsible Officer or any of the [Company]’s employees that is requested by the [Company], or required by [O’Brien Corporate] to be undertaken by the [Company], the Responsible Officer or any of the [Company]’s employees;
(2)pay to [O’Brien Corporate] in advance the fees prescribed by O’Brien for convening any seminars, meetings or conferences; and
(3)pay all Costs of the [Company], the Responsible Officer or any of the [Company]’s employees attending any seminars, training, meetings or conferences including travel, accommodation and meal expenses.
The Company incurred costs of $10,360 in accordance with cl 11.5.
Mr Tennant also drew the Court’s attention to cl 11.2 which states:
11.2 Training when necessary
[O’Brien Corporate] may conduct training and convene seminars for O’Brien Members and their officers and employees whenever [O’Brien Corporate] reasonably considers it necessary or appropriate.
Clause 11.5 created an obligation for the Company to pay O’Brien Corporate in advance for providing any training, that is, inter alia, required by O’Brien Corporate to be undertaken by the Company and its responsible officer or any of its employees. In my opinion, adopting the rationale of Mandie J in ASIC v Plymin, the obligation to pay for training is akin to a contract for the sale of goods where delivery times are left for future orders or instructions. As a matter of substance and commercial reality, a debt will be incurred on each occasion when a delivery is ordered – in my view, the Company incurred an obligation to pay for training and events on each occasion that O’Brien Corporate directed the Company to attend such training and events. The subject invoices all post-dated the date of the established insolvency of the Company and I consider the claim in respect of training and events has been made out.
To summarise, the debts for royalties and marketing contributions and charges were incurred at the date of entry into the Licensing Agreement before the date of the establishment of the Company’s insolvency, and those claims will be disallowed. I would allow the claims for merchandise and training and events by reason that those debts were incurred at times when the Company was shown to be insolvent.
At the time the debts were incurred, were there reasonable grounds to suspect insolvency?
Mr Edwards asserted that he was unaware that the Company was insolvent, but as is revealed by the discussion in paras 88 to 89 above, the test in s 588G(1)(c) is an objective one. The inquiry is not one concerning the particular director whose conduct is under consideration, rather it is an inquiry into the objectively formed state of mind of a person of ordinary competence. Section 588G(1)(c) describes a state of reasonable grounds for suspicion of insolvency and the awareness of a reasonable person in a like position, in a company in the Company’s circumstances. The authorities to which reference has been made indicates that ‘reasonable’ in this context imports the standard of reasonableness appropriate to a director of reasonable competence and diligence, seeking properly to perform his or her duties imposed by law, and capable of reaching a reasonably informed opinion as to a company’s financial capacity.
In my opinion, on an application of these principles which are set out at paras 86-89, a director of a company in the same circumstances as the Company would have had reasonable grounds for suspecting that the Company was insolvent. Mr Edwards was the sole director at the relevant times that the debts were incurred ; a person in his position should have been aware of the dire position that the Company was in by reason of their awareness The existence of the very significant liabilities to the DCT alone would have given rise to a director in Mr Edwards’ position reasonably suspecting that the Company could not pay its debts as and when they fell due. On and from 30 June 2017, a diligent and competent director informing themselves as they are obliged as to the company’s financial position would have at least suspected (if not actually known) that the Company was insolvent by reason of the existence of the indicators of insolvency mentioned in para 92 above.
I am also satisfied of the matters required to be established under s 588G(2). While Mr Edwards asserted that he was not aware that the Company was insolvent, the second limb of s 588G(2) calls for an objective analysis.[78] . In my opinion a reasonable person in the position of director of a company in the circumstances of the Company would have been aware that there were reasonable grounds to suspect that the Company was insolvent on and from 30 June 2017 for the reasons discussed above.
[78]Vlahos (n 36) [219].
There is no evidence that Mr Edwards took any reasonable steps to prevent the Company incurring the debts.
Findings on the insolvent trading claims
Section 588G of the Act applies if the matters set out in s 588G(1) are satisfied. Section 588G(1) refers to the ‘time when the company incurs a debt’. In these circumstances, the subject debts have been incurred over a period of time on and from the time the Company was shown to be insolvent on 30 June 2017. Section 588G(1)(a) obliges the plaintiffs to establish that Mr Edwards was a director of the Company at the time when the debts were incurred. This has been established. Section 588G(1)(b) requires the Court to consider whether the Company was insolvent at the date that the debts were incurred. In my opinion, this has been satisfied. I have found that the Company was insolvent on and from 30 June 2017 and that each of the debts which are the subject of the plaintiffs’ claim were incurred in that period. As discussed, in my opinion, on and from 30 June 2017, as s 588G(1)(c) requires, it has been established by the plaintiffs that there were reasonable grounds for suspecting that the Company was insolvent for the reasons provided above. The dire position of the Company should have led a director of reasonable competence and diligence, informing themselves of the Company’s financial position, that the Company was insolvent as at 30 June 2017.
Section 588G(1)(d) of the Act provides that the plaintiffs establish that the relevant debts were incurred on or after the date of commencement of the Act. That has been satisfied in this case.
The elements of s 588G(1) having been satisfied, it is then necessary to consider s 588G(2). As has been discussed, that subsection provides both a subjective and an objective test. Under the objective test described in s 588G(2)(b), there is a contravention of s 588G if the person fails to prevent a company from incurring a debt when ‘a reasonable person in a like position in a company in the company’s circumstances’ would be aware that there were reasonable grounds for suspecting that the company is insolvent. I consider that a reasonable person in the position of director of a company in the circumstances of the Company would have been aware that there were reasonable grounds to suspect that the Company was insolvent on and from 30 June 2017 for the reasons discussed above. There is no evidence Mr Edwards took any reasonable steps within his power to prevent the Company from incurring the debts incurred after 30 June 2017. As has been said, he did not rely on any of the statutory defences in s 588H.
In the circumstances, the plaintiffs have established that they are entitled to judgment in the insolvent trading claim for the claims mentioned in the table in para 22 above subject to the deduction of the claims made under the Licensing Agreement for royalties and marketing contributions and charges together with the adjustments required to be made to the amounts claimed by the DCT for SGC and RBA liability, referred to by Mr Stone in his evidence and mentioned in para 30 above.
Findings on the FDA claims
As to the FDA claims, s 588FDA provides that a transaction is an unreasonable director-related transaction if:
Unreasonable director-related transactions
(1)A transaction of a company is an unreasonable director-related transaction of the company if, and only if:
(a) the transaction is:
(i)a payment made by the company; or
(ii)a conveyance, transfer or other disposition by the company of property of the company; and
(b)the payment, disposition or issue is, or is to be, made to:
(i) a director of the company;
…
and
(c)it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:
(i)the benefits (if any) to the company of entering into the transaction; and
(ii)the detriment to the company of entering into the transaction; and
(iii)the respective benefits to other parties to the transaction of entering into it; and
(iv)any other relevant matter.
An unreasonable director-related transaction is voidable pursuant to s 588FE(6A) if it was entered into, or an act was done for the purposes of giving effect to it or during the period from four years prior to the relation-back day and when the winding up began.
It is not an element of an unreasonable director-related transaction that the company was insolvent at the time of the transaction.[79]
[79]Aviation 3030 Pty Ltd (in liq) v Lao [2022] FCA 458 [288]–[284] (Anastassiou J); Re Rococo Group Pty Ltd (in liq) [2022] VSC 167 [133] (AsJ Hetyey).
Where a court is satisfied that an unreasonable director-related transaction is voidable, it may make one or more of the orders set out in s 588FF(1), including that a person pay the company an amount of money.
In respect of the FDA claims, Mr Stone deposes that between September 2019 and 15 July 2020, the Company transferred $79,395.10 to Mr Edwards’ bank account as per the table in para 25 above.
It will be seen that a transfer of $53,093.19 took place on 15 July 2020, the date of the winding up order and the liquidator’s appointment. Mr Stone states that no basis or explanation was provided by Mr Edwards as to why such payments were made. This final payment effectively cleared out the Company’s bank account.
In respect of the FDA claim, Mr Edwards contended at the hearing that, from 2017, he had not taken a wage or dividend from the Company and that the balance of the $53,903.19 withdrawn by him on 15 July 2020 was his ‘portion of commissions’. I note there has been nothing placed into evidence to support this contention.
Each of the payments was a payment made by the Company through Mr Edwards, who at the time was a director of the Company. Section 588FDA(1)(c) requires the Court to have regard to several matters, which include:
(a)the benefits (if any) to the Company of entering into the transaction;
(b)the detriment to the Company of entering into the transaction; and
(c)the respective benefits to other parties of the Company entering into the transactions.
No demonstrable benefit to the Company resulted from the payments, indeed the Company suffered a detriment to the extent of the amount of such payments by the depletion of its assets. Mr Edwards benefitted in the amount of the payments and there is no evidence that he provided any value to the Company by way of consideration. The payments took place during the four year period ending on the relation-back date and are therefore within the period prescribed by s 588FE(6A).
In my view, the payments constituted an unreasonable director-related transaction within the meaning of s 588FDA so as to constitute a voidable transaction under s 588FE(6A). In my opinion, it is appropriate to order that Mr Edwards pay to the Company the sum of $79,395.10 pursuant to s 588FF(1)(a).
Conclusion
I would ask the plaintiffs’ legal representatives to compute the exact amount and submit an order to the Court (and circulate it to Mr Edwards) consistent with these reasons for its consideration. When this has been done, I will list the matter for hearing on a date convenient to the parties in order to make final orders.
SCHEDULE OF PARTIES
| S ECI 2021 03934 | |
| BETWEEN: | |
| O’BRIEN REAL ESTATE DROUIN PTY LTD (ACN 602 065 734) (IN LIQUIDATION) | First Plaintiff |
| JASON STONE (IN HIS CAPACITY AS LIQUIDATOR OF O’BRIEN REAL ESTATE DROUIN PTY LTD (ACN 602 065 734) (IN LIQUIDATION)) | Second Plaintiff |
| - v - | |
| JOHN EDWARDS | Defendant |