Sheahan v Ren
[2017] FCA 1163
•29 September 2017
FEDERAL COURT OF AUSTRALIA
Sheahan v Ren [2017] FCA 1163
File number: SAD 302 of 2016 Judge: BESANKO J Date of judgment: 29 September 2017 Catchwords: PRACTICE AND PROCEDURE – Consideration of an application seeking summary judgment pursuant to r 26.01(1)(e) of the Federal Court Rules 2011 (Cth) and s 31A of the Federal Court of Australia Act 1976 (Cth) – where the respondent was a director of each company and each company was insolvent at the time a debt was incurred or became insolvent by incurring the debt – where neither company had any books or records – where the companies had no assets and had not commenced any business activity – where the respondent either was aware, or a reasonable person in his position would be aware that the companies would become insolvent on incurring the debts – where the amount claimed by the applicants reflects the loss or damage within s 588M of the Corporation Act 2001 (Cth).
PRACTICE AND PROCEDURE – Consideration of an application seeking default judgment pursuant to r 5.23(2)(b) or (2)(c) of the Rules – where the respondent failed to comply with an order of the Court and did not attend a number of hearings without explanation.
Legislation: Corporations Act 2001 (Cth) ss 286, 588E, 588G, 588M
Federal Court of Australia Act 1976 (Cth) s 31A
Federal Court Rules 2011 (Cth) rr 5.22, 5.23, 26.01
Cases cited: Spencer v The Commonwealth of Australia (2010) 241 CLR 118 Date of hearing: 29 June 2017 Registry: South Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 48 Counsel for the Applicants: Mr J Cudmore Solicitor for the Applicants: Cosoff Cudmore Knox Counsel for the Respondent: The Respondent did not appear ORDERS
SAD 302 of 2016 BETWEEN: JOHN SHEAHAN AND IAN RUSSELL LOCK AS JOINT AND SEVERAL LIQUIDATORS OF TERRITORY HEAVY INDUSTRIES LIMITED (IN LIQUIDATION) ACN 149 466 142
First Applicant
JOHN SHEAHAN AND IAN RUSSELL LOCK AS JOINT AND SEVERAL LIQUIDATORS OF CASCADE INFRASTRUCTURE PTY LIMITED (IN LIQUIDATION) ACN 147 019 654
Second Applicant
AND: JERRY REN
Respondent
JUDGE:
BESANKO J
DATE OF ORDER:
29 SEPTEMBER 2017
THE COURT ORDERS THAT:
1.The applicants be heard on interest before final judgment is entered.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
BESANKO J:
The two applicants in this proceeding are Mr John Sheahan and Mr Ian Russell Lock as joint and several liquidators of Territory Heavy Industries Limited (in liquidation) (Territory) and Mr John Sheahan and Mr Ian Russell Lock as joint and several liquidators of Cascade Infrastructure Pty Limited (in liquidation) (Cascade). On 30 July 2015, a company called Opus International Consultants (Australia) Pty Limited (Opus) lodged petitions for the winding up of Territory and Cascade and, on 23 September 2015, this Court made a winding up order in relation to each company and appointed Messrs Sheahan and Lock liquidators of each company.
The respondent to this proceeding is Mr Jerry Ren. Mr Ren was appointed a director of Territory on 22 February 2011 and he remained a director at the date of winding up. He was the sole director of Territory from late March 2014. He was appointed the sole director of Cascade on 27 January 2011 and he remained the sole director of the company at the date of winding up.
Opus carried out engineering services for Territory and Cascade and claims that it is owed the amount of $41,468.10 and interest to the date of judgment by Territory, and the amount of $246,194.95 and interest up to the date of judgment by Cascade.
There are no funds in the winding up of either company and the applicants seek to recover these amounts from Mr Ren under subs 588M(2) of the Corporations Act 2001 (Cth) (the Act). This subsection provides that a company’s liquidator may recover from a director as a debt due to the company an amount equal to the amount of the loss and damage calculated in accordance with subs 588M(1) of the Act. Relevantly, that subsection provides as follows:
588M 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;
…
Subsections 588G(1) and (2) provide as follows:
588G 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.
To establish insolvency, the applicants rely on the presumption of insolvency in recovery proceedings in s 588E of the Act. Subsection 588E(1)(e) provides that a recovery proceeding in relation to a company includes proceedings for a contravention of subs 588G(2). Subsection 588E(4) provides as follows:
(4) Subject to subsections (5) to (7), if it is proved that the company:
(a)has failed to keep financial records in relation to a period as required by subsection 286(1); or
(b)has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2);
the company is to be presumed to have been insolvent throughout the period.
Subsections 286(1) and (2) provide as follows:
286 Obligation to keep financial records
(1)A company, registered scheme or disclosing entity must keep written financial records that:
(a)correctly record and explain its transactions and financial position and performance; and
(b)would enable true and fair financial statements to be prepared and audited.
The obligation to keep financial records of transactions extends to transactions undertaken as trustee.
Period for which records must be retained
(2)The financial records must be retained for 7 years after the transactions covered by the records are completed.
The applicants have issued an Interlocutory Application in this proceeding seeking summary judgment on their claim pursuant to r 26.01(1)(e) of the Federal Court Rules 2011 (Cth) (the Rules) or default judgment pursuant to r 5.23(2)(b) or (2)(c) of the Rules.
Insofar as the application is for summary judgment, I proceed on the basis that the applicants also rely on s 31A of the Federal Court of Australia Act 1976 (Cth). The principles on an application for summary judgment under that section were identified in Spencer v The Commonwealth of Australia (2010) 241 CLR 118.
Insofar as the application is for judgment by default, the relevant Rules are 5.22 and 5.23 and they provide, relevantly, as follows:
5.22 When a party is in default
A party is in default if the party fails to:
(a)do an act required to be done, or to do an act in the time required, by these Rules; or
(b) comply with an order of the Court; or
(c) attend a hearing in the proceeding; or
(d) prosecute or defend the proceeding with due diligence.
5.23 Orders on default
(1)…
(2) If a respondent is in default, an applicant may apply to the Court for:
(a)…
(b)if the claim against the respondent is for a debt or liquidated damages—an order giving judgment against the respondent for:
(i) the debt or liquidated damages; and
(ii)if appropriate, interest and costs in a sum fixed by the Court or to be taxed; or
(c)if the proceeding was started by an originating application supported by a statement of claim, or if the Court has ordered that the proceeding continue on pleadings—an order giving judgment against the respondent for the relief claimed in the statement of claim to which the Court is satisfied that the applicant is entitled; or
…
The facts relevant to the application for judgment by default are as follows.
The Originating Application was issued on 3 November 2016. Finlaysons filed a Notice of Appearance on behalf of Mr Ren on 17 November 2016.
On that day, I made an order that the respondent file and serve a defence on or before 8 December 2016, and an order to the effect that the applicants file and serve affidavits containing their evidence in the proceeding on or before 23 December 2016. Mr Ren filed a Defence to an Amended Statement of Claim on 12 December 2016. The applicants filed their evidence in the proceeding on 23 December 2016.
On 20 February 2017, I made an order to the effect that the respondent file and serve his evidence in the proceeding by no later than 4 April 2017.
On 14 March 2017, Finlaysons filed a Notice of Ceasing to Act for Mr Ren. On 4 April 2017, Andreyev Lawyers filed a Notice of Acting on behalf of Mr Ren and they filed an Interlocutory Application seeking an extension of time within which Mr Ren may file and serve his evidence in the proceeding. On 20 April 2017, I granted an extension of time to on or before 31 May 2017.
On 22 May 2017, Andreyev Lawyers filed a Notice of Ceasing to Act.
Mr Ren did not file his evidence in the proceeding on or before 31 May 2017 and he has not done so since that date. He did not appear at hearings before the Court on 31 May 2017 or 15 June 2017. He did not appear before the Court on 29 June 2017 when this application was argued.
It is convenient to deal first with the application for summary judgment. The applicants relied on various affidavits which they had filed. The facts in relation to Territory and Cascade overlap in a manner which I will identify. I start with the facts in relation to Territory.
On 9 May 2014, Opus issued a document which is entitled “Confirmation of Instructions/Fee Offer”. The document is a pro forma document with sections to be completed in relation to the particular client and task. It sets out a summary of the scope of service and associated fees and the terms of the fees of Opus. It contains provision for the signature of the client which is taken to be confirmation of instructions and acceptance of fees and terms. I will refer to this document as the engagement letter. The scope of the service was described in part as follows:
To liaise with Territory Heavy Industries (THI) representatives and specialists to prepare an application for purchase of land for proposed 26Ha industrial development.
The engagement letter was signed by Mr Ren.
On 23 May 2014, Mr Ren sent a copy of the Certificate on Registration on Change of Name for Territory to a Mr Tan and he said to Mr Tan that “we need this company to sign for the engagement letter”. The evidence before me indicates that Mr Tan was a project engineer at Opus.
On 20 June 2014, Opus issued an invoice for $36,020.60 to Territory for “Progress Claim No.1 Fees from Start to 13/06/14”. Payment of the invoice was due by 18 July 2014. Territory did not pay the invoice and on 25 February 2015, Mr Adrian White of Opus wrote to Mr Ren in the following terms:
Please refer to the attached letters regarding our outstanding accounts. We are unfortunately in a position where our sub consultants are issuing Opus with letters of demand and this will affect our standing in the industry – as discussed previously we need these accounts paid.
This written message from Mr White to Mr Ren related not only to the invoice issued to Territory, but also an invoice issued to Cascade which is identified below (at [43]).
Mr Ren responded by email on 2 March 2015 in the following terms:
Hi Adrian
Thanks for the letter
as you were informed that I had been trying to get money to loan the company to pay you.
but I can not find the money in such short time as you are clear that I am trying to solve the problem
of receivership at the moment
If this is the what you have to do, I could not stop you but I will keep on looking for fund to loan the company
before your moving into legal process or before I feel it is of no use
thanks
jerryOn the same day, Mr White responded as follows:
Can you advise a time frame for payment and amounts
If so please provide with commitment to pay interest as per the original agreement conditions
I need dates and amounts pleaseOn 4 March 2015, Mr Ren responded to Mr White’s email in the following terms:
the negotiation for the groups still going on, it might take 3-4 months before it is finalized. If you have to push to hard, the company will be copplased.
it does not help anyone, I only need time to get the group issue solved so that I could find money tolend to the company to pay you, as you know well
On 30 April 2015, the lawyers for Opus served a statutory demand on Territory and, as I have said, on 30 July 2015, Opus filed an application in this Court seeking the winding up of Territory. That order was made on 23 September 2015.
On 25 September 2015, the liquidators wrote to Mr Ren seeking a report as to affairs in relation to Territory and, (it is convenient to note at this stage) by separate letter, a report as to affairs in relation to Cascade.
On 29 December 2015, Mr Ren sent an email to the liquidators attaching the respective reports as to affairs for Territory and Cascade and stating the following in the email:
I have filled in the forms and attached both of them.
Please let me know immediately if you have any queries or I have missed any of the areas that needed to be filled in.
In the case of both Territory and Cascade, no person or entity was identified by Mr Ren in the report as to affairs as an unsecured creditor of the company. That led to an email from the liquidators to Mr Ren on 18 April 2016 in the following terms:
I refer to previous correspondence in relation to Territory Heavy Industries limited and Cascade Infrastructure Pty Limited (both in Liquidation) and, specifically, to the reports as to the affairs of the companies that you prepared and provided to us on 29 December 2015. I attach copies of those reports for your ease of reference.
I note, with reference to Schedule H on page 7 of both reports, that you have not listed any unsecured creditors of either of the companies. As you are aware, the companies were wound up by order of the Federal Court of Australian upon the application of Opus International Consultants (Australia) Pty Limited. Please confirm whether Opus is the only creditor (of which you are aware) of each of the companies.
Mr Ren responded on the same day by saying that Opus was the only creditor.
With respect to the applicants’ case that each of Territory and Cascade failed to keep financial records as required by subs 286(1) of the Act and failed to retain financial records as required by subs 286(2), the following facts are relevant.
On 11 January 2016, the liquidators wrote to Mr Ren in the following terms:
I confirm receipt of your reports as to the affairs of' Territory Heavy Industries Limited and Cascade Infrastructure Pty Limited (both in Liquidation).
Please note that you are still required to provide to the liquidators all books and records of the companies. Please arrange for the delivery of all such books and records to our firm's Adelaide offices (Level 8, 26 Flinders Street, Adelaide SA 5000) within 7 days.
Mr Ren responded on 15 January 2016 as follows:
Thanks for your mail
I am not sure whether you received my reply.
The two companies were using the office of Australian ilmenite resources pl(air)
Had no employees upon the time air where they were supposed to get finance help from was put into receivership.
So they had problems before they were able to start and before any employees were hired or books made
Thanks and please let me know any further info you may require.
On 18 January 2016, the liquidators wrote to Mr Ren in the following terms:
Presumably the company has at least some books and records (including, for example, a corporate register and general ledger). Please advise where such books and records are held so that we can arrange to collect same.
Mr Ren responded to this email as follows:
The two companies’ development plans were interrupted suddenly when AIR(Australian ilmenite resources) was put into administration
In a hostile LOAN TO OWN event by CPPIB BEFORE any books were made, we were immediately shutout of the office(in air office)
And could not go there again.
On 19 January 2016, the liquidators wrote to Mr Ren in the following terms:
For the avoidance of any doubt, please confirm (as appears implicit from your email below) that the companies do not have, and never have had, any books and records.
On 20 January 2016, Mr Ren responded in the following terms:
The companies were put into administration before hiring employees and hence not yet had any books or records made in time
In this correspondence, Mr Ren refers to Australian Ilmenite Resources Pty Limited. The records show that Mr Ren was appointed a director of that company on 28 January 2008 and he remained a director until 15 April 2016. That company was placed into external administration on 28 July 2014.
On 17 December 2013, Deloitte Touche Tohmatsu provided a copy of the annual report and financial statements of Territory for the year ended 30 June 2013. Those statements show that Territory had no revenue in the year ended 30 June 2013 and that its only asset was $100 and it had liabilities of $2,155. The company had negative net equity of $2,055. The first note to the accounts states that the company is 100% owned by Warrawee Investments Pte Ltd, a resident company of Singapore and that the company had not commenced any business activity since incorporation.
The respective reports as to affairs for Territory and Cascade state that at the date of its winding up, Territory and Cascade had no assets and no employees.
Mr Ren was the sole director of Territory on 20 June 2014 when Opus rendered its invoice. Mr Rodney Grant Illingworth resigned as a director of the company on 10 March 2014 and Mr Geoffrey John Fanning resigned as a director of the company on 17 March 2014. Mr Ren received a copy of the financial statements for the year ended 30 June 2013 of Territory prepared by Deloitte Touche Tohmatsu. Mr Ren confirmed that Territory had no books or records. Two other companies of which Mr Ren was a director (Australian Ilmenite Resources Pty Ltd and Roper Constructions Pty Ltd) were in financial peril. As to the latter company, an application was made seeking an order that it be wound up in solvency on 27 June 2014, and on 30 July 2014, that order was made. Mr Ren said in his email of 2 March 2015 to Mr White of Opus that he was unable to find the money in such a short time. The report as to affairs signed by Mr Ren on 26 December 2016 disclosed that Territory had no assets.
On 24 June 2014, Mr Ren transferred part of his interest in his residence at Warrawee to his wife and a couple of days before his s 597 examination on 3 November 2016, Mr Ren signed a binding financial agreement which purported to transfer the remaining joint tenancy of the Warrawee property wholly to his wife so that he would be entirely divested of that asset which appears to be his only asset in Australia.
The loss or damage in relation to the debt suffered by Opus because of the insolvency of Territory is said to be the full amount of the debt and interest. The liquidators received a proof of debt from Opus in the liquidation of Territory for an unsecured debt in an amount of $41,468.10 and that they have admitted that proof of debt. There are no funds available in the winding up of Territory and no dividend has been paid. I note that the position in the case of Cascade is the same.
As to the calculation of the amount claimed, the engagement letter contained or attached an Agreement For The Provision Of Consulting Services. Clause 7 of that document provided as follows:
If the Client does not pay the Consultant in accordance with the Agreement then, without prejudice to any other rights or remedies the Consultant may have, interest will be payable from the date of invoice until payment at a rate per annum of 12%.
I note that there is a similar provision contained in or attached to the Cascade engagement letter.
As far as Territory is concerned, interested is calculated from 20 June to 23 September 2015 at a simple interest rate of 12% resulting in a figure of $5,448. The liquidators claim the amount of the original invoice, being $36,020 and interest of $5,448, a total of $41,468.
In the case of Cascade, the engagement letter is dated 10 July 2014 and it describes the scope of services as follows:
To liaise with the client to establish and manage an overall project team to prepare a detailed proposal for the development of the Northern Territory Government Land Release at Zuccoli.
The engagement letter was signed by Mr Ren on 18 July 2014. He subsequently signed a number of other documents in connection with the Cascade proposal.
In the case of Cascade, Opus issued its invoice on 5 August 2014 for “Progress Claim No.1 Fees from Start to 31 July 2014”. The amount claimed in the invoice is $216,700 and that amount is said to be due for payment on 2 September 2014. I have already referred to the correspondence between Mr White of Opus and Mr Ren between 25 February 2015 and 4 March 2015 (at [21]-[24]). As with Territory, the lawyers for Opus served a statutory demand on Cascade on 30 April 2015. I have also already referred to the events between 25 September 2015 and 18 April 2016 relating to the completion of the report as to affairs for Cascade (at [26]-[28]). In addition, I have already referred to the correspondence concerning the books and records of Cascade which passed between the liquidators and Mr Ren between 11 January 2016 and 20 January 2016 (at [30]-[33]).
As to the matters the liquidators rely on to establish that Mr Ren was aware there were grounds for suspecting that Cascade was insolvent, the matters relied on in the case of Territory apply mutatis mutandis to the case of Cascade.
As with Territory, the liquidators claim that the amount of the loss and damage is the debt plus interest at 12%. Interest at 12% from 5 August 2014 to the date of the winding up on 23 September 2015 amounts to $29,494. The liquidators claim the amount of the invoice of $216,700 plus interest of $29,494, a total of $246,194.
I am satisfied that this is an appropriate case for summary judgment. Clearly, Mr Ren was a director of each company. Each company was insolvent at the time the debt was incurred or became insolvent by the incurring of the debt. Having regard to the correspondence of 19 and 20 January 2016 (at [32]-[33]), I find on the balance of probabilities that neither company had books or records. If in some way it is said that the engagement letters are sufficient to satisfy the requirements of s 286 of the Act, it is clear on the evidence that the companies became insolvent on incurring the respective debts. The companies had no assets and, in the case of Territory, was said not to have commenced any business activity. There were undoubtedly reasonable grounds for concluding that the companies would become insolvent on incurring the debts and Mr Ren was either aware or a reasonable person in his position would be aware of such grounds. Furthermore, I am satisfied that the amount claimed by the applicants reflects the loss or damage within s 588M of the Act.
Had it been necessary to do so, I would have entered judgment by default. Mr Ren has failed to comply with an order of the Court and he has not attended a number of hearings. He has provided no explanation for these failures.
Before entering judgment, I will hear the applicants as to the claim for interest to the date of judgment.
I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko. Associate:
Dated: 29 September 2017
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