Stone (liquidator), in the matter of Ironbark Blacksmithing Pty Ltd (in liq) v Mizzi

[2024] FCA 696

FEDERAL COURT OF AUSTRALIA

Stone (liquidator), in the matter of Ironbark Blacksmithing Pty Ltd (in liq) v Mizzi [2024] FCA 696   

File number(s):

NSD 710 of 2020

Judgment of:

HALLEY J

Date of judgment:

28 June 2024

Catchwords:

CORPORATIONS – application by liquidator of company for recovery of shareholder loans from company to the defendants, and damages for breaches of directors’ duties and insolvent trading – where defendants were the sole directors and shareholders of the Company – whether company made loans to the defendants by way of loan agreement pursuant to Div 7A of the Income Tax Assessment Act 1936 (Cth) or general loan principles – where defendants deny loans were made – where defendants contend they made loans to the company – where financial records of the company were incomplete – where defendants claim in the alternative that they are entitled to set-off – where satisfied that amounts were advanced to defendants by way of shareholder loans – defendants not entitled to set-off – no mutuality where debts were owed to partnership – where defendants had notice of facts which would indicate to reasonable person in their position that company was insolvent

CORPORATIONS – breach of directors’ duties – claim that defendants advanced payments to themselves whilst company insolvent in breach of statutory directors’ duties – claim that defendants breached duty of care and diligence, duty to act in good faith in the best interests of corporation and for a proper purpose, and duty not to misuse position under s 180(1), s 181(1) and s 182(1) of the Corporations Act 2001 (Cth) (Act) – where satisfied that advances were made to the defendants by way of further shareholder loans – contraventions established – compensation ordered

CORPORATIONS – insolvent trading – presumed insolvency – failure to keep books and records – actual insolvency – where company held insufficient funds to meet tax liabilities – effect of payment plans on the solvency of the company – where satisfied that company was insolvent during claimed period – whether there were reasonable grounds for suspecting insolvency – defendants were not aware that the company was insolvent – where satisfied that reasonable person in position of defendants would be aware of grounds for suspecting insolvency – whether debts were incurred by the company whilst insolvent – debts incurred in breach of s 588G of the Act – where defendants claim relief from liability pursuant to s 1317S or 1318 of the Act – whether defendants established honest conduct – defendants demonstrated reckless indifference to director responsibilities – no entitlement to relief claimed

LIMITATION OF ACTIONS – limitation defence – whether claim for repayment of shareholder loans statute barred pursuant to s 14 of Limitation Act 1969 (NSW) and s 1317K of the Act – date on which cause of action accrues – distinction between loan with specified repayments, loan repayable on demand and loan only repayable on condition that a demand be first made – where liquidator made demand for repayment of loans within 6 years of commencement of proceedings – claims not statute barred

LIMITATION OF ACTIONS – whether claims for breaches of directors’ duties in amended pleadings statute barred – date on which amendments take effect – whether amended allegations arose out of the same or substantially the same facts – rule in Weldon v Neal considered – where satisfied amendments arose out of the same or substantially the same set of facts originally pleaded – amendments to take effect on date proceeding was commenced – claims not statute barred

Legislation:

Bankruptcy Act 1996 (Cth) s 86

Corporations Act 2001 (Cth) ss 95A, 180, 181, 182, 183, 254T, 286, 553C, 588E, 588G, 588H, 588M, 1305, 1317H, 1317K, 1317S, 1318

Evidence Act 1995 (Cth) s 50

Federal Court Act of Australia 1976 (Cth) s 59

Income Tax Assessment Act 1936 (Cth) Div 7A

Law and Justice Legislation Amendment Act 1994 (Cth)

Taxation Administration Act 1953 (Cth) Sch 1, s 255-15

Trade Practices Act 1974 (Cth) s 82

Federal Court Rules2011 (Cth) rr 8.21, 16.53

Limitation Act1969 (NSW) s 14

Cases cited:

Australian Karting Association Ltd v Karting (New South Wales) Incorporated [2022] NSWCA 188

Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148; [2005] NSWSC 831

Australian Securities and Investments Commission v Australian Property Custodian Holdings Ltd (No 2) (2013) 213 FCR 289; [2013] FCA 409

Australian Securities and Investments Commission v Bettles [2023] FCA 975

Australian Securities and Investments Commission v Drake (No 2) (2016) 340 ALR 75; [2016] FCA 1552

Australian Securities and Investments Commission v Healey (No 2) (2011) 196 FCR 430; [2011] FCA 1003

Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052

Australian Securities and Investments Commission v Plymin [2003] VSC 123

Australian Securities and Investments Commission v Rich (2009) 236 FLR 1; [2009] NSWSC 1229

Austructures Pty Ltd v Makin (2014) 290 FLR 153; [2014] VSC 544

Baldry v Jackson [1976] 2 NSWLR 415

Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; [2008] WASC 239

Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5

Clifton (Liq) v Kerry J Investment Pty Ltd t/as Clenergy (2020) 379 ALR 593; [2020] FCAFC 5

Commonwealth of Australia v Dixon (1988) 13 NSWLR 601

Daniels v Anderson (1995) 37 NSWLR 438

Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473; [2008] HCA 41

Doyle v Australian Securities and Investments Commission (2005) 227 CLR 18; [2005] HCA 78

DSHE Holdings Ltd (recs and grs. apptd) (in liq) v Potts (2022) 405 ALR 70; [2022] NSWCA 165

Gloucester Shire Council v Fitch Ratings, Inc (No 2) [2017] FCA 248

Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd (2012) 265 FLR 33; [2012] VSC 112

Gye v McIntyre (1991) 171 CLR 609

Hall v Poolman [2007] NSWSC 1330

Haller v Ayre [2005] 2 Qd R 410; [2005] QCA 224

Hoh v Ying Mui Pty Ltd [2019] VSCA 203

Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation (2009) 26 VR 657; [2009] VSCA 319

Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93

Mackenzie v Albany Finance Ltd [2003] WASC 100

McGrath v HNSW Pty Ltd (2014) 219 FCR 489; [2014] FCA 165

McGraw-Hill Financial Inc v Clurname Pty Ltd (2017) 123 ACSR 467; [2017] FCAFC 211

Metal Manufactures Pty Limited v Morton (2023) 275 CLR 100; [2023] HCA 1

Ogilvie v Adams [1981] VR 1041

Oztech Pty Ltd v Public Trustee of Queensland(No 2) [2015] FCA 1485

Pedersen v Young (1964) 110 CLR 162

Queensland Bacon Pty Ltd v Rees (1965) 115 CLR 266

R v Byrnes (1995) 183 CLR 501

Re Custom Bus Australia Pty Ltd (in liq) [2021] NSWSC 1036

Smith v Bone (2015) 104 ACSR 528; [2015] FCA 319

Stec v Orfanos [1999] FCA 457

Sydney Subdivision Pty Ltd (in liq) v Chow [2023] FCA 8

Termite Resources NL (in liq) v Meadows, Re Termite Resources NL (in liq)(No 2) (2019) 370 ALR 191; [2019] FCA 354

Tourprint International Pty Ltd (in liq) v Bott [1999] NSWSC 581

United Petroleum Australia Pty Ltd v Herbert Smith Freehills (2018) 128 ACSR 324; [2018] VSC 347

Wardley Australia Limited v State of Western Australia (1992) 175 CLR 514

Weldon v Neal (1887) 19 QBD 394

Whitton v Regis Towers Pty Ltd (2007) 161 FCR 20; [2007] FCAFC 125

Young v Queensland Trustees Ltd (1956) 99 CLR 560

Division:

General Division

Registry:

New South Wales

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Number of paragraphs:

406

Date of last submissions:

10 July 2023

Date of hearing:

19-23 June 2023

Counsel for the Plaintiffs:

Mr J Raftery

Solicitor for the Plaintiffs:

Roser Lawyers

Counsel for the Defendants:

Mr D Allen

Solicitor for the Defendants:

Circle Bridge Legal

ORDERS

NSD 710 of 2020

IN THE MATTER OF IRONBARK BLACKSMITHING PTY LTD (IN LIQUIDATION) ACN 088 142 787

BETWEEN:

RICHARD STONE IN HIS CAPACITY AS LIQUIDATOR OF IRONBARK BLACKSMITHING PTY LTD (IN LIQUIDATION) ACN 088 142 787

First Plaintiff

IRONBARK BLACKSMITHING PTY LTD (IN LIQUIDATION) ACN 088 142 787

Second Plaintiff

AND:

STEPHEN MIZZI

First Defendant

ANDREW JOSEPH MIZZI

Second Defendant

ORDER MADE BY:	HALLEY J
DATE OF ORDER:	28 JUNE 2024

THE COURT ORDERS THAT:

1.Judgment against the first defendant in the amount of $98,097.69 for loans that are due and payable to the second plaintiff.

2.Judgment against the second defendant in the amount of $188,309.88 for loans that are due and payable to the second plaintiff.

3.Pursuant to s 1317H of the Corporations Act 2001 (Cth) (Act), an order for compensation in favour of the second plaintiff against the first and second defendants in the amount of $89,056.96.

4.Pursuant to s 588M(2) of the Act, the defendants are to pay to the first plaintiff, as a debt due to the second plaintiff, the amount of $339,436.92.

5.The parties are to seek to reach agreement as to both costs and interest pursuant to s 51A(1) of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and provide agreed short minutes to the Associate to Justice Halley, by 4.00 pm on Friday, 12 July 2024, failing which the parties are to file and serve submissions of no more than 5 pages, and any affidavit evidence in support, addressing any areas of disagreement between them, by 4.00 pm on Friday, 26 July 2024.

6.In the absence of agreed short minutes on costs and interest pursuant to s 51A(1) of the FCA Act, those matters will be determined on the papers unless a party requests an oral hearing at the time that they file submissions pursuant to Order 5 of these orders.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

A.       INTRODUCTION	[1]
B.       BACKGROUND	[9]
C.       EVIDENCE	[26]
C.1.  Plaintiffs’ evidence	[26]
C.2.  Defendants’ evidence	[29]
D.       LOAN ADVANCES	[44]
D.1.  Overview	[44]
D.2.  Relevant principles	[48]
D.2.1.  Overview	[48]
D.2.2.  Books and records of a company	[49]
D.2.3.  Set off	[56]
D.2.4. Limitation Act	[65]
D.3.  Plaintiffs’ submissions	[73]
D.4.  Defendants’ submissions	[82]
D.5.  Consideration	[99]
D.5.1.  Overview	[99]
D.5.2.  Financial statements of the Company	[108]
FY2012	[108]
FY2013	[114]
FY2014	[124]
D.5.3. Div 7A Loan Agreement	[127]
D.5.4.  Accounts 2-1027 and 2-1170	[140]
D.5.5.  Account 2-9000	[145]
D.5.6.  Account 2-1010	[153]
FY2013	[154]
FY2014	[159]
FY2015	[173]
D.5.7.  Account 2-1015	[174]
FY2013	[175]
FY2014	[190]
FY2015	[202]
D.5.8.  Account 2-1030	[203]
Status of the account	[203]
Credit of $546,210 to the account	[216]
D.5.9.  Set-off for dividend and directors’ fees	[222]
D.5.10. Limitation Act defences	[233]
D.5.11.  Conclusion	[238]
E.       BREACH OF DIRECTORS’ DUTIES	[241]
E.1.  Overview	[241]
E.2.  Relevant principles	[249]
E.2.1. Limitation Act issues	[249]
E.2.2.  Directors’ duties	[261]
E.3.  Plaintiffs’ submissions	[273]
E.4.  Defendants’ submissions	[276]
E.5.  Consideration	[281]
E.5.1. Limitation Act issues	[281]
E.5.2.  Advances made to defendants during the Impugned Period	[291]
F.        INSOLVENT TRADING	[302]
F.1.  Overview	[302]
F.2.  Relevant principles	[304]
F.3.  Was the Company insolvent during the Relevant Period?	[314]
F.3.1.  Plaintiffs’ submissions	[314]
F.3.2.  Defendants’ submissions	[318]
F.3.3.  Consideration	[321]
Presumed insolvency	[321]
Actual insolvency	[324]
F.4.  Were there reasonable grounds for suspecting insolvency?	[339]
F.4.1.  Plaintiffs’ Submissions	[339]
F.4.2.  Defendants’ Submissions	[341]
F.4.3.  Consideration	[342]
F.5.  Were the alleged debts incurred by the Company?	[346]
F.5.1.  Plaintiffs’ submissions	[346]
F.5.2.  Defendants’ submissions	[349]
F.5.3.  Consideration	[357]
F.6.  Conclusion	[370]
G.       CLAIM FOR RELIEF UNDER S 1317S AND S 1318	[371]
G.1.  Overview	[371]
G.2.  Relevant principles	[372]
G.3.  Submissions	[379]
G.4.  Consideration	[383]
H.       DISPOSITION	[406]

HALLEY J:

A.       INTRODUCTION

1. In these proceedings, the plaintiffs seek the recovery of shareholder loans alleged to have been made by Ironbark Blacksmithing Pty Ltd (in liquidation) (Company) to the defendants, and damages for breaches of directors’ duties and insolvent trading.

2. The first plaintiff, Richard Stone, is the liquidator of the second plaintiff, the Company.

3. The first defendant, Stephen Mizzi, and the second defendant, Andrew Mizzi, were both directors of the Company from the date it was incorporated on 18 June 1999, until the Company was placed into liquidation. The defendants were the only shareholders of the Company.

4. The plaintiffs contend that the defendants (a) obtained shareholder loans from the Company in the period to 30 June 2014 in an aggregate amount of $598,280.24 that have not been repaid, (b) made further advances by way of shareholder loans to themselves or for their benefit in the period 30 June 2014 to 5 February 2015 in an net amount of $102,157.28 in breach of their statutory directors’ duties, and (c) caused the Company to trade while insolvent in the period from at least 29 April 2013 until the appointment of a liquidator to the Company.

5. The defendants deny that the Company lent them any money. The defendants claim that to the contrary, they lent money to the Company. In the alternative, the defendants claim a set-off pursuant to s 553C of the Corporations Act 2001 (Cth) (Corporations Act) for salary, director’s fees, rent and shareholder advances.

6. Further, the defendants contend that (a) the creditors identified by the plaintiffs have not suffered the loss or damage alleged by the plaintiffs in the amended statement of claim (ASOC), (b) the plaintiffs’ claims are precluded by limitation defences, and (c) in any event, at all times they acted honestly and having regard to all the circumstances ought fairly be excused from any liability that might otherwise be imposed on them, pursuant to s 1317S or s 1318 of the Corporations Act.

7. For the reasons that follow, I have concluded that:

   (a)the amounts alleged to have been advanced by the Company to the defendants prior to 30 June 2014 were made by way of shareholder loans and they remain outstanding in the amounts recorded in the Company’s financial records (shareholder loans);

   (b)the defendants are not entitled to set off any amounts against the shareholder loans including amounts owed by the Company to the partnership between the defendants, A & S Mizzi (ABN 41 071 016 732);

   (c)the plaintiffs’ claim for repayment of advances made by the Company by way of further shareholder loans after 29 June 2014 is not precluded by the limitation defences sought to be advanced by the defendants;

   (d)the defendants breached their statutory directors’ duties by making payments to themselves or on their behalf by way of shareholder loans in the period between 30 June 2014 and 6 February 2015;

   (e)the Company was insolvent at all times between 29 April 2013 and the appointment of a liquidator to the Company on 6 February 2015;

   (f)a reasonable person in the position of the defendants would have been aware that there were grounds for suspecting that the Company was insolvent at all times between 29 April 2013 and the appointment of a liquidator to the Company on 6 February 2015;

   (g)most, but not all of the debts alleged to have been incurred by the Company between 29 April 2013 and the appointment of a liquidator to the Company on 6 February 2015 remain outstanding; and

   (h)the defendants should not be otherwise excused pursuant to s 1317S or s 1318 of the Corporations Act for any liability that they might have to the plaintiffs.

8. I am therefore satisfied that judgment should be given in favour of the plaintiffs and orders for compensation should be made against the defendants, substantially in the form or to the effect of those sought by the plaintiffs.

   B.       BACKGROUND

9. The Company operated a metal fabrication business building steel stairs and iron balustrades.

10. The Company completed a number of projects for commercial properties in the central business district of Sydney and well known individuals, including John Symonds, Heath Ledger, Jamie Packer, Zara, Hugo Boss, Ivy Hotel, Real Life Insurance and Greg Page.

11. Stephen Mizzi’s role was to look after the workshop floor. He was also responsible for quotes, ordering, approving bills and making progress claims.

12. Andrew Mizzi’s role was in quoting, design, workshop drawings and logistics.

13. The Company initially operated its steel fabrication business from a factory at Smithfield (Factory) which was owned by a partnership between the defendants, with the name “A & S Mizzi” (Partnership). The Partnership acquired the Factory in or about 2003.

14. The Company paid a market value rent per square metre to the Partnership, but not all payments were made on a timely basis and over time a considerable shortfall arose. There were no written agreements between the Company and the Partnership recording the terms on which the Company leased the Factory from the Partnership.

15. The Company employed a professional bookkeeper from 1999 to about 2012. The Company’s bookkeeping records were kept on MYOB software (MYOB files). The MYOB files included general journals and general ledgers for multiple accounts.

16. From 2012, following the departure of the professional bookkeeper, the defendants’ sister, Kathryn Muscat, performed the bookkeeper role.

17. The Company retained Forest Accounting as its accountant to prepare its annual financial statements and taxation returns. Forest Accounting also prepared and lodged the defendants’ personal taxation returns and the Partnership’s taxation returns. The principal of Forest Accounting was Andrew Toumazis.

18. By the commencement of the 2010 financial year the Company had incurred retained losses of $387,780.

19. In late 2011 or early 2012, the Partnership commenced to market the Factory for sale and ultimately the Factory was sold in 2013. The Company thereafter leased a small previously unused space at the rear of the Factory from the purchaser (new leased premises). As a result, the Company’s monthly rental payments fell from an amount of between $18,000 to $22,000 to an amount of approximately $4,300. The reduction in rent, however, was offset, at least in the short term, by the cost of fitting out the new leased premises and downtime while the fit out was taking place, estimated by Stephen Mizzi to be in the order of $80,000 to $100,000.

20. In addition to relocating to the new leased premises, the Company reduced its staff to between 7 and 10 employees.

21. Notwithstanding these reductions in operating expenses and being able to trade profitably in FY2011, FY2012 and FY2014, the Company continued to hold insufficient cash at bank to meet its tax liabilities and was not able to comply with payment plans that it had entered into with the Australian Taxation Office (ATO).

22. On or about 25 July 2014, the ATO served a statutory demand on the Company in an amount of $140,463.49 with respect to an outstanding deficit on the Company’s running balance account with the ATO (statutory demand).

1. The Company did not pay the debt the subject of the statutory demand.

2. On 6 February 2015, the Company was wound up in insolvency by an order of the Supreme Court of New South Wales. Peter Marsden was appointed as the liquidator of the Company.

3. On 21 June 2019, Mr Marsden was replaced as liquidator of the Company by Mr Stone.

   C.       EVIDENCE

   C.1.  Plaintiffs’ evidence

4. The plaintiffs relied on six affidavits affirmed by Mr Stone on 26 June 2020, 28 May 2021, 24 November 2021, 28 November 2022, 16 June 2023 and 19 June 2023. Mr Stone gave evidence of his review of the financial records of the Company, in particular, the existence of shareholder loans made by the Company to the defendants, liquidity ratios of the Company, continuing losses, overdue taxation liabilities, outstanding compulsory superannuation payments, and special arrangements with creditors. He also gave evidence of proofs of debt that had been provided to the former liquidator of the Company.

5. Mr Stone was cross examined.

6. His oral evidence was consistent with his affidavit evidence and he made appropriate concessions. He answered questions put to him directly and without prevarication. At times, however, his evidence tended to gloss over the detail provided in the Company’s financial records and drew conclusions too readily, particularly with respect to the quantum of loans outstanding, the time at which debts were incurred to the ATO and the relevance of the financial statements prepared by Forest Accounting for the Company.

   C.2.  Defendants’ evidence

7. Both defendants gave affidavit evidence in support of their defence to the claims advanced by the plaintiffs. In summary, they gave evidence that (a) the Company operated as a family business with no formal meetings, (b) there were no written agreements between the Partnership and the Company, (c) the Company’s financial records were maintained on the MYOB files, (d) in or about 2012 they discovered that their bookkeeper had stolen money from the Company and she was replaced by their sister, but she only had limited financial knowledge, (e) as a result of the money stolen by the bookkeeper they could not meet their taxations obligations and negotiated a payment plan with the ATO, (f) at the end of 2013 they moved to new and more modest premises and reduced the number of staff employed by the Company, and (g) many of the debts alleged to be owed by the Company have been repaid or were not incurred.

8. Significantly, the defendants also gave evidence that (a) they adopted the tax structure determined by their accountant, (b) they relied on their bookkeeper to document the Company’s financial transactions and their accountant to prepare the Company’s financial reports and their own individual taxation returns, (c) their accountant did not give them any indication that “we could be in a bit of trouble”, and gave them taxation returns “with no special comments”, (d) the Company made no loans to them, and (e) whenever the Company needed money they would put it in.

9. There was limited documentary support for the evidence given by the defendants.

10. Both defendants were cross examined.

11. The evidence that each gave in cross examination was broadly consistent with their affidavit evidence. It was readily apparent that each had a limited recollection of the financial transactions of the Company. This was not surprising given the dearth of contemporaneous documentation available to them, the passage of time, and their limited financial knowledge and understanding. I am satisfied that they left financial recording, reporting and taxation obligations to their bookkeeper and accountant.

12. Significantly, neither was able to explain discrepancies between their understanding of how much they were paid in wages by the Company and the wages income recorded in the MYOB files and the income declared in their income taxation returns.

13. In the course of his cross examination Andrew Mizzi estimated that his annual wages were approximately $120,000 for the financial year ending 30 June 2013, but was not able to explain why his tax return for that year only reported wages income of $41,000. Stephen Mizzi estimated his weekly wages paid by the Company were between $1,500 and $2,000 a week based on the money he was receiving in his bank account. He stated that he relied on his accountant to prepare his tax return, he did not review his tax returns and in 2013 he did not understand how a tax return worked or even that his 2013 tax return included a figure of $41,019 for salary and wages before tax.

14. Stephen Mizzi’s limited financial understanding and at times, combative approach to giving evidence, was illustrated in the following exchange during his cross examination, bearing in mind his 2013 tax return recorded that he had received a dividend from the Company of $50,000:

    Do you understand what a dividend is?---Not entirely.

    You say, “Not entirely”, but what is your understanding of a dividend?---I don’t know what a dividend is.

    Do you understand if you were a shareholder and received a – you might – I withdraw that. As a shareholder of a company you may receive a payment?---A  wage?

    No. As a shareholder. So a shareholder is the owner of the company or the owner of the shares?---Okay.

    Correct?---Correct.

    And if the company is profitable they will make a payment to the shareholders?---As a dividend? Is that what - - -

    As a – no, that’s - - -?--- - - - you’re telling me?

    Is that what you understand is a dividend?---Well, if you’re telling me that that’s what it is, I suppose that’s what it is.

    Did you have that understanding in 2013 that it was called a dividend?---No.

15. Ultimately, I was not able to place any significant weight on the evidence given by the defendants as to the financial position of the Company, except to the extent it was corroborated by contemporaneous documents or was consistent with the apparent logic of events.

16. The defendants also sought to rely on two expert reports prepared by a forensic accountant, Tamara Lindsay. Ms Lindsay was asked to comment on Mr Stone’s analysis of the financial records of the Company and to provide her opinion on whether the Company was insolvent in the period between 29 April 2013 and the appointment of a liquidator to the Company on 6 February 2015.

17. Ms Lindsay did not agree with Mr Stone’s calculations of the amounts that the defendants owed the Company because they did not take into account that the Company’s financial records indicated that the Company owed a “significant amount” to the defendants “by virtue of the rent owing to the Partnership”. She considered that after setting off the Company’s rental debt to the Partnership and shareholder loans against the amounts owed by the defendants, the Company’s financial statements indicated that there was a balance owing by the Company to the defendants in each of the financial years ending 30 June 2010, 2011 and 2012, as well as 2013 based on the second version of the FY2013 accounts.

18. Ms Lindsay, however, concluded that the Company was likely insolvent during the periods 6 June 2013 to around 9 September 2014 and from 9 October 2014 to the appointment of a liquidator to the Company on 6 February 2015. In her first report, Ms Lindsay concluded that the Company was not insolvent during the period 9 September 2014 to 9 October 2014 on the basis that during that period the ATO had indicated it was prepared to enter into another payment plan arrangement.

19. Ms Lindsay also considered that if the Court was satisfied that the Company was insolvent during those periods, the debts that the plaintiffs claimed had been incurred while trading insolvent were materially overstated because the majority of those debts had been incurred prior to 6 June 2013.

20. Ms Lindsay was cross examined. She generally answered questions directly and without prevarication. On occasions, however, she strayed into advocacy and at times she was reluctant to make appropriate concessions. Having said that, I was satisfied that she was expressing opinions that she genuinely held and was seeking to assist the Court in understanding the financial records of the Company.

21. Ultimately, as I explain below, although I derived some assistance from the evidence of Ms Lindsay and Mr Stone, I principally relied on my own analysis of the financial records of the Company, in particular, the entries in the MYOB files and the bank statements for the Company’s Commonwealth Bank of Australia (CBA) cheque account.

    D.       LOAN ADVANCES

    D.1.  Overview

22. The plaintiffs rely on the financial records of the Company to contend that substantial loans were made by the Company to each of the defendants. They contend that the loans are repayable either pursuant to a loan facility agreement dated 30 June 2012 between the Company and the defendants for the purposes of Div 7A of the Income Tax Assessment Act 1936 (Cth) (ITAA1936) (Div 7A Loan Agreement) or under general loan principles. They contend that as at 30 June 2014, the Company had advanced $205,146.49 to Stephen Mizzi and $393,133.75 to Andrew Mizzi (ASOC at [12F]) (Alleged Loan Advances).

23. The plaintiffs contend that in breach of the Div 7A Loan Agreement, the defendants failed to make the minimum repayments prescribed by Div 7A of the ITAA1936 in each of FY2015, FY2016, FY2017 and FY2018, and failed to repay the whole or any part of the Alleged Loan Advances, together with interest, on or before 1 July 2019 (ASOC at [12G]).

24. The defendants deny the Company lent them money. They claim that to the contrary, they advanced considerable sums to the Company and in the alternative claim they are entitled to set off other amounts owed to them by the Company.

25. Further, the defendants contend that the limitation period for the claims with respect to each of the Alleged Loan Advances expired before the commencement of the proceedings on 30 June 2020 and are thereby statue barred pursuant to s 14 of the Limitation Act1969 (NSW) (Limitation Act).

    D.2.  Relevant principles

    D.2.1.  Overview

26. The contentions advanced by the parties with respect to the Alleged Loan Advances raise three principal legal issues, (a) the extent to which a party can rely on financial records of a company as evidence of the transactions that they purport to record, (b) the circumstances in which mutual debits and credits may be set off against each other, and (c) the time at which a cause of action accrues with respect to a loan for the purposes of the Limitation Act.

    D.2.2.  Books and records of a company

27. Section 1305 of the Corporations Act provides:

    (1) A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.

    (2) A document purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).

28. A statement of a matter in a book kept by a company is thus sufficient to prove that matter in civil proceedings, unless other evidence convinces the Court to the contrary, on the balance of probabilities: Australian Karting Association Ltd v Karting (New South Wales) Incorporated [2022] NSWCA 188 at [129] (Gleeson JA, Meagher JA and Simpson AJA agreeing) citing Australian Securities and Investments Commission v Rich (2009) 236 FLR 1; [2009] NSWSC 1229. In Rich, Austin J stated at [397]-[400]:

    [397] Section 1305(1) does not make the company’s books conclusive evidence of the matters they contain, in the sense of requiring the tribunal of fact to make a finding in terms of the content of the books in the absence of proof to the contrary by the opposing party. The books are prima facie evidence of the matters stated in them, but the weight of that evidence is to be measured in accordance with the common sense of the tribunal of fact (Phipson on Evidence, 16^th edn (2005), at [7–17]).

    [398] In my view it would be open to the tribunal of fact to find that the prima facie evidence constituted by the company’s books is outweighed by other evidence (including evidence adduced by the proponent of the books, even if the opponent does not give evidence about them); or by some quality or characteristic of the books themselves, even if there is no other evidence. In particular, if a book has the appearance of a draft or (being electronic) has a file title indicating that it is a draft, that alone may be sufficient (all other things being equal) for the tribunal of fact to reject the book as evidence of the matter stated in it, notwithstanding that the book is prima facie evidence of that matter; a fortiori if, in addition to having the appearance of a draft, the book contains inconsistencies or ambiguities or the matter otherwise demands explanation.

    [399] My view as to the meaning of the subsection is consistent with the explanatory memorandum to the Companies Bill 1981, which introduced the provision. The explanatory memorandum, which I also quoted in my judgment on the admissibility of corporate records (ASIC NSWSC 417at [225]), said:

    [225] This is a new provision based on s-sec 156(3) of the Ontario Business Corporations Act. It is an evidentiary provision that is intended to expedite legal proceedings where books are to be introduced in evidence. This provision obviates the need to call witnesses to prove that books are books of the corporation when this fact is not in question or to prove transactions recorded in books when these matters are not in dispute.

    [400] Therefore s 1305(1) allows a company’s books to be introduced into evidence as they are, without any “authenticating” evidence by any witness, and allows the books to be relied upon to prove transactions recorded in them. But it does not elevate matters contained in the books to a plane of probative value that requires the court to disregard the context in which the matters relied on appear in the tendered document. If, for example, there is some doubt as to whether a particular transaction is “recorded” in a book because of some uncertainty about the status of the document or ambiguity about what it contains, s 1305(1) does not overcome the problem.

29. The New South Wales Court of Appeal in Karting observed that in Hoh v Ying Mui Pty Ltd [2019] VSCA 203, the Victorian Court of Appeal (Beach and Hargrave JJA and Sifris AJA) referred to a possible tension between statements by that Court in Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93 at [37] (Maxwell P and Buchanan JA), referring to the decision of the Full Court of this Court in Whitton v Regis Towers Pty Ltd (2007) 161 FCR 20; [2007] FCAFC 125 at [59] (Buchanan J, Marshall and Tracey JJ agreeing), and the statements in Rich.

30. In Livingspring, the Victorian Court of Appeal stated at [37]:

    As the Full Federal Court said in Whitton v Regis Towers Real Estate Pty Ltd, s 1305 does not elevate an entry in a book of account to the status of prima facie evidence of the transaction(s) which the entry purports to record.

31. The Full Court in Whitton was concerned with a proof of debt submitted by an administrator of a company, which had been rejected by a trustee of a bankrupt estate. The proof of debt was based on the books of the company which the primary judge found to be insufficiently reliable to be accepted. Certain debit entries in a director’s loan account with the company had been described in the relevant journal entries as “balancing entries”. After observing at [55] that these entries were “the outcome of an undisclosed process of judgment or inference by the staff in the accounting firm which compiled the accounts”, the Full Court said, with respect to a journal entry recording a balancing debit entry of $1,198,969.72 in the director’s loan account with the company at [59]:

    The particular entry (and many others) is not a direct record of an actual transaction. Section 1305 of the Corporations Act does not elevate the entry to prima facie evidence that any such transaction (or series of transactions) exists. It can be no more than prima facie evidence that an unknown person formed an opinion on an undisclosed basis that, in the absence of any directly recordable transaction nevertheless, as a balancing entry, such a figure should appear in the accounts. Mr Harris took the matter no further and, indeed, eroded any weight the entry may have had.

32. The Victorian Court of Appeal, however, stated in Hoh at [193]:

    There may be a tension between the decision of this Court in Livingspring, applying the decision of the Full Federal Court in Whitton, and ASIC v Rich, but it is unnecessary to explore that in the context of this appeal. In any case where a party to a legal proceeding relies upon financial statements of a company as proof of a contested fact, the court is required to consider all the evidence and attribute such weight to the entries in the financial statements as is appropriate in the context of the evidence as a whole. That is how the trial judge approached the shareholder loan entries in the financial statements in this case. There was no error in that approach.

33. In the light of the above statements in Livingspring, Whitton and Hoh, the Court of Appeal concluded in Karting at [136] that it was unnecessary to address the suggested tension between Livingspring and Rich, as:

    Adopting the approach in Hoh, the court is required to consider all the evidence and attribute such weight to the entries in the financial statements as is appropriate in the context of the evidence as a whole.

    D.2.3.  Set off

34. The defendants seek a set-off, pursuant to s 553C of the Corporations Act, for salary, directors’ fees, rent and shareholder advances.

35. Section 553C of the Corporations Act provides:

    (1)  Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:

    (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and

    (b) the sum due from the one party is to be set off against any sum due from the other party; and

    (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.

    (2)  A person is not entitled under this section to claim the benefit of a set‑off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.

36. In order to assess whether there is mutuality, the rights of the parties are to be taken and ascertained as at the time of winding up. The important factor is whether there is an obligation or liability prior to liquidation which might mature into a debt. Any acquisition by a liquidator of new claims on behalf of a company cannot vary the parties’ antecedent set-off rights: Metal Manufactures Pty Limited v Morton (2023) 275 CLR 100; [2023] HCA 1 at [18] (Kiefel CJ, Gordon, Edelman and Steward JJ).

37. There are three aspects to mutual dealing, (a) the credits, debts or claims must be between the same persons, (b) the benefit or burden of them must lie in the same interests, and (c) the credits, debts or claims must be commensurable for the purposes of set-off under s 553C, meaning that they must ultimately sound in money: Gye v McIntyre (1991) 171 CLR 609 at 623 (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ); Metal Manufactures at [19].

38. In Stec v Orfanos [1999] FCA 457, a Full Court of this Court considered a similar provision in the Bankruptcy Act 1996 (Cth), and said at [24] (Beaumont, Branson and Sundberg JJ):

    Thus a claim by a judgment creditor personally cannot be answered by a claim against the creditor as a member of a partnership or as an executor or trustee. See Re Wedd; Ex parte Wedd (1961) 19 ABC 36; Re Molesworth (1907) 51 Sol J 653; Vogwell v Vogwell (1939) 11 ABC 83 at 89. But the requirement relevant to the present case is that the claims be mutual; that is that they be of the same kind or nature. Thus joint debts cannot be set off against several debts: Middleton v Pollock (1875) LR 20 Eq 515 at 518. Here three of Mr Stec’s claims were against ERI alone. There is thus no mutuality in relation to these claims. His other claim was against Messrs Conroy, Rybak and Georgopolos. Again there is no mutuality because one of the joint creditors, ERI, is not the subject of the cross claim.

1. The purpose of s 553C of the Corporations Act, similarly to s 86 of the Bankruptcy Act 1966 (Cth) on which it is modelled, “is to prevent a creditor of an insolvent company who is also a debtor of that company being required to pay the full amount of the debt owed to the company and yet being entitled to receive only a fraction of the credit due from the company where that would result in substantial injustice”: Metal Manufactures at [69] (Gageler J, as his Honour then was). His Honour continued:

   With the object of confining the availability of set-off to circumstances where payment of the full amount of the debt without entitlement to the full amount of the credit would result in substantial injustice to a creditor, as distinct from unfairness to other creditors, the concept of mutuality has long been understood to entail that the burden of the debt and the benefit of the credit must lie in the same “equitable or beneficial interests”.

   (Footnotes omitted.)

2. Section 553C(2) of the Corporations Act requires more than “reasonable grounds for suspecting” insolvency. It requires proof, not that the creditor at the relevant time knew the company to be insolvent, but that the creditor had notice of that fact. A person will have notice of the fact that a company is insolvent if the person has actual notice of facts which disclose that the company lacks the ability to pay its debts when they fall due. It is not necessary to show that the person actually formed the view that the company lacked that ability: Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation (2009) 26 VR 657; [2009] VSCA 319 at [21] (Maxwell P, Byrne and Williams AJJA).

3. It is not sufficient, for the purposes of s 553C(2), that insolvency is a possible inference from the known facts: Jetaway Logistics at [22].

4. The relevant time at which the creditor or debtor is required to have had notice of facts that would have indicated to a reasonable person that the company lacked the ability to pay its debts when they fell due, is at the time of giving or receiving credit. Ordinarily, this would be when the transaction that gave rise to the liability occurred: Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd (2012) 265 FLR 33; [2012] VSC 112 at [72]-[76] (Sifris J).

   D.2.4. Limitation Act

5. Section 14(1)(a) of the Limitation Act provides:

   (1)  An action on any of the following causes of action is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims—

   (a) a cause of action founded on contract (including quasi contract) not being a cause of action founded on a deed

6. Section 14(1) of the Limitation Act has been construed as a procedural provision which has the effect of barring the commencement or maintenance of proceedings: Commonwealth of Australia v Dixon (1988) 13 NSWLR 601 at 605 (Hope JA). The provision bars the remedy, not the right, as a rule of procedure only: Pedersen v Young (1964) 110 CLR 162 at 166 (Menzies J).

7. Section 1317K of the Corporations Act provides:

   Proceedings for a declaration of contravention, a pecuniary penalty order, or a compensation order, may be started no later than 6 years after the contravention.

8. Section 1317K has been construed to bar both the relevant right and remedy outside the six year period and that the Court does not have the power to extend the specific time period pursuant to s 1322(4)(d) of the Corporations Act: Austructures Pty Ltd v Makin (2014) 290 FLR 153; [2014] VSC 544 at [30], [46]-[50] (Almond J).

9. A cause of action accrues at the time the loan is made if no time is specified for repayment or a loan is repayable on demand: Young v Queensland Trustees Ltd (1956) 99 CLR 560 at 566 (Dixon, McTiernan and Taylor JJ). As Fullagar J stated in Ogilvie v Adams [1981] VR 1041 at 1043-1044:

   Where there is a loan of money simpliciter (i.e. with nothing at all said as to repayment), the money is repayable instanter. Where there is a loan of money and the borrower contracts to repay on demand, again the money is repayable instanter. Where there is a loan of money which is recorded or acknowledged by the parties to be a loan repayable on demand, again the money is repayable instanter.

   The common law has always regarded the fact of indebtedness as a continuing detention by the debtor of the creditor’s money, and this whether the creditor brought an action of debt or an action in indebitatis assumpsit. Therefore, if A lends money to B, then instantly B is detaining A’s money.  In order to prevent a cause of action for recovery arising in A instantaneously on paying the money, the parties must expressly contract out of that situation by words clearly inconsistent with that situation. The courts have long since settled it that a mere statement or agreement that the money is repayable on demand (or request or at call) is not sufficient to contract out of that situation where all else that is known of the terms of the contract is that A has paid money to B by way of loan. The lender’s cause of action still arises instanter on the receipt of the money by the borrower, so that the lender’s cause of action becomes statute barred at the expiry of six years after the receipt of the money. See, for example, the early cases of Capp v Lancaster (1597) Cro Eliz 548; 78 ER 794; Ashenden v Clapham (1673) 1 Freeman 114; 89 ER 84 Norton v Ellam (1837) 2 M and W 461; 150 ER 839; Jackson v Ogg (1859) Johnson’s Reports 397; 70 ER 476 and the recent case of Commercial Union Assurance Co. Ltd. V Revell, [1969] NZLR 106. See also the unanimous dictum of the Full High Court in Young v Queensland Trustees Ltd. (1956) 99 CLR 560, at p. 566; [1956] ALR 939, at p. 942, per Dixon, CJ and McTiernan and Taylor, JJ.: “A loan of money payable on request creates an immediate debt.”

10. The subsequent application of the principle stated by Fullagar J in Ogilvie was considered in some detail by Keane JA in Haller v Ayre [2005] 2 Qd R 410; [2005] QCA 224. In Haller at [30], Keane JA, quoting from McLure J in Mackenzie v Albany Finance Ltd [2003] WASC 100 at [244]-[245] set out:

    “Where there is a simple loan of money, the debt is due and payable immediately and thus the cause of action therefore arises immediately upon the loan of the money. This position can be unchanged notwithstanding an express agreement making the loan repayable on demand, on request or on call: Young v. Queensland Trustees Ltd (1956) 99 CLR 560 at 566; Ogilvie v. Adams [1981] VR 1041.

    If, however, the agreement between the parties is that the loan is repayable only upon the happening of a certain event or upon compliance with a condition precedent to liability, the debt is not immediately due and payable and the cause of action does not arise until the happening of the event or compliance with the condition: Atkinson v. Bradford Third Equitable Benefit Building Society (1890) 25 QBD 377. An agreement may provide that the amount of the loan is not repayable until a demand is made, in the sense that the making of the demand is a condition precedent to liability to repay, and in that case the cause of action does not arise until demand has been made: Joachimson v. Swiss Bank Corp (above); Re Brookers (Aust) Ltd (in liq); Brooker v. Pridham (1986) 41 SASR 380 at 382.

    …

11. A loan payable on demand is to be distinguished from a loan only repayable on condition that a demand be first made. In the latter case, the making of the demand is a condition precedent to liability to repay, and the cause of action does not arise until such demand has been made: Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5 at [37] (Murphy JA, Buss JA agreeing), citing Mackenzie at [244].

12. Further, if the existence of a loan is confirmed, including by the making of payments by a borrower to the lender, the time before the making of those repayments does not run for limitation purposes. Section 54 of the Limitation Act relevantly provides:

    (1)Where, after a limitation period fixed by or under this Act for a cause of action commences to run but before the expiration of the limitation period, a person against whom (either solely or with other persons) the cause of action lies confirms the cause of action, the time during which the limitation period runs before the date of the confirmation does not count in the reckoning of the limitation period for an action on the cause of action by a person having the benefit of the confirmation against a person bound by the confirmation.

    (2) For the purposes of this section—

    (a)        a person confirms a cause of action if, but only if, the person—

    (i)acknowledges, to a person having (either solely or with other persons) the cause of action, the right or title of the person to whom the acknowledgment is made, or

    (ii) makes, to a person having (either solely or with other persons) the cause of action, a payment in respect of the right or title of the person to whom the payment is made,

    (b)a confirmation of a cause of action to recover interest on principal money operates also as a confirmation of a cause of action to recover the principal money, and

    (c)a confirmation of a cause of action to recover income falling due at any time operates also as a confirmation of a cause of action to recover income falling due at a later time on the same account.

    D.3.  Plaintiffs’ submissions

13. The plaintiffs submit that both the Company’s financial statements and the MYOB files support the contention that it was the defendants that borrowed funds from the Company. The plaintiffs submit that there is also other objective evidence supporting that contention, including the unsigned Div 7A Loan Agreement and bank statements.

14. The plaintiffs submit that there is no objective evidence that the defendants lent substantial amounts to the Company.

15. Further, the plaintiffs submit that contrary to the defendants’ contentions, account 2-1030 should be characterised as a joint shareholders’ loan account, not a Partnership loan account. They submit in the absence of any evidence from the Company’s bookkeepers or accountant or financial statements of the Partnership, that the Court should be very hesitant to draw any inference that the account was a Partnership account. They submit that in any event (a) many of the transactions on the account concerned the shareholders, not the Partnership, (b) the balances in the account were included as “Loan to Shareholder” in the Company’s financial statements, (c) there was no reference to any loans between the Company and the Partnership, and (d)  the characterisation of the account as a shareholders’ loan account is consistent with the taxation strategy implemented by the Company’s accountant of treating the majority of the payments to the defendants as loans rather than wages or dividends.

16. The plaintiffs contend that account 2-1030 formed part of the accounts in the general ledger that recorded the shareholder loans made to the defendants. They contend that the Alleged Loan Advances included the outstanding $44,987.20 debit balance in the account as at 30 June 2014. They seek to add this amount, in equal shares, to the Alleged Loan Advances, made by way of shareholder loans to each of the defendants.

17. The plaintiffs submit that the set-off proposed by the defendants between amounts alleged to be owed to the Partnership by the Company and amounts owed by the defendants to the Company must be rejected. They submit (a) it is not between the same persons, is not for mutual dealings, and would not do substantial justice between the parties, and (b) there are good reasons why the amounts should not be set off, including that the Partnership is a different entity with its own ABN and TFN, the Partnership is responsible for its liabilities and the partners are required to pay tax on the distributions from the Partnership.

18. The plaintiffs submit that the circumstances raised by the defendants would not give rise to an equitable set-off. The plaintiffs submit that there is no evidence that there was a shared understanding that the amounts would not be demanded by the Company. There is no equitable reason why the defendants or Partnership could be put in a better position than the other unsecured creditors of the Company. Moreover, the plaintiffs submit that the defendants should not be able to avoid paying tax by engaging in a scheme whereby they set off loans against amounts purportedly owing pursuant to a rental agreement for which they would have been required to pay tax.

19. The plaintiffs submit that the defendants would, in any event, fail pursuant to s 553C(2) of the Corporations Act, on the basis that they had notice of facts that would have indicated to a reasonable person the fact that the Company was insolvent.

20. The plaintiffs submit that the defendants did not adduce any evidence of outstanding salary or directors’ fees. The plaintiffs submit that any payments made by the defendants to the Company have already been set off in the claims made and there was no mutuality with respect to rent because that was a debt owed by the Company to the Partnership.

21. The plaintiffs otherwise submit that their claims with respect to the Alleged Loan Advances are not statute barred because of, assuming the parties are bound by the Div 7A Loan Agreement, the demand made by the liquidator for repayment of the advances within six years of the commencement of the proceedings. Further, or alternatively, the plaintiffs submit that their Alleged Loan Advances claims are not statute barred because repayments of the Alleged Loan Advances were made by the defendants within six years of the commencement of the proceedings.

    D.4.  Defendants’ submissions

22. The defendants advance the following submissions in response to the plaintiffs’ claims with respect to the Alleged Loan Advances.

23. First, the defendants submit that the Court should find that it is not satisfied that the Div 7A Loan Agreement contained terms that they agreed with the Company.

24. The defendants submit that to have effect for tax purposes, a loan agreement for the purposes of Div 7A of the ITAA1936 must be in writing and signed. They submit as the Div 7A Loan Agreement was not signed it could have no effect. They submit that their evidence that they never approved the entry into a Div 7A Loan Agreement by themselves or the Company should be accepted.

25. The defendants submit that the financial records of the Company are inconsistent with the Div 7A Loan Agreement having been entered into. They principally rely on the absence of any inclusion of Div 7A interest income in the second version of the FY2013 financial statements.

26. Second, the defendants submit that to the extent there is evidence of the Div 7A Loan Agreement having been acted upon, the loan was intended to reflect amounts owing by the Partnership to the Company. They submit that (a) the Div 7A Loan Agreement refers to a single borrower “Andrew & Steven Mizzi” and it would not be an ordinary and natural usage to refer to joint parties, even if they had the same surname, in that way, (b) the description of the borrower is an approximation of the name of the Partnership “A & S Mizzi”, (c) the borrower is described as “A & S Mizzi” in the Div 7A calculator and decision tool included in the FY2013 financial statements of the Company, (d) Div 7A applies to an associate of a shareholder and an associate of a natural person includes a partnership, and (e) repayments made to the loan in FY2014 were made on the “2-1030 account” (an account that the defendants submit was a Partnership loan account).

27. Third, the defendants submit that account 2-1030 in the company’s MYOB files was a liability account that was used for amounts owed by the Partnership to the Company.

28. The defendants rely on (a) a MYOB print out dated 2 May 2014 included in the Company’s FY2013 financial statements that describes account 2-1030 as “Loan A & S Mizzi”, (b) a year end journal entry in the Company’s FY2013 financial statements that recorded that the balance of “2-1300 Loan A & S Mizzi Partnership” was reduced by a credit of $159,500 which corresponded to a $145,000 debit to the account “6-2960 Rental on Property” when it was grossed up by GST of $14,500, and (c) many payments made by the Company to the Partnership recorded in the Company’s bank statements were entered as debits to account 2-1030.

29. Ms Lindsay included in her expert report a summary that she had prepared of transactions through the Company’s trade creditor / accounts payable general ledger account with the Partnership in the MYOB files from 1 March 2008 to 4 September 2012. She concluded from this summary that the Company had a trade creditor balance in the MYOB files owing to the Partnership of $502,210 as at 30 June 2012.

30. Ms Linday stated in her expert report that it is very likely that the trade creditors on the Company’s balance sheet includes the amount owing to the partnership of $502,210 as at 30 June 2012 because it was possible to reconcile the Company’s aged payables balance in the 2012 MYOB file with the company’s trade creditors balance in its FY2012 financial statements (to within $20).

31. Ms Lindsay also concluded that as at 30 June 2013, the Company’s financial statements indicated there was a loan owing to the shareholders of $499,728.

32. Fourth, the defendants submit that the balances in the MYOB files that the plaintiffs rely upon in respect of FY2014 relate to balances that accrued prior to 29 June 2014. They point to the outstanding balances in the Company’s general ledger as at 24 June 2014 for the “A Mizzi Directors Drawings” account of $370,640.15, the “S Mizzi Directors Drawings” account of $182,652.89 and the “A & S Mizzi” account of $44,987.20.

33. Fifth, the defendants submit that a credit of $546,210 should be applied to account 2-1030 as at the date that the Company was wound up. They submit that the Court should reduce the amount outstanding on the loans made by the Company to the defendants by this amount. The defendants seek to rely on Ms Lindsay’s supposition, in her second report at [10] that it is likely that Forest Accounting effected an additional journal entry in the Revised FY2013 financial statements, in order to amend the balances shown in the “Rental on Property” and “Partnership loan accounts” (a reference to account 2-1030) in the MYOB files, by crediting $546,210 to account 2-1030 “A & S Mizzi Drawings/Loan A & S Mizzi Partnership”.

34. Ms Lindsay concludes that if this journal entry had been made then the MYOB files relied upon by the plaintiffs would record a “Rental on Property” expense of $145,000 and the “A & S Mizzi loan account (2-1030)” would record a debt owing by the Company to “A & S Mizzi” of $501,222.80. The defendants submit that the impact of including the credit of $546,210 to account 2-1030 would be to give rise to a debt owing by the Company to the “shareholders”, as at 6 February 2015, of $513,787.68 (being $546,210 - $32,422.32).

35. Sixth, the defendants submit that they had not agreed to repay any amounts that they owed to the Company because the Company owed money to the Partnership and they are therefore entitled to a set-off under s 553C of the Corporations Act. They submit that because Forest Accounting grouped balances on the 2-1010, 2-1015 and 2-1030 accounts as “Loans to shareholders” in the financial statements of the Company is evidence that the liabilities were on the same account and therefore gave rise to mutual debits and credits and mutual dealings between the defendants and the Partnership and the Court should infer that there was an understanding that the amounts could be set off against each other and would be treated as being on the same account.

36. The defendants submit that an equitable set-off applies, such that the Company’s claim to any amounts owing by the defendants personally or the Partnership must be reduced by the amounts owing to the defendants and the Partnership. They submit that the consistent practice between the Company, the defendants and the Partnership of making advances when needed was premised on a shared understanding that amounts would not be demanded by any party so as to allow the Company to continue to operate, and the defendants to continue to provide their labour. They submit that in those circumstances it would be unconscionable for the Company to call for an account for the advances made to the defendants and the partnership without bringing to account advances made by the defendants and the partnership to the Company. Alternatively, the defendants submit the transactions were in the nature of a running account.

1. Seventh, the defendants submit that any amounts payable by them to the Company in respect of FY2014 should be reduced by the amount of the FY2014 dividend and FY2014 directors’ fees because (a) the Court should infer that Forest Accounting recorded the FY2013 dividend as a payment to the defendants that was applied by them to reduce the Partnership loan, (b) the Court should infer that any amount payable by either of them in respect of FY2014 should be reduced by $40,000 on account of the FY2014 dividend due to the absence of any record of the FY2014 dividend in the MYOB files, and (c) the Court should infer that any amount payable by Stephen Mizzi with respect to FY2014 should be reduced by $100,000 on account of directors’ fees because his FY2014 tax return included a salary of $104,907 for FY2014.

2. Eighth, the defendants submit that the plaintiffs’ claim for repayment of advances made by the Company to Stephen Mizzi or Andrew Mizzi (and potentially any balance owed by A & S Mizzi after a set-off) before 29 June 2014 are not maintainable under s 14(1)(a) of the Limitation Act. They submit that (a) the Company’s cause of action for recovery of the loans or advances arose on receipt of the money by the defendants and the Company’s cause of action became statute barred at the expiry of six years after the receipt of the money, (b) there is no basis for the Court to infer an agreement to repay the advances or loans other than upon them being made, and (c) the loan repayments that the plaintiffs seek to rely upon were all made by the Company to the Partnership on account 2-1030.

   D.5.  Consideration

   D.5.1.  Overview

3. Making findings as to the state of the financial position of the Company, given (a) the incomplete financial documentation now available, as I explain at [322] below , (b) the absence of any evidence from the Company’s former accountants or bookkeepers and, (c) the defendants’ evidence, that and they had very limited financial knowledge and they relied on their bookkeepers and accountant to record the transactions of the Company accurately, is an inherently difficult task.

4. The financial records of the Company that were in evidence relevantly comprise the end of year financial statements and taxation returns for the Company prepared by Forest Accounting for each of FY2012, FY2013 and FY2014, and the MYOB files, comprising general journals and general ledgers, for FY2013, FY2014 and for the period 1 July 2014 to 6 February 2015.

5. The plaintiffs rely on the references to shareholder loans in the Company’s financial statements but do not seek to quantify the alleged indebtedness of the defendants to the Company by reference to figures recorded in the financial statements of the Company.

6. Rather, the figures relied upon by the plaintiffs in the ASOC as quantifying the Alleged Loan Advances are taken from the balances outstanding as at 30 June 2014 in the general ledger in the MYOB files for account 2-1010 “A Mizzi Directors Drawings”, account 2-1015 “S Mizzi Directors Drawings” and account 2-1030 “A and S Mizzi Drawings”. The balances outstanding as at that date were recorded as $370,640.15 for account 2-1010, $182,652.89 for account 2-1015 and $44,987.20 for account 2-1030, which add to $598,280.24.

7. In order to determine whether the indebtedness recorded in those accounts formed part of the Alleged Loan Advances, it is necessary to have regard to all the available financial records of the Company. In particular, it is necessary to have regard to (a) entries in other accounts included in the MYOB files, most significantly, account 2-9000 that was named “Directors Drawings”, (b) financial statements of the Company prepared by Forest Accounting, (c) the Div 7A Loan Agreement, (d) bank statements for the Company’s CBA cheque account (CBA bank statements), (e) the taxation returns of the defendants and the Partnership.

8. In analysing the Company’s financial records, I also had regard to the evidence of (a) the defendants, but only to the extent that it was probative, plausible and consistent with the apparent logic of events, and (b) the evidence of Mr Stone and Ms Lindsay. This evidence, however, was of comparatively limited assistance compared with the inferences that I was able to draw from my own review of the financial records, particularly, with respect to account 2-1030 and the interrelationship between the financial statements of the Company and its tax returns prepared by Forest Accounting, the MYOB files maintained by the Company’s bookkeepers and the CBA bank statements.

9. The entries in the MYOB files in the period between an unspecified date in 2012 and the appointment of a liquidator on 6 February 2015 were made by the defendants’ sister, Ms Muscat, who replaced the former bookkeeper following her resignation and after the Company discovered that she was allegedly stealing money from the Company.

10. The defendants gave evidence that Ms Muscat had limited financial knowledge but received assistance from an independent bookkeeper, Mr Toumazis, for a short period, to enable her to record the financial transactions of the Company in the MYOB files. Given that the payments and receipts that are recorded in the general ledgers, other than journal entries, are largely corroborated by balancing credits and debits in Company’s contemporaneous CBA bank statements, I accept that the MYOB files reflect transactions that occurred and journal entries that were made to the accounts.

11. Before turning to accounts 2-1010, 2-1015 and 2-1030, it is necessary to first have regard to the end of year financial statements of the Company prepared by Forest Accounting, the Div 7A Loan Agreement and to review the entries made in the general ledger in the MYOB files for accounts 2-1027, 2-1170 and 2-9000.

    D.5.2.  Financial statements of the Company

    FY2012

12. The tax return and financial statements of the Company prepared by Forest Accounting for the year ending 30 June 2012 (FY2012 financial statements) record that the Company had made “Loans to Shareholders” in an aggregate amount of $498,291.99 as at 30 June 2012. This item was included as an asset in the notes to the financial statements under the heading “Trade and Other Receivables”. The financial statements also record that the current liabilities of the Company as at 30 June 2012 included “Loans to Shareholders” in an aggregate amount of $34,357.19. This would more accurately have been described as “Loans from Shareholders” given it was recorded as a liability, not an asset of the Company.

13. A listing of general journal entries for the Company for the period 1 July 2011 to 30 June 2012 produced from the MYOB files includes general journal entries under the heading “30/6/2012 agree to forest accounts” of a debit of $498,291.99 to account 1-1017 “Loan to Shareholders” and a credit of $34,357.19 to account 2-1036 “Loan [from] Shareholders”.

14. The Div 7A Loan Agreement is dated 30 June 2012. The Company is recorded as the lender and the borrower is recorded as “Andrew & Steven Mizzi”. The Div 7A Loan Agreement is not signed by the Company or either of the defendants. A copy of the Div 7A Loan Agreement was included in the FY2012 financial statements.

15. The attachment to the Div 7A Loan Agreement provides that it was for a principal sum of $463,934, with a commencement date of 1 July 2012 and for a seven year period expiring on 1 July 2019. The principal sum of $463,934 was in an amount equal to the difference between “Loans to Shareholders” of $498,291.99 and “Loans [from] Shareholders” of $34,357.19, rounded down to the nearest dollar, as recorded in the FY2012 financial statements.

16. Clause 10.1 of the Div 7A Loan Agreement relevantly provides that if the borrower fails to pay interest or make any repayment by the due date, the balance of the loan and any accrued interest will, at the option of the Company as lender, immediately become due and payable in full on demand.

17. The FY2012 financial statements also included unsigned minutes of a meeting of the Company that was stated to have been attended by Andrew Mizzi, Steven Mizzi and Mr Toumazis on 30 June 2012. Those minutes record:

    1.It was noted that a loan had been made between the Company as the Lender and the Borrower as set out below (“the Loan”). The terms of the Loan are and the Loan will be made in accordance with the provisions contained within the Company’s Constitution.

    2.The Loan was reviewed in detail and it was resolved that the Company accept the terms of the Loan and execute any relevant additional documentation required to give effect to the Loan.

    Amount of Loan         $463,934

    Borrower                   Andrew & Steven Mizzi

    Date of Advance        01/07/2012

    Secured/Unsecured      Unsecured

    FY2013

18. Forest Accounting prepared two versions of the financial statements of the Company for the financial year ending 30 June 2013.

19. The first version of the financial statements for FY2013 included the tax return for the Company for that financial year (FY2013 financial statements). Those statements record that the Company had made “Loans to Shareholders” as at 30 June 2013 in an aggregate amount of $534,906.47. As was the case for the FY2012 financial statements, this item was included as an asset in the notes to the financial statements under the heading “Trade and Other Receivables”. The financial statements did not disclose any “Loans to [or from] Shareholders” in the Company’s current or non-current liabilities.

20. The profit and loss statement for the Company in the FY2013 financial statements disclosed that an “Interim Dividend” of $100,000 was paid in FY2013. The payment of an interim dividend in that amount was also disclosed in the notes to the balance sheet of the Company with reference to the item “(Accumulated losses) Retained earnings”. Those notes included an item “Dividends provided for or paid” of (100,000).

21. The FY2013 tax returns prepared and lodged by Forest Accounting with the ATO for the defendants record that each received a franked dividend of $50,000 in that financial year and Stephen Mizzi and Andrew Mizzi were entitled to corresponding franking credits of $21,428 and $21,429, respectively.

22. The FY2013 tax returns for the defendants disclosed that each had received a gross payment for salary and wages for that financial year of $41,109 and their main salary and wage occupation description was “MANAGER – GENERAL”. Stephen Mizzi’s FY2013 tax return also disclosed that he had received total supplemental income of $19,950.

23. The FY2013 financial statements also included a Div 7A calculator and decision tool spreadsheet. The spreadsheet recorded:

    (a)the “Name of shareholder or shareholder’s associate” was “A & S MIZZI”, the loan was made for seven years in “2011-12” and the amount of the loan not repaid at the end of the financial year ending 30 June 2012 was $463,935;

    (b)the minimum yearly repayment for the financial year ending 30 June 2013 was $86,234.75 and $79,727.07 for the financial year ending 30 June 2014; and

    (c)the total repayments made in the financial year ending 30 June 2013 was $100,000, comprising an interest payment of $25,657.41 and a principal repayment of $74,342.59 giving rise to a closing balance for the end of that financial year of $389,592.41.

24. On 25 July 2014, the ATO issued a statutory demand on the Company.

25. On 13 August 2014, a revised form of the FY2013 financial statements prepared by Forest Accounting were provided to the ATO in support of a payment plan that the Company was seeking from the ATO (Revised FY2013 financial statements). There are two principal differences between the FY2013 financial statements and the Revised FY2013 financial statements.

26. First, the figure of $534,906.47 for “Loans to Shareholders” included in current assets in the balance sheet for the Company in the FY2013 financial statements was replaced with a figure of $415,246.35 in the Revised FY2013 financial statements. As I explain below, however, the figure for “Loans to Shareholders” included in current assets in the Revised FY2013 financial statements is of a different character to the entry with that description in the FY2012 financial statements and the FY2013 financial statements.

27. Second, the figure for “Trade and Other Payables” of $784,240.23 in current liabilities in the balance sheet for the Company in the FY2013 financial statements was replaced with the description “Trade Creditors” in an amount of $117,132.46 and “Loans to Shareholders” in an amount of $499,728.29 in the Revised FY2013 financial statements. Given that it was recorded as a current liability, the “Loans to Shareholders” entry would more accurately be described as “Loans from Shareholders”.

    FY2014

28. The financial statements for the Company prepared by Forest Accounting for the year ending 30 June 2014 (FY2014 financial statements) record that the company had made “Loans to Shareholders” as at 30 June 2014 in an aggregate amount of $603,766.94 and in an aggregate amount of $415,246.35 for FY2013. Again, the “Loans to Shareholders” figures included in current assets in the notes to the FY2014 financial statements under the heading “Trade and Other Receivables” were of a different character to the entries with that description in the FY2012 financial statements and the FY2013 financial statements.

29. The FY2014 financial statements did not expressly disclose any “Loans [from] Shareholders” in the Company’s current or non-current liabilities. I note, however, that the figure for current liabilities of $663,279.41 for FY2013 recorded in the FY2014 financial statements is the same figure that appeared in the Revised FY2013 financial statements and that figure included “Loans [from] Shareholders” in an amount of $499,728.29.

30. The Company’s tax return for the year ending 30 June 2014 (FY2014 tax return) disclosed a figure of $760,834 for “All current assets”. This was the same figure that was disclosed in the balance sheet of the Company that was included in the FY2014 financial statements. The figure of $760,834.42 included $729,022.11 for “Trade and other receivables”, which in turn included the figure of $603,766.94 for “Loans to Shareholders”. A fee memorandum from Forest Accounting to the Company, marked for Andrew Mizzi’s attention, dated 24 October 2014, included in the fee narrative the preparation and lodgement of the FY2014 tax return and “[f]or arranging the signing of your return and the supply of a copy together with returning your documentation and the holding of the executed ATO declarations”.

    D.5.3. Div 7A Loan Agreement

31. I am satisfied that the objective intention of the parties was that they would be bound by the Div 7A Loan Agreement. Although the document was not signed, it was reduced to writing and it was contained in the Company’s bound financial records prepared by its accountant.

32. The Div 7A Loan Agreement was a critical component of the tax minimisation strategy implemented by the Company’s accountant. It enabled Forest Accounting to prepare and lodge taxation returns for the defendants in FY2013 and FY2014 that did not include the amounts advanced by way of “shareholder loans” in their assessable incomes. Had the Div 7A Loan Agreement not been entered into, the shareholder loans would have to have been included as dividends paid by the Company and would have been taxable.

33. The entry into the Div 7A Loan Agreement was confirmed in the FY2013 financial statements. The initial principal advanced under the Div 7A Loan Agreement also matched the net amount of the shareholder loans outstanding as at 30 June 2012, as recorded in the general ledger for account 1-1017 “Loan to Shareholders” and account 2-1036 “Loan [from] Shareholders”. I am satisfied that the Div 7A Loan Agreement, although not signed, recorded the terms on which loans were made by the Company to the defendants, in their capacity as shareholders of the Company.

34. I am not persuaded that I should draw the inference sought by the defendants that the reference to “Andrew and Steven Mizzi” as the borrower in the Div 7A Loan Agreement was a reference to the “A & S Mizzi partnership”.

35. As submitted by the plaintiffs, the objective circumstances supporting these findings include:

    (a)there was no reference in the financial statements of the Company to any loans made by the Company to the Partnership, only references to “Loans to Shareholders”;

    (b)the principal amount identified in the Div 7A Loan Agreement is consistent with the amounts recorded as being owed by the defendants, as shareholders, in the MYOB files and the FY2012 financial statements;

    (c)a loan repayment in an amount of $100,000 was made from a dividend paid to the defendants by way of a debit to the retained earnings account 3-8000 and a credit to account 2-1030;

    (d)but for the Div 7A Loan Agreement, the net amount of $463,934 recorded as loans to shareholders in the MYOB files would have been deemed to be a dividend and taxable; and

    (e)the defendants did not disclose the net amount of $463,934 recorded as loans to shareholders in the MYOB files, or any other amount referrable to that figure, in their FY2012 tax returns.

36. A fundamentally different position, however, was sought to be advanced in the Revised FY2013 financial statements. Those financial statements were provided to the ATO as an attachment to a letter dated 13 August 2014 in which the defendants sought to explain the Company’s failure to comply with an existing payment plan and, I infer, persuade the ATO to extend or enter into a further payment plan with the Company with respect to its accumulated debt. The Revised FY2013 financial statements purported to disclose a new liability of “Loans [from] Shareholders” (incorrectly described as “Loans to Shareholders) of $499,728.29, a current asset of “Loans to Shareholders” of $415,246.35 and replacing current liabilities for “Trade and Other Payables” of $784,240.23 in the FY2013 financial statements with $117,132.46 for “Trade Creditors”.

37. These “revisions” to the FY2013 financial statements were supported by entries in the general journal that purported to show debits and credits made as at 30 June 2013, to give effect to the revisions.

38. The journal entries to give effect to the revisions appear from a date stamp on an extract from the general journal of the Company to have been made no later than 3.24 pm on 2 May 2014. They must have been made at a date after the FY2013 financial statements were prepared as they are not reflected in those financial statements.

39. The journal entries were made at a time when the Company was not meeting its payment obligations with the ATO. It can readily be inferred that the disclosure of “Trade and Other Payables” of $784,240.23 in current liabilities as at 30 June 2013, and net liabilities of $55,333.62 for FY2013 would not have assisted the Company in persuading the ATO that the Company could meet its taxation obligations.

40. The effect of the journal entries was first, to reduce the balance outstanding in account 1-1017 (Loan to Shareholders) of $498,291.99 to nil, and second, to reduce the balance outstanding in account 2-1036 (Loan [from] Shareholders) of $30,657.19 to nil.

41. The balance in account 1-1017 was reduced to nil by the following journal entries as recorded in the Company’s general ledger:

    (a)credit $498,291.99 to account 1-1017 – “Loan to Shareholders”;

    (b)debit $260,463.81 to account 2-1030 –“ A & S Mizzi Drawings”;

    (c)debit $120,692.18 to account 2-1010 –“A Mizzi Directors Drawings”;

    (d)debit $110,000.00 to account 2-1030 –“A & S Mizzi Drawings”; and

    (e)debit $7,136.00 to account 2-1030 – “A & S Mizzi Drawings”.

42. The sum of the four debits identified above is $498,291.99.

43. I accept it is not unusual that journal entries might be made after the end of a financial year to record more accurately credits and debits in a company’s financial records. I am satisfied, however, that the entries made in the MYOB files to give effect to these revisions cannot be relied upon to alter the fundamental character of the Company’s financial relationship with the defendants. Irrespective of how they might have been categorised in the financial statements as at 30 June 2014, I am satisfied that the advances were made to the defendants as shareholder loans as recorded in the MYOB files under the umbrella of the Div 7A Loan Agreement or otherwise on the basis that they were loan advances, not the payment of wages or dividends.

    D.5.4.  Accounts 2-1027 and 2-1170

1. The absence of any indication from a company’s accountant that the company was insolvent might well be relevant to the question of whether a director was aware that a company was insolvent but is of limited relevance to the question of whether a reasonable person in the position of the director would have grounds to suspect insolvency. Moreover, I do not accept that a reasonable person in the position of the defendants would not have suspected insolvency on the basis that if the outstanding debt to the ATO was demanded, it could be paid from the proceeds of a large contract or support from the Partnership. The first alternative did not rise above speculation and the second proposition is particularly implausible, given the Partnership did not in fact meet the outstanding debt to the ATO or otherwise provide any or sufficient funds to the Company to enable it to meet all its obligations under the payment plans with the ATO.  

   F.5.  Were the alleged debts incurred by the Company?

   F.5.1.  Plaintiffs’ submissions

2. The plaintiffs allege in the ASOC at [13] that the Company incurred the following debts during the Relevant Period (Alleged Debts):

Date of Debt	Priority Creditors	Amount
29 Aug 2014 – 5 Feb 2015	Australian Super	$3,898.21
30 Nov 2014 – 5 Feb 2015	CBUS Superannuation	$4,986.14
Total	$8,884.35
Partly Secured Creditors
Westpac Banking Corporation	$10,000.00
Macquarie Bank	$2,000.00
Esanda	$5,000.00
Total		$17,000.00
Unsecured Creditors
30 May 2014	Australian Taxation Office	$257,174.24
23 October 2014	Austech Supplies	$772.75
21 March 2014	Bent & Curved Glass	$3,614.00
21 November 2014	Castlecrest Engineering Pty Ltd	$2,651.00
31 Aug 2014 – 31 Aug 2015	CGU Workers Compensation	$10,337.56
10 Oct 2014 – 10 Mar 2015	Central Monitoring Services Pty Ltd	$2,372.70
15 November 2014	Coregas (Previously Linde Gas)	$296.91
26 November 2013	Elite Glass	$2,503.95
5 Sep 2014 – 28 Oct 2014	Forest Accounting & Taxation Services	$9,917.00
20 Nov 2014 – 11 Dec 2014	Hilti	$293.97
10 June 2014	Macquarie Premium Funding	$1,632.32
11 August 2011	M J YANG Enterprises	$1,594.00
10 January 2014	Mario & Sons Steel	$5,050.00
30 Apr 2013 – 18 Jun 2014	Mitre 10 Home & Trade	$993.50
31 Aug 2014 – 8 Oct 2014	NQX Transport	$1,020.75
8 May 2014 – 12 Oct 2014	Office National, Merrylands	$384.75
11 Mar 2014 – 19 Nov 2014	Origin Oz	$47,011.99
11 November 2014	Omniveta Australia Pty Ltd	$33,428.52
28 Nov 2014 – 28 Jan 2015	Precision Oxycut	$4,038.13
12 Apr 14 – 9 Nov 14	Pure Drinking Water	$240.00
22 October 2014	Snap Printing	$192.50
29 November 2014	Track Fast	$121.00
10 August 2014	Toll North	$1,189.72
28 November 2014
15 January 2014	Unaveave Pty Ltd	1,360.00
15 August 2014	George Weston & Sons	$1,363.83
Total	$389,555.09 $387,961.09
Grand Total	$415,439.44$396,845.44

1. The plaintiffs submit that each of the Alleged Debts is substantiated by proofs of debt, invoices and/or entries in an aged payables summary for the Company as at 11 May 2015 that was produced from the MYOB files (Aged Payments Summary).

2. Further, the plaintiffs submit that (a) the Company’s report as to affairs completed by Andrew Mizzi confirms that the Company’s unsecured creditors included the ATO and creditors listed in the creditors ledger and otherwise stated “REF COMPANY BOOK & RECORDS”, and (b) claims by Stephen Mizzi that certain alleged debts were not payable because of the supply of faulty goods or services were not supported by any evidence.

   F.5.2.  Defendants’ submissions

3. The defendants advance the following challenges to the Alleged Debts.

4. First, the defendants submit that none of the following Alleged Debts appear in the Company’s Aged Payments Summary in the accounts payable system: Castlecrest Engineering ($2,651), CGU workers compensation ($10,337.56), Central Monitoring Services ($2,372.70), Macquarie Premium Funding ($1,632.32), Omniveta Australia ($33,428.52), Toll North ($1,189.72), and George Weston & Sons ($1,363.83).

5. Second, the defendants submit that (a) the proof of debt for CGU claims a debt for workers compensation insurance beyond the period of insolvency through to 31 August 2015, (b) the proof of debt for Central Monitoring Services does not include any documents that substantiate the claim and in particular the reason for the large invoice of $1,815 on 16 December 2014, (c) the Omniveta proof of debt does not substantiate a debt incurred by the company to Omniveta or when that debt was incurred, and (d) the proof of debt for Austech supplies annexed to the 16 June 2023 affidavit of Richard Stone is outside the plaintiffs’ pleaded case.

6. Third, the defendants submit that proofs of debt have not been provided for the following Alleged Debts: Bent & Curved Glass ($3,614), Coregas ($296.91), Elite Glass ($2,503.95), Forest Accounting & Taxation ($9,917), Hilti ($293.97), Macquarie Premium Funding ($1,632.32), Mitre 10 Home & Trade ($993.50), NQZ Transport ($1,020.75), Office National ($384.75), Origin OZ ($47,011.99), Precision Oxycut ($4,038.13), Snap Printing ($192.50), Track Fast ($121) and Unaveave ($1,360).

7. Fourth, the defendants submit that the invoices issued by Forest Accounting that are attached to Mr Stone’s affidavit affirmed on 16 June 2023 do not take into account payments of $500 made by the Company to Forest Accounting on each of 25/07/14, 01/08/14, 14/08/14, 15/08/14, 22/08/14, 12/09/14, 19/9/14, 3/10/14, 10/10/14, 17/10/14 and 20/11/14, and the plaintiffs have included a fee memorandum addressed to “Andrew & Stephen Mizzi”  which is not a Company liability.

8. Fifth, the defendants submit that the Court should accept Stephen Mizzi’s evidence that the following alleged debts were not incurred by the Company, principally because the goods or services supplied were faulty: Bent & Curved Glass ($3,614), Office National ($384.75), Origin OZ ($47,011.99), Pure Drinking Water ($240) and George Weston & Sons ($1,363.83).

9. Sixth, the defendants submit that the proof of debt submitted by Australian Super and Cbus  Super are based on an estimated payment rate for certain employees for periods up to February 2015, they do not take into account all payments made by the Company, as recorded in the MYOB files, and the Court should accept Stephen Mizzi’s evidence in cross examination that he gave instructions for all superannuation to be paid.

10. Seventh, the defendants submit that not all of the outstanding debt to the ATO was incurred during the period of the Company’s alleged insolvency, in particular a general interest charge that accrued on 17 February 2015 with respect to unpaid amounts that the plaintiffs have not established were incurred during the Relevant Period and general interest charges that were imposed on an income tax assessment as at 3 April 2013.

    F.5.3.  Consideration

11. The absence of supporting financial records, in particular, copies of invoices, receipts and contractual documents makes it difficult to reconcile the competing submissions of the plaintiffs and the defendants, and to conclude which of the Alleged Debts were in fact incurred and remain outstanding.

12. Stephen Mizzi gave evidence, unsupported by any documentary evidence, that the debts to Australian Super, Cbus Superannuation and CGU Workers Compensation have been paid, the Alleged Debt to Bent & Curved Glass had not been incurred because the glass supplied was defective and had not been accepted, the balance outstanding to Forest Accounting was incorrect as some payments had been made, the alleged debt to Office National had not been incurred because the goods supplied did not match the agreed description, Origin OZ had agreed to write off the $47,000 cost of the glass to cover the cost of the rectification of the defective glass supplied to the Company, the alleged debt to Pure Drinking Water was not incurred because the goods supplied had not been ordered, and the Alleged Debt to George Weston & Sons was not incurred because the goods supplied were defective and were not accepted.

13. In the circumstances, I have accepted that the Alleged Debts which were recorded in both the Aged Payments Summary and the Report as to Affairs (RATA) were incurred on the dates alleged in the ASOC and remain outstanding.

14. I have approached the determination of the Alleged Debts on this basis because I am satisfied that the Aged Payments Summary in combination with the RATA or proofs of debt supported by invoices are likely to be the most reliable guide to the existence, quantum and current status of each of the Alleged Debts.

15. Further, I accept that Stephen Mizzi has given evidence on oath challenging the existence of many of the Alleged Debts but this evidence is not supported by contemporaneous documents. The absence of any supporting documents and the passage of time since the Alleged Debts have been pleaded to have been incurred significantly diminishes the weight I can give to this evidence. At the same time, I am not prepared to discount this evidence entirely. Hence, in the absence of any evidence from creditors seeking to dispute the defendants’ challenges to Alleged Debts, I am not persuaded that I can reject that evidence where the plaintiffs seek to rely only on the content of proofs of debt, that are not supported by invoices or any other contractual documentation, to substantiate the Alleged Debts.

16. I am, therefore, not satisfied that the Company incurred the Alleged Debts to Australian Super, Cbus Superannuation and Central Monitoring Services. Each of these Alleged Debts was disputed and the plaintiffs rely only on proofs of debt without any accompanying invoices or other contractual documentation.

17. The Company’s indebtedness to the ATO during the Relevant Period is recorded in the Integrated Client Account and the Income Tax Account.

18. The debit balance outstanding in the Integrated Client Account increased from $78,524.84 as at 29 April 2013 to an amount of $235,473.42 as at 6 February 2015. During the Relevant Period, the Integrated Client Account recorded $349,985.53 in debits and $192,219.22 in credits and the Income Tax Account recorded $7,021.24 in debits and $40,519.62 in credits.

19. The Alleged Debt to the ATO included a general interest charge as at 6 February 2015 of $24,450.65 with respect to the Integrated Client Account and $6,020.02 with respect to the Income Tax Account.

20. Further, as explained by Ms Lindsay, if interest, payments and refunds are allocated to the earliest tax debt incurred, the $21,700.82 closing balance of the Income Tax Account as at 6 February 2015 comprised a general interest charge of $6,020.02 and an amount of $15,680.80 being the amount outstanding on the Company’s $44,451.50 FY2012 income tax liability (which was assessed as at 3 April 2013).

21. The FY2012 income tax liability was incurred prior to 29 April 2013 and the plaintiffs have not demonstrated that the underlying tax debts to which the general interest charges applied were incurred wholly or partly during the Relevant Period. It follows, that these amounts cannot be included in the insolvent trading claim sought to be advanced by the plaintiffs.

22. For the foregoing reasons, it is therefore necessary to deduct the general interest charges and the amount outstanding from the FY2012 income tax liability from the Alleged Debts for the ATO as the plaintiffs have not established those debts were incurred in the Relevant Period. The Alleged Debts to the ATO must be reduced to $211,022.77 ($257,174.24 - $6,020.02 - $15,680.80 - $24,450.65).  

23. For these reasons, I have therefore concluded that only the following Alleged Debts were incurred by the Company during the Relevant Period and remain outstanding:

Date of Debt	Unsecured Creditors	Amount
13 May 2013 - 6 Feb 2015	Australian Taxation Office	$211,022.77
23 October 2014	Austech Supplies	$772.75
21 March 2014	Bent & Curved Glass	$3,614.00
21 November 2014	Castlecrest Engineering Pty Ltd	$2,651.00
31 Aug 2014 – 31 Aug 2015	CGU Workers Compensation	$10,337.56
15 November 2014	Coregas (Previously Linde Gas)	$296.91
26 November 2013	Elite Glass	$2,503.95
5 Sep 2014 – 28 Oct 2014	Forest Accounting & Taxation Services	$9,917.00
20 Nov 2014 – 11 Dec 2014	Hilti	$293.97
10 June 2014	Macquarie Premium Funding	$1,632.32
10 January 2014	Mario & Sons Steel	$5,050.00
30 Apr 2013 – 18 Jun 2014	Mitre 10 Home & Trade	$993.50
31 Aug 2014 – 8 Oct 2014	NQX Transport	$1,020.75
8 May 2014 – 12 Oct 2014	Office National, Merrylands	$384.75
11 Mar 2014 – 19 Nov 2014	Origin Oz	$47,011.99
11 November 2014	Omniveta Australia Pty Ltd	$33,428.52
28 Nov 2014 – 28 Jan 2015	Precision Oxycut	$4,038.13
12 Apr 14 – 9 Nov 14	Pure Drinking Water	$240.00
22 October 2014	Snap Printing	$192.50
29 November 2014	Track Fast	$121.00
10 August 2014	Toll North	$1,189.72
15 January 2014	Unaveave Pty Ltd	1,360.00
15 August 2014	George Weston & Sons	$1,363.83
Grand Total	$339,436.92

F.6.  Conclusion

1. For the foregoing reasons, I am satisfied that the plaintiffs have established that the Company was insolvent at all times during the Relevant Period, that there were reasonable grounds for suspecting that the Company was insolvent at all times during the Relevant Period and that the defendants permitted the Company to incur each of the Alleged Debts listed in [369] above during the Relevant Period in an aggregate amount of $339,436.92.

   G.       CLAIM FOR RELIEF UNDER S 1317S AND S 1318

   G.1.  Overview

2. The defendants contend if the Court finds that the Company was insolvent and there were reasonable grounds to suspect its insolvency, primarily because payment arrangements with the ATO lacked legal effect, then this would be an appropriate case for relief from liability under s 1317S or s 1318 of the Corporations Act.

   G.2.  Relevant principles

3. Section 1317S of the Corporations Act provides:

   (1)       In this section:

   eligible proceedings:

   (a) means proceedings for a contravention of a civil penalty provision (including proceedings under section 588M, 588W, 961M, 1317GA, 1317GB, 1317H, 1317HA, 1317HB, 1317HC or 1317HE); and

   (b) does not include proceedings for an offence (except so far as the proceedings relate to the question whether the court should make an order under section 588K, 1317H, 1317HA, 1317HB, 1317HC or 1317HE).

   (2)      If:

   (a)      eligible proceedings are brought against a person; and

   (b) in the proceedings it appears to the court that the person has, or may have, contravened a civil penalty provision but that:

   (i)       the person has acted honestly; and

   (ii) having regard to all the circumstances of the case (including, where applicable, those connected with the person’s appointment as an officer, or employment as an employee, of a corporation or of a Part 5.7 body), the person ought fairly to be excused for the contravention;

   the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention.

   (3) In determining under subsection (2) whether a person ought fairly to be excused for a contravention of section 588G, the matters to which regard is to be had include, but are not limited to:

   (a) any action the person took with a view to appointing an administrator of the company or Part 5.7 body or a restructuring practitioner for the company; and

   (b)      when that action was taken; and

   (c)      the results of that action.

   (4) If a person thinks that eligible proceedings will or may be begun against them, they may apply to the Court for relief.

   (5) On an application under subsection (4), the Court may grant relief under subsection (2) as if the eligible proceedings had been begun in the Court.

   (6) For the purposes of subsection (2) as applying for the purposes of a case tried by a judge with a jury:

   (a) a reference in that subsection to the court is a reference to the judge; and

   (b) the relief that may be granted includes withdrawing the case in whole or in part from the jury and directing judgment to be entered for the defendant on such terms as to costs as the judge thinks appropriate.

   (7) Nothing in this section limits, or is limited by, section 1317QC or section 1318.

4. Section 1318 of the Corporations Act provides:

   (1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person’s appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.

   (2) Where a person to whom this section applies has reason to apprehend that any claim will or might be made against the person in respect of any negligence, default, breach of trust or breach of duty in a capacity as such a person, the person may apply to the Court for relief, and the Court has the same power to relieve the person as it would have had under subsection (1) if it had been a court before which proceedings against the person for negligence, default, breach of trust or breach of duty had been brought.

   (3) Where a case to which subsection (1) applies is being tried by a judge with a jury, the judge after hearing the evidence may, if he or she is satisfied that the defendant ought pursuant to that subsection to be relieved either wholly or partly from the liability sought to be enforced against the person, withdraw the case in whole or in part from the jury and forthwith direct judgment to be entered for the defendant on such terms as to costs or otherwise as the judge thinks proper.

   (4)      This section applies to a person who is:

   (a)      an officer or employee of a corporation; or

   (b) an auditor of a corporation, whether or not the person is an officer or employee of the corporation; or

   (c)      an expert in relation to a matter:

   (i)       relating to a corporation; and

   (ii) in relation to which the civil proceeding has been taken or the claim will or might arise; or

   (d) a receiver, receiver and manager, liquidator or other person appointed or directed by the Court to carry out any duty under this Act in relation to a corporation.

   (5) This section does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation.

5. Section 1317S and s 1318 make substantially identical provision for relief of persons who may have contravened a civil penalty provision: Smith at [395] (Gleeson J); Hall v Poolman at [313]-[314] (Palmer J).

6. The sections confer a “very wide discretion” on the Court: Hall v Poolman at [315]. The purpose of the provisions is to “excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are businessmen and women who act in an environment involving risk in commercial decision-making”: Daniels v Anderson (1995) 37 NSWLR 438 at 525 (Clarke and Sheller JJA).

7. There are three stages of inquiry, being (a) whether the applicant for relief had acted honestly, (b) whether having regard to all of the circumstances, the applicant ought fairly be excused, and (c) whether the applicant should be relieved from liability wholly or in part, and if partly, to what extent: Smith at [395]; Australian Securities and Investments Commission v Healey (No 2) (2011) 196 FCR 430; [2011] FCA 1003 at [84].

1. When considering whether a person has acted honestly for the purposes of s 1317S or s 1318, the Court should only be concerned with whether the person has acted honestly in the ordinary meaning of that term, that is, whether the person acted without deceit or conscious impropriety, without intent to gain improper benefit or advantage for themselves or another, and without carelessness or imprudence so as to demonstrate that there has been no genuine attempt at all to carry out the duties and obligations of their responsibilities imposed by the Corporations Act, or the general law: Hall v Poolman at [325].

2. A failure to consider the interests of the company as a whole, or the interests of creditors, may be of such a high degree as to demonstrate failure to act honestly, however, if the failure is the result of error of judgment, no finding of failing to act honestly should be made, but the failure must be taken into account as one of the circumstances that the Court is to have regard to under s 1317S(2)(b)(ii) and s 1318: Hall v Poolman at [325].

   G.3.  Submissions

3. The plaintiffs submit that the defendants should not be excused from liability from the insolvent trading claims because they did not act honestly. They point to the defendants continuing to take large sums of money for their own benefit while the Company was insolvent, failing to take any steps to understand or determine the Company’s financial circumstances, failing to seek specific accounting advice or any legal advice, and continuing to operate the Company as if it were not insolvent.

4. The defendants submit that they acted honestly by continuing to trade the Company in the period up to the appointment of a liquidator on 6 February 2015. They submit that they had a reasonable expectation that by reducing the Company’s overheads and putting more money into the Company that they would be able to repay the ATO debt. They submit that the Company was otherwise up-to-date in the filing of its tax returns and the directors were providing “frank information” to the ATO. They submit that the ATO was able to protect itself as the Company’s substantial creditor by agreeing (or not) to the proposed payment arrangements.

5. The defendants submit that in all the circumstances, their conduct in entering into a consensual arrangement with the ATO to work out the Company’s debt to the ATO by way of an informal payment arrangement was honest conduct.

6. More broadly, the defendants submit that they should be relieved from any liability pursuant to s 1317S or s 1318 of the Corporations Act for any contravention that the Court might otherwise find of s 588M of the Corporations Act because (a) they were substantially complying with the terms of a payment arrangement offered by the ATO in relation to the integrated client account balance on 15 May 2013, (b) the Company was mitigating the potential loss to the ATO by continuing to trade, (c) they were making voluntary capital contributions to support the Company, (d) the ATO was receptive to further payment arrangements, accepted the voluntary repayments and did not initiate winding up proceedings until later, (e) the defendants were relying on the advice of their accountant up until at the earliest October 2014, and (f) the Company did not incur debts to other creditors that it did not pay.

   G.4.  Consideration

7. I am not persuaded that the defendants have established any entitlement to relief under s 1317S or s 1318 of the Corporations Act. Their failure to appreciate that the Company was incurring debts at a time when it was insolvent cannot be characterised as a mere error of judgment.

8. I accept that the defendants may well have assumed that the ATO would continue to extend payment arrangements that they had earlier agreed to enter into with the Company. I also accept that the defendants had taken significant steps to reduce the expenses of the business undertaken by the Company, that the Company paid most of its debts within usual trading terms, it was generally trading profitably except for FY2013 and its cash flow problems were exacerbated by builders not paying debts owed to it and delays in the release of retentions.

9. At the same time, the defendants continued to cause the Company to make significant payments to themselves, with no apparent appreciation of the specific basis on which those payments were being made to them. Moreover, the defendants were aware that the Company was unable to comply with its repayment obligations to the ATO by no later than April 2013, and had entered into but then failed to comply with payment arrangements with the ATO, that were not subsequently extended.

10. The defendants were content to rely wholly on Forest Accounting to attend to the Company’s taxation and financial reporting obligations and their own personal taxation returns. With the benefit of hindsight, they now allege that their reliance on Forest Accounting was misplaced.

11. The evidence given by the defendants, both in their affidavits and in cross examination, demonstrates a reckless indifference to their responsibilities as directors of the Company. In attempting to sheet home responsibility to Forest Accounting for the insolvent trading of the Company, the defendants only highlight their failure to appreciate their responsibilities as directors of the Company. They did not make even the most cursory of enquiries of the Company’s financial position, notwithstanding their evidence that they did not consider Forest Accounting was providing any substantive assistance to them or advice as to the Company’s financial position.

12. Stephen Mizzi gave the following evidence about the work undertaken by Forest Accounting for the Company:

    Andrew Toumazis was the principal at Forest Accounting. He was always hard to get. He was on the verge of retirement. It was hard to get information from him.

    I feel the accountant was more of a good talker than doing the job for us. He would introduce a new accountant every time we would go there until the last time I recall attending in about 2012, and say this is the person looking after your file. He said that he was the wicket keeper. We were getting the wrong advice from him because there were no alarm bells at no time did he ever advise us of any issues.

    We used to go to Forest Accounting for an annual meeting and he would have a report there for us and he would pretty much be telling us that everything was alright. The meetings took about 30 minutes and mostly consisted of Andrew talking about himself. The accountants did not scrutinise what was in the MYOB and were very lazy. I have the impression that the accountants took the MYOB and generated financial statements without any consideration. I remember Andrew Toumazis saying, “All we have to worry about is that we do not set up any red flags with the ATO”.  

13. Given Stephen Mizzi’s claimed very limited understanding of financial and taxation issues, it is difficult to place much weight on his observations as to the competence of Mr Toumazis, but if that view was genuinely held it is telling that he took no steps to address the concern. The significance of his failure to make further enquiries as to the Company’s financial position is made even more acute because of his evidence that he did not trust the book entries in the Company’s accounts, he relied on Forest Accounting to correct them and he did not review or finalise any of the “draft” financial statements prepared and none of them were used by anyone at the Company.

14. In cross examination, Stephen Mizzi gave the following evidence in relation to his approach to the Company’s taxation returns:

    Did you review your taxation returns before you signed them?---No.

    Is the reason why you didn’t review your taxation returns because you were receiving advice from your accountant and you were willing to accept that advice, whatever it was?---Yes.

15. Stephen Mizzi also gave evidence that he did not recall signing any financial statements or any declarations to give to Forest Accounting and acknowledged:

    We did not have a good accountant. It was never cleaned up really. I understand that Andy and I were ultimately responsible. We were focused on work-in, work-out, get the production happening. The paperwork and the rest of it we left that to people who maybe we should not have.

16. When pressed in cross examination about the operation of the Company’s bank account in 2013 and 2014, Stephen Mizzi gave evidence that he did not “remember the ins and outs of the bank account in 2013”, he did not look at the Company’s bank account, he relied on the bookkeeper if he wanted to know how much money was in the Company’s bank account but he cannot recall how regularly he asked the bookkeeper how much money was in the bank account and when he had to purchase something for the Company he “would ask the bookkeeper, “Can we please pay this”, and it would be paid”. Further, in response to a question whether he asked the bookkeeper whether there were sufficient funds in the bank account to enable the payment to be made, Stephen Mizzi responded that he asked the bookkeeper something along the lines of “I want to pay X, do we have enough money to cover it?”.

17. Andrew Mizzi gave evidence in cross examination that he never reviewed the financial reports of the Company and only relied on the Company’s bank statements to determine whether the company could pay its liabilities.

18. The extent to which Andrew Mizzi failed to take any steps to engage with the financial position of the Company is illustrated in the following exchange in his cross examination:

    MR RAFTERY: Is it your case that you just had generally no idea about the income of the business?---Yes.

    You generally had no idea of the expenses?---Yes.

    You didn’t know whether the company was making a profit?---No.

    You didn’t know whether the company was making a loss?---No.

19. Rather, Andrew Mizzi was prepared to accept whatever was recorded by Forest Accounting in the Company’s financial statements and tax returns, as the following exchange makes clear:

    HIS HONOUR: Sorry, when you say no, do you mean you weren’t prepared to accept that they were and correct without reviewing them, or do you mean that you didn’t review them?---I didn’t review them, yes.

    Was that because you relied on your accountant - - -?---Yes.

    - - - who told you that they were fine to be signed?---Exactly.

    Yes?---Yes.

    MR RAFTERY: And on that basis, you were prepared to accept your accountant’s word?---Yes.

    Did they - - -?---Yes.

    Yes. You felt no need to review the material yourself?---Mmm.

    HIS HONOUR: Sorry. Again, if you wouldn’t mind saying the word?---Yes. Yes. Yes.

    Thank you?---Sorry. Yes.

    MR RAFTERY: And similarly, in respect of the individual taxation returns, do you say that you were willing to solely rely upon what your accountant had prepared?---Yes.

    Yes. You didn’t review the individual taxation returns?---No.

    You signed the individual taxation returns, declaring that they were true and correct?---Yes.

    And you were prepared to represent that they were true and correct to the Commissioner of Taxation?---Yes.

20. The evidence given by Andrew Mizzi in his affidavit is also telling as to the unreasonableness of his approach to his duties as a director of the Company.

21. He gave evidence that he only attended a yearly meeting with Mr Toumazis and only up until 2012. He stated that Forest Accounting did “not really give much advice at the yearly meetings” and  “did not give us much guidance about how we should be running the business”. Moreover, he gave evidence that he did not use the “draft financial statements” prepared by Forest  Accounting and he could not recall “ever reviewing them or finalising them”.

22. He also gave evidence that:

    My sister Kathy Muscat took the bookkeeping on when Fran left. My sister had no idea what she was doing. My daughter was working there as well and she helped a little bit. We had scaled right back. Kathy worked full-time in the business up to the end.

23. In light of this evidence and Andrew Mizzi’s professed lack of financial knowledge, it is remarkable that he was content (a) not to make further enquiries of Forest Accounting as to the Company’s financial position during the Relevant Period, (b) to rely on his sister to act as the Company’s bookkeeper following the departure of the former bookkeeper and (c) not to seek any legal advice as to the potential consequences of the Company’s failures to comply with its payment plans with the ATO.

24. Moreover, contrary to the defendants’ submissions, the Company was not meeting all its debts, other than the ATO debt, as and when they fell due during the Relevant Period. The Company’s outstanding debts incurred in the Relevant Period that remain outstanding were not limited to the ATO debt. Each of the Alleged Debts identified in [369] above, was entered into during the Relevant Period and remains unpaid.

25. Nor do I accept the defendants’ contention that the Company was mitigating its loss to the ATO by continuing to trade.

26. In the course of oral closing submissions, the defendants’ counsel handed up a schedule summarising amounts paid by the Company that were “over” or “under” the payment obligations in the payment arrangements that the Company had entered into with the ATO. Counsel confirmed that the schedule was relied on only for the purposes of the defendants’ s 1317S defence to the plaintiffs’ claim for compensation caused by the alleged contravention by the defendants of s 588M. Counsel for the defendants submitted that the schedule established that the ATO’s loss was in fact being mitigated during FY2014.

27. Counsel for the defendants sought to tender the schedule, which had been marked MFI 7, as a summary pursuant to s 50 of the Evidence Act 1995 (Cth) (Evidence Act) in the course of his oral closing submissions. I deferred ruling on the tender until counsel for the plaintiffs had been given an opportunity to consider the schedule and the accompanying explanation provided in a three page memorandum and submission explaining how the schedule was prepared. In their reply submissions filed after closing oral submissions the plaintiffs submitted that contrary to the summary undertaken in MFI 7. the indebtedness of the Company increased rather than decreased in the Relevant Period and MFI 7 omitted the amount that remained outstanding to the ATO as at the commencement of the Relevant Period.

28. I am satisfied that in all the circumstances that the application to tender MFI 7 as a summary document pursuant to s 50 of the Evidence Act is misconceived. Section 50 provides for the tender of a summary of material not in evidence. Rather than being a summary of documents not in evidence, MFI 7 is a summary of documents that are in evidence. Its probative weight cannot rise higher than the documents it purports to summarise. MFI 7 will therefore be treated as a submission and its tender is rejected.

29. The stark reality for the defendants is that the outstanding debit balance on the Company’s integrated client account with the ATO increased from $78,524.84 as at 29 April 2013 to a figure of $235,473.42 as at 6 February 2015. The $156,948.58 increase in the outstanding indebtedness was only partially offset by the $33,498.38 ($55,199.20 - $21,700.82) reduction in the amount outstanding on the Income Tax Account during the Relevant Period.

    H.       DISPOSITION

30. For the foregoing reasons, judgment is to be given in favour of the plaintiffs on the shareholder loans, breach of directors’ duties and insolvent trading claims. Orders substantially in the form, but not in the amounts, of the orders sought by the plaintiffs will be made.

I certify that the preceding four hundred and six (406) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley.

Associate:

Dated:       28 June 2024