Trinick as Liquidator of Forgione Family Group Pty Ltd (in liq), in the matter of Forgione Family Group Pty Ltd (in liq) v Forgione
[2015] FCA 642
•26 June 2015
FEDERAL COURT OF AUSTRALIA
Trinick as Liquidator of Forgione Family Group Pty Ltd (in liq), in the matter of Forgione Family Group Pty Ltd (in liq) v Forgione [2015] FCA 642
Citation: Trinick as Liquidator of Forgione Family Group Pty Ltd (in liq), in the matter of Forgione Family Group Pty Ltd (in liq) v Forgione [2015] FCA 642 Parties: GLEN DOUGLAS TRINICK AS LIQUIDATOR OF FORGIONE FAMILY GROUP PTY LTD (ACN 009 363 464) (IN LIQUIDATION) v PASQUALE FORGIONE and FRANCESCO FORGIONE File number(s): WAD 86 of 2009 Judge(s): SIOPIS J Date of judgment: 26 June 2015 Catchwords: CORPORATIONS – insolvent trading – directors’ liability for insolvent trading - whether a company has failed to retain financial records for seven (7) years – financial records of company lost while in possession of a former director – whether a company is presumed to be insolvent by reason of failure to retain financial records – proper construction of s 286 and s 588E of the Corporations Act 2001 (Cth) – whether company was insolvent – whether there were reasonable grounds to suspect company was insolvent – whether the directors failed to prevent a company from incurring debts – whether the directors could rely upon defences under s 588H(2) and s 588H(3) of the Corporations Act – whether company’s accountant was a person responsible for providing directors with adequate information about the solvency of company – whether director acted honestly and ought fairly to be excused for the contravention of s 588G of the Corporations Act – whether there should be an inquiry under s 536 of the Corporations Act into the conduct of the liquidators. Legislation: Corporations Act 2001 (Cth) ss 9, 95A, 286(1), 286(2), 286(3), 530A, 536, 588E, 588E(4), 588E(6), 588E(6)(a), 588E(6)(b), 588E(6)(c), 588FF(1) 588G, 588G(1), 588G(1)(c), 588G(2), 588G(2)(a), 588G(2)(b), 588H(2), 588H(3), 588M, 588M(2), 1317S
Evidence Act 1995 (Cth) s 140(2)Cases cited: Fisher v Devine Homes Pty Ltd (2011) 85 ACSR 512
Lewis v Doran (2004) 208 ALR 385
International Cat Manufacturing Pty Ltd (in liq) v Roderick (2013) 97 ACSR 200
Lewis, Re Damilock Pty Ltd (in liq) v VI SA Australia Pty Ltd (2008) 252 ALR 533
Smith v Bone (2015) 104 ACSR 528
Powell v Fryer (2001) 37 ACSR 589
Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148
McLellan, in the matter of The Stake Man Pty Ltd v Carroll (2009) 76 ACSR 67
Leslie v Hennessy [2002] FCA 1532
Hall v Poolman (2009) 75 NSWLR 99Date of hearing: 7-14 April 2014 Place: Perth Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 522 Counsel for the Applicant: Mr M Cuerden Solicitor for the Applicant: Tottle Partners Counsel for the First and Second Respondents: Mr J Garas
Solicitor for the First and Second Respondents: Ashurst Australia
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
WAD 86 of 2009
IN THE MATTER OF FORGIONE FAMILY GROUP PTY LTD (ACN 009 363 464) (IN LIQUIDATION)
BETWEEN: GLEN DOUGLAS TRINICK AS LIQUIDATOR OF FORGIONE FAMILY GROUP PTY LTD (ACN 009 363 464) (IN LIQUIDATION)
ApplicantAND: PASQUALE FORGIONE
First RespondentFRANCESCO FORGIONE
Second Respondent
JUDGE:
SIOPIS J
DATE OF ORDER:
26 JUNE 2015
WHERE MADE:
PERTH
THE COURT ORDERS THAT:
1.The parties are to produce a minute of orders which reflects the findings in these reasons for judgment and includes an amount in respect of interest within 14 days.
2.The parties will be heard on costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
WAD 86 of 2009
IN THE MATTER OF FORGIONE FAMILY GROUP PTY LTD (ACN 009 363 464) (IN LIQUIDATION)
BETWEEN: GLEN DOUGLAS TRINICK AS LIQUIDATOR OF FORGIONE FAMILY GROUP PTY LTD (ACN 009 363 464) (IN LIQUIDATION)
ApplicantAND: PASQUALE FORGIONE
First RespondentFRANCESCO FORGIONE
Second Respondent
JUDGE:
SIOPIS J
DATE:
26 JUNE 2015
PLACE:
PERTH
REASONS FOR JUDGMENT
On 20 December 2004, at a meeting of creditors of Forgione Family Group Pty Ltd (the company) it was resolved that the company be placed into liquidation and that Mr Graeme Lean, who was then the administrator of the company, be appointed as the liquidator. On that date, Mr Pasquale Forgione, the first respondent, was the only director of the company. However, until his resignation on 3 June 2004, Mr Francesco Forgione, the second respondent, had also been a director of the company. During the trial, Mr Pasquale Forgione and his father, Mr Francesco Forgione, were referred to as Peter Forgione and Frank Forgione respectively. Without any disrespect to either gentleman, I will adopt the same nomenclature in these reasons for judgment.
The Deputy Commissioner of Taxation (the Deputy Commissioner) and Mr Frank Forgione were among the creditors who filed proofs of debt in the liquidation of the company.
The debt claimed by the Deputy Commissioner in his proof of debt was in respect of unpaid income tax, unpaid GST instalments, unpaid PAYG withholding tax instalments, together with general interest charges and penalties for late lodgement, as well as superannuation contributions which the company had failed to make in respect of its employees.
The debt alleged by Mr Frank Forgione in his proof of debt was in respect of unpaid loans made by Mr Frank Forgione to the company. The loans to the company were made by Mr Forgione discharging from his own monies a number of the company’s debts.
On 28 May 2009, Mr Lean, as liquidator, commenced this proceeding against the respondents pursuant to s 588M(2) of the Corporations Act 2001 (Cth).
By the time the matter came to trial, Mr Lean had been replaced by Mr Glenn Trinick as liquidator of the company.
In his further re-amended statement of claim (the applicant’s statement of claim), the applicant claimed that Mr Peter Forgione and Mr Frank Forgione were jointly and severally liable for the amount of $234,555.55 and that, in addition, Mr Peter Forgione was individually liable for the amount of $32,395.79. The total amount claimed against Mr Peter Forgione and Mr Frank Forgione jointly and severally, relates to debts allegedly incurred during the period when both Mr Peter Forgione and Mr Frank Forgione were directors of the company and comprised the following sums:
1.$100,279.25 being an amount equal to the debt incurred by the company to the Deputy Commissioner during the period 1 July 2001 to 3 June 2004; and
2.$17,993.30 being an amount equal to the superannuation contributions pursuant to an assessment for unremitted superannuation payments issued against the company by the Deputy Commissioner for the years ended 30 June 2001, 30 June 2002 and 30 June 2003, together with interest;
3.$113,807 being the amount equal to a debt which was incurred by the company to Mr Frank Forgione during the year ended 30 June 2004; and
4.$2,476 being a debt which was incurred to Telstra Corporation which remained due and unpaid.
The sum of $32,395.79 claimed against Mr Peter Forgione in respect of debts which were said to be incurred to the Deputy Commissioner during the period 4 June 2004 to 20 December 2004 on the grounds that Mr Peter Forgione was the sole director during that period.
However, in closing submissions, counsel for the applicant advised the Court that the applicant pressed a claim in the total amount of $251,244.06. The claim was comprised of the following elements:
(a)as against Mr Peter Forgione and Mr Frank Forgione jointly and severally, the amount of $90,279.75 being debts incurred to the Deputy Commissioner but not paid by the company during the period when both Mr Frank Forgione and Mr Peter Forgione were directors of the company;
(b)as against Mr Peter Forgione individually:
(i)the amount of $29,401.01 being the tax debts incurred by the company to the Deputy Commissioner during the period when Mr Peter Forgione was the sole director of the company;
(ii)the amount of $17,756.30 being the amount of the assessment for superannuation contributions not paid by the company pursuant to a default assessment issued by the Deputy Commissioner on 10 August 2004;
(iii)$113,807.00 being the amount equal to a debt which was incurred by the company to Mr Frank Forgione during the period ended 30 June 2004.
In addition, the applicant claimed interest.
Section 588M of the Corporations Act provides:
(1)This section applies where:
(a)a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and
(b)the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency; and
(c)the debt was wholly or partially unsecured when the loss or damage was suffered; and
(d)the company is being wound up;
whether or not:
(e)the director has been convicted of an offence in relation to the contravention; or
(f)a civil penalty order has been made against the director in relation to the contravention.
(2)The company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.
…
Section 588G(1) of the Corporations Act provides:
This section applies if:
(a)a person is a director of a company at the time when the company incurs a debt; and
(b)the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
(c)at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and
(d)that time is at or after the commencement of this Act.
Section 588G(2) of the Corporations Act provides:
By failing to prevent the company from incurring the debt, the person contravenes this section if:
(a)the person is aware at that time that there are such grounds for so suspecting; or
(b)a reasonable person in a like position in a company in the company’s circumstances would be so aware.
In support of his claim, the applicant contended that at the time that the company incurred the debts in respect of which the s 588M(2) claim has been brought, the company was by reason of s 588E(4) of the Corporations Act, presumed to have been insolvent during the whole period of 1 July 2001 to 20 December 2004, because of the company’s failure to comply with its obligations under s 286(1) and s 286(2) of the Corporations Act by failing respectively to keep financial records and to retain those records for seven years. Alternatively, said the applicant, the company was actually insolvent during that period.
The respondents deny the allegations that the company was presumed to have been, or was actually insolvent.
An important aspect of the respondents’ defence to the claim that the company was presumed to have been, or was actually, insolvent is the contention that at all material times up to late 2004, Mr Frank Forgione was ready, willing and able to provide such funding as was required from time to time to enable the company to pay its debts as and when they fell due.
In addition, each of the respondents relied upon the defences set out at s 588H(2) and s 588H(3) of the Corporations Act. These sections provide as follows:
(2)It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.
(3)Without limiting the generality of subsection (2), it is a defence if it is proved that, at the time when the debt was incurred, the person:
(a) had reasonable grounds to believe, and did believe:
(i)that a competent and reliable person (the other person) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and
(ii)that the other person was fulfilling that responsibility; and
(b)expected, on the basis of information provided to the first‑mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.
As to the defence under s 588H(2), each respondent contended that at the time that the relevant debts were incurred, he had reasonable grounds to expect, and did expect, that the company was solvent, and would remain solvent even if it incurred the debt and any other debts that it incurred, at that time.
In relation to the defence under s 588H(3), in short, each respondent contended that the company had engaged an external accountant, Mr Gary Philpott of the firm Lincolns Accountants and Business Advisers (Lincolns), to provide “taxation and accounting services” to the company and that each believed that Mr Philpott and Lincolns were fulfilling their responsibility for providing information about whether the company was solvent, and further that each respondent believed, on the basis of information provided by Mr Philpott and Lincolns that, at the time each of the debts was incurred, the company was solvent.
Further, each of the respondents claimed that at all material times, he acted honestly in the performance of his duties as a director and that if he contravened s 588G, in all the circumstances, he ought fairly to be excused for the contravention pursuant to s 1317S of the Corporations Act.
Also, the respondents claimed that Mr Lean did not act faithfully in commencing this proceeding against the respondents when there is “no commercial benefit for the company’s creditors which are unrelated to the respondents” and the Court should order an inquiry into Mr Lean’s conduct as liquidator under s 536 of the Corporations Act.
The respondents also made the same claim, mutatis mutandis, in relation to the conduct of Mr Trinick in continuing to pursue this proceeding against each of them, and claimed that the Court should also order an inquiry into the conduct of Mr Trinick as liquidator under s 536.
BACKGROUND
In January 1989, the company was incorporated under the name, Southlands Holdings Pty Ltd. On 1 July 1991, Mr Frank Forgione and Mr Peter Forgione were appointed as directors of the company. The company carried on a printing business initially under the name of Great Southern Printers. The company operated the business from premises at 344 Middleton Road, Albany. These premises were owned by Mr Frank Forgione. During the time he was a director of the company, Mr Frank Forgione also carried on business as a hairdresser from his hairdressing salon at 139 Grey Street West, Albany. Mr Frank Forgione also owned the premises at 139 Grey Street West, Albany, as well as a number of other premises in Albany.
In about 1994, Mr Gary Philpott of Lincolns commenced providing taxation and accounting services to the company.
Until 2001, both Mr Frank Forgione and Mr Peter Forgione participated in the management of the business. However, in 2001, Mr Peter Forgione assumed sole responsibility for the day-to-day management of the company. Mr Frank Forgione continued working in his hairdressing business at 139 Grey Street West. Around the middle of June 2001, Mr Peter Forgione became engaged in discussions with a printing company in Perth, Picton Group Pty Ltd (Picton Group). Mr Peter Forgione described the discussions as relating to a possible merger of the business conducted by the Picton Group with the company’s business.
On 7 March 2001, the company lodged its business activity statement (BAS) with the Australian Taxation Office (ATO) for the quarter ended 31 December 2000 and remitted payment to the ATO.
On 10 May 2001, the company lodged its BAS for the quarter ended 31 March 2001. However, the company failed to remit payment to the ATO. The company’s ATO running balance account (RBA) deficit was then $5,911.03.
Before 30 June 2001, the company sold two Heidelberg printing presses. These presses had been used in the company’s business. The company had not by 30 June 2001, received the proceeds for the sale of the printing presses. The debt was, therefore, reflected as a receivable in the company’s financial statements for the year ended 30 June 2001.
On 12 July 2001, the company obtained a $70,000 business loan from the Bank of Western Australian Limited (BankWest) which was fully drawn down on that date. It was a term of the loan facility that there be a monthly repayment. That amount varied between $820 and $840 per month. The company initially met its obligations to make this payment.
On 27 July 2001, the company changed its name from Southland Holdings Pty Ltd to the Forgione Family Group Pty Ltd.
On 28 July 2001, the company was obliged to remit to the ATO compulsory superannuation contributions of $2,363.68 in respect of the superannuation payable for the employees then employed by the company. On 28 July 2001, the company failed to make those contributions.
On 30 July 2001, the company registered its business name as Picton Print and Design.
On 1 August 2001, the company made a payment of $1,392 against the RBA deficit reducing the deficit to $4,648.70.
On 8 August 2001, the company opened a business cheque account with the National Australia Bank Limited (NAB). During the period of his directorship of the company, Mr Peter Forgione regularly used this account and the company’s accounts with BankWest to pay a number of personal debts and expenses.
At a time unknown but prior to 30 September 2001, the company was paid the receivable in respect of the sale of the two Heidelberg printing presses.
On 11 November 2001, the company lodged its BAS for the quarter ended 30 June 2001. It assessed its liabilities at $4,262. It failed to remit a payment, bringing its RBA deficit to $9,071.08.
On 20 November 2001, the company lodged its BAS for the quarter ended 30 September 2001 disclosing tax liabilities totalling $22,515. It failed to remit a payment which brought its RBA deficit to $31,711.72. However, on 22 November 2001, the company made a payment of $4,754.30, leaving its RBA deficit at $26,957.42.
On 13 February 2002, the company’s monthly repayment of $824.35 in respect of its BankWest loan was dishonoured.
On 20 February 2002, the company lodged its BAS for the quarter ended 30 December 2001. The company failed to remit payment and its RBA deficit was then $34,349.44.
On 22 February 2002, Mr Peter Forgione obtained a valuation from Mr Grant Soloman of one of his father’s properties at 342-344 Middleton Road, Albany. The stated purpose of the valuation was for “mortgagee security purposes”.
On 3 April 2002, the NAB dishonoured a cheque drawn by the company on its business cheque account. This was a cheque in the sum of $10,000. The bank statements for that account shows that since the month of December 2001, the account was consistently in debit. The maximum credit which it reflected during that period was $365.62 for a period of two days only. At the time when the NAB dishonoured the cheque, the account was in debit in the sum of $25,576.33. During the course of the next two years the NAB dishonoured a total of 122 cheques drawn on that account.
On 15 April 2002, the company’s monthly payment to its BankWest loan of $824.35 was dishonoured.
On 1 May 2002, the company was assessed for income tax for the financial year ended 30 June 2001 in the sum of $7,631.64. The company did not pay the tax.
On 14 May 2002, the company’s monthly repayment to the BankWest loan of $824.35 was dishonoured.
By 28 May 2002, the deficit in the company’s NAB business cheque account had grown to $46,082.67.
On 29 May 2002, the company entered into a $50,000 loan facility agreement with the NAB. It was named a “business secured variable instalment loan”. The loan was to be for a term of five years. It was a term of the loan agreement that the performance by the company of its obligations under the agreement be guaranteed by its then directors, Mr Frank Forgione and Mr Peter Forgione, and that the guarantor obligations be secured by a registered mortgage over the commercial property situated at 340 Middleton Road, which was also a property owned by Mr Frank Forgione. It was a further term of the loan agreement that the loan be secured by a mortgage debenture over all the property of the company.
It was also a term of the loan agreement that the company make a monthly repayment in the amount of $1,040 per month. It was a special condition of the loan that there be a lump sum reduction of $20,000 before 30 July 2002 – which was only a matter of two months after the commencement of the term of the loan.
The new NAB loan was fully drawn down on the first day and used to pay out the company’s debt on the overdrawn NAB business cheque account. It was only a matter of days before the NAB business cheque account went into debit again when on 5 June 2002, Mr Peter Forgione drew $1,272.15 to make a payment in respect of a personal debt. The NAB reversed that payment a day later.
On 5 June 2002, the company lodged its BAS for the quarter ended 31 March 2002. The company failed to remit payment and the RBA deficit increased to $38,737.17.
At 30 June 2002, the company had a working capital deficiency of $94,816.
On 28 July 2002, the company failed to remit superannuation contributions to the ATO in respect of its three employees for the year ended 30 June 2002.
On 30 July 2002, the company failed to meet its obligation to pay $20,000 by way of a lump sum reduction pursuant to the terms of the NAB loan facility agreement.
On 14 September 2002, the company lodged its BAS for the quarter ended 30 June 2002. The company failed to remit any payment. The RBA deficit was increased to $40,325.29.
Prior to October 2002, the NAB bank statements in respect of the NAB business cheque account were sent quarterly and were addressed to the company at its post office box number in Albany. However, during the period October to November 2002, the NAB changed this practice. From 21 October 2002, the NAB issued weekly bank statements, rather than quarterly bank statements, for that account. Also, rather than being addressed to the company, as had been the NAB’s practice, the bank statements were addressed specifically to Mr Frank Forgione, Forgione Family Group Pty Ltd, at 139 Grey Street West, Albany, which was the premises at which he carried on his hairdressing business. The weekly bank statements showed that the NAB was continuing to dishonour cheques drawn on that account. The cheques dishonoured in October 2002, included a cheque made out to Flexirent Capital in the sum of $142.62 and two other cheques in the sums of $1,500.21 and $1,864.05 respectively.
In November 2002, the company failed to lodge its BAS for the quarter ended 30 September 2002. The company remained in default of this obligation until 27 November 2003.
From 26 November 2002, the NAB continued to send the business cheque account weekly bank statements addressed specifically to Mr Frank Forgione, Forgione Family Group Pty Ltd but changed the address from the Grey Street West address to the company’s post office box address.
In February 2003, the company failed to lodge its BAS for the quarter ended 31 December 2002. The company remained in default of this obligation until 27 November 2003.
On 23 April 2003, the company made a payment of $5,000 against its RBA deficit, reducing the deficit to $43,300.62. However, the company failed in May 2003 to lodge its BAS for the quarter ended 31 March 2003. The company remained in default of this obligation until 16 April 2004.
On 7 May 2003, the company sent a further cheque to the ATO in the sum of $1,700 to reduce the RBA deficit, but that cheque was dishonoured on 9 May 2003.
On 16 July 2003, the company’s monthly repayment to its BankWest loan of $895 was dishonoured.
On 28 July 2003, the company failed to pay the superannuation contributions to the ATO in respect of its employees for the year ended 30 June 2003.
In August 2003, the company failed to lodge its BAS for the period ended 30 June 2003. The company remained in default of this obligation until 16 August 2004.
At some time between July and December 2003, Mr Peter Forgione moved to Perth. In Perth, Mr Peter Forgione worked as an employee of the Picton Group from its offices.
After Mr Peter Forgione moved to Perth and began working for the Picton Group, the company ceased trading.
In November 2003, the ATO imposed penalties of $550 in respect of the company’s failure to lodge its BAS for each of the quarters ended September 2002, December 2002, March 2003 and June 2003.
On 27 November 2003, the company lodged its BAS for the quarter ended 30 September 2002 and 31 December 2002. The company failed to remit the payments in respect of the tax liabilities assessed in the BAS for each quarter and the RBA deficit increased to $67,157.11.
On 8 January 2004, the ATO issued a penalty notice to each of Mr Frank Forgione and Mr Peter Forgione in respect of the company’s failure to remit PAYG withholding tax in the amount of $2,501 in respect of the period 1 July 2002 to 30 September 2002, and $2,714 in respect of the period 1 October 2002 to 31 December 2002.
The ATO’s covering letter sent with the penalty notice read:
Please find enclosed a notice of your liability to pay a penalty equal to the amount(s) unpaid to the Commissioner by the company FORGIONE FAMILY GROUP PTY LTD, ACN 009 363 464 of which you were a director at relevant times as referred to in section 222AOC and/or section 222AOD of the Income Tax Assessment Act 1936 (ITAA 1936). You automatically became liable to the penalty when the company failed to remit the amount(s) set out in the notice by the due date(s).
Action to recover the penalty from you will be taken without further notice unless, after fourteen days from the date the enclosed notice is given to you:-
(a)the company’s liability has been discharged; or
(b)an agreement under section 222ALA of the ITAA 1936 to pay the liability is in force; or
(c)the company is under administration within the meaning of the Corporations Act 2001; or
(d)the company is being wound up.
The penalty will be remitted if any one of these options is adopted within 14 days from the date the notice was given to you.
Neither Mr Frank Forgione nor Mr Peter Forgione paid the amount demanded in the penalty notice. Nor did Mr Frank Forgione put the company into funds to permit the company to discharge the company’s tax liability in respect of those amounts, within the 14 day period referred to in the penalty notice, or at any time before the company went into liquidation.
In about March 2004, Mr Peter Forgione left the employment of the Picton Group and started a printing business in Perth. Mr Peter Forgione continued to reside in Perth.
On 4 March 2004, the NAB issued a notice of default in respect of the default on the company’s two bank accounts with the NAB. This notice was addressed to the company and each of its two directors, Mr Frank Forgione and Mr Peter Forgione, in their capacity as guarantors. The default notice stated that the company had failed to pay the loan repayment instalments for the months of December 2003, January 2004 and February 2004 in respect of the loan facility, and that it was also in default of the terms of the business cheque account. The notice stated that either the company or one or both of the guarantors should pay the sum of $2,778 immediately into the instalment loan account and $77.18 plus interest and fees should be paid into the business cheque account. The notice stated that if the default was not remedied within 31 days, the NAB intended to commence enforcement proceedings.
Neither Mr Frank Forgione nor Mr Peter Forgione paid the sums demanded. Nor did Mr Frank Forgione advance any money to the company to pay the sums claimed by the NAB in the notice of default.
On 4 April 2004, the period prescribed in the NAB default notice for the company, or each of the guarantors, to remedy the defaults in respect of the NAB bank accounts expired. The defaults were not remedied.
On 16 April 2004, the company lodged its BAS for the periods ended 31 March 2003 and 30 June 2003. The company did not remit any payments to the ATO. The RBA deficit increased to $96,879.50.
On 29 April 2004, the ATO issued a second penalty notice to each of Mr Frank Forgione and Mr Peter Forgione in respect of his personal liability for the unremitted PAYG withholding tax instalments. This notice was issued in respect of the failure of the company to remit PAYG withholding tax instalments in the amounts of $4,269 for the quarter ended 31 March 2003, and $3,800 for the quarter ended 30 June 2003.
Neither Mr Frank Forgione nor Mr Peter Forgione discharged his personal liability in respect of the second demand from the ATO. Nor did Mr Frank Forgione advance any monies to the company in order for it to discharge its liability within the 14 day period referred to in the second penalty notice, or at any time before the company went into liquidation on 20 December 2004.
On 17 May 2004, the company made a payment of $1,000 to the ATO thereby reducing the RBA deficit to $99,073.90.
However, at some time during the period around March to June 2004, Mr Frank Forgione commenced making payments from his own monies to pay a number of other creditors of the company which Mr Peter Forgione had identified. Records were not produced at the trial evidencing the precise date on which the payments to these creditors were made. The precise date on which each of these debts was paid is, therefore, not known. However, the payments included the payment of an outstanding balance of $55,099.88 owed by the company under its BankWest loan facility, $19,569.18 in respect of its BankWest visa card account, and $24,000 owed under a vehicle financing arrangement Mr Peter Forgione had entered into in respect of an Alfa Romeo motor vehicle which Mr Peter Forgione had purchased from a car dealer, Barbagallo. It was not disputed that during the period, Mr Frank Forgione paid a total sum of $122,832.39. Mr Frank Forgione claimed in his proof of debt that the payment of these monies comprised a loan by him to the company.
Notwithstanding that at around this time Mr Frank Forgione was paying the debts owed by the company to other of its creditors, he did not advance the company any monies to discharge the RBA debt then due to the ATO.
On 3 June 2004, Mr Frank Forgione, on the advice of Mr Philpott, resigned as a director of the company. At that time, the deficit on the RBA was $101,279.75.
On 6 July 2004, the company lodged its BAS for the quarters ended 30 September 2003 and 31 December 2003. The company failed to remit payments in respect of those quarters. The company’s RBA deficit was then $117,898.56.
By that time, however, the company had not lodged its BAS for the quarter ended 31 March 2004. Nor did it, during August 2004, lodge its BAS for the quarter ended 30 June 2004, nor did it, in November 2004, lodge its BAS for the quarter ended 30 September 2004.
On 6 August 2004, the NAB commenced proceedings in the Supreme Court of Western Australia against the company and Mr Frank Forgione and Mr Peter Forgione. The NAB claimed in the writ the sum of $39,262.85 from the company and Mr Frank Forgione, “being the total amount owing by [the company] and guaranteed by [Mr Frank Forgione] to [the NAB] under a Business Secured Variable Rate Instalment Loan (account 54-365-9047) as at 27 July 2004”. As against Mr Peter Forgione the bank claimed in the writ the total sum of $125,094.29 which comprised the sum of $85,831.44 owed by Mr Peter Forgione under a personal loan agreement between Mr Peter Forgione and the NAB, and $39,262.85 in respect of his liability as a guarantor of the company’s debt obligations.
The NAB writ also claimed possession of 340 Middleton Road, Albany being the property mortgaged to the NAB.
Mr Frank Forgione did not, on service of the NAB writ, or at any time thereafter, advance to the company the monies necessary to pay the debt of $39,262.85 due by the company to NAB.
However, in the Supreme Court proceedings, Mr Frank Forgione defended his personal liability to the NAB as a guarantor of the company’s debt on the basis that it was not his signature on the guarantee document. These matters remained unresolved by the time the company went into administration and, subsequently, into liquidation. However, in 2005, the NAB and Mr Frank Forgione ultimately entered into a settlement of the NAB’s claim against Mr Frank Forgione and Mr Peter Forgione. However, no settlement was ever reached in respect of the company’s liability for the unpaid debt.
The company’s debt to the NAB was still outstanding at the time that the company went into administration and liquidation.
On 10 August 2004, the ATO, having conducted a superannuation guarantee audit of the company, issued a default assessment for unpaid superannuation contributions for the years 2001, 2002 and 2003 in the total sum of $17,756.30. Mr Frank Forgione did not advance the company any monies to pay this assessment; and the company did not pay the amount of $17,756.30, or any amount, in respect of the assessment.
On 27 August 2004, the Deputy Commissioner issued a statutory demand against the company in respect of the debt then due under the RBA, the unpaid income tax for the year ended 30 June 2001 and a general interest charge. The statutory demand read:
1.The company owes the Deputy Commissioner of Taxation…the amount of $131,667.09, being the total of the amounts of the debts described in the Schedule.
2.Attached is the affidavit of Jacqueline Anne Simons, dated 27 August 2004, verifying that the amount is due and payable by the company.
3.The creditor requires the company, within 21 days after service on the company of this demand:
(a)to pay to the creditor the total of the amounts of the debts; or
(b)to secure or compound for the total of the amounts of the debts, to the creditor’s reasonable satisfaction.
4.The creditor may rely on a failure to comply with this demand within the period for compliance set out in subsection 459F(2) as grounds for an application to a court having jurisdiction under the Corporations Act 2001 for the winding up of the company.
…
SCHEDULE
Description of the debt Amount of the debt a) Running Balance Account deficit debt as at 27 August 2004 in respect of amounts due under the BAS provisions as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (“the ITAA 1997”) [BAS provisions include, generally: the goods and services tax provisions , the PAYG withholding provisions, the PAYG instalment provisions, the fringe benefits tax instalment provisions and the deferred company instalment provisions], administrative penalties due under Part 4-25 of Schedule 1 of the Taxation Administration Act 1953 (“the TAA 1953”) and the general interest charge payable under section 8AAZF of the TAA 1953, being a debt due and payable by the company pursuant to section 8AAZH of the TAA 1953 121,519.19 b) Income tax liability for the year ended 30 June 2001, as per an assessment taken to have been made and notice of which was taken to have been served on 1 May 2002, which was due and payable on 8 April 2002 7,631.64 PLUS: The general interest charge pursuant to section 204 of the Income Tax Assessment Act 1936 (“the ITAA 1936”) and Division 1 of Part IIA of the TAA 1953, calculated up to and including 26 August 2004 2,516.30 10,147.94 LESS: payments and/or credits 0.04 10,147.90 Total Income Tax Debt at 27 August 2004 $10,147.90 Total Amount $131,667.09 Dated: 27th day of August 2004
The statutory demand came to the attention of Mr Frank Forgione and Mr Peter Forgione. Mr Frank Forgione did not, on becoming aware of the statutory demand, advance the sum of $131.667.09 to the company in order for it to meet the statutory demand.
At around this time, Mr Philpott introduced Mr Frank Forgione and Mr Peter Forgione to Mr Ian Bowman of Financial Crisis Recovery, a business operating in Perth. Mr Bowman was at that time a financial adviser. By this time, the company’s financial statements and tax returns for the financial years ended 30 June 2003 and 30 June 2004 had not been prepared.
Mr Peter Forgione attended a meeting with Mr Bowman in Perth. At that meeting, Mr Bowman advised Mr Peter Forgione that he should appoint a “friendly administrator” to the company so that the liability to the ATO could be settled through a compromise under a deed of company arrangement.
On or about 18 September 2004, the time for the payment of the statutory demand expired. The company did not pay the amount demanded in the statutory demand.
On 23 September 2004, Mr Philpott sent a letter addressed to “the directors” of the company, care of Mr Frank Forgione at his home address. The salutation of the letter was: “Good morning Frank and Peter”. The content of the letter was, therefore, addressed to both Mr Frank Forgione and Mr Peter Forgione notwithstanding that Mr Frank Forgione had resigned as a director some three and a half months earlier. The letter stated:
You may recall that several months ago a Superannuation Guarantee Audit was undertaken on the company, which compared the superannuation the company was required to pay with the actual amounts paid.
As you would be aware, very little superannuation was paid by the company on behalf of employees and the tax audit determined that a shortfall of $13,444.63 for superannuation exists.
As such they have issued an assessment for superannuation of an amount outstanding of $17,756.30 for the years 2001/2002 and 2003.
Mr Philpott also stated in the letter that the ATO would start collection proceedings in respect of the debt.
The letter went on to say that Mr Philpott was still waiting for information from them which he had requested in June 2004. The letter then said:
Once we have this available, we will be in a position to determine what the overall tax implications and superannuation owing to the Tax Office is and you can then make steps to negotiate a repayment plan.
On receipt of Mr Philpott’s letter, Mr Frank Forgione did not advance the company the sum of $17,756.30 in order for the company to pay that amount required under the assessment issued in respect of the unpaid superannuation contributions. The company did not pay the ATO that sum, or any sum before the company went into liquidation.
On 1 October 2004, Mr Philpott by facsimile addressed to Mr Frank Forgione advised him of the amounts and details of the company’s tax liabilities and the amount of the company’s tax liability for which each director was personally liable.
In that facsimile, Mr Philpott advised that the total amount owed by the company to the ATO was $122,545 – of which the directors were personally liable for the sum of $30,927 in respect of unremitted PAYG withholding tax instalments. However, that total amount, said Mr Philpott, was exclusive of an amount of $28,335 in respect of income tax instalments. In respect of that amount, Mr Philpott said that “we should be able to get this down to nil once Peter has supplied the rest of the information”. Mr Philpott said he expected that the refund would occur once the 2004 tax return was filed, and, referring to the $28,335 amount, repeated that he needed “documents and details from Peter to get this taken off”.
The facsimile went on to say:
We will wait to hear about Peter’s meeting with Ian Bowman & then decide on the next step to take.
Stay in touch.
Neither the company nor Mr Frank Forgione made any payment to the ATO following the receipt of Mr Philpott’s letter of advice of 1 October 2004.
On 7 October 2004, Mr Philpott wrote to Mr Ian Bowman in the following terms:
As requested by the directors of Forgione Family Group Pty Ltd, we enclose a summary of the debt owing to the Tax Office by the company (allocated between the different taxes outstanding). The company taxation return for 2002/03 and 2003/04 still needs finalisation and the Business Activity Statement for March 2004, June 2004 and September 2004 is still outstanding. Once lodged these will impact on the taxation owing. In addition the directors have requested we provide an estimate of the company’s current financial position. This summary is also attached.
I understand you are obtaining quotes and advice on the liquidation of the company and will feed back the required quote and advice to Peter and Frank Forgione.
Please ring if you require any further information.
Mr Philpott’s letter included a copy of the facsimile of advice about the company’s tax liability, referred to in [99] above, an extract from the company’s RBA with the ATO from the tax portal, and also a statement, drawn up by Mr Philpott, of the company’s current financial position. That statement was as follows:
FORGIONE FAMILY GROUP PTY LTD Schedule of Approximate Current Financial Position October 2004 ASSETS Printing Plant and Equipment – approximate sale value 5,000 Loan – Peter Forgione Excluded Value of Business Unknown _____ 5,000
_____ LIABILITIES Loan – National Australia Bank – Instalment Loan
#086-518-54-365-9047 – (Secured by personal guarantee)41,000 Australian Taxation Office 122,000 Sundry Creditors 5,000 Family Loans 9,000 Loans – Frank Forgione (being funds advanced to payout company’s debts namely:
- Vehicle
- Credits
- Bankwest Business Loan
- Bankwest Business Visa)
124,000
_______ 301,000
______ Net Approx Deficiencies $(296,000)
On 26 October 2004, the Deputy Commissioner filed a winding-up application against the company founded on the fact that the statutory demand issued on 27 August 2004 had not been paid.
Shortly after the winding-up application was filed, Mr Bowman met in Perth with Mr Peter Forgione and Mr Lean. Mr Frank Forgione attended the meeting by telephone. I deal in greater detail with that meeting later in the reasons for judgment.
On 1 November 2004, Mr Lean was appointed administrator of the company by Mr Peter Forgione. On 5 November 2004, Mr Lean visited the company’s premises and Lincolns’ offices in Albany. I deal with these visits later in the reasons for judgment.
On 8 November 2004, the first meeting of the company’s creditors took place.
On 26 November 2004, Lincolns sent to Mr Lean the draft accounts for the company for the year ended 2004. Those accounts reflected that Mr Peter Forgione’s loan account balance with the company stood at $165,992 for the year ended 30 June 2003 and $162,675 for the year ended 30 June 2004.
On 29 November 2004, the second meeting of the company’s creditors was held. The meeting was adjourned to 20 December 2004.
On 1 December 2004, the company lodged its BAS for the quarter ended 30 June 2004. The company failed to remit payment and the RBA deficit was then $129,864.25.
On 10 December 2004, Ms Simons of the ATO sent a facsimile to Mr Frank Forgione advising him that the amount of his personal liability for unremitted PAYG withholding tax instalment amounts was $30,927.
On the same date, Mr Frank Forgione made a written proposal to pay the company $59,012 on 30 June 2005 and to purchase the company’s printing equipment for $3,000, as part of a proposed deed of company arrangement with the company’s creditors. The document read:
I Frank Forgione of Albany offer the following Deed of Company Arrangement to Creditors.
I will pay to the Administrator $59,012 on 20th June 2005.
I also wish to purchase all the company’s printing equipment for $3,000 on 20th February 2005.
The purpose of this remittance is to,
1.Pay the ATO for the company’s outstanding taxes which are owed personally by me or my son Peter Forgione.
2.Pay outstanding Superannuation contributions and penalties.
3.The Administrators fees and expenses.
On 10 December 2004, Mr Lean produced the second administrator’s report. That report stated that Mr Frank Forgione had offered to pay $59,012 to the company’s creditors as part of a deed of company arrangement. The report included a projected comparison between accepting the deed of company arrangement and liquidation of the company. The comparison showed, in essence, that the monies offered by Mr Frank Forgione would be used by the company to pay the ATO debt in respect of the unpaid superannuation contributions and interest of $20,315 and $30,927 in respect of the tax debt for unremitted PAYG withholding tax instalments for which Mr Frank Forgione and Mr Peter Forgione were each personally liable. Mr Lean recommended that the creditors enter into the deed of company arrangement.
On 20 December 2004, the adjourned second meeting of the company’s creditors was held at the offices of GT Lean & Associates in Perth. Mr Frank Forgione did not attend the meeting in person. He participated in the meeting by telephone. A representative of the ATO was present at the meeting. The deed of company arrangement which was proposed was rejected. It was resolved that the company be placed into liquidation and that Mr Lean be appointed as the liquidator of the company. The minutes of the meeting record the following:
The terms of a Deed of Company Arrangement (DOCA) were discussed amongst those present and clarification was given to the ATO regarding the terms and possibility of the ATO pursuing the directors in the future. It was explained that the DOCA did not allow the ATO that opportunity as the terms were “in complete satisfaction of all outstanding debts”, to which the ATO replied that it would be unable to accept such a proposal due to ATO Policy that states that they must not relinquish their rights to pursue directors individually.
1.That the DOCA be accepted by the creditors.
Moved: Mr Francesco Forgione
Lost on numbers2.That the company be placed into liquidation.
Moved: ATO
Seconded: Mr Francesco Forgione
Carried Unanimously3.That Graeme Lean of GT Lean & Associates be appointed as liquidator of the Forgione Family Group Pty Ltd.
Moved: ATO
Seconded: Mr Francesco Forgione
Carried UnanimouslyOn 16 February 2005, Mr Lean wrote to Mr Frank Forgione recommending that he should advise the ATO that he could pay the outstanding PAYG withholding tax instalment amounts of $30,927 on 20 June 2005. Mr Lean had previously advised the ATO that he would be making that recommendation to Mr Frank Forgione. Mr Lean later forwarded to Mr Frank Forgione a facsimile from the ATO dated 19 May 2005, extending the date for payment of that sum to no later than 20 June 2005.
Around the middle of May 2005, Mr Frank Forgione removed the company’s records from where they were stored at the company’s former business premises. He moved some of the records to his property at 139 Grey Street West, Albany and the rest of the company’s records to the ground floor of the building of the company’s former business premises.
On 24 June 2005, Mr Frank Forgione’s new accountants, James & Ellis Accountants, on his instructions, wrote to the ATO offering to pay $30,927 (without interest) in instalments over two years and enclosing a cheque for $10,000. The letter referred to the fact that Mr Frank Forgione would, when taking into account past income tax due by him, owe the ATO a total of $5,469.22 once he lodged his 2004 income tax return. The letter went on to say:
Mr Forgione also has the following loans
Citibank – Mr Forgione – Balance at 18/05/05 242,926
BankWest – Mr & Mrs Forgione – Balance at 28/05/05 211,813
(Copies of these bank statements are attached.)In view of the above, Mr Forgione wishes to make you the following offer in regards payment of the $30,927 owing by the Forgione Family Group Pty Ltd.
·$10,000 to be paid immediately upon your acceptance of his offer
·$5,000 payable 31/12/05
·$5,000 payable 30/06/06
·$5,000 payable 31/12/06
·$5,927 payable 30/06/07
Mr Frank Forgione paid the first instalment of $10,000 and on 8 August 2005, the ATO credited the company’s tax liability with the sum of $10,000. Thereafter, Mr Frank Forgione never paid any further instalments to the ATO.
On 8 August 2005, Mr Lean made demands for books and records pursuant to s 530B of the Corporations Act to Mr Frank Forgione, Mr Peter Forgione, Lincolns and Financial Crisis Recovery. Each of the persons, other than Mr Peter Forgione, responded in writing. I will discuss this issue later in these reasons for judgment.
In 2006, Mr Frank Forgione sold his hairdressing business.
On 28 May 2009, these proceedings were commenced.
On 21 December 2011, Mr Trinick was appointed liquidator of the company in place of Mr Lean.
Insofar as the matters referred to in [23]-[122] above, comprise statements of fact, I make findings of fact to that extent.
WITNESSES
Mr Jeffrey Graeme Lean
Mr Lean gave evidence as part of the case for the applicant liquidator, Mr Trinick.
Mr Lean was a blunt and generally speaking, inarticulate witness. At times, he demonstrated an impatient and irascible demeanour.
Insofar as Mr Lean demonstrated an irascible response to some of the questions by counsel for the respondents, that response was largely the consequence of the respondents through their counsel using the proceeding to impugn, unjustifiably, as I have found, Mr Lean’s professional conduct.
An attack was made on the credibility of Mr Lean’s evidence on the basis of a statement he had made in a number of his reports to creditors. The statement was that he had commenced proceedings in the Supreme Court of Western Australia against the directors for insolvent trading. Mr Lean accepted in cross-examination that the statement was to his knowledge false, because at the time of the statement, it was only his intention to commence those proceedings. However, notwithstanding this admission by Mr Lean, I generally accept his evidence.
Mr George Albury Lopez
The applicant adduced expert evidence from Mr George Albury Lopez. Mr Lopez is a partner in the firm of Melsom Robson, Chartered Accountants. Mr Lopez has been a partner in that firm since July 1997. Mr Lopez is also an official liquidator of the Supreme Court of Western Australia and a registered trustee in bankruptcy. Mr Lopez has extensive experience in insolvency administration, has a Bachelor of Business degree and a Post-Graduate Diploma in Business.
Mr Lopez produced an expert report on the questions of insolvency and the books and records which would normally be kept by a company in order to produce financial statements reflecting a true and fair view. Mr Lopez was cross-examined to a limited extent.
Mr Lopez was an impressive witness and I accept his evidence.
Mr Frank Forgione
Mr Frank Forgione gave evidence and was cross-examined.
I formed a poor impression of the evidence of Mr Frank Forgione. Mr Frank Forgione’s evidence was evasive, pitched at a high level of generality, muddled and at times almost incomprehensible as he sought to explain his version of events. Mr Frank Forgione had a propensity to fashion his evidence in a manner which best suited his case. Mr Frank Forgione consistently advanced evidence which was contrary to objective fact, and appeared to have persuaded himself as to the veracity of his version of events, notwithstanding the contrary objective evidence. In forming this view, I have taken into account that English is not Mr Frank Forgione’s native language. I have, during the course of the reasons for judgment referred to unsatisfactory aspects of Mr Frank Forgione’s evidence.
I have not accepted very much of Mr Frank Forgione’s evidence.
Mr Peter Forgione
Mr Peter Forgione gave evidence and was cross-examined.
Mr Peter Forgione’s evidence was for the most part unsatisfactory. This is because Mr Peter Forgione frequently resorted to the answers that he “did not know” or he “did not remember” during cross-examination. I approach Mr Peter Forgione’s evidence with considerable caution and have not accepted many aspects of that evidence. This is because there was considerable variance between his evidence-in-chief in his witness statement and his evidence in cross-examination on some important issues – which he acknowledged.
However, Mr Peter Forgione did on occasions make concessions in cross-examination when concessions were called for and I have accepted some of his evidence.
Mr Cameron Palassis
I also observe that the respondents tendered a witness statement of Mr Cameron Palassis. Mr Palassis was not cross-examined. The respondents relied on Mr Palassis’s report to claim that the respondents should be relieved of liability in respect of part of the ATO loss claimed by the applicant, because if the company had filed its tax returns for 2003 and 2004 a refund amount would have been applied against the amounts claimed in respect of unremitted income tax instalments.
THE APPLICANT’S CLAIM
For the applicant to succeed on his claim, it is necessary for the applicant to show that:
(a)the company was insolvent at the time that it incurred each of the debts in respect of which the applicant claims compensation;
(b)at the time that each of those debts was incurred there were reasonable grounds for suspecting that the company was insolvent or that it became insolvent by incurring one or more of the debts;
(c)each director failed to prevent the company from incurring each debt; and
(d)when the director failed to prevent the company from incurring the debt, he was aware, at that time, that there were such grounds for so suspecting; or that a reasonable person in a like position in a company in the company’s circumstances would be so aware.
I observe that in making the findings that I have in relation to Mr Frank Forgione and Mr Peter Forgione, I am conscious of the requirements of s 140(2) of the Evidence Act 1995 (Cth) and I am satisfied that the requirement has been met. I am, in other words, comfortably satisfied in relation to those findings.
INSOLVENCY
I first deal with the question of whether the company was insolvent at the time that the debts, to which the applicant’s claim relates, were incurred.
The applicant relied on two alternative bases to contend that the company was insolvent at the relevant times. First, it was contended that the company is presumed to have been insolvent from 1 July 2001. Alternatively, it was contended that the company was actually insolvent.
Presumed insolvency
I deal now with the issue of presumed insolvency.
The applicant relies upon s 588E(4) of the Corporations Act. This section of the Corporations Act provides:
Subject to subsections (5) to (7), if it is proved that the company:
(a)has failed to keep financial records in relation to a period as required by subsection 286(1); or
(b)has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2);
the company is to be presumed to have been insolvent throughout the period.
Section 588E(6) of the Corporations Act relevantly provides:
Section (4) does not have effect, insofar as it would prejudice a right or interest of a third person for the company to be presumed to be insolvent because of a contravention of subsection 286(2) if it is proved that:
(a)The contravention was due solely to someone destroying concealing or removing the financial records of the company; and
(b)none of those financial records was destroyed, concealed or removed by the first-mentioned person; and
(c)the person was not in any way by act or omission, directly or indirectly, knowingly or recklessly concerned in, or party to, destroying, concealing or removing any of the financial records.
Section 286(1) and s 286(2) of the Corporations Act referred to in s 588E(4) state as follows:
(1)A company…must keep written financial records that:
(a)correctly record and explain its transactions and financial position and performance; and
(b)would enable true and fair financial statements to be prepared and audited.
…
(2)The financial records must be retained for 7 years after the transactions covered by the records are completed.
Section 286(3) of the Corporations Act provides that an offence based on s 286(1) or s 286(2) is an offence of strict liability.
Section 9 of the Corporations Act provides that the term “financial records” includes:
(a)invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers;
(b)documents of prime entry;
(c)working papers and other documents needed to explain:
(i)the methods by which financial statements are made up; and
(ii)adjustments to be made in preparing statements.
The term “financial statements” is defined as meaning, in these circumstances, annual financial statements.
The applicant pleaded in para 9 of his statement of claim that “the company failed to keep or retain written financial records that correctly recorded and explained its transactions and financial position and performance and which would enable true and fair financial statements to be prepared and audited”.
In support of his claim that there is a presumed insolvency in respect of the period from 1 July 2001, the applicant relied primarily upon a contention that the company had in breach of the obligation in s 286(2) to retain its written financial records for seven years after the transactions covered by the financial records were completed. I deal first, therefore, with this contention.
In the particulars of this contention, handed up during the trial, the applicant said that the company had failed to retain written financial records which:
(a)correctly recorded and explained its transactions, and the financial position and performance of the company at all times during 1 July 2001 to 9 June 2004, and
(b)which would enable true and fair financial statements to be prepared and audited for the financial years ended 2002, 2003 and 2004.
The applicant said that the company did not retain the following books and records:
(1)creditors’ invoices;
(2)correspondence from company bankers, creditors, employees and the ATO on behalf of the Deputy Commissioner regarding tax and superannuation deductions and other correspondence;
(3)quotations for work carried out by the company, job cards, job costing records and stock record details for costing of all printing work and printing brokerage work carried out by the company during the relevant period;
(4)bank statements, deposit books, copies of contracts for hire purchase arrangements, chattel mortgages and other financial records, receipts from creditors after payment and other finance related documents;
(5)cash-flow forecasts of incoming expenditure of the company.
Further, in support of the allegation that the company failed to comply with s 286(2) of the Corporations Act, the applicant said he relied upon the inference to be drawn from the fact that Mr Lean, as liquidator of the company, on 8 August 2005, issued demands for the production of the books and records of the company for the period 1 July 1995 to 30 June 2003 to each of Mr Frank Forgione, Mr Peter Forgione, Lincolns, James & Ellis Accountants, and Financial Crisis Recovery; and that none of the parties to whom the demand was addressed provided any books and records, other than to the limited extent provided by Financial Crisis Recovery and Lincolns.
In response to the applicant’s allegation that the company had contravened s 286(2) of the Corporations Act, and that, accordingly, the presumption of insolvency applied, each of the respondents pleaded as follows.
First, it was said that because Mr Frank Forgione resigned as a director on 3 June 2004, he had not since that time been acting as an agent of the company and, therefore, any acts or omissions by him in relation to the removal and loss of the company’s financial records could not be attributed to the company as a failure of the company.
Secondly, it was pleaded that because Mr Peter Forgione’s powers as a director were suspended following Mr Lean’s appointment as administrator from 1 November 2004, and, thereafter, as a liquidator on 20 December 2004, any conduct by Mr Peter Forgione in relation to the company’s books and financial records after those dates could not be attributed to the company as a failure by the company.
Thirdly, it was said that the company decided to keep its financial records at its former premises at 344 Middleton Road and with the company’s former accountants, Lincolns. It was then pleaded that the financial records at the former premises of the company, were secured “in the ordinary way with the permission of the landlord”- as previously mentioned, the owner and landlord of the premises was Mr Frank Forgione - and that the financial records remained available at those premises until after the appointment of Mr Lean as administrator and subsequently liquidator.
Fourthly, it was pleaded that on or about 15 November 2004, Mr Frank Forgione showed Mr Lean the company’s records where they were located at the company’s former premises, and that on that date, some but not all of the company’s records were made available to Mr Lean at the premises, but he failed to take possession of them. It was also pleaded that on about the same date some but not all of the company’s records were made available to Mr Lean at Lincolns, but he failed to take possession of them.
Fifthly, it was pleaded that approximately six months after the meeting in November 2004, the company’s books and financial records which remained at the company’s former premises were moved by Mr Frank Forgone to make room for an incoming tenant; and that since that time the books and financial records have been moved on a number of occasions and have been lost.
Sixthly, it is said that Mr Lean did not make demand for the books and financial records until after the books and financial records had been moved by Mr Frank Forgione
I also observe that the respondents contended that in the event that the presumption of insolvency did apply, that presumption was rebutted by reason that Mr Frank Forgione was throughout the relevant period ready, willing and able to provide financial support to the company to permit it to pay its debts as and when they fell due.
I make the following findings of fact in relation to this issue.
On 14 November 2004, Mr Lean, who was then the administrator of the company, drove to Albany and met Mr Frank Forgione at his hairdressing salon. Mr Lean stayed overnight in Albany.
On 15 November 2004, Mr Frank Forgione and Mr Lean went to the company’s former premises at 344 Middleton Road, Albany. There Mr Frank Forgione showed Mr Lean a number of the company’s records. These records included some employee records, invoices and job cards. In evidence, Mr Frank Forgione said that Mr Lean took some but not all of the company’s records and he did not recall what records were taken by Mr Lean. This is contrary to what the respondents pleaded in their defence, what was put to Mr Lean in cross-examination, and Mr Lean’s evidence. I find that Mr Lean did not take any records.
Mr Frank Forgione and Mr Lean then drove to the offices of Lincolns at 70 Frederick Street, Albany. There Mr Lean met Mr Philpott, a partner at Lincolns, and, whilst at those premises, Mr Lean examined the company’s NAB bank statements, cheque books and butts; and also the company’s financial statements for 2001 and 2002. At that time, the financial statements for the 2003 and 2004 financial years had not been completed, nor had the tax returns for those years been completed. Also, the BAS statements for March 2004, June 2004 and September 2004 were still outstanding. Mr Lean asked Mr Philpott to complete the financial statements as soon as he could. Mr Philpott told Mr Lean that he would provide Mr Lean with the books and records of the company.
Mr Philpott did not ultimately provide Mr Lean with the books and records of the company. Mr Lean did not take the books and records which he had examined at Lincolns, into his possession.
In May 2005, Mr Frank Forgione, moved the company’s records from their storage place in the premises formerly occupied by the company, to make room for an incoming tenant. The records were stored in boxes. Mr Forgione moved some of the records to 139 Grey Street West and other documents into a different location in the building at 344 Middleton Road, Albany. Thereafter, the boxes and the records within those boxes have disappeared and have been lost. Mr Frank Forgione admitted during cross-examination, that all the daily records and general ledger reports were kept at the company’s premises. He also admitted that the company’s records he had moved were whatever records that were at the premises, and those documents included cheque butts, cheque books, bank statements, wage records and creditors’ invoices.
I, accordingly, find that the documents that were in the boxes which Mr Frank Forgione had moved and subsequently lost, were the financial records of the company.
On 8 August 2005, Mr Lean sent a letter to Mr Frank Forgione headed “Requirement to deliver specified books to the liquidator - section 530B(1) of the Corporations Act 2001”. The letter required that Mr Frank Forgione deliver on or before 5:00 pm on 19 August 2005 the following books and records of the company “to the extent that they are in your possession and/or control”:
(a)All Financial Statements for the financial years commencing 1 July 1995 to 30 June 2003 inclusive including but not limited to all Profit and Loss accounts, Balance Sheets, Depreciation Schedules and Taxation Returns.
(b)General Ledger for the relevant period 01 July 1995 to 30 June 2003.
(c)General Journal for the relevant period 01 July 1995 to 30 June 2003.
(d)Assets Register for the relevant period 01 July 1995 to 30 June 2003.
(e)Cash Records for the relevant period including but not limited to all Cash Receipts Journals, Bank Deposit Books, Cash Payments Journal, Cheque Butts and Petty Cash Books.
(f)Bank Account Statements and Bank Reconciliations for the relevant period 01 July 1995 to 30 June 2003.
(g)Sales/Debtor Records for the relevant period including but not limited to all Sales Journals, Debtors Ledger, Lists of Debtors, Invoices & Statements Issued and Delivery Dockets.
(h)Work in Progress Records for the period from 01 July 1995 to 30 June 2003.
(i)Job/Customer Files for the period from 01 July 1995 to 30 June 2003.
(j)Stock Listings for the period 01 July 1995 to 30 June 2003.
(k)Creditors records for the period 01 July 1995 to 30 June 2003. Including but not limited to Invoices & Statements received & paid, Creditors Ledger and Unpaid Invoices.
(l)All Correspondence for the period from 01 July 1995 to 30 June 2003.
(m)Wages Records for the period 01 July 1995 to 30 June 2003.
(n)The following Registers, namely: Members, Options, Debenture Holders, Prescribed Interests, Charges, Futures Licensees, Holders of Proper Authorities and Unclaimed Property.
(o)Minutes of Meetings of Directors and/or Members.
(p)The following Deeds namely: All Trust Deeds, Deed of Debentures and any contract or Agreement, concerning or relating to the company/s affairs executed during the period 01 July 1995 to 30 June 2003.
(q)Company Secretarial Register.
On the same day, Mr Lean sent a letter in the same terms to each of Mr Peter Forgione, Lincolns, James & Ellis Accountants and Financial Crisis Recovery – attention Mr Ian Bowman.
By a letter dated 11 August 2005, Ms Jasmyn Mumme, on behalf of Financial Crisis Recovery, replied as follows:
In response to your Formal Demand for the records of the above company, we advise that these records are in the possession of our client, Frank Forgione or his accountant, Lincoln Partners.
The documents we currently hold copies of in our client file, and which have already been copied and given to you, are shown on the attached list. If you require further copies of any of the items on this list please advise and we will provide these to you immediately on your request.
Please note that we have also been in contact with Frank Forgione to emphasise the importance of getting the requested documentation to you.
The attached list referred to by Ms Mumme included only the NAB business loan facility agreement and associated security documents, a statement of Mr Peter Forgione’s financial position as at 21 June 2004, a company search of the company, the winding-up application filed by the ATO, a NAB bank statement for the period 28 September 2004 to 4 October 2004 and a letter from Lincolns enclosing the 2004 financial statements for the company.
On 12 August 2005, Mr Frank Forgione replied by letter to Mr Lean as follows:
You have requested to deliver specified books to the liquidator section 530B(1) of the Corporation’s Act 2001. As I am not a director of the company and neither I held any official position when the company went into liquidation I suggest you get the information from the director of the company.
I have given a lot of documents to Ian L Bowman and I understand that he has given you some of the documents and he also told me he is going to give you the rest of the documents that he has in his possession. I also suggest if you require any more documentation to get in touch with Lincoln’s Accountants, as they were the accountants for the company.
If I can assist you further please do not hesitate to get in contact with me.
Mr Peter Forgione did not respond in writing to the demand for documents, nor did he at any time supply any of the documents requested by Mr Lean.
During cross-examination, Mr Peter Forgione was taken to Mr Lean’s letter dated 8 August 2005 demanding the production of the company’s financial records and gave the following evidence:
You didn’t provide any documents to Mr Lean in response to the demand, did you?‑‑‑I don’t remember receiving it.
Do you recall providing any documents to Mr Lean?---Well, my father was handling all that, so I don’t - - -?---
Okay?---Didn’t – didn’t get involved.
Okay. Let’s be clear. Your father was handling the question of documents, was he?‑‑‑Correct.
Okay. Your father wasn’t a director of the company though at this stage, was he?‑‑‑Doesn’t matter. He was helping me out.
Okay. Do you think you may have spoken with Mr Lean in response to - - -?---No, I didn’t speak to Mr Lean shortly after all this because my father was taking care of it.
I find that after he left Albany and moved to Perth in the second half of 2003, Mr Peter Forgione left Mr Frank Forgione in control of the company’s books and records, and that in May 2005, when he removed the books and records, Mr Frank Forgione had the books and records in his possession and was in control of those documents.
I infer from the fact that on 12 August 2005, when he wrote his letter in response to Mr Lean’s letter, Mr Frank Forgione did not produce the documents which he had removed from the company’s former premises, that the documents had been lost by that date.
I also find that the letter of Mr Frank Forgione dated 12 August 2005 was deliberately obstructive and misleading. This is because in that letter Mr Frank Forgione implied that Mr Peter Forgione might be able to provide the information sought, namely, the financial records. However, when he wrote the letter, Mr Frank Forgione knew that the documents had been under his, and not Mr Peter Forgione’s control, and that, only three months earlier, he had removed the documents from the company’s former premises, but he did not disclose these facts in his letter.
By a letter dated 25 August 2005, Mr Philpott on behalf of Lincolns, replied to Mr Lean’s demand that the only records of the company which they had in their possession were the attached copies of the financial statements for the years 1997 through to 2004. Mr Philpott went on to say:
In regard to the other documents outlined on your list, we do not have any of those documents in our possession as all of the daily records in [sic] general ledger reports etc were kept by the company’s offices [sic] at the company’s premises.
Prior to the trial of this matter, Mr Lean obtained copies of the company’s bank statements for BankWest account number 001 040693-9 for the period 6 April 2001 to 22 June 2004 directly from Bank West. Likewise, Mr Lean obtained from the NAB directly copies of the bank statements for the company’s two accounts namely, 533900829 and 543659047. Mr Lean was required to obtain copies of these bank statements directly from the banks because the bank statements were not provided to him by Mr Frank Forgione or Mr Peter Forgione or any of the other recipients of Mr Lean’s letter of 8 August 2005.
On the basis of the findings made above, I find that the financial records of the company were not retained beyond 12 August 2005.
The first issue, however, is whether the evidence supports a finding that the financial records which were not retained related to financial transactions which occurred during the financial years ended 30 June 2001 to 30 June 2004.
As mentioned, in his particulars, the applicant sought to rely, in part, on the inference arising from the failure of anyone to produce the company’s financial records in response to Mr Lean’s notice. It is to be observed, however, that Mr Lean’s demand under his notice issued on 8 August 2005, related only to the financial records for the period 1995 to 30 June 2003, and not to 30 June 2004.
The next question is whether the evidence supports an inference that the documents that Mr Frank Forgione removed from the company’s former premises, and lost, included the financial records in respect of the financial year ended 30 June 2004, as well as from the previous three financial years.
Mr Frank Forgione’s evidence was that Lincolns, from time to time, required him and Mr Peter Forgione to provide them with information in order to complete the company’s financial statements and that they would supply documents to Lincolns for that purpose.
I infer from the findings that I made at [165] above, that in November 2004, when Mr Lean visited Lincolns, they were in possession of such of the company’s financial records as had been provided to them for the purpose of drawing up the 2003 and 2004 financial statements. However, by Mr Philpott’s letter of 25 August 2005 (at [179] above), some nine months after Lincolns had prepared the financial statements for the years ended 30 June 2003 and 30 June 2004, Lincolns advised Mr Lean that they were not in possession of the company’s documents as the daily records and general ledger reports were kept by the company officers at the company’s premises.
I infer from Mr Philpott’s letter of 25 August 2005, that Lincolns usual practice was to return the company’s documents, which they had used for the purpose of producing the company’s financial statements, to the company’s officers after it had prepared the financial statements for each year. I infer, therefore, that within a short period of time after the 2003 and 2004 financial statements had been prepared, Lincolns returned the documents they used to prepare the 2003 and 2004 financial statements to Mr Frank Forgione for storage at the company’s premises.
I infer that the documents were returned by Lincolns to the control of Mr Frank Forgione because at that time Mr Peter Forgione was resident in Perth and Mr Frank Forgione was then in control of the company’s premises; and, as is evident from Mr Philpott’s letters of 23 September 2004 and 1 October 2004, notwithstanding that Mr Frank Forgione had resigned as a director, Mr Philpott was still dealing with Mr Frank Forgione about the company’s affairs. I reject Mr Frank Forgione’s evidence that the documents were sent by Lincolns to Mr Peter Forgione. This is contrary to Mr Peter Forgione’s evidence and to Mr Philpott’s letter of 25 August 2005 which refers specifically to the documents being kept at the “company’s premises” – which were then under the control of Mr Frank Forgione.
I infer further that the returned documents used to prepare the 2003 and 2004 financial statements, were stored with the company’s other books and records in the boxes which were stored at their usual location at the company’s former premises and then removed by Mr Frank Forgione in May 2005.
It follows that I find that the documents which were stored in the boxes at the company’s premises, which Mr Frank Forgione later removed, were documents which had been used by Lincolns to prepare the financial statements for each of the financial years from the year ended 30 June 2001 to 30 June 2004, and related to financial transactions which had occurred during those financial years.
I find that the financial records in respect of the company’s transactions that occurred during the financial years 2001, 2002, 2003 and 2004 were not retained for seven years.
The next question is whether this failure is a failure by the company to retain the financial records such as to attract the operation of s 286(2) and s 588E(4) of the Corporations Act.
The respondents contended that the reason that the financial records for those years were not retained was because Mr Frank Forgione removed them from their storage place at the former company’s premises which led to the financial records being lost, and that when Mr Frank Forgione removed the documents, he was not a director of the company. Therefore, contended the respondents, the failure to retain the records did not occur by reason of an act or omission of the company, but by reason of Mr Frank Forgione removing, and then, losing, the documents. Accordingly, said the respondents, s 286(2) had no application, and, therefore, there was no presumed insolvency as provided for in s 588E(4).
In support of this contention the respondents relied on the observations of Barrett J in Fisher v Devine Homes Pty Ltd (2011) 85 ACSR 512 (Devine Homes).
In that case, the plaintiff, Mr Allen, was the liquidator of a company in liquidation, namely, Devine Homes Pty Ltd. Mr Francois Harb was the sole director and shareholder of the company. Mr Harb failed to deliver the books and records of Devine Homes to the liquidator pursuant to his obligation to do so under s 530A of the Corporations Act. The liquidator was hampered in his investigation of the affairs of the company because he did not have the books and records of the company.
Ultimately, however, the liquidator brought a claim against Mr Harb under s 588FF(1) of the Corporations Act alleging that certain payments which had been made by cheques drawn on the company’s bank account either in favour of Mr Harb or to cash, were voidable transactions.
In order to succeed in his claim, the liquidator needed to prove that the liquidated company was insolvent when the impugned transactions were made. The liquidator relied upon s 588E(4) of the Corporations Act to demonstrate that the company was insolvent at the time of the impugned transactions.
Among the issues considered by Barrett J was whether s 286(1) or s 286(2) of the Corporations Act applied as a means of founding the presumption of insolvency in s 588E(4).
Mr Harb gave evidence that he had delivered the company’s documents to an accountant named “Shafeel” of a firm called “Stanford Accountants” sometime after the making of the winding-up order of Devine Homes in April 2007. Mr Harb went on to say that Shafeel had then simply disappeared leaving his office unoccupied and the papers Mr Harb had given him were then lost in the sense that Mr Harb did not know where they were and could not retrieve them. Barrett J accepted the evidence of Mr Harb.
The respondents then say that despite being the only person empowered to lodge the tax returns, Mr Lean did not lodge them.
The respondents said that in the ordinary course, upon lodgement of those tax returns, the company’s liability for income tax in respect of the years ended 30 June 2003 and 30 June 2004 would be assessed as nil and the general interest charges would be remitted.
The particulars do not expressly plead the particular aspect of the respondents’ conduct they relied upon to contend that each respondent acted honestly. However, the respondents’ case appears to be that they acted “honestly” because they supplied Lincolns with the information which Lincolns needed in order to prepare the 2003 and 2004 tax returns, but it was Lincolns that was “late” in preparing the company’s tax returns for those years.
In my view, each of the respondents has failed to establish the pleaded case.
I find that insofar as the company’s tax returns for 2003 and 2004 were not prepared timeously, it was not because Lincolns were dilatory or, to use the respondents’ language, “late”, but because the respondents were dilatory in supplying Lincolns with the information which Lincolns needed for Lincolns to prepare the financial statements and tax returns for those two years.
I find that, notwithstanding several requests made by Lincolns, Mr Frank Forgione and Mr Peter Forgione failed to provide Lincolns with the necessary information to permit Lincolns to prepare the relevant tax returns.
I have come to this view for the following reasons.
Mr Frank Forgione said in his witness statement, that in about November or December 2003, he had a conversation with Mr Philpott during which Mr Philpott said that he needed more information from Mr Frank Forgione in order to prepare the company’s financial statements. Mr Frank Forgione then went on to say in his witness statement, that he provided “some documents” in response to the request, but he could not remember what documents they were.
In his witness statement, Mr Frank Forgione then said that in February 2004, he again telephoned Mr Philpott and asked where the financial statements and tax returns were, and Mr Philpott again said that he needed further information from Mr Frank Forgione in order to prepare the financial statements and tax returns. Mr Frank Forgione then said that:
Until this time, I believed we had provided Lincolns with all information necessary to finalise the tax returns.
Mr Frank Forgione said that Mr Philpott then put him in contact with a colleague of Mr Philpott’s “in relation to further information Mr Philpott said was required to finalise the financial statements and tax returns”. Mr Frank Forgione then deposed that he did not recall what further information was requested but he did recall providing further documents to Lincolns so that the financial statements and tax returns could be finalised.
Mr Frank Forgione also gave evidence that he had a conversation with Mr Philpott, at a date he could not remember, but around January to April 2004, when Mr Philpott told him that Lincolns were “finalising” the company’s financial statements and tax returns.
I do not, for the following reasons, accept Mr Frank Forgione’s evidence that he supplied Lincolns with all of the information that was necessary for Lincolns to prepare the financial statements and the tax returns, or that Mr Philpott said to him in a conversation sometime in the first four months of 2004 that he was “finalising” the financial statements and tax returns, which, in the context, would presumably have been for the 2003 year.
First, Mr Frank Forgione’s evidence was unsatisfactory and unreliable in that it was vague and at a high level of generality in relation to the documents and information he said he had supplied, and as to the time of the alleged conversation with Mr Philpott.
Secondly, the evidence is not supported by the objective evidence. It is highly implausible that Mr Philpott would, around January to April 2004, have said that he was “finalising” the company’s financial statements and tax returns, when it is apparent from Mr Philpott’s letter of 23 September 2004, that in June 2004, some two months later, Mr Philpott had made a request of Mr Frank Forgione for information to permit him to prepare the financial statements and tax returns. It is also apparent from that letter that the information Mr Philpott had requested in June 2004, had still not been supplied by the time Mr Philpott wrote the letter – three months later.
Further, it is apparent from Mr Philpott’s letter of 1 October 2004, that he was still awaiting information from Mr Peter Forgione before he could prepare the financial statements and tax returns for the years ended 2003 and 2004. In two places in that letter, Mr Philpott refers to the fact that he was waiting for further information from Mr Peter Forgione before he could complete the financial statements and tax returns so that the income tax element of the amount owed by the company, could be reduced to “nil”.
As to the position of Mr Peter Forgione, in his witness statement, Mr Peter Forgione said that from about 2003 his contact with Lincolns and Ms Hawley became “more sparse” and that he was aware that there were deadlines for the preparation of financial statements and tax returns and that no one from Lincolns had been in contact with him to arrange a meeting to discuss the preparation of those statements and tax returns for some time. He said that he did not recall the precise dates, but “during that period” he contacted Ms Hawley on a number of occasions to make sure that the financial statements were being prepared.
Mr Peter Forgione then went on to say that he believed that the tax returns were being “taken care of” by Lincolns and that he would be informed if there was “a problem”.
I do not accept Mr Peter Forgione’s evidence that he contacted Ms Hawley on a number of occasions from about 2003 to make sure the financial statements were being prepared. This is because the evidence is so vague as to be of no probative value, and is not consistent with the objective facts.
First, the evidence does not identify the dates when his conversations with Ms Hawley, to make sure that the financial statements were being prepared, took place. In this regard, it is relevant to observe that it was Ms Hawley’s role to prepare, on the basis of information supplied to her by the company, the quarterly BAS; and that the BAS for each quarter up to June 2002, was duly lodged by the company. However, the company did not lodge any BAS for more than a year thereafter. The BAS for each of the quarters ended September 2002 and December 2002, was not lodged until 27 November 2003, and then only following the imposition of a penalty by the ATO for the failure to lodge the BAS. Further, the BAS for each of the quarters ended March 2003 and June 2003, was only lodged on 16 April 2004. This evidence is entirely inconsistent with Mr Peter Forgione’s evidence that he was in contact with Ms Hawley on a number of occasions during the period to make sure financial statements were being prepared.
Secondly, Mr Peter Forgione’s evidence is inconsistent with the content of Mr Philpott’s letter of 23 September 2004 and facsimile of 1 October 2004. These documents show that Mr Philpott had in June 2004 – 12 months after the end of the 2003 financial year - made a request for information to permit him to prepare the financial statements and tax returns and that request had not been answered; and that in October 2004, he still needed information to prepare the 2003 and 2004 financial statements and tax returns.
It follows that the respondents have not made good the factual basis upon which they based their claim to have acted “honestly” and I reject each respondent’s claim for relief under s 1317S of the Corporations Act.
In any event, I do not accept the respondents’ contention that the failure of Mr Lean to lodge the tax returns was culpable.
During cross-examination, Mr Lean said that he entertained doubts as to the integrity of the financial statements and tax returns for the 2003 and 2004 years, which Lincolns had produced and was not prepared to endorse them. Mr Lean went on to say that because the former directors had not delivered the company’s financial records and the relationship with the former directors had broken down, these doubts were never able to be assuaged. Mr Lean’s doubts about the accuracy of the financial statements, was shared by Mr Lopez.
SHOULD THERE BE AN INQUIRY UNDER S 536 OF THE CORPORATIONS ACT INTO THE CONDUCT OF MR LEAN AND THE APPLICANT?
The respondents claim that there should be an inquiry into the conduct of Mr Lean and the applicant.
In support of the claim for an inquiry into Mr Lean’s conduct, each respondent pleaded that Mr Lean gave him advice not to pay the company’s creditors and that Mr Lean should be appointed as administrator. It was then said that had it not been for Mr Lean’s advice not to make any further payments to creditors of the company, any such liabilities would have been paid by Mr Frank Forgione.
Each respondent then pleaded that in the event that the applicant is successful in his claim against him, only a small fraction of the judgment sum ordered will be paid to the creditors of the company unrelated to the respondents; and the balance would be payable to Mr Lean “who funded the litigation”, on the one hand; and to Mr Frank Forgione, on the other.
It is then pleaded that by reason of these matters, Mr Lean and the applicant did not act faithfully in performing his duties as a liquidator of the company respectively, in commencing and pursuing this proceeding against each respondent where there was “no commercial benefit” for the company’s creditors unrelated to the respondents.
Section 536 of the Corporations Act relevantly provides that:
(1)Where:
(a)it appears to the Court...that a liquidator has not faithfully performed or is not faithfully performing his or her duties or has not observed…
(ii)a requirement of this Act…; or
(b)a complaint is made to the Court…by any person with respect to the conduct of a liquidator in connection with the performance of his or her duties;
the Court…may inquire into the matter and, where the Court…so inquires, the Court may take such action as it thinks fit.
A court may order an inquiry to be held under s 536 of the Corporations Act if it is satisfied that there is a sufficient basis upon which it should exercise its powers in order to order an inquiry into the conduct of a liquidator. It is not necessary for the person complaining about the liquidator’s conduct to establish a prima facie case, that a liquidator has engaged in the alleged conduct (Leslie v Hennessy [2000] FCA 1532, Hall v Poolman (2009) 75 NSWLR 99 (Poolman) at [59]-[60]).
As to the first complaint, at the trial the respondents contended that Mr Lean improperly used his position because he never corrected his initial advice to Mr Frank Forgione not to pay the creditors of the company, or put the company in funds to pay the creditors, with the consequence that Mr Frank Forgione, relying on that advice, never personally discharged all of the company’s debts. The further consequence, said the respondents, was that following the failure of the deed of company arrangement proposal, Mr Lean became the liquidator of the company, and some four and a half years later, commenced this proceeding.
During cross-examination, it was suggested to Mr Lean by counsel for the respondents, that his motivation in giving, and not correcting, the impugned advice, was to earn fees for himself. Mr Lean vehemently denied this suggestion.
Counsel for the respondents contended that “the only person who stood to gain from the continuation of the administration and any future liquidation was Mr Lean in the form of fees”. The respondents contended that Mr Lean’s impugned conduct may have amounted to a failure by Mr Lean to perform his duty to exercise skill, care and diligence. Alternatively, contended the respondents, if Mr Lean engaged in the impugned conduct with the deliberate intent of causing the company to be placed into administration and then liquidation, so that he could claim fees, Mr Lean’s conduct may have amounted to a breach of the duty to act in the best interests of the company and for a proper purpose and not to use his position to gain an advantage.
This complaint covers essentially the same ground as formed the basis of the allegations made in support of relief under s 1317S of the Corporations Act.
In dealing with the claim for relief under s 1317S, I found that Mr Frank Forgione did not intend, and was not willing, when Mr Lean gave the impugned advice, or at any time before or after that date, to put the company in funds to discharge its debts, including the ATO debt. I have also already rejected the contention that, but for Mr Lean’s advice, the company would not have gone into administration, and subsequently into liquidation, because Mr Frank Forgione would have advanced the company sufficient funds for it to have discharged the ATO debt, or would have discharged that debt directly himself.
Further, as I have already said, even after Mr Lean was appointed liquidator, Mr Frank Forgione had the opportunity to give effect to his asserted willingness to discharge the ATO debt, but failed to do so. This occurred when Mr Lean obtained the agreement of the ATO to extend the payment date for Mr Frank Forgione to pay the amount of $30,927 for which he was personally liable. However, despite being given the opportunity to pay this amount, Mr Frank Forgione failed to pay even that portion of the company’s debt to the ATO.
Accordingly, I reject the contention that the first complaint made by the respondents, warrants the holding of an inquiry under s 536 of the Corporations Act.
The second and third complaints are related, namely, whether Mr Lean in commencing and prosecuting this proceeding, and the applicant, Mr Trinick, in pursuing this proceeding, each acted in breach of duty, because the return to the creditors unrelated to the respondents, would be minimal, after the fees incurred by Mr Lean and Mr Trinick and legal fees were deducted.
The respondents pleaded that only a “small fraction” of any judgment obtained against each respondent would ultimately be paid to the ATO. The balance of the judgment amount, said the respondents, would be used to reimburse the liquidators for their fees and disbursements. In support of this contention, the respondents referred to a schedule which showed that by 10 February 2014, the total for liquidators’ fees and disbursements (other than legal fees) was $81,515.62; and legal fees were $52,000 (which sum included unbilled work in progress), making a grand total of $133,515.62. However, during cross-examination, Mr Lean, who had paid the legal fees personally, said that the litigation had cost him $125,000 – which is in excess of the $52,000 referred to in the schedule. The respondents contended that the $52,000 amount for legal fees should, accordingly, be increased by an additional $73,000 which would bring the total fees and disbursements (including legal fees) to $206,515.62.
The respondents have not, in my view, established that an inquiry in respect of the impugned conduct of the applicant and Mr Lean is warranted.
This is because I do not accept that this is a case where it could be said that there was “little or no likelihood” of recovery going beyond the recovery of the liquidators’ fees and disbursements. A judgment (including interest) in favour of the applicant would be for more than $394,000. That is a sum substantially in excess of the sum of $206,515.62 for liquidators’ fees and disbursements postulated by the respondents. Further, the respondents would be liable to pay a substantial portion of the legal costs of a successful claim. It is apparent, therefore, that the successful prosecution of this litigation would yield a reasonable recovery in respect of the debt owed to the ATO.
In any event, having heard the evidence in this case and having made findings in relation to the conduct of each of the respondents, which I have made, it is apparent that Mr Lean was justified in the public interest in commencing, and the applicant was justified in continuing, this proceeding. (See, Poolman at [128].)
It follows, therefore, that the respondents have failed in their application that the Court should order an inquiry into the conduct of Mr Lean and the applicant.
COMPENSATION
The next question is the quantum of the loss or damage which the applicant is entitled to claim as a debt due to the company under s 588M(2) of the Corporations Act.
That section permits a liquidator to claim an amount equal to the amount of loss or damage suffered by a creditor in respect of a debt incurred by the company in breach of a director’s duty under s 588G of the Corporations Act which the creditor has not been able to recover by reason of the company’s insolvency.
There are two creditors in respect of which the liquidator is entitled to recover an amount equal to the amount of loss and damage suffered by each of those creditors, namely, the ATO and Mr Frank Forgione.
I deal first with the amount claimed in respect of the loss suffered by the ATO. As mentioned, in his closing submissions, the applicant said that his claim was founded on debts incurred to the ATO, as recorded in the RBA, which commenced with the debt having the effective date of 29 October 2001 arising from the lodging of the company’s BAS on 20 November 2001 and the debt ending with the general interest charge of $130.19 having an effective date of 7 November 2004 which was the last balance date before the company was wound up on 20 December 2004. At that date, the deficit of the RBA was $129,680.76.
The deficit of the RBA prior to the incurring of the debt on 29 October 2001, arising from the lodgement of the BAS statement on 20 November 2001 was $9,196.72.
However, it is relevant to observe that the company did, during the period of 21 November 2001 to 19 May 2004, make the following payments in reduction of the debit balance of the RBA:
(a)$4,754.30 paid on 21 November 2001;
(b)$5,000 paid on 23 April 2003;
(c)$375 paid on 27 June 2003;
(d)$1,000 paid on 19 May 2004.
It is also relevant to have regard to the fact that Mr Frank Forgione resigned as a director of the company on 3 June 2004 and the debit balance of the RBA at the last balance date before his resignation was $100,279.75. That debit balance amount, of course, takes into account the four payments which were made by the company in reduction of the deficit of the RBA at the time that each payment was made. The four payments which were made, of course, extinguished the pre-existing debt of $9,196.72 which existed at 29 October 2001, as well as reducing by a small amount ($1,932.58) a portion of the total debt which debt was incurred by the company to the ATO by reason of the contravention by each of Mr Frank Forgione and Mr Peter Forgione of his duty under s 588G of the Corporations Act.
The respondents contended that the credit to be accorded to the payments made to the ATO should be applied to reducing the ATO debt which was incurred in the same financial year as the amount was paid. I do not accept that there is a sound basis to treat the payments as being confined in such a way. I apply the principle that the payments which were made are to be treated as extinguishing the oldest debt.
It follows, therefore, that the debt incurred during the period 29 October 2001 to 28 May 2004 being the last balance date of the RBA before Mr Frank Forgione’s resignation, was $100,279.75.
It also follows, that subject to the way in which the $10,000 payment made by Mr Frank Forgione in June 2005 is to be treated, the ATO suffered a loss during the period when both Mr Peter Forgione and Mr Frank Forgione were directors of the company in the sum of $100,279.75.
In relation to the way in which the $10,000 which Mr Frank Forgione paid to the ATO in June 2005, is to be treated, I accept the applicant’s contention that it is appropriate that that amount be deducted from the amount in respect of which Mr Frank Forgione would otherwise be liable. Accordingly, I find that the amount equal to the loss or damage suffered by the ATO during the period 29 October 2001 to 3 June 2004, is $90,279.75.
On the basis of the findings which I have made, Mr Peter Forgione and Mr Frank Forgione are jointly and severally liable to the applicant in respect of this amount of $90,279.75.
The applicant claimed that the amount equal to the amount of loss or damage suffered by the ATO during the period 4 June 2004 to 20 December 2004, when the company went into liquidation and Mr Peter Forgione was the sole director of the company, is $29,401.01. However, that amount includes an interest amount of $130.19 which was incurred after Mr Peter Forgione had appointed Mr Lean as administrator on 1 November 2004. In my view, Mr Peter Forgione ought not be liable for that amount of $130.19. The applicant is, therefore, entitled to the sum of $29,270.82 from Mr Peter Forgione in respect of the loss suffered by the ATO.
In addition, the ATO suffered a loss by reason of the company’s failure to pay the amount of $17,756.30 pursuant to the assessment issued by the ATO in respect of the unpaid superannuation contributions. This assessment was issued in August 2004 after the date that Mr Frank Forgione resigned as a director. The respondents contended that this debt only became due on the issue of the assessment for the sum of $17,756.30. The applicant was, for the purposes of the proceeding, prepared to accept that contention, and so the applicant claims the sum of $17,756.30 against Mr Peter Forgione only. I find that the applicant is entitled also to the sum of $17,756.30 from Mr Peter Forgione.
The other creditor who suffered loss by reason of the insolvency of the company is Mr Frank Forgione. In relation to that claim, the applicant claims the amount of $113,807, being the amount which was advanced by Mr Frank Forgione to the company in 2003.
The applicant only makes this claim against Mr Peter Forgione on the basis that the evidence did not permit the applicant to make a submission that any of the debts comprising the sum claimed were incurred during the period before Mr Frank Forgione resigned as a director.
Accordingly, I find that the applicant is entitled to a payment of $113,807 against Mr Peter Forgione.
The applicant will also be entitled to interest on the amounts which I have found are liable to be paid by each of Mr Frank Forgione and Mr Peter Forgione to the applicant.
The parties are to produce a minute of orders which reflects the findings in these reasons for judgment and includes an amount in respect of interest within 14 days.
I will also hear the parties on costs.
I certify that the preceding five hundred and twenty-two (522) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis. Associate:
Dated: 26 June 2015
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