Judgment summary
This is a decision of the Federal Court of Australia arising from an application by a liquidator against the first and fifth defendants concerning the insolvent trading and phoenixing of a formwork business conducted through Eastside Formwork Pty Ltd (the Company) [1]-[2].
The liquidator alleged that Mrs Connie Stojic, although not formally appointed, acted as a de facto director or officer of the Company from its incorporation, and that she and her husband, Mr Dane Stojic (an agreed de facto or shadow director), engaged in a Scheme to leave debts, including to the Australian Taxation Office, behind in the Company while transferring value to related entities Buildquip Pty Ltd and Eastside Holdings Pty Ltd, and to Mr Stojic personally [2], [25]-[27].
The Court found that Mrs Stojic was a de facto director and/or officer of the Company [243], that the Company was presumed insolvent from incorporation under s 588E(4) due to a failure to maintain proper books and records under s 286, and was actually insolvent from 20 June 2017 [289], [308]. The Court found that Mrs Stojic breached her duties under ss 180, 181, 182 and 588G of the Corporations Act 2001 (Cth), was liable under the first and second limbs of Barnes v Addy, and that Buildquip was liable under the second limb [26]-[27]. Mrs Stojic and Buildquip were also found liable as accessories to breaches by Mr Stojic and Mr Zaidan [389].
Background
Eastside Formwork Pty Ltd (the Company) was incorporated on 9 April 2015 and provided formwork contracting services to builders [16]. Mrs Stojic was the Company's sole shareholder until December 2016, when Mr Mohammed Zaidan became the sole director, secretary and shareholder, holding shares non-beneficially [6], [35], [39]. Mr Zaidan's evidence, uncontested, was that he was a director, secretary and shareholder "in name only" [5], [116].
Mr Dane Stojic, Mrs Stojic's husband, was agreed to have been a de facto and/or shadow director of the Company since incorporation, and was an employee and undischarged bankrupt who did not participate in the trial [4], [22].
The liquidator alleged that the Business had previously been conducted by earlier related entities, including Rediform NSW and Rediform Contracting, before being taken over by the Company, and that the Business was later slated to be taken over by a further entity, Eastside Formwork Group Pty Ltd (EFG) [2], [18]-[19].
On 16 July 2020, receivers and managers were appointed to the Company by its secured creditor, Australian Invoice Finance Limited (AIF). The Company was placed into voluntary administration on 12 October 2020 and into liquidation on 13 November 2020 (the Winding Up Date) [17].
The Company made substantial payments to Buildquip (of which Mrs Stojic was sole director, secretary and shareholder), to Eastside Holdings Pty Ltd (of which Mrs Stojic was also sole director and shareholder), and to Mr Stojic, which the liquidator alleged were uncommercial or made for no, or inadequate, consideration (the Transfers) [3], [7], [314]-[359].
Core dispute
The central dispute was whether Mrs Stojic was, despite not being formally appointed, a de facto director or alternatively an officer of the Company under ss 9AC, 9AD and the equivalent definitions in s 9 of the Corporations Act 2001 (Cth) [127]-[146]. Mrs Stojic contended that her involvement was merely administrative, undertaken to assist her husband, and that Mr Zaidan was the true owner and controller of the Company [34], [137].
A further dispute concerned whether there was a Scheme, as pleaded, involving phoenixing of the Business through successive entities to leave debts behind for creditors, including the ATO [2], [95]-[113].
The parties also disputed whether the Company was actually or presumptively insolvent, including whether the Company had failed to keep proper books and records under s 286, entitling a presumption of insolvency under s 588E(4) [244]-[308].
A significant contest concerned the genuineness of invoices tendered by the defendants (particularly Buildquip invoices) to justify the Transfers as legitimate business expenses, and whether the liquidator was required to plead fraud to challenge those documents [318]-[337].
Finally, the parties disputed whether Mrs Stojic breached statutory directors' duties (ss 180, 181, 182, 588G) and fiduciary duties, whether she and Buildquip were liable under the first and/or second limbs of Barnes v Addy, and whether Mrs Stojic and Buildquip were liable as accessories for breaches by Mr Stojic and Mr Zaidan under s 79 [309]-[389].
Court findings
The Court found that the evidence overwhelmingly supported the existence of a Scheme, pointing to Mr Zaidan's role as a nominee/stooge director, Mrs Stojic's willingness to sign bare trust deeds, her financial involvement including mortgaging her family home, and her denial that EFG was incorporated to take over the Business [126].
The Court found Mrs Stojic to be a de facto director and/or officer of the Company, relying on her use of the Company Admin Email, her role in negotiating the factoring arrangement with AIF and mortgaging her home as security, her conduct of negotiations for the sale of the Business, her instructions to employees, solicitors and accountants of the Company, and her correspondence with customers and creditors [170], [178], [209], [221], [234], [240]-[243].
On credit, the Court found Mrs Stojic's evidence unreliable save where corroborated by contemporaneous documents, citing her denial of involvement in doctoring remittance advices sent to AIF despite clear documentary evidence to the contrary [52]-[67].
The Court drew adverse inferences under the Jones v Dunkel principle from the defendants' failure to call Mr Stojic, Ms Banco, Mr Rao or Mr Mikulic, and from Mrs Stojic's failure to produce full books and records [68]-[79].
The Court found the Company was presumed insolvent from the Incorporation Date under s 588E(4) due to a failure to comply with s 286, based on findings that the iKeep general ledger was a post hoc reconstruction rather than a contemporaneous record [284]-[289]. In the alternative, the Court found the Company was actually insolvent from 20 June 2017 [308].
The Court found that the Buildquip invoices relied upon by Mrs Stojic were not genuine contemporaneous business records but were created by her between two tranches of her examination in bankruptcy, and that the Buildquip payments, Holdings payments, and payments to Mr Stojic were each uncommercial and made without, or without adequate, consideration [335]-[336], [352], [359].
The Court found Mrs Stojic breached her duties under ss 180(1), 181(1) and 182(1) and s 588G(2) of the Corporations Act, was liable under the first and second limbs of Barnes v Addy in relation to the Buildquip Transfers, and that Buildquip was liable under the second limb [363], [377], [383].
The Court further found Mrs Stojic and Buildquip liable as accessories for breaches of statutory and fiduciary duties by Mr Stojic and Mr Zaidan pursuant to s 79 [389], and found the net Buildquip payments to be voidable transactions under Pt 5.7B of the Corporations Act [394].
Outcome
The Court was prepared to make the orders sought by the plaintiffs [395]. The parties were directed to provide draft orders reflecting the Court's reasons within 14 days [Order 1]. Unless notified of an application for a special costs order within 14 days, the defendants were ordered to pay the plaintiffs' costs [Order 2], [28], [395].
Major issues / areas of contention
- Whether Mrs Stojic was a de facto director or, alternatively, an officer of the Company under the Corporations Act.
- Whether there was a Scheme involving the phoenixing of the formwork business through successive entities to leave debts, including ATO debts, with the Company.
- Whether adverse inferences should be drawn under the rule in Jones v Dunkel from the defendants' failure to call available witnesses, including Mr Stojic, and from the failure to produce full books and records.
- Whether the Company was actually insolvent, or presumed insolvent under s 588E(4) due to a failure to maintain financial records as required by s 286.
- Whether the payments to Buildquip, Eastside Holdings and Mr Stojic (the Transfers) were uncommercial transactions made for no, or inadequate, consideration.
- Whether the liquidator needed to plead fraud in order to challenge the genuineness of invoices tendered by the defendants to justify the Transfers.
- Whether Mrs Stojic breached statutory duties under ss 180, 181 and 182 of the Corporations Act and her fiduciary duties as director or officer.
- Whether Mrs Stojic breached her duty to prevent insolvent trading under s 588G(2) of the Corporations Act.
- Whether Mrs Stojic and Buildquip were liable under the first and/or second limbs of Barnes v Addy with respect to the Transfers.
- Whether Mrs Stojic and Buildquip were liable as accessories under s 79 for breaches of statutory and fiduciary duties by Mr Stojic and Mr Zaidan.
- Whether the payments made by the Company to Buildquip were voidable transactions under Pt 5.7B of the Corporations Act.