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

IN THE MATTER OF FORGIONE FAMILY GROUP PTY LTD (ACN 009 363 464) (IN LIQUIDATION)

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 MATTER OF FORGIONE FAMILY GROUP PTY LTD (ACN 009 363 464) (IN LIQUIDATION)

REASONS FOR JUDGMENT

1    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.

2    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.

3    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.

4    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.

5    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).

6    By the time the matter came to trial, Mr Lean had been replaced by Mr Glenn Trinick as liquidator of the company.

7    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.

8    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.

9    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.

10    In addition, the applicant claimed interest.

11    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.

…

12    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.

13    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.

14    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.

15    The respondents deny the allegations that the company was presumed to have been, or was actually insolvent.

16    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.

17    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.

18    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.

19    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.

20    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.

21    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.

22    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

23    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.

24    In about 1994, Mr Gary Philpott of Lincolns commenced providing taxation and accounting services to the company.

25    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.

26    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.

27    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.

28    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.

29    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.

30    On 27 July 2001, the company changed its name from Southland Holdings Pty Ltd to the Forgione Family Group Pty Ltd.

31    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.

32    On 30 July 2001, the company registered its business name as Picton Print and Design.

33    On 1 August 2001, the company made a payment of $1,392 against the RBA deficit reducing the deficit to $4,648.70.

34    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.

35    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.

36    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.

37    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.

38    On 13 February 2002, the company’s monthly repayment of $824.35 in respect of its BankWest loan was dishonoured.

39    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.

40    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”.

41    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.

42    On 15 April 2002, the company’s monthly payment to its BankWest loan of $824.35 was dishonoured.

43    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.

44    On 14 May 2002, the company’s monthly repayment to the BankWest loan of $824.35 was dishonoured.

45    By 28 May 2002, the deficit in the company’s NAB business cheque account had grown to $46,082.67.

46    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.

47    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.

48    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.

49    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.

50    At 30 June 2002, the company had a working capital deficiency of $94,816.

51    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.

52    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.

53    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.

54    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.

55    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.

56    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.

57    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.

58    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.

59    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.

60    On 16 July 2003, the company’s monthly repayment to its BankWest loan of $895 was dishonoured.

61    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.

62    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.

63    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.

64    After Mr Peter Forgione moved to Perth and began working for the Picton Group, the company ceased trading.

65    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.

66    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.

67    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.

68    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.

69    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.

70    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.

71    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.

72    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.

73    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.

74    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.

75    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.

76    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.

77    On 17 May 2004, the company made a payment of $1,000 to the ATO thereby reducing the RBA deficit to $99,073.90.

78    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.

79    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.

80    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.

81    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.

82    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.

83    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.

84    The NAB writ also claimed possession of 340 Middleton Road, Albany being the property mortgaged to the NAB.

85    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.

86    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.

87    The company’s debt to the NAB was still outstanding at the time that the company went into administration and liquidation.

88    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.

89    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

90    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.

91    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.

92    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.

93    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.

94    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.

95    Mr Philpott also stated in the letter that the ATO would start collection proceedings in respect of the debt.

96    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.

97    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.

98    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.

99    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”.

100    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.

101    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.

102    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.

103    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:

104    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.

105    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.

106    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.

107    On 8 November 2004, the first meeting of the company’s creditors took place.

108    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.

109    On 29 November 2004, the second meeting of the company’s creditors was held. The meeting was adjourned to 20 December 2004.

110    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.

111    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.

112    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.

113    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.

114    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 numbers

2.    That the company be placed into liquidation.

Moved: ATO

Seconded: Mr Francesco Forgione

    Carried Unanimously

3.    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 Unanimously

115    On 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.

116    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.

117    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

118    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.

119    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.

120    In 2006, Mr Frank Forgione sold his hairdressing business.

121    On 28 May 2009, these proceedings were commenced.

122    On 21 December 2011, Mr Trinick was appointed liquidator of the company in place of Mr Lean.

123    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

124    Mr Lean gave evidence as part of the case for the applicant liquidator, Mr Trinick.

125    Mr Lean was a blunt and generally speaking, inarticulate witness. At times, he demonstrated an impatient and irascible demeanour.

126    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.

127    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

128    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.

129    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.

130    Mr Lopez was an impressive witness and I accept his evidence.

Mr Frank Forgione

131    Mr Frank Forgione gave evidence and was cross-examined.

132    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.

133    I have not accepted very much of Mr Frank Forgione’s evidence.

Mr Peter Forgione

134    Mr Peter Forgione gave evidence and was cross-examined.

135    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.

136    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

137    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

138    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.

139    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

140    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.

141    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

142    I deal now with the issue of presumed insolvency.

143    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.

144    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.

145    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.

146    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.

147    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.

148    The term “financial statements” is defined as meaning, in these circumstances, annual financial statements.

149    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”.

150    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.

151    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.

152    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.

153    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.

154    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.

155    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.

156    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.

157    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.

158    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.

159    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.

160    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

161    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.

162    I make the following findings of fact in relation to this issue.

163    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.

164    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.

165    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.

166    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.

167    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.

168    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.

169    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.

170    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.

171    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.

172    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.

173    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.

174    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.

175    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.

176    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.

177    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.

178    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.

179    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.

180    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.

181    On the basis of the findings made above, I find that the financial records of the company were not retained beyond 12 August 2005.

182    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.

183    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.

184    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.

185    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.

186    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.

187    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.

188    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.

189    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.

190    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.

191    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.

192    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.

193    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).

194    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).

195    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.

196    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.

197    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.

198    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).

199    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.

200    In considering whether Devine Homes had failed to “retain” financial records for seven years as required by s 286(2) of the Corporations Act, Barrett J said that the question was whether by virtue of Mr Harb’s delivery of the documents to the accountant, Shafeel, Devine Homes, had failed to retain the documents. Barrett J went on to observe that it was “strictly speaking not possible to identify any ‘failure’ of Devine Homes in relation to the retention of documents by reason of Mr Harb’s delivery to the accountant”. This is because, Barrett J found that after 16 April 2007 when Mr Allen was appointed liquidator, Mr Harb’s power as a director of Devine Homes was no longer exercisable except as the liquidator or as a court may specifically allow.

201    Barrett J observed at [34] in Devine Homes:

The act of delivering the documents to the accountant was, therefore, not an act of Devine Homes. It was an act of a person neither qualified nor entitled to act for Devine Homes.

202    Barrett J then went on to observe that if he was wrong in relation to that analysis, s 588E(6) precluded the liquidator from relying upon the presumption of insolvency arising from the failure of the company to keep or retain financial records, against Mr Harb. This was because Mr Harb had proved all of the facts identified in the three conditions identified in s 588E(6)(a), (b) and (c) of the Corporations Act.

203    In this case, by contrast, the respondents did not seek to rely upon, or invoke, s 588E(6)(a), (b) and (c). Rather, as mentioned, the respondents relied (see para 10 of Mr Peter Forgione’s further amended substituted defence (Peter’s defence), and para 7 of Mr Frank Forgione’s amended substituted defence (Frank’s defence)) solely upon the contention (based upon Barrett J’s observations in Devine Homes (set out at [201] above) that in removing the company’s documents from their former storage location and then losing the documents, Mr Frank Forgione was not acting as a director of the company or otherwise as a person qualified or entitled to act on behalf of the company, and, therefore, the removal of the documents and their subsequent disappearance, was not the act or omission of the company, and, therefore, not a failure by the company to retain the records for seven years in contravention of s 286(2) of the Corporations Act.

204    For the following reasons, I do not accept the respondents’ contention.

205    The statutory scheme reflected in s 286(1) and s 286(2) of the Corporations Act, broadly stated, is that s 286(1) requires a company to keep such written records of the transactions occurring during the course of a financial year as would enable true and accurate financial statements to be prepared; whereas s 286(2) requires that those records then be retained for a period of seven years after the relevant transactions are completed.

206    It is apparent that in Devine Homes, Barrett J posited two possible constructions of the relationship between s 286(2) and s 588E of the Corporations Act (see [201] and [202] above). I prefer, for the following reasons, the second of the possible constructions posited by Barrett J.

207    When s 286(2) is considered in the context of s 588E, it is apparent that the obligation which s 286(2) imposes is an obligation imposed upon the company which continues for the period of seven years from the date of the relevant transactions. It is, as is stated in s 286(3), a strict liability obligation. In my view, therefore, because the obligation is a strict liability obligation, the company will be in breach of the obligation if the documents are lost or destroyed during the seven year period whether or not this occurred by reason of any fault by a person acting as an officer or agent of the company at the relevant time.

208    This construction, in my view, is congruent with the terms of s 588E(6) which provides, in effect, that the presumption of insolvency arising from a contravention of s 286(2), will not apply to the prejudice of a person (most likely a potential defendant to a recovery claim), if it is shown that that person was not involved in the loss or destruction of the company records which gave rise to the contravention.

209    This construction also promotes the purpose of this part of the legislation, namely, to assist a liquidator in bringing recovery actions (including recovery actions against former directors for insolvent trading) when it is necessary to prove insolvency and the company’s financial records are not available. That legislative purpose is not promoted by the construction which would hold that the presumption does not arise where, after the appointment of a liquidator, a former director loses or destroys company records, on the grounds that the former director, did not at that time have authority to act on behalf of the company.

210    It is apparent, therefore, that, notwithstanding, that in 2005, when the documents were removed and lost by Mr Frank Forgione, Mr Lean, and not Mr Frank Forgione, was the authorised officer of the company, it is the company which has, by reason of Mr Frank Forgione’s acts and omissions, failed to comply with its obligations under s 286(2) of the Corporations Act.

211    As mentioned, neither Mr Frank Forgione, nor Mr Peter Forgione, pleaded nor sought to invoke s 588E(6)(a), (b) and (c) in answer to the applicant’s contention.

212    It follows that I find that the company is presumed to have been insolvent during the period 1 July 2001 to 30 June 2004, for the purpose of the applicant bringing the proceeding against Mr Frank Forgione and Mr Peter Forgione.

213    The respondents did, however, seek to rebut the presumption that the company was insolvent during the periods 1 July 2001 to 30 June 2004.

mr frank forgione as a source of funding to meet the company’s debts

214    The respondents contended that the company was not insolvent during the period in question because Mr Frank Forgione was, at all times prior to late 2004, ready, willing and able to provide finance to the company to permit it to pay its debts as and when they fell due. More specifically, Mr Frank Forgione pleaded this contention in para 22(a) of his defence in the following terms:

(iv)    [Frank] provided funding on the terms pleaded in paragraph 19 of this amended substituted defence to the company as was required from time to time to enable the company to meet its debts as and when they became due and payable; and

(v)    At all times prior to late 2004 [Frank] remained ready, willing and able to provide such funding to the company as was required form time to time to enable the company to pay its debts as and when they became due and payable including any funding that might be required to pay the alleged debts referred to in this claim as the “debts”.

215    The reference in para 21(a) of the defence, to para 19 of the defence, is a reference to Mr Frank Forgione’s claim that he provided the funding on terms that it was “deferred or subordinated to ordinary unsecured creditors”. Mr Peter Forgione pleaded to similar effect in para 21(a) of his defence.

216    Mr Frank Forgione gave evidence in his witness statement that he, at all times, intended to support the company financially and that he was always ready, willing and able to provide funds to the company to permit it to pay its debts as and when they fell due.

217    In his witness statement, Mr Frank Forgione said that although he was not actively involved in managing the company in 2001, he said to Mr Peter Forgione “on a number of occasions” words to the following effect: “If the company needs money, let me know, I will provide it.”

218    Mr Peter Forgione also gave evidence in his witness statement that in 2001, his father began to take a less active role in the company and said to him on a number of occasions words to the following effect:

I will stand behind Picton Print and Design financially and will help you as and when you need.

219    Mr Peter Forgione said that he believed this was true and that his father had the capacity to do so.

220    In his evidence-in-chief, Mr Peter Forgione gave evidence that he did not approach his father to provide financial support to the company until February 2004, and that he made the approach only after he had received the penalty notice from the ATO in January 2004.

221    Mr Peter Forgione’s explanation for not approaching his father before February 2004, to pay the company’s creditors, was that up to that time, he believed the creditors would be paid with the proceeds of the proposed merger of the business with the Picton Group. Mr Peter Forgione said in evidence-in-chief that when it became clear that the merger would not go ahead, he provided his father with a list of trade creditors and his father paid them from his own personal funds.

222    Mr Peter Forgione was cross-examined about the plausibility of this explanation. Mr Peter Forgione agreed that there was no documentation which supported the contention that there were negotiations between the company and the Picton Group in relation to a merger.

223    Further, the following cross-examination occurred:

Now, you say, in or around February 2004, you had a conversation with your father in relation to the payment of the company’s outstanding creditors. Now, first of all, this is the first occasion on which you spoke to your father about the company’s financial predicament, correct?---That is correct.

And why do you date this conversation as at, in or around February of 2004?---I don’t know exactly why because – it would have been the reason for when I received the demand from the ATO.

224    Mr Peter Forgione also agreed during cross-examination that the only possible thing that could be sold to the Picton Group was the company’s equipment. The following exchange occurred:

So the only thing that would be sold to Picton, according to you, in these negotiations or any possible merger was the company’s equipment; correct?---Yes.

225    Mr Peter Forgione was then taken to the estimate of the company’s financial position which was carried out by Mr Philpott in October 2014 and sent to Financial Crisis Recovery. In that document Mr Philpott valued the company’s printing plant and equipment at approximately $5,000. The following cross-examination then occurred:

Do you see under the heading Assets, there’s an entry “printing, plant and equipment, approximate sale value $5000”?---Yes.

That was the value, in your discussions with Mr – with Mr Philpott of Lincolns that you and your father had put upon the sale – put upon that equipment, wasn’t it?---Well, I don’t recall that.

Did you say – do you recall saying to Mr Philpott - - -?---No.

- - - “It’s worth a lot more than that”?---No. I didn’t speak much to Philpott at that time.

226    Mr Peter Forgione also accepted that under the proposed merger he would work for the Picton Group and then the following exchange occurred:

And it was to be you, not the company, that would acquire that share in Picton. Correct?---Don’t know.

Okay. Do you recall discussing the fact that you would need to borrow moneys to acquire that share in Picton Proprietary Limited?---No.

You just don’t recall that, either way. And you would work for Picton?---I did work for a period of time. Yes.

But under the proposed merger, you would work for Picton?---Yes.

And be paid a wage?---Correct.

Yes. Now, from that discussion with the Picton representatives, where was the money going to come from to pay out the company’s creditors?---I’ve no idea.

227    I do not accept Mr Peter Forgione’s evidence that the reason he did not approach his father for financial assistance to pay the company’s debts before February 2004, was because he expected to be able to pay those debts from monies obtained from the proposed merger with the Picton Group. That evidence is simply implausible, as Mr Peter Forgione, in effect, acknowledged in cross-examination.

228    I find that the reason Mr Peter Forgione did not approach Mr Frank Forgione for financial assistance to permit the company to meet its debts as and when they fell due prior to February 2004, was because Mr Frank Forgione had not made any promise or other statement to him to the effect that he would provide the company with funds, if the company needed funds, to meet its debts as and when they fell due. I find that the approach made by Mr Peter Forgione to his father for funds in February 2004, was prompted by a specific circumstance, namely, the issue of the demand by the ATO, and not pursuant to any pre-existing undertaking or promise or representation by Mr Frank Forgione to provide the company with funds to permit the company to meet its debts as and when they fell due.

229    Further, Mr Frank Forgione’s evidence of his willingness to advance funds to the company to permit the company to pay its debts as and when they fell due, is to be assessed by reference to his actual conduct when he was given the opportunity to give effect to his asserted willingness to provide funds to the company for the purpose of meeting its debts as and when they fell due.

230    In light of that assessment, I do not accept Mr Frank Forgione’s evidence that he was at all times prior to late 2004, ready, willing and able to provide such funding to the company from time to time to pay its debts as and when they fell due.

231    This is because Mr Frank Forgione was presented with a number of opportunities prior to the company going into administration, to put the company in funds to meet its debts, even after they had fallen due, and he failed to do so.

232    In other words, Mr Frank Forgione’s evidence proclaiming his intention and continuing willingness to support the company financially so as to permit it to meet its debts as and when they fell due, does not survive scrutiny when assessed by reference to what he actually did, when given the opportunity to give effect to this professed intention and willingness. In short, Mr Frank Forgione failed to act consistently with his professed state of mind. Accordingly, I find that Mr Frank Forgione did not have the intention nor the willingness to which he deposed. I have come to this view for the following reasons.

233    In January 2004, Mr Frank Forgione had an opportunity to demonstrate his willingness to advance money to the company to pay all of its debts, even after the debts had fallen due.

234    In that month, the ATO issued a penalty notice to Mr Frank Forgione arising from the company’s failure to pay PAYG withholding instalments to the ATO. The notice which Mr Frank Forgione received identified the two payments in relation to PAYG withholding instalments which the company had failed to make, being $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. Notwithstanding that the ATO’s penalty notice advised Mr Frank Forgione of the company’s default, and of the precise amount of the company’s liability - and the fact that the total sum demanded by the ATO was relatively small - Mr Frank Forgione did not advance the company monies to pay the amount demanded in the ATO’s penalty notice, let alone the outstanding RBA liability at that date.

235    About two months later, in March 2004, Mr Frank Forgione had another opportunity to demonstrate his willingness to provide the company with funds to permit it to pay all of its debts, even after the debts had fallen due. On this occasion, a notice of default dated 4 March 2004, addressed to the company and to each of Mr Peter Forgione and Mr Frank Forgione, was issued by the NAB. This notice of default advised that the company had not met its obligations in respect of two financial facilities which the company had with the NAB. The notice of default advised of the amounts which the company, or each of the guarantors, needed to pay into the two bank accounts in order to remedy the default. Mr Frank Forgione did not advance the monies to the company to permit it to remedy the default, notwithstanding that the amount required to remedy the default was relatively modest – being $2,778 in respect of the investment loan account, and $77.18 (and interest and costs) in respect of the business cheque account.

236    The next opportunity for Mr Frank Forgione to demonstrate his willingness to place the company in funds to discharge all of its debt obligations as and when they fell due, was when Mr Frank Forgione received a second penalty notice from the ATO dated 28 April 2004. This notice advised of the company’s failure to remit PAYG withholding instalments in the amounts of $4,269 for the period 1 January 2003 to 31 March 2003 and $3,800 for the period 1 April 2003 to 30 June 2003. The notice required the payment of the total sum of $8,069 due by the company within 14 days. Notwithstanding that Mr Frank Forgione was advised of the precise amount that was due by the company to the ATO, Mr Frank Forgione did not put the company in funds in order to permit the company to pay the ATO penalty notice, let alone the outstanding RBA liability at that date.

237    I place no weight on Mr Frank Forgione’s evidence that, at about this time, he made a telephone call to Ms Simons of the ATO to inquire about the penalty notices, as comprising a satisfactory explanation, consistent with his asserted willingness to place the company in funds to discharge all of its debts as and when they fell due. The tenor of Mr Forgione’s evidence was that he was seeking to understand the basis of the claim that he was personally liable to pay the company’s tax debts. However, whatever may have been Mr Forgione’s confusion about his personal liability, each penalty notice clearly advised of the company’s default and the amounts required to discharge the company’s liability. There was no room for any confusion as to the fact that the company was in default of its obligations to pay its tax debts; and, notwithstanding this obvious fact, Mr Frank Forgione did not place the company in funds to permit it to meet these tax debts to the ATO, which were well past being due.

238    During the period sometime around March 2004 to June 2004, Mr Frank Forgione did advance monies totalling about $122,000 to the company to pay outstanding debts to certain of the creditors. However, Mr Frank Forgione’s willingness to advance monies to assist the company pay its debts, plainly did not extend to advancing funds to the company to permit it to meet the demands being made on the company by the ATO and the NAB in respect of debts which were then past being due.

239    In August 2004, Mr Frank Forgione had a further opportunity to demonstrate his willingness to advance money to the company to pay its debts as and when they fell due. On 6 August 2004, the NAB commenced proceedings by issuing a writ against the company, claiming that the company owed the amount of $39,262.85 under the business secured variable instalment loan facility – being one of the accounts in respect of which the notice of default (see [235] above) had been issued in March 2004 - some four months earlier. Mr Frank Forgione was also a defendant to the writ by reason of a claim by the NAB that Mr Frank Forgione was a guarantor of the company’s obligations under that loan facility.

240    However, rather than placing the company in funds to pay the debt claimed by the NAB, Mr Frank Forgione disputed his personal liability as a guarantor of the debt and defended his personal liability on the basis of a claim that he had not signed the guarantee. The debt owed by the company to the NAB was never paid.

241    Later in August 2004, Mr Frank Forgione had another opportunity to demonstrate his willingness to put the company in funds in order to permit the company to pay its debts as and when they fell due, when the company was served with a statutory demand by the ATO. The statutory demand was for a total amount of $131,667.09. The statutory demand stated the precise amount to be paid, placed a time limit of 21 days within which the company should make the payment, and stated that in the event that the amount was not paid by the due date, the ATO may rely upon the default to make an application to court for the winding-up of the company. However, notwithstanding the dire consequences facing the company if the demand was not met, Mr Frank Forgione did not take the opportunity, on the service of that demand, to put the company into funds so as to permit the company to pay the monies demanded; nor did Mr Frank Forgione put the company into funds so as to permit the company to take any action to set aside, or otherwise dispute the amount of the debt which was claimed in, the statutory demand. In other words, Mr Frank Forgione did not put the company in funds to permit it to meet the statutory demand, or otherwise to take steps to avoid the prospect of the company being wound up, when he had the opportunity to do so.

242    Mr Frank Forgione had yet another opportunity to demonstrate his willingness to put the company in funds to pay its debts as and when they fell due when, in late September 2004, Mr Philpott sent Mr Frank Forgione a letter advising him and Mr Peter Forgione that the ATO had issued an assessment for $17,756.30 for unpaid superannuation contributions. Notwithstanding, that in the letter Mr Philpott advised that the ATO would start collection proceedings, Mr Frank Forgione did not place the company in funds in order to meet this assessment.

243    The next opportunity Mr Frank Forgione had to put the company into funds so as to permit it to pay its debts as and when they fell due, was on 1 October 2004 when Mr Philpott advised Mr Frank Forgione in writing of the amount of the company’s ATO debt. This amount included a notional refund in respect of its income tax instalments on the assumption that this refund would be made on the lodging of the company’s outstanding tax returns. However, notwithstanding that Mr Philpott had advised Mr Frank Forgione of the extent of the company’s debts, including the debt owed to the ATO, Mr Frank Forgione did not take the opportunity to put the company into funds so as to meet the outstanding debts then due by the company to the ATO, even on a basis that took into account the notional refund.

244    On the basis that Mr Frank Forgione eschewed on each of the foregoing occasions the opportunity to pay the company’s debts even after they had fallen due, I do not accept Mr Frank Forgione’s evidence that he was at all times prior to late 2004, ready, willing and able to meet the company’s debts as and when they fell due.

245    Accordingly, I reject the respondents’ contention that Mr Frank Forgione was, until late 2004, ready, willing and able to provide such funding as the company required from time to time to enable the company to pay all of its debts as and when they fell due.

246    It follows that I find that the respondents failed to rebut the presumption that the company was insolvent during the period 1 July 2001 to 30 June 2004. I find, therefore, that the company was insolvent during the period 1 July 2001 to 30 June 2004.

247    It also follows that it is unnecessary to consider the applicant’s claim that the company was presumed to be insolvent during the period 1 July 2001 to 20 December 2004 by reason of its contravention of s 286(1) of the Corporations Act. However, had it been necessary to consider that question, I would have, on the basis of the uncontradicted evidence of Mr Lopez, found that the company had contravened s 286(1) of the Corporations Act in that, it failed to keep adequate financial records to permit true and fair financial statements for the financial years 2001 to 2004 to be prepared and audited.

actual insolvency

248    I now consider whether the company was actually insolvent at the time when the debts the subject of this application were incurred.

249    In support of the applicant’s claim that the company was actually insolvent at the time that it incurred the debts in respect of which the claim was brought, the applicant relied upon the expert evidence of Mr George Lopez. Mr Lopez referred to the paucity of the company’s records that had been provided to him, and the absence of records which comprised the financial records of the company. He said that the lack of records had hampered his investigations. Mr Lopez approached the question of insolvency from two perspectives, namely, an analysis of the financial statements and by assessing other indicia of insolvency.

250    Mr Lopez conducted an analysis of the financial statements of the company for each of the financial years from 1999 to 2004. He produced a summary of the information extracted from the financial statements as an annexure to his expert report. Mr Lopez noted that there were curiosities in the financial statements because there was no provision for trade creditors outstanding at the end of each financial year. He observed, however, that in relation to the years 2001 and 2002, the financial statements did show “creditors” which may have represented trade creditors, but did not necessarily do so. He observed that the financial statements for the other four years did not reveal any outstanding trade creditors. He observed that it was very unlikely that a company would have no trade creditors outstanding at any point in time, let alone on 30 June of four out of the six years. He went on to say:

The failure to reveal trade creditors may be consistent with the company not maintaining proper records of its creditors. It may also suggest that the financial statements were prepared a significant time after the end of the financial year which, together with lack of records, meant that outstanding trade creditors at the end of each reporting period may not have been known.

251    Mr Lopez also observed that the analysis of each of those financial years showed quite significant variations in costs of goods from a low of 19.4% in 2000 to a high of 69.1% in 2002. Mr Lopez said that the large variation could be explained in a number of ways including the failure to record properly sales income, changes to the sales mix and sales structure, lack of proper records of purchases, lack of records of raw material and work in progress stocks and failure to record outstanding creditors at the end of the period and failure properly to record costs of production.

252    Mr Lopez said that having regard to the foregoing matters, it was his view that the financial statements he analysed did not reflect the company’s true financial position at any point in time.

253    However, notwithstanding that qualification, Mr Lopez observed that the company experienced gradually declining sales from 1999 to 2003. And in 2004, during which financial year the company ceased trading, the sales fell to $97,121.

254    Mr Lopez also observed that the financial statements reflected that the company suffered losses in each year since 1999, except in years 2001 and 2003. Mr Lopez observed that the financial statements in 2001 reflected a nett profit of $71,101, but he said the profit was only achieved as a consequence of selling the company’s most significant assets, namely, two printing presses. Without that sale, said Mr Lopez, the company would have experienced a net loss of $57,425. Mr Lopez also observed that the financial statements in 2003 reflected a net profit of $13,629. However, Mr Lopez observed that the gross profit for that year was 79.62% of sales and observed that this percentage was anomalous when assessed by reference to other results. Mr Lopez’s opinion was that the result reflected in the 2003 financial statements was an aberration as was the result in the 2002 financial statements because the gross profit percentage for that year is shown to be “far lower than at any other time in the company’s history”. Mr Lopez went on to say that it was more likely that some of the 2002 costs of goods sold should have been charged in 2003 hence reducing the loss in 2002 and reducing the reported profit in 2003 to a loss.

255    Mr Lopez also said that the company’s net tangible assets showed a decline from 1999 to 2000, a recovery in 2001 and then a decline in trend from 2002 to 2004. In Mr Lopez’s view the recovery in 2001 may be attributed to the sale of the fixed assets for a profit, whereas the declining assets position reflected the consistent losses being suffered by the company.

256    Mr Lopez also had regard to the working capital position of the company. Mr Lopez observed that the working capital position was marginal until 2000. In 2001, however, said Mr Lopez, the sale of the printing presses converted what were essentially fixed assets into a more liquid form, namely, debtors, and the working capital improved dramatically to the extent that at the end of the year the company had current assets of $287,794 and a working capital surplus of $199,182. Thereafter, however, the current assets depleted significantly so that the working capital deficiency in 2002 was $94,816. Mr Lopez said that that figure represented a decline within one year of $294,798. He said that some of that decline could be attributed to the operating loss, whereas the use of current assets (namely, debtors) to pay out non-current liabilities being bank loans, had depleted the company’s working capital.

257    Mr Lopez went on to observe that in 2003 the company’s position appeared to improve to the extent that it showed a working capital surplus of $31,015. However, Mr Lopez observed that, in his view, for the reasons previously given, the financial statements for that year were incorrect. Mr Lopez went on to observe that, in addition, a significant component of the current assets total of $170,508 comprised a debt of $165,992 owed by Mr Peter Forgione - a debt that subsequently proved incapable of being satisfied. Thus, said Mr Lopez, if one disregarded Mr Peter Forgione’s debt the working capital deficiency for 2003 was $134,977.

258    Mr Lopez concluded that in summary his analysis of the financial statements in isolation suggested that the company may have been insolvent prior to the year ended 2001 but a sale of its major production assets at a profit provided temporary relief in that year. However, the situation deteriorated subsequently and the company never recovered from that position until it finally went into liquidation on 20 December 2004. Thus, from a financial statement perspective, Mr Lopez said that the company appeared to have been insolvent sometime between 30 June 2001 and 30 June 2002.

259    Mr Lopez then reported on his examination of other indicia of the company’s insolvency. It was Mr Lopez’s opinion that the company was insolvent from at least 28 July 2001. Mr Lopez reached that view by the following reasoning.

260    Mr Lopez first referred to an analysis of the dishonoured cheques on the NAB business cheque account - of which there were 122. Mr Lopez said it appeared that the company had experienced difficulties in paying its debts from at least 2 April 2002 when records show that the NAB began to dishonour cheques drawn by the company. Between 2 April 2002 and 13 May 2004, there were 122 instances of payments being dishonoured by the company’s banker.

261    Mr Lopez went on to say that on 29 May 2002, the company borrowed $50,000 from the NAB. The funds were paid into the company’s overdrawn business cheque account but that it was apparent that the borrowing did not increase the company’s capacity to pay its debts. The loan documentation required that the company repay the loan by regular monthly payments of $1,040 with a monthly repayment of $20,000 by 30 July 2002. Mr Lopez said that records showed that the company was unable to make the first payment of $1,040 by 30 June 2002 and further that it was unable to make the lump sum payment of $20,000 on 30 July 2002. On that basis, Mr Lopez opined that it appeared that the company was unable to pay its debts as and when they fell due from 30 June 2002 onwards.

262    Mr Lopez then considered the evidence of the company’s transactions with the ATO which showed that the company did not pay its debts due to the ATO as and when they fell due and the debt owed to the ATO continued to increase until the company finally went into liquidation. On the basis of the information provided by the ATO portal, Mr Lopez was of the view that the company was insolvent from at least 30 September 2001.

263    Mr Lopez then inferred that the company did not meet its obligations in respect of compulsory superannuation contributions from at least 28 July 2001 on the basis of the failure to meet those obligations that the company was unable to pay its debts as and when they fell due from at least 28 July 2001. Mr Lopez concluded by opining that the company was unable to pay its debts as and when they fell due from at least 28 July 2001 until 20 December 2001.

264    Mr Lopez was only cross-examined on one issue. This was whether, in reaching his conclusions as to the period during which the company was insolvent, he had considered whether the company had access to loan funding from one of its directors. Mr Lopez conceded that the question of whether funding was available to a company from a director who was ready, willing and able to provide funding to the company, was a relevant consideration in determining whether a company was insolvent. However, Mr Lopez said that he was asked not to have regard to whether the directors and, in particular, Mr Frank Forgione, were ready, willing and able to provide funding to the company for the purpose of discharging the company’s debts as and when they fell due.

265    The respondents led no expert evidence which challenged Mr Lopez’s analysis and conclusions. However, the respondents contended that only limited weight should be placed on Mr Lopez’s evidence.

266    In my view, Mr Lopez’s opinion was expressed by reference to his specialist knowledge and I have accepted his evidence. However, I have not placed significant weight on his evidence insofar as it is based on his examination of other indicia of insolvency, because this was a case where it was open to the Court to draw its own conclusions from the objective facts. As is apparent from what follows, my findings drawn from the objective facts, are consistent with the views expressed by Mr Lopez.

267    The Corporations Act provides that a company is insolvent, if and only if, it is not able to pay all of its debts as and when they become due and payable (s 9 and s 95A). However, the question of whether a company is insolvent is a question of fact which must be assessed by reference to commercial reality. In Lewis v Doran (2004) 208 ALR 385, Palmer J at [106], observed as follows:

I think that I must approach the application of s 95A of the CA with two considerations in mind. First, the words of s 95A must be construed as they stand, without addition or subtraction. Second, the law both before and after the enactment of s 95A is unequivocally and emphatically clear that insolvency is, first and last, a question of fact “to be ascertained from a consideration of the company’s financial position taken as a whole. In considering the company’s financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable”: Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213 at 224 (citations of authority omitted); 188 ALR 114; 164 FLR 430; 39 ACSR 305 at 316.

268    At [116], Palmer J went on to observe:

In my opinion, s 95A requires the court to decide whether the company is able, as at the alleged date of insolvency, to pay all its debts as they become payable by reference to the commercial realities. If the court is satisfied that as a matter of commercial reality the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party.

269    These observations are relevant to this case because, as I have mentioned, the respondents contended that the company was never insolvent during the period alleged by the applicant because at all material times, as a matter of commercial reality, Mr Frank Forgione was ready, willing and able to provide the company with such funding as it needed, on a deferred payment basis, to pay all of its debts as and when they fell due.

270    The fact that a court may have regard to the source of unsecured funding from a third party, including a director or shareholder, in assessing the sources of funding available to the company to pay all of the company’s debts as and when they fall due, has been recognised in a number of authorities. These authorities are discussed by the Queensland Court of Appeal in International Cat Manufacturing Pty Ltd (in liq) v Roderick (2013) 97 ACSR 200, a case strongly relied upon by the respondents.

271    Also, relevant to the circumstances of the case are the following observations of Mansfield J in Lewis, Re Damilock Pty Ltd (in liq) v VI SA Australia Pty Ltd (2008) 252 ALR 533 (Lewis) at [16]:

It is generally, but not necessarily, the case that an inquiry into the insolvency or otherwise of a company at material times is assisted by considering various indicia of insolvency. In Australian Securities and Investments Commission v Plymin (No 1) (2003) 46 ACSR 126; [2003] VSC 123, Mandie J at [386] referred to a number of indicia of insolvency. It is convenient to list them. I propose to consider those which are particularly relevant to the present circumstances. The indicia referred to by Mandie J were:

•    continuing losses;

•    liquidity ratios below one;

•    overdue Commonwealth and state taxes;

•    poor relationship with bank, including inability to borrow further funds;

•    no access to alternative finance;

•    inability to raise further capital;

•    suppliers placing company on cash on delivery or otherwise demanding special payments before resuming supply;

•    creditors unpaid outside trading terms;

•    issuing of post-dated cheques;

•    dishonoured cheques;

•    special arrangements with selected creditors;

•    solicitors’ demands, summonses and the like;

•    payments to creditors of rounded amounts not reconcilable to specific invoices; and

•    inability to produce timely and accurate financial information to indicate trading performance and financial position, and to make reliable forecasts.

In any particular case, one or more of those factors, or other factors, may have particular significance and one or more of them may not exist. The absence of one or more of those factors does not, of itself, establish solvency.

272    I will now examine the solvency position of the company. In this regard, it is to be observed that the first of the debts in respect of which compensation is claimed, was incurred by the company to the ATO with effect from 29 October 2001 as a consequence of the company lodging its BAS for the quarter ended 30 September 2001, on 20 November 2001. The question, therefore, is whether the company was insolvent at the time that this debt was incurred.

273    There was no real issue at the trial in relation to the question of whether and when the company incurred a debt to the ATO in respect of the debits which were recorded in the RBA. It was accepted that the debts were incurred on the effective date of the debt as recorded in the RBA. (See, Smith v Bone (2015) 104 ACSR 528 at [37], Powell v Fryer (2001) 37 ACSR 589 at [72].) Insofar as there was an issue as to when the debt or debts in respect of the company’s failure to make the superannuation contributions in each of 2001, 2002 and 2003, the applicant was content not to challenge the respondents’ contention that the debt of $17,756.30 was only incurred on the issue of the ATO assessment on 10 August 2004.

274    On 10 May 2001, the company filed a BAS for the quarter ended 31 March 2001, which self-assessed a GST liability of $4,177 and PAYG withholding tax liability of $1,722. The company did not pay the self-assessed tax due to the ATO.

275    In cross-examination, Mr Peter Forgione accepted that he received copies of the quarterly BAS statements from Ms Helen Hawley of Lincolns in 2001 and 2002.

276    When asked in cross-examination why the company did not pay the self-assessed liabilities of $5,899 on 10 May 2001, Mr Peter Forgione was not able to offer any explanation for not remitting the payment to the ATO at that time. Mr Peter Forgione was asked:

And on this occasion the company did not remit payment to the Tax Office; correct?---Yes.

Now, again, was there a particular reason why the company didn’t pay the tax owing in that BAS statement at that time?---There was no reason, no.

277    Likewise, Mr Peter Forgione was unable to offer an explanation why the company’s payments made to the ATO on 27 July 2001 and 27 November 2001 were in irregular amounts and less than then due to the ATO on the RBA were made.

278    On 28 July 2001, the company did not pay the compulsory superannuation contributions which it was required to pay and, at that time, the company’s overdraft facility with BankWest was fully drawn.

279    During cross-examination, Mr Peter Forgione was asked to give a reason why the company did not pay the superannuation contributions for its employees in July 2001. The following exchange occurred:

There was no reason, was there, for her to have stopped paying the employees their full superannuation entitlements in 2001?---Not really, no.

Other than the company’s inability to meet those payments?---No.

There’s no other reason, was there?---No, there’s – well, I’m not saying – I’m not saying that that’s the case.

Well, what I’m doing is asking you whether there was any other reason consistent with the company having the ability to pay, why it wouldn’t have paid its employees’ superannuation entitlements?---I understand what you are asking.

I am really giving you the chance to tell his Honour whether there’s another explanation for it?---Well, there’s no explanation.

280    The company did not pay the self-assessed amount of $4,262 in its BAS for the period ended 30 June 2001 when it lodged its BAS on 11 November 2001, bringing the RBA deficit to $9,071.08. The effective date of that debt was 13 August 2001.

281    Further, the company did not pay the self-assessed amount of $22,515 in respect of its BAS for the period ended 30 September 2001, when it lodged its BAS on 20 November 2001. The incurring of that debt increased the RBA deficit to $31,711.32. The effective date of that debt was 29 October 2001. However, on 27 November 2001, the company made a payment of $4,754.30 in reduction of that deficit.

282    Mr Peter Forgione was cross-examined about the reason for the company not paying the self-assessed amount in respect of the BAS for the period ended 30 September 2001. The following exchange occurred:

And the PAYG tax withheld being $3537, bringing the company’s debit balance with the Tax Office to $31,711.72. Do you see that?---Yes.

And then on 27 November there was a payment made of $4754.30. You see that?---Yes.

And, again, do you have any explanation as to why a payment was made in that irregular amount that did not discharge all of the debt?---No.

And this is as at late November – as at November 2001, at a time when you were in regular contact with Ms Hawley, wasn’t it?---That’s correct.

And you knew full well the amounts of the BAS statements that had been lodged?---I would have known some of it, yes.

And you knew full well the amount of the company’s tax debt?---Not the exact amount, but, yes, I would have had an idea.

You had an idea. And the reason that the company didn’t pay the debt was simply because it didn’t have the ability to do so; correct?---Are you asking me?

Yes?---Yes. Not necessarily.

What other explanation is there?---I don’t have an explanation.

283    By the effective date of the debt in respect of the company’s BAS for the September 2001 quarter, the company had failed to meet its tax liabilities in relation to its BAS in respect of the periods ended 31 March 2001 and 30 June 2001, and it had failed to make its superannuation contributions which were due on 28 July 2001, and its facility with BankWest was fully drawn.

284    As is evident from the foregoing, during cross-examination, Mr Peter Forgione was asked for an explanation for not paying the superannuation contributions consistent with the company’s ability to make those contributions, but was not able to give such an explanation. The same is true in relation to the company’s failure to pay the debt incurred by the lodging in November 2001 of the BAS for September 2001. Of particular importance in relation to Mr Peter Forgione’s answers is that Mr Peter Forgione did not suggest that there was any source of funding available to the company to pay its debts as and when they fell due, which in the circumstances he had not utilised. In my view, the failure by Mr Peter Forgione to refer to his father as being a source of funding available to the company to meet those debts when given the opportunity to do so during cross-examination, further undermines the respondents’ contention that Mr Frank Forgione had previously said to Mr Peter Forgione that he would stand behind the company and provide the company with financial assistance for it to be able to meet its debts as and when they fell due.

285    I have, of course, already found that Mr Frank Forgione had not given such an assurance to Mr Peter Forgione and he was not then or at any time thereafter until late November 2004, ready, willing and able to provide such financial support to the company as would permit it to pay all of its debts as and when they fell due.

286    Accordingly, I find that the company was unable to pay its debts as and when they fell due, at the latest, by 29 October 2001, being the effective date of the debt to the ATO arising from its BAS statement for the quarter ended 30 September 2001.

287    Further, an examination of the deterioration of the company’s financial position from November 2001 until Mr Lean’s appointment as administrator on 1 November 2004, on an application of the criteria referred to in Lewis, shows that the company was insolvent throughout that period.

288    The company failed to make monthly repayments on 13 December 2001, 11 April 2002 and 14 May 2002 in respect of its BankWest loan account. In addition, on 3 April 2002, the NAB dishonoured cheques drawn on the company’s NAB business cheque account.

289    Also, the company failed in February 2002, to meet its income tax liability of $6,573 in respect of its BAS for the period ended 31 December 2001. This increased the deficit on the RBA to $34,349.44.

290    The company failed to pay income tax in the sum of $7,631.64 which was due in May 2002.

291    In cross-examination, Mr Peter Forgione was unable to give an explanation consistent with the company’s solvency for the failure to make this payment.

292    As mentioned, the company was able to obtain an instalment loan of $50,000 from the NAB on 29 May 2002. At that time, the company had an unpaid income tax debt of $7,631.64 and the RBA was in deficit to the extent of $34,971. The company was overdrawn on its NAB business cheque account by more than $46,000. The new loan was used to discharge the overdraft on the NAB business cheque account, and the new loan did not, therefore, improve the company’s capacity to pay its debts as and when they fell due. Therefore, notwithstanding, the new loan from the NAB, the monies due to the ATO remained unpaid. By 30 June 2002, the company’s RBA was in deficit to the extent of $39,107.17.

293    The company’s financial statements show that as at 30 June 2002, the company had a working capital deficiency of $94,816.

294    During the financial year ended 30 June 2003, the deficit in the RBA grew from $39,107.78 on 29 June 2002 to $44,296.77 on 30 June 2003. However, during the financial year ended 30 June 2003, the company failed timeously to lodge its BAS for each of the periods ended 30 September 2002, 31 December 2002 and 31 March 2003. After the company had been penalised and belatedly lodged its BAS for September 2002 and December 2002, and an effective date was applied to the unpaid debt in respect of each quarter, the RBA deficit with the ATO was $67,157.11.

295    Also, in July 2002, the company failed to pay to the ATO superannuation contributions in respect of its employees for the year ended 30 June 2002.

296    During the financial year ended 30 June 2003, only one payment was made to the ATO. That was in the sum of $5,000 on 23 April 2003. A further cheque in the sum of $1,700 was sent to the ATO on 7 May 2003, but that cheque was dishonoured.

297    In addition, the company failed to pay the $20,000 lump sum payment due on 31 July 2002 to the NAB. Also, during the financial year ended 30 June 2003, a total of 53 cheques drawn on the NAB business cheque account, were dishonoured by the NAB.

298    The 2003 financial statements which were prepared by Lincolns, after Mr Lean was appointed as administrator, show a working capital surplus of $31,015. The reliability of these accounts has been challenged, on other grounds, by Mr Lopez. However, even accepting their reliability, on those grounds, as Mr Lopez observed, the surplus assumes a recoverability of a debt due by Mr Peter Forgione to the company of $165,992, which was unrecoverable. Accordingly, if one leaves out of the account the debt due by Mr Peter Forgione to the company, the company had a working capital deficiency of $134,977.

299    During the period 1 July 2003 to 29 October 2004, the deficit on the RBA grew to $124,156.94.

300    Further, in the period 1 July 2003 to 1 November 2004, a total of 50 cheques which were drawn on the NAB business cheque account were dishonoured. The two demands issued by the ATO on 8 January 2004 and 29 April 2004, referred to at [67] and [75] above, were not paid. The notice of default issued by the NAB calling upon the company to remedy defaults on its bank accounts was not met.

301    Also, the assessment of $17,756.30 issued on 10 August 2004 by the ATO in respect of the unpaid superannuation contributions was not paid. The amount of $39,262.85 demanded by the NAB in its writ of 6 August 2004 was not paid. Nor was the statutory demand for the sum of $131,667.09 issued by the ATO on 27 August 2004 paid. In addition, the statement of the company’s financial position prepared by Mr Philpott and sent to Mr Bowman on 1 October 2004 shows a deficiency of assets over liabilities of $296,000.

302    Accordingly, in my view, on the application of the criteria referred to in Lewis, it is apparent that the company was insolvent from 29 October 2001, at the latest, until the company was wound up on 20 December 2004. This is because by 29 October 2001 (and even earlier) the company was unable to meet its tax obligations as and when they fell due. The consequence was that during the period 29 October 2001 to 20 December 2004, the deficit on the RBA grew from $9,196.72 to $129,680.76. Such attempts as were made to make payments in reduction of the RBA deficit were in generally round figures and made at intermittent periods.

303    Further, I have found that Mr Frank Forgione was not, as the respondents’ contended, an available source of finance to the company to permit it to pay all of its debts as and when they fell due. Mr Peter Forgione did not give any evidence that the company was able to borrow monies from any source other than the two banks with which it had loan facilities. However, those facilities were fully drawn and proved inadequate to permit the company to meet its debts as and when they fell due. There were 122 occasions during the period 29 October 2001 to 24 November 2004 that the NAB dishonoured cheques on the business cheque account and the company defaulted regularly in relation to its repayment obligations on its NAB loan account.

304    Also, the company failed to submit its BAS timeously after September 2002 and had not by the time that Mr Lean was appointed as administrator on 1 November 2004, prepared the financial statements or the company’s tax returns for the financial years ended 2003 and 2004.

305    The respondents made two contentions in answer to the applicant’s contention that the company was actually insolvent from at least 1 July 2001.

306    The first contention is that the company was never insolvent, because Mr Frank Forgione was at all times until late November 2004, ready, willing and able to place the company in funds to permit the company to pay all of its debts as and when they fell due. I have already rejected that contention.

307    The second contention is that the company was not insolvent as at 1 July 2001, because the company during the first quarter of the financial year was “flush with funds”. The respondents based this contention on the fact that the company had during the quarter ended 30 September 2001 received a taxable supply of $307,615.00. This contention was founded on the amount of the GST payable pursuant to its BAS statement for that quarter, which was lodged, but not accompanied by any remittance to the ATO.

308    In light of the revised way in which the case was put by the applicant in his closing submissions, it is unnecessary for me to find that the company was insolvent as at 1 July 2001. However, I do not accept the contention that the company was “flush with funds” and was, therefore, not insolvent as at 1 July 2001. Therefore, had it been necessary to do so, I would have found that the company was insolvent at that date. I say this for the following reasons.

309    First, it is common cause that the sale proceeds collected in the quarter until September 2001 included the proceeds from the sale of the Heidelberg printing presses which had occurred prior to 30 June 2001.

310    I find that the sale proceeds did not comprise available cash to the company but that the proceeds were used to pay out two equipment loans which totalled at least $227,316. This is because during cross-examination, Mr Peter Forgione acquiesced in counsel’s proposition that the two equipment loans previously recorded in the company’s accounts as owing to the ANZ and BankWest were paid out from the proceeds of the sale of the printing presses.

311    Further, the fact that the taxable supplies did not result in available cash to the company is evidenced by the fact that the company did not produce any bank statements which supported the availability of ready cash, and the fact that the company did not meet its tax liabilities in respect of the BAS for the quarter ended 30 September 2001. Further, Mr Peter Forgione, when asked during cross-examination about the reason for the company not paying its tax debts from May 2001, did not refer to the availability, or the anticipation of the availability of, this pool of cash as a source of funds.

312    It follows that I find that the company was actually insolvent from, at the latest, 29 October 2001 to 20 December 2004 when Mr Lean was appointed as liquidator.

were there reasonable grounds for suspecting insolvency?

313    The next issue is whether the applicant has shown that there were reasonable grounds for suspecting that the company was insolvent at the time that it incurred each of the debts in respect of which compensation is claimed in this proceeding.

314    In the case of Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148 at [249]-[250], Barrett J made the following observations in relation to the approach to be taken in assessing whether an applicant has satisfied the requirements of s 588G(1)(c):

[249]    The inquiry relevant to s 588G(1)(c) is not an inquiry concerning the particular director whose conduct is under scrutiny. It is an inquiry into the objectively formed state of mind of a person of ordinary competence. These propositions are supported by cases such as 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 and Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699. As Einfeld J observed in the latter case (at 703) questions of the particular director’s knowledge of and participation in the incurring of the debt play no part in this aspect of the s 588G inquiry.

[250]    The central word in s 588G(1)(c) is “suspecting”. The criterion is one of suspicion, which is something less developed and less well formulated than expectation. The matter was explained by Kitto J in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303 in this way:

In the first place, the precise force of the word “suspect” needs to be noticed. A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to “a slight opinion, but without sufficient evidence”, as Chambers’s Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which “reason to suspect” expresses in subs (4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the subsection describes — a mistrust of the payer’s ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors.

315    In McLellan, in the matter of The Stake Man Pty Ltd v Carroll (2009) 76 ACSR 67 (McLellan) at [144], Goldberg J observed:

The test prescribed by s 588G(1)(c) is an objective test: Powell v Fryer (2001) 159 FLR 433, Hall v Poolman (above) at [231]. The concept of “suspecting” or “suspicion” involves having a state of mind which falls between having a firm belief or a significant degree of satisfaction that insolvency exists on the one hand and wondering whether it exists on the other. The concept of having a “suspicion” requires an affirmative feeling: Hall v Poolman (above) at [231].

316    As is set out in the observations referred to above, the criterion is on the concept of “suspecting” which is “something less developed and less formulated than expectation”. Further, the question of whether the facts and circumstances comprised reasonable grounds for suspecting that the company was insolvent must be assessed by reference to the objectively formed state of mind.

317    I have at [274]-[311] above set out the circumstances which prevailed in relation to the ability of the company to meet its debts as and when they fell due, during the period 29 October 2001 to 20 December 2004. The debts in respect of which compensation is claimed were incurred throughout that period.

318    In my view, a person of ordinary competence would, on the basis of the facts and circumstances to which I have referred in [317] above, objectively have suspected that the company was not able to pay all of its debts as and when they fell due. Of particular significance to this view, is the fact that the objectively formed state of mind of a person of ordinary competence would not have had regard to Mr Frank Forgione as a source of finance available to the company to meet all of its debts as and when they fell due. The respondents did not contend that there were any other sources of finance available to the company, and the evidence did not reveal any such available sources.

319    Accordingly, the applicant has satisfied the requirements of s 588G(1)(c) of the Corporations Act.

the awareness of the reasonable grounds

320    Section 588G(2) of the Corporations Act provides that by failing prevent the company from incurring the debt, the person contravenes this section if:

(a)    the person is aware at the 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.

Mr Peter Forgione

321    I deal first with the question of whether the conditions referred to in s 588G(2)(a) or (b) applied to Mr Peter Forgione, in relation to the debts incurred by the company to the ATO and his father, during the period 29 October 2001 to 20 December 2004. Mr Peter Forgione was a director of the company throughout this period and the person who had day-to-day management of the printing business of the company conducted in Albany until about September 2003 whilst it was trading.

322    In his evidence-in-chief, Mr Peter Forgione said that until his father contacted him in early 2004, after his father had received a demand from the ATO, he did not believe that there was an issue with respect to any outstanding ATO liability. He also said in that evidence-in-chief that he did not recall ever receiving “notices or demands from the ATO”. The following cross-examination then occurred:

Did you tell his Honour a short while ago that the very reason for approaching your father, in or around February 2004, was that you had received a demand from the ATO. It was a matter of some urgency and you therefore spoke to your father within a matter of days?---Probably in the matter of time, yes.

Which is true? Did you get a demand that made you speak to your father, or did you never receive a demand at all?---I received a demand. I don’t know – I don’t understand why I didn’t say I didn’t receive it, but I did receive a demand.

323    Later, Mr Peter Forgione was taken to para 33 of his witness statement, and the following cross-examination occurred:

Now, you say in paragraph 33:

Until my father was contacted by the ATO, I did not believe that there was an issue with respect to any outstanding ATO liability.

Do you see that?---Yes.

Now, that is just plainly wrong, isn’t it?---Mean, “plainly wrong”?

You knew, from 2001, the company had an outstanding tax liability, didn’t you? We’ve been through that over yesterday and today?---Right.

Do you agree with that?---Yes.

At all times from 2001 you knew that the company owed the ATO substantial amounts of money?---Yes.

Why did you make the statement at paragraph 33 of your witness statement?---I don’t know. It’s - - -

That’s - - -?--- - - - obvious error, isn’t it? I don’t know.

It’s an obvious error? I suggest to you - - -?---Yes. I don’t understand.

324    As well as this evidence of Mr Peter Forgione’s knowledge from 2001 of the company’s liability to the ATO in respect of its tax debts, there is also his further evidence given in cross-examination (see [282] above), that in 2001, he knew generally from the contents of the BAS statements which Ms Hawley had prepared at that time, the amounts of tax which the company was not, but should have been, paying when lodging each BAS.

325    I find, therefore, that in relation to the debts incurred to the ATO, Mr Peter Forgione was aware from, at the latest, 29 October 2001 to 20 December 2004, of the fact that the company was unable to pay those debts as and when they fell due; and, for the reasons I have previously given, he knew that the company did not have access to available financial resources to permit it to pay its debts as and when they fell due, throughout the whole of this period.

326    In addition, I find that Mr Peter Forgione was aware that cheques drawn on the NAB business cheque account, were being dishonoured. I reject his evidence in his witness statement that when a cheque was dishonoured he made sure that there were funds available to support the payment on the next occasion. There were 122 occasions when cheques were dishonoured by the NAB on the business cheque account during the period from October 2001 to December 2004. The volume of cheques dishonoured in itself demonstrates the falsity of Mr Peter Forgione’s statement in relation to him making sure that funds were available to ensure that cheques would be honoured on the next occasion. Mr Peter Forgione was also taken in cross-examination, to a number of specific instances when this had not occurred.

327    I find, therefore, that Mr Peter Forgione was, by reason of these facts, from 29 October 2001, at the latest, to 20 December 2004, aware that there were reasonable grounds to suspect that the company could not pay its debts as and when they fell due. If I am wrong in this conclusion, I find that a reasonable person acting as a director of the company, would have been aware that there were reasonable grounds for so suspecting.

328    Further, I find that Mr Peter Forgione took no steps to prevent the incurring of each of the debts to the ATO reflected on the RBA statement, commencing with the debt, having the effective date of 29 October 2001 and ending with an effective date immediately before the appointment of Mr Lean as administrator on 1 November 2004.

329    In relation to the company incurring the debt to Mr Frank Forgione, I find that Mr Peter Forgione was, at the time that the debt was incurred, aware that there were reasonable grounds to suspect that the company was insolvent.

330    At this time, Mr Peter Forgione was, of course, aware that the ATO debt was outstanding and the company was not in a position to meet that debt. He was also, of course, aware that the company was unable to pay those debts which had already fallen due, which he then asked his father to pay. Accordingly, I find that Mr Peter Forgione was aware that there were reasonable grounds to suspect that the company was not able to pay its debts as and when they fell due, at the time when he asked his father to pay the debts in question, and during the period in mid 2004 when his father paid those debts.

331    I find, of course, that Mr Peter Forgione failed to prevent the company from incurring the debt to his father, comprising the loan made by his father to the company.

332    I also reject the evidence of Mr Frank Forgione that the debt was made on a deferred basis. This is contrary to the objective evidence being the recording of the debt in the 2004 accounts as a current liability, and the fact that Mr Frank Forgione has relied upon this debt in his proof of debt, and also the recording of the debt as a liability (without reference to it being deferred) in the statement of financial position of the company prepared by Mr Philpott in October 2004.

Mr Frank Forgione

333    I now deal with the question of whether the conditions in s 588G(2)(a) or (b) applied to Mr Frank Forgione up to 3 June 2004, in relation to the incurring of the debt to the ATO.

334    In his witness statement, Mr Frank Forgione said that he first became aware of the fact that the company was in financial difficulties in February 2004 after he had a conversation with Mr Smith of BankWest during which Mr Smith said:

Peter has written a number of cheques from the Forgione Family Group’s bank accounts that have been dishonoured by BankWest as the company’s accounts had insufficient funds.

335    Mr Frank Forgione said that after the conversation, he telephoned Mr Peter Forgione who told him that the company had been losing money and was suffering from cash-flow difficulties and that there were a number of creditors that had not been paid.

336    I do not accept Mr Frank Forgione’s evidence that he first learned that the company was not able to pay its debts as and when they fell due, or was in financial difficulty, in February 2004.

337    First, Mr Peter Forgione, whose evidence I prefer on this point, denied that there ever was a conversation in the terms alleged by Mr Frank Forgione. His evidence was that it was he who contacted his father about paying the creditors after he had received the ATO penalty demand.

338    Secondly, there was no documentary evidence which supported Mr Frank Forgione’s evidence that as late as February 2004, there had been cheques written by his son which were being dishonoured on the BankWest account. Further, when Mr Frank Forgione was cross-examined on how he was able to recall that the conversation with Mr Smith of BankWest had occurred in February 2004, and how he reconciled his evidence with that given by Mr Peter Forgione as to the circumstance in which Peter asked him to pay the creditors, Mr Frank Forgione’s answers were confused and erratic. (See transcript at 290-292.)

339    Thirdly, the NAB had commenced dishonouring the company’s cheques on its business cheque account in April 2002. From October 2002, the NAB sent weekly bank statements for the company addressed to Mr Frank Forgione which recorded the fact that the company’s cheques were being dishonoured. I do not accept Mr Frank Forgione’s evidence that he did not see those bank statements. It is simply implausible and is a further example of Mr Frank Forgione tailoring his evidence to suit his case. This was not a case of a one-off document being sent to Mr Frank Forgione, which he might have overlooked. These were statements that were sent on a weekly basis and could not have been overlooked. Accordingly, I find that from October 2002, Mr Frank Forgione did know the state of the NAB business cheque account and the fact that the company’s cheques were being dishonoured by the NAB.

340    I find that Mr Frank Forgione from October 2002, was actually aware there were reasonable grounds to suspect that the company was unable to pay its debts as and when they fell due.

341    I have found that Mr Peter Forgione, a director of the company, was actually aware that there were reasonable grounds to suspect that the company was unable to pay its debts as and when they fell due from, at the latest, 29 October 2001 until 20 December 2004.

342    In my view, a reasonable person in the position of a director of the company would have monitored whether the company was meeting, and was able to meet, its quarterly tax obligations as and when they fell due, and whether the company had paid, and was able to pay the superannuation contributions for its employees on an annual basis. Further, that director would also have monitored the state of the company’s bank accounts and, in particular, whether the company was able to honour cheques that were being drawn on the bank accounts and the company was meeting its loan repayment obligations to the banks. Such activities would have invoked an awareness of reasonable grounds to suspect that the company was insolvent.

343    I find, therefore, that a reasonable person in the position of Mr Frank Forgione, as a director of the company, would have been aware, as Mr Peter Forgione was aware, that there were reasonable grounds to suspect from, at the latest, 29 October 2001 until 3 June 2004 that the company was unable to pay its debts as and when they fell due.

344    I find that Mr Frank Forgione did not prevent the company from incurring the debts to the ATO from 29 October 2001 up to 3 June 2004 when he retired as a director.

defence under s 588H(2) of the corporations act

345    Each of the respondents pleaded a defence under s 588H(2).

346    Neither of the respondents pleaded any material facts in support of the defence. The defence filed by each of the respondents does no more than simply plead the words, appropriately adapted, of s 588H(2). However, in his written opening submissions, counsel for the respondents said that each respondent had the actual expectation that the company was and would continue to be solvent because each knew and firmly believed that Mr Frank Forgione would provide all the necessary support to pay all of the company’s debts as and when they fell due.

347    I have already rejected Mr Frank Forgione’s evidence that he was at all material times willing to provide such financial support as was necessary to meet all of the company’s debts as and when they fell due.

348    As mentioned, Mr Peter Forgione gave evidence that Mr Frank Forgione told him during 2001 that he would be available to assist the company with finance should the company need money to meet its obligations and that he believed that his father would do so. I have also rejected that evidence.

349    I find, accordingly, that each of the respondents has failed to make out the defence based on s 588H(2) of the Corporations Act.

defence under s 588H(3) of the corporations act

350    Each respondent also relied on a defence under s 588H(3).

351    Each respondent pleaded that at all times prior to mid 2004, the company had engaged Mr Gary Philpott of Lincolns, an experienced accountant, to provide accounting and taxation services; and that each respondent believed that Mr Philpott and Lincolns were discharging their duties to the company and, in particular, that Mr Philpott and Lincolns were providing sufficient information to the company to enable the company to discharge any obligations to the ATO.

352    Each respondent then went on to plead that he had reasonable grounds to believe and did believe that at the time when the debts were allegedly incurred, that Mr Philpott and Lincolns were each:

(a)    a competent and reliable person responsible for providing each respondent with adequate information about whether the company was solvent; and

(b)    fulfilling that responsibility.

353    Further, each respondent pleaded that at the time when the debts were incurred, he expected on the basis of the information provided to him by each of Mr Philpott and Lincolns, that the company was solvent, and would remain solvent even if it incurred the debts.

354    As with the defence based upon s 588H(2), this defence was pleaded at a high level of generality.

355    No material facts were pleaded which identified the information it is alleged that Lincolns provided to each of Mr Frank Forgione and Mr Peter Forgione which allegedly induced the expectation in each of them, at the time the debt was incurred, that the company was solvent. The particulars which were provided were at a high level of generality and unhelpful, referring only to “various conversations” and “ad hoc information”.

356    Also, no material facts, other than that the company had engaged Mr Philpott to provide “accounting and taxation services”, were pleaded in support of the contention that Mr Frank Forgione and Mr Peter Forgione believed that Mr Philpott of Lincolns had undertaken the responsibility of providing them “adequate information about whether the company was insolvent”.

357    The respondents’ opening written submissions also did not identify the information said to have been provided by Mr Philpott and Lincolns for the plea in [351] above. In the respondents’ closing written submissions, the respondents simply repeated their opening written submissions. Also, in his closing oral submissions, counsel for the respondents did not identify any specific information in support of the plea.

358    In his written statement of evidence, however, Mr Frank Forgione said that in 2001, he left the running of the day-to-day business operations to Mr Peter Forgione and he was confident in Mr Peter Forgione’s ability to manage the day-to-day operations of the business and “I trusted that Mr Philpott and Lincolns were overseeing the company’s financial affairs and would let me know if there was a problem”.

359    Further, Mr Frank Forgione also said that in 2003, he had “a couple of conversations” with Ms Hawley of Lincolns whom he understood was responsible for assisting in the company’s tax and financial reporting requirements. According to Mr Frank Forgione, in one of these conversations, Ms Hawley told him that the company was “running well and that there would be some tax payable the next year”. Mr Forgione went on to say that when he asked Ms Hawley how much tax would be payable, she said that she could not tell him because it was confidential.

360    Mr Frank Forgione then deposed that in November or December 2003, he spoke to Mr Philpott and said that he was annoyed because Mr Philpott had not returned his calls and Ms Hawley would not “provide me with any information about the company. I am a director of this company but feel like I am not being told what is happening.”

361    Mr Philpott replied, according to the evidence of Mr Frank Forgione, by saying that he did not know why Mr Forgione’s calls had not been returned but that Lincolns were working on the 2003 financial statements but required some further information from Mr Forgione. Mr Frank Forgione went on to say that he did “not recall what documents were requested”, but he did recall providing Lincolns with “some documents”, in response to that request for information.

362    Mr Frank Forgione also said that after he received the ATO notice of demand in April 2004, he had several conversations with Mr Philpott when he followed up the status of the company’s financial statements. He said that on each occasion, Mr Philpott said:

We are finalising the company’s financial statements and tax returns. We will be in a position to advise about the company’s debts to the ATO once they are completed.

363    Mr Frank Forgione also said that he had a conversation with Mr Philpott in March 2004 when Mr Philpott advised him to retire as a director. Mr Frank Forgione deposed that he did not understand the reason for doing so but he followed Mr Philpott’s advice.

364    I do not accept the evidence of Mr Frank Forgione about the contents of his conversation with Ms Hawley referred to at [359] above.

365    First, it is inherently implausible that Ms Hawley would tell Mr Forgione that the company was “running well”, when she would have known from the ATO portal that the company had not remitted the payments required at the time that the company’s BAS statements were lodged, since December 2000, that the company had not lodged a BAS for any quarter since June 2002, and that the company was in debt to the ATO at the beginning of 2003 to the extent of $42,000 and $63,000 by the end of the year.

366    Also, it is implausible that Ms Hawley would have said that there would be “tax payable the next year” when the financial statements for 2003 had not at that time been prepared.

367    Secondly, it is highly improbable that Ms Hawley would refuse to disclose information to Mr Frank Forgione on the grounds of “confidentiality” at a time when Mr Frank Forgione was a director, when it is apparent that Lincolns both before and after the alleged conversations with Ms Hawley, dealt with Mr Frank Forgione whilst he was a director, and continued to deal with him directly about the company’s affairs, even after he ceased to be a director. Examples of this latter circumstance, is the letter of 27 September 2004, which Mr Philpott sent to Mr Frank Forgione at his residential address, and also his facsimile of 1 October 2004 setting out the company’s tax position was addressed specifically and only to Mr Frank Forgione.

368    Thirdly, even on his own evidence, Mr Frank Forgione placed no weight on Ms Hawley’s advice. Instead, he said that he complained to Mr Philpott that he was not being told about the company’s affairs.

369    Further, the evidence of Mr Frank Forgione in relation to his dealings with Mr Philpott does not support a contention that Mr Philpott had provided any information to him that the company was solvent. Mr Frank Forgione’s evidence about his conversations with Mr Philpott in April 2004, goes no further than to show that Mr Philpott wanted further information from Mr Frank Forgione before he could prepare the 2003 financial statements and tax returns. It does not constitute information upon which Mr Frank Forgione could have entertained an expectation, on reasonable grounds, that the company was solvent.

370    Rather, these conversations show that Mr Philpott, to the knowledge of Mr Frank Forgione, was in the position of not having sufficient information as would permit him to finalise the 2003 financial statements. By the time of Mr Lean’s appointment as administrator on 1 November 2004, the financial statements and tax returns for 2003 and 2004 had still not been prepared. In both his letter of 27 September 2004 and his facsimile transmission of 1 October 2004 to Mr Frank Forgione, Mr Philpott made it clear that he was still awaiting information from either Mr Frank Forgione or Mr Peter Forgione, or both, before he could complete the preparation of the 2003 and 2004 financial statements and tax returns.

371    Further, Mr Philpott’s advice to Mr Frank Forgione that he resign as a director, did not constitute information which could form the basis for Mr Frank Forgione to expect on reasonable grounds, that the company was solvent.

372    As to the s 588H(3) defence raised by Mr Peter Forgione, his evidence was that Mr Philpott’s and Lincolns’ role was to prepare the financial statements of the company and to act as the company’s tax agents, and that he dealt with Ms Hawley, whose job it was to prepare the BAS for the company.

373    Mr Peter Forgione gave no evidence that Mr Philpott or Lincolns gave him any advice or information which Mr Peter Forgione relied upon as giving rise to an expectation that the company was solvent. Nor could he have given such evidence in light of the fact that in 2001 and 2002, Ms Hawley prepared the BAS statements for the company which reflected that there were amounts payable to the ATO, which Mr Peter Forgione did not cause the company to pay. As previously mentioned, Mr Peter Forgione admitted in cross-examination that he was aware from 2001 of the unpaid tax obligations owed to the ATO.

374    On his own evidence, Mr Peter Forgione said that his contact with Ms Hawley became “more sparse”. In the absence of more detailed evidence from Mr Peter Forgione of any meetings he had with Ms Hawley in 2003, and the fact that the company ceased to lodge its BAS from June 2002 on a regular and timeous basis, I infer that there were no meetings between Ms Hawley and Mr Peter Forgione after June 2002.

375    In any event, in my view, each respondent fell far short of establishing that he had reasonable grounds to expect that Mr Philpott or Lincolns was for the purposes of s 588H(3) a “competent and reliable person” (referred to in s 588H(3) as the “other person”) who was responsible for providing Mr Peter Forgione and Mr Frank Forgione “adequate information about whether the company was solvent”.

376    The circumstances when a person might reasonably be characterised as the “other person” for the purposes of this defence were considered by Goldberg J in McLellan. In that case, Goldberg J cited with approval the following observations of Young CJ in Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304, [2002] NSWSC 330:

[52]    It is extremely difficult for a person to say that a person is responsible for providing adequate information about solvency and was fulfilling that responsibility when the person allegedly relying on the other person was the source of the supply of information and that supply of information was not completely full.

[53]    The subsection arises from the recommendations made in para 211 of the Law Reform Commission’s Discussion Paper No 32 as fleshed out in [303] and following of the Harmer Report. In [307] it was said:

The Commission considers that the defence is clearly necessary in the case of larger companies in which it cannot be expected that directors will have control over every action taken in the conduct of the company’s business. Additionally, a defence of this nature may encourage a proper system of financial management.

[54]    Thus the prime thrust of the defence is to cover the situation where there is a large corporation with bulky accounts and where there is a system in place of competent accountants, credit controllers and financial management and the board has a regime whereby those people, provided they are competent and responsible, will report to the board any problems that the board may pick up. The prime thrust of the exception is not to deal with the situation where a small company with directors who have little idea of accountancy, bring in a trouble shooter, supply the trouble shooter with information which may not be complete, receive reports back from the trouble shooter and then intend to rely on a report which is incomplete because they have provided incomplete information.

377    In McLellan, Mr Carroll, the defendant director, alleged that he reasonably believed a Mr Bright who was employed as an inhouse accountant by the company, to be the “other man” for the purposes of s 588H(3). Goldberg J observed as follows:

[185]    The evidence does not satisfy me that Mr Bright was specifically given the role or task of providing Mr Carroll “adequate information about whether the Company was solvent”. Although Mr Bright told Mr Carroll on a number of occasions that he did not consider that the Company was insolvent, that information was given as part of the general accountancy and advisory work which Mr Bright was undertaking for the Company. It was not given in discharge of a responsibility for providing to Mr Carroll adequate information whether the Company was solvent. Mr Bright was not providing to Mr Carroll adequate information about whether the Company was solvent. Rather, he was expressing an opinion based upon information provided by Mr Carroll himself. (Emphasis added.)

378    Goldberg J distinguished between information given by a person in the context of general accountancy and advisory work, and a person who had accepted responsibility for providing “adequate information about whether the Company was solvent”.

379    In this case, neither respondent pleaded nor alleged that Mr Philpott or Lincolns had acted other than in their role as providing accountancy and taxation advice.

380    Further, and importantly, the evidence establishes that Mr Philpott never accepted the responsibility for providing adequate information to the directors about whether the company was solvent. To the contrary, after the demands started being made on the company from the ATO and the NAB in the first half of 2004, Mr Philpott refused to assume responsibility in relation to advising on solvency, and referred Mr Peter Forgione and Mr Frank Forgione to Mr Bowman. In his cross-examination, Mr Peter Forgione expressly said that Mr Philpott sent him to Mr Bowman for advice because he did not offer that kind of advice. (See, [406] below). Mr Frank Forgione gave evidence to similar effect.

381    In any event, as I have already mentioned, neither Mr Philpott nor Lincolns ever gave advice that the company was solvent.

382    It follows that neither Mr Frank Forgione nor Mr Peter Forgione has discharged the onus of demonstrating that he had reasonable grounds to believe that Mr Philpott or Lincolns were competent or reliable persons within the meaning of s 588H(3), who provided each of them with information about the company which led him to expect, on reasonable grounds, that the company was solvent, at that time.

383    Accordingly, the defence relied upon by each respondent has not been made out.

whether each of the respondents ought to be relieved of liability under s 1317s of the corporations act

384    Further, each of the respondents sought to rely upon a defence under s 1317S of the Corporations Act. That section provides as follows:

(1)    In this section:

eligible proceedings

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

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

(2)    If:

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

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

(i)    the person has acted honestly; and

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

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

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

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

(b)    when that action was taken; and

(c)    the results of that action.

Mr Frank Forgione’s claim for relief under s 1317S of the Corporations Act

385    Mr Frank Forgione pleaded that at all times he acted “honestly in the performance of his duties as a director”, and that if he contravened s 588G, then pursuant to s 1317S of the Corporations Act, he ought fairly to be excused in all the circumstances for the contravention.

386    In support of that claim, Mr Frank Forgione pleaded that in about mid 2004, he became aware, that, contrary to his prior belief, Mr Philpott and Lincolns had failed to inform the company, or him, of the company’s liabilities to the ATO.

387    Mr Frank Forgione then went on to plead that in late 2004, Mr Frank Forgione and Mr Peter Forgione met with Mr Lean to obtain advice in relation to the debt due to the ATO and that at that meeting Mr Lean advised Mr Frank Forgione not to advance any further funds to the company and Mr Peter Forgione not to make any further payments to the creditors of the company and recommended that Mr Peter Forgione appoint Mr Lean as an administrator.

388    Mr Frank Forgione’s contraventions of s 588G are comprised of his conduct as a director up to 3 June 2004, in that, from 29 October 2001 until that date, he failed to prevent the company from incurring debts to the ATO.

389    The first element of Mr Frank Forgione’s pleaded case is that he was always willing to advance monies to the company to pay the ATO’s debt, but the only reason that he did not do so whilst he was a director was because until “about mid 2004”, he did not know of that debt. As I have already stated, Mr Frank Forgione had by mid 2004, already received two penalty notices from the ATO, and would, therefore, have been aware of the company’s default in meeting is debt obligations to the ATO. Further, I have rejected his claim that he was always willing to put the company in funds to meet all of its debts as and when they fell due. Accordingly, I reject this element of his pleaded case.

390    The second element of Mr Frank Forgione’s pleaded case is that, at a meeting in “late 2004”, he was diverted from advancing monies to the company so that it could discharge the ATO debt by the pleaded advice from Mr Lean not to pay the debt due to the ATO. The event relied on for this element of Mr Frank Forgione’s pleaded case occurred months after he ceased to be a director. The fact that this pleaded event post-dates Mr Frank Forgione’s retirement as a director, is fatal to Mr Frank Forgione’s claim that he acted “honestly” in the performance of “his duties as a director” because he acted on the advice given by Mr Lean on that occasion.

391    Accordingly, Mr Frank Forgione has on the factual foundation pleaded in support of his claim, failed to establish that he acted “honestly” in the performance of his duties as a director, and that he ought to be excused for the contraventions of s 588G of the Corporations Act whilst a director, pursuant to s 1317S of the Corporations Act. The defence is, therefore, dismissed on this basis.

392    However, in the event that I am wrong in that analysis, I will consider the evidence advanced and submissions made in relation to this defence.

393    The tenor of Mr Frank Forgione’s defence under s 1317S, as advanced at trial, appears to be that he acted honestly as a director because he was at all times willing to put the company in funds to pay the company’s debt to the ATO but did not do so, because, before the meeting with Mr Lean, he was “still trying to get to the bottom” of the amount of the company’s debt to the ATO; and then at the pleaded meeting, Mr Lean told him not to pay the ATO debt, but to appoint him as administrator and then seek to discharge the company’s debt to the ATO, through the means of a deed of company arrangement, to which he should make financial contribution.

394    Mr Frank Forgione, in his evidence-in-chief, said that in or around July 2004 or August 2004, he was at a loss as to what needed to be done to discharge the company’s debt to the ATO; and that during this time he was liaising with Mr Philpott and Mr Bowman on a regular basis “to get to the bottom” of the ATO debt so as to ascertain the amount of the ATO debt and to place the company in funds to pay that amount.

395    I do not accept the evidence given by Mr Frank Forgione in support of his claim that before his meeting with Mr Lean, he was at all times willing to discharge the whole of the company’s debt to the ATO, but did not do so, because he did not know the amount of the debt.

396    I have already found that Mr Frank Forgione was not at all material times ready and willing to place the company in funds so that it could discharge its debts as and when they fell due, including the ATO debt. However, I specifically reject Mr Frank Forgione’s evidence that despite being willing to do so, he did not pay the ATO debt because he did not know the amount he had to pay. This is because during the period January 2004 to October 2004, Mr Frank Forgione received demands from the ATO for the payment of specific sums of money. However, on each occasion Mr Frank Forgione eschewed the opportunity to place the company in funds to pay the specific amounts claimed by the ATO.

397    These sums were the amounts of $5,215 and $8,069 in respect of the penalty notices received by the company and Mr Frank Forgione in January 2004 and April 2004 respectively; the precise amount of $17,756.30 assessed in respect of the unpaid superannuation contributions of which he was aware by the end of September 2004 at the latest, and the amount of $131,667.09 in the statutory demand issued by the ATO on 27 August 2004.

398    It is, in my view, particularly the fact that Mr Frank Forgione did not place the company in funds in order to discharge the statutory demand, which decisively undermines his evidence that he was willing to provide funding to the company to pay its obligations to the ATO , but was “at a loss” to know how much to pay. This is because, Mr Frank Forgione knew the precise amount of the debt claimed by the ATO in the statutory demand that the company had to pay to avoid the prospect of the company going into liquidation. However, despite knowing the precise amount which the ATO required the company to pay to avoid the risk of liquidation, Mr Frank Forgione was not willing to place the company in the requisite funds.

399    Mr Frank Forgione said in evidence that the reason he consulted Mr Bowman was so that he could find out how much the ATO debt was so he could pay it. During cross-examination, the following exchange occurred:

Your meeting with Mr Philpott – sorry, Mr Philpott referred you to Mr Bowman of Financial Crisis Recovery - - -?---Yes.

- - - before you had received the statutory demand?---Yes, correct.

And you weren’t seeing Mr Bowman just to find out the amount of the debt owed to the Tax Office, were you?---It was new to me. All of these things were new to me.

I will ask you this. Mr Philpott could find out and tell you the amount of the debt owing to the Tax Office, couldn’t he?---Nobody ever told me.

You weren’t seeing Mr Bowman to find out the amount of the debt to the Tax Office, were you?---I want to find out what I owe the tax man so I can pay. I didn’t want this sort of a dragging-on situation. I pay – always my bills. I - - -

Mr Bowman worked for an organisation known as Financial Crisis Recovery. Do you understand that?---That’s correct, but I didn’t understand the meaning of Philpott putting me to this person.

And you were seeing Mr Bowman to try and sort out some sort of deal to organise the company’s financial position?---No. My understanding at that time – and I hope you do believe me because it’s the truth – is that I want to get to the bottom about what do I owe or what is my obligations and I don’t understand why he put me to Mr Bowman and - - -

400    I reject, specifically, Mr Frank Forgione’s evidence that he consulted with Mr Bowman for the purpose of finding out how much the ATO debt was so that he could pay it.

401    Mr Frank Forgione’s evidence is contrary to the objective contemporaneous evidence and to the evidence of Mr Peter Forgione, and represents another instance of Mr Frank Forgione reconstructing events to assist his case.

402    First, it was Mr Philpott who was the company’s tax agent, during the period when Mr Frank Forgione and Mr Peter Forgione were consulting with Mr Bowman. Mr Frank Forgione was consulting with Mr Philpott, and not Mr Bowman, about the amount of tax owing by the company and the amount of his and Mr Peter Forgione’s personal liability in respect of tax unpaid by the company. This is obvious from Mr Philpott’s facsimile of 1 October 2004, which is addressed to Mr Frank Forgione and is headed “Owing to the Tax Office – Forgione Family Group P/L”.

403    Secondly, Mr Philpott’s facsimile of 1 October 2004 to Mr Frank Forgione and Mr Philpott’s letter of 7 October 2004 to Mr Bowman, demonstrate that by 7 October 2004, Mr Frank Forgione and Mr Peter Forgione were seeking advice from Mr Bowman, and were contemplating the prospect of taking their own steps to put the company into administration or liquidation as an alternative means of dealing with the demands of the company’s creditors, other than by putting the company in funds to meet their demands in full.

404    Plainly, if Mr Frank Forgione had been willing to put the company in funds to discharge all of the company’s debts, including that owed to the ATO, there would have been no need to have consulted Mr Bowman, and no need for the question of administration or liquidation of the company to be the subject of advice from Mr Bowman.

405    Thirdly, Mr Frank Forgione’s evidence as to the purpose of the meeting with Mr Bowman is not supported by the evidence of Mr Peter Forgione.

406    During cross-examination, Mr Peter Forgione’s evidence was as follows:

Okay. There was no need to see Mr Bowman to get information as to the actual amount owed to the Tax Office, was there?---Mr Bowman knew, when I got the wind-up notice from the ATO.

And Mr Philpott had that as well, didn’t he?---I don’t know if he had it or not.

Mr Philpott was your registered tax agent, wasn’t he?---Yes.

And he was the tax agent of the company?---Yes.

So the one person who was uniquely positioned to find out if it needed to be found out, how much tax the company owed, was Mr Philpott?---Yes.

He didn’t send you to Mr Bowman to work that out, did he?---He suggested I go and see him.

And he suggested you see Mr Bowman to try and work out a deal, to resolve your financial crisis and your father’s liability under the National Australia Bank guarantee?---He just suggested I go and seek advice, because he doesn’t do it.

He doesn’t do what?---Well, he doesn’t offer that kind of advice.

What kind of advice?---That we have to go and see the likes of the financial service people.

To try and sort out a deal?---Correct.

407    The reality was, and I find that, Mr Frank Forgione did not consult with Mr Bowman for the purpose of ascertaining the amount of the ATO debt so that he could discharge that debt. Rather, I find that Mr Frank Forgione was at that time, not ready and willing to put the company in funds to permit it to discharge the full extent of its debts, including the debts then outstanding to the ATO and the NAB. I also find that Mr Frank Forgione and Mr Peter Forgione consulted with Mr Bowman about alternative ways and means of dealing with the company’s debts to the ATO and the NAB, and their personal liability in respect of those debts, other than by putting the company in funds to discharge its liabilities.

408    I now deal with Mr Frank Forgione’s claim that he would have put the company in funds to discharge the ATO debt but for Mr Lean’s advice at the meeting held before Mr Lean was appointed as administrator.

409    Mr Frank Forgione gave evidence in his witness statement that he received a call from Mr Peter Forgione who said that he was in a meeting with Mr Bowman and Mr Lean and that Mr Bowman advised that a winding-up application had been brought by the ATO and that, in those circumstances, there was nothing more Mr Bowman could do, and that if Mr Peter Forgione appointed Mr Lean as an administrator he would be able to “sort this mess out”. Mr Frank Forgione said he asked how much it would cost, and Mr Lean said he would need $10,000 for his fees, and that Mr Lean said that he could sort out an arrangement with the ATO. Mr Frank Forgione then said as follows:

I recall thinking that this was a lot of money but because I understood from this call that appointing Mr Lean was necessary in order to pay the ATO debt and resolve the winding-up application. Had this not been my understanding I would simply have paid the ATO debt.

410    In his witness statement, Mr Lean said that he told Mr Frank Forgione and Mr Peter Forgione not to advance any further funds to the company, because if the funds were used to pay creditors, the payments would be recoverable as preferences, and that if there were personal funds available, they should be made available to the creditors by way of a contribution to a deed of company arrangement.

411    I find, therefore, that the conversation as deposed to by Mr Lean did occur. However, I find that Mr Lean’s advice did not cause Mr Frank Forgione not to discharge the company’s ATO debt. This is because I do not accept Mr Frank Forgione’s evidence that he was, in fact, ready and willing to discharge the whole of the ATO debt and that it was Mr Lean’s advice which stopped him from doing so.

412    I have come to that view for the following reasons.

413    First, as I have previously found, if Mr Frank Forgione had, in fact, been willing to put the company in funds to discharge the ATO debt, he had ample opportunity to do so before the filing of the winding-up application. In particular, as I have previously mentioned, his failure to put the company in funds to meet or contest the ATO’s statutory demand, comprehensively undermines his claim that he was willing to put the company in funds to permit it to discharge the ATO debt, let alone also satisfy the debt due to the NAB.

414    Secondly, as I have found, even before Mr Lean’s appointment, Mr Frank Forgione and Mr Peter Forgione, having been confronted with the prospect of personal liability in respect of the company’s failure to remit PAYG withholding tax instalments, were taking advice from Mr Bowman on alternative means of dealing with the company’s outstanding creditors including the ATO and the NAB and their personal liability in respect thereof, other than by causing the company to pay its debts in full. In fact, it was Mr Bowman’s advice that an administrator be appointed so that the ATO debt could be settled through a compromise under a deed of company arrangement.

415    Mr Frank Forgione was particularly unconvincing when he was cross-examined on this issue. The transcript reads:

Can I suggest that the purpose for seeing Mr Bowman and the purpose for appointing Mr Lean as administrator was to sort out the question of your personal liability and Peter’s personal liability?---Yes. Yes.

You weren’t interested in paying company debts, were you?---I was.

Your concern was ensuring that your personal exposure and Peter’s personal exposure was taken care of?---Well, I didn’t – that’s the part I don’t understand. That is the – his exposure is to the…or other – people make…understood whatever debt had to be paid, that I wanted to know – “Please explain to me.” “This is it. Once you do that, you’re out.” That was my – always in my understanding, that somebody says to me, “Frank, you owe us $50,000 – 4300,” or whatever. “You pay this,” and, “We don’t owe you any…we don’t…” And that was I was trying to get at all times.

416    I find that, far from being thwarted in his asserted desire to put the company in funds to discharge the whole of the ATO debt, Mr Frank Forgione was content to accept Mr Lean’s appointment as administrator and then to participate in the proposal for a deed of company arrangement because he saw this as a means of discharging the company’s and his own and Mr Peter Forgione’s personal liability to the ATO by a means other than by putting the company into funds to discharge the whole of the company’s debt to the ATO, and to avoid his and Mr Peter Forgione’s personal liability in respect of the unremitted PAYG withholding tax instalments.

417    I find that the appointment of Mr Lean as administrator gave effect to the very purpose of Mr Peter Forgione and Mr Frank Forgione taking advice from Mr Bowman in the first place.

418    In this regard, it is significant that later in November 2004, Mr Frank Forgione consulted with Mr Philpott in relation to the content and effect of the financial contribution that he would make to the amount available to creditors under the proposed deed of company arrangement, and that Mr Philpott confirmed the terms thereof with Mr Lean.

419    I find that Mr Frank Forgione knew and understood the effect of making a proposal to discharge the ATO debt (which was crafted specifically by reference to his and Mr Peter Forgione’s personal liability for part of that debt) by means of a deed of company arrangement. I find that Mr Frank Forgione, with that knowledge, was content to participate in that process by paying the sum of $60,000 to the company to fund the proposed deed of company arrangement. I find that the advice given by Mr Lean never caused Mr Frank Forgione not to put the company in funds in order to discharge its debt to the ATO. Mr Frank Forgione was never willing to do so, whether before or after that advice by Mr Lean.

420    Thirdly, I find that Mr Frank Forgione’s conduct after the company went into liquidation was also inconsistent with his assertion that but for Mr Lean’s advice, he would, in November 2004, have put the company in funds so that it could discharge the whole of the ATO debt, and so have avoided the company going into administration.

421    After the liquidation, on 16 February 2005, Mr Lean, after having consulted with the ATO, recommended to Mr Frank Forgione that he pay the ATO the $30,927 for which he and Mr Peter Forgione were personally liable in respect of unpaid PAYG withholding tax instalments. The ATO then extended the time for that payment to be made. However, even then Mr Frank Forgione did not discharge even that limited portion of the company’s ATO debt. Rather, Mr Frank Forgione through his new accountants, sent a letter to the ATO enclosing a cheque for $10,000, and making an offer to pay the rest of the amount owing in instalments over the next 24 months. Mr Frank Forgione never paid any of the further instalments.

422    The failure of Mr Frank Forgione, even after the liquidation of the company, to take up the opportunity to discharge even that limited portion of the company’s debt to the ATO, for which he and Mr Peter Forgione were personally liable, further undermines Mr Frank Forgione’s assertion that but for Mr Lean’s impugned advice, he would have put the company in funds, so that the company could discharge in full the company’s obligation to the ATO.

423    Accordingly, I find that Mr Lean’s advice did not cause Mr Frank Forgione not to discharge the company’s debt to the ATO, as he claimed.

424    I observe that although not pleaded in support of his claim under s 1317S, Mr Frank Forgione also gave evidence that at a meeting on 15 November 2004 after Mr Lean had been appointed as administrator, but before he was appointed as liquidator, Mr Lean advised him not to “pay anyone” and, acting on this advice, he did not pay the ATO. For the sake of completeness, I record that for the reasons already given, I do not accept that even if this advice was given, that it caused Mr Frank Forgione not to advance the funds to the company, to discharge the ATO debt, or not to discharge the ATO debt himself directly.

425    Further, and in any event, I would for the following reasons, not have exercised the discretion to excuse Mr Frank Forgione from liability in respect of his contravention of s 588G of the Corporations Act.

426    After Mr Peter Forgione took control of the day-to-day management of the business, Mr Frank Forgione remained a director of the company which was then continuing to employ persons and was incurring tax liabilities and debts to third parties. However, notwithstanding these circumstances, Mr Frank Forgione failed to accept the responsibilities attendant upon the office of a director of a company. Mr Frank Forgione was indifferent as to whether the company was meeting its obligations to pay tax, or was otherwise paying its other creditors and making superannuation contributions for its employees.

427    As I have found, by October 2002, Mr Frank Forgione knew that cheques drawn on the company’s NAB account were being dishonoured. However, even after learning of the company’s cash-flow issues, Mr Frank Forgione, thereafter, took no steps to ensure that the company was meeting its obligations to all if its creditors, or otherwise, to stop the company from incurring more debts.

428    A further example of Mr Frank Forgione’s indifference to the obligations and responsibilities of his office, is the fact that during the period November 2002 to 27 November 2003, Mr Frank Forgione did not procure that the company file any of its BAS. Nor, did Mr Frank Forgione procure that the company prepare its 2003 financial statements and its 2003 tax return before his retirement as a director on 3 June 2004.

429    Further, notwithstanding that by the time he resigned as a director in June 2004, Mr Frank Forgione was aware that the company could not meet its debts as and when they fell due, he did not appoint an administrator to the company. It was only five months later, and then, only after the ATO’s winding-up application was brought, that an administrator was appointed. By then the company was hopelessly insolvent and the appointment of the administrator did not avoid liquidation.

430    In addition, it does not reflect well on Mr Frank Forgione that in August 2005, he wrote a letter to Mr Lean in response to his request for the company’s records, which was at the very least misleading and obstructive. Nor does it reflect well on Mr Frank Forgione that in this proceeding, Mr Frank Forgione sought, unjustifiably, to pass the blame for his indifference to his duties as a director, and the failure of the company to pay its debts, upon Mr Philpott, Lincolns and Mr Lean.

431    Accordingly, I dismiss Mr Frank Forgione’s claim for relief under s 1317S of the Corporations Act.

Mr Peter Forgione’s claim for relief under s 1317S of the Corporations Act

432    Mr Peter Forgione also claimed relief under s 1317S of the Corporations Act on the basis that he at all times acted honestly in the performance of his duties as a director of the company.

433    Mr Peter Forgione pleaded in support of that relief the same facts, mutatis mutandis, as pleaded by Mr Frank Forgione which are set out at [386]-[387] above.

434    The one difference between Mr Peter Forgione and Mr Frank Forgione is that as at the date of the meeting with Mr Lean pleaded in his defence, Mr Peter Forgione was still a director of the company, whereas Mr Frank Forgione was not – having resigned from that position some five months earlier.

435    The first contention pleaded by Mr Peter Forgione in support of his claim that he acted honestly as a director is that he first became aware of the company’s tax liability in mid 2004 because prior to that time, Lincolns had failed to inform him of that liability. I have already rejected that contention because I have found, as he admitted in cross-examination, that Mr Peter Forgione was aware the company was not meeting its tax liability from, at the latest, 29 October 2001 onwards.

436    The gravamen of the second contention pleaded by Mr Peter Forgione is that, but for the advice of Mr Lean not to advance monies to the company to pay the creditors, Mr Frank Forgione would have advanced the company monies to pay all of the creditors and there would have been no administrator appointed.

437    Mr Peter Forgione said in his evidence-in-chief that after the ATO issued its winding-up application on 26 October 2004, Mr Bowman referred Mr Peter Forgione to Mr Lean, and that he later met with Mr Bowman and Mr Lean in Perth and that Mr Frank Forgione joined the meeting by telephone from Albany. Mr Peter Forgione said that during the meeting Mr Bowman said that since the winding-up application had been filed there was not much more that he could do. According to Mr Peter Forgione, Mr Lean then said:

I can take care of this, we have these problems with the ATO all the time. Don’t pay anybody. If I am appointed as an administrator I will sort out an arrangement with the ATO.

438    Mr Peter Forgione went on to say in his witness statement:

I do not recall Mr Lean giving me a reason why appointing him as an administrator was better than paying the ATO directly. However, Mr Lean said that he had done this before, gave us a solution and made the solution seem very easy. I trusted his professional opinion and his claim of experience in these matters.

439    Mr Peter Forgione then said that had he not received the advice from Mr Lean not to pay the ATO directly, he would not have appointed an administrator of the company and he and his father would have “continued our discussions with the ATO to the pay the ATO debt (or otherwise enter into an arrangement with the ATO ourselves)”.

440    First, as is the case in relation to Mr Frank Forgione’s defence, I do not comprehend how Mr Peter Forgione can rely on an event in November 2004, to excuse the incurring of debts in contravention of s 588G prior to that event. Accordingly, I reject Mr Peter Forgione’s claim, based on his pleaded case, that he acted honestly in the performance of his duties as a director, and that he ought to be excused for the contravention of s 588G.

441    In any event, I also reject Mr Peter Forgione’s evidence upon which he relies in support of his claim made under s 1317S of the Corporations Act.

442    I specifically reject Mr Peter Forgione’s evidence that, but for Mr Lean’s advice not to pay the ATO directly, he would not have appointed an administrator.

443    As previously mentioned, the objective evidence discloses that the very reason that Mr Peter Forgione and Mr Frank Forgione sought advice from Mr Bowman was for the purpose of exploring alternative means of dealing with the debts due to the ATO and the NAB, other than by paying the whole amount claimed by each of those creditors. By 1 November 2004, the company had had the opportunity of discharging those debts by meeting the demands made by each of those creditors, but had failed to do so.

444    Further, it was Mr Peter Forgione’s own evidence that the reason for seeing Mr Bowman was to explore the prospect of reaching a compromise with the company’s creditors; and that Mr Bowman had recommended the appointment of an administrator so that this could be done through a deed of company arrangement.

445    In addition, I have, in dealing with the defence raised by Mr Frank Forgione, rejected the contention that, but for the impugned advice of Mr Lean, Mr Frank Forgione would have advanced monies to the company to enable it to discharge its liability to the ATO. I find that Mr Peter Forgione would, because of his father’s failure to put the company in funds to permit it to pay the demands made by the ATO and the NAB during the first nine months of 2004, have known that his father was unwilling to provide financial support to the company to permit it to discharge its financial obligations to those two creditors. I find further that Mr Peter Forgione consulted with Mr Bowman because he knew that his father was not willing to provide funds to the company to permit it to discharge the debts it owed to the ATO and the NAB, and an alternative means of dealing with the company’s debt was needed. As I have mentioned, there would have been no cause to consult Mr Bowman, if Mr Frank Forgione was willing to put the company in funds to discharge its debts to the ATO and the NAB.

446    Accordingly, I find that Mr Peter Forgione appointed Mr Lean as administrator in furtherance of his and his father’s purpose of seeking to compromise the company’s liability and each of their own personal liability to its creditors; and not because of Mr Lean’s impugned advice.

447    Further, I do not accept Mr Peter Forgione’s evidence, that but for the impugned advice given by Mr Lean to them, he and his father would have “continued” discussions with the ATO. Mr Peter Forgione accepted in cross-examination, that neither he, nor to his knowledge, his father, had been engaged in any discussions with the ATO about the payment or compromise of the ATO debt. I find that there were no pre-existing discussions with the ATO about the payment or compromise of the ATO debt. This finding is supported by the objective evidence of the letter and facsimile written by Mr Philpott in September 2004 and October 2004 referring to the future possibility of entering into discussions with the ATO about the payment of the ATO debt.

448    It follows that Mr Peter Forgione has not made out the facts upon which he relies for his defence under s 1317S of the Corporations Act.

449    I, accordingly, dismiss his defence on this basis as well.

450    Further, and in any event, I would not have found that, in all the circumstances, Mr Peter Forgione should have been excused from liability arising under s 588G of the Corporations Act.

451    First, Mr Peter Forgione and Mr Frank Forgione only consulted Mr Lean after they had caused the company to get into such a hopeless financial position that it was on the verge of being wound up. At the date of that meeting with Mr Lean, Mr Peter Forgione was the sole director of the company, which until he moved to Perth in about September 2003, had been carrying on business, employing persons and incurring tax liabilities and debts to other third parties. In relation to the company’s obligations to the ATO, Mr Peter Forgione had failed to ensure that the company lodged its BAS regularly on a quarterly basis, and, insofar as the company did lodge quarterly BAS statements throughout the period commencing in May 2001 to November 2004, Mr Peter Forgione failed to ensure that the self-assessed amounts payable to the ATO, in respect of each BAS, were paid to the ATO. Further, whilst acting as a director of the company, Mr Peter Forgione failed to ensure for three successive years that the company made superannuation contributions on behalf of its employees. Also, Mr Peter Forgione failed to ensure that the company pay the income tax assessment of $7,631.64 which was issued on 1 May 2002.

452    However, during this period, Mr Peter Forgione drew 122 cheques which were dishonoured and was content to use the company’s funds, for his own personal benefit, including for paying his personal credit card debts and purchasing an Alfa Romeo motor vehicle, to such an extent that he built up an irrecoverable debt to the company of $168,000 by June 2004.

453    Thus, even though Mr Peter Forgione knew from, at the latest, 29 October 2001 onwards that the company was unable to pay all of its debts as and when they fell due, and that the ATO liability was increasing, Mr Peter Forgione did not appoint an administrator until 1 November 2004. Rather, he let the company continue to trade until he moved to Perth in late 2003, and to use the company’s bank accounts to pay his personal debts and expenses whilst ignoring the company’s obligation to the ATO and to other creditors. Mr Peter Forgione only appointed an administrator after the company received a winding-up application. By then the company was hopelessly insolvent, and the appointment of an administrator did not prevent the company from going into liquidation.

454    It follows that I find that Mr Peter Forgione, since June 2001, showed a complete indifference to the responsibilities attendant upon being a director of a company; and made no genuine attempt to carry out the duties and obligations of his office.

455    Accordingly, I reject Mr Peter Forgione’s claim for relief under s 1317S.

THE RESPONDENTS’ ADDITIONAL CLAIM FOR RELIEF UNDER S 1317s OF THE CORPORATIONS ACT

456    Further, during the trial, the respondents, apparently without objection, also made an additional claim for relief under s 1317S.

457    The respondents contended that they ought to be partially relieved from liability in respect of the loss claimed by the applicant. The respondents contended that the amount of compensation payable should be reduced by an amount equal to the tax refund which the company would have received relating to the PAYG instalment tax for the 2003 and 2004 financial years, had the tax returns for those years based on the financial statements prepared by Mr Philpott, been filed by Mr Lean.

458    The particulars of the additional claim state that the respondents relied upon Lincolns to prepare the company’s tax returns including for the years ended 30 June 2003 and 30 June 2004 and that Lincolns “were late” in preparing the returns for the 2003 and 2004 financial years, and that during the course of 2004 the respondents attempted to have the financial statements and tax returns finalised with Lincolns.

459    It is then alleged that after Mr Lean was appointed as an administrator, he reported to the creditors of the company that he would attempt the finalisation of the financial statements and tax returns and that the completion of the accounts would allow the ATO to lodge a correct proof of debt.

460    The respondents went on to allege that after Mr Lean’s appointment as an administrator, Lincolns provided the financial statements and tax returns for 2003 and 2004 financial years and informed Mr Lean that there would be no tax liability for those years.

461    The respondents then say that despite being the only person empowered to lodge the tax returns, Mr Lean did not lodge them.

462    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.

463    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.

464    In my view, each of the respondents has failed to establish the pleaded case.

465    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.

466    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.

467    I have come to this view for the following reasons.

468    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.

469    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.

470    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.

471    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.

472    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.

473    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.