Can you believe we are halfway through the year?!
This month’s top five thought-provoking cases deal with issues including claiming legal privilege over documents created during a liquidation, whether blame for insolvent trading can be shifted to external accountants under a general advisory retainer, the meaning of a ‘gentleman’s agreement’, when an undocumented shareholder loan is repayable and when a liquidator can recover costs from a recalcitrant examinee.
Case No. 1: B.C.I. Finances Pty Limited (In Liquidation) v Commissioner of Taxation  FCA 602 – 15 June 2015
This decision is one of a number in the ongoing dispute between the Commissioner of Taxation, BCI and the Binetter family.
Here, the Commissioner applied to the Federal Court for an order releasing him from the implied obligation not to use certain documents obtained during the course of litigation for purposes other than those of that litigation. BCI’s liquidators made a similar application. The documents at issue related to those obtained under court order from an Israeli bank. Before dealing with the Commissioner’s application, however, the Court was asked to rule on whether certain documents of the Commissioner’s and the liquidators’ could be withheld from the Binetter parties on the basis of privilege.
The documents claimed to be privileged by the Commissioner and the liquidators were communications between the Commissioner (including the ATO) and his lawyers, between the Commissioner’s Australian and Israeli lawyers, and between the Commissioner and his lawyers and BCI’s liquidators and their lawyers.
In deciding which of the documents did attract legal professional privilege, Justice Foster said the key question is ‘what was the dominant purpose for the making of the communication?’. In the case of written communications, his Honour said the key question there is ‘what was the dominant purpose for making the record of the communication?’. So, for example, a document from BCI’s liquidators to the ATO reporting expenditure in the liquidation in contemplation of a funding agreement between the liquidators and Commissioner was held not to be privileged as it was not made for the predominant purpose of litigation. However, communications between the ATO, the liquidators and the liquidators’ solicitors after the funding agreement had been entered were held to be privileged.
This case is a reminder that determining what documents are privileged is not necessarily straightforward, and just because something passes through a solicitor’s hands does not automatically mean a communication is protected by privilege.
Case No. 2: Trinick as Liquidator of Forgione Family Group Pty Limited (In Liquidation), in the matter of Forgione Family Group Pty Limited (In Liquidation) v Forgione  FCA 642 – 26 June 2015
The liquidator of Forgione Family Group (FFG) sued the directors under section 588M of the Corporations Act 2001 (Cth) for insolvent trading. On the question of insolvency, the liquidator said FFG was presumed insolvent for failure to keep and retain records under section 286 of the Corporations Act or, alternatively, was actually insolvent during the relevant period.
In defence of the claim, the directors said FFG was solvent because one of them 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’. Furthermore, each director relied on the defences in section 588H whereby they expected FFG was and would remain solvent or, alternatively, they relied on the advice of external accountants that FFG was solvent during the relevant period.
In finding for the liquidators, Justice Siopis of the Federal Court noted the following. First, on the question of presumed insolvency, the fact the liquidator issued demands to the directors and other people under sections 530A and B for production of FFG’s books and records, and no records were produced, supported a finding that FFG had failed to comply with section 286.
Secondly, on the question of funding from one of the directors, the willingness to advance funds to FFG was to be assessed by reference to the director’s actual conduct. As the director had never actually advanced funds to FFG to meet its debts, the director had ‘failed to act consistently with his professed state of mind’ and his assertions were rejected.
Thirdly, on the question of actual insolvency, independent expert evidence from an experienced liquidator was persuasive — more so than FFG’s liquidator — and actual insolvency was found.
Fourthly, on the question of the directors’ knowledge of insolvency, there was simply too much documentary evidence against the directors’ assertions they did not suspect insolvency. In this regard, his Honour noted the directors had sought advice from a specialist “debt crisis” consultant many months before the liquidator was appointed.
Finally, on the question of relying on external accountants, the accountants were merely engaged to provide general accounting and tax services to FFG. They were never asked to analyse or advise the directors whether FFG was insolvent. In fact, the accountants were requesting records from the directors to complete two years of outstanding financial statements and tax returns, which meant the accountants were in no position to advise on the question of solvency if asked.
Among other things, this case shows that directors cannot shift the blame for insolvent trading onto their accountants under a general advisory retainer, nor can they profess to have been willing to keep the company solvent if in fact they never paid any outstanding bills.
Case No. 3: In the matter of Civil & Civic Infrastructure Pty Limited  NSWSC 770 – 17 June 2015
While not strictly insolvency related, this case is interesting nonetheless.
The plaintiff, Mr Elfar, sought orders to give him an interest in Civil & Civic Infrastructure (C&CI). Mr Elfar claimed there had been a “gentleman’s agreement” with C&CI’s sole director and shareholder, Mr Tiplady, that Mr Elfar was entitled to 50% of the shares. Mr Tiplady disputed the claim.
At the outset, Justice Black of the NSW Supreme Court said he had ‘substantial reservations’ as to Messrs Elfar’s and Tiplady’s credit. The gentlemen had first met while both were in prison on remand, and Mr Elfar had been previously disqualified by ASIC from being a company director. His Honour also noted that ‘several aspects of the parties’ evidence are in stark contradiction, such that both versions of events cannot be true’.
Next, Justice Black considered the meaning of a gentleman’s agreement. His Honour said that while it is a phrase not commonly used, ‘it does not seem to me that it would be used to refer merely to an oral agreement or an informal, but legally binding, agreement, and it connotes an agreement which is not intended to be binding in law’. This view was consistent with Justice Gobbo’s decision in Moore v Lam  VR 559 where the term was described as an informal or voluntary arrangement and ‘no legal contract for transfer of property or arrangement enforceable in law is intended’.
On the basis then that Mr Elfar was not entitled to an interest in C&CI, the share register of that company could not be amended as Mr Elfar wished, and nor did Mr Elfar have standing to make a winding up application for just and equitable reasons under section 461(1)(k) of the Corporations Act.
Case No. 4: In the matter of Tuffrock Pty Limited  NSWSC 738 – 12 June 2015
Tuffrock applied to set aside a creditor’s statutory demand served on it by Roger Smith & Associates (RSA). RSA was a shareholder of Tuffrock, and the two companies shared a common director.
RSA demanded repayment of $40,000 loaned to Tuffrock. Tuffrock resisted the demand on the basis there was a genuine dispute about whether the amount was presently due and payable to RSA. Instead, Tuffrock said that with RSA’s agreement at the time the loan was made, the loan was not repayable until there would be no negative impact on Tuffrock’s financing and operations.
The question for the Court was whether RSA’s loan was due and payable as alleged.
Justice Black of the NSW Supreme Court said that a debt is due and payable when the time for payment has arrived and an unqualified obligation requirement performance has arisen. In finding for Tuffrock, his Honour noted the lack of documentation about the loan, including its term, which meant it was unclear to anyone when the loan was repayable.
This case confirms the importance of properly documenting arrangements between different legal entities, no matter how close relationships may seem at the beginning of the arrangements or whether common people are involved in the entities.
Case No. 5: Re Calder Park Promotions (In Liquidation)  VSC 285 – 19 June 2015
During 2014, the liquidators of Calder Park Promotions (CPP) conducted a public examination of certain persons in relation to the examinable affairs of CPP. Bob Jane was one such person to whom a summons was issued to produce documents and appear for examination.
Mr Jane failed to properly produce documents and over the course of the year, the proceeding went before the Court multiple times, with the liquidators obtaining (on more than one occasion) orders compelling Mr Jane to produce documents as summonsed. At no time did Mr Jane file an application to have the examination summons set aside or narrowed on the question of documents to be produced.
The liquidators sought an order against Mr Jane for their costs wasted by reason of Mr Jane’s failure to produce documents as ordered. In finding for the liquidators, Associate Justice Gardiner of the Victorian Supreme Court said what had ensued was ‘an extraordinarily drawn out process with serial resistance to the production of documents and the proffering of various excuses as to why the production of the documents could not take place’.
His Honour agreed with the liquidators that if Mr Jane had produced the documents required to be produced at the time they were to be produced, there would have been no requirement for subsequent orders, disputes about those orders and time wasted by the liquidators in and out of court.
This case confirms, yet again, that a person disobeys court orders to produce documents at their peril.
For more information contact: