In the matter of Pulse Interactive Pty Limited (in liquidation)

1. [1]

   HER HONOUR: In this matter, the liquidator of three companies seeks to recover some $4.1 million from the former sole director and shareholder, Richard Friedrichs, comprising some $2.1 million paid by those companies to him and a further $2 million in director’s loans which he owed the companies, and some of which may have been written off at or about the time that the companies went into voluntary liquidation. After a protracted and somewhat unsatisfactory procedural history, Mr Friedrichs did not appear at the final hearing of the matter. Nonetheless, I am satisfied on the evidence relied upon by the liquidator that the orders which he seeks should be made for the reasons which follow.

Facts

1. [2]

   Mr Friedrichs was the sole director, secretary and shareholder of three companies.

2. [3]

   By 2011, Mr Friedrichs and the companies were experiencing difficulties with payroll tax. Mr Friedrichs and the companies retained solicitors to object to a decision by the Office of State Revenue to group these companies for the purpose of assessing payroll tax. By April 2013, the Office of State Revenue had issued a garnishee order to the companies’ bank for unpaid payroll tax.

3. [4]

   On a happier note, on 5 August 2013, Optus offered to buy back the Optus franchises from Pulse Interactive and Amel Corporation for $2,780,012 plus GST. Formal agreements were entered into with Optus later that month.

4. [5]

   On 28 August 2013, the Office of State Revenue advised the companies’ solicitor that Amel Corporation owed $155,496.98 for payroll tax, which amount was accruing interest daily. On 13 September 2013, the companies applied to the Office of State Revenue for exclusion from grouping for payroll tax purposes on the basis that the companies were substantially independent. At the time, the companies were not up to date with the lodgement of returns with the Office of State Revenue, having only lodged returns for the financial year ended 30 June 2011. As part of the companies’ application, the companies advised:

5. [6]

   On 17 September 2013, the companies’ solicitor told Mr Friedrichs that the application for exemption had been lodged, “meantime those financials we need to pay attention to with regard to timing.” Mr Friedrichs replied that the financials for 2013 were “on track for the date agreed in the lodgement doc”.

6. [7]

   On 24 September 2013, the companies’ solicitor sought clarification from the Office of State Revenue as to the composition of the amount owing for payroll tax, noting that “once we have this information we will be able to take further instructions from our client regarding a payment plan.” I take it from this that the companies did not have sufficient funds to pay the outstanding payroll tax. On 1 October 2013, Mr Friedrichs signed financial statements for the companies for the financial year ended 30 June 2013, including a Director’s Declaration that the financial statements and notes fairly presented the companies’ financial position and performance. The financial statements were clearly prepared in accordance with the promise made by the companies to the Office of State Revenue to bring the companies’ returns up to date. I consider that the financial statements accurately recorded the companies’ financial position which was sought to be conveyed to the Office of State Revenue in support of the application for exemption from grouping. The following items in the financial statements are noteworthy:

7. [8]

   It can be seen that:

8. [9]

   On 2 and 11 October 2013, the Office of State Revenue emailed the companies’ solicitor confirming that Amel Corporation owed payroll tax of $156,639.85, referable to tax, penalties and interest for the years ended 30 June 2008 to 30 June 2011 and confirmed that the return for 30 June 2012 had not been lodged. The companies’ solicitor forwarded these emails to Mr Friedrichs, who was thereby aware that the monies were due and payable unless the companies’ application for exemption from grouping was successful, and that further monies were likely to be payable once the companies had lodged their returns for the financial years ended 30 June 2012 and 30 June 2013. Given the relatively weak financial position of the companies revealed in the financial statements recently signed by Mr Friedrichs, it would have been apparent to him that the financial position of the companies was about to deteriorate further.

9. [10]

   On 25 October 2013, Optus paid $1,284,824.49 to Pulse Interactive and $923,194.82 to Amel Corporation for the Optus franchises purchased from those companies. The very next day, Pulse Interactive paid $1 million to Mr Friedrichs and Amel Corporation paid $850,000 to Mr Friedrichs. Both companies ceased to trade. There are no contemporaneous business records which explain why these payments were made to Mr Friedrichs. It seems to me that Mr Friedrichs made these payments in order to secure the benefit of the sale of the Optus franchises for himself to the exclusion of the existing and anticipated creditors of the companies, including monies owed and expected to become owing to the Office of State Revenue.

10. [11]

    On 15 April 2014, the Office of State Revenue informed the companies that it had disallowed the exclusion from grouping for payroll tax purposes. Six weeks later, on 2 June 2014, for no apparent reason, Mr Friedrichs ceased to be an office-holder of Pulse Interactive and Amel Corporation. Shane Cook was appointed in his stead. On 5 June 2014, Mr Friedrichs placed Pulse Interactive and Amel Corporation into voluntary liquidation pursuant to a resolution he passed as the sole shareholder of each company.

11. [12]

    Prior to the liquidation of the companies, Mr Friedrichs met with Dean Wilcocks of Lowy Wilcocks and Co., chartered accountants, to discuss the financial position of the companies. Mr Friedrichs instructed Mr Wilcocks to prepare draft financial statement for Pulse Interactive and Amel Corporation “for discussion purposes”. Those financial reports were in draft format and, according to Mr Friedrichs, had not been adopted or actioned at the time of liquidation. The financial statements were not signed by Mr Friedrichs or Mr Wilcocks. Salient information from these draft accounts is set out in the following table for the six months ended 31 December 2013:

12. [13]

    Goodwill on acquisition was written off in the draft accounts of Pulse Interactive. The director’s loans were written off in the draft accounts of Pulse Interactive and Amel Corporation. The draft financial statements for Pulse Interactive did not record the proceeds for the sale, whilst the draft financial statements for Amel Corporation did. Further elucidation as to what was proposed by these draft financial statements was located by the liquidator amongst the books and records of the companies, being:

13. [14]

    Similar records have been located for Amel Corporation Pty Ltd which record that, for the financial year ended 30 June 2014, Mr Friedrichs owed Amel Corporation $630,650.55. A draft General Journal Sheet proposed to reduce the balance of the loan account to nil by debiting inter alia “goodwill on acquisition”. This proposed entry did not make its way into the general ledger for Amel Corporation Pty Ltd for the year ended 30 June 2014 but is reflected in the draft financial statements for the period ended 31 December 2013.

14. [15]

    The liquidator gave evidence that he has examined the bank statements and records of Pulse Interactive and Amel Corporation and can find no repayments by Mr Friedrichs of his loans nor the declaration of any dividend to support a reduction in the loan balances.

15. [16]

    I note that section 1305 of the Corporations Act 2001 (Cth) provides:

16. [17]

    His Honour Austin J explained the application of this section in Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 at [397]-[398]:

17. [18]

    Like the situation before Sloss J in Re Shot One Pty Ltd (in liquidation) [2017] VSC 71, the records before me indicate different and inconsistent treatment of loan accounts such that the draft financial statements and associated records may be considered to lack reliability such that they do not raise a prima facie presumption of the elimination of the loans owed by Mr Friedrichs when viewed in the context of the body of evidence before the Court: at [243]-[244]. I cannot put it better than Mr Friedrichs: these draft financial statements were for discussion only and were not adopted or actioned. That is, although Mr Friedrichs explored how the loans he had obtained from the companies might be written off, the director’s loans were not written off and remain owing. It seems to me that Mr Friedrichs explored the possibility of writing off the loans in circumstances where he had already paid $1,850,000 from those companies to himself and expected that the companies would go into liquidation with their main asset being monies owed by him to the companies. The liquidator appointed to the companies might be expected to seek to retrieve the loans from him.

18. [19]

    According to the liquidator, proofs of debt have been lodged by creditors in the amount of $1,709,963 for Pulse Interactive, which includes a proof of debt lodged by Mr Friedrichs in the amount of $131,913. Proofs of debt have been lodged by creditors of Amel Corporation totalling $478,597. The creditors of both companies include the Office of State Revenue, the Deputy Commissioner of Taxation, BMW Australia Finance and the companies’ accountant and solicitor.

19. [20]

    On 18 June 2014, the Office of State Revenue sent a letter to Amel Holding enclosing a payroll tax assessment notice of $400,867.47 due on 9 July 2014. On 30 June 2014, Amel Holding entered into a contract to sell its “Just Cuts” franchises for $415,000. On 22 July 2014, the sale was completed and the purchase price paid into the trust account of Amel Holding’s solicitor. Amel Holding ceased to trade. On 5 August 2014, Amel Holding’s solicitor paid Mr Friedrichs part of the settlement funds, being $214,940.38 and, on 9 September 2014, a further $37,966.75 from the proceeds of sale. There are no contemporaneous business records which explain why these payments were made to Mr Friedrichs. It seems to me that Mr Friedrichs made these payments to himself in order to secure the benefit of the sale of the “Just Cuts” franchises for himself to the exclusion of the existing and anticipated creditors of the company, including the Office of State Revenue.

20. [21]

    On 19 September 2014, for no apparent reason, Mr Friedrichs ceased to be the sole director of Amel Holding Pty Ltd and was replaced by David Irvine. On 17 October 2014, Mr Friedrichs placed Amel Holdings into voluntary liquidation pursuant to a resolution he passed as sole shareholder.

21. [22]

    No draft financial statement was prepared for Amel Holding like those prepared for Pulse Interactive or Amel Corporation, although a balance sheet has been located as at June 2014 which retained the directors loan but wrote off the goodwill on acquisition. The balance sheet recorded payroll liabilities of $501,131.86.

22. [23]

    According to the liquidator, proofs of debt totalling $742,544 have been lodged by creditors of the company, including the Office of State Revenue, the Deputy Commissioner of Taxation and the company’s accountant.

Procedural history

1. [24]

   In November 2015, the liquidator commenced these proceedings against Mr Friedrichs, contending that the payments made by the companies to Mr Friedrichs were voidable and that the director’s loans should be repaid. In his defence, Mr Friedrichs admitted that he was the sole director of the companies and that the payments had been made to him, but denied that the liquidator was entitled to the relief sought.

2. [25]

   Although Mr Friedrichs was initially legally represented, his solicitors ceased to act in May 2017. There have been, by my count, some 27 directions hearings in this matter, which is reflective of the slow progress of the matter towards trial. On the final directions hearing on 17 September 2018, Mr Friedrichs did not appear but had informed the plaintiffs’ solicitor that he needed three months to put on further evidence. His Honour Black J gave Mr Friedrichs the requested time and listed the matter for hearing on 29 January 2019, directing the plaintiffs to notify Mr Friedrichs of the orders made. The plaintiffs’ solicitor did so later that day. On 8 January 2019, the plaintiffs’ solicitor also served a proposed Second Further Amended Originating Process on Mr Friedrichs, noting that the relief claimed in the document mirrored that sought in the statement of claim filed on 12 July 2017 save for one difference which I consdider to be immaterial. On 24 January 2019, the plaintiffs’ solicitor provided Mr Friedrichs by email with a Dropbox link to the electronic form of the Court Book for the hearing and asked where he would like the hard copy delivered. There was no reply.

3. [26]

   There was no appearance by Mr Friedrichs at the hearing. However, I am satisfied that the defendant was aware that the hearing was to take place and chose not to appear. I granted leave to file a Second Further Amended Originating Process having regard to the fact that the plaintiffs did not seek to rely on any further evidence but simply to align the relief sought with the evidence as had already been filed and served. As matters unfolded, the plaintiffs pressed their claim by reference to section 588FE of the Corporations Act 2001 (Cth) only, although other pleaded causes of actions were equally available given the facts as I have found them to be.

Voidable transactions

1. [27]

   The liquidator submits that, at the time that the payments by the companies were made to Mr Friedrichs, the companies had no liabilities to him but rather were owed large sums in director loans by him. Further, the companies had significant debts and limited assets. The liquidator seeks the return of the payments with interest on the basis that the payments were voidable transactions, being unreasonable director-related transactions within the meaning of sections 588FDA and 588FE of the Corporations Act 2001 (Cth). Section 588FE(6A) of the Corporations Act 2001 (Cth) provides:

2. [28]

   The only issue before me is whether the payments meet the description in section 588FE(6A)(a). In respect of this, section 588FDA(1) provides:

3. [29]

   The requirements of section 588FDA(1)(c) are comprehensively analysed by Gleeson J in Smith (in his capacity as liquidator of Action Paintball Games Pty Ltd) v Starke (No 2) [2015] FCA 1119; 109 ACSR 145, whose analysis has been approved and summarised by the Court of Appeal in Crowe-Maxwell v Frost [2016] NSWCA 46 per Beazley P at [70]:

4. [30]

   The liquidator submitted that a reasonable person in the companies’ circumstances would not have made the payments as the payments were voluntary and were made in circumstances where the companies had significant debts, limited assets and limited cash. As a result of the payments, coupled with Mr Friedrichs’ failure to repay his loans from the companies, the companies are presently unable to pay creditors in full. There were no benefits to the companies in making the payments. By making the payments, the companies no longer had the money the subject of the payments to meet their liabilities and became insolvent. There were no respective benefits to other parties to the transactions other than Mr Friedrichs who, it was submitted, received a windfall despite the fact that in reality he owed money at the time to the companies. It was submitted that all four of the payments were unreasonable director-related transactions and, therefore, voidable.

5. [31]

   I agree with the liquidator’s submissions. The payments were made by Mr Friedrichs for no apparent reason and at a time when the companies were ‘sailing close to the wind’ and were in need of the funds to pay creditors, both existing and imminent. The payments were not in the interests of the companies nor of the creditors of the companies. The payments satisfy the criteria in section 588FDA(1)(c) and were unreasonable director-related transactions under section 588FE(6A)(a) and voidable.

Director’s loans

1. [32]

   Further, the liquidator seeks the repayment of the director’s loans. As I have already found, the director’s loans remain due and payable in respect of the three companies. The draft financial statements prepared for Pulse Interactive and Amel Corporation were not approved or implemented but were for discussion purposes only. It seems to me from all of the records of the companies which are in evidence before me that the director’s loans remain owing as recorded in the financial statements signed on 1 October 2013 for Pulse Interactive and Amel Corporation, and the balance sheet of Amel Holding of June 2014. Mr Friedrichs should repay the loans, which will enable the liquidator to pay the creditors of the companies.

Orders

1. [33]

   The defendant should be required to repay to the liquidator the sum of each of the voidable transactions, with interest, running from the dates which he received the payments.

2. [34]

   This sum is calculated as follows:

   1. (1)

      $1,000,000.00, being the amount of the payment made by Pulse Interactive, plus interest at the prescribed rates from 28 October 2013 to 28 January 2019 of $312,462.35;

   2. (2)

      $850,000.00, being the amount of the payment made by Amel Corporation, plus interest at the prescribed rates from 28 October 2013 to 28 January 2019 of $265,593.00;

   3. (3)

      $214,940.38, being the amount of the first payment made by Amel Holding, plus interest at the prescribed rates from 5 August 2014 to 28 January 2019 of $56,309.23; and

   4. (4)

      $37,966.75, being the amount of the second payment made by Amel Holding, plus interest at the prescribed rates from 10 September 2014 to 28 January 2019 of $9,702.98.

3. [35]

   Further, the defendant should be required to repay the loan amounts to each of the first, second and third plaintiffs, along with interest calculated from the respective dates of liquidation, as follows:

   1. (1)

      $663,589.00, the amount of the Pulse Interactive loan, plus interest at the prescribed rates from 5 June 2014 to 28 January 2019 of $181,053.00;

   2. (2)

      $883,889.00, the amount of the Amel Corporation loan, plus interest at the prescribed rates from 5 June 2014 to 28 January 2019 of $241,159.44; and

   3. (3)

      $471,884.00, the amount of the Amel Holding loan, plus interest at the prescribed rates from 17 October 2014 to 28 January 2019 of $117,487.81.

4. [36]

   I make the following orders:

   1. (1)

      The Defendant pay the Fifth Plaintiff the sum of $2,746,975, which includes interest.

   2. (2)

      The Defendant pay the First Plaintiff the sum of $844,642, which includes interest.

   3. (3)

      The Defendant pay the Second Plaintiff the sum of $1,125,048, which includes interest.

   4. (4)

      The Defendant pay the Third Plaintiff the sum of $589,372, which includes interest.

   5. (5)

      The Defendant to pay the plaintiffs’ costs as agreed or assessed.