In the matter of Forward Horizons Capital Pty Ltd

By Originating Process filed on 5 March 2024, Mr Timothy Heesh in his capacity as liquidator of Forward Horizons Capital Pty Ltd (in liq) (“FHC”), Forward Horizons Pty Ltd (in liq) (“FH”) and SHIBS Management Pty Ltd (in liq) (“SHIBS”) (together, the “Group”) seeks directions under s 90-15 of the Insolvency Practice Schedule (Corporations) (“IPSC”) in respect of three issues. The first of the directions sought is that he is justified in proceeding on the basis that the assets that he realised in the liquidation of the three companies are FHC’s property. The second is that he is justified in proceeding on the basis that FHC is the true employer of all employees working within the Group’s business. The third is directed to questions whether there is a loan agreement between FHC and FH and, if such a loan existed, whether its current balance is nil; whether there is a loan agreement between FHC and SHIBS; and whether there is a loan agreement between FHC and SHIBS. I have identified these questions in a different order to the Originating Process because, as Mr Pokoney who appeared for Mr Heesh accepted in opening, the third of these questions has no practical significance, if the assets realised in the liquidation are FHC’s property and FHC is the true employer of all employees within the Group, with the consequence that priority employee entitlements will exhaust FHC’s assets.

I now set out a brief chronology, drawing on a helpful chronology provided by Mr Pokoney and on Mr Heesh’s affidavits, and I will then address Mr Heesh’s affidavit evidence and the three questions noted above.

FHC was incorporated on 16 August 2000, initially under the name “Forward Horizons Pty Ltd”. Arthur Boyd (Mr Boyd) was then one of its directors (Ex P1, CB 206). FHC then operated a business with two other entities and rendered invoices to at least one of them (Heesh 5.3.24 [39]-[41]).

In early October 2012, a third party, Naval Ship Management (Australia) Pty Ltd (“NSM), to which the Group later provided services, obtained a contract from the Royal Australian Navy to provide maintenance services on vessels (Ex P1, CB 977). It appears that FHC, then named Forward Horizons Pty Ltd, reached agreement with NSM to provide it with services, as part of the maintenance contract with the Royal Australian Navy (Heesh 5.3.24 [70]).

FH was incorporated on 22 October 2012 (Ex P1, CB 212) and FHC changed its name from “Forward Horizons Pty Ltd” to “Forward Horizons Capital Pty Ltd” (Ex P1, CB 206).

On 28 March 2014, FH signed a contract with NSM to provide maintenance services (Ex P1, CB 985, 1080). FH subsequently received payments for work under that contract and, from 1 July 2014, FH began to transfer monies to FHC, described (inter alia) as “TRANSFER…TO [FHC]” (Ex P1, CB 1279).

From 16 October 2014, FH issued invoices to NSM for “Labour” and “Material/Consumables” and those invoices continued until December 2016 (Ex P1, CB 1136-1164). From 21 October 2014, FH begins to record receipt of payment from NSM (Ex P1, CB 1280).

On 13 March 2015, SHIBS was incorporated and Mr Shanon Boyd, the son of Mr Arthur Boyd, was its sole director (Ex P1, CB 216).

From 5 June 2015, transfers of funds from FH to FHC were described within the bank register maintained by the Group as “LOAN TO [FHC]” or similar (Ex P1, CB 1286).

On 30 June 2015, FH recorded within general journal No. 34 (Ex P1, CB 1314) a loan owed by FHC to FH in the amount of $3,274,227.83 and “Management Fees” owed to FHC by FH in the same amount. Also as at that date, FHC’s tax return for FY15 records a costs of sales of $1,284,288 and total assets of $2,125,666 (and non-current assets of $1,973,171) (Ex P1, CB 422). The profit and loss statement for FHC as at that date records, for each month from July 2014 to June 2015, a sum for “Total Costs of Sale” and the corresponding profit and loss statement for FH records no entries for “Total Costs of Sale” for the same period (Ex P1, CB 429, 435).

On 4 August 2015, FH recorded purchasing a motor vehicle for $13,750 (Heesh 5.3.24 [51]; Ex P1, CB 421). Aside from this record, the liquidator has not located any record showing any non-current assets to indicate that FH was the holder of any plant and equipment used by the Group, nor any MYOB file to show any purchase of equipment.

On 17 November 2015, FH entered into a facility agreement with Full House Investments Pty Ltd. The “Approved Purpose” of the facility was for “cash flow operations of the Borrower’s business” (Ex P1, CB 1347, 1366). I recognise that the stated purpose represents that FH was carrying out that business.

On 30 June 2016, FH recorded within general journal No. 193 a loan owed by FHC to FH in the amount of $5,193,975.24; a “reversal” of “Management Fees” in favour of FH of $450,000; and “Management Fees” owed to FHC in the amount of $5,643,975.24, creating “total debits” of $5,643,975.24 and “total credits” in the same amount (Ex P1, CB 1315). The profit and loss statement for FHC as at that date records, for each month from July 2015 to June 2016, a sum for “Total Costs of Sale” and the corresponding profit and loss statement for FH records no entries for “Total Costs of Sale” for the same period (Ex P1, CB 431, 436).

On 28 October 2016, FH lodged a quarterly BAS statement for Q1 FY17 which recorded no trading income (Ex P1, CB 1275).

On 1 January 2017, FHC began to issue invoices and receive payments, instead of FH doing so (Heesh 5.3.24, [92]). On 24 March 2017, FHC lodged a quarterly BAS statement for Q1 FY17 which recorded $1,369,112 in sales and $159,268 in “salary, wages and other payments” (Ex P1, CB 1276).

As at May 2017, the profit and loss statement for FHC records, for each month from July 2016 to May 2017, a sum for “Total Costs of Sale” and the profit and loss statement for FH records no entries for “Total Costs of Sale” for the same period (Ex P1, CB 433, 437).

On 11 May 2017, FHC entered creditors voluntary liquidation and Mr Boyd completed a Form 509 (Presentation of summary of affairs of a company), noting FHC as the holder of over $1M in assets (Ex P1, CB 43). On 16 May 2017, FH entered creditors voluntary liquidation and the corresponding Form 509 (presentation of summary of affairs of a company) stated that FH held “Nil” assets (Ex P1, CB 74, 78). On 18 May 2017, SHIBS entered creditors voluntary liquidation and Mr Shanon Boyd completed a Form 509 (presentation of summary of affairs of a company) stating that SHIBS holds “Nil” assets (Ex P1, CB 108).

Turning now to the affidavit evidence, Mr Heesh reads his two affidavits dated 5 March 2024 and 27 May 2024. He refers, in his first affidavit, to his appointment as the liquidator of the three companies; to several reports that he issued to creditors in the course of the liquidations of those companies; to the investigations which he has undertaken in the course of those liquidations; and to the difficulties which he has experienced in obtaining all of the books and records of the companies and to the fact that the books and records that he has obtained are incomplete and inadequate. Mr Heesh also addresses the operations of the Group and indicates his view that FHC was and remained the principal operational entity within the Group and was the owner of the Group’s assets in the form of plant and equipment, the owner of stock used by the Group and the employer of employees working within the Group. I will refer to Mr Heesh’s evidence as to these matters in addressing each of these issues below.

Mr Heesh indicates (Heesh 5.3.24 [98]-[99]) that he has realised funds in the liquidation of the Group in respect of cash on hand at his appointment; debtors; plant and equipment; stock and work in progress and that

In a voluminous exhibit to his affidavit dated 5 March 2024 (Ex P1, CB 27ff), Mr Heesh exhibits documents relevant to the questions whether FHC is the owner of the assets recovered in the liquidation, including a summary of assets and liabilities apparently completed by Mr Boyd recording that FH had no such assets and liabilities; the general ledger maintained by FHC (Ex P1, CB 373) recording the purchase of stock in FHC (Ex P1, CB 373); a record of the purchase of a motor vehicle in FH in 2015 (Ex P1, CB 421); and documents relating to the contractual arrangements and billing arrangements between the Group and NSM (Ex P1, CB 964, 977, 985, 1081, 1136, 1164). Mr Heesh also tenders, and I have been taken to, documents relating to the employment arrangements with employees of the Group, including several contracts of employment (Ex P1, CB 445ff), the record of payment of wages by FHC (Ex P1, CB 865ff) and payroll advices which, as Mr Heesh noted in his affidavit, record FHC as the paying entity (Ex P1, CB 597ff). Mr Heesh also tenders documents relating to the suggested “loans” by FH to FHC, including bank registers obtained by FH which record the receipt of funds from clients and then the transfer of funds to FHC, described in the latter part of the period as “loans” to FHC (Ex P1, CB 1279ff); and the journal entries at the end of a financial year by which the purported loan by FH to FHC was set-off against the purported management fee by FHC to FH (Ex P1, CB 1314-1315). Mr Heesh also tendered a creditor listing for FHC, FH and SHIBS (Ex P2) which indicated that at least the identification of the ownership of the assets in the Group and the true employer of employees within the Group have practical importance, where many creditors are creditors only of FHC and would not benefit from any assets owned by FH, and two creditors, including the Office of State Revenue, are creditors only of FH and would not benefit from realisations in FHC (Ex P2).

By a second affidavit dated 27 May 2024, Mr Heesh refers to notification of this application to the Department of Employment and Workplace Relations in right of the Fair Entitlements Guarantee Scheme, and to the Department’s advice (Ex P1, CB 1373) that it does not oppose the directions sought or the order sought that Mr Heesh’s costs of and incidental to this application be paid out of FHC’s assets on an indemnity basis.

As I noted above, Mr Heesh seeks directions under s 90-15 of the IPSC in respect of the three issues. The Court’s power to give directions under that section is, as I will note below, wider than the Court’s power under former s 479(3) of the Corporations Act 2001 (Cth) (“Act”). I described the scope of the former section in Re MF Global Australia (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [7], to which Mr Pokoney refers, as follows:

Mr Pokoney rightly points out that the power under IPSC s 90-15 is wider, at least in terms, than the predecessor provision. He notes that in Walley, in the matter of Poles & Underground Pty Ltd (admin apptd) [2017] FCA 486 at [41], Gleeson J expressed the view that the question whether to exercise the power was “to be answered by reference to the principles applied to the exercise of the discretions previously contained in [ss] 479(3) and 511 of the [Act]”.

In Re Mudgee Dolomite & Lime Pty Limited (in liq) [2021] NSWSC 1350 at [4], I observed that:

Mr Pokoney then refers to the three areas of uncertainty as to which Mr Heesh seeks a direction, which I have noted above. I accept that such a direction is properly made in respect of the first two issues, where it would not be possible for Mr Heesh to resolve these issues by further inquiries, and he should not be left to bear the risk of a claim against him by a creditor which is disadvantaged by the opinion that he has formed as to these issues. I explain below why it is not necessary to give such a direction in respect of the third of those issues.

As I noted above, the first question as to which Mr Heesh seeks a direction is whether he is justified in proceeding on the basis that the assets that he realised in the liquidation of the three companies are FHC’s property. In his affidavit dated 5 March 2024, Mr Heesh expresses the view that FHC owned the assets used by the Group as part of its business operations, rather than FH or SHIBS doing so. He refers to several reasons for that view, namely that Mr Boyd, the director of FHC, advised him of that position; a ledger maintained by FHC indicated that plant and equipment was purchased by it (Ex P1, CB 373-420) and, with the exception of a single motor vehicle, there is no evidence of the purchase of assets by FH; FHC’s income tax return for the financial year 2014-2015 (Ex P1, CB 422-426) recorded significant non-current assets; and there are no entries in the MYOB file maintained by FH which record or indicate that FH purchased any plant and equipment. Mr Heesh recognises that there remains a degree of uncertainty as to the question of ownership of assets where he has not had access to documents recording purchase of the plant and equipment by the three companies. Mr Heesh also refers to his realisation of the assets of the Group, which has generated a surplus which would be distributed to creditors of FHC (or at least priority creditors of FHC) if those assets are owned by FHC.

In his affidavit dated 5 March 2024, Mr Heesh also addresses the position in respect of stock used in the Group’s business, and he there expresses the view that FHC was the owner of that stock, again by reference to information provided to him by Mr Boyd and the available documentation. Mr Heesh there refers to the profit and loss statement obtained in the MYOB records maintained by FHC, which includes valuations for stock on hand (Ex P1, CB 429ff); by contrast, no value is recorded for stock on hand in FH’s profit and loss statement in its MYOB records (Ex P1, CB 435-437). He also refers to the general ledger maintained by FHC within its MYOB records which referred to the purchase of stock by FHC (Ex P1, CB 373-420) and to cost of sales expenses recorded in FHC’s tax return for 2014-2015 (Ex P1, CB 422-426). Mr Heesh notes that he realised $16,000 from stock used in the Group’s business, which will be available to creditors of FHC if that stock is property of FHC. Mr Heesh again notes a degree of uncertainty as to the ownership of the stock, again because of the limitations in the available records.

Mr Pokoney also took me to the documents to which Mr Heesh referred in reaching the view that FHC owned the assets and stock used in the Group’s business in the course of submissions and they are consistent with the conclusions that Mr Heesh has drawn from them in his affidavit dated 5 March 2024.

Mr Pokoney refers to the nature of the assets realised in the liquidation of FHC, comprising cash at the time of appointment of $59,775.41 ($19,419.19 from bank accounts held in the name of FH and $40,356.22 from bank accounts held in the name of FHC); trade debtors of $928,834.55 ($30,976.41 realised in the name of FH and $897,858.14 in the name of FHC); plant and equipment of $234,344.80; stock of $18,700; and work-in-progress of $1,526.72. He submits that:

Mr Pokoney then turns to case law addressing the concept of “ownership” and refers, inter alia, to Gatward v Alley (1940) 40 SR (NSW) 174, Bellinz v Commissioner of Taxation (Cth) (1998) 84 FCR 154; [1998] FCA 615, Kent v SS ‘Maria Luisa’ (No 2) (2003) 130 FCR 12; [2003] FCAFC 93 and Simonson Properties Pty Ltd v Hardy and Another (2014) 15 ASTLR 167; [2014] NSWSC 229 in that regard. He also then summarises the evidence to which I have referred above, in respect of plant and equipment and stock. Mr Pokoney points out that, of the $988,609.96 in realised debtors and cash on hand (at appointment), the vast majority (i.e. $938,214.36) was realised in the name of FHC, but recognises that “[t]here is some uncertainty, however, as to whether the balance of $50,395.60 realised in the name of FH is the property of FH or FHC.” He points to Mr Heesh’s view that:

Mr Pokoney then submits, and I accept, that these factors indicate that the cash held, and debtors realised, in the name of FH represent the property of FHC.

Mr Pokoney then submits, by way of summary, that:

It seems to me that the matter which Mr Heesh has to determine ultimately turns, not on a legal question as to the nature of ownership, but a factual question that has to be resolved by reference to the available evidence. I have reviewed that evidence above and I am satisfied that the financial and other records of the companies to which I have referred, which are consistent with the information provided by Mr Boyd, support the inference that the realised assets were owned by FHC rather than FH, including where money was held or debts on their face owed to FH, where FHC rather than FH conducted the relevant business. Mr Heesh has therefore reasonably formed the view, within the limits of the available evidence, that the assets, plant and equipment and stock that he has realised in the liquidation are assets of FHC rather than of FH and SHIBS and a direction should be given that he is justified in proceeding on that basis.

As I noted above, the second question as to which Mr Heesh seeks a direction is whether he is justified in proceeding on the basis that FHC is the true employer of all employees working within the Group’s business.

In his affidavit dated 5 March 2024, Mr Heesh refers to the inadequacy of records relating to the employment of personnel within the Group. His evidence is that he has obtained contracts of employment for several employees within the Group, although many of those contracts are unclear, because they refer to the employer as FH on the title page of the contract, but to another entity, usually FHC, as the employer in a schedule to the contract. Importantly Mr Heesh also notes that payslips for employees identify the employer as FHC (Ex P1, CB 597-862) and that FHC’s bank records indicated that it, rather than FH or SHIBS, paid wages and other employee entitlements (Ex P1, CB 863-962).

Mr Heesh expresses his view (Heesh 5.3.24 [67]) that FHC was the true employer of all employees working within the Group, by reason of several matters:

Mr Heesh again recognises a degree of uncertainty as to that conclusion as a result of references to “Forward Horizons” rather than particular companies and to other entities within the documentation, and the lack of evidence as to the exercise of control and management of the employees of the Group on a day-to-day basis. Mr Heesh notes that the determination of this question is also of practical importance, where the Department of Employment and Workplace Relations in right of the Fair Entitlements Guarantee Scheme is a substantial creditor in the liquidation.

Turning now to Mr Pokoney’s submissions, he draws attention to my review of the principles relevant to the determination of an employee’s “true employer” in Re Spitfire Corporation Ltd (in liq) and Aspirio Pty Ltd (in liq) (2022) FLR 225; (2022) 160 ACSR 394 at [66]-[70]; [2022] NSWSC 340, where I observed that:

As Mr Pokoney recognises, I there (at [79]) distinguished three recent High Court decisions on the basis that they addressed the character of the employment relationship, as distinct from the identity of the true employer. My analysis of those principles was approved on appeal, although the result that I reached was reversed on other grounds: Resilient Investment Group Pty Ltd v Barnet and Hodkinson as liquidators of Spitfire Corporation Ltd (in liq) (2023) 111 NSWLR 446; [2023] NSWCA 118 (“Spitfire Corporation”) at [153]. There is no reason that the approach approved by the Court of Appeal should not be taken in addressing the issue which Mr Heesh here has to determine.

Mr Pokoney then addresses the evidence relating to the employment of the employees within the Group, to which I have referred above, and submits that:

It seems to me that the documents to which Mr Heesh refers, to which I have again been taken in submissions, are consistent with his description of them and support the conclusion that he has reached, adopting the approach approved in Spitfire Corporation. The factors that have the greatest weight in that regard are not the contracts of employment, which are in any event internally inconsistent, but the fact that FHC paid the remuneration of employees; that FHC was recorded as their employer on their payslips; and that FHC (while it remained solvent) rather than FH had the financial capacity to pay their wages and entitlements, where monies received by FH were regularly transferred to FHC. I will make a direction that Mr Heesh is justified in proceeding on that basis, where the incompleteness of the documentary records would otherwise unfairly expose Mr Heesh to potential liability to third parties in respect of that conclusion.

The third direction sought by Mr Heesh deals with questions whether there is a loan agreement between FHC and FH and, if such a loan existed, whether its current balance is nil; whether there is a loan agreement between FHC and SHIBS; and whether there is a loan agreement between FHC and SHIBS.

In his affidavit dated 5 March 2024, Mr Heesh outlines the contracting arrangements between FHC and NSM to which FHC and possibly other entities provided services at least from 1 October 2012, and he refers to the invoicing arrangements adopted by the Group in the relevant periods. He notes that, between 22 October 2012 and 31 December 2016, FH issued all invoices for the Group including in relation to the works conducted for NSM; the income generated by the Group was receipted by FH but then transferred to FHC, in arrangements later described as “loan” arrangements, to allow FHC to pay for labour, plant, equipment and stock; and, at the end of each financial year other than the year in which the companies were placed in liquidation, the consequent “debt” was extinguished when FHC charged FH a “management fee” of an equal amount to the “debt” then owed by FHC to FH. That management fee was not charged and that “debt” was not extinguished in the year in which the companies were placed in liquidation, presumably because that occurred prior to the end of the financial year. Mr Heesh also notes that, from 1 January 2017, FHC commenced issuing invoices and receiving payment of invoices.

Mr Heesh refers to information provided by Mr Boyd that the invoicing arrangements were structured in this manner for “tax minimisation”; that may be a reference to the fact that the arrangements would have apparently had the result that FH generated no profit, because the revenue that it received was equal to the management fee which FHC charged it; and FHC would receive no apparent taxable income, because the monies were distributed to it by FH as a “loan”. Mr Heesh expresses the view (Heesh 5.3.24 [90]-[91]) that there was in fact no loan between FH and FHC and that:

Mr Pokoney submits, in respect of these transactions, that:

Mr Pokoney then submits that the Court should conclude that this structure was established for tax purposes and does not represent a genuine indebtedness between FH and FHC, for several reasons. I should note that the Court’s role, in an application of this kind, is not to reach a factual finding of that character, but to assess whether Mr Heesh can reasonably and properly proceed on the basis of the view that he (rather than the Court) has formed. It is also only necessary or appropriate to give such direction where to do so will advance the conduct of the liquidation.

It seems to me that there is considerable force in Mr Heesh’s analysis of the relevant transaction, which is consistent with the documents to which I have been taken in the course of submissions. However, where I will direct that Mr Heesh would be justified in proceeding on the basis that the assets realised in the liquidations are assets of FHC and that FHC was the true employer of employees in the Group, it is not necessary to give a further direction as to the treatment of any “loan” by FH to FHC, either in a legal sense or in an accounting sense, because the entitlement of priority creditors in the liquidation of FHC will exhaust its available assets and there would be no distribution to FH in respect of any purported loan by it to FH in any event. It is neither necessary nor appropriate to give Mr Heesh a direction as to this question, where it is not apparent that its resolution will have any practical impact on the conduct of the liquidations.

For these reasons, I make the following orders: