On 5 November 2014, the Federal Court handed down its decision in Highup Pty Ltd (in Liquidation) v Gubas [2014] FCA 1170. The decision serves as a timely reminder, to both solicitors and litigants, of the importance of putting all available evidence before the court, even if the defending party refrains from doing so.  Failing to adequately prove all of the elements of your case risks an unfavourable decision being made, which is what happened to the liquidator of Highup Pty Limited (in liquidation).

Factual Background

Prior to being placed into liquidation, Highup operated a revolving restaurant in the Telstra Tower in Canberra known as ‘Alto’. It had also operated a kiosk in the tower known as the ‘Panorama Kiosk’.

Three companies had been established to discharge Highup’s employment liabilities, including Catering Staff Services Pty Limited (CSS) which operated between 2010 and 2011.  CSS was (along with the other employment services entities) placed into liquidation.

Miroslav Gubas (Mr Gubas) and Miriana Cavic were the directors of Highup.  They were also husband and wife.  Vesna Gubas (Mrs Gubas), Mr Gubas’ mother, was the director of CSS.

Prior to Highup being placed into liquidation, the liquidator of CSS had allegedly made and settled a claim against Mrs Gubas arising out of an insolvent trading claim.  The liquidator of Highup asserted that Highup had paid the settlement amount to CSS on Mrs Gubas’ behalf, essentially  ‘gifting’ her that amount.

The liquidator brought proceedings against Mrs Gubas, arguing that the payments to CSS were for her benefit and therefore recoverable as a ‘related entity benefit’ under section 588FH of the Corporations Act 2001 (Cth).

The Evidence

The only evidence before the court of CSS’ liquidator making a demand on Mrs Gubas was an unexecuted deed of settlement. Highup was not a party to that deed.  The judge queried the relevance of such a document in circumstances where the deed was not only unexecuted, but was possibly incomplete. The judge was also critical of the fact that reports to creditors evidencing the claim against Mrs Gubas were not in evidence.  Indeed, the judge held:

In the present proceedings there is no evidence as to how, if at all, [Mrs Gubas] may be liable to pay compensation to CSS for permitting CSS to trade whilst insolvent, or in what amount, if any, such liability might exist.  The plaintiff submitted that a liability, or a contingent liability, arose because the liquidator of CSS had made a demand on [Mrs Gubas], but there is no evidence of even such a demand, apart from the reference in Recital D of the proposed deed.

The minutes of a creditors’ meeting were adduced to evidence that the claim was compromised to the amount of $150,000.  There was also evidence that amounts totalling $130,000 were paid by Highup to CSS between 5 March 2012 and 22 February 2013.  Despite this, His Honour noted that:

There is no direct evidence of the reason for the payments but [the liquidator of Highup] attributed them, as a matter of opinion in his affidavit, to performance of the proposed deed.

No evidence was adduced with respect to the discrepancies between the payments made by Highup and the payments referred to in the proposed deed, namely discrepancies as to the dates and amounts of payments, and the payer.

Mrs Gubas denied all of the material allegations, but presented little or no evidence in the matter. The liquidator’s counsel therefore asked the court to draw a negative inference against her – if she had evidence in her defence, she should have presented it.

The Court’s View

The court considered the liquidator’s evidence and found that Highup was insolvent when the relevant payments were made.  The liquidator had won the battle, but was to ultimately lose the war.  The court considered whether the transactions were uncommercial transactions and whether they had the effect of discharging a liability of Mr Gubas or Mrs Gubas.

Counsel for Highup had essentially asked the court to draw a number of inferences with respect to the commercial utility in Highup making the payments. In response to this, the judge was quite critical of being asked to take this approach and, quite pithily, commented:

There are too many imponderables involved to permit me to accept this submission.

His Honour went on to discuss the lack of background provided. In a rather scathing judgment, His Honour held that the consequence of this was:

I am not prepared to simply assume, in favour of the plaintiff, that the payments by Highup to CSS “cannot” be explained by normal commercial practice.  I know nothing about whether Highup may have had a legitimate commercial reason for making a payment on its own behalf to CSS, or a legitimate commercial reason for making such a payment on behalf of Mr Gubas, on the assumption that he had assumed some such obligation. I am not prepared to conclude that the only explanation for the payments lies in a desire to acquit a liability on behalf of [Mrs Gubas], or that the terms of the proposed, unexecuted deed should be regarded as legally effective, much less that they should be regarded as explanatory of the conduct of Highup, which was not proposed to be a party to it.

The liquidator’s claim that the payments had the effect of discharging a liability of Mr Gubas or Mrs Gubas was also rejected. His Honour stated:

The evidence did not establish that the defendant was subject to a liability to CSS, much less in any particular amount… I am not able to accept the bald submission, unsupported by reference to authority, that a mere demand raises a contingent liability of the kind referred to in s 588FH(1)(c).

In holding that the liquidator had failed to make out its case (notwithstanding the minor victory on establishing the insolvency of Highup), His Honour also held that ‘I am inclined to think that the appropriate order is that the plaintiff pay the defendant’s costs, as taxed if not agreed’.

Take-away points

In this case, the fact that the defendant had produced little or no evidence did not mean that the plaintiff could cut corners in proving their claims.  Lawyers may often like to think that judges will draw an inference or make an assumption from evidence which does not directly establish matters and, sometimes, this may be correct.

Lawyers would be most familiar with the principles espoused in Jones v Dunkel (1959) 101 CLR 298 as authority for the proposition that the court may draw an inference that where a party fails to adduce evidence, any evidence the party may have given would not have assisted its case.  There are limitations on this, importantly (and as noted in the present case), that there is no inference that can save a party who simply fails to make out the elements of its case.

Whenever you are involved in litigation, it is essential that you make out all of the elements necessary to prove your claim or make your defence, even if the other side is woefully unprepared and even if the case is, on its face, a fait accompli.  There is no getting around the need to establish every fact on which you need to rely in order to establish what you are trying to prove.

As always, if you are in any doubt as to what evidence is needed, you should seek the advice of experienced, competent insolvency lawyers.