s. 1305 – Where Prima Facie Books and Records are not so Prima Facie
In Michell v Onroad Offroad Pty Ltd  VSC 648 (31 October 2018) the Trustee in bankruptcy was unsuccessful in recovering an alleged loan owing to the bankrupt which had been on the books and records of the company since 1998.
There are a couple of important takeouts for insolvency practitioners. These include:
1. That the reliance upon s 1305(1) of the Corporations Act 2001 in relation to the admissibility of books and records of a company being used as prima facie evidence is NOT so straightforward. Supporting evidence is required.
2. Without specific evidence to the contrary, the clock starts ticking in relation to a debt being owed from the moment the funds were advanced.
- The bankrupt was the sole director of Onroad Offroad Pty Ltd (“the defendant “) from its registration in 1998, until her bankruptcy in 2014.
- In 1998, the accountant in consultation with the bankrupt recorded a loan in the books and records of the company for approximately $1.8 M.
- Since that time, amounts withdrawn from the company by the bankrupt were offset against the alleged loan.
- The net effect of this was that no tax was paid on these funds as they were recorded as a ‘loan repayment’.
- The trustee was unable to obtain any supporting evidence in relation to the origins of the relevant loan account, nor were they able to adduce any evidence from the company’s accountant at that time.
- Importantly, they were unable to uncover any written acknowledgement of either in advance by the bankrupt, or a receipt by the defendant for any such sum.
Effectively the trustee’s case surrounded the inference that, pursuant to s 1305 of the Corporations Act 2001, the books and records of the defendant are prima facie evidence of any matter stated or recorded in the book.
Admissibility of books in evidence:
- A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.
- A document purporting to be a book kept by a body corporate is unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).
In a nutshell, between 2010 and 2015, the financial statements and tax returns of the defendant recorded a ‘Loan to Director’ account with an outstanding balance of over $1M.
The bankrupt argued that the ‘Loan to Director’ was created by an accountant “shuffling figures” and was done to create a tax advantage. The trustee’s response was to highlight the fact that the accounts had been prepared by a professional accountant, and that the bankrupt made a declaration as to their status which was lodged with the ATO.
The bankrupt then argued that amounts received were directors’ drawings however these amounts were not disclosed as income in the bankrupt’s tax return.
The bankrupt was never in a financial position to loan any such amount to the company.
Lawyers for the bankrupt were given leave to amend their defence on the first day of trial arguing that the Trustee’s claim was ‘statute-barred’ given that the alleged loan agreement was made in 1998.
In relation to the alleged loan, Digby J quoted the Chief Justice of the High Court of Australia’s decision in Manzi v Smith (Manzi):
The Chief Justice concluded that the liquidators needed to ‘investigate in fact the transactions which are said to be reflected in the Books of Account’. Both Mason and Jacobs JJ agreed with the Chief Justice’s evidentiary analysis and conclusions.
The Chief Justice’s observations are relevant and of assistance here. In that case, journal entries in a company’s books of account did not, per se, obviate the need for the moving party bearing the onus of proof to prove the nature and existence of the underlying transaction alleged to give rise to the defendant’s indebtedness.
Digby J refused to infer that the loan existed from circumstantial evidence further commenting:
The circumstantial evidence on which the plaintiff relies must be evaluated against the direct, clear, unequivocal and, in my view, credible evidence given by Hill which was also, in essence, consistent with Townsend’s evidence. Similarly, the plaintiff’s reliance on s 1305(1) of the Corporations Act, addressed below, is to be considered in the same context.
Digby J found in favour of the defendant who submitted that because there was no stipulation for a repayment date it must be taken that the alleged loan was repayable on demand and ‘it follows that time began to run when the alleged loan was created on or about 17 June 1998.
Digby J commented:
In my view, there is no evidence of a payment or payments which can properly be characterised as admissions by the defendant that the alleged debt remains due. To merely assert that there is an admission and point to any payment is insufficient. The Limitation of Actions Act requires the plaintiff to demonstrate that the defendant made a payment which was in respect of the alleged debt. That causal link is essential. Only then will such payment constitute an ‘admission’ for the purpose of the Act.
Accordingly, the cause of action which accrued on or around 17 June 1998 has been barred from or about 17 June 2004. The plaintiff has not shown that part payments revived its right to prosecute the claim.
Often books and records can be misleading and without proper investigation, the insolvency practitioner can potentially be led awry.