Australco Industries P/L v Weinstock, D.I
[1994] FCA 966
•13 DECEMBER 1994
IN THE MATTER OF YABE CONSTRUCTIONS PTY LIMITED (In Liquidation) and AUSTRALCO
INDUSTRIES PTY LIMITED v. DANIEL ISAAC WEINSTOCK, GREGORY VAUGHAN POOLEY and
WILLIAM ERIC COPP
No. NG3288 of 1993
FED No. 966/94
Number of pages - 11
Corporations
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
DAVIES J
CATCHWORDS
Corporations - liquidation - debt owed by liquidated company with no assets - whether directors liable for payment of debt - whether there were reasonable grounds to expect that the company would be able to pay its debts - no point of principle.
Corporations Law, s.592(1)
HEARING
SYDNEY, 23 November 1994
#DATE 13:12:1994
#ADD 15:5:1995
Counsel for the Applicant: D.J. Hammerschlag
Solicitors for the Applicant: Rosenblum and Partners
Counsel for the Respondents: D.L. Ronzani
Solicitors for the Respondents: Abbott Tout
ORDER
THE COURT ORDERS THAT:
1. There be judgment for the applicant against the respondents in the sum of $68,509.50.
2. The respondents pay the applicant's costs of the proceedings.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
DAVIES J In this application, Australco Industries Pty Limited ("Australco"), which has judgment against Yabe Constructions Pty Limited (In Liquidation) ("Yabe") for $54,083.46 in respect of building works carried out and materials supplied by Australco to Yabe between October 1990 and February 1991, seeks an order under s 592 of the Corporations Law that the respondents, Daniel Isaac Weinstock, Gregory Vaughan Pooley and William Eric Copp, who were directors of Yabe, pay the debt.
Section 592(1) of the Corporations Law provides:-
"Where:
(a) a company has incurred a debt before the commencement of Part 5. 7B;
(b) immediately before the time when the debt was incurred:
(i) there were reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or
(ii) there were reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they become due; and
(c) the company was, at the time when the debt was incurred, or becomes at a later time, a company to which this section applies;
any person who was a director of the company, or took part in the management of the company, at the time when the debt was incurred contravenes this subsection and the company and that person or, if there are 2 or more such persons, those persons are jointly and severally liable for the payment of the debt."
I need not set out the defence provided by s 592(2), as that defence was not relied upon.
Australco is a company which specialises inter alia in the manufacture of aluminium framework, windows and fittings. The debt arose out of an agreement entered into between Australco and Yabe on 28 September 1990 whereby Australco agreed to supply and to install aluminium framing and to provide the glazing to an industrial factory project which was under construction by Yabe at 81-3 Station Road, Seven Hills.
Yabe was a construction company. Its directors' report for the year ended 30 June 1989 described its principal activity as "Building Projects for others on a non-profit basis." Its capital was $2.00 and the accounts for the years ended 30 June 1989, 1990 and 1991 showed total shareholders' equity as $2.00. The profit and loss statements for each of those years disclosed operating revenue and operating profit/loss as nil.
Notwithstanding the complete absence from the accounts of any entry relating to business activities, Yabe in fact carried on a significant business as a construction company. It operated its bank account as a clearing account, receiving money from project owners which it paid out to sub-contractors and others. Mr Weinstock, who gave some brief evidence, was unable to explain why the accounts disclosed no operating revenue or outgoings. He said that the accounts were the responsibility of Mr Copp, who did not give evidence.
It seems clear from the evidence that there were some employees of the business, that Yabe hired some equipment and, from time to time, purchased materials. In the light of this and in the light of the fact that Yabe undertook project work for more than one project owner, I conclude that Yabe carried on a business in its own right, notwithstanding that it was a non-profit business and that its accounts did not truly reflect its business.
Counsel for Australco submitted that the only purpose served by interposing Yabe between project owners and contractors was to ensure that the contractors dealt with a worthless limited liability company, so that, in the event that problems arose, the project owners would be isolated from liability. If there was some other explanation for the arrangement, Mr Weinstock was unable to give it. The following is some of the uninformative evidence given by Mr Weinstock on the subject:-
"You signed the statutory accounts of YABE for the financial years ended 1989, 1990 and '91?---Correct. Did you just sign them on Mr Copp's advice, did you?---It was a $2 company.
With nothing else in it?---I don't recall what was in it. I would have to have a look at the balance sheets. Well, it had no - it never had any operating revenue, did it?---I am not an accountant.
...
What was the reason for the formation of YABE, Mr Weinstock?---For construction.
...
So what was the purpose of the incorporation of Yabe, Mr Weinstock?--- For construction.
What was the purpose though? Why have a separate company?--- Because it was - we had various - we were constructing for various people.
Is that the reason?---Yes.
And what is the purpose for incorporating a company intended not to operate at a profit?---I don't recall. Was this something that was done on the advice of Mr Copp?--- I don't recall."
The project owners of the Station Road industrial complex were Empex Holdings Pty Limited ("Empex") and Acolin Holdings Pty Limited ("Acolin"), each of which was itself a trustee company holding its principal assets respectively on trust for the Weinstock and the Copp families. Mr Pooley is Mr Copp's son-in-law.
In the present case, there was a dispute as to Australco's performance. Australco did not complete the work within the time specified in the agreement of 28 September 1990. Whether that was the reason why Yabe did not pay Australco is one of the issues to be considered. Counsel for the respondents said that the reason for Yabe's failure to make the payment to Australco was because the directors were dissatisfied with Australco's performance. Counsel said that Yabe could have made the payment but chose not to do so.
The respondents did not, however, give evidence of that fact. Mr Weinstock and Mr Pooley swore affidavits; but their affidavits did not say that the directors chose not to make the payment to Australco. As they did not depose to the fact, they were not cross-examined about it. Counsel for the respondents submitted, nevertheless, that the onus was on Australco to prove that, when Yabe incurred the debt, there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due.
I need describe the facts only briefly and shall concentrate on what was said and written by the directors of or otherwise on behalf of Yabe.
The contract of 28 September 1990 provided for completion within 4 calendar weeks from the date of site measurements. The measuring of the site occurred on Monday, 29 October. However, some problems arose. One was that the employees of Australco who undertook the measurements failed to note the provision made for certain columns in the construction. The correction of this mistake involved Australco in time and expense. It was necessary to cut around the sub-head, the sub-sill, the head and the sill of each frame as to make the frame fit the available space. The cut-outs had to be sealed with silicon and the panels had to be glazed on site rather than in the factory. A second problem that arose was that Australco was dissatisfied with some of the aluminium which had been fabricated by the manufacturer, Alcan. The quality was thought not to be satisfactory. Aluminium was returned to Alcan for rectification.
The specified date for completion was 24 November 1990. On 30 November, Australco wrote to Yabe seeking $12,200 because of the additional work required to adjust the aluminium frames to the columns. The managing director of Australco, Mr R Magid, and Mr Weinstock met on 5 December. It was agreed that Yabe would pay Australco an additional $2,900 and would arrange for the hire of a cherry picker to enable Australco to glaze the affected panels on site.
On 13 December, Mr Pooley wrote a letter headed "Without Prejudice", which appears to be somewhat inconsistent with that agreement. The letter stated, inter alia:-
"It should be remembered that Australco signed a contract stipulating that glazing would be complete four calendar weeks after site measurement. Site measurement occurred on the Monday 29th October - Australco should have been completed by Friday 24th November. The contract with Australco clearly states that all necessary overtime must be worked to ensure compliance with the programme. We have on a number of occasions expressed to Australco representatives including Peter White and Bob Magid to work Saturdays and extra hours during the week. There has been no response other than to continue working a normal 7 - 3.30 5 day week. As you would appreciate the holding charges on this project are high."
On 3 December 1992, Australco sought a progress payment of $58,700. The contract had provided that "Progress payments are received monthly - payable at the end of the following month". It would seem that the amount claimed, if payable, was due at the end of December.
The work was not completed during December and no payment was made at the end of that month. No work occurred over the Christmas period or in early January. I take this to coincide with the ordinary closure in the building industry during this period.
In the middle of January 1991, there were discussions between the parties. An agreement was arrived at between Mr Varipatis of Australco and Mr Weinstock. On 17 January, Mr Varipatis prepared a letter setting out the agreement. The letter read, inter alia:-
"1 Work will recommence on site on Monday 21st January 1991 with the view to complete lock-up of all 8 units by Saturday 9th February 1991.
2 Payment will consist of the following break-up: $10,500 upon completion of units without doors. $11,900 upon completion of units with doors. 3 Cheques to be held on site by Mr Greg Pooley who will inspect units with an Australco representative and upon satisfactory completion of each unit (not necessarily complete of glazing beads, etc.) immediately hand over cheque to Australco.
4 Payment for Monday 21st January 1991 to be $23,800 upon delivery of glazing bead and internal strips for unit No. 6 and 7.
4a. Payment of $23,800 upon delivery of doors for units No. 8 and 5 and upon commencement for unit No.4 after which payment will be paid for each unit as completed (except for beads etc) which are to be on site and the commencement of installation of adjacent unglazed unit. 5 Prior to the commencement of the last unit and assuming that lock-up has been achieved on all 7 units a total of $83,912.50 is to have been paid. 6 On delivery of material for the last unit a cheque for the balance of $9,590 is to be on site. The cheque is to be handed to Australco upon completion.
7 The outstanding balance of $2,397.50 which represents 2 1/2% of the contract value is to be released upon total completion of the works inclusive of all glazing beads, etc. which had not been previously installed."
A letter to this effect was signed by Mr Magid. The letter provided for a signature on behalf of Yabe Constructions; but it was not in fact so signed. Nevertheless, in his affidavit, Mr Weinstock did not deny the evidence of Mr Varipatis that agreement had been reached.
When Mr Varipatis and Mr Weinstock came to their agreement on 17 January, Mr Weinstock said, according to Mr Varipatis, "The completion date is the critical thing for me. If you can meet the deadline, payment wouldn't be a problem." Mr Weinstock's version of his statement was, "The completion date has passed. It must be finished - payments are never a problem." There seems to be no significant difference between the two versions.
Work recommenced on 21 January. The payment of $23,800 for 21 January was met. On 22 January, Australco provided Yabe with a program for completion which provided for completion on 9 February 1991. A cheque for the second $23,800 was received on 4 February; but it was stopped on the same day, though Australco was not then notified.
On 6 February 1991, Australco wrote, inter alia:-
"3. We are proceeding as per our schedule. Units 2, 3 and 4 should be complete by 3 p.m. Thursday, 7th February 1991.
4. We have tried to contact you today and understand that you will be on site at 3 p.m. tomorrow afternoon. As per note 5 of our agreement you should bring with you a cheque in an amount of $36,312.50.
5. Since material has been delivered and installed for the final unit you should bring to site an additional cheque for $9.590.00 which is to be handed to us upon completion which we anticipate on Friday. You would then retain then (sic) 2 1/2% retention as agreed. Mr Emmanuel Varipatis will meet you on site at 3 p.m. on Thursday to collect the cheque."
On the evening of 6 February 1991, Mr Varipatis telephoned Mr Weinstock to confirm a meeting the next day. In the course of that conversation, Mr Weinstock said, according to Mr Varipatis:-
"'I am going to the bank tomorrow morning to arrange for the cheques to be drawn so that they will be available for our
(3.30) meeting.'
I then said:
'There is no problem with payment, is there?' He said:
'No, everything should be O.K. for 3.30 pm.'"
According to Mr Weinstock's evidence:-
"I did not used (sic) the words attributed as mine. The words I used were to the following effect, 'If the work is OK and done properly, and if the amount claimed is OK, there never is a problem with money. In 15 years of building, sub-contractors always have been paid in full. In fact, I don't remember ever being in Court because of not paying."
Again, I think nothing turns on the differences in the evidence.
On the morning of 7 February 1991, it was ascertained that the second cheque for $23,800 had been stopped. Mr Varipatis telephoned Mr Copp. This conversation ensued, according to Mr Varipatis:-
"Mr Copp said to me words to the effect of: 'Yes, the payment for the cheque was stopped. However, it was outside my control, I didn't stop it. The bank and the architect decided to stop the cheque until they inspected the works.'
He added:
'I believe the architect and the bank's representative had since inspected the site. You can re-present the cheque and it would be cleared.'
I then said to him:
'Could you confirm our discussion in writing and that Yabe intends to pay the outstanding money owing subject to the bank's authority.'
He replied:
'No, the issue of payment is totally outside my control. You probably won't get the cheque this afternoon (in the sum of $36,912.50) as the bank will have to inspect the building.'"
The conversation was not denied by Mr Copp.
Later that afternoon, Mr Varipatis went to the site and waited for Mr Weinstock. Mr Weinstock did not appear. On the following morning, 8 February 1991, Mr Varipatis phoned Mr Weinstock. According to Mr Varipatis's affidavit, the following conversation occurred:-
"'What's going on Danny? You didn't bother returning any of my calls. There is no excuse because you've got my mobile phone number.'
Mr Weinstock said to me words to the effect of: 'I'm nearly broke with this project and I have no more interest in it.'
I then said:
'Do you have any on-going financial control of this project?'
He then replied:
'This project is sending me broke and I have completely pulled out. The person who has full control of the project is Bill Copp. It is a waste of time talking to me as I have nothing to do with the project any more.'"
Mr Weinstock's version of the conversation was:-
"I deny the words attributed to me. What I said during the conversation was to this effect, 'Your delays in mucking around and amateurish ways of doing business are costing me a fortune. Don't forget I can't rent the building until it's finished, interest rates are high. I also have to pay Council rate, Water rates and the like. We are concerned that you make promises and can't keep them.".
A significant difference in the two versions is that Mr Varipatis recalls Mr Weinstock as saying that Mr Copp was in control of the project. This evidence is supported by the fact that, in the preceding days, Mr Weinstock had not been in communication with Australco and, on 7 February, did not turn up for his meeting with Mr Varipatis. Similarly, at the next meeting which was held on 12 February 1991, at which Mr Copp, Mr Weinstock, Mr Magid and Mr Varipatis were also present, Mr Weinstock kept walking out of the room leaving the main conversation to Mr Copp, Mr Magid and Mr Varipatis.
At the meeting of 12 February 1991, Mr Copp said:- "The agreement of 17 January (1991) does not exist. It was never agreed to. We have to look at the original contract, and if you look at the original contract you're late. I'm not sure if there would be anything left for you after we deduct from your claims our damages for late completion."
Subsequently, several meetings were scheduled with Mr Weinstock but he failed to attend. Mr Magid went to see Mr Weinstock and offered to produce his invoices to show what the contract had cost Australco. He subsequently forwarded those invoices to Mr Weinstock.
In 1991, Australco instituted proceedings in the District Court of New South Wales. The proceedings were at first defended by Yabe and a counter-claim was lodged. However, the defence and counter-claim were subsequently abandoned. Australco obtained judgment on 6 April 1991. On 23 October 1992, there was an order that Yabe Constructions Pty Limited be wound up. A report of the liquidator showed a nil return, save for the $54,083.46 claimed by Australco. The liquidator reported as to this claim, "Not entitled in my opinion contract subject to claim was never completed - the contract was terminated by the company". Under contingent assets, the liquidator showed a claim for $150,000 against Australco which was estimated to produce nil "unless liquidator proceeds to take appropriate action".
I am satisfied that Australco substantially completed its contract and was entitled to payment. Evidence has been given that, when the work ceased on 9 February 1991, the only matter left outstanding was the glazing of four sheets of glass plus trims which Mr Magid has estimated had a value of $2,000. Such a completion meets the requirements of substantial performance as enunciated in Dakin and Co v Lee (1916) 1 KB 566, a doctrine which is now a standard doctrine of construction law. The claim made does not claim for the value of the works still to be completed.
The contract was not terminated as the liquidator appears to have thought. If there was a claim for damages for non-performance, it has not been pursued in these proceedings. Yabe would not have had holding charges. Yabe had no interest in the project other than as a construction company and it does not appear to have incurred any liability for interest. No doubt Acolin and Empex incurred holding charges, but their loss has not been raised as a set-off or a counter-claim as against any moneys due by Yabe to Australco.
On 12 February 1991, Mr Copp, on behalf of Yabe, wrote to Australco as follows:-
"We refer to our discussions today and note that you have not completed your contract as set forth in the Agreement dated 28th Sept, 1990.
In the circumstances we must advise that your failure to complete the contract is causing loss to this Company on a daily basis and unless your obligations under the contract are totally performed by 5 p.m. on the 16th February, 1991 then this Company will terminate the contract and arrange for another contractor to complete the works."
However, no action was taken to terminate the contract. In any event, the work had already been substantially performed.
On 15 February, Mr Copp wrote on behalf of Yabe, stating, inter alia:-
"3. Mr Weinstock did not reach any agreement to vary the terms of the contract with your Company on 17th January, 1991. A meeting was certainly held on that day, but of course by that time your Company was already in breach of its contractual obligations, and the object of the meeting was to determine whether your Company could complete the works and when it intended so to do. Mr Weinstock did not agree, and had no authority from this Company to agree to vary the terms of the contract in relation to your Company's payment, nor to waive any rights which accrued to this Company in relation to your breach of the Company. (sic)
4. As you are aware, this Company has suffered damage as a result of your failure to complete the work within the required period and your Company would be well advised to mitigate these damages by completing the works as soon as possible. Unless the work is completed by 16th February, 1991, this Company will terminate the contract, arrange for the work to be completed elsewhere, and hold you liable for all further losses to this Company which will arise through the inevitable further delay which will then ensue."
It will be noted that, in the correspondence which passed, no complaint was made as to the quality of the work which was performed. The only complaint made was as to delay in performance. In neither Mr Weinstock nor Mr Pooley's affidavit was any complaint made as to the quality of the work performed. Mr Magid gave the following evidence in cross-examination, which I accept in the absence of any written complaints during this period as to the quality of the work:-
"At the end of the day we did a perfect job. We finished the job to the - to everyone's satisfaction, as far as I recall. There were no subsequent complaints about leakage or about difficulties. I have no idea whether there were any problems, but as far as I'm aware the end result was that we did a very good job."
I am not satisfied that, when the contract was entered into on 28 September 1990, there were reasonable grounds to expect that Yabe would not be able to pay its debts as and when they became due. In assessing Yabe's ability to pay its debts, it is necessary to take into account the company's ability to call upon the project owners to fund the expenses of the project. See Taylor v Powell (1993) 113 ALR 374 at 382. There is no reason to suspect that, had the contract been finished within the specified time, namely by 24 November 1990, Yabe would have had any difficulty in paying Australco.
However, a new agreement was entered into on 17 January 1991. As I have said, I am satisfied that the letter which was forwarded by Australco to Yabe on that day set out the agreement reached between Mr Varipatis and Mr Weinstock and that Mr Weinstock had authority or ostensible authority to enter into the arrangement. The agreement was given effect. Australco recommenced work on 21 January and concluded the work as promised except as to a matter of small moment. Yabe for its part made the first payment of $23,800 on 23 January and the second payment of $23,800, first by delivery of a cheque on 4 February and later by withdrawing the stop which it had placed on the cheque on that day. In my opinion, the debt as now claimed was incurred under that agreement.
The conclusion I reach from the whole of the evidence is that, by 17 January 1991, the project owners were suffering severe financial problems. I think it is probable that, by the middle of January 1991, funds were tight and not all creditors could be paid as their debts fell due.
There are several factors which support this view:-
1. The fact that no progress payment was made at the end of December suggests that the project owners were in financial difficulties by that time.
2. The fact that the second cheque of $23,800 was stopped on 4 February until there had been an inspection of the property by the architect and an officer of the bank suggests that the financial difficulties had reached the stage where payments could not be made without the specific approval of the supporting bank.
3. The fact that Mr Weinstock did not turn up for agreed meetings or continue to deal with Australco suggests that the project may have been taken out of the hands of Mr Weinstock during January 1991, the future of the project then being in the hands of the financiers, including Mr Copp.
4. The depth of feeling which the delay in performance engendered is an indication that the financial problems of the project owners were substantial. No explanation for the concerns about the delay other than the concern as to the holding costs and lack of rental income was proffered.
The inference that the project owners were suffering financial difficulties is enhanced by the fact that, in the course of these proceedings, the respondents objected to the subpoenas for the production of the financial records of the respondents and of the records of Acolin and Empex. That ground having been taken, it appears that the subpoenas were not pursued and no order was made. In the light of the defence taken by counsel for the respondents, the financial records of the project owners became highly relevant. However, they were not proffered and were not in Court.
Insofar as there is financial information in evidence before the Court, the bank statements respecting Yabe's No 2 Account, show continuous transactions before and after the period with which we are concerned. Substantial sums were received and were paid out.
The first cheque of $23,800 relied upon a credit of $28,000 deposited on 21 January 1991. The cheque was debited on the same day. On 4 February 1991, the date when the second cheque for $23,800 was drawn, there was a credit of $85,000, but debits as against that cheque used up the credit by the end of 5 February. A credit of $24,000 was recorded on 7 February and it was from that credit that the second cheque of $23,800 was met on 8 February. This suggests that either the $23,800 could not have been met on 4 February or that, when that cheque was stopped, other outstanding accounts could be paid.
Similarly, handwritten accounts which are in evidence record a deposit of $24,500 on 25 January and a cheque on that day to Terry Wynard Plant Hire against which is the note "Payment Stopped". The bank statement of that day shows that there were two payments, one of $10,000 and another $14,568, which used up the credit of $24,500. There is no evidence as to whether the Terry Wynard payment was connected with the subject project.
On the whole of the evidence, I think the conclusion should be drawn that, by the middle of January 1991, the project owners were suffering financial hardship and were unable to pay all the accounts as they fell due. In this circumstance, I think the conclusion should be drawn that, by the middle of January 1991, there were reasonable grounds to expect that Yabe would not be able to pay all its debts as and when they became due.
There is, moreover, another point. At some stage, those who were governing the affairs of the project owners, that is to say Messrs Weinstock and Copp, must have decided that they would not pay the moneys due to Australco. This conclusion should be drawn from the fact that Empex and Acolin did not fund Yabe so as to enable it to make these payments although they continued to fund Yabe for the payment of other creditors. When Yabe went into liquidation, it had no assets and there were no creditors other than Australco.
When this decision was made, however, is a little difficult to determine. The fact that the agreement of 17 January was not signed on behalf of Yabe and that, subsequently on 15 February, Mr Copp wrote to say that there had been no authority to vary the terms of the September 1990 agreement, suggest that, by January 1991, Mr Copp at least had formed the view that Australco would not be paid or not paid in full.
On the whole of the evidence, I think it is probable that, during January and February 1991, Yabe, Empex and Acolin could not pay all their debts as they fell due and that the event which subsequently occurred, namely that Yabe should be allowed to go into liquidation owing a debt but having no funds to do so, was one of the courses of action which was then in mind.
The respondents would say that any decision not to pay Australco was taken by the directors of Yabe. I think it more probable that the decision was made by and in the interests of the project owners and in light of the fact that Yabe was a $2 company with no assets.
In my opinion, sufficient evidence has been called on behalf of the applicant to put forward a case which, if not answered, satisfies the terms of s 592(1). As none of the respondents has deposed that Yabe had the ability to pay its debts as and when they fell due but chose not to pay Australco, I am of the opinion that the applicant's case must succeed.
I would give judgment for $45,902.50. This represents the total of the figures in paragraph 5 and 6 of the agreement of 17 January less the $47,600 which has been received. I shall not include the outstanding balance of $2,397.50, representing the 2 1/2 retention sum, as there were works which were not completed. I do not add the $2,900 agreed to be paid on 5 December 1990. That sum is not referred to in the agreement of 17 January 1991. I am of the opinion that liability to pay that separate sum has not been established under s 592(1). Interest up to judgment of $22,607 calculated in accordance with the Rules of the Supreme Court of New South Wales should be added. The total is $68,509.50.
The applicant should have the costs of the proceedings.
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