Capricorn Society Ltd v Robert Douglas Linke and Ors No. SCGRG 93/1125 Judgment No. 5477 Number of Pages 42 Corporations
[1996] SASC 5477
•27 February 1996
COURT IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA COX(2), PERRY(3) AND LANDER(1) JJ
CWDS
Corporations - companies - management and administration - directors and other officers - personal liability - debts incurred company insolvent - defences - Corporations - Corporations Law, s592.- civil liability of directors where reasonable grounds to expect that company will not be able to pay all its debts as and when they become due - defences provided for in s592(2) - whether debt incurred without express or implied authority or consent - whether respondents had reasonable cause to expect that company would not be able to pay all its debts as and when they became due.
Corporations Law s592; Companies Act 1962 s303; Companies (South Australia) Code s556, referred to. Southern Star Group Pty Ltd v Taylor (No. 2) (1991) 9 ACLC 1211; Group Four Industries v Brosnan (1992) 59 SASR 22; Morley v Statewide Tobacco Services Ltd (1993) 1 VR 423; (1993) 1 VR 451; Commonwealth Bank v Friedrich and Ors (1991) 5 ACSR 115; Rema Industries and Services Pty Ltd v Coad (1992) 7 ACSR 251; Standard Chartered Bank of Australia Ltd v Antico (1995) 131 ALR 1, applied. Sandell v Porter (1966) 115 CLR 666; Shapowloff v Dunn (1981) 148 CLR 72; Watt v 9M Australia Pty Ltd (1984) 3 NSWLR 671; Metal Manufacturers Ltd v Lewis (1986) 11 ACLR 122; (1988) 13 NSWLR
315; BM Australia Pty Ltd v Hemish (1986) 10 ACLR 371; Pioneer Concrete v Ellston (1985) 10 ACLR 289; John Graham Reprographics v Steffens (1987) 12 ACLR 779; Heide v Lester (1990) 3 ACSR 159; White v The Queen (1967) SASR 184; Devlin v Collins (1984) 37 SASR 98; Pooraka Holdings Pty Ltd v Participation Nominess Pty Ltd and anor (1989) 52 SASR 148; Pashalish v WorkCover Corporation (1994) 63 SASR 71, discussed.
HRNG ADELAIDE, 4 September 1995 #DATE 27:2:1996 #ADD 28:3:1996
Counsel for appellant: Mr N E Clayton QC
with Ms S L Pickering
Solicitors for appellant: Fisher Jeffries
Respondent Robert Linke: No attendance
Counsel for respondents Robert Vere Hodges and Michael Lister Verco: Mr J M Wilkinson
Solicitors for respondents Robert Vere Hodges and Michael Lister Verco: Cowell Clarke
ORDER
Appeal allowed.
JUDGE1 LANDER J The appellant, as plaintiff, on 24 June 1993, commenced proceedings against Robert Linke, Robert Hodge and Michael Verco, claiming that each of those persons as Directors of SA Service Stations Pty Ltd (the company) were jointly and severally liable for payment of a debt owing by the company to the appellant. A sequestration order was made against the estate of Robert Linke on 13 October 1993, and Mr Peter Ivan Macks, a Chartered Accountant, was appointed trustee of his estate.
2. No steps were taken to obtain leave to proceed against Mr Linke, pursuant to s58(3)(b) of the Bankruptcy Act 1966, and indeed, nothing was done save for amending the Statement of Claim to plead the fact of the sequestration order. Mr Linke did not file a defence and he took no part in the proceedings at all. In the absence of an order for leave to proceed, the plaintiff was not entitled to proceed against Mr Linke and the action ought to have been stayed as against him. In any event, the action proceeded as if it were an action only against the other respondents, Messrs Hodge and Verco, who jointly filed a defence denying that they were liable, and in particular, pleaded that if they were otherwise liable, then the debts were incurred without the express or implied authority of either of them, or that, at the time that the debts were incurred, they did not have reasonable cause to expect that the company would not be able to pay all its debts as and when they fell due, or that, if the company incurred a debt to the appellant, it would not be able to pay all its debts as and when they became due. Both of them claimed that they had been farmers all their lives and that they were unskilled in commerce and as directors of companies. They both claimed they had become investors and directors as a result of representations made by Mr Linke. They both claimed that after they were appointed non-executive directors, Mr Linke represented to each of them that the company was trading successfully and that as non-executive directors they were entitled to rely upon, and did rely upon, those representations.
3. The appellant's appeal is against an order of a Master of the Court, who dismissed the appellant's action against the second and third respondents.
4. The appellant is incorporated pursuant to the Co-Operative and ProvidentSocieties Act 1903 (WA) and carries on the business as a co-operative of service station operators Australia-wide. If a service station operator becomes a member of the appellant, the operator becomes entitled to a supply of service and goods within the industry. The appellant then invoices the operator monthly for the supply of goods and services.
5. The company was incorporated under the name of Merrilyn Hart Enterprises Pty Ltd and Mr Linke and his wife became directors of the company on 1 July 1984. Subsequently, the company changed its name to SA Service Stations Pty Ltd. In its early years it apparently conducted two businesses as service station operators at BP Glandore and BP Glenunga. Apparently from early 1988 it also conducted a perfume business known as 'From Paris With Love'.
6. No financial statements of the company for a period earlier than 30 June 1988 were tendered, but the financial statements for that year include comparative balance sheets and profit and loss accounts for the year ended 30 June 1987.
7. In 1987 the company had fixed assets of $365,817, current assets of $83,911 and current liabilities of $568,551, leaving it with a deficiency of assets of $118,591. The current liabilities included loans from directors of $195,380.
8. The profit and loss account showed that in the year ended 30 June 1987 the company had suffered a loss of $64,932.
9. The financial statements of the company show that in the period ended 30 June 1988 it suffered a further loss of $162,555. Indeed, its trading statements show that its gross profit on a turnover of $1,583,182 was only $110,377, and the only other income was $12,237 in reimbursement of motor vehicle expenses. With expenses of $285,169, it suffered a loss of $162,555.
10. When that loss was brought to the 1988 balance sheet, the deficiency of assets totalled $281,146 and the clear impression is that without the support of financiers the company was insolvent as at 30 June 1988. Sandell v Porter
(1966) 115 CLR 666. Moreover, its current liabilities far exceeded its current assets. The balance sheet for 30 June 1988 shows fixed assets of $378,059; current assets of only $177,062, and current liabilities by then of $836,499.
11. The current liabilities were set out as follows:
Bank No. 2 $47,377
Bank No. 3 24,706
Bank bill 300,000
Discount bills 100,000
Loan from directors 346,389
Creditors and accruals 18,027
12. The loss of $162,555 had in fact been financed by further loans from directors and the taking out of a discount bill of $100,000.
13. The financial statements for the period ended 30 June 1989 show a further loss for that year of $186,082. This loss had come about because sales of $2,703,177 had yielded only a gross profit of $231,851. The total income was only $321,943, but the company's expenses were $508,025, which gave rise to the loss of $186,082.
14. The balance sheet as at 30 June 1989, which showed a deficiency of assets of $427,630, showed that the current liabilities of the company were $737,196 and the current assets $279,292.
15. The current liabilities were made up of:
Bank No. 2 $ 198,543
Bank No. 3 131,909
Bank bill 0
Discount bills 100,000
Loans from directors 297,509
Creditors and accrual 9,235
16. No debt was disclosed to the Bank of Singapore.
17. A director of a company is obliged to ensure that the company's financial statements for an accounting period comply with the prescribed requirements relevant to the financial statements (s297(1) Corporations Law). A company must comply with accounting standards (s298). Moreover, the financial statements must contain such information and explanation as will give a true and fair view of those financial statements (s299).
18. The accounting standards and Schedule 5 to the Corporations Law give an expanded meaning to 'current assets' and 'current liabilities'. A current asset would ordinarily be understood to be cash or other assets of the company which would be consumed or converted into cash within twelve months. A current liability would be understood to mean a liability that would in the ordinary course of business of the company be due and payable within twelve months after the end of the last financial period of the company.
19. Understood in that light, this company as at 30 June 1989 faced payments of liabilities or debts over the next twelve months of $737,196, with assets that could be converted into cash of only $279,292. Again it can be said that in the absence of support of financiers, and perhaps even the directors, the company was insolvent as at 30 June 1989.
20. When the 1989 balance sheet is compared with the 1988 balance sheet it can be seen that the loans from directors to the company had decreased by something in the order of $50,000. That decrease mainly accounted for the decrease in current liabilities from approximately $836,000 to $737,000. The current assets had increased by approximately $100,000 in 1989. However in reducing the current liabilities the directors opted to repay moneys owing to themselves prior to repaying the bank.
21. Another matter to be observed is that the 1988 balance sheet had included land and buildings in fixed assets at $348,453, but the 1989 balance sheet showed those assets as nil.
22. This reflects the fact that during the latter part of the 1989 financial year the two service stations, BP Glandore and BP Glenunga were sold. The 1989 balance sheet shows for the first time a capital reserve of $39,597, which would suggest that on the sale of the land and buildings there had been a capital profit in the order of $40,000. This would account for the fact that the total deficiency in assets had only increased by the order of $146,000 when the loss was $186,000.
23. The 1989 balance sheet shows that the company's fortunes had deteriorated in that its assets had reduced to a total sum of $309,566, and its liabilities stood at $737,196, i.e. its total liabilities were more than double its total assets.
24. From a comparison of the profit and loss accounts, it can be shown that the company had suffered losses of $64,932 in 1987, $162,555 in 1988, and $186,082 in 1989.
25. There is no doubt that a reading of the financial statements shows that the company was deteriorating rapidly and that it could not continue to operate without the financial support of its directors and the support of its bankers. Even with that support the company would need to reverse a history of losses and make very substantial profits before it could be restored to financial stability. The company did not claim that any of the losses which it incurred prior to 1989 had a value for income tax purposes. No claim was made for an intangible asset to reflect future income tax benefits. That is important because of what transpired.
26. In 1989 the third-named respondent, Mr Michael Verco, conducted a family farming business in conjunction with two of his sons at Langhorne Creek on a property, 'Tolderol'. A number of businesses were conducted on that property. Each of his sons used part of the property. He and his wife carried on the business, in partnership, of cropping and lucerne growing, and a company, Tolderol Pty Ltd, of which the third-named respondent was a director and shareholder, carried on a farming operation on the property. He was also involved, although the involvement is not clear, in a family trust. The financial structure of the businesses with which the third respondent was associated had been put in place by his Chartered Accountant, Mr Des Rundle of Peat, Marwick, Mitchell, and by the third respondent's son, Mr Tom Verco, who is also a Chartered Accountant.
27. His evidence was that he was aware that the directors have to approve the accounts of the company each year and conduct an annual general meeting. He had a familiarity with his obligations as a company director in relation to the family company. He was aware of an entitlement to carry forward losses for the purpose of taxation advances and offsetting those losses against future profits.
28. He also had had experience with the South Australian Jockey Club, and had been on the committee of that club for two years prior to the end of 1989. He was the nominated member from a provincial racing club, Strathalbyn Racing Club, of which he had been a committee member for some thirty-four years. He knew that that club prepared financial statements every year and that the committee members met for the purpose of approving those financial statements. It was his association with the racing clubs which brought him into contact with Mr Robert Linke, whom he had known for about twenty years prior to 1989. For many years Mr Linke had been Chairman of the Balaklava Racing Club, and later the Chairman of the South Australian Jockey Club.
29. It is clear enough that Mr Verco had a familiarity with the function of the board of directors of a company, both through his own experience as a director of a company of which he and his wife had control, and also by reason of his experience with the two jockey clubs.
30. The third respondent had known Mr Linke for many years and knew that he had been involved in the bulk fuel business at Balaklava for many years. Mr Linke had, to the third respondent's knowledge, a reputation as being a very fair, honest and good businessman, who had been successful and had acquired properties at Crafers, Glenelg and Port Julia.
31. In 1990 the third respondent was asked by Mr Linke whether he had ever considered going into the fuel business. Mr Linke told the third respondent that he knew of two service stations which were coming up for purchase, in which he was interested, and that he was looking for other people to go in with him. He described the sites to the third respondent as being the best two sites in South Australia.
32. The third respondent later telephoned Mr Linke and advised that he would be interested in investing. Mr Linke then promised to provide some documents for him. Shortly after, Mr Linke did produce to the third respondent a profit and loss statement of J.J. and Y.K. Russell Pty Ltd, trading as Mobil Salisbury Downs, for the year ended 30 June 1989, and a profit and loss account for Rowan Enterprises Pty Ltd, trading as Mobil Para, for the period from 1 July 1989 to 31 December 1989.
33. In respect of Mobil Salisbury Downs a net profit for the year to 30 June 1989 of $180,290 was disclosed and in respect of Mobil Para, a net profit for the half year to 31 December 1989 of $137,161 was disclosed. No balance sheets were provided.
34. Mr Verco was also shown budgets in relation to Mobil Salisbury Downs, which showed a budgeted profit and loss statement for the twelve months to 31 March 1991, and which predicted a net profit before tax of $252,085 and in respect of Mobil Para he was shown a budget which disclosed a budgeted profit before tax for the twelve months to 31 March, of $218,020.
35. It is not possible to compare the budgeted figures with the actual figures disclosed in the two earlier trading periods for either service stations. This is because, in the budgets the sales figures are shown only as gross profit on the litres sold, and for some unexplained reason the actual sales of motor fuel are not included, but only the profit component. This has the effect of distorting a comparison of income and sales.
36. Importantly, however, it can be observed that the budget predicates expenses in respect of Salisbury Downs significantly less than the actual expenses incurred in the year to 1989. The difference is not explained.
37. I would have thought that the information provided was quite insufficient to determine whether or not either business was worth acquiring. Nor was the information sufficient to determine whether an investment ought to be made in the company without an examination of the company's financial statements. The information provided to Mr Verco was of businesses to be acquired by the company, not businesses then owned by the company, but the investment that was sought was in the company, which would in turn own the businesses. The worth of an investment in the company cannot be measured simply by an examination of the worth of the businesses to be acquired. The worth of the company must be measured by reference to its own balance sheet and profit and loss accounts. Apparently Mr Verco was not supplied with the financial statements of the company, nor were they sought.
38. Instead, he was told that the company had accrued tax losses of approximately $1,000,000, and that those tax losses could be offset against future profits, so that the first two or three years of trading would be tax-free.
39. I have already referred to the balance sheet as at 30 June 1989. That balance sheet showed accumulated losses of $467,412, and a deficiency of assets of $427,630. The balance sheet did not disclose any asset by way of future income tax benefit, nor could the company have disclosed future income tax benefits of $1,000,000, having regard to its previous losses. At most, it could have disclosed future income tax benefits of $467,412. However, a future income tax benefit can only be returned as an asset of the company in certain circumstances. Apparently the author of the balance sheet as at 30 June 1989 did not believe that the trading losses qualified as future income tax benefits. Therefore, if it was the case that Mr Verco was told that there were $1,000,000 of accrued tax losses, that representation was not true in respect of at least the two matters that I mentioned.
40. Mr Linke indicated to the third respondent that he was looking for the third respondent to invest in 12.5 per cent of the capital and that he, Mr Linke, would put in 75 per cent and that a third person would be found to put in the other 12.5 per cent.
41. He was told that an investment of 12.5 per cent would involve him putting in $200,000; $75,000 by way of purchase of shares; and $125,000 would be by way of loan.
42. The value of the shares in the company would be determined by the underlying value of the company itself. It would have to be measured by a comparison of the value of the assets against the liabilities. The value of the shares would, of course, be measured by the amount that the assets of the company exceeded its liabilities. In the case of this company, the liabilities exceeded the assets and the shares were therefore worthless. A cursory look at the balance sheet as at 30 June 1989 would have shown any investor that no investment ought to be made under any circumstance.
43. However, the third respondent took the information to his son, who was a Chartered Accountant with Fennell Allen and Co. Mr Verco's evidence was that before he made the investment he spoke not only to his son, but also to the solicitor for the company who was then a director and he confirmed that which Mr Linke had told him.
44. A letter was written by the third respondent's son, Mr Tom Verco, of Fennell Allen and Co, to the National Australia Bank, in relation to the proposed investment. The date of the letter is unclear, but it would have to have been 20 June 1990. I set out the contents of that:
"20th June, 1990
National Australia Bank,
22-26 King william Street,
ADELAIDE, SA 5000
Attention: Mr. David Egan
Dear Sir,
Re: Michael Lister Verco and Sarah Jennet Verco
We write to explain the proposed investment to be made by
the above and details of loan funds requested.
The intention is to invest into a Company (S.A. Service
Stations Pty. Ltd.) which is presently owned by the Mr. Bob
Linke Group. This Company has approximately $1 million of
accumulated tax losses. A one eighth share in the Company
would be acquired for $75,000 and a further $125,000 would
be lent to the Company.
This Company would then acquire two Mobil Service Station
franchises, Mobil Salisbury Downs and Mobil Para for
approximately $600,000, plus stock and plant and equipment
bringing to total purchase price of approximately $1
million.
We have enclosed copies of Profit and Loss Accounts for both
service stations received from the Vendors as well as
Budgeted Profit and Loss Statements for each for the year
ended 31st March, 1991. The Budgeted Profit and Loss
Statements have been prepared by Mr. Linke and Mr. R.A.
Veitch. Mr. R.A. Veitch is Mr. Linke's Accountant and can
be contacted on 333 0770. Both have extensive knowledge of
the industry especially in the fuel, parts, oil and
cigarette sales area.
The shares to be purchased in the Company S.A. Service
Stations Pty. Ltd. are to be held and owned in the name
Michael Lister Verco and Sarah Jennet Verco as Trustees of
the M.L. Verco Family Trust at a cost of $75,000.
The M.L. Verco Family Trust will also lend S.A. Service
Stations Pty. Ltd. $125,000.
The funds will be derived from the following:-
- $100,000 Equity from M.L. Verco and S.J. Verco
individually contributed to the M.L. Verco Family Trust.
- $80,000 borrowed from the National Australia Bank Ltd. in
the name of the partnership 'M.L. and S.J. Verco'. These
funds will be withdrawn as repayment of the partners'
Capital Accounts and individually contributed to the M.L.
Verco Family Trust.
- $20,000 borrowed from the National Australia Bank Ltd. in
the name of the Company 'Tolderol Pty. Ltd'. These funds
will repay an interest accruing loan from S.J. Verco who in
turn will contribute them to the M.L. Verco Family Trust.
- i.e. Total Funds Borrowed $100,000
Total Equity Contributed $100,000
$200,000
The loan from the M.L. Verco Family Trust to S.A. Service
Stations Pty. Ltd. will be repaid half yearly. Basically
because the Company will not be taxable until the $1 million
accumulated tax losses have been extinguished, all profits
of the Company will be repaid via a reduction in the
investors loan account, until all tax losses have been
utilised. These tax losses are expected to be utilised
within three years from which time fully franked dividends
are expected to be paid.
If you should have any queries with any of the above please
do not hesitate to contact Mr. Tom Verco of this office.
Yours faithfully,
FENNELL, ALLEN and CO.
M.J. LANE
Partner
Enc."
45. Apparently the accountants did not seek any financial statements of the company, nor make any of the more obvious inquiries that I have mentioned above.
46. At the time that those negotiations were taking place, Mr Linke suggested to the third respondent that he should be a director of the company. The third respondent told him that he did not wish to be involved in the running or management of the service stations at all, but simply wanted an investment which would give him a half yearly dividend of around 10 to 20 per cent. Mr Linke told him that he could have an expectation of receiving a dividend of that kind.
47. It was the case, therefore, that Mr Verco made an investment of $200,000 on 26 June 1990, investing $75,000 apparently in share capital, and loaning $125,000 to the company. There is no evidence as to who the shareholders were who were selling their shares to Mr Verco, nor any evidence as to whether or not there was nominal share capital available, or share capital issued in fact to allow for the sale and purchase of 75,000 one dollar shares. That matter has remained unexplained. Apparently Mr Verco made his investment of $200,000 by writing a cheque to Rowan Enterprises. Rowan Enterprises, of course, was the owner of Mobil Para. Again it seems rather incredible that an investor in the company would write out a cheque made payable to the owner of a business which was to be acquired by the company.
48. The third respondent has admitted in his defence that he was appointed a director on 23 June 1990. Although I am not sure that any meeting was had by either the board of directors or the shareholders of the company to appoint the third respondent, this admission in the defence makes that inquiry unnecessary.
49. The fact that the third respondent did invest without sighting the financial statements of the company, the fact that he invested at all, the fact that he invested without knowing whether he was acquiring share capital, or indeed, from whom he was acquiring share capital, or whether he was lending moneys to the company on terms unspecified, the fact that he made his investment by a payment direct to the owner of a business to be acquired by the company in which he was investing, and the fact that he became a director without any resolution of the board of directors or the shareholders all point to confirm that the third respondent had little or no business acumen.
50. Six days after the third respondent became a director, the Bank of Singapore (Australia) Ltd (the Bank) wrote to the company, but addressing the letter to Mr and Mrs Linke. The Bank offered a facility to the company in two parts, by cash advance of $600,000, and bank guarantee of $50,000. The facility was to be fully repaid in one lump sum by 31 January 1991. The purpose of the cash advance was to assist to purchase the two Mobil service stations. The bank guarantee was to cover uncleared cheques issued in payment for deliveries of petroleum by Mobil. The Bank sought security in the form of a second mortgage over Mr and Mrs Linke's residential home at Stirling, joint and several guarantees from Mr and Mrs Linke, and a first registered debenture over the assets and undertaking of the company. The facility was conditional upon, inter alia, the provision of monthly management accounts. The offer remained open until 20 July 1990.
51. It is clear that the offer was accepted, but the circumstances leading up to acceptance are entirely unclear. This offer could not have been approved without the resolution of the board. No evidence was led in respect of that. I am not sure whether a debenture was taken, and if so, whether the granting of the debenture was pursuant to a resolution or purported resolution of the board. It is not clear, whether Mr Verco at this time had any knowledge of the transaction at all, although he was later aware that moneys were owed to the Bank.
52. The exhibits suggest that the Bank did have the 1988 and 1989 financial statements. What other information they had is unknown, and in particular it is not known whether they were aware that Mr Verco was an investor and the extent of the investment.
53. Whether the moneys advanced were used for the purpose provided was not the subject of evidence.
54. The respondents' case is one that suggests that they and others were the victims of fraudulent misrepresentations by Mr Linke, but their case stops just short of saying so. Instead, as I have said, they do not so much rely upon the fact that they were victims, but rather that they were without business experience and acumen. I, of course, ought not to speculate as to whether they were victims, or indeed, if they were, whether that would have affected the conclusion to which I have arrived.
55. After that time the third respondent saw Mr Linke regularly and during July and August 1990 he was told that trading was going very, very well and that there were weekly takings in the order of $100,000 to $120,000.
56. In August 1990 Mr Linke advised the third respondent that he wanted another $50,000 for his share and the third respondent contributed a further $50,000. The circumstances of this investment are even less satisfactorily explained than the original investment. It is not clear whether the $50,000 contribution was for the acquisition of share capital or by way of loan. No-one seems to suggest that the books of the company, or the financial records of the company, record a deposit of $50,000, or the transfer of shares to Mr Verco.
57. Throughout the rest of 1990 the third respondent claimed that Mr Linke continued to represent that trading was going very well, and it was said on one occasion Mr Linke suggested that gross takings for a weekend had been $150,000. In January 1991 Mr Linke told the third respondent that the company was doing so well that he could expect a dividend in the near future, and in February 1991 Mr Linke handed Mr Verco a cheque for $20,000. He was told by Mr Linke that the cheque represented his share for the first eight months trading, and, that he could expect a better dividend at the end of the financial year. It is not clear who was the drawer of the cheque. Apparently, accepting the third respondent's evidence, there was no resolution of the company to pay any dividend at this stage, nor could a dividend have then been paid out of profits.
58. At this time Mr Linke explained the absence of accounts by representing that the computer had broken down and that there were some difficulties in programming it but they hoped to have the accounts by the end of June 1991.
59. It is apparent from Mr Verco's evidence that throughout the whole of this period there were no meetings of directors, nor did he make any formal enquiry as to the company's fortunes, nor did he examine the company's books or make any effort to verify what he was being told by Mr Linke. It is clear that at this stage he trusted Mr Linke implicitly, and in trusting Mr Linke to the extent that he did, he completely abrogated his responsibilities as a director by failing, during this period, to ensure that there were proper financial statements of the company to 30 June 1990, or to ensure there were proper financial records of the company kept, or that there were regular meetings of the board, or that any annual general meeting was held. His naivety and his trust in Mr Linke led him to be in breach of a number of his obligations as a company director.
60. In March 1991 the third respondent visited Mr Linke at his beach house at Port Julia. At that time Mr Linke advised Mr Verco that he had spoken with the second respondent, Mr Hodge, and hoped to have Mr Hodge on the board very soon. Mr Hodge was well known to Mr Verco, being a farmer at Coonalpyn and another member of the SAJC committee. It was represented that Mr Hodge was to put in half of the amount that had been put in by Mr Verco. The original plan was that Mr Linke would have 75 per cent of the company and 12.5 per cent of the company would be owned by Mr Verco, and 12.5 per cent by some other party. If in fact it was then being suggested that Mr Hodge would obtain 12.5 per cent at a cost of half of that paid by Mr Verco, it seems incredible that it did not occur to Mr Verco to ask how it was that Mr Hodge would be able to purchase a like shareholding in the company for half of the price that he had paid less than twelve months before.
61. In May 1991 Mr Hodge, who had been a farmer at Coonalpyn since 1959, became involved in the company. Mr Linke had been known to him for sixteen to eighteen years through Mr Hodge's involvement with the Balaklava Racing Club and later when Mr Linke joined the SAJC Committee of which Mr Hodge had been a member since 1988. Mr Linke's reputation, as far as Mr Hodge was concerned, was of a substantial businessman, and Mr Hodge's observations were that Mr Linke had been very successful, in as much as he owned a substantial house at Stirling and a penthouse at Glenelg.
62. In February or March 1991 Mr Linke approached Mr Hodge and inquired whether he wished to invest in two good businesses that he had. He told Mr Hodge that Michael Verco had invested, and as a result, Mr Hodge spoke to Mr Verco and ascertained that Mr Verco was an investor and had received a dividend of $20,000.
63. Later Mr Hodge and his wife met with Mr Linke at Murray Bridge. Mr Linke explained that the company ran two service stations at Hillbank and Salisbury. There was discussion about Mr Hodge investing $125,000. At that stage nothing was said about whether that investment would take the part of a purchase of shares or a loan. Mr Hodge advised Mr Linke that he would wish to have a dividend every six months. At the time, the second respondent was given a profit and loss account for the period ended 31 December 1990, in relation to the Salisbury Downs business, which showed a profit for the six months of $86,546. The expenses in that profit and loss account are substantially less than those for the budgeted figures for the twelve months to 31 March 1991. For the six month period to 31 December 1990 the actual expenses shown on the profit and loss statement for Salisbury were $163,584. In the budget, total expenses were estimated to be $397,465. He was also given a 'trading statement' for Para Hills, which showed a profit for the period to 31 December 1990 of $53,443. The expenses shown for that six months were a little higher than the expenses projected for the twelve months in the budget to 31 March 1991.
64. It is not clear from the evidence who was the author of the profit and loss account and the trading statement. It would appear, however, from the documents themselves that they were prepared by an accountant, because the documents refer to an accountant's disclaimer.
65. It is also not entirely clear whether Mr Hodge received a balance sheet with the profit and loss account and trading statement. An abbreviated balance sheet as at 31 December 1990 is exhibited and it shows an excess of liabilities over assets to the extent of $407,206. That balance sheet shows accumulated losses of $626,988 but a capital profit reserve of $219,662. I am unable to determine from that document, or the accompanying documents, what was sold, if anything, which caused the increase in the capital reserve. I mention that no financial statements for 30 June 1990 were exhibited, and as a consequence, it is difficult to identify exactly what happened in the eighteen months between 30 June 1989 and 31 December 1990.
66. There were also trading statements prepared for each of the service stations until December 1990. Again it is not clear whether those were given to Mr Hodge with the profit and loss statements.
67. When he received the financial information that he did, he passed that on to his accountant, a Mr Storer, of a firm called Mann Judd, Chartered Accountants.
68. By letter dated 6 May 1991, Mr Storer wrote to Mr Hodge in relation to documents that he had been provided with. I set out that letter in full:
"6 May 1991
Mr R V Hodge
Gundooee
via COONALPYN SA 5265
Dear Rob
I thought it could be worthwhile confirming the matters we
discussed last week following my review of the financial
reports of SA Service Stations Pty Ltd.
The company balance sheet at 31 December 1990 revealed a
shortfall in Shareholders Funds of $407,206 which results
from trading or other losses of $626,988 offset by capital
profits of approximately $220,000. In broad terms the
company's operations are being funded by Directors loans
($826,195) and a current advance of $725,000 from the Bank
of Singapore.
The major asset of goodwill ($775,898) was apparently
purchased on July 1990.
My initial recommendations centre on these three matters.
1. The terms and conditions of the directors loans should
be clearly established. It could also be in your interests
to discuss the possible capitalisation or part of all of
these loans.
2. The terms and conditions of the advance from the Bank of
Singapore should be closely examined.
3. The value of goodwill should be clearly understood. If
possible, industry guidelines should be examined to
ascertain the existence and actual value of the asset.
Please contact me as soon as possible to discuss the outcome
of any further discussions you may have held or any other
matters relevant to the proposition.
Kind regards
Yours sincerely
(Signature)
N J STORER"
69. That letter indicates that a balance sheet was provided to Mr Storer, presumably by Mr Hodge, sometime, probably late in April or in early May. That letter confirms the figures to which I have earlier referred, but also shows that the balance sheet had further information other than that contained in the appeal books, in as much as the balance sheet showed as at that date, directors' loans of $826,195 and a current advance of $725,000 from the Bank of Singapore.
70. The letter raised relevant matters, but omitted to ask a number of questions that I would have thought had to be asked. Mr Hodge said that he sought answers to those questions from Mr Linke, and was given answers, but could not remember what those answers were, except that when he passed them on to Mr Storer, Mr Storer was satisfied by them.
71. On 15 May 1991 Mr Hodge then borrowed $100,000, and together with $25,000 of his own money, paid that to an account nominated by Mr Linke. Mr Hodge was not able to remember the account to which the moneys were transferred. At the time that he paid the moneys he was not aware what share he was getting in the company, nor had there been any discussion about his being a director. Subsequently there was such a discussion which gave rise to his appointment as a director on 28 May 1991. He said he had accepted that appointment on the basis that he was a non-active, non-executive director. On the same day a brother-in-law of Mr Linke, Mr John Louis Siegele, who has since died, was appointed a director of the company.
72. The second respondent admitted in his defence his appointment as a director. Again, I do not know whether his appointment was regularly made, i.e. whether the necessary resolutions were passed, but the admission in the defence makes that inquiry unnecessary.
73. The evidence suggests that there had not been any meetings of directors between the appointment of Mr Verco on 23 June 1990, and the appointment of Messrs Hodge and Siegele on 28 May 1991. It would appear from the evidence that there were no meetings of directors held at all during the whole of the financial year ended 30 June 1991. If financial statements had ever been prepared in respect of the year ended 30 June 1990, they have not been made available nor exhibited in these proceedings.
74. Between May 1991 and August 1991 Mr Linke told Mr Hodge that the business was still doing well. Moreover, he told Mr Verco that accounts were not available because of problems with the computer. In August he told both Mr Verco and Mr Hodge that he was considering expansion, as expansion seemed to be the only way to go. He handed both Mr Verco and Mr Hodge some accounts in September 1991. He also gave them other financial statements to which I will return. The accounts for 30 June 1991 were apparently prepared by Mansom Collinson Services Pty Ltd. The profit and loss statement showed gross sales of $11,033,822, a gross profit on trading of $1,124,060 and expenses of $1,090,939. The profit and loss statement shows an operating profit before tax of $35,491 and no provision for income tax expense. There is no comparative profit and loss statement for the period ended 30 June 1990.
75. The balance sheet as at 30 June 1991 shows accumulated losses of $731,486 and a capital profits reserve of $219,662. Again, there is no comparative balance sheet for the period ended 30 June 1990.
76. The abbreviated balance sheet as at 31 December 1990 disclosed accumulated losses of $626,988. Therefore between that date and 30 June 1991 the accumulated losses had increased by $105,000, which is, of course, inconsistent with a company which was trading profitably. If the company did make a profit of $35,491, as disclosed in the accounts, and if the accumulated losses were correctly disclosed in the half yearly balance sheet and the balance sheet to 30 June 1991, then the company must have made a profit of in excess of $140,000 in the first half of that financial year.
77. The balance sheet as at 30 June 1991 shows current assets of $392,837, and current liabilities of $318,857. There are intangible assets of $786,745, most of which are made up of an item for goodwill of $775,898. The balance sheet does not show what the goodwill consisted of, but presumably it was for purchased goodwill, which arose at the time of the acquisition of the Salisbury Downs and Para service stations. Whether or not the purchased goodwill had any value, of course, is another thing, and the balance sheet makes no attempt to show how it was valued. It is most unlikely that the purchase of those businesses would have given rise to goodwill of that order. The goodwill would have had to have been the amount in excess of the net tangible assets of the business for which the businesses were purchased. There is no evidence that such a significant sum was paid.
78. The current liabilities include a bank overdraft of $148,551, trade creditors of $146,306 and an advance from AGC of $24,000. Non current liabilities are disclosed as $1,574,189, being made up of a loan from the Bank of Singapore of $645,000, a loan from CBFC of $42,000 and unsecured loans of $887,189. It would not be right to include the Bank of Singapore advance as a non current liability, unless the terms of the facility had changed from that offered in the Bank's letter of 29 June 1990, because the original terms of repayment made the loan a current liability.
79. The accounts which were handed to Mr Hodge and Mr Verco were apparently management accounts.
80. Mr Verco wrote to Mr Linke on 21 October 1991 and requested further information. I set out that letter:
"Tolderol,
LANGHORNE CREEK SA 5255
21st October, 1991
Mr. R.D. Linke,
16 Birth Road,
STIRLING SA 5152
Dear Bob,
I write seeking some further information and explanation
regarding the Financial Statements for the year ended 30th
June, 1991. The information is required so I can complete
my own Financial Statements for the M.L. Verco Family Trust
for the year ended 30th June, 1991 and correctly show the
investment at cost and loans outstanding in S.A. Service
Stations Pty. Ltd. and Batmas Nominees Pty. Ltd., and to
answer some concerns I have. Therefore the information
required is as follows:
1. The amount paid for the 1,600 shares in S.A. Service
Stations Pty. Ltd., and the 1,600 shares in Batmas Nominees
Pty. Ltd.
2. The details on who the "Loans - Unsecured" for $887,198
are payable to.
3. A Trading and Profit and Loss Statement for:
- Mobil Para and
- Mobil Salisbury, and not just a consolidated one.
4. Details of what salary was paid to Phillip Greatbatch.
5. Details of the Legal Expenses and why they were so high.
6. As I am a Director of S.A. Service Stations Pty. Ltd.,
it is of concern that the Accounts supplied to me are not in
accordance with Schedule 5 of the Corporations Law. If
these were only a Management Set of Accounts, please could
you supply me with the final complete set, including Notes
To and Forming Part of the Accounts and a Sources and
Application of Funds Statement.
7. A copy of the 1991 Taxation Return for S.A. Service
Stations Pty. Ltd. and Batmas Nominees Pty. Ltd.
In your Annual Report you mentioned it is your wish to repay
the Bank of Singapore loan. Why pay them back before the
shareholders? If you are considering paying back $15,000
per month, why not reduce that to perhaps $5,000 or $10,000
and distribute the other $10,000 or $5,000 to the
shareholders?
In August I was issued with an exhaustive list of monthly
budgets but it is now nearing the end of October and I am
yet to see an actual figure. When will any actual results
be produced and if they have, when will I see them.
If you have any queries with any of the above, please do not
hesitate to contact me.
Yours faithfully,
MICHAEL LISTER VERCO"
81. No doubt that letter was drafted by someone other than Mr Verco, but the letter recognizes some of the duties that Mr Verco had as a director of this company. It was the first recognition by either of the second or third respondents that the position of director carried with it statutory and other obligations.
82. In October Mr Linke advised Mr Hodge that trading was improving and that he expected to organize a directors' meeting very soon. A similar report was made to Mr Hodge in November 1991, and Mr Hodge was told at that time that an office had been booked for a directors' meeting for 3 December at Mr Owen Keen's office. Mr Owen Keen, a partner in Messrs Piper, Alderman, was the solicitor for the company and had previously been a director of the company.
83. Presumably after October 1991, having regard to the contents of the letter written by Mr Verco to Mr Linke, financial statements were prepared in a form for submission to the Australian Taxation Office, and so as to purport to comply at least with Schedule 5 of the Corporations Law. It is probable that those documents were prepared later in 1991 and not provided until 24 January 1992. There is a letter from Mr Veitch of Mansom, Collinson Services Pty Ltd, to Mr Tom Verco of Fennell Allen and Co, of that date, enclosing income tax returns and financial accounts for the year ended 30 June 1991, and "shareholder details".
84. A meeting was held on 3 December 1991, which was the first meeting of directors at any time after either of the second or third respondents were appointed directors. In the case of Mr Verco, therefore, he allowed nearly eighteen months to pass without requiring a directors' meeting, and in the case of Mr Hodge, six months. It is also to be remembered that Mr Verco allowed the financial year ended 30 June 1990 to pass without the preparation of financial statements on the part of the company, and without the tabling of those financial statements. I do not know, because the evidence is unclear, whether or not income tax returns were filed on behalf of the company.
85. Four directors were present at the meeting of the directors on 3 December 1991, namely, Messrs Linke, Siegele, Verco and Hodge. Three other persons were present by invitation, namely Mr Greatbatch, who was an employee, Mr Veitch, who was an employee of the accountants Mansom Collinson Services Pty Ltd, and Mr Owen Keen, the solicitor for the company and previously a director.
86. Minutes of the meeting were kept by Mr Keen and they showed that there was discussion in relation to the completion of a shareholders' agreement. That document is an agreement executed on an unknown date between the company on the one hand and Mr and Mrs Linke and Mr and Mrs Verco, Mr Siegele and Mr and Mrs Hodge, on the other hand. It refers to schedules which are said to set out the shareholdings and loan accounts. Those schedules are not included in the document tendered in the proceedings. The agreement also talks of the ability of the company to suspend interest payment on loan accounts and for the repayment of all loan accounts on a particular date not specified. The agreement provides for the transfer of shares and pre-emptive rights of shareholders and for the sale of shares. Apparently the agreement was entered into by some of the parties at this meeting. The reason for execution of the agreement is unclear.
87. At the meeting of 3 December questions were raised relating to the inability of the company to produce current financial figures, and in response Mr Linke produced handwritten figures to which he spoke. There is no entry in the minutes as to what was said and the evidence in relation to what was said is unclear. There is a suggestion that Mr Linke was considering the installation of a carwash at the Para service station, which he said would be in the order of $115,000.
88. There is an item mentioned in the minutes that Mr Verco "reinforces his views expressed in his letter to RDL". It can be assumed that that item refers to the letter of 21 October 1991.
89. The notes conclude with this note:
"Robert Veitch to supply shareholders with particulars of
loan accounts, share considerations. In particular, the
last call of $1,000 for 1 per cent explanation. Go to loan
accounts - 12th August."
90. It does not appear that any meaningful management accounts were presented at that meeting, nor was there any sensible conversation had in relation to the financial position of the company. There is no note, nor any evidence to suggest that either of the second or third respondents sought any further explanations as to the company's fortunes other than that set out above. There is no suggestion that the financial statements for the year ended 30 June 1991 were approved, nor any resolution for the holding of an annual general meeting.
91. On 17 October 1991 the National Australia Bank had approved a temporary overdraft on the company's number one account and number two account, up to a combined maximum of $35,000, which facility was to continue only until 11 November 1991, after which time the accounts were to be maintained in credit.
92. A letter dated 17 October 1991 shows that the bank wrote to "The Directors, SA Service Stations Pty Ltd" and after stating those facts mentioned above, wrote this: "The temporary facility agreed to is to be secured by a guarantee from Robert Douglas Linke, Meredith Linke and Phillip Greatbatch for $35,000-00, and is subject to Mr Linke handing to us a signed copy of a Contract for land at Port Julia, the surplus funds from the settlement of same being the source of clearance of the facility herein approved."
93. There is no suggestion that letter was brought to the attention of the other directors at that time or at the meeting of directors of 3 December 1991.
94. On 20 November 1991 the bank wrote again in relation to that temporary overdraft accommodation and confirmed that it had been verbally extended until 15 November 1991, but required that the accounts be maintained in credit. That letter pointed out that the three accounts of the company with that bank were in overdraft to the extent of about $12,500. Again, there does not seem to be any suggestion that letter was brought to the attention of the other directors, nor mentioned at the directors' meeting of 3 December 1991.
95. Messrs Mansom, Collinson and Veitch's letter of 24 January 1992 confirms that company acted as accountants to the company for the purpose of preparing the financial statements and income tax returns for the period to 30 June 1991. As mentioned, Mr Veitch had been present at the meeting of 3 December 1991. The financial statements which are annexed to that letter are dated 17 December 1991. They appear to be the same as the financial statements which were handed to Messrs Verco and Hodge in September 1991.
96. The notes to and forming part of the accounts assert that the accounts had been prepared in accordance with applicable accounting standards and the Corporations Law, including the disclosure requirements of Schedule 5 of the Corporations Law.
97. The notes further show that the accounts had been prepared on the basis that future income tax benefits were not to be brought to account unless realisation of the asset was assured beyond any reasonable doubt. The notes disclose that future income tax benefits in relation to tax losses were not brought to account unless there was virtual certainty of realisation of the benefit.
98. There is no asset which reflects future income tax benefits in the balance sheet, which would suggest that at least the authors of the accounts believed that the accounting standards did not allow the previous losses to be disclosed as an income tax benefit and thus be categorized as an asset.
99. The accounts are drawn on the basis that the company is a going concern and in particular the accounts show a statement by directors that at the date of the statement, which is said to be 17 December 1991, "there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due".
100. Those accounts, together with the income tax returns were provided to Messrs Verco and Linke in January 1992. An annual report annexed to those accounts signed by Mr Linke shows:-
"ANNUAL REPORT
S.A. SERVICE STATIONS PTY LTD 1990-91
Trading for the above financial year was disappointing in
terms of net profit however the immediate and long term
looks bright. The anticipated profit and performance
against budget was well down. I have clearly identified
most of the major problem areas during a concerted effort to
establish much better procedures with the view of arresting
and rectifying the lack of acceptable margins being
achieved. It is my intention to become a full-time working
director of the company to assist Phillip Greatbatch in
gathering all the necessary information required to maintain
good stock and price control and to establish a much greater
degree of management information.
Our present cash control system is very good but our monthly
reports leave a lot to be desired and have fallen short of
providing any meaningful information. It must be pointed
out that because the purpose of Mobil Para and Mobil
Salisbury Downs was on a walk-in, walk-out basis, the net
profit was adversely effected (sic). We believe the stock
on hand, in spare parts at Para was exaggerated by some
$50,000 at the time of accepting the deal. Other factors
that contributed to the poor result are as follows:
(1) Incorrect percentage method of marking up on spare
parts
(2) Videos. A price war flared up in this section
statewide. Also Para display in the video section needs
vast improvement.
(3) Legal expenses amounted to $31,000
(4) Phillip Greatbatch's salary was not budgeted for and
did not appear in wages until 30 June 1991, on the trading
statements.
(5) Cigarettes at Salisbury Downs. The high sales target
could not be achieved with a 20% mark up.
(6) No provision was made for depreciation in the budget.
(7) Interest was not budgeted for.
All the above factors have been taken into account when
framing this year's budgets and it is my belief that the
consolidated bottom line will be achieved. I will be
reporting on a monthly basis highlighting any significant
variances in performance against budget both in the sales
and expenditure areas. A similar format as is shown on the
monthly breakups in each category will be provided through
our new computerized system. Provision has not been made on
the budget for any principal repayments to the Bank of
Singapore, however, it has been indicated to me that $15,000
per month would be an acceptable amount. The work and time
involved in getting our new computer system up and running
has been grossly underestimated. The amount of work and
time involved with the input, particularly in the spare
parts area, is enormous. However, it is pleasing to report
that all involved are very confident that the system will
suit our needs admirably and will assist greatly in
management and control of stock, cash and salaries.
The purchase of Caltex Ingle Farm will prove to be a good
one and will compliment (sic) S.A. Service Stations in terms
of staffing, return on investment and general running of our
three sites. Settlement has now been effected on Ingle
Farm, however a few trading days have been lost in August.
Every Effort (sic) will be made to pick up that loss in the
first few months of trading.
Trusting each share holder can look forward to a prosperous
and a happy association with S.A. Service Stations and
Batmas Nominees.
For and behalf (sic) of the directors.
(Signature)
RD Linke"
101. The annual report must have been prepared prior to October 1991 because it refers to the repayment to the Bank of Singapore of the sum of $15,000 per month. The letter of Mr Verco of 21 October 1991 referred to that annual report and to the matter of the repayment of those moneys to the Bank of Singapore. One important matter about the annual report is that it states that Mr Linke would be reporting on a monthly basis. He did not, and it does not appear that any steps were made to require him to do so.
102. Messrs Verco and Hodge said that at the directors' meeting in December 1991 they were given a glowing report of the company's fortunes. Moreover, they said the company's accountant and the company's solicitor were present and they accepted the explanations given by Mr Linke in relation to the company's then position.
103. On 25 February 1992 the Bank of Singapore advised the secretary of the company at the address of Mr and Mrs Linke in Stirling that "(i)n view of recent developments" Arthur Anderson had been appointed to investigate the affairs and financial position of the company and Batmas Nominees Pty Ltd.
104. The evidence suggests that there had not been much contact between Messrs Linke, Verco and Hodges between December 1991 and 14 March 1992, when a receiver was appointed. Certainly Messrs Verco and Hodge were not told of the Bank's appointment of accountants to investigate in February 1992. When he was advised that a receiver had been appointed Mr Verco said that he could not believe it. He said that after he was told that by Mr Linke there was a meeting at Mr Linke's penthouse, which was then bare of all furniture. Mr Linke told Mr and Mrs Hodge and Mr Verco that they would have to find an extra $300,000. Mr Linke was still confident that moneys could be obtained from Hong Kong or by the injection of capital from some other person.
105. It was the evidence of both Mr Verco and Mr Hodge that they had no idea until that time that any of the creditors had not been paid in the ordinary course of business. Neither of them had ever heard of the plaintiff and they were unaware that the company ran an account with the plaintiff, or indeed, that the plaintiff's account was overdue.
106. It seems almost incomprehensible that either or both Mr Verco or Mr Hodge ever invested in this company. The company's prospects were never good, and indeed, the company, when Mr Verco first invested, was simply a company with liabilities of hundreds of thousands of dollars and no assets, except an illusory asset of a future income tax benefit. The company's position was no better, and probably worse, at the time that Mr Hodge invested.
107. Neither sought to understand the nature of their investment. There is no evidence that either of them purchased shares and obtained share certificates, or when depositing moneys on loan accounts, received any acknowledgment of the deposit. The very investment shows an extraordinary naivety on the part of both of them which arose because both respondents trusted Mr Linke and apparently continued to trust him right up until March 1992.
108. In giving him that trust they completely abrogated their responsibilities as directors in failing to insist upon even the most basic information as to the company's financial position, or to insist upon the holding of directors' meetings or even to insist upon some record of the entry into contracts by the company, or insisting upon a record of the use of the company's seal. It seems to me that a fair reading of the evidence suggests that they carried out none of the usual responsibilities attendant upon the duties of a director.
109. It is in those circumstances that the plaintiff sought to recover against each of Messrs Linke, Hodge and Verco, pursuant to s592 of the Corporations Law. That section provides:
"(1) 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.
(2) In any proceedings against a person under subsection
(1) it is a defence if it is proved:
(a) that the debt was incurred without the person's express
or implied authority or consent; or
(b) that at the time when the debt was incurred, the person
did not have reasonable cause to expect:
(i) that the company would not be able to pay all its
debts as and when they became due; or
(ii) that, if the company incurred that debt, it would
not be able to pay all its debts as and when they became
due.
(3) Proceedings may be brought under subsection (1) for the
recovery of a debt whether or not the person against whom
the proceedings are brought, or any other person, has been
convicted of an offence under subsection (1) in respect of
the incurring of that debt.
(4) In proceedings brought under subsection (1) for the
recovery of a debt, the liability of a person under that
subsection in respect of the debt may be established on the
balance of probabilities."
110. For the appellant to succeed, it needed to establish, firstly, the incurring of a debt, and secondly, that immediately before the time when the debt was incurred there were reasonable grounds to expect either that the company would not be able to pay all of its debts as and when they became due, or that if the company incurred the particular debt, it would not be able to pay all of its debts as and when they became due. The appellant was obliged to prove the liability of the respondents upon the balance of probabilities (s592(4)).
111. The appellant led evidence from a number of creditors and from an accountant, which established in the opinion of the Master and in my opinion, firstly, that the debt had been incurred between November 1991 and March 1992, and secondly, that at the time the debt was incurred, there were reasonable grounds to expect that the company would not be able to pay all of its debts as and when they became due, or that if it incurred the debt which it did, that it would not be able to pay all of its debts as and when they became due.
112. It was then incumbent upon the appellant to establish that the company was at the time that the debt was incurred, or became at a later time, a company to which the section applied. The section applies to any company which is placed in liquidation and that occurred in respect of this company on 8 July 1992 and as a consequence, s592 applied to the company. The admissions by each of the second and third respondents in their defence established that both of them were directors and therefore the appellant was able to establish that the second and third respondents were directors at the time when the debt was incurred, and by reason of all of that, the second and third respondents had contravened the section and as such were jointly and severally liable, pursuant to s592. The issue which was before the Master, and the issue raised on appeal, was as to whether or not the second and third respondents had made out any of the defences which are offered, pursuant to s592(2) of the Corporations Law.
113. Before turning to the defences it would be appropriate to have regard to the history of s592. That is so because the construction of s592 and its predecessors has been the subject of conflicting decisions.
114. When the Companies Act 1962 was introduced it included, within Subdivision (4) of Division IV of Part X "Offences", s303(3), which provided:-
"If in the course of the winding up of a company it appears
that an officer of the company who was knowingly a party to
the contracting of a debt provable in the winding up had, at
the time the debt was contracted, no reasonable or probable
ground of expectation, after taking into consideration the
other liabilities, if any, of the company at the time, of
the company being able to pay the debt, the officer shall be
guilty of an offence against this Act."
115. That section imposed a criminal liability, but no civil liability, upon directors, secretaries and employees of companies, and receivers and managers and liquidators. The offence was limited to circumstances where the officer was knowingly a party to the contracting of a debt which was provable in the winding up of the company, and in circumstances where that officer had no reasonable or probable ground of expectation that the company would be able to pay that debt. The New South Wales equivalent of that section was considered by the High Court in Shapowloff v Dunn (1981) 148 CLR 72. In that appeal, which was from a conviction recorded by a Magistrate, of an officer of a company, Wilson J (with whom Gibbs CJ, Stephen, Murphy and Aickin JJ concurred) said (at 85-86):
"The prosecution must prove beyond reasonable doubt that at
the time of contracting the debt the defendant himself had
no expectation, reasonably grounded in the whole of the
circumstances then existent as he knew them, of being able
to pay the debt. It will be seen that the test involves a
blending of subjective and objective considerations. The
test of reason imports an objective standard, but it is to
be applied to the facts as known to the defendant.
Given this construction of the provision, I am unable to
accept the submission of the appellant. The defendant
himself cannot be the arbiter of the reasonableness or
otherwise of an expectation that he would be able to meet
the debt."
116. The section was repealed in 1972 and s374c was enacted in its place, and it provided:
"(1) If an officer of a company to which this section
applies was knowingly a party to the contracting of a debt
by the company and had, at the time the debt was contracted
no reasonable or probable grounds of expectation after
taking into consideration the other liabilities, if any, of
the company at the time, of the company being able to pay
the debt the officer shall be guilty of an offence against
this Act."
117. Section 374e defined the circumstances in which s374c applied which circumstances included the winding up of a company.
118. That section repeated the criminal liability of an officer of a company but did not impose, itself, any civil liability upon any officer.
119. However, at the same time as s374c was enacted, so also was s374d, which provided that where a person was convicted of an offence under s374c(1), a Court, on the application of a liquidator (where a company was being wound up) or on the application of a creditor or member (with the consent of the Attorney-General), could declare the person convicted to be personally responsible, without any limitation of liability, for the payment to the company of an amount equal to the whole or such part of the debt as the Court thought fit. The section gave the Court consequential powers for the purpose of giving effect to the declaration, including the power to order that the liability be a charge on any debt owed from the company to that person. The civil liability created by the procedure under s374d was to have effect notwithstanding that the officer was also criminally liable in respect of the matters the subject of the declaration (s374d(4)).
120. The 1972 amendment thus created a civil liability only in circumstances where the officer had first been convicted of a criminal offence. Therefore an officer would not be liable to civil consequences unless all of the elements of the offence under s374c had been made out beyond reasonable doubt.
121. Section 374c was not materially different from the repealed s303(3). Therefore the reasoning of Wilson J in Shapowloff v Dunn (supra) undoubtedly applied. In those circumstances it would follow that a civil liability could only ever arise in circumstances where the Court had proceeded to conviction, applying an objective standard "to the facts as known to the defendant". In those circumstances, an officer could never have become liable for a civil liability in circumstances where he did not know, but ought to have known certain matters. That is so because the officer could never have been convicted in those circumstances and his conviction was a condition precedent to his civil liability.
122. The Companies (South Australia) Code repealed the Companies Act. Section 556 of the Companies (South Australia) Code is in a very similar form to s592 of the Corporations Law, but there is a difference, which is not immaterial, which I should mention immediately. Section 556 of the Companies Code was silent as to the standard of proof. It did not have the equivalent of s592(4) of the Corporations Law, allowing for the liability for a debt to be established on the balance of probabilities.
123. Section 556 of the Companies Code and s592 of the Corporations Law are in a far different form to the section of legislation considered by Wilson J in Shapowloff v Dunn (supra). The new form of the legislation makes a director or a person who took part in the management and who has breached the section, both guilty of an offence and liable to civil consequences; that is to say, the sections have a dual purpose. After the 1981 Companies Code, civil liability has not depended upon there first being established a criminal offence. That proposition was put beyond doubt by the provisions of s556(3) of the Companies Code and by s592(3) of the Corporations Law. Further, it seems to me clear enough that Parliament intended with s556 of the Companies Code to allow a creditor to recover against a director or a person concerned in the management of a company. The section not only imposes a civil liability upon directors and those who took part in the management, but gives the corresponding right to an individual creditor to bring action against the director. Watt v 3M Australia Pty Ltd (1984) 3 NSWLR 671.
124. The legislation prior to the enactment of s556 had given no such right to a creditor. Whilst a creditor had a right, with the consent of the Attorney-General, upon a conviction of an officer, to seek a declaration from the Court of that officer's civil liability, the liability of the officer was limited to a liability to make payment to the company of the amount equal to the whole or part of the debt.
125. So, as at the time of the enactment of s556 of the Companies Code, for the first time the legislation allowed for the creditor to seek recovery directly from the officer and to recover moneys for the creditor and not for the company of which the defendant was an officer.
126. Section 557 of the Companies Code and s593 of the Corporations Law preserved the right of the Court to make a declaration. Those sections again are similar and can be considered together. The sections authorize the Court to make a declaration, not as under s374d of the Companies Act for payment to the company, but for payment to the person to whom the debt is payable. The legislation recognizes that a declaration that an officer pay the debt to an insolvent company may be little help to the creditor who suffered a loss by reason of a breach of s556 or s592.
127. Section 556 was considered by the Court of Appeal of New South Wales, in an appeal from Hodgson J, in Metal Manufacturers Ltd v Lewis (1988) 13 NSWLR
315. Kirby P, at 318, identified its purpose as being: "... designed to instill a high sense of responsibility in directors and other officers in the discharge of their duties."
128. The President went on to say (at 318-319): "The time has passed when directors and other officers can simply surrender their duties to the public and those with whom the corporation deals by washing their hands, with impunity, leaving it to one director or a cadre of directors or to a general manager to discharge their responsibilities for them."
129. The section has undergone something of a metamorphosis since its original enactment. Whilst originally it provided only for a criminal offence and offered no statutory defences, in its new form it provides a dual role, giving rise to both criminal and civil liability. The section also provides common defences to both those liabilities. It makes clear that civil liability only needs to be proved upon the balance of probabilities. It now gives an individual creditor a right to sue the director or that person who took part in the management of the company directly. The burden of proof has changed. Under s303(3) the burden was upon the prosecutor to prove that the officer had no reasonable or probable ground of expectation of the company being able to pay the debt. The burden is now upon the officer to establish that the officer did not have reasonable cause to expect, at the time when the debt was incurred, either that the company would not be able to pay all its debts as and when they became due or that, if the company incurred that debt, it would not be able to pay all its debts as and when they became due.
130. In 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371, Foster J, after referring to the Court of Appeal decision in Shapowloff v Dunn, and the dicta of Wilson J in the High court, said of s556 of the Companies Code (at 375):
"In the first place, there is a clear change in legislative
policy introduced in s556(1). The net of liability, both
criminal and civil, is cast far more widely than in the
earlier section. Whereas s303(3) was aimed solely at a
company officer who had knowingly been a party to the
contracting of the debt in question, with the attendant
necessity that the prosecution prove this threshold matter
beyond reasonable doubt, s556(1) contains no such limiting
requirement. A prima facie liability in a director of the
company or a person in a managerial position, can be
established without proof that such person had any personal
knowledge of, let alone involvement in, the incurring of the
relevant debt. Such matters form no part of the ingredients
of the offence.
It is to be noted that questions of knowledge of and
participation in the incurring of the relevant debt are now
relegated to the status of factual matters which may arise
should the defendant seek to establish one of the statutory
defences afforded by the provisions of s556(2). Indeed, it
may well be that the defendant's absence of knowledge of and
participation in the incurring of the relevant debt is of no
relevance whatever where the debt was incurred with the
defendant's implied authority or consent: s556(2)(a) or to
the defence constituted by s556(2)(b)(i). These questions
of construction do not, in the ultimate, arise for
consideration on the facts in the present case and,
accordingly, I refrain from expressing any concluded view
about them." His Honour went on to say (at 376):
"The structure of the new section and its sub-sections,
together with the imposition of onuses, is basically
different from the earlier section. Clearly, s556(1)
creates two offences, and corresponding heads of civil
liability, in relation to the company's incurring of the
relevant debt, without regard to the presence or absence of
personal involvement of the defendant in the incurring of
that debt or to his knowledge or lack of knowledge of
matters indicating the company's ability or otherwise to
meet all its debts. I have already indicated my view that
the sub-section, when it speaks of 'reasonable grounds' is
not speaking of grounds personal to the defendant. It is
speaking of grounds which should be adjudged 'reasonable'
according to the standard of a director or manager of
ordinary competence.
The inquiry as to the establishment, prima facie, of an
offence or head of civil liability is, therefore, very
different from the inquiry called for under the old section.
No elements personal to the defendant are involved at all."
131. As mentioned, there are two defences available to a defendant facing liability under s592(1). Section 592(2)(a) excuses the director or person who took part in the management of the company if that person can establish that the debt was incurred without that person's express or implied authority or consent. This defence is thus concerned with the person's participation in the incurring of the debt. The second defence, set out in s592(2)(b), is concerned with the person's knowledge and expectation of the company's ability to pay a particular debt, or all of its debts, at the time of incurring the debt.
132. The second and third respondents in this matter sought to rely on both defences. It is convenient to examine these defences in reverse order.
133. The second and third respondents rely on s592(2)(b), in that they argue that at the time the debt was incurred, neither the second nor the third respondent had reasonable cause to expect that the company would not be able to pay all its debts as and when they became due or that if the company incurred that debt, it would not be able to pay all its debts as and when they became due. It was for the second and third respondents to establish, on the balance of probabilities, those matters (Southern Star Group Pty Ltd v Taylor (No. 2) (1991) 9 ACLC 1211; Group Four Industries v Brosnan (1992) 59 SASR
22).
134. There are, in fact, alternative defences within s592(2)(b). A defence is made out if a director can establish either of the matters in sub-paragaraphs (i) or (ii). In the circumstances of this case it does not matter which of the sub-paragraphs are addressed, because neither director had any knowledge at all of the company's financial circumstances when the debts were incurred between November 1991 and March 1992. They both attempted to argue from a state of self-induced ignorance that they were entitled to the benefit of a defence under s592(2)(b).
135. There has been considerable debate as to whether a defence raised under s592(2)(b) requires not only an examination of what the party knew at the particular time under enquiry, but also an examination of what the party ought to have known. This debate has tended to centre around the applicability or otherwise of the principles enunciated by the High Court in Shapowloff v Dunn to the interpretation of s592(2)(b).
136. In Pioneer Concrete Pty Ltd v Ellston (1985) 10 ACLR 289, Carruthers J, in considering the defence under s556(2)(b) of the Companies Code, applied these principles. His Honour said (at 301):
"The defendant does however rely upon both limbs of para
(b). Applying the principles enunciated by the High Court in
the Shapowloff case, supra, the test to be applied here
involves I think, 'a blending of subjective and objective
considerations'.
Here the defendant must prove on the balance of
probabilities that at the time when each debt was incurred
between 1 June 1983 and 31 August 1983, he had no cause
163. In any event, this Court would follow a previous decision of its own, unless it was satisfied that the previous decision is plainly wrong. Certainly, it could not be said that the opinions expressed, by the majority at least, in Group Four Industries v Brosnan (supra) were plainly wrong, in the sense in which that expression is used in cases relating to circumstances in which a court will depart from its previous decisions (White v The Queen
(1967) SASR 184; Devlin v Collins (1984) 37 SASR 98; Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd and Another (1989) 52 SASR 148; Pashalis v Workcover Corporation (1994) 63 SASR 71).
164. I do not believe the second and third respondents ever made any enquiry, let alone any appropriate enquiry, as to whether this company would be able to pay this or any of its debts. Instead, they simply adopted the position, each of them said, that they did at the time of their appointment, namely, in the case of Mr Verco, that he did not wish to be involved in the running or management of the company, and in the case of Mr Hodge, that he would be a non-active, non-executive director. Their belief in the company's ability to pay its debts could only have come from what they were told by Mr Linke. They had no first-hand knowledge or understanding of the company's trading history. In those circumstances, they did not have cause to expect that the company would be able to pay this debt or any other debt, as this debt or any other debt fell due. Having regard to their complete abrogation of their responsibilities as directors, it simply could not be said that at any time they had reasonable cause to expect that the company would be able to pay any of its debts as and when they became due. I therefore disagree with the Master who found, contrary to my opinion, that the second and third respondents had made out the defence given by s592(2)(b).
165. The Master was of the opinion that the inquiries made of the respective accountants of each of the respondents, together with the inquiries of Mr Linke, and the information that they received in relation to the December 1991 meeting, in combination, was sufficient for them to be able to say that they did not have reasonable cause to expect that the company would not be able to pay this debt or all of its debts as and when they became due.
166. For the reasons I have already given, I cannot agree that those inquiries, or that information, was anywhere near sufficient for the respondents to be able to make out the defence. Not only were those inquiries and that information insufficient, but in my opinion, their failure to carry out their duties as directors of the company made it impossible to make out the defence.
167. In those circumstances, in my opinion, a defence under s592(2)(b) was not available to the second or third defendants.
168. Turning then to the defence offered under s592(2)(a), the second and third respondents claimed that the debt was incurred without the express or implied authority or consent of either the second or third respondent.
169. In the circumstances of this case there were no directors' meetings. No general authority was given expressly by each of the second and third respondents, and, of course, no specific authority was given to incur this debt. The question then is whether the defence under s592(2)(a) was available. The Master concluded that the second and third respondents expressly became members and directors of the company on the understanding that they would not be involved in the day-to-day management of the company, and thereby implicitly left such decisions to Mr Linke. The Master accordingly determined that, consistent with the reasoning of Ormiston J, the defence under s592(2)(a) was not available.
170. Again there has been considerable debate concerning the precise ambit of this defence.
171. In Metal Manufacturers Pty Ltd v Lewis (supra) the Court of Appeal in New South Wales considered a defence under s556(2)(a). According to the headnote of that case, the majority (Mahoney and McHugh JJA, Kirby P dissenting) reached the conclusion that a director was only liable for those debts incurred by the company, at the instigation of the managing director, in circumstances where the director had given a particular authority or consent. The headnote says that the majority would not allow for recovery in circumstances where there was proof only of a general authorization. Although this appears to be the basis of McHugh JA's judgment, there does not appear to be anything in Mahoney JA's judgment which supports the proposition that the necessary authority must relate to the specific debt incurred. Rather, Mahoney JA relied upon the office held by Mr Lewis, that of managing director, and the idea that, prima facie, his authority derives from that office, or, where the articles of association provide for a managing director, from the articles of association.
172. Ormiston J, in Morely v Statewide Tobacco Services Ltd (supra), said (at 450):
"... contrary to what might appear, from a reading of the
headnote, to have been decided in Lewis's Case, a director
cannot assert in reliance on para.(a) of s.556(2) that a
relevant debt was incurred without his or her 'express or
implied authority or consent' if the director had
participated as one of the board of directors in conferring
the company's general authority to act on its behalf on
another director or upon an employee or agent, whether that
authority relates to a particular debt or whether the
authority be general and of the kind normally given by
implication to managers and other officers of companies." Earlier in his judgment, Ormiston J had said (at 442):
"If that authority or consent exists, whenever conferred,
the section must operate according to its terms, and subject
to the defences contained therein, even if that results in
criminal liability. The authority therefore may be one
which in the ordinary case will be general, although it is
possible that it may be specific, but the potential criminal
and civil liability of the director or even a fellow
director responsible for incurring the debt cannot require
that the relevant authority or consent should be confined to
a particular debt." His Honour concluded, at 443, upon this aspect of his reasons:
"Although I must take account of the fact that the section
imposes a form of criminal liability, albeit regulatory
criminal liability, on its proper construction there is no
true ambiguity or equivocation such as to require a narrow
meaning to be given to its provisions. Indeed, as has been
pointed out in numerous journal articles, which need not be
listed in detail, the section would have little operative
effect if para. (a) were confined to authority or consent to
the incurring of a particular debt."
173. In any event, his Honour distinguished Metal Manufacturers Pty Ltd v Lewis on the basis that it was central to the reasoning in that case that Mr. Lewis, who incurred the debts, was the managing director.
174. In Group Four Industries v Brosnan (supra) the Court was called upon to consider the alternative defence under s592(2)(a). Matheson J referred at length to the reasons of Ormiston J. In particular, Matheson J, at 37, took up and approved the passage of Ormiston J referred to above (from Morley v Statewide Tobacco Services (supra) at 442). Olsson J distinguished Metal Manufacturers Pty Ltd v Lewis, before specifically agreeing with the reasons of Ormiston J, and in particular his Honour's criticism of McHugh JA's conclusion concerning the insufficiency of a general authorisation. Debelle J also specifically disagreed with McHugh JA, and agreed with the approach of Ormiston J.
175. The decision is thus undoubtedly authority for the proposition that the authority in 592(2)(a) need not be directed to the particular debt and may be given generally.
176. The Court was then called upon to determine whether that authority or consent could be implied in circumstances of inactivity or indifference. Debelle J said (at 66):
"When determining whether there is an implied consent for
the purpose of s556(2)(a), acquiescence in a course of
conduct is capable of constituting an implied consent. Just
as inactivity or indifference may reach a degree from which
an implied authority may be inferred so too inactivity or
indifference may be of such a degree that consent or
acquiescence may be inferred. A director who stands by and
allows another director to incur debts on behalf of the
company might, depending on the circumstances, have given
his implied consent to the incurring of those debts."
177. I take his Honour to be saying no more than that, in certain circumstances, a director who displays no interest in the company's affairs, but simply allows another director to incur debts on behalf of the company may be, by that person's conduct, or lack of conduct, impliedly consenting to the incurring of those debts. It cannot be said that in all circumstances inactivity will mean that implied authority or consent can be inferred. Debelle J went on to say, at 67, in considering an inactive director's state of knowledge:
"In practical terms, it should not be difficult to prove the
knowledge required by s556. Generally speaking, a company
will incur debts in the ordinary course of its business.
The company would have a most unusual business if it did
not. It would, therefore, be most unlikely that a director
would be able to satisfy a court that he did not know or at
least did not have reasonable cause to suspect that the
company of which he was a director was incurring debts.
That fact, coupled with the duties imposed by s229(2) and
s269(9)(a)(iii) to take reasonable care to be aware of the
debts being incurred by the company and the capacity of the
company to be able to pay those debts as and when they fell
due, has the consequence that it will be on rare occasions
only that a director would be able to satisfy the Court that
he had no cause to suspect that the company was incurring
debts." His Honour concluded (at 69):
"I, therefore, conclude that a director will not have proved
that a debt was incurred without his express or implied
authority or consent if he knew or had reason to suspect
that the debt might be incurred and stood by and allowed the
company to incur that debt in the sense that he took no step
to attempt to prevent the incurring of the debt. It will,
of course, be a question of fact in every case as to what is
the true inference to be drawn from the conduct of the
person who seeks to show that the debt was not incurred with
his implied authority or consent: cf Performing Right
Society Ltd v Ciryl Theatrical Syndicate Ltd (1924) 1 KB 1
at 9. Given the variety of facts and circumstances which
might rise to an implied authority, it is not possible, if
not also undesirable, to attempt to prescribe what kind of
conduct will constitute an implied authority or consent.
Where a company director stands by and leaves the management
of the company to a fellow director, he is by implication
acquiescing in their decision to incur debts on behalf of
the company. He is giving his implied authority or consent,
therefore, to the company incurring debts. No other
inference can reasonably be drawn from the lack of action on
the part of the director. It is unrealistic and, indeed,
would fly in the fact of commercial reality if a director
were to assert that he believed the company could carry on
its business without incurring debts. It would be a most
unusual company which was able to carry on its business
without incurring debts. Where there are but two directors
of a company and director A leaves to director B the conduct
and management of the business of the company, it is, I
think, reasonable to infer that director A knows or has
reason to suspect that debts will be incurred on behalf of
the company. Where, as here, the two directors are husband
and wife and the wife leaves the management of the business
to the husband, the capacity to draw the inference may be
stronger."
178. Again, his Honour was making it clear, I think, that whether or not inactivity amounts to acquiescence and whether that acquiescence leads to an inference that the inactive director has impliedly authorized or consented to the incurring of a debt, is a matter of fact to be determined in each case. I do not understand him to be going further than that.
179. In Standard Chartered Bank of Australia v Antico (1995) 131 ALR 1, Hodgson J, at 112, posed this question, and gave this answer:
"(d) Does acquiescence amount to consent?
In the South Australian Full Court in Group Four Industries,
Debelle J said that it does. I would prefer to say that
acquiescence is evidence of consent, and may amount to
consent, or at least prevent the defendant negativing
consent. This question merges into the next one."
180. I do not understand Debelle J to have gone so far. I understand his Honour to be saying no more than that conduct in the nature of acquiescence may give rise to an inference of consent, not that it must.
181. With respect, I agree with Debelle J's reasons, insofar as they are relevant for the purpose of deciding this case.
182. In this case it was incumbent upon the second and third respondents, if each was to succeed on the defence raised under s592(2)(a), to establish that the debt was incurred without the implied authority or consent of each of them. In my opinion the defence in s592(2)(a) was not available to either of the respondents. Both the second and third respondent had made it clear to the first respondent, Mr Linke, that they wished to have nothing to do with the day-to-day management of the company, and to that extent they made it clear to him that he had their authority to conduct the day-to-day activities of the company. Their conduct, in the case of Mr Verco after June 1990, and in the case of Mr Hodge after May 1991, was entirely consistent with that. They could not have expected that the company could conduct its business without entering into arrangements in the ordinary course of trade with its creditors. Their conduct in failing to seek any financial statements or to make any enquiries in relation to the conduct of the affairs of the company, in my opinion, was entirely consistent with them having, by implication, authorized Mr Linke to enter into arrangements with creditors from time to time. There was no suggestion that the debt owing to the plaintiff was not an ordinary trade debt of the kind that the company could be expected to incur.
183. The second and third respondents say that they left those matters to Mr Linke because they trusted him. That is an explanation, but the Corporations Law does not allow that explanation to be an excuse for their failure to carry out the most basic obligations of a company director. If they were not content to leave everything to Mr Linke, they ought not to have accepted their appointments as directors. Mr Linke could be said to have had at least an implied authority from the second and third respondents to cause the company to enter into debts of this kind.
184. In those circumstances, in my opinion, the defence offered by s592(2)(a) was not open to the second and third respondents.
185. It follows, in my opinion, that the Master was in error in dismissing the claim against the second and third respondents, and the appellant is entitled to succeed on this appeal.
186. I would propose that the appeal be allowed, and that the judgment entered for the second and third respondents be set aside. In lieu thereof, judgment ought to be entered for the appellant and I would propose that the parties be heard on the quantum of that judgment, including interest.
JUDGE2 COX J I would allow this appeal and make the order proposed by Lander J for the reasons that his Honour will give.
JUDGE3 PERRY J I am grateful to Lander J for his comprehensive exposition of the facts. I agree in substance with the analysis which he makes of the relevant authorities, and with the conclusions which he reaches.
2. Without knowing more than is revealed in the appeal papers, I would, however, hesitate to draw the inference which he draws from the absence in the balance sheet of the company as at 30 June 1989 of a reference to future income tax benefits, that the author of the balance sheet must be taken to have held the view that the trading losses did not qualify as future income tax benefits.
3. As to the circumstances in which Mr Verco wrote a cheque payable to the owner of the business which was to be acquired by the company, there may be circumstances in which a proposed investor in a company might be given a direction to pay a creditor or other person with whom the company was contracting. I would not be prepared to express an opinion as to the propriety of that course of action in this case.
4. Neither would I wish to express a view as to whether or not Mr Linke was guilty of misrepresentations verging on the fraudulent.
5. None of those matters are germane to the considerations relevant to determination of the question whether or not s592(1) of the Corporations Law applies, and if so whether either or both of the defences under subs(2) of that section avail the respondents.
6. This matter is yet another example of a case in which it is necessary to consider the application of the section vis-a-vis directors who have turned their back on the day-to-day management of the company.
7. Such a circumstance has little or no impact on the nature of exercise to be performed in determining the applicability of s592(1). As cases such as Morley v Statewide Tobacco Services Ltd (1993) 1 VR 423 and Group Four Industries Pty Ltd v Brosnan and Anor (1992) 59 SASR 22 demonstrate, the test involving a "blending of subjective and objective considerations" (Shapowloff v Dunn (1981) 148 CLR 72 per Wilson J at 85) which applied to the precursor of the section (see, for example, the Companies Act 1962, s374c(1)) does not apply to the recast provision appearing in s592(1). On the contrary, it is clear from authority which this Court has accepted, that the test under s592(1) is purely objective. It is equally clear that the test was satisfied in this case.
8. It is as to the defences spelled out in s592(2) that the conduct of a director who has turned his or her back on the day-to-day management of the company becomes a more critical consideration.
9. In such circumstances it will rarely be the case that the defence in s592(2)(b) could be made out. On the contrary, in such a case the remarks of Ormiston J in Morley v Statewide Tobacco Services Ltd (supra) (1993) 1 VR at 448 are apposite:
"A director should not in those circumstances be entitled to
hide behind ignorance of the company's affairs which is of
his own making or, if not entirely of his own making, has
been contributed to by his own failure to make further
necessary inquiries."
10. That passage was expressly approved in Group Four Industries v Brosnan (supra) by Matheson J (59 SASR at 40) and by Olsson J (59 SASR at 59).
11. As to the defence afforded by s592(2)(a), in a situation where a non-executive director has left the day-to-day running of a company entirely to another director, it will normally be difficult for the non-executive director to prove that the debt "was incurred without the person's express or implied authority or consent", at least where the debt is of a kind which the company could reasonably be expected to incur in the ordinary course of the carrying on of its business.
12. It has not been suggested that the debt in question was other than of that character.
13. I agree with the orders proposed by Lander J.
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