Coates v Hardwick

[1987] TASSC 66

Serial No 63/1987
List “A”

COURT:  SUPREME COURT OF TASMANIA

CITATION:              COATES v HARDWICK [1987] TASSC 66; A63/1987

PARTIES:  COATES, Barry William
  v
  HARDWICK, Glenn Geoffrey

FILE NO/S:  53/1987
DELIVERED ON:  8 December 1987
DELIVERED AT:  Hobart
JUDGMENT OF:  Cosgrove J

Judgment Number:  A63/1987
Number of paragraphs:  15

Serial No 63/1987

List "A"

File No LCA 53/1987

BARRY WILLIAM COATES v GLENN GEOFFREY HARDWICK

REASONS FOR JUDGMENT  COSGROVE J.

8 December 1987

1. This is a Motion to Review an order made in the Court of Petty Sessions on the 12 May 1987 whereby the applicant was convicted on some 90 or so charges laid under s556 of the Companies (Tas) Code; and was fined $2,500 and ordered to pay costs.

1. Subsection (1) of s556 provides that if a company incurs a debt at a time when there are reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due, and the company is subsequently wound up, the directors of the company are guilty of an offence. However, subs(2) provides that it is a defence to prove that the debt was incurred without the express or implied authority or consent of the director in question. It is also a defence to prove that at the time when the debt was incurred, the director concerned did not have reasonable cause to expect that the company would not be able to pay all its debts as and when they became due. That is a truncated statement of the provisions of the section but it encompasses I believe all of the provisions relevant to this appeal.

1. The charges laid against the applicant concerned debts incurred between 9 July 1982 and the 11 February 1983. The fact that the company was subsequently wound up and therefore the section applied was never in dispute; nor was there any dispute as to the fact of the debts being incurred. There was an issue as to whether there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due. That issue was resolved against the applicant by the learned magistrate. However, in respect of all the debts incurred up to and including the 15 November 1982, the learned magistrate held that they were incurred without the express or implied authority or consent of the applicant on the ground that explicit instructions had been given to management by the applicant not to pledge the credit of the company. The charges found to be proved were those which related to debts incurred between the period the 16 November 1982 and the 11 February 1983 inclusive. The principal ground of appeal is that in proceeding to conviction on those charges the learned magistrate misdirected himself on the question of expressed or implied authority or consent both in law and in fact.

1. The evidence disclosed that the applicant was a chartered accountant practising in Victoria. He or his firm maintained a branch office in Hobart. In 1981 he became interested in the business of the Travellers Rest Hotel in Sandy Bay and formed a unit trust known as the Travellers Rest Hotel Unit Trust. The trustee was a company formed by the applicant called Parsnips Pty. Ltd. A number of persons invested in the unit trust and the applicant took a number of units of an entrepreneurial nature. On the 29 June 1981 Parsnips Pty Ltd acquired the leasehold of the Travellers Rest Hotel and commenced to operate the business. For some time the business was quite profitable but in 1982 a decline in turnover was noticed and trading debts began to mount. In the early months of 1982 the applicant became concerned by the fact that turnover had fallen below the break even level; and also by the expenditures made by the manager, a Mr Bond. The applicant instituted a series of budgets and required Bond to adhere to them. Bond did not do so and in fact incurred debts well over budget. In July 1982 Bond was summoned to Melbourne and informed that his services would be dispensed with. He pleaded to be retained, and was told that he would be kept on until an alternative manager could be found but that his salary would be halved. He was directed to operate the hotel on a cash basis, i.e. not to pledge credit. Bond apparently did not obey his instructions and on the 7 September 1982, he was dismissed and a company known as Aloora Eight Pty Ltd was appointed Manager. This company, whose principal operatives were a Mr Minton–Connell and a Mr. Smith, was instructed also not to pledge credit. On the 10 November 1982, presumably acting under a writ of fi fa, the Sheriff seized the stock of the hotel. What happened to the stock and how it was replaced it not clear to me, but at all events Aloora Eight Pty Ltd was discharged as manager and Mr Minton–Connell alone managed the hotel until it was sold on the 11 February 1983. It would appear that during the period November 1982 to February 1983 the hotel was continuing in business merely because a better price would be obtained by selling a functioning business than by selling an empty hotel with an incompleted term of lease. There may well have been other reasons for continuing to trade, such as possible cancellation of the lease, but if so, they have not been made clear to me. It was obviously in the interest of creditors to obtain the best possible price.

1. The following finding of the learned magistrate (which appears on page 14 of his written reasons for judgment) is significant for the purposes of this appeal:

"From the evidence I again accept that Aloora Eight Pty. Ltd. was specifically told to trade on a cash basis and that a similar direction was given to Mr. Minton–Connell when the hotel was re–stocked after the Sheriff‘s seizure."

At page 15 after referring to the period 11 November 1982 to the 10 February 1983 his Worship found:

"This is also a period during which the defendant had told the manager Mr. Minton–Connell to trade only on a cash basis".

1. The passage of the evidence upon which this finding is based appears at page 24T of the transcript and includes this question and answer:

"Question:       After the seizing of the stock by the Sheriff from that time until the sale of the business in February 1983, did Mr. Minton–Connell or any other person have the authority of Parsnips Pty. Ltd. to purchase anything on credit.

"Answer:         Explicitly no. He was virtually in a caretaking role to preserve the assets of the company and to operate within the confines of its cash resources".

1. On the 15 November 1982, the applicant prepared an "aged" list of creditors. This document (which was P56) was prepared from the statements not from the invoices. I infer therefore that it reflects the due date for payment of the debts listed therein. It is noteworthy that although it shows a number of debts incurred in July, August and September, it shows no debts incurred in the month of October apart from two continuing lease–hold payments due to Claude Neon and Rentlo. I would not regard these latter as debts incurred by the company because the actual contract was probably made some considerable time in the past, and it is common knowledge that to cancel lease agreements of this nature is often to incur a greater and more immediate debt.

1. As Bond had been dismissed in September and Aloora Eight then took over, this document would have showed to the applicant that Aloora Eight had not at that stage, incurred any debts in the period under review. In the course of his evidence the applicant said that, and added that he had no knowledge of any debts incurred by Aloora Eight Pty Ltd during the period of its management. His Worship noted this in his reasons for judgment and wrote:

" ... Of the balance after June 1982 he, [the applicant] could not say if any had been incurred by Allora 8 Pty. Ltd. From the evidence it would appear this [P56] was the first check this defendant had made as to the list of creditors since giving orders to both Mr. Bond and Aloora 8 Pty. Ltd. [in September] to trade on a cash basis. At that stage it must have been self–evident that his previous directions had not been adhered to in their totality. However, again the evidence does not suggest that he either re–issued the directive to the encumbent manager or that he took any steps to trace the offending parties."

1. I find the final comment rather curious in the light of the finding on the same page (to which I have already referred) that during the period November 1982 to February 1983, Minton–Connell had been told to trade only on a cash basis and that the offending party Bond had been dismissed.

1. A computer print out dated the 31 December 1982, prepared in the Hobart office of the applicants firm, showed that the company had incurred some debts which were current at that time. A further print out dated the 11 February 1983, which was the date of sale of the business, showed a number of other current and thirty day debts. The evidence does not suggest that these documents ever came into the hands of the applicant and the applicant was not cross examined about them. It is clear therefore, and his Worship seems to have so found, that during the period in which the debts the subject of this appeal were incurred, the applicant‘s instructions to Mr Minton–Connell were that no debts were to be incurred, and no information came to him to the effect that his instructions were not being obeyed. He therefore had no actual knowledge that the debts were incurred. It is plain therefore, that he gave no express authority or consent to the credit transactions.

1. However his Worship found that as from the 15 November, the applicant had a duty as a director to monitor closely the affairs of the hotel, that he was in breach of that duty and was therefore, liable to conviction under s229 of the Companies (Tas) Code because he did not at all times exercise a reasonable degree of care and diligence in the exercise of his powers and the discharge of his duty. His Worship then proceeded to find that because he was in breach of that duty, he was "no longer entitled to the shield afforded by s556(2)(a)". This was the principal ground upon which his Worship disallowed the defence under s556(2)(a), though it is possible to construe from his reasons that the inaction of the applicant to which he referred amounted to an implied consent to the incurring of the debts. He quoted at length from the valuable judgment of Hodgson J in Metal Manufactures Ltd v Lewis & Anor reported in (1986) 11 ACLR at p122. It is useful to set out again the passage which his Worship quoted and I do so:

"The views which I have reached on the defence provided by sec. 556(2)(a) may be summarised as follows:

(a)the defence is not available to any person who actually participated in incurring the debt. This will be so even though that person has acted on instructions from a superior in the company, at least unless there was a factual overbearing of the participant‘s will.

(b)It is not available if there has been an express authorisation or consent by words, or an implied authorisation or consent by explicit conduct, which on its true construction extends to incurring the debt in question. This will be so if the incurring of the debt is sufficiently identified by the words or conduct. It will also be so if the authorisation or consent is in general terms, but on its true construction extends to incurring the debt in question.

(c)The defence is not available if authorisation or consent is implied from inaction by the defendant. For this to be so, the circumstances must be such that inaction does imply authority or consent. For example, authority or consent would be implied if the defendant is a person whose authority or consent is relevant (not necessarily legally required, but at least relevant in a practical sense), and the circumstances are such that there was an occasion for the defendant to signify an objection (if indeed the defendant objected to the incurring of the debt). Again, the content of the authority or consent implied must be such as to extend to the incurring of the debt.

Whether inaction in particular circumstances implies authority or consent will be substantially a question of fact in particular cases.

For example, if a managing director knows that the company is insolvent and that a manager of the company is about to incur a debt, which the managing director could prevent by issuing appropriate instructions, then clearly, in my view, failure to issue those instructions would amount to implied authority or consent. However, if it is the managing director who is about to incur the debt, and the defendant is a mere director, then it will be a question of fact in each case whether inactivity by the director amounts to authority or consent. Factors such as the following would be relevant:

(a)Whether the person incurring the debt is accustomed to act in accordance with the advice of the defendant, or is otherwise under his influence or likely to be persuaded by him.

(b)What steps are reasonably available to the defendant to prevent the participant from incurring the debt in question, and what is actually involved in pursuing such steps.

(c)The extent of the actual or constructive knowledge of the defendant of the insolvency of the company, including the length of time during which he has had such knowledge."

1. In my view, the reasoning which prompted his Worship to conclude that a breach of the duty of which s229 speaks (assuming without deciding that such a breach occurred) in some way deprived the applicant of the defence provided by subs2(a) of s556 is unsound. It may be that his Worship was over influenced by the comments of Hodgson J in the last three paragraphs in the excerpt from his judgment, which both he and I have quoted. Those paragraphs are not intended to be of general import, but are used as illustrative of the hypothetical problem posed by Hodgson J in the preceding paragraph. His Worship does not appear to have had recourse to other passages in the judgment, one of which is this:

"In my view, a defendant who is not an actual participant in the incurring of a debt does not give actual authority or consent to it unless there are words, actions andor omissions by that defendant which in the circumstances are objectively such as to communicate to the actual participant that the defendant authorises or consents to the incurring of the debt. In considering whether this is so or whether it is negatived, one can have regard to all the circumstances, including the relationship between the defendant and the participant only, and not involving third parties, as would questions of apparent or ostensible authority or consent.

Accordingly, the question in this case is whether or not the second defendant communicated to her husband her authority or consent to his incurring the subject debt." [The emphasis is mine].

1. Applying that passage it is plain to me that there is no evidence of any action or inaction by the applicant which would have communicated to Minton–Connell an implied or express authority or consent to the incurring of the debts. Coupled with the fact that, as his Worship found, the applicant had reason to believe that Aloora Eight Pty Ltd under Minton–Connell‘s partial direction at least for some time obeyed his instructions not to incur any debts, that the applicant had no knowledge of the subsequent debts incurred by Minton–Connell, and that his instruction to trade on a cash basis was not withdrawn, it seems plain to me that the defence under s556(2)(a) was made out and the applicant should not have been convicted.

1. The Motion to Review will be granted and the convictions quashed.

1. Mr Blow made other submissions which concerned the failure of the magistrate to consider the availability of funds to meet the debts, a matter which might conceivably be relevant in relation to subs(1) of s556. It is unnecessary for me to reach a finding in respect of that, but in case it should ever come into question, I record my view that Mr Blow's submission in this respect fails.