Countryside (No.3) v Best/Lawson

[2001] NSWSC 1152

CITATION:

Countryside (No.3) v Best/Lawson [2001] NSWSC 1152

CURRENT JURISDICTION:

Equity Division

FILE NUMBER(S):

SC 2810/99; 2812/99; 2814/99

HEARING DATE(S):

12-14 November 2001

JUDGMENT DATE:

14 December 2001

PARTIES :

P - Countryside (No.3) Pty Limited
v
1D - Michael John Harold Best
2D - Ian Elliott Savins

P - Countryside (No.3) Pty Limited
v
1D - Geoffrey Marshall Lawson
2D - Jessie Fay Lawson
3D - Kenneth Ian Cockburn
4D - Kenneth George Buckley

P - Countryside (No.3) Pty Limited
v
1D - Geoffrey Marshall Lawson
2D - Jessie Fay Lawson

JUDGMENT OF:

Davies AJ at 1

COUNSEL :	Countryside - Mr M B Evans Best & Anor - Mr N G Rein SC, Mr S Loughnan Lawson & Ors - Mr T Robertson SC
SOLICITORS:	Countryside - Douglas Knaggs Solicitor Best & Anor - Minter Ellison, Lawyers Lawson & Ors - Walters, Solicitors
CATCHWORDS:	Corporations Act - directors' liability for insolvent trading - relevance of directors' belief that no debt incurred - whether the relevant obligation was a 'debt' - Trusts - whether beneficiaries of unit trust personally liable to indemnify the trustee - whether taking up of additional units in trust involved an obligation to indemnify for past debts.
LEGISLATION CITED:	Corporations Act 2001, ss 589, 592 Environmental Planning and Assessment Act 1979 Companies (Qld) Code, s 556 Companies (NSW) Code, s 556 Workers Compensation Act 1987, s 151A
CASES CITED:	Causley v Countryside (No.3) Pty Ltd (NSWCA, 2/9/96, unrep) Hardoon v Belilios [1901] AC 118 Balkin v Peck (1998) 43 NSWLR 706 J W Boomhead (Vic) Pty Ltd v J W Broomhead Pty Ltd [1985] VR 891 TCN Channel Nine Pty Ltd v Scotney (1995) 17 ACSR 116 Standard Chartered Bank of Australia Ltd v Antico [No.s 1 and 2] (1995) 38 NSWLR 290 State of New South Wales v Taylor (2001) 75 ALJR 652 Hawkins v Bank of China (1992) 26 NSWLR 562 Shephard v ANZ Banking Corporation Ltd (1996) 41 NSWLR 431
DECISION:	Applications dismissed with costs.

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

DAVIES AJ

FRIDAY, 14 DECEMBER 2001

2810/99 - COUNTRYSIDE (NO.3) PTY LTD v BEST & ORS
2812/99 - COUNTRYSIDE (NO.3) PTY LTD v LAWSON & ANOR
2814/99 - COUNTRYSIDE (NO.3) PTY LTD v LAWSON & ORS
JUDGMENT

1 HIS HONOUR: In each of these three proceedings, the plaintiff, Countryside (No.3) Pty Ltd (“Countryside”), seeks an order that the defendants, who were directors of companies which were wound up for insolvency, pay debts due by the companies to Countryside. Although the relevant events occurred many years ago, counsel are agreed that the relevant statutory provision is s 592 of the Corporations Act, 2001 (Cth).

2 In each case, Mr M B Evans of counsel appeared for Countryside. In proceedings 2810/99, Mr N G Rein SC and Mr S Loughnan appeared for Michael John Harold Best and Ian Elliott Savins, who were directors of Lex Investments Pty Ltd (“Lex”). In proceedings 2812/99 and in proceedings 2814/99, Mr T Robertson SC appeared for Geoffrey Marshall Lawson and Jessie Fay Lawson, who were directors of GLI Services Pty Ltd (“GLI”). In proceedings 2812/99, Mr Robertson also appeared for Kenneth Ian Cockburn and Kenneth George Buckley, who were directors of Buckley Dowdle & Associates Pty Ltd (“Buckley Dowdle”).

Outline of Facts

3 In 1973, Mr Kenneth Kingsford and his wife, in partnership with Mr Kingsford’s brother Edward and his wife, purchased 50 acres on the outskirts of Brunswick Heads in northern New South Wales. The land was bounded on the west by the proposed highway between Ballina and Brunswick Heads and on the east by Simpsons Creek. There was a reserve between the creek and the ocean. The interest of Mr Kingsford and his wife was later transferred to Countryside, a trustee of trusts in which Mr Kingsford and his wife had an interest. In 1974, Countryside purchased a further 100 acres adjacent to the 50 acres. As the land was not altogether suitable for grazing, Mr Kingsford and his brother decided to apply to the Byron Shire Council (“the Council”) for approval for a village subdivision. In March 1982, that approval was gazetted for the 100 acre block and for approximately 30 acres out of the adjacent 50 acre block.

4 At a later stage, Countryside acquired the additional 30 acres in which the brother Edward and his wife had an interest. However, before that occurred, Mr Kingsford, his brother and their wives decided to develop the 130 acres as a joint venture or, alternatively, to sell it. Advertisements seeking a joint-venture interest were placed in ‘The Australian’ newspaper on 9 January 1982 and in ‘The Sydney Morning Herald’ newspaper on 12 January 1982. Mr Lawson and Mr Buckley were amongst those who responded to the advertisements. They took steps to form a syndicate to acquire the land. Mr Lawson was a real estate agent who operated in and was familiar with the area. Mr Buckley and Mr Cockburn were members of a firm of consulting surveyors and development consultants, Buckley Dowdle & Associates, which was active in the area. Mr Lawson interested Mr Savins and Mr Best, who were partners in a solicitor’s firm practising in the district. Mr McGeary of McGeary Bros Contractors Pty Ltd, earthmoving and civil engineering contractors, also took an interest. A number of other persons who were graziers or who lived or worked in the area joined the syndicate.

5 A joint venture was discussed at first. However, for reasons which are not explained by the evidence, it was decided that a syndicate, which would not include the Kingsfords, would be formed to acquire the land. Apparently, Mr McKerlie, an accountant and partner of the firm Thomas Davis, Rutherford & Co (“TDR & Co”), advised that a unit trust should be formed. In May 1983, a summary of the project was prepared. This stated:-

“The project involves the purchase of 55 hectares of coastal land and development of this site over an eleven year period into a fully integrated residential community complimentary to the adjoining village. The project when finalised will consist of 321 residential allotments and 33 medium density allotments which will provide 220 individual unit sites with an estimated population, including caravan park residents, in excess of 2,000. A formal description of the land and details of land utilisation are included in annexure 1.

Investment in this project will be in multiples of $50,000. The first returns will emerge after 2 years. An average rate of return on funds invested in the order of 20% per annum is forecast, this being based on a zero growth of the variables involved in the development. Any increase in land prices would of course significantly increase the return.”

6 The introduction was followed by a market assessment, to which presumably Mr Lawson contributed. That was followed by a report on the feasibility of the project and its structure, prepared by TDR & Co. Also included was a report on the anticipated development costs, prepared by Buckley Dowdle. There were many attachments including a cash flow analysis. TDR & Co had assumed that there would be eleven equal unit holders, each contributing $50,000 and that there would be bank borrowings of $400,000. They had assumed that all lots in each stage would be sold within the year of development and that, after the first year, there should be sufficient returns from land sales to fund the venture and to provide returns to investors. Mr Kingsford was prepared to sell the land for $2,000,000, payable over ten years, the intent being that, as each tranche of the price was paid, one stage of the subdivision would be transferred to the purchaser.

7 All relevant enquiries were made. In evidence, there are letters from real estate agents in the area, which were received at the time, expressing their view that the proposed lots should sell for $20,000 - $25,000. Enquiries were made of and discussions were held with Council officers, all of whom seemed at the time to favour the subdivision. In October 1983, the Byron Shire Environmental Study Summary Report was released. The proposed development appeared to be consistent with the proposal.

8 During 1983, advice on the proposed structure of the venture as a unit trust and on other aspects of the venture was obtained from Mr R A Conti QC, a distinguished commercial silk.

9 On 25 October 1983, a deed of option was obtained for the purchase of the subject land by GLI or its nominee. A development application under the Environmental Planning and Assessment Act, 1979 was lodged by Mr Buckley on 9 November 1983. The application sought approval for thirty-two residential lots in Stage 1, together with public reserve, and provision for Stage 2, being lot 33, and Stage 3, being lot 35. The Council gave approval to the development application on 30 November 1983 specifying twenty-seven conditions, none of which seemed controversial.

10 On 20 December 1983, a Unit Trust Deed (“the Deed”) was executed between Mr Buckley, Mr Savins, Mr Lawson and Mr Blair (an accountant who had replaced Mr McKerlie), who were called “the Managers”, Rokolat Pty Limited (a company which later changed its name to Bayside Brunswick Pty Limited (“Bayside Brunswick”)), the trustee, and Lex, which was the original unit holder. Lex paid $60 and took up one unit to establish the Brunswick Unit Trust (“the Trust”). The Deed was in general terms. I need not describe the terms other than to say that the Deed provided that the Managers should, subject to the overall control of the trustee, “administer and manage the affairs of the Trust”. The Managers were to collect and receive all income of the Trust and to pay out all costs and disbursements incurred on behalf of the Trust. The powers of the trustee were extensive but were limited by the words “as directed by the Managers”. It will be seen that it was intended that Bayside Brunswick would operate substantially as a bare trustee and that is effectively what happened. Decisions were taken by the Managers, although it seems that Mr Buckley, Mr Savins and Mr Lawson were also the directors of Bayside Brunswick and Mr Blair was its secretary. Probably, no clear distinction in functions was drawn.

11 On 16 January 1984, an agreement for the sale of land and its purchase by Bayside Brunswick, as nominee of GLI, was executed. The agreement provided that the price was $2,000,000 of which a deposit of $5,000 was to be paid. The balance was to be payable as follows:-

“5. The balance of the purchase price amounting to the sum of ONE MILLION NINE HUNDRED AND NINETY FIVE THOUSAND DOLLARS ($1,995,000.00) shall be paid as follows:-


(a) As to the sum of ONE HUNDRED AND SEVENTY FIVE THOUSAND DOLLARS ($175,000.00) within thirty (30) days of the purchaser obtaining subdivision approval as herein defined or within ninety (90) days from the date hereof whichever shall first occur (‘the date of settlement’).

(b) As to the sum of ONE HUNDRED AND TWENTY THOUSAND DOLLARS ($120,000.00) one (1) year from the date of settlement.

(c) As to the sum of TWO HUNDRED THOUSAND DOLLARS ($200,000.00) two (2) years from the date of settlement.

(d) As to the sum of TWO HUNDRED THOUSAND DOLLARS ($200,000.00) three (3) years from the date of settlement.

(e) As to the sum of TWO HUNDRED THOUSAND DOLLARS ($200,000.00) four (4) years from the date of settlement.

(f) As to the sum of TWO HUNDRED THOUSAND DOLLARS ($200,000.00) five (5) years from the date of settlement.

(g) As to the sum of TWO HUNDRED THOUSAND DOLLARS ($200,000.00) six (6) years from the date of settlement.

(h) As to the sum of TWO HUNDRED THOUSAND DOLLARS ($200,000.00) seven (7) years from the date of settlement.

(i) As to the sum of TWO HUNDRED AND FIFTY THOUSAND DOLLARS ($250,000.00) eight (8) years from the date of settlement.

(j) As to the sum of TWO HUNDRED AND FIFTY THOUSAND DOLLARS ($250,000.00) nine (9) years from the date of settlement.”
Clause 6 of the agreement provided that, upon each payment, a designated portion of the land was to be transferred to the purchaser. Clause 11 provided that, upon default, at the option of the vendor, the whole of the balance of the purchase money became forthwith due and payable.

12 In March and April 1984, units in the Trust were applied for and issued. The unit holdings were as follows:-

NAME UNITS
Mr & Mrs I R Causley 832
Mr & Mrs C G Smith 832
Mr & Mrs G W Starkey 832
Amalgamated Causleys 832
Mr & Mrs C J Mullins 832
Lex Investments Pty Ltd 832
Boreas Pty Ltd 832
McGeary Bros 832
Mr & Mrs G Silver 832
GLI Services Pty Ltd & Buckley Dowdle & Associates Pty Ltd 832

Each of the ten groups contributed $50,000 to the project. The unit holders were also the shareholders in Bayside Brunswick.

13 The project was not fully funded. It was anticipated that the $500,000 contributed would be sufficient, with bank finance, to fund the development of Stage 1 and that, thereafter, the project would be self-funding.

14 The project in fact encountered difficulties but no evidence has been called by Countryside, which has directly challenged the assumptions upon which the venture proceeded. No evidence has been called contending that the purchase price of the land was excessive, that the prices expected to be achieved were unrealistic or that the assumptions upon which the financial report of TDR & Co proceeded were unreasonable. No evidence has been called that the development costs estimated by Buckley Dowdle were flawed.

15 On the contrary, the evidence called on behalf of Countryside supports the conclusion that the proposed development appeared feasible. In his affidavit evidence, Mr Kingsford, when speaking of the period when the development had encountered financial problems, said, “Notwithstanding the meeting of creditors I couldn’t see why the project should not still succeed”. In his oral evidence, Mr Kingsford said:-

“Q. You thought there was a great deal of potential in this land that you were selling for development. You saw that as a very positive development, did you not?
A. Yes.

…

Q. Mr Lawson was always optimistic about the prospects of developing this land, was he not?
A. Properly so, yes.

Q. You and he, I think you know, shared the vision of developing this land, did you not?
A. Yes.”

16 The defendants’ case was supported by Mr Neil Ingham, an experienced consultant town planner, who, during the early 1980’s, assisted the Council in the development of environmental planning policies for the area. In his written report, Mr Ingham said:-

“29. At 1983, when the original Stage 1 application was lodged and approved, it could have been anticipated by any applicant that the whole of the land generally was available for development (apart from a low lying area at the eastern extremity of the site) and that approval for development would have been a relatively formal matter rather than a matter of detailed consideration. In my opinion, at 1983, any experienced developer of land could have anticipated that the majority of the land was available for urban residential development and that this development could be undertaken in conjunction with a small neighbourhood centre embracing shops and commercial facilities. …”

17 However, the development did encounter problems which were not foreseen. One of the problems was that the Council’s approval of the project had required the provision of various engineering details, including satisfactory engineering design plans with respect to the construction of roads, stormwater drainage, sewerage and water supply and lot filling and grading. In addition, there was to be an engineer’s report on the provision of a trunk main from the Council’s existing reservoir to the subject site, a report on the disposal of sewerage effluent from the site in the ultimate development situation and a report on the method of stormwater drainage proposed, such report to detail the ultimate flow conditions and to include details on the basis of design flows. In the administration of these conditions, Council engineers required a great deal more detail than the consulting engineers engaged for the project, Col Jenkins & Associates (“CJA”), anticipated. Moreover, some of the information required with respect to water supply, sewerage and drainage related to the entire proposed subdivision, not merely Stage 1. CJA, who were experienced in working in the area, seemed to be incapable of supplying the details needed by officers of the Council or of negotiating a satisfactory resolution of the engineering problems.

18 CJA delivered engineering plans to the Council in July 1984. However, on 15 August 1984, the Council responded with a five page letter of requirements with respect to engineering plans and specifications. The requirements would have seemed horrendous to CJA, although, perhaps to engineers more experienced in large developments, the requirements may well have appeared to be usual and necessary.

19 Another engineer was brought into assist CJA in the preparation of plans and Mr Buckley and others had discussions with Council officers. On 1 November 1984, the Council approved the engineering plans in general but required further details with respect to the road intersection with the Pacific Highway, with respect to the roads and drainage plan, with respect to the stormwater longitudinal section, with respect to the sewerage and water supply plan and with respect to cross-sections on roads 1 and 3. That letter, in its first paragraph, expressed approval “subject to the generalised comments advised by separate letter”. The separate letter was not in fact sent by the Council.

20 On 20 May 1985, there was a meeting with officers of the Council and various problems were discussed. By this time, Mr Buckley and other members of the syndicate had formed the view that some officers of the Council were either obstructive or incompetent. Further approvals were given. The final plan of subdivision was lodged with the Council in late 1985. It was released on 27 November 1985 and it was registered on 17 January 1986.

21 In the meantime, construction had gone ahead. It had been anticipated that the first lots would be ready for sale by the end of 1984. However, no lots were ready for sale until September 1985. By that time, marketing conditions were no longer favourable. Interest rates had been creeping up and the Bond Corporation had been seeking to sell the last hundred or so of its lots in a competing development, named “Ocean Shores”, for very low prices. Fourteen of Bayside Brunswick’s lots were auctioned in September 1985. Hundreds of people attended but no lots were sold.

22 Marketing conditions continued to be unfavourable for some time. Interest rates were high and continued to rise. In September 1985, capital gains tax was introduced with the result that speculators withdrew from the market. Nevertheless, it is unlikely that money problems themselves would have stopped the project. Bayside Brunswick had obtained an overdraft from the Commonwealth Bank and a $400,000 bill facility from Westpac. Bayside Brunswick held valuable assets and the banks would have continued to support the venture. Indeed, in June 1986, the Commonwealth Bank increased its overdraft by another $200,000.

23 However, there were changes in environmental policy which dramatically affected the viability of the venture. It had been anticipated that the most valuable part of the development would be the land on the eastern side, adjacent to Simpsons Creek. It had been anticipated that there would be a road and a footbridge across Simpsons Creek enabling ready access through bushland to the beach. On 11 December 1985, the ‘State Environmental Planning Policy No.14 – Coastal Wetlands’ (“SEPP 14”) was promulgated. SEPP 14 concerned wetlands along the eastern shore of New South Wales, excluding the Sydney metropolitan area. It dealt, inter alia, with the Byron Bay area. One of the wetlands identified was a wetland on the eastern part of the Bayside Brunswick land. The identification of this wetland had the effect of sterilising about 21 per cent of the land for urban development and of preventing ready communication between the development and the sea.

24 SEPP 14 identified wetlands by reference to aerial photographs which were not necessarily accurate in their delineation. However, it effectively provided a constraint against development until additional ground investigation and survey work was undertaken so as to identify the actual extent of the wetlands which needed to be protected. In fact, the wetlands identified in SEPP 14, so far as the development of the subject land was concerned, was grossly inaccurate. The true extent of the wetlands was later identified in a report by Croft & Associates of 3 November 1986. The report of Croft & Associates indicated that the original plan of subdivision prepared by Mr Buckley was generally valid.

25 In the meantime, in June 1986, the Council had exhibited a ‘Draft Local Environmental Plan, 1986’. This Plan proposed that the subject land be zoned - partly as 7(a) Wetlands Zone, accepting the wetland delineation of SEPP 14, partly as 1(a) General Rural Zone, and the balance of the land as a 2(a) Residential Zone. The Residential Zone was more restrictive than the Village Zone, for which the land had been zoned since 1982. A Village Zone permitted development of properties for shopping and commercial purposes, whereas the 2(a) Residential Zone prohibited the use of any part of the land for commercial purposes or shops (other than general stores).

26 Necessarily, because of the problems which were occurring, the residential lots, which had continued to be developed, became much less attractive to purchasers. It had been anticipated that the total development would contain its own shopping centre and that there would be ready access to the beach.

27 By late 1986, Bayside Brunswick was in serious financial trouble. A number of the unit holders agreed to each put $5,000 into additional units to fund submissions to the Council with a view to having the Draft Local Environmental Plan altered. Each of the unit holders had originally received 832 units for their $50,000 payment. Those who subscribed for an additional $5,000 each received 125,000 units for that payment. GLI made such a subscription in its own right and also purchased the 832 units held by Boreas Pty Limited for $2,000. After the issue of the units, the holdings were as follows:-

“Ian Raymond Causley and
Gloria Jane Causley 125,832 units

Colin Gladston Smith and
Christine Yvonne Smith 125,832 units

Gordon William Starkey and
Margaret Joan Starkey 125,832 units

Christopher John Mullins 832 units

Lex Investments Pty Limited 125,832 units

Gary Frederick Silver and Jennifer Ann Silver 832 units

G.L.I. Services Pty Limited 125,832 units

Brendan Ian Causley and others trading as
Amalgamated Causleys 125,832 units

McGeary Brothers Contractors Pty Limited 832 units

G.L.I. Services Pty Limited and
Buckley Dowdle & Associates Pty Limited
(jointly) (‘the partners’) 125,832 units”

28 In late 1986, Mr William Simpson, Deputy Chairman of the Office of the Commissioners of Inquiry for Environment and Planning, held public hearings into the Draft Local Environmental Plan for the Shire of Byron. In February 1987, he reported in favour of the submissions that had been put on behalf Bayside Brunswick. He considered that a shopping and commercial development was appropriate for the land and that the extent of the wetlands should be further investigated. In July 1987, the Council expressed substantial agreement with this view. The Council accepted that a 2(v) Village type zoning was appropriate to expand the range of permissible uses to allow “adequate commercial and community uses in a developing residential neighbourhood”. The Council also accepted that it was necessary to redefine the wetlands zoning, although it did reserve a strip along Simpsons Creek which impacted, to some extent, on the proposed development. The Council also agreed to reduce another area of conflict, the size of a buffer zone around certain sewerage works from 4.4 hectares to less than 1 hectare.

29 Although the planning problems were substantially overcome, by then Bayside Brunswick had gone into liquidation. By the end of 1986, it was clear that Bayside Brunswick could not pay its debts as they became due. Mr and Mrs Lawson were the only unit holders who were willing to put more funds into the venture. Mr McGeary was the only one who had sufficient funds to complete the venture and he chose not to do so. On 23 December 1986, it was resolved by the directors of Bayside Brunswick that the company should go into liquidation. The necessary resolution was passed at a general meeting of the shareholders on 27 February 1987.

30 In 1987, Bayside Brunswick defaulted on a payment due to Countryside. Only the instalments due in 1984, 1985 and 1986 had been paid releasing the land for Stages 1, 2 and 3. On 29 September 1989, Countryside sold the two-thirds of the land, which had not been conveyed to Bayside Brunswick, to Gaoten Pty Ltd for $820,000. Subsequently, in 1994, at a time when presumably there was more demand for land in the area, the land was transferred to Codlea Pty Limited, for the consideration of $2,500,000.

Trustees’ Right of Indemnity Against Beneficiaries

31 As Countryside was unable to recover its loss, the difference between the sum due under its contract with Bayside Brunswick and the $820,000 payable by Gaoten Pty Ltd, Countryside sued the beneficiaries of the Trust. In 1994, Brownie J gave judgment in favour of Countryside, apportioning the liability in accordance with the proportions in which the units were held after the further distribution of units in 1986. Inter alia, Lex, GLI and Buckley Dowdle, and GLI were each ordered to pay $171,631.13 plus interest and costs. After that judgment, Lex, GLI and Buckley Dowdle were each placed in liquidation. Presumably, little was recovered from those companies. These present proceedings were then instituted against the directors of those companies claiming that, by the taking up of units in the Trust in 1984 and, in the case of GLI, by the acquiring of the additional 125,832 units in late 1986, the companies had incurred liabilities at a time when it was reasonable to expect that they were unable to pay their debts as and when they fell due or that, if they acquired the units, they would be unable to do so. No other allegation of insolvent trading has been made. No attempt has been made to found a case under s 592 of the Corporations Act by reference to the actions taken and debts incurred in the course of the development of the subject land.

32 Because the right to an indemnity is central to the issues in this case and because particular issues turn upon it, I should say something about a trustee’s right to indemnity from beneficiaries personally. Before Brownie J, it had been argued, on behalf of Countryside, that there was a prima facie rule that a cestui que trust who obtains the benefits of trust property should bear its burden unless the beneficiaries can establish some good reason why the trustee should bear the burden. Brownie J expressed the argument put on behalf of Countryside in this way:-

“The plaintiff’s claim was based on the statements of Lord Lindley, delivering the advice of the Judicial Committee, in Hardoon v Balilios [1901] AC 118 at 123-125: as between a trustee and a sole cestui que trust, who is under no disability, the plainest principles of justice, and the rules of equity require that the cestui que trust who gets the benefit of the trust property should bear its burden unless he can establish some good reason why the trustee should bear the burden himself; the right of the trustee to indemnity in respect of liabilities incurred by him within the scope of the trust is not limited to the assets of the trust, but extends to the imposition of a personal liability on the cestui que trust; and the liability of the cestui que trust arises from the mere fact of the relationship between the parties, and does not depend upon there having been any request from the cestui que trust to the trustee to incur the liability.”

33 However, in his conclusion, Brownie J relied, not merely on the fact that the unit holders were beneficiaries who were sui juris and absolutely entitled, but also upon the circumstance that Bayside Brunswick was established as the vehicle to carry out the particular venture. His Honour said:-

“On the evidence, the appropriate inference is that those who applied for units in 1984 did so as participants in some commercial arrangement, in the expectation of profit: they paid a total of $49,920 each for units in a trust the sole function of which was to pay for, subdivide, develop and then resell the land in question; and they did this in the expectation that the trustee would make a profit for them. To adapt the language of Lord Lindley in Hardoon , the plainest principles of justice require that the beneficiaries who get all the benefit of the trust property should bear its burden unless they can show some good reason why the trustee should bear it itself; and the fact that there are several beneficiaries, rather than one beneficiary, is not of itself a good reason.”

34 His Honour’s finding was well founded on the facts of the case. Bayside Brunswick functioned as little more than a bare trustee in whose name the development venture, a venture in which all unit holders were participants, was carried out. Of particular significance was the fact that the Deed appointed Mr Buckley, Mr Savins, Mr Blair and Mr Lawson as Managers, in accordance with whose directions Bayside Brunswick should act. The facts of the case were such that Bayside Brunswick was entitled, under the principles of restitution, to recoupment of its expenditures from those persons for whose benefit the expenditure was incurred.

35 In Causley v Countryside (No.3) Pty Ltd (NSWCA, 2 September 1996, unreported), Cole JA, with whom Clarke and Beazley JJA agreed, said, inter alia:-

“It is established that, absent provision in the trust deed denying the right of indemnity, or circumstances indicating good reason why a trustee should not be so indemnified, a trustee is entitled to be indemnified by the cestui que trust in respect of liabilities incurred by the trustee in pursuit of functions within power where the cestui que trust is or, if more than one, are the absolute beneficial owners of the trust property the legal title to which is vested in the trustee. … Here c14 of the trust deed vested beneficial ownership of the trust property in the unit holders.

…

… As was made clear by McGarvie J in Broomhead (1985) VR 891 at 936: ‘The basis of the principle is that the beneficiary who gets the benefit of the trust should bear its burdens unless he can show some good reasons why the trustee should bear the burdens himself.’ ”
The remarks of Cole JA were brief but I take them to relate to the facts of the case and particularly to the point that the liabilities were incurred by Bayside Brunswick in the pursuit of its functions under the Deed, which were, as I have said, in this particular case, substantially functions of a bare trustee which complied with the directions of the Managers appointed to carry on the venture for the benefit of the beneficiaries.

36 In his article on The Right of a Trustee to a Personal Indemnity from Beneficiaries (1990) 64 ALJ 567, Dr R A Hughes expressed the view, at p 579, that:-

“… As the authorities stand, the beneficiaries of a trust being sui juris and absolutely entitled are personally bound to indemnify the trustee against liabilities incurred by him or her in carrying out the trust. The trustee must have been acting within the scope of authority conferred by the trust. … The attribution of personal liability to the beneficiaries is a consequence of the express or implied authority of the trustee to carry out the trust on behalf of the beneficiaries, which authority is conceded by the beneficiaries in accepting the benefits conferred by the trust.”

37 That was the general principle which counsel for Countryside had submitted to Brownie J and, I assume, to the Court of Appeal. In his article on Trading Trusts and Creditors’ Rights (1981-82) 13 MULR 1, Professor Ford, at p 6, said:-

“According to the Privy Council in Hardoon v Belilios [1901] AC 118 … where the only beneficiary is sui juris , the right of the trustee to indemnity against him for liabilities properly incurred by the trustee by his retention of the trust property has never been limited to the trust property. Such a beneficiary is subject to an equitable personal obligation to indemnify his trustee. It is not necessary for the trustee to show that the beneficiary requested him to incur the liability.”
At pp 7-8, Professor Ford said:-

“One would expect that the same principle ought to apply where there is more than one beneficiary and all of them are sui juris and entitled to the same interest as absolute owners between them.

However, in such cases of multiple beneficiaries as have been reported, there has been the further element that the trustees incurred the liability at the request of the beneficiaries. ( Ex parte Chippendale; Re German Mining Co. (1854) 4 DeG M & G 19, 54; 43 ER 415, 428; Buchan v Ayre [1915] 2 Ch 474; Matthews v Ruggles-Brise [1911] 1 Ch 194.) A request from a beneficiary who is sui juris to the trustee to assume the office of trustee or to incur liabilities ( Balsh v Hyham (1728) 2 P Wms 453; 24 ER 810; Hobbs v Wayet (1887) 36 ChD 256; Jeffray v Webster (1895) 17 ALT 72; 1 ALR 65) obviously justifies the imposition of a personal liability to indemnify on the beneficiary and this should be so even if the beneficiary has only a limited interest. The Privy Council in Hardoon v Belilios relied on some earlier authority which concerned multiple beneficiaries for the proposition that a sole beneficiary who is sui juris is bound to indemnify even though the trustee does not prove a request by the beneficiary. This reliance suggests that the Privy Council thought that personal liability to indemnify would attach to several beneficiaries having the same interest, all of them being sui juris and absolutely entitled. (In Ontario in Clarkson v McClean (1918) 42 OLR 1 several beneficiaries were held liable to indemnify.)

…

Perhaps the relevant principles can only be understood in the light of the fact that the decided cases in which beneficiaries have been held personally liable to indemnify concerned not family trusts (they being the only trusts likely to involve successive interests) but trusts associated with business ventures or investments.”

38 I agree with the view expressed by Professor Ford that, in the case of multiple beneficiaries, in order to establish personal liability on the beneficiaries, there needs to be more than the mere fact that the beneficiaries are sui juris and absolutely entitled. An additional fact may arise from a circumstance such that the beneficiary is a settlor of the trust or contributed the funds which were managed or that the beneficiaries requested that the expenditure be incurred or approved of its being incurred or that the trustee was carrying on a business established for the benefit of the beneficiaries.

39 In Balkin v Peck (1998) 43 NSWLR 706, Mason P, with whom Priestley JA and Sheppard AJA agreed, analysed the principle enunciated by Lord Lindley in Hardoon v Belilios [1901] AC 118 and placed it in the field of restitution. At p 712, the President said:-

“It is understandable why Lord Lindley emphasised the equitable basis of the right in a trustee context. However, the notion of a right to contribution, recoupment or indemnity is not peculiar to equitable relationships. Such rights, unless grounded in contract or statute, derive from the unfairness of a person who gets all or part of the benefit of property or a legal transaction not bearing all or the proportionate part of the burden associated with it. Lord Lindley described this concept of correlative benefit/burden as ‘the plainest principle of justice’ in Hardoon (at 123). In Causley v Countryside (No 3) Pty Ltd (Court of Appeal, 2 September 1996, unreported) this Court approved the statement of McGarvie J in J W Broomhead (Vic) Pty Ltd v J W Broomhead Pty Ltd [1985] VR 891 at 936 that ‘… the basis of the principle is that the beneficiary who gets the benefit of the trust should bear its burdens unless he can show some good reasons why the trustee should bear the burdens himself’: see also Mahoney v McManus (1981) 180 CLR 370 at 388; Paul A Davies (Australia) Pty Ltd v Davies [1983] 1 NSWLR 440 at 450. Many later authorities have preferred to use the concept of unjust enrichment to describe the same basal principle: cf Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256-257. Whatever its label, it is a concept that informs doctrines of equitable and legal contribution ( Dering v Earl of Winchelsea (1787) 1 Cox 318; 29 ER 1184; Albion Insurance Co Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342 at 350-352), marshalling ( Ramsay v Lowther (1912) 16 CLR 1 at 23-24) and recoupment by varieties of sureties against those principally liable ( Moule v Garrett (1872) 7 Ex 101 at 104).”
I respectfully agree with the President’s analysis. It places emphasis upon the need for there to be facts which make it just for the person who paid or incurred an expenditure to be reimbursed by another.

40 I have spent time on this issue as two particular points concerning it have been raised in these proceedings. The first is that each of the defendants has given evidence that, when the units were applied for and issued, he or she was not aware and the relevant company was not aware that the trustee, Bayside Brunswick, had a right to personal indemnity from the unit holders. The defendants have given evidence that, had they been aware of the right to personal indemnity, they would not have entered into the transaction. It is more likely of course that, if in 1983 it had been thought that the beneficiaries would be liable to indemnify Bayside Brunswick, a clause excluding such right would have been included in the Deed. I shall later deal with the question as to whether the evidence given on this matter has relevance. For the moment, I merely say that I accept the evidence given as to the lack of knowledge of Bayside Brunswick’s entitlement to a personal indemnity.

41 By the early 1980’s, there had been very few cases in which a personal obligation to indemnify a trustee had been imposed upon beneficiaries. The Fifth Edition of Jacobs’ Law of Trusts in Australia, published in 1986, stated, in para [2105], that the modern authorities were not numerous and that, if there were a plurality of beneficiaries and there was no request from all of them, it seemed that the trustee would have no right of indemnity. I believe that that was the understanding of the law at that date. The decision of McGarvie J in J W Broomhead (Vic) Pty Ltd v J W Broomhead Pty Ltd [1985] VR 891 was not delivered until 1985. Since that decision, knowledge of the right to a personal indemnity has become more widespread. I therefore accept the defendants’ evidence on this point.

42 The other issue is that counsel for Countryside relies, in relation to Mr and Mrs Lawson, upon the transaction in October 1986 when their company, GLI, applied for and received an additional 125,000 units in the Trust and also acquired the 832 units which had previously been held by Boreas Pty Limited. GLI was also the joint holder of other units with Buckley Dowdle but I am not now dealing with that holding. Counsel for Countryside submitted that, by taking up the units in October 1986, GLI undertook a liability to personally indemnify the trustee, Bayside Brunswick, for the debts which it had incurred and did so at a time when it was obvious that the debts of Bayside Brunswick could not be met.

43 The additional units were issued in 1986, at a time when the venture was close to collapsing. They were issued to those unit holders who were prepared to put in an additional $5,000 to enable submissions to be put with respect to the planning problems which the venture was facing. Boreas Pty Limited did not wish to put in any further funds. GLI acquired its units for $2,000 and, with other unit holders, put in $5,000 for an additional 125,000 units. When it transferred its units, Boreas Pty Limited took a release from Bayside Brunswick with respect to any claim against it.

44 In my view, GLI did not, by reason of this transaction, come under a liability to indemnify Bayside Brunswick in respect of the expenses which Bayside Brunswick had previously paid or incurred. In my opinion, no principle of trust law or of the law of unjust enrichment requires that GLI be held liable for debts incurred prior to that transaction. The transaction did not amount to adoption and approval of all that had previously occurred. It was merely a transaction whereby a modest sum was raised with a view to overcoming some of the problems which the venture then faced.

45 In my opinion, the finding of Brownie J that there was an obligation to indemnify was based firmly upon the view that the beneficiaries, who obtained the benefit of the expenditure, should personally indemnify Bayside Brunswick in respect of that expenditure. In my opinion, although Brownie J apportioned the liability to indemnify having regard to the portions in which the units were held after the rearrangement in 1986, his Honour was then dealing with the issue as to how a fair apportionment should be made, not with the issue as to whether the facts gave rise to an obligation to indemnify. In examining the issue of indemnity, Brownie J did not start as at the position in October 1986, the date of the rearrangement, but commenced with the facts which showed that the debts had been incurred by Bayside Brunswick for the benefit of the beneficiaries.

46 I am therefore of the view that GLI did not, in October 1986, incur a debt which is relevant for the purposes of the present proceedings.

Section 592 of the Corporations Act

47 Relevant sections of the Corporations Act provide:-

“ 589 Interpretation and application

(1) Sections 590 to 593 (inclusive) apply to a company:
(a) that has been wound up or is in the course of being wound up; or
…
592 Incurring of certain debts; fraudulent conduct

(1) Where:


(a) a company has incurred a debt before 23 June 1993; and

(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.

…

(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.”

48 Each of the three companies, Lex, GLI and Buckley Dowdle, have been wound up. Accordingly, they are companies in respect of which s 592 applies. Each of the defendants was a director at all relevant times.

49 The manner in which s 592(1) is to be interpreted was enunciated by Tamberlin J in TCN Channel Nine Pty Ltd v Scotney (1995) 17 ACSR 116, where his Honour said, inter alia, at p 118:-

“The case law guidelines pertinent to the circumstances of this case can be summarised as follows:

1. The test in s 592(1) is an objective test which requires that reasonable grounds in fact exist without reference to the need for any particular person to hold the expectation. A prima facie liability can arise even where the director or manager had no personal knowledge of the incurring of the relevant debt. If the requirement is satisfied then all directors and managers come within it regardless of their subjective expectations or individual grounds for such expectations: re New World Alliance Pty Ltd (rec and mgr apptd); Sycotex Pty Ltd v Baseler (No 2) (1994) 51 FCR 425 at 433 per Gummow J, and Rema Industries and Services Pty Ltd v Coad (1992) 107 ALR 374 at 381-82; 7 ACSR 251 at 258-9 per Lockhart J.

2. Factors personal to the director or manager are the concern of s 592(2) which provides a defence once the threshold of s 592(1) is crossed: Re New World Alliance Pty Ltd supra at 435.

3. The creditor must prove facts which, immediately before the time when the company incurred the relevant debt, gave a person, seeking properly to perform the duties of a director or manager of that company, reasonable grounds to say: ‘I expect that the company will not be able to pay all its debts as and when they become due’. (See Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 124 per Tadgell J and 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 at 377-8 per Foster J). …

4. …

5. The ‘expectation’ must be more than a hope, possibility or suspicion. The term is used in the sense of ‘to regard as about to happen; to anticipate the occurrence or the coming of …’: The Shorter Oxford English Dictionary . …

6. …

7. ‘Debt’ where used in s 592(1) includes a contingent debt. See Hawkins v Bank of China (1992) 26 NSWLR 562 at 568; 7 ACSR 349 at 353-4.”

50 In Standard Chartered Bank of Australia Ltd v Antico [Nos 1 and 2] (1995) 38 NSWLR 290, Hodgson J discussed s 556 of the Companies (Queensland) Code, which was in similar terms. I respectfully agree with his Honour’s exposition of the terms of the section. However, on one aspect, I prefer the approach taken by Tamberlin J. In my view, the test to be applied in s 592(1) is an objective test. Hodgson J agreed with that but said at p 334, “In my view, the facts to be taken into account include all facts reasonably capable of being known to any of the directors of the company: accordingly, they extend to all facts actually known to any director, and also to facts not actually known by any director…”. The reference to knowledge of directors is, I believe, misplaced. I am guided by the decision of the High Court of Australia in State of New South Wales v Taylor (2001) 75 ALJR 652. McHugh, Kirby, Hayne and Callinan JJ said, at p 653, in relation to s 151A(5) of the Workers Compensation Act, 1987, where the expression “reasonable cause to believe” was used, that it was not proper to consider the position of “a reasonable person in the position of the injured person” but rather that, “The reasonable cause for belief is determined by reference to the evidence before the court concerning the applicant’s condition at that time and expert evidence as to what the medical prognosis for that condition was at that time. What the applicant knew or ought to have known is irrelevant”. I consider that a similar approach is appropriate for the purposes of s 592(1). Of course, for the purposes of s 592(2), the knowledge and position of the particular director is crucial.

Debt

51 In Hawkins v Bank of China (1992) 26 NSWLR 562, it was held that a liability under the guarantee there in question was a debt for the purposes of s 556 of the Companies (New South Wales) Code, a section which was in similar terms to s 592. At p 572, Gleeson CJ said, inter alia:-

“The words ‘incurs’ and ‘debt’ are not words of precise and inflexible denotation. Where they appear in s 556 they are to be applied in a practical and commonsense fashion, consistent with the context and with the statutory purposes.

…

… Once it is accepted that ‘debt’ may include a contingent debt then there is no obstacle to the conclusion that, in the present context, a debt may be taken to have been incurred when a company entered a contract by which it subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future time. This is such a case.”

52 Counsel for the defendants have submitted that the liability to indemnify Bayside Brunswick was not relevantly a debt. Counsel pointed to the fact that the obligation to indemnify was a restitutionary obligation and that the subject debt due by Bayside Brunswick to Countryside was, in the events which occurred, an obligation to pay unliquidated damages.

53 Counsel relied upon Shephard v ANZ Banking Corporation Ltd (1996) 41 NSWLR 431. In that case, it was held that, where amounts were prepaid by way of deposit under a contract for the supply and erection of kit homes and were required to be repaid when the kit homes were not supplied and erected within a reasonable time, the company did not incur a debt for the purposes of s 556 of the Companies (New South Wales) Code. At pp 434-435, Giles AJA said:-

“Holdings did not incur debts upon entering into the relevant contracts simply because if it failed to perform the contracts it would be liable in damages to its customers and, with appropriate proceedings, the customers could obtain judgments for definite sums of money. The appellants, of course, did not so submit: they concentrated on the deposits. But their arguments involved that debts were incurred when obligations were undertaken which might in time result in repayment of the deposits, and so it is necessary to consider the nature of the obligations and whether the relationship between an obligation being or becoming a debt for the purposes of s 556(1) and the undertaking of the obligation was such that the composite phrase was satisfied.”

54 At p 442, Abadee AJA, with whom Meagher JA agreed, said:-

“… The basis of the remedy is that in the absence of the customer receiving the agreed performance or its equivalent in unliquidated damages, the law recognises it as unjust that the company continue to retain the purchase moneys received at the expense of the customer. The law then imposes the restitutionary obligation on the company. The restitutionary obligation is ‘incurred’, if at all, only at that time. Thus, in this case no restitutionary obligation and hence no debt was incurred at any of the stages asserted by the appellant.”

55 It was submitted that the obligations of the unit holders were no more than restitutionary obligations to repay the trustee, Bayside Brunswick, for what was said to be its obligation to pay unliquidated damages to Countryside. Counsel relied upon the following finding by Brownie J as to the obligation due by Bayside Brunswick to Countryside:-

“I consider that the vendors are prima facie entitled to the contract price, less what they have been paid by the first defendant, and less the value of the balance of the land, not transferred to the first defendant, as at the date of the rescission.”

56 However, in my view, Bayside Brunswick relevantly incurred a debt to Countryside when it agreed to pay, by instalments, $2,000,000 to Countryside for the subject land. It seems to me that that was, so far as Bayside Brunswick was concerned, a debt for the purposes of s 592, notwithstanding that the actual claim, subsequently made by Countryside, was a claim for damages for breach by Bayside Brunswick of its obligation to pay the agreed instalments. Likewise, it seems to me that, when a party requests another to incur a monetary liability for the benefit of the first party, that first party may incur a liability which is a relevant debt for the purposes of s 592. An obligation does not necessarily fall outside the provisions of s 592 simply because it may be labelled as a restitutionary obligation. Many quasi contractual debts would be debts incurred for the purposes of s 592. Whether it does or does not depends on the circumstances of the particular transaction. In the present case, it seems to me that the obligation incurred by Bayside Brunswick to pay $2,000,000 by instalments was an obligation in respect of which the unit holders were bound to indemnify Bayside Brunswick. Therefore, as Bayside Brunswick’s obligation was a debt, it seems to me that the corresponding obligation of each unit holder was likewise a debt for the purposes of s 592. I do not accept the submission, which has been put to me on behalf of the defendants, that a trustee must necessarily have recourse to the Trust’s assets before seeking personal indemnity. The authorities are to the contrary.

57 Even if I were wrong in the conclusion I have expressed above that, when it acquired the further units in October 1986, GLI did not come under an obligation to indemnify Bayside Brunswick in respect of the obligations that had previously been incurred, I would not hold that, at that stage, GLI came under an obligation that was a debt for the purposes of s 592. By October 1986, the venture was close to collapse. The likely claim to be made by Countryside was a claim for damages rather than a claim for a liquidated sum. At that point of time, no debt had been incurred.

Reasonable Grounds to Expect

58 Countryside has the onus of proving that, immediately before the time when the debt was incurred, there were reasonable grounds to expect that, if the company incurred the debt, it would not be able to pay all its debts as and when they became due. I use the terms of s 592(1)(b)(ii) as, in the circumstances of this case, they appear to be more apposite than those of s 592(1)(b)(i).

59 Relevant particulars of Countryside’s claim read as follows:-

“At the time the partners subscribed for their 832 units in the BBUT, 21 February 1984, the partners then held or would upon the issue of all of the first subscriptions for units hold 10% of the units in the BBUT.
At the time Bayside Brunswick Pty Ltd had entered into a contract to purchase land for a total price of $2m, payable over time (as set out on page 3 of the judgment of Brownie J of 20 April 1994 in the principal proceedings). The first of those payments of $175,000 was due on 19 March 1984. At the time Bayside Brunswick Pty Ltd did not have any assets. A failure to meet that payment would constitute a repudiation of the whole contract rendering Bayside Brunswick Pty Ltd liable in damages for the balance of the purchase money. The partners then did not have sufficient assets to meet 10% of the liability due on 19 March 1984, let alone 10% of any damages which would become payable in the event of default in the payment of that sum.
In view of the lack of any assets available to Bayside Brunswick Pty Ltd as at 21 February 1984 and on each day thereafter until 31 August 1994 when Brownie J delivered judgment against the partners, there were reasonable grounds to expect that those companies would not be able to their [sic] debts as and when they become due in the sense that the companies comprising the partnership would not be able to pay any sum demanded or required by the trustee (or any creditor subrogated to the rights of the trustee) in respect of any liability incurred by the trustee in carrying out the BBUT and, in particular, would not be able to meet any demand by the trustee for indemnity in respect of the purchase price or any sum of damages payable in the event of breach of the contract for sale of land dated 16 January 1984.
Upon subscribing for units (as the partners did on 21 February 1984) and as GLI Services Pty Ltd did in its own right on 24 October 1986) the subject companies, as unitholders in the BBUT became entitled to proportionate shares of the income and capital of the BBUT. They also became obliged, correspondingly, to indemnify the trustee for all liabilities or obligations of the trust, existing then or which might be incurred thereafter.
We enclose copies of the balance sheets and financial records for Bayside Brunswick Pty Ltd for the period from 30 June 1984 to 13 March 1987.”

60 As I have stated above, the liability of Bayside Brunswick to pay damages for default was not relevantly a debt for the purposes of s 592. However, Bayside Brunswick did incur a debt to pay the purchase price of $2,000,000 for the land by instalments. In my opinion, that obligation was a relevant debt of Bayside Brunswick and the obligation to indemnify a trustee in relation to that debt was a relevant debt of each of the unit holders. I consider that Countryside should not be held too strictly to its particulars in this respect. However, of more importance is the fact that the particulars make no allegation that it was reasonable to expect that the companies would be unable to pay their debts as and when they fell due, save that it is alleged that, at the time of entering into the obligation and by the taking up of units in the Trust, the companies did not then and there have funds available to meet the $2,000,000 obligation. Indeed, the particulars as given refer only to the financial position of Bayside Brunswick and to the fact that it had no available funds other than those contributed by the beneficiaries.

61 In his oral address, counsel for Countryside, Mr Evans, took a broader approach and relied upon hindsight to prove his case. Mr Evans submitted that the venture was substantially unfunded, that no arrangements were made to pay the bulk of the $2,000,000 debt incurred to Countryside, that the assumptions upon which the venture depended for its success turned out to be ill-founded and that the venture failed through a lack of capital. Mr Evans submitted that those involved in the venture did not make arrangements to ensure that the liabilities would be met but, to the contrary, expected that their liabilities would be limited to the funds which they contributed, a total of $500,000. The relevant date, Mr Evans said, was immediately prior to the taking up of units in the Trust.

62 If the word “expect” were to be read as “suspect”, Mr Evans’ submissions would be upheld. But the word does not have that meaning, as Tamberlin J and Hodgson J have pointed out.

63 There is no evidence before the Court, other than the events which occurred, which casts doubt on the financial or other predictions upon which the venture proceeded. The only evidence indicating that the land was not worth the value which Bayside Brunswick agreed to pay for it is the lower figure which Countryside received on the resale of the balance of the land for which Bayside Brunswick had not paid. But, as to that, Mr Kingsford gave evidence that the sale was a “fire sale”, so far as he was concerned, for he had overseas loans and was paying 24½ per cent interest. The land was sold again in 1994 for a vastly increased sum, $2,500,000.

64 Of the assumptions, the most important were the saleability and the selling price of the lots. An assumption was made that the lots would sell readily and at a price of between $20,000 and $25,000 each. At the time when Stage 1 was completed and ready for sale, that was not the position. However, there are in evidence letters from other real estate agents, which Mr Lawson received in 1983, which justified that assumption. Mr Lawson, himself, was a real estate agent working in the area. Mr Buckley and Mr Cockburn were land surveyors who worked in the area and should have had a good knowledge of the saleability and value of the proposed lots. Mr McGeary was a contractor whose work included constructing subdivisions of residential land. Accordingly, there was a good deal of expertise amongst the unit holders. Mr Kingsford of Countryside was likewise optimistic about the development. When finance was sought, that finance was granted.

65 Another assumption was that lots would sell within the year in which they were developed. This assumption was adopted by TDR & Co in 1983. There is no evidence that that was an unreasonable assumption to make at that point of time. I could not conclude that the assumption was unreasonable. The venture was carried out by persons who had a good deal of expertise in the area. Nor could I conclude that, even if the assumption was unduly optimistic, it would have put the project at risk. In his affidavit, Mr Lawson said:-

“55. … I knew that land demand was cyclical, but I also knew that historically north coast demand for house lots had only slumped for 12 months and then quickly picked up. I was confident that, once the land was released to Bayside Brunswick, bridging finance would be available from the banks on the security of the land to meet any annual payment of the Kingsfords which could not be met from sales revenue because of a downswing. The Kingsfords had agreed that their mortgage would rank below bank mortgages for this very reason. …”

66 In his evidence, Mr Buckley also referred to the fact that he considered that, if it were necessary to borrow to pay any instalment, that could be done against the security of the land. It is necessary to keep in mind that this is not a case where the venture failed because it was unable to meet pressure from the banks. The venture failed because the combination of changes to environmental policies and a downturn in the market had such an effect that the unit holders considered that it was not feasible to continue with the project.

67 On the facts before me, I cannot conclude, as a matter of probability, that, when Lex, GLI and Buckley Dowdle took up their units, it was reasonable to expect that they or any of them would not be able to pay all their debts as and when they became due. On the evidence before the Court, both Countryside and the defendants expected that Bayside Brunswick would be able to pay the instalments of the purchase price due to Countryside.

68 It was submitted by Mr Evans that, at the time GLI took up its additional units in October 1986, there were reasonable grounds to expect that, if the company incurred the debt (the obligation to indemnify Bayside Brunswick) it, GLI, would not be able to pay all its debts as and when they became due. This submission was well-founded to the extent that it has been established that, by October 1986, the venture was in serious difficulties. However, it seems to me, as I have said, that GLI did not relevantly incur a debt as at October 1986.

Section 592(2) of the Corporations Act

69 In view of my findings under s 592(1), it is unnecessary to deal with the defence raised under s 592(2). However, as the defendants have relied upon it, I should discuss it briefly.

70 Each defendant relied upon the fact that, at the time the units were taken up, he or she was not aware that the beneficiary company was liable to indemnify Bayside Brunswick for the obligation which that company incurred.

71 However, the relevant provision for the purposes of the present case is s 592(2)(b)(ii). This provision includes the phrase “if the company incurred that debt”. The provision requires the director to prove, as a matter of probability, that he or she did not have reasonable cause to expect that, if the company incurred the debt, it would not be able to pay all its debts as and when they became due. A defendant cannot establish this matter if the defendant’s case is that he or she did not know that, by the company’s action, a debt was incurred. Furthermore, both paragraphs (i) and (ii) require an assessment to be made of the company’s ability to pay all its debts as and when they become due. This requirement also necessitates the taking into account of the particular obligation. A defendant cannot take advantage of the terms of the section by saying that he or she was unaware of the debt.

Ability to Pay

72 A defence was taken in relation to Mr and Mrs Lawson and Mr Buckley and Mr Cockburn that their respective companies had, when the relevant debt was incurred, the financial capacity to meet all of the debts of their company as and when they became due. In view of my findings under s 592(1), I need not deal further with this issue.

Orders

73 For these reasons, I am of the view that the applications must be dismissed with costs.

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Last Modified: 12/19/2001