Dwyer v Chugg & Chalke

[1992] TASSC 80

Serial No 28/1992
List “A”

CITATION:              Dwyer v Chugg & Chalke [1992] TASSC 80; A28/1992

PARTIES:  DWYER
  v
  CHUGG
  CHALKE

TITLE OF COURT:  SUPREME COURT OF TASMANIA

FILE NO/S:  LCA 92/1991
HEARING DATE:  18 May 1992
JUDGMENT OF:  Cox J

Judgment Number:  A28/1992
Number of paragraphs:                17         

Serial No 28/1992

List “A”

File No LCA 92/1991

DWYER v CHUGG AND CHALKE

REASONS FOR JUDGMENT  COX J.

18 May 1992

Companies – Directors – Convicted under s.556(1) – Appeal against sentence – Whether manifestly inadequate – Whether custodial sentence required as general deterrent – Relevant considerations to penalty – Companies (Tasmania) Code, s.556(1).

1. This is an appeal against the alleged inadequacy of penalty imposed by the Court of Petty Sessions upon the respondents. They had been jointly charged with 458 offences contrary to the Companies (Tasmania) Code, s.556(1). At the conclusion of the prosecution case charge 197 was dismissed and the following is a representative of the balance, as in each instance it is only the particulars which vary:

   “1.      That Philip George Chugg and Wesley Roger Chalke were directors of The Jean Scene Pty. Ltd. (hereinafter called ‘the said Company’), a Company duly incorporated pursuant to the provisions of the Companies (Tasmania) Code (hereinafter called ‘the said Code’) and now in the course of being wound up, at a time when the said Company incurred a debt with Axis Sportswear Pty. Ltd. in the sum of $561.50 on or about the 20th day of March 1987 being in respect of goods supplied, when immediately before the time when the said debt was incurred there were reasonable grounds to expect that the said Company would not be able to pay all its debts as and when they became due CONTRARY to the provisions of Section 556(1) of the said Code.”

2. At the end of the trial they were both convicted on 451 counts, the offences having occurred in the period between January and July 1987. The learned magistrate imposed upon each respondent a fine of $5.75 on each count. In doing so he emphasised that the penalty imposed on each charge should not be regarded as having any significance and that it was merely a means of arriving at the appropriate total penalty which amounted to $2,593.25 on the whole complaint.

3. Before considering the grounds of appeal, it is necessary to state the basic facts which I take from the learned magistrate‘s reasons for judgment:

   “In August 1971 the first defendant commenced business in Hobart as a retailer of clothes, specialising in jeans and denim clothing. On the 26th June 1972 The Jean Scene Pty. Ltd. (’the company‘) was incorporated and the first defendant was appointed a director of the company. In October 1971 a store was opened in Moonah and another store was opened in Launceston in November 1971. In November 1981 the defendants opened a further store in the Eastlands Shopping Centre which was conducted by Jeans Eastlands Pty. Ltd. On the 26th April 1983 the second defendant became a director of the company and on the 30th May 1985 Jeans Eastlands Pty. Ltd. changed its name to Jean Scene (Retail) Pty. Ltd., a company of which both the defendants were appointed directors. In 1985 the Launceston store was franchised and in the same year a franchised store was opened in Burnie and a further store was opened in Kingston. Jean Scene (Retail) Pty. Ltd. was originally responsible for the conduct of the business at the retail outlets at Eastlands, Glenorchy and Kingston but in a company reorganisation in 1986 also took over the conduct of the business of the Hobart store. Thereafter the role of the company was as the purchaser of stock from the suppliers and the sale and distribution of that stock to the stores conducted by Jean Scene (Retail) Pty. Ltd. and to the franchised stores and for this service the company charged an administration fee. A loan account was created between the two companies and the amount due from Jean Scene (Retail) Pty. Ltd. for stock was recorded in that account. The ability of the company to pay its creditors was dependent on Jean Scene (Retail) Pty. Ltd. selling stock through its retail outlets so that it could then pay the company. The businesses of the companies were integral parts of the one business of purchasing and reselling stock through a number of retail outlets and it is not possible to ascertain an accurate picture of the company’s financial position at a particular time without ascertaining the capacity of Jean Scene (Retail) Pty. Ltd. to meet the amount due in the loan account at the same time.

   The company carried on business until it was sold in August 1987 and subsequently an order winding it up was made in the Supreme Court on the 30th November 1987 on the petition of Smiths Clothing Co. Pty. Ltd.

   ...

   Each of the charges related to a debt alleged to have been incurred for the purchase of stock from manufacturers or suppliers. Although some stock was obtained direct from that held by agents, the majority was purchased on ‘indent’ which involves the ordering of stock from samples provided by agents up to six months before delivery was required. It is not in dispute that the company ordered the stock, the supply of which gave rise to the allegation that the debts were incurred, but the one order may have resulted in the items being delivered on different dates and to the different stores on behalf of which the company was purchasing and each delivery has been made the subject of a separate charge. During the course of the hearing I ruled that for the purposes of section 556 a debt was incurred when the items were delivered and not when the order was placed. The complaint alleges that the debts were incurred, and therefore the offences were committed, between the period the 19th November 1986 and the 9th July 1987. The orders which gave rise to delivery of goods on the dates alleged were placed between the 11th September 1986 and June 1987.

   ...

   In accordance with my earlier ruling the debt was incurred at the time of the acceptance of delivery although some of the goods were later returned. The return of the goods and the issue by the supplier of a credit note is relevant to the amount of the indebtedness of the company to the supplier in the winding up but is not relevant to the question of whether the debt was incurred.”

4. There were eleven creditors referred to in the complaint and the total of the debts the subject of the charges found proved was a little over $216,000.00.

   “It appears that the company traded profitably from its incorporation until 1982 when it incurred liquidity problems. Mr. Mark Siddall, of the firm of Wise Lord and Ferguson and who was the company‘s accountant, organised an informal scheme of arrangement with the creditors and he and Mr. Peter Beven took over the financial management of the company. The first defendant realised assets and put the funds into the company and the creditors were paid over an extended period of time. Thereafter the first defendant resumed the control of the company and following the second defendant becoming a director in 1983, they managed the company until its sale to Salix Pty. Ltd. in August 1987.

   …..

   The profit and loss statement and balance sheet for the financial year ended the 30th June 1986 show a significant deterioration in the financial position of the company. The unaudited profit and loss statement discloses a net loss of $63,512, and the balance sheet as at that date shows current assets of $237,763, current liabilities of $282,627, including sundry creditors of $209,172. There was therefore a deficiency in net assets of $26,809 and a deficiency in working capital of $44,864. However, it is inappropriate to consider the financial position of the company at any particular time without having regard to the position of Jean Scene (Retail) Pty. Ltd. at the same time because at all relevant times the company’s sole source of income and cash flow was from sales made to Jean Scene (Retail) Pty. Ltd. Although the Launceston stores were franchised there is no significant income nor reasonable prospect of income from the franchisees during the relevant periods. At all times the principal asset of the company was the debt owed by Jean Scene (Retail) Pty. Ltd. and as at the 30th June 1986 the debt owed by that company was $168,295 which represented 70.58 percent of the company‘s tangible assets. At the same time the financial statements of Jean Scene (Retail) Pty. Ltd. showed a trading loss of $7,354 and a deficit in working capital of $57,380.

   When the financial statements of both companies were received for the financial year ended the 30th June 1986 the defendants, after discussion with Mr. Beven, approached the A.N.Z. Bank because it must have been apparent that without a significant improvement in trading results or an injection of capital from an external source, the deficit in working capital of Jean Scene (Retail) Pty. Ltd. would make it impossible for that company to repay its debt to the company at a rate sufficient for the company to meet debts to its unsecured creditors. The defendants prepared a cash flow forecast and estimated profit and loss statement for the financial year ended the 30th June 1987. The statements were prepared by adding a component for inflation to the figures shown in the financial statements for the previous year and were considered by the defendants, and in particular by the first defendant who appeared to be responsible for their compilation, to be realistic. On the basis of the financial projections which estimated an increased overall gross profit of 42 percent the A.N.Z. Bank agreed to lend $126,000 of which $45,000 was borrowed by the first defendant and his wife, $41,000 by the second defendant and his wife and $60,000 was a fully drawn advance in the name of the company. The company’s existing fully drawn advance of $26,000 was cleared from the $45,000 borrowed by Mr. and Mrs. Chugg and therefore $120,000 was new capital injected into the company. These funds were made available in October 1986 and the bank‘s diary note states that ’the directors understand that the lending now approved represents the maximum level of our assistance and efforts should be made to seek franchises of some of the suburban stores if the 1986 results are not reversed in the current year‘. The defendants were aware of the attitude which the bank had adopted and it does not appear that there were any other external sources of funds available.

   ...

   The bank made the loan funds available which improved the capital position and having regard to the first defendant’s knowledge of the history of the company I am not able to say that his budget forecast for the period to the 30th June 1987 was unrealistic and therefore provided some reasonable ground of expectation that if the company operated in accordance with results forecast that it would be able to pay its debts as and when they became due.

   However, the position did not improve but instead continued to deteriorate. At the end of November the deficit in working capital had increased by 47 percent, the deficit in net assets had increased by 79 percent and the loan to the retail company represented 88.59 percent of the company‘s tangible assets. During the period from the 1st August to the 30th November the total receipts were $42,567 below the sales projections prepared in support of the application to the A.N.Z. Bank for loan funds and from October 1986 the franchise income from the Burnie store ceased although the forecast income from that source had been $43,000 for the period.

   ...

   ... the defendants were relying on the December sales to reverse the trend which was now well evident, but this reversal did not occur. The projected income for December including the franchise income from the Burnie store was $275,000. The actual income was $214,847 with nothing coming from the Burnie franchise. As at the 31st December the company had shown a trading loss of $25,352 and an accumulated loss of $84,075. There was a deficit in net assets of $52,161 and in working capital of $70,187 and the only significant asset was the loan to Jean Scene (Retail) Pty. Ltd. of $269,153 which was 81.96 percent of the company’s current assets. Although the retail company had a trading profit for the month of $4,776, the deficit in its working capital had increased to $61,287 and the loan debt due to the company had increased by 59 percent compared with the position at the end of June.

   ...

   The financial statements to the end of December 1986 did not become available to the defendants until February 1987 but the defendants did have access to the material on which those statements were based.

   ...

   All this information was available to the defendants and it should have been apparent to them that they could have no reasonable expectation that Jean Scene (Retail) Pty. Ltd. was able to repay the loan debt to the company within a sufficient period to permit the company to repay its trade creditors within the trading terms even as those terms had evolved by the course of dealings over many years. The retail company was insolvent and as its debt constituted the only significant current asset of the company the inevitable result was that the company was not able to pay its debts as and when they became due and that situation would continue unless there was an injection of capital funds from an external source. There was no reasonable expectation that such funds were available to either company. ... If proper regard had been had to the financial information available to the defendants on a daily basis they would have realised the true situation of the two companies. The failure of the defendants to do so resulted in their falling short of the standard of reasonable competence of a director and I am satisfied that at least after the 31st December 1986 they incurred debts by accepting delivery of stock when there was no reasonable ground of expectation that the company would be able to pay all its debts as and when they became due. The obligation was to stop incurring debts at that time because it should have been obvious that the company‘s position was not one of temporary reverse which it could reasonably expect to be able to trade out of but was one of progressive decline where continuation of trading would put its creditors in serious jeopardy of not being paid.

   ...

   When the financial statements to the 31st December 1986 were produced in February 1987 the defendants had a meeting with Mr. Beven at which a decision was made to advertise the business for sale and this was done by placing advertisements in national newspapers at a sale price of $350,000 plus stock at valuation. ... The business was finally sold in August 1987 for $100,000. In February 1987 the possibility of a sale of the business was not such as would have given rise to any reasonable ground of expectation in a director of ordinary competence that a sale would provide a source of funds to permit the company to pay its debts. Nor was the interest engendered in the ensuing months sufficient to give rise to any such expectation.

   ...

   The defendants were aware that the company’s receipts were consistently falling below those predicted in the document prepared in August and they were aware that those predicted figures did not allow for a significant trading profit. They were also aware that the company did not have access to the capital funds which were necessary if the trend was to be reversed.”

5. The main thrust of the appellant‘s complaint to this Court is that the respondents’ conduct amounted to such a serious breach of the law that a custodial penalty ought to have been imposed on each respondent. They were charged and convicted under s.556(1) which does not require proof of any intent to defraud, but nonetheless provides for a maximum penalty of $5,000.00 or imprisonment for one year or both. Section 556(5) provides, in essence, that where the company does any act with intent to defraud creditors of the company or of any other person or for any other fraudulent purpose, any person who was knowingly concerned in the doing of the act with that intent or for that purpose is guilty of an offence for which the maximum penalty is precisely double that provided in subs.(1). The absence of any such intent cannot of itself be a mitigating factor to a charge laid under s.556(1) (Castrisios v. McManus (1991) 9 A.C.L.C. 287). It was therefore submitted by the appellant that notwithstanding the absence of such moral turpitude the circumstances of this case represent an offence or series of offences at the upper end of the scale of gravity contemplated by subs.(1) and demand condign punishment.

6. I venture to repeat what I said in Castrisios v. McManus (supra) at p.295, namely:

   “Although the penalties, particularly under s.229(3)” [with which we are not here concerned] “can be very heavy, the variety of conduct covered by both sections is almost infinite.”

   It is not difficult to think of some circumstances which would make the respondents‘ breach of s.556(1) much more blameworthy and meriting therefore much more severe punishment than that imposed here. While the amount of debt incurred in the instant case is large by any standard, there could be cases which the penalty is still intended to cover where very much larger sums of money are involved. There can be cases where it is alleged that the incurring of debts involving many millions of dollars have been countenanced by directors of insolvent companies in circumstances where an intention to defraud may not be proved. Then there could be cases where there were not merely reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due, but there was in addition a positive subjective belief not necessarily involving an intent to defraud that such was the case. Actual knowledge of the relevant legislation and a deliberate decision to flout it would also make for a worse case, while persistence in the conduct complained of in the face of active discouragement by other directors or advisers would likewise aggravate the offence. The section covers a range from cases of gross negligence not involving a specific intent to defraud down to cases of relatively little moral blameworthiness where the defendant, perhaps through naivety or obtuseness, simply fails to meet the objective standard required of a director or manager of a company. Then again the personal circumstances of the offender may vary so as to require a significant differentiation in treatment. It is obvious from the existence of all these factors that the range of appropriate sentence will vary enormously.

7. By ground 2 of the Notice to Review the appellant complains that the learned magistrate erred in fact and in law in holding that there were no aggravating circumstances in which to impose a custodial sentence for the offences. What his Worship said was:

   “Counsel for the Crown submitted to me that a term of imprisonment would not be inappropriate as you have a personal liability to the creditors and the limited personal funds which you may have available would be further depleted if fines were imposed. I say immediately that to impose a custodial penalty because a defendant is unable to pay a fine which would otherwise be appropriate is not a sound exercise of the sentencing discretion. The offence as created by s.556 is unusual in that it does not require for its proof the existence of a guilty mind of actual knowledge or even reckless indifference. Therefore it seems to me that there must be some aggravating features to justify the imposition of imprisonment when the subjective state of mind of the offender is irrelevant. I am satisfied that there are no such aggravating features present here. The offences were part of a course of continuing conduct. I am required by law to sentence you on each charge and I do so having regard to what I consider to be the appropriate total penalty for that conduct. I have certainly come to the conclusion that a custodial penalty is not appropriate.”

1. While the subjective state of an offender’s mind can never be irrelevant for all purposes, I do not understand his Worship to mean anything more than that it is not necessary to prove as an ingredient of the offence.

2. He had earlier made findings which are not challenged in the appeal that it was not at any time their intention to act dishonestly in any way but that they had closed their minds to the realities of the company‘s financial position and had at all times held a blind hope that the fortunes of the company would change. He said their culpability did not lie in any dishonest intent but in their failure to realise and act in accordance with the true financial position of the company. Their failure to take steps which would have protected their creditors was contributed to by the absence of any advice to do so from their professional advisers in whom they had placed a great deal of reliance.

10.  In my opinion his Worship was not in error in law or in fact in holding that in the circumstances found by him there were no circumstances aggravating the offences to such an extent as to require a custodial sentence on either respondent.

11.  By ground 4 the appellant complains that the learned magistrate erred in law in taking into account when imposing sentence that the respondents did not intend to defraud creditors of the company or intend to act dishonestly. In Castrisios v. McManus (supra) at pp.294–295 I said:

“Counsel for the appellant laid great emphasis upon the learned magistrate’s findings cited above that the appellant did not intend to defraud the creditors or to act dishonestly. Such an intention is not an essential ingredient of the charge and indeed where it is present it creates a separate offence under s. 556(5) and exposes the offender to penalties double those prescribed for offences against s. 556(1). In accordance with the law laid down in Lovegrove v. R. [1961] Tas.S.R. 106 and R. v. De Simoni (1980–1981) 147 C.L.R. 383 the presence of such aggravating factors which could be made the subject of a distinct charge should be ignored when determining sentence. Conversely, their absence should not per se attract leniency.”

12.  These words were cited to the learned magistrate by counsel for the prosecutor when addressing him on sentence. In the process of defining the nature of their culpability as one lying in their failure to realise and act in accordance with the true financial position of the company, the learned magistrate said:

“I am satisfied that your conduct in incurring the debts was not intended to defraud the creditors of the company nor was it at any time your intent to act dishonestly in any way but a dishonest state of mind is not an element of the offence charged. You closed your minds to the realities of the company‘s financial position at all times having the hope that the fortunes of that company would change.”

13.  I do not think it can fairly be inferred that he did take into account as an extenuating factor the absence of an intention to defraud the creditors of the company. In the context in which they appear, these words serve merely to emphasise that neither an intent to defraud the creditors nor a general dishonest state of mind was an element of the offence which he found made out on the evidence before him. Because the existence of an intent to defraud is an element of another more serious offence which could have been charged had the evidence suggested its existence, such an intent could not be used as a circumstance of aggravation in the sentencing process, nor conversely could its absence of itself mitigate the offence committed. But a general dishonest state of mind not amounting to such an intent or such a fraudulent purpose, while not an essential element of the charge under s.556(1), nor of that under s.556(5), was capable of aggravating the offence under the former subsection, and conversely its absence was capable of reducing the gravity of that offence. The causing of injury to a person is not an essential element of the crime of assault, but where an injury is sustained the severity of it is capable of aggravating the assault, while the fact that it is a minor injury or the fact that none has been sustained can properly be taken into account in fixing a lower penalty. Even therefore if it be the fact that the learned magistrate took into account as a mitigating factor the absence of a dishonest state of mind not amounting to an intent to defraud or to one in which the respondents were knowingly concerned in the doing of an act for any other fraudulent purpose, he was entitled to do so. However, looking at the comments on passing sentence as a whole, I think the learned magistrate’s references to the absence of dishonesty merely served to emphasise that the respondents‘ conduct as found by him amounted to the offences proscribed by s.556(1) notwithstanding its absence.

14.  Ground 6 alleges that the learned magistrate erred in law in taking into account the respondent’s financial loss and weighing that loss against the loss to the creditors of the company. He said:

“I have emphasised that you did not act with any dishonest intent or with the intent of personal gain. You each had a hope which was a blind hope that the company would survive and rather than gain from permitting the company to trade you have lost substantially both in financial and personal terms. Those are matters personal to you which are to be weighed against the very substantial loss to the creditors of the company.”

I can see no error in this statement. Only a month or so before the first offence was committed by the acceptance of goods already indented for, each respondent had advanced to the company over $40,000.00 as part of the injection of new capital of $120,000.00 in November 1987 arranged through the bank. The court was entitled to take this fact into account, at least as constituting an explanation of their reluctance to stop trading and to put it beyond their power to ever recover their money. It was also an earnest of the genuineness of their belief, blind though it was, that they could turn the company‘s deteriorating condition around. Very properly, however, the learned magistrate emphasised that though it was a factor to be taken into account in their favour, it must still be seen in its proper perspective which included the magnitude of the loss of the other creditors. He was not wrong to take it into account and there is no reason to suppose that he gave it undue weight.

15.  Ground 5 complains that the learned magistrate gave excessive weight to the two–fold effect of indent ordering. This procedure, he had said, had the consequence first that each order gave rise to a number of invoices depending on the date on which parts of the order were delivered and the store to which the delivery was made, and second the financial position of the company changed between the date of the order and the date of the delivery, so that a belief as to the capacity of the company to pay its debts would be different at the earlier date to that at the time the goods were received. He continued:

“I think there is a great deal of merit in the submission that having ordered the goods you considered that you were bound to accept them and that your state of mind was that the company’s funds had been expended at the time the orders were placed. I do not think that you at any time applied your mind to the legal distinction between a claim for damages which would flow from non acceptance of ordered goods and the failing to pay. It appears that approximately 30 orders gave rise to the 451 charges.”

16.  It is not suggested that the learned magistrate was in error in having regard to the two–fold effect he mentioned but rather that he accorded it too much weight. Whether or not he did so can really only be judged, like any other non–specific attack on the exercise of a discretion, in the light of the result. This exercise requires a consideration of the remaining grounds of appeal, namely ground 1, that the sentence was manifestly inadequate in all the circumstances, and ground 3, that the learned magistrate erred in not giving sufficient weight to the need to impose a sentence to act as a general deterrent.

17.  I have already adverted to a number of matters which show that these offences, numerous though they were and involving a large sum of money, might properly be regarded as not being at the top end of the scale of seriousness contemplated by the Parliament in enacting s.556(1) and providing the penalty attached thereto. The personal circumstances of each respondent argued for a mitigation of penalty and the imposition of a fine of over $2,500.00 can fairly be seen as a substantial pecuniary penalty likely to affect them significantly and to operate as a deterrent to them, and to the business community at large, properly apprised of the circumstances of the offences and of the offenders. I am not satisfied that penalties were manifestly inadequate or were not fixed in the due and proper exercise of the authority of the court of first instance. The appeal will be dismissed.