Gamble v Hoffman
[1997] FCA 677
•25 JULY 1997
FEDERAL COURT OF AUSTRALIA
CORPORATIONS - directors’ duties - respondents (husband and wife) were the only directors of Company A - caused Company A to make payments on behalf of Company B - respondents held all of the shares in both companies - respondents and two others had jointly and severally guaranteed certain obligations of Company B - Company B hopelessly insolvent when payments made - payments had effect of discharging respondents’ obligations as guarantors - no obligation on Company A to make those payments - whether negligence, default, breach of trust or breach of duty on respondents’ part as directors - whether improper use of respondents’ position to gain advantage - whether directors ought fairly to be excused wholly or partly from liability - whether respondents should be ordered to pay interest on amounts to be repaid - date from which such interest should be calculated.
Corporations Law ss 232(4), 598, 1318,
Federal Court of Australia Act 1976 (Cth) s 51A
Walker v Wimborne (1976) 137 CLR 1
R v Byrnes (1995) 183 CLR 501
Vrisakis v Australian Securities Commission (1993) 9 WAR 395
Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952
Daniels v Anderson (1995) 13 ACLC 614
Re International Vending Machines Pty Ltd [1962] NSWR 1408
Ferrier and Knight v Civil Aviation Authority (1994) 54 FCR 28
Air Services Australia v Ferrier and Knight (1996) 137 ALR 609
RONALD DEREK GAMBLE and STEPHEN JAMES MANN v JAMES ARTHUR HOFFMAN and BARBARA JOYCE HOFFMAN
WAG 3039 of 1996
CARR J
PERTH
25 JULY 1997
IN THE FEDERAL COURT OF AUSTRALIA )
WESTERN AUSTRALIA DISTRICT REGISTRY ) WAG 3039 of 1996 GENERAL DIVISION )
BETWEEN: RONALD DEREK GAMBLE and
STEPHEN JAMES MANN
ApplicantsAND: JAMES ARTHUR HOFFMAN and
BARBARA JOYCE HOFFMAN
Respondents
JUDGE: CARR J PLACE: PERTH DATE: 25 JULY 1997
MINUTE OF ORDERS
THE COURT ORDERS THAT:
The respondents pay to the applicants the sum of $98,355.00 plus an additional compensatory amount either by way of interest or in lieu of interest. That additional amount is to be calculated on the sum of $98,355.00 at the rate of interest from time to time payable in respect of judgments of this Court as fixed by the Rules of Court. The date from which such additional amount is to be calculated is 20 March 1996. Judgment for the total of the foregoing amounts is to be entered in favour of the applicants against the respondents.
The respondents pay the applicants’ costs of the application.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA ) WESTERN AUSTRALIA DISTRICT REGISTRY ) WAG 3039 of 1996 GENERAL DIVISION )
BETWEEN: RONALD DEREK GAMBLE and
STEPHEN JAMES MANN
ApplicantAND: JAMES ARTHUR HOFFMAN and
BARBARA JOYCE HOFFMAN
Respondent
JUDGE: CARR J PLACE: PERTH DATE: 25 JULY 1997
REASONS FOR JUDGMENT
INTRODUCTION
This is an application under s. 598 of the Corporations Law by the liquidators of a company called Tallimba Pty Ltd (“Tallimba”) seeking repayment by the respondents, as directors of Tallimba, of certain moneys paid from the funds of that company. The application is similar to what used to be called a “misfeasance summons”.
FACTUAL BACKGROUND
The parties filed a statement of agreed facts. The following narration of the factual background to the matter has been taken largely from that statement. Where it has been necessary to make other findings of fact, I will so identify those findings and my reasons for making them.
The applicants are the joint liquidators of Tallimba which went into liquidation on 6 July 1995 after having been placed into voluntary administration on 8 June 1995. Tallimba was incorporated on 20 May 1982. At all material times it operated a wholesale fruit and vegetable business, trading under the registered business name of “Sell Fresh Packaging Co.” The respondents, Mr James Arthur Hoffman and his wife Mrs Barbara Joyce Hoffman, have since 25 June 1982 been the only directors and the only shareholders of Tallimba. At all material times Mr Hoffman was the managing director of Tallimba. Mr Hoffman owns one fully paid ordinary share in the capital of Tallimba and Mrs Hoffman owns two such shares. Mr Hoffman was, from 20 March 1991, also a director of a company called Sunhaven Nominees Pty Ltd (“Sunhaven”) which was incorporated on 5 March 1991. Mrs Hoffman was the Company Secretary of Sunhaven from 20 March 1991. At all material times Mr and Mrs Hoffman were the only shareholders of Sunhaven. Sunhaven operated a retail fruit and vegetable business at Shop 4, Bull Creek Shopping Centre in the Perth suburb of Bull Creek (“the Premises”) from on or about 1 April 1991 to in or about November 1992 and then for a further period from late April or early May 1993 until about 5 June 1993. During the intervening period of about 5 or 6 months that business was conducted by a Mr Dalliston. I shall refer to that business as “the Business”. Mr Hoffman, in his evidence in chief, described Sunhaven’s trading at the Premises as being “an absolute disaster”. He said that Sunhaven “just could not get [the Business] to trade profitably”. He had tried to get a rent reduction and changed the management. But it was “a waste of time”, so he negotiated a deed of surrender of the lease with the lessor. That lease had been created by an agreement dated 19 November 1991 (“the Lease Agreement”) made between Sunhaven as lessee and the Government Employees Superannuation Board (“GESB”) as lessor. Sunhaven agreed to lease the Premises from GESB for a period of ten years from 22 March 1991. Mr and Mrs Hoffman, their son Mr Cameron Jay Hoffman and two other persons joined in the Lease Agreement as guarantors, thereby jointly and severally guaranteeing compliance by Sunhaven with its obligations under the covenants contained in the Lease Agreement. Sunhaven ceased operating the Business on or about 5 June 1993 and did not carry on any other business after that date. Sunhaven is now a defunct company.
On 2 November 1994 GESB, Sunhaven and the five guarantors (referred to above) entered into a deed of surrender of lease (“the Deed of Surrender”). That deed required Sunhaven to pay GESB the sum of $80,000 as part of the consideration for accepting the surrender of the lease of the Premises. On or about 17 October 1994 Sunhaven had paid that sum of $80,000 to GESB as a result of the following:
(a)On 28 September 1994 a cheque was drawn by Tallimba for $80,000 made payable to Mr and Mrs Hoffman’s solicitors, Messrs Ginbey & Co., which was deposited into the trust account of that firm on that day [the evidence does not disclose whether the moneys were held on trust for Tallimba or Mr and Mrs Hoffman; the case was conducted by the parties on the basis that the moneys still belonged beneficially to Tallimba at that stage]; and
(b)on express instructions from Mr and Mrs Hoffman, the funds of $80,000 credited to the trust account of Messrs Ginbey & Co., were disbursed by a trust cheque drawn by Messrs Ginbey & Co., made payable to GESB and delivered to GESB’s solicitors, Messrs Blake Dawson Waldron, on or about 17 October 1994.
The balance of the amount claimed by the applicants in this application comprises the sum of numerous payments of Sunhaven’s rent of the Premises between 2 August 1993 (some two months after Sunhaven had ceased carrying on business) and 26 April 1994, and two other payments of Sunhaven’s debts. The agreed total of those amounts is $18,355.00.
STATUTORY FRAMEWORK
It is common ground that the applicants as liquidators are “eligible applicants”. Section 598 of the Corporations Law relevantly provides:
(2) Subject to subsection (3), where, on application by an eligible applicant, the Court is satisfied that:
(a)a person is guilty of fraud, negligence, default, breach of trust or breach of duty in relation to a corporation; and
(b)the corporation has suffered, or is likely to suffer, loss or damage as a result of the fraud, negligence, default, breach of trust or breach of duty;
the Court may make such order or orders as it thinks appropriate against or in relation to the person (including either or both of the orders specified in subsection (4)) and may so make an order against or in relation to a person even though the person may have committed an offence in respect of the matter to which the order relates.
(3) The Court shall not make an order against a person under subsection (2) unless the Court has given the person the opportunity:(a)to give evidence;
(b)to call witnesses to give evidence;
(c)to bring other evidence in relation to the matters to which the application relates; and
(d)to employ, at the person’s own expense, a solicitor, or a solicitor and counsel, to put to the person, or to any other witness, such questions as the Court considers just for the purpose of enabling the person to explain or qualify any answers or evidence given by the person.
(4) The orders that may be made under subsection (2) against a person include:
(a)an order directing the person to pay money or transfer property to the corporation; and
(b)an order directing the person to pay to the corporation the amount of the loss or damage.
(5) Nothing in this section prevents any person from instituting any other proceedings in relation to matters in respect of which an application may be made under this section.
So far as s 598(3) is concerned, the respondents were represented by solicitors and Mr P S Bates of counsel appeared on their behalf. Mr and Mrs Hoffman gave evidence and I am satisfied that the subsection has been complied with.
WHETHER THE RESPONDENTS’ CONDUCT FELL WITHIN S 598 OF THE CORPORATIONS LAW
The applicants rely on all the statutory grounds of liability, except fraud. They contend that the respondents, in making the above payments, have been negligent, in default, in breach of trust or in breach of their duties as directors of Tallimba.
I shall first consider whether the respondents have been shown to be negligent in making the above payments. There was little, if any, difference between the parties concerning the legal principles upon which the issue of negligence should be decided. It was common ground that the principles explained in Daniels v Anderson (1995) 13 ACLC 614 (“the AWA case”) applied to the present matter, although that case arose under s 232(4) of the Corporations Law. In fact Mr Bates, in final address, referred to that subsection as a source of guidance on the question of negligence. Section 232(4) provides that:
“In the exercise of his or her powers and the discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation’s circumstances.”
In the AWA case (at pp 665-666) Clarke and Sheller JJA of the Court of Appeal of New South Wales explained that:
“A person who accepts the office of director of a particular company undertakes the responsibility of ensuring that he or she understands the nature of the duty a director is called upon to perform. That duty will vary according to the size and business of the particular company and the experience or skills that the director held himself or herself out to have in support of appointment to the office. None of this is novel. It turns upon the natural expectations and reliance placed by shareholders on the experience and skill of a particular director. The duty is a common law duty to take reasonable care owed severally by persons who are fiduciary agents bound not to exercise the powers conferred upon them for private purpose or for any purpose foreign to the power and placed, in the words of Ford and Austin, Principles of Corporations Law, 6th ed at 429, at the apex of the structure of direction and management. The duty includes that of acting collectively to manage the company. Breach of the duty will found an action for negligence at the suit of the company.”
Clarke and Sheller JJA had (earlier on p 665) referred to the measurement of conduct “... by reference to what the reasonable man of ordinary prudence would do in the circumstances.” In relation to skill their Honours explained:
“Skill is that special competence which is not part of the ordinary equipment of the reasonable man but the result of aptitude developed by special training and experience which requires those who undertake work calling for special skill not only to exercise reasonable care but measure up to the standard of proficiency that can be expected from persons undertaking such work ... A director may be appointed because of a particular or special skill and may take up the appointment on the basis that he or she will bring that skill to the performance of the office.”
I think it is in that context that the reference to “the experience or skills” in the first passage set out above should be understood. Mr Bates contended that when assessing whether Mr Hoffman had exercised due care and diligence, I should take into account the fact that Mr Hoffman left school at the age of 14 years, has no tertiary qualifications and has spent his life “... essentially as a fruit and vegetable market gardener”. I took the words which I have put in quotation marks as intended to be a reference to a fruit and vegetable marketer or merchant, for that was Mr Hoffman’s evidence. It is not necessary for me to decide the point in this case (in view of the findings which I make below) but I have some reservations about whether subjective considerations of that nature and extent should affect the minimum content of the duty or standard of care required of the respondents in this matter. As Ipp J pointed out in Vrisakis v Australian Securities Commission (1993) 9 WAR 395 (at p 451) the ambit of the duty and the standard of care depend on the particular circumstances. However, the test is essentially objective i.e. did the officer exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation’s circumstances? I doubt whether the factors which Mr Bates advanced would justify a lower standard of care. They might exclude any suggestion of special skills other than those acquired by extensive experience in the fruit and vegetable markets. However, there was no such suggestion in the present matter.
The next issue is a factual one i.e. did the respondents exercise reasonable care in the performance of their office? That issue has to be decided by considering all the relevant factual circumstances. The conduct called into question in this case is that the respondents, as directors of Tallimba, decided that Tallimba would make (and caused it to make) numerous payments of Sunhaven’s rent and the two other debts referred to above between 2 August 1993 and 10 June 1994 (“the Series of Payments”). Furthermore, on or about 17 October 1994, they decided to cause Tallimba to pay the sum of $80,000 to GESB (“the $80,000 Payment”). I shall deal first with a preliminary argument concerning the $80,000 Payment. The respondents contended that Sunhaven had entered into an agreement with Tallimba to borrow that sum. No written agreement was adduced in evidence. Mr Hoffman did not give any evidence of any oral agreement. It may not matter whether there was any loan agreement made before the sum of $80,000 was paid by Tallimba. I say that because the relationship of creditor and debtor arose in any event. Tallimba made the payment for and on behalf of Sunhaven who had knowledge of that payment and was a party to the Deed of Surrender which was executed after the payment had been made. That deed referred to the fact that the payment had been made. However, in case it does matter, I find that there was no such previous loan agreement and that the decision was simply to pay the moneys on behalf of Sunhaven (by so finding I should not be taken to have overlooked the consequent benefit to the guarantors) to secure the acceptance by GESB of Sunhaven’s surrender of its lease.
In my view, the respondents’ duty of care required them to take the following steps:
Assess what benefit, if any, Tallimba would derive from making these payments on behalf of Sunhaven.
If there were any benefit so to be derived by Tallimba, to assess whether there was any reasonably foreseeable prospect of detriment to Tallimba?
If there was a reasonable prospect of detriment to Tallimba the Court has to decide whether that prospect of detriment outweighed the likely benefit to the company to the extent that making the payments amounted, in all the circumstances, to negligence? I adopt, respectfully, the approach along these lines suggested by Ipp J (with whom Malcolm CJ agreed) in Vrisakis at pp 449-450. At the core of this question was the prospect of recovering the money.
WAS THERE ANY BENEFIT TO TALLIMBA IN MAKING THE PAYMENT OF
$80,000?
In paragraphs 10-14 and 18 of their written outline of submissions the respondents referred to “cash advances” as being made in Tallimba’s interest. It is possible that those submissions relate to the Series of Payments (made between 2 August 1993 and 10 June 1994), but as a matter of caution I shall regard them as being made distributively to all payments. Those paragraphs read as follows:
“10. At the relevant time the Respondents had embarked upon a development program for Sunhaven to enter significant shopping centres in the metropolitan area.
11. Sunhaven made an agreement with Tallimba to purchase all of its supplies from Tallimba.
12. Tallimba was at all times vulnerable to losing large wholesaling contracts through no fault of its own.
13. Tallimba’s cash advances aided making Sunhaven’s position structurally sound.
14. By making Sunhaven’s position structurally sound, Tallimba gained advantage by securing its equitable charge over its wholesale contracts to Sunhaven.
. . .
18. It was in Tallimba’s interest to make the cash advances to Sunhaven for the reasons aforesaid.”
Mr Hoffman gave evidence (see page 83 of the transcript) that Sunhaven “... was set up to create a retail chain of shops, a retail arm of Tallimba ...”. He explained that Sunhaven was established:
“... to set up this chain of shops so that we could have the core of the business supplying those shops, that was in 1991.”
Mr Hoffman’s evidence about Sunhaven’s future business intentions in October 1994 (when Tallimba made the $80,000 Payment) was somewhat difficult to follow. For example he said (at p 83):
“Well, at that point in time Sunhaven, prior to this particular time, was - we were considering using that company, if it wasn’t for the fact that it was tied to Bull Creek it probably would have been used in other arms of the business that we were trying to put together after the shop failed.”
At the next page of the transcript Mr Hoffman said that “around 1993” he spoke to his accountant about the possibility of using Sunhaven as a vehicle to conduct “the packaging department” being part of the business conducted by Tallimba.
There was no evidence that Sunhaven ever set up shop in any shopping centres other than the Premises or had even negotiated to that end. I find that at the relevant times (between August 1993 and June 1994 in respect of the Series of Payments and October 1994 in respect of the $80,000 Payment) there was no development programme of the type described in paragraph 10 above. So far as paragraph 11 is concerned, Sunhaven may originally have had an agreement with Tallimba to purchase all of its supplies from it but from about 5 June 1993 Sunhaven had no business at all. My assessment of the evidence is that there was very little prospect of Sunhaven purchasing supplies from Tallimba at that time or in the foreseeable future. In those circumstances the assertion in paragraph 12 above is simply irrelevant. Then (in paragraph 13 above) it is said that Tallimba’s cash advances “aided making Sunhaven’s position structurally sound”. The Series of Payments (starting some two months after Sunhaven ceased business) was largely in respect of Sunhaven’s rent for the Premises. Tallimba also paid two other, relatively minor, debts of Sunhaven totalling $855.00. The $80,000 Payment went straight to GESB as consideration for accepting a surrender of Sunhaven’s lease and the release of the guarantors. I do not consider that any of those payments helped to make Sunhaven’s position “structurally sound”. That removes the basis for the submission made in paragraph 14 above. In any event, there was no evidence of any equitable charge over any of Sunhaven’s assets. In paragraph 6 of their points of defence the respondents allege that “Sunhaven was to repay its debts to Tallimba from its retail trade”. The truth of the matter was that after 5 June 1993 Sunhaven had no trade, whether retail or otherwise.
In my view, there were no reasonable prospects of any benefit accruing to Tallimba either by making the Series of Payments or by making the $80,000 Payment on behalf of Sunhaven on 17 October 1994. In relation to the latter payment, Sunhaven had ceased carrying on any business some sixteen months previously. According to Sunhaven’s financial statements for the year ended 30 June 1994 and as at that date Sunhaven had no assets. It had trade creditors of about $119,000 and owed its shareholders (in respect of loans) $50,000 i.e. its total liabilities exceeded its assets by about $169,000. There was no evidence that Sunhaven proposed to resume the conduct of any business. On 17 May 1995 Mr Hoffman as a director of Sunhaven signed an application for the de-registration of Sunhaven as it was a defunct company. There was no evidence that any business plans for Sunhaven existed as at 17 October 1994 but were abandoned by 17 May 1995. In fact, Mr Hoffman’s evidence (in re-examination), when asked why he waited until that date to apply for de-registration of Sunhaven, was to the effect that his wife had for some time “wanted to finish that off”. He added that at that stage he did not think that Tallimba “was going to go beyond a week or two and it [the de-registration of Sunhaven] was one of those loose ends that now could be tidied up”. I find that as at 17 October 1994 there was no reasonable prospect of benefit being derived by Tallimba in the form suggested i.e. purchases of fruit and vegetables, or in fact in any of the other forms referred to above. The same applies to the Series of Payments at the respective times when they were paid.
There was no evidence that Tallimba was likely to receive any interest from Sunhaven on the payments so made and in particular in respect of the sum of $80,000. There was no evidence that Sunhaven had agreed to pay any such interest. In any event, given Sunhaven’s financial position, the prospects of it being able to pay interest on advances made by Tallimba to it were, in my opinion, remote.
In his closing submissions, Mr Bates advanced a contention (which was not contained in the respondent’s points of defence or its written outline of submissions) that Mr Hoffman acted in the interests of Tallimba by causing it to pay the $80,000 on behalf of Sunhaven. This was because if the payment had not been made, Mr Hoffman would have been made bankrupt “pursuant to the guarantee”. Mr Hoffman, so it was put, had played such a direct role in the running of Tallimba that he was “the pivotal component” in its management. Mr Bates submitted that with Mr Hoffman, as a bankrupt, being unable to act as a director, Tallimba would have failed “because it would have essentially lost its alter ego”.
I think that there are too many assumptions to warrant acceptance of this submission. These include:
. that no alternative arrangements (i.e. not involving Tallimba) could have been made to resolve the claims of GESB;
. that Mr and Mrs Hoffman could not have found the funds necessary to satisfy the requirements of those arrangements;
. that GESB would have taken the matter as far as obtaining an order for the sequestration of Mr Hoffman’s estate; and
. that if GESB had taken the matter that far, some other arrangement could not have been made for the management of Tallimba.
Furthermore, assuming that the continued availability of Mr Hoffman’s services was at risk and further assuming that the loss of his services would constitute significant detriment to Tallimba, it was not necessary, in my view, in order to protect those interests, to carry out the transaction in relation to the sum of $80,000 in the manner in which it was carried out. For example, the moneys could have been loaned by Tallimba to Mr and Mrs Hoffman. They could then have made payment of the $80,000 due to GESB. In those circumstances, Tallimba would have had immediate recourse to Mr and Mrs Hoffman for repayment, rather than having to institute these proceedings. Instead, the moneys were paid out on behalf of a hopelessly insolvent company with no real prospects of repayment. Even accepting the assumptions referred to above (which I do not), to carry out the transaction which is said to have saved Mr Hoffman from bankruptcy in the particular manner chosen was certainly not, in my opinion, in the interests of Tallimba. In commercial effect, what happened was the interposition of an insolvent debtor for the purposes of carrying out a transaction where the immediate beneficiaries were the guarantors.
Two further derivative benefits were advanced on behalf of the respondents. The first was based on the following passage in Walker v Wimborne (1976) 137 CLR 1 at p 6:
“the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder in company B if that company is enabled to trade profitably or realize its assets to advantage.”
I reject the submission that there was any such derivative benefit to Tallimba, for two reasons. First, Tallimba held no shares in Sunhaven. Secondly, the payment did nothing to enable Sunhaven to trade profitably or realise its assets to advantage.
The second derivative benefit claimed on behalf of the respondents was that the $80,000 Payment “helped to preserve the corporate identity of the retailing arm of the group which, according to Mr Hoffman’s evidence, he had some plans to pursue in the future” (p 157 of the transcript). The respondents relied upon the decision of the Court of Appeal of New South Wales in Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952. That case involved directors causing company funds to be used to repay a bank loan owed by another company in the same group, to ensure the bank’s continuing support for the group as a whole. The circumstances are clearly distinguishable from the present matter. For reasons which I give below concerning Mr Hoffman’s credibility, I reject Mr Hoffman’s evidence that he had plans for Sunhaven to become a profitable trading entity. He conceded that there was no documentation of those plans. Mr Bates acknowledged that the plans existed only in Mr Hoffman’s head. Even if Mr Hoffman had such plans, the financial reality of the situation was that Sunhaven was hopelessly insolvent and a most unlikely candidate to become a successful trading entity in the foreseeable future. The survival of what the respondents termed their “group” did not depend upon and nor was it made more likely by paying $80,000 to Sunhaven’s lessor on its behalf. The same applied to the balance of the payments which form the subject matter of these proceedings.
The respondents faced the prospect of letting Sunhaven continue in its default under the Lease Agreement. In that event, Sunhaven being insolvent, it was obvious that the respondents and the other two guarantors would be called upon to make the payments of rent and other outgoings accruing due under that document. The lease would not expire for nearly 61/2 years. The Lease Agreement was in evidence. It shows that the then current rental alone (i.e. excluding the lessee’s liability for variable outgoings) was $62,051 per annum. The rent was subject to escalation by reviews on 22 March 1996 and 22 March 1998. The guarantors faced a potential liability of hundreds of thousands of dollars. After negotiation, that potential liability was compromised for a relatively modest sum when the lessor agreed to accept $80,000 as the monetary consideration for the surrender of the lease. The respondents were faced with the task of finding that amount. They could have borrowed it themselves either from Tallimba or any other source. Mr Hoffman’s explanation for not taking this course was (see p 113 of the transcript):
“Would that not have been a viable option? --- To me it didn’t make any difference.
Well, the difference was it would be your money as distinct from Tallimba’s money? --- Tallimba’s money was my money.”
If the respondents had borrowed that sum from Tallimba, they would, of course, be legally obliged to repay the money. Instead, they chose to cause Tallimba to pay the moneys “on behalf of Sunhaven” to the lessor. I put those words in quotation marks because, as I see it, although the moneys were technically paid on behalf of Sunhaven, they were also technically and in reality paid very much on behalf of the guarantors. Sunhaven was so insolvent and without any real prospect of financial improvement that in my opinion it made no difference to it whether the lease remained in force or was surrendered. Not surprisingly, the Deed of Surrender provided that the guarantors would be released from all further liability under the Lease Agreement once the sum of $80,000 had been paid. In my view, the payment of this sum was not intended to benefit Tallimba but was intended to achieve that effect i.e. to release Sunhaven, but more particularly to release the guarantors from that very substantial financial liability. Such an intention can be found (as I find) as an inference from the objective circumstances, including in particular the effect achieved by the payment. The conclusion that this was subjectively the respondents’ purpose and intention emerged in the following portion of Mr Hoffman’s evidence (at p 102 of the transcript):
“So the payment of the $80,000 did not give some kick-start to life to Sunhaven to enable it to re-enter the retail trade? --- No, it got me off the hook.
Exactly? --- Yes
And that was the purpose of the payment, to get you off the hook? --- Absolutely, yes.”
Mr Bates explored that evidence in re-examination in the following exchange:
“Well, just explain what you meant by your answer to my learned friend? --- I had a weeping sore that - I can’t - by “the hook” I mean I had a massive problem that was going to go away as soon as that was paid.
Perhaps I could be more precise then. What did you mean by reference to the word “me”? --- Me, I’m Tallimba, you know, whatever. I’m the one that was suffering and had been suffering for three years with that shop.”
On several occasions while giving evidence, Mr Hoffman said words to the effect that in his view Sunhaven, Tallimba and he were all one and the same thing. It would appear by his answer in re-examination that Mr Hoffman was seeking to explain his earlier answer as amounting to a statement that the payment enabled Tallimba or perhaps Sunhaven to “get off the hook”. I have explained above my assessment that in the circumstances the payment made no financial difference to Sunhaven. Realistically, Sunhaven was financially dead. Tallimba was not on any hook. It was the guarantors who were on the hook and I take Mr Hoffman’s evidence that the payment of $80,000 “got me off the hook” at its face value. It did precisely that and in my view was intended to do so. Mrs Hoffman’s evidence was that she knew that the $80,000 Payment was going to be made by Tallimba “to Sunhaven”. In relation to the Series of Payments, I note that her signature appears on the 22 cheques (totalling $14,500) for payment of Sunhaven’s rent. When, in cross-examination, Mrs Hoffman (twice) said that she did not have anything to do with those payments or was not involved with them, the most charitable conclusion that can be drawn is that she had forgotten that she signed the cheques. I make that conclusion. I should explain that although the cheques were in evidence, there was no express evidence to identify the signature on each of those cheques as being that of Mrs Hoffman. The matter was not the subject of any discussion at the hearing. However, Mrs Hoffman’s signature was identified on the Lease Agreement. While preparing these reasons for judgment, I compared that signature with the signature on each of the cheques, namely, “B J Hoffman”. The similarity between the identified signature and those signatures, coupled with Mrs Hoffman’s initials was the basis upon which I made the provisional inference that she signed those cheques. Before finally making that inference, I gave the respondents an opportunity to make submissions on the question whether those signatures were made by Mrs Hoffman and whether I should make that inference. The respondents (through their solicitors) replied by conceding that the signatures were those of Mrs Hoffman. Their solicitors submitted that to the extent that the fact that Mrs Hoffman signed those cheques is relevant to the issues before the Court and to the extent that there might be deficiencies in that evidence, “such deficiencies should operate in favour of the Respondents”. I would have found that the signatures were those of Mrs Hoffman simply for the reasons stated above. I did not want to do so if the truth of the matter was that, though the signatures so closely resembled the identified signature, they were in fact those of someone else. That matter was capable of being confirmed or put in issue very readily and I thought that it was in the interests of justice to take the course of raising the matter with the respondents. Accordingly, for the above reasons, I reject the submission put forward by the respondents’ solicitors. There was no suggestion either that Mrs Hoffman was unaware of the remaining $3855 paid by Tallimba on Sunhaven’s behalf or that she might be excused liability on such a basis. Furthermore, Mrs Hoffman was at all material times the Company Secretary of Sunhaven. Her evidence was that she knew Sunhaven’s affairs and that the effect of the $80,000 Payment would be that she and her husband and the other guarantors would be released from their personal guarantees. In cross-examination, Mrs Hoffman agreed, quite emphatically, that at the time when this sum was paid Sunhaven had no real chance of paying it back to Tallimba.
WHETHER THERE WAS LIKELY DETRIMENT TO TALLIMBA IF IT PAID THE SERIES OF PAYMENTS AND THE SUM OF $80,000 ON BEHALF OF SUNHAVEN?
Tallimba’s financial statements show that as at 30 June 1994 it had a bank overdraft of about $79,000 and only about $2,000 cash at bank. The cheque which Tallimba drew on its bankers for $80,000 on 27 September 1994 was in evidence. I infer either that Tallimba incurred interest at bank rates on that payment and the Series of Payments or, at the very least it forewent the opportunity to earn interest on the progressive sum of those payments at the rates prevailing from time to time. That was one detriment.
The next detriment concerns the prospects of repayment by Sunhaven of these amounts. I assess the respondents’ decision-making process in that regard both objectively and in the light of their knowledge of the financial circumstances of Sunhaven. I should note that, on the evidence before me, the debt was completely unsecured.
First of all, there is the uncontradicted evidence that during the year ended 30 June 1993 Tallimba had to write off as a bad debt an amount of approximately $150,000 owing by Sunhaven to it. The evidence suggests that the debt related to fruit and vegetables supplied by Tallimba to Sunhaven for stock-in-trade. The relevant context is thus one in which decisions were made by the respondents to cause Tallimba to advance the Series of Payments and a further sum of $80,000 to Sunhaven, in the case of the latter, within about sixteen months of having written off a loan of nearly twice that amount to the same company as being irrecoverable. I appreciate that Tallimba’s financial statements for the year ended 30 June 1993 would appear (from such evidence as was put before the Court on this point) not to have been prepared in final form until December 1994, but draft statements had been prepared earlier. The evidence was that Tallimba’s management accounts were prepared on a monthly basis. Furthermore, as Sunhaven had ceased carrying on business in early June 1993 and was hopelessly insolvent, the actual writing off of the debt in Tallimba’s accounts was simply a formal recording of what must have been obvious to the respondents as at 30 June 1993. Mr Hoffman’s evidence at p 115 of the transcript strongly suggests that he was well aware of this bad debt when he and his wife caused Tallimba to pay the sum of $80,000 to GESB on Sunhaven’s behalf. Secondly, I refer to the fact that Sunhaven had no assets and in fact existing liabilities which were double the amount of the proposed advance. The respondents suggested that, contrary to the figures disclosed in Sunhaven’s balance sheet, it in fact had shop fittings and the like to an approximate value of $40,000. I accept the uncontradicted evidence of Mr Gamble that Mr Hoffman had told him (and I find that Mr Hoffman in so doing was telling the truth to Mr Gamble) that Tallimba purchased those fittings and the like from Sunhaven and in early 1995 sold the bulk of them for approximately $1,000. The sale to Tallimba must have been before 30 June 1994, because Sunhaven’s balance sheet as at that date shows (by comparison with the figures for 30 June 1993) that Sunhaven ceased to own those assets at some time between the two dates. It would seem that the purchase price of $38,792 was paid by reducing the amount owed to Tallimba by Sunhaven by that sum - see the change in the item “Trade Creditors”. In re-examination Mr Hoffman sought to explain that by “bulk” he meant the larger items such as the coolrooms. He said that the items which were of real value in the secondhand market had “already been utilized by Tallimba or sold for Tallimba some time earlier”. I accept that the proceeds of sale of heavy coolrooms in situ may be low due to removal costs, but my impression of Mr Hoffman’s explanation was that it was contrived to meet the point that any assets owned by Sunhaven when it ceased business on 5 June 1993 were not of any significant value. In any event, even if the fixtures and fittings were worth in the order of $40,000 in June 1993 that was clearly not a sufficient reason or basis for advancing $80,000 to Sunhaven in October 1994. In my view even if Sunhaven had some assets until an indeterminate point in the financial year ended 30 June 1994, they were of very little significance on the question whether Sunhaven would be in a position to repay the Series of Payments and in particular the $80,000 Payment made in October 1994. In my opinion it must have been obvious to the respondents at the times when the respective payments were made that there was virtually no prospect of any of those payments being repaid by Sunhaven to Tallimba.
In the respondents’ points of defence and in Mr Bates’ final address, reliance was placed upon two meetings which Mr and Mrs Hoffman had with the first-named applicant Mr Gamble in his capacity as a partner of Messrs Bentleys, chartered accountants, and its successor firm, Messrs BDO Nelson Parkhill. The evidence was that Messrs Bentleys were insolvency experts. The first such meeting was on 10 June 1994. Mr Hoffman’s evidence was that on that occasion he sought Messrs Bentleys’ advice about whether Tallimba was trading insolvently. There was an initial interview followed by two visits to Tallimba’s premises by an employee accountant of Messrs Bentleys, to obtain further financial information. The employee was Mr Adrian James Saggers, a nephew of Mr and Mrs Hoffman’s usual accountant, Mr Graham Saggers. The respondents contended and Mr Hoffman’s evidence (in his affidavit sworn on 25 November 1996, but not in his oral evidence) was that at the initial meeting Mr Gamble told them that if either of Sunhaven or Tallimba was insolvent, he would notify them. It is common ground that Mr Gamble did not advise the respondents whether either company was solvent or insolvent. For the reasons which I give below about Mr Hoffman’s credibility, I do not believe his evidence to the effect that Mr Gamble undertook to let him know if either of the two companies was insolvent. I believe Mr Gamble’s evidence that he did not make a statement to that effect to Mr and Mrs Hoffman. I find further on the evidence of Mr Gamble and Mr Adrian Saggers that no further investigative work was carried out for one or other (or both) of two possible reasons. It is not necessary to find the facts any more precisely. The first possible reason was (as Mr Gamble thought was the case) that Mr Graham Saggers informed either Mr Adrian Saggers or Mr Gamble or both that Mr Hoffman was only in a position to pay a few hundred dollars for the accounting advice, whereas in fact an extensive investigation was required to ascertain Tallimba’s financial position. The second possible reason is that Mr Adrian Saggers left his employment with Messrs Bentleys for a few months and the matter of further investigation was allowed to lapse. I think it was unfortunate that Mr Gamble did not communicate to Mr Hoffman the fact that Messrs Bentleys were unable to form a view one way or the other about the solvency of Tallimba. However, the absence of any confirmation one way or the other from Messrs Bentleys does not in my view provide the respondents with any basis for avoiding liability for negligence or other breach of their duties. The second meeting was on 11 May 1995 at which the evidence suggests that Mr and Mrs Hoffman again raised the question of Tallimba’s cash flow and liquidity. Apparently Tallimba had some liquidity problems. Mr Gamble suggested that they approach a factoring organisation to factor trade debts owed to Tallimba. I do not see that meeting as adding anything to the question whether the respondents are liable personally for causing Tallimba to make the various payments for which the applicants sue in this matter. Mr Bates submitted that the evidence about the meetings was indicative of Mr Hoffman’s honesty in that he went for advice on the occasions on which he had any indication that the company was likely to fail. In my opinion, that evidence is at best neutral on the question of Mr Hoffman’s honesty in relation to the conduct which the applicants seek to impugn in this matter, namely causing Tallimba to make the various payments.
CONCLUSION ON NEGLIGENCE
In my view, the respondents’ conduct in causing Tallimba to make the above payments fell short of their duty to take reasonable care in the performance of their office as directors. In summary, I find that there was no benefit which Tallimba would derive from making the payments. There was the relatively minor detriment of interest incurred or interest lost on the moneys paid out. But the most important factor was the almost inevitable loss of these amounts by virtue of Sunhaven’s inability to repay. The respondents were well aware of that inability. All of this is to be seen in the context of a relatively recent writing-off of the earlier debt of Sunhaven in an amount of $150,000. In my opinion the respondents did not exercise reasonable care when they caused these payments to be made.
DEFAULT, BREACH OF TRUST OR BREACH OF DUTY
I was not taken to any authority which explains whether the five legal bases of liability referred to in s 598(2)(a) of the Corporations Law apply separately or whether they overlap. However, I think that they must overlap. Fraud is not alleged in this matter, but fraudulent conduct might well fall within each of the other four categories of negligence, default, breach of trust or breach of duty. Similarly, conduct (whether by commission or omission) which amounts to negligence could also, depending upon the circumstances, fall within the descriptions of default, breach of trust or breach of duty. Having found negligence on the respondents’ part in the present matter, it is not strictly necessary to visit the other three possible bases of liability except perhaps in relation to the respondents’ plea that I consider excusing their conduct by the application of s 1318 of the Corporations Law (a subject to which I turn below). However, I propose briefly to express some views on those matters. Default, I think, is used in the sense of failure to act or perform adequately (see the New Shorter Oxford English Dictionary at p 615). I am inclined to think that the default contemplated by the subparagraph is an omission or failure to do something, or to fall short in the performance of something required in law. If default has a meaning which extends beyond omission, then in my view there was certainly default on the respondents’ part in failing to comply with their obligations to exercise reasonable care. I do not propose to consider whether the respondents could be held to be in breach of trust. I think they were in breach of duty. They were in breach of their common law duty to exercise reasonable care. If there is a difference between that duty and the statutory duty imposed by s 232(4) then I consider, for the same reasons as set out above, that they breached that statutory duty too. Furthermore, in my view they breached s 232(6) of the Corporations Law by making improper use of their positions as directors of Tallimba to gain directly or indirectly the advantage of being discharged from potential liability as guarantors. In R v Byrnes (1995) 183 CLR 501 the High Court of Australia held that the test of impropriety under s 229(4) of the Companies (South Australia) Code was objective and did not depend on consciousness of impropriety. Impropriety consists in a breach of the standards of conduct expected of a person in the position of a director by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case. Section 229(4) of the Companies (South Australia) Code was relevantly in identical terms to s 232(6) of the Corporations Law.
CAUSATION
In their written submissions, the respondents raised the question of causation. They submitted that a causal connection must be established between the alleged acts of wrongdoing and the loss or damage. I find that there is such a causal connection. If the respondents had not caused Tallimba to make these payments on behalf of Sunhaven (which I have found to have been a hopelessly insolvent company at the time) then Tallimba would not have suffered the loss. The uncontested evidence was that the moneys paid by Tallimba on Sunhaven’s behalf (being the moneys for which the respondents are being sued in these proceedings) have never been repaid to Tallimba.
WHETHER TALLIMBA WAS SOLVENT AT THE TIME OF THE VARIOUS
PAYMENTS AND IN PARTICULAR AT THE TIME OF THE PAYMENT OF
THE SUM OF $80,000
The question whether Tallimba was solvent at the time when it made the payments referred to above, and particularly the payment of $80,000, was the subject of some evidence and submissions at the hearing. Mr Hoffman’s evidence was to the effect that Tallimba could well afford to make payment of $80,000 in October 1994. One reason he gave for that opinion was that Tallimba’s trade had improved over the previous month. In other evidence Mr Hoffman said that he went to see Mr Gamble and Mr Adrian Saggers on 10 June 1994 because he was concerned that Tallimba may have been trading insolvently. The evidence shows that the company (Tallimba) had run at a loss for three of the four financial years before the $80,000 Payment was made. The profit (made in the year ended 30 June 1994) was $73,820. That, as the applicants pointed out, was some $24,000 less than the total of the advances made by Tallimba on Sunhaven’s behalf. In my view the evidence shows that Tallimba’s financial position was such that these payments (and in particular the payment of $80,000) were very significant payments in terms of its liquidity and profitability. In terms of Tallimba’s ability to pay its debts on time, Mr Hoffman (at p 84 of the transcript) said that this “... was always tight”.
It is not necessary for me to make a finding whether at the relevant time (i.e. when the respective payments were made) Tallimba was insolvent. If the indications had been other than as I have just described (i.e. that in the scheme of things, these amounts were insignificant), then that might have had a bearing on the question whether the respondents were negligent. However, if anything, the evidence only serves to emphasise the irresponsibility of their conduct, as directors of Tallimba, in putting such a large sum of money at such great risk and for no benefit.
WHETHER THE COURT SHOULD RELIEVE THE RESPONDENTS FROM
LIABILITY
The respondents submitted that, in the event that I found against them in relation to the application of s 598, as I have, then I should apply s 1318(1) of the Corporations Law. That subsection relevantly provides as follows:
“If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person’s appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.”
I accept the respondents’ submission that they are persons to whom s 1318(1) applies because, as directors of Tallimba, they are officers of that corporation, see s 1318(4)(a) when read with s 1318(5)(a).
As part of their written submissions, the respondents advanced the following contentions:
“At the time of the cash advances, Tallimba could make the loan to Sunhaven in the honest belief that the interests of the creditors would not be harmed, but rather that the move was a sound business venture that would benefit Tallimba and its creditors. The demise of Tallimba was not attributed to the cash advances but that Tallimba was forced to call in voluntary Administrators as a result of charges for billing by the Market Trust, change in market circumstances, and by Tallimba’s competitors (creditors) making business difficult to conduct.”
In deciding whether the respondents (or either of them) should be relieved wholly or partly from liability by the application of s 1318(1) I think that it is appropriate first to make an assessment of Mr Hoffman’s credibility for the purpose, among other things, of deciding whether the respondents acted honestly in relation to the matters which have given rise to what would otherwise be their liability. I decided that Mr Hoffman was not a reliable witness. I decided that I would not accept his evidence unless it were corroborated by either documentary evidence or other credible oral evidence. I did not come to this conclusion on the basis of Mr Hoffman’s performance in the witness box. In other words, his demeanour played no part in my assessment. Rather, I relied upon matters which included the following:
. Mr Hoffman’s demonstrated preparedness not to be truthful, or at the very least to provide deliberately misleading information, on oath. I refer to the evidence which Mr Hoffman put before the Court in his affidavit dated 25 November 1996 which I shall refer to as “his affidavit”. His affidavit was filed, pursuant to the District Registrar’s directions, at a time when it was envisaged it would be the principal evidence in reply to the affidavit evidence filed in support of the application. I have had regard to the following matters:
(a)In paragraph 5(d), (e), (f) and (g) of his affidavit Mr Hoffman swore to the following:
“(d) Sunhaven had entered into a lease agreement with the Government Employees Superannuation Board (“the GESB”) for a period of 10 years commencing on the 22nd March 1991. As a result of significant building changes made to the Bullcreek Shopping Centre by the lessor, shop 4 became isolated within the shopping centre as the pedestrian traffic had been diverted away from shop 4 and other shops on an access (sic) by the significant structural alterations to the shopping centre. This led to a significant downturn in the business of Sunhaven and resulted in Sunhaven entering into negotiations with the lessor for its release from the lease agreement.
(e) The release was successfully negotiated between the directors of Sunhaven and the lessor and a deed of surrender of lease was entered into on 2 November 1994. Pursuant to that agreement, Sunhaven agreed to pay the sum of $80,000 to the lessor to be released from its obligations under the lease.
(f) The release of Sunhaven was of commercial benefit to Sunhaven and also to the lessors. The lessor recognised that its decision to substantially remodel the shopping centre had led to a vast decrease in the passing trade to shop 4 and agreed to release Sunhaven from the balance of the term of the lease which was approximately 8 years at the then current rental of approximately $3,500 per month.
(g) The sum paid to the lessor by Sunhaven represented a proportion only of unpaid rental and outgoings for the premises as Sunhaven had steadfastly refused to pay rent and outgoings to the lessor following the alterations to the premises which were not notified to the lessee, Sunhaven, or for which its consent was given. At the date of the signing of the deed of surrender of the lease, the lessor claimed that Sunhaven was indebted to it in the sum of approximately $120,000, which claim was vigorously denied by Sunhaven.” (My emphasis)
In my view, anyone reading those paragraphs would have formed the impression that after Sunhaven had entered into the Lease Agreement and taken possession of the Premises, the lessor had made significant building changes to the Bull Creek Shopping Centre which had resulted in a significant downturn in Sunhaven’s business. It is difficult to see how any other conclusion could be drawn. The truth of the matter was that these alterations were made three years before Sunhaven had entered into the Lease Agreement and taken possession of the Premises. There were no alterations made thereafter. Mr Hoffman admitted that was the case. I found his attempt to explain the discrepancy between his affidavit and the facts to be very unconvincing. In cross-examination Mr Hoffman agreed that his solicitor had told him that his affidavit was an important document of the Court and that it must be accurate.
. Paragraph 5(i) of Mr Hoffman’s affidavit read:
“At the date of the signing of the deed of surrender of lease, numerous items of plant and equipment remained in the premises. These items included shelving, display counters, significant cool rooms, packing cartons etc. The deponent estimates their value at that date at approximately $40,000 in situ.”
As I have pointed out above, the evidence was that Sunhaven had no assets at the date of signing of the Deed of Surrender of Lease. The items referred to above had been disposed of to Tallimba. In cross-examination Mr Hoffman denied that by the above paragraph he was intending to convey that Sunhaven had $40,000 worth of assets. I can think of no other reason why that fact should be put forward in the context of justifying a loan from Tallimba to Sunhaven of $80,000. The same applies to paragraph 6 of Mr Hoffman’s affidavit which read:
“At the time Tallimba made the $80,000 payment to the GESB, Sunhaven had assets in the form of goodwill, plant and equipment, fixtures and fittings and shop fronts.”
. Towards the end of paragraph 5(j) and in paragraph 5(k) of his affidavit there appeared the following passages:
“... The plan for the retail division was to establish a considerable number of retail stores through the Perth metropolitan area to be conducted under the Sunhaven trading name and Sunhaven would purchase all of its requirements through Tallimba. This would have the effect of making Tallimba’s position structurally sound in that it would be supplying to a large client and the supply contract would be on a long term basis.
(k) By making Sunhaven’s position structurally sound it would have put Sunhaven in a position where it would have repaid all its debts to Tallimba from its retail trade.”
In my view those statements were intended to create the impression of the benefit which would have been derived by Tallimba in making payment of the $80,000. They completely mis-state what the true position was at that time.
. Paragraph 7(b) of Mr Hoffman’s affidavit read:
“The deponent states categorically that the loan by Tallimba to Sunhaven of the sum of $80,000 did not seriously hamper Tallimba’s financial affairs. It was not detrimental to Tallimba and did not cause damage to that company. It is a distortion of the facts to indicate that Tallimba was not legally or otherwise required to make the payment to the GESB. At all times the sum of $80,000 was treated by Sunhaven as a loan from Tallimba and by Tallimba as a loan to Sunhaven and the entries made in September 1994 reflect the arrangement.”
The truth of the matter was that the sum of $80,000, although originally treated in Tallimba’s books as a loan to Sunhaven, was by book entry on 19 May 1995 (two days after Mr Hoffman signed an application for the deregistration of Sunhaven) credited to Sunhaven’s loan account and debited to Tallimba’s rent account, in which were recorded Tallimba’s payments of rent to the Market Trust. Mr Hoffman, when first asked about these book entries (at p.85 of the transcript) said that he knew absolutely nothing about it. Then he said that he recollected a discussion with “the data entry clerk” (his daughter Ms Calinda Anderson) in which he told her that he wanted the entry kept separate from the normal running of Tallimba, and that he did not want the entry to come into the profit and loss figures of Tallimba. When asked (at p 133 of the transcript) whether it was his decision to record the payment of $80,000 in the books of account of Tallimba under the heading of drawings, Mr Hoffman’s response was:
“I am not sure where that transaction was put. My only instruction to the person handling it was that I didn’t want it to show up in the day to day profit figures which all the members of the staff were privy to . ... My instructions to the data person was to put it in so that it didn’t show up in the day to day operations.”
Mr Hoffman’s evidence was that Tallimba’s management accounts were prepared on a monthly basis. The general ledger trial balance print-out in which these book entries are shown is in evidence. I do not believe Mr Hoffman’s evidence that he was unaware of these book entries. Ms Anderson was not called to give evidence to corroborate Mr Hoffman’s evidence in that regard. The evidence was that she was available to give evidence. In those circumstances I have greater confidence in inferring, as I do, that Mr Hoffman was aware how the moneys paid out by Tallimba on Sunhaven’s behalf had been recorded in the books of Tallimba both initially and on 19 May 1995 when Mr Hoffman had so recently applied to have Sunhaven de-registered, see Jones v. Dunkel (1959) 101 CLR 298. I infer that Ms Anderson’s evidence would not have been helpful to the respondents. My assessment of Mr Hoffman is that he well knew how the entry had been initially debited to Sunhaven’s drawings account on 27 September 1994 when the cheque was drawn and that the debit balance of that account on 19 May 1995 was reduced to nil on 19 May 1995 by crediting an amount of $96,355 to that account and debiting $80,000 of that to Tallimba’s rent account and the balance of $16,335 by way of debit to Tallimba’s bad debts account. On 29 June 1995 Mr Hoffman signed a statement verifying a statement of affairs dated 8 June 1995 relating to Tallimba (see attachment J to Exhibit C being Mr Gamble’s affidavit of 15 October 1996). Nowhere in that statement of affairs is there any reference to a debt of $98,355 owing to Tallimba by Sunhaven. If that debt had been shown in the list of debtors it would have been the second largest debt, second only to that owed by Woolworths. In my view not only is the above paragraph of Mr Hoffman’s affidavit misleading or deceptive, but the inference which I draw from all of the circumstances which I have set out above is that Mr Hoffman decided to attempt to hide the existence of Sunhaven’s indebtedness to Tallimba.
. At p 118 of the transcript Mr Hoffman swore:
“The only cheques that she [Mrs Hoffman] ever wrote were wages and that’s about the sum total of her involvement in the whole thing. She did the wages.”
This evidence is inconsistent with Mrs Hoffman’s signature being on twenty-two cheques, totalling some $15,500, for the rent paid by Tallimba to the Bull Creek Shopping Centre on behalf of Sunhaven.
. In cross-examination, Mr Hoffman said that he told Mr Gamble or Mr Saggers at their meeting on 11 May 1995 what had happened about the $80,000 Payment (see transcript pp 125 and 126). This contrasts with his evidence (at p 91 of the transcript) that he had told Mr Gamble that the shop had been “paid out”, but had not told him about the mechanism by which that had been done.
. In cross-examination Mr Hoffman swore that he did not discuss with his wife the question of whether the $80,000 should come from borrowing against their home or from Tallimba. Subsequently (at p 143 of the transcript) Mr Hoffman said that he did discuss with his wife the payment of the $80,000 by Tallimba. [In fairness to Mr Hoffman, it should be noted that he did not say that there was on that occasion any discussion about borrowing against the security of their home]. He said that it was a major thing for them, that it would have been discussed and that she knew the payment was being made by Tallimba. Mrs Hoffman, in her evidence, confirmed the latter statement.
After considering all of the above matters I made the decision not to believe any evidence from Mr Hoffman that was not corroborated.
It was common ground that at the meeting between Mr and Mrs Hoffman on the one hand and Mr Gamble and Mr Adrian Saggers on the other hand on 10 June 1994, Mr and Mrs Hoffman expressed concern at the possibility of losing their house. Mr Hoffman denied that this had been stated in the context of the personal guarantee. From all of the above evidence I have drawn the inference that not only did the respondents cause Tallimba to pay the sum of $80,000 on Sunhaven’s behalf in order to discharge their obligations as guarantors but they also had in mind (not surprisingly) protecting their equity in their home. At the time of the meeting the negotiations with GESB had commenced and the payment itself was only some four months later.
In terms of the application of s 1318(1) of the Corporations Law I do not think that Mr Hoffman acted honestly. Apart from the observations made immediately above, I have set out (at pp 20-22) my reasons for considering that the evidence that Mr Hoffman, on two occasions, sought professional advice about insolvency, to be at best neutral on the question of his honesty. I find that Mrs Hoffman had sufficient knowledge of what happened to be equally disentitled to a finding that she acted honestly in the sense used in that section. The section requires me to have regard to all the circumstances of the case, and I do so. The respondents accepted that they had the onus of proving the existence of facts to justify granting the relief. In their written submissions, the respondents referred to the question of whether the transactions were carried out in good faith and for the benefit of Tallimba as being “a major issue” in the application of s 1318. For the reasons which I have set out above, I do not consider that the transactions were carried out in good faith or for the benefit of Tallimba. In the same submissions, the respondents say that the interests of the creditors may be a relevant consideration when assessing the directors’ conduct. In my view, the respondents gave no consideration to the interests of Tallimba’s creditors. Mr Hoffman freely admitted that he regarded Tallimba and Sunhaven and himself as being one and the same entity. But Tallimba at all times had a very much larger indebtedness to trade creditors than Sunhaven had. Again in their written submissions, the respondents acknowledged that a Court would be reluctant to relieve a director from a liability to repay money from which he has received a benefit - a reference to Re International Vending Machines Pty Ltd [1962] NSWR 1408. That case is authority for the relevance of such a benefit when the Court exercises its discretion. The respondents submitted that they did not receive any personal benefit from the payment which relieved Sunhaven of its obligations. I think that is quite wrong. It is quite clear that they did receive a personal benefit in the form of the discharge of their liability as guarantors. Then it was suggested that as there were five guarantors (including the respondents) a ratio of 40% should be applied to the benefit derived. I do not think that is appropriate. The respondents were jointly and severally liable as guarantors with the other three guarantors. If they repaid Tallimba the amount of that benefit, then they may have rights of subrogation or indemnity from the other three guarantors. However, I see no reason why Tallimba’s recovery from the respondents should be reduced by 60% because there were three other guarantors.
I do not consider that the respondents “ought fairly to be excused for their negligence, default or breach”.
CONCLUSION
For the above reasons, there will be an order that the respondents pay to the applicant at least the sum of $98,355.00. The applicants claim interest on that amount from 28 September 1994 at the rate of 12% per annum. The matter of interest was not the subject of any submissions or argument at the hearing. 28 September 1994 was the date upon which Tallimba made the $80,000 Payment. Section 51 of the Federal Court of Australia Act 1976 (Cth) relevantly provides that in any proceedings for the recovery of any money in respect of a cause of action that arises after 22 November 1984 the Court shall, unless good cause is shown to the contrary, order that interest be included in the sum for which judgment is given. The interest is to be at such rate as the Court thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date of judgment. Alternatively, instead of calculating interest, the Court may include a lump sum in lieu of such interest. In applying s 51A of the Federal Court Act in Ferrier and Knight v Civil Aviation Authority (1994) 55 FCR 28, [appeal allowed by the High Court of Australia on other grounds in Airservices Australia v Ferrier and Knight (1996) 137 ALR 609] a Full Court of this Court allowed interest only from the date of demand by the liquidators in that matter. That matter concerned the recovery of preferences. The Full Court acknowledged (at p 92) that the cause of action arose, within the meaning of s 51A, upon the appointment of the liquidators. However the Full Court adopted what was described as “the ordinary course” of allowing interest only from the date of demand by the liquidators. It may be that Ferrier’s case is distinguishable from the present circumstances. Although a preference, once avoided, is treated as void from the commencment of the winding up, the liquidator has to elect to treat the payment as void and make demand for repayment. In the present circumstances I consider that the cause of action arose at the time when Tallimba suffered the loss. It might even be argued that the applicants’ entitlement to recover the above moneys arose later still. The right of recovery invoked by the applicants in these proceedings is a statutory one arising out of the application of s 598 of the Corporations Law and conditioned upon the Court’s satisfaction of the matters referred to in s 598(2). However, the better view seems to be that s 598 is procedural - see the commentary and cases cited in Ford’s “Principles of Corporation Law” at p 11,244. It is not necessary for me to decide that question. Not having heard argument on the point, my provisional view is that I should apply s 598(2) and make an order which I think is appropriate. I think that it would be appropriate under s 598(2) to include a reasonable amount in the judgment sum to compensate Tallimba for the loss of use of the money which was paid out. The appropriateness of taking this course for the purposes of giving effect to s 598 would seem good cause for not ordering interest under s 51A of the Federal Court Act. If not, then the result would be the same because, in applying that section, I would have calculated the interest in the same manner as I am about to describe. That further compensation should be calculated (in respect of an amount of $98,355.00) in the same manner as interest. I think that the rate of interest claimed is excessive and that an appropriate rate would be the rate of interest from time to time payable in respect of judgments of this Court as fixed by the Rules of Court. Rather than that amount being calculated from 28 September 1994, in my view it would be appropriate for the calculation to be made from the date upon which the respondents were first called upon to pay the above sum. That is, if there was a written demand, from that date. The date is not in evidence, but the parties should be able to agree it. If there was no written demand then I consider that the appropriate date from which to calculate this additional payment should be 20 March 1996. That was the date upon which Tallimba sued the respondents in the District Court of Western Australia to recover the above moneys. The applicants have undertaken not to proceed or take any further steps in that action whilst this application is being dealt with. However, I will hear counsel on these matters relating to the applicant’s claim for interest.
I certify that this and the preceding twenty-nine (29) pages are a true copy of the Reasons for Judgment herein of Justice Carr
Associate:
Date: 25 July 1997
Counsel for the Applicant: Mr N W McKerracher Solicitor for the Applicant: Ilbery Barblett Counsel for the Respondent: Mr P S Bates Solicitor for the Respondent: Ginbey & Co Dates of Hearing: 26-27 June 1997 Date of Judgment: 25 July 1997
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