Gibbons v Deputy Commissioner of Taxation

[2003] NSWSC 936

CITATION:	John Raymond Gibbons & Anor as official liquidators of Deemah Marble & Granite Pty Ltd (in liq) v Deputy Commissioner of Taxation [2003] NSWSC 936
HEARING DATE(S):	27.08.03; 28.08.03; 29.08.03; 02.09.03; 03.09.03
JUDGMENT DATE:	24 October 2003
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Nicholas J
DECISION:	Plaintiffs entitled to order sought pursuant to s588FF(1)(a) Corporations Act 2001 (Cth); Defendant to pay Plaintiffs interest and costs; Defendant entitled to declaration and order that the Respondent is liable to indemnify it pursuant to 588FGA(2) ; Respondent to pay Defendant interest and costs
CATCHWORDS:	INSOLVENCY - UNFAIR PREFERENCE - UNCOMMERCIAL TRANSACTION - PAYMENTS IN REDUCTION OF TAX LIABILITY - Whether company insolvent at time of payments - Whether transactions constituted unfair preferences - Whether transactions constituted uncommercial transactions HELD: Company insolvent at time of payments - payments constituted unfair preferences and uncommercial transactions - Plaintiffs entitled to order sought pursuant to s588FF(1)(a) - Defendant to pay Plaintiffs interest and costs - CLAIM FOR INDEMNITY FROM DIRECTOR DEFENCES UNDER s588FGB(3),(4),(6) - Whether Respondent liable to indemnify Defendant in respect of payments made when company was insolvent - Defences of expectation of solvency, reliance on other person, and all steps taken - HELD: Defendant entitled to declaration and order that the Respondent is liable to indemnify the Defendant pursuant to 588FGA(2) - Respondent to pay Defendant interest and costs.
LEGISLATION CITED:	Corporations Act 2001 (Cth) s 95A(1), 95A(2), 198(A)(1), 286(2), 459E, 588E(4), 588FA, 588FA(1), 588FB(1), 588FC, 588FC(a), 588FE(2), 588FE(3), 588FF, 588FF(1)(a), 588FGA, 588FGA(2), 588FGB(3), 588FGB(4), 588FGB(4)(a), 588FGB(4)(a)(ii), 588FGB(4)(b), 588FGB(6), 588FGB(6)(a), 588FGB(6)(b), 588H(2) Income Tax Assessment Act 1936 (Cth) s 222AOE
CASES CITED:	ASIC v Plymin & Ors (2003) VSC 123 Bank of Australasia v Hall (1907) 4 CLR 1514 Daniels v Anderson (1995) 37 NSWLR 438 Deputy Commissioner of Taxation v Clark (2003) NSWCA 91 Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722 Hamilton v BHP Steel (JLA) Pty Ltd (1995) 13 ACLC 1548 Keith Smith East West Transport Pty Ltd (in liq.) & Anor v Australian Tax Office (2002) NSWCA 264 Leslie & Anor v Howship Holdings Pty Ltd (1997) 15 ACLC 459 Manpac Industries Pty Ltd v Ceccatini (2002) NSWSC 330 Sandell v Porter (1966) 115 CLR 666 Spedley Securities Ltd (in liq) v Western United Ltd (in liq) (1992) 27 NSWLR 111 Taylor v Australia & New Zealand Banking Group Ltd (1988) 6 ACLC 808 Tosich Construction Pty Ltd (in liq) & Anor v Tosich (1997) 23 ASCR 466 Tourprint International Pty Ltd (in liq) & Anor v Bott (1999) 32 ASCR 201 Walsh v Natra Pty Ltd (2000) VSCA 60
PARTIES :	John Raymond Gibbons & Anor as official liquidators of Deemah Marble & Granite Pty Ltd (in liq) - Plaintiffs Deputy Commissioner of Taxation - Defendant Peter John Solomon - Respondent
FILE NUMBER(S):	SC 5129/01
COUNSEL:	C R C Newlinds - Plaintiffs R Rodionoff - Defendant C Robinson - Respondent
SOLICITORS:	Clayton Utz - Plaintiffs Australian Government Solicitor - Defendant Colin Biggers & Paisley - Respondent

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

Nicholas J

24 October 2003

5129/01 John Raymond Gibbons & Anor as official liquidator of Deemah Marble and Granite Pty Ltd (in liq) v Deputy Commissioner of Taxation

JUDGMENT

1 His Honour: These proceedings involve claims by the Plaintiffs who are the liquidators of Deemah Marble and Granite Pty Ltd (in liquidation) (Deemah) to recover payments made to the Deputy Commissioner of Taxation (the Defendant) during the period 9 May 2000 to 12 July 2000 in the total sum of $821,590.55.

2 Deemah was ordered to be wound up on 7 September 2000 and the relation back date was 7 March 2000. For many years prior to its winding up Deemah’s business was the provision and installation of stone and granite on buildings pursuant to sub-contracts from builders.

3 By letter dated 4 December 2000, the solicitors for the Plaintiffs made demand of the Defendant to repay the amount received, alleging that the payments were unfair preferences at a time when Deemah was insolvent, and thus were voidable transactions under s 588FE(2) Corporations Act 2001 (Cth) (the Act). Repayment was refused.

4 Plaintiffs’ claim is pursuant to s 588FF of the Act. Of the total amount claimed, recovery of the sum of $491,234.93 is sought on the basis that the constituent payments were unfair preferences under s 588FA, insolvent transactions under s 588FC, and voidable under s 588FE(2). Recovery of the balance in the sum of $330,355.62 is sought on the basis that the constituent payments were uncommercial transactions under s 588FB, insolvent transactions under s 588FC, and voidable under s 588FE(3).

5 The Defendant does not admit that the transactions were insolvent transactions and puts the Plaintiffs to proof of insolvency. It also puts in issue the entitlement of the Plaintiffs to rely upon the presumption of insolvency under s 588E(4).

6 It admits that the payments which are claimed to be unfair preferences were made to it on the dates and for the amounts alleged. If it is found that Deemah was insolvent at the times of the payments the Defendant accepts that the Plaintiffs are entitled to an order for payment of these amounts in the total sum of $491,234.93.

7 The Defendant admits subject to qualification, that the payments which are claimed to be uncommercial transactions were made to it on the dates and for the amounts alleged. The qualification was that the actual date of the payments said to be on each of 21 and 22 March 2000 was 22 and 21 March 2000 respectively. The qualification is of no significance. However, the Defendant denied that these payments were uncommercial transactions and hence denies the Plaintiffs’ entitlement to recover the sum of $330,355.62 in respect of them.

8 If the Court makes an order against it under s 588FF, the Defendant claims an indemnity against Dr Peter John Solomon (the Respondent) under s 588FGA in respect of payments which were made during the periods he was a director of Deemah. The total amount sought from him is $538,314.39.

9 The Respondent was a director of Deemah during the periods 30 September 1999 to 27 March 2000 and 23 June 2000 to 12 July 2000. Of the payments made to it by Deemah, the amounts which the Defendant claims from the Respondent are the following, which were amounts applied towards tax liabilities:

(i) $42,403.29 received on 21 March 2000 and $93,651.71 received on 11 July 2000 in relation to the liabilities of Copanat Pty Ltd (Copanat);

(ii) $39,961.94 received on 22 March 2000 and $86,004.30 received on 11 July 2000 in relation to the liabilities of Copalock Pty Ltd (Copalock);

(iii) $276,293.15 received on 11 July 2000 in relation to the liability of Deemah.

10 Copalock and Copanat were companies wholly owned by Deemah. Deemah used them as service companies to employ some of its workers. Both companies were wound up on 19 April 2001. The Respondent was also a director of Copalock and Copanat during the periods 30 September 1999 to 27 March 2000 and 23 June 2000 to 12 July 2000.

11 The Respondent joins with the Defendant in putting in issue insolvency, and that the transactions were insolvent transactions. He denies that the payments with which he is concerned were unfair preferences and/or uncommercial transactions.

12 In defence to the Defendant’s claims, the Respondent raised grounds under s 588FGB(3) that he had reasonable grounds to expect that Deemah was solvent, and under subs (4) that in reliance on information provided by another person he had reasonable grounds to believe that it was solvent, and under subs (6) that there were no reasonable steps which he could have taken to prevent it making the payments.

13 Details of the payments made to the Defendant in reduction of its unsecured debt which are said to be unfair preferences are as follows:

09 May 2000	$113,359.66
26 May 2000	$96,748.84
12 July 2000	$281,126.43
Total	$491,234.93

14 The payments which are said to constitute uncommercial transactions were made to the Defendant in reduction of the unsecured debts of the related companies Copalock and Copanat. The details are as follows:

21 March 2000	$39,961.94
22 March 2000	$42,403.29
26 May 2000	$27,038.22
26 May 2000	$27,724.16
11 July 2000	$99,275.56
11 July 2000	$93,952.45
Total	$330,355.62

Insolvency

15 The first issue to be resolved is whether the company was insolvent from 7 March 2000. Neither the Defendant nor the Respondent led evidence to contradict the Plaintiffs’ claim that the company was insolvent when each of the payments were made. Nevertheless, the Plaintiffs bore the onus of proving insolvency on each of the relevant occasions.

16 Section 95A(1) of the Act provides that “A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable”. By subs (2) “A person who is not solvent is insolvent”.

17 It is now well-settled that the statutory test of solvency is a “cash flow test” rather than a simple “balance sheet test” (Keith Smith East West Transport Pty Ltd (in liq.) & Anor v Australian Taxation Office (2002) NSWCA 264 per Mason P para 33). In Leslie & Anor v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at p 465 Sackville J stated the test in those terms, and continued:

“It follows that the mere fact that the company’s assets exceed its liabilities does not establish solvency. In re Bond Corporation Holdings Ltd … Ipp J quoted the following passage from Buckley on the Company’s Act (13th Ed, 1957) at 60 … on the question of commercial insolvency: “ … that is, of the company being unable to meet current demands upon it in such a case it is useless to say that if its assets are realised there will be ample to pay 20 shillings in the pound: this not the test. A company may be at the same time insolvent and wealthy. It may have wealth locked in investments not presently realisable; but although this be so, yet if it have not assets available to meet its current liabilities, it is commercially insolvent and may be wound up””.

18 The question whether a company is able to pay its debts as they fall due is one of fact, which is to be decided as a matter of commercial reality in all the circumstances (Taylor v Australian and New Zealand Banking Group Ltd (1988) 6 ACLC 808 at p 811; Leslie & Anor v Howship Holdings Pty Ltd (supra) p 466). The concept of “commercial reality” was considered by Young J in Hamilton v BHP Steel (JLA) Pty Ltd (1995) 13 ACLC 1,548 in which he said (at p 1,552):

“… What has to be done is not a mere accounting exercise, but an appreciation of whether moneys can be readily mustered in order to pay creditors.
It seems to me that the words “commercial reality” mean that one must look at the circumstances in the light of prevailing business practices”.

His Honour makes plain that the question requires the application of “good commercial and legal common sense” ( Manpac Industries Pty Ltd v Ceccatini (2002) NSWSC 330 para 41).

19 It is important to keep in mind the approach stated in Sandell v Porter (1966) 115 CLR 666 at pp 670-671 and Bank of Australasia v Hall (1907) 4 CLR 1514 at p 1528. It was summarised in Keith Smith (supra) at para 29 by Mason P:

“A conclusion as to solvency or otherwise can only be made having regard to the total position at the relevant time: See generally Sandell v Porter .… Whether or not a company has the capacity to pay a particular debt necessarily depends inter alia on the pool of assets available to meet it and the existence and press of other company creditors”.

20 A recent review and confirmation of the authorities is to be found in the judgment of Mandie J in ASIC v Plymin & Ors (2003) VSC 123 paras 468-380. It included (at para 370) the following passage from an article by Prof. A R Keay, “The Insolvency factor in the avoidance of antecedent transactions in corporate liquidations” (1995) 21 Monash University Law Review 305 at p 307:

“The cash flow test provides that a company is insolvent when it is unable to pay its debts as they fall due. It is of no consequence, under this test, that assets exceed liabilities. The important point is: can the company pay its way in carrying on its business? The court, in examining whether a company is suffering cash flow insolvency, will consider whether the company is actually paying its debtors”.

The evidence of insolvency

The report

21 The Plaintiffs relied upon a report as to the solvency of Deemah prepared by Mr Gibbons with the assistance of Mr Trevor Mark Pogroske. Mr Gibbons was, for good reason, unavailable to attend the hearing. Mr Pogroske gave evidence and was cross-examined in relation to the report. He is a chartered accountant by profession and an associate director of the firm of which Mr Gibbons is a partner. He assisted the liquidators, and had access to and reviewed the books and records of Deemah.

22 For the Defendant and the Respondent it was argued that the report was flawed on a number of grounds by reason whereof little or no weight should be placed on the analyses and conclusions in it, with the consequence that it should it be found that the Plaintiffs had failed to prove insolvency.

23 One such ground was that Mr Pogroske was merely adopting the report of Mr Gibbons without sufficient personal involvement in its preparation or knowledge of Deemah’s records to qualify him to present the report as his own, or to give reliable evidence as to the ultimate conclusions expressed in it and the facts and assumptions upon which they were based. This contention must be rejected. Mr Pogroske’s evidence, particularly under cross-examination, satisfied me that he was well-informed as to the affairs of Deemah, and qualified to adopt the report as his own. He was a convincing witness whose evidence I accept.

24 The Plaintiffs’ opinion was that Deemah became insolvent from, at the latest, 31 March 2000 and remained so until it was wound up. The matters which supported this opinion are contained in section 5 of the report of which the following is a summary:

25 The overview of creditors as at 31 March 2000 showed that the total amount due and payable to creditors was $5,177,363.00 with cash available in the sum of $296,024.00. Unsecured creditors increased from $4,300,000.00 in December 1999 to $5,000,000.00 in January 2000 and thereafter monthly increases in the total of unsecured creditors were noted until April 2000 when they reached $6,100,000.00. At 31 March 2000 unsecured creditors were pressing Deemah for payment of the amounts owed to them. The amounts could not be extinguished from the cash at bank or from other resources available to Deemah at the time. Furthermore, from March 2000 onwards, Deemah had difficulty in procuring supplies from certain suppliers due to the outstanding nature of its accounts as exemplified in Annexure U.

26 Analysis of Deemah’s balance sheets demonstrated that it had a deficiency of:

(i) Total adjusted assets compared to total adjusted liabilities from 30 April 2000;

(ii) Adjusted current assets compared to adjusted current liabilities from November 1999 onwards; and

(iii) Adjusted quick assets compared to adjusted current liabilities from October 1999 onwards.

27 Deemah was unable to generate sufficient funds through the sale or realisation of its assets in the timeframe required to meet its liabilities that were due and payable at 31 March 2000. Its current assets comprised mainly of contract debtors and retention monies, which were proven to have been difficult to recover during the liquidation.

28 The overview of Deemah’s cash flow from operations showed that it traded with negative actual cash flow in eight of the 13 months during the period July 1999 to July 2000 as shown in table 5 of the report. Deemah had not been trading profitably during the period September 1999 to July 2000. The conclusion was that Deemah was unable to generate sufficient cash flow from its operations after September 1999 to satisfy its obligations to its priority and unsecured creditors which were due and payable as at 31 March 2000. Its capacity to meet all its debt as and when they became due and payable from its available resources deteriorated significantly after March 2000 as table 8 shows. Table 8 represented outstanding trade and statutory creditors and available cash for the period July 1999 to July 2000. It shows substantial deficit for each month in amounts which range from $2,688,686.00 in July 1999 to $3,106,306.00 in July 2000. Specifically, in January 2000 the deficit was $3,854,210.00, in February 2000 it was $3,819,567.00, and in March 2000 it was $3,580,976.00.

29 As to Deemah’s funding and borrowing capacity, as at 31 March 2000 no additional financial facilities were available to it from:

(i) Its banker, Westpac Banking Corporation, in the form of an overdraft or similar facility;

(ii) Its parent company Deemah World of Stone Pty Ltd (by way of loans or otherwise);

(iii) Any other company in the Group; or

(iv) A strategic investor.

Annexure U

30 Annexure U to the report was a volume containing internal e-mails relating to pressing creditors and correspondence from creditors demanding payment of outstanding accounts from October 1999 to 8 August 2000, the date of appointment of provisional liquidators. It is appropriate to briefly indicate some of its contents.

31 Section U1 (tab 41) contained correspondence from creditors pressing for payment of outstanding accounts from October 1999 to 8 August 2000, examples of which are the following.

(i) By fax of 13 October 1999 JDV Engineering sought payment of $120.00 and $4,933.00 overdue 60 and 45 days respectively.

(ii) By letter of 20 October 1999 DD Stone sought payment of $77,107.17 being the balance overdue in respect of numerous accounts rendered between 11 January and 20 October 1999.

(iii) By letter of 29 November 1999 SD Tillett Memorials Pty Ltd sought payment of overdue accounts for September 1999 for $19,844.69 and for October 1999 in the sum of $15,954.35. Deemah directed payment of the September, but not the October, account.

(iv) By letter of 8 February 2000 O’Brien Glass threatened proceedings for the recovery of $116.00 outstanding since November 1999.

(v) By letter of 14 February 2000 BOC Gases threatened proceedings for the recovery of $4,317.00.

(vi) By letter of 28 February 2000 Brodie Collection Services made a similar threat for the recovery of $4,830.00 for overdue surveyors fees incurred between 17 March and 27 May 1999. In this case proceedings were taken in the Magistrates’ Court of Victoria on 23 March 2000 and judgment in default was entered on 3 May 2000.

(vii) The other documents for the period March to August 2000 evidence numerous overdue debts, large and small, for the recovery of which demands were made by creditors, collection agencies and solicitors.

32 Section U2 (tab 42) contains internal e-mails relating to pressing creditors and arrangements for payment of outstanding accounts.

Included is a record of a managers meeting on 2 May 2000 at which the priority for the payment of numerous creditors was decided. It noted, for example, that $300,000.00 was due to Award Engineering of which $134,000.00 had been overdue since December 1999. It recommended part payment to be made. It was noted that a supplier, Granitek, was owed about US$99,000.00 and would no longer trade until all accounts had been settled. There was a list of suppliers one of which was owed $1,200.00, another $3,000.00, requiring payment as soon as possible. In respect of Classic Ceramics there was the note “Can hold off at present”.

There is also the note of 8 March 2000 from Mr Randal Jones, Deemah’s chief financial officer, to staff who purchased goods and services for Deemah advising them to ensure that all suppliers were required to participate in the Exelerate program and that any who declined would not be in “the priority payment queue”.

There were numerous internal e-mails from May 2000 to August 2000 from staff obliged to deal with complaints from unpaid creditors. An example is an e-mail from Juili Lau of 30 May 2000 seeking instructions as to the response to be made to a creditor pressing for payment of $580.00 overdue since December 1999. Another is of 2 June 2000 in which Juili Lau referred to the claim by Classic Ceramics for $7,848.00 overdue since February 2000. She concludes: “I told her my usual line. Please advise as to when she will be paid”. Another is of 29 June 2000 in respect of a debt for $726.00 unpaid since February 1999.

On 10 July 2000 there was prepared a list of suppliers who were taking recovery action. The total amount of unpaid debts was $1,035,833.00. The list included debts overdue from September, November, and December 1999 and January, February, and March 2000. It records that many creditors ceased supply.

33 Section U7 (tab 47) contains numerous statements of claim and statutory demands from creditors for varying amounts, some of which date back to December 1999.

34 The contents of U2 strongly indicate that from at least mid 1999 to the date of winding up Deemah was unable to pay day-to-day expenses necessary to keep its business running in an ordinary way.

Challenges to the report

35 The substantial challenge to the report was directed to the balance sheet position for the period July 1999 to July 2000 as reflected in Annexure H to the report. This annexure was described as a balance sheet adjusted with regard to items explained in Annexure G to the report. The conclusion as to Deemah’s deficiencies set out in para 26 above was based on this analysis (report para 4.2).

36 It was put that it was erroneous to have omitted from the balance sheet loans to shareholders and other related entities known as C2, Deemah SARL, Petank and Lutesang, and a loan to a third party known as Germani which, in total, amounted to $3,168,469.00. The loans were omitted because the liquidator concluded that they were irrecoverable although at a later time some monies were recovered from Germani. It was put that Mr Pogroske was unable to substantiate that the loans were irrecoverable and that there had been a failure to investigate the financial ability of the borrowers to repay the loans as at 31 March 2000 or at any time prior to the winding up.

37 It was argued that the inclusion in Annexure H of the item “Deferred tax” for the amount of $733,488.00 for each month as a current liability, rather than as a contingent liability which might never be brought to account, presented a misleading picture of liabilities and hence of net assets available to creditors at relevant times. Mr Pogroske accepted that no analysis had been made of the deferred tax liability, and that it was possible that some proportion of it would never be brought to account.

38 It was also put that Annexure H failed to take into account the effect of Deemah’s arrangement with Exelerate Funding Pty Ltd (Exelerate) by which the date due for payment of debts was deferred for 120 days. It was put that adjustment to allow for deferment of liabilities was relevant to the true representation of the balance sheet position, and that failure to do so was a ground for doubting the worth of the report as a whole.

39 Finally, it was put that the report indicated an undue concentration on liabilities without taking into account, for example, those which were contingent or deferred. Thus, contrary to the principle which requires consideration of the total position at the relevant time (Keith Smith East West Transportation (supra)) there had been an overstatement or misrepresentation of Deemah’s liabilities.

40 In my opinion the submissions that a finding of insolvency based on the report should not be made having regard to the treatment of Exelerate, deferred tax, and irrecoverable loans cannot be sustained for the following reasons.

41 The arrangement with Exelerate was described in part 4.7 of the report. Under it Deemah’s liabilities to sundry creditors became a liability to Exelerate, the extent of which between February and August 2000 was illustrated in table 7. Mr Pogroske’s evidence was that it was taken into account in the cash flow analysis in table 5. It was not overlooked in the consideration of matters relevant to the question of Deemah’s solvency.

42 With regard to the irrecoverable loans, no criticism can be made for excluding these items from the list of assets in the balance sheet. Mr Pogroske said that the purpose of Annexure H was to record assets available at the relevant times, being cash and assets that were easily turned into cash. Such evidence as there was indicated that, as a matter of common sense and commercial reality, these proceeds were neither available nor realisable during March 2000 or at any other relevant time. If some or all of the proceeds were, in truth, available it is difficult to understand why they were not called up to relieve Deemah of the plight it was in at those times. In my opinion the fact that no investigation was made as to the borrower’s capacity to pay at any of these time does not, in the circumstances, invalidate the manner in which the loans were dealt with.

43 With respect to the treatment of deferred tax it was not put to Mr Pogroske that it was wrong to include the item as a current liability. He accepted that its inclusion might inflate Deemah’s liabilities as at 31 March 2000, and the matter was taken no further with him. There was no evidence to support a finding that the inclusion of this item distorted in any relevant way the overall impression as to the balance sheet position conveyed by Annexure H, or had any bearing upon the cash flow analysis in table 5.

44 Assuming, without deciding, that any or all of the items considered above warranted some revision of the balance sheet set out in Annexure H, I find that none of them affect the situation demonstrated by the cash flow analysis or establish a basis for rejecting the opinion as to insolvency stated in the report.

Taxation liabilities

45 The evidence of Ms Elaine Thomas, an employee of the Defendant with extensive knowledge of Deemah’s taxation record, proved the extent of its liabilities in respect of group tax, prescribed payments scheme deductions (PPS) and income tax. From 7 May 1999 continuously until 21 July 2000 Deemah’s liabilities to the Defendant were substantial.

46 The table below is an extract from the evidence as to its liabilities and payments.

Date tax payable	Description	DR	CR	Running Account
05.01.2000	Group Tax	142,042.55	(471,294.27)
19.01.2000	PPS	40,098.00	(431,196.27)
21.01.2000	Group Tax	113,359.66	(544,555.93)
21.01.2000	PPS	19,459.00	(564,014.93)
21.01.2000	PPS	19,459.00	(544,555.93)
09.02.2000	Group Tax	134,425.27	(410,130.66)
21.02.2000	Group Tax	96,748.84	(506,879.50)
21.02.2000	PPS	16,910.00	(523,789.50)
21.03.2000	Group Tax	147,498.83	(671,288.33)
21.03.2000	PPS	12,543.00	(683,831.33)
11.04.2000	Income Tax late payment interest and penalties	31,131.40	(714,962.73)
26.04.2000	Group Tax	128,794.32	(843,757.05)
26.04.2000	PPS	11,721.00	(855,478.05)
28.04.2000	PPS	11,721.00	(843,757.05)
28.04.2000	PPS	16,910.00	(826,847.05)
28.04.2000	PPS	12,543.00	(814,304.05)
09.05.2000	Group Tax (in payment of liability falling due 01/00)	113,359.66	(700,944.39

47 Between 9 May 2000 and 21 July 2000 the amount owing fluctuated from $700,944.39 to $1,067,462.62.

48 On 8 December 1999 Ms Thomas caused two director penalty notices pursuant to s 222AOE Income Tax Assessment Act 1936 (Cth) to be issued to the Respondent in respect of group tax liability and PPS liability for September 1999.

49 As at 22 March 2000 Deemah had not paid group tax for the months of December 1999 and January and February 2000. It had not paid PPS for the months of January and February 2000. Consequently, Ms Thomas caused two similar director penalty notices to be issued to the Respondent in respect of the group tax debts and PPS debts.

50 On 11 April 2000 Ms Thomas caused a statutory demand pursuant to s 459E Corporations Law (the demand) to be issued. The demand was in respect of income tax debts, group tax for the months of December 1999, January and February 2000, and PPS debts for the months of January and February 2000.

51 Thereafter on a number of occasions Ms Thomas spoke to the Respondent and Mr Jones to discuss arrangements for payments. In the result the payments shown on the table above and two subsequent payments were made but the indebtedness remained substantial.

52 Mr Yok Choong Liaw was Deemah’s accountant. His evidence was that Deemah’s January 2000 group tax could not be paid when due, and was not paid until 26 May 2000 because, as he said (Tp 130) “… we don’t have money to pay our bills”.

Other indicia of insolvency

53 In ASIC v Plymin & Ors (supra, para 386) Mandie, J listed matters which were described as indicators and common features of insolvency. The report shows, and I find, that from about February 2000 to the date of winding up the following indicia from that list were established in this case.

· Continuing losses.

· Liquidity ratios below 1.

· Overdue Commonwealth and State taxes.

· Poor relationship with present Bank, including inability to borrow further funds.

· No access to alternative finance.

· Inability to raise further equity capital.

· Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply.

· Creditors unpaid outside trading terms.

· Special arrangements with selected creditors.

· Solicitors’ letters, summons[es], judgments or warrants issued against the company.

· Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.

54 Although a factoring arrangement is not necessarily an indication of insolvency, in my opinion it is appropriate to treat the arrangement with Exelerate as such. It began on about 7 February 2000 at a time when there were substantial taxation liabilities, and when creditors, large and small, were pressing for payment. These matters considered together indicate Deemah’s inability from February 2000 to pay debts when and due payable.

55 The Respondent himself gave evidence of other indicia. He was the recipient of director penalty notices issued by the Defendant on 8 December 1999 and 22 March 2000. His attempts to obtain information as to Deemah’s financial situation as at December 1999, and thereafter, from Mr Liaw and Mr Benton, the chairman, were, as he said, fobbed off and to no avail, and led to his resignation on 27 March 2000. At no time prior to his resignation did he see any documents concerning the financial position of Deemah or its associated companies. The inability or refusal to produce to a director financial information as to its operations, in the circumstances, is a further indication of insolvency.

Conclusion

56 I accept the evidence in the report. On the basis of the report which includes Annexure U, and with regard to the evidence of taxation history and liabilities, and to the other indicia, and with the relevant principles in mind, it is plain to me, and I so find, that as a matter of commercial reality Deemah was unable to pay its debts as and when they fell due and payable from at least 7 March 2000 to the date of winding up. Specifically, I find that Deemah was insolvent on the dates on which each of the relevant payments were made. The Plaintiffs have established insolvency according to the common sense application of the cash flow test.

Section 588E(4) presumption

57 Paragraph 2.2 of the report contained information as to the categories of documents which the liquidators expected to find in the records of Deemah but which, despite efforts, were not physically located by staff or were recoverable from the computer system maintained by Deemah. Such categories included minutes of meetings of directors and/or members; management reports for the months of October 1999, February, May and June 2000; working papers detailing calculations used to determine monthly and annual profits, assets and liabilities; working papers and assumptions supporting monthly cash flow projections or budget forecasts; records as to the nature and terms of any loans or advances made to related companies or related parties; and records of the nature or terms of any agreements in relation to the payment of management fees or service agreements with the management of Deemah, its former directors or related parties. In cross-examination Mr Pogroske’s evidence was to like effect.

58 The evidence clearly supports the inference that Deemah failed to retain financial records as required by s 286(2) of the Act. The Plaintiffs are entitled to the benefit of the presumption of insolvency under s 588E(4), and I so find.

Unfair preferences

59 The Plaintiffs’ claim, pursuant to s 588FF, the sum of $491,234.95 paid to the Defendant on the ground that the constituent payments were unfair preferences within the meaning of s 588FA(1) of the Act. The relevant payments were made on 9 May, 26 May, and 12 July 2000 (para 12).

60 As noted above (para 6) the Defendant accepts that the Plaintiffs are entitled to an order for payment of these amounts. However, the Respondent put the Plaintiffs to proof.

61 Section 588FA(1) so far as relevant, provides:

“A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; “.

62 Deemah was insolvent at the time each payment was made, and was insolvent at the date of winding up. The evidence as to its situation from at least March until July 2000 as described in the report demonstrates the probability that unsecured creditors would receive nothing or, at best, substantially less than 100 cents in the dollar, in the winding up. Furthermore, if it is correct that proof that a transaction is an unfair preference under s 588FA(1) requires proof that there was a creditor at the time of the relevant payment(s) which remained a creditor at the time of the winding up (Walsh v Natra Pty Ltd (2000) VSCA 60; Spedley Securities Ltd (in liq) v Western United Ltd (in liq) (1992) 27 NSWLR 111) the Plaintiffs have met that requirement. In evidence was a proof of debt for the total sum of $143,437.93 lodged on behalf of Savema SPA dated 26 January 2001 for unpaid and unsecured debts invoiced to Deemah on 16 February 2000 for $102,274.70 and $25,080.16, on 23 March 2000 for $8,683.00, and on 19 May 2000 for $7,400.00.

63 In the circumstances it is clear that the Defendant, having received full payment of its unsecured debts, received more than it would receive in the winding up. Accordingly, I find that the payments constituted unfair preferences within the meaning of s 588FA(1). They were made at times when Deemah was insolvent and were insolvent transactions under s 588FC(a), and voidable under s 588FE(2).

Uncommercial transactions

64 The Plaintiffs’ claim the sum of $330,355.62 pursuant to s 588FF on the basis that the constituent payments were uncommercial transactions within the meaning of s 588FB(1). As detailed in para 13 above, the payments were made in reduction of the unsecured debts of Copalock and Copanat on 21 and 22 March, 26 May and 11 July 2000.

65 Section 588FB(1) of the Act provides:

“A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:
(a) the benefits (if any) to the company of entering into the transaction; and
(b) the detriment to the company of entering into the transaction; and
(c) the respective benefits to other parties to the transaction of entering into it; and
(d) any other relevant matter”.

66 In Tosich Construction Pty Ltd (in liq) & Anor v Tosich (1997) 23 ACSR 466 at p 473 per Lehane, J said: “The question to be asked is whether the transaction was one which a reasonable person in the company’s circumstances would not have entered into, having regard to the matters specified. … The matter must be looked at from the point of view of the company.”

67 The evidence shows that neither Copalock nor Copanat maintained any bank account or had any assets. These companies employed some of the employees who worked for Deemah. Deemah’s records show that it paid their salary and wages and related statutory charges. No records were found by the Plaintiffs of any management or other arrangement, or of invoices, relating to the provision of services rendered by these companies to Deemah.

68 There was no evidence which proved that the payments were referrable to, or in consideration of, any service rendered to Deemah by either company, or that there was benefit to it in making them at times when it was insolvent in discharge of taxation claims for which it was not liable. Mr Liaw was not asked to identify any relevant services or to describe any benefit to Deemah from the payments, and it may be inferred that his evidence would not have assisted either the Defendant or the Respondent on this issue. The invitation extended to the Court on behalf of the Defendant and the Respondent to speculate about the existence of a benefit is rejected.

69 No evidence established an explanation for the payments consistent with normal commercial practice. Put simply, Deemah incurred a detriment to the extent of $330,355.62 for the benefit of the companies with the result that its assets were depleted to the ultimate detriment of its unsecured creditors.

70 Looked at from Deemah’s point of view, in my opinion there was no justification for the payments and a reasonable person in Deemah’s circumstances would not have made them. Accordingly, I find that the payments were uncommercial transactions within the meaning s 588FB(1). They were made at times when Deemah was insolvent and were insolvent transactions under s 588FC(a), and voidable under s 588FE(3).

The claims against the Defendant

71 For the above reasons, in my opinion the Plaintiffs are entitled to orders pursuant to s 588FF(1)(a) of the Act directing the Defendant to pay to Deemah the sum of $491,234.93 in respect of the payments found to be unfair preferences, and the sum of $330,355.62 in respect of payments found to be uncommercial transactions. Thus the Defendant is liable to pay to Deemah the whole of the amount claimed being the sum of $821,590.55.

The Defendant’s claims against the Respondent

72 The Defendant’s claims against the Respondent under s 588FGA(2) of the Act are in respect of payments made to it by Deemah for tax payable by Deemah, Copanat and Copalock. The payments were made on 21 March, 22 March and 11 July 2000, for the total sum of $538,314.39. The details are in para 9.

73 The Respondent was a director of these companies at the time each payment was made, having been a director during the periods 30 September 1999 to 27 March 2000, and 23 June 2000 to 12 July 2000.

74 Section 588FGA(2) provides that a director of the company when the payment was made is liable to indemnify the Commissioner in respect of any loss or damage resulting from an order under s 588FF.

75 The Respondent relies upon the defences under ss 588FGB(3), (4) and (6) of the Act in respect of each payment claimed by the Defendant. These provisions are:

“(3) It is a defence if it is proved that, at the payment time, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it made the payment.
(4) Without limiting the generality of subsection (3), it is a defence if it is proved that, at the payment time, the person:
(a) had reasonable grounds to believe, and did believe:
(i) that a competent and reliable person ( the other person ) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and
(ii) that the other person was fulfilling that responsibility; and
(b) expected, on the basis of information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it made the payment.
…
(6) It is a defence if it is proved that:
(a) the person took all reasonable steps to prevent the company from making the payment; or
(b) there were no such steps the person could have taken”.

76 It is relevant to an understanding of the application of these provisions to keep in mind what is expected of a director in the ordinary performance of his duties. The expectation is that every director will participate in the management of the company. Indeed, s 198(A)(1) of the Act provides that the business of a company is to be managed by or under the direction of the directors.

77 In Deputy Commissioner of Taxation v Clark (2003) NSWCA 91; 45 ASCR 332 at para 118 Spigelman CJ said:

“Section 588H(4) and s588FGB(5) operate on the assumption that every director will be involved in the management of the company unless "illness or other good reason" excuses involvement. Part 5.7B, particularly s588G, was intended to reinforce this obligation in the context of insolvency. To repeat one sentence from par [304] of the Harmer Report:
"Directors should be responsible for ensuring that the solvency of their company be monitored on a continuing basis".”
At para 121 he said that the test is well expressed in terms of a duty to put himself or herself into a position to guide and monitor the management of the company.

78 It follows that a director is obliged to put himself in a position where he knows what is going on, that is, to be proactive. His conduct must be judged not only by a reference to what he knew, but also by a reference to what he ought to have known (Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722; ATC 5135 para 28 per Heydon JA).

79 In ASIC v Plymin (supra) para 424, Mandie J said:

“Of course, as is well known, both common law and statute have placed an increasing onus on non-executive directors. A non-executive director is expected to take steps to put himself in a position to monitor the company and to exercise and form an independent judgment and to take “a diligent and intelligent interest in the information either available to him or which he might with fairness demand from the executives or other employees and agents of the company” ( Statewide Tobacco Services Ltd v Morley (1993) 1 VR 423 at 448)”.

(See also Daniels v Anderson (1995) 37 NSWLR 438 at pp 502-504).

80 In Tourprint International Pty Ltd (in liq) &Anor v Bott (1999) 32 ASCR 201 Austin J discussed the concept of “expectation” as required by s 588H(2) of the law. His views are relevant to the application of s 588FGB(3) of the Act. He said:

“”Expectation”, as required by s 588H(2), means a higher degree of certainty than “mere hope or possibility” or “suspecting”: 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 at 378; Dunn v Shapowloff [1978] 2 NSWLR 235 at 249; (1978) 3 ACLR 775. The defence requires an actual expectation that the company was and would continue to be solvent, and that the grounds for so expecting are reasonable. A director cannot rely on a complete ignorance of or neglect of duty ( Metal Manufacturers Ltd v Lewis (1986) 11 ACLR 122 at 129) and cannot hide behind ignorance of the company’s affairs which is of their own making or, if not entirely of their own making, has been contributed to by their own failure to make further necessary inquires: Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405; Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423; (1992) 8 ACSR 305”.

Ms Thomas

81 Ms Thomas gave evidence orally and by her affidavit sworn 15 July 2002 relevant to the Respondent’s defences. She was not cross-examined on his behalf. I accept her evidence as to the events described below.

82 On 8 December 1999 she discovered that Deemah had not paid group tax for the month of September 1999 (due on 21 October 1999) or for the month of October 1999 (due on 21 November 1999) and had not paid its PPS debts for those months due on the same dates. On 8 December 1999 she caused the director penalty notices referred to in para 48 to be issued to the Respondent. Each notice is in similar terms and stated that, as a director of the company, he was liable to pay the Defendant by way of penalty an amount equal to the unpaid amount of each liability of Deemah, the details of which were set out in the notice. The notice in respect of unpaid group tax was for an amount of $155,324.32 due on 21 October 1999. The notice in respect of PPS was for the amount of $55,890.00 due on 21 October 1999. The covering letter with each notice advised, inter alia, that he automatically became liable to the penalty upon Deemah’s failure to remit the amount by the due date, and that action to recover it from him would be taken without further notice unless he adopted one of the stipulated options within 14 days.

83 On 16 December 1999 payment was made of each of these amounts.

84 On 21 March 2000 Ms Thomas discovered that Deemah had not paid group tax for the months of December 1999, January and February 2000, and had not paid PPS for the months of January and February 2000.

85 On 22 March 2000 she caused the director penalty notices referred to in para 49 to be issued.

86 The terms of the notices and of the covering letters were the same as in the earlier ones. The notice in respect of group tax was for a total amount of $357,607.33 for payments due on 21 January, 21 February, and 21 March 2000. The notice in respect of PPS was for a total amount of $29,453.00 for payments due on 21 February and 21 March 2000.

87 On 11 April 2000 Ms Thomas posted the demand to Deemah. It was for the payment of income tax overdue since April 1999, group tax overdue since December 1999, January and February 2000, and PPS overdue for January and February 2000. The total amount for which the demand was made was $832,698.28.

88 The demand stated, inter alia, that payment was required within 21 days after service, and that failure to comply may be relied upon as grounds for an application to a court for the winding up of the company.

89 On the same day, and shortly after she posted the demand, she received a phone call from the Respondent during which he told her that he was appalled that there was so much money owing. She informed him that she had just posted the demand, and he requested that he be sent a copy, and said that he would seek an explanation from the company. Her evidence is that he went on to say: “ … I am only a director as a favour to a friend. I’ll be resigning soon. I’ll contact you once I have some answers”.

90 She then sent the Respondent a copy of the demand by facsimile transmission.

91 Annexed to her affidavit was a copy of the letter of 18 April 2000 from Deemah to the Defendant. The letter was in response to the demand said to have been received on 12 April 2000. The letter was under the hand of Mr Jones. In it was proposed a payment program in respect of PPS and group tax during the period 28 April to 2 June 2000 for a total payment of $165,643.63. The letter included the following:

“I hope that you will find this payment program acceptable and that you are agreeable to it. If you have any questions or points you wish to discuss in person, please feel free to contact me, Peter Solomon or Mr Liaw”.

Mr Liaw

92 Mr Liaw in evidence demonstrated a poor recollection of the period(s) for which the Respondent was a director, and of the number of occasions the Respondent requested information. His response to such a request was to direct the Respondent to Mr Benton to whom Mr Liaw reported. Mr Liaw took his instructions from Mr Benton in relation to financial matters. When Mr Peter Muriwai became the managing director at the end of June 2000 he also reported to him. Mr Jones was his immediate superior. He agreed that the Respondent had very little to do with the management of Deemah. I accept his evidence was truthfully given.

The Respondent

93 The Respondent’s evidence was that he was aware of the duties and obligations of a director. It was conceded (T p 280) that he did take part in the management of the company at the relevant times. He said that he was a non-executive director, and almost half his term was spent overseas, and the other half in “investigating the situation”. His role was to give advice in relation to matters concerning dimensional stone.

94 The Respondent said that all the financial affairs of Deemah and its associated companies were handled by Mr Benton, Mr Jones and Mr Liaw.

95 Before Christmas 1999 he asked Mr Liaw for a copy of the half yearly management accounts, and was referred by him to Mr Benton. Mr Benton, in turn, informed him that the accounts were not complete and needed adjustment. The Respondent did not pursue the matter further at that point. He was overseas and out of total contact with anybody for most of the time between January and early March 2000.

96 Upon his return on about 12 March 2000, the business of Deemah appeared to him to be thriving, an impression which he said remained with him. It was under the control of Mr Benton and Mr Jones, and he received no information from day-to-day, and no board meetings were ever held. When he pressed Mr Liaw and Mr Benton for the management accounts he was fobbed off. In a heated conversation with Mr Benton he complained about the lack of financial information and his treatment as a lackey.

97 In para 11 of his affidavit sworn 5 November 2002 the Respondent stated:

“11. I resigned my directorship in Deemah and all the companies associated with Deemah on 27 March 2000. At no time prior to my resignation did I see any documents concerning the financial position of Deemah or its associated companies. Nor did I have any reason to think that the company could not pay its debts. Nor was I aware of what payments were or were not being made. I was not a signatory to any account of any company in the group”.

98 A few weeks after his resignation he had a conversation with Mr Jones who informed him that Deemah owed money to the Defendant and asked for his help. In his affidavit the Respondent swore that he thought that there was some procedural issue which had arisen and then telephoned the relevant person in the Australian Taxation Office. It seems clear, and I find, that this was the conversation which took place on 11 April 2000 about which Ms Thomas gave evidence (para 89). She informed him that Deemah was considerably in arrears in payments of its tax. He then spoke to Mr Jones and suggested that immediate arrangements be made to pay the taxation liabilities.

99 Next, the Respondent referred to an occasion in or about June 2000 when Mr Benton requested him to become a director again, with Mr Peter Muriwai as managing director. He had known Mr Muriwai for some time and was comforted by the thought that he would be in control. Shortly before his appointment as a director he had a conversation with Mr Muriwai during which he was assured by him that he had looked at some of the books and was of the view that the business was sound, with good quality debtors and reliable payers. The Respondent asserts that on the strength of that conversation he accepted appointment as director effective from 23 June 2000.

100 At the time of this appointment the Respondent was overseas. He returned on 30 June 2000. On about 24 or 25 June 2000 he had a telephone conversation with Mr Muriwai and was told that more operating capital was required, and that Mr Benton had promised to provide it.

101 On 27 June 2000 in another telephone conversation, Mr Muriwai told him that funds had not been provided by Mr Benton, and he did not believe they would be. He advised that he had decided to resign as a director, but would stay on and help. The Respondent replied that he would have to consider the effect that would have on minority shareholders.

102 The Respondent then telephoned Mr Benton, informed him of the conversation with Mr Muriwai, and was told that the funds were on the way.

103 On 3 July 2000 the Respondent spoke to Mr Muriwai in Deemah’s offices in Sydney. Mr Muriwai expressed doubt that Mr Benton would provide funds. He spoke of arrangements made for the payment of some creditors, and of unpaid tax and wages for which there were no holding accounts. The Respondent then thought he should make further enquiries himself out of concern for the welfare for some 30 or 40 people (presumably employees) whose livings he thought were at stake.

104 On 6 July 2000 Mr Muriwai told him that no money had come and never would. The Respondent then, and later, sought information from Mr Liaw without success, and was referred to Mr Benton.

105 On about 8 July 2000 he spoke to Mr Benton who expressed amazement that the funds had not come through. Unable to believe that Mr Benton was lying, the Respondent decided to wait until 10 July 2000 before taking any further decision. On 10 July 2000 it was his view that the prospect of funds from Mr Benton was remote, without which Deemah was unable to continue functioning.

106 On 11 July 2000 he telephoned Mr Benton and told him that there were no funds in the account, that he no longer believed him, and was resigning. On 12 July 2000 he lodged his resignation with ASIC. Thereafter he played no direct role in the operations of Deemah but tried to assist with management when requested.

107 The Respondent said that he was aware that at about this time there were outstanding amounts of tax payable by Deemah, Copanat and Copalock. He was aware on 11 July 2000 that Deemah’s cash position was serious, and also of Mr Muriwai’s pessimism about the fulfilment of Mr Benton’s promise of funds. He was not aware of any payment made to the Australian Taxation Office on or about 11 or 12 July 2000, and was not a signatory to Deemah’s bank account, and did not have direct access to its financial records. He was, however, aware of the impending sale of the Singapore business which he expected to realise significant funds to assist in the short term.

The evidence considered

108 The Respondent accepts that, as a matter of fact, he was involved in the management of Deemah at the relevant times, and was aware of his obligations as a director. In the circumstances it is irrelevant to the issues under each of the defences that he was a non-executive director. His continuing obligation was to put himself where he knew what was going on, including knowledge of the financial position of Deemah, at the time of each payment.

109 An extraordinary feature of the Respondent’s case is that no reference was made to the director penalty notices issued on 8 December 1999, or to the payment made on 16 December 1999, or to the director penalty notices issued on 22 March 2000, or to the liabilities to which they referred. Likewise, no reference was made to the demand which he asked Ms Thomas to send him during their conversation on 11 April 2000.

110 Having regard to the terms of the notices and the covering letters which made plain the risk of personal liability, I am satisfied that the Respondent caused Deemah to make the payment to the Defendant on 16 December 1999. I am also satisfied that he was thereby alerted to the likelihood that at this time Deemah’s ability to pay its debts when due was highly doubtful and had the potential to lead to insolvency. That he was so concerned is to be inferred from the request made to Mr Liaw for the half yearly management accounts just before Christmas, which lead to Mr Benton’s response that they were not complete and needed some adjustment. His evidence that he did not pursue the accounts further at that point indicates, and I find, a failure on his part to take steps to put himself in a position to monitor the company and to obtain sufficient information to enable him to form a judgment about its affairs.

111 This failure continued until his return from overseas on about 12 March 2000. Thereafter, such requests for information as he made were fobbed off. In fact he received no information, and no board meetings were held. On any view, by this time a director who was aware of his responsibilities would and should have been alerted to, and alarmed about, the probability that Deemah was in financial difficulty, and thus should have taken action to investigate and control the situation or to arrange for professionally qualified people to do so.

112 The Respondent’s assertion that it was his impression that the business was sound and thriving is, in the circumstances, implausible, and I reject it. The evidence gives it no support and, in effect, negates it.

113 The evidence compels the finding that although he was on notice of that it was in financial difficulty he acquiesced in, and took no reasonable initiative or steps to correct, a continuing state of ignorance on his part of the true and complete financial position of Deemah from December 1999 until his resignation on 27 March 2000. The period includes lengthy periods overseas and out of contact. Support for this finding is found in his own evidence that he was not aware of what payments were or were not made, and that at no time prior to his resignation did he see any documents containing financial information. In the circumstances his assertion that he did not have any reason to think that Deemah could not pay its debts must be rejected. It is inherently implausible, the more so where he pointed to no matter which would cause a reasonable person to think that it could.

114 After his resignation the Respondent continued his involvement with Deemah for some time in April 2000. Ms Thomas told of her conversation with him on 11 April 2000 in which, with regard to the demand, he told her he would seek an explanation from the company and would contact her when he had some answers. In Deemah’s letter of 18 April 2000 to the Defendant, Ms Thomas was advised that he was available to discuss the payment regime proposed therein. The evidence is set out in paras 83 and 85 above. The evidence was neither challenged nor explained by, or on behalf of, the Respondent. It supports the finding that at that time, at latest, he was sufficiently informed as to Deemah’s financial position to know that it was unable to pay not only its taxation debts when due but also debts incurred in the ordinary course of business.

115 There was no evidence that the Respondent believed, or was given any information to show, that the financial position of Deemah had improved between April 2000 and the time of his re-appointment as a director on 23 June 2000. The circumstances in which the Respondent accepted re-appointment are described in paras 98 and 99 above.

116 Mr Muriwai resigned on 3 July 2000, barely a fortnight after he had encouraged the Respondent to accept re-appointment. On that occasion he expressed doubts that Mr Benton would provide the funds, and he advised of arrangements to pay some creditors, and of unpaid tax and wages. This information prompted the Respondent’s concern for the welfare of employees. This, together with the evidence of events until his resignation on 12 July 2000 referred to in paras 104-106 above supports the finding, which I make, that the Respondent knew, or ought to have known, that Deemah was insolvent in April 2000 and thereafter.

Conclusion

117 In my opinion the defence under s 588FGB(3) of the Act is not available to the Respondent. I have found that from December 1999 until about 12 March 2000 he had failed to take appropriate steps to obtain sufficient information to enable him to form a judgment about Deemah’s affairs. I have also found that although he was aware of its financial difficulties the Respondent acquiesced in, and took no reasonable steps to correct, a continuing state of ignorance on his part of the true and complete financial position of Deemah from December 1999 until his resignation on 27 March 2000. In respect of his knowledge of the company’s affairs during his directorship between 23 June and 12 July 2000 I have found that the Respondent knew, or ought to have known, that from April 2000 Deemah was insolvent.

118 Furthermore there was simply no evidence that the Respondent held an actual expectation that Deemah was, and would continue to be, solvent at any relevant time, or that there were reasonable grounds for so expecting. Of course, had proper enquiries been made, the Respondent would have learnt that Deemah was in serious financial difficulty, and probably insolvent, from at least February 2000 and that it was, in fact, insolvent thereafter.

119 It is also my opinion that the defence under s 588FGB(4) is not available to the Respondent. In order to succeed the Respondent was required to establish, on the probabilities, each component of this defence required by sub-paras (a) and (b). The evidence did not establish the existence of the contemplated “competent and reliable person” who was responsible for providing to the Respondent adequate information about whether the company was solvent. To the extent that reference is made to either Mr Liaw or Mr Benton all that can be said is that the evidence makes plain that neither could be described as competent and reliable. Furthermore, with regard to sub-para (a)(ii) it was the Respondent’s experience that those in Deemah identified as having some involvement in managing its financial information in fact declined to provide to the Respondent any, or any adequate, information as to the company’s financial affairs. In my opinion the evidence of the Respondent himself is sufficient to deny him the defence under this sub-section. He makes plain that he was not, in fact, being provided by anyone with any adequate information as to the solvency of the company. It follows that there was simply no evidence as to the existence of the expectation required in sub-para (b).

120 With regard to the defence under s 588FGB(6)(a), there was no evidence that the Respondent took any, or any reasonable, steps to prevent Deemah from making any of the payments. This defence must fail.

121 The defence under s 588FGB(6)(b) requires the Respondent to prove that there were no reasonable steps he could have taken to prevent Deemah from making the payments at the times they were made. It was put on his behalf that at all relevant times financial control was in the hands of Mr Benton who denied him access to information as to the company’s financial position. It was also put that Mr Liaw would not provide him with such information when requested, and always referred him to the unhelpful Mr Benton. It was submitted that the Respondent was kept out of the “financial loop”, and was thus unable to take steps to prevent the payments.

122 In my opinion these matters do not prove there were no reasonable steps the Respondent could have taken. On the findings already made, it is plain that had he turned his mind to the discharge of his duty as a director at any time after receipt of the director penalty notices on 8 December 1999, it should have been apparent that there were steps he could and should have taken which may have resulted in prevention of the payments being made.

123 A director is not powerless. Regardless of the conduct of others involved with the running of Deemah, it remained the Respondent’s duty to put himself into a position to guide and monitor, at the very least, the management of matters relevant to its solvency. The extent of his ignorance did not deny him knowledge in and after December 1999 of the likelihood that Deemah was in financial difficulty. He also knew, or ought to have known, that it was insolvent in April 2000 and thereafter, and therefore not capable of continuing to trade lawfully.

124 Aware of the problem it would have been reasonable to seek professional advice. It is apt to quote the observations of Heydon JA in Saunig (supra):

“36. … A reasonable director would have sought legal advice from a lawyer or practical advice from an accountant …. Any professional adviser consulted would have gone through the various possibilities set out above; might have been able to threaten or influence the other directors into behaving more sensibly than Mr Saunig was able to; might have been able to form a view about the company’s solvency and about whether the directors were engaging in insolvent trading, which view might have been a spur to the directors to act collaboratively to appoint an administrator or to cause the company to begin to be wound up; and would have been able to advise the winding up of the company at the instance of Mr Saunig as director”.

125 The Respondent’s failure to obtain advice meant that he was without information as to the choices lawfully available to him and to his fellow directors. It is reasonable to infer that the professional advice would have been that the payments should not be made and that the Respondent would have had the opportunity of persuading his fellow directors not to make them. The Respondent has not discharged the onus of proving that there were no reasonable steps he could have taken to prevent Deemah from making the payments. Thus it, too, must fail.

Orders

126 The Plaintiffs are entitled to the relief claimed in the Further Amended Originating Process and in the Further Amended Points of Claim, namely an order that the Defendant pay to the Plaintiffs the sum of $821,590.55.

They also claim interest and costs and, at present, there is no reason for not awarding interest and making an order that the Defendant pay their costs.

127 The Defendant is entitled to the relief claimed in the Amended Points of Claim re Interlocutory Process, namely:

(1) A declaration that the Respondent is liable to indemnify the Applicant pursuant to sub-section 588FGA(2) of the Corporations Act 2001 in respect of any loss or damage sustained by the Applicant as a result of any order in these proceedings that the Applicant pay an amount to the Plaintiffs pursuant to section 588FF of the Corporations Act 2001 relating to the payments received on 21 March 2000, 22 March 2000 and 11 July 2000.

(2) An order that the Respondent pay to the Applicant the sum of $538,314.39.

(3) An order that the Respondent pay the Applicant any costs and interest awarded to the Plaintiffs against the Defendant in these proceedings.

It also claims interest and costs and, at present, there is no reason for not awarding interest and making an order that the Respondent pay its costs.

128 I expect the parties to agree on the amount of interest in each case. In the circumstances it is appropriate that I direct the Plaintiffs to bring in short minutes of orders which give effect to the reasons for decision. The parties may also address me in relation to costs. Arrangements should be made with my Associate by 11 November 2003 for the re-listing of this matter.

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Last Modified: 11/11/2003