Hawcroft General Trading Co Pty Ltd v Edgar, Anthony MacInnes
[1996] FCA 439
•4 JUNE 1996
CATCHWORDS
CORPORATIONS LAW - application pursuant to s 592 of the Corporations Law - s 592(1) is an objective test requiring reasonable grounds to exist without need for any particular person to hold the expectation - prima facie liability can arise where director had no personal knowledge of the incurring of the relevant debt - factors personal to director relate to defence under s 592(2) - creditor must prove facts which, immediately before incurring of relevant debt, gave director reasonable grounds to say that (s)he expects company will not be able to pay its debts as and when they become due - question of fact - meaning of the word "expectation" - only matters prior to, and reasonably foreseeable are to be taken into account - reasonable expectation requires a prospective not hindsight consideration.
Corporations Law s 592
New World Alliance Pty Ltd (Receiver and Manager Appointed); Sycotex Pty Ltd v Baseler (No 2) (1994) 51 FCR 425, cited
Rema Industries and Services Pty Ltd v Coad (1992)
107 ALR 374, cited
Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, cited
3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371, applied
Shapowloff v Dunn (1981) 148 CLR 72, cited
Hawkins v Bank of China (1992) 26 NSWLR 562, cited
HAWCROFT GENERAL TRADING COMPANY PTY LIMITED v
ANTHONY MACINNES EDGAR and JOHN DAVID WINTERS
No NG 3513 of 1994
Tamberlin J
Sydney
4 June 1996
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3513 of 1994
GENERAL DIVISION )
BETWEEN: HAWCROFT GENERAL TRADING
COMPANY PTY LIMITED
(ACN 000 409 076)
Applicant
AND: ANTHONY MACINNES EDGAR
First Respondent
JOHN DAVID WINTERS
Second Respondent
CORAM: TAMBERLIN J
PLACE: SYDNEY
DATED: 4 JUNE 1996
MINUTE OF ORDERS
THE COURT:
Declares that the respondents have contravened s 592(1) of the Corporations Law.
Declares that the directors are jointly and severally liable to pay the debt.
Orders that the respondents pay to the applicant the sum of $23,580 with interest.
Orders that the respondents pay the applicant's costs.
NOTE: Settlement and entry of orders is dealt with in accordance with Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3513 of 1994
GENERAL DIVISION )
BETWEEN: HAWCROFT GENERAL TRADING
COMPANY PTY LIMITED
(ACN 000 409 076)
Applicant
AND: ANTHONY MACINNES EDGAR
First Respondent
JOHN DAVID WINTERS
Second Respondent
CORAM: TAMBERLIN J
PLACE: SYDNEY
DATED: 4 JUNE 1996
REASONS FOR JUDGMENT
TAMBERLIN J:
Background
The first respondent, Mr Anthony Macinnes Edgar ("Edgar") and the second respondent, Mr John David Winters ("Winters"), were appointed directors of International Sport Publications Pty Ltd ("ISP") on 13 August 1992 which trades as ADC Graphic Services ("ADC").
The applicant, Hawcroft General Trading Company Pty Ltd ("Hawcroft"), trades as Imprimatur Press ("Imprimatur"), which is a printing company.
On 10 March 1993, Imprimatur, received from ADC a request to provide a quotation for printing 20,000 copies of a 64 page magazine called "Volleyball Magazine" ("the magazine").
On 11 March 1993 Imprimatur provided the quotation.
On 25 March 1993, Mr Knudsen, a sales representative of Imprimatur received an order from Edgar on behalf of ISP to print the Autumn edition (No. 3) of the magazine for ISP. Mr Knudsen requested that Edgar provide a credit application in relation to the proposed printing work.
On 25 March 1993 Imprimatur received from ISP a completed credit application and final distribution instructions. The credit application was signed by Edgar.
In a covering faxed letter, Edgar, as Managing Director of ISP wrote:
"To explain our business, International Sport Publications Pty. Ltd. (ISP) was established last year to publish Volleyball Magazine as the official publication of the Australian Volleyball Federation. Subscription to the magazine is automatically built into membership fees of members Australia wide. The federation, by contract ... is due to pay ISP on or before April 1, 1994 the full annual subscription of ALL members.
Could you please note that ADC Graphics co-ordinate all production and separations."
Imprimatur then proceeded to print the Autumn edition of the magazine for ISP.
On or before 1 April 1993, the necessary film was provided to Imprimatur. By 5 April 1993 the printing was completed and delivered pursuant to instructions.
On or before 5 April 1993, Imprimatur was informed that inserts were to be made into 10,000 copies of the magazine. The price of providing the inserts was agreed at $580.
On 23 April 1993, an Imprimatur Press invoice was issued to ISP in the amount of $23,580. The payment was due 14 days from the invoice date.
ISP failed to pay the invoice.
On 20 July 1993, a creditor's statutory demand for payment of debt dated 15 July 1993, was served on the registered office of ISP by Hawcroft.
Between 20 July 1993 and 18 November 1993, $3000 was received by Imprimatur from ISP in reduction of the debt. This was later required to be repaid to the liquidator as a voidable preference.
On 18 November 1993, on the application of Hawcroft, ASP was wound up and a liquidator appointed.
As at 12 May 1995, ISP remains indebted to Imprimatur.
On 4 October 1994 Hawcroft filed an application in this Court seeking orders against Edgar and Winters that they are jointly and severally liable for the payment of the applicant's debt pursuant to s592 of the Corporations Law.
That section reads:
"592(1) Where:
(a)a company has incurred a debt before the commencement of Part 5.7B;
(b)immediately before the time when the debt was incurred:
(i)there were reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or
(ii)there were reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they become due; and
(c)the company was, at the time when the debt was incurred, or becomes at a later time, a company to which this section applies;
any person who was a director of the company, or took part in the management of the company, at the time when the debt was incurred contravenes this subsection and the company and that person or, if there are 2 or more such persons, those persons are jointly and severally liable for the payment of the debt.
592(2) In any proceedings against a person under subsection (1), it is a defence if it is proved:
(a)that the debt was incurred without the person's express or implied authority or consent; or
(b)that at the time when the debt was incurred, the person did not have reasonable cause to expect:
(i)that the company would not be able to pay all its debts as and when they became due; or
(ii)that, if the company incurred that debt, it would not be able to pay all its debts as and when they became due.
592(4) In proceedings brought under subsection (1) for the recovery of a debt, the liability of a person under that subsection in respect of the debt may be established on the balance of probabilities ..." (Emphasis added)
There is no dispute in the present case that ISP is a company to which at all relevant times s592 applies. See s589(1).
Part 5.7B was inserted by Act No 210 of 1992 and became effective from 23 June 1993. Since the debt in the present case was incurred prior to that date there is no dispute that s592 is the relevant provision. Further, there is no dispute that the respondents were directors.
A Statement of Claim was lodged and a defence was entered. The defence simply denied certain paragraphs and alleged that in March 1993 ISP was solvent and that there were no reasonable grounds to expect that the company would not be able to pay all its debts as and when they fell due. Nor, it was alleged were there reasonable grounds to expect that if the company incurred the debt to Imprimatur it would be able to pay all its debts as and when they became due.
The evidence includes the Official Liquidator's report which is dated 15 March 1994. The relevant paragraphs read:
" ... The company was incorporated as International Sport Publications Pty Limited on 13 August, 1992.
I am advised that the company ceased trading on 1 September, 1993 after 2 editions of the magazine were published. I have also been advised by Mr Edgar that he is considering publishing a similar magazine in the future."
Under the heading "Reasons for Failure of the Company," the Official Liquidator writes:
"The directors have advised me that they consider the reasons for the failure of the company to be 'failure to achieve cash flow projections'. The company held a contract to publish the 'Australian Volleyball Magazine', however, the company's contract with the Australian Volleyball Federation Inc. to publish the magazine was terminated on 17 November, 1993 as a result of the application being made for the winding up...
The latest available accounts prepared for the company were draft accounts in respect of the year ended 30 June, 1993. These accounts show the financial position of the company to be as follows:
Y/E 30/6/93
Sales 109,745.33
Expenses 341,784.88
Net Profit/(Loss) (148,038.55)
Total Assets 58,056.00
Total Liabilities 206,094.55
Net Assets (148,038.55)
The assets of the company at this date comprised the following:-
Debtors 55,789.00
Formation Expense 2,267.00
....
My review of the records of the company ... indicates that the initial revenue projections for the company's magazine were up to 4 times higher than the actual revenue received. This shortfall would appear to be associated with a significant over-estimation of actual subscriptions and membership contributions from the Australian Volleyball Federation Inc..."
The Report as to Affairs shows a deficiency of assets to liabilities in the sum of $265,898.
Imprimatur filed an affidavit of Glen Pomroy, an accountant, who expressed the view that the respondents had reasonable grounds to expect that ISP would not be able to pay all its debts as and when they fell due, and that there were reasonable grounds to expect that if the company incurred debt to Imprimatur it would not be able to pay all its debts as they became due.
Mr Pomroy holds a degree from Macquarie University in Economics and is a Member of the Institute of Chartered Accountants of Australia. He is a registered Tax Agent and has 12 years experience dealing with small to medium size businesses.
In substance, his evidence is that the books and records supplied to him, showed that the first and second editions of the magazine, which were published and sold, incurred significant losses of approximately $25,000 for each edition. The company's bank overdraft, at 23 March 1993, had reached its limit and the Bank Manager had seen fit to return several cheques unpaid. As at 23 March the indebtedness and overdraft was $30,529.
In a questionnaire for directors and officers conducted by the liquidator, the other director, Winters stated that the balance sheets and profit and loss accounts for the company, as at 30 June 1993, showed a loss of $190,745. The dollar amount of the company's quarterly sales were said to be $48,000 with quarterly direct expenses of $56,000 and monthly overheads of $12,000.
Mr Pomroy reports that:
"As at 23 March 1993 the Company had excess liabilities over assets, the Company's Bank Overdraft was in Debit $30,529, the Company had made a loss on the publication of issues 1 and 2 and the Company had not paid Printers for costs incurred in printing the Volleyball Magazine for issues 1 and 2..."
Mr Pomroy expressed the view that the cash flow projections were grossly overstated and had evidently not been amended downwards. Nor did he see any other avenues which could be used to alleviate the perilous cash flow position at that time.
The evidence of Edgar was that in mid-1992, ISP entered into a contract with the Australian Volleyball Federation ("AVF") to subsidise publication of the magazine over a 5 year period. The AVF was a federal body charged with the administration of the game of volleyball and associated activities throughout Australia.
Edgar annexed to his affidavit a summary of what, as at 23 March 1993, he projected would have been the cash position of the company on 2 April 1993, if AVF paid the company, the sum of $137,532 which he anticipated it would pay.
The table is set out below.
"International Sports Publications Pty Limited
As of 23 March, 1993
Revenue
Issue 1 & 2 (excluding Federation)
• Advertising, subs, other & newsagency
49922
Issue No 3 (excluding Federation)
• Advertising, subs, other & newsagency
31874
Federation (Including issue 2,3,4,& 5 April)
• Issue 1
32719
• Issue 2,3,4 7 5 April (11,461 members)
137352
Total Revenue
251867
251867
Costs
Issues 1 & 2
• Production
99100
• Administration Overheads
31514
Issue 3
• Production
64419
• Administration Overheads
22086
Total Costs
217119
217119
Surplus/deficit
34,748"
It can be seen from the above Table that the amount of $137,352 claimed to be due in April in respect of 11,461 members with respect to issues 2, 3, 4, and 5, was of central importance in determining whether there were reasonable grounds of expectation that all due debts would not be paid by the company.
Mr Pomroy in his report refers to a "monthly account summary of receipt and payments" of ISP from August 1992 to June 1993. These are said to show losses on Issues of 1 and 2 of $25,778 and $26,357 respectively. Issue 3 is said to have shown a loss of $21,481. The quantum of these losses are disputed by Edgar in annexure J to his affidavit. He says the losses were $1,097 for Issue 1, and $11,537 for Issue 2, and $11,480 for Issue 3.
The applicant's submission is that on the evidence, as at 26 March 1993, the date the Imprimatur debt was incurred, there were outstanding debts as follows:
Imprint Limited $17,979
McPhersons Colour Printing $31,800
Commonwealth Bank Overdraft $31,010
Total $80,789
In addition to this, the subject debt of $23,580, which was on 14 day trading terms to Imprimatur, took the indebtedness to $104,369.
By way of defence Edgar submits that as at 26 March 1993, there were reasonable grounds to expect, and that he reasonably expected, on or about 1 April 1993, six days later, to receive from AVF, the sum of between $122,400 and $134,400 for printing of editions 2, 3, 4 and 5. This expectation is central to the respondent's case.
Imprimatur points out that, even if the sum of $137,352 were received on 1 April 1993, that amount related to the production of editions 2, 3, 4, and 5, being the December 1992, April 1993, June 1993 and September 1993 editions. It is submitted that ISP had an obligation to AVF to produce future editions; 3, 4 and 5 using these moneys and that on the production of each edition ISP would continue to make a loss of approximately $25,000 per edition so that with each edition ISP would be deeper in debt.
Edgar, in cross-examination, gave evidence that accounts were produced monthly by a book-keeper and that expenses and income for the production of each edition were produced quarterly. The expenses listed in these accounts were accurate and he had possession of the accounts and looked at them daily. The income shown in the accounts was the expected or projected income and was not income actually received.
Edgar states that he received from AVF $33,720 for edition 1 and that by 23 June 1993 he received $63,000 from AVF. This was only approximately 50% of the money he expected ISP to receive from the AVF in April 1993 pursuant to the contract with AVF. Imprimatur submits that the accounts annexed to the affidavit of Mr Pomroy, include the expected income to be received from the AVF, being at best $134,400, that is to say approximately $33,600 per edition. Even if expected payments were made by AVF and were included in the income accounts for ISP, the accounts which Edgar looked at regularly, showed that ISP would make a loss of approximately $25,000 per edition.
Accordingly, it is said that directors of ISP would have reasonable grounds to expect that ISP would not be able to pay all its debts as and when they became due. The applicant submits that there were reasonable grounds to expect substantial losses on the Autumn and later editions.
It is further submitted that the respondents were aware at 26 March 1996, that AVF would not be in a position to pay the lump sum amount said to be expected, and that since the projections depended on this, they had reasonable grounds to expect an inability to pay.
The evidence of Edgar, as to his expectations, should be approached with some caution. My concern arises from his insistence that the invoices sent from his office on 15 March, to the State associations were simply "reminders" and not intended to be invoices, notwithstanding that they are described on their faces as invoices and required payment directly to ISP. In evidence, he said that he "never expected them (the State associations) to attach a cheque to that invoice and send it back to us". Yet, this is what the invoice required. When questioned he tried to distance himself from the invoices, by assigning responsibility for them, to a large extent, to his secretary, Ms Kelly. I am satisfied that by 15 March 1993, Edgar and Winters were well aware of the short-fall in subscriptions received to that date and that they sent out the invoices to the State associations with a view to obtaining prompt payment. The respondents did not follow up these invoices to check the position before incurring the debt to Hawcroft.
It is common ground that the date on which the subject debt was incurred was 26 March 1993. Edgar submits that events and facts after that date are irrelevant. He says he had a reasonable expectation which was based on the contract with AVF. He says that the evidence of the accountant called on his behalf, Mr Hunter, should be accepted in preference to that of Mr Pomroy because Mr Hunter is said to be an expert in insolvency matters, whereas Mr Pomroy does not have the same specific expertise and experience.
The evidence of Mr Hunter was basically directed to criticising and taking issue with various paragraphs in Mr Pomroy's report. He says that Mr Pomroy's statement did not take into account the concept of futurity, or the future income earnings or expectations of ISP and that he failed to take account of the contract with AVF.
Mr Hunter based his view on information from the instructing solicitor for Edgar that the contract with the AVF required payment beginning on 1 April 1993. He also criticised the Pomroy report on the basis that it did not take into account the various customers who had "agreed" to future advertising commitments.
He was critical of the instructions given to Mr Pomroy and made certain observations about non-recording of persons who provided information. He points to an absence of detail.
In cross-examination Mr Hunter conceded that he was not informed that the accounts on which Pomroy relied were accounts prepared by a book-keeper for ISP or that Edgar was aware of the accounts. He was not asked to express a view on whether it was reasonable for the directors to expect that they would be able to pay their debts. He said he did not know whether there were any assets, which could be the subject of pledge or mortgage to raise funds. In cross-examination he said that if it was reasonable to anticipate the contract was on foot and the moneys were going to be paid by the Federation, there were reasonable grounds to expect the company could pay their debts.
Legal Principles
The guidelines pertinent to the circumstances of this case can be summarised as follows:
The test in s592(1) is an objective test which requires that reasonable grounds in fact exist without reference to the need for any particular person to hold the expectation. A prima facie liability can arise even where the director or manager had no personal knowledge of the incurring of the relevant debt. If the requirement is satisfied then all directors and managers come within it regardless of their subjective expectations or individual grounds for such expectations: Re New World Alliance Pty Ltd (Receiver and Manager Appointed); Sycotex Pty Ltd V Baseler (No 2) (1994) 51 FCR 425 at 433 per Gummow J, and Rema Industries and Services Pty Ltd v Coad (1992) 107 ALR 374 at 381-382 per Lockhart J.
Factors personal to the director or manager are the concern of s592(2) which provides a defence once the threshold of s592(1) is crossed: Re New world Alliance Pty Limited (supra) at 435.
The creditor must prove facts which, immediately before the time when the company incurred the relevant debt, gave a person, seeking properly to perform the duties of a director or manager of that company, reasonable grounds to say: "I expect that the company will not be able to pay all its debts as and when they become due." (See Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 124 per Tadgell J and 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 at 377-8 per Foster J). Contrast s303(3) of the Companies Act 1961 which was concerned with whether an officer of the company had any reasonable ground of expectation of the company being able to pay a particular debt. See Shapowloff v Dunn (1981) 148 CLR 72.
The question is one of fact. Attention should be directed to whether a reasonable director or manager operating in a practical business environment would expect that at some point the company would be unable to meet a liability. The question involves consideration of the timing of revenue flow and debts incurred, and contingencies including the ability to raise funds. The conclusion ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. See Sandell v Porter (1966) 115 CLR 666 at 670 per Barwick CJ.
The "expectation" must be more than a "hope, possibility or suspicion". The term is used in the sense of "to regard as about to happen; to anticipate the occurrence or the coming of ...": The Shorter Oxford English Dictionary. See also 3M Australia Pty Limited (supra at 378). By contrast, the test used in s588G is whether there are reasonable grounds for "suspecting". This is a lower threshold than reasonable grounds to "expect".
If an event occurred after the debt was incurred, which produced the situation that the company was unable to pay all its debts, but which was at the relevant time not reasonably foreseeable then such an event could not form part of the reasonable grounds envisaged by the section: 3M Australia Pty Limited (supra at 377 per Foster J).
"Debt" where used in s592(1) includes a contingent debt. See Hawkins v Bank of China (1992) 26 NSWLR 562 at 568.
Matching of Income and Expenditure
Imprimatur contends that even if the sum of $134,400 could reasonably have been expected as at 1 April 1993, or shortly thereafter, these moneys had to be matched against the expenditure required to produce the subsequent editions of the magazine, in respect of which it was paid. Accordingly, it would only be appropriate to apportion a proportionate amount of that income as being available for payment of debts incurred on 26 March 1993. The submission, in substance, is that in relation in receipt of the payment of $134,400, the moneys received would have to be allocated to the costs incurred in printing the next 4 editions of the magazine, in accordance with the accounting principle of matching expenses to the earning of revenue. If the receipt of the money in April was to cover future editions, then the cost of those future editions must be apportioned against that amount.
The question to be addressed under s592 is whether a director had reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due if the subject debt were to be incurred. The required exercise is to apply the words of the subsection. If at the time when a debt is incurred, in this case, 26 March 1993, there were reasonable grounds to expect that the company would not receive sufficient funds to enable all its due debts to be paid, then I consider the ground would be established. While the "matching" principle may represent sound accounting principles, the statutory test is that prescribed by the language used in the section and is not based on matching theory. The fact that funds, which will become available in the short term, will carry obligations involving future expenditure, does not necessarily mean that those funds will not be available to pay the debts in question within the meaning of the section. There is nothing in the nature of a trust or contractual obligation which would prevent the use of those funds to pay the debts of ISP. The fact that provision will have to be made in the future for funding to meet future expenses of production, as and when they become due, is not to the point. The present receipt of income, which entails future expenditure does not mean that those moneys must be preserved to make future payments, although it may be commercially prudent to do so.
In the circumstances of the present case, if the funds could have reasonably been expected to be forthcoming to enable the company to pay its debts as and when they became due, then I do not think that the accounting principle of "matching" required those funds to be ignored as a result of payment obligations which would arise in the ensuing months to pay for the future issues as and when they were produced.
Accordingly, I do not accept the submissions by Imprimatur based on the matching principle.
ISP and AVF
Central to the respondents' case is the claimed expectation that on or about 1 April 1993, ISP would receive in the order of $134,400 from AVF or the State Associations.
Under the Agreement with AVF made in mid-1992, the relevant obligation on AVF to pay ISP is in clause 2.4 which reads:
"2.4Any amount representing Subscription Fees received by AVF from member associations prior to 15 March in any year shall be paid by AVF to ISP on before 1 April in any year and thereafter on the first day of each month following collection." (Emphasis added)
Clause 2.5 provides that the subscription fee for the year ended 31 December 1993, shall be $12.
The first point to note is that the obligation of AVF is to pay "any amount representing subscription fees received by AVF from member associations." If, in fact, funds are not received by AVF from member associations, then there is no obligation on AVF to pay. It is only those funds actually received, that AVF is bound to pay.
The second point to note is the evidence that on or about 15 March 1993, ISP sent out invoices, in respect of Issues 2, 3, 4, and 5 to the State member associations, requiring payment to it of amounts ranging between $3,750 for, and in the case of New South Wales, $52,644. There are no contractual obligations between ISP and State member associations. ISP had no legal right to claim such funds from these bodies.
A letter dated 26 May 1995 from AVF to its solicitor, in relation to the liquidation of ISP, states:
"4.By 15 March 1993, the number of members actually registered was significantly less than projected and would not cover the cost of the next issue #3. At this time the States agreed with Anthony Edgar to pay on an issue by issue basis." (Emphasis added)
There is no evidence as to this alleged "agreement" and its terms are not disclosed in the evidence. On the evidence I infer that on or about 15 March, Edgar became aware of a significant shortfall in membership subscriptions to AVF, such that costs of the next issue might not be met. The invoices sent out on 15 March 1983, refer to specified numbers of copies of the issues at $3 each. This indicates that any understanding with the States was for separate issues.
In a facsimile of 16 April 1993 to Edgar, from Mr Breen, the General Manager of AVF, which is annexed to the affidavit of Edgar, it is recorded:
"In response to your fax today, I am writing to confirm the Federation's absolute commitment to the magazine and to explain some of the technical difficulties our State Associations have had in meeting the April 1st payment scehdule in the contract.
The contract requires the Federation (ie each State) to pay on 1 April $12 per registered number (sic) as of 15 March; and further to pay on 1st of each month, $12 for each additional full registration as of 15th of the preceding month. This means that the invoices you sent to the States for specific amounts for each issue of the magazine from December 1992 are not valid. They represent the number of magazines actually sent in December and March/April based on last years registrations. There will be some variation this year with variations in registrations. We do however anticipate an overall increase in registrations.
There have been delays mostly caused by the late registration in most States and I know ACT, WA and SA begin competitions in April and therefore had very few registrations as of 15 March.
The minutes from the Executive Committee of March 25 (the State Executive Directors meeting with myself; which was attended by yourself) indicate a projected subscription to the magazine in 1993 of a minimum of 12,950 (total $155,400). This figure is likely to be exceeded.
One State, ACT, have (sic) indicated that their payment will be delayed until ISP honours their commitment to actually deliver the March issue of the magazine, which is now in the post.
......
I believe you now have a better understanding of how our registration system works and some of our limitations in actually processing the registrations efficiently ... I'm sure we can overcome these problems but it may require a reworking of payment dates in the contract ....."
In a letter dated 9 April to AVF, Edgar had stated that;
"According to the contract, we were to receive on or before April 1, payment from all states for all affiliated members for issues Summer '92, Autumn '93, Winter '93, Spring '93. To date this has not happened with payments from four states not yet received and full payment from the other two being well below invoiced amounts. To date we have only received $16,073 from a total invoiced amount of $107,088. Please note that this total amount just over 50% of the original budgeted projection. (Emphasis added)
The above evidence supports a conclusion that as at 26 March 1993, the respondents were aware that:
They were only entitled from 1 April 1993 to subscription fees actually received by AVF from member associations. The contract with AVF so provides.
By 15 March 1993, the number of members actually registered was significantly less than projected and would not cover the costs of the next issue, namely edition 3. For this reason, I find that invoices were sent out directly to the States by ISP, claiming payment on an issue by issue basis.
The requirement of the contract with AVF was that only fees actually received prior to 15 March were required to be paid on or before 1 April 1993. Fees received by AVF after 15 March were not required to be paid until 1 May.
There was a bank overdraft in the order of $31,000 and a cheque for $2,000 had previously been dishonoured on this account. The bank expected clearance of the overdraft by the first week in April 1993. The letter of the Commonwealth Bank of 8 March 1993 recorded that the overdraft limit was $30,000. There had been overdrawing in the past and that because of previous overdrawing an additional fee was payable.
There were unpaid accounts from Imprint Limited and McPhersons Colour Printing Pty Limited in relation to earlier editions of the magazine in a total sum of about $49,000. These had remained unpaid for some months. The invoice of Imprint Limited was dated 30 September 1992 in the sum of $17,879. The invoice of Mcpherson Colour Printing Pty Limited was dated 9 December 1992, with terms strictly 30 days net.
It was proposed to incur a debt on 26 March in the sum of $23,580 to Hawcroft.
Previous editions of the magazine had incurred losses. The questionnaire completed by Winters, indicated that the dollar amount of the company's quarterly sales was $48,000 and the quarterly expenses were $92,000. (Winters and Edgar regularly discussed the affairs of ISP)
No inquiries had been made of the State bodies or AVF as to how much was likely to be received on or about 1 April 1993. In particular, there does not appear to have been any inquiry as to the exact amounts actually received by AVF by 15 March 1993.
In my opinion, before incurring the debt of $23,580, the directors should have made inquiries of the State bodies and the AVF as to the amount actually in hand to pay to ISP and how much it was anticipated to have in hand in the coming week. No such inquiry was made.
Although the test of reasonable grounds of expectation calls for a prospective and not a hindsight examination of the financial affairs of ISP, it is necessary to bear in mind that by 9 April 1993 only a little over $16,000, in fact, had been received by ISP. This indicates that if proper inquiry had been made of AVF or the state associations before the subject debt was incurred, as to the amount which was in hand and which it was anticipated would be paid within the following six days to enable payment of the debt, the response would have disclosed the lack of availability of these funds to enable payment of all the company's debts. Directors cannot immunise themselves from liability by turning a blind eye and failing to make reasonable enquiries.
Edgar gave evidence that he had the role of managing director of ISP with control of the financial affairs of the company. He shared the same office as Winters. Winters had been intimately involved with AVF for some two or three years prior to 1992. Edgar spoke to him on a daily basis about every aspect of the business. The primary role of Winters was that he dealt with major clients and promoted the magazine to the market place. Winters regularly met with AVF on other matters. There were regular meetings between Edgar and Winters in relation to the financial position of the company. They shared the same office and their desks were no more than ten feet apart. Once the book-keeper updated figures, the figures were discussed by Edgar and Winters on a regular but not daily basis. In his dealings with AVF, Edgar spoke to them every day and in the first six months of operation up to 10 times per day. Thus, there would have been no difficulty in him ascertaining in mid to late March 1993, exactly what moneys were in hand with AVF to pay debts in respect of the magazine. Having regard to these matters, I am satisfied that at the relevant date, 26 March 1992, there were reasonable grounds for Winters and Edgar to both have the expectations referred to in s592(1) of the Law. Neither director has made out a defence under s592(2).
In my view, for the above reasons, the applicant has made good its case under s592(1) against both respondents. The respondents have not made out a defence under s592(2). I find that the respondents have contravened s592 and that they are jointly and severally liable for the debt and interest thereon. The respondents should pay the applicants' costs.
I certify that this and
the preceding twenty-six (26)
pages are a true copy of the
Reasons for Judgment herein of
his Honour Justice Tamberlin.
Associate:
Date: 4 June 1996
Solicitor for Applicant: Rockliffs Solicitors
First Respondent in Person: Mr A Edgar
Date of Hearing: 14 & 15 March 1996
Date Judgment Delivered: 4 June 1996
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