Hawkins v The Bank of China

[1993] HCATrans 26

..

.

• ~

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S68 of 1992

B e t w e e n -

ALLAN ROBERT HAWKINS

Applicant

and

THE BANK OF CHINA

First Respondent

DAVID KINGSLEY ADAMS and BRIAN

DAVID FITZGERALD

Second Respondents

AUSTRALIAN SECURITIES

COMMISSION

Third Respondent

Application for special leave

Hawkins 1 12/2/93

to appeal

MASON CJ TOOHEY J McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 12 FEBRUARY 1993, AT 2.29 PM

Copyright in the High Court of Australia

MR J.G.F. HARROWELL:  May it please Your Honours, I seek

leave to appear on behalf of the applicant.	(of
Hunt & Hunt)

MASON CJ:	Why do you seek leave, Mr Harrowell?
MR HARROWELL:	I made inquiries with the Registry,

Your Honour, and I was advised that, being a solicitor, it was appropriate to seek Your Honour's

leave.

MASON CJ: That is not right. The rule has been amended so

that an application for special leave to appeal can

be presented by a barrister or solicitor or

barrister and solicitor.

MR HARROWELL: That was my understanding also, Your Honour.

MASON CJ: I am surprised the Registry so advised you. The

result is you do not need leave.

MR HARROWELL:	Thank you, Your Honour.
MR T.E.F. HUGHES, QC:	May it please the Court, I appear

with my learned friend, MR T.D.F. HUGHES, for the

respondent, the Bank of China. (instructed by

Ratner Chiu and Company)

MR R.W. WHITE: If the Court pleases, I appear for the third

respondent, the Australian Securities Commission.

(instructed by Peter Stepick)

MASON CJ:  The Registrar says that he has been informed by

the second respondent that they will not be
appearing on the hearing of this matter and that
the second respondent will abide by any order of

the Court except as to costs.

MR HARROWELL:  Your Honours, the issue on which the

applicant seeks special leave to appeal is a fairly

narrow issue, however, an issue which it is

submitted is attended with some difficulty as was

recognized, indeed, by the learned President in the

court below. The issue revolves around the

construction of section 556 of the Companies Code

which, for all material purposes, is exactly the

same as section 592 of the Corporations Law. The

facts briefly are that this -

MASON CJ:  We are aware of the facts. You can proceed to

the argument in support of the application for

special leave.

MR HARROWELL:  In essence, the primary legal argument put by

the applicant in this case is that the issue of

whether a guarantee, in this case it is a

Hawkins 2 12/2/93

conventional all moneys guarantee with no amount
defined and no limitation, is a contingent

liability. The applicant submits that a contingent

liability should be distinguished from a contingent

debt. If I might develop that, Your Honour, we do

it in this way: it is our submission that at the

time of the execution of the guarantee - and it is

common ground that is the relevant time to be

considered for the purpose of section 556 - - -

MASON CJ: That is common ground, is it?

MR HARROWELL:  Yes, Your Honour. That at the time the

guarantee was executed, what came into existence - it is submitted that it is not correct to jump the next step to say it was a contingent debt, in this

way, Your Honours. We submit that at the time of

execution of the guarantee it was established a contingent liability. The extent to which that

liability was quantified was impossible to know at

that time, and that is the relevant time. On the

default by the lender, we submit that there arises

the contingent debt and that upon the making -

TOOHEY J:  Excuse me. Why do you use that expression,

Mr Harrowell?

MR HARROWELL:	We use it for this reason - - -
TOOHEY J:	..... the language of the statute.
MR HARROWELL:	Yes, Your Honour. There are two reasons for using that expression, Your Honour. Firstly, it is
impossible if a director is to exercise his mind,
as required by section 556, as to whether it is
reasonable or not to incur this obligation, if I can put it neutrally for a moment, to exercise his
mind as to whether it is reasonable or not, because
it is an open-ended obligation.
TOOHEY J: But the question is whether there was a debt or

not.

MR HARROWELL:  Yes, from a practical point of view, as

ordinary commercial men would understand, it is

difficult to see that there is a debt at that time.

Indeed, Your Honour, the Chief Justice appeared to

recognize that in the court below at page 30 of the

application book where he says, at point 3:

At the time of executing the guarantee -

and the Chief Justice was referring to guarantees

in general -

such a liability would not normally be shown

as, or included in, a liability in the

Hawkins 3 12/2/93

company's balance sheet, but it would be

referred to in a note to the accounts.

The Chief Justice also goes on, at the bottom of

page 30, about point 25, where he says:

Now would it normally, and apart from some

special context, be said that a person who

gives a guarantee in respect of a debt
incurred by another thereupon himself incurs a

debt -

Now, that is the basis on which I would say that

the normal situation, which the Chief Justice

refers to, does not suggest the debt occurs at that
stage. The way in which the court below, and also

the Chief Justice in the Commercial Division dealt with it is to say, well, it was a contingent debt. Now, one then goes to the language of the statute

and says, as a matter of construction, where does

the statute change what the Chief Justice

identifies as the normal situation - that is

normally giving a guarantee does not constitute

incurring a debt. One also has to go to the

reading speeches and seek to identify some

intention on the part of the Parliament to change

what people, as the Chief Justice says, would
normally think to be the situation, a guarantee at

the time it is incurred is not a debt.

TOOHEY J:  Can you just take us to where the expression

ttcontingent debttt as opposed to ttcontingent

liabilitytt is used.

MR HARROWELL:  Your Honour, I cannot recall if the phrase

ttcontingent liabilitytt is actually referred to in

any of the judgments.

TOOHEY J:  I think the phrase ttcontingent liabilitytt is, is

it not?

MASON CJ: It is referred to on page 30, for example,

line 11.

MR HARROWELL:  I am sorry, yes, it is.

TOOHEY J: But that was not my question.

MR HARROWELL:  I appreciate Your Honour's question. I

cannot recall that any of the judgments actually

contrast the expressions ttcontingent liabilitytt as

against ttcontingent debttt,

TOOHEY J:  I just wondered why you introduced that

expression.

Hawkins 4 12/2/93

MR HARROWELL:  It was an expression in an argument that was

put below and rejected, Your Honour. The argument

we make on appeal on this terminology, if I could

take Your Honours to page 39 - in fact, I think
there is a problem in the appeal book. I think the

last page of the Chief Justice's judgment, which is

page 18 of the judgment at the bottom of the page,

may be missing.

MASON CJ: Yes, we have it. It is at page 40 of the

application book.

MR HARROWELL:  Mr Hughes rang me last night. Apparently he

was missing a page. I was not sure. The reason we introduced the concept, Your Honours, of contingent

liability is that the way in which the court below,

and indeed Mr Justice Rogers approached it is that

if one accepts that a contingent debt is included
within section 556 - and this is at the time the
debt was incurred, that is the execution of the
guarantee - then the obligation under this

guarantee is a debt for the purpose of section 556.

Your Honours, there is discussion in the

judgment in both the Court of Appeal and the court

below -

McHUGH J:  Can I just interrupt you, Mr Harrowell. The old

303 of the Companies Act specifically referred to

the term "contingent debt", did it not?

MR HARROWELL:  Yes, it did, Your Honour, in essential terms.

That expression has been deleted from section 556. It was contended by the respondents below, without

taking my learned friend's argument, that the
intention of the Parliament was, notwithstanding

the absence of those words, to expand the scope of

section 556 and notwithstanding their absence, 556

should not be read down to that.	The commentators,
and Professor Herzberg is referred to in the

judgment of Mr Justice Rogers in this case, also

refer to contingent debts. The reason I seek to

distinguish a contingent debt between a contingent

liability - and the phrase does not appear in the

judgments, Your Honours, but it was raised below -

is that even the applicant would accept that, for

instance, if one takes the case in Hussein v Good

referred to in the judgments where goods are
ordered, there is created a contingent debt at the

time of the order and a debt for the purpose of

section 556.

However, Mr Justice Southwell in Victoria did not hold, even in that case where there was a

specific sum of money and a specific order, that

there was a debt incurred at that time for the

purpose of section 556. Similarly, in Castrisios v

Hawkins 5 12/2/93

McManus, which is also referred to in the

judgments, which is a Tasmanian case - that was an

attempt to recover unpaid tax where, indeed, the

unpaid tax was deemed to be, by the revenue

legislation, a debt by definition, again even

thought there was an obligation incurred which

inevitably gave rise to an obligation to pay tax,

again that was not held to be a debt for the

purpose of section 556. It is very difficult to

reconcile why - and if I might also refer to the

Russell Halpurn Nominees case in Western Australia

where the director of a lessee was not held

responsible for the execution of a lease by the

insolvent company. These authorities, we would

submit, are difficult to reconcile; indeed, they

raise the issue of public importance.

This Court has dealt with the matter in

Shapowloff v Dunn. That is also slightly different

from the present case. Shapowloff v Dunn involved

a contract to buy shares and an inability to pay

for them and an argument that the contingency

excused the application of the section.

All of those cases deal with a situation where

it was sought to hold liable a director for making

a bargain which required the company to pay a sum

of money which was known to the director at the

time. In the present case, if the time for
incurring the liability is at the point of

execution, it is impossible for the director to

exercise his mind as required by section 556 as to

whether it is reasonable or not to incur that

obligation.

Now, the legislation does contemplate that in certain circumstances a director should be excused

from that burden placed on directors to ensure they

properly run their company.

MASON CJ:  I am not quite sure about your argument at the

moment. Do you agree that in the circumstances of

this case - and I am not talking about the time -

that the company incurred a debt.

MR HARROWELL:  On the execution of the guarantee -

MASON CJ:  No, I am not asking about time. Do you agree

that the company incurred a debt?

MR HARROWELL:	Yes, Your Honour.
MASON CJ:	When do you say it incurred the debt?
MR HARROWELL:	A contingent debt arose on the default by the

borrower because the lender could then make a

Hawkins 6 12/2/93

demand on the guarantee and an amount was

identified.

MASON CJ: 

So you are saying that the time of incurring the debt was when there was default by the borrower.

MR HARROWELL: 

Yes.

TOOHEY J: 

So you are accepting the approach of members of

the Court of Appeal that the word "debt" is capable
of including a contingent debt?

MR HARROWELL:  Yes, Your Honour. And the reason for making

the distinction, because of this section we have to

look at what then is the situation at the time the

guarantee was executed; what was incurred then.

And I say that at that time there was the incurring

of a contingent liability. There was no amount

specified, no amount recoverable. Now, it is a

difficult issue, Your Honours, because whether one

takes the Court of Appeal approach or the approach

that I am urging, injustice can occur.

MASON CJ: It seems to me it is quite extraordinary that you

would look at it at a point in time when the

directors of the company or the officers of the

company are not applying their minds to the

consequences of the instrument that they execute.

And that is what you are asking us to hold.

MR HARROWELL:  Yes, I am, Your Honour. The reason for

submitting that - and this is a difficult section -

is that whichever approach one takes, there is a

potential injustice for directors, prudent company directors. Consider this situation, Your Honours:

MASON CJ: But I mean take the situation where, for example,

at the time the guarantee is executed there is

nothing to suggest that the company will be unable

to meet its obligations and the execution of the

guarantee is reasonable. But then there is default well down the track, where the circumstances of the

company have radically changed. It seems

inapposite, does it not, to as it were apply the

statutory criterion at that time, when things have

changed much for the worse?

MR HARROWELL:  It depends against whom that would be

applied, Your Honour. Assume someone was a

director at the time of execution and the approach

of the Court of Appeal was taken and made a

judgment at that stage - and this is an all moneys

guarantee where one could argue, as a matter of

policy, it is so open ended you cannot reasonably

make any decision and therefore you should not

execute it as a prudent director - but assume it

was executed whilst the company was solvent, in

Hawkins 7 12/2/93

contemplation that the maximum amount to be lent to

the borrower, being guaranteed, was, say, in this
case $5 million at that time. Suppose that

director resigns; five years later the borrower and

the lender have extended facilities and it is up to

$100 million; that director who executed - and the

Court of Appeal will fix him or her with the

liability - will be judged, on the test of

reasonableness on executing that guarantee, against

what ultimately is quantified. The problem is

highlighted even in this case, Your Honour, that

since the hearing in the Court of Appeal, as a

result of various other restructures within this

group, it appears that the amount finally payable,

assuming these defendants should lose this case, is

in fact substantially reduced. It is still a

substantial amount, I understand.

But which amount, if you fix it as being a

debt at the time of execution in an all moneys

guarantee situation, it would be different if it

was a guarantee limited to $1 million, but in an

all moneys situation, did the Parliament intend to

discourage directors of companies from allowing

their corporation to bind themselves to an all

moneys guarantee. The Chief Justice says,

normally, you would not think this created a debt.

The section carries penal provisions with it

and the problem that exists, particularly if one

looks at the debris of the 1980s, Your Honours, is

that there are a lot of these all moneys guarantees

that have been executed that are sleeping at the

moment. Now, one of the consequences of the Court

of Appeal decision is that you will go back to when
those guarantees were executed, some five, six
years ago, who knows, and you will say, "Was it

reasonable", because these directors presumably

will try and make out their defence, "for the

directors to execute that guarantee?" What

benchmark do you measure that reasonableness

against; the solvency of the company at the time

against the debt that the company now finds itself

liable for, because of the default? They may have

nothing to do with that.

Now, it could be argued, if one accepts the

construction that I am urging, that that defeats

the whole purpose of section 556(1) of the Code.

However, I would submit that if the proffering of

the guarantee, in circumstances where there was no

hope of payment existed, there are provisions there

such as 556(5) dealing with fraudulent trading; in

other words, fraudulently inducing the lender to

accept this dodgy guarantee, which was of no

substance, to extend credit to some third party.

Hawkins 8 12/2/93

The problem in this case, because the words of the section are not clear, is how far, at the time

the section was enacted, did the Parliament intend
to go. Because suppose leave is refused today and

this decision of the Court of Appeal stands. What

does a prudent company director do, knowing that he

was part of executing a bank guarantee five, six

years ago, perhaps he has retired; he rings up and

finds the debt is now $100 million.	We are hanging
on by the skin of our teeth.	He said, "You didn't

ask me about it." He has no control. He cannot say to the bank, even if he is a prudent company

director, "I now want to fix my liability." The

consequence of these all money guarantees is it is

completely open ended and he cannot control either

the borrower, in terms of requesting bigger

facilities, nor the lender, if the lender wishes to

grant them.

Did the Parliament intend to render a director liable for that. Injustice will occur both ways;

whichever construction is adopted. I cannot back

away from that. The analogy that has been put up

below, and I am sure my learned friend will urge on

Your Honours, as to injustice if one takes the time

of the default as the relevant time is just as much

so in relation to the director who signs the

guarantee. It really means that no prudent
director could sign it. If one accepts that, that

the debt does not occur until there is a default,

what is actually incurred when the guarantee is

executed. That is why I submit that at that time

there is incurred a contingent liability.

The fact, as the Chief Justice recognizes at

page 30, that it is not recognized in accounting
parlance as a debt, would also, I would submit, if

one follows that through as a company director

should, looking at section 556, gives comfort if

they are being asked to sign an all moneys

guarantee that they are not incurring a debt. What

are the consequences if there is a debt when you
sign such a document? It really means bringing

into account, as a liability of the company, an

estimate as best one can of what might ultimately

be payable. This type of guarantee is not very

much different from a policy of insurance, insuring

a motor car for an agreed value. The practice of insurance companies, of course, is not to include the value of every agreed value policy as a debt of

the company. An assessment is made because whilst

on the happening of the contingency an accident,

the insurance company is bound to pay the agreed

sum, the insurance company comes to the view, and

their auditors agree because the accounts are not

qualified, that it is appropriate to treat it as a

contingent liability, make an actuarial assessment

Hawkins 9 12/2/93

as to how much of that contingent liability will

become converted into a debt.

The fundamental difference, in terms of the

approach adopted by the courts below in relation to

all moneys guarantees, means that unlike any of the

other cases that either frankly support or do not

support the applicant in this case, it is

impossible to know at the time of signing the

guarantee what the amount is. Now, there are many

old authorities on what constitutes a debt and it

may be a sum payable now or payable in the future,

but there is some basis of ascertaining it. Here,

the directors have no control. It could be said

that is the whole purpose of the legislation, to

discourage them from entering into such documents.

Unfortunately, they are out there, thousands of

them, some of them being called upon, and it is my

submission that that is one of the most important

public interest issues in terms of why it is

desirable that this Court should consider the

issue.

I am advised that the decision in Castrisios v

McManus, in fact, has been followed - it was the

tax case in Tasmania saying that payroll tax does

not constitute a debt - since the decision of the

Court of Appeal in Western Australia. There is the

potential for several streams of authority to be

created on this and, as the President says in his

judgment - and I do not think Your Honours may have

this, it is page 3 of his judgment, I think it may

have been omitted from Your Honours' application

books - it should come after numbered page 42 - Mr

Hughes advised me last night that this was

apparently missing from his as well - - -

TOOHEY J:	We have a page 42A.
MR HARROWELL: It has been completed then, Your Honour. At

about point 8 on the page the learned President

indicates how desirable it is to have a uniform
interpretation of this particular provision. There

is a stream of authority which says even though you

know at the time of entering into the obligation

what the amount will be, that is not a debt. There

is now a line of authority, starting with

Mr Justice Rogers in the Supreme Court of New South

Wales, which says that even though you cannot know

with any certainty what the amount might be at the

time you execute the agreement, that is a debt.

They are my submissions, Your Honour.

MASON CJ: Yes, Mr Hughes.

Hawkins 10 12/2/93

MR HUGHES:  Your Honours, it is clear that the question

decided by the Court of Appeal was a question of

considerable importance. The basis upon which we

submit that special leave should be refused is that

the decision of the Court of Appeal, upholding the

primary judge, is not attended with sufficient

doubt to justify the grant of special leave.

Could I hand up a very short outline.

MASON CJ: Yes, thank you.

McHUGH J:  The learned President took the view that a number

of telling arguments could be mounted against

the - - -

MR HUGHES:  His Honour said that there was an ambiguity and,

of course, in a way there is, but resolving

ambiguities on questions of construction is a

commonplace task, with respect, and the question is

whether the resolution of the ambiguity in the way

the learned President saw it was clearly right.

McHUGH J: But have you not got a case of conflicting

decisions between the States?

MR HUGHES:  On very different factual situations. It is

important, in our submission, to confine the ambit

of this question to the case of guarantees. There

may be different questions in the case of payments

of tax or liability to pay tax, because as I think

in the Tasmanian case, the liability depended

perhaps on the issue of a notice. The debt did not

accrue until some formal step was taken. It is important, and the learned Chief Justice in the Court of Appeal was conscious of this, to confine

the ambit of this decision to guarantees. Even so,

I readily concede it is an important question.

Your Honours will see that the exculpatory

provisions of section 556, contained in

subsection (2), focus in large measure the

attention of the court on the reasonableness of the

director's decision to incur the debt at the

particular time when it was incurred. Given that,

we would say it is appropriate, and can only be

appropriate, that the reasonableness of the

director's conduct should be assessed in relation

to the time when he was able to exercise his own

judgment on whether he should sign on the dotted

line, as it were, because it seems difficult to

impute to the legislature an intention that the

director's conduct in terms of reasonableness

should be judged in relation to a point of time at

which he could do nothing.

Hawkins 11 12/2/93

McHUGH J:  But the language of subsection (2) indicates that

is what the legislature did have in mind:

that at the time when the debt was incurred,

he did not have reasonable - - -

MR HUGHES: Exactly, and it is only by treating that

expression, "at the time when the debt was

incurred" as applying to the time when the director

had scope for choice, judgment, that the section

can be given a just operation.

McHUGH J: But no debt was incurred when the guarantee was

signed.

MR HUGHES: Well, it was, if I may beg to put the other

view, because first of all a debt can be a

contingent debt. And that is conceded; that is

common ground. It is not without interest,

perhaps, to notice - - -

MASON CJ: That is not quite common ground, is it,

Mr Hughes?

MR HUGHES:  I do not want to tread unjustly over my friend's

argument, but I thought my learned friend said that

a contingent debt was incurred at some point of

time. We say that when a company director

contracts with a bank - this is our first

proposition - that he will pay money to the bank as

a debt, in an amount referable to that which his

company will owe to the bank, if his company should

make default in payment there is necessarily a

point in time at which a debt is incurred.	The
question is to select the point of time.	We say it

is pretty obvious, with great respect to the

President, that the selection is easy. You select

the point of time at which independent judgment is

available - or the exercise of independent judgment

is available to the director.

McHUGH J: But one wonders whether the legislature,

particular in 1961 - sorry, when the Companies Code

came in - 1981, really had the question of

guarantees in mind. Section 556 is not a general

provision regulating the general conduct of

directors. If they entered into a contract which

ends up forcing the company into insolvency, even

though they should not have entered into the

contract, section 556 says nothing. It is talking

about debts.

MASON CJ:  It is very difficult to think they did not have

guarantees in mind when one bears in mind - - -

MR HUGHES:  Shapowloff.

Hawkins 12 12/2/93

MASON CJ: Yes.

MR HUGHES:  Shapowloff, which was decided on the old

section 303 of the 1961 Act and Shapowloff

considered the section 303 in which the reference

was to contracting a debt.

McHUGH J:  I appeared for the losing party in

Shapowloff - - -

MR HUGHES:  Your Honour may have bitter memories.

MASON CJ:  That may be the explanation for the decision. Do

not rub salt into an old wound, Mr Hughes.

MR HUGHES:  I will not fall into the error of respectfully

agreeing with that observation, Your Honour.

Your Honours, another perhaps significant aspect of

this .section is that if you go through

subsection (2):

it is a defence if the defendant proves -

(b) that at the time when the debt was
incurred, he 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;

So the legislature is pointing to two situations as
being different: the time when the debt was

incurred and the prospect, as at that time, of

whether the company would be able, in the future,

to pay all its debts as and when they fell due. So

that points very distinctly, we would say, towards

the conclusion that contingent debts of the kind we

assert were incurred here were in fact entered

into.

MASON CJ:  The section is undoubtedly drawn on the view that

the company, by an act of its, incurs a debt, and

it is drawn consistently with the idea that you

look at the situation at the time the company

performs that act.

MR HUGHES:  Yes.

MASON CJ: But, on the other hand, one must say that it

seems rather inappropriate that a section of this

kind should apply to a guarantee where the

liability remains contingent for so long, or may

remain contingent.

Hawkins 13 12/2/93

MR HUGHES: There is no doubt a difficulty. I respectfully

agree with what Your Honour the Chief Justice has

put. But perhaps the high point, if I can so

describe it, of our argument is one we seek to
encapsulate in proposition 5, that the potential

for injustice inherent in the choice of the time at

which the guarantee is, as it were, called up is

obvious. The director may have had good reason to

believe, when he undertook the conditional
obligation, that the company was and would remain

solvent. He was therefore justified, in terms of

the policy of the section, in undertaking the

obligation on behalf of the company or in

committing the company to the obligation. The

alternative choice, rejected by the Court of section should the company unexpectedly become

insolvent at some future time. And that

consideration weighed heavily with both courts

below.

MASON CJ:  Would he not have a defence under subsection (2),

that is the director who was not a director at the

time the instrument of guarantee was executed?

MR HUGHES: 

If he was not a director at the time when the

instrument was executed that would be a case in
which the debt was incurred without his express or
implied authority, yes. But I am postulating, for
the purpose of illustrating the point I am seeking

to make, a director who was in office at the time

when the guarantee was executed and who was also in

office when the skies fall in and the guarantee is

called up.  We submit that is a powerful

consideration. It would be inherently unjust that

a director holding the office of a director at both
relevant times should be cast in liability for

events which, on the applicant's argument, would

create that liability, although he had no control

over the situation and had acted with complete

reasonableness antecedently.

Really, Your Honours, this is a point about which one can, I suppose, go round the mulberry

bush, but we take our stand, if I may say so, on

the proposition that there is .really not sufficient

doubt.

MASON CJ: 

And on that example, as indicating the magnitude

of the injustice that would result from a contrary

construction.

McHUGH J: But if you adopt your construction that a

director may be guilty of a criminal offence even

though the company runs into no trouble, that is to

say at the time when the guarantee is given there

may be no reasonable grounds to expect that the

Hawkins 14 12/2/93

company ought to pay all its debts as and when they

become due, but three or four years later that

might be in quite a different situation. There may

never ever be any insolvency, it may be able to pay

its debts, for example, but on your theory there

would be an immediate offence under - - -

MR HUGHES:  There is nothing obnoxious in that, if the

policy of the provision is to discourage directors

from incurring liabilities which, at the time,

there is no reasonable prospect that the company

can meet.

McHUGH J: Yes, I follow the force of that.

MR HUGHES:  Your Honours, I doubt whether there is anything

else I can put, except to say that it is important
to - and I am sure Your Honours appreciate that

this is an application of a section by the Court of

Appeal which is confined to guarantees and

guarantees that create debts.

MASON CJ: Yes, Mr White.

MR WHITE:  If the Court pleases, the Commission neither

supports nor opposes the application. There is,

however, a consideration to which the Court's

attention has not yet been directed on which maybe

I could provide assistance if it would be of

assistance, and that is the current state of the

Corporations Law. Section 592 replicated
section 556 of the Code. There was passed, on

24 December last year, the Corporate Law Reform

Act 1992. The effect of that Act is that section

592, in its present form, continues to apply to

debts which are incurred before the commencement of Part 5.7B of the Corporations Law which is to

come into effect at some time in the future.

The new Part 5.7B has not yet been proclaimed

to commence. It must commence by 25 June this

year. When it does commence the Corporations Law

will provide a new Code, if you will, for the

liability of directors who incur debts after the

commencement of that Part. The new legislation

continues to use the phrase, "incurring of a debt"

in a number of places but it is, I think, fair to

say that various other provisions, defences,

whether the liability is of a civil or criminal

nature, matters of that kind, are such that it

would not necessarily follow that a decision of

this Court upon section 556 of the Companies Code

would be determinative of the construction of a

similar phrase in the new section 588G when it is

introduced in the new legislation.

Hawkins 15 12/2/93

Having said that, there are undoubtedly many

cases which will fall to be decided under

section 556 of the Code and under section 592 of

the Corporations Law for debts which are incurred

until some time during the course of this year.

There is unquestionably questions of difficulty and

importance in the construction of section 556.

If it would be of assistance to the Court, I

could hand to Your Honours a summary of some of the
significant differences between the legislation in

the new Part 5.7B in the Corporate Law Reform Act

and the present section which is section 592 of the
Corporations Law and also provide to Your Honours

copies of the Bill. Your Honours will see from the summary of some, though not all, of the differences the nature of the changes which the new legislation

will implement.

I should say, Your Honours, that I am afraid I

have not been able to provide Your Honours with

copies of the new Act. It was passed just before

Christmas and has not yet been printed.

McHUGH J:  The words in 588G, "insolvent ..... or becomes

insolvent by incurring that debt", would seem to

negative a case such as the present.

MR WHITE:  I would not like to have to make a submission

that that is either the case or not, Your Honour.

What the expression in 588G does unquestionably do

is use the expression "incurring of a debt", but

does it at a time of insolvency which is defined

to mean insolvency when a debt is not only due but

payable. The consequence of that to a case such

as the present is one which I do not wish to argue now, nor one which would of course be argued on an appeal in these proceedings.

But Your Honours will appreciate that the extent to which questions such as the defences

available under subsection (2) are material to the

construction of the phrase ''incurs a debt" in

subsection (1) of section 556 could be affected by

the reframed defences in the new law. His Honour

Justice McHugh has referred to the use now of the

defined phrase of insolvency, and there is also the

consideration that a contravention of section 588G

will not, of itself, constitute a criminal offence
or give rise to a liability for a civil penalty

order, but unless contravention is accompanied by

recklessness or dishonesty or matters of that kind,
the liability will not be criminal.

So to that extent a decision of the Court, although very important obviously for the large

number of cases which presumably exist under the

Hawkins 16 12/2/93

present law, will not necessarily be determinative,
although obviously of great assistance, on the

construction of the new law. If the Court pleases.

MASON CJ: 

Mr Hughes, I do not know whether you ought to say

anything this before we give Mr Harrowell the
opportunity of replying.

MR HUGHES:  Your Honours, very little really. We have

conceded that the question is one of public

importance. This perhaps adds a little to that

proposition.

TOOHEY J:	You take the stand on the correctness of the decision.
MR HUGHES:	Yes, the manifest correctness, as we would

respectfully put it, of the decision below.

MASON CJ: Yes, Mr Harrowell.

MR HARROWELL:  Very briefly, Your Honours. The critical

problem in construing this section for company

directors to whom it applies is that if the Court

of Appeal be right, there was a debt incurred on

signing a document that did not specify any sum of

money, any relation to which the final sum of money

the people who signed it had no control. Now, it

might be that this Court comes to a view that the

legislature's intention was to discourage exactly

that conduct.

McHUGH J: That is the most telling point against you, is it

not, that the construction which Mr Hughes puts on

it seems designed best to give effect to its, one

assumes, evident policy.

MR HARROWELL:  Yes, that is the most telling point against

us, Your Honour, and our submission is that there

is nothing in the section and explanatory

memoranda which indicate that the Parliament

intended to go that far and that the authorities

that exist at the moment - and some are for and

some are against us, including Shapowloff and

Russell Halpurn and so on - all those authorities, and some are favourable, deal with where there was

a specific sum of money identifiable by the

directors when exercising their mind. Now, the

effect of the Court of Appeal's decision, and if

that be the policy decision of the legislature, is

to say, "No prudent director can ever enter into an

all moneys guarantee because he cannot control that

liability." He can control how much his company

purchases, whether it is solvent or not, but he

cannot control whether that lender should give to

the borrower, the other company in the group or

unrelated company, for that matter, triple the

Hawkins 17 12/2/93

amount contemplated at the time of the guarantee.

Now that, we submit, is a very big step.

On the other hand, I also accept the burden,

Your Honours, that if my proposition be right, that excludes from 556 and 592, and perhaps also from

588G, guarantees. What of the situation where

someone does fraudulently say, we will cross-

guarantee. And this guarantee arose, as was common

at the end of the 80s, lenders had run out of

security, they said cross-guarantee everything. It

has happened in thousands of cases and they are

still coming to the courts.

If the proffering of that guarantee to seek

indulgence from the lender in desperate
circumstances was fraudulent, in other words there
was no substance to the guarantee, the director

still is liable. But the problem that you still

have on Mr Hughes' construction and that proposed by the Court of Appeal is that the amount against

which you will test the reasonableness or the

unreasonableness of the decision of the director

whether to execute or not is, firstly, not

controlled by the director, unlike ordering goods

and services for his company; secondly, absolutely

incapable of being ascertained. We say that is the

difference, and then the question will be, what is

created, and that is why I say what is created then

is a contingent liability; it becomes a contingent

debt - - -

MASON CJ:  I think you are repeating what you said in-chief,

Mr Harrowell.

MR HARROWELL:  Yes. They are my submissions. That is, I

would submit, the distinction. It is not easy,
because the defence provisions which the President

takes comfort in could not be made out in those

circumstances because what would the prudent

director think.

TOOHEY J: Could I just ask you this, Mr Harrowell. How

would paragraph (b)(ii) operate on your approach?

MR HARROWELL:	Of section 556?
TOOHEY J:	I am sorry, of section 556.

MR HARROWELL: In the circumstances of the guarantee, I

would submit it would operate this way, that the

director has to say, here is a guarantee for the

company to sign. Can we pay, if called upon? He

can come to the view that his company is solvent

and not going to become insolvent for reasons

unrelated to the guarantee. He then must say,

potentially under this guarantee we are incurring,

Hawkins 18 12/2/93

I say a liability, Mr Hughes says a contingent

debt. He should say to himself, how much? If it is

$5 million maximum, can we cope with it? Because
it is an all moneys guarantee, I would say that he

is in an impossible situation if 556 applies

because he will not know, and indeed cannot

control - the guarantee expressly excludes any

involvement - in what the lender will lend to the

borrower.

TOOHEY J:	You are looking at it from the point of view of the director, but in making good, let us say, a
prosecution, it would have to be shown, among other
things, that 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.

MR HARROWELL:  Yes. It may be difficult, in a prosecution

as distinct from civil action, to establish it with

the requisite burden in a criminal matter.

However, there would be a strong argument, with all

the changes in terms of director's

responsibilities, that simply exposing the company

to an obligation which there was no control over

was sufficient to bring into operation the section,

simply by the fact that the obligation was open

ended and unlimited, and that director was allowing

the company really to be put at the whim of the
borrower and the lender, that the section should

apply if the guarantee is a debt.

TOOHEY J:	Thank you.
MASON CJ: Thank you, Mr Harrowell.	The Court will take a

short adjournment to consider the course it will

take in this matter.

AT 3.20 PM SHORT ADJOURNMENT

UPON RESUMING AT 3.27 PM:

MASON CJ: Although s. 556 gives rise to difficulties of

construction, the construction placed upon it by

the Court of Appeal best gives effect to the policy

that underlies the section. The application for

special leave to appeal is therefore refused.

MR HUGHES:  I ask for costs, Your Honour.

MASON CJ: Not opposed, Mr Harrowell? The application is

refused with costs.

AT 3.28 PM THE MATTER WAS ADJOURNED SINE DIE

Hawkins 19 12/2/93