Mercantile Credits Ltd v Chow & Chow

[1996] QSC 127

IN THE SUPREME COURT

OF QUEENSLAND

No. 1301 of 1990

[Mercantile Credits Ltd v Chow & Chow]

BETWEEN:
  MERCANTILE CREDITS LIMITED
  Plaintiff

AND:
  CHERNG-YUN CHOW
  First Defendant

AND:
  WEI-PING CHOW
  Second Defendant

JUDGMENT  -  THOMAS J.

Delivered:17 July 1996

CATCHWORDS:      PRACTICE - Pleadings - Application by the defendants to strike out part of the plaintiff's statement of claim - O.22 r.31

Whether on the facts pleaded the debtor company is a company to which s.556 of the Companies (Queensland) Code is capable of applying - A company ". . in respect of property of which a receiver . . has . . been appointed" (s.553(1)(e) Companies (Queensland) Code)

Whether an extension of time for the repayment of a pre-existing loan constitutes the incurring of a debt - Standard Chartered Bank of Australia v. Antico (1994) 18 ACSR 1 discussed - Jurisdiction to strike out not to be exercised unless the lack of a cause of action is clearly demonstrated - General Steel Industries Inc v. Commissioner for Railways (NSW) (1964) 112 CLR 125, 129 applied

Summons dismissed with costs.

Counsel:Mr R. Derrington for the Plaintiff

Mr J. Batch for the First and Second defendants

Solicitors:Hunt & Hunt Lawyers for the Plaintiff

Hogans Lawyers for the First and Second Defendants

Hearing Date:                3 July 1996

IN THE SUPREME COURT

OF QUEENSLAND

No. 1301 of 1990

BETWEEN:
  MERCANTILE CREDITS LIMITED
  Plaintiff

AND:
  CHERNG-YUN CHOW
  First Defendant

AND:
  WEI-PING CHOW
  Second Defendant

JUDGMENT  -  THOMAS J.

Delivered 17 July 1996

This is an application by the defendants to strike out part of the plaintiff's statement of claim.  The application is brought under O.22 r.31.
Paragraphs 1 to 28 of the statement of claim relate to the plaintiff's action based upon a guarantee given by the defendants over moneys payable to the plaintiff by Lyndoch Pty Ltd ("the debtor company").  Paragraphs 29 to 35 of the statement of claim bring a further or alternative claim against the defendants based upon s.556 of the Companies (Queensland) Code.  It is common ground that in view of the times when the relevant transactions were alleged to have occurred, the relevant statutory law to be applied is the Companies (Queensland) Code.
The essential claim is that the defendants were directors of the debtor company or took part in its management when various advances were obtained from the plaintiff, and that with respect to debts so incurred the directors are jointly and severally liable along with the debtor company for payment of the debt.  It is alleged that immediately before the incurring of each relevant debt, there were reasonable grounds to expect that the debtor company would not be able to pay all its debts as and when they became due.
Section 556 states -

"556(1)  [Civil and criminal liability re certain debts]   If

(a)       A company incurs a debt, whether within or outside the State;

(b)       immediately before the time when the debt is incurred -

(i)there are 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 are 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 is, at the time when the debt is 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 is guilty of an offence 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."

The point taken by counsel for the defendants is that, on the facts alleged in the statement of claim, the debtor company was not, under s.556(1)(c), "a company to which this section applies".  In order to answer the question whether it was such a company, one goes back to s.553.  It states -

"553(1)  [Application of sec. 554-557]   Sections 554 to 557 (inclusive) apply to a company -

(a)       that has been wound up or is in the course of being wound up;

(b)       that has been in the course of being wound up, where the winding up has been stayed or terminated by an order under section 383;

(c)       that has at any time been, or is, under official management;

(d)       affairs of which have been or are under investigation pursuant to Part VII or the provisions of a previous law of the State with which that Part corresponds;

(e)       in respect of property of which a receiver, or a receiver and manager, has at any time been appointed, whether by the Court or pursuant to the powers contained in any instrument, whether or not the appointment has been terminated;

(f)        that has ceased to carry on business or is unable to pay its debts;  or

(g)       that has entered into a compromise or arrangement with its creditors."

For present purposes the subparagraph relied upon by the plaintiff for activating s.556 is s.553(1)(e).  The statement of claim includes an allegation that on 8 February 1990 a receiver and manager was appointed over the property of the debtor company.  The defendants' submission is that this is insufficient to make s.556 apply to the company in question.  The submission concentrates upon the words "in respect of property of which" the contention being that whilst the circumstance mentioned in s.553(1)(e) may permit ss.554, 555 and 557 to apply, it is inappropriate for application of s.556.  The submission is that the words do not apply to the company simpliciter, but only "to a company . . in respect of property of which a receiver . . has . . been appointed".  The submission is that the other six subparagraphs apply to the company itself whilst this one applies only to a company "in respect of property" of the company.  Accordingly it is submitted that s.556 applies to companies, not the property of companies, and that s.553(1)(e) is incompatible with s.556.
I cannot accept this submission.  Section 553(1) is concerned with designating the companies to which the following sections will apply.  The criteria in subparagraphs (a) to (g) inclusive are the respective qualities or factors that qualify a company to be subject to the following sections.  The relevant draftspersons were no doubt well aware that a receiver is not appointed to a company, but rather is appointed in respect of the property of the company.  Awareness of this is equally evident in paragraph (d) of the definition of appropriate officer in s.555(3) and paragraph (d) of the definition of "relevant day" in that section, and indeed elsewhere in the Act.  There is no reason to think that a different result was intended with respect to subparagraph (e) than that in the other subparagraphs.  On an ordinary reading of the following words taken from s.553(1), "Sections 554 to 557 apply to a company in respect of property of which a receiver has at any time been appointed", the facts pleaded qualify the debtor company as one to which those sections apply.
One may wonder why the appointment of a receiver at any stage in this history of a company should remain forever a qualifying factor for directors becoming liable for debts incurred when there are reasonable grounds to expect insolvency.  But the same question might equally well be asked with respect to subparagraph (c), or indeed other subparagraphs in s.553(1).
In my view on the facts pleaded the debtor company is a company to which s.556 is capable of applying.
The second point taken by counsel for the defendants is that the facts alleged in the statement of claim show that the defendants were not appointed as directors until four days after the liability that was incurred under the major deed (referred to as "the first deed") on which the plaintiff sues.  Accordingly the defendants submit that this statutory cause of action is unavailable.
The answer to this lies in paragraph 34 of the statement of claim -

"At all material times immediately before the incurring of each of the debts referred to in paragraphs 31 and 32 hereof the defendants were directors and/or took part in the management of the debtor". (My underlining)             

Section 556(1) imposes liability not only on actual directors, but also on persons who take part in the management of the debtor company.  Accordingly this objection to the statement of claim fails.
Finally it is submitted that analysis of the statement of claim reveals that the execution of the two deeds upon which this claim is based achieved no more than extensions of time for pre-existing loans existing between the plaintiff and the debtor company.  The submission is that no new loan was created.  Reliance is placed upon observations of Hodgson J in Standard Chartered Bank of Australia v. Antico (1994) 18 ACSR 1; 1995 13 ACLC 1381, 1426-1431. His Honour there drew a distinction between making a loan and extending a loan, observing that the alteration of the date for repayment of a debt could not amount to the incurring of a debt. The obtaining of extra time of course incurred a fresh liability to further interest. His Honour noted the contending submissions in this way.

"There is force in Mr Hughes' submissions that a transaction which, in substance, does no more than alter the terms on which an existing debt is to be paid should not be regarded as incurring a debt;  because the creditor is not disadvantaged, because it could operate unfairly where financial incapacity has arisen after the original debt was incurred and where the composition of the board of directors has changed, and because it could unreasonably inhibit useful arrangements for moratoriums.  On the other hand, I think there is also force in Mr Jucovic's submission that where directors, who know or ought to know that the company cannot pay its debts, secure the continued trading of an insolvent company by entering into a new agreement with an existing creditor, and thereby promote the incurring of further debts by the company, the dissipation of its assets, and perhaps the encumbering of its assets, it would be consonant with the purpose of s.556 to regard the transaction as the incurring of a debt."

His Honour then expressed the opinion that "A company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable" and, "In general terms, I am inclined to think that in the case of the loan for a fixed term, a company does by taking the loan incur a debt for the principal and interest for the term of the loan . . ;  and that it incurs a debt for the difference between the prompt payment rate and the higher rate each time it fails to pay on time".  I shall not canvass the judgment further at this stage of what is merely a ruling on a pleading point.  The judgment supplies very useful guidance for a trial judge confronted with ultimate facts where there may be considerable variation in circumstances and degree that may make different results possible.  To some extent the extensive discussion in this case may be regarded as obiter, although on my researches it seems to be the most useful discussion available on this point.  It should also be recognised that it generally favours the position of the defendants in the present case.  However I am not prepared to regard it as a clear instance of an allegation upon which the plaintiff cannot succeed in whole or in part, and I do not think that the circumstances are clear enough to justify a striking out so as to limit the claim to one of additional interest.
The jurisdiction to strike out is not to be exercised unless the lack of a cause of action is clearly demonstrated (General Steel Industries Inc v. Commissioner for Railways (NSW) (1964) 112 CLR 125, 129). I do not think that the present application meets that test.
The summons should therefore be dismissed with costs.