Milner v Ali
[2000] QDC 107
•29/2/2000
DISTRICT COURT OF QUEENSLAND
CITATION: Milner v Ali [2000] QDC 107 PARTIES: BRUCE POUNTNEY MILNER
RASHEED AKHTAR ALI AND ANOR.
FILE NO/S: 4657 of 1996 DELIVERED ON: 29/2/2000 DELIVERED AT: BRISBANE HEARING DATES: 4 & 5/1/2000 JUDGE: SKOIEN S.J.D.C. ORDER: Judgment for plaintiff for $70,956.05 plus interest CATCHWORDS: Corporations Law, insolvent trading, directors’ liability, reasonable grounds to expect solvency. Corporations Law ss. 588G, 588H, 588M COUNSEL: Hack for the plaintiff
Newton for the defendantsSOLICITORS: Hopgood Ganim for the plaintiff
Stephens & Tozer for the defendants
This is a claim by the liquidator of a company in liquidation (Havencatch Pty Ltd) for $70,956.05 as a debt due to him and recoverable by virtue of s.588 of the Corporations Law. The defendants are former directors of Havencatch.
The Legislation
The Corporations Law has the following relevant provisions:
“588G(1) This section applies if:
(a) a person is a director of a company at the time when the company incurs a debt; and
(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and
(d) that time is at or after the commencement of this Part.
588G(2) By failing to prevent the company from incurring the debt, the person contravenes that section if:
(a) the person is aware at that time that there are such grounds for so suspecting; or
(b) a reasonable person in a like position in a company in the company’s circumstances would be so aware.
588H(1) This section has effect for the purposes of proceedings for a contravention of section 588G in relation to the incurring of a debt (including proceedings under section 588M in relation to the incurring of the debt).
588H(2) It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even it if incurred that debt and any other debts that it incurred at that time.
588H(3) Without limiting the generality of subsection (2), it is defence if it is proved that, at the time when the debt was incurred, 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 incurred that debt and any other debts that it incurred at that time.
588M(1) This section applies where:
(a) a person (in this section called the ‘director’) has contravened section 588G in relation to the incurring of a debt by a company; and
(b) the person (in this section called the ‘creditor’) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency; and
(c) the debt was wholly or partly unsecured when the loss or damage was suffered; and
(d) the company is being wound up;
whether or not:
(e) the director has been convicted of an offence in relation to the contravention; or
(f) a civil penalty order has been made against the director in relation to the contravention.
588M(2) The company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.”
The Chronology
At all material times Havencatch was a duly incorporated company. The defendants became its directors on 2 April 1992. At all material times the general manager of Havencatch was Mrs Joanne Smith. The plaintiff was appointed to be its administrator on 18 June 1996. On 16 July 1996 a creditors’ meeting resolved that it be wound up, the plaintiff becoming its liquidator.
Between January 1996 and June 1996 the company incurred debts to creditors in the total sum of $70,946.05. Details of those debts are scheduled to the claim but (subject to two of them which I will discuss later) it is unnecessary to say more than that each is a debt which the company incurred in the ordinary course of its business, which was that of buying killed poultry, cutting it into portions, and re-selling the portions to caterers, hotels, clubs and the like.
The Issues
The issues in the case are:-
(a) was Havencatch insolvent between January and June 1996 when it incurred the debts set out in the annexure to the claim (s.588G(1)(b));
(b) were there reasonable grounds for suspecting insolvency at that time (s.588G(1)(c));
(c) did the defendants at that time have reasonable grounds to expect, and did they expect, that Havencatch was solvent and would remain so even if it incurred those debts (s.588H(2));
(d) did the defendants at that time have reasonable grounds to believe, and did they believe, that Mrs Smith was responsible for providing to them adequate information about whether Havencatch was solvent and that she was fulfilling that responsibility and did they expect, on the basis of the information provided, that Havencatch was solvent and would remain so even if the debts were incurred (s.588H(3));
(e) when did Havencatch incur the debt for rent for the month of June in the sum of $2,210.20, which is one of the debts making up the claim;
(f) when was the debt incurred which is owed by Havencatch to the Deputy Commissioner of Taxation in the sum of $9,359.83, being one of the debts making up the claim.
The plaintiff bears the onus of proof in each of the matters in sub-paragraphs (a), (b), (e) and (f) of paragraph [5]. The defendants bear the onus of proof in sub-paragraphs (c) and (d).
Issues [5(a)] and [5(b)]
In his written submission Mr Newton, counsel for the defendants, while not able to admit the point, conceded that he could not dispute the fact that at the material time there were reasonable grounds for suspecting that Havencatch was insolvent or would become insolvent. He did not expressly concede that at the material time Havencatch was insolvent, but he made no submissions that a finding of solvency could be made.
In those circumstances I propose to go into little detail to support the finding of fact that I make that Havencatch from January to June 1996 was in fact insolvent and that there were reasonable grounds for suspecting that. It was unable to pay its debts as they fell due. See s.95A of the Corporations Law. That is the conclusion which the plaintiff reached, for reasons which he summarises in paragraph 1 of his expert report (exhibit 1). I accept the validity of that summary.
The plaintiff’s expert opinion is supported by the evidence of Mrs Smith and of Miss Grieff who was the administration manager of Havencatch for almost all of the relevant period. The picture painted by their evidence is that of a company struggling unsuccessfully to stay afloat.
This was not a case of a company which was temporarily short of liquidity but of a company with an endemic shortage of working capital. See Hymix Concrete Pty Ltd v Garrity, (1977) 13 ALR 321 at 328. By the beginning of 1996 Mrs Smith and Miss Grieff were forced into the position in which the available money was sufficient to pay, and was used to pay, only the most pressing debts. They spent much of their time fending off creditors. Particular mention might be made of the inability to pay group tax deductions which first arose with the instalment which fell due on 7 December 1995 (paid on 4 January 1996), an inability which continued thereafter. No arrangement was made with the Australian Taxation Office until late May/early June 1996 (exhibits 4 and 5). Then there was the inability to pay the Workers’ Compensation premium, the age of the debt to Nerang Park (a major supplier of poultry carcasses), the late payment of wages and the “top drawing” of cheques to creditors. These matters are discussed more fully hereunder (paragraphs [22] et seq) where the statutory defences are considered.
So the plaintiff has established the issues set out in paragraphs [5](a) and [5](b). It is convenient to turn now to the matters in paragraphs [5](e) and [5](f)
Issue paragraph [5(e)], the rent debt
The premises occupied by Havencatch were held under a lease (exhibit 19) the term of which began on 5 May 1992 and expired on 4 May 1995. On its expiration Havencatch did not exercise the option to renew the lease but remained on in possession paying monthly rental. Clause 3(vi) of the lease provides that such holding on was as a tenant from month to month, terminable by not less than one month’s notice in writing.
The submission for the defendants is that the rent liability was incurred under the lease and thus was incurred when the lease was first entered into. That is answered by the decision of Hodgson J. in Standard Chartered Bank v. Antico [Nos. 1 & 2] (1995) 38 NSWLR 290 at 314 where His Honour said:
“In my opinion 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 would otherwise would not have been liable. …
In the case of a lease, this formulation suggests that entry into a lease for a term does incur a debt for the rent for the whole term of the lease, as found in Russell Halpern Nominees Pty. Ltd. v. Martin [1987] WAR 150 and Bans Pty. Ltd. v. Ling (1995) 16 ACSR 404. However, where there is a periodic tenancy, or a holding over after expiry of a term, the company can put a stop to the accrual of rent liability by giving a notice to quit and/or giving up possession; so in those cases, in my opinion, it would be the failure from time to time to take those steps which, as a matter of substance, would make the company liable for each rent instalment accruing from a time when such a step would have stopped the rent accruing. On each occasion when the company could terminate the lease but does not do so, it would incur the rent for the period to which this omission committed the company.” [Emphasis added].
I respectfully agree with that statement of the law.
As I have said Havencatch was holding over after the expiry of the lease on 4 May 1995. Clause 3(vi) of the lease made it, in those circumstances, a tenant from month to month on a tenancy determinable by the giving of one month’s notice in writing. By failing to give that notice one month prior to the commencement of the June 1996 term (on 5 June) Havencatch incurred the rent obligation for June 1996.
In these circumstances Havencatch incurred the rent obligation of $2,210.20 for June 1996 on 5 May 1996.
Issue paragraph [5(f)], the group tax debt
Mr Newton’s submissions contained a “query” in relation to the debt of $9,359.83 owing to the Australian Taxation Office. This sum related to group tax instalments which fell due during March, April and May 1996. When Havencatch could not pay them an agreement was reached in late May/early June 1996 (exhibits 4 and 5) that these arrears could be paid off at the rate of $500 per week. The first and second of such payments were in fact made on 7 and 14 June. The “query” of Mr Newton thus is whether, such arrangements having been made, there was any debt “incurred” for the balance of the remaining outstanding group tax instalments within the relevant period of January to June 1996.
I agree with the submission of Mr Hack of counsel, for the plaintiff, that the “query” is based upon a misconception. It confuses the concepts of incurring a debt and of obtaining an extension of time to pay the debt. So far as this aspect of the case is concerned all that is relevant is the fact that the debt was incurred. That occurred by force of statute (s.221F(5) of the Income Tax Assessment Act 1936).
Any arrangement entered into by the Deputy Commissioner to accept payment by instalments did not affect the statutory creation of the debt, that is, the incurring of it. At best, it may mean that the sum was not then payable.
I was referred by Mr Newton to re Newark Pty. Ltd. (in liq.) (1993) 1 Qd.R. 409, where, at 413, it was stated that a debt does not necessarily become due in accordance with the stipulated terms of trade if the course of dealings between the parties leads to the conclusion that it is not payable and is not expected to be payable until some future time. But the court there was talking of “due” in the context of solvency or insolvency; it was not dealing with the incurring of a debt, that is, its genesis.
I conclude that Havencatch incurred the debt to the Australian Taxation Office within the relevant period.
Issues [5(c)]and [5(d)]
It is convenient to deal with these issued together and that necessitates a discussion of the evidence.
Mrs. Smith had worked for Havencatch as administration manager from May 1992, when Havencatch first bought the business, to January 1994 when she took up employment elsewhere. She was re-employed in December 1994 as general manager and remained there in that position until 30 June 1996. I accept that she was adequately trained and was intellectually equipped properly to carry out the duties of her employment.
Shortly prior to re-commencing her employment Mrs. Smith spoke to Mr. Rasheed Ali and his son Mr. Arif Ali and to Mr. Ramswarup. She was told that Havencatch’s accounts were in a mess but that there were sufficient funds to pay the creditors. She was asked, as general manager, to get the accounts into order.
Mrs. Smith and Miss Grieff set about doing that and managed to get them to the point at which they had reconciled the accounts, that is identified the source purchase and sales dockets and married them with the accounts for debts and creditors. They found that some debts were irretrievable, the debtors having gone out of business. However it seemed to Mrs. Smith that provided sales kept going, preferably improving, Havencatch could be profitable and for a short while in 1995, trading actually improved.
Golden Cockerel was a major supplier to Havencatch. About mid 1995 Golden Cockerel, which had already once increased the price at which it sold poultry, raised the price again. Added to that was the fact that new competitors had come into the market which were under-selling Havencatch. These factors caused severe difficulties for Havencatch.
On a date Mrs. Smith could not identify in the third quarter of 1995 she had a meeting with Mr. Rasheed Ali, Mr. Ramswarup and Mr. Arif Ali when it was decided to lay off some of Havencatch’s employee to reduce costs. That was done but the position did not improve. She said that Havencatch was just “floating along” and that by the end of 1995 creditors were not being paid on time. She and Miss Grieff would decide which creditors could be paid and give priority to these. More debts became obviously irretrievable. The stress of this and of having to deal with creditors affected her health adversely.
Each day Mrs. Smith prepared a daily report on the company’s trading and faxed it to Mr. Rasheed Ali. Each week she prepared a weekly report on trading. She also faxed the weekly reports to Mr. Rasheed Ali, usually with a debtors’ trial balance. The weekly report showed a weekly net gain or loss and also figures for the year to date. Both reports were on printed forms which were prepared before her re-employment. The weekly reports are in evidence. The daily reports, with three exceptions, have mysteriously disappeared.
Mrs. Smith also periodically phoned Mr. Rasheed Ali and sometimes saw him face to face. She saw Mr. Ramswarup on only about three occasions. She had some contact with Mr. Arif Ali and with Mr Rasheed Ali’s wife, particularly when Mr. Rasheed Ali was overseas, as he was periodically. Exhibit 23 shows that during the material first half of 1996 he was overseas for 52 days for periods of a day up to about a week.
In December 1995 Mrs. Smith met Mr. Rasheed Ali and told him she could not keep going in this fashion. He said to keep the business going over Christmas and he would try to sell Havencatch. If that had not occurred by the end of January he would close the business down.
Mrs. Smith described the financial position which Havencatch had reached by January 1996 as extremely difficult. These difficulties continued. She was not able to pay creditors on time. When she first reconciled the accounts on her re-employment, she had agreed with Nerang Park, another major supplier, that she would pay the current accounts within seven days and also reduce the outstanding account. After some time, however, she had found she was unable to meet that arrangement and Nerang Park put Havencatch on a C.O.D. basis. The insurance on the plant and equipment was allowed to lapse and the public liability policy was not renewed. The group tax payable to the A.T.O. for March, April and May 1996 could not be paid and arrangements were made to pay in instalments. Wages to the office staff were also late in being paid, this occurring almost every week in 1996.
Mrs. Smith and Miss Grieff developed a practice whereby they calculated the likely receipts from debtors and would draw cheques up to that amount in favour of the most pressing creditors. Once signed, the cheques were held until the funds actually became available. This often involved cheques being held for lengthy periods and in fact when the administration of Havencatch began on 18 June 1996 a large bundle of them (exhibit 6) remained.
Mrs. Smith, in her conversations with Mr. Rasheed Ali, told him of her difficulties in paying creditors, and how she was having to withhold some payments. His reactions were non-committal. She was asked to “soldier on”.
Mrs. Smith, as manager, made the day to day decisions in the running of Havencatch but I accept that she never made any major decisions without telling Mr. Rasheed Ali, or if he was out of the country, without giving the information to Arif Ali or sometimes to his wife. It is clear that Mr. Rasheed Ali was content to have his wife and son be his channel of communication on those occasions. Whether to Mr Rasheed Ali personally, or to him via his wife or son, I am satisfied that he was kept au fait with Havencatch’s financial position.
In June 1996 Mrs. Smith was contacted by Mr. Rasheed Ali, told to cancel all signed cheques held by her and to collect all accounting documentation for a meeting on 14 June. During that meeting she gave notice of her intention to leave the employ of Havencatch.
Mrs Smith’s evidence of details such as dates, frequency of meetings with Mr Rasheed Ali and exactly what was discussed was not always precise. Sometimes, on further reflection, she qualified what she had said earlier. But I can see no reason to doubt the broad accuracy of her evidence and certainly no reason why she would be untruthful. She seems to have no axe to grind. She went from Havencatch’s employment to another job, where she remains.
The thrust of Mrs Smith’s evidence of the parlous, one would say hopeless, financial position of Havencatch, particularly in the first half of 1996, was materially corroborated by Miss Grieff. She also was a witness with no apparent axe to grind who appeared to be giving me her honest recollection. She also said that Mr Rasheed Ali was well aware of the state of Havencatch’s financial affairs.
I do not find particularly surprising the inability of Mrs Smith or Miss Grieff to be able to specify occasions on which the difficulties in paying particular creditors or other financial problems were discussed with Mr Rasheed Ali. The more a circumstance becomes the norm, the less one may be able to recall specific examples of it. But that does not prevent a person from clearly recalling that the circumstance existed and that it was well known to all.
It is the fact (as I have found in paragraphs [7] – [10] above) that in the first half of 1996 Havencatch was insolvent, and on the evidence may have been even before that. It is the fact that Mrs Smith and Miss Grieff (particularly Mrs Smith) were stressed by the lengths to which they were being put to fend off creditors. The defendants accept that she was in a state of stress. One cannot help asking why, that being the case, Mrs Smith would have kept the reason for her stress (that is, the financial state of Havencatch) to herself? Why would she not have told the directors, especially the director on the spot, Mr Rasheed Ali, about it? Why would she suffer alone? To find that she did these things would be contrary to common sense.
Late in his cross examination Mr Rasheed Ali agreed that “in general discussions” Mrs Smith told him during the first half of 1996 that Havencatch was not paying creditors on time, that their payment terms were being extended without any agreement on the part of the creditor. That very substantially corroborates Mrs Smith’s evidence on his knowledge of Havencatch’s bad financial position.
Mr Rasheed Ali said in evidence, initially, that until he looked carefully at the daily report of 14 June 1996, exhibit 3, and had Mrs Smith prepare complete schedules of Havencatch’s finances, he had felt no cause for concern. Before that he simply used to look at the daily and weekly reports, broadly tally the figures and conclude that all was in sufficient order. However, his subsequent evidence cast doubt on this initial evidence of general confidence in Havencatch’s ability to trade. As his evidence developed a somewhat different picture emerged, and I now set out some of that evidence.
In December 1995 he was expressly made aware by Mrs Smith that there had been a downturn in sales attributable to other competitors entering the market and that sales were significantly lower. He knew over a period of time that the situation was “extremely tight”. He did not ever compare the final results of the weekly reports with the annual accounts. His enquiries appear to have been limited to comparing the debtors with creditors on the daily reports and satisfying himself that they were “broadly in balance”. He did not superintend the measures discussed in the September/October meeting to increase profitability. He knew that the position with creditors was that some creditors were not being paid when payment was due and that that was the position throughout 1996. He had been told by Mrs Smith that the company was taking “extended terms” with creditors without any agreement by them to do so throughout 1996. He knew that during 1996 the company was continuing to trade at a loss. He did not question Mrs Smith about the accuracy of the reports nor request her to complete the aging of creditors and debtors sections in the daily reports. Nor did he seek a breakup of outstanding creditors nor ask whether the debtors were all collectible.
I cannot accept that Mr Rasheed Ali, in the light of those matters, did not actually know that Havencatch was insolvent between January and June 1996, that is, was unable to pay its debts as they became due. He is clearly an experienced business man. He has accounting qualifications.
So I find that Mr Rasheed Ali had actual knowledge of the insolvency of Havencatch during the material period January to June 1996, and thus has failed to satisfy the onus cast on him by s.588 H(2) and by s.588 H(3).
Even if it were the case that Mr Rasheed Ali did not have actual knowledge of the insolvency, in my opinion he would fail to establish that he had reasonable grounds to expect that Havencatch was solvent and would remain so if it continued to trade in 1996 (s.588 H(2)), or that based on the information given to him by Mrs Smith he expected that Havencatch was solvent and would remain so if it continued to trade in 1996 (s. 588H(3)).
The term “expect” in The Corporations Law has been interpreted as meaning “to anticipate the occurrence or the coming of some event and to import a greater degree of certainty than mere hope or possibility and of a higher order than suspecting” (3M Australia Pty Ltd v. Kemish (1986) 10 ACLR 371 at 378; Dunn v. Shapowloff (1978) 2 NSWLR 235 at 249). Equally in Queensland Bacon Pty Ltd v. Rees (1966) 115 CLR 266 at 303, Kitto J. said with respect to a similar Bankruptcy Act provision “a suspicion that something exists if more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to a slight opinion but without sufficient evidence … a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence.”
Thus while it is conceded by Mr Newton that there were reasonable grounds for suspecting insolvency (s. 588G(1)(c)) reasonable grounds to expect (s. 588H(2) and s. 588H(3)(6)) contemplates on the part of the defendants a higher degree of knowledge, a more formulated understanding of the possibility. And of course reasonable grounds to believe (s. 588H(3)(a)) contemplates and even more settled state of mind.
A director’s expectation contemplates the state of mind of a director who has acted with due diligence. As Austin J said in Tourprint International Pty Ltd (In Liq.) v. Bott (1999) 32 ACSR 201 at 215:
“Directors cannot rely on a complete ignorance of or a neglect of duty….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 enquiries."
As the plaintiff emphasised in evidence, the weekly and daily reports of the company lacked an essential ingredient to the proper understanding of the liquidity of Havencatch. That essential ingredient was an “aging” of debtors and creditors. The importance of that should be, I consider, obvious to anyone with a reasonable understanding of business principles and practice. An aged list of debtors may reveal debts owing to the company which are suspiciously old and that should lead to an investigation of the reason. That investigation may cast doubt on the likelihood of being paid the debt. An aged list of creditors may reveal debts payable by the company which are suspiciously old and that should lead to an investigation of the reason. One reason could be lack of available funds. Either of those circumstances would make a reasonably astute director realise that, despite an apparent state of financial health, the company was in financial trouble.
Mr Newton was critical of the plaintiff for placing too much weight on the fact that the defendants both had accounting qualifications. In my view the defences in both ss. 558H(2) and (3), where they speak of “the person” having reasonable grounds to expect or to believe, speak of the actual director. The question then is whether that director had reasonable grounds and that must be measured according to the skills and experience of that director. A highly skilled and experienced director to whom a state of expectation or belief could safely be attributed because of his knowledge of certain facts cannot be heard to say that he should not be struck with that expectation or belief because a less skilled and experienced director would not have reached the same expectation or belief based on those facts.
In fact, however, I have formed the view that matters such as the aging of creditors and debtors, whether the figures in the weekly and daily reports were net of rebates, and whether in the light of trading losses over the past three years a company’s “tight” financial situation should be closely monitored would be recognised as important by a reasonably astute businessman and not only by a qualified accountant. So, were the case against Mr Rasheed Ali to depend on the defences in ss. 588H(2) or (3), I would find that he had no reasonable grounds to expect solvency, as the provisions require.
The evidence does not establish that Mr Ramswarup had actual knowledge of insolvency. However it does establish that he neglected the duty to supervise the affairs of Havencatch in a proper fashion. He was aware that in 1995 “the company had not done as well as one would have expected of it, which required closer scrutiny of the activities” yet his evidence does not reveal that he gave any closer scrutiny.
To the contrary, while Mr Rasheed Ali “kept (him) informed of certain problems”, in late 1995 and early 1996 other activities meant that he had very little involvement in Havencatch. He was aware that the company in January and February traded poorly but did receive (or apparently seek) the daily or weekly reports. He did not follow up the implementation of reforms which were suggested in September 1995 to improve Havencatch’s financial position, beyond being told by Mr Rasheed Ali that “there had been an improvement in the figures for the company. But he conceded that he was told that the company was still trading at a loss. In fact he accepted that “in the strictest accounting sense” the company never made a profit. Yet at no time before 16 June 1996 did he contemplate the possibility that Havencatch should be wound up.
The conclusion is inevitable that Mr Ramswarup turned a blind eye to the management and financial affairs of Havencatch. In those circumstances he also fails to satisfy the onus cast on him by s. 588H(2) and s. 588H(3).
I should say something about the provision in s. 588H(3)(a) relating to the duties and fulfilment of responsibilities by Mrs Smith. I have found in paragraph [22] that she was capable of performing properly as the general manager and in general she did perform to the proper standard. Importantly she did, as I have found, inform Mr Rasheed Ali of the financial plight of Havencatch. A criticism of her could be that she did not produce an aged list of creditors and debtors in her written reports, nor specifically state whether the figures were net of any rebate. But her oral communications were sufficient to make up for that omission. Had the defendants asked for the aged list she would certainly have been able to supply it. Had they asked for details of any rebates she would certainly have supplied them. More fundamentally, assuming that this fundamentally important information was not being otherwise supplied (and I find it was, orally), the directors should have appreciated that omission, and therefore could not have held the belief that Mrs Smith was providing them adequate information about whether the company was solvent, a belief which is necessary to give them a defence under s. 588H(3).
Conclusion
There will be judgment for the plaintiff against the defendants for $70,956.05, with interest on that sum at 10% from 16 July 1996.
DISTRICT COURT OF QUEENSLAND
CITATION: Milner v Ali [2000] QDC 107 PARTIES: BRUCE POUNTNEY MILNER
RASHEED AKHTAR ALI AND ANOR.
FILE NO/S: 4657 of 1996 DELIVERED ON: 29/3/2000 DELIVERED AT: BRISBANE HEARING DATES: 29/2/2000, 13/3/2000 JUDGE: SKOIEN S.J.D.C. ORDER: Order the defendants to pay the plaintiff’s costs of and incidental to the action, including any reserved costs, to be taxed as between solicitor and client up to 30 June 1999 and thereafter to be assessed on the indemnity basis. CATCHWORDS: Offer to settle; whether indemnity costs appropriate. UCPR rules 360, 361. COUNSEL: Hack for the plaintiff
Newton for the defendantsSOLICITORS: Hopgood Ganim for the plaintiff
Stephens & Tozer for the defendants[56]
On 29 February 2000 for the reasons which I then published I gave judgment for the plaintiff against the defendants for the amount of the claim, $70,956.05 with interest on that sum at 10% from 16 July 1996.
On that day, counsel asked me to adjourn the action in order to allow them to deliver written submissions on the question of costs, there having been offers of settlement made in the past. Those submissions were completed by 13 March.
The appropriate rule of the Uniform Civil Procedure Rules 1999 (which came into force on 1 July 1999) is Rule 360 which is as follows:
“360(1) If –
(a)the plaintiff makes an offer to settle that is not accepted by the defendant and the plaintiff obtains a judgment no less favourable than the offer to settle; and
(b)the court is satisfied that the plaintiff was at all material times willing and able to carry out what was proposed in the offer;
the court must order the defendant to pay the plaintiff’s costs calculated on the indemnity basis unless the defendant shows another order for costs is appropriate in the circumstances.
(2)If a plaintiff makes more than 1 offer, the offer most favourable to the plaintiff is taken to be the only offer for this rule.”
Rule 361 makes complementary provision in favour of a defendant who has offered to settle. It is, relevantly,
“361(1) This rule applies if –
(a) the defendant makes an offer to settle that is not accepted by the plaintiff and the plaintiff obtains a judgment that is not more favourable to the plaintiff than the offer to settle; and
(b) the court is satisfied that the defendant was at all material times willing and able to carry out what was proposed in the offer.
(2) Unless a party shows another order for costs is appropriate in the circumstances, the court must –
(a) order the defendant to pay the plaintiff’s costs, calculated on the standard basis, up to and including the day of service of the offer to settle; and
(b) order the plaintiff to pay the defendant’s costs, calculated on the standard basis, after the day of service of the offer to settle.”
Before 1 July 1999 materially identical rules appeared in the District Court Rules. For convenience I will refer only to the UCPR.
On 20 November 1997 the plaintiff made a formal offer under the then applicable rules of the District Court to settle on receipt of $73,707.02. That was, effectively, an offer to receive the sum claimed but without any interest or costs. That offer was rejected. The judgment which I gave on 29 February 2000 allowed interest at 10% from 16 July 1996, which was about $9,460 as at the date of the plaintiff’s offer. So under my judgment the assessed sum for the plaintiff to recover was then more favourable to the plaintiff. Prima facie, therefore, the plaintiff is entitled to his costs taxed as between solicitor and client up to 30 June 1999 (District Court Rules, rule 118) and thereafter to be assessed on the indemnity basis (UCPR rule 360).
The submission of Mr Newton for the defendants is that another order is appropriate because two offers to settle were made by the defendants which would have been more favourable to the plaintiff than the offer made by the plaintiff.
The first offer was a formal one, made on 24 February 1998 by the defendants in the sum of $20,000 plus party and party costs. The offer was said to be “exclusive of dividend payments to Sailmoss Pty Ltd, Sibdew Pty Ltd and Sibdew Pty Ltd as Trustee for its superannuation fund”.
Sailmoss is a company “controlled” by the defendant Mr Arif Ali, which had advanced $141,700 to Havencatch. Sibdew is a company “controlled” by the defendant Mr Ramswarub which in its own capacity and as trustee of a superannuation fund, had advanced some $96,000 to Havencatch. Mr Newton’s submission was that the forgiveness of those debts would have left Havencatch in a better financial state for the benefit of the unsecured creditors than is their position now with the judgment. He submitted that recovery by the unsecured creditors of something very close to 100 cents in the dollar would have been achieved, whereas the evidence is that only a few cents in the dollar are now likely to be available.
I am unable to accept that submission because, until the administration of Havencatch is completed, it is not possible to say what the position of the unsecured creditors will be. Certainly the defendants have not produced any calculations to support Mr. Newton’s submission. I cannot easily see how an offer of $20,000 could result in full repayment of unsecured creditors who total about $70,000 (excluding Sailmoss and Sibdew). So the defendants’ offer failed to satisfy rule 361(1)(a).
There is a further point about the offer to which Mr Hack referred. The offer made by the defendants is dependent on the co-operation of two entities who are not parties to the litigation (Sailmoss and Sibdew) and who would not be bound by any agreement based on the formal offer as put forward by the solicitors for the defendants. The plaintiff’s solicitors in their letter of 17 September 1998 pointed out this fact to the defendants’ solicitors and suggested that the difficulty could be overcome by having the two companies agree, by deed under seal, not to prove in the administration. That has never occurred. In these circumstances I do not consider that an offer to settle in acceptable form was made by the defendants on 24 February 1998. The plaintiff cannot be expected to assume that third parties will co-operate to support the defendant’s offer. Further, the offer fails to comply with rule 361(1)(b) which requires me to be satisfied that the defendants were at all material times willing and able to carry out the proposed offer. I simply do not know whether the two defendants are in fact able to obtain the necessary deed of forgiveness from the companies they “control”. All that can be said is that they have never done so.
A further offer to settle is relied upon by the defendants. This was an informal offer to pay $35,000 all up, again on the basis that Sailmoss and Sibdew would forego their debts. The defendants’ submissions do not identify the date of that offer but from the plaintiff’s submissions it seems to have been an oral offer from the defendants’ solicitor to the plaintiff’s solicitor on 8 October 1998. That offer was rejected by letter of 19 November 1998.
This further offer suffers from the same defects as did the earlier offer. First it is not possible to say whether it would have been more favourable for the plaintiff than the judgment (and it seems probable that it would not). Second, unsupported by deeds from Sailmoss and Sibdew, the offer could not be seen to be one which was acceptable. Third, the defendants did not establish that they were willing and able to carry out the offer. So it does not satisfy rule 361.
There is a reference in the defendants’ submissions to an offer to settle made by them to a firm of solicitors acting for the plaintiff’s litigation insurers. I regard that as irrelevant. The rules contemplate offers between the parties or between the lawyers acting for them in the litigation.
Then it is submitted that this litigation will ultimately not benefit the unsecured creditors because of the effect of the costs of the action and so I should make an order for costs which will have the effect of discouraging this plaintiff (the liquidator of Havencatch) and others tempted to act like him.
Courts have an undoubted discretion to discourage fruitless litigation by an appropriate costs order. That is the purpose of rules 360 and 361. But I do not think this is the case to exercise that discretion. On the material before me the plaintiff obtained the instructions of the creditors in order to bring the action and to continue it despite the settlement offers. I do not think I can look behind that. The action was continued and succeeded fully. The judgment is more favourable to the plaintiff then was the plaintiff’s offer and the defendants’ two offers were. In those circumstances rule 360 should apply.
I am unable, however, to find in the plaintiff’s favour (as I was asked to) that the case before me was of such complexity that a certificate under item 27(3) of Part 2 of the Scale of Costs is called for to permit the plaintiff to recover costs at a rate above the usual rate. It was not a long case. The applicable principles of law were not particularly difficult and the factual matters not unusually complicated.
Conclusion
I order the defendants to pay the plaintiff’s costs of an incidental to the action, including any reserved costs to be taxed as between solicitor and client up to 30 June 1999 and thereafter to be assessed on the indemnity basis.
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