Monsoon Industries Pty Ltd v Simpson

[1992] QCA 314

IN THE COURT OF APPEAL	[1992] QCA 314
SUPREME COURT OF QUEENSLAND	C.A. No. 40 of 1992
BETWEEN:

MONSOON INDUSTRIES PTY LTD

(Plaintiff) Appellant

AND:

TERENCE MICHAEL SIMPSON

(First Defendant) Respondent

AND:

MAVIS SIMPSON

(Second Defendant) Respondent

REASONS FOR JUDGMENT OF THE COURT

Delivered the 25th day of September 1992

This appeal concerns the application of s. 556(1) of the Companies Code (Queensland) to the facts of this case. That sub-section, which has been replaced by s. 592(1) of the Corporations Law, provides:

"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.

Penalty: $5,000 or imprisonment for 1 year, or
both."

The respondents were directors of a company, Cradcon Pty Ltd. The question is whether, at the time any of a number of debts were incurred by the company to the appellant in and between October and December 1989, there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due. It was common ground that if an affirmative answer was given to this question the respondents are liable for the debts; otherwise they are not.

On its face the plain meaning of sub-s. (1)(b) is not clear.
However, the trial judge adopted and the parties before us
accept the test as being that stated by Foster J. in 3M

Australia Pty Ltd v. Kemish (1986) 10 A.C.L.R. 371 at 378;

that the appellant had to prove,

"the existence of facts at the time of the incurring of the subject debt which would reasonably induce a director or manager of ordinary competence to anticipate or predict that the company would clearly be unable to pay all its debts as and when they became due."

In those circumstances we are also content to accept this as the correct test. Would a reasonable director have predicted that the company would be clearly unable to pay all its debts as and when they became due? The contest to some extent focussed on the word "due" in the context of a debt being allowed by a creditor to remain unpaid after the original due date for payment had passed.

The appellant, who of course sought and had to prove an affirmative answer to the question, attempted to do this in two ways. First it said that looking at the company generally in the relevant period this was so. Secondly it said that this was so in particular when one looked at its dealings with the appellant.

In saying the first of these, it pointed to the following:

1.   A number of documents consisting of accounts rendered and letters of demand which it said indicated that the company was being constantly pursued by creditors in order to obtain payment of accounts owed and was not paying its accounts as and when they fell due for payment, supported by evidence of an accountant, Irving, that these documents were examples only;

2.   Corroborative evidence on this from two former employees of the company;

3.   Creditors aged trial balances which it was said confirmed, in a general sense, the failure of the company to pay its accounts within ordinary trading terms;

4.   Some evidence described as evidence of a more theoretical kind from Irving which it was said showed that the company had liabilities well in excess of its assets; and

5.   The evidence of Rossiter, the company's accountant, which it was said demonstrated that the company was in severe financial difficulties.

His Honour rejected each of these separately and together as
proving what the appellant undertook to prove. So also do
we. It is sufficient to advert briefly to each in the order
set out above:
(1) We agree with his Honour that many of the documents

were remote in time from the relevant period, the material from within the relevant period being insufficient to be significant; moreover in most cases the documents had an endorsement showing payment usually, where a date is given, quite soon after the reminder;

(2) The evidence of both former employees, though each deposed to communications from creditors seeking payment of accounts, was of a most general kind and did not indicate that any such creditors were not prepared to allow further time to pay;

(3) The conclusion said to follow from an analysis of the trial balances begged an important question; what were ordinary terms with each of those creditors who were referred to? Furthermore, between October and November 1989 the trial balances showed a significant reduction in 60 and 30 day debts, a slight reduction in 90 day debts and a substantial increase in current debts, that is those owing for less than 30 days, indicating, as other figures showed, a substantial increase in trade during that period;

(4) It is not entirely clear to what extent his Honour rejected Irving's evidence. It is clear that he did so whenever it conflicted with that of Rossiter, the company's former accountant. His Honour was critical of and clearly rejected Irving's historical cash flows and, though he did not refer to the other part of Irving's theoretical exercise, we think that by implication he rejected it because of Rossiter's criticisms and because its effect was that the company was insolvent for virtually the whole of 1988 and 1989.

We think that his Honour was entitled to reject this evidence. However, the evidence of Rossiter referred to below is to the effect that the company's liabilities exceeded its assets;

(5) Rossiter's evidence, though to the effect that the company's liabilities exceeded its assets, and that it was undercapitalised, went no further and in particular did not support the view that it would clearly be unable to pay its debts as they fell due.

Curiously, as his Honour pointed out, there was no evidence before the court with respect to the attitude of creditors of the company other than the appellant. No clear conclusion could therefore be reached as to whether the company was able to pay their debts as they fell due.

We turn now to the company's dealings with the appellant. The company was the appellant's sole distributor in Queensland. Indeed, one of the company's "trading arms" bore one of the appellant's trade names. The company placed an order with the appellant only when it had received an order from one of its customers. There was an obvious incentive to the appellant in allowing, even encouraging, the company to continue to trade.

It was the appellant's case that the normal trading terms between it and the company included a maximum period for payment of 60 days. However, from the commencement of the business relationship between the parties this was never adhered to or insisted upon except possibly for short periods.

In March 1989 when there was a substantial amount owing for considerably more than 60 days, an exchange of facsimile transmission and letter between the appellant and the company confirmed an agreement for payment of the outstanding account by instalments. The agreement included a term that all orders dispatched from that date would be paid for on the day of dispatch until, in effect, all arrears had been paid. The agreement was never adhered to in the sense that credit was once again almost immediately extended to the company. In October 1989 the company was again informed by the appellant that due to its inability to provide a firm commitment to pay the outstanding account, no further work would be done on any of the company's orders until payment was made. Again that was not adhered to and trade between the appellant and the company appeared to continue as before. Notwithstanding what was said, therefore, the appellant's conduct indicated a preference for continuing trading with the company even though payment of the company's debts to it continued in arrears. It therefore appeared willing to extend generous credit arrangements to the company to allow it to continue to trade in what it apparently perceived to be the best interests of both.

It was not until January 1990 that the appellant ceased to supply the company. His Honour found that it was not until then, or at the earliest late December after the latest of the subject debts was incurred, that there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due. We also think that the appellant's conduct before then leads to that conclusion.

There are two other matters to which we should make brief reference. The first is that over the relevant period the company's debt to the appellant in fact decreased from about $200,000 to about $116,000 whilst the company continued to place new orders with the appellant amounting in total to about $123,000. Nor does it appear that during this period any other creditors suffered because of this. The second is that there was no evidence of the company's relationship with its bank during the relevant period; in particular that it could not have commanded a sufficient advance to enable payment to be made to any creditors who insisted on it.

The appeal must therefore be dismissed with costs.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND	C.A. No. 40 of 1992
Before the Court of Appeal
The Chief Justice Mr Justice Davies Mr Justice Ambrose
BETWEEN:

MONSOON INDUSTRIES PTY LTD

(Plaintiff) Appellant

AND:

TERENCE MICHAEL SIMPSON

(First Defendant) Respondent

AND:

MAVIS SIMPSON

(Second Defendant) Respondent

REASONS FOR JUDGMENT OF THE COURT

Delivered the 25th day of September 1992

MINUTES OF ORDER: Appeal dismissed with costs

CATCHWORDS:	CORPORATIONS LAW - INSOLVENCY - Respondents/directors caused the company to incur debts to appellant - whether at the time incurred there were reasonable grounds to expect company unable to pay its debts as and when due - whether a reasonable director would have predicted that company would be clearly unable to pay when due - COMPANIES (QLD) CODE s. 556(1)
Counsel:	P. Hack for the Appellant R. Douglas for the Respondents
Solicitors:	Lees Marshall & Warnick for the Appellant Nicholsons for the Respondents

Date(s) of Hearing:4 September 1992

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND	C.A. No. 40 of 1992
BETWEEN:

MONSOON INDUSTRIES PTY LTD

(Plaintiff) Appellant

AND:

TERENCE MICHAEL SIMPSON

(First Defendant) Respondent

AND:

MAVIS SIMPSON

(Second Defendant) Respondent

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THE CHIEF JUSTICE
DAVIES JA
AMBROSE J
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Reasons for Judgment of the Court delivered the

25th day of September 1992

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'APPEAL DISMISSED WITH COSTS'

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