Perkins and Anor v Viney and Ors No. Scciv-99-1088

PERKINS AND ANOR V VINEY AND ORS
[2001] SASC 362

JUDGE BURLEY. The first plaintiff (Mr Perkins) is the liquidator of the second plaintiff, LVS Meat Company Pty Ltd (LVS). He has brought these proceedings against the defendants to recover damages for alleged insolvent trading pursuant to the relevant provisions of the Corporations Law. At the commencement of the trial it was announced that a settlement had been reached between the plaintiffs and the first three defendants in respect of the plaintiffs’ claim. There also forms part of these proceedings a cross-claim pursued by the fourth defendant against the first three defendants. Settlement between those parties had also been reached. Consequently, the only matter which proceeded to trial was the claim by the plaintiff against the fourth defendant for insolvent trading.
The alleged period of insolvent trading commenced on 23 June 1993 and ended on the date of the winding up of LVS on 13 May 1994. Consequently the relevant provisions of the Corporations Law which came into operation in June 1993 apply. These provisions were considered by the Full Court in Powell and Anor v Fryer and Anor (2001) 37 ACSR 589 per Olsson J with whom Duggan and Williams JJ agreed. In that case the period of insolvent trading was from 23 June 1993 until 2 April 1995 when an administrator was appointed. Consequently the principles of law set out in the judgment of Olsson J are directly applicable to this action.
It is possible to set out the factual background to this matter by reference to the pleadings because many of the allegations made by the plaintiffs in the amended statement of claim have either been admitted in the defence or were not the subject of dispute during the course of the trial.
LVS was incorporated on 25 November 1982 and in 1983 commenced operating an abattoir business at Angaston. The company was wound up by order of the Federal Court made on 13 May 1994 when Mr Perkins was appointed liquidator. In their statement of claim the plaintiffs assert that all of the defendants were directors of the company, the first three defendants from November 1982 and the fourth defendant from January 1987. Mr Perkins’ affidavit of 21 January 1999 establishes that the first three defendants were appointed directors on 25 November 1982. The first three defendants remained directors of the company until it was wound up. The fourth defendant (Mr Clark) denied both in his evidence and in his defence that he was ever a director of the company. He has said in the alternative that if he was a director then he was unaware of having been appointed.
On the question of whether or not Mr Clark was a director, the plaintiff relies upon Section 60(1) of the Corporations Law which is as follows:
“60(1)Subject to subsection (2), a reference to a director, in relation to a body, includes a reference to:
(a) a person occupying or acting in the position of director of the body, by whatever name called and whether or not validly appointed to occupy, or duly authorised to act in, the position; …”
It is the plaintiffs’ case that Mr Clark was appointed a director in January 1987 but, if there was no valid appointment, it is pleaded in the alternative that he occupied or acted in a position of a director of LVS. This is the first of the disputes between the parties which needs to be resolved.
In paragraph 4.2 of the statement of claim it is alleged that Mr Clark resigned as a director on 5 May 1994. This is denied by Mr Clark. Both his appointment and resignation as a director are evidenced by minutes of directors’ meetings respectively dated 16 January 1987 and 5 May 1994. Mr Clark has denied that he attended such meetings and has questioned whether the meetings ever took place. In relation to the meeting which allegedly evidences his resignation as a director, his counsel, Mr Keen, contended that the minutes of 5 May 1994 were a fabrication.
Mr Clark does not dispute that the company was insolvent during the period that the debts set out in paragraph 10 of the statement of claim were incurred. That period commences on 23 June 1993 and ends with the winding up of the company on 13 May 1994.
The trading position of the company, as revealed by the company records examined by Mr Perkins after his appointment, is set out in Mr Perkins’ affidavit of 21 January 1999. I accept his evidence in that regard. Mr Perkins has also relied upon documents lodged by the company with the Australian Securities and Investments Commission and the Australian Taxation Office.
The first three defendants all consented to be directors and the appropriate form of consent was lodged with ASIC. No consent to act as a director was lodged with ASIC in respect of Mr Clark. There is no evidence that such a consent was ever signed by Mr Clark. However, a form notifying ASIC of his appointment as a director was lodged in February 1987 and thereafter all annual returns lodged with ASIC after 1987 included the defendant as a director. Reference to him was omitted from the 1987 annual returns. This was picked up by the Commission which sought clarification as to whether or not he had resigned. Subsequently an amendment was filed with the Commission confirming Mr Clark’s appointment as a director. There is no evidence that Mr Clark was either aware of or consented to these notifications to ASIC.
Mr Clark is also identified as a director in all of the directors’ reports for the company for the years ended June 1990 to June 1993.
Mr Perkins exhibited to his affidavit a copy of the minute book of the company (Exhibit FCP5). For the initial years of trading it does not appear to be a complete set of minutes because, for example, there is a gap between 28 February 1984 and 17 December 1986. However, from January 1987 onwards there appears to be a complete set of minutes. The minutes are particularly relevant in relation to two aspects of this claim: first, whether or not Mr Clark was a director at any material time and, second, the financial position of the company from January 1987 onwards.
The Relevant Provisions of the Corporations Law
The references to the various provisions of the Corporations Law in these reasons are those provisions set out in the 1999 volume of the CCH publication “Corporations and Securities Legislation”, 10th Edition. As I understand it, they contain the relevant provisions of the Law relied upon respectively by the parties which applied from 23 June 1993 and which had not been changed by the time that the alleged insolvent trading period expired, namely, in the case of Mr Clark, the date of his alleged resignation as a director, 5 May 1994.
It is common ground that the relevant provisions came into force on 23 June 1993. The application is made pursuant to Section 588M of the Law which enables a liquidator to recover from a director who has contravened Section 588G(2) or (3) an amount equivalent to the loss sustained by the relevant creditors as a result of the breach.
Section 588G applies to a person who is a director of a company at a time when the company incurs a debt when it is insolvent or becomes insolvent by reason of incurring that debt. For Section 588G(1) to apply, there must be in existence, at the time of incurring the debt, reasonable grounds for suspecting that the company is insolvent or would become insolvent as the case may be.
The plaintiff also relies on Section 1317HD(1) of the Law. However, the extent to which that section has been relied upon has only been the subject of passing reference in the submissions of the plaintiff and it would be unsafe to guess at the basis upon which the section may be said to apply (it has been the subject of several amendments since originally inserted in the Law) and the efficacy it has in relation to the plaintiff’s case that it did apply. Consequently, I will confine my attention to the provisions of Sections 588M and 588G together with any other provisions of the Law which affect how those sections are to be implemented.
The provisions of Section 588G will require close scrutiny to ascertain what the effect of the section is and how other sections, such as Section 588M, relate to it. The section occurs in Division 3 of Part 5.7B of the Law which is headed “Director’s Duty to Prevent Insolvent Trading”. Sub-section (1) provides that the section applies in the circumstances referred to in sub-paragraphs (a) to (d). Although sub-section (1) says that the section applies in given circumstances, it does not say what the section applies to.
Sub-section (1A) defines when a debt is incurred.
Sub-section (2) provides that by failing to prevent the company from incurring a debt “the person contravenes this section if” the matters referred to in sub-paragraphs (a) and (b) are made out. I take sub-section (2) to mean that where sub-section (1) applies, if the director referred to in paragraph (1)(a) fails to prevent the company from incurring the relevant debt, there is a contravention of the section (whatever that means) if the director is aware at the relevant time that there are grounds for suspecting that the company is insolvent or would become insolvent by incurring the debt or if a reasonable person in a like position in the company’s circumstances would be so aware. If that is the meaning of the section, it is a very obscure way to provide that, first, a director is obliged to prevent an insolvent company from incurring debts and, second, that if a director fails to prevent an insolvent company from incurring debts, the director is in breach of that obligation. I recognize that the obligations imposed are to be viewed in the context that at the time the debt is incurred, there are reasonable grounds for suspecting that the company is insolvent and that either the person is aware there are such grounds for suspicion or that a reasonable person in the director’s position would be so aware.
In order to give effect to Section 588G, it is necessary to interpret it in this way. This is evident from Section 588H which refers to “proceedings for a contravention of sub-section 588G(2)”. Such an expression, wherever it is used in the Law, creates confusion because it is difficult to see how there can be a contravention of the sub-section when the relevant obligation or duty is not directly referred to. Sub-section 588G(2) merely provides that in the circumstances referred to in sub-paragraphs (a) or (b), a person who fails to prevent the company from incurring a debt contravenes the section. In other words, the nature of the obligation is described by reference to a breach, namely failing to prevent the company from incurring the debt.
Section 588H of the Law raises a number of defences to proceedings for a contravention of sub-section 588G(2). Section 588H(2), upon which Mr Clark relies, provides:
“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 if it incurred that debt and any other debts that it incurred at that time.”
In paragraph 8.2 of his defence, Mr Clark pleads:
“That he at all material times believed and expected that the company was and would remain solvent because he believed that the first, second and third [defendants] intended and had the means to ensure that the company was and would remain solvent.”
Mr Clark also relies upon Section 588H(4) which provides:
“If the person was a director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company.”
In paragraph 10.3 of his defence, Mr Clark pleads:
“... [I]f the fourth [defendant] was a director of the company at any time after 30th June 1993 (which is denied) he did not in fact take part during that time in the management of the company and did not so take part for the good reason that he did not know or believe that he was a director of the company and is thereby entitled to the defence prescribed by S588H(4) of the Corporations Law.”
This ground of defence seems to ignore that in the circumstances contemplated by Section 60(1) of the Law, the state of mind of the person who acts as a director is irrelevant. In any event, this aspect of Mr Clark’s defence must fail because it has not been established that at any material time, he did not take part in the management of the company. I refer to my findings set out below relating to whether or not Mr Clark was a director of LVS.
At paragraph 14.1 of his defence, Mr Clark pleads:
“The fourth respondent ought to be excused from the consequence of his breach pursuant to Section 1317JA or in the alternative Section 1317S or in the alternative Section 1318 of the Corporations Law.”
The reference to Section 1317S is unnecessary because the applicable provision, which is in the same terms as Section 1317S is Section 1317JA.
Section 1318(1) of the Law is as follows:
“If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person’s appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.”
To the extent that that provision is relied upon in the alternative, I do not think that it applies at all because it refers to “civil proceeding ... for negligence, default, breach of trust or breach of duty”. In my view, the sub-section, properly construed, only refers to those causes of action that may be available against the relevant officer which are not specifically provided for in the various provisions of the Law. Section 1317JA (now Section 1317S) of the Law applies specifically to proceedings such as this which have been brought pursuant to Section 588M of the Law. Whether or not Mr Clark is to be relieved from liability (assuming that he is found liable) is to be determined solely by reference to Section 1317JA of the Law.
Finally, I should mention that Mr Clark contends that a number of the alleged debts referred to in paragraph 10 of the statement of claim are not debts within the meaning of Section 588G(1) of the Law.
I turn to a consideration of the elements of the plaintiffs’ statutory cause of action bearing in mind what has been admitted and denied by Mr Clark and the grounds of defence he relies upon. First, the plaintiffs must establish that at all material times Mr Clark was a director of LVS. This is denied by Mr Clark. The plaintiffs rely upon Section 60(1) of the Law.
Second, the plaintiffs must establish that the company has incurred debts as alleged in paragraph 10 of the statement of claim. Most of the debts have been admitted but some are in dispute.
Third, the plaintiffs must establish that the company was insolvent during the period of alleged insolvent trading. This has been admitted.
Fourth, the plaintiffs must establish that at the time that each of the debts was incurred there were reasonable grounds for suspecting that the company was insolvent. This concept overlaps with Section 588G(2)(a) or (b). A combination of Section 588G(1)(c) and 588G(2)(a) or (b) requires that the plaintiff establish that there were reasonable grounds for suspecting that the company was insolvent and that either the director was so aware or that a reasonable person in the position of the director would be so aware. These matters have been denied by the defendant. They overlap with one of the grounds of defence relied upon by the defendant, namely that arising under Section 588H(2). In order to make out that defence, Mr Clark has to establish that he had reasonable grounds to expect and did expect that the company was solvent at the relevant times and would remain solvent even if the company incurred the relevant debts.
Section 95A of the Law defines solvency and insolvency. Sub-section 95A(1) provides:
“A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.”
This definition was referred to by Prior J, the judge at first instance in Powell v Fryer [2000] SASC 97 where his Honour said (at paragraph 9 of his reasons):
“It must be acknowledged immediately that there is no specific reference to or requirement in this section that debts must be payable from the company’s own money. ... Access to money of other persons is not an irrelevant consideration in determining whether or not a company is insolvent.”
His Honour also made some general observations about solvency. He said:
“The commercial solvency of a company is not proved by merely looking at its accounts and making a mechanical comparison of its assets and liabilities. Insolvency is a question of fact falling to be decided as a matter of commercial reality in the light of all of the circumstances with things being viewed as it would be by someone operating in a practical business environment. The statutory focus is on solvency, not liquidity. Thus it is appropriate to consider the terms of credit or financial support available to the company with which to defray any debts owed to creditors. The question is not to be answered merely by looking at the financial statements.
It must also be acknowledged that whilst s95A may be identified as a provision stating a cash flow test rather than a balance sheet test for insolvency, that is not a reason to construe the word ‘debts’ in the section as referring only to those debts treated for accounting purposes as having been incurred on revenue account as distinct from capital account, nor does that assumption exclude a proper consideration of a company’s balance sheet. What must be acknowledged is, of course, that it is not necessary to establish [that] a company’s liabilities exceed its assets to show that it is unable to pay its debts as and when they become due and payable. It is another thing to say that that is an irrelevant circumstance when considering the issue of insolvency. Similarly, a temporary lack of liquidity will not necessarily give rise to an inference that a company is unable to meet its debts as and when they become due and payable.” [citations omitted]
Was Mr Clark a Director?
In my view, Mr Clark acted in the position of director within the meaning of Section 60(1) of the Law. He did so both factually in the sense that his contribution and activity was what a director would do. He also, as a matter of law, acted as a director in the sense that he occupied a position which could only have been held by a director under the company’s articles. He was held out to be a director. He was shown as a director on various notices sent to ASIC and in financial statements published from time to time he was referred to as a director.
The minutes of the directors’ meetings also indicate that Mr Clark acted as a director. Before turning to the minutes, it is appropriate to refer to a number of matters which place a consideration of the minutes in their proper context. It is common ground that Mr Clark never had a financial interest in the company by way of shareholding or otherwise, he was not a signatory in respect of any company bank account and he was not paid for his attendance at directors’ meetings, although he did obtain an occasional minor benefit by having his own stock slaughtered at the abattoirs and by the provision of meat on a few occasions. In his evidence he said that he was invited by Mr Viney to preside at meetings of the Board of directors in order to limit the conflict or acrimony that had sometimes arisen at Board meetings in the past. That evidence was supported by evidence from Mr Viney and Mr Linke to a like effect. I accept their evidence on that topic.

It is common ground that LVS’s Articles provided that only a director could be Chairman of Directors.
A perusal of the minutes of the director’s meetings set out in Exhibit FCP5 indicate that Mr Clark engaged in activities consistent with him being a director of LVS. He occupied the position of director at every director’s meeting he chaired because only a director could hold the position of chairman. It mattered not that he may not have been validly appointed or that he was not aware of having been appointed.
The same may be said of Mr Clark “acting in the position of a director”. It is clear from the minutes (which he signed as correct and accepted in evidence that he would not have done so unless the minutes had been correct) that he undertook duties which directors normally undertake. For the purposes of Section 60(1)(a) of the Law that is sufficient.
I mention a few examples of Mr Clark acting as a director during the period June 1993 to May 1994.
This point is taken up by the plaintiffs in counsel’s written outline of argument dated 13 July 2001 (at paragraph 5). Within that written submission there are numerous references to the activities of Mr Clark as evidenced by what has been recorded in the minutes contained within Exhibit FCP5. Mr Clark referred to costs and the necessity to improve sales, to the need for an injection of capital, and he suggested changes to the invoicing system. Mr Clark attended at the premises of a company referred to as TAJ for the purposes of holding talks. He agreed to contact a Mr Don Lindner in relation to company business. He had dealings with the Commonwealth Development Bank in relation to company business. He arranged for a solicitor to be instructed in relation to one of the company matters. He ventured an opinion in relation to the proposal by another company to purchase fifty-one per cent interest in LVS. He had dealings with the Angaston Council on behalf of the company. It is not necessary to mention all of the examples referred to in the written outline. It is sufficient to say that they are supported by the evidence and constitute a clear indication that Mr Clark both occupied the office of director and acted in that capacity with the authority of the other directors. He was not, as was suggested in the evidence of Mr Clark and the first three defendants, merely a person brought into ensure that the directors’ meetings were conducted in an orderly fashion. That may have been the original purpose of his appointment, but his subsequent activities were not limited to that purpose.
I find that from at least mid-1993 until early May 1994, Mr Clark acted as a director of LVS within the meaning of Section 60(1)(a) of the Law.
The Disputed Debts
The debts referred to in the statement of claim constitute the amount of the loss the plaintiffs seek to recover. This is in accordance with the authorities, in particular Powell v Fryer (supra) where Olsson J said (at para 88):
“I entertain no doubt that, read in context, the loss and damage adverted to is the amount of the unpaid debt due to the creditor in question. This is the view which was obviously taken by Austin J in Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201 at 217 (Tourprint), and, in my experience, has always been applied to the practical administration of the statute.”
A schedule of the debts commences at page 13 of the statement of claim. They are numbered in the left-hand column and I shall refer to those numbers to identify them. I shall only refer to those debts which are disputed. Some of them are of such a small amount that only the briefest mention is warranted.
Paragraph 2 - this payment of $50.00 constituted a donation and cannot be characterised as a debt.
Paragraph 3 - the amount for this debt was amended to $44,186.27. The amended figure is admitted.
Paragraph 5 - this constitutes a debt in the sum of $6,500.00 for the training levy collected by the Australian Taxation Office. It is, in my view, to be treated no differently from the immediately preceding item which constitutes payroll tax. It is a debt for the purposes of Section 588G: Powell and Another v Fryer (supra) (Full Court).
Paragraph 6 - this is a debt in the sum of $48,256.72 for group tax. It should be treated in the same way as Item 5 for the same reasons.
Paragraph 8 - this is a debt in the sum of $5,509.95 being monies payable to the Australian Taxation Office in relation to the superannuation guarantee. It is a debt for the same reasons as given in respect of paragraph 5.
Paragraph 9 - these constitute payments to AGC Limited in respect of a contract which was entered into prior to 23 June 1993. I would agree with the defendants’ contention that the liability arose prior to the time at which Section 588G came into force (23 June 1993). The matter is to be decided not by reference to when the payments were actually due but when the liability to pay the same was incurred. In my view, the claimed sum of $6,628.40 is not recoverable.
Paragraph 18 - this item consists of interest paid to directors in respect of loan accounts amounting to $13,673.41. This was interest payable to the first three defendants and not to Mr Clark, who did not lend any monies to LVS. This technically must be a debt which comes within Section 588G although, if Mr Clark does not otherwise have a defence to this or any other aspect of the plaintiffs’ claim, it would seem to be unduly harsh that he should have to pay out in respect of a debt owing by LVS to his fellow directors, particularly where the case is settled on undisclosed terms in relation to those three defendants. It seems to me, that even if Mr Clark is otherwise held to be liable for the plaintiffs’ claim or any part of it, he should be relieved of liability pursuant to Section 1317JA(2) of the Law. Counsel for the plaintiffs did not argue to the contrary.
Paragraph 19 - this is referred to as special purpose loans amounting to $5,000.00. It does not appear to have been pursued either evidentially or by way of submission by the plaintiffs. It is denied by the defendants and the sum will not be allowed.
Paragraph 20 - this debt to the District Council of Angaston amounting to $10.71 should be allowed.
Paragraph 22 - this debt amounts to $92,329.02 and comprises outstanding levies and penalties payable to the Department of Primary Industries in respect of the meat processing. In my view, this constitutes a debt which the company incurred over a period of time in respect of its operations and is clearly the type of debt which is encompassed within the reasoning of the Full Court in Powell v Fryer. The amount should be allowed.
Paragraph 27 - this debt is for the supply of water for charges totalling $3,053.85. It is a debt within the meaning of Section 588G and should be recovered.
Paragraph 34 - this item amounting to $9,023.00 has been withdrawn by the plaintiffs.
Paragraph 42 - this debt in the sum of $216.00 constitutes a payment said to be due to the Meat Workers Union. It has not been established that this is other than a voluntary payment and should not be recovered.
Paragraph 51 - this debt in the sum of $652.00 is for transport costs payable to a Mr Schulz. The debt is on the company’s books and although denied by the defendants, there is nothing to suggest that the item has been other than properly included as a debt of the company. The amount should be allowed.
Paragraph 54 - this is an amount for accounting and secretarial services. It should be treated in the same way as Item 51.
Paragraph 59 - this debt in the sum of $5,089.00 is in respect of outstanding levies due to the Workcover Corporation. It is a debt which comes within Section 588G in accordance with the principles set out in Powell v Fryer.
As a result of the above findings, the total amount of the debts claimed should be reduced by $34,610.81. The total debts after adjusting items 3, 5, 18 and 22 during the course of the trial amount to $317,358.41. If the total amount disallowed is deducted, this leaves a net of $282,747.60.
While dealing with these figures it is appropriate to consider the question of interest. If the plaintiffs are otherwise successful, interest should be allowed from the date of winding up: Powell v Fryer (supra) per Olsson J at paras 114 and 115.
The calculation of interest in respect of the amount originally claimed, $313,318.58, has been made for the period of the date when the company went into liquidation to the date of trial. The figure reached is approximately $168,000.00. This should be adjusted upwards to account for the period of time from date of trial to the date of delivery of judgment and downwards to reflect the fact that a number of the amounts in the schedule of debts have either been reduced, increased or disallowed. I would also make a deduction to interest, if it is to be awarded, because the rates set out in the calculation are on average about one per cent too high. Consequently, I add, in round figures, $4,500.00 to cater for interest to the date of judgment, I deduct $20,000.00 to account for the reduction in the various interest rates by one per cent and I deduct $10,000.00 to account for the reduction of the principal sum of $313,318.00 to $282,747.60. That makes a net deduction of $25,500.00. If that sum is deducted from $168,000.00 interest, if it is to be awarded, should be in the sum of $142,500.00 in round figures.
The plaintiffs also referred in their statement of claim to an alleged entitlement to “$30,963.00 being the amount by which the total net assets of the company decreased between 30 June 1993 and 30 April 1994 as set out in paragraph 9c” of the statement of claim. This does not appear to have been pursued at trial, but even if it had been, it does not seem to me to be recoverable in addition to damages commensurate with the unpaid debts to creditors set out in paragraph 10 of the statement of claim.
I turn now to a consideration of the fourth element, namely whether or not either Mr Clark was aware that were reasonable grounds for suspecting that the company was insolvent or that a person in his position would have been so aware.
An examination of the evidence of Mr Clark and the other three defendants and of the documentary evidence, in particular the copies of the monthly statements exhibited to Mr Perkins’ affidavit and the financial statements for the financial year ended 30 June 1994, it reveals that LVS had had, for the two years from June 1993 to June 1995, considerable financial difficulties. It is also apparent from the financial details in evidence that up to 30 June 1993 the company had been experiencing financial difficulties for several years. In support of their case that Mr Clark was either aware of the company’s insolvency or a person in his position would have been so aware, the plaintiffs provided a detailed schedule of references to the evidence on this aspect of the matter. The items contained in the schedule refer to an abundance of evidence, the source of which is noted in the right-hand column, to the effect that the company was in financial difficulties from the time that Mr Clark became chairman of directors and that the position did not improve. For the purposes of this case, the crucial period is June 1993 to June 1995 to take the nearest whole financial years into account.
To some extent the question of the knowledge of Mr Clark of LVS’s finances (or of a person in his position) may be dealt with at the same time as the defence relied upon by Mr Clark that he had reasonable grounds to expect and did expect that the company was solvent at the time. The concepts do not entirely overlap but if it is held that Mr Clark was either aware or a person in his position would have been aware that there were reasonable grounds for suspecting the company was insolvent, it could hardly be said that the defence under Section 588H(2) could be made out.
At the directors’ meeting of 14 September 1993, Mr Clark warned the other directors that the “extended creditors’ amount would only come down ... if the company continued to make a profit”. It is noted in the minutes that Mr Clark “was concerned that LVS was coming into traditionally weak trading months, and their impact on liquidity”. Mr Clark was asked about this in cross-examination (T329/14-18):
“QThat it may well be that you were just explaining from a commonsense point of view that you were approaching poor trading months, and unless the company was going to make a profit, the end was nigh, basically.
AYes.”
At the Board meeting on 11 May 1993 Mr Clark referred to an injection of further funds amounting to $50,000.00 into the company. He said that even with that injection the company was still under-capitalised and that the directors should not be led into a false sense of security. Mr Cuch, the company’s accountant, agreed with what Mr Clark said and went on to refer to the company’s future trading prospects. Mr Clark was asked about this in the course of his evidence. He agreed that the effect of what Mr Cuch was saying was that because the company was under-funded it would not survive. Mr Clark said (T325/6) that he realised at the time the implications of what Mr Cuch was saying.
During cross-examination Mr Clark was asked about his awareness of the company’s financial position during the time that he was chairman (T335/28 et seq). Mr Clark agreed that the company never made a profit over a twelve month period, that there was a problem with respect to insufficient sales, that there were aged creditors and that in 1993 the problems seemed to be worsening. He was aware that the company was facing possible liquidation and that the company was under-capitalised. He acknowledged that there had been discussions as to the option of liquidation and that the shareholders did not want to pursue that option.
If the evidence is reviewed as a whole, it is impossible to see how any of the directors could have done other than realize that there were grounds for suspecting that the company was insolvent or would become insolvent if further liabilities were incurred. The combination of the oral evidence given by all of the defendants and of the contents of the minutes of meetings from mid-1993 to mid-1995 lead to the conclusion that the directors, including Mr Clark, with the knowledge they had, must have realized that the company either was or was in danger of becoming insolvent. It must be accepted that between June 1993 and June 1995 there were periods when the company’s position looked more positive, so that, at those times, there would not necessarily have been reasonable grounds for suspecting that the company either was or would become insolvent. However, those periods were of short duration and could not be used as a measure of the company’s performance over the relevant two years.
I find that by June 1993, the financial position of the company to the knowledge of Mr Clark, was tenuous and that he must or should have suspected that the company either was or would become insolvent if it continued to trade. Put another way, he must or should have been aware, based on his knowledge of the performance of the company between early 1987 and mid-1993, that there was little chance of the company improving its trading position such that it would trade its way out of its difficulties. It had been trying to do that since 1987 and had not succeeded in doing so. Further injections of capital had not helped and were therefore most unlikely to be forthcoming in the future.
In light of those findings, the plaintiffs have established the fourth element of the claim against Mr Clark and Mr Clark has failed to establish his defence based on Section 588H(2) of the Law. In particular, he has failed to establish that he had reasonable grounds to expect that the company was solvent. The total liability is $425,247.60 which comprises $282,747.60 damages and $142,500.00 interest.
The final matter to be considered is whether or not, and if so to what extent, Mr Clark should be relieved of liability pursuant to Section 1317JA of the Law. The relevant parts of the Section are as follows:
“1317JA(2) Where, in eligible proceedings against a person, it appears to the court that the person has, or may have, contravened a civil penalty provision but that:
(a)the person has acted honestly; and
(b)having regard to all the circumstances of the case (including, where applicable, those connected with the person’s appointment as an officer of a corporation, of a registered scheme’s responsible entity or of a Part 5.7 body), the person ought fairly to be excused for the contravention;
the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention.
1317JA(3) In determining under subsection (2) whether a person ought fairly to be excused for a contravention of section 588G, the matters to which regard is to be had include, but are not limited to:
(a)any action the person took with a view to appointing an administrator of the company or Part 5.7 body; and
(b)when that action was taken; and
(c)the results of that action.”
I must determine whether Mr Clark acted honestly and whether, in all the circumstances (including those specified in paragraph (2)(b) and sub-section (3)) Mr Clark ought fairly to be excused, either wholly or partly, from liability.
In order to be found to have acted honestly, I must be satisfied that Mr Clark acted bona fide in the interests of the company including the unsecured creditors: Powell v Fryer (supra) per Olsson J at para 111 and Australian Growth Resources Corporation Pty Ltd v Van Reesema (1998) 13 ACLR 261.
There is no doubt, in my view, that Mr Clark acted bona fide in the interests of the company apart from its unsecured creditors. He was continually making suggestions to the Board which, if implemented, he believed would improve the company’s viability. To that extent he was also acting in the interests of the creditors in a bona fide manner. There can, in my view, be no suggestion, as was the case in Powell v Fryer, that he purported to take advantage of indulgent creditors or that he was negligent in the performance of his duties. It must be remembered that, although a director, his role on the Board was at best that of an adviser. He had no financial stake in the company and, as such, he had little choice but to defer to the other directors who did. It is for these reasons that I have concluded that he acted “honestly” within the meaning of Section 1317JA(2)(a) of the Law.
I must next determine whether or not, in all the circumstances, he should be relieved of liability. The circumstances specifically referred to in the section are:
· the circumstances of his becoming a director;
· the matters referred to in sub-section (3).
Sub-section (3) does not assist Mr Clark because he took no action at any time to appoint an administrator. However, the circumstances relating to his becoming a director are important. He was brought in, initially, to provide calm to an unruly Board. He soon became an adviser, but no more. He had no financial interest in the company, nor was he remunerated for his services. If the heavy responsibilities which are imposed on directors are put to one side, it could be said that it would be an unduly onerous application of the Law if Mr Clark were to be subject to a judgment in excess of $425,000.00 and costs where the other directors have settled on undisclosed terms. I think it is a question of balancing the seriousness of the duties of a director with the circumstances I have just mentioned. In my view, a proper balance is struck if Mr Clark’s liability is limited to what he would have been required to contribute (as between judgment debtors) if there had been a joint judgment against all four directors. This was an alternative approach favoured by Rogers J, the judge at first instance in Daniels v Anderson (1995) 37 NSWLR 438, an approach with which the Court of Appeal did not disagree (at 525). Their Honours were then dealing with Section 1318 of the Corporations Law, but, in my view, it is equally applicable to Section 1317JA.

For the above reasons, there will be judgment against the fourth defendant for the sum of $106,312.00 inclusive of interest.

[2001] SASC 362

1 November 2001