PHILIP GREGORY JEFFERSON as Liquidator of Complete Industries Pty Ltd ACN 010 959 056 (in Liquidation) v SMITH
[2000] QDC 52
•16 June 2000
[2000] QDC 052 DISTRICT COURT OF QUEENSLAND
REGISTRY: BRISBANE
NUMBER: D4064 of 1998
Plaintiff:
PHILIP GREGORY JEFFERSON as liquidator of Complete Industries Pty Ltd ACN 010 959 056 (in liquidation)
AND
First Defendant:
GRAEME STEPHEN SMITH
Second Defendant:
HEATHER SMITH
REASONS FOR JUDGEMENT
DELIVERED the sixteenth day of June, 2000
1. This matter was called on before me on 7th June, 2000. I stood it down until later that day whilst I dealt with another matter. This matter then commenced, and the evidence concluded the following day.
2. When the matter was first called on Mr. Collins announced his appearance for the plaintiff. The first defendant appeared in person, and told me that the second defendant, his wife, would not be appearing.
3. The matter proceeded in the absence of the second defendant. At the end of the day I do not think the failure of the second defendant to appear is a matter which need concern me further.
4. The matters in issue in this case are within narrow compass.
5. The Company Complete Industries Pty Ltd (“the company”) formerly traded in the building trade, principally, as I understand the evidence, as a cabinet maker. It provided kitchens to the building trade. It appears to have traded profitably for a number of years, but in early 1994 ran into financial trouble.
6. At all relevant times the defendants were the directors of the company.
7. On 6th September, 1995 the company went into liquidation by order of the Supreme Court of Queensland. The plaintiff was appointed to be the company’s liquidator.
8. The Liquidator brings these proceedings to recover debts incurred by the company during a period whilst the defendants were directors, and during which it is said they were aware that the company was insolvent.
9. The basis of the plaintiff’s claim is section 588M of the Corporations Law. The section provides,[1] so far as is relevant, that the company’s liquidator may recover from the directors, as a debt due to the company, an amount equal to “the amount of the loss or damage.” To understand this last phrase one must have regard to sub-section 1 of the section which provides:
[1]. In subsection 2.
This section applies where:
(a) a person ... has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and
(b) the person ... 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.
10. Sub-Section (2) of section 588G (which is relevant in this case) must be read with sub-section (1). Together they provide:
(1) This section applies if:
(a) a person is a director of a company when the company incurs a debt; and
(b) the company is insolvent at that time, ...; and
(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, ...;
.....
(2) By failing to prevent the company from incurring the debt, the person contravenes this 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.
11. Pursuant to these provisions, if the plaintiff is to succeed in respect of any particular debt incurred by the by company he must prove:
a. The debt was incurred by the company; and
b. The defendants were directors of the company at the time the debt was incurred; and
c. The company was insolvent at the time the debt was incurred; and
d. At the time the debt was incurred there were reasonable grounds for suspecting that the company was insolvent; and
e. The directors were aware at the time the debt was incurred that there were reasonable grounds for suspecting that the company was insolvent; and
f. The debt has not been paid; and
g. The person to whom the debt is owed has suffered loss or damage in relation to the debt; and
h. That loss or damage has been suffered because of the company’s insolvency; and
i. The debt was wholly or partly unsecured when the loss or damage was suffered; and
j. The company is being wound up.
12. The liquidator sues in respect of debts allegedly incurred by the company between May, 1994 and 28th March, 1995.
13. I have already mentioned that the defendants were at all material times directors of the company.[2] Thus the matters referred to in sub-paragraph (b) of paragraph 11 are proved.
[2]. See the allegations made in paragraph 2 of the plaint, which are admitted in paragraph 1 of the defence.
14. In paragraph 5 of the joint defence of the defendant it is admitted that the company was insolvent from May, 1994 to 28th March, 1995. Thus the matters referred to in sub-paragraph (c) of paragraph 11 are proved.
15. In the same paragraph of the defence it is admitted that there were reasonable grounds for suspecting that the company was insolvent (the admission appears to me to relate to the same period, namely from May, 1994 to 28th March, 1995 - nothing to the contrary was suggested to me during the trial.) Thus the matters referred to in sub-paragraph (d) of paragraph 11 are proved.
16. In paragraph 5 of the defence it is admitted by the defendants that they were aware there were grounds for suspecting that the company was insolvent at the relevant time, although issue is taken (as it is consistently throughout the defence) with the fact that debts were in fact incurred. Hence it seems to me that the matters referred to in sub-paragraph (e) of paragraph 11 above are proved.
17. I have already referred to the winding up order. I find the matter referred to in sub-paragraph (j) of paragraph 11 are proved.
18. I now turn to the contentious issues.
19. The plaintiff sought to prove its claim by calling Michael Neilsen, a chartered accountant in the employ of the liquidator. He has had the day to day control of the liquidation of the company on behalf of the liquidator.
20. Prior to trial Mr. Neilsen prepared an affidavit, a copy of which was provided to the defendants. In it he exhibits a list of the company’s creditors, printed on 6th March, 1995 and which came from the company’s records.[3]
[3]. Exhibit MN2.
21. As a result of the defendant’s alleging that some of the debts shown in the document were not incurred during the relevant period he made further enquiries, and, for himself at least, appears to have accepted some at least of the defendants’ claims. This lead him to produce a further list.[4]
[4]. Exhibit MN3.
22. In respect of one of the matters on that revised list, namely the debts allegedly incurred to Tasman KB, I was advised that the plaintiff did not seek to pursue that claim. The total of the listed debts remaining is $69,377.63.
23. In respect of each of the claims listed on this last list Mr. Neilsen has attached copies of statements and invoices from the company and the various suppliers to it. In each case, he says, the documents establish that the company purchased goods from the various suppliers during the relevant period.
24. Mr. Smith gave evidence. He impressed me as an honest and straightforward man.
25. Essentially Mr. Smith’s case, as presented through his evidence, is that, realising the company was in difficulty, he made arrangements with the various suppliers of materials. In each case he agreed that when materials were ordered, he would ascertain the cost of the materials to be supplied. He would then arrange for that amount to be paid, plus a further amount to discharge earlier indebtedness.
So I changed the whole business structure that we were then dealing with all of the customers, all of our clients and it was my understanding at that time that as long as I didn't incur debt, that I was doing the right thing and as long as I reduced debt, that I was again doing the right thing. So I set in motion a system whereby all of the different creditors actually received cash for their goods as they received them and in most parts they were happy to work with me because they had seen a large amount of money go through their accounts and they saw that they would work with us. Oftentimes we would get the problem that they wanted more money than we were able to give them on top of the cash that we were giving them for the goods supplied and that became a contentious issue from time to time. Nevertheless, I have documents here to show that during the time that we were allegedly insolvent, that I paid on top of the materials that were supplied for three people at the moment - I have mentioned them earlier and that's Laminex Industries, we paid them back $8,211.79. We paid back CSR on top of the goods that we were supplied, $8,568.74. And we paid back Hettich, $6,376. In a total you are looking at $16 - about 25, $26,000, in total, those three.[5]
[5]. Transcript pages 71-72.
26. I have no doubt that Mr. Smith did seek to implement the system he outlined in respect of some, perhaps most, of the company’s suppliers. He is supported to some extent by the evidence of Lawrence Rogers, who owned a business manufacturing vanity tops. He said:
We ... were paid COD on all these transactions because you phoned me and asked if I would agree to COD payments plus $200 payments at the same time to pay off all debts and I agreed to that. That we would continue to deal with you on the basis that it would all be COD payments and that continued up to date up to the point when we ceased - when you ceased trading.[6]
[6]. Transcript page 39-40.
27. On the other hand, it is clear that Mr. Roger’s business in fact treated all payments received by it as being payments off the account, and attributed the payments to the elimination of the oldest debts. That this was the case is confirmed both by his evidence,[7] and by the documents exhibited to Mr. Neilsen’s affidavit.
[7]. Transcript, page 42.
28. In the case of Mr. Roger’s business, if the agreement between it and the company was as both Mr. Rogers and Mr. Smith allege, then it seems to me the business was not entitled to deal with the monies received as it did. If the goods were ordered on a COD basis, as Mr. Rogers says, and they were paid for, then the business was not entitled to appropriate that money to old debts. I think the law is conveniently stated by Lockhart J. as follows:[8]
A debtor who owes two debts to a creditor is entitled to appropriate a payment which he makes to his creditor to one debt rather than the other. If he omits to do so, the creditor may make the appropriation. If neither makes any appropriation, the law appropriates the payments to the earlier debt. If there is specific appropriation by the debtor cadit quaestio. In the absence of a specific appropriation it is a question of fact whether there was any appropriation by the debtor. To constitute an appropriation there must be more than an intention to appropriate by the debtor.
[8]. Re Walsh: Ex parte Deputy Commissioner of Taxation (NSW), 1982 42 A.L.R. 727, 728-29.
29. In the light of Mr. Roger’s evidence as to the arrangement which he entered into on behalf of his business, it seems to me the business was wrong to treat the supply of the most recent items to the company as being unpaid. In respect of Crest Marble the matters referred to in sub-paragraphs (f) and (g) of paragraph 11 have not been proved.
30. The question remains as to the other claims made by the liquidator.
31. No other witness was called by the defendants.
32. The documents exhibited by Mr. Neilsen are all largely inconsistent with Mr. Smiths evidence. Some of them, it is true, show invoices marked “COD” or with some similar notation - and I note that in some cases that notation has been crossed out, and words such as “To A/C” written in their place - which would seem to suggest that in some cases there may have been an agreement to pay cash on delivery, which was later varied to allow for amounts to be further charged to the company’s account.
33. The fact remains that the documents now before the court all indicate that the various suppliers regarded the debts as having been incurred during the relevant period. This would suggest that the supplier either did not have an arrangement for the goods to be paid for on delivery, or that if there was, that it was abandoned. Of course, an alternative explanation is - as happened in the case of Crest Marble - that the supplier’s bookkeeper simply ignored, or was ignorant of, the arrangement.
34. The onus is upon the plaintiff to prove the debts were incurred at the relevant time.
35. I am persuaded that, with the exception of the Crest Marble debt, the liquidator has proved the debts were incurred in the relevant period. In coming to this conclusion I am persuaded largely by the contemporaneous documents - although, for the reasons I have outlined, I have not always felt entirely confident in so doing.
36. I am satisfied that none of the debts claimed have since been paid. The creditors are therefore suffering a loss equal to their respective debts, and that loss has been suffered because of the insolvency of the company. In short, I am satisfied that the matters referred to in sub-paragraphs (a), (f), (g), and (h) of paragraph 11 above have been proved.
37. In paragraph 9 of the defence matters are pleaded which amount to allegations that the company attempted to trade its way out of its difficulties. It is alleged that the company succeeded in reducing its indebtedness during the relevant period. However, it does not seem to me that these matters amount to a defence to this action.
38. I give judgment for the plaintiff against the defendant in the sum of $63,604.12. I order that the defendants pay the plaintiff’s costs of and incidental to the action to be assessed.
H. W. H. Botting, D.C.J.
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