Rema Industries & Services Pty Ltd v Coad, A.P.

Re: REMA INDUSTRIES AND SERVICES PTY LIMITED
And: AMBROSE PATRICK COAD, MARC ALFRED WILSON; CHRISTOPHER SHANE SMITH and
TASPAC THERMOFORMING PTY LIMITED
No. G3021 of 1991
FED No. 118
Corporations Law
(1992) 7 ASCR 251, (1992) 10 ASCR 530
(1992) 107 ALR 374

COURT

IN THE FEDERAL COURT OF AUSTRALIA

TASMANIA DISTRICT REGISTRY
GENERAL DIVISION
Lockhart J.(1)

CATCHWORDS

Corporations Law - s. 592 - civil liability of directors for company's debts - whether there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due - meaning of "reasonable grounds" - meaning of "debt incurred" - meaning of "due" - duties owed by passive directors - defence under s. 592 - whether director had reasonable cause to expect - meaning of "reasonable cause".

Corporations Law: s. 592.

HEARING

SYDNEY

#DATE 18:3:1992

Counsel for the Applicant : R.A. Parsons

Solicitors for the Applicant : Messrs Abelitis and Co.

Counsel for the First Respondent : A.G. Melick

Solicitors for the First Respondent: Messrs. Gunson, Pickard and Hann

Counsel for the Third Respondent : A.G. Melick

Solicitors for the Third Respondent: Messrs Gunson, Pickard and Hann

ORDER

The court orders that:

The applicant bring in short minutes of order to give effect to the Court's reasons for judgment on a date to be fixed.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This is an application, pursuant to s. 592 of the Corporations Law, by the principal creditor of a company, seeking judgment against the directors of the company on the basis that they contravened the section and are jointly and severally liable for payment of the company's debts. The relevant provision in the present case is s. 592(1)(b)(i); so it is incumbent upon Rema to establish, on the balance of probabilities, that immediately before the time when the debt or debts due to it was or were incurred there were reasonable grounds to expect that Taspac would not be able to pay all its debts as and when they became due.

The debtor company is Taspac Thermoforming Pty Limited ("Taspac"). The creditor is the applicant, Rema Industries And Services Pty Limited ("Rema"). The directors of Taspac are Ambrose Patrick Coad, Mark Alfred Wilson and Christopher Shane Smith, the first, second and third respondents respectively.
Two of the directors (the first and third respondents, Mr Coad and Mr Smith) raised (though not until the commencement of the trial) a defence pursuant to s. 592(2)(b)(i), namely, that neither of them had reasonable cause to expect that the company would not be able to pay all its debts as and when they became due.
Mr Coad and Mr Smith were represented by counsel and solicitors at the hearing. The second respondent (Mr Wilson) was represented by solicitors until shortly before the commencement of the hearing, but he was not represented at the hearing and he was not present personally.
It is agreed by Rema, Mr Coad and Mr Smith (as Mr Wilson did not appear at the final hearing it cannot be said he agreed) that the applicable law in this case is s. 592 of the Corporations Law, not its predecessor, s. 556 of the Companies (Tas) Code. In my view s. 592 is the applicable law, but it would not make any difference to the result of this case whether it was the Corporations Law or the previous Companies (Tas) Code that applied.
Taspac was incorporated in 1987 and it appears that its early life was as a shelf company under a different name. The shares were acquired by the respondents, although one spouse did provide some security. It commenced trading in or about September 1987. The directors of Taspac at all material times were the three respondents. Mr Coad conducted the day to day operations of Taspac. Mr Wilson and Mr Smith had little to do with the running of the company, but there is no dispute that they were directors at all material times together with Mr Coad.
Taspac carried on the business of producing and marketing moulded trays for prepackaged meat and other perishable foodstuffs. From the time it commenced business until October 1988 the sole supplier of raw material to Taspac was Garwood Pty Limited ("Garwood"). The trays were manufactured originally from rigid PVC material in which chlorofluorocarbons ("CFC") were used.
During 1988 the Tasmanian Government became concerned about the chlorofluorocarbons which were said to be ozone depleting substances. Consequently the Tasmanian Government was considering the introduction of legislation which would cover banning the sale and manufacturing of foam trays such as Taspac then manufactured. Mr Coad perceived that Taspac might derive advantage from such a ban because, provided he changed the raw material then being supplied to Taspac from PVC to more environmentally friendly material, it would leave Taspac as the only producer in Tasmania of moulded trays produced from polystyrene sheeting in which no CFC material was used. From about mid 1988 Mr Coad had discussions with Ministers and high level officials in the Tasmanian government. The discussions concerned the banning of the sale, manufacture and distribution of certain material containing chlorofluorocarbons.
On 1 October 1988, the Chlorofluorocarbons and Other Ozone Depleting Substances Control Act 1988 (Tasmania) (Act No. 13 of 1988) came into operation. Regulations were made under that Act to take effect on 1 October 1988, being the Chlorofluorocarbons Control Regulations 1988. These regulations listed the types of CFCs to be banned. Much to Mr Coad's surprise the list did not include hydrofluorocarbon 22 ("HFC22") which was the HFC from which moulded foam trays were then being used for prepackaged food products. It meant that competitors in the foam tray market could switch from one form of HFC to HFC22 without making substantial differences in cost or changes in methods of production. Not until 1991 were the regulations amended to include HFC22 as a banned substance.
At about this time Taspac stopped producing trays which contained HFC or any banned substance. On 31 October 1988 Taspac received its last invoice from Garwood. From that time onwards Rema became its sole supplier. Rema supplied polystyrene sheeting which did not contain any CFC material including HFC22.
Taspac commenced business on the basis of loan finance of $10,000 each from two of its directors and a later amount from Mr Smith of $15,000. It received a $100,000 facility from the Commonwealth Development Bank ("the CDB") in January 1989. These were the only sources of finance which Taspac was able to arrange.
During the latter half of 1988 and 1989 Mr Coad tried to obtain an injection of equity capital to keep the company afloat. The Tasmanian Development Authority rejected his application on 1 September 1988. In September and October 1988 Mr Smith, who had lent the company $15,000, tried to obtain repayment of the loan from Taspac but it is clear that Taspac did not have the capacity to pay that amount at that stage and it did not do so.
In early 1989 Mr Coad applied to the CDB for a further loan, this time for $400,000, which was required not only to keep the company afloat but to substantially restructure it in order to make Taspac a viable operator. Mr Coad's proposal included buying out the other directors. The CDB rejected Mr Coad's proposal and no money was forthcoming from it.
Taspac ceased trading on 15 December 1989 and sold all its assets in December 1989 to a company Thermform Packaging Pty Limited ("Thermform") which still trades and carries on basically the same business as Taspac previously carried on and uses the machinery, stock and customers of Taspac's former business. Mr Coad is in charge of the operations of Thermform. It appears that Taspac has not been wound up, though it is highly insolvent.
Evidence was given on behalf of Rema by its General Manager, Paul Raymond Bennett. The principal witness called by the first and third respondents was Mr Coad, the Managing Director of Taspac. The other witness called by the first and third respondents was Mr Smith.
I accept Mr Bennett as a truthful witness. Mr Coad impressed me in relation to certain of his evidence as a truthful witness, but on some matters crucial to his case he did not strike me as reliable. Mr Smith was a basically reliable witness.
The evidence included documents of various kinds including invoices, ledger cards, correspondence, accounts and balance sheets.
It is necessary to examine the trading relationship between Taspac and its former supplier, Garwood, and especially the subsequent trading relationship between Rema and Taspac. Garwood was Taspac's main, probably sole, supplier since it commenced business in 1987 and the relationship continued until October 1988. The relationship between them was that Taspac was to pay for the goods it ordered and which were delivered to it on the basis of a 30 day trading account.
At the end of October 1988 Taspac owed Garwood $145,000. By January 1989 Taspac owed Garwood $105,000 and payments ceased to Garwood in April 1989 when Taspac still owed it $55,000. Substantial payments were made by Taspac to Garwood in November and December 1988 and March, April and May 1989 pursuant to a scheme which had been worked out by Garwood with Taspac after a letter of demand had been given to Taspac by Garwood on 13 September 1988. As Garwood had ceased to be the supplier to Taspac in October 1988, when Rema commenced to act as the supplier, it follows that during the course of the trading relationship between Taspac and Rema, Taspac was still paying Garwood (from October 1988 through to May 1989) in order to reduce its previous debt to Garwood.
Mr Coad gave evidence that the relationship between Taspac and Garwood became increasingly strained because Taspac asserted that Garwood was supplying inferior quality raw materials. It is clear that there was disagreement between the two companies over the quality of the material supplied to Taspac. Taspac wrote a letter to Garwood on 13 January 1989 which suggested that it was on the verge of instituting proceedings against Garwood on the basis of inferior goods. However, there is no evidence that this claim was ever brought and I doubt if it was seriously contemplated.
Rema asserted in argument that Taspac changed its supplier from Garwood to Rema in October 1988, in order to escape its liability to Garwood. Mr Coad gave evidence that the change in supplier was in part because he was not happy with the quality of the raw materials which Taspac received from Garwood. It is interesting that payments were made by Taspac to Garwood even after the trading had ceased between them. I am not persuaded that there is any substance in the contention of Mr Coad that there was a sound base to Taspac's assertion that Garwood had supplied inferior goods.
Rema was the main supplier of raw materials to Taspac from November 1988 to December 1989 when Taspac ceased carrying on business. The only other supplier that Taspac used during the abovementioned period was Polystrom Plastics Pty Limited, on a one-off basis in March 1989.
The evidence is not clear as to the basis upon which Taspac began trading with Rema. It is unclear whether the Taspac account with Rema was on a basis of 30 day terms. However, the pattern of invoices which Taspac received from Rema after ordering goods from it and following the delivery of the goods does suggest that terms were on a 30 day net basis.
It is important to analyse the history of the trading relationship between Rema and Taspac. For the month of November 1988 (the first month in which Taspac traded with Rema) Taspac ordered a total of $30,000 worth of goods and paid to Rema in that month a total of $5,000. In the month of December 1988 Taspac ordered approximately $55,000 worth of goods and paid for $12,000 worth, and as at the end of December 1988 Taspac owed Rema approximately $68,000. In December 1988 one-quarter of the amount owed was on the basis of 30 day terms. In January 1989 Taspac ordered $56,000 worth of goods and paid $13,000 to Rema. The total amount owing was $107,000 and half of this was owed on a 30 day basis. In February 1989 Taspac ordered $30,000 worth of goods but paid Rema $40,000, thus lowering the total amount owed to approximately $97,000. At this time half of the account was on a 30 day basis in my opinion, but about 15% expanded to a 60 day debt. In March 1989 Taspac ordered $20,000 worth of goods but paid Rema $25,000, thus reducing the total debt to $92,000; however almost half of that debt had by then expanded to a 90 day debt.
During the whole of its trading relationship with Taspac, Rema showed concern over the terms of payment. This is made clear by the correspondence between the two companies. On 19 December 1988 Taspac sent a letter to Rema stating that it was unreasonable to demand prepayment for goods and said that such prepayment was merely a short-term method of payment which should only continue for so long as Taspac had shown that it was a bona fide company. Taspac asserted that it had shown its bona fides by this stage and prepayment should not be required for amounts after that date. The correspondence, in my opinion, assumes that there was an arrangement between the two companies that the amount owing by Taspac should not exceed $50,000. The letters of 21 December 1988 and 24 January 1989 (part of exhibit 3) demonstrate this.
A letter from Taspac to Rema dated 16 February 1989 (part of exhibit 3) refers to a meeting in Sydney held between Mr Coad and Mr Bennett on 14 February. This letter refers to the discussion of a possibility of Rema taking equity in Taspac. It is not clear that this was intended to be an exchange of debt for equity, but what is clear is that at the meeting of 14 February the terms of trading between the two men were discussed. It was agreed that Rema would continue to supply Taspac for so long as there was prepayment of that particular current order and provided extra money was sent in excess of the amount of goods ordered in order to pay off the oldest debt.
A document tendered in evidence by Rema (and agreed in by Taspac as showing a correct trading analysis) became exhibit 19 and it is a spreadsheet analysing the trading relationship between the two companies. Taspac asserted that no new debts were incurred by it with Rema after 14 February 1989 that were not prepaid (that is paid before delivery). This is not correct. For example, invoice number 7819 dated 21 February 1989 in the sum of $20,027.70 was never prepaid and in fact was never paid at all. The same is true of invoice number 7864 dated 27 February 1989 in the amount of $9,511.40. Both of these invoices were issued in late February 1989 after the meeting between Mr Coad and Mr Bennett earlier that month.
It is clear that in April 1989 Taspac had no ability at all to pay the outstanding debt to Rema. The facsimile transmissions of 5 April, 12 April and 17 April 1989 from Rema to Taspac speak eloquently of this. Mr Bennett became increasingly desperate and he wrote to Taspac on 21 April 1989 stating that he was becoming increasingly concerned about Taspac's inability to pay and would appreciate early attention to the matter. The letter was a facsimile transmission and it was not answered until 2 May 1989 after three intervening facsimile transmissions had been sent by Rema to Taspac requesting Mr Coad's answer. Mr Coad wrote a letter of 2 May 1988 in which he gave as an excuse for not answering that Taspac was "restructuring".
In summary, it is clear that the bulk of the debt owed by Taspac to Rema was incurred as a result of orders lodged in December 1988, January and February 1989. It is plain that in April and even early May 1989 Rema was still asking Taspac to take the rest of its February order and that Taspac neither had the sales nor the cashflow to service the Rema debt. Yet even after this period Taspac was ordering from Rema, but not on the basis of prepayment which was agreed in February 1989.
Section 592 of the Corporations Law provides:-

"592(1) Where:

(a) a company has incurred a debt;

(b) immediately before the time when the debt was incurred:

(i) there were 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 were 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 was, at the time when the debt was 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 contravenes this subsection 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.

(2) In any proceedings against a person under subsection (1), it is a defence if it is proved:

(a) that the debt was incurred without the person's express or implied authority or consent; or

(b) that at the time when the debt was incurred, the person did not have reasonable cause to expect:

(i) that the company would not be able to pay all its debts as and when they became due; or

(ii) that, if the company incurred that debt, it would not be able to pay all its debts as and when they became due.

(3) Proceedings may be brought under subsection (1) for the recovery of a debt whether or not the person against whom the proceedings are brought, or any other person, has been convicted of an offence under subsection (1) in respect of the incurring of that debt.

(4) In proceedings brought under subsection

(1) for the recovery of a debt, the liability of a person under that subsection in respect of the debt may be established on the balance of probabilities.

(5) Where subsection (1) renders a person or persons liable to pay a debt incurred by a company, the payment by that person or either or any of those persons of the whole or any part of that debt does not render the company liable to the person concerned in respect of the amount so paid.

(6) Where:

(a) a company has done an act (including the making of a contract or the entering into of a transaction) with intent to defraud creditors of the company or of any other person or for any other fraudulent purpose; and

(b) the company was at the time when it does the act, or becomes at a later time, a company to which this section applies; any person who was knowingly concerned in the doing of the act with that intent or for that purpose contravenes this subsection.

(7) A certificate issued by the proper officer of an Australian court stating that a person specified in the certificate:

(a) was convicted of an offence under subsection (1) in relation to a debt specified in the certificate incurred by a company so specified; or

(b) was convicted of an offence under subsection (6) in relation to a company specified in the certificate; is, in any proceedings, prima facie evidence of the matters stated in the certificate.

(8) A document purporting to be a certificate issued under subsection (7) shall, unless the contrary is established, be deemed to be such a certificate and to have been duly issued."

Section 592 creates two classes of offences, one under sub-section (1) and another under sub-section (6). It also confers a civil remedy under sub-section (3). Where a person has been convicted under sub-section (1) or sub-section (6) a further remedy is provided in s. 593. It is sub-sections (1) and (2) of s. 592 with which this case is primarily concerned. The remedy sought is a civil remedy under sub-section (3) and where this is the case, proof is the civil standard, that is on the balance of probabilities: s. 592(4).
Section 592 of the Corporations Law is the successor to s. 556 of the Companies Code previously in force and which is in identical terms in all material respects. The origin of these provisions lies in s. 303(3) of the Uniform Companies Act 1961 which was substantially amended from time to time. This legislation all reflects the tendency of Parliament in recent times to place greater responsibility on persons who are directors and managers of companies at times when debts are incurred in circumstances where there is no reasonable prospect of the companies being able to pay their debts.
Section 592 and its predecessors have received considerable judicial scrutiny. Most of the cases are conveniently collected in the judgment of Tadgell J. in Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 124. In addition, reference may be made to Group Four Industries Pty Limited v Brosnan (Duggan J., unreported, 16 August 1991) and Holpitt Pty Limited v Swaab, (Burchett J., unreported, 3 January 1992). There are some judicial differences of opinion expressed in the cases about the construction of s. 592 and its predecessors which are helpfully discussed in the judgments of 3M Australia Pty Ltd v Kemish (1986) 4 ACLC 185, Metal Manufacturers v Lewis (1988) 6 ACLC 725, Statewide Tobacco Services Ltd v Morley (1990) 8 ACLC 827 and Friedrich.
To prove an offence under s. 592 a number of requirements must be satisfied. The first is the requirement that the company has in fact incurred a debt. Closely related to this requirement is a determination of when this debt was incurred. It is at this time that the reasonable grounds of expectation of the company's inability to pay all its debts must be proved.
The time when a debt is "incurred" will vary from case to case, depending principally upon the terms of the agreement between the parties, express or implied. Three of the reported cases that are of assistance in the present case in determining when debts to Rema were incurred by Taspac are John Graham Reprographics Pty Limited v Steffens (1987) 12 ACLR 779; Hussein v Good (1990) 8 ACLC 390 and Group Four Industries.
I am satisfied that the debts were incurred by Taspac to Rema at the time of delivery of goods pursuant to invoice during the trading relationship between Taspac and Rema. The exception to this was where any particular debt was subject to the agreement for prepayment. This arrangement was infrequent in its application.
Further, I am satisfied that new debts were incurred after 14 February 1989 by Taspac to Rema that were not in fact prepaid. Whatever may have been the terms of the arrangement reached on 14 February 1989 between Mr Bennett and Mr Coad, as to which the evidence is far from precise, any arrangement of prepayment agreed in at the 14 February meeting was not in fact implemented. I refer to what I said earlier about invoices 7819 and 7864. Also, invoice number 7941 dated 10 March 1989 for goods in the sum of $19,099.07 related to debts that were incurred without prepayment.
The question of what standard should be applied when considering an objective test as to "reasonable grounds" has been considered in various cases. I agree with the test as stated by Foster J. in Kemish (at 187):

"It will be seen that subsec. (1)(b)(i) makes no provision for the person or class of persons who are to have the relevant expectation. Clearly, material that could provide 'reasonable grounds' for expectation by a person with the qualifications of an auditor, could be very different from material that would provide such grounds for an office boy. I am satisfied from a reading of the whole of the subsection, and having regard to the fact that it prescribes an offence, that the reasonableness of the grounds relied upon by the prosecution and/or a civil plaintiff, must be judged by the standard appropriate to a director or manager of ordinary competence."

In my opinion when sub-section (1) of s. 592 refers to "reasonable grounds" it requires the establishment of grounds which are reasonable according to the standards of directors or officers of companies of reasonable ability. Reasonable ability is a relative concept designed to be applied with some flexibility. The test is objective and is not measured by subjective considerations personal to the defendant.
It is plain that at least from the time when Taspac commenced its trading relationship with Rema it was in fact unable to pay its debts as and when they fell due. At the commencement of that relationship, Taspac's account with Garwood was overdue for payment and it remained overdue thereafter. Whilst there is some uncertainty as to the precise terms of payment between Taspac and Rema it is clear that the agreed terms for payment were "short trading terms". Even as late as 16 December 1988 Mr Coad informed Garwood that Taspac could not reduce its account balance with Garwood for want of funds. This was the fact. It is also worth noting that between 23 May 1989 and 11 October 1989 cheques were received by Rema from Taspac in purported reduction of Taspac's account with Rema which were returned unpaid and marked "present again". However, when the cheques were presented again they were then met.
Taspac was considerably undercapitalised from its inception and it never recovered from that state. Working capital was deficient at all material times. Judged by the standards of directors or officers of companies of reasonable competence it is plain that immediately before each relevant debt was incurred by Taspac to Rema (i.e. at the time of each delivery of goods pursuant to a particular invoice unless the debt was subject to the prepayment agreement which, as I said earlier, had infrequent application), there were reasonable grounds to expect that Taspac would not be able to pay all its debts as and when they became due.
The defence raised, though at the heel of the hunt, by Mr Coad and Mr Smith is under s. 592(2)(b)(i) which speaks of the defendant not having "reasonable cause" to expect that the company would not be able to pay all its debts as and when they became due. They must prove this defence. The test of "reasonable cause" in the context in which the expression appears imports an objective standard, but it must be applied to the facts and circumstances known to the defendant and facts and circumstances which, by reason of the defendant's duties as a director or officer of the company, ought to have been known to him. It would be absurd for a defendant to be able to establish a defence simply on the basis of what he in fact knew. This would reward the incompetent director who ought to have known a great deal more than he in fact knew.
It was argued on behalf of Mr Coad that no debt was incurred by Taspac to Rema after 14 February 1989 because, so it was said, all supplies of goods thereafter by Rema to Taspac were on the basis of prepayment subject to one immaterial exception, namely, an invoice dated 18 May 1989 relating to certain tools and a small debt in respect thereof which was incurred in February. It was argued on behalf of Mr Coad that he thought Taspac would succeed and become a successful and viable business enterprise for a number of reasons including the following:
. Mr Coad's expectation that the proposed chlorofluorocarbons

legislation would be passed and thus give him a substantial business advantage because of the absence of competitors using products that would not be prohibited by the prospective legislation.

. Once he realised that the regulations were inadequate, it was

argued that he had reason to suspect that the loophole would be closed and that the relevant CFC substances would be then included in the class prohibited by the regulations. As at 7 February 1989 Mr Coad had, so it was said, every confidence in Taspac's future and indeed was trying to buy out the equity of other interested parties in Taspac.

. It was said that even during the period November and December 1988

and January 1989 sales of Taspac were increasing, profitability had improved and liability to Rema and others had been reduced.

. Taspac continued to trade until September 1989 during which period

the liability to Rema decreased by approximately $45,000 and $60,000 was paid to Garwood leaving an undisputed debt of only $11,000 owing to it.

As to Mr Smith's defence it was submitted on his behalf that:-
. He made enquiries mainly from Mr Coad from time to time as to the

financial position of Taspac. He was pursuing a different business activity at all relevant times and had nothing to do with the day to day management of Taspac and he had no reason not to trust Mr Coad whom he assumed had the appropriate expertise and accounting support to form reasonable opinions as to the business operations of Taspac.

. Although he received from time to time financial summaries

relating to Taspac which were not entirely optimistic, he was influenced more by comments that he received from Mr Coad indicating that Taspac was in a reasonably sound position.

I accept that Mr Coad did expect that the CFC legislation would effectively raise a barrier to current suppliers of trays in the relevant market and give Taspac a real commercial advantage. Taspac was at that time the only producer of CFC-free moulded trays available on the market in Tasmania, although there was some interest shown in Tasmania from a New Zealand company. It is likely that, if the legislation had in fact banned the manufacture, sale and use of products made from HFC22, Taspac would have been able to obtain a substantial market share within a short time. The fact that it was not banned until 1991 when the regulations were amended was definitely a factor which led to the failure or Taspac, although in my opinion the basic cause of its failure was its acute undercapitalisation which continued throughout its life.
Taspac placed large orders with Rema in December 1988, January and February 1989 for raw materials based, so Mr Coad says, upon his expectation that the CFC legislation would be amended and not retain the HFC22 exception. I am not persuaded that Mr Coad did have as high an expectation as he claims he did and, I suspect that these large orders were based on an optimistic view of sales which could not reasonably be justified.
Nor did Mr Coad have a reasonable basis for any view that Taspac's financial position would improve after February 1989. His application for a substantial loan to the CDB in early 1989 was rejected on 10 February 1989. Mr Coad's meeting with Mr Bennett in Sydney on 14 February 1989 about trading terms based on prepayment, were not terms that would seriously ground a reasonable belief of a company director about his company's future financial prospects, especially in the circumstances of this case.
I am satisfied that Mr Coad has not established his defence under s. 592(2)(b)(i).
As to Mr Smith's defence, although he was not a working director of Taspac (indeed, in fact, he had hardly any knowledge of its affairs) in my opinion he ought to have informed himself far more fully than he did about the financial affairs of Taspac, including its trading relationship with Rema, if he was to fulfil his duties as a director of Taspac. He has failed to establish a defence.
It follows that Rema has established its case under s. 592. Each of the respondents is liable to Rema for the payment of the full amount of Taspac's debt to it.
Interest must be awarded to Rema pursuant to s. 51A of the Federal Court of Australia Act 1976; but, as discussed with counsel during addresses, this should be assessed by the parties after judgment is given and then included in the orders to be embodied in short minutes to be brought in by Rema.
I shall therefore not enter judgment today but stand the matter over to a date to be fixed by arrangement between my associate and counsel. I direct that Rema bring in short minutes of order to give effect to my reasons for judgment on that date. Rema's costs of the proceeding including reserved costs, if any, must be paid by all three respondents.
Had I found that Mr Coad and Mr Smith established defences under s. 592(2) and that this was the only basis upon which they succeeded, I would have nevertheless ordered them to pay the costs of Rema of the whole proceeding. Those costs were incurred in any event, it being remembered that it was not until the first day of the trial that Mr Coad and Mr Smith sought leave to amend their defences by raising s. 592(2) defence. Nor was notice given beforehand of their intention to take this course. It was suggested by counsel for Mr Coad and Mr Smith that a statement made by each of them by affidavit that "at no time during the relevant period did I believe or have any cause to believe that the company was continuing to trade whilst it was unable to pay its debts as and when they fell due" amounted in substance to notice of the intention to raise the statutory defence under sub-s. (2). I reject the argument. Parties are entitled to conduct their cases on the basis of the pleadings where pleadings have been ordered as they were here and the statements made in the affidavits cannot in my opinion constitute notice of any intention to raise the statutory defence.

[1992] FCA 118

18 MARCH 1992