Scott v Williams & Ors No. Scciv-98-1663

SCOTT V WILLIAMS & ORS
[2002] SASC 424
Civil

LANDER J.
Introduction
The plaintiff is the liquidator of South Australian Ships Pty Ltd (the Company) having been appointed by order of this Court on 8 June 1999. The Company went into liquidation on 21 March 1997 and the first third party (Mr Sims) was appointed liquidator on that day.
The first third party and the plaintiff were, at the times of Mr Sims’ appointment as liquidator, and at the time of his retirement and Mr Scott’s appointment, partners in the firm of Sims Lockwood together with the other third parties.
The third parties practise as a firm of chartered accountants which specialises in insolvency work. The plaintiff is, as I have said, a member of that firm.
The plaintiff has brought this action pursuant to s 588M of the Corporations Law, 1996 (Cth) (the Law) against the defendants who were the directors of the Company at the time that the Company went into liquidation.
Section 588M(2) allows a company’s liquidator to recover from a director “... as a debt due to the company, an amount equal to the amount of the loss or damage” suffered by the company in circumstances where the company has traded whilst insolvent.
The fourth defendant, Mr Hercus, (the defendant) is one of five directors who was sued.
The Other Defendants
A settlement has been reached with the other directors. Dr Donald Williams was the chairman of directors. He died on 7 August 2001. The liquidator has reached an agreement with his executrix, Mrs Naomi Williams, the terms of which have been recorded in a Deed executed on 9 January 2002.[1] She has agreed to pay $300,000 by way of ‘Interim Settlement Sum’ “ ... in partial settlement of the Proceeding and (subject to certain matters) additional monies to settle the Liquidator’s claim against the Estate in the Proceeding and will enter into further negotiations with the Liquidator on the terms set out in this Deed to pay up to a further maximum amount of $400,000.00.”
[1] P1 [The exhibits in this case were identified by reference to the party who tendered them, P (Plaintiff) D (Defendant) TP (Third Parties).
P5 contained 17 Lever Arch Files
TP 12 contained 4 Lever Arch Files
The documents in these exhibits have separate internal numbers
The terms of the Deed of Settlement provided that she was to pay the Interim Settlement Sum before 10 January 2002.
It is provided in clause 8 of the Deed of Settlement:
“8 If the Liquidator:
8.1Settles with Phillip Christian Hercus (“Hercus”) (who is also a defendant in the Proceeding) for any amount at any time; or
8.2Obtains a judgment against Hercus for any amount and after the determination of any appeal or appeals arsing from any such judgment.
the parties agree that after any of the events in clause 8.1 or 8.2 first occurring they will promptly and no later than 14 days after conduct further negotiations with a view to the Executor and the Liquidator agreeing an additional payment (separate from the Settlement Sum) from the Executor to the Liquidator up to a maximum of $400,000.00 (“the Additional Settlement Sum”).”
The parties have agreed that if, after negotiation, they are unable to reach agreement the dispute is to be submitted to arbitration for a determination (inter alia) whether superannuation payments and a bank account (the disputed funds) are property of the estate and available to the creditors of the estate including the liquidator.
Clause 14 of the Deed provides:
“14.If the parties are unable to reach agreement and obtain an award from arbitration the parties agree the following with respect to the costs of the arbitration and the costs of the reference (“the Disputed Funds Arbitration”):
14.1If the Liquidator obtains an award that the Disputed Funds are divisible property of the Estate, the Executor will pay to the Liquidator the sum of $400,000.00 inclusive of interest plus the costs of the Disputed Funds Proceedings to be agreed or taxed;
14.2If the Liquidator obtains an award that the superannuation payment and life insurance proceeds or any part of them form part of the divisible property of the Estate but that the Westpac monies do not, the Executor will pay to the Liquidator the sum of $200,000.00 and each party will bare its own costs of the Disputed Funds Proceedings;
14.3If the Liquidator obtains an award that the Westpac monies form part of the divisible property of the Estate but the superannuation payments and life insurance proceeds do not, the Executor will pay to the Liquidator the sum of $200,000.00 and each party will bare its own costs of the Disputed Funds Proceedings.
The additional amount paid to the Liquidator by the Executor pursuant to the provisions of this clause 14 including any costs of the Disputed Funds Arbitration is in this deed called “the Additional Settlement Sum”.
The Deed thereby provides rather elaborate machinery for determining whether Dr Williams’ estate has funds sufficient to make payment of an additional settlement sum and for the determination of that sum.
Dirk Pieter Verboon, Hindrikus Gerardus Verboon and Michael Arthur Thomas were also directors of the Company. Mr Thomas was also the Chief Executive Officer.
The liquidator has settled with each of those parties upon the basis that Mr Dirk Verboon pays $150,000 towards the liquidator’s costs and that Mr Hindrikus Verboon and Mr Michael Thomas each pay $1 towards those costs.[2]
[2] P1
There is no evidence before me why it was that the liquidator settled on those terms with those three directors.
Dr Williams and Mr Thomas acted as executive directors throughout the relevant period. The defendant, Mr Hercus, lived out of this State and was mainly reliant upon Dr Williams, Mr Thomas and the management for information relating to the Company. I think that the defendant was, in a number of respects, misadvised and in some other respects, not properly advised of the Company’s finances from time to time.
For reasons which I will give, it is apparent that his culpability is less than Dr Williams and Mr Thomas.
Section 588N of the Law prevents double recovery by the liquidator or a creditor in any proceedings under s 588M. It provides:
“588NAn amount recovered in proceedings under section 588M in relation to the incurring of a debt by a company is to be taken into account in working out the amount (if any) recoverable in any other proceedings under that section in relation to the incurring of the debt.”
In those circumstances it seems to me that the settlement with the estate of Dr Williams and the other directors are relevant to these proceedings because those settlements are for amounts recovered in proceedings under s 588M.
The executrix of Dr Williams’ estate and the other three directors have also compromised their claims for indemnity and contribution with the third parties.
There are no contribution proceedings between the various directors so that the other defendants’ settlements with the plaintiff and the third parties means that the only issues alive are between the plaintiff and Mr Hercus and Mr Hercus and the third parties.
The Plaintiff’s Case In Outline And The Legislation
The plaintiff claims that during the period 1 June 1996 to 14 January 1997 the Company traded whilst insolvent. The plaintiff claims that, because the defendant was a director at the relevant time, he is liable for the amount of loss or damage suffered by the Company pursuant to s 588M of the Law.
Division 3 of Part 5.7B of the Law imposes a duty upon a director of a company to prevent the company trading whilst insolvent. The duty is provided for in s 588G. Section 588G is a civil penalty provision.[3] A contravention of the section makes a director liable to a civil penalty order.[4] A contravention of a civil penalty provision can, in the circumstances provided for in s 1317FA, give rise to an offence.
[3] s 588G(3); s 1317DA
[4] s 588G(3)
Division 4 of Part 5.7B gives a statutory cause of action to a liquidator of a company to recover from a director any loss or damage suffered by the company as a result of the company trading whilst insolvent.
The statutory cause of action is contained in s 588M which identifies the matters which must be established for the liquidator to recover.
Section 588M(1) provides:
“(1) This section applies where:
(a)a person (in this section called the “director”) has contravened section 588G in relation to the incurring of a debt by a company; and
(b)the person (in this section called the “creditor”) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency; and
(c)the debt was wholly or partly unsecured when the loss or damage was suffered; and
(d)the company is being wound up;
whether or not:
(e)the director has been convicted of an offence in relation to the contravention; or
(f)a civil penalty order has been made against the director in relation to the contravention.
(2)The company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.
(3)The creditor may, as provided in Subdivision B but not otherwise recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage.
(4)Proceedings under this section may only be begun within 6 years after the beginning of the winding up.”
The claim is that of the liquidator.[5] The claim is for an amount equal to the amount of the loss or damage by the company incurring the debt whilst insolvent. A claim could be brought by a creditor provided that the creditor could bring himself or herself within Subdivision B of Division 4 of Part 5.7B. Those sections are not relevant to this case.
[5] s 588M(2)
If a liquidator seeks to recover from the director as a debt due to the company an amount equal to the amount of loss or damage pursuant to s 588M(2) it is necessary for the liquidator to establish the matters in paragraphs (a), (b), (c) and (d) of s 588M(1). First, the liquidator must prove that the Company is being wound up.[6] Secondly, the liquidator must establish that the defendant was a director.[7] Thirdly, that the director has contravened s 588G of the Law.[8] Fourthly, the liquidator must establish that a creditor to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency.[9] Loss or damage in this context means the amount of the unpaid debt due to the creditor in question.[10] Lastly the liquidator must prove that the debt was wholly or partly unsecured when the loss or damage was suffered.[11]
[6] s 588M(1)(d)
[7] s 588M(1)(a)
[8] s 588M(1)(a)
[9] s 588M(1)(b)
[10] Powell v Fryer [2001] 37 ACSR 589; Tourprint International Pty Ltd (In Liq) and Another v Bott
[11] s 588M(1)(c)
In fact it is admitted that the Company is being wound up; that Mr Hercus was a director of the Company between 1 June 1996 and 14 January 1997; that creditors have suffered loss or damage by the company incurring debts; and that all of the debts were wholly unsecured when the loss or damage was suffered.
The issue in this case is whether the defendant has contravened s 588G.
The Amount of the Debts
During the trial the plaintiff’s claim was amended to claim the sum of $2,969,690.26, which he says is the loss or damage suffered by the company as a result of the defendant’s breach of s 588G of the law.
That sum was made up of debts incurred by the Company over the period between 1 June 1996 and 14 January 1997.
Later I was advised that the parties had agreed that one of the debts in the statement of claim should be deleted.[12] That was a debt to Kamewa Australia Pty Ltd incurred on 9 July 1996 in the sum of $327,678.12. The parties also agreed that the sum of $113,265 shown in the amended statement of claim as owing to the Australian Taxation Office at 31 December 1996 had been paid.[13]
[12] TX 776
[13] TX 776
The unsecured debts incurred in the period 1 June 1996 to 23 September 1996 and unpaid totalled $1,406,105.15. The unsecured debts incurred in the period 24 September 1996 to 14 January 1997 and unpaid totalled $1,122,640.99.
The total of the plaintiff’s claim for the whole period is $2,528,371.15.
The plaintiff was in error in his closing submission when he claimed that his claim was $2,642,012.14.[14]
[14] Plaintiff’s written submission Part 1 paragraph 8
He overlooked the agreement in respect to the second debt to the Australian Taxation Office.
The defendant and the third parties have agreed that debts of those sums were incurred in those two periods.
It is not relevant on the plaintiff’s case to distinguish between the period before 23 September 1996 and after 24 September 1996. However the periods are relevant because of the defendant’s defence and the defendant’s case against the third parties.
The Defendant’s Response In Outline
The defendant admits that the Company traded whilst insolvent but he says he did not contravene s 588G. In the alternative he relies on defences which are available under s 588H of the Law. In particular for the period 25 September 1996 to 14 January 1997 he says that he believed that a competent and reliable person was responsible for providing him with adequate information about whether the Company was solvent and that that other person was fulfilling that responsibility.[15] It is the defendants’ case that the first third party, Mr Sims, was retained by both the Company and the directors on or about 24 September 1996 to give that advice and that he gave that advice between that date and 14 January 1997. In relation to the earlier period between 1 June 1996 and 24 September 1996 the defendant says that he was not guilty of any contravention of any Corporations Laws because Mr Sims advised on 24 September 1996 that the Company was not insolvent. The defendant has sought indemnity and contribution from the third parties in the third party proceedings.
[15] s 588H(3)(a)
The Third Parties Case
On 14 January 1997 Mr Sims was appointed the administrator of the Company. As I have already mentioned, he was appointed the liquidator of the Company on 21 March 1997. It is the third parties’ case that Mr Sims was not retained by the directors to give any advice. It is the third parties’ case that Mr Sims did not give advice to the Company about its solvency. They say that Mr Sims was retained only for the purpose of being appointed an administrator under the Law.
The Defendant’s Further Assertion
The defendant says that the plaintiff has a conflict of interest inasmuch as he was a member of the firm of which the first third party was also a member and which the defendant says was retained to give advice to both the Company and the directors in relation to the period when the plaintiff claims the Company was trading whilst insolvent to the knowledge of the defendant.
The plaintiff’s claim against the defendant is a statutory one and requires proof of a contravention of subsection 588G.[16]
[16] s 588M(1)(a)
The Statutory Cause Of Action
Section 588G of the Law provides:
“588G (1) This section applies if:
(a)a person is a director of a company at the time when the company incurs a debt; and
(b)the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
(c)at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and
(d)that time is at or after the commencement of this Part.
...
(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.”
The defendant admits that he was a director of the Company at the time when the debts were incurred,[17] that the Company was insolvent at that time[18] and that the debts were incurred after the commencement of the Act.[19] He does not admit that when each or any of the debts were incurred there were reasonable grounds for suspecting that the Company was insolvent.[20]
[17] s 588G(1)(a)
[18] s 588G(1)(b)
[19] s 588G(1)(b)
[20] s 588G(1)(c)
For the section to apply in these proceedings the plaintiff must therefore establish that when the Company incurred the debts there were reasonable grounds for suspecting that the Company was insolvent.[21] That matter is in issue.
[21] s 588G(1)(c)
If that matter is established the plaintiff must then establish that the defendant failed to prevent the Company from incurring the debts.[22] If both those matters are established, the defendant will have contravened the section if the plaintiff proves either of the matters in s 588G(2); that the defendant himself was aware at that time that there were such grounds for suspecting the Company was insolvent[23] or that a reasonable person in a like position in a company in the Company’s circumstances would be so aware that the company was insolvent.[24] The legal and evidential onus is upon the plaintiff to establish those matters.
[22] s 588G(2)
[23] s 588G(2)(a)
[24] s 588G(2)(b)
The plaintiff can establish his case by proving objectively that there were reasonable grounds for suspecting the Company was insolvent at the time that the debt was incurred[25] and that a reasonable person in the position of a director in a company in the Company’s circumstances would be so aware that the company was insolvent.[26]
[25] s 588G(1)(c)
[26] s 588G(2)(b)
In the alternative the plaintiff can establish his case by proving that the defendant was aware at the time that the debt was incurred that there were reasonable grounds for suspecting that the Company was insolvent.[27] If the plaintiff can establish that the defendant was aware that there were grounds for suspecting that the Company was insolvent at the time the debts were incurred it follows that there must have been reasonable grounds for suspecting that the Company was insolvent.[28]
[27] s 588G(2)(a)
[28] s 588M(1)(b)
In other words, it seems to me, that the plaintiff may establish his case by proving subjectively that the defendant did have reasonable grounds for suspecting that the Company was insolvent or by objectively establishing that a reasonable person in the defendant’s position would be aware that there were reasonable grounds for suspecting that the Company was insolvent.
In this case the plaintiff sought to establish both matters.
It must be assumed for the purpose of an objective assessment whether there were reasonable grounds for suspecting that the director discharged his or her duties as a director of the Company.
It must be assumed for the purpose of that exercise that the standard is to be judged by the standard appropriate to a director of ordinary competence.[29]
[29] 3M Australia Pty Ltd v Kemmish (1986) 10 ACLR 371 at 373; Metropolitan Fire Systems Pty Ltd v Miller & Ors (1997) 23 ASCR 699
An ordinarily competent director would inform himself or herself on the company’s financial condition and its capacity and be capable of keeping abreast of the company’s affairs and sufficiently abreast of them to act appropriately if there are reasonable grounds to expect insolvency.[30]
[30] Commonwealth Bank of Australia v Freidrich (1991) 5 ACSR 115 at 126
In Morley v State Wide Tobacco Services Ltd[31] Ormiston J said:
“A director should not in those circumstances be entitled to hide behind ignorance of the Company’s affairs which is of his own making or, if not entirely of his own making, has been contributed to by his own failure to make further necessary enquiries.”
[31] (1993) 1 VR 423 at 448
An ordinarily competent director would not delegate his or her responsibilities to any other director however competent that other director might be. An ordinarily competent director will discharge his or her responsibility himself or herself.

It follows therefore that whether there were reasonable grounds for suspecting that the Company could not pay its debts as and when they fell due must be measured against the standard of an ordinarily competent director who obtained all of the information which either was, or should have been available to a director of the Company throughout the period 1 June 1996 to 14 January 1997 and, made whatever inquiries were appropriate to determine whether or not the Company could pay its debts as and when they fell due. Those inquiries might be of fellow directors including the executive directors, management, the Company’s advisers, its bankers and other financiers and its creditors.
Section 588G talks of suspecting not expecting. The meaning of suspicion was considered in Queensland Bacon Pty Ltd v Rees[32] where Kitto J observed:
“A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension of mistrust, amounting to a “slight opinion, but without sufficient evidence”... Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence.”
[32] (1966) 115 CLR 266 at 303
It is not necessary to establish that the Company was insolvent only that there were reasonable grounds for suspecting that it was insolvent.
The question in this case, at least insofar as the objective assessment is concerned, is whether or not an ordinarily competent director carrying out his or her duties as a director would have concluded that there were reasonable grounds for suspecting that the Company was insolvent.
The subjective test is a question of fact. If the plaintiff is to succeed and establish the matters in s 588G(2)(a) the plaintiff must then prove, to the appropriate level of satisfaction, that the defendant was aware between 1 June 1996 and 14 January 1997 that there were grounds for suspecting that the Company was insolvent.
That test must be upon the information which was actually available to the defendant in the circumstances and in the manner in which the defendant has charged his director’s responsibilities.
The Statutory Defences
If the plaintiff has established that the defendant had the necessary state of mind or that objectively he should have, and the defendant failed to prevent the Company from incurring the debt, then the defendant can only escape liability for the loss or damage caused by the incurring of the debt by making out any one of the statutory defences available under s 588H.
“588H      (1) This section has effect for the purposes of proceedings for a contravention of section 588G in relation to the incurring of a debt (including proceedings under section 588M in relation to the incurring of the debt).
(2)It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.
(3)Without limiting the generality of subsection (2), it is a defence if it is proved that, at the time when the debt was incurred, the person:
(a)had reasonable grounds to believe, and did believe:
(i)that a competent and reliable person (“the other person”) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and
(ii)that the other person was fulfilling that responsibility; and
(b)expected, on the basis of information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.
(4)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.
(5)It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt.
(6)In determining whether a defence under subsection (5) has been proved, 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; and
(b)     when that action was taken; and
(c)     the results of that action.”
There are four separate defences provided for in s 588H. They are not mutually exclusive. Some could run in parallel with the others.
A level of expectation is, in my opinion, significantly different from a level of suspicion. The term ‘expect’ has a greater degree of certainty than mere hope or possibility and is of a higher order than suspecting.[33]
[33] 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 at 378
Expectation implies a level of confidence that the Company was solvent. It follows that the defendant, to establish this defence, must have reasonable grounds for regarding it as likely that the Company could pay its debts as and when they fell due.
It follows that s 588H throws a higher onus upon the director to escape liability than the proof of the matters in s 588G.
The defence provided for in s 588H(2) allows a director to avoid liability if the director has reasonable grounds to expect and did expect that the company was solvent at the time the debt was incurred and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.
The first matter to notice is that like the other defences provided for in the various subsections of s 588H the onus lies upon the defendant to establish the defence. Secondly, this defence requires the director to prove that he or she had reasonable grounds ‘to expect’ rather than ‘to suspect’ that the company was solvent. A level of suspicion is different to a level of expectation. Thirdly, this defence could have no application if the plaintiff established the matter in s 588G2(a) that the director was aware at the time that the debt was incurred that there were reasonable grounds for suspecting that the Company was insolvent. The defence provided for in s 588H(2) could only apply if the plaintiff has only established the objective test in 588G(2)(b).
In any event the defendant has relied upon that defence in this case for both periods.
The second defence in s 588H(3) allows the director to escape liability if the director had reasonable grounds to believe and did believe that some other person (both competent and reliable) had provided the director with adequate information about whether the company was solvent; and the director expected on the basis of the information provided that the company was solvent and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.[34] That defence raises the first third party’s involvement in the second period from 24 September 1996 to 14 January 1997. That defence has no application to the period 1 June 1996 to 23 September 1996.
[34] s 588H(3)
I do not need to discuss the defence in subsection (4) because it was not relied upon by the defendant.
Section 588H(5) provides a defence to a director if it is proved that the director took all reasonable steps to prevent the Company from incurring the debt.[35] The reasonableness of such steps is determined by reference to the criteria included in s 588H(6) and any other relevant criteria.[36]
[35] s 588H(5)
[36] s 588H(6)
The Pleadings
The plaintiff alleged in its statement of claim that the Company was insolvent between 1 June 1996 and 14 January 1997 and that each of the unsecured debts particularised in the schedule to the statement of claim were incurred during that period. The defendant has admitted the Company’s insolvency during the period between 1 June 1996 and 14 January 1997.[37]
[37] Paragraph 4 of the defence
The plaintiff alleges that at the time of incurring the debts the defendant was aware that there were grounds for suspecting that the Company was insolvent. In the alternative it is alleged that a reasonable person in a like position, namely that of a director of the Company, would have been aware that there were grounds for suspecting that the Company was insolvent.[38]
[38] Paragraph 6 of the statement of claim
Next the plaintiff alleges that the defendant has contravened s 588G of the Law.[39] That is denied by the defendant.[40]
[39] Paragraph 7 of the statement of claim
[40] Paragraph 7 of the amended defence
The defendant further asserts that at all material times third parties were retained by or undertook to provide advice to the Company and the directors of the Company as to whether; the Company was insolvent; the Company could lawfully continue to trade; the directors were able to continue to trade without contravening the provisions of the Law; the condition of the Company required the directors to appoint an administrator; the Company should continue to trade.
He then asserts that the third parties from or about 25 September 1996 until 14 January 1997 investigated the circumstances of the Company and advised the directors of the Company, including Mr Hercus, as to the Company’s solvency and made certain representations which are particularised in the defence.[41]
[41] Paragraph 9 of the defence
The defendant asserts that he relied upon both the advice and the representations of the third parties and as a consequence the Company continued to trade and the defendant refrained from appointing an administrator to the Company during the period.[42] Mr Hercus assumed the third parties and especially Mr Sims were a competent and reliable person and asserts that upon their representations he understood and expected that the Company was solvent as at 25 September 1996 and was solvent during the period from 25 September 1996 and 14 January 1997.[43]
[42] ‘The period’ is defined in paragraph 9 of the defence to be the period from 25 September 1996 until 14 January 1997
[43] Paragraph 11.4 of the defence
Consequently he asserts he has a defence under s 588H(2) of the Law in that the Company was solvent as at 25 September 1996 and the Company was solvent during the period and remained so.[44] In the alternative he asserts that he has a defence under s 588H(3) of the Law and particularises that defence.[45]
[44] Paragraph 12 of the defence
[45] Paragraph 13 of the defence
It is not easy to discern from Mr Hercus’ defence whether he claims that the advice and representations given by Mr Sims on 25 September 1996 enable him to say that he therefore had reasonable grounds to expect that when debts were incurred in the period 1 June 1996 to 24 September 1996 the Company was solvent and would remain solvent even if it incurred those debts.[46]
[46] s 588H(2)
I cannot understand how advice given on 25 September 1996 would allow him to argue that in a previous period he had reasonable grounds to expect that the Company was solvent. If he had reasonable grounds to expect that the Company was solvent in the period 1 June 1996 to 24 September 1996 those reasonable grounds must arise out of other facts apart from the advice given by Mr Sims, if such advice was given on 24 September 1996 or 25 September 1996.
I can understand how he claims that he has a defence under s 588H(3) for the period after 25 September 1996. That will give rise to a factual inquiry into Mr Sims’ terms of retainer and the advice and representations given and made by Mr Sims over that period of time.
The defendant has also pleaded that he has a defence under s 588H(5) of the Law because he took all reasonable steps to prevent the Company from incurring the debt.[47] He says that on 25 September 1996 the directors resolved that the Company trade on a cash only basis and that he gave instructions to management to that effect. Again whether that defence is available depends upon a factual inquiry.
[47] Paragraph 24 of the defence
Lastly he claims to be entitled to an exemption from exoneration from liability arising out of any contravention of s 588G of the Law pursuant to s 1317S of the Law.[48]
[48] Paragraph 25 of the defence
The defendant further asserts that whether there has been any relevant “loss or damage” and what, if any, compensation should be payable by Mr Hercus under s 588M, must depend upon a number of factors. The Court should have regard to s 588N and how the Court should exercise discretionary powers such as those under s 1317S. The Court must take into account the settlements between the Company and the first, second, third and fifth defendants. It should also take into account that the Company may have an entitlement to relief against the third parties and has failed to mitigate its damage by seeking relief against those parties.
In particular it is the defendant’s case that if the defendant has contravened s 588G he has acted honestly and having regard to all of the circumstances of the case he ought fairly to be excused for that contravention. He seeks relief wholly from any liability or, in the alternative, partly from any liability to which he would otherwise be subject.
He has particularised a number of facts and circumstances which he says would give rise to an order granting him relief from the consequences of s 588G. I will not refer them at this stage.
I can say from the outset that s 1317S has no application to this case. That section was enacted in 1999 subsequent to the conduct complained of. If the defendant is entitled to exoneration it is under s 1317JA of the Corporations Law 1996 (Cth). Section 1317JA was enacted by amending act number 210 of 1992 and became effective from 1 February 1993. It was repealed in 1999. However the differences in the two sections are immaterial.
Section 1317JA applies to ‘eligible proceedings’, which are proceedings for a contravention of a civil penalty provision including provisions under s 588M, s 588W or s 1317HD.[49] Where it appears to the Court that a person has or may have contravened a civil penalty provision but the person has acted honestly and having regard to all of the circumstances of the case 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.[50]
[49] s 1317 JA(1)
[50] s 1317JA(2)
Section 1317JA(3) provides:
“1317JA(3) In determining under subsection (2) whether a person ought fairly to be excused for a contravention of s 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.
Section 1317JA(7) provides:
“(7) Nothing in this section limits, or is limited by section 1318.”
Section 1317JA will have to be considered if I am satisfied that the plaintiff has established a contravention of s 588G(2) and I reject the defendant’s defences under s 588H for either or both periods.
It was put in the alternative, but faintly, that the defendant was entitled to relief under s 1318 of the Law. Section 1318(1) provides:
“(1)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.”
In Kenna & Brown v Kenna[51] Bergin J said that s 1317JA operated concurrently with s 1318.
[51] (1999) 32 ACSR 430 at 455
That decision was followed by Young CJ in Eq in Manpac Industries Pty Ltd v Ceccattini.[52] That was a case where a liquidator had brought proceedings under s 588M of the Law. After finding a contravention of s 588G of the Law and dismissing the defendant’s defence under s 588H Young CJ considered the application of s 1318. He cited with apparent approval Her Honour’s decision in Kenna & Brown Pty Ltd v Kenna (supra). His Honour made no mention of s 1317JA even though the impugned conduct occurred in 1994 and 1995. His Honour followed Daniels v Anderson (1995) 37 NSWLR 438 and in particular the dictum of Clarke JA and Sheller JA who said at 525 after referring to s 1318 of the Corporations Law:
“The purpose of the section is to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are businessmen and women who act in an environment involving risk in commercial decision-making: ... The courts have a wide discretion to relieve in whole or in part. In the present case Hooke acted honestly and did not benefit personally from his negligence.”
[52] (2002) 20 ACLC 1304
Whether s 1318 has any application in s 588G proceedings was not a relevant consideration in that case for two obvious reasons. First, the proceedings were not brought for a contravention of s 588G. Secondly, the impugned conduct occurred prior to the enactment of s 1317JA.
I do not agree with Bergin J or Young CJ that s 1318 operates concurrently with s 1317 JA, at least in relation to proceedings under s 588G.
The purpose of enacting s 1317JA(7), in my opinion, is to preserve s 1318’s operation in proceedings other than proceedings for a contravention s 588G. Section 1317JA(7) preserves s 1318’s operation in relation to proceedings under s 1317HD and in particular where the action against the officer of the Company is seeking relief in relation to the causes of action identified in s 1318.
I think that s 1317JA(3) supports a construction of s 1317JA that s 1317JA is a code in relation to proceedings under s 588M.
I do not think that s 1318 has any application because the proceedings against the defendant are not proceedings for negligence, default, breach of trust or breach of duty, but statutory proceedings under s 588M. I think that it is clear that s 1317JA has been enacted to grant relief to persons against whom proceedings are brought under s 588M and that s 1317JA (now s 1317S) acts as a code in regard to those proceedings where a contravention of s 588G has been proved.
I think therefore that s 1318 has no application. In the end result it does not matter much because the provisions of both sections are so similar that regard must be had to the same or similar matters in deciding whether or not relief should be granted. In that regard I agree with the judgment of Master Burley of this Court in Perkins & Anor v Viney.[53]
[53] [2001] 216 LSJS 201
In Powell & Anor v Fryer (supra) the Full Court of the Supreme Court considered the application of s 1318 in a claim brought against the director under s 588M. The conduct complained of was between 1991 and late 1994 early 1995. The Full Court found that s 1318 had no application, not because of a construction of the section, but because the directors seeking relief had not acted honestly. There was no discussion in that case whether s 1317JA had any application, or if it did, whether it did so to the exclusion of s 1318. It appears s 1317JA was not addressed perhaps because it was enacted part way through the impugned conduct.
Solvency
Section 95A of the Law provides:
“95A(1) 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.
(2)A person who is not solvent is insolvent.
(3)…”

Person, of course, includes a company.[54]
[54] s 85A of the Law
In a consideration of the questions relating to suspicion or expectation of solvency in Part 5.7B the question will be whether the company was able to pay its debts when they became due and payable at any given time.
In Sandellv Porter & Anor[55] Barwick CJ said:
“An essential step in making out that a payment is a preference within s 95 is to establish by evidence to the satisfaction of the Court that the payer was at the time of the payment insolvent. Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend the moneys to which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor’s assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.”
[55] (1966) 115 CLR 666 at 670
There is a distinction between the Act under consideration in Sandell v Porter (supra) and this case. Here the definition does not restrict the debtor meeting its obligations out of its own money. The definition in the Law simply requires a company to meet its debts as and when they become due and payable.
It follows that consideration must be given to whatever resources are available to the company to pay its debts. These resources would include credit resources. Solvency will depend upon the cash flow of the Company rather than the state of its balance sheet.
Whilst a company’s prospects are not irrelevant the question to be determined is whether the Company can pay its debts as and when they fall due, not whether if the Company is allowed to continue trading it will be able, at sometime in the future, to pay its debts.[56]
[56] Sheahan v Hertz Australian Pty Ltd (1995) 16 ACSR 765 per King CJ at 769
In this case the defendant has admitted that the Company was insolvent at the relevant time. The concession made by the defendant was properly made. This Company could not meet its debts as and when they fell due throughout the period 1 June 1996 to 14 January 1997. It suffered a continuous and endemic shortage of working capital such that its liquidity could only have been restored by further capitalisation. Even if allowed the company could never have traded out of its chronic working capital shortage. It could only have ever restored its liquidity by an injection of capital.
There is no need to consider the statutory presumption of insolvency provided for in s 588E of the Law.
However the definition of solvency is not irrelevant in a consideration of whether insolvency was suspected or expected.
The Defendant’s Early History
The defendant, who was nearly 60 years of age at the time of the trial, is by training and experience, a naval architect. He is a managing director and a shareholder in two companies controlled by him and his wife, being International Catamaran Designs (Sydney) Pty Ltd (formerly known as Hercus Marine Designs Pty Ltd) (HMD) and International Catamaran Designs Pty Ltd (INCAT).
In 1972 he established the business which was acquired by HMD which consisted of the design of small workboats and fishing boats and general consulting work.
In 1976 he designed a catamaran ferry which was commissioned by a Mr Robert Clifford.
In 1978 he and Mr Clifford formed INCAT.
Over the next ten years Mr Clifford and the defendant developed INCAT’s business. The relationship between Mr Clifford and the defendant terminated in 1988. Thereafter the defendant concentrated on his work as a designer of boats.
The defendant lives in Sydney. HMD and INCAT carry on their businesses in Sydney. Of course the Company of which the plaintiff is liquidator carried on its business in Adelaide.
Dr Don Williams was formerly the manager of the Australian Submarine Corporation Pty Ltd which carried on business in South Australia.
The defendant met Dr Williams in about 1992. Sometime between 1993 and 1994 the defendant developed a concept for a fast container ship. He believed that the best way to develop that concept was to take an interest in a shipbuilding company in Australia.
The Directors
The defendants, who subsequently became the directors of the Company, came together early in 1994 to bring together their experience and specialisation in the shipbuilding industry.
The defendant offered his skills as a designer.
Dr Williams was well known in the shipbuilding industry and had considerable administration skills. The defendant had a high opinion of Dr Williams. The defendant believed that Dr Williams was an eminent engineer and administrator with substantial government contracts. He believed he was a very capable administrator. He had served on another board with Dr Williams for some years. Both of them, from time to time, had been chair of the Australian Maritime Co-operative Research Centre. The defendant said that he had a very high degree of confidence in him.[57] The defendant said that prior to the Company’s establishment Dr Williams had informed him that, through his contacts with the South Australian Government, he had been able to obtain financial assistance. Dr Williams reported to him that the South Australian Government had offered the Company a grant of $100,000, a loan of $250,000 for a term of 99 years interest free and a further loan of $400,000 for a term of five years at an interest rate of 8.5 per cent per annum.
[57] TX 596
Mr Dirk Verboon, who was resident in Western Australia, was well known in the shipbuilding industry. The defendant believed that Mr Verboon’s standing in the Australian Shipbuilding Industry would generate orders particularly orders for trawlers. In fact that did occur.
Mr Verboon’s son also had considerable experience in shipbuilding production particularly in the design and construction of prawn trawlers.
Mr Michael Thomas had experience in the management of shipyards at Port Lincoln. Immediately prior to the incorporation of the Company Mr Thomas was the managing director of the Port Lincoln Shipyard. The defendant believed that Mr Thomas was well regarded in the shipbuilding industry. He was deputy chair of the Australian Shipbuilding Association.
The Company was incorporated on 31 May 1994 under the name Lincoln Shipbuilding Industries Pty Ltd but changed its name to South Australian Ships Pty Ltd on 9 September 1994.
The defendant had a substantial interest in the Company through a trust which he controlled, the Hercus Family Trust. Originally that trust held 22.2 per cent of the Company’s issued share capital.
The defendant became a director on 9 June 1994 and remained a director after that time. The other gentlemen to whom I have referred also became directors at that time and remained directors up until the appointment of the liquidator.
The Company’s directors met sporadically and infrequently and always in Adelaide. The directors failed to meet at times when the Company was clearly in serious financial problems. The directors did not ensure that accurate minutes of these meetings were kept. Indeed for some meetings minutes were not taken. The failure of the directors to meet regularly is surprising having regard to the size of the Company’s undertaking, and the directors’ experience.
I accept the defendant’s evidence of his opinions of his fellow directors. I also accept his evidence of his understanding of the expertise which each of those directors brought to the Company.
The Defendant’s Awareness of a Director’s Responsibilities
The defendant was well aware of his responsibilities as a director. In giving evidence he did not attempt to avoid acknowledging his duties.
In cross examination, Mr Hercus was asked:
“QDoes that indicate your understanding of your responsibilities as a director at that time; that you believed you had to be fully informed of matters of that kind which might effect the Company.
AYes, I believe I have always understood my responsibilities as a director.” [58]
[58] TX 259
Earlier in his cross examination the defendant had acknowledged that as a director he had responsibilities not only to the Company but also to its creditors.[59] He was aware that the director of a Company should not permit a Company to trade or to incur debts if the Company was not able to pay its debts as and when they fell due.[60] He knew that if a director breached that duty the director could be personally responsible.[61] He was aware that a director had an obligation to keep abreast of the Company’s financial position which would require the director taking a continuous interest in the financial position of the Company. As a director he was aware of the need to monitor trade creditors and debtors or be aware of their aging and monitor cash flow.
[59] TX 233
[60] TX 395
[61] TX 450
He was also aware that the Company’s cash flow could be measured by reference to its current assets and his current liabilities.
He was aware of a Company’s obligation to make statutory payments such as payroll tax, group tax and workers’ compensation levies. He was aware that an indication of a Company not being able to pay its debts as and when they fell due was a Company’s inability to pay those statutory liabilities.[62]
[62] TX 235
Mr Hercus had had considerable experience as a company director of small private companies of which he was the principal shareholder and director.
I find that during the whole of the time that Mr Hercus was a director of the Company he was aware of his general responsibilities as a director and his particular responsibility to ensure that a company, of which he was a director, would not trade whilst insolvent. He was aware that insolvency could be tested by reference to the ability of a company to pay its debts as and when they fell due. He was aware of those matters which might indicate a company’s inability to pay its debts as and when they fell due.
I find that Mr Hercus knew that a director’s responsibility attached to a particular director and was not delegable to other directors or management. He was also aware, and I so find, that he had a personal responsibility if he failed to discharge his responsibilities as a director and in particular his responsibility to ensure that the Company did not trade or incur debts whilst it was insolvent.
The defendant acknowledged that he had a duty to keep himself informed of the financial health of the Company which he said he discharged:
“43.Throughout the period between 1 June 1996 and 14 January 1997 I believed that my co-directors (particularly Messrs Williams, Thomas and Rick Verboon who were resident in Adelaide and actively involved in the day to day management of SAS), Capital Strategies Pty Ltd and Messrs Carver, Robinson, and Winter were competent and reliable professionals, charged with, and performing, duties to provide me with adequate information about whether SAS was solvent. On the basis of information provided to me by them I believed (until the collapse of SAS’s negotiations with YQ Company on or about 10 January 1997) that SAS was solvent and would remain so, despite cash flow problems it experienced.
44.My main sources of financial information concerning SAS other than periodic accounts (produced after the events upon which they reported) were, first, Dr Williams and, then, Mr Thomas. From time to time I contacted Mr Carver to discuss SAS affairs and to ascertain whether the information he told me corroborated what the other Directors had also told me and to have the benefit of his perspective of the Company’s affairs.
45.Throughout the period between 1 June 1996 and 14 January 1997 I endeavoured, despite my residency in Sydney, to monitor the course of SAS’s business, including especially its sales of vessels. I believe I participated in each board meeting either by attending personally in Adelaide or by telephone. In doing so, I took comfort from the active roles of Messrs Williams, Thomas and to a lesser degree Rick Verboon in the management of the Company and the ready availability to it of the professional services of Capital Strategies Pty Ltd, Mr Carver and Mr Winter. I also took comfort in what appeared to me to be a close monitoring of the Company’s affairs by its bankers (the ANZ Banking Group), through Mr Carter of Ferrier Hodgson, and (from late September 1996) what I understood to be advice given to the Company and its directors by the accountants Sims Lockwood & Partners.
46.I also maintained contact with Gary Steene (the manager of SAS’s aluminium division), Jim Clements (the manager of the Company’s steel division) and Jenelle Oest (the human resources manager, and later the executive secretary of the Company).” [63]
[63] D9
Of course what he did not do, as his evidence shows, is keep himself informed of the Company’s financial position by requiring that management present him with timely management accounts, budgets and forecasts. Nor did he keep himself informed of the Company’s creditors and the Company’s relationship with its creditors.
For the purpose of these proceedings the defendant has conceded that the Company was insolvent between 1 June 1996 and 14 January 1997. For the reasons that follows that concession was clearly appropriate. However, for those same reasons during the whole of that time there were reasonable grounds for suspecting that the company was insolvent. There were therefore reasonable grounds for suspecting that the Company was insolvent when the post 1 June 1996 debts were incurred.
The defendant has said that he was not aware that during that time there were grounds for suspecting the Company was insolvent.
Even if that is the case a reasonable person in the defendant’s position, in the Company, in the Company’s circumstances would have been aware.
The defendant, even though he was aware of his director’s duties, failed to discharge those duties. He was not entitled to delegate his duties to his fellow directors. His fellow directors were not entitled to assume his duties.
He had positive duties to inform himself of the Company’s financial position if for no other reason than to prevent the Company incurring a debt when it was insolvent.
For the reasons that follow, subject to any defence available to the plaintiff under s 588H, the plaintiff has established a contravention by the defendant of s 588G.
The Witnesses
Only 5 witnesses were called in the trial. The parties relied mainly on documentary evidence.
All witnesses gave their evidence in chief by way of the tender of witness statements. Thus any impressions of the witnesses’ demeanour were formed in their cross examination. The plaintiff,[64] the defendant[65] and the first third party[66] each gave evidence in their respective cases.
[64] TX 156-TX 213
[65] D9; TX 226-TX 774
[66] TP 21; TX 799-TX 835
The defendant also called Mr Alexander Marshall, a solicitor.[67] It would be convenient to deal with Mr Marshall’s evidence at this time. The defendant tendered an affidavit sworn by Mr Marshall on 31 January 1997 in proceedings in the South Australian Registry of the Federal Court of Australia. The affidavit was allowed, by the defendant, to stand as Mr Marshall’s evidence in chief.
[67] D20; TX 780-TX 793
In that affidavit Mr Marshall deposed to a number of conversations he had with Mr Sparks, then an employee of the third parties and later a partner in that firm, and Mr Sims.
In cross examination, Mr Marshall said that he had no recollection of matters contained in the affidavit but that the affidavit contained his recollection at that time.
I accept Mr Marshall’s evidence that when he was called to give evidence in this trial he had no more than a vague recollection of some of the events and that his better recollection was contained in the affidavit.
Because he had no recollection independent of the affidavit, counsel for the third parties was placed at a disadvantage in challenging the matters contained in that affidavit.
However, in a sense, that does not matter much. Mr Marshall’s evidence was at best peripheral to the issues between the parties. He was called to establish that Mr Sims had given an undertaking that in the event that Mr Sims became the voluntary administrator of the Company then he would not dispute Mr Marshall’s client’s right to possession of some equipment which had been provided to the Company, and which had been installed in one of the steel vessels built by the Company.
The third parties also called Mr Grant Sparks who has subsequently become a partner in the firm of Sims Lockwood.[68]
[68] TP 22; TX 836-TX 852
I accept the evidence of Mr Sparks and Mr Marshall.
The liquidator was called for the purpose of tendering a report which he had prepared in relation to the financial affairs of the Company. That report was tendered.[69] He also gave evidence that the debts pleaded in the statement of claim remained unpaid.[70]
[69] P5 16
[70] TX 157
He was cross examined by counsel for the defendant on other matters. The cross examination was somewhat unusual. Mr Lindsay SC, who appeared as senior counsel for the defendant, put statements made by other persons in other proceedings to the witness and asked him if he would admit those statements for the purpose of these proceedings.
For example he was shown an affidavit which had been sworn by Grant Sparkes in which Mr Sparkes had deposed:
“It was apparent to me from the beginning of my involvement with the company that the company was insolvent.”
The liquidator was asked:
“Q And do you admit, for the purpose of the proceedings, that statement?
A I do, yes.” [71]
[71] D4 paragraph 56; TX 168-169
I think that such an admission means that the liquidator admitted for the purpose of the proceedings that Mr Sparks believed from the beginning of his involvement with the Company that the Company was insolvent. I think that is clear from later cross examination in relation to the matter.
I have therefore taken the admissions made by Mr Scott in his cross examination as being admissions that the deponents to the various affidavits, to which he was referred, either did make the observations referred to by them in their respective affidavits or held the opinions expressed in those affidavits. Initially, I think Mr Scott was uncomfortable with the form of the cross examination but as it developed he made his admissions in a straightforward manner and without any prevarication.
In my opinion Mr Scott was doing his best to assist me in arriving at my decision.
Mr Sims was called by the third parties. The plaintiff did not seek to lead any further evidence from him. He was cross examined by counsel for the defendant.
Mr Sim’s evidence was in some respects somewhat defensive and his answers exhibited a certain wariness. He was less straightforward than Mr Scott. I have more hesitation in accepting Mr Sim’s evidence because of both its content and the manner in which it was given. In two respects I do not accept his evidence.
The major witness in the trial was the defendant Mr Hercus. He was extensively cross examined by both counsel for the plaintiff and the third parties. His evidence occupied seven days nearly all of which was cross examination.

Mr Hercus was an excellent witness. I formed a very favourable impression of him. He had no trouble understanding the questions which he answered straightforwardly. He gave his evidence candidly and frankly. At no time did he prevaricate.
He did not attempt to exculpate himself. He was a credible witness. He is undoubtedly an honest and decent man. I accept most of his evidence.
However in some respects his evidence was wrong. Where I have not accepted his evidence I have said so. Otherwise it may be assumed that I accept his evidence.
However, accepting his evidence does not mean that his defence must succeed. Indeed, in some respects, both the plaintiff and third parties relied on his evidence for their submissions that the defendant’s case must fail.
The Company’s Early History
On 13 July 1994 the Company entered into an agreement with INCAT and HMD whereby INCAT and HMD granted the company the exclusive rights to construct and market marine freight vessels designed by HMD. This was for a period of two years commencing on 1 July 1994 with an option for a further two year period commencing immediately thereafter provided that the company had a fully executed contract in place to build a prototype marine freight vessel of the type referred to in the agreement.[72] The vessels referred to in the agreement were fast freight vessels being Wave Piercing Catamarans of up to 150 metres in length.
[72] P5 17.15
In late 1994 probably about September the Company commenced trading at Port Adelaide.[73] It had two shipyards, one ‘Northarm’, for the construction of steel vessels and the other ‘Berth 25’, for the construction of aluminium vessels.
[73] P5 4.3
Mr Thomas acted as Managing Director of the Company and was actively involved in the day-to-day management of the Company.
On 6 December 1994 Mr Hercus wrote to Mr Thomas confirming arrangements made between the company and INCAT for the design of fast catamarans to be built by the company.[74]
[74] P5 17.16
The arrangements were for a period of five years with an option to extend for a further five years and covered the design of all types of powered catamarans “... which are capable of a speed (in knots) equal to 2.5 times the square root of the overall length of the vessel (in metres)”.[75]
[75] P5 17.16
It was agreed that the Company would have the right to build the vessels in South Australia and to sell them anywhere in the world except in Japan.
The fee payable for the use of the design data to build one vessel which was provided for in the letter is not important for the purpose of the decision in this case but the manner of payment maybe. The design fee was to be paid in a series of equal instalments spread through the construction period. The first instalment was payable at the commencement of work by INCAT and the last payable on completion of the vessel. The agreement contemplated that there would be four payments for vessels up to 50 metres in length and eight payments for larger vessels.
Thus, it was by the end of 1994 that the defendant had put in place two contracts between the Company and companies of which he and his wife were proprietors which gave the company the rights to build vessels referred to in the agreements of 1994 and 6 December 1994.
Dr Williams was Chairman of the Board and was also actively involved in the day-to-day management of the Company. On 3 July 1996 he assumed an even greater role by becoming Executive Chairman.[76] Mr Dirk Verboon (who was resident in Adelaide) was actively involved with Mr Thomas and another party in setting up the Company’s shipyards.
[76] P5 2.10
The Company appointed the ANZ Banking Group as its bankers and they remained the bankers to the Company over the whole of the relevant period.
Paul Robinson was an accountant who carried on business under the name of Capital Strategies Pty Ltd.[77] Capital Strategies is a specialist chartered accountancy practice which provides financial consulting services with regard to major financial transactions, mergers, acquisitions, business sales and start up ventures. Mr Thomas suggested to the board that Capital Strategies Pty Ltd be retained. Indeed Mr Robinson was present at the first meeting of the directors held on 9 June 1994.[78]
[77] TX 27
[78] P5 2.1
Mr David Carver, an accountant, was retained as an independent consultant on a full time basis to act as the internal accountant and financial controller of the Company.
Mr Colin Dunford of Arthur Andersen and Co was appointed auditor of the Company.
Mr Nigel Winter acted as solicitor for the Company from incorporation until the appointment of an administrator.
Initial Capital
The directors collectively subscribed $750,000 to capital. The Share Capital was paid up by 28 February 1995.[79]
[79] P5 2.3
The Government of South Australia provided two loans one through the Economic Development Authority (EDA) of $400,000 for a period of seven years and the other by the Government of South Australia in the sum of $100,000 for a period of 99 years interest free.
Having regard to the business that the Company expected to carry on it is clear that the Company was under-capitalised from the outset.
The Company contemplated a significant undertaking. It saw itself as a major builder of both steel and aluminium vessels. It proposed to engage a workforce in the order of 200 people. It entered into leases for the premises at which the shipbuilding was to be carried on for a period of 20 years.
If the Company were to conduct a shipbuilding operation of the kind it contemplated it needed significant capital to tide it over, its start-up operation and purchase the raw materials necessary to carry on its business.
A budget prepared, I think, in October 1994 contemplated a net loss for the period to 30 June 1995 of $70,000. That budget predicted that the Company would enjoy a negative cash flow for that period amounting to $1.97 million, which would be funded by the capital contributed to by the directors and two Government loans of $400,000 and $250,000 together with creditors of $85,000.
The budget anticipated that by 30 June 1995 the Company would have cash reserves in the order of $280,000.
It was clear by January 1995 that the budget was optimistic. A revised forecast was prepared in February 1995 by Mr Robinson. That forecast predicted a net loss for the period ending 30 June 1995 of $210,000 and a negative cash flow in the order of $3,680,000. Debtors were likely to be in the order of $2 million more by 30 June 1995 than expected in the budget. It was believed that the increased negative cash flow would be funded by the capital and loans to which I have referred together with bank facilities of $1.18 million. Further, the forecast assumed that there would be a reduction in capital expenditure as predicted in the earlier budget of $500,000.
Shortly after commencement the Company received orders for the construction of two steel prawn trawlers. In 1995 A Raptis & Sons Pty Ltd (Raptis) ordered a steel boat. That Company followed with orders for seven further steel boats. Other customers ordered other steel boats in 1995 and 1996.
On 7 March 1995 the directors resolved to build a 46 metre aluminium catamaran (the aluminium ferry).[80] At that time there had been some discussions with overseas companies, especially in India and China, relating to the purchase of such a vessel but nothing had been resolved. However, Berth 25 required work. The directors believed that if construction commenced on the aluminium ferry it was likely that a buyer would be found. The construction of such a vessel was the real reason for the defendant’s involvement in the Company. He was the designer of the vessel.
[80] P5 2.3
At the same meeting as the directors resolved to build the aluminium vessel “on spec” the directors discussed the possibility of securing a “Strategic Partner” and “... the requirement for existing shareholders to contribute a further $250,000 if a partner was not secured ...”.[81]
[81] P5 2.3
On 8 May 1995 Mr Robinson reported to the board that difficulties were being experienced with EDA who were insisting that a further $250,000 be immediately subscribed as share capital in accordance with the loan agreement which had been entered into between the Company and EDA.[82]
[82] P5 2.4
At that board meeting, Dr Williams listed the options which EDA had put to the Company which were either to subscribe a further $250,000 in share capital, return to EDA proportionately $167,000 until such time as capital was subscribed or broaden the board with an EDA-appointed independent director until such time as the new strategic partner was introduced.
After discussion, the following resolution was passed:
“It was resolved the Directors arrange for a loan of $250,000 to be sought from Westpac Bank guaranteed by all Directors to be paid into the Company as a subordinated loan until such time as a strategic partner was introduced. All costs and interest associated with the loan is to be met by the Company. It was further resolved that this subordinated loan would be supported by an underwriting agreement signed by the Directors.” [83]
[83] P5 2.4
The directors instructed Mr Thomas and Mr Robinson to advise EDA of the resolution.
The minutes also disclose that Mr Robinson reported the Company’s financial statement in detail to the board. He said the Company had suffered a significant negative cash position which would prevail until significant aluminium construction occurred.
He further advised the board that it was necessary to advise EDA and the ANZ bank that it was likely the Company would incur further losses of between $100,000 to $150,000 before it began to trade in a profitable manner.
It is not clear from the minutes to which financial statements Mr Robinson was referring. However, the documents tendered in this trial include a report of 21 April 1995 by Mr Robinson to Mr Thomas the Managing Director of the Company.[84]
[84] P5 4.2
In that letter, Mr Robinson writes:
“Further to our recent meeting of Wednesday, 19 April 1995 with yourself and Dr Don Williams, please find attached various financial information for circulation to the Board with respect to the financial performance of the Company for the above period...”
I think it can be inferred, and I find, that the financial statements to which Mr Robinson was referring in the board meeting of 18 May 1995 were those contained and enclosed in his letter to Mr Thomas of 21 April 1995.[85]
[85] P5 4.2
A revised forecast for the year ended 30 June 1995 predicted a negative cash flow in the order of $2.83 million.
In his report Mr Robinson wrote:
“At the time of writing this report EDA remains adamant that the Directors should subscribe an additional $250,000 in capital as a condition of the 99 year loan agreement from EDA. The original submissions to EDA and IDC were to the background and this capital should ideally be subscribed by a strategic partner who can assist the company with gaining acceptance and market penetration in the aluminium fast ships industry. We note that the Directors have offered EDA a legally binding director’s underwriting agreement for this additional capital. This arrangement in our opinion should be endorsed by the EDA as it provides the company with access to an additional $0.25m if required for working capital purposes whilst leaving the opportunity open for the company to gain a further strategic partner.”[86]
[86] P5 4.2
Mr Robinson forecast further negative cash flow for the period ending 31 December 1995.
On 27 June 1995 the board was advised by Dr Williams that he and Mr Dirk Verboon had arranged for subordinated loans of $125,000 to be deposited to the Company’s account no later than 30 June 1995.
The minutes disclose:
“The Chairman further stated that a letter needed to be circulated between the Directors setting out the obligations and risks involved in connection with this loan. It was further agreed Hercus Marine Design should invoice their current work on vessel 56 and that $125,000 should be applied to the deferred loan account of Mr P C Hercus on the same conditions as D P Verboon and D G Williams.” [87]
[87] P5 2.5
I am satisfied, and I find, that EDA was not prepared to continue with its loan upon the basis that the Company would borrow a further $250,000, which would be guaranteed by the directors. It insisted that the directors contribute a further $250,000 by way of capital. This was done by way of a subordinated loan. Mr Hercus agreed to subordinate his charges for the work he was carrying out in relation to the design of the aluminium ferry in the same manner as Dr Williams and Mr Verboon.
The same minutes disclose that Mr Thomas reported that Tubemakers were prepared to provide aluminium for the construction of a 46 metre aluminium ferry on a delayed payment basis subject to a limit of $500,000.[88]
[88] P5 2.5
The Aluminium Ferry Contract with the YQ Company
On 25 November 1995 the Company signed a letter of agreement with a Chinese company Yue Qing High Speed Passenger Ship Company Ltd (the YQ Company) to sell a ferry to that company.[89] The letter of agreement provided that a formal contract would be signed before 30 December 1995. Delivery of the aluminium ferry would be on 30 June 1996.
[89] TP 12B 7 MAT 1
The letter of agreement further provided:
“4. ...
5. 5% warranty bond.
6.Long term L/Cs for up to one and a half years as per the payment for last Two Million U.S. Dollars shall be issued to South Australian Ships Pty Ltd. The L/Cs shall be endorsed for all discount bank charges to Account of Joint Venture Yuequing High Speed Passenger Ship Co; Ltd.
7.…
8.The Buyer will grant to the Builder in the Ship Building Contract an option for a second vessel which will be taken up within six months of delivery of the contracted vessel.
... ”
The purchase price was less than the Company had sought to obtain. In an affidavit sworn by Mr Thomas on 23 January 1997 and tendered in these proceedings by the third party, Mr Thomas said:
“The end result was the signing of a binding Letter of Agreement to build a vessel for YQ Company at a cost of $US 7.55 million on the basis that a formal contract would be signed before 30 December 1995. … Due to the significant discount against budgeted cost plus profit margin, YQ Company gave an undertaking to build a second boat on the understanding that a more commercial price would be negotiated for that vessel. Our budgeted price for the vessel was $US 8.4 million. We were able to re-cast our budget to $US 7.55 million after significant discounts were negotiated with our major suppliers and the substantial front end cash flows were taken into account.” [90]
[90] TP 12B 7 paragraph 11
At the time the Company entered into the agreement with the YQ Company for the construction of the aluminium ferry it was experiencing significant negative cash flow. It was under-capitalised. It lacked a strategic partner. It entered into agreement with the YQ Company to sell the aluminium ferry at a figure in the order of $US 850,000 below its budgeted price. Such an agreement could have only aggravated its liquidity problems.
However, the problem was even more acute. From the day the agreement was signed with the YQ Company, that Company breached its contractual obligations for payment.
The letter of agreement provided for the execution of a contract before 30 December 1995.[91] Delays were experienced for a number of reasons, one of which was that the Company had to give a performance bond to the YQ Company. On 12 December 1995 a draft of an Export Finance Investment Corporation (EFIC) performance bond was sent to the YQ Company.[92] As an interim measure the Company requested the ANZ bank issue the first performance bond for $US 755,000 on the basis that the ANZ bank could hold those funds in escrow until that bond was replaced by an EFIC bond.
[91] TP 12B 7 and MAT 1
[92] D5 paragraph 14; TP 12B 7 paragraph 14
On 20 January 1996 a formal contract dated 26 November 1995 was signed between the two companies providing for a purchase price of $US7,550,000 to be paid by instalments during the continuing construction of the vessel.[93]
[93] D5 MAT 3; TP 12B 7 MAT 3
The contract provided the purchase price was to be paid in eight stages. The first payment was to be on the signing of the agreement or no later than 15 February 1996. Each of the other stage payments had to be made on production of an invoice, an interim stage certificate issued by the classification society, a performance bond, and in some cases photographs.
The contract further provided that the last $2 million of the purchase price could be required to be paid by long term letter of credit.
The contract provided that the Company would furnish the YQ Company with a series of seven performance bonds covering the principal amount of the relevant progress instalment payment plus interest.
The first payment of $US 755,000 was not made as the contract provided on 15 February 1996. The Company was advised by the YQ Company that the first payment would be made on 15 March. The YQ Company continued to delay payment. In the end a payment of half the first payment due under the contract was paid on 16 April. I shall return to that.
To End of February 1996
In the meantime the board had met again on 27 February 1996.[94] It resolved not to build any further aluminium vessels on spec and that any future building of aluminium vessels would be considered only where finance facilities in the form of construction finance with engine suppliers was first in place.
[94] P5 2.8
At that meeting, Mr Carver tabled two sets of financial statements. He tabled the financial statements for the period to 30 June 1995 for discussion.[95] Mr Dunsford, the auditor, was in attendance. The minutes report that enquiries were made of Mr Dunsford in respect of his view of these accounts and “... the going concern nature of the business and treatment of future tax benefits...”.[96]
[95] P5 4.3
[96] P5 4.3
Note 16 of the 30 June 1995 financial statements said:
“The company commenced trading in September 1994 and is still in a startup phase of operations, and in the process of developing a diversified customer base. During the financial period, there was a level of dependence on the small customer base secured to date. The company therefore has an ongoing dependency on the ability to secure contracts for both its aluminium and steel vessels and growing its customer base.” [97]
[97] P5 4.3
In the audit opinion, Mr Dunsford wrote:
“The financial statements have been drawn up in accordance with the going concern principle, where it is assumed the company can realise its assets and extinguish its liabilities as and when they fall due in the normal course of business. Our opinion has been formed on the assumption it is appropriate to apply the going concern principle. If it were not appropriate to apply the going concern principle, then the realisability of the company’s assets may not be adequate to extinguish all of the company’s liabilities.
In determining the going concern principle to be appropriate, the company has projected profitability and positive cash flows in the foreseeable future. In addition to the economic dependency disclosure at note 16 to the accounts, the company requires the continued support of its members, bankers, customers and creditors in addition to future profitability and positive cash flows, to continue as a going concern.” [98]
[98] P5 4.3
The auditors’ qualification in certifying the financial statements to be true and fair and in accordance with applicable accounting standards should have alerted the board to the question of whether the Company was a going concern.
The directors resolved to accept the financial statements and in particular resolved that there were reasonable grounds to believe that the Company would be able to pay its debts as and when they fall due. It was resolved that the two directors should sign the accounts. The directors must have satisfied themselves that the accounts should be prepared on a going concern basis.[99]
[99] P5 2.8

The bank was advised that it was the Company’s intention to appoint Mr Sims as administrator on 13 January 1997.
A meeting was held on that day.[482] Present at this meeting were Dr Williams, Mr Thomas, Mr Carver and Mr Winter representing the Company, two officers of the ANZ bank, Mr Carter and Mr Barrett.
[482] TP 12B 62; TP 12D 139
Mr Sims and Mr Sparks were also present.[483]
[483] TP 21 paragraph 47
Mr Winter reported that Dr Williams’ trip to China had been unsuccessful and it was the intention of the directors to appoint Mr Sims as administrator today “... as the directors had exhausted all their options”.[484]
[484] TP 12D 139
It was also revealed at the meeting that a board meeting to appoint a voluntary administrator had been heard as early as the previous Monday, 6 January.
There is no record of such a meeting but it is alluded to in other documents, one of which I will refer to shortly. It would appear that a resolution was passed on 6 January to appoint a voluntary administrator.
That meeting triggered a demand by the ANZ bank for payment of all the outstanding facilities of $1,169,863.62.[485] Moreover, demand was made by the bank upon the guarantors for the same sum.[486]
[485] TP 12D 140
[486] TP 12D 141
On the morning of 14 January 1997, Mr Sims convened a meeting with the same people who were present at the meeting of 13 January, with the exception of Dr Williams. He announced at the meeting that it was intended to appoint him voluntary administrator and that the purpose of the meeting was to determine the ANZ bank’s attitude and how the Company could deal with the Raptis and the aluminium vessels.[487]
[487] TP 12D 142
The meeting concluded with Mr Sims being advised that the ANZ bank was reluctant to advance any further funds.
On the same day the board met. Three members of the board were present by telephone, Mr H G Verboon, Mr D P Verboon and the defendant. The minutes record that due to the delay in Dr Williams’ and Mr Thomas’ return from their recent trip to China and as a consequence of a request made by the ANZ bank the resolution of the board of 6 January 1997 had not been acted upon.[488] The minute does not announce that the previous resolution had been made but I think that it may be inferred that the board had met on 6 January 1997 and resolved to appoint Mr Sims as a voluntary administrator.
[488] P5 2.19
The resolutions passed at the meeting of 14 January 1997 were:
“3 Resolutions
3.1 Solvency
It was resolved that, because ICBC, Yue Qing High Speed Passenger Ferry Company and Wenzhou Economic Development Corporation had advised that they would not honour the outstanding letters of credit in the sum of US$2,377,500 (in accordance with their contractual obligations arising under the agreements of 31 October 1995, 5 November 1996, 14 November 1996 and 6 December 1996) and the directors now being of the view that of (sic) the Company is unlikely to receive the further US$2M equity funding, the Company is insolvent.
3.2Appointment of Administrator
It was resolved that Anthony Milton Sims of Sims Lockwood Level 6, 81 Flinders Street, Adelaide SA 5000, having consented in writing to act as administrator of the company, be appointed administrator of the company pursuant to section 436A of the Corporations Law effective as at 2 pm on Tuesday 14 January 1997.” [489]
[489] P5 2.19
Mr Sims said that his potential engagement by the Company as a voluntary administrator was very much “on again, off again” as the option of the Company between September 1996 and 13 January 1997. [490]
[490] TP 21 paragraph 48
In particular there were periods when he heard nothing from the Company at all. Between about 25 September 1996 and 10 October 1996 he heard nothing. He was advised that he was to be appointed administrator but no appointment was made. After 12 December 1996 until 13 January 1997 he again had no contact with the Company.
He said the topic of solvency was never actually discussed by him with any directors or representatives of the Company. He always believed that the Company’s insolvency was a condition precedent to his appointment.
In his cross examination, Mr Sims confirmed that whilst on two occasions he advised the Company that it should not incur any further credit he did not at any stage give any advice to the directors, officers or the Company regarding the solvency or otherwise of the Company nor did he give any advice to the directors or officers regarding their duties and obligations as directors or officers.[491]
[491] TX 801
The two occasions, when he gave advice, in the presence of the directors, that the Company should not incur any further credit, were on 26 September 1996 and 17 October 1996. On that second occasion the defendant was present.
He said that he did not hold an opinion on 24 September 1996 that the Company was insolvent but that at some later time he formed that opinion. I find that Mr Sims held that opinion as at 25 September 1996.
On that day he believed it was incumbent on the directors to appoint an administrator pursuant to the Law.[492]
[492] TX 804
Nevertheless he did not at any time advise the Company or its directors that he held that opinion.
When pressed in cross examination Mr Sims suggested that his action on 25 September 1996, forwarding to the directors the draft minutes appointing an administrator and his executed consent to act as an administrator, represented advice given by him to the Company that he believed the Company was solvent.
I reject that suggestion. I do not believe that his provision of those documents in any way could amount to the communication of his opinion to the directors that the Company was insolvent and that the Company ought to appoint an administrator.
I think the provision of those documents does no more than reflect the instructions given to Mr Winter that he should prepare such documents.
It would be extraordinary that a professional man would provide an opinion of the kind in such an oblique way.
I do not believe that Mr Sims intended to provide any opinion to the Company at that time, either that the Company was insolvent or that it should appoint a voluntary administrator.
I therefore reject his evidence that he gave such advice by the provision of those documents at that time.
He was then cross examined about evidence he had given in this court on another occasion in relation to work in progress.
His evidence on that previous occasion, both in an affidavit filed in those proceedings and orally, was that if the Company had survived by obtaining refinance outside a voluntary administration then the third parties would have rendered an account for the work carried out after 24 September 1996. He agreed that the work in progress amounted to nearly $60,000. He agreed that that work had been carried out by himself, Mr Sparks and by a number of employees employed by the third parties.
Because the third parties contemplated billing the Company in the event that the Company survived does not bear upon the terms of the retainer of the third parties or the advice given by either Mr Sims or Mr Sparks.
Mr Sims said, in his cross examination, that he was never retained by the directors but by the Company itself. He never told the directors that he did not act for them.
Although he was retained by the Company he did not believe that he had any obligation to advise the Company or the directors at any time between 23 September/24 September 1996 and 14 January 1997 or express any opinion on any matter. Furthermore, he did not believe that he had any obligation to advise either the Company or its directors that he was not under an obligation to provide advice or give any opinion.
He said the terms of his retainer were to be in a position to accept the appointment as administrator of the Company and to ensure that the Company had sufficient resources to continue to trade under administration with the ultimate view of a deed of company arrangement.
I accept his evidence.
I have set out in detail all that occurred after 1 June 1996 because it is necessary to determine precisely the terms of Mr Sim’s retainer on or about 24 September 1996 and particularly whether the terms of that retainer included an obligation upon him to advise either the Company or the directors on the issues of insolvency.
I have to resolve those issues in somewhat of a vacuum. The defendant was not in Adelaide between 1 June 1996 and 14 January 1997, except as I have indicated. He met Mr Sims and Mr Sparks on one occasion on 17 October 1996. His knowledge of the terms of Mr Sims’ retainer must be based upon hearsay. He was dependant upon advices mainly from Dr Williams but also from Mr Thomas and Mr Carver. He cannot give much evidence of his own knowledge of the terms of that retainer.
The defendant claimed that after 24 September 1996 he relied upon the advice given by Mr Sims and thereby the third party.
As I have already mentioned the defendant gave quite elaborate evidence of a meeting he had with Mr Sims and Mr Sparks in which he claimed Mr Sims gave advice from which he relied. It is clear that such a meeting did not take place.
I do not believe that the defendant’s evidence was untrue. I think he was mistaken. I do not believe that the defendant gave any untrue evidence. As I have already said I formed the impression that the defendant was an honest and decent man. That of course does not mean that his evidence is completely reliable. In this regard his evidence is unreliable.
In his evidence in chief he said that between 24 September 1987 and 10 January 1997 he believed that the third parties were providing advice to the Company and its officers about the financial status, trading and prospects of the Company and were engaged in discussions with the bank, creditors and prospective financiers about financial support for the Company.
He took comfort, to use his expression, from those matters because he believed that the third parties were competent and reliable accountants specialising in insolvency work and they would advise him if the Company was insolvent or was not able to properly continue trading. The third parties had the professional expertise and experience to advise the Company and its directors accordingly.
He said that he was never advised prior to a meeting of the board of directors on 14 January 1997, that the third parties or any partner or employee of the third parties held the opinion that the Company was insolvent; or could not properly continue to trade without the appointment of an administrator; or that there was a risk that if the Company continued to trade its directors would be exposed to potential liabilities for debts incurred by the Company; or that the directors were obliged to appoint an administrator or to cause the Company to cease to trade.
He said that if he had been advised of any of those matters he would not have consented to the Company continuing to trade without the appointment of an administrator. He would also have urged his co-directors to join with him in resolving not to allow the Company to trade and if his co-directors had refused he would have resigned as a director himself.
For reasons I have already given I accept the evidence that Mr Sims did not give that advice to the Company or to the directors at any time. I also accept the defendant’s evidence that no other partner or employee of the third party ever gave such advice.
I also accept the defendant’s evidence that if he had received advice in such unqualified terms he would not have consented to allow the Company to trade and if his directors did not agree to appoint an administrator he would have resigned as a director.
However, in my opinion and for reasons already given, Mr Sims was not retained to give that advice. He always believed that the Company was probably insolvent but he was not retained to give advice as to the Company’s solvency or whether it should continue to trade.
His retainer was to act as a voluntary administrator when appointed. There were subsidiary terms in the retainer as I have already mentioned which obliged him to acquaint himself with the financial position of the Company by attending meetings with the bank and EFIC but he was not employed or retained as an advisor to the Company at any time.
I accept the defendant’s evidence that no-one at any time told him that the Company was insolvent or that the Company should not trade without the appointment of an administrator.
In my opinion, if the defendant had acquainted himself as he was obliged, with the financial position of the Company, that was an opinion he would have formed for himself.
The Company was clearly insolvent throughout the second period between 25 September 1996 and 14 January 1997.
I cannot think that the directors who were present in Adelaide and had the day to day executive responsibility for the Company, Dr Williams and Mr Thomas, could have thought otherwise. Dr Williams was an experienced man. He must have known that the Company was insolvent at that time.
I do not believe that Dr Williams told his fellow directors in those terms that the Company was insolvent.
I believe that he always hoped that the Company would be able to recapitalise itself and go forward.
All of the directors had a substantial investment in the Company. It was not in any of the directors’ interest for that investment to be lost.
However, I do not think that protection of their own investment was the only reason they continued to allow the Company to trade. I think they thought that if they kept the Company’s doors open some investor would inject the necessary capital that would allow the Company to flourish. I think they all always thought that the Company had substantial prospects.
Mr Hercus did not give any further evidence in chief in relation to the events which occurred after 25 September 1996.
I believe that the defendant was not made aware of a number of developments over the relevant periods. For example, on 26 December the president of ANZ China reported to the Adelaide ANZ office that Michael Thomas had told him that if the letters of credit were not met by Friday 27 December “... SA Ships would cease to be a business”.[493]
[493] TP 12D 108
Mr Hercus was not made aware that that was Mr Thomas’ view at that time.
The Company continued to fail to publish its financial statements in a timely fashion. I think the defendant did not receive the September financial statements until some time in December.[494] He did not receive the November accounts until 14 January 1997, the August accounts until 10 December and the September accounts until 17 December.[495]
[494] TX 757
[495] TX 759
The defendant asserted in his evidence in chief that between 1 June 1996 and about 10 January 1997 he believed that although the Company had cash flow problems it was solvent and it would remain so. He said that he held that belief for the following reasons: First, because the YQ Company would complete its purchase of the ferry. Secondly, on statements made to him by Dr Williams that there was a strong prospect that the SA Government would provide financial support for the Company beyond that which it had provided at the commencement of the Company’s operation. Thirdly, because in May 1996 MISBARD had commissioned Leadenhall Australia and that Company had reported on 22 August 1996. At a board meeting held on 10 September 1996 he said that Dr Williams said words to the following effect:
“The Leadenhall report has been completed for MISBARD. It is good news. It values the company at $17 million and says that the company could see profits as early as this financial year. It also says that the company had some cash flow shortages that we have to overcome by sourcing $2 million in additional equity. But we have until July of next year to find it. Overall the report is very positive.”[496]
[496] D9 paragraph 61(c)
Fourthly, because on 2 September 1996 the SA Government agreed to convert $400,000 to the Company as an interim grant and although the SA Government had indicated by 9 September 1996 that it would not be prepared to provide further financial assistance, EFIC was actively entertaining applications by the Company for assistance. Fifthly, because between 7 July 1996 and 15 December 1996 discussions took place between the Company and ISC with the prospect of ISC inquiring 50 per cent of the equity in the Company for $US2 million. He said in respect to that reason:
“An agreement was signed and dated 21 September 1996 in relation to the purchase. I was fortified in my belief after a nephew of the principal of the investor met me and other board members to express the investors’ commitment to the agreement.”[497]
[497] D9 paragraph 61(e)
Sixthly, because on 3 July 1996 Mr Carver said at the directors’ meeting the Company was solvent and they could expect to generate a profit in the year ended 30 June 1997. Seventhly, the ANZ bank continued to support the Company pending completion of the ferry. Eighthly, on or about 4 December 1996, Alan Scott and the SA Government agreed to provide assistance of $1 million to the Company pending receipts of funds from the YQ Company. Ninthly,[498]
“When, in late September 1996, SAS and the directors of the Company obtained, as I believed, advice from Sims Lockwood & Partners (in light of the then recent rejection by the South Australian Government of an application by SAS for assistance), as to whether the Company could properly continue to trade, Mr Sims at that firm expressed the view (as I believed) that it could do so.”[499]
[498] D9 paragraph 61(i)
[499] D9 paragraph 62(i)
In my opinion, a reasonable person, even assuming the matters to which the defendant has referred, would have formed the opinion that the Company was insolvent throughout the whole of the period and in particular not able to pay its debts as and when they fell due.
The fact was that the Company had extraordinary difficulty in coming to any terms with the YQ Company. Having come to terms with the YQ Company that Company defaulted on its obligations to pay in accordance with the terms of the contract from the outset. It consistently refused to honour its financial obligations under its contract for purchase of the aluminium vessel. The defendant could not reasonably have obtained any comfort from the YQ Company’s agreement to pay and its issue of its letters of credit in relation to the aluminium vessel.
It may have been that Dr Williams advised the defendant that the South Australian Government was considering offering the Company further financial support.
However, the defendant knew that that support had not eventuated at any time prior to 25 September 1996. He knew by 25 September 1996, that the SA Government had expressly refused further support.
During the time when he thought such support might eventuate he could not have thought that the possibility of such support would mean that the Company could pay its debts as and when they fell due. After 25 September 1996 he could not have believed there was any prospect of any support.
I am prepared to accept that Dr Williams stated what the defendant asserted he said on 10 September 1996.
However, the defendant did not call for nor has he ever read the Leadenhall Report. It was not sufficient for him in the discharge of his duties to simply accept Dr Williams’ short summary of the Leadenhall Report especially when the Company was at that stage in a parlous financial position.
True it is that the SA Government did agree on 2 September 1996 to convert the $400,000 loan to the Company into a grant. However, the SA Government also rejected an application by the Company for further financial assistance on 9 September 1996 and rejected a further application on 22 September 1996. The defendant could not reasonably have believed after 9 September 1996 or 10 September 1996 that the SA Government would give any further support.
I do not believe it was reasonable for the defendant to believe that the Indian investors would ever materialise. It certainly was not reasonable to hold that belief after 15 October 1996 when the Indian investors failed to provide the guarantee which was required and wrote what must be described as an extraordinary letter.

Whilst Mr Carver might have expressed the view that the Company was solvent at the directors’ meeting of 3 July 1996, such a declaration was inconsistent with the objective facts. It was also inconsistent with Mr Thomas’ managing director’s report[500] and with Mr Carver’s letter to the State Taxation Office dated 8 July 1996, seeking an extension of time until July 1996 to make payments of payroll tax.
[500] P3
Any reasonable enquiry at that time would have shown that Mr Carver’s declaration was incorrect.
The ANZ bank did not withdraw its facilities at any time over the period mentioned. However, it is undoubtedly clear from the bank’s notes of meetings with the directors and management of the Company that the bank remained the Company’s bankers only because the bank could see no way of extricating itself over that period. Indeed at one point the bank made it clear that it would not remain the Company’s bankers after 31 December 1996.
On any understanding of the bank’s relationship with the Company the bank was a reluctant partner.
That must have been apparent to those directors who attended meetings with the bank, particularly Dr Williams and Mr Thomas. The defendant should have been aware of that position and could have been aware if proper inquiries had been made of Dr Williams and Mr Thomas. Indeed he could have made those inquiries of Mr Sims.
Mr Scott’s possible involvement with the Company could not have offered any comfort to the defendant that the Company was solvent as at 4 December 1996 or any time thereafter. Mr Scott was prepared to make a loan to the Company in certain but limited circumstances. The South Australian Government was also prepared to assist at that stage in the same circumstances.
Mr Scott’s involvement depended upon some certainty on the part of the YQ Company. In my opinion, merely because Mr Scott might have made a loan of $1 million dollars at that time could not have allowed the defendant to think that the Company was solvent.
The last mentioned reason for his belief must be rejected because I have found Mr Sims did not express that view. He was not asked to give that opinion nor did he give it.
In summary therefore there are no reasonable grounds to support the defendant’s belief that the Company was solvent during the period mentioned.
In my opinion, the defendant has established that throughout the period from 25 September 1996 to 14 January 1997 there were reasonable grounds for suspecting that the Company was insolvent.
I think that the defendant may not have suspected that the Company was insolvent but for reasons which I have demonstrated they were unreasonable.
A reasonable person in the circumstances of the defendant would have suspected that the Company was insolvent throughout the whole of that period.
There are a number of reasons why a reasonable person would have so suspected and I shall identify just some of them. First, Mr Robinson’s meeting in late October with Mr Sims. Secondly, the meeting of 3 November. Thirdly, the opening of a ‘wages only’ account on 7 November and the directors’ contributing a sum of money to pay wages. Fourthly, the meetings of 20 November and 26 November. Fifthly, the call upon the directors to give guarantees on 26 November. Sixthly, the ANZ’s refusal to honour cheques. Seventhly, the statutory demands under s 459E. Eighthly, the meeting of 2 December and the letter of 3 December to Mr Hu threatening to appoint an administrator. Ninthly, Mr Scott’s involvement. Tenthly, Dr Williams’ acknowledgement of the solicitor’s debt of $66,416 and the Company’s cash flow problems. Eleventhly, the ANZ’s conduct throughout this period in extending the facilities but upon more and more onerous terms. Twelfthly, the ANZ’s letter to the defendant relating to the INCAT debt on 9 December.
They are just some of the reasons why a reasonable person in the circumstances of the defendant would have suspected that the Company was insolvent.
The plaintiff has established a contravention of s 588G.
In my opinion, the defendant cannot rely upon the defence under s 588H(2) that he had reasonable grounds to expect that the Company was solvent at that time. There were no reasonable grounds for that expectation and therefore that defence has not been made out.
The defendant has also pleaded reliance on the defence in s 588H(3).
In my opinion that defence must fail because the advice which the defendant said Mr Sims had given was never given. In those circumstances the defendant did not have reasonable grounds to believe that Mr Sims was responsible for providing to him adequate information about whether the Company was solvent. It might have been that the defendant was misled into believing that such advice had been given. However, because of the seriousness of the Company’s position, in my opinion, the defendant was under an obligation to speak to Mr Sims to ascertain whether his advice was as reported, if it was reported that the Company was solvent.
I find therefore that the defence fails because the advice was never given nor received and in those circumstances the defence could not operate.
Whilst the Company was advised to trade on a cash only basis after 25 September 1996, the defendant did not take any steps to prevent the Company from incurring the debts which the Company incurred between 25 September 1996 and 14 January 1997. He took no steps whatsoever in that regard. The defence under s 588H(5) has therefore not been made out.
In all those circumstances it seems to me that the plaintiff has established that the defendant is responsible for the loss or damage suffered by the plaintiff because of its insolvency.
It follows, because I have found that Mr Sims did not give the advice alleged by the defendant or any advice that was relied upon by the defendants, that the defendant’s claim for contribution or indemnity from Mr Sims must be dismissed.
Section 1317JA
That leaves only one matter and that is whether or not I should relieve the defendant either wholly or partly from the liability to pay loss or damage suffered by the Company under s 1317JA(2).
The defendant is entitled to have the Court consider relieving him wholly or partly if he has acted honestly and having regard to all the circumstances of the case including these connected with his appointment he ought fairly to be excused for the contravention of s 588G.[501]
[501] s 1317 JA(2)(a) and (b)
I think that the defendant has asked honestly. Acting honestly means that the defendant must have acted bona fide in the interests of the Company including the unsecured creditors.[502]
[502] Powell v Fryer (supra) at 111
The circumstances surrounding his appointment are not relevant. I shall return to the other circumstances which might be relevant to excusing the defendant for his contravention of s 588G.
I must take into account any action the defendant took with a view to appointing an administrator, when that action was taken and the results of that action.[503]
[503] s 1317 JA(3)
The defendant, of course, participated eventually in the appointment of Mr Sims as administrator. That of itself is barely relevant for determining whether or not he should be relieved of liability under s 1317JA. He took no steps to appoint an administrator prior to about 23 September. He then participated in a decision not to appoint an administrator even though a reasonable person in his position would have known that the Company was insolvent. Between 24 September and immediately before 14 January he took no steps to appoint a voluntary administrator although a reasonable person in the defendant’s circumstances would have concluded that the Company was insolvent.
The defendant failed to appoint an administrator because he wished to see the Company succeed. I think he believed that there was some possibility the Company would succeed if it was allowed to trade even though it had a chronic cash flow shortage.
Whilst it was in the defendant’s interest for the Company to succeed, because he had no prospects of return of capital invested if the Company failed and he would lose the value of the work which had been performed by his Company in relation to the design of the aluminium vessels, I do not think it was self interest that motivated his failure to appoint an administrator.
I think during the whole of this period the defendant was concerned that the Company might be insolvent and that he hoped the Company could trade out of its problems.
I am satisfied that his failure to appoint an administrator or cause such an appointment to be made, was a result of a misguided belief that the Company could survive. I think therefore that his failure to ensure that such an appointment took place should not disqualify him from obtaining relief under this section.
The defendant’s real breach in this case was failing to keep himself properly informed of the Company’s fortunes. He knew what his duties were. He knew what he needed to do to discharge those duties. What he failed to do was to obtain sufficient information from those who had that information to enable him to make a properly informed decision.
In particular, he relied too much on Dr Williams as a source of information. He was also too reliant on Dr Williams’ judgments. He failed to obtain sufficient information from Mr Thomas. He failed to obtain any information from Mr Sims or Mr Sparks. He wrongly assumed that Mr Sims and Mr Sparks were advising the Company in relation to the very decision which had to be made by the defendant and that was the appointment of an administrator. He failed to obtain relevant and up to date financial accounts of the Company. He failed to ensure that the directors met regularly and were properly informed at board meetings and in particular in receiving proper financial statements.
I do not think that the defendant ever lost interest in the Company’s fortunes. I believe he was vitally interested in the Company’s fortunes. He suffered the disadvantage of trying to carry out his duties from a distance. That did not relieve him of his obligations.
However, the defendant’s culpability, if I might describe it that way, was less than that of Dr Williams or Mr Thomas. Dr Williams was the senior executive director during the relevant time. He was the chairman of the board and did have first hand information. It was his duty to convene meetings of directors. He had an obligation to ensure that any information he passed to his fellow directors was accurate. He was not entitled to edit that information.
Mr Thomas was also better informed than the defendant and was capable of better informing the defendant. Both Dr Williams and Mr Thomas had information available to them that they could have been passed on to their fellow directors.
In those circumstances I conclude that in fact the defendant’s culpability was less than that of Dr Williams and Mr Thomas.
In my opinion, it is relevant that the plaintiff has settled with Dr Williams’ estate and Mr Thomas in the terms which I have already identified.
No evidence was led before me to suggest, especially in the case of Dr Williams, that the settlement arrived at with Dr Williams was predicated upon an absence of funds. I assume that the liquidator believed that the settlement arrived at with Dr Williams was appropriate having regard to all of the circumstances.
In the end result I believe that it would be inappropriate to relieve the defendant wholly from any liability to the plaintiff. On the other hand I believe that to be consistent with the settlement arrived at with Dr Williams he should be relieved partly from liability.
It is relevant to take into account that all of the other directors, apart from Dr Williams, had the same obligations and responsibilities as the defendant.
I would relieve the defendant of all liability except as to $500,000.
It follows therefore that judgment should be entered for the plaintiff against the defendant in the sum of $500,000.
The defendant’s claim against the third parties should be dismissed.
The third party should have judgment against the defendant.
I shall hear the parties as to costs.

(1999) 32 ACSR 201 at 217

[2002] SASC 424

20 December 2002