Sheahan v Verco and Hodge No. Scciv-96-1303

SHEAHAN AND ANOR V VERCO AND HODGE
[2002] SASC 68
Full Court: Doyle CJ, Lander and Wicks JJ

DOYLE CJ: I would dismiss the appeal. I agree with the reasons given by Lander J. There is nothing that I wish to add to those reasons.
LANDER J This is an appeal by the liquidator of SA Service Stations Pty Ltd (“the company”), whose action against two former directors of that company, Messrs Verco and Hodge, was dismissed by a Judge of this Court. The liquidator had claimed before the Trial Judge that the directors owed duties to the company pursuant to s 232(4) of the Corporations Law which, they had breached and which had caused the company loss or damage.
The capital of the company was acquired by a Mr Linke and his accountant in 1984. Mr Linke and his wife became the directors of the company on 1 July 1984 and thereafter the company traded under the governance of Mr Linke, who acted as the managing director and chief executive officer of the company. He remained a director until 28 May 1992.
In March 1988 the company acquired two service stations which operated at Glandore and Glenunga under the BP banner.
The service stations were acquired by the company obtaining a loan from the Australia and New Zealand Banking Group Ltd (the ANZ Bank) which took security by way of debenture over all of the assets and undertakings of the company. The Bank also took security over a number of assets owned by Mr and Mrs Linke.
About a month later the company acquired a third business “From Paris With Love” which sold perfume. Further loans were obtained for that purpose.
None of the businesses traded profitably and by 30 June 1989 the company had accumulated losses of $467,412. Its liabilities exceeded its assets by $427,630. The company was indebted to the ANZ Bank in the sum of $740,452.
During the next financial year the company sold the two service station businesses and the perfumery business. By December 1989 it had virtually no assets. It had significant liabilities to the ANZ Bank which was still owed $637,978 on bills and $30,373 on overdraft.
Prior to the sale of the businesses the company made further trading losses and by 30 June 1990 its liabilities exceeded its assets by $547,196.
The Trial Judge found that the company was insolvent at that time.
The company’s solvency depended upon its ability to meet its debts as and when they fell due. The company was in fact not meeting those debts. Its major creditor at that time was the ANZ Bank and the company was allowing that debt to accumulate.
The ANZ Bank did not take steps to call up the debt. It held security against other assets owned by Mr Linke. The ANZ Bank required Mr Linke to liquidate those other debts to reduce the amount owing by the company.
Notwithstanding the parlous financial position of the company, Mr Linke caused the company to purchase two further service stations at Hillbank and Salisbury Downs which traded under the Mobil banner. The company purchased those businesses for $1,150,000. With transaction costs and other expenses the company paid $1,317,480.36 at settlement which occurred on 4 July 1990.
The acquisition was financed by a loan of $650,000 from the Bank of Singapore (Australia) Ltd (the Bank of Singapore) which was made up of two facilities one of $600,000 and the other of $50,000. Both facilities were required to be paid by 31 January 1991. The vendor provided a loan of $450,000 which was repayable on 1 August 1990.
Security was taken by both the Bank of Singapore and the vendor over property owned by Mr and Mrs Linke. Security was given by way of charge, over the assets of the company, to the Bank of Singapore.
The ANZ Bank accepted Mr Linke’s proposal to pay the interest due to it from income received from the two service station businesses. It agreed to postpone its debenture, behind the debenture, to the Bank of Singapore. The ANZ Bank expected the loans to be repaid from Mr Linke’s other assets and by other companies Mr Linke controlled.
The ANZ Bank was prepared to postpone its charge in favour of the Bank of Singapore. No doubt it did so for good commercial reasons from its point of view. No-one was called from the ANZ Bank to explain why the Bank agreed to postpone its charge in favour of the Bank of Singapore. However, it may be inferred as did the Trial Judge did, that the Bank was acting in what it perceived to be its best interests.
The purchase price comprised goodwill of $740,000, plant of $80,000, video tapes of $80,000 and stock of $250,000. The goodwill represented the amount paid in excess of the value of the assets acquired.
The company entered into leases with respect to each of the two service stations and a separate franchise agreement with Mobil.
Mr and Mrs Linke provided $96,000 of the amount due at settlement. Of that sum about $86,000 was paid to the ANZ Bank to obtain the release of its security.
The Trial Judge found that immediately prior to the acquisition of the two service stations in July 1990 the company had no business, no income and no assets of any significance. It had a substantial debt to the ANZ Bank due to the commercial activities of Mr and Mrs Linke. His Honour found that it could not be doubted that the company was insolvent at that point in time.
Insolvency is established if, as a matter of fact, a company is unable to pay its debts as and when they become due; Sandell v Porter & Anor (1966) 115 CLR 666. That does not mean that the company must be able to pay its own debts from its own resources.
If the company has the support of its shareholders, directors or bankers and that support, as a matter of fact, means that the company is able to pay its debts as and when they fall due then the company would not be insolvent.
I think that the Trial Judge was right to conclude that the company was insolvent when it entered into the transaction to purchase the two services stations. Whilst the company then had the support of its shareholders, Mr and Mrs Linke, that support was not sufficient to allow the company to pay its debts as and when they fell due. In fact their resources were so stretched that they had to liquidate their assets to repay the company’s indebtedness to the ANZ Bank.
Mr Linke did not give evidence in these proceedings, nor did the defendants, Mr Verco or Mr Hodge. All parties contended that Mr Linke had been guilty of very serious breaches of his duties as a director of the company. It was the defendants’ case that Mr Linke had been guilty of very serious misrepresentations to them which had induced them to purchase shares, advance loans and become directors of the company.
The Trial Judge said:
“Mr Linke did not give evidence. Although he was a party to the action, it was discontinued against him on 10 February 1998. He has not been called upon to answer allegations made about him and consequently adverse findings about him in these proceedings should only be made when necessary and upon only the clearest evidence. With those observations in mind, it has been clearly established that Mr Linke misled Mr Verco, Mr Hodge and Mr Siegle on many important aspects. Also he misled the ANZ Bank, the Bank of Singapore and Excel. He misled all of them as to the financial position of the company and the two service stations. At all times he represented the company and the business as profitable, in a sound financial position and with considerable potential. In fact, as has been seen, the company had a substantial liability to the ANZ Bank before the two service stations were purchased. Substantial liabilities of interest payments, depreciation and amortisation of goodwill were never brought to account in the various budgets and profit and loss statements or, if so, in a totally inadequate manner. Having regard to all our gains and liabilities the company did not make a profit in regard to those items during any relevant period which are kept from the other directors by Mr Linke.”
In my opinion, the Trial Judge’s approach in relation to the allegations made against Mr Linke was appropriate. Findings could only be made when they were necessary to resolve the issues between the parties and having regard to Mr Linke’s absence upon clear evidence.
I also agree with the findings that His Honour made in relation to Mr Linke. Mr Linke was, in my opinion, guilty of the various matters to which His Honour has referred.
The plaintiff tendered the evidence given by Messrs Verco and Hodge in proceedings in this Court sub nomineCapricorn Society Ltd v Linke & Ors (1996) 130 FLR 19; (1996) 14 ACLC 431. In that case the plaintiff, a creditor of the company, brought proceedings against Mr Linke, Mr Verco and Mr Hodge claiming that each of them were liable as directors of the company to the plaintiff. It was claimed that the company incurred a debt to the plaintiff at a time when there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due. The action did not proceed against Mr Linke who was then a bankrupt. The plaintiff succeeded against Messrs Verco and Hodge under s 592 of the Corporations Law.
Ordinarily parties who decline to give evidence on their own behalf and in their own defence run the risk of having adverse inferences drawn against them. In this case, however, there is no relevant evidence which could have been given by the defendants. The case against them was a failure to act, in particular a failure to ascertain adequately the financial state of the company. There is no doubt that that case was made out. Having regard to their failure to act they had no knowledge of the relevant matters which the plaintiff needed to prove to establish their liability.
This case is exceptional in that it is irrelevant that the defendants failed to give evidence.
Mr Linke and Mr Verco were acquainted through membership of horse racing clubs. In June 1990 Mr Linke approached Mr Verco enquiring whether he wished to become a shareholder in the company. He told Mr Verco that two of the best service stations in South Australia were coming up for sale and that he was looking for people to join the acquisition.
Mr Linke represented to Mr Verco, through documentation which he showed him, that the service stations were profitable, one earning $137,000 in a year and the other earning $180,000 in a period of six months.
He prepared budgets which he showed Mr Verco, projecting a profit of $470,000 for the 1991 year.
He proposed to Mr Verco that Mr Verco take a 12.5 per cent interest in the acquisition. He said he would seek out another person to take a like interest and that he would retain a 75 per cent interest.
It was proposed that the company would be the vehicle to purchase the service station businesses. The company had tax losses of about $1 million which Mr Linke told Mr Verco would mean that profits would not be taxable until those tax losses were expunged.
Mr Verco invested $200,000 through a trust, the M L Verco Family Trust.
Whilst neither Mr Linke nor Mr Verco gave evidence it is clear from the documents that Mr Verco was misled by Mr Linke in relation to the profitability of the businesses and the financial viability of the company.
Mr Verco and his wife were allocated 1,600 shares in the company which represented 16 per cent of the issued capital of 10,000 shares. $18,750 was allocated to the purchase of the shares. The balance was treated as a loan to the company.
Mr Verco was appointed a director of the company on 20 June 1990.
Financial statements of the company at 30 June 1990 show accumulated losses of $766,978 after a loss for that financial year of $299,564. The liabilities of the company exceeded its assets by $547,196.
The vendor finance had to be repaid on 1 August 1990. Mr Verco had not been told that there was a debt to the vendors.
On 25 June 1990 Mr Linke arranged to borrow a sum of $200,000 from Excel Finance Corporation Ltd (Excel) which was secured by way of second charge on the assets of companies controlled by Mr Linke. The loan was not made to the company but to Mr and Mrs Linke personally. Mr Linke purported to have the company guarantee the loan. As a director he should have been consulted about the company giving a guarantee to Excel in relation to a loan to one of its directors.
As it was he did not become aware of the guarantee until after managers and receivers were appointed by the Bank of Singapore. Moreover, no resolution of the directors of the company was ever passed enabling the company to execute a guarantee in relation to the loan by Excel to Mr and Mrs Linke.
The proceeds of the loan were provided by Mr and Mrs Linke to the company to enable the vendor finance to be repaid.
On 30 July 1996 a further sum of $100,000 was borrowed by the company from the Bank of Singapore. Mr Linke represented to the Bank of Singapore that a family member was to invest $200,000 but had died. Again Mr Verco was not advised of this additional loan.
Mr Linke sought a further $50,000 from Mr Verco. Mr Verco was told by Mr Linke that Mr Verco should have contributed $250,000 not $200,000 to acquire his interest.
A further $75,000 was borrowed from the Bank of Singapore in November 1990. Loans to the Bank of Singapore were renegotiated to be repaid on 31 January 1991.
Throughout 1990 Mr Linke represented to Mr Verco that the company was trading very well. Financial accounts for the three months ending on 30 September 1990 were provided by Mr Linke to Mr Verco. Those accounts showed that the two service stations had made a profit in excess of $90,000.
In November 1990 Mr Linke represented to Mr Verco that profitability was increasing. Documents were presented to Mr Verco showing that the two businesses had made a net profit in excess of $105,000 for the month. In December 1990 Mr Linke told Mr Verco that in one weekend the gross takings had reached $150,000.
The financial statements of the company at balance date 31 December 1990, showed that the amount then owing to the ANZ Bank was $730,841. On 26 December 1990 the ANZ Bank wrote to Mr and Mrs Linke proposing a repayment schedule which in fact Mr and Mrs Linke had no prospects of achieving.
As at 31 December 1990 $600,000 was still owing to the Bank of Singapore. Mr and Mrs Linke owed Excel $200,000.
The company was obliged to repay the Bank of Singapore its indebtedness by 31 January 1991. The ANZ Bank had proposed that its debt be reduced by $200,000 on 4 January 1991, $100,000 on 28 February 1991 and that the balance be repaid on 8 April 1991.
The balance sheet disclosed an excess of liabilities over assets of $407,206. However, that balance sheet included intangible assets of $789,339 which included goodwill of $775,898. That goodwill attached to the two businesses which, had been acquired in June of 1990. In fact the goodwill had increased by $35,898. This increase in the goodwill is not explained.
A profit and loss statement for the six months to 31 December 1990 showed a total net profit of $139,989 after a provision for bank interest of $50,162. The bank interest was understated.
The profit and loss statement did not provide for depreciation or amortisation of goodwill.
The company did not repay its debt to the Bank of Singapore on 31 January 1991, nor did it meet the ANZ repayments schedule. The Bank of Singapore extended its time for repayment until 31 May 1991 and later to 30 June 1991. It required, however, repayment of the principle sum by instalments of $20,000 on the last day of each month commencing on 28 February 1991.
In February 1991 Mr Linke caused the company to pay to the M L Verco Family Trust the sum of $20,000 which he represented to Mr Verco was his share of the first eight months of trading. In fact the sum of $20,000 was debited to the loan account of the M L Verco Family Trust without Mr Verco’s knowledge.
In March 1991 the ANZ Bank wrote to Mr Linke regarding his failure to comply with his undertakings to reduce the debt and pay interest. He was advised that unless the matter was satisfactorily resolved by 1 April 1991 the ANZ Bank would demand repayment of the loans and take action upon the security.
Mr Hodge, the second defendant, was also known to Mr Linke. He was a mutual friend of both Mr Linke and Mr Verco. Mr Linke approached him to become an investor in the company. Mr Linke told him that Mr Verco had become an investor in the company and that Mr Verco had received a dividend of $20,000. Mr Linke made a number of representations to Mr Hodge about the financial viability of the company and the service stations. He told Mr Hodge that he could expect to earn 20 per cent per annum on his investment.
Mr Hodge said that he would invest but that he wished to be a ‘sleeping partner’. He and his wife agreed to contribute $125,000 for which they were allotted 800 shares at a cost of $50,000. It is not clear why the shares were valued at that figure. The balance of $75,000 was treated as a loan by them to the company.
Mr Linke provided Mr Hodge with the financial statements which misrepresented the financial liability of the company.
In April 1991 Mr Linke persuaded a relative, Mr Siegle, to also invest in the company. Mr Siegle invested a sum of $125,000 for which he obtained 800 shares. The cost of those shares was again $50,000, and again the balance of the investment was treated as a loan. On 28 May 1991 Mr and Mrs Hodge and Mr Siegle became directors.
The company was at this stage experiencing cash flow problems. It was slow in paying interest to the Bank of Singapore and was under pressures, to which I have already referred, to the ANZ Bank. In April 1991 Mr Linke proposed to the Bank that he would sell all of his assets, except his shares in the company, to repay the debt owing to the ANZ Bank.
Financial pressure continued to mount. On 20 June 1991 the manager of the ANZ Bank wrote to Mr and Mrs Linke informing them that three of their properties had to be sold as a priority and that if contracts for the sale and purchase of those properties were not provided to the Bank by 15 July 1991 the ANZ Bank would act to take possession.
In June 1991 and again in July 1991 cheques written by the company on a trading account with the State Bank of South Australia were dishonoured.
The Trial Judge described the company’s position as at 30 June 1991 in the following terms:
“The loans due to the Bank of Singapore had not been paid by the due date on 30 June 1991. Mr and Mrs Linke had not sold any of the assets in which they, or their companies, had an interest. There were no funds available to pay that loan and that Bank extended the time for payment until 12 July 1991 and soon thereafter an extension was made to 31 July 1991. The amount due on the principal loan had increased from $600,000 to $645,000. However, all interest payments due to the Bank of Singapore had been made during the financial year. That Bank had allowed the company to continue to operate the two service station businesses and, as had been seen, increased and extended loans for that purpose.”
The financial statements for the year ended 30 June 1991 were prepared and published in August 1991. The company’s liabilities exceeded its assets by $464,710. The company had accumulated losses of $731,486.
Of the company’s total assets of $1,428,336, $786,745 represented intangible assets of which goodwill amounted to $774,898.
Mr Linke advised his fellow directors that the poorer than expected profit was disappointing but “the immediate and long term looks bright”. He said that he would assume the position of full time working director to establish better management information. He would report on a monthly basis. He published a budget indicating net profits for the two businesses for that financial year in the sum $210,000.
Mr Linke continued to represent to his fellow directors that trading was improving.
On 3 December 1991 the directors held their one and only directors’ meeting during the term of office of Mr Verco and Mr Hodge or either of them. Mr Linke reported to that meeting that results were favourable. The business manager, however, reported that a breakdown of the computer meant that the financial figures could not be presented. Mr Linke produced a handwritten document of trading results which was the first report for that financial year.

On 23 December 1991 Excel, as guarantor of the loan to Mr and Mrs Linke, made a demand on the company for the sum of $197,774.53. The company had guaranteed the loan although the common seal had been affixed without the resolution of the directors and indeed without the knowledge of Mr Verco. On 21 January 1992 the ANZ Bank made a demand, directed to Mr Linke, in respect of the total amount then outstanding of $812,724.87.
Notwithstanding these demands Mr Linke continued to represent to Mr Verco and Mr Hodge that the company was trading well and that they could expect another dividend.
In early 1992 Mr Linke met with the company’s creditors offering a scheme of arrangement. On 25 February 1992 the Bank of Singapore appointed Mr Irving, a partner of Arthur Anderson & Co to assess the proposed scheme. On 9 March 1992 he recommended to the Bank of Singapore that they not agree to the proposed scheme. On 9 March 1992 the Bank of Singapore demanded payment of the arrears of $68,451.13 by 11 March 1992. The company defaulted and on 12 March 1992 the Bank of Singapore appointed Mr Irving and Mr Young as managers and receivers of the Company.
Mr Linke advised Mr Verco of the appointment of the managers and receivers and shortly thereafter Mr Linke and Mr Verco met with Mr and Mrs Hodge. Mr Linke informed those attending the meeting that they would have to find $300,000 if they wish to sell the company. Mr Verco and Mr Hodge learned for the first time that the company had guaranteed the loan from Excel and that the company was indebted to the ANZ Bank.
The receivers and managers operated the businesses until either 22 and 23 June 1992 when they sold the business for a total of $752,526. A further $8,000 was received for the purchase of the spare parts division and a sum of $2,424 for the other plant.
During this period the businesses were operated by the receivers and managers and operated at a net profit of $52,851.
This Court made an order winding up the company on 8 July 1992. Mr and Mrs Linke were declared bankrupt on 13 October 1993 and 7 February 1994 respectively. Mr Siegle died in 1993.
The plaintiff’s claim against the defendants is not a claim for insolvent trading. When these events occurred a director could be liable to a creditor if the director permitted the company to incur a debt to the creditor when there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due: s 592 Corporations Law. That provided a creditor with an action to recover the debt pursuant to s 592(3) of the Corporations Law but no cause of action was given to the company which had been caused to incur the debt.
As I have already mentioned, a creditor did bring an action against the directors in relation to a debt incurred whilst the company was insolvent and recovered against both Mr Verco and Mr Hodge: Capricorn Society Ltd v Linke & Ors (supra).
Subsequent to these events Parliament enacted s 588G of the Corporations Law which imposed a duty on a director to prevent insolvent trading by a company of which he or she was a director and gave the company a right of action in that regard. That section has no application in this case.
Thus, the liquidator had no action available to him or the company against these directors for insolvent trading. The action is therefore not an action at the suit of the company against directors for allowing a company to trade whilst insolvent.
This action was framed in breach of duty. It was claimed that the defendants owed duties to the company including duties under s 232(4) of the Corporations Law and that they were in breach of those duties, as a result of which the company suffered loss. The Statement of Claim does not identify any other duty other than the specific statutory duty to which I have referred or indeed how those other duties arose. (see para 7 of the Statement of Claim)
On appeal the plaintiff’s counsel limited the plaintiff’s claim to that of a breach of the statutory duty provided for in s 232(4) of the Corporations Law. The plaintiff conceded on appeal that whatever other duty might have been owed by the defendants to the plaintiff it was no wider than that provided for in s 232(4).
Section 232(4) has since been repealed. It provided at the time:
“232(4)An officer of the corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his or her powers and the discharge of his or her duties.”
The Trial Judge found, without doubt and rightly in my opinion, that the defendants were in breach of that duty. Furthermore, there were a number of breaches. He found they failed to ensure that directors’ meetings were held. Only one meeting was held during the whole time that both men were directors, on 3 December 1991. He found that they were in breach of their duty by failing to ensure that the company kept accounting records which, correctly recorded and explained its transactions and which allowed for the preparation of true and fair accounts. He found that they were in breach by failing to ensure that the company kept a minute book. He found that they were in breach by failing to make adequate provision for doubtful debts and to value current and non current assets.
The defendants have not challenged the findings of breach of duty.
The defendants’ case, both at trial and on appeal, was that the breach did not lead to loss.
Because this is a statutory breach and because it occurred prior to 1993 the question of loss is governed by s 232(8) of the Corporations Law. That section has also now been repealed but at the relevant time provided:
“232(8) Where a person contravenes a provision of this section in relation to a corporation, the corporation may, whether or not the person has been convicted of an offence in respect of that contravention, recover from the person as a debt due to the corporation by action in any court of competent jurisdiction:
(a)if that person or any other person made a profit as a result of the contravention - an amount equal to that profit; and
(b)if the corporation has suffered loss or damage as a result of the contravention - an amount equal to that loss or damage.”
The plaintiff proved that the defendants contravened s 232. There was no suggestion in this case that the defendants had made a profit so s 232(8)(a) has no application. However, the company had a right to recover from the defendants, as a debt, any amount equal to any loss or damage suffered “as a result of the contravention” s 232(8)(b).
The plaintiff therefore needed to establish, on the balance of probabilities, that it had suffered loss or damage as a result of the defendant’s breach of duty owed under s 232(4).
In my opinion, s 232(8) requires proof of causation. That is a factual inquiry as to whether the breach of the duty caused the loss or damage. The breach of duty need not have been the sole cause of the loss or damage but it must have been a substantial cause of the loss or damage. Like s 82 of the Trade Practices Act, s 232(8) takes up the common law concept of causation as a common sense factual inquiry: March v Stramare (E & M H) Pty Ltd (1991) 171 CLR 506.
The plaintiff pleaded in its Statement of Claim that from at least 23 June 1990 until the appointment of the liquidator the company was insolvent in that it was unable to pay its debts as and when they fell due; was unable to trade profitably; and was continuing to incur trading losses.
It was claimed that the defendants should have been aware of those matters and taken steps to cause the company to cease trading and be wound up or to take some other steps to appoint external administrators to the company.
It was further claimed that between 23 June 1990 and 30 June 1991 the company continued to trade and incur debts which it was unable to pay and from 1 July 1991 until the appointment of the receivers and managers in 1992 the company continued to trade and incur further debts.
In this case, the plaintiff asserted that if the defendants had complied with their duties under s 232 (4) of the Corporations Law the defendants would not have allowed the company to trade after 1 July 1991 and until 12 March 1992 when the receivers and managers were appointed. It was claimed that the losses amounted to either $406,886 or $442,357.
There was, I think, with respect, a misunderstanding on the plaintiff’s part of the matters which it had to prove. A good deal of the case was directed to proving that the plaintiff was, at given times, insolvent. It was not necessary for the plaintiff to establish that the company was insolvent. What the plaintiff had to establish was that the plaintiff suffered loss or damage as a result of the contravention of a statutory duty. Whilst its solvency was relevant to the question of the duties owed by the directors it could have suffered loss or damage whether it was solvent or insolvent.
The plaintiff seemed to think that if it proved that the company was trading whilst insolvent it necessarily suffered loss or damage. In my opinion that is not correct. An insolvent company may continue to trade without suffering loss or damage. Indeed an insolvent company may trade its way out of insolvency.
If as company was insolvent at the commencement of a period it will suffer loss or damage if, by continuing to trade, its liabilities exceed its assets by a greater sum at the conclusion of the period in question. If it was solvent at the commencement of the period it will suffer loss or damage if, by continuing to trade, its net assets decrease in value. Those events can occur if either its assets lose value or its liabilities increase, or both. Its assets may lose value independently of its trading circumstances, simply by reason of delay or market forces and liabilities may increase in an ordinary trading company if it suffers trading losses.
Whether a company has suffered loss or damage over a period of time requires a valuation of its assets and liabilities at the commencement and end of the relevant period. All of the assets and liabilities must be valued and assessed.
That evaluation can give rise to quite complex evidence. First a determination has to be made as to how the assets will be valued. The valuation of plant and equipment will depend upon whether or not the company is a going concern or whether the plant and equipment must be realised. Different values may be arrived at in those two different circumstances. The valuation of receivables must depend upon their recoverability. That gives rises to judgments. The valuation of the assets may involve different considerations at the commencement and completion of the period. However, in my opinion, a number of matters in a trading company which has assets of the kind that this company did at the commencement of the period, are not relevant in a valuation of the company’s assets and liabilities.
It is not enough to say that the company suffered loss or damage because it borrowed money during that period of time. Of course the borrowing of money increases the company’s liabilities but the borrowed money increases its assets by the same amount. A loan by itself is no evidence of loss or damage: Galoo Ltd (in liq) & others v Bright Grahame Murray (a firm) and another [1995] 1 All ER 16. A company which borrows money will only suffer loss or damage if the borrowed moneys are lost.
A significant aspect of this company’s assets was the amount attributed to goodwill on the purchase of the two service stations.
The Trial Judge found that until 30 June 1991 the company made a profit of $35,491. He also found that the company did not suffer loss or damage in the period between 1 July 1991 and 12 March 1992 because during that period the company in fact traded at a profit. In the six months to 31 December 1991 he found the company made a profit of $92,328. For the period 1 January 1992 to the date of the appointment of the managers and receivers on 12 March 1992 he found the company made a profit of $7,857. His Honour also found that the financial statements of the company showed an understatement of sales during those three periods to the extent of $42,274.
Thus, His Honour found that over the period complained of the company made a trading profit of $142,459.
In those circumstances he found that although the defendants had been in breach of their duties and had thereby contravened s 232(4) of the Corporations Law, the company had not suffered loss or damage by reason of that contravention.
The plaintiff argued, on this appeal, that the Judge’s finding that the company had traded at a profit for the three periods, to which I have referred, was wrong in that he failed to have regard to other costs incurred by the company during those three trading periods.
In particular it was argued that there had to be an adjustment to those trading losses to reflect the following additional costs:

Adjustments per plaintiffs’ case

(152,477) Debt to Mobil at 12 March 1992

(91,967) Amortisation of goodwill

(52,499 Depreciation of videos

(7,244) Depreciation of plant & equipment

(4,898) Depreciation of motor vehicles

(40,773) Group tax liability at 12 March 1992

5,895 Add back group tax

(55,521) Interest to BOSA

34,886 Add back interest

(42,274) Add back understatement of sales

2,675 Add back interest

Total adjustments (404.197)

Adjusted Loss 261,738

The plaintiff had the onus of establishing that the contravention caused the loss or damage. It was necessary that the plaintiff establish that the adjustments needed to be made to reflect the true profit or loss.
The plaintiff thought it could prove its case by simply tendering the financial statements of the company. The Trial Judge rejected that approach.
The plaintiff claimed that there was an amount outstanding to Mobil for the purchase of fuel, in the sum of $152,477 at 12 March 1992. The Trial Judge found such an amount was owing. However, he was not satisfied that that debt had been incurred within the relevant period. The plaintiff did not establish the opening balance owing to Mobil as at 1 July 1991, the amount of the purchases during the relevant period and the amount paid to Mobil during the same period.
In those circumstances, in my opinion, the Trial Judge rightly found that he could not be satisfied that the costs of goods as identified by the company in its financial statements was understated by that amount.
The plaintiff claimed that the profit found by the Trial Judge excluded a group tax liability of $40,773.
I think there is evidence that the company did incur a group tax liability during the relevant period.
The plaintiff tendered a number of documents relating to this liability. The joint receivers and managers acknowledged, in a letter dated 24 July 1992, that a sum of $36,616.29 was owing in respect of group tax for the period November 1991 to 12 March 1992. In correspondence from the joint receivers and managers to the Deputy Commissioner of Taxation they identified how that amount had been calculated.
I think the plaintiff did establish that such an amount was incurred during the relevant period.
In my opinion, that liability would have been incurred directly as a result of the company continuing to trade. It could not trade without its employees.
However, the plaintiff claims that the outstanding figure is $40,773 which includes the sum of $36,616.29, to which I have referred, together with penalty tax of $2,629.80 and additional amounts for late payment calculated to 12 March 1992 of $1,349.12.
In my opinion, the assessed penalty and the additional taxation has not been established as having been incurred by reason of the continuing trading.
I think there ought to be an adjustment to the notional profit at which the Trial Judge arrived, by reducing that amount by $36,616.29.
Next the plaintiff claimed that the Trial Judge should have reduced the notional profit by a figure to reflect the amortisation of the goodwill in the balance sheet of the company.
In my opinion, that is not correct. When these two businesses were acquired the company paid a significant sum by way of goodwill, namely $740,000. The goodwill presumably attached to the two businesses of the service stations.
The company also had in its balance sheet further goodwill which had been purchased in the two earlier businesses which had failed. That goodwill had not been completely amortised as at July 1991.
The accounting standards and the Corporations Law required the plaintiff to amortise that goodwill over a period of time. It is presumed in the accounting standards that the purchased goodwill will reduce by the amount which is amortised in each year.
In due course the two businesses which were traded were sold for a sum which included goodwill but for a sum less than that which those businesses were purchased.
The plaintiff did not establish that the goodwill attaching to the businesses depreciated by any amount over the relevant period.
The plaintiff has simply assumed that because the accounting standards require the amortisation of goodwill that the goodwill attaching to the businesses reduced by that amount.
That is not an assumption which, in my opinion, is valid and certainly not an assumption which the Trial Judge ought to have made. Indeed His Honour rejected such a submission.
If it was the plaintiff’s case that the capital value of the businesses reduced over the relevant period then it was incumbent, in my opinion, upon the plaintiff to establish the value of the businesses at the commencement and at the completion of that period. That was not done and therefore, in my opinion, the claimed figure for amortisation could not be brought to account and set off against the trading profits.
The same is the case in relation to the depreciation of the various items referred to in the proposed adjustments.
Whilst the accounting standards require a company to depreciate its assets over a period of time and at a particular rate, depending upon the asset, it is not necessarily the case that the particular asset depreciates at that rate or at all.
Again the plaintiff needed to establish the value of the assets at the commencement and the completion of the relevant period to show if it was the case that during the trading period the assets had necessarily depreciated thereby occasioning a loss to the company.
It is claimed that His Honour was wrong to have included in the notional profit the sum of $42,274 which he found to be an understatement of sales in the company’s financial statements.
It is said that there was not such an understatement.
In my opinion, the plaintiff has failed to establish that His Honour erred in that regard and that the evidence that His Honour relied upon for his conclusion was not reliable.
The last significant figure in the adjustments is the sum of $55,521 being interest which was not paid to the Bank of Singapore during the relevant period.
I think the plaintiff is correct in asserting that that sum ought to be offset against the notional profit arrived at by the Trial Judge.
In due course the businesses were sold and the proceeds of the sale were used to reduce the indebtedness to the Bank of Singapore.
If the company had not traded during the relevant period the businesses could have been sold at an earlier time and the Bank of Singapore’s loan reduced thereby reducing the interest payable to the bank.
There had to be some reduction to the notional profit for the unpaid interest to the Bank of Singapore over the relevant period.
Even if that amount was deducted from the notional profit it is clear that that amount and the group tax liability, which also should have been brought to account, would not mean that the company made a loss or thereby suffered damage during the relevant period.

In my opinion, the plaintiff failed to establish that the contravention by the directors gave rise to a loss or damage.
The appeal should be dismissed.
WICKS J: I would dismiss the appeal for the reasons given by Lander J.

Adjustments per plaintiffs’ case
(152,477)	Debt to Mobil at 12 March 1992
(91,967)	Amortisation of goodwill
(52,499	Depreciation of videos
(7,244)	Depreciation of plant & equipment
(4,898)	Depreciation of motor vehicles
(40,773)	Group tax liability at 12 March 1992
5,895	Add back group tax
(55,521)	Interest to BOSA
34,886	Add back interest
(42,274)	Add back understatement of sales
2,675	Add back interest
Total adjustments	(404.197)
Adjusted Loss	261,738

[2002] SASC 68

6 March 2002