Simar Transit Mixers Pty Ltd v Baryczka & Baryczka No. Scgrg-97-1029 Judgment No. S6723

[1998] SASC 6723

SIMAR TRANSIT MIXERS PTY LTD (IN LIQUIDATION)
ACN 008 192 989 v BARYCZKA and BARYCZKA

Full Court
Coram:  Doyle CJ, Millhouse and Nyland JJ

Millhouse J

Appeal from a District Court Judge

It is a sad story, both matrimonially and commercially.  The learned judge set out the facts at length.  I shall do no more than give a summary sufficient to decide the points taken on appeal.

Simes & Martin Pty Ltd was an old South Australian business.  It was involved in the cement industry, particularly in engineering.  The company fell to a concern interstate of which Mr George Baryczka, the first respondent, an engineer, was a senior employee.  He and his family lived in Melbourne.  He spent a good deal of time in Adelaide in connection with his work.  This put a strain on his marriage. He was able, by the sale of the family home in Melbourne, to buy Simes & Martin from his employer.  The family moved to Adelaide.  The business venture went wrong.  Simes & Martin failed.  It seems that Mr Baryczka was not good at handling the money side of things.  Mrs Shiela Baryczka, the second respondent, certainly thought so.

Mr and Mrs Baryczka decided to set up in business again, as a successor to Simes & Martin.  This time Mrs Baryczka insisted on running the business.  Mr Baryczka did not like that.  He did not like the idea of "working" for his wife.  As it was the only way to keep the family together he agreed. 

They bought a shelf company in 1990 and changed its name to Simar Transit Mixers Pty Ltd.  The company is the appellant in this action.  Its business was to make and repair truck mounted cement mixer bowls and concrete batch plant machinery.

To make the arrangement with his wife a bit more palatable to him, Mr Baryczka was to be regarded as a consultant rather than an employee.  The learned judge found that Mr Baryczka was an independent contractor.  This finding is not challenged.

In 1991 Mrs Baryczka bought a house.  The respondents' parents helped out with money but Mrs Baryczka still had to get a mortgage: the monthly repayment on it was $943.00

Up to then Mr Baryczka had been working, in effect, for his keep and pocket money.  He made an offer to his wife who, after some demur, agreed to it.  The offer was that he would in future be paid $955.00 per month plus 45% of the profits of the business.  The $953.00 was automatically debited towards the mortgage repayments.

Alas! Despite the efforts of both respondents the business failed again.  Mrs Baryczka had been working full time in it but in 1994 she took another job to keep things going financially.  She tried to cope with the affairs of the company after hours and had taken on an impossible workload.  This resulted in a nervous breakdown.  She and her husband separated.  Mr Baryczka perforce had to take over the day to day running of the company until it ceased to trade in August 1995.

Cash flow had been a problem from 1991 but in one way or another all creditors were eventually paid.  That is, all creditors but the Australian Taxation Office.  During this time the monthly mortgage repayments were always made. The total repayment was $47,664.00 to the date of cesser of trading.

In the later months of 1994, the Australian Taxation Office undertook a sales tax audit.  This resulted in the company being forced into liquidation, in September 1995.  

The financial records of the appellant from 1992 had been poor to non-existent.  The liquidator has not been able to piece a coherent picture together for the years 1992, 1993 or 1994.

The respondents in these proceedings are sued pursuant to s232(6) of the Corporations Law:-

"(6)   An officer or employee of a corporation must not, in relevant

circumstances, make improper use of his or her position as such an officer or employee, to gain, directly or indirectly, an advantage for himself or herself or for any other person or to cause detriment to the corporation."

The complaint is that all through this time when the company was insolvent it continued to make the mortgage repayments.  Thus the respondents gained the advantage of keeping the house, a roof over the heads of themselves and their family.  It is contended that this was an improper use of their positions.

Mr Craig McCarthy,  for the appellant, was inclined to argue that the very fact of the arrangement that Mr Baryczka be paid and that his pay go towards the mortgage was improper.  There is no reason why the arrangement should necessarily be regarded as improper. There was no suggestion that Mr Baryczka’s pay was too much.  If he wanted to use his pay for a specific purpose, then so be it.  The impropriety arose only when the respondents knew or were deemed to know that the company was insolvent and should therefore cease trading. From then on there could be no justification for keeping up the payments on the mortgage, even for paying Mr Baryczka at all.

The crucial point then is when the respondents realised that the company was hopelessly insolvent and unable to trade its way out of its financial difficulties.

The finding of the learned judge on that point is:-

"     I find that the defendants knew or should have reasonably known at the latest by about the month of March 1995 that the plaintiff could not pay its debts as they fell due.  Thereafter the plaintiff continued trading in circumstances where Mrs Baryczka should have taken steps to put the plaintiff into liquidation.  I accept that she was hoping that, by continued trading, the plaintiff would repay all its trading debts, but in face of the demand for penalty tax and against a background of a recent sales tax audit with the potential liability that implied, no competent director in her position would have permitted that.  In my opinion by March 1995, when the plaintiff as Mrs Baryczka knew was hopelessly insolvent, Mrs  Baryczka was intent not only in looking to do what she could to repay trading creditors but also to keep the plaintiff afloat so that those employed by it, including Mr Baryczka, would continue to receive wages or other remuneration. And of course she had an interest, the payment of her mortgage, in seeing to the continued engagement of Mr Baryczka at his agreed rate.  Not to take immediate steps to close the plaintiff's business and to place it in liquidation but, as she did, permit the plaintiff to continue in business secured for a time an advantage to her, namely the continuing repayment of her mortgage instalments
…
     As I have earlier found, Mr Baryczka from in the month of March 1995, was an officer of the plaintiff - he was effectively in charge of its business in an executive position.  I do not accept his evidence that until May 1995 or thereabouts he did not know the plaintiff was insolvent.  I find he knew that to be the case in the month of March 1995, yet he with that knowledge joined with  Mrs Baryczka in continuing the plaintiff in business when he knew that would, amongst to other things directly advantage Mrs Baryczka (and indirectly himself) by reason of the repayments to the Bank."

The learned judge made a finding of fact that it was not until March 1995 that the respondents knew the company could not pay its debts as they fell due. It was then that they began making an improper use of their positions.  Having made the finding, he gave the appellant judgment for an amount equal to the mortgage repayments made between March and September 1995, $5,724.00, instead of the $47,664.00 claimed, being equal to the repayments since August 1991.

The first ground of appeal involved the appellant asking us to find the respondents liable pursuant to section 232(6) of the Corporations Law, from 14 February 1992. This ground was quickly abandoned during argument and the alternative to ground one was argued, this being that the respondents be held liable from 16 March 1994.

The appellants base this submission on two important pieces of evidence relating to that date.  The first is a letter dated 16 March 1994 from the respondents to the Australian Taxation Office, this being the subject matter of exhibit D28.  The second involved the trial judge’s finding that Mrs Baryczka had obtained further employment in addition to her position as director of the company.   At page 26 of the judgment, the learned trial judge said:-

“     It is not clear, because the defendants, as I find, failed to keep any proper accounts, what the financial position of the plaintiff was by the end of 1994, but it appears to have been serious enough (and to have deteriorated since March 1994 Exhibit D28) for Mrs Baryczka to obtain other employment for three or four days per week to, in some way, prop up the plaintiff’s position.”

It is at this date, 16 March 1994, that the appellants argue the company was ‘hopelessly insolvent’.  I do not accept the argument.  The letter, marked exhibit D28, of 16 March 1994, details a means by which the respondents intend to trade themselves out of their financial difficulty.  In essence, the respondents are asking the Australian Taxation Office for an extension of time.  There was no reason at this stage to consider that the extension of time would not be granted, given the Tax Office had been supportive and cooperative on a number of previous occasions.

In determining whether a director had reasonable grounds to expect insolvency, or an inability to pay debts as they fall due, account may be taken of any extensions of time granted by creditors.  This position was made explicitly clear in Pioneer Concrete (VIC) Pty Ltd v Stule (No 2) (1996) 20 ACSR 480, a decision of the Supreme Court of Victoria, in which Hayne JA in dealing with s556(1) of the Companies (VIC) Code said at page 482:

“     It may perhaps have been possible to say, as counsel for the appellant submitted, that Larsson’s evidence about group tax arrears could have been taken to reveal insolvency.

…
     But that evidence had to be assessed in the light of all the available material, including evidence which revealed: apparently continuing support to the company from its bankers despite the company routinely exceeding its overdraft limit; well advanced plans to raise further sums on the security of real property (plans which were, on one view of the evidence, still on foot in April, May and June 1990); some question about repayment of refunds due under the Prescribed Payments Scheme; some possibility of a continuing dispute with state tax authorities about the penalty tax claimed in respect of payroll tax and WorkCare levies; the possibility of realising some assets quickly to improve cash flow; the possibility (if not the reasonably confident expectation) of securing further contracts.”

The letter of 16 March 1994 was really asking for an extension of time.  The request amounted to more than a ‘vain hope’ or ‘sheer optimism’.  Given the history of the relationship between the respondents and the Australian Taxation Office, it was reasonable to assume that the proposal would be accepted.  The matters referred to in the letter and the extra work undertaken by Mrs Baryczka, are indicators that the respondents did not consider the company to be ‘hopelessly insolvent’ on 16 March 1994. 

As well, the learned trial judge cited a passage from the decision of the High Court in R v Byrnes (1995) 183 CLR 501 @ 514 - 515 per Brennan, Deane, Toohey & Gaudron JJ in which the Court says :

“When impropriety is said to consist in an abuse of power, the state of mind of the alleged offender is important … But impropriety is not restricted to abuse of power.  It may consist in doing of an Act (sic) which a director or officer knows or ought to know that he has no authority to do”

In the present case His Honour found knowledge did not go back before March 1995.  It was a plain finding of fact.  Mr McCarthy did his best to persuade us by copious reference to the evidence that the learned judge was wrong.  So far as I am concerned he failed.  He no doubt put the same arguments at trial. The learned judge was entitled on the evidence to make the finding which he did.  He found no knowledge and therefore no improper use before March 1995.  Caedit questio.

I suggest that this ground of appeal fails.

A second ground of appeal was that the respondents had failed to keep proper records. The appellants argued that the respondents' failure or inability to keep proper records and books of account, should see the company deemed insolvent as a matter of law and therefore subject to liability pursuant to section 232(6) of the Corporations Law.

This argument faces a number of obstacles. 

In order to rely on a presumption of insolvency based on improper records one must qualify under s588E(4)  which says:-

“(4)   Subject to subsections (5), (6) and (7), if it is proved that the            
       company:

(a)    has contravened subsection 289 (1) by failing to keep accounting

records that correctly record and explain:

(i) its transactions (including any transactions as trustee)

during a particular period (“the relevant period”); and

(ii) its financial position during the relevant period; or by

failing to keep such accounting records in the manner 
     required by paragraph 289 (1) (b); or

(b)    has contravened subsection 289 (2) by failing to retain such

accounting records for the period required by that subsection;

it must be presumed that the company was insolvent throughout the relevant period.”

The presumption of deemed insolvency in s588E(4) only arises if the action is for the purpose of recovery proceedings.  This is made quite clear by s588E(2).  It was admitted by Mr McCarthy that these are not recovery proceedings and so the presumption is of no use to him.

Mr McCarthy went further, to argue that s289 alone could lead to a deemed insolvency.  I do not accept that.  Nowhere in s289 is there a statement that a failure to keep proper records will lead to a presumption that a company is insolvent.  Furthermore, Mr McCarthy’s proposition does not sit well with s588E(4)  which creates a presumption of insolvency in the case of recovery proceedings.

While it is unnecessary to deal further with this argument, it is worth noting, that even if the appellant had shewn a presumption of insolvency based on improper records, it would still not have succeeded. If we accept that the respondents failed to keep proper records and were deemed insolvent, the appellant pleaded s232(6) which is improper use of position. It would then need to shew that the respondents' purpose was not to try and keep the company going but an attempt to look after themselves. This takes us back to the first ground of appeal.

I suggest that the appeal be dismissed.

DOYLE CJ

In my opinion the appeal should be dismissed.  I agree in substance with the reasons of Millhouse J.

The claim made, or the claim in respect of some of the amounts claimed, might have been brought under provisions of the Corporations Law that regulate the recovery of property or compensation for the benefit of creditors of an insolvent company. That was not done. The claim was based exclusively on s232(6) of the Corporations Law.

The success of the claim required a finding that Mrs Baryczka made improper use of her position as a director to gain an advantage for herself.

The judge’s finding was that the making of the agreement between the company and Mr Baryczka, under which Mr Baryczka was paid monthly for his services, involved no improper use by Mrs Baryczka of her position.  The judge found that the agreement was made in the interests of, and for the benefit of, the company.  The purpose of the agreement was to secure for the company the services of Mr Baryczka.  The judge found that the purpose of the agreement was not to gain an advantage for Mrs Baryczka or for any other person.  In my opinion, no error in that finding has been demonstrated.

It follows, in my opinion, that the claim to recover moneys paid under the agreement could not succeed unless there was a change of circumstances such that it became improper for Mrs Baryczka to continue the employment of Mr Baryczka under the agreement, or to continue to make payments to Mr Baryczka under the agreement.

As to that, the judge found that until March 1995 Mrs Baryczka believed that the company could trade its way out of trouble.  He found that she believed that all creditors would be paid under arrangements that she had made with them, although payment was to be made over a period of time.  The effect of the judge’s findings appears to be that not only was that a genuine belief but that it was, under all the circumstances, a reasonable belief.  The inadequate financial records of the company made things difficult for the judge, but he found that there was some support for Mrs Baryczka’s belief in the events that transpired at the relevant time.  In considering the question of whether Mrs Baryczka made improper use of her position, it is relevant to emphasise the fact that the continuation of payments to Mr Baryczka was essential to enable the company to continue to trade.  It was only by doing so that the creditors were likely to receive payment.

The judge found that by about March 1995 Mrs Baryczka knew, or should reasonably have known, that the company could not pay its debts as they fell due.  The judge found that from that time Mrs Baryczka was motivated by a desire to protect the payments being made by Mr Baryczka, in reduction of her indebtedness, from the moneys that the company paid to Mr Baryczka.  It was on that basis that the judge concluded that, from that time, Mrs Baryczka made improper use of her position by continuing Mr Baryczka’s employment and by continuing to cause the company to make payments to him.

That latter finding was not, of course, the subject of challenge. The complaint on appeal was that a similar finding should have been made in relation to an earlier stage of events. The test of impropriety under s232(6) may well, in a case like this, be an objective one: see R v Byrnes (1995) 183 CLR 501 at 514-515. The application of the provision to a case like this is not straightforward. However, treating the test as an objective one for present purposes, in my opinion it has not been demonstrated that the judge erred in refusing to find that Mrs Baryczka breached the standards of conduct that would be expected of a person in her position. He found that it was not a breach of those standards to continue to make payments to Mr Baryczka under the agreement while she thought the company was solvent and could trade its way out of difficulty, and until she realised or should have realised that that belief was unfounded. The thrust of the appellant’s argument was that Mrs Baryczka knew, or should have known, that the company was unable to pay its debts at an earlier stage than March 1995. In my opinion the criticisms of the judge’s failure to make that finding do not succeed. While that is not, in itself, necessarily decisive of the outcome of the appeal, for the reasons that I have indicated I find no error in the judge’s conclusions.

For those reasons, I agree with Millhouse J that the appeal should be dismissed.

NYLAND J

I agree that the appeal should be dismissed.