Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation

[2001] NSWSC 621

Reported Decision: (2001) 39 ACSR 305
(2001) 19 ACLC 1513
[2001] ACL Rep 120 NSW 113
53 NSWLR 213

New South Wales

Supreme Court

CITATION:	Southern Cross Interiors Pty Ltd and Anor v. Deputy Commissioner of Taxation and Ors. [2001] NSWSC 621
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 3501/00
HEARING DATE(S):	5-6 July, 2001
JUDGMENT DATE:	31 August 2001
PARTIES :	Christopher John Palmer (First Plaintiff) Southern Cross Interiors Pty Limited [In Liquidation] (Second Plaintiff) Deputy Commissioner of Taxation (Defendant/Applicant) Robert Paul Clark (First Respondent) Carole Ellyn Martin (Second Respondent)
JUDGMENT OF:	Palmer J

COUNSEL :	Anthony Lo Surdo (Plaintiffs) Lee Aitken (Defendant/Applicant) Todd A. Alexis (Respondents)
SOLICITORS:	Peter M. Wayne Associates (Plaintiffs) Australian Government Solicitor (Defendant/Applicant) Whittens (Respondents)
CATCHWORDS:	CORPORATIONS - UNFAIR PREFERENCE - Whether evidence that creditors have not strictly enforced terms for payment produces result that debts are not payable until such time as enforced by statutory demand - whether there is a distinction between a "debt due" and a "debt payable" for purposes of test of insolvency in s.95A(1) Corporations Act - whether, and to what extent, Court may have regard to normal indulgences granted by creditors in requiring payment - principles discussed. - INSOLVENT TRADING - DEFENCES - Cross claim by defendant against first and second respondents for indemnity - insolvent trading - first and second respondents, husband and wife, sole directors of company - wife accepts appointment as director at husband's request - wife told appointment a formality - wife unaware of duties of a company director - wife does not participate in management of company - whether, because of trust and confidence placed in husband, wife has a "good reason" for non-participation so as to afford defence to insolvent trading claim - principles discussed. - SEXUALLY TRANSMITTED DEBT - Legal recognition of phenomenon - whether liability for insolvent trading a species of sexually transmitted debt - whether ignorance of duties of director induced by trust and confidence of marital relationship should excuse spouse from legal consequences of accepting company directorship - competing policy considerations - discussion of principles.
LEGISLATION CITED:	Bankruptcy Act 1924 - s.95 Bankruptcy Act (Cth) 1924-1965 - s.95(1) Bankruptcy Act 1966 - s.122(1) Companies Act, 1961 - s.293 Companies (NSW) Code - s.556(1), s.556(2)(b) Corporations Act 2001 - s.95A, s.459B, s.459E, s.588FC, s.588FE, s.588FF, s.588FGA, s.588FGB, s.588G, s.588H, s.588M, s.588R, s.592 Income Tax Assessment Act, 1936 - s.221F(5), s.221YHDC(2) Uniform Companies Acts - s.303
CASES CITED:	- Bank of Australasia v. Hall (1907) 4 CLR 1514 - Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 - Calzaturificio Zenith Pty Ltd (In liq) v. NSW Leather & Trading Co Pty Ltd [1970] VR 605 - Capricorn Society Ltd v Linke (1996) 14 ACLC 431 - Carrier Airconditioning Pty Ltd v. Kurda (1993) 11 ACSR 247 - Commonwealth Bank of Australia v. Friedrich (1991) 5 ACSR 115 - Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625 - Credit Corporation Australia Pty Ltd v Atkins (1999) 30 ACSR 727 - Cuthbertson and Richards Sawmills Pty Ltd v Thomas (1998) 28 ACSR 310 - Re Elgar Heights Pty Ltd (1985) 9 ACLR 846 - Emwest Products Pty Ltd v Olifent (1996) 22 ACSR 202 - Re Fastnedge, ex parte Kemp (1874) LR 9 Ch App 383 - Garcia v. National Australia Bank Ltd (1998) 194 CLR 395 - John Graham Reprographics Pty Ltd v. Steffens (1987) 12 ACLR 779 - Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112 - Group Four Industries v. Brosnan (1992) 59 SASR 22 - Guthrie v Radio Frequency Systems Pty Ltd (2000) 34 ACSR 572 - Hall v Aust-Amec Pty Ltd (unrep., FCA Lindgren J, 20 September 1994) - Hamilton v BHP Steel (JLA) Ltd (1995) 13 ACLC 1548 - Heide Pty Ltd v Lester (1990) 3 ACSR 159 - Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103 - London & Southwestern Railway Co v Blackmore (1870) LR 4 HL 610 - Melbase Corporation Pty Ltd v. Segenhoe Ltd (1995) 17 ACSR 187 - Metal Manufacturers Ltd v. Lewis (1986) 11 ACLR 122; 13 ACLR 315 - Morley v. Statewide Tobacco Services Ltd [1993] 1 VR 423 - Re New World Alliance Pty Ltd; Sycotex Pty Ltd v. Baseler (1994) 51 FCR 425 - Re Newark Pty Ltd (In liq); Taylor v. Carroll (1991) 6 ACSR 255 - Norfolk Plumbing Supplies Pty Ltd v. Commonwealth Bank of Australia (1992) 6 ACSR 601 - Opera House Investments Pty Ltd v. Devon Buildings Pty Ltd (1936) 55 CLR 110 - Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 - Pioneer Concrete Pty Ltd v. Ellston (1985) 10 ACLR 289 - Pioneer Concrete (Vic) Pty Ltd v. Stule (No.2) (1996) 20 ACSR 480 - Powell v. Fryer (2001) 37 ACSR 589 - Qantas Airways Ltd v Gubbins (1992) 28 NSWLR 26 - Rema Industries & Services Pty Ltd v. Coad (1992) 7 ACSR 251 - Sandell v Porter (1966) 115 CLR 666 - Sheahan v Hertz Australia Pty Ltd (1995) 16 ACSR 765 - Shapowloff v. Dunn (1981) 148 CLR 72 - Standard Chartered Bank of Australia Ltd v Antico (No 2) (1995) 38 NSWLR 290 - Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 - 3M Australia Pty Ltd v. Kemish (1986) 10 ACLR 371 - Re Toowong Trading Pty Ltd (In liq) (1988) 13 ACLR 121 - Tourprint International Pty Ltd (In liq) v. Bott (1999) 32 ACSR 201 - Yerkey v. Jones (1939) 63 CLR 649 --- - G.J. Hamilton "An Insolvency Riddle: When is a Debt which is Due Not a Debt which is Due and Payable", (1997), 5 Insolvency Law Journal 78. - Australian Law Reform Commission’s Report Equality Before the Law: Women’s Equality (1994) Report No.69 Pt II - Bailey "Sexually transmitted debts: Criticisms and Prospects for Reform" (Auckland University Law Review, 8(4) 1999: p.1001 - Baron "The Free Exercise of Her Will: Women and Emotionally Transmitted Debt" (Law in Context 13(1) 1995: 23) - Fehlberg "Money and Marriage: Sexually Transmitted Debt in England" International Journal of Law, Policy and the Family, Vol 11 No 3, December 1997: p.320 - Fehlberg "Sexually Transmitted Debt" (1997 Clarendon Press) - Howell "Sexually Transmitted Debt: a Feminist Analysis of Laws Regulating Guarantors and Co-borrowers", Australian Feminist Law Journal (4) March 1995: 93 - Kaye "Equity’s Treatment of Sexually Transmitted Debt" (1997, 5(1) Feminist Legal Studies 35)
DECISION:	Judgment for plaintiff against defendant in respect of preference claim; declaration that first respondent liable to indemnify defendant in respect of judgment obtained against it by plaintiff; judgment for second respondent on defendant's claim against her.

Introduction

1    These proceedings were commenced under the Corporations Law and were heard on 5 and 6 July 2001. At the conclusion of argument I reserved judgment. On 15 July 2001 the Corporations Act 2001 came into effect and pursuant to s.1383 and s.1399 of that Act the proceedings are now deemed to be proceedings under the Corporations Act . I will refer hereafter to all sections of the Corporations Act by the prefix “CA”. 2    The plaintiff, Southern Cross Interiors Pty Ltd (In liquidation) (“SCI”) carried on a business of constructing and installing partitioning in commercial premises. In mid-1997 its major debtor failed, a circumstance which in turn placed SCI in financial difficulty. On 30 September 1997 an external administrator was appointed to the company and on 27 October 1997 it was wound up. By virtue of CA ss.513B, 513C and 435C, the winding-up commenced on 30 September 1997. 3    On 8 August 2000 SCI’s liquidator, Mr Palmer, commenced these proceedings seeking an order against the Deputy Commissioner of Taxation (“DCT”) pursuant to CA s.588FA, s.588FE and s.588FF(1) for the recovery of $208,737.44 as an unfair preference, and for interest thereon. That amount was the total sum paid by SCI to the Australian Taxation Office (“ATO”) between 22 May 1997 and 19 August 1997 in respect of Group Tax debts due by the company to the ATO under s.221F(5) of the Income Tax Assessment Act, 1936 (“ITAA”) and in respect prescribed payment scheme debts due under s.221YHDC(2) ITAA. 4 The only defence to the liquidator’s preference claim which is raised by the DCT is that the liquidator has failed to prove that SCI was insolvent at the time of the payments within the meaning of CA s.95A so that, it is submitted, the liquidator has not proved that the payments were insolvent transactions within the meaning of CA s.588FC and, therefore, voidable under CA s.588FE(2). 5 In addition to defending the liquidator’s claim the DCT, by an application in these proceedings filed on 1 September 2000, sought a declaration that the two directors of SCI who were in office at the relevant times, Mr and Mrs Clark, are liable to indemnify the DCT pursuant to CA s.588FGA(2) in respect of all repayments which the DCT might be liable to make to the liquidator. 6 In the affidavits filed on their behalf, Mr and Mrs Clark have raised three matters by way of response. The formulation of these three matters has been vague in some respects because the case as between the DCT and Mr and Mrs Clark has not proceeded on pleadings. 7 First, Mr and Mrs Clark say that under a Deed of Release dated 11 September 1998 between themselves and the liquidator, the liquidator is prevented from bringing the preference proceedings against the DCT which have, in turn led to the DCT’s claim against them. There is no express term in the Deed of Release which is clearly and unequivocally to this effect, but they say that such prohibition arises on the true construction of the Deed. 8 Second, and in the alternative, Mr and Mrs Clark say that on 21 July 1998 the liquidator represented to their accountant, Mr Armstrong, that if Mr and Mrs Clark paid a substantial sum to the liquidator in settlement of a certain claim which the liquidator was then maintaining against them, then the liquidator would not do anything in the course of the liquidation of SCI which might result in any further claim being made against them. Mr and Mrs Clark say that, induced by that representation, they entered into a Deed of Release with the liquidator on 11 September 1998 and paid him the sum of $75,000. Accordingly, they say, the liquidator is now estopped from prosecuting to finality his claim against the DCT because that claim results in the DCT’s claim against them for an indemnity under CA s.588FGA. 9 The consequence of Mr and Mrs Clark succeeding in either of these two contentions has not been made clear as, in the absence of a pleading or cross claim, no specific relief against the liquidator is sought. However, if it were found that the liquidator had breached a term of the Deed of Release in making and prosecuting a preference claim against the DCT, then Mr and Mrs Clark could elect whether to seek an injunction restraining the liquidator from taking any further step in the proceedings against the DCT – for example, by entering or enforcing any judgment obtained – or they could elect to claim damages from the liquidator equal to any amount which they might be required to pay to the DCT if the DCT’s claim against them succeeds. 10 Likewise, if it were found that the liquidator is estopped from bringing or maintaining his claim against the DCT, then Mr and Mrs Clark might seek an injunction restraining the liquidator from taking any step to enforce a judgment which he obtains against the DCT. 11 The third matter raised by Mr and Mrs Clark is a defence which is said to avail only Mrs Clark. CA s.588FGB(5) provides that it is a defence to a claim by the DCT against a director for indemnity under CA s.588FGA(2) that, “because of illness or for some other good reason” , the director did not take part in the management of the company at the time that the company paid to the DCT the monies ultimately recovered by the liquidator as a preference. Mr and Mrs Clark say, and it is not contested by the DCT, that at no time during the period in which Mrs Clark was a director of SCI did she participate in the management of the company in any degree at all. Mrs Clark was not ill at any relevant time. Accordingly, the sole issue in this defence is whether Mrs Clark did not participate in management “for some good reason” . 12    I will deal with each of these issues in turn. Solvency – the facts 13    The DCT’s case is that the liquidator has failed to discharge the onus which he bears of proving that SCI was insolvent at any time from 22 May 1997, when the first of the subject payments to the DCT was made, to 19 August 1997, when the last of the payments was made. 14    In order to prove insolvency, the liquidator relied upon the expert report of Mr Ian Struthers, an experienced accountant and an Official Liquidator. Mr Struthers examined the books and records of SCI and concluded that the company was insolvent from at least 30 April 1997. He supported his conclusions by a number of facts and circumstances, which I summarise in the following paragraphs. 15    Between 30 April 1997 and 30 September 1997 SCI’s deficiency of current assets to current liabilities had risen from 4% to 140%. The growing deficiency in current assets reduced the cash funds available to the company in order to meet its liabilities as they fell due. 16    SCI had no significant fixed assets which could be sold quickly in order to alleviate its liquidity problems. 17    The company’s year to date trading losses increased from $7,841 in April 1997 to $205,634 in August 1997. 18    The company’s creditors’ trial balance for the months of July and August 1997 disclose that debts due to creditors for 90 days and over totalled $338,133.51, which was 42.41% of the total creditors outstanding at that time. 19    SCI debtors’ trial balance as at 31 August 1997 disclosed outstanding debtors of 90 days and over in the sum of $428,157.22, which was 51.72% of the total balance outstanding at that time of $827,804.38. This overdue balance, in Mr Struthers’ opinion, reflected slow cash collections, causing difficulties for the company’s overall liquidity position. 20    There was evidence that the company was drawing cheques in favour of creditors but not releasing them for payment because the amounts of the cheques were in excess of the company’s credit balances. By reference to the company’s bank statements and cash books, Mr Struthers concluded that as at 30 April 1997 the company had drawn but not released cheques totalling $46,822.61. As at 31 May 1997 the figure was $110,889.52. As at 30 June 1997 the figure was $138,931.69. As at 31 July 1997 the figure was $81,043.69. As at 31 August 1997 the figure was $73,906.12. As at 30 September 1997 the figure was $18,358.09. 21    The second largest creditor of the company, Plaster Master, had outstanding invoices totalling $149,641 which had not been paid for a period of six months. Normal terms of trade were said to be thirty days. 22    The company’s outstanding debts to the ATO as at 30 April 1997 were $102,945 in respect of group tax and $409,332 in respect of prescribed payment scheme debts. Some debts due to the ATO had been outstanding since July 1995. Solvency – legal principles 23    There was no challenge to the accuracy of the facts stated by Mr Struthers. Mr Aitken, who appeared for the DCT, attacked Mr Struthers’ conclusion of insolvency essentially upon one point. He elicited from Mr Struthers that in the course of his investigation of SCI’s financial position, he had not enquired of the liquidator whether the company had received, prior to its demise, any letters of demand from creditors, statutory demands under CA s.459E or summonses for the payment of debts. Mr Struthers admitted that he had no information as to whether or not any of the company’s creditors had granted it time to pay or was forbearing to insist on payment on the date specified in the creditor’s normal trading terms. The DCT itself adduced no evidence of any agreements between SCI and its creditors extending the time for payment of debts. 24    In an intriguing submission, Mr Aitken pointed to the fact that during the period from 30 April to 30 September 1997 a substantial number of trade creditors’ debts had been outstanding for more than thirty days, which was the stipulated time for payment under SCI’s normal trading terms with its creditors. This evidence, said Mr Aitken, coupled with Mr Struthers’ concession that he did not know whether any creditors had been demanding payment, led to the inference that creditors had been content not to press for payment strictly in accordance with their normal trading terms. Accordingly, so Mr Aitken’s submission proceeded, although the debts of such creditors may have due within thirty days of their accounts, the debts were not in fact payable at that time. The debts were payable only when the creditors issued statutory notices of demand under CA s.459E and not before. 25    There was no evidence, said Mr Aitken, that any statutory notices of demand had been served on SCI during the relation back period, that is, from 30 April to 30 September 1997. Therefore there was no evidence that any one of the debts of the company relied upon by Mr Struthers to support his conclusion of insolvency was actually payable during that time. As the test of insolvency prescribed by CA s.95A(1) depended upon inability to pay all debts “as and when they became due and payable ” and as there was no evidence that any debt of SCI due between 30 April and 30 September 1997 had “become payable”, it followed, said Mr Aitken with characteristic panache, that the liquidator had failed to prove insolvency for the purposes of CA s.588FC and s.588FE(2). 26 The proposition that a contract debt may “become due” on the date stipulated for payment in the contract but not “become payable” on that date may seem a surprising one. In ordinary usage, “due” and “payable” are often synonymous. According to the Shorter Oxford English Dictionary , the primary definition of “due” is “owing or payable as an obligation or debt” and the primary definition of “payable” is “falling due (usually at or on a specified date)” . 27    It has long been recognised in the authorities that, depending on the context, “due” may mean “owing” rather than “payable”. If one assigns “all debts due to me” one does not assign only those debts payable at the time of assignment, one assigns all debts presently outstanding including those payable at a future time. The distinction is articulated in the Latin phrase “debitum in praesenti solvendum in futuro” and has been noted in many cases concerned with the interpretation of the test of insolvency in earlier bankruptcy legislation. 28    For example, in Re Fastnedge, ex parte Kemp (1874) LR 9 Ch App 383, Mellish LJ, having adverted to the different meanings of “due” in different contexts, said at p.388:
“Illustrations of these various meanings may be found in the [Bankruptcy Act, 1899] itself. In the 6th subsection of the 6th section it is enacted that it shall be an act of bankruptcy if a debtor who has been served with a debtor’s summons requiring him to pay a sum due of not less than £50 has neglected to pay that sum. It is obvious that in this place ‘due’ must mean ‘payable’, because it would be absurd to suppose that a man could be made a bankrupt for not paying a debt which was not yet payable.”
29    Many of the cases which have considered which of the two meanings of “due” is applicable in the context of the companies legislation have been reviewed by Ormiston J. in a scholarly and illuminating judgment in Re Elgar Heights Pty Ltd (1985) 9 ACLR 846, at 851ff. That review shows two things. The first is that in the United Kingdom and Australia “due” has been uniformly construed as meaning “payable” in those sections of the companies legislation which are concerned with ascertaining a company’s ability to pay its debts. The second is that the question whether “due” means “payable” or merely “owing” is a frequently litigated one. 30 Doubtless, it was in the hope of reducing the scope for argument as to the test of a company’s insolvency and in order to emphasise that the test was concerned only with a company’s ability to pay its debts when they became payable that the drafter of CA s.95A(1) indulged in what might be described as a surfeit of pleonasms. The words “as and when” place emphasis upon the time at which the character of debts is to be ascertained, although “as” and “when” are synonymous in this context. Likewise, the words “become due and payable” place emphasis on the character of the debts which is to be ascertained although, again, the words “due” and “payable” are clearly synonymous in this context. 31 Unfortunately, the use of the two words “due” and “payable” when one would have sufficed has made room for the argument that if two separate words are used in the definition of insolvency then each word must have different work to do. Thus, Mr Aitkin has had a respectable, if tenuous, toehold for his submission that, on the true construction of CA s.95A(1), the time at which a debt “becomes due” may be different from the time at which it “becomes payable”. The submission has some encouragement from at least one academic writer: see G.J. Hamilton “An Insolvency Riddle: When is a Debt which is Due Not a Debt which is Due and Payable” , (1997) 5 Insolvency Law Journal 78. 32 The sooner this incipient heresy is scotched, the better. In a claim for recovery of an unfair preference, the test of insolvency prescribed by CA s.95A(1) is no different in substance from that prescribed by its predecessors, s.95 of the Bankruptcy Act, 1924 and s.122(1) of the Bankruptcy Act, 1966 . That test is simply whether the company is able to pay its debts as they become payable: see Carrier Air Conditioning Pty Ltd v. Kurda (1993) 11 ACSR 247, at 254 per Debelle J; Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187, at 199. 33 I think that Mr Aitken’s real point does not depend upon a distinction being drawn between a “debt due” and a “debt payable” for the purposes of CA s.95A(1). His real point is that the liquidator has failed to prove that any debts of SCI were payable during the relation back period. He says that on the available evidence in this case an inference should be drawn that all creditors of SCI waived their rights to payment at the times stipulated in their contracts. Accordingly, he says, the debts became payable on demand and there is no evidence of any demand having been made by any creditor during the relation back period. 34 Whether, and in what circumstances, the Court can determine a company’s inability to pay its debts by taking into account the apparent laxity of its creditors in pressing for prompt payment has been the subject of much judicial attention. There is conflict in the authorities as to whether, for the purpose of ascertaining insolvency, a trading debt is to be regarded as payable when it is required to be paid under the terms of the relevant contract or whether the Court can take into account normal or likely indulgences granted to the company by its creditors. The cases recognise that the former proposition may produce a test of unrealistic rigidity while the latter may produce a test which is so imprecise as to be impossible of consistent and principled application. Many judges have, therefore, struggled to find some middle ground between the two competing views. The result, unfortunately, is that the law on this point is in a state of some uncertainty. The point is critical in the present case because it is upon this question of law alone that the DCT’s defence to the liquidator’s claim rests. 35 So far as is presently relevant, three types of case have considered the test of insolvency, viz. applications to wind up a company on the ground of insolvency, claims to recover preferences, and claims to recover particular debts from directors on the ground of insolvent trading. Prior to the enactment of CA s.588G(1)(b), which introduced the necessity to prove insolvency as defined by CA s.95A, the plaintiff in an insolvent trading case had to prove only that there were “reasonable grounds to expect” insolvency at the time that the relevant debt was contracted: see e.g. CA s.592(1), s.556(1) Companies (NSW) Code (“the Code”). The necessity to prove actual insolvency was always common to winding up and preference cases. For the purposes of this discussion, therefore winding up and preference cases may be treated as in one category, and insolvent trading cases may be treated as in a different category. Statements of principle as to insolvency in one category of case have often been cited in the other category of case. 36    The three cases most frequently referred to as the origins of the differing views as to when a debt is to be regarded as payable are Calzaturificio Zenith Pty Ltd (In liq) v NSW Leather & Trading Co Pty Ltd [1970] VR 605, Pioneer Concrete Pty Ltd v Ellston (1985) 10 ACLR 289, and 3M Australia Pty Ltd v. Kemish (1986) 10 ACLR 371. 37 Calzaturificio (supra) was concerned with a claim for the recovery of a preference under s.293 of the Companies Act, 1961 , that section incorporating by reference the provisions of s.95(1) of the Bankruptcy Act (Cth) 1924-1965 . At pp.608-609, Menhennitt J, relying upon Sandell v Porter (1966) 115 CLR 666, said that to determine whether a company was unable to pay its debts as they became due within the meaning of s.95(1) of the Bankruptcy Act required an examination of all of the company’s resources, including “terms of credit available to a debtor” . His Honour found as a fact that “a significant number” of the company’s creditors were extending up to ninety days’ credit to the company but, pursuant to a factoring arrangement, the company was receiving payment of debts due to it within seven days. 38    The consequence of those facts was, as his Honour found (at p.609), that the company:

“… was receiving the benefit of a credit arrangement of something of the order of 60 days or more, comparing what it had to pay and what it was receiving. And on its turn-over, that credit arrangement of something of the order of 60 days or more was a very significant factor in determining its ability to pay its debts as they fell due. That being so, merely to take a balance sheet which puts opposite each other book debts and creditors’ liabilities as if they were to be equated is, in my view, erroneous. It would be necessary to make an appropriate calculation to decide when the creditors had to be paid and when the debts were likely to be received in order to decide whether at any particular moment of time the company was or was not able to pay its debts as they fell due.”
39    It will be seen that his Honour’s view that insolvency would have to be shown by calculating “when the creditors had to be paid and when the [payments of] debts were likely to be received” was founded upon the rather unusual facts proved in the case before him. 40    In Ellston (supra), Carruthers J. was concerned, not with a liquidator’s claim to recover a preferential payment, but with a claim by a creditor against a director of a company in liquidation under the insolvent trading provisions of the companies legislation, then s.556 of the Code. The critical question was whether the plaintiff had established, as required by s.556(1)(b), that “immediately before the time when the [plaintiff’s] debt [was] incurred there [were] reasonable grounds to expect that the company [would] not be able to pay all its debts as and when they [became] due” . As has been observed, “reasonable grounds to expect” inability to pay debts is not the test of insolvency prescribed for recovery of a preference in s.95(1) of the Bankruptcy Act 1924-1965 and s.293 of the Companies Act 1961 , considered in Calzaturificio , nor is it the test in the successor sections to s.293, up to and including CA s.588FC coupled with CA s.95A. 41 It was doubtless because “expectation” upon reasonable grounds was at issue in Ellston that a submission was put on behalf of the defendant that the evidence demonstrated that suppliers of goods and materials in the building industry were slow to enforce trading terms against debtors, so that the Court was required to look at those circumstances in determining when debts were “due” for the purpose of s.556(1)(b). 42    In response to that submission, Carruthers J. said (at p.301):
“… the question whether a debt has or has not become due is to be determined by reference to the legal agreement between the parties. Hesitation on the part of a creditor (probably for commercial reasons) to take immediate steps to enforce its rights against a customer can have no bearing upon this question.”

It does not appear whether the decision of Menhennitt J. in Calzaturificio was cited to Carruthers J., but his Honour did not refer to it in his judgment.

43    In Kemish (supra) the Court was, as in Ellston , concerned with an “insolvent trading” claim against a director under s.556(1) of the Code. Foster J. first considered the question of whose “expectation” was relevant in order to apply the test of reasonableness for the purpose of s.556(1)(b). His Honour concluded that the reasonableness of the relevant expectation must be judged by the standard appropriate to a director or manager of ordinary competence (at p.373). 44 At p.378 his Honour said:
“I am satisfied that a debt does not necessarily become ‘Due’ within the meaning of the section upon the date originally stipulated for its payment. I consider that it is proper to take into account arrangements made by the company with the creditor for extended time for payment, even where such arrangements would not be contractually binding upon the creditor. Even where there is no express arrangement for the extension of credit beyond the time originally stipulated, I think it appropriate to take into account in determining whether the section has been satisfied, whether a course of dealing between the company and a particular creditor would reasonably lead to an expectation on the part of the defendant that some reasonable extension of a period of credit would be allowed by the creditor as a matter of grace. Clearly, nice questions of fact must be involved in such considerations and the question of whether the ‘Due’ date for payment of a company’s debt has been extended, will depend upon the precise circumstances relating to the individual debt, and the particular creditor.”
45    His Honour’s observation that it is proper to take into account even non-contractual arrangements for extending time for payment of debts is firmly embedded in the context of a consideration of what is a reasonable expectation on the part of a director of ordinary competence for the purposes of the new s.556(1)(b). His Honour’s remarks as to when a debt becomes “due” are explicitly confined to the use of that word “within the meaning of the section” . 46    It may be admitted at once that the hypothetical director of ordinary competence, acting reasonably, makes decisions on the basis of practical experience and commercial reality. Practical experience teaches that creditors will often allow a debtor some indulgence before insisting on payment. Where a company is suffering a temporary liquidity shortage, the hypothetical director of ordinary competence may reasonably expect that a discreet reliance upon such indulgences, paying those creditors who are becoming insistent and delaying payment to those who have not yet become insistent, may well enable the company to trade successfully through its difficult period. In an insolvent trading claim, it will be a question of fact in each case whether such expectation is reasonable or unreasonable in the light of the company’s position as a whole. These are the considerations to which s.556(1) and the reasoning of Foster J. in Kemish are directed: cf. Re New World Alliance Pty Ltd ; Sycotex Pty Ltd v. Baseler (1994) 51 FCR 425, at 434E; Melbase (supra) at 199. 47 After the decision in Kemish , the seminal propositions advanced in that case and in Calzaturificio and Ellston were much discussed in winding up/preference cases and insolvent trading cases. Some of the authorities disapproved of the approach in Calzaturificio and Kemish : Re Toowong Trading Pty Ltd (in liq) (1988) 13 ACLR 121, Norfolk Plumbing Supplies Pty Ltd v Commonwealth Bank of Australia (1992) 6 ACSR 601, Hall v Aust-Amec Pty Ltd (unrep., FCA Lindgren J, 20 September 1994), Melbase , New World Alliance , Cuthbertson & Richards Sawmills Pty Ltd v Thomas (1998) 28 ACSR 310, Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103, and Credit Corporation Australia Pty Ltd v Atkins (1999) 30 ACSR 727. Some followed the approach in Calzaturificio : Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808; Re Newark Pty Ltd (In liq), Taylor v. Carroll (1991) 6 ACSR 255; Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625; Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61; Hamilton v BHP Steel (JLA) Ltd (1995) 13 ACLC 1548; Carrier , Standard Chartered Bank of Australia Ltd v Antico (No 2) (1995) 38 NSWLR 290, and Pioneer Concrete (Vic) Pty Ltd v Stule (No 2) (1996) 20 ACSR 480. Some strove to find the middle ground: e.g., Powell v Fryer (2001) 37 ACSR 589. 48 In Taylor v. ANZ (supra), a preference case, McGarvie J., relying upon the statement of Barwick CJ in Sandell v. Porter (supra) at 670 to the effect that insolvency was a question of fact, added the words “to be decided as a matter of commercial reality in the light of all the circumstances” (at 811). 49    The proposition that insolvency was to be determined as a matter of “commercial reality” was taken up in later cases: see e.g. Newark (supra) and Sheahan v Hertz Australia Pty Ltd (1995) 16 ACSR 765. 50 In Hamilton (supra), a preference case, Young J (as he then was) considered that determining solvency “as a matter of commercial reality” required the Court to look at “prevailing business practices” . His Honour observed that because many businesses are funded on borrowed capital, commercial debtors endeavour to minimise payment of interest to their financiers by delaying payment to creditors as long as possible, a common strategy being, by consistent slow payment, to place creditors in the position where they have to decide whether to continue trading with an endemically slow payer or else lose the business by ceasing to trade with the debtor at all. His Honour said at p.1552:
“I believe that when one is working out questions of insolvency in the 1990s, one needs to take into account that such happenings are common in the commercial community because this is part of the commercial reality with which the Court has to deal. I also consider that … the Court can take into account such practices as a matter of its own knowledge from commercial activities that come before the Court.”
51    His Honour’s views as to the impact of what are said to be common business practices on the “commercial reality” test of insolvency may be regarded as at one end of the spectrum of judicial thinking. They have not found general support: see e.g. Emwest Products Pty Ltd v Olifent (1996) 22 ACSR 202, at 209-210. On the other hand, a number of authorities have firmly rejected the notion that debts may be “legally due” but not “commercially due” because the creditors have not actually sought to enforce payment and that only debts “commercially due” should be taken into account in determining a company’s solvency: see e.g. Hall v Aust-Amec (supra); Melbase (supra) at 199; Carrier at 253 per Debelle J.; Lee Kong (supra) at 112; Cuthbertson & Richards Sawmills Pty Ltd v Thomas (supra) at 320. 52 I cannot find any support in the authorities for the proposition that the Court ought to take cognisance of what is said to be a common business practice of debtors delaying payment to creditors for as long as possible and of creditors accepting that practice as a fact of commercial life, with the result that no contract debt can be regarded as payable for the purposes of ascertaining a company’s solvency unless there is evidence that the creditor has actively pursued payment to the point of a statutory demand. This was the proposition hinted at by Young J in Hamilton (supra) and explicitly advanced by Mr Aitken in his submissions. 53    If such a proposition were accepted by the law, the consequences in the commercial community would be chaotic. Debtors would know that contractually stipulated times for payment of their debts are virtually meaningless and that they have the luxury of delaying payment until the creditor commences legal process against them. Many creditors would not, or could not, go to that expense in order to recover comparatively modest sums. The law of contract would be held up to ridicule. 54    In my opinion, the following propositions may now be drawn from the authorities:


i) whether or not a company is insolvent for the purposes of CA ss.95A, 459B, 588FC or 588G(1)(b) is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole: Sandell v Porter , Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 and Powell v Fryer ;

ii) in considering the company’s financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable: Sandell v. Porter , Taylor v. ANZ , Newark and Sheahan v. Hertz .

iii) in assessing whether a company’s position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency: Bank of Australasia v. Hall (1907) 4 CLR 1514, at 1528; Norfolk Plumbing at 615; Taylor v ANZ at 784; Guthrie v. Radio Frequency Systems Pty Ltd (2000) 34 ACSR 572, at 575;

iv) the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand: Antico at 331; Hall v Aust-Amec (supra); Melbase (supra) at 199; Carrier (supra) at 253; Cuthbertson & Richards Sawmills Pty Ltd v Thomas (supra) at 320; Lee Kong (supra) at 112;

v) in assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the Court’s satisfaction, that:

• there has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment; or

• there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or

• there has been a well established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors’ terms of trade or are payable only on demand:

Newark at 260; Antico (supra) at 331; Melbase (supra); Cuthbertson & Richards Sawmills Pty Ltd v Thomas (supra); Powell v Fryer (supra) at 600;


vi) it is for the party asserting that a company’s contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence: Powell v Fryer (supra) at 600; Melbase (supra); Cuthbertson & Richards Sawmills Pty Ltd v Thomas (supra).

Solvency – conclusion 55    In the present case, it is accepted that the normal trading terms of SCI’s creditors required payment within thirty days of invoice. By statute, the tax debts due to the DCT were payable within twenty-one days after the liability was incurred. The DCT has adduced no evidence of any agreement, express or implied, between SCI and any of its trade creditors for a variation of the times for payment. There is no evidence of any agreement between SCI and the DCT varying the time for payment of the tax debts. There is no evidence of an established and recognised course of conduct either in the industry in which SCI operated or, more particularly, between SCI and its creditors, whereby normal trading terms were varied. All that can be gleaned from the evidence is that some creditors, including the DCT, had failed to enforce strictly the company’s payment obligations. The reasons for such failure were unexplained. 56    Accordingly, in my opinion, in assessing SCI’s solvency it is appropriate to act upon the basis that the normal terms of trading between the company and its creditors as to time for payment were unvaried. I hold that all debts of SCI falling due for payment under the terms of the relevant contracts during the period from 30 April to 30 September 1997 were payable at that time. 57    The evidence of Mr Struthers referred to in paragraphs 14 to 21 above, taken as a whole, compels the conclusion that from 30 April 1997 onwards SCI was not suffering merely from temporary illiquidity; it was endemically unable to pay its debts as they became payable. It follows that the liquidator has proved that SCI was insolvent at the time of the payments to the DCT so that the DCT’s only defence to the liquidator’s claim fails. Deed of Release 58    The question now arises: is the liquidator prevented, by covenant in the Deed of Release, from prosecuting to finality his preference claim against the DCT. 59    The parties to the Deed are Mr Palmer, as liquidator of SCI, and Mr and Mrs Clark. The Deed recites that Mr and Mrs Clark were at all material times directors and employees of SCI, that the liquidator was appointed Administrator of the company and then liquidator pursuant to a creditors’ winding up, that the liquidator made demands upon Mr and Mrs Clark for the recovery of salaries which were said to be excessive under CA s.588FB, and that the liquidator’s claim was disputed. 60    The recitals continue:
“g) The parties have entered into negotiations and the releasees have now offered to repay to the company an amount of $75,000.00 in full settlement and in answer to the said demands.
h) The Liquidator has requested by way of additional consideration the releasees to assist in the recovery of undue preferences and voidable dispositions.
i) The Liquidator has agreed to accept this offer based upon advice as to the costs and prospects of success and recovery should he proceed to litigate the claim and has agreed to resolve and settle this claim and release the releasees in respect of this claim and all other claims upon the terms and conditions hereafter provided.”


61    The relevant covenants in the Deed are as follows:
“1. The releasees agrees to give all such assistance as may be necessary and as required by the Liquidator to prosecute any undue preferences, voidable dispositions or any other claim that may be brought pursuant to the provisions of the Law against any third party and which the Liquidator in his absolute opinion may decide to prosecute.
2. The releasor hereby releases the releasees from all actions, suits, cause of actions, claims and demands whatsoever arising out of the alleged over payment of salaries and the appointment of the releasor or consequent upon the carrying out of the duties of the releasor or any other action, suit, cause of action, claim or demand whatsoever which the releasor might have against the releasee but for the execution of this deed.
3. The releasor agrees that this deed may be pleaded in bar to any action, suit or proceeding commenced by the releasor or by anyone acting on the releasor’s behalf or in the releasor’s name, against the releasees but nothing in this deed shall prevent the Liquidator giving a consent to any third party to take any action as may be contemplated by the Law.”


62    Mr Alexis, who has argued the case most capably for Mr and Mrs Clark, submits that upon its true construction the Deed operates to prevent the liquidator from bringing any claim against a third party which will, in turn, result in a claim by that third party against Mr and Mrs Clark. In support of his submission he points to the terms of recital (i) as demonstrating that the release is not confined to the liquidator’s claim against Mr and Mrs Clark under CA s.588FB but is intended to have wider operation. 63    He submits that on its true construction clause 2 releases Mr and Mrs Clark from four categories of actions, claims and demands: first, those arising out of any over-payment of salaries; second, those arising out of the appointment of Mr Palmer as the liquidator of the company; third, those arising as a consequence of Mr Palmer carrying out his duties as liquidator of SCI; fourth, “any other action, suit, cause of action, claim or demand whatsoever which the releasor might have against the releasee but for the execution of this Deed” . 64    Mr Alexis submits that the DCT’s claim against Mr and Mrs Clark under CA s.588FGA is a claim in the second category in clause 2 in that it arises out of the appointment of Mr Palmer as liquidator. The DCT’s claim against Mr and Mrs Clark, he says, would never have arisen but for the appointment of a liquidator to SCI. Alternatively, he says, the DCT’s claim is in the third category in that it arises as a consequence of Mr Palmer carrying out his duties as liquidator of SCI by seeking to recover a preference from the DCT. 65    Mr Lo Surdo, in his thorough and able argument for the liquidator, relies first, upon the principle that general words in a release are limited to those matters or things which were in the contemplation of the parties when the release was given: Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112, at 129; London & Southwestern Railway Co v Blackmore (1870) LR 4 HL 610, at 623; Qantas Airways Ltd v Gubbins (1992) 28 NSWLR 26, at 29. 66 Mr Lo Surdo points out that there is no evidence that it was in the contemplation of the parties that a claim by the DCT against Mr and Mrs Clark might be made as a consequence of the liquidator making a preference claim against the DCT. Second, Mr Lo Surdo says that recital (h) and clause 1 of the Deed make it clear that it must have been expressly in the contemplation of the parties that the liquidator would take any and all such preference and other proceedings against third parties as he thought appropriate in his absolute discretion. By September 1998 Mr and Mrs Clark knew that the liquidator was contemplating preference proceedings against a number of creditors including the DCT. If it were intended that clause 2 operate in some way to limit clause 1 by prohibiting the liquidator from pursuing those claims which would, in turn, engender claims against Mr and Mrs Clark, then one would have expected express words of limitation to have been used either in clause 1 or in clause 2. 67 Third, Mr Lo Surdo submits that the release in clause 2 is directed only to such claims as the liquidator himself has against Mr and Mrs Clark. He says that the words “which the releasor might have against the releasee but for the execution of this Deed” qualify all four categories of claims encompassed in clause 2 and not merely the fourth category, as Mr Alexis contends. This construction is supported by clause 3, which acknowledges that the release may be pleaded in bar to any action by the liquidator or his privy, but is otherwise not to prevent the liquidator from facilitating a third party’s claims against the releasees. 68 Fourth, Mr Lo Surdo submits that the words of clause 2 are singularly inapt to produce the consequence which Mr Alexis urges. It is a very strange usage of “release” to apply that word, not to a claim which the releasor has, but to a claim which someone not a party to the Deed might have. If what had been intended was that the liquidator would indemnify Mr and Mrs Clark if a third party brought a claim against them as a result of the liquidator prosecuting a claim against the third party, it would have been very easy to incorporate such an indemnity expressly. Mr and Mrs Clark had the benefit of their own legal advice before they executed the Deed. The difference between “release” and “indemnity” is well understood. 69 Fifth, Mr Lo Surdo draws attention to the express agreement in clause 3 that the liquidator is not precluded from consenting to a claim under the Corporations Act brought by a third party against Mr and Mrs Clark. Such an agreement is inconsistent with a construction of clause 2 which would prevent the liquidator from giving such consent. 70    I am persuaded that Mr Lo Surdo’s submissions are correct. I hold that nothing in the Deed of Release prevents the liquidator from pursuing his claim in these proceedings against the DCT.

Estoppel 71    Mr Armstrong is an accountant who has had some experience in insolvency practice. He provided accountancy services to SCI and in 1997 he recommended that Mr Palmer be appointed as administrator of the company. When Mr Palmer as liquidator of the company began to press a claim against Mr and Mrs Clark for recovery of alleged excessive salaries, Mr Armstrong negotiated on their behalf for a settlement of the claim. 72    Mr Armstrong says that in late July 1998 he had a telephone conversation with Mr Palmer in which he put to Mr Palmer that he would try to get Mr and Mrs Clark to increase their offer of settlement to $75,000. According to Mr Armstrong, he said:
“If Rob and Carole pay the $75,000, what will this mean for them?”

He says that Mr Palmer responded:
“Robert and Carole will receive a full and clear release from the company and me as liquidator and rest assured I will not do anything that may result in a claim of any kind being made against Rob or Carole.”
73    Mr Armstrong says that he spoke to Mr Clark about increasing the settlement offer to the liquidator. He says that he told Mr Clark that if he paid $75,000 he and Mrs Clark would receive a full release from the liquidator which “will stop all further action against you by the liquidator whatsoever and the liquidator will not take any action that could result in a claim of any kind being made against you or Carole”. 74    Mr Palmer agrees that in his conversation with Mr Armstrong he said that he would release Mr and Mrs Clark from all further claims which he as liquidator might have against them. However, he firmly denies that he said anything to the effect that he would take no action which could result in a claim of any kind being made against them. 75    On 27 July 1998 Mr Armstrong sent a facsimile message to Mr Palmer in which he said:
“Notwithstanding that [Mr and Mrs Clark’s financial] position looks grim, [Mr Clark] will, subject to the previous full and clear release etc, increase his offer to $75,000 as discussed.”


76    Mr and Mrs Clark had no direct negotiation with Mr Palmer. Mr Palmer’s solicitors drafted a Deed of Release which was forwarded to Mr and Mrs Clark’s solicitors. It was left to Mr Armstrong and Mr Clark to instruct those solicitors to ensure that the terms of the Deed of Release properly reflected the terms of the agreement which had been reached with the liquidator. 77    Mr Clark’s solicitors obviously took instructions for this purpose. On 26 August 1998 they wrote to Mr Palmer’s solicitors commenting that the draft Deed “does not reflect the full extent of the agreement reached” . The letter set out the amendments which Mr and Mrs Clark requested. None of these proposed amendments was to the effect that the liquidator would not take any action which could result in a claim of any kind being made by a third party against Mr and Mrs Clark. 78 On 4 September 1998 Mr Palmer’s solicitors wrote to Mr and Mrs Clark’s solicitors responding to the letter of 26 August. The letter advised that the liquidator would require a clause in the Deed to the effect of what is now clause 3. The letter added:
“We also note our comments that it is not intended that the release extends to preventing the liquidator giving consents to others to take action such as is contemplated by section 588R.”
79 CA s.588R entitles a creditor to bring an insolvent trading claim against a director under CA s.588M if the creditor obtains the liquidator’s written consent. 80 It is clear from this correspondence and from the terms of clause 3 of the Deed that, prior to the execution of the Deed, the parties expressly contemplated that, after the release took effect, the liquidator would nevertheless be entitled to take action to facilitate claims by third parties against Mr and Mrs Clark. Such an understanding was completely contrary to the alleged agreement that the liquidator would take no action that could result in a claim of any kind being made against Mr and Mrs Clark. 81 I am unable to accept that a conversation between Mr Armstrong and Mr Palmer took place in July 1998 in the terms which Mr Armstrong alleges. There is no contemporaneous note which supports Mr Armstrong’s assertion that the liquidator agreed not to do anything that might result in a claim of any kind being made against Mr and Mrs Clark. The only record of the conversation made by Mr Armstrong was his facsimile message of 27 July 1998, which made no reference to that term of the alleged agreement. If that term had in fact been agreed, it would have been an important term which one would have expected Mr Armstrong to confirm explicitly. 82 Further, and even more importantly, the terms of clause 3 of the Deed and of the correspondence passing between the parties’ solicitors prior to its execution are inconsistent with the alleged prior agreement by the liquidator that he would do nothing that might result in a claim of any kind being made against Mr and Mrs Clark. 83 Accordingly, the defence of estoppel fails. Mrs Clark’s defence – the facts 84    In view of my findings as to the construction of the Deed of Release and as to estoppel, Mr Clark has no further defence to the DCT’s claim under CA s.588FGA(2). Mrs Clark’s sole remaining defence to the claim is that afforded by CA s.588FGB(5), i.e. that, for some “good reason”, she did not take part in the management of SCI between 30 April and 30 September 1997. The relevant facts may be shortly stated. They are not in dispute. 85    Mr Clark is a carpenter by trade. For three or four years prior to 1994 he was a director of a company which was a fit-out contractor. That company went into liquidation. In 1994 he and three friends started another business doing small fit-out jobs. They incorporated SCI on 3 November 1994. 86    For some reason not explained in the evidence, Mr Clark was not an initial director of the company. He became a director only on 1 May 1996. Mrs Clark, however, became a director on 23 August 1995. That was the date upon which one of the two then-current directors, Mr Donohoe, resigned. Mr Clark was appointed as a director when another director resigned, leaving Mrs Clark as sole director. Mr Clark’s evidence as to how Mrs Clark came to be a director of SCI was that when one of the directors resigned, he believed that the company required two directors, so he asked his wife to become a director. He said to her words to the effect:
“I just need you to be a director because I need two directors.”
87    He said that after Mrs Clark became a director of SCI he never discussed the affairs of the company with her. He never showed her any documents relating to the company’s affairs, such as its financial accounts, because he did not want “to stress her out” . He explained what he meant:
“And when I say I didn’t want to stress her out, I don’t mean because of the accounts, I mean I didn’t tell her anything because she – I carried a lot of stress just in the operation of the whole thing, and I didn’t take work home at all. And, you know, because she could see that running the company was very time consuming, and a lot of pressure deadlines to finish fit outs for companies to move in, and there was always constant pressure, and so I didn’t – very rarely spoke about work at home. When I got home it was just, you know, time together, time out. And so this is why I wouldn’t have shown her any accounts because she just wouldn’t be interested. She just didn’t want to know.”
88    Mrs Clark’s evidence was that she had been carrying out home duties full time since the birth of the first of her three children in 1992. Before that, she had worked as a secretary but her main interest was in creative areas. She had done singing for recording sessions and in 1997 her hobby was writing and putting together a children’s production involving a musical programme for performance in shopping centres. She conducted that hobby from her home when time permitted. She had had no business experience and had never been a company director before being appointed as a director of SCI. At the same time, she had also been appointed as secretary of the company but could not recall being so appointed or how that appointment had come about. 89    Mrs Clark gave this evidence as to how she had been appointed a director of SCI:
“Q: How was it that you came to be a director of the Company?
A: My husband just wanted me to be. As I understood it there was a requirement that there be two directors in the Company and I was to be one of them.”
…
Q: Clearly you had to sign various documents when you became a director, did you?
A: Yes.
Q: What did you think becoming a director of the Company involved or entailed?
A: Well I just thought it was what I had to do, being Robert’s wife, and I was quite happy to do that.
Q: Had you not been a director of a company before?
A: No.
Q: So this was the first time you had been a director?
A: Yes.
Q: Did you understand that being a director involved paying some care and attention to the running of the Company or not?
A: I do now. At the time I left it to Rob.
Q: I understand that, but I am really focussing on what you thought you should do at the time?
A: I thought I should let Rob run it and I signed papers to be honest.
Q: Is that in fact how your involvement unfolded, your husband Robert would bring home documents?
A: Yes.
Q: And did you look at them at all in terms of signing or did you simply just sign the documents put before you?
A: Sometimes I would look and, honestly, the amount of time that it would have taken to sit down and fully understand! He would quickly say ‘This is such and such. Can you sign this?’ I would usually have [a] frying pan in one hand and be signing [with] the other.”
90    Mrs Clark also said that she never had any idea of the balance in the company’s cheque account although she believed that she was a signatory to the account and signed “a handful” of cheques at some stage. She never did any banking or other work for the company. She never saw a balance sheet. She was aware that Mr Armstrong was the company’s accountant and was advising Mr Clark as to the conduct of the business. She was aware that the company employed carpenters, possibly four men, whom she would see regularly because they were friends. Mrs Clark ceased to be a director of the company on 3 June 1997 because Mr Clark then became aware that it was no longer necessary for a company to have two directors. That, as Mrs Clark described it, was the full extent of her involvement with SCI’s business. 91    This evidence of Mrs Clark was not challenged by Mr Aitken and I have no hesitation in accepting it. Mrs Clark struck me as a lively, creative person who was devoted to her family. It was clear from her evidence and her demeanour in Court that she trusts her husband implicitly. 92    When asked about her appreciation of her duties and responsibilities as a director of SCI when she accepted the appointment, Mrs Clark gave this evidence:
“Q: … did you have any idea whether the law imposed any duties upon company directors?
A: No, I didn’t.
Q: And required …
A: No, I didn’t, your Honour.
Q: Did you have any idea when you became a director of Southern Cross what was involved in being a director of a company?
A: No, I didn’t, no, but I knew that Rob did.

93    As to when it was that she was told that SCI was in financial trouble, all Mrs Clark could say was that she recalled her husband telling her that the company was in difficulty and talking about Mr Palmer in that context. Mr Palmer having been appointed as administrator on 30 September 1997, it seems a reasonable inference that Mr Clark told his wife about the company’s problems and Mr Palmer’s appointment in August or September 1997, at the earliest – well after her resignation in June 1997. 94    I am satisfied on the evidence that in accepting appointment as a director of SCI Mrs Clark acted at her husband’s request, relying entirely on his implied assurance that her appointment was a formality because the company needed two directors. She thought that that was what she had to do as Mr Clark’s wife and she was happy to comply with his request. 95    I am satisfied that Mrs Clark left the management of SCI entirely to Mr Clark and that she did so, again, because she believed that as Mr Clark’s wife that was what she should do. She did not know what was involved in becoming a director of the company but believed that her husband did know. I infer that Mrs Clark trusted Mr Clark to the extent that she believed that, in asking her to become a director in name only, he would not deliberately place her at risk in any way without telling her. 96    I am satisfied that Mr Clark did not ask his wife to become a director for any reason other than that he thought it was a necessary formality that SCI have two directors. He did not withhold information as to the affairs of the company from his wife for any sinister purpose but, rather, out of consideration for her and because he thought that it was his role to accept the responsibility of providing for his family without burdening his wife with his business worries. In short, I am entirely satisfied that, in acting as they did, both Mr and Mrs Clark honestly believed that there was nothing improper or untoward in Mrs Clark taking no part at all in the management of SCI. 97    The critical question is: do those findings on the facts afford Mrs Clark a “good reason” for not participating in the management of the company so that she succeeds in her defence under CA s.588FGB(5)? Mrs Clark’s defence – legal principles 98    Pt 5.7B Divisions 2 and 3, which deal respectively with voidable transactions and insolvent trading, were introduced into the Corporations Law by amendments taking effect on 23 June 1993. The amendments significantly changed the law relating to directors’ liabilities for transactions entered into by a company which becomes insolvent. 99    Subsections (3) to (7) of s.588FGB afford the same defences to a claim by the DCT for indemnity under s.588FGA as are afforded by subsections (2) to (6) of s.588H to a claim for insolvent trading under s.588G, s.588M and s.588R. As almost all of the relevant authorities discuss claims against directors for insolvent trading, it is convenient to examine the construction and application of s.588H and s.588G and their antecedents. For this purpose, a brief review of the origins of the present s.588G and s.588H is necessary. A detailed history of the insolvent trading provisions in the companies legislation is traced by Lander J. in Capricorn Society Ltd v Linke (1996) 14 ACLC 431. 100 The liability of a director for insolvent trading was first introduced into Australian companies legislation by s.303(3) of the Uniform Companies Acts . That section imposed criminal liability, but not civil liability, on an officer of a company who was knowingly a party to the contracting of a debt when the officer had no reasonable or probable ground for expecting that the company would be able to pay that debt. The difficulty of securing a conviction for an offence under the section, illustrated by the course of the proceedings in Shapowloff v. Dunn (1981) 148 CLR 72, led to the repeal of the section in 1972 and its replacement by s.374C and the insertion of s.374D, which enabled a creditor to obtain an order requiring an officer convicted of an offence under s.374C to make payment of the relevant debt to the company. To secure a conviction under s.374C the prosecution still had to prove beyond reasonable doubt that the officer had no reasonable or probable grounds for expecting that the company would be able to pay the relevant debt. Proof of that element of the offence involved a blended subjective and objective test, namely, the application of the objective standard of reasonableness to the facts actually known to the officer: Shapowloff v. Dunn (supra) per Wilson J. at 85. 101    Section 556 of the Companies Code s was very different from its predecessors under the Companies Acts . A creditor was afforded a direct remedy against a director or person concerned with the management of the company. Under s.556(1), liability for the payment of a creditor’s debt was imposed on all directors and others taking part in the management of the company if, at the time the debt was contracted, there were reasonable grounds to expect that the company would become insolvent. Section 556(2) provided a defence if the defendant proved that the relevant debt was incurred without his express or implied authority or consent or that, at the time when the debt was contracted, he did not have “reasonable cause” to expect that the company would become insolvent. Section 592(1) and (2) of the Corporations Act , the successors to s.556(1) and (2) of the Companies Codes , were in almost identical terms. 102    At first there was a conflict in the authorities as to the test to be applied in determining whether a director had no “reasonable cause” to expect insolvency for the purposes of a defence under s.556(2)(b). In Ellston (supra), Kemish (supra), John Graham Reprographics Pty Ltd v. Steffens (1987) 12 ACLR 779, and Heide Pty Ltd v. Lester (1990) 3 ACSR 159, the Court applied the blended subjective/ objective test formulated in Shapowloff v Dunn (supra), i.e., whether on the facts actually known to the director or officer it was objectively reasonable not to expect insolvency. 103    However, this was not the approach adopted by Hodgson J. (as he then was) at first instance in Metal Manufacturers Ltd v. Lewis (1986) 11 ACLR 122. His Honour came to the view that the reasoning in Shapowloff v Dunn (supra) as to the test to be applied to a prosecution under s.303(3) of the Companies Acts was inappropriate to be applied to a defence advanced under s.556(2)(b) of the Code . His Honour held that in deciding whether or not a director or officer had “reasonable cause” not to expect insolvency for the purposes of s.556(2)(b), the Court could have regard not only to facts and circumstances actually known to the defendant but also to facts and circumstances which the defendant ought to have known, having regard to the defendant’s position in the company and to the duties associated with that position (at p.129). The case was taken on appeal but not upon this point. 104    The approach of Hodgson J. in Metal Manufacturers was adopted by Ormiston J. in Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423. At 448 his Honour said:
“What is reasonable, therefore, is related in part to the extent of the enquiries that the director has made and should have made about the company’s solvency. 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 … to fail to make any enquiries whatsoever is not excusable and an opinion on the company’s solvency based on that ignorance could not be characterised as reasonable.”
105    The decision of Ormiston J. in Morley was upheld on appeal and was followed by Tadgell J. in Commonwealth Bank of Australia v. Friedrich (1991) 5 ACSR 115. The same approach was taken by Lockhart J. in Rema Industries & Services Pty Ltd v. Coad (1992) 7 ACSR 251, and by the Full Court of South Australia in Group Four Industries v. Brosnan (1992) 59 SASR 22. At p.74 of the judgment of Debelle J. in the latter case, his Honour said that it would be absurd for a defendant to be able to establish a defence under s.556(2)(b) simply on the basis of what he in fact knew “because that would be to reward the incompetent director who ought to have known a good deal more than he in fact knew” . In Linke (supra) the Full Court of South Australia applied Morley and Brosnan to a defence under the successor to s.556(2)(b), namely, CA s.592(2)(b) which was, as I have noted, in virtually identical terms. 106    Sections 588G and 588H differ significantly from s.592. The sections provide, in so far as is presently relevant, as follows:

“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. …
(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.
…”
“588H(1) This section has effect for the purposes of proceedings for a contravention of subsection 588G(2) in relation to the incurring of a debt (including proceedings under s.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 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 debt that it incurred at that time.
(4) If the person was a director of the company at the time 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.
…”
107    It will be seen that the sections endeavour to codify some of the glosses which have been placed by the cases upon s.556 of the Code and CA s.592. Subsection 588G(2), which came into effect on 13 March 2000, enacts, by way of amplification to subsection (1)(c), that the test for “reasonable grounds for suspecting” insolvency is either a subjective test, i.e., actual awareness of grounds for suspicion of insolvency, or the objective test propounded in Lewis (supra), Morley (supra) and Friedrich (supra), namely, whether a reasonable person in a like position in a company in the company’s circumstances would have been aware of grounds for such suspicion. 108    Subsection 588H(2) retains the substance of the defence afforded by s.556(2)(b) and CA s.592(2)(b), merely substituting “reasonable grounds” for “reasonable cause” and, as to the expectation of solvency, casting into positive form what is expressed as a double negative in the antecedent subsections. If a director relies upon a defence under CA s.588H(2) the law as expressed in Lewis , Morley , Friedrich , Brosnan and Linke will still be applicable. The defence will fail if it is shown that the director’s expectation of solvency was the result of self-induced ignorance or failure to make such enquiries as a reasonable and competent director would make. 109    Subsection 588H(3) is, as its prefatory words indicate, a defence additional to that afforded by subsection (2). It provides exculpation for the director who has “reasonable grounds” for reliance on information provided by others as to the company’s solvency. That defence acknowledges the observation of Ormiston J. in Morley (supra, at 488) that directors are not required to be omniscient and are not presumed in all cases to be fully engaged in the company’s affairs. His Honour was of the view that a director may be able to prove a defence under s.556(2)(b) by showing that he or she took reasonable steps with the other directors to appoint suitable and appropriate accountants and other executives, and that those persons failed to provide information when asked. 110 The defences afforded by subsections (2) and (3) will, in many cases, overlap. Reasonable reliance on information provided by apparently competent executives or auditors may justify an expectation of solvency for the purposes of both subsections. But the defence afforded by subsection (4) is, clearly, quite different in character and scope from the defences afforded by subsections (2) and (3). A person who has not taken part in the management of the company at the relevant time cannot claim to have actually expected solvency, or to have had reasonable grounds for expecting solvency, for the purposes of a defence under subsections (2) or (3). Ordinarily, such a person would have had no grounds at all for expecting anything as to the company’s financial position during the time of non-participation. Yet subsection (4) affords such a person a defence if his or her non-participation is for “some good reason”. 111 The subsection doubtless has its origin in the remarks of Foster J. in Kemish (supra, at 377) and Hodgson J. in Lewis (supra, at 129) that considerations such as illness or absence could be taken into account in assessing whether a director had no reasonable grounds to expect insolvency for the purposes of a defence under s.556(2)(b). Under that subsection a director had to prove a negative, namely, absence of an expectation of insolvency. Justifiable non-participation in management at the relevant time was clearly relevant to proving ignorance of facts which would have reasonably grounded such a suspicion in the mind of a person who was participating in management. 112 Under s.588H(2) a director must now prove a positive, namely, that he or she had an actual and reasonable expectation of solvency. Non-participation in management at the relevant time would normally make such a defence impossible. The defence under subsection (4) is, therefore, a special defence which stands independently of those afforded by subsections (2) and (3). One must be careful not to treat a defence under subsection (4) as merely a sub-species of the defences under subsections (2) and (3). 113 The first matter of significance to note is that, unlike subsections (2) and (3), subsection (4) does not engage the test of reasonableness. The subsection does not require, as it might have done, that a director show “reasonable cause” or “reasonable grounds” for not participating in management. If the test of reasonableness had been engaged, it would have been necessary to enquire by what standard of conduct the director’s conduct in the particular case is to be measured, since reasonableness is a relative concept and can only be judged by reference to a standard: Opera House Investments Pty Ltd v. Devon Buildings Pty Ltd (1936) 55 CLR 110, at 117, per Starke J.; Friedrich at 122. The standard of conduct would, doubtless, have been that required of a competent director seeking to act reasonably in accordance with his or her duties under the Corporations Act and the general law: Kemish (supra); Friedrich at 124ff. In other words, the standard of conduct for a defence under subsection (4) would have been measured by the same test as is required for defences under subsections (2) and (3). 114 But subsection (4) eschews the test of reasonableness with its in-built standard of conduct by reference to the obligations of a director under the Corporations Act and the general law. It requires that a “good reason” for non-participation in management be shown. By what standard is “good” to be measured? 115    So far as I am aware there is only one case which has dealt with s.588H(4), a decision of Austin J. in Tourprint International Pty Ltd (In liq) v. Bott (1999) 32 ACSR 201. There the defendant, Mr Bott, had worked for the plaintiff company for some time before becoming a director at the invitation of another director, Mr Moore. Mr Moore told Mr Bott that the other co-director was about to resign and that another director would be needed because at least two directors were required for the company. Mr Bott accepted Mr Moore’s invitation because he regarded Mr Moore as a friend in need of help. When a claim was brought against him under s.588M for insolvent trading, Mr Bott asserted that he had taken no part in the management of the company and had made no enquiries about its financial position because he had relied upon Mr Moore’s misleading statements that the company was sound. 116 His Honour accepted that Mr Bott had been deceived by Mr Moore and that Mr Bott had taken no part in the “financial management” of the company. However, his Honour doubted that Mr Bott had not taken part in the management of the company at all. He had played an important part in sales and in debt recovery. It was also relevant to note that, prior to commencing to work for the plaintiff company, Mr Bott had been managing director of another company with an annual turnover of around $3.5M. In that capacity he had received financial reports on a monthly basis. He was not financially sophisticated but he was not financially naive. 117 In these circumstances, his Honour rejected Mr Bott’s defence that he had a “good reason” for not participating in the management of the company. His Honour referred to the absence of authority directly in point as to the meaning of “good reason” and said at p.217:
“The provision seems to have its source in the Report of the General Insolvency Inquiry by the Australian Law Reform Commission (Report 45 – “Harmer Committee Report”), which said at para 312 that ‘it is not appropriate for a provision designed to establish a proper standard of conduct by directors to impose liability on a director who was not in a position to influence the management of the financial affairs of the company at the relevant time’. Mr Bott says that he was not in a position to influence the management of the financial affairs of the company because Mr Moore deceptively excluded him.
In my opinion Mr Bott’s submission is contrary to the policy underlying the subsection as disclosed by the Harmer Committee. In para 312 the Harmer Committee expressed the view that a director should not be excused where, though acting reasonably, he has not shown the ‘necessary commitment to an involvement with the management of a company in financial difficulties’. Mr Bott clearly did not show a proper degree of commitment to involvement in the financial management of the company, for he was never involved in financial management at all. He ought to have realised that by not having any such involvement, he was not properly discharging his responsibilities as a director. He ought to have taken steps from the outset, and at least by mid-1993, to ensure that he had a proper degree of involvement as a director in the management of the company. He ought, in short, to have confronted Mr Moore and insisted upon proper involvement in the company’s affairs. He cannot now treat Mr Moore’s deceptive conduct as a good reason for not taking part in management when he did not assert his rights as a director from the outset and with vigour.”


118    I may say at once, with respect, that I agree with the result at which his Honour arrived on the facts of the case before him. Mr Bott had previously been a managing director; he must have been aware of at least some of the responsibilities of a company director. Yet, apparently, he chose not to assert his rights as a director; he chose to remain excluded from the company’s management. 119    However, it is not clear to me whether his Honour intended to suggest that, as a matter of policy, whether a “good reason” has been shown for non-participation in management must depend upon whether the director has shown the “necessary commitment to an involvement with the management of a company in financial difficulties” . If his Honour did intend to suggest such an approach to the application of subsection (4) then, with great respect, I am unable to agree, essentially for the reason that, in my opinion, such an approach imposes upon the words “good reason” a limitation which the words were not intended to have. The subsection itself recognises that there may be a “good reason” for not demonstrating that commitment to involvement with a company’s affairs which the Corporations Act and the general law otherwise require. 120    It is trite to say that the policy or purpose of legislation may be referred to as an aid to its construction and application. But Courts must be careful, nevertheless, to construe and apply only the words which the legislature has enacted. It is never permissible to pass over the words of the section and to apply, instead, what is perceived to be the policy behind those words. As Mahoney JA said in Lewis , on appeal at 13 NSWLR 315, p.326:
“Even where the policy or purpose of the legislation is clear judges may differ as to what follows from it and how the policy or purpose operates in the individual case. The danger that a judge may see a policy or purpose behind the legislation for reasons which are idiosyncratic has been referred to: see Halsbury’s, Laws of England , 4th ed, vol 44, par 903(4) at 555.
But to see the key to the meaning of a section in the policy or purpose of the legislation is, in my opinion, to take a less than sophisticated view of the art of the parliamentary draftsmen. In many cases, the interpretation of a provision is difficult, not because the policy or purpose of the legislation is not clear, but because the section is directed, not simply to effecting that policy or purpose, but to achieving a compromise between it and other considerations. In the present case, the evil and the remedy are clear. The draftsmen sought to prevent the improper incurring of debts and to do so by imposing criminal and civil liability on relevant directors. The difficulty that arises in the interpretation of s 556(2) arises because, having the mischief and the remedy clear, the draftsman had to determine the ‘true reason’ of the remedy chosen, that is, how far he should apply it without infringing the rights of otherwise innocent directors.”
121    Returning to the present case, it may be noted that paragraph 312 of the Harmer Report recorded two submissions as to the appropriate wording of the defence of non-participation in management, one being for “other unavoidable cause” , the other being for “other reasonable cause” . Neither of those submissions was adopted. Instead, the Commission recommended the words “other sufficient cause” . The legislature, however, did not follow that recommendation. Doubtless, as suggested by Mahoney JA in Lewis (supra), the parliamentary drafter of subsection (4) had to determine what was the “true reason” of the defence and had to consider a compromise amongst a number of considerations. 122    I am of the opinion that the Court should not approach a defence under s.588H(4) of non-participation in management “for good reason” trammelled by a fixed view as to where policy considerations lie. The words “good reason” are deliberately as wide as they could be, in order that the Court may determine each case on its own particular facts. The words “good reason” do not carry with them the relative standard of measurement inherent in the words “reasonable cause” or “reasonable grounds” in the way those words do where used in s.556(2)(b) of the Code or CA s.588H(2) and (3). But that does not mean that the Court is free to apply idiosyncratic notions of justice or fairness when determining whether “good reason” has been shown for the purposes of subsection (4), nor does it mean that the duties imposed on directors under the Corporations Act and the general law are of no greater significance than any other consideration. 123    In my opinion, in evaluating a defence under subsection (4) it is proper to start with the assumption that a person who accepts appointment as a company director has a sufficient understanding of the responsibilities which that office carries with it to know what is required of him or her in order to discharge those responsibilities as the law requires. That assumption is justified in a society which is generally literate, educated to secondary school standard, exposed to commercial transactions at varying levels ranging from the purchase of a car or home to running a small business, and in which the professional assistance of accountants and solicitors is readily available. But that assumption is by no means an irrebuttable presumption. Many examples can readily be given in which the assumption would not be valid: recent immigrants from non-English speaking countries who are themselves not English speaking; those with limited education and little, if any, exposure to a commercial environment, such as indigenous people in remote areas; those with intellectual disabilities, to name but a few. 124    It may be said that people in these categories are inherently unlikely to find themselves appointed as company directors. As a general observation, that is undoubtedly so. But it is the difficult and unusual cases, as well as the commonplace, with which the law, as embodied in the subsection, must deal. Assume, for example, that a non-English speaking immigrant with no commercial experience is persuaded by a rogue to sign a consent to be a company director on the assurance that the document is something quite different or that appointment as a company director is merely a formal bureaucratic requirement which does not entail responsibility for the company’s management. Assume, for example, that a criminal threatens a highly experienced and competent company director with death or injury unless the director remains on the board of a company but turns a blind eye to the company’s activities. Can it be said that the policy of the Corporations Act or the expectations of the community require that persons such as these be held accountable for insolvent trading and be denied a defence under s.588H(4)? So to hold would make the office of a director one of strict liability. 125    The civil law knows how to relieve people from the legal consequences of their acts or omissions according to well defined principles. Duress, non est factum, undue influence, deceit, misleading and deceptive conduct, and unconscionable conduct are but some of the bases upon which a Court acts to protect a person from the legal consequences and liabilities of his or her acts, whether voluntary or involuntary. 126    In my opinion, any reason which the law holds sufficient, according to accepted legal principle, to excuse a person from the legal consequences of his or her acts or omissions is a “good reason” for the purposes of a defence under CA s.588H(4) and s.588FGB(5). 127    Within the category of circumstances constituting “good reason” for non-participation in a company’s management I would include those circumstances which underlie the reasons of Dixon J. in Yerkey v. Jones (1939) 63 CLR 649, as affirmed and explained in Garcia v. National Australia Bank Ltd (1998) 194 CLR 395. In Garcia the appellant, a married woman, voluntarily and without undue influence, guaranteed to the Bank loans for the benefit of her husband’s business. The Bank itself did not coerce her nor did it have actual knowledge of the means whereby the husband had procured his wife’s execution of the guarantee. The Bank doubtless believed that it was entitled to hold the appellant to the consequences of her act in voluntarily entering into a contract of guarantee. The Court held that the appellant should be relieved of those consequences: it held that enforcement of the guarantee against the appellant would be unconscionable. 128    The majority judgment (Gaudron, McHugh, Gummow and Hayne JJ) noted an argument that the equitable principle spoken of by Dixon J. in Yerkey v. Jones (supra) reflected outdated views of society generally and the role of women in society in particular. The majority said at p.403:

“That Australian society, and particularly the role of women in that society, has changed in the last six decades is undoubted. But some things are unchanged. There is still a significant number of women in Australia in relationships which are, for many and varied reasons, marked by disparities of economic and other power between the parties. However, the rationale of Yerkey v Jones is not to be found in notions based on the subservience or inferior economic position of women. Nor is it based on their vulnerability to exploitation because of their emotional involvement, save to the extent that the case was concerned with actual undue influence.
So far as Yerkey v Jones proceeded on the basis of the earlier decision of Cussen J in Bank of Victoria Ltd v Mueller , it is based on trust and confidence, in the ordinary sense of those words, between marriage partners. The marriage relationship is such that one, often the woman, may well leave many, perhaps all, business judgments to the other spouse. In that kind of relationship, business decisions may be made with little consultation between the parties and with only the most abbreviated explanation of their purport or effect. Sometimes, with not the slightest hint of bad faith, the explanation of a particular transaction given by one to the other will be imperfect and incomplete, if not simply wrong. That that is so is not always attributable to intended deception, to any imbalance of power between the parties, or, even, the vulnerability of one to exploitation because of emotional involvement. It is, at its core, often a reflection of no more or less than the trust and confidence each has in the other.”
129    The law recognises that the relationship of trust and confidence between married people may lead one of them to undertake responsibilities or liabilities which would not have been undertaken but for the relationship. That reality of human experience, when it produces financial liability for the unsuspecting or incautious spouse, has recently acquired the provocative tag of “sexually transmitted debt”. 130    In the Australian Law Reform Commission’s Report Equality Before the Law: Women’s Equality (1994) Report No.69 Pt II (“the ALRC Report”), the Commission referred to sexually transmitted debt in the following terms (para 13.4):
“The key feature of sexually transmitted debt is the relationship of dependence and the emotional ties that dominate the transaction. These are often found, for example, in wife/husband, parent/child and de facto relationships. The dependent party in the relationship accepts responsibility for the other party’s debt primarily because of that relationship. If the other party becomes unable or unwilling, for example, through bankruptcy or divorce, to meet the debt, the dependent party is liable for the debt. In that way the debt is ‘transmitted’ to the dependent party. A useful generic definition of sexually transmitted debt is
the transfer of responsibility for a debt incurred by a party to his/her partner in circumstances in which the fact of the relationship, as distinct from an appreciation of the reality of the responsibility for the debt, is the predominant factor in the partner accepting liability.”
131    At para 13.56 the Commission noted that one of the ways in which sexually transmitted debt may arise is where the woman is a “silent partner” or “silent director” in a family business or family company, having no effective control over the business and being excluded from participating in it. The Commission quoted an observation of the Victorian Attorney General that:
“[w]omen in the community who have no knowledge of business affairs, no control over the running of the business, and little or no information about its financial position, are putting themselves in a position of considerable risk. As non-participatory directors, they can be faced with financial ruin if the business fails. … The wife often feels it is her duty to be a part of her husband’s business affairs and sign documents and so on. Women in this position often do not stand to gain much benefit for the risks they run, and it is difficult to gain relief in the courts.”
132    Academic writers have drawn attention to the problems of women who incur liabilities as sureties or as “silent directors” of family companies because of:
“… the tendency of women … to defer to and trust in male authority and expertise, in matters of the ‘public’ sphere, including business, commerce and legal transactions” :

Fehlberg “Sexually Transmitted Debt” (1997 Clarendon Press) at p.11; see also Bailey “Sexually transmitted debts: Criticisms and Prospects for Reform” ( Auckland University Law Review , 8(4) 1999: p.1001; Kaye “Equity’s Treatment of Sexually Transmitted Debt” (1997, 5(1) Feminist Legal Studies 35); Howell “Sexually Transmitted Debt: a Feminist Analysis of Laws Regulating Guarantors and Co-borrowers”, Australian Feminist Law Journal (4) March 1995: 93 at 95; Baron “The Free Exercise of Her Will: Women and Emotionally Transmitted Debt” ( Law in Context 13(1) 1995: 23); Fehlberg “Money and Marriage: Sexually Transmitted Debt in England” International Journal of Law, Policy and the Family , Vol 11 No 3, December 1997: p.320.

133    Awareness of the realities and the problems discussed in these writings is reflected in the observations of the majority in Garcia (supra), quoted above, that:
“The marriage relationship is such that one, often a woman, may well leave many, perhaps all, business judgments to the other spouse.”
134    In my view, the law should recognise that a wife’s failure to appreciate the reality of her responsibilities as a director due to deferral to her husband in the circumstances referred to in Garcia and in para.13.4 of the ALRC Report may be a “good reason” for failing to participate in management for the purposes of a defence under s.588H(4) and s.588FGB(5). Such recognition will not undermine the policy of the law that those who accept office as a director are expected to act with competence and diligence in discharging the duties of their office. Whether the wife has truly failed to appreciate her responsibilities and whether such failure has anything to do with trust and confidence in the marital relationship are questions of fact in each case. So, for example, if a woman already has some knowledge and experience of business and of the responsibilities of a company director before she accepts a directorship at her husband’s request, it will be very difficult indeed for her to convince the Court that she had a “good reason” for not participating in management simply because she left business matters to her husband. In those circumstances, she would be expected to know that her duties as a director overrode the exigencies of the marital relationship. 135    On the other hand, if a woman, inexperienced in business and completely unaware of the responsibilities of company directorship, is told by her husband, whom she trusts and believes to be honest and to be knowledgeable in such matters, that some formality requires her to be appointed as a director to a family company and that management of the company may be left entirely to him, then, in my view, she has a “good reason” for not participating in management for such time as she genuinely remains in ignorance of her duties. 136    It will be a comparatively rare case in which a wife is able to establish such a defence on the facts. I venture to think that if the unsuccessful defendants in each of the insolvent trading cases which I have reviewed had pleaded a defence of non-participation in management for good reason under CA s.588H(4) none would have fared any better and all would have failed on the facts, either because there was no relationship of trust and confidence which induced the acceptance of the directorship, because the defendant was sufficiently experienced in commercial matters to have appreciated the duties of a director or because the defendant was sufficiently involved in the company’s affairs not to be able to claim non-participation in management: see e.g. Lewis at first instance (supra, at 131). The present case is, however, one of those rare cases in which the defence should succeed. Conclusion 137    I hold that Mrs Clark accepted appointment as a director of SCI with no understanding at all of the duties and responsibilities which that office entailed. That lack of understanding was not due to any fault on her part. Her husband failed to explain to her anything of the responsibilities which directorship involved and did not suggest that she seek advice or further information. She accepted the appointment at his request because of the trust and confidence which she had in him, believing, at his suggestion, that the appointment was only a formal requirement. She did not participate in the management of the company because she did not believe that she was required to do so. That belief was induced by her husband’s statements at the time he requested her to become a director and by his subsequent conduct in not discussing the company’s affairs with her. She acted upon that belief because of the trust and confidence she placed in her husband and because she thought that he was knowledgeable in such matters. Nothing was brought to her attention during her directorship which should have put her upon enquiry as to SCI’s financial position or as to her responsibilities as a director. 138    In those circumstances I hold that Mrs Clark has established a good reason for not participating in the management of SCI at any relevant time, so that her defence under s.588FGB(5) succeeds. Orders


(1) There will be judgment for the plaintiff against the defendant in the sum of $208,737.44 together with interest at the rates provided in the Rules.

(2) There will a declaration that the first respondent is liable to indemnify the defendant in respect of the judgment obtained against it by the plaintiff and an order accordingly.

(3) There will judgment for the second respondent on the defendant’s claim against her.

(4) I will stand the matter over to a date to be fixed for submissions as to costs and for the bringing in of Short Minutes of Order to reflect these reasons.

(5) Exhibits may be returned.

– o0o –

Last Modified: 09/03/2001