Sycotex P/L (ACN 000 565 999) v Lutz Clemens Wolfgang Baseler

IN THE MATTER OF NEW WORLD ALLIANCE PTY LIMITED (Receiver and Manager
Appointed)
SYCOTEX PTY LIMITED v. LUTZ CLEMENS WOLFGANG BASELER AND OTHERS
No. NG3227 of 1992
FED No. 1035/93
Number of pages - 5
Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
SHEPPARD J

CATCHWORDS

Practice and Procedure - interrogatories - action against directors - whether directors had reasonable grounds to expect that company would not be able to pay all its debts as and when they became due - interrogatory asking directors whether they had formed an expectation that the company would not be able to pay its debts as and when they became due - no mention in interrogatory of "reasonable grounds" - whether interrogatory objectionable.

The Corporations Law, s.592

HEARING

SYDNEY, 23 December 1993

#DATE 23:12:1993

Solicitors for the Applicant: Ms. M.J. Rankin

of Dunhill Madden Butler

Counsel for the Respondents: T.J. Hancock

Solicitors for the Respondents: Freehill, Hollingdale and Page

ORDER

The Court Orders That:-

Interrogatories 1, 2, 4(b), 6(b)(iii), 7(b) and 8(b) be disallowed.

The remaining interrogatories be allowed subject to

interrogatory 3 being limited to the period 1 January 1991 to 29 October 1991.

The costs of the notice of motion be costs in the principal application.

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

JUDGE1

SHEPPARD J This is a notice of motion in which the applicant seeks orders that the respondents make further answers to interrogatories administered to them. The interrogatory which occasions difficulty is Interrogatory 1 in each case which is as follows:-

"At any time during 1991, did you form the expectation that New World Alliance Pty Limited (Receiver and Manager Appointed) ("the company") would not be able to pay all its debts as and when they became due? If so, state:"

There follows a series of requests for information.

The answer of each of the respondents to the interrogatory is, in part, that it seeks admissions in relation to irrelevant matters namely the respondents' subjective expectations.
The action is brought pursuant to the provisions of s.592 of the Corporations Law which, so far as relevant, is as follows:-

"592(1) where:

(a) a company has incurred a debt before the commencement of Part 5.7B;

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

(i) there were reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or

(ii) there were reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they become due; and

(c) the company was, at the time when the debt was incurred, or becomes at a later time, a company to which this section applies; any person who was a director of the company, or took part in the management of the company, at the time when the debt was incurred contravenes this subsection and the company and that person or, if there are 2 or more such persons, those persons are jointly and severally liable for the payment of the debt.

(2) In any proceedings against a person under subsection

(1), it is a defence if it is proved:

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

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

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

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

In order to understand the point of difference between the parties, it is necessary to refer to some authorities. In Shapowloff v Dunn (1981) 148 CLR 72, the Court was concerned with the provisions of s.303 of the Companies Act 1961 (NSW). The section provided that, if in the course of the winding up of a company, it appeared that an officer of the company who was knowingly a party to the contracting of a debt provable in the winding up had, at the time the debt was contracted, no reasonable or probable ground of expectation, after taking into consideration the other liabilities of the company at the time, of the company being able to pay the debt, the officer was guilty of an offence. After referring to the history of the provision and some authorities, Wilson J said (at 85):-

"Against the background provided by the history of the phrase in the bankruptcy legislation, it seems to me that the meaning of the relevant words of s.303(3) is clear. The prosecution must prove beyond reasonable doubt that at the time of contracting the debt the defendant himself had no expectation, reasonably grounded in the whole of the circumstances then existent as he knew them, of being able to pay the debt. It will be seen that the test involves a blending of subjective and objective considerations. The test of reason imports an objective standard, but it is to be applied to the facts as known to the defendant."

His Honour's judgment in relation to this matter was agreed in by Gibbs CJ (at 75), Stephen J (at 79), Murphy J (at 79) and, inferentially, Aickin J (at 79).
Since Shapowloff, there have been a number of decisions of courts dealing either with s.303 of the Companies Act or the legislative successors to that legislation. There has not, I think, been any case dealing with s.592 of the Corporations Law in its present form. The later cases are relevant and of assistance in relation to the present problem, but they do not, in my opinion, change or affect the approach taken in Shapowloff to what are very similar words. The cases to which I refer are Statewide Tobacco Services Limited v Morley (1990) 2 ACSR 405 per Ormiston J of the Supreme Court of Victoria (at 430-2), Commonwealth Bank of Australia v Frederich (1991) 5 ACSR 115 per Tadgell J of the Supreme Court of Victoria (at 122 - 125) and the decision of the Full Court of the Supreme Court of South Australia in Group Four Industries Pty Limited v Brosnan (1992) 8 ACSR 463 per Debelle J (at 512-4).
The cases to which I have referred are by no means the only relevant authorities but, in my opinion, the problem in question can be solved by a reference to the language of s.592 and the dictum from the judgment of Wilson J in Shapowloff which I have cited. The critical words of the section are "there were reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due" (subpara (1)(b)(i) and the similar words in subpara (1)(b)(ii) and in subsec.(2). The two essential expressions or phrases are "reasonable grounds" and "to expect". Together they constitute the criterion upon which liability will be determined. The expression "reasonable grounds to expect" must, of course, be read as a whole.
The essential point made by Wilson J in Shapowloff was that the similar legislation in question in that case formulated a test which involved a blending of subjective and objective considerations. That, in my opinion, is also the case in relation to the present provisions.
The respondents are asked in the interrogatory whether at any time in 1991 they formed the expectation that the company, New World Alliance Pty Limited, would not be able to pay all its debts as and when they became due. I have concluded that the interrogatory is objectionable. It does not tie the expectation to reasonable grounds as does the section. The answer it seeks would, if given, be based entirely on subjective considerations. That makes the interrogatory irrelevant. If it had picked up the entirety of the expression used in the section, it would have brought into play the concept of reasonable grounds. But such an interrogatory would, in my opinion, also be objectionable because it would require the respondents to take account of objective considerations which will eventually be a matter for the Court and will be based on the entirety of the evidence led in the case.
Accordingly the objection to Interrogatory 1 in each case is upheld. Similar considerations apply to Interrogatories 4(b) and 7(b) in each case. The objections to them are also upheld. My conclusions make it unnecessary to deal with submissions concerning the width of Interrogatory 1 as to time.
The remaining interrogatories can be dealt with briefly. I do not find it necessary to set them out. Interrogatory 2(a) asks whether, during the period 1 July 1991 to 29 October 1991, the respondents had any discussions or communications "with any person including ...". There follows a reference to specific classes of persons and the enumeration of a number of topics. In my opinion the interrogatory is too wide because it asks for the information in relation to any person whomsoever. It may be that the interrogatory can be redrawn in a narrower way which will not be objectionable, but I do not think it appropriate for the Court itself to attempt that task. Interrogatory 2(b) is consequential upon 2(a).
The essential objection to Interrogatory 3 is its dependence upon the expression "financial accommodation". It was said that this was too imprecise and uncertain and that the interrogatory should be disallowed for this reason. I disagree with this submission. "Financial accommodation" is a well known expression frequently used in commercial dealings and discussions. I allow the interrogatory subject to the period specified in para. (a) being narrowed to 1 January 1991 to 29 October 1991.
Interrogatory 4(a) asks the respondents to look at three guarantees and then whether, in relation to each, the guarantee was provided pursuant to "any facility" granted by a bank. Objection is taken because of the use of the word "facility". In my opinion the objection is without foundation. I allow Interrogatory 4(a). I have earlier disallowed Interrogatory 4(b).
Interrogatory 5 refers to a report of a Mr. Hoobin and asks when Mr. Hoobin was engaged by New World to provide the report and who on the part of the company engaged him. The interrogatory is said to be fishing and also to seek an admission in relation to an irrelevant matter. I overrule these objections. I do not see why the interrogatory is not relevant and I do not regard it as fishing. The interrogatory is allowed.
In relation to Interrogatory 6 which asks whether each of the respondents was present at any meeting of the Board of Directors of the company held during 1991, the respondents object to so much of it as seeks the substance of what was said by each person present at each meeting of the Board of Directors during the whole of 1991. I agree that the interrogatory is oppressive in this respect. It is not limited as to subject matter. If it were, it may be that it would be allowed. Accordingly, I uphold the objection to Interrogatory 6(b)(iii).
Interrogatory 7(a) asks how much money was owed by the company to the Bank of New Zealand by reason of a cross-guarantee referred to in a note to the company's accounts for the 1991 year. It is said that the interrogatory is oppressive and does not relate to any matter in question in the proceedings. It is further said that the respondents would have to make inquiries as to the indebtedness of the cross-guarantors. I do not agree that the interrogatory is oppressive or irrelevant. It may be that the respondents will not be able to answer it, but I see no reason why they should not be obliged to make inquiries about it. As to relevance, it is plain that the whole of the financial circumstances of the company as they were in the relevant period will need to be the subject of investigation. The interrogatory is allowed. Paragraph (b) is disallowed because the same considerations apply to it as apply to Interrogatory 1.
That leaves Interrogatory 8 (asked only of the second respondent) which, like Interrogatory 6 seeks information on the substance of what was said by each person at a meeting of the Board of Directors. The interrogatory is unlimited as to topic and I disallow it for that reason.
In substance then I have disallowed Interrogatories 1, 2, 4(b), 6(b)(iii), 7(b) and 8(b). The remaining interrogatories are allowed subject to Interrogatory 3 being limited to the period 1 January 1991 to 29 October 1991.
The costs of the motion will be costs in the principal application.

[1993] FCA 1035

23 DECEMBER 1993