Taylor, T.H. v Darke, G.T

Re: TREVOR HENLEY TAYLOR AND ANNETTE JENNIFER TAYLOR trading as MODULEC
ENGINEERING
And: GEORGE THOMAS DARKE
No. G3095 of 1991
FED No. 718
Corporations
(1992) 10 ACLC 1516

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Beaumont J.(1)

CATCHWORDS

Corporations - management and administration - s.592 Corporations Law - whether debt incurred when reasonable grounds to expect that company will not be able to pay debts as they become due - debt incurred by non-director - whether involved in day-to-day management of company.

HEARING

SYDNEY

#DATE 3:9:1992

Counsel and Solicitors Mr B. Sharpe instructed by
for Applicant: Michell, Siller, McPhee and Meyer

Counsel and Solicitors Mr R. Page instructed by
for Respondent: Salvatore Macedone

ORDER

THE COURT ORDERS:

1. Judgment for the applicant against the respondent in the sum of $12,370.00.

2. The respondent pay the applicant interest at the rate of 13% per annum from 15 March 1991 until the date of judgment.

3. The respondent pay the applicant costs of the proceedings.

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

JUDGE1

These proceedings are brought under s.592 of the Corporations Law, in respect of an amount of $12,370 together with interest. The amount of the claim is relatively small and it is unfortunate that whatever the result of the case, the legal and professional expenses incurred by the parties will necessarily be very high. The history and character of s.592 have recently been described by Lockhart J in Rema Industries and Service Proprietary Limited v Coad (1992) 107 ALR 374, at 380 to 381, and I need not repeat that discussion. Lockhart J went on to say, at 381:

"To prove an offence under S592, a number of requirements must be satisfied. The first is the requirement that the company has in fact incurred a debt. Closely related to this requirement is a determination of when this debt was incurred. It is at this time that the reasonable grounds of expectation of the company's inability to pay all its debts must be proved. The time when a debt is "incurred" will vary from case to case depending principally upon the terms of the agreement between the parties, express or implied."

The background to the present matter is described by the first applicant, Mr Taylor, in his affidavit sworn on 16 December 1991. Mr Taylor was cross-examined on his affidavit, but I accept, in substance, his version, which is corroborated by other material on any matter of significance. Mr Taylor says that he and his wife are the proprietors of a business carried on under the name of Modulec Engineering at Katoomba. The business manufactures and supplies, inter alia, module switchboards.
In August 1990, it appears that negotiations were carried out between the parties to these proceedings through an intermediary, a Mr Peter Reid. Mr Reid was not called and, in fact, there is very little evidence as to the terms of those earlier negotiations. However, this would not appear to be material, for present purposes, because there is in evidence a quotation, given by Modulec, dated 17 October 1990, addressed to Mr Reid entitled, "re Centio's meter board". There is then a description of a board with a figure quoted of $12,310, which was said to include freight to site and drawings.
At the back of the quotation, the terms and conditions of the quote are set out and with respect for payment, it was there provided that there are two alternatives: (a) a cash sale with a one-third deposit with the order and the balance on final factory inspection or delivery; or, (b) a 30-day account (subject to credit approval) and it appears that no such approval was specifically given in the present case, in which event terms were to be strictly net 30 days and payable by the 24th of the month following the month of purchase or as negotiated.
It was said to be a condition of the credit account to reserve the right to charge interest on any overdue amounts. On the following day, 18 October 1990, Centio Pty Limited, which carries on business as industrial and commercial builders, prepared an order in favour of Modulec in respect of the switchboard in the sum of $12,370. A delivery address was given on the order form. The date required was said to be "as programme." The price of $12,370 was quoted, and the price quoted was said to be on the basis of delivery to the site.
Lower down in the order form beside the words "date required," there appeared a statement referring to the first week in December with a printed notation below that to the effect that Centio were to be advised immediately if the delivery date could not be kept. The order form provided for a signature on behalf of Centio Pty Limited in its printed terms and in this section of the document the signature of Mr Darke, the present respondent, appeared.
Reference was made in this order form to the standard terms and conditions printed on the back of the document. They included condition 11 which was as follows:

"Payment will be made the last day of the month following the month in which delivery is received by us or in the case of nominated subcontractors and suppliers seven days after we are paid by the client."

(It is not suggested that Centio was a nominated subcontractor or supplier.)

In his affidavit, Mr Taylor went on to say that in early December 1990 he had a telephone conversation with Mr Sam Pogson one of the directors of Centio in which he informed Mr Pogson that the switchboard was ready for delivery.
Mr Pogson said that Mr Taylor should talk to the Centio's construction manager, Mr Darke, about that and indicated that Mr Darke was away at that time.
On 11 December 1990 Mr Taylor sent a fax to Mr Pogson stating that the switchboard was ready for dispatch and asking Centio to notify Modulec if delivery was not required immediately so that storage could be arranged. A request was made that Centio also organise that a cheque be sent to Modulec in the amount of $12,370 as per Modulec's invoice. This was a reference to an invoice dated 20 November 1990 which Modulec had raised and it appears sent to Centio at about the date it bore.
Mr Taylor also gave evidence in his affidavit that in late December 1990 he had another telephone conversation with Mr Pogson in which he inquired whether the fax dated 11 December had been received. Mr Pogson said that it had been received but that Mr Taylor should talk to Mr Darke about delivery when Mr Darke gets back. Mr Taylor again asked for a cheque to be sent off. Mr Pogson said that payment for the goods was 30 days after the month of delivery. Mr Taylor said that no credit account had been established so that it should not be assumed that 30 days credit was available.
Mr Pogson then referred to Centio's condition 11 on its order form. Mr Taylor responded that it was not his practice to offer 30 day credit on initial transactions. Mr Pogson then said the following:

"Well, it's written on our order, that's what we're going by. If you're not happy with our order you can send it back. We can always get it off someone else."

In his affidavit Mr Taylor went on to say that in early January 1991 he had a conversation with Mr Darke to the following effect:

"I said, "What's going on, George? When are you going to need this board?" He said, "The jobs are running a bit behind. I guess it will be probably another month or so before we need it." I said, "Well, what can we do about payment because we've had it ready at the end of November for delivery first week in December as per your order?" He said, "We pay at the end of the month, following the month of delivery." I said, "That's no good to us." He said, "It's on our order." I said, "The terms and conditions are a bit one way, George." He said, "Not really, Trevor. I've just formulated them from previous problems and experience I have had." I said, "Maybe we'll have to compromise. If you get a cheque off for say half the amount and the balance 30 days subject to credit approval." He said, "I'll have to speak to Sam about that." I said, "I'll get an account form off to you."

Mr Taylor gave further evidence in his affidavit that at the end of February 1991, he visited the site at which Centio was proposing to install the meter board and was informed by Mr Sizar that the meter board was then required. According to the order form of Centio dated 18 October 1990, Mr Sizar was the site foreman. Mr Taylor also gave evidence of a conversation with Mr Darke on 14 March 1991. There is an issue as to this conversation. Mr Taylor's version is as follows:

"Mr Darke said, "We are ready for the board now. Can you arrange for delivery on Friday?" I said, "We have come to no final agreement about payment yet. Can you get a cheque for at least part payment so we can pick it up on delivery?" He said, "There's no question. You will be paid, but we can't pay it until we get paid". I said, "But this is your own development, so you must have some money somewhere". He said, "It is arranged on finance and we get our money on progress payment". I said, "I'd better get Garth (Bird) to talk to you".

In his affidavit sworn on 3 March 1992, Mr Darke denies this conversation. He says he can recall saying to Mr Taylor words to the following effect:

"There is no question of pre-payment. We have discussed this before and I have pointed out the terms of our order. I have absolutely no reason to suspect that you won't get paid in due course, but in my experience, it won't be until we get paid. If you want to know any more you will have to talk to Sam."

There is in evidence a facsimile message signed by Mr Darke addressed to Mr Garth Bird at Modulec dated 14 January 1991 as follows and I quote:

"Ready for switchboard on site now. Understand Trevor's situation. We will arrange earliest possible payment and will endeavour to meet your need for payment by end of March."

According to Mr Darke's evidence, this fax was sent after he had spoken to Mr Pogson and reflected Mr Pogson's instructions to Mr Darke. On behalf of the applicants, reliance is also placed upon the affidavit evidence of Michelle Jeffery who swore an affidavit on 16 December 1991. She is the accounts clerk for Modulec. She said that on 28 March 1991 she telephoned Centio and spoke to Mr Darke. She said that payment was now due and was wondering when Modulec was going to get the cheque.
Mr Darke said that payment will be made early next week. In fact, no cheque was received as Centio was unable to pay its debts. Miss Jeffery was cross-examined on her affidavit, and I accept her evidence as reliable. Evidence as to the financial position of Centio was given by Mr K.J. Rennie, a chartered accountant and official liquidator; at a general meeting of the members of Centio, held on 3 May 1991, it was resolved that Centio be wound up voluntarily; at a meeting of its creditors on 24 May 1991, the company was placed into liquidation, and Mr Rennie was appointed its liquidator.
Mr Rennie refers in his affidavit to a report as to the affairs of Centio, prepared by Mr Pogson, dated 3 May 1991, as at 19 April 1991. In his oral evidence, Mr Rennie said that in some respects, the report gave a rather optimistic view of the affairs of the company. However, for present purposes, it is sufficient for the court to proceed on the footing that the report as to affairs as at 19 April 1991 reflected the true position of the company at that date.
According to the report, the company had the following assets: sundry debtors in the sum of $30,000 - that was being an amount said to be owed by Hardie Iplex Pipelines; cash of $502; cash at bank of $8000; plant and equipment of $46,657, with an estimated realisable value of $25,000 and other assets of the value of $3058, being deposits held by councils, presumably in respect of pending developments. Thus the total estimated realisable values were said to be $86,258.
From this, there had to be subtracted the following liabilities: claims by employees in the sum of $15,050 as follows: Mr Darke, wages, $900; holiday pay, $7651 (said to give a total of $8552); two other employees who are not involved in these proceedings, in the sum of $288 for wages and $833 for holiday pay (said to give a total of $1171) and in the other case, $330 for wages and $1497 for holiday pay (a total of $1827), and the fourth employee claiming was Mr Pogson, who claimed wages of $900 and holiday pay of $8977, (and for some reason which appears to be an error, this is shown as a total liability of $3500 in Mr Pogson's case) said to give an overall total of $15,050.
The next liability shown in the report is an amount of $119,699 said to be owing to Abrojazz Pty Limited, secured on a floating charge. The next liability is preferential creditors in the sum of $24,645, although no details of those creditors appear in the report. It thus appears that the estimated amount available for unsecured creditors was a deficiency of $73,136, assuming all those preferential claims, including the secured claim, could be met. The other liability which is certificate 1 for present purposes is a total of $849,250, said to be owed to unsecured creditors, giving a total deficiency of $922,386. There is annexed to the report a list of unsecured creditors, which includes Modulec, shown as a creditor in the sum of $11,917.84. There are many creditors listed, some for relatively small amounts. The background to the activities of Centio was described in the affidavit of Mr Pogson, sworn on 2 September 1992.
Mr Pogson says he was a director of the company, from March 1985 until the appointment of Mr Rennie. The only other director was his wife, but it appears that Mrs Pogson has not been involved in the management of the company or active in her role as a director. Mrs Pogson's father is Mr Darke. According to Mr Pogson's affidavit, on or about 15 March 1991 the following persons were employed by the company, and the nature of their employment was as follows: George Darke, construction manager; David Hans, site foreman; Tahir Sizar, site foreman; Phil Wilson, estimator; Luke Joseph, sales and marketing duties; Karen Lee, office and clerical duties.
Mr Pogson said that verbal authority had been given by him to Mr Darke, Mr Hans, Mr Sizar, and Mr Wilson, to sign purchase orders on behalf of the company, in connection with contracts being performed by the company. He said the company was engaged in the construction industry. It would submit quotations and tenders to obtain construction work. Prior to submitting a quotation or a tender, the company would firstly seek quotes from relevant subcontractors to calculate costings for work to be provided.
Mr Darke would be engaged in the obtaining of such quotes and generally in the provision of estimations of costing of the work required. Having obtained the necessary quotes and assessments, Mr Darke would then pass the necessary information on to Mr Pogson, and he would then prepare the final quotation or tender for the work, which the company was interested in obtaining. Mr Pogson said that the company performed all its construction activities on site but maintained an office at suite 5, 80 Kitchener Parade, Bankstown.
Mr Pogson spent nearly all his time at that office and was not engaged in the day-to-day building activities of the company. Such work was under the care of the construction manager and the site foreman at each site. Mr Pogson's day-to-day activities involved the approval of payment of all creditors; recovery and payment of amounts due by debtors; preparation of budgets for the various construction jobs; the approval of orders and subcontracts; the preparation of quotes and tenders; control of all accounts maintained by the company and the obtaining of work for the company.
Mr Pogson said that all payments to creditors were approved by him and that he and his wife were the only signatories on the company's cheque account. He said that before a progress payment was made to a subcontractor, it was usual for Mr Darke to inform Mr Pogson of the stage which a particular subcontractor had reached. Mr Pogson said that in 1991, prior to the company going into liquidation, the company was engaged in a number of construction jobs at Chipping Norton, Moorebank, Riverwood and Blacktown. They were at various stages of completion. Mr Darke was responsible for the day-to-day work carried out at each of these sites. He said that Mr Darke did not attend any directors' meetings or meetings with the company's accountants and did not have access to the company's accounting records.
It appears from the material annexed to the affidavit of Mr Rennie that in the period 1989 through to the beginning of 1991, the company had a substantial turnover in its operations. For instance, the balance sheet as at 30 June 1990 showed trade debtors in the sum of $1,174,178.60 and trade creditors in the sum of $799,717.53. However, as at 31 March 1991, the position had been dramatically changed. At that stage, there was a balance sheet deficiency of $683,688.45 on the figures shown in this material, which, as I have already said, were according to Mr Rennie and his opinion I would accept without reservation, optimistic. But even taking those figures as at 31 March 1991, it appears that there were then trade debtors of $201,981 and trade creditors of $644,779.
The optimism of those figures, which themselves disclosed a substantial deficiency, is revealed when one compares them with the report of affairs as at 19 April, some three weeks later, when trade debtors are only $30,000. In these proceedings, which were fiercely contested, a major issue arose as to the actual role played by Mr Darke in the affairs of Centio. In his affidavit sworn on 3 March 1992, Mr Darke said that in the early 1980s, in Newcastle in New South Wales, he was the managing director of two companies: G.T. Darke Constructions Proprietary Limited and Ambassador Homes Proprietary Limited.

"The other director of these two companies was my wife. Both of these companies failed and were wound up as a result of certain building work having been underpriced by an employee involved in preparing quotes for the building work to be carried out by the companies."

In March 1985, he and his wife were both made bankrupt but were discharged from their bankruptcies in March 1988. In July 1988, he joined Centio.
As I have already said, Mr Darke is the father-in-law of Mr Pogson. It was quite apparent to me that Mr Darke had had considerable experience in the building industry and his experience in that field must have far exceeded that of his son-in-law.
Mr Pogson held qualifications as a boilermaker and had been engaged in constructing some rural sheds in country districts of New South Wales, but he had not had experience of commercial industrial development. He had not had any prior experience of commercial and industrial development on the scale embarked upon by Centio.
I accept that there was some division of labour and activity as between Mr Darke, on the one hand, and Mr Pogson on the other. In particular, I accept their evidence that Mr Pogson had the responsibility for the financial administration of the affairs of the company. At the same time, the conclusion is open and, in my opinion, the inference should be drawn that Mr Darke was very much involved in the day-to-day management of the affairs of the company at the managerial level in terms of the carrying out of the construction and development work which was the company's activity.

As has been said, the first requirement of s.592 is that the company has, in fact, incurred a debt. It is not disputed that the company incurred a debt to Modulec in the sum of $12,370. The next question is to determine the date at which this occurred. This has been the subject of considerable argument and evidence. It is true that the standard conditions of Centio and Modulec are different in this respect.
The proper conclusion to be put upon the course of events, in my opinion, is that no firm agreement as to the date of payment of the debt was reached until March of 1991. Until that stage, the parties were in truth in a state of negotiation on this point. However, by the time the meter board was delivered on 15 March 1991, it is clear, in my view, that the amount of the price was then due.
On the other hand, contrary to a submission put on behalf of Mr Darke, I do not think that it could be said that there was any liability on Centio to pay the price for the board until delivery in March of 1991. It will be recalled that in the fax sent by Mr Darke on 14 March, there was a statement that he would endeavour to meet Mr Taylor's need for payment by the end of March. I would take this to be an acknowledgment that the price was then due but that an attempt would be made to make payment by the end of March.
Like Lockhart J in Rema Industries, above, at 381, I am satisfied that the debts were incurred by Centio to Modulec at the time of delivery of the goods. I am further satisfied that there was no other special arrangement for payment. It follows, in my opinion, that the relevant debt was incurred as at 15 March 1991.
As I have already said, the evidence of Mr Rennie indicates that as at the end of March at the latest, Centio was very much insolvent. It is but a short step for me to infer that as at 15 March, some two weeks earlier, the company was also insolvent. If any corroboration of this conclusion is required, it could be found in the evidence of Mr Pogson given today, where it emerged quite clearly that at least in the period towards the end of 1990 and in the beginning of 1991, Centio was entirely dependent for its cash flow and its liquidity upon income being generated from a substantial new project.
The position was that Centio was completing its existing projects and although it had two smaller projects to which recourse might have been had for some income, the substantial amount - that is to say, nearly $1,000,000 - required to meet the claims of unsecured creditors had to be found from a new source. Although Mr Pogson said that Centio held a bank overdraft facility with its bank in the sum of $150,000, I am satisfied that this facility was fully used in the period in question, and no recourse could be had to it for present purposes. Mr Pogson said that it was hoped that Centio could commence a substantial development at Turrella - he mentioned a figure of approximately $2,000,000 as the size of this project - but went on to say in his evidence that this project ran into difficulties and never in fact proceeded. In those circumstances, the company's financial position as at March 1991 was hopeless.
The next matter to be considered for the purpose of s.592(1), is whether immediately before the time when the 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 become due. In my opinion, there were reasonable grounds so to expect, and here also I refer to the explanation of the relevant principles given by Lockhart J in Rema at 381-2. In my opinion, only one possible conclusion was open, and that was that as at 15 March Centio was not able to pay all its debts as and when they became due.
The next matter to be considered is the defence which is raised under s.592(2). Again, the defence is discussed by Lockhart J in Rema at 382, and the defence is, according to the terms of the statute, open, if it is proved that the debt was incurred without the person's authority - and this is not a point available here having regard to the fact that Mr Darke signed the order form - but under subparagraph (b) it is a defence if:

"at the time when the debt was incurred the person did not have reasonable cause to expect that the company would not be able to pay all its debts as and when they became due."

This defence was forcefully argued by counsel on behalf of Mr Darke, but I am of the opinion that it has no substance. By reason of the small size of the company and by reason also of the important role played by Mr Darke in organising the construction side of its activities, and by reason, further, of his close family connection with the only directors of the company, I am of the view that the only inference that can properly be drawn is that Mr Darke was fully acquainted with the financial affairs and difficulties that this company confronted in March 1991.
The final point that remains to be considered is whether Mr Darke, not being a director of the company, can be said to have taken part in its management within the meaning of s.592(1). In this regard I have been taken to a number of authorities, but in particular reliance is placed, on behalf of Mr Darke, on the reasons of Burchett J in Holpitt Proprietary Limited v Swaab (1992) 6 ACSR 488, in particular the passages appearing at 591-2.
His Honour there says:

"That an application of the maxim Nocsitur Sociis would suggest that the other persons, that is to say persons other than a director, that the other persons embraced by the section are persons whose management role may be likened to that of a director."

I am prepared, for the purposes of the present argument, to accept that as a correct statement of principle. Even if it be assumed that it were necessary, in order for the applicants to succeed here, to show that the role of Mr Darke in management may be likened to that of a director, I would so conclude.
As I have already indicated Mr Darke was entirely in charge of the construction activities of the company. He had great experience in this area whereas the directors had not, relatively speaking, much experience at all. It is clear to me that the company was run, conducted and managed on the footing that there would be a division of labour and activities along the lines I have indicated.
An integral part of the management of Centio's activities fell to be carried out by Mr Darke and by Mr Darke alone. In that sense it may be said, in my view, that his role in management may be likened to that of a director. I bear in mind in this respect the important consideration that this is a small company. This is a matter touched upon by Ormiston J. in Commissioner for Corporate Affairs v Bracht (1989) 7 ACLC 40 at 48.
Reference should also be made to the discussion by Young J. in Cullen v Corporate Affairs Commission (1988) 7 ACLC 117 at 125. In those circumstances I am of the opinion that relief should be granted as asked.

[1992] FCA 718

03 SEPTEMBER 1992