Taylor, T.H. v Powell, F.J

[1993] FCA 121

Re: TREVOR HENLEY TAYLOR AND ANNETTE JENNIFER TAYLOR TRADING AS MODULEC
ENGINEERING
And: FREDERICK JAMES POWELL
No. N G3094 of 1991
FED No. 121
Number of pages - 17
Corporations Law
(1993) 10 ACSR 174

COURT

IN THE FEDERAL COURT OF AUSTRALIA

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

CATCHWORDS

Corporations Law - whether director is personally liable for payment of a company's debt under s.592 Corporations Law - date at which debt was incurred - whether reasonable grounds to expect company would not be able to pay its debts as and when due - objective test of reasonableness - relevance of extended terms for payment of debts - relevance of funds available to the company from an external source.

Corporations Law (Cth) s.592

Deputy Commissioner for Corporate Affairs v. Caratti (1980) 5 ACLR 119

Dunn v. Shapowloff (1978) 2 NSWLR 235

Trevor Henley Taylor and Annette Jennifer Taylor T/as Modulec

Engineering v. George Thomas Darke (Beaumont J., unreported, 3 September 1992)

Morley v. Statewide Tobacco Services Ltd (1992) 8 ACSR 305

Rema Industries and Services Pty Limited v. Coad (1992) 107 ALR 374

Shapowloff v. Dunn (1982) 148 CLR 72

3M Australia Pty Ltd v. Kemish (1986) 4 ACLC 185

HEARING

SYDNEY, 15-16 December 1992

#DATE 11:3:1993

Counsel for the Applicant : M R Aldridge

Solicitors for the Applicants : Michell Sillar McPhee Meyer

Counsel for the Respondent : R K Eassie

Solicitors for the Respondent : Slattery Jurd and Co.

ORDER

The Court orders that:

1. There be judgment in favour of the applicants against the respondent in the sum of $48,276.89.

2. The respondent pay the applicants' costs.

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

JUDGE1

DAVIES J. The applicants in these proceedings, trade creditors of a company, seek judgment against a director of the company under s.592 of the Corporations Law, as that law applied to debts incurred prior to the enactment of Pt5.7B of the Corporate Law Reform Act 1992 (Cth).

1. Section 592 of the Corporations Law provided, inter alia:-
   "(1) Where:
   

(a) a company has incurred a debt;

(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 the 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."

1. Section 592, and its material equivalent in the Companies Code, has been the subject of judicial scrutiny, as reviewed by Tadgell J. in Commonwealth Bank of Australia v. Friedrich (1991) 5 ACSR 115 at 124. See also 3M Australia Pty Ltd v. Kemish (1986) 4 ACLC 185; Rema Industries and Services Pty Limited v. Coad (1992) 107 ALR 374; Morley v. Statewide Tobacco Services Ltd (1992) 8 ACSR 305 and Trevor Henley Taylor and Annette Jennifer Taylor T/as Modulec Engineering v. George Thomas Darke (Beaumont J., unreported, 3 September 1992). I need not outline the general nature of the provision.

2. The applicant creditors, Trevor Henley Taylor and Annette Jennifer Taylor, carried on business as manufacturers and suppliers of electrical engineering products under the name Modulec Engineering ("Modulec"). Powells Electrical Services Pty Limited ("PES"), now in liquidation and of which the respondent, Mr Frederick James Powell, was a director, became indebted to Modulec in the sum of $24,535 on 22 May 1992 and of $9,250 on 21 June 1990, which debts PES did not pay.

3. PES carried on a business which included the supply, installation and wiring of electrical power boards. The respondent, Mr Powell, was one of three directors of PES and he fulfilled the role of its managing director, responsible for estimating, approving and paying invoices and the day to day running of the company.

4. In the period from January to June 1990, a sub-contract to Bryangle Pty Ltd ("Bryangle") was the most substantial project in which PES was involved. There was evidence that in the period April to June 1990, PES was involved with at least four other jobs in progress; namely, two Australian Construction Services contracts for $9,550 and $2,939.02, a contract with Dominelli Ford for $1,398.73 and a contract with G.E. Hurst (Construction) for $80,426.41. However, the Bryangle contract was the most substantial component of PES' business.

5. The trading relationship between PES and Bryangle commenced in mid 1989, when PES contracted with Bryangle to supply and install seven distribution boards and two sub-boards for a development project in which Bryangle was involved. Thereafter, PES performed works in part performance of its contractual obligations. However, the trading relationship between PES and Bryangle deteriorated in the first half of 1990.

6. On 26 February 1990, PES submitted to Bryangle a progress claim for $10,000 which was paid in full. On 26 February 1990, PES submitted to Bryangle a progress claim for $38,000, which was not paid on the ground that payment was premature. The completion date for that project was 15 March 1990, but work was delayed due in part to bad weather. In a letter of 27 March, Bryangle alleged breach of the agreement and informed PES that its sub-contract would be determined if the electrical work was not completed by 30 March. In a letter of 29 March, Mr Powell said to Bryangle that the delay was caused by a delay in the manufacture of the specified light fittings and in the pouring of concrete bases and also by Bryangle's failure to make progress payments. Mr Powell requested that Bryangle make payment of the $38,000 owing to PES within 7 seven days. This demand was not met.

7. On 17 April, Bryangle's cheque for $20,645.40 was banked but was dishonoured. The cheque was redeposited on 24 April and was again dishonoured. On 30 April, Bryangle made further complaints that PES' staff were not present on site, that the distribution boards were not wired and that sub and main switchboards had not been provided as requested. On 2 May, Mr Powell wrote to Bryangle justifying PES' position against Bryangle's stated intention to claim for liquidated damages, and making a further demand for a commitment to pay outstanding and overdue progress claims within 24 hours. On or about 2 May, Mr Powell contacted his solicitor to obtain advice with respect to the overdue payments. On 14 May, Bryangle wrote to PES stating that the progress claim of 26 February would not be met, because light fittings certified as correct had later been removed from site and because, although on site, the power boards had not yet been installed. Bryangle gave formal notice that PES was held in default under the contract. On 15 May, PES suspended work on the Bryangle project for non-payment of progress claims.

8. On 14 May 1990, a personal cheque, from a Mr Grant Hickey on behalf of Bryangle, was deposited but was dishonoured. On 17 May, PES' solicitor advised PES to issue a s.364 (Companies Code) notice to Bryangle in demand of payment. This notice was served on Bryangle by fax on 17 May.

9. In a letter of 18 May, PES and Bryangle entered an agreement whereby Bryangle agreed to pay a bank cheque of $41,000 to PES and PES agreed to practical completion of the project by 25 May. PES and Bryangle confirmed their willingness to complete the project in their mutual interests. Mr Powell stated in evidence, however, that the work required to bring the project to a state of practical completion would realistically have taken one month. The $41,000 was, by 18 May, only a portion of the sum which PES claimed from Bryangle.

10. On 18 May, Bryangle provided PES with a bank cheque for $41,000 which was honoured on presentation. On 5 June, Bryangle's further cheque for $17,076 was deposited but was dishonoured. On 12 June, the cheque was represented and dis-honoured, and again on 15 June, the same cheque was presented and dishonoured. On 13 June, a further cheque from Bryangle for $17,076 was deposited and was dishonoured. On 21 June, Bryangle sent a fax to PES in which it expressed complaint with the unfinished state of the work. Mr Powell stated in evidence that the reason PES went "slow" on the project was to use the unfinished portion of the work as leverage to achieve payment of the dishonoured cheques. On 26 June, Bryangle sent a letter advising PES of its intent to determine the contract as of that date and to withhold all outstanding monies to offset the additional costs of completion.

11. Bryangle was placed in liquidation in February 1991, at which date its outstanding debt to PES as claimed was $74,694. PES itself went into liquidation on 24 April 1991.

12. The second major contract in which PES was involved was that between PES and G.E. Hurst (Construction). In the accounts of PES as at 30 June 1990, G.E. Hurst was shown as a trade debtor in an amount of $71,000. This amount, however, represented the total balance of the contract moneys, which were not due to PES until the work was completed and invoiced. An amount of $99,638 which PES subsequently claimed it had earned was disputed, and when PES was placed in liquidation, an amount of only $60,796 had been paid.

13. On 16 May 1989, PES as sub-contractor invited Modulec to tender for the supply of a number of electrical power boards required by Bryangle and accepted Modulec's tender on 11 October 1989. On 26 October 1989, PES applied for, and obtained, a credit account with Modulec. The terms as set out in a letter from Modulec to PES on 12 October 1989 were strictly net 30 days with accounts being payable on the 24th of the month following the date of purchase.

14. In December 1989, PES requested that Modulec provide two sub-boards for Bryangle. An invoice (No. 1234) was issued to PES on 30 April 1990, in the amount of $12,000. On 11 May 1990, Mr Taylor, a director of Modulec, informed Mr Powell by telephone that the sub-boards were nearing readiness for delivery. Mr Powell requested that Modulec delay delivery until a Bryangle cheque to PES was cleared and honoured by the bank. Mr Taylor agreed to delay delivery. In the meantime, Modulec forwarded to PES a further invoice (No. 1238) on 11 May 1990, in the amount of $12,535.

15. On or about 18 May 1990, Mr Powell telephoned Mr Taylor to inform him that payment from Bryangle had been received and that delivery should proceed. That payment was the cheque for $41,000 received on 18 May 1990. The first delivery of goods from Modulec to PES occurred on 22 May 1990. On 21 June 1990, a second delivery of goods was made by Modulec to PES, and an invoice (No. 1264) for $9,250 was forwarded on 30 June 1990.

16. There were, consequently, two relevant dates of delivery; 22 May 1990 in respect of invoices No. 1234 and 1238 for $24,535, and 21 June 1990 in respect of invoice No. 1264 for $9,250. Counsel agreed that, for the purposes of this case, the dates of delivery should be taken as the dates on which PES incurred the subject debts. The agreement accords with authority such as Hussein v. Good (1990) 1 ACSR 710, Taylor and Taylor v. Darke (Beaumont J. unreported, 3 September 1992) and Rema Industries and Service Pty Ltd v. Coad, cited above.

17. I need not discuss the accounts of PES, as disclosed by the Profit and Loss Account and Balance Sheet as at 30 June 1990 or by the cash book. It is clear that the accounts were inadequate and misleading. For example, the Balance Sheet included amongst the stated debtors sums which were not due while the cash book included only the sums received and paid out. No accurate record of amounts payable and receivable is extant, if it ever existed. The information about the company's affairs which is most useful for present purposes comes from a collection of documents held by the liquidator of PES. These documents, however, principally concern liabilities which were still outstanding as at the date of liquidation of PES and do not disclose sums which were due in May and June 1990 but which were paid prior to liquidation. However, the documents are revealing for our purposes.

18. The documents show that PES was late in forwarding to the Australian Taxation Office its group tax for May 1990 and that the group tax due for June 1990 was not paid. Needless to say, when a company is unable to pay its group tax, which constitutes a deduction from the wages payable to employees and represents the PAYE tax payable by employees, then the company is experiencing significant financial problems.

19. Of the creditors of PES, ALH Australia Limited on 4 June 1990 sued PES for $8,927.75 for moneys due between January and April 1990. Another creditor, Fire Fighting Enterprises (Aust) Services Pty Limited invoiced PES on 29 January for a amount of $1,779 and, on 21 February, for a further amount of $12,964, in each case payable on 7 day terms. These amounts were not paid. A summons was issued on 16 August 1990, but the sums were apparently still outstanding when PES went into liquidation. GEC Australia Limited sued PES on 22 August 1990, for $31,188.94 for work and services performed in March to June 1990. Easy Metal Products NSW Pty Limited later sued PES for $11,477 for goods and services provided between 1 December 1989 and 30 December 1990. Kaperbury Pty Limited sued PES for $3,258.50, moneys due between March and April 1990. D. and J. Cable Wholesalers invoiced PES for $1,040.50, moneys due in February 1990.

20. These facts show that, during May and June 1990, PES was unable to pay its debts as they fell due. The clearest instances are those of Fire Fighting Enterprises (Aust) Services Pty Limited and GEC Australia Ltd, which issued summonses in August 1990, and of ALH Australia Ltd which issued a summons on 4 June 1990. But all the information, considered as a whole, shows that, on 18 May 1990, when Mr Powell asked Mr Taylor to deliver the electrical power boards which PES had ordered, PES was unable to pay its debts as they fell due, for PES was at that time holding overdue invoices which it was unable to pay.

21. Another indication to the same effect is the bank statement of PES for May 1990. PES had been in credit with its banker, Westpac Banking Corporation, until about March 1990. It then made an arrangement for an overdraft, for which no security was provided. PES utilised the overdraft during April 1990, and by early May 1990 the overdraft was at its limit. It is clear from the bank statement for May 1990 that a number of cheques drawn prior to 18 May 1990 must have been held back awaiting the receipt of a credit. A comparison of the cheque numbers reveals that many cheques which were presented shortly after 18 May 1990 must have been drawn at an earlier stage. The result was that the $41,000 paid in on 18 May rapidly disappeared, leaving PES without funds to pay Modulec for the electrical power boards, the delivery of which Mr Powell had requested.

22. The question to be determined under s.592(1) is whether, at a time immediately prior to the deliveries on 22 May 1990 and 21 June 1990, there were reasonable grounds to expect that PES would not be able to pay all of its debts as and when they became due. Under s.592(2)(b), the question is whether Mr Powell had reasonable cause to expect that the company would not be so able.

23. The existence and reasonableness of such grounds of expectation are to be determined for the purposes of s.592(1) by the application of an objective test, as explained in Dunn v. Shapowloff (1978) 2 NSWLR 235 and Shapowloff v. Dunn (1982) 148 CLR 72. In the former case in the Court of Appeal, Mahoney J.A. said at 244:-
    

"Next, it is necessary to examine what is meant by ability to pay. That which is in question is not whether the company, at the relevant time, will be solvent or whether it will, on an assumed and instant liquidation, have a surplus sufficient to meet the debt, though these may be relevant in considering the statutory question. What will constitute ability to pay must be determined, in a realistic way, by reference to the facts of the particular case, after taking into consideration, inter alia, the company's assets and liabilities and the nature of them, and the nature and circumstances of the company's activities: cf. in other contexts, Lyde v. Barnard (1955) p 215, at pp 230, 241, 247,

248. The cash expected to be available at the particular time will be relevant, but not necessarily determinative. It will, for example, be relevant to consider whether the company could be expected to pay the debt by borrowing; whether, if it must realize assets to obtain the money to pay the debt, it can be expected to do this by the relevant time and at what price; and whether what it will have to do in paying and being able to pay the debt will involve the company or its officers in voidable transactions, improper preferences, or breach of obligations under the general law or relevant legislation. It would, I think, be proper, in a particular case, for account to be taken appropriately of a promise, legally binding or otherwise, to provide money or financial assistance, by loan, subscription for share capital, or (as was suggested in this case) by the provision of a guarantee."

In 3M Australia Pty Limited v. Kemish (1986) 4 ACLC 185 at 193, after citing this passage, Foster J. said:-

"I am equally of the view that Mahoney J.A.'s remarks as to some flexibility being imported into the question of time for payment are applicable to the construction of the new section. 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 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."

1. For the purposes of s.592(2), the test of 'reasonable cause' involves a "blending of subjective and objective considerations" as discussed by the High Court in Shapowloff v. Dunn (1981) 148 CLR 72 at 85. I adopt the formulation of the inquiry as proposed by Foster J. in Kemish, at 191-2
   

"The exculpatory provisions of subsec.2 are then brought into play if it be established that the defendant did not have 'cause to expect' either because he was unaware of the existence of the grounds so established or, although being aware of them, was unable to interpret their significance in relation to the company's ability to pay its debts as they fell due. The next step is to inquire whether this ignorance or failure properly to interpret the 'grounds' was objectively 'reasonable'. In determining this latter question, regard must necessarily be paid, inter alia, to the actual position occupied by the defendant in the company, the range of responsibilities properly attached to it, the degree to which it properly fell upon him to take steps to acquaint himself with the facts going to make up the 'grounds', established under subsec. (1) or to acquire the expertise necessary to interpret them correctly. Quite clearly, considerations relating to the actual position of the defendant are involved in the determination of the objective reasonableness of the absence of cause alleged by him."

This test has been applied in Morley v. Statewide Tobacco Services Ltd (1992) 8 ACSR 305, in Travel Compensation Fund v. Dunn (1992), in Southern Star Group Pty Ltd T/as KGC Magnetic Tapes v. Taylor (No. 2) (1991) 9 ACLC 1211, and in Rema Industries and Services Pty Ltd v. Coad (1992) 107 ALR 374.

1. Evidence of agreements as to the time of payment or evidence disclosing the history of a trading relationship, will be relevant. See the discussion of the Court of Appeal of New South Wales in Monsoon Industries Pty Ltd v. Simpson (unreported, 25 September 1992). In the course of giving evidence, Mr Powell referred to oral agreements he had reached with some of PES' trade creditors, permitting 60 day terms of payment instead of the shorter terms specified in the invoices. Reference was also made to a practice, said to be common throughout the building industry, of allowing extended time for the payment of debts. In this respect, however, for the purposes of the application of s.592, it is necessary to distinguish between the time when a debt falls due and the time when a debt is collected or enforced. The latter may only serve as evidence of the time of payment and not of the time when payment was due.

2. It is accepted that s.592 is not directed to the situation where a company is experiencing a mere temporary dip in liquidity. In this respect, some flexibility is adopted in the application of s.592. However, as stated by Mahoney J.A. in Dunn v. Shapowloff at 244:-
   

"The fact that there is a reasonable or probable ground of expectation that the company will be able to pay the debt at a time distant from the time when the debt falls due will not normally be an answer to the prosecution".

1. It is relevant that debts owed by PES to Fire Fighting Enterprises (Aust) Services Pty Ltd, Easy Metal Products NSW Pty Ltd, Lighting and Allied Products Pty Ltd, D. and J. Cable Wholesalers and ALH Australia Ltd, would have been "due" by 18 May 1990, even on the assumption of extended 60 day terms.

2. Sometimes, such facts are counter-balanced by the consideration that the creditors prefer that the debtor company continue trading, albeit that their payments are overdue, in anticipation of payment at some later date. See the discussion by Foster J. in Kemish at 195. However, s. 592 refers to "all debts". In the present case there was no evidence of a specific arrangement between PES and all of its creditors, or for that matter, evidence of a specific arrangement with respect to any particular creditor. It is clear, from the fact that a summons was issued on 4 June 1990 and two others in August 1990 and from the fact that the May group tax was not paid on time, that by 22 May 1990, PES was unable to pay its debts as they fell due and that not all of its creditors were content to wait.

3. The expectation that funds may be available from a source external to the company was held to be sufficient to protect a director from personal liability in Deputy Commissioner for Corporate Affairs v. Caratti (1980) 5 ACLR 119. In that case, a director in control of a group of related companies was absolved of personal liability for a contract made by one company which had historically relied upon the injection of loan funds from the other companies as required, notwithstanding that the financial support was subsequently withdrawn. Likewise, Foster J. in Kemish at 188 and 193, and Mahoney J.A. in Dunn v. Shapowloff at 244, gave consideration to a company's capacity to borrow or realise a promise to make funds available to the company. In Flavel v. Day (1985) 9 ACLR 502, Prior J. similarly took account of a promise to lend money to a company where the director had periodically injected personal funds into the company to enable it to meet its obligations.

4. PES had a non-current liability loan of $52,990 from an associated holding company, Powells Power Tools Pty Limited ("PPT"), which had been established in 1982. Mr Powell, together with his two sons, were the directors of PPT, and Mr and Mrs Powell were the two shareholders. Mrs Powell was responsible for the day to day management of PPT and Mr Powell inspected the books on a monthly basis. Between 1988 and 1989, PPT advanced $32,990 to PES for set-up expenses and wages, and PPT advanced a further $20,000 to PES by way of working capital at a later date. PPT remained a creditor in the amount of $52,990 at the date of liquidation of PES. PPT was placed in liquidation on 24 August 1992.

5. PPT itself had an overdraft facility with Westpac, which was secured by way of a first mortgage over the residential property co-owned by Mr and Mrs Powell at 28 Greenacre Road, Hurstville. This property was valued at $500,000 as at April 1991. The sole encumbrance on this property during the first half of 1990 was a debt in the amount of $180,000.

6. Mr Powell stated in evidence that, although there were no formal arrangements in place, it had been contemplated since the formation of PES that all funds available to PPT would be made available to PES as and when required. The overdraft facility which PPT had with the Commonwealth Bank of Australia was not provided subject to a restriction or limitation, so that the directors of PPT could make those funds available to PES should they decide so to do. Mr Powell stated that, as a director of PPT together with his two sons and of PES together with his wife, he fully expected that such funds would be made available to PES if required.

7. However, no evidence was given of an arrangement whereby PES was accorded the right to call upon any such external source of funds, or even of any discussion with respect to the matter. It was submitted by Mr R.K. Eassie, counsel for Mr Powell, that PES, together with PPT, was one of a group of companies with an established history of inter-company loans. Yet, PES had no right to call upon PPT for further funds and, in the period with which we are concerned, did not do so. At that time, the debts incurred by PES in December 1989, January, February and March 1990 remained unpaid. Mr Powell himself was not in control of the finances for PPT, for that company was managed by his wife. PPT's ability to borrow was dependent upon an arrangement being made with PPT's bank and upon the provision of security by way of the family home, which was jointly owned by Mr Powell and his wife. Mr Powell could not expect moneys to be made available to PES through PPT unless Mrs Powell agreed to extend the mortgage upon the family home. Mr Powell gave no evidence of any discussion with his wife to this effect during the period with which we are concerned, although it appears that later in the year, in September or October 1990, arrangements were made to provide further moneys to PES and PPT using the Powell's home as security. But that, of course, was several months later and long after many of the debts of PES had become due and payable.

8. The ultimate question to be addressed, was stated by Foster J. in Kemish at 197, as:-
   

"Whether an ordinary competent manager, at that point in time, would have felt that the company would ... be unable to pay its debts as they fell due on existing trading terms or any reasonably envisaged extension of them."

1. The question must be answered by taking into account the nature of PES' activities within the context of the building industry. A subcontracting company may ordinarily expect that, in the course of work on a development project, the builder will pay the subcontractors' progress claims to the extent approved by the architect, so that suppliers' claims can continue to be met. Nevertheless, from mid April 1990 all but one of the cheques provided by Bryangle to PES had been repeatedly dishonoured by the bank, and the contractual relationship had deteriorated steadily until the determination of the contract on 26 June.

2. The fact that Bryangle provided a bank cheque for $41,000 on 18 May and that Bryangle and PES had reached an agreement on that day to continue the contract in their mutual interests would have given Mr Powell grounds as at that date to hope that PES' claims would be eventually met. Yet, in view of the past history of dishonoured cheques, Mr Powell could not reasonably have expected that Bryangle would pay the claims of PES as they fell due. The cheque for $41,000 alone did not, in Mr Powell's view, bring Bryangle up to date in the payment of PES' claims. Furthermore, Mr Powell's agreement to achieve completion of the project by 25 May 1990 was an agreement as to a fact which Mr Powell knew could not be achieved. Mr Powell did not have access to information as to Bryangle's financial position and no reason to expect that it had improved. Reason to hope is not commensurate with reason to expect.

3. It seems to me that, by 22 May 1990, Mr Powell knew that PES could not pay its debts as they fell due. He may have hoped that the position would improve and thought that his best course was to continue trading, but he could not have had, at that time, any reasonable expectation that PES could pay all of its debts as they fell due.

4. Mr Powell was personally involved with and responsible for the day to day management of the company's financial affairs. I am satisfied in the present case that, whilst not possessed of expertise in accounting, Mr Powell was fully acquainted with and aware of the financial difficulties facing PES in May and June 1990. The overall impression from the evidence is that Mr Powell approached the management of the company's difficulties with the hope that the dispute with Bryangle would be satisfactorily resolved and that the debts owed by PES to its suppliers, would be paid at some future date. That outlook does not, however, satisfy the requirements of the statutory defence provided by s.529(2)(b).

5. I accordingly hold that the respondent is personally liable for payment of the debt owed by PES to the applicants, incurred at the time of the delivery of goods on 22 May 1990 and 21 June 1990. The amounts of the debts are $24,535 and $9,250. Interest of $14,491.89 is awarded to the applicants, calculated in accordance with the practice of the Supreme Court of New South Wales.

6. I order that the respondent pay the applicants' costs of these proceedings.