TCN Channel Nine Pty Ltd v Scotney, R S
[1995] FCA 851
•26 OCTOBER 1995
CATCHWORDS
CORPORATIONS - directors' liability - "reasonable grounds to expect" - whether expected immediate revenue flows can be taken into account in assessing liability under Corporations Law s 592(1)(b).
Corporations Law s 592
Re New World Alliance Pty Limited (Receiver and Manager Appointed); Sycotex Pty Limited v Baseler (No 2) (1994) 51 FCR 425
No NG 346 of 1995
TCN CHANNEL NINE PTY LIMITED v ROSLYN SHIRLEY SCOTNEY
BLACK CJ, SHEPPARD AND BRANSON JJ
Sydney
26 October 1995
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No NG 346 of 1995
)
GENERAL DIVISION )
On appeal from the Honourable Justice Tamberlin
BETWEEN:
TCN CHANNEL NINE PTY LTD
Appellant
- and -
ROSLYN SHIRLEY SCOTNEY
Respondent
COURT: Black CJ, Sheppard J and Branson J
PLACE: Sydney
DATE: 26 October 1995
MINUTES OF ORDERS
THE COURT ORDERS THAT:
The appeal be dismissed.
The appellant pay the respondent's costs of the appeal.
NOTE: Settlement and entry of orders is dealt with in accordance with Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No NG 346 of 1995
)
GENERAL DIVISION )
On appeal from the Honourable Justice Tamberlin
BETWEEN:
TCN CHANNEL NINE PTY LTD
Appellant
- and -
ROSLYN SHIRLEY SCOTNEY
Respondent
COURT: Black CJ, Sheppard J and Branson J
PLACE: Sydney
DATE: 26 October 1995
REASONS FOR JUDGMENT
The appellant has appealed from the whole of a judgment of a single judge of this Court whereby its application pursuant to s592(1) of the Corporations Law against the respondent was dismissed. By its application the appellant sought judgment against the respondent for the sum of $164,223 plus interest.
The respondent was a director of the company, Bright & Beautiful Pty Limited ("the company") which is now in liquidation. It is
not in dispute that the company was a company to which s592 of the Corporations Law applied and that the company incurred debts to the appellant in the total sum of $164,223 at times relevant for the purposes of s592(1).
The appellant pleaded its case against the respondent in the alternative so as to invoke both limbs of s592(1)(b). It alleged that immediately before each of the times when the company incurred its debts to the appellant:-
(a)there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due; or
(b)there were reasonable grounds to expect that, if the company incurred the debts, it would not be able to pay all of its debts as and when they became due.
BACKGROUND
There is no real dispute as to the background facts in this matter. They are set out in the reasons for decision of the trial judge. The following is a summary of such facts, taken from his Honour's reasons for decision, so far as they are relevant to this appeal.
The company was formed to carry on the business of importing and selling, by telephone and mail order, tooth whitening kits sold under the label "Bright and Beautiful".
Prior to January 1991 the company had been involved in several months of research and investigation which led up to an advertising campaign to introduce its tooth whitening kits into the Australian market. The first national television advertising took place on 14 February 1991 and attracted an excellent response. The method of advertising was "direct response advertising" which entails the screening of a telephone number which prospective customers are urged to call to place orders immediately. The advertising target was to achieve a ratio of 1:3 as between the cost of the advertising and the revenue resulting from such advertising. The trial judge found that such a ratio was achieved in respect of the February advertising.
The successful pilot television advertising was followed by other forms of advertising which were not successful. The company determined to recommence direct television advertising.
On 27 February 1991 the company made a credit application to the appellant which was accepted. It was a condition of the resulting credit account that payment was to be made within thirty days of the statement date. Subsequently, advertising time was booked by the company with the appellant and the appellant screened advertisements for the company.
The first order booking advertising time with the appellant was placed by the company on 24 April 1991. The advertising was screened on 29 and 30 April 1991 and 1, 2, 3 and 4 May 1991 at a cost of $87,353.
On 3 May 1991 the company booked further advertising time with the appellant. The advertising was screened on 7, 8, 9, 10 and 11 May 1991 at a cost of $76,870. These amounts make up the total debt in respect of which the application was brought.
On 8 May 1991 "The Melbourne Truth" newspaper published an article strongly critical of the company's tooth whitening product. At about the same time a reporter from the ABC television program "The Investigators" telephoned the company. According to the evidence, the managers of the company formed the view that the reporter was "biased" and likely to compile a damaging report about the company's tooth whitening product. A decision was made to cancel future advertising until the foreshadowed "The Investigators" segment was shown and its effects measured.
"The Investigators" program of 20 May 1991 included a segment concerning the company's tooth whitening product. It was highly critical of the product. Revenue returns of the company, which had declined following the cessation of television advertising, declined further after 20 May 1991.
The trial judge accepted evidence that in a period of fourteen days prior to this adverse publicity, average daily sales of the tooth whitening kit of between 450-500 orders had been achieved. Sales of 450 orders per day for a period of fourteen days would, his Honour calculated, have generated revenue in the order of $378,000.
On 24 June 1991 a provisional liquidator was appointed to the company and on 29 July 1991 liquidators were appointed. As at 30 July 1991 the estimated deficiency in the company was $848,470.
GROUNDS OF APPEAL
It is contended on behalf of the appellant that the trial judge erred in not finding that, immediately before each of the dates on which the company booked advertising time with the appellant, there were reasonable grounds to expect that the company would not be able to pay its debts as and when they became due. The appellant by its notice of appeal drew attention to the following matters:-
(a)the company was incorporated on 2 October 1990 with a paid up capital of $2.00;
(b)the respondent was a director of the company from 2 October 1990 until 25 July 1991;
(c)between the date of its incorporation and 24 April 1991, the date on which the company incurred the first of its debts to the appellant, the company had suffered a net trading loss of $149,815;
(d)between 25 April and 3 May 1991, the date on which the company incurred the second of its debts to the appellant, the company suffered a further trading loss of $106,659; and
(e)on 24 June 1991 a provisional liquidator was appointed and the company was later ordered to be wound up with a deficiency subsequently calculated at $848,470.
For the purposes of this appeal we are prepared to act on the basis that each of these matters was established. We point out, however, that there is reason to think that the figure of $149,815 referred to in paragraph (c) above could be too high - perhaps by as much as $24,758.
Mr Fahey, the expert accountant called at trial on behalf of the appellants, expressed the following opinion:-
"... having regard to the position of the company as revealed in the Income and Expenditure Statement and Statement of Assets and Liabilities, as at 24 April, 1991 or immediately before that date, Bright & Beautiful Pty Ltd (In Liquidation) could not pay all of its debts as and when they became due."
He expressed an identical opinion with respect to 3 May 1991, and immediately before that date.
It was conceded by Mr Grieve QC, senior counsel for the appellant, that it was not established before the trial judge when the debts of the company as at 24 April 1991 and 3 May 1991 respectively would become due for payment. As the trial judge pointed out in his reasons for decision, the largest of the debts appear to be, in the most part, in respect of the late April, early May advertising campaign. Mr Grieve submitted that it would be unduly onerous upon an applicant to require it to establish the due date of a company's debts for the purposes of s592(1) of the Corporations Law. We do not agree. It will ordinarily be a quite straightforward matter to prove, by documentary evidence, the terms of payment for a company's debts if those terms are in issue between the parties. We see no reason to suppose that proof of the terms of payment would have presented any particular difficulty in the present case. If in some cases proof of the terms of payment is necessary but is very difficult, that provides no reason for construing s592 in such a way as to relieve an applicant of the burden of proving, on the balance of probabilities, one of the essential matters necessary to establish liability. The critical question is whether there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due. The due date for the payment of the debts was, therefore, all important.
The importance of the dates upon which the debts of the company as at 24 April and 3 May 1991 respectively became due, derives from the nature of the business of the company. It appears incontestable that if any significant part of the debts of the company, as at either of the relevant dates, was then actually due and payable, the company would not have been then in a position to pay them. There was however no evidence that the company was exceeding its credit terms and the nature of the business of the company was such that its early costs, or what might be called its "start-up costs", were intended to be met from revenue generated once its direct marketing operations commenced. As to debts of the company not immediately due for payment, the question required by s592(1)(h)(i) to be answered, in the circumstances of this case, is whether, at the relevant dates, there were reasonable grounds to expect that the company would be able to generate future revenue sufficient to pay such debts, and any other debts, by the time that they became due. The remarks of Gummow J in Re New World Alliance Pty Limited (Receiver and Manager Appointed); Sycotex Pty Limited v Baseler (No 2) (1994) 51 FCR 425 at 435-436 are, in our view, apposite in this case. His Honour there said:-
"At the trial, a great deal of attention was focussed on the level of indebtedness of New World and whether its liabilities exceeded its assets. However, this in itself does not directly answer the issue raised by paragraph (b). The issue is not dealt with by analysing a hypothetical instantaneous liquidation."
To the extent that Mr Fahey considered the capacity of the company to generate future revenue sufficient to meet its debts, he implied that it would not be reasonable to conclude that such capacity was sufficient. He worked on budget figures utilised by the company for planning purposes. It may be that in respect of his calculations concerning the debts of the company as at 24 April 1991 he overlooked the possibility that certain of the debts were for advertising costs, the payment of which was provided for in the 1:3 ratio referred to above. If this were the case such debts would not need to be met from the profit figure built into the budget calculations. It seems plain that in his oral evidence in which he did a similar calculation in respect of the debts of the company as at 3 May 1991, he did "double count" in this way.
More importantly, however, in considering whether there were reasonable grounds to expect that the company would be able to pay its debts when they became due, the trial judge looked to actual revenue figures of the company as reported in minutes of a meeting of the company and as disclosed by the company's bank statements. Having regard to such figures, and to the proven indebtedness of the company, his Honour was not satisfied that the appellant had proved on the balance of probabilities that there were, as a matter of objective fact, as at the relevant dates, reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due. Nothing said on the appeal has persuaded us that this finding of fact was not open to his Honour on the evidence placed before him.
It was suggested before us that the company ought to have anticipated possible adverse publicity with respect to its tooth whitening kit. Nothing in the evidence, in our view, demonstrates that such publicity was reasonably to be expected.
It was also argued before us that a significant decline in the company's financial position between 25 April 1991 and 3 May 1991 suggested that there were not reasonable grounds to expect that the company would be able to pay its debts as and when they became due. We are not satisfied that the trial judge erred in failing to give weight to this evidence. There was no evidence that any direct television advertising of the company's product was being screened immediately before this period so that significant revenue during the period was not to be expected. It was, however, a period during which expensive future advertising was ordered - although it was not then due for payment. Such advertising was, as his Honour found, reasonably calculated to generate future income.
It was further contended that the size of the eventual deficiency between the assets and liabilities of the company was indicative of a company which on the relevant dates could not reasonably be expected to be able to pay its debts as and when they became due. We agree that the size of the eventual deficiency is a factor to be taken into account, but the Court's task is to ascertain whether, at the time the debts were 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. The
significant matters to be considered are those earlier dealt with. In our opinion, they are determinative of the outcome. The fact that the eventual deficiency was comparatively large is not sufficient to displace them.
The appellant also relied on the matters set out above in support of its ground of appeal that the trial judge erred in not finding that there were reasonable grounds to expect that if the company incurred the debts in fact incurred by it on 24 April 1991 and 3 May 1991 respectively, it would not, in each case, have been able to pay all its debts as and when they became due. The trial judge approached the determination of these issues, arising under the second limb of s592(1)(b) of the Corporations Law, in the same way as he approached the determination of the issues arising under the first limb of s592(1)(b). For the reasons set out above we conclude that he has not been shown to have erred in doing so.
The appeal will be dismissed with costs.
I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment of the Court.
Associate:
Dated:
APPEARANCES
Counsel for the Appellant : Mr D E Grieve QC with him
Mr M P Podleska
Solicitors for the Appellant : Holman Webb
Counsel for the Respondent : Mr P K Searle
Solicitors for the Respondent : J Cullen & Associates
Hearing Date : 27 September 1995
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