TCN Channel Nine Pty Ltd v Scotney, R.S
[1995] FCA 250
•26 Apr 1995
CATCHWORDS
CORPORATIONS - directors' liability - "reasonable grounds to expect" - discussion of principles - whether expected immediate revenue flows can be taken into account in assessing liability under Corporations Law s 592(1) - whether proposed expansion of company activities of any weight - whether adverse publicity could reasonably have been expected - whether decision of WA Supreme Court on similar matter of any weight.
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.
Rema Industries and Services Pty Limited v Coad (1992)
107 ALR 374
Commonwealth Bank v Friedrich (1991) 5 ACSR 115
3M Australia Pty Limited v Kemish (1986) 10 ACLR 371
Sandell v Porter (1966) 115 CLR 666
Hawkins v Bank of China (1992) 26 NSWLR 562
Jingles Australia Pty Ltd v Francis Peter Ciantar & Anor (Steytler J, Supreme Court WA, No. 1622 of 1994, 25 October 1994, unreported)
TCN CHANNEL NINE PTY LIMITED (ACN 001 549 560) v
ROSLYN SHIRLEY SCOTNEY
No NG 3236 of 1993
Tamberlin J
Sydney
26 April 1995
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3236 of 1993
GENERAL DIVISION )
BETWEEN: TCN CHANNEL NINE PTY LIMITED
(ACN 001 549 560)
Applicant
AND: ROSLYN SHIRLEY SCOTNEY
Respondent
CORAM: TAMBERLIN J
PLACE: SYDNEY
DATED: 26 APRIL 1995
'
MINUTE OF ORDERS
THE COURT ORDERS THAT:
The application be dismissed.
The applicant pay the costs of the respondent, with the exception of any costs awarded to the applicant in interlocutory proceedings.
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 3236 of 1993 GENERAL DIVISION )
BETWEEN: TCN CHANNEL NINE PTY LIMITED
(ACN 001 549 560)
Applicant
AND: ROSLYN SHIRLEY SCOTNEY
Respondent
CORAM: TAMBERLIN J
PLACE: SYDNEY
DATED: 26 APRIL 1995
REASONS FOR JUDGMENT
The applicant TCN Channel Nine Pty Limited ("TCN") instituted proceedings seeking judgment against the respondent, Mrs Roslyn Shirley Scotney ("Scotney") pursuant to s 592(1) of the Corporations Law in the sum of $164,223 and interest, said to arise from advertising booked and screened in late April to early May 1991, relating to a tooth whitening product known as "Bright & Beautiful Cosmetic Dental Cream".
The applicant alleges that at the time the debts were incurred there were reasonable grounds to expect that the company, Bright & Beautiful Pty Limited ("the company") of which Scotney was a director would not be able to pay all its debts as and when they became due. In the alternative, it is claimed that immediately before the time the debt was incurred there were reasonable grounds to expect that, if the company incurred the debt, it would not be able to pay all its debts as and when they became due. These allegations reflect the two limbs of s 592(1)(b).
The Amended Statement of Claim is in short compass. It asserts that from 2 October 1990 to 25 July 1991, Scotney was a director and secretary of, and a shareholder in, a company known as "F.P. Ciantar Dental Pty Limited". This is not in dispute. On 26 April 1991 that company changed its name to Bright & Beautiful Pty Limited. About 27 February 1991, the company made an application to TCN for a credit account in the sum of $40,000 per month. In about March 1991, TCN approved the company's application for a credit account. The Defence filed denies the allegations and relies on s 592(2) but no evidence was called to make out the defences provided by s 592(2).
On 24 April and 3 May 1991, the company booked advertising time with TCN for screening during the weeks commencing 28 April 1991 and 5 May 1991 respectively in respect of the dental cream. The cost of such advertising was $164,223. The applicant screened the company's television advertisements on specified days between 29 April 1991 and 11 May 1991. On 24 June 1991 Mr Ivor Worrell was appointed as provisional liquidator and on 29 July 1991, Mr R A Duus and Mr Neil Sommerson of Ernst & Young were appointed liquidators of the
company. As at 30 July 1991 date the estimated deficiency in the company was $848,470.
Section 592
Relevantly the section provides:
"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.
592(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.
592(4) In proceedings brought under subsection (1) for the recovery of a debt, the liability of a person under that subsection in respect of the debt may be established on the balance of probabilities ..." (Emphasis added)
Part 5.7B was inserted by Act No 210 of 1992, s 111, and became effective from 23 June 1993. Since the debts in the present case were incurred prior to that date there is no dispute that s 592 is the relevant provision. Nor is there any dispute that the company is one to which the section applies. Further, there is no dispute that the respondent was a director for the purposes of s 592.
Case Law
The case law guidelines pertinent to the circumstances of this case can be summarised as follows:
The test in s 592(1) is an objective test which requires that reasonable grounds in fact exist without reference to the need for any particular person to hold the expectation. A prima facie liability can arise even where the director or manager had no personal knowledge of the incurring of the relevant debt. If the requirement is satisfied then all directors and managers come within it regardless of their subjective expectations or individual grounds for such expectations: ReNew World Alliance Pty Limited (Receiver and Manager Appointed); Sycotex Pty Limited v Baseler (No 2) (1994) 51 FCR 425 at 433 per Gummow J, and Rema Industries and Services Pty Limited v Coad (1992) 107 ALR 374 at 381-382 per Lockhart J.
Factors personal to the director or manager are the concern of s 592(2) which provides a defence once the threshold of s 592(1) is crossed: Re New World Alliance Pty Limited (supra at 435).
The creditor must prove facts which, immediately before the time when the company incurred the relevant debt, gave a person, seeking properly to perform the duties of a director or manager of that company, reasonable grounds to say: "I expect that the company will not be able to pay all its debts as and when they become due". (See Commonwealth Bank v Friedrich (1991) 5 ACSR 115 at 124 per Tadgell J and 3M Australia Pty Limited v Kemish (1986) 10 ACLR 371 at 377-8 per Foster J). Contrast s 303(3) of the Companies Act 1961 which was concerned with whether an officer of the company had any reasonable ground of expectation of the company being able to pay the particular debt.
The question is one of fact. Attention should be directed to whether a reasonable director or manager operating in a practical business environment would expect that at some point the company would be unable to meet a liability. The question involves consideration of the timing of revenue flow and debts incurred, and contingencies including the ability to raise funds. The conclusion ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. See Sandell v Porter (1966) 115 CLR 666 at 670 per Barwick CJ.
The "expectation" must be more than a hope, possibility or suspicion. The term is used in the sense of "to regard as about to happen; to anticipate the occurrence or the coming of ...": The Shorter Oxford English Dictionary. See also 3M Australia Pty Limited (supra at 378). By contrast the test used in s 588G is whether there are reasonable grounds for "suspecting". This is a lower threshold than reasonable grounds to "expect".
If an event occurred after the debt was incurred, which produced the situation that the company was unable to pay all its debts, but which was at the relevant time not reasonably foreseeable then such an event could not form part of the reasonable grounds envisaged by the section: 3M Australia Pty Limited (supra at 377 per Foster J). In the present case I consider that the adverse publicity which occurred in relation to the tooth whitening product on 8 and 20 May 1991 falls within this principle.
"Debt" where used in s 592(1) includes a contingent debt. See Hawkins v Bank of China (1992) 26 NSWLR 562 at 568.
The "Jingles" Decision
On 25 October 1994, judgment was delivered by Steytler J of the Supreme Court of Western Australia in the case of Jingles Australia Pty Ltd v Francis Peter Ciantar and Roslyn Shirley Scotney (Supreme Court WA No. 1622 of 1994, unreported), where it was held that Dr Ciantar and the present respondent Mrs Scotney were not liable under s 592(1) of the Corporations Law in respect of debts incurred by the company Bright & Beautiful Pty Limited for advertising.
On behalf of Scotney reliance was sought to be placed on this decision in the present case.
Of course, that judgment is not binding on this Court. Some of the facts traversed by the Court in that case were raised in the present case but there is no question of issue estoppel as regards the present parties before me, because the applicant is different, much of the evidence is different (however, there is some common evidence) and the debts incurred were different. Although the respondent relied on this decision to support an argument in the present case that s 592(1) did not apply, I do not think that the judgment is of any assistance to the respondent on that matter.
In that case the debts in question were incurred during March and April 1991.
Evidence in relation to the solvency of the company was given in that case by Mr Manteit, a chartered accountant, practising in partnership with Messrs Ernst & Young. Members of that firm had been appointed liquidators of the company and Mr Manteit assisted with the conduct of the affairs of the company once placed in liquidation.
Mr Manteit was not called to give evidence before me. In the Western Australian matter, he expressed the opinion that the company was insolvent at least from 21 May 1991 onwards. Steytler J, after considering the evidence, came to the conclusion that the company was from about that date unable to pay all its debts as and when they fell due. He considered that no adequate foundation had been laid in evidence to support the proposition that in or about March or April 1991, when most of the debts were incurred, it was apparent that the company would fail.
After referring to the state of the evidence, his Honour said at p 20:
".... I am not prepared to find that, prior to about 21 May 1991, by which time the effects of the bad publicity and cessation of advertising had begun to become apparent, there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due. Because it was common cause that the bulk of the debts ... were incurred in March and April 1991 it follows that the claim fails in respect of those debts ..."
His Honour went on to find that there were two invoices rendered by Jingles Australia Pty Ltd ("Jingles") to the company after 21 May 1991. However, notwithstanding the dates of the invoices, he was not prepared to find that the evidence was sufficient to establish that the debts were incurred at a time when there were reasonable grounds to expect the company would not be able to pay all of its debts as and when they became due.
Because the essential question before me is one of fact and degree, the respondent in my view does not gain any comfort or assistance in the present case from the Jingles decision.
As it turns out, for reasons given below I have come to the conclusion that the criteria in s 592(1) were not established by 4 May 1991, and this conclusion is, of course, not inconsistent with the conclusion reached by Steytler J.
Background
The company was incorporated in October 1990 with Scotney and Dr Ciantar, a dentist, as directors. They were directors at all material times. Dr Ciantar has since died. Scotney was also company secretary and a shareholder. The evidence is that she did attend some formal meetings of the company and management at which promotion and advertising were discussed, although not on a regular basis. However, there is no issue based on absence of authority or consent.
The company was formed to carry on the business of importation and sale by mail order and telephone, of tooth whitening kits marketed and sold using the descriptive phrase "Bright & Beautiful".
On 30 October 1990 the company entered into two contracts with Senti-Metal Pty Limited ("Senti-Metal"), the first being a "Management Contract" and the second a "Letter of Agreement". The Letter of Agreement was executed by Senti-Metal as promoter. Scotney and Dr Ciantar were described as "the dental consultants" and Senti-Metal as "the promoters". By clause 7 of the Letter of Agreement it was provided that the promoters would have full and total authority and control to manage, promote and administer the company and the business of marketing the dental cream. The documents in evidence indicate that a Mr Michael Phillips, who was appointed a manager of the
company by Senti-Metal, arranged the TCN advertising with some involvement by his wife Lisa.
On 27 February 1991 a credit application was made to TCN. It was signed by Lisa Phillips who was described as "financial controller" of the company. On that date Ms Phillips wrote to Mr Fairlie, Direct Sales Executive of TCN. The letter thanked him for sending the application for a monthly account and stated that it has been duly completed and signed and was enclosed for his perusal. Mr Davis, credit controller of TCN, agrees that the credit application was received by TCN, with the letter.
There was some suggestion that the credit application did not set out the terms agreed to between the parties but I do not accept this. The application form was sent by TCN to the company. It was duly executed and returned on 27 February 1991. Subsequently advertising time was booked and screened by TCN. In these circumstances, in my view, the credit application had been accepted and the terms set out on that application applied to the arrangements between the parties.
This has some importance on the question of when the debts to TCN fell due because the Application for Credit Account sets out the terms and conditions applicable to the credit account. In particular, condition 2 reads:
"2.PAYMENT IN FULL OR BALANCE THEREOF TO BE MADE WITHIN THIRTY (30) DAYS OF STATEMENT DATE".
The Bright & Beautiful tooth whitening system was an "at home" tooth whitening process. Dr Ciantar had been offered exclusive Australian rights to the Bright & Beautiful dental cream product through his associates in the United States who were manufacturers of the product. He established the company which had a paid up capital of $2 and appointed Mr Gillings as Manager.
A Statement of Affairs prepared by Mr Gillings, dated 11 June 1991, indicates that prior to January 1991, there were several months of research and investigation prior to commencement of the advertising campaign to introduce the product into the Australian market.
The product was launched onto national television through the "til TEN" programme on the Channel 10 network. The first episode went to air on 14 February 1991 and attracted what is claimed to have been an excellent response. Six segments of three minutes each went to air over the following three weeks. The method of advertising was "direct response advertising" which entails that a telephone number or address is screened together with the advertisement and prospective customers are urged to call the given number and place orders immediately and pay by credit card or cheque. The advertising was therefore designed to achieve not only an immediate direct impact but also the advertising target was to achieve a ratio of 1:3 as between the cost of advertising purchased and the revenue resulting from the advertisement. In respect to the February television advertisements it is said that $33,000 worth of airtime purchased led to sales of around $95,000. It is also said that it was expected to reach between $100,000 - $105,000 as cheque orders filtered through over the ensuing 30 days. I accept that the 1:3 ratio was achieved on this occasion.
This successful pilot television exercise was followed by a press advertising campaign in March 1991 which proved to be "disappointing". There was also some shorter television advertising but this proved unsatisfactory. The company then directed its attention once more to further more intensive television advertising.
The Minutes
Company Minutes of a meeting held on 24 April 1991 at which Mr Gillings and Mr Phillips were present record:
"Mike spoke to Kate Sulman at The Levita Group. First results are that the commercial is a success. She replied that they have had "heaps" of calls ...
...we are pleased and feel that the new commercial is the answer.
.....
It is agreed to book all the media ourselves direct...
It is agreed to purchase air time on Channel 7 to the value of approximately $75,000 for Melbourne and Sydney. To purchase air time with Channel 9 in Brisbane, Sydney and Melbourne for approximately $90,000 and with Channel 10 .....
It is anticipated that based upon extensive testing of the new commercial not only on a one to one basis, but with initial figures from the peppering of the commercial in Perth and Melbourne, that a return of between 2.6 and 3 to every one dollar invested could be expected. Therefore if $200,000 is spent on air time, a return of $520,000 to $600,000 could be reasonably anticipated.
This figure is also arrived upon when considering that six segments were aired on the 'til TEN programme and returned a ratio of 3 to 1. i.e. $33,000 in air time purchase for a return of $96,500.
Based upon the extensive tests conducted and the previous results, it is believed that the possibility of the commercial not recouping its costs is minimal.
It was agreed to run all commercials in the same week as the women's magazines have been published and it is essential to have the TV commercials out at the same time as the magazines for total impact.
The company has 2,700 units of product in stock. Also there are another 5,080 units ordered for a total of 7,780 although only the first 2,700 are paid for. The sale of these 7,780 will return $466,800.
With sales anticipated to be in excess of this and also the women's magazine orders, it is agreed to contact the manufacturers and advise them of our intentions to order a further 140 cartons (5040 units) within the next 14-21 days."
The product sold at $59.95 per unit and its cost to the company was $7.60 per unit.
The first order booking the screenings was placed on 24 April with TCN at a cost of $87,353 for screening during the week beginning 28 April 1991. The advertising was screened on 29 and 30 April 1991, and 1, 2, 3 & 4 May 1991. The screening took the form of a 120 second spot followed by a 30 second "kicker" to back up the initial impact. Sales of two thousand units therefore would bring in revenue of about $120,000.
On 3 May 1991, the company booked further advertising with TCN at a cost of $76,870 for screening during the week commencing 5 May 1991. This advertising was screened on 7, 8, 9, 10 and 11 May 1991.
Minutes of a meeting of 3 May 1991 at which Mr Gillings and Mr Phillips were present record:
"The first figures for Day 1 and of the TV campaign are good. Difficult to get an exact number but believed to be over 600 orders which could result in a further 600-900 following through, although this is not definite. The people that respond to the advertisement by sending a cheque rather than using the 008 number for credit cards is always variable.
Overall though it seems very good. Bookings for the following week will remain in place although we will reduce our expenditure by 33%. If the figures are positive and continue to grow, as would be expected, then we can always put that 33% into the following week without losing too much momentum....
If they (Advantage Media) are not prepared to allow us the extra 18 days then we should advise them to cancel the outstanding bookings. Our cash flow is still recovering from the awkward start and we do not want to give the agency the false impression that we would be able to meet all commitments on the 10th of the month, when we would actually require the extra 18 days to allow orders to come in from the advertisements and therefore to a large degree be able to pay for themselves". (Bracketed material added)
On 8 May 1991 The Melbourne Truth newspaper under the headline "Bright may not be so Beautiful" published an article strongly critical of the product. The article contained a statement to the effect that "the Australian Dental Association is warning people not to use Bright & Beautiful". Suggestions were made that use of the product could be harmful.
Either on, or immediately before 8 May 1991, a reporter from the ABC programme "The Investigators" had telephoned the company's Brisbane office. Mr Phillips gained the impression that the reporter was biased, ill informed and determined to compile a damaging piece on Bright & Beautiful. Mr Phillips agreed to compile as much factual information as possible and send it to Amanda Weaver at The Investigators' office. Naturally, as managers of the company, Mr Gillings and Mr Phillips were concerned by this development. As a result they decided to cancel future advertising until the television investigation was over and the effects measured.
On 14 May 1991 the Minutes record:
"This meeting was called by Dr Ciantar following a telephone conversation he had earlier this day with Amanda Weaver of the ABC Television programme, "The Investigators".
Dr Ciantar explained that he felt he should appear on the programme to defend the product. A great deal of money had been spent on advertising and as sales would be expected to flow through over the next few weeks, it was critical that the product not be defamed.
Dr Ciantar further stated that he had total confidence in the product and that for 44 years he had been a practising dentist bringing comfort and relieving pain for patients, and the suggestion that at this stage of his life he would be associated with a product that caused harm was very distressing to him and that he wished to defend himself and his product.
Cliff Gillings stated that sales were looking very good and that subject to The Truth article not effecting (sic) sales to a great degree and no adverse publicity in the immediate future, the prospects for the product were good."
The Minutes of 21 May 1991 record:
"The meeting was called to discuss the television programme The Investigators which went to air last night.
Dr Ciantar was annoyed at the bias showed (sic) in the show. They had selected (sic) edited his interview from approximately 20 minutes to less than 3 minutes leaving the positive points he expressed out...
The concern was raised by Cliff that sales could be lost because of this damaging programme which was totally without foundation. Cliff explained that his staff had contacted Mr John Lapsley of The Levita Group who record our 008 calls.
He was voted 1989 Direct Marketer of the Year by A.D.M.A. and is very experienced and respected in the industry. He said that in his opinion the report on The Investigators was "vicious in nature, bias (sic) and inaccurate and designed to do the product maximum harm".
He felt that sales would very definitely suffer. He was also concerned that current orders may be lost - but without doubt, people who see future advertising or are considering purchasing would be swayed against doing so in light of the report.
In conclusion he said that he felt the company had taken, "a direct missile hit..."
Cliff stated that no advertising had been booked in the past 2 weeks since The Truth newspaper article appeared and the first call was received from The Investigators. It was also agreed that cancelling the $175,000 of media that was booked was the right decision as had been done on the 8th May.
It was shown that the average daily sales for the past 14 day (sic) was between 450-500 orders. These figures would have been expected to follow through for another 3 weeks or more. It will therefore be easy to access (sic) the damage based upon our projections and returns on dollars invested in advertising against actual returns that will be received.
It was also advised that over 5,200 packets were in transit from New York as had been ordered and paid for based upon our projections". (Emphasis added)
Four hundred and fifty sales per day over 14 days would generate revenue in the order of $378,000.
Revenue returns of the company began to decline after 8 May and slumped after 20 May. Minutes of 3 June record that:
".... orders had dropped dramatically. From an average of 450-500 orders a day, the past seven days has seen an average of 68 orders, a drop of 85%. In dollar terms revenue for the past 7 days has dropped from a projected $210,000 to $30,000".
Expected Cash Flow
The evidence for the applicant included two reports by Mr Fahey, an accountant, together with an affidavit by Mr Davis, the Credit Controller of TCN which annexed documents and correspondence. There were also a number of documents tendered. There was cross-examination of the two witnesses called by TCN. No affidavit or oral evidence was called on behalf of Scotney but an agreed bundle of documents was tendered.
The sum claimed is made up of two debts arising from advertising orders. The first of these orders was made and the debt was "incurred" on 24 April 1991 and was for $87,353. The second order was made and the debt was incurred on 3 May 1991 in the sum of $76,870. Under the relevant terms, referred to above which I find to be applicable, payment was due within 30 days of the statement. It is common ground that the statement was sent out on or after 31 May 1991, which is the date it bears. Payment was therefore due by approximately 30 June 1991. On this basis the question then is whether as at 24 April and 3 May there were reasonable grounds for a director to believe that all the debts of the company could reasonably be expected to be paid as and when they fell due.
In his first report Mr Fahey prepared an Income and Expenditure Statement for the period October 1990 to 24 April 1991 which was the active life of the company to that date. This showed a net trading loss for that period of $149,815.47.
In his second report he prepared Income and Expenditure Statements for the period 25 April 1991 to 28 April 1991. This showed an additional trading loss of $5274.13 excluding the debt incurred to TCN of $87,353. He also prepared an Income and Expenditure Statement for the period 29 April to 3 May which showed a further additional trading loss of $101,384.77 including the debt to TCN of $87,353 but this excluded the 3 May advertising order to TCN of $76,870. For the period October 1990 to 28 April 1991 the total net trading loss was $155,089.60 and for the period October 1990 to 3 May 1991 the net trading loss, including the first order to TCN, amounted to $256,474.37.
It was suggested by Mr Fahey that in order to recoup the trading loss of $149,815.47 sales of 16,665 units of stock with sales revenue of $999,067 would need to be sold and paid for. This was on the basis that the profit margin on each item of stock was 15%. By extrapolation to recoup the deficiency of $256,474.37 which applied at 3 May 1991 would require sales in the order of $1.71 million.
The applicant submits that at the time the debts were incurred the company was hopelessly insolvent and that thereafter its position rapidly became worse. It is claimed that during the month of May the company was in "financial free fall". It incurred a loss of about $100,000 between 28 April and 3 May and by July the deficiency was over $850,000.
Mr Fahey considered that sales made subsequent to 3 May 1991, should not be taken into account because they were only prospective at that date, and that there could be no guarantee that simply by running an advertisement it would follow that sales would be derived. Nor, in his opinion, could it be determined as of 28 April or 3 May what the quantum of sales would be likely to have been. Nor did he consider that the "til TEN" experience in February 1991 had any relevance.
In my view, in the circumstances of the present case, this approach is too rigid and narrow when examining the reasonableness of an expectation as to whether all the debts could be paid at a certain point of time. The direct advertising campaign planned for May 1991 in the present case was calculated to produce an almost immediate return and flow of revenue. This had been the experience of the company in February 1991.
Where very substantial promotional and advertising funds had been injected into the campaign for the benefit of the company, which were expected to produce large funds from sales revenue in the immediate days and weeks succeeding the campaign, I consider that it is not correct to ignore that potential revenue whilst taking into account on the debit side, the moneys expended to get the company into that position. As at 3 May 1991, there was in my view a reasonable ground to sustain an expectation that the campaign would produce "almost immediately" a large revenue inflow so as to enable the company to pay all its debts when they became due whether or not the particular TCN debts were counted or not. Essentially the advertising campaign appears to have been directed to the month of May and was focussed on the generation of sales during that month.
Although from a strict accounting point of view the position taken by Mr Fahey may be technically correct, an examination of what is a "reasonable expectation" entails a consideration across a broader spectrum. The assessment of the reasonableness of an "expectation" is, of necessity, directed to future circumstances. The use of the term "expectation" makes this apparent.
The respondent's case is that there were at both dates reasonable grounds to expect sufficient sales revenue would be generated after 28 April 1991 by the advertising campaign to enable the company to pay all its debts including the TCN debts as and when they became due.
The respondent points out that under the agreed terms the particular advertising debts to TCN did not in fact become due until late June 1991. That is to say, 30 days from the date of the statement. Of course, looking forward, as at 24 April and 3 May 1991, the date when the statement would issue was
not known. However, it would have been reasonable in my view then to expect that the TCN debts would not become due and payable on these terms until early to mid-June at the earliest. It appears that the practice was not to issue statements until the advertisements were screened.
The respondent says that a great deal of the promotional and advertising expenditure had been taken into account in reaching the deficiency figure of $256,474.37 as at 3 May 1991 and that it was a matter of waiting for the imminent revenue to come in over the immediately ensuing days and weeks.
The respondent's primary argument is this. The onus of proof is on the applicant. The standard of proof is on the balance of probabilities that a reasonable expectation did not exist. The onus and standard have not been discharged or satisfied.
The respondent says that as at 24 April and 3 May 1991 the company had the reasonable expectation grounded on the previous successful advertising experience in February, that the direct market television advertising campaign would generate $3 in sales revenue for every $1 spent on advertising. Such revenue could be expected to flow to the company within a matter of days after each advertisement was screened, having regard to the nature of the direct advertising campaign. Therefore, so the argument goes, an expenditure of $164,223 could be expected to generate a large and relatively immediate cash flow in the order of several hundred thousands of dollars. If the rule of three to one is applied then the revenue would be in the order of $490,000. This, it is said, would reasonably be expected to come in before the latter part of May at least. Therefore, there would be sufficient funds to enable the company to pay all its debts as they became due.
The respondent relies on the company's experience in relation to the television advertising carried out in February 1991 to justify reliance on the 1:3 criterion. Whilst it is true, as the applicant points out, that there was no expert evidence called to support this criterion, nevertheless the fact is that such a result had been achieved in February 1991 in respect of a substantial expenditure of $33,000.
For further support of this argument the respondent points out that the screenings booked on 24 April took place on 29 and 30 April, and on 1, 2, 3, and 4 May 1991. The screenings booked on 3 May took place on 7, 8, 9, 10, and 11 May 1991. There was then as a matter of fact an immediate surge in the cash flow of the company as reflected in its bank statements. The respondent says that the advertisements led to a "massive positive cash flow" throughout May. The closing balance in the bank on 10 May was a credit of $124,692. During that day the credit balance reached $159,183.50. At the close of 15 May the closing credit balance was $119,368.50 after reaching $152,980.72. For the month of May, the sales revenue was over $342,0000. During this month a number of large payments were made by the company.
Attention was directed to the Minutes which record that in the 14 days prior to 21 May, the average daily sales had been 450 - 500 orders. This material is relied on to support the submission that as at 24 April and 3 May 1991, there were reasonable grounds to expect that all the debts of the company would be paid as and when they became due from the additional revenue because that is in fact what occurred. The immediately following revenue flow is in my view pertinent to an assessment of the reasonableness of an expectation at the relevant dates, in the sense that the cash flow indicated that the expectation was not without some foundation in fact.
In essence, the respondent submits that although there was a large deficiency by 3 May 1991 in the order of $256,000, it is essential to look at the dramatic increase in revenue after 3 May to see the financial position in its entirety and proper perspective. The analysis of Mr Fahey, it is said, is too limited because it cuts out at 3 May 1991 and there is no weight given to the large and immediate flow of income likely to be generated by the advertising. Therefore it is argued the position presented in Mr Fahey's reports is misleading.
The respondent also sought to rely on correspondence and discussions during the period late April to mid-May 1991, relating to expanding company activities towards seeking foreign sales for the product and marketing new products. In late April the company was examining other products to launch including a "Jet Teeth Cleaner" for marketing under the "Bright & Beautiful" brand name. The company was interested in marketing in Singapore, Malaysia, New Zealand and especially Japan. The company's proposals and progress in relation to these matters are set out in a letter to Mr Cushion, of the Advance Media Group Pty Limited, dated 31 May 1991. However, notwithstanding the optimism and enthusiasm reflected in the Minutes and the letter in respect of these proposals, they are in my view far too speculative to be weighed in the balance when considering the existence of reasonable grounds, and accordingly I assign no weight to these matters.
It is then said that the primary reason the company's finances collapsed was due to the publication in The Melbourne Truth and The Investigators programme of strongly critical material attacking the product. I accept that this was a central factor in the collapse. Questions were raised as to the safety of the product and sales dropped by about 85% after 20 May 1991 when The Investigators programme was screened. These events, it is said, could not have been reasonably expected and they had a disastrous effect on credibility and marketability of the product. The evidence supports the above conclusions.
Reliance is placed on the Minutes to show that the company was confident of being able to generate satisfactory sales revenues for the advertising.
The subjective confidence of the directors or managers is not however, a relevant consideration. The real question is whether as a matter of objective fact TCN has proven on the balance of probabilities that the company did not have reasonable grounds to expect to be able to pay all its debts as and when they fell due immediately before the debts were incurred or alternatively after taking into account the debts incurred.
I am not satisfied that TCN has proven on the balance of probabilities the necessary absence of reasonable grounds as required by s 592(1). The question of s 592(2) defences does not arise.
As at 24 April 1991, accepting that there was a net trading loss of about $150,000 and having regard to the past experience of the company with television direct advertising and the threefold return of revenue over cost experienced in February 1991, coupled with the fact that the debt was not due until the end of May at the earliest, I consider there was a reasonable ground on which the company could have founded the relevant expectation that all the company's debts would be paid as and when they fell due whether with or without taking
account of the debt raised on that date. I take a similar view in respect of the debt incurred on 3 May 1991
In the schedule of creditors to his supplementary report, Mr Fahey sets out company creditors as at 3 May 1991 which total $267,149.72. This figure includes the first debt to TCN 9 in respect of advertising ordered on 24 April 1991, in the sum of $87,353, but does not include the debt incurred by the order of 3 May 1991.
It is not clear from the schedule when the other debts of the company became due and payable. The largest of these debts namely those in relation to Corporate Image - Advertising ($27,670), Advantage Media ($27,900), Levita ($10,774.06), United Telecasters ($33,000), Media Specialists ($66,784) and TCN ($87,353) appear to be in respect of the late April-early May advertising campaign for the most part. The dates assigned to these debts appear to be the dates of the orders and not the dates of the statements or invoices and it is not clear when the amounts were due and payable. The date opposite the reference to TCN is the date of the order and not the date when it became due and payable.
In the case of one large debt due to United Telecasters, in the sum of $33,000, two dates appear opposite the amounts on the schedule, namely 28 February and 28 March 1991. Many of the large advertising debts appear to relate to mid to late April, whilst six of the debts relate to mid or late March. There is no breakdown provided to reflect whether the company was exceeding its credit terms in respect of all or any of the creditors referred to in the schedule with the exception of the TCN debt of 24 April 1991.
Conclusions
On the evidence presented to me in this matter I am not satisfied that as at either 24 April or 3 May 1991, or at any time up to at least 8 May 1991, when The Melbourne Truth article appeared, there were reasonable grounds to expect, either with or without incurring the two relevant debts, that the company would be unable to pay all its debts as and when they became due.
Accordingly, I dismiss the application with costs with the exception of any costs awarded to the applicant in interlocutory proceedings.
I certify that this and
the preceding twenty-eight (28)
pages are a true copy of the
Reasons for Judgment herein of
his Honour Justice Tamberlin.
Associate:
Date: 26 April 1995
Counsel for Applicant: Mr D E Grieve QC
Mr M P Podleska
Solicitors for Applicant: Holman Webb
Counsel for Respondent: Mr P K Searle
Solicitors for Respondent: J J Cullen & Associates
Date of Hearing: 29 & 30 March 1995
Date Judgment Delivered: 26 April 1995
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