Tourprint International Pty Ltd (In Liq) v Bott

[1999] NSWSC 581

Reported Decision: (1999) 32 ACSR 201
(1999) 17 ACLC 1543

New South Wales

Supreme Court

CITATION:	Tourprint v Bott [1999] NSWSC 581
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	1684/97
HEARING DATE(S):	8 September, 19 October, 9, 19 & 27 November and 2 December 1998
JUDGMENT DATE:	15 June 1999
PARTIES :	Tourprint International Pty Ltd (In liquidation) & Geoffrey David McDonald (P) v Geoffrey Edward Bott (D)
JUDGMENT OF:	Austin J

COUNSEL :	T Blackburn (P) P Walsh & J Conomy (D)
SOLICITORS:	Gray & Perkins (P) In Person
CATCHWORDS:	Corporations - companies - winding up - director's liability for insolvent trading - action by liquidator for recovery - ingredients of liability - defence of reasonable grounds to expect solvency - defence of not taking part in management of company for 'some other good reason'
ACTS CITED:	Corporations Law ss 95A, 588E, 588G(1) & (2), 588H(2) & (4)
CASES CITED:	3M Australia Pty Ltd v Kemish (1986) 10 ACLC 371 Androvin v Figliomeni (1996) 14 ACLC 1461 Briginshaw v Briginshaw (1938) 60 CLR 336 Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Dunn v Shapowloff [1978] 2 NSWLR 235 Hymix v Garritty (1977) 13 ALR 321 Jones v Dunkel (1959) 101 CLR 298 Metal Manufacturers Ltd v Lewis (1986) 11 ACLR 122 Morley v State Wide Tobacco Services Ltd (1990) 2 ACSR 405; (1992) 8 ACSR 305 Playcorp Pty Ltd v Shaw (1993) 10 ACSR 212 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 West v Government Insurance Office of New South Wales (1981) 148 CLR 62
DECISION:	Declarations and orders made as sought by plaintiffs

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

TUESDAY 15 JUNE 1999

1684/97 : TOURPRINT INTERNATIONAL PTY LTD & ANOR V GEOFFREY EDWARD BOTT

JUDGMENT

1 HIS HONOUR: This case is a cautionary tale for company directors, especially in the small business sector. The defendant, Geoffrey Bott, joined the board of directors of the plaintiff company less than a year before it went into voluntary administration. He received no remuneration as a director. For at least a substantial part of that period, the company was hopelessly insolvent. For the reasons I shall give, the consequence for the defendant is that he is liable to the company’s liquidator under the insolvent trading provisions of the Corporations Law in a sum in excess of $500,000, plus interest. 2 The hearing of the case was delayed and made difficult because for most of the hearing, Mr Bott was not legally represented, and was inclined to raise irrelevant allegations. However, he secured legal representation of high quality for the purpose of making submissions, through the New South Wales Bar Association’s voluntary legal aid scheme.

The company

3   From 1985 to December 1993 the company was involved in the business of print broking in Sydney. The business of print broking involves the broker obtaining printing orders from customers and then placing the work with select printers. Until 1989 the company was a consultant to a print broker providing the services of its director and sole employee, Mr Victor Moore, to the print broking company. Commencing with the 1990 financial year, the company traded as a print broker in a principal capacity. It is worth noting that since a print broker acts in a principal capacity, it is a creditor of the printing customers and a debtor to the printer, and is unable to offset debts of customers against amounts owed to printers. 4   The company operated from leased premises at St Leonards, and subsequently at Neutral Bay. The business was managed by Mr Moore. It employed two office support staff and retained the services of a part-time bookkeeper. Its financial records were kept on a computer maintained by the bookkeeper. It retained the services of several individuals who were described as ‘independent sales representatives’, one of whom was Mr Bott. 5   Mr Moore and his wife were initially the holders of the company’s two shares, though eventually Mrs Moore’s share was transferred to Mr Bott in trust for Mr Moore, as I shall explain.

Mr Bott’s experience

6 Prior to 1987, Mr Bott appears to have had no experience in corporate financial management. He worked for a British sports marketing company in an operations rather than a financial capacity. He describes his job at Tourprint International as a ‘freelance print broker’, remunerated by way of profit share for jobs done for customers whom he brought into the business. In traditional terms, he was a commission agent. He began to work for the company in November 1991. 7 From 1987 to 1990 he had been managing director of Bilbette Investments Pty Ltd, a company involved in the importation, production and distribution of prints, posters and associated paper products. As managing director of Bilbette, which had an annual turnover of around $3.5 million, he reviewed financial reports on a monthly basis. According to Mr Bott’s evidence, he resigned as managing director when he discovered that amounts of money were being transferred, apparently without his authorisation, from Bilbette to its parent company to assist other subsidiaries which were in financial difficulty. He says he was aware of his responsibilities under the Corporations Law. In my opinion the value of Mr Bott’s experience in corporate management at Bilbette is qualified by the fact that Bilbette was a wholly owned subsidiary, and he says himself that he was responsible principally to the parent company, which determined the form in which financial information emerged. 8 Overall the evidence is consistent with the impression I formed of Mr Bott in the witness box. He has had substantial experience in marketing and sales of various products and services. But his experience of corporate financial management is very limited, and his understanding of financial matters is imperfect. For example, in oral evidence he was asked to explain how $250,000 would be injected into Tourprint International by Tourprint Publishing, the new publishing company which (as I shall explain) had been formed by mid-1993. He said he believed the money would be lent by Tourprint Publishing to Mr Moore, who would ‘put that money unencumbered’ into Tourprint International. However, he could not explain how that would occur. It did not seem to occur to him that the money might be paid over in repayment of an inter-corporate debt, even though at another time he alleged that Tourprint Publishing had ‘syphoned off money’ from Tourprint International for expenses.

The 1992 financial statements and the Valuation

9   The company retained William Buck & Co, chartered accountants, as its external accountants on 8 July 1992, to prepare the financial statements for the year ended 30 June 1992. Before that time another external accountant was involved, but there is no evidence about the identity or work of that accountant. There is no evidence that annual financial statements were completed for the year ended 30 June 1993. 10   William Buck & Co was retained by Mr Moore on behalf of the company. Mr Fausto Pastro was the partner at William Buck & Co with whom Mr Moore dealt. Mr Pastro was provided with monthly profit and loss statements, balance sheets, creditor ledgers and debtor ledgers generated by means of the company’s computer accounting package, and a computer generated general ledger for the period 1 July 1991 to 30 June 1992, to enable him to prepare the 1992 financial statements. 11   In October 1992 Mr Moore instructed Mr Pastro to prepare a valuation of the company which was to be supplied to Mr Moore’s wife in connection with family law proceedings between them. The valuation, dated 9 November 1992 (‘the Valuation’), was issued by William Buck Partners Pty Ltd, of which Mr Pastro is a director. It was based on the company’s balance sheets and profit and loss statements for the years ended 30 June 1986 to 1992, the company’s taxation returns for those years and interim financial statements for the period ended 30 September 1992. The financial statements were all unaudited, and the interim financial statements were prepared by the company’s bookkeeper. 12   The company’s balance sheet as at 30 June 1992, which is annexed to the Valuation, showed net assets of $29,106. The Valuation also annexed summary profit and loss statements for the financial years from 1986 to 1992, and for the period July to September 1992. The figures showed gross profit rising from 1990 to 1992, but falling in the September 1992 quarter. Operating expenses rose from 1990 to 1992. The company made a small profit in 1990, a loss in 1991, a profit in 1992 and a larger loss for the September 1992 quarter. By the time of the Valuation, the company had a deficiency in working capital of $16,545. 13   The Valuation pointed out that the company’s business structure required it to bear the risk of customers’ bad debts, and limited the company’s goodwill because customers dealt primarily through independent consultants. Additionally, the company’s operating expenses included high fixed expenses for rental of premises, equipment and furniture. 14   Noting that the company’s financial position had deteriorated in the quarter to September 1992 and that it had no financial reserves on which to rely, the Valuation stated that any value of goodwill in the company was more than offset by its inability to make an operating profit, caused by its substantially fixed and unchangeable operating costs. The Valuation continued:

‘Furthermore, recent trading history leads us to conclude that the company might not be able to continue trading due to a significant decline in its revenue base.’

15   The opinion was expressed that the net tangible assets as at 30 June 1992 had disappeared as a result of trading losses incurred after that date, and the company had significant contingent liabilities due to unexpired lease commitments not reflected in the calculation of net tangible assets. The Valuation concluded that the company had no value. 16   While the Valuation does not establish that the company was insolvent in November 1992, it describes a company with serious operating problems of a kind which had the clear potential to lead rapidly to insolvency, if insolvency had not already arrived.

Mr Bott becomes a director

17   In September 1992 Mr Moore approached Mr Bott to invite him to become a director of the company. Mr Moore told Mr Bott that he had separated from his wife, who was the only other director of the company, and that he had arranged to swap his interest in the family home for her interest in the company. As part of this arrangement, she would resign as a director and another director would be needed to replace her. Under the company law at the time, at least two directors were needed for a proprietary company. 18   Mr Moore did not disclose to Mr Bott the contents of the valuation or the company’s poor financial health. Mr Bott says that ‘by all appearances’ the business was thriving. He says that he told Mr Moore that he would need to think about the offer and investigate the financial position of the company before he made any decision. Mr Moore has died, and the only evidence of this conversation is the evidence given by Mr Bott. Nevertheless, I do not believe Mr Bott’s evidence on this point, for reasons explained below. 19   In late 1992 there was a meeting attended by Mr Moore, Mr Pastro and Mr Bott. Mr Bott says that at the meeting he was advised by Mr Pastro that the company was in a sound financial position and that he, Pastro, could see no reason why Mr Bott should not accept the invitation to become a director. Mr Pastro says that he had been asked by Mr Moore to prepare a budget and cashflow forecast for the company, and the meeting was held so that Mr Pastro could obtain Mr Bott’s view as a sales consultant on the forecast of sales which would be part of the cashflow forecast. Mr Pastro denies that he ever made any representation to Mr Bott about the company’s financial position or that he gave him any advice about becoming a director, or that Mr Bott asked him any questions relating to the financial position of the company or sought any advice, at that meeting or at any other time. 20   Mr Bott accepted the invitation to become a director. He says there were to be no immediate benefits but Mr Moore was a friend in need of help. 21   On 5 January 1993 Mr Bott was appointed a director of the company, replacing Mr Moore’s wife. On 28 January 1993 Mr Moore instructed Mr Pastro to arrange for the directorship and for his wife’s shareholding to be transferred to Mr Bott in trust for Mr Moore, effective from 5 January 1993. He did so. He says he remembers wondering why anyone would agree to become a director of the company given its financial position. He says that if Mr Bott had asked him what the financial position of the company was at any time from the date of his appointment as a director on 5 January 1993 to the date when the company ceased trading, he would have told Mr Bott that in his opinion the company was probably insolvent.

Mr Bott’s financial inquiries

22   Mr Bott says that there were never any formal meetings of the board, but he saw Mr Moore every day. He says that he made repeated requests for access to the company’s profit and loss reports and balance sheets, but was told by Mr Moore and the bookkeeper (who has not given evidence) that there were problems with the accounting system which prevented the production of that information. He says that the problems with the accounting system did not lead him to conclude that no one in the company knew its financial position, because he relied on Mr Moore, whose main concern was with debtors and creditors, and on the appearance that the business was thriving. 23   Mr Pastro says that he is not aware of any significant problems experienced by the company in generating monthly profit and loss statements, balance sheets, creditor ledgers and debtor ledgers. He says that those documents were prepared by the company’s bookkeeper and office staff on a monthly basis and he looked at them at times and discussed them with Mr Moore. He says Mr Moore asked him to investigate a new accounting system in mid-1993 but that was for Mr Moore’s new publishing business, which I shall describe. 24   Mr Bott says that around the middle of 1993 he ‘became aware that there was a problem’ with the company. He discovered that Mr Moore and his new partner, a freelance print consultant called Louise Mahoney, had established a travel publishing company called Tourprint Publishing Pty Ltd, and that Mr Moore was by that time focusing most of his efforts on the new venture. He overhead Mr Moore complain about cashflow problems. He says that when in June or July 1993 he demanded access to information about the company’s financial position, he was told by Mr Moore that there was short term cashflow problem. He says that Mr Moore told him that he expected to raise a substantial sum of money from investors in the new Tourprint Publishing business, and that $250,000 from that money would be ‘injected’ into Tourprint International, apparently in order to resolve its cashflow difficulties. He says he was shown a document prepared by Mr Moore and Mr Pastro which valued the publishing business at $1 million. He says they assured him that it was worth at least that amount and that at least two potential investors were interested. Mr Bott says he accepted this explanation. 25   However by September or October 1993 Mr Bott had reached the view that ‘it was obvious that the problems were more than cashflow and that investors for the publishing company were not going to materialise’. Nevertheless he decided not to resign as a director as ‘it was too late for me to do anything’ and he was told by Mr Moore that ‘it was basically all over’. He says Mr Moore told him that he had paid all of Tourprint Publishing’s costs out of Tourprint International. Mr Moore apologised to him for leaving him with a mess. 26   Subsequently Mr Sam Francipanny was retained by Mr Moore to represent him, and possibly also Mr Bott. Mr Francipanny became a director of Tourprint Publishing, which was re-named ‘Where In the World Publishing’. Mr Bott says Mr Francipanny did nothing to assist him, contrary to his expectation.

The company in voluntary administration and liquidation

27   The second plaintiff, Mr McDonald, was appointed as administrator of the company on 13 December 1993. He was appointed liquidator on 3 February 1994. Most of the company’s financial records had been lost before Mr McDonald took up his position as administrator. Mr Bott alleges that Mr Moore admitted to him that the financial records were destroyed by Mr Moore on the advice of Mr Pastro, but Mr Pastro denies this allegation. 28   The evidence does not include minutes of the meetings of creditors which the administrator would have been required to convene under ss 436E and 439A. Nor does the evidence include the report which the administrator would have been required to provide to creditors under s 438D. However, the liquidator’s ‘report as to affairs’ under s 497(1), dated 10 June 1994 (‘the Report’), is in evidence. 29   The Report contains a statement of assets and liabilities of the company as at 3 February 1994, stating figures at going concern valuation and estimated realisable values. On a going concern basis, the company’s total assets are stated at $254,000, and on an estimated realisable basis the figure is $170,519. The assets comprise cash of $60,228 and plant and equipment of $6,000 (realisable at $5,700), the remainder being trade creditors. Liabilities amounted to $826,642. Schedule H to the Report is a list of the company’s unsecured creditors by name, showing the amount claimed by the creditor and the amount admitted as owing. There are 86 creditors listed, though in some cases the amount claimed is nil, and in each case the amount admitted as owing is the same as the amount claimed by the creditor. The amounts are not broken down by date of debt. According to the evidence of Mr Reidy, the manager assisting Mr McDonald, Schedule H was prepared from information supplied by the company’s directors and from proofs of debt lodged with Mr McDonald by the company’s creditors. 30   Annexed to the affidavit of Mr Reidy of 29 September 1997 is a schedule (annexure H) prepared by Mr McDonald’s staff, which gives a month by month analysis for the period from July to December 1993 of the company’s debts. Annexure H shows the amount owing to creditors at the beginning of July 1993, and the amount of payments allocated against those debts during the months from July to December 1993. According to this information, $822,977 was owing at the beginning of July 1993, and that amount had been reduced to $782,861 by December. Annexure H also shows the amount of debts incurred in the months from July to December and the amount of payments allocated to those debts, as well as the total debtors’ balance in each month and the net deficiency in each month. Those figures, which I accept, show that although the total amount owed to creditors declined slightly over the six month period, the total debtors’ balance also declined and consequently the deficiency rose from $287,775 in July to $564,941 in December.

The evidence of Mr Bott and Mr Pastro

31 As I have indicated, Mr Bott has given evidence which implies that he relied on representations by Mr Moore and Mr Pastro, and attempted to inform himself about the company’s financial affairs, but failed through no fault of his own. In large measure, Mr Bott’s evidence is contradicted by the evidence of Mr Pastro. In making findings of fact, I must decide which witness to believe. 32 Apart from Mr Reidy, the second plaintiff’s manager, the only witnesses to be cross-examined were Mr Bott and Mr Pastro. Mr Moore has died. The signed transcript of his examination before the Registrar is in evidence, and sheds some limited light on a few matters, as I shall indicate. 33 In cross-examination Mr Bott generally gave direct and straightforward answers to the questions put to him. His oral evidence was internally consistent and was also consistent with his affidavits, although it is true that his affidavits, which appeared to have been drafted without much or any legal assistance, were expressed in broad and imprecise language. However, it is obvious that Mr Bott finds himself in desperate circumstances and finds it difficult to grasp that the law might impose on him personal liability for the company’s debts although his conduct was (in his view) entirely innocent. His attitude to the proceedings led him to make allegations about the bona fides of the liquidator and allegations about conspiracies of various kinds, which were without any evidentiary basis. That same attitude seems to me to have affected his evidence. His evidence was given in a spirit of earnest advocacy. Understandable though that approach may have been in his personal circumstances, it has made me wary about accepting his evidence where it is contradicted by other evidence and even where, though not contradicted, it is uncorroborated. 34 Mr Bott’s evidence was contradicted at crucial points by the evidence of Mr Pastro. There are four areas of disagreement: first, Mr Pastro denies that prior to Mr Bott’s appointment as a director, he told Mr Bott that the company was solvent and that there was no reason why he should not accept the appointment; secondly, Mr Pastro says he observed no problems with the company’s computer system which interfered with the production of financial records; thirdly, Mr Pastro denies advising Mr Bott about the financial position of the company or the publishing business after Mr Bott’s appointment to the board, and denies that he told Mr Bott that the publishing business was worth $1 million; and fourthly, Mr Pastro denies advising Mr Moore to destroy the company’s records when it became obvious that the company was insolvent. 35 Mr Pastro’s oral evidence was clear and internally consistent, and consistent with his affidavit and other evidence apart from the evidence of Mr Bott. Observing him as a witness, I saw no reason to disbelieve his evidence. Mr Bott attacks Mr Pastro’s credibility and several grounds. First, he says that Mr Pastro obtained a ‘free’ overseas trip from Mr Moore - presumably the contentions are that the enticement of the overseas trip led Mr Pastro to conceal the truth about the company’s financial position from Mr Bott and to recommend that corporate records be destroyed, and the acceptance of the overseas trip was somehow improper in a way which casts a shadow over Mr Pastro’s evidence. When asked about the overseas trip, Mr Pastro admitted that Mr Moore had funded an overseas trip for him as part of his remuneration for the services which his firm had provided to Mr Moore, Tourprint International and Tourprint Publishing. He accounted to his partners for the remuneration in that form. Since I accept that evidence, I reject the contentions that it was improper of Mr Pastro to accept the overseas trip, that the overseas trip was a reward for improper advice such as the advice to destroy financial records, and that the enticement of the trip caused Mr Pastro to mislead Mr Bott. 36 Mr Bott also asserts that Mr Pastro had a duty to warn him of the true financial position of the company, both prior to his taking the appointment and subsequently while he was director. Mr Bott engaged Mr Pastro to provide a shelf company, but that engagement cannot have implied any duty to warn Mr Bott about the financial position of Tourprint International. Apart from this, the evidence indicates that Mr Pastro was engaged to provide services in three relevant capacities: first, by Tourprint International to prepare unaudited financial statements for the year ended 30 June 1992 and some tax advice about the payment of commission to individuals rather than to companies; secondly, by Mr Moore or Tourprint International, to prepare the Valuation of Tourprint International in connection with his divorce from his wife; and thirdly, by Mr Moore or possibly Ms Mahoney or Tourprint Publishing, to assist in the preparation of the information memorandum used for the purpose of attracting investors to the publishing business. 37 Tourprint International did not have an auditor. Mr Pastro received his instructions principally from Mr Moore, though it appears that he also dealt with the company’s bookkeeper. He did not receive instructions from or report to Mr Bott. Mr Pastro was contractually bound to provide specified services to Tourprint International, and it is likely that the contract of engagement by that company obliged Mr Pastro to exercise due care. He probably also owed the company a tortious duty of care. However, it appears to me that all relevant reporting duties were adequately discharged by Mr Pastro reporting to Mr Moore. It seems to me that he had no obligation in contract or tort to ensure that his reports reached Mr Bott as well as Mr Moore, in the circumstances of the present case. 38 Those circumstances are as follows. According to Mr Pastro’s evidence, which I accept, he was never requested by any director (that is, Mr Moore, his wife and, subsequently, Mr Bott) to provide financial information to anyone other than Mr Moore. He dealt with Mr Moore because Mr Moore was the person primarily involved in the management of the business. He told Mr Moore on various occasions, including the time of the Valuation, that the company had significant operating difficulties. During the second half of 1993 he told Mr Moore more than once that the company’s liabilities exceeded its assets and it had significant cashflow difficulties, and was not making a profit. Although he may not have used the word ‘insolvent’, I am satisfied that this advice implied that in Mr Pastro’s opinion, the company was insolvent for the purposes of the definition in the Corporations Law. 39 Mr Pastro’s evidence on these matters is consistent with Mr Moore’s evidence in his examination before the Registrar under s 597 of the Corporations Law, held on 1 July 1994. The transcript indicates that according to Mr Moore, Mr Pastro advised him that the company was ‘in a bit of a hole’ and had to get in more work, and that if something was not done, ‘it could be terminal’. 40 I therefore reject Mr Bott’s submission that Mr Pastro had, in the circumstances, a duty to warn him of the true financial position of the company. The position may have been different if Mr Pastro had known that Mr Moore was misleading Mr Bott as his co-director, and excluding him from access to financial information notwithstanding Mr Bott’s requests. But I find Mr Pastro was not aware of any such matters. It follows from these conclusions that I reject Mr Bott’s attempts to undermine the evidence of Mr Pastro by asserting that he failed to discharge a duty to warn Mr Bott of the company’s financial circumstances. I also reject Mr Bott’s submission that it is inherently implausible that Mr Pastro would not have given such a warning to him. 41 Weighing up all of these factors, I have concluded that the evidence of Mr Pastro is to be preferred to Mr Bott’s evidence wherever their accounts conflict. That being so, I make the following findings. 42 First, I find that Mr Bott did not ask Mr Moore for any financial information, nor Mr Pastro for any advice or information, when the three of them met with Mr Moore before Mr Bott was appointed to the board. It is plausible, as Mr Pastro says, that their meeting with Mr Moore was about sales projections. It is implausible that Mr Bott regarded financial information as important at that time, since his own evidence is that he thought the business was thriving and that he joined the board without having received any financial information at all. It is likely that some financial information was available as at September 1992, or at least before January 1993 - specifically, the annual financial statements for the year ended 30 June 1992, which were dated 16 December 1992 and summarised in an annexure to the Valuation. 43 Secondly, I find that Mr Bott did not seek balance sheets, profit and loss statements or creditor ledgers from Mr Moore, Mr Pastro or the company’s bookkeeper, and did not otherwise seek to inform himself of the financial health of the company, during the first six months of 1993. I accept that he obtained and used financial information about debtors, since essentially his job was to obtain orders for printing work from customers who thereby became debtors, and it was necessary for him to know whether those customers owed the company money. But in my opinion, on the balance of probabilities, that is as far as his financial knowledge of the company went, and he did not during the first six months of 1993 seek to inform himself more generally of the company’s financial position and state of solvency. Mr Bott says that he was denied financial information because, according to Mr Moore and the bookkeeper, problems with the company’s computer prevented the information from being produced. That is inconsistent with the evidence of Mr Pastro that he experienced no problem with access to financial records through the company’s computer system. It is also inconsistent with evidence which Mr Moore gave in his examination under s 597 before the Registrar, to the effect that the computer could produce trial balances, creditor and debtor ledgers and ‘all those sorts of things’, and that the complaints about the computer were only that it could not perform additional functions and that it kept ‘crashing’ and would be down for a week when it did so. If Mr Bott believed, as he evidently did, that the company depended on the computer for such accounting records as a general ledger, and debtor and creditor ledgers, and if he also believed that the computer was incapable of producing them, he should have insisted that the company immediately put itself in the position to keep the financial records which the Corporations Law requires, but there is no evidence that he did so. The most plausible explanation is that basic financial information was available from the company’s computer, allowing for occasional breakdowns, but Mr Bott did not seek to obtain it during the first six months of 1993. I note that in his examination before the Registrar, Mr Bott said that he asked for financial information ‘six months before Tourprint folded’, and asked again in October 1993, and that he believed that the information which he sought was available from the computer. This is inconsistent with his evidence in these proceedings. 44 I accept Mr Bott’s evidence that from the middle of 1993, he became concerned that there was a financial problem with the company, and that then he was persuaded by Mr Moore that the company’s cashflow difficulties would be overcome when investors provided funds for Tourprint Publishing. That evidence is not inconsistent with Mr Pastro’s evidence, since Mr Pastro confirms that he had instructions from Mr Moore to prepare financial information for an information memorandum at that time. But Mr Pastro did not make any representation directly to Mr Bott on that subject. The information memorandum is not in evidence, but I accept that it contained an optimistic account of the value of the business of Tourprint Publishing and the prospects of that company. It probably stated that Tourprint Publishing was indebted to Tourprint International in the sum of $402,000. It not clear from the evidence whether the information memorandum stated that Tourprint International was shareholder in Tourprint Publishing, nor whether that was ever in fact the case. In my opinion it is unlikely that the information memorandum contained any information about Tourprint International which would have provided a basis for the belief that in the absence of a cash injection (perhaps through repayment of the loan account in the event that investors were attracted into Tourprint Publishing) Tourprint International would be able to pay its debts as and when they fell due. I accept Mr Pastro’s evidence that he gave no advice or made any representations to Mr Bott about the information memorandum or about the financial position of Tourprint International at any stage during Mr Bott’s directorship. 45 Finally, given my assessments of Mr Bott and Mr Pastro as witnesses, I see no basis for accepting Mr Bott’s serious allegation that Mr Pastro advised Mr Moore to destroy the company’s records. Mr Moore sought to explain the absence of records in his evidence before the Registrar, on the basis that documentary records were lost when the company moved from St Leonards to Neutral Bay early in December 1993, and he said that the computer itself was damaged when dropped by the removalist and was discarded to a rubbish tip. Regardless of whether Mr Moore’s account is convincing, there was nothing in it to implicate Mr Pastro.

The law

46 By a summons filed on 13 March 1997, the company in liquidation and the liquidator now sue Mr Bott for declarations and orders under Part 5.7B Division 3 of the Corporations Law with respect to debts incurred by the company during the period from July to December 1993. The cause of action is under s 588M. Section 588M(1) sets out four ingredients of the cause of action, of which only two can be in issue in these proceedings. The two ingredients which cannot be contested are that the debts specified in the summons are unsecured (s 588M(1)(c)) and that the company is being wound up (s 588M(1)(d)). The other two ingredients are that Mr Bott has contravened s 588G in relation to the incurring of debts by the company (s 588M(1)(a)), and that creditors have suffered loss or damage in relation to the debts because of the company’s insolvency (s 588M(1)(b)). Mr Bott denies that he has contravened s 588G, asserting that the plaintiffs have failed to prove that any individual debt was incurred at the relevant time, and relying on the defences contained in ss 588H(2) and (4). He also denies that the plaintiffs have proved that there are any creditors who have suffered loss or damage.

The liquidator’s calculation of the amount claimed in the summons

47   Mr McDonald as liquidator seeks to recover $519,320 from Mr Bott, together with interest. The schedule to the summons filed on 13 March 1997 contains an alphabetical list of creditors and adjacent to each, one or more dates and amounts, the amounts adding up to that sum. The earliest date listed is 1 July 1993 and the latest is 9 December 1993. The list runs to 13 pages. Mr Reidy’s evidence is that the schedule to the summons sets out the outstanding debts of the company which were incurred over the period from 1 July to 9 December 1993. He says the list was prepared by reference to a schedule (‘the Creditors’ Schedule’) which is annexure A to his affidavit of 13 August 1998. He says that the Creditors’ Schedule was prepared by staff of Mr McDonald on the basis of information contained in invoices, statements and correspondence which had been delivered to Mr McDonald. 48   The Creditors’ Schedule is a spreadsheet giving an alphabetical list of creditors, the opening balance (if any) of the amounts owing to them as at 1 July 1993, and for each of the months from July to December 1993, a list of additional debts incurred and amounts paid, giving a date for each item. 49   Naturally there are differences between Schedule H to the Report and the list in the summons, for two reasons. First, Schedule H states only total amounts claimed and admitted in respect of each creditor, whereas the schedule to the summons is confined to the outstanding amount of debts incurred on or after 1 July 1993, and lists them individually. Secondly, Schedule H was prepared on the basis of information supplied by the directors and proofs of debt lodged by the creditors, whereas the schedule to the summons, being based on the Creditors’ Schedule, is sourced in information contained in invoices, statements and correspondence from creditors. Those documents, which are voluminous, are in evidence. 50   In an effort to clarify the situation, Ms Ward, who is an employee of Mr McDonald, prepared a schedule dated 5 August 1998 which lists creditors alphabetically, and for each creditor shows the amount appearing in Schedule H to the Report, the amount of any proof of debt, the part of any proof of debt which relates to the period after June 1993, and the amount claimed in the schedule to the summons. 51   Mr Bott submits that the plaintiffs have failed to prove that any individual debt referred to in the schedule to the summons was incurred at the time asserted in the schedule. He says that for this to be proved, on the balance of probabilities, the Court must form an actual belief to a reasonable satisfaction about the relevant facts. He cites Briginshaw v Briginshaw (1938) 60 CLR 336, 361-2; Jones v Dunkel (1959) 101 CLR 298, 304-5; West v Government Insurance Office of New South Wales (1981) 148 CLR 62, 66; and D H Hodgson, ‘The Scales of Justice: Probability and Proof in Legal Fact Finding’ (1995) 69 ALJ 731. He submits that the liquidator should have given evidence of the manner in which he investigated and verified each debt which he claims from Mr Bott, but he failed to do so. Mr Reidy’s evidence, he says, is inadequate and vague, and does not explain what the liquidator has in fact done. He notes that many of the items which appear in the schedule to the summons do not appear in Schedule H to the Report, and others appear for differing amounts, and claims that the discrepancy is not adequately explained. The basis on which proofs have been accepted is not explained, and nor is the basis upon which the plaintiff makes a claim in respect of creditors who have not lodged a proof of debt. 52 Mr Bott says he has compared the schedule to the summons with Schedule H and has calculated that only $327,163 of the claims in the summons are mentioned in Schedule H (and some of these are for differing amounts). Further, Mr Bott has calculated that the summons claims $77,179 for debts incurred after 1 October 1993, before any allowance is made for discrepancies between the summons and Schedule H. 53 I reject Mr Bott’s submissions on these matters. I accept that the plaintiffs must prove that each individual debt claimed in the schedule to the summons was incurred during the relevant period (the relevant period being the period from 1 July to 9 December 1993, assuming for present purposes that the company was insolvent throughout that period). I accept that the Court must form an actual belief to a reasonable satisfaction that those debts were incurred, in order to find for the plaintiffs on the balance of probabilities. But in the circumstances of this case I regard the plaintiffs’ evidence as adequate to enable the Court to reach a conclusion in the plaintiffs’ favour. The discrepancies between the schedule to the summons and Schedule H to the Report are, in my opinion, explicable in the manner which I have indicated. The fact that some of the creditors listed in the schedule to the summons have not lodged a proof of debt is inconclusive. The plaintiffs’ evidence is that the schedule to the summons was prepared by reference to the Creditors’ Schedule, which is in evidence, and the Creditors’ Schedule was prepared on the basis of information contained in invoices, statements and correspondence which are also in evidence, grouped by reference to whether the debts relate to the period to 30 June 1993 or from 1 July 1993. In my opinion this evidence amply discloses the liquidator’s methodology in preparing the schedule to the summons. I reject the submission that the evidence of Mr Reidy was inadequate and vague, when one takes account of both his two affidavits and his oral evidence. 54 It was open to Mr Bott to review the evidence, comprising the crowded contents of five lever-arch folders, to demonstrate any error in the correlation of that documentary evidence with the items in the schedule to the summons. He did not do so, even though he had Ms Ward’s helpful schedule which drew attention to differences between Schedule H, proofs of debt and the schedule to the summons. I infer from Mr Reidy’s evidence of the liquidator’s methodology, and from the evidence which comprises the Creditors’ Schedule and the bundles of documents upon which it is based, and from the absence of any specific challenge to the accuracy or compilation of that evidence, that on the balance of probabilities the debts listed in the schedule to the summons were incurred on the dates there stated and remain outstanding to the extent of the amounts there stated.

Finding on insolvency

55 The meaning of the ‘solvent’ and ‘insolvent’ for the purposes of s 588G (inter alia) is given by s 95A. Section 95A(1) says that a person is solvent if and only if the person is able to pay all his or her debts as and when they become due and payable. A person who is not solvent is insolvent (s 95A(2)). 56 The summons seeks an order that Mr Bott pay to the liquidator the amount of debts incurred by the company during the period from 1 July 1993 to 9 December 1993, a few days before the company went into voluntary administration. This is on the basis that either the company was insolvent throughout that period, or that it became insolvent by incurring the debts listed in the schedule to the summons, or those debts and other debts. 57 In my opinion the evidence establishes that the company was insolvent prior to 1 July 1993 and continued to be insolvent thereafter. I reach this conclusion on the following grounds. First, the Valuation indicated that the company had suffered a significant net loss in the quarter to September 1992 and had negative working capital. While the Valuation does not demonstrate that at its date, 9 November 1992, the company was unable to pay all its debts as and when they became due and payable, since the financial statements upon which it relied showed substantial cash on hand and there was no analysis of the aging of debtors and creditors, nevertheless the Valuation provides a basis for apprehension about the company’s solvency. Secondly, Mr Pastro’s evidence is that he thought the company was probably insolvent before Mr Bott took up his directorship. Thirdly, the analysis in annexure H to Mr Reidy’s affidavit of 29 September 1997, which was not challenged, is that there was a net deficiency of creditors over debtors in each month from July to December, ranging from $287,775 in July to $564,941 in December, and that the deficiency according to the opening creditors’ balance for July was nearly $300,000. Fourthly, the Report stated that as at 3 February 1994, the estimated deficiency in the company was $656,123. It is implausible that this deficiency would have arisen entirely over a period shorter than the period from July to December 1993. Finally, correspondence between the company and its creditors is in evidence. It shows that Mr Moore was in correspondence with a significant number of creditors from September to November 1993, apologising for not paying accounts, identifying ‘liquidity problems’ which (he said) would be overcome shortly, and offering instalment payments. There is similar though less voluminous correspondence during the period from June 1992 to August 1993. Taken together, this material shows that the company was chronically unable to meet its debts as and when they fell due from at least September 1993, and implies that the problem arose at an earlier time. That this occurred is corroborated by Mr Bott’s own evidence that he overheard Mr Moore speaking of ‘cashflow problems’ in mid-1993. 58 This was not a case of a cashflow problem in the sense of temporary lack of liquidity. As Jacobs J said in Hymix v Garritty (1977) 13 ALR 321 at 328:

‘A temporary lack of liquidity must be distinguished from an endemic shortage of working capital whereby liquidity can only be restored by a successful outcome of business ventures in which the existing working capital has been deployed…’

59 It is not necessary, in my opinion, to rely on the statutory presumption of insolvency arising under s 588E in order to reach the conclusion on the present facts that the company was insolvent throughout the period from July to December 1993. However, since the present proceeding is clearly a ‘recovery proceeding’ (see ss 588E(1)(e) and 588E(2)) and the company is being wound up, the presumption in s 588E(3) is available. Even if it were not clear that the company was insolvent throughout the period from July to December 1993, it would be incontestable that the company was insolvent by December 1993, when the administrator was appointed. In the present case the relation back day is 13 December 1993, the date on which the administrator was appointed, having regard to ss 513B and 513C. Therefore the effect of s 588E(3) is that it must be presumed that the company was insolvent throughout the period of twelve months ending on 13 December 1993.

Liability for insolvent trading

60 The relevant parts of s 588G are as follows:

‘(1) This section applies if:
(a) a person is a director of a company at the time when the company incurs a debt; and
(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at the time debts including that debt; and
(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would become so insolvent, as the case may be; and
(d) that time is at or after the commencement of this Part.
(2) By failing to prevent the company from incurring the debt, the person contravenes this section if:
(a) the person is aware at that time that there are such grounds for so suspecting; or
(b) a reasonable person in a like position in a company in the company’s position would be so aware.’

61 I have found that the company incurred the debts listed in the schedule to the summons on the dates so listed. During the whole of the period from 1 July 1993 to 9 December 1993, Mr Bott was director of the company. Therefore s 588G(1)(a) is satisfied. I have also found that the company was insolvent throughout the period from 1 July 1993 to 9 December 1993. Therefore s 588G(1)(b) is satisfied. Obviously s 588G(1)(d) is satisfied. I turn to s 588G(1)(c). 62 Case law gives some assistance as to the meaning of the concept of ‘reasonable grounds for suspecting’: see Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, 303; Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, 123-124. However, it is not necessary to explore the reach and limits of that concept given the clear facts of this case. In my opinion it is beyond contest that throughout the period from 1 July 1993 to 9 December 1993 there were reasonable grounds for suspecting that the company was insolvent. Those grounds arose out of the state of the company’s financial records, which were reviewed by Mr Pastro, the growing deficiency of creditors over debtors, and the absence of any significant assets other than trade debtors and cash. Anyone aware of facts disclosed by that information would have realised that the company was hopelessly insolvent throughout the relevant period. 63 As to the ingredients of s 588G(2), I find that Mr Bott’s state of knowledge in mid-1993 was such that he was aware that there were reasonable grounds for suspecting that the company was insolvent at that time, and his awareness of such grounds continued for the whole period from July to December 1993. His own evidence is that he was aware that ‘there was problem’ around the middle of the year. He knew that Mr Moore and his friend Ms Mahoney had established the travel publishing business and that they were concentrating most of their efforts on that business. He overheard Mr Moore complaining about cashflow. When he ‘demanded’ evidence of the company’s financial position he was told that there was a short term cashflow problem and that Mr Moore was looking for an investor for the publishing company. The natural implication was that if investors were not attracted to the publishing company so that cash could be injected into Tourprint International, the cashflow problem would continue. 64 In my opinion, a reasonable person in a like position in a company in Tourprint International’s circumstances would have been aware throughout the period from July to December 1993 that there were reasonable grounds for suspecting insolvency, even if Mr Bott was not aware. A reasonable person would have pressed forcefully for financial information about the company before taking up an appointment to the board, and then for regularly updated financial information so that a proper assessment of the company’s financial position could regularly be made. A reasonable person in the position of director of Tourprint International would not have suspended his demands for financial information because of any alleged inadequacies of the company’s computer, and would have explored and insisted upon resolving any such problems. It is not easy to envisage circumstances in which a reasonable company director could tolerate a situation in which the company could not produce basic financial information, such as debtor and creditor ledgers, for any significant period of time. In the circumstances of the present case, either a reasonable person in Mr Bott’s shoes would have obtained financial information by mid-1993 which would have provided ample grounds to believe that the company was insolvent or, if such information was sought and not obtained, the absence of the information would itself contribute, together with other circumstances, to the existence of reasonable grounds for strong suspicion of insolvency.

Defences

65 Mr Bott relies on two of the defences to proceedings for contravention of s 588G, found respectively in ss 588H(2) and (4). 66 Section 588H(2) says:

‘It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debt that it incurred at that time.’

67   ‘Expectation’, as required by s 588H(2), means a higher degree of certainty than ‘mere hope or possibility’ or ‘suspecting’: 3M Australia Pty Ltd v Kemish (1986) 10 ACLC 371, 378; Dunn v Shapowloff [1978] 2 NSWLR 235, 249. The defence requires an actual expectation that the company was and would continue to be solvent, and that the grounds for so expecting are reasonable. A director cannot rely on a complete ignorance of or neglect of duty (Metal Manufacturers Ltd v Lewis (1986) 11 ACLR 122, 129) and cannot hide behind ignorance of the company’s affairs which is of their own making or, if not entirely of their own making, has been contributed to by their own failure to make further necessary inquiries (Morley v State Wide Tobacco Services Ltd (1990) 2 ACSR 405, 431; (1992) 8 ACSR 305). 68 Mr Bott says that he did expect and had reasonable grounds to expect that the company was solvent, at least up until September-October 1993. It may be that Mr Bott’s actual expectation was that the company would be able to pay its debts as and when they fell due, prior to September 1993. But by mid-1993, if not before, that expectation was without any reasonable foundation. He became aware of a ‘problem’ in the middle of the year, and observed Mr Moore concentrating on the new publishing business and overhead him complaining about cashflow. Although he was shown the information memorandum and told that some investors were interested, it was not reasonable for him, without further investigation, to expect that investors would come forward and that Tourprint Publishing would inject further capital of $250,000 into Tourprint International. And even if that expectation had been reasonable, it would not be reasonable to expect that the injection of that further capital would solve Tourprint International’s problem, without proper inquiries as to the financial state of affairs in the company. If proper inquiries had been made, Mr Bott would have come to realise the serious operational problems which had arisen in the company by no later than mid-1993, and probably many months earlier; he would have discovered the amount of the net deficiency of assets to creditors, which the evidence indicates was already in excess of $250,000 by the end of June 1993; and he would have realised that even with a cash injection, the company’s financial prospects were very bleak because of its high fixed costs and declining gross profit. In those circumstances he cannot invoke s 588H(2) to hide behind his ignorance. 69 Section 588H(4) provides:

‘If the person was director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company.’

70   Counsel for Mr Bott submits, with some ingenuity, that Mr Bott did not take part in the management of the company ‘for some other good reason’. The ‘good reason’ is said to be that he was excluded from management by the deceptions of Mr Moore and Mr Pastro. 71   I have rejected Mr Bott’s contention that he was deceived by Mr Pastro in various ways, but I accept that he was mislead by Mr Moore. Mr Moore was well aware of the company’s poor financial health at least as from the date of the Valuation, and was informed of the worsening situation by Mr Pastro from time to time. Yet he did not disclose any of this information to Mr Bott, and led Mr Bott to believe that the company’s financial predicament was less serious than it was, and would be cured once funds were raised for the publishing business. 72   Mr Bott did not take part in the financial management of the company, but he had an important role to play in sales and in debt recovery from his customers. In these circumstances I doubt that it is true to say that he did not take part in the management of the company at all. But even if that can be said, my opinion is that Mr Bott’s failure to have a more active role in management is not referrable to any reason which is a ‘good reason’ for the purposes of s 588H(4). 73   There are no reported decisions which interpret the words ‘other good reason’ in the context of the present section. Case law under the previous s 592, which is differently worded, considered circumstances such as these: · where an alternate director, who acts only when a regular director cannot do so, is not acting as a director when the debt is incurred (Playcorp Pty Ltd v Shaw (1993) 10 ACSR 212); · where a director goes overseas and requests another director to be appointed in his place (Androvin v Figliomeni (1996) 14 ACLC 1461).

If the facts of those cases occurred under the present section, they may well be cases of ‘other good reason’ under s 588H(4).

74   The provision seems to have its source in the Report of the General Insolvency Inquiry by the Australian Law Reform Commission (Report 45 - ‘Harmer Committee Report’), which said at paragraph 312 that ‘it is not appropriate for a provision designed to establish a proper standard of conduct by directors to impose liability on a director who was not in a position to influence the management of the financial affairs of the company at the relevant time’. Mr Bott says that he was not in a position to influence the management of the financial affairs of the company because Mr Moore deceptively excluded him. 75 In my opinion Mr Bott’s submission is contrary to the policy underlying the subsection as disclosed by the Harmer Committee. In paragraph 312 the Harmer Committee expressed the view that a director should not be excused where, though acting reasonably, he has not shown the ‘necessary commitment to an involvement with the management of a company in financial difficulties’. Mr Bott clearly did not show a proper degree of commitment to involvement in the financial management of the company, for he was never involved in financial management at all. He ought to have realised that by not having any such involvement, he was not properly discharging his responsibilities as a director. He ought to have taken steps from the outset, and at least by mid-1993, to ensure that he had a proper degree of involvement as a director in the management of the company. He ought, in short, to have confronted Mr Moore and insisted upon proper involvement in the company’s affairs. He cannot now treat Mr Moore’s deceptive conduct as a good reason for not taking part in management when he did not assert his rights as a director from the outset and with vigour. 76 At one stage Mr Bott indicated that he wished to rely on s 588H(3), although he did not do so in final submissions. In my opinion s 588H(3) is not available on the facts, as I have found them to be in this case. Mr Pastro was not responsible for providing Mr Bott with adequate information about whether the company was solvent. Nor was Mr Moore, but even if Mr Moore had accepted some such responsibility, it would not have been reasonable for Mr Bott to believe that Mr Moore was fulfilling that responsibility. 77 My conclusion is that none of the defences relied upon is available in the present case, and consequently the contravention of s 588G is made out.

Loss or damage suffered by creditors

78   For the purposes of s 588M(1), the persons to whom the debts are owed are those listed in the schedule to the summons. Because of the company’s insolvency, they have not been paid. They have therefore suffered loss or damage in relation to their debts because of the company’s insolvency, and consequently s 588M(1)(b) is satisfied in this case. 79   It follows that all the ingredients of s 588M(1) have been made out, and consequently Mr McDonald as the company’s liquidator may recover from Mr Bott as a director, as a debt due to the company, an amount equal to the amount of the loss or damage of the creditors, which in the present case is the amount of their debts (s 588M(2)).

Conclusion

80   Mr McDonald is entitled to the principal relief claimed in the summons, namely:

(1) a declaration that at the time when the first plaintiff incurred the unsecured debts to the creditors referred to in the schedule to the summons (‘the Debts’), the first plaintiff was insolvent;
(2) a declaration that at the time the first plaintiff incurred the Debts there were reasonable grounds suspecting that the first plaintiff was insolvent;

(3) a declaration that the defendant was a director of the first plaintiff at the time when the first plaintiff incurred the Debts;

(4) a declaration that by virtue of the preceding matters the defendant has contravened s 588G of the Corporations Law;

(5) a declaration that the creditors of the first plaintiff set out in the schedule have suffered loss or damage in relation to their debts because of the first plaintiff’s insolvency;

(6) an order that the defendant pay to the second plaintiff as a debt due to the first plaintiff the sum of $519,320.

81 The summons claims interest pursuant to s 94 of the Supreme Court Act 1970 (NSW). The award of interest under that section is discretionary, though the Court will normally exercise its discretion in favour of a plaintiff who obtains a money judgment. I can see no reason for not awarding interest in the present case, and I propose to do so. Equally I can see no reason for not ordering that Mr Bott as defendant pay the costs of the plaintiffs. 82 I therefore propose to make the declarations and orders set out in paragraphs (1) to (6) above. Those declarations and orders can take effect in the normal way, when they are entered. I also propose to order interest pursuant to s 94 of the Supreme Court Act, and that the defendant play the plaintiffs’ costs, on the basis that the last two orders will take effect one week from the date of handing down these reasons for judgment. I shall grant either party liberty to apply to me on any week day on 24 hours notice to the other party, for the purpose of making any submissions as to interest or costs, on the basis that if that liberty is not successfully exercised within seven days, the orders concerning interest and costs will take effect automatically. 83 I shall ask counsel for the plaintiffs to prepare short minutes of orders to reflect these reasons.

* * * * * * * * * *

Last Modified: 06/15/1999