CATCHWORDS
CORPORATIONS - directors' liability for debts - consideration of when debts fall due - whether expected revenue flows can be taken into account under Corporations Law s 592(1)(b) - factual dispute as to whether individuals were directors of company at relevant times.
Corporations Law s 592
3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371
Rema Industries and Services Pty Ltd v Coad and Others; Re Taspac Thermoforming Pty Ltd (1992) 7 ACSR 251
Re New World Alliance Pty Limited (Receiver and Manager Appointed); Sycotex Pty Ltd v Baseler and Others (No 2) (1994) 51 FCR 425
TCN Channel Nine Pty Limited v Scotney (unreported decision of the Full Court of the Federal Court delivered 26 October 1995)
Carrier Air Conditioning Pty Ltd v Kurda and Others (1993) 11 ACSR 247
Group Four Industries Pty Ltd v Brosnan & Anor (1992) 8 ACSR 463
Statewide Tobacco Services Ltd v Morley (1990) 8 ACLC 827
No G 3282 of 1993
GENERAL ADVERTISING COMPANY (AUSTRALIA) PTY LIMITEDApplicant
- and -
ROBERT JEFFRESS First Respondent
- and -
JAMES WATTS Second Respondent
- and -
ROBERT JEFFRESS Cross Claimant
- and -
ROBERT IAN ASHWOOD Cross-Respondent
Branson J
Sydney (Judgment delivered in Adelaide via video link-up)
3 November 1995
IN THE FEDERAL COURT OF AUSTRALIA)
)
NEW SOUTH WALES DISTRICT REGISTRY) No G 3282 of 1993
)
GENERAL DIVISION )
BETWEEN:
GENERAL ADVERTISING COMPANY (AUSTRALIA) PTY LIMITED
Applicant
- and -
ROBERT JEFFRESS
First Respondent
- and -
JAMES WATTS
Second Respondent
- and -
ROBERT JEFFRESS
Cross Claimant
- and -
ROBERT IAN ASHWOOD
Cross-Respondent
MINUTES OF ORDER
CORAM: Branson J
PLACE: Sydney (Judgment delivered in Adelaide via video link-up)
DATE: 3 November 1995
THE COURT ORDERS THAT:-
1. The application be dismissed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA)
)
NEW SOUTH WALES DISTRICT REGISTRY) No G 3282 of 1993
)
GENERAL DIVISION )
BETWEEN:
GENERAL ADVERTISING COMPANY (AUSTRALIA) PTY LIMITED
Applicant
- and -
ROBERT JEFFRESS
First Respondent
- and -
JAMES WATTS
Second Respondent
- and -
ROBERT JEFFRESS
Cross Claimant
- and -
ROBERT IAN ASHWOOD
Cross-Respondent
REASONS FOR JUDGMENT
CORAM: Branson J
PLACE: Sydney (Judgment delivered in Adelaide via video link-up)
DATE: 3 November 1995
This is an application pursuant to s592 of the Corporations Law by a major creditor of a company in liquidation seeking judgment against individuals who it is alleged were directors of the company. It is alleged against such individuals that they contravened s592 of the Corporations Law and are jointly
and severally liable for payment of debts of the company owing to the applicant.
The debtor company is Filmpage Pty Limited ("Filmpage"). The creditor is the applicant General Advertising Company (Aust) Pty Limited ("the applicant").
Mr James Watts, the second respondent, acknowledges that he was a director of Filmpage at all relevant times. Mr Robert Jeffress, the first respondent, acknowledges that he was an original director of Filmpage. He contends, however, that he resigned as a director effective from 3 March 1992, a date earlier than the dates upon which the debts the subject of these proceedings were incurred. Mr Jeffress has, by a cross claim against Mr Robert Ian Ashwood, pleaded that if he is liable to the applicant for the amounts claimed in the application, Mr Ashwood was at all material times a director of Filmpage pursuant to a resolution of Filmpage of 15 January 1992, or alternatively pursuant to s60 of the Corporations Law. Mr Ashwood denies that he was at any time a director of Filmpage.
All parties, other than Mr Watts, were represented by solicitors and counsel at the hearing. Mr Watts was represented by solicitors until shortly before the hearing. He appeared in person at the hearing.
Background
In late 1990 the first and second respondents, with Ms Miranda Marsh and Mr Ric Klusman, agreed to establish an advertising agency. In about December 1990 using the company Filmpage they commenced business under the name Pace Marketing. The first and second respondents worked in the business as executive directors. Ms Marsh was also an executive director. Mr Klusman became a non-executive director.
In the advertising industry, advertising agencies accredited in accordance with requirements laid down by the Media Council of Australia are eligible to receive commissions from the placement of advertisements with media outlets such as television stations, radio stations and newspapers. Filmpage was not so accredited. The applicant was, and continues to be, so accredited. In about January 1991 an arrangement was entered into by the first respondent on behalf of Filmpage and Mr Kenneth Johnson ("Mr Johnson") on behalf of the applicant for Filmpage to place the media component of its advertisements through the applicant. It was agreed that Filmpage would book the media component of its advertising with the media outlets and invoice its clients directly: it was to send copies of its bookings to Mr Johnson at the end of each month. On this basis it was agreed that the applicant would give to Filmpage 8% of the 10% commission which it would receive from the media outlets.
The
applicant as an accredited advertising agency was not
required to pay for media advertising placed through it until 45 days from the
end of the month in which the media advertising appeared. The evidence is not wholly clear as to the
arrangements made between Filmpage and the applicant as to the due dates of
payments to be made by Filmpage to the applicant for advertising placed by
Filmpage. It was the evidence of Mr
Johnson that the arrangement was for a nominal 30 day account in accordance
with industry practice, but that in fact payments were made to the applicant by
Filmpage 45 days after the end of the month (i.e. that the payment
practice between the applicant and Filmpage was the same as that between the
applicant and the media outlets). The evidence
of the first respondent was that the arrangement made between him and Mr Johnson
was that generally Filmpage would pay the applicant by the time that the
applicant was required to pay the media outlets but that it was recognised that
occasionally this time frame would not be met.
The second respondent gave evidence that it was his understanding that
Filmpage agreed to pay its bills to the applicant 45 days from the end of the
month of invoice so that the applicant would have funds in hand with which to
pay the media. I find that Mr Watts'
understanding reflects at least what became the ordinary payment practice
between Filmpage and the applicant, and a practice which it was reasonable to
conclude would continue.
After a few months of operation Filmpage had attracted a number of significant clients and appeared to be doing well. Its largest client at that time was a company trading under the name Charter Search ("Charter Search"). In about March 1991 Charter Search gave to Filmpage post dated cheques in a total amount of $59,145.90. When presented for banking the cheques were returned marked "Refer to Drawer". They were returned similarly marked when presented second and third times. As a consequence, a cheque dated 15 May 1991 drawn by Filmpage in favour of the applicant was not met by Filmpage's banker as insufficient funds were held by it in Filmpage's account. Charter Search was eventually wound up in September 1991 owing Filmpage $168,104.32.
Notwithstanding the inability of Filmpage to meet its liabilities to the applicant arising out of advertisements placed on behalf of Charter Search, business between Filmpage and the applicant continued much as usual. In the words of Mr Johnson, "I really had little or no option, I was locked in." Filmpage had sought and obtained trade indemnity insurance which it had assigned to the applicant. It was recognised by both parties that such trade indemnity insurance presented the best hope of recovery of at least the major portion of the amount owed by Filmpage to the applicant as a consequence of advertisements booked through the applicant on behalf of Charter Search ("the Charter Search debt").
Nonetheless, well before payment under the trade indemnity insurance was received Filmpage commenced to reduce the amount of the Charter Search debt. In April 1992 the trade indemnity insurance pay-out in respect of the Charter Search debt was received by the applicant. The only issue outstanding with respect to the Charter Search debt relates to the entitlement, if any, of the applicant to be paid interest in respect of the monies outstanding between May 1991 and April 1992. This is discussed further below.
Between May 1991 and April 1992, the Charter Search debt aside, Filmpage paid its debts as they fell due with the exception of certain tax liabilities, as to which its accountant and tax agent had apparently reached an agreement with the Deputy Commissioner of Taxation, and, possibly, liabilities to the company Zabari Print and Design Services Pty Limited ("Zabari"). Zabari was a company which at the relevant time had as its only directors and shareholders the second respondent and his wife. Zabari had premises immediately adjacent to those occupied by Filmpage and Filmpage was its major client.
The second respondent gave evidence that when Filmpage encountered problems receiving payment from Charter Search he agreed with the first respondent that Zabari would give Filmpage trading terms of "90 days or if we needed to a fraction more". The first respondent gave evidence of an arrangement for extended trading terms of 90 to 120 days. I find that there was an understanding between Zabari and Filmpage that Zabari would not insist upon its formal trading terms of 30 days being met. I further find that the arrangement between Filmpage and Zabari after the Charter Search problems arose was that ordinarily the trading terms between them would be payment within 90 days but that on occasions longer trading terms would be tolerated by Zabari. I am not satisfied that there was an express agreement for trading terms extending to 120 days.
In or about September or October 1991 Ms Marsh and Mr Klusman sold their respective shares in Filmpage to the first and second respondents and ceased to be further involved with the company. At about that time Filmpage won a major contract for the national promotion of Elders Real Estate. The first and second respondents expected, reasonably as I find, that Filmpage would make significant profits from the contract.
The first respondent ceased day-to-day involvement in the operations of Filmpage during January 1992. In that month he accepted an offer of the position of Managing Director of the Neville Jeffress advertising agency in Perth to commence at the beginning of March 1992. The issue of whether the first respondent resigned as a director of Filmpage effective from February or early March 1992 is discussed below. It is plain, however, that at all relevant times he retained his shareholding in Filmpage.
In January 1992 Filmpage entered into another large contract with the Elders Group of Companies: this time with Elders Wool in Adelaide. Again, reasonably as I find, significant profits from the contract were expected. In February 1992 Filmpage engaged a consultant to advise it on restructuring in the light of the increased amounts of business which it was attracting.
In June 1992 problems arose with respect to work undertaken by Filmpage on behalf of one or more members of the Elders Group of Companies ("Elders"). As a consequence Filmpage paid $25,000 for freight charges on behalf of Elders and further agreed to reduce one bill to Elders by an amount of $50,000. It incurred certain unplanned expenditures. In mid July 1992 the second respondent advised Mr Johnson that Filmpage was in financial difficulties. On or about 3 August 1992 Filmpage ceased trading.
The statutory context
Section 592 of the Corporations Law, so far as is here relevant provides as follows:-
"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 become due; or
(ii)that, if the company incurred that debt, it would not be able to pay all its debts as and when they become due.
592(3) Proceedings may be brought under subsection (1) for the recovery of a debt whether or not the person against whom the proceedings are brought, or any other person, has been convicted of an offence under subsection (1) in respect of the incurring of that debt.
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 that debt may be established on the balance of probabilities."
The debts in issue in this case were incurred before the commencement of Part 5.7B of the Corporations Law on 23 June 1993. It is not disputed that the company Filmpage became a company to which s592 of the Corporations Law applied.
Section 592(1)(b) of the Corporations Law postulates an objective test as did its predecessor, s556 of the Companies Code. As to s556 of the Companies (NSW) Code Foster J said in 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 at 372-373:-
"It will be seen that sub-s1(b)(i) makes no provision for the person or class of persons who are to have the relevant expectation. Clearly, material that could provide "reasonable grounds" for expectation by a person with the qualifications of an auditor, could be very different from material that would provide such grounds for an office boy. I am satisfied from a reading of the whole of the subsection, and having regard to the fact that it prescribes an offence, that the reasonableness of the grounds relied upon by the prosecution and/or a civil plaintiff, must be judged by the standard appropriate to a director or manager of ordinary competence."
This test has received support in subsequent decisions on s592 of the Corporations Law (see, for example, per Lockhart J in Rema Industries and Services Pty Ltd v Coad and Others; Re Taspac Thermoforming Pty Ltd (1992) 7 ACSR 251 at 258). I adopt it.
As Gummow J pointed out in Re New World Alliance Pty Limited (Receiver and Manager Appointed); Sycotex Pty Ltd v Baseler and Others (No 2) (1994) 51 FCR 425 at 434:-
"The expectation which this officer of ordinary competence must have is an expectation that the company "will not be able to pay all of its debts as and when they become due." This necessarily introduces temporal considerations, and thus contingencies and the potential to raise money must be taken into account. The question is not answered simply by ascertaining whether liabilities exceed assets."
At 435-436 his Honour went on:-
"At the trial, a great deal of attention was focused on the level of indebtedness of New World and whether its liabilities exceeded its assets. However, this in itself does not directly answer the issue raised by par(b). The issue is not to be dealt with by analysing a hypothetical instantaneous liquidation ... If debts are long term, and the company is making profits, it may be that a company with substantial indebtedness could trade its way out of difficulties. What is required is an analysis of the assets and financial resources of the company, and its likely liabilities and probable dates that these will fall due, to ascertain whether it is reasonable to expect that one or more of these liabilities will not be able to be met."
See also TCN Channel Nine Pty Limited v Scotney (unreported decision of the Full Court of the Federal Court delivered 26 October 1995).
In the New World Alliance Pty Limited case Gummow J gave consideration to an apparent conflict in the authorities as to whether a debt falls due when it is legally required for payment or when its payment is likely to be insisted upon having regard to normal or likely indulgences granted by the creditor (see, for example, 3M Australia Pty Ltd v Kemish at 378 and Carrier Air Conditioning Pty Ltd v Kurda and Others (1993) 11 ACSR 247 at 254). His Honour said at 434:-
"I would not consider such an issue to be a question of law to be decided by the application of a rigid rule. Rather, the statute appears to focus attention upon what it is reasonable to expect in a given set of circumstances, such a consideration necessarily being made by someone operating in a practical business environment."
I accept his Honour's statement of the law in this regard.
Issues
The principal issues to be determined between the parties are those contained in the two limbs of s592(1)(b). Further, the first respondent and the cross-respondent raise the defences provided by s592(2) of the Corporations Law. So far as the first respondent and the cross-respondent are concerned there is also the question of whether they respectively were directors of Filmpage at any relevant time. The respondents and the cross-respondent have further put in issue the quantum of the claim of the applicant.
The relevant debts
Crucial to a determination of the issues between the parties is the identification of the relevant debts incurred by Filmpage to the applicant and a determination of the times when such debts were incurred.
The first amount claimed by the applicant as a debt incurred to it by Filmpage is an amount of $8,426.19 said to be interest accrued in respect of the Charter Search debt. The evidence of Mr Johnson in respect of this alleged debt is contained in his affidavit in the following terms:-
"37.In March of 1992 I called a meeting in the offices of Pace Marketing in view of the bad debt situation which had arisen. The meeting was attended by myself and my secretary at that time (Ms Suzanne Hepi); and for Pace Marketing, Mr James Watts, Mr Bob Ashwood and Ms Daragh Casey. During the meeting words to the following effect were spoken:
Ken Johnson: 'Now that Trade Indemnity have indicated they will pay us some money, what about payment of interest costs?'
James Watts: 'That's fine by us. In fact we were pleasantly surprised - we thought it was going to be more.'"
In his oral evidence Mr Johnson confirmed that the above exchange constituted the first mention of the sum of interest now claimed or of the rate of interest by which it was calculated. He indicated, however, that he had earlier mentioned to the first respondent the interest rate which the applicant was paying on overdraft finance. He further stated that the second respondent had been given a "draft" figure for interest before the March 1992 meeting. Although his evidence is not entirely clear, I understand him to have asserted that such figure was given to Mr Watts by the applicant's then media clerk, Ms Hepi.
The evidence of Mr Watts with respect to the claim of $8,426.19 interest is that at the March 1992 meeting of which Mr Johnson gave evidence, Mr Johnson said to him, "We have to talk about interest later", but that the subject was not brought up between them again. The evidence of Ms Suzanne Jones-Pritchard, previously known as Ms Hepi, was that she would not have given Mr Watts notice of any interest calculations before the March meeting: the only thing she would have done was send the invoice.
Even if Mr Johnson's evidence on this topic were to be accepted, it would fall short of establishing a binding agreement to pay: no consideration for the implied promise of Mr Watts to pay the interest can be identified. However, the evidence of Ms Jones-Pritchard referred to above, which was not suggested to her to be inaccurate, suggests against the accuracy of Mr Johnson's recall on this issue. I am not satisfied that there was any agreement between Filmpage and the applicant for the payment by Filmpage of the amount of $8,426.19, or any other sum, by way of interest. Such sum did not become a debt due by Filmpage to the applicant.
An amount of $4,800.00 referred to in the statement of claim was not pressed at trial.
The remaining debts of which payment is sought by the application are debts relating to media placements made by Filmpage to the account of the applicant in the months of May, June and July 1992. Such debts were incurred by Filmpage at the time that the advertisements to which they relate were placed with the relevant media outlets. The applicant rendered invoices to Filmpage in respect of such placements. In accordance with the payment practice between Filmpage and the applicant as I have found it to be, the amounts payable pursuant to such invoices were due for payment by Filmpage 45 days after the end of the month to which the invoice related. The amount of the debts shown on the statements annexed to the affidavit of Mr Johnson for each of the three months is as follows:-
May 1992 $24,866.13
June 1992 $28,442.23
July 1992 $ 8,533.20.
However, as to the June 1992 statement, Mr Johnson agreed in cross-examination that it should have had a credit of $2,275.37 included on it. Such credit was shown on a different version of the statement for June 1992 tendered during the hearing. Ms Jones-Pritchard in her evidence indicated that the credit may have been reversed by the applicant without reference to Filmpage because an earlier account was unpaid. No evidence was called of any arrangement between Filmpage and the applicant which would have justified such a reversal. Mr Johnson's admission that the credit should have been allowed gives support to a conclusion that there was no such arrangement. It was submitted on behalf of the first respondent that a further credit of $682.66 should have been allowed by the applicant in respect of the July 1992 statement. I am not satisfied that such submission is supported by the evidence. I find that the amounts of the debts shown to be owing by Filmpage to the applicant are as follows:-
May 1992 $24,866.13
June 1992 $26,166.86
July 1992 $ 8,533.20
TOTAL $59,566.19.
The case was argued on the basis that the amounts properly shown on the May, June and July 1992 statements provided by the applicant to Filmpage constituted three separate debts. The reality, in my view, is that a separate debt was incurred by Filmpage to the applicant each time that a relevant media placement was made by Filmpage. This occurred on a number of separate occasions during each of the months of May, June and July 1992. It will, I consider, make no difference to the outcome of this case if the May 1992 debts are treated together as one debt and the June 1992 debts are treated in the same way and I will so treat them. I propose to treat the beginning of each of these months as the time "immediately before the time when the debt [for that month] was incurred." The case was conducted on all sides in a way which would make any attempt at greater refinement not only inappropriate, but likely, impossible. As to the July 1992 debts, however, it is necessary to look at the particular dates on which each of them was incurred.
The May 1992 debt
I turn then to consider what will be referred to as the May 1992 debt. Has it been established that at the beginning of that month there were reasonable grounds to expect that Filmpage would not be able to pay all of its debts as and when they became due, or that there were reasonable grounds to expect that if Filmpage incurred the May 1992 debt to the applicant, it would not be able to pay all of its debts as and when they became due? The two limbs of this question reflect the two limbs of s592(1)(b) of the Corporations Law.
The Court had in evidence before it financial statements of Filmpage as at 28 February 1992 prepared by the company's accountant. If accepted such statements provide information which, in the circumstances of this case, goes to the reasonableness of an expectation at the beginning of May 1992 that Filmpage would be able to pay its debts, including those to be incurred in May 1992, as and when they became due. Such financial statements show an excess of assets over liabilities of $30,843.17 and net profit for the period from 1 July 1991 to 28 February 1992 of $106,659.17. It has not been suggested that the information contained in these financial statements of itself would give rise to any concerns as to the ability of Filmpage to pay its debts as and when they became due.
The applicant sought, however, to challenge the accuracy, and possibly the bona fides, of these financial statements by contrasting the figures included in them with figures contained in a balance sheet for Filmpage dated January 1992 and two lists, one of "Aged receivables" and the other of "Aged payables", of Filmpage both dated 10 February 1992. These latter three documents were not prepared by Filmpage's accountant but by the second respondent. The second respondent gave evidence that he prepared the balance sheet dated January 1992 at a time when he was learning to use a computer-based accounting program. He denied that the document accurately represented the company's balance sheet in January 1992. He said that he was unable to vouch for the accuracy of the lists of "Aged receivables" and "Aged payables" which he asserted were also produced whilst he was learning how to put the computer program together.
Whilst I agree with Mr Fagan, counsel for the applicant, that a degree of scepticism must be brought to the evidence of the second respondent concerning the financial affairs of Filmpage, I am not satisfied that the attack on the financial statements of Filmpage as at 28 February 1992 has been made out.
No reason has been suggested for Filmpage providing to its accountant other than complete and accurate financial information. It has not been suggested that the accountant had any reason to prepare financial statements which disguised the true financial position of Filmpage. It seems clear enough that the financial statements of Filmpage as at 28 February 1992 were prepared during March 1992 in the ordinary course of Filmpage's business.
I am not satisfied that it has been shown that a director or manager of ordinary competence would reasonably have concluded as at the beginning of May 1992 that the financial position of Filmpage was significantly different from that revealed by the financial statements of Filmpage as at 28 February 1992. Such financial statements show a company trading profitably and with an excess of assets over liabilities. In my view, no change in its pattern of trading ought then reasonably to have been expected. Although Filmpage had significant outstanding debts to the applicant and to Zabari at the beginning of May 1992 it has not been shown to be an unreasonable expectation that such debts could be met as they became due from the assets of the company and its likely future profits.
The first limb of s592(1)(b) of the Corporations Law has not been made out so far as the May 1992 debt is concerned. For the same reasons I conclude that the second limb of s592(1)(b) has also not been made out.
The June 1992 debt
No additional expert evidence was called as to the financial position of Filmpage at the beginning of June 1992. There is no reason to conclude that it was significantly different from its financial position at the beginning of May 1992. Filmpage's problems with Elders did not arise until part way through the month of June 1992. The evidence does not establish any reasonable basis upon which such problems could have been foreseen at the beginning of June. Filmpage continued to have a significant liability to Zabari and to the applicant as at the beginning of June 1992. It has not been established, in my view, that a director or manager of reasonable competence could not reasonably have expected that such liabilities, along with other liabilities to fall due within the month, could be met within the terms of trading which had been arranged from the financial resources likely to become available to Filmpage from its ongoing, and then apparently profitable, operations.
I conclude that neither the first nor the second limb of s592(1)(b) of the Corporations Law has been made out so far as the June 1992 debt is concerned.
The July 1992 debts
It appears from invoice M3083 that the July 1992 debts were incurred over three days, namely 4, 11 and 18 July 1992.
Mr Goman, a chartered accountant who gave evidence on behalf of the applicant, expressed in his affidavit the view that, on the information available to him, there was a deficiency in shareholders' funds in Filmpage as at 30 June 1992 "of somewhere in the vicinity of $200,000 to $230,000 and the company may have been insolvent." I am satisfied that the figures upon which he based the above opinions are inaccurate, and in particular that there is a significant over-estimate in such figures of the debts of Filmpage. Moreover, Mr Goman gave no consideration to the dates upon which the debts of Filmpage would become due for payment, and the capacity of Filmpage to generate income from which such debts could be paid by their due dates.
The important issue with respect to the July 1992 debts is the timing and the impact of Filmpage's problems with Elders. I accept the evidence of Mr Ashwood and the second respondent, which is set out below, that early in June 1992 (i.e. before the Elders problems arose) Filmpage was trading well.
The evidence of the second respondent was that problems with the Elders account arose "round about towards the end of June". The cross-respondent gave evidence that he was aware that Filmpage was facing some difficulties arising out of the Elders account in early to mid June but later than 11 June 1992. It was on 11 June 1992 that Mr Ashwood wrote a letter to the first respondent in which an offer was made, on behalf of the second respondent, a Ms Daragh Casey and himself, to purchase the first respondent's shareholding in Filmpage for the sum of $12,000. I accept Mr Ashwood's evidence that he would not have signed this letter if he had known of the problem with the Elders account. His evidence was that at the time that he signed the letter, "We were trading well, exceptionally well, and the level of work, the quality of the work and the quantity was very high ... we knew we were going places." The evidence of the second respondent was that at the time of the above offer he thought that the shares of the first respondent were worth more than $12,000. He said that he held this view "[b]ecause at that time we were turning over a huge amount of money with Elders and we got quite [a] few clients and everything looked pretty good."
I find that it was probably in the second half of June 1992 that problems with the Elders account arose. At that time Elders refused to pay a large account rendered to it by Filmpage. Part of the account was disputed by Elders apparently because of sub-standard work, but initially Elders refused to pay any part of the account. As is implicit from the above analysis of the May and June 1992 debts, the ability of Filmpage in 1992 to pay its debts as and when they fell due was dependent upon its own debtors making payment to it broadly in accord with its trading terms.
The evidence does not establish when a director or manager of ordinary competence ought reasonably to have appreciated that the Elders problems would impact upon the capacity of Filmpage to pay its own debts as and when they became due. The affidavit evidence of the second respondent is that "in June 1992" Filmpage paid $25,000 for freight charges which Elders refused to pay. He was not questioned as to whether there was in June, or thereafter, an expectation that this amount could be recovered, in whole or in part, from Elders. The second respondent also gave affidavit evidence of Elders' refusal "in June 1992" to make a large payment due to Filmpage. His affidavit goes on, "Eventually the Company reduced the bill by $50,000 and Elders paid the balance of the monies owing to the Company." The evidence does not establish whether this eventuality occurred in June, July or August 1992. However, on 15 July 1992 the second respondent met with Mr Johnson to advise him of Filmpage's financial problems. I am prepared to assume that by this time it was apparent to the second respondent that Filmpage's dispute with Elders could have serious consequences for Filmpage's financial viability. At about this time the second respondent sought professional advice with respect to the financial position of Filmpage.
An unsigned letter dated 21 July 1992 over the name of the cross-respondent has been placed in evidence. Its opening paragraph reads:-
"In the light of recent discoveries regarding the true financial situation in the ... company I am not prepared to act against the best interests of the company by incurring costs from outside suppliers until a strategy to ensure the company's ongoing solvency is enforced." (emphasis in the original)
This letter might be thought to confirm that it was in about mid-July that the true ongoing significance for Filmpage of the problems with the Elders account became apparent to those involved in the operations of Filmpage.
The expectation required in the respective circumstances provided for by the two limbs of s592(1)(b) of the Corporations Law is that the company "will not be able to pay all its debts as and when they become due." Such expectation involves more than an apprehension or suspicion that the company may not be able to pay such debts at the requisite time or times (see 3M Australia Pty Ltd v Kemish at 378). Reasonable grounds for such an expectation may involve at least some time for the proper assessment of the likely impact of an unexpected and adverse eventuality such as that which arose in this case.
On the whole of the evidence I am unable to find, on the balance of probabilities, that at the respective times that the July debts were incurred there were reasonable grounds to expect that Filmpage would not be able to pay all of its debts as and when they became due, or that there were reasonable grounds to expect that, if Filmpage incurred such debts, it would not be able to pay all of its debts as and when they became due.
The application must therefore be dismissed.
Others matters
It is appropriate that I make findings with respect to the other important matters of factual dispute in this case against the possibility that this matter may go further.
The issue of whether the first respondent was a director of Filmpage at the relevant time is one upon which he carried the onus of proof. An extract from the records of the Australian Securities Commission ("ASC") which all parties agreed to accept as a certificate of the ASC within the meaning of s242(9) of the Corporations Law, shows the first respondent as a director of Filmpage from 21/11/1990 to 17/9/1993. I am not satisfied that the first respondent has discharged the onus of establishing that he was not a director of Filmpage between those dates. The suggestion that the first respondent resigned orally in a conversation with his co-director, the second respondent, is not supported by the evidence as a whole. If the first respondent did resign as a director of Filmpage it must, on the evidence, have been by the notice of resignation dated 3 March 1992. I am unable to accept his evidence, and that of the second respondent and Mr Turner, Filmpage's accountant, so far as such evidence supports the evidence of the first respondent, that such resignation was provided to Mr Turner on or about 3 March 1992 with the intention that it be then acted upon.
I do not propose to rehearse all of the extensive evidence on this topic in these reasons. I list the following factors upon which I have placed particular weight:-
(a) no satisfactory explanation was given by Mr Turner of his failure to complete appropriate ASC forms concerning the alleged resignation of the first respondent as a director: this is the more surprising if the first respondent did telephone Mr Turner from Perth, as he said that he did, to request that this action be taken;
(b) no satisfactory explanation was given by the second respondent for his failure to query with Mr Turner his failure to include in ASC forms reference to the resignation as a director of the first respondent: this is the more surprising if the obtaining of the resignation of the first respondent was important to him, as he said that it was;
(c) no satisfactory explanation was given by either Mr Turner or the second respondent for the drawing of minutes recording the appointment of additional directors to Filmpage on 15 March 1992 if they understood at the time, as they said that they did, that the first respondent had resigned as one of only two directors on 3 March 1992;
(d) the inconsistencies between the date and the terms of the notice of resignation dated 3 March 1992 and the affidavit evidence of the first respondent as to the time at which he wrote his note of resignation and of his recollection of its terms.
The first respondent also carried the onus of proof on the issue of whether the cross-respondent was at any relevant time a director of Filmpage. The ASC records do not show the cross-respondent as a director of Filmpage at any time.
An extract from the minute book of Filmpage was placed in evidence. It records the following resolution of a meeting at which the first and second respondents were present:-
"IT WAS RESOLVED to appoint as directors of the company as from the 15th March, 1992, the following persons, subject to their approval:
ROBERT IAN ASHWOOD
DARAGH CASEY."
A Corporations Law form of consent to act as a director bearing the date 15 March 1992 and signed by the cross-respondent was also placed in evidence. The cross-respondent did not dispute the genuineness of the signature, nor did he assert that the document was not intended to be operative in accordance with its terms.
The articles of association of Filmpage adopt regulation 61(1) of Table A in Schedule 3 to the Companies (NSW) Code. Such regulation provides:-
"The directors may at any time appoint any person to be a director, either to fill a casual vacancy or as an addition to the existing directors, but so that the total number of directors does not at any time exceed the number determined in accordance with these regulations."
No submissions were made concerning the qualification contained in the above regulation. Although it is not appropriate for me to determine the point in the absence of submissions, it is at least arguable that the qualification is without significance in the light of the full articles of association of Filmpage. The important point for present purposes is that it was not suggested on behalf of the cross-respondent to have any significance to his position.
In my view the evidence as a whole does not detract from the significance of the above resolution taken together with the form of consent to act as director signed by the cross-respondent and dated 15 March 1992. I find that the cross-respondent was a director of Filmpage from that date.
I also record that were it necessary for me to make a finding as to whether the first respondent and the cross-respondent had established the defence provided by s592(2)(a) of the Corporations Law I would find that they had not. As to the first respondent, although resident in Perth at the time that the debts were incurred, and not then involved in the day-to-day management of Filmpage, he had a detailed knowledge of the nature of the business of Filmpage. He was aware of the kinds of debts which would be incurred in the normal course of its business. The debts with which these proceedings are concerned are debts incurred by Filmpage in the ordinary course of its business. Indeed, it could not carry on its business without incurring debts of this kind. In my view the first respondent must be taken to have impliedly consented to such debts being incurred (see Group Four Industries Pty Ltd v Brosnan & Anor (1992) 8 ACSR 463).
I turn to the position of the cross-respondent.
Filmpage was a small company. On any view of the evidence the cross-respondent played a significant role in its operations, and in particular in preparing budgets for the work undertaken by it. The media components of such work must have formed an element in such budgets. In my view the cross-respondent in acquiescing in the placing of the media components of the work budgeted by him, impliedly authorised the incurring of the debts the subject of these proceedings (see Statewide Tobacco Services Ltd v Morley (1990) 8 ACLC 827; Group Four Industries Pty Ltd v Brosnan & Anor).
Application to be dismissed
As I am not satisfied that either limb of s592(1)(b) of the Corporations Law has been established in this case, the application must be dismissed.
I will hear counsel on the question of costs.
I certify that this and the preceding pages are a true copy of the Reasons for Judgment of the Honourable Justice Branson.
Associate:
Dated:
Counsel for the Applicant : Mr D Fagan
Solicitors for the Applicant : Dickson Fisher & Macansh
Counsel for the First Respondent : Mr J Bartos
Solicitors for the First Respondent : Cowley Hearne
Second Respondent appeared in person
Counsel for the Cross Claimant : Mr J Bartos
Solicitors for the Cross Claimant : Cowley Hearne
Counsel for the Cross-Respondent : Mr G Van der Flag
Solicitors for the Cross-Respondent : McGrath Dicembre & Company
Hearing Dates: : 5-9 June 1995,
29 September 1995
