FEDERAL COURT OF AUSTRALIA
EVIDENCE – Evidence Act 1995 (Cth) – expert evidence – admissibility of expert report – whether factual basis of opinion need be disclosed and proved – requirement that opinion be wholly or substantially based on specialised knowledge – consequence of admission into evidence of hearsay evidence – power of a court to limit use to be made of evidence – whether solvency is a matter of fact or a matter of opinion – distinction between evidence of fact and evidence of opinion
CORPORATIONS LAW – directors – insolvent trading – whether reasonable grounds to suspect the company was insolvent – consent of liquidator to bring proceedings under s 588R(1) of the Corporations Law – whether consent must be for initiating process or claim made by amendment
WORDS & PHRASES – meaning of “proceedings”
Evidence Act 1995 (Cth)ss 4, 55, 56, 59, 60, 69, 76, 79, 80, 135, 136
Corporations Law ss 588M, 588R, 592
Pownall v Conlan Management Pty Limited (1995) 12 WAR 370, cited
Allstate v ANZ Banking Group (No. 5) (1996) 64 FCR 73, cited
Re Action Waste Collections Pty Ltd (in liquidation) [1981] VR 691 at 703, not followed
Jones v McKenzie (1859) 13 Moo P.C.C. 1 at 9; 15 ER 1 at 4, referred to
Clark v Ryan (1960) 103 CLR 486 at 491, mentioned
Eastman v The Queen (1997) 76 FCR 9, cited
Ramsay v Watson (1961) 108 CLR 642, considered
Paric v John Holland (Constructions) Pty Ltd (1985) 62 ALR 85, considered
Welsh v R (1996) 90 A.Crim.R. 364, mentioned
R v Turner (1974) 60 Crim.App.R 80 at 83, mentioned
Murphy v R (1989) 167 CLR 94 at 111, 130, mentioned
Farrell v R (1998) 155 ALR 652 at 566, mentioned
Potts v Miller (1940) 64 CLR 282, mentioned
R v Seifert (1955) 73 WN (NSW) 358, mentioned
Enston v Pardel (1958) 75 WN (NSW) 370, mentioned
3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 at 376, applied
Commonwealth Bank v Friedrich (1991) 5 ACSR 115 at 123, applied
Standard Chartered Bank of Australia Ltd v Antico (1995) 18 ACSR 1 at 74-5, applied
Re New World Alliance Pty Ltd (rec & mgr apptd) (1994) 122 ALR 531 at 539-40, applied
Dunn v Shapowloff (1978) 2 NSWLR 235 at 244, considered
Re Wheeler v Reynolds; Ex parte Kerr v Crowe (1988) 20 FCR 185, mentioned
Staples; Ex parte Baker (1996) 67 FCR 541, mentioned
Eddy v Stewart (1932) 3 WWR 71 at 74, mentioned
Re Carrick Estates Ltd (1987) 43 DLR (4th) 161, mentioned
WILLIAM GARY QUICK v STOLAND PTY LIMITED (ACN: 003-790-056)
NG 46 of 1998
BRANSON, EMMETT & FINKELSTEIN JJ
SYDNEY
25 SEPTEMBER 1998
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IN THE FEDERAL COURT OF AUSTRALIA |
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On appeal from a judge of the federal court of australia
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BETWEEN: |
WILLIAM GARY Quick APPELLANT
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AND: |
Stoland PTY LIMITED [ACN: 003-790-056] Respondent
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DATE OF ORDER: |
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WHERE MADE: |
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THE COURT ORDERS THAT:
1. The appeal be allowed.
2. The respondent is to bring in short minutes of order which reflect the judgment of the Court within seven (7) days from today’s date.
3. Each party has liberty to apply on three days written notice to the other.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
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IN THE FEDERAL COURT OF AUSTRALIA |
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on appeal from a judge of the federal court of australia
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BETWEEN: |
AppELLANT
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AND: |
Stoland PTY LIMITED [ACN: 003-790-056] Respondent
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JUDGES: |
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DATE: |
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PLACE: |
REASONS FOR JUDGMENT
BRANSON J
This is an appeal from a judgment entered in favour of the respondent for the sum of $241,249.73 together with interest. The judgment sum represents the aggregate amount of debts incurred by a company now in liquidation, Cazihaven Homes Pty Ltd (“the Company”). The appellant was a director of the Company at the time when each of the debts was incurred. As to the debts incurred before 23 June 1993, the respondent’s claim before the primary judge was made under s 592 of the Corporations Law; for debts incurred on and after that date, the claim was made under ss 588M and 588R of the Corporations Law.
The issues raised by the appeal fall into two broad categories. First, whether the primary judge erred in allowing into evidence a report by Martin Madden (“Mr Madden”), a partner in the firm Arthur Andersen; and second, whether the primary judge erred in concluding that there were, at the time the debts were incurred, reasonable grounds to expect or suspect that the Company would not be able to pay all of its debts as and when they became due.
The Expert Report
The contentions of the appellant with respect to Mr Madden’s report reflected the common law, particularly as elucidated by Ipp J, with whom Malcolm CJ agreed, in Pownall v Conlan Management Pty Limited (1995) 12 WAR 370 at 375. In Pownall’s case, Ipp J gave consideration to the common law rule that the admissibility of expert opinion evidence depends on proper disclosure and proof of the factual basis of the opinion.
The admissibility of evidence in this matter was, however, governed not by the common law but by the Evidence Act 1995 (Cth) (“the Act”). The Act, with only minor qualifications, implements recommendations made by the Australian Law Reform Commission (“the ALRC”) following its review of the “laws of evidence applicable in proceedings in Federal Courts and the Courts of the Territories with a view to producing a wholly comprehensive law of evidence based on concepts appropriate to modern conditions and anticipated requirements” (see the Attorney-General’s reference to the ALRC of 18 July 1979).
The Act, with only limited exceptions, applies in relation to all proceedings in a federal court (s 4 of the Act). Chapter 3 of the Act, which is comprised of ss 55-139, is concerned with the admissibility of evidence. Chapter 3 is designed to deal exhaustively with this topic and, in a practical sense, constitutes a code relating to the admissibility of evidence in proceedings to which the Act relates.
The key provision of Chapter 3 of the Act is s 56. Section 56 is in the following terms:
“56.(1) Except as otherwise provided by this Act, evidence that is relevant in a proceeding is admissible in the proceeding.
(2)Evidence that is not relevant in a proceeding is not admissible.”
“Relevant evidence” is defined in s 55(1) of the Act as follows:
“55(1)The evidence that is relevant in a proceeding is evidence that, if it were accepted, could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceeding”
An exclusionary rule which, for the present purposes, limits the broad principle of s 56 is the “opinion rule” contained in s 76 of the Act. Section 76 provides:
“76. Evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed”.
However, the opinion rule is itself qualified by s 79 of the Act which is in the following terms:
“79. If a person has specialised knowledge based on the person’s training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge”.
In the law of evidence, an “opinion” is an inference drawn from the facts: Cross on Evidence (Aust.edition) para 29010 (see also Allstate v ANZ Banking Group (No.5) (1996) 64 FCR 73 at 75).
Section 80 of the Act provides:
“80. Evidence of an opinion is not inadmissible only because it is about:
(a) a fact in issue or an ultimate issue; or
(b) a matter of common knowledge”.
The Act does not contain a provision which reflects the common law rule that the admissibility of expert opinion depends upon proper disclosure and proof of the factual basis of the opinion. This is not an accidental omission. The ALRC considered that no such pre-conditions to the admissibility of expert opinions should be imposed. It was of the view that the general discretion of a court to refuse to admit evidence was sufficient to deal with problems that might arise in respect of expert opinions the basis of which was not disclosed (ALRC Report No. 26, vol 1, para 750). This general discretion finds expression in s 135 of the Act which provides as follows:
“135 The court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might:
(a) be unfairly prejudicial to a party; or
(b) be misleading or confusing; or
(c) cause or result in undue waste of time”.
It is not necessary in the present case to give consideration to whether an expression of expert opinion, the factual basis of which is not disclosed or not proved, but which otherwise falls within s 79 of the Act, will survive s 56(2) of the Act. The position may be that, in the circumstances of a particular case, a bare expression of opinion could, if accepted, rationally affect the assessment of the probability of the existence of a fact in issue in the proceeding. In the circumstances of most cases, however, a bare expression of opinion is likely to be incapable of affecting the assessment of the probability of the existence of any fact in issue in the proceeding.
Mr Madden’s report is divided with a number of sections. Section A details his instructions. Section B summarizes his professional experience and qualifications. Section C lists the documentation provided to him for the purpose of his conducting a review of the Company’s financial position. Section D identifies source material which was not available to Mr Madden with the result, as this section identifies, that he was not asked to carry out his intention of reconstructing the financial accounts of the Company for certain identified periods of time. Section E records his conclusion that in order to review the solvency of the Company it was necessary to review its working capital and net assets position. It further contains his summary of certain accounts of the Company. Section F sets out Mr Madden’s conclusions. Section G contains reference to certain material which Mr Madden regarded as supportive of his conclusion. Section H contains Mr Madden’s overall conclusion as follows:
“For the reasons set out above, I am of the opinion that the Company was insolvent prior to 29 February 1992 and continued to be insolvent up to the appointment of the Administrator on 13 October 1993”.
It was accepted before the primary judge, and before this Court, that Mr Madden is a qualified accountant and registered auditor with extensive experience as an insolvency practitioner. He is thus a person who has specialised knowledge based on his training, study and experience within the meaning of s 79 of the Act. Subject to the relevance test, he was entitled to give evidence before the primary judge of his opinion provided that his opinion was wholly or substantially based on his specialised knowledge.
It is necessary to give consideration to the requirement of s 79 of the Act that an expert opinion be wholly or substantially based on the expert’s specialised knowledge. As is mentioned above, the law of evidence recognises that an expert opinion will have a factual base. This can be illustrated by two medical examples: the expert opinion of a physician as to the state of health of an individual will ordinarily be substantially based on that individual’s medical history and the symptoms described by him or her; the expert opinion of a radiologist as to the soundness or otherwise of an individual’s spine will ordinarily be wholly or substantially based on the radiologist’s examination of an x-ray or x-rays. However, the fact that an expert opinion has a factual basis is not inconsistent with a finding that the opinion is wholly or substantially based on specialised knowledge within the meaning of s 79 of the Act. Section 79 is not concerned with the factual basis of an expert’s opinion, but rather with the view, estimation or judgment inherent in the inference drawn by the expert from that factual basis. It is the expert’s inference, in this sense, which s 79 requires to be wholly or substantially based on his or her specialised knowledge.
It is necessary also to give consideration to whether Mr Madden’s report in fact contains evidence of any relevant opinion. The distinction between evidence of “fact” and evidence of “opinion” assumes a dichotomy which it is not always easy to draw (see the discussion of this issue in ALRC Report No. 26, Vol 1, para 156). I note that in Re Action Waste Collections Pty Ltd (in liquidation) [1981] VR 691 at 703 Tadgell J characterised a statement made by a liquidator that the company was insolvent as at a particular date as not amounting “to more than a statement of belief in a conclusion of fact”. His Honour placed reliance on Jones v McKenzie (1859) 13 Moo P.C.C. 1 at 9; 15 ER 1 at 4. With respect to his Honour, I doubt that Jones v McKenzie is an authority in favour of the view adopted by Tadgell J. Indeed, Lord Kingsdown, who delivered the advice of the Privy Council in Jones v McKenzie, spoke of a “correct opinion” on the subject of insolvency being dependent on accounts and other matters of fact. I consider the better view to be that, in other than obvious cases, a statement of a qualified accountant and insolvency practitioner, made on the basis of an examination of financial accounts and other company records, that a particular company is, or is not, insolvent is an expression of opinion. Corporate accounts, and corporate accounting practices, have become increasingly complex. I consider that it is generally recognised that persons with training, study and experience of the kinds enjoyed by Mr Madden possess peculiar skills in an area in which “inexperienced persons are unlikely to prove capable of forming a correct judgment upon it without such assistance” (J.W. Smith in the notes to Carter v Boehm, 1 Smith L.C., 7th ed. (1876) p.577 cited by Dixon CJ in Clark v Ryan (1960) 103 CLR 486 at 491).
As Emmett J has pointed out in his reasons for judgment, which I have had the advantage of reading in draft, Mr Madden’s opinions concerning the Company’s insolvency are heavily based on matters of fact and, in some cases, arguably unsubstantiated factual inferences. However, it seems to me that Mr Madden’s specialised knowledge does qualify him to form views and make judgments as to solvency based on financial statements and other material of the kind to which he refers in his report. Whilst recognising that, in the circumstances of this case, the matter is not free from doubt, I conclude that the opinions expressed by Mr Madden in Section H of his report are substantially based on his specialised knowledge within the meaning of s 79 of the Act. The weight appropriate to be accorded to such opinion is, of course another matter.
Subject to the discretion given to the primary judge by s 135 of the Act, the opinions expressed by Mr Madden in Section H of his report were, in my view, admissible as they were relevant in the proceeding and fell within the exception created by s 79 of the Act to the opinion rule set out in s 76 of the Act.
The statements contained in Section E of Mr Madden’s report that:
“In order to properly review the solvency of the Company it was necessary to review the working capital and net asset positions. Both working capital and net assets are key indicators of a company’s solvency”
are also expressions of opinion which, in my view are wholly or substantially based on Mr Madden’s relevant specialised knowledge. I do not regard them, or either of them, as a conclusion of law. Mr Madden was concerned in his report to address the issue of the solvency of the Company as an accounting or financial concept, rather than as a matter of law. It was for the primary judge to determine the weight to be accorded to Mr Madden’s opinions having regard to the legal requirements of ss 592 and 588M of the Corporations Law. In my view, the opinions expressed by Mr Madden in Section E of his report were admissible before the primary judge on the same basis as the opinion expressed by him in Section H of his report.
The statements of opinion as to the company’s solvency or insolvency contained in Section F of Mr Madden’s report are, so far as admissibility is concerned, in my view, in the same position as the expression of Mr Madden’s overall conclusion in Section H of his report.
Those parts of Mr Madden’s report which are not evidence of opinion were admissible in evidence before the primary judge if they were facts relevant in the proceeding (i.e. they could rationally affect the assessment of the probability of the existence of a fact in issue in the proceeding) and secondly, if they did not fall within any exclusionary rule in Chapter 3 of the Act such as the hearsay rule (see Part 3.2 of the Act).
The hearsay rule is expressed in s 59(1) of the Act as follows:
“59(1)Evidence of a previous representation made by a person is not admissible to prove the existence of a fact that the person intended to assert by the representation”.
The term “previous representation” is defined in Dictionary to the Act as follows:
“previous representation means a representation made otherwise than in the course of giving evidence in the proceeding in which evidence of the representation is sought to be adduced”.
The Dictionary also provides that:
“representation includes:
(a) an express or implied representation (whether oral or in writing); or
(b) (not here relevant)
(c) (not here relevant)
(d) (not here relevant)”.
The financial records of the Company and other documents provided to Mr Madden, to the extent that they were relied on as proof of the facts contained in such records and documents, fell, prima facie, within the hearsay rule as expressed in s 59(1) of the Act. However, s 69 of the Act contains an exception to the hearsay rule for business records. So far as is here relevant, s 69 provides as follows:
“69.(1) This section applies to a document that:
(a) either:
(i) is or forms part of the records belonging to or kept by a person, body or organisation in the course of, or for the purposes of, a business; or
(ii) at any time was or formed part of such a record; and
(b) contains a previous representation made or recorded in the document in the course of or for the purposes of, the business.
(2)The hearsay rule does not apply to the document (so far as it contains the representation) if the representation was made:
(a) by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact; or
(b) on the basis of information directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact.
…
(5)For the purposes of this section, a person is taken to have had personal knowledge of a fact if the person’s knowledge of the fact was or might reasonably be supposed to have been based on what the person saw, heard or otherwise perceived (other than a previous representation made by a person about the fact)”.
There seems to be no reason to doubt that the financial records of the Company, to which reference is made in Mr Madden’s report, formed part of the records kept by the Company in the course of, and for the purposes of, the business, and contain representations made on the basis of information directly or indirectly supplied by a person who might reasonably be supposed to have had previous knowledge of the asserted facts within the meaning of s 69(2) of the Act. The financial records themselves were admissible in evidence before the primary judge as proof of the matters of fact conveyed by such accounts. As is mentioned above, some, but not all, of such records were received in evidence.
Mr Madden summarised in his report the contents of certain financial records of the company, including financial records not received in evidence before the primary judge. Mr Madden’s summary was not itself admissible as a business record for the purpose of proving the facts conveyed by the financial accounts. However, s 60 of the Act provides as follows:
“60 The hearsay rule does not apply to evidence of a previous representation that is admitted because it is relevant for a purpose other than proof of the fact intended to be asserted by the representation”.
The report of Mr Madden, to the extent that it does not amount to evidence of his opinions based wholly or substantially on his specialised knowledge of accounting and insolvency matters was, in my view, admissible before the primary judge on the basis that it was relevant for a purpose other than proof of the facts thereby asserted. That purpose was the purpose of establishing the factual basis upon which Mr Madden held the expert opinions expressed in his report. The weight to be accorded to the opinions expressed by Mr Madden depended to a significant degree upon the factual basis for such opinions. Evidence of the factual basis for his opinions was thus relevant in the proceeding as evidence which, if it were accepted, could rationally affect the assessment of the probability of the existence of a fact in issue in the proceeding, namely the duration of the insolvency of the company.
It is not necessary in the context of this case to give detailed consideration to the circumstances in which, and the extent to which, evidence of the factual basis of an expert opinion will amount to evidence of the truth of that factual basis. (cf. Eastman v The Queen (1997) 79 FCR 9 at 78-79). It may be that a different result will follow depending upon the form in which the expert gives evidence of the factual basis of his or her opinion; ie. whether such evidence is given in the form of a representation or, alternatively, in the form of an identification of a hypothetical assumption. If s 60 of the Act does operate to give mere form significance in this way, the result cannot be regarded as entirely satisfactory. In cases in which there is a genuine dispute as to the relevant facts, it might be expected that a court would ordinarily limit the operation of s 60 of the Act by exercising the power vested in it by s 136 of the Act. Section 136 of the Act provides as follows:
“136. The court may limit the use to be made of evidence if there is a danger that a particular use of the evidence might:
(a) be unfairly prejudicial to a party; or
(b) be misleading or confusing”.
Even where s 136 of the Act is not invoked, the weight to be accorded to any particular evidence remains a matter for the court before which the evidence is adduced.
Ought the primary judge in the circumstances of this case, have refused to receive the evidence of Mr Madden’s expert opinions on one of the bases referred to in s 135 of the Act? Mr Madden by his report identified the material upon which he relied, and set out the important aspects of the reasoning process which led to his forming the opinions expressed in his report. It was thus not necessary for court time to be expended unnecessarily in obtaining evidence from Mr Madden in these regards. Although not all of the material upon which Mr Madden relied was tendered in evidence, all of the material was available to the applicant for his inspection and consideration. He was not prejudiced by any inability to test the accuracy of such material or to question the use made of it by Mr Madden. There was no reason in the circumstances for him, or the primary judge, to be misled or confused in any material way. In my view nothing before this Court suggests that the learned primary judge ought to have exercised his discretion under s 135 of the Act by refusing to receive the evidence of Mr Madden’s expert opinions.
The appeal, so far as it relates to the decision of the primary judge to receive in evidence the report of Mr Madden, should be dismissed.
other matters
I have had the advantage of reading in draft the reasons for judgment of Finkelstein J. Like Emmett J, I agree with his Honour’s conclusion that the respondent was entitled to recover from the appellant only the debts incurred after 31 January 1993. I also agree that the appellant’s contention that the respondent was not entitled to bring any claim under s 588M of the Corporations Law against him must be rejected. The respondent began proceedings under s 588M, within the meaning of s 588R(1), when it exercised the leave granted to it to amend its application and statement of claim to incorporate a claim under s 588M.
CONCLUSION
In my opinion the appeal should be allowed and the orders of 18 December 1997 set aside. The respondent should bring in short minutes of order which reflect the judgment of this Court.
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I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Branson |
Associate:
Dated: 25 September 1998
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IN THE FEDERAL COURT OF AUSTRALIA |
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NEW SOUTH WALES DISTRICT REGISTRY |
NG 46 of 1998 |
On appeal from a judge of the federal court of australia
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BETWEEN: |
WILLIAM GARY QUICK APPELLANT
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AND: |
STOLAND PTY LIMITED rESPONDENT
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JUDGES: |
BRANSON, EMMETT AND FINKELSTEIN JJ |
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DATE: |
25 September 1998 |
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PLACE: |
SYDNEY |
REASONS FOR JUDGMENT
EMMETT J:
I have read in draft form the reasons for judgment of Finkelstein J. I agree, for the reasons given by his Honour, that the respondent was only entitled to recover from the appellant the sum of the debts incurred after 31 December 1992. Having regard to the conclusions reached by Finkelstein J and his reasons for those conclusions, the admissibility of Mr Madden’s report is not critical to the outcome. However, I have also read in draft form Branson J’s reasons for judgment. While I agree entirely with her Honour’s analysis of the scheme of the Evidence Act 1995 (Cth) (“the Act”) I wish to make some observations concerning the application of the Act to Mr Madden’s report.
Branson J’s observations centre around the provisions of the Act dealing with opinion evidence and, in particular, section 79 of the Act. Section 79 makes admissible an opinion of a person who has specialised knowledge based on the person’s training, study or experience, if the opinion is wholly or substantially based on that knowledge. The observations I wish to make relate to the extent to which the opinions in Mr Madden’s report can be said to be wholly or substantially based on his specialised knowledge based on relevant training, study and experience.
Mr Madden’s report is concerned with the question of whether Cozihaven Homes Pty Limited (“the Company”) was insolvent at various times. Under section 95A of the Corporations Law, a person who is not solvent is insolvent and a person is solvent if and only if the person is able to pay all the person’s debts, as and when they become due and payable. In order to determine whether the Company was solvent at a given time, it would be relevant to consider the following matters:
· All of the Company’s debts as at that time in order to determine when those debts were due and payable.
· All of the assets of the Company as at that time in order to determine the extent to which those assets were liquid or were realisable within a timeframe that would allow each of the debts to be paid as and when it became payable.
· The Company’s business as at that time in order to determine its expected net cash flow from the business by deducting from projected future sales the cash expenses which would be necessary to generate those sales.
· Arrangements between the Company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts.
It may be that, in carrying out such an exercise, a person having Mr Madden’s qualifications would be able to give admissible opinion evidence. For example, such an expert could bring his or her specialised knowledge to bear on the analysis of accounting records, expected cash flows, liquid and realisable assets such as debtors and the like. However, for reasons explained in his report, Mr Madden was apparently not able to do that. He says that he intended to reconstruct the financial accounts of the Company for the relevant periods and perform a detailed review of the financial accounts prepared by the Company’s accountants as at relevant year ends during the period. However, he was unable to perform that detailed work because not all of the primary accounting records and secondary documentation of the Company were available.
In section A of his report, Mr Madden states his terms of reference. He says that he was instructed to perform a review the Company’s financial position and form an opinion “as to the solvency of the Company, namely the ability of the Company to pay its debts as and when they fall due, for the period October 1991 to 13 October 1993”. Thus, he correctly states one of the issues in the proceeding. Mr Madden then states his qualifications, the documentation reviewed for his report and the limitation on source material available to him.
In Section E of his report, entitled “Financial Position of the Company”, Mr Madden begins as follows:
In order to properly review [sic] the solvency of the Company it was necessary to review the working capital and net asset positions. Both working capital and net assets are key indicators of a company’s solvency.
Working capital is determined by subtracting current liabilities (liabilities due within 12 months of balance date) from current assets (assets expected to be realised within 12 months of balance date).
The net asset position is determined by subtracting total liabilities from total assets.
He does not explain how a review of the working capital and net asset positions is a means of determining solvency, namely whether the Company was able to pay its debts as and when they became due and payable. Rather, he simply states that working capital and net assets are key indicators of solvency. While those matters may be indicators, they are not necessarily determinative.
Thus:
· It is often accepted, as a rule of thumb, that a company will be regarded as insolvent if its current liabilities exceed its current assets. However, that cannot be more than a rule of thumb. A company might satisfy that requirement yet may be shown, on more careful analysis, not to be able to pay its debts as and when they become due and payable. Equally, a company may fail that test but still be able to demonstrate that it can pay all its debts as and when they become due and payable.
· Further, a deficiency of total assets to total liabilities is not conclusive as to insolvency. A company could have a deficiency of net assets yet, because of a very strong profit making business, be in a position to pay all its debts as and when they become due and payable. That is to say, even if a net asset deficiency exists reasonable projections may indicate that the company would generate sufficient profit to be able to eliminate that deficiency before the long term debt becomes due and payable. The company would be solvent in those circumstances. Equally, a company which has a surplus of total assets over total liabilities could still be insolvent.
It may be that Mr Madden’s specialised knowledge would enable him to say that where a company has a deficiency of current liabilities over current assets and a deficiency of total liabilities over total assets, the company will normally be insolvent. Such an opinion would be admissible if based on his specialised knowledge. For example, it may be that, in the absence of primary accounting records and other secondary documentation, working capital and net assets are the best indicators available. However, it is not entirely clear that Mr Madden was purporting to express such an opinion.
Even so, the excess of current liabilities over current assets and the excess of total liabilities over total assets would need to be proved as facts. If there is a question of accounting practice involved in the determination of any of those amounts, the opinion of Mr Madden on such question, based on his specialised knowledge, would be relevant and admissible. However, absent any such questions, there would normally be no need for expert opinion to determine whether one figure is greater than another. Where the amounts are derived from balance sheets, that can be determined by the court upon examination of the balance sheets in evidence.
Section F of Mr Madden’s report is the first significant expression of opinion. There Mr Madden expresses his opinion that:
· the Company was insolvent at 29 February 1992 and earlier;
· the Company was insolvent at 30 June 1992;
· the Company was clearly insolvent at 30 June 1993.
In Section G Mr Madden refers to his having located correspondence with creditors and financiers which, he says, “indicated the Company was experiencing difficult trading conditions and difficulties in paying its debts as and when they fell due”. He sets out some examples and says that that material:
“further supports a conclusion that the Company was insolvent:
- prior to 29 February 1992…; and
- for the entire period between 29 February 1992 to the date of ….appointment [of an] Administrator on 13 October 1993”
Section H of Mr Madden’s report contains his “overall conclusion”. He says:
For the reasons set out above, I am of the opinion that the Company was insolvent prior to 29 February 1992 and continued to be insolvent up to… 13 October 1993.
Mr Madden gives his reasons for reaching the opinion set out in Section F. However, the opinion does not appear to me to be based on any specialised knowledge. Rather, the opinion appears to be based on figures derived from balance sheets of the Company as at 30 June 1991, 29 February 1992, 30 June 1992, 30 June 1993 and 13 October 1993 all which were in evidence, together with specific material relating to the Company, some of which was in evidence and some of which was not.
Some of the material referred to in Section G was in evidence. Some of it was not. In so far as that material was relied on by Mr Madden in arriving at his opinion referred to above, that opinion does not appear to be based on his specialised knowledge. Rather, it is based in part upon his examination and analysis of specific material and the inferences which he draws from that material.
It is clear enough that the reasoning contained in Section G, together with the matters set out in Sections E and F, are the “reasons set out above” referred to in Section H. Accordingly, the opinion set out in Section H is based at least in part on Mr Madden’s examination of the material identified in his report and the inferences which he draws from that material. It is not based on his specialised knowledge based on training, study or experience. In the circumstances, I consider that there is a real question as to whether the opinions expressed by Mr Madden as to the insolvency of the Company were admissible.
I also agree with the conclusion of Finkelstein J concerning the application of section 588M of the Corporations Law. That is to say, the word “proceedings” in section 588R(1) should be taken to include any process by which a claim under section 588M is made in a court of competent jurisdiction. In particular, it would include making a claim by way of amendment to an existing proceeding. The question of whether “proceeding” could include something other than a court proceeding does not arise in these proceedings and, accordingly, I express no view on that question.
In the result, the appeal should be allowed and the orders of 11 December 1997 should be set aside. The respondent should bring in short minutes which reflect the conclusion reached by Finkelstein J.
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I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. |
Associate:
Dated: 25 September 1998
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IN THE FEDERAL COURT OF AUSTRALIA |
|
|
new south wales DISTRICT REGISTRY |
NG 46 of 1998 |
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
between: william gary quick
APPELLANT
and: stoland pty ltd
RESPONDENT
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JUDGES: |
branson, emmett and finkelstein jj |
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DATE OF ORDER: |
25 september 1998 |
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WHERE MADE: |
sydney |
REASONS FOR JUDGMENT
FINKELSTEIN J:
The appellant was a director of Cazihaven Homes Pty Ltd (the company). Between 12 December 1991 and 31 August 1993 the company incurred debts totalling $241,249.73 with the respondent for goods sold and delivered. The company did not pay those debts and after the company was wound up the respondent commenced a proceeding, initially under s 592 and then under ss 592 and 588M of the Corporations Law, seeking judgment for the amount of those debts alleging that when the debts had been incurred there were reasonable grounds to expect that the company was not able to pay its debts as and when they became due.
At trial the respondent relied upon the evidence of Mr Madden, a chartered accountant, to establish that the company was unable to pay its debts when due. The nature of his evidence is described in the judgments of the other members of the Court. The appellant had unsuccessfully objected to the tender of this evidence on the basis that the facts upon which Mr Madden had based his opinion had not been proved: Ramsay v Watson (1961) 108 CLR 642; Paric v John Holland (Constructions) Pty Ltd (1985) 62 ALR 85. However, as
Branson J has pointed out, assuming Mr Madden’s evidence to be admissible, to the extent that he relied upon hearsay as a basis for his opinion s 60 of the Evidence Act 1995 (Cth) operates to make that hearsay admissible as proof of the facts: see also Welsh v R (1996) 90 A.Crim.R. 364.
In many cases the extraordinary effect of s 60 would be unfair to the party against whom the evidence is tendered. For example, where the hearsay involves “facts” that are in conflict or “facts” that are unreliable it is quite unsatisfactory for those “facts” to be proved by the operation of s 60. One way in which this problem can be overcome is by an order under
s 136 limiting the use to be made of that evidence. In the case of evidence given by an expert, he or she can be required to express his opinion in answer to a hypothetical question leaving it to the party calling the expert to prove the facts upon which the opinion is based.
The function of an expert is to provide the trier of fact, judge or jury, with an inference which the judge or jury, due to the technical nature of the facts, is unable to formulate. “An expert’s opinion is admissible to furnish the Court with scientific information which is likely to be outside the experience of a judge or jury. If on the proven facts a judge or jury can form their own conclusions without help, then the opinion of the expert is unnecessary”: R v Turner (1974) 60 Crim.App.R 80 at 83 per Laughton LJ; see also Clark v Ryan (1960) 103 CLR 486 at 491-492; Murphy v R (1989) 167 CLR 94 at 111, 130; Farrell v R (1998) 155 ALR 652 at 655.
In this case Mr Madden was asked to express his opinion on the financial condition of the company based on certain of the books and records of the company that had been made available for his inspection. It is not unusual for an accountant to give this type of evidence: see e.g. Potts v Miller (1940) 64 CLR 282; R v Seifert (1955) 73 WN (NSW) 358; Enston v Pardel (1958) 75 WN (NSW) 370. However, if the accountant seeks to do no more than state what is otherwise obvious from such records his evidence is not receivable. The position is different where some analysis of the books and records is required in order to draw the inferences that are sought to be made or if an analysis of those books and records might prove to be a difficult task for the judge or jury.
It may be doubted whether Mr Madden did give the evidence of an expert. Much of what he said would have been apparent to the trial judge from his own examination of the books of account. However, the reasons for decision show that the trial judge did receive some assistance from the opinions expressed by Mr Madden and this is a sufficient basis for holding that his evidence was admissible.
To succeed in its claim under s 592 in respect of debts incurred by the company before 23 June 1993 (for debts incurred after that date the claim was made under
s 588M) the respondent was required to establish that immediately before the time that each debt was incurred: (a) there were reasonable grounds to expect that the company was not able to pay all of its debts as and when they became due; or (b) that there were reasonable grounds to expect that, when the company incurred each debt, it would not be able to pay all of its debts when they became due.
The respondent was not required to prove the company was insolvent at the relevant points in time. It only needed to establish that there were “reasonable grounds” to expect that the company would not be able to pay its debts. Even if it had been shown that the company was insolvent when it incurred the relevant debts it was still necessary for the respondent to prove there were reasonable grounds to expect that it could not pay all of its debts as and when they became due.
The existence of reasonable grounds for the purposes of s 592 is an objective test: 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 at 376; Commonwealth Bank v Friedrich (1991) 5 ACSR 115 at 123. The standard of reasonableness is that of a director of reasonable competence, a director who is expected to be capable of reaching a reasonably informed opinion about the financial capacity of the company: Standard Chartered Bank of Australia Ltd v Antico (1995) 18 ACSR 1 at 74-5.
The enquiry whether there are reasonable grounds to expect that the company will not be able to pay its debts when due is a factual one to be decided in the light of all of the circumstances of the case: Re New World Alliance Pty Ltd (rec & mgr apptd) (1994) 122 ALR 531 at 539-40. It is to be decided as a matter of commercial reality and thus requires a consideration of the company’s financial condition in its entirety, including its activities, assets, liabilities, cash, money that it could procure by the sale of assets or by way of loan and its ability to raise capital: Standard Chartered Bank, supra, at 71. See also Dunn v Shapowloff [1978] 2
NSWLR 235 at 244 where Mahoney JA said that
“[w]hat will constitute ability to pay must be determined, in a realistic way, by reference to the facts of the particular case, after taking into account, inter alia, the company’s assets and liabilities and the nature of them, and the nature and circumstances of the company's activities …”
The liability imposed on directors in the case of debts incurred by an insolvent company after 23 June 1993 is governed by s 588G. Although this section is cast in different terms from
s 592 the differences are not material in this case. It must be established that the company is insolvent, that is that the company is unable to pay its debts as and when they become due (see the definition of “insolvent” in s 95A), at the time when it incurs a debt or that the company becomes insolvent because it has incurred that debt. A director will then be liable to pay that debt if there were reasonable grounds for suspecting that the company was insolvent or would become insolvent, as the case requires, and the director was aware of such grounds or a reasonable person in the position of a director would be so aware.
This case is remarkable for the lack of evidence that was led at trial on the question whether the appellant had reasonable grounds to say, at the relevant times, “I expect that the company will not be able to pay all of its debts as and when they become due” to put the matter the way Tadgell J did in Friedrich, supra, at 124.
Principally the evidence comprised the end of year (30 June) accounts of the company for the years 1991 to 1993, the interim accounts of the company for the period 1 July 1991 to 29 February 1992 and Mr Madden’s analysis of those accounts. The task that Mr Madden had set himself was to “form an opinion as to the solvency of the company, namely the ability of the company to pay its debts as and when they fell due, for the period October 1991 to 13 October 1993.” He explained that “in order to properly review the solvency of the company it was necessary to review the working capital and net asset position [because] both working capital and net assets are key indicators of a company’s solvency.”
The accounts disclosed that the financial position of the company at various dates during the relevant period was as follows:
30/6/91 29/2/92 30/6/92 30/6/93 13/10/93
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Current Assets |
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|
|
|
|
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Security Deposits/ Cash |
137,532 |
138,989 |
31,711 |
9,139 |
0 |
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Inventories |
299,590 |
223,670 |
466,464 |
182,543 |
0 |
|
Receivables |
0 |
17,070 |
40,000 |
18,672 |
18,164 |
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Other |
0 |
10,870 |
0 |
0 |
0 |
|
437,122 |
390,599 |
538,175 |
210,354 |
18,164 |
|
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Non Current Assets |
|||||
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Related Party Receivables |
7,025 |
0 |
54,909 |
53,729 |
0 |
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Other Receivables |
0 |
0 |
37,061 |
0 |
0 |
|
Plant and Equipment |
4,420 |
5,540 |
24,876 |
19,334 |
1,090 |
|
11,445 |
5,540 |
116,846 |
73,063 |
1,000 |
|
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Total Assets |
448,567 |
396,139 |
655,021 |
283,417 |
19,164 |
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Current Liabilities |
|||||
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Creditors and Provisions |
155,000 |
416,684 |
237,076 |
661,209 |
676,641 |
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Bank Overdraft |
154,817 |
72,277 |
152,271 |
126,600 |
0 |
|
309,817 |
488,961 |
389,347 |
787,809 |
676,641 |
|
|
Non Current Liabilities |
|||||
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Creditors and Borrowings |
136,500 |
143,700 |
227,857 |
219,007 |
0 |
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Total Liabilities
|
146,317 |
632,661 |
617,204 |
1,006,817 |
676,641 |
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Working Capital
|
127,305 |
88,362 |
148,828 |
577,455 |
658,477 |
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Net Assets/ Liabilities |
2,250 |
236,522 |
37,817 |
723,299 |
657,477 |
Mr Madden said that these figures established the company was insolvent as at 29 February 1992 and earlier (he did not say how much earlier) because at that date it had a deficiency of assets of $236,522, a deficiency of working capital of $98,362, it was overdrawn with its banker to the extent of $72,277 (it had an operating limit of $127,000) and its creditors had increased from $155,000 as at 30 June 1991 to $416,684 as at 29 February 1992.
In expressing his opinion Mr Madden had not taken into account the general trading activities of the company. In particular, Mr Madden did not undertake any analysis of the company’s ability to carry on its business activities at a profit. This was a critical omission bearing in mind that according to the test of insolvency adopted by Mr Madden the company was solvent on 30 June 1991 and on 30 June 1992. Mr Madden did not explain how he was able to conclude that the company was insolvent “on 29 February 1992 and earlier” when it had been solvent some months before and some months after that time.
It must be mentioned that Mr Madden did say that the company was insolvent on 30 June 1992 “as the realisable value of its assets exceeded its liabilities”. Two points must be made about this opinion. In the first place, in order to arrive at it, Mr Madden had deducted from the net assets of the company as shown in its balance sheet the sum of $54,909 being the total amount of the unpaid loans that had been made by the company to its directors. Mr Madden said that because the loans had not been repaid it was appropriate to conclude that the loans were irrecoverable. However, there was no evidence to support the conclusion that the loans were irrecoverable. In some cases it might be reasonable to infer that the failure to pay a debt that has been due for some time is prima facie evidence of the insolvency of the debtor. But that is not a reasonable inference to draw in the case of a loan made to a director where there might be any number of reasons why the loan has not been repaid. Perhaps there had been no demand for payment. Perhaps it has been agreed that the loan should remain outstanding for a further period. Perhaps the failure to repay the loan was an oversight.
The second point to be made is even if the company’s liabilities did exceed its realisable assets to the extent of $17092 (that is after the deduction of the loans) that is but one matter, and in some cases not a very significant matter, to be taken into account in deciding whether the company was able to pay its debts when they fell due for payment. In this case a deficiency of $17092 was not sufficiently large to warrant that conclusion.
Mr Madden also said that the company was insolvent as at 30 June 1993 because its accounts showed that it had a deficiency of assets of $723,399 and a deficiency of working capital of $577,455. Having regard to the deterioration of the company’s financial position during the twelve months ended 30 June 1993 this opinion was sufficiently made out the evidence. And it was an opinion that was confirmed by other evidence. On 14 January 1993 the company had offered to provide an item of equipment (a bobcat) to a trade creditor in partial discharge of a debt due to that creditor which the company said it could not otherwise pay. Further, in a letter dated 3 June 1993 the company had advised another trade creditor that it could not pay its outstanding debt of $242,000 stating that the company’s future “appears extremely clouded.”
The principal issue for the trial judge to determine was whether it could be said that at all times during the period between 1 June 1992 and 22 June 1993, being the period during which the company incurred the relevant debts, there were reasonable grounds for expecting that the company was unable to pay its debts.
The starting point for this enquiry must be the position of the company as at 1 July 1992. At that time the company had available to it working capital of $148,824, it had a surplus of assets over liabilities and it had just completed a year of trading that had yielded an operating profit of $6,445 after income tax. This profit was derived after a period of trading that was unprofitable. The interim accounts show that as at 29 February 1992 the company had incurred trading losses of the order of $268,743. Thus there appears to have been a significant turnaround in the profitability of the company’s activities since that time.
Based on this evidence it cannot be said that as at 1 July 1992 it was reasonable for any director to expect the company would be unable to pay its debts when due. On the contrary, based on the evidence that was before the trial judge, the only conclusion that was available was that the company was trading profitably and was well able to meet its obligations.
On the other hand it seems to be clear enough that by 30 June 1993 the company was hopelessly insolvent. By that time no director of the company, reasonably acquainted with its affairs, could have expected that it would pay its debts when due.
The difficult question is at what time during the course of the financial year would it have become apparent to the appellant that the company’s position had deteriorated to the point where it was no longer able to pay its debts? The answer is not easy to discern because of the scant state of the evidence. The only evidence that is of assistance is the letter of 14 January 1993 where the company offered to transfer its bobcat in partial discharge of a debt due to a creditor. The bobcat was an item of equipment that was required by the company for use in its businesses. The offer made to the trade creditor was on terms that the company would retain possession of the bobcat for the purpose of completing certain works and that possession of the bobcat would be given to the creditor only when that work had been completed. It is reasonable to infer from this offer that the company was not able to meet its outstanding obligations at least by 14 January 1993. It is probable that the company could not meet its obligations before that day. How much earlier is impossible to say although it seems appropriate to take the relevant date back to 1 January 1993. The reason for the selection of this date is that the company carried on business as a builder and it is unlikely to have been actually engaged in building activities between 1 January 1993 and 14 January 1993.
It follows that the respondent was only entitled to recover from the appellant the sum of the debts incurred between 1 January 1993 and 22 June 1993. Unfortunately there is not sufficient information in the Appeal Book to enable this sum to be ascertained.
It is now necessary to consider the appellant’s contention that the respondent was not entitled to bring any claim against him under s 588M. The argument is based on s 588R(1) which provides:
“A creditor of a company that is being wound up may, with the written consent of the company’s liquidator, begin proceedings under s 588M in relation to the incurring by the company of a debt that is owed to the creditor.”
The appellant says that the company’s liquidator had not given his consent to the commencement of proceedings against him and thus the claim is not maintainable. The way that the appellant puts this argument is as follows. The “proceedings" referred to in
s 588R(1) are curial proceedings and a curial proceeding under s 588M only begins when an initiating process (whether a writ, application or motion) is filed in a court of competent jurisdiction. Here the initiating process was filed on 3 May 1994 and the liquidator had not given his consent to that process.
It is true that the proceedings were commenced on 3 May 1994. However, the relief claimed was confined to a claim under s 592. Some years later it was realised that s 592 could not be relied upon to recover the debts that were incurred by the company after 23 June 1992. Accordingly, the respondent sought the consent of the liquidator to commence a proceeding under s 588M. On 12 June 1997 the liquidator gave that consent. Then on 16 October 1997 the respondent applied for and was granted leave to amend its application and statement of claim to incorporate a claim under s 588M in respect of those debts that had been incurred after 23 June 1993.
In these circumstances the issue that must be resolved is whether the introduction by amendment of a claim under s 588M can be characterised as the commencement of a proceeding. This requires some reference to the provisions that deal with the means by which a claim under s 588M may be made and to the persons who are entitled to bring that claim.
Where a director of a company is liable to pay the debts that were incurred by that company in consequence of the application of s 588G, those debts are recoverable by the liquidator
(s 588M(2)) or by the creditor (s 588M(3)). If the debts are recovered by the liquidator they will form part of the estate of the company that is available for distribution among its creditors and contributories. If recovered by the creditor they will be retained by him or her.
However, a director cannot be subjected to competing claims. It is for the liquidator to decide whether he or she will bring the claim or allow the creditor to bring it. To ensure that the decision remains with the liquidator s 588R(1) provides that the creditor is not able to bring proceedings under s 588M without the consent of the liquidator.
There is one exception. If a creditor requests the consent of the liquidator to bring a proceeding under s 588M and the liquidator does not give that consent, the creditor may apply to the court for leave to bring the proceeding: see s 588S and s 588T. It is to be noticed that the nature of the proceeding to which the leave of the court may be given is a proceeding “in a court”: see s 588T(2).
One question that arises is whether the word “proceedings” in s 588R(1) is a reference to curial proceedings. The “proceedings” to which s 588R(1) refers is a proceeding under
s 588M namely, a proceeding “to recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage” suffered by the creditor.
There are a variety of ways in which the debt that is due to a creditor by reason of a contravention of s 588G can be recovered. One method is to proceed to judgment in an action commenced in a court of competent jurisdiction. Another method is to make a demand and have that demand satisfied by a voluntary payment. In the event that a director becomes bankrupt a proportion of the debt due may be recovered as a consequence of the filing of a proof of debt in the bankruptcy.
There is something to be said for the view that “proceedings” in s 588R(1) should not be confined to curial proceedings but should include any process the result of which might be that the creditor will receive payment of the debt due. It is only if a wide meaning is given to the word “proceedings” that the liquidator will have effective power to determine whether it is he or the creditor who will recover the debt from the director. Some support for this construction is to be found in s 588T(2) where the particular proceedings that are there referred to are specified as curial proceedings and the same specification is not to be found in
s 588R(1). See also Re Wheeler v Reynolds; Ex parte Kerr v Crowe (1988) 20 FCR 185 and Re Staples; Ex parte Baker (1996) 67 FCR 541 where the word “proceedings” was said to mean more than a proceeding in court.
However, it is not necessary to reach any concluded view on the precise meaning of “proceedings” in s 588R(1). It is sufficient to hold that the word should be taken to mean, at the very least, any process by which a claim under s 588M is made in a court of competent jurisdiction. Such a claim may be made in an originating process. If it is, that process could only be commenced with the consent of the liquidator. It would also include a claim made by way of amendment to an existing proceeding. It is the claim made by the amendment which is the means by which the creditor seeks to “recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage” suffered by the creditor. It conforms with the object of s 588R(1) if “proceedings” are taken to include both the commencement of an action at law and any step in that action: compare Eddy v Stewart [1932] 3 WWR 71 at 74; Re Carrick Estates Ltd (1987) 43 DLR (4th) 161.
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I certify that this and the preceding nine (9) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein |
Associate:
Dated: 25 September 1998
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Counsel for the Appellant: |
Mr P Graham QC with Mr J T Johnson |
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Solicitor for the Appellant: |
Ward Maxwell & Co |
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Counsel for the Respondent: |
Mr Cashion QC |
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Solicitor for the Respondent: |
Kemp Strang |
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Date of Hearing: |
10 July 1998 |
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Date of Judgment: |
25 September 1998 |
