FEDERAL COURT OF AUSTRALIA

 

Credit Corp Pty Ltd v Atkins [1999] FCA 335

 

CORPORATIONS – s 592 – directors’ liability for company’s debts – dates when debts were incurred – whether debts were incurred without the express or implied authority or consent of one of the directors – whether both directors did not have reasonable cause to expect that the company would not be able to pay all its debts as and when they became due

DEBTS – apportionment of payments – rule in Clayton’s case

Corporations Law s 592

Companies (Vic) Code s 556

Evidence Act 1995 (Cth) ss 63, 67, 128

Federal Court of Australia Act 1976 (Cth) s 51A

 

 

 

Butterworths Australian Corporation Law – Principles and Practice Vol 2

 

Rejfek v McElroy (1965) 112 CLR 517 cited

Hussein v Good (1990) 8 ACLC 390 cited

Rema Industries v Coad (1992) 107 ALR 374 referred to

Leigh-Mardon Pty Ltd v Wawn (1995) 13 ACLC 1244 cited

Re Beckwith; ex parte Power and Power (a firm) (1993) 43 FCR 256 discussed

Hawkins v Bank of China (1992) 26 NSWLR 562 considered

Russell Halpern Nominees Pty Ltd v Martin (1987) WAR 150 considered

3M Australia v Kemish (1986) 4 ACLC 185 at 191 referred to

Commonwealth Bank v Friedrich (1991) 5 ACSR 115 referred to

Standard Chartered Bank of Australia Ltd v Antico (1995) 131 ALR 1 referred to

Quick v Stoland Pty Ltd (1998) 157 ALR 615 referred to

TCN Channel Nine v Scotney (1995) 18 ACSR 393 applied

Pioneer Concrete Pty Ltd v Ellston (1985) 10 ACLR 289 followed

Carrier Air Conditioning v Kurda & Ors (1993) 11 ACSR 247 cited

Re Toowong Trading Pty Ltd (In liq) (1987-88) 13 ACLR 212 cited

Norfolk Plumbing Supplies Pty Ltd v Commonwealth Bank of Australia (1992)

6 ACSR 601 cited

Sheahan v Hertz Australia Pty Ltd (1994) 14 ACSR 209 cited

Hertz Australia Pty Ltd v John Sheahan (1995) 16 ACSR 765 cited

Lee Kong & Ors v Pilkington (Australia) Limited (1997) 25 ACSR 103 applied

Dunn v Shapowloff (1978) 2 NSWLR 235 cited

Re New World Alliance Pty Ltd (Receiver & Manager appointed) (1994) 122 ALR 531 cited

Dunn v Shapowloff (1982) 148 CLR 72 cited

Deveynes v Noble: Clayton’s case (1816) 1 Mer 572 applied

Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 cited

Morley v Statewide Services Ltd (1993) 1 VR 423 applied

Group Four Industries Pty Ltd v Brosnan (1991) 56 SASR 234 discussed

Group Four Industries Pty Ltd v Brosnan (1992) 59 SASR 22 referred to

Capricorn Society Ltd v Linke (1996) 14 ACLC 431 applied

Metal Manufacturers v Lewis (1986) 4 ACLC 739 cited

Amatek v Botman (1995) 13 ACLC 1729 referred to

Metal Manufacturers Ltd v Lewis (1988) 13 NSWLR 315 cited

CREDIT CORPORATION AUSTRALIA PTY LTD & ORS v JUDITH ROSEMARY ATKINS AND MAURICE KEVIN ATKINS

 

SG 3107 OF 1996

 

 

 

 

O’LOUGHLIN J

31 MARCH 1999

ADELAIDE

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SG 3107 OF 1996

 

BETWEEN:	CREDIT CORPORATION AUSTRALIA PTY LTD First Applicant   G M & J LOMBARDI PTY LTD Second Applicant   WORKCOVER CORPORATION PTY LTD Third Applicant   G R FAUNTLEROY trading as SOUTH HEDLAND AUTO ELECTRIC Fourth Applicant   COMMONWEALTH INDUSTRIAL GASES LTD Fifth Applicant   TRUCKLINE PARTS CENTRE PTY LTD Sixth Applicant   BRIAN ERIC WOOLLAT AND HEATHER JANICE WOOLLAT trading as B E 7 H T WOOLLAT Seventh Applicant   BORAL TYRES PTY LTD Eighth Applicant   P & J TRANSPORT ENGINEERS PTY LTD Ninth Applicant
AND:	JUDITH ROSEMARY ATKINS First Respondent   MAURICE KEVIN ATKINS Second Respondent
JUDGE:	O’LOUGHLIN J
DATE OF ORDER:	31 MARCH 1999
WHERE MADE:	ADELAIDE

 

 

 

 

THE COURT ORDERS THAT:

 

1.                  There be judgment in favour of Credit Corporation Australia Pty Ltd against Judith Rosemary Atkins and Maurice Kevin Atkins in the sum of $56,500.

2.                  There be judgment in favour of GM & J Lombardi Pty Ltd against Judith Rosemary Atkins and Maurice Kevin Atkins in the sum of $17,200.

3.                  The questions of costs be adjourned for further consideration.

4.                  There be liberty to apply including liberty to relist on seven days notice.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SG 3107 OF 1996

 

BETWEEN:

CREDIT CORPORATION AUSTRALIA PTY LTD First Applicant   G M & J LOMBARDI PTY LTD Second Applicant   WORKCOVER CORPORATION PTY LTD Third Applicant   G R FAUNTLEROY trading as SOUTH HEDLAND AUTO ELECTRIC Fourth Applicant   COMMONWEALTH INDUSTRIAL GASES LTD Fifth Applicant   TRUCKLINE PARTS CENTRE PTY LTD Sixth Applicant   BRIAN ERIC WOOLLAT AND HEATHER JANICE WOOLLAT trading as B E 7 H T WOOLLAT Seventh Applicant   BORAL TYRES PTY LTD Eighth Applicant   P & J TRANSPORT ENGINEERS PTY LTD Ninth Applicant

AND:

JUDITH ROSEMARY ATKINS First Respondent   MAURICE KEVIN ATKINS Second Respondent

 

JUDGE:	O’LOUGHLIN J
DATE:	31 MARCH 1999
PLACE:	ADELAIDE

REASONS FOR JUDGMENT

1                     In this action the applicants, a group of creditors, instituted proceedings alleging that the respondents, as the former directors of a failed company, were personally liable for certain unpaid debts of the company.  The applicants have proceeded under s 592 of the Corporations Law (“the Law”), subs (1) of which provides as follows:

“(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.”

 

 

Background Facts

2                     Greenline Operations Pty Ltd (in liquidation) (“Greenline” or “the company”) was incorporated in South Australia on 4 May 1973 and was wound up by order of the Supreme Court of that state on 12 January 1993.  Its registered office was, during the period that is material to these proceedings, situated at the office of Nicholas Birdseye and Associates, 98 Kermode Street North Adelaide 5006.  Mr Birdseye of that firm was Greenline’s accountant and tax agent.  Judith Rosemary Atkins and her former husband, Maurice Kevin Atkins, the respondents in this action, were the only two directors of the company during its life.

3                     Mr and Mrs Atkins married in 1966 and were divorced in mid 1991.  Initially, Mr Atkins had been  employed as a truck driver but later he started his own business, incorporating Greenline for that purpose.  Greenline was instrumental in obtaining a cartage contract (“the Boral contract”) which necessitated the company and the family moving to Ceduna on the West Coast of South Australia.  Mr Atkins said that he lived in Ceduna from about 1976 until 1991.  Whilst he was there his company worked with Waratah Gypsum, carting salt and gypsum from a quarry site to the rail siding at Penong.  The distance involved was relatively short, ranging from one to five kilometres.

4                     In 1984, Mrs Atkins and the children of the marriage moved to Adelaide for the childrens’ schooling; Mr Atkins continued to work and live in Ceduna visiting Adelaide when he could.  Mrs Atkins said in her evidence that even before she left Ceduna, she played little part in the management and activities of Greenline.  She said that her husband did not seek out her opinions; she therefore had little or nothing to do with the company or the business.  She obtained part-time employment in Adelaide in 1985 as a nurse at the Royal Adelaide Hospital.  After a few years she converted to full-time employment and she continues to work at the hospital in that capacity.  In April 1985 Mr and Mrs Atkins purchased a home at Dernancourt, a suburb of Adelaide, although within a short time they ceased cohabiting.  Mrs Atkins said that occasionally the company’s accountant would ask for her signature on some company documents, such as its tax return, but, so she claimed, her contact with the company and her knowledge of its affairs were minimal.

5                     Sometime late in 1990 or early 1991, the Boral contract came to an end, and with it, Greenline lost its only source of income; as a result of a change in management, Boral had decided that it would cart the salt and gypsum, using its own equipment.  It was also at about this time that relationships between Mr and Mrs Atkins had deteriorated to such a point that she had sought and obtained a restraining order against him.  She even left the Dernancourt house for a short while and lived in a flat, obtaining a silent phone number to reduce the chances of Mr Atkins finding her new address.

6                     By this time Mr Birdseye, who seemed to enjoy the confidence and trust of both Mr and Mrs Atkins, had become the company’s accountant.  According to Mrs Atkins, it was Mr Birdseye who brokered the family property settlement that was ultimately approved by the Family Court in May 1991.  Mrs Atkins said that the base arrangement under the settlement was that she acquired the house at Dernancourt and Mr Atkins took the company and the business.  Under the terms of the Family Court order, Mrs Atkins was to resign as a director of Greenline and transfer her share to Mr Atkins or his nominee.  She did not do this however, claiming, somewhat paradoxically, that it was Mr Birdseye who recommended to both of them that she maintain her involvement in Greenline.  Mr Atkins gave a different explanation:  he said that she stayed on in the company because he had not paid her the benefits to which she was entitled under the property settlement.  I do not consider that this contradiction is a matter of great significance.  What is significant is that Mrs Atkins chose to remain a director of the company.

7                     Following the termination of the Boral contract, Greenline was without any source of income until Mr Atkins obtained work in Port Hedland, Western Australia.  Eltin Limited (“Eltin”) had a contract to cart manganese ore from an open-cut mine at Woodie Woodie to the wharf at Port Hedland where it was stock-piled to await cartage overseas by ore carriers; Woodie Woodie is about 400 kms due east of Port Hedland on the edge of the Sandy Desert.  Eltin sub-contracted out some of its cartage work to independent contractors of whom Greenline became one.  The work in Western Australia was quite different to that which the company had carried out under the Boral contract.  The distances were greater, the roads were rougher, wear and tear on vehicles was more severe but the greatest difference was the vehicles that were used in the West.  Unlike the Boral contract, it was necessary to operate a “road train” for the Eltin contract, comprising a prime mover, two dolleys and three tipper trailers; (a dolley is the set of bogie wheels that is used to connect two trailers.)

8                     In order to carry out its new contract, Greenline had to buy additional expensive equipment.  Some of this equipment was purchased through P & J Transport Engineers Pty Ltd (“P & J Transport”).  That company assigned the debt that Greenline ultimately owed to it to Credit Corporation Australia Ltd, the first named applicant in these proceedings.  Other equipment was purchased by Greenline from G M & J Lombardi Pty Ltd (“Lombardi”), the second named applicant in these proceedings.  Greenline also purchased a 1983 tandem drive prime mover from Mack Trucks (Australia) Pty Ltd (“Mack Trucks”) at a cost of $90,000; that purchase was financed by the company’s banker, the State Bank of South Australia.  In April 1991 the bank arranged with Mr Atkins for facilities to be made available through its Ceduna branch to enable the company to purchase the prime mover.  A fully drawn advance of $70,000 was utilised to complete the purchase on 10 May 1991.

9                     At the end of the Boral contract, Greenline had five trailers - two Gitshams, two Fruehaufs and a Superlift.  One of the Gitshams and the two Fruehaufs were sent to P & J Transport’s workshop to be made ready to go to Port Hedland to work as part of the road train.  The remaining Gitsham was left at Ceduna.  The Superlift, coincidentally, had earlier been sent down to P & J Transport.  When Mr Atkins moved the components of the road train to Port Hedland he also arranged to have all workshop equipment transported at the same time.

10                  Mr Cocks, the manager for P & J Transport, gave evidence for the applicants.  He agreed that, during April and May 1991, his company had performed work on instructions from Greenline knowing that Greenline was in the course of marshalling a road train to take to Port Hedland.  Mr Cocks was quite open when questioned about the subject of payment of his company’s account; he said he could not remember discussing the matter with Mr Atkins, but “probably” he could have agreed to a proposition that he would be paid once the company was “up and running”.  He also agreed that Mr Birdseye had said to him that it might be necessary for him to wait up to two months for payment of his account.

11                  Greenline’s road train began work in Port Hedland on 31 May 1991, working seven days a week.  One driver would do a round daily trip of about 800 kilometres and then be replaced by another on the next day.  The company started to receive income from the Eltin operation shortly after it commenced operations.  In other words, having regard to the issues in this trial, it would be appropriate to find, as I do, that the company was “up and running” by mid to late June 1991.

12                  Mr McGee took up employment as the manager of Greenline at Port Hedland in early July 1991.  He had known Mr Atkins as a neighbour in Ceduna and had, at one stage, worked for Greenline out of Ceduna for about three years.  As manager, he had full authority to place orders in the name of the company for goods and for services.  Mr McGee gave evidence for the defence; he gave his evidence impressively.  I consider that, making due allowance for the passage of time and its effect on a person’s memory, his evidence along with that of Mr Gangell (an employee of the company) is the most reliable when the time comes to make findings about the company’s activities in the June- December 1991 period.

 

The first accident

13                  Within a month of Mr McGee’s arrival at Port Hedland, one of the trailers, a Fruehauf, tipped over as a result of a pivot pin breaking:  (“the first accident”).  The accident occurred on the wharf at Port Hedland when the trailer was in the course of being unloaded; it was tipping its load when the pin broke.  As a result the trailer tray tipped to one side and fell over.  The three axles and the suspension from the damaged trailer were sent to P & J Transport in Adelaide with instructions that they be used in the construction of a replacement trailer (“the rebuilt trailer”); the twisted body or tray of the trailer was kept at Port Hedland.  Meanwhile the company continued to operate its road train using another trailer that it was able to hire from Eltin.

14                  In July 1991, Mr Atkins decided that Greenline should acquire and operate a second road train; he said that he made this decision at Eltin’s suggestion.  Mr McGee confirmed this.  Mrs Atkins said that Mr Birdseye told her that Mr Atkins had made the decision that Greenline would purchase a second road train.  She said that this news was not a cause of concern to her.  She said that Mr Atkins had always paid his debts; she also said that Mr Birdseye had told her that the company was earning large profits and that these would be used to purchase the second road train.

15                  A second hand Mack prime mover costing $60,000 was purchased.  The company paid a deposit of $20,000 and borrowed the balance from Esanda Finance Limited; it was repayable over a period of eighteen months.  Exhibit A19, the company’s cashbook, shows that a cheque for $20,000 was drawn on 30 August 1991. In addition, it was also necessary to purchase a sixth trailer.  That was bought on credit from P & J Transport; it was a Freightmaster.  The two other trailers that were needed for the second road train were salvaged from those that the company had previously used for the Boral contract – that is, the second Gitsham and the Superlift.  In addition to buying the second prime mover and the Freightmaster trailer, Greenline also purchased two dolleys from P & J Transport.  Based on Mr Birdseye’s letter to the State Bank dated 16 October 1991, the second road train became operational at Port Hedland on about 18 October 1991.

16                  Asked by his counsel whether he discussed terms of payment for the Freightmaster with Mr Cocks, Mr Atkins replied that he had and that the agreement was “as the money flowed in he would be paid and he agreed on it.”

17                  In due course, the rebuilding of the damaged Fruehauf was completed by P & J Transport and returned to the company at Port Hedland.  The first road train continued thereafter to operate as before.  Both the Freightmaster and the rebuilt Fruehauf trailer needed hoists; these had not been installed by P & J Transport.  The hoists were supplied to the company by Lombardi and Greenline’s employees installed them in the company’s workshop at Port Hedland.

The second accident

18                  In late November or early December 1991 (the evidence does not allow for a finding of the precise date but the subject will be addressed further at a later stage in these reasons), there was a second accident involving the rebuilt Fruehauf trailer.  Again it occurred on the wharf on Port Hedland when a load was being tipped onto the stockpile.  Although Mr McGee was not present when the accident occurred, he arrived shortly afterwards and, so far as he was aware, the trailer had not been moved since the accident.  The probabilities are that it had not been moved and I so find.  He said that the trailer was lying on its side.  Exhibit KR14 comprises ten photographs showed the damaged trailer from different angles.  Mr McGee made a particular point of checking the unit to ensure that the pivot pin had not broken again; he satisfied himself that it was intact.

19                  Mr McGee was asked to explain the normal procedure for unloading ore from a trailer; he said that the operator would first open the tailgate of the trailer and then, using the hoist, would commence to lift the trailer so that it could discharge its load.  It was Mr McGee’s opinion that there was too much weight on one side of the trailer, that the trailer was too weak to hold the load and, as a result, the weight of the load caused the tray of the trailer to tip to the side and fall to the ground.

20                  Mr Gangell had been driving the road train immediately prior to the second accident.  At that stage, he had had fifteen years experience in driving all manner of heavy vehicles.  He was an impressive witness.  He gave his evidence with short, sharp answers; he knew his subject and he gave his answers with confidence.  He explained his procedures which, he said, followed a long established routine.  So far as it is relevant to this litigation, that routine included watching with care the loading of the trailers at the mine site to ensure that the load was evenly distributed straight down the trailer.  When he arrived at the site of the stockpile at the Port Hedland wharf, Mr Gangell said that he always looked for level ground before commencing to tip.  On the day in question he followed his routine of checking the trailer on both sides before undoing the tailgate.  He then got back into the cabin of the truck and put his foot on the accelerator to operate the hoist.  He said that he felt the hoist pass into the second stage and he thought it had passed into the third stage when the hoist “just let go”.  By this he meant that the body of the trailer twisted sideways to the right so that the side of the trailer went through an arc of about ninety degrees and ended on the ground.  It is true that the hoist broke but whether its breaking caused the accident or whether the accident caused the hoist to break is a question that must be resolved.  Mr Gangell was an experienced driver; the trailer was not an unknown quantity; he estimated that he had tipped it on about twenty previous occasions.  His opinion is entitled to respect.  On the basis that the road train operated every day this would mean that the rebuilt trailer had tipped loads of manganese ore daily for about forty days before the second accident.  Accepting him as a reliable and truthful witness leads me to conclude that he had satisfied himself that day that the trailer had been properly loaded.  In other words I reject, as an explanation for the second accident, that faulty loading was its cause.

The claim against P & J Transport

21                  One of the defences that the respondents have raised in these proceedings is that the second accident occurred as a result of faulty workmanship by P & J Transport when it rebuilt the trailer.  If, therefore, the company owed any money to P & J Transport (or to Credit Corporation Australia Pty Ltd by way of assignment) the respondents claimed that the company was entitled to set-off the damages that it had suffered as a consequence of the second accident; the respondents also claimed that they could stand in the shoes of the company and benefit from the set-off to which it was entitled.

22                  Credit Corporation offered three responses to the claim for damages for faulty workmanship.  First, it pleaded in its reply that P & J Transport, acting on the instructions of Greenline, built the trailer for Greenline without a hoist in it; the hoist was acquired from Lombardi and installed by Greenline in its workshop at a later date.  It alleged that when the rebuilt trailer was raised, the hoist collapsed and that it was that collapse that caused the trailer to roll over.  Credit Corporation therefore denied that the rebuilt trailer was not of merchantable quality and, in addition, there was a denial of the allegation that the unit was not suitable for the purposes for which it was required.  I will consider this matter further when discussing the engineering evidence.  Secondly, the applicant raised an estoppel argument.  It was pleaded that as the liquidator of Greenline had admitted the proof of debt that had been lodged by P & J Transport (or Credit Corporation) in the winding up of the company, Mr and Mrs Atkins were thereby estopped from denying that Greenline had been indebted to P & J Transport.  I do not consider that there is any substance in that defence.  The conduct of the liquidator could not possibly bind Mr and Mrs Atkins.  Thirdly, it was claimed by Credit Corporation that Mr and Mrs Atkins “have no standing to purport to act on behalf of the company or the liquidator in asserting a right to set off.”  This defence must also be rejected.  They are not purporting to act on behalf of the company; they are defending themselves by arguing that, on the principle of set-off, there are no moneys owing by Greenline to Credit Corporation.  Thus, so it is claimed, although the company may have incurred a debt in circumstances where its directors attract potential liability under s 592, neither the company nor the directors will be liable for the payment of that debt because of the existence of the set-off.

23                  Before turning to the engineering evidence I should mention that Mr Atkins said that he rang Mr Cocks of P & J Transport and told him that the rebuilt Fruehauf trailer had collapsed, but he acknowledged that he never advised Mr Cocks that Greenline held P & J Transport responsible for the collapse.  He also acknowledged that Greenline had never written P & J Transport making a claim on it.  Asked to explain why he had not taken any action, Mr Atkins said that Greenline, at that stage, still owed P & J Transport money and that he and Mr Birdseye had decided that Greenline would not pay P & J Transport’s account.  He also acknowledged that Greenline had successfully claimed on its insurers in respect of the damage to the trailer.  The evidence in the trial shows that the insurer made inquiries of P & J Transport but that it did not make any claim on that company.

24                  Mr Cocks said in his evidence that he knew that the rebuilt Fruehauf had tipped over and had been damaged.  He admitted that he had been approached by Greenline’s insurers who had questioned him about his design and the construction of the unit.  However, Mr Cocks maintained that neither Mr Atkins nor the company’s insurers had ever informed him that a claim was to be made against him or his company in respect of the damage to the trailer.  Mr Cocks’ memory about this subject and his memory about many aspects of his business relationships with Mr Atkins was poor.  However, I do not suggest that this means that his evidence is to be rejected.  In my opinion, he was labouring under the difficulty that many witnesses suffer; he was being asked to recount details of transactions, many of which were over seven years old.  I accept Mr Cocks as a witness of truth; I accept that he gave his evidence to the best of his ability.  It remains a fact that in some areas his memory let him down.  Nevertheless, I find that, at no time prior to the institution of these proceedings, was any claim made on P & J Transport as a result of the damages suffered by the company from the second accident.  This in my opinion is very significant.  As will become apparent in due course, P & J Transport ultimately petitioned for the winding up of Greenline; surely, if Greenline thought that P & J Transport were responsible for the second accident, then that was the time to raise the issue of faulty workmanship.  It is true that some general comment on the subject was made but one would have expected Greenline to do then what it has done in these proceedings.

25                  A Mr Giles, a Chartered Engineer, was retained to examine the damaged trailer.  Whether he was engaged by Greenline or its insurers was not explained.  He examined the trailer at the premises of Lombardi where it had been sent for repairs but the date of his examination has not been disclosed.  In January 1992, Mr Giles wrote a three-page report which was accompanied by two pages of calculations and formulae.  Unfortunately, Mr Giles died before he could give evidence; the respondents therefore retained the services of Mr Potts, a Consulting Mechanical Engineer.  Mr Potts submitted his own report in February 1998 and also gave evidence with respect to the opinions expressed by Mr Giles in his report.  Although the respondents had not given the applicants formal notice under ss 63 and 67 of the Evidence Act 1995 (Cth) of their intention to apply to tender Mr Giles’ statement, the applicants were served with copies of the reports of Mr Giles and Mr Potts.  The applicants therefore knew that Mr Potts, in compiling his report, had referred to Mr Giles’ report.  No prejudice to the applicants was identified; I therefore received the report of Mr Giles and the first page of his calculations in the exercise of my discretion.  I excluded the second page because I was not satisfied that Mr Potts understood all of the calculations that Mr Giles had set out in it.

26                  Both Mr Giles and Mr Potts were firm in their views that the cause of the trailer rolling over was its faulty design; the trailer was, so they said, too long and the sides of the body were excessively slender.  Mr Potts emphasised that the right hand side wall of the trailer had bowed outwards; this, in his opinion was consistent with the dynamic force brought about by a shifting load.  The bow could not have been a result of the trailer striking the ground, for any force resulting from such an episode would have pushed the wall of the trailer inwards.  The photographs that were taken shortly after the accident were quite dramatic in their effect.  The bow in the steel was so severe and so obvious that it is evident that the steel was insufficient to withstand the force of the moving load.  Whether the hoist broke, as Mr Gangell suggested, or whether the trailer was too long, the fact remains that the steel side of the trailer was of insufficient strength to withstand the force of a shifting load.  However, that does not conclude the matter.  It was not suggested, for example, that Mr Cocks should have designed a trailer of sufficient strength to withstand the consequences of a broken hoist.

27                  Under cross-examination, Mr Cocks defended his design of the trailer; he acknowledged that a representative of Greenline’s insurer had suggested that the trailer was too long; he also agreed that the length of a trailer is important in that it has an impact on the engineering design.  He further agreed that “a small increase in the length can result in a significant change in the need to design a much stronger trailer to deal with the forces created by the increase in length.”  Mr Cocks acknowledged that he did have the technical expertise of an engineer and that he did not know the particulars of the factor of stress on bending.  He relied upon the fact that he had built other trailers of the same size and he also relied on the fact that “a lot depends on how you load it as well and where the weight is.”

28                  The theory that there was a fundamental flaw in the design of the trailer does not readily fit with the fact that it had been used on about forty consecutive days before the accident occurred.  If the design was at fault one would have expected the accident to have occurred on a much earlier occasion.  The engineering evidence did not afford an explanation for this apparent inconsistency.  Mr Gangell’s evidence about the number of times that the trailer had been used tends to refute the submission that the cause of the accident was a faulty design for which P & J Transport was responsible.

29                  Mr Hall, an engineer who gave evidence on behalf of the applicants, supported the proposition that the accident could well have occurred as a result of the collapse of the hoist.  The position remains shrouded in doubt.  But bearing in mind that the onus rests on Mr and Mrs Atkins, I find myself unable to have the necessary degree of satisfaction that the accident occurred as a result of faulty workmanship on the part of P & J Transport.  That is a possibility - but it is only a possibility.  It is equally possible that the accident was caused through the hoist collapsing.  The fact that no attempt was made to assert this claim until after the institution of the proceedings offers some support for the proposition that the respondents never had much faith in the allegation of faulty workmanship.

30                  According to Mr Atkins, the rebuilt Fruehauf trailer was out of commission for eighty days until its repairs were completed by Lombardi.  Mr Atkins explained in his evidence that Eltin was not able to hire out a replacement trailer and as a result, a trailer load of ore per day for eighty days was lost at the rate of $1,000 per load or $80,000.  In addition to these losses there was also the costs incurred in repairing the trailer, but that cost was covered by insurance and it cannot be claimed as part of the set-off that Greenline allegedly had against P & J Transport .  Nevertheless, in addition to the claim for damages by way of loss of earnings, the respondents also claimed that the set-off would include:

·	The amount paid or payable to P & J Transport for rebuilding the trailer	$20,494.57
·	The amount paid or payable to GM & J Lombardi Pty Ltd for the hoist	$  5,650.00
·	The amount paid or payable to Lombardi Manufacturing Pty Ltd to shorten the length of the trailer	$  3,917.00 $30,061.57

31                  These amounts are, in my opinion, gross figures; if an award was made against P & J Transport there would have to be some discounting to allow for the fact that Greenline had enjoyed up to forty days use out of the rebuilt trailer and its hoist; allowance would also have to be made for any contribution from Greenline’s insurer to the costs of repairs.  No evidence was led to establish the amount that was paid by the insurer; that omission must be held against the respondents.  I know only of an amount of $1,000 that was payable by Greenline with respect to an invoice that was raised by Lombardi Manufacturers Pty Ltd.  That would be the only sum that I would have allowed.

32                  Mr Atkins was unable to identify, even approximately, the date upon which the rebuilt Fruehauf collapsed.  On the other hand he was quite sure that it was out of action for eighty days.  Predictably, its absence affected Greenline’s business adversely.  According to the evidence of Mr Atkins, by the time Lombardi had completed the repairs and the completed second road train was operational again, work had dropped off.  This, he said, was caused by a variety of factors:  the overseas market for manganese had collapsed; flooding had occurred at the mine, and wet weather affected cartage. No direct evidence was led to establish any of these factors.  However, despite these events, Mr Atkins maintained that during the eighty day period there would have been work daily for the two road trains.  I find it hard to believe that for eighty days there was continual work for two road trains but that such work began to drop off immediately after the expiration of that period.  The coincidence is too much.  In any event the proposition could have been easily verified by calling evidence from Eltin.

33                  Mr Atkins said that, at first, there was only work for one road train and later Greenline was put on a roster of two to three loads per week.  All this occurred towards the end of 1991 or in early 1992.  As I have said, it seems to me to be highly unlikely that the cartage work would have coincidentally disappeared at the time when the rebuilt Fruehauf trailer became operational again.  I am prepared to accept that these events occurred at some stage and I am satisfied that they had an adverse effect on Greenline’s profitability.  My difficulty lies in the fact that there is no evidence to which I can turn so as to pin point when these events occurred.  I am not prepared to accept the period of eighty days nor can I accept the bald figure of $1,000 per day.

34                  Various dates were given for the second accident.  Mr Birdseye put it at 7 November 1991.  However, the most reliable evidence is that of Mr McGee and the driver, Mr Gangell.  Mr McGee said the truck operated for about six weeks after it arrived in Port Hedland; he said that it arrived on 14 October 1991, a date which approximates Mr Birdseye’s date – 18 October.  This would put the accident in late November 1991.  Mr Gangell said that he drove the prime mover with the trailer that collapsed, on a “day on – day off” basis, from the time he started work, on about 20 occasions.  Exhibit A35 shows that Mr Gangell started working for Greenline in early November 1991.  This would put the accident about forty days after he started work, or about 10 December 1991.  It was Mr McGee’s evidence that Eltin introduced a roster system about a fortnight after he returned to Port Hedland from holidays on 4 January 1992.  That would mean that the drop off in work occurred on about 18 January 1992.  He said that work dropped off to about one-quarter of what it had been before.  Accordingly, even if the company had all six trailers in operation, any losses that occurred after that date would not have been caused as a result of the second accident.

35                  In the event that this matter should be the subject of an appeal, I turn to the question of damages that Greenline suffered as a consequence of the second accident.  If the accident occurred somewhere between 1 December 1991 and 12 December 1991, and the work dropped away on 18 January 1992, the claim would be for a period of between thirty-seven days and forty-eight days.  (Those calculations make no allowance for any rest days, including Christmas day.)  Mr Atkins’ claim that eighty days were lost must be rejected.  In his closing submissions, counsel for Mr Atkins did not pursue the claim of eighty days.  He accepted the date fixed by Mr Atkins – 18 January 1992 – as the date from which work under the Eltin contract commenced to drop off.  He then submitted that the evidence warranted a finding that the second accident occurred about late November; it was submitted that a period of fifty days would thereby be a fair and reasonable estimate of the period during which the rebuilt trailer was out of commission; however, he made no allowance for any expenses, claiming that the net loss was $1,000 per day.  The $1,000 per day per trailer suggested by Mr McGee and Mr Atkins must, in my opinion, be reduced by making some allowance for the costs of fuel.  Further, there would have been expenses such as tyres and springs and general wear and tear for which some allowance must be made because those expenses would not have been incurred while the trailer was not operating.  The evidence led by the respondents gives little basis to make such calculations.  The court is left to do the best it can with the evidence available.  The most reliable evidence is the breakdown of motor vehicle expenses and repairs as a percentage of sales in the report of Mr Holmes, a chartered accountant, who was called to give evidence on behalf of the applicants: Ex A27 schedule F.  Accepting that the average gross income per trailer per day was $1,000, Mr Holmes’ calculations gave a net return of $512 per trailer per day.  If the time frame of forty-eight days were to be accepted then the total loss would be 48 x $512 - or $24,576.  If the time frame were to be (say) 12 December 1991 to 18 January 1992, the loss is 37 x 512 – or $18,944.  Doing the best I can, I would have quantified the company’s loss as a result of the second accident at an approximate mid way point of $21,800 to which I would add the excess of $1,000 to which earlier reference has been made.

Claims of creditors

36                  When proceedings were first commenced in this Court on 30 July 1996, there were eight creditors of Greenline who were named as applicants in these proceedings.  The circumstances under which a ninth applicant, P & J Transport, was added will be discussed later in these reasons.  Subsequently however, the claims of six of those creditors were compromised and, by consent, judgments were entered in their favour on 14 November 1997 against Mr and Mrs Atkins jointly in the respective sums set out hereunder.  In each case, the judgment sum was expressed to be inclusive of interest and costs.  The particulars appearing under the heading “Date” have been extracted from the statement of claim; they alleged the month or the period of time in which Greenline incurred the debt or debts to the named creditor:

Name of Creditor	Date	Amount Claimed	Consent Judgment
Boral Tyres Pty Ltd	September 1991 - December 1991	$15,000.00	$5,000.00
Workcover Corporation	April 1991 - November 1992	$23,572.00	$8,700.00
BE & HJ Woollat	September 1991	$ 8,525.00	$5,500.00
Commonwealth Insurance Gases Pty Ltd	February 1992 - November 1992	$ 5,153.70	$5,500.00
Truckline Parts Centre	March 1992 - May 1992	$ 5,329.99	$4,500.00
South Hedland Auto Electrics	June 1991 - December 1991	$ 5,508.00	$5,500.00

37                  The circumstances under which the judgments were entered by consent in favour of those creditors were not the subject of specific reference to the Court at the time when the judgments were entered.  In particular, it was not suggested that the respondents attempted to preserve some denial of liability or to have the judgments recorded without prejudice to their rights with respect to the claims of the two remaining creditors.  Mrs Atkins acknowledged that she had solicitors acting for her when she consented to those judgments but she claimed that she did not thereby understand that she was admitting that she had a reasonable expectation at any time that Greenline would not be able to pay its debts as and when they became due.  Asked by her counsel why she had agreed to commit herself to paying money to six of Greenline’s creditors, she said that she was “honour bound” to do it.  Mrs Atkins also explained that she had not agreed to compromise the debt claimed by P & J Transport because Greenline had a set-off against P & J Transport for damages for faulty workmanship.  She then added that she had not settled with Lombardi because the wrong company had been named as the applicant.  Taking such a point may offer a sound legal defence but it is not consistent with the conduct of a person who regards herself as honour bound to pay her company’s debts.  Furthermore, as Mrs Atkins was bound to concede in  cross-examination, she had made no attempt to make any payment to any creditor of Greenline until long after these proceedings were instituted.  I find her answers unacceptable:  they fail, for example, to explain why $5,000 only of a debt of $15,000 was paid to Boral Tyres Pty Ltd.  It was not suggested by Mrs Atkins that $5,000 was the limit of the debt.  The same observation may be made about the judgment for $8,700 in favour of Workcover Corporation when that creditor had claimed $23,572.00.  I consider that it is necessary to emphasise these facts because, in my opinion, the respondents’ conduct in consenting to these judgments is some evidence in the remaining proceedings with respect to the Greenline’s ability (or inability) to pay its debts and Mr and Mrs Atkins’ expectations on that subject.

38                  When Mr Atkins was asked why he had consented to those judgments being entered against him, he said that he had agreed to settle the claims as a result of advice that he had received from his former solicitors.  He added that he now believed that their advice was wrong and that he should not have settled those claims.  That was the limit of his explanation however.  I do not accept Mr Atkins evidence on this subject for in one area there was a material inconsistency.  It relates to the amount owing by Greenline to B E & H J Woollatt.  Although B E & H J Woollatt had claimed that they were owed $8,525 by Greenline, Mr Atkins was insistent that they had quoted $4,000 for the particular job and, so he said, that was the limit of Greenline’s liability.  He was then asked to explain why it was that he had consented to judgment in the sum of $5,500.  His answer that he did so on legal advice did not impress me.  He had been caught out and was not able to give a satisfactory explanation for this contradictory evidence.  If for example, the additional $1,500 was an allowance for costs and interest, he could have said so; he was not an unintelligent man and he had had ample time to prepare for this case.  The fact that he and his wife had consented to pay some of Greenline’s creditors would have been recognised by him and his advisers as an area of importance that would be explored at trial.

39                  Not knowing how the various claims were settled, it is not possible to draw clear inferences from these settlements.  For example, in agreeing to pay Boral Tyres Pty Ltd $5,000 in satisfaction of a claim of $15,000 it could be that the $5,000 represented the debts incurred last in point of time.  The same observation can be made with respect to the debts owing to Workcover Corporation, Commonwealth Insurance Gases Pty Ltd and Truckline Parts Centre.  On the other hand, the debts that were incurred by Greenline with South Hedland Auto Electrics were first incurred as early as June 1991 and subject to an allowance for interest and costs, (if indeed any such allowance was made) Mr and Mrs Atkins agreed to accept liability for the whole of the amount owing save for $8.00.

40                  The two remaining creditors who were originally named as applicants in these proceedings are, first, Credit Corporation Pty Ltd, which sues by way of an alleged assignment from Greenline’s original creditor, P & J Transport.  The amount claimed is $55,083.39.  That amount (being the aggregate of numerous debts) was said to have been incurred from September 1991 through to 1992.  The remaining creditor is Lombardi.  Its claim is for $19,414.49 and that amount is alleged to have arisen during the months of August through to December 1991; it is also the aggregate of several debts.

The Law

41                  In order for Credit Corporation and Lombardi to succeed, they must prove each of the three elements that are listed in pars (a) to (c) of subs 592(1).  The first and third elements present no problems; s 592 only applies to a company when it has incurred a debt before the commencement of Pt 5.7B.  That part came into operation on 23 June 1993.  In both cases therefore, the applicants can claim that they have satisfied the provisions of par 592(1)(a) and I so find.  The third element may be briefly stated thus:  the effect of s 589 of the Law is that s 592 applies in a variety of circumstances, one such being that it applies to a company that is in the course of being wound up.  In their defence, Mr and Mrs Atkins admitted that Greenline was a company to which s 592 applies.

42                  It is the second element – that contained in par 592(1)(b) - that is the cause for concern.  Both applicants must satisfy the Court that, immediately before the time when each debt was incurred, there were reasonable grounds to expect at that time, either, that the company will not be able to pay all its debts as and when they become due or that if the company incurred a particular debt, it will not be able to pay all its debts as and when they become due.  Where a creditor of a company institutes civil proceedings against an officer of a company seeking from that officer payment of moneys owing by the company, the officer’s liability must be established to the extent that its proof be “clear and cogent such as to induce, on the balance of probabilities, an actual persuasion of the mind as to the existence of [the liability]”: Rejfek v McElroy (1965) 112 CLR 517 at 521.

The meaning of “Incurred”

43                  The time when a debt is “incurred” will vary from case to case, depending principally upon the express or implied terms of the agreement between the parties.  In Hussein v Good (1990) 8 ACLC 390 Southwell J held that in a case involving the sale of goods, nothing was owed until delivery of the goods.  Accordingly, the debt was only incurred upon delivery.  His Honour said at p 398:

“I have said that the parties were in agreement as to the liability for payment – that was to be made upon delivery of the goods.  In the circumstances of the present case, I am of opinion that the company did not “incur a debt” within the meaning of section 556(i) until the goods were delivered.”

In Rema Industries v Coad (1992) 107 ALR 374,Lockhart J was satisfied that the debts were incurred at the time of delivery of the goods pursuant to invoice.  In Leigh-Mardon Pty Ltd v Wawn (1995) 13 ACLC 1244 Hodgson J found that, in the case of sale of goods, there were two possibilities as to when a debt is incurred:

·        if  the goods ordered were readily saleable by the vendor elsewhere it could be said the debt was incurred by accepting delivery;

·        if the goods were specially manufactured for the company and could not be sold elsewhere such that a refusal to take delivery would be a breach of contract resulting in damages approximating to the full price of the goods, one would regard the debt as having been incurred by placing the order (p 1248).  Hodgson J was of the view that there was “no hard and fast rule” that a company incurs a debt for goods sold and delivered at the time when the goods are delivered (p 1248).

All of the goods purchased from P & J Transport and Lombardi were, in my opinion, resaleable.  They were goods used in the ordinary coarse of a haulage or trucking business.  Accordingly, the debts would have been incurred, on either of the two views expressed above, upon delivery.  In the present case there is no documentary material before the Court – nor, indeed, any oral evidence – specifically directed to this issue.  In respect of some of the debts, there is evidence (through the existence of job cards) indicating the likely date when an order was placed; but that does not necessarily mean that a debt was incurred on that occasion.  At the other end of the spectrum, it must be acknowledged that a debt can be incurred even though, as a result of arrangements that have been made between the debtor and the creditor, the debt may not be payable until a later date.  Thus, upon delivery of the ordered goods in an acceptable condition, the debtor has become liable for their payment and has thereby incurred the debt, even though the date of payment may have been deferred by (say) thirty days.  Mr Keith, counsel for Mr Atkins, submitted that a debt is incurred when a debtor undertakes an engagement or an obligation to pay.  He submitted that I should not follow the authorities (to which reference has been made) that have held that a debt is incurred only at the time of delivery of goods.  In support of his submission, Mr Keith referred to the decision of Cooper J in Re Beckwith; ex parte Power and Power (a firm) (1993) 43 FCR 256 where his Honour said at p 271:

“The essential consideration which led to the decision in each of these cases was that upon execution of the document the company had subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future time.  The debt has been incurred because the company by entering the agreement had created an unavoidable obligation.”

That observation was, however, the consequence of his Honour discussing the decision of the New South Wales Court of Appeal in Hawkins v Bank of China (1992) 26 NSWLR 562 and the decision of the Full Court of the Supreme Court of Western Australia in Russell Halpern Nominees Pty Ltd v Martin (1987) WAR 150.  In the former case it was held that a debt may be taken to have been incurred when a company entered into a contract of guarantee by which it subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future time.  In the later case, the Court rejected a proposition that debt was incurred on each and every rent day throughout the term of the relevant lease.  Read in that context, I am of the opinion that the remarks of Cooper J do not have any application to the case in hand.  In the absence of evidence to the contrary I am content to follow Hussein v Good and Rema Industries v Coad (see above); I find that in the present case, debts were incurred in favour of P & J Transport and Lombardi at the time of delivery of the goods pursuant to invoice; in the case of services performed, it would be consistent, in my opinion, to find that the debt was incurred upon delivery of the relevant invoice.

Reasonable Grounds

44                  The term “reasonable grounds” appearing in subpars (i) and (ii) of par 592(1)(b) does not mean grounds that are personal to a respondent; the subpars are speaking of grounds that should be adjudged “reasonable” according to the standards of a director of ordinary competence - one who is expected to be capable of reaching a reasonably informed opinion about the financial capacity of the company: 3M Australia v Kemish (1986) 4 ACLC 185 at 191; Commonwealth Bank v Friedrich (1991) 5 ACSR 115 at 123; Rema Industries and Services P/L v Coad (see above) at 381; Standard Chartered Bank of Australia Ltd v Antico ((1995) 131 ALR 1; Quick v Stoland Pty Ltd (1998) 157 ALR 615.  In other words, the word “reasonable” imports an objective test of reasonableness.  The Court must be satisfied that the applicants have proved, on the balance of probabilities, that there was, as a matter of objective fact, as at each relevant date, reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due: TCN Channel Nine v Scotney (1995) 18 ACSR 393 at 397.

Due date for payment

45                  The applicants submit that, for the purposes of this section, debts become due when they are due legally.  In Pioneer Concrete Pty Ltd v Ellston (1985) 10 ACLR 289 Carruthers J said at page 301:

“The question whether a debt has or has not become due is to be determined by reference to the legal agreement between the parties.  Hesitation on the part of a creditor (probably for commercial reasons) to take immediate steps to enforce its rights against a customer can have no bearing on this question.”

I respectfully agree with this view; it has been followed by the South Australian Full Court in Carrier Air Conditioning v Kurda & Ors (1993) 11 ACSR 247 where Debelle J, who delivered the principal judgment, referred to the above passage from Pioneer Concrete and said at p 254:

“In my respectful view, the approach of Carruthers J is to be preferred.”

46                  The view has also been followed in various other cases such as Re Toowong Trading Pty Ltd (In liq) (1987-88) 13 ACLR 212; Norfolk Plumbing Supplies Pty Ltd v Commonwealth Bank of Australia (1992) 6 ACSR 601; Sheahan v Hertz Australia Pty Ltd (1994) 14 ACSR 209 (and on appeal in Hertz Australia Pty Ltd v John Sheahan (1995) 16 ACSR 765).  The Full Court of the Western Australian Supreme Court in Lee Kong & Ors v Pilkington (Australia) Limited (1997) 25 ACSR 103 also followed this approach, Owen J (with whom Franklin and Murray JJ agreed) endorsing the view of Carruthers J in Pioneer Concrete that whether or not a debt is due is to be determined by reference to the legally binding agreement between the parties (p 112).

47                  On the other hand, the date upon which a particular debt must be paid is not to be regarded as an inflexible absolute; there is a measure of flexibility that is to be assessed having regard to the particular facts of the case: Dunn v Shapowloff (1978) 2 NSWLR 235 at 243 per Mahoney JA.  His Honour said:

“What will constitute ability to pay must be determined, in a realistic way, by reference to the facts of the particular case, after taking into consideration, inter alia, the company’s assets and liabilities and the nature of them, and the nature and circumstances of the company’s activities.”

The inquiry whether there are reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due is a factual one to be decided in the light of all the circumstances of the case: Re New World Alliance Pty Ltd (Receiver & Manager appointed) (1994) 122 ALR 531 at 539-540; Quick v Stoland (see above).  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 on hand and money that it could procure by the sale of assets or by way of loan and its ability to raise capital:  3M Australia Pty Ltd v Kemish at 195;  Standard Chartered Bank of Australia Ltd v Antico; Dunn v Shapowloff  at 244 per Mahoney JA; Quick v Stoland.

48                  In Commonwealth Bank v Friedrich (see above) at 124, Tadgell J posed the test that an applicant must meet in presenting a case under subs 556(1) of the Companies (Vic) Code, the precursor to subs 592(1) of the Law.  His Honour said that:

“the plaintiff must prove facts which, immediately before the time when the company incurred the relevant debt, gave a person seeking properly to perform the duties of a non-executive director of that company reasonable grounds to say: “I expect that the company will not be able to pay all its debts as and when they become due”.”

That passage was quoted with approval by Finkelstein J (with whom Branson and Emmett JJ agreed) in  Quick v Stoland (see above) at 627.

49                  The date upon which a debt becomes payable is to be determined by ascertaining the agreement that has been reached by the debtor and the creditor.  If for example, the trading arrangements are that payment is to be made within thirty days of the receipt of a monthly statement, the exercise of ascertaining whether a company will not be able to pay all its debts as and when they become due must centre upon the due date for payment.  However, that exercise is to be carried out – not on the date when payment is due – but on the date when the debt was incurred; of necessity, this date will always predate the date of payment.  An applicant in proceedings such as these is therefore required to establish the due date or dates for payment of a company’s debts as well as the date or dates on which those debts were incurred for the purpose of subs 592(1) of the Law.  The due date for the payment of the debt is  therefore “all important”:  TCN Channel Nine v Scotney (see above).

50                  The risk that directors take is two-fold.  They might be held liable for a debt that has been incurred in the name of their company if, immediately before the debt was incurred, there were reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; that is the effect of subpar 592(1)(b)(i).  That can be called the general risk to separate it from the specific risk that is identified in subpar 592(1)(b)(ii).  At the time immediately before a debt is incurred in the name of a company, there may be funds available to the company to pay that particular debt.  That, however, is not the end of the matter because the subject of reasonable grounds relate to an expectation with respect to the company’s ability to pay all its debts as and when they become due if that particular debt is incurred.  For example, a company may incur a debt of a certain amount and at that time it may have that amount available in cash in the till.  The test is not to determine whether there were reasonable grounds to expect that the company will not be able to pay that particular debt; the test is whether there were reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due after having regard to all of the company’s debts and their respective dates for payment.

51                  Mr and Mrs Atkins submit that no such reasonable grounds existed with respect to any debt that is the subject of this litigation.

The defences afforded by subs 592(2)

52                  Subsection 592(2) provides as follows:

“In any proceedings against a person under subsection (1), it is a defence if it is proved:

(a)           that the debt was incurred without the person’s express or implied authority or consent; or

(b)           that at the time when the debt was incurred, the person did not have reasonable cause to expect:

(i)                 that the company would not be able to pay all its debts as and when they became due; or

(ii)               that, if the company incurred that debt, it would not be able to pay all its debts as and when they became due.”

53                  The onus of establishing that a particular debt was incurred without a respondent’s express or implied authority or consent lies on that respondent.  It was not suggested on behalf of Mr Atkins that this defence was open to him but Mrs Atkins relies on it.  Mrs Atkins has said, and I accept, that she played no active part in the management of the business of the company.  But that does not thereby mean that she had no knowledge of the affairs of the company.  There is no evidence that suggests that any debt owing to P & J Transport or to Lombardi was incurred with her express authority or consent.  But could it be said those debts (or some of them) were incurred with her implied authority or consent?  I will consider the answer to that question when dealing specifically with Mrs Atkins’ evidence.

54                  Both Mr and Mrs Atkins rely upon the defence that is afforded by par 592(2)(b).  In respect of each debt, they both claim that, at the time when it was incurred, he and she did not have reasonable cause to expect either of the factors that are mentioned in subpars (i) and (ii).  That is to say, they both submitted that at all relevant times they did not have reasonable cause to expect that the company would not be able to pay all its debts as and when they became due, or that if the company incurred a particular debt, it would not be able to pay all its debts as and when they became due.

The onus

55                  The onus of establishing these negative propositions lies on Mr and Mrs Atkins in respect of their separate defences:  3M Australia Pty Ltd v Kemish at 190 per Foster J.  As his Honour there pointed out, the inquiry is not directed simply to the question of a company’s capacity to pay a particular debt, the incurring of which is basic to the application of the section; it is directed to “the company’s capacity to discharge all of its debts on their respective dates for payment.” (p 191)  The defence afforded by subs 592(2) need be established only on a mere balance of probabilities.

Reasonable Cause

56                  This is the expression that is used with respect to the defence that is afforded by par 592(2)(b).  The test imports an objective standard “but it must be applied to the facts and circumstances known to the defendant and facts and circumstances which, by reason of the defendant’s duties as a director or officer of the company, ought to have been known to him”; Rema Industries v Coad at 382.  “The defendant himself cannot be the arbiter of the reasonableness or otherwise of an expectation that he would be able to meet the debt.  However, it is a question of his expectation, and whether that expectation is objectively reasonable”; Dunn v Shapowloff (1982) 148 CLR 72 at 84-85 per Wilson J.

Debt Due to P & J Transport

57                  The amount claimed by Credit Corporation, pursuant to the alleged assignment from P & J Transport, as set out in Schedule A to the statement of claim, is $55,083.39.  That is also the amount appearing in document no 3.535 of Ex A12, the October 1992 monthly statement that was issued by P & J Transport to Greenline.  Credit Corporation is said to have purchased the debts owing to P & J Transport by Deed of assignment dated 9 August 1994 (Ex A11).  It is an agreed fact that notice of that assignment was given to the company at about that date.

58                  For the purpose of laying down a foundation for its claim against Mr and Mrs Atkins, Credit Corporation commenced with P & J Transport’s statement for the month of May 1991.  It contained a reference to four invoices that had been raised against Greenline during the course of that month; they totalled $29,011.89.  Most, if not all, of those moneys relate to the acquisition of the two dolleys and the repairs for the first road train.  The statements for June, July and August show that no purchases were made by Greenline in those months but they also show that up to 30 August 1991, payments totalling $26,000 had been made by and credited to Greenline.  These payments had the effect of reducing the outstanding balance, as at the end of August 1991, to $3,011.89.  On 18 September 1991 a further $3,000 was paid in reduction of the P & J Transport debt; it therefore then stood at only $11.89.  It is also worth noting that it was on 25 September 1991 that an amount of $3,000 was paid in reduction of the P & J Grit Blasting account.  That account is explained below.

59                  Trading between Greenline and P & J Transport resumed in the months of August and September 1991.  The reason for the resumed trading was two-fold – the repairs to the damaged trailer and the decision to establish a second road train.  The most substantial item of expenditure incurred by Greenline in the September monthly statement, was an amount of $19,950 for the Freightmaster trailer.  The amount owing by Greenline on P & J Transport’s September account was $21,982.09.

60                  At the end of October 1991, Greenline’s account with P & J Transport had grown to $53,667.42 despite three payments each of $5,000 having been made.  Mr Cocks acknowledged that he had been told by Mr Birdseye that P & J Transport would probably have to wait about two months for payment of these accounts.  That time factor must therefore be taken into account when assessing whether, at the time when these debts were incurred, there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due.

61                  Included in the debits on the October statement was an amount of $10 which Mr Cocks identified as a bank charge for representing a dishonoured cheque on a second occasion.  No further invoices were raised in November but three bank fees each of $10 were charged by P & J Transport to Greenline.  These bank fees, totalling $40.00, cannot be claimed against Mr and Mrs Atkins.  They were not debts that were incurred by Greenline and there is no evidence of any contract or arrangement between P & J Transport and Greenline whereby Greenline acknowledged any form of liability for incidental charges of this nature.  Two payments each of $2,500 were made on 20 and 28 November by Greenline in reduction of the overall indebtedness and the net result, as at the end of November 1991, was a debit entry of $48,697.42.  That figure appeared in the statements for the months of December 1991 and January 1992.  The next statement that was tendered was that in respect of the month of June 1992 and it was for $1,000 less - $47,697.42.  That figure was repeated in the monthly accounts for the months of July 1992 and September 1992.  Mr Cocks could not explain how the amount owing by Greenline decreased by $1,000.  For the month of October 1992 the monthly statement read as follows:

                            “Account Rendered                 $47,697.42

                               Sand Blasting Account          $  1,980.00

                               Interest Charged 9%            $  4,470.97

                               Solicitor’s Fees                     $     435.00

                               Serving  (sic) Agreement      $     500.00

                                                                             $55,083.39”

62                  The invoices and job cards disclose the following information with respect to P & J Transport’s account for the month of September 1991:

·        Invoice No 417595 dated 25 September 1991 in the sum of $116.40 was for some motor vehicle spare parts.  There is an endorsement on the invoice “Taken by Bill”; that is a reference to Mr Bill Atkins, the brother of the respondent, Mr Kevin Atkins.  There is no job card for this invoice.

·        Invoice No 417596 dated 25 September 1991 in the sum of $19,950 was the cost of the Freightmaster trailer.  The matching job card is No 1493 and the first entry on that card was 24 August indicating, most likely, that the order for the trailer was placed sometime on or before that date.

·        Invoice No 417613 dated 30 September 1991 in the sum of $968.64 was for some motor vehicle spare parts.  There is no job card for this invoice.

·        Invoice No 417622 dated 30 September 1991 in the sum of $935.16 was for repairs to a prime mover and also for some spare parts.  The matching job card for the repairs was No 1513 (Ex A9).  The job card was opened on 23 September and the first entry for labour was 25 September.

63                  I move now to the P & J Transport’s October account:

·        Invoice No 417631 dated 15 October 1991 for $1,050 is for one “new Turntable”. Mr Atkins denied that his company had purchased any such turntable; I will deal with that subject shortly

·        Invoice No 417643 dated 21 October 1991 for $200 is for the hire of a crane.  This debt was also disputed by Mr Atkins

·        Invoice No 417667 dated 31 October 1991 for $21,500 is for the supply of two dolleys.  No job card was produced for this invoice but the probabilities are that the dolleys were ordered at about the same time as the Freightmaster, that is, sometime about 24 August 1991.

·        Invoice No 417668 dated 31 October 1991 for $20,494.57 is for the costs of repairs to, and parts for, the rebuilt Fruehauf trailer.  The matching job card shows that work on the trailer commenced on 30 August and concluded on 4 October.

·        Invoice No 417672 dated 31 October 1991 for $1,920.04 is for building up three Fruehauf Axles and some spare parts.  The relevant job card was No 1507 but it was not produced.

·        Invoice No 417673 dated 31 October 1991 for $1,510.72 is for relining two axles and some spare parts.  The relevant job card was No 1416; it was not produced.

Sandblasting Account - P & J Grit Blasting

64                  Independently of its main business operations, P & J Transport acquired a sand blasting business which it called “P & J Grit Blasting”.  Mr Cocks said in evidence that this business was owned by the company, P & J Transport Engineers Pty Ltd, but that the business name had not been registered.  Mr Cocks explained that Mr Atkins had asked him to do the work necessary to clean Greenline’s equipment preparatory to it being taken to Western Australia.  They were the circumstances under which sand blasting was carried out on various pieces of equipment in May 1991 to a total value of $4,200.  Three invoices were raised by P& J Grit Blasting against Greenline.  One dated 1 May 1991 was for $70; the remaining two, for a total of $4,130 were dated 31 May 1991  As I have said, on 25 September 1991 an amount of $3,000 was paid off this account, leaving a balance owing of $1,200.  On 30 September 1991, a further invoice was raised against Greenline in the sum of $280 for sand blasting two Dolleys and on 31 October 1991, there was another invoice for $500.  Neither of those invoices have been paid and both amounts together with the $1,200. – a total of $1,980.00 - are claimed against Mr and Mrs Atkins.

65                  If Mr or Mrs Atkins are to be held liable for any part or parts of the debts that Greenline incurred as a result of the sand blasting, the applicant must establish its case (i.e. “the reasonable grounds to expect”) separately in respect of the three sums of $1,200, $280 and $500 having regard to the different dates on which those debts were incurred.  Broadly speaking, those debts were incurred in May, September and October 1991 respectively.  In May 1991 the Western Australian venture was about to begin and Mr Cocks was prepared to wait for payment.  I am by no means satisfied that Mr and Mrs Atkins should be held liable to pay that particular debt of $1,200.  It was the start of a new venture; in terms of the defence afforded by subs 592(2) the directors were entitled to claim that they did not have “reasonable cause” to expect that the company would not be able to pay its debts.

Interest

66                  According to the evidence of Mr Cocks his company’s claim for interest at 9 per cent derives from an endorsement that appears on some - but not all - of his company’s monthly statements.  For example in the statement for the month of May 1991 there is an endorsement:  “Net 60 days or 9% interest charged.”  The same endorsement appears in the statements for the months of June and July 1991.  On the other hand, it does not appear in the statements for the months of August and September 1991.  Some of the invoices in respect of some of the charges contain an endorsement “net 7 days”.  One such example of that endorsement is invoice no J1389 dated 31 May 1991.

67                  An endorsement on an invoice or statement that interest will be charged in the event of late payment has no effect in law unless it amounts to an acknowledgment or a confirmation of an arrangement that is already in existence.  The relevant contract (if one exists) is made at the time when a debtor’s order for the supply of goods has been accepted by the creditor.  In the circumstances of this case, there is no evidence that at the time when Greenline ordered the goods from P & J Transport there was an express or implied term in the contract that interest would be payable in the event of late payment.  In my opinion, the applicant has failed to prove that Greenline ever agreed – either specifically or by its conduct – to pay interest.  For those reasons, Mr and Mrs Atkins cannot be held liable for the claim for interest.

Solicitor’s Fees and “Serving” Agreement

68                  Mr Cocks was not able to explain either of these entries.  Probably, the first of them related to legal costs involved in the attempted recovery of the outstanding debts but they could not be said to be debts incurred by Greenline.  These two claims cannot succeed against Mr and Mrs Atkins.

Disputed Items

69                  As I have earlier indicated, Mr Atkins disputed certain items in P & J Transport’s claim.

70                  The first of these items relates to a charge of $200 for the hire of a crane.  In answer to a question from Mr Keith, counsel for Mr Atkins, Mr Cocks said that a crane had been used on two occasions at his premises and that Mr Atkins paid on one occasion and that P & J Transport paid on the other occasion.  In my opinion Mr Atkins, relying on the fact that Greenline had paid crane hire on one occasion, either overlooked or was not aware that the amount claimed by P & J Transport was in respect of a different hiring.  I will allow this item in favour of Credit Corporation.

71                  The second dispute concerned the supply of a turntable.  Mr Keith put to Mr Cocks that Mr Atkins denied that his company had ordered or received a turntable.  Mr Cocks said in answer:

“What I vaguely remember was that that turntable was put on one of the Macks, one of the new trucks, but we never fitted it.  They fitted it.”

Mr Cocks had no independent memory of the supply of the turntable.  He relied only on his company’s invoice, acknowledging that there were other members of his staff who might have taken the order and attended to the supply of the unit.  It was not as if this was a subject that would have taken Mr Cocks by surprise; it had appeared in the defence of the respondents from the outset.  Mr Cocks would have had ample time to have made inquiries and to have come better prepared to answer the assertion that no such turntable had been supplied.  On balance I lean to Mr Atkins:  I exclude the costs of the turntable, $1,050, from the calculations.

Summary

72                  At this stage, based on the conclusions that I have so far reached, the case for the applicant against Mr and Mrs Atkins may, as a matter of convenience, be summarised in this way:

·               18 September 1991     Balance of general account                           $       11.89

·               24 & 30

          September 1991          Invoices on general account                         $21,970.00

·               30 September 1991     Sandblasting                                                 $    280.00

·               15, 21 & 31

          October 1991              Invoices on general account                         $46,675.33

·               31 October 1991         Sandblasting                                                $     500.00

                                                                                                                $69,437.42

                                             Less payments and credits                           $21,000.00

                                                                                                                $48,437.42

 

The figure of $48,437.42 is then reconciled with the amount claimed in the statement of claim in this fashion;

                                             Adjusted Claim                                            $48,437.42

                                             Add back:

                                             May 91 sandblasting

                                             Account                            $1,200.00

 

                                             Bank fees                          $     40.00

                                             Interest                             $4,470.97

                                             Solicitor’s fees                  $   435.00

                                             Serving (sic) Agreement    $   500.00           $  6,645.97

                                                                                                                $55,083.39

 

73                  The adjusted claim of $48,437.42 is then further reduced by the claim of $1,050 for the turntable to give a final figure of $47,387.42.

74                  P & J Transport elected to submit statements to Greenline in the name of P & J Grit Blasting for $1,980 in the month of October 1991 and in subsequent months.  In other words, the payments and credits of $21,000 that P & J Transport received in October and subsequent months are to be applied in discharge of the balance of $11.89 that remained from the May account and, thereafter, in substantial reduction of the September invoices.  When a debtor makes a payment on a running account, he is entitled to nominate the particular debt that he is paying.  Absent any such nomination and absent any agreement between the parties, the usual practice is to apply such payments in discharge of the earlier debts.  I have proceeded on that premise when considering the payments that Greenline made to P & J Transport and to Lombardi.  I rely for that proposition on the following passage from the judgment of Sir William Grant MR in Deveynes v Noble: Clayton’s case (1816) 1 Mer 572 at 605; 35 ER 781 at 792.  The learned Master of the Rolls was discussing the rules by which the application of indefinite payments is to be governed.  After saying that the leading rule was that the option to appropriate was given in the first place to the debtor and in the second to the creditor he went on:

“If neither applied the payment the law made the appropriation according to certain rules of presumption, depending on the nature of the debts, or the priority in which they were incurred.  And, as it was the actual intention of the debtor that would, in the first instance, have governed; so it was his presumable intention that the absence, therefore, of any express declaration by either, the inquiry was, what consequently, applied to the most burthensome debt, - to one that carried interest, rather than to that which carried none, - and, if the debts were equal, then to that which had been first contracted.”

 

75                  In Butterworths Australian Corporation Law – Principles and Practice Vol 2, Clayton’s case is discussed at pp 58122-58123.  The following passage then appears:

“The rule has the potential, therefore, to secure the notional appropriation of repayments to the satisfaction of particular debts whose incurring is most likely to trigger liability under s 592(1).”

 

76                  With respect I cannot agree that this passage is a correct statement of the law.  The rule in Clayton’s case is one which operates between a debtor and a creditor; it has nothing to do with a statutory regime such as that contained in s 592 of the Law.  In fact, there is not a true debtor/creditor relationship between a claimant under s 592 and the director of the company against whom liability is sought pursuant to the provisions of that section.

The assignment to Credit Corporation

77                  Mr and Mrs Atkins challenged the legal efficacy of the assignment of the debt by P & J Transport.  Whilst they admitted that a notice of assignment to Credit Corporation of the debt owing by Greenline to P & J Transport had been served on Greenline, they challenged the effect in law of that assignment; they submitted that it did not amount to an assignment by P & J Transport of its statutory rights under s 592 of the Corporation Law.  They also claimed that no notice of any assignment of any cause of action under s 592 (as distinct from the notice of assignment of the debt) was given to the company.  It was because of this defence that counsel for the applicants applied for and was granted leave to add P & J Transport as a ninth applicant during the course of the trial.  The thrust of s 592 of the Law is to make a person (who would not otherwise be responsible for the payment of a debt) jointly and severally liable for the payment of the debt with the debtor/company.  The section states that where a company has incurred a debt in the circumstances that are postulated therein, the person or persons who are identified in the section will, subject to the defences afford, assume a liability that they would not otherwise owe.  The section does not therefore create a new cause of action for the creditor continues to have the same cause of action against the debtor/company; the section merely adds one or more additional respondents to that cause of action.  In that context there is therefore nothing to assign from the original creditor over and above the simple assignment of the contract debt.  It is the assignment of that debt - without more – that allowed Credit Corporation to prosecute this action.  The conclusion that I have reached means that there is no chose of action (in the form of a statutory right to sue) that needs to be assigned; it also means that it is not necessary to consider the respondents’ further argument that any such assignment of the chose in action (on the assumption that it would be no more than a bare right to sue) would be void as contrary to public policy on the grounds that the assignment would contravene the rules concerning maintenance and champetry.  In my opinion, there is no substance in the respondents’ argument.  An examination of subs 592(1) shows that there is no reference to the identity of a creditor.  The subsection refers to a company incurring a debt at a particular time and then states that if there were reasonable grounds for certain expectations, certain officers of the company will be liable for the payment of the debt.  That means, in my opinion, that payment will be made by those officers to the party, who as a matter of law, is entitled to receive payment.  That party can be, in an appropriate case, the assignee of a debt from an original creditor.  As there is nothing in subs 592(1) that identifies an original party who is entitled to institute proceedings, there is nothing to assign in the nature of a statutory cause of action.  Indeed it is more accurate to describe subs 592 as creating a statutory liability than to think of it as creating a statutory cause of action.

Debt Due To Lombardi

78                  Greenline first purchased materials from Lombardi in August 1991.  On 5 September 1991, Mr Birdseye submitted to Lombardi, on behalf of Greenline, an application for credit.  A clause in the application stated that:

“Full payment must be received by the creditor grantor not later than 30 days from receipt of each month’s statement.”

79                  There being no other evidence on the subject, I find that this endorsement coupled with the conduct of Greenline in ordering and accepting goods, represents the due date for payment in respect of each of the several debts that were incurred by Greenline.

80                  Trading continued and, at the end of September 1991, Lombardi issued its routine monthly statement showing an amount of $4,514.47 owing as at the end of that month.  By the end of October 1991, further trading of $1,439.19 had increased Greenline’s indebtedness to $5,948.66; there had been no payment on account of any of the invoices that had been raised by Lombardi at that stage.

81                  No statement for the month of November was tendered in evidence but three invoices that were issued in that month were tendered; they totalled $10,672 for various goods sold.  One dated 8 November 1991 was for a fifty ton Mailhot Hoist costing $4,650; another was for a fifty ton AHS Hoist costing $5,650 and the balance was made up of sundry parts.  The addition of this figure of $10,672 to the previous outstanding account of $5,948.66 resulted in a total of $16,620.66 then owing by Greenline to Lombardi as at the end of November 1991.  But the opening outstanding balance for the month of December 1991 showed a debit of only $15,972.66, a reduction of $648 (“the unexplained credit”).  Perhaps there was a payment or a credit of that amount during November.  The discrepancy was not explained, but for the reasons that I gave when discussing the debt owing to P & J Transport that credit should be applied to the September account reducing it from $4,514.47 to $3,866.47.  According to Lombardi’s December statement, Greenline made two payments by cheque, each of $2,500 on 5 and 10 December 1991.  However one of those cheques was dishonoured.  The only remaining entry in the December statement was a debit of $41.83 in respect of some freight charges.  After adding the freight charges and giving credit for a payment of $2,500 the amount outstanding on the December account was $13,514.49.  On 20 December 1991 Lombardi raised a credit note for the freight charges of $41.83 but failed to give credit for the amount in its monthly statement; an adjustment will have to be made for that amount in due course.  Greenline did not use Lombardi’s credit facilities in January, February or March 1992 but it did reduce its debt by $1,100 in January and by $2,500 in February.  At the end of February 1992 the outstanding balance was $9,914.49.

82                  In March 1992 an invoice number No 26632 in favour of Lombardi Manufacturing Pty Ltd was raised against Greenline in the sum of $3,917.  The invoice, which was handwritten (not computer generated), dealt with a specific job for the shortening of a trailer length.  The invoice contained an entry “as quoted” and a further entry:  “Paid with thanks”.

83                  Putting to one side the unexplained credit of $648, if  it was GM & J Lombardi Pty Ltd. (and not Lombardi Manufacturing Pty Ltd) that received this payment of $3,917, it would mean that in the period December 1991 to March 1992 Greenline had made the following payments to GM & J Lombardi Pty Ltd:

5 December 1991	$ 2,500
31 January 1992	1,100
26 February 1992	2,500
12 March 1992	3,917 $10,017

84                  The first three payments were made in reduction of Greenline’s general indebtedness but the last payment of $3,917 was clearly made in payment of the debt represented by invoice number No. 26632.  The proximity in time and the exact amount of the payment are sufficient indicators to establish that the debtor was identifying its payment as a discharge of the debt that had been incurred in that amount and as shown in that particular invoice.

85                  There was no further trading between Lombardi and Greenline after March 1992.  Statements for the subsequent months to November 1992 (other than August which was missing) were tendered showing that four payments totalling $2,500 were made in reduction of the general account.  The outstanding balance was therefore reduced from the March balance of $9,914.49 to $7,414.49.

86                  On 30 June 1993 the liquidator and Greenline instituted proceedings in the Supreme Court of South Australia against GM & J Lombardi Pty Ltd claiming the recovery of preferential payments.  As to the first four payments totalling $10,017.00, it was pleaded that Greenline was “at the date of the making of the payments to the defendant and thereafter unable to pay its debts as they became due from its own moneys”.  As to the second group of four payments totalling $2,500, it was pleaded that they were paid by Greenline after the commencement of the winding up and were void.  In all, Lombardi was facing claims for the repayment of preference payments totalling $12,517.00.

87                  In December 1993, the liquidator and Lombardi settled their disputes by the Lombardi group paying to the liquidator the sum of $11,000.  In these present proceedings against Mr and Mrs Atkins, Lombardi seeks to include that figure of $11,000 in the amount that it claims against them.  In the statement of claim, the amount claimed on behalf of Lombardi is $19,414.49.  However its monthly statement for March 1992, (by which time credit had been given for all payments made by Greenline) was $7,414.49.  Adding back the amount of $11,000 would therefore mean that the correct amount of Lombardi’s claim is $1,000 less or $18,414.49.  The result of the settlement with the liquidator is that the only money to be credited to Greenline (as a “payment” made by it in reduction of its indebtedness) is $1,517.00 (“the settlement credit”), being the difference between the size of the preference payments of $12,517 and the amount disgorged by the Lombardi group in settlement of the claims against it - $11,000.  Consistent with my earlier reasons, I would apply the settlement credit in partial satisfaction of the money owing on Lombardi’s September statement.

88                  Subject to a discrete issue that has been argued with respect to the invoice for $3,917 from Lombardi Manufacturing Pty Ltd, the amount of $18,414.49 that is claimed against Mr and Mrs Atkins can be presented in the following manner:

          Amount owing on September 1991 Account      $ 4,514.47

          Less:

                   the unexplained credit        $   645

                   the settlement credit           $1,517                 $2,165   $  2,349.47

 

          Amount owing on October 1991 account                               $  1,434.19

          Amount owing on November 1991 Invoices$10,672.00

          Amount owing on December 1991 account$       41.83

          Amount owing on March 1992 account (Inv 26632)              $  3,917.00      $18,414.49

                   Less:

                                      Credit for freight charge                                                      $     41.83

                                      Adjusted claim                                                                  $18,372.66

 

89                  I turn now to consider the debt of $3,917 that was raised on an invoice in the name of Lombardi Manufacturing Pty Ltd.  This was based on Lombardi’s quotation to shorten the length of the Fruehauf trailer that had featured in the second accident.  Mr Peter Frank Lombardi said in evidence that in 1992 he was a director and the administrative manager of GM & J Lombardi Pty Ltd.  At that time, there was a second Lombardi company known as Lombardi Manufacturing Pty Ltd.  The claim in these proceedings identifies GM & J Lombardi Pty Ltd as the claimant creditor; Lombardi Manufacturing Pty Ltd is not included as such a creditor.  All documents that were tendered during the course of the trial by way of statements and invoices, with two exceptions, emanated from GM & J Lombardi Pty Ltd.  Mr Lombardi also acknowledged that all invoices and statements were in respect of parts supplied by GM & J Lombardi Pty Ltd to Greenline.  He described his company’s business as the supplier of spare parts for heavy machinery and vehicles.  The second Lombardi company, Lombardi Manufacturing Pty Ltd was established, according to the evidence of Mr Lombardi, as a means of delaying the payment of sales tax.  Primarily, as its name indicated, it operated as a manufacturer and onsold its manufactured products to GM & J Lombardi Pty Ltd as a retailer; sales tax was thereafter paid upon the retail sale as a result of GM & J Lombardi Pty Ltd being able to quote a sales tax number.

90                  One of the papers in Ex A3 is a document on the letterhead of GM & J Lombardi Pty Ltd addressed to Mr  McGee of Greenline.  Although it carries the endorsement “message” it would seem that it is in the nature of a quotation.  It refers to:

“Modifications to semi trailer to provide a more structurally sound unit

            (1)        shorten length by 600mm back to 28’

            (2)        fix extra top rail to both sides

            (3)        fix body rails under

                        Total  $2,917”

Somebody has then endorsed in different handwriting “agreed to”.

91                  Invoice number 26632 dated 23 March 1992 is addressed to “Greenline Operations” and the description of the work in the invoice is as follows:  “Shorten trailer length & extra top rail and body rails”.  The invoice then contains the endorsement:  “As quoted $2,917”.

Further information contained in the invoice includes the endorsement “paid with thanks” and an abbreviated entry:

“Ins

excess $1,000”

 

It was common ground that this indicated that the creditor was expecting an insurance company to pay $2,917 and Greenline to pay $1,000.

92                  The stationery used by GM & J Lombardi Pty Ltd, photocopies of which were tendered in evidence during the course of the trial, indicates that all statements and invoices carry the name “Lombardi” in heavy type at the top of the page.  To the right of that word appear the abbreviations “Pty. Ltd.”.  To the left there is a logo which represents “GM & J”.

93                  Invoice number 26632 appears to be the same form of invoice as was used by GM & J Lombardi Pty Ltd subject to two qualifications.  The document that was used as an exhibit in the trial is a photostat copy only and the top left hand corner has been so heavily blurred that one is not able to say whether the logo representing “GM & J” does or does not appear as part of the invoice.  The position of the word “Lombardi” and the position of the abbreviations “Pty Ltd” are in the identical positions as is also the description of the company’s activities that appears immediately after the name, namely:

“Transport and Construction Equipment Suppliers”.

 

However, the word “Manufacturing” has been typed onto invoice number 26632, immediately to the right of the word “Lombardi” and immediately above the abbreviations “Pty Ltd”.  Whether the logo “GM & J” does or does not appear, it is abundantly clear that the word “Manufacturing” has been the subject of a deliberate insertion.

94                  Mr Lombardi acknowledged that the activities of Lombardi Manufacturing Pty Ltd (which went into liquidation in about 1994) were, at the relevant time, those of a repairer as well as a manufacturer, but he was adamant that the correct identity of the creditor was GM & J Lombardi Pty Ltd.  However, apart from his oral assertion to that effect, he was not able to produce any documentation from either company that would support his proposition other than those few to which reference is made in these reasons.

95                  Additional evidence relative to the debt of $3,917 appears in document no. 3.347 in Vol 2 of Ex A14 where Pam Yates, Lombardi’s bookkeeper, prepared a summary of the net balance owing by Greenline to GM & J Lombardi.  The amount that she arrived at, as at 30 November 1992, was $7,414.49.  There then appeared the following endorsement:  “$3,917 paid to Lombardi Manufacturing P/L.”

96                  Exhibit CR3 is a letter from Messrs Johnston Winter and Slattery to Greenline’s liquidator dated 12 October 1993.  Messrs Johnston Winter and Slattery were the solicitors for GM & J Lombardi Pty Ltd in the liquidator’s Supreme Court proceedings for the recovery of preferential payments.  That letter enclosed two cheques each for $5,500 each drawn on Lombardi Manufacturing Pty Ltd.  Exhibit CR2 was a letter from Leslie M Smith, the accountant for Lombardi, to Mr Giulio Lombardi dated 30 September 1993.  In it he confirmed that:

“The $11,000 payable to the liquidator shall be paid in equal proportions:

              GM & J Lombardi Pty Ltd                           $ 5,500

              Lombardi Manufacturing Pty Ltd               $ 5,500

                                                                                 $11,500”

That letter also stated that “any recovered amount from the debt of approximately $20,000 will be shared equally” between those two companies. It was put to Mr Lombardi during the course of cross-examination that the contents of this letter indicated an entitlement to moneys in favour of Lombardi Manufacturing Pty Ltd, but I do not consider that that is the only interpretation available from a perusal of that letter.  Another interpretation is that it was advice from an accountant to a group of companies on how best to organise the companies’ cash flows.

97                  Exhibit KR3 is a letter on the letterhead of Lombardi (Manufacturing) Pty Ltd dated 3 March 1992 addressed to Nicholas Birdseye & Associates.  The letter stated that the company was prepared to take “a bill of sale over the semi trailer currently in our workshop, to secure Greenline’s debit of $9,914.49 plus $2,917 for repairs currently being carried out in our workshop”.  The figure of $9,914.49 coincides with the balance said to be owing by Greenline in the monthly statement issued by GM & J Lombardi Pty Ltd for the month of February 1992.  As matters transpired the bill of sale was not executed; the letter is, however, another item of evidence involving Lombardi Manufacturing Pty Ltd.

98                  Having regard to all of the evidence, I find that Lombardi Manufacturing Pty Ltd was the creditor who raised the invoice in the amount of $3,917; Mr Smith’s letter acknowledges some involvement of Lombardi Manufacturing Pty Ltd in respect of the moneys owing by Greenline and it should have been Lombardi Manufacturing Pty Ltd who was named as a claiming creditor in these proceedings to the extent of $3,917.  Whatever else may be the outcome of these proceedings, Mr and Mrs Atkins can not be held liable to pay this amount of $3,917.  It was a debt that had been incurred by Greenline but it is not a debt that has been claimed by the relevant creditor in these proceedings.

99                  The matter is attendant with sufficient doubt to conclude that G M & J Lombardi Pty Ltd has not made out its claim to the amount of $3,917 appearing in invoice number 26632.  On this basis, the revised claim of G M & J Lombardi is to be reduced by $3,917 from $18,372.66 to $14,455.66.  The debts that make up the amount of $14,455.66 are the balance of the September 1991 account, the amount of the October statement and the three November 1991 invoices.

100               It was submitted on behalf of the respondents that Lombardi was not entitled to claim any part of the $11,000 that was paid to the liquidator in settlement of the preference claims.  The submission, which in my opinion, is devoid of merit, was to the effect that there had been no judicial finding that the payments that had been made to the Lombardi group were void or voidable – the fact that the liquidator had taken action and the fact that the Lombardi group had elected to settle the liquidator’s claim did not revive the debts.  The argument concluded with the proposition that there had to be a judicial finding that a payment was a preference before the debt would be revived.  Such an argument, if accepted, would mean that it would be necessary to pursue every case to judgment before enforcement proceedings against a director or an officer of a defaulting company could be enforced.  Such a course of action should be avoided if it is possible; it would only engender a waste of time and money in many cases.  It is not as if the director or officer is left without protection.  It would always be open to him or her to plead that the relevant payment had not been preferential – but it was noteworthy that neither respondent entered that plea in their respective defences.

101               The respondents next submitted that because Lombardi Manufacturing Pty Ltd had paid $5,500 (being one half of the agreed settlement) to the liquidator, G M & J Lombardi Pty Ltd could not include that figure in the moneys that it was claiming in these proceedings.  The fact that the two companies arranged their affairs in such a manner that Lombardi Manufacturing Pty Ltd supplied a cheque for $5,500 (instead of $3,917) is a private matter between the two companies.  It does not mean that there should be some finding against the interests of GM & J Lombardi Pty Ltd.

Accounting evidence

102               Mr Holmes, a chartered accountant, gave evidence on behalf of the applicants.  Mr Muller who had qualifications in accountancy and management was called by Mr Atkins as part of his defence; effectively, however, Mr Muller’s evidence was in aid of both respondents.  Mr Holmes was of the opinion that Greenline became insolvent in February 1991, shortly after the termination of the Boral contract.  With that termination its only source of income dried up but non-operating outgoings continued to be incurred.  It was Mr Holmes’ evidence that Greenline remained insolvent thereafter for the remainder of its corporate life.

103               Mr Muller was of a contrary opinion but in the confrontation of opinions I prefer that of the applicants’ witness.  Mr Muller was of the opinion that Greenline, up to 31 October 1991, would have had a reasonable expectation that it would be able to pay its debts as and when they became payable.  He conceded under cross-examination that there were other factors pointing in the opposite direction, but he maintained that he had taken those factors into consideration when arriving at his final opinion.  I believe that Mr Muller set about his task by using all means at his disposal to drag this company out of its insolvency; in doing this he allowed his judgment to be overborne by his objective.  Two examples from Mr Muller’s evidence point to a lack of objectivity.  The first related to his treatment of the “Nillinghoo debt”.  Mr Atkins had used Greenline’s funds to invest in a mining venture that was known as “Nillinghoo”.  He said in evidence that his partner in the venture, a Mr Scarfe, died a week before Easter 1991; he recognised that Mr Scarfe’s death meant that he and Greenline had no hope of recovering any of the money that Greenline had invested in the mine.  He said that he tried to dispose of the mine but found it impossible.  The finance company took back the equipment after he had tried to sell it for six months or so.  Based on this evidence I find that the value of $35,744 given to this asset in the balance sheet of Greenline as at 30 June 1991 (Ex A32) is inaccurate and, based on the events described above, it should have been recorded as having no value.

104               In the preparation of his original report, Mr Muller had removed the Nillinghoo debt of $35,744 as he considered that it was irrecoverable.  In the preparation of some adjustments shortly prior to giving evidence he brought the debt back in at its full value.  His note to his adjustment was:  “Advised that circumstances such that it may have been too early to write off at this point.”  When asked to explain what “advice” he had been given, it transpired that Mr Muller acted on information that Mr Atkins had given him.  Notwithstanding the nature of that information, the fact remains that Mr Atkins acknowledged that the death of Mr Scarfe at Easter 1991 meant that neither he nor Greenline had any hope of recovering any money out of the Nillinghoo venture.  Mr Muller was at fault in simply relying on Mr Atkins’ information; he should have made some independent inquiries.  Those inquiries would have quickly revealed that the investment was worthless.  This was an important issue.  The exercise that Mr Muller was undertaking when he made his adjustments to his original report was directed towards ascertaining the likely value of the net assets of Greenline.  His starting point was the company’s accounts for the year ending 30 June 1991 which showed that the company had a deficiency of $57,665.  Having made upward adjustments for debtors and plant, Mr Muller was able to convert that deficiency into a surplus, but only by retaining the Nillinghoo investment as an asset.  That factor shows how important it was to be sure of its correct value.  As it is, the excision of the figure of $35,744 wipes out the surplus that Mr Muller calculated and leaves a deficiency of $9,390 on his figures.

105               The second area in which I am critical of Mr Muller’s approach related to his treatment of certain items of plant and equipment.  Mr Muller capitalised $65,911 as the value of plant that Greenline had bought  during the 1991 financial year.  Amounts to that value had been written off as repairs and maintenance in the preparation of the company’s accounts.  In my opinion, Mr Muller was correct in principle to do this – many of the items were clearly items of a capital nature.  However, I do not agree with him bringing all such assets to account at cost.  As he acknowledged, the correct exercise is to bring them to account at the lower of cost or market value, but he made no attempt to assess the likely market value of any of the items that he brought to account as capital.  Some of them must be highly suspect.  For example, tyres to the value of $5,683 were purchased in mid-May; they were brought to account by Mr Muller in his adjustments as capital acquisitions at cost.  There is no evidence, one way or the other, to suggest that these tyres were on hand as at 30 June 1991 as unused reserve stock.  Bearing in mind that this company was establishing a new venture, substantially on borrowed funds and extended credit from suppliers, it is more probable than not that most, if not all, of the tyres would have been needed for immediate use.  In addition, it is to be remembered that the wear and tear on tyres would have been very heavy.  Greenline was operating on unsealed country roads hauling heavy loads of manganese ore.  As a matter of pure accounting – and for income tax purposes – one can accept that the purchase of the tyres was part of the purchase by the company of the equipment that it needed for its new venture in Port Hedland.  In that sense it is correct to treat the tyres as part of the capital cost of establishing a new business.  However, I am quite sure that the inclusion of the tyres at cost would create an unreal situation.  Some attempt should have been made to ascertain whether they were unused as stock in reserve (in which case, cost value might have been appropriate) or, as is more likely the case, whether they had been fitted to the vehicles and put into operation.  In that latter case, the idea of treating them as having a value equal to cost would be quite wrong.  What I have said about bringing tyres to account at cost, applies also to most, if not all of the items of plant that make up the figures of $65,911.  Mr Muller did make an allowance of $1,000 which he described as depreciation but, in my opinion, such an amount would be quite inadequate in the circumstances of this case.  The nature of the company’s business and the roads over which its vehicles had to travel would have required a much greater allowance.

106               The exercise of examining items of expenditure (such as the costs of tyres, painting, sand blasting, replacement of worn springs and suspensions) to decide whether they should be treated as items of capital expenditure or on account of revenue was not, in the particular circumstances of this case, a useful exercise.  If they were to be treated as items of capital as Mr Muller suggested, they would have increased the value of the company’s assets in its books of account and, in addition, they would also have increased its profitability by having them removed as items of expenditure for repairs and maintenance.  But that treatment would not have materially improved the company’s ability to pay its debts as and when they fell due.  The company could not, from a practical point of view, sell any of those assets for they represented an essential part of the company’s only income earning asset.  Mr Muller acknowledged that it would not be realistic to contemplate the company selling either of the road trains to raise funds to pay creditors; these assets were the source of the company’s income and without them the source of income would be lost.  However, he did advocate that one should allow for the possibility that the company could sell some or all of its assets on a “lease back” arrangement.  In my opinion this was not a feasible proposition in the circumstances of this case.  The State Bank of South Australia held a debenture charge over the whole of the assets of the company and was expressing serious concern about the state of its account; the second prime mover had been financed by Esanda Ltd; all in all, the prospect of a sale and lease back was not tenable.  The only value that might be achieved by such an exercise would be an attempt to show that the readjusted accounts might have given the company the potential to borrow further monies based on the value of its assets and on its profitability.  However, there was no evidence that any such exercise was examined and the correspondence from the State Bank in particular suggests that such an exercise would have been fruitless.  Mr Keith submitted that Greenline could have leased the dolleys instead of purchasing them; this is not a helpful submission because the company did not lease them – it purchased them and, in so doing, incurred a debt.

107               In any event, such a hypothesis is of little use when considering Mr and Mrs Atkins’ expectations at the times when various debts were incurred.  Mr Muller’s adjustments and theories would not have been known to the directors.  What financial knowledge they would have had, would have been based on the information that Mr Birdseye had given to them - and the practical manifestation of that advice was, ultimately, the accounts of the company that he prepared as at 30 June 1991.  In other words, the state of a company’s accounts will never be the final determiner.  In Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 at 435-6 Gummow J said:

“At the trial, a great deal of attention was focussed on the level of indebtedness of New World and whether its liabilities exceeded its assets.  However, this in itself does not directly answer the issue raised in [par 592(1)(b).]  The issue is not dealt with by analysing a hypothetical instantaneous liquidation.”

This passage was quoted with approval by a Full Court of this Court in TCN Channel Nine Pty Ltd v Scotney (see above) at 396.  The size of any deficiency between the assets and liabilities of the company is a factor that can be taken into account for it may be indicative of a company that, on relevant dates, could not reasonably be expected to be able to pay its debts as and when they became.  But it is not possible to lay down any rule of general application.

108               Mr Birdseye also gave evidence supporting the case for the respondents.  Unfortunately, after his very protracted period in the witness box, I found myself unable to rely on what he said.  He completely lacked objectivity; his attitude to his responsibilities when preparing financial records for the company was quite astounding.  I have little faith in the ability of Mr Birdseye as an accountant and less faith in his professional standards.  On several occasions it was necessary for the Court to warn him that answers to particular questions may tend to prove that he had participated in the commission of an offence – specifically, an offence amounting to a fraud on the revenue in the preparation of the company’s income tax returns and financial accounts.  As a result, Mr Birdseye invoked privilege in respect of self-incrimination and answered questions under the protection of s 128 of the Evidence Act 1995 (Cth).  Counsel for the applicants in his written submissions said that Mr Birdseye, “in his preparation of the financial statements in general, showed a cavalier disregard for proper treatment of the figures.”  That was not an unreasonable observation.  Faced with the predicament that the accounts that he had prepared in the name of the company for the year ending 30 June 1991 disclosed a trading loss, Mr Birdseye said in evidence that the loss had been created by him treating items of expenditure as revenue when proper accounting standards would have called for them being treated as payments of a capital nature.  The following passage in his cross-examination at p 784 is most revealing:

“Just one more question on this topic:  all that you said to his Honour in that long answer can be summarised in this, can it not, that you – on your case you and Mr and Mrs Atkins conspired to defraud the revenue? – there was no conspiring to defraud revenue in the year ended 30 June 1991 because it was deemed that the – it was calculated that the company, that it had disclosed a full profit – treated things in a true – or under the full principles of accounting of the Income Tax Act, then it would have only just been at break-even point.

So the company still would not have made a profit even if you did it right.  Is that what you say? – The company would have been at a break-even point, correct.

It would have made a loss? – I cannot give you a precise answer.

It could well have made a loss? – My belief is that there was likely to have been more of a loss than there was a profit, but, I mean, it – I believe it is more likely to have been a loss.”

 

On the other hand, the fact remains that neither Mr nor Mrs Atkins knew of the poor quality of Mr Birdseye’s advice; they had every reason to believe that he was advising them competently and in accordance with the law.  Hence, notwithstanding the objective nature of the exercise, his advices to them are to be considered subjectively through their eyes for it might be that his misinformation might constitute an explanation for their conduct and, perhaps, a defence under subs 592(2).  The difficulty in accepting such an explanation, however, is that at the commencement of the 1991-1992 financial year Greenline’s financial position, as compiled by Mr Birdseye, showed a deficiency of assets over liabilities and an accumulation of trading losses.  Those factors were either known to both directors or, if not actually known, they were factors that should have been known by them.  Not even Mr Birdseye’s optimism could hide those factors from directors who were prepared to perform their duties as directors in a proper manner.

109               Mr Clayton QC, counsel for Mrs Atkins submitted that the insolvency of Greenline – however “insolvency” may be defined – is not the ultimate criterion in determining whether there were reasonable grounds to expect either or both of the propositions that are referred to in s 592 of the Law.  I agree.  He also submitted that the retrospective preparation of, or the exercise of adjusting, the financial accounts of the company years after the relevant debts had been incurred is an irrelevant exercise.  I cannot agree that this would always be an irrelevant exercise if the adjusted accounts would thereby reflect what the directors knew or ought to have known.  If, on the other hand, technical arguments over the correct accounting treatment of transactions was at the heart of adjustments it could well be that Mr Clayton’s submission is correct.  If, as was the case with Mr Birdseye, he was responsible for incorrectly classifying payments as revenue expenditure when they should have been treated as items of capital, it would be unreasonable to expect of unqualified persons such as Mr and Mrs Atkins to know or believe that they could not rely on their accountant’s advice.  The primary task is to make due allowance for all factors – one being the poor quality of Mr Birdseye’s advice – when assessing separately in respect of each of them, whether there were reasonable grounds to expect that Greenline would not be able to pay all its debts as and when they became due under either of the exercises contemplated by s 592 of the Law.

The lists of Aged Creditors

110               Exhibit A43 is a hand written sheet of paper containing a list of creditors that was prepared by Mr Birdseye.  The document lists creditors, the amounts owing to them as at 1 August 1991 and the amounts owing to them as at 1 July 1991.  The interesting factor about this list is that so many of the creditors whose debts were in existence at 1 July 1991 are still owed the same amount (or a greater amount) a month later on 1 August.  Mr Birdseye said that this list was tabled at a meeting with Mr and Mrs Atkins on or about that date.

111               The document was not complete as Mr Birdseye acknowledged; it contained no provision for outstanding group tax nor for Work Cover payments, both of which were then in fact owing.  Its importance rests in the fact that it is the prelude to a series of documents subsequently prepared by Mr Birdseye entitled “aged creditors listing”.  It is also important because the subsequent listings are indicators that as at the date of the preparation of Ex A43, 1 August 1991, there were concerns within the company about the non-payment of its creditors’ accounts.

112               Lists of creditors as at 25 September 1991, 30 September 1991, 7 October 1991, 28 October 1991 and another twelve lists on various dates from November 1991 to December 1992 formed part of Vol 1 of Ex A14.  Each in turn was put to Mr Atkins, and in respect of most of them, he said that he was unable to remember whether he had seen the particular list.  Accepting that seven to eight years has passed since the events in question, I nevertheless remain satisfied that these lists – or at least most of them – would have been seen by Mr Atkins and discussed by him with his company’s accountant, Mr Birdseye.  Indeed, in fairness to Mr Atkins, he did not suggest that he had never seen any such list; he merely said that he was unable to remember.  When shown the aged creditors listing for 25 September 1991, Mr Atkins said that he recalled seeing that document sometime in September or October of that year.  However, he did not know where he saw it.  He only remembers discussing it with Mr Birdseye but with no one else.  He could not recall whether it was a discussion in person or by telephone but he did volunteer that he said to Mr Birdseye that “we have got to get it down”.  There are two aspects of this evidence which, in my opinion, react adversely against the interests of Mr Atkins and Mrs Atkins.  The first is the title that Mr Birdseye gave to the documents; he called them “aged creditors’ listing” thereby acknowledging that the lists were not the lists of current creditors.  Secondly, there is the repetitiveness of the listings.  It is quite common practice for a company’s accountant to extract a list of creditors; it is not so common to describe them as “aged” creditors and it is unusual for listings to be prepared at such short intervals of time.  For example, one listing was prepared, as at 25 September and five days later another listing was prepared as at 30 September 1991.  A week later another listing was prepared for creditors as at 7 October and three weeks later yet another list was prepared of “aged” creditors as at 28 October.  It would be appropriate to infer, as I do, that probably from 1 August – but at least from 1 September - the company was experiencing difficulties in paying its creditors.  This would not have happened suddenly; a fair inference is that by 1 September 1991 the problem had already existed for some unspecified period of time.

113               Mr Atkins said it was his belief that the company could pay its creditors because of the money that was being generated through the two road trains.  He maintained that the time never came when he believed that the company could not pay its creditors.  This may have been his subjective belief but was it a reasonable belief?  In any event the test is an objective one; were there reasonable grounds to expect that the company would not be able to pay all its debts in the circumstances postulated in subpars 592(1)(b)(i) and (ii)?  It is true that there are factors favouring the respondents; they were not to know that the demand for manganese would diminish, that the mine would be flooded and, of course, they were not to know that the second accident would occur.  In assessing the position at the time when the different debts were incurred these matters are not to be overlooked but they are not to be considered in isolation; they are to be considered as part of the complete range of relevant facts.

Income Tax and Group Tax

114               Greenline had been assessed for company tax for the year ending 30 June 1990 in the sum of $3,377.  That amount was due but unpaid as at 30 June 1991.  According to Mr Birdseye the tax return was completed in April or May 1991 and it was due fourteen days thereafter.  On 5 July 1991, the Tax Office issued a final notice for payment of the tax; it was not paid.  A fine was imposed and a notice of additional tax was issued by the Tax Office and received by Greenline on 18 July 1991; that was not paid.  That debt can be traced through all the aged creditors’ listings.

115               Mr Atkins, during the course of his cross-examination, acknowledged that Mr Birdseye had told him that company tax had not being paid.  Asked why it was that the company had never paid this tax, Mr Atkins agreed that it was because the company did not have the money to pay it.  The second and even more condemning piece of evidence as to what was occurring in the operations of Greenline on and after 1 July 1991 is that group tax was never paid.  Exhibit A35 shows that, between 1 July 1991 and 31 October 1991, the company had at least six employees in addition to Mr Atkins.  As Ex A14 shows, the Tax Office issued final notices to the company throughout this period for payment of group tax; these notices were ignored.  The unpaid group tax was recorded in the creditors’ listings up to 31 October 1991.  Mr Atkins accepted that group tax was not paid because the company did not have the money to pay it.  Mrs Atkins agreed that the failure to pay group tax was seriously improper conduct (T538).  But Mr Birdseye said that both Mr and Mrs Atkins specifically directed him not to pay the Tax Department.

116               It is beyond doubt that, as from 1 July 1991 and continuing thereafter, the directors knew, and if they did not know they ought to have known, that income tax and group tax was not being paid.  That must have been because the need to pay important trade creditors meant that there was not the money to pay the tax.  That is a most important finding because the company was, during that same critical period of time continuing to incur further debts.  It becomes a further factor to be brought into the melting pot when considering whether there were reasonable grounds to expect from some date after 1 July 1991 that the company would not be able to pay all its debts as and when they became due.

Boral Tyres Pty Ltd and other creditors

117               The monthly accounts of various creditors of the company were put to Mr Atkins during the course of his cross-examination; he was given the opportunity of explaining why it was that these accounts remained outstanding month after month.  In respect of one creditor, Boral Tyres Pty Ltd (“Boral”), he agreed that the company did not have the money to pay the debt.  It is instructive to set out the history of Boral’s account for it typifies Greenline’s financial malaise in the second half of 1991.  Boral’s terms of credit required payment on or before the last day of the month following the month in which the goods were delivered, irrespective of the date of the invoice.  Document 3.29 shows that, pursuant to invoice dated 10 May 1991, goods to the value of $7,884 were supplied to Greenline:  that amount was not paid as of 30 June 1991 - the terms of trade had not been complied with.  Document 3.30, Boral’s statement of 31 July 1991, shows that only $5,000 was paid to that date, leaving an outstanding balance of $2,884 which was then two months old.  Document 3.331 shows that at the end of August, payment had still not been made and $2,884 was now three months overdue.  Further, goods that had been acquired on 29 July 1991 had not been paid by 31 August 1991.  Again the trading terms were not complied with.  More goods were acquired in September 1991 (see Docs 3.32, 3.33 and 3.34).  It is clear that payment was not made for those goods because by Doc 3.41 dated 24 February 1992 a summons was issued for the sum of $17,234.80 for goods provided in about September 1991.  That action was initially defended by Greenline (Doc 3.43), but the company subsequently consented to judgment (see Doc 3.50).

118               As to the debt owing to Bridgestone Australia Ltd (which was first incurred in June 1991) Mr Atkins said that he did not know whether it was correct to say that the debt was not paid.  I cannot accept that answer; it was an embarrassing response to a most embarrassing question.  Bridgestone invoices showed that its terms of trading required payment in thirty days.  Payment was not made by 31 July 1991 and a demand was issued on 21 August 1991 (Doc 3.64) for payment by return mail.  But the August statement, (Doc 3.65) showed that payment had not been made.  A part-payment was, however, made in September 1991 (Doc 3.67).  Accordingly from June to September 1991 the company was not able to pay Bridgestone within its terms.  This unpaid account is evidence that as early as July 1991 (when the June account was due for payment) there was a shortage of cash resources.  That does not mean, without more, that the company could not pay its debts; but it does point strongly in that direction.  McLeods Tyres was another creditor of note; its monthly statements indicate that no payments were made to it from May 1991 to October 1991.  Mr Atkins said that he could not explain why this was so.  There were other creditors whose debts remained unpaid during this period but I do not consider that it is necessary to set out their history.  A similar story could be told about the trading history with POW Autos, Northwest Plumbing, South Hedland Auto Electrics and Riddells Transport.  It is quite clear that the company’s expected cash flow from the Eltin contract was insufficient to meet the combination of the company’s current liabilities and its capital commitments arising from the purchase of the first road train.

Greenline and its bankers

119               Greenline’s only banker to 30 June 1991 had been the State Bank of South Australia.  The company’s trading account had an overdraft limit of $48,000 but throughout the whole of 1991 the account was consistently in excess of the limit.  After the move to Port Hedland, there being no branch of the State Bank available, Greenline opened a trading account with the National Australia Bank.  That account did not have an overdraft arrangement but on occasions it was overdrawn.

120               A series of letters and file notes compiled by the Ceduna Branch Manager of the State Bank of South Australia were tendered as part of the applicant’s case.  The purpose of the tender was to indicate that there had been a long history of unsatisfactory relations between Greenline and its banker.  On 24 January 1991 the bank wrote Greenline advising that a regular debit of $1,000 in favour of AMP Assurance had not been met by the bank because the company’s account was overdrawn $84,147.66.  On 19 July 1991 the bank wrote Mr Birdseye saying in part:

“We note that the business cheque account is currently overdrawn $58,235.53 and has been irregular since 23 May 1991.”

The bank described this situation as “totally unacceptable.”  Despite the submissions on Mr Atkin’s behalf to the contrary, I think it quite appropriate to classify the Bank’s correspondence as “stern”; it is not necessary that the author of the letter be called in order to give that description to the Bank’s letters.  File notes of conversations with Mr Birdseye on 25 June, 19 July and 30 July 1991 indicate that on those dates the bank was expressing its concern about the state of the account.  On 18 September 1991, the bank wrote Mr Birdseye once again complaining that the company had exceeded its approved limit of $48,000; at that date the overdraft stood at $54,164.90 and additional monthly loan instalments of $5,090 together with interest fees were falling due at the end of the month.  On 9 October 1991 the bank wrote again to Mr Birdseye and on this occasion it was threatening to initiate “recovery action”.

121               These letters and file notes were put to Mr and Mrs Atkins, but neither of them admitted to being aware of them or of their content.  Each of them acknowledged that Mr Birdseye may have shown them the letters or mentioned the subject of his conversations with the bank manager but that was the limit to which they were prepared to acknowledge any information on the subject.  I am satisfied and I find that both Mr and Mrs Atkins had a general awareness of the attitude of the State Bank.  Mr Birdseye may not have shown them a particular letter but I am quite sure that he would have informed them generally of the contents of any contact that he had with the Bank.

The second road train

122               The decision to establish the second road train was, having regard to the financial circumstances of Greenline in July/August 1991, a mistake.  It might well have been that the company was then of the opinion that it had obtained a lucrative contract but it overlooked the fact that it was still struggling to extricate itself from its financial woes that so clearly existed at the end of the 1991 financial year.  Instead of running the first road train profitably and thereby restoring the financial health of the company, the decision to purchase the second road train incurred the company in further massive capital debt that it was unable to service.  At the best it might be said that it was a mistake of timing.  In any event, the costs involved in establishing the second road train were clearly beyond the financial resources of the company at the time when the debts were incurred.

Conclusion

123               In my opinion, the several matters set out above, by their combination, constitute tangible evidence that Greenline was in dire financial straits by 1 September 1991; the date might indeed have been earlier but I will limit my findings to 1 September out of an abundance of caution.  In listing these matters, I emphasise that individually, their significance might have been insufficient to make adverse findings against Mr and Mrs Atkins; it is their totality that is important.  First, there was the fact that Greenline had no income after the loss of the Boral contract until it started to receive payments under the Eltin contract – about June 1991.  Secondly, there was the need for the regular preparation of lists of creditors that were significantly called “aged” creditors.  Thirdly, the company could not find funds to pay the relatively small amount that is owed for income tax for the year ended 30 June 1990; this failure was compounded by its failure to remit group tax.  Fourthly, there was the acknowledgment by Mr Atkins that the accounts of certain creditors such as Boral were not paid because the company lacked the funds to pay them.  Yet, despite this parlous financial predicament, it was in August 1991 that huge capital commitments were undertaken.  The company purchased the second prime mover; to do this it had to borrow $40,000 from Esanda.  The first accident had occurred in August; the company engaged P & J Transport to rebuild the Fruehauf trailer; those repairs were slightly in excess of $20,000.  The company also ordered the Freightmaster trailer and two additional dolleys from P & J Transport during this month.  The trailer cost $19,950 and the dolleys cost $21,000.  In all these commitments amounted to about $100,000 at a time when the company had insufficient funds to pay its existing creditors.  Finally, there was the willingness of Mr and Mrs Atkins to compromise and agree to pay some of the claims of the remaining applicants in these proceedings.

124               These conclusions inevitably led to an adverse finding against Mr Atkins; he was the chief executive officer of the company.  Mr Atkins’ account of his knowledge of the company’s financial affairs was unsatisfactory.  His evidence was evasive and unconvincing.  It seemed to me that being aware that he – or perhaps that he and Mrs Atkins – could be held liable to pay some of Greenline’s debts if the Court believed that he knew that the company was in financial difficulties, he made every effort to give the impression that he genuinely believed that the company, given time, would have earned profits sufficient to pay all its debts.  However, all too often, when pressed by a difficult question, he would fall back on a stock answer to the effect that he could not remember because of the gap in time.  For example, he could not remember that the company’s banker had dishonoured cheques and he could not remember that the company had failed to remit payments of group tax; I do not believe that matters of such moment would have escaped Mr Atkins’ memory.  Mr Keith, counsel for Mr Atkins, submitted that there was no evidence upon which a finding could be made that Mr Atkins “must be taken to have known” that the company would not be able to pay its debts as and when they became due.  This submission overlooks that inevitable exercise of drawing inferences from circumstantial evidence; it was the overwhelming weight of a combination of factors that led, inevitably, to this conclusion – not only in relation to Mr Atkins but also in relation to Mrs Atkins.

The involvement of Mrs Atkins

125               But what of Mrs Atkins?  Mrs Atkins was cross-examined extensively about her knowledge of the affairs of the company.  With some exceptions she maintained that she knew very little about the company or its operations - particularly its operations after the move to Port Hedland.  On the other hand, as she acknowledged, she allowed the Dernancourt house to be offered to Greenline’s banker as security for financial accommodation.  She said that she believed, and had always believed, that the company was profitable; she said that it had always supplied the family with a high standard of living.  She considered that it was in her interests to help the company because what was good for the company would be good for her - and Mr Birdseye had spoken of the Port Hedland contract in glowing terms.  What is more, Mr Atkins had still been remitting moneys for her to her bank account and she saw the success of the company as his means of maintaining those payments.

126               It is true that Mrs Atkins was prepared to put her house at risk when the second road train was purchased.  I accept Mr Clayton’s submission that this confirms that at that point of time she could not foresee any problem with the company paying its debts.  The fact that the first road train was paid for out of the company’s earnings by mid September 1991 might have been a ground for the directors to expect that the second road train could have been paid off in the same way were it not for the fact that there were other creditors whose debts were not being paid as and when they fell due.  Even so, I have borne these factors in mind and they partially explain why I have delayed the date at which there were “reasonable grounds to expect” until 1 September 1991.  It is also worthy of mention, in my opinion, that the responsibilities of a non-executive director, such as Mr Atkins, do not necessarily match those of an executive director such as Mr Atkins.  In the normal course of events one would expect more of an executive director.  Non-executive directors should be allowed a reasonable time to make an assessment of what is happening in a company.  Where an adverse change occurs non-executive directors should not instantaneously be fixed with notice of the change.  They should be allowed a reasonable time to gather information and make an assessment.

127               Mrs Atkins pointed out that in mid 1991 she was in the midst of a divorce and, from her point of view, her husband and the company were “synonymous”.  I take that to mean that she wanted little or nothing to do with either of them.  However, she did remain as a director, resident in Adelaide, with her ex-husband and the company in Port Hedland.  The trading debts that were being incurred were being incurred, in the main in Port Hedland, if not by Mr Atkins then by a resident employee such as Mr McGee; it has not been suggested that Mrs Atkins was ever actively involved in an act that constituted the incurring of a business debt.

128               She admitted to a limited knowledge of some matters.  For example, she was prepared to acknowledge that Mr Birdseye had told her, in or about July 1991, that the company had a liability to the Income Tax Department.  But she made no further inquiries on the subject; she said that she assumed that Mr Birdseye would attend to it.  She acknowledged that she attended a meeting of directors with Mr Atkins at the office of Mr Birdseye on 1 August 1991.  She was shown, during her cross-examination, the hand-written list of creditors that was dated 1 August 1991.  She was prepared to concede that the list was probably in Mr Birdseye’s handwriting and she agreed that it contained two separate entries for money owing to the Income Tax Department.  When asked if the subject of the company’s debts to the Income Tax Department had been discussed at that meeting, Mrs Atkins would only say that it “may have been” and that “I imagine that it would”.  This was a strange answer for she had earlier emphasised that the non-payment of tax would have been a matter of concern to her.

129               Mr Birdseye was asked during the course of his examination in chief to describe his involvement in the business of Greenline once the company had commenced operations in Port Hedland.  He answered by first stating that it was his responsibility to pay accounts and then, significantly added that his involvement included communicating “with Judith Atkins who would come to my office …”.  Mr Birdseye’s time sheets were tendered in evidence; they show quite regular contact between him and Mrs Atkins.  Mrs Atkins did not challenge any of these entries during her evidence in chief.  Mr Birdseye confirmed, during the course of his evidence, that his contact with her related to the affairs of the company.  Later Mr Birdseye made another revealing comment that strongly pointed to Mrs Atkins’ involvement in the affairs of the company.  He said “Judith wanted to write every cheque – or she wanted to know all of the moneys that would be dispensed out of the bank account because she had a perception that Kevin would only spend money on the trucks and on looking after the business, and she wanted to make sure that if there was to be any money that was spent that she would be a joint cheque signatory for it to be done.”(T 598).  It may well be that Mrs Atkins’ motives in taking such an interest in the company were based on self-interest, but the fact remains that she had a far greater involvement in the affairs of the company than she would have the Court believe.

130               What follows is one example of Mrs Atkins’ involvement in the affairs of the company.  In Action No 654 of 1992 in the Supreme Court of South Australia, P & J Transport instituted proceedings against Greenline seeking an order that the company be wound up.  The petition was based on the company’s failure to comply with the notice that had been served on it pursuant to s 460 the Law.  That notice had demanded payment of an amount of $50,677.42 and was dated 10 February 1992.  The matter was compromised and on 22 April 1992 the action was dismissed but with an order that P & J Transport have its costs which were fixed in the sum of $1,650.  (As I have earlier said, surely this was the occasion to raise the subject of P & J Transport’s responsibility for the second accident).

In Action No 1202 of 1992 in the Supreme Court of South Australia, Mack Trucks applied for an order that Greenline be wound up.  P & J Transport filed an appearance in those proceedings and applied to be substituted as the plaintiff if Mack Trucks did not pursue the order for winding up.  Another supporting creditor in Action No 1202 of 1992 was the Australian Taxation Office.  It alleged that Greenline was indebted to the Deputy Commissioner of Taxation in the sum of $4,182.91 for income tax and additional tax.

131               Mrs Atkins said that she had no knowledge of that debt, but I cannot accept that statement.  When the proceedings were called on for hearing before a Master on Wednesday 24 June 1992,Mrs  Atkins appeared on behalf of Greenline.  It is more probable than not that she would have known details of the petitioning creditor and the supporting creditors.  Thereafter, there was a series of adjournments during which some, but not all, of the pressing creditors were paid the amounts owing to them.  Ultimately, however, a winding up order was made on 12 January 1993 and David John Olifent was appointed official liquidator of the company.

132               I find it unnecessary to explore in any further detail the evidence that Mrs Atkins gave.  I accept that she had minimal involvement in the conduct of the affairs of the company.  In particular, I accept that she was not the party who incurred any business debts in the name of the company.  I suspect that she knew more about the company than came out in her evidence but that is not important.  Her defence to a claim under s 592 is not based on her knowledge; it is based on whether she had a reasonable belief.  As to that, her evidence can be summarised in this manner:  first she relied on Mr Birdseye; he was a great optimist and always assured her that everything would be all right; secondly, she played only a very small part in the affairs of the company.

133               Mr Clayton QC, submitted on Mrs Atkin’s behalf that she was entitled to expect that Mr Birdseye, a professional accountant, would advise her that the company should cease trading if there was a cause for concern; he maintained that so far as Mrs Atkins was concerned, the question was not whether the advice that she was receiving was correct or incorrect.  She was entitled, said Mr Clayton, to rely upon her professional adviser and should not be held responsible for any deficiencies that may have existed in his accounts.  Mr Clayton referred to and relied upon the following passage from the judgment of Ormiston J in Morley v Statewide Services Ltd (1993) 1 VR 423 at 448:

“It is not yet assumed that directors shall apply themselves full-time to the company’s business.  There is still a place for part-time and advisory directors.  Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day to day affairs of the company.  What each director is expected to do is to take a diligent and intelligent interest in the information either available to him to which he might with fairness demand from the executives or other employees and agents of the company.

However, at the least, a director cannot now assert from a state of total ignorance that he or she had no reasonable cause to expect that a company could not pay its debts as they fell due, within the meaning of para. (b).  A director may claim, exceptionally, that he took reasonable steps with the other directors to appoint suitable and appropriate accountants and other executives and that they failed to provide information when asked.  If the failure to provide information be short in duration, the director may be able to show that he acted reasonably, but he cannot rest on that ignorance.  Moreover, to fail to make any enquiries whatsoever is not excusable and an opinion on the company’s solvency based on that ignorance could not be characterised as reasonable.  Even in a small company a director should ask for and receive figures, albeit of a basic kind, on a more or less regular basis.  If that is sought and it reveals no difficulties and the director has no other reason to suspect the company may not be able to pay its debts as they fall due, then the director may be shown to have acted reasonably.  Directors cannot be required to make their own further investigations or to “audit” the accounts provided, unless they have particular responsibilities or expertise, and they can only be required to seek more information if the company’s accounts, together with any other information from the company’s executives, put them on inquiry.”

Morley’s case was one that dealt with a director, who like Mrs Atkins, had had minimal involvement in the affairs of her company.  The defendant had been a director of and shareholder in a small family company from the time of its incorporation until its liquidation.  The company had been managed by the defendant’s husband until a time shortly prior to his death when its management was assumed by her son, another director and shareholder.  On the death of the defendant’s husband, the defendant and her daughter (also a director and shareholder) informally requested the son to continue to manage the company, which he did.  There was evidence that while the defendant had received regular income from the company and had signed certain formal documents on its behalf, she had made no attempt to inspect the company’s books or accounts or to seek specific information concerning its affairs.  During 1988, the son incurred certain debts to the plaintiff on behalf of the company at times when it was conceded to have been commercially insolvent.  The plaintiff sued the defendant under s 556(1) of the Companies (Victoria) Code for recovery of the debts.  The defendant sought to rely upon the defences contained in s 556(2) of the Code.  It was held by Ormiston J and, on appeal, by the Full Court, that the defendant had not made out a defence under s 556(2) because she had, within the meaning of s 556(2)(a), expressly or impliedly conferred a general authority on her son which was sufficient to authorize the incurring of the debts sought to be recovered by the plaintiff.  It was also held that, in determining whether the defendant had made out a reasonable cause within s 556(2)(b), regard should be had to the facts known, and also to the facts which ought to have been known, to the defendant.  The defendant could not rely on her ignorance of the company’s affairs to make out a case that she had no reasonable cause to expect that the company could not pay its debts as they fell due.

134               Group Four Industries Pty Ltd v Brosnan (1991) 56 SASR 234 is another example of a director who had minimal involvement in the running of a company.  In that case, the defendant was initially successful in defending a claim under the precursor of s 592.  The defendant and her husband were the only directors of the company.  The plaintiff/creditor was held to have established its case against both defendants in that immediately before each monthly debt was incurred there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due.  The learned trial judge concluded that the husband, who had been responsible for the day to day running of the business, had failed to establish either defence.  As to the question of “implied authority” his Honour said (at 246):

“Although under s 556(1) liability is determined according to an objective assessment, harshness is ameliorated by defences which take into account subjective elements.  I understand the reliance which Ormiston J places upon the manner in which directors are ordinarily required to act and I accept his comment that more often than not debts will be incurred without the express authority of the Board or executive director.  However, the defences created by s 556(2) give rise to subjective considerations, namely, the actions and state of mind of the defendant.  Emphasis is placed upon the particular debt.  It is far from clear that a general authority for others to incur debts excludes the defence provided for in s 556(2)(a).  The existence of a severe penal sanction reinforces my view that a narrower interpretation is called for.”

With respect to his Honour, I feel that his remarks are not wholly compatible with what Ormiston J had said in Morley’s case.  Whilst it is true to say that there are “subjective considerations” they must, nevertheless, be viewed objectively.  A lazy director or an inefficient director cannot hide behind the shield of ignorance, laziness or inefficiency; if for any unjustified reason, such a director chooses to leave the affairs of the company to another, at a time when that director had every opportunity to be aware of the incurring of debts, that director has a heavy responsibility in satisfying the Court that she or he was not impliedly consenting to the incurring of the company’s debts.  In any event, in the present case the evidence points to Mrs Atkins having, at least from 1 August 1991, a much greater degree of involvement and knowledge as a result of her regular contacts with Mr Birdseye.  It is significant that the decision in Group Four Industries v Brosnan, exonerating the wife from liability, was reversed on appeal: Group Four Industries Pty Ltd v Brosnan (1992) 59 SASR 22.

135               It is also clear from the judgment of Lander J in Capricorn Society Ltd v Linke (1996) 14 ACLC 431that a court will have regard to the facts and circumstances that the respondent ought to have known as well as to the facts and circumstances that are actually known to a respondent.  Lander J, at p 437 referred to the remarks of Hodgson J in Metal Manufacturers v Lewis (1986) 4 ACLC 739 at 749 where his Honour said:

“The view that I have come to … is that in deciding whether or not a defendant has reasonable cause within section 556(2) one can have regard to facts and circumstances actually known to the defendant and also to facts and circumstances which the defendant ought to know having regard to the defendant’s position in the company and the duties associated with that position.”

136               Ormiston J also said at 448:

“What is reasonable, therefore, is related in part to the extent of the inquiries the directors made and what should have been made about the company’s solvency.  A director should not in those circumstances be entitled to hide behind ignorance of the company’s affairs which is of his own making, or if not entirely of his own making, has been contributed to by his own failure to make necessary inquiries.”

137               Ormiston J’s decision was followed by Tadgell J in Commonwealth Bank of Australia v Freidrich (see above) and in Rema Industries v Coad (see above) where Lockhart J said:

“The test of reasonable cause in the context in which the expression appears imports an objective standard, but it must be applied to the facts and circumstances known to the defendant and facts and circumstances which by reason of the defendant’s duties as a director or officer of the company ought to have been known to him.  It would be absurd for a defendant to be able to establish a defence simply on the basis of what he in fact knew.  This would reward the incompetent director who ought to have known a great deal more than he in fact knew.”(p 537)

138               The Victorian Court of Appeal in Morley’s case said at 465:

“… we would have little hesitation in substantially adopting what seems to us, with respect, to be persuasive reasoning of Hodgson, Ormiston and Tadgell JJ.  It does not seem right that in this day and age the director who takes sufficient interest in his duties to be fixed with knowledge of insolvency, may, if he neglects to act, become criminally and civilly liable, whereas a director who wholly ignores the obligations imposed upon him by the Code, can escape that liability by pleading his own ignorance of the relevant facts.”

139               Morley’s case has since been followed by the South Australian Full Court in the Group Four Industries v Brosnan (see above).  In that case Debelle J said at 74:

“When section 556(2)(b) is viewed against the other provisions in the Code, the duties created by the Code, and the statutory intention the directors should comply with and observe those duties, the conclusion is, I think, inescapable that, when considering the questions in section 556(2)(b), the court may have regard to facts and certain factors known to the defendant and also to facts and circumstances which by reason of the defendant’s duties ought to have been known to the defendant.  I respectfully agree with Lockhart J [in Rema Industries v Coad at 259] that it would be absurd for a defendant to be able to establish a defence under s 556(2)(b) simply on the basis of what he in fact knew because that would be to reward the incompetent director who ought to have known a good deal more than he in fact knew.”

140               Lander J in Capricorn Society v Linke agreed with the remarks of Debelle J in Group Four Industries v Brosnan.  I adopt this line of authority for the purpose of resolving the issues in this case with respect to both respondents.

141               In the critical period commencing on 1 July to 31 October 1991, Greenline  was incurring debts at a time when it did not have funds to pay its outstanding debts.  Of those outstanding debts, its liability for income tax and its failure to remit group tax are two significant and important examples.  Lack of liquid funds to pay outstanding and pressing creditors does not prove – of itself and without more – that at that critical time there must have been reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due; it is always possible that acceptable evidence might justify a contrary expectation.  But in my opinion there is no such contrary evidence available to Mr and Mrs Atkins.  In the particular circumstances of this case, the inability of Greenline to pay its income tax liability and to remit its group tax are strong pointers to the finding that I make that at about this time it must have become apparent to the directors of the company that there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due.  The initial confidence that they were entitled to enjoy with the start of the new venture must not be allowed to sustain them.  It is expected of them that they would quickly realise that their initial hopes were not being fulfilled.  Although this is not an exact science and one should avoid looking for a state of perfection with the benefit of hindsight, in my opinion, it must have become apparent to the directors by 1 September 1991 that then and thereafter there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they fell due.

142               The company started the Port Hedland enterprise in difficult financial circumstances.  It was an admitted fact that it had traded at a loss during the 1991 financial year.  In addition it had heavy capital expenditure in the latter part of that year in establishing the first road train.  Not only had its trade creditors grown from $22,440 as at 30 June 1990 to $66,906 as at 30 June 1991, its liability to its banker had increased from $128,000 to $151,000 in the same period.  The accounts of the company, as prepared by Mr Birdseye for the financial year ending on 30 June 1991, showed also that the company had a deficiency of assets over liabilities.  Although those accounts were not signed off by Mr Atkins until 7 November 1991, that is not to say that the information disclosed by those accounts would not have been available to a prudent director until that date.  On the contrary, a prudent director would have – or should have – known the company’s financial position on or shortly after 30 June 1991: Amatek v Botman (1995) 13 ACLC 1729 at 1748 per Steytler J.  It can be seen, therefore, that Greenline commenced the new financial year and the new venture in Western Australia with a deficiency of assets over liabilities, with accumulated trading losses, with substantial new debts occasioned by the acquisition and establishment of the first road train and with hopeful expectations only with respect to the Eltin contract.  It was not an auspicious beginning; it was fertile ground in which to lay a foundation for the existence of reasonable grounds to expect that Greenline might not be able to pay all its debts as and when they became due.  As events transpired, the position did not improve.  The uncertain “might” inexorably moved to a finding, at the latest by 1 September 1991, that the company at that date and thereafter will not be able to pay all its debts as an when they became due.

The defence under subpar 592(2) (i)

143               It remains to consider whether the defence afforded by par 592(2)(a) – that the debts were incurred without her express or implied consent – is available to Mrs Atkins.  In Statewide Tobacco Services Ltd v Morley Ormiston J said that:

“… a director cannot assert in reliance on para (a) of s 556(2) that a relevant debt was incurred without his or her “express or implied authority or consent” if the director had participated as one of the board of directors in conferring the company’s general authority to act on its behalf on another director or upon an employee or agent, whether that authority relates to a particular debt or whether the authority be general and of the kind normally given by implication to managers and other officers of companies.”( p 450)

144               The South Australian Full Court also considered the availability of this defence in Group Four Industries v Brosnan (see above).  In that case, Matheson J applied the reasoning of Ormiston J in relation to par 592(2)(a) of the Law whilst Debelle J said:

“When determining whether there is an implied consent for the purpose of section 556(2)(a), acquiescence in a course of conduct is capable of constituting an implied consent.  Just as inactivity or indifference may reach a degree from which an implied authority may be inferred so too inactivity or indifference may be of such a degree that consent of acquiescence may be inferred.  A director who stands by and allows another director to incur debts on behalf of the company might, depending on the circumstances, have given his implied consent to the incurring of those debts”

 

 

On the following page Debelle J added:

“In practical terms it would not be difficult to prove the knowledge required by section 556.  Generally speaking, a company will incur debts in the ordinary course of its business.  The company would have a most unusual business if it did not.  It would, therefore, be most unlikely that a director would be able to satisfy a court that he did not know at least or did not have reasonable cause to suspect that the company of which he was a director was incurring debts. That fact, coupled with the duties imposed by section 229(2) and section 269(9)(a)(iii) to take reasonable care to be aware of the debts being incurred by the company and the capacity of the company to be able to pay those debts as and when they fell due has the consequence that it will be on rare occasions only that a director would be able to satisfy the Court that he had no cause to suspect that the company was incurring debts”

 

Debelle J concluded by saying:

“I, therefore, conclude that a director will not have proved that a debt was incurred without his express or implied authority or consent if he knew or had reason to suspect that the debt might be incurred and stood by and allowed the company to incur that debt in the sense that he took no step to attempt to prevent the incurring of the debt … Where a company director stands by and leaves the management of the company to a fellow director, he is by implication acquiescing in their decision to incur debts on behalf of the company.  He is giving his implied authority or consent, therefore, to the company incurring debts.  No other inference can reasonably be drawn from the lack of action on the part of the director.  It is unrealistic and, indeed would fly in the face of commercial reality if a director were to assert that he believed the company could carry on its business without incurring debt.  It would be a most unusual company which was able to carry on its business without incurring debts.  Where there are but two directors of the company and director A leaves to director B the conduct and management of the business of the company, it is, I think, reasonable to infer that director A knows or has reason to suspect that debts will be incurred on behalf of the company.  Where, as here, the two directors are husband and wife and the wife leaves the management of the business and the company to the husband, the capacity to draw the inference may be stronger.”(p 1475)

In delivering the principal judgment of the Full Court, Lander J in Capricorn Society Ltd v Linke (Cox and Perry JJ agreeing) quoted with approval the remarks of Debelle J that are set out above.  In my opinion, they should be followed and I respectfully do so.  They are highly pertinent to the facts of this case so far as they relate to the defence that has been raised by Mrs Atkins.

145               In my opinion, she ought to have informed herself far more fully than she did about Greenline’s financial affairs, including its trading relationship with P & J Transport and Lombardi, if she were to fulfil her duties as a director of Greenline:  Rema Industries v Coad (see above)at 384.  She cannot avoid liability simply upon the premise (if it be true) that she did not know the state of the company’s finances.  As Kirby P (as he then was) said in Metal Manufacturers Ltd v Lewis (1988) 13 NSWLR 315 at 318-319:

“The time has passed when directors and other officers can simply surrender their duties to the public and those with whom the corporation deals by washing their hands, with impunity, leaving it to one director or a “cadre” of directors or to a general manager to discharge their responsibilities for them.”

At the same page his Honour had remarked that the philosophy of s 592 was “designed to instil a high sense of responsibility in directors and other officers in the discharge of their duties.”  Mrs Atkins has failed to establish this defence.

Interest

146               Credit Corporation and Lombardi are entitled to interest on the amounts that have respectively been found to be payable to them:  see s 51A of the Federal Court of Australia Act 1976 (Cth).  The relevant rate of interest is “such rate as the Court or the Judge, as the case may be, thinks fit” and the interest can be calculated “for the whole or any part of the period between the date when the cause of action arose and the date as to which judgment is entered.”  In this case it would seem to me to be fair to limit the period in respect of which interest is charged so that it commences within the institution of these proceedings on 29 July 1996; no explanation was given for the delay in the commencement of the action and I do not see why the respondents should automatically bear the brunt of that delay.  Having regard to the diminishing rates of interest over the last few years I consider that it would be reasonable to take a “broad brush” approach and apply an interest rate of 7 per cent for a period of two years and nine months.

147               On my calculations, this means that Credit Corporation is entitled to a judgment against both respondents in the sum of $47,387.42 plus interest of $9,122 or (say) $56,500.  GM & J Lombardi Pty Ltd is entitled to judgment against both respondents in the sum of $14,455.66 plus interest of $2,782 or (say) $17,200.  There will be orders accordingly.  I will hear the parties on the issue of costs.

I certify that the preceding one hundred and forty-seven (147) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Loughlin.

Associate:

Dated:              31 March 1999

Counsel for the Applicants:	Mr F C Brohier
Solicitors for the Applicants:	Messrs Thomson Playford
Counsel for the first Respondent:	Mr D E Clayton QC Mr M D Deller and Mr U S Mahadeva
Solicitors for the first Respondent:	Messrs Deller & Co
Counsel for the second Respondent:	Mr M Keith
Solicitors for the second Respondent:	Mr M Esau
Dates of Hearing:	4-7 May, 25, 27, 28 May, 30 July and 17-21 August 1998 8-12 February and 15-17 February 1999
Date of Judgment:	31 March 1999