FEDERAL COURT OF AUSTRALIA
McLellan, in the matter of The Stake Man Pty Ltd v Carroll [2009] FCA 1415
CORPORATIONS – trading while insolvent – whether director aware of grounds for suspecting insolvency – whether reasonable grounds to suspect insolvency – whether a reasonable person in the position of director of a company in the circumstances would have been aware of insolvency – failure of director to prevent company incurring debts – creditors suffered loss and damage – whether reasonable grounds to expect solvency – whether reasonable grounds to believe a competent and reliable person was responsible for providing adequate information about company’s solvency – whether director ought fairly to be excused for contravention
Bankruptcy Act 1966 (Cth): s 95
Payroll Tax Act 1971 (Vic)
Australian Securities and Investments Commission v Plymin (2003) 46 ACSR 126, followed
3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371, followed
Sandell v Porter (1966) 115 CLR 666, followed
Re United Medical Protection Ltd (prov liq appt) (2003) 47 ACSR 705, followed
Hall v Poolman (2007) 65 ACSR 123, followed
Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 188 ALR 114, followed
Lewis v Doran (2004) 50 ACSR 175, followed
Powell v Fryer (2001) 159 FLR 433, followed
Tourprint International Pty Ltd v Bott (1999) 32 ACSR 201, followed
Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330, cited
IN THE MATTER OF THE STAKE MAN PTY LTD (IN LIQUIDATION)
ACN 006 602 919
VID 373 of 2007
GOLDBERG J
30 NOVEMBER 2009
MELBOURNE
| IN THE FEDERAL COURT OF AUSTRALIA |
|
| VICTORIA DISTRICT REGISTRY general division | VID 373 of 2007 |
IN THE MATTER OF THE STAKE MAN PTY LTD (IN LIQUIDATION)
ACN 006 602 919
| BETWEEN: | ANDREW JAMES McLELLAN (IN HIS CAPACITY AS LIQUIDATOR OF THE STAKE MAN PTY LTD) ACN 006 602 919 First Plaintiff
THE STAKE MAN PTY LTD (IN LIQUIDATION) ACN 006 602 919 Second Plaintiff
|
| AND: | ANTHONY PAUL CARROLL Defendant
|
| JUDGE: | GOLDBERG J |
| DATE OF ORDER: | 30 NOVEMBER 2009 |
| WHERE MADE: | MELBOURNE |
THE COURT ORDERS THAT:
1. The proceeding be adjourned to 9.30am on 14 December 2009 to hear submissions as to the form of order that should be made consequent upon the Reasons for Judgment published this day.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.
| IN THE FEDERAL COURT OF AUSTRALIA |
|
| VICTORIA DISTRICT REGISTRY general division | VID 373 of 2007 |
IN THE MATTER OF THE STAKE MAN PTY LTD (IN LIQUIDATION)
ACN 006 602 919
| BETWEEN: | ANDREW JAMES McLELLAN (IN HIS CAPACITY AS LIQUIDATOR OF THE STAKE MAN PTY LTD) ACN 006 602 919 First Plaintiff
THE STAKE MAN PTY LTD (IN LIQUIDATION) ACN 006 602 919 Second Plaintiff
|
| AND: | ANTHONY PAUL CARROLL Defendant
|
| JUDGE: | GOLDBERG J |
| DATE: | 30 NOVEMBER 2009 |
| PLACE: | MELBOURNE |
REASONS FOR JUDGMENT
INTRODUCTION
1 The liquidator of The Stake Man Pty Ltd (In Liquidation) (“the Company”) and the Company have applied to the Court for orders against the defendant, Mr Anthony Carroll, who was the sole director of the Company at all relevant times in respect of alleged insolvent trading by the Company. The application is brought pursuant to ss 588G and 588M(2) of the Corporations Act 2001 (Cth) (“the Act”). The effect of ss 588G and 588M(2) is that a company’s liquidator can recover from a director of the company loss and damage suffered by creditors of the company where:
· the director failed to prevent the company from incurring debts due to those creditors of the company;
· at the time the company incurred the debts the company was insolvent or became insolvent by incurring the debts;
· at that time there were reasonable grounds for suspecting that the company was insolvent or would so become solvent;
· the director was aware at that time that there were such grounds for suspecting that the company was insolvent or a reasonable person in a like position in a company in the company’s circumstances would have been so aware.
2 Accordingly, the plaintiffs seek the following orders:
(a) a declaration that the particular transactions identified by the liquidator were debts incurred by Mr Carroll in contravention of s 588G of the Act;
(b) an order pursuant to s 588M(2) of the Act that Mr Carroll pay the Company $426,469.37.
3 The plaintiffs’ case may be summarised as follows:
(a) On 10 May 2006 (“the appointment date”) the Company appointed Mr Andrew McLellan as its administrator pursuant to s 446A of the Act;
(b) on 6 June 2006 creditors of the Company resolved pursuant to s 439C(c) of the Act that the Company be wound up and Mr McLellan became the liquidator of the Company by virtue of s 446A of the Act;
(c) between 31 December 2005 and 10 May 2006, (“the relevant period”) the Company incurred debts of $426,469.37 which debts remained outstanding as at 10 May 2006;
(d) Mr Carroll was the sole director of the Company at all relevant times;
(e) the Company was insolvent at all times during the relevant period. Alternatively, the Company became insolvent during the relevant period by incurring the debts. The facts relied upon by the liquidator in support of this proposition are analysed later in these reasons;
(f) Mr Carroll was aware, or should have been aware, at all times during the relevant period that the Company was insolvent or about to become insolvent;
(g) there were reasonable grounds for Mr Carroll to suspect that the Company was insolvent or would become insolvent;
(h) Mr Carroll failed to prevent the Company from incurring each of the debts;
(i) the total of the outstanding debts owed by the Company as at 10 May 2006 was $426,469.37 and it is unlikely that the unsecured creditors will receive any distribution even if the Company is able to recover the amount claimed from Mr Carroll in this proceeding.
4 Mr Carroll, in his amended defence:
(a) agrees that between 31 December 2005 and 10 May 2006 the Company traded and incurred liabilities but says that all the debts relied upon by the plaintiffs were not incurred as he alleges. Mr Carroll says that some of the debts were disputed and some did not remain owing as 10 May 2006;
(b) denies that the Company was insolvent between 31 December 2005 and 10 May 2006;
(c) says that until he decided to appoint Mr McLellan as administrator of the Company, he did not believe that the Company was insolvent nor was it reasonable for him to have done so;
(d) says that he had reasonable grounds to expect, and did expect, that the Company was solvent at the time the debts were incurred and would remain solvent even if it incurred the debts;
(e) says that:
(i) he relied on Mr Bright as a competent and reliable person responsible for providing him with adequate information about the Company’s solvency and that Mr Bright was fulfilling that responsibility;
(ii) he expected that on the basis of information provided to him by Mr Bright the Company was and would remain solvent even if it incurred the debts;
(f) relies on the provisions in ss 1317S and 1318 of the Act;
(g) says that the liquidator has failed to take all reasonable steps to realise the assets of the Company for the best available price. (This allegation was not developed at the trial.)
BACKGROUND
5 The Company was incorporated on 30 June 1986. Mr Carroll has been a director of the Company since its incorporation.
6 Until 2004 the Company was a successful, profitable company which operated a business of processing and wholesaling raw timber. It operated a sawmill at Mansfield and had an office in Richmond. Its business consisted of purchasing green timber saw logs which it milled at Mansfield to make unseasoned timber, stakes and flooring materials. It sold the stakes directly to wholesalers and end‑users of stakes. Its principal customers included Bunnings, Neville Smith Timber Industries, Tait Timber, Sevron Environmental Contractors, Melbourne Water, local councils and contractors. The Company sold its rough sawn timber to other mills which had the capacity to dry and machine the timber prior to usage.
7 Green timber is milled from timber which has been freshly cut and partly or wholly air dried. It has more limited uses than timber which has been kiln dried. Until 2004, the Company had no kilns and no capacity to dry timber other than by air drying. Stakes did not need kiln drying so the Company could sell them directly to wholesalers and end‑users.
8 By the late 1990s the Company had leased an established mill site in Mansfield. The mill site had a large log yard which allowed the Company to cut green timber which could then be racked out and hessian wrapped for air drying, awaiting sale. In 2001 the Company varied its lease of the mill site to increase the size of the site and in April 2004 the Company obtained a further increase in the size of the leased premises. During this period the Company also expanded its capacity to cut saw logs.
9 Towards the end of 2003 Mr Carroll saw that the opportunity would soon arise to expand his production of sawn logs through the State Government’s proposal to auction future log licences over the internet which would enable him to obtain more logs and of a better grade. Mr Carroll conceived a plan to capitalise on the expanded production capacity of the Company’s Mansfield mill, and the opportunity to obtain a much larger and better log quota. The plan was that the Company would purchase plant and equipment to enable it to kiln dry and machine its own timber rather than be limited to on‑selling green rough cut boards. This involved the Company obtaining an injection of capital in order to be able to afford an expansion into kiln drying.
10 Around October 2003 Mr Carroll was introduced to Mr Tom Cameron who was looking for an interest in which to invest. In November 2003 an agreement was reached between Mr Carroll and Mr Cameron whereby Mr Cameron’s trust, The Cameron Family Trust, acquired a 45 percent interest in the Company by way of an issue of shares for $1 million and made a three year loan of $250,000 to the Company at 7.5 percent per annum repayable in January 2007. According to Australian Securities and Investments Commission records, shares were not issued to Mr Cameron as trustee of The Cameron Family Trust until 21 July 2004. Between July 2004 and January 2005 Mr Cameron made further advances to the Company totalling $437,000. The Cameron Family Trust also made further advances to the Company totalling $693,000 between January 2004 and February 2005 and it made a further advance of $675,000 on 5 July 2005.
11 Kiln drying timber involves two drying stages:
· pre‑drying, that is reducing the timber moisture content to a level enabling kiln drying to occur;
· the drying of timber using the kiln and machining the kiln dried timber.
This process ordinarily takes between eight to twelve weeks from the commencement of pre‑drying until the timber is ready for the market.
12 In order to dry large quantities of rough sawn timber, the Company needed to purchase and install pre‑dryers and a kiln, which involved the laying down of a concrete slab and the installation of extensive infrastructure and pipe work.
13 Mr Carroll and Mr Cameron began investigating the kiln drying supplier market around November 2003 and after extensive enquiries and discussions with a number of persons, they made contact with Shepherd Systems Pty Ltd who, in the course of discussions, drew their attention to “high vac” kilns manufactured by Brunner‑Hildebrand a German corporation for whom Shepherd Systems Pty Ltd had the agency in Australia. After further research and comparisons with other products, Mr Carroll and Mr Cameron decided to purchase through Shepherd Systems Pty Ltd two Brunner‑Hildebrand pre‑drying kilns and a high vac kiln to undertake the initial drying to finish the process.
14 After comparisons with other kilns, Mr Carroll and Mr Cameron planned a timber production budget for 2004‑2006. They took into account the specifications of the Brunner‑Hildebrand kilns and the costing involved and believed that they had sufficient capital to fund the venture safely. Their analysis was based upon an investment of $1.1 million in kilns and related infrastructure which would result in an increase of around $900,000 in annual pre‑tax profit. Shepherd Systems Pty Ltd told them that they would need to place their order for the kilns before the end of 2003 to ensure that the kilns would be working by May 2004.
15 Just before Christmas 2003, the Company placed the order with Shepherd Systems Pty Ltd, and paid a deposit in January 2004 of $120,000 plus GST for the supply and installation of the Brunner‑Hildebrand vacuum dry kiln. The agreed price was $471,900 (excluding GST). On or about 5 February 2004 the Company entered into an agreement with Shepherd Systems Pty Ltd for the supply and installation of two pre‑drying kilns for $299,000 (excluding GST).
16 Throughout 2004 normal production and sales of cut green timber by the Company continued.
17 From the outset of the process of installing the kilns, the Company incurred cost blow outs and had problems with Shepherd Systems Pty Ltd in relation to the installation and operation of the two pre‑drying kilns and the high vac kiln. The first cost blow out related to the construction of the concrete slab and footings necessary for the kiln. Shepherd Systems Pty Ltd had said that the cost would be around $25,000 whereas the actual cost was just over $80,000. The Company’s budget had assumed that the kilns would be operational by May 2004 but this did not occur due to a number of delays and problems with their installation.
18 Commencing in early 2004 Mr Carroll was engaged in securing log supplies for the Company so that it would have timber ready when the kilns became operational. He also made numerous contacts to ensure future sales for the kiln dried products when the kilns came on line in the expectation that the kiln would be ready to use by that time. By 30 June 2004, the Company’s balance sheet recorded timber stock on hand of $808,573.
19 By the middle of 2004, the delay in having the kilns operational had started to affect the Company’s cashflow. In June 2004 the Company obtained a loan of $700,000 and an overdraft facility from the Bendigo Bank which was secured by a charge over the Company’s assets and Mr Carroll’s home as a collateral security.
20 In August 2004 an engineer from Brunner‑Hildebrand came to Australia to commission the high vac kiln at Mansfield. The first batch of timber was loaded into the kiln and according to Brunner‑Hildebrand’s drying schedules was expected to take five days to dry but in fact took around three weeks. Brunner‑Hildebrand representatives told Mr Carroll that teething difficulties were not uncommon but thereafter timber which had been dried in the high vac kiln dried unevenly and was unsaleable.
21 From September 2004 until 2006 the Company continued to use the pre‑dryers and the kiln and used trial and error to try to work out why the finished product was not as it had been led to believe it would be by Brunner‑Hildebrand and Shepherd Systems Pty Ltd. Brunner‑Hildebrand and Shepherd Systems Pty Ltd blamed each other for the problems and Shepherd Systems Pty Ltd failed to provide the support it had promised the Company.
22 On 12 January 2005 Mr Carroll sent an email to Mr Ingo Wallocha of Brunner‑Hildebrand in which he complained about the delays in the commissioning and the late commissioning of the pre‑dryers and the high vac kiln. In the email Mr Carroll said that “As previously discussed our cashflow has been affected enormously” and that as a result of particular delays in commissioning “by now we were alarmed by our lack of cashflow”. The email concluded:
“We did send you a proposed payment schedule, which we tried to stick to. We do intend to pay your bill, however you must be patient. The problems we have incurred have been significant. Our cash flow is very sick. We will survive, but it will take some time. It is not beneficial to either of us if we closed. Giving our file to your lawyers will not speed up our repayment plan to you. Only the success of our business will sell more of your high‑vacs in Australia. Ingo we have suffered a lot, we need your help and time to turn this business into a strong and leading lumber company.”
23 In cross‑examination Mr Carroll said that his statement in the email that “our cash flow has been affected enormously” was an overstatement of his case and that he was exaggerating the damage being done by the kilns as he was trying to get the supplier to fix the kilns. It was put to Mr Carroll that in January 2005 the Company had a lack of cashflow and his response was that in January 2005 “we were trading okay”. He said that his statement in the email that “By now we were alarmed by our lack of cashflow “was extremely exaggerated … a great exaggeration”. He explained that:
“We weren’t getting the results out of the kilns that we were expecting. .. it was affecting our cashflow”.
It was put to Mr Carroll that at this time the cashflow of the Company was affected to the point were he was concerned the Company might have to close down. His answer was “At that time, no, I wasn’t”.
24 He also said that his statement in the email that “our cashflow is very sick” was an exaggeration and that the whole letter was exaggerated.
25 By March 2005 it was apparent that the Company had significant problems with its kiln drying operations. The problems with the kilns needed to be resolved before regular production and sale of kiln dried timber could commence.
26 On 29 June 2005 Mr Carroll sent an email to Mr Wallocha in which he referred to previous complaints relating to damage to timber which had been dried in the kiln. In the email Mr Carroll said:
“We are absolutely desperate to get your help to stop destroying so much timber. This damage is really killing us. Please Ingo, do what ever you can to get Frank here to solve this problem.”
27 The Company’s cashflow problems in the first half of 2005 have little bearing on the issues to be determined having regard to the injection of capital by Mr Carroll and Mr Cameron in July 2005 to which I refer later in these reasons.
28 Between late 2004 and May 2006 Mr Carroll obtained expert advice from Mr Robert Rule of Timber Training, Creswick and Mr Graeme Dimmack as to possible solutions which the Company put into operation. Mr Rule visited the mill on a number of occasions and spoke on the telephone on a number of occasions with Mr Carroll and the Company’s employees to help Mr Carroll resolve the problems with the pre‑drying and the final drying kiln. However, this involved a trouble shooting process which took a long time to implement because of the time involved in the drying cycle. Mr Dimmack had twenty years experience in the timber industry and was employed as the Company’s Assistant Manager from 2003 until May 2005.
29 By the middle of 2005 it was clear to Mr Carroll that the kiln problems might take months or even years to resolve while stocks remained or built up in the yard waiting for the time when the kilns were properly operating. The continuing kiln problems were having an effect on the Company’s cashflow as were the significant losses it was suffering because of the large amount of timber which was unsaleable through damage in the kiln.
30 During this period Mr Carroll said that it was also apparent to him that if the kiln drying problems could be solved the Company would be able to generate positive cashflow and significant profits almost immediately from the sale of the kiln dried timber.
31 On 5 July 2005 Mr Carroll sent an email to Mr Wallocha (drafted by Mr Cameron) in which he informed Mr Wallocha that getting the two pre‑drying kilns operating correctly was now “an urgent matter of our business survival”. The email referred to the difficulties and problems the Company had experienced in getting the kilns to function properly. The email continued:
“From their performance from the start it is clear that after building the kilns you and your agent did not properly commission the kilns and get them operating to match your promises and our expectations.
Over more than 6 months now a lot of our timber has been ruined by these problems with your kilns and our cashflow and working capital position has been severely hurt.
If we don’t get it fixed soon your kilns will have put us out of business. This would be very bad for both of us.”
32 In cross‑examination Mr Carroll said that his statement that “getting the two Brunner pre‑drying kilns operating correctly now is an urgent matter of our business survival” was true but that all of his correspondence with the supplier “was to really motivate them to get them to come and fix it, so I wasn’t allergic to exaggerating”.
33 Mr Carroll was asked whether he had a view on 5 July 2005 that if the problem with the kiln was not fixed soon the Company would be out of business. His answer was that “No, I didn’t believe that”, and that the statement to that effect in the email was false. I accept this evidence.
34 In or about March 2005 the Company changed its accountant to Mr Paul Bright from WHK Armitage Downie Pty Ltd Accountants. Mr Carroll chose Mr Bright as he knew that he had a significant interest in a similar sized sawmill at Powelltown and he knew the timber mill industry well. Mr Bright had been practising as an accountant in Gippsland since 1989 and had specialised in accounting and business advisory services for participants in the timber industry. He had acted for numerous sawmills. Mr Bright recommended, and introduced, new accounting systems to the Company, prepared new valuations of stock on hand and prepared cashflow projections for the Company both as to the original green timber business on a stand‑alone basis and as to the business as a whole including kiln drying. Mr Bright did not carry out a stocktake as such. He used the quantities supplied by Mr Carroll and applied the average sales price that his sawmill obtained for green timber. The projections prepared by Mr Bright were based on assumptions that the kiln problems could be solved and the “cash burn” which the Company was suffering could be arrested.
35 Mr Carroll told Mr Bright that he required business advice regarding the Company’s cashflows, costs and expenses and an analysis of the business model and its profits and losses. In early May 2005 Mr Bright prepared interim financial statements for the Company which disclosed that it had significant negative cashflows and was making significant losses. Part of the work carried out by Mr Bright involved allocating a value to the existing rough sawn green timber stock on hand. He inspected the timber and accepted Mr Carroll’s value of $550/m3. Mr Bright considered that that value was a fair value based on his experience in the timber industry and that it reflected what he considered to be the fair value of the rough sawn green timber on a going concern basis. Mr Bright told Mr Carroll that he considered that the cause of the losses was almost exclusively due to the operations of the drying process which the Company had acquired in 2004. Mr Bright considered that the losses were occurring due to the volume of timber being damaged during the drying cycles in the kilns and the labour cost involved in attempting to get the kilns to work properly. Mr Bright considered that if the kilns could be made to work the Company should be able to operate the kiln drying timber business profitably.
36 During this same period (May/June 2005), Mr Bright prepared a costing analysis (cashflows and projected profit and loss) for the green timber milling business which the Company had historically operated and was continuing to operate at the same time as it was trying to run the new kiln drying business. Mr Bright told Mr Carroll that while there appeared to be a weakening in the profitability of this part of the business he considered that it was well configured and operated and that it was still profitable as a stand-alone business. Mr Bright’s opinion was that the green timber business was profitable on its own and that remained his opinion until May 2006.
37 In or about June 2005 Mr Bright told Mr Carroll that based on his analysis of the business and the rate of cash burn that the business was undergoing at the time, he considered that the business was close to insolvency. He told Mr Carroll that the business needed a significant capital injection until such time as the kilns could be made to work or a decision was made not to proceed any further with the kilns.
38 By June 2005 it was apparent to Mr Carroll that the Company needed more capital to address the problems which had arisen with the kilns. Although ongoing sales were good, the problems with the kilns were damaging the Company’s business. In or about June 2005, Mr Carroll personally borrowed $1 million from Bluestone Finance using his wife’s and his house as security. This money was paid to the Company in July 2005, $675,000 being new capital and the balance being used to discharge the Company’s debt to the Bendigo Bank. Around the same time Mr Cameron, through The Cameron Family Trust, advanced a further $675,000 to the Company to assist the Company in the repayment of all its debts to the Bendigo Bank. Mr Cameron and Mr Carroll signed a letter dated 5 July 2005 recording the loan which included the statement:
“Unless changed by mutual agreement it is also understood that this loan should be repaid in 3 years time on 5 July 2008, or sooner if possible.”
This loan was used to discharge the Company’s overdraft account with the Bendigo Bank.
39 On 6 July 2005 Mr Carroll, also advanced $675,308 to the Company. At that time Mr Cameron and Mr Carroll agreed that neither of them would seek repayment of any of the moneys they had advanced to the Company until such time as the business became cashflow positive again and then, any loan would only be repayable out of the profits of the business.
40 After it became apparent that the capital cost and working capital requirements of the kiln drying and machined timber expansion proved to be much greater than had been anticipated, Mr Cameron agreed his Trust would fund the cost overruns until the new expansion was complete. Between June 2004 and July 2005 the Trust made a series of loans totalling $1,555,000 to assist the financing and completion of the expansion. Mr Cameron and Mr Carroll had an understanding that the Company would pay the Trust accumulated interest and repay capital when the cashflow from the expansion permitted.
41 Notwithstanding the statements made in the emails dated 29 June 2005 and 5 July 2005, I am satisfied that as at 5 July 2005 the Company was not in a precarious financial position nor was it in a near‑insolvency situation. Although its cashflow was suffering its inventory of stock was increasing due to its kiln drying problems. I am satisfied that the Company was not insolvent as at 5 July 2005.
42 In mid 2005, Mr Carroll asked Mr Bright to draw up a business plan with the aim of encouraging Brunner‑Hildebrand to invest in the Company’s business as a joint venturer or partner of some kind. Mr Carroll believed that this was preferable to taking legal action against Brunner‑Hildebrand.
43 In early July Mr Bright prepared a draft report to the Company’s solicitors in which he identified the financial consequences that had arisen from the decision of the Company to pursue the kiln drying of timber utilising the equipment purchased from Brunner‑Hildebrand.
44 Mr Bright said in the draft report that he had practised in Gippsland for the last 16 years and had a speciality in the timber industry representing businesses at all stages of the production cycle. He stated:
“I represent numerous sawmills in various locations and have been extensively involved in benchmarking their operations through detailed cost analysis to identify key performance indicators and profit drivers. I have an intimate understanding of what makes sawmills produce profits and alternatively what makes them produce losses.”
45 Mr Bright prepared interim financial statements for the period ended 4 May 2005 on the Company’s MYOB accounting program which indicated a substantial loss. Mr Bright investigated the cause of this loss and found it to be almost exclusively due to the volume of sawn product that was damaged in the drying process and the labour costs associated with attempting to get the equipment to operate effectively. In the course of the draft report Mr Bright stated:
“Unfortunately for SM the cash burn that they have experienced in attempting to perfect the processes of the Brunner‑Hildebrand pre‑dryers and kilns have left them in a precarious position. I have advised the Directors of the Company that unless further capital is injected that they are effectively trading while insolvent, and the ramifications of this. They are in no position to take full benefit of the largest and most beneficial change to the resource allocation system that I have seen.
…
The Company has a damaged reputation in the market place as a result of the poor quality of the product.
This resulted in the degradation of the Companies profitability to the point that the Company is very close to being insolvent.
The Company is as a result of this in a very poor position to access future resources and unable to operate effectively.”
46 The evidence does not establish the precise date upon which Mr Bright sent this draft report to the Company’s solicitors but it would appear to be just after 5 July 2005, the day upon which Mr Cameron and Mr Carroll had each advanced approximately $675,000 to the Company. Mr Bright said the statements in the draft report were correct at the time he made them but that they were made before he was aware of the capital injection of $1.35 million or thereabouts made by Mr Carroll and Mr Cameron in July 2005. He considered that these capital contributions should have enabled the Company to keep trading until either the problems with the high vac kiln were fixed or a decision was made not to continue to try and make it work.
47 It is relevant to note that from July 2005 until May 2006, Mr Bright continued to be involved in giving advice to Mr Carroll regarding the Company and its business. Mr Bright was engaged by the Company during the second half of 2005 and the first half of 2006 to provide various business advisory services and to prepare financial statements. Mr Bright’s firm prepared the Company’s financial statements for the year ending 30 June 2005.
“We have commissioned an independent accountant’s report on the impact of the kiln failures on the business of our client. It concludes that our client had a successful and growing business before the kiln failures, but this is now ‘close to insolvency’ as a result of the kiln failures. Also that, had the kilns worked as represented by HH, then our client’s business would have continued to grow with strong profitability.
Our client estimates that its losses resulting from the kiln failures, if the company were to become insolvent and be placed into liquidation, would be quantified well in excess AUS$3 million.”
The letter then stated that the Company held Brunner‑Hildebrand responsible for its losses on the basis that they were directly caused by the failure of the kilns to perform. The letter then continued:
“Our client has invested all of its financial resources into the kiln project. It has no further financial resources to put in to the business. It is now concerned that, without some form of financial support, the business of our client will not survive. Without additional financial assistance there may be no option but to place our client into liquidation. Should that occur, HH faces the prospect that the creditors and any liquidator of our client would look to it for compensation for our clients losses.
Our client is taking every action available to it to avoid insolvency. Our client now looks to HH for some form of financial support. Any such arrangement could involve a broader settlement of our client’s claims, and a release from liability in favour of HH.”
49 On 1 August 2005 Shepherd Systems Pty Ltd’s solicitors sent a letter of demand to the Company demanding payment of $147,274.81 for goods sold and delivered and services rendered.
50 On 8 August 2005 Hildebrand Holztechnik GMBH responded to the Company’s solicitor’s letter stating that it was not the appropriate organisation to which the Company should be making a complaint about the kilns. That letter enclosed a letter also dated 8 August 2005 from Hildebrand Holztechnik GMBH to Shepherd Systems Pty Ltd. In that letter it stated that the kilns had been ordered and purchased from Shepherd Systems Pty Ltd and not from Hildebrand Holztechnik GMBH. It denied any responsibility for the difficulties which the Company had confronted in the installation and commissioning of the kilns.
“The owners [of the Company] have a total investment of approximately $5,600,000 and are not in a position to inject any further funds.
…
If the requested capital injection can not be sourced, The Stakeman Pty Ltd does not possess sufficient cash resources to recover from the loss of funds in the R & D phase and as such would have to look at alternative avenues to recoup its losses.”
54 On 7 February 2006 Hildebrand Holztechnik GMBH wrote a letter to Mr Carroll stating that it could not provide any further service until the Company paid a minimum of $20,000 to Shepherd Systems Pty Ltd by 21 February 2006.
55 Throughout 2005 the business of the Company was continuing to grow and the valuation of its stock was increasing. For example, sales figures for the period 1 July 2004 to 11 November 2004 were $627,802 whereas sales for the corresponding period in 2005 were $879,217.
56 On or about 2 February 2006 Mr Gavin Low, an accountant and friend of Mr Carroll referred Mr Carroll to Mr Brendan Marchesi who practised as an insolvency practitioner. Mr Carroll went to Mr Marchesi’s office on 9 February 2006 and explained the history of the Company to him. He told him about the difficulties of getting the kilns to work properly and that the problems had now been remedied. Mr Carroll said that the Company was experiencing cashflow problems. Mr Marchesi recalled telling Mr Carroll that if he believed that the business was viable it would be necessary to find an investor or further capital to enable the Company to continue to trade. According to Mr Marchesi, Mr Carroll also told him that he had been trying to sell the business but had not been able to find a buyer.
57 Mr Carroll denied telling Mr Marchesi that he had been trying to sell the business but had not been able to find a buyer. He said that he was trying to get someone to invest in the business and that he certainly did not want to sell the business which he had built up over 20 years. Mr Marchesi said that he did not have an independent recollection of the meeting although he believed that was what Mr Carroll had told him. He made notes at the time of the meeting with Mr Carroll but those notes did not record any statement by Mr Carroll that he had been trying to sell the business but had not been able to find a buyer. Apart from this conversation there was no other evidence that Mr Carroll had been trying to sell the business during the relevant period or that he had been unable to find a buyer during the relevant period or, indeed, before it. Having regard to this conflict in the evidence I am not satisfied that Mr Carroll told Mr Marchesi that he had been trying to sell the business but had not been able to find a buyer. Such a statement was inconsistent with his conduct and what he was trying to achieve in early 2006. I am also not satisfied that Mr Carroll told Mr Marchesi that the problems with the kilns had now been remedied. This was not the fact in February 2006. Mr Marchesi’s evidence in this respect was not challenged in cross‑examination nor was it raised with Mr Carroll. If Mr Carroll made the statement it was contrary to other evidence of Mr Carroll and also contrary to the evidence of Mr Rule and Mr Dimmack.
58 On 6 February 2006 a stock take as at 31 January 2006 was calculated which gave timber on hand a value of $1,041,534.37. From the time when Mr Bright was engaged by the Company in or about April 2005 the Company’s stock on hand was valued in accordance with figures provided by Mr Bright as representing appropriate values. These values were as follows:
(a) rough cut green timber; including timber in the pre‑dryers, was valued at $550/m³;
(b) rough cut material ready to be processed into stakes was valued between $0.80 and $2.75 depending on length and thickness;
(c) processed stakes ready for sale were valued at between $0.20 and $4.00 per stake depending on length and thickness and whether they were painted or not.
Mr Carroll considered Mr Bright’s figures to be appropriate based on the costs of acquisition of the timber and the historical costs of sale by the Company.
59 The problems which the Company was encountering with the operation of the kilns continued into 2006. Throughout this period the Company was taking advice from Mr Rule and Mr Dimmack regarding the state of the kilns and the time it might take to get them to work properly.
60 In early 2006 Mr Carroll told Mr Bright that the pre-dryers were still not working. In March 2006 Mr Bright inspected the timber in the Mansfield yard and he observed that it generally appeared to be well stored and maintained, was in an undeteriorated condition and so was suitable for air drying. He examined a recent stock take for the timber, by comparison with the stock he saw in the yard, which appeared to him to be accurate although he only undertook what he called “a cursory look”. Mr Bright then prepared a fresh cashflow analysis for the Company. He took into account the holding costs of the timber on site, the variation in stock volume which would occur as a result of air drying the timber on hand. He retained the values which he had previously been given for the Company’s stock on site. At this time the stock had a value recorded in the Company’s books of account in excess of $1 million. Mr Bright prepared a green mill only cashflow budget which, subject to certain achievable criteria, showed significant positive cashflows. Mr Bright gave these analyses to Mr Carroll to discuss with potential investors in the Company’s business.
61 On 23 March 2006 Shepherd Systems Pty Ltd’s solicitors served a creditor’s statutory demand on the Company claiming $147,274.81. The Company made an application to the Court to set aside the demand on the basis that the debt was disputed because the Company had an offsetting claim against Shepherd Systems Pty Ltd, relating to the defects in the pre‑dryers supplied by it, amongst other matters. The Company had quantified that claim at an amount in excess of $2 million. The statutory demand was withdrawn on 5 May 2006.
63 By March 2006 Mr Bright was aware that the Company’s cashflow situation was poor and that the funds provided by Mr Carroll and Mr Cameron in July 2005 had been exhausted in February 2006. Mr Bright was aware that Mr Carroll was looking for potential investors which he discussed with Mr Bright. Between January and April 2006 based upon the value of its stock on hand, which Mr Bright considered was saleable and able to be realised within a short period of time, namely “a couple of months”, he did not consider that the Company was insolvent at that time. He told this to Mr Carroll on a number of occasions. During this period Mr Carroll told Mr Bright that he was advancing small amounts of money to the Company to meet smaller creditors’ debts and that he was arranging for a further capital injection of $250,000 to be made to the Company. Mr Bright said that those matters:
“… also affected my consideration of whether TSM was solvent or not, as did my view that if TSM determined to stop pressing on with the kiln drying of timber, it could become cashflow positive almost immediately, as I advised Tony.”
64 Around April 2006 at the request of the Company’s solicitors, the valuers Lockwood & Co Pty Ltd provided the solicitors with a valuation of the plant and equipment of the Company on a market value for existing use basis of $1,363,460 and on an auction realisation basis of $503,955.
65 On 3 May 2006 an officer from the Australian Taxation Office telephoned Mr Carroll and told him that the Company owed the Australian Taxation Office $110,000 and that Mr Carroll had until 17 May 2006 to review how he was going to reduce the debt over the next eighteen months. On the following day Mr Carroll spoke to Mr Bright about this conversation and said that the Company did not have $110,000 on hand to pay the tax bill. Mr Bright told him that he had to do something and that he had met a business restructure specialist, Mr Andrew McLellan, who had impressed him and who might be able to assist Mr Carroll to deal with the matter. On 5 May 2006 Mr Bright telephoned Mr Carroll and gave him contact details for Mr McLellan.
66 Mr Carroll telephoned Mr McLellan and they had a meeting on 8 May 2006 at which Mr Carroll discussed the Company’s business with Mr McLellan and told him about the kiln problems. Mr McLellan told him words to the effect that the problems of the business were quite fixable. He recommended that the Company should go into voluntary administration.
THE APPOINTMENT OF THE VOLUNTARY ADMINISTRATOR
67 On 10 May 2006 Mr Carroll appointed Mr McLellan as voluntary administrator of the Company. On 6 June 2006 creditors of the Company resolved that the Company be wound‑up and Mr McLellan became the liquidator of the Company.
68 After his appointment as administrator, Mr McLellan took steps to sell the business and assets of the Company as a going concern.
69 Mr McLellan placed advertisements in newspapers and sent copies of the advertisements to prospective purchasers and to companies and entities listed on his company’s sale of business data base. Between 18 May 2006 and 13 June 2006 he received about sixteen expressions of interest none of which resulted in an offer to purchase or the sale of the assets or any portion of them. In or about mid July 2006 a consortium of former employees of the Company agreed to purchase the Company’s business plant and equipment and remaining stock for $220,000.
Inventories
71 In the balance sheets as at 31 December 2005 and as at 9 May 2006 “stock on hand” was shown as an asset at $1,041,534.37. Mr McLellan believed that the true value of the stock as at 10 May 2006 was not more than $220,000 and that the stock value in the balance sheet as at 31 December 2005 was greatly overstated. He considered it had a realisable value more in line with the value he achieved over the period that he traded the business of the Company between 10 May 2006 and 12 July 2006 when he achieved sales totalling $209,904.
72 Mr McLellan said that according to its management accounts the Company’s inventory as at 31 December 2005 was valued at $1,041,000 and $1,042,000 as at 10 May 2006, which values would, according to Australian Accounting Standards, be the lower of the cost price or net realisable value. Mr McLellan said further that the stock on the ground when he was appointed on 10 May 2006 was largely exposed, in a deteriorated condition and appeared to have been sitting on the ground for a long time. This observation was disputed by Mr Carroll.
73 Mr Carroll said that he was fully aware of the state of the stock on hand at Mansfield and that on 10 May 2006 a stocktake was undertaken. He produced a copy of that stocktake which showed that the total value of unfinished timber on hand, valued in accordance with the figures recommended to him by Mr Bright as appropriate stock values, was $1,063,712.26 and that the total value of kiln dried timber was $367,058.58. Mr Carroll said that the stock was not exposed but was wrapped in hessian and was not in a deteriorated condition; some of it had been on hand for a considerable period of time, waiting to be kiln dried but its condition had not been affected.
74 Mr Carroll said that the closing down of the mill and the liquidation of the Company had an immediate negative impact on the value of the stock and prevented the orderly sale of the timber by the Company. Mr Carroll explained this statement by saying that he carried out nearly all the sales for the business and once the fact of the administration occurred he felt that a number of customers closed the door on him.
75 I am not disposed to accept Mr McLellan’s evidence as to the value of stock on hand as at 31 December 2005 and as at 9 May 2006 where it conflicts with the evidence of Mr Carroll. Mr Carroll had twenty years experience in the timber industry whereas Mr McLellan had no experience with timber mill businesses prior to his appointment as administrator of the Company and this administration was his first timber mill business. He had no experience with timber as a stock item in relation to the assets of the Company. Further, Mr McLellan’s evidence that the stock on the ground when he was appointed was in a deteriorated condition was not based on any experience and he formed his view just by looking at the age of the timber. He did not personally undertake a stocktake.
76 In the Lockwood valuation which had been obtained in April 2006, the valuer stated that if he was asked to value the timber he believed the Company would receive between 5 percent and 25 percent of the wholesale cost if the stock was sold by way of auction, depending on the various stages of the machined timbers. On 15 May 2006 Mr McLellan telephoned Fowles Auctions who declined to value the stock and said they were not interested in attending to give a valuation.
77 On his appointment as administrator Mr McLellan engaged Mr Carroll to be the person responsible for the sale of timber and between 10 May 2006 and 12 July 2006 sales totalling $209,904 were achieved and expenses totalling $10,000 were incurred each week to achieve these sales. Mr Carroll said that these sales represented less than a quarter of the stock on hand. The balance of the stock remaining after 12 July 2006 was sold for $10,000 to the purchaser of the business. In short, the Company’s stock on hand on 10 May 2006 and timber processed during the administration was sold for a total of $219,904.
Plant and equipment
78 According to Mr McLellan the Company’s plant and equipment was valued in its accounts at $1,953,000 as at 31 December 2005 and at $1,955,000 as at 9 May 2006. This amount included $505,052 worth of capital improvements to the Company’s premises in Mansfield which was not a realisable asset. Mr McLellan was unable to obtain any offers to purchase the plant and equipment and ultimately sold it to Aussie Hardwood Pty Ltd for $180,000 plus GST, which amount was consistent with the auction realisable value attributed to the Company’s owned plant and equipment in the Lockwood valuation of $181,000 before auction realisation costs. Shepherd Systems Pty Ltd maintained that it retained title to the kiln equipment until the balance of the debt of approximately $147,000 due to it was paid.
Research and Development
79 According to Mr Bright the amount of $1,131,057.02 shown in the balance sheets as at 31 December 2005 and 9 May 2006 reflected the costs associated with the commissioning of the kiln system. Mr Carroll contended in his evidence that part of that amount reflected the costs involved in preparing the drying schedules which he maintained could be used as a future asset. Mr McLellan concluded that the amount shown in the balance sheet was not an asset which could be realised by the Company but was rather an expense and should have been treated as such in the Company’s accounts. I accept Mr McLellan’s evidence in this respect.
Goodwill
80 The balance sheet as at 31 December 2005 and 9 May 2006 showed an asset of “Goodwill at cost” of $250,000. Mr McLellan considered that this was not a realisable asset of any value to the Company although he allocated $10,000 plus GST of the purchase price of the Company’s business to goodwill as under the Sale of Assets Agreement the purchaser required goodwill items.
Loan – Cameron Family Trust
81 Various sums totalling $1,805,000 were advanced to the Company from time to time by Mr Cameron and the Cameron Family Trust as loan moneys. In particular the Cameron Family Trust had advanced $675,000 to the Company on 5 July 2005. This long term liability was not shown on the Company’s balance sheets as at 31 December 2005 and 9 May 2006. In his adjusted balance sheet Mr McLellan included the total amount of the loans by Mr Cameron and the Cameron Family Trust.
82 The result of the adjustments which Mr McLellan made to the Company’s balance sheet was that the Company had a net deficiency of $3,319,000 as at 31 December 2005 and a net asset deficiency of $4,041,000 as at 9 May 2006.
83 A more relevant financial analysis for the purposes of the issues in the proceeding is an analysis of the Company’s cashflow and, in particular, the cash available to satisfy the Company’s current liabilities as at 31 December 2005 and during the relevant period up to 10 May 2006. According to Mr McLellan’s analysis the Company had a cash deficiency as at 31 December 2005 of $232,945 and as at 10 May 2006 a cash deficiency of $639,868. He reached this conclusion by reference to the following summarised figures:
| 31 December 2005 | 10 May 2006 | |
| Bank Account Balance | $157,670 | $433 |
| Trade Debtors | $238,525 | $257,960 |
| Total Cash Available | $396,195 | $258,393 |
| Superannuation (12 months outstanding by 10 May 2006)
| $53,100 | $84,161 |
| ATO Debt (4 months outstanding by 10 May 2006)
| $17,934 | $109,853 |
| Trade Creditors | $558,206 | $704,247 |
| Total Debts | $629,140 | $898,261 |
| Deficiency | ($232,945) | ($639,868) |
As at 31 December 2005 the trade creditors included debts due and payable and outstanding more than 30 days totalling $191,810 or thereabouts and the Shepherd Systems Pty Ltd debt of $147,274.81. Mr McLellan said that the amounts for “Total Cash Available” did not take into account whether the Company could have raised cash resources against the Company’s assets.
84 Mr McLellan also considered that the Company had a deficiency of working capital of $55,000 as at 31 December 2005 and of $804,000 as at 10 May 2006. That is to say, the Company’s current assets were insufficient to meet the Company’s current liabilities to this extent.
85 Mr McLellan was cross‑examined. He was challenged on some of his conclusions in relation to the financial state of the Company at the two relevant dates. He said he had read the affidavits of Mr Carroll and Mr Bright and that there were no specific matters to which he wished to respond in relation to the contents of those affidavits.
86 There are a number of matters that emerged in Mr McLellan’s cross‑examination which have significance and relevance for the purposes of the issues to be resolved. I have summarised these matters in point form:
· He had not asked for proofs of debt or received any proofs of debt in respect of the debts incurred by the Company after 31 December 2005 other than from the State Revenue Office and the Australian Taxation Office.
· Neither he nor his staff had investigated the invoices and debts which Mr Carroll had challenged as not being due or payable by the Company.
· He had adjusted the figure for plant and equipment shown in the balance sheets from $1.4 million or thereabouts down to $725,000. He had excluded the leasehold improvements at the Mansfield property as he had not received any offer to purchase them. His figure of $725,000 was arrived at by reference to hindsight. The lease was for a period to 2026 and he disclaimed the lease and closed the business after nine weeks. He wrote down the value of the lease to zero.
· He accepted that on the assumption that the Company had a 20 year security of tenure lease then on a going concern basis its balance sheet should reflect the capital improvements made to the site in the balance sheet as an asset.
· He did not doubt the Lockwood valuation of the plant and equipment on a market value existing use basis as being an appropriate valuation on a going concern basis for the assets of the Company.
· He did not seek to negotiate the resolution of the retention of title claims made in respect of the kilns and the pre‑dryers.
· He did not make any allowance in the balance sheet for the claim against Shepherd Systems Pty Ltd or Brunner‑Hildebrand to have any value. Further, he did not discount Shepherd Systems Pty Ltd’s claimed debt of $147,274.81. He agreed that if that company was not a creditor that had an effect upon his analysis as to the solvency of the Company.
· The figure in the adjusted balance sheets for plant and equipment comprised the amount shown in the management accounts less the Lockwood kiln valuation. The kilns were valued on a going concern basis that is, market value for use.
87 The schedule of fresh debts said by Mr McLellan to be incurred during the relevant period was prepared by or under the supervision of Mr McLellan’s manager, Ms Peta Carroll. She had no personal knowledge of the manner in which any of those debts were incurred prior to 10 May 2006 and her knowledge of them came from her review of the books of account of the Company.
Cashflow
88 According to Mr McLellan, the Company had insufficient cash available to satisfy its current liabilities, including in particular its trade creditors as at 31 December 2005 and 10 May 2006. The Company’s current assets were insufficient to meet the Company’s current liabilities as at 31 December 2005 and as at 10 May 2006. The Company had deficiencies of working capital of $55,000 and $804,000 as at 31 December 2005 and 10 May 2006 respectively.
89 Mr McLellan also demonstrated that the Company had insufficient current assets to meet short-term debts by reference to a “quick asset ratio” which is a measure of a company’s liability both as at 31 December 2005 when the Company’s quick asset ratio was 0.41 and as at 10 May 2006 when the Company’s quick asset ratio was 0.16.
90 The Company incurred a total trading loss for the period 1 July 2004 to 30 June 2005 of $2,569,000 and for the period 1 July 2005 to 10 May 2006 of $2,030,000. These figures were derived by Mr McLellan after making adjustments to the stock figures.
91 On 24 October 2006 the Australian Taxation Office submitted a proof of debt in the liquidation of the Company claiming $205,856.32. The claim consisted of a running balance account deficit debt in the amount of $109,853.47, a superannuation guarantee charge for the period 1 January 2005 to 10 May 2006 in the amount of $95,973.09 and a general interest charge of $29.76. As at 30 March 2005 the Company was liable for unpaid superannuation contributions totalling $2,491.98 which amount had increased as at 31 December 2005 to $53,100 and had further increased as at 10 May 2006 to $84,161.
92 Fresh debts incurred by the company after 31 December 2005 totalled $426,469.37.
ISSUES TO BE DETERMINED
93 The claims made by the plaintiffs require the resolution and determination of the following issues:
(a) Whether Mr Carroll was a director of the Company when the Company incurred the various debts relied upon by the plaintiffs: s 588G(1)(a). This was not in issue.
(b) Whether all the debts relied upon by the plaintiffs were incurred by the Company during the “relevant period” that is between 31 December 2005 and 9 May 2006. Mr Carroll contended that the plaintiffs had not proved that all of these debts were incurred during the relevant period. The plaintiffs’ list of debts totalled $426,469.37.
(c) Whether the Company was insolvent at the time of incurring each of the debts or became insolvent by incurring each of the debts: s 588G(1)(b). Having regard to the time at which all the relevant debts were said to be incurred the plaintiffs had to establish that the Company was insolvent at all times during the relevant period. Mr Carroll contended that the plaintiffs had not established this fact.
(d) If the Company was insolvent, that is to say it was not able to pay all its debts as and when they became due and payable (s 95A of the Act), were there reasonable grounds for suspecting that the Company was insolvent, or would become insolvent, during the relevant period: s 588G(1)(c).
(e) Whether Mr Carroll was aware at the time when the debts were incurred during the relevant period that there were grounds for suspecting that the Company was insolvent or would become so insolvent: s 588G(2)(a).
(f) Whether a reasonable person in a like position in a company in the Company’s circumstances would have been so aware: s 588G(2).
(g) Whether Mr Carroll failed to prevent the Company from incurring the debts: s 588G(2). This was not in issue.
(h) Whether the creditors in relation to those debts suffered loss and damage because of the Company’s insolvency: s 588M(1)(b). This was not in issue.
94 These matters need to be established affirmatively by the plaintiffs in order to make out their cause of action. In determining whether the plaintiffs have proven each element of their cause of action I have applied the civil standard of proof, namely the balance of probabilities but I have done so consistently with, and bearing in mind, the “Briginshaw” approach. This was the standard of proof applied by Mandie J in Australian Securities and Investments Commission v Plymin (2003) 46 ACSR 126 at 208, after his Honour exhaustively considered and analysed relevant and applicable statutes and authorities. I do not consider that this approach is inconsistent with the observation of Foster J in 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 at 376 where his Honour said, in relation to previous insolvent trading provisions in the Corporations Act:
“Where the section is used to establish a head of civil liability, that liability must be established to the extent that its proof be ‘Clear and cogent such as to induce, on a balance of probabilities, an actual persuasion of the mind as to the existence of (the liability)’”.
95 Mr Carroll also relied upon the following defences arising under ss 588H(2), 588H(3), 1317S and 1318 of the Act:
(a) At the times when the debts were incurred, Mr Carroll had reasonable grounds to expect, and did expect, that the Company was solvent at that time and would remain solvent even if it incurred those debts and any other debts that it incurred at that time.
(b) At the times that the debts were incurred Mr Carroll:
(i) had reasonable grounds to believe, and did believe, that a competent and reliable person, namely Mr Paul Bright, was responsible for providing to Mr Carroll adequate information about whether the Company was solvent and Mr Bright was fulfilling that responsibility;
(ii) expected, on the basis of information provided to Mr Carroll by Mr Bright that the Company was solvent at that time and would remain solvent even if it incurred each of the debts in question and any other debts that it incurred at that time;
(c) if he had contravened s 588M of the Act has he acted honestly and, having regard to all the circumstances of the case, he ought fairly to be excused for the contravention: ss 1317S(2) and 1318.
In determining whether Mr Carroll has made out these defences, I have applied the civil standard of proof, the balance of probabilities without any Briginshaw gloss on it.
WAS THE COMPANY INSOLVENT AS AT 31 DECEMBER 2005 AND THROUGHOUT THE RELEVANT PERIOD UP TO 10 MAY 2006?
96 A critical issue in the proceeding was the evidence available to Mr Carroll as to the Company’s solvency, his belief as to the Company’s solvency, that is to say his belief as to the Company’s ability to pay all of its debts as and when they fell due, and what Mr Bright told him during the relevant period.
97 Mr Carroll was asked in the course of cross‑examination whether, when he appointed Mr McLellan as voluntary administrator of the Company on 10 May 2006 he understood the Company to be solvent or insolvent. His answer was:
“I don’t believe that I had made up my mind whether it was solvent or not.”
98 Mr Carroll signed a minute of a meeting of the director of the Company on 10 May 2006 in which he resolved to appoint Mr McLellan administrator of the Company pursuant to s 436A of the Act. In that minute under the heading “Appointment of Administrator” the following appeared:
“The Director considered the future prospects of the Company.
In the opinion of the Director the Company is insolvent.”
The minute then notes that it was resolved that:
“In the opinion of the Director the Company is insolvent and therefore an Administrator should be appointed to the Company in accordance with Part 5.3A of the Corporations Act 2001.”
99 It was pointed out in cross‑examination to Mr Carroll that in the minute he had resolved that in his opinion the Company was insolvent. He was then asked “Does it not follow that that’s what you believed on that day?” and he answered “No, I don’t believe so”. Mr Carroll was challenged on this answer. He was asked whether he read the minute before he signed it and he said “I don’t believe that I read it properly or absorbed it. I was in shock”. He said that on 10 May 2006 he was not expecting to lose the Company and he was not expecting to be shut right out of the business.
100 He was then asked:
“Are you saying that you did not appreciate, when you signed this, that you were resolving that in your opinion the Company was insolvent?”
His answer was:
“I don’t believe that I was 100% made up my mind either way, whether it was solvent or insolvent”.
101 Mr Carroll was asked what was his understanding as to the meaning of the word “insolvency” and he answered “insolvent means you can’t pay your debts”. He was asked whether he had that understanding in the period between 31 December 2005 and 10 May 2006 and whether he turned his mind to the question of insolvency during that period. He answered “I asked that question regularly”. He was then asked “You asked what question?” and he answered “whether or not we were insolvent or whether or not we were close to the line of being insolvent”.
102 Mr Carroll may not have made up his mind 100 percent that the Company was insolvent prior to 10 May 2006 but I am satisfied that on 10 May 2006 he was 100 percent satisfied that the Company was insolvent. He said so in the minute of the meeting at which he appointed the administrator of the Company. He may have been in shock and he may not have read it properly, but he did not say he did not know what he was signing. Further, the meeting with Mr McLellan was precipitated by the telephone call from the Australian Taxation Office on 3 May 2006 when he was confronted with a tax bill of $110,000 which the Company could not pay.
103 There was no issue between the parties as to the definition of “insolvency” or the relevant test to determine whether the Company was insolvent throughout the relevant period. The learning in relation to the determination of insolvency of a corporation is well established. A company is insolvent if, and only if, it is not able to pay all its debts as and when they become due and payable: ss 9 and 95A of the Act.
104 A seminal authority in relation to the meaning of “insolvency” is Sandell v Porter (1966) 115 CLR 666 in which the High Court considered the meaning of insolvency under s 95 of the Bankruptcy Act 1966 (Cth). Barwick CJ (with whom McTiernan and Windeyer JJ agreed) said at 670‑671:
“… Insolvency is expressed in s. 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.”
105 What is made clear in Sandell v Porter and restated in subsequent cases is that a temporary lack of liquidity does not mean that there is insolvency. As Mandie J pointed out in Australian Securities and Investments Commission v Plymin (supra) at 209, s 95A of the Act provides a “cashflow test” of insolvency which Mandie J described as follows:
“The cashflow test provides that a company is insolvent when it is unable to pay its debts as they fall due. It is of no consequence, under this test, that assets exceed liability. The important point is: can the company pay its way in carrying on its business? The court, in examining whether a company is suffering cashflow insolvency, will consider whether the Company is actually paying its debtors”.
• “whether or not a company is insolvent … is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole”, and is a question to which ‘[c]ommercial realities will be relevant”: Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213 at 224; 188 ALR 114 at 124‑5; 39 ACSR 305 at 316‑17 per Palmer J;
• “it is useless to say that if its assets are realised there will be ample to pay 20 shillings in the pound: this is not the test. A company may be at the same time insolvent and wealthy”: Re Tweed Garages Ltd [1962] Ch 406 at 410 per Plowman J;
• “it is thus of no consequence, of itself, that assets exceed liabilities, the important point being whether the company can pay its way in carrying on its business”: see A R Keay, “The insolvency factor in the avoidance of antecedent transactions in corporate liquidations” (1995) 21 Monash Univ LR 305 at 307);
• “the question is not whether the debtor would be able, if time were given to him, to pay his debts out of his assets, but whether he is presently able to do so with moneys actually available”: Bank of Australasia v Hall (1907) 4 CLR 1514 at 1528 per Griffith CJ;
• “It is the debtor’s inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency”: Sandell v Porter (1966) 115 CLR 666 at 670 per Barwick CJ;
• “If, as a matter of substance, the company is not able to pay its debts as they become due, the circumstance that the relevant creditors may give the company some time before they actually seek to enforce their remedies, and the company may well be able to pay them out given that time, will not negative the application of the section”: Standard Chartered Bank of Australia Ltd v Antico (Nos 1 & 2) (1995) 38 NSWLR 290 at 331 per Hodgson J;
• “for the purpose of assessing insolvency, a contractual debt is taken to be payable at the time stipulated for payment in the contract, unless there is evidence of an express or implied agreement between the company and creditor for extension of time, or a course of conduct sufficient to give rise to an estoppel against the creditor, or an established practice in the industry or between the company and its creditors whereby debts are taken to be payable at some other time than provided for in the contract: Southern Cross Interiors at NSWLR 225; ALR 125; ACSR 317.”
“[187] An asset cannot be taken into account in assessing solvency at a particular time without reference to the time it would realistically take to effect realisation and produce cash. It is no indication of solvency – indeed, it is the opposite – to point to property as available to meet debts falling due next month when, even with the utmost expedition, that property cannot be turned into cash for 6 months. Realisable property can only be taken into account in assessing solvency “if that property is in such a position as to title and otherwise that it could be realised in time to meet the indebtedness as the claims mature”: Bank of Australasia v Hall (1907) 4 CLR 1514 at 1543; 14 ALR 51 at 80; see, for example, Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (2006) 58 ACSR 631; [2006] VSC 338 at [141]‑[144] per Dodds‑Streeton J and Noxequin Pty Ltd v DCT [2007] NSWSC 87 at [14] and [15] per Barrett J.
…
[265] The liquidators have focused on what they say is a critical gap in the elements of Mr Irving’s defence. In order for the defence to succeed, there must be an expectation, held on reasonable grounds, that recourse to assets will enable debts to be paid, not at some indefinite time in the future, but so as to keep the companies solvent according to the definition in s 95A of the CA, namely, as the debts fall due to payment. It is not appropriate to base an expectation of solvency (Sheahan v Hertz Australia Pty Ltd (1995) 16 ACSR 765 at 769):
… upon the prospect that [the company] might trade profitably in the future thereby restoring its financial position … The question is whether the company at the relevant time is able to pay its debts as they become due not whether it might be able to do so in the future if given time to trade profitably …
[266] The law recognises that there is sometimes no clear dividing line between solvency and insolvency from the perspective of the directors of a trading company which is in difficulties. There is a difference between temporary illiquidity and “an endemic shortage of working capital whereby liquidity can only restored [sic] by a successful outcome of business ventures in which the existing working capital has been deployed”: Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321 at 328; 2 ACLR 559 at 566; Re Newark Pty Ltd (in liq); Taylor v Carroll [1993] 1 Qd R 409; (1991) 6 ACSR 255. The first is an embarrassment, the second is a disaster. It is easy enough to tell the difference in hindsight, when the company has either weathered the storm or foundered with all hands; sometimes it is not so easy when the company is still contending with the waves. Lack of liquidity is not conclusive of insolvency, neither is availability of assets conclusive of solvency: Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820 at 837; 4 ACLR 679 at 718.
[267] Where a company has assets which, if realised, will pay outstanding debts and will enable debts incurred during the period of realisation to be paid as they fall due, the critical question for solvency is: how soon will the proceeds of realisation be available: see the authorities cited at [187] above. Bearing in mind the commercial reality that creditors will usually prefer to wait a reasonable time to have their debts paid in full rather than insist on putting the company into insolvency if it fails to pay strictly on time, I think it can be said, as a very broad general rule, that a director would be justified in “expecting solvency” if an asset could be realised to pay accrued and future creditors in full within about 90 days.”
108 Having regard to the authorities and principles to which I have referred, I am satisfied that as at 31 December 2005 and thereafter throughout the whole of the relevant period up to 10 May 2006 the Company was insolvent. I have reached this conclusion by approaching the matter from a number of different directions.
109 Mr Carroll acknowledged that he knew that he had a cashflow shortage after 31 December 2005. He also acknowledged that during the period from 31 December 2005 to 10 May 2006 the cashflow was tight in some months. He said that “some months the cashflow was very tight”. In answer to the question whether the cashflow did not permit payment of superannuation contributions, he answered “yes”.
110 Mr Carroll conceded that from at least January 2006 the Company was not paying its debts as and when they became due and payable. This concession was also repeated in his final written submissions.
111 I am satisfied that this inability of the Company to pay its debts out of cashflow as and when they fell due continued throughout the relevant period. This is apparent from the following exchange in the course of the cross‑examination of Mr Carroll:
“…There are amounts here which became due in the relevant period and were incurred and became due in the relevant period but were not paid: isn’t that correct?---Correct.
They were not paid because the cash flow didn’t permit it. Cash flow was not sufficient to pay these amounts and others we’ll go to. I see you shrugging your shoulders, but you’ll have to voice your answer.
HIS HONOUR: Do you agree with what counsel is putting to you, Mr Carroll?---I’m not sure. I’m not sure, your Honour.
You’re not sure of the answer or you’re not sure what he’s saying?---I’m not sure of the answer.
Yes?---I did have a number of suppliers we were slow payers and that was part and parcel.
But were you slow payers because you didn’t have the cash at the time to make those payments within the trade terms given to you?---Well, even when I had a very good cash flow my payments would often be slow.
Yes.
MR GALVIN: But in this period, the relevant period after 31 December ’05, there were creditors who weren’t paid because the cash wasn’t there to pay them; isn’t that correct?---Yes.
And amongst those creditors were creditors who had not agreed to extend the time for payment isn’t that correct?---Yes.
…
Well, in attempting to maximise the return, you were still unable, to maximise the return on your stock, you were still unable to pay these debts in that period?---I was still unable to pay some of those debts, yes.”
It is apparent from Mr Carroll’s evidence and, in particular, the answers to which I have referred that on and after 31 December 2005 and up to 10 May 2006 the Company did not have sufficient cashflow in fact (leaving aside for the moment whether there were other sources available from which cash could be obtained or realised to pay those debts) which enabled it to pay all its debts which became due and payable during that period.
112 The Company’s balance sheet as at 31 December 2005 disclosed current liabilities of $980,820.31 comprised as follows:
“Trade creditors $ 558,206.09
Credit card debts $ 14,838.00
Tax debts (payroll & GST) $ 122,243.83
Centrepoint Finance $ 36,003.56
Suncorp Metway $ 36,381.36
Toyota Finance $ 4,168.96
Bendigo Bank $ 208,978.51
$ 980,820.31”
113 Although Mr Carroll contended that some of the last four liabilities were hire purchase liabilities which were not necessarily immediately payable but were otherwise payable over a period of 12 months, there was no evidence before me as to the terms of the agreements under which those liabilities either had accrued or were accruing. Even if these liabilities are regarded as hire purchase liabilities payable over 12 months the result still remains that there were current liabilities as at 31 December 2005 of $695,287.92.
114 According to the balance sheet as at 31 December 2005 there was total cash available of $167,619 and trade debtors of $238,524.94, a total of $406,143.
115 It should also be noted that at this point of time, 31 December 2005, there were outstanding debts which had not been paid: see par [70] above. As Mandie J pointed out in Australian Securities and Investments Commission v Plymin (supra) at 370 the mere fact of non‑payment of debts is a relevant factor to be taken into account in determining whether a company is insolvent.
116 As I pointed out earlier, and as the authorities confirm, the determination of solvency is not done on a balance sheet basis but rather on a cashflow basis. This gives rise to the question – what other sources of cash were available to the Company as at 31 December 2005 and thereafter to enable it to pay debts then due and payable? Mr Carroll and Mr Cameron had ceased to advance money to the Company and the moneys which they had earlier advanced had been exhausted and used up.
117 Mr Carroll submitted that the reason why the Company was not paying its debts as and when they became due and payable on and after 31 December 2005 was not an inability to raise cash with which to pay its debtors, but “an apparent unwillingness (not inability)” on his part to raise cash to pay the debts. It was submitted that Mr Carroll was unwilling to borrow money against the security of the Company’s assets, was unwilling to inject fresh capital into the Company and was unwilling to sell down its timber stock on hand for anything less than its full perceived value. There is no evidence to support this submission. There were no assets of the Company which could be provided as security to support the borrowing of sufficient money to provide sufficient cash to discharge all the Company’s debts then due and payable. None were identified.
118 Nor was there identified any source to which Mr Carroll could have had recourse to obtain fresh capital to inject fresh capital into the Company. According to the Company’s solicitors and Mr Carroll, he had no further avenues open to him to provide such capital. In the letter the Company’s solicitors sent to Brunner‑Hildebrand on 20 July 2005 (par [48] above) the solicitors stated:
“Our client has invested all of its financial resources into the kiln project. It has no further financial resources to put in to the business”.
Further, in the letter Mr Carroll wrote to Brunner‑Hildebrand on 30 August 2005 (par [51] above), he said:
“We do not have any further resources left after putting in this total of $A3,000,000.”
And in the business proposal prepared by Mr Carroll at or about this time for consideration by Brunner‑Hildebrand (par [52] above) it was stated:
“The owners [of the Company] have a total investment of approximately $5,600,000 and are not in a position to inject any further funds”.
119 Mr Carroll’s submission that he had an apparent unwillingness (not inability) to raise cash by selling down the Company’s timber stock on hand at anything less than its full perceived value presupposes, and is based on the premise, that had he been so willing to sell down the Company’s timber stock, the cash received would have enabled the Company to obtain sufficient cash funds to enable it to pay all its debts then due and payable but nevertheless unpaid.
120 There is no evidence to support this presupposition or premise. Mr Carroll relied on a passage in the course of his cross‑examination to show that this presupposition or premise was justified. I have added the passage leading up to the passage relied on to put the passage relied on in context:
“HIS HONOUR But what’s being put to you, Mr Carroll, is that the company wasn’t able to pay all its bills out of the cash flow from sales of timber. The cash flow from sales of timber wasn’t sufficient to pay all the debts of the company as they fell due?---I wouldn’t – could I see the value of the sales on a monthly basis, just to have a look at it, because that would give me a better feel for the figures.
MR GALVIN: Well, I don’t have that with me but, as I understand it, you have already said that the company wasn’t – because of tight cash flow – able to pay all these creditors, their entitlements as they were accrued in the relevant period. You have said that?---I agree.
Now, it follows, does it not, that the sale of stock of timber didn’t overcome that problem in that period?---I would agree.
And you were selling as much stock as you could. I think you said you were using – you were selling as much as possible for the best price possible. Is that not the case?---I was trying to maximise the sale of the price that I was getting. I could have got my prices and got better sales. I could have sold the timber, like, the timber that was being air dried, wrapped, I could have sold that to other companies that had kilns but that would only be a short term fix. I was hanging on to get the better dollar.
Well, in attempting to maximise the return, you were still unable, to maximise the return on your stock, you were still unable to pay these debts in that period?---I was still unable to pay some of those debts, yes.”
121 There was no evidence available which would enable the drawing of a conclusion or the forming of an opinion that sufficient extra timber stock could, or would, have been sold within the relatively short period required, to enable the funding of the amount required to satisfy and discharge all debts of the Company then due and payable which were outstanding and unpaid. What occurred when the administrator came on board on 10 May 2009 and sold stock through the efforts of Mr Carroll, albeit with hindsight, supports this conclusion.
122 I do not consider that there was any other source available to the Company as at 31 December 2005 and during the subsequent relevant period, which could have contributed to, and enhanced, the cashflow and cash position of the Company.
124 Mr Carroll relied upon a number of matters in support of his submission that the Company was not insolvent as at 31 December 2005 or thereafter during the relevant period. However, when considering these matters it is important to bear in mind, as referred to earlier in par [106], that the issue of solvency is a question of fact to be determined from an analysis of the Company’s financial position taken as a whole, having regard to “commercial realities”. A particular “commercial reality” is the extent to which a company’s assets can be realised or made available as a security to raise money and the time it would take to do so. In this respect the observation of Palmer J in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 188 ALR 114 at par [54] is relevant:
“In considering the company’s financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable.”
125 The significance of the time within which an asset can be realised in order to meet the liabilities of the Company was again emphasised in Hall v Poolman (supra) at par [187]: see par [107] above.
126 The existence or availability of assets is not an answer to a claim of insolvency in the absence of any indication as to when, and to what extent, those assets can be pledged or realised. In order to have assets taken into account in determining the issue of solvency on a cashflow basis, it is necessary to establish that those assets are readily realisable in a short space of time: Hall v Poolman (supra) at par [267]. In the passage extracted at par [107] above, it is important to note that Palmer J referred to the realisation of an asset in “about 90 days” in order to pay not only accrued but also future creditors in full.
127 Mr Carroll relied principally on the Company’s inventory of stock to demonstrate the availability of a source from which cash could be obtained to pay existing debts. He submitted that in determining whether the Company was solvent at relevant times it was appropriate to take into account, and the Court was entitled to take into account, that at all relevant times it had timber stock on hand in excess in value of $1 million. Mr Carroll submitted that immediately prior to the commencement of the administration on 10 May 2006 the value of the stock had increased to in excess of $1.4 million. Mr Carroll relied upon Mr Bright’s evidence, which he submitted was uncontested, that the timber stock could be realised by the Company as a going concern within two months. He submitted this was within the three month period referred to in Hall v Poolman (supra) at par [267] as the broadly acceptable timeframe for realisation of assets to meet debts.
128 The value of the stock was contentious between the parties and Mr Bright’s evidence must be treated with caution. Mr Bright did not undertake a stocktake valuation of the stock himself. He said that he was required “to allocate a value” to the existing stock on hand and he did so on the basis of an inspection. He did not attempt to confirm or ascertain the value of the stock otherwise than by what he called “a cursory look”.
129 I do not consider that I should take into account the total “value” of the stock as set out in either of the balance sheets or the stocktake figures referred to by Mr Carroll in determining whether on the dates of the balance sheets and stocktakes the Company was able to pay all its debts as and when they fell due.
130 There was no evidence of the value of the stock as at 31 December 2005. Mr Carroll said that he did not enter the amount of $1,041,000 shown in the accounts of the Company as the value of the stock as at 31 December 2005 personally. He said there would have been a stocktake done at the end of December which was valued and that that would be what the figure represented. He accepted that a stocktake was not a valuation as such and he implicitly accepted that the monthly stocktakes to which he had referred were not valuations of stock.
131 Mr Bright said that during the period from January to April 2006 he considered that the stock on hand was “saleable and able to be realised within a short period of time, that is a couple of months”. However, he did not say whether he was referring to sale in the ordinary course of business or some form of forced sale such as by way of auction or a fire sale. He said that based on the value of the stock on hand he did not consider that the Company was insolvent during that period because of his view that the stock was saleable and able to be realised within a short period of time, that is a couple of months. Mr Carroll’s evidence was that because of the Company’s tight cashflow it was unable to pay all its creditors their entitlements as they accrued in the relevant period and that the sale of the stock of timber did not overcome that problem during that period. I therefore assume that Mr Bright was not saying that the stock on hand was saleable and able to be realised in the ordinary course of business within a short period of time to which he referred but rather, that he meant in some form of forced sale. What was not made clear was the amount which might have been realised if stock were to be sold over that two month period.
132 In the events which occurred, timber stock could not be realised within two months in the ordinary course of business or on a going concern basis. Fowles Auctions were not interested in valuing the stock.
133 In the nine weeks of trading after the appointment of the administrator only $210,000 or thereabouts was realised from trading although I accept that the amount received was substantially impacted upon by the fact that the Company was under administration which had a negative effect on its ability to achieve sales at ordinary prices. It is significant to note that Mr Carroll was in charge of selling the stock during the nine week period after the administrator was appointed. His evidence was:
“The stock that you was selling, or the way you were going about selling the stock in that nine week period was consistent with the way you had gone about trying to sell stock in the previous five months, wasn’t it?---Yes, but like I was under a lot of duress, a lot of pressure to maximise my sales so I was really being pressured to sell, sell, sell. And I am not successful when I am on the back foot.
Nonetheless, you were trying to obtain a reasonable fair price, weren’t you?---Absolutely. I wasn’t going to give it away.”
134 Mr Carroll submitted that the value of the timber stock at any given date should not be measured with hindsight but rather by reference to “commercial realities” at the relevant date. That submission does not mean that the Court should disregard what in fact occurred in relation to the sales of the timber stock. I consider that what happened with hindsight is relevant to the question of solvency.
135 I adopt, with respect, the observation of Palmer J in Lewis v Doran (2004) 50 ACSR 175 at 198‑199:
“[108] Where the question is retrospective insolvency, the court has the inestimable benefit of the wisdom of hindsight. One can see the whole picture, both before, as at and after the alleged date of insolvency. The court will be able to see whether as at the alleged date of insolvency the company was, or was not actually paying all of its debts as they fell due and whether it did, or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and common sense, had to be considered as at the date of insolvency. By reference to what actually happened, rather than to conflicting experts’ opinions as to the implications of balance sheets, the court’s task in assessing insolvency as at the alleged date should not be very difficult.”
136 Ialsoadopt,withrespect,theobservationofPalmer JinHallvPoolman(supra)at165:
“[203] Solvency is a question of fact and in finding whether or not a company was solvent at a particular point of time in the past the court does not proceed upon possibility or speculation as to what might have happened when it has clear evidence as to what did, in fact, happen. …”
137 There was no other source available to the Company as at 31 December 2005 and throughout the relevant period which could have assisted the cashflow position of the Company to enable it to pay its debts as and when they fell due at that time. Plant and equipment as at 31 December 2005 had a value in the balance sheet of $1,447,972.76 and that value as at 9 May 2006 was not much different. Mr Carroll said that the value of the plant and equipment in the Company’s accounts was arrived at by Mr Bright but Mr Bright did not give any evidence to that effect.
138 Mr Carroll gave evidence that around April 2006 he had discussions regarding the obtaining of finance over equipment but these discussions did not proceed anywhere. There was no evidence before the Court that finance on the security of any of the plant and equipment of the Company was available.
139 The values in the balance sheets in respect of research and development and goodwill had no realisable value to assist the Company in its cashflow situation. Nor did the capital improvements on the property at Mansfield. No further funds were available for advance to the Company by Mr Carroll or Mr Cameron after 31 December 2005. Mr Carroll said that at all relevant times until he appointed the administrator he had the capacity to inject further funds into the Company but there was no evidence as to that capacity or whether it would have been of a sufficient amount to enable the Company to pay all its debts as and when they fell due. I do not accept that Mr Carroll had that capacity or that he was willing to inject any further substantial funds into the Company after 31 December 2005 sufficient to pay all outstanding creditors during the relevant period. He said that he did not have that capacity in the letter he wrote to Brunner‑Hildebrand on 30 August 2005 (par [51] above). The Company’s solicitors had made the same statement in their letter to Brunner‑Hildebrand on 20 July 2005 (par [48] above).
140 I am also satisfied that at all relevant times between 31 December and 9 May 2006 the Company was insolvent, that is to say it was unable to pay all its debts out of its cashflow from whatever sources were available to it as and when they fell due.
141 Although Mr Carroll submitted that Mr McLellan had only addressed the Company’s solvency as at two dates namely, 31 December 2005 and 10 May 2006 and that insolvency could not be made out at any other date in the relevant period, there was sufficient evidence to satisfy me that during the whole of the relevant period the Company was insolvent. Between 31 December 2005 and 9 May 2006 the Company’s tax office running balance account increased. Further, the bank statements during the relevant period showed a deterioration in the Company’s cashflow position. The aged payables listing as at 10 May 2006 show that the Company’s debts were not being paid over longer and longer periods. Also, the invoices from suppliers and statements from creditors during the relevant period cannot be ignored.
142 As the plaintiffs submitted, the only significant change in the Company’s financial position from 31 December 2005 to 10 May 2006 was that the financial position deteriorated rather than improved; it did not remain stable. During this period according to the balance sheets as at 31 December 2005 and 9 May 2006 cash on hand declined from $164,000 to $64,000 although on the date of the appointment of the administrator it appears that there was only $432.89 cash on hand. Also, at the end of the relevant period, according to the Company’s records the Company’s GST liability had increased from $21,000 to $119,000 and the Company’s trade creditors had increased from $550,000 to $705,000.
143 My conclusion is therefore, that on 31 December 2005 and 10 May 2006 and on all the dates between the Company was insolvent.
WERE THERE REASONABLE GROUNDS FOR SUSPECTING INSOLVENCY?
144 The next issue to determine is whether at the time the Company was insolvent there were reasonable grounds for suspecting that the Company was insolvent or would so become insolvent as the case may be: s 588G(1)(c). The test prescribed by s 588G(1)(c) is an objective test: Powell v Fryer (2001) 159 FLR 433, Hall v Poolman (supra) at 174. The concept of “suspecting” or “suspicion” involves having a state of mind which falls between having a firm belief or a significant degree of satisfaction that insolvency exists on the one hand and wondering whether it exists on the other. The concept of having a “suspicion” requires an affirmative feeling: Hall v Poolman (supra) at 174.
145 I am satisfied that on 31 December 2005 and throughout the relevant period up to 10 May 2006 there were reasonable grounds for suspecting that the Company was insolvent or would so become insolvent. My reasons for reaching this conclusion are predicated upon the following facts and circumstances:
· At the time Mr Bright was appointed accountant for the Company in or about March 2005 the Company was suffering from “cash burn” which needed to be arrested. That cash burn was arrested temporarily in July 2005 with the injections of funds by Mr Carroll and Mr Cameron but was resurrected at the end of December 2005 when those funds were used up and exhausted.
· It was apparent to Mr Carroll by March 2005 that the Company had a significant problem with its kiln drying operations which might take many months or years to resolve.
· The kilns did not work properly after their installation and commissioning and had not worked properly since April 2005, which situation was continuing as at 31 December 2005 and throughout the relevant period.
· Prior to 31 December 2005 and throughout the relevant period the Company had experienced, and continued to experience, serious cashflow problems which were caused by the problems with the kilns and it had complained on a number of occasions to the manufacturer without satisfaction.
· In July 2005 Mr Bright had told Mr Carroll that the Company was “very close to being insolvent”. Mr Bright acknowledged that this observation was made before Mr Carroll and Mr Cameron through the Cameron Family Trust had invested $1.675 million or thereabouts in the Company in July 2005. However, those funds had been used up by December 2005. As at 31 December 2005 the Company’s cashflow problems were continuing and had not eased.
· The Company had not been able to attract further investment in it notwithstanding Mr Carroll’s efforts to obtain such investment in order to overcome the Company’s cashflow problems.
· Throughout the relevant period the Company was not able to pay its debts out of its cashflow and trade debts increased.
· The Company’s indebtedness to the Australian Tax Office increased to around $80,000 (including superannuation guarantee charges) by the end of the relevant period.
AWARENESS THAT THERE WERE GROUNDS FOR SUSPECTING THAT THE COMPANY WAS INSOLVENT
146 I am satisfied that on 31 December 2005 and throughout the relevant period up to 9 May 2006 Mr Carroll was aware that there were reasonable grounds for suspecting that the Company was insolvent. Further, I am satisfied that a reasonable person in a like position in a company in the Company’s circumstances would also have been so aware.
147 Mr Carroll was well aware of the problems which existed with the kilns and the impact that was having on the Company’s cashflow and ability to prepare timber stock for sale. For example, on 12 January 2005 he told Mr Wallocha that the Company’s cashflow had been “affected enormously”. He said that he was exaggerating the situation to get the matter moving but I am satisfied that he was well aware of the significant impact the problems with the kilns were having on the Company’s cashflow. In the same email he said that they were “alarmed by our lack of cashflow”. Six months later his language had not changed. On 29 June 2005 he wrote to Mr Wallocha and said that the damaged wood which was coming out of the kilns was “really killing us”. Again, Mr Carroll said that he exaggerated the situation to get Brunner‑Hildebrand to fix the problems. Nevertheless there is no doubt that he regarded these matters, as he said in the email, as “very urgent issues”. It was seven days later on 5 July 2005 that he told Mr Wallocha in an email that getting the kilns operating correctly was now “an urgent matter of our business survival”. Again, he said he exaggerated the situation to motivate the company but he was well aware of the difficulties the kilns were causing. The problems with the kilns and their deleterious effect on the Company’s cashflow continued throughout the relevant period.
“Did you have that understanding [insolvent means you can’t pay your debts] in the period between 31 December 2005 and May 2006, did you turn your mind to the question of insolvency during that period?”
He answered:
“I asked that question regularly.”
He said that the question he asked was:
“Whether or not we were insolvent or whether or not we were close to the line of being insolvent.”
149 It should also be noted that in February 2006 Mr Carroll consulted Mr Marchesi, an insolvency practitioner, who Mr Carroll knew was an accountant who specialised in helping businesses that were in trouble.
150 Mr Carroll said that at the time he appointed Mr McLellan administrator he did not believe that he was 100 percent made up in his mind either way whether the Company was solvent or insolvent. The minute of appointment which he signed as director of the Company on 10 May 2006 stated that the Company was insolvent. When he was asked whether that statement in the minute was not true, he answered “I believed that I hadn’t stopped and read and considered what I was signing properly”. However, he did not say that he did not know what he was signing. I also note that on the previous day 9 May 2006 he withdrew most of the balance of the money standing in the Company’s bank account to reimburse himself for debts he had paid on behalf of the Company.
151 I am satisfied that throughout the relevant period and particularly on 9 May 2006 Mr Carroll was aware that there were grounds for suspecting that the Company was insolvent. If I am wrong in this respect I am satisfied that a reasonable person in Mr Carroll’s position in a company in the Company’s circumstances would have been aware that there were grounds for suspecting that the Company was insolvent.
152 Mr Carroll submitted that the fact that the Company was a fully operating, going concern until 10 May 2006 was a factor which had to be taken into account in considering whether there were reasonable grounds at any time during the relevant period for suspecting that the Company was insolvent. Taking that factor into account does not advance the inquiry any distance because it is necessary to analyse and understand the manner in which the Company was operating, its financial structure and, in particular, the extent to which it was able to pay, and was paying, all its debts as and when they fell due.
153 Mr Carroll relied upon a number of matters which he said, when taken into account with the fact that the Company was a fully operating going concern, demonstrated that there were not reasonable grounds for suspecting that the Company was insolvent. However, on closer analysis these matters do not support the proposition that on 31 December 2005 and during the relevant period there were not reasonable grounds for suspecting that the Company was insolvent.
154 Mr Carroll submitted that the following facts and circumstances demonstrated, and justified, the view that as at 31 December 2005 and throughout the relevant period there were not reasonable grounds for suspecting that the Company was insolvent:
· The apparent value of the assets of the Company as a going concern as at 31 December 2005 and thereafter. This could be ascertained from the balance sheets and other financial records.
· It was reasonable to believe that it was possible for the Company to raise cash with which to satisfy the Company’s debts as and when they fell due by borrowing against a security over the Company’s assets or selling the timber stock on hand.
· It was reasonable at that time to believe that it was possible for the Company to raise cash by the making of unsecured loans by Mr Carroll with which to satisfy the Company’s debts as and when they fell due.
· Mr Carroll had no reason to believe at any time that the Company’s business could not be sold as a going concern.
· Mr Bright’s concerns about the Company’s solvency in early July 2005 preceded the capital injection by Mr Carroll and Mr Cameron.
· It was reasonable at that time to believe that the problems with the kilns could be fixed. Mr Rule told Mr Carroll that he believed they could be but there was no firm evidence as to how long it would take.
· As at 31 December 2005 the Company had unencumbered assets including cash of $166,000, trade debtors of $238,000, timber stock worth in excess of $1 million, plant and equipment worth $1,447,000, capital improvements to the leased premises worth $505,051.77, motor vehicles valued at $45,868 and office equipment valued at $9,000.
· Regardless of the values assigned in the balance sheets to research and development and goodwill there were still unencumbered tangible assets in the books of the Company worth $3.45 million as at December 2005.
I reject that submission. The facts and circumstances relied upon by Mr Carroll do not demonstrate or justify the view for which Mr Carroll contended for the following reasons:
· I have already found that there were no such assets of the Company available, nor was stock available from a temporal point of view as at 31 December 2005 or thereafter, which could be made available to pay all the debts of the Company during the relevant period as and when they fell due.
· It was not reasonable at that time to believe that it was possible for the Company to raise cash, by the making of unsecured loans by Mr Carroll with which to satisfy all the Company’s debts as and when they fell due. Mr Carroll did not have the funds to do so.
· There was no evidence which bore upon the issue whether Mr Carroll had any reason to believe, at any given time, that the Company’s business could not be sold as a going concern. Having regard to the problems which continued in relation to the commissioning and operation of the kilns the sale of the business as a going concern was problematic.
· I do not take into account Mr Bright’s expressed concerns about the Company’s solvency in early July 2005 having regard to the capital injection by Mr Carroll and Mr Cameron which occurred in that month.
· Having regard to the history of the installation and commissioning of the kilns, their operation and the damage to timber that was produced from them, there was no basis throughout the relevant period to believe that the problems with the kilns could be fixed during such a period so as to enable the cashflow of the Company to improve to the extent of enabling the Company to pay all its debts as and when they fell due. Mr Carroll relied on Mr Rule’s evidence but that did not demonstrate that the problems with the kilns could be fixed at any time during the relevant period: see par [179].
155 Mr Carroll submitted that it would have appeared to a hypothetical reasonable person that an analysis of the balance sheets of the Company as at 31 December 2005 and 9 May 2006 disclosed that the Company had a number of unencumbered assets including cash of $166,000, trade debtors of $238,000, timber stock worth in excess of $1 million, plant and equipment worth $1,447,000, capital improvements to its leased premises worth $505,051.77, motor vehicles valued at $45,868 and office equipment valued at $9,000. According to Mr Carroll, that analysis shows that there were still unencumbered tangible assets in the books of the Company of $3.45 million as at 31 December 2005. It followed, Mr Carroll submitted, that all the assets were available as security against which cash might have been borrowed to satisfy short term liabilities of the Company. I reject that submission. For the reasons to which I have already referred, I am satisfied that there were not, and that a reasonable person would not have considered that there were, sufficient unencumbered tangible assets in the books of the Company available either to pay and discharge all the debts of the Company as and when they fell due during the relevant period or to provide security for the payment of them.
156 Mr Carroll submitted that his acceptance that the Company was not in fact paying its debts as and when they fell due was not an admission that he was aware or suspected that the Company was insolvent. The basis for this submission was that that was only one of the factors to be taken into account in determining solvency. I have already found that the factors upon which Mr Carroll relied did not, taken together, demonstrate solvency. Mr Carroll submitted that “one unusual feature of this case” was that while the Company was not paying its debts as and when they became due and payable, the reason for that state of affairs was not an inability to raise cash with which to pay off its debtors but “an apparent unwillingness (not inability)” on the part of Mr Carroll to raise cash to pay them. I have rejected that submission: see par [123] above.
157 Mr Carroll’s acceptance that the Company was not in fact paying its debts as and when they fell due may not be an admission, strictly so called, that he was aware or suspected that the Company was insolvent but I consider that it is a significant factor to take into account in determining whether he was so aware or whether he suspected that the Company was insolvent.
158 Further, I consider that a reasonable person in a like position to Mr Carroll in a company in the Company’s circumstances would have been aware at the time the debts were incurred during the relevant period that there were grounds for suspecting that the Company was insolvent or would become so insolvent if that person was aware that the Company was not in fact paying its debts as and when they fell due.
DID MR CARROLL FAIL TO PREVENT THE COMPANY FROM INCURRING THE DEBTS?
159 Section 588G(2) requires the plaintiffs to establish that Mr Carroll failed to prevent the Company from incurring the debts. This was not a contentious issue and I am satisfied that Mr Carroll failed to prevent the Company from incurring the debts.
DID THE CREDITORS SUFFER LOSS AND DAMAGE BECAUSE OF THE COMPANY’S DEBTS?
160 The answer to this question, required to be answered by s 588M(1)(b) of the Act depends upon a finding as to the identification and quantum of the debts incurred. The plaintiffs initially claimed $459,119.02 but at trial, in the light of calculations made by Mr Carroll, reduced this amount by $32,649.65 to $426,469.37. Mr Carroll challenged a number of these debts and initially contended in his Amended Defence that a number of the debts were disputed, the quantum of those debts being $135,146.45. He further alleged that a part of the taxation liabilities ($123,080.22) was incurred prior to the relevant period.
161 At the trial the plaintiffs conceded that certain debts were not properly claimable. These amounted to $32,649.65. The plaintiffs’ claim as finally formulated (less interest and costs) totalled $426,469.37.
162 Mr Carroll’s response to the quantum of debts claimed by the plaintiffs was to say that the fresh debts after 31 December 2005 totalled $342,903.29. The difference between this figure and the plaintiffs’ claim is represented by debts disputed by Mr Carroll and a number of debts in respect of which he claimed that he had made the payments himself. Mr Carroll claimed to have paid debts of the Company in the total sum of $38,581.82. He initially claimed in his affidavit that he made these payments “via my personal credit cards (American Express and Visa cards).” However, in the course of cross-examination he said that all but one of those debts had been paid by him by personal cheque. He said he had not been reimbursed for those amounts. The plaintiffs criticised this evidence and submitted that there was no documentary evidence of the payments. I accept Mr Carroll’s evidence in this respect.
163 The plaintiffs submitted that to the extent that Mr Carroll had paid debts of the Company, he was entitled to be indemnified by the Company and that accordingly he was the person who suffered loss and damage because of the Company’s insolvency. The plaintiffs submitted that payments made by Mr Carroll in discharge of debts due by the Company did not reduce the amount which the plaintiffs were entitled to recover under s 588M of the Act. There was no evidence that Mr Carroll had made a claim upon the Company in respect of any of the amounts which he had paid personally to discharge debts of the Company. It follows, therefore, that the amount of $38,581.82 should be deducted from the amount of the claim by the plaintiffs. The result is that the plaintiffs’ claim, on this basis, is reduced from $426,469.37 to $387,887.55.
164 Mr Carroll challenged a number of other debts claimed by the plaintiffs. The plaintiffs submitted that they were entitled to rely on the books and records of the Company as prima facie evidence of the Company’s liabilities. That may be so, but it is necessary to look at the challenge made by Mr Carroll to each of the disputed debts to determine whether that prima facie evidence either has been, or can be, displaced. Some of the debts were of relatively small amounts and I propose simply to summarise my conclusion in relation to each of those debts.
· Advanced Timber Systems Pty Ltd
Mr Carroll challenged $3,550.69 of this debt on the basis that it related to repair work on equipment which was not properly carried out as the equipment “blew up” a few days after repairs were conducted. Accordingly, I am not satisfied that the plaintiffs have established that the amount of $3,550.69 was due and owing.
· Allianz Workers Compensation
I accept Mr Carroll’s submission that only $13,889.90 is claimable by the plaintiffs. That is the amount claimed in the proof of debt lodged by Allianz Australia Workers Compensation (Vic) Limited with the plaintiffs on 11 July 2006.
· Broken River Imaging
The amount of $277.95 relates to medical services supplied to two employees. Mr Carroll submitted that these amounts were payable by Workcover. I accept the submission of the plaintiffs that Workcover only covers costs if the initial $546 of an injured worker’s medical expenses in each instance is paid by the Company.
· Central General Practice
The amount of $42.90 relates to medical services supplied to an employee. Mr Carroll submitted that this amount was payable by Workcover. I accept the submission of the plaintiffs that Workcover only covers costs if the initial $546 of an injured worker’s medical expenses in each instance is paid by the Company.
· Clark & Co
The amount of $50 is claimed in respect of a rental property at Mansfield. As the invoice is dated 31 May 2006 I am not satisfied that the rental had accrued as at 10 May 2006.
· Mansfield District Hospital
The amount of $131 relates to medical services supplied to employees. Mr Carroll submitted that these amounts were payable by Workcover. I accept the submission of the plaintiffs that Workcover only covers costs if the initial $546 of an injured worker’s medical expenses in each instance is paid by the Company.
· Mansfield Medical Clinic
The amount of $1,178.50 relates to medical services supplied to five employees. Mr Carroll submitted that these amounts were payable by Workcover. I accept the submission of the plaintiffs that Workcover only covers costs if the initial $546 of an injured worker’s medical expenses in each instance is paid by the Company.
· Ryan & McNulty
The plaintiffs conceded that $4,749.90 of this debt was not due and owing and $1,114.27 was in issue. I have considered the invoices and am not satisfied that the balance of the debt was incurred subsequent to 31 December 2005.
· Sawmaster Industries
The amount of $64.83 is claimed in respect of interest accrued on an outstanding balance as at March 2006. I reject Mr Carroll’s submission that as it is interest on the pre‑existing debt there is no evidence as to when the interest was incurred.
· State Revenue Office
The plaintiffs relied on a Proof of Debt which showed that the amount was due up to 9 May 2006 “based an estimated wages”. Mr Carroll submitted that the plaintiffs had not proved that the Company had incurred an actual debt to the Commissioner of State Revenue during the relevant period. Having regard to the provisions of the Payroll Tax Act 1971 (Vic) relating to the liability of a person to pay payroll tax, I reject Mr Carroll’s submission.
· Telstra
Mr Carroll submitted that the disputed part of these debts was not proven as to when the debts were incurred. I accept the plaintiffs’ submission that each of the Telstra invoices relates to services rendered during the relevant period.
· TRUenergy
The plaintiffs claimed that $26,540.26 was due and owing. Mr Carroll gave evidence that he paid personally $9,682.44 which evidence I accept.
· VicForests
Mr Carroll submitted that the plaintiffs had not established when the debts were incurred in relation to some of the debts claimed. These debts related to licence fees. The statement in evidence shows that the fees were incurred in the months of January, February, March and April 2006, within the relevant period.
· Victorian Association of Forest Industries
Mr Carroll submitted that the plaintiffs had not established when these debts were incurred. I reject that submission. The invoices in evidence show that the debts were incurred within the relevant period.
· WHK Armitage Downie
Mr Carroll acknowledged that part of the debt was incurred during the relevant period. The plaintiffs submitted that only two attendances from the accountants fell outside the relevant period. Based upon the invoices in evidence the debt claimed by the plaintiffs should be reduced to $5,020.13.
· Yarra Valley Saws
I accept Mr Carroll’s evidence that the invoice for $374 represents debts incurred prior to 31 December 2005.
· Superannuation Guarantee charges
Mr Carroll submitted that the amount of $12,341.04 was the amount recorded as due during the relevant period in the records prepared by the plaintiffs. The amount submitted by Mr Carroll was verified in cross‑examination by Ms Peta Carroll, a manager who assisted Mr McLellan in the performance of his duties as liquidator. In final submissions the plaintiffs explained that Mr Carroll had misconstrued the record prepared by Ms Carroll. The plaintiffs’ submission was not founded upon any evidence before the Court. I accept Mr Carroll’s submission.
166 I turn to the defences raised by Mr Carroll under ss 588H(2), 588H(3), 1317S and 1318 of the Act.
AT THE TIME THAT THE DEBTS WERE INCURRED DID MR CARROLL HAVE REASONABLE GROUNDS TO EXPECT, AND DID EXPECT, THAT THE COMPANY WAS SOLVENT AT THAT TIME AND WOULD REMAIN SOLVENT EVEN IF IT INCURRED THOSE DEBTS AND ANY OTHER DEBTS THAT IT INCURRED AT THAT TIME?
167 Section 588H of the Act provides:
“(1) This section has effect for the purposes of proceedings for a contravention of subsection 588G(2) in relation to the incurring of a debt (including proceedings under section 588M in relation to the incurring of the debt).
(2) It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.
(3) Without limiting the generality of subsection (2), it is a defence if it is proved that, at the time when the debt was incurred, the person:
(a) had reasonable grounds to believe, and did believe:
(i) that a competent and reliable person (the other person) was responsible for providing to the first‑mentioned person adequate information about whether the company was solvent: and
(ii) that the other person was fulfilling that responsibility; and
(b) expected, on the basis of information provided to the first‑mentioned person, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.
…”
168 In order to establish a defence under s 588H(2) of the Act it is necessary for Mr Carroll to establish that, notwithstanding that the Company was insolvent throughout the relevant period and that there were reasonable grounds for suspecting that the Company was insolvent and that he was aware during the relevant period that there were such grounds for so suspecting or a reasonable person in a like position in a company in the Company’s circumstances would be so aware, at the times when the debts were incurred he had reasonable grounds to expect and did expect that the Company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.
169 I have already found that Mr Carroll was aware throughout the relevant period that there were reasonable grounds for suspecting that the Company was insolvent and that a reasonable person in a like position in a company in the Company’s circumstances would be so aware. However, the fact that Mr Carroll may have had a “suspicion” of insolvency does not answer the question whether he had an “expectation” that the Company was solvent throughout the relevant period. It is apparent from the statutory scheme, and in particular, ss 588G and 588H of the Act, that a director can, at one and the same time, have a “suspicion” of insolvency and also an “expectation” of solvency. Reasonable grounds for “suspecting” that a company is insolvent does not require the same degree of satisfaction as is required to determine if a director has reasonable grounds “to expect” solvency.
170 The distinction was explained succinctly in Tourprint International Pty Ltd v Bott (1999) 32 ACSR 201 at 215:
“[67] “Expectation”, as required by s 588H(2), means a higher degree of certainty than “mere hope or possibility” or “suspecting”: 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 at 378; Dunn v Shapowloff [1978] 2 NSWLR 235 at 249; (1978) 3 ACLR 775. The defence requires an actual expectation that the company was and would continue to be solvent, and that the grounds for so expecting are reasonable. A director cannot rely on a complete ignorance of or neglect of duty (Metal Manufacturers Ltd v Lewis (1986) 11 ACLR 122 at 129) and cannot hide behind ignorance of the company’s affairs which is of their own making or, if not entirely of their own making, has been contributed to by their own failure to make further necessary inquiries: Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405; Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423; (1992) 8 ACSR 305.”
This passage was approved by Palmer J in Hall v Poolman (supra) at 180.
171 Mr Carroll submitted that his expectation of solvency relied upon a number of matters. In particular, he relied upon the inventory of the stock of timber held by the Company during the relevant period, what he said was its value and the Company’s ability to realise and sell that stock.
172 However, as I have noted earlier (par [107]above), whether a realisation of the stock or other assets can be taken into account has a temporal aspect or limitation to it. I adopt the observation of Palmer J in Hall v Poolman (supra) at par [187] (see par [107] above).
173 Whether Mr Carroll had the relevant expectation depends upon the facts and circumstances known to him at the time, or throughout the period, he had that expectation.
“[269] There comes a point where the reasonable director must inform himself or herself as fully as possible of all relevant facts and then ask himself or herself and the other directors: “How sure are we that this asset can be turned into cash to pay all our debts, present and to be incurred, within 3 months? Is that outcome certain, probable, more likely than not, possible, possible with a bit of luck, possible with a lot of luck, remote, or is there is no real way of knowing?’
[270] If the honest and reasonable answer is “certain” or “probable”, the director can have a reasonable expectation of solvency.
[271] If the honest and reasonable answer is anywhere from “possible” to “no way of knowing”, the director can have no reasonable expectation of solvency.
[272] If the honest and reasonable answer is “more likely than not”, the director runs the risk that a court will hold to the contrary in an insolvent trading claim.
[273] If the honest and reasonable answer is “no way of knowing yet, we need more information”, the director must then ask: How long before we have the information so that we can give a final answer?”
[274] If the honest and reasonable answer to that question is: “By a definite date which will not extend the realisation period (if there is to be one) beyond 3 months”, the director may reasonably say: “Let’s wait until then before deciding”.
[275] If the honest and reasonable answer is “there is no way of knowing yet when we will have the information to make a decision”, the director must say: “Then there is no way that we can now have a reasonable expectation of solvency and there is no way we can reasonably justify continuing to trade without knowing when we will know whether the company is insolvent. Call the administrators”. By this series of questions and answers I do not mean to lay down some pro forma test of directors’ liability for insolvent trading. Each case depends on its particular facts. These questions and answers merely serve to illustrate that when a company is struggling to pay its debts, the directors must face up to the issue of insolvent trading directly and with brutal honesty: they must not shirk from asking themselves the hard questions and from acting resolutely in accordance with the honest answers to those questions.”
175 Mr Carroll advanced a number of grounds which he submitted were reasonable and which founded his expectation of solvency. Those grounds must be considered against the background that Mr Carroll knew throughout the relevant period that the Company was not in fact paying its debts as and when they fell due.
176 I consider that whether Mr Carroll had reasonable grounds to expect that the Company was solvent during the relevant period depends substantially upon his reliance on the Company’s inventory of stock and his reliance on communications with Mr Bright.
177 Mr Carroll had grounds for believing that the value of the stock was quite substantial and he turned his mind to the value of the stock on numerous occasions throughout the relevant period. The Company undertook monthly stocktakes from at least 2003 until the date on which the administrator was appointed namely, 10 May 2006. When Mr Bright was appointed as the Company’s accountant he prepared new valuations of stock on hand as well as cashflow projections both in relation to the original green timber business on a stand‑alone basis and in relation to the business as a whole including the kiln drying process. Thereafter the Company constantly monitored its stock levels. It should also be noted that sales continued to increase in early 2006. By mid April 2006, the Company had won significant log licences from the silent auction conducted by VicForests. Mr Carroll considered this to be a very positive development as the logs were of better quality and value than those the Company had previously been able to acquire.
178 Although Mr Carroll was paying particular attention to the stock position and had grounds for believing that the Company had a substantial amount of stock on hand which was saleable, the extent of the outstanding and unpaid debts of the Company and the extent to which future debts would be incurred were such that it was not reasonable, in my opinion, to expect that the stock could be sold within a sufficiently short timeframe to enable all the Company’s debts to be discharged as and when they fell due.
180 I therefore conclude, and am satisfied, that the defence available to Mr Carroll under s 588H(2) of the Act is not made out. Mr Carroll did not have reasonable grounds to expect, nor did he expect, that the Company was solvent throughout the relevant period, and would remain solvent even if it incurred the debts it did incur during the relevant period. The staged enquiry to which I have referred in par [174] above did not enable Mr Carroll to have an expectation of solvency during the relevant period.
181 Mr Carroll placed particular reliance on Mr Bright’s advice. That gives rise to the question whether his reliance on that advice falls within s 588H(3) of the Act.
182 An analysis of the defence available under s 588H(3)(a), which is helpful in the present context, was undertaken by Young CJ in Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304, [2002] NSWSC 330. Young CJ said at pars [52]‑[54]:
“[52] It is extremely difficult for a person to say that a person is responsible for providing adequate information about solvency and was fulfilling that responsibility when the person allegedly relying on the other person was the source of the supply of information and that supply of information was not completely full.
[53] The subsection arises from the recommendations made in para 211 of the Law Reform Commission’s Discussion Paper No 32 as fleshed out in [303] and following of the Harmer Report. In [307] it was said:
“The Commission considers that the defence is clearly necessary in the case of larger companies in which it cannot be expected that directors will have control over every action taken in the conduct of the company’s business. Additionally, a defence of this nature may encourage a proper system of financial management.”
[54] Thus the prime thrust of the defence is to cover the situation where there is a large corporation with bulky accounts and where there is a system in place of competent accountants, credit controllers and financial management and the board has a regime whereby those people, provided they are competent and responsible, will report to the board any problems that the board may pick up. The prime thrust of the exception is not to deal with the situation where a small company with directors who have little idea of accountancy, bring in a trouble shooter, supply the trouble shooter with information which may not be complete, receive reports back from the trouble shooter and then intend to rely on a report which is incomplete because they have provided incomplete information.”
183 There is no doubt that Mr Bright was engaged or retained by the Company in March 2005 for the purpose of giving the Company business advice regarding the Company’s cashflows, costs and expenses, and an analysis of the business model profits and losses. Mr Bright prepared financial statements which included requiring him to allocate a value to the timber stock inventory. Further, in the middle of 2005 he prepared financial analyses relating to the green timber milling business which he considered to be still profitable.
184 However, I do not consider that Mr Bright was given the role of “the other person” for the purposes of s 588H(3)(a)(i) of the Act. That is to say, I do not consider that Mr Bright was required to fulfil the role or did fulfil the role of a competent and reliable person who was responsible for providing to Mr Carroll adequate information about whether the Company was solvent. Certainly Mr Bright was a competent and reliable person but I do not consider that it can be said that he was “responsible” for providing to Mr Carroll adequate information about whether the Company was solvent. True it is that on occasions he gave Mr Carroll advice about whether the Company was solvent. He gave such advice in or about June 2005 and later during the relevant period, although his evidence as to what he told Mr Carroll in relation to the solvency of the Company during the relevant period was limited. His evidence was:
“I was aware by March 2006, as Tony had told me, that TSM’s cashflow situation was poor, and that the funds provided by Tom Cameron and Tony to TSM in July 2005 had been exhausted, in February 2006. At this time, Tony was looking for potential investors, which he discussed with me. At no time during January to April 2006 did I formally tell Tony that I believed TSM was insolvent. Based on the value of its stock at hand, which I considered was saleable and able to be realised within a short period of time (i.e. a couple of months) I did not consider that TSM was insolvent at that time, and I told Tony this on a number of occasions. …”
185 The evidence does not satisfy me that Mr Bright was specifically given the role or task of providing Mr Carroll “adequate information about whether the Company was solvent”. Although Mr Bright told Mr Carroll on a number of occasions that he did not consider that the Company was insolvent, that information was given as part of the general accountancy and advisory work which Mr Bright was undertaking for the Company. It was not given in discharge of a responsibility for providing to Mr Carroll adequate information whether the Company was solvent. Mr Bright was not providing to Mr Carroll adequate information about whether the Company was solvent. Rather, he was expressing an opinion based upon information provided by Mr Carroll himself.
186 Having regard to Mr Bright’s retainer and the work he carried out for the Company I am not satisfied that Mr Carroll had reasonable grounds to believe that Mr Bright had the role, or was fulfilling the role required by subpar (a) of s 588H(3). Mr Carroll did not say that Mr Bright had been retained by him or the Company to provide, or was responsible to provide to him or to the Company, adequate information about whether the Company was solvent throughout the relevant period.
187 Any expectation of solvency Mr Carroll might have had during the relevant period was not predicated upon information provided by a person who satisfied the requirements of subpar (a) of s 588H(3).
188 It follows that the defence available to Mr Carroll under s 588H(3) of the Act is not made out.
HAS MR CARROLL ACTED HONESTLY AND HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE OUGHT HE FAIRLY TO BE EXCUSED FOR THE CONTRAVENTION OF S 588M OF THE ACT PURSUANT TO S 1317 OR S 1318 OF THE ACT?
189 Sections 1317S and 1318 are applicable to an insolvent trading claim such as has been brought in the present proceeding: Hall v Poolman (supra) at 191. Although there has been a debate as to whether s 1318 applies to an insolvent trading case in addition to s 1317S, it does not matter whether one or other or both sections apply as the Court is required to have regard to the same considerations in each section.
190 I am satisfied that throughout the whole of the relevant period and, indeed, at all material times prior to 31 December 2005 Mr Carroll acted honestly. The plaintiffs did not submit to the contrary. In reaching this conclusion I have adopted the criteria for determining such honesty set out by Palmer J in Hall v Poolman (supra) at 193‑194 in the following terms:
“[325] In my view, when considering whether a person has acted honestly for the purposes of a defence under ss 1317S(2)(b)(i) or 1318 of the CA, the court should be concerned only with the question whether the person has acted honestly in the ordinary meaning of that term, that is, whether the person has acted without deceit or conscious impropriety, without intent to gain improper benefit or advantage for himself, herself or for another, and without carelessness or imprudence to such a degree as to demonstrate that no genuine attempt at all has been to carry out the duties and obligations of his or her office imposed by the Corporations Act or the general law. A failure to consider the interests of the company as a whole, or more particularly the interests of creditors, may be of such a high degree as to demonstrate failure to act honestly in this sense. However, if failure to consider the interests of the company as a whole, including the interests of its creditors, does not rise to such a high degree but is the result of error of judgment, no finding of failure to act honestly should be made, but the failure must be taken into account as one of the circumstances of the case to which the court must have regard under ss 1317S(2)(b)(ii) and 1318 of the CA.”
191 Having regard to all the circumstances of the case ought Mr Carroll fairly to be excused? Mr Carroll submitted that he should be excused in circumstances where he continued to take advice from Mr Bright and acted upon it. It was submitted that his approach to the Company’s problems up to 10 May 2006 was that to be expected of a reasonable, commercially experienced director dealing with ongoing issues in a company which was suffering cashflow problems by reason of one of the Company’s two businesses experiencing “cash burn”. It was submitted that he sought and obtained advice from Mr Bright, an expert accountant experienced in the timber industry and that he did not ignore or downplay that advice, but acted upon it appropriately.
192 The difficulty with this submission is that from September 2004 until 10 May 2006 the Company continued to have problems with the drying of the timber and the use of the kilns which it could not resolve. This had the consequence of creating what Mr Carroll called the “cash burn”, which continued until 10 May 2006.
“…continued to be involved in giving advice to Tony from July 2005 until May 2006 regarding TSM and its businesses. I was engaged by TSM during the second half of 2005 and the first half of 2006 to provide various business advisory services, and to prepare financial statements”.
Mr Bright gave a number of examples of the advice he gave to Mr Carroll during the relevant period. For example, in early 2006 he discussed with Mr Carroll whether it might be possible to air dry green timber in preparation for drying in high vac kiln as the pre‑dryers were not working. He also attended the site in March 2006 and inspected the timber. After he did this, he prepared a fresh cashflow analysis for the Company which he provided to Mr Carroll for him to discuss with potential investors in the Company’s business.
195 During the relevant period stock sales were increasing and Mr Carroll was monitoring stock levels and the amount of daily production.
196 During the relevant period the position was not one where Mr Carroll stood still and did nothing while the cash burned. He was taking active steps to expand sales and he kept on trying to get the kilns to work properly.
197 Mr Carroll also sought advice from Mr Marchesi (par [56] above) an insolvency practitioner and told him of his cashflow problems. Mr Marchesi told him that if he believed the Company’s business was viable it would be necessary to find an investor or further capital. This, Mr Carroll attempted to do, par [62] above.
198 Further, although Shepherd Systems Pty Ltd claimed a debt from the Company of $147,274.81 the service of a statutory demand was set aside because the debt was disputed. The Company’s challenge to the statutory demand removed for the time being from the equation of whether the Company was insolvent a substantial debt which relieved some of the pressure on the Company’s cashflow. In March 2006 he took active steps to seek out investors who could provide further capital for the Company and in April 2006 he took steps, ultimately not proceeded with, to factor book debts.
199 It is not in doubt that throughout the relevant period Mr Carroll was faced with difficult decisions. To adopt and adapt the words of Hamlet “to trade or not to trade, that is the question”. As I noted in par [148] above, Mr Carroll regularly during the relevant period asked the question whether the Company was insolvent or close to the line of being insolvent and on a number of occasions Mr Bright answered the question in the negative. That dilemma facing Mr Carroll brings to mind the observation of Palmer J in Hall v Poolman (supra) at 194:
“[329] As I have discussed above at [266] and following, it is sometimes a difficult decision for a director of a trading corporation suffering from liquidity problems to decide whether, and when, to abandon hope of a change in the company’s fortunes and to summon the administrators. There are often pressing interests involved in the decision: the jobs of employees will be lost, the investment of shareholders will evaporate, and a promising venture in which a great deal of personal effort may have been expended will end in failure. On the other hand, the livelihood of creditors whose businesses depend on reasonably prompt payment may also be ruined if a company continues to trade while insolvent. When confronted with the necessity of making a decision involving these factors, a director cannot afford to procrastinate or to avoid confronting realities. He or she must ask and honestly answer the hard questions: see [269] and following above”.
When finally confronted with the ultimatum from the Australian Taxation Office on 3 May 2006 Mr Carroll did not procrastinate. On the next day he spoke to Mr Bright who put him in contact with Mr McLellan and Mr Carroll met Mr McLellan three days later.
200 The plaintiffs submitted that the fact that Mr Carroll persisted with the kiln drying business which involved cash burn and thereby permitted the Company to incur debts knowing that it could not meet those debts out of cashflow ought to preclude relief under ss 1317S or 1318 as he had been aware, for no less than eighteen months previously, of compelling factors pointing to the Company’s insolvency. I have taken that submission into account and weighed it in the balance in having regard to all the circumstances of the case. However it is an exaggeration to say that there were compelling factors pointing to the Company’s insolvency for no less than eighteen months prior to 10 May 2006. The potential insolvency facing the Company in June 2005 had been arrested in July 2005 by the capital contributions made by Mr Carroll and Mr Cameron. The spectre of insolvency did not re‑emerge until the end of 2005, less than five months before 10 May 2006.
201 There is no doubt that Mr Carroll permitted the Company to incur debts in circumstances giving rise to a contravention of s 588G of the Act. However, he did so against the background of all the circumstances to which I have referred in pars [193]–[200] above. Mr Carroll did not profit personally from permitting the Company to trade in this way throughout the relevant period. He was not disregarding advice and, indeed, obtained advice from Mr Bright and others throughout the relevant period.
202 In reaching the conclusion that in all the circumstances of the case Mr Carroll ought to be excused from his contravention of ss 588G of the Act, I have placed particular emphasis and considerable weight upon Mr Carroll’s retainer of Mr Bright, the work carried out by Mr Bright and the statements and advice he gave to Mr Carroll from the time of his original retainer in March 2005 up to 10 May 2006.
203 I do not consider that there is any inconsistency or lack of logic in concluding that a significant and substantial reason for excusing Mr Carroll is his resort to Mr Bright and his reliance on what Mr Bright told him when at the same time I have concluded that the defence available to Mr Carroll pursuant to s 588H(3) of the Act did not apply to Mr Carroll because Mr Bright was not a person who “was responsible for providing to [Mr Carroll] adequate information about whether the Company was solvent” nor was Mr Bright fulfilling the responsibility of providing adequate information about whether the Company was solvent to Mr Carroll.
204 Section 1317S of the Act is applicable as a defence in proceedings brought, inter alia, under s 588M of the Act. The Court’s power under s 1317S arises where “eligible proceedings” are brought against a person. The expression “eligible proceedings” is defined in s 1317S as including proceedings under s 588M. The power of the Court to relieve a person either wholly or partly from liability to which the person would otherwise be subject or that might otherwise be imposed on the person because of proceedings under s 588M arises where the person “has or may have” contravened s 588G(2). In the present circumstances I have found that Mr Carroll has contravened s 588G(2) in proceedings brought under s 588M. I have found that contravention because the elements of the contravention required by s 588G(2) have been made out. It is implicit in that finding of a contravention of s 588G(2) that Mr Carroll has been unable to avail himself of any of the defences in s 588H.
205 It follows that although I am not satisfied that Mr Bright qualified to be the “other person” as defined in s 588H(3) I am still entitled, in having regard to “all the circumstances of the case” to take into account, for the purposes of exercising jurisdiction under s 1317S, the role Mr Bright played in all the circumstances of the case and, the communications he had with Mr Carroll and what he told Mr Carroll in proceedings brought under s 588M.
206 In all these circumstances I consider that Mr Carroll should be excused for his contravention of s 588G(2) and that he should be relieved from a liability to pay to the plaintiffs the amount of the loss suffered by creditors of the Company throughout the relevant period whether it be the sum of $356,952.02 to which I have already referred or any other sum.
207 I therefore propose that the following orders be made:
(a) A declaration that Mr Carroll has contravened s 588G(2) of the Act by failing to prevent the Company from incurring the debts referred to in the schedule to the amended Statement of Claim.
(b) A declaration that pursuant to s 1317S(2) of the Act that having regard to all the circumstances of the case Mr Carroll ought fairly to be excused for that contravention.
(c) A declaration pursuant to s 1317S(2) of the Act that Mr Carroll be relieved wholly from any liability to pay to the plaintiffs pursuant to s 588M of the Act any amount in respect of the loss and damage suffered by creditors of the Company referred to in the schedule to the amended Statement of Claim.
208 I will hear the parties as to the form of order which should be made including any orders as to costs.
| I certify that the preceding two hundred and eight (208) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg. |
Associate:
Dated: 30 November 2009
| Counsel for the Plaintiffs: | M Galvin |
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| Solicitor for the Plaintiffs: | Maddocks |
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| Counsel for the Defendant: | J L Evans |
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| Solicitor for the Defendant: | Voitin Lawyers |
| Date of Hearing: | 20, 21, 22 & 23 October 2008 |
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| Date of Final Submissions: | 18 November 2008 |
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| Date of Judgment: | 30 November 2009 |
