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[2004] VSCA 54
Court of Appeal (Vic)
2004-04-07
WARREN, C.J., CHARLES, J.A. and O'BRYAN, A.J.A.
Original judgment source is linked above.
[ 2004] VSCA 54
INSOLVENCY - Corporations - Insolvent trading - Directors' liability for debts of corporation - Application by ASIC for civil penalties - Defences - Liability of non-executive director - Interpretation of ss.588G, 588H of Corporations Law 1991 (C'wth) - Whether ASIC must prove that director failed to take particular step, the taking of which would have prevented the debts being incurred - Corporations Law 1991 (C'wth), ss.588G, 588H, 588J, 1317EA, 1317JA.
CORPORATIONS - Civil and criminal consequences of contravening civil penalty provisions - Directors' duty to prevent insolvent trading - Relief from liability for insolvent trading - Disqualification orders - Compensation orders - Pecuniary penalty orders - Whether contraventions of insolvent trading laws ought to be excused - Corporations Law 1991 (C'wth), ss.588J, 1317EA, 1317JA.
(1) A declaration pursuant to s.1317EA(2) of the Law that each of the defendants had contravened s.588G of the Law with respect to the insolvent trading of Holdings on or after 14 September 1999, or alternatively, on or after 3 October 1999.
(2) A declaration pursuant to s.1317EA(2) of the Law that each of the defendants had contravened s.588G of the Law with respect to the insolvent trading of Mills on or after 14 September 1999 or, alternatively, on or after 3 October 1999.
(3) An order pursuant to s.588J of the Law that each of the defendants pay compensation to Holdings equal to the loss or damage suffered by creditors of Holdings as a result of the contravention of s.588G(2).
(4) An order pursuant to s.588J of the Law that each of the defendants pay compensation to Mills equal to the loss or damage suffered by creditors of Mills as a result of the contravention of s.588G.
(5) An order pursuant to s.1317EA(3)(a) prohibiting each defendant from managing a corporation for such period as was specified in the order.
(6) An order pursuant to s.1317EA(3)(b) that each defendant pay to the Commonwealth a pecuniary penalty of an amount specified that did not exceed $200,000.
(7) Interest.
(8) Costs.
"(a) The Water Wheel companies, Mills and Holdings, were each insolvent at all times on and between 14 September 1999 and 17 February 2000 ("the relevant period"); (b) The said Water Wheel companies each incurred various debts during the relevant period ...; (c) The defendants Plymin and Elliott were each directors of the said Water Wheel companies throughout the relevant period and thus were directors when each of the said debts was incurred; (d) Throughout the relevant period, there were reasonable grounds for suspecting that each of the said Water Wheel companies was insolvent and thus such reasonable grounds existed when each of the said debts was incurred; (e) The defendants Plymin and Elliott each failed to prevent the said Water Wheel companies from incurring each of the said debts; (f) The defendants Plymin and Elliott were each aware throughout the said period, and thus at the time that each of the said debts was incurred, of reasonable grounds for suspecting that the Water Wheel company incurring the said debt was insolvent; (g) At the time of each of the said debts being incurred, a reasonable person in a like position to that of Plymin, in a company in the circumstances of the Water Wheel company incurring that debt, would have been aware of reasonable grounds for suspecting that that company was insolvent; (h) At the time of each of the said debts being incurred, a reasonable person in a like position to that of Elliott, in a company in the circumstances of the Water Wheel company incurring that debt, would have been aware of reasonable grounds for suspecting that that company was insolvent."
(i) whether pursuant to s.1317JA the Court should relieve Elliott or Plymin either wholly or partly from any liability to which they or either of them might otherwise be subject, or that might otherwise be imposed on them, because of the contraventions;
(ii) whether the Court should make orders pursuant to s.1317EA(3) of the Law prohibiting Elliott and Plymin, or either of them, from managing a corporation for any specified period, and/or requiring them, or either of them, to pay to the Commonwealth any, and if so what pecuniary penalty; and
(iii) other matters, including costs.
"(a) Upon its proper construction does section 558G(2) of the Corporations Law require proof that the individual director failed in his/her duty to take a step which would have been effective to prevent the company incurring the debt? (b) Was the plaintiff required to prove as against Elliott (a non-executive Director who was not himself capable of preventing the company from incurring a debt) in order to establish a contravention under section 558G(2) that Elliott was under a duty to take a particular step which would have been effective to prevent the company from incurring the debt and that he did not take any such step? (c) Was the trial judge required to consider what duty Elliott had to prevent the company incurring each particular debt for which a contravention was alleged? (d) Did the trial judge fail to properly consider Elliott's defences and, in particular, the availability of a defence under section 588(H)(5)? (e) When exercising his power under section 588J, was the trial judge required to confine any order for compensation to debts incurred by the company in respect of which an individual examination had been made of breach by Elliott of his duty to prevent that debt being incurred? (f) Does the fact that creditors reached agreement with an administrator and entered in a Deed of Company Arrangement make section 588(J) inapplicable as a remedy against Elliott? (g) In any event, having regard to the existence of the Deed of Company Arrangement and the consideration given by Elliott and his associates under that Deed, should Elliott have been relieved of liability? (h) Did the discretion exercised by the trial judge under section 1317JA miscarry? (i) Did the discretion exercised by the trial judge under section 1317EA(3) miscarry?"
"The learned trial judge erred in finding that Plymin failed to prevent the Water Wheel companies from incurring debts during the relevant period and ought to have found that as managing director Plymin was unable to prevent the Water Wheel companies from incurring debts during the relevant period and further that ASIC failed to make out any case that Plymin was at any material time in a position to prevent the companies from incurring the debt."
"(1) This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) that time is at or after the commencement of this Part. (1A) ..... (2) By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware. (3) This section is a civil penalty provision as defined by section 1317DA, so Part 9.4B provides for civil and criminal consequences of contravening it, or of being involved in a contravention of it. (4) The provisions of Division 4 of this Part are additional to, and do not derogate from, Part 9.4B as it applies in relation to a contravention of this section."
"Knowing that Water Wheel was continuing to make significant losses and knowing of the Bank's concerns and that the Bank was `looking over their shoulders', it is apparent that the directors considered that it was necessary to attempt to sell these principal business assets in an attempt to avoid sales of these assets in less favourable circumstances, such as receivership, and it must have been apparent to Elliott and would have been apparent to a reasonably competent director that the sale of these principal business assets was necessitated by Water Wheel's lack of liquidity and failure to locate alternative finance."
"In view of the large half year loss being reported we are now placing facilities on demand. A letter to this effect is attached. As outlined in this letter we are not proposing at this stage to demand repayment of facilities, subject to the conditions outlined in the letter, which includes PWC's weekly reviews, however, our rights remain reserved."
Water Wheel's secured indebtedness to ANZ Bank at this time was approximately $4M.
"... it is an element of the contravention described in s.588G(2) that the director has failed to prevent the company from incurring the debt. The section is somewhat curiously worded in that the opening words are: `By failing to prevent the company from incurring the debt, the person contravenes this section if [etc]'."
"In the context of the facts involved in the present proceeding, it is clear that the Board of Directors of Water Wheel, as a body, at all relevant times acquiesced in Water Wheel's continuing to trade and thereby acquiesced in the company continuing to incur all such debts as it would incur in the ordinary course of business. So it can readily be seen that the Board as a whole failed to prevent Water Wheel from incurring each debt which was incurred after the date of insolvency. What of an individual director? I do not think that the requirement that a director must have failed to prevent the company from incurring the debt means that it must be shown that the individual director had the power by himself to prevent either the incurring of each debt or, more realistically in the present context, to prevent Water Wheel's continuing to trade. By analogy with the previous Law and the reasoning referred to above, inactivity or the failure to attempt to prevent the company from trading or incurring the debt will be sufficient to constitute a failure to prevent the company from incurring the debt within the meaning of s.588G(2)."
"Where, on an application for a civil penalty order against a person in relation to a contravention of section 588G, the Court is satisfied that: (a) the person committed the contravention in relation to the incurring of a debt by a company; and (b) the debt is wholly or partly unsecured; and (c) the person to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; the Court may (whether or not it makes an order under sub-section 1317EA(3)) order the first-mentioned person to pay to the company compensation equal to the amount of that loss or damage."
(a) to Mills the sum of $279,513.89;
(b) to Holdings the sum of $20,486.11.
The Statutory Defences to a s.588G Action
"588H(1) This section has effect for the purposes of proceedings for a contravention of section 588G in relation to the incurring of a debt (including proceedings under section 588M in relation to the incurring of the debt). 588H(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. 588H(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 by the other 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. 588H(4) If the person was a director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company. 588H(5) It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt. 588H(6) In determining whether a defence under subsection (5) has been proved, the matters to which regard is to be had include, but are not limited to: (a) any action the person took with a view to appointing an administrator of the company; and (b) when that action was taken; and (c) the results of that action."
After mentioning these defences, the judge concluded[14] that -
"The constructional effect of providing for these defences is, it seems to me, that the legislation, read as a whole, treats a director, or at least an inactive or acquiescent director, as having failed to prevent the incurring of a debt unless the director satisfies the onus of proving one or more of the matters referred to in those sections. Put another way, the language in which these defences is couched depicts the obverse of a failure to prevent the company from incurring a debt."
The Arguments of Elliott and Plymin as to the Interpretation of s.588G
(a) Elliott knew that a particular debt relied upon by ASIC was to be incurred;
(b) at that time Elliott had the necessary degree of awareness of insolvency;
(c) Elliott did not take steps to prevent the company from incurring that debt; and
(d) had Elliott so acted the debt would not have been incurred.
The Failure to Raise These Arguments at Trial
"[51] Accordingly this appeal must be allowed. It would be inimical to the due administration of justice if, on appeal, a party could raise a point that was not taken at the trial unless it could not possibly have been met by further evidence at the trial. Nothing is more likely to give rise to a sense of injustice in a litigant than to have a verdict taken away on a point that was not taken at the trial and could or might possibly have been met by rebutting evidence or cross-examination. Even when no question of further evidence is admissible, it may not be in the interests of justice to allow a new point to be raised on appeal, particularly if it will require a further trial of the action. Not only is the successful party put to the expense that may not be recoverable on a party and party taxation but a new trial inevitably inflicts on the parties worry, inconvenience and an interference with their personal and business affairs. [52] As Water Board v. Moustakas makes clear, a point may be a new point even though it is within the pleadings or particulars. The pleadings and particulars are frequently decisive in determining whether a party is seeking to raise a new point on appeal. But they are not conclusive. To determine whether a party is raising a new point on appeal, it is `necessary to look to the actual conduct of the proceedings'. Thus in Water Board, the plaintiff's case at trial had been that his employer was negligent in failing to prevent traffic from crossing into the lane in which he was working. On appeal, the Court of Appeal of New South Wales allowed the plaintiff to raise a case that the employer was negligent in failing to provide a barrier to prevent the plaintiff from straying into the adjoining lane. This Court held that, although this alternative case was within the particulars, it had not been the plaintiff's case at the trial and the Court of Appeal had erred in allowing it to be raised on appeal."
"What of an individual director? I do not think that the requirement that a director must have failed to prevent the company from incurring the debt means that it must be shown that the individual director had the power by himself to prevent either the incurring of each debt or, more realistically in the present context, to prevent Water Wheel's continuing to trade."
Mr Young argued that the judge's application of s.588G(2) was correct on the facts his Honour had found and that it was unnecessary for his Honour to attempt any more comprehensive definition of the opening words of s.588G(2). He submitted that the construction arguments could not lead anywhere on the appeal, because they could not overturn what had happened at the trial below and the judge's findings of fact. He put it, however, that if the trial judge had had to decide the points now raised on behalf of the appellants, he would inevitably have decided them against the appellants. For example, there had been no genuine attempt to embark or persuade fellow directors at a board meeting to desist from trading. There was, Mr Young submitted, an air of complete unreality in the submissions now made, in circumstances where the facts before the trial judge showed that ASIC had itself raised concerns with the directors of Water Wheel as to the solvency of the companies, and the directors in turn had ignored ASIC's concerns and simply asserted the ability of Water Wheel to pay its debts as they fell due.
"In any proceedings against a person under subsection (1), it is a defence if the defendant proves - (a) that the debt was incurred without his express or implied authority or consent; or (b) that at the time when the debt was incurred, he did not have reasonable cause to expect - (i) that the company would not be able to pay all its debts as and when they became due; or (ii) that, if the company incurred that debt it would not be able to pay all its debts as and when they became due."
"It is thus apparent without considering the effects of s.556, that a director is obliged to inform himself or herself as to the financial affairs of the company to the extent necessary to form each year the opinion required for the director's statements. Although that is only an annual obligation, it presupposes sufficient knowledge and understanding of the company's affairs and its financial records to permit the opinion of solvency to be formed. See also per Hodgson, J. in Metal Manufacturers Ltd. v. Lewis (1986) 4 A.C.L.C. 739 at 750. Provisions such as these provide some indication of the attitude now taken by the legislative scheme in the Code towards the role and duties of directors and that altered attitude should be taken into account in interpreting provisions such as s.556. Having regard to what I have said already about the broad structure of s.556 and the general scheme of the Code, it is thus apparent that, in enacting the present section, the legislature has deliberately sought to impose a heavier burden on directors and other officers of companies which happen to become insolvent. In my opinion it is part of a consistent legislative pattern over recent years whereby the duties and obligations of directors and company officers have been increased and made more onerous."
Dealing with the question of what power a non-executive director may have to prevent a company acting in relation to incurring debts, his Honour said[27] -
"It would not be difficult to satisfy the first condition in relation to the trading company but I cannot accept that the power to prevent a debt being incurred should be the criterion for liability and the primary basis upon which the defence could be rebutted. It is impractical to suggest that an ordinary director - that is a director other than an executive director - could exercise such a power except with the concurrence of at least one or more of his or her fellow directors. If a director were entitled to rest supinely and protest that he could not act without the concurrence of one or more of his colleagues when he knew that the company was in fact insolvent, then the section would have little practical purpose. It would be wrong if the word `authority' were so narrowly construed and the director was not in those circumstances obliged to take all steps practicable to prevent the company from trading while insolvent. The fact that often a single director may be unable to prevent the authorised person contracting a debt is irrelevant. If he is unable to persuade his fellow directors to withdraw that authority when the company is insolvent, he should seek to have the company wound up or resign. If each director took account of his obligations the company would soon cease trading. That is why the section permits the defence to be raised only where the director has not been responsible for conferring or giving express or implied authority or consent. For these reasons I have concluded that on a fair reading of s.556(2)(a) the `authority' to which the paragraph refers is an authority given as a matter of fact by a director, either as an executive director or as a participating member of the board of directors, on behalf of the company. That authority should be sufficient to authorise the incurring of the liability and may either be in express terms or it may be implied from the terms of an authority given, in particular, as part of a general or usual authority to an executive director, a manager or other employee or agent of the company ...".
Ormiston, J. concluded that the reasoning of Mahoney and McHugh, JJ. in the majority in the Court of Appeal of New South Wales in Lewis's case was not identical, so that there was no single ratio for the majority's decision. For those reasons his Honour did not accept that Lewis's case required him to hold that the authority or consent referred to in para.(a) of s.556(2) must be confined to a particular debt. His Honour continued[28] -
"This conclusion therefore confirms the opinion already expressed ..., that the relevant `authority' for the purposes of para.(a) may be acquired from a director, or other person taking part in the management of the company, who participates in the giving of authority to incur liability, whether that authority is given in express terms or whether it is to be implied from the terms when authority is given as part of the general or usual authority of an executive or other employee or agent of the company. ... If the conclusions stated above be correct, then it follows that the relevant authority was conferred by the defendant in the present case and she is not entitled to rely upon the defence set out in para.(a) of s.556(2). It is sufficient to repeat that she and her daughter agreed in 1979, albeit informally, with their co-director Mr Ian Morley that he should continue to manage the company on their and its behalf. The general authority so conferred was sufficient to authorise the incurring of the debts which the plaintiff now seeks to enforce against the defendant pursuant to s.556. It likewise follows that those debts were incurred with her implied authority within the meaning of the paragraph."
An appeal from the decision of Ormiston, J. was dismissed, the Appeal Division of the Supreme Court[29] accepting in full the reasoning which had led Ormiston, J. to his conclusions. In particular, the judgment of the Appeal Division accepted the conclusion of Ormiston, J. that s.556 was not to be construed in such a way that the section was only concerned with a defendant who had an involvement in the incurring of a particular debt.[30]
and on the explanatory memorandum for it. Mr Judd relied, as we have already said, on the opening words of s.588G(2), "By failing to prevent the company from incurring the debt", as indicating that the legislature intended to introduce a new duty into the legislation, which carried with it various concepts, including that an enquiry had to be made, first, as to the level of knowledge of the director and, secondly, as to what steps the director could have taken. Furthermore the new regime in one respect imposed a heavier burden on directors, since beforehand one critical question was whether the director had reasonable cause to expect that the company could not pay its debts (s.556(2)), whereas under s.588G(1)(c) the director was at risk if there were reasonable grounds to suspect that the company was insolvent. It was argued that in thus "lowering the bar", as it was put, the legislature had at the same time introduced a duty on directors of a different kind and imposed on ASIC a positive obligation to establish a breach. The argument was that since a mere suspicion of insolvency was now sufficient to found liability, there was nothing inconsistent in saying that if ASIC sought to mount a case against a non-executive director, the onus was placed on ASIC to establish a breach of duty by the director, something which, the argument ran, was neither impractical nor overly difficult. It was argued that the consequence of this was that s.588G(2) required ASIC to prove a breach of duty in relation to a particular debt, an analysis which plainly had not been undertaken by the judge.
* "Where it is shown that a company has engaged in insolvent trading, a director of the company should be able to avoid liability by establishing at least one of three defences: - the director had reasonable grounds to expect that the company would have been able to pay its debts from its own resources - the director took reasonable steps to minimise the possible loss to the creditors - the director was not able, for good reasons, to participate in the management of the company at the relevant time. * The first of these defences, that of having reasonable grounds to expect that the company would be able to pay its debts, should be established if the director had reasonable grounds to believe that a competent and reliable person - had responsibility for providing directors with sufficient information to prevent the company from engaging in insolvent trading and - discharged that responsibility - * The second of these defences, that of taking reasonable steps to minimise the loss to creditors, should be established if the director - endeavoured to prevent the insolvent trading or - endeavoured to place the company under a form of administration in insolvency."
Paragraph 285 of the Report contained a formulation of the director's duty, in these terms -
"'Engaging in insolvent trading' involves the incurring of a debt by a company when circumstances of insolvency exist and the company is subsequently wound up in insolvency. This formulation of a director's duty removes attention from the incurring of a particular debt or debts and directs attention to the director's responsibility for the overall financial management of the company." (Our emphasis.)
Paragraph 288 of the Report related to the connection with winding up in insolvency. It was in these terms -
"The fact that the company is being wound up in insolvency is an essential element of the liability of a director under the Commission's proposal. The existing liability in s.556 applies in a wide range of situations where the company is under a form of voluntary or involuntary insolvency administration. However, the Commission considers that directors should only be liable where the company has gone into insolvency winding up. Even though a voluntary insolvency administration may result in a compromise under which creditors accept less than the full amount of their debt, the creditors will at least have the power to accept or reject such a compromise in the knowledge that an insolvent winding up may result in an action against directors to recover amounts which cannot be paid from the assets of the company. ...".
Paragraph 302 of the Report dealt with potential defences for a director. It said the following -
"Proposal in DP32. It was proposed in DP32 (para.211) that, where a company has engaged in insolvent trading, a person who was a director of the company should be presumed to have breached the duty to prevent the company from engaging in insolvent trading unless one of the specific defences provided is established. In effect, three separate grounds of defence were provided: * reasonable grounds to expect that the company would have been able to pay its debts from its own resources * reasonable steps to minimise possible loss to creditors * non-participation in management as a result of illness or other sufficient cause."
Paragraph 25 of the Report dealt with the Commission's assessment and recommendation. It said the following -
"The duty focusses on preventing the company from engaging in a course of insolvent trading rather than the incurring of a particular debt. It is therefore appropriate to look to those who are entrusted with the overall management of the company rather than those who may have authority to take some part in its management. It is the directors who have a duty to oversee the whole management of the company. Only they should owe the duty to prevent insolvent trading. ...". (Our emphasis.)
"Duties of directors D2. A director of a company has a duty to the company to prevent the company from engaging in insolvent trading. Engaging in insolvent trading D3. A company shall be taken to have engaged in insolvent trading if - (a) the company incurred a debt at a time when circumstances of insolvency existed; and (b) the company subsequently commenced to be wound up in insolvency. Circumstances of insolvency D4. If, as at a particular time, there were reasonable grounds for suspecting that a company was unable to pay its debts, after taking into account contingent and prospective liabilities, then circumstances of insolvency shall, for the purposes of this part, be taken to have existed in respect of the company as at that time."
The Explanatory Memorandum to the Corporate Law Reform Bill 1992
"The duty is expressed in such a way that the director will not be able to use lack of involvement in the company's affairs as a basis for asserting that a particular transaction was entered into without his or her implied authority."
Paragraph 1085 made the point that under the previous legislation (s.592) -
"for a director to be liable there must be reasonable grounds to expect that a company would not be able to pay its debts. Under proposed s.588G it will be sufficient if there are reasonable grounds to suspect insolvency. This is based on a recommendation of the Harmer Report".
Paragraph 1086 is important and should be quoted at length. It provided as follows -
"Under s.592, a director has a defence where he or she could show that the debt was incurred without his or her express or implied authority or consent. This defence has been successfully invoked in circumstances where a director failed to take an active role in the management of the company and could therefore claim that debts incurred while the company was insolvent were incurred without his or her authority.[37] Such a situation does not accord with modern expectations about the role of company directors. In particular most persons would nowadays expect all the directors of a company to acquaint themselves with the general financial position of their company, and to take positive steps where necessary to protect the interests of members and creditors. Accordingly, the very broad defence in the current provision, which applied where the debt `was incurred without the person's express or implied authority or consent' is to be replaced by more specific defences, which are carefully tailored to meet situations where a director has acted diligently and has actively participated in management, but has nevertheless been unable to prevent the incurring of the crucial debt. These defences are as follows [paragraph 1086 then mentioned each of the defences later covered by s.588H(2), (3), (4), and (5)].
Paragraph 1089 is also important, and was as follows -
"Section 592 applies to all those who took part in management of the company, whereas the proposed provision 588G applies to directors only. The Harmer Report took the view that the duty to prevent insolvent trading focusses on preventing the company from engaging in a course of insolvent trading rather than the incurring of the particular debt and that therefore it is appropriate to look to those who are entrusted with the overall management of the company rather than all those who may have the authority to take any part in its management. The Harmer Report stated that it is the directors who have a duty to oversee the whole management of the company and that only they should owe the duty to prevent insolvent trading by the company. ...".
Deputy Commissioner of Taxation v. Clark[38]
"Part 5.7B, including ss.588G and 588H, was based on the assumption that a director would participate in the management of the company. This assumption strongly suggests that a total failure to participate, for whatever reason, should not be regarded as a `good reason' for failing to participate at a particular time."
The Submissions of ASIC as to ss.588G and 588H
"So the general flavour of s.588G(2) is that someone has an obligation to deal with the company's affairs in such a way to stop it incurring a debt, and that that person is guilty of volitional delinquency in and about that obligation."
In Ingram v. Ingram Jordan, C.J. observed that the word "fail" may have at least three possible meanings, saying[45] -
"... where it is provided by statute that certain consequences shall follow if a person fails to do something which is directed to be done, the meaning of the word `fail' depends upon the context in which it is found. In some contexts it may mean simply the omission to do the thing in question, irrespectively of any reason which may have existed for his not doing it ... In other cases it may mean an omission to do the thing by reason of some carelessness or delinquency on his part, but not omission caused by impossibility for which the person in question is not responsible ... In other cases, it may mean omission to do the thing, but so that omission caused by impossibility arising from some causes is included and from others is excluded ...".
Ingram was referred to in CBS Productions Pty. Ltd. v. O'Neill where the Court of Appeal of New South Wales held that on the true construction of the terms of a commercial agreement between a recording artist and a recording company the words "the Artist fails, except solely for CBS' refusal without cause to allow the Artist to perform, to fulfil his Minimum Recording Commitment or the Increased Recording Commitment" mean "the Minimum Recording Commitment or the Increased Recording Commitment has not been met for any reason whatsoever except solely for CBS' refusal without cause to allow the Artist to perform". The word "fails" was said by Mahoney and Priestley, JJ.A., with Kirby, P. dissenting, to be there used to denote mere non-fulfilment for whatever reason.
"Failure to do acts, which could have been done in New South Wales, seems to me to make the delinquency occur in New South Wales. It may well be that some of the failure occurred in New Zealand, and some in New South Wales, but it would seem to me that that is sufficient to give this Court jurisdiction. Accordingly, in my view, the learned acting master was correct in giving leave to proceed."
It was submitted on behalf of ASIC that Young, C.J. in Eq. was not expressing any view as to what must be proved in order to establish a contravention of s.588G(2), a submission which we think is plainly correct.
Conclusions as to the Interpretation of ss.588G and 588H
(a) s.588G(2) does not require proof that an individual director failed in his or her duty to take a step which would have been effective to prevent the company incurring the debt;
(b) ASIC was not required to prove against Elliott in order to establish a contravention under s.588G(2) that Elliott was under a duty to take a particular step which would have been effective to prevent the company from incurring the debt and that Elliott did not take such a step;
(c) the judge was not required to consider what duty Elliott had to prevent the company incurring each particular debt for which a contravention was alleged;
(d) the judge properly considered Elliott's defences, and in particular the availability of a defence under s.588H(5);
(e) the judge, when exercising his powers under s.588J, was not required to confine any order for compensation to debts incurred by the company in respect of which an individual examination had been made of breach by Elliott of his duty to prevent that duty being incurred.
"(1) This section applies if the Court is satisfied that a person has contravened a civil penalty provision, whether or not the contravention also constitutes an offence because of section 1317FA. (2) The Court is to declare that the person has, by a specified act or omission, contravened that provision in relation to a specified corporation, but need not so declare if such a declaration is already in force under Division 4. (3) The Court may also make against the person either or both of the following orders in relation to the contravention: (a) an order prohibiting the person, for such period as is specified in the order, from managing a corporation; (b) an order that the person pay to the Commonwealth a pecuniary penalty of an amount so specified that does not exceed $200,000."
(a) Mills and Holdings were insolvent;
(b) each appellant was aware that there were reasonable grounds for suspecting that Mills and Holdings was insolvent; and
(c) a reasonable person in a like position in a company in the circumstances of Mills and Holdings would have been so aware.
Prohibition orders
(a) Plymin be prohibited from managing a corporation for a period of ten years commencing on 28 July 2003.
(b) Elliott be prohibited from managing a corporation for a period of four years commencing on 28 July 2003.
(c) Harrison be prohibited from managing a corporation for a period of seven years commencing on 28 July 2003.
"(1) In this section: eligible proceedings means proceedings for a contravention of a civil penalty provision (including proceedings under section 588M, 588W or 1317HD of the Corporations Law of this jurisdiction) but does not include proceedings for an offence (except so far as the proceedings relate to the question whether the court should make an order under section 588K or 1317HB of that Law.) (2) Where, in eligible proceedings against a person, it appears to the court that the person has, or may have, contravened a civil penalty provision but that: (a) the person has acted honestly; and (b) having regard to all the circumstances of the case (including, where applicable, those connected with the person's appointment as an officer of a corporation, of a registered scheme's responsible entity or of a Part 5.7 body), the person ought fairly to be excused for the contravention; the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention. (3) In determining under subsection (2) whether a person ought fairly to be excused for a contravention of section 588G, the matters to which regard is to be had include, but are not limited to: (a) any action the person took with a view to appointing an administrator of the company or Part 5.7 body; and (b) when that action was taken; and (c) the results of that action."
"In all the circumstances, Mr Elliott's contraventions were serious and represent a sustained and continuous course of inexcusable and unjustifiable neglect of important duties of a non-executive director. I do not accept Mr Myers' submission that Mr Elliott's conduct was "an isolated incident" or a "mistake". In my opinion Mr Elliott showed continuing disregard for the position of unsecured creditors given his awareness of grounds for suspecting insolvency. The appointment of administrators, as I have said, came far too late."
"19. In ordering that Plymin be prohibited from managing a corporation for ten years. 20. In ordering an excessive period of prohibition. 25. In failing to order that Plymin be relieved from liability under s.1317JA of the Corporations Law. 27. In failing to take account of or failed to give sufficient weight to a number of matters, such as, the age of the second appellant, the fact that the Board of Water Wheel appointed administrators, the fact that there was no finding of dishonesty against the second appellant, the fact that the second appellant had provided substantial assistance to the administrators, that there was no finding that the second appellant had profited from the relevant contraventions of s.588G, that the board of Water Wheel had consulted professional advisers prior to the appointment of administrators, the second appellant's prior good employment record at senior management levels, the second appellant's good character, the second appellant's loss of future employment prospects and there was no evidence that the second appellant would engage in similar conduct in the future."
"I am not satisfied under s.1317JA of the Law, having regard to all of the circumstances of the case and in the light of the submissions made, that Mr Plymin ought fairly to be excused for his contraventions. He should not pursuant to that section be relieved either wholly or partly from any liability. In relation to Mr Plymin, I accept in substance the submissions advanced on behalf of ASIC.[50] I am satisfied in light of the findings in the primary judgment and upon all the evidence that the relevant contravening conduct of Mr Plymin was in all the circumstances unreasonable and inexcusable. His conduct was reckless and grossly negligent. It showed no regard for the position of those who dealt with Water Wheel from 14 September 1999 onwards. The appointment of administrators came far too late. I am not satisfied that, even now, he truly understands the nature of a director's duties or the seriousness of his contraventions. "
1. The contraventions were not an isolated event but extended over five months and in circumstances where Mr Plymin had been aware of Water Wheel's serious financial difficulties for an even longer period. 2. There was no indication that Mr Plymin understood he had failed to fulfil his duties as a director. 3. The debts incurred by Water Wheel after 14 September 1999 were substantial. 4. The objects of personal and general deterrence. 5. In discharging his duties as Managing Director, Mr Plymin lacked reliability and competence. 6. Mr Plymin demonstrated an inappropriate and cavalier attitude toward the incurring of debts and the payment of creditors.
"(1) on application by ASIC, the Court may disqualify a person from managing corporations for a period that the Court considers appropriate if: (a) a declaration is made under section 1317E (civil penalty provision) that the person has contravened a corporation/scheme civil penalty provision; and (b) the Court is satisfied that the qualification is justified. (2) In determining whether the disqualification is justified, the Court may have regard to: (a) the person's conduct in relation to the management, business or property of any corporation; and (b) any other matter that the Court thinks appropriate."
(i) Disqualification orders are designed to protect the public.
(ii) The banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office.
(iii) Protection of the public includes protection of individuals that deal with companies, including consumers, creditors, shareholders and investors.
(iv) The banning order is protective against present and future misuse of the corporate structure.
(v) The order has a motive of personal deterrence, though it is not punitive.
(vi) The objects of general deterrence are also sought to be achieved.
(vii) In assessing the fitness of an individual to manage a company, it is necessary that they have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company.
(viii) Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty.
(ix) In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may indulge in similar conduct in the future and the likely harm that may be caused to the public.
(x) It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct.
(xi) A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming.
(xii) The following criteria need to be assessed:
* Character of the offender;
* Nature of the breaches;
* Structure of the companies and the nature of their businesses;
* Interests of shareholders, creditors and employees;
* Risks to others from the continuation of offenders as company directors;
* Honesty and competence of offenders;
* Hardship to offenders and their personal and commercial interests;
* Offenders appreciation that future and breaches could result in future proceedings.
(xiii) Factors which lead to the imposition of the longest periods of disqualification (25 years or more) include:
* large financial losses;
* high propensity to contravene again;
* lack of contrition or remorse;
* disregard for the law;
* dishonesty and intent to defraud; and
* previous convictions and contraventions for similar activities.
(xiv) In cases in which the period of disqualification ranged from seven to twelve years, the factors evident included:
* serious incompetence and irresponsibility;
* substantial loss;
* engaging in deliberate courses of conduct to enrich the defendants;
* wilful contraventions of the law and disregard for legal obligations;
* lack of contrition or acceptance of responsibility.
(xv) In cases in which the period of disqualifications ranged up to three years, the factors evident include:
* the defendants had endeavoured to repay the amounts owed;
* the defendants had no future intention to hold a position as manager of a corporation; and
* the defendant had expressed remorse and contrition, acted on advice of professionals and had not contested the proceedings.
"The evidence of Mr Elliott's achievements and the favourable evidence from some highly experienced and reputable businessmen concerning Mr Elliott's performance as a company director in the past and concerning his implementation of the responsibilities of a director in relation to other companies stand in stark contrast to the circumstances disclosed by the evidence in this proceeding. His course of conduct in relation to Water Wheel occurred recently and his evidence in this proceeding concerning that conduct, including his explanations of it and attitude towards it, did not engender any confidence in the Court as to his present fitness to act as a company director. Nor do the references in his affidavit to what `befell' Water Wheel, or the material in his affidavit concerning his present understanding of the responsibilities of a company director redress such lack of confidence. His affidavit evidence was, to adopt language used in another case,[54] somewhat `formulaic and mechanical'. In the light of my findings in the primary judgment and considering all the evidence now before the Court and after taking account of the submissions made on his behalf, I am not satisfied that Mr Elliott is a fit and proper person to manage a corporation. In order to protect the public and those who deal with corporations, a prohibition order should be made. In relation to the period of disqualification, I take into account his relative culpability and the positive matters advanced in his favour[55] and I have had regard to the prejudice and hardship which may be caused in relation to the various family businesses by such an order. I also take into account considerations of deterrence (in particular, personal deterrence). I consider that Mr Elliott should be prohibited from managing a corporation for a period of 4 years commencing on 28 July 2003. Anything less would not be an appropriate measure of protection of the public."
"I am not satisfied that Mr Plymin is a fit and proper person to manage a corporation. In order to protect the public and those who deal with corporations, a prohibition order should be made. I accept in substance the submissions made by ASIC[57]. Taking into account all of the positive matters and the submissions advanced on Mr Plymin's behalf, he should nevertheless be prohibited from managing a corporation for a period of 10 years commencing on 28 July 2003. The protection of the public is the paramount objective."
, we are satisfied that the discretion exercised by the trial judge under section 1317JA did not miscarry.
(1) whether Water Wheel was insolvent on or after 14 September 1999, or alternatively on or after 3 October 1999; and if so,
(2) whether the directors contravened s.588G(2) with respect to the insolvent trading of Mills and Holdings on and after the date of their insolvency.
Each appellant at trial denied Water Wheel was insolvent before administrators were appointed on 16 February 2000.
"Though not therefore criminal proceedings it has been common ground that proceedings of this character invoke requirements for prosecutorial fairness and a standard of proof commensurate with the gravity of the allegations."
"I accept that the stricter Briginshaw approach should be adopted and I have adopted it throughout ..."[67]
"It was submitted that although the conditions for the making of a compensation order had been met, the relief was discretionary. It was submitted that the Court had a discretion under s.588J to make orders for several liability and that the order in respect of Mr Harrison should take into account, inter alia, his culpability and role in the conduct, his contrition and remorse in respect of the consequences thereof and his preparedness to co-operate with the plaintiff (including the consequent saving of the time and cost of a more prolonged trial). ASIC and Mr Harrison agreed that the appropriate amount of compensation to be paid by Mr Harrison was $300,000, such amount to be divided pro rata as between Mills and Holdings according to the amount of loss and damage suffered by their respective creditors. It was further agreed that if any penalty was ordered, the amount of compensation should be reduced by the amount of the penalty so that the third defendant should not in any circumstances be required to pay more than an aggregate sum of $300,000 to satisfy the orders of the Court and pay ASIC's costs. It was submitted that the Court had the power to make orders for compensation at less than the full amount of the proved loss and damage and differential orders as between defendant directors. It was submitted, at any rate, that there was no warrant for reading an `all-or-nothing' requirement into the section where the parties have agreed otherwise."
. In essence, s.588J(1) vests a discretion in the court to make an order for the payment of compensation to the subject company equal to the amount of that loss or damage where three criteria are satisfied: first, that the person committed the contravention in relation to the incurring of a debt by a company; secondly, that the debt is wholly or partly unsecured; and thirdly, the person to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency. Sub-section (2) of s.588J provides that the "liquidator" of a company may intervene in an application for a civil penalty order against a person in relation to a contravention of ss.588G(2). Sub-section (3) of s.588J entitles a "liquidator" who so intervenes to be heard in certain circumstances[75].
"In order to establish each alleged contravention, it is necessary for the plaintiff to prove the alleged debt and that it was incurred during the relevant period. That proof is also relevant to the power contained in s.588J(1) which provides that where, on an application for a civil penalty order in relation to a contravention of s.588G, the court is satisfied that the director committed the contravention in relation to the incurring of a debt by a company and the debt is wholly or partly unsecured and the person to whom the debt is owed (the creditor) has suffered loss or damage in relation to the debt because of the company's insolvency, the court may order the director to pay to the company compensation equal to the amount of that loss or damage. Put into the context of the present proceeding, where the defendant's directors by a continuous course of conduct may have committed numerous contraventions in relation to the incurring of debts by Water Wheel on and after 14 September 1999, it is necessary to identify the debts so incurred by Water Wheel and their amount. It is convenient at this juncture to then ascertain whether any loss or damage has been suffered by each relevant creditor because of Water Wheel's insolvency. A number of issues have arisen in relation to when debts were incurred and in what amount and some issues have arisen in relation to loss and damage."
. It was argued for Elliott that the finding caused the exercise of the discretion as to whether to order compensation to miscarry because undue emphasis and impact were attributed to that matter, without allowance for the greater culpability of Plymin. With respect to the exercise of the discretion, reliance was placed, also, on s.1317JA of the Corporations Law. It vests a broad discretion in the Court to grant relief from liability for compensation.[80]
"Further, I am not satisfied that Elliott, an experienced businessman and company director, who showed himself in the witness box to be a very intelligent and astute individual, did not know at all relevant times that he could and should have obtained from management on a regular basis a list of debtors and creditors by age and amount (including the age and amount of off-balance sheet finance), regular profit and loss and cash-flow statements and reports on negotiations (if any) with creditors whose debts were outside trading terms. I am therefore not satisfied that at any relevant time Elliott believed that Plymin and management generally were competent and reliable persons who were fulfilling their responsibility to provide him with adequate information about whether the company was solvent. Indeed, having seen and heard Elliott give evidence I consider that Elliott turned a blind eye to the details of Water Wheel's liquidity crisis in the hope that `something would turn up' to rescue the company and his own associated financial interests." [Our emphasis]
The application of s.588J and the exercise of the discretion under s.1317JA
(f) The fact that creditors reached agreement with an administrator and entered into a deed of company arrangement does not render s.558J inapplicable as a remedy against Elliott; (g) having regard to the existence of the deed of company arrangement and the consideration given by Elliott and his associates under that deed, Elliott should not have been relieved of liability; (h) the discretion exercised by the trial judge under s.1317JA did not miscarry; (i) the discretion exercised by the trial judge under s.1317EA(3) did not miscarry.
[1] ASIC v. Plymin, Elliott & Harrison [2003] VSC 123 at [568]. This judgment will be referred to as the "Liability judgment" hereafter. The Liability judgment is reported at [2003] VSC 123; (2003) 46 ACSR 126; 21 ACLC 700.
[2] ASIC v. Plymin, Elliott & Harrison (No. 2) [2003] VSC 230. This judgment will be referred to as the "Penalty judgment" hereafter. The Penalty judgment is reported at [2003] NSWCA 71; (2003) 21 ACLC 1,237.
[3] Liability judgment at [381] and [429].
[8] See Schedule A to the order of Mandie, J. dated 30 June 2003: Penalty judgment.
[9] See Schedule B to the order of Mandie, J. dated 30 June 2003: Penalty judgment.
[12] Liability judgment at [429]-[450].
[13] Liability judgment at [451]-[462].
[15] See, e.g., AWA Ltd. v. Daniels (1992) 10 ACLC 933, at 1013-1016; on appeal Daniels v. Anderson (1995) 37 N.S.W.L.R. 438 at 488-505.
[16] See James v. Andrews [2001] NSWSC 1149; (2001) 166 F.L.R. 11 at 13-15.
[18] Elliott's closing submissions at trial, p.12 at paragraph 20.
[19] Liftronic Pty. Ltd. v. Unver (2001) 75 A.L.J.R. 867 at [44] and [58]; Coulton v. Holcombe [1986] HCA 33; (1986) 162 C.L.R. 1 at 8; University of Wollongong v. Metwally [No. 2] (1985) 59 A.L.J.R. 481 at 483.
[20] [2003] H.C.A. 48 at [51]- [53].
[24] Mahoney and McHugh, JJ.A., Kirby, P. dissenting.
[25] According to the headnote of the report of the judgment at 13 N.S.W.L.R. 315.
[29] Crockett, Southwell and Hedigan, JJ. at [1993] 1 V.R. 455-466.
[35] At 59 S.A.S.R., 63-64, 68, 69 and 70-71.
[36] See par.[[] and following.
37] The Harmer Report was completed in 1988, after Metal Manufacturers Pty. Ltd. v. Lewis had been decided in 1988, but before the decision of Ormiston, J. in Morley v. Statewide Tobacco Services Ltd. in 1992.
[39] See paras 78, 92-93, 97-99, 108 and 110-114, and in particular par.114.
[41] [2001] NSWSC 1149; (2001) 166 F.L.R. 11 at 13-15.
[50] See paras.[19] and [22] in the Penalty judgment.
[51] Re HIH Insurance Ltd; Australian Securities and Investments Commission v. Adler and Ors [2002] NSWSC 483; (2002) 42 ACSR 80.
[52] [2002] NSWSC 483; 42 ACSR 80 at [54], pp 97 to 99.
[54] ASIC v Doyle [2002] WASC 223, at para [71] per Roberts-Smith, J.
[55] For example, see items (a), (c), (d), (f), (h) in para.[89] of the Penalty judgment and the matters relating to assistance to the administrators and the administration.
[57] Penalty judgment at [22]-[23].
[59] Paras [[] and [] above.
[65] Supra[2002] NSWSC 171; , (2002) 41 ACSR 72 at 80-81.
[66] Liability judgment at [357]-[367].
[67] Briginshaw v. Briginshaw [1938] HCA 34; (1938) 60 C.L.R. 336. At 362 Dixon, J. commented:
"The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved ..."
[69] The trial judge observed in the Penalty judgment at para.[36] that Harrison admitted those facts subject to an amendment to the statement with respect to actual awareness.
[72] Liability judgment at paras [463]-[542]; also, Penalty judgment at para.[104].
[73] Penalty judgment at paras [104]-[105].
"A company's liquidator who so intervenes is entitled to be heard:
(a) only if the Court is satisfied that the person committed the contravention in relation to the incurring of a debt by that company; and
(b) only on the question whether the Court should order the person to pay compensation to the company."
[76] Liability judgment at paras [463]-[464].
[77] Liability judgment at paras [463]-[542].
[78] Reliance was placed on Woolworths Limited v. Kelly (1991) 22 N.S.W.L.R. 189, 193-194.
[79] Liability judgment at [560]; see also, paras [[] and [] below.
81] Reliance was placed on Kenna & Brown Pty. Ltd. v. Kenna [1999] NSWSC 533; (1999) 32 A.C.S.R. 430, 456.
[82] See also Liability judgment at para.[537].
[83] House v. R. [1936] HCA 40; (1936) 55 C.L.R. 499.
[85] The examples cited in the Liability judgment were paras [76], [86], [100]-[101], [129], [149], [200], [234], [235], [244] and [254].
[86] See, for example, Liability judgment at paras [437], [443] and [444].
[89] Liability judgment at paras [538], [539] and [542].
[90] See paras [[] and [] above.
93] House v. R. [1936] HCA 40; (1936) 55 C.L.R. 499.
[94] See paras [[] and [] above.