Elliott v Australian Securities and Investments Commission; Plymin v Australian Securities and Investments Commission [2004] VSCA 54

Court of Appeal (Vic)|2004-04-07|Before: WARREN, C.J., CHARLES, J.A. and O'BRYAN, A.J.A.

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.

This appeal brought by John Dorman Elliott, the first appellant and Bernard Henry Plymin, the second appellant, Australian Securities and Investments Commission ("ASIC") being the respondent, is against findings, declarations and orders made by Mandie, J. on 30 June 2003 against the appellants who were at all material times directors of Water Wheel Mills Pty. Ltd. ("Mills") and Water Wheel Holdings Ltd. ("Holdings"). Where the context permits, the first appellant will be referred to as "Elliott" and the second appellant as "Plymin". Unless the context otherwise requires, the two Water Wheel companies will be referred to as "Water Wheel". Elliott was a non-executive director and Plymin was the Managing Director of Water Wheel.

ASIC brought a civil penalty proceeding against the first and second appellants and William Maxwell Harrison, the Chairman of Directors of Water Wheel, by originating process on 27 November 2000. The application was made under ss.588G, 588J, 1317EA(2), 1317EA(3)(a), 1317EA(3)(b) and 1317EB(1) of the Corporations Law as in force prior to 13 March 2000. Harrison admitted liability in the course of the trial and did not appeal the orders made against him.

(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 central issue during the trial was whether Water Wheel was insolvent on and after 14 September 1999, or alternatively on and after 3 October 1999. Elliott and Plymin denied throughout the trial that Water Wheel was insolvent in the relevant period and further denied they were in breach of their duty as directors to prevent insolvent trading by Water Wheel (s.588G). Elliott and Plymin denied contravening s.588G and denied on the application for a civil penalty order pursuant to s.588J that the Court should order compensation be paid to Water Wheel by them. Elliott and Plymin further denied that civil penalty declarations and orders should be made in relation to the contraventions prohibiting each of them from managing a corporation and paying a pecuniary penalty (ss.1317EA(2), 1317EA(3)(a) and (b)).

After a trial occupying some 41 days, on 5 May 2003, Mandie, J. delivered his primary reasons for finding the following[1]:

"(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."

Mandie, J. further found that Elliott and Plymin had each contravened s.588G of the Law, on each occasion a debt was incurred in the relevant period and had failed to establish any of the defences provided by s.588H. His Honour said that he was also satisfied that the debts incurred by each of the Water Wheel companies throughout the relevant period were wholly unsecured and that the persons to whom the debts were owed had suffered loss and damage in relation to such debt because of the insolvency of the relevant Water Wheel company.

At the conclusion of the first stage of the proceeding it remained for submissions to be made concerning:

(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.

Submissions were made to his Honour by counsel for the parties, including Harrison, on 3 and 4 June 2003 and on 30 June 2003 judgment was delivered.[2]

As against Elliott, Mandie, J. was not satisfied under s.1317JA that he ought fairly to be excused for his contraventions of the Law. Elliott was ordered to pay compensation to Mills of $1,330,486.11 and to Holdings of $97,513.89 pursuant to s.588J(1). Elliott was prohibited from managing a corporation for a period of four years and was ordered to pay a pecuniary penalty of $15,000 pursuant to s.1317EA(3)(a).

As against Plymin, his Honour was not satisfied under s.1317JA that he ought fairly to be excused for his contravention of the Law. Plymin was ordered to pay compensation to Mills of $1,330,486.11 and to Holdings of $97,513.89 pursuant to s.588J(1). Plymin was prohibited from managing a corporation for a period of ten years and was ordered to pay a pecuniary penalty of $25,000 pursuant to s.1317EA(3)(a).

As against Harrison, Mandie, J. ordered that he be prohibited from managing a corporation for a period of seven years and should pay compensation to Mills of $279,513.89 and to Holdings of $20,486.11. No pecuniary penalty was ordered against Harrison.

Elliott gave notice of appeal on 14 July 2003 relying upon 25 grounds. Before the appeal hearing began Mr Judd, who appeared in this Court for Elliott, notified the Court that he intended to rely only upon 17 grounds. Seven grounds related to liability and ten grounds related to compensation, prohibition and the pecuniary penalty. Mr Judd also informed the Court before the hearing began that his client would no longer challenge the finding of the trial judge that on and after 14 September 1999 Elliott was aware of reasonable grounds for suspecting insolvency for the purpose of s.588G of the Corporations Law. Nor would Elliott contend in his appeal that Mills and Holdings were solvent after 14 September 1999.[3]

Mr Judd also notified the Court before the hearing that the questions for determination on the appeal were as follows:

"(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?"

Plymin gave notice of appeal on 14 July 2003 specifying 31 grounds. On 17 October 2003 an amended notice of appeal was given in which 17 new grounds numbered 32 to 48 were added. Grounds numbered 4 to 12 are concerned with denial of natural justice in that Plymin was unrepresented and conducted his own defence at the trial. Those grounds assert that he did not receive a fair trial. Grounds 13 to 16 were later abandoned. Grounds 17 to 31 contended that the judge erred in law in relation to the compensation order, the pecuniary penalty order, the prohibition order and the order as to costs. The new grounds numbered 32 to 46 were abandoned shortly before the appeal hearing began. Grounds 47 and 48 asserted that errors were made by the trial judge in finding that Plymin was liable to pay compensation.

Plymin was granted leave by the Court to add a new ground, numbered 49:

"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."

Mr Jones, who appeared in this Court for Plymin, informed the Court that Plymin would no longer challenge the finding of the trial judge that on or after 14 September 1999 he was aware of reasonable grounds for suspecting insolvency for the purpose of s.588G of the Corporations Law. Nor would he contend that the companies were solvent after 14 September 1999.

As a consequence of the matters referred to in paragraphs [14] to [16], the questions for determination on the appeal were, save for the denial of natural justice grounds (4 to 12), identical to the questions referred to in paragraph [13].

Counsel for Plymin indicated in a written submission dated 20 February 2004 that he adopted the written submissions made by Mr Judd for Elliott on the basis that any reference to Elliott in such submissions should be read as a reference to Plymin.

Thus, many of the issues for determination by the Court were common to both appellants. Peculiar only to Plymin's appeal was the denial of natural justice issue, and a short argument as to costs.

The directors of Mills and Holdings at all relevant times were Plymin, since May 1997, Elliott, since May 1997 and Harrison, since October 1987. Kenneth Carnie became a director on 29 September 1999 when Water Wheel was insolvent. Mills had been incorporated in 1888 as Water Wheel Flour Mills Pty. Ltd. and was the trading entity of Water Wheel Group. Holdings was the parent company of the Group. Holdings' solvency depended on the solvency of Mills.

ASIC alleged that Water Wheel was insolvent on and after 14 September 1999, or, alternatively, on and after 3 October 1999 and that Plymin, Elliott and Harrison contravened s.588G of the Corporations Law of Victoria with respect to the insolvent trading of Water Wheel on and after 14 September 1999.

In Part 5.7B, Division 3 of the Corporations Law as in force prior to 13 March 2000, s.588G prescribes a director's duty to prevent insolvent trading by a company, thus -

"(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."

A considerable body of evidence in the proceeding dealt with events occurring between September 1998 and September 1999. A further body of evidence was concerned with insolvent trading by Water Wheel which commenced on or about 14 September 1999 and continued until 16 February 2000 when administrators were appointed. Plymin, who was not represented during the first stage of the hearing, and Elliott, who was represented, contested, as we have said, the allegation that Water Wheel was insolvent on or about 14 September 1999 and denied liability under s.588G. Harrison, who was represented, admitted liability in the course of the trial and only contested the civil penalties sought by ASIC.

Water Wheel purchased and milled wheat and paddy rice to produce flour, stockfeed and rice. It had a rice mill at Bridgewater installed at a cost of $3M. with a capacity to produce 48,000 tonnes per annum. It had a wheat flour mill and a stockfeed plant at Mitiamo. In the calendar year 1999 Water Wheel generated revenue of approximately $12.5M. from its flour business, approximately $9M. in revenue from rice and $5.7M. from its stockfeed business, a total of approximately $27M.

Water Wheel purchased large quantities of wheat and paddy rice. Derrick & Son (Grain) Pty. Ltd. ("Derrick & Son"), grain traders and grain merchants, financed Water Wheel's purchases of paddy rice and the New South Wales Grain Board ("NSWGB"), a large supplier of wheat, financed Water Wheel in respect of wheat. Neil's Transport Group provided transport facilities for all Water Wheel's products from the Bridgewater mill. In or about August 1997 the managing director of Neil's Transport Group agreed with Plymin, for Water Wheel, upon terms of payment for transportation services. It was agreed that payment was to be made within 30 days of receipt of an end-of-month statement and that in the event of non-payment Neil's Transport would be entitled to claim a lien in respect of any goods stored by it for and on behalf of Water Wheel. Neil's Transport ceased trading with Water Wheel in about mid-October 1999 due to Water Wheel's persistent indebtedness outside the agreed terms for payment.

AWB Limited, a company associated with the Australian Wheat Board ("AWB") had a longstanding commercial relationship with Water Wheel. Its standard terms of trade with Water Wheel were payment within 30 days from the Saturday of the week of delivery. In late September 1998 Water Wheel was indebted to AWB in the sum of $339,000 of which $158,000 was overdue since 24 August 1998. AWB's manager of trade finance told Water Wheel's financial controller and company secretary (Terry Crowe) that until payment was made Water Wheel's credit limit of $400,000 was suspended and that there would be no further deliveries of wheat. On 6 October 1998, by letter, AWB requested Water Wheel to pay immediately the sum of $102,844.43 (all overdue for payment) "to ensure that deliveries are not suspended". There had been a history of indebtedness outside the agreed terms for payment.

On 12 October 1998 a Board of Directors meeting of Water Wheel took place at which Harrison, Plymin, Elliott, John Gross and Crowe were present. The Board resolved that additional financial information was required for future Board meetings.

In December 1998 when carrying out the audit of the accounts for the financial year ended 3 December 1998 the auditors, Hall Puddy and Wales (HPW), sighted a trial balance prepared by Water Wheel's management. The trial balance suggested that a profit of approximately $1M. would be made for the 11 months from 3 December 1997 to 31 October 1998. This figure was soon to be replaced by a substantial loss after HPW commenced an audit of Water Wheel's consolidated financial accounts for the financial year ended on 3 December 1998 in early December 1998. HPW became aware in early February 1999 that the result for the financial year to 3 December 1998 was likely to be a substantial loss and spoke to Harrison. Harrison spoke to Plymin and it was agreed that Deloitte Touche Tohmatsu ("Deloittes") would investigate the cause of the loss.

A Board meeting of Water Wheel at which the directors, Harrison, Plymin and Elliott were present, was held on 16 February 1999. Also present were Charles Rosedale, a partner at Clayton Utz, legal adviser to Water Wheel and Stephen Nankervis, financial controller of Water Wheel from 1 February to 19 April 1999. The Board was informed by Nankervis that a loss of about $1.5M. was anticipated for the year ended 3 December 1998. The Board, having earlier anticipated a profit of about $1M., resolved to request Deloittes to investigate whether a substantial quantity of flour sales had not been recorded in the books of account. The Board believed that missing sales could account for $1M. to $1.8M. Water Wheel advised the Australian Stock Exchange ("ASX") that the Board considered it was inappropriate to lodge its accounts for the year ended 3 December 1998 due to anomalies in the accounts.

On 15 January Crowe ceased to be Water Wheel's company secretary and financial controller, being replaced by Stephen Nankervis. By letter dated 26 February 1999 AWB complained to Water Wheel of late payments for deliveries of wheat and noted that $104,930.74 was overdue for payment. AWB indicated that Water Wheel's credit limit might be reduced or withdrawn. The amount overdue was not paid and AWB again wrote to Water Wheel advising Harrison that on average AWB's invoices were being paid every 45 days and reminding him that AWB's standard trading terms "are strictly payable 30 days from the weekend of delivery". The letter threatened legal proceedings for recovery of the sum of $104,930.74 if payment was not made by 17 March. On 10 March 1999 AWB deactivated Water Wheel's credit limit and required all future grain sales to be on a cash with order basis. Water Wheel paid the sum claimed on or about 17 March 1999.

The investigation completed by Deloittes did not show any lost sales of flour. On 18 March 1999 the Board of Directors met in Elliott's office and were informed that HPW's completed audit of Water Wheel showed a loss for the year of $878,889, mainly due to the flour section.

In June 1998 Water Wheel made an agreement with the NSWGB relating to about 50,000 metric tonnes of grain covering the 1997/1998 wheat season. The wheat delivered was stored in silos at Bridgewater controlled by Water Wheel. The agreement provided for Holdings to pay for all wheat the subject of the agreement by 30 November 1998. By the end of 1998 a total amount of $623,441 was owing by Water Wheel to NSWGB. It was never paid.

On 6 January 1999 Rice Growers Co-operative Ltd. ("Rice Growers"), a rice marketing company for the NSW Rice Marketing Board, delivered a quantity of paddy rice to Water Wheel and invoiced Water Wheel for the amounts of $1,126,623.15 and $1,242,270.19. The agreed trading terms with Rice Growers were payment within 14 days of delivery. The first amount was paid on 22 January, outside the terms of trading. The second amount was part paid by instalments in February and on 26 February Rice Growers' retained a debt collector to recover the balance of $300,000. Further instalments were paid in March, but payment of the outstanding amount of $150,000 was not made until 3 May.

On 12 March 1999 a Board of Directors meeting was held at which Harrison, Elliott, Plymin and Gross were present. Also present was Nankervis, the Financial Controller. The directors were informed by Nankervis "of [Water Wheel's] tightening liquidity, the increased legal recourse suppliers were taking to recover debts and the difficulty being experienced in paying debts when they fell due" which Nankervis said raised concerns that Water Wheel might be insolvent.[4] At the meeting on 12 March the directors were informed by Trevor Brown, a partner of Deloittes who attended the meeting, that Deloittes had not found any abnormalities in the invoicing of sales of flour and that for the six months to 3 December 1998 Water Wheel's expenses had increased by approximately $1.2M. Mark Gross (of KPMG Corporate Finance and a consultant to Water Wheel) presented the Board with a memorandum in which he assessed that Water Wheel could experience a negative cash flow of approximately $670,000 in the financial year 1998 to 1999. After the meeting Brown and others from Deloittes attended at Water Wheel's mill at Bridgewater and found no discrepancy of invoices for flour sales in the computer system.

In March 1999 Neil's Transport complained to Plymin about the tardy way Water Wheel was paying invoices. Payment was outside the terms of trade and it was rare that invoices would be paid by Water Wheel within 75 days. It was not unusual for the debt outstanding by Water Wheel to Neil's to be $.5M. or more.

In April 1999, trade creditors of Water Wheel were demanding immediate action on their overdue accounts, to the knowledge of Plymin, and Water Wheel's electricity supplier, Powercor Australia Ltd., had threatened to stop supply unless a large debt was paid within two hours. During the period between July and November 1999 the amount due varied between $30,822 and $43,690 and was paid by dribs and drabs.

At a Board meeting of Water Wheel on 12 April attended by the directors, Harrison, Plymin, Elliott and John Calvert-Jones, Calvert-Jones asked whether Water Wheel was solvent and was told by Plymin it was solvent. Nankervis drew attention to the cash flow deficit and the need for a further $1.2M. in cash to bring existing creditors in line with agreed trading terms. Water Wheel's need for working capital of approximately $5.7M. was also raised at the meeting. Nankervis said in evidence that Water Wheel had a shortfall in liquidity of a minimum of $2M. and was unable to pay creditors within normally accepted trading terms. Nankervis also said in evidence, which his Honour accepted, that initial legal advice given to him was that inability to pay creditors within normal trading terms constituted trading while insolvent. Calvert-Jones also asked whether Water Wheel's superannuation contributions for employees were up to date and Nankervis replied that superannuation contributions for employees were three months in arrears.

On 14 April Calvert-Jones resigned, followed by Nankervis on 19April. Plymin became Financial Controller on 20 April, holding that office until 9 August 1999 when he was replaced by David Wilson.

On 20 April, at a Board meeting which included the directors Harrison, Plymin, Elliott and Gross, Charles Rosedale, the legal adviser to Water Wheel, also attended. The Board discussed the cash position of Water Wheel and ascertained from Nankervis that debtors outweighed creditors by about $300,000. Nankervis was asked why Water Wheel was unable to pay its debts as and when they fell due. He stated that debtors were only 0-30 days old whereas creditors were up to 120 days old causing cash flow problems. The minutes recorded that the Board was of the opinion that the company was in a solvent position. The Board was informed that in the first three months of 1999 Water Wheel experienced losses of about $.5M. each month. Mr Wallace-Smith of Deloittes also attended the meeting and addressed the Board on the general concept of solvency and the operations of the voluntary administration provisions of the Corporations Law.

ANZ Bank was Water Wheel's banker. On 23 April Plymin advised the bank in a memorandum addressed to Mark Edwards, ANZ Bank Manager, that Water Wheel required an additional $2.9M. in "seasonal finance facilities" to purchase the 1999 Victorian rice crop and "to bring existing trade creditors in line with agreed trading terms". $1M. represented "outstanding creditors over 90 days".

On 21 May 1999 Harrison, Plymin and Elliott were advised in a document that the current creditors of Water Wheel exceeded Water Wheel's current debtors by $1.133M., that creditors outstanding for more than 90 days amounted to $680,879.23 and that creditors outstanding between 60 days and 90 days amounted to $917,339.33.

On 2 June Water Wheel owed Derrick & Son an amount of $520,869 overdue for payment and Plymin agreed to reduce the debt by instalments of $180,000 commencing 4 June and weekly thereafter.

On 9 June Plymin attended the ANZ Bank and met with Edwards and another Bank officer. Plymin was advised of the bank's concerns in relation to Water Wheel's inability to provide financial information and that the bank proposed to appoint an investigative accountant at Water Wheel's cost to provide information on the company's business. Christopher Daly of Price Waterhouse Coopers (PWC), an accountant, was appointed on 9 June 1999.

Daly reported to the ANZ Bank on 5 July and provided a draft copy of his report to Plymin. Daly noted that Water Wheel had reported a loss of $1.232M. for the five months, December 1998 to 30 April 1999. The report noted that Water Wheel could possibly report a loss of $1.82M. for the seven months to 3 December 1999.

On 19 July the ANZ Bank wrote a letter to Water Wheel in which it expressed serious concern about a number of matters including "significant trading losses", "material adverse change in Water Wheel's financial position" and "safety of the Bank's exposure". The bank required an action plan by 30 July and an external valuation of Water Wheel's assets. Elliott said in evidence that he was made aware of the Bank's serious concerns and that the Board met and seriously decided to sell both the flour business and the stock feed business.

"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 July Water Wheel was continuing to experience difficulties in meeting the trading terms of NSWGB, Derrick & Son and Rice Growers. On 19 July 1999 NSWGB advised Plymin of overdue invoices totalling $1.37M. ($571,542.73 under an invoice dated 31 January 1999 and $800,000 under a series of invoices dated from February 1999 to July 1999). On 21 July Derrick & Son demanded payment from Water Wheel of $579,388.40 and on 23 July advised it would not make further deliveries to Water Wheel without payment of "cash upfront". On 23 July Rice Growers determined that all future orders by Water Wheel were to be paid prior to delivery. Incitec, a supplier of product to Tristate Commodities, a grain merchant business owned by Water Wheel ("Tristate"), advised that Incitec would close Tristate's account and pursue legal action if $78,000 was not paid within 36 hours.

On 26 July Plymin and Harrison met ANZ Bank officers and were informed that the relationship between Water Wheel and the bank had been given "high risk" classification.

On 30 July John Gross resigned as a director of Water Wheel.

On 29 July HPW advised Harrison and Plymin that Water Wheel had incurred a large loss of $2,740,420 in the first 6 months of the 1999 financial year attributable to increases in the cost of goods sold.

Water Wheel's payroll tax liabilities to the State Revenue Office from July 1999 onwards were never paid.

Difficulties in cash flow continued in August. Water Wheel required $2M. for working capital but the ANZ Bank was not prepared to extend its facilities. On 16 August the bank wrote to Water Wheel expressing its concerns with the half year loss reported and advised:

"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.

On the same date the bank wrote to the directors of Water Wheel informing them in similar terms to the letter written to Water Wheel on 16 August that the bank was prepared to withhold its demand for repayment subject to a number of conditions which were specified.

On 9 August David Wilson became Water Wheel's Group Financial Controller.

On 13 August Water Wheel's results became available for the half-year to 3 June 1999. They disclosed a loss of $2.135M. on sales of $18.5M. The results showed that creditors' current liabilities were $10.4M., the ANZ Bank debt was $5.7M., other provisions were $223,000 and current assets were $12.3M. Frank Montesano, the Audit Manager of HPW and Geoffrey Wales, an audit partner of HPW, met with Harrison and Plymin and informed them that the large loss to 3 June was being funded by trade creditors. Harrison said that in those circumstances "it may be appropriate for an administrator to be appointed".

On 17 August a Board meeting was held attended by Harrison, Plymin, Elliott and others. Plymin tabled the ANZ Bank letter of 16 August advising Water Wheel that all facilities were now on demand. Following a telephone call by Harrison to the bank the Board was advised that the bank was not demanding immediate repayment. Elliott said in evidence he understood that the bank debt was at call.

On 20 August Tristate owed Derrick & Sons $166,000 on account of purchases, some invoices for which were outstanding since early June and early July 1999. On 27 August Air Express International made a final demand of $296 for services provided on 12 May; payment was not made until 22 September. On 31 August HPW, the Water Wheel auditors, invoiced Water Wheel for $49,250 for services in the 6 months ended 3 June 1999. The amount was never paid.

Water Wheel's serious cash flow shortage continued in September 1999. On 1 September PWC reported to the ANZ Bank that Water Wheel had $1.3M. owing to creditors for over 60 days and $1.754M. owing for over 90 days. The report noted that there were 126 other creditors to whom was then owed an average of $2,595 whose debts were outstanding for between 61 to 90 days and 141 other creditors to whom was then owed an average of $3,418 and whose debts were then outstanding for more than 90 days.

In September, Albright & Wilson was owed $14,422 with invoices dating back to January 1999. AWB advised that Water Wheel's account was suspended until payment in full was made. A similar position applied to another creditor of Water Wheel, Satake Australia Pty. Ltd. In early September Water Wheel owed Derrick & Son an amount of $1,070,814, of which $873,232 was overdue for payment by more than 30 days. Arrangements were made to pay $873,232 by instalments over a six week period using post-dated cheques.

On 7 September a meeting was held between two senior officers of the ANZ Bank and Plymin and Elliott. The bank officers expressed their concern about ongoing trading at a loss, as reported by PWC. Plymin and Elliott sought to allay the bank's concern and advised that Water Wheel expected to realise $3M. from the sale of its customer base.

On 14 September a further meeting was held at the ANZ Bank at which Plymin alone represented Water Wheel. A bank officer informed Plymin that Water Wheel's account had been transferred to the Group Credit Management section of the ANZ Bank because the bank had decided to end its relationship with Water Wheel and that whilst no demand had been made, facilities were repayable on demand.

On 16 September ASIC wrote to Water Wheel expressing its concern with Water Wheel's profit performance and solvency. ASIC requested Water Wheel to advise it by 20 September 1999 whether Water Wheel was able to pay all its debts as and when they became due. The letter was received by Plymin.

This letter was distributed to the directors of Water Wheel, Harrison, Elliott and Kenneth Carnie, a recently appointed director. Elliott testified during the trial that the letter `came as quite a shock' as he did not think that the company was insolvent. He said that his `definition of solvency was quite clear, it's where the current assets exceed current liabilities and excluding bank debt.' Plymin said that on 20 September 1999 he ascertained the excess of debtors to creditors was $187,000, excluding the amount owed to the ANZ Bank.

The summary of the facts in paras [23] to [63] persuaded the trial judge to make the primary findings set out in para. [5].

During the trial the Court heard evidence from two expert accounting witnesses, Michael Humphris, who was called on behalf of Elliott, and Lindsay Maxsted, who was called on behalf of ASIC.

Humphris was of the opinion that Water Wheel was trading while insolvent as early as 1 November 1999 until administrators were appointed[6]. The judge found that Humphris did not appear to attempt seriously to consider the issues relating to whether there was insolvency prior to November 1999. Humphris said the indicators of insolvency present were: continuing losses over a prolonged period of time, overdue Commonwealth and State taxes, inability to obtain further or other bank finance, inability to raise equity capital, placement of orders by suppliers on COD terms, issue of post-dated cheques some of which were dishonoured, legal proceedings and payment of rounded sums to creditors[7].

Maxsted opined that Water Wheel was insolvent as from 14 September 1999 and there were many indicators of insolvency from much earlier dates.

His Honour considered that Maxsted's opinion represented a reasonable analysis of Water Wheel's financial position and supportive of ASIC's case. However, his Honour did not find it necessary to rely upon Maxsted's opinion in reaching his conclusion that Water Wheel was insolvent from 14 September 1999 onwards.

His Honour was satisfied on the whole of the evidence that Water Wheel was insolvent within the meaning of the Corporations Law from 14 September 1999 onwards. It is unnecessary to state further the reasons given by his Honour for finding insolvency, since the finding is no longer contested by either Elliott or Plymin.

In the period between Water Wheel becoming insolvent and 17 February 2000 when administrators were appointed to Water Wheel by the directors, some five months, Mills incurred debts totalling $1,883,260.10 owed to 55 creditors.[8] In the same period Holdings incurred debts totalling $1,485,740.21 owed to six creditors.[9]

Group tax payable to the Australian Taxation Office in the sum of $83,685.10 for September 1999 was due on 21 October and went unpaid until 20 December. Group tax deducted by Water Wheel from the wages of employees for the months of October, November, December, January and February 2000, totalling $449,419.19 was not paid before the companies went into voluntary liquidation. The debt shown in Schedule A is $468,598.50. In the same period Pay-roll tax owed to the State Revenue Office totalled $54,574.86.

During the first half of October 1999 Water Wheel's trade debts continued to increase and creditors' threats to withhold supply or cease trading also continued.

On 3 November representatives of NSWGB met with Plymin and Harrison at Water Wheel's office in East Melbourne and discussed Water Wheel's indebtedness to NSWGB. Elliott later joined the meeting and was informed by Plymin, as his Honour found, that NSWGB had stopped all supply to Water Wheel other than on cash prior to delivery terms due to outstanding debts which were out of terms and that this requirement was causing problems for Water Wheel's operations. Water Wheel was indebted to NSWGB in an amount in excess of $1.4M.

His Honour considered a director's duty to prevent insolvent trading and the provisions of the Corporations Law applicable to the proceeding before the Court and noted[10]:

"... 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]'."

His Honour stated that neither Plymin nor Elliott took any steps to prevent Water Wheel's continuing to trade during the relevant period and that he was satisfied that each of them failed to prevent Water Wheel from incurring each of the relevant debts within the meaning of s.588G(2). He said[11]:

"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)."

His Honour examined the facts and made findings that Elliott was aware of reasonable grounds for suspecting insolvency of Water Wheel as at 14 September 1999 and at all relevant times thereafter.[12]

His Honour also made findings that Plymin was aware of reasonable grounds for suspecting insolvency of Water Wheel as at 14 September 1999 and at all relevant times thereafter.[13]

"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."

The judge first considered the amount of the loss or damage suffered by creditors in relation to whom debts were incurred on and after 14 December 1999. The judge accepted a calculation provided by ASIC which was not challenged by Plymin, Elliott and Harrison, showing that, after allowing for a total distribution of 14.5 cents in the dollar, the loss or damage in relation to relevant creditors of Mills was $1,610,186.10, say $1.61M. The judge accepted a calculation provided by ASIC, which was not challenged, showing that, after allowing for a total distribution of 90 cents in the dollar, the loss or damage in relation to relevant creditors of Holdings was $148,016. The judge reduced the calculation by allowing for a distribution of 92 cents in the dollar, based on the evidence. The revised calculation became $118,412, say $118,000.

Pursuant to an agreement entered into between Harrison and ASIC, the sum of $300,000 was paid to ASIC to abide any order in the proceeding. The judge considered it was appropriate to order that Harrison pay compensation pursuant to s.588J of $279,513.89 to Mills and $20,486.11 to Holdings - a total of $300,000.

His Honour was satisfied that the prerequisites contained in s.588J(1) had been satisfied and that it was in all the circumstances just and appropriate that orders should be made that Elliott and Plymin pay compensation to Mills and Holdings.

The amount of compensation payable to Mills was $1,610,000 less $279,513.89 paid by Harrison, namely, $1,330,486.11. The amount of compensation payable to Holdings was $118,000 less $20,486.11 paid by Harrison namely, $97,513.89.

Accordingly, in paragraph 3 of the orders and declarations made on 30 June 2003, Elliott and Plymin were both ordered to pay compensation pursuant to s.588J(1) of the Law (but not so as to exceed in total each of the following amounts):

(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

Immediately after the passage in the trial judge's reasons referred to in paragraph [75] above, the judge observed that his analysis of s.588G(2) was supported by the existence of the particular defences expressly provided for by s.588H(4) and (5). The content of s.588H was also an integral part of the arguments of all parties before this Court in relation to the interpretation of s.588G. Section 588H provides -

"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

The principal issues before the trial judge, to which a great deal of time and evidence were directed, were, first, whether Water Wheel was insolvent at or after 14 September 1999 and, secondly, whether Elliott and Plymin were aware of reasonable grounds for suspecting insolvency of Water Wheel as at that date and at relevant times thereafter. When written submissions for this appeal were first delivered, these issues remained at the forefront of both appellants' arguments. However, shortly before the appeal came on for hearing, supplementary outlines of argument were delivered on behalf of both Elliott and Plymin which, as we have said, abandoned the challenge to the judge's findings of the insolvency of Water Wheel and as to the fact that Elliott and Plymin were aware of reasonable grounds for suspecting insolvency. In place of these arguments, Mr Judd, for Elliott, mounted a completely different challenge to the case made by ASIC before the trial judge and in particular challenged the construction of s.588G(2) at which the judge had arrived. Mr Jones for Plymin adopted Mr Judd's submissions. It is necessary now to examine this argument in detail.

The essence of Mr Judd's argument was that in order for ASIC to succeed against Elliott it was necessary for ASIC to establish that -

(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.

Mr Judd's argument ran as follows. The Board of any company is entrusted with overall management, and has a duty to prevent insolvent trading. But s.588G is concerned with the position of individual directors and the circumstances in which the director will become liable for the consequences of a contravention. The argument ran that liability can only be established after an examination of the position of the individual director, including the aspects of his responsibility, duty to act and opportunity to take a meaningful step within the collective environment of the Board. It was emphasised that Elliott was a non-executive director on the relevant boards and was, for most of the time, one of four directors. Plymin, on the other hand, was managing director. It was submitted that these circumstances and the manner in which ASIC had conducted its case, exposed a number of novel and important issues concerning the application of the insolvent trading provisions of the Corporations Law. It was fundamental to Mr Judd's argument that the duties and responsibilities of a non-executive director, such as Elliott, are critically different to those of directors involved in the day-to-day management of a company, or a director, such as the managing director, who has the authority to make executive decisions. It followed that the ability of an executive director to take action to prevent an insolvent company from incurring a debt could readily be distinguished from the position of a non-executive director[15].

The argument continued that s.588G(2) does not purport to impose a liability on a director merely because the director did not prevent the company from incurring the debt or did not attempt to do so. Thus, an executive director might have the power to stop trading or seek to persuade the Board to appoint an administrator but might fail to do so. In these circumstances the director might have a defence under s.588H(5). On the other hand ASIC might have alleged that Elliott had the capacity to direct management, that he did not take any step to do so and therefore relevantly failed to prevent the incurring of debts. No such case was alleged against Elliott. Mr Judd submitted that a contravention of s.588G(2) and corresponding liability for compensation and other penalties depended upon establishing "volitional delinquency" on the part of the individual director - and not the board as a whole - in failing to stop the company incurring a particular debt.[16] He submitted that such delinquency was not established by an omission to act unless the circumstances placed the director under a duty to do something which had utility in preventing the company incurring the debt. There was, so the argument ran, an intended nexus between the volitional delinquency of the director when failing to prevent the company incurring "the debt" and compensation which might be ordered. A director, so it was said, is only liable to compensate the company in respect of the loss and damage suffered by a creditor in respect of a particular debt which the director failed to prevent.

In his defence to ASIC's case, Elliott had denied that he failed to prevent a company from incurring the debts, thus putting ASIC, it was said, on notice that it was required to prove each and every element of s.588G(2). ASIC, for its part, had chosen to lead no evidence on this aspect and did not contend that Elliott, as a non-executive director, was required to take any particular step to prevent the company incurring each relevant debt. Consequently, in Mr Judd's argument, ASIC did not prove, and the judge did not find, that such a step, if taken, would have prevented Water Wheel from incurring the debt. It had been ASIC's submission that all that was necessary was that Elliott had permitted the company to continue to trade, an approach which the trial judge had apparently accepted. It was submitted that in doing so the judge overlooked the difference between continuing to trade and what were said to be the express and explicit requirements of ss.588G(2), 588H and 588J which focus attention on "the debt" or "that debt", the state of awareness of the director at "the time" the company incurred the debt and the conduct of the director "at that time".

Mr Judd argued that the proper construction of s.588G does not require a non-executive director to resign to escape liability. In his submission the important role of non-executive directors should not be threatened by an implicit requirement that upon suspecting insolvency that director should immediately resign to avoid a contravention because of being unable to take other steps to prevent the company from incurring new debts. It was argued that if the chairman and managing director of a company are firmly of the view that a company is solvent, there may be no point in a non-executive director seeking to force the issue. It followed that unless it could be demonstrated that the non-executive director would have been capable of taking some step to prevent the company from incurring the debt, there could be no violation of the policy underlying this part of the Corporations Law. All of these considerations led to the conclusion that if circumstances suggested that a non-executive director should move the Board to refrain from incurring a debt or to cease trading or to appoint an administrator, and the individual director failed so to act, it would be necessary, before a contravention of s.588G was established, to prove that the act, if performed, would have been successful before it could be said that such a person "failed to prevent" a company incurring the relevant debt. In other words, a failure to take a step to prevent a company from incurring the debt would not translate into "a failure to prevent" unless the step would have been effective.

Against this background, Mr Judd argued that the trial judge was shown to have erred in a number of ways in his conclusions against Elliott. First, it was submitted that the judge misinterpreted s.588G and, in so doing, had found that Elliott had contravened s.588G(2) without first having identified the steps which Elliott should have taken to prevent a relevant debt being incurred, and without satisfying himself that the step, if taken, would have been effective to prevent the company incurring that debt. Secondly, it was said that the judge erred in finding that a director with the requisite degree of awareness of insolvency, would contravene s.588G(2) if that person failed to take steps or make an attempt to prevent the company from trading; since there had been no identification of any step or thing which might or should have been taken by Elliott to prevent the company incurring any debt or continuing to trade. Thirdly, the judge had erred by treating an individual director with the requisite degree of awareness of insolvency as having failed to prevent the company from incurring a debt unless the director satisfied the onus of proving one or more of the defences in s.588H. Fourthly, it was said that the judge should have held that it was necessary for ASIC, to establish a contravention under s.588G(2), to prove at least that, at the time each relevant debt was incurred by Water Wheel, Elliott was aware that there were grounds for suspecting insolvency, that at that time Elliott should have taken certain identified steps to prevent the company from incurring that debt, and that had Elliott taken those steps the company would not have incurred that debt.

Mr Judd argued that ASIC had not suggested that Elliott himself had the power to intervene in the management of Water Wheel, or to instruct Plymin or other executives not to incur a further debt or to appoint an administrator. Had ASIC alleged that Elliott should have moved the board, it would have been necessary for ASIC to establish that his attempt would have been successful. No such evidence was adduced, since ASIC had not called evidence from Harrison or any other director. He argued that such evidence as was before the Court suggested that Elliott would have been outvoted. In his submission it was only by confronting the issue of what an individual director could or should have done that the Court could properly determine the nature and scope of the duty. If, in truth, there was nothing the director could have done because of the entrenched attitude of the Board as a whole, a failure to take a step or "attempt to prevent" by moving the Board could not constitute a contravention even though the director was unable to point to a single act for the purpose of raising a defence under s.588H(5).

It followed, Mr Judd submitted, that the consequence of the erroneous approach taken by the judge to the construction of s.588G resulted in his Honour formulating an erroneous pathway to liability and compensation. No attention had been directed to Elliott's duty or capacity in respect of particular debts at the time the debt was incurred. As a consequence, the judge misunderstood and overlooked the significance of a body of evidence and findings made by him which bore directly upon the nature and extent of the duty of a director in Elliott's position to act at all to prevent a relevant debt from being incurred. His Honour's approach, so it was said, also coloured his Honour's consideration of defences as well as his exercise of the Court's power under s.1317JA and the power to order compensation. The argument continued that had ASIC presented its case so as to identify individual duties and capacity to act at each relevant time, the impact on other aspects of the case would have been profound. By failing to properly consider and apply the requirements for a contravention, it followed that the judge had also failed to properly consider the various affirmative defences raised by Elliott at the trial.

As part of his argument, Mr Judd accepted that under the previous legislation dealing with the liability of directors of insolvent companies, for insolvent trading, such as ss.556 of the Companies Code and s.592 of the Corporations Law 1991, it was a feature of those sections that there was "sudden death liability" for directors. He accepted that under these sections if the directors had the requisite introductory knowledge, the directors then became liable for debts of a company incurred after that time. We shall turn to the relevant sections and the cases dealing with them shortly. Mr Judd's argument was that with the introduction of s.588G in 1992, there was a new beginning and a new duty and a new enquiry was brought about. In his submission the introductory words of s.588G(2) were critical and must not be overlooked in the interpretation of the section.

The Failure to Raise These Arguments at Trial

The careful arguments of Mr Judd (who did not appear at the trial) raise a new case on appeal. That a new case was being argued was not contested by Mr Judd, although it was put that it had been submitted that Elliott's position as a non-executive director was quite different from that of Plymin, the managing director, and there had been a body of submissions the effect of which was that ASIC was obliged to prove a breach of duty. It is, however, clear that no attempt was made in the defences of either Elliott or Plymin, both of which had been filed before ASIC closed its case, to plead or rely on s.588H(5), namely the defence that a director took all reasonable steps to prevent the company from incurring the debt. The judge found[17], as we have said, that it was 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.

We were referred to the closing written submissions at trial filed on behalf of Elliott to demonstrate the nature of the defence made on Elliott's behalf to ASIC's case. The thrust of those submissions was that the Court could not find that Elliott had contravened s.588G without first determining what duties were owed by Elliott to Water Wheel pursuant to s.232 of the Corporations Law in his capacity as a non-executive director and that the Court was bound to infer that there had been no breach of his duties under s.232. The second principal argument made on Elliott's behalf in relation to these matters was that Elliott, as a non-executive director, was powerless to prevent debts being incurred by Water Wheel, and that accordingly s.588G could have no application. It was argued in the closing submissions at trial that "in these circumstances the proper construction of s.588G renders it inapplicable to a non-executive director who was at no time possessed of the power or right to stop Holdings from trading or incurring debts."[18]

It is quite clear from a reading of the submissions filed on behalf of Elliott before the trial judge, which were not amplified by oral submissions, that the argument now raised by Mr Judd based on the interpretation of s.588G(2) is new, and was not put at trial. Indeed, Mr Judd did not suggest the contrary. The simple case made below for ASIC was that no steps had been taken by any director to curtail trading by Water Wheel, because the directors asserted that the companies were solvent and they had no reason to suspect insolvency, and accordingly, no occasion to take any steps. No issue had been raised below as to whether enough had been done by any director to prevent Water Wheel incurring debts in insolvency. The issues resolved at trial had led the judge to the now undisputed conclusions that Water Wheel was insolvent, and the directors at relevant times had reasonable grounds to suspect insolvency. It was accordingly common ground that each director had taken no steps to prevent Water Wheel from incurring any of the relevant debts within the meaning of s.588G(2). These findings were, Mr Young for ASIC submitted in this Court, unimpeachable, and had led to his Honour's conclusion that the Board of Water Wheel as a whole had acquiesced at relevant times 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.

In general, a party is bound by the way it conducts its case at trial and it is not open to a party which has elected not to pursue a particular course at trial then to argue on appeal points not taken below.[19] This principle was recently emphasised in Whisprun Pty. Ltd. v. Dixon[20], where Gleeson, C.J., McHugh and Gummow, JJ. said -

"[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."

In this Court Mr Young for ASIC submitted that the factual findings made by the judge were on any view of s.588G(2) an insurmountable obstacle to the appeals succeeding. He put it, however, that in his reasons[21] the judge had anticipated the argument now made in the passage where his Honour said that -

"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.

Before considering further the question whether either appellant should now be permitted to rely upon the arguments newly raised on appeal as to the construction of s.588G(2) and s.588H we should turn instead to the question what is the proper construction of these sections.

Section 556(1) of the Companies (Victoria) Code in 1981 imposed personal liability upon a director of a company in respect of debts incurred by the company if, immediately before the time when the debt was incurred, there were reasonable grounds to expect either (i) that the company would not be able to pay all its debts as and when they became due; or (ii) if the company incurred the debt it would not be able to pay all its debts as and when they became due. Section 556(2) of the Code, however, provided -

"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."

These sections were considered in Morley v. State Wide Tobacco Services[22], a case in which the defendant was a director of and shareholder in a small family company. The company had been managed by the defendant's husband until a short time prior to his death in 1979 when its management was taken over by her son, another director and shareholder. On the death of the defendant's husband, the defendant and her daughter (also a director and shareholder) informally requested the son to continue to manage the company, which he did. The defendant received regular income from the company and signed formal documents on its behalf, but made no attempt to inspect the company's books or accounts or seek specific information concerning its affairs. During 1988, the son incurred debts to the plaintiff on behalf of the company at times when it was conceded that the company was commercially insolvent. The plaintiff sued the defendant under s.556(1) for recovery of debts, and the defendant sought to rely upon the defences contained in s.556(2). The critical question raised was whether a director who leaves the conduct of a business entirely to another director or executive can make out the defence under s.556(2)(a) by proving that the debts in question were incurred without his or her "express or implied authority or consent". The issue had previously been considered in Metal Manufacturers Pty. Ltd. v. Lewis[23] where a majority of the Court of Appeal of New South Wales[24] had held that for liability to attach to a director under s.556(2)(a) of the like section in the New South Wales Code, he must have given "express or implied authority or consent" to incurring the particular debt in question.[25]

In Morley, Ormiston, J. in a very influential and much cited judgment, said[26] -

"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]

The interpretation of the like section, also s.556, of the Companies (South Australia) Code was considered in Group 4 Industries Pty. Ltd. v. Brosnan[31], by the Full Court of the Supreme Court of South Australia[32]. Substantially the same issue was involved in that the appellant had sued the respondents, who were husband and wife, as the only directors of a company which installed air-conditioners for a debt owed for equipment supplied before the company was voluntarily wound up. It was claimed that the respondents were jointly and severally liable pursuant to the provisions of s.556(1) of the Companies Code, both respondents then relying on the defence in s.556(2) that they did not have "reasonable cause to expect that the company would not be able to pay all its debts as and when they became due". The wife claimed "that the debt was incurred without her express or implied authority or consent". At first instance Duggan, J. had found the husband liable but that the wife had not taken as active a role in the business and had a good defence. The Full Court concluded that the wife had both impliedly authorised and consented to her husband incurring the debts on behalf of the company and was accordingly liable for the debts incurred. Matheson, J. quoted extensively from the judgment of Ormiston, J. in Morley's case, saying[33] that the judgment "is illuminating, and I agree in substance with all that his Honour said". Olsson, J. in substance adopted the reasoning of Ormiston, J.[34] and Debelle, J. also accepted the reasoning of Ormiston, J.[35]

On 1 January 1991 the Commonwealth introduced a new body of legislation, the Corporations Law 1991, in order to nationalise as much as possible the regulation of company takeovers, securities and the futures industry. Section 566 of the Companies Code was replaced by s.592 of the Corporations Law, but the section was drafted in substantially the same terms as the previous legislation. Mr Judd accepted that decisions such as Morley and Group 4 had correctly decided that these sections imposed a form of "sudden death" or strict liability for directors, and that the onus was then cast on a defendant director to prove one of the matters contemplated by s.556(2) to mount a defence to an action under s.556(1). The Corporate Law Reform Act 1992 (C'th) then introduced a new insolvent trading regime into the Corporations Law, replacing s.592 with s.588G.

The appellants now argue for a construction of s.588G which would involve a dramatic change in the law of directors' liability for insolvent trading. The argument is based on two elements of the wording of s.588G, on the Harmer Report which led to the introduction of the new legislation[36]

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.

The General Insolvency Inquiry of the Commonwealth Law Reform Commission of 1988 is generally known as the Harmer Report. The explanatory memorandum to the Corporations Law 1991 demonstrates that the Harmer Report is the basis of much of the change that was brought about by the Corporations Law 1991 and we will refer to sections of the explanatory memorandum to this legislation shortly. Relevant provisions of the Harmer Report show that the Commission recommended a total restructuring of the legislation concerning director liability so that the legislation "should impose on directors a duty to prevent the company from engaging in insolvent trading". Paragraph 283 of the Report included the following -

* "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.)

The Report also recommended a form of legislation to give effect to its proposals which included the following provisions -

"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 explanatory memorandum to the bill stated, in paragraph 26, that proposed Parts 5.7B and 9.4AA implement recommendations of the Harmer Report. Paragraph 182 proposed that directors "will be under a positive duty to ensure that the company does not incur debt while insolvent". That paragraph included the statement that -

"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. ...".

The foregoing passages from the Harmer Report and the explanatory memorandum demonstrate that the recommendation of the Commission, and the original intention of the framers of the legislation was that the potential liability of directors of a company was limited to circumstances of insolvent trading leading to a winding up. A company was only taken to have engaged in insolvent trading when circumstances of insolvency existed at the time when the company incurred a relevant debt and the company subsequently commenced to be wound up in insolvency. In the event, however, Parliament determined that the director's duty to prevent insolvent trading should not be limited by the necessity for the company to be subsequently wound up, thus making it possible for the sections to apply in circumstances such as the present case, where the company (Water Wheel) had gone into voluntary administration. In our view the Harmer Report and in particular paragraphs 285, 302 and 325, makes it abundantly clear that the Commission was not contemplating placing any onus on ASIC to prove any particular breach or failure. The same conclusion can, we think, be drawn from paragraphs 26, 1082, and 1089 of the explanatory memorandum of the legislation introducing s.588G(2) and s.588H. Neither the Harmer report nor the explanatory memorandum gives any support to the submission made by the appellants as to the interpretation of ss.588G and 588H of the Law. On the contrary both support the view that the Legislature was intending to achieve at least the same level of responsibility for directors in insolvent trading as had been imposed by courts in cases such as Morley and Group 4 Industries.

Deputy Commissioner of Taxation v. Clark[38]

Both Mr Judd and Mr Young sought to place some reliance on the judgment of Spigelman, C.J. in this case, decided in 2003. The respondent and her husband were the directors of a company which had been wound up on 27 October 1997. The liquidator had obtained an order against the Commissioner for recovery of amounts paid by way of group tax and prescribed payments, on the ground that such payments constituted an unfair preference. The husband was ordered to indemnify the Commissioner for such amounts, but the respondent was held to have had good reason to have not taken part in the management of the company at the times of the payments. The Commissioner appealed against the decision at first instance. The case principally concerns the interpretation of s.588FGB in Division 2 of Part 5.7B of the Corporations Law, but also contains a number of observations as to ss.588G and 588H. It is sufficient to say that insofar as relevant, the Court applied the reasoning in Morley and Group 4 Industries to the interpretation of s.588G[39]. For example Spigelman, C.J. said -

"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

Mr Young for ASIC submitted that it was well-established before the 1992 amendments to the Corporations Law that directors would contravene s.592 if a debt was incurred when there existed reasonable grounds to suspect insolvency, unless the directors could establish a defence, the burden of which lay on the director. The powerlessness of the directors was, he submitted, irrelevant and the director was obliged to take all practicable steps to prevent the company incurring debt. There was, he argued, no requirement on ASIC to show that the director could be proved to have known of or authorised the incurring of debts, or be shown to have taken no steps to prevent the incurring of debt. He submitted that the Harmer Report, the explanatory memorandum to the amending legislation and the subsequent decision in Clark v. Deputy Commissioner of Taxation all showed that the 1992 amendments did not intend to abandon any of these fundamental tenets.

As to the operation of Part 5.7B of the Corporations Law, it was argued that the director's duty arises from the operation of the whole division. Section 588G states the circumstances in which the section applies (which plainly are not limited to a winding up in insolvency). Nor, it was argued, is it a condition of the operation of ss.588J and 588K that the relevant company be wound up, in contrast to s.588M where it is clearly stated[40] that a condition of the section's operation is that the company is being wound up. Section 588G(1) and (2) must be read together. Section 588H is, in Mr Young's submission, the key to understanding s.588G. The defences there specified cover all the defences which on the appellants' argument are covered by the opening words of s.588G(2), but also show in unmistakable terms that the legislature has deliberately placed the burden of proving any such defences on the relevant director. This is seen by reference to the wording of each sub-section of s.588H which provides a defence for a director, but most clearly in sub-s.(5), which places on the director the onus of showing that the director took all reasonable steps to prevent the company from incurring the debt. The construction for which Mr Judd contended, ASIC submitted, would make sub-s.(5) of s.588H irrelevant and meaningless.

The opening words of s.588G(2) ("By failing to prevent") were much relied on by Mr Judd as indicating that s.588G(2) showed that the legislature had placed a positive duty to act on a director, and for this purpose Mr Judd had relied on what was said by Young, C.J. in Eq. in James v. Andrews[41]. In this case, a company registered and in liquidation in New South Wales and its liquidator were seeking compensation from a director of the company in relation to failing to prevent the company from incurring debts in New South Wales while insolvent. The director was at all relevant times a citizen of and resident in New Zealand. The director appealed against the decision of an acting master to grant the defendants leave to proceed against him, claiming that the court in New South Wales had no jurisdiction over him in respect of the proceedings. It was held that where a New South Wales statute creates an obligation on a company director, that obligation attaches to the company director wherever the director may physically be, and a failure to do acts which could have been done in New South Wales made the delinquency occur in New South Wales and was sufficient to give the court jurisdiction. Young, C.J. in Eq. referred to Ingram v. Ingram[42] and CBS Productions Pty. Ltd. v. O'Neill[43], before saying that[44] -

"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.

In James v. Andrews, Young, C.J. in Eq. concluded[46] that -

"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

Having regard to the context, the history and evident legislative purpose of ss.588G and 588H it is in our view clear that the effect of s.588G(2) is that a director contravenes the section "by not preventing" or "by failing to prevent" a company from incurring a debt, and that a director will be taken to have so failed if debts are incurred by a company at a time when there are reasonable grounds for suspecting that the company is insolvent. There is, we think, nothing in the wording of s.588G to support the contrary argument for which counsel for Elliott and Plymin contended. The Harmer Report, on which the legislation was based and the paragraphs in the explanatory memorandum to which reference has been made plainly support these conclusions. We also accept that the interpretation for which the appellants contend would make s.588H(5) both irrelevant and meaningless. It follows that we see no error in the trial judge's reasons dealing with the director's duty to prevent insolvent trading, and his Honour's interpretation of ss.588G and 588H.

We now turn to the questions for determination which Mr Judd put to the Court, insofar as they depend on the interpretation of ss.588G and 588H, and which are set out in paragraph [13] above, and answer the first five of those questions in turn. We conclude -

(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.

The answers we have given to these questions (which apply with equal force to the arguments made on Plymin's behalf by Mr Jones) make it unnecessary for us to consider the further question whether Elliott and Plymin should be allowed to argue an entirely new case on appeal. For on the interpretation we have given to ss.588G and 588H, the appeal of both would inevitably fail for the reasons given in para.[97] above.

In Chapter 9 of the Corporations Law_,_ s.1317EA provides_:_

"(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."

ASIC sought and obtained from the judge two declarations pursuant to s.1317EA(2) of the Corporations Law that each appellant, as a director of Mills and Holdings, by failing to prevent Mills and Holdings from incurring each of the debts referred in Schedule A (Mills) and Schedule B (Holdings) to the order of the Court, on and between 14 September 1999 and 17 February 2000 (the relevant period), had contravened a civil penalty provision, namely s.588G of the Law, with respect to the incurring by Mills and Holdings of each of the said debts, in circumstances where at all material times during the relevant period:

(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

The judge in relation to the contraventions specified in paragraphs 1 and 2 of the order of 30 June 2003, ordered pursuant to s.1317EA(3)(a) of the Law, that:

(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.

The debts referred to in Schedule A concerned 55 creditors and a total amount of $1,883,260. One large creditor was the Commonwealth Commissioner of Taxation where the debt was $468,598.50; another large creditor was Powercor Australia Ltd., an electricity supplier, where the debt was $129,310.88. The debts referred to in Schedule B concerned six creditors and a total amount of $1,485,740. One large creditor was Derrick & Son where the debt was $1,252,239. Another large creditor was the NSWGB where the debt was $172,076.

Mr Judd for Elliott argued in the appeal that the discretion exercised by the judge under s.1317EA(3)(a) miscarried. In his submissions, Mr Judd submitted that it was not appropriate for Elliott to be prohibited from managing a corporation; that Elliott was a fit and proper person to manage a corporation and that the judge's reasons for prohibiting him from managing a corporation were contrary to the evidence or the weight of the evidence and had no reasonable basis.[47]

Plymin and Elliott each became directors of Mills and Holdings in May 1997. They remained on the Board of Mills and Holdings until administrators of the Water Wheel companies were appointed on 16 February 2000.

Impressive character evidence was adduced for Elliott from Sir Roderick Carnegie, Mr Sidney Baillieu Myer, Senator Richard Alston and Mr Gary Morgan as to his business, political and community interests. Elliott swore an affidavit dated 2 June 2003 in which he deposed as to his extensive experience as a director and manager of many substantial public corporations. He detailed his current business activities and directorships in family oriented companies and trusts and the need for him to be available to manage those corporations.

Counsel for Elliott at the trial had submitted that having regard to his exemplary character and good record he was a fit and proper person to manage a corporation. It was argued that allowing Elliott to continue to manage companies did not pose any danger to the public and that his failure in his responsibilities as a director of Water Wheel was an isolated incident.

Counsel for Elliott sought relief from the trial judge from liability for contravention of a civil penalty provision, (s.588G of the Law), pursuant to s.1317JA.

"(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."

The judge was not satisfied under s.1317JA of the Law that Elliott ought fairly to be excused for his contraventions. His Honour said that Elliott was significantly less culpable than the managing director, Plymin, and less culpable than the chairman, Harrison. His Honour added[48]:

"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."

Plymin's grounds of appeal asserted errors of law by the trial judge:

"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."

Mr Jones for Plymin in this Court relied upon the foregoing matters in his submissions to this Court.

Additional evidence was tendered and submissions were made by Mr Jones at the second stage of the trial. An affidavit was sworn by Plymin on 21 May 2003 in which he detailed his past history as a businessman, as a commercial manager and as an executive director over a period of 30 years. Plymin was born in 1951 and is now aged 53. He deposed that he assisted the administrators full-time and part-time for about ten months, and did so to ensure that the creditors of Water Wheel were paid. He expressed his deep regret that the creditors of Water Wheel had suffered loss. Character evidence was provided by Mr Lord, a company director who worked with Plymin until 1997 and had formed the opinion that he was hard-working, conscientious, professional in his approach to matters and highly ethical.

The judge was not satisfied that Plymin ought fairly to be excused for his contraventions under s.1317JA. He said[49]:

"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. "

ASIC had relied upon six factors as the basis for its submissions that a substantial prohibition order should be made against Plymin. They were:

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.

The judgment of Santow, J. in Re HIH Insurance Ltd.[51] contains a helpful collection of reported decisions bearing on this issue and a distillation of propositions which may be extracted from them. His Honour was required to consider provisions of the Corporations Act 2001 applicable to the disqualification of persons from managing corporations. The section considered, section 206C, is to be found in part 2D.6 of the Act, and provides:

At a glance

Court

Decision date

Before

Source

Judgment (334 paragraphs)