Iso Lilodw' Aliphumeleli Pty Limited (In Liq) & Anor v Commissioner of Taxation & 2 Ors - [2002] NSWSC 644 - NSWSC 2002 case summary — Zoe

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Iso Lilodw' Aliphumeleli Pty Limited (In Liq) & Anor v Commissioner of Taxation & 2 Ors

[2002] NSWSC 644

Supreme Court of NSW|2002-08-02|Before: Davies AJ, Mr P

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Court

Supreme Court of NSW

Decision date

2002-08-02

Before

Davies AJ, Mr P

Source

Original judgment source is linked above.

Judgment (29 paragraphs)

[1]

CITATION : Iso Lilodw' Aliphumeleli Pty Limited (In Liq) & Anor v Commissioner of Taxation & 2 Ors [2002] NSWSC 644 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 2077/99 HEARING DATE(S) : 24/06/02, 25/06/02, 26/06/02, 27/06/02 JUDGMENT DATE : 2 August 2002

[2]

Iso Lilodw' Aliphumeleli Pty Limited (In Liquidation) - First Plaintiff Steven Nicols - Second Plaintiff PARTIES : Commissioner of Taxation - Cross-Claimant Peter David Prentice - First Cross-Defendant Gordon Theodore Hothersall Getley - Second Cross-Defendant JUDGMENT OF : Davies AJ

[3]

No Appearance - First Plaintiff No Appearance - Second Plaintiff COUNSEL : M R Aldridge SC/P Rodionoff - Cross-Claimant R McKeand - First Cross-Defendant In Person - Second Cross-Defendant No Appearance - First Plaintiff SOLICITORS : No Appearance - Second Plaintiff Australian Government Solicitor - Cross-Claimant Holman Webb - First Cross-Defendant CATCHWORDS : CORPORATIONS - Insolvent trading - whether company unable to pay its debts as and when they fell due - Reasonable expectation - Reliance upon information provided. Corporations Act 2001,ss 95A, 588FC, 588FE, 588FF, 588FGA, 588FGB LEGISLATION CITED : Income Tax Assessment Act 1936 (Cth), ss 222ALA, 22AF(5) Acts Interpretation Act 1901 (Cth), s 10 Bankruptcy Act 1924 (Cth) Hillig v Federal Commissioner of Taxation (2000) 46 ATR 25 Southern Cross Interiors Pty Limited (In Liq) v Deputy Commissioner of Taxation (2001) 39 ACSR 305 Dunn v Shapowloff [1978] 2 NSWLR 235 Shapowloff v Dunn (1981) 148 CLR 72 CASES CITED : Taylor v Powell (1993) 113 ALR 374 Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330 Re New World Alliance Pty Limited (Rec and Mgr apptd); Sycotex Pty Limited v Baseler (No 2) (1994) 51 FCR 425 Sandell v Porter (1966) 115 CLR 666 Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 DECISION : Refer paragraph 93

[10]

10 In these present proceedings, Mr Prentice relies upon the defence provided by s588FGB of the Act and Mr Getley relies upon the defences provided by s588FGB(3) and (4). Section 588FGB provides, inter alia: " 588FGB Defences in proceedings under section 588FGA (1) This section has effect for the purposes of: (a) proceedings to recover from a person an amount payable under subsection 588FGA(2); and …. (2) The time when the payment referred to in subsection 588FGA(1) was made is called the payment time . (3) It is a defence if it is proved that, at the payment time, 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 made the payment. (4) Without limiting the generality of subsection (3), it is a defence if it is proved that, at the payment time, 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 made the payment." 11 Mr Prentice does not dispute that the last payment to the Commissioner of $50,000 was made at a time when ILA was insolvent. I need not discuss the $50,000. It is clear that, at the time it was paid, ILA was insolvent. Solvency 12 The test of solvency is that provided by s 95A of the Act, namely, whether the company was able to pay all its debts as and when they became due and payable. That test was considered in great detail by Palmer J in Southern Cross Interiors Pty Limited (In Liq) v Deputy Commissioner of Taxation (2001) 39 ACSR 305 at 310-317. I accept in general the guidelines which his Honour has stated, but consider that the issue is ultimately one of fact which cannot readily be constrained by the enunciation of legal criteria. 13 I agree with Palmer J that no distinction is to be drawn between the words "due" and "payable" and I accept gratefully the first three propositions enunciated by his Honour at pages 316-7 as follows: "(i) whether or not a company is insolvent for the purposes of CA ss95A, 459B, 588FC or 588G(1)(b) is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole: Sandell v Porter; Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 and Powell v Fryer ; (ii) in considering the company's financial position as a whole, the court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable: Sandell v Porter; Taylor v ANZ, Newark and Sheahan v Hertz ; (iii) in assessing whether a company's position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency: Bank of Australasia v Hall (1907) 4 CLR 1514 at 1528; 14 ALR 51; Norfolk Plumbing at 615; Taylor v ANZ at 784; Guthrie v Radio Frequency Systems Pty Ltd (2000) 34 ACSR 572 at 575." 14 I do not cite principles (iv), (v) and (vi) as enunciated by his Honour at p 317 as I consider that, as enunciated, the principles may imply a legality or inflexibility which is inconsistent with the point that the ultimate issue is a question of fact. I prefer the view stated by Mahoney JA in Dunn v Shapowloff [1978] 2 NSWLR 235 where his Honour said at 244: "On the other hand, the fact that there is a reasonable or probable ground of expectation that the company will be able to pay the debt at a time distant from the time when the debt falls due will not normally be an answer …. It will be necessary in each case to take into account the particular facts; I think the words 'being able to pay the debt' admit of some flexibility in this regard." 15 I discussed many of the relevant issues of law in Taylor v Powell (1993) 113 ALR 374 and I abide by my observations in that case. However, there are some authorities to which I should make specific reference. In Re New World Alliance Pty Limited (Rec and Mgr apptd); Sycotex Pty Limited v Baseler (No 2) (1994) 51 FCR 425 Gummow J pointed out that the issue was essentially one of fact. At 434 his Honour said: "Any conflict between the authorities may be more illusory than real, and factual rather than legal. I would not consider such an issue to be a question of law to be decided by the application of a rigid rule. Rather, the statute appears to focus attention upon what it is reasonable to expect in a given set of circumstances, such a consideration necessarily being made by someone operating in a practical business environment. Attention is focused at whether a person would expect that at some point the company would be unable to meet a liability. Such a question is necessarily a factual one to be decided in light of all the circumstances of the case. At one end of the spectrum a company may be operating in an industry where a code of practice of paying 60 days after invoicing has arisen, despite stated terms of 30 days. If the company has a large number of creditors, it may be reasonable to expect that all of them would not suddenly insist on being paid in 30 days. At the other end of the spectrum would be a case where a single creditor had granted an indulgence on one occasion. It may well not be reasonable to expect a repetition of that event."

[11]

16 On the issue of ability to pay, Barwick CJ, with whom McTiernan and Windeyer JJ agreed, in Sandell v Porter (1966) 115 CLR 666 said at 670-671: "Insolvency is expressed in s95 (Bankruptcy Act 1924 (Cth) as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realisation by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due." 17 To the same effect are the remarks of Mahoney JA in Dunn v Shapowloff where his Honour said at 244: "Next, it is necessary to examine what is meant by ability to pay. That which is in question is not whether the company, at the relevant time, will be solvent or whether it will, on an assumed and instant liquidation, have a surplus sufficient to meet the debt, though these may be relevant in considering the statutory question. What will constitute ability to pay must be determined, in a realistic way, by reference to the facts of the particular case, after taking into consideration, inter alia, the company's assets and liabilities and the nature of them, and the nature and circumstances of the company's activities: cf in other contexts, Lyde v Barnard (1836) 1 M & W 101; 150 ER 363; J v J [1955] P 215, at pp 230, 241, 247, 248. The cash expected to be available at the particular time will be relevant, but not necessarily determinative. It will, for example, be relevant to consider whether the company could be expected to pay the debt by borrowing; whether, if it must realize assets to obtain the money to pay the debt, it can be expected to do this by the relevant time and at what price; and whether what it will have to do in paying and being able to pay the debt will involve the company or its officers in voidable transactions, improper preferences, or breach of obligations under the general law or relevant legislation. It would, I think, be proper, in a particular case, for account to be taken appropriately of a promise, legally binding or otherwise, to provide money or financial assistance, by loan, subscription for share capital, or (as was suggested in this case) by the provision of a guarantee."

[12]

An appeal from this decision was dismissed by the High Court of Australia in Shapowloff v Dunn (1981) 148 CLR 72. 1997 and early 1998 18 ILA was established on 29 October 1993 to be an administrative company for two mining and exploration companies, Great Fitzroy Mines NL and Hargraves Resources NL ("Hargraves"). Great Fitzroy Mines NL later changed its name to Copper Mines and Metals Limited ("CMML"). In September 1997, Hargraves sold or assigned its interest in the company to Danae Resources Limited ("Danae"). The task of ILA was to provide the clerical, managerial and professional expertise which was required, particularly for the mineral exploration and project activities of the two shareholders. ILA was provided with no capital, there being only two $1 shares issued. It was not intended that it would build up substantial assets of its own or that it would derive any substantial profits. In 1997, CMML and Danae agreed to fund the expenses of ILA equally and to pay a minimum of $40,000 each per month to ILA in respect of the services of that company's personnel. Mr Getley, a director of CMML, was the director of ILA who represented CMML's interests, whilst Mr Prentice, a director of Danae represented Danae. Mr Getley described Mr Prentice as Chief Executive Officer of both CMML and Danae. He was also effectively Chief Executive Officer of ILA although his designation from May 1998 was that of Secretary. 19 As Mr Getley explained in his evidence, mineral exploration companies tend to encounter periods of financial stringency for they lack a regular source of income. It is not uncommon that, before projects come to fruition, such companies find they have expended available funds and must seek further equity or loan funds to progress. CMML encountered one such period during the second half of 1997. It had entered into an agreement to purchase a copper mine at Cobar. It sought equity funds from the public and funds from its banker. The raising of funds from the public took longer than expected although the capital raising was ultimately successful. The bank agreed to loan funds for the acquisition and development of the Cobar mine. However, by the time all this had occurred, it was found that the vendor of the mine had defaulted in its obligations, particularly its obligation to maintain and refurbish the mine. Pending settlement of the contract of purchase, CMML could not take advantage of the funds promised by the bank. CMML's financial problems continued through into 1998. The Cobar mine was seized by a receiver and CMML ceased to be interested in it save for the recovery of a deposit of $2,000,000 which had been paid for the intended acquisition. The claim for that deposit was settled in December 1998 by a payment of $1.2 million, most of which was retained by CMML's bank, a secured creditor. The problems of CMML necessarily affected ILA, which was also short of funds during the second half of 1997. 20 On 7 January 1998 ILA defaulted on its payment of group tax for the month of December 1997. There is no doubt that, from a date in 1997 until Danae provided further funds to ILA in June 1998, ILA was unable to pay its debts as and when they fell due. Continuously throughout the first half of 1998, ILA sought extensions of time for the payment of group tax, and the Commissioner of Taxation indicated that payment would be accepted on extended dates if payment was by then received and if current group tax was paid. None of the arrangements made by ILA were or could be complied with. No current group tax was paid and no sum was paid off outstanding tax. 21 Throughout this period of six months, the debts of ILA grew. Danae, for its part, had encountered cash problems and, during March to May 1998, failed to pay accounts rendered to it for the work done by the personnel of ILA. The situation became so serious that, from February 1998, ILA was unable to pay its employees and consultants their regular remuneration. In March 1998, a meeting of the personnel was called and the company's financial position was explained to them. Some employees left the company and, for some time, payments were made only on a request for emergency funds. 22 ILA was dependent upon CMML and Danae for funds. Although CMML was unable to fund ILA. The personnel of ILA continued to work on CMML projects. By 30 June 1998, CMML owed ILA approximately $700,000. One balance sheet in evidence states the liability as $661,178. This has been altered in handwriting to $758,867. Danae, for its part, provided some funding to ILA, but was unable to pay the substantial part of the fees due by it for the months March April and May 1998. 23 Mr Prentice gave evidence that the directors of ILA were not concerned about the position of Danae for, in April 1998, Danae received a loan of $500,000. However, notwithstanding those moneys, Danae did not, and presumably could not, meet its obligations to ILA. With all three companies, the position was that, from 1997 onwards, creditors were not paid when their accounts fell due. 24 On 18 August 1997, Mr Williamson, the then Secretary of CMML (then GVM) and ILA, wrote to Mr Prentice to say: "Over the last few days I have spent some time analysing the cash position of GFM and ILA. Based on outstanding invoices due by ILA and GFM and the negative cash position of both companies (per bank accounts) as at last Friday, there must be a severe risk that both companies are technically insolvent under section 588G of the Corporations Law."

[13]

25 The following Memorandum dated 27 February 1998 from Mr T. Weiner, with respect to the affairs of CMML, probably gives a realistic picture of the state of the affairs of the companies: "You would appreciate the fact that some of the creditors are now getting extremely nervous despite my reassurances that we are still optimistic about the 'deal' going ahead which will subsequently enable them to be paid in full. You should note that the following creditors have suspended our credit facilities. · Avis - Mascot Branch · Brilliant Images (will do work on a COD basis) · Cabcharge · Kingsway Technology · Licensed Post Office · Tecnoprint (will do work on a COD basis) · Wentworth Hotel Other creditors who are becoming increasingly restless and annoyed include Behre Dolbear, Avis (Stuart Mathews hire vehicle), Australia Jet Charter, Global Mining Services, Allied Pickford (people that moved Tim L from WA), Mailing and Print Services, MLT Travel, Resource Strategies." 26 Although that memorandum relates to the affairs of CMML, it was indicative of what was occurring with respect to all three companies. The same detail is not available with respect to the affairs of ILA, but there is evidence that it was having trouble with creditors. For example, in October 1997, the lease of the premises occupied by ILA was terminated for non-payment of rent and the company was given notice to quit. Mr Weiner, the accountant for the group, was in communication with more than one creditor who had referred its account to a collection agency. 27 On 23 March 1998, Mr Weiner wrote to Mr Getley and Mr Prentice: "We have received correspondence from Avis (dated 13 March 1998) and Cabcharge (dated 16 March 1998) stating that if we don't settle their outstanding accounts the 25th March and 23rd March respectively, our account will be placed in the hands of a collection agency. If this occurs on these dates and if these Collection Agencies go through their normal processes then we could have up to ten days grace on these accounts from the dates specified above. ILA owe Cabcharge $2,192 and Avis $801. You should note also for the record that Monocrafts, a creditor of ILA have already instigated collection action for a debt worth $259. the date of the notice was 11 March 1998. I have no choice but to pay this. This will leave a balance in ILA's accounts of only $900 and with CMML's balance standing at approximately $749.5k. On a final note Stanton Hillier Parker are chasing very hard for payment of the March rental. Could you please advise what I should be saying to these creditors? " 28 On 24 March 1998, Mr Max Williamson, the then Secretary of ILA , sent a facsimile to Mr Getley which annexed a copy of the insolvent trading provisions of the Act, and stated, in relation to a conversation he had had, inter alia: "I advised that the directors now have a clear exposure to Section 588G that needs to be addressed immediately, because there is no apparent means for the CMML group to meet its debts as they fell due. Believe CMML group including ILA, should look at Voluntary Administration as soon as directors could meet by phone or otherwise and that a scheme involving a capital reconstruction, a debt for equity swap and a cash injection from the Eastern Metals consortium seemed to be the best answer." 29 On 9 April 1998, Mr Williamson wrote with respect to ILA, CMML and Haib, an associate of CMML as follows: "Attached are printouts of current creditors of the three entities - ILA $590,111 Haib $1,286,584 CMML $714,476 Total $2,591,171

[17]

33 In June 1998, Danae was proposing to enter into a mining venture with Golden Valley Mines NL (""GVM") and its subsidiary, Gondwana Resources NL (Gondwana) concerning a gold mine in Greece in which Danae had an interest. In anticipation that this venture would proceed, which ultimately it did not, and presumably to assist Danae to overcome its parlous financial situation, Gondwana lent Danae $2,000,000 on 29 June 1998. That sum was repayable on 25 August 1998. When the venture had received all necessary approvals and the formalities been attended to, the $2,000,000 was to be offset against the payments which would be due to Danae under the joint venture arrangement. In anticipation of the joint venture, two directors nominated by GVM replaced two of the four directors of Danae. One of those directors, Mr Beckwith, became Chairman of Directors of Danae. 34 Danae received that sum on 29 June 1998 and immediately paid out most of the money in settlement of its debts. Two sums were paid to ILA, $328,483.82 on 29 June 1998 and $156,159.08 on 30 June 1998. From these sums, ILA made a number of payments including $100,000 to the Commissioner of Taxation on 26 June 1998. That cheque, which covered a part of the outstanding liability, was paid in anticipation of the receipt of money from Danae. 35 Mr Prentice has given evidence that, before the payments in late June were made by ILA, the debts of ILA to its creditors other than CMML and Danae amounted to $796,189.70. Mr Prentice said that, in the last few days of June 1998, cheques were issued for debts totalling $512,082.87, leaving a balance of such creditors at 30 June 1998 of $284,106.83. Mr Prentice said that some of the sums included in that balance were either disputed or were not expected to become payable, and that the remainder of the debts were deferred by arrangement with the creditors, who were content to support ILA. Mr Prentice said that many of the creditors who remained unpaid were persons who were employees of or consultants to ILA. Of the debts deferred, $124,788.47 was due to the Commissioner of Taxation.

[22]

AMOUNT DATE OF PAYMENT $50000.00 30.9.98 $50000.00 31.10.98 $24788.47 30.11.98" 41 Mr Aldridge SC and Mr Rodionoff conceded that the fax and the letter constituted an agreement and that "whilst instalments were paid as agreed he could take no action to recover the outstanding deductions (whether that restriction arises from estoppel, administrative rights or some other source is not necessary to establish)." However, they submitted that the agreement was not a s 222ALA agreement. I do not propose to discuss all the points raised in the submissions. The most important was that: "(the agreement did not state) the precise remittance liabilities that must be discharged by the payment. The agreement reached was to apply payments to the outstanding arrears of group tax without specifying to which particular [monthly] liabilities the payment was to be applied." 42 Section 222ALA uses the expression "one or more specified liabilities". In my opinion, by referring to the totality of the arrears, $124,788.47, the fax and the letter specified the liabilities to be paid. ILA and the Commissioner were in agreement as to the extent of the arrears and as to their composition. The agreed payments, totalling $124,788.47, were to pay off the whole of that outstanding liability. No more was required. The section does not require that particular payments accord with precise monthly arrears. It merely requires that the liabilities to be paid off be specified, which is to say, designated. The fax and the letter so provided. 43 In my opinion, those documents constituted an agreement to which s222ALA of the Income Tax Assessment Act applied. That section provides, inter alia: " Commissioner may make agreement 222ALA (1) The Commissioner may make with a person a written agreement under which the person is to pay specified amounts, on specified days, for the purpose of discharging one or more specified liabilities of the person, each of which is: (a) a liability under a remittance provision; or …. (4) The amounts specified in an agreement are due and payable on the specified days. …. (6) Subsections (4) and (5) have effect despite Divisions 2, 3A, 3B and 4 and the other provisions of this Division, but are to be ignored: (a) in calculating a penalty under any of those Divisions; and (b) for the purposes of this Division (except this section) and Division 9."

[23]

44 The effect of the agreement was to overcome the provisions of s221F(5) which made deductions by group employers payable to the Commissioner not later than the twenty first day of the month in which the deductions were made or not later than the seventh day of the month succeeding that month, the date depending upon the time when the deductions were made. 45 Once the agreement had been reached, the outstanding group tax was not due and payable save than in accordance with the terms of the agreement. Thus, when $86,957.54 was paid on 10 July 1998 and $36,981.24 was paid on 6 August 1998, the outstanding balance of group tax was not due and payable and, therefore, was not to be taken into account in assessing the solvency of ILA. The sum of $86,957.54 represented deductions made during June 1998 and the $36,981.24 represented deductions made during July. 46 For a few weeks from 8 July 1998, the financial position of ILA was not desperate. It is impossible to ascertain the precise position of ILA as at 30 June 1998. There are in evidence five balance sheets for the company as of that date. Some are markedly different from others. No witness was aware which was the final balance sheet, if there was one, or whether any of the balance sheets was reliable. The accounts show that the assets of ILA comprised plant to the value of $970,000 and money due by CMML, approximately $700,000. The evidence before the Court does not suggest that the plant was readily convertible into cash for the payment of creditors. The balance sheets show that there was an overall deficiency, the company's liabilities being greater than its assets. 47 The accounts of Danae as at 30 June 1998 show there was a sum of about $94,015 due to Danae by ILA as a current debt. That was the balance after the two sums paid to ILA in June had been applied to the payment of the accounts which had been rendered by ILA to Danae in the preceding months and also to the account for June. There was also a debt of $397,124 due to Danae as a long term liability. I would not take either of these sums into account in assessing solvency. The long term liability had presumably arisen from a contribution of funds for the purchase of plant and such matters. As to the $94,015, it was expected that this would be off set against work done by employees of Danae in the future. Danae was not expecting a cash repayment.

[24]

48 There was an outstanding liability of $76,325 which was payable to the Commissioner for State Revenue in respect of payroll tax. This liability was due and payable, but it was the subject of an objection and the liability was disputed. There were also some other obligations which it was not expected the company would be called upon to pay. 49 Accounts of Danae also show provisions for annual leave and for long service leave. In the absence of evidence to the contrary, I assume that, in each case, the provision was for payments arising out of past events which would become payable in the future. There was no liability to pay until the employees took leave or ceased employment. See Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616. 50 I treat Mr Prentice's evidence with reserve. In my opinion his depiction of the affairs of the company was unduly favourable. He did not give an accurate depiction of the situation of the company during late 1997 and early 1998, which was that the company was having difficulty continuing to trade and could only do so by not paying its creditors, including its employees, what they were entitled to receive. A company which cannot pay its group tax or its health insurance premiums or its employees is in a very serious financial position. No such picture emerges from the affidavits of Mr Prentice or, for that matter, of Mr Getley. Thus I discount Mr Prentice's contentions that sums which were shown as due in ILA's books were not due, and his contention that many of the sums which were shown as due had been deferred. It is perhaps worth noting that Mr Prentice's analysis of the accounts of the company, with a view to showing that ILA was solvent as from 30 June 1998 was not made until his affidavit sworn 29 January 2002. His earlier evidence tended to concentrate upon the prospects of CMML and of Danae. I take the same view with respect to the evidence of Mr Weiner. I consider that his evidence with respect to disputed debts and deferred debts was much too glib. 51 Mr Prentice gave evidence that, of the trade creditors totalling $159,318 shown in the accounts, liabilities of $124,038.60 had been outstanding for more than 30 days. It may be noted that some of the accounts were long overdue. One invoice of Dashing Office Stationery had been issued in December 1996. Of the $124,038.60, Mr Prentice said the liabilities totalling $25,215.47 were payable by CMML and liabilities totalling $20,172.54 were payable by Danae. However, as in both cases the debts were shown in the books of ILA, they should, in my opinion, be taken into account in assessing ILA's solvency, notwithstanding that ILA may have had a right to call upon CMML and Danae for reimbursement. I infer that the invoices had been addressed to ILA. 52 Mr Prentice gave evidence that, excluding the CMML and Danae liabilities, the trade liabilities of ILA which had been outstanding for 30 days or more totalled $78,650.59. Mr Prentice said that a debt shown as due to Maptek of $23,702.95 was not owing and that the debt to Whittle Programming of $3,074 was also not owing. Mr Prentice said that a debt shown as due to Wiltax Consulting Pty Ltd ("Wiltax") of $15,093.95 was disputed. The evidence does not support that. Wiltax, which was Mr Williamson's company, had made a large claim in respect of Mr Williamson's service up to May 1998, when he ceased to be employed by ILA. The general tone of letters from ILA to Wiltax was that there were some aspects of the claim which had to be further considered but that the remainder would be paid when ILA had the funds to do so. It seems probable that the $15,093.95 which was recorded in ILA's books as a debt was due and owing. 53 I do not accept that all the debts which Mr Prentice and Mr Weiner said were deferred were in fact deferred in the sense that arrangements had been made that the debts were no longer due and payable. For example, there is a memorandum which records the following information in respect of one of the creditors said to be deferred, Grant Thornton, the auditors of ILA, Danae and CMML, which reads: " ….. Grant Thornton placed an ultimatum to us that unless a substantial payment was made in relation to I.L.A.'s outstanding account they could not commence or inturn(sic) complete the audit of Danae. An executive decision was made to make a part payment from Danae with the balance being paid by CMML. A review of the invoices led to the payment being split Danae A$4,785.00, CMML A$3,445.00." Of the $4,785 there referred to, Grant Thornton was paid only a part, leaving $3,045 as due by ILA as at 30 June 1998.

[26]

56 Danae made a payment of $194,198.68 to ILA on 10 July 1998. It was out of this sum that ILA paid the $86,957.54. Danae paid another sum of $63,230 on 14 July 1998 and from this sum ILA was able to pay the salaries which were payable on that date. Even the receipt of these sums from Danae ILA did not enable ILA to pay out all the debts which Mr Prentice said were due for thirty days or more by to 30 June 1998. Mr Prentice contended that, as ILA had a small credit in its bank account as at 30 June 1998, it could have paid these sums or some of them. From the fact that the debts remained outstanding I draw the conclusion that ILA was not in a position to pay all its debts as they became due and payable. 57 On 7 August 1998, Danae paid $54,771.85 to ILA in respect of salaries. Out of this sum the payment to the Commissioner of $36,981.24 was made. When the salaries of ILA employment became due on 14 July 1998 they were not paid. From that time on, the affairs of Danae deteriorated. An inference can be drawn from the fact that ILA used the salary monies to pay the Commissioner and other debts that ILA was again in the position of paying its most pressing creditors in preference to others. It should be noted that, by this time, it was known that the timetable for the joint venture between Danae and GVM and Gondwana had been delayed. 58 It had been anticipated that there would be a general meeting of the shareholders of Danae to approve its entry into the project with GVM and Gondwana. It had been anticipated that that would take place towards the end of August 1998. The holding of that meeting was delayed because of the necessity to obtain and distribute to shareholders an expert's report on the viability of the project and on the propriety of the terms on which Danae would enter into the project. From about the middle of August 1998, the directors of GVM and of Gondwana turned their minds to restructuring the project so as to introduce another party. Eventually, the further negotiations broke down. The project as originally envisaged did not proceed. In November 1998 GVM and Gondwana appointed a receiver to Danae to recover the $2,000,000 it had advanced in June 1998. Within a month, Danae had interested another company, Multiplex Corporation, in the Greek gold mine. That company advanced money and Danae was taken out of administration. 59 ILA went into voluntary administration on 22 December 1998 and into liquidation on 19 February 1999. 60 In his affidavits, Mr Prentice downplayed the problems which ILA encountered. During the whole period, CMML, Danae and ILA were scratching for money. They had prospects but little money. During the period, CMML and Danae received substantial funds, CMML from its raising of capital in late 1997, and Danae from its borrowing of $500,000 in April 1998 and its borrowing from Gondwana of $2,000,000 in June 1998. But the expenses of CMML and Danae were substantial and, notwithstanding the influx of these monies, the companies continued to struggle. 61 In his affidavits, Mr Prentice concentrated on the prospects which the companies had. At the beginning of the period, CMML had an interest in the Haib project in Namibia and anticipated acquiring the Cobar copper mine. When the purchase of the Cobar mine collapsed, CMML negotiated for the purchase of the Woodcutters mine in the Northern Territory. It ultimately resolved not to proceed with that acquisition as a material error was discovered in the project information. In the middle of 1998, CMML negotiated for the acquisition of the Renison Tin Mine in Tasmania and received approval for bank funding for that acquisition. However, this project did not proceed. Throughout 1998, CMML was seeking to recover the $2,000,000 deposit it had paid for the acquisition of the Cobar mine and, in December 1998, it settled the claim for $1.2 million, of which approximately $150,000 was paid to ILA. 62 In his address, Mr Getley informed the Court that CMML is still operating although under a different name and that he is still a director of it. He did not say whether there was a compromise with creditors. In any event, the position appears to be that CMML was a public company with sufficient backing to raise moneys and to attract bank funding to enable it to engage in substantial projects. That is a factor to be taken into account, although I would not, on the evidence before the Court, be satisfied that CMML was, throughout the period with which we are concerned, solvent. 63 Danae was likewise a public company with a sufficient interest in the Greek gold mine to enable it to raise substantial funds. The project in Greece was obviously a valuable one, sufficient to attract the interest first of GVM and Gondwana, and later of Multiplex Corporation. However, Danae's liabilities were great and its borrowings during 1998 were dissipated in the payment of debts. 64 I accept that CMML and Danae were mineral exploration companies whose financial position fluctuated markedly from time to time and that that fact is a factor which ought to be taken into account. People dealing with mineral exploration companies would understand the problems of the industry. However, to say that the nature of the industry is a factor to be taken into account is not to say that mineral exploration companies are exempt from the solvency provisions of the Act. Directors of companies which trade when the companies are unable to pay their debts as and when they fell due are liable to encounter the personal obligations imposed by the Corporations Act. 65 In his evidence, Mr Prentice placed weight upon the ability of ILA to call upon CMML and upon Danae. In that respect, I repeat remarks which I made in Taylor v Powell at 382: "The expectation that funds may be available from a source external to the company was held to be sufficient to protect a director from personal liability in Deputy Commissioner for Corporate Affairs v Caratti (1980) 5 ACLR 119. In that case, a director in control of a group of related companies was absolved of personal liability for a contract made by one company which had historically relied upon the injection of loan funds from the other companies as required, notwithstanding that the financial support was subsequently withdrawn. Likewise, Foster J in Kemish at 188 and 193, and Mahoney JA in Dunn v Shapowloff at 244, gave consideration to a company's capacity to borrow or realise a promise to make funds available to the company. In Flavel v Day (1984) 9 ACLR 502, Prior J similarly took account of a promise to lend money to a company where the director had periodically injected personal funds into the company to enable it to meet its obligations." 66 However, the evidence shows it was understood by early 1998 that CMML was not in a position to fund ILA, at least not until its own position improved. Its position did not improve sufficiently before ILA went into Voluntary Administration. ILA received support from Danae in late June through to early August 1998. Mr Prentice, in his evidence said that ILA could, in July and early August 1998, look forward to continuing support from Danae. However, the position was that Danae did not advance sufficient moneys to pay off all ILA's debts. It may have been able to pay more funds to ILA had it determined to do so. One reason why ILA could not look forward to unequivocal support from Danae was that, from 29 June 1998, when Gondwana advanced $2,000,000 to Danae, the Board of Danae changed, one half of the Board being comprised of two directors nominated by GVM and Gondwana, with Mr Beckwith being appointed the Chairman of Directors. 67 Danae was not prepared to and was not in a position to support ILA to the point of paying off all its debts. Some of the work which ILA had done, had been done on behalf of CMML. ILA continued to do work and to incur obligations in respect of CMML's projects. Danae did not wish to fund CMML. ILA charged CMML $137,282.24 for its services in July 1998, $65.510.80 for its services in August 1998, and $70,829.17 for its services in September 1998. It also incurred disbursements on ILA's behalf. The disbursement for July amounted to $30,712.27. The amount outstanding for earlier services and disbursements was approximately $700,000. These sums remained unpaid. Necessarily, the financial position of ILA was precarious. 68 ILA was in its most favourable position in July 1998. It had received from Danae the cheque for $328,483.82 on 29 June 1998, the cheque for $156,159.08 on 30 June and the cheque for $194,198.68 on 10 July. It paid off a great many debts and the amount of trade creditors remaining outstanding was not great. It brought itself almost up to date with respect to salaries and benefits payable to or in respect of employees. On 8 July 1998, the outstanding liabilities to the Commissioner were postponed. So far as CMML was concerned its prospects were looking better for it had tendered for the Renison Tin mine and had received bank approval for funding for that acquisition. Danae had an agreement in principle with GVM and Gondwana and anticipated that when the formalities were completed it would become entitled to a payment of $3.5 million. 69 However, although the prospects for ILA were relatively bright at that time, I draw the conclusion that ILA never reached the stage of being able to pay all its debts as and when they fell due. The moneys which it received from Danae were quickly dissipated in the payment of debts. ILA had so little cash available that it could not afford to pay all its outstanding creditors. By 7 August 1998, when ILA paid group tax to the Commissioner from the moneys which it received from Danae for salaries, ILA was again seriously short of funds. 70 Had July 1998 been the first month in which ILA encountered liquidity problems, I would have been inclined to conclude that the amounts outstanding were so small as merely to represent a temporary liquidity problem. However, by the end of 1997, ILA was unable to pay its debts as they fell due. The company then entered a period of long- standing insolvency from which it never recovered. 71 It is worth noting that all three companies incurred expenses at a rate far beyond any existing ability to meet them. Their concern was with mineral exploration and mining ventures, not financial control. ILA incurred operating losses which, in the balance sheet with handwriting alternations on it, were stated as $149,587 for the year ended 30 June 1987 and $247,356 for the year ended 30 June 1998. ILA had no reserve assets to enable it to meet such losses. CMML continued to use ILA to investigate new projects but it could not pay for the costs and expenses incurred. Mr Beckwith probably stated Danae's position accurately when he wrote to Mr Prentice on 24 June 1998 to say: "Danae is financially struggling with an excess of $1.7 million in creditors and that figure would be rising quickly. It is operating at cost levels which are unsustainable."

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Necessarily, there were serious underlying problems with ILA's business. 72 In Sandell v Porter, in the passage I have cited above, Barwick CJ said that "It is the debtor's inability, utilizing such cash resources as he can command through the use of his assets, to meet his debts as they fall due which indicates insolvency." From late 1997 onwards, ILA could not meet its obligations as they fell due. ILA did not have any asset resources of its own on which it could call for the payment of debts. ILA had to rely upon its shareholders CMML and Danae. But CMML was not in a position to support it. Danae may have been in a position to extinguish the outstanding liabilities of ILA had it decided to do so. However, the only funds which Danae had available were borrowed funds. The lender of the funds was represented by directors on the Board. Mr Prentice was not in a position to do whatever he wished with those monies. ILA, which continued to incur debts by reason of its work for CMML, was not in a position to expect Danae to meet all its obligations. 73 In my opinion, ILA was insolvent when the subject payments were made to the Commissioner of Taxation and the directors of ILA had no reasonable grounds to expect otherwise. Defence under s588FGB(3) 74 Having regard to the matters I have outlined I am of the view that neither Mr Prentice nor Mr Getley had reasonable grounds to expect ILA was solvent at the time any of the subject payments were made to the Commissioner of Taxation. In my opinion, it was reasonably apparent to all persons who were involved with ILA that ILA was unable to pay its debts as and when they fell due. 75 I am satisfied that Mr Prentice fully understood the financial position of ILA. The substance of his evidence was not that he believed that, when the payments were made, ILA was in a position to pay all its debts. Rather, the crux of his evidence was that he believed that ILA would receive moneys which would enable it to pay off its debts. For example, in his affidavit of 29 January 2002, Mr Prentice deposed: "On 10 July 1998, when the payment was made to the Australian Taxation Office I expected that ILA would continue to be able to pay the Australian Taxation Office in accordance with the arrangement made on 8 July and would continue to be able to pay its other taxation liabilities, employees' debts and other debts as and when they fell due because I expected sufficient funds to come to ILA from Danae for those purposes." 76 However, the position on 10 July 1998 was that ILA did not then have the funds to pay its debts. Mr Prentice was aware that there were outstanding liabilities, including employees' salaries. 77 On the evidence which I accept, Mr Prentice has satisfied neither the objective nor the subjective elements of s 588FGB(3). 78 Nor has Mr Getley. He was not as intimately involved in the affairs of ILA as was Mr Prentice. However, he was kept informed of the general position of ILA. Moreover, he was a director of CMML and was generally aware of its position. He must have known that, as at 30 June 1998, outstanding fees of approximately $700,000 were due by CMML to ILA and that ILA personnel were continuing to do work which CMML was not in a position to pay for. Mr Getley had no reason to expect that Danae would meet all the obligations of CMML. Mr Getley had no reason to expect and in my opinion did not believe that ILA could pay all its debts as and when they became due. Mr Getley relied upon the future prospects of CMML, particularly upon the prospect of purchasing the Renison Tin Mine and the prospect of recovering all or some of the deposit paid on the Cobar mine. However, these were mere prospects, not sources of funds available for the payment of creditors. CMML did not acquire the Renison Tine Mine and, as to the Cobar deposit, the $1.2m received back in December 1998 largely went in payment to CMML's bank, a secured creditor.

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Defence under s588FBG(4) 79 Mr Getley further relied upon the defence that he had reasonable grounds to believe and did believe that a competent and reliable person was responsible for providing to him adequate information about whether the company was solvent, that the other person was fulfilling the responsibility and that, on the basis of the information provided by that other person, the company was solvent at the time when the payments were made. 80 Section 588FGB(4) is directed primarily to the circumstance where directors must rely primarily upon other persons, particularly accountants and actuaries to prepare accounts which will disclose the financial position of a company. The section does not negate a director's duty to keep himself informed, and to form his own judgment about the affairs of the company, of which he is a director. 81 In Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330, Young CJ in Eq said at paras 53-4: "The subsection arises from the recommendations made in para 211 of the Law Reform Commission's Discussion Paper No 32 as fleshed out in [303] and following of the Harmer Report. In [307] it was said: 'The Commission considers that the defence is clearly necessary in the case of larger companies in which it cannot be expected that directors will have control over every action taken in the conduct of the company's business. Additionally, a defence of this nature may encourage a proper system of financial management.' Thus the prime thrust of the defence is to cover the situation where there is a large corporation with bulky accounts and where there is a system in place of competent accountants, credit controllers and financial management and the board has a regime whereby those people, provided they are competent and responsible, will report to the board any problems that the board may pick up." 82 The substance of Mr Getley's case was put in paragraphs of his affidavit such as the following: "By June 1998 my association with Mr Prentice had extended over a number of years. Mr Prentice was an experienced and successful businessman. I had developed a significant amount of faith and reliance in his judgment. Was also conscious that he was at that time devoting himself full time to the operations of CMML and the related companies. … I trusted and relied upon what I was being told by my fellow director and senior management of ILA. I had no reason to distrust what they were relating to me about the condition of ILA or related matters. … I was aware CMML did not have the funds itself, although I was confident that the major shareholders would ensure that CMML would not founder and as Mr Prentice had been able to secure funds in the past, I felt sure he would do so again." 83 Mr Getley relied upon the fact that he was a non executive director, that his offices were in Perth whereas ILA operated from Sydney, and that, although he kept in touch with Mr Prentice and with officers of the company, most of his conversations took place on the telephone. 84 Mr Getley referred generally to Mr Prentice and to the officers of the company, expressing the view that they were much more intimately involved with the affairs of the company than he was. However, Mr Getley did not point to any specific information received which, in my opinion, ought to have led him or did lead him to expect that ILA was able to pay its debts as they fell due. In the early half of 1998, Mr Getley was in constant receipt of information that CMML and ILA were paying urgent accounts only and were juggling creditors. 85 Mr Getley was a director of CMML and was aware of the financial problems which that company encountered. He was aware of the difficulties thereby occasioned to ILA. He was advised by Mr Max Williamson in March 1998 that both CMML and ILA were insolvent and should be placed into voluntary administration. He was aware that ILA was unable to pay its employees in March 1998 and, indeed, he took part in the calling of a meeting of the employees to explain the position to them. Mr Getley was the recipient of a notice from the Commissioner setting out the amount of group tax outstanding. He was aware that there were problems. I am satisfied that Mr Getley was aware in general terms of the company's financial position and was kept generally informed about the position of CMML and of Danae. 86 In his evidence, Mr Getley understated or misstated the financial position. Mr Getley said, for example, speaking of early 1998: "I believe that CMML was in a position to fund ILA's ongoing operations … I was of the view that the short term cash flow problems would be shortly resolved and therefore ILA was solvent." 87 The true position was that, by the time it was ascertained in December 1997 that the vendor had defaulted on its obligations to maintain and refurbish the Cobar Mine, CMML and ILA had entered a period of long-term financial difficulties. CMML could not draw down the funding agreed to be provided for the purchase of the mine and could not pay ILA for the ongoing work which it did. I do not accept that Mr Getley was unaware of the general situation. 88 Mr Getley contended that he believed that everything would turn out satisfactorily in the long run and that the shortage of money which ILA encountered was simply the regular shortage of money which mineral exploration companies tend to encounter. Such an attitude, which was in substance a view that, with a successful project, the company would be able to trade out of its problems, does not satisfy either of the defences provided by s588FGB(3) and (4). 89 In his final address, Mr Getley conceded that at no stage did he ask anyone the specific question, whether ILA was solvent. Nor does the evidence suggest that he was informed that the company was solvent. On the contrary, the evidence shows that, when Mr Williamson advised that CMML and ILA were insolvent, Mr Getley did not seriously turn his own mind to the question whether ILA could pay its debts as they fell due. 90 Section 588FGB(4) requires that the director have reasonable grounds to believe and did believe that a competent and reliable person be responsible for providing adequate information about whether the company was solvent. Mr Getley had no such belief. He, like Mr Prentice and other officers of ILA, was interested not in the question of solvency but in continuing to engage in mineral exploration and development activities. Mr Getley relied upon what were, at most, assurances that the position was not so desperate that ILA could not continue to operate. 91 I do not accept that Mr Getley expected, on the basis of information provided to him, that ILA could pay its debts as and when they became due. The information given to him demonstrated that it could not do so. 92 Mr Getley was probably not aware of the precise situation of ILA during July and early August 1998. However, I do not accept that he received any information which led him to believe that ILA could pay all its debts. He was aware that ILA was acting on behalf of CMML as well as Danae and that CMML would not be able to meet those costs until a venture such as the purchase of the Renison Tin Mine, was entered into. Orders 93 For these reasons the Commissioner is entitled to recover $261,938.78 plus interest from 4 July 2000. The order will be that Messrs Prentice and Getley, the cross-defendants, pay $317,986.22 to the Commissioner of Taxation, the cross-claimant. The cross-defendants should pay the costs of the cross claim. **********