Kenna & Brown P/L v Kenna & Ors [1999] NSWSC 533 | Case summary

JUDGMENT Introduction 1 The plaintiffs in this matter are Kenna & Brown Pty Ltd (In Liquidation) (the Company) and the liquidator of the Company, Daniel Ivan Cvitanovic (the Liquidator) who was appointed on 29 June 1995. The Company was incorporated in 1980 and, as trustee for the Kenna & Brown Trust pursuant to deeds dated 30 April 1980 and 10 June 1983 (the Trust Deeds), conducted the business of building and construction and property development in the Wollongong and surrounding areas. 2 The first defendant Lance Eric Kenna (Mr Kenna),who is now a bankrupt, was a director of the Company between 30 April 1980 and 29 June 1995. 3 The second defendant Patricia Ellen Kenna, (Mrs Kenna) was employed by the Company between 1982 and 29 June 1995. 4 The third defendant, Ernest Brown, (Mr Brown) was a director of the Company between 30 April 1980 and 29 June 1995. 5 Mr Kenna and Mr Brown first met in 1964 and commenced a business partnership that year in which they sub-contracted carpentry services to builders and home owners (the partnership). 6 In 1976 the partnership moved into property development which included the purchase of residential blocks of land for the construction and sale of houses and blocks of units. 7 From approximately 1973 Mr Graeme Brangwin of KPMG Peat Marwick was retained as the accountant for the partnership and then later for the Company. 8 The Company's registered office was at 26 Ocean Street Thirroul (the Thirroul property). These premises were for some years both the home of Mr and Mrs Kenna and the office from which the Company operated. Mr Brown did not have any interest in the Thirroul property nor did he have or occupy any office space within the Thirroul property. 9 Mr Kenna was the sole registered proprietor of the Thirroul property from 1 January 1989 to 18 June 1993. Mr and Mrs Kenna have been registered proprietors of the Thirroul property since 18 June1993. Another property owned by Mr and Mrs Kenna is Lot 7, 40 Sullivans Road Douglas Park (the Douglas Park property). Mr Kenna was the sole registered proprietor of this property from 1 January 1989 to 18 June 1993 when Mrs Kenna was also registered as proprietor. 10 In 1980 when the partnership was incorporated Mr Brangwin explained the role, responsibility and obligations of directors to Messrs Kenna and Brown. The division of duties in the Company was that generally Mr Brown was out on the jobs building things and Mr Kenna was back in the office running the business side of things. 11 Mr Brown did the carpentry and rectification work and supervised the building works and tradesmen on site. Mr Kenna visited the building sites daily at which time the two men would discuss the progress of the work. 12 Mr Brown left the management of the office to Mr & Mrs Kenna. He attended the Thirroul property office weekly to collect his wages. He would also attend the office from time to time to check building plans and specifications, to pick up materials required at the site and to sign any documents which Mr Kenna had prepared for him for signature. 13 By 1994 the Company had expanded its activities and was undertaking more work than it had the previous year. During the latter half of 1994 and into 1995 the Company expanded its activities even further. It commenced three new large projects and employed two additional site supervisors. 14 In March 1995 Mr Kenna approached the Company's banker to renegotiate the Company's facilities in particular to apply for an extension of the Company's overdraft. The bank declined the application and on 2 June 1995 an administrator was appointed to the Company. Mr Kenna issued the following letter on Company letterhead that day. This letter causes me great disappointment. I must inform you that as of today, 2 June 1995, Kenna and Brown Pty Ltd is closing down and stopping all work on current projects. We have experienced financial hardship during the last six months, due we feel to the volume of work we have, causing a cash flow crisis, which we feel we cannot overcome. An administrator has now been appointed and will be in touch with you on Monday 5 June. 15 The liquidator was appointed on 29 June 1995. 16 The plaintiffs subsequently commenced these proceedings. Mr J Thomson of counsel appeared for the plaintiffs. Mr C Newlinds appeared for Mrs Kenna and Mr D Robinson and Mr J Conomy appeared for Mr Brown. Ms Nash (solicitor) appeared on the first day of the hearing for the official trustee in bankruptcy of the estate of Mr Kenna. On 7 April 1999 Tamberlin J granted leave pursuant to s 58(3) of the Bankruptcy Act 1966 to continue these proceedings against Mr Kenna. 17 The matter was heard on 6,7,8 & 9 April 1999 when it was stood over to allow Mr Thomson to file further written submissions and to consider whether an application to re-open should be made in the light of the third defendant's submissions in relation to s1318 of the Corporations Law . The plaintiffs filed further written submissions on 21 April 1999 and on 27 April 1999 advised there would be no application to re-open. The third defendant's written submissions in response to the plaintiffs' submissions were filed on 5 May 1999. Claim against the First Defendant Mr Kenna 18 The plaintiffs claim that Mr Kenna; 18.1. misapplied the assets of the Company in the amounts of $131,390.18 for payment for work done and materials supplied to the Douglas Park Property between 1 January 1994 and 29 June 1995 and $40,500 for work done and materials supplied to the Thirroul property. ( paragraphs 13 & 14); 18.2. breached his duty to the Company to ensure that proper records of the Company's financial dealings were maintained by:- (a) directing Mrs Kenna not to record cash received from customers of the Company in the Company's financial records; (b) directing and/or acting with Mrs Kenna in the falsification of cheque butts to record payments to the Water Board knowing that the cheque had been made out to cash; (c) failing to bring to the Company's external accountants' attention; (i) the fact that they had not been given records of cash received by the Company nor any records that showed the cash had been given to Mr Kenna; and (ii) the fact that cheque butts recording payments to the Water Board were false entries and that the cheques were in fact made out to cash. ( paragraphs 13A and 5) 18.3 breached his duty to the Company by taking cash received by the Company and failing to account to the Company for that cash. (paragraphs 16 and 5) 19 It is alleged that by reason of the matters set out in paragraph 18 above Mr Kenna received the benefit of the cash and the misapplied funds without which he would not have been able to acquire, repay loans on and improve the Douglas Park property. 20 It is claimed that in the circumstances he is liable to account to the Company. It is further claimed that the Company is entitled to; · trace the misapplied funds into the Douglas Park property; · an order declaring that Mr & Mrs Kenna hold the Douglas Park property upon a constructive trust; and/or · an order charging the Douglas Park property with the obligations of Mr & Mrs Kenna to account. ( paragraphs 13B and 13C) 21 It is also alleged that Mr Kenna failed to exercise the degree of care and diligence that a reasonable person in like position in a corporation would exercise. A further circumstance relied upon in this regard is his purported approval at a meeting recorded as having taken place on 16 December 1994 that the financial statements of the Company as at 30 June 1994; (a) gave a true and fair view of the Company's position; and (b) that the Company kept such accounting records as correctly recorded and explained transactions and financial positions of the Company; when he knew this was not the position. (paragraph 17) 22 It is also alleged Mr Kenna failed to take all reasonable steps to comply with or secure compliance with or was the cause of the default in the Company complying with Part 3.6 of the Corporations Law (paragraph 18). 23 It is alleged that the Company was insolvent at all times between 1 April 1995 and 2 June 1995 . It is claimed that the Company contravened s289(1) & (2) of the Corporations Law during that period and is thereby deemed to be insolvent pursuant to s588E (4) of the Corporations Law. 24 It is alleged alternatively that during that period the Company incurred debts exceeding $1,280,923 of which $1,280,923 was not paid as at the date of liquidation. As at the date of liquidation, 29 June 1995, it is alleged that that Company had debts of $2,747,391 of which $1,466,468 was owed by the Company to creditors as at 1 April 1995 and has never been paid to those creditors. (paragraphs 22 to 25) 25 It is alleged that Mr Kenna was aware at the times when the Company incurred these debts that there were grounds for suspecting that the Company was then insolvent at the time each such debt was incurred (paragraph 26). Alternatively it is alleged that a reasonable person in a like position would have been so aware. (paragraph 27) 26 The plaintiffs claim that Mr Kenna contravened s588G of the Corporations Law and an order pursuant to s 588M that he pay $1,286.923.40 to the Company. (paragraph 30) Claim against the second defendant, Mrs Kenna 27 It is alleged that Mrs Kenna was employed by the Company between 1982 and 29 June 1995 as the internal accountant with duties which included the preparation and/or supervision of the preparation of the Company's books and records. It is further alleged that the nature of Mrs Kenna's duties were such that she was an executive officer within the meaning of the Corporations Law. (paragraphs 3 & 4) 28 It is claimed that by reason of her position as internal accountant and the nature of her duties Mrs Kenna owed a fiduciary duty to the Company to; (a) ensure that proper records of all the Company's financial dealings were maintained; (b) ensure that no cheque was drawn on the Company's bank account except for a purpose of the Company; (c) inform the Company if any of its monies had been or might in the future be misapplied; (d) disclose to the Company any misconduct of any director of the Company; (e) disclose to the Company's external accountant all records and information necessary to enable the formation of a true view of the affairs of the Company. (paragraph 4) 29 It is alleged that Mrs Kenna breached her fiduciary duty to the Company in that; · she did not take steps to ensure that proper records of all of the Company's financial dealings were maintained; · she made false entries in the Company's records; and · she failed to inform the Company or the external accountants of these matters and the misapplication of the Company's monies to the benefit of herself and Mr Kenna in relation to the payments made for the Douglas Park property and the payments to Mr Kenna of the cash received by the Company. (paragraphs 5 to 9 and 11 to 13A) . 30 Additionally the plaintiffs claim that Mrs Kenna has breached her duty to the Company by gaining an advantage for herself by the use of the funds for the improvement of the Douglas Park and Thirroul properties and through the benefit of the cash payments. The plaintiffs claim Mrs Kenna is liable to account to the Company for those amounts. (pars 13 &14) Claim against the third defendant, Mr Brown 31 It is alleged that Mr Brown failed to institute checks and controls or seek advice as to such checks and controls that would have protected the Company against the misconduct of Mr & Mrs Kenna. It is also alleged that such conduct was a failure to exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the Company's circumstances. (paragraph 17) 32 There is a similar claim made against Mr Brown as is made against Mr Kenna in respect of the insolvency of the Company with a claim made for orders that Mr Brown has contravened s588G of the Corporations Law and s588M(2) and that he pay $1,286,923 to the Company. The Company as Trustee 33 The Trust Deeds required any determination or resolution of the Company as Trustee to be recorded in a written minute and signed by the directors of the Company. In the event that income was insufficient to meet the Trust's obligations the Company as Trustee was authorised to borrow funds and mortgage or charge the whole or part of the future income of the trust. 34 Additionally the Trust Deeds imposed an obligation on the Company as Trustee to keep accurate accounts of its trusteeship with a discretion to have those accounts audited annually. 35 There was no express authority in the Trust Deeds authorising the directors or employees of the Company as Trustee to take cash or benefit from other monies of the Trust. There was no minute recording the provision of such cash or other benefits to the directors or employees. No specific point has been raised by the defendants in respect of the Company acting as Trustee and Mr Thomson submits that it does not assist the defendants in this case. 36 Mr Thomson has referred me to Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367 in support of the principle that the trustee is personally liable for its acts and omissions as trustee. Additionally he submits that the fact that the trust funds were being managed by the Company may be relevant to the nature of the duties owed by the defendants to the Company with which I will deal in due course. Otherwise there is no need to deal further with this topic and the reference to the Company throughout this judgment should be taken to include a reference to the Company as Trustee. Presumption of Insolvency 37 The plaintiffs rely on s588E(4) of the Corporations Law to establish the insolvency of the company by its alleged breach of s289 of the Corporations Law because of: 1. the failure of the company to: (a) keep accounting records that correctly recorded and explained its transactions (including any transaction as trustee) and financial position during the relevant period; and/or (b) keep such account records in the manner prescribed by s 289(1)(b) of the Corporations Law; and/or 2 the failure of the company to obtain such accounting records for the period required by s 289(2). 38 Accounting records include the documents of prime entry as defined and "such working papers and other documents as are necessary to explain the methods and calculations by which accounts are made up" (s 9). 39 Section 289 imposed on the company an obligation to: (a) to keep such accounting records as correctly record and explain its transactions and financial position; and (b) so keep its accounting records that: (i) true and fair accounts of a company could be prepared from time to time; and (ii) the company's accounts could be conveniently and properly audited or reviewed in accordance with the Corporations Law. 40 In respect of the breach of s289 the plaintiffs rely on the evidence of Mrs Kenna in the public examination pursuant to s596A of the Corporations Law which occurred on 5 and 6 October 1995. 41 The transcript of that evidence was tendered pursuant to s597(14) which provides relevantly that any transcript of an examination may be used in evidence in any legal proceedings against that person. 42 Objection was initially taken by Mr Newlinds to the tender of this transcript in the absence of specific parts of the transcript being identified. Those specific parts were subsequently identified. No objection was taken as to the authentication of the transcript and it was admitted as exhibit C. It was not tendered against Mr Brown however Mr Brown's transcript was tendered by the plaintiffs in their case against him. 43 The case against Mrs Kenna includes a claim that as a result of her conduct the Company suffered loss and damage. Mrs Kenna's evidence in exhibit C can be relied upon by the plaintiff in respect of the insolvency question. 44 Mrs Kenna's evidence included the following: 44.1 The Douglas Park property was purchased in approximately 1989 and during 1994 and 1995 a five bedroom home with guest quarters was constructed at the property. The construction of this home at Douglas Park was carried out in part by subcontractors of the company. During 1994 certain payments were made by the company for the construction costs of the home at the Douglas Park property. 44.2 Mrs Kenna kept what she described as a little journal in respect of the payments relating to the Douglas Park property which she said told her what was paid, who to, by whom, how much, what dates . Mrs Kenna also claimed there was a file containing every invoice that was paid in respect of the Douglas Park property. 44.3 Payments made by the Company recorded in the little journal to which Mrs Kenna referred were not recorded in the records of the company which were provided to the accountant Mr Brangwin. 44.4 Some cheques of the Company were written to cash but those cheque butts were recorded as payments to the Water Board. The accountant was not informed that these cheque butts contained false entries nor was he informed that the cheques were in fact paid to cash. 44.5 Mrs Kenna claimed that she kept two separate cash receipt books. In a little red cash receipt book she recorded cash that was received by the Company but was paid directly to Mr Kenna. This book was not given to the accountants. When the Company's accounts were prepared by the accountant they did not record any of the cash that had been received nor was the accountant informed of the receipt of such cash. It is also apparent that no cash was banked through the company's account from July 1992. 44.6 On some occasions when the Company paid invoices and/or wages for work done on the Douglas Park property the payments were recorded in the Company's records as a payment in relation to a different property altogether. For instance rather than recording the payment in respect of the Douglas Park property it was recorded as Francisco Crescent Rosemeadow. 44.7 Although Mrs Kenna claimed she kept: (i) a file relating to the Douglas Park property of invoices paid; (ii) a little journal recording payments by the Company in respect of the Douglas Park property; (iii) a little red book recording receipts of cash which that were paid to the Company and given to Mr Kenna they had all "disappeared". Mrs Kenna claimed there was a break in at the Thirroul property in May/June 1995 when although other things were not stolen these records disappeared. 45 Additionally or alternatively the plaintiffs also rely on the liquidator's evidence to prove this aspect of the case. Mr Euan Poulton claimed that he paid $6,000 cash to the company on 13 May 1995 and that there was no record of the receipt of this amount either on the deposit slips or in the bank statements of the Company. Nor was there any record in the debtor's card for the particular job to which the payment related (182 Foothills Road Corrimal). The liquidator could not find any manual cash book for the relevant period 46 He said that the records of the Company referred to cash payments to trade creditors of the Company when in fact they were payments to suppliers of goods and/or services towards the construction of the home at the Douglas Park property. 47 The liquidator also produced a series of documents in exhibit B which demonstrate that the records of the Company were inaccurate and did not reflect the transactions that occurred in respect of the supply of goods and services to the Thirroul property in particular the supply of such services by Coastal Stairs and Tile Distributors. It is apparent from this documentation that although the supply was to the Thirroul property the Company's records, in particular the purchase journal, allocated such supply to other jobs or clients. 48 The liquidator also produced cheque butts of the Company's Commonwealth Bank account no 2607 0010 6580 for the period 11 November 1994 to 18 May 1995. Additionally copies of all the cheques matching the cheque butts in the exhibit were obtained from the bank demonstrating that the cheques were paid to cash inconsistently with the details on the cheque butt being paid to "Water Board". 49 Mr Frank Thomas Arnold swore an affidavit in which he gave evidence of a series of cash payments and cheque payments to the Company in 1994 and 1995 in respect of work done by the Company on his home. Mr Arnold referred to various cash receipts provided to him by Mrs Kenna at the time of the cash payments to the Company. The receipts issued to Mr Arnold for cash payments had a sequence from 89 to 93 whereas the receipt number for a cheque payment that Mr Arnold made was 160411. 50 The liquidator gave evidence that he had never been provided with the cash receipts book of the Company and he was unable to locate any cash payments made to the Company from 1 July 1994 to 2 June 1995. In the circumstances the liquidator was unable to ascertain whether the receipts issued from the cash receipts book of the Company in the sequence referred to by Mr Arnold were ever properly recorded in the books and records of the Company. 51 Additionally the liquidator gave evidence that he could not locate files relating to the Douglas Park property and a property at Kanahooka. He could not locate the cash payments journal after 31 December 1994 nor the asset register since 30 June 1994. He was also unable to locate a cash receipts book from 1 January 1994 and a building contract for 182 Foothill Road Corrimal. Most of these documents were the ones referred to by Mrs Kenna as having disappeared. 52 The liquidator was cross examined by Mr Conomy about the types of documents he did locate and it was suggested that those documents of prime entry were sufficient to satisfy the requirements of the Corporations Law and that the Company had not breached s289. 53 Section 289 is predicated on the accounting records that are available being accurate. The significant and insurmountable obstacle to the suggestion made by Mr Conomy in this regard is the falsity of the entries in these documents of prime entry. 54 Mr Conomy's cross examination also suggested that if the moneys were taken from the company and utilised on the Douglas Park property without authority of the Company one would not expect to find them in the Company's records. 55 One problem with that argument being accepted is that when the cash was received it was an authorised receipt by the Company and should have been recorded in the company's records. 56 Mr Conomy further suggested that if the books and records that had disappeared were made available to the liquidator then he would be satisfied that the Company's records complied with s289 of the Corporations Law. 57 All of these arguments are flawed by the falsity of the documents of prime entry and are thereby doomed to failure. 58 The false entries on the cheque butts, the failure to record the cash received by the Company, the false entries in the allocation to jobs other than the Douglas Park property, the keeping of a separate little journal which was not provided to the accountant and the failure to inform the accountant of the cash that was received and paid to Mr Kenna are all factors which lead me to the irresistible conclusion that the records of this Company were such that: (i) true and fair accounts of the Company could not be prepared from time to time; and (ii) accounts could not be conveniently and properly audited or reviewed. 59 I am satisfied that the Company was in breach of s 289 of the Corporations Law and in the circumstances it must be presumed that the Company was insolvent at least from 1 April 1995 (s 588E(4) of the Corporations Law). Insolvency 60 Section 95A(2) of the Corporations Law provides that a person who is not solvent is insolvent and s 95A(a) provides that a person is solvent if, and only if, the person is able to pay all the person's debts as and when they become due and payable. 61 Insolvency is a question of fact to be determined in all the circumstances (Sandell v Porter (1966) 115 CLR 666) and is to be decided as a matter of commercial reality (Taylor v Australian & New Zealand Banking Group Ltd (1988) 6 ACLC 808 at 810 - 811). 62 When the Court is deciding whether or not a company was unable to pay its debts as and when they fell due it is not embarking upon "a mere accounting exercise". It is assessing whether moneys can be "readily mustered in order to pay creditors". It takes prevailing business practices into account including the practice that "commercial debtors funded on borrowed capital endeavour to minimise their payment of interest to their own financiers by delaying payment to creditors for as long as realistically possible". (Hamilton v BHP Steel (JLA) Pty Ltd (1993) 13 ACLC 1548 at 1552). 63 The test in s 95A of the Corporations Law has been referred to as a cash flow test rather than a balance sheet test of insolvency (Melbase Corp Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 at 832). 64 Mr Thomson submits that there is clear and cogent evidence of insolvency as at 1 January 1995. This submission is based in part on analysis of the accounts for the year ended 30 June 1994 and the half yearly accounts for the period ended 31 December 1994. 65 The income statement in the December accounts recorded the comparison between the position as at 30 June 1994 $647,173 profit with $25,936 loss as at 31 December 1994. 66 The Company's work in progress as at 30 June 1994 was assessed at $1,002,653 and at 31 December 1994 at $849,638. It is submitted that these figures demonstrate that even though the Company had completed some of its works with consequent cash receivables it was still trading at a gross loss. 67 The receivables were down from $98,421 for the twelve month period to June 1994 to $27,740 for the 6 month period to December 1994. 68 It was further submitted that a comparison of current assets against current liabilities in the balance sheet in December 1994 demonstrates that the Company did not have the capacity to meet its then current liabilities in the short term. However the following note appeared in the financial statements of December 1994: Going Concern The trust has a deficiency of trust funds of $311,064. The continuance of the trust as a going concern is dependent upon the ability of the trust to continue to raise sufficient finance for its working capital needs. Certain beneficiaries of the fund have advanced moneys to the trust and have undertaken to advance such further sums as may be necessary until such time as profitable operations are resumed and the accumulated losses of the trust have been eliminated. Accordingly, the accounts of the trust have been prepared on the basis of a going concern 69 Gummow J considered a similar note in Re New World Alliance Pty Ltd (Receiver and Manager appointed); Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 . In that case the note stated that the financial accounts had been prepared on an ongoing basis but the validity of that approach was dependent upon continuing financial support of the holding companies and local financiers. The note specifically referred to the fact that the auditors had not obtained evidence that continuing support would be available from those sources. 70 I am faced with a situation that is a little different. The accountants who prepared the note in this case said that certain beneficiaries had undertaken to advance such further sums that may be necessary until profitable operations were resumed. 71 After an analysis of the evidence in New World Alliance Gummow J reached the conclusion that those managing New World could not rely on the group as a source of finance (at 432 d - e) and no reliance could be placed upon an accommodation being available (at 436). 72 Mr Thomson submits that in this case the only inference that is available on the evidence is that there were no such undertakings as referred to in the going concern note. He submits that if there had been a capacity to call upon such an undertaking the time to do so had well and truly arrived in late 1994 when it is clear that the Company was stretched and certainly required additional funding. 73 There was no evidence that any such support was furnished or any undertaking called up even when the Company's banker refused to extend its facilities. Mr Brown gave evidence that he did not give such an undertaking and he was not aware of anybody else giving such an undertaking. In evidence at the public examination Mrs Kenna said she did not give such an undertaking. In those circumstances it is submitted that no undertakings sufficient to carry the Company through and render it solvent were available. It seems to me that such a conclusion is justified on the evidence and it is the conclusion that I have reached. 74 Mr Thomson also relied on what could be described as a wealth of evidence in the documentary exhibits prepared by the liquidator and supplemented by the oral evidence from him. 75 Further factors upon which Mr Thomson relied include: · the fact that further funding was needed and was not obtained. · a pattern of payments to creditors being delayed and cheques being held back; and · Mr Brown's evidence that; · the Company had been increasing its level of activity with three new significant projects in the second half of 1994 and the subsequent employment of two additional supervisors; · such steps had been taken without any increase in the funding or working capital of the Company; · the Company was stretched in late 1994; and · although it was clear additional funding would be needed it was not obtained. 76 In all of these circumstances it is submitted that the Company was as at 1 April 1995 unable to pay its debts as and when they became due and payable. 77 Mr Conomy submitted that the plaintiff had not proved that any particular debt was incurred between 1 April 1995 and 2 June 1995 when the administrator was appointed. 78 In support of this submission Mr Conomy focused on the proofs of debt that had been lodged with the liquidator and his evidence that he had accepted the claims on face value and put all the proofs of debt and claims under consideration. 79 The liquidator agreed that he had approached the insolvency issue by a "short cut" method of seeking to establish insolvency pursuant to the presumption available in circumstances proved under s 588E(4) of the Corporations Law. He also conceded that he could not specifically recall sighting any demand from a creditor for payment in the Company's records. Additionally Mr Conomy submitted that I would have regard to the fact that no creditor was called to give evidence and there was no evidence of a pattern of dishonoured cheques. 80 However Mr Conomy's client, Mr Brown, the third defendant, was asked a number of questions about the items listed in a document referred to as Schedule N in exhibit B3 entitled "Creditors Invoices due for payment". At pages 188 - 189 of exhibit B3 there appears a list of what is described as outstanding invoices as at 2 June 1995 prepared by Affective Services Pty Ltd in June 1995. It seems to me from the cross examination of Mr Brown that he accepted that, with some exceptions to which I shall refer, the goods and services claimed to have been provided by Affective Services Pty Ltd to the Company had been provided. 81 The exceptions were The Grove, Austinmer (apparently also known as Hill Street Austinmer), 4 Rosemount Street Wollongong and Thirroul Kindergarten. 82 The alleged debts owed to Affective Services about which Mr Brown was cross examined are listed in Schedule N in the months in which it is alleged they fell due for payment . The liquidator gave evidence that Schedule N had been prepared after the financial records of the Company had been perused by himself and his staff. He said that the terms and conditions of invoices issued by most of those creditors required payment within 30 days or less. 83 I do not agree with Mr Conomy's submission. I am satisfied that the debts alleged to be owed to Affective Services have been proved by the plaintiff. Additionally it is open on the evidence to conclude that Mr Brown accepted that at least the following debts were owed to that company: (i) For March 1995 $8104.50 which takes into account the exclusion of 4 Rosemount Street, Hill Street and Thirroul Kindergarten. (ii) For April 1995 $71,593 , taking into account the exclusion of 4 Rosemount Street and Hill Street. (iii) For May 1995 $43,205 taking into account the exclusion of the The Grove; and (iv) For June 1995 $249,700.65 excluding 4 Rosemount Street; 84 The liquidator also gave evidence that prior to the day upon which he gave evidence no person other than Mr Kenna had suggested that the details relating to the creditors listed in schedule N were other than substantially correct. The reference to Mr Kenna taking issue with the list of the creditors in schedule N and the dates upon which the debts were alleged to have been incurred was dealt with in cross examination. However no evidence was called which seriously contested the evidence of the liquidator. 85 Mr Conomy submitted that I should feel some disquiet in making any finding in relation to insolvency based on Schedule N and the documentary materials exhibited in support of it. He submitted this disquiet would exist because what things were done as to individual accounts are not before the court and it would be a matter for conjecture as to whether there is an oral contract which predates an invoice which would override a term that appears on an invoice. He said he would try to marshal some schedule in that respect. 86 No such schedule was marshalled or if it was it certainly was not tendered. Schedule N refers to the conditions of the individual invoices and from that and the supporting documentary materials I am entitled to reach a conclusion that the terms of trading as referred to by the liquidator are as he stated. It seems to me that it would be quite unrealistic for me to entertain the disquiet based on the matters outlined in Mr Conomy's submission. I am dealing with matters of commercial reality on the evidence before me and I see no good reason to entertain this particular disquiet. 87 On the evidence before me I am satisfied that the identity of the creditors, the debts and the dates upon which the debts are alleged to have arisen as listed of Schedule N and described in the legend Payment terms ( excluding those with the legends % and @ ) did in fact arise as described in the schedule. 88 The liquidator also gave evidence that his analysis of the Company's records demonstrated that cheques were being held back and not presented to the Bank as one would expect in the ordinary course of business. The inference is available that the holding back of cheques in the circumstances of this Company's affairs is an indication that there were not sufficient funds in the account and/or the overdraft at the Bank to meet the debts as they fell due. 89 Hodgson CJ in Eq said that the question as to whether a company was able to pay its debts as and when they fell due ; ..is to be decided as a matter of commercial reality, in the light of the circumstances… the company's financial condition in its entirety, including its activities, assets, liabilities, cash, money which it could procure by sale or on the security of its assets, and its ability to obtain financial assistance by way of loan or subscription for share capital. (Standard Chartered Bank v Antico (nos 1 & 2) (1995) 38 NSWLR 290) 90 I am satisfied on all the evidence that as a matter of commercial reality the Company was not able to pay its debts as and when they fell due and was insolvent as and from 1 April 1995. Insolvent Trading 91 Within Division 4 - Director Liable to Compensate Company s588M(1)&(2) provide: 588M(1) This section applies where: (a) A person (in this section called the " director" ) has contravened s 588G in relation to the incurring of a debt by a company; and (b) the person (in this section called the " creditor ") to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and (c) the debt was wholly or partly unsecured when the loss or damage was suffered; and (d) the company is being wound up; whether or not; (e) the director has been convicted of an offence in relation to the contravention; or (f) a civil penalty order has been made against the director in relation to the contravention. 588M(2) The company's liquidator may recover from the director, as a debt due to the company an amount equal to the amount of the loss or damage . 92 Within Division (3) - Director's Duty to Prevent Insolvent Trading s588G provides relevantly: 588G(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. 93 Section 588G(1)(c) raises the question whether at the time the debts were incurred there were reasonable grounds for suspecting that the company was or would become insolvent. The answer to this question involves an objective assessment in the context of an assumption of the directors' compliance with their statutory obligations. 94 This includes the obligation to be sufficiently familiar with the company's affairs so as to be in a position to make a proper judgment about its financial position. The assessment of reasonable grounds for such suspicion uses as a touchstone the director seeking properly to perform his or her duties in such circumstances. In this regard it is a director of reasonable competence, exercising the care and diligence that a reasonable person might be expected to take in the same circumstances ( Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946 at 953-958; Standard Chartered Bank v Antico (nos. 1 and 2) (1995) 38 NSWLR 290 at 332) 95 Mr Thomson submits that the " circumstances" to be taken into account in answering this question include: · The Company's parlous state of financial affairs as disclosed by the June 30 1994 financial statements. · The commencement of three large projects in 1994 and early 1995 which were unfunded and in circumstances where no cash flow projection had been made and no budget prepared; · The employment of two additional site supervisors in the same circumstances; · The failure to obtain extra funding from the Company's banker from late 1994 when the Company was stretched; · The failure to obtain funding from the Company's banker in March 1995 and between March 1995 and June 1995; · The continuation of trading in circumstances where no additional funding had been obtained; · the outstanding debts due to the Company's suppliers and contractors as at 1 April 1995 and later as identified in the liquidator's evidence including schedule N; · The construction of the Douglas Park property in 1994 and 1995 in the circumstances of the Company's subcontractors being used to assist in that construction. 96 Although the defendants placed emphasis upon the lack of any evidence of formal demand for payment on the Company and the absence of any pattern of dishonoured cheques I am of the view that such does not detract from the cogent evidence to which I have had regard in reaching my conclusion. I am satisfied pursuant to s588G(1)(c) on all the evidence that by April 1995 there were reasonable grounds for suspecting that the Company was insolvent or would become insolvent as it incurred the debts referred to in schedule N for the period April 1 1995 to June 1995. 97 The further amended statement of claim alleges that both Mr Kenna and Mr Brown were aware at the time when the Company incurred the debts that there were grounds for suspecting the Company was then insolvent at the time each such debt was so incurred. (s588G(2)(a)) The particulars of the matters which the plaintiffs claim are relevant to the awareness it claims existed in the minds of both Mr Kenna and Mr Brown are as follows: 97.1. The financial statements of the Company as at 30 June 1994 which were prepared in about December 1994 and given to the defendants at the time disclosed: (i) That trade creditors of the Company had increased from $454, 585 to $805,845. (ii) The overdraft account of the Company had increased from $52,304 to $153,564. (iii) Loans owed by the Company had increased from $142,403 to $223,165; (iv) Nett assets of the Company exceeded liabilities of the Company by only $30,000. 97.2 The Company's debts were continually ageing. 97.3 The Company incurred large amounts of debts with other creditors in excess of previous levels of indebtedness to creditors. 97.4 From prior to 1 April 1995 to 2 June 1995 the Company was experiencing a cash flow problem. 97.5 In March 1995 the Company was unsuccessful in obtaining re-finance from its banker. 97.6 Creditors of the Company were not paid within agreed trading terms. 97.7 By letter dated 2 June 1995 the first defendant wrote to creditors of the Company and informed them that the Company had experienced financial hardship during the previous six months causing a cash flow problem which it could not overcome; and 97.8 In excess of $1,466,468 was owed to creditors prior to 1 April 1995 and has never been repaid. 98 Alternatively the plaintiffs' claim that a reasonable person in a like position to Mr Kenna and Mr Brown's position in the Company in the Company's circumstances would have been aware at the time when the Company incurred the debt that there were grounds for suspecting that the Company was then insolvent . (s 588G(2)(b)) Mr Kenna 99 In the circumstances of his bankruptcy there was no appearance by or for Mr Kenna to put any matters to the Court in his defence however I have considered the evidence and the claims against him for the purposes of this aspect of the plaintiffs' claims. 100 There were in evidence before me two Minutes purporting to be Minutes of a meeting of directors on 16 December 1994 and the 1994 annual general meeting on 30 December 1994 signed respectively by Mr Kenna as director and chairman. Both minutes record Mr Brown as having been present. Mr Brown denied he was present at those meetings. The Company's financial statements for the year ending 30 June 1994 were purportedly adopted at the general meeting and at the directors meeting it was noted in the Statement by Directors that; (c) as at the date of this resolution, there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due; and (e)…the company has; (i) kept such accounting records as correctly record and explain the transactions and financial position of the company; (ii) kept its accounting records in such a manner as would enable true and fair financial statements of the company to be prepared from time to time; and (iii) kept its accounting records in such a manner as would enable the financial statements of the company to be conveniently and properly audited in accordance with the Corporations Law. 101 Mr Kenna was the signatory of the cheques paid to the various contractors for the construction of the Douglas Park property. These payments were not accurately described in the Company's records and Mr Kenna must have been aware that the Company's records were not as described in the above minute. 102 In assessing the evidence I have been careful not to use the evidence of Mrs Kenna in the public examination against Mr Kenna. The evidence of Mr Brown, Mrs Rowlands and Mr Arnold demonstrates that cash was received by the company certainly in 1994 and/or 1995.It is clear that such cash was given to Mr Kenna. The liquidator's evidence demonstrates that such cash was not banked and was not entered in the records of the Company. 103 It is also clear from the evidence of Mr Brown, to which I shall refer in detail below, that the Company was stretched in the latter part of 1994. It is also clear that further funding was needed and that it had not been obtained. Additional large projects were taken on by the Company in 1994 and 1995 without additional funding, a budget and or flow projection. I am satisfied that Mr Kenna was not only aware of these matters but also of the list of creditors who remained unpaid as referred to in Schedule N of the liquidator's evidence. 104 Mr Kenna was the director with the hands on financial management of the Company. I am satisfied that he was aware that the diversion of the Company's funds to him and to the Douglas Park property would add that extra burden on the Company such as to amount to an awareness that there were grounds for suspecting the Company was insolvent as at 1 April 1995. 105 In these circumstances I am satisfied pursuant to both s588G(2)(a) and s 588G(2)(b) that Mr Kenna has contravened s588G of the Corporations Law. Mr Brown 106 Mr Conomy submits that I would not be satisfied that Mr Brown was aware at the relevant time that there were such grounds for so suspecting (s588G(2)(a)) . In support of this submission he referred to the following matters: · The financial statements of the Company as at 30 June 1994 appear to have been created in December 1994 and Mr Brown was not present at the 1994 meeting with the accountant which would have usually included an explanation of the accounts; · Although Mr Brown accepted that he had received a copy of the accounts he said that he did not receive any explanation of them; · In observing the extension of the Company's activities it was reasonable to assume the Company's trade creditors would increase; and · Mr Brown was not aware of the specific amount of the overdraft at any particular time including the time that he signed the application for the extension of the overdraft in March 1995. 107 Mr Conomy submitted that there was really little support for the plaintiffs' case in any reliance upon the fact that Mr Brown had a copy of the 30 June 1994 financial statements to demonstrate a relevant awareness under s588G(2)(a). Certainly the plaintiffs do rely on such a circumstance and that reliance is very understandable. But Mr Conomy points to paragraph 38 of Mr Brown's affidavit which he says should cause any support to be largely discounted . Paragraph 38 states; I have never been formally trained nor have I otherwise acquired the ability to read and interpret accounting records or financial statements. At all times I relied upon the first and/or the second defendant and/or Mr Brangwin to inform me of the financial position of the plaintiff Mr Conomy submits that this evidence was not challenged. 108 Mr Brown was cross examined about these financial statements and more particularly about the Company's financial position. His oral evidence included the following; · He did not ever make any request of Mr or Mrs Kenna or Mr Brangwin to keep him informed of the Company's financial position; · He received a copy of the 30 June 1994 accounts in about December 1994; · It had been his practice to go to Mr Brangwin's office at Parramatta every 12 months for the approval of the accounts at which time the accountant would explain them; · He did not attend the accountant at the time the 30 June 1994 accounts were prepared because he was too busy and had quite a few jobs to look after at that time; · He did not receive an explanation in respect of these particular financial statements; · He was aware that the Company was stretched in late 1994. 109 The following cross examination is important on this aspect of the case against Mr Brown; Q. It was apparent to you.. .that this extra level of activity would generate an increased level of expenditure, at least for the duration of these projects? A. Yes Q. When did you and he (Mr Kenna) first discuss the need to approach the bank or otherwise obtain additional funding to enable the company to cope with this increased level of building activity it was undertaking? A It must have been around about April of 1995 Q. 22 March.. Was that the first occasion that you learned that any steps were being taken in that regard? A. Yes . Q. Even though it was pretty evident I suggest that the company would need further funding? A. Yes it was evident. Q. Because there was no expectation that the company's cash flows would dramatically increase sufficiently to cover the additional expenditure, was there? A. No (tr.83-84)(emphasis added) Q. Were there any steps taken to enable the company to fund that increased level of activity between 93 and 94 to your knowledge? A. Not that I know of, not that I know of. (tr 87) And later in relation to the application to the Bank for further funding; Q And you were aware that it was not available? A. It wasn't Q. It wasn't obtained? A. It wasn't obtained. It was to be - as far as I knew it was to be resubmitted. Q. Anyway it wasn't obtained before the company ceased trading? A. No. Q. And it was likely I suggest if you turned your mind to it, that in such circumstances the amount of unsecured creditors would increase, given that the company was continuing with its trading activities in the interim. A. Yes. (tr.98) 110 Mr Brown was not asked whether in fact he did turn his mind to the circumstance referred to in this last question. However I understand that having regard to Mr Brown's admitted awareness that; · the Company was stretched in late 1994 when extra projects were taken on; · there was a need for further funding; · there was no expectation that the Company's cash flows would increase to cover the additional expenditure; and · there was no extra funding obtained; the plaintiffs submit that I would be satisfied that Mr Brown did have the requisite awareness referred to in s588(2)(a). 111 The evidence also discloses that Mr Brown left the management of the Company to Mr and Mrs Kenna. Although he did discuss finances with Mr Kenna when he came to the site it is apparent the discussion was not detailed. There was no delay in payment of his wages which were paid weekly. He was not aware of any demand for payment or complaint by creditors at the site or lack of supply of goods and services because of non payment. 112 He only became aware that the three new large projects had been taken on after they were taken on. The cross examination also elicited that; · he did not know that since 1992 the Company had not banked any cash (although by the time he gave his evidence he said it would not surprise him); · he was not aware before the day that he gave his evidence that the trust had a deficiency of funds of $311.000 as at 31 December 1994; and · he was surprised that the level of unsecured creditors was as high as $1.3m. 113 Mr Brown was persuasive in his cross examination about his lack of cognisance of the depth of the Company's problems. I formed this view even though he admitted he knew the Company was stretched. This of course does not mean that his approach was reasonable, indeed it seems to me that his approach was not reasonable. Although he was relying on others he did not consult properly with those others to ascertain the true state of the Company's financial affairs. But that is not a matter which concerns me in the consideration of this aspect of Mr Brown's defence. I have concluded that he was not aware that there were reasonable grounds to suspect that the company was or would become insolvent. 114 In all the circumstances I am not satisfied that Mr Brown had the requisite awareness referred to in s 588G(2)(a). However the matters to which Mr Thomson has referred and the evidence generally leads me to the conclusion that a reasonable person in a like position in the Company to that of Mr Brown in the Company's circumstances would be so aware (s588G(2)(b)) . 115 I am therefore satisfied Mr Brown has contravened s588G of the Corporations Law. Mr Brown's defences 116 The defences pleaded on Mr Brown's behalf in respect of that contravention is as follows: 4 The third defendant says that at the time the debts referred to in the further amended statement of claim were incurred, he had reasonable grounds to expect, and he did expect, that the Company was solvent at the time and would remain solvent even if it incurred those debts. (the s588H(2) defence) 5 The third defendant says that at all material times he had reasonable grounds to believe, and did so believe, that a competent and reliable person was responsible for providing to him adequate information about whether the company was solvent and that person was fulfilling that responsibility and he expected, on the basis of the information provided to him, that the plaintiff was solvent at the time it incurred the debts and would remain solvent even if it incurred the debts. Particulars The first and/or second defendants had responsibility for informing the third defendant of the position of the plaintiffs. The third defendant was provided with information from time to time by the first and/or second defendants. On the basis of this information the third defendant expected that the plaintiff was solvent. (the s588H(3) defence) 117 On the first day of the hearing, 6 April 1999, leave was granted, unopposed, to the third defendant to amend his defence to include the following paragraph: In answer to the whole of the claim and in so far as these proceedings against him are for negligence, default, breach of trust or breach of duty the third defendant claims an order of the Court relieving him of his liability on the ground that he has acted honestly and ought fairly to be excused under s 1318 of the Corporations Law.

The s588H(2) defence 118 Mr Conomy places emphasis upon Mr Brown's background as a qualified carpenter and the fact that from 1964 when he and Mr Kenna first went into business together it has always been Mr Kenna alone (that is without Mr Brown's involvement) who attended to the financial affairs of the partnership. He paid all the creditors and kept the books and records of the business - both for the partnership and later the Company. In later years he was assisted by Mrs Kenna and Mr Brangwin. This had been the agreed division of their duties in the partnership and later the Company. 119 Mr Conomy relied on par 38 of Mr Brown's affidavit extracted above to demonstrate Mr Brown's lack of expertise in financial matters.( Standard Chartered v Antico (supra at 332)) Mr Brown's affidavit also stated in paragraph 16; To the best of my knowledge and belief (Mr Kenna) provided the .. financial information to Mr Brangwin and Mr Brangwin reviewed that information quarterly from 1973 until..June 1995. 120 In 1984 Mr Brown was involved in a conversation in which it was agreed with Mr Brangwin that the financial information necessary to prepare monthly accounts for the Company would be sent to him at the end of each month by Mrs Kenna so that he could prepare them and keep an eye on them for the Company. Mr Brown said he had the belief that this system was in place from 1984 throughout the period, presumably until June 1995. 121 In 1987 Mr Brangwin raised some concerns about some of the Company's properties causing a financial drain on the Company and advised Messrs Kenna and Brown to sell the properties to get rid of the burden on the Company. He told them that they needed to act immediately and that he would keep an eye on the accounts after the properties were sold and let them know if there is any further problem. 122 Mr Brangwin did not raise any further concerns at any of the meetings Mr Brown attended with him nor did he indicate that the Company was experiencing or could anticipate any other financial difficulties. Mr Brown said I never received anything from him saying that we were insolvent, and he assumed we would have been solvent. 123 However Mr Brown said that he made express inquiry of Mrs Kenna as to the Company's solvency on or about 22 March 1995. She rang him and asked him to go into the office to sign a document for the bank. She informed him she was attempting to refinance the Company's loan arrangements because of the number of large projects the Company had at that time. He said that when he attended the office and Mrs Kenna gave him the document he said What is this all about? to which Mrs Kenna responded Its a statement to say the Company is solvent in response to which he said Is it ? And Mrs Kenna said yes. 124 Mr Brown gave evidence before the Registrar in the public examination in October 1995. The following evidence is relevant to the conversation of 22 March 1995; Q And were you aware in March or April of this year that Mr Kenna was attempting to refinance the loan arrangements of the company. A No I wasn't aware of that. (Tr 40 exhibit C) Q Have you got a document there that says "Declaration of Solvency" addressed to the Commonwealth Bank dated 22 March 1995. A Yeah I see that, yeah. Q Can you remember signing that document. A I can, I can remember signing but I didn't read it. Q And what were the circumstances in which you signed it. A I think I was called into the office one afternoon, I had to call there to sign a document for the bank. Q Okay and did you ask what the document was. A Yes, I said "what's it for?" Q And what did he say. A It was Trish that got me to sign it. Q What did she say. A She said it was just a statement for the bank. Q And you didn't bother to read that document. A I'm afraid I didn't read that part. I didn't read the declaration of solvency . (Tr 42 -43 exhibit C) 125 Mr Brown was not taken to this portion of his evidence before the Registrar. It is somewhat inconsistent with the conversation that he gave in evidence before me particularly in relation to the statement about the solvency of the Company. 126 Mr Brown relies upon his evidence before me to support his claim that he had an expectation that the Company was solvent and would remain solvent even if it incurred further debts. He also relies on this evidence to support his claim that he had reasonable grounds for such an expectation. 127 I accept that Mr Brown left the management of the Company to Mr and Mrs Kenna. I also accept that he relied upon Mr Brangwin for explanation of the accounts each year when he attended his office in Parramatta. Additionally I accept in the light of Mr Brangwin's previous concern having been expressed in 1987 about the financial drain on the Company and his stated intention to bring any further problems to notice that Mr Brown was entitled to expect that Mr Brangwin would bring such to his notice. 128 Although he gave evidence that he had a practice of seeing Mr Brangwin each year for the approval and explanation of the accounts Mr Brown did not attend a meeting at which the 30 June 1994 accounts were approved. His evidence in the public examination suggests he had not seen Mr Brangwin since about December 1993. His explanation was that he was too busy. There is no evidence that he had any discussion at all in 1994 with Mr Brangwin or Mr Kenna about the financial position of the company prior to the very short conversation he had with Mrs Kenna in March 1995. 129 This is curious in the circumstances particularly as Mr Brown said he was aware that the Company needed extra funds and that it was stretched in late 1994. There was also the peculiar situation that as a director of the company he was not informed that the company was taking on three new large projects until after they were commenced. The employment of the two additional site supervisors without extra funding being obtained, with no expectation that the company's cash flows would increase sufficiently to cover the additional expenditure makes the lack of communication about the Company's financial position even more puzzling. 130 Notwithstanding Mr Brown's expectation that Mr Brangwin would let him know about any further problems these circumstances developed some 7 years after that conversation with Mr Brangwin in 1987. There is no doubt Mr Brown was aware of these circumstances and they should have alerted Mr Brown to the need not only for some sensible communication about the Company's financial position but also for appropriate action to address the situation. 131 In all these circumstances, even if I were to accept that Mr Brown expected the Company was solvent and would remain solvent because no one told him otherwise I am of the view that he did not have reasonable grounds for that expectation. This defence must fail. The s588H(3) defence 132 As I have said above in relation to the s588H(2) defence Mr Brown obviously relied upon Mr and Mrs Kenna to manage the Company and upon Mr Brangwin to bring certain matters to his attention in relation to the financial affairs of the Company. However there was one matter of which Mr Brown was aware about which he had some concern which prompted him to make some enquiry of Mr Kenna. It involved the receipt of cash by the Company. 133 He gave evidence that when the business changed from being a partnership to a Company he asked Mr Kenna what was going to happen in relation to the cash received by the Company. His evidence was that it was not unusual for payments to be made to the Company in cash. Mr Kenna told him that it was going to be dealt with in exactly the same way that it had been in the partnership. He understood that it would be banked. 134 He did not enquire about the receipt of cash again until about 1990. His evidence was as follows: A. Well I asked another time, later on, and I was given virtually the same answer as what I was given the first time. Q What was his response. A It was virtually the same statement; that cash was - I had no knowledge of cash being paid at that time, it was just a question on another part and the answer was cash was no different, once again, that cash was no different to a cheque. Q What was the context which led you to raise that issue with Mr Kenna at that time. A There was a bit of matrimonial dispute between Lance and his wife at the time, and she told my wife that she took something like $20,000 out of the draw at Lance's. So I was sort of making a comment to try and let him know that I knew that there was cash there at that time. But that was - but I had no other reason I couldn't say if it was his own or who it belonged to. (tr 79- 80) Q …Anyway the reason for asking the question was to let him know inferentially, anyway, that you had an interest in what happened with the company's cash is that why you did it. A Yes that's right. Q But you didn't take it any further. A No. Q You didn't do any follow up checks of any kind. A No. (tr 81) 135 As I have said earlier Mr Brown was not told about three new large projects being taken on by the Company in 1994/95 until after they were taken on. It is clear Mr Brown was not being kept informed of the financial situation of the Company. These projects were obviously relevant to the Company's financial situation and it can hardly be said that the responsible person was providing him with adequate information about that matter. 136 There is no evidence to suggest that once he became aware of the projects having been taken on he ever spoke to Mr or Mrs Kenna or Mr Brangwin about them and their possible impact on the Company's financial position. He was willing to raise what he seemed to regard as the delicate question about the cash four years earlier but he remained silent about what appears to be the less delicate matter of not being kept informed. 137 The conversation in March 1995 with Mrs Kenna could reasonably be described as of a most cursory nature with no apparent explanation being sought as to why he was not told about these projects until after they were taken on. 138 I am of the view that in all the circumstances Mr Brown did not have reasonable grounds to believe that he was being adequately kept informed by the responsible person about whether the Company was solvent. This defence must fail. The application of s1318 139 Mr Robinson submitted that his submissions on this aspect of the case were a little controversial in that their adoption would require me to take a somewhat different approach from that taken in Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946; (Friedrich) Standard Chartered Bank v Antico (1995) 38 NSWLR 290 (Standard Chartered)and Southern Star Group v Byron (1995) 13 ACLC 1622.(Southern Star) 140 He distinguishes the present case from the approach taken in those previous cases by a comparison of the wording of 588G with its predecessors ss592 and 556. He submits that s588G with which I am dealing is relevantly different from those previous sections. 141 Mr Robinson submits that s556(1) was directed to an offence by the Company. It provided: 556(1) If - (a) a company incurs a debt, or whether within or outside the State; (b) immediately before the time when the debt is incurred - (i) there are reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or (ii) there are reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they become due; and (c) the company is, at the time when the debt is incurred, or becomes at a later time, a company to which this section applies, Penalty any person who was a director of the company, or took part in the management of the company, at the time when the debt was incurred is guilty of an offence and the company and that person or, if there are 2 or more such persons, those persons are jointly and severally liable for the payment of the debt. Penalty $5,000 or imprisonment for one year, or both. 142 A defence was provided for in s556(2) whereby a defendant could prove that the debt was incurred without express or implied authority or consent or by proving that he did not have a reasonable cause to expect the company was unable to pay its debts. Section 556(3) provided that proceedings could be brought under subs 1 for the recovery of a debt. 143 Section 592 was in very similar language to s556 and refers to the company incurring a debt (s592(1)(a)). 144 Mr Robinson contrasts these sections with s588G wherein the contravention is by failing to prevent the company from incurring a debt . (s 588G(2)) He submits that this imposition of a duty to prevent the Company from incurring a debt is something quite different to that which is found in the predecessors to the section. 145 He submitted that s588G(2) imposes an absolute duty on the director which distinguishes the situation with which I am dealing from that with which the court was dealing in Friedrichs, Standard Chartered and Southern Star . 146 Mr Thomson has referred me most helpfully to Mr L Powers article Can the Court excuse Insolvent Trading? Journal of Banking and Finance Law and Practice Vol 7 June 1996 p 160. Mr Powers suggests that although a court could not relieve a director who was pursued under s556 of the Companies Code it can do so when a director is pursued under s588G of the Corporations Law.(at 160) 147 After referring to Friedrichs, Standard Chartered and Southern Star Mr Powers said: .. a new regime applies to debts incurred after 23 June 1993. Section 588G of the Corporations Law, which is headed "Directors Duty to prevent insolvent trading by a company" makes it an offence for a director to "fail to prevent" a company from incurring a debt in the prescribed circumstances. Had Tadgell J been dealing with a claim under the Corporations Law, it seems clear he would have been able to find what he thought was missing from 556 of the Companies Code, mainly, liability arising from the doing of acts or, at least, liability for failing to do something specifically required by the law. 148 This was no doubt a reference to Tadgell J's following statement in Commonwealth Bank v Friedrich (at 1007 ); …it remains necessary to discern the imposition by s556(1) of a liability to the plaintiff for a default or breach of duty by the defendant. I have difficulty in seeing that s556 imposes by its terms a liability for an act or omission in contravention of the Code or for the breach of any duty imposed by the Code or otherwise. ..The liability under s556(1) does not arise on account of..the performance of some act forbidden, or the omission of some act required, by s556(1) or indeed any other provision of the Code. The only prerequisite to the defendant's liability under s556(1) over which he has any necessary control is simply that he was a director or took part in the management of the company. This cannot by itself involved him in any default or breach of duty. 149 In Standard Chartered v Antico Hodgson J (as he then was) followed Tadgell J saying at 370; ..I am not satisfied that Tadgell J was wrong in his view that s556 simply imposes a liability for debt on directors and participants in management in certain circumstances spelt out in s556(1), which do not involve default or breach of duty. 150 Hodgson J expressed some concern that the predecessor to s1318 of the Corporations Law ( s535 of the Code) might operate capriciously because s556 imposed liability on persons who may not be officers of the company. He went on to say that the broad powers given to the Court in s535 did not sit well with the defence in s556(2) because this latter section gave some appearance of being a full elaboration of the circumstances in which the legislature considered that persons falling within s556(1) ought to escape liability. (at 371) 151 Of Hodgson J's concern about the possibility of the capricious operation of the section Mr Powers said; The point made by Hodgson J concerning the failure of s1318 to cover the position of persons who were merely involved in management, and who were not otherwise officers, also appears to fall away under the new regime. The new law imposes liability for insolvent trading only on directors. It no longer applies to persons merely involved in the management of the company. So if s1318 applies, it covers all those who might incur liabilities under s588G. 152 As to Hodgson J's opinion that the stated general appearance of s556(2) did not sit well with s535(s1318) Mr Powers placed reliance on the notation of the precept by the High Court in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 13 ACLC 1572 that it is inappropriate to read down a provision which grants powers to a court by imposing limitations not found in the express words of the section. 153 Section 1317JA of the Corporations Law provides; 1317JA(1): "Eligible Proceedings" means proceedings for a contravention of the civil penalty provision (including proceedings under s588M, 588W or s1317HD 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 s588K or 1317HB of the law). 1317JA(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 5.47 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. 1317JA(3): In determining under subs (2) whether a person ought fairly to be excused for a contravention of s 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 557 body; and (b) when that action was taken; and (c) the results of that action. …. 1317JA(7) Nothing in this section limits, or is limited by, s1318. 154 s1318(1) provides: If, in any civil proceedings against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the Court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default of breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the Court may relieve the person either wholly or partly from liability on such terms as the Court thinks fit. 155 Mr Powers concludes; Whatever the limits of s1318..the power of the court to grant relief in respect of liability for insolvent trading now seems to be beyond doubt as a result of the introduction of s1317A. This section operates in addition to s1318. Now, in "eligible proceedings" the court is given specific power to grant relief. Eligible proceedings means proceedings "for a contravention of a civil penalty provision"..Section 588G is a civil penalty provision. Contravention of the duty in s588G is the basis for civil recovery action by a liquidator (or a creditor in certain circumstances). Therefore the power to grant relief is not limited to proceedings in which the ASC is seeking a civil penalty order. In both situations the action can be properly said to be proceedings "for a contravention". 156 I agree with Mr Powers' conclusion. I am also of the view that because of the imposition of the duty in s588G the reservations expressed by Tadgell J in Friedrich , Hodgson J in Standard Chartered and Young J in Southern Cross are not obstacles to the application of s1318 in this instance. I am also of the view that although the defences in s588H may give some appearance of a full elaboration of the circumstances to escape liability, such appearance disappeared with the introduction of 1317JA which operates concurrently with s1318 (s1317JA(7)). 157 There is no claim for relief under s1317JA. Section 1318 operates when civil proceedings are brought for a breach of duty. Division (3) of Part 5.7B of the Corporations Law imposes on a director a duty to prevent insolvent trading. Although the language used in 588G(2) refers to a contravention I am of the view that language does not detract from the interpretation I have applied which is that it is a breach of the duty which amounts to the contravention which entitles proceedings under s588M to be commenced. I am of the view that s1318 applies. 158 It is therefore necessary to decide whether I should exercise my discretion in Mr Brown's favour under s1318. This has been descibed as a wide discretion . (Daniels v Anderson (1995) 37 NSWLR 438 at 525B) 159 Since 1981 there has been no express requirement that the director acted reasonably. The removal of this requirement serves to focus the attention of the Court primarily on the honesty of the director. However honesty alone is not sufficient to ground a proper exercise of my discretion under s1318. (Advance Bank Australia Limited & Ors v FAI Insurance Ltd & Anor (1987) 5 ACLC 716 at 725 per Kirby P (as he then was) (with whom Glass JA agreed) at 746). There is no suggestion that Mr Brown did not act honestly. I therefore find that prerequisite satisfied. 160 Although reasonable conduct is not an express prerequisite to granting relief under the section I regard it as a relevant consideration in exercising my discretion as to whether Mr Brown ought fairly to be excused from liability. A decision on this matter is reached having regard to all the circumstances of the case which will include the way in which the breach of duty occurred. ( Circle Petroleum (Qld) v Greenslade (1998) 16 ACLC 1577 at 1598). 161 S1317JA(3) refers to some specific matters to which the Court is to pay regard when that section is relied upon in determining whether a person ought fairly to be excused for a contravention. These matters are not exhaustive. 162 Mr Robinson emphasised the necessity for Mr Brown to rely on others with the relevant skills to manage the financial aspects of the Company. He submits that this is consistent with the acknowledgement in the Corporations Law that reasonable reliance is permissible. I agree. I regard Brown's reliance on others in respect of the day to day management of the Company's financial affairs as reasonable. 163 Mr Brown was misled by Mr and Mrs Kenna at the very least by the production of false books and records. It is submitted the diversion of cash and resources away from the Company and into the Douglas Park property must have at least contributed to the Company's insolvency and may have caused it. 164 It is also submitted that Mr Brown worked to the best of his abilities in coming to grips with the financial affairs of the Company. He complied with a system that had been developed over a considerable period of time that had hitherto proved effective in bringing matters to his attention. His trust was misplaced in 1994 and 1995 and it is submitted that his actions were that of an honest person in dealing with the Company's affairs and it would be fair to relieve him wholly or partly from liability. 165 Mr Thomson relied upon the relevant portion of the judgment of Clarke and Sheller JJA in Daniels v Anderson at 525 in relation to the purpose of s1318 : The purpose of the section is to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are business men and women who act in an environment involving risk in commercial decision making. In reliance upon this authority he submitted that the director's duty is not limited by the state of the director's knowledge, experience, ignorance or inaction. 166 Mr Thomson submitted that it would be an erroneous application of s1318 to relieve a director who was utterly ignorant of and completely indifferent to the Company's financial affairs. It is suggested such epithets accurately describe Mr Brown. 167 Mr Thomson submits that the matters which would count strongly against granting the relief to Mr Brown include the following: (a) Mr Brown has not been able to make out a defence pursuant to s588H. (b) Mr Brown's complete disregard of his obligations as a director to acquaint himself with the Company's affairs in relation to its financial management. (c) The fact that Mr Brown's failures as referred to in (b) allowed the Company's business to be ruined by fraud and mismanagement on the part of those he left entrusted and, it is submitted wholly unchecked, to carry out the functions. (d) Mr Brown's failure to intelligently enquire or ascertain the facts when there were the clearest grounds to do so. On this topic Mr Thomson referred to the question of cash receipts and Mr Brown's failure to follow his suspicions through, his failure to address the Company's need for additional working capital which it is submitted he recognised in late 1994 and his failure to clarify the position of the building project at Douglas Park when he was aware that subcontractors were being dragged away from other projects. (e) Mr Brown had available to him all the armoury of legal powers necessary to ensure that the loss suffered by the Company was not so suffered. Mr Thomson emphasised the lack of such armoury in the unsecured creditors and points to the fact that Mr Brown had ready access to those who could have assisted him including Mr Brangwin or alternatively Mr Brown's son who had some accountancy training. He failed to seek such assistance. 168 The fact that Mr Brown has not been able to make out a defence under s588H does not of itself have much bearing on the exercise of my discretion. If Mr Brown had been able to make out his defence I would not have to consider exercising my discretion under s1318. It is more the circumstances of the breach of duty to which there is no successful defence to which I must have regard. 169 I do not agree that the epithets utterly ignorant and completely indifferent are accurate descriptions of the way in which Mr Brown approached the Company's financial situation. There were matters of which he was not ignorant and certainly there were matters to which he was not indifferent. His annual attendance upon Mr Brangwin and the receipt of explanations about the company's financial position at that time which he regarded as adequate is support for that view. Additionally he gave evidence that his son explained some aspects of the financial statements to him. This is not the measure of a man who is utterly ignorant or completely indifferent. 170 Although I have found that it was reasonable for Mr Brown to rely on others in respect of the financial management of the company it does not follow that it was reasonable for him not to make some enquiry in respect of the financial affairs of the Company particularly during 1994. 171 Without reiterating the matters of which he was aware in late 1994 and accepting the version of the conversation with Mrs Kenna on 22 March 1995 that he gave in evidence before me, I am of the view that the enquiry he did make was very cursory indeed. This is so particularly having regard to the fact that he was also aware that he had effectively been kept in the dark about those extra projects being taken on by the Company. 172 It is clear that he was extremely busy but this should not have prevented him from speaking to Mr Kenna or Mr Brangwin (even on the telephone) about the effect of the extra projects and/or the deposits of cash. He could have informed Mr Brangwin that the Company was in the habit of receiving cash payments in the course of its business. Alternatively he could have raised the matters with his son and asked him to assist him in an approach to Mr Kenna or Mr Brangwin. 173 The approach to Mr Kenna may have been less than comfortable for him but as a director he could (either alone or with his son) have required a proper explanation as to the cash and the impact of the new projects. Another matter upon which he could have required an explanation was the Douglas Park property. 174 Had he raised the matter of cash payments with Mr Brangwin it has to be assumed that an enquiry would have revealed, as the liquidator was able to discover, that no cash payment had been deposited into the Company's bank account between July 1992 and June 1995. Mr Brown knew or had a reasonable belief that cash had been paid to the company during 1994/1995. He could have told Mr Brangwin of his discussion with Mr Arnold in that period whose conversation had led him to the reasonable conclusion that he was paying cash to the Company. 175 Once this was discovered it would have very much depended upon the explanation given by Mr Brangwin as to the company's affairs as to whether the diversion of cash and resources to the Douglas Park property could have been uncovered and turned around in time to salvage the solvency of the Company. 176 One matter of relevance is that Mr Brangwin had been the accountant for the partnership and the company for about 22 years. The evidence suggests that prior to July 1992 cash was received and banked. It is reasonable to assume that Mr Brangwin was aware that the company received cash in the ordinary course of its business. 177 It may be that Mr Brangwin had been given an explanation that there was no cash being received by the Company after July 1992. If that were the case then Mr Brown's approach would have alerted Mr Brangwin to a possible problem. Mr Brangwin was not called to give evidence and it is therefore not possible to know what, if anything, he was told by Mr or Mrs Kenna. However it is clear from Mrs Kenna's evidence at the public examination that Mr Brangwin was misled on a number of other matters. 178 Mr Brown was in a position superior to that of the unsecured creditors so far as the alternatives that were available to uncover and reverse the decline into which the Company was being led by the conduct of Mr and Mrs Kenna. 179 It has been suggested that such conduct may not have been so easy to uncover. However Mr Brown gave some evidence on this topic that was very telling. He said he made a number of phone calls to the Company's sub-contractors at the request of the liquidator. He was able to find out from those sub-contractors that they claimed they were owed money by the company (not Mr & Mrs Kenna) in respect of the Douglas Park property. Such an enquiry could have been made by Mr Brown much earlier. It is very probable that he would have seen these sub-contractors on the numerous jobs he was supervising and had a good working relationship with them. There was no apparent impediment to him asking them about the Douglas Park property. 180 Mr Brown had been a friend and business partner of Mr Kenna for almost 30 years. He thought he could trust him implicitly. This trust was no doubt misplaced in later years particularly when it is apparent that the Company's money was being diverted for the benefit of Mr & Mrs Kenna and to the exclusion of Mr Brown. It seems that this was made possible and perhaps easier by the division of duties to which the two men had become accustomed. 181 However once Mr Brown became aware that he had not been consulted in relation to the three extra projects and their impact on the financial position of the Company in circumstances where he knew the Company was stretched his inaction was in my opinion not reasonable. 182 I am of the view that in exercising my discretion it is necessary to have regard to Mr Brown's present circumstances in deciding whether to excuse him partly or wholly from liability. I raised this matter with his counsel but I am left without any reliable evidence as to any detail of his current personal or financial circumstances. Additionally although further written submissions were made by Mr Thomson which agreed with such an approach being taken by me, Mr Brown's counsel's further written submissions in response made no reference to this aspect of the matter. 183 Although there is some evidence of Mr Brown's background as a carpenter and the fact that he is a pensioner doing part time work for his son there is no detail of his current assets. Mr Thomson submits that no inference favourable to Mr Brown should be drawn in the circumstances of his failure to give evidence of that detail. ( Commercial Union Co v Ferrcom (1991) 22 NSWLR 389 at 418-9;Pratt v Hawkins (1991) 32 NSWLR 319 at 323). I agree. 184 In all the circumstances of the case I am not of the view that Mr Brown ought fairly to be excused from any liability. Claim against Mrs Kenna 185 There is no issue between the parties that Mrs Kenna owed a duty of fidelity and good faith to the Company as her employer. (Robb v Green [1895] 2 QB 315 at 317; Blyth Chemicals v Bushnell (1933) 49 CLR 66 at 81-82) Employment is regarded as a relationship giving rise to a fiduciary duty. (Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96-7). 186 The plaintiffs claim that Mrs Kenna owed a fiduciary duty to the Company to perform the duties as outlined in par 28 above. It is also alleged by the plaintiffs that Mrs Kenna breached that duty by the conduct alleged in par 29 above. There is an issue between the parties about the specific nature of Mrs Kenna's employment duties. 187 Mr Newlinds submits that his client puts the plaintiffs to strict proof on the following matters; · Mrs Kenna's role as an employee. · Mrs Kenna's role in the improvement of Douglas Park and Thirroul; · Mrs Kenna's involvement in the alleged misappropriation of cash. · Any misapplication of the Water Board cheques. Mrs Kenna's role as an employee 188 Mr Newlinds submits that I should not find that Mrs Kenna held a position with the company such that would attract the statutory obligations of the Corporations Law (s232) . Mr Thomson submits that he does not have to go so far as to show that Mrs Kenna fell within the definition in the Corporations Law to prove that she owed a fiduciary duty to the Company. In any event he submits that the evidence discloses that Mrs Kenna did take part in the management of the Company as provided in the definition of executive officer in s9 of the Corporations Law . 189 Mr Newlinds submits that it was solely Mr Kenna who managed the Company and in reality Mrs Kenna simply did as she was told by her husband. He submits that in those circumstances there is an issue as to whether the relationship gave rise to any fiduciary obligations and if it did a question arises as to how their scope is to be moulded according to the relationship and the facts proved. (Colour Control Centre Pty Ltd v Ty. Santow J 24 July 1995 unreported) 190 Mrs Kenna's evidence in the public examination is relied upon by the plaintiffs in support of their submissions in this regard. In that evidence Mrs Kenna adopted the broad description of her duties that her husband had given in his 597A affidavit except for the statement that she attended to the cleaning of the office. The description of duties which Mrs Kenna adopted was as follows; Answering the telephone from 6am until approximately 8.30pm Answering the door during the same hours and at times on weekends; Answering the two-way radio during all hours commencing early hours of the morning until late hours of the evening, on weekends and at various other times; Worked generally in the office from 8am until 5pm with ½ hour lunch break Monday to Friday; Duties were; Typing contracts, quotes and correspondence; sending faxes; Writing cash payments journal, writing cash receipts journal, writing purchase journals, balancing purchase journal; writing receipts, writing bank deposits, writing weekly cheques; preparing wages; entering wage book; entering PPS records on tax forms and in journals; balancing PPS accounts and paying PPS tax cheques; keep records of superannuation funds; preparation of annual group certificates; prepare and review payments to employees, sub-contractors; attend to company's banking Operation of postal and mail including ingoing and outgoing mail; taking shorthand from directors; filing records; attending hardware stores, newsagents and other shops for upkeep of company; Prepare and arrange colour schemes of spec homes; checking homes and liaising with sub-contractors in relation to spec homes; collecting plans with Wollongong Council; attendances at draftsmen, surveyors offices to drop off or collect plans; meeting with some sub-contractors; Review monthly accounts and ensuring all accounts are sent; debt recovery for company; general messages; Meeting with accountants; operation of ATS audits; Meeting clients and entertaining clients; prepare tea, coffee morning tea for clients; care for clients children while in interviews with directors; odd jobs around the office such as preparing job cards, brick cards and other inter-office records. Interviewing potential staff; teaching and instructing office staff 191 Mrs Kenna accepted in her evidence at the public examination that she prepared the books and the financial records of the Company. She also accepted that for the previous thirteen years she had been carrying out the role of the Company's internal accountant . She said that she also liaised with KPMG to assist them to prepare the Company's accounts in final form. 192 In paragraph 34 of his affidavit Mr Brown stated that from 1984 Mrs Kenna worked as the bookkeeper, office manager and accounts manager and assisted Mr Kenna with all the administration tasks. He was cross examined about these descriptions by Mr Newlinds. Mr Brown agreed Mrs Kenna did not have any signing rights for cheques nor did she make any decisions about how much employees were to be paid. He admitted that the descriptions he gave of Mrs Kenna's duties were what he thought she did. He was not aware of any contract of employment for Mrs Kenna and had no involvement in the decision to employ her. He agreed with the proposition that Mr Kenna made the decisions and Mrs Kenna carried them out. 193 Mrs Diane Rowlands who was employed by the Company between November 1993 and June 1995 gave evidence that she performed clerical duties under Mrs Kenna's supervision. Mrs Rowlands agreed with Mr Newlind's descriptions of Mr Kenna as the boss and that he ran the show . She observed occasions when Mr Kenna told Mrs Kenna what to do but never observed Mrs Kenna telling Mr Kenna what to do. She agreed with the suggestion that it was Mr Kenna who wore the pants and made the major decisions within the office . 194 Mr Thomson submits that the evidence supports a finding that Mr Kenna did make the major decisions but Mrs Kenna in a very real sense occupied an executive office and carried out executive functions, in effect, as Mr Kenna's second-in-charge. It is submitted that she was, as Mr Brown described her, the office manager and held a senior position in the day to day management of the company's affairs. 195 Mr Newlinds submits that the evidence does not support such a finding and that Mrs Kenna's position was that of a senior member of the secretarial staff as receptionist/bookkeeper. So far as her capacity to instruct others was concerned Mr Newlinds submitted that it was no different from that of a senior apprentice on a factory floor instructing the junior apprentice. He submitted that Mr Thomson's submission that Mrs Kenna was an executive officer was a meaningless proposition and made a similar submission in relation to his own client's adoption of the description of herself as the internal accountant of the Company. In support he pointed to the fact that Mrs Kenna only maintained secondary books and records and the final records were prepared by the external accountant. 196 Mr Newlinds submitted further that the nature of Mrs Kenna's duties was consistent with those of an office girl, bookkeeper and receptionist. He pointed to the absence of any suggestion that she hired potential staff or had the ability to make decisions. As to the description of instructing office staff he pointed to the absence of any detail as to precisely what was taught. 197 I am of the view that Mr Newlinds interpretation of Mrs Kenna's duties ignores some important features which demonstrate that her role was much more significant than that of a bookkeeper, receptionist or as he put it, an office girl. Mrs Kenna prepared and arranged colour schemes for the spec homes. She checked those homes and liaised with sub-contractors in relation to them. On occasions she met with the sub-contractors. She interviewed potential staff no doubt to make decisions as to whether they would be suitable employees. Even if the final decision on this matter was made by Mr Kenna her role in this aspect of the company's affairs could hardly be said to be that of an office girl although there were duties within her range of duties that were reasonably menial. It seems that Mrs Kenna was expected to be multi-skilled. 198 Mrs Kenna was employed for 13 years and was entrusted with responsibilities described above and in her evidence which I regard as significant employment responsibilities. Mrs Kenna had access to all the Company's business records and was the author of the primary records and working papers for the accountant. She said that the financial records and the supervision of those records were all under the control of herself and her husband. Payments of cash were made to her and she instructed the staff what to do with such payments in her absence. She no doubt acted as the Company's agent in meeting with the sub-contractors and in checking the spec homes. 199 I am satisfied that Mrs Kenna was involved with Mr Kenna in the management of the Company and second-in-charge would not be an unreasonable description of her. Mrs Kenna's role in the improvement of Douglas Park and Thirroul 200 Mrs Kenna gave evidence at the public examination that in 1994 she was aware that certain payments were made by the Company on her husband's behalf and on her behalf for the construction costs of her home at Douglas Park. She understood that those payments were for the personal benefit of herself and her husband. She said in her evidence that she was directed to make those payments from the Company's account by Mr Kenna. 201 Although Mrs Kenna claimed initially that she intended to repay the monies to the company she then said that she did not know whether she intended to repay the money and finally admitted that she had no plans to repay the money. She said that she was aware that the payments made by the Company in relation to the Douglas Park property should have been recorded in the records of the Company and were not so recorded. She admitted that she did not tell the external accountant of the payments that had been made in relation to the Douglas Park property which were not recorded in the Company's records. 202 Mrs Kenna admitted that there were transactions recorded in the Company records in which the payments made by the Company for the work on the Douglas Park property were recorded as payments made by the Company in respect of other jobs. She admitted making false entries in the records but said she did so at the direction of her husband because she always just did what he said. 203 On this evidence alone Mrs Kenna's involvement in diverting the Company's funds to her own benefit and that of her husband is beyond any doubt at all. Mr Newlinds submits that I should assess this evidence with particular regard to Mrs Kenna's statement that she did as she was told by her husband. I have assessed the evidence with regard to that matter. It has never been suggested to me that Mrs Kenna was not a willing participant in this conduct nor was there any suggestion of any threat. It was simply that she always did as her husband asked. 204 The liquidator's evidence in relation to the Thirroul property which was not challenged in cross examination by Mr Newlinds. is helpfully summarised in document D1 within Exhibit B and from page 60 to 65 of his affidavit of 30 July 1997. Goods and services were supplied for the living area such as the lounge room, dining room and hallway of the Thirroul property. By comparison with the documents in D2 to D4 in Exhibit B it is apparent that some of the goods and services supplied to the Thirroul property were allocated to other clients and addresses. This evidence demonstrates that during Mrs Kenna's period of employment specifically the period 31/12/89 to 31/12/93 $40,512 of the Company's funds were expended on improvements to the Thirroul property. 205 I am satisfied that Mrs Kenna was a willing participant in the payments of Company funds to the various contractors for the improvement of the Douglas Park and Thirroul properties. The alleged misappropriation of cash 206 In the public examination Mrs Kenna admitted that from time to time the Company received cash and she purposely did not include the receipts in the Company's records. She said she did this at her husband's direction. She admitted that she realised that her failure to record it was a dishonest act. She said that she had no choice. However she also said that her husband did not threaten her. Her explanation was that there was only one boss in our house and that was my husband and I did what he said. 207 The cash was given to Mr Kenna and if Mrs Kenna was not present on the occasion when cash was paid she had instructed the staff to place it in a drawer in the office or give it to Mr Kenna. Mr Newlinds submits that there is no evidence to suggest that Mrs Kenna benefited directly from the cash . Mr Thomson submits that the fact that the cash was given to Mr Kenna does not mean that Mrs Kenna did not obtain a benefit from it either directly or indirectly. It is not surprising that if Mr Kenna wore the pants in the relationship, to use Mr Newlinds expression, that at first instance the cash would go to him. 208 There is some evidence that Mr & Mrs Kenna had recently come to some arrangement about the sharing of their finances and assets. In evidence in the public examination Mrs Kenna said that prior to the purchase of the Douglas Park property she and Mr Kenna had separate bank accounts. 209 When the Douglas Park property was purchased Mr & Mrs Kenna opened a joint account. They had a home loan account into which they each paid money. Mrs Kenna said; It was worked out that I owed one third and Lance owed two thirds of the loan so we decided upon an amount each that we would put into that account to pay the monthly home loan repayment plus..rates, electricity, everything else relating to the two properties. 210 Mrs Kenna also gave evidence that in May 1993 Mr Kenna transferred an half interest in the Thirroul property to her because they had been married for a long time, it was time we.. shared our property. Of this transfer Mrs Kenna said I nagged him for years. I thought it was only fair and finally he agreed. Mrs Kenna did not agree that this was somewhat inconsistent with the picture painted of a woman who had no choice but to do as she was told. That may or may not be so however it certainly suggests that there was a sharing of property and assets on what Mrs Kenna thought was a fair basis. 211 In all the circumstances I am satisfied that it is probable that the cash that was given to Mr Kenna benefited Mrs Kenna by reason of these arrangements. The plaintiffs have proved their case in this regard on the balance of probabilities and it was not their task to have to exclude every reasonable hypothesis in relation to the use of the money. (State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (In liq) (1999) 73 ALJR 306 at318 par 49) The Water Board cheques 212 It is not necessary for me to deal with this matter because any reliance placed upon the cheques to prove cash payments to Mr and Mrs Kenna was abandoned after Mrs Rowlands gave evidence that she understood it was for cash to be paid to employees who worked on the weekend. The plaintiffs relied upon the false entries only in so far as they were misleading to the accountants and in respect of the presumption of insolvency. Mrs Kenna's duty 213 I am satisfied on the evidence that it was implicit in Mrs Kenna's employment that she had undertaken to act in the Company's best interests and that she owed to the Company a fiduciary duty to; · ensure that proper records of all the Company's financial dealings were maintained; · ensure that no cheque was drawn on the Company's bank account except for a purpose of the Company; · disclose to the Company's external accountants all records and information necessary to enable the formation of a true view of the affairs of the Company. 214 The other two duties alleged by the plaintiffs were firstly a duty to inform the Company if any of its monies had been or might in the future be misapplied and secondly to disclose to the Company any misconduct of any director of the Company. 215 Mrs Kenna had been placed in a very special situation as it related to Mr Brown and the company generally. She was the internal accountant and I am of the view that Mrs Kenna did owe a duty to the Company to inform it when its monies had been misapplied. I am not satisfied that I should mould the duty in the circumstances of the facts that have been proved to include a duty to inform the company about what might happen. 216 As it happens if Mrs Kenna had complied with this duty it would have resulted in the Company being informed of Mr Kenna's misconduct. Realistically Mr Brown would have been informed as Mr Kenna was well aware of his conduct. However I am not satisfied that such a broad duty requiring Mrs Kenna to report any misconduct is appropriate. 217 I am also satisfied that Mrs Kenna breached her fiduciary duty in that she; · made false entries in the Company's records as demonstrated particularly by her own admissions in the public examination which included false entries in relation to the Douglas Park property and a failure to record the receipt of cash; · prepared cheques and obtained Mr Kenna's signature on them which were payable to contractors for the construction of her home at Douglas Park and knew that it was not for the Company's benefit; · failed to tell the external accountants of these matters; and · failed to report to the Company that its monies had been misapplied. Claim against Mr & Mrs Kenna 218 The plaintiffs submit that Mr & Mrs Kenna owed fiduciary and statutory duties to the Company to act honestly, not to gain an advantage for themselves and not to cause detriment to the company. (Furs Ltd v Tomkies (1936) 154 CLR 583 at 592,598 & 599 per Rich,Dixon and Evatt JJ; Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722). 219 Mr Thomson also made a submission that both Mr & Mrs Kenna's conduct fell short of the requisite standard under either or both limbs of Barnes v Addy (1874) LR 9 Ch App 244 and failed the "objective standard" of honesty. ( Royal Brunei Airlines v Tan (1995) 2 AC 378 at 390F). Mr Newlinds objected to these submissions on the basis that such a case was not pleaded against Mrs Kenna. 220 It seems to me that the case was pleaded in paragraph 13 to 13 C of the Further Amended Statement of Claim notwithstanding Mr Newlinds submission that the duties relied upon by the plaintiffs were limited to those pleaded in par 4 of the pleading. 221 It is submitted that the conduct necessarily falls short of the standard required. It is submitted that as recipients of a benefit from their dishonest conduct they are liable to account to the Company in respect of the misuse of the Company's funds in the amount of $131,390 paid in respect of work on the Douglas Park property, $40,500 in respect of the Thirroul property and the further amounts in respect of cash payments made by Mr Poulton of $6,000 and by Mr Arnold of $51,360. (Royal Brunei Airlines v Tan (1995) 2 AC 378) 222 Mr Kenna did not appear and did not give any evidence. Mrs Kenna did not give any evidence. In those circumstances I am entitled to and do assume that they could not have given any evidence that was favourable to them on this aspect of the plaintiffs' case against them. 223 The plaintiffs tendered Mr Kenna's affidavit sworn on 3 October 1995 which was in response to an order under s597A of the Corporations Law. Mr Kenna's statements in that affidavit include the following; (i) In relation to the Douglas Park property; …. any payments made by the company in respect of improvements made on that property were paid in lieu of entitlements of myself as a director and employee and shareholder of the company and I say that I am unaware of the amounts or dates of any such payments but say that all such details are within the knowledge of the liquidator and are contained within the records held by the liquidator in respect of the company. I cannot recall any services being provided by the Company in respect of the construction or the improvements on the (Douglas Park property). The property was built by myself and my sons. I am unable to provide an itemisation of the services or goods provided in respect of the property..as all such records of the Company are held by the liquidator and are within his knowledge. In respect of receipts of cash; During the period 1 January 1990 to date both myself and the other director of the Company from time to time received cash payments on behalf of the Company. I am unable to recall specific instances , circumstances, dates, amounts or parties in respect of such payments. I say that on such occasions such cash payments were received and divided equally between the directors of the Company. 224 Mr Brown denies receiving the half share of the cash as claimed by Mr Kenna in this affidavit and there is no claim made against him in respect of the allegation made by Mr Kenna. 225 Mr Newlinds submitted that I would not be satisfied on the evidence before me that Mr Poulton paid an amount of $6,000 cash to the Company. It is true that there was no direct evidence from Mr Poulton but the evidence of the liquidator in respect of this payment by Mr Poulton was not challenged. In the circumstances I am satisfied that Mr Poulton did make the payment in cash and that it was, according to Mrs Kenna's admitted practice, given to Mr Kenna. 226 The Company's records demonstrate that Mr Kenna's statements in his s597A affidavit in respect of the Douglas Park property cannot be accepted. The liquidator's analysis of the Company's records referred to above leads me to the conclusion that $131,000 was paid out of the Company funds to pay for the Douglas Park property as was $40,500 for the Thirroul property . I am also satisfied that Mr and Mrs Kenna obtained the benefit of the cash payments made by Mr Poulton and Mr Arnold. 227 I am satisfied that both Mr and Mrs Kenna owed a duty to the Company to act honestly and not to gain an advantage for themselves. I am also satisfied they breached that duty and gained advantages for themselves from the improvements to the two properties and the use of the cash payments. Uplift claim 228 A rather novel approach was adopted by Mr Thomson in his pleading to claim an additional unspecified amount on the basis that the quantum of cash taken by the first and second defendants was substantial. It is alleged that by the very nature of the Company's business there was a likelihood of it receiving cash. Other allegations include the fact that Mr and Mrs Kenna failed to produce the second cash receipts book to the liquidator and that their expenditure in addition to ordinary living expenses was well beyond any amounts paid lawfully to them by the Company without an apparent source of any other funds. In these circumstances it is submitted that a finding should be made that cash additional to that which has been proved was taken from the Company's funds. 229 There is no doubt in my mind that this case has not been proved. Although it was submitted that I could give the plaintiff some uplift in this portion of its claim I was referred to no authority that would entitle me to do so. Notwithstanding the absence of such an authority it seems to me at the very least there had to be cogent evidence before I could embark upon the journey to such a finding. The plaintiffs have not proved their case in this regard. Causation 230 It is submitted by Mr Newlinds that the conduct of Mrs Kenna has not caused the Company any loss or damage. I disagree. 231 It is submitted that if Mrs Kenna had told Mr Brown about Mr Kenna's activities Mr Brown would have left matters up to Mr Kenna. It seems to me that the evidence does not support such a submission When Mr Brown was informed third hand about a problem with cash in 1990 he was willing to confront Mr Kenna about it. Certainly that confrontation was in the circumstances perhaps less than adequate but he was at least willing to raise the matter. Had he been informed first hand by an employee of the Company that money was being taken from the funds of the Company it seems to me on the evidence of those previous approaches to Mr Kenna that it is more probable than not that Mr Brown would not simply have left it to Mr Kenna and would have rectified the problem. 232 A similar submission was made in respect of the notification to the accountant and his consequent duty to inform only the directors and shareholders. Because of the finding I have made in respect to Mr Brown rectifying the problem this submission must also fail. 233 In any event Mrs Kenna's conduct in breach of her duties enabled Mr Kenna to extract cash from the Company's funds; facilitated the payments from the Company's funds for improvements to the Douglas Park and Thirroul properties; enabled those payments to remain undetected and caused loss to the Company. Conclusion 234 I will make the declarations and orders in par 30 of the Further Amended Statement of Claim. However I have considered all the circumstances of this case and I am satisfied that it is an appropriate case in which to construe a trust in aid of Mr and Mrs Kenna's obligations to account to the company. ( Giumelli v Giumelli (1999) 73 ALJR 547) I am also satisfied that in all the circumstances such trust should be construed in the terms of par 30.2C of the Further Amended Statement of Claim. 235 I have found that the first and third defendants have contravened s588G of the Corporations Law and will make the consequential declarations and orders in respect of the amount $1,286,923. I am satisfied that the plaintiff has proved the amounts in the document entitled Schedule of Payment (less $5,234 which was abandoned) making a total of $229,250. I am also satisfied that the Company is entitled to interest. 236 I will stand the matter over to Friday 4 June 1999 at 9.30 am for the parties to bring in Short Minutes of Order reflecting these findings at which time I will hear any application in respect of costs. **********

Kenna & Brown P/L v Kenna & Ors

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