(b) expected, on the basis of information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time."
43 The defence to be made out requires that the relevant defendant had a positive belief that the company was solvent. The defendant must hold that view on reasonable grounds or must hold that view on reasonable grounds that the person providing information on which he or she came to that conclusion fitted within the requirements of subsection 3(a). It is no defence that the defendant involved had no knowledge at all as to whether the company was solvent or not; see eg Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405.
44 In the instant case it is clear that neither director could believe that ICM was solvent or could have reasonable grounds for any such belief except that such belief came from the material supplied by Mr Turner. There is no doubt at all that prior to September 1994 such a belief could not have been held. However, Mr Ireland QC says that following the remedial work done by Mr Turner for the relevant period September 1994 to May 1995 there was such a belief and it was on reasonable grounds as a result of Mr Turner's reports.
45 The first question to pose is whether Mr Turner was a "competent and reliable person".
46 There is no case law on this expression as far as I am aware. The onus is on the defendant to prove the defence. Strangely enough, there was no evidence before the Court as to Mr Turner's curriculum vitae, no evidence of his qualifications and indeed, his letter of appointment was not tendered. In most cases, this omission would be fatal.
47 However, it is put that when one actually reads Mr Turner's reports themselves, one can see that he had a good grip of what was happening and was providing sensible advice.
48 The second limb of what had to be proved, namely whether Mr Turner was responsible for providing adequate information about solvency I will leave for the moment and turn to the third, that is, whether the directors had reasonable grounds to believe and did believe, that Mr Turner was fulfilling his responsibility.
49 Mr Turner's first report showed that he had relied on his own enquiries which had been to interview Mr Ceccattini (who was the main source of information), to consider the records of ICM (which he said were in some sort of disarray), to interview the solicitors and accountants for the group and to attend a meeting with the Commonwealth Bank. The first report noted that there had not been sufficient time to verify many of the statements made.
50 As I have indicated, Mr Turner reported in May that "the company" was solvent. It should be observed that he was considering the group accounts of ICM and Mercap.
51 Whilst Mr Turner appears to have a pretty good grasp of what was happening in the books and what was happening with the Bank, and indeed, what was happening with the plaintiff, he was not given full and proper details of what was occurring with the trade creditors and debtors. This is why the figures produced by Mr Turner in Month 2 sometimes show a greater number of creditors aged 31 to 60 days, than Month 1 showed for creditors 0 to 30 days.
52 It is extremely difficult for a person to say that a person is responsible for providing adequate information about solvency and was fulfilling that responsibility when the person allegedly relying on the other person was the source of the supply of information and that supply of information was not completely full.
53 The subsection arises from the recommendations made in para 211 of the Law Reform Commission's Discussion Paper No 32 as fleshed out in [303] and following of the Harmer Report. In [307] it was said:
"The Commission considers that the defence is clearly necessary in the case of larger companies in which it cannot be expected that directors will have control over every action taken in the conduct of the company's business. Additionally, a defence of this nature may encourage a proper system of financial management."
54 Thus the prime thrust of the defence is to cover the situation where there is a large corporation with bulky accounts and where there is a system in place of competent accountants, credit controllers and financial management and the board has a regime whereby those people, provided they are competent and responsible, will report to the board any problems that the board may pick up. The prime thrust of the exception is not to deal with the situation where a small company with directors who have little idea of accountancy, bring in a trouble-shooter, supply the trouble-shooter with information which may not be complete, receive reports back from the trouble-shooter and then intend to rely on a report which is incomplete because they have provided incomplete information.
55 However, there is another reason why Mr Turner does not fit within the exception. One must look to see whether in fact he was charged with the responsibility of providing the board with adequate information as to whether ICM was solvent. Again, it must be observed that in the average company one does not write into the statement of duties of the principal accountant that he or she is to advise the board as to whether the company is solvent so long as the general duties will include that responsibility.
56 Here, as I have said, the appointment of Mr Turner was not put into evidence. However, one has to look at his statement of objectives set out in his first report, AX04, which is quotes from his letter of appointment:
" … our task is to assist you survive. From that point on, we are to assist you continue building up the business. The work to be done is in two areas:
· Arrange injection of capital and refinance the loans away from the Commonwealth Bank and CBFC; or alternatively make suitable arrangements with this bank to give you the necessary financial backing.
· Organise the office administration to ensure that accounting, legal, management, control and clerical procedures are of good standard and function efficiently. This will enable you to spend more time on production and marketing."
57 There is nothing there which would suggest that there was any responsibility on Mr Turner to provide the directors with adequate information about whether ICM was solvent.
58 Although one may infer such a responsibility from conduct, the mere fact that a person's reports include information as to solvency is not sufficient to make the inference that he or she had that responsibility.
59 Accordingly, in my view the third limb of the defence is not made out.
60 The fourth limb is that the director expected on the basis of the information that the company was solvent and would remain solvent. In the instant case any belief that there might have been that ICM might be solvent and remain solvent depended upon a belief that the negotiations with the plaintiff would reach the stage where there would be an injection of funds and that the plaintiff would take over the Bank's debt and would also arrange for provision for the other debts and not on information provided by Mr Turner as to solvency.
61 Returning to the second limb, it can best be dealt with in my consideration of the general questions which I now start to consider.
62 It is clear that subsection 3 is only part of a wider defence that directors had reasonable grounds to expect and did expect that ICM was solvent and would remain solvent.
63 There could be no reasonable ground for thinking that ICM was solvent unless there was reason for thinking that Mr Wong and his friends would not only ensure that ICM was saved ultimately but also kept afloat in the meantime.
64 The evidence on this point is very sparse. However, putting together the facts as best I can, there is no doubt that Mr de Michelis had virtually no views at all as to the solvency of ICM. He merely worked at grass roots level and left things to Mr Ceccattini. This, of course, is no defence, as he was a director and he should have put himself in a position where he did know what was going on. Mr Ireland QC says that the clear attitude of the defendants is that it is either one or both who are liable but that, of course, does not bind the plaintiff who would be able to recover against Mr De Michelis even if it did not recover against Mr Ceccattini.
65 However, dealing with Mr Ceccattini's position, again the defence is not made out. He knew about the indebtedness to the Bank. He knew that the Bank was unhappy with the situation. He must have known that he was not supplying full and accurate information to Mr Turner, but that even if he was, Mr Turner's reports indicated that the Bank debt needs to be refinanced and there needed to be a substantial write off of trade debtors. There were negotiations with more than just Mr Wong and his friends, but these negotiations seem to have come to an end at least by December 1994.
66 I have already set out the letter of 5 April 1995 from Mr Wong to Mr Ceccattini and Mr de Michelis. It is clear that basically $500,000 was to be invested by Mr Wong and his friends, an additional $75,000 loaned for the purpose of being spent in constructing a building to house the manufacturing plant and tidying up the Plumpton site, with any balance funding the working capital of "the company". Such an investment would not except perhaps to a fairly minor extent, reduce the group's indebtedness. Moreover, the offer made it quite clear that the investment would be made in Mercap and that Mr Wong would not be taking any interest in ICM. What was to happen would be that Mr Wong and his friends would subscribe for shares in Mercap or a new company.
67 Mr Ireland QC fixes on the sentence "Mercap Pty Limited will assume working capital assets and liabilities of ICM with precise details to be determined on the date of settlement." However, in view of what is in the whole document that pre-existing liabilities of ICM were not to Mr Wong's account, one cannot really construe this as being a promise to take over all the liabilities. In any event, the wording of the sentence makes it clear that something more needed to happen before the deal was consummated, whether that be that precise details were to be worked out, or as Mr Wong would have it that there would be some sort of due diligence or whether it involved Mr Wong's bankers taking out the CBA may be a matter of debate. However, it does not much matter as there was no binding promise to do so. Nor in the light of the discussions that had been had could one reasonably take the position that the Wong interests would in fact deal with the liabilities.
68 I should note that I have been referred to a number of authorities and I will mention the principal ones lest it be thought I have overlooked them, but it seems to me that on any view of the way in which s 588H is constructed, the defendants must fail.
69 In Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, which although decided under previous legislation is still considered to be one of the leading cases in the area, Tadgell J held that in determining whether a director had no reasonable cause to expect within s 588H(2) an objective standard must be applied to the facts known to the defendant. His Honour further held that it was generally to be expected that directors would know, at least in general terms, what was in the company's accounts as presented to the annual general meeting.
70 In Tourprint International Pty Ltd v Bott (1999) 32 ACSR 201, Austin J examined s 588H(2) and noted that the word "expectation" meant a higher degree of certainty than "mere hope or possibility" or "suspecting" and that the defence required the defendant to establish an actual expectation that the company was and would continue to be solvent and that the grounds were reasonable. In Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 39 ACSR 305, a case where Palmer J traces through the history and derivation of s 588H(2) at para [119] p 329, his Honour sought to criticise part of the decision in Tourprint if it meant what his Honour thought it could possibly mean, though he agreed in the result. I think, with great respect, that Tourprint did not mean what his Honour thought it might possibly mean.
71 The only remaining matter to consider is the defence under s 1318 of the Corporations Act. That section empowers the Court to relieve a director from liability for default of a provision of the Corporations Act if that person has acted honestly and having regard to all the circumstances of the case ought fairly to be excused.
72 There is no doubt in this case that the directors acted honestly. The problem for them is whether they ought to be fairly excused.
73 The operation of s 1318 was discussed by Bergin J in Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430, 453 and following. Her Honour said at p 456 that although s 1318 does not expressly contain a requirement that the director act reasonably, such was a relevant consideration in the exercise of the discretion because the discretion had to be reached having regard to all the circumstances of the case which would necessarily include the way in which the breach of duty occurred.
74 In Daniels v Anderson (1995) 37 NSWLR 438, 525, Clarke and Sheller JJA said:
"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 … . The courts have a wide discretion to relieve in whole or in part."
75 It may be that such considerations mean that the Court will be a little less severe upon those in default than a court would be to a trustee under section 85 of the Trustee Act 1925 where a defaulting trustee has to establish a strong case before the Court would apply the section in his favour: Partridge v Equity Trustees Executors & Agency Co Ltd (1947) 75 CLR 149, 165. However, in both the cases of s 85 and s 1318, it is clear that each case must depend on its own facts: Partridge at 165; Kenna at 456.
76 Section 1317S(3) of the Act notes that in considering whether a person ought to be fairly excused for 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 5.7 body; and (b) when that action was taken; and (c) the results of that action". However, nothing in s 1317S is to limit s 1318. I find this a little difficult to comprehend as a matter of logic, but it does not matter as none of the events in s 1317S are relevant to the present case.
77 In my view, the defendants have not made out a case to be excused under s 1318. They were really just concretors carrying on their business in the hope that they would be bailed out by successful negotiations with Mr Wong. The state of books up until May 1994 was not good; Mr Turner was brought into the matter near the eleventh hour, he did the best he could, but the position did not improve. ICM was able to stave off winding up, but it did not fulfil its promises to its workers' compensation insurer to pay premiums for some years by instalments. It consistently met creditors' claims with allegations of set-off which, when it was sued it did not press, it knew it was in trouble with its bankers, but just left the matter to hope. The circumstances do not show that it is a case where the directors should be excused.
78 The essence of the matter is that the law provides limited liability to people carrying on business using a corporate vehicle because it is to the community's interest that people should venture and take commercial risks in their trade without the constant worry of being personally liable for any risk which happens to go wrong. However there is a limit to that protection and the limit is reached where directors have reasonable grounds to believe that the company is no longer solvent. When that point is reached, the field of limited liability to a degree evaporates unless the directors can demonstrate some special circumstances as to why they should still be protected. In the instant case they have not.
79 It follows that there must be a verdict for the plaintiff against the defendants jointly and severally for the agreed amount, namely $399,090.50 and costs. The exhibits may be returned after 28 days unless there is an appeal in which case they should be retained until the finalisation of the appeal.