• Corporations Law s95A, s588, s588E, s588G, s588H, s588M, s1317JA;
• Supreme Court Act 1935 s30C;
• Sales Tax Assessment Act 1992 s68;
• Companies' (SA) Code s556, referred to.
• Carrier Air-Conditioning v Kurda (1993) 11 ACSR 247;
• Dominion Insurance Co of Aust Ltd v Finn (1988) 7 ACLC 25, applied.
• Russell Halpern Nominees Pty Ltd v Martin (1987) WAR 150, distinguished.
• Standard Chartered Bank v Antico (1995) 131 ALR 1;
• New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler [1994] FCA 1117; (1994) 122 ALR 531;
• Sandell v Porter (1996) 115 CLR 666;
• State Government Insurance Commission v Pollock (1993) 11 ACSR 333;
• Melba Base Corp v Sedgion Hoe Limited [1995] FCA 1225; (1995) 17 ACSR 187;
• Brooks v Heritage Hotel Adelaide (1996) 20 ACSR 61;
• Shepherd & Others v Australia & New Zealand Banking Group Ltd (1996) 20 ACSR 81;
• Australian Growth Resources Corp Pty Ltd v Van Reesema (1988) 13 ACLR 261;
• Advance Bank Ltd v FAI Insurance (1987) 9 NSWLR 464;
• Dunn v Shapowloff (1978) 2 NSWLR 235;
• Sands and McDougall v Commissioner of Taxation [1998] VSCA 76; (1999) 1 VR 489;
• Marchese v Barnes [1970] VicRp 56; (1970) VR 434;
• Duke Group Ltd v Pilmer [1999] SASC 97; (1999) 73 SASR 64;
• Southern Resources Ltd v Residues Trading (1991) 56 SASR 455, considered.

Judgment No. [2000] SASC 97

[2000] SASC 97

In these proceedings the liquidators of Noelex Yachts Australia Pty Ltd claimed to recover from three directors of the company $227212.49*(a), an amount which corresponds with the total of some debts incurred by the company between 23 June 1993 and April 1995. The liquidators allege that when each of the debts were incurred the company was insolvent and that there were reasonable grounds for suspecting that the company was then insolvent. On that basis provisions of the Corporations Law which came into force in June of 1993 were invoked to claim recovery of those debts from each of three defendants to the extent that they were directors at the time particular debts were incurred.

The first defendant, Mr Fryer, was a director of the company from May 1989 until 2 April 1995, when an administrator was appointed. He became Chairman soon after the resignation of another director with effect from 25 October 1992. The second defendant, Mr Tonkin, became a director in November 1990, resigning just before Christmas in 1994. Before he was a director he was an accountant giving financial advice to the company and its directors. The third defendant, Mr Perry, was a director from October 1987 until the administrator was appointed. The proceedings against Mr Tonkin were discontinued during the course of the trial.

The company was wound up on 9 June 1995 by resolution of creditors at a meeting held that day. The present liquidators were appointed in March 1997. These proceedings were instituted within 12 months of the plaintiffs' appointment. The first plaintiff gave evidence and referred to a report prepared to support his conclusion that the company "was insolvent and unable to pay its debts as and when they became due and payable from its own money at all times from at least 23 June 1993".

Mr Powell said that he addressed the question of the company's insolvency "on the basis of two tests of insolvency, namely:-

* illiquidity or 'cash flow' insolvency, where the debtor is unable to pay its debts from available resources as and when they become due and payable. This test is derived from the section 95A of the Law wherein a corporation is defined as being solvent if and only if the corporation is able to pay its debts as and when they fall due and payable.

* Asset/liability or 'balance sheet' insolvency, where total assets fall short of total liabilities."

The first plaintiff's opinion was that both tests of insolvency were satisfied on the material he had before him.

By s 588G of the Corporations Law a director of a company at the time when the company incurs a debt contravenes that section if, at the time the company incurs the debt, that person is aware that there are reasonable grounds for suspecting that the company is insolvent or would become insolvent by incurring at that time debts including the particular debt. The director is also in breach of the section if "a reasonable person in a like position in a company in the company's circumstances would be so aware".[1]

7 Section 588M of the Corporations Law authorises the company's liquidator to recover from a director in breach of s 588G in relation to the incurring of debts by the company an amount equal to the amount of loss or damage suffered by those persons to whom such debts were owed because of the company's insolvency. The amount is recoverable as a debt due to the company.[2]

8 The defendants denied liability and sought to prove that whenever a particular debt was incurred they "had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time".[3]

9 Section 95A(1) provides that a company is solvent if, and only if, it is able to pay all its debts as and when they become due and payable. The section further provides that a company which is not solvent is insolvent.[4] It must be acknowledged immediately that there is no specific reference to or requirement in this section that debts must be payable from the company's own money. In this respect the liquidator's conclusion must be modified and the effect of his evidence and opinion judged against a proper interpretation of the relevant statutory provisions. Access to money of other persons is not an irrelevant consideration in determining whether or not a company is insolvent.[5] The commercial solvency of a company is not proved by merely looking at its accounts and making a mechanical comparison of its assets and liabilities.[6] Insolvency is a question of fact falling to be decided as a matter of commercial reality in the light of all the circumstances with things being viewed as it would be by someone operating in a practical business environment. The statutory focus is on solvency, not liquidity. Thus it is appropriate to consider the terms of credit or financial support available to the company with which to defray any debts owed to creditors. The question is not to be answered merely by looking at the financial statements.[7]

10 It must also be acknowledged that whilst s 95A may be identified as a provision stating a cash flow test rather than a balance sheet test for insolvency, that is not a reason to construe the word "debts" in the section as referring only to those debts treated for accounting purposes as having been incurred on revenue account as distinct from capital account, nor does that assumption exclude a proper consideration of a company's balance sheet.[8] What must be acknowledged is, of course, that it is not necessary to establish a company's liabilities exceed its assets to show that it is unable to pay its debts as and when they become due and payable. It is another thing to say that that is an irrelevant circumstance when considering the issue of insolvency.[9] Similarly, a temporary lack of liquidity will not necessarily give rise to an inference that a company is unable to meet its debts as and when they become due and payable.

11 The company was incorporated in this State in August 1987 under the name What A Statement Pty Ltd, changing its name in November of that year. It operated a business of the manufacturing and wholesaling of yachts from premises in Goolwa. That business was acquired from a company associated with Mr Perry.

12 Of particular significance in these proceedings is a meeting of directors held at Goolwa on 8 April 1992. At that time Mr Tonkin was not a director of the company. He prepared financial statements for it then as he did throughout the period from 23 June 1993 until he resigned from his directorship on 19 December 1994. The minutes of the 8 April 1992 special meeting record that the company "continued to trade in the expectation and hope that there would be a revival in the trailer boat market.... This was noted as not having been realised and in fact.... there are no forward orders on the books. ...

A review of the balance sheet as depicted by Mr Tonkin made it apparent that in its present position, Noelex is insolvent...."

Within a month a special general meeting of shareholders on 6 May recorded that the directors then advised:

"To keep the business going we need an input of cash of $80,000 for finance charges, wages and creditors. Two Avenues (a) Right issue of shares on one for one discount to 50 cents/$1. (b) ask shareholders to lend money to company using four stock boats as security."

At a directors' meeting on 1 July 1992 Mr Perry reported to the other three directors that he had stopped purchasing as he believed he could not legally do so. The minutes of the meeting make plain that all directors viewed the company as being "at the absolutely critical stage" and that all avenues had to be tried to realise funds. I find that both Mr Perry and Mr Fryer then knew the company was then insolvent and unable to pay any debt as and when it became due and payable.

It was resolved that a rights issue of one for one at 10 cents per share be offered to existing shareholders together with a general share issue at 25 cents per share. Requirements of the Corporations Law were not complied with. Mr Fryer and Mr Perry, or companies to which they were related, took up the right to purchase 261898 shares at $26189.80. There was only one other shareholder who took up the rights issue with a total investment of but $800. No shares were issued under the general share issue.

The company's financial circumstances did not improve significantly at all. In September 1992 Mr Perry drew post-dated cheques in part payment of some creditors. Mr Perry properly admitted that at that time the company did not have the money to pay creditors. He also correctly agreed that, in fact, the company's position worsened during the 1992 year, certainly by the time financial statements were received in October. Plainly, therefore, the situation in October 1992 was as Mr Perry found it to be when he reported to the directors' meeting on 1 July 1992. The company remained insolvent.

A director, Mr Ironside, resigned with effect from 27 October 1992. In his letter of resignation of 25 October, that resigning director referred to the fact that on two occasions when he assumed direct control of the company during the absence on leave of the managing director, Mr Perry, he found the financial position of the company "to be somewhat different to that which had been indicated to (him). During the most recent occasion it was necessary for (him) to fund the operation from (his) own resources."

In the chairman's report for a shareholders' meeting dated 9 June 1993 Mr Fryer concluded by saying that the company situation was "desperate". He said that unless the company received a substantial cash commitment the Board would recommend the winding up of the company. The records available to the liquidator do not indicate that any further shares were issued or shareholder loans received. No persuasive evidence was led at the trial to shake the proper inference to be drawn from the circumstances as proved and available to the liquidator. The company remained insolvent.

Two months later, on 10 August 1993, the Australian Taxation Office initiated winding up proceedings. There was a substitution of another creditor in place of the Taxation Office in October. That petition was dismissed in March of 1994 after the substituted plaintiff was paid out. However, at about that time a further winding-up petition was issued by the Workers Rehabilitation and Compensation Corporation. That petition was dismissed within six months after repayment arrangements were made. Whilst those repayments were made it is not without significance that, again, there is evidence that a creditor, R W Basham, was sent a cheque in part-payment of an account, the payment of which was freely acknowledged by Mr Perry to have been "delayed". In his evidence, he spoke of "an agreement ... to pay (that account) off gradually as and when funds were available". Post-dated cheques were issued to other creditors at this time. The company was then continuing to trade when Mr Perry knew it was unable to pay all its debts as and when the debts were due and payable.

On 1 December 1993 the chairman reported to the Annual General Meeting of the company that the directors had worked very hard to keep the company afloat and that without the directors' support and diligence the company would by then have "passed into liquidation". Reference was made to the negotiation of a contract for the supply of fibreglass containers to a well-known company. The chairman said that this had been most valuable with regard to cash flow. The chairman referred to the fact that the first three months' trading period of the year the company had made a profit of $18000. He said that if the trading continued to be profitable and the repayment of debts continued to proceed there would be no reason for not paying a dividend in the future. During the course of the meeting Mr Ironside sought more explanatory financial reports. It was agreed that there should be a further breakdown of income and expenditure.

I think that the evidence clearly establishes that Mr Fryer, though appearing to be optimistic in his report, was by no means convinced about the company's solvency at that time. I find that when a debt included in those pursued in these proceedings was incurred on 1 July 1993 the company was insolvent and that there were reasonable grounds for suspecting that the company was then insolvent. I find that both defendants were aware that there were reasonable grounds for suspecting that the company was then insolvent and that a reasonable person in a like position in a company in the company's circumstances would be so aware. Neither defendant has proved that at that date he had reasonable grounds to expect and did expect that the company was then solvent and would remain solvent, even if it incurred that debt and any other debts then.[10]

22 Things did not really improve. In March 1994 WorkCover commenced a separate winding-up action against the company. In June, the company was struggling to make even reasonably small payments to its creditors. A cheque for $400 to WorkCover was referred to by Mr Tonkin as having been referred to drawer. Mr Perry admitted to not being surprised about that at the time. On 24 June, the company's bankers issued a Notice of Demand, calling up its facility of $327246. Payment within three days was demanded. Aged creditors had increased by some $70000 during that financial year. The company had made an operating loss of $24509.

23 Current liabilities where shown at $539783, with current assets but $207207. Soon after the demand for payment of $327246 the company's bank commissioned a report to it from Chua Crase. The accountants' subsequent report to the bank was dated 14 September 1994. The bank referred to its concern with the present conduct of the business and the lack of progress in servicing and reducing the company's debt. Within the report to the bank there was reference to the company's liquidity position being severely strained, with the majority of outstanding creditors as at 31 August 1994 already well overdue for payment. The accountants described the company's position as serious. A cash flow annexed to the report was not achieved. I think it is correct to say that that cash flow was never ever likely to be achieved. Of significance is the fact that within that cash flow the bank's debt would only have decreased by $12000 within 12 months.

24 The bank invited the directors to consider the issues arising from the report. This included the deficiency shown on the balance sheet of the company, the position of trade creditors, the company's liquidity position, monthly management reports and a finance proposal. Any confidence asserted to be gained by any director from this letter must be described as misplaced.

25 The directors met on 12 October, resolving to ignore the bank's letter as, in many ways, irrelevant. The directors proposed that the Goolwa branch office of the bank should be invited to accept a restructure of the company's loan, from a business loan to a property loan for $340000 secured by properties in Goolwa and directors' guarantees. The minutes of the directors' meeting of that date record that the bank was to be made aware that all directors were prepared to put in personal guarantees for a property loan only. At the same time, at that meeting, the directors recorded that the cash flow of the company remained critical, with Mr Perry having sufficient money for wages that week and the next. In cross-examination, Mr Perry would not admit that at that time there was no money for anything else other than two weeks wages. I think the fact was otherwise. I so find. Again at this time the company was insolvent. There were then reasonable grounds for suspecting that the company was insolvent. The defendants were so aware. So would be the person referred to in s 588G(2)(b). Neither defendant has made out the defence raised.

26 The bank rejected the proposal made by Dr Fryer, on behalf of the company by letter of 5 November 1994. That letter, and another addressed to him of 7 December 1994, were seen by both Mr Fryer and Mr Perry. The first called for the immediate payment of interest arrears and charges totalling $17616.93. It also pointed out that the decision to appoint an investigative accountant for the company "would have clearly indicated ... that the bank was dissatisfied with the existing position" of the company and that the bank was unable to allow the situation to continue to drift with further legal proceedings to be instigated if the matter was not rectified by 15 December. The letter of 7 December referred to discussions and a lack of response by the company for information requested and general failure of management to cooperate resulting in the bank informing the chairman that it wished to see total debts cleared in full by the end of January 1995. The bank then noted an undertaking from Mr Fryer, as chairman, that refinancing would be arranged by that date. The bank put the directors on notice that should refinancing not occur, the bank would have no alternative but to immediately take recovery action.

27 On the day of the bank's letter of 7 December, Mr Perry received a facsimile from a disgruntled creditor. A copy also went to Mr Fryer. The previous practice of sending post-dated cheques and part payment of creditors was continuing. Riviera Nautic then complained that assurances that a cheque would not bounce proved false when a post-dated cheque was returned marked "refer to drawer". The disgruntled creditor spoke of taking immediate action to recover the $12825 and all monies owed to it on a particular vessel. The evidence clearly establishes that both Mr Fryer and Mr Perry knew that creditors were then pressing for payment and that the company was unable to meet its debts as and when they became due and payable.

28 By letter dated 19 December 1994, Mr Tonkin resigned from his position as a director. That letter reflects dissatisfaction not dissimilar from that aired by Mr Ironside when he resigned in October 1992. Mr Tonkin spoke of being totally frustrated with the company's inability to meet deadlines. He said he was powerless to ensure that work was done in a timely and tradesman-like way. He spoke of being incredulous at the continuing inefficiencies and inability of the company to meet deadlines. It is plain from his evidence that his resignation carried with it a belief in him that at that time the company was insolvent and unable to pay any further debts as and when they became due and payable. I find that the company was insolvent then and that there were reasonable grounds for so suspecting.. It also my view that at this time both Mr Fryer and Mr Perry well knew the company was then insolvent and unable to pay debts as and when they became due and payable. No defence is made out. The evidence with respect to Mr Fryer's further negotiation with the bank clearly discloses that debts were still being incurred when things had got no better.

29 On 3 March 1995 the company stopped trading. All employment contracts were terminated. On 8 March, Mr Fryer advised an extraordinary meeting of members of the company that trading during the past few years had been difficult. He also reported that there had been no orders for the past four months and that the situation was "dire". Before a master of this Court, in December 1996, Mr Fryer described the company as successful. The company was not a successful company. In my view, the evidence clearly establishes that Mr Fryer well knew that the company was never successful and that he realised well before June 1993 that the company was not going to succeed. I find that he had no reasonable proper grounds to be optimistic.

30 In his evidence in chief Mr Perry sought to satisfy me that throughout the period of time he was involved with the company he was always able to proceed upon a basis that most creditors would not press for payment or that he would ensure payment of creditors by making some further loans to the company himself or through companies with which he was associated or through some similar act by other directors. At the end of his evidence I was not satisfied or persuaded that that was the truth. Rather, in my view, the fact was that at all times relevant to the debts the subject of these proceedings the situation was as Mr Perry put it to the directors in July of 1992. The company was insolvent. There were reasonable grounds for suspecting that the company was insolvent. Both defendants were aware at those times that there were grounds for so suspecting. Equally, a reasonable person in a like position in a company in the company's circumstances would be so aware.

31 At the end of his cross-examination, Mr Perry agreed that at best, there was an understanding that creditors would not take action against the company provided it paid within a reasonable time after 30 days. I think that is closer to the truth. However, I am not satisfied that any particular creditor has been shown to have actually agreed to take no action against the company with respect to payment of debts beyond the usual commercial period of 30 days. The fact that proceedings were not issued against the company by many of its creditors only served to encourage Mr Perry and his fellow director to take advantage of that position and continue to trade notwithstanding the company's insolvency. Injection of funds did occur on some occasions, but never really to the point where the company could be seen as solvent against its assets and liabilities. I do not accept that it has been properly proved that particular creditors had agreed not to seek payment of debts. Rather, the evidence identifies nothing more than what has been described as hesitation on the part of creditors to take immediate steps to enforce their rights against the company. I think the liquidator was entitled to consider the usual trading terms of creditors to be 30 days. The schedule prepared indicates the enormity of unpaid creditors at relevant times.

32 I agree with the view expressed by Debelle J and other judges, cited by him in his judgment in Carrier Air-Conditioning. Just as with s 556(1) of the Companies' (SA) Code, so too under s 588G, the relevant enquiry relates to the company's obligation as to payment of its debts, not with periods of grace which might have been obtained by creditors not insisting on payment strictly in accordance with agreed terms.

"A reasonable and prudent company director would assess whether a company is in a position to pay its debts as and when they fall due by reference to the legal obligations of the company not by reference to any indulgences which the company might have received from its creditors. He would have regard to the fact that the credit policy of any particular creditor might suddenly change and require any outstanding debts to be paid forthwith. The possibility of such a change could result from any one of a number of factors including the fact that the creditor is itself experiencing financial stringency or, as the circumstances of this case illustrate, a change in management. A reasonable and prudent director must found his expectations on reasonable grounds. An expectation that creditors will continue to permit late payment of accounts is founded on hope or optimism, not on reason. It is a policy fraught with danger and could only be reasonably adopted if the company was experiencing a temporary lack of liquidity. A reasonable and prudent director would acknowledge that, while his company might have enjoyed periods of grace in the payment of its debts, there could be no reasonable expectation that that situation would continue. Apart from these considerations, he would recognise that the very fact that the ability of a company to continue to trade depends on indulgences from its creditors points to the conclusion that it is unable to pay its debts as and when they fall due. In other words, a reasonable and prudent director will, generally speaking, be directing his attention to whether the company will be able to pay its debts on the date stipulated for payment."[11]

33 This company was not one experiencing a temporary lack of liquidity. No variation by agreement or estoppel by course of conduct has been made out. The fact that creditors did not insist on payment by the ordinary commercial expectation of 30 days is not a ground on which the directors can reasonably form an expectation as to the company's solvency and make good the defence identified in s 588H(2) with respect to any of the incurred debts in issue here. The evidence with respect to payments made or contemplated by directors does not help either. That evidence does not establish solvency or the expectation of it at the time particular debts were incurred. The commercial reality of the situation here was that the company was at all relevant times unable to pay debts as and when they became due and payable.[12]

34 Mr Fryer did not adduce any positive evidence of a reasonable belief in him that the company was solvent and would remain solvent when debts were incurred before July 1994. However, it was his evidence that in about July of 1994 the prospects of the company improved because of orders coming in. I find that the evidence established makes this, again, nothing more than false optimism. In fact, and I so find, there were no reasonable grounds to base a reasonable expectation of solvency on an increase in sales at that time. The 1993 profit was based on the sale of plant. There is no credible evidence of monthly profit and loss statements. The liquidator found no evidence of structured management reports being prepared on a monthly basis for consideration by the directors and managers of the company. Other evidence before me makes plain that what Mr Perry says happened with respect to this did not happen. I refer to what is said by Mr Ironside and Mr Tonkin in particular.

35 The financial year ending 30 June 1994 ended in a loss despite the first quarter profit. There were no orders from December 1994 to March 1995. Increased sales did not occur. Two of the six boats the directors told the authors of the Chua Crase report about were being built for directors at cost.

36 I am not prepared to accept the evidence as establishing that Fryer was ever told of particular arrangements with creditors sufficient to establish a defence under s 588H(2). I rather doubt that Perry ever told Fryer that he had "creditors in hand". If he ever did tell Fryer such a thing it was not a reference to, nor could it be reasonably understood to be, anything more than periods of grace or indulgences. I reject any suggestion that Fryer believed that the creditors were in hand in the sense that there were agreements not to seek payments of debts. I think the reality is that Mr Fryer was looking for an excuse or defence where there was none given the realities of the situation as he and any reasonable person would understand it in light of the information that was available at particular times.

37 The evidence establishes what the liquidators must prove with respect to debts incurred after 30 June 1994. The findings I have made as to insolvency on particular occasions after 30 June 1994 are also established by the presumption to be made in recovery proceedings pursuant to s 588E(3) of the Corporations Law. It is not disputed that the company was insolvent on 2 April 1995. The bank's demand of 24 June 1994 clearly establishes the company was unable to pay its debts as and when they fell due and payable soon after that. Therefore it must be presumed that the company was insolvent throughout the period beginning 30 June 1994 and ending on 2 April 1995. The defendants have not proved the contrary, namely that the company was solvent after 30 June 1994, that is that it was able to pay all its debts as and when they became due and payable.[13]

38 When each of the debts the subject of these proceedings was incurred the company was insolvent. Both defendants were then aware that there were reasonable grounds for suspecting that the company was insolvent. A reasonable person in a like position in a company in this company's circumstances would be so aware also. On the material before the court and in light of the credibility findings I have made the plaintiffs are entitled to recover from the two defendants an amount equal to the amount of loss or damage suffered by the creditors because of the company's insolvency.[14]

39 The amount of the creditors' loss or damage is the non-payment of the debt when it became due and payable because of the directors failure to prevent insolvent trading. The argument advanced by counsel for Mr Fryer that the loss or damage is the difference between the amount of the debt and what the creditors might receive on the winding-up of the company must be rejected. The loss or damage suffered because of the company's insolvency is the failure to be paid the debt. The amount of the debt is what is recoverable.

40 It was also argued that taxes, levies, employee entitlements and penalties for late payment of taxes and levies are not debts incurred for the purposes of s 588G and s 588M of the Corporations Law. Reference was made to Russell Halpern Nominees Pty Ltd v Martin[15] and Standard Chartered Bank of Australia Limited v Antico[16]. In Standard Chartered Bank, Hodgson J said:

"In my opinion, a company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable. This formulation has three aspects which could cause difficulty in particular cases: first, as to whether the company has a choice whether to do (or omit) the act or not; second, as to whether it is the act or omission, or something else, which renders the company liable for the debt; and third, as to whether the company would otherwise (in any event) have been liable for the debt."

41. Halpern's case was a case where rent was treated as incurring at a time when a lease was entered into, even though time must elapse before rent becomes payable with various possible events intervening to prevent rent ever becoming due. These two decisions and opinions were considered by Bryson J in Shepherd v ANZ[17]

His Honour disagreed with Hodgson J. Bryson J's view was that the section, which can be described as a predecessor to s 588G, did not in any way express an element of choice. In Bryson J's opinion, "obligations imposed by law, including revenue law and the law of restitution, can be debts" for the purpose of the section then under consideration "whether or not acts or omissions which the company chose to be involved in brought them into existence".

42 In His Honour's view, where the company's conduct and omissions involve it in liability for damages and the general law gives another party an election to recover the money paid and by the election to bring a debt into existence there was no warrant for not regarding that debt as a debt for that relevant purpose or for not regarding the time of the election as the time when it was incurred. I think the approach of Bryson J is correct and that the objections taken with respect to the liquidators claim that these various taxes, levies and penalties are debts incurred at the times identified by him in his schedule must be rejected.

43 In the case of penalties, they are debts incurred when the late payment penalty is assessed, not when the original tax liability arose. The dates identified in the various schedules are all dates when the company was insolvent. I reject the submission that sales tax is not a debt.[18] WorkCover levies are debts accruing as a result of a positive act of employing a person, continuing to employ and obtaining a policy of insurance for that person.[19] The fact that group tax liability is specifically made a debt for the purposes of s 588G by (2) of s 588(5) does not mean that group tax penalties are not debts for the purposes of s 588G. In my view, group tax penalties are debts to which s 588G and s 588M apply consistent with the approach taken by Bryson J in Shepherd's case. Equally, as for sales tax, the penalty payable under s 68 of the Sales Tax Assessment Act 1992 (Cth) is a debt incurred by the company. It is a result of the company continuing to trade whilst insolvent. The company has failed to pay its sales tax because of its insolvency and continued to trade. A further debt arises from an election not to pay debts owed to the Commissioner of Taxation. It is this failure that attracts the penalty interest provisions. As for penalties under the Workers Rehabilitation and Compensation Act 1986, again the test propounded by Bryson J is satisfied. The company has incurred a debt from continuing to trade while insolvent. This is a reason for its inability to pay the levies it has incurred. The company has become subject to the assessment of fines particularised in s 70 of the Act. As for termination payments, clearly these were incurred on the date that the factory was closed in March 1995. The obligation to pay workers their full entitlements constitutes a debt of the company. Section 588G and s 588M clearly apply to those payments. A further submission with respect to E & WS rates fails for similar reasons.

45 I am asked to consider the exercise of the power conferred upon me by s 1317JA of the Corporations Law in favour of each defendant. I do not think either defendant can be said to have acted honestly[20] in the ordinary sense of that word or in a manner consistent with the meaning given to it in other provisions of corporation laws[21] but even assuming that, having regard to all the circumstances of the case, I do not think that either of them ought fairly to be excused for any of their contraventions of the civil penalty provisions of the Corporations Law.[22] In my view, both defendants were negligent and, indeed, reckless with respect to the company's financial position and capacity to trade. They did not act fairly but took advantage of indulgent creditors by allowing the company to continue to trade.

45 I therefore enter judgment for the plaintiffs for the sum claimed, $227212.49*(b). There is a claim for interest pursuant to s 30C of the Supreme Court Act 1935. I propose to award a lump sum of $13287.51*(c) in lieu of interest pursuant to s 30C(3). In making this award I do not overlook the submissions made by both defendants and, in particular, the fact that the amount of debts ultimately pursued in these proceedings is less than half that the subject of a Notice of Demand in January 1997. The liquidator has not been shown to have been responsible for any inexcusable delays in the pursuit of the award now made. Abandonment of some parts of the claim does not impair the proper application of the principle that interest is recompense for being kept out of money which should have been paid earlier. The liquidator does not argue that the amount recoverable by him as a debt arises any earlier than when the company was put into liquidation. I think it is appropriate to award interest running from that date.

46 Judgment therefore for the plaintiffs in the total sum of $240500*(d).

*(a) By Order of 28 June 2000, pursuant to SCR 53.10, the amount of $277342 has been substituted for the amount appearing above.

5. cp Standard Chartered Bank v Antico (1995) 131 ALR 1 at 71

6. Sandell v Porter (1966) 115 CLR 666 at 670 applied in Carrier Air-Conditioning v Kurda (1993) 11 ACSR 247 at 258

7. Brooks v Heritage Hotel Adelaide (1996) 20 ACSR 61 at 64; Standard Chartered Bank v Antico (1995) 131 ALR 1 at 71

8. See Melba Base Corp v Sedgion Hoe Limited [1995] FCA 1225; (1995) 17 ACSR 187 at 198 and Carrier Air-Conditioning v Kurda (1993) 11 ACSR 247 at 255

9. Dunn v Shapowloff (1978) 2 NSWLR 235

11. Carrier Air-Conditioning v Kurda (1993) 11 ACSR 247 at 254 - 255;

12. See also Standard Chartered Bank v Antico (1995) 131 ALR 1 at 72 - 74

13. Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler [1994] FCA 1117; (1994) 122 ALR 531 at 539 - 540 and Standard Chartered Bank v Antico (1995) 131 ALR 1 at 73 - 74

16. (1987) WAR 150

17. (1995) 131 ALR 1 at 57

(1996) 20 ACSR 81 at 89

18. See Sands and McDougall v Commissioner of Taxation [1998] VSCA 76; (1999) 1 VR 489 at 504

19. State Government Insurance Commission v Pollock (1993) 11 ACSR 333

20. Dominion Insurance Co of Aust Ltd v Finn (1988) 7 ACLC 25 at 33 - 34

21. See Australian Growth Resources Corp Pty Ltd v Van Reesema (1988) 13 ACLR 261; Marchesi v Barnes [1970] VicRp 56; (1970) VR 434; Southern Resources Ltd v Residues Trading (1991) 56 SASR 455 at 476; Duke Group Ltd v Pilmer [1999] SASC 97; (1999) 73 SASR 64 at 220 [690 - 692]

. cp Kirby P Advance Bank Ltd v FAI Insurance (1987) 9 NSWLR 464 at 490

*(b) By Order of 28 June 2000, pursuant to SCR 53.10, the amount of $277342 has been substituted for the amount appearing above.

*(c) By Order of 28 June 2000, pursuant to SCR 53.10, the amount of $62657.77 has been substituted for the amount appearing above.

*(d) By Order of 28 June 2000, pursuant to SCR 53.10, the amount of $340000 has been substituted for the amount appearing above.

[5] cp Standard Chartered Bank v Antico (1995) 131 ALR 1 at 71

[6] Sandell v Porter (1966) 115 CLR 666 at 670 applied in Carrier Air-Conditioning v Kurda (1993) 11 ACSR 247 at 258

[7] Brooks v Heritage Hotel Adelaide (1996) 20 ACSR 61 at 64; Standard Chartered Bank v Antico (1995) 131 ALR 1 at 71

[8] See Melba Base Corp v Sedgion Hoe Limited [1995] FCA 1225; (1995) 17 ACSR 187 at 198 and Carrier Air-Conditioning v Kurda (1993) 11 ACSR 247 at 255

[9] Dunn v Shapowloff (1978) 2 NSWLR 235

[10] s 588G(1)(b), s 588G(1)(c), s 588H(2)

[11] Carrier Air-Conditioning v Kurda (1993) 11 ACSR 247 at 254 - 255; See also Standard Chartered Bank v Antico (1995) 131 ALR 1 at 72 - 74

[12] Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler [1994] FCA 1117; (1994) 122 ALR 531 at 539 - 540 and Standard Chartered Bank v Antico (1995) 131 ALR 1 at 73 - 74

[15] (1987) WAR 150

[16] (1995) 131 ALR 1 at 57

[17] (1996) 20 ACSR 81 at 89

[18] See Sands and McDougall v Commissioner of Taxation [1998] VSCA 76; (1999) 1 VR 489 at 504

[19] State Government Insurance Commission v Pollock (1993) 11 ACSR 333

[20] Dominion Insurance Co of Aust Ltd v Finn (1988) 7 ACLC 25 at 33 - 34

[21] See Australian Growth Resources Corp Pty Ltd v Van Reesema (1988) 13 ACLR 261; Marchesi v Barnes [1970] VicRp 56; (1970) VR 434; Southern Resources Ltd v Residues Trading (1991) 56 SASR 455 at 476; Duke Group Ltd v Pilmer [1999] SASC 97; (1999) 73 SASR 64 at 220 [690 - 692]

[22] cp Kirby P Advance Bank Ltd v FAI Insurance (1987) 9 NSWLR 464 at 490