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[2002] SASC 424
Supreme Court of SA
2002-12-20
Lander J
Original judgment source is linked above.
For the reasons that follow, subject to any defence available to the plaintiff under s 588H, the plaintiff has established a contravention by the defendant of s 588G.
Only 5 witnesses were called in the trial. The parties relied mainly on documentary evidence.
All witnesses gave their evidence in chief by way of the tender of witness statements. Thus any impressions of the witnesses' demeanour were formed in their cross examination. The plaintiff, the defendant and the first third party each gave evidence in their respective cases.
The defendant also called Mr Alexander Marshall, a solicitor.[67] It would be convenient to deal with Mr Marshall's evidence at this time. The defendant tendered an affidavit sworn by Mr Marshall on 31 January 1997 in proceedings in the South Australian Registry of the Federal Court of Australia. The affidavit was allowed, by the defendant, to stand as Mr Marshall's evidence in chief.
In that affidavit Mr Marshall deposed to a number of conversations he had with Mr Sparks, then an employee of the third parties and later a partner in that firm, and Mr Sims.
In cross examination, Mr Marshall said that he had no recollection of matters contained in the affidavit but that the affidavit contained his recollection at that time.
I accept Mr Marshall's evidence that when he was called to give evidence in this trial he had no more than a vague recollection of some of the events and that his better recollection was contained in the affidavit.
Because he had no recollection independent of the affidavit, counsel for the third parties was placed at a disadvantage in challenging the matters contained in that affidavit.
However, in a sense, that does not matter much. Mr Marshall's evidence was at best peripheral to the issues between the parties. He was called to establish that Mr Sims had given an undertaking that in the event that Mr Sims became the voluntary administrator of the Company then he would not dispute Mr Marshall's client's right to possession of some equipment which had been provided to the Company, and which had been installed in one of the steel vessels built by the Company.
The third parties also called Mr Grant Sparks who has subsequently become a partner in the firm of Sims Lockwood.[68]
I accept the evidence of Mr Sparks and Mr Marshall.
He was cross examined by counsel for the defendant on other matters. The cross examination was somewhat unusual. Mr Lindsay SC, who appeared as senior counsel for the defendant, put statements made by other persons in other proceedings to the witness and asked him if he would admit those statements for the purpose of these proceedings.
For example he was shown an affidavit which had been sworn by Grant Sparkes in which Mr Sparkes had deposed:
"It was apparent to me from the beginning of my involvement with the company that the company was insolvent."
"Q And do you admit, for the purpose of the proceedings, that statement?
I think that such an admission means that the liquidator admitted for the purpose of the proceedings that Mr Sparks believed from the beginning of his involvement with the Company that the Company was insolvent. I think that is clear from later cross examination in relation to the matter.
I have therefore taken the admissions made by Mr Scott in his cross examination as being admissions that the deponents to the various affidavits, to which he was referred, either did make the observations referred to by them in their respective affidavits or held the opinions expressed in those affidavits. Initially, I think Mr Scott was uncomfortable with the form of the cross examination but as it developed he made his admissions in a straightforward manner and without any prevarication.
In my opinion Mr Scott was doing his best to assist me in arriving at my decision.
Mr Sims was called by the third parties. The plaintiff did not seek to lead any further evidence from him. He was cross examined by counsel for the defendant.
Mr Sim's evidence was in some respects somewhat defensive and his answers exhibited a certain wariness. He was less straightforward than Mr Scott. I have more hesitation in accepting Mr Sim's evidence because of both its content and the manner in which it was given. In two respects I do not accept his evidence.
The major witness in the trial was the defendant Mr Hercus. He was extensively cross examined by both counsel for the plaintiff and the third parties. His evidence occupied seven days nearly all of which was cross examination.
Mr Hercus was an excellent witness. I formed a very favourable impression of him. He had no trouble understanding the questions which he answered straightforwardly. He gave his evidence candidly and frankly. At no time did he prevaricate.
He did not attempt to exculpate himself. He was a credible witness. He is undoubtedly an honest and decent man. I accept most of his evidence.
However in some respects his evidence was wrong. Where I have not accepted his evidence I have said so. Otherwise it may be assumed that I accept his evidence.
However, accepting his evidence does not mean that his defence must succeed. Indeed, in some respects, both the plaintiff and third parties relied on his evidence for their submissions that the defendant's case must fail.
On 13 July 1994 the Company entered into an agreement with INCAT and HMD whereby INCAT and HMD granted the company the exclusive rights to construct and market marine freight vessels designed by HMD. This was for a period of two years commencing on 1 July 1994 with an option for a further two year period commencing immediately thereafter provided that the company had a fully executed contract in place to build a prototype marine freight vessel of the type referred to in the agreement.[72] The vessels referred to in the agreement were fast freight vessels being Wave Piercing Catamarans of up to 150 metres in length.
In late 1994 probably about September the Company commenced trading at Port Adelaide.[73] It had two shipyards, one 'Northarm', for the construction of steel vessels and the other 'Berth 25', for the construction of aluminium vessels.
Mr Thomas acted as Managing Director of the Company and was actively involved in the day-to-day management of the Company.
On 6 December 1994 Mr Hercus wrote to Mr Thomas confirming arrangements made between the company and INCAT for the design of fast catamarans to be built by the company.[74]
The arrangements were for a period of five years with an option to extend for a further five years and covered the design of all types of powered catamarans "... which are capable of a speed (in knots) equal to 2.5 times the square root of the overall length of the vessel (in metres)".[75]
It was agreed that the Company would have the right to build the vessels in South Australia and to sell them anywhere in the world except in Japan.
The fee payable for the use of the design data to build one vessel which was provided for in the letter is not important for the purpose of the decision in this case but the manner of payment maybe. The design fee was to be paid in a series of equal instalments spread through the construction period. The first instalment was payable at the commencement of work by INCAT and the last payable on completion of the vessel. The agreement contemplated that there would be four payments for vessels up to 50 metres in length and eight payments for larger vessels.
Thus, it was by the end of 1994 that the defendant had put in place two contracts between the Company and companies of which he and his wife were proprietors which gave the company the rights to build vessels referred to in the agreements of 1994 and 6 December 1994.
Dr Williams was Chairman of the Board and was also actively involved in the day-to-day management of the Company. On 3 July 1996 he assumed an even greater role by becoming Executive Chairman.[76] Mr Dirk Verboon (who was resident in Adelaide) was actively involved with Mr Thomas and another party in setting up the Company's shipyards.
The Company appointed the ANZ Banking Group as its bankers and they remained the bankers to the Company over the whole of the relevant period.
Paul Robinson was an accountant who carried on business under the name of Capital Strategies Pty Ltd.[77] Capital Strategies is a specialist chartered accountancy practice which provides financial consulting services with regard to major financial transactions, mergers, acquisitions, business sales and start up ventures. Mr Thomas suggested to the board that Capital Strategies Pty Ltd be retained. Indeed Mr Robinson was present at the first meeting of the directors held on 9 June 1994.[78]
Mr David Carver, an accountant, was retained as an independent consultant on a full time basis to act as the internal accountant and financial controller of the Company.
Mr Colin Dunford of Arthur Andersen and Co was appointed auditor of the Company.
Mr Nigel Winter acted as solicitor for the Company from incorporation until the appointment of an administrator.
The directors collectively subscribed $750,000 to capital. The Share Capital was paid up by 28 February 1995.[79]
The Government of South Australia provided two loans one through the Economic Development Authority (EDA) of $400,000 for a period of seven years and the other by the Government of South Australia in the sum of $100,000 for a period of 99 years interest free.
Having regard to the business that the Company expected to carry on it is clear that the Company was under-capitalised from the outset.
The Company contemplated a significant undertaking. It saw itself as a major builder of both steel and aluminium vessels. It proposed to engage a workforce in the order of 200 people. It entered into leases for the premises at which the shipbuilding was to be carried on for a period of 20 years.
If the Company were to conduct a shipbuilding operation of the kind it contemplated it needed significant capital to tide it over, its start-up operation and purchase the raw materials necessary to carry on its business.
A budget prepared, I think, in October 1994 contemplated a net loss for the period to 30 June 1995 of $70,000. That budget predicted that the Company would enjoy a negative cash flow for that period amounting to $1.97 million, which would be funded by the capital contributed to by the directors and two Government loans of $400,000 and $250,000 together with creditors of $85,000.
The budget anticipated that by 30 June 1995 the Company would have cash reserves in the order of $280,000.
It was clear by January 1995 that the budget was optimistic. A revised forecast was prepared in February 1995 by Mr Robinson. That forecast predicted a net loss for the period ending 30 June 1995 of $210,000 and a negative cash flow in the order of $3,680,000. Debtors were likely to be in the order of $2 million more by 30 June 1995 than expected in the budget. It was believed that the increased negative cash flow would be funded by the capital and loans to which I have referred together with bank facilities of $1.18 million. Further, the forecast assumed that there would be a reduction in capital expenditure as predicted in the earlier budget of $500,000.
Shortly after commencement the Company received orders for the construction of two steel prawn trawlers. In 1995 A Raptis & Sons Pty Ltd (Raptis) ordered a steel boat. That Company followed with orders for seven further steel boats. Other customers ordered other steel boats in 1995 and 1996.
On 7 March 1995 the directors resolved to build a 46 metre aluminium catamaran (the aluminium ferry).[80] At that time there had been some discussions with overseas companies, especially in India and China, relating to the purchase of such a vessel but nothing had been resolved. However, Berth 25 required work. The directors believed that if construction commenced on the aluminium ferry it was likely that a buyer would be found. The construction of such a vessel was the real reason for the defendant's involvement in the Company. He was the designer of the vessel.
At the same meeting as the directors resolved to build the aluminium vessel "on spec" the directors discussed the possibility of securing a "Strategic Partner" and "... the requirement for existing shareholders to contribute a further $250,000 if a partner was not secured ...".[81]
On 8 May 1995 Mr Robinson reported to the board that difficulties were being experienced with EDA who were insisting that a further $250,000 be immediately subscribed as share capital in accordance with the loan agreement which had been entered into between the Company and EDA.[82]
At that board meeting, Dr Williams listed the options which EDA had put to the Company which were either to subscribe a further $250,000 in share capital, return to EDA proportionately $167,000 until such time as capital was subscribed or broaden the board with an EDA-appointed independent director until such time as the new strategic partner was introduced.
After discussion, the following resolution was passed:
"It was resolved the Directors arrange for a loan of $250,000 to be sought from Westpac Bank guaranteed by all Directors to be paid into the Company as a subordinated loan until such time as a strategic partner was introduced. All costs and interest associated with the loan is to be met by the Company. It was further resolved that this subordinated loan would be supported by an underwriting agreement signed by the Directors." [83]
The directors instructed Mr Thomas and Mr Robinson to advise EDA of the resolution.
The minutes also disclose that Mr Robinson reported the Company's financial statement in detail to the board. He said the Company had suffered a significant negative cash position which would prevail until significant aluminium construction occurred.
He further advised the board that it was necessary to advise EDA and the ANZ bank that it was likely the Company would incur further losses of between $100,000 to $150,000 before it began to trade in a profitable manner.
It is not clear from the minutes to which financial statements Mr Robinson was referring. However, the documents tendered in this trial include a report of 21 April 1995 by Mr Robinson to Mr Thomas the Managing Director of the Company.[84]
"Further to our recent meeting of Wednesday, 19 April 1995 with yourself and Dr Don Williams, please find attached various financial information for circulation to the Board with respect to the financial performance of the Company for the above period..."
"At the time of writing this report EDA remains adamant that the Directors should subscribe an additional $250,000 in capital as a condition of the 99 year loan agreement from EDA. The original submissions to EDA and IDC were to the background and this capital should ideally be subscribed by a strategic partner who can assist the company with gaining acceptance and market penetration in the aluminium fast ships industry. We note that the Directors have offered EDA a legally binding director's underwriting agreement for this additional capital. This arrangement in our opinion should be endorsed by the EDA as it provides the company with access to an additional $0.25m if required for working capital purposes whilst leaving the opportunity open for the company to gain a further strategic partner."[86]
"The Chairman further stated that a letter needed to be circulated between the Directors setting out the obligations and risks involved in connection with this loan. It was further agreed Hercus Marine Design should invoice their current work on vessel 56 and that $125,000 should be applied to the deferred loan account of Mr P C Hercus on the same conditions as D P Verboon and D G Williams." [87]
The Aluminium Ferry Contract with the YQ Company
6. Long term L/Cs for up to one and a half years as per the payment for last Two Million U.S. Dollars shall be issued to South Australian Ships Pty Ltd. The L/Cs shall be endorsed for all discount bank charges to Account of Joint Venture Yuequing High Speed Passenger Ship Co; Ltd.
8. The Buyer will grant to the Builder in the Ship Building Contract an option for a second vessel which will be taken up within six months of delivery of the contracted vessel.
"The end result was the signing of a binding Letter of Agreement to build a vessel for YQ Company at a cost of $US 7.55 million on the basis that a formal contract would be signed before 30 December 1995. ... Due to the significant discount against budgeted cost plus profit margin, YQ Company gave an undertaking to build a second boat on the understanding that a more commercial price would be negotiated for that vessel. Our budgeted price for the vessel was $US 8.4 million. We were able to re-cast our budget to $US 7.55 million after significant discounts were negotiated with our major suppliers and the substantial front end cash flows were taken into account." [90]
"The company commenced trading in September 1994 and is still in a startup phase of operations, and in the process of developing a diversified customer base. During the financial period, there was a level of dependence on the small customer base secured to date. The company therefore has an ongoing dependency on the ability to secure contracts for both its aluminium and steel vessels and growing its customer base." [97]
"The financial statements have been drawn up in accordance with the going concern principle, where it is assumed the company can realise its assets and extinguish its liabilities as and when they fall due in the normal course of business. Our opinion has been formed on the assumption it is appropriate to apply the going concern principle. If it were not appropriate to apply the going concern principle, then the realisability of the company's assets may not be adequate to extinguish all of the company's liabilities.
In determining the going concern principle to be appropriate, the company has projected profitability and positive cash flows in the foreseeable future. In addition to the economic dependency disclosure at note 16 to the accounts, the company requires the continued support of its members, bankers, customers and creditors in addition to future profitability and positive cash flows, to continue as a going concern." [98]
The auditors' qualification in certifying the financial statements to be true and fair and in accordance with applicable accounting standards should have alerted the board to the question of whether the Company was a going concern.
The directors resolved to accept the financial statements and in particular resolved that there were reasonable grounds to believe that the Company would be able to pay its debts as and when they fall due. It was resolved that the two directors should sign the accounts. The directors must have satisfied themselves that the accounts should be prepared on a going concern basis.[99]
It was reported at the meeting that the financial statements showed a net loss after taking into account an income tax benefit of $936,580. The income tax benefit was $523,782. Without taking into account that income tax benefit (which of course was only a benefit if the Company was a going concern and the Company was likely to be profitable in the future), the Company suffered a loss of $1,460,363.
The accounts which were approved by the directors on that day were not signed until 9 July 1996.[100] It is not clear to me why there was such a significant delay in the signing of those accounts. However, when they were signed, the directors were in possession of other financial information which was provided to them at a meeting to be held in July 1996. I will return to those accounts.
Mr Carver also tabled the November management results.[101]
The November accounts which were apparently printed on 22 February 1996 for the purpose of this meeting showed that the Company had made a loss for the period 1 July 1995 to 30 November 1995 before provision for income tax benefits, of $416,358. The financial statements also show the Company had a negative cash flow in that same period of $1,627,943.
The balance sheet attached to the November accounts is instructive. It shows total assets of $7,623,809, which comprise current assets of $5,850,000, and as part of the non-current assets a sum of $616,471 representing future income tax benefits.
The current liabilities totalled $6,939,576 and include a bank overdraft of $1,627,943. The bank overdraft had been $705,488 in October. Not only had the bank overdraft increased in the order of $900,000 but the commercial bills increased by a further $500,000.
The Company's total liabilities were $8,076,856. Its liabilities exceeded its assets by $453,047 but only after taking into account, as an asset, future income tax benefits. If future income tax benefits were ignored, the Company's liabilities exceeded its assets by $1,070,000.
The forecast profit and loss statement accompanying the financial statements predicted an income in the aluminium division of $1,331,446 in February. It was known as at the date of this meeting that the YQ Company had failed to honour its obligations pursuant to the agreement. The YQ Company was in breach from 15 February and had indicated it would not make the first payment until 15 March. The forecast also assumed a payment of $7,235,969 in March. On the agreement which had been executed by the Company with the YQ Company there was no possibility, even if the YQ Company observed its obligations, that the Company would receive a sum of that order in March.
As at the end of February 1996, the directors were aware:
1 That the Company had suffered a trading loss to 30 June 1995 of $936,581.
2 If income tax benefits were excluded then the trading loss for that period was $1,460,363.
3 The original capital subscribed for the Company was $750,000.
4 Two directors had advanced a further $125,000 each by way of subordinated loans.
5 Mr Hercus had agreed to subordinate the Company's debt to him in respect of the design of the aluminium ferry to the extent of $125,000.
6 The Company had commenced building the aluminium ferry on spec.
7 Budgeted cost for the aluminium ferry was $US 8.4 million.
8 The Company had entered into a contract for the sale and purchase of that aluminium ferry in the sum of $US 7.55 million.
9 The purchaser had failed to pay the first instalment due on 15 February 1996.
10 The Company had experienced a further trading loss for the period to November 1995 after excluding any income tax benefit of $416,358.
11 Leaving aside income tax benefits, which at that stage were illusory except in an accounting sense, the Company had lost nearly $2 million during the period between September 1974 and 30 November 1995.
In particular I find that the defendant was aware of all of those matters. It is clear from Mr Quick QC's cross examination of the defendant that the defendant was aware of the Company's financial position as at the date of the director's meeting on 27 February 1996.[102]
Assuming the subordinated loans to be available to the Company as quasi-capital, it had lost nearly $850,000 more than its own capital. It could have expected, as indeed it transpired, that the Government would convert the two loans to which I have referred, to grants. But even so, those grants would not restore the Company to a positive position.
The directors, no doubt in an endeavour to improve the Company's balance sheet, agreed to convert the three subordinated loans to which I have referred into $1 convertible preference shares. The resolution was subject to the Memorandum and Articles of Association being amended to allow the Company to issue preference shares.
The directors did not hold regular board meetings. The board meeting held on 11 December 1995 was closed without any date being set for the next meeting.[103] Minutes of the board meeting of 27 February 1996 show that the next board meeting was to be held on 16 April 1997.[104] No such meeting was held.
It is surprising that regular board meetings were not held particularly in the period between December 1995 and April 1996 when the Company was under so much strain.
The directors were not supplied with timely financial information at their board meetings. At the board meeting of 27 February 1996 the directors received the November management results which were already three months out of date.[105]
During the period between December 1995 and February 1996, there were other indications that the Company was under financial strain. On 3 January 1996 Mr Carver wrote, on behalf of the Company, to the Australian Taxation Office seeking deferral of payment of Group Tax amounting to $100,219.14 until 21 January 1995.[106] The reason given for the request was that cash inflow had been irregular. On the same day, he wrote to the State Taxation Office seeking deferral of payment of Payroll Tax of $22,313.76 and to WorkCover seeking deferral of the payment of the WorkCover levy of $29,044.16 until 21 January 1995.[107]
On 6 February 1996 he wrote again to the Australian Taxation Office, the State Taxation Office and WorkCover seeking deferral of payments of, respectively, $104,569.52, $24,321.22 and $30,490.08 until 21 February 1996.[108]
There is no record of the directors being advised of those requests at the meeting of directors on 27 February 1996.
The ANZ bank originally provided a facility by way of overdraft with a limit of $500,000. In March 1995 that was apparently increased to $750,000, although that may have only been on a temporary basis. In April 1995 the facility was increased to $827,000 but the facility was restructured to include an overdraft, an encashment facility, a variable rate commercial bill acceptance/discount facility, and a credit card facility. The limit approval fee was then fixed at $1,000,000.
On 24 November 1995 the ANZ offered additional facilities including a variable rate commercial bill acceptance/discount facility with a limit of $4,250,000.[109] That facility was in addition to the overdraft facility.
On 15 December 1995 the bank wrote to Mr Thomas drawing his attention to the pressure which was being placed on the bank's agreed overdraft limit of $500,000.[110] It extended the overdraft temporarily to allow the Company to meet its commitments.
On 8 January 1996 the bank advised the Company that it would increase the overdraft limit to $1,600,000 "... to assist your cash flow position".[111] However, the overdraft had to be reduced to $1,250,000 by 12 January 1996, to $600,000 by 19 January 1996 and to its original limit of $500,000 by 26 January 1996.
Dr Williams met with the ANZ bank on 18 January 1996 and asked the bank to consider relaxing the requirement to reduce the overdraft balance to $500,000. He also sought finance in relation to the bank guarantee to EFIC and for other matters.
On 18 January 1996 the bank wrote to Dr Williams in the following terms:
"We have previously advised that only wages and cheques that could jeopardise the trading of SA Ships should be paid until overdraft balance has reduced to within the approved overdraft limit of $500,000." [112]
However, the bank advised that it was prepared to honour cheques to pay payroll tax, group tax and other sundry cheques provided various deposits were made within a certain time.
On 1 February 1996, the ANZ confirmed that it would assist with the EFIC performance bond.[113] At the same time however, it advised that the overdraft limit must remain within the $500,000 agreed limit.
On 26 February 1996, the bank sent guarantees and indemnities to the Company for execution by the directors.[114]
On 29 February 1996, Mr Carver wrote to the bank in the following terms:
"At the Board Meeting held on Tuesday, it was resolved that the Directors would be prepared to sign guarantees in support of the overdraft facility subject to the following terms:
1. The guarantees were to be operative up to the date of receipt of the second of the contract eight payments on the Aluminium Vessel destined for China. i.e. SAS will have received as a minimum 20% of the contract price US$7.55 m.
2. Clearance of document for commercial reasonability by the company's legal counsel. I intend to use Johnson Winter Slattery for this review as Minter Ellison are advisers to ANZ Bank and are therefore not independent advisers as required by the Guarantee. I have already faxed a copy to Charlie Winter for this review to be commenced ASAP.
3. An overdraft limit of A$1.5 m is provided. The purpose of the limit is to provide some degree of flexibility within which to operate. It is not my intention to spend up to this limit unless absolutely necessary. Upon receipt of the second payment and termination of the Directors' Guarantees, the overdraft limit would revert back to $500,000." [115]
Mr Carver's letter was in accordance with the resolution of the board of directors passed on 27 February 1996.
On 29 February 1996, the bank confirmed it would make an overdraft facility to a level of $1.5 million available upon the basis that the directors would give the guarantees provided and that the overdraft would be reduced to $500,000 upon payment of the deposit from the Chinese in respect of the aluminium vessel. The bank agreed to cancel the guarantees when the overdraft was reduced.[116]
On 16 January 1996, Dr Williams wrote to the Manager Prudential Assessment of EDA in which he confirmed that the existing EDA loan agreement required that the issued capital of the Company be increased to at least $1 million on or before 31 December 1995.[117] In that letter he referred to a Malaysian investor who had undertaken to provide the necessary capital and an additional $.5 million subordinated loan on 22 January 1996. Dr Williams wrote that if that Malaysian investor should not eventuate the existing subordinated loans provided by Dr Williams, Mr Verboon and Mr Hercus would be converted to ordinary shares at par value.
On 29 January 1996, EDA extended the time within which the ordinary equity be increased to $1 million until 31 March 1996 on the proviso that the shareholders' loans of $375,000 would also remain.[118]
On 23 February 1996, EDA advised that the $250,000 99 year interest loan to the Company would be converted to a grant provided that the Company retain a minimum level of ordinary capital of $1 million.[119]
Between February and July the Company's financial fortunes did not improve.
Notwithstanding the Company's obvious financial problems in early 1996, no further board meetings took place until 3 July 1996.
Between 29 February 1996 and 3 July 1996 a number of matters occurred.
Whilst no board meetings took place during this time this period is relevant, because the plaintiff has asserted, and the defendant has admitted, that from 1 June 1996 the Company was insolvent.
It is necessary therefore to examine the Company's history during that time.
The Company continued to have difficulty paying its debts as and when they fell due. On 3 April 1996, Mr Carver wrote to Taylor Marine advising that the Company was not in a financial position to pay its January 1996 invoices until the deposit for the aluminium ferry was received.[120] He advised Taylor Marine that ANZ was only prepared to pay the employees' wages. Mr Carver advised that the Company had received information on 1 April that the deposit monies would be paid by 15 April. A similar letter was written to another creditor, Blast Master.[121] On the same day, he wrote to WorkCover seeking deferment of the payment of the WorkCover levy of $36,663.35.[122] He also wrote to the Australian Taxation Office seeking deferment of the March Group Tax payment of $134,815.17;[123] and to the State Taxation Office seeking deferment of Payroll Tax amounting to $30,543.84.[124]
As I have previously mentioned, the contract between the Company and the YQ Company required the YQ Company to pay 10 percent of the purchase price by 15 February. Notwithstanding the Company had sent the YQ Company a performance bond of US$755,000 the YQ Company unilaterally extended the time for payment until 15 March and then to 15 April.[125]
On 4 April 1996, Mr Thomas wrote to the YQ Company requesting the 10 percent instalment to be paid in full before 15 April 1996 and if it was not paid the contract would be terminated.[126]
On 4 April he received a reply advising that the best that the YQ Company could do was to pay 5 percent of the purchase price on 15 April 1996, with 10 percent on 25 April 1996. He replied to that fax on the same day pointing out that the YQ Company was 60 days in arrears "... which is causing problems for our Company".[127] On 9 April 1996, Mr Thomas wrote to the YQ Company advising that the Company would accept 5 percent before 15 April 1996 and the balance of that deposit, namely 5 percent, by 25 April 1996.[128] He said that the Company would also expect that all other progress payments would be made in accordance with the contract. Lastly, he advised the YQ Company that the delivery date for the ship would be 10 September 1996.
Since the signing of the contract the Company had continued with the building of the vessel and a number of claims had been made in accordance with the contract. In fact, progress claims 1 to 4 had been lodged for payment before 15 March 1996 and progress claim number 5 which amounted to $US 1.51 million was lodged on 17 April 1996.
In accordance with the terms of the contract the YQ Company should have paid 80 percent of the purchase price or $US 6.04 million on 25 April 1996.
The first 5 percent instalment was received on 16 April 1996.[129] No payment was made by the YQ Company on 25 April 1996.[130] That Company did pay $US 110,000 on 1 May 1996 and $US 267,500 on 9 May 1996.[131] At the end of May the YQ Company had failed to honour its obligation to pay the 10 percent deposit on 15 February 1996 and it failed to honour its obligations in accordance with the various claims made under the contract by the Company.
On 6 May 1996, Mr Carver wrote to the Australian Taxation Office in the following terms:
"As discussed over recent months, the sale of the high speed vessel to China has been putting this business under severe cash flow pressures - and continues to do so. In the last two weeks we have discovered that the Chinese buyer for the high speed aluminium fast ferry has turned out to have no financial backing whatsoever. We have however, managed to receive a total of 6.5% of the contract, where under the original contract terms, 80% is now due and payable."[132]
On 31 May 1996, Mr Carver again wrote to the Australian Taxation Office requesting deferment of the April 1996 Group Tax instalment deductions. He again complained that the YQ Company had not honoured its obligations.[133]
In March 1996, Mr Thomas met with the ANZ bank and requested an increase in the Company's overdraft from $500,000 to $2.2 million. He told the bank that the additional facility was required to assist with the payment of creditors and wages pending receipt of the Chinese deposit. The application was refused but the bank agreed to extend the overdraft to $1.5 million.
That extension was not sufficient and on 1 April 1996, Mr Thomas again attended on the bank seeking an extension of the facility to $1.75 million so as to allow the Company to meet wages due on 12 April ($120,000) and 19 April ($50,000). The bank refused that further request.
Mr Thomas again attended on the bank seeking assistance to pay pressing sub-contractors and the Bank agreed to extend the overdraft facility to $1.565 million.
On 10 April 1996, the bank wrote to the Company in the following terms:
"Michael, your company has not operated within its approved Overdraft facility since December 1995. The Bank has given you every support over the past 16 months but we must draw the line somewhere and limiting the Overdraft to $1.500,000 was intended to send you a clear message that we will not continue to provide cash flow to your group for the construction of the ferry, particularly as we made our position clear from day one that we did not see financing of this vessel as our role." [134]
The bank advised the Company that it would extend the overdraft to $1.5 million until the end of April 1996.
The bank insisted upon guarantees and on 30 April 1996 Mr Carver wrote to the defendant advising him that the directors' guarantee would expire on 30 April 1996 and that the bank had indicated that upon expiry of that guarantee they would demand repayment of $1 million of the $1.5 million overdraft facility unless new guarantees were in place.[135] Mr Hercus signed the further guarantee.[136]
In the meantime (16 April 1996) the company entered into a Recourse Deed with EFIC under which EFIC would issue performance bonds totalling US$7,172,500 in favour of the YQ Company but expiring on 31 August 1996.[137]
On 7 May 1996, Mr Thomas sought further accommodation from the bank.
The bank advised Mr Thomas that it would consider his request provided that the Company undertook to pay a fee for Mr Bruce Carter of Ferrier Hodgson to make an immediate enquiry into the following matters:
"• Efficacy of daily cash flow forecasts to 30th June 1996;
• Future cash flow projections beyond June 1996;
• Overview of your Assets and Liability position, including a current profile of the company's unsecured credits." [138]
A meeting was arranged, between representatives of the bank, Dr Williams, Mr Thomas and representatives of Mr Carter's office, for 8 May 1996.
On 15 May 1996, Mr Carver sent a facsimile to the bank seeking approval to pay a number of cheques to creditors of the Company, totalling $339,000 which would take the Company in excess of its overdraft limit. Mr Carver advised the bank that if payment of those cheques was authorised, and with other monies to be paid, the overdraft would increase to $2.014 million.[139]
On 27 May 1996, Mr Carver, Mr Robinson and Mr Kerr who was also employed by Capital Strategies met with the bank to discuss the temporary overdraft facility of $1 million which was due to expire on 31 May 1996.[140]
They advised the bank that they were presently working on a revised cash flow forecast for presentation to the bank for an additional temporary facility beyond May 1996.
On 27 May 1996, the bank advised that upon receipt of further deposit monies from the YQ Company or the close of business on 31 May 1996, the overdraft limit would return to a basic level of $500,000.[141]
The bank advised Mr Carver that it would consider further facilities provided certain information was provided.
On 31 May 1996, the bank advised that it was prepared to offer additional facilities that may be summarised as follows:
Variable Rate Commercial Bill Facility $2,500,000
Indemnity Guarantee Facility No. 1 - $US 755,000 $1,034,000
Indemnity Guarantee Facility No. 2 - $US 358,625 $491,267
Thus, by 1 June 1996, the liability to the bank had ballooned out to $6,038,017, although it must be admitted that part of the indebtedness included the indemnity guarantee facilities which were to be taken up by EFIC.
During the period between February 1996 and June 1996, the proportion of creditors aged 90 days and over, increased significantly. In March 1996, the proportion of creditors aged 90 days and over, was .62%; in April 1996, 9.72%; in May 1996, 8.55%; and in June 1996, 33.21%.
In cross examination Mr Hercus acknowledged that as at 31 May 1996 he was concerned about the solvency of the Company.[143] He was aware that accounts rendered by his companies to the Company had not been met.[144] He was aware that those accounts had not been met because the purchaser of the aluminium vessel had not paid instalments which had fallen due. In particular he was aware that the Company then had a cash flow problem.[145] He was also aware that the Company was undercapitalised.[146]
During his cross examination I asked these questions of the defendant:
"Q Did you have an appreciation, say at the end of 1995, that the company's balance sheet must have regard to whether or not the company is itself a going concern.
A I guess I knew that. One of the things that did bother me throughout the period was, while I knew the company had a cash flow problem, as I've said before, a cash flow problem doesn't necessarily mean that the company is insolvent. Now, I'm not an expert on when a company is solvent and when it's not solvent, and I needed to have advice from people who were expert in such a matter, whether the Company was solvent or not. Ultimately, that's why I raised the question at the early September board meeting, but prior to that point, I had been assured by people who were working for us continuously that the company was solvent. As I said, I don't remember exactly which meetings we talked about it, but the question of whether or not the company was solvent was a matter that was discussed a number of times, because we didn't want to have happen what has subsequently happened and we were watching very closely. By the same token we didn't want to say 'Oh, it might rain, therefore we better close the company up' - By '96 we had 200 people who were working there and I think it would have been irresponsible to prematurely close the company.
Q Was the question of the company's solvency discussed at the meeting of 27 February 1996. I ask that question having regard to the first paragraph and item 7.2.
A I would think it must have been, because it says here 'the question of the going concern nature was discussed.'" [147]
Moreover the defendant was aware that by this stage the Company had been holding back payments to trade creditors. He was aware of that because one of the companies which he controlled was a trade creditor and it had not been paid.[148]
As he said that was an indicator of the possibility of insolvency.[149]
The question of the Company's insolvency was discussed from time to time. Mr Hercus said he discussed the Company's ability to meet its future debts with Mr Carver, Mr Robinson, Mr Thomas and Dr Williams. He believed that the question of solvency was discussed at the February 1996 meeting. He was asked by Mr Quick in cross examination:[150]
"Q You actually inquired about insolvency because you suspected that there might be insolvency, did you not.
A I did not suspect - sorry, I did not expect that there was insolvency -
Q I didn't mean to cut you off, but you are not answering my question. I'm not asking you about expectation, I'm asking you about suspicion. Now, the fact that you were inquiring, I suggest to you, if you think about it and make your answer on oath, I suggest to you that the fact of that inquiry meant that at that time you had suspicions that the Company was, or might be, insolvent.
A I would have asked to - yes, there was a suspicion, but I didn't think it was.
Q When you had that suspicion, you knew it was part of your responsibility as the director to satisfy yourself about whether or not the Company would be able to meet its future debts as and when they became due. You knew that, didn't you?
The defendant said that he trusted the judgment of others as to whether the Company could pay its debts as and when they fell due. In particular he relied upon Mr Carver, Mr Robinson, Mr Thomas and Dr Williams because he believed those persons had a 'hands-on feel' which provided them with the ability to make judgments.[151]
He said he did not rely on any one of those people but relied upon information and advice from them all.[152]
He said that prior to 31 May 1996 he did understand that insolvency was measured by a Company's abilities to pay its debts as and when they fell due.[153] He remembered asking both Mr Winter and Mr Robinson about the Company's solvency position. However, on that matter he was somewhat vague and I am not satisfied that he has an accurate recollection at any time prior to 31 May 1996.
He also said he spoke to Mr Carver about that issue. Again I am not satisfied that at any time prior to 31 May 1996 he asked Mr Carver whether the Company was able to pay its debts as and when they fell due.
I am satisfied for reasons previously given that prior to 31 May 1996 Mr Hercus did suspect that the Company could not pay its debts as and when they fell due because the Company had not received the promised payments from the YQ Company in relation to the aluminium vessel. I am satisfied that prior to 31 May 1996 he suspected that the Company was suffering a negative cash flow, in that it was bearing the cost of the construction of the aluminium vessel without receiving the corresponding interim payments to cover those costs.
Mr Hercus said that as at 31 May 1996 he did believe that the Company was solvent.[154]
The liquidator has said in his report, which has been tendered in these proceedings, that an insolvent company would typically demonstrate some or all of the following characteristics:
"• growing indebtedness to creditors and deterioration in the ageing of debts;
• inability to meet statutory liabilities when due and payable;
• inability to meet obligations to landlords when due and payable;
• inability to pay insurance commitments when due and payable;
• inability to obtain further external funding; and
• full utilisation of bank facilities and exceeding facility limits." [155]
I accept that all of those matters may be indicia of insolvency
The Company was insolvent as at 1 June 1996 and remained so until an Administrator was appointed on 14 January 1997.
The first question to be decided is whether at 1 June 1996 there were reasonable grounds for suspecting that the Company was insolvent or would become insolvent as the case may be.
EFIC and the Company agreed to extend the Performance Bonds until 15 October 1996 or the signing of the Protocol of Delivery and Acceptance (3 June ).[156]
On 13 June, Mr Carver paid the April and May WorkCover levies and on 19 June he paid the outstanding Payroll Tax for April and May.[157]
On 7 June 1996, Capital Strategies presented a revised cash flow projection and overdraft requirements which had been prepared by Mr Carver to the ANZ bank.[158]
The submission was optimistic. The Company suggested that it would be able to bring back creditors to normal 30 days trading terms and to reduce its overdraft progressively to $1.5 million by 30 September 1996 and $.5 million by 30 November 1996. This submission assumed a capital injection of $1.5 million.
The bank responded on 19 June.[159] It pointed out that the revised submission effectively sought an additional $1 million in overdraft facilities at least to 30 September 1996 and that that reduction was dependent upon further capital raising.
The bank rejected the Company's application. It said:
"The Bank remains uncomfortable with the company's financial standing, particularly the equity position and the volatility of cash flows. On this basis, the Bank is looking to further reduce its exposure to the group in an orderly manner and puts you on notice now that any additional facility to assist completion of any new boats is unlikely to be approved, and further, that the existing Commercial Bill facility against 'Raptis 6' and '7' is to terminate upon delivery and payment of those vessels.
With respect of the Overdraft facility, the Bank would prefer to see a structured reduction program between now and September 1996, and our initial suggestion is:
The Company had purchased the water jets for the aluminium ferry from KaMeWa, a Swedish company. The Company was, however, unable to pay for the water jets. By 19 June, KaMeWa had indicated that it was not prepared to give a discount previously offered and that it required something in the nature of a guarantee from the Company's bankers before it would release the water jets.[161]
On 20 June, Mr Carver advised KaMeWa of its difficulties in meeting its request.[162]
On 24 June 1996, KaMeWa advised the Company that it was prepared to release the water jets subject to a number of stringent conditions, one of which was that the contract price would be paid no later than 15 September 1996.[163]
He observed that the Company intended to pay INCAT a total of $250,000 in two tranches on 11 June and 19 June. He advised the bank that a cheque for $105,000 was in the process of being paid. He recommended to the bank that payments to directors and shareholders should be deferred. INCAT was not paid.
In his report to the ANZ bank, Mr Carter further observed that as at 31 May 1996, creditors totalled approximately $4.5 million and were aged from current to 120 days plus.
He told the bank that the cash flow forecasts were unrealistic.
He advised the bank that the cash flows ought to be restructured and that the Company should look to Dr Williams to inject further funds into the business or the South Australian Government to assist with further finance. Alternatively the Company should obtain guarantees or obtain additional finance from other financial institutions.
He advised that the ANZ ought to decide to withdraw support and convey that decision to the Company as soon as possible.[166]
The aluminium ferry depended upon Caterpillar engines. They were supplied by Energy Power Systems. On 26 June 1996, that company wrote to Dr Williams noting that the Company could not pay for the engines for that month as agreed.[167] Energy Power Systems accepted an alternative proposal that 50% of the payment for the engines would be made on 27 June 1996 and the remaining 50% on or before 31 July 1996.[168]
Energy Power Systems also proposed financing the construction of a second aluminium ferry and construction finance for that vessel.
On 26 June 1996, Mr Hercus spoke to Dr Williams and was advised by Dr Williams that the bank was insisting on restricting the Company to an overdraft of $500,000.[169]
As I have already observed, no board meetings were held between 27 February 1996 and 3 July 1996. Having regard to the parlous state of the Company's finances, it is almost incomprehensible that the board had not met during this time. The directors had an obligation to acquaint themselves with the Company's financial fortunes during this time. As I have said, the defendant now concedes that for part of this time the Company was insolvent.
It is also clear from the evidence tendered at trial that the directors had not been provided with any financial statement later than the November 1995 nor any management accounts except for perhaps the December 1995 accounts which were apparently printed on 4 April 1996. It appears that the management accounts for January and March 1996, were not distributed to the directors prior to the meeting of 3 July 1996.[170] There is no record that the December management accounts were ever distributed to the directors or at least to the non-executive directors.
The 1995 financial statements had not been signed by this time. As I have already observed, they were signed off, at least by the Auditors, on 9 July 1996.[171] There was no explanation for the failure of the directors to certify the accounts prior to this time. There is a reference to the 1995 accounts in paragraph 4.4 of the minutes of the meeting of 3 July 1996:
These accounts are now ready to be signed by Arthur Andersen as Auditors." [172]
All directors were present at the meeting, as was Mr Carver.[173] At some point in the meeting, Messrs Robinson and Kerr from Capital Strategies joined the meeting. It is recorded that Mr Carver tabled the year to date result to May 1996 for discussion and approval was sought and given for a copy of these accounts to be given to the bank.
The only document which might fit that description is a balance sheet prepared to 30 April 1996.[174] The balance sheet contained in that exhibit was probably created by Mr Robinson of Capital Strategies. It is likely that the document tabled contained Mr Robinson's letter and enclosure of 21 May 1996.[175]
That balance sheet indicates an excess of assets over liabilities of $118,093. However, its assets only exceeded its liabilities if it was appropriate to take into account future income tax benefits of $656,000. The Company's current liabilities exceeded its current assets by more that $4.5 million.
It was put to Mr Hercus, in cross examination, by Mr Quick that the in house monthly accounts for the months of February, March, April and May had not been presented to him prior to the meeting of directors on 3 July 1996. Mr Hercus agreed that management accounts had lagged and were not presented in a timely fashion.[176]
It was established beyond doubt in cross examination that the directors were not advised on a regular and timely fashion of the financial situation of the Company. That was partly the fault of management who failed to produce management accounts on a regular monthly basis. It was also partly due, in my opinion, to the failure by the directors to meet regularly and thereby require regular reports to be given to them of the financial position of the Company.
However, I think that the proposition that Mr Quick put to Mr Hercus was not entirely accurate. Mr Robinson had written to the ANZ bank on 21 May 1996, enclosing the draft management accounts for the period ended 30 April 1996.[177] A copy of his letter to the bank and enclosures was sent to Mr Bruce Carter of Ferrier Hodgson (advisor to the bank) and copies were sent to Dr Williams, Mr Thomas and Mr Carver.[178]
It is therefore likely that at least two of the directors had been presented with accounts prepared by Mr Robinson of Capital Strategy by the middle of May. It may have been that Mr Hercus had not received a copy of Mr Robinson's letter and enclosures prior to 3 July 1996 but that is unclear.
I suppose, however, in the end result the point made by Mr Quick is still valid. The directors were not kept fully acquainted with the financial position of the Company between board meetings and indeed at board meetings.
He also tabled cash flow projections for the period to 30 September 1996.[181]
He reported that upon the assumptions inherent in those projections the Company could meet its debts as and when they fell due for payment.[182]
A managing directors' report was presented to the board meeting on 3 July 1996.[183] In that report the managing director (Mr Thomas) referred to cash flow difficulties affecting the delivery of Raptis vessels 5, 6 and 7.
David Carver will report independently of our current financial status.
It is of great concern to me that our efforts in attracting an equity partner have not materialised to date and it is now the singular most important task for this Board to consider. Several potential equity partners have been approached by our Chairman in recent weeks the details of which will be reported at the meeting.
The cashflows quite clearly indicate that without firm forward orders by the end of August, the additional capital/loans will be essential for the continuing viability of the business." [184]
On 8 July 1996, Mr Carver wrote to the State Taxation Office enclosing a cheque for $30,543.84 for the March 1996 Payroll Tax.[185] He sought an extension of time until 19 July to make payment of the June Payroll Tax which amounted to $23,000.64.
During July correspondence was exchanged between the Company and Energy Power Systems relating to payment to them for the engines contained in the aluminium ferry. Clearly enough, Energy Power Systems was concerned that it would not be paid.[186]
The Company also continued to correspond with KaMeWa relating to the supply of its equipment.
In the end result, KaMeWa agreed to release the shipping documents to the Company provided that SEK3,306,000 was paid as soon as possible after launch of the vessel.[187]
On 31 July Mr Carver wrote to Welding Industries of Australia explaining why its account had not been paid because of delays in cash being remitted from China.[188] On 1 August, Mr Carver wrote to Tubemakers expressing his surprise that Tubemakers had put the Company on "stop supply".[189] He admitted in that correspondence that the Company had been tardy in payment of its accounts.
It is quite clear that in July 1996, the company was having significant difficulty in obtaining the equipment necessary to complete the aluminium vessel. It was having to negotiate terms of repayment with the suppliers of the engines and the water jet units.
The Company's position with its bankers did not improve in July. On 25 July 1996, Mr Carver was obliged to seek further assistance from the bank to pay contractors and key suppliers.[190] He advised the bank that supplies had been stopped by some suppliers pending receipt of payment.
The Company's position worsened in August. On 2 August 1996, Mr Carver again wrote to the bank, this time seeking $190,000 to pay key accounts, mainly suppliers.[191]
On 5 August the Company sought an extension of time within which to pay its WorkCover liability for July amounting to $44,797.25 and on the same day it sought an extension of time within which to pay its Payroll Tax liability for the same month, amounting to $33,401.76.[192]
On 13 August 1996, Mr Carver provided the management's financial statements for the Company for the period 30 June 1996 to each of the directors.[193] Mr Hercus has a memory of receiving that document.[194] He thinks that he received the document at the early September board meeting and that the document gave rise to considerable discussion including him asking whether the Company was insolvent.
The document includes an acknowledgement by management that management had not been preparing timely monthly accounts. Indeed Mr Carver wrote:
"... [t]he lack of accounting systems, policies and disciplines for the period July to October 1995 ended up causing significant financial heartburn in attempting to establish an accurate financial position for this period." [195]
After referring to other shortcomings in accounting policies and procedures he wrote in relation to the results themselves:
"Ignoring the aberrations referred to above, the June 1996 results were disappointing - especially in the area of Steel Division Gross Margin. Clearly one of the key reasons for this result was the over estimation of Gross Margin on Raptis Vessels 7 and 8 and the Pearling vessel in prior months. Analysis shows that the major area of blow out was in the cost of direct labour and contract/casual labour due to the shortage of cash delaying material deliveries and ultimately labour utilisation. In addition but on a minor scale it has been found that purchase orders for contract/agency labour have not always been raised thereby understating the anticipated costs of completion.
A number of system disciplines have now been implemented to ensure this situation, though minor in the scheme of things, does not re-occur.
These delays in material deliveries through cash shortages conservatively have cost the company approximately $201,000 in lost margin on the following vessels..."[196]
He then referred to the Raptis 6, Raptis 7 and Maxima Pearl Vessels.
The accounts showed a loss of $107,259 before tax and $70,125 net of tax. The loss was only contained by including in the profit and loss a sum of $650,000 by way of Government grant.
A balance sheet accompanying the report showed that the Company had current assets of $6,573,000 and currently liabilities of $8,925,000.
As at 30 June 1996 the trade creditors totalled $4,970,000, even after receipt of the payment by the YQ Company in June of that year. Notwithstanding that payment the balance sheet showed that trade creditors had increased in June.
The balance sheet indicated that the Company's assets exceeded its liabilities by $118,296 provided, however, that it was appropriate to include as part of the non current assets the sum of $616,471, reflecting future income tax benefits.
The defendant admitted that when he first saw these figures he sought external advice as to whether or not the Company was solvent.[197]
He thought then that it was significant that the trade creditors had not reduced in spite of the YQ Company paying a significant amount to the Company in June. He said he spoke to Mr Carver about that.[198]
It was Mr Hercus' recollection that he first saw these management accounts at the board meeting which occurred on 10 September. Later in his cross examination Mr Hercus was shown a document which he had written on 19 September 2000, asserting that he had received the 30 June 1996 accounts in late August 1996.[199] I think it is probable that Mr Hercus received these documents prior to the 10 September 1996 board meeting and that he had an opportunity well before that board meeting to consider the accounts.
I think his recollection at trial that he received the documents at the board meeting is wrong.[200]
On 14 August, Mr Thomas met with the ANZ bank seeking temporary assistance pending receipt of further deposit monies from China. The bank advised Mr Thomas that it was "... disappointed with the need for such assistance and is uncomfortable with the present circumstances in which the company finds itself."[201]
The bank reiterated that it had no desire to fund the aluminium ferry but that the present request for support was effectively requiring the Bank to do so.
However, the bank agreed to provide a temporary overdraft facility of $400,000 for a maximum period of three weeks to expire on 5 September 1996 when it was expected that the letter of credit from the YQ Company would be available.
The bank also advised that it was reluctant to provide any funding for the Raptis 8 vessel until the bank had seen some further evidence of government support and/or significant progress in addressing the Company's under-capitalised position.
The Company had sought financing from the Commonwealth Bank but that application was refused during August.[202]
On 13 August 1996, Mr Carver forwarded to the directors, the June 1996 accounts which he described as being "... preliminary in that items like depreciation expense and export market development grant are yet to be finalised".[203]
He described the results for the financial year as disappointing.
The profit and loss statement enclosed with Mr Carver's memorandum disclosed a loss before provision for income tax of $107,259. That loss was reduced by an income tax benefit of $37,134.
A balance sheet disclosed current assets of $6,573,464 and current liabilities of $8,925,033.
The balance sheet disclosed an excess of assets over liabilities of $118,296 but only if it was appropriate to include, as an intangible asset, future income tax benefits of $616,471.
On 3 May 1996, the Department of Manufacturing, Industry, Small Business and Regional Development (MISBARD), formerly known as Economic Development Authority, had commissioned Leadenhall Australia Limited to carry out a review and to report on the current status of the Company.
In particular, Leadenhall Australia was asked to quantify the capital requirements of the Company and to identify relevant issues to be addressed by the company.
Leadenhall Australia Limited reported on 22 August 1996.
It described its own key findings in the following way:
"• An equity injection of $2 million is required in the current financial year.
• Sensitivity analysis indicates that this amount could rise to $3.7 million in a 'worst case' scenario using lower-bound projections, a three-month delay on aluminium vessel contracts and low bank security cover ratios ...
• The company has continued to experience difficulties with cash flow during the course of our review. An immediate funding requirement of $750,000 to $1 million needs urgent attention.
• No profits have been earned by the company to date.
• Budgets show a considerable upside potential value if budgets are achieved and the equity injection is obtained.
• The company currently has a negative net asset position of $137,000 (after adjusting for SA Government funding treated by the Company as a grant) and a negative working capital position of $366,000.
• Resourcing shortages have caused delays in obtaining financial information. This situation has been exacerbated by cash management difficulties.
• It appears that the Company would benefit from additional financial, commercial and accounting input at Board level.
• The core competitive advantage afforded to SA Ships through its relationship with Mr Phil Hercus and his design firm Incat Designs appears to be in question. We understand that relevant contracts have not been renewed. During the course of our review, we were advised that new arrangements would be put in place, but we understand that contract renewal has not yet been finalised.
• A preliminary analysis based on the future cash flow projections contained in the high and low five-year estimates provided by SA Ships and Capital Strategies indicates a potential value of approximately $17 million in non-current assets. This preliminary analysis of value is highly dependent upon the introduction of the equity required to achieve the budgeted profitability and cashflow. The 'back-of-the-envelope' valuation is also provided against a backdrop of negative profitability to date and a current balance sheet position showing a shortfall on net assets after adjusting for SA Government funding." [204]
The defendant did not receive a copy of the Leadenhall Report. He did not ever read it before the Company went into voluntary administration.[205] In fact he did not see it until about four years after the Company went into liquidation.[206] The Report was tabled at the meeting of directors on 10 September.[207] He agreed that if he had read the Report at the time it was published he would have realised that there was a very serious doubt about the ability of the Company to meet its debts as and when they fell due.[208]
There is no doubt in my mind that the defendant was remiss in not seeking a copy of the Leadenhall Report at the time of its publication. The Report was commissioned for the purpose of advising the Company and MISBARD on the Company's financial position.
On any understanding at that time the Company was undercapitalised. It was suffering serious cash flow problems. The defendant was becoming concerned about the Company's ability to pay its debts as and when they fell due. In those circumstances as a director of the Company he had an obligation to call for the Leadenhall Report, study it, understand it and, if he accepted those findings act, upon them.
The defendant was overseas in late August and did not return to Australia until 7 September.[209]
On 2 September 1996, MISBARD wrote to the Company advising that the existing $400,000 loan had been converted to a grant.[210] In that letter, MISBARD stated:
"This conversion is on the basis of your advice that failure by South Australian Ships Pty Ltd (SA Ships) to be able to treat this as a grant in the financial accounts, could lead to questions as to solvency of the Company, resulting in the appointment of a Receiver.
I would also like to confirm that MISBARD has agreed to consider a formal proposal for a short term Government finance/guarantee. As advised, to warrant consideration by MISBARD, this proposal would need to include significant equity contributions from existing shareholders and other parties such that the amount requested of the Government is significantly reduced from $1.5 million to a level that may be considered acceptable. The proposal would also need to properly address an acceptable contract with Phil Hercus and a documented and feasible plan as to how the additional equity requirements identified in the Leadenhall report will be secured."[211]
On 6 September the Company wrote to Mr Cambridge at MISBARD "... seeking the urgent assistance of the Department of Manufacturing Industry Small Business and Regional Development ("MISBARD"), your Minister and Cabinet with regard to a range of matters outlined in this application."[212]
The letter sought a South Australian Government guarantee or equivalent for $1.35 million for the three months to 31 December 1996 and thereafter reducing.
The submission was predicated upon the basis that the directors would contribute a further $375,000 by way of capital and that the major creditors of the Company would continue to support it. The major creditors identified in the submission were Caterpillar of Australia Limited, Reintjes (Gearbox Suppliers), KaMeWa, Tubemakers and the ANZ Bank.
The submission recognised the Company's acute cash flow problem and its inability to continue without further capital injection. The submission recognised the appropriateness of the recommendations in the Leadenhall report.
The defendant said he did not receive a copy of this letter at or about the time it was created and notwithstanding that he discovered the letter on these proceedings.[213]
He was overseas when the letter was written. He could not explain how he came to discover the letter.
He said he would have vigorously disagreed with aspects of it.[214] The letter referred to the possibility of Mr Hercus' former business partner, Mr Clifford, taking equity in the Company. Mr Hercus said he was not aware that had occurred. Mr Hercus and Mr Clifford are not on good terms. He would remember if he had received their letters.
I accept his evidence that he did not receive a copy of this letter at that time.
On 6 September 1996 a report was prepared and published relating to the aluminium yard.
The report indicated that there had been a number of hold ups with materials supply. It identified the suppliers who were holding up the suppliers and concluded by saying:
"Major holdups with supply of bits and pieces being denied by credit restrictions are still being experienced."[215]
On 9 September 1996 the Government rejected the Company's application for financial assistance.
On 10 September 1996 a board meeting was held. The defendant said that the 10 September board meeting was held because of the South Australian Government's rejection of the Company's application for financial assistance on the previous day.
There are no board minutes of this meeting. It is almost incomprehensible that the directors did not ensure that proper minutes were kept of a meeting of such importance to the Company. The defendant recognised that minutes should have been taken.[216]
Although there are no board minutes the defendant kept notes of the meeting.[217]
The meeting was attended by all directors and also by Mr Carver, Mr Robinson and Mr Winter.
The defendant said that at that board meeting Dr Williams said words to the following effect:
"The Leadenhall Report has been completed from MISBARD. It is good news. It values the company at $17 million and says that the company could see profits as early as this financial year. It also says the company has some cash flow shortages that we have to overcome by sourcing $2 million in additional equity. But we have until July of next year to find it. Overall the report is very positive."[220]
The defendant said that Dr Williams told him that the Leadenhall Report was all good news.[221] I am not sure whether the defendant meant that was said at that meeting or some other time.
I accept that Dr Williams told the defendant that the Leadenhall Report was all good news. It does not matter for the purpose of this case whether the defendant was told that at this meeting or at some other time. I think Dr Williams was an optimist. I think he believed that the Company could turn itself around and become a profitable shipbuilder in South Australia. I think all of the directors wanted to believe that. I think that is why Dr Williams would have said what the defendant claims.
It is surprising that Dr Williams said that the Leadenhall Report was all good news. The State Government had, through MISBARD, commissioned the Leadenhall Report for the purpose of deciding whether it would invest in the Company. It had advised the Company the day before that it would not invest in the Company. In those circumstances it is hard to think that the Leadenhall Report could be called good news if, in fact, the party commissioning the Report had refused to invest on the strength of the Report.[222]
However, even if Dr Williams did say that the Leadenhall Report was all good news that did not relieve the defendant from the obligation of reading the document himself. As I have already found he had an obligation, because of the Company's position, to read a report which was commissioned to advise the Company, its directors and its potential financiers on the Company's financial position. This very meeting was deciding whether or not the Company should continue to trade.
No financial statements were tabled at this meeting.[223]
That seems again surprising. The meeting was called to discuss the Company's future which, of course, entirely depended upon its financial position.
A number of options were discussed at the meeting. The defendant listed the options which were discussed. Those options were:
7 Appoint a Voluntary administrator (Directors appoint).
8 Wait for creditor to seek appoint of a liquidator." [224]
The defendant said that the first option was to attempt to obtain financial assistance from EFIC in order to enable the Company to complete construction of the aluminium catamaran.
He said that when that option was considered by the meeting Mr Robinson said words to the effect:
"Otherwise we will need to consider voluntary administration."[225]
The defendant said that he was not familiar with the concept of voluntary administration although he understood that creditor's payments would be suspended and the business might survive in a voluntary administration.[226] I accept his evidence in that regard. The concept of voluntary administration in 1996 was relatively new. I find that the defendant was unfamiliar with the concept of voluntary administration as at 10 September 1996.
The defendant said that he sought advice from Mr Robinson "as to when such an administration should be adopted."[227] He said that Mr Robinson advised the meeting to the following effect:
"Concepts of voluntary administration and corporate insolvency are complex. There are accountants who specialise as insolvency practitioners. We need to get some independent advice from such a specialist as to whether the company is solvent. Sims Lockwood & Partners would be an appropriate firm to get such advice."[228]
"Are we solvent or not? What is the definition?"[229]
"I am not an expert in insolvency practice. You need to go to an expert. I recommend Tony Sims of Sims Lockwood."[230]
The defendant said that either Mr Robinson or Mr Winter advised the meeting that the directors must reasonably believe that the Company was able to meet its obligations to avoid the suggestion that the directors allowed the Company to trade whilst insolvent.[231] He said the question of the directors' personal liability was discussed.[232]
Mr Hercus' note of that meeting includes the following:
"We now cannot incur any new expenses, commitments, etc - Directors are personally liable for any new expenses." [233]
That note indicates the topic which was addressed and that the directors, I think, resolved not to incur any further expenses. I believe they did so because they recognised at that time the Company's financial position and the consequences to them if they allowed the Company to continue to trade.
In my opinion, that note indicates the directors' level of awareness of the Company's financial position. The note also includes the following:
"Shortfall = (approx) $1.75 million."[234]
In my opinion, that also indicates that the directors were well aware as at 10 September 1996 that the Company was insolvent.
It was the defendant's evidence that Mr Robinson said that anyone providing funds would want to see some further commitment from the directors. Mr Hercus said that he told the meeting that he was willing to consider foregoing an INCAT account.
The defendant said that Dr Williams told the meeting that the Government had not walked away from the Company because a submission to and from MISBARD was still to come.
The defendant was aware that the Cabinet had refused an application for assistance but in circumstances where the Company's two supporters, the Premier, Dean Brown, and the Minister for Industry, John Olsen, had been overseas. Dr Williams said that the previous application had not been put to Cabinet as strongly as it could have been. He told the meeting there was still room for hope. He said that he was seeing MISBARD that afternoon before they finalise their submissions for the Government.
Mr Hercus stated that the directors had resolved to apply to EFIC again and the State Government for assistance. The Directors further resolved that Dr Williams should speak to Mr Ian Kowalick of the South Australian Premier's Department to assess whether it would be advantageous for the Company to make an additional submission to the State Government.
Mr Hercus said that he relied upon Dr Williams' judgment in that regard.
No financial statements were presented to the meeting of 10 September. Notwithstanding that the directors were advised at that meeting that there was a shortfall of $1.75 million and that the Company should not incur any new expenses in the future, the defendant did not call for any financial statements for the period after 30 June 1996.[235]
Mr Hercus was keen to assure MISBARD that INCAT would continue to support the Company which is one of the conditions set out in MISBARD's letter of 2 September 1996, to which I have already referred. He met with MISBARD immediately after the directors' meeting.[236]
At that meeting Mr Hercus said INCAT would continue to support the Company in accordance with one of the conditions mentioned in the letter of the Government to the Company, dated 2 September 1996. INCAT promised a two year period of exclusivity doing work for the Company.
He said that at the same meeting he took the opportunity to request Government funds to ensure that the Company was stable enough to warrant INCAT's involvement.
The defendant was well aware as at 10 September 1996, that it was his duty to prevent the Company from trading whilst insolvent.
On the same day the defendant and two other directors, Dr Williams and Mr Thomas and Mr Winter, the Company's solicitor, met with representatives of EFIC and Mr Paul Robinson.
The Leadenhall Report was discussed and the meeting was told that in the opinion of Leadenhall the Company was worth $17 million.
The meeting discussed the cost of completing the aluminium vessel and when it would be launched.
EFIC was advised that Mr Robinson believed that the Company needed a further $3 million worth of capital and $2 million of standby finance.
The meeting was advised that the directors would contribute $250,000-$375,000 by way of equity.
EFIC advised that it believed that the Company had a significant problem in the retention of title claims on the engines on the aluminium vessel.
Mr Hercus made notes of that meeting.[237]
The defendant said that he was telephoned by Dr Williams on 12 September who said:
"I am of the view that there was something wrong with the Government's understanding of what we have been asking for. I think it is worth approaching them again."[238]
On 13 September 1996, Mr Bruce Carter of Ferrier Hodgson, chartered accountants, who had been retained by the ANZ to advise in relation to its facilities with the Company, attended the Company's premises and met with Mr Carter. On 16 September 1996, Mr Carter reported to the ANZ. Clearly enough his instructions must have been to report upon the bank's position in the event that the Company was placed in administration of some kind. His report indicates that there had been public speculation on the morning of 13 September that the Company would be placed in receivership.[239]
He provided advice to the bank on the likelihood of recovery in the event of a forced closure.
On 16 September 1996, the Company sought financing for the purpose of building an eighth vessel for Raptis.[240] The Company applied for a further $500,000 by way of accommodation. The application which was signed by Mr Carver contained the following:
"As you are aware cash flow management is particularly tight at present and we trust the above proposal can be considered and approved by you by the targeted Wednesday 18 September 1996 with regard to the initial draw down of $500,000 net. In addition, it would help our relations with Energy Supply Systems (Caterpillar) and Antelope Engineering (gearboxes) if funds could be drawn down to satisfy these two major suppliers shortly thereafter."[241]
On the same date the bank advised the Company that it would not consider funding that vessel, at least until the positions of EFIC and the SA Government were known.[242] It further advised:
"However please note that on the information provided to date the ANZ is unlikely to fund Raptis #8 vessel on the basis requested." [243]
The defendant said that he was unaware of the application. I take his evidence to be that at that stage he was unaware that the Company was seeking an extra $500,000 by way of credit specifically in relation to Raptis 8 Vessel.
This application seems to be inconsistent with the Company having resolved not to incur further expenses or commitments. Here the Company was seeking a further advance of $500,000.
On 17 September 1996 the defendant wrote to Mr Bill Price, Manager of EDA, in the following terms:
Thank you for the time that you and Richard Matthews spent with me last Tuesday.
For good order I wish to confirm the following:
1 International Catamaran Designs Pty Ltd has very strongly supported South Australian Ships since its inception and intends to do so in the future. We see the link with SAS as a vital part of the future business strategy of ICD.
The support takes the form of designs for various types of catamarans designed by ICD, i.e. Wave Piercers, conventional catamarans, low wash catamarans etc.
In addition, part of the support as the supply of technical information and marketing assistance to be used in SAS's marketing activities. For your information, up to the end of June 1996 we had supplied approximately $210,000 worth of marketing support.
2 Hercus Marine Designs Pty Ltd, the conventional naval architectural (i.e. not catamaran) side of our business, has supplied naval architectural and drafting services to SAS in connection with the various trawler projects undertaken. We will continue to provide this assistance as and when SAS require.
3 For the last four or so years we have conducted an internal R&D program to develop designs for fast freight ships derived from our successful far car ferries. We believed that the market potential for these ships will ultimately fast surpass that of the fast car ferries currently being produced in Australia. We invested in SAS with a primary goal of establishing a shipyard which could become a specialised builder of fast freight ships.
At the inception of SAS we agreed to give SAS the exclusive right for Australia to build fast freight ships to our designs. That exclusivity was for a period of 2 years which lapsed at 30 June 1996.
We are willing to renew that exclusivity agreement but only if the future of SAS is assured. As you clearly know, SAS is in a constrained financial position at the moment and we are not prepared to tie ourselves exclusively for another two years to a company which will not be able to provide us with a credible shipbuilding capability for these vessels.
While we accept your belief that the package of support recently sought by SAS maybe too great for the State to provide, we believe that the South Australian Government can and should provide a lower level of assistance as part of an overall package of support from interested parties.
During our meeting I mentioned a small booklet that I had recently produced and used as the basis for a presentation at a major international conference in Germany last May. I enclose five copies of the booklet for your information and distribution to other interested parties in your Department.
There can be no doubt that Mr Hercus' letter of 17 September 1996 followed the meeting with MISBARD on or about 10 September 1996.
The letter, however, is in somewhat different terms to Mr Hercus' evidence in chief. The letter promised a two year 'exclusivity agreement' to the Company but only if the future of the Company was assured.
In my opinion that letter indicates Mr Hercus' both state of knowledge and state of mind at the time.
Mr Hercus was well aware that the Company could not support itself without financial assistance but he was not prepared to support the Company without Government assistance.
Sometime prior to 19 September, Dr Williams met Fateh Singh Jodhka and his nephew, Marindah Singh. They claimed to represent Money Exchange Corporation Limited (MEC), which had expressed a willingness to consider acquiring a 50 per cent shareholding in the Company. Dr Williams and Mr Carver introduced them to the ANZ bank on 18 September 1996. The Bank has recorded in a note that "[t]he substance of discussions did not engender confidence as to bona fides of Mr Jodhka or his company...".[245]
A further meeting of the board was held on 19 September 1996. Mr Hercus attended this meeting by telephone.
Also present at this meeting were Dr Fateh Singh Jodhka and Mr Marindah Singh, who claimed to represent International Shipping Corporation (ISC) not MEC.
The directors resolved at that meeting to approve Dr Williams and Mr Verboon signing under the seal of the Company, a Shareholder Agreement by which International Shipping Corporation (ISC) acquired the right to acquire 50 percent of the capital for the sum of $2 million and a Marketing Agreement, which subject to ISC performing the Shareholder Agreement, would give ISC the marketing rights for the Company's products in India, Sri Lanka, Bangladesh, Africa and the Middle East.
Immediately prior to this meeting the share capital of the Company was $1,125,000, of which Dr Williams and the defendant had each contributed $291,667 or 25.93 per cent and Mr Thomas and Mr Rick Verboon had contributed $166,667 or 14.81 per cent and Mr Dick Verboon had contributed $208,333 or 18.52 percent.[246]
On 20 September 1996, EFIC declined the Company's further application for assistance.[247] Not only did EFIC reject the Company's application for finance it gave notice at the same time that the Company was in breach of EFIC's charge under a Recourse Deed.
The shareholder agreement and the marketing agreement were entered into on 21 September 1996.[248]
The shareholder agreement contemplated that the existing shareholders would increase their capital contributions to AUD$1.5 million and that ISC would provide US$2 million in cash on or before 31 December 1996 to be applied in subscription for 1,500,000 ordinary shares for a total consideration of AUD$2 million and for the balance of monies to be loaned unsecured to the Company for a period of three years with interest payable monthly at the rate of 10 percent.
It was also agreed that International Shipping Corporation would provide a further US$2 million cash loan or guarantee to provide working capital for the Company.
The shareholder agreement also provided that ISC would provide to the company, on or before 15 October 1996, a guarantee from an Australian trading bank guaranteeing to the Company the sum of $US 2 million in the event that ISC could not comply with the operative parts of the shareholder agreement. The agreement also provided that, on or before 31 December 1996, ISC would pay to the Company the sum of $US2 million when the Company would allot the shares to ISC. The agreement also provided that ISC would lend the balance of the money, being the difference between $US2 million and the amount necessary to enable ISC to purchase the shares, to the Company on or before 31 December 1996 for a term of three years at an interest rate of 10 per cent.
The shareholder agreement further provided that ISC would advance to the Company a further sum of $US2 million by 30 June 1997. Those monies would be applied by the company for its own working capital. That loan was to be for a period of 10 years commencing on the day the monies were advanced.
The shareholder agreement provided that ISC would carry out a due diligence inquiry and investigation concerning the financial circumstances of the Company and would commence such an inquiry as soon as practicable following execution of the agreement.
"The obligations of the New Shareholder under this Agreement shall be subject to and conditional upon the New Shareholder carrying out due diligence in the nature of enquiries and investigation as the New Shareholder considers necessary concerning the financial circumstances of the Company and the adequacy and acceptability of the terms of this Agreement from the perspective of the New Shareholder which enquiries and investigation must provide the New Shareholder with results satisfactory to it in its absolute discretion."[249]
The shareholder agreement contemplated the marketing agreement which, as I say, was also executed on the same day.
In that agreement the Company agreed to appoint ISC as the sole marketing agent for India, Sri Lanka, Bangladesh, the African Continent and Middle East countries.
During their negotiations the parties recognised that the Company would hold other discussions with other parties regarding the issue of additional equity.
On the same day that the shareholder agreement and the marketing agreement were executed, Dr Williams wrote to Mr Kowolick, the then chief executive in the Department of Premier and Cabinet, making a further application for financial assistance.[250]
He sought the following financial assistance:
1 Performance guarantee EFIC/Chinese purchaser re Xiang Zehen Vessel - approximately AUD $480,000.
3 Construction Costs of Slipway - AUD $75,000. [251]
After referring to the agreement signed with ISC, Dr Williams wrote:
"As can be seen from the above proposal the company has an immediate cash requirement of AUD$325,000 (AUD$250,000 advance plus AUD$75,000 for slipway) and a standby facility for further AUD$125,000 (AUD$375,000 maximum for advance less AUD$250,000). In addition, we request the South Australian Government provide the EFIC/Chinese customer performance bonding guarantee in the order of AUD$480,000. This would be the Government's maximum exposure under these guarantees and the company would not expect any of this guarantee to be called provided the vessel is delivered satisfactorily to China."[252]
Dr Williams advised Mr Kowalick that the next board meeting was to be held on 23 September 1996.
Clearly enough the agreement signed with ISC did not meet the Company's short term financial needs.
On 23 September 1996, the same day as the board meeting, the Government advised the Company that it would not provide the financial assistance sought.
By 23 September 1996 the Company was in a parlous state. It had no prospects of obtaining finance from any source, except perhaps an investment by ISC but not until after a due diligence inquiry and no earlier than 15 October 1996.
A number of options were considered at this meeting. However, I think the directors resolved to approach someone to act as an administrator.[255]
Mr Hercus said that the directors debated the issues of solvency at this meeting and at a subsequent meeting held on 25 September 1996 to which I will refer.
He said that because the Indian interests had signed an agreement with the Company, and EFIC might yet be prepared to assist, the Company needed to work out if it was solvent. It is not clear to me why it was contemplated at that stage that EFIC might be prepared to assist. It had made its position perfectly clear. It was no longer prepared to assist the Company.
Mr Hercus was cross examined by Mr Lunn, counsel for the third parties, concerning his awareness at this meeting:
"Q On 23 September, you were still in the position where you knew that you were at risk as to personal liability as the director according to whether or not the company was insolvent.
Q I suggest it was your expectation that if the State Government didn't provide what it was being asked for, and the house of cards came tumbling down, so to speak, that the $1 million was not available, then the only hope of avoiding voluntary administration was if the Indians came forward with some $2 million -
A And the Indians weren't going to come forward that quickly.
Q In that event, do you accept that on 23 September that, unless the State Government came through with what it was being asked for, that it was your expectations that a voluntary administrator would have to be appointed.
A No, it wasn't that. It wasn't that, I'm sorry. I misled you with the previous answer. The situation was dire. We needed - and this was where we needed the advice from Mr Sims, or someone like Mr Sims.
Q It wasn't just a question of someone like Mr Sims said the company is solvent or not; you had to find some further funding if the company was to proceed, didn't you?
A Yes, but the question would have been whether the Indian contract would have provided money quickly enough or whether we could hold out until the Indian money came forward.
Q Or, I suggest, whether you were prepared to trade whilst insolvent in the hope of trading out of insolvency.
A We had no intention of trading whilst insolvent.
Q Well, you had been doing that, I suggest, for a fortnight.
A We did not believe that to be the case. If we had been trading whilst insolvent - we had no intention of trading whilst insolvent.
Q You knew you were trading at the risk of being insolvent.
A At the risk of being insolvent, though we were not being advised that we were insolvent by our own in-house people and our advisors so we felt that that risk was minimal."[256]
Mr Hercus said that directors decided that the prudent course was to obtain independent advice. Mr Sims, who had been recommended to the directors and the meeting of 10 September 1996, was mentioned as a possible independent expert who might be consulted.
Mr Hercus believed, at the end of the meeting of 23 September, that Mr Winter was to arrange for Mr Sims to meet with the rest of the directors on the next day.[257]
I am satisfied on the whole of the evidence that Mr Sims had no contact with the Company prior to 23 September 1996.[258] I find that the first contact he had with the Company was when Mr Winter telephoned him to enquire whether he was in a position to accept an appointment as voluntary administrator.
I accept Mr Sim's evidence that the enquiry of him was whether he was in a position to accept appointment as a voluntary administrator of the Company. There was only one other person who is privy to what passed in that telephone conversation and he was not called, although he was available to be called by the defendant. The defendant is not in a position to know what was said between Mr Winter and Mr Sims.
Mr Sims made enquiries that day to ensure that he had no conflict of interest. He reported to Mr Winter that there was no reason why he could not accept a position as voluntary administrator. Some time that day Mr Winter told Mr Sims that the Company intended to convene a meeting for the next day to brief Mr Sims. Mr Winter told Mr Sims that he was to be appointed voluntary administration the day following this meeting. Mr Winter must have been told that the Company had resolved to appoint Mr Sims. It was likely he was told by Dr Williams. I find on the balance of probabilities that Mr Winter was told by Dr Williams that the Company had resolved to appoint Mr Sims as voluntary administrator. I find that the Company had so resolved at the meeting of the board of directors on 23 September.
Mr Sims said he assumed, because of Mr Winter's experience in corporation matters and in particular insolvency matters, that the Company had already received advice that it should appoint a voluntary administrator. He also assumed that the threshold requirement for a voluntary administrator, namely that the Company was insolvent, existed.
I believe that both assumptions made by Mr Sims were reasonable. He had been approached by a legal practitioner experienced in matters of this kind to act as the voluntary administrator of a corporation. It was reasonable for him to assume that the Company was presently insolvent and that the board had either resolved or were about to make a resolution on his appointment. It was also reasonable for him to assume that the Company had received advice that it was in the interests of all concerned that an administrator be appointed.
A meeting was convened on 24 September. I think it is likely that it was convened by Mr Winter because the meeting took place at Johnson Winter and Slattery's offices, a firm in which he was then a partner.
Mr Sims and his then assistant, Mr Sparks, attended. Mr Winter was present. Mr Carver represented the Company management. Dr Williams, chairman of the Company, was present. Mr Paul Robinson and Mr John Kerr from Capital Strategies were also present.
Dr Don Williams swore an affidavit in proceedings in this Court on 23 August 1999.[259] Mr Lindsay cross examined the plaintiff on matters deposed to in that affidavit. The plaintiff called upon Mr Lindsay to tender the affidavit and the relevant parts of the affidavit were tendered. The evidence is admissible against the plaintiff and the third parties because the trial proceeded upon the basis that all evidence admitted in the proceedings between the plaintiff and the defendant would be admissible in the proceedings between the defendant and the third parties. Likewise all evidence in the proceedings between the defendant and the third parties would be admissible in the proceedings between the plaintiff and the defendant.
In any event Dr Williams deposed in that affidavit that the meeting was convened "... for the purpose of meeting Mr Sims in order to obtain his professional opinion as to whether the Company had reached a point where it was bound to appoint an administrator."[260] Mr Sims, however, believed that the meeting had been convened for the purpose of briefing him in respect of the Company's present operational status, its financial structure and the cash flow difficulties that the Company was then facing. I think that Mr Sims' belief is more likely to be accurate than Dr Williams. I have found that on 23 September, the board had resolved to appoint Mr Sims. Mr Sims' opinion was unnecessary. However, he did need to be briefed.
In preferring Mr Sims' evidence to Dr Williams' account, contained within his affidavit, I have not overlooked Mr Carver's statement. I shall refer to that later.
No financial accounts were produced at the meeting.[261]
Mr Sims was briefed on the Company's business and was told that the Company had a shortage of capital and was experiencing cash flow difficulties. In particular he was told that the cash flow difficulties made completion of all of the vessels doubtful unless there was an injection of fresh capital or there was a voluntary administration.[262]
He was further told that there was some prospect of an Indian investor introducing capital and some prospect of assistance from EFIC and/or INCAT.
Mr Sims said that at that meeting he advised the Company that if he was appointed as administrator he would need to:
"(a) gain a detailed understanding of the Company's present and projected financial profile,
(b) have various models prepared for the purpose of assessing likely cash flows to be generated under an Administration to decide if the Company could continue to trade,
(c) protect my personal liability under the Corporations Law for debts incurred during an Administration,
(d) gain an understanding of the outstanding work in progress and completion costs including labour and materials to complete the ships presently under construction, and to understand the contractual provisions relating to such construction,
(e) gain an understanding of the Company's relationship with unions and employees,
(f) understand what proposals might be available for introduction of new equity and investors and/or contracts for the purpose of any Deed of Company Arrangement, and
(g) understand the objectives of the directors in appointing an Administrator and to obtain their preliminary views in relation to any proposed Deed of Company Arrangement."[263]
Mr Sims said he told the meeting that the Company would need to move very quickly if, as had been proposed by Mr Winter, his appointment was to be made the following day, 25 September 1996.[264] I accept that evidence.
Mr Sims said that he was not asked to give a formal opinion on the solvency or otherwise of the Company at that meeting but he did form a preliminary view that the Company was insolvent.[265] He formed that view on the basis of the extent of the Company's creditors, its cash flow difficulties and the Company's own acknowledgement that it needed substantial equity injection. However, he said that although he did not offer the opinion that the Company was insolvent he specifically pointed out to those present at the meeting that the Company must not incur any further credit.[266] His evidence was that Mr Winter also supported his advice that the Company should not incur further credit and that the directors instructed Mr Carver, at the meeting, to ensure that the recommendation was adopted and implemented. Dr Williams, in his affidavit, makes no mention of that advice.
Mr Sparks was also called on behalf of the third parties. His evidence was consistent with Mr Sims'.[267] In some respect he had better recollection of the meeting than Mr Sims.
He said that Mr Sims played a mainly passive role in the meeting until the meeting reached the point where Mr Sims advised those present that he would need further information if he were to act in the role of an administrator.[268]
Mr Sparks said that Mr Sims outlined the role of an administrator which he said those present at the meeting seemed to understand. He said that Mr Sims told the meeting that a voluntary administrator was personally liable for any debts incurred by the Company during his administration and that therefore the Company's cash flow position was critical.[269] He said that consequently he needed to be aware of the ANZ's attitude because the ANZ, as a secured creditor, could appoint a receiver. Mr Spark's recollection is that Mr Sims was asked not to approach the ANZ bank at that stage to discuss the administration.
Mr Sparks supports Mr Sims' evidence that the Company was told that it should not incur any further credit.[270] He said that Mr Sims specifically mentioned the possibility of the directors being liable for insolvent trading if the directors continued to let the Company trade and incur credit. He said that Dr Williams instructed Mr Carver to ensure that the Company did not incur further credit.[271] He said that at no time was Mr Sims asked to offer any opinion on the solvency of the Company or whether the directors were or were not obliged to appoint a voluntary administrator.[272]
He said that common assumption of those present at the meeting was that the Company was insolvent.[273]
It is more than likely that Mr Sims did not express any opinion as to solvency. Because no financial accounts were presented at the meeting he would not have been in a position, in any event, to advise on solvency. I do not think that the directors needed his advice on solvency. I think Mr Sims was right that he assumed that the directors had reached the conclusion that the Company was insolvent.
I am satisfied that the advice Mr Sims said he gave was given and that Mr Winter gave similar advice. The chairman of the board, Mr Carver, and the Company's financial adviser were aware that the Company should not incur any further credit.
I am further satisfied that Mr Carver was instructed accordingly.
Mr Carver also swore an affidavit in proceedings in this Court on 17 August 1999.[274]
"2. I am aware that on 24 September 1996 the directors of the Company approached Mr Tony Sims of Sims Lockwood to assist them in determining whether the financial circumstances of the Company had reached a point where it was incumbent on the directors to appoint an administrator pursuant to the Corporations Law.
3. I attended a meeting with Mr Sims at the offices of Johnson Winter & Slattery on 24 September 1996 in the company of Don Williams, Nigel Winter, Paul Robinson and Grant Sparks from Mr Sims' office. The purpose of that meeting was to acquaint Mr Sims with the financial circumstances of the Company at that time and to obtain his expert opinion as to whether the directors were acting reasonably in not proceeding to appoint an administrator at that particular time.
4. Mr Sims did not proffer a view at that time but indicated that he would like to look at the company's financial records and consider the current cash flow projections that I had prepared in respect of the next three months. It was resolved that I would forward to Mr Sims as soon as possible an up to date set of management accounts and cash flow projections for him to consider over night. It was then agreed that Mr Sims would attend a meeting that was scheduled the next day between representatives of the Company and the Export Finance Insurance Corporation and that the meeting with Mr Sims would be reconvened during the afternoon of 25 September 1996 shortly before a directors' meeting scheduled for late that afternoon."[275]
"I refer to your recent request for our office to assist you in appointing an Administrator to the above company pursuant to section 436A of the Corporations Law.
I enclose for your completion pro-forma minutes for a directors' meeting together with an Instrument of Appointment of Administrator to be executed by the Director and Secretary, pursuant to the Articles of Association, under common seal.
Also enclosed is my Consent to Act pursuant to section 448A of the Corporations Law in the event that I am appointed.
If you have any queries on procedures or require any information in relation to the above, please do not hesitate to contact the writer." [279]
"I believe that we had convened a telephone board meeting, initially at 11:30. There was a brief discussion about the possibility of appointing an administrator to the company, and it was proposed that a motion would be put to the meeting that Anthony Milton Sims be appointed administrator of the company as of 4pm on the 25th September 1996, but the meeting was deferred, or interrupted, because I think there was to be a further meeting between Dr Williams, and I think Michael Thomas, and Mr Sims later that day, and they wanted to have that later meeting - I can't remember whether ANZ and/or EFIC were involved at that time. But there was another meeting to be held later that day and our board meeting was to be reconvened later on in the day. I believe we have seen typed minutes of the meeting that give the time of the meeting as four o' clock, or something like that, which was about the time that the meeting resumed." [281]
I think that evidence is accurate. I think that at 11:30am that morning the directors did intend to appoint Mr Sims at a meeting which was to be held at 4:00pm that afternoon as administrator of the Company. Mr Hercus' evidence is consistent with Mr Sims and the documentary evidence.
Mr Sims and Mr Sparks attended the meeting with EFIC which commenced at approximately 12:30pm that day. That meeting was also held at the office of Johnson Winter and Slattery.
Present at that meeting on behalf of the Company were Dr Williams, Mr Carver, Mr Winter and Mr Robinson. Three senior officers of EFIC were present Mr Slater Smith, Mr Michael Jackson and Mr John Collins. The EFIC representatives had travelled from Sydney for the meeting. Mr Sims and Mr Sparks were present and were introduced to the EFIC representatives as insolvency practitioners.
Dr Williams informed the meeting that the directors were considering the appointment of a voluntary administrator and asked what EFIC's attitude would be in the event that that occurred.[282]
EFIC were in a difficult position. They had considerable exposure to the Company. They had issued performance bonds to the YQ Company. It was important, from EFIC's point of view, that the aluminium vessel be completed so that the bonds would not be called upon.
However, the aluminium vessel could not be completed without further funding. Mr Sparks said the meeting was an exercise in brinkmanship on the part of Dr Williams in an attempt to force EFIC to further fund the Company to protect EFIC's exposure to the Company. I agree that that is the likely reason for the meeting.[283]
Midway through the meeting the persons present were advised that representatives of the ANZ bank had arrived. Dr Williams told Mr Sims and Mr Sparks that it would be inappropriate that they remain present. They left by a rear door.[284] Mr Sims and Mr Sparks both say that at no time during the meeting when they were present was it suggested that Sims Lockwood were engaged to advise directors on solvency or the Company as to whether it should continue to trade. I accept that evidence. There is no evidence to the contrary.
A note prepared by an officer of the ANZ bank shows that the meeting proceeded in the absence of Mr Sims and Mr Sparks.[285] I think that contemporaneous note is likely to be an accurate account of the meeting.[286] The ANZ bank was told that the Company had sought from and been refused further assistance by the South Australian Government.
It is reported that the EFIC representatives had agreed to take the Company's request to their full board meeting which was to take place on 30 September 1996. In the meantime EFIC was arranging for some due diligence work to be completed on SA Ships' figures.
On the evidence it is not clear when it was that EFIC advised the Company's representatives that it would take their request to a full board meeting on 30 September 1996.
I think it more likely than not that EFIC agreed to take the request to their full board meeting after Mr Sims and Mr Sparks had left the meeting. I think it is more likely than not that, at the time that Mr Sims and Mr Sparks left the meeting, Mr Sims believed that he would still be appointed the voluntary administrator of the Company that afternoon.
The meeting was further informed that the existing shareholders would only inject a further $250,000 by way of capital when all external creditors had agreed to support the Company.
Dr Williams advised the meeting that ISC had agreed to pay $US 2 million by 15 October 1996. It is clear from the ANZ record and previous bank memoranda that the bank had little confidence that ISC would ever inject any money.
After EFIC left the meeting the ANZ bank advised the Company's representatives that notices would be given on 30 September 1996 converting the ANZ's floating charge to a fixed charge over specific deposits.
The reason why I think it is likely that Mr Sims and Mr Sparks were not aware of EFIC's agreement to take the Company's request to a full board meeting on 30 September is that on 25 September Mr Sims prepared a draft press release.[287] That press release advised that the Company had appointed Mr Sims as voluntary administrator to take control of the Company's activities immediately. If Mr Sims had believed that the matter was to be deferred until at least 30 September it is unlikely that he would have prepared that press release. Mr Sims' evidence was that at approximately 3:50pm he was advised by Mr Winter that the directors had been advised that EFIC needed until Friday or Monday to consider its position.[288] That is consistent with Mr Sims not being aware of EFIC's position until after he left the meeting. I find therefore that when Mr Sims and Mr Sparks left the EFIC meeting in the early afternoon of 25 September 1996 both assumed that Mr Sims was to be appointed voluntary administrator that afternoon. Neither was aware that EFIC had agreed to take the Company's request to a full board meeting.
Dr Williams stated in his affidavit sworn on 23 August 1999, which was tendered in these proceedings:
"3 On 25 September 1996 the directors of the Company met with representatives of Export Finance Insurance Corporation (EFIC). The meeting went for most of the morning. The meeting took place in the large conference room at level 5, 75 Hindmarsh Square Adelaide. Mr Sims and Mr Sparks attended that meeting. At that meeting representatives from EFIC, namely Mr Slater Smith and Mr John Collins, were advised of the financial circumstances of the Company as they then stood." [289]
I think that evidence is accurate. He went onto say:
"4 During the afternoon of 25 September 1996 the further meeting took place at Mr Sims' office. Present at that meeting were myself, Nigel Winter, Paul Robinson, David Carver, Tony Sims and Grant Sparks. At that meeting intensive and detailed discussions took place with Mr Sims in relation to the financial position of SA Ships. At that time I indicated to Mr Sims that, in my view, because the Company had executed an agreement with a new equity investor on 21 September 1996, by virtue of which the company would be able to borrow up to $US 2 million on 15 October 1996 and, having regard to the cash flow forecast provided to him the previous day, it was evident that the company was able to pay all of its debts.
5 At that meeting Mr Sims explained that, while he had not yet had an opportunity to fully review the financial information provided to him by Mr Carver, he had run through a series of financial scenarios that gave rise to certain financial outcomes. During the meeting Mr Sims set out the various scenarios on the whiteboard in his office. These analyses confirmed my view that at that time it would be reasonable for the directors to expect that the company was in a position where it would be able to pay all of its debts.
6 At the conclusion of this meeting I said to Mr Sims:
'Tony I assume the directors are acting properly in making a decision to trade on.'
'Yes it is in the best interests of the creditors.'
7 Through prior arrangement it had been agreed that a full directors meeting would be convened on the afternoon of 25 September 1996 by teleconference. Accordingly a teleconference was set up between myself and Rick Verboon in Adelaide, Michael Thomas in Sydney, Dick Verboon and Mandurah and Phil Hercus in Sydney." [290]
In my opinion, Dr Williams' evidence of that meeting is incorrect. No meeting took place on the afternoon of 25 September 1996 with Mr Sims and Mr Sparks. There was no meeting with Mr Sims and Mr Sparks after they left the EFIC meeting and before the board met at 4 o'clock on 25 September 1996.
He said that apart from any other reason, he would not have advised the directors to continue trading after he had signed a consent to act as administrator.
I accept Mr Sims' evidence. As I have already said no such meeting occurred in any event. However, I also accept his evidence that he would not have given that advice on that day after earlier signing a document consenting to act as administrator on that day.
It follows that I reject Dr Williams' evidence in that affidavit.
There was a further board meeting of the Company on 25 September 1996 which Mr Hercus attended by telephone. The meeting took place at 4:00pm. It must therefore have been that Mr Winter advised Mr Sims that his appointment would be delayed immediately prior to the meeting of the board of 25 September 1996.
In my opinion, Mr Sims always believed, until shortly before this meeting, that he would be appointed voluntary administrator of the Company. As I have already found, it follows that it was reasonable for him to believe that the Company was insolvent and the directors had resolved upon his appointment. In those circumstances there was no need for him to advise the Company on solvency. He assumed the Company was insolvent. There was also no need to advise on the course of action that the directors should take. He always believed that he was to be appointed the voluntary administrator. There is nothing inconsistent with him attending the meeting with EFIC. If he were to be appointed voluntary administrator it was critical that he knew of the major creditors' attitude to the Company continuing to trade.
I think that prior to the directors' meeting some directors and probably Mr Winter, thought that the directors would resolve to appoint Mr Sims as voluntary administrator. A draft minute to that effect surfaced on 31 December 1996.[293]
The directors' meeting of 25 September 1996, was held at the offices of Johnson Winter and Slattery and minutes were taken. Present at the meeting at those offices were directors Dr Williams, Mr Thomas and Mr H G Verboon. Mr Carver was also present. The defendant and Mr Dirk Verboon attended by telephone.
A summary of the meeting with EFIC and the ANZ bank was presented to the meeting. It was minuted:
"The financial position of the company was presented with a view to determining what support EFIC in conjunction with the ANZ Bank could provide, given EFIC's previous rejection of the company's request for financial assistance. EFIC conditionally agreed to review their position in the light of the fact that a lack of assistance would in all probability trigger a call upon Performance Bonds issued by EFIC in favour of the Chinese buyer for the aluminium high speed ferry.
One condition for support would be the need for a review of the company's projected cash flows by an independent firm of financial advisers. The cost of this exercise to be borne by the company.
EFIC agreed to reconsider their position and would upon completion of a review submit a letter of offer for financial support to the company." [294]
The meeting considered the issue of appointing Mr A Sims of Sims Lockwood and Partners as Administrator of the company.
It was resolved that this would not be necessary as a result of a meeting primarily involving ANZ Bank and EFIC held earlier that day to discuss the current financial position of the company, including agreement reached with the proposed investor. The outcome of this meeting was that EFIC would reconsider their previous rejection for financial support for the company.
The meeting further resolved that the company would trade on a cash only basis until EFIC advised the company of its decision as to whether it would provide financial support or not. The cash only decision primarily relates to suppliers of materials and does not include employee wages, contract labour and payroll associated deductions."[295]
"We will need to look at the position as to insolvency. In the meantime, as a precaution, I would advise that the Company trade on a cash only basis."[296]
"As a consequence of that advice given by Mr Sims I believe that the directors decided to defer the appointment of Mr Sims as the administrator of the Company." [301]
The directors' resolution not to appoint Mr Sims on 25 September 1996 was as a result of EFIC's agreement to take the Company's request to its full board meeting. The resolution not to appoint Mr Sims was not a consequence of anything said or done by Mr Sims. Mr Sims believed that the Company would resolve to appoint him until he was advised otherwise at 3:50pm that day.
I do not think that the directors made that decision upon any advice given by Mr Sims. I think their decision was made for the reasons given in the minutes themselves.[302] I think that the directors thought the Company could continue to trade. They were wrong about that.
The defendant was pressed in cross examination about the apparent inconsistency with the Company resolving to trade on a cash only basis and the Company being solvent. The defendant said he did not believe the two statements were inconsistent. He believed that trading on a cash only basis was a precautionary thing.[303]
The defendant accepted in cross examination that he had not received any personal advice from Mr Sims or Mr Sparks in relation to solvency.[304]
The defendant was cross examined about his attitude as at 25 September:
"Q Your position was that you were going to continue to accept that the company was solvent until such time as an expert told you otherwise.
A I believe I said that earlier, because I would not have wanted to risk rocking the boat in the company without an expert to say 'Yes, the company does have a problem, we'd better put an administrator in.'
Q Your position for accepting that the company was solvent until you were told otherwise, was taken by you because of the responsibility you felt as a director, in particular in relation to employees.
Q That state of mind was a state of mind which was made without personal consideration of the accounts which were presented, in particular, those up to 30 June 1996 because you believed that was the province of experts to advise you in relation to that matter.
A I looked at the accounts, but in terms of the insolvency or otherwise of the company, I needed expert advice. I did my best to familiarise myself with the accounts.
Q I am asking you in relation to the June 1996 figures, but I'm directing your attention to your state of mind as at 25 September 1996. The answer you gave in relation to the last question was that in relation to your state of mind as at 25 September 1996.
Q I've asked you about your state of mind and about the fact that you were prepared to accept that the company was solvent until you were told by an expert to the contrary.
Q Was that your state of mind as at 25 September 1996.
Q Having then had the financial figures for the end of June 1996.
Q Was that also your state of mind in relation to the period 25 September back to 1 June, bearing in mind that you did not have the figures even available to you at that time.
I think that evidence summarises the defendant's attitude as at 25 September 1996 and also the other directors' attitude. I believe that all of the directors were very reluctant to allow the Company to go into administration and to appoint a voluntary administrator.
In my opinion, the directors were determined to allow the Company to trade in the hope that the Company could trade out of its financial problems.
They had reasons for that. First, most of them had made a substantial capital contribution and if an administrator was appointed it was likely that capital would be lost. Secondly, they all had a personal commitment to the Company. They were all individually talented men who had combined together to attempt to exploit those individual talents through the Company. It would not have been easy for any of them to admit failure or to give up the dream which was encapsulated in the Company. Thirdly, as Mr Hercus has said, there were a number of employees to consider. Fourthly, they would have had to advise the State, which had supported the Company, that its investment had been lost. Fifthly, they would have had to publicly acknowledge their inability to make their project work.
Dr Williams gave evidence in another application in these proceedings and his attention was directed to an affidavit sworn by Mr Sims.[306] Dr Williams gave this evidence:
"Q That is what I'm looking to identify. What do you say was the advice given by Mr Sims by the time of the meeting on 25 September, which is the advice that you described as advice provided by Mr Sims.
A That the company should trade on a cash only basis.
Q Mr Sims had not expressed any view on the solvency of the company by the 25 September 1996 meeting, had he.
Q He had only just been involved the day before.
Q And there had only been one meeting by the time of the board meeting.
Q By the time of the board meeting what was the extent of Mr Sims' involvement in the company, how long had he spent looking at the company?
A His extent of involvement was relatively minimal. He had a briefing on the previous day where the directors and our advisors, including me, gave him an overview of the situation of the company and all the factors that affected that. He asked for additional financial information which we agreed to provide him. Subsequent to that, on the following day, he was present for part of the meeting we had with EFIC to determine whether they were prepared to provide bridging finance, but at that stage Mr Sims' understanding, in terms of analysing the financial position of the company, was fairly minimal."[307]
In my opinion, that evidence is correct. Mr Sims could not have given any opinion on the solvency of the Company by 25 September. He simply did not have the information to do that.
Mr Hercus was directed to Dr Williams' evidence in his cross examination.[308] Mr Hercus said that Dr Williams' evidence was quite inconsistent with the advice at the board meeting on 25 September, that the company should trade on. The defendant said that this was the first he had heard that Dr Williams had ever changed that advice.
It is the defendant's case that between 24 September 1996 and 10 January 1997, or thereabouts, the defendant believed that Sims Lockwood and Partners were providing advice to the Company and its officers about the financial status, trading and prospects of the Company; and was engaged in discussions on behalf of the Company with the ANZ bank, the Company's creditors and prospective financiers about financial support for the Company.
If that was the defendant's belief there was nothing said or done by Mr Sims before the board meeting of 25 September 1996 which would justify such a belief.
I find that the Company was insolvent between 1 June 1996 and 25 September 1996. Its insolvency was demonstrated by its chronic liquidity problems, its inability to meet its statutory liability, its under capitalisation and its inability to secure payment from the YQ Company for the construction of the aluminium vessel.
The Company was not able to pay its debts as and when they fell due.
I believe, for all of the reasons which I have already given, that there were reasonable grounds for suspecting that the Company was insolvent during this period.
The defendant knew that the Company should not trade whilst it was insolvent. He was aware that the Company was suffering chronic cash flow problems and he knew that cash flow problems were indicators of insolvency. He knew that the ANZ had withdrawn support. The defendant also knew that the South Australian Government had withdrawn support and he knew, prior to 25 September 1996, that EFIC would not continue to support.
Immediately before the board meeting of 25 September 1996 the only possibility that that Company had of trading in the future was if ISC delivered on its agreement and that was subject to ISC being satisfied, after a due diligence inquiry, that the investment was appropriate.
In my opinion, the defendant must have been aware immediately before the meeting of 25 September 1996 that there were grounds for suspecting that the Company was insolvent. I find that he was aware that there were grounds for suspecting that the Company was insolvent.
If he was not himself aware it was only because he had failed to acquaint himself with the relevant information which would have allowed him to have considered that question. He had failed to obtain management accounts. He had failed to require that the Company's directors meet and he had failed to obtain financial statements of the Company on a timely basis.
It is clear from the matters to which I have referred that information was available which showed that the Company was insolvent through the whole of this period. That information was not only available but should have been obtained by the defendant.
In those circumstances, even if he was not aware that there were grounds for suspecting that the Company was insolvent, a reasonable person in his position in a company in the Company's circumstances would be so aware.
I find that subject to any defence which might be available under s 588H of the Law the defendant has contravened s 588G of the law.
Of course the defendant pleads that he does have a defence.
The defendant pleads that with respect to this period he was entitled to rely upon information provided to the Company by Mr Sims that the Company was solvent as at 25 September 1996.
I do not believe that the defendant had reasonable grounds to expect and did expect that the Company was solvent during this period of time. There were no reasonable grounds to expect that the Company could pay its debts as and when they fell due. In fact there were no grounds. Nothing that Mr Sims said could have allowed the defendant to expect that the Company was solvent during this period. As I have already found Mr Sims did not say anything on 24 September which could have given rise to such an expectation.
For the reasons already given it was not reasonable for Mr Hercus to rely upon any information given by Mr Sims to the Company.
Mr Sims' only involvement with the Company, up until the board meeting of 25 September 1996, was to wait upon his appointment as voluntary administrator on that day.
He did not provide any information, nor was he expected to. In my opinion, he gave no advice nor was he expected to.
He was not retained, prior to 25 September 1996, for the purpose of advising the Company on any matter. His retainer, prior to 25 September 1996, obliged him to attend the meeting with the Company's representatives on 24 September 1996 for the purpose of being briefed, to prepare the forms which were prepared and sent to Mr Winter on the morning of 25 September 1996 and to attend at the EFIC meeting in the early afternoon of 25 September 1996.
He was under no other obligations prior to 25 September 1996.
The defence pleaded under s 588H(2) fails, as does any reliance upon s 588H(5). The defendant took no steps during the relevant period to prevent the Company from incurring the debt. He is thus not entitled to rely upon s 588H(5).
The defendant has no defence in relation to his contravention of s 588G for the period of 1 June 1996 to 25 September 1996 and he must be found liable for the loss and damage suffered by the Company in incurring debts during that period of time.
"In the event that a substantial capital commitment is not secured, the proposal as outlined in your letter of 9 October 1996 is not likely to provide sufficient working capital for the Company to continue to trade. Accordingly, in the absence of the directors' gaining sufficient comfort with respect to solvency from either International Shipping, Path Line or a restructured capital contribution from EFIC, we may have no option but to seek the appointment of a (sic) Administrator to the company. This would not be done lightly and the directors are concerned that the best interests of both EFIC and the company may not be served through this action.
Accordingly, we request that EFIC give preliminary consideration to providing the company with medium-term financial assistance by way of subscribing for sufficient redeemable convertible preference equity (or other equity alternative at EFIC's discretion) to permit the company to complete the Yue Qing vessel." [318]
"While extending deep gratitude for the affectionate courtesy & dealings you have very kindly accorded during the Tour of our Hon'ble Chairman in Australia, we take the privilege to fax to communicate that through the pious - Tie of Shareholder - Agreement, referred to in the subject; we have become one, we are one we would remain one piously by heart - this is our firm assurance to the esteemed Company." [322]
"Since the initial retention of Mr Sims as an advisor to the Company on 24 September 1996, Mr Sims and/or members of his staff were continually appraised of all developments relating to the financial position of the Company by various people including myself, Michael Thomas and David Carver. As a consequence, Mr Sims was aware of the EFIC proposal of 9 October 1996, the contents of my letter of 11 October 1996 and the fact that EFIC had withdrawn its offer of support by letter of 16 October 1996."[326]
As a statement that is correct. However, Mr Sims' knowledge has to be put in context. Notwithstanding that Mr Sims was aware of the EFIC proposal he had been advised on 10 October 1996, that he would be appointed administrator of the Company on 16 October 1996.
On 17 October 1996, the directors held a board meeting. Again there are no minutes of the meeting. I think all directors were present. Certainly the defendant was present. Mr Sims and Mr Sparks also attended the meeting. This was the first occasion that Mr Sims had met any directors apart from Dr Williams and Dr Thomas. I find specifically this is the first occasion that the defendant met Mr Sims.
At the only meeting the defendant had with Mr Sims, the defendant said that Mr Sims did not advise the meeting on the solvency or otherwise of the Company.[327] This is that meeting. It follows that Mr Sims did not advise the directors on 17 October that the Company was solvent or otherwise and I so find.
The directors discussed the impact of the expiry performance bonds. There was discussion about the ownership of the aluminium ferry and the impact on any retention of title claims on the ferry or any part of it. There was no discussion whilst Mr Sims was present on the reliability of the proposal or of EFIC's potential support.
Mr Sims said, and I accept, that he was only present at a meeting with the directors for about 30 minutes. The rest of his time at the Company's premises, at that time, was taken up with a tour of the shipyard.[328]
The directors did not resolve to appoint an administrator. In fact the directors did not pass any resolutions at all.
Dr Williams said that at the board meeting on 17 October 1996, Mr Sims advised the directors that in his view the fact that the EFIC performance bonds had lapsed was a significant improvement to the Company's financial position because the Company owned the ferry and the YQ Company was an unsecured creditor. He asserted that Mr Sims said that this gave the Company considerable bargaining power as against the YQ Company. Mr Sims was also reported by Dr Williams as saying that because EFIC was no longer on risk it meant that the directors were also no longer on risk over their guarantees to EFIC. He said this was a good development from the point of view of the directors personally.
Dr Williams further deposed in his affidavit:
"At that meeting the issue of whether the time had come for the Company to appoint an administrator was again addressed. Mr Sims again indicated that he did not believe it was necessary for the directors to proceed to appoint an administrator at that stage." [329]
The defendant did not support Dr William's account.
In his witness statement Mr Sparks said, on this topic:
"Dr Williams discussed the effect of the expiry of the EFIC bond. I can particularly recall that Dr Williams appeared to be quite excited by the expiry of the performance bond, because he commented that it also had the effect of causing the directors' guarantees to EFIC to expire." [330]
The defendant said that it was either Dr Williams or Mr Thomas who mentioned that the Company had considerable bargaining power against the Chinese purchaser because the Chinese purchaser was an unsecured creditor.[331]
Mr Sparks said that at this meeting Mr Sims advised that the Company should not incur any further credit.
In cross examination Mr Sims denied that he said that the expiration of the EFIC Performance Bonds was a significant improvement in the Company's financial position.[332] His evidence was that the expiration of these bonds changed the Company's financial demographics. His evidence was that he told the directors that the Company, rather than having a very substantial claim from secured creditors, was now subject to a very substantial claim from the Company's unsecured creditors. EFIC was no longer a secured creditor. In EFIC's place stood the unsecured creditor, the YQ Company.[333] He accepted that he did see that as an advantage to the Company because the Company had an option previously not available, namely to raise further funds secured against the asset.
That account is not inconsistent with the defendant's who saw the expiry of performance bonds as creating a different liability.[334]
It was put to Mr Sims that he also told the meeting that he did not believe it was necessary for the directors to proceed to appoint an administrator at that stage. He denied having said that, although he agreed that he did not tell the directors it was incumbent upon them to appoint an administrator.
Mr Sparks' evidence was that at this time he believed the Company was insolvent.[335] Indeed during his involvement with the Company he always thought the Company was insolvent.[336] But Mr Sparks agreed that Mr Sims did not say at this meeting or at any other time prior to his appointment as administrator that the Company was insolvent.
Mr Sparks' evidence was that the discussion at the meeting of 17 October was premised on the basis of appointing a voluntary administrator to the Company, although no resolution to that effect was put in his or Mr Sims' presence.
I do not accept Dr Williams' statement which is in conflict with Mr Sims' and Mr Sparks' evidence.
The letter from ISC[337] was either tabled at that meeting or had been previously circulated. As I have previously noted the defendant described the letter as "quite amazing".[338] Mr Manvinda Singh attended the meeting and in the defendant's words, "... told a long detailed story which seemed quite believable ...".[339] As a result of what he was told by Mr Manvinda Singh the defendant still maintained some hope that ISC would inject some equity, although he did entertain doubts.[340]
The Company's position had worsened significantly since 25 September 1996. Its only hope of capital injection had virtually gone. ISC had not taken up any capital or undertaken to take up any capital. Whilst Dr Williams had made a vague reference to Chinese interests the prospect of those parties injecting equity were quite remote.
EFIC had only agreed to continue to support the Company on quite onerous and unpalatable terms. The bank was clearly keen to disassociate itself from the Company.
The only good news was that EFIC's performance bonds had expired which meant that the YQ company had become the Company's largest unsecured creditor. In those circumstances the YQ company was locked into the Company's fortunes. However, by the same token, EFIC was no longer exposed to the extent it had been.
The surprising aspect of the meeting of 17 October 1996, was the apparent failure by the directors to consider appointing a voluntary administrator at that time.
In my opinion, there were clear indications as at 17 October 1996 that the Company should appoint a voluntary administrator. The Company's position had worsened considerably since 25 September 1996. In those circumstances the directors should have made the appointment at that board meeting.
On 23 September 1996, the Company had advised the YQ Company that the aluminium vessel would be launched on 3 October 1996 and ready for sea trials on or about 10 October 1996.
However, during this period the Company was experiencing quite severe cash flow problems and the Company was not able to complete the vessel within the time prescribed.
On 4 October 1996, the Company had received a demand from the YQ company claiming that the Company was in breach of contract.
Mr Thomas has said in an affidavit sworn on 23 January 1997, in other proceedings in this Court, that in the week commencing 7 October 1996 "... things were really starting to slow down at SA Ships due to a shortage of cash".[341]
"By this stage all requests that had been put in place to the State, EFIC and the ANZ bank to provide funding assistance had not produced any results."[342]
"... Mr Hu gave me a very clear and strong message to take back to my Directors, that they should be strong and not do anything which would cause SA Ships to go into Administration or prejudice the project."[345]
"It is further proposed that a voluntary administration and subsequent Deed of Company Arrangement be entered into with the company's creditors whereby the creditors would receive an immediate dividend of approximately 25 cents in the dollar, with a further dividend proposed to be paid out of future profits resulting from future contracts.
Letters of commitment from Mr Hu and G Raptis and Son in relation to future work would be sought for the company's creditors to have confidence in relation to future profits of the company."[354]
"SA Ships through Tony Sims, have requested that the Bank advance a further $0.5 million overdraft, taking the OD facility to $1.0m as a "bridging" facility while matters are negotiated with the Chinese. SA Ships see the request as reasonable given their firm belief that the Chinese will deliver and the understanding that the Bank's security position now extended to the vessel." [356]
"As we discussed with you in our office yesterday we are in urgent need of interim funding to enable us to meet the immediate expenses needed to progress the completion of the vessel until a letter of credit is available on 8 November 1996.
The details of our immediate requirements totalling $420,000 are per the attached list. These payments must be made in the course of the next (7) days in order to secure the supply and installation of the related materials to ensure that the delivery of the vessel by the revised completion date, together with our ongoing payroll requirements.
We have had discussions with ANZ and they have advised that no further financial accommodation will be available in the absence of a commitment from EFIC to underwrite their additional exposure.
Accordingly we hereby request that EFIC or its relevant associate guarantee the payment of $420,000 to ANZ Bank until such time as the letter of credit is available.
In the event that your organisation is not willing to provide this assistance the Directors of this company will have no option but to appoint an administrator. We believe that our position is such that we will not be able to avoid taking this option any later than close of business tomorrow.
Obviously if an administrator is appointed our agreement with Mr Hu will be avoided and the administrator will then have to manage the completion and sale of the vessel on best terms for our creditors.
In addition to the above we also seek your assistance to secure carry on finance from ANZ Bank after receipt of the letter of credit on 8 November 1996 sufficient to complete the subject vessel and deliver the same in Wenzhou on the due date of 10 December 1996. We will discuss the nature and details of this assistance with you after the Directors have met tomorrow." [364]
Mr Hercus attended a meeting in Adelaide on 1 November 1996.[365] There was no board meeting on that day. It is unclear, on his evidence, why it was that he came to Adelaide. I think, however, it may be inferred that Mr Hercus travelled to Adelaide for the purpose of meeting with his fellow directors.
The Company had been successful on 31 October 1996 in reaching an agreement with the YQ Company but it still lacked sufficient funds to carry on.
As Mr Thomas' letter to EFIC showed the directors were contemplating the appointment of an administrator the next day.
Mr Sims and Mr Sparks met with Dr Williams and Mr Carver on 3 November 1996. Mr Sparks' recollection is that at this meeting he was told that the Company had a critical cash flow shortage and that the directors were proposing to advance money to the Company to enable it to pay its wages. He believes a figure of $250,000 was mentioned.[366]
It was apparent to him that the directors had either obtained advice or otherwise knew that a payment of that kind would give them a priority in the event of the winding up of the Company.[367] He said that specifically s 560 of the Law was mentioned.
He said Dr Williams sought advice on how the directors could protect themselves by obtaining a priority under s 560. He advised Dr Williams that the Company should open a new bank account into which the funds should be deposited and drawn against to pay employees' wages and other entitlements.
On 4 November the Australian Taxation Office agreed to extend the Company's liability for Group Tax of $113,265 due on 7 October until 22 November but only upon the basis that the directors would each become personally liable to pay the tax in the event that the Company defaulted. In due course the defendant was called upon to pay the tax as if it were a penalty.[368]
On 5 November 1996, Mr Hu agreed to provide a further $US 2 million in the form of share capital.
A meeting took place on 6 November 1996 which Mr Sims attended at the request of Dr Williams. The meeting was with Dr Williams, David Carver and Mr Winter and concerned a consideration of a proposed letter of credit and risk management in the event of non performance by the YQ Company. Nothing appears to have been decided at that meeting. Mr Sims' evidence was that he attended the meeting because he would need to rely on any letter of credit in the event that he was appointed a voluntary administrator.[369]
On 7 November 1996, a 'Wages Only Account' was opened with the ANZ bank.[370] The defendant was a signatory to this account. He was aware it was opened and the reasons for the account being opened. At that time there was a shortage of cash. The directors acted on Mr Sparks' advice and opened this account to protect them in the event that the Company went into administration.[371]
The defendant made two payments into the account. He paid in $58,500 as did Dr Williams and Mr Dick Verboon.[372]
The letter of credit which was received by the ANZ bank on 10 or 11 November was in an unauthorised form.[373] It had been changed to provide that the Protocol of Delivery and Acceptance needed to be signed by a representative of Wenzhou Economic and Technical Development Corporation in addition to the authorised representatives of the Company and the YQ Company.
Effectively this meant that the location for the protocol and delivery and acceptance was to be at Wenzhou rather than Port Adelaide.
At this stage the vessel was in Port Adelaide. It was intended to sail it to Cairns. The Chinese would not honour the letter of credit until the vessel reached Wenzhou, China but the Company's secured creditors, who had retention of title claims over equipment installed in the vessels, and the ANZ bank would not allow the vessel to depart Cairns until the letter of credit had been paid and debts settled.
A further agreement was entered into between the Company and the YQ company on 14 November 1996 which varied the agreement relating to delivery of the vessel so that delivery might be achieved at Port Adelaide. It was further agreed that the Company would transport the vessel to China to arrive on 10 December 1996.[374]
At or about this time the directors had to personally pay in $75,000 so that the Company could meet its wage bill on 7 November 1996.[375] The directors also had to agree to meet the Group Tax payment of $125,000 which was shortly to become due.
On 15 November 1996, Dr Williams sent a copy of the Agreement made on 14 November 1996 to Mr Sims.[376]
I think the purpose of sending the Agreement to Mr Sims was so that he could make inquiries regarding the availability of insurance for the letter of credit. He certainly spoke to Dr Williams about that on 15 November 1996. On the same day he spoke to a broker regarding the availability of such insurance.[377]
On 18 November 1996, Mr Sims accompanied Dr Williams, Mr Thomas and Mr Carver to a meeting with the ANZ bank.[378]
The purpose of that meeting was to obtain further bridging finance from the ANZ pending the release of the letter of credit or, alternatively, pending further support from EFIC.
The bank was satisfied with the authenticity of the letter of credit and agreed to lend a further $60,000 to tide the Company over.
It is not entirely clear to me why Mr Sims attended that meeting.
The Company continued to seek accommodation from its creditors. On 18 November 1996, it wrote to Chubb Security advising that it expected to put in funds shortly.[379] On 19 November 1996, it advised the State Taxation Office that it was hoping to be able to draw against the letter of credit shortly and therefore meet the Company's outstanding payroll tax obligations.[380]
The same day EFIC wrote to the Company offering a guarantee in favour of the ANZ bank of the letter of credit to the value of $US2 million.[381]
The bank wrote on the same day to the directors of the Company confirming that it was prepared to provide a further sum of $60,000 until 22 November 1996, at which time the facilities including the advance would fall due and payable upon demand being made by the bank.[382] The bank required the Company's directors to confirm their acceptance of the terms under which the advance was made. The defendant received a copy of that letter at that time.[383]
The defendant conceded in his cross examination that the Company had an extraordinary liquidity problem at that time.[384]
Cash flow was so tight that the Company needed an extension on its facility with the ANZ bank of $60,000 "... to assist with the acquisition of seating and safety equipment, necessary to allow the aluminium vessel to commence sea trials."[385]
A series of meetings took place on 20 November 1996 between the Company, the bank and representatives of EFIC following upon EFIC's letter of offer.[386]
Mr Sparks was present at the first meeting which was called for the purpose of determining how the Company could organise its finances against the EFIC guarantee. Mr Sims did not attend that meeting.
The bank offered to provide $US2 million funding against the EFIC guarantee upon the condition that the existing overdraft facility would be paid out and the further condition that the EFIC guarantee would cover all risks up until the acceptance of documents under the two letters of credit issued by the Chinese bank.
EFIC had assumed, until that time, that the overdraft facility would remain. Mr Collins, who represented EFIC at that meeting, advised the bank's representatives that the EFIC facility had been approved to assist in completion of the aluminium vessel and not for the purpose repaying the ANZ bank. He said that EFIC may not be prepared to continue with the guarantee if the ANZ were to continue their insistence to be paid up front.[387]
The bank representatives then met amongst themselves to discuss their strategy. The meeting resumed with the Company representatives, EFIC and Mr Winter.[388]
A compromise was proposed whereby the overdraft would be reduced by $200,000 out of the funds made available by the bank to be drawn against the EFIC's guarantee.
It is not entirely clear to me why Mr Sparks was present at that meeting.
The question of voluntary administration was raised again in a meeting between Mr Robinson, Mr Sims and Mr Sparks which occurred in the early morning of 22 November 1996. In this meeting three alternatives for voluntary administration were presented to Mr Sims.[389] Mr Sims denied that he said anything about the Company continuing to trade without a voluntary administration. Nothing was decided at the meeting.[390]
In the afternoon of the same day, Mr Sims and Mr Sparks met with Mr Bruce Carter, its advisor and representatives of the ANZ when Mr Carter advised that the ANZ would probably serve a demand on the Company within the next few days. He told them that the bank would probably provide a limited indemnity for voluntary administrators' fees to allow the completion of the aluminium vessel. The bank at that stage would have preferred not to appoint a receiver.
Mr Sparks said he had gained the impression that the ANZ would prefer the Company not appoint a voluntary administrator but if it did it would itself appoint a receiver and manager.[391]
That meeting took place in the context of a further communication from EFIC of the same day, of which Mr Sims was aware.
In a letter written the same day and faxed to Mr Thomas by Mr Collins of EFIC, EFIC refused a more recent request by the Company to issue a guarantee to Energy Power Systems in the sum of $700,000.[392] Energy Power Systems was the supplier of the engines for the aluminium vessel.
Not only did EFIC refuse to issue a further guarantee it advised that it had reviewed the ANZ offer and had concluded that ANZ's position, and that of other suppliers, had jeopardised EFIC's ability to issue a guarantee to ANZ.
After referring to ANZ's position in detail and the attitude of other suppliers and creditors EFIC wrote:
"Based upon the above, SA Ships is unable to comply with the terms and conditions of the EFIC offer. Accordingly, EFIC is not in a position to issue the Guarantee.
For EFIC to consider the matter further, we would need to be provided with satisfactory evidence that facilities currently provided to SA Ships by ANZ (at least A$500,000) together with the further facility or other financial accommodation to be provided by ANZ of $US2,000,000 will be maintained for the life of any EFIC Guarantee. Compliance with all other conditions of EFIC's Offer would also be necessary." [393]
EFIC's refusal to issue the guarantee to Energy Power System and its review of its offer to issue the guarantee to the ANZ bank meant that the ANZ bank would not lend upon the security of the letter of credit. That being so, the letter of credit was of no assistance to the Company. The letter of credit without a guarantee could not generate any immediate cash flow.
On the next day Mr Carter spoke to Mr Thomas and advised him that the ANZ bank was prepared to soften its attitude and provide funding for the completion of the building of the vessel. Mr Thomas convened a meeting at Mr Sims' office. Mr Sims said, in his evidence, that he could not recollect how the meeting came to be at his office. He said it was a surprise to both him and Mr Sparks.[394]
Mr Sims and Mr Sparks attended the meeting.[395] Mr Carter represented the ANZ bank. Mr Thomas was the sole director of the Company present. Mr Carver attended and so did Mr Winter.
Mr Carter advised the meeting that the ANZ bank would be prepared to provide some additional funding provided that a new ships mortgage was granted over the aluminium vessel and fresh directors' guarantees were obtained.
Mr Sims said that he was not asked to advise whether the ANZ bank's proposal should be accepted and did not advise.[396]
Mr Sims said that he was keen to know whether or not there would be a voluntary administration. A voluntary administration depended, amongst other things, upon the support of the ANZ bank. That support apparently was not forthcoming without the directors proffering personal guarantees to support any advances the bank may provide to the Company either before it went into administration or after.
Mr Carver sent Mr Hercus a guarantee which the bank required him to sign.[397]
On 26 November the ANZ bank made a formal offer in conformity with the advice which Mr Carter had given on 24 November.[398]
In addition to the current overdraft of $560,000, the bank offered to provide a second overdraft of $600,000, both were repayable on or before December 1996. The second overdraft was solely provided as working capital for the purpose of completing the aluminium vessel.
The conditions precedent for that facility included joint and several guarantees by the directors and the agreement of the directors that they would subordinate any directors' loans during the currency of the ANZ facilities.
It was also a condition precedent that the Company would provide the bank with not less than 48 hours notice of any meeting of directors at which there was to be consideration of any resolution that the directors appoint an administrator or seek the appointment of a provisional liquidator or liquidator of the Company.
The ANZ's letter of offer assumed the existence of three letters of credit. The first letter of credit was the letter of credit in the sum of $2 million dated 17 November 1996 to which I have referred. The second letter of credit was in the sum of $377,500 and dated 31 July 1996. The third letter of credit was a letter of credit to be procured by the Company from the same bank, which had issued the previous two letters of credit, in a sum not less than $US2 million payable on or before 8 December 1996. This letter of credit was the letter of credit referred to in the agreement of 5 November.
A meeting took place on 26 November 1996 at the third party's offices. Present, on behalf of the Company, were directors Dr Williams and Mr Thomas whilst Mr Carver represented management. The Company's solicitor Mr Winter was also present. The ANZ bank was represented by its manager Mr Waugh, solicitor Mr Michael Barrett and Mr Bruce Carter. Both Mr Sims and Mr Sparks were present.[399] It is unclear to me why it was that what was essentially a meeting between customer and banker took place at the third parties' offices.
The ANZ bank's letter of offer was discussed in detail and the Company was asked to indicate its attitude by the end of that day.
The board resolved to accept the letter of offer subject to the bank's conditions.[402]
Each of the directors provided the guarantees as sought.[403]
Mr Sims evidence was that he had become somewhat cynical by this time about the prospects of his appointment as a voluntary administrator. He believed that it was unlikely that he would be appointed until the Company's financial position was so poor that its chances of being saved under a voluntary administration were significantly diminished. He had reached the view that the directors hoped to obtain sufficient finance to continue to trade whilst they sought further equity partners. He believed the directors were doing everything possible to avoid appointing an administrator.
Mr Sims' evidence was that he did not advise the Company or its directors either to accept or refuse the ANZ bank's offer. He gave no advice as to this at all.
I accept Mr Sims' evidence. Indeed I have no doubt that Mr Sims' explanation is correct. I think it is clear that the directors were very reluctant to lose control of the Company by appointing an administrator. I think they were optimistic that somehow the Company could survive. However, there was no apparent plan as to how the Company's survival would be achieved. Over this whole period the Company lurched between its banker, the Government and EFIC seeking accommodation from one or the other whilst continuing with the building of the aluminium vessel. I think the Company thought that if the aluminium vessel could be completed and delivered that the YQ Company would inject some equity into the Company in order to ensure that it could obtain a second vessel of the same kind. However, by adopting that attitude the Company simply lurched from crisis to crisis throughout the period after 25 September 1996.
On 26 November 1996, Mr Hercus' solicitor delivered his acknowledgement of the more important terms of the condition precedent as required by the ANZ bank and his guarantee of the Company's indebtedness.[404]
On that same day Mr Sparks met with Mr Alex Marshall who was the solicitor representing the Cummins Engine Company Pty Ltd, which had supplied an engine for one of the steel vessels. Mr Marshall was well known to Mr Sparks, their offices were in the same building.
There is a dispute as to what was said at that meeting. Mr Marshall said that Mr Sparks told him that Mr Sims had initially advised the Company to place itself into voluntary administration but that the Company had decided to trade out. Mr Sparks denies having said that. He said that he told Mr Marshall that their understanding was that Mr Sims was to be appointed as a voluntary administrator. Mr Sparks was cross examined about his conversation with Mr Marshall. Mr Marshall also gave evidence.
I have already observed that Mr Marshall's evidence in chief was contained in an affidavit.[405] He had no real recollection of the events independent of that affidavit.
I think what was said by Mr Sparks to Mr Marshall is at best a collateral issue. The conversation took place very late in the piece. The purpose of Mr Sparks meeting was to attempt to keep the creditors and especially the retention of title claim creditors informed. No administration could be successful if the creditors actively opposed the administration especially if the retention of title claim creditors were in opposition.
Mr Sparks was cross examined about this conversation with Mr Marshall and other conversations which followed. Those conversations related to Mr Marshall's client's actions to recover money from the Company.
Mr Marshall's affidavit was originally prepared for proceedings in the Federal Court of Australia in which his client, Cumins Engine Company Pty Ltd, was attempting to recover the engine which had been placed in the steel vessel. The purpose of his affidavit was to establish that in a telephone conversation on 2 December 1996, Mr Sparks told Mr Marshall that if Mr Sims were appointed as voluntary administrator of the Company then he would not dispute Cumins Engine Company Pty Ltd's right to possession or entitlement to return of the equipment.
Mr Sparks disputed Mr Marshall's assertions. Mr Sims was not able to help on that topic.
In the end result I do not think I need to resolve whether or not the conversations took place as deposed to by Mr Marshall in his affidavit or Mr Sparks in his witness statement[406] or his evidence.
Mr Marshall's recollection is not sufficiently reliable on his own admission to act upon his evidence for the purpose of rejecting Mr Sparks' evidence or even Mr Sims' evidence on this topic or passing any sort of assessment on their credibility or reliability generally.
The subject matter of the conversations was barely relevant to the issues between the parties in this case.
I do not think that those conversations helped to establish one way or the other the third parties' terms of their retainer and what advice Mr Sims or Mr Sparks might have given the Company and its directors from time to time.
The plaintiff tendered an extract of minutes of a meeting of the directors of the Company, said to have been held at Adelaide on 26 November 1996 at 6:00pm. That extract has been certified by Dr Williams as a complete, correct and up to date copy of an extract from the minutes of a properly held meeting of the board of directors held on that date.
The board minutes show that the directors agreed to the letter of offer dated 26 November 1996 from the bank to the Company under its general conditions.
There are also minutes of the board meeting which is said to have been held on 27 November 1996.[409] The minutes claim that the defendant was present. I do not think that the minutes are accurate. If the meeting did take place I do not think that the defendant was present. On 17 January 1997 he provided an invoice to the Company which discloses the dates which he attended Adelaide for board meetings.[410]
I think that invoice is accurate. I find that he did not personally attend any board meeting on 27 November 1996.
The minutes claim that a resolution was passed that pending receipt from the YQ Company of the proceeds from the three letters of credit, the Company would cause to be allotted to the YQ Company or its nominee $1,125,001 ordinary $1 shares; and $1,124,999 non voting, non convertible 5 per cent cumulative redeemable preference shares; and 250,000 non voting convertible 5 per cent cumulative redeemable preference shares which may be converted to ordinary shares.
"... that they could limp on until the sale of the Chinese boat but shortly thereafter they were likely to be in Court once the 459E Notices had expired."[416]
"It was acknowledged by the Directors at the meeting that the company may need to consider a formal appointment of some sort before too long given these new developments, however the directors seem determined to avoid this for the time being, and to that end have now proposed the following plans."[420]
Three alternative plans were presented to the meeting. The first allowed for the vessel to sail to China but only after the payment of funds under the first and second letters of credit. Those funds would be used to repay the ANZ bank facilities and those creditors which had retention of titles claims. It was proposed that the Chinese purchaser (the YQ Company) would then provide the Company with a mortgage over the vessel for the sum of $US 2 million. The Company would insure the sum payable under the mortgage. The unsecured creditors would eventually be paid out of those funds.
It is recorded that the meeting believed that the plan was considered to be highly unlikely to reach fruition given that it relied upon the co-operation of the Chinese and the ability of the Company to find some sort of insurance cover for payment of the $US 2 million.
However, it is further recorded that Mr Sims had made inquiries of an American underwriter who specialised in this area of insurance and the Company would know by tomorrow if cover was possible. That plan had been provided to the Chinese for their consideration.
The second plan involved another approach to EFIC to procure funds from their national interest account. It is recorded that the meeting believed that that plan was unlikely to succeed because previous attempts had failed.
The third plan involved Dr Williams making a fresh approach to the Government in an effort to gain direct financial support or to persuade the Government to place political pressure on EFIC to support the Company. It is further recorded:
"The possibility that the directors may seek to appoint a Voluntary Administrator or such other administration, was discussed and the directors confirmed that if Plan 1 above was determined to be unfeasible then their hands would virtually be forced on this matter.
Given these developments, the Bank has re-affirmed that its release of the Raptis hull has been withdrawn and the directors acknowledge this by saying that they themselves were no longer prepared to release the vessel.
With the flow of funds from the Raptis deal now on hold the question was asked as to what would occur now with the steel yard creditors. It was noted that wages were due on Wednesday and that it was unlikely that the company would be in a position to pay these wage (sic). Directors responded that a progress payment of $200,000 for the Earle vessel was due on Wednesday and this would be sufficient to pay wages."[421]
I think this meeting shows how determined the directors were to continue trading and to avoid placing the Company into some sort of administration. By 2 December 1996, the directors were aware that the third letter of credit, which was essential to meet the unsecured creditors' claim, would not be procured by 8 December 1996 and there was no certainty that it would ever be procured. They were also aware that they were not able to pay their creditors as and when they fell due. The only asset of any value, namely the aluminium vessel, could not be released to trigger payments of the first and second letters of credit because by release of the vessel the Company would lose its security over the vessel.
The Directors could think of only three plans none of which they believed were likely to succeed.
All of the conditions were present for the appointment of a form of administration. The Company was now not only in dispute with the YQ Company but also in a significant dispute with Raptis.
Later that day Mr Sims did report to the ANZ bank that there was some possibility of insuring the letter of credit.
On 3 December 1996, the bank wrote to the Company indicating that it was concerned that it had heard that the directors had attempted to advance a proposal whereby some form of mortgage would be granted by the YQ Company to the Company in order to secure the sum of $US2 million.[422] It requested a meeting that afternoon. A copy of that letter was sent to Mr Sims.[423]
Mr Sims was cross examined about the contents of this letter. It was pointed out to him in cross examination that the letter which was written to the Company, a copy of which he had received, contained a reference to the meeting of 2 December and referred to the bank meeting with the Company and "your advisors". It was put to him that he did not protest to Messrs Kelly & Co, the bank's solicitors, about being described as the bank's advisors.
He agreed that he did not protest. His failure to protest is a matter, in my opinion, of no significance. It would have been pedantic for him to have contacted the bank's solicitors and informed them that he was not one of the bank's advisors and that if the term referred to in the letter referred to him, that it was in error. That simply was not a matter of any concern to anyone at that time.
A meeting took place and notes were taken by the bank.[424]
Mr Sims attended this meeting.[425] Three directors of the Company were in attendance, Dr Williams, Mr Thomas and Mr Rick Verboon. The ANZ and its advisors were also represented.
In particular Plan 1 was discussed. The bank was advised that an insurance policy of the kind considered at the previous meeting was available but further information in that regard would not be available until the next day.
The meeting was advised that Mr Hu would be in Adelaide on 5 December and the directors were optimistic that a deal would be brokered with him at that time.
Mr Thomas confirmed that the vessel and the crew, subject to obtaining fuel, were ready to leave port.
The bank was advised by Mr Winter who also attended the meeting that the directors had breached an arrangement to meet group tax of $115,000 in the previous week and were now personally liable for that amount. Mr Hercus' evidence, which I accept, was that he was unaware that the Company had failed to pay group tax.[426]
The bank advised the directors that it remained extremely concerned about the arrangements with Mr Hu. The bank was currently reviewing its stance on a daily basis given the ever changing nature of the Company's relationship with the YQ Company. The bank stated it would review its position the next day and requested that the directors meet again for that purpose.
On 3 December 1996, the Company wrote to the YQ Company in the following terms:
a) SA Ships will complete the Protocol of Delivery and Acceptance on 4 December 1996; and
b) SA Ships will deliver the vessel in Wenzhou no later than 20 December 1996;
c) that immediately upon the completion of the Protocol of Delivery and Acceptance the two existing letters of credit for US$2,377,500.00 are available for immediate collection;
d) execution of the enclosed agreement and the ships mortgage attached thereto by your company on 4 December 1996; and
e) confirmation that your company will proceed with the construction and purchase of the second aluminium vessel (we acknowledge that the existing letter of credit for US$2,000,000.00 is a payment on account of this vessel); and
f) SA ships being able to procure an insurance policy (on terms acceptable to SA Ships) in respect of your commitment to pay the said sum of US$2,000,000.00 pursuant to the enclosed agreement.
If the vessel is to arrive in Wenzhou not later than 20 December 1996, then it will be imperative that it leaves Adelaide not later than Sunday 8 December 1996. Even that time table only allows 2 or 3 days on account of mechanical complications or bad weather.
This company currently has approximately US$2.4 million of secured creditors (ANZ Bank US$900,000.00 and US$1,500,000.00 to retention of title creditors). It is necessary for this company to obtain the consent of all of these creditors before the vessel is able to leave Adelaide. At the moment these creditors are not willing to allow the vessel to leave Adelaide until it is clear that the further monies of US$2,000,000.00 proposed in the enclosed agreement will be forthcoming.
We recognise that you have difficulty in putting in place a letter of credit to secure the payment of these funds before the vessel arrives in Wenzhou. For this reason we have suggested a ships mortgage to secure the payment rather than a letter of credit.
In addition to the secured creditors referred to above, the company also has approximately US$2.4 million of unsecured creditors in Australia. It will also be necessary for the company to convene a meeting of these creditors to seek their approval to send the vessel to China as proposed herein rather than retain the vessel in Adelaide and sell the same to another purchaser.
Because it was not possible to reach agreement when Mr Thomas was in Shanghai last weekend, SA Ships has little alternative but to appoint an administrator (Chapter 11) which is most likely to do tomorrow, Wednesday 4 December 1996. If SA Ships does receive your further US$2,000,000.00 and in thereby able to satisfy the creditors and also receives your ongoing support by way of future orders, then SA Ships will be debt free and can look forward to substantial future profits which we can both enjoy.
Although this matter has not been the subject of a formal resolution by the directors of SA Ships, I am confident that the existing shareholders would be prepared to cause the company to allot to you additional shares sufficient to give your company 75% of the total issued ordinary shares.
Your urgent consideration of these matters is requested and I look forward to your reply by return.
That letter reflects the first plan discussed at the meeting the day before.
The letter contains a threat that the company might appoint an administrator the next day. I think the directors were using the threat of the appointment of an administrator in an endeavour to achieve their ends. They had threatened EFIC, the ANZ bank and now the YQ Company with such an appointment. However, the appointment of an administrator was, in the directors' minds, an act of last resort. In my opinion, they only intended to appoint an administrator if they could not get one of the ANZ bank, EFIC or the YQ Company to continue to support the Company.
The Company's position worsened the next day.[428] Mr Sims described the Company's financial position as desperate. It was at least that.
On 4 December 1996, Kelly & Co, solicitors for the ANZ bank, wrote to the Company advising that the Company was in default by failing to procure the third letter of credit.[429] The letter confirmed the matters that had been discussed the previous day and in particular confirmed the bank's position.
"In that regard we confirm that yesterday afternoon you advised the Bank as follows:
1. You were at that time still progressing discussions with the Chinese customer concerning the proposed transaction under which a ship's mortgage would be obtained from the Chinese customer as a replacement for the sum of money to be paid under the third letter of credit. You have made enquiries of an insurance company in the United States as to the circumstances in which the insurer would be prepared to insure against the risk that the Chinese customer would default under the terms of any such ship's mortgage. We note your acceptance of the fact that if that risk cannot be insured, then the practical situation is that any ship's mortgage you obtain from the Chinese customer once the Chinese Ferry is in China would be very difficult, if not impossible, to enforce. It is the view of the Bank and we understand you accept this, that the proposed transaction with the Chinese customer involving the granting of a ship[s] mortgage would be of no practical benefit to the company unless there is some way to insure against the risk that the Chinese customer might default in discharging its obligations under that mortgage.
2. That you are dependent upon receipt of funding from another customer today for the purpose of meeting wages which are also due today and other amounts by way of creditor payments.
3. The Chinese Ferry must sail at the latest by Sunday. We note that this is a different date from that previously advised to the Bank on several occasions.
4. There is no concluded arrangements with Energy Power Systems concerning the retention of title claim.
5. That the Chinese customer is travelling to Australia and will be meeting with your client on Thursday for the purpose of discussing the terms of the proposal contained in your letter of 3 December 1996, a copy of which was provided to the Bank yesterday.
6. Your client is unable to pursue any further the opportunity to obtain support from either the Premier's Department or EFIC in relation to the transaction.
7. You consider that unless all necessary arrangements can be concluded by the end of this week, the company is likely to be put into voluntary administration. We note the comment in your letter to the Chinese customer to the effect that the company is contemplating that will occur today. We are instructed to remind you of the obligation contained under clause 8 of the conditions precedent to the letter of offer and the covenant signed by each of the directors that you will provide to the Bank not less than 48 hours notice of the convening of any such meeting of directors at which such resolution is to be considered.
8. We note also your acknowledgement that if either the insurance arrangements cannot be effected in a satisfactory fashion today or the money from the Steel Yard customer cannot be made available today, then the company cannot hope to complete arrangements with the Chinese customer outside of a formal insolvency administration.
We confirm that we advised yesterday that the Bank's position is:
1. It is extremely concerned as to the current position of the company. The company has committed numerous breaches of the facilities and the Bank, as indicated above, fully reserves its rights. The Bank accepts your assertion that without the conclusion of satisfactory arrangements today involving the prospective Chinese ship's mortgage and the receipt of moneys necessary to meet wages, the company's position is critical.
2. Given these events, the Bank considers that some form of informal insolvency administration whether it be instigated by the company or by the Bank, or by both parties is imminent. In those circumstances, the Bank hereby provides notice that given the commission of events of default, it terminates immediately its obligations pursuant to the terms of the letter of offer of facilities dated 26 November 1996 to release from the scope of its debenture charge the vessel number 8, being that vessel described in the ship building agreement dated 13 August 1996 between you and A Raptis & Sons Pty Ltd.
3. The Bank fully reserves all rights it has in the matter.
A copy of this letter has been sent to Mr Winter and Mr Sims.
"I was in no position to give her assurances and certainly not to say that it would be me who would be the critical person. It was her husband who held the key to any success in relation to the negotiation with the Chinese."[440]
"As you are aware the company is currently experiencing some financial difficulties hence the timing of the payment of these fees is uncertain, however, I am hopeful we will be able to clear the debt within the next few months." [441]
"We also seek your confirmation that you will not cause the vessel to depart from the Port of Cairns for passage to China until you have received written confirmation from the Bank that the debt due by the Company to the Bank has been paid." [446]
"We are now well advanced with work on this project and have expended a substantial amount of money. Therefore I herewith attach our invoices for the first two payments that are now due." [448]
It seems surprising that the defendant would have caused that letter to be written to the Company at that time. The defendant had agreed to subordinate any loans which he had made to the Company when the ANZ extended its facility by offering the second overdraft.
The defendant thought that the agreement reached on 6 December 1996 meant that the ANZ facility would be repaid in full and that on or after December 1996 the Company would be recapitalised by the injection of the $US2 million from the YQ Company.[449]
In my opinion, this letter indicates how well advised the defendant was of the fortunes of the Company. The Company was indebted to INCAT in respect of design work on the aluminium vessel and already considerably indebted to the Company in respect of the design work on the second vessel. For those reasons it was in the defendant's interests that the Company not be placed in administration.
At a meeting with the bank on 6 December 1996, Mr Thomas provided the bank with a copy of the Certificate Of Technical Acceptance and the Protocol of Delivery and Acceptance.[450] He also provided the Company with the agreement with the YQ Company under which the YQ Company agreed to subscribe $US2 million as capital in the Company.
At that meeting the bank took the view that the agreement with the YQ Company was open ended and did not require any subscription of capital before a board meeting of the Company on 18 December 1996.
The bank took the view that the agreement entered into between the Company and the YQ Company did not leave the Company any recourse in the event that the YQ Company did not inject $2 million worth of capital.
The bank advised Mr Thomas, Mr Winter and Mr Sparks of Sims Lockwood, who was also present, that it did not wish to play any part in the Company's affairs after 31 December 1996. It advised them that they should in turn tell Mr Scott that the ANZ would not be the banker to the Company after that date.
About this time Johnson Winter and Slattery wrote to EDA in Shanghai enclosing in triplicate a bill of sale duly executed by the Company in favour of the YQ Company and asked EDA to hold those documents until otherwise instructed.[451]
It appears clear enough that Mr Sims was not party to the conferences between the Company and Mr Scott and EDA. I think that is consistent with the third parties' case. If the YQ Company were to inject $US2 million of capital into the Company the Company would survive, at least that was the perception of the directors at the time. In those circumstances there would be no need to appoint a voluntary administrator and no need to keep Mr Sims abreast of events.
Mr Sims needed only to be informed of those matters which might impact upon him if he were appointed a voluntary administrator.
Of course it was always the third parties' case that he only attended these meetings because it was contemplated that he would be appointed a voluntary administrator. In my opinion, his absence from the meetings to which I have referred, supports that proposition.
On 7 December 1996, two events of significance occurred. First, Mr Hercus wrote to Dr Williams after receiving a copy of the ANZ letter of 6 December. He wrote:
"I accept the terms of the revised banking facilities but I am deeply concerned by item 6.5. This requires that no entity or company associated with any guarantor shall seek payment of any account, now due or becoming due during the term of facilities from the ANZ.
This condition specifically disadvantages two companies that hold shares in, Hercus Marine Designs Pty Ltd and International Catamaran Pty Ltd. These have very substantial amounts due for design work on catamarans and trawlers. These companies have been severely weakened this year by the failure of SA Ships to meet its commitments, yet have continued to support SA Ships.
We have already had to retrench 20% of our staff recently and if we must continue unpaid we believe we will be forced to make more substantial retrenchments in the immediate future. This will severely affect our ability to prepare designs for SA Ships and will similarly affect SA Ships ability to secure and complete future contracts.
In addition, I fail to see why Hercus Marine Designs and International Catamaran Designs can be singled out for different treatment to other unsecured creditors of SA Ships." [452]
On the same day, a Saturday, a meeting was held at the Company's premises. The directors present were Dr Williams and Mr Thomas. Also present were Mr Carver and Mr Winter. The ANZ bank was represented by Mr Waugh. Mr Carter and Mr Barrett were also present.
A number of matters were raised at that meeting. First the directors sought the continuation of the facilities until 9 January 1997 which was refused. Secondly, the Company brought to the attention of the bank that currently the Company owed Hercus Marine and associated entities approximately $115,000. The Company sought a clearance to pay those monies "... on the basis that Phil Hercus is only a 50% shareholder on these entities, and the claim that these entities have undergone their own hardship on the basis that they had not been paid".[453]
The bank categorically refused to consent to that payment and advised that the bank expected the directors to continue to comply with the covenants agreed to on 27 November 1996.
Mr Hercus' letter to Dr Williams was written in anticipation of the meeting which was to take place and for the purpose of Dr Williams raising that matter with the bank on that day.[454]
The proposed guarantee from EDA was discussed. The bank drew to the attention of the directors' that it would not be able to call upon that guarantee without first pursuing the directors into bankruptcy. The proposed guarantee from EDA stood behind the directors' guarantees and was dependent upon the directors not being able to meet their guarantee obligations.
It was at this meeting that the Master of the vessel was introduced and it was at this meeting he signed the acknowledgement of the letter, to which I have already referred, dated 6 December 1996.[455]
On 9 December 1996, the ANZ bank wrote directly to Mr Hercus drawing his attention to the conditions precedent and noting that until all of those conditions had been fulfilled the variation to facilities would not be effected.[456]
In particular, it pointed out that the bank currently had no obligation to provide the overdraft accounts beyond 16 December 1996, until arrangements were concluded between the bank, EDA, the Company and the various guarantors of the Company.
On 9 December 1996, the bank gave its formal response to the directors' request made on 7 December 1996 to extend the facilities until 9 January 1996.
I set out that letter in full because it shows the pressure which the bank was then exerting upon the Company:
The Bank refers to its discussion with you at your premises on Saturday, 7 December 1996.
Prior to the Bank receiving acceptance of the Letter of Offer of 6 December 1996, you raised three specific issues with the Bank. They were:
1. You requested that the offer of facilities be extended until 9 January 1996. This request was also put to the Bank on the afternoon of 6 December 1996. The Bank has fixed the date of 2 January 1996 after being advised by you that the additional sum of US$2 million by way of equity should be subscribed by Yue Qing by 31 December 1996. The Bank accordingly has declined to vary the date upon which the facilities expire. If it is the case that some arrangements can be effected with the Economic Development Authority ("EDA") such that at least a portion of the Bank's debt is paid at the time of the discounting of the first and second letters of credit, then the Bank may be able to reconsider its position.
2. You have advised the Bank that further discussions have occurred with A Raptis & Sons Pty Ltd such that you are confident that a total sum of $500,000.00 may be available to the company. The details of those arrangements have not been concluded. If the Bank is to provide a release from its security of the Raptis number 8 vessel, it needs to be advised of what the proposed arrangements are between A Raptis & Sons Pty Ltd in the near future.
3. Both in its letter of 6 December 1996 and during the course of the meeting on the afternoon of 7 December 1996, the Bank clearly stated that the extension of the facilities in respect of the Overdraft Facility and Overdraft Facility No 2 account (other than the extension of the repayment date until 16 December 1996) is in all respects conditional upon each of the conditions precedent set out in the letter of 6 December 1996, including but not limited to, the conclusion of all arrangements with the EDA in a form which is satisfactory to the Bank. As indicated in the letter of 6 December 1996 and again confirmed on 7 December 1996, those arrangements have not been the subject of any detailed discussions between the Bank and the EDA and no arrangement has, of course, been concluded. If such an arrangement is not concluded then the Bank will require repayment of all facilities being the Overdraft Facility and the Overdraft Facility No 2 account by no later than the close of business on 16 December 1996. The Variable Rate Commercial Bill Acceptance/Discount Facility will be available on the satisfaction of each of the conditions precedent that relate to that facility. Those facilities are not dependant upon the conclusion of the arrangements with the EDA.
The Bank and its advisors met with the EDA today. The EDA, subject in all respects to cabinet approval and clearly the agreement of the Bank has put to the Bank a proposal to provide a guarantee in favour of ANZ for a sum of not less than $1 million together with costs and interest. That guarantee may be called upon by ANZ in respect of the liability of the company under the Overdraft facility and the Overdraft Facility No 2 account on the following basis:
1. The equity to be subscribed by Yue Qing of not less than US$2 million is not paid on 2 January 1997. We have raised with the EDA the suggestions made by you that there may be some delay in the payment of moneys given the administrative difficulties in so doing and further, the fact that the payment is to be made at the end of the financial year.
2. You fail to make payment to ANZ of the amounts outstanding under the Overdraft Facility and Overdraft Facility No 2 account by 2 January 1997.
3. ANZ uses its best endeavours to recover its debt from the assets secured in its favour and from the guarantors. It is proposed that the Bank commits itself to use its best endeavours to recover all such amounts as are outstanding. This includes, but is not limited to, the appointment of a receiver to the assets of the company and further, the commencement of bankruptcy proceedings against each of the individual guarantors.
4. In the event that notwithstanding ANZ's best endeavours an amount still remains outstanding in respect of the Overdraft Facility and Overdraft Facility No 2 account by 30 September 1997, then ANZ will transfer to the EDA all its interest in the debt and securities outstanding including the rights to recover the debt pursuant to the terms of the guarantee in return for which the EDA will pay to the Bank the full amount of the debt then outstanding.
5. ANZ will consult with the EDA concerning the steps taken by any receiver or by ANZ to recover amounts due from either the company or the guarantors.
The Bank notes from its discussions with you on Saturday, 7 December 1996 that you have expressed a preference to see a partial reduction of the value of the commitment to be provided by the EDA on the basis that there will be a partial reduction in the Overdraft Facility and the Overdraft Facility No 2 account at the time of the payment of moneys due to you pursuant to the first and second letters of credit. The Bank's preferred position is that a sum of not less than $600,000.00 being the total facility limit in respect of the Overdraft Facility No 2 account which has been applied to the construction of the Chinese Ferry should be repaid from the proceeds of the first and second letters of credit.
The concept of a reduced EDA commitment as advanced by you at the meeting on Saturday, 7 December 1996 has been put to the EDA who have expressed opposition to such proposal.
The Bank now seeks the Director's views on this proposal and confirmation of their willingness to proceed on this basis.
The Bank is writing to give you preliminary notice only of these arrangements. They have yet to be confirmed. Once they are confirmed the Bank will submit these arrangements to you and each of the guarantors for your formal approval pursuant to the terms of the Variation Letter dated 6 December 1996.
The Bank also refers to the amendment to the Variation Letter of 6 December 1996, and in particular, clause 5 on the page 9 such that the Bank has agreed that any salaries due to any of the guarantors continue to be paid from the company's funds, and similarly, any moneys due to Markwell Pty Ltd. Please provide to the Bank full details of the salaries paid to the guarantors and the amounts of money payable to Markwell Pty Ltd." [457]
The bank was trying to bring this matter to a head. It was trying to make the directors face up to their responsibilities. No doubt the bank had become a little tired of the various propositions being put by the directors. I think it may be inferred that the bank was also concerned that at this stage the directors seemed to be protecting themselves. Mr Hercus wanted to be paid money owed to him by the Company, notwithstanding that he had previously agreed to subordinate any debts owed by the Company. The directors were trying to position EDA between them and the bank so that the guarantees that they had given to the bank would not be called upon.
Because the EDA proposal required the bank to bankrupt the directors the proposal was not that attractive to the bank even though ultimately it would protect the bank.
Nothing was settled at this time. Dr Williams continued to deal with Mr Scott. Mr Scott amended his offer from a guarantee of $1 million to a loan of $1 million. That was reported to the bank. That $1 million loan would be used to pay out the bank's $1 million bill facility.
At the same time Mr Scott approached the Government to convert the proposed EDA guarantee to an outright grant. The bank did not accept that the Government was likely to agree to that proposition.
During this period, in mid December, the bank also refused to release the Raptis 8 hull upon any assumption that the Scott transaction would take place.
A bank note made on 12 December 1996 summarises the Company's position, I think:
"At the time of writing this diary note the customer seems unable to formulate any strategy forward, while it waits to see what support will be forthcoming from AA Scott and what form the SA Government's support will take (grant or guarantee?). With the time at which the L/C 1 and 2 proceeds are anticipating fast approaching these matters need to be resolved one way or the other very quickly.
Michael Thomas is aware that unless and until some form of proposal can be bedded down then the Bank's facilities must be paid from L/C 1 and 2." [458]
Mr Sims also had conversations with Mr Marshall relating to Mr Marshall's client's claims against the Company.[459] On 12 December 1996, in response to a question from Mr Marshall as to whether his appointment was imminent, he told Mr Marshall he only had limited knowledge at that time. He had previously declined to accept a nomination as liquidator in the event that Cummins Engine Company Pty Ltd took steps to wind up the Company. He thought his previous signed consent as a voluntary administrator prevented him doing so.
Mr Sims had no further contact with the Company after 12 December 1996, until shortly before he was appointed administrator on 14 January 1997.[460]
On 13 December 1996, Mr Thomas approached the bank asking it to speak to Mr Hu, of the YQ Company, to enquire when payment would be made under the first and second letters of credit. The bank was reluctant to deal with the purchaser. Mr Thomas advised the bank that the delay in making payment of the letters of credit may be due to a misunderstanding on the part of the YQ Company believing that the EDA was about to make a grant to the Company.[461]
On 13 December 1996, the bank withdrew its offer of any facilities.[462] That tactic, in my opinion and I do not use the word tactic pejoratively, was no doubt a further attempt to bring the matter to a head. At this stage the aluminium vessel was in Cairns. There were two letters of credit both of which had not been paid. There were some creditors who claimed title to parts of the aluminium vessel under retention of title clauses and their contractual arrangements with the customer. Unsecured creditors were pressing.
The bank facilities expired on 16 December 1996. The bank advised Mr Thomas of the expiration of the facility and advised him that payment of the letters of credit had not been made. Mr Thomas advised the bank that he believed that the Chinese were probably waiting upon the delivery of the vessel. That was contrary to all that had been agreed between the Company and the YQ Company in November/December.
The bank spoke to Mr Carver advising him that Mr Hu was sending a telegraphic transfer for $US2 million independent of the letters of credit.
On the same day Dr Williams and Mr Thomas sent a request to the bank seeking release of the Raptis 8 vessel. They also advised the bank that AA Scott Pty Ltd had agreed to advance the Company the sum of $1 million and enclosed an undated letter from the Scott Group of Companies addressed to the Company.
It is instructive to see the conditions of the loan being offered by AA Scott Pty Ltd:
This letter sets out the terms on which this company agrees to provide a loan facility to South Australian Ships Pty Ltd ('SA Ships').
The advance is conditional on a $1 million facility being granted to SA Ships by the South Australian Government by 20 December 1996 and will be made on the following basis:-
4. secured by a second ranking debenture charge over the company's assets and undertaking;
5. payment of the advance to be made in accordance with a schedule approved by this company;
6. funds to be used to pay SA Ship's creditors but not to be used to pay employees' wages and other entitlements, nor to be paid to SA Ship's directors or companies related to those directors, unless this company has given its prior written consent to such payments;
7. the ANZ Bank's registered charge over SA Ships will have priority over this company's charge to the extent of $1,160,000 plus 12 months interest (provided that interest is due and payable) and costs;
8. SA Ships is to provide this company with such financial information that this company requires, including monthly financial statements comprising profit and loss statements and balance sheets;
9. SA Ships is to co-operate with this company to allow this company to work with SA Ship's directors and management with a view to improving SA Ship's financial performance.
Please provide Mr L Ackroyd with a proposed payment schedule, which should specify the amount required, the date such amount is required and the reason(s) for the requirement.
As at the date that letter was provided to the ANZ bank there was no certainty that the first of those conditions would be satisfied. Indeed a bank note of the same date suggests that EDA was proceeding only on the basis of a guarantee.
On 17 December 1996 the bank spoke to Mr Price of EDA who told the bank that he believed that a guarantee was now available in acceptable form and it was likely to be executed by the parties.[464]
On 18 December 1996 the bank wrote to the Company advising the Company that the facilities had expired on 16 December 1996.[465] It observed that pursuant to the variation letter which extended the facilities until 16 December 1996, Mr Alan Scott was to provide a guarantee in respect of the Variable Rate Commercial Discount Facility. It further noted that on 12 December 1996, the bank had been advised that in lieu of the proposed guarantee an advance of $1 million would be made by Mr Scott by way of loan. It noted that the terms of the advance had not been communicated to the bank. In that letter the bank also noted that EDA appeared to grant a guarantee and indemnity and it required the Company to agree to the form of guarantee and indemnity which was enclosed with the letter.
In the letter the bank offered to extend the facilities until 15 January 1997 partly upon the same conditions as had previously been imposed.
On this occasion it was a condition of the extension of the facilities that payment would be made under the first and second letters of credit by no later than 4:00pm on Friday 20 December 1996.
No payment was made on the letter of credit by 20 December 1996 and various extensions were granted by the bank to 24 December 1996; to 27 December 1996; to 30 December 1996; to 31 December 1996; and to 2 January 1997.
The Company and the YQ Company were involved in something of a stalemate. On the one hand the Company wanted release of the funds under the letters of credit and on the other hand the YQ Company wanted the bill of sale and delivery of the aluminium vessel.
On 20 December 1996, Mr Winter sent the bill of sale to Wenzhou Economic and Technical Development Zone.[466]
On 23 December 1996, the YQ Company asserted that the bank was illegally detaining the vessel in Australia.
Eventually Austrade became involved.[467] Austrade was told that the ANZ bank was interfering with the delivery of the vessel. On 24 December 1996, the bank advised Austrade that the aluminium vessel was still owned by the Company and was subject to a mortgage to ANZ bank. The mortgage would be discharged and title transferred to the YQ Company as soon as the two letters of credit in favour of the Company had been processed.
The problem simply drifted along without the aluminium vessel being delivered or the letters of credit being met. A further complication was introduced when the crew advised that it would be unable to continue to serve past early January.
It was the defendant's evidence that throughout this period, up until at least Christmas of 1996, he believed Mr Sims and Mr Sparks were fully acquainted with the Company's financial position and were advising the executive directors in relation to its ability to continue to trade.
His understanding was based on telephone conversations with Dr Williams and Mr Thomas. He had the positive belief that it was appropriate for the Company to continue to trade until he was advised otherwise by Mr Sims.[468] I accept that was the defendant's understanding but that understanding was incorrect. In reality Mr Sims and Mr Sparks were not consulted on this topic at all. Their position had been somewhat marginalised by Christmas 1996. The Company and its directors did not ever seek advice from them about the Company's ability to continue to trade or solvency.
By 31 December 1996, the company's advisors were preparing for the appointment of Mr Sims as voluntary administrator. A draft minute for the board was prepared on that day.
On New Year's Eve the Master advised the ANZ bank that the crew would be wound down from 8 to 2 being a Master and an engineer. The Master would be replaced. The berth in Cairns was only available until 12 January.
The bank telephoned Dr Williams. A note of that telephone call made by the bank records:
"Telephoned Don Williams at SA Ships. Don advised that following a meeting yesterday evening in China, the Australian High Commissioner was making a representation to the Australian government today for the government to become involved. This involvement would take the form of a guarantee from the government guaranteeing the payment by ICBC under LC's 1 and 2 which would enable the vessel to leave the port of Cairns and the LCs to be paid when the vessel arrives in China. Suggested to Don that we could not be totally confident that the LCs would be paid if the boat did arrive in China, however he pointed out that that would be a commercial risk that the Federal Government would take should they provide the guarantee support. He advises that he is hopeful of having a meeting with Minister Downer this afternoon and will also be in contact with Deputy Prime Minister Fisher.
Also discussed the balance of SA Ships No 1 account being $566,653 against a limit of $560,000. Don advised that he will arrange for David Carver to adjust the account today, however pointed out that the debiting of the $25,000 Kelly & Co fee to the account had caught them by surprise and had affected cash flow." [469]
The position worsened and Dr Williams sought the assistance of the Minister for Foreign Affairs, the Hon Alexander Downer. A briefing note to Mr Downer's Media Assistant, after discussing the problems with the failure of the Company to obtain payment of the letters of credit, said:
"YQ Ferries and their Chinese affiliates have threatened legal action and physical disruption at the Australian Shanghai Trade Office unless the vessel proceeds to China. There have also been threats in relation to broader trade and commercial issues. Threats of legal action against the ANZ Bank in Shanghai have also been made.
We understand that the Trade and DFAT Officials in Shanghai are deeply concerned and that recommendation of Government intervention in the National Interest has been forwarded to DFAT in Canberra by the Australian Ambassador to China, Mr Rick Smith. A solution would be for a Government Guarantee of the L/Cs against payment upon arrival at Wenzhou.
The SA Government is also very concerned about potential impact on its trading initiatives in Shanghai and elsewhere."[470]
In early January the Chinese interests requested that the aluminium vessel be allowed to sail to China because they claimed they had paid for the vessel in full. Austrade reported the Chinese position as follows:
"The Chinese side have dug in. They are not going to accept anything less than delivery in Wenzhou before they will pay the remaining L/Cs. My view is that there is less than 20% chance that they will pay against the remaining L/Cs once the vessel is in their possession even if I visited Wenzhou and received written assurances that the contracting parties and the local government supported payment." [471]
Of course, technically the Chinese were correct. So much was recognised by the President of the ANZ bank in China in a memorandum to the Senior General Manager of the ANZ Bank in Melbourne. As he pointed out, of the $US2,377,500 outstanding on the letters of credit $US377,500 represented the last contract payment on the vessel. The balance of $US2,000,000 was actually a down payment on a second vessel.
The President of the ANZ bank in China believed that it would be unlikely that the Chinese buyer would release the letters of credit once they had the vessel in China. He also did not believe that the YQ Company would continue to deal with the Company after it received the aluminium vessel.
A meeting was convened on 2 January 1997 between representatives of the Company and the bank. The Company was as usual represented by Dr Williams and Mr Thomas. Mr Winter was also present. The bank was represented by its acting state manager and regional manager.
A number of matters were explored. Dr Williams inquired of the bank whether it would lend an additional $1.8 million to take out the creditors with retention of titles claims. Dr Williams also asked the bank to contact its officers in Shanghai to ascertain why there was a hold up in payment on the letters of credit.
Dr Williams could not understand why it was that the YQ Company insisted that it was permitted to title notwithstanding that the bill of sale, which had been sent to China, had been delivered to Mr Hu. The explanation was that Mr Thomas had handed the bill of sale over to Mr Hu subject to an undertaking by Mr Hu that the letters of credit would be met the next day.
"To summarise the above, it now transpires that SA Ships have delivered the original copies of the Bill of Sale to the Chinese purchaser and it is likely that this is the reason that they are claiming that title of the vessel has transferred and payment has been made in full." [472]
The meeting was advised, by Mr Winter, that three or four unsecured creditors were expected to petition for the winding up on the Company on 6 January 1997.
On 3 January 1997, the bank wrote advising the Company that it was concerned that apparently the Company had provided the YQ Company with the bill of sale.[473] That letter was replied to on the same day.[474] It was the Company's position that the bill of sale had only been provided to the YQ Company on Mr Hu giving an undertaking that the letters of credit would be met on delivery of the vessel.[475]
On 6 January 1997, the Company wrote to the YQ Company in the following terms:
We continue to attempt to find a solution but time is now of the essence. The following is our position.
1. Our legal advice is that the vessel remains the property of SA Ships until the undertakings given in the Agreement of 31st October and 14th November 1996 are honoured and the funds provided for in the L/C's are transferred to SA Ships.
2. Unless the funds from the L/C's are transferred on Thursday, 9th January 1997 the Directors of SA Ships will have no alternative but to forthwith proceed to appoint an Administrator and invite the ANZ Bank to take possession of the vessel.
3. If the funds from the L/C's are paid on Thursday the vessel can sail for Wenzhou on Monday, 13th January 1997.
4. Mr Thomas and I will come to Wenzhou for meetings on Wednesday and Thursday, 8th & 9th January on the understanding that:
i) The L/C's will be cashed on Thursday, 9th January 1997.
ii) The L/C's relate to the delivery of "Xiang Zhen" and the second vessel and not Shareholding.
iii) You provide confirmation at our meeting, in writing, that the US$2millioin for Shareholding will be provided to SA Ships seven (7) days after the arrival of the vessel in Wenzhou.
We appreciate all your efforts to find a solution and we come to Wenzhou to finalise the above arrangements.
Dr Williams met with the bank and other representatives of the bank on 7 January and explained the Company's position and the circumstances in which Mr Thomas had delivered the bill of sale to the YQ Company.[477] Dr Williams indicated that he was going to China to see whether he could reach a satisfactory settlement of the impasse.
Dr Williams and Mr Thomas travelled to China and met with the YQ Company but that meeting failed to resolve their differences.
The bank's China office (Justin Breheny) attend a meeting on 9 January 1997. It reported to Head Office in Australia.
After referring to the parties' respective positions Mr Breheny wrote:
The parties are miles apart and it is unlikely they will reach agreement. Effectively the Chinese buyers are being asked to bail SA Ships out of its financial troubles by paying USD4m into the company. Needless to say the Chinese buyers are balking at this and dispute their obligation (under a number of signed agreements) to do so. I therefore believe that Don Williams (who returns to Adelaide Saturday morning), will have no option but to appoint a voluntary administrator on Monday January 13." [478]
A further meeting was arranged between those directors, the Wenzhou Municipal Government, two representatives from Austrade and a member of the Consulate staff. No agreement was reached at that meeting either.
Mr Winter telephoned the bank on 10 January 1997 and advised that Dr Williams' trip to China had not been successful in resolving the matter and that Dr Williams and Mr Thomas were presently in Hong Kong en route to Australia. He told the bank that the directors of the Company would be considering their position over the weekend but Mr Winter believed that it was now highly likely that some form of administration would be entered into on the Monday.
He told the bank that the directors of the Company would be available for a meeting on the weekend if the bank desired to meet.[479]
On 10 January 1997, Dr Williams, Mr Thomas and the defendant advised the bank that they were not prepared to guarantee any further advances to the Company.[480] The bank was advised over the weekend of 11/12 January that Dr Williams and Mr Thomas had been unsuccessful in China and would be returning to Australia on that weekend.[481]
The bank was advised that it was the Company's intention to appoint Mr Sims as administrator on 13 January 1997.
A meeting was held on that day.[482] Present at this meeting were Dr Williams, Mr Thomas, Mr Carver and Mr Winter representing the Company, two officers of the ANZ bank, Mr Carter and Mr Barrett.
Mr Sims and Mr Sparks were also present.[483]
Mr Winter reported that Dr Williams' trip to China had been unsuccessful and it was the intention of the directors to appoint Mr Sims as administrator today "... as the directors had exhausted all their options".[484]
It was also revealed at the meeting that a board meeting to appoint a voluntary administrator had been heard as early as the previous Monday, 6 January.
There is no record of such a meeting but it is alluded to in other documents, one of which I will refer to shortly. It would appear that a resolution was passed on 6 January to appoint a voluntary administrator.
On the morning of 14 January 1997, Mr Sims convened a meeting with the same people who were present at the meeting of 13 January, with the exception of Dr Williams. He announced at the meeting that it was intended to appoint him voluntary administrator and that the purpose of the meeting was to determine the ANZ bank's attitude and how the Company could deal with the Raptis and the aluminium vessels.[487]
The meeting concluded with Mr Sims being advised that the ANZ bank was reluctant to advance any further funds.
On the same day the board met. Three members of the board were present by telephone, Mr H G Verboon, Mr D P Verboon and the defendant. The minutes record that due to the delay in Dr Williams' and Mr Thomas' return from their recent trip to China and as a consequence of a request made by the ANZ bank the resolution of the board of 6 January 1997 had not been acted upon.[488] The minute does not announce that the previous resolution had been made but I think that it may be inferred that the board had met on 6 January 1997 and resolved to appoint Mr Sims as a voluntary administrator.
The resolutions passed at the meeting of 14 January 1997 were:
It was resolved that, because ICBC, Yue Qing High Speed Passenger Ferry Company and Wenzhou Economic Development Corporation had advised that they would not honour the outstanding letters of credit in the sum of US$2,377,500 (in accordance with their contractual obligations arising under the agreements of 31 October 1995, 5 November 1996, 14 November 1996 and 6 December 1996) and the directors now being of the view that of (sic) the Company is unlikely to receive the further US$2M equity funding, the Company is insolvent.
It was resolved that Anthony Milton Sims of Sims Lockwood Level 6, 81 Flinders Street, Adelaide SA 5000, having consented in writing to act as administrator of the company, be appointed administrator of the company pursuant to section 436A of the Corporations Law effective as at 2 pm on Tuesday 14 January 1997." [489]
Mr Sims said that his potential engagement by the Company as a voluntary administrator was very much "on again, off again" as the option of the Company between September 1996 and 13 January 1997. [490]
In particular there were periods when he heard nothing from the Company at all. Between about 25 September 1996 and 10 October 1996 he heard nothing. He was advised that he was to be appointed administrator but no appointment was made. After 12 December 1996 until 13 January 1997 he again had no contact with the Company.
He said the topic of solvency was never actually discussed by him with any directors or representatives of the Company. He always believed that the Company's insolvency was a condition precedent to his appointment.
In his cross examination, Mr Sims confirmed that whilst on two occasions he advised the Company that it should not incur any further credit he did not at any stage give any advice to the directors, officers or the Company regarding the solvency or otherwise of the Company nor did he give any advice to the directors or officers regarding their duties and obligations as directors or officers.[491]
The two occasions, when he gave advice, in the presence of the directors, that the Company should not incur any further credit, were on 26 September 1996 and 17 October 1996. On that second occasion the defendant was present.
He said that he did not hold an opinion on 24 September 1996 that the Company was insolvent but that at some later time he formed that opinion. I find that Mr Sims held that opinion as at 25 September 1996.
On that day he believed it was incumbent on the directors to appoint an administrator pursuant to the Law.[492]
Nevertheless he did not at any time advise the Company or its directors that he held that opinion.
When pressed in cross examination Mr Sims suggested that his action on 25 September 1996, forwarding to the directors the draft minutes appointing an administrator and his executed consent to act as an administrator, represented advice given by him to the Company that he believed the Company was solvent.
I reject that suggestion. I do not believe that his provision of those documents in any way could amount to the communication of his opinion to the directors that the Company was insolvent and that the Company ought to appoint an administrator.
I think the provision of those documents does no more than reflect the instructions given to Mr Winter that he should prepare such documents.
It would be extraordinary that a professional man would provide an opinion of the kind in such an oblique way.
I do not believe that Mr Sims intended to provide any opinion to the Company at that time, either that the Company was insolvent or that it should appoint a voluntary administrator.
I therefore reject his evidence that he gave such advice by the provision of those documents at that time.
He was then cross examined about evidence he had given in this court on another occasion in relation to work in progress.
His evidence on that previous occasion, both in an affidavit filed in those proceedings and orally, was that if the Company had survived by obtaining refinance outside a voluntary administration then the third parties would have rendered an account for the work carried out after 24 September 1996. He agreed that the work in progress amounted to nearly $60,000. He agreed that that work had been carried out by himself, Mr Sparks and by a number of employees employed by the third parties.
Because the third parties contemplated billing the Company in the event that the Company survived does not bear upon the terms of the retainer of the third parties or the advice given by either Mr Sims or Mr Sparks.
Mr Sims said, in his cross examination, that he was never retained by the directors but by the Company itself. He never told the directors that he did not act for them.
Although he was retained by the Company he did not believe that he had any obligation to advise the Company or the directors at any time between 23 September/24 September 1996 and 14 January 1997 or express any opinion on any matter. Furthermore, he did not believe that he had any obligation to advise either the Company or its directors that he was not under an obligation to provide advice or give any opinion.
He said the terms of his retainer were to be in a position to accept the appointment as administrator of the Company and to ensure that the Company had sufficient resources to continue to trade under administration with the ultimate view of a deed of company arrangement.
I have set out in detail all that occurred after 1 June 1996 because it is necessary to determine precisely the terms of Mr Sim's retainer on or about 24 September 1996 and particularly whether the terms of that retainer included an obligation upon him to advise either the Company or the directors on the issues of insolvency.
I have to resolve those issues in somewhat of a vacuum. The defendant was not in Adelaide between 1 June 1996 and 14 January 1997, except as I have indicated. He met Mr Sims and Mr Sparks on one occasion on 17 October 1996. His knowledge of the terms of Mr Sims' retainer must be based upon hearsay. He was dependant upon advices mainly from Dr Williams but also from Mr Thomas and Mr Carver. He cannot give much evidence of his own knowledge of the terms of that retainer.
The defendant claimed that after 24 September 1996 he relied upon the advice given by Mr Sims and thereby the third party.
As I have already mentioned the defendant gave quite elaborate evidence of a meeting he had with Mr Sims and Mr Sparks in which he claimed Mr Sims gave advice from which he relied. It is clear that such a meeting did not take place.
I do not believe that the defendant's evidence was untrue. I think he was mistaken. I do not believe that the defendant gave any untrue evidence. As I have already said I formed the impression that the defendant was an honest and decent man. That of course does not mean that his evidence is completely reliable. In this regard his evidence is unreliable.
In his evidence in chief he said that between 24 September 1987 and 10 January 1997 he believed that the third parties were providing advice to the Company and its officers about the financial status, trading and prospects of the Company and were engaged in discussions with the bank, creditors and prospective financiers about financial support for the Company.
He took comfort, to use his expression, from those matters because he believed that the third parties were competent and reliable accountants specialising in insolvency work and they would advise him if the Company was insolvent or was not able to properly continue trading. The third parties had the professional expertise and experience to advise the Company and its directors accordingly.
He said that he was never advised prior to a meeting of the board of directors on 14 January 1997, that the third parties or any partner or employee of the third parties held the opinion that the Company was insolvent; or could not properly continue to trade without the appointment of an administrator; or that there was a risk that if the Company continued to trade its directors would be exposed to potential liabilities for debts incurred by the Company; or that the directors were obliged to appoint an administrator or to cause the Company to cease to trade.
He said that if he had been advised of any of those matters he would not have consented to the Company continuing to trade without the appointment of an administrator. He would also have urged his co-directors to join with him in resolving not to allow the Company to trade and if his co-directors had refused he would have resigned as a director himself.
For reasons I have already given I accept the evidence that Mr Sims did not give that advice to the Company or to the directors at any time. I also accept the defendant's evidence that no other partner or employee of the third party ever gave such advice.
I also accept the defendant's evidence that if he had received advice in such unqualified terms he would not have consented to allow the Company to trade and if his directors did not agree to appoint an administrator he would have resigned as a director.
However, in my opinion and for reasons already given, Mr Sims was not retained to give that advice. He always believed that the Company was probably insolvent but he was not retained to give advice as to the Company's solvency or whether it should continue to trade.
His retainer was to act as a voluntary administrator when appointed. There were subsidiary terms in the retainer as I have already mentioned which obliged him to acquaint himself with the financial position of the Company by attending meetings with the bank and EFIC but he was not employed or retained as an advisor to the Company at any time.
I accept the defendant's evidence that no-one at any time told him that the Company was insolvent or that the Company should not trade without the appointment of an administrator.
In my opinion, if the defendant had acquainted himself as he was obliged, with the financial position of the Company, that was an opinion he would have formed for himself.
The Company was clearly insolvent throughout the second period between 25 September 1996 and 14 January 1997.
I cannot think that the directors who were present in Adelaide and had the day to day executive responsibility for the Company, Dr Williams and Mr Thomas, could have thought otherwise. Dr Williams was an experienced man. He must have known that the Company was insolvent at that time.
I do not believe that Dr Williams told his fellow directors in those terms that the Company was insolvent.
I believe that he always hoped that the Company would be able to recapitalise itself and go forward.
All of the directors had a substantial investment in the Company. It was not in any of the directors' interest for that investment to be lost.
However, I do not think that protection of their own investment was the only reason they continued to allow the Company to trade. I think they thought that if they kept the Company's doors open some investor would inject the necessary capital that would allow the Company to flourish. I think they all always thought that the Company had substantial prospects.
Mr Hercus did not give any further evidence in chief in relation to the events which occurred after 25 September 1996.
I believe that the defendant was not made aware of a number of developments over the relevant periods. For example, on 26 December the president of ANZ China reported to the Adelaide ANZ office that Michael Thomas had told him that if the letters of credit were not met by Friday 27 December "... SA Ships would cease to be a business".[493]
Mr Hercus was not made aware that that was Mr Thomas' view at that time.
The Company continued to fail to publish its financial statements in a timely fashion. I think the defendant did not receive the September financial statements until some time in December.[494] He did not receive the November accounts until 14 January 1997, the August accounts until 10 December and the September accounts until 17 December.[495]
The defendant asserted in his evidence in chief that between 1 June 1996 and about 10 January 1997 he believed that although the Company had cash flow problems it was solvent and it would remain so. He said that he held that belief for the following reasons: First, because the YQ Company would complete its purchase of the ferry. Secondly, on statements made to him by Dr Williams that there was a strong prospect that the SA Government would provide financial support for the Company beyond that which it had provided at the commencement of the Company's operation. Thirdly, because in May 1996 MISBARD had commissioned Leadenhall Australia and that Company had reported on 22 August 1996. At a board meeting held on 10 September 1996 he said that Dr Williams said words to the following effect:
"The Leadenhall report has been completed for MISBARD. It is good news. It values the company at $17 million and says that the company could see profits as early as this financial year. It also says that the company had some cash flow shortages that we have to overcome by sourcing $2 million in additional equity. But we have until July of next year to find it. Overall the report is very positive."[496]
Fourthly, because on 2 September 1996 the SA Government agreed to convert $400,000 to the Company as an interim grant and although the SA Government had indicated by 9 September 1996 that it would not be prepared to provide further financial assistance, EFIC was actively entertaining applications by the Company for assistance. Fifthly, because between 7 July 1996 and 15 December 1996 discussions took place between the Company and ISC with the prospect of ISC inquiring 50 per cent of the equity in the Company for $US2 million. He said in respect to that reason:
"An agreement was signed and dated 21 September 1996 in relation to the purchase. I was fortified in my belief after a nephew of the principal of the investor met me and other board members to express the investors' commitment to the agreement."[497]
Sixthly, because on 3 July 1996 Mr Carver said at the directors' meeting the Company was solvent and they could expect to generate a profit in the year ended 30 June 1997. Seventhly, the ANZ bank continued to support the Company pending completion of the ferry. Eighthly, on or about 4 December 1996, Alan Scott and the SA Government agreed to provide assistance of $1 million to the Company pending receipts of funds from the YQ Company. Ninthly,[498]
"When, in late September 1996, SAS and the directors of the Company obtained, as I believed, advice from Sims Lockwood & Partners (in light of the then recent rejection by the South Australian Government of an application by SAS for assistance), as to whether the Company could properly continue to trade, Mr Sims at that firm expressed the view (as I believed) that it could do so."[499]
In my opinion, a reasonable person, even assuming the matters to which the defendant has referred, would have formed the opinion that the Company was insolvent throughout the whole of the period and in particular not able to pay its debts as and when they fell due.
The fact was that the Company had extraordinary difficulty in coming to any terms with the YQ Company. Having come to terms with the YQ Company that Company defaulted on its obligations to pay in accordance with the terms of the contract from the outset. It consistently refused to honour its financial obligations under its contract for purchase of the aluminium vessel. The defendant could not reasonably have obtained any comfort from the YQ Company's agreement to pay and its issue of its letters of credit in relation to the aluminium vessel.
It may have been that Dr Williams advised the defendant that the South Australian Government was considering offering the Company further financial support.
However, the defendant knew that that support had not eventuated at any time prior to 25 September 1996. He knew by 25 September 1996, that the SA Government had expressly refused further support.
During the time when he thought such support might eventuate he could not have thought that the possibility of such support would mean that the Company could pay its debts as and when they fell due. After 25 September 1996 he could not have believed there was any prospect of any support.
I am prepared to accept that Dr Williams stated what the defendant asserted he said on 10 September 1996.
However, the defendant did not call for nor has he ever read the Leadenhall Report. It was not sufficient for him in the discharge of his duties to simply accept Dr Williams' short summary of the Leadenhall Report especially when the Company was at that stage in a parlous financial position.
True it is that the SA Government did agree on 2 September 1996 to convert the $400,000 loan to the Company into a grant. However, the SA Government also rejected an application by the Company for further financial assistance on 9 September 1996 and rejected a further application on 22 September 1996. The defendant could not reasonably have believed after 9 September 1996 or 10 September 1996 that the SA Government would give any further support.
I do not believe it was reasonable for the defendant to believe that the Indian investors would ever materialise. It certainly was not reasonable to hold that belief after 15 October 1996 when the Indian investors failed to provide the guarantee which was required and wrote what must be described as an extraordinary letter.
Whilst Mr Carver might have expressed the view that the Company was solvent at the directors' meeting of 3 July 1996, such a declaration was inconsistent with the objective facts. It was also inconsistent with Mr Thomas' managing director's report[500] and with Mr Carver's letter to the State Taxation Office dated 8 July 1996, seeking an extension of time until July 1996 to make payments of payroll tax.
Any reasonable enquiry at that time would have shown that Mr Carver's declaration was incorrect.
The ANZ bank did not withdraw its facilities at any time over the period mentioned. However, it is undoubtedly clear from the bank's notes of meetings with the directors and management of the Company that the bank remained the Company's bankers only because the bank could see no way of extricating itself over that period. Indeed at one point the bank made it clear that it would not remain the Company's bankers after 31 December 1996.
On any understanding of the bank's relationship with the Company the bank was a reluctant partner.
That must have been apparent to those directors who attended meetings with the bank, particularly Dr Williams and Mr Thomas. The defendant should have been aware of that position and could have been aware if proper inquiries had been made of Dr Williams and Mr Thomas. Indeed he could have made those inquiries of Mr Sims.
Mr Scott's possible involvement with the Company could not have offered any comfort to the defendant that the Company was solvent as at 4 December 1996 or any time thereafter. Mr Scott was prepared to make a loan to the Company in certain but limited circumstances. The South Australian Government was also prepared to assist at that stage in the same circumstances.
Mr Scott's involvement depended upon some certainty on the part of the YQ Company. In my opinion, merely because Mr Scott might have made a loan of $1 million dollars at that time could not have allowed the defendant to think that the Company was solvent.
The last mentioned reason for his belief must be rejected because I have found Mr Sims did not express that view. He was not asked to give that opinion nor did he give it.
In summary therefore there are no reasonable grounds to support the defendant's belief that the Company was solvent during the period mentioned.
In my opinion, the defendant has established that throughout the period from 25 September 1996 to 14 January 1997 there were reasonable grounds for suspecting that the Company was insolvent.
I think that the defendant may not have suspected that the Company was insolvent but for reasons which I have demonstrated they were unreasonable.
A reasonable person in the circumstances of the defendant would have suspected that the Company was insolvent throughout the whole of that period.
There are a number of reasons why a reasonable person would have so suspected and I shall identify just some of them. First, Mr Robinson's meeting in late October with Mr Sims. Secondly, the meeting of 3 November. Thirdly, the opening of a 'wages only' account on 7 November and the directors' contributing a sum of money to pay wages. Fourthly, the meetings of 20 November and 26 November. Fifthly, the call upon the directors to give guarantees on 26 November. Sixthly, the ANZ's refusal to honour cheques. Seventhly, the statutory demands under s 459E. Eighthly, the meeting of 2 December and the letter of 3 December to Mr Hu threatening to appoint an administrator. Ninthly, Mr Scott's involvement. Tenthly, Dr Williams' acknowledgement of the solicitor's debt of $66,416 and the Company's cash flow problems. Eleventhly, the ANZ's conduct throughout this period in extending the facilities but upon more and more onerous terms. Twelfthly, the ANZ's letter to the defendant relating to the INCAT debt on 9 December.
They are just some of the reasons why a reasonable person in the circumstances of the defendant would have suspected that the Company was insolvent.
The plaintiff has established a contravention of s 588G.
In my opinion, the defendant cannot rely upon the defence under s 588H(2) that he had reasonable grounds to expect that the Company was solvent at that time. There were no reasonable grounds for that expectation and therefore that defence has not been made out.
The defendant has also pleaded reliance on the defence in s 588H(3).
In my opinion that defence must fail because the advice which the defendant said Mr Sims had given was never given. In those circumstances the defendant did not have reasonable grounds to believe that Mr Sims was responsible for providing to him adequate information about whether the Company was solvent. It might have been that the defendant was misled into believing that such advice had been given. However, because of the seriousness of the Company's position, in my opinion, the defendant was under an obligation to speak to Mr Sims to ascertain whether his advice was as reported, if it was reported that the Company was solvent.
I find therefore that the defence fails because the advice was never given nor received and in those circumstances the defence could not operate.
Whilst the Company was advised to trade on a cash only basis after 25 September 1996, the defendant did not take any steps to prevent the Company from incurring the debts which the Company incurred between 25 September 1996 and 14 January 1997. He took no steps whatsoever in that regard. The defence under s 588H(5) has therefore not been made out.
In all those circumstances it seems to me that the plaintiff has established that the defendant is responsible for the loss or damage suffered by the plaintiff because of its insolvency.
It follows, because I have found that Mr Sims did not give the advice alleged by the defendant or any advice that was relied upon by the defendants, that the defendant's claim for contribution or indemnity from Mr Sims must be dismissed.
That leaves only one matter and that is whether or not I should relieve the defendant either wholly or partly from the liability to pay loss or damage suffered by the Company under s 1317JA(2).
The defendant is entitled to have the Court consider relieving him wholly or partly if he has acted honestly and having regard to all the circumstances of the case including these connected with his appointment he ought fairly to be excused for the contravention of s 588G.[501]
I think that the defendant has asked honestly. Acting honestly means that the defendant must have acted bona fide in the interests of the Company including the unsecured creditors.[502]
The circumstances surrounding his appointment are not relevant. I shall return to the other circumstances which might be relevant to excusing the defendant for his contravention of s 588G.
I must take into account any action the defendant took with a view to appointing an administrator, when that action was taken and the results of that action.[503]
The defendant, of course, participated eventually in the appointment of Mr Sims as administrator. That of itself is barely relevant for determining whether or not he should be relieved of liability under s 1317JA. He took no steps to appoint an administrator prior to about 23 September. He then participated in a decision not to appoint an administrator even though a reasonable person in his position would have known that the Company was insolvent. Between 24 September and immediately before 14 January he took no steps to appoint a voluntary administrator although a reasonable person in the defendant's circumstances would have concluded that the Company was insolvent.
The defendant failed to appoint an administrator because he wished to see the Company succeed. I think he believed that there was some possibility the Company would succeed if it was allowed to trade even though it had a chronic cash flow shortage.
Whilst it was in the defendant's interest for the Company to succeed, because he had no prospects of return of capital invested if the Company failed and he would lose the value of the work which had been performed by his Company in relation to the design of the aluminium vessels, I do not think it was self interest that motivated his failure to appoint an administrator.
I think during the whole of this period the defendant was concerned that the Company might be insolvent and that he hoped the Company could trade out of its problems.
I am satisfied that his failure to appoint an administrator or cause such an appointment to be made, was a result of a misguided belief that the Company could survive. I think therefore that his failure to ensure that such an appointment took place should not disqualify him from obtaining relief under this section.
The defendant's real breach in this case was failing to keep himself properly informed of the Company's fortunes. He knew what his duties were. He knew what he needed to do to discharge those duties. What he failed to do was to obtain sufficient information from those who had that information to enable him to make a properly informed decision.
In particular, he relied too much on Dr Williams as a source of information. He was also too reliant on Dr Williams' judgments. He failed to obtain sufficient information from Mr Thomas. He failed to obtain any information from Mr Sims or Mr Sparks. He wrongly assumed that Mr Sims and Mr Sparks were advising the Company in relation to the very decision which had to be made by the defendant and that was the appointment of an administrator. He failed to obtain relevant and up to date financial accounts of the Company. He failed to ensure that the directors met regularly and were properly informed at board meetings and in particular in receiving proper financial statements.
I do not think that the defendant ever lost interest in the Company's fortunes. I believe he was vitally interested in the Company's fortunes. He suffered the disadvantage of trying to carry out his duties from a distance. That did not relieve him of his obligations.
However, the defendant's culpability, if I might describe it that way, was less than that of Dr Williams or Mr Thomas. Dr Williams was the senior executive director during the relevant time. He was the chairman of the board and did have first hand information. It was his duty to convene meetings of directors. He had an obligation to ensure that any information he passed to his fellow directors was accurate. He was not entitled to edit that information.
Mr Thomas was also better informed than the defendant and was capable of better informing the defendant. Both Dr Williams and Mr Thomas had information available to them that they could have been passed on to their fellow directors.
In those circumstances I conclude that in fact the defendant's culpability was less than that of Dr Williams and Mr Thomas.
In my opinion, it is relevant that the plaintiff has settled with Dr Williams' estate and Mr Thomas in the terms which I have already identified.
No evidence was led before me to suggest, especially in the case of Dr Williams, that the settlement arrived at with Dr Williams was predicated upon an absence of funds. I assume that the liquidator believed that the settlement arrived at with Dr Williams was appropriate having regard to all of the circumstances.
In the end result I believe that it would be inappropriate to relieve the defendant wholly from any liability to the plaintiff. On the other hand I believe that to be consistent with the settlement arrived at with Dr Williams he should be relieved partly from liability.
It is relevant to take into account that all of the other directors, apart from Dr Williams, had the same obligations and responsibilities as the defendant.
I would relieve the defendant of all liability except as to $500,000.
It follows therefore that judgment should be entered for the plaintiff against the defendant in the sum of $500,000.
The defendant's claim against the third parties should be dismissed.
The third party should have judgment against the defendant.
[1] P1 [The exhibits in this case were identified by reference to the party who tendered them, P (Plaintiff) D (Defendant) TP (Third Parties).
The documents in these exhibits have separate internal numbers
[10] Powell v Fryer [2001] 37 ACSR 589; Tourprint International Pty Ltd (In Liq) and Another v Bott
[1999] NSWSC 581; (1999) 32 ACSR 201 at 217
[14] Plaintiff's written submission Part 1 paragraph 8
[29] 3M Australia Pty Ltd v Kemmish (1986) 10 ACLR 371 at 373; Metropolitan Fire Systems Pty Ltd v Miller & Ors (1997) 23 ASCR 699
[30] Commonwealth Bank of Australia v Freidrich (1991) 5 ACSR 115 at 126
[31] [1993] VicRp 32; (1993) 1 VR 423 at 448
[32] [1966] HCA 21; (1966) 115 CLR 266 at 303
[33] 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 at 378
[38] Paragraph 6 of the statement of claim
[39] Paragraph 7 of the statement of claim
[40] Paragraph 7 of the amended defence
[42] 'The period' is defined in paragraph 9 of the defence to be the period from 25 September 1996 until 14 January 1997
[51] [1999] NSWSC 533; (1999) 32 ACSR 430 at 455
[55] (1966) 115 CLR 666 at 670
[56] Sheahan v Hertz Australian Pty Ltd (1995) 16 ACSR 765 per King CJ at 769
[92] D5 paragraph 14; TP 12B 7 paragraph 14
[345] TP 12B paragraph 77; D5 paragraph 77
[351] TP 22 paragraph 88; TP 21 paragraph 23
SCOTT
WILLIAMS & ORS No. SCCIV-98-1663 [2002] SASC 424