SUPREME COURT OF QUEENSLAND 

1. KEANE JA:  The respondent is the liquidator of Scholz Motor Group Pty Ltd ("the company").  She was appointed on 11 April 2006 pursuant to a resolution of the company's creditors.  The liquidator brought proceedings against the appellants pursuant to s 588M(2) of the Corporations Act 2001 (Cth) ("the Act") to recover a large sum of money representing the amount of loss suffered by creditors of the company because of its insolvency.

2. The learned trial judge held that the liquidator was entitled to recover $3,101,145.78 from the appellants, being the amount of unsecured debts incurred by the company after 1 July 2005 while it was insolvent, and in circumstances where there were reasonable grounds for suspecting that the company was insolvent and the appellants were, or should reasonably have been, aware of those grounds.

3. At trial it was common ground that the appellants were directors of the company during the relevant period. That the appellants were directors was established on the pleadings, and the case was conducted on the basis that the appellants were directors of the company at the relevant time. In written submissions delivered the day before the hearing of the appeal, the appellants sought, for the first time in the proceeding, to argue that they were not, in truth, directors of the company.

4. According to the written submissions initially delivered on behalf of the appellants, they sought to challenge the decision of the learned trial judge on six grounds:

1. that the decision must be set aside by reason of the apprehended bias of the learned trial judge;

2. that evidence which was not before the learned trial judge, but which this Court should now receive, demonstrates that the learned trial judge erred in rejecting evidence given by the appellants;

3. that the learned trial judge erred in concluding on the evidence before him that the company was insolvent when the debts in question were incurred by it;

4. that the learned trial judge erred in concluding that the appellants did not have reasonable grounds to expect that the company was solvent;

5. that the learned trial judge erred in failing to excuse the appellants from liability under s 1318 of the Act; and

6. that the learned trial judge erred in failing to conclude that the liquidator's claims, or some of them, were precluded by issue estoppel.

5. During the course of the hearing of the appeal, the appellants, through their counsel, abandoned these grounds of appeal. The respondent seeks an order for costs on the indemnity basis in the event that the appeal is dismissed. She relies, inter alia, upon the proposition that it was unreasonably put to expense in responding to submissions which should never have been advanced. In order to appreciate the force of the respondent's argument, it is necessary to consider briefly the arguments initially advanced by the appellants in their written submissions. I propose to deal with these arguments briefly and then turn to the arguments actually agitated on the appeal.

Apprehended bias

6. This ground of appeal arose out of the learned trial judge's observation that the appellants were reluctant to cooperate in progressing the matter towards a hearing and seemed anxious to avoid a determination of the liquidator's claim.^[1]  The appellants' contention in their initial written submissions was that the learned trial judge's finding that the appellants' lack of cooperation and seeming anxiety to avoid a hearing was "so unfounded as to amount to apprehended bias on the part of his Honour".

7. In Concrete Pty Ltd v Parramatta Design and Developments Pty Ltd,^[2] the High Court suggested that a party who seeks to contend on appeal that the decision of the primary court is affected by bias, actual or apprehended, should not be allowed to pursue such a contention while at the same time seeking orders from the appellate court in vindication of that party's substantive rights.  It was said by Kirby and Crennan JJ that such a party should be put to an election "on the basis that if the allegation of … bias is made out, a retrial will be ordered irrespective of possible findings on other issues."^[3]  The issue of apprehended bias must be dealt with first and separately from the other issues in the appeal.  And Gummow ACJ said:

"If the bias submissions were to succeed, the remedy would be a retrial.  If the [substantive] submissions were to succeed, the [appellate court] would itself provide the orders which should have been made and there would be no occasion to order a retrial."^[4]

8. As Kirby and Crennan JJ explained the position,^[5] if bias is established, it "strike[s] at the validity and acceptability of the trial and its outcome", so that, in the present case, if the appellants were to succeed on their other grounds of challenge, they would be entitled to have the liquidator's claims against them dismissed on the merits, but if they were to succeed on this first ground, the only relief which this Court could grant would be an order for a new trial of the liquidator's claims.

9. The appellants, in their initial written submissions, seemed to accept that the "bias issue" would have to be dealt with by this Court before the other issues which they sought to agitate, but they gave no indication in any of their written submissions as to whether they would elect to pursue only their first ground of challenge to the decision of the learned trial judge. It was only during the hearing of the appeal, and then only at the prompting of the Court, that the appellants, through their counsel, informed the Court that the appellants chose to abandon this ground. The respondent was given no notice at all that this contention was to be abandoned. This aspect of the conduct of the appellants' case is properly described as unreasonable.

10. Whether or not the appellants could have pursued this ground at the same time as their other grounds, it is apparent that the appellants had no prospect of establishing that the decision of the learned trial judge was affected by bias, real or apprehended. The observation by his Honour which gave rise to this ground of appeal was no more than a passing comment on the conduct of what was, as his Honour correctly found to be, a hopeless attempt to resist the liquidator's claim.

11. I turn now to consider the other initial arguments. Those arguments will be better understood in the light of the uncontroversial facts of the case and of the findings and conclusions of the learned trial judge on matters in dispute. First of all, however, it is necessary to set out the relevant provisions of the Act.

The Act

12. Section 588G of the Act makes it unlawful for a director of a company to allow the company to incur a debt if the company is not then "able to pay [its] debts, as and when they become due and payable",^[6] and, if at the time the debt is incurred, there are reasonable grounds for suspecting that the company is insolvent and the director is, or ought to be, aware of those grounds.  It provides that:

"(1)This section applies if:  

(a) a person is a director of a company at the time the company incurs a debt; and

(b) the company is insolvent at that time …; and

(c) at that time, there are reasonable grounds for suspecting that the company is insolvent …; and

(d) that time is at or after [28 June 2001].

…

(2) By failing to prevent the company from incurring the debt, the person contravenes the section if:  

(a) the person is aware at that time that there are such grounds for so suspecting; or

(b) a reasonable person in a like position in a company in the company's circumstances would be so aware."

13. Section 588M of the Act creates a cause of action for the recovery of loss suffered by creditors by reason of a contravention of s 588G. Section 588M relevantly provides:

"(1) This section applies where:  

(a) a person (… the director) has contravened subsection 588G(2) … in relation to the incurring of a debt by a company; and

(b) the person (…the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and

(c) the debt was … unsecured …; and

(d) the company is being wound up …

(2) The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage."

14. Section 588H of the Act creates defences to a charge of a contravention of s 588G. Section 588H relevantly provides:

"…

(2)It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent … and would remain solvent …

(3) … it is a defence if it is proved that, at the time when the debt was incurred, the person:  

(a) had reasonable grounds to believe, and did believe:  

(i) that a competent and reliable person … was responsible for providing … adequate information about whether the company was solvent; and

(ii) that the other person was fulfilling that responsibility; and             

(b) expected, on the basis of information provided … that the company was solvent at that time and would remain solvent …

(4) If the person was a director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part … in the management of the company.

(5) It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt."

15. Section 1318 of the Act provides as follows:

"Power to grant relief

(1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person’s appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.

(2) Where a person to whom this section applies has reason to apprehend that any claim will or might be made against the person in respect of any negligence, default, breach of trust or breach of duty in a capacity as such a person, the person may apply to the Court for relief, and the Court has the same power to relieve the person as it would have had under subsection (1) if it had been a court before which proceedings against the person for negligence, default, breach of trust or breach of duty had been brought.

(3) Where a case to which subsection (1) applies is being tried by a judge with a jury, the judge after hearing the evidence may, if he or she is satisfied that the defendant ought pursuant to that subsection to be relieved either wholly or partly from the liability sought to be enforced against the person, withdraw the case in whole or in part from the jury and forthwith direct judgment to be entered for the defendant on such terms as to costs or otherwise as the judge thinks proper.

(4) This section applies to a person who is:  

(a) an officer or employee of a corporation; or

(b) an auditor of a corporation, whether or not the person is an officer or employee of the corporation; or

(c) an expert in relation to a matter:  

(i) relating to a corporation; and

(ii) in relation to which the civil proceeding has been taken or the claim will or might arise; or

(d) a receiver, receiver and manager, liquidator or other person appointed or directed by the Court to carry out any duty under this Act in relation to a corporation.

(5) This section does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation.

Note:  Similar provision is made in relation to Aboriginal and Torres Strait Islander corporations under section 576-1 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006."

Uncontroversial facts

16. The company was incorporated in April 2004. At trial, it was common ground that its directors were the appellants, their son, Leslie Scholz, and Brett Seymour. The company operated a business of selling new and used cars at 35 Nind Street, Southport and in Ferry Road, Southport.  The company leased the premises from which it operated from a company, Reefward Pty Ltd, the shareholders of which were the appellants.  It financed its stock of cars pursuant to a floor plan arrangement with members of the St George Bank Limited group.  It had no substantial capital assets and no working capital.   

17. The company commenced trading in June 2004. From the beginning, the company did not trade profitably. As at 31 December 2004 its accumulated losses for the previous six month period amounted to $345,710.13. As at 30 June 2005 it had accumulated trading losses of $1,673,138.10. It ceased to trade on 20 October 2005. At this time, its total accumulated loss for the period from 1 July 2004 to 20 October 2005 was $3,078,495.39.

18. When the company commenced trading, its overdraft limit with the National Australia Bank Ltd ("the NAB") was $200,000. This overdraft limit was increased to $450,000 on 27 April 2005 and to $1,000,000 on 22 August 2005. These increases in the overdraft facility did not solve the company's liquidity problems. Until the NAB refused further accommodation, the company regularly exceeded its overdraft limit.

19. Between 1 July 2005 and 19 October 2005 the company drew cheques totalling $9,179,158.19 which were dishonoured on presentation: some were for relatively small amounts such as $894.55, but some were for substantial amounts such as $860,000 and $575,082.49.

20. Between 1 August 2005 and 10 October 2005 the company sold 19 motor vehicles at prices which were less than the cost to the company. A loss of $546,512.11 was incurred on these transactions.

21. On 23 September 2005 the NAB wrote to the directors of the company terminating the banking relationship because of the company's obvious financial difficulties and the unsatisfactory history of the overdraft account.

The findings of the trial judge

22. A number of issues agitated at trial and resolved by the learned trial judge were not agitated again on the appeal. The following summary of the learned trial judge's reasons deals only with those of his Honour's findings and conclusions which are necessary to an understanding of the arguments advanced on the appeal.

23. The learned trial judge found that the company "was insolvent at all times, and certainly on [and] from 1 July 2005."^[7]  This finding was based on the uncontroversial evidence summarised above.   

24. At trial, the appellants had sought to resist this compelling case of insolvency by reference to the evidence of Mr Burgess, an expert accountant. Mr Burgess criticised a set of calculations by the liquidator which were designed to demonstrate the company's insolvency. His Honour accepted Mr Burgess' criticisms of the respondent's calculations, and declined to act upon this aspect of the liquidator's evidence.^[8]  His Honour summarised, and dealt with, the evidence of Mr Burgess in the following paragraphs:

"Apart from his valid criticism of Ms Williams' ratios Mr Burgess had only one substantial point. It is that the Company should not be considered to be have been insolvent because the directors could by the use of their own resources have provided the Company with long term loans in lieu of bank debt, thus reducing the Company's current liabilities and its need to service bank debt from its revenues.  Mr Burgess expanded the point by saying that such an arrangement would have led to a reappraisal of the liquidity ratios.  By removing bank debt from current liabilities and replacing it with long term loans from the directors the ratio would be improved and indicate a position of solvency.

As a matter of theoretical accountancy this may be right but it is not, in fact, what happened.  The Company did not have long term debt the repayment of which it could ignore in the day to day operations of its business.  It had current debts to its bankers which it could not repay as evidenced by the increasing level of debt and the frequency of occasions on which overdraft limits were exceed.  Nor is it right to say that the Company had working capital 'supplied as a result of guarantees by the shareholders and/or related parties and supporting securities.'  The defendants, as directors, and their companies gave guarantees to secure the obligations of the Company.  When the Company defaulted because it could not pay its debts the guarantors were called upon to pay.  It is quite wrong to say that their payment of their obligations as guarantors was a manifestation of the Company paying its debt from its own working capital.  It was because it had no such capital, and because it could not pay its debts from revenue, the guarantors were called upon."^[9]

25. As to whether there were reasonable grounds for suspecting that the company was insolvent and whether the appellants were aware of those grounds, or whether a reasonable person in their position would have been aware of them between 1 July 2005 and 28 January 2006, the learned trial judge said:

"To return to the point it is obvious that there were reasonable grounds for suspecting the Company's insolvency on and from 1 July 2005.  The factors which compel the conclusion that the Company was insolvent themselves provide the reasonable grounds.  The Company traded unprofitably and accumulated losses continuously after July 2004.  Its overdraft was frequently exceeded and the limit had to be negotiated upwards to accommodate the Company’s increasing level of debt.  It was the defendants and Mrs Scholz in particular who negotiated these increases.

The NAB sent monthly bank statements to the defendants.  They were opened and read by Mrs Scholz.  From them one can observe the daily balances and see when they exceeded the arranged overdraft limit.  As well a bank officer regularly telephoned Mr or Mrs Scholz or the Company's financial controller, Mr Wilson, when the account exceeded its approved limit.  When cheques were dishonoured the bank would telephone to advise the directors of that fact.  As well a standard written form giving notice of the dishonour was sent to the defendants with respect to each cheque dishonoured.  On 22 August 2005 when the overdraft limit was increased to $1,000,000 the bank officer who agreed to the increase told the defendants that no further increase would be approved.

The steadily increasing level of debt, the Company's need for increased debt financing and its inability to operate within approved limits of borrowing indicate chronic, indeed endemic, unprofitability. Even if one did not have access to accurate monthly accounts showing accumulating losses the fact that the business was running at a loss is the only sensible conclusion one can draw from the escalating debt.  It is not as though that liability was offset by monies owed to the Company from the sale of its stock in trade.  When cars were sold they were paid for immediately.  There was no delay, which might be expected to be short, in receiving payment for goods sold which might explain a temporary need for increased bank finance or an inability to pay debts which fell due.  The liabilities were increasing without any offsetting increase in assets.  The frequency with which cheques were dishonoured after July and the amounts involved provided alarming evidence of insolvency.

The next question is whether the defendants were aware of the grounds or whether a reasonable person in their position would have been aware of them.  The answer must be affirmative.  The evidence comes from transactions on the Company's bank account the records of which were sent by the NAB to the defendants.  They were the ones who negotiated the increases in overdraft limits and were notified by a bank officer when the limits were exceeded and when cheques were dishonoured.  The NAB was their bank.  They had been its customers for years and approached it to provide finance for the Company's operations.  It was to them and their assets the bank looked for repayment of the Company's debts.  It is not credible to think the defendants were not aware of the Company's deteriorating financial circumstances."^[10]

26. The company had neither cash nor assets, liquid or otherwise. The company traded at a loss. Its rapidly accumulating losses reached $1,673,138.10 as at 30 June 2005. The company ran up a staggering amount of dishonoured cheques after 1 July 2005. This record is consistent only with a state of insolvency which was endemic during the period between 1 July 2005 and when the company ceased trading. This state of affairs was blindingly obvious, or should have been, to anyone involved in the management and direction of the company. There could be no doubt that the requirements of s 588G(2)(b) were satisfied.

27. The learned trial judge concluded that the appellants had attempted to "understate their involvement in the management and direction of the Company"^[11], no doubt with a view to invoking s 588H(3) of the Act.  The central thrust of the appellants' evidence in this regard was that they were dependent upon Mr Seymour in relation to the management and direction of the company.  The appellants gave evidence that they were not familiar with the dire state of the company's financial position because they were entirely and reasonably reliant upon Mr Seymour in relation to the management of the company.  There was a conflict of evidence between the appellants and Mr Seymour as to the extent of the appellants' involvement in the management and direction of the company's business.  The learned trial judge resolved this conflict by preferring the evidence of Mr Seymour even though his Honour acknowledged "some need for caution in accepting Mr Seymour's evidence."^[12]

28. But quite apart from the evidence of Mr Seymour, the learned trial judge was entitled to conclude that the appellants' own evidence meant that they could not establish the defence in s 588H(3) of the Act. Mrs Scholz gave evidence that she was concerned with the way Mr Seymour was running the company and that she did not trust him. In this regard, his Honour said:

"The defendants' evidence destroys their case of reasonable reliance on Mr Seymour to provide reliable information.  Apart from their failure to say what information he gave them, their own testimony shows that they did not trust him and could not reasonably rely on him by reason of that distrust.  On their own evidence, which I do not accept, they had reason for deep suspicion about how Mr Seymour, and their son, were running the Company and evidence that it was so far in debt the bank would not honour its cheques.  Yet they did nothing.  They did not convene a company meeting and remove Seymour as the director.  They did not question their son about the Company's affairs.  They did not themselves resign or appoint external administrators."^[13]

Fresh evidence

29. On the appeal, the appellants initially sought to adduce two pieces of fresh evidence.

30. The first piece of fresh evidence was said to concern the circumstance that Mr Seymour has been charged with stealing from a car dealer with whom he obtained employment after the company closed its doors.  It was said that he failed to account to his employer for the cash proceeds of the sale of a motor vehicle to Mr Spizzirri.  It was said on behalf of the appellants that "[t]he striking similarity between that offence and the transactions centrally at issue in these proceedings is a matter that would have caused his Honour to have rejected the evidence of Mr Seymour in these proceedings."  The appellants did not actually provide evidence of the charge which they asserted here; and, further, they did not seek to explain why this evidence could not have been made available at trial with the exercise of reasonable diligence on their part.  Such an explanation was necessary to establish the "special grounds" for the reception of further evidence on appeal contemplated by r 766(1)(c) of the Uniform Civil Procedure Rules 1999 (Qld) ("the UCPR").^[14]  In any event, evidence of the mere making of an allegation against Mr Seymour, without evidence to establish the truth of the allegation, would not have been apt to alter the learned trial judge's willingness to accept Mr Seymour's evidence, bearing in mind that his Honour knew that Mr Seymour had already been charged with an offence of dishonesty in relation to the affairs of the company (as had the other directors).

31. It must also be said that even if one were disposed to accept that Mr Seymour's evidence was not worthy of belief, it would not follow that the judgment of the learned trial judge should be set aside. On the uncontroversial facts which established the insolvency of the company, and the blindingly obvious nature of that state of affairs, any reasonable person in the position of the directors would have reached the conclusion that the company was insolvent. The elements of the contravention of s 588G contained in s 588G(1)(c) and (2)(b) were indisputably established, and the possibility of a defence under s 588H(2) was also excluded. As I have noted, the learned trial judge held that the appellants' attempt to invoke the defence afforded by s 588H(3) was rendered hopeless by their own evidence of their suspicions of Mr Seymour.

32. At the hearing of the appeal, counsel for the appellants did not seek to press the tender of this piece of fresh evidence. It is obvious that he was right not to do so. The point, however, is that the respondent was put to expense to address an argument utterly devoid of substance.

33. The second piece of fresh evidence is a report of a clinical psychologist who examined the appellant Mr Neville Scholz on 13 October 2007. This report relates to Mr Scholz' mental state at that time, and expresses the psychologist's opinion that Mr Scholz "would likely be disadvantaged in the courtroom context" and the psychologist's concern "about [Mr Scholz'] capacity to be a reliable witness." The appellants sought to press the tender of this evidence at the hearing of the appeal. The tender was rejected by the Court for reasons given at the hearing.

34. In this regard, no explanation was forthcoming as to why this evidence could not have been adduced at trial with reasonable diligence on the appellants' part. Indeed, Mr Scholz gave evidence at the trial. No concern was raised by the appellants at trial as to his "capacity to be a reliable witness." Of course, if such a suggestion had been made it would have furnished another reason to regard his evidence with scepticism.

35. At best for the appellants it can be said that if the psychologist's report had been available at trial, a decision might have been made by the appellants not to call Mr Scholz to give evidence at all, but it is impossible to see how that decision would have been likely to improve the appellants' prospects of a successful outcome.  Further, the psychologist's report itself is in no way apt to support the appellants' pleaded defence that they were incapable of comprehending "any financial information in respect of the Company, or participating in the management of the Company".  The evidence of the psychologist relates to Mr Scholz' mental state as at October 2007 not in 2005; further, it does not assert that he was incapable of understanding financial information presented to him or of participating in the management of the company to the extent that he wished to do so.

36. For the sake of completeness, I would add that the incapacity pleaded by the appellants was not, as a matter of law, a defence against the liquidator's claim because a confession by a director of his or her incapacity to discharge the irreducible minimum responsibilities of a company director is not apt to avoid the liability imposed by s 588G of the Act on an officer of a company. That is because s 588G(1)(c) and (2)(b) respectively postulate reasonable grounds for suspicion of insolvency and the awareness of "a reasonable person" in a like position in a company in the company's circumstances. So far as the defence in s 588H(4) of the Act is concerned, this defence would not be engaged by proof that Mr Scholz was incapable of making a meaningful contribution to the conduct of the company's affairs if he actually took part in the management of the company as the learned trial judge found he did on the basis of evidence which clearly supported that finding.^[15]

37. The appellants sought to tender further new evidence at the hearing of the appeal in support of the arguments advanced by them in the new written submissions which emerged only the day before the hearing. It is convenient to defer reference to this material to the discussion of the appellants' new arguments.

The company's inability to pay its debts as they fell due

38. The appellants' principal argument in support of the third ground initially taken by them is that the learned trial judge erred in approaching the issue as to the company's insolvency without regard to the well-settled principle that insolvency is a question of fact to be resolved by reference to "the company's financial condition in its entirety, including … its ability to obtain financial assistance by way of loan or subscription for share capital".^[16] 

39. The appellants argued in their initial written submissions that his Honour gave no consideration "to the prospect of the Scholzes providing long term loans to the company (or share capital) in lieu of bank debt." The appellants argue that it was on the basis of the appellants' ability in this regard that "Mr Burgess opined that the company was not insolvent." The appellants' argument is without substance.

40. It may readily be accepted that, as Giles JA, with whom Hodgson and McColl JJA agreed, said in Lewis (as liquidator of Doran Constructions Pty Ltd (In liq)) v Doran,^[17] "the key concept is ability to pay the company's debts as and when they fall due" (emphasis in original).  The appellants argue in their written submissions that the learned trial judge:

"incorrectly rejected the evidence of the [a]ppellants' expert witness Mr Burgess to the effect that the [c]ompany was not insolvent because the [a]ppellants, who were persons of significant financial capacity, were in a position to support the [c]ompany and had in fact been financially supporting the [c]ompany."

41. Crucial to the appellants' argument on this point is the proposition that, as a matter of fact, the appellants were capable of, and willing to, furnish the company with the funds, by way of loan or share capital, to meet the debts which the company could not pay from the other resources at its command. To sustain this crucial proposition, the evidence adduced by the appellants was plainly insufficient.

42. There was simply no evidence at all from either of the appellants that they were able and willing to provide sufficient funds from their own resources to the company to enable it to discharge its debts. That this is so is not surprising. It would have been to stretch credulity too far to invite a court to accept that the appellants were willing and able to provide their company with necessary financial support at the same time as $9 million worth of the company's cheques were being dishonoured. The very fact that the company continued to trade only by exceeding its overdraft limit so that its cheques were dishonoured without attracting any financial assistance from the appellants by way of loan funds or share capital is powerful evidence of the absence of willingness and ability on their part to fund the company to meet its debts as they fell due for payment.

43. Mr Burgess did not claim any personal knowledge of the appellants' financial position or of their attitude to supporting the company. He could not have given admissible evidence about the appellants' ability to provide loan funds or share capital; and, in truth, he did not purport to do so. The appellants' willingness and ability in this regard could not be proved by hearsay statements by Mr Burgess. Mr Burgess spoke only of the "possibility" that the appellants could have borrowed funds and on-lent them to the company.

44. The appellants sought to argue that it might be inferred, from the fact that the appellants met their obligations under guarantees given to banks, that they were willing and able to make their own funds available to meet obligations of the company in respect of which they had not given guarantees. One needs only to state this argument to see that it cannot be sustained. The issue is not whether the appellants were willing and able to meet their own legal obligations to the company's creditors, but whether they were willing and able to assume the burden of discharging obligations of the company where they were not under a personal liability to creditors.

45. The appellants' argument on this point was utterly without substance. It should never have been agitated, and the respondent should not have been put to the expense of having to address it.

46. In an argument associated with this point, the appellants submit that the learned trial judge erred in concluding that the liquidator "had discharged her onus of proof in relation to the existence of debts, and that the debts were incurred at a particular time." In particular, the appellants contended that the evidence did not permit a conclusion that "all, or even a majority, of the debts alleged were in fact due and payable by the [c]ompany at a relevant point in time."

47. The basis for this contention seemed to be that much of the documentary evidence assembled on behalf of the liquidator and tendered in evidence at trial as Exhibit 5 by way of proof of the debts incurred between 1 July 2005 and 20 October 2005 as Sch F to the liquidator's statement of claim did not disclose when payments were due to be made by the company in relation to the transactions there referred to. But the learned trial judge's finding that the company was insolvent at all times after 1 July 2005 was securely established by the uncontroversial facts relating to the trading of the company.  There is no reason to doubt the accuracy of the inference that the company's insolvency at all times after 1 July 2005 was so deep and intractable that it would never be able to pay the debts it incurred between 1 July 2005 and 20 October 2005 whenever those debts were to become payable.  The appellants made no attempt to suggest any reason for thinking that any debt incurred before the company ceased trading had not become due and payable as at the date when the company's liquidation commenced.

Reasonable grounds for an expectation of solvency

48. The principal basis for the appellants' initial written submission that the appellants had a good defence under s 588H(2) of the Act because they had reasonable grounds to expect that the company was solvent and would remain solvent between 1 July 2005 and 20 October 2005 (apart from their willingness to fund the company from their own resources), was that during this period the company was only rendered insolvent by a series of loans arranged by Mr Seymour outside the ordinary course of business and of which the appellants were unaware. These loans were said to have caused the company a loss of the order of $2,000,000.

49. This submission failed entirely to appreciate that the company did not suffer loss as the recipient of loan moneys actually advanced to it. The receipt of these loans gave the company funds, albeit with a consequential liability to repay. The point is that the company was not rendered less solvent because of the loans. The learned trial judge found that the company was insolvent on and from 1 July 2005 and that the appellants ought, as directors, to have been aware of this state of affairs from that time. As I have said, these findings are not open to successful challenge.

50. This argument was abandoned, and rightly so. It is an argument which should never have been advanced.

Section 1318 of the Act

51. On behalf of the appellants it was submitted at trial that they should be relieved of liability to the liquidator pursuant to s 1318 of the Act. This submission was initially advanced on behalf of the appellants on the basis that the learned trial judge, having found that the appellants acted honestly and were misled by their principal dealer Mr Seymour in respect of transactions which occurred outside the ordinary course of business, ought to have excused the appellants from liability to that extent.

52. The learned trial judge rejected this argument for the following reasons:

"The defendants cannot be relieved of liability in this case without prejudicing the creditors whose claims would thereby go unmet in whole or in part.  Nor is this a case of inadvertence.  On the evidence which I accept the defendants, and certainly the first defendant, had a clear intimation that the Company was in financial difficulties.  It was not paying its debts and it had insufficient accommodation with the bank to meet its financial obligations as they fell due.  Notwithstanding this clear indication the defendants allowed the [Company] to continuing trading, incurring debts and allowing [tradesmen] to provide services and deliver goods which they must have expected the Company could not pay for.  It is not fair to excuse them, especially when the Act specifically imposes a liability on directors in that situation.

The function of s 1318 is not to subvert the operation of s 588G and 588M.  Even on the defendants’ own evidence the Company was left to the management of Mr Seymour whom they did not trust and whom they understood was concealing facts from them.  Not to act in those circumstances where they knew the Company’s finances were deteriorating is not a circumstance of which it can be said it is fair to excuse their dereliction of duty as directors."^[18]

53. The learned trial judge was clearly correct. The arguments initially advanced on the appellants' behalf did not even seek to come to grips with his Honour's reasons. The argument was rightly abandoned, but there was never even the remotest prospect that it could be sustained.

Issue estoppel

54. The appellants initially submitted that the learned trial judge erred in failing to hold that decisions of the Commercial and Consumer Tribunal ("the Tribunal") in respect of claims by Spizzirri, Warr, Montegano and Lynch for compensation in respect of the loans made by them to the company operate to preclude the recovery by the liquidator from the appellants of sums relating to these debts.

55. Once again, this submission was abandoned, but, on the hearing of the appeal, counsel for the appellants sought to argue that the amount of the judgment debt should be reduced by the amount of claims by individual creditors allowed by the Tribunal by the Office of Fair Trading.

56. It is convenient to deal with this argument in discussing the arguments actually agitated on behalf of the appellants during the hearing of the appeal.

57. None of the appellants' initial grounds of challenge to the decision of the learned trial judge had any substance. They were rightly abandoned.

The appellants' second set of arguments

58. In written submissions provided to the Court and the respondent on the day before the hearing, the appellants sought to agitate new and largely different arguments.

The appellants were not directors of the company

59. The first of these arguments was that the appellants were not directors of the company at the relevant time. The appellants sought to support this argument by an affidavit of the appellants' solicitor which, inter alia, exhibited documentation some of which is said to be forged and which is said to be insufficient for the purposes of s 201D, s 201G and s 201H of the Act. The arguments to this effect were based on hearsay assertions in the affidavit of the appellants' solicitor. There was no affidavit material from either of the appellants which might serve to explain why the admission that they were directors was wrongly made, or, indeed, even to assert that it was wrongly made by them. The appellants' affidavit material made no attempt to show "special grounds" for the reception of such evidence in accordance with the requirements of r 766(1)(c) of the UCPR relating to the reception of further evidence on appeal: in particular, no attempt was made to explain how this material could not have been adduced at trial with the exercise of reasonable diligence on the part of the appellants. Finally and fundamentally, the appellants' argument did not come to grips with the point that this argument was contrary not merely to the appellants' pleaded case but to the basis on which the trial was conducted and, indeed, the overwhelming evidence at trial that the appellants had conducted themselves as directors of the company.

Forged and fraudulent documents

60. The appellants also sought to agitate arguments to the effect that Mr Seymour had acted fraudulently towards the appellants and the company in the conduct of the company's affairs. The appellants' solicitor's affidavit sought to assert, once again by hearsay statements, that documents such as guarantees given by the appellants were forged by Mr Seymour. Once again, quite apart from the circumstance that the solicitor's assertions were inadmissible hearsay, there was no attempt to explain why this material could not have been adduced with reasonable diligence at the trial. Further, the appellants' arguments failed to appreciate that to damage Mr Seymour's credibility is not to show a basis on which the judgment could be set aside. As has been seen, the judgment can be sustained without preferring the evidence of Mr Seymour to that of the appellants.

61. The arguments agitated on the appellants' behalf at the hearing of the appeal sought to emphasise the injustice of the position of the appellants as victims of the fraudulent misconduct of others, principally Mr Seymour. This emphasis reflects a failure to focus upon the nature of the claim made against the appellants by the liquidator. The liquidator's action seeks to recoup debts owed to creditors who will otherwise be left to bear losses incurred by them as a result of the company's insolvent trading. The liquidator has, of course, not been responsible in any way for the liability incurred by the appellants whose grievances would seem to be more properly directed against persons other than the innocent creditors of the company. Further, to the extent that the appellants paid out large sums of money on a forged guarantee, without appreciating that the guarantee was forged, the appellants were not worse off as a result since the payment in question served to reduce the quantum of the liquidator's claim.

Reduction of the judgment debt

62. The failure of the appellants to focus on the real issues in the case was apparent as well in the argument whereby they sought to contend that the judgment debt should be reduced by amounts paid to individual creditors by the Office of Fair Trading under the Property Agents and Motor Dealers Act 2000 (Qld) ("the PAMDA") in satisfaction of claims made in the Tribunal by such creditors.

63. The appellants' argument fails to appreciate that, to the extent that the claims of individual creditors have been satisfied by payments under the PAMDA, the Office of Fair Trading would be subrogated to stand in that creditor's shoes as against the company so that the company's entitlement as against the appellants would not be reduced.

Summary

64. The arguments advanced for the appellants on the hearing of the appeal were arguments which could not properly be agitated on appeal having regard to the way the trial was conducted. The appellants' attempts to advance these arguments by an affidavit which, so far as it was arguably relevant, was inadmissible hearsay, and which did not attempt at all to explain how, consistently with r 766(1)(c) of the UCPR, the evidence could not with reasonable diligence have been available to the appellants at trial. The tender of the affidavit was rejected for these reasons. And the appellants' arguments must also be rejected.

65. While one cannot but sympathise with the situation in which the appellants find themselves, there can be no doubt that the learned trial judge was correct in adjudging them liable for the debts incurred by the company by reason of its insolvent trading.

Conclusion and orders

66. The appeal must be dismissed and the appellants must pay the respondent's costs of the appeal.

67. As to the basis on which the costs payable by the appellants should be assessed, it will be apparent from the foregoing that the issues agitated on the appeal were always bound to be resolved against the appellants. The pursuit of the appeal was quite unreasonable. That unreasonableness was aggravated by the initial pursuit of arguments which were abandoned only after the respondent had been put to the expense of demonstrating their fatuity. In these circumstances, the costs payable by the appellants to the liquidator should be assessed on the indemnity basis.

68. MUIR JA:  In these proceedings the respondent as liquidator of Scholz Motor Group Pty Ltd (in liquidation) claimed against the appellants, Mr and Mrs Scholz, who were directors and shareholders of the Company, pursuant to s 588M of the Corporations Act 2001 (Cth) ("the Act") for recovery $5,327,686.96 as a debt due to the Company.  The basis of the claim was that the Company had incurred debts of not less than the amount of the claim in the course of insolvent trading between 1 July and 20 October 2005.

69. After a four day trial, the learned primary judge found that the Company had been trading when insolvent and rejected the appellants’ substantive defences. On 4 October 2007, it was ordered that the appellants pay to the respondent $3,422,900.27, including interest of $321,754.49.

70. The appellants appeal against these orders. There were 24 grounds of appeal in the notice of appeal and a considerable number of sub-grounds which alleged numerous errors of fact and law. These were all abandoned on the hearing of the appeal. An outline of submissions was filed which challenged the primary judge’s findings: as to insolvency; on the extent of the Company’s debts at relevant times; that the appellants were aware or ought reasonably to have suspected that the Company was insolvent at relevant times and as to the availability of a defence under s 1318 of the Act. It was contended that the respondent was estopped from claiming in respect of four debts which had been the subject of proceedings before the Commercial and Consumer Tribunal. The outline also alleged apprehended bias and foreshadowed an attempt to introduce fresh evidence. On the day prior to the commencement of the hearing of the appeal a different outline of submissions was submitted by Mr Sive of counsel who had taken over the conduct of the appellants’ case.  This outline advanced the following grounds of appeal:

1. The appellants could not have incurred liability under s 588 of the Act as they were not directors of the Company at any material time;

2. The appellants were deprived of:

1. disclosure by St George Bank Limited, which was incomplete and provided during the trial in response to a subpoena;

2. the ability to have Mr Neville Scholz examined mentally and physically.

3. The Court “when making the order against the appellants relied solely on the evidence of Mr Seymour.”  His evidence and statements in, and in respect, of proceedings before the Commercial and Consumer Tribunal contradicted his evidence in the trial. 

4. The primary judge’s decision was erroneous “and should be reversed in accordance with the policy that favours the reversal of decisions that would in effect sanction a fraud or promote an injustice.”

71. The arguments advanced in the first outline of submissions were abandoned by Mr Sive in the course of argument.

The contention that the appellants were not directors of the Company at material times

72. The argument that the appellants were not directors of the Company is based on the claims that:

“(a)There is no consent to act as director [signed by each of the appellants] in accordance with s 117 of the Act;

(b)There is no [such] consent within the Company Register as required by       s 201D of the Act …; and

(c)There is no record that a General Meeting was held [to appoint] … additional directors as provided by section 201G of the Act.”

73. The appellants’ counsel attempted to read an affidavit sworn by the appellants’ solicitor which contained some material arguably relevant to the proposed new grounds of appeal. Much of the affidavit was hearsay. Much of the rest of it contained argumentative matter. Counsel for the respondent objected to its being received and the objection was upheld.

74. The appellants were not disadvantaged by the rejection of the affidavit. The claim that the appellants were not directors at material times was a remarkable one. That Mr and Mrs Scholz acted as directors of the Company at material times emerges clearly from Mrs Scholz’s own evidence. The appellants’ arguments overlook the definition of “director” in s 9 of the Act which encompasses de facto directors.  It is also the case that the records of the Australian Securities and Investment Commission show that the appellants were appointed directors of the Company on 29 April 2004.

75. It is instructive to refer to some of Mrs Scholz’s evidence relevant to the appellants’ participation in the affairs of the Company.

76. In her evidence-in-chief, Mrs Scholz explained how the Company’s business came to be purchased. She said that the Company was set up on the suggestion of Mr Seymour and a Mr Smith. She agreed that it was “set up ... involving, as directors, [herself] … [her] husband, [her] son, Leslie, and also Brett Seymour”. She agreed also that Mr Seymour would be “the dealer principal and the managing director”.

77. In evidence-in-chief, Mrs Scholz gave evidence of meetings which the appellants attended at the Company’s offices. She said that in the first three months minutes were taken of those meetings and the Company’s business and financial affairs were the subject of discussion. When referring to the Company in her evidence, Mrs Scholz spoke in terms of “our employees” and “our dealership”. She said that she and her husband, both of whom went to the Company’s premises daily, participated in the appointment of Mr Wilson as “our financial controller”. In evidence-in-chief, Mrs Scholz identified a director’s declaration accompanying the Company’s balance sheet as at 30 June 2004 as a “director’s declaration signed by the four directors” including herself, on 31 March 2005.

78. The questioning in evidence-in-chief proceeded on the basis that Mrs Scholz had a detailed knowledge of the Company’s finances. She said that the appellants and Mr Leslie Scholz discussed the cheques dishonoured in July with Mr Seymour who asserted that money to cover the cheques would be coming in.  She also said that this was confirmed by Mr Wilson.

79. Her attention was drawn to the fact that although she agreed on 22 August 2005 to raise the overdraft limit to one million dollars, cheques continued to be dishonoured. She said that the overdraft limit was increased because Mr Leslie Scholz and Mr Seymour approached the appellants stating that the overdraft needed to be increased because the business was “growing so quickly”.  She said, in effect, that the appellants were concerned because the overdraft limit had been exceeded.  Asked if she discussed the matter with Mr Seymour she responded that she was told by her son not to discuss it with Mr Seymour or to ask Mr Seymour any questions.

80. Mrs Scholz said that in the first week of October 2005, the appellants were informed that there were “many illegal things going on in the dealership” that they didn’t know of. She considered terminating Mr Seymour’s directorship but did not do so, in consequence of a discussion with Mr Leslie Scholz.

81. On the advice of the appellants’ solicitors, Mrs Scholz saw a firm of insolvency practitioners with a view to having the Company placed in voluntary administration. That did not take place because of other legal advice that the respondent should be appointed Receiver.

82. For most of the relevant time, most of the Company cheques were signed by Mr Leslie Scholz and Mr Seymour, by Mr Leslie Scholz and Mrs Scholz, or by the appellants.  

83. It can be seen from the foregoing account that the appellants, and Mrs Scholz in particular, acted in the position of a director of the company.

84. Another insuperable problem for the appellants in relation to this ground of appeal, is that it was not a matter relied on at first instance. On the contrary, the defence admitted that the appellants were directors of the Company at material times and the parties conducted the case on that basis.

85. No reason was given for the failure of the appellants’ legal advisors to advance this new argument on the trial. No attempt was made to establish that the evidence sought to be relied on on the appeal was unavailable at the time of the trial or could not have been obtained with the use of reasonable diligence.

Disclosure by St George Bank

86. The difficulties, if any, existing in respect of third party disclosure by St George Bank did not emerge in either oral or written submissions. There is no suggestion that the appellants sought to have the trial adjourned with a view to remedying any evidentiary deficiencies caused by late third party or other disclosure. This point lacks substance also.

87. In the appellants new outline of submissions there is a complaint that an agreement purportedly between St George Bank and the Company in or about December 2004 relating to an increase in the Company’s floor plan from two million dollars to 2.9 million dollars was not “properly executed”. It is submitted in this regard that the Company’s records “show no resolution or resolutions, in form and substance satisfactory to the Bank, passed by the Board of Directors ... certified by the Secretary ... authorising the borrowings ...”. It is submitted also that “the document purporting to empower St George Bank to make the appointment of the Administrator that subsequently resulted in the liquidation of the Company is a fraud.”

88. It is far from clear how these matters are sought to be relied on by way of a defence to the respondent’s claims. There is an air of improbability about them. They were not raised in the trial. No attempt has been made to establish that the evidentiary basis for them, insofar as there is one, consists of evidence which could not have been available for the trial with the use of reasonable diligence.^[19]  There is the added curiosity that the evidence on the trial reveals that St George Bank called on the appellants as guarantors of the Company’s obligations to the Bank and that the appellants discharged their obligations as guarantors.

The appellants were deprived of the ability to have Mr Neville Scholz examined mentally and physically to rebut adverse evidence considered by the primary Court

89. Mr Scholz was born on 26 November 1926 and was thus 81 years of age at the time of the trial. It is submitted that “at all material times Mr Scholz was mentally incompetent, illiterate, and had no capacity whatsoever to act.”

90. The affidavit of Barry J Smith, which the appellants’ counsel was not permitted to read on the hearing of the appeal, had annexed to it a copy of a report consequent upon a psychometric assessment of Mr Scholz on 13 October 2007 seemingly conducted by a clinical psychologist. The report contained opinions by the psychologist concerning Mr Scholz’s level of intellectual functioning, including verbal comprehension and working memory at about the time of the report.

91. It was not suggested by counsel for the appellants that there would have been difficulty in obtaining such a report for use in the trial if that were thought desirable. That alone demonstrates the unsustainability of this ground.

92. Senior counsel for the appellants called Mr Scholz to give evidence on the trial. Nothing was said by senior counsel about any lack of capacity. The primary judge did not remark on any want of capacity on Mr Scholz’s part and the psychologist’s report does not address Mr Scholz’s condition, relevant to his ability to function as a director, in July, August, September and October 2005. Plainly, this proposed ground of appeal involves questions of fact which are likely to be disputed.

Reliance by the primary judge on the evidence of Mr Seymour and the discrediting of that evidence by subsequent proceedings in the Commercial and Consumer Tribunal

93. The primary judge observed that the respondent’s case relied heavily on the evidence of Mr Seymour whose evidence was contraverted by the appellants. He noted that all the former directors, including Mr Seymour, had been charged with offences against the Criminal Code and concluded that there was “some need for caution in accepting Mr Seymour’s evidence.” In particular, the primary judge concluded that Mr Seymour “exaggerated some aspects of his evidence” and that he “sought to obtain a personal benefit of about $100,000 from the Company” knowing that it was in financial difficulty. His Honour preferred Mr Seymour’s evidence to that of the appellants and noted that much of Mrs Scholz’s evidence was not put to Mr Seymour and not supported by the evidence of Mr Leslie Scholz.

94. There is no admissible evidence which bears out the contentions that statements made by Mr Seymour and evidence tendered in proceedings in the Commercial and Consumer Tribunal contradict the evidence of Mr Seymour on the trial. Even if such evidence existed, and it was material to the primary judge’s findings, those findings would not be impugned. The further evidence would provide further justification of the primary judge’s conclusion that Mr Seymour’s evidence had to be treated with caution. There is nothing which reveals anything “rare and exceptional”^[20] about this further evidence which would justify its reception on appeal.  Also, the above discussion of Mrs Scholz’s evidence and the later discussion in respect of insolvency shows that there was ample evidence, apart from that of Mr Seymour, to support the primary judge’s findings.

Conclusions in relation to the proposed new grounds of appeal

95. In my view it would be unjust and inconsistent with authority to permit the notice of appeal to be amended to encompass the matters now sought to be raised. As was observed in the joint reasons in Coulton v Holcombe^[21]: 

“It is fundamental to the due administration of justice that the substantial issues between the parties are ordinarily settled at the trial.  If it were not so the main arena for the settlement of disputes would move from the court of first instance to the appellate court, tending to reduce the proceedings in the former court to little more than a preliminary skirmish.  The powers of an appellate court with respect to amendment are ordinarily to be exercised within the general framework of the issues so determined and not otherwise.  In a case where, had the issue been raised in the court below, evidence could have been given which by any possibility could have prevented the point from succeeding, this Court has firmly maintained the principle that the point cannot be taken afterwards: see Suttor v Gundowda Pty Ltd; Bloemen v The Commonwealth.  In O'Brien v Komesaroff, Mason J, in a judgment in which the other members of the Court concurred, said:  

‘In some cases when a question of law is raised for the first time in an ultimate court of appeal, as for example upon the construction of a document, or upon facts either admitted or proved beyond controversy, it is expedient in the interests of justice that the question should be argued and decided (Connecticut Fire Insurance Co v Kavanagh; Suttor v Gundowda Pty Ltd; Green v Sommerville.)  However, this is not such a case.  The facts are not admitted nor are they beyond controversy.

The consequence is that the appellants' case fails at the threshold.  They cannot argue this point on appeal; it was not pleaded by them nor was it made an issue by the conduct of the parties at the trial.’

In our opinion, no distinction is to be drawn in the application of these principles between an intermediate court of appeal and an ultimate court of appeal.  Finally, in a recent decision of six justices of this Court (University of Wollongong v Metwally [No 2]) the Court said:  

‘It is elementary that a party is bound by the conduct of his case.  Except in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so.’

The Court of Appeal recognized the great importance, in the public interest, of these principles.  Their Honours summarized them in the following terms:  

‘The finality of litigation; the difficulty of inducing an appeal court to consider new facts; the undesirability of encouraging tactical decisions not to present an issue at first instance: keeping it in reserve for appeal; and the need for vigilance to avoid injustice to a party having to meet new facts and new issues of law for the first time at the appeal court.’” (footnotes deleted)

96. The proposed new grounds, with the exception of the one relating to Mr Seymour’s evidence, all concern issues which could have been but which were not raised at first instance. It cannot be said in respect of these grounds that evidence could not have been given which by any possibility could have prevented the point from succeeding. Indeed, it is difficult to see how any of these points could have succeeded on the evidence before the court on the hearing of the appeal. In all such cases the further evidence sought to be relied on was evidence which could have been adduced on the trial.

97. As for the attempt to rely on materials placed before the Commercial and Consumer Tribunal it is sufficient to dispose of this point to note that no evidentiary basis for it was disclosed. But there are other reasons. As the above and subsequent discussion shows, there was ample evidence, in addition to that of Mr Seymour, supporting the primary judge’s findings.

98. Finally, the appellants’ counsel’s submissions identify no features of the evidence on which reliance would be placed to bring it within the “special grounds” on which fresh evidence is received under r 766 of the Uniform Civil Procedure Rules 1999 (Qld).  The evidence, as represented, amounts to no more than subsequent assertions by a witness and others which is inconsistent with the earlier evidence of that witness:  a witness who was not regarded by the primary judge as particularly creditworthy.

99. For these reasons I would refuse the appellants leave to amend the Notice of Appeal to raise the new grounds of appeal.

The original submissions in respect of insolvency

100. The following submissions were advanced by counsel for the appellants in support of this ground in the original outline of submissions.

101. The primary judge erroneously rejected the evidence of Mr Burgess, an expert accounting witness, called on behalf of the appellants. His evidence was to the effect that the Company was not insolvent because the appellants, who were persons of significant financial capacity, were in a position to support the Company financially and had in fact been so supporting it. The evidence placed before the primary judge by the respondent as to insolvency was “entirely rejected” by the primary judge and described by him as “hopeless”.

102. The evidence relied upon by the primary judge as to insolvency was circumstantial and contradicted by Mr Burgess’s evidence. It was submitted that:

“The primary judge erred in drawing a false distinction between Mr Burgess’s example of ‘long term bank debt’ being retired by the Scholzes, and the actual existence of ‘current debts’.  Mr Burgess had opined that the Company was not insolvent because the appellants were capable of retiring long term debt.  His Honour suggested that because the debt of the Company was ‘current’ debt and not ‘long term debt’, the analysis by Mr Burgess was to be disregarded.  That conclusion is plainly incorrect.  If the retirement of debt by the Scholzes was possible, it would matter not whether it was a retirement of long or short term debt.  His Honour erred in rejecting the evidence of Mr Burgess on the basis of a distinction which was without relevance.”

103. The test of insolvency applied by the primary judge was incorrect. It was that “the principle requires a debtor to be able to pay all its debts as and when they fall due from its cash resources, or by sale or hypothetical of its assets …”. That test is too simplistic in that it ignores the “commercial reality test” and, in particular, the Company’s “ability to obtain financial assistance by way of loan or subscription for share capital”. The primary judge’s formulation disregards the appellants’ ability to provide financial assistance by way of loan and/or subscription of share capital.

Relevant findings of the primary judge

104. Before considering the above grounds, it is desirable to say a little bit about the appellants and the Company’s business. It is convenient to do so by repeating the following passages from the primary judge’s reasons, which are not the subject of challenge^[22]:

“[8]The Company carried on business as a seller of new and used motor cars.  It had premises at 35 Nind Street and in Ferry Road in Southport.  The Nind Street premises were used for the sale of new, luxury, cars while the Ferry Road premises was the site for the sale of used cars.  It traded under the name 'Gold Coast European Automobiles' and sold Mercedes Benz, Porsche, Lexus, Citroen and Peugeot vehicles.  On occasions it sold even more expensive makes: Lotus, Lamborghini and Hummers.

[9]The defendants and their son Leslie knew next to nothing about such a business.  The second defendant is an elderly retired farmer.  In his long retirement he had invested in real property with obvious and considerable success.  The first defendant is his second wife who is much younger than he.  Mr Leslie Scholz is their only child who, when he left school, worked as a part-time salesman at a car dealership in Brisbane where the sales manager was Mr Brett Seymour.  It appears that to indulge their son and to provide him with employment into the future the defendants bought an existing motor car dealership on the Gold Coast and sought to enhance and expand it.  Mr Seymour was asked to leave his former employment to become a director in the Company with a small qualifying shareholding and the role as principal dealer, an office required of such businesses by the Property Agents and Motor Dealers Act 2000 (Qld).

[10]Although their son and Mr Seymour were directors the defendants were the majority shareholders who charged their private wealth to secure bank loans to enable the Company to commence business.”

105. Mr Seymour “had been a most successful sales manager for a Brisbane car dealer.  He knew something of that business and a great deal about selling cars ... the defendants must have looked to Mr Seymour for advice on sales techniques, pricing and the type of business clientele the Company should aim to attract.”

“[1] … On 11 April 2006 the Company’s creditors resolved to wind it up and the plaintiff was appointed liquidator.  The defendants are husband and wife and were directors of the Company at all times between its incorporation and its liquidation.  The other directors were their son, Leslie Scholz, and one Brett Seymour.”

“[11]The first indication of insolvency relied on by the plaintiff is that the Company consistently traded at a loss, and had accumulated substantial losses when it ceased trading.  The figures are collected in Exhibit 9.  In its first month of trading, June 2004, it made a loss of $120,898.72.  The next month it made a modest profit of $33,376.83.  Thereafter in every month from 30 August 2004 until the cessation of trading on 20 October 2005 it made losses.  The accumulated losses to 30 December 2004 amounted to $345,710.13. The total accumulated losses for the period 1 July 2004 to 20 October 2005 was $3,078,495.39.  If one adds the losses incurred in the first month of trading, June 2004, the total losses stood at $3,189,293.

[12]   In each month while the Company made a gross profit from the sale of cars its operating expenses always exceeded the gross profit, and by substantial amounts.  For example in each of the three months March, April and May 2005 the Company made gross profits of $200,000, $135,000 and $115,000 respectively. However the expenses of running the business in each of those months exceeded $350,000, swamping the profit.

[13]At 30 June 2005 the Company had accumulated trading losses of $1,673,138.10, In the next four months the losses accelerated. Between 1 July 2005 and 20 October 2005 the Company lost $1,405,357.29 from its trading activities.

[14]The Company had no substantial capital assets and no working capital. It operated out of premises leased from a company owned by the defendants, Reefward Pty Ltd.  In lieu of working capital it borrowed from banks. It had an overdraft facility with the National Australia Bank in the sum of $200,000. The limit was increased to $450,000 on 27 April 2005 and increased again on 22 August 2005 to $1,000,000.  As well it had a bailment agreement with banks in the St. George Bank Limited group ('SGB') under which cars were bought into stock with monies advanced by SGB, which owned them, but bailed them to the Company which displayed them for sale on its showroom floor.  When a car subject to the bailment agreement was sold the Company was obliged to remit an amount equivalent to its purchase price to SGB.  It retained the profit.  The limit which SGB made available for the purchase of cars on this 'floor plan' was $3.9 million.

[15] SGB was the chargee of a fixed and floating charge given by the Company over its assets and undertaking to secure the advances made under the bailment agreement.  The defendants, and one of their companies Reefward Pty Ltd, guaranteed the Company’s obligation under the agreement.

[16]  The Company defaulted in making payments due to SGB which appointed receivers pursuant to its charge on 20 October 2005.  There is evidence that the defendant paid SGB from their own resources the sums of $600,000 and $1,278,022.31 pursuant to their guarantee. This aggregate amount represents debts which the Company owed SGB and could not discharge.  The sum of $600,000 was paid some time prior to the appointment of the receivers and at a time when SGB was complaining that monies due to it had not been paid by the Company. The second, larger, sum was paid shortly after receivers were appointed. 

[17] There is also evidence that as at 27 February 2006 SGB was owed $5,079,426.73 by the Company and the debt was paid by Reefward Pty Ltd.”

Principles relevant to the determination of insolvency

106. Section 95A of the Corporations Act 2001 (Cth) provides that:

“A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.”

107. In Sandell v Porter^[23] Barwick CJ explained the concept of insolvency as follows:

“Insolvency is expressed in s 95 [of the Bankruptcy Act 1924 - 1960 (Cth)] as an inability to pay debts as they fall due out of the debtor’s own money.  But the debtor’s own monies are not limited to his cash resources immediately available. They extend to monies which he can procure by realisation, by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court …”

108. Section 95A of the Act, unlike the s 95 of the Bankruptcy Act 1924 – 1960 (Cth) contains no express requirement that the debtor must be able to pay its debts “out of the debtor’s own moneys”.  The significance of the omission of this requirement from s 95A of the Act was the subject of useful analysis and consideration by Palmer J in Lewis v Doran^[24].  It is not necessary or desirable for present purposes to go into the question of the manner in which the omission affects the current test of insolvency.  There has been no argument on the point and the facts are established with relative clarity.

109. It is well established that in considering a company’s financial position as a whole, reference may be had, not merely to strict legal rights and obligations under agreements with creditors and debtors, but to “commercial realities”.^[25]  A significant consideration on any such determination is often the ability of the Company to borrow on the security of its own assets and the willingness of its secured creditors to continue lending despite temporary financial difficulties. 

110. Unsecured borrowings are also relevant, provided that they do not give rise to obligations which the company is unable to meet.^[26]  Where the Court has the benefit of assessing insolvency with the advantage of hindsight, as is the case here, it will tend to be in a better position to evaluate the true bearing of unsecured borrowings on the Company’s ability to meet its financial obligations.^[27]  There is some authority for the proposition that unsecured loans by directors cannot be taken into account.^[28]  There should, however, be no objection in principle to regarding such financial support as relevant where the evidence establishes that the directors are likely to continue it.  Loans by related corporations have been regarded as relevant to the determination of solvency.^[29]  And there is no reason in principle why a loan from directors should be treated any differently to loans from companies controlled by directors.  The most important consideration is the degree of commitment to the continuation of financial support.

Mr Burgess’ evidence

111. In his report dated 8 August 2007, Mr Burgess made it plain that he was suffering from a considerable handicap in not having had access to the Company’s accounting records. In view of this limitation and the lack of other detailed information, he observed in his report at various places “without further details I am unable to comment” or “I am unable to comment further”. He cast doubt on the calculation of the Company’s “current ratio” and “quick ratio”, respectively the current assets divided by current liabilities and the current assets minus stock divided by current liabilities. Calculations of those ratios were in Annexures “B” and “C” respectively to the Statement of Claim. In Mr Burgess’s opinion, the two ratios were misleading. In this regard he observed:

“The Company was financed largely by means of working capital supplied as a result of guarantees by the shareholders and/or related parties and supporting securities.  This appears to be agreed by all parties and the settlements by the Defendants in terms of these guarantees have been noted in the Report by the Administrator.  These guarantees and securities were long term commitments by both the Defendant and the creditors (St George Bank Finance Ltd and National Australia Bank Ltd).

It is entirely possible that the shareholders could, on the same principle of financing, have borrowed the funds in their own right from the creditors, and 'on lent' the funds, as long term loans, to the Company.  In the case that this facility would thus correctly be classified as 'non current' it would not affect the Current or Quick Ratios adversely.  These 'facility funds' should accordingly in the current instance, in my opinion, be viewed correctly as long term borrowings and accordingly not be included in the Current Ratios for the purposes of comparison.  Whilst I have no actual figures to recalculate the ratios on this basis and provide a comparison there appears to be no doubt that on this basis of calculation there would be indicated a substantial improvement in both the Current (liquidity) and Quick Ratios, certainly to the point that both would almost without doubt became favourable.”

112. In relation to the issue of insolvent trading, Mr Burgess pointed out that at the time of cessation of trading, the Administrator appeared to be of the impression that the Company had sustained losses of less than a million dollars. He remarked that the appellants had given personal guarantees and security in an amount that far exceeded this anticipated loss. The guarantees were called upon and the guarantors met liabilities of the Company in excess of five million dollars. Mr Burgess concluded:

“The financial information available at the relevant time would indicate that the Company, with the support of the guarantees [sic] and security of the Defendants, would be able to pay all its debts as and when they became payable.”

113. In cross-examination, Mr Burgess agreed that it was “very unusual” that a company’s cheques totalling over nine million dollars were dishonoured over a four month period. He was not prepared to accept, however, that this was “an indication of insolvency”. He said it could be explained by “a cash flow problem” or a dispute with bankers. He accepted that the Company’s overdraft with the National Australia Bank was exceeded on 15 of 21 days recorded on the Company’s bank statements for July 2005 by amounts ranging from approximately $10,000 to $772,000. Asked if that was an indication of insolvency, he responded, “Not prima facie of insolvency but it could be an indication.”

114. Critical to Mr Burgess’s opinion that the Company was solvent at relevant times was his understanding that the appellant directors, by way of their guarantees and otherwise, stood behind the Company.

115. The primary judge’s findings in this regard are contained in paragraph 35 of his reasons. His Honour there said, referring to a view expressed by Mr Burgess that the Company should not be considered to be insolvent because the directors could by the use of their own resources have provided the Company with long term loans in lieu of Bank debt, thus reducing the company’s current liabilities:

“As a matter of theoretical accountancy this may be right but it is not, in fact, what happened. The Company did not have long term debt the repayment of which it could ignore in the day to day operations of its business.  It had current debts to its bankers which it could not repay as evidenced by the increasing level of debt and the frequency of occasions on which overdraft limits were exceed.  Nor is it right to say that the Company had working capital ‘supplied as a result of guarantees by the shareholders and/or related parties and supporting securities.’ The defendants, as directors, and their companies gave guarantees to secure the obligations of the Company.  When the Company defaulted because it could not pay its debts the guarantors were called upon to pay.  It is quite wrong to say that their payment of their obligations as guarantors was a manifestation of the Company paying its debt from its own working capital.  It was because it had no such capital, and because it could not pay its debts from revenue, the guarantors were called upon.”

116. Mr Burgess was not in a position to, and did not, give evidence of the financial support the appellants had given or were prepared to give at relevant times beyond the provision by them of their guarantees.

Conclusions in relation to insolvency

117. That the Company did not pay its debts when due is witnessed by the volume of dishonoured cheques which resulted in the National Australia Bank’s refusing to provide further banking services to the Company. In its letter of 23 September 2005 to the Company’s directors, the bank’s senior relationship manager referred to a meeting between bank officers and the directors on 21 September 2005 and stated:

“As discussed at the meeting, the conduct of SMG’s facilities with the National has been unacceptable, with many instances of Overdraft 57-005-7690 being drawn to over its $1.00m limit.  This has meant we have had to return many payments of substantial amounts.

The combination of the following matters indicates SMG is experiencing significant financial difficulty;

. . .

Frequent excesses of significant amounts; [further matters were listed]

. . .

We now seek to terminate the banking relationship with SMG and seek repayment of all facilities in full.  We will be forwarding formal default notices to you shortly in respect of the non-provision of information as required by the terms of SMG’s facilities.”

118. The Company commenced trading in June 2004 with an Overdraft limit of $200,000, which was increased to $450,000 on 27 April 2005 and to a million dollars on 22 August 2005. When the Overdraft limit was increased to a million dollars, the directors of the Company were informed by the bank that it would not provide any further increases. Despite the increase in the limit to a million dollars, that limit was regularly exceeded in September and October 2005, often by hundreds of thousands of dollars. For example, the limit was exceeded on 4 October 2005 by $1,705,434 and on 12 October by $534,102.

119. Between 1 July 2005 and 19 October 2005, the Company drew cheques in an aggregate amount of $9,179,159.15, which were dishonoured on presentation. In that period cheques were dishonoured almost daily. Many of the cheques were for sums exceeding $100,000.

120. Between 1 August 2005 and 10 October 2005, the Company evidenced the financial desperation of its managers by selling 19 motor vehicles at less than their individual acquisition costs, incurring a total loss of $546,512.

121. Mr Seymour gave evidence that in January 2005, the financial controller advised at a meeting attended by the appellants that a “capital injection would be required pretty much immediately to be able to continue to operate the business.” He said that $800,000 to a million dollars was required. The working capital was never provided, although “the Company was haemorrhaging” and the financial controller and Mr Seymour “basically begged Mrs Scholz to fix the situation.” Although Mr Seymour’s evidence is suspect it is obvious that there was a cash flow problem which remained unremedied.

122. The primary judge was plainly correct in finding that the meeting by the appellants of their obligations as guarantors consequent upon default by the Company could not be equated with the repayment by the Company of debts due to all classes of creditors from its own working capital. As his Honour pointed out, it was because the Company lacked working capital that the guarantors were called upon to meet the Company’s obligations to the secured creditors.

123. The frequency with which cheques were dishonoured and the amounts of the dishonoured cheques provides strong evidence that the appellants were not prepared to do what was necessary to ensure that the Company could meet its obligations. The evidence of the appellants’ preparedness to support the Company financially is very limited. Mrs Scholz said that on no occasion did the appellants refuse a request to increase the overdraft to a higher figure. She also gave evidence that the appellants added, as an additional security for the Company’s obligations, the property in which Mr Leslie Scholz and his wife resided. This security was provided for the benefit of the National Australia Bank.

124. This evidence, whilst relevant, needs to be viewed in the light of: the history of dishonoured cheques; the failure to provide the Company with working capital; the sale of stock at less than cost; the National Australia Bank’s advice when increasing the overdraft limit to $1,000,000 that there would be no further increases; and the preparedness of the appellants to let the Company default in its obligations to the St George Bank and the National Australia Bank and be called upon as guarantors of the Company’s obligations.

125. Those matters provide strong evidence that the appellants were not firmly committed to continuing financial support to the Company at relevant times. So too does Mrs Scholz’s own evidence of consulting with insolvency practitioners with a view to having a liquidator appointed. There is, of course, a vast difference between providing a company with funds so that it can pay its creditors in a timely way and not providing it with such funds but, after default by the Company, discharging its obligations to secured creditors by meeting demands under guarantees. Neither of the appellants swore to a resolve, firm or otherwise, at relevant times to continue to support the Company financially.

126. Consequently there is no reason to doubt the primary judge’s findings on insolvency. The abandonment by counsel of reliance on insolvency was well advised.

Conclusion

127. I have had the advantage of reading Keane JA’s reasons for judgment.I respectfully agree generally with what his Honour has written and, in particular,I agree with his reasons in relation to the application of s 588G(2)(b), s 588H,s 1318 of the Act and costs.  I agree with the orders his Honour proposes.

128. MACKENZIE AJA:  I agree that the appeal should be dismissed for the reasons given by Keane JA.  I also agree, for the reasons given by him, with the costs order proposed by him.