Hambleton v Bates-Wagstaff[2014] QDC 162

DISTRICT COURT OF QUEENSLAND

Introduction

1. [1]
   This proceeding concerns if, and thereupon when, a particular company, which purchased a sole asset (a barge) for the purposes of refurbishing it and then using it in the business to be conducted with it by the company, became insolvent with the potentially consequential triggering of s 588G(2) of the Corporations Act 2001 (Commonwealth), thereby implicating a director of the company as having failed to prevent the company from incurring debts at the times that it did.

2. [2]
   The trial of this proceeding, which took place on 17 and 18 July 2014, proceeded against the first defendant only. She was self-represented on and from 2 September 2013. That part of this proceeding which consisted of the claim against the second defendant was the subject of a compromise. No further comment need be made about that here.

3. [3]
   The first defendant alleged, by the amended defence of the defendants (when both defendants were represented by their then solicitors), that she was a director on and from 27 June 2009 only. The only evidence led to establish the allegation in the statement of claim that she had been a relevant director from 5 December 2008 was through a series of questions, asked in cross-examination, about a document attached to an affidavit of the first defendant’s former solicitors. As it has transpired, it does not matter because the longest period for which the plaintiffs claim that there was insolvency only began on 30 June 2009 (ending on 24 August 2012 when the first plaintiff was appointed as joint and several liquidators in the Supreme Court of Queensland).

4. [4]
   Incorporation of the second plaintiff has been admitted, as has the appointment of the first plaintiff as liquidators.

5. [5]
   While on the face of s 588M(2) of the Act it is only the company’s liquidator who can “recover from a director”, as a debt due to the company, an amount equal to the amount of loss or damage where there has been a contravention of s 588G(2) in relation to the incurring of a debt of a company, I accept that it is appropriate that the second plaintiff also be a party to this proceeding. The explanation for that is provided by Barrett J in Tolcher v National Australia Bank Ltd & Ors.^[1] As he so explained, it is the liquidator, as liquidator, who initiates proceedings and, if the liquidator is successful in making out the case, the result is an order of the court that the other party pay money “to the company”: at 746 [21]. It is unnecessary for the purposes of this proceeding to explore that matter any further; but it is consonant with the words of s 588Y(1) of the Act, referring to an amount “paid to a company” under, amongst other provisions, s 588M.

Legislation

6. [6]
   Section 95A(2) of the Act states that a person who is not solvent is “insolvent”. In explanation, s 95A(1) states 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”.

7. [7]
   Section 588G(1) of the Act states that s 588G applies if:

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

2. (b)
   the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

3. (c)
   at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and

4. (d)
   that time is at or after the commencement of the Act.

8. [8]
   As already (partially) noted, s 588G(2) of the Act states that, by failing to prevent the company from incurring the debt, the person contravenes s 588G if:

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

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

9. [9]
   There are defences provided in s 588H of the Act. As s 588H(1) states, s 588H has effect for the purposes of proceedings for a contravention of s 588G(2) in relation to the incurring of a debt [including proceedings under s 588M in relation to the incurring of a debt]. By s 588H(2), it is a defence if it is proved that, at the time that the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. Further, s 588H(3) states that, without limiting the generality of s 588H(2), it is a defence if it is proved that, at the time that it was incurred, the person:

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

1. (i)
   that a competent and reliable person (the other person) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and

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

2. (b)
   expected, on the basis of information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.

The other defences under s 588H were not raised on the evidence.

Issues raised on the pleadings

10. [10]
    The statement of claim was brief. Nevertheless, the amended defence was drawn by the first defendant’s then solicitors, being filed on 24 May 2013. That defence, besides putting in issue the allegation of insolvency and raising some issues which were not put in contest by actual evidence led at trial, did raise, in paragraph 6 of the amended defence, allegations which touched upon aspects of s 588H of the Act. Although the claimed debts - the ACN 126 989 802 Pty Ltd debt apart - were denied, it is clear that the Deputy Commissioner of Taxation was owed $73,566.91 after 30 June 2012 (Exhibit 1, Annexure “D”) and that the three directors did incur a debt for each of their further advances and payments, generating a legal obligation in the second plaintiff to repay, especially where each, later, lodged a formal Proof of Debt concerning the same (Exhibit 1, Annexure “J”). It is equally clear that, having incurred such debts, if there was insolvency at the time, each debtor then suffered a “loss”. The structure of the plaintiff’s case was that only four potential dates of insolvency were advanced. Specific, identified debts incurred thereafter were then sought to be recovered as claimed “loss or damage”.

11. [11]
    Although it was contended in oral submissions (made at the conclusion of the trial) by the plaintiffs that s 588H was not expressly raised, it is difficult to interpret paragraph 6 of that amended defence other than, even if only incidentally, raising such defences. Nevertheless, it is true that the primary allegations in that particular paragraph were directed towards the second plaintiff having relevant support from the directors of the second plaintiff who were prepared to contribute funds.

12. [12]
    Because of the way the trial was conducted, including the evidence led by the first plaintiff, I indicated, during concluding submissions, that I was prepared to find that defences were raised concerning s 588H and would move to consider them.

13. [13]
    It is to be remarked, again, that the first defendant, because of her self-representation combined with her lack of knowledge and understanding of her obligations as a director under the Act, was unable to contribute significantly to the task of discharging the onus cast on her under s 588H. H.

Relevant principles (re claim)

14. [14]
    It is, as was held by the Queensland Court of Appeal in Williams (as liquidator of Scholz Motor Group P/L (in liq)) v Scholz & Anor,^[2] a well settled principle that insolvency is a question of fact to be resolved by reference to the particular company’s financial condition in its entirety, including, amongst other things, its ability to obtain financial assistance by way of loans, or subscriptions for share capital: at [38] per Keane JA.

15. [15]
    In Williams, Keane JA went on to remark that it may readily be accepted – quoting cited authority – that the key concept is the “ability” to pay the company’s debts as and when they fall due: at [40]. Crucial to the relevant argument is the proposition that, as a matter of fact, the directors are capable of, and willing to, furnish the company with 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: at [41]. In that case it was important to note that 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 directors by way of loan funds or share capital was 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: at [42].

16. [16]
    Dealing more generally with the assessment of a corporation’s solvency or insolvency, Philip McMurdo J in First Strategic Development Corporation Ltd (in liq) & Anor v Chan & Ors^[3] held that it is well established that s 95A of the Act requires the court to have regard to “commercial reality” in assessing whether, as at the relevant date, a company is able to pay its debts as they become due and payable: at [67]. As he further stated, in this context a company’s position must be considered by reference to not only its legal rights and obligations but also other circumstances such as the relevant likelihood that it will have funds available to it from sources with which it has no formalised agreement or understanding: also at [67]. Quoting relevant authority, he further held that, in such a context, the most important consideration is the degree of commitment to the continuation of financial support, emphasising, again, that the key concept is an “ability” to pay the company’s debts as and when they fall due: at [68]-[69]. Lastly, in considering this concept of ability, the prospects of obtaining the necessary funds from a party, which is not obliged to provide these, must be such as to give the company something more than a “chance” of paying its debts: the prospect must be sufficient to make the company able to do so. And while that does not mean that the provision of the funds must be free of any uncertainty or contingency, there must be a sufficient likelihood for the company, and those directing it, to be able to rely upon the availability of those funds when incurring the relevant debts: at [69].

17. [17]
    It must be recognised that, in assessing insolvency, s 95A of the Act addresses its attention to the company’s cash flow, rather than according to the results of the balance sheet:  see, for example, the discussion in Box Valley P/L v Kidd & Anor,^[4] at [65].

18. [18]
    Additionally, there is an important difference between “temporary illiquidity” and “an endemic shortage of working capital”. Even so, in JTS Property & Investments No 1 P/L v Sadri^[5] it was held that it is important to approach questions of liquidity, whether temporary or endemic, in a way which does not depart from the terms of s 95A(1) of the Act, such that simply an ability to raise money from assets and pay a debt before the creditor’s patience is exhausted “is not enough”: per Bryson AJ at [48].

19. [19]
    In Australian Securities & Investments Commission v Plymin & Ors (No 1),^[6] Mandie J identified various factors as indicators of insolvency: at [386]. They included:

• continuing losses;
• liquidity ratios below 1;
• overdue Commonwealth and State taxes, including the service of direct penalty notices;
• poor relationship with bankers, including inability to borrow further funds;
• no access to alternative finance;
• inability to raise further equity capital;
• suppliers placing the company on COD, or otherwise demanding special payments before resuming supply;
• creditors unpaid outside trading terms;
• issuing of post-dated cheques;
• special arrangements with selected creditors;
• solicitors’ letters, summonses, judgments or warrants issued against the company;
• payments to creditors of rounded sums which are not reconcilable to specific invoices; and
• an inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and to make reliable forecasts.

20. [20]
    In certain circumstances, hindsight may be of utility in assisting to determine solvency and insolvency: see New Cap Reinsurance Corp Ltd (in liq) v AE Grant & Ors^[7] at [50]-[51].

Evidence of the liquidator (David James Hambleton)

21. [21]
    The basic evidence led by the plaintiffs in this case was through the report of one of the joint and several liquidators, Mr David James Hambleton. His Solvency Report, dated 6 February 2013, became Exhibit 1 in the proceeding. As I remarked during submissions, I do not rely upon any hearsay statements in that Report (such as comments said to be made by the second defendant in a telephone interview with a member of that liquidators’ staff). Even so, the Report was, essentially, an analysis by a qualified chartered accountant who had been a registered liquidator since June 2005 and an official liquidator since January 2007 and who had specialised in insolvency work for over 15 years (having managed over 500 official liquidations, creditors’ voluntary liquidations and voluntary administrations, as well as receiverships, court appointed receiverships and bankruptcies). The information upon which he relied and the opinions expressed in the Report were primarily from the company’s financial records.

22. [22]
    While Mr Hambleton did express expert opinions on some matters, the approach of the court is simply to take, where accepted by it, those opinions in light of the court’s own conclusions concerning what the documentary and other evidence demonstrates.

23. [23]
    With respect to financial records, s 286(1) of the Act obliges a company (such as the second plaintiff here) to keep written financial records that both correctly record and explain its transactions and financial decision performance and enable true and fair financial statements to be prepared and audited. Section 1305 of the Act states that a book kept by a body corporate under a requirement of the Act is admissible in evidence in any proceeding as prima facie evidence of any matter stated or recorded in the book: see sub-section (1). Further, by s 1305(2), a document purporting to the book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in s 1305(1). Section 1306 of the Act deals with the form and evidentiary value of books, with sub-sections (5) and (6) dealing with written reproductions as evidence. By s 9 of the Act, “books” is defined to include:

3. “(a)
   a register; and

2. (b)
   any other record of information; and

2. (c)
   financial reports or financial records, however compiled, recorded or stored; and

2. (d)
   a document.”

24. [24]
    Bearing in mind those provisions, I have examined the various books of the second plaintiff in light of the expert evidence provided by Mr Hambleton and the other evidence led at trial.

25. [25]
    In so examining those books, I note that Mr Hambleton has expressed the following opinions:

• the second plaintiff was “balance sheet” insolvent as at 30 June 2009 and 30 June 2010, with net liability positions of $83,377.00 and $157,213.00, respectively;
• the second plaintiff was “balance sheet” insolvent as at 30 June 2011 and remained so for each subsequent month until the date of its winding up on 24 August 2012 (with the respective net liability positions being set out in his Report at p 5);
• with respect to “cash flow” solvency, the second plaintiff (which was incorporated on 5 December 2008) showed, by its profit and loss statements for relevant financial years, that it generated losses of $83,377.00 and $73,837.00 for the respective years ending 30 June 2009 and 30 June 2010;
• the first defendant made a loss of $88,124.21 in the financial year ending 30 June 2011 and, during the period from July 2011 to August 2012, the second plaintiff made a further loss of $87,049.33;
• in total, the second plaintiff incurred accumulated trading losses of $332,387.54 from the date of its incorporation to the date of its winding up;
• a liquidity ratio (calculated by dividing a company’s current assets by its current liabilities) is a measure of a company’s ability to satisfy its current debts from its current assets (with “current debt” being defined as a debt which is owing between 30 and 90 days and “current asset” as an asset which is readily convertible);
• liquidity relates to the ability of a company to pay its short-term debts and therefore is closely related to solvency, although a far narrower concept;
• the second plaintiff’s liquidity ratio as at 30 June 2009 was 1.3703 and as at 30 June 2010 was 0.4556;
• calculations made of the second plaintiff’s monthly liquidity ratios from June 2011 to August 2012, while showing some variation from month to month was, at least until 30 June 2012, consistently below 0.0300 (although for 31 December 2011 and 31 January 2012 it was 0.1107 and 0.1060, respectively, for 31 July 2012 it was 0.4938, and as at 24 August 2012 it was 0.3493 – it being remarked that the sole asset of the company was sold by a contract of sale settled on 13 July 2012); and
• as an indicator of solvency, an acceptable ratio is 2 and, consequently, a liquidity ratio below 1 demonstrates severe liquidity problems and, therefore, does not support solvency.

26. [26]
    Most of the remainder of Mr Hambleton’s Report states obvious conclusions taken from the company’s books. I will analyse them in turn; but it unnecessary to specifically refer to the Report for the conclusions that are reached.

Relevant principles (re defences)

27. [27]
    As was made clear by Austin J in Tourprint International P/L (in liq) & Anor v Bott^[8] the expectation underlying the term “reasonable grounds to expect” does require more than a “mere hope or possibility”: at [67]. As he went on to record, a director cannot rely on complete ignorance and cannot hide behind ignorance which is of the director’s own making; or, if not entirely of the director’s own making, has been contributed to by the director’s own failure to make further necessary inquiries: also at [67].

28. [28]
    In determining the applicability of s 588H of the Act, it needs to be borne in mind that directors need to adequately perform their common law and statutory duties, such as to actively participate in the company’s affairs and not unreasonably rely upon other directors to look after such affairs: see, for instance Deputy Commissioner of Taxation v Clark,^[9] per Spigelman CJ at 131-134 [57]-[73].

29. [29]
    For the purposes of considering s 588H(3), it was remarked by Young CJ (in Eq) in Manpac Industries P/L v Ceccattini^[10] that the defence is not available if the person (identified as being relied upon) is not given sufficient information from the director to perform the person’s task: at [54].

Insolvency as at 30 June 2009?

30. [30]
    The plaintiffs’ primary case was that the second plaintiff was insolvent on and from 30 June 2009.

31. [31]
    I have great difficulty accepting that particular proposition, at least insofar as it applies to the commencement date (being the only relevant date for this primary contention).

32. [32]
    First, with reference to “balance sheet” insolvency, the net liability position as at 30 June 2009 was $83,377.00. Somewhat importantly, as at 30 June 2009 there was “cash” in a National Australia Bank (“NAB”) cheque account of $89,282.00, as a current asset. The non-current assets were, in total, $1,715,005.00 [which related to the purchase of the commercial barge (the “Alpha Bree”) and improvements to it of $1,110,989.00 (less accumulated depreciation)]. The reason for the high level of non-current liabilities – at least relatively – was that a loan had been obtained by the second plaintiff from the NAB (the “Barge Loan”) for $800,000.00 and loans from the first defendant, the second defendant and a third director, Mr Tim Lawrence, had been obtained by the second plaintiff in the sums of $251,896.00, $302,465.00 and $300,000.00, respectively. In addition, there were loans from “associated” companies of $168,148.00.

33. [33]
    Given that it was not in contest that the reason for the incorporation of the second plaintiff was to have the company own and operate a commercial barge in North Queensland, with the intention of servicing routes to and from the mainland and to and from Keswick and Brampton Islands, large sums were needed to be borrowed in order both to undertake the purchase and to effect relevant improvements. Since, as noted, the reason for the existence of the company was to utilise this sole asset for such purposes, it can scarcely be highly significant that technical insolvency can be demonstrated by the net liability position as the predominating factor among all the factors to be considered.

34. [34]
    Secondly, referable to the contention of cash flow insolvency, as at 30 June 2009, though the financial records of the second plaintiff showed a loss from ordinary activities (before income tax) of $83,377.00, it should be immediately noted that the calculation of such loss had allowed for a depreciation “expense” of $43,482.00 and, unsurprisingly in the circumstances, where there had been no income received by then. Again, adopting an approach that recognises commercial reality, it cannot be demonstrated, to the requisite standard, that this particular factor was significantly influential in determining overall insolvency.

35. [35]
    Thirdly, the liquidity ratio calculated by Mr Hambleton – which I accept – was, as at 30 June 2009, at a ratio of 1.3703. Although it was opined by Mr Hambleton that an appropriate liquidity ratio was 2, it was not - as stressed by Mr Hambleton as being a particularly important factor - “below” 1. As he freely acknowledged, it is a far narrower concept than insolvency because it simply relates to the ability to pay short term debts from current assets.

36. [36]
    Fourthly, there is nothing in the Australian Taxation Office’s documents concerning the second plaintiff that disclosed that, for instance, any payment arrangements had been entered into with the ATO by the second plaintiff as at 30 June 2009.

37. [37]
    Fifthly, while in a later period there was a demonstrated poor relationship with the NAB which included an inability to borrow further funds, as at 30 June 2009, no such problem existed.

38. [38]
    Sixthly, it has not been shown that, as at 30 June 2009, any director would not have lent further sums, in circumstances where the key concept in such an issue is the second defendant’s “ability” to pay debts as and when they fall due in circumstances where directors are capable of, have indicated so, and are, in fact, furnishing the company with funds. The fact that the director Mr Lawrence lent a further $100,000.00 for the financial year ending 30 June 2010 is a strong indicator of the negation of an assertion that that ability was absent.

39. [39]
    Seventhly, as at this date, there was no evidence presented to the Court of any dishonoured cheques or payments.

40. [40]
    Accordingly, the conclusion that I reach with respect to the issue of whether s 588G(1) applied as at this first contended date is that, importantly for this outcome, there was no demonstrated insolvency and there were no reasonable grounds for suspecting that the second plaintiff was insolvent by reason of its entire financial condition as at that date.

Insolvency as at 30 June 2010?

41. [41]
    An alternative contention relied upon by the first plaintiff was that the next “date” of asserted insolvency was 30 June 2010.

42. [42]
    A consideration of the relevant factors as at that date therefore needs to be undertaken.

43. [43]
    First, it is not in dispute that, after an initial trading period of approximately six months, demand for the Alpha Bree’s services declined due to an unanticipated reduction in the number of tourists, as well as the cessation of development and building work on Keswick Island. Even though alternative work was sought for the barge, this did not eventually provide a consistent source of income. It was a time of expected growth; but a sudden downturn in global growth was occurring. Although the evidence showed that this could only have occurred in the 2009-2010 financial year, no evidence was given through the plaintiffs’ witnesses of exactly when the relevant period began. For her part, the first defendant asserted that the barge “didn’t start working” until early 2010 (with its maiden voyage) and so “the business was really just starting then”; and this was not contested. As indicated earlier, after the appointment of the first plaintiff on 18 May 2012, the Alpha Bree was sold, with that contract of sale settling on 13 July 2012. Hence, although there was always a possible course open to the directors during the financial year leading up to 30 June 2010 to undertake a similar sale of the barge, it would arise only if any circumstances indicative of pending insolvency demanded it as a reasonable response. 

44. [44]
    Secondly, in looking at the “balance sheet” insolvency as at 30 June 2010, the net liability position was $157,213.00. Although that sum is almost twice the figure for the preceding financial year, it is noted that the non-current liabilities (insofar as they dealt with additional loan sums advanced to the second plaintiff) increased by a figure of just under $400,000.00. Of that, the amount that I have earlier mentioned from Mr Lawrence of $100,000.00 obviously played its part. Additionally, a further $250,000.00 (approximately) was added to the Barge Loan. It is also noted that an amount of just under $640,000.00 was spent on further improvements to the Alpha Bree. While the level of the amounts owing to “trade creditors” had decreased, it was of some concern that just under 50% of those were 90 days, or more, overdue. But it was not revealed how far, if at all, the patience of such creditors was approaching “exhaustion”. Overall, this factor of itself, stripped of any effect that other factors must show, might be seen in the overall context as at least a minor troubling factor. 

45. [45]
    Thirdly, with respect to “cash flow” insolvency, the loss from ordinary activities before income tax was $73,837.00. In relative terms, it had improved from the previous financial year, albeit only marginally. There was, of course, a deducted expense relevant to depreciation of $224,004.00, although it is concerning that the interest expense was $139,649.00 in circumstances where the overall total income was only $765,022.00 (as calculated at the end of this financial year). It can be seen from the next financial year (ending 30 June 2011) that the total income had by then fallen dramatically to $390,826.59 and that, in particular, what was then called “Contract Income” (but had formally been recorded as “Sales”) had reduced from $728,929.00 in the 2009-2010 financial year to $327,846.31. But to look so far further ahead is to take too much hindsight into account in the special circumstances of this sole asset business, where the necessity was to “build up” the business, as indicative of the relevant commercial reality. Thus, taken as a factor solely in its own right, this loss was a concern, though it was not of particular concern given the matters mentioned earlier of the expectation of increasing sources of income, though the longer term proved such expectation to be inaccurate.

46. [46]
    Fourthly, the liquidity ratio for the year ending 30 June 2010 had dropped significantly to 0.4556. That must have been of considerable concern, particularly in circumstances where a liquidity ratio below 1 shows a poor ability to pay short term debts.

47. [47]
    Fifthly, regarding debts due to the ATO, a debt demand letter was issued to the second plaintiff - but this was not until 26 July 2010 (i.e. after 30 June 2010). It followed from the concern expressed by the ATO that the second plaintiff may not be able to pay the then present amount outstanding unless an arrangement were to be made. A “lodgement alert” was then sent to the second plaintiff on 7 September 2010 concerning “overdue documents”, with a “peripheral” warning letter issued soon after 4 October 2010. Even though those events occurred subsequent to the end of the financial year in question, they do show that there were some warning signs available to the directors by the end of 30 June 2010.

48. [48]
    Sixthly, and particularly concerning because the NAB relationship was the only relationship that the second plaintiff had with any bank or other financial institution, there were dishonoured electronic payments regarding the account which dealt with the asset, the Alpha Bree. On 18 January 2010 there was a dishonour of $15,461.96. That was followed by a dishonour of $15,668.01 on 16 April 2010 and - although after 30 June 2010 - by further dishonour on 17 August 2010 of $16,034.50. On the other side of this coin were the facts that “replacement” payments were able to be made, respectively, on 21 January 2010, 21 April 2010 and 26 August 2010, although it should be noted that the times for final honouring kept extending (as measured in days). Nevertheless, the really significant problem occurred only when a dishonour occurred on 16 September 2010 in the sum of $16,029.75 which was not substantially rectified until 15 October 2010. Though these dishonours are concerning, particularly given the indicators of potentially falling income, it is the fact that the directors, in total, had advanced just over $105,000.00 to the end of that financial year to assist the company.

49. [49]
    The overall background is that the accounting of the second plaintiff was – as deposed to by Mr Hambleton and which is accepted by me – “not complicated”. Furthermore, in the minutes of the directors’ meeting of the second plaintiff held on 15 February 2010 - such minutes being signed by the first defendant - reference was made to the “current financial situation” (expressed in a concerning sense). Those minutes also showed that at that time there were “infrequent runs” being undertaken by the barge. And, as demonstrated by the formal Proof of Debt of ACN 126 989 802 Pty Ltd (lodged in the liquidation of the second plaintiff), a settlement of an outstanding debt with it had been agreed in January 2010 in the amount of $5,000.00, though its terms were never exposed.

50. [50]
    Of particular concern in the determination of whether there has been a contravention of s 588G(2) of the Act is whether the person – in this case, the first defendant – was aware at a relevant time that there were grounds for suspecting, in failing to prevent the company from incurring debts, that insolvent trading was occurring within the meaning of s 588G(1). Here, the Questionnaire for Directors and Officers (Exhibit 4) - which I find was signed by the first defendant on or about the date that appears on it (namely, 10 September 2012) and, despite the first defendant’s denials about any recollection of it, about which I find that it was read and signed by her and returned under the hand of her then solicitors, Macrossan and Amiet on 12 September 2012 to the first defendant - contained the hand written statement, “No./Uncertain” in answer to the question whether the company’s accounts were audited at any time. That, taken together with the evidence given at the trial by the first defendant, convinces me that what ever else happened at the director’s meetings which were said to be held “monthly” during their financial year, no attention was paid at all to the company’s financial circumstances, at least insofar as its solvency was concerned, in any time up to 30 June 2010.

51. [51]
    That Questionnaire stated that the first defendant “took over operations” in 2010 and 2011. Although the answer to Question 12 was to the effect that it was “unknown” what figures were compiled by the second plaintiff or presented to the first defendant [and whether weekly, monthly, or (some other) period] to show the company’s financial position, it does seem as if she did have some awareness of the prevailing financial climate when she wrote an email to the other director, Mr Lawrence, on 26 November 2010 that she and the second defendant were “still trying very hard to save this project” but that the company was “in no position to pay money towards our interest” and that advice would be given to Mr Lawrence when the company was “in a better position”. But, again, such scant evidence as this was of events after this financial year had ended.

52. [52]
    The major concern which I have in determining, to the requisite standard, that the first plaintiff was insolvent as at 30 June 2010 is this factor of illiquidity. The evidence led by the first plaintiff did not focus on how the sum of $100,000.00 (which was advanced as a loan to the company by Mr Lawrence, who was a director until 1 February 2012) was utilised, although there is evidence that it was borrowed for this purpose on 13 August 2009. Because of such uncertainties, the financial position of the company may have been due in large part to “temporary” illiquidity only. Certainly, the first significant delay (i.e. over 7 days) in attending to the NAB dishonours occurred over 8 months after the drawdown of $1,422,717.60 on 15 December 2009. And the dishonours for this period happened only in the second half of the financial year to 30 June 2010, and were “corrected” within several days on each occasion (in the evidence given before me). Hence, it may well have been that Mr Lawrence’s funds were used to meet that “temporary” problem and that, therefore, there was the prospect, which can be said to be of a sufficient likelihood for the company, and those directing it, to be able to rely upon, that such funds would continue to be made available when incurring the debts as they became due. There is also, as I have already observed, other loans from other entities which were advanced to the company during the 2009-2010 financial year.

53. [53]
    Since it is the entirety of the circumstances that must be looked at, the fact that the most serious factors suggesting insolvency are, on close examination, restricted to the liquidity ratio being below 1 and the temporary dishonouring of payments – but only two times for short periods – up to 30 June 2010, leads to the conclusion that I am not satisfied, to the requisite standard of probability, that the second plaintiff was insolvent as at 30 June 2010.

54. [54]
    I am, therefore, unable to conclude that, within the terms of s 95A of the Act, as at 30 June 2010 relevant insolvency for s 588G(1) purposes was occurring, much less that there were reasonable grounds for a suspicion of such. This does not exclude the fact that there may well have been a dereliction in the duties owed both under the general law and pursuant to statute by all directors of the second plaintiff. The problem in the end is one of proof, in the context of a company which was attempting to make a business commercially viable with a sole asset on which a very substantial amount of money was spent (with a sizeable amount spent during the 2009-2010 financial year) to make it so productive.

Insolvency as at 30 June 2011?

55. [55]
    By any measure, there is no doubt that the second plaintiff was insolvent by 30 June 2011.

56. [56]
    First, the “balance sheet” insolvency position showed the company with a net liability of $245,347.69. Further, as at that date, “cash on hand” was less than $2,500.00 and the trade debtors figure was a miserable $5,508.25. Although the fixed asset value (constituted entirely by the barge) was entered in the balance sheet for the relevant date at $1,877,685.18, it is clear that the liabilities were significant, including a running account balance with the ATO showing a liability of $13,377.65. In addition, the long term liabilities in the form of loans exceeded $1,180,000.00. Such figures painted an extremely gloomy picture at best.

57. [57]
    Secondly, “cash flow” insolvency showed a loss of $88,124.21. While that in itself may not be seen to be significant, in light of the ever continuing yearly losses to that date, it achieved a considerable measure of significance, showing that the losses kept continuing despite the large amount of money expended on the sole asset.

58. [58]
    Thirdly, the liquidity ratio by 30 June 2011 had plummeted to 0.0089.

59. [59]
    Fourthly, overdue taxes had reached a very significant stage. Not only had the ATO deferred lodgement and payment of various activity statements but it also had accepted that the second plaintiff had been identified as potentially “impacted” by a natural disaster in early 2011. By 29 June 2011 a previous arrangement had been cancelled, because the second defendant could not make repayments.

60. [60]
    Fifthly, the dishonouring of electronic payments to the NAB had reached alarming proportions, including a delay of over one month in meeting the dishonour of 16 September 2010. Even a quick glance at the relevant NAB statement in question (Exhibit 1, Annexure “G”) showed significantly late payments and continuing dishonours up to 30 June 2011.

61. [61]
    Sixthly, it is clear from the small amounts and nature of the loans made in the 2010-2011 financial year that there was no longer the earlier demonstrated ability, engineered through “friendly” loans, to enable the company’s debts to be paid as and when they fell due. Things had moved certainly to an endemic shortage of working capital.

62. [62]
    Although there are many factors which are outlined in Plymin (No1) which are not applicable here, those that have applicability all are strong indicators of insolvency.

63. [63]
    It is very difficult to address any date earlier than 30 June 2011 - which I accept as an alternative date relied on for legislative purposes. What is clear is that the first defendant was a director of the second plaintiff at a time when the second plaintiff “incurred” debts after that date. And because the whole of that particular financial year was one of an endemic shortage of available funds from any source, it can be found any debt that was incurred thereafter (whenever that was) happened at a time when the second plaintiff was insolvent (as defined). Next, from the analysis that I have made, there were reasonable grounds for suspecting (when used in its interpreted sense) that the second plaintiff was insolvent thereafter. It is unnecessary in this case to look at s 588G(1)(d) because the whole of that financial year was after the commencement of the Act.

64. [64]
    Turning, then, to the relevance of s 588G(2), no conclusion can be reached other than that the first defendant failed to prevent the second plaintiff from incurring debts after 30 June 2011, being at a time when a reasonable person in a like position to that which she had in the second plaintiff, and in the relevant circumstances, would have been aware that there were reasonable grounds for suspecting insolvency. This is a particularly easy conclusion to draw in the circumstances where the first defendant’s own evidence at trial showed an incomprehension of her responsibilities as a director to monitor the ongoing financial position of the second plaintiff, simply living in the hope that everything would be rectified.

Existence of defences?

65. [65]
    So far as s 588H(2) is concerned, it is not open on the evidence led before this Court to find that the first defendant has proved that, as at the time the particular debts were incurred from 30 June 2011 onwards by the second plaintiff, she had reasonable grounds to expect that the company was solvent and, more especially, remain solvent even if it incurred each of those debts. After all, her own evidence was that she simply “just assumed that the finances were okay and everything was getting paid as we went along”.

66. [66]
    With respect to s 588H(3) - again noting that the onus is on the first defendant to establish these defences - there is no evidence that, at the time when each of the debts in question was incurred, the first defendant had reasonable grounds to believe - much less did believe - that a competent and reliable person was, in fact, responsible for providing to her adequate information about whether the company was solvent. This must be so, particularly in circumstances where the first defendant’s own evidence was that she was not provided with any information at all about the financial position by any other person (stating that she “never dealt with the accounts” and did not “know anything about them”) and where the engaged company accountants, Strategic Accountants, sought in 9 December 2011 to have a Solvency Minute signed for the 2010-2011 financial year, expressing “concern” as to whether it could be done (since they were “unaware” of the financial situation facing the company). As for the final aspect of s 588H(3), there could be no expectation that the company was solvent and would remain so because there was no such information so provided.

67. [67]
    Hence, there is no defence (for which the first defendant has satisfied the onus of establishing) in the circumstances of this case.

Outcome

68. [68]
    Because s 588M(2) seizes on an amount equal to the loss or damage and since, in this case, the loss equals the total of the relevant debts incurred after 30 June 2011 (namely, $143,883.40), it is that amount which is recoverable from the first defendant, as the second plaintiff’s director, as a debt due to the second plaintiff.

69. [69]
    There will, accordingly, be judgment for the second plaintiff in that sum against the first defendant.

Interest

70. [70]
    The plaintiffs have claimed interest pursuant to s 58 of the Civil Proceedings Act 2011. There being no contended commencement date, I have selected the date of filing of the Claim (namely, 20 February 2013). Appling the interest calculated from that date to the end of July 2014, an interest sum of $14,628.52 is to be awarded.

Costs

71. [71]
    Unless there has been some offer made which would prevent the normal order for costs being given in such a case as this [namely, following the event (which is judgment for the second plaintiff)], the order for costs will be that the first defendant pay the first and second plaintiffs’ costs of the proceeding against her to be assessed on the standard basis. I intend to make a conditional order to that effect when handing down this decision.