Williams v Scholz[2007] QSC 266

SUPREME COURT OF QUEENSLAND

1. Scholz Motor Group Pty Ltd (“the Company”) was incorporated on 22 April 2004. On 28 January 2006 the plaintiff was appointed its administrator by a directors’ resolution pursuant to s 436A of the Corporations Act 2001 (“the Act”).  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.

2. By an amended Statement of Claim the plaintiff alleges that at all times from 1 July 2005 the Company was insolvent and that between 1 July 2005 and 28 January 2006 it incurred debts, full particulars of which were given, which amount in the aggregate to $3,959,420.35.  It is further alleged that when the debts were incurred there were reasonable grounds for suspecting that the Company was insolvent and that each of the defendants failed to prevent the Company from incurring the debts;  and that a reasonable person in the defendants’ position would have been aware of those grounds.

3. The further amended Defence does not admit insolvency because “the defendants have made reasonable enquiries and remain uncertain of the truth” of the allegation, notwithstanding their directorships, because “they had no knowledge of the financial condition of the Company and had no access to any of the Company’s books or records”. Likewise the defendants did not admit the allegation that the Company incurred the particularised debts between 1 July 2005 and 28 January 2006, on the same grounds, that they had no knowledge whatsoever of the Company’s financial condition and had no access to any of its books.  Neither do the defendants admit that there were reasonable grounds for suspecting the Company’s insolvency on and after 1 July 2005.  They deny that each of them failed to prevent the Company from incurring the debts.  They also deny that a reasonable person in their position would have been aware of the reasonable grounds for suspecting insolvency.

4. The defence then raises positive defences under s 588H and s 1318 of the Act. The latter defence can be put to one side for the moment. As to the former it is alleged that the defendants were not involved in any aspect of the trading activities of the Company between 1 July 2005 and 20 January 2006, nor did they have any knowledge of its financial affairs but rather had an expectation the Company was solvent and reasonably relied on information provided to them by the Company’s mangers. There was a late allegation that they took reasonable steps to prevent the Company from incurring any debts, by attempting to appoint an administrator, at about the beginning of October 2005.

5. Section 588G of the Act provides that the section applies if:

“(1)(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 the Company in the Company’s circumstances would be so aware.”

6. Section 588M 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.”

7. Section 588H sets out some defences to the liquidator’s action. The section provides:

“(2)It is a defence if it is proved that, at the time 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 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.”

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.

Insolvency

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 $3.9million.

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.

18. The evidence is not as clear as it should be as to the dates of payments and as to actual proof of amounts paid. I am not sure whether the sum paid by Reefward Pty Ltd is meant to include the sum of $1,878,022.31 which other evidence indicates was paid by the defendants personally. It is, at any event, clear from Mrs Scholz’s own evidence that she and her husband paid the latter sum to SGB pursuant to their guarantees. This was a debt which the Company incurred and could not pay. It is a loss in addition to the trading losses which I mentioned earlier. This must be so because trading losses are calculated by subtracting expenses from gross profits. Those profits are measured on the basis that cost of stock is subtracted from sale price. The calculation presupposes that the cost of the stock, which had been paid for by SGB pursuant to the bailment agreement, had been recovered from the sale price. It should have been paid to SGB. Gross profits are calculated on the basis that there was money available from sale proceeds to do so.

19. There was also a substantial debt owing to NAB. On 20 October 2005 the Company was overdrawn on its operating account by $1,139,705.45. The overdraft limit was then $1,000,000. Between 1 July and 29 July 2005 the Company’s overdraft limit was $450,000. In that period, in which there were 21 working days, the overdraft limit was exceeded on 15 of them. On 27 July 2005 the overdraft exceeded the limit by over three quarters of a million dollars. On each of nine other days the limit was exceeded by more than $200,000. Between 1 August and 25 August 2005 when the limit was still $450,000 there were 18 working days.  On 15 of these the overdraft limit was exceeded, usually by very substantial amounts.  On three occasions the excess was greater than half a million dollars and on each of eight other days the excess was greater than $200,000. 

20. Between 26 August and 20 October 2005 the overdraft limit was $1,000,000. In this period of 38 working days the overdraft limit was exceeded on 23. The excesses were smaller, no doubt reflecting the higher overdraft limit, but on one occasion (4 October 2005) the overdraft was $2.7million, an excess of $1.7million. The excesses were frequently greater than $200,000.

21. The details appear in Exhibit 5 Volume 2 Section D.

22. The debt to the NAB was eventually paid by the defendants pursuant to their guarantee.

23. On 23 September 2005 the NAB wrote to the directors of the Company following a meeting between one of the bank’s managers and inter alia Mr and Mrs Scholz.  The letter read:

“As discussed at the meeting, the conduct of (the Company’s) facilities … has been unacceptable …  This has meant we have had to return many payments of substantial amounts.

The combination of the following matters indicates (the Company) is experiencing significant financial difficulty:

• Frequent excess of significant amounts
• Failure to provide timely and accurate financial information
• The working capital position does not appear to have been proved despite increases in facilities totalling $1.165m since January 2005 …

We have formed the view that we do not have the requisite confidence in management or the directors to address the urgent issues of the business.  The reputation of the business is clearly poor, as can be expected with so many returned cheques.

…

We now seek to terminate the banking relationship with (the Company) and seek repayment of all facilities in full.  We will be forwarding formal default notices to you shortly …  We will return all payments that caused the facilities to be drawn … in excess of their respective limits …  This includes payments for wages …”

24. The picture so far is of loss making throughout the period of its operations and with increasing bank debt which it utilised in lieu of working capital. Its only valuable assets were its stock in trade, the sale of which incurred losses.

25. There are further indications of insolvency. Between 1 July 2005 and 19 October 2005 the Company drew cheques in an aggregate amount of $9,179,158.19 which were dishonoured on presentation.  Details of the cheques appear in Exhibit 5 Volume 1 Section A.  About $2,000,000 worth of cheques so dishonoured were to effect payment to SGB under the bailment agreement.  Although some cheques had been dishonoured from time to time in earlier periods, from 22 July 2005 cheques were dishonoured almost daily.  Some were for relatively small amounts e.g. $894.55, but some were for substantial amounts, $860,000 and $575,082.49.

26. Between 1 August 2005 and 10 October 2005 the Company sold 19 motor vehicles for prices which were less than the cost of acquiring the vehicles. In all a total loss of $546,512.11 was incurred. The aggregate purchase price was $2,310,501.11. The losses were more than a fifth of this amount. The Company’s business was selling motor cars with a view to profit. The only explanation advanced for these unprofitable transactions was that the Company was in desperate need of income and was prepared to incur losses to generate some cash flow to meet its most pressing debts. Details of the transactions appear in Exhibit 5 Volume 2 Section E.

27. The plaintiff put in evidence a calculation of liquidity and quick ratios. The former is a measure of a company’s ability to pay current debts. It compares the value of a company’s liquid assets which it has on hand for immediate use with those debts. The value of assets is divided by the value of liabilities. If the ratio is greater than one the Company has more current or liquid assets than current or payable debt. Such a ratio is therefore a general indicator that the Company is solvent. The quick ratio is another simple mathematical comparison, but for this exercise the value of assets excludes stock in trade/sale revenue. On the liability side one ignores debt due in respect of the stock. A quick ratio of one or more generally indicates the Company has sufficient liquid assets to meet its short term debts.

28. Ms Williams’ analysis was flawed. She took as her basis the Company’s own financial statements which themselves were incomplete and inaccurate. More seriously the accounts wrongly characterised some liabilities as assets which produced the incongruity that assets had a negative value. When the ratios were calculated using these anomalous figures they produced incomprehensible results. For example for a number of months the ratio was a negative figure. As a function of accounting and arithmetic this is impossible. A company with no assets and substantial liabilities will have a liquidity ratio of zero. It can never be a figure with a value less than zero.

29. Although Ms Williams claimed to have performed a liquidity ratio in fact she did not do so. In neither of her calculations did she include the value of stock in trade so that in fact both her calculations were of a quick ratio.

30. I do not intend to act upon Ms Williams’ ratios. Her methodology was seriously flawed. Her reluctance to adjust the entries in the Company’s accounts, even to make obvious corrections, mean her figures cannot be relied upon. Mr Burgess, a chartered accountant called by the defendants, did attempt that recharacterisation of assets and liabilities to produce a liquidity ratio. He disavowed its accuracy because of the brief time he had had to consider the Company’s affairs and to prepare a report. As well he had not had access to all relevant information. Nevertheless his figures, which may be rough and ready for the reasons he explained, show that the ratio was less the one in all months from October 2004 to October 2005. From March of that year it was less than .7. This means, as I understand these things, that for every dollar of liability the Company had less than 70 cents worth of assets from which it could discharge its debts.

31. I do not propose to act upon the evidence of ratios. Ms Williams’ are hopelessly wrong and Mr Burgess did not vouch for the accuracy of his.

32. Nevertheless the evidence I have rehearsed points unhesitatingly in the direction of insolvency. The Company never had any substantial assets of its own. Its stock in trade was bought with money borrowed from SGB. Its working capital came in the form of a bank overdraft. It made losses continuously throughout its time in business and the level of its debt increased. Its only means of paying the debts with which it commenced business was to generate profits, and it never did.

33. Mr Burgess valiantly tried to present the defendants with an argument against the inexorable conclusion that the Company was insolvent from 1 July and, indeed, well before. He was retained late and his report was not provided to the plaintiff until the eve of the trial. The rules as to the provision of expert reports were not complied with and his report was otherwise inadmissible because the defendants had put the question of insolvency in issue only by non-admission. They did not plead a positive case of solvency. Nevertheless I overruled Ms Downes’ objection and permitted the defendants to adduce Mr Burgess’ written and oral testimony. I did so because the claim against the defendants is a large one and they have already lost very substantial sums by reason of their investment in the Company. As well the trial went over its initial allotted time and had to be adjourned for about a week. This gave the plaintiff sufficient time to meet the new evidence.

34. 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.

35. 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.

36. The principles are not in doubt. According to Barwick CJ in Sandell v Porter (1966) 115 CLR 666 at 670:

“Insolvency is … an inability to pay debts as they fall due …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 …”

37. Subsequent cases, some of which I analysed in Emanuel Management Pty Ltd (in liq) and Ors v Foster’s Brewing Group Ltd and Ors (2003) 178 FLR 1 at 24-30, have not changed this basic exposition.  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 hypothecation of its assets, within a relatively short time.  A debtor need not have on hand a sufficient supply of cash to pay all his debts but he must have assets which can be readily converted to cash, by sale or charge, in order to pay his debts.

38. Section 95A of the Act 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.

39. The Company had neither cash nor assets to covert into cash. It had debts and accumulating losses which added to the debt. It was insolvent at all times, and certainly on from 1 July 2005.

Reasons for suspicion

40. It is necessary now to consider whether between 1 July 2005 and 28 January 2006 there were reasonable grounds for suspecting that the Company was insolvent and whether the defendants were aware of those grounds, or whether a reasonable person in their position would have been aware of them. It is convenient to consider also the circumstances which might give rise to a defence under s 588H. The same evidence is relevant to all these points.

41. The plaintiff’s case relied heavily on the evidence of one of the former directors, Mr Seymour.  His evidence was controverted by the defendants and his conduct was criticised by their counsel.  The collapse of the Company’s business has led to recriminations and animosity between the defendants and their son, and Mr Seymour.  I expect the feeling is bilateral though it was most evident in the testimony of the defendants.  All of the former directors have been charged with offences against the Criminal Code arising out of the prolific drawing of dishonoured cheques against an overdrawn account.  As well the first defendant has been charged with attempting to pervert the course of justice.  It is alleged that she sought to persuade Mr Seymour to give false evidence.  The details of the charges are not relevant and were not provided.  I mention these matters only to indicate that there is some need for caution in accepting Mr Seymour’s evidence.

42. I think he exaggerated some aspects of his evidence. He overstated the second defendant’s physical prowess and energy. Mr Seymour sought to obtain a personal benefit of about $100,000 from the Company at a time when, he admitted, he knew the Company was in financial difficulty. There was a dispute as to whether the defendants authorised the payment or whether he sought to take the money without their knowledge. I think Mr Seymour’s version of the event is correct. The account from which the attempt was made to take the money could only be operated by the defendants and Mr Seymour could not have hoped to take the money without their assistance. The attempt failed only because of a lack of funds. Nevertheless the episode shows Mr Seymour to have behaved discreditably, and probably dishonestly.

43. Despite the need for caution and these indications that Mr Seymour’s evidence cannot be accepted in its entirety I prefer it to the defendants’ evidence. I propose to accept Mr Seymour’s evidence except where I indicate that I do not. The defendants’ testimony bore the marks of invention. Much of what Mrs Scholz said was not put to Mr Seymour and was implausible. She gained no support for her most dramatic claim from her son. Mr Seymour’s evidence in critical parts was corroborated, grudgingly, by Mr Scholz.

44. One matter of defence can be addressed immediately because it can be disposed of shortly. Although not pleaded explicitly it seems that the second defendant relies upon s 588H(4). He gave evidence, which was supported to some extent by Mrs Scholz, that he was ill throughout the time the Company traded and did not take part in its management.  The evidence does not make out the defence.  Mr Scholz is, as I have said, elderly.  He was diagnosed with prostate cancer though he did not identify when the diagnosis was made.  He said only that he was “in the middle of treatment” in 2004 and 2005.  He said that he went to the Nind Street premises “of a morning” after the business was purchased, “but there was a rest bed up there and I used to spend most of my time on that.”  He did not speak to people there apart from a greeting.  He denied doing any odd jobs around the showroom or landscaped areas and “had very little to do” with the business side of things.  He “never had anything to do” with the Company’s books and records.  In cross-examination he said there was a “stage where I was fairly crook.”  The “stage” is not identified.  There was some reference in the evidence to Mr Sholz being treated by a course of chemotherapy but no particulars were given of the treatment or as to the date of commencement or cessation of the treatment, the regularity with which he was treated,  or the effect the treatment had on him.  No evidence was led from any treating doctor to explain what effect the drugs might have on a patient or what effect they had on Mr Scholz.

45. It is significant that Mr Scholz went to the Company’s premises every day. If he were too ill to attend to its affairs one would have expected him to remain at home. If he was so debilitated that he was obliged to lie on a bed one would have expected him to stay at home in greater comfort. He did not resign his directorship because he could not discharge his duties.

46. There was no sufficient evidence to show that Mr Scholz was so ill that he could not take part in the Company’s management. As well there is evidence that he did take part. He travelled to Sydney with his wife to negotiate selling franchises for French manufactured motor vehicles.  He made two such trips.  He was a signatory to the Company’s cheque account and he signed cheques.  He attended regular meetings of directors to discuss the Company’s operations.  He signed guarantees in September and October 2005 when the Company was obliged to borrow monies from its customers to generate cash flow.

47. This defence is not made out.

48. 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.

49. 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.

50. 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.

51. 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.

52. The defendants sought to understate their involvement in the management and direction of the Company. Mr Scholz, as I have mentioned, maintained that he went to its office to lie down and read the newspaper. Mrs Scholz testified that her time there was spent in preparing meals for the staff and cleaning the toilets. Mr Seymour tells a different story, which I prefer.

53. He said that the Company’s books and records were kept in an administration office at 35 Nind Street.  A bookkeeper, Yvette Benham, was employed to keep the entries up to date.  Mr Conrad Wilson was the financial controller replacing Mr Smith, an earlier employee in that role.  The directors had ready access to the records and Mr Seymour observed Mrs Scholz examining the books and speaking to Ms Benham.  She did so “often”.  One of the things she did was to instruct cheques to be drawn for the payment of invoices.  Every working day the directors would meet in the boardroom.  Mr Seymour, Mrs Scholz and Leslie Scholz attended all the meetings.  The second defendant attended most of them but missed some.  The Company’s employees produced daily operating charts setting out in great detail the Company’s financial dealings.  One of the matters contained in the charts was its trading position.  These were sent to each director and were the subject of discussion at the meetings.  The NAB bank statements were sent to the defendants at their home but were brought by Mrs Scholz to the meetings.  From January 2005 onwards the state of the Company’s overdraft account was the major topic.  It was then the directors “noticed distress on (the) accounts.”  Mr Wilson attended the meetings and would explain the transactions on the bailment agreement with SGB.  He would tell the directors “where we were at on our floor plan limit and what … had to be paid … what cars were … going out and what cars were coming in.”

54. In January Mr Wilson told the directors that a capital injection was required urgently if the Company was to continue in business. The intimation was directed at the defendants who were the only people of substance in the Company. Mr Wilson estimated that between $800,000 and $1,000,000 was needed.  Mr Seymour spoke daily to the defendants between July and October 2005 about the state of the overdraft and the bank’s intimations that it should be conducted within limits.  They had told him that “there was going to be … a capital injection into the Company” but also instructed Mr Seymour to sell more vehicles to generate cash flow so as to keep the overdraft within limits “until such time as the capital injection could be organised.”  Mrs Scholz told Mr Seymour that she would provide the Company with “about a million dollars” by way of capital on a number of occasions commencing in about March 2005.  The discussions did not seem to indicate whether the advance would be by way of a share issue or directors’ loans.  In any event the money was never provided.

55. I mentioned earlier that a number of cars were sold for less than cost price. The practice developed in response to the need for revenue to deposit into the NAB account. The decision to adopt that self-defeating strategy was made “by the four directors as a group”. The strategy “was not intended to be … indefinite” but “many cars” were sold at a loss. The financial consequences of the transactions appears in the operating charts which were discussed at the daily directors’ meetings.

56. Mr Seymour denied that he had total control over the Company’s finances. He said that no decision on that topic could be made without Mrs Scholz “being involved”. Mr Seymour “could not ring the National Bank and instruct … them to utilise funds in any manner … it had to come from … Mr and Mrs Scholz or Leslie Scholz …”

57. In about October 2005 the Company’s position was so desperate that Mr Seymour approached some of his better customers, who were known to be car enthusiasts, to ask them to lend money to the Company to keep it going. Extraordinarily they agreed. Some of their loans are among the debts in respect of which the plaintiff sues. There is no point here in setting out the details of the transactions but Mr Seymour contended he had the approval of the defendants to approach the customers. They deny it but Mr Leslie Scholz accompanied Mr Seymour on at least one occasion when he borrowed a substantial sum from one customer. I think it unlikely that Mr Leslie Scholz would keep the transaction secret from his parents or that he would not discuss with them the Company’s predicament which gave rise to the approach. Nor is it likely that Mr Seymour would involve Mr Leslie Scholz in importuning a customer to lend money if he were on a frolic of his own.

58. Mr Seymour’s evidence finds corroboration in some parts of the second defendant’s evidence. He said that he “had very little to do” with the business and “never had anything to do” with the books and records. When asked, however, if the first defendant was involved “in those things” he said “Yes. She was quite capable.” He also remembered that he “became aware of (the Company) being in a bit of trouble”. He could not recall when that was. He did recall that business “was quite good at one time” but then “it gradually got a bit worse”. Mr Scholz accepted that his wife “did very well to understand the general running of things.” She discussed “things” with the Company’s external accountant in the upstairs office. The “girls in the office” used to send “documents to her”. He agreed that the directors would meet at least weekly and sometimes more frequently. They discussed “financial information concerning the business” and Mrs Scholz spoke to Mr Seymour and “different accountants” whom she had “come up for a talk”. He confirmed that Mrs Scholz would received notice of the dishonour of cheques which made her “upset”.  She would discuss the dishonour with Mr Seymour.  Mr Sholz also remembered Mr Wilson saying that the Company required a capital injection although he could not recall the date of the intimation or the amount asked for.  He remembers as well Mr Seymour asking him and his wife when they would “put money into the Company” sometime in 2005.

59. Mr Seymour may have exaggerated the frequency of the directors’ meetings but with that exception his evidence which I have rehearsed should be accepted. The defendants’ case is that they took no interest in the Company’s business and left it entirely to Mr Seymour to manage. I think that most unlikely given that it was their investment bought to give their son a future. I do not accept that Mrs Scholz, in particular, did not take an active interest in the business. She is obviously intelligent and forceful. This consideration apart the second defendant’s admissions are important support for Mr Seymour’s description of the defendants’ involvement in the Company.

60. There are some minutes of a meeting of employees of the Company on 22 September 2005.  Mrs Scholz and her son were present as were nine employees.  Mr Seymour and the second defendant did not attend.  The minutes record Mrs Scholz as saying:

“That if she asks any one a question about anything they must answer her and tell her.  … she is the owner and wants to know everything to do with the business.  … if anyone doesn’t want to comply with her and answer questions they can leave.  … her signature must be on all cheques with either (Mr Seymour’s or Mr Leslie Scholz’s).

… (she) wants to know all stock lists at each yard and the profit from each vehicle.”

Mrs Sholz denies the accuracy of the minute.  There is no reason to doubt the contemporaneous written record.

61. The defendants’ pleaded case is that they reasonably relied upon Mr Seymour who was competent and reliable and responsible for providing them with adequate information about the Company’s insolvency and they expected, on the basis of what he told them, that the Company was solvent. As well neither defendant gave evidence of what it was that Mr Seymour told them that led them to believe that the Company was solvent so as to show that it was reasonable for them to rely upon it. Such a case would sink beneath the evidence I have just summarised but it should be noted that the defendants did not attempt to make out this pleaded defence. The case founders on their evidence that they did not trust Mr Seymour.

62. It is, I suspect, true that to a large extent the defendants and their son did rely upon Mr Seymour. He 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 knew nothing of it and Mr Leslie Scholz had worked only as an employed salesman.  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. This is far from saying that the defendants left the entire management of the Company to Mr Seymour, or that they took no interest in its business activities, finances or profitability.  I accept Mr Seymour’s evidence that they did and that Mrs Scholz in particular sought to learn as much as she could about the business.  She struck me as being that sort of woman.

63. The second defendant said that his wife “had a problem” with Mr Seymour and “the girls” by which I presume he meant the bookkeeping staff. Mr Seymour would “block her from doing anything”. He made it “impossible for her to discuss anything with the staff.” There would be “a row” if Mrs Scholz talked to any employees. Mrs Scholz thought that Mr Seymour “had plenty of things to hide and he didn’t want her to discuss anything … in the … office.” He would “get down there” and tell the staff that they were not to discuss anything with Mrs Scholz. Mr Scholz said that this behaviour occurred “all the time”.

64. Mrs Scholz remembered having an “intense discussion” with Mr Seymour in July 2005 because she wanted “some answers”.  She asked him “about the situation of the Company” and a dishonoured cheque or cheques.  She asked Mr Seymour “what have you done to my son”.  Her question was prompted by the fact that Mr Leslie Sholz had said to her “If you love me, don’t ask any more questions.”  In any event Mr Seymour reassured Mrs Scholz, or at least attempted to.  He said that everything was “Okay” and that he was “the one … running this company.”  When asked if she believed Mr Seymour and his assurances she said she did not.  However she did not press him for more particular answers because she “had been told not to ask any more questions.”

65. In about March of 2005 Mr Leslie Scholz instructed his mother not to ask questions of Mr Seymour. She complied because she “believed in him” and because the motor car business was “his dream”. She did not even speak to Mr Seymour about the phenomena of dishonoured cheques after the overdraft limit was increased to $1,000,000. Mr Leslie Scholz did not, initially, explain why he wanted his mother to refrain from asking about a matter of such importance.

66. Mrs Scholz also testified that she was not allowed to talk to any of the administrative staff and the prohibition originated with Mr Seymour who had, she inferred, instructed the staff to walk away as soon as she asked any questions. They did that, she said, “they would just walk away and ignore me.” She confirmed that in August 2005 she did not trust Mr Seymour. He had persuaded Mr Leslie Scholz to say to his mother “keep away from there.” When asked what she thought her son and Mr Seymour were hiding from her she said she did not know. She did not inquire.

67. Mr Leslie Scholz did not corroborate his mother’s evidence that he implored her not to ask questions about the Company’s activities or finances. He denied any such behaviour.

68. 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.

69. Three other matters should be mentioned which are relevant to the defences. The first is that the Company’s monthly accounts prepared by its accounting staff show its position to be much more favourable than the retrospective accounts compiled by the liquidator after the commencement of her administration and liquidation. Some of these monthly financial statements appear to show the Company making a profit. This is a point taken in the defendants’ submissions but it goes nowhere because the accounts were referred to only in passing in the evidence and neither defendant ever claimed to have seen them, believed them, and inferred from them that the Company was solvent. In fact it appears to be accepted on all sides that the management accounts were incomplete and inaccurate.

70. The second matter is the claim that the defendants took all reasonable steps to prevent the Company from incurring debts when they became aware or had grounds to suspect that the Company was insolvent. This plea is of course irreconcilable with their preferred position which is that they did not know or suspect insolvency because of their reliance upon Mr Seymour and his obstruction of their attempts to discover the truth about the Company finances. What the defendants say they did was attempt to appoint an administrator to the Company. What happened was that towards the end of November 2005 the plaintiff was asked to attend a meeting at the offices of the Company’s accountants, PKF Accountants, on the Gold Coast. She went and met the defendants, Mr Leslie Scholz, Mr Seymour and an accountant from PKF. Ms Williams’ invitation came from a firm of solicitors in Brisbane.  Her retainer was to give the directors “an outline of the procedures under the voluntary administration process.”  At the meeting the directors told her that a receiver had been appointed to the Company and they were considering appointing a voluntary administrator or summoning a meeting of creditors to put the Company into voluntary liquidation.  The defendants and their son favoured voluntary liquidation while Mr Seymour thought administration a better option.  Ms Williams was asked to attend the meeting to explain the incidents of the two procedures to allow them to make a choice between them.  She gave the requisite explanation and heard nothing more until January 2006 when she was approached by the defendants’ solicitors in Brisbane who asked her to accept appointment as voluntary administrator of the Company.  That occurred on 28 January 2006.

71. This short recital of facts is enough to show that the defendants did not do all that was reasonable to protect creditors and prevent the Company from incurring debts. No evidence was given to explain why the defendants did not take action promptly after meeting with Ms Williams in November 2005, or why they did not act even earlier.

72. The third matter to mention is the defendants’ claim to have any liability for the Company’s debts reduced by at least 50% pursuant to s 1318 of the Act. The section provides that in a civil proceeding for default or breach of duty if it appears to the court that the person has acted honestly and having regard to all of the circumstances of the case ought fairly to be excused for the default or breach the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.

73. The defendants may have acted honestly but the evidence makes it impossible to conclude that ought fairly to be excused from the consequences of contravention of s 588G. The discretion to relieve the defendants, wholly or in part, from the liability which the section would otherwise impose is to be exercised in the context of a claim, brought on behalf of unsecured creditors who will otherwise go unpaid, to recover the amount of their debt from directors who allowed the Company to incur those debts knowing or suspecting that it would not pay them. It is no doubt right as was said in Daniels v Anderson (1995) 37 NSWLR 438 (525) that:

“ ‘The purpose of the section is to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are businessmen and women who act in an environment involving risk in commercial decision making’ and ‘the courts have a wide discretion to relieve in whole or in part.’ ”

74. French J noted in Re Wave Capital Ltd (2003) 47 ACSR 418 at para 29:

“Section 1318 … reflects a broad legislative policy that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of non-compliance with its requirements where such non-compliance is the product of honest error or inadvertence and where the court can avoid its effects without prejudice to third parties or to the public interest in compliance with the law.  That broad policy does not authorise the court lightly to set aside the requirements of the Act where they have not been observed.”

75. 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 defendant to continuing trading, incurring debts and allowing tradesman 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.

76. 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.

77. This defence also fails.

Debts

78. The last requirement the plaintiff must prove to establish an entitlement to judgement against the defendants is that the Company incurred debts between 1 July 2005 and 28 January 2006.  This element of the cause of action gave rise to difficulty during addresses.

79. To put the difficulty in context it is necessary to say something about the conduct of the trial, which was unsatisfactory in several respects. I do not intend by this remark to suggest any criticism of counsel or their solicitors. The problem I suspect had its origin in the fact that the defendants were reluctant to co-operate in preparing the action for trial. It was put on the commercial list and recognised as an a matter requiring expedition. The defendants changed legal representations several times and seemed anxious to avoid a hearing.

80. The matter was set down for a two day trial on the basis that the pleadings indicated the issues were narrow. The defendants did not admit insolvency or that the debts in the amounts which the plaintiff sought to recover were incurred in the relevant period which, on the plaintiff’s case, was between 1 July 2005 and 28 January 2006. The defendants raised a case of reasonable reliance upon Mr Seymour. It was to meet this contention that the plaintiff’s principal witness was Mr Seymour and that two days appeared an ample estimate for the trial.

81. The plaintiff accordingly opened her case on the basis that there was no real contest about solvency or the debts the Company incurred in the relevant period. A schedule of those debts was prepared and three volumes of exhibit 5 contain documents intended to prove the existence and quantum of the debts.  When the trial started Mr Griffin QC who appeared with Mr Handran for the defendant asked me to rule that the proofs of debt included in those three volumes were proof only of a claim and not of the debt.  I pointed out that I had power to dispense with ordinary modes of proof with respect to claims not really in dispute.  The debate ended inconclusively but at no time did counsel for the defendants indicate that there were particular objections to the plaintiff’s proposed mode of proving the debts.  It was said only that the plaintiff had to prove that the debts were incurred after 1 July 2005, the date the plaintiff nominated as the commencement of insolvency.

82. Ms Downes who appeared for the plaintiff raised the matter again when the trial resumed on the third day after an adjournment of about 10 days. She asked for a direction whether she was required to question the defendants about each of the debts. She pointed out that there had been no challenge to the plaintiff on any aspect of that topic.

83. It was not a matter for the court, of course, to advise a party how its case should be conducted, or to give a ruling on what proof would be sufficient, but I noted that the plaintiff had tendered documents which appeared to prove this element of her case and there had been “no particular challenge to any transaction” and that the plaintiff “could proceed on that basis”. I asked Mr Griffin what he wished to say and his only objection was to Ms Downes’ designation of exhibit 5 as “an agreed tender bundle”. I pointed out that the plaintiff might proceed as she had done in the absence of any intimation of an attack on the plaintiff’s mode of proof of the debts. There was no such intimation.

84. The plaintiff liquidator had been asked in chief whether she had “looked through volumes 3, 4 and 5” of exhibit 5. She said she had and that the documents in those volumes correlated with annexure F to the statement of claim which sets out the debts in respect of which the claim was brought. She said that she had satisfied herself that the amounts set out in schedule F for each of the creditors identified in it was correct, and she had done so by reading the proof of debt, and the books and records of the Company, including its electronic records.

85. The only cross-examination on the point was this:

“So there are no creditors in relation to the period prior to the 1^st July 2005 is that so? – In this schedule?

Yes … No there are but in this schedule …

Where are they then? – Those claims haven’t been submitted in these … schedules …

Now on that topic you are of course not personally aware of the circumstances in which these alleged debts were incurred are you? – No not personally.

And you would agree that in saying that you’re satisfied the debts are in fact owing first of all you verified that there was no payment of those debts and secondly you’ve looked at the documentation and … on the basis of that you have admitted the proof of debt? – On the basis of the information available to me, I have admitted the debt.

And that information is the information we see in those folders? – To an extent … to put in everything that I’ve undertaken during the course of my administration would be voluminous.” (T 159 .25 – 160 .12)

86. Then matters rested until written submissions which included from the defendants’ counsel a lengthy document corresponding to schedule F and containing detailed criticisms of the proofs offered by the liquidator. These points were taken when the evidence had been completed and cases for both plaintiff and defendants had closed. The challenge to the proof of the debts seems to have become the main focus of the defence. It did so after the defendants’ attempt to show that the Company was solvent looked doubtful and the pleaded defences under s 588H were in tatters.

87. The situation is totally unsatisfactory from all points of view. The defendants now wish to conduct a minute examination of hundreds of documents to dispute that the plaintiff has proved that debts were incurred at a particular time. This is to be done without the benefit of oral explanation. The plaintiff is deprived of the chance of supplementing any deficiencies by evidence that might be readily available. It must be remembered that the plaintiff’s claim is brought on behalf of unsecured creditors who will go unpaid if it fails. Their debts were incurred, on my findings, because the defendants allowed their company to continue trading when they knew it could not pay the debts it was incurring.

88. Counsel for the plaintiff complains that by pleading only a non-admission of the debts and the dates on which they were incurred the defendants should not now be allowed to raise these objections. Counsel for the defendants reply that UCPR 165 only prevents them from adducing evidence on the point and they are not doing that. They are merely pointing out that the plaintiff has not proved her case.

89. I do not deny a defendant’s right to take advantage of a plaintiff’s failure to prove its case. The UCPR with its insistence upon detailed responsive pleadings has not deprived a defendant of that forensic advantage. But in this case to allow the defendants to adopt this course would work injustice and allow them to take advantage of conduct which has the appearance of sharpness, though I accept that none was intended.

90. Section 283 of the Supreme Court Act 1995 provides that the commercial causes judge may give such directions as are expedient for the speedy and inexpensive determination of the questions in an action really at issue.  To that end the judge may dispense with the rules of evidence for proving any matter where it is just to do so, and may require either party to make an admission with respect to any questions of fact involved in the action.   Litigants in the commercial list are expected to prepare and conduct their cases on the basis that only issues genuinely in dispute are to be fought and determined.  This has been well publicised.  Parties are expected to identify those issues and to put aside anything which is not the subject of a genuine dispute.  It is not a jurisdiction in which one can adopt Mr Micawber’s philosophy.

91. Had the defendants intimated they intended taking the course they ultimately did I would have made directions designed to elicit whether there was any substance in the defendants’ doubts about the debts the plaintiff propounded as the basis for her claim. To the extent the doubts seemed insubstantial I would have directed admissions or summary proof. To the extent the doubts seemed justified they would have identified issues of fact to be determined.

92. The need to identify such areas of dispute became obvious on the morning of the third day of the trial when Ms Downes made it clear she intended to rely upon volumes 3, 4 and 5 of exhibit 5 in the absence of any intimation of dissatisfaction with that mode of proof. None was forthcoming. The cross-examination of Ms Williams reinforced the impression that the defendants took no issue with the sufficiency of proof.

93. In the circumstances I intend to take the documents in the volumes at face value and regard them as proving what their contents purport to prove. That is to say, I regard the documents as proof of their contents.

94. Much of the defendants’ industry has gone to demonstrate that the plaintiff has not proved that the debts were incurred after 1 July 2005. This being the date the plaintiff selected as the commencement of insolvency. I have found the Company was insolvent the year before that so that the defendants’ complaints lose much of their point.

95. I will deal as briefly as possible with each of the claims set out in Schedule F.

Schedule F

Priority Creditor

(1)Superannuation Employee entitlements$30,450.74

(2)Australian Taxation Office Super Guarantee Charge$40,974.90

(3)Department of Employment Workplace Relations

Employee entitlements$167,313.48

$238,739.12

Unsecured Creditor

(4)Affordable Windscreens Repairs$247.50

(5)A Line Tow Bars$1,955.50

(6)AOK Home Services and Repairs$53,450.10

(7)API Security Pty Ltd$2,996.06

(8)Australian Taxation Office$71,509.96

(9)Auto Sales Promotions$2,134.50

(10)Ellebarr Marketing Pty Ltd$4,580.00

(11)Battery World$674.50

(12)Bosca Trading$1,747.45

(13)BP Australia$13,988.40

(14)Coastwide Signs$7,546.00

(15)Cosmic Co Electrical$2,114.97

(16)Culpans Electrical Contractors$1,174.53

(17)Dean Spizzirri$530,000.00

(18)Dentbiz Pty Ltd$605.00

(19)Donald Scott$10,010.00

(20)East Coast Mobile Safety Certificates$10,770.00

(21)Econorth Timbers$2,681.25

(22)Energex$2,469.80

(23)Eurocom Australia Pty Ltd$3,188.87

(24)Francis Montegano$142,000.00

(25)Gleam It Products Pty Ltd$2,138.34

(26)Gold Coast Automotive Group$60,500.00

(27)Gold Coast Mufflers$1,111.00

(28)Gold Coast Publications Pty Ltd$78,275.00

(29)Gold Group Business Advisers$23,320.00

(30)Lara Glen Pty Ltd$90,000.00

(31)Hinterland Group$61,750.00

(32)Horwath Motor Industry Services Pty Ltd$6,017.00

(33)Jax Tyres Brakes & Suspensions$9,899.45

(34)Jim Boland Motors$1,740.90

(35)John Kleeman$9,750.00

(36)KS Promotions$422.40

(37)Kevin Angus Livingstone$85,000.00

(38)Kos Karydis$5,252.39

(39)Malcolm Lynch$1,160,000.00

(40)Monterey Auto Accessories$495.00

(41)Ms Kelly Dixon$1,615.00

(42)NBN Limited$6,193.00

(43)Nigel Thomas Warr$291,870.00

(44)Office of State Revenue$6,839.78

(45)Paradise Mobile Locksmith$373.00

(46)Peter Moore$1,400.00

(47)Precision Automotive Equipment$5,164.50

(48)Raw Cars$19,800.00

(49)Reynolds Print Service (Qld) Pty Ltd$1,290.30

(50)Sci-Fleet Motors Pty Ltd$142,172.00

(51)Southern Cross Security$2,259.39

(52)The Busy Group Pty Ltd$500.00

(53)The Hot Tomato Broadcasting Company Pty Ltd$9,427.00

(54)The Motor Vehicle Consultants$2,920.00

(55)Windscreen Experts$2,431.00

(56)Workcover Queensland$9,966.65

$2,965,737.49

Related Parties

(57)Mr & Mrs N & M Scholz$705,000.00

(58)Other employee claims (includes Brett Seymour)$49,943.74

96. I have examined the documents inserted in volumes 3, 4 and 5 of exhibit 5 in support of each of the debts set out in Schedule F in respect of which the plaintiff brings her claim. I am satisfied that the item numbers 4, 7, 9, 11-16, 18, 21, 22, 23, 25-29, 31, 32, 34-37, 40, 41, 42, 44-56 in the schedule are proved by the supporting documents. The vast majority of these are claims by suppliers of goods and services evidenced by invoices. In the absence of any other evidence or particular challenge to the invoices I accept that the Company incurred the debts evidenced by the invoices on the dates they bear. There is authority for such a view. See Credit Corporation Australia Pty Ltd v Atkins (1999) 30 ACSR 727 at 741.

97. Item 1 is supported by a company record setting out its employees and their statutory entitlements to superannuation which had not been paid by the Company. The documents are secondary, not primary, but the defendants took no objection to their tender and I act upon them. They prove the claim.

98. The documents offered in support of item 2 are brief and lacking in detail but given the nature of the creditor and the lack of any challenge to this claim or its proof I accept it.

99. Item (3) in the schedule is supported by comprehensive secondary accounting documents. The only objection to it is that that the payment aggregating the sum of $167,330.48 was made subsequent to 28 January 2006. The objection misconceived the nature of the claim. It is for a liability incurred by the Company to pay its employees wages and entitlements. The liabilities, or debts, owned to the employees were incurred in the period between 1 July 2005 and 28 January 2006, as Ms Williams testified. In fact the employees were paid by a commonwealth department but it is subrogated to the employees’ rights in respect of payments it made. The matter was not fully investigated but the plaintiff’s evidence was unchallenged and I accept that the amount claimed is in respect of debts incurred by the Company in the relevant period by way of wages and other entitlements owed to its employees.

100. Item (8), the claim by the Australian Taxation Office for $71,509.96 has not been proved, perhaps because of an oversight. I will adjourn this claim to allow the plaintiff to reopen her case and adduce such further evidence as she can find. This is a matter that the parties should have identified at the trial. The deficiency in proof could have been addressed. The public interest in litigation of this nature requires this indulgence.

101. Something should be said about item (10), the claim by Ellebarr Marketing Pty Ltd. On 30 September 2005 Ellebarr paid the Company $4,055.20 as a deposit on a new Citroën motor vehicle. It also assigned a car it owned as part payment of the purchase price for the new car. That car was security for a loan Ellebarr had taken out to buy it. The arrangement with the Company was that it would discharge the loan and credit the purchaser with the difference between the value of the car and the amount of the loan. The Company did not deliver the new car and did not pay out the loan on the old car. Ellebarr was obliged to retake possession and reassume liability for the loan. It paid $80 to obtain a roadworthiness certificate and $445.45 to reregister the car. It claims in total the amount of $4,580.00. The defendants’ objection is that the claim is for damages not for a debt. The amount paid by way of deposit is a debt or liquidated sum. Upon the Company’s failure to deliver the new car there was a total failure of consideration for the payment of the deposit. Ellebarr had a claim for a liquidated sum for money had and received. See Lagos v Green-Waldt [1910] 1 KB 41 at 48.  It is, I think, right that the balance of the claim for $525.45 is for damages and should be disallowed.

102. The claim in respect of Mr Spizzeri is one of the more bizarre sets of circumstances which attended the demise of the Company. It is by no means the only one. On 23 September 2005 Mr Spizzeri agreed in writing to buy two Hummers from the defendant.  He paid a deposit of $100,000 under each contract.  The vehicles were never delivered and the deposits were never returned.  The claim is the same in character as the last I mentioned and is proved by the documents and by Mr Seymour’s evidence.  The balance of the claim is for loans Mr Spizzeri made to the Company at the request of Mr Seymour and Mr Leslie Scholz.  He was one of those “good” customers approached by the Company in its last desperate weeks to provide what was no doubt meant to be temporary finance.  Mr Seymour gave evidence that in September and October 2005 Mr Spizzeri lent four separate amounts, $45,000, $250,000, $5,000 and $30,000.  None of the loans has been repaid.  The total amount of Mr Spizzeri’s claim is $535,000 but only $530,000 was sought no doubt because of oversights.  In any event the amount claimed has been proved.  The debts were payable on demand.  The Company incurred a liability to repay them when it received the money, which is in the relevant period.

103. The claim in respect of Mr Donald Scott is very straight forward. The defendants’ query against it appears irrational. Mr Scott sold a car to the Company and was given a cheque dated 7 October 2005 for $10,000. The cheque was dishonoured on presentation. The bank charged Mr Scott a fee of $10 for having to notify him the cheque was not honoured. The Company incurred a liability when it wrote the cheque on 7 October 2005. The liability remains unsatisfied. The defendants’ resistance to this claim is incomprehensible. I do not intend to take the $10 off the amount of the claim.

104. The claim in respect of East Coast Mobile Safety Certificates is for $10,7770. The proofs offered establish only a debt of $3,850. A claim for $6,920 for “renovations” is not verified by any document. This is a point that should have been raised in evidence. I will give the plaintiff leave to adduce any further evidence she may have in support of this claim.

105. The defendant seeks to reduce the claim in respect of Eurocom Australia Pty Ltd by $436.70 on the ground that the invoice shows that the debt was incurred on 26 November 2004.  I am satisfied that the Company was insolvent at that date and I decline to make the reduction.  The claim is otherwise established by the invoices.

106. The claim in respect of Mr Montegano is another tale of a disappointed buyer. Mr Montegano consigned his car to the defendants in about February 2005 for the purposes of sale.  It was sold and the Company received $122,000.  By agreement the sum was applied as a deposit on a new Mercedes Benz CLK which Mr Montegano agreed to buy from the plaintiff.  In September 2005 he was asked to increase the deposit by the payment of a further sum of $20,000 which he did.  The Mercedes Benz was never delivered.  There was, in this case also, a total failure of consideration giving rise to a claim on the common money count.  This is a liquidated claim, or debt.  It arose subsequent to September 2005 when the consideration failed.

107. The only comment required with respect to the claim brought in respect of Gregory Sands is that Schedule F identifies the wrong creditor.  The claim is for a cheque in the sum of $90,000 drawn by the defendants on 13 October 2005 in favour of Lara Glen Pty Ltd.  The cheque was dishonoured on presentation.  The claim is clearly a proper one but Mr Sands, who was the only director of Lara Glen is mistakenly described as the creditor.  Subject to that amendment, which I give the plaintiff leave to make, the claim is proved.  The only objection is, apparently, that Mr Sands brought an action against Messrs Seymour and Leslie Scholz for a different amount in respect of a different cause of action, and obtained judgment by default.  The point has no substance.

108. The objection against the claim brought in respect of Jax Tyres Brakes and Suspension has substance. Exhibit 5 contains no documents to support the claim at all. This is no doubt an oversight. I give the plaintiff leave to adduce further evidence should she desire to reopen her case.

109. There is an objection to the claim brought on behalf of Mr Karydis. It, too, is misconceived. Mr Karydis sold his car to the Company on 14 October 2005. The value of his car, less the amount owed to a finance company, was agreed to be taken as part payment of the price of the new car. The Company did not pay the finance company from the proceeds of sale of Mr Karydis’ car. He was called upon to pay it himself and claims in respect of that loss. There is no doubt that the loss occurred within the relevant time. It is also clear that the loss was of a liquidated amount, a debt, which the Company incurred in that time. The Company promised to pay Mr Karydis’s debt to his finance company and did not do so.  The failure is of the Company’s promise to discharge Mr Karydis’s debt to his finance company.  The amount of the debt was $12,101.37.  It is reduced to the amount of the claim by reason of the finance company’s subvention.  It sold the car and applied the proceeds in reduction of the debt.

110. Mr Lynch must have been the unluckiest of the Company’s customers. The claim brought on his behalf is so well established that the defendants’ objection is, again, incomprehensible. In September 2005 Mr Lynch was the owner of a red Mercedes Benz worth, beyond controversy, $270,000. He thought he would prefer a blue one. He agreed to buy that car and consigned the original, red, Mercedes Benz to the Company for sale. It was sold for $270,000. On 7 October 2005 he was given a cheque for $250,000 but asked not to bank it “for a few days”. The balance of $20,000 was paid four days later by another cheque. Both cheques were dishonoured on presentation. Undeterred Mr Lynch paid $250,000 on 22 September 2005 for the blue Mercedes Benz.  Three weeks later Mr Seymour told him another customer wished to buy that car and Mr Lynch left it with the Company for sale on consignment.  In fact Mr and Mrs Scholz gave the car to some friends of theirs who had some unrelated claim against the Company.  Mr Lynch lost his car and his money.  To show there was no hard feelings Mr Lynch then bought a Lamborghini from the Company for $400,000.  A term of the purchase contract was that the Company would discharge a hypothecation in favour of a finance company over the Lamborghini in the sum of $260,000.  Needless to say, it did not do so.  With mystifying patience Mr Lynch agreed to be part of another transaction of Byzantine complexity the essence of which was that he would lend $240,000 to the Company to allow it to buy a Porsche for another customer.  His recompense was to be $70,000 and a different Porsche worth $170,000.  Again it is needless to say that Mr Lynch saw neither money nor car.  The loan, which he made on 8 October 2005 remains unpaid.  Mr Lynch’s claims, for $270,000, $250,000, $260,000 and $240,000 are amply proved by the documents in Exhibit 5 and Mr Seymour’s evidence.  The amount of the debt is $1,020,000, not $1,160,000 as claimed.

111. The claim in respect of Mr Warr is again bizarre but seems established by the evidence. On 2 August and 10 August 2005 respectively Mr Warr sent by telegraphic transfer to the Company the sums of $150,000 and $141,870. They were to buy a Porsche and Mercedes Benz. Neither car was delivered and no monies were repaid. On the same principles as I have discussed already the monies are repayable on the common money count on a total failure of consideration giving rise to a liquidated demand.

112. There is a claim for “employment entitlements”, including Mr Seymour’s in the sum of $49,943.074. The plaintiff has provided no particulars at all of this claim which cannot, therefore, be allowed. I will give her leave to adduce further evidence to support it, if she can, if she decides to accept the chance to reopen her case. This is a claim which, in respect of Mr Seymour, should be scrutinised carefully.

113. There is also a claim made in respect of a proof of debt lodged by the defendants. The plaintiff claims the sum of $705,000 but the proof of debt is for a much larger sum. The defendants no longer wish to press the claim for understandable reasons. They will recover less by way of dividend than the amount they would be required to pay by the judgment. The liquidator opposes their withdrawal of their proof of debt. After much vacillation and indecision the defendants forgave the debt by deed dated 30 August 2007. By another deed of the same date the defendants withdrew their proof of debt and promised not to re-submit it.

114. The second deed is, I think, ineffective. A creditor who has submitted a proof of debt may only withdraw it with the liquidator’s consent. Regulation 5.6.56 of the Corporations Regulations 2001.  The plaintiff liquidator adamantly refuses her consent. 

115. The other deed is, I think, effective. It purports to be made between the defendants, the plaintiff and the Company but it is only executed by the defendants. Nevertheless by its terms they unconditionally and irrevocably forgive and release the Company and the liquidator all debts owed to them by the Company including those identified in their proof of debt. The release does not need the assent of the releasee to be effective. It is the unilateral act of the creditor and the deed is unequivocal in its terms. It extinguishes the debts and discharges the Company from all liability to pay them.

116. The plaintiff complains the defendants should not be allowed to defeat her claim by this stratagem. Her counsel argues that s 588M will still be satisfied despite the defendants’ release in favour of the Company and the liquidator. She submits that requirements (a), (c) and (d) of s 588M(1) are made out. Requirement (b) is that a creditor to whom a debt is owed has suffered loss or damage in relation to the debt because of the Company’s insolvency. The argument is:

“Whether the debt is forgiven or not, the creditor has still ‘suffered loss’ or damage.  That is so is not by reason of the debt being incurred … in the first place, then by reason of the … fact that the creditor has forgiven it.”

Then it is pointed out that the provisions of Part 5.7B of the Act have a purpose beyond merely allowing a liquidator to recover amounts for the benefit of unsecured creditors.  Reference is made to Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651.  That case refers to the benefit of having the affairs of an insolvent company properly investigated and administered in an orderly fashion according to the law.

117. Accepting all of this, it is my opinion that on the execution of the deed of release and forgiveness the debts owed by the Company to the defendants were extinguished. By reason of the deed there was no debt, and therefore no creditor “to whom the debt is owed”. Moreover the former creditor who released the debt cannot be said to have suffered loss or damage in relation to the debt because of the Company’s insolvency.  If the creditor’s financial position deteriorates it is not because of the Company’s insolvency but because the creditor gave up its right to be paid. 

118. I conclude that s 588M does not apply to the debt which the defendants have released and the plaintiff may not recover an equivalent amount from the defendants pursuant to that section.

119. If this be wrong I would exercise the power under s 1318 to relieve the defendants from liability to pay the amount of $705,000 which the liquidator asserts is the debt owed them by the Company. The circumstances are such that the defendants ought fairly to be excused from paying that amount. The debt arises because the defendants paid substantial amounts of money on the Company’s behalf. $600,000 was paid to SGB prior to the appointment of receivers to reduce the Company’s indebtedness to that bank. The money was due pursuant to the bailment agreement but the Company had not paid it. A further $50,000 was paid to Renault as a deposit for the acquisition of the franchise. Again the debt was the Company’s which the defendants discharged on its behalf. The balance of $50,000 is said to be in the same category though the evidence is not explicit about that. There would be, I think, an element of unfairness in requiring the defendants to pay the liquidator an amount referable to amounts they have already paid on the Company’s behalf and for its benefit. It is not fair they should pay a second time when the Company has already had the benefit of their intervention on its behalf.

120. Accordingly I disallow item 57 from Schedule F.

121. The plaintiff has made out a case for judgment against the defendants in the sum of $3,306,032.81. I will not give judgment now but adjourn the proceedings to allow the plaintiff an opportunity to adduce further evidence on the claims not sufficiently proved. If that course is to be followed directions will be necessary for the quick resolution of the outstanding questions.

Further Reasons

122. On 21 September 2007 I published reasons and gave the plaintiff leave to reopen her case and to produce additional evidence in support of the claims that had not been proved. The plaintiff has taken advantage of that leave and produced a further bundle of documents in support of the five claims that had been insufficiently supported by evidence. The defendants have commendably acquiesced in this course and the documents have been admitted into evidence by consent. As well the parties have produced a joint submission accepting the further claims, with some reductions and one objection.

123. Item 8 in Schedule F was a claim by the Australian Taxation Office for $71,509.96. The plaintiff has now proved a debt to the Australian Taxation Office in a greater amount but the defendants admit the debt claimed in Schedule F, $71,509.96, and the plaintiff seeks no more.

124. I pointed out that item 20 in the schedule, a debt of $10,770 to East Coast Mobile Safety Certificates had not been proved. Only the sum of $3,850 had been proved. This is now accepted by the plaintiff as the correct figure and the balance of $6,920 is given up.

125. I also pointed out that item 31, a debt owed to Mr Gregory Sands identified the wrong creditor. The debt which the company incurred was owed to Lara Glen Pty Ltd.  The defendants agree that the amendment should be made.

126. The next item to consider is item 34, a claim on behalf of Jax Tyres Brakes & Suspensions. No proof was offered in support of this claim but it is now admitted that the company incurred a debt to that creditor in the sum of $9,070.33.

127. Lastly there was a claim brought on behalf of Mr Seymour by way of employee’s entitlements. It is accepted that the company’s records establish that on termination of his employment on 20 October 2005 the company owed Mr Seymour $18,512.46 by way of unpaid annual leave; $13,846.40 by way of salary in lieu of notice pursuant to clause 16 of his employment contract; $13,846.40 by way of redundancy entitlements and $3,738.48 by way of unpaid superannuation contributions. The total is the amount claimed, $49,943.74.

128. The defendants object to this claim. They point out that Mr Seymour was as much a party to the contraventions of s 588M of the Act as they were. Indeed he was more directly involved in the company’s egregious efforts to raise money from its customers. He, as much as the defendants, must have had a keen appreciation of the company’s financial predicament. He must have known it was insolvent.

129. These facts are, however, no answer to the statutory cause of action. The defendants were directors of the company when it incurred the debt to Mr Seymour and, at the time, they knew or had reason to suspect that the company was insolvent.

130. It was the defendants who acted to terminate Mr Seymour’s contract of employment thereby exposing the company to a liability to pay him salary in lieu of notice and redundancy entitlements. They could have acted earlier to appoint an administrator or liquidator. Moreover there is no doubt that Mr Seymour worked energetically, if unsuccessfully, for the company. There is no legal basis for denying him the amounts due under his contract of employment. Accordingly this claim should be allowed.

131. Several versions of Schedule F were put before the court. It is said that the one which is reproduced in paragraph 95 of these reasons was not the definitive one. I have accordingly amended the schedule in that paragraph to accord with the final form of Schedule F. With these corrections and with the further items of claim which have now been proved, the plaintiff has made out an entitlement to judgment against the defendants in a sum of $3,101,145.78. There will be judgment for the plaintiff against the defendants in that sum.

132. I further award interest on that amount against the defendants at a rate of seven percent, to be calculated from the period beginning on the date of the winding up of the Company and ending on the date of final judgement.