JUDGMENT No. snd Stool 1%. CATCHWORDS TRADE PRACTICES - misleading or deceptive conduct - representations relating to solvency of company and ability to pay debts. CORPORATIONS - directors' liability - insolvent trading - whether there were reasonable grounds for director to expect that the company would not be able to pay all its debts as and when they became due - defence under s 592(2)(b) - whether absence of reasonable cause for expectation. CORPORATIONS - management and administration - insolvent trading - resignation of director - liability for debts incurred - whether involved in management of company at time debt incurred. Trade Practices Act 1974, s 52 Fair Trading Act 1987 (NSW) s 42 Corporations Law, s 592 Holpitt Pty Lid v Swaab (1992) 33 FCR 474 w_ Wi e td : td_v_Basele: (1994) 122 ALR 531 wW icultural Traders P imited v_ J s Adams and Graha Richard Catto No. NG 87 of 1992 Coram: Whitlam J Place: Sydney RECEIVED Date: 3 November 1994 -9 NOV 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY IN THE FEDERAL COURT OF AUSTRALIA ) W. W. STR 3 NG 87 of 1992 ) GENERAL DIVISION ) NEW ENGLAND AGRICULTURAL TRADERS PTY LIMITED Applicant JOHN THOMAS ADAMS First Respondent GRAHAM RICHARD CATTO Second Respondent Coram: Whitlam J Place: Sydney Date: 3 November 1994 RE S FOR JUDG The applicant, New England Agriculture Traders Pty Ltd ("NEAT"), 1s a grain trader. The respondents, Mr John Adams and Mr Graham Catto, were respectively a director and the accountant of a company called Alfla & Co Pty Ltd ("Alfla"). Alfla operated a cattle feedlot at a property "Birralee" outside the town of Merriwa. Between May and September 1991 NEAT sold large quantities of grain to Alfla, which failed to pay $210,807.12 of the price of such grain, On 20 December 1991 a winding-up order was made against Alfla. In this proceeding NEAT seeks to recover the unpaid amount from Mr Adams and Mr Catto on the basis that each of them was 2. involved in contraventions of s 52 of the Trade Practices Act 1974 and contravened s 42 of the Fair Trading Act 1987 (NSW) and s 592 (1) of the Corporations Law. The allegations of misleading and deceptive conduct arse out of what was said, or left unsaid, in a series of conversations that a director of NEAT, Mr Peter Howard, had with Mr Adams and Mr Catto. NEAT and Alfla had had no previous dealings prior to the first of these conversations. Mr Howard had been told that Mr Adams was a feedlot operator "in the market for considerable tonnages of grain." On or about 11 April 1991 he initiated the first contact by telephoning Mr Adams. Mr Howard deposed to a conversation in the following terms: "HOWARD: "I understand you are a feedlot operator and are in the market to buy grain." HOWARD: "Well maybe we can talk some prices and I will give you an idea of what grain NEAT may have available." ADAMS: "OK." HOWARD: "If we sold you any grain, what name do you trade under?" ADAMS: "It will be in the name of my company Alfla & Co Pty Limited." WARD: "I see. What is Alfla and what it its structure? If you are looking to purchase on credit then we will need to know what your company consists of, in other words, what are its assets and liabilities?" ADAMS: "Well, Alfla owns the property "Birralee". It is a substantial property of about 2,000 acres. We have 3. purchased grain in the area for a long time as well." HOWARD: "Do you own your own cattle in the feedlot?" ADAMS: "No. The cattle are all custom fed which means there are no risks in the business. It does not matter if cattle prices fall as the owners absorb that risk. We just get paid for feeding them." HOWARD: "What about the financial position?" ADAMS: "We've got a very strong cash flow and there would be no worries about you being paid." HOWARD: "You know our contractual terms and conditions are 30 days from the end of the week of delivery?" ADAMS: "Yes, there would be no wornes about meeting your terms." A general discussion then ensued about the market and what parcels of grain might be available including a parcel of up to 4,000 tonnes of corn." This account was not contradicted by Mr Adams. Following this conversation Mr Howard faxed to Mr Adams a copy of the corn standards of the Grain and Feed Trade Association of New South Wales together with the Association's conditions and rules. By letter dated 11 April 1991 Alfla faxed to NEAT an offer to purchase 4,000 tonnes of corn. Mr Howard further deposed: "On 13 April 1991 I had a telephone conversation with John Adams during which words to the following effect were said: HOWARD: "I got your offer for the corn but the price of $114.00 per tonne is too low, we just can't make it work. However, I've got a small parcel of barley if you are ADAMS: HOWARD: ADAMS: HOWARD: ADAMS: HOWARD: ADAMS: HOWARD: 4. interested, We've got 150 tonnes of barley at $110.00 per tonne ex-farm Boggabri." "Well, I am definitely interested in that." "Tell me again about Alfla will you. Do you own the property "Birralee"?" "Yes." "How many cattle have you got on the feed lot." "About 4,000." "Are you sure you will be able to meet our payment terms of 30 days from the end of the week of delivery?" "Yes. t "Well look, have a think about the barley and get back to me if you are interested." On 15 April 1991 I had a telephone conversation with John Adams during which words to the following effect were said: HOWARD: ADAMS: HOWARD: ADAMS: HOWARD: "Look. it's just not possible to get the corn at the moment. But are you still interested in the barley?" "Yes. " "OK, I offer you firm 150 tonnes of barley at $100 per tonne ex farm and as per our previously discussed payment terms and conditions. Thanks Peter, I accept your offer." "Good. I'll send a confirmation of sale. Again, you know the payment details are 30 days from the end of the week of delivery?" "Yes." Mr Adam's only quibble with this account was that he did not recollect the last sentence attributed to Mr Howard in the conversation of 15 April 1991. 5. After further discussion between the two, on 9 May 1991 NEAT sold 150 tonnes of sorghum to Alfla. The barley deliveries commenced on 10 May 1991 and the sorghum deliveries on 13 May 1991. The first invoices were raised on 20 May 1991 with the first payment for the barley due on 10 June 1991 and the first payment for sorghum due on 17 June 1991. On 23 May 1991 NEAT sold a further 350 tonnes of sorghum to Alfla. By 28 May 1991 no payments had been received. On that day Mr Howard and Mr Adams had another telephone conversation. Mr Howard deposed to its terms as follows: "HOWARD: "Hello John, just a call to keep you in touch with the market. We have a seller of a large tonnage of wheat in the Nyngan area. There is 1,000 tonnes at about $132.00 per tonne. Are you interested?" ADAMS: "Yes. I'll take it." HOWARD: "John, this is potentially a large trade and it comes on top of the three earlier purchases you have made with us which means you have got credit sales with us of over $75,000.00. As you can see our exposure has increased and if we agree to provide you with the 1,000 tonnes of wheat it will be even greater. It's very important that we know exactly what's going on with Alfla. We need confirmation about the property you Say it owns and the profitability. We need to know the net asset position and what equity the company has." ADAMS: "Look, there's absolutely no need to worry although I can understand why you are concerned. My accountant is actually with me at the moment but he is busy and he can't come to the phone. His name in Graham Catto and he's been our accountant for a long while. I'll give you his telephone number and you can ring him later. He will confirm everything I've said about the company. He will confirm that it owns "Birralee', that it is a very valuable property, that the company is profitable, that the business is solid and that the feedlot 6. is full. We've got excellent clients and the money is coming in. It's a viable business and we have the capacity to pay." HOWARD: "Alright, I agree to sell you the 1,000 tonnes of wheat provided your accountant can confirm what you've said and satisfies us about the assets, the net equity and profitability of Alfta." ADAMS: "OK, that will be fine. I'm sure you'll have no worries once you have talked to Graham." This account was substantially corroborated by Mr Sniekers, another director of NEAT, who was listening to the conversation on a speaker phone in the same office as Mr Howard. However, the account was contradicted in some respects by Mr Adams. One such matter is curious, but I think ultimately unmmportant. Mr Adams denied saying that Mr Catto was with him. Mr Adams was at "Birralee", and he demed that Mr Catto was there. Mr Catto also denied being at "Birralee" on 28 May 1991. There is, in any event, no suggestion that Mr Catto overheard the conversation between Mr Howard and Mr Adams and, if (as seems likely) Mr Howard and Mr Sniekers were confused about whatever was said about where Mr Catto was, nothing turns on it. In his affidavit Mr Adams had been astute to deny that he had said Mr Catto would confirm anything. In cross-examination, he accepted that Mr Howard had required confirmation about the ownership of the "Birralee" and profitability of Alfla. Mr Adams' evidence was confused as to whether Mr Howard had wanted to know the net asset position. He allowed that he was not sure about this. Mr Adams said that he volunteered that he would get Mr Catto to send Mr Howard a copy of Alfla's balance 7. sheet. This fact, which Mr Howard confirmed, suggests to me that the subject of net assets and equity was mentioned. Mr Adams agreed that he had also volunteered Mr Catto's telephone number, and at the end of a thorough, but very fair, cross-examination he appeared to agree that he had in fact told Mr Howard that Mr Catto would confirm the various items which Mr Howard recounted. To the extent that any of the occasionally confusing answers given by Mr Adams suggest a different version of the conversation, I reject his evidence and accept that the substance of the conversation was as deposed to by Mr Howard. I am conscious that Mr Adams was appearing for himself and may not have appreciated the opportunity to confront Mr Howard in cross- examination with his own version of the conversation. However, it was quite apparent that Mr Adams had no coherent version which he could propound. Notwithstanding the qualified tone of what Mr Howard said to Mr Adams at the end of their conversation on 28 May 1991, NEAT sent to Alfla a note dated that same day confirming the sale of 1,000 tonnes of wheat. Mr Howard said that on 29 May 1991 he telephoned Mr Catto at the tatter's office in Port Macquarie. He deposed to the following conversation: "HOWARD: "Hello Graham, it's Peter Howard from New England Agricultural Traders calling." CATTO: "Yes, I know who you are. John Adams has told me you've been supplying grain to Alfla." HOWARD: I'm ringing because now that we're considering doing larger transactions with Alfla, our exposure has grown and we need to know the exact financial structure and position of Alfla. John Adams has told me he has given you permission to provide us with this information about Alfla. You are aware of that aren't you?" HOWARD: HOWARD: HOWARD: HOWARD: HOWARD: "Yes, " "One of the most important things we've been told is that Alfla owns a property called "Birralee", is that right?" "Yes. tt "Well is that the major asset of Alfla?" "Yes, there are other assets however such as trucks, plant etc but "Birralee" is the major asset." "I suppose more importantly does Alfla have a significant asset position?" "Oh yes, most definitely." "So if you looked at the liabilities are there still significant nett assets? Is there a significant equity in the property?" "Ves, " "In other words if John Adams or Alfla got into any financial difficulties or troubles the property would form the major underlying asset. "Yes. t "Am I right in thinking John would be very reluctant to sell the property as it is the backbone of the business?" "Yes of course. He is a farmer and as you know farmers are very loathe to part with their properties." "Yes I know about that. Good. Look can you send me the balance sheet of Alfla so we can confirm this?" "Yes, t "What else can you tell me about Alfla. Is it solvent and trading profitability?" "Yes. Alfla has a large cash flow and is a solid business. John Adams has been in the feedlot business for a long time. He is a salt of the earth type of individual. Your are vital to his business and you will 9. be looked after accordingly. I know that." HOWARD: "So you're telling me Alfla's got the capacity to pay for the grain we are supplying?" CATTO: "Yes, Alfla's trading profitably and will have no difficulty in meeting your payment terms." HOWARD: "Well then what financial statements are available that you can send us?" CATTO: "I've only got the financial statements to June 1990 but they reflect the current position of Alfla. There has been no significant change." HOWARD: "Good. When can you send these financial statements to us?" CATToO: "Well look, I'm busy at the moment but probably in the next two or three days. HOWARD: "Great. Thanks very much for your help." Mr Sniekers said that he also listened to this telephone conversation on the speaker phone. Again he substantially corroborated Mr Howard's recollection of what was said. (During his cross-examunation, Mr Sniekers said, in answer to a question from Mr Adams, that Mr Catto had also said that "Alfla could meet its debts as and when they fell due." However, he later said, in answer to a question from Mr Catto, that he did not "recall exactly" such a comment, but "we were told that we'd be looked after.") Mr Catto denied that his first conversation with Mr Howard took place on 29 May 1991. He said that it was on 18 or 19 June 1991. Mr Catto fixed on these dates because he said that he was at Merriw. when he first spoke to Mr Howard. He said that Mr Adams handed him the phone. Mr Catto said he was not at Merriwa in May 1991. However, Mr Catto's version 1s not supported by Mr Adams. The other reason Mr Catto 10. advanced for saying that the conversation took place on 18 or 19 June 1991 is a diary entry for 20 June 1991 reminding him to send a balance sheet to Mr Howard together with NEAT's fax number. I reyect Mr Catto's evidence about the date of his first telephone conversation with Mr Howard. It appears that he has reconstructed the date by reference to what I find to be a false premise, namely that he took Mr Howard's call at Merriwa. I accept that Mr Howard telephoned Mr Catto at Port Macquarie. Mr Adams said that, after his conversation with Mr Howard on 28 May 1991, he telephoned Mr Catto to tell him that Alfla was purchasing grain from NEAT and that he should expect a call from Mr Howard. Further, I accept the evidence of Mr Howard and Mr Sniekers that the telephone conversation with Mr Catto took place the next day on 29 May 1991. Mr Howard had no reason to delay and he was obviously concerned about NEAT's greatly increased exposure. Mr Catto gave a different version of his conversation with Mr Howard. He recollected their first discussion this way: "HOWARD: "Would you be able to let me have the financial statements" CATTO: "Only 1990 financial statements are available, will they do." HOWARD: "Yes, that will be OK. How is the company going." CATTO: "Reasonably, there's about 3000 head in the feedlot and the Marubeni contract is looking good." WARD: "Is a profit being made". 11. CATTO: "I feel a small profit will be made for the year." HOWARD: "What type of person is Adams" CATTO: 'John has been in business since leaving school, has experienced good times and bad times in the past but has always proved to be very capable getting through during those bad times. HOWARD: "Does Alfla own the property "Birralee" ". HOWARD: "What is the size and type of land of 'Birralee™. CATTIO: "About 1800 acres in all, with the exception of the 5 to 10 acres the feedlot is on, arable." HOWARD: "Would there be any problems getting paid for the grain". CATTO: "I would imagine not". HOWARD: "I would imagine Adams would look after his grain suppliers anyway." CATTOQ: "Yes - he realises that without grain he would have no income.". To the extent that Mr Howard deposed to other matters being discussed, Mr Catto "categorically" demed them. However, in cross-examination, the following exchange took place: "Mr Howard asked you whether Alfla had a significant asset position, did he not?---That is not correct. He asked you whether you had significant net asset position, did he not?--- That is not correct. He said to you that if John Adams or Alfla got into any financial difficulties or troubles the property would form the major underlying asset did not he?--- There was a possibility that there was a- - - 12. That is what he said to you did not he?---No, I can't recall that offhand. He said something like that did not he?---He may have said something along that line. You did not disclose to Mr Howard in that conversation that there was no equity in the property Birralee did you?---No, I did not. That was the truth of the matter was not it? There was going to be nothing left for unsecured creditors out of Birralee if the company went into liquidation?---That would be correct." And, in his cross-examination, Mr Catto did agree that by this conversation he knew Mr Howard was keen to know whether NEAT was likely to be paid. Mr Catto did not, in fact, send anything to Mr Howard until 17 July 1991, when he faxed to him a copy of Alfla's accounts as at 30 June 1990. Mr Howard said that he had made a number of "reminder calis" to Mr Catto asking for Alfla's financial statements. Mr Catto can only remember one such call on 15 July 1991. I do not think that it matters how many such calls there were, although Mr Catto's diary entry for 20 June 1991 (which I have found to be some three weeks after his initial telephone conversation with Mr Howard) suggests that there may have been a prompt earlier than 15 July 1991. In the meantime, Mr Howard had continued to deal with Mr Adams, who placed a number of grain orders. On 31 May 1991 NEAT sold Alfla a further 250 tonnes of sorghum. The first payments from Alfla to NEAT, being those due under the initial barley contract, were received on 20 June 1991. On that day NEAT also sold Aifla 600 tonnes of corn worth approximately $90,000. During the rest of June and early July 1991 deliveries of sorghum took place and payments due for past deliveries of barley and sorghum were made fairly promptly. On 10 July 1991 the sale of a further 100 tonnes of corn was agreed. After he received Alfla's accounts, Mr Howard telephoned Mr Catto on 17 July 13. 1991. Mr Howard deposed to the following conversation: HOWARD: HOWARD: The two sums referred to were contained in notes (4) and (5) to the accounts. Note (4) dealt with "Current habilities Creditors & borrowings", and note (5) with "Non- current liabilities Creditors & borrowings." Note (4) showed moneys owing on a bank overdraft, but each note recorded nothing owing for 1990 and the previous year in "You have sent me the balance sheet but I want to discuss the liability section. It is not quite clear from the page I have in front of me. I would like to know firstly whether the loans on page 6 in the amount of $413,219.00, are loans from John Adams or his interests to Alfla? I presume that John Adams originally owned the property and sold it to Alfla." "Yes it is a long story but that is correct." "I assume that the figure of $785,233.00 in the non current liabilities is also a loan to John Adams or his interests and explicable in the same manner." "Yes that is correct." "Is the company still trading profitability given that this was prepared on 30 June 1990 and does it reflect the current situation." "To my knowledge the company is trading profitability [sic] and the June 1990 balance sheet represents the current situation." respect of an item "Bank loan." 14, Mr Catto denied that in his conversation with Mr Howard on 17 July 1991 there was any reference to specific dollar amounts or to Mr Adams "originally owning the property". He said that Mr Howard did ask, in relation to the item "Loans-other" (which was next to the figure $758,233), "Are these shareholder loans?", and that he replied: "The majority, yes." Mr Catto denied that there was any conversation to the effect of the last question and answer deposed to by Mr Howard. In paragraph 10 of its statement of claim, NEAT alleged that in his conversations of 11 and 13 April and 28 May 1991 Mr Adams represented: "a. That Alfla was able to pay its debts as and when they fell due. b. That Alfla had been paying its debts as and when they fell due c. That Alfla was trading profitably d. That Alfla had traded profitably in the past e. That the property Birralee formed part of the assets of Alfla f That the property Birralee was a valuable property being of 1800 acres and incorporating a 3000 head feed lot capacity g That there would be no trouble in Alfla meeting its debts to the Applicant for the grain supplied h. That the company's accountant Mr Catto could confirm the financial position of the company. In his defence Mr Adams admitted that he made a representation that "he had reasonable cause to expect" that Alfla was able to pay its debts as and when they became due and that he made the representations alleged in paragraphs (b)-(e) above. He denied making the representations alleged in paragraphs (g)-(h) above. However, in view 15. of my findings about the content of the conversations, I am satisfied that these two representations were conveyed. The alleged misrepresentations involving Mr Catto are contained in paragraphs 11 and 13 of the statement of claim. By his two conversations with Mr Howard, he was alleged to have represented: "a. That Alfla was able to pay its debts as and when they fell due b That Alfla had in the past paid its debts as and when they fell due c. That Alfla was trading profitably a. That Alfla in the past had traded profitably @ That the Applicant would have no problems in getting paid by Alfla and/or Adams f That as a supplier of grain the Applicant was vital to the successful operation of Alfla's business and the debts to it would be looked after accordingly That the latest completed financial information available in respect of Alfia was the 1990 financial statements but that these also accurately reflected the financial position of Alfla as at 30 June 1991 Q9 h. That Alfla had significant net assets. In the second conversation, Catto was alleged to have 'a. Repeated the representations [referred to above] b. Represented that the loans showing in the company's 1990 accounts involved an indebtedness of Alfla to Adams and his family which indebtedness would not be called upon ahead of and [sic] indebtedness to the Applicant" 16. In his defence Mr Catto denied that the alleged representations were conveyed in his conversations with Mr Howard. It will be necessary, therefore, first to determine what was actually said. I have set out the way in which each of Mr Howard and Mr Catto recollects their conversations, and it will be seen that the topics overlap. However, to the extent that they differ, I accept Mr Howard's account and reject the evidence of Mr Catto. I have no doubt that Mr Howard was specifically reassured about Alfla's significant net asset position. The discussion about "Burralee" would otherwise not seem to make such sense. I gained the clear impression from Mr Howard that, had he been confronted with the kind of qualified expressions that Mr Catto said that he employed such as "a small profit" and particularly "I would imagine not" (as to the prospects of being paid), he would not have been satisfied and would have sought more information. In paragraph 12 of the statement of claim it was alleged that various facts had not been disclosed on behalf of Alfla or by Mr Adams and Mr Catto in the above conversations. One category of such facts involved Mr Catto's relationship with various companies. Mr Catto was a shareholder in a company called Darnmort Pty Ltd, which owned half of the shares in Alfla. Mr Catto was also the accountant of Mr Adams and two other companies, Collaroy Cassilis Pty Ltd ("Collaroy") and Fibuga Pty Ltd ("Fibuga""), of both of which he was the secretary. Collaroy and Fibuga each held fixed and floating charges over the assets and undertaking of Alfla. The other category of facts involved the position of trade creditors who, it was alleged, had not been paid moneys due to them in accordance with their usual trade terms. The failure to disclose these matters was also said to amount to misleading and deceptive conduct. 17. Counsel for NEAT had opened his client's case by characterizing the pleaded representations as part and parcel of the same overall representation that Alfla was a viable, solvent company able to pay its debts. In his closing address counsel submitted that, so far as the representations alleged against Mr Catto were concerned, one should not dwell on the precise way each was framed but on the overall impression of solvency and ability to pay its debts that was given on behalf of Alfla. I think that this 1s a commonsense approach. Having regard to my findings about the terms of the various conversations, the meaning urged by counsel emerges naturally. On any view of the evidence, Alfla was insolvent on the relevant dates in April, May and July 1991. This is not seriously in dispute. Alfla had not been paying its debts as they fell due and was not able to do so. Mr Adams agreed as much under cross- examination. The evidence of Mr P.C. Hicks, Alfla's liquidator, made clear that there was a deficiency in shareholders' equity. In his evidence Mr Catto seemed concerned only to make the point that he did not know of the serious situation with trade creditors until late July 1991. Mr A.J. Coates, an accountant called by the respondents, opined that Alfla's solvency was only apparent in hindsight. Be that as it may, the overall impression conveyed on each occasion by Mr Adams and Mr Catto was misleading or deceptive or likely to mislead or deceive. Further, each of the respondents was involved in the contraventions by Alfla, since they were the very authors of the proscribed conduct. The respondents contend, however, that NEAT did not rely on the several conversations, that 1s, that their conduct did not cause any loss or damage. Contrary to 18. the submission of Mr Adams, there was no evidence of any other credit checks on Alfla bemg made on behalf of NEAT. Each of Mr Sniekers and Mr Howard explained quite credibly why NEAT would allow credit to a rural landholder who was the consumer of grain purchased. They had no reason to doubt what I have found that Mr Howard was told by Mr Adams and Mr Catto. Mr Catto submits that NEAT was contractually bound to deliver much of the grain before he spoke to Mr Howard. It should be noted that NEAT's terms of sale provided that there was deemed to be a separate contract in respect of each consignment of grain delivered. In the absence of assurances such as were given, further deliveries would have been an unthinkable commercial nsk. In this way NEAT was induced to make the deliveries for which it was not paid. The assurances given by Mr Catto in May and July 1991 reinforced those given by Mr Adams and operated by their own terms to induce further deliveries by NEAT. Nor was there any reason why NEAT should delay deliveries after 29 May 1991 pending receipt of the promised financial statements, Mr Catto's first conversation would not have aroused any caution. Mr Catto submits that the balance sheet that he sent to NEAT on 17 July 1991 did show a shortage of working capital, but this overlooks entirely the effect of his oral assurances. Deliveries were made after 1 September 1991 when payments due on earlier deliveries were in arrears, but there is no suggestion that NEAT's directors knew at this stage about Alfla's hopeless insolvency (which was then obvious to Mr Catto). Indeed, Mr Sniekers gave a satisfactory and sensible explanation about why he permitted further deliveries in the light of excuses that were given to him for the late payment. I am quite satisfied that none of the deliveries for which Alfla failed to pay would have been made, if the assurances about its financial health and commercial standing had not been given by Mr Adams and Mr Catto on its behalf. It follows that the causes of action under the ar 19. Trade Practices Act and the Fair Trading Act are made out. ] turn now to the causes of action based upon s 592 of the Corporation Law ("the Law"). Section 592 has been superseded by the more detailed provisions in Pt 5.7B of the Law, which commenced on 23 June 1993. However, in this case an order for the winding-up of Alfla was made on 20 December 1991 and thus, by virtue of s 1384(1) of the Law, s 592 in its original form continues to apply to the events in question. The requirements of s 592 have been recently explained by Gummow J in Re New World Alliance Pty Ltd (Rec and Mgr Apptd): Sycotex Pty Ltd v. Baseler (1994) 122 ALR 531 at 538-540. In the present case, where a number of debts are the subject of the proceeding, s 592(1)(b) requires consideration of the circumstances existing before the incurring of each debt. The debts remaining unpaid were incurred following grain deliveries made between 11 July 1991 and 23 September 1991. Since it is unarguable that the financial position of Alfla deteriorated between those dates, the relevant question for the purposes of s 592(1)(b) may be conveniently posed as whether as at 11 July 1991 there were reasonable grounds for a director or manager of ordinary competence to expect that Alfla would not be able to pay all its debts as and when they became due. This involves an objective test. Mr Adams had been a director of Alfla since its incorporation im the early 1970s. He conducted the day-to-day running of its business, and he placed the relevant grain orders with NEAT, and he arranged for the collection of the grain. 20. Mr Catto had been a director and the secretary of Alfla from 23 April 1982 until 23 November 1990, when he resigned these offices. Mr Catto provided his services as accountant to Alfla through a company, Loyola Holdings Pty Ltd. He did not provide services to the public. He worked only for Alfla, Mr Adams, Collaroy, Fibuga and a Mr Blewitt. The others ali had commercial relationships with Alfla. Mr Catto provided bookkeeping services to Alfla. On 4 July 1991 Mr Catto sent a "brief on Alfla" to the well-known Japanese trading house, Marubeni. In a section entitled "Staff", he stated: "Finance and administration is controlled by Graham Catto who has been associated with the company for seventeen years." On 7 November 1990, whilst he was still a director of Alfla, Mr Catto wrote as secretary of Collaroy to its solicitors. The letter was concerned with Collaroy's exposure in respect of loan advances to Alfla and Mr Adams and guarantees of their borrowings. In the letter Mr Catto stated: "It 1s believed there is a good possibility that Alfla & Co Pty Ltd is not, or will not in the near future, be able to pay its debts." To the extent that this statement contained any element of prophecy it was soon fulfilled, as must have been evident to Mr Catto from his dealings with Alfla's banks and principal trade creditor. In any event, Mr Adams said that Mr Catto told him, if he was going to continue working for Alfla, it would be better if he resigned as a director. By July 1991 the material available to both Mr Adams and Mr Catto showed that there were reasonable grounds to expect that Alfia would be unable to pay its debts. This would have been obvious since November 1990 when Mr Catto resigned his directorship. Equipment leases with the Commonwealth Development bank were in 21. arrears. Payments of principal and interest had not been made on a farm loan by the Commonwealth Bank's Tamworth branch to Mr Adams, the proceeds of which had been on-lent to Alfla and in respect of which Alfla had given a mortgage over Birralee. In February 1991 Mr Catto had re-arranged the securities given by Alfla to Collaroy and Fibuga in order to improve the position of these two compamies, and he had arranged for Collaroy and Mr Blewitt to have their debts paid whilst trade creditors remained unpaid. Numerous trade creditors were pressing for payment unsuccessfully throughout this period. The situation had reached such a parlous situation with the banks that an officer of the Commonwealth Development Bank noted on 27 May 1991 that he had told Mr Catto that he did not want part payments of arrears on the equipment leases to be made by penodical payments through the Commonwealth Bank at Tamworth, because "I am concerned that if funds go through CBA Tamworth they will 'snaffle' it." The evidence was overwhelming. After a thorough (but no doubt frustrating) cross- examination, counsel for NEAT eventually secured from Mr Catto his grudging acknowledgment of the obvious fact that it was apparent to him (Mr Catto) that Alfla could not pay all its trade creditors in early to mid 1991. Each of Mr Catto and Mr Adams have pleaded the defence in s 592(2)(b) of the Law. But Mr Catto (whom it 1s conceded by NEAT was not a director at the relevant time) also disputes that he "took part in the management of the company, at the time when the debt was incurred", as required by s 592(1). Mr Catto also relies on the defence in s 592(2)(a). The various roles of Mr Adams and Mr Catto may be illustrated by the part each 22. of them played in dealings with Alfla's largest trade creditor, the Grain Sorghum Marketing Board for the State of New South Wales ("the GSMB"). Alfla had been purchasing grain from the GSMB since mid-1990. By the end of that year an amount in excess of $166,000 was due and owing by Alfla to the GSMB. By March 1991 the GSMB was pressing for payment. Mr J.D. Ranken, who was the executive director of the GSMB at the time, gave evidence about his attempts to obtain payment. Mr Adams referred Mr Ranken to Mr Catto. Thereafter Mr Ranken discussed Alfla's financial affairs with Mr Catto. Mr Catto drafted a number of letters to the GSMB, which were signed by Mr Adams on behalf of Alfla and contained various proposals to pay off the debts due. Mr Catto also arranged to send Mr Ranken a summary of Alfla's income, purporting to show its cash flow. Mr Ranken said that he gained the impression Mr Catto was aware of the operations and of what was happening and "knew about numbers." On 28 May 1991 (by which time Mr Adams acknowledged that Alfla had exhausted the goodwill of the GSMB) Mr Catto even faxed Mr Ranken directly to inquire about deliveries outstanding on earlier grain orders. In his evidence Mr Catto initially strove to give the impression that he had had little to do with the GSMB and had not been all that familiar with the debts owing to it. This evidence was quite unconvincing and counsel for NEAT was able to demonstrate by reference to contemporaneous documents that Mr Catto had been well aware of the situation with the GSMB debt at all times after March 1991. There was also evidence of Mr Catto's involvement in proposals for payment put to several smaller creditors, who were also pressing for payment at this trme. Mr Adams, of course, knew of these debts too. Both of the respondents were aware of the material available at July 1991 which indicated that Alfla would not be able to pay all its debts. 23. There was no material personal to either Mr Adams or Mr Catto which could amount to an absence of reasonable cause for expectation as to the inability of the company to pay those debts. The defence under s 592(2)(b) of the Law cannot succeed. This means that the cause of action against Mr Adams under s 592 is established. However, Mr Catto's position is different. He was not a director when the debts were incurred, and it must be shown that he "took part in the management" of Alfla at that time. T have only lightly sketched Mr Catto's involvement. He devoted perhaps a third of his time to the affairs of Alfla and Mr Adams. His activities do not appear to have changed after he resigned as a director. Indeed, the amount of time he spent on Alfla's affairs may have increased. (However, that could not be the test where hability does not fix upon a person qua his or her office as a director.) The fees charged for Mr Catto's services appeared in Alfla's books as "office expenses." Mr Catto had a very intimate involvement with the company. He had set up Alfla's management system pursuant to which information was routinely furnished to his office in Port Macquarie where the bookkeeping was done. Mr Catto's knowledge of Alfla was extensive and perhaps, given his accounting skills, he was at the relevant times in a better position than Mr Adams to perceive the vulnerable position of Alfla. Counsel for NEAT has emphasized Mr Catto's role in the restructuring of Alfla early in 1991 and in a substantial reorganization of assets after September 1991, involving the sale of "Birralee" and the other companies for which he 24. provided services. Without going into these transactions, it may be said that Mr Catto displayed a confident familiarity with the affairs of all the parties, including Alfla. Mr Catto may be more than the outside professional adviser who fell outside the net of s 592(1) in Holpitt Pty Ltd v Swaab (1992) 33 FCR 474. However, as was emphasized in Re New World Alliance by Gummow J (at 547) what is required is that a person have some decision-making role in the company. Notwithstanding what he said in the brief to Marubeni and the confident manner in which he acted for Alfla in dealings with the banks and other creditors, NEAT had not established to my satisfaction that Mr Catto had such a role in Alfla. Mr Catto denied that he took decisions on behalf of Alfla without recourse to Mr Adams. So did Mr Adams. I am not able to draw a contrary inference from the evidence. NEAT, of course, bears the onus of establishing this basis for liability under s 592(1). This conclusion makes it unnecessary to consider Mr Catto's defence under s 592(2)(a). In any event, the loss suffered by NEAT as a result of the respondents' involvement in the conduct contravening s 52 of the Trade Practices Act is the non- payment of the debts for which Mr Adams is also lable under s 592 of the Law. NEAT has claimed interest on the amount of such debts from the dates on which payment was due in accordance with the rates prescribed by Schedule J to the Supreme Court Rules 1970 (NSW). That seems appropriate. Accordingly, there will be judgment for the applicant against the respondents for the sum of $210,807.12 plus interest to be calculated on that basis. The respondents must pay the applicant's costs. 25. I certify that this and the preceding twenty four pages are a true copy of the reasons for judgmeny herein of the Hon. Justice AP. Whitlam Date: 3 November 1994 Counsel for the applicant: D.L. Williams instructed by Ebsworth & Ebsworth The respondents appeared in person. Dates of hearing: 16-18, 28 March and 27-30 June 1994