CATCHWORDS CORPORATIONS LAW - application pursuant to s. 592 Corporations Law for orders rendering first respondent personally liable for a debt incurred by second respondent - whether reasonable grounds to expect second respondent company would not be able to pay all its debts - whether reasonable grounds to expect that if second respondent company incurred the debt it would not be able to pay all its debts as and when they became due. Corporations Law: s. 592 OPAC PTY LIMITED v JONATHAN BRUCE COXHEAD and IDB COMMUNICATIONS PTY LIMITED G 3365 of 1994 LOCKHART J. SYDNEY 11 AUGUST 1995 IN THE FEDERAL COURT OF AUSTRALIA) ) NEW SOUTH WALES DISTRICT REGISTRY) No. G3365 of 1994 ) GENERAL DIVISION ) BETWEEN: OPAC PTY LIMITED Applicant AND: JONATHAN BRUCE COXHEAD First Respondent AND: IDB COMMUNICATIONS PTY LIMITED Second Respondent JUDGE MAKING ORDER: LOCKHART J. WHERE ORDER MADE: SYDNEY DATE ORDER MADE: 11 AUGUST 1995 MINUTE OF ORDER THE COURT DECLARES THAT: 1. Jonathan Bruce Coxhead, a director of BBC Computer and Communication Services Pty Limited, contravened s. 592(1) of the Corporations Law in relation to the incurring by that company of a debt to Opac Pty Limited on or about 5 May 1989 in the sum of $18,205 and that he is liable for the payment of the unpaid portion of that debt, namely, $4,469 to Opac Pty Limited. 2. Jonathan Bruce Coxhead is liable to pay to Opac Pty Limited the sum of $4,469, plus interest pursuant to s. 51A of the Federal Court of Australia Act 1976 in the sum of $2,801.39, a total of $7,270.39. THE COURT ORDERS THAT: 1. Jonathan Bruce Coxhead pay the costs of Opac Pty Limited of this proceeding including reserved costs. 2. Opac Pty Limited pay the costs of IDB Communications Pty Limited of this proceeding. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA) ) NEW SOUTH WALES DISTRICT REGISTRY) No. G3365 of 1994 ) GENERAL DIVISION ) BETWEEN: OPAC PTY LIMITED Applicant AND: JONATHAN BRUCE COXHEAD First Respondent AND: IDB COMMUNICATIONS PTY LIMITED Second Respondent 11 August 1995 REASONS FOR JUDGMENT LOCKHART J. The applicant, Opac Pty Limited (Opac), applies pursuant to s. 592 of the Corporations Law for orders rendering the first respondent, Jonathan Bruce Coxhead, personally liable for a debt incurred by BBC Computers and Communication Services Pty Limited (BBC) in May 1989. The amount for which liability is sought to be attributed to Mr Coxhead is the sum of $4,469 plus interest. Opac also seeks an order for payment to it from IDB Communications Pty Limited (IDB) of the sum of $2,325 plus interest. This second claim may be briefly disposed of. The amended application and amended statement of claim are based upon the premise that the claim by Opac against IDB is pursuant to s. 592, as is the primary claim against Mr Coxhead. The case was conducted by counsel for Mr Coxhead and IDB on this assumption and indeed it was the assumption made by me until the closing stages of the hearing on Friday, 21 July last. Mr Jacob Keness, one of the two directors of Opac and the person primarily in charge of its affairs, was given leave by the Court to represent Opac and he appeared for it without counsel or solicitors. Rather than framing the case as a claim against IDB for recovery of a debt due at common law, the case was erroneously framed throughout on the basis that I have mentioned above; that is, as a s. 592 claim. Accordingly, I propose to dismiss the application in so far as it relates to the claim against IDB. This will not, of course, prevent Opac from recovering the amount claimed from IDB in an appropriate proceeding unless the matter is resolved in the meantime. I turn then to the claim against Mr Coxhead. BBC is a company that was trading in May 1989, though it was deregistered by the Australian Securities Commission (ASC) under s. 574 of the Corporations Law on 10 July 1992 as a defunct company. BBC commenced carrying on business in Sydney about July 1988 and it carried on business until July-August 1990. Between May 1989 and July 1990 BBC purchased equipment relating to satellite receiving systems from Opac. One of the directors of BBC at all material times was the first respondent, Mr Coxhead. He was in fact the Chairman of the board of directors of BBC and involved in the purchasing of equipment from Opac and with its financial affairs. He was both a director of BBC and a person who took part in its management at all relevant times. It is unnecessary to trace the business dealings between Opac and BBC because the relevant transaction with which this case is concerned occurred on 5 May 1989 when BBC purchased from Opac equipment with an invoice value of $18,205. There were prior and subsequent dealings between Opac and IDB. Most of the transactions were for the supply of equipment by Opac to BBC and payment was made in cash on delivery but not at all times. Other payments were made by cheque. I thought at first that Opac's case was based on the amount that remained owing to it from BBC (on a form of running account) but this was not the case and this case was not pressed by Opac. The case for Opac is that the amount claimed from Mr Coxhead is the amount still remaining unpaid on the invoice of 5 May 1989. This is said to be $4,469. I am satisfied on the evidence that that is the amount that is owed by BBC to Opac (I leave aside interest for the moment) and that if there is any entitlement of Opac to recover moneys under s. 592 from Mr Coxhead it is that sum (again ignoring interest). The primary issue in the case is whether Opac has established the necessary ingredients of s. 592(1)(b) of the Corporations Law. Section 592(1), (2) and (4) are in the following terms: "(1)Where: (a) a company has incurred a debt before the commencement of Part 5.7B; (b) immediately before the time when the debt was incurred: (i) there were reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or (ii)there were reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they become due; and (c) the company was, at the time when the debt was incurred, or becomes at a later time, a company to which this section applies; any person who was a director of the company, or took part in the management of the company, at the time when the debt was incurred contravenes this subsection and the company and that person or, if there are 2 or more such persons, those persons are jointly and severally liable for the payment of the debt. (2) In any proceedings against a person under subsection (1), it is a defence if it is proved: (a) that the debt was incurred without the person's express or implied authority or consent; or (b) that at the time when the debt was incurred, the person did not have reasonable cause to expect: (i) that the company would not be able to pay all its debts as and when they became due; or (ii)that, if the company incurred that debt, it would not be able to pay all its debts as and when they became due. ... (4) In proceedings brought under subsection (1) for the recovery of a debt, the liability of a person under that subsection in respect of the debt may be established on the balance of probabilities." Evidence was given by Mr Keness on behalf of Opac and by Mr Coxhead. They both either swore affidavits or signed statements which were verified in the witness box and gave oral evidence. Although Mr Keness appeared for Opac without legal assistance he appeared to me to be well aware of the issues in the case; he conducted it with competence. He understood what it was all about. Mr Coxhead and IDB were represented by solicitors and counsel. In about July or August 1990 BBC ceased to carry on business and IDB carried on the business previously carried on by it. IDB is still carrying on business, though the evidence discloses little about its present affairs. There is a degree of conflict in the evidence between Mr Keness and Mr Coxhead. I observed them both give their evidence and I have assessed their credibility in the light of the contemporaneous documents and the probabilities. Where their evidence conflicts I prefer the evidence of Mr Keness. I am satisfied that immediately before the debt was incurred on 5 May 1989 there were reasonable grounds to expect that BBC would not be able to pay all its debts as and when they became due (s. 592(1)(b)(i)); also that there were reasonable grounds to expect that if BBC incurred the debt it would not be able to pay all its debts as and when they became due (s. 592(1)(b)(ii)); and that BBC was at the time when the debt was incurred a company to which s. 592 applied (s. 592(1)(c)). Indeed, it was not suggested by counsel for the respondents that paragraph (c) had not been established. The issue was as to subparagraphs (i) and (ii) of s. 592(1)(b). Immediately before the time when the debt was incurred BBC was indebted in substantial sums to the two banks with which it had operating accounts, namely, Commonwealth Bank of Australia and the State Bank of New South Wales. Its indebtedness to the former on 5 May 1989 was approximately $29,000 and its indebtedness to the latter at that time was approximately $22,000. The history of the accounts with those two banks is one of indebtedness: so far as the Commonwealth Bank is concerned from the period of at least 3 January 1989 through to January 1992 (this being the period covered by the bank statements); and with the State Bank also a history of indebtedness from February 1989 through to September 1989 (this also being the period provided for in the bank statements). The profit and loss statement of BBC and related documents (exhibit 5) shows that at 30 June 1989 BBC had fixed assets of $3,060 and current assets of $29,965, the bulk of which was work in progress $20,000 and debtors $9,965. Its current liabilities were $76,088.93 which was represented by either loans to the banks or other creditors. BBC had receipts of $110,462.78 as at that date and expenses totalling $153,526.71. It incurred a loss of $43,063.93. Statements were made not infrequently by Mr Coxhead to Mr Keness during the relevant period (Mr Coxhead was the person with whom Mr Keness primarily dealt), that BBC did not have "any funds available to pay", that "hopefully we'll get some work and we can get rid of this particular debt" and "I will pay you soon. I can't give you a cheque right at this moment but you will be paid very soon". But nevertheless it was hoped that Opac would be paid for its debt soon. This is the tenor of the discussions that took place between them from time to time and although none of them was immediately before the incurring of the relevant debt it is permissible in my view to have regard to them and subsequent discussions to determine the true financial position of BBC at the relevant time because the evidence does disclose a history of inability to pay the debt owing from time to time by BBC to Opac. When the invoice relating to the purchase of 5 May 1989 was handed by Mr Keness to Mr Coxhead and Mr Keness requested payment for the goods supplied, as all previous dealings between the parties had been on a COD basis, he expected to receive a cheque that same day; but Mr Coxhead replied: "You will be paid soon". Mr Keness asked when that would be and Mr Coxhead replied: "In a couple of weeks". It is not a case of a company (BBC) carrying on business in a small way, paying its creditors as and when it could, but always with hope of being able to trade itself out of its difficulties. Rather it is a case of a company that at all material times was not able to pay its debts as and when they became due including the most relevant time in this case, namely, immediately before 5 May 1989. Mr Coxhead gave evidence that he believed that BBC was able to pay its debts as and when they became due; but I do not accept that evidence. Nor do I accept that at the time the debt was incurred Mr Coxhead did not have reasonable cause to expect that BBC would not be able to pay all its debts as and when they became due (the language of s. 592(2)(b)(i)) or that, if BBC incurred the relevant debt, it would not be able to pay all its debts as and when they became due (s. 592(2)(b)(ii)) (the double negatives are those of the statute; they are not mine). In short, I am not persuaded that the defence for which s. 592(2)(b) makes provision has been established by Mr Coxhead. Some attempt was made in cross-examination of Mr Keness to establish that Opac has been knowingly trading with BBC for some months and accepting that the slow payment of its account was on some arranged commercial basis between them. This was based on a letter of 3 December 1991 from Opac to BBC and in particular a paragraph which reads: "We have been extremely patient in accommodating your past financial situation, however, we are aware that all the relevant hardware supplied has been sold and paid for, but the proceeds of these have not been used to reduce your debt to us." The paragraph must be read in the context of the letter as a whole; but whether read in isolation from the rest of the letter or in the context of the whole of the letter, plainly the writer of the letter is simply saying that Opac has been extremely patient in not suing BBC for the amount which it admittedly owed it. There is no substance in the contentions based on this letter. The Court declares that Jonathan Bruce Coxhead, a director of BBC Computer and Communication Services Pty Limited, contravened s. 592(1) of the Corporations Law in relation to the incurring by that company of a debt to Opac Pty Limited on or about 5 May 1989 in the sum of $18,205 and that he is liable for the payment of the unpaid portion of that debt, namely, $4,469 to Opac Pty Limited. The Court declares also that Jonathan Bruce Coxhead is liable to pay to Opac Pty Limited the sum of $4,469, plus interest pursuant to s. 51A of the Federal Court of Australia Act 1976 in the sum of $2,801.39, a total of $7,270.39. The Court orders that Jonathan Bruce Coxhead pay the costs of Opac Pty Limited of this proceeding including reserved costs, if any; and that Opac Pty Limited pay the costs of IDB Communications Pty Limited of this proceeding. I certify that this and the preceding nine (9) pages are a true copy of the reasons for judgment herein of the Honourable Justice Lockhart. Associate Dated: 11 August 1995 Mr Jacob Keness (one of two directors of applicant) appeared without counsel or solicitors. Counsel for the Respondents : Mr A Monaghan Solicitors for the Respondents: Peter Cornelius & Partners Date of Hearing : 21 July 1995 Date of Judgment : 11 August 1995