Reported Decision : (2002) 20 ACLC 1304 New South Wales Supreme Court CITATION : Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 4440/97 HEARING DATE(S) : 8, 9, 10 April 2002 JUDGMENT DATE : 23 April 2002 Manpac Industries Pty Ltd (P) PARTIES : Gualtiero Ceccattini (D1) Emilio de Michelis (D2) Rocco Mura (D3) JUDGMENT OF : Young CJ in Eq COUNSEL : W Haffenden (P) J M Ireland QC and C Dimitriadis (D1 & 2) SOLICITORS : Smits Leslie (P) Marsdens (D1 & 2) CATCHWORDS : CORPORATIONS [328] [329] [330]- Personal liability- Insolvent trading- Directors appoint consultant to advise- Whether consultant responsible for advising board as to solvency- Whether directors ought fairly to be excused. LEGISLATION CITED : Corporations Act ss 588G, 588H, 588M, 1317S, 1318 Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Daniels v Anderson (1995) 37 NSWLR 438 Emwest Products Pty Ltd v Olifent (1996) 22 ACSR 202 Hamilton v BHP Steel (JLA) Ltd 1995) ACLC 1548 CASES CITED : Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430 Melbase Corp Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 Partridge v Equity Trustees Executors & Agency Co Ltd (1947) 75 CLR 149 Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 39 ACSR 305 Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405 Tourprint International Pty Ltd v Bott (1999) 32 ACSR 201 DECISION : See para 79. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG CJ in EQ Tuesday 23 April 2002 4440/97 – MANPAC INDUSTRIES PTY LTD v CECCATTINI JUDGMENT 1 YOUNG CJ in EQ: The plaintiff sues two former directors of Industrial Concrete Manufacturing Pty Ltd ("ICM") for $399,090.50 under the statutory cause of action provided by s 588M of the Corporations Act 2001. 2 ICM was wound up on 22 May 1995 in circumstances that will shortly appear. The winding up was deemed to have commenced on 22 July 1994. Mr Andrew Love is ICM's liquidator. 3 The plaintiff says that between 30 September 1994 and 18 April 1995 it sold and supplied concrete to ICM and that sale and supply made ICM liable to pay it a large sum of money. Although early on in this litigation there was some dispute as to the amount due after taking into account cross-claims, there is now agreement that the amount is as I have set out above. 4 There is no doubt that the first and second defendants were directors of ICM at the relevant time. There was a third director, Mr Mura. He was also initially sued, but the proceedings against him were settled. 5 The defendants say that they are not liable because: (a) ICM was not insolvent between 30 September 1994 and 18 April 1995 (which period I will hereafter refer to as "the relevant period"); (b) during the relevant period there were reasonable grounds to expect that ICM was solvent and would remain solvent even if it incurred debt to the plaintiff or others; (c) that the defendants expected that ICM was solvent at the relevant time and would remain solvent; (d) that at the relevant time the directors had reasonable grounds to believe that a competent and reliable person, namely Mr Goran Turner, was responsible for providing to them adequate information concerning whether ICM was solvent and that Mr Turner was fulfilling that responsibility and expected on the basis of information provided to them by Mr Turner, that ICM was solvent at that time and would remain solvent even if it incurred the relevant debt; (e) that each of the defendants should be excused from liability pursuant to s 1318 of the Corporations Act. 6 The defendants' defences depend on s 588H of the Corporations Act. 7 The first and second defendants are brothers-in-law. They formed two companies, ICM and Mercap Pty Ltd ("Mercap"). Mercap's role was to be the holder of 5 acres of land at Plumpton. ICM's role was to use the land to manufacture and sell precast concrete panels. 8 The first defendant was the dominant partner, both morally and also because he held 65% of the shares to the second defendant's 35%. For a time Mr Mura was also a shareholder, but the defendants came into dispute with Mr Mura which ended in litigation in this Court and from such time he played no part in the control of ICM. 9 In 1991, ICM acquired a concrete batching plant which it erected on its land at Plumpton. A batching plant enables the ingredients of concrete to be mixed and loaded onto tankers for delivery to building sites. It is important in the concrete trade that batching sites be strategically situated so that concrete can be delivered to building sites before it sets hard in the tanker. The plaintiff was a supplier of concrete and needed a batching facility in the Plumpton area. Discussions took place, but no firm arrangement between the plaintiff and ICM, however, was reached with respect to the batching site until 1994. 10 The first defendant said that he had a meeting with Mr Wong, the principal of the plaintiff, in early 1994 in Sydney during which Mr Wong said: "My company would still be interested in leasing your batching plant at Plumpton. But we would also be interested in getting involved in your business generally." Mr Ceccattini said that he would be interested in further discussions and these took place in February when Mr Wong said: "I represent a group of investors who are prepared to invest into your group in return for a 50% shareholding but to progress the matter we would need access to your accounts and also necessary financial information." Mr Ceccattini said that that information could be provided and Mr Wong continued: "In the meantime, my company is prepared to lease the batching plant at Plumpton and supply ICM with concrete at cost." Mr Ceccattini said that he would be interested in such an arrangement and would require rent for the plant and Mr Wong said: "My company will agree to that." Mr Ceccattini said that following that conversation the batching plant at Plumpton was made available exclusively to the plaintiff which carried out concrete batching operations and ICM purchased all of its requirements of concrete from the plaintiff. 11 In March 1994, the Deputy Federal Commissioner of Taxation was pressing winding up proceedings against ICM for non-payment of group tax. Mr Ceccattini says that he was concerned about the financial future of ICM and arranged to retain Turner Capital Services, a company of which Goran Turner was the principal consultant, to assess ICM's financial and trading position and negotiate a capital raising arrangement. Mr Turner then commenced work and during May 1994 prepared a report to the directors of Mercap and ICM, as a result of which Mr Ceccattini said he believed that both companies were solvent, though clearly lacking liquidity. 12 Mr Wong agrees that there were some initial discussions in 1991, but they did not proceed. He agrees that there was a meeting in February 1994 and does not dispute much of what is said, but denies that he said he would supply ICM with concrete at cost, but rather that he said "In the meantime, my company is prepared to lease the batching plant at Plumpton for $2.50 per cubic metre on any sales of concrete to outside parties and to supply ICM with concrete at an agreed figure" and Mr Ceccattini said "We agree to that". I need not go into this further as as I have indicated, the amount of debt if there is any liability on the defendants, is now agreed as noted above. 13 A meeting was held between Mr Wong, Mr Turner and the defendants at the Manly Pacific Hotel on 20 September 1994. Mr Ceccattini said that Mr Wong said at that meeting: "My group has decided that ICM is attractive enough to invest our money and we have the capacity to make substantial contributions to and to support the business over the years ahead. … ". Mr Ceccattini said: "We are obviously very interested to go ahead on this basis but we are looking for a larger investment of $500,000." Mr Wong replied: "There are financial problems but we can overcome them together and we are now supplying you with concrete and that will continue so long as the relationship is there. I feel very strongly about the long term potential … ". 14 Mr Wong said that he did not say "ICM" in the first sentence of the speech attributed to him but rather "Your group". He also denies that he said the words commencing "There are financial problems" as attributed to him. 15 Mr Ceccattini says that from then until a document was signed on 5 April 1995, he continued to believe that Mr Wong and his friends would support the company, ie ICM. The plaintiff continued to supply concrete; there was no real pressure to pay its bills and he believed that Mr Turner and Mr Wong were working together towards the consummation of the arrangement. 16 Mr Wong disputes this. He says that he was constantly asking for financial documents and the usual response was "We have Goran Turner handling that. It should be with you soon". He further says that both he and his credit controller, a Mr Kumar, were continually pressing for payment for the concrete being supplied. Although Mr Ceccattini denies it, Mr Kumar's evidence and the fact that large lump sums were paid on account of the debt from time to time, makes me prefer the plaintiff's evidence on this aspect of the case. Mr Wong says that he did not regard there being any firm agreement between the plaintiff and ICM in the latter part of 1994 and early 1995. 17 On 5 April 1995, Mr Wong, on behalf of himself and three others, submitted an "investment proposal" to the defendants and they accepted that proposal. Essentially the proposal was to subscribe for shares in Mercap, but not ICM. The business of manufacture of precast concrete panels was to be transferred to Mercap or a new company as a subsidiary of Mercap or as owned by the shareholders in agreed proportions. Mr Wong and his friends would invest $500,000 equity capital and loan up to $75,000 in addition to be spent on construction of the building to house the manufacturing plant at Plumpton, to tidy up the site to meet its DA conditions and increase concrete production in the batching plant and to fund the working capital of the company. The Wong interests were to own 50% of the equity shares and 51% of the management shares. "The investment will be made in Mercap Pty Ltd where we will subscribe shares as described above. We will not purchase an interest in Industrial Concrete Manufacturing Pty Ltd ('ICM'). "Mercap Pty Ltd will assume working capital assets and liabilities of ICM with precise details to be determined on the date of settlement." 18 Mr Wong says that that investment proposal was subject to proper documentation after due diligence had been carried out. 19 The principal financial support to ICM was the Commonwealth Bank. 20 It was common ground that the building industry generally had suffered very badly in the recession of the early 1990s. Mr Wong and others were impressed that ICM had survived the recession even though it was carrying significant debts. The Commonwealth Bank, towards the end of 1994, appeared to be getting rather nervous about its exposure to ICM and started making the overtures that one expects banks to make in such a situation, namely having Coopers & Lybrand prepare a report and offering the company contact with Coopers & Lybrand if it needed assistance. 21 According to AX04, Turner Capital Services, a company which appears to be under the control of a Mr Goran Turner, was retained by ICM and Mercap on 26 April 1994. 22 The letter of appointment of Turner Capital Services is not in evidence. However, in its report of 17 May 1994, AX04, in the preamble, Turner Capital Services' task and objectives were allegedly quoted from that letter of appointment. Essentially, the company's task was "to assist you to survive". Provided that occurred, Turner would assist continued building up of the business, arrange injection of capital, refinance loans away from the Commonwealth Bank and organise office administration to ensure that everything was functioning efficiently. 23 The first report, which was based on information from Mr Ceccattini, described as the main source of information, ICM and Mercap's solicitors and accountants and the Bank as well as the plaintiff, concluded: "When we commenced this task we did not know what to expect. We now know that the company is solvent and has a solid business base. It appears to have weathered the worse and is now able to look forward. "The company needs bank's support and a further capital injection. It is pleasing to note that the shareholders are quite happy to dilute their equity in order to ensure that the business has a bright and prosperous future." 24 The accounts which were presented on a consolidated basis, tended to show that the company was currently profitable. However, it said: "There are no pressing creditors, though a number of them in the 90+ category are calling regularly. This takes up a lot of management time and is therefore counter-productive. The only creditor which had a judgement was ATO in respect of PPS and Group Tax. The amount owing now is as listed in the Creditors Schedule and is no longer considered to be of material importance. "PPS and Group Tax payments are now up to date and are maintained consistent with the payroll and contracting experience." 25 Of the company's debtors it was recommended that $296,936 of $449,382 be written off as uncollectible. Creditors were shown as $246,653.59. 26 It is to be noted that the group was analysed as a whole and there is frequent reference to "the company" without specification. 27 A meeting was held with the Commonwealth Bank on 27 January 1995 at which were present Mr Turner, Mr Wong, Mr Wong's present wife and Maree Sumertha, the Bank's manager, credit recovery. According to Ms Sumertha's notes, "In essence, agreement has been reached for Wong's company (who is also ICM's main creditor – apart from CBA/CBFC) to purchase 50% of Mercap for $500,000. Funds will be utilised to build factory, site rectification works to comply with DA & EPA notices and working capital. Wong has rejected the use of any proposed equity being used to reduce CBA/CBFC debts; simply, Wong is looking to improve business by various means including restructure of existing debt load. It is apparent that Wong has a good grasp on ICM's problems and that proposed remedial action/direction to be taken are positive steps, including the improvement to security property. "Notwithstanding this, I informed Wong and Turner that CBA was not prepared to continue funding the group and in terms of previous advices, refinance was to be obtained … "While Wong was of the view that CBA had been more than reasonably tolerant in the past, with improvements made and debt restructure, he could not understand CBA's insistence on refinance but acknowledged decision and will look to his own bankers (NAB and Westpac) to assist. … "Current provisions of $430,000 is excessive by about $250,000 but, in view of proposed refinance, will leave in place pending finalisation." 28 Up until the end of January 1995, Mr Turner kept the Bank informed regularly of what was allegedly happening within ICM and Mercap. His last report was on 23 March 1995. This was a rather acerbic letter on which the bank officer has written the word "Rubbish" alongside various statements. A day or so later, the Commonwealth Bank by Ms Sumertha made demand on Mercap to repay its fully drawn loan. Mr Turner faxed Mr Wong on 30 March that Bank action was getting close and this probably led to the execution of the heads of agreement of 5 April. On 18 April 1995 the Bank put in receivers to both ICM and Mercap. 29 A winding up application had been made in the Federal Court of Australia by Belgravia Investments Pty Ltd. This application had been made in 1994. The Federal Court of Australia purported to make a winding up order because the receivers in charge of ICM put up no resistance on 22 May 1995. The relation-back date for purposes of debt recovery is 22 July 1994. In due course, by Act of Parliament, that decision became validated and assumed the status of a decision of this Court. The directors had argued that the alleged debt to Belgravia was not owing and that if any debt were owing for the transaction over which Belgravia sued it was another company, Tristar. However, with the appointment of the receivers the control of the Federal Court proceedings was taken out of the defendants' hands. 30 There had previously been an application by the Deputy Commissioner of Taxation in this Court in 1993 to wind up ICM. This application was stood over from time to time and finally settled on the basis that ICM would pay the debt by instalments. 31 The evidence shows, and this evidence is analysed in fair detail in Mr Haffenden's written submissions for the plaintiff, a whole series of creditors obtaining judgment or issuing statutory demands against ICM. I will leave those submissions, whose factual analysis I accept, with the papers. 32 There is no doubt at all that up to at least August 1994, ICM was in a hopeless financial position. Mr Ireland QC, who appeared for the defendants, did not vouchsafe that comment. Indeed, Mr Ceccattini himself said in evidence that in May 1994 the financial position was hopeless. 33 However, Mr Ireland QC says that after September, which is the relevant period, the position had improved. Mr Haffenden's schedule seems to suggest otherwise. A judgment was entered in favour of Albion Steel Pty Ltd for $6178.10 in December 1994, Wilson Mobile Cranes Pty Ltd obtained a judgment against ICM for $5257.54, again in December 1994. In February 1995 a statutory demand was served on ICM by Bresprint Pty Ltd for $3619.51. Moreover, the workers' compensation insurer, Mercantile Mutual, had a judgment against ICM for unpaid workers' compensation premiums for 3 years up to August 1994. A deed of arrangement was entered into but nothing was paid and a claim of $17,000 by Mercantile Mutual was to be heard by the Court in February 1995. 34 A list of trade creditors was supplied by Mr Turner each month. However, as Mr Haffenden's submissions clearly show, there were obvious deficiencies in these figures, else why would the amount of debt in the 31 to 60 day category be more than those in the zero to 30 day category for the preceding month? 35 When Mr Love became liquidator, he made a report showing that there was a deficiency of about $1.2 million. The directors say that this was a false assessment and took account of the fact that the petitioning creditor's debt was allowed because the receivers had taken no action to defend it, when really it wasn't owing at all. They also say that the plaintiff's debt was inflated. 36 Mr Shirlaw, a well-known and experienced A list liquidator in this State, gave evidence and was cross-examined. He said that all the indications he could see from Mr Turner's report and from the figures from Mr Love's reports and otherwise showed that ICM was insolvent at all relevant times including between September 1994 and May 1995. I accept this evidence. 37 The evidence put on by the defendants did not cause me to waiver from this view. Neither of the defendants was a person skilled in accountancy, and their business management methods were rather primitive. They doubtless performed very well at grass roots level in producing concrete panels and affixing them, but the financial state of their companies was left to Mr Turner, at least in the last year. Mr Turner's figures are not always accurate, presumably because many of the basic facts and figures were supplied by the directors and the directors did not supply Mr Turner with up to date figures. It would seem that some of the discrepancies in the figures were caused by invoices not being given to Mr Turner, so that they could be included in the accounts. This is the probable explanation for the discrepancy described in the preceding paragraph. 38 That ICM could not pay its debts as and when they fell due is well illustrated by the history which I have summarised and which is set out in greater detail in Mr Haffenden's submissions. 39 Before leaving this issue I should make some comments about the submissions that were made as a result of what I said in Hamilton v BHP Steel (JLA) Ltd (1995) ACLC 1548 and what fell from Palmer J in Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 39 ACSR 305, 315-317. It is only necessary to make comments, as whatever tests of solvency one applies in the instant case, one must reach the same result. 40 Solvency and insolvency are defined in s 95A of the Corporations Act as meaning a company which is unable to pay all its debts as and when they become due and payable. This, as Lindgren J pointed out in Melbase Corp Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187, requires a cash flow test rather than a balance sheet test. Again, as his Honour said in that case, when one is applying the cash flow test it is relevant to take into consideration the relationships between creditor and debtor, any agreement and the course of conduct. In Hamilton I indicated that that course of conduct may mean that despite what is written on the invoices etc as to time for payment, industry practice or dealings between the parties demonstrate that everyone accepts that debtors will often not pay creditors within normal trading terms. In business circumstances sometimes this is quite necessary in an industry which is experiencing recession because otherwise creditors may not be able to sell their product at all. Even though they would prefer people to stick to their 30 day terms it is better to have recalcitrant debtors than sell no product at all. 41 What I said in Hamilton seems to have been developed into a much stronger statement by counsel in Emwest Products Pty Ltd v Olifent (1996) 22 ACSR 202, 209-210 and in Southern Cross at 315. However, if what is said in Hamilton is properly examined, it will be seen that the proposition expounded is not only quite in accordance with authority, but is also good commercial and legal common sense. 42 I now turn to the defences under s 588H. This section provides that it is a defence against liability under s 588G (and thus 588M), " … if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time." Subsection 3 goes on to say that without limiting the generality of what I have just set out " … it is a defence if it 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 ('the other person') was responsible for providing to the first-mentioned person 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 to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time." 43 The defence to be made out requires that the relevant defendant had a positive belief that the company was solvent. The defendant must hold that view on reasonable grounds or must hold that view on reasonable grounds that the person providing information on which he or she came to that conclusion fitted within the requirements of subsection 3(a). It is no defence that the defendant involved had no knowledge at all as to whether the company was solvent or not; see eg Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405. 44 In the instant case it is clear that neither director could believe that ICM was solvent or could have reasonable grounds for any such belief except that such belief came from the material supplied by Mr Turner. There is no doubt at all that prior to September 1994 such a belief could not have been held. However, Mr Ireland QC says that following the remedial work done by Mr Turner for the relevant period September 1994 to May 1995 there was such a belief and it was on reasonable grounds as a result of Mr Turner's reports. 45 The first question to pose is whether Mr Turner was a "competent and reliable person". 46 There is no case law on this expression as far as I am aware. The onus is on the defendant to prove the defence. Strangely enough, there was no evidence before the Court as to Mr Turner's curriculum vitae, no evidence of his qualifications and indeed, his letter of appointment was not tendered. In most cases, this omission would be fatal. 47 However, it is put that when one actually reads Mr Turner's reports themselves, one can see that he had a good grip of what was happening and was providing sensible advice. 48 The second limb of what had to be proved, namely whether Mr Turner was responsible for providing adequate information about solvency I will leave for the moment and turn to the third, that is, whether the directors had reasonable grounds to believe and did believe, that Mr Turner was fulfilling his responsibility. 49 Mr Turner's first report showed that he had relied on his own enquiries which had been to interview Mr Ceccattini (who was the main source of information), to consider the records of ICM (which he said were in some sort of disarray), to interview the solicitors and accountants for the group and to attend a meeting with the Commonwealth Bank. The first report noted that there had not been sufficient time to verify many of the statements made. 50 As I have indicated, Mr Turner reported in May that "the company" was solvent. It should be observed that he was considering the group accounts of ICM and Mercap. 51 Whilst Mr Turner appears to have a pretty good grasp of what was happening in the books and what was happening with the Bank, and indeed, what was happening with the plaintiff, he was not given full and proper details of what was occurring with the trade creditors and debtors. This is why the figures produced by Mr Turner in Month 2 sometimes show a greater number of creditors aged 31 to 60 days, than Month 1 showed for creditors 0 to 30 days. 52 It is extremely difficult for a person to say that a person is responsible for providing adequate information about solvency and was fulfilling that responsibility when the person allegedly relying on the other person was the source of the supply of information and that supply of information was not completely full. 53 The subsection arises from the recommendations made in para 211 of the Law Reform Commission's Discussion Paper No 32 as fleshed out in [303] and following of the Harmer Report. In [307] it was said: "The Commission considers that the defence is clearly necessary in the case of larger companies in which it cannot be expected that directors will have control over every action taken in the conduct of the company's business. Additionally, a defence of this nature may encourage a proper system of financial management." 54 Thus the prime thrust of the defence is to cover the situation where there is a large corporation with bulky accounts and where there is a system in place of competent accountants, credit controllers and financial management and the board has a regime whereby those people, provided they are competent and responsible, will report to the board any problems that the board may pick up. The prime thrust of the exception is not to deal with the situation where a small company with directors who have little idea of accountancy, bring in a trouble-shooter, supply the trouble-shooter with information which may not be complete, receive reports back from the trouble-shooter and then intend to rely on a report which is incomplete because they have provided incomplete information. 55 However, there is another reason why Mr Turner does not fit within the exception. One must look to see whether in fact he was charged with the responsibility of providing the board with adequate information as to whether ICM was solvent. Again, it must be observed that in the average company one does not write into the statement of duties of the principal accountant that he or she is to advise the board as to whether the company is solvent so long as the general duties will include that responsibility. 56 Here, as I have said, the appointment of Mr Turner was not put into evidence. However, one has to look at his statement of objectives set out in his first report, AX04, which is quotes from his letter of appointment: " … our task is to assist you survive. From that point on, we are to assist you continue building up the business. The work to be done is in two areas: · Arrange injection of capital and refinance the loans away from the Commonwealth Bank and CBFC; or alternatively make suitable arrangements with this bank to give you the necessary financial backing. · Organise the office administration to ensure that accounting, legal, management, control and clerical procedures are of good standard and function efficiently. This will enable you to spend more time on production and marketing." 57 There is nothing there which would suggest that there was any responsibility on Mr Turner to provide the directors with adequate information about whether ICM was solvent. 58 Although one may infer such a responsibility from conduct, the mere fact that a person's reports include information as to solvency is not sufficient to make the inference that he or she had that responsibility. 59 Accordingly, in my view the third limb of the defence is not made out. 60 The fourth limb is that the director expected on the basis of the information that the company was solvent and would remain solvent. In the instant case any belief that there might have been that ICM might be solvent and remain solvent depended upon a belief that the negotiations with the plaintiff would reach the stage where there would be an injection of funds and that the plaintiff would take over the Bank's debt and would also arrange for provision for the other debts and not on information provided by Mr Turner as to solvency. 61 Returning to the second limb, it can best be dealt with in my consideration of the general questions which I now start to consider. 62 It is clear that subsection 3 is only part of a wider defence that directors had reasonable grounds to expect and did expect that ICM was solvent and would remain solvent. 63 There could be no reasonable ground for thinking that ICM was solvent unless there was reason for thinking that Mr Wong and his friends would not only ensure that ICM was saved ultimately but also kept afloat in the meantime. 64 The evidence on this point is very sparse. However, putting together the facts as best I can, there is no doubt that Mr de Michelis had virtually no views at all as to the solvency of ICM. He merely worked at grass roots level and left things to Mr Ceccattini. This, of course, is no defence, as he was a director and he should have put himself in a position where he did know what was going on. Mr Ireland QC says that the clear attitude of the defendants is that it is either one or both who are liable but that, of course, does not bind the plaintiff who would be able to recover against Mr De Michelis even if it did not recover against Mr Ceccattini. 65 However, dealing with Mr Ceccattini's position, again the defence is not made out. He knew about the indebtedness to the Bank. He knew that the Bank was unhappy with the situation. He must have known that he was not supplying full and accurate information to Mr Turner, but that even if he was, Mr Turner's reports indicated that the Bank debt needs to be refinanced and there needed to be a substantial write off of trade debtors. There were negotiations with more than just Mr Wong and his friends, but these negotiations seem to have come to an end at least by December 1994. 66 I have already set out the letter of 5 April 1995 from Mr Wong to Mr Ceccattini and Mr de Michelis. It is clear that basically $500,000 was to be invested by Mr Wong and his friends, an additional $75,000 loaned for the purpose of being spent in constructing a building to house the manufacturing plant and tidying up the Plumpton site, with any balance funding the working capital of "the company". Such an investment would not except perhaps to a fairly minor extent, reduce the group's indebtedness. Moreover, the offer made it quite clear that the investment would be made in Mercap and that Mr Wong would not be taking any interest in ICM. What was to happen would be that Mr Wong and his friends would subscribe for shares in Mercap or a new company. 67 Mr Ireland QC fixes on the sentence "Mercap Pty Limited will assume working capital assets and liabilities of ICM with precise details to be determined on the date of settlement." However, in view of what is in the whole document that pre-existing liabilities of ICM were not to Mr Wong's account, one cannot really construe this as being a promise to take over all the liabilities. In any event, the wording of the sentence makes it clear that something more needed to happen before the deal was consummated, whether that be that precise details were to be worked out, or as Mr Wong would have it that there would be some sort of due diligence or whether it involved Mr Wong's bankers taking out the CBA may be a matter of debate. However, it does not much matter as there was no binding promise to do so. Nor in the light of the discussions that had been had could one reasonably take the position that the Wong interests would in fact deal with the liabilities. 68 I should note that I have been referred to a number of authorities and I will mention the principal ones lest it be thought I have overlooked them, but it seems to me that on any view of the way in which s 588H is constructed, the defendants must fail. 69 In Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, which although decided under previous legislation is still considered to be one of the leading cases in the area, Tadgell J held that in determining whether a director had no reasonable cause to expect within s 588H(2) an objective standard must be applied to the facts known to the defendant. His Honour further held that it was generally to be expected that directors would know, at least in general terms, what was in the company's accounts as presented to the annual general meeting. 70 In Tourprint International Pty Ltd v Bott (1999) 32 ACSR 201, Austin J examined s 588H(2) and noted that the word "expectation" meant a higher degree of certainty than "mere hope or possibility" or "suspecting" and that the defence required the defendant to establish an actual expectation that the company was and would continue to be solvent and that the grounds were reasonable. In Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 39 ACSR 305, a case where Palmer J traces through the history and derivation of s 588H(2) at para [119] p 329, his Honour sought to criticise part of the decision in Tourprint if it meant what his Honour thought it could possibly mean, though he agreed in the result. I think, with great respect, that Tourprint did not mean what his Honour thought it might possibly mean. 71 The only remaining matter to consider is the defence under s 1318 of the Corporations Act. That section empowers the Court to relieve a director from liability for default of a provision of the Corporations Act if that person has acted honestly and having regard to all the circumstances of the case ought fairly to be excused. 72 There is no doubt in this case that the directors acted honestly. The problem for them is whether they ought to be fairly excused. 73 The operation of s 1318 was discussed by Bergin J in Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430, 453 and following. Her Honour said at p 456 that although s 1318 does not expressly contain a requirement that the director act reasonably, such was a relevant consideration in the exercise of the discretion because the discretion had to be reached having regard to all the circumstances of the case which would necessarily include the way in which the breach of duty occurred. 74 In Daniels v Anderson (1995) 37 NSWLR 438, 525, Clarke and Sheller JJA said: "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 business men and women who act in an environment involving risk in commercial decision making … . The courts have a wide discretion to relieve in whole or in part." 75 It may be that such considerations mean that the Court will be a little less severe upon those in default than a court would be to a trustee under section 85 of the Trustee Act 1925 where a defaulting trustee has to establish a strong case before the Court would apply the section in his favour: Partridge v Equity Trustees Executors & Agency Co Ltd (1947) 75 CLR 149, 165. However, in both the cases of s 85 and s 1318, it is clear that each case must depend on its own facts: Partridge at 165; Kenna at 456. 76 Section 1317S(3) of the Act notes that in considering whether a person ought to be fairly excused for contravention of s 588G " … the matters to which regard is to be had include, but are not limited to: (a) any action the person took with a view to appointing an administrator of the company or Part 5.7 body; and (b) when that action was taken; and (c) the results of that action". However, nothing in s 1317S is to limit s 1318. I find this a little difficult to comprehend as a matter of logic, but it does not matter as none of the events in s 1317S are relevant to the present case. 77 In my view, the defendants have not made out a case to be excused under s 1318. They were really just concretors carrying on their business in the hope that they would be bailed out by successful negotiations with Mr Wong. The state of books up until May 1994 was not good; Mr Turner was brought into the matter near the eleventh hour, he did the best he could, but the position did not improve. ICM was able to stave off winding up, but it did not fulfil its promises to its workers' compensation insurer to pay premiums for some years by instalments. It consistently met creditors' claims with allegations of set-off which, when it was sued it did not press, it knew it was in trouble with its bankers, but just left the matter to hope. The circumstances do not show that it is a case where the directors should be excused. 78 The essence of the matter is that the law provides limited liability to people carrying on business using a corporate vehicle because it is to the community's interest that people should venture and take commercial risks in their trade without the constant worry of being personally liable for any risk which happens to go wrong. However there is a limit to that protection and the limit is reached where directors have reasonable grounds to believe that the company is no longer solvent. When that point is reached, the field of limited liability to a degree evaporates unless the directors can demonstrate some special circumstances as to why they should still be protected. In the instant case they have not. 79 It follows that there must be a verdict for the plaintiff against the defendants jointly and severally for the agreed amount, namely $399,090.50 and costs. The exhibits may be returned after 28 days unless there is an appeal in which case they should be retained until the finalisation of the appeal. ***************************** Last Modified: 04/24/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.