Reported Decision : 69 ATR 186 New South Wales Supreme Court CITATION : Sims v Deputy Commissioner of Taxation [2007] NSWSC 998 HEARING DATE(S) : 4, 5, 6, 11 & 12 September 2007 JUDGMENT DATE : 25 September 2007 JUDGMENT OF : Hammerschlag J DECISION : Judgment for plaintiffs against the Commissioner; orders against the first respondent for the full amount, orders against the second respondent in respect of four payments. CATCHWORDS : CORPORATIONS – Application by company and its liquidators under s 588FF of the Corporations Act 2001 (Cth) ("the Act") to recover from the Deputy Commissioner of Taxation payments made under alleged voidable transactions within meaning of s 588FE of the Act – No contest by Commissioner – Commissioner seeks indemnity under s 588FGA of the Act from company's two directors – Directors contest insolvency and plead defences under subss 588FGB(3), (4) and (6) – Whether insolvency established – Whether defences made out Corporations Act 2001 (Cth) LEGISLATION CITED : Income Tax Assessment Act 1936 (Cth) Taxation Administration Act 1953 (Cth) Crosbie v Commissioner of Taxation (2003) 21 ACLC 1659 Harris v Commissioner of Taxation [2006] 2 Qd R. 445 Young v Commissioner of Taxation (2006) 56 ACSR 654 Dean-Willcocks v Commissioner of Taxation (No.2) (2004) 49 ACSR 325 Powell v Fryer (2001) 37 ACSR 589 Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87 CASES CITED : Lewis v Doran (2005) 54 ACSR 410 Australian Securities and Investments Commission v Edwards (2005) 54 ACSR 583 Quick v Stoland (1998) 29 ACSR 130 Tru Floor Service Pty Ltd v Jenkins (No. 2) (2006) 232 ALR 532 Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201 Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722 Iso Lilodw' Aliphumeleli Pty Ltd v Commissioner of Taxation (2002) 42 ACSR 561 Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330 State Rail Authority of New South Wales v Brown (2006) 66 NSWLR 540 Anthony Milton Sims and Neil Geoffrey Singleton as Joint and Several Liquidators Pty Ltd of ACN 087 202 980 Pty Ltd (In Liquidation) (Formerly Newsnet.Com Pty Ltd) PARTIES : The Deputy Commissioner of Taxation Anthony Leonard Maine Judith Merryn Maine FILE NUMBER(S) : SC 2717/2004 P. Braham with L McBride (Plaintiffs) COUNSEL : P. Rodionoff (Defendant) N. Cotman SC with G Lucarelli and (1st Respondent) J. Clarke (2nd Respondent) Purcell Insolvency Lawyers (Plaintiffs) SOLICITORS : ATO Law & Practice (Defendant) Home Wilkinson Lowry (1st Respondent) Esplins Solicitors (2nd Respondent) - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST HAMMERSCHLAG J 26 SEPTEMBER 2007 2717/2004 ANTHONY MILTON SIMS AND NEIL GEOFFREY SINGLETON AS JOINT AND SEVERAL LIQUIDATORS PTY LTD OF ACN 087 202 980 PTY LTD (IN LIQUIDATION) (FORMERLY NEWSNET.COM PTY LTD) -V - THE DEPUTY COMMISSIONER OF TAXATION JUDGMENT Introduction 1 HIS HONOUR: These are proceedings under s 588FF of the Corporations Act 2001 (Cth) ("the Act") by a company and its liquidators against the defendant Deputy Commissioner of Taxation ("the Commissioner") for orders directing the Commissioner to pay amounts equal to those earlier paid by the company to him under alleged voidable transactions within the meaning of s 588FE of the Act. 2 The Commissioner in turn seeks statutory indemnity under s 588FGA of the Act from two directors of the company, Mr Anthony Leonard Maine (the first respondent), and Mrs Judith Merryn Maine (the second respondent). 3 All references to sections are, unless otherwise stated, references to sections of the Act. 4 ACN 087 202 980 Pty Ltd was formerly known as Newsnet.com Pty Ltd ("the Company"). Before that it was Newsnet Holdings Pty Ltd and before that Penova Holdings Pty Ltd. 5 On 27 December 2001 Mr Maine and Mrs Maine resolved to appoint voluntary administrators. Messrs Anthony Milton Sims and Neil Geoffrey Singleton (the first plaintiffs) were appointed. 6 On 21 January 2002 the creditors of the Company resolved that the Company be wound up. Messrs Sims and Singleton were appointed joint and several liquidators. A brief history of the Company 7 The Company was incorporated on 20 April 1999. 8 Mr Maine was appointed a director on 30 April 1999 and Mrs Maine on 24 January 2000. Mr Maine was appointed Chief Executive Officer on 1 August 1999 and remained in that position until the Company's winding-up. 9 Mr and Mrs Maine divorced in 2005. 10 Mr Christopher Frank Sherbon was appointed a director on 30 April 1999 and resigned on 5 October 2001. 11 Mr William David Sherbon was appointed on 24 January 2000 and resigned on 28 February 2001. 12 From 1985 to 1999 Mr Maine operated a marketing consultancy business called Maine Marketing Pty Ltd ("Maine Marketing"). Mrs Maine was a director. Maine Marketing focused on providing advice on exploiting opportunities which arose as a result of the de-regulation of the telecommunications industry. In this context he encountered the opportunity of purchasing a media broadcasting business (known as the Newsnet business) from a group of companies under voluntary administration. 13 In May 1999 the Company bought the Newsnet business. 14 The business involved, amongst other things, large volume facsimile, email and SMS broadcasting messaging through dedicated telecommunications links and an internet access system delivering global self-service capacity to customers. 15 Originally, the Company had two shares on issue. One was held by Mr Maine and the other by Mr Christopher Sherbon. On or about 10 July 2000, the shares were transferred to a Bermudan entity, Newsnet Global Ltd ("Newsnet Global"), which became the Company's holding company. 16 Although Newsnet Global was the Company's sole shareholder, the substance was that the enterprise was owned by the Maines and the Sherbons who almost invariably referred to themselves when referring to the "shareholders". Unless the context indicates, the term shareholders in this judgment refers to them. 17 Mr Maine was a director of Newsnet Global. 18 Mr Ed Conway was the Company's Chief Financial Officer. He joined the Company in 2000. His responsibilities included global billing operations and responsibility for all financial reporting and legal compliance requirements. 19 Along with the acquisition of the business came relationships with certain service providers (or carriers) including Worldcom USA (of Tulsa, Oklahoma) which later crashed with some notoriety, and Equant Network Services of Singapore. 20 The Company also took over staff employed in the business. 21 According to Mr Maine, on or about 22 March 2000 Newsnet Global entered into a "carrier interconnects agreement" with Asia Global Crossing (formerly Ixnet) ("Asia Global") for the provision of network capacity. The document identified by him as that agreement is, however, on its face, between Asia Global and the Company, not Newsnet Global. 22 In about October 2000, Newsnet Global concluded a software development agreement with an Indian company, Satyam Infoway Ltd, for development of a web based self-service messaging system. This operating system was known as the Integrated Messaging Platform ("IMP") and took about 12 months to be developed. 23 IMP involved technology combining to integrate computer and internet facilities to allow messaging across a range of formats such as text, audio, video and fax. 24 The Company's principal areas of expenditure were the costs of developing IMP, its carrier costs and staff. 25 Towards the end of 2000 negotiations took place with a Singaporean company, Comcraft Asia Pacific Pte Limited ("Comcraft"), for a possible investment by Comcraft in Newsnet Global (and accordingly indirectly in the Company). 26 A memorandum dated 9 November 2000 from Mr Maine to the Sherbons and Mrs Maine indicates that the original "Comcraft deal" contemplated US$2.5M in two tranches six months apart. 27 As at 31 December 2000 the Company had negative shareholders' equity of $247,000. It made an operating loss for the month of December 2000 of $181,000. It lost $1.37M for the six months to December 2000. 28 On 8 February 2001 Newsnet Global and Comcraft entered into a subscription agreement under which Comcraft was to invest two tranches of $US0.5M each by way of subscription for fully paid ordinary shares in Newsnet Global. 29 The subscription agreement was signed by Mr Maine on behalf of Newsnet Global. It records that half of Tranche 1 had been advanced to Newsnet Global in accordance with an Interim Loan Facility. 30 At that time one US dollar was worth approximately two Australian dollars. The subscription agreement thus envisaged a total investment by Comcraft of around $2M, somewhat less than the figure originally in contemplation. 31 Tranche 2 was to be invested no later than three months after the Tranche 1 Subscription Date of 9 February 2001, that is, by 9 May 2001. 32 The subscription agreement contains provisions intended to ensure that the monies to be injected by Comcraft were not to be used to pay liabilities which had been incurred as at 31 December 2000 and which did not relate to expenditure on, or investment in, the re-development of the Company prior to that time. In other words, Comcraft contemplated its investment being used to develop the Company and its business subsidiaries rather than to pay for past debts unrelated to that endeavour. The agreement also contained a condition precedent to Comcraft's obligation to subscribe, namely that the "Founders" (effectively the Maines and Sherbons) would procure funding of US$150,000 for the payment of such of the liabilities of the Company as at 31 December 2000 (totalling $626,553) which were payable within 14 days of the Tranche 1 Subscription Date. The records of the Company reflect that the directors lent it $150,000 on 15 February 2001. 33 According to Mr Maine, during the financial year to 30 June 2001 and for the five months to 30 November 2001, (that is almost up until the appointment of the administrators) the Asia Global agreement and the development of IMP were funded by way of shareholders' loans and the investment of US dollars made by Comcraft in Newsnet Global and passed on to the Company. 34 A Special Purpose Finance Report (unaudited) as at 30 June 2000 signed by Mr Maine on 1 November 2000 contains (in its notes) a section entitled "Summary of Significant Accounting Policies" which says the following: "The accounts have been prepared in accordance with the historical cost convention and on a going concern basis. The key factor supporting the going concern basis is the funding arrangements which have been proposed between Newsnet Global Ltd (the parent entity of Newsnet.Com Pty Ltd) and Comcraft Asia Pacific Pte Ltd, a Singapore company." 35 That financial report contains a profit and loss statement and balance sheet with comparative figures for 1999. As at 30 June 2000 the Company had a net deficiency in assets of $1,578,396. 36 In evidence was a Company document entitled "Estimated creditors and accrued liabilities 31 December 2000". Knowledge of it, and acquiescence in it, was disavowed by Mr Maine. It was probably generated either by Mr Conway or one of the Sherbons. A footer indicates that it was created on 24 January 2001. In it creditors are categorised as "Critical/urgent, Deferrable for few weeks & longer, or Arguable". Each category is further divided into "Founders" or "Investors". 37 Shown as "Critical/urgent" in the category of Founders are amounts of $117,098 and $12,497 owing to Worldcom, and as Critical/urgent in the category of Investors $60,476 owing to Equant. Under the heading Deferrable in the category Founders are shown amounts of $201,000 owing to English solicitors Farrer & Co and $24,253 to English accountants Smith & Williamson. 38 On 7 April 2001 Mr Graham Sharpe-Paul, a senior Company employee, had a telephone conversation with a representative of Comcraft, Mr Chandaria. There had been a fire in Comcraft's Malaysian aluminium rolling plant. The upshot of the conversation was that Comcraft communicated that no further cash would be available for the Company inside two weeks and that it may not ever be available. 39 Mr Chandaria indicated that less important investments might not receive further support. Mr Sharpe-Paul asked if that meant that, as in the case of the Company, funds would not be advanced even if that sent the Company to the wall, to which Mr Chandaria replied that if that was the outcome, then so be it. 40 Minutes of a Company board meeting on 11 April 2001 show that the contents of the Chandaria communication were communicated to the board and that the directors were extremely concerned at the actions of Comcraft. 41 The minutes record that the actions of Comcraft "had placed the company in a parlous trading position where the ability to reasonably and effectively maintain the operations of the business depended on securing new external funding." They go on to record that "[o]n the basis of a reasonable expectation of further fund, Directors would provide sufficient injection of capital to cover the salaries account. (Judy Maine in discussion with the NAB)". 42 The minutes indicate that Mr Maine was actively seeking an investor. 43 On about 23 April 2001, Mr Maine met with Asia Global and advised them of the situation. An email of that date from him to the Sherbons reflects that Asia Global was extremely understanding and would not press its account. 44 By May 2001, the Company was in non-compliance with its Pay as you Go (or PAYG) "withholding tax payments" (sometimes referred to as group tax) obligations to the Commissioner. PAYG and group tax are used interchangeably in this judgment. 45 As at 3 May 2001, the Company's February group tax obligation of about $60,000 had not yet been met. 46 In an email dated 2 May 2001 to his fellow directors, Mr Maine reported on the position of the Company as at 1 May 2001. He recorded that he had been in negotiations with five parties with respect to finding new investors. Of these he considered that the only realistic option was with General Atlantic, represented by Mr John Clough. 47 On 3 May 2001, Marta Elsik, a subordinate of Mr Conway, was in contact with the Australian Taxation Office ("ATO"). She mentioned that the Company was expecting investors to provide them with adequate funding to meet their taxation obligations. Internal ATO records indicate that an outstanding amount of $61,627.54 along with March liabilities was to be paid on 10 May 2001. 48 The Company's directors met on 7 May 2001. Mr Maine reported that Mr Clough had not committed to funding and that he, Mr Maine, "therefore did not commit to NAB Bond for office lease". His file note reflects that on that date his intended course of action included having a preliminary discussion on potential administration with Mr Murray Smith of KPMG. Mr Maine's evidence was that he understood administration to mean surrendering the company "because we could no longer properly trade under the law". 49 On 10 May 2001, Mr Conway advised the ATO that payments due to the Company had not come through as expected and that therefore he was not able to make payment in full of the outstanding amount due to the ATO, but that they were able to pay the March quarter Business Activity Statement ("BAS") amount of $59,176 due that day. The sum of $59,175.59 was paid on 11 May 2005. Mr Conway further said that "he would be able to offer a new arrangement on Monday that he would be able to reasonably comply with". The ATO officer advised that it was crucial to make an offer that "wouldn't be defaulted" on. Mr Conway was to get back to the ATO by Monday 14 May 2001 at the latest. There is no evidence that he did so and on 17 May 2001 the ATO officer left a message for Mr Conway to call him back. 50 On about 14 May 2001, Merranth Nominees Pty Ltd, a company associated with the Maines, agreed to lend $60,000 to the Company for 60 days at no interest for that period and at 8 per cent per annum thereafter. 51 On 17 May 2001 Mr Conway informed the ATO that the Company's office in the Netherlands had sent $72,000 that week and that he believed that it would take three or four days to process. He asked if he could call on the following Monday to hopefully clear the debt in a lump sum or at least advise of the status. The evidence indicates a payment to the ATO of $20,000 on 22 May 2001. There is no evidence of any further payment by the Company to the ATO before 1 July 2001 when an amount of $7,420 attributed to GST was paid. 52 As at 28 June 2001 the Company had not lodged its BAS for April or May. 53 As at 28 June 2001, $165,133 in PAYG was owing, being $40,482 for February, $60,447 for April and $64,204 for May 2001. 54 Management accounts for the Company were prepared as at 30 June 2001. They reflect that its results for the calendar year 2001 had been revised from a loss of $1.1M to a loss of $2.1M and that the likely date for reaching break-even point was around March /April 2002. The consolidated profit and loss component of those accounts reflects an operating loss of $2.67M and the balance sheet reflects negative shareholders' equity of $1.205M. 55 On 25 July 2001 solicitors on behalf of Newsnet Global made demand on Comcraft in respect of its failure to pay Tranche 2. In the demand it was asserted that Comcraft's failure to perform the subscription agreement "has directly resulted in causing Newsnet severe financial difficulties and has caused substantial damage to the company and consequently threatened its continued ability to trade." 56 The demand goes on to say "[w]e are instructed that your company was at all times aware of the timetable and critical path actions required for providing capital subscriptions to enable Newsnet to meet its contractual commitments and other obligations…". 57 On 28 July 2001 the ATO updated the Company's account from "Defaulted" to "High Risk Unactioned". 58 A memorandum from Mr Maine to his fellow directors dated 6 August 2001 records that "First contact with Comcraft occurred last Wednesday. We agreed to negotiate a settlement. Objectives have been set and Chris Stephenson will lead the negotiation". There is, however, no evidence of the content of any such negotiation. 59 On 15 August 2001, the Commissioner directed notices to both Mr Maine and Mrs Maine of their liability to pay a penalty equal to amounts withheld by the Company and not remitted to the Commissioner. 60 On 22 August 2001 Mr Conway informed the ATO that investment funds were expected within a week. He asked what the ATO called a reasonable lump sum. The ATO officer suggested 50 per cent. Mr Conway advised that he would call back on Friday to "see if that is feasible". Mr Conway saw payment in full in the time frame of four weeks. It did not emerge from the evidence what the source or amount was of the investment funds Mr Conway apparently had in mind. 61 On 24 August 2001 ATO records indicate that money was expected by the Company early the following week and that it was "probable that the 50% expected amount will be there". Mr Conway was to call "on Tuesday am to confirm the amount and to make an arrangement to pay the rest". 62 As at 8 September 2001 the Company owed over $290,000 to the Commissioner. 63 On 10 September 2001 Mr Conway informed the ATO that the Company did not have the $114,000 to pay that day. (It is not entirely clear how that figure was derived but it is in the broad region of 50 per cent of the amount then overdue.) He said $50,000 would be paid that day and that he would call on 12 September 2001 when he expected to have the remaining $64,000. 64 On 10 September 2001 the Company paid to Commissioner $50,000 which was attributed as to $9,517.42 for April 2001 PAYG and as to $40,482.58 for February 2001 PAYG. These are the first two payments from the Company to the Commissioner sought to be impeached in these proceedings. 65 On 11 September 2001 Asia Global's head office in the World Trade Centre, New York was destroyed by terrorists. 66 On 13 September 2001 Mr Conway informed the ATO that the Company could not make the agreed payment of $64,000 but could pay $10,000 by EFT that day. He informed the ATO that the Company was reliant on money from overseas (USA) and that the terrorist attack had held the money up. The factual basis for the statement is not apparent from the evidence. Mr Conway was not called by any party. 67 The amount of $20,000 was paid to the Commissioner on 14 September 2001 and attributed to April 2001 PAYG. This payment is sought to be impeached in these proceedings. 68 In late September 2001, the shareholders resolved to put $100,000 per month into the Company. The Maines and the Sherbons each put in $50,000 on or about 28 September 2001. Each put in another $50,000 in November 2001. They accordingly put in a total of $200,000. 69 On 27 September 2001 the Company paid to the Commissioner $20,000 attributed to April 2001 PAYG. This payment is sought to be impeached in these proceedings. 70 On 3 October 2001 the Company paid to the Commissioner $20,000 which was attributed to April 2001 PAYG. This payment is sought to be impeached in these proceedings. 71 On 10 October 2001 the Company paid to the Commissioner $20,000 attributed to May 2001 PAYG. This payment is sought to be impeached in these proceedings. 72 There was a shareholders meeting on 16 October 2001. It was called primarily to consider a letter of resignation as director which had been received from Mr Christopher Sherbon. A file note by Mr Maine reflects Mr David Sherbon (presumably Mr William David Sherbon) as indicating, on behalf of the Sherbons, that they both committed their involvement and financial support to the Company on the basis of continuing positive trends and agreement by all shareholders to continue to support the Company. The same file note reflects that Asia Global agreed to freeze existing debt and provide extended credit to February 2002. 73 On 18 October 2001 the Company paid to the Commissioner $20,000 attributed to May 2001 PAYG. This payment is sought to be impeached. 74 On 18 October 2001 Mr Conway offered an interim instalment arrangement to the ATO. The arrangement involved instalments of $20,000 on 22 October, 30 October, 6 November, 13 November, 20 November and 27 November 2001. 75 The arrangement apparently did not comprehend the amounts already payable in respect of July and August, or the amount for September 2001 which was about to become due. 76 The Company did not pay the instalments under the arrangement on time. It paid $20,000 on each of 25 October, 31 October, 8 November, 15 November, 22 November and 27 November 2001. Each of those payments is sought to be impeached. In addition it paid GST of $15,209 on 29 October 2001, which payment is also sought to be impeached. 77 Apparently as a consequence of its changed circumstances brought about by the terrorist attack, Asia Global required an instalment payment schedule to be agreed. A new instalment payment schedule was proposed by the Company in a letter to Asia Global dated 25 October 2001, and accepted by Asia Global shortly thereafter. 78 The instalment payment schedule entailed the Company making payment to Asia Global of $57,414.36 by the end of November 2001 and $59,138.71 by the end of December 2001. It foreshadowed payments of $250,000 at the end of January and February 2002. The evidence indicates that the last payment made by the Company to Asia Global pursuant to the instalment schedule (as opposed to the continuing monthly charges accruing) was on 30 November 2001, in the amount of $28,707. 79 There is no evidence of any demand from Asia Global on the Company. 80 On 31 October 2001, Mr Maine sent an email to his fellow shareholders and directors. In it he recorded, amongst others, that the Company had incurred significant liabilities while struggling with insufficient funding to reach the point it had reached; that executives had left and Mr Conway had resigned; and that with their own organisational problems and the depressed market, efforts to deliver an effective or timely outcome in the undertaking to raise capital was unlikely. The email referred to up to $1M being owing to Asia Global which "must be paid/negotiated in the first quarter next year". It went on to say; "On our current performance Newsnet alone will not be able to meet those obligations". 81 The email concluded as follows: "If I have not received any advice by noon today I intend to ask Mr Alex Linden of Kemp Strang to place the company in to administration. I do not intend calling a meeting or seeking a vote, because for your own reasons you have resigned your directorships knowing that both the responsibility and the attendant liability would fall to me. For the reasons I have set out, despite having done everything I can to enable Newsnet to succeed, I do not believe I would be acting reasonably to continue operating the company beyond today." 82 The email was sent at 10.35am on 31 October 2001 and called for a response by noon that day. There is no evidence of a response. Mr Maine, however, apparently held off with respect to administration. 83 On 6 November 2001 Mr Maine had a conversation with Mrs Maine in which Mr Maine foreshadowed putting the company into administration. 84 On 7 November 2001 Mr Maine and Mrs Maine met with lawyers and insolvency experts. 85 Mr Maine's evidence was that negotiations with Comcraft were suspended on about 8 November 2001. 86 Internal records of the ATO record as at 20 November 2001 that the arrangement was defaulting and current obligations were being "rolled into the debt". 87 On 27 November 2001 the ATO directed a letter to the Company (for the attention of Mr Conway) making a number of observations including that there was then a tax debt owing of $170,509.33 and that over the past six months the Company's tax debt had quadrupled. There is no evidence about when the letter came to Mrs Maine's attention. 88 By 30 November 2001 the Company had not paid the instalment then due to Asia Global. 89 The ATO records show that at 17 December 2001 $224,591.68 was owing in tax. 90 On 17 December 2001 the resolution was passed to place the Company into voluntary administration. 91 A report as to affairs signed by Mr Maine on 18 January 2002 reflects that creditors as at 30 November 2001 were $1,832,109 and accrued liabilities as at 31 November 2001 (sic) were $444,472. The Commissioner is reflected as then being owed $318,455. 92 Mr Sims reported to creditors on 17 January 2002. By 30 November 2001 the Company's accumulated losses exceeded $5M. He recommended winding up. 93 The creditors so resolved on 21 January 2002. The claims, cross-claims and defences 94 From 10 September 2001 to 30 November 2001, the Company made payments to the Commissioner totalling $285,209 as follows: Date Description Amount ($) 10 September 2001 April 2001 PAYG 9,517.42 10 September 2001 February 2001 PAYG 40,482.58 14 September 2001 April 2001 PAYG 20,000.00 27 September 2001 April 2001 PAYG 20,000.00 3 October 2001 April 2001 PAYG 20,000.00 10 October 2001 May 2001 PAYG 20,000.00 18 October 2001 May 2001 PAYG 20,000.00 25 October 2001 May/June 2001 PAYG 20,000.00 29 October 2001 September 2001 GST 15,209.00 31 October 2001 PAYG 20,000.00 8 November 2001 PAYG 20,000.00 15 November 2001 PAYG 20,000.00 22 November 2001 PAYG 20,000.00 30 November 2001 PAYG 20,000.00 TOTAL 285,209.00 95 By verified Amended Statement of Claim dated 16 July 2004, Messrs Sims and Singleton as liquidators and the Company, bring proceedings against the Commissioner pursuant to ss 588FE and 588FF to recover those payments on the basis that when they were made the Company was, or is deemed to have been, insolvent. 96 The Commissioner in turn brings a cross-claim against Mr Maine and Mrs Maine pursuant to s 588FGA for orders that they pay to the Commissioner the amount of any loss or damage resulting from any order against the Commissioner under s 588FF. 97 Mr Maine and Mrs Maine each rely on defences provided in s 588FGB. The relevant statutory provisions 98 Under s 588FF(1)(a) where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of s 588FE, the court may make an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction. 99 Relevantly, for present purposes, under s 588FE(2), a voidable transaction is one which is "an insolvent transaction of the company" and which was entered into during the six months ending on "the relation-back day". In this case the relation-back day is, by virtue of s 9 read with s 513C, the date of the administration, that is 17 December 2001. To be captured by the provisions, the transactions in this case must have been entered into on or after 18 June 2001 and at a time when the Company was insolvent, or deemed to be. 100 Relevantly, for present purposes, under s 588FC an insolvent transaction is only an insolvent transaction if it is "an unfair preference given by the company" and the transaction is entered into when the company is insolvent (or is deemed to be), or the company becomes insolvent by entering into it. 101 Under s 95A(1) a person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. 102 Under s 95A(2) a person who is not solvent is insolvent. 103 Under s 588E(3) if a company is being wound up and it is proved that it was insolvent at a particular time during the 12 months ending on the relation-back day it must be presumed that the company was insolvent throughout the period beginning at that time and ending on that day. 104 Under s 588FA a transaction is an unfair preference given by a company to a creditor of the company if, and only if, the company and the creditor are parties to it and the transaction results in the creditor, in respect of an unsecured debt that the company owes to the creditor, receiving more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company. 105 Sections 588FGA(1) and (2) provide that if the Court makes an order under s 588FF against the Commissioner because of the payment of an amount in respect of a liability under certain specified provisions of the Income Tax Assessment Act 1936 (Cth) or the Taxation Administration Act 1953 (Cth), each person who was a director of the company when the payment was made, is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order. 106 It is not in issue in these proceedings that each of the payments which is sought to be impeached was paid in discharge of the Company's liability under one of the specified taxation enactments. 107 Section 588FGA(4) provides that the Court may, in the proceedings in which it made the order against the Commissioner, order a person to pay to the Commissioner an amount payable by the person under subs (2). That is, the Court may in the same proceedings order a director who is liable to indemnify the Commissioner to pay the Commissioner. 108 Section 588FGB provides defences for a director. Subsections 588FGB(3), (4) and (6) provide that: (3) [Defence of reasonable presumption – solvency] It is a defence if it is proved that, at the payment time, 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 made the payment. (4) [Defence of reasonable presumption – third party] Without limiting the generality of subsection (3), it is a defence if it is proved that, at the payment time, 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 made the payment. (5) … (6) [Defence of reasonable action] It is a defence if it is proved that: (a) the person took all reasonable steps to prevent the company from making the payment; or (b) there were no such steps the person could have taken. The issues 109 In points of defence dated 1 April 2005 the Commissioner admits the payments, his unsecured creditor status and that the payments he received resulted in him receiving more than he would have if they were set aside and he were to prove in the winding up of the Company. 110 Importantly, he also admits that the Company was at the time of each payment insolvent and unable to pay its debts as and when they became due for payment. 111 As between the plaintiffs and the Commissioner there is accordingly, no lis, and on the pleadings at least, the plaintiffs are entitled to succeed against him. 112 The Commissioner in turn seeks indemnity from Mr Maine and Mrs Maine for the damage he will suffer if orders for payment are made. 113 In his amended defence, Mr Maine denies insolvency of the Company at the time of the payments. 114 In addition, he pleads the defence under s 588FGB(3) that he had reasonable grounds to expect, and did expect, that the Company was solvent and remained solvent even if the payments were made. 115 In her amended defence Mrs Maine likewise denies insolvency. In addition, she pleads the defences afforded by s 588FGB(4) and (6). 116 The substance of her defence is that she had reasonable grounds to believe, and did believe, that Mr Maine and Mr Conway were persons responsible for providing to her adequate information about whether the Company was insolvent, and that she expected, on the basis of information provided by them that the Company was solvent at the time of each payment and would remain solvent even if the Company made the payment. She also pleads that there were no reasonable steps she could have taken to prevent the Company from making the payments. Insolvency 117 There has been a debate in the authorities about the operation of ss 588FF and 588FGA(1) and (2) in the context of an admission by the Commissioner as to a company's insolvency but denial (or non-admission) of insolvency in the same proceedings by a director sued for indemnity, see for example: Crosbie v Commissioner of Taxation (2003) 21 ACLC 1659; Harris v Commissioner of Taxation [2006] 2 Qd R 445; Young v Commissioner of Taxation (2006) 56 ACSR 654; Dean-Willcocks v Commissioner of Taxation (No.2) (2004) 49 ACSR 325. 118 There is no doubt that Mr Maine and Mrs Maine are entitled in their case to contest insolvency. They have done so. 119 Notwithstanding the Commissioner's admission, the plaintiffs have forensically taken upon themselves the burden of proving insolvency of the Company. 120 The necessity to consider the effect of the Commissioner's admission of insolvency (leaving aside any issue of costs) thus only arises in this case in practical terms if insolvency is otherwise not made out. 121 Whether a company is insolvent at a particular point in time is a question of fact. The conclusion of insolvency must be derived from a proper consideration of the company's financial position, in its entirety, based on commercial reality: Powell v Fryer (2001) 37 ACSR 589 at 600 [75]. 122 The predominant test is a cash flow one although the state of a company's balance sheet is still relevant: Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 at 198; Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87. 123 As Lindgren J said in Melbase Corporation Pty Ltd v Segenhoe Ltd at 198; "The words "as and when they become due and payable" make it clear that although the issue of prima facie insolvency must be determined as at a particular time, the determination calls for a degree of "forward looking"." 124 In Powell v Fryer at [75], Olsson J made the point that it is the inability, utilising such resources as are available through the use of assets or which may otherwise realistically be raised to meet debts as they fall due, which indicates insolvency. 125 Turning then to consider the question of the Company's solvency or otherwise at the time of each payment sought to be impeached. 126 There were admitted into evidence two expert reports by Mr Sims as to the financial position of the Company. 127 In his first report Mr Sims expressed the opinion that the Company was insolvent as at 31 December 2000 and remained insolvent until his appointment on 17 December 2001. 128 Features of the Company's performance dealt with in his first report included the following: a in May 1999 the Company had positive working capital of $497,772 which peaked in August 1999 at $618,017. From that point onwards the Company's working capital position continually deteriorated up to and including 17 December 2001; b the balance sheet in the Company's management accounts as at 31 December 2000 disclosed an excess of liabilities over assets of $2,836,090; c the Company consistently made trading losses from its inception to the date of his appointment. To 31 December 2001 those trading losses amounted to $2,897,926. (The total trading losses throughout the life of its business activity, that is two years and seven months, amounted to $4,894,024); d Mr Sims' calculation that as at 31 December 2000, 23.6 per cent of the Company's trade debtors were overdue more than 90 days; and e as at 31 December 2000 the total amount owing to creditors was $1,327,232. (Mr Sims was unable to reconcile the Company's trial balances with the balance sheet in its management accounts as at 31 December 2000). 129 In his second report Mr Sims dealt with the position of the Company in relation to the period 30 June 2001 to 17 December 2001 (the date of the administration), relying on his previous report but also upon additional material relating specifically to 30 June 2001. 130 Mr Sims had at his disposal the Company's management accounts as at 30 June 2001 and also draft financial statements as at the same date. He chose to rely on the management accounts in favour of the draft financial statements because they had supporting schedules and were contemporaneous with the reporting date of 30 June 2001. The difference between the overall reported deficiency as at 30 June 2001 respectively reflected in each document was $105,000, which he did not consider to be material. 131 Features of the Company's performance dealt with in the second report as at 30 June 2001 included the following: a the Company had a net deficiency in assets (reflected by accumulated losses) of $4,127,157; b it had trade debtors of $799,903 of which 44 per cent were more than 90 days old; c it had total current liabilities of $2,374,384; d it had a deficiency of working capital of $1,645,937; e it had trade creditors, divided between "carriers" and other "trade creditors" of $1,653,060 of which 52.1 per cent of the combined total was more than 90 days old; f the most significant balances making up trade creditors overdue by 90 days were: · Communication Development Consultants (Sherbons) $ 90,765 · Farrer & Co $127,947 · Maine Marketing $106,944 · PriceWaterhouse Coopers $ 11,000 · Smith & Williamson $ 24,253 · The ATO $ 40,483 · Fishtech and Partners $ 63,369 g the largest balances making up the "carrier" creditors which were overdue by 90 days were: · TMI Australia $ 13,100 · Equant – monthly $ 43,426 · Equant – contract cancellation fee $ 60,476 · Asia Global (out of a total of $516,819) $117,502 · Worldcom USA $154,907 h as at 30 June 2001 there was a provision for an amount owing for group tax of $188,738 of which $60,447 in respect of April had been due since 7 May 2001 and $61,774 in respect of May 2001 had been due since 7 June 2001. 132 With the exception of July 1999 and May 2001 the Company traded at a loss on a monthly basis. 133 For the five months from July to November 2001 it made an operating loss of $852,359. 134 During that period it incurred charges to Asia Global of $625,170 of which, in accordance with the October 2001 arrangement, $57,414.36 was payable by 30 November 2001 and an additional $559,138.71 was to be paid by the end of February 2002. 135 Mr Braham of counsel for the plaintiffs, and Mr Rodionoff of counsel for the Commissioner put that the Company was insolvent at least from April 2001 when Comcraft defaulted on its subscription obligation. 136 They placed heavy reliance on the circumstances that the Company was not in a position to meet its tax liabilities as and when they fell due and on its hefty trading losses. 137 Mr Sims' analysis included as debts due and payable by the Company, amounts claimed by Farrer & Co, Smith & Williamson, Worldcom, Equant and TMI. 138 It was put on behalf of both Mr Maine and Mrs Maine that these were not debts of the Company to be taken into account in assessing the Company's solvency. 139 Mr Maine gave evidence that: a the Farrer & Co claims (to the extent that there were any) were properly against Newsnet Global as was the Smith & Williamson claim; b nothing was owed to Worldcom and that its claim related to the predecessor Newsnet business and was abandoned by Worldcom in a meeting in Tulsa Arizona in 1999; c the Equant debt was disputed because a Mr Freeth, who purportedly committed the Company to the Equant arrangements did not have authority to do so; and d the TMI claim was also to be attributed to the predecessor Newsnet business. 140 Mr Maine was cross-examined about these matters and his credit attacked. Aspects of his evidence did not sit easily with contemporaneous documents of the Company, including the report as to affairs which he himself signed and which reflected Worldcom and Equant as creditors, and a schedule of estimated creditors and accrued liabilities to 30 November 2000 (which appeared to be associated with an email of Mr Maine dated 6 December 2000) also reflecting Worldcom and Equant as creditors. In relation to Equant the schedule included a footnote to the effect that: "Equant cancellation charge is covered by investor funds. Discussions will be held with Equant to negotiate a lesser amount." 141 On the other hand, there was no evidence of any demand from Worldcom or Equant and the objective material with respect to Farrer & Co was not inconsistent with the true debtor being Newsnet Global. 142 I am not satisfied that the evidence established these as debts due and payable by the Company and in considering its solvency I have left them out of account. 143 The position taken on behalf of Mr Maine (for whom Mr Cotman SC and Mr Lucarelli of counsel appeared) and adopted on behalf of Mrs Maine (for whom Mr J Clarke of counsel appeared) placed significant reliance on an analysis of the Company's creditor position between 30 June 2001 and 30 November 2001 which, it was submitted, established that the Company had the capacity to, and was, servicing its creditors and that it was in a position to do so because of the support it had from Asia Global and its shareholders. 144 In aid of this analysis a comparison was made between creditors as at those two dates. 145 Leaving aside Maine Marketing and Asia Global, it was put that creditors increased by the insignificant figure of $21,806.75. By including Maine Marketing and Asia Global the analysis indicated an increase in creditors of $421,323.98. 146 It also was put that until 7 November 2001 the Company had a realistic prospect of obtaining funding from Comcraft notwithstanding the stance that organisation had taken. 147 It was put that the Company's tax obligations were the subject of a practically binding arrangement with the Commissioner on 18 October 2001 and that, although it met the agreed instalments marginally late, in commercially realistic terms it was in a position to meet, and was meeting, its debts to the Commissioner as and when they fell due. 148 It was however, conceded by Mr Cotman that "as an objective matter" the Company was insolvent on 7 November 2001 at which time the Company did not have the wherewithal to meet both its tax obligations and the balance of payments then owed to Asia Global. 149 The picture which emerges from the evidence is of a company which from the commencement of its business life was significantly undercapitalised (perhaps as a consequence of the initial investment by Comcraft being significantly smaller than what was originally contemplated). 150 From May 2001, it was not in a position to pay its debts due to the Commissioner notwithstanding the forbearance of its principal carrier, Asia Global. It was by then insurmountably and endemically illiquid. Mr Cotman's analysis did not, and could not, deal with the manifest inability of the Company to pay its accruing tax debts while it struggled to pay off its past ones. 151 Also, the creditors listings as at 30 June 2001 and 30 November 2001 respectively used in the analysis disclose that a number of debts due at 30 June 2001 (including some or parts of some which were already over 90 days old at 30 June 2001) remained unpaid at the end of November 2001. These included $63,369.49 owing to Fishtech & Partners which was already over 90 days old at 30 June 2001 and which had increased to $76,514 by the end of November 2001, $5,772.27 owing to Kemp Strang Lawyers as at 30 June 2001 which had not been paid by 30 November 2001 and to whom $10,510.42 was owed for more than 90 days by November 2001, $20,000 which by November 2001 was owing to Morgan & Banks for more than 90 days, $26,116.20 which by November 2001 was owing for more than 90 days to Political Reference Service and $18,796.20 which by November 2001 was owing for more than 90 days to the Commissioner of State Revenue. 152 Mr Clarke put a submission that apart from the tax debt, for the period up to September 2001 there was no evidence of other debts unpaid at the time. The objective material in evidence clearly shows otherwise. 153 As at 2 May 2001 Mr Maine's assessment was that General Atlantic was the only realistic option as a provider of capital. It had not committed by 7 May 2001 and there was no evidence indicating any realistic prospect from that source. There was no contact with Comcraft until August 2001 and there is no basis in the evidence for any conclusion that there was any realistic prospect from that source either. 154 In my view, on a cash flow test, the Company was clearly insolvent by May 2001, and the position progressively worsened until its demise. 155 In May 2001, that is, the month after Comcraft's default, the Company made an operating loss of $198,923. For June 2001 it made an operating loss of $285,201. From July 2001 to November 2001 it made an operating loss of $853,212. Even excluding all the direct fixed and variable costs payable to Asia Global for that period ($625,170), it lost $228,042. This is in the context of the shareholders having advanced $200,000 to it on loan in September and November 2001. As at 30 June 2000 the Company's accounts had been certified on a going concern basis because of the funding arrangements then proposed between Newsnet Global and Comcraft. By May 2001 Comcraft had repudiated those arrangements. 156 On 18 October 2001 the Company reached an accommodation with the Commissioner to pay instalments in reduction of indebtedness going back some months. 157 It is legitimate to take into account indulgences extended to a company by its creditors as to trading terms: Powell v Fryer at [75]. If by the instalment arrangement agreed with the Commissioner the Company was otherwise meeting its commitments to him or was in a position to do so, that would have been an important consideration. However, as the Commissioner's letter of 27 November 2001 said, the tax debt was not falling. It had quadrupled in the last six months. 158 As to shareholder support, voluntary assistance may properly be taken into account in determining (according to commercial realities) an ability to pay debts as and when they become due and payable: Lewis v Doran (2005) 54 ACSR 410. The support the Company received from the Maines and the Sherbons was manifestly insufficient to make the Company solvent even if the funds which they advanced were on terms which excluded the Company's loan liability to them (which the evidence did not establish) instead of merely substituting one form of immediate (or near immediate) obligation for another: Australian Securities and Investments Commission v Edwards (2005) 54 ACSR 583 at 611 [99] per Barrett J. 159 Whilst the file note of the shareholders' meeting of 16 October 2001 records an indication of the Sherbons' involvement and financial support to maintain the Company in a viable trading position, the realities are that there was no such sufficient support. 160 Mr Maine's memorandum of 6 August 2001 refers to Asia Global and Satyam Infoway Ltd as being supportive creditors "given the prospect of a new investor". There is no objective evidence of any such realistic prospect. 161 The same memorandum refers to Asia Global's offer to freeze existing debt and provide extended credit to February 2002. 162 Approaching the matter as at that time but looking forward as contemplated by Lindgren J in Melbase Corporation Pty Ltd v Segenhoe Ltd the Company had no realistic prospect of meeting its deferred debt to Asia Global, even that which was due at the end of November 2001. 163 By 31 October 2001 Mr Maine himself was contemplating administration. 164 Notwithstanding the indulgence from Asia Global and whatever shareholder support it had available, as at 17 May 2001, 22 August 2001, 24 August 2001, 10 September 2001 and 13 September 2001, the Company was unable, utilising all its available resources, to meet its tax liabilities which had then fallen due. It was evidently unable to meet those that were falling due as it tried to reduce past liabilities. 165 On a balance sheet test the Company was clearly insolvent by 30 June 2001 and was probably insolvent from a much earlier point in time. As at 30 June 2000 it had negative shareholders' equity of $1,578,396. Its position was shored up by the subscription agreement with Comcraft but the amount of the investment left the Company undercapitalised. As at 30 June 2001 the Comcraft support had fractured and the Company's accumulated losses and negative shareholders' equity had ballooned to $4,022,577. Its current assets amounted to $872,223 and its current liabilities to $2,147,772. 166 An excess of current liabilities over current assets is not conclusive of a company's insolvency and "cannot be more than a rule of thumb": Quick v Stoland (1998) 29 ACSR 130 at 139 per Emmett J; Tru Floor Service Pty Ltd v Jenkins (No. 2) (2006) 232 ALR 532 at 543 [43]. 167 In this case the balance sheet position of the Company as at 30 June 2001 serves to confirm its insolvency on any test by that date. 168 By the operation of s 588E(3) the Company was insolvent at least throughout the period 30 June 2001 to 17 December 2001. 169 The Commissioner's admission of insolvency was soundly made and because the evidence has established it as a fact it is not necessary to consider what the effect might have been if there had been an incongruity between it and a finding of fact in the claim brought by the Commissioner against Mr Maine and Mrs Maine. Mr Maine 170 Mr Maine pleads the defence in s 588FGB(3) that he had reasonable grounds to expect, and did expect, that the Company was solvent at the time of each payment and would remain solvent even if it made it. 171 The particulars pleaded by him are that: a during late 2001 he believed that Comcraft would eventually pay the Tranche 2 which would be used to fund the continued operation of the Company and pay its creditors; b the principal creditors were the Sherbons, the Maines and Newsnet Global, none of whom were pressing for payment; c the directors had entered into an instalment payment schedule with the Commissioner on the basis of their expectation that Tranche 2 would be paid and made available for payment of the Company's debts including that owed to the Commissioner augmented by the Company's cash flow; d prior to 25 October 2001 the Company had an agreement with Asia Global whereby monthly carrier costs would accrue but not be payable until February 2002 when they would be paid by cash or shares or both. After 25 October 2001 the Company and Asia Global were bound by the agreement comprehended in the 25 October 2001 letter; and e the directors were negotiating with a US company CRG Inc for a US$250,000 capital investment which would be available to fund the Company's continuing operations. 172 The particulars reflected in sub par (d) above were introduced by an amendment which was, with leave, made during the hearing. 173 "Reasonable grounds" to expect requires more than a mere hope or possibility: Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201. 174 The test requires the director subjectively to have that expectation and for the expectation to be reasonably based. 175 The director's conduct is to be judged not only on what he knew but on what he ought to have known: Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722 at 731. 176 So far as Comcraft is concerned, on his own version, Mr Maine ceased negotiations with that company on 8 November 2001. Beyond that date he could not have had any reasonable expectation that Comcraft would pay. The Company's solicitors had made demand on Comcraft on 25 July 2001 and the first contact with it for negotiation purposes was in August 2001. Newsnet Global may have had a claim against Comcraft for damages (or in debt) according to the laws of Bermuda (see clause 15.1 of the subscription agreement). As at 11 April 2001, according to the minutes of a board meeting of the Company on that day, following seven weeks of effort to secure the payment of Tranche 2, Comcraft advised that it did not have the capacity to meet its commitments. This may or may not have been true. However, Mr Maine proffered no evidence of any dealings with Comcraft which might have formed the basis for any reasonable expectation on his part of performance by Comcraft after 7 April 2001. 177 Moreover, the investment from Comcraft would not on its own have been enough to place the Company in a solvent position. 178 So far as Asia Global is concerned, until 25 October 2001, on Mr Maine's evidence, Asia Global was carrying the Company without requiring payment. But the time would have come when arrangements for payment on some basis would have to be made. The arrangements with Asia Global do not assist Mr Maine with respect to an expectation reasonably based, that the Company was solvent. It needed to be carried by Asia Global because it was not solvent. From 25 October 2001 there were arrangements for instalments which the Company had no reasonable prospect of meeting and there was no basis upon which Mr Maine could reasonably have contemplated it would have. 179 Neither the Sherbons nor the Maines were pressing for payment. In September and November 2001 they put money into the Company. But, as has been dealt with above, the funds provided were inadequate and the fact that they were not pressing for payment did not mean they would not, at short notice, have done so. In any event, the Company was unable to meet its tax obligations even with their support. 180 So far as the instalment payment schedule with the Commissioner is concerned, there could have been no reasonable expectation that Tranche 2 was forthcoming from Comcraft to enable the Company to meet it. More significantly, the instalment payment schedule was reducing past indebtedness to the Commissioner but making no inroads with regard to tax obligations which were continually accruing. 181 Mr Maine gave evidence that when the Company fell behind in its group tax obligations he would have expected that David Sherbon would have spoken with him, but he had no recollection of receiving the August penalty notice. He did not believe he communicated with the ATO but would have been working with Ed Conway and would have been advised by him about Mr Conway's dealings with the ATO. 182 He accepted that the Company did not "just write a cheque" for the outstanding group tax because the Company did not have the money to do so unless the shareholders put it in at that time. He accepted that no shareholder or director offered to stand in and fund the Company's group tax obligations even after the 18 October 2001 arrangement was entered into. His evidence was that "we had in relation to all other matters in relation to the company, to work with those people to hold their obligations". 183 There is no basis for a finding that Mr Maine held any reasonable expectation that the Company was in a position to meet its tax debts as and when they fell due. There is no evidence of any consideration by him of how he expected the Company might be in a position to do so. Even if the Commissioner had at 18 October 2001 not insisted on payment strictly in accordance with the Company's obligations, the Company did not have cash or credit resources from which to pay its continuing obligations: Iso Lilodw' Aliphumeleli Pty Ltd v Commissioner of Taxation (2002) 42 ACSR 561 at 566 [15] and following per Davies AJ. 184 There was no evidence of any reasonable expectation for an investment from CRG Inc. 185 Beyond the particulars, it must have been obvious to Mr Maine from the end of 2000 that the Company was undercapitalised and that from at least the time of Comcraft's repudiation it was in a perilous position. The Company's existence depended on securing new external funding and beyond 7 May 2001 there is no evidence of the existence of any reasonable prospect for such funding. 186 A finding that Mr Maine had a reasonable expectation that the Company was solvent at any time from May 2001 onwards is not open. 187 His defence fails. Mrs Maine 188 Mrs Maine pleads the statutory defences in ss 588FGB(4) and (6). 189 Under s 588FGB(6) there is a defence if Mrs Maine took all reasonable steps to prevent the Company from paying the Commissioner or proves that there were no such steps she could have taken. 190 This defence can be disposed of shortly. 191 Mrs Maine took no such steps. To the contrary, she facilitated the making of the payments to the extent at least of providing continuing support for the Company, which she could have withheld. Had she refused at the end of September 2001 and in November 2001 to put money in it is difficult to see how the Company would not have failed then. 192 Although it was put that had Mrs Maine opposed the payments being made to the Commissioner, Mr Maine would have persuaded her otherwise, the proposition is no more than hypothesis because she did not oppose the payments being made. 193 It was not, nor could it properly have been, suggested that Mr Maine would not have taken her views into account. Mr Maine made it clear that she was no shrinking violet and I formed the same impression. 194 Moreover, the position the Sherbons would have taken may have been relevant and they did not give evidence. 195 In my view Mrs Maine has not proved that there were no reasonable steps she could have taken to prevent the Company from making the payments and her defence in that respect fails. 196 The defence under s 588FGB(4) has two elements: a firstly, a belief on reasonable grounds that a competent and reliable person was fulfilling a responsibility to her for providing adequate information about whether the Company was solvent; and b secondly, an expectation based on such information so provided that the Company was solvent at the time of each payment and would remain solvent even if it made it. 197 As to the first element it was put that there were two persons responsible to her for providing the information, Mr Maine and Mr Conway. 198 Mrs Maine described herself as a non-executive director of the Company. She attended weekly financial briefings by Mr Conway and also monthly board meetings. Usually the only directors at the financial briefings were her and Christopher Sherbon. 199 The Company had an executive group responsible for day to day management of which she was not a member. She sometimes stood in as receptionist. She was not paid for this. 200 Mr Conway was responsible, the evidence established, for all financial reporting and legal compliance requirements. He was a member of the Institute of Chartered Accountants and had previously worked for KPMG Peat Marwick. 201 He prepared various forms of financial information and gave financial briefings to Mrs Maine. They included the provision to her of financial "key points" for each monthly board meeting. 202 The last of the key point documents referred to by her in her affidavit evidence is that for October 2001, which under the heading "Creditors" states that: "Creditors currently stands at $2.4 mill plus $286K relating to group tax. A separate schedule is attached and identifies the creditor amount as either under arrangement, subject to negotiation or current". 203 The schedule was, however, not in evidence. 204 From both the ambit of his officially designated functions and from the activities which he in fact engaged in, I find that it was one of Mr Conway's responsibilities to provide information to the board (and therefore to Mrs Maine) as to whether the Company was solvent. 205 It was put by Mr Rodionoff, that from about 15 August 2001 Mrs Maine knew there was default by the Company in paying its tax and that there is no evidence she took any steps to find out what was happening with the tax debt. Reliance was placed on what was said by Davies AJ in Iso Lilodw' Aliphumeleli Pty Ltd v Commissioner of Taxation at [80] that: Section 588FGB(4) is directed primarily to the circumstance where directors must rely primarily upon other persons, particularly accountants and actuaries to prepare accounts which will disclose the financial position of a company. The section does not negate a director's duty to keep himself informed, and to form his own judgment about the affairs of the company, of which he is a director. 206 It follows, it was put, that Mrs Maine did not have (nor could she have had) a reasonable basis to consider Mr Conway was providing adequate information. 207 However, Mr Conway was the person charged with responsibility for dealing with the ATO and he had been doing so, relevantly, from at least May 2001. Her evidence was that receipt of the penalty notice documents from the ATO prompted the instalments payments made by the Company starting in September 2001. She understood that if the Company paid out the underlying tax liabilities for group tax, the ATO would not be able to pursue her personally for the penalties. Dealing with the ATO was left to Mr Conway. 208 Mr Conway may have fallen short of providing her with adequate information, particularly as to the inability of the Company to meet its continually accruing tax obligations from about May 2001, but the test under the first limb of s 588FGB(4) does not focus on whether Mr Conway did in fact fulfil his responsibility, but rather on whether Mrs Maine had reasonable grounds to believe he was doing so. 209 In many cases where a director who raises the defence has fallen short of his or her statutory or equitable duties to the company, the factual circumstances may preclude successful reliance on the defence because reliance on the information provider may not be reasonable. Each case will depend on its own circumstances. 210 It was, in my view, reasonable for Mrs Maine, as a non-executive director, to leave that matter in his hands, as a highly qualified Chief Financial Officer, and for her to rely upon him to relay to her adequate information. 211 In the specific circumstances of this case, I do not accept the submission on behalf of the Commissioner that from August 2001 reliance on Mr Conway was not reasonable. 212 I also find that there were reasonable grounds for a belief that he was competent and reliable and, as is referred to below, that he was fulfilling that responsibility until the end of October 2001. I find that Mrs Maine had reasonable grounds, until that time, for placing reliance upon Mr Conway. 213 With respect to Mr Maine, I do not consider that Mrs Maine established that Mr Maine was responsible to her for providing adequate information about whether the Company was solvent, that she had reasonable grounds to believe he was so responsible or that he was fulfilling that responsibility. 214 Mr Maine was the chief executive officer whose responsibilities were, according to his "Executive Profile" in Newsnet Global's 2001 Company Profile, "setting strategic direction, contributing to business development, producing an effective operation environment for Executives, and delivering value to shareholders". 215 The evidence showed that Mr Conway was as much responsible to Mr Maine as he was to Mrs Maine for the provision of financial information. Mr Maine's background was in political science, marketing and industrial relations. He was not skilled in accountancy. 216 At the monthly board meetings Mr Maine presented an Equity Investor report. The presentation of that report was in accordance with his responsibilities and functions. Although such information might have an effect on consideration of the Company's solvency, it is not information about whether the Company was solvent as contemplated in s 588FGB(4). It is information concerning the Company's progress and prospects of raising investment capital. 217 Presentation of the financial report, which was such information, was Mr Conway's function. 218 Nothing in the evidence establishes responsibility on the part of Mr Maine to provide the directors, including Mrs Maine, with adequate information about whether the Company was solvent. He provided no reports with any substantive information which might indicate a responsibility on his behalf in that regard. In my view, the first limb of the defence is not made out with respect to Mr Maine: see Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330 at [57] per Young CJ in Eq. 219 Mrs Maine gave evidence of the type of information provided to her by Mr Conway at the financial briefings. It included a profit and loss schedule, information concerning creditors and debtors and current up to date financial data. 220 Mrs Maine gave evidence that from the end of July 2001 to October 2001 she had several discussions with Mr Maine along the following lines: "Mrs Maine: Is the advice you are receiving still confirming that we are ok to carry on trading? Mr Maine: Yes. All of the advice we have been getting has been telling us that we can continue to trade as we have the support of the creditors and the shareholders continue to put in funds as and when required. Ed and I still believe that the company can continue to trade into the future." 221 Mrs Maine's evidence was that it was never suggested at any of the financial briefings that the Company was insolvent or in danger of trading while insolvent. 222 However, Mr Maine's email of 31 October 2001 to her and others made it clear that on its current performance the Company alone would not be able to meet its obligations to Asia Global in the first quarter of the following year and the email expressly foreshadowed administration. By that time Mr Conway had resigned although he had not yet left. He apparently stayed on through November 2001. 223 On 6 November 2001 Mrs Maine had a conversation with Mr Maine to the following effect: "Mr Maine: I think it's taking too long. All of the advice we have received has been that we are okay to keep trading but I think it is taking too long to find an equity investor. Mrs Maine: What do you think we should do? Mr Maine: I think we need to go and see Steve Williams and put the company into administration. Mrs Maine: If that is what you think then I will trust your advice and judgment. Mr Maine: I'll call Steve Williams first thing tomorrow morning to arrange a meeting." 224 The following day they met with insolvency experts at which, according to her evidence, a restructuring which "would save" the Company (but which she did not understand) was discussed. 225 Mrs Maine's evidence was that all times prior to 17 December 2001 she believed (held the expectation) that the Company could pay its debts as and when they fell due. 226 Section 588FGB(4)(b) does not require the expectation to be reasonably based. 227 As to whether she held the expectation, Mr Rodionoff placed heavy reliance on Mr Maine's email of 31 October 2001 to found a submission that Mrs Maine did not have the expectation of solvency at that time. However, she was not confronted with the document and she was also not challenged on her evidence that she held the expectation of solvency throughout 2001, notwithstanding the discussion with Mr Maine of 6 November 2001 and her attendance at a meeting the following day where a restructuring to "save" the Company was discussed with lawyers and insolvency experts. 228 In those circumstances it seems to me that the challenge to her state of mind principally based on a document which she received but upon which she was not cross-examined is not fairly open: State Rail Authority of New South Wales v Brown (2006) 66 NSWLR 540. 229 In my view, with some degree of hesitation, I accept her evidence that she subjectively held the expectation until immediately before the administration commenced. 230 However, subjectively holding the expectation is not sufficient for the defence. That expectation must be proved to have been held on the basis of information provided by Mr Conway. 231 Mr Rodionoff put that for Mrs Maine to discharge the onus on her of proving that the expectation was on the basis of information provided by Mr Conway she had to identify, with some degree of particularity, the information upon which that expectation was based, and that she had failed to do so. There is some force in the submission. 232 In Mrs Maine's affidavit evidence she made reference to the financial reports presented by Mr Conway to the board and also to the key points documents, the last of which referred to by her was that of October 2001. 233 Leaving aside the key point documents, some of which were produced, she made no reference to any specific financial report or information in it. 234 Under cross-examination she said that in October 2001 she turned her mind or considered whether the Company could pay its debts as and when they fell due and formed the view that "we were able to pay our debts". She said the conclusion would have been on the advice of Mr Conway and his reading of his documents to the board and analysis of them. 235 Her evidence was that the same would have been true for the month of November 2001. 236 Mrs Maine was not cross-examined as to what she derived from the October 2001 financial key points document. Although it was not put to her that she had not derived the understanding which she says she did, the evidence did not establish that even if she had an expectation that the Company was solvent beyond the end of October 2001 that that expectation was based on information provided to her by Mr Conway. 237 She was however, not challenged on the several discussions from July to October 2001 in which Mr Maine conveyed to her Mr Conway's belief that the Company could continue to trade into the future. 238 The October 2001 key points document does not paint a positive picture but neither does it inform the reader that the Company is insolvent. 239 There is no evidence of any monthly board meeting or financial briefing by Mr Conway after 31 October 2001. 240 The evidence did not establish any specific reliance upon Mr Conway or reliance on any specific information being provided by him beyond the time of the October 2001 key points document. 241 The only express reference in the 31 October 2001 email to Mr Conway is that he had resigned and was to leave the Company by mid November. 242 After reading that email it does not seem to me that it could fairly be said that any expectation of solvency could any longer have been based on information provided by Mr Conway. 243 The evidence such as it was points in the opposite direction. There is no suggestion of any participation by Mr Conway in or reliance by her upon anything said by him in the conversations and meetings beyond 31 October 2001. 244 Mr Conway plays no part in the discussion on 6 November 2001 between Mrs Maine and Mr Maine. By that time there is no evidence of anything said or done by Mr Conway which could fairly be argued to have given rise to an expectation of solvency on her part. 245 By that time she was clearly placing reliance on Mr Maine who could himself have had no reasonable basis for an expectation that the Company was solvent. Moreover, the contents of his 31 October 2001 email and what he said during the 6 November 2001 conversation are inconsistent, on any view, with communicating an expectation to that effect. 246 In the circumstances it seems to me that there is sufficient warrant, albeit by the barest of margins, to conclude that until the end of October 2001 Mrs Maine's expectation was based, in part, on information provided by Mr Conway. 247 The email of 31 October 2001 was sent at 10:35am. The evidence did not establish when Mrs Maine read it. A payment of $20,000 was made to the Commissioner that day, but the evidence did not establish whether it was made before or after she had notice of the email. Had it been established that she read the email before the payment was made, I would have rejected her defence with respect to it not only for the reason that reliance would not have been shown to have been placed on Mr Conway from that point, but because, in addition, having regard to the content of the email, she would not have established that beyond that date she had reasonable grounds to believe that Mr Conway was fulfilling a responsibility to provide her with adequate information about whether the Company was solvent. 248 After 31 October 2001, the next payment made to the Commissioner was on 8 November 2001. In my view Mrs Maine has failed to establish the second limb of the defence beyond the end of October 2001. 249 In those circumstances she has established her defence with respect to all but the last four payments totalling $80,000 in respect of which she must pay an equivalent amount to the Commissioner. Conclusion 250 The plaintiffs succeed against the Commissioner to the full extent of their claim. 251 The Commissioner is entitled to be indemnified by Mr Maine to the full extent of the Commissioner's loss. 252 The Commissioner is entitled to be indemnified by Mrs Maine with respect to the loss incurred by him in having to pay to the plaintiffs the following amounts paid by the Company to him: 8 November 2001 PAYG 20,000.00 15 November 2001 PAYG 20,000.00 22 November 2001 PAYG 20,000.00 30 November 2001 PAYG 20,000.00 253 I will hear the parties on costs and on the form of orders. The parties are to bring in short minutes making provision for precise calculations including interest. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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