District Court New South Wales Medium Neutral Citation: Mansfield v Townend [2017] NSWDC 370 Hearing dates: 25, 26 and 29 May 2017. Submissions closed 19 June 2017 Date of orders: 20 December 2017 Decision date: 20 December 2017 Jurisdiction: Civil Before: Wilson SC DCJ Decision: (a) verdict for the first defendant against the plaintiff; (b) the plaintiff to pay the first defendant's costs of the proceedings; (c) I note that the proceedings against the second and third defendants have previously been discontinued; (d) I order that the First Cross Claim be dismissed with no order as to costs; (e) I order that the Second Cross Claim be dismissed with no order as to costs; (f) I grant the parties liberty to apply within 28 days to vary the costs order referred to in paragraph (b) above, if necessary; (g) I direct that the Exhibits be returned after 28 days. Catchwords: CORPORATIONS LAW – trading whilst insolvent – duties of directors – whether the first defendant was a director – whether company was insolvent – whether the first defendant contravened sub-section 588G(2) of the Corporations Act 2001 – whether the first defendant failed in her duty to prevent insolvent trading by company – whether the first defendant was aware that there were grounds for suspecting insolvency – whether a reasonable person in a like position in the company's circumstances would be so aware. Legislation Cited: Corporations Act 2001 Unfair Contracts Act 1980 (NSW) Cases Cited: Australian Securities and Investment Commission v Edwards (2005) 54 ACSR 583, [2005] NSWSC 831 Commonwealth Bank of Australia v Freidrich Australian Securities and Investments Commission v Plymin (No 1) (2003) 46 ACSR 126 Credit Corp Australia Pty Limited v Atkins (1999) 30 ACSR 727, [1999] FCA 335 Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 Hedges v New South Wales Harness Racing Authority Club Limited and Ors (1991) 5 ACSR 291 at [293] Knight v Bulic (1994) 13 ACSR 553 at [560] Metal Manufacturers Ltd v Lewis (1986) 11 ACLR 122 Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423 at 448 Powell v Fryer (2001) 37 ACSR 589; [2000] SASC 59 Queensland Bacon v Rees (1996) 115 CLR 266 at 303 Smith v Bone (2015) 104 ACSR 528, [2015] FCA 319 Swan Services Pty Limited (in Liquidation) [2016] NSWSC 1724 Category: Principal judgment Parties: David Ian Mansfield as Official Liquidator of Camperdown Bowling & Recreation Club Limited (in Liquidation) ACN 000 248 215 (Plaintiff) Leanne Maree Townend (First Defendant) Paul James McDonald (Second Defendant) Ronald Lewis (Third Defendant) Representation: Counsel: Mr D Krochmalik (Plaintiff) Mr A Martin (First Defendant) Solicitors: Shine Lawyers (Plaintiff) Law Society Pro Bono & Community Services (First Defendant) File Number(s): 2015/241621 Publication restriction: None Judgment Introduction Primary Legislative Provisions The Plaintiff's Principal Contentions Ms Townend's Principal Contentions Statutory Defences Facts in Dispute Chronology The Evidence The Evidence of the First Defendant – Leanne Maree Townend The Evidence of the Plaintiff – David Ian Mansfield Documentary Evidence Minutes of Board Meetings Documentary Evidence Relating to Solvency Analysis and Findings Was Ms Townend a director during the Relevant Period? Section 588G Section 588G(1) Section 588G(2) Finding re Contravention Findings as to Facts in Dispute ISSUE 1: Whether Ms Townend was a director within the meaning of s9 of the Act; ISSUE 2: Whether the Company was in fact insolvent during the Relevant Period or became insolvent as a result of incurring the debt. ISSUE 3: Whether the Company was trading whilst insolvent by reason of a presumption arising under the Act. ISSUE 4: Whether there are reasonable grounds for suspecting that the Company was insolvent or would become insolvent. ISSUE 5: Whether Ms Townend has contravened sub-section 588G(2)(a) or (b) by the Company incurring the debt(s) during the Relevant Period. ISSUE 6: Whether the person (the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the Company's insolvency; ISSUE 7: Whether the debt was wholly or partly unsecured when the loss or damage was suffered. ISSUE 8: Whether the Company is being wound up. Disposition Statutory Defences Orders Judgment Introduction 1. By Statement of Claim filed 18 August 2015, the plaintiff (a liquidator) claimed compensation from the defendants pursuant to s588M(2) of the Corporations Act 2001 ("the Act") on the basis that they were directors of the Camperdown Bowling & Recreation Club Limited ("the Company"). The Company was placed into liquidation by order of the Supreme Court of New South Wales on 20 September 2012. 2. Although all three named defendants were directors at the relevant time, this action is pressed as against the first defendant only. Although not pertinent to the determination of the proceedings, I understand that the second and third defendants are bankrupt such that proceeding against them would be futile. The proceedings brought by the plaintiff against the second and third defendants have been discontinued. 3. It is alleged that between 1 July 2010 and 20 September 2012 ("the Relevant Period") the Company incurred debts totalling $190,910.30. It is further alleged that during the Relevant Period, the Company was trading whilst insolvent and that those debts ought not to have been incurred. 4. It is alleged that the insolvency is demonstrated by the financial records of the Company during the Relevant Period and that a presumption of insolvency arises by operation of s588E(4) due to its failure to keep financial records. 5. A threshold question arose as to whether the first defendant was a director of the Company. Primary Legislative Provisions 1. The case proceeded principally on two sections of the Act – s. 588C (the breach provision) and s. 588M (the remedy provision). 2. Section 588G sets out a director's duty to avoid a company trading whilst insolvent: CORPORATIONS ACT 2001 - SECT 588G Director's duty to prevent insolvent trading by company (1) This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) that time is at or after the commencement of this Act. (1A) For the purposes of this section, if a company takes action set out in column 2 of the following table, it incurs a debt at the time set out in column 3. … (2) By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware. Note: This subsection is a civil penalty provision (see subsection 1317E(1)). ... (4) The provisions of Division 4 of this Part are additional to, and do not derogate from, Part 9.4B as it applies in relation to a contravention of this section. 1. The plaintiff contends: 1. that the first defendant (Ms Townend) was a director of the Company at the time when the debts were incurred (s588G(1)(a)); 2. that the Company was insolvent at that time (s588G(1)(b)); 3. that at the relevant time there were reasonable grounds for suspecting that the Company was insolvent or would become insolvent (s588G(1)(c)); 4. specifically, that Ms Townend contravened sub-section s588G(2) in that either: 1. Ms Townend was aware at the time the Company incurred the debt that there were grounds for suspecting that the Company was or would become insolvent (s588G(2)(a)); or 2. that a reasonable person in a like position in the company in the company's circumstances would be so aware. 1. Sub-section 3 provides the offence provision. That is not relied upon by the plaintiff. 2. The relief sought by the plaintiff is compensation for loss resulting from insolvent trading. That remedy is provided by s588M of the Act: CORPORATIONS ACT 2001 - SECT 588M Recovery of compensation for loss resulting from insolvent trading (1) This section applies where: (a) a person (in this section called the director ) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and (b) the person (in this section called the creditor ) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and (c) the debt was wholly or partly unsecured when the loss or damage was suffered; and (d) the company is being wound up; whether or not: (e) the director has been convicted of an offence in relation to the contravention; or (f) a civil penalty order has been made against the director in relation to the contravention. (2) The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage. (3) The creditor may, as provided in Subdivision B but not otherwise, recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage. (4) Proceedings under this section may only be begun within 6 years after the beginning of the winding up. 1. In the circumstances of this case, the plaintiff was the official liquidator of the Company and relied upon the standing provided by s588M(2). The Plaintiff's Principal Contentions 1. The plaintiff contends that the defendant was a director of the Company at the time the relevant debts were incurred. It is further contended that at the relevant time, the Company was insolvent or would become insolvent and that Ms Townend was aware that there were reasonable grounds for suspecting same (s588G(2)(a)) or that a reasonable person in a like position in the company's circumstances would be aware (s588G(2)(b)). 2. By reason of those allegations, it is submitted that the defendant has contravened s588G(2) of the Act giving right to the action for compensation now brought. Ms Townend's Principal Contentions 1. Ms Townend disputed the fact that she was a director of the Company during the Relevant Period. 2. Further, Ms Townend disputed that she was aware or ought to have been aware of the fact that the Company was insolvent either actually or by way of the presumption upon which the plaintiff relies. 3. Further, it was pleaded by Ms Townend that she is entitled to the defence provided by s588H(4) of the Act which provides: (4) if the person was a director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company. 1. In the particulars to paragraph 4 of the Defence in which this section is raised, the following allegation is made: The first defendant was suffering severe cognitive impairment between 1 July 2010 and 20 September 2012 and was not involved in the management of the company. 1. Despite this pleading and the evidence adduced in respect of it, Ms Townend abandoned this defence in Written Submissions. Statutory Defences 1. Finally, in the event that it is found that Ms Townend is liable to the plaintiff under s588M then Ms Townend seeks to be excused from that liability and relies upon ss 1317S and 1318 of the Act. 2. Section 1317S provides: CORPORATIONS ACT 2001 - SECT 1317S Relief from liability for contravention of civil penalty provision (1) In this section: "eligible proceedings " : (a) means proceedings for a contravention of a civil penalty provision (including proceedings under section 588M, 588W, 961M, 1317GA, 1317H, 1317HA or 1317HB); and (b) does not include proceedings for an offence (except so far as the proceedings relate to the question whether the court should make an order under section 588K, 1317H, 1317HA or 1317HB). (2) If: (a) eligible proceedings are brought against a person; and (b) in the proceedings it appears to the court that the person has, or may have, contravened a civil penalty provision but that: (i) the person has acted honestly; and (ii) having regard to all the circumstances of the case (including, where applicable, those connected with the person's appointment as an officer, or employment as an employee, of a corporation or of a Part 5.7 body), the person ought fairly to be excused for the contravention; the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention. (3) In determining under subsection (2) whether a person ought fairly to be excused for a contravention of section 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. (4) If a person thinks that eligible proceedings will or may be begun against them, they may apply to the Court for relief. (5) On an application under subsection (4), the Court may grant relief under subsection (2) as if the eligible proceedings had been begun in the Court. (6) For the purposes of subsection (2) as applying for the purposes of a case tried by a judge with a jury: (a) a reference in that subsection to the court is a reference to the judge; and (b) the relief that may be granted includes withdrawing the case in whole or in part from the jury and directing judgment to be entered for the defendant on such terms as to costs as the judge thinks appropriate. (7) Nothing in this section limits, or is limited by, section 1318. 1. Section 1318 provides: CORPORATIONS ACT 2001 - SECT 1318 Power to grant relief (1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit. (2) Where a person to whom this section applies has reason to apprehend that any claim will or might be made against the person in respect of any negligence, default, breach of trust or breach of duty in a capacity as such a person, the person may apply to the Court for relief, and the Court has the same power to relieve the person as it would have had under subsection (1) if it had been a court before which proceedings against the person for negligence, default, breach of trust or breach of duty had been brought. (3) Where a case to which subsection (1) applies is being tried by a judge with a jury, the judge after hearing the evidence may, if he or she is satisfied that the defendant ought pursuant to that subsection to be relieved either wholly or partly from the liability sought to be enforced against the person, withdraw the case in whole or in part from the jury and forthwith direct judgment to be entered for the defendant on such terms as to costs or otherwise as the judge thinks proper. (4) This section applies to a person who is: (a) an officer or employee of a corporation; or (b) an auditor of a corporation, whether or not the person is an officer or employee of the corporation; or (c) an expert in relation to a matter: (i) relating to a corporation; and (ii) in relation to which the civil proceeding has been taken or the claim will or might arise; or (d) a receiver, receiver and manager, liquidator or other person appointed or directed by the Court to carry out any duty under this Act in relation to a corporation. (5) This section does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation. 1. The parties have agreed that consideration of relief under ss1317S and/or 1318 of the Act should await determination of the principal issues as those defences would only arise in the event that liability is found. Facts in Dispute 1. There are essentially seven issues which arise at this stage of the proceedings: ISSUE 1: Whether Ms Townend a director within the meaning of s9 of the Act; ISSUE 2: Whether the Company was in fact insolvent during the Relevant Period or became insolvent as a result of incurring that debt; ISSUE 3: Whether, by reason of presumption arising under s588E(4) of the Act, the Company is presumed to have been trading whilst insolvent during the Relevant Period; ISSUE 4: Whether, for the purpose of s. 588G(1)(c), there were reasonable grounds for suspecting that the Company was insolvent or would become insolvent; ISSUE 5: Whether Ms Townend has contravened sub-section 588G(2)(a) or (b) by the Company incurring the debt(s) during the Relevant Period; ISSUE 6: Whether the person (the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the Company's insolvency; ISSUE 7: Whether the debt was wholly or partly unsecured when the loss or damage was suffered; ISSUE 8: Whether the Company is being wound up. 1. If the first issue is determined in favour of the first defendant, it is not necessary for the Court to make findings as to the remaining matters. Chronology 1. A chronology was prepared on behalf of the plaintiff. It became Exhibit A and correlates relevant events to their foundation in the evidence. "CB" denotes Court Book. That chronology has been adapted as follows: CHRONOLOGY Date Event Reference CB Volume, Page number 25 September 1958 Camperdown Bowling & Recreation Club Ltd (In Liquidation) (the Company) was incorporated Page 96 of Exhibit DM1 CB1-95 (Exhibit B in the proceedings) 20 July 2002 Company executes lease over club house and bowling greens at Camperdown Park Annexure 11 to pages 126-142 of Exhibit DM1 (Solvency Report) CB2-429-451 (Annexure 11) (Exhibit B in the proceedings) CB1-165-181 (Solvency Report) 14 September 2008 First Defendant, Leanne Townend (Ms Townend) was appointed a director and company secretary of the Company Page 4 of Exhibit DM1; Page 96 of Exhibit DM1 CB1-43; (Exhibit B in the proceedings) CB1-135 30 June 2010 Date from which Plaintiff alleges the Company was insolvent Paragraph 8 of Affidavit of David Mansfield; Solvency Report CB1-22 (Exhibit B in the proceedings) CB1-165-181 22 October 2010 Loan Agreement between Terry Palapanis and the Company, executed on behalf of the Company by Paul James McDonald (also known as Paul Shiel) (Mr McDonald) and Ms Townend (Loan Agreement) Annexure 11 to Solvency Report CB2-429-451 (Exhibit B in the proceedings) 24 March 2011 Variation to Loan Agreement between Terry Palapanis and the Company executed on behalf of the Company by Mr McDonald and Ms Townend Annexure 11 to Solvency Report CB2-429-451 (Exhibit B in the proceedings) 27 May 2011 Further variation to Loan Agreement between Terry Palapanis and the Company, which was executed on behalf of the Company by Mr McDonald and Jennifer Grosvenor Annexure 11 to Solvency Report CB2-429-451 (Exhibit B in the proceedings) 30 June 2011 Last point in time at which financial records of the Company were available Paragraph 6 of Affidavit of David Mansfield; Solvency Report CB1-21 (Exhibit B in the proceedings) CB1-165-181 (Solvency Report) Meeting of Board of directors of the Company at which Ms Townend was in attendance. Pages 5-14 of Exhibit DM1 7 July 2011 Minutes record that [page 6 of DM1]: (Exhibit B in the proceedings) CB1-5-53 "[T]he club has approx. $79,000 in creditors at present but strongly believes that this amount can be reduced by making offers to settle outstanding amounts in full at less than their full value". Meeting of Board of directors of the Company at which Ms Townend was in attendance. Pages 15-19 of Exhibit DM1 11 August 2011 Minutes record [page 15 of DM1]: (Exhibit B in the proceedings) CB1-54-58 "Again no financial reports were tabled at the meeting. The board has expressed its concern for the lack of financial knowledge around the financial position of the club by board members" Meeting of Board of directors of the Company at which Ms Townend was not in attendance (listed as an apology). Annexure 22 to Solvency Report 21 August 2011 Minutes record: (Exhibit B in the proceedings) CB2-603-605 "The club should have closed two years ago but we are still trading…" Meeting of Board of directors of the Company at which Ms Townend was in attendance. Pages 20-24 of Exhibit DM1 15 September 2011 Minutes record [page 21 of DM1]: (Exhibit B in the proceedings) CB1-59-63 "This is the 4th Month these [financial] reports have not been tabled…" 8 May 2012 Application is made by Aristocrat Technologies Australia Pty Limited for winding up of the Company in insolvency Pages 25-27 of Exhibit DM1 CB1-64-66 (Exhibit B in the proceedings) Meeting of Board of directors of the Company at which Ms Townend was in attendance. Pages 28-29 of Exhibit DM1 21 August 2012 Minutes record [pages 28-29 of DM1]: (Exhibit B in the proceedings) CB1-67-68 "Breaches notice issued by…OLGR" in relation to failure to prepare and produce financial statements and reports 20 September 2012 Company wound up pursuant to an order of the Supreme Court of New South Wales; Plaintiff appointed liquidator of the Company Page 54 of Exhibit DM1 CB1-93 (Exhibit B in the proceedings) The Evidence 1. The evidence relied upon by the parties was largely documentary. Both the plaintiff and the first defendant put on affidavit evidence and were cross-examined on same. 2. The bulk of the evidence upon which the plaintiff relied was contained in Exhibit C which was the affidavit of the plaintiff attaching a large number of documents. The plaintiff also relied on a further affidavit dated 29 May 2017. 3. The primary document was a Solvency Report by the plaintiff dated 29 April 2016 in which the author concluded that the Company was insolvent during the Relevant Period by continued trading. That conclusion was reached on two bases: 1. that the management accounts were not sufficient to meet the requirements of s286 of the Act thereby giving rise to a presumption of insolvency (presumptive insolvency); and 2. that the actual accounts, to the extent to which they were in existence, demonstrated by reference to profit/loss statement and balance sheets actual insolvency during the Relevant Period (actual insolvency). The Evidence of the First Defendant – Leanne Maree Townend 1. The question of whether Ms Townend was a director is a threshold question. Evidence bearing upon that issue came from the ASIC record and her own evidence. I will consider the evidence on this question in advance of the other questions concerning insolvent trading. 2. In contrast to the clear and concise evidence provided by the plaintiff (see below), Ms Townend's evidence was at times confusing and it was obvious that she was struggling with the process of answering the questions put to her in the witness box. This may well be explained by her lack of intellectual sophistication. That last remark is not intended to be an insult or in any way condescending of Ms Townend but, rather, may provide some insight into why and how she came to be the defendant in the proceedings in the first place. 3. Ms Townend's evidence-in-chief was primarily provided by way of affidavits. There were two. The first sworn 15 December 2016 (Exhibit 1) and the second sworn the same date (Exhibit 2). The reason for there being two affidavits was that Exhibit 2 contained a number of personal, confidential medical matters which, it was agreed, would be returned to the first defendant's legal representatives at the conclusion of the hearing. 4. At the time of swearing her affidavits, Ms Townend was 53 years of age and unemployed. 5. She provided evidence as to her background and schooling which commences at page 2 of Exhibit 1. I do not intend to go into great detail as to these matters, although they may also inform her current predicament. Ms Townend was educated to the level of Year 10 and did not undertake any further education or obtain any further qualifications thereafter. 6. Ms Townend worked for AWA on two occasions. The first being between the ages of 16 to 24. She left because of depression and bullying. The second period was from the age of 26 to 31. She left on that occasion due to complications with transport between her home and work place. 7. Ms Townend commenced work for the Company at the Bowling Club at around the age of 34 in about 1997. This was part time employment in the bar area usually working of a Wednesday night, Saturday and Sunday to a total of about 15 hours per week. 8. Ms Townend told the Court that she knew of the Club through friends and she had previously worked at the Western Suburbs Soccer Club at Five Dock at reception and behind the bar. Some of her friends had also made the transition from the Soccer Club to the Bowling Club. 9. Whilst Ms Townend was working at the Bowling Club she was also working as a temporary employee with British American Tobacco ("BAT") during the day. She worked two jobs for a period of about two to three years. 10. In 2000, she resigned from her employment with the Bowling Club after being offered permanent employment with BAT in customer administration. She was working 38 hours per week. 11. Nevertheless, Ms Townend maintained contact with the Bowling Club on a social basis where she would meet to see her friends. 12. Ms Townend resigned from BAT in around 2007 as a result of what is referred to in paragraph 10 of her first affidavit as "being bullied constantly by the supervisor". She said that by that time she recalled that she was already having issues "mostly consistent of her ability to retain and process information". 13. After giving up her employment with BAT, Ms Townend spent more and more time at the Club with her friends. She participated in lawn bowls on the weekends and played Keno and the poker machines. She always had a few drinks when she was there. 14. Around that time, Ms Townend was living close to the Club in rented accommodation at Croydon Park. Unfortunately, that accommodation came to an end in or around 2006 when she was evicted for non-payment of rent. 15. After being evicted from the premises at Croydon Park, Ms Townend lived in a single room at the Illinois Hotel at Five Dock for a couple of years. She then moved to a boarding house at Glebe and was asked to leave that place due to her inability to pay her bills. 16. These events demonstrate that Ms Townend had difficulty managing her own financial affairs for some time. 17. The following extract from Exhibit 1 provides a good illustration of Ms Townend's involvement in the activities of the Bowling Club and the Company: 14 I enjoyed being at the Club as I could socialise with my friends, some of whom were staff members of the Club. I observed during my visits to the Club that the Club was always trying to increase the number of people visitors to it, especially the Barefoot Bowls as this would in turn bring people to the bar area to purchase drinks. 15 I decided to volunteer at the Club and help out by doing things like showing new people how to bowl, selling raffle tickets, showing people around who wanted a Christmas party function to be held there, those sorts of things. 1. Ms Townend agreed to become the social director of the Club "because of the friendships that (she) had made with the people who worked there". She was never paid for that work and did it on a voluntary basis for social reasons. In Exhibit 1 (paragraph 17) Ms Townend stated that she did recall signing some sort of document or form to become the social director of the Club. By the time of the hearing, she did not have a copy of that form, neither did the plaintiff. 2. Her evidence was quite clear on this point. She never believed that as a social director that she was responsible for the management or running of the Club because she was not running the Club. She was only organising the bowling activities and social bookings. Ms Townend was never involved in paying the bills, liability, expenses or costs of the Club and was not permitted to sign cheques or make any financial decisions regarding the Club. She did not have access to the Club's bank account. 3. Ms Townend's description of the occupation of the directors' positions of the Club is set out in paragraph 20 of Exhibit 1. She stated that the Board members would change on an almost monthly basis. People would agree to participate but then would not turn up the following month. Others would agree to be a Board member, attend a Board meeting and then change their minds, leaving that position behind. 4. Confirming her understanding of her role at the Club, in paragraph 21 of Exhibit 21, she stated that her understanding of her position as social director was just that. To organise the social affairs of the Club. "I never thought I was in a position to make any decisions on behalf of the Club". 5. Ms Townend did, however, attend the regular Board meetings of the Club which she thought she was doing as social director. Whilst, fairly, she conceded that she felt able to participate in the meetings, she did not consider her role as that of making informed financial decisions for the Club but more just being there to ensure a quorum on votes which might be held during the course of these meetings. 6. As stated above, Ms Townend was not paid for this work. The only time she received money from the Club was when she needed to purchase things for the raffles (such as meat) in which case she was allocated petty cash by Jerry Vogiatos, the bar manager. Mr Vogiatos was not called by the plaintiff to give evidence. 7. As a further indicia of the distribution of functions within the company, Ms Townend's involvement in the running of the Company, she had no access to the computer database, management emails, correspondence or information relating to the Club. The only computer access which she had was for renewing Club memberships and to general emails from members of the Club or people wishing to make reservations. 8. The clear impression of Ms Townend was that Mr McDonald was in charge and responsible for all financial matters and for the day to day management of the Club. Mr McDonald would develop business strategies for the Club and present those to the Board for discussion and approval. The general feeling was that he was the businessman and that he knew what he was talking about. That was admitted into evidence as evidence of an impression formed by Ms Townend and not evidence of the fact. Ms Townend believed that Mr McDonald was also the treasurer/chairman of the Club during that period. These are matters relevant to the objective test under the second limb in the breach provision. 9. Ms Townend further recalled that Ronald Lewis was actively involved in the meetings of the Club and that he appeared to her to be another Board member. He would make recommendations about the future of the Club which were generally accepted by the Board. Ms Townend stated (Exhibit 1, paragraph 25) "Paul ultimately would get his way on decisions relating to the Club. Nobody wanted to see the Club go downhill, including me. We were all just keen to get new options to keep the Club going. 10. The organising of Board meetings was haphazard at best. Ms Townend estimated that there were approximately 10 meetings held over a six year period from 2005 to 2011. 11. Ms Townend was absent for at least one of the Board meetings in the period from July 2010 to the second half of 2011. That was on 21 August 2011 when the statement was made that "the Club should have closed two years ago but we are still trading". Had Ms Townend been present when this statement was made or otherwise became aware of it (about which there was no evidence) then it may have been relevant to her knowledge or suspicion of the Company's solvency. 12. Ms Townend had the impression that those not attending had resigned from the Board. 13. In any event, Ms Townend was absent from Board meetings in April 2011 through to August 2011 when she resided temporarily on the Gold Coast following her mother's sudden death. She did not attend the initial AGM in August 2011 where she has since been told that there were discussions of the Club being in debt by $90,000.00. She did, however, attend the usual Board meeting on 15 September 2011 which is one of the last official meetings ever held by the Company. 14. Commencing at paragraph 29 of Exhibit 1, Ms Townend provided some insight into her involvement into the proposed merger of the Club with Ryde City Bowling Club in 2011. She stated categorically "I was not involved in the negotiations to merge". She was, however, asked to sign some papers into 2011 which she did at the request of Mr McDonald. She said that sometimes he asked her to co-sign documents and that "I agreed as I thought it was necessary to help the Club out". 15. Notwithstanding her absence from the Board meeting in August 2011, the plaintiff candidly admitted that she had "heard rumours" that the Club was in some financial difficulty. 16. The first defendant's solicitor drew her attention to a loan document dated 24 March 2011 which was signed by her and others. She said in her statement and was not challenged as to this matter that she was only made aware of the loan document when it was brought to her attention by her solicitor. She said that she was also informed of an amended loan document dated 27 May 2011 which had not been signed by her. 17. In paragraph 30 of Exhibit 1, the plaintiff stated "I note that on those documents I am written as being company director/secretary which is inaccurate. I was definitely never a Club director or secretary in the management sense, only the social and bowling director and secretary". That evidence was objected to but admitted on a limited basis as to the first defendant's understanding, not as to evidence of the fact. According to ASIC records, Ms Townend had been a director of the Company since 14 September 2008. 18. In relation to the documents required to re-finance the Club in order to facilitate its merger with Ryde Bowling Club, Ms Townend stated: If I ever signed anything, I never understood what I was signing nor was it explained to me. I was often asked by Paul Shiel to sign documents in a hurry or without telling me what they were or why I needed to sign them (Exhibit 1, paragraph 31). 1. This evidence has a ring of truth about it and it is not uncommon in a commercial or even private setting for one who trusts another to rely upon whatever requests are made of them to sign a document. In fact, it is a type of situation which if it led to a contract being formed requiring the plaintiff to perform specific duties or incur obligation then it may possibly have been subject to challenge pursuant to the Unfair Contracts Act 1980 (NSW). Mr McDonald seemed to be quite domineering and may well have taken advantage of Ms Townend's inexperience. That, however, does not answer the question as to whether Ms Townend was a director. 2. Having observed Ms Townend give evidence I have no hesitation in finding that whilst the documents themselves speak of her being a director and/or secretary of the Company that was not her genuine belief. Ms Townend had never knowingly consented to being a company director and no evidence of that consent was adduced by the plaintiff. I find that Ms Townend was of the understanding that she was the social director and not a director within the meaning of the Act. Again, that, however, does not determine the matter. 3. As to the solvency of the Company, Ms Townend stated in Exhibit 1, paragraphs 32, 33 and 34: 32 I do not know who the creditors of the Club were or who were its debtors. I am not aware of the Club being involved in any Court proceedings. I was only made aware of there being problems with the Club when I received a letter from the plaintiff's solicitors in relation to these proceedings. 33 I was never given access to any information about the Club's financial position. I do recall taking a phone message to give to Paul of someone chasing money. I wrote down the message and put it in the office for Paul and or his friend, James (I do not know his last name), who was assisting Paul in the office. 34 I assumed, given the Club continued to trade and its doors remained open that it did not have any great financial difficulties. I had though heard rumours from other patrons of the club, that there were some problems, but didn't think it was as bad it was …. 1. Again, this evidence appeared to be truthful and I accept it. The principal source of information provided to Ms Townend as to the financial position of the Club seems to have come from patrons rather than from the office holders of the Company itself. 2. As for dealing with administrative and other matters, the plaintiff gave evidence in Exhibit 1, paragraphs 35 and 36: 35 I would collect the Club's mail from the post office box, open it and distribute. I looked at anything to do with updating member details, addresses etc and handed everything else to Paul. 36 My understanding of being a company secretary is someone who looks after the runnings of the club and its financials. I was never the Club's secretary, nor did I ever sign or agree to this. I only ever agreed to be the social secretary and the bowls secretary (which is being in charge of the bowling activities at the Club). 1. Paragraph 36 was objected to by the plaintiff but admitted and limited in use to the understanding of Ms Townend. 2. Further, as to her understanding, the plaintiff told the Court (Exhibit 1, paragraphs 37 and 38): 37 I never agreed to act in any other capacity at the Club other than as its social director as I stated above. 38 I never agreed or understood that I was signing on to be the director of the Club and responsible for its affairs and management. I have no training or experience in that area and I would never have agreed to take on such a position. I do not know how a company works or operates. I have never been a director of any other company. 1. Paragraph 38 was admitted purely as evidence of Ms Townend's understanding whereas paragraph 37 was admitted for all purposes. 2. Having carefully viewed Ms Townend and considered her evidence, I have no hesitation in accepting the matters sworn to in paragraphs 36, 37 and 38 of Exhibit 1. 3. As mentioned above, Exhibit 2 was expressed as a confidential affidavit of Ms Townend in relation to personal matters concerning her health and well-being. I have directed that the affidavit be returned to the solicitor for Ms Townend at the conclusion of these proceedings. 4. I do not intend to recite verbatim the contents of the affidavit for obvious reasons. It is apparent that during the Relevant Period (that is, the period of trading loss insolvent) Ms Townend was suffering from depression and anxiety. She was living in a boarding house which made her unhappy and she lacked confidence. Ms Townend developed a dependency upon alcohol which is referred to in various places but particularly in paragraph 3 of Exhibit 2. 5. It is apparent from paragraph 6 of Exhibit 2 that during her voluntary work with the Club she developed a medical condition requiring admission to hospital, albeit for a short period of time. In paragraph 7 of Exhibit 2, Ms Townend described the attempts she went to improve her health but it is clear and unchallenged that her lifestyle was impacting upon her memory and cognitive functioning. Having considered other material for medical professionals and the like, I have no difficulty in accepting the evidence of Ms Townend as to this matter. In respect of that ancillary medical material, I only place reliance upon it in considering the plaintiff's health and state of mind at the time she became a director of the Company on 14 September 2008 and during the period of alleged insolvency, namely 1 July 2010 through to 20 September 2012, a period of two years and almost three months. 1. In view of the abandonment of the defence under s588H(4), I do not rely upon evidence as to her health and well-being. I refer to it merely as part of her circumstances. 2. That comprised the affidavit evidence of Ms Townend. She also gave oral evidence. 3. Ms Townend told the Court that, at the time of giving evidence, she was unemployed. In her oral evidence-in-chief, Ms Townend was asked to describe how she was health-wise around the time that she resigned from British American Tobacco (about 2005 or thereabouts). She told the Court that she was not in a very good way and was very nervous. She left the job because she was being bullied [T121.6]. 4. In expanding upon that answer, she stated that she felt very down on herself, not healthy, depressed and basically not in a good way [T121.11]. 5. When asked what she meant by saying that she was not well in a good way, Ms Townend replied: In my brain and in my body, I wasn't eating well and so I was physically not very well, and mentally I wasn't very well either. I think just, like, depression and anxiety. [T121.15]. 1. Ms Townend was then asked to describe her memory at that time. Perhaps inadvertently answering the question, her reply was: I don't really recall. [T121.21]. 1. Significantly, in her oral evidence-in-chief, the plaintiff gave the following evidence: Q: At some stage, if (should read "did") somebody associated with the club invites (should read "invite") you to take up some position within the club? A: I wasn't invited, it was like a suggestion because I was – instead of getting involved in – I was very interested in the club, that was sort of my social – Q: Just bear in mind you can't say what that other – A: Okay. Q: -- person actually said. A: Okay. Q: Do you recall who that person was? A: No, I believe – Q: If you don't recall – A: No, I don't. Q: -- don't guess. As a result of that conversation, did you take up some position within the club? A: At the – yes, I applied for a social director. Q: Social selector? A: Social director. Q: Was that application successful? A: Yes, it was. Q: And you became the social director of – A: A social director, which had nothing to do with any finances. Q: That's okay. A: Sorry. Q: We will delete that last part of the answer because it's not responsive. Can you tell me then, please, when it was that you became the social director of the club? A: I don't recall the exact date. Q: Can you recall the date by reference to when you ceased work at BAT? A: It would have been approximately that time. Q: So around 2005 or thereabouts. How long did you remain the social director for the club? A: Until – I remained as the social director. [T125.42-126.35]. 1. That comprised the evidence-in-chief, additional to Exhibits 1 and 2. 2. Ms Townend was cross-examined by counsel for the plaintiff. It was apparent from the first two questions put to Ms Townend in cross-examination that her memory was poor (see T127.20-30]. 3. The cross-examination then turned to the signing of the ASIC document, presumably in September 2008. When asked what she understood the involvement of ASIC to be, Ms Townend replied: I suppose I thought it was just a formality that was needed as I put in my answer. I didn't think it was - probably not understanding the complexity of what it was the actual form was about. I just thought it was just a formality that, you know, you're a director, you know, a social director. [T128.13-16]. 1. Ms Townend was pressed as to her memory of signing an ASIC form. She stated: I still don't recall completely. I think – I probably can just say like it might have been just, you know, just sign this and not, again, not understanding what exactly it meant. I just – at that stage I just really wanted to be a director – a social director and so it was just, yeah, I want to do this and so, yeah, just to sign that. [T128.33-37]. 1. When pressed, Ms Townend could not recall whether what she signed was in fact an ASIC form. Of course, at no stage during the proceedings did either party produce an ASIC form which related to the appointment of Ms Townend as a director on 14 September 2008 and as the company secretary on the same date. This is curious as the ASIC Current and Historical Organisation Extract (commencing at page 133 of Exhibit B), ASIC provides a document number in respect of both appointments. One might expect they would retain at least a soft copy of such documentation. In any event, it was not produced and there is no evidence as to the form which Ms Townend in fact signed. 2. The evidence surrounding the signing of a form is so unclear that it does not permit of a finding as to what the form was and what effect it had. The evidence certainly does not support a finding that Ms Townend consented by the signing of a form to become a company director. That is a matter which she specifically denies and about which there is no evidence. 3. Ms Townend was then asked in cross-examination about the Board meetings. It was suggested to her that she would receive paper work in advance of the meetings. She said that that did not happen regularly and that the meetings "probably weren't very well run" [T129.32]. She further said that "there was, you know, people didn't turn up, or they would walk out and so there was never I'd say a real total structure like a proper meeting" [T129.32-34]. 4. Ms Townend was asked whether she considered herself to be a board member. She replied: No. Well, again, if I could just – say, a board as a social – which is part of the board. You had your financial people, your social person, which is me, and – and – yeah it was that. [T129.43-45]. 1. Over the course of the next few questions at [T129-130] counsel sought to clarify Ms Townend's understanding of her role at the Club. The following exchange occurred in answer to a question from the Bench: Q: Is this a correct description of your understanding that you were a director of the company but responsible for social engagements? A: Well, that was my title, but because I didn't – my understanding is because I had no official business probably not. 1. The following questions were asked by counsel for the plaintiff: Q: Can I just ask you some questions about that. A: Mm. Q: Is it fair to say that although you had the title of a director you didn't think that you had yourself any need to look at financial matters— A: That's correct. Q: -- or other things. You thought that part of your role as a director was only to focus on the social matters affecting the Club. A: That's correct. Q: Is that right? A: Yes, and I probably would just say like I went to the meetings and I had my bit where I was ready to prepare and speak about and financials to organise the social things but otherwise I don't think it was really my concern as much. Q: When you went to these meetings, is it correct to say that you went as a director but your focus was on the social matters that were discussed at the meetings. A: Yes. [T129.47 – 130.23]. 1. In my mind, the effect of that cross-examination does not detract from Ms Townend's previously stated understanding that she was the social director of the Club and would never have agreed to be a director of the Company. 2. The questioning returned to the irregular Board meetings at T131 of the transcript where the following exchange occurred. It is, unfortunately necessary to extract in full the questions asked by counsel for the plaintiff and the answers given by Ms Townend in order to fully appreciate the flavour of her understanding to both the question asked in Court and her role at the Club: Q: Just going back to the meetings, remember the ones that you said that you attended, I know you said they weren't very well run but do you remember I asked you a question about whether in advance of the meeting you got some papers? Sorry, withdraw the question. Do you remember I asked you whether in advance of the meeting or at the meeting you got some papers about the meeting? A: No, we didn't. Q: You don't ever recall seeing any documents? A: The only documents and that, as I said previously, the meetings weren't very well run. Sometimes you got the minutes from the last meeting and sometimes you didn't and sometimes minutes were taken and sometimes they weren't … (not transcribable) … just see you at the next meeting. Q: Where there were minutes taken were they provided to you? A: As I said, sometimes not on a, not like the next meeting here's the minutes from the last meeting. Sometimes you got them, sometimes you didn't. Q: So sometimes you saw the minutes but not every meeting. A: Not every meeting. Q: When you went to the meetings, I think you said in your affidavit that you voted on certain resolutions that were passed at the meeting. Do you remember that? A: No. Q: Do you remember saying "I" or "Nay" at a meeting? A: I'm sorry, yes. Q: You remember doing that, so you remember voting at the meetings? A: Again, I only sort of voted on what, you know, I was voting for myself what I wanted to sort of do something and it had to go to the, we never sort of really voted so much on, again, I'm saying sometimes we voted, sometimes we didn't. Sometimes it would be put off to the next meeting and as I said then the next meeting wouldn't happen and, like I said. Q: Did you understand that the reason why you went to these board meetings was because you were a director of the company albeit that your responsibility was for social matters? A: For social matters, yes. Q: But because you were a director of the company? A: Again, I just want to say I was the social director. To me, I just, director is a more, I don't know how to word, more I took that as a title not a position. I suppose that's the best way wording I can come up with. [T131.48-132.46]. 1. Ms Townend was then asked further questions about her attendance at and participation in the meetings [T132–134]. 2. With respect, it is clear that the effect of all the cross-examination as to the plaintiff's attendance at the meetings merely confirmed her belief that she was the social director and not in any way concerned with the finances of the Company. 3. In the middle of questioning about the Board meetings, Ms Townend was asked a number of questions about some documents which she signed or co-signed at the request of Paul McDonald. Again, as a further example of her frankness as a witness, Ms Townend conceded that she had a general recollection of co-signing documents at the request of Mr McDonald [T131.3]. Her specific evidence as to that matter reads as follows: Q: Do you remember signing them, sorry let me go back a second. Is it correct that when you signed these documents somebody just gave them to you and asked you to sign them? A: Yes. Q: Was that because of your role as a director of the Camperdown Bowling Club that you were asked to do that? A: Probably just if Paul asked me to, you know, I need to do this or whatever, I don't know anything specific and it's urgent can you just initial this or something and – Q: That's all right. Can I ask you this question? Did you understand that the reason Paul asked you to do that was because of your role as a director of the bowling club? A: No, I didn't really understand. (The questioning was then interrupted by an objection resulting in the following question being rephrased) Q: Sorry, the question is do you know why Paul asked you to sign documents relating to the bowing club? A: Not really, no. I would say the only, because I was there and he wanted, I don't, no I don't know. … Q: Did you ever see Paul ask anybody else at the club to sign documents? A: I didn't. [T130.25-131.45]. 1. After the luncheon adjournment the cross-examination returned to Ms Townend's attendance at meetings. For the reasons given above, where I refer to evidence concerning the meetings, I do so by reference to the evidence verbatim: Q: Do you remember whether you were asked ever to do certain tasks at any of those meetings? A: On a social level I was like, as I said previously, I was organising parties and stuff so it was like, you know, can you ring and book this and go shopping and buy whatever was required for the event. That's basically it. Q: Do you remember ever that at a meeting of the board you were asked to update the membership list? A: That was something that I just used to do. I don't think that was ever like a board thing. I think it was just, I used to do it like years ago and then when there were new memberships coming in, as I said, I was in at the club because I wasn't working so I was there a lot during the day taking phone calls for parties and stuff so, you know, if the computer was available I would do some memberships, spare time basically. Q: Okay. Do you remember though at any of the meetings that you were asked specifically to do something in relation to membership? A: No. Q: You don't remember? A: No. I mean, I wasn't asked specifically. It was something I took on. Q: What about, in fact, to be fair to you I will show you the document to see if it helps trigger your memory. Can you have a look at the documents in volume 1 of the folder? A: Yes. Q: The numbers are in the top right-hand corner you will remember. A: Yes. Q: If you could turn to page 44, please. Do you see this is the agenda for the meeting on 7 July 2011? A: Yes. Q: Just go over the page, you see this is the minutes form that meeting? A: Yes. Q: You see that you were listed as being present at that meeting? A: Correct, yes. Q: Can you just go over to page 49? Do you see at the top of the page there's a reference to TPL licence? A: Yes, I do. Q: Do you know what TPL stands for? A: I think it's, I'm not a hundred per cent sure, I think it's just the liquor licence. I don't know what the initials stand for. I just recall perhaps making a phone call or something because someone else was doing that as far as I recall and I don't think there was any answer back and I think I would have, might have said I would follow up but I don't even think I did it. Q: You see where it says action, do you remember being asked to confirm that the liquor licence was current? A: No, I don't. Q: But you remember making some phone calls after that to try and, but you don't have any more specific memory than that. Is that right? A: That's correct. Q: Do you remember how you, sorry withdraw the question. You will remember that before lunch you gave some evidence about how there were minutes but not every meeting was what you said. A: That's correct. Q: When there were minutes prepared, who prepared them? A: Diane Dunne. Q: Did Ms Dunne give them to you and to your knowledge the other people who were present at the meeting? A: I believe she would have, when they were done they would have been given to Paul and then, like been hand out sort of. Q: Were they handed out in advance of the next meeting or at the next meeting? A: No, at the next meeting. Q: You remember that at the meetings one of the things that were discussed was the resolution of the minutes from the last meeting? Was that something that you remember? A: I'm sorry, can you repeat that? Q: Yes, of course. At the meetings that you went to do you remember that one of the items for discussion was approval of the minutes from the previous meeting? A: No, I don't. Q: You don't remember that? A: No. Q: But you remember receiving the minutes of the previous meeting at the next meeting? A: Yes. Q: Did you read through the minutes yourself? A: Not at the meeting I read it. Q: Did you read them afterwards? A: Sometimes maybe. Maybe not. [T137.15-139.18]. 1. It is apparent from that evidence that Ms Townend, on the occasions when she received the minutes prepared by Ms Dunne, she was not required to nor did she read the documents other than on some occasions. 2. Ms Townend was then asked about a particular Board meeting which took place on 11 August 2011. The minutes for that meeting commence at page 54 of Exhibit B. Item 10 on the Agenda was the appointment of new Board members and directors and removal from ASIC of previous Board members. It is plain from the minutes of that meeting that Ms Townend remained the secretary of the Company. When I asked her about that, the following exchange occurred: His Honour: Q: Just before you do, did you also understand that you were, at page 56, the secretary of the company? A: No, that's, I wasn't the secretary of the company. I was the bowls secretary. I don't know why that says secretary. Bowls secretary meaning to me I just looked after, I think, it was just a terminology more than anything. I was just looking after the bowls to put, nothing, the secretary to me isn't the understanding that I was that. [T141.20-26]. 1. The upshot of Ms Townend's evidence concerning what appears at page 56 is summarised by the following exchange: Q: Can I express the position this way and you tell me if it's correct or incorrect, madam. Is it right that you understood that although you were a director your responsibilities were the social side. A: That's correct. Q: So membership and organising booking and social activities. A: That's correct. Q: You didn't understand that you had other responsibilities? A: No. … Q: Is it your understanding that you were a director but had those responsibilities for social matters, is that the reason why you signed documents involving the club which listed you as a director? A: If I signed anything I believe I was only doing it as a witness more than me actually signing for it as such. [T140.42-141.10-14]. 1. This evidence continued in a similar vein: Q: Did you understand that you were allowed to sign documents on behalf of the club? A: Well, there's Mr Shiel and MacDonald, asked me to as he was the, you know, the main person. If he's asked me to I probably would have thought well if he's asked me to I'm obviously allowed to but as again I still think more of a witness than just, because he needed a signature basically. Q: Did you understand that you were signing this document that you weren't doing it as a witness? A: No. I didn't understand that. … Q: Sorry, the question was did you understand that you were allowed to sign documents on behalf of the club? A: Well, there was never any you can or you can't sort of thing. So I wouldn't say it was like a hearsay yes, I can sign it or no I can't sign it. I just, I was asked to sign that document and obviously I did, that's my signature. Again, not understanding basically the reason why. [T143.19-46]. 1. The confusion continued. Q: … When Mr Shiel, Mr Macdonald, I don't know which you prefer to call him, when he gave you this document to sign is the reason why you understood that he asked you to sign it and why you agreed to sign it was because you understood that you were allowed to sign the document on behalf of the company? A: Again, not really. I didn't really understand. I just obviously did it but probably not understanding fully why I was doing it. [T144.4-10]. 1. In an effort to shed further light upon this evidence, the following exchange occurred between the Bench and the witness: His Honour: Q: Can I ask you, madam, what were the circumstances which led you to sign this document? That is the loan agreement between Mr Palapanis and the company. First of all, do you recall the circumstances in which you signed it? A: Not really, your Honour. Q: Are you aware of the fact that the corporations, it's necessary for two directors to sign an agreement? You're aware of that? A: Yes. Q: And plainly your name or rather your signature appears above the words "Director/Secretary" and was it your understanding when you signed the document you were signing it as a director? A: No. [T144.14-28]. 1. There was then some further questioning about Ms Townend's involvement in the Club but, in my view, that evidence took the case no further. 2. She was then asked about the solvency of the Club. For the same reasons as before, I will set out the evidence verbatim: Q: You knew that the club had some financial difficulties. Correct? A: I knew that yes, that we weren't going, I knew that there was a struggle. Struggle, yes. Q: I think you said in your affidavit you'd heard rumours that the club might have to close. A: Rumours, yes. Q: Yes. I think you also said that you remember at one point taking a phone call from someone who was chasing money that they said was owed to them by the club? Is that right? A: I beg your pardon can you repeat that? … (The question was repeated and the following answer was given): A: Perhaps, yes. Q: Are you aware that the garbage wasn't being collected from the club for a certain period of time? A: I know they did change garbage collection companies. I believe there could have been some sort of issue, only for, you know, if you walk past the garbage bins and they're overflowing, you know it's not being collected basically. Q: Did you know that was because there was some problem paying the garbage collector? A: No. Q: You were aware that there was a jazz band that used to plat (it should read "play") at the club, you remember that? A: Yes. Q: Do you remember that the club had to stop asking the jazz band to come and play because they had difficulty paying the jazz band? … A: The only recollection I have of that is that the jazz band was a bowling member of the club or him and his band and he asked, he approached Paul I believe to ask if they could play there pretty much as a rehearsal type thing which I think they did for a couple of weeks and then there was really no response from people listening to them basically and so I believe Paul, and I think there were doing it for, I'm not a hundred per cent sure. It was just sort of like a rehearsal sort of thing and then there could have been, you know, give them a couple of beers or something like that, I don't know or you know a minimal sort of rate but I recall it happening but I don't recall the exact circumstances. It was a minimal, if it was anything it might have been $20 or $30 or a couple of beers or something. … Q: Do you recall, madam, that the club was struggling to pay $200 to the jazz band on an ongoing basis? A: No, I don't. Q: Do you recall there being a discussion at a board meeting about that matter? A: No, I don't. Q: You said just a moment ago that you were aware in a general sense that the club had some financial problems. A: In a general sense. Q: Is it correct to say that you didn't know the precise details of the financial problems? A: That's correct. Q: I take it that you didn't ask to see the company's financial records at any point in time. A: No. Q: You didn't either speak to the accountant, James, is that right about the financial matters affecting the club? A: No. … Q: I assume you didn't consider that you had to ask those questions because they weren't part of what you understood your responsibilities to be. A: That's correct. [T148.15-150.13]. 1. That concluded the cross-examination of Ms Townend. In my opinion, although questions were put carefully and thoughtfully by counsel for the plaintiff, the answers did not really advance the understanding of Ms Townend's role at the Club and her knowledge of its financial affairs. It seems other than hearing some non-specific rumours from members of the Club and some mentions at Board meetings, she had no knowledge of the Club's financial position whatsoever. 2. As is explored below, a contextual reading of the Board meetings reveal that Mr McDonald provided some but not all of the relevant financial information. In most cases, any negative or pessimistic remarks by him were followed up with a strategy as to how to overcome the possibility of any financial problems and, in fact, improve the Club's financial position. 3. My impression was confirmed by the few answers asked in re-examination of Ms Townend: Q: Madam, do you recall you were asked a question a moment ago about the fact that there were some rumours circulating in the club about its financial position. A: Yes I do. … Q: Was there any conversation you had with persons at the club after you became aware of the existence of those rumours? A: I believe I might have spoken to Paul and said everyone's, you know, talking about it and again it was just, you know, it was just rumours and -- … His Honour Q: Madam, when you heard about the rumours about the financial predicament of the club, were you concerned? A: I was concerned but then I said, I did mention to Paul everyone was talking and he was just saying, pretty much the answer was everyone's just mudslinging and stirring and there's basically nothing .. … Q: After you spoke to Paul about the rumours, how did you feel? A: I felt maybe a slightly bit better but he, I believe he spoke to me in a quite lengthy – Q: You can't say what he said? A: No, but a sort of lengthy conversation. Can I say that? Q: You had a lengthy conversation with Paul about the rumours. A: Yes. Q: Without telling us what he said how you were left feeling after that conversation? A: Still a little bit of trepidation but I believed him, what I was told. [T150.40-152.41]. The Evidence of the Plaintiff – David Ian Mansfield 1. Mr Mansfield affirmed two affidavits. The first on 29 April 2016 which has voluminous annexures and forms part of Exhibit B. The second, sworn 29 May 2017 and is Exhibit C. He also was required for cross-examination. 2. On 20 September 2012 he was appointed as the official liquidator of the Company by order of the Supreme Court pursuant to s459A of the Act. 3. Mr Mansfield undertook an ASIC search for records held by ASIC. They are produced at pages 97 to 128 of Exhibit B. Those documents indicated that Ms Townend was appointed a director of the Company on 14 September 2008 by the lodgement of a document identified by a reference in the right hand margin. The search also confirmed that on the same date Ms Townend was appointed the secretary of the Company. Again, the document reference is provided. Neither of those documents had been tendered by the parties so their contents are unknown to the Court. 4. I should at the outset say that Mr Mansfield gave his evidence in a very matter-of-fact fashion. He is a professional and conducted himself as such in the witness box. His answers were clear and precise. I have no hesitation in accepting Mr Mansfield as a truthful witness and also as an expert in his area of practice. 5. The evidence of Mr Mansfield of course goes to issues 2 and 3, stated above, namely: Issues 2: Whether the Company was in fact trading whilst insolvent during the Relevant Period or became insolvent as a result of incurring the debt, and Issues 3: Whether by reason of presumption arising under s588E(4) of the Act, the Company is presumed to have been trading whilst insolvent during the Relevant Period. 1. Bearing upon question 3, despite attempts of obtaining material from those connected with the Company, Mr Mansfield, was only able to obtain "limited records" for the period 1 July 2008 to 30 June 2011. He was unable to obtain any financial records for the Company for the period 1 July 2011 to the date of his appointment in 2012. He relied upon the inadequacy of the financial records as giving rise to the presumption of insolvency provided for under the Act. 2. Mr Mansfield's evidence is best summarised by the statement which appears at paragraphs 7 and 8 of his first affidavit: 7 It is my view that the Company has been insolvent since 30 June 2010. In this respect I refer to the Solvency Report (Solvency Report) prepared by me and dated 29 April 2016 which outlines my investigations in respect of the solvency of the Company. A copy of this Solvency Report appears at pages 126 to 142 of the Exhibit. 8 The Solvency Report opines at page 13 of the Exhibit that the Company was insolvent from 30 June 2010 to the date of court ordered liquidation on 20 September 2012 because of amongst other things: a. A consistent history of trading losses since at least FY09; b. A net asset deficiency since at least 30 June 2010; c. A current ratio and quick ratio of below 1 since 30 June 2010; d. A consistent build-up of unpaid creditor debts since 30 June 2010; e. A failure to maintain adequate financial records for the period 1 July 2011 to 30 June 2012; and, f. The Company did not have any prospect of achieving a cash injection sufficient to meet all of its debts as and when due considering the history of trading losses, poor financial position, an inability to produced timely financial information and an absence of material physical assets which could be pledged to raise finance. 1. The documents attached to the first affidavit of Mr Mansfield makes out, at least on a prima facie basis, the matters referred to above. The second aspect of Mr Mansfield's first affidavit is to quantify the loss suffered as a consequence of the Company trading whilst insolvent. Initially he came to a total of unsecured debts of some $190,000.00 set out in paragraph 9 of his affidavit. 2. In paragraphs 10 and 11 of his first affidavit, Mr Mansfield commented upon matters which were unnecessary. That is, matters which bore upon issue 1 above. Although in paragraph 10 he stated that the defendant was present at Board meetings on 7 July 2011, 21 August 2011 and 16 September 2011 "in her capacity as a director" the words in quotation were not admitted as evidence of the fact. 3. Mr Mansfield prepared a Solvency Report dated 21 April 2016 (at page 165 of Exhibit B). It is sufficient, for present purposes, to state his conclusions. 4. First, he concluded that it was his opinion that the Company traded whilst it was insolvent from 30 June 2010 to the date of his appointment on 20 September 2012 and during that period incurred debts in the order of $190,910.30. The reasoning underlying that opinion are set out clearly in his report. I accept his opinion. 5. Secondly, Mr Mansfield expressed the opinion that in view of the state of the financial records kept by the Company the presumption provided for under s588E(4) of the Act was engaged so as to give rise to a presumption of insolvency during that period. I also accept this aspect of his opinion. 6. At page 7 of his report, he sets out the inquiries he made to obtain access to other financial records which may have bore upon his assessment of the inadequacy of the financial records held by the Company. It is sufficient to note that inquiries which he undertook were generally unproductive. 7. As mentioned above, a second affidavit sworn 29 May 2017 was relied upon in the plaintiff's case (Exhibit C). The purpose of this affidavit was to confirm that he undertook an examination of the debts which had been lodged in support of the claim of approximately $190,000.00. The only secured debt was that owing to Mr Palapanis which is excluded from this claim. 8. Mr Mansfield was cross-examined on his affidavits. Whilst the cross-examination of this witness was considered and precise, I am not of the view that it undermined or called into question the fundamental opinions expressed by the witness. That is, for the reasons set out in the Solvency Report, the Company was incurring debts whilst insolvent for the Relevant Period. 9. There was some criticism of Mr Mansfield not making inquiries to obtain access to financial records. In respect of that evidence, it is my opinion that it was open to the first defendant to call evidence from those sources if that evidence would have assisted the first defendant's case in establishing the Company was not trading whilst insolvent. 10. Secondly, the failure to perform all of the inquiries and searches referred to in cross-examination do not undermine Mr Mansfield's principal opinion that, based upon the financial records, the Company was trading whilst insolvent. 11. Accordingly, I accept the opinion of Mr Mansfield and find that the Company was continuing to incur debts whilst insolvent in the period 1 July 2010 to 20 September 2012. I further find that the loss calculated by Mr Mansfield is a reasonable measure of the plaintiff's loss and damage for the purposes of s. 588M(2) in the circumstances. Documentary Evidence 1. A number of documents were attached to the affidavit of the plaintiff which bears upon the two primary questions which is whether or not Ms Townend was a director; and whether there were reasonable grounds for suspecting the Company was insolvent and continuing to incur debts. 2. Broadly, these documents fall into two categories. First, the Agenda/Minutes of Board meetings of the Company and secondly, documents relating to the Company's increasing debt level. Minutes of Board Meetings 1. Documents have been produced in respect of meetings which took place on 7 July 2011, 11 August 2011, 21 August 2011 (an Extraordinary General Meeting), 15 September 2011 and 21 August 2012. Ms Townend attended all but one of those meetings. She did not attend the Extraordinary General Meeting which took place on Sunday 21 August 2011. 2. The Board meeting of 7 July 2011 was attended by Ms Townend and others. Section 5 of the minutes of the meeting deals with the Company's financial position. It begins: (Mr McDonald) advised that the Club currently has approx. $79,000.00 in creditors at present but strongly believes that this amount can be reduced by making offers to settle outstanding accounts in full at less than their full value. 1. The minutes then referred to a number of steps to be taken by the Club in order to ensure its solvency. 2. Section 10 of the minutes provides an update on the amalgamation between the Bowling Club and Ryde City Bowling Club. 3. The overall impression one gleans from the minutes of the meeting on 7 July 2011 is that the Company had some liquidity issues which were being addressed by the Board's principal directors. 4. The Board meeting minutes of 11 August 2011 confirm the attendance of Ms Townend. Under the heading "Financial Reports" in section 6 of the minutes, there is a note of concern about the "lack of financial knowledge around the financial position of the Club by Board members". Mr McDonald stated: … that we are not incurring any more debt and have been making arrangements for the existing creditors by starting to pay off old outstanding accounts. Paul believes that we should be cash positive within 12 months. Telstra phone bill of $2,200.00 was paid this week also. 1. There is also reference to the expectation of receipt of $15,000.00 from Keno in September 2011. 2. The minutes of the meeting of 11 August 2011 also confirmed that the amalgamation with the Ryde Club was on track and that an application had been made by the Company to take over Mortdale Bowling Club. 3. The minutes also referred to the appointment of directors, removal of directors and those who were to remain directors, including Ms Townend. 4. Overall, the minutes of the meeting on 11 August 2011 created the impression that the Club was moving forward with plans for expansion and an expectation of increase in profit. 5. An Extraordinary General Meeting took place on Sunday 21 August 2011. Ms Townend was absent. It was noted: (Mr McDonald) referred everyone to the Annual Report for year 2009-2010 and stated that the Club is still not out of a difficult financial situation however we are solvent given our assets are greater than out debts, He was upset at the task of keeping the doors open as Camperdown Bowling Club has been hindered by gossip from some members of staff who are no longer with us who were intend on seeing the Club close. The Club should have closed two years ago but we are still trading and starting to improve and it is his hope and belief that we will be out of our current financial situation in the next 12 months as the Board are working very hard to repay old debt, maintain current spending and not increase our debt amounts while reducing significant costs the Club had been incurring in the past. 1. After referring to a number of outstanding debts, it was recorded that Mr McDonald stated "the most important thing is we are still very much open for business" and: (Mr McDonald) concluded by saying let's move on and forget about the past and make this one of the best Bowling Clubs. We can very much improve on what we have now and he was looking forward to working together. 1. The minutes for the Board meeting of 15 September 2011 have also been produced. Ms Townend attended that meeting. There was reference to current outstanding accounts in the amount of approximately $122,000.00. There was also reference to the amalgamation of the Club with the Ryde Club which was "starting to move along well" and was building momentum for an October opening. 2. The minutes also recorded: We need to start driving activity in the Club as we move into the busy period of the year. Michael Hilt has offered to run trivia on Thursday nights: we need to promote activities such as Melbourne Cup, Seafood Raffle on Saturday and NRL Grand Finals Sausage Sizzle. We also need to start newspaper and flyer promotions. 1. The minutes of that meeting also referred to a fall out with the jazz band and the Club's struggle to pay the band. 2. The final document of minutes of Board meetings related to a meeting that took place on 21 August 2012. There is reference to a number of infringements of varying severity including the Club's failure to produce a balance sheet, profit and loss accounts or an auditor's report for the last two years. In relation to the Ryde Club, the minutes confirmed that the Club was about to fully open, expecting renovations and the kitchen to be finalised in the week of 3 September. 3. The impression one gets from reading the minutes of that meeting is that there are a number of minor breaches committed by the Club which it was actively addressing. There was also an element of optimism regarding the pending opening of the Ryde Club. 4. That is the extent of the minutes of Board meetings held by the Company. They demonstrate that Ms Townend attended all but one of those meetings. 5. The records also indicate that the Company was aware of its financial position and was actively taking steps to improve the situation. Documentary Evidence Relating to Solvency 1. Attached to the Solvency Report by the plaintiff, are a number of proofs of debt, bill of costs and the like relating to the debts for which relief is now sought. Although the creditor and the amount due are set out in the Solvency Report at page 13, the dates upon which the debts were incurred or fell to be payable are not identified. 2. At page 14 of the Solvency Report, its author lists the debts payable as at the date of his appointment in October 2012. They came to just over $190,000.00. 3. In the graph on page 14 of the Report, the plaintiff demonstrates the period of time over which unpaid liabilities were accrued. There was a rapid acceleration in the middle of 2011 resulting in the total amount payable identified as at October 2012. 4. There is no indication that Ms Townend was aware of any of the debts resulting in the amount now claimed, let alone the Company's failure to pay them. The only evidence as to the state of her knowledge or the basis for any suspicion is derived from the minutes of Board Meetings, such as they are produced, which indicate that only a few select debts were referred to. 5. The central question in determining the liability of Ms Townend is to ascertain when each debt fell due and payable. It is at that time that an assessment must be made as to the solvency of the Company and the knowledge or suspicion of Ms Townend. Although some information as to that matter was available (see for example MFI 2 and MFI 5), that material was not put into evidence. This raises question of proof necessary for the determination of the liability of Ms Townend under s588G. Analysis and Findings Was Ms Townend a director during the Relevant Period? 1. The question of whether or not Ms Townend was a director must first be determined. 2. Director is defined in s9 of the Act in the following terms: Director of a company or other body means: (a) a person who: (i) is appointed to the position of a director; or (ii) is appointed to the position of an alternate director and is acting in that capacity; regardless of the name that is given to their position; and (b) unless the contrary intention appears, a person who is not validly appointed as a director if: (i) they act in the position of a director; or (ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes. Sub-paragraph (b)(ii) does not apply merely because directors act on advice given by the person in the proper performance of functions attaching to the person's professional capacity, or the person's business relationship with the directors or the company or body. 1. The plaintiff relies upon the fact that the ASIC Register in respect of the Company identified Ms Townend as a director and secretary from 14 September 2008. It was submitted that, by reason of s1274B of the Act, a legal presumption arises. That is not strictly so. Section 1274B of the Act provides: CORPORATIONS ACT 2001 - SECT 1274B Use, in court proceedings, of information from ASIC's national database (1) In this section: "data processor " means a mechanical, electronic or other device for processing data. (2) In a proceeding in a court, a writing that purports to have been prepared by ASIC is admissible as prima facie evidence of the matters stated in so much of the writing as sets out what purports to be information obtained by ASIC, by using a data processor, from the national database. In other words, the writing is proof of such a matter in the absence of evidence to the contrary. (3) A writing need not bear a certificate or signature in order to be taken to purport to have been prepared by ASIC. (4) Nothing in this section limits, or is limited by, section 1274 or 1274A. 1. That renders the ASIC search result as admissible in the proceedings as prima facie evidence of the fact that from 14 September 2008, Ms Townend was a director and the secretary of the Company. 2. The plaintiff further submitted that Ms Townend's submissions that she was not a director fail. It was submitted that Ms Townend "effectively acknowledged in cross-examination that she was a director". 3. Again, this is not strictly accurate. It is plain from the sections of her evidence extracted above, that the closest the evidence came was that she understood that she was a director but her responsibilities were for the social side of the business. 4. It is apparent from her evidence that she had no real understanding of the responsibilities and obligations which arose by reason of being a director of a public company. Whilst this is unfortunate, it is a relevant consideration in considering Ms Townend's position. The test is objective. 5. Whilst I do not accept that Ms Townend accepted in evidence that she was a director within the meaning of the Act, such a finding is open by reason of the prima facie evidence arising from the ASIC results. 6. It might be said that her actual knowledge (or absence thereof) is "evidence to the contrary" such that the presumptive proof is rebutted. 7. Counsel for Ms Townend submitted that she was never validly appointed as a director in that either she did not provide her consent or, alternatively, her appointment was not confirmed by resolution at a company AGM. In respect of the latter contention, Ms Townend relied upon s201H of the Act which provides: CORPORATIONS ACT 2001 - SECT 201H Directors may appoint other directors (replaceable rule—see section 135) Appointment by other directors (1) The directors of a company may appoint a person as a director. A person can be appointed as a director in order to make up a quorum for a directors' meeting even if the total number of directors of the company is not enough to make up that quorum. Proprietary company—confirmation by meeting within 2 months (2) If a person is appointed under this section as a director of a proprietary company, the company must confirm the appointment by resolution within 2 months after the appointment is made. If the appointment is not confirmed, the person ceases to be a director of the company at the end of those 2 months. Public company—confirmation by next AGM (3) If a person is appointed by the other directors as a director of a public company, the company must confirm the appointment by resolution at the company's next AGM. If the appointment is not confirmed, the person ceases to be a director of the company at the end of the AGM. 1. There was no evidence that Ms Townend was appointed by other directors and there was no evidence that her appointment was confirmed by resolution at the Company's next AGM. It was submitted by counsel for Ms Townend that this required confirmation either on or before 30 June 2009 or within five months thereafter being no later than 30 November 2009. 2. Counsel for Ms Townend submitted that no evidence was adduced by the plaintiff to show that any confirmation ever occurred. 3. The plaintiff resisted Ms Townend's case on this point. In further Written Submissions dated 13 June 2017, it was put that: 1. First, Ms Townend ought not to be entitled to rely upon s201H(3) at this very late stage of the proceedings. It was further submitted that it was not pleaded as part of her Defence or raised in the course of evidence. It only arose in the course of closing submissions. I am not persuaded that is an adequate reason to shut out the argument if it otherwise applies; 2. It is further opposed on the basis that there was no evidence that the plaintiff was appointed by directors rather than by members at a general meeting. That is a matter about which she could have and ought to have given evidence, so the argument goes. In the absence of records as to what in fact occurred, the plaintiff relies upon the fact that effective 14 September 2008, there were "wholesale changes" to the Board of the Company including the resignation of four directors and the appointment of five directors. It is submitted that the appointment of Ms Townend was unlikely to have been by directors but rather by a general meeting of members in accordance with the Company's obligation to hold its Annual General Meeting within five months of the end of the financial year which would include the date on which she was appointed as director; 3. Thirdly, the plaintiff submitted that it is not a matter for which the plaintiff bears an onus. The plaintiff relies upon the prima facie evidence of the fact that Ms Townend was appointed a director by reason of the evidence provided by ASIC in the form of the Company's Register; 4. The fourth submission made by the plaintiff against the defendant's reliance upon s201H(3) is that any irregularity in the confirmation of Ms Townend's appointment as a director does not overcome the plaintiff's reliance upon the second limb of the definition of director provided under sub-paragraph s9(b). 1. It is convenient to deal with the operation of the second limb of the definition of director at this time as it may also answer the submission by Ms Townend that her appointment was never confirmed. 2. In the plaintiff's original Outline of Submissions (MFI 3) reference was made to the Full Federal Court decision of Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 where at [64] it was stated: Whether a person has acted in the position of a director is a question of substance and not simply of how that person has been denominated in, or by, the company. 1. The plaintiff then set out the six grounds upon which it was submitted that Ms Townend met the definition of director under the second limb, that is, on the basis that she acted "in the position of a director". 2. It is submitted that the evidence established that both the Company and Ms Townend held herself out as a director and that Ms Townend took certain steps and undertook certain tasks in her capacity as a director of the Company. Reference was then made to six factors in support of that submission. They were: 1. first, Ms Townend acknowledged that she signed an ASIC form after being asked to become a director. Whilst this fact may bear upon the first question as to whether she is in fact a director, it also demonstrates her acting as a person who wished to become a director of the Company and who subsequently acted as same; 2. secondly, Ms Townend attended and voted at company meetings. The minutes of the meetings referred to Ms Townend as a director. That evidence goes both to a question of the substance of Ms Townend's involvement but also as to how she was denominated by the Company; 3. thirdly, it is submitted that Ms Townend was tasked with performing certain responsibility in relation to the operation of the Company. Whilst she agreed that these were mostly social matters, there was reference to at least on one occasion following up a matter in relation to the Club's trading promotion lottery licence (TP Licence). That is a further example of Ms Townend holding herself out as acting in the role of a director of the Company; 4. the fourth matter relied upon by the plaintiff is that Ms Townend prepared the minutes of one of the meetings. I do not regard this as particularly persuasive or at all determinative of the question; 5. the fifth matter relied upon is that Ms Townend signed documents in her capacity as director and secretary of the Company. This included financial agreements between the Company and Mr Palapanis. The financial agreements are in evidence and plainly identify Ms Townend as a director/secretary of the Company. On at least two occasions, she signed documents accepting that description of her role. I consider this to be the most persuasive evidence of Ms Townend acting in the position of a director so as to satisfy the second limb of the definition of director provided by s9; 6. the sixth matter relied upon by the plaintiff as evidence of Ms Townend acting in the position of a director related to the tasks she performed for the Company. The matters referred to are preparing the minutes of meetings, opening mail, maintaining the membership database and responding to email requests for social bookings. I do not regard this as conduct of a type in which a director of a company would necessarily engage and of itself is not determinative of that question. 1. On balance, I find that during the Relevant Period, Ms Townend acted in the position of a director. The evidence which weighed against her most was as to the signing of legal documents directly above her name with nomenclatures "secretary" and "director". 2. Her understanding or awareness of the consequences of acting as a director are not relevant to the question of whether or not she was a director. Her belief that she was the "social director" is, similarly immaterial. She agreed in evidence that she understood that she was a director responsible for social events. The signing of two financial agreements on behalf of the Company identifying herself as director/secretary puts, beyond argument, the question as to whether or not Ms Townend was acting in the position of a director. Accordingly, I find that Ms Townend was a director of the company on two bases: 1. on the prima facie evidence of the ASIC Register; and 2. under the second limb of definition of director provided by s9 on the basis that Ms Townend acted in the position of a director after being so appointed. 1. The next questions to be determined arise under s. 588G(2) in relation to the incurring of a debt by the Company (s588M(1)(a)). Section 588G 1. Section 588G(2) provides as follows: [Failure to prevent debt] By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware. Section 588G(1) 1. Section 588G(1) requires that four conditions be satisfied before turning to the breach provisions of s588G(2). From the findings above, conditions (a), (b) and (d) have been met. The only remaining question as to whether during the Relevant Period there were reasonable grounds for suspecting that the Company is insolvent or would become insolvent (by incurring the debt). 2. Counsel for the plaintiff identified the general principles regarding the test to be applied in the determination of s588G(1)(c) of the Act. It was submitted that the sub-section does not require an enquiry concerning the particular director whose conduct is under scrutiny but, rather, an enquiry into the objectively formed state of mind of a person of ordinary competence and diligence, who performed his or her duties imposed by law, capable of reaching a reasonably informed opinion as to the financial capacity of the Company (Australian Securities and Investment Commission v Edwards (2005) 54 ACSR 583, [2005] NSWSC 831 at [249]; Smith v Bone (2015) 104 ACSR 528, [2015] FCA 319 at [367]; Re Swan Services Pty Limited (in Liquidation) [2016] NSWSC 1724 at [23]. 3. Plainly, the test under s588G(1)(c) is an objective one (Powell v Fryer (2001) 37 ACSR 589; [2000] SASC 59 at [76]-[77]). I accept that submission. It is irrelevant at this stage of the inquiry whether Ms Townend herself suspected insolvency. 4. Counsel for the plaintiff emphasised that the focus is on the suspicion of insolvency and referred to Queensland Bacon v Rees (1996) 115 CLR 266 at 303 in which Kitto J stated: In the first place, the precise force of the word "suspect" needs to be noticed. A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to a "slight opinion, but without sufficient evidence", as Chambers's Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which "reason to suspect" expresses in sub-s(4) is, I think, of something which in all of the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the subsection describes - a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors. 1. In the present case, the plaintiff relies upon the following facts as giving rise to a reasonable grounds of suspicion of insolvency/ in the mind of the hypothetical direction of ordinary competence and diligence: 1. the inability in paying creditors commencing from mid-2010; 2. the fact that the Club was receiving calls from debt collectors; 3. the series of undefended judgments being entered against the Company; 4. the fact that Commonwealth taxes and council rates were not being paid; 5. the fairly obvious fact that the rubbish was not being collected from the premises because moneys were unpaid to the waste collection providers; 6. the inability to pay tax debts in full (as found to be ample of itself to conclude the reason a director ought to suspect insolvency in Smith per Gleeson J at [370]. 1. It was submitted by counsel for the plaintiff that: The multiplicity of factors in the present case makes that conclusion irresistible. 1. Counsel for Ms Townend resisted a finding that there were reasonable grounds for suspecting insolvency. The final submission made in support of that conclusion was that the plaintiff had failed to prove that the Company was unable to pay its debts as and when they fell due. Unfortunately, the fact is that the Company did not, by reason of its financial capacity, pay the subject debts as and when they fell due resulting in the Company going into administration. 2. Counsel for Ms Townend refers to a number of representations made by Mr McDonald to the Board as to the financial position of the Company and submitted that Mr McDonald "basically operated the club as an autocrat and that he was in charge and responsible for the financial affairs of the club". 3. In my opinion, the submissions advanced on behalf of Ms Townend in this respect (FDS [81]-[90]) conflate the objective test of the hypothetical director with subjective considerations. 4. When one considers to the authorities identified by counsel for the plaintiff, I find that there were reasonable grounds for suspecting that the Company was insolvent or would so become insolvent by incurring the subject debts. 5. This finding opens the gateway to a more detailed consideration of the circumstances as they relate to Ms Townend when considering whether or not she failed to comply with her obligation under s588G(2). Section 588G(2) 1. In relation to the subjective limb of the test (s588G(2)(a)) the plaintiff submitted (PS [63]) that there was a great deal of evidence that Ms Townend herself suspected that insolvency of the Company. An example was given based upon rumours and her attendances at various Board meetings where financial matters were raised. 2. The plaintiff relies upon a number of events which, it is submitted, justifies a finding that Ms Townend was aware that there were grounds for suspecting insolvency. 3. The first matter relied upon was the Board meeting which took place on Thursday 7 July 2011, attended by Ms Townend. The notes to that Board meeting (Exhibit B, page 6.) recorded: (Mr McDonald) advised that the club currently has approx. $79,000 in creditors at present but strongly believes that this amount can be reduced by making offers to settle outstanding accounts in full at less than their full value. 1. The minutes go on to refer to a number of expected receipts by the Club including from Carlton, Keno and membership renewals. In my view, the reference to the creditors and negotiations to settle outstanding accounts would not, of itself, be sufficient to make Ms Townend aware of the grounds for suspecting insolvency. On the contrary, it suggests that the Company is being well-managed by Mr McDonald. He demonstrated a precise knowledge of what was owed to the company's creditors and spoke of a plan to avoid an adverse financial outcome. 2. The second event relied upon by the plaintiff to establish knowledge on the part of Ms Townend is an entry in the same Board meeting minutes (Exhibit B, page 7.) in which the following is recorded: Paul advised that the club needs to make approx. $4,000 a week to remain open. 1. This is no more than a statement of fact and would not, of itself, justify a finding that Ms Townend had the requisite knowledge under sub-section 588G(2)(a). For all Ms Townend knew, the company may have been earning double that. Indeed, the notes also go on to refer to additional measures being taken by the Company in order to meet its financial obligations. 2. The third factor relied upon by the plaintiff in an attempt to prove knowledge on the part of Ms Townend is which was recorded to have been said at the Board meeting of 11 August 2011 (Exhibit B, page 15). In particular, (Mr McDonald) stated that we are not incurring any more debt and had been making arrangements with existing creditors and starting to pay off old outstanding accounts. Paul believes that we should be cash positive within 12 months. 1. Counsel for Ms Townend submitted that was said by Mr McDonald on that occasion was in fact encouraging and quite positive. The Club's creditors had increased by only $1,000.00 in the course of one month, no further debt was being incurred and arrangements were being made to pay out old outstanding accounts. Mr McDonald had also expressed his belief that the Company would be cash positive within 12 months. It was submitted that this meeting would not justify the finding of requisite knowledge under this sub-section. Counsel for Ms Townend submitted that the suspicion must be more than a mere inkling. I agree that this interpretation accords with the authorities. 2. I do not accept that the Board meeting of 11 August 2011 would have made Ms Townend aware of grounds for suspecting insolvency. 3. The next factor relied upon by the plaintiff were the Board meetings minutes of 15 September 2011 which referred to "emergency measures to drive revenue in the club" (Exhibit B, page 23). If one reads the entry as a whole, the following appears under the words just quoted: We need to start driving activity in the Club as we move into the busy period of the year. Michael Hilt has offered to run trivia on a Thursday night; we need to promote activities such as Melbourne Cup, Seafood Raffle on Saturday and NRL Grand Final Sausage Sizzle. We also need to start newspaper and flyer promotions. 1. If one removes the word "emergency" from the heading of that subject then it is an entry of the type which one would ordinarily expect to see in minutes of this nature. The use of the word "emergency" must be read in context. That is, the desire of the Club to drive activity as it moves into the busy period of the year. I read the use of the world "emergency" as a reference to the effluxion as time before Christmas and not as anything catastrophic. Mind you, there is nothing in that part of the Board meeting notes which would ground the necessary suspicion. 2. The next matter relied upon by the plaintiff were the Board meeting minutes of 21 August 2011. It must first be noted that Ms Townend was not present when this meeting took place. There was no evidence that she became aware of the minutes of the meeting or the subject matter of the minutes. Ms Townend was not cross-examined on this topic. Reliance is placed by the plaintiff upon the fact that it was recorded that Mr McDonald stated: The club should have closed two years ago but we are still trading and starting to improve and it is his hope and belief that we will be out of our current financial situation in the next 12 months as the Board are working very hard to repay old debt, maintain current spending and not increase our debt amounts while reducing significant costs that (the) club have been incurring in the past. 1. The historical reference to the closing of the Club two years ago cannot affect the knowledge or suspicion of Ms Townend as at 2011. Again, if one reads the entire note it is clear that the forecast was hopeful and positive. As to its present position, Mr McDonald was also recorded as stating: We are solvent given our assets are greater than our debts. 1. I reject the submission that this note justifies a finding of requisite knowledge or suspicion on the part of Ms Townend to satisfy the subjective test under sub-section 588G(2)(a). 2. Those were the matters relied upon by the plaintiff in its case against Ms Townend under s588G(2)(a). For the reasons given above, I find that Ms Townend was not aware at the time debts were incurred that there were grounds for suspecting that the Company was insolvent or would become insolvent. There is also no evidence that she was even aware of the debts being incurred or when they were payable. 3. Section 588G(2)(b) provides what, on its face, appears to be an objective test. It, however, imports some subjective considerations by use of the words "like position" and "in the company's circumstances". 4. The parties were asked to further address the Court as to the extent to which the Court should have regard to the personal circumstances of Ms Townend in considering a reasonable person "in a like position". Further, the parties were asked to address the question as to what extent regard should be had to the subjective circumstance of the Company in view of the reference to the words "in the company's circumstances" in sub-section 588G(2)(b). 5. The plaintiff submitted that regard should not be had to any relevant subjective characteristics or factors pertaining to Ms Townend. Reference was made to the decision of O'Loughlin J in Credit Corp Australia Pty Limited v Atkins (1999) 30 ACSR 727, [1999] FCA 335 in which his Honour stated: [134] … While it is true to say that there are "subjective considerations" they must, nevertheless, be viewed objectively. A lazy director or an inefficient director cannot hide behind the shield of ignorance, laziness or inefficiency … [135] … It is also clear from the judgment of Lander J in Capricorn Society Ltd v Linke (1996) 14 ACLC 431 that a court will have regard to the facts and circumstances that the respondent ought to have known as well as to the facts and circumstances that are actually known to a respondent. 1. I do not accept that Ms Townend was ignorant, lazy or inefficient. In my view, she efficiently attended to her duties at the Club as she understood them to be. They did not include the financial management of the company. 2. The plaintiff also directed the Court's attention to Metal Manufacturers Ltd v Lewis (1986) 11 ACLR 122 at 748-9, Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423 at 448, Commonwealth Bank of Australia v Freidrich and Powell v Fryer (2001) 37 ACSR 589. 3. The plaintiff submitted that s588G(2)(b) "typically arises in circumstances where the particular director was unaware of the facts and matters constituting reasonable grounds for suspecting insolvency because he or she had failed to ascertain them, but a reasonable person in a like position would or ought to have ascertained those facts and matters" (Australian Securities and Investments Commission v Plymin (No 1) (2003) 46 ACSR 126). 4. Accordingly, the plaintiff's position was that the Court is to have regard to what ought to have been known by a reasonable director in the circumstances as well as what was actually known by Ms Townend. 5. Factors relevant to the considerations in this objective test are the following factors peculiar to Ms Townend: 1. that Ms Townend considered herself to be the social or bowls director of the Company; 2. she had no involvement in the financial management of the Company; 3. all invoices and bills were passed on to Mr McDonald; 4. Ms Townend did not have access to the Company's accounts; 5. Ms Townend did not have access to the Company's online banking computer system; 6. she was reassured on occasions by Mr McDonald that the Company's financial position was being managed; 7. the relevant Company circumstances include the fact that Mr McDonald, seemingly to the exclusion of all others, was responsible for the financial affairs of the Company. 1. Counsel for Ms Townend submitted that guidance as to interpretation may be gleaned from the Explanatory Memorandum for the Corporate Law Reform Bill 1992 which, in dealing with the director's duty of care and diligence, stated: The addition of the phrase "in a like position" will enable the court to look both at any special expertise held by individual directors and the distribution of functions within the corporation. (Emphasis added). 1. I note the remarks of Hodgson J in Metal Manufactures Ltd v Lewis (1986) 11 ACLR 122 at 748-9 where his Honour said: … the view that I have come to … is that in deciding whether or not a defendant has "reasonable cause" within s556(2)(b), one can have regard to the facts and circumstances actually known to the defendant, and also facts and circumstances which the defendant ought to know, having regard to the defendant's position in the company and the duties associated with that position. (Emphasis added). 1. It is necessary, therefore, to give consideration to Ms Townend's role in the operation of the business, her duties as well as the role of other directors as well as the facts and circumstances actually known to Ms Townend. 2. On behalf of Ms Townend, it was submitted: The evidence very plainly reveals, objectively, that the duties and responsibilities of the first defendant in the club had nothing to do with the financial side of matters and that her role was limited to social matters only. This evidence was unchallenged. 1. The responsibilities of Ms Townend and her position in the Company are well described elsewhere in these reasons. It is clear that not only was she not involved in decisions of a financial nature but that she did not have access to documents of a financial kind which may have informed a reasonable person of matters relevant to the test under s588G(2)(b). The facts and circumstances which Ms Townend ought to have known having regard to her position in the Company and her duties associated with her position do not include matters of a financial nature. 2. It is equally clear that the financial management and decisions pertaining to such matters were solely within the purview of Mr McDonald. This is a matter relevant to the "company circumstances" but also to "a reasonable person in a like position" to Ms Townend. 3. Given the unchallenged evidence of Ms Townend that her role was limited to social matters and having regard to the structure of the Company including the dominance of Mr McDonald in its financial management and affairs I find that a reasonable person in a like position to Ms Townend in a company in the Company's circumstances would not be aware of any reasonable grounds for suspecting insolvency. 4. Dealing first with Ms Townend's actual awareness and knowledge. The evidence from Ms Townend clearly established that she was not involved in any financial aspect of the management of the Company. Although she was cross-examined about payments to a band and waste collectors, it was perfectly clear from her evidence that all financial matters were handled by Mr McDonald. She did not know who the creditors were, would not necessarily have known when debts were incurred or when they fell due for payment. 5. Accordingly, I find that Ms Townend was not aware during the Relevant Period of any grounds for which would create in the mind of an ordinary person in her position for suspecting that the Company was incurring debts whilst insolvent. Finding re Contravention 1. Accordingly, I find that the plaintiff has failed to discharge his onus of proof in establishing that Ms Townend contravened sub-section 588G(2)(a) or (b) in relation to the incurring of a debt by the Company. 2. In the event that I am incorrect in that finding, I find that the remaining provisions of s588M(1) were made out on the evidence. 3. Further, I accept the opinion of the plaintiff and find that, for the Relevant Period, the Company was insolvent in fact and insolvent by reason of the presumption based upon the state of its financial records. Findings as to Facts in Dispute 1. For the reasons detailed above, I make the following findings in respect of the issues in these proceedings: ISSUE 1: Whether Ms Townend was a director within the meaning of s9 of the Act; 1. As indicated above, I find that Ms Townend was a director of the Company during the Relevant Period. ISSUE 2: Whether the Company was in fact insolvent during the Relevant Period or became insolvent as a result of incurring the debt. 1. I find that the Company was continuing to incur debts through trading whilst insolvent during the Relevant Period. ISSUE 3: Whether the Company was trading whilst insolvent by reason of a presumption arising under the Act. 1. For the reasons provided above and relying upon the evidence of the plaintiff, I find that the presumption under s588E(4) of the Act is engaged so that the Company is presumed to have been trading whilst insolvent during the Relevant Period. ISSUE 4: Whether there are reasonable grounds for suspecting that the Company was insolvent or would become insolvent. 1. For the purposes of engaging s588G(1)(c), I find that there were reasonable grounds for suspecting that the Company was insolvent or would so become during the Relevant Period. ISSUE 5: Whether Ms Townend has contravened sub-section 588G(2)(a) or (b) by the Company incurring the debt(s) during the Relevant Period. 1. For the reasons provided in the Analysis section above, I find that Ms Townend did not contravene sub-sections 588G(2)(a) or (b). 2. Specifically, I find: 1. that Ms Townend was not aware that there were grounds for suspecting that the Company was insolvent or would become insolvent by incurring a debt; 2. that a reasonable person in a like position to Ms Townend in a Company in the Company's circumstance would not be aware of grounds for suspecting that the Company was insolvent or would become insolvent by incurring a debt. ISSUE 6: Whether the person (the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the Company's insolvency; 1. The creditors have regrettably suffered loss and damage in relation to the respective debts because of the Company's insolvency. ISSUE 7: Whether the debt was wholly or partly unsecured when the loss or damage was suffered. 1. I accept and find that the debts, the subject of this claim, were unsecured when the loss was suffered. ISSUE 8: Whether the Company is being wound up. 1. This question is also answered in the affirmative. Disposition 1. There can be no doubt that the obligations to be placed upon directors of companies are important and ought to be taken seriously. It is unfortunate that some people become directors and act in that role without knowledge of that fact or of its consequences. Those employed by companies or who trade with companies on terms rely upon the honesty of its directors as to the company's capacity to pay for those goods or services. It is a significant and burdensome obligation. 2. In relation to Ms Townend, her position is unusual and extremely unfortunate. 3. In view of the findings as to the facts in dispute, referred to above, I have concluded that Ms Townend ought not to be held personally liable for the unsecured debts incurred by the Company during the Relevant Period. 4. It is plain from the evidence that the Company was very much run by the other two directors who may or may not be in breach of their director's duties under the Act. It is regrettable that the creditors who are left out of pocket as a consequence of the conduct by this Company are left without a satisfactory remedy in circumstances where they were dealing with the Company in good faith. 5. In disposing of these proceedings, I note that the actions brought against the second and third defendants have been discontinued. That order has been made, although the pleadings do not reflect that fact. 6. The only live party against whom the plaintiff has proceeded is Ms Townend, the first defendant. I find that the plaintiff's claim against her must fail. There ought to be a verdict entered in her favour and her costs ought to be paid by the plaintiff. 7. Cross Claims were issued on behalf of Ms Townend against the other two defendants. My understanding is that the Cross Claim against Mr McDonald has never been served. Accordingly, I dismiss that Cross Claim with no order as to costs. 8. I understand that the Cross Claim against Mr Lewis was served but he has never taken an active role in these proceedings. In view of my finding that Ms Townend is not liable to the plaintiff then the Cross Claim is not enlivened. Accordingly, I dismiss both Cross Claims and make no order as to costs. Statutory Defences 1. As noted earlier, Ms Townend relies upon s1317S and 1318 of the Act as defences in the event that liability was found against her. The parties had agreed to address separately on these sections. In view of my findings that Ms Townend is not liable under s588M it is not necessary for those defences to be determined. 2. Without receiving submissions as to these defences, I will not make alternate findings. I will, however, observe, that the evidence did not establish that Ms Townend acted other than honestly in her dealings as a director of the Company. Orders 1. Accordingly, I make the following orders: (a) verdict for the first defendant against the plaintiff; (b) the plaintiff to pay the first defendant's costs of the proceedings; (c) I note that the proceedings against the second and third defendants have previously been discontinued; (d) I order that the First Cross Claim be dismissed with no order as to costs; (e) I order that the Second Cross Claim be dismissed with no order as to costs; (f) I grant the parties liberty to apply within 28 days to vary the costs order referred to in paragraph (b) above, if necessary; (g) I direct that the Exhibits be returned after 28 days. ********** 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. Decision last updated: 20 December 2017