Tubemakers of Australia Limited v Joszef Szell and Malcolm Angelo Negri [1987] ACTSC 48 (14 July 1987)

SUPREME COURT OF THE ACT

TUBEMAKERS OF AUSTRALIA LIMITED v. JOSZEF SZELL and MALCOLM ANGELO NEGRI
S.C. No. 1682 of 1983
Company Law

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Kelly J.(1)

CATCHWORDS

Company law - Directors - Liability for debts incurred when company unable to pay its debts as and when they became due - Encouragement by creditor to continue trading - Estopped.

Companies Act 1981, s.556

3M Australia Pty. Limited v. Kemish, Supreme Court (N.S.W.) Foster J., 20 March 1986 (unreported)

HEARING

CANBERRA
14:7:1987

ORDER

There be judgment for the plaintiff against the first and second defendants in the sum of $186,921.81.

DECISION

In this action the plaintiff claims against each defendant jointly and severally the sum of $212,364.94 and interest. It alleges that each of the defendants was at all material times a director of S. & N. Nominees Pty Limited (in liquidation) (the company) and that, as is admitted, the company was ordered to be wound up by order of this Court made on 13 May 1983. It alleges further that between 28 September 1982 and 20 April 1983 the company incurred debts to it totalling $198,857.84 which, together with interest of $13,507.10 said to have been payable in respect of those debts, makes up the amount claimed. The amounts claimed as individual debts, the numbers of the invoice said to relate to each and the date upon which each debt is said to have been incurred are set out in a schedule to the statement of claim.

2. The plaintiff alleges that immediately before each debt was incurred the company was not able to pay all its debts -

(a) as and when they became due, or

(b) to pay each debt incurred to the plaintiff as and
when it would fall due.

It further alleges that each of the defendants was aware of the matters just referred to and that there were reasonable grounds to expect each of those matters.

3. In support of its claim the plaintiff relies upon s.556 of the Companies Act 1981 (the Act), the material provisions of which are as follows:-

"(1) If -

(a) a company incurs a debt, whether within
or outside the Territory;

(b) immediately before the time when the
debt is incurred -

(i) there are reasonable grounds to
expect that the company will not be
able to pay all its debts as and
when they become due; or

(ii) there are reasonable grounds to
expect that, if the company incurs
the debt, it will not be able to
pay all its debts as and when they
become due; and

(c) the company is, at the time when the
debt is incurred, or becomes at a later
time, a company to which this section
applies, any person who was a director of the company,
or took part in the management of the
company, at the time when the debt was
incurred is guilty of an offence and the
company and that person or, if there are 2 or
more such persons, those persons are jointly
and severally liable for the payment of the
debt.

. . .

(2) In any proceedings against a person under
sub-section (1), it is a defence if the
defendant proves -

(a) that the debt was incurred without his
express or implied authority or consent;
or

(b) that at the time when the debt was
incurred, he did not have reasonable
cause to expect -

(i) that the company would not be able
to pay all its debts as and when
they became due; or

(ii) that, if the company incurred that
debt, it would not be able to pay
all its debts as and when they
became due.

(3) Proceedings may be brought under
sub-section (1) for the recovery of a debt
whether or not the person against whom the
proceedings are brought, or any other person,
has been convicted of an offence under
sub-section (1) in respect of the incurring
of that debt."

4. Although in his defence the first defendant did not admit that the plaintiff was a body corporate capable of suing, he conceded that fact at the hearing. The second defendant conceded it in his defence. I am satisfied on the pleadings and the evidence that at all material times the defendants were directors of the company.

5. The first defendant also pleaded that if such a debt as that alleged was incurred (which was not admitted) it was incurred without his express or implied authority or consent. All the evidence was against this plea and I reject it.

6. At an early stage in the proceedings in this Court I directed attention to the fact that balance sheets tendered were headed:-

"S. & N. Unit Trust trading as S. & M. Engineering"

7. Counsel for the plaintiff then said, "It is common ground, I think, that the bodies are the same. There is a problem of a misnomer which I understand not to be raised in these proceedings." I then said, "This can be taken then as the company's account". The company in question was S. & N. (Nominees) Pty Limited (in liquidation) named in paragraphs 2 and 3 of the statement of claim.

8. Before evidence was called, counsel for the plaintiff made an explanation concerning the first item appearing in the schedule. The debt of $135.46 shown there was but part of a much larger debt, of the order of $8,609, which was incurred on 28 September 1982 and in respect of which Invoice No. 67M20694 was issued. The balance of that debt, some $8,474.54, had been paid.

9. At the outset, counsel for the defendants were asked whether it was admitted that the debts had been incurred. Counsel for the first defendant said:-

"So far as the debts are concerned, the debts
from September (1982) through to . . . 28 March
(1983) are conceded."

He conceded also that goods to the value of $350.63 which were said to have been sold to the company on 20 April 1983 and in respect of which Invoice No. 67M23740, the last invoice in the schedule, issued, were purchased. However, he stated that at that stage the plaintiff was supplying the company with goods on a cash basis only and that therefore the debt was not admitted to that extent. Neither was the interest particularised in the statement of claim conceded.

10. Counsel for the second defendant admitted that goods as set out in each of the invoices in the schedule to the statement of claim were supplied on or about the dates of those invoices to the value of the amounts set out next to them. Counsel went on to say:-

"It is not, however, admitted that debts in
that amount were incurred on that day, nor is
it admitted that interest is payable as set
out in the last paragraph of the schedule."

I asked, "On that day. You mean the April day, do you?" Counsel replied:-

". . . yes. That is to say, the second-named
defendant stands on its denial and requires
proof that those debts were incurred on or
about those days."

Counsel for the plaintiff then said:-

"I understand the position to be in that
respect that the goods are admitted to have
been delivered and ordered but no debt is
admitted."

Counsel for the second defendant replied, "That is correct".

11. I am satisfied from the evidence of the liquidator, Mr R.J. Yeomans, that the company's books were well and accurately kept. I am further satisfied that as at 30 June 1982 the value of stock and work in progress shown in the company's records totalled $143,376. The amount of debts owed the company at that date by debtors was $273,450.21 and its current liabilities on that date were $528,053.24.

12. Mr Yeomans was then asked whether he could express a view as to whether, as at 30 June 1982, the company was solvent in the sense that it was able to pay its debts as they fell due. The question was objected to but I permitted it to be answered on the basis that Mr Yeomans, a Fellow of the Institute of Chartered Accountants since August 1963, a registered company liquidator for some 15 years, an official company liquidator since 1982, and experienced in general accountancy, tax accounting services, business advice, auditing and consultancy work in respect of both company liquidations and professional bankruptcies with, additionally, wide business and executive experience, was qualified to express an opinion on the matter even though it might go to the ultimate question which the Court is to decide.

13. He replied:-

"Based on an analysis of the balance sheet
and financial accounts of 30 June 82, there
was a deficit of working capital, that is the
current liabilities exceeded the current
assets, and on that basis my opinion would be
that the company was insolvent and unable to
pay its debts as and when they fell due."

14. In expressing that opinion, Mr Yeomans took into account his belief that the company had an overdraft facility of $100,000 from its banker which had been drawn upon up to an amount of $93,200 giving it an undrawn limit at that stage of $6,800.

15. Reference to the company's balance sheet of 30 June 1982, Exhibit A, shows that as at that date the company's current assets including cash on hand of $210 amounted to $471,587. That amount included a number of loan accounts which totalled $54,551. Its current liabilities totalled $728,145. As well as the total of $528,053 owed to trade creditors and the $93,200 owed on the bank overdraft which was secured, $80,101 had been drawn against a fully drawn bank advance account which was unsecured. $26,791 in respect of unsecured loan accounts made up the balance of the then current liabilities.

16. I accept Mr Yeomans' evidence that the company became unable to pay its debts as and when they fell due on or about 30 June 1982, and possibly before, and continued unable to pay its debts from that date to the date when it was placed in liquidation, 13 May 1983. Mr Yeomans was then asked whether, having examined the accounts of the company, there was anything in them which would justify the conclusion that reasonable grounds existed for expecting that the company would be able to pay its debts. Again the question was objected to but again I allowed it. Mr Yeomans replied that he had no grounds based on the financial accounts for those days that he had examined to come to the "conclusion at all that it would ever be able to pay its debts". He could find nothing in the accounts to justify an expectation that the company would be able to pay its debts on any of those dates and there were no readily realisable assets that would put the company in a position of being able to pay its debts. By "those dates" I understood him to mean, in the context, the dates between 30 June 1982 and 13 May 1983.

17. A financial account summary was tendered. It is convenient to set it out.

" S. & N. UNIT TRUST
TRADING AS S. & M. ENGINEERING
FINANCIAL ACCOUNT SUMMARY

Period Turnover Profit Surplus
(Loss) (Deficiency)

Year ended
30 June 1981 811,445 25,402 200

Year ended
30 June 1982 1,253,048 (109,534) (109,334)

Period ended
30 September 1982 640,860 27,338 (81,996)

Period ended
31 October 1982 723,857 50,113 (59,221)

Period ended
28 February 1983 1,351,480 (22,325) (131,659)

Period ended
31 March 1983 1,400,405 (68,872) (178,206)"

18. It will be seen that the company traded at a profit of $27,338 for the period from 1 July 1982 to 30 September 1982 and that in the month of October 1982 it made a further profit of $22,775. That reduced the deficit in existence at 1 July 1982 to $59,221. From 1 November 1982 to 28 February 1983 a loss of $72,438 was sustained, the forerunner of a further loss of $46,547 during March 1983.

19. A dissection of creditors was made. Again it is convenient to set it out.

"S. & N. UNIT TRUST
TRADING AS S. & M. ENGINEERING
CREDITOR DISSECTION

Month Amount
Owing %

July 1982 and prior

periods 58,951 11.6

August 9,710 1.8

September 22,808 4.5

October 23,882 4.7

November 54,814 10.8

December 71,257 14.0

January 26,339 5.2

February 132,231 26.0

March 55,186 10.9

April 45,640 9.0

May 7,682 1.5

$508,500 100.0"

20. It will be seen that 11.6% of the amount outstanding as at 13 May 1983 was owed by the company as far back as July 1982 and when the company went into liquidation 47.4% of its final debt antedated 1 January 1983.

21. A bank account analysis showed that in respect of the month of July 1982 there was a closing balance of $97,608.44. Unpresented cheques totalled $152,674.45. Having regard to the bank accommodation then available, $100,000, the company would have had available to it after presentation of those cheques up to $45,000 approximately, an amount which if used would have brought the overdraft to its $100,000 limit. In August 1982 there was a closing debit balance at bank of $75,694.84 which, together with unpresented cheques for $21,793.13, would have left a reserve of just over $2,500 before the limit of the overdraft was reached. In September 1982 a debit balance of $87,707.59 together with unpresented cheques of $47,135.11 indicated that the company's bank account would have been overdrawn by $134,842.70 or $34,842.70 beyond the limit of accommodation had all the unpresented cheques been presented. The position improved somewhat in respect of the month of October 1982 when the total of the debit closing balance and unpresented cheques was reduced to $107,450.92. The total for the month of November was $116,173.69 and for the month of December $99,540.19.

22. The figures just referred to cannot tell the whole story because they do not correspond with the total amount of debts due to creditors at the relevant dates. Their interest lies in the fact that cheques, although described as unpresented, were not, apparently, sent to the creditors but had been prepared and noted in the company's books of account so that they might be sent out in due course to the creditors when funds were available to meet them.

23. The evidence shows that a number of the company's cheques were returned unpaid. For the month of November 1982 cheques totalling $9,819.05 were returned unpaid, for the month of December unpaid cheques amounted to $2,175.50, for January 1983 they amounted to $3,469.33, for February 1983 they amounted to $1,500 and for March 1983 they amounted to $7,955,88.

24. Mr Yeomans gave evidence concerning the use of a ratio between current assets and current liabilities as a mark of insolvency. He calculated that ratio in respect of the company's affairs as at 30 June 1982 at 1 - 1.54, as at 30 September 1982 at 1 - 1.68, at 31 October 1982 at 1 - 1.58, at 28 February 1983 at 1 - 1.76 and at 31 March 1983 at 1 - 2.41.

25. Some of the figures used by Mr Yeomans in calculating these ratios are somewhat more favourable to the company than those shown in the balance sheets which made up Exhibit E but, having regard to his overall evidence, the difference is negligible and I am content to accept the ratios he provided. He was then asked,

"What are you able to say of the degree of
insolvency of a company where the current
liabilities exceed the current assets by
between one third and one half?"

He replied,

"It depends on a number of factors such as
undrawn overdraft limits or the other assets
on the balance sheet being the fixed assets,
plant and equipment, etc., that might be
capable of being realised, but once you go
worse than 1 - 1 you are starting to get into
cash flow difficulties and that exacerbates
your insolvency situation and then once you
get sort of to the 1.25 - 1, from there on
you are really starting to look difficult."

26. The defendant Mr Szell gave evidence. He told of the company's need to acquire larger premises so that it might grow, of the acquisition of land at Hume and of the building with the aid of a Commonwealth Development Bank loan of $160,000 of a new building big enough to deal with the company's needs. Unfortunately, the needs as perceived were greater than had been expected when the loan application was made and the directors of the company considered that there was a need for two additional bays. Before they proceeded to build them they sought a further loan from the Development Bank but did not get it. They went ahead and had the bays built nevertheless. By 30 June 1982 the company was operating solely from the new factory.

27. On or about 22 October 1982 Mr Bluhm, a member of the firm K M G Hungerfords, Chartered Accountants, produced accounts for the company for the year ended 30 June 1982. He had been associated with the company since February 1980. Initially he prepared its annual accounts. In 1982 there was a change in the work he was to do. He produced the company's accounts for the year ended 30 June 1982 on or about 22 October 1982. These showed the substantial loss of some $109,000. He said that the directors were naturally concerned as to whether or not problems existed in the business and called upon him to produce accounts for the next quarter, to 30 September 1982. He produced the accounts for that quarter by approximately 5 November 1982.

28. Mr Szell was asked what had prompted him to ask Mr Bluhm to look at the finances of the company and to provide monthly accounts. He said that he had had some calls from creditors and had asked Mr Bluhm to look into the matter. At that stage he was concerned with the profitability of the company simply because of the phone calls.

29. In August 1982 his company had received a letter from the plaintiff setting out that as from 1 September 1982 its terms of trading were 30 days nett, that is, its account was due and payable within the month following that in which the goods were delivered. The plaintiff reserved the right, it said, to apply and recover an interest charge of 20% per annum of any amount outstanding and reserved the right to vary that interest rate by notice in writing should interest rates vary significantly. The company responded by saying that it could not pay accounts within 30 days and sought terms allowing it to pay its accounts to the plaintiff within 90 days. I am satisfied that the plaintiff agreed to this. I am also satisfied that the defendants told a representative of the plaintiff that it would not be feasible to charge the company interest and that except to a very limited extent to which I will later refer there was no evidence that thereafter interest was ever charged. So much appears from the accounts rendered.

30. Mr Bluhm gave evidence that accounts to 31 October 1982 were prepared by some date after 7 December 1982 and that accounts to 30 November 1982 were completed some time after 20 February 1983. These dates were not challenged and I accept them as correct.

31. Mr Szell gave evidence that after accounts dated 31 October 1982, which showed that profits had been earned for the months of September and October, had been received Mr Bluhm told the directors that things were starting to turn round and that they were trading profitably again. Mr Szell gave further evidence that during the months of September, October and November 1982 Mr Negri was writing letters in an attempt to get more finance. The Commonwealth Development Bank was the first source tried and afterwards Mr Negri wrote to or contacted various companies. At the end of October and into November the company had a lot of work to do although it had not won any additional work. He thought that the work which they had at the time would probably finish some time in April of the following year.

32. Some industrial problems in relation to contracts which were being carried out in Sydney exacerbated the situation because it led to the delay in the receipt of income from the company which was afflicted by industrial troubles. As well, however, there was a complaint by that company relating to non-delivery by the company of certain purlins.

33. I am satisfied that at least part of the delay in that receipt of income was due to the company's own fault.

34. The usual construction industry Christmas break with its requirement that employees be paid holiday pay was appreciated, Mr Szell said, as "going to have a pretty bad effect on us".

35. On 17 January 1983 a meeting was held with Mr Ron Murray and Mr Hilless, employees of the plaintiff. I am satisfied that at that meeting the plaintiff's representatives agreed to continue to provide steel to the company and at the same time made arrangements for the liquidation of the outstanding debt due to it. The defendants agreed to give to the plaintiff by way of security a mortgage over the land at Hume which was in their names, not in that of the company. In due course a draft memorandum of mortgage was forwarded to them. It showed a principal sum outstanding of $163,583 and indicated that arrangements had been made that $12,000 should be paid on 31 January 1983, $20,000 on 28 February 1983, $56,000 on 31 March 1983, $50,000 on 30 April 1983, $50,000 on 31 May 1983 and $20,000 on 30 June 1983.

36. As appears from the draft memorandum of mortgage the land was subject to two earlier mortgages, one to the Commonwealth Trading Bank of Australia and one to the Commonwealth Development Bank of Australia.

37. For reasons into which it is unnecessary to go, the memorandum of mortgage was never executed by the defendants but the plaintiff continued to supply goods to the company thereafter.

38. The position was complicated by the fact that another company was supplying steel to the company. At some date before Christmas 1982, the exact date does not appear from the evidence, the company was indebted to that other company in the sum of about $50,000. Arrangements had been made that it should be paid off. In February 1983 a payment of $20,000 was due. The defendants elected to pay that amount to the plaintiff rather than to the other company. The other company then began liquidation proceedings.

39. By 30 March 1983 the directors were fully aware that the company's position was perilous. Accounts received about 23 or 24 March 1983 showed a loss to the end of February 1983. A meeting was arranged with a liquidation expert from Mr Bluhm's firm and subsequently a meeting was held at which representatives of the plaintiff and of the Commonwealth Bank were present. The possibility of the bank's appointing a receiver was discussed but rejected by the bank. A representative of the plaintiff was prepared to have the company continue to trade on the basis that he had seen companies "trade out of it" in the past when in difficult situations such as that faced by the company.

40. Mr Szell said that at 30 March 1983, at the meeting to which I have just made reference, he believed that the company could not go on unless it got finance. To that point his belief had been that a loan from the Development Bank would be granted. Additionally it was hoped that the factory might be sold to the plaintiff. He referred to the fact that in the sixteen years during which he had been in business it had been a fluctuating business always. This was described in other evidence as the cyclic nature of the business.

41. Mr Szell also gave evidence that late in 1982 he considered the possibility of selling the Fyshwick factory and injecting money obtained thereby into the company's funds. I am satisfied that this possibility was canvassed late in 1982 and that there was then a not unreasonable expectation that $40,000 might have become available as a result of the sale. In the event that proved totally unrealistic because the price bid at auction was not enough to satisfy the mortgagees.

42. In cross-examination Mr Szell agreed that there had been occasions in the sixteen years of the history of the business when he had had problems with creditors but he had managed to trade out of the situation after making arrangements with them. He hoped that would be the case with the difficulties the company was experiencing in 1982 and 1983 but in addition he expected to get additional finance. He was not worried by the loss incurred in 1982 as he attributed that to the change in factories and did not expect any further loss. He viewed the loss incurred because of the change of factories as an extraordinary one. The first time he started to worry about the ability of the company to pay its creditors was when Mr Bluhm was called in. I am satisfied that this was after, but very shortly after, 22 October 1982. Even then he was not worried about the company's ability to pay creditors but rather that there should be tight control over the way the company was running. He denied a suggestion that by June 1982 he was already aware that the company was in a situation where it was very likely to be unable to pay its creditors in accordance with the terms of trading.

43. Mr Szell said that he discussed with Mr Negri the possibility of injecting the balance available after the sale of the factory at Fyshwick just after what must have been Christmas 1982. The proposal would not have been matched by Mr Negri. He appreciated the possibility that, having put that money into the company if he did, he might lose it.

44. Mr Negri also gave evidence and was cross-examined. He told of the building of the new factory and the provision of loan funds of $160,000 by the Commonwealth Development Bank and a further $80,000 from the Commonwealth Trading Bank. Obviously these were secured by mortgages as appears from what I have earlier said. Mr Negri gave evidence setting out how in his opinion the loss for the year ended 30 June 1982 was incurred.

45. He was asked whether, during the period immediately following 30 June 1982 leading up to September 1982, the company experienced any liquidity difficulties. He replied that there were some minor liquidity problems but generally the company was paying its creditors as and when they were required to be paid within the 90 day period of trading that had been established. This was with one exception, Scruttons. He said that the company got steel from Scruttons in April and May. The 90 day period for payment for those supplies would have ended in July and August 1982. He said there were no outstanding payments beyond 90 days until August 1982 but that the company was experiencing liquidity problems after that. He said that the balance sheet and profit and loss account for the year ended 30 June 1982 was received at about the usual time.He was concerned, after receipt of those accounts, to establish whether it was a one-off situation or one which was likely to continue and he arranged accordingly with Mr Bluhm for a balance sheet to be prepared to the end of September 1982. That document indicated a profit of about $22,000 for the three month period and that accordingly the operation was profitable and reversing the 1982 situation.

46. When the company received those accounts it was still experiencing liquidity difficulties. Asked their nature and extent, he said that the company still had not recovered enough of its cash from the loss of 1982 to be able to put itself in a more favourable liquid situation. As well it had difficulties of obtaining payment for work it had done. Scruttons was starting to press for payment. Their letter dated 18 November 1982 referred to their outstanding account of $58,848 and asked for payment within seven days. A suggested arrangement was not accepted. No other creditors were pressing for payment at that time apart from Scruttons.

47. The company took steps in an attempt to get more liquid funds. It also attempted to obtain from companies for which it was doing work earlier payment of its accounts than was due. One company eventually, in January 1983, agreed to the request for earlier payment but the other companies did not.

48. Still in chief he was asked whether as at 29 November 1982 his company was experiencing any liquidity difficulties and replied, "Yes, we still had the liquidity problems that existed - had existed for some months - for a couple of months", but that the company still had sufficient liquidity to pay their debts as they fell due. Obviously this cannot relate to the Scruttons debt.

49. On 29 November 1982 Mr Negri, on behalf of the company, wrote to the Department of Transport and Construction concerning work which the company was doing for two Sydney projects. In the letter, after explaining difficulties which were being experienced, he said:-

"At this stage we are finding ourselves with
a considerable cash flow problem because of
the delay in being paid for the North West
Mail Centre (one of the projects). We are
unable to carry a debt of $125000.00
outstanding on this job for a further four
months as we do not have the extra collateral
required to arrange a bridging loan for this
amount of money. Unless we are able to be
paid a substantial proportion of the value of
these materials on site, we will be unable to
continue with the work on either of the above
jobs and will probably be forced into
liquidation."

The letter ended with a request that urgent consideration be given to the making of a payment for materials on site.

50. Mr Negri attempted in evidence to say that what he said in that letter was wrong but I am satisfied that it represented his view of the company's situation at that time.

51. Mr Negri said that on 19 November 1982 it was decided that additional finance was needed. He approached the Commonwealth Bank initially with a request for an additional $80,000. The company included in the submission requesting the additional funds a document setting out estimated cash flow and estimated expenditure. The cash flow was estimated as at 25 November 1982 for the period up to 14 April 1983 at $644,000. Wages to the end of April were estimated at $177,000, overheads for the same period at $18,500 and payments due to creditors to the end of March only at $441,000. That left an estimated deficit, without regard to payments due to creditors for the month of April, of $66,500.

52. On 12 January 1983, apparently following a telephone discussion concerning accounts for the months of September and October 1982 totalling $19,797.61, Mr Negri wrote to the creditor and said, inter alia, "We are not at this stage able to pay the full amount". An offer to pay off the account at $5,000 per month with the first payment before the end of January 1983 was made. Payment of interest at 1 1/2% per month for amounts outstanding over 60 days was also offered. Mr Negri completed the letter by saying, "Payments for deliveries made after October 1982, we believe can be made within your normal trading terms in addition to the above payments." The creditor replied agreeing in substance to the proposal although its acceptance was subject to some difference in detail. The reply was dated 17 January 1983.

53. On 17 January 1983 Mr Negri rang Mr Hilless, the Canberra Manager of the plaintiff, to advise him that the company would not be able to pay the plaintiff's December account in full. As a result there followed the meeting to which I have already made reference. During that meeting Mr Negri said that Mr Murray, a credit controller of the plaintiff, said, and I accept that he did, that he had been able to work his way out of these sorts or problems with other companies and suggested that he could increase the credit terms available to the company to $200,000 but that he would require some security, namely, a mortgage over the new factory premises. The defendants agreed to this. Two days later Mr Murray gave Mr Negri the formula for repayment which was incorporated in the draft mortgage documents. By letter dated 18 February 1983 Mr Negri forwarded to Scruttons' solicitors a bank cheque for $12,107.20 and a company cheque post dated 30 March 1983 for $49,067.89. Those cheques were said to be for payment in full of the company's account with Scruttons including their costs and interest charges.

54. A list of work in hand as at 13 January 1983 shows that the value of work remaining to be done was $366,500 out of work of a total contract value of $900,800, or 40% of work under contracts to be done. There is no indication that the company had entered into any contracts for other work. Indeed, the evidence is that it found it impossible to tender for work at a realistic price having regard to the then state of the market.

55. The document just referred to, Exhibit PP, is to be compared with the estimated cash flow as at 25 November 1982, Exhibit EE, which shows the estimated cash flow for the period after 30 December 1982 as $518,000.

56. Mr Negri gave evidence that he was buoyed up by Mr Murray's assessment of the situation on 18 January 1983. It should be noted that two jobs of a total contract value of $140,000 had been successfully tendered for by 13 January 1983 but no work had been done on them.

57. Mr Negri gave evidence and I accept that until 10 March 1983 the defendants did consider that there was a possible equity of $40,000 in the Fyshwick factory. I am also satisfied that by the end of 1982 the defendants were well aware that they would get no further funds from the mortgagee banks in respect of their new factory at Hume.

58. Mr Negri sought to make much of the cyclical nature of the company's business. By this he meant that work came unevenly, sometimes a lot at one time and sometimes a little at one time. However, I am satisfied that nothing in the material before me warrants the view that at any time after 30 September 1982 the company was entitled to expect that it would get large quantities of new work. In fact in the estimated cash flow as at 25 November 1982 Mr Negri set out under the heading "Anticipated new work" one item only and that apparently work of a contract value of $243,000. I do not understand the reference to the "anticipated new work". It seems to refer to a mail centre which was already the subject of calculations in the estimated cash flow.

59. Mr Negri conceded in cross-examination that for the whole of the period from October 1982 until the end of 1982 he entertained the apprehension that the company might not be able to pay its debts as and when they fell due.

60. I accept that evidence as correct.

61. In cross-examination Mr Negri was asked about a meeting of a company called Marelman Pty Ltd held on 21 June 1982. The meeting was a meeting of the directors of that company as trustee for the S. & N. Superannuation Fund. Those present were the defendants.

62. Included in the minutes of that meeting were the following:-

"It had become evident that funds lent to the
S. & N. Unit Trust may be in jeopardy as a
result of the downward trend in trading of
the Trust.

It was unanimously resolved that the loan of
seventeen thousand five hundred dollars
($17,500) plus interest to 30th June 1982 be
recalled on 1st July 1982, and that the Trust
direct it in writing to repay the loan.
Messrs Szell and Negri indicated that to
their knowledge the S. & N. Unit Trust is not
in a position to repay its loan from the
Superannuation Fund. They indicated their
willingness to lend sufficient funds to the
Trust in order that it may repay the loan to
the Superannuation Fund provided the
Superannuation Fund was prepared to advance
such sum to the Szell Negri Partnership.
They pointed out that their equity in the
building at Hume, which was valued at
$450,000 was substantial, and therefore the
loan to them from the Superannuation Fund
would be secure.

It was unanimously resolved that the
Superannuation Fund advance eighteen thousand
eight hundred and fifty dollars ($18,850) to
the Szell Negri Partnership at an interest
rate of 17.5% per annum on the condition that
such funds be lent on to the S. & N. Unit Trust
for the repayment of the loan to the
Superannuation Fund.

It was further resolved that such transaction
be carried out by way of book entry as both
the Superannuation Fund and the Szell Negri
Partnership had no bank account."

63. When the minutes of the meeting on 21 June 1982 referred to S. & N. Unit Trust, they referred, as I have indicated above, to the company.

64. If those minutes are to be taken at their face value, two things are worthy of note. The first is that the defendants apparently believed that any funds lent to the company might be in jeopardy as a result of the downward trend in its trading. The second is that to the knowledge of the defendants the company was not in a position to repay $17,500 plus interest of, it would seem, $1,350, to the Superannuation Fund as at 30 June 1982 or 1 July 1982.

65. The story is taken up by the minutes of a meeting of the directors of S. & N. (Nominees) Pty Limited as trustee for the S. & N. Unit Trust held on 2 July 1982 at which only the defendants were present. A letter was tabled from Marelman Pty Limited, the trustee of the S. & N. Engineering Superannuation Fund requesting payment of principal and interest totalling $18,850. The defendants disclosed their interest in the Szell Negri Partnership and indicated that they were in a position to repay their loan account to a figure sufficient to cover the repayment of the loan from the Superannuation Fund. It was then apparently resolved that the loan of $18,850 be repaid to the Superannuation Fund out of funds to be provided by the Szell Negri Partnership. It was further resolved that such repayment should be effected by book entries as neither the Superannuation Fund nor the Partnership had a bank account.

66. Mr Bluhm gave evidence that towards the end of the calendar year 1982 he did not believe the company could continue. He attributed its downturn to external factors out of control of the company some time after November 1982. He thought that the factors were basically the lack of work in the Australian Capital Territory area and the fact that the work which was available had a very low margin of profit because of pressure being exercised by contractors from outside the Australian Capital Territory who were tendering for work within the Territory.

67. He gave evidence that on 8 November 1982 an approach was made to the Commonwealth Trading Bank in Fyshwick. It was unsuccessful. On 10 November 1982 a visit was paid Finance Corporation of Australia Limited. It, too, was unsuccessful. On 26 November 1982 Banque Nationale De Paris and Mercantile Credits Limited were visited. Those visits proved fruitless. Indeed, as I understand the evidence, the representatives of Banque Nationale de Paris peremptorily rejected the application. Other financial institutions were approached with the proposition that they should provide finance to the company. Amongst them was the National Australia Bank and, possibly, one or two others, the names of which Mr Bluhm did not recall. All approaches failed. So, too, did the possibility of a sale and lease back arrangement explored in January 1983.

68. It was suggested that Mr Bluhm's evidence lessened to nothing the effect of the minutes to which I have made reference. I am unable to see that this was so. I think it follows from those minutes that the defendants were well aware that there had been a downward trend in the company's trading and that it was unable to pay the relatively small debt of $18,850 referred to in the minutes. When that is coupled with the evidence of the liquidity problems which were acknowledged to have continued through the rest of the year, I am satisfied that the defendants were each aware at all material times of the company's perilous position.

69. I am not prepared to take at other than its face value the letter Mr Negri wrote on 29 November 1982 to the Department of Transport and Construction. That letter would have accorded with the nett effect of the approaches made to financial institutions during the month of November, approaches which were rejected. It establishes, in my view, a continuing belief that the company was insolvent or at least that there were no reasonable grounds for believing that it was able to pay its debts as they fell due or that they might be paid when they were incurred.

70. When there is added to what I have just said, what may be taken as a diligent (one might almost describe it as desperate) search for funds for working capital from a number of financial institutions, I am forced to the conclusion that at all times from 1 July 1982 onwards there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due or that if the company incurred a debt it would not be able to pay its debts as and when they became due and I am further of the opinion that when the debts to the plaintiff were incurred the defendants did not have reasonable cause to expect that the company would be able to pay all its debts as and when they became due or that if the company incurred a debt or debts to the plaintiff it would be able to pay all its debts as and when they became due.

71. Counsel for the second defendant asked that I make twelve findings of fact. They were:-

1. That the company made express arrangements
with the plaintiff, Scruttons and Maxspan to
defer payment of debts.

I am prepared to make that finding. I have referred to the relevant circumstances.

2. That before the latter half of 1982 the
company had had dealings with its creditors
such that it might expect that in a time of
cash shortage those creditors would not press
for payment in accordance with strict
contractual terms.

I am prepared to make that finding also.

3. That trade creditors other than Scruttons,
Maxspan and the plaintiff were not pressing
for payment but were acquiescing in delays
beyond 90 days.

I accept that to have been so.

4. That the nature of the company's business was
cyclical.

Such a finding which would necessarily be vague and unsatisfactory could only have any effect favourable to the defendants if it could be established that there were reasonable expectations that contracts for new work in a quantity sufficient to ensure that the company would be in a position to trade profitably to the necessary high degree were in reasonable prospect. I do not accept that such expectations existed. At best there was no more than a pious hope.

5. That there was a return to profitability in
the period from 1 July 1982 to 30 September
1982.

I am prepared to make that finding.

6. That there was an expectation held with some
confidence that the Commonwealth Development
Bank facility of $80,000 would be granted.

I do not think that expectation ought to have been or was held with any confidence having regard particularly to the short shrift accorded applications to other financial institutions for additional finance. I say this notwithstanding Mr Stockwell's evidence, evidence which I did not find impressive.

7. That in the course of conferences with the
plaintiff's representatives in January and
March 1983 full and complete disclosure of
the financial information available to the
company at the time was made.

I am prepared to make that finding.

8. That after that full and true disclosure the
plaintiff gave encouragement and support to
the company extending further credit to them
and allowing them to continue trading.

I accept that that was so.

9. That the defendants believed that Mr Szell
had an equity of $40,000.00 in the Fyshwick
factory and that he was prepared to and
intended to inject that equity into the
company.

I am prepared to make that finding but I think the belief was unreasonable.

10. That the defendants believed they had a
$190,000 equity in the property at Hume and
were prepared to put that equity in the
company either by way of security or by sale
and injection of the proceeds.

I am not prepared to make that finding. It is to be remembered that the mortgage, a third mortgage, was to be given to the plaintiff in respect of a past debt. I find that the mortgage could not have been registered at that point without fraud and find further that although the mortgagee bank was willing to consent to its registration it advised against it.

11. That the plaintiff, a major supplier of steel
was sufficiently satisfied about the future
viability of the company on 17 January 1983
to extend terms of credit to $200,000 and to
allow further sales on credit in excess of
$100,000.

I am prepared to make that finding.

12. That but for the arrangement made with the
plaintiff on 18 January 1983 the business of
the company would then have stopped.

I accept that this was so. The provision of steel was vital to the company's existence. The only suppliers of whom mention was made were the plaintiff and Scruttons. Scruttons would no longer supply steel and had the plaintiff adopted the same course the business of the company would, I think, have stopped suddenly.

72. It follows from the last finding particularly that had the plaintiff not encouraged the defendants as directors of the company to continue trading, all the debts in respect of steel supplied on or after 18 January 1983 would not have been incurred. In these circumstances it seems to me that the plaintiff must be estopped from claiming against the defendants in that regard since they altered their position to their detriment as a result of representations made by the plaintiff. This seems to me to be a classic case of estoppel.

73. However, I am satisfied in all the circumstances that the plaintiff has made out its case against the defendants in respect of the steel supplied between September and the end of December. In reaching this conclusion I have followed, with respect, the reasoning in 3M Australia Pty. Limited v. Kemish, a decision of the Supreme Court of New South Wales, Foster J., delivered 20 March 1986 and, so far as I know, unreported.

74. Two items in the company's creditors' ledger indicate that there might have been an agreement between the company and the plaintiff that interest be paid on overdue debts. I refer to the entry of an amount for interest for January and February 1982. There was, however, no evidence sufficient to establish the terms of a collateral contract concerning interest. I am not prepared to allow anything on account of it.

75. The plaintiff is entitled to recover, therefore, the sum of $122,687.40 on account of its claim. I allow interest at $64,234.41.

76. There will be judgment for the plaintiff for $186,921.81.