Southern Steel Supplies Pty Ltd v Kees Martin De Rouw & Anor [1997] FCA 52 (11 February 1997)

CATCHWORDS

CORPORATIONS LAW - Insolvent trading - Liability of directors - Whether debt was incurred with express or implied authority - whether reasonable grounds to expect that company would not be able to pay all of its debts as and when they became due

Companies (New South Wales) Code 1981 s 556

No. NG 3170 of 1994

Southern Steel Supplies Pty Ltd v Kees Martin De Rouw and Anor

MOORE J

SYDNEY

11 FEBRUARY 1997

IN THE FEDERAL COURT OF AUSTRALIA )

)

NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3170 of 1994

)

GENERAL DIVISION )

BETWEEN: SOUTHERN STEEL SUPPLIES PTY LTD

Applicant

AND: KEES MARTIN DE ROUW AND ANOR

Respondents

JUDGE: Moore J

PLACE: Sydney

DATE: 11 February 1997

ORDER OF THE COURT

THE COURT ORDERS THAT:

1. Judgment for the applicant against the first and second respondents, in the sum of $51,784.29.

2. The respondents to pay the applicant's costs.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )

)

NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3170 of 1994

)

GENERAL DIVISION )

BETWEEN: SOUTHERN STEEL SUPPLIES PTY LTD

Applicant

AND: KEES MARTIN DE ROUW AND ANOR

Respondents

JUDGE: Moore J

PLACE: Sydney

DATE: 11 February 1997

REASONS FOR JUDGMENT

This is an application brought under s 556 of the Companies (New South Wales) Code 1981 ("the Code") and also, initially, under s 592 of the Corporation Law. Reliance on s 592 was later abandoned. The applicant is Southern Steel Supplies Pty Ltd ("Southern Steel"). It supplied goods to KDD Welding and Fabrications Pty Ltd ("KDD") between 21 January and 10 October 1991. Southern Steel contends that during that period KDD became indebted to it in the sum of $51,784.29. The first respondent, Mr Kees Martin de Rouw, and the second respondent, Mr Daryl Ian Harbrow, were then directors of KDD. Southern Steel seeks orders against de Rouw and Harbrow rendering them jointly and severally liable to it for the moneys owing. Their liability is said to arise because they permitted KDD to trade when insolvent.

Southern Steel's statement of claim was filed on 3 May 1994 and a defence was filed by the solicitor then acting for the respondents on 27 May 1994. A notice of ceasing to act was filed by that solicitor on 11 July 1996. Southern Steel's solicitor notified both respondents of the hearing date, but they did not appear. The matter proceeded ex parte.

In their defence the respondents do not admit that Southern Steel supplied KDD with goods between 21 January 1991 and 10 October 1991, that these purchases were upon a credit account payable monthly, or that a debt of $51,784.29 was incurred by KDD. Further, they deny that the amount of $51,784.29 is still owed by KDD to Southern Steel and that, at the time the debt was allegedly incurred, there were reasonable grounds to expect that KDD would be unable to pay all its debts. Alternatively, they deny that there were reasonable grounds to expect that, if KDD incurred indebtedness to Southern Steel, it would not be able to pay all its debts as and when they became due. The respondents do not admit that the alleged indebtedness was incurred with the express or implied authority of either of the respondents, or that KDD was a company to which s 592 of the Corporations Law applied.

KDD operated a light engineering and machine workshop which processed steel components. KDD placed verbal orders with Southern Steel, a steel supplier, which then supplied goods to KDD on a credit account, payable monthly. On 31 August 1993 an order was made by the Supreme Court of New South Wales winding KDD up and appointing a liquidator.

Section 556 of the Code provides:

"(1) If-

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

(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.

Penalty: $5,000 or imprisonment for 1 year, or both."

This section applies to companies which have ceased to trade and to which a liquidator has been appointed: see s 553 of the Code and thus applied to KDD. Section 556(2) deals with the defences available to a director. Section 556 requires proof by an applicant that a respondent was a director, a debt was incurred and there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due. It is for a respondent to demonstrate that the debt was incurred without express or implied authority: see State Wide Tobacco Services Ltd v Morley (1990) 8 ACLC 827; 3M Australia Pty Ltd v Kemish (1986) 4 ACLC 185; Standard Chartered Bank v Artico [1995] HCA 48; (1995) 13 ACLC 1,381.

&2 Southern Steel sought to rely on a report of Mr Geoffrey David McDonald, chartered accountant, whom it employed as an expert to inspect the books and records in the possession of the liquidator of KDD. McDonald's instructions were:

"[T]hat we review the company's books and records with a view to expressing an opinion as to whether the Directors of KDD may be personally liable for incurring the debt to your client whilst the company was insolvent."

McDonald examined KDD's cashbook, sale/receipts journal, purchases/creditors journal and various correspondence between KDD's accountant, Gillespies, and the National Australia Bank. He noted that KDD's monthly sales average from July 1990 to December 1991 was only $46,097.22 and that, in his opinion, it needed to attain average monthly sales of $80,000.00 to break even. McDonald concluded:

"[I]t is this firm's view that:-

(1) [KDD] was not paying it's debts as and when they fell due as at 30th June 1991 or subsequently.

(2) That the fundamental position of [KDD] had not altered between January 1991 and June 1991, and that therefore [KDD] had not been paying it's debts as and when they fell due since at least January 1991 and that this was the case throughout the period when your client's debt was incurred.

(3) There is nothing in the books and records of [KDD], that we have had the opportunity to review, that indicates that a reasonable person should have expected that [KDD's] position would be improving in a short time frame, to the point where [it] would be paying it's debts as and when they fell due."

I accept McDonald's evidence: see State Government Insurance Corp v Pollock (1993) 11 ACLC 839, and, in the absence of evidence to the contrary, I infer that between 21 January 1991 and 10 October 1991, there were reasonable grounds to expect that KDD would not have been able to pay all its debts as and when they became due.

Southern Steel sought to prove the debts of $51,784.29 through the evidence of its Credit Manager, Ms Carol Lowe. An annexure to Ms Lowe's affidavit contains copies of invoices issued to KDD by Southern Steel totalling $36,936.06. Counsel for Southern Steel indicated that an additional document existed which may help to prove the existence of the debt concerning the residual amount, but no further evidence was tendered to prove the existence of debts totalling $14,848.23.

I am satisfied, having regard to Ms Lowe's evidence and the invoices annexed to her affidavit that debts of $36,936.06 were incurred by KDD for goods supplied by Southern Steel during the period surveyed by McDonald. In relation to the additional $14,848.23 of monies owed by KDD to Southern Steel, I accept, in the absence of evidence to the contrary, Ms Lowe's evidence of the existence of the residue of the debts. Those debts remain unpaid. I find that the respondents allowed KDD to incur debts totalling $51,784.29 at a time when there was reasonable cause to expect that KDD would not be able to pay the debts as and when it became due.

Southern Steel is entitled to judgment against each of the respondents in the sum of $51,784.29, and costs. I so order.

I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Moore.

Associate:

Alexandra George

Dated: 31 January 1997

APPEARANCES

Counsel for the Applicant: Mr S Bell

Solicitor for the Applicant: Mr T Simons

Dates of Hearing: 31 July 1996

Written Submissions Complete: 16 August 1996

Date of Judgment: 11 February 1997