Australian Securities and Investments Commission v Plymin [2003] VSC 123
In a civil penalty proceeding brought by ASIC in the Supreme Court of Victoria, Mandie J held that the managing director and a non-executive director of two insolvent companies each contravened section 588G of the Corporations Law on each occasion a debt was incurred, and that neither established a defence under section 588H [569]. The law applied was the Corporations Law (Vic) in force from 14 September 1999 to 17 February 2000 [316]. Under the transitional provisions, Parts 5.7B and 9.4B as operative before 13 March 2000 governed the proceeding [336]. The judgment determined contravention, leaving for further hearing whether to relieve the directors wholly or partly from liability under section 1317JA(2) [570]. Whether to order compensation under section 588J(1) was also left open [571]. Also left for further hearing were declarations, disqualification and penalties, costs and the position of Harrison [572], [573], [574].
What the court decided
ASIC sued three directors of Water Wheel Mills Pty Ltd and Water Wheel Holdings Ltd: managing director Plymin, chairman Harrison and non-executive director Elliott [1]. Harrison admitted liability at trial and orders against him were deferred, while Plymin defended in person without giving evidence [3].
Elliott's challenge to ASIC's power failed: section 1317EB(1) conferred the power, and section 66(1) of the Corporations (Victoria) Act was a complete answer for the State [347]. Section 11(7) of the Australian Securities and Investments Commission Act 1989 was supported by heads of power in section 51 of the Constitution [354]. The civil standard of proof applied, and his Honour adopted the "stricter" Briginshaw approach throughout [367].
Both companies were insolvent from 14 September 1999 to 17 February 2000 [568]. Whether they were insolvent earlier was not decided [381]. Although non-payment does not necessarily show inability to pay, the delay or permanent non-payment of certain large debts justified that inference [384]. On 14 September 1999 the ANZ Bank told Plymin it had decided to end the relationship, that facilities were repayable on demand and that flour business sale proceeds would reduce its debt [385]. Humphris, an accountant, was called as an expert on behalf of Elliott [386]. Rejecting his analysis, his Honour said a company unable to pay a large debt "is not per se more solvent" because that creditor is failing to demand or sue [397].
The board as a body acquiesced in continued trading and so failed to prevent each debt being incurred [420]. An individual director need not have had power alone to stop the trading, because inactivity or failure to attempt prevention was sufficient unless a defence such as section 588H(4) or (5) was proved [420]. Neither Plymin nor Elliott took any steps to prevent the companies continuing to trade [422].
"Reasonable" imported the standard of a director of reasonable competence and diligence, and his Honour assumed, as Elliott submitted, the standard of a non-executive director [423]. Section 588G(2)(a) requires subjective awareness of grounds which may objectively be characterised as reasonable grounds for suspecting insolvency [426]. It does not require proof of actual suspicion, or that the director knew the grounds were reasonable [426]. The matters known to Elliott by about 7 September 1999 constituted such grounds, and he remained aware of them from then on [444]. His Honour also accepted ASIC's alternative case under section 588G(2)(b) against Elliott, specifically that a reasonable director would have obtained aged creditor lists and cashflow information [450]. Plymin knew all that Elliott knew and more, and section 588G(2)(a) and (b) were satisfied for him [451].
When a debt is incurred turns on when, in substance and commercial reality, the company is exposed to the liability [516]. Under a sale of goods contract with deliveries left to future orders, a debt will often be incurred on each order, leaving open whether a contingent debt is incurred on contracting [517]. Some claims failed in whole or in part because the evidence did not show when deliveries were arranged or orders placed [519], [520], [527]. The NSWGB claim was limited to debts under contracts made after 14 September 1999 because ASIC had not analysed the contract terms [532]. Absent other evidence, an unpaid debt was the creditor's loss, less any dividend received or likely to be received [469]. His Honour allowed for actual and expected dividends, which ASIC conceded so far as contrary to Powell v Fryer, a concession his Honour tended to think correct [535]. The court was satisfied that the debts were unsecured and the creditors suffered loss [571].
Neither defendant pleaded section 588H(2), and it was not made out [556]. Elliott's pleaded defence raised section 588H(3) [558]. The defence failed on several grounds, first because he had no reasonable grounds to believe management was providing adequate information [559]. Nor was his Honour satisfied that he believed Plymin competent and reliable, and he had "turned a blind eye" to the details of the liquidity crisis [560]. Neither Elliott nor Plymin, despite Plymin's pleaded reliance on the financial controller and PwC, was shown to expect solvency [562], [563], [564].
Why it matters
At first instance, the judgment holds that section 588G(2)(a) requires awareness of facts objectively amounting to reasonable grounds for suspicion, not actual suspicion [426]. It treats an inactive or acquiescent director as failing to prevent each debt unless a defence such as section 588H(4) or (5) is proved [420]. On these facts, creditors' laxity in enforcing payment, a bank's present forbearance and management's reassurances did not assist directors who knew large debts were going unpaid.
Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.