The case of ASIC v Plymin, Elliott & Harrison  VSC 123 is considered as amongst the leading cases in the matter of breach of directors’ duties as a result of undertaking insolvent trading (Allens, 2017a). Such cases act as a guide to the corporations and the directors, along with officers of the company, to not indulge in such activities, which might result in insolvent trading. The Victorian Supreme Court Justice Mandie in this case held that the non-executive director of the company, i.e., John Elliott had failed in preventing the company from undertaking the debts at such time period, when the company was insolvent, and so, the relevant provisions of the Corporations Act, 2001 (Cth), i.e., section 588G had been contravened (Allens, 2017b).
In February 2000, the Walter Wheel companies were put in the voluntary administration. Civil proceedings were initiated by the ASIC, i.e., Australian Securities & Investments Commission against the non-executive director, chairman and the managing director of the company for the contravention of the insolvency provisions (Jade, 2017).
In the following parts, this very case has been discussed in the IRAC format, to examine the case in detail.
Whether the companies was insolvent at the time of incurring the debts, or not? Were there reasonable grounds to suspect the insolvency of the companies, or not? Whether the directors were in a position so as to have been aware about the rational justifications for suspecting insolvency, or not?
As per section 588G of the Corporations Act, 2001, it is the duty of the directors to safeguard the company from any insolvent trading. The applicability of this section is only in such cases where the individual was the director in the company, at such point of time, when the debt was incurred by the company (WIPO, 2015). Further, the company had to be insolvent at that period of time, or has to become insolvent subsequently, as a result of incurring the debt or incurred debts at such period of time, and one of the debts was the one undertaken by the director. The next requirement is that at such point of time, there had to be presence of reasonable grounds for suspecting the insolvency of the company, or that the company would become so, if the debt is incurred. And lastly, the time is after or at the time the Corporations Act, 2001 was incurred (Australasian Legal Information Institute, 2017a).
If the person fails in preventing the company from undertaking a debt, this section would be breached only when the individual was aware at the time of undertaking the debt that there were grounds to suspect the company’s solvency; or in such a case where a prudent individual in similar circumstances and in same position would have been so aware. A contravention of this section leads to a civil penalty as per section 1317E of this act, as per which, the court makes a declarations of contravention (ICNL, 2017).
A defense which can be used to shield a claim of 588G can be found in the case of 588H (Condon Associates, 2010). As per this section, if at the time of undertaking the debts, the individual had sufficient grounds for expecting or did in reality expect the solvency of the company, at that particular time and even after incurring of such debts, the individual cannot be held in breach of section 588G. For this, reasonable grounds have to be shown that a reliable or competent individual had been responsible for ensuring that the adequate information was provided to the director regarding the solvency status of the company and that such other individual had fulfilled such responsibility in a proper manner. A supporting point can be made by the director that proper care and view was taken while adopting the view of the other person (Federal Register of Legislation, 2017).
Young CJ, in the case of Manpac Industries Pty Ltd v Ceccattini  NSWSC 330 held that section 95A had to be used for acknowledging if the company would be able to pay off its debts as and when they fall due. And for this, the decision given by Lindgren J in the case of Melbase Corp Pty Ltd v Segenhoe Ltd  FCA 1225; (1995) 17 ACSR 187, was quoted. As per this particular decision, for ascertaining the solvency, a cash flow test had to be used, instead of using the balance sheet test (Lhuede & Alderman, 2009).
A non-executive director of the company is required to take certain steps so as to put their own self in such a position which would enable the monitoring of the company, along with exercising and forming an autonomous judgment. And this has to be done in an intelligent and diligent mater as per the information, which might be demanded in fairness from the agents, executives or the employees of the company, along with the information which is available to him (Keay, 2007).
Any competent court would confirm that when a director of the company was aware of certain facts which could support the susceptibility of the insolvency, it would not be considered regarding whether or not there was an actual suspicion on part of the director. In other words, the own state of mind of the director cannot assist them in a relevant manner. Then again, if it cannot be established that the director had been aware of these grounds, though a prudent director in a similar position would have known about the same, then it remains irrespective that there was a lack of awareness on part of the particular director (Cassidy, 2006).
To establish if a debt is incurred or not, the same does not have to depend upon a legal analysis of the relevant terms in a strict manner. It actually is initiated when in commercial reality and in substance, the company becomes exposed to the relevant liability. For establishing that the directors had failed in undertaking insolvent trading and could not prevent such actions, the inactivity, along with the failure in attempting to safeguard the company from incurring or trading in the debts, is sufficient for establishing a failure in prevention of the company, within the meaning contained in section 588G(2).
In order to decide upon the solvency of the company, the judges believe that the best test is the cash flow test, which relates to the question of the company paying off its debts, at the time they fall due. This is due to the verdict given in both Manpac Industries Pty Ltd v Ceccattini and Melbase Corp Pty Ltd v Segenhoe Ltd. In the matter of ASIC v Plymin, the company was insolvent, as per the contentions made by the ASIC, from the date of September 14th, 1999 onwards (ASIC, 2017).
On this particular date, the managing director had been informed by the ANZ Bank that the funds from the partial sale of the business had to be paid to the banks for reducing the debts which were owed by the company to the bank. The bank had made a decision to terminate the relationship with the company of Water Wheel. Further, the bank had also stated that the credit facilities of the company were repayable on demand. This is coupled with the fact that throughout the year of 1999, the company had never paid and was continuing to not pay the majority of the debts, which had been incurred by it. Hence, the company was insolvent (Australasian Legal Information Institute, 2017b).
The next issue is to establish the presence of reasonable grounds for suspecting that Water Wheel was insolvent. And this has to be judged as per the standard or the objectives of rationality, which is reasonable for a non-executive director or a director, with regards to the rational diligence and competence (Baxt, 2005).
In this particular matter, Elliot had the knowledge of the facts, along with the matter, which led to reasonable grounds being raised for suspecting the insolvency of the company. The particular matters relate to:
- The concerns regarding the point that the financial controller had already raised the issue of the company being possibly insolvent;
- For the year ending December 3rd, 1998, the audited loss stood at a value of $879,000 and the value of the losses for the half year to the date of June 3rd, 1999 stood at a value of $2.135 million;
- The company Deloitte had been appointed for investigating on the loss undertaken in the year of 1998. This was done to decide on the matter regarding whether or not this particular loss could be attributed to the flour sales which were not attributed as a result of the new computer system. By the time of April 1999, this company had established that there was no proof to show that unrecorded sales had taken place. This is in addition to the creditors not being paid as per the normal trading terms, coupled with the worsening liquidity problems for the company;
- By the end of this date, i.e., April 1999, it was well known that the off balance sheet finance was not likely to result from the existing financiers and also, no replacement financiers could be established;
- C co-director had expressed his concern at the Board meeting which took place in April regarding the lack of information and financial results for the initial three months of that year and even questioned upon the solvency of the companies. This director had resigned without an explanation after two days from the company;
- In June 1999 and till August 1999, an investigative accountant was appointed by the ANZ bank. ANZ bank had indicated that this particular company, in its credit facility arrangements was in default and had also placed all the facility arrangements on demand; and
- By the end of August 1999, it was very well known that the creditors were owed an amount to the value of $10.4 million, the debt of the ANZ Bank amounted to a value of $5.7 million, and that the current assets of the company were valued at an amount of $12.3 million (Lhuede & Alderman, 2009).
It was very clear and apparent that Elliott had closed his eyes shut over the financial difficulties being faced by the Water Wheel and so, there was a non-availability of the defense to the claims which had being raised against him (Lhuede & Alderman, 2009).
The next point which has to be established relates to the prevention on part of the directors of the company from incurring the debts, when the insolvency condition has been clearly established. In this particular matter, it is clear that the directors did not take any step to stop the company from continuing its trade, which kept on pilling up the debts. And regarding when the particular debts were incurred, in this matter, in case of sale of goods, the debts were incurred on every such occasion when such an order was delivered (Australasian Legal Information Institute, 2017b).
On these bases, it can be stated that the companies were insolvent at the relevant period and at this relevant period, the companies incurred numerous debts. Both Elliott and Plymin were the directors of the company at this relevant time period and so, were directors when the debts were incurred by the company. There was a presence of reasonable grounds at relevant time period for suspecting the insolvency of the company and so, these reasonable grounds were present at the time when the debts were incurred (Australian Institute of Company Directors, 2017).
The directors of the company had clearly failed in preventing the companies from undertaking these debts. And the directors were also aware about the facts that such debts were being incurred, even when they knew that the companies were insolvent. A reasonable person in their place would have refrained from incurring such debts, due to the circumstances highlighted here. And such an individual, being at the position of the directors, would have been aware about the grounds for insolvency (Australasian Legal Information Institute, 2017b).
On the basis of the details given above, it can be concluded that there had been a clear breach of section 588G, on part of the directors of the companies. And due to these reasons, they should be awarded with the appropriate penalties, to be decided upon by the court (Anderson, 2008).
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