Androvin Pty Ltd and Ors v Figliomeni
(1996) 14 ACLC 1461(Judgment by: Owen J)
Androvin Pty Ltd and Ors
vFigliomeni
Judges:
Kenndy J
Franklyn J
Owen J
Subject References:
Companies
Directors
Liability for debts of company
Reasonable grounds to expect that company not able to pay all its debts
Director absent overseas
Alternate director appointed but taking no part in management of company
Whether debts incurred by other director without express or implied authority of absent director. Corporations Law, s592
Case References:
Byron v Southern Star Group Pty Ltd - (1995) 13 ACLC 301
Coates v Hardwick - (1987) 12 ACLR 657
Group Four Industries Pty Ltd v Brosnan - (1992) 59 SASR 22
Metal Manufacturers Pty Ltd v Lewis - (1988) 13 NSWLR 315
Morley v Statewide Tobacco Services Ltd - [1993] 1 VR 423, 451
Northside Developments Pty Ltd v Registrar-General - (1990) 170 CLR 146
Playcorp Pty Ltd v Shaw - (1993) 11 ACLC 641
Standard Chartered Bank of Australia Ltd v Antico - (1995) 13 ACLC 1381
Capricorn Society Ltd v Linke - (1995) 17 ACSR 101
Gould v Vaggelas - (1985) 157 CLR 215
Heide Pty Ltd v Lester - (1990) 3 ACSR 159
Jeffree v National Companies and Securities Commission - [1990] WAR 183
Lackersteen v Jones (No 2) - (1988) 93 FLR 442
Neville Smith Timber Industries Pty Ltd v Lennan - unreported SCt of Qld (MacKenzie J) No 1801 of 1995 11 August 1995
re New World Alliance Pty Ltd - (1994) 122 ALR 531
Judgment date: 9 August 1996
Judgment by:
Owen J
This is an appeal from a decision of a Judge of this Court in which his Honour dismissed claims by creditors of a company in liquidation seeking to have a director of the company held personally liable for certain of the debts of the company.
BACKGROUND
Jameswest Pty Ltd (In Liquidation) ("Jameswest") was incorporated in 1982. It was involved in the building industry. In 1987 it commenced to carry out work as a building contractor on behalf of Homeswest. After June 1990 Homeswest was Jameswest's only client. The defendants in the action, Nicola (Jim) Figliomeni ("JimF"), Jennifer Figliomeni ("JennF") and Domenico Figliomeni, were, at various times, directors or alternate directors of Jameswest. JennF is the wife of JimF. Domenico Figliomeni (the only respondent to this appeal) is the brother of JimF. Each of the appellants is an unsecured creditor of Jameswest. The debts in favour of these creditors were incurred by Jameswest in the period between 8 May 1992 and January 1993. On 20 January 1993 a secured creditor appointed a receiver and manager to Jameswest. Subsequently, the company was placed in liquidation. It is not expected to return any dividend to its unsecured creditors.
JimF and the respondent were directors of Jameswest from the date of incorporation and throughout the period relevant to this appeal. JimF assumed the role of managing director and was the person most closely involved in the day to day activities of the company. The respondent, who holds a number of business qualifications and who (during 1992 and the early part of 1993) was in full time employment outside the company, was a non-executive director. The respondent saw it as his role to review the financial data on a regular basis. He attended monthly meetings with JimF but had little influence on policy and was not involved in the day to day activities.
JennF was not involved with Jameswest until 14 August 1992. On that day she was appointed, by notice in writing signed by the respondent and served on Jameswest, as an alternate director for the respondent. The reason for her appointment was that the respondent had earlier informed JimF that he would not be able to act as a director of Jameswest from mid-August 1992 until the end of December 1993. This was because the respondent was going overseas on holidays until November 1992 and when he returned he would be busy catching up on work at his place of full time employment and at his home. In late July or early August 1992 JimF told the respondent that he had arranged for JennF to be appointed alternate director. The respondent had not requested that JennF be so appointed and nor did he have any discussions with her about the appointment. It seems that JennF was reluctant to accept appointment but did so after being assured by JimF that she would have no responsibilities. The evidence was that she had little, if any, involvement as a director from the time of her appointment until she resigned office on 5 January 1993.
The respondent left for overseas on 24 August 1992. Between 14 August 1992 and the date of his departure pressure of work at his place of employment meant that he was unable to devote any time to the affairs of Jameswest. At some time prior to his departure he asked about Jameswest's profit and loss for the year ending June 1992 and was told that it showed an operating profit of $56,000. The respondent returned to Australia on 16 November 1992 but was busy on his own affairs. He had nothing to do with Jameswest other than to ask JimF in a very general way how things were going. JimF did not raise any matters of concern with him. In mid to late December 1992 the respondent learned for the first time that Jameswest was having trouble with Homeswest. In fact these problems had their origin in events (that I do not need to relate) between Homeswest and Jameswest in May and June 1992. At a meeting just after Christmas 1992 ("the post-Christmas meeting") the respondent asked JimF to provide him with financial information relating to Jameswest and he told JimF not to incur further debts. JimF told him that trading would cease. As I have already said, a receiver and manager was appointed on 20 January 1993. The respondent resigned as a director on 2 March 1993.
During 1993 the appellants commenced the action, naming JimF, JennF and the respondent as defendants. Prior to trial, JimF was declared bankrupt and the action went to trial against the other two defendants. The appellants claimed that since June 1990, and certainly between May 1992 and January 1993 when the debts the subject of the action were incurred, there were no reasonable grounds to believe that Jameswest would be able to pay all its debts as and when they fell due. Accordingly, and pursuant to s592(1) of the Corporations Law ("the Law"), the directors were jointly and severally liable for the payment of those debts.
I should, at this stage, say something about the statutory provision. S592, is, relevantly, in these terms: "(1) Where: (a) a company has incurred a debt before the commencement of Pt5.7B; (b) immediately before the debt was incurred: (i) there were 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 were 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 was, at the time when the debt was incurred, or becomes at a later time, a company to which this section applies; any person who was a director of the company, - at the time when the debt was incurred contravenes this subsection and the company and the 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 under subs(1), it is a defence if it is proved: (a) that the debt was incurred without the persons express or implied authority or consent; or (b) that at the time the debt was incurred the person 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 the debt, it would not be able to pay all its debts as and when they became due."
S238(2) of the Corporations Law makes it clear that the power to appoint an alternate director must be conferred by the Articles of Association. In the case of Jameswest the power is to be found in Article 82, which is in these terms: "82. Any director with the approval of the directors may appoint any person (whether a member of the Company or not) to be an alternate or substitute director in his place during such period as he thinks fit. Any person while he so holds office as an alternate or substitute director shall be entitled to notice of meetings of the directors and to attend and vote thereat accordingly and to exercise all the powers of the appointor in his place. An alternate or substitute director shall not require any share qualification and shall ipso facto vacate office if the appointor vacates office as a director or removes the appointee from office. Any appointment or removal under this Article shall be effected by notice in writing under the hand of the director making the same."
The appellants contended at trial that the respondent was well aware of the financial position of Jameswest until late July 1992 but consented to it continuing to trade and continuing to incur debts. They also contended that in the period after 14 August 1992 the respondent's inability to attend to the affairs of the company and the appointment by him of an alternate director afforded no answer to the claims. The appellants' case was that in the circumstances of this case it would have been necessary for the respondent to withdraw his consent to the incurring of further debts by the company before he could take advantage of the statutory defence. His actions in appointing an alternate director and absenting himself from participation in the affairs of the company could not be characterised in that way. As against JennF, the appellants' case was that by allowing JimF to manage Jameswest without reference to her she had impliedly consented to the incurring of the debts.
The defendants put in issue, among other things, whether Jameswest was in fact unable to pay its debts at the relevant times and whether there was a reasonable expectation in that regard. The trial Judge found that Jameswest was, by no later than the beginning of May 1992, unable to pay all of its debts as they fell due and that there were reasonable grounds to expect that this would continue to be so. There is no cross appeal by the respondent concerning that finding. There was no issue at trial that the debts were incurred "before the commencement of Part 5.7B" and nor was it disputed that Jameswest was a company to which s592 applied. Accordingly, it followed from the findings concerning Jameswest's inability to pay its debts and the existence of reasonable grounds to expect a continuation of such inability that the respondent would be jointly and severally liable for the debts incurred after May 1992 and during the currency of his directorship unless he could bring himself within the protective provisions of s592(2).
The gravamen of the respondent's defence was that whatever may have been the objective position in relation to Jameswest's solvency, he had, at the relevant times, reasonable cause to expect that the company could pay its debts. He also contended that the debts which were incurred after 14 August 1992 were incurred without his express or implied authority or consent. This was because he had not been involved in the affairs of the company during that time and had appointed an alternate director to act in his place. Of the debts which were the subject of the action only two were incurred prior to 14 August 1992. Both were in favour of fifth appellant and they totalled $517.43. The trial Judge found that at the time when each of those debts were incurred the respondent had reasonable cause to expect that the company would not be able to pay all its debts as and when they became due. Accordingly, the respondent was not able to avail himself of the defence set out in s592(2)(b). The defendant had not argued at trial that s592(2)(a) was applicable to those two debts. The result was that the trial Judge pronounced judgment for the fifth appellant in the sum of $517.43. The respondent has not cross-appealed against those findings or that aspect of the judgement.
All of the other debts the subject of this action, except one, were incurred between 28 August 1992 and 24 December 1992. The final debt was for $1400. It was incurred in favour of the second appellants in January 1993. It was necessary to give that debt separate consideration because it had been incurred after the post-Christmas meeting. His Honour found that this debt had been incurred without the respondent's express or implied consent. Although it is not specifically mentioned, it seems that his Honour viewed his finding that, prior to 14 August 1992 the respondent had a reasonable expectation that the company could not meet its debts, as continuing after 14 August 1992. Accordingly, there could be no defence under s592(2)(b) in relation to any of the remaining debts. Once again, there is no cross-appeal against this aspect of the trial Judge's conclusions.
The real question was whether those debts had been incurred without the express or implied consent of the respondent. The trial Judge concluded that during the period in question there was an absence, on the respondent's part, of the relevant authority or consent to the incurring of the debts. It is this conclusion that is at the heart of the appeal.
For sake of completeness I should add that the trial Judge also found that all of the debts had been incurred between 14 August 1992 and 5 January 1993 were incurred without the express or implied consent of JennF. Accordingly, the claims against her were dismissed. There is no appeal against those findings or that conclusion.
THE REASONS FOR DECISION AND GROUNDS OF APPEAL
It is necessary to refer in any detail only to that portion of his Honour's reasons for decision which relates to the incurring of the debts after 14 August 1992. As to the debt for $1400 incurred in favour of the second appellants in January 1993, the trial Judge referred to the post-Christmas meeting at which the respondent had instructed JimF not to incur further debts and had received an assurance in that regard. His Honour found that as there was no reason for the respondent to doubt the assurance the debt was incurred without his express or implied consent and that a defence had been made out under s592(2)(a). His Honour referred to Coates v Hardwick [1987] 12 ACLR 657 in support of that conclusion. The trial Judge continued: "So far as concerns the debts incurred between 18 August 1992 and 24 December 1992 are concerned it must, I think, be conceded by [the respondent] that notwithstanding the appointment of [JennF] as his alternate, he remained a director of Jameswest. There was no assignment of that office effected merely as a consequence of the appointment of an alternate. However, it seems to me that, in circumstances in which [the respondent] had made it plain to his fellow director that he would not, between mid August and late December 1992, be able to give any attention at all to the affairs of Jameswest, in which he had, on 14 August 1992, appointed [JennF] (albeit at her husband's request) as his alternate in terms requiring her to act on his behalf 'in respect to my capacity as a director of Jameswest Pty Ltd' and in which he had not, during that period, in fact given any real attention to the affairs of the company, debts incurred by Jameswest during that period were incurred without his express or implied authority or consent. The words 'without - authority or consent', in their context in s592(2)(a), require only proof of the absence of the relevant authority or consent. They do not require proof that the act was done contrary to the will of the person in question. (see Metal Manufacturers Pty Ltd v Lewis (1988) 12 NSWLR 315 at 320 per Kirby P and 323-24 per Mahoney JA and Group Four Industries Pty Ltd v Brosnan (1992) 59 SASR 22 at 64 per Debelle J.) It seems to me to be difficult to suggest that, in the circumstances which I have outlined, [the respondent] gave to his brother authority or consent to do anything at all during the period of his inability to attend to the affairs of the company. The effect of what he had said to his brother was no more or less than that he would be unable to turn his mind to any aspect of Jameswest's affairs during the period specified by him. While he would, of course, have assumed that Jim would continue to run the company in his absence (calling upon [JennF] for any matters which required the concurrence of a second director) that is not, I think, to say that, in his capacity as a director of Jameswest, he gave Jim his authority or consent, or that he agreed to some pre-existing authority or consent given to him by Jim, to do as he thought fit with respect to the incurring of debts on behalf of that company. Rather, it seems to me, his words or conduct were more consistent with the notion of informing his brother that he would, during the specified period, be in no position to consent to, or authorise, anything at all. That being so, it seems to me, the better view is that there was, during the period in question, the absence, on [the respondent's] part of the relevant authority or consent to the incurring of those debts."
It is not necessary to dwell on the reasons for decision in so far as they concern the position of JennF other than to note that his Honour's acceptance of the dicta of Hedigan J in Playcorp Pty Ltd v Shaw (1993) 11 ACLC 641, which involved a claim against an alternate director under s592. In Playcorp (supra) Hedigan J commented that the policy of the legislation was to "visit responsibility on those who fail to exercise within reasonable bounds the duties that the occupation of the office, or the assumption of powers and duties, commands". Liability for acts or defaults would not attach to the alternate director unless and until he or she had "assumed directorial authority" in the sense of assuming the active function of the absent appointor. The trial Judge noted the difference between the article in Playcorp (supra) and Article 82 but concluded that similar reasoning applied. He found that as JennF had not been invited to a board meeting of Jameswest or been requested to do anything in relation to the affairs of the company there was no occasion for her to exercise powers whether by way of giving authority or consent to the incurring of debts or otherwise. Accordingly, she was not liable for the debts under consideration. It was not argued on appeal that we should reconsider those findings or the reasoning behind them.
In the grounds of appeal the appellants point to the basic findings of fact relating to Jameswest's insolvency and the continued trading and incurring of debts during the relevant period. What is really the sole point in this appeal has been neatly summarised in ground 2 of the grounds of appeal: "2 The learned trial Judge erred in fact and in law in holding that by the mere expedients of: 2.1 going on holiday; 2.2 informing Jim that he was too busy to attend to the company's affairs; 2.3 appointing Jim's wife as an alternate director the respondent - was able to abrogate his statutory and fiduciary duty to Jameswest, and in particular abrogate that statutory obligation of [a] director (implicit in s592 of the Corporations Law), to cause Jameswest to cease to trade (upon there being reasonable grounds to expect the company would be unable to pay all its debts), in circumstances where, prior to each and any of the events 2.1, 2.2 and 2.3, the respondent - was aware, or ought to have been aware of Jameswest's insolvency."
THE EVIDENCE CONCERNING THE RESPONDENT'S ABSENCE
It is necessary to examine the evidence as to what transpired in July and August 1992 between the respondent and JimF concerning the respondent's impending departure and inability to carry out the functions of a director.
In his statement of evidence (which apparently stood as his evidence in chief) the respondent testified that on 8 July 1992 he wrote to JimF in these terms: "This is to officially advise that I will not be a director of Jameswest from mid August 1992 to the end of December 1992 as I will be overseas on holidays and on my return I will be busy catching up at work and at home."
Subsequently, the respondent discussed with JimF the appointment of someone as a director in his place. In late July or early August 1992 JimF told him that he had arranged for JennF to be appointed as an alternate director in the respondent's place. The respondent signed a "legal form" appointing JennF as an alternate director. The respondent testified that he had not requested that JennF act as an alternate for him and had no discussions with her regarding her appointment. In his own mind the respondent felt that in the period from mid August to the end of December 1992 he was not a director of Jameswest. The document of appointment is in these terms: "I [the respondent] hereby appoint [JennF] as an alternate director to act on my behalf in respect to my capacity as a director of Jameswest Pty Ltd"
The respondent also testified that from the date of JennF's appointment he had very little involvement with Jameswest. There were no director's meetings in the period. Prior to his departure the respondent spoke to JimF or Mr Ho (an accountant employed by Jameswest and related companies) and was told of the operating profit figure for the year ending 30 June 1992. The respondent departed for overseas on 24 August 1992. He returned on 16 November 1992. After his return the respondent was busy with work and home commitments and had nothing to do with Jameswest other than to ask how things were going and no matters of concern were relayed to him. He did not pursue the matter until mid to late December 1992 when the problems with Homeswest were brought to his attention. This eventually led to the post-Christmas meeting.
There is not a great deal in the cross-examination of the respondent that is relevant to this issue. The respondent confirmed that when he appointed JennF as his alternate he had it in mind that she would be an active alternate director for him but he had not discussed the matter with her. He thought the discussions with JimF or Mr Ho concerning the 1992 operating profit were before JennF's appointment. It seems from the cross-examination concerning discussions between the respondent and JimF following the former's return from overseas that respondent maintained the view that he was not a director and that he was enquiring out of brotherly concern rather than in his capacity as a director.
The Respondent also gave evidence about the post-Christmas meeting. He said that he called the meeting after receiving advice from another of his brothers to the effect that JimF was experiencing difficulties with Homeswest. At that meeting the financial position of the company was discussed. In para36 of his statement the respondent says: "I specifically told Jim that there must be no more liabilities incurred by the company and any impact on creditors should be minimised as any trading from then on would be illegal if debts were no able to be paid. Jim assured me that no further debts would be incurred and that trading would cease."
The only aspect of this evidence that was canvassed in cross- examination was whether the advice given by the respondent to JimF at the post-Christmas meeting was given in his capacity as a director or more out of brotherly concern. The respondent was not challenged on the content of the advice tendered.
JimF also gave evidence. In his statement of evidence he described how the respondent had told him that he would be temporarily absent from duties. He said that in late July or early August 1992 the respondent told him that he had to go overseas for about three months. He told JimF that he would not be in a position to act as director or to accept any responsibilities as a director during his absence and for a time after he returned. The respondent told JimF that he (JimF) would have to arrange for someone else to be appointed to that position. He received a hand written letter to that effect. Presumably that was the letter of 8 July 1992. JimF took advice from his accountants and they recommended that he arrange for someone to be appointed as an alternate director during the time the respondent was unable to act. JimF was not cross-examined on this issue.
JimF gave a rather different version of the conversation (see para27 of his statement of evidence) and was not cross-examined on it. However, it seems that the trial Judge accepted the respondent's version of the post-Christmas meeting (see Appeal Book 26C) and I can see no reason to interfere with that conclusion.
As can be seen from this brief summary of the evidence the factual matrix upon which the respondent's liability falls to be determined was not particularly complex or contentious. However, what flows from those facts and the inferences to be drawn from them is another matter.
LEGAL PRINCIPLES
Counsel for the appellants relied heavily on a line of cases of which Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423 and Group Four Industries Pty Ltd v Brosnan (1992) 59 SASR 22 are examples.
In Statewide (supra) the defendant was a widow. Her deceased husband had conducted a business as a tobacconist through a family company. He died in 1979. The defendant was a director and shareholder. After the death of the husband the management of the company was taken over by a son, who was also a director and shareholder. The defendant received income from the company and, from time to time, signed documents but took no real part in the running of the company and nor did she seek information concerning its affairs. In 1988 the son incurred debts to the plaintiff on behalf of the company. At the time when the debts were incurred the company was insolvent. The plaintiff sued the defendant under the predecessor to s592 and the defendant sought to rely on the statutory defence. The plaintiff succeeded at first instance and the judgment was affirmed on appeal.
In Metal Manufacturers Pty Ltd v Lewis (1988) 13 NSWLR 315 the Court of Appeal had held that the "authority or consent" of which s556 spoke was an authority or consent to the incurring of the very debt the subject of the action and not an authority or consent to the incurring of debts generally. The question is whether this was a general statement of the law or whether it was confined to the facts of the particular case. In Statewide (supra) Ormiston J distinguished Lewis (supra) on the basis that the latter involved the activities of a managing director, formally appointed as such, but in respect of whose appointment the defendant had not played a part. In Statewide (supra) the director who incurred the debt may have been acting in much the same role as a managing director but had not been so appointed and the defendant had been party to the request to the particular director that he should run the company.
In this respect there are similarities between Statewide (supra) and the situation in which the management and operation of Jameswest involved as between the respondent and JimF.
It is essentially a question of authority. The starting point is that an ordinary individual director of a company does not have any ostensible authority to bind the company. The mere position of director does not carry with it any ostensible authority to act on behalf of the company. Directors can only act collectively as a board and the function of the individual director is to participate in the decisions of the board. On the other hand, individual directors may have quite significant functions entrusted to them by the company, but this occurs by actions of the board: see Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 205. In a case such as this, where a director who has not been appointed formally as managing director acts in a fashion similar to that of a managing director, the question is the extent to which the other directors can say that the actor is acting without their authority. It is a question of fact to be decided in the circumstances of each individual case. In relation to the incurring of debts, neither the mere holding of office as director nor the participation in the appointment of an officer who later incurs a debt is sufficient, of itself, to amount to an authorisation or consent by the former to the incurring of the debt: Byron v Southern Star Group Pty Ltd (1995) 13 ACLC 301 at 312.
I need now to return to Statewide (supra). Ormiston J dealt with the question of authority in considerable detail. His Honour said: "If the debt is incurred by the director's own acts, clearly the defence could not be invoked either because, at least in a loose sense, the defendant authorised the incurring of the very debt, or, perhaps, he should be treated as having consented to it, notwithstanding the absence of any consensual act: ---. If the debt is incurred by another, whether by a director or another servant or agent of the company, the director again remains liable unless he proves the want of the necessary consent or authority. In short, he is required to show that he bears no relevant responsibility for the authority given to incur the debt." [at 432] "---on a fair reading of s556(2)(a) the 'authority' to which the paragraph refers is an authority GIVEN AS A MATTER OF FACT by a director, either as an executive director or as a participating member of the board of directors, on behalf of the company. That authority should be sufficient to authorise the incurring of the liability and MAY BE EITHER EXPRESS OR IMPLIED FROM THE TERMS OF AN AUTHORITY GIVEN, IN PARTICULAR, AS PART OF A GENERAL OR USUAL AUTHORITY TO AN EXECUTIVE DIRECTOR, ---. If a director participates in the giving of such express or implied authority, then, on the face of the matter, I can see no reason why he or she should be entitled to rely on the defence in para(a) where the person authorised continues to incur debts while the company is unable to pay its debts as and when they fall due." (at 439)(italics added) It is clear from this dicta that the question of authority need not be directed specifically to the very debt that is the subject of the action. Certainly, an authority or consent of this type can extend generally to debts of a trading company incurred in the ordinary course of the business of that company.
There may be problems where the debt is incurred otherwise than in the ordinary course of business or where it required some special sanction of the administrative organs of the company.
The approach taken by Ormiston J in Statewide (supra) was endorsed by the Full Court of the Supreme Court of Victoria on appeal. The same approach was taken by the Full Court of the Supreme Court of South Australia in Group Four (supra). Whether Lewis (supra) actually stands for a proposition that is contrary to the one enunciated by Ormiston J in Statewide (supra) where a debt is incurred in the ordinary course of the business of a trading company has been doubted in New South Wales: see Standard Chartered Bank of Australia Ltd v Antico (1995) 13 ACLC 1381. If there is a difference I am attracted to the reasoning of the Courts in Statewide and Group Four and would prefer to follow them.
The duties which a director has in relation to the affairs of the company cannot be circumvented by mere inaction. A director who, for whatever reason, decides to take no part in the affairs of the company does so at his or her own risk and cannot then rely on inaction to avoid liability. Passive acquiescence in the incurring of a debt on behalf of a company can be evidence of authority or consent and may, depending on the circumstances, be sufficient to justify a finding that such authority or consent existed: Statewide (supra) at 439; Group Four (supra) at 66; Antico (supra) at 1473.
The onus of establishing the statutory defence lies on the person seeking to invoke it. He or she must show an absence of express or implied authority or consent.
DID THE RESPONDENT AUTHORISE THE INCURRING OF THESE DEBTS?
The evidence led at trial clearly supports the proposition that the respondent knew that JimF would be incurring debts of behalf of the company. The respondent testified that JimF assumed the role of managing director and that he had no day to day involvement in the management or the trading operations of the company. However, on a monthly basis he enquired of JimF whether the company was trading profitably and he reviewed the financial statements. The only influence he sought to have on the company's operations were in the strategic area, in terms of its overall direction. He did not seek, nor did he have, any influence on the day to day activities of the company.
I do not think it could seriously be argued that, at all times prior to 14 August 1992, the necessary consent or authority from the respondent to JimF to enable JimF to incur debts on behalf of the company, was not present. Obviously, consent or authority require knowledge but there is ample evidence to support the conclusion that the respondent knew that the company would and did incur debts in the ordinary course of its business and that JimF would operate on the company's behalf in that regard. It is not clear on the appeal papers whether the board of directors formally resolved to confer authority on JimF to do so and, if so, on what terms and conditions. Be that as it may, the fact is that this is how the company operated and the respondent was well aware that it was doing so. The respondent and JimF were the sole directors of the company. Acting collectively (whether formally or not) they must be taken to have authorised the particular method of operation employed in relation to the company's affairs.
The conclusion is inevitable that the respondent, at least impliedly, authorised the incurring of debts by JimF on behalf of the company. However, that is not an end to the matter. The critical point is whether that authority existed at the time when the debts were actually incurred. This is not to be confused with the question whether authority or consent must relate to the very debt the subject of the action or can operate at large. The onus was on the respondent to establish that at all times after 14 August 1992 the authorisation that had existed before then had ceased to exist. There was some debate at the hearing of the appeal as to whether this would have to amount to a withdrawal of consent or whether something short of withdrawal would suffice. The trial Judge expressed his conclusion on the basis that the respondent indicated to his brother that he would, during the period in question, be in no position to consent to or authorise anything at all and that, accordingly, there was an absence of consent.
Whether or not this is phrased as an absence of authority or consent or in terms of a withdrawal of authority or consent may be no more than a question of semantics. What is important is the end result. This was a trading company operating in the ordinary course of business. There was an authority given to permit the incurring of liabilities within the ordinary course of business. That authority may be seen to have arisen either expressly or by implication from the terms of the authority given by the board of directors as part of a general or usual authority to JimF as executive director. As a matter of logic it seems to me to be necessary to say that the authority which is found to have existed was withdrawn. It is difficult to see any other basis on which it could be said to have become inoperative. In the end, I do not think it matters much. Just as the initial authority can arise by implication or by way of inference from the facts, so too could a withdrawal be inferred from the circumstances taken as a whole.
Counsel for the respondent submitted that, from 14 August 1992, the respondent cannot be said to have acquiesced passively in the continued incurring of debts by JimF on behalf of the company. This, counsel for the respondent argued, constitutes the point of departure between this case and cases such as Statewide (supra) and Group Four (supra). Those cases involved a "sleeping director" who took little or no part in the affairs of the company. Here, the respondent took active steps to bring to an end the authority that had existed up to that date. It is a question of fact whether, looking at the circumstances as a whole, the was a change in the arrangements of such a magnitude that it can properly be said that the authority was withdrawn or otherwise ceased to exist.
What are the "active steps" on which the respondent relies? As I have already said, the facts on which the decision turns are not substantially in dispute. The letter of 8 July 1992 was communicated to JimF. It says that the respondent "will not be a director" of Jameswest during the relevant period and gives the reason why. There was an oral communication between the respondent and JimF on the issue. The tenor of that communication was that the respondent would not be in a position to act as director or to accept any responsibilities as a director during his absence and for a time after he returned. The respondent asked JimF to arrange for someone else to be appointed to the position. JimF made the arrangement. On advice, it was by
way of appointment by the respondent of JennF as an alternate director. The respondent made that appointment by written instrument. From that time on the respondent had little to do with the company. There is no clear finding in the reasons for decision as to whether the conversation between the respondent and JimF or Mr Ho about the 1992 operating profit was before or after the appointment of JennF as alternate director. Nor is there any clear finding about the extent of the respondent's activities in relation to the company between the date of his return and mid-December 1992, when he did start to make enquiries again. On the state of the evidence I do not think that there is anything inimical to the conclusion that during the relevant period the respondent did not involve himself to any relevant extent.
It is clear from the letter of 8 July 1992, from the respondent's discussion with JimF and from cross-examination of the respondent that he thought that he would not be a director at all during the relevant period. That, of course, is legally incorrect. By appointing an alternate director he retained the office and the responsibilities that went with it. There may have been a further error on his part. Both s238(2) of the Corporations Law and Article 82 refer to the appointment of an "alternate or substitute" director. I am not sure of the exact difference but I suspect that the term "substitute" means what it says. The instrument of appointment dated 14 August 1992 constitutes JennF the alternate of the respondent rather than his substitute. However, all that went before it suggests that what the respondent had in mind (and what he communicated to JimF) was the nomination of a substitute director.
The question of what the respondent thought or believed does, I think, have some relevance. Generally speaking, s592 operates in the objective rather than the subjective sphere. The question is whether beliefs or expectations are "reasonable" in an objective sense. However, the focus of attention here is on s592(2)(a) and on whether, as between the respondent and JimF, there was a withdrawal of an implied authority to incur debts on behalf of the company. In my view the evidence is clear. The respondent felt that he could not act as a director during the relevant period. He communicated this to the other director who, on the evidence, appears to have understood what was being said to him. The remedial action that the respondent had in mind, namely his replacement as a director for the relevant period, was not put into effect. But this does not alter the position that as between the respondent and JimF there was a fundamental change in the nature of the working arrangements upon which the operations of the company had been constructed. It was a change based on the inability of the respondent to fulfil his obligations as a director. It was a change of which JimF was aware. In my opinion this was sufficient material on which to base a conclusion that the authority that had existed up to that time was withdrawn, or (if it is not necessary to achieve such precision) had ceased to exist.
During argument, some concern was expressed that this conclusion would present a simple mechanism by which directors could avoid their responsibilities. I do not think this is the case. The mere appointment of an alternate director does not of itself entitle the director to invoke the statutory defence. It would not have been in this case and I doubt whether it ever would be. There must be more. Each case will depend on its own facts. If the express or implied authority to incur debts exists it must be brought to an end before the director could avail himself or herself of the statutory defence. The director must evince an intention to bring the authority to an end, engage in overt acts putting the intention into effect and communicate that intention to the other party.
In my opinion the trial Judge was correct in his conclusion that there was an absence of the requisite authority or consent at the time when the debts in favour of the first, third, fourth, sixth, seventh and eighth appellants were incurred and that the respondent had made out the defence provided for in s592(2)(a).
The debt of $1400 incurred in favour of the second appellant falls into a different category. The trial Judge accepted that at the post-Christmas meeting the respondent instructed JimF to cease trading and not to incur further debts. The capacity in which the respondent proffered the advice (that is, as a director or simply out of concern for his brother) does not seem to me to matter a great deal. The fact is that he was a director at the time and he did give the instruction. The further fact is that he received an assurance that the instruction would be complied with and, as his Honour found, there was no reason for him to doubt the assurance. This it seems to me, is an express withdrawal of any consent or authorisation that may have existed prior to that date. There may be cases where the issuing of an instruction of that nature would not be enough. For example, if JimF had expressed a refusal to comply with the instruction or, to the respondent's knowledge, had failed to heed it, it may have been incumbent on the respondent to take further steps, such as to resign. That is not the case here. In my opinion the trial Judge was correct in his conclusion that the debt in favour of the second appellant was incurred without the express or implied authority or consent of the respondent.
COSTS
On the written outlines of submissions it seemed that there may be some dispute concerning the costs orders made by the trial Judge. However, counsel for the appellants abandoned the challenge to the costs orders. Accordingly, there is no reason to deal with the arguments raised.
CONCLUSION
I would dismiss the appeal.