Edwards v Australian Securities and Investments Commission [2009] NSWCA 424

What the court decided

The Australian Securities and Investments Commission (ASIC) sought declarations that Mr Edwards, a director of Murray River Limited, had contravened section 588G(2) of the Corporations Act 2001 (Cth) (the Act) by failing to prevent that company incurring debts while insolvent [8]. Barrett J, the trial judge, made declarations of contravention and disqualified Mr Edwards from managing corporations for ten years [8]. His Honour found the debts to be quantum meruit liabilities to a builder that the company had asked to begin work on a resort, and found that no contract was ever concluded [9], [21]. The events occurred in 1999, and the parties accepted that the transitional provision in section 1400 made the Act applicable to them [16].

Macfarlan JA gave the leading reasons for the Court of Appeal [1]–[2], [7]. Spigelman CJ agreed with those reasons and with the supplementary observations of Campbell JA [1]. Campbell JA agreed with Macfarlan JA and added reasons on the debt question [2].

Whether such a liability is a debt was raised for the first time on appeal [13]. Macfarlan JA treated authority that such a claim is a "debt or liquidated demand" under court rules as authority on the point [81]. He held that a liability in quantum meruit to pay reasonable remuneration for work done at the defendant's request is a debt within section 588G [88]. It was therefore unnecessary to decide ASIC's alternative argument that such a liability, even if one for unliquidated damages, would still be a debt; ASIC said that Box Valley Pty Ltd v Kidd [2006] NSWCA 26; (2006) 24 ACLC 471, holding otherwise, was contrary to High Court authority [89]. As that question did not arise, the orders referring it to a five-judge bench were rescinded [90], [190].

Campbell JA reasoned that reading "debt" to include quantum meruit amounts advances the section's purpose of discouraging, and remedying, a kind of commercial dishonesty or irresponsibility [4]. A narrow or technical reading would not [4]. He added that the change from a company contracting a debt to one that "incurs a debt" is consistent with that view [5].

Macfarlan JA upheld the finding that the builder began at the company's implied request, making the company liable for the value of the work [119], [138]. He rejected the argument that the benefit went to the club holding the lease rather than the company, a joint venturer with a clear interest in the work [142]. He also rejected the submission that the builder accepted the risk of no contract, since it would not start without a letter of intent and was partly performing the contemplated contract [139]–[141].

Macfarlan JA held that the liabilities accrued day by day as the work was done, not on each certification as the trial judge had held [27], [143]. The builder's rights did not depend on certification occurring [145]. The liabilities began to be incurred on 10 February 1999 [146]. On contract formation, raised by ASIC's cross-appeal (on which no separate order was made), he departed from the trial judge and found a contract concluded on or about 15 April 1999, alternatively 13 May 1999 [12], [14], [68], [72], [78]. Its terms then governed work done and to be done, superseding the quantum meruit [14]. The amount already certified under the first certificate became a contractual debt when the contract was made, and later amounts on each further certificate, because its clause 19.4 made certified amounts a debt [79]. That first certificate had issued on 13 April 1999 [71].

Mr Edwards's challenge to the insolvency finding failed; he had confined it to February and March 1999, relying on the company's borrowing capacity [162]–[164]. Macfarlan JA rejected it: the trial judge's view that loans "for a very short term or payable on demand" do not enhance solvency fitted the one-month loan of $440,000 the company had taken on onerous terms, and borrowing would only replace one unpayable liability with another soon due [163]–[164]. Nor should Mr Edwards be allowed to raise the point for the first time on appeal, having shown no reason for not taking it at trial, where it might have drawn contradicting evidence [167]. ASIC's expert evidence of insolvency on each day from 10 February 1999 had gone unchallenged [166]. His explanation, that ASIC had not run a daily accrual case, failed because ASIC had kept that alternative alive [168]–[169].

Mr Edwards's challenges to the credit-based findings that he knew of the work and of the company's liability for it failed under the principles in Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 [147], [161]. The parties treated his attack on the finding that he knew or suspected the company was insolvent as depending on those challenges; as they and the insolvency challenge had failed, it failed too [173]. The alternative under section 588G(2)(b), whether a reasonable person in his position would have been aware, therefore did not arise [17], [174].

Every ground against the disqualification order failed [189]. The trial judge had refused to excuse him under sections 1317S and 1318, finding he had not acted honestly in the sense used there: conduct not straightforward and involving moral turpitude [40]–[41], [47]. The Court of Appeal held that characterisation justified: he let the builder work at a risk of non-payment known to him but not to it, knowing the company lacked funds or any certain ability to borrow, and to his own advantage [177]–[178]. It was open to find him more culpable than a co-director disqualified for five years [188]. In the result, the Court of Appeal dismissed the appeal with costs [190].

Why it matters

The Act was applied to 1999 events on the parties' acceptance of its transitional provision [16]. Readers should check the current text of the Act before relying on it.

The practical lesson is for developers who ask a builder to start under a letter of intent before any contract exists. Where the builder works at the developer's request, has not agreed to bear the chance of going unpaid and is performing the contemplated contract work, the liability accrues daily until a contract is made, not when a certificate issues [140]–[141], [143], [146]. After that, because this contract made certified amounts a debt on certification, the amount already certified under the first certificate became a debt when the contract was made, and later amounts on each further certificate [14], [79]. A contract can be made by conduct before signed documents are exchanged [72]–[73]. Directors should not treat an unsigned contract as meaning no debt yet exists. The disqualification reasons also show that a director who lets a contractor work, knowing as it does not that the company may be unable to pay, and gaining from the work, can be found not to have acted honestly [177]–[179].

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.