Perkins v Viney [2001] SASC 362

A recent decision of the Supreme Court of South Australia highlights the risks involved when "advisers" sit in on board meetings of insolvent companies. It is also a comparatively rare instance of a Court partially relieving an honest defendant from liability for insolvent trading.

The proceedings were brought by Mr Perkins as liquidator of LVS Meat Company Pty Ltd ("LVS"), a company that operated an abattoir at Angaston. Mr Clark, the fourth defendant, disputed that he was ever formally appointed as a director of LVS. He was initially consulted by the board to assist its members to conduct meetings in a calm and orderly fashion.

The evidence, however, disclosed that Mr Clark, over time, assumed a more active and "hands-on" role in the management of LVS, having, for example, dealings with the Angaston District Council on behalf of the company. Indeed, annual returns lodged with ASIC listed Mr Clark as a director, even though he had never signed a formal consent to so act.

Mr Perkins relied upon section 60(1) of the (then) Corporations Law, which, in effect provides that a person is taken to be a director of a company for the purposes of the Corporations Law, if they act in the position of director, irrespective of whether or not he or she is validly appointed or are duly authorised to do so.

The Court had no difficulty in finding that Mr Clark was a director. Similarly, the Court had no difficulty in finding that, during the relevant period:

• LVS was insolvent
• Mr Clark had reasonable grounds to suspect that the company was insolvent, and a reasonable person in his position would have had such grounds
• contrary to the defence raised by him, Mr Clark had no reason to expect that the Company was and would remain solvent.

Mr Clark was therefore prima facie liable for insolvent trading.

Judge Burley then dealt with Mr Clark’s argument that he ought fairly to be excused from liability. The Corporations Law provided (and the new Corporations Act 2001 provides) that a Court may excuse a director from liability for insolvent trading where the director has acted honestly and the circumstances are such that he or she ought fairly to be so excused, either in whole or in part.

His Honour found that the following circumstances were relevant to his determination:

• Mr Clark had acted bona fide in the best interests of the company (although not necessarily in the best interests of creditors)
• he had consistently made reasonable suggestions that would, might have improved the company’s viability
• there was no suggestion of Clark acting negligently, or taking advantage of indulgent creditors
• Mr Clark had no financial stake in the company, and was simply there as a volunteer
• the proceedings had settled on undisclosed terms as against the other three directors of LVS.

In all the circumstances His Honour decided to excuse Mr Clark from liability in two respects:

• firstly, His Honour thought it unduly harsh that Mr Clark should have to compensate LVS for $13,673.41 paid to the other three directors by way of interest on their loan accounts
• secondly, His Honour reduced the amount for which he entered judgment to the amount which, he said, Mr Clark would be required to contribute if there was a joint judgment against all four directors. That is, he reduced Mr Clark’s liability to the company by three-quarters.

Accordingly, there was judgment against Mr Clark for $106,312.00, inclusive of interest. This decision is arguably one of the more lenient (so far as directors are concerned) to be handed down in an insolvent trading case.