Even if a company is insolvent, before a director becomes liable under s 588G, it must be established that there were reasonable grounds to suspect that the company was insol- vent or would become insolvent.165 Under s 588G, the test requires that whatever is “suspected” must be based on reasonable grounds and imports into this section an objec- tive test for suspicion. The enquiry whether there are reasonable grounds to expect that the company will not be able to pay its debt when due is a factual one to be decided in light of all the circumstances. The decisions to date have indicated that this is to be decided as a matter of commercial reality and requires a consideration of the company’s entire finan- cial condition including assets, liabilities, cash, money, loans and its ability to raise finance. To date, there are only a few authoritative judicial considerations of the term in the context of s 588G.166 Former s 592(1)(b) contained the expression “reasonable grounds to expect”. The change in language was a result of a recommendation by the ALRC.167 It was thought that this change of wording from “expect” to “suspect” would increase po- tential liability, thus encouraging directors to be more rigorous in considering the company’s financial affairs and, where appropriate, initiate insolvency administration. The difference in the meaning of “expect” and “suspect” is borne out in 3M Australia Pty Ltd v Kemish,168 where it was observed that the word “expecting” is very different to
163. (1995) 18 ACSR 1. 164. Ibid at 57.
165. Section 588G(1)(c).
166. Stargard Security Systems v Goldie (1994) 13 ACSR 805. This case concerned a chamber summons for summary judgment and the court considered whether there was a defence under s588H(2). See also
Metropolitan Fire Services Pty Ltd v Miller (1997) 23 ACSR 699; Quick v Stoland Pty Ltd (1998) ACSR 130
and Muller v Dana Australia Pty Ltd [1998] VSCA 30 (27 August, 1998). 167. Harmer Report, supra n 13, para 287.
“suspecting’, and was synonymous with “predicting”.169 The meaning of “suspicion” was also considered in Queensland Bacon Pty Ltd v Rees,170 in the context of the variable preference provisions of s 95 of Bankruptcy Act (1924–1960) (Cth), where Kitto J ob- served:
In the first place, the precise force of the word “suspect” needs to be noticed. A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a posi- tive feeling of actual apprehension or mistrust, amounting to “a slight opinion, but without sufficient evidence”, as Chambers’ Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which “reason to suspect” expresses in subsection (4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the subsection describes — a mistrust of the payer’s ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors.171
A helpful guide to the interpretation of “reasonable grounds to suspect” is provided by Einfeld J in Metropolitan Fire Services Pty Ltd v Miller. In this case, His Honour recognised the application of an objective test in assessing reasonableness and said:
Irrespective of how the test is formulated, it is one of objectively reasonable grounds, which must be judged by the standard appropriate to a director of ordinary competence . . . Ques- tions of knowledge of and participation in the incurring of the relevant debt are now relegated to the status of factual matters which may arise should the director seek to establish one of the statutory defences afforded by the legislation. The establishment of liability is therefore not contingent on elements personal to the respondents.172
Although it has not been completely decided what meaning will be given to “suspect” in the context of s 588G, it is clear there is now a higher standard of care expected of directors. There is good reason to assume the judiciary will interpret “suspect” in a way that will make directors more accountable.173
However, the introduction of the word “suspect” is not without criticism, as some commentators have questioned its effectiveness174and alleged that it shifts the balance to- wards protecting creditors by promoting a risk-adverse culture.175 It has also been criticised on the basis that it is not a commercial term and directors should not be expected to make important business decisions on grounds of suspicion.176 These criticisms may
169. Ibid at 192.
170. (1965) 115 CLR 266. 171. Ibid at 301.
172. Metropolitan Fire Services Pty Ltd v Miller (1997) 23 ACSR 609 at 704.
173. N Coburn, ‘When a Director Suspects Insolvency: The New Insolvent Trading Provisions’ (1996) 5
Corporation Law Bulletin 74.
174. R P Austin, ‘The Corporate Law Reform Bill — Its Effect on Liability Holding Company Debts of Subsidiary’ (1992) 6 Corporation Law Bulletin 103.
175. J Dabner, ‘Trading Whilst Insolvent — A Case for Individual Creditor Rights Against Directors’ (1993) 17
University of New South Wales Law Journal 562.
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Insolvent Trading in Australia: The Legal Principles
prejudge the operation of the word in the context of s 588G. There is little basis to suggest that the word “suspect” has over-reached its mark so as to place entrepreneurship at risk.