Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Edenborn Pty Ltd
[2020] FCA 715
•27 May 2020
FEDERAL COURT OF AUSTRALIA
Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Edenborn Pty Ltd [2020] FCA 715
File number: WAD 553 of 2015 Judge: DAVIES J Date of judgment: 27 May 2020 Catchwords: CORPORATIONS – voidable transactions – unfair preferences – interpretation of s 588FA of the Corporations Act 2001 (Cth) – whether there was a continuing business relationship in the form of a running account – where there was a break in continuing business relationship during the relation back period – whether ultimate effect doctrine continues to apply under s 588FA – peak indebtedness rule applied – good faith defence under s 588FG(2) of the Corporations Act 2001 (Cth) not made out – whether Court has discretion under s 588FF(1) of the Corporations Act 2001 (Cth) not to make order in respect of preferential payments – discretion not exercised on facts of case Legislation: Acts Interpretation Act 1901 (Cth), ss 2(2), 33(2A)
Bankruptcy Act 1966 (Cth), ss 122
Companies Act 1993 (NZ), s 292(4B)
Corporations Act 2001 (Cth), Pt 5.7B, Pt 5.9, Div 1, ss 436A, 439C, 588FA, 588FC, 588FE, 588FG(2), 588FF, 1305(1)
Evidence Act 1995 (Cth), ss 69, 135, 167, 168(1)
Statute Law (Miscellaneous Provisions) Act 1987 (Cth)
Cases cited: Airservices Australia v Ferrier [1996] HCA 54; 185 CLR 483
Australian Securities and Investments Commission v Rich [2009] NSWSC 1229
Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492
Beveridge v Whitton [2001] NSWCA 6
BP Australia Ltd v Brown [2003] NSWCA 216; 58 NSWLR 322
Bryant (liquidator) v LV Dohnt & Co Pty Ltd, in the matter of Gunns Limited (in liquidation) (receivers and managers appointed) [2018] FCA 238
Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Badenoch Integrated Logging Pty Ltd [2020] FCA 713
Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd [2020] FCA 714
Cashflow Finance Pty Ltd (in liq.) v Westpac Banking Corp [1999] NSWSC 671
Clifton (as liquidator of Adelaide Fibrous Plasterboard Linings Pty Ltd (in liq)) & Anor v CSR Building Products Pty Ltd [2011] SASC 103
CSR Ltd trading as the Readymix Group v Starkey (as liquidator) of Allan Fitzgerald Pty Ltd (in liq) (1994) 13 ACSR 321
Cussen (as liquidator of Akie Pty Ltd) v Commissioner of Taxation [2004] NSWCA 383
Cyberduck Software Pty Ltd (in liq) & Anor [2018] VSC 122
D Pty Ltd (in liq) v Calas (Trustee), in the matter of D Pty Ltd (in liq) [2016] FCA 1409
Federal Commissioner of Taxation v Kassem [2012] FCAFC 124; 205 FCR 156
G and M Aldridge Pty Ltd v Walsh [2000] HCA 27; 203 CLR 662
Great Investments Ltd v Warner [2016] FCAFC 85; 243 FCR 516
Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543
In the matter of Employ (No 96) Pty Limited (in liquidation) [2013] NSWSC 61
Jones vDunkel [1959] HCA 8; 101 CLR 298
Manzi v Smith [1975] HCA 35; 132 CLR 671
McKernv Minister Administering the Mining Act 1978 (WA) [2010] VSCA 140; 28 VR 1
Olifent v Australian Wine Industries Pty Ltd (1996) 130 FLR 195
Petagna Nominees Pty Ltd v A E Ledger (1989) 1 ACSR 547
Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266
Re Discovery Books Pty Ltd (1973) 20 FLR 470
Re Weiss; Ex parte White v John Vicars & Co Ltd [1970] ALR 654
Rees v Bank of New South Wales [1964] HCA 47; 111 CLR 210
Richardson v Commercial Banking Co of Sydney Ltd [1952] HCA 8; 85 CLR 110Roach & Ors v Page & Ors (No. 11) [2003] NSWSC 907
Sheahan v Fabienne Pty Ltd [1999] SASC 335
Sutherland v Lofthouse [2007] VSCA 197; 214 FLR 157
Sydney Appliances Pty Ltd (in liq) v Eurolinx Pty Ltd [2001] NSWSC 230
Timberworld Ltd v Levin [2015] 3 NZLR 365
VR Dye & Co (a firm) v Peninsula Hotels Pty Ltd (in liquidation) [1999] 3 VR 201
Date of hearing: 15, 16, 17, 18, 23 and 24 April and 28 May 2019 Date of last submissions: 31 May 2019 Registry: Western Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 211 Counsel for the Plaintiffs: Mr J Evans QC with Mr B Gibson Solicitor for the Plaintiffs: Johnson Winter & Slattery Counsel for the Defendant: Mr S Penglis SC with Mr J Park Solicitor for the Defendant: Kott Gunning Lawyers ORDERS
WAD 553 of 2015 IN THE MATTER OF GUNNS LIMITED (IN LIQUIDATION) (RECEIVERS & MANAGERS APPOINTED) (ACN 009 478 148)
BETWEEN: DANIEL MATHEW BRYANT, IAN MENZIES CARSON, AND CRAIG DAVID CROSBIE (IN THEIR CAPACITIES AS JOINT AND SEVERAL LIQUIDATORS OF GUNNS LIMITED (IN LIQUIDATION) (RECEIVERS & MANAGERS APPOINTED) (ACN 009 478 148)
Plaintiffs
AND: EDENBORN PTY LTD (ACN 065 056 180)
Defendant
JUDGE:
DAVIES J
DATE OF ORDER:
27 MAY 2020
THE COURT ORDERS THAT:
1.The parties provide to the Court draft orders giving effect to this judgment within 14 days.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
DAVIES J:
INTRODUCTION
The plaintiffs are the liquidators of Gunns Limited (in liquidation) (receivers and managers appointed) (Gunns). They have alleged that Gunns made payments to the defendant (Edenborn) in the period between 16 May 2012 and 25 September 2012 that are voidable under s 588FE of the Corporations Act 2001 (Cth) (the Corporations Act) as insolvent transactions. The total amount claimed by the liquidators is $2,455,090.11, or alternatively $1,684,681.40.
There are seven payments in issue, which the liquidators contend comprise six transactions:
No
Date
Amount
1
16 May 2012
$220,000.00
2
29 June 2012
$101,465.47
3
6 July 2012
$100,000.00
4
6 August 2012
$1,340,216.36
5
15 August 2012
$388,839.93
6
19 September 2012
$43,000.00
21 September 2012
$352,629.04
25 September 2012 (invoice)
($91,060.69)
The liquidators concede that the payment of $220,000 on 16 May 2012 was made during a period when there was a continuing business relationship between Gunns and Edenborn for the purposes of s 588FA(3) of the Corporations Act. On the liquidators’ case (but disputed by Edenborn), that continuing business relationship came to an end after the 16 May 2012 payment and before the 29 June 2012 payment so that there are no transactions after the payment on 16 May 2012 forming part of the “single transaction” for the purposes of s 588FA(1). The liquidators claim a preferential payment of $220,000 in relation to this “single transaction”, being the difference between the point of peak indebtedness in the continuing business relationship during the period 26 March 2012 to 25 September 2012 (the relation back period) and the amount Gunns owed to Edenborn when, as claimed by the liquidators, that continuing business relationship came to an end.
Transactions two to five, totalling $1,930,521.76, were said by the liquidators to be individual payments made by Gunns to Edenborn at a time when there was no continuing business relationship and thus, they contended, the preferential effect of these payments is to be assessed by reference to their immediate effect upon Gunns.
The sixth transaction comprises two payments that the liquidators accept were made as part of a second continuing business relationship between Gunns and Edenborn, which began once Gunns had paid its liabilities to Edenborn in full (on 15 August 2012), and continued until the appointment of administrators on 25 September 2012. As the liquidators accept that the invoice of $91,060.69 issued by Edenborn to Gunns for services rendered formed part of the second continuing business relationship, the amount claimed in relation to the sixth transaction is $304,568.35.
In the alternative, if the Court accepts Edenborn’s case that there was no interruption to the continuous business relationship during the relation back period, the liquidators seek to impugn as the “single transaction” for the purpose of s 588FA all payments made and invoices raised between 16 May 2012 and 25 September 2012, the effect of which, it is claimed, is a preference of $1,684,681.40.
STATUTORY PROVISIONS
Section 588FF(1) relevantly provides that:
Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
(a)an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
…
Section 588FE prescribes when a transaction is voidable for the purposes of s 588FF. Relevantly, s 588FE(2) provides:
The transaction is voidable if:
(a) it is an insolvent transaction of the company; and
(b) it was entered into, or an act was done for the purpose of giving effect to it:
(i) during the 6 months ending on the relation-back day; or
(ii) after that day but on or before the day when the winding up began.
Section 588FC prescribes when a transaction is an insolvent transaction. The section provides:
A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:
(a) any of the following happens at a time when the company is insolvent:
(i) the transaction is entered into; or
(ii)an act is done, or an omission is made, for the purpose of giving effect to the transaction; or
(b) the company becomes insolvent because of, or because of matters including:
(i) entering into the transaction; or
(ii)a person doing an act, or making an omission, for the purpose of giving effect to the transaction.
Section 588FA prescribes when a transaction is an unfair preference. The section relevantly provides:
(1)A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b)the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
…
(3)Where:
(a)a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and
(b)in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;
then:
(c)subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and
(d)the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference.
ISSUES
In a separate hearing, the Court determined that Gunns was insolvent on and from 30 March 2012: Bryant (liquidator) v LV Dohnt & Co Pty Ltd, in the matter of Gunns Limited (in liquidation) (receivers and managers appointed) [2018] FCA 238 (the insolvency judgment). Further, it was not in dispute that Edenborn was paid the amounts in question (save that Edenborn claimed that payment 2 was paid and received on 28 June 2012), nor that Edenborn was an unsecured creditor of Gunns in respect of the payments it received. In issue in these proceedings is:
(a)whether the payments constituted unfair preferences within the meaning of s 588FA and, if so, the quantum of that preference (the unfair preference issue);
(b)whether there was, or remained, a “continuing business relationship” within the meaning of s 588FA(3)(a) of the Corporations Act between Gunns and Edenborn at the time that each of the payments was received by Edenborn, and (if so) whether the payments were an integral part of the relationship, such that the making of some or all of the payments is to be treated as a single transaction for the purposes of s 588FA(1) (the continuing business relationship issue);
(c)if there was a continuing business relationship for the purposes of s 588FA(3)(a) at the time each payment was received and each payment formed part of and was integral to that relationship:
(i)whether the Court can, or should, have regard to the “ultimate effect” of the transaction(s);
(ii)if so, whether the ultimate effect of the transaction(s) was to confer on Edenborn an unfair preference within the meaning of s 588FA(1)
(the ultimate effect issue);
(d)whether the “peak indebtedness rule” applies for the purposes of s 588FA(3) (the peak indebtedness issue);
(e)whether the Court has a discretion under s 588FF to reduce the amount otherwise payable as a preference, and, if so, whether the Court’s discretion should be exercised (the discretion issue); and
(f)whether Edenborn has established a “good faith” defence pursuant to s 588FG(2) (the good faith defence).
Some of these issues are common to two other preference actions brought by the liquidators against other creditors of Gunns (the Gunns preference claims) in which judgment is handed down at the same time: see Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Badenoch Integrated Logging Pty Ltd [2020] FCA 713 and Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd [2020] FCA 714.
THE GUNNS GROUP
The following background to Gunns is taken from the insolvency judgment in this proceeding.
Gunnsis the parent company of theGunns Group. The Gunns Group was organised on a divisional basis by reference to its major operating business units rather than by reference to individual legal entities or groups of entities and, as the parent company, Gunnsperformed various functions for the group, including providing a centralised treasury and banking system. The principle financier to the Gunns Group was a syndicate of 10 banks led by ANZ Cavell Court as syndicate agent.
The principle activities of the GunnsGroup were:
(a)the processing, manufacturing and selling of sawn timber products and veneers including merchandising;
(b)forest management and development, milling, processing and export of hardwood wood chip products;
(c)responsible entity management of various forestry and horticultural managed investment schemes; and
(d)financing managed investment scheme investors.
The Gunns Group operated from various sites, namely:
(a)sawmills in Tarpeena, South Australia and Bell Bay, Tasmania;
(b)a wood chip export facility at the Port of Portland, Victoria (sold in August 2012);
(c)hardwood plantations (owned) located in the south east of South Australia;
(d)plantations (owned and managed under managed investment schemes) in Tasmania;
(e)plantations owned by investors under various managed investment schemes located in several states of Australia;
(f)softwood plantations in the area known as the “green triangle” (Auspine softwood plantations) located in the south east of South Australia and Victoria; and
(g)vineyards and wineries located in Tasmania.
During 2010 and 2011 the trading performance of the GunnsGroup was impacted by several external factors and theGunns Group suffered significant declines in revenue. From mid-2011 onwards there were ongoing delays in the payment of creditors and in September 2011, Gunns identified that it was unlikely to repay its finance debt which was repayable by 31 January 2012 and would require an extension of the repayment date. On 31 January 2012 the term was extended to 31 December 2012. Despite steps taken by the GunnsGroup to reduce its finance debt the Gunns Group remained reliant on the lenders to fund its working capital requirements. A capital raising announced in early February 2012 did not proceed and alternative equity raising options did not eventuate. On 25 September 2012, the liquidators were appointed as joint and several administrators of Gunns and its subsidiaries by resolution of the directors of Gunns pursuant to s 436A of the Corporations Act. On 5 March 2013, at a meeting of the creditors of Gunns, the creditors of Gunns resolved that Gunns be wound up pursuant to s 439C of the Corporations Act and that the liquidators be appointed joint and several liquidators of Gunns in the winding up. As at 25 September 2012, the creditors of the GunnsGroup totalled $780,798,000, which included unsecured trade creditors of $61,820,000 and other unsecured creditors of $73,016,000.
EDENBORN
Edenborn carries on business as a harvester, wood-chipper and haulage contactor. It commenced operations in the late 1990s, initially planting trees on a contractual basis on behalf of various entities which promoted and conducted managed investment schemes based on tree planting, growing and harvesting for the eventual creation, sale and exporting of wood chips. Amongst others, Edenborn did work for Great Southern Limited, the scheme manager of a number of managed investment schemes in the Great Southern region of Western Australia.
In 2009 Great Southern Limited went into administration and in early 2010 Gunns acquired Great Southern Limited’s tree assets. At the time, Edenborn had two contracts on foot with Great Southern Limited – a Woodchip Processing and Haulage agreement and a Log Harvesting and Processing agreement (the contracts) – and, in May 2010, Great Southern Limited novated those contracts to Gunns. Shortly after that, Edenborn began working for Gunns on the former Great Southern Limited tree assets, conducting harvesting, chipping and haulage, substantially on the same terms as it had previously done for Great Southern Limited.
During the relation back period the following payments were made and invoices raised for the services Edenborn provided to Gunns:
Date
Invoice
Payment
31 March 2012 (invoice)
($403,219.49)
2 April 2012
$228,354.13
5 April 2012
$150,000.00
15 April 2012 (invoice)
($371,335.33)
17 April 2012
$220,000.00
30 April 2012 (invoice)
($505,661.54)
4 May 2012
$218,660.55
9 May 2012
$220,000.00
15 May 2012 (invoice)
($519,934.39)
16 May 2012
$220,000.00
31 May 2012 (invoice)
($123,479.53)
29 June 2012
$101,465.47
6 July 2012
$100,000.00
6 August 2012
$1,340,216.36
15 August 2012
$388,839.93
15 August 2012 (credit note)
($4,573.99)
15 August 2012 (invoice)
($189,740.67)
31 August 2012 (invoice)
($395,629.04)
3 September 2012
$189,740.67
15 September 2012 (invoice)
($255,874.13)
19 September 2012
$43,000.00
21 September 2012
$352,629.04
25 September 2012 (invoice)
($91,060.69)
Total payments: $3,772,906.15
Total invoices: ($2,855,934.81)
Credit note: ($4,573.99)
WITNESSES
Evidence was given on behalf of the liquidators in this case by Craig Crosbie, one of the liquidators of the Gunns Group, and Bryan Hayes, the general manager of the Forest Products Division of Gunns from June 2010 until 4 September 2014. Only Mr Crosbie was subject to cross-examination.
The defendant adduced evidence from Peter “Murray” Howson, the sole director and company secretary of Edenborn, Craig Fildes, who was employed by Edenborn in the role of operations manager between 2005 until July 2016, and from Steven Butt, who was employed as an accountant by Gunns between 2001 and 2012. All three witnesses were subject to cross‑examination.
Both parties also adduced expert evidence directed at the question as to whether the “ultimate effect” of the payments that formed part of the continuous business relationship was to give Edenborn a preference or preferences. The parties’ experts prepared a joint report and gave concurrent evidence, during which each expert was subject to cross-examination.
EVIDENCE OBJECTIONS
The liquidators’ tender bundle included a number of internal Gunns’ emails which they sought to tender on the basis they are business records containing representations to which the hearsay rule does not apply by virtue of s 69 of the Evidence Act 1995 (Cth) (Evidence Act).
Section 69 of the Evidence Act relevantly provides:
(1) This section applies to a document that:
(a) either:
(i)is or forms part of the records belonging to or kept by a person, body or organisation in the course of, or for the purposes of, a business; or
(ii) at any time was or formed part of such a record; and
(b)contains a previous representation made or recorded in the document in the course of, or for the purposes of, the business.
(2)The hearsay rule does not apply to the document (so far as it contains the representation) if the representation was made:
(a) by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact; or
(b)on the basis of information directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact.
…
(5)For the purposes of this section, a person is taken to have had personal knowledge of a fact if the person's knowledge of the fact was or might reasonably be supposed to have been based on what the person saw, heard or otherwise perceived (other than a previous representation made by a person about the fact).
Edenborn accepted that the emails are business records but contended that s 69(2) of the Evidence Act was not satisfied. The ground of the objection was the same with respect to each document. C172 was put forward as an example. C172 is an email from Peter Merry, Gunns’ regional manager in Western Australia at the time, to Mr Hayes sent on 17 June 2012. The subject matter of the email was “WA Region update”. Mr Merry wrote:
..
Contractor payment situation – WA region
General points:-
As expected the situation here with contactors (particularly ATS and Edenborn) is becoming increasingly desperate.
Gunns met with ATS & Edenborn on Friday am to establish their ‘here and now’ expectations / preparedness / ability to resume providing services to Gunns.
Contractors are desperate for Gunns to process a progressive payment to assist with easing their cash flow issues, & re-commencement of the WA harvesting programme.
I have advised all contractors that it is predicted the earliest return to work date has been pushed back to 2/7/2012.
Contractors recognise they have to work with Gunns to ensure their outstanding liabilities are cancelled in time. Both ATS, SRT & Edenborn have indicated they remain supportive of maintaining a business relationship & want to work with Gunns.
…
Edenborn
Current liability -$1,930,000
They advised if Elders Forestry had not recommenced harvesting they would have been forced to cease trading, and are of the view they have not been given any assistance by Gunns since last payment date (15/5).
Cash flow is critical, compounded by 0.8% interest / month on outstanding payments, business is liable for GST on YTD RCTI’s [sic], & standard end of financial year tax liabilities.
To recommence operations Edenborn have indicated they would a) require a significant payment (not prepared to put a $ figure on the table), and b) have advised they will issue a letter of demand to ensure there is an alignment between contract & actual trading terms going forwards (used the analogy of not prepared to keep offering Gunns an unsecured bank loan equivalent).
Murray is frustrated with you not returning several calls recently, recognises Gunns local support – can you please call him when you have an opportunity?
It was submitted for Edenborn that the statement “Gunns met with … Edenborn on Friday” did not say who from Gunns met representatives of Edenborn, and with whom from Edenborn they met, nor was it apparent from the email – or any other evidence – that Mr Merry was personally present. Thus, it was said, the liquidators had not established that Mr Merry was a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact. It was also submitted that the comment “contractors are desperate” and the passage under the heading “Edenborn” were not evidence in admissible form of what the representative of Edenborn allegedly said.
The objection was not well-founded. First, the evidence showed that Mr Merry at the time was Gunns’ regional manager in Western Australia and, as noted above, Mr Hayes at the time was Gunns’ general manager of the Forest Products Division. The subject of the email was “WA Region Update”. It is reasonable to infer from his position within Gunns and from the fact that he was reporting to the general manager of forest products at Gunns that Mr Merry either himself had personal knowledge of the matters referred to in that email or was conveying information that was directly or indirectly supplied to him by persons within Gunns who had or might reasonably be supposed to have had personal knowledge of those matters. Secondly, if s 69 applies to the email, the effect of the section is that the hearsay rule “does not apply to the document (so far as it contains the representation)…”. That is to say, the email stands as evidence of the representation that was made
There is no merit in the s 69(2) point in relation to the following emails to which Edenborn also objected:
(a)C174 is another email from Mr Merry to Mr Hayes;
(b)C203 is an email from Adam Crook to Mr Hayes, copied to Mr Butt. Mr Crook was the harvest and processing manager at Gunns at the time. As noted above, Mr Butt was employed by Gunns as an accountant;
(c)C205 is an email from Mr Butt to Mr Hayes;
(d)C205A is an email from Mr Hayes to Mr Butt;
(e)C210 is an email from Mr Crook to Mr Butt;
(f)C262 is an email from Mr Merry to Mr Hayes, copied to Mr Crook;
(g)C263 is an email from Mr Hayes to Mr Merry, copied to Mr Butt;
(h)C267 is an email from Mr Butt to Mr Merry, copied to Mr Hayes.
In view of the positions that each of these persons held within Gunns, it might reasonably be supposed that they either had personal knowledge of the matters recorded in the emails or that such information was directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of such matters.
C89 and C228 do not require consideration as C89 was in any event an exhibit to Mr Howson’s first affidavit and put into evidence by Edenborn, and C228 is an article, not an internal Gunns email, and appears to have been wrongly included in Edenborn’s list of objections.
Edenborn also relied on s 135(a) of the Evidence Act, submitting that the Court should refuse to admit the emails into evidence on the basis that their probative value was substantially outweighed by the danger that the evidence might be unfairly prejudicial to Edenborn. The basis of this objection was that the authors of those emails were not called to give evidence and there was no opportunity to cross-examine them. Moreover, it was submitted:
(a)the documents were not third party documents but are business records of the company of which the plaintiffs are the liquidators;
(b)the authors of the documents were not third parties but are employees of Gunns;
(c)there was no evidence before the Court establishing any, let alone any satisfactory, reason as to why the authors of the emails were not called to give evidence in the usual way;
(d)the documents were not of peripheral relevance but were relied on by the liquidators as central to the issue of good faith;
(e)the documents were tendered for the sole purpose of seeking to invite the Court to accept what is recorded there as factually correct in preference to the evidence given by witnesses called for Edenborn; and
(f)the statements in the emails are summaries only and evidence in that form would not have been permitted if sought to be given orally.
It was submitted that to allow the liquidators to rely on the documents would be inconsistent with the rationale of Jones vDunkel [1959] HCA 8; 101 CLR 298.
In response, the liquidators argued that despite the amended tender list being served on Edenborn on 18 January 2019, which included the emails in question save for C205A:
(a)no request was made by Edenborn pursuant to s 167 of the Evidence Act for the liquidators to call the authors of those emails, such request being required to be made within 21 days of receipt of the notification that the evidence would be sought to be relied on: s 168(1);
(b)no objection to the tender of the emails was raised until the Friday before the trial commenced, almost three months after the amended tender list was served, and the grounds of objection relied on, even then, did not include the claim that Edenborn would be unfairly prejudiced by the failure of the liquidators to call the authors of the emails. The grounds then relied on were that:
These documents are all internal Gunns’ emails. Unless they were read by someone within Edenborn (and then depending upon whom) they are irrelevant. Also, insofar as the same are sought to be tendered to establish the truth of their contents, objection is taken on the basis of hearsay;
and
(c)Edenborn first raised s 135 of the Evidence Act as a ground of objection at the hearing, by which time it was too late to call the authors as witnesses.
The liquidators additionally argued that the admission of the emails would not be unfairly prejudicial to Edenborn, submitting that:
(a)more than six years had passed since the emails were created and it is unlikely that the recollection of the authors of the emails would be extensive or of much assistance to the Court;
(b)the representations sought to be tested were representations attributed to Edenborn;
(c)there was no unfair prejudice in not having an opportunity to cross-examine the authors of the emails in relation to statements attributed to Edenborn and of which the authors of the emails were not the makers; and
(d)both Mr Howson and Mr Fildes were subject to cross-examination on the material.
Both parties referred to Roach & Ors v Page & Ors (No. 11) [2003] NSWSC 907 for a helpful summary of the considerations relevant to the exercise of discretion under s 135 of the Evidence Act where the opposing party is unable to cross-examine. Justice Sperling stated at [74]:
Considerations relevant to “unfair prejudice”
Having regard to the terms and context of ss 135, 136 and 137 and the case law to which I have referred, I set out my view of considerations relevant to “unfair prejudice” as follows.
(a) To say that any prejudice must be unfair prejudice is to state the obvious.
(b) The phrase “unfair prejudice” is not defined. The legislature imposed no restriction on the criteria for unfairness.
(c)The exceptions to the hearsay rule evince a legislative intention to allow evidence notwithstanding its hearsay character. But ss 135, 136 and 137 evince a legislative intention to allow any evidence, otherwise admissible, to be rejected or its use to be limited if the conditions specified in those sections are met;
(d) Where hearsay evidence is made admissible by an exception to the hearsay rule it would be wrong to exclude it or to limit its use merely because it is hearsay and therefore of inherently less reliable quality. That would be to frustrate the intention of the legislature in making hearsay evidence admissible where it is covered by an exception to the hearsay rule. But that is not the same as saying that there is scope for the application of ss 135, 136 and 137 in relation to hearsay evidence which is covered by such a statutory exception but where there is some additional factor, for example, where the maker of the representation is not to be called.
(e) Inability to test the truth of the representation is a legitimate ground for rejecting or limiting the use of evidence which is covered by an exception to the hearsay rule. Thus, whether the maker of the representation will be called as a witness is a relevant consideration.
(f) However, where hearsay evidence is admissible under an exception to the hearsay rule because of the unavailability of the maker of the representation, there is a special reason for not disallowing the evidence or limiting its use on the ground that the evidence cannot be tested by cross-examination. That is because the legislature has made the evidence admissible notwithstanding that consideration.
(g) Conversely, where the maker of the representation is available or is not shown to be unavailable and the party tendering the evidence does not call the person, that is a legitimate consideration in favour of a finding of unfair prejudice.
…
As the authorities show, the inability of the opposing party to cross-examine the maker of a statement because of the unavailability of that person as a witness may constitute a legitimate ground for the exclusion of evidence under s 135 of the Evidence Act, but the mere fact that the maker of the statement is not available for cross-examination may not be reason enough in itself. In each case, the issue for the Court is whether the probative value of the evidence is substantially outweighed by the danger that the evidence might be unfairly prejudicial to the opposing party.
I am not persuaded that the emails should be excluded from evidence because the authors of the emails have not been called. First, any prejudice arises from the failure of Edenborn to put the liquidators on notice at a much earlier point in time than at the hearing of its intention to rely on s 135 of the Evidence Act on the basis that the authors of the emails had not been called to give evidence. Edenborn claimed that it approached the trial on the basis that Mr Hayes, who was one of the authors, was going to give evidence as he had sworn an affidavit, but it was only the Thursday before the trial that Edenborn was informed that he would not be called. However, of the emails in issue, only C263 was sent by Mr Hayes. The content of the portion of that email chain on which the liquidators sought to rely concerns an initial payment plan for Edenborn (and other contractors), followed the next day by a revised payment plan said to be “due to the 7 day delay in loading the Portland vessel”, as a result of which “[Gunns] have had to split and spread payments to match cash inflows”. It is not apparent on the face of that email chain how it could be said that the inability of Edenborn to cross-examine Mr Hayes makes the admission of that email unfairly prejudicial, nor was one suggested. Secondly, the evidence was to the effect the persons at Edenborn who dealt with Gunns were Mr Howson and Mr Fildes, and both of them gave evidence and were cross-examined on their dealings with Gunns, including on C172, C174, C205A (which includes the entire content of C205), C210 and C262. Thirdly, the reliability of the evidence sought to be relied on by the admission of the emails in question, including C203, C263 and C267, can be rationally assessed in the context of the evidence considered as a whole, notwithstanding the absence of cross‑examination of the authors of the emails. Accordingly, I also reject the s 135 application.
Edenborn also objected to the admission of media articles not seen by Mr Howson or Mr Fildes on the ground of relevance but the real issue is the weight to be afforded to such articles, not admissibility.
FACTS AND EVIDENCE
Edenborn harvested and chipped bluegums for Gunns in the South Western region of Western Australia, which it then hauled to the Port of Albany for shipping. Edenborn was paid fees calculated by multiplying the agreed harvesting, processing and haulage rates applicable to each plantation (or part of plantation) by the quantity of timber or woodchips in green metric tonnes (GMT) for its services. Gunns prepared and issued recipient created tax invoices approximately fortnightly to Edenborn payable under the terms of each novated contract on the 15th day and final day of each month. The evidence showed that from the outset, Gunns was tardy in paying Edenborn for its services and, on many occasions, Gunns did not just pay late, it also did not pay the full invoiced amount. Moreover, from at least January 2012 Gunns was making rounded sum payments to Edenborn that did not correspond with the outstanding invoices that were due.
In September 2011, at Gunns’ request, Edenborn agreed to monthly payment terms on the condition that there be a maximum debt limit of $1.2 million. It is unclear on the evidence whether the agreement was put into effect, as although Mr Howson’s evidence was that payment terms changed to monthly, Gunns continued to issue recipient created tax invoices on a fortnightly basis that expressly stipulated that payment was due on either the 15th or final day of the month.
Mr Howson’s evidence was that Gunns “mostly stayed within the 30 day terms and the $1.2m agreed debt limit”, but that evidence was not accurate. By the end of September 2011, Edenborn was owed just over $1.3 million. In his examination conducted under Pt 5.9, Div 1 of the Corporations Act on 15 September 2015 (liquidator’s examination), Mr Howson acknowledged that he was concerned at the time by the size of the amount owing and Mr Fildes “was having to keep a pretty weather eye on the extent to which Gunns were or were not making payments”. The evidence also showed Edenborn chasing Gunns for payment from October 2011 onwards, with Gunns promising payment but payments often being received later than promised and usually only in part payment of the invoiced amounts. Mr Fildes’ evidence was that he was “regularly chasing up payments from Gunns, because it was a habitual late payer”.
On 25 November 2011, The Age newspaper published an article under the heading “Gunns directors under fire” stating that “[s]hareholders in loss-making forestry group Gunns have used the company’s annual meeting to question whether the company can pay its bills, asking whether it has a back-up plan should it fail in its bid to build a controversial $2.3 billion pulp mill”. The article further reported that a major shareholder had asked if the company would “be insolvent if the pulp mill did not go ahead”.
On 22 December 2011, Gunns announced to the Australian Securities Exchange (ASX) that it had revised its market guidance for the year ended 30 June 2012, with underlying earnings before interest and tax for the year expected to be approximately $30 million.
As at 31 December 2011, the debt owed to Edenborn was around $1.7 million, with no payments made at all in December 201l, though a payment of $640,828.12 had been due on 15 December 2011.
On 4 January 2012, Brent Donaldson, the regional manager for Gunns in Western Australia, sent an email to Mr Howson, copied to Mr Fildes, Mr Hayes and Mr Merry, advising him that Edenborn would receive $200,000 that day, but additional payments would not be possible until early to mid-week the following week, when additional funds were due to arrive. He also advised that he would shortly be sending an email to all contractors stating that payments would not occur until the following week, but Mr Howson could disregard that email “as obviously you will be receiving some funds today”. Mr Howson was unable to explain why Edenborn was receiving a payment when other contractors were not, but it is reasonable to infer that it was because Edenborn had been pressing Gunns for payment. In an email sent on 3 January 2012, Mr Donaldson had informed Gunns’ Forest Product Division Group Financial Controller that “we have some relatively urgent payments to make”, noting that Edenborn had “pretty well reached its maximum liability allowed by its financiers, and so are not expected to recommence working until paid”.
Also on 4 January 2012, Mr Donaldson sent a group email to Gunns’ contractors in the Great Southern region advising them that:
.. there are some over-due payments to contractors to be made, and so have made enquiries as to the status of the said payments.
I have been advised that, possibly due to the time of the year, some funding scheduled to the company in mid-late December was delayed; in addition a [sic] anticipated asset sale has not yet proceeded as planned, and that other creditor payments had been made in anticipation.
This has unfortunately resulted in a short term cash flow constraint situation.
It is now expected that payments will recommence from early next week.
Mr Howson accepted during cross-examination that he “probably” read that email. He also acknowledged in his liquidator’s examination that he was aware at this time that “there were things happening to [Gunns’] cash flow that meant [Gunns] couldn’t make full payments”. Mr Howson also said during his liquidator’s examination that he understood at this time that Gunns’ other contractors were “being paid in similar ways” – with the exception of one company he believed “had different contractual arrangements that were getting some priority in payment” – and he believed Gunns’ late payment to contractors was “an Australia-wide” problem. He also stated that he was aware that payments were dependant on asset sales and that the bank, as a secured creditor, would get “first bite of the cherry” from asset sales. Mr Fildes’ evidence was that he could not recall whether or when he read Mr Donaldson’s email of 4 January 2012 but there is no reason to doubt that he did read that email either at or around the time it was sent, or by the latest in January 2012 when he returned to work after the Christmas break. Further, Mr Fildes admitted to hearing rumours that other creditors of Gunns in the Great Southern region were not being paid on time.
As promised, Edenborn received $200,000 from Gunns on 4 January 2012. On 9 January 2012, in an email chain between Mr Donaldson and Mr Fildes with the subject line “Payment”, Mr Donaldson advised Mr Fildes that:
… From what I can tell, you may not get all the monies owing this week, but part payments are likely to continue…
You will need to get Murray Howson to talk to me if the intention of Edenborn is to halt all or part of your activities in Gunns’ managed forests tomorrow…
I reiterate that while the company is in a tight cash flow situation at the present time, based on forecast in-flows over the next few weeks and months, it is of narrow duration…
Mr Fildes responded by email that day as follows:
It was Edenborn’s intention to stop production if the two payments due were not made early this week, which was the last indication in your email last week. [Mr Howson] is away on holidays for 6 weeks so all decisions for the next 6 weeks will have to come from me, but [Mr Howson] did have this discussion with me on Friday before he left.
Gunn’s [sic] has been in a tight cash flow position for quite some time now and with so much negative press at the moment and the share price sitting on 10.5 cents giving Gunns and [sic] market cap of only $89,000,000 we are feeling quite vulnerable. We have one major supplier who is seriously looking at cutting our credit limit until Gunn’s [sic] gets past the 31st January loan refinance commitment. This is not a good position to be in as it could impact our other harvesting activities.
There are two outstanding invoices totalling $1,289,136 of which $200,000 has been paid leaving a balance of $1,089,136. We have another invoice due very early next week for $447,429. With last week’s activities the total amount is getting too high to ignore.
As there are so many of your crucial people away today I will leave my final decision until tomorrow, but if a substantial payment cannot be made by Wednesday night I will have to stand all systems down until we are up to date with all payments.
I feel Edenborn has been very reasonable up to now with slow payments from Gunns, but there are serious ramifications for this company if we continue to expose ourselves without payment.
Mr Fildes agreed in cross-examination that he was aware at the time there were negative media articles about Gunns’ financial position and also agreed he “probably” held the view at the time that Gunns had been in a tight cash flow position for quite some time. When asked about the sentence “we are feeling quite vulnerable”, Mr Fildes’ answer was that he could not recall whether it was a true statement. His evidence also was that he did not discuss the email with Mr Howson before he sent it, contrary to the representation made in the email, and that his threat to stand down all systems was a “bluff” as he did not have the authority to carry it out.
When Mr Howson was asked in his liquidator’s examination about whether he had a discussion with Mr Fildes as referred to in the email, his answer was that the discussion “certainly took place” although he was not sure of the context of those discussions. He then contradicted that evidence in this proceeding by asserting that he did not have such a discussion with Mr Fildes. He also gave evidence that it was not his view that Edenborn was “feeling quite vulnerable” because of the debt owed to it by Gunns, and that he did not give instructions to Mr Fildes that systems were to be stood down if a substantial payment was not made.
I do not accept the evidence of Mr Howson or Mr Fildes that Mr Fildes sent the email without discussing it with Mr Howson first or Mr Fildes’ evidence that the threat to stand down all systems was a “bluff”. I find their answers in cross-examination self-serving and not plausible. First, Mr Howson and Mr Fildes both gave evidence that Mr Fildes would consult Mr Howson on “significant” matters. Mr Howson deposed in his affidavit that he was overseas in January 2012 and in his absence Mr Fildes had day-to-day control of Edenborn “but always subject to conferral with [Mr Howson] as regards significant decisions”. Similarly, Mr Fildes’ affidavit evidence was that Mr Howson contacted him every day whilst he was away from the office on holiday wanting to know what was going on with the business and he would discuss with Mr Howson “[a]ny abnormal or important decisions” that he needed to make. Given Mr Fildes’ evidence that he could not make the decision to withdraw Edenborn’s services to Gunns, it is not plausible that Mr Fildes would send an email threatening withdrawal, even as a bluff, without first consulting with Mr Howson before sending the email. Tellingly, Mr Fildes was also in email communication with Mr Howson at the time. On 10 January 2012, Mr Donaldson sent an email to Mr Fildes advising that Gunns was unlikely to give a “concise date for full payment” until the Friday – being three days later – and it was Mr Donaldson’s “gut feeling” that there would be some “drip feed payments made”, but that Edenborn would not be fully paid up to date until closer to the end of the month. Mr Fildes forwarded that email to Mr Howson promptly after receipt. Given the regularity of Mr Fildes’ contact with Mr Howson, I find it improbable that Mr Fildes was making threats to Gunns without instructions or the authorisation of Mr Howson.
Secondly, Mr Donaldson clearly did not regard the email as a bluff. On 9 January 2012, Mr Donaldson forwarded the email chain of 9 January 2012 to Mr Butt explaining that “we will have significant difficulties meeting our forward orders if there are crew shut-downs. As you are aware, Edenborn has been burnt twice before and so they are serious about minimising their exposure; it is pretty much a directive from their financiers”. In response to the 9 January 2012 email from Mr Fildes, Mr Donaldson, by email sent the same day, asked Mr Fildes to get Mr Howson to advise Mr Donaldson that all decision-making was in Mr Fildes’ hands. Mr Donaldson also wrote that he was hopeful that a payment would be made prior to Wednesday night (ie within two days) and he should get confirmation of this the following morning. More particularly, Mr Fildes’ assertion that he sent the email as a bluff is contradicted by an email of 11 January 2012 between Mr Donaldson and other Gunns’ employees, where Mr Donaldson noted that:
Edenborn had already ceased one of three systems; one is being suspended tomorrow; they are likely to suspend the remaining one by Friday -
and by an email from Mr Merry (who replaced Mr Donaldson as the Gunns’ Western Australian regional manager) to Mr Hayes on 23 January 2012 in which he stated that:
Production in the past fortnight has been negatively impacted by Gunns cashflow crisis – Edenborn & ATS parked up operations for approx. 1.5 weeks & actively sought short term work opportunities with other plantation management companies.
These emails are probative evidence that the threat of suspension was not merely a bluff but was actually carried out. It may also reasonably be inferred it was carried out with Mr Howson’s authority as there is nothing to suggest that Mr Fildes did not have Mr Howson’s authority.
I also do not accept Mr Howson’s evidence that he was not concerned about the non-payment of the invoices. First, there is no reason to doubt the accuracy of the advice given by Mr Merry to Mr Hayes on 23 January 2012 by email that Edenborn had “parked up operations for approx. 1.5 weeks & actively sought short term work opportunities with other plantation management companies”. Secondly, in an email that Mr Howson sent to Mr Fildes on 16 January 2012, Mr Howson advised they “need[ed] a firm commitment of payment” of $750,000 by lunch time Friday (ie four days later). Thirdly, it appears that Edenborn threatened to shut down its harvesting and haulage services to Gunns if it did not receive further payments. On 27 January 2012, Mr Merry sent an email to Mr Hayes and Mr Butt with the subject line “[Gunns] Payment Priorities 30-31/1/2012” advising that he had spoken to contractors to form an understanding of their position. Mr Merry reported with respect to Edenborn that:
nil payment & approx. $1.02 M outstanding on 29/1 is likely to result in Edenborn shutting down it’s [sic] infield chipping /haulage operation for [Gunns] effective from 31/1, it is imperitave [sic] [Gunns] retains Edenborn in the system producing between now & 15/2 due to their production capacity, $ indicated should be sufficient to ensure Edenborn continues its operation from 31/1 to 4/1 inclusive.
On 30 January 2012, Mr Fildes sent an email to Mr Howson extracting a media statement from Gunns. The media statement stated:
EXTENSION OF FINANCING FACILITIES
Gunns Limited confirms that the terms for an extension to 31 December 2012 of its syndicated debt facility (currently $340m) and primary working capital facilities, have been agreed with its primary banking syndicate… The facility balance is expected to be progressively reduced in the course of the 2012 year, as the company completes asset sale processes in progress and finalises the Bell Bay pulp mill project investment. The finance facility extension provides the certainty necessary for the continued implementation of the Company’s business strategy as outlined at the recent Annual General Meeting.
Mr Howson and Mr Fildes each recalled learning in late January 2012 that Gunns had received an extension to its debt facility in the order of $340 million to 31 December 2012. Mr Howson agreed in cross-examination that he understood that, despite the extension, it was likely that the banks would be entitled to call in that debt at some earlier date if certain criteria were not met. During cross-examination, Mr Howson also admitted that he understood in 2012 that Gunns’ financiers had required Gunns to sell down its assets in order to reduce its debt to the banks. He also agreed that he understood that the finalisation of the development of the Bell Bay pulp mill (pulp mill development) by Gunns was an important part of its financial arrangements.
On 31 January 2012, Mr Fildes sent an email to Mr Merry, copying Mr Howson, in relation to Edenborn adding another “system” (ie, harvesting and chipping machine) on 7 February “as requested”:
Given that we originally requested full payment of current invoices before this system was being made available…I believe, Edenborn is really going above and beyond what is normally expected.
The email enclosed a proposed payment plan for payment of outstanding debt as follows:
Friday 3rd payment of $150,000
Monday 6th payment of $450,000
Friday 10th payment of $500,000
Further payments to be advised ASAP
Also on 31 January 2012, Mr Butt sent a letter to Mr Howson formally advising of a payment schedule for progressive payments of the current outstanding debt as follows:
Payment Date Amount Confirmation Status
3/02/2012 $150,000.00 confirmed
6/02/2012 $450,000.00 confirmed
10/02/2012 $501,200.00
The letter stated that Gunns would endeavour to make the last payment by the nominated date and that Gunns’ ability to process further payments would be advised over the course of the following week. The payment schedule was substantially met. However, the pattern of partial and late payment continued in relation to new invoices that issued, with Edenborn regularly inquiring when payment would be received and for how much.
It appears that a meeting between Mr Howson and Gunns was arranged for early February 2012. On 2 February 2012, Mr Fildes sent an email to Mr Howson (who was still away) stating that:
Few thoughts for your meeting on Monday –
I went into Gunns yesterday and sat down with Pete Merry to understand when other payments would be forth coming [sic]. I think you will need to do the same when you get back, but it was very clear “to me” that we will probably be in this situation for the best part of the year, if they [Gunns] survive that long. All their spare money is going into the earth works for the pulp mill and an example that was given yesterday was the Cassandra just left Albany with 54,000 tonnes and that payment is due into their bank on Monday. That should cover our harvesting & haulage, but the most part of this is going to cover the earth works for the pulp mill. Because they are still trying to lure a joint party to make the pulp mill successful they have to pump a lot of money into the mill to make it look attractive. If a joint party does not come along soon they will run out of money. They are basically using our money.
The reason why I am mentioning this as I now think it dangerous to put in additional systems with Gunns on a long term basis and perhaps parking the machines up and going for a makeup payment is much safer …
Probably change my mind again in few days, but that’s today’s thoughts.
During his liquidator’s examination, Mr Howson could not recall whether the meeting had taken place. He indicated that it could not have been a “physical” meeting because he was out of the country, but acknowledged that a meeting by telephone may have taken place. Mr Fildes agreed in cross-examination that he had no reason to doubt that what he said in his email of 2 February 2012 was an accurate representation of his views at the time he sent it. The common evidence of Mr Fildes and Mr Howson was that Mr Howson did not agree with the views expressed by Mr Fildes.
On 6 February 2012, the ASX announced that, at the request of Gunns, pending the release of an announcement by Gunns, Gunns shares were to be placed in a trading halt until 8 February 2012 or until the announcement was made.
On 7 February 2012, The Sydney Morning Herald newspaper published an article under the heading “Gunns bid for more capital” stating that at the end of 2011, Gunns had forecast an overall profit downgrade of $10 million to $20 million up to 30 June 2012 and was “trading at historic lows” on the ASX. The article further quoted an industry analyst as stating “there was no indication that a joint-venture announcement for the pulp mill was near”.
On 8 February 2012, Gunns announced that it had signed a term sheet with Richard Chandler Capital Corporation Pte Limited (Richard Chandler Corporation) to facilitate an equity investment of $150 million in the Gunns Group. The announcement noted that the terms were non-binding and were subject to approvals from the ASX, Gunns shareholders and lenders within a 90 day exclusivity period, as well as due diligence and Foreign Investment Review Board approval.
On 29 February 2012, Mr Merry provided an update to Mr Hayes by email of the responses from contractor parties with whom he had had discussions. He reported in relation to Edenborn that it was “very concerned re: their current exposures as they ramped up to producing 34,000 GMT for the month (equivalent to 400K p.a.), and feel particularly vulnerable”. Mr Merry also reported that Mr Howson could not provide an answer “re: how they are able to proceed” and that Mr Howson had “indicated they do want to continue to work with Gunns however the recurrence of payment issues presented as a real impediment to moving forwards”.
It was recorded in an email chain between Mr Merry, Mr Fildes and Mr Howson (among others) that Mr Fildes had a meeting with Mr Merry on 1 March 2012. Mr Fildes appears to have been told there would be no further payments until 16 March 2012 and Mr Fildes requested a “firm payment schedule to rectify the current outstanding payment situation”. In cross-examination Mr Fildes claimed to have no recollection of the meeting taking place. Despite Mr Fildes’ apparent lack of recollection, there is no reason to doubt the accuracy of what was recorded in the email chain.
Mr Merry informed Mr Hayes in an internal Gunns email on 1 March 2012 that “[w]hat the contractors are searching for is certainty in payment dates to make the smartest decision to protect their respective businesses. To date the 16/3 has been offered to them as an unconfirmed/possible resumption of creditor payment. They are concerned that this date will come & go with nil payment”. The email noted that Edenborn was offering a lower production capacity until payment was received.
On 2 March 2012 in an email from Mr Fildes to Mr Merry, copied to Mr Howson and others, Mr Fildes stated:
The last 2 months have seen Edenborn commit 80% of our resources to Gunns to ensure you meet your shipping schedule. Given that Gunns have stated that there will be no further payments until the 16th of March, we now find ourselves in a very awkward situation with both outstanding payments and our cash flow position. By the 16th of March Edenborn will be owed just over 1.7 million and will have just under 2.3 million outstanding for all work completed…
I would ask that a single payment of $280,000 be made next week to keep out [sic] total outstanding debt to less than 2 million.
Can you also provide in writing a clarification of when all our outstanding invoices will paid? [sic]
The position did not improve. By April 2012, Edenborn was plainly aware that Gunns was in financial difficulty and that the problems with non-payment were happening to “everybody”, added to which there was a gradual increase in the outstanding invoiced amounts due to Edenborn, notwithstanding a tranche of payments. On 11 April 2012, Mr Fildes wrote an email to Mr Howson stating that “[i]f we actually believe there will be no more Gunns soon then APB has to be the best option”. That evidence is probative evidence of Mr Fildes’ state of mind at the time, namely that he suspected that Gunns was then insolvent or would become insolvent. Even if Mr Howson did not actually have that same state of mind, there were at least reasonable grounds for a reasonable person in Edenborn’s position to hold that view. In response to inquiries as to when payments would be received, Mr Butt told Mr Howson that Gunns’ ability to process further payments “will be advised in line with anticipated developments aligned to the company’s capital raising program”. Despite the representation to Edenborn on 23 March 2012 that it was Gunns’ intention to be substantially back on payment terms by early April 2012, this did not happen. Payments did not return to terms but continued to be intermittent and Gunns continued to be evasive about payment. That situation continued through May 2012 and the following months. Moreover, by July 2012, Edenborn was aware that Gunns had been forced to revalue its forestry assets because of the “ailing woodchip market” and there were fears that Gunns shares would not trade again. By that time, Edenborn had threatened to issue a letter of demand, was regularly pressing Gunns for a substantial reduction payment of the outstanding invoices and had become increasingly concerned about Edenborn’s exposure. Edenborn did eventually get the debt to it paid in full in mid‑August 2012, but that only followed Edenborn’s refusal to resume work for Gunns after the Elders lock out without first being paid in full. Edenborn was also aware that the August payments were made out of the Portland sale. By August 2012, Edenborn was also aware of at least one newspaper article advising that Gunns had made an ASX announcement that its liabilities exceeded its assets and that it was likely that Gunns would be able to pay its debts as and when they fell due. I therefore reject the submission that “to all appearances” Edenborn and Gunns had a “sustainable, business relationship”. I also reject the submission which is not supported by the evidence and facts that the effect of the sale by Gunns of its Portland woodchip facility confirmed to Edenborn, and would have confirmed to the “reasonable person” in the circumstances of Edenborn that Gunns’ asset sale process was working and had freed up money to pay creditors. That submission is contradicted by the 28 August 2012 email from Mr Fildes to Mr Crook at Gunns, in which Mr Fildes wrote that Edenborn needed to regain some confidence in Gunns and there was “still a lot of negative press [about Gunns] out there that is still making us feel very nervous”. By 1 September 2012, Edenborn knew from news articles that advisory firm KordaMentha had been engaged in July 2012 to examine Gunns’ solvency.
I reject as implausible and unreliable Mr Howson’s affidavit evidence that in January 2012 he “regarded Gunns as a large long term customer with a fundamentally good business” and he “was not, and never became concerned” about Gunns’ liquidity until after Gunns was put into administration. I also reject as implausible Mr Fildes’ evidence in cross-examination that he never believed that Gunns was insolvent. It must have been plain to Mr Howson and Mr Fildes by the end of March 2012 that Gunns’ inability to pay its debts on time was not merely a short term cash flow problem. I find on the evidence that Edenborn, as at, and from, March 2012 at the latest, had reason to suspect that Gunns was insolvent. I further find that a reasonable person, in Edenborn’s circumstances, would had have grounds for suspecting insolvency as at, and from, March 2012 at the latest. Accordingly, the good faith defence is not made out in respect of any of the impugned transactions.
The further submission was made by the liquidators that the onus of proof was not discharged by reason of Edenborn’s failure to call Fran Leary as a witness. Ms Leary was Edenborn’s Chief Financial Officer and a chartered accountant. Ms Leary’s responsibilities included the company’s cash flow management, entering and recording invoices rendered and payments received, and preparation of aged creditor and debtor reports. Mr Fildes’ evidence was that it was Ms Leary who would inform him of the amounts outstanding from Gunns and provide him with an aged debtor listing. He admitted he would discuss with Ms Leary from time to time the aged debtors of Edenborn, how many days late in making payments those debtors were, any issues which he perceived with respect to principals making payment, and issues concerning the ability of principals to make payment on time. He admitted that this was because these matters fell within the scope of Ms Leary’s role. Mr Fildes also admitted discussing with Ms Leary media reporting of Gunns’ financial position from time to time throughout 2012. Mr Fildes also admitted to becoming aware of Edenborn’s cash flow position from time to time as a result of his discussions with Ms Leary. Specifically, Mr Fildes said that he had discussions with Ms Leary regarding Gunns’ running account with Edenborn. Ms Leary was also frequently copied into communication to and from Gunns regarding issues with payment. Mr Howson admitted that Ms Leary had an interest in receiving information regarding the financial status of Edenborn’s creditors, and that letters from Gunns which detailed payment plans, including letters which noted that payment would be delayed and dependent on asset sales, were actioned by Ms Leary rather than Mr Howson. It was submitted for the liquidators that Ms Leary should therefore reasonably be thought to have a relevant opinion to prove Edenborn did not suspect that Gunns was insolvent and the failure to call her as a witness was a sufficient basis in itself for finding that Edenborn’s onus of proof under s 588FG(2) was not discharged. It was submitted for Edenborn that it was unnecessary to call Ms Leary as there was no suggestion that Ms Leary had any separate communication with Gunns.
Although it is not necessary to decide, I would not find that Edenborn’s onus of proof under s 588FG(2) was not discharged simply on the basis that Ms Leary was not called. First, there was an absence of evidence that either of Mr Howson or Mr Fildes relied on or had regard to anything told to them by Ms Leary as the foundation for their asserted lack of concern about Gunns’ financial position. Secondly, as submitted by Edenborn, there was an absence of evidence to indicate that Ms Leary had any separate communication with Gunns. Thirdly, nothing in the documentary evidence indicated that Ms Leary expressed any view, one way or the other, to Mr Howson or Mr Fildes concerning Gunns’ financial position.
DISCRETION ISSUE
Edenborn submitted that the powers given to the Court by s 588FF(1) are discretionary and by s 588FF(1)(a), the Court must consider whether to order Edenborn to repay some, or all, of the payments constituting the unfair preference. It was submitted that the Court, in the exercise of its discretion, should not order Edenborn to repay the preferential payments by reason that because of the payments made by Gunns, Edenborn provided ongoing services to Gunns and committed substantial resources for Gunns’ benefit. It was submitted that Edenborn should not be in a worse position for having continued to provide services than had it terminated its services and in circumstances where:
(a)all of the sums claimed by the liquidators related to services provided by Edenborn to Gunns during the relation back period, and this was not a case of payments being received in reduction of liabilities that existed at the start of the relation back period or where the payments in issue were not for fresh consideration;
(b)because of the unusual nature of Gunns’ contractual rights, payments made by Gunns to Edenborn not only resulted in Gunns earning an income (and profit) that it otherwise would not have earned, but gave rise to an entitlement to recover those payments from the scheme owners;
(c)both experts were agreed that the relevant profit that Gunns made from Edenborn’s services was $652,378, so that as a result of making the payments which are now challenged, Gunns was $652,378 better off. It was submitted that an order for payment would provide the liquidators with a windfall gain. Reference was made to Re Cyberduck Software Pty Ltd (in liq) & Anor [2018] VSC 122 (Cyberduck) at [82]–[89], where the discretion was exercised to refuse to make an order for payment of a preference because it would, in effect, be a windfall to the liquidator.
The liquidators argued that s 588FF(1) confers jurisdiction and power on the Court and not a discretion, but if it does confer a discretion, the discretion must be exercised in light of the purpose of s 588FF, being “to ensure that a creditor did not receive a benefit over and above that received by other creditors”: Cashflow Finance at [570]. The liquidators argued that there would be no windfall gain to the liquidators if Edenborn was required to repay the moneys in question but, to the contrary, permitting Edenborn to retain what would otherwise be preferential payments by reference to downstream profits of Gunns allegedly generated by Edenborn instead of the contract value of the services provided, would advantage Edenborn over all other unsecured creditors, contrary to the purpose and object of s 588FA. It was submitted that there is nothing in Edenborn’s circumstances in the present case that appears to differ from any unsecured trade creditor supplying commercial goods or services on credit on an arm’s length basis as part of its business functions.
In Great Investments Ltd v Warner [2016] FCAFC 85; 243 FCR 516 the Full Court of the Federal Court at 553–4 [141] noted that different views had been expressed as to whether s 588FF(1) confers a discretion or, rather, a jurisdiction. The Court stated:
The latter view was taken by Einstein J in Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corporation [1999] NSWSC 671 at [569] and Nicholas J in Cussen v Sultan (2009) 74 ACSR 496 at [24]-[30]. However, the view that s 588FF(1) confers a discretion was assumed or held in BP Australia Ltd v Brown (2003) 58 NSWLR 322 at [157], [171] (Spigelman CJ, Mason P and Handley JA agreeing); Ansell Ltd v Davies (2008) 219 FLR 329 at [52] (Doyle CJ, Anderson and David JJ agreeing); and New Cap Reinsurance Corporation Ltd v AE Grant (2009) 3 BFRA 766; 257 ALR 740 at [59] (Barrett J). See also Buzzle Operations Pty ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47 at [244], [258]-[261] (Young JA); Assaf F, Shields B and Kincaid H, Voidable Transactions in Company Insolvency (LexisNexis Butterworths, 2015) at [8.43].
In that case, the Court proceeded on the assumption that s 588FF(1) does provide a discretion, but held that appellants had not demonstrated why an order under s 588FF(1) should not be made.
I note that in neither of the cases mentioned by the Full Court where it has been held that there is no discretion did the Court consider s 33(2A) of the Acts Interpretation Act 1901 (Cth) (Acts Interpretation Act). That sub-section provides:
Where an Act assented to after the commencement of this subsection provides that a person, court or body may do a particular act or thing, and the word may is used, the act or thing may be done at the discretion of the person, court or body.
Section 33(2A) of the Acts Interpretation Act was introduced by the Statute Law (Miscellaneous Provisions) Act 1987 (Cth), which commenced on 18 December 1987. Therefore, subject to s 2(2) of the Acts Interpretation Act, the provision applies to s 588FF of the Corporations Act, as the Corporations Act received royal assent after the commencement of s 33(2A). Section 2(2) of the Acts Interpretation Act prescribes that the application of a provision of the Acts Interpretation Act to a provision of an act is “subject to a contrary intention”. The liquidators submitted that a contrary intention is evinced in Part 5.7B. I doubt the correctness of that submission and, in my view, the power of the Court under s 588FF in relation to the orders it can make where a creditor receives an unfair preference is a discretionary power. However, the discretion whether to make one or more of the orders prescribed in s 588FF(1) must be exercised judicially, in light of the purpose and object of the preference provisions in Part 5.7B of the Corporations Act. In the present case, none of the matters submitted by Edenborn warrant the exercise of discretion that no repayment of the preference transactions should be ordered.
First, the cases which have considered the exercise of discretion under s 588FF are distinguishable. In Cyberduck, upon which Edenborn placed reliance, the discretion was exercised in circumstances where the Australian Tax Office had applied an input tax credit in reduction of a company’s tax debt. That company then went into liquidation and the liquidators argued that the application of that credit was a preference. It was later discovered that the company had no entitlement to the benefit of the input tax credit in question. Associate Justice Efthim found that the application of the credit to reduce the tax debt was a preference, but declined to make an order under s 588FF as the company “was never entitled to claim the credit” and would receive a “windfall” if it was to receive money to which it had not had an entitlement in the first place: at [89]. In BP Australia Ltd v Brown [2003] NSWCA 216; 58 NSWLR 322, the question of whether a discretion did in fact exist did not fall for determination but, in the course of considering whether an extension of time in which to bring a preference action should be granted, the New South Wales Court of Appeal considered at 352 [157] that delay in applying for an extension of time “would also play a part in the exercise of the discretion to make orders under s 588FF(1)”. In D Pty Ltd (in liq) v Calas (Trustee), in the matter of D Pty Ltd (in liq) [2016] FCA 1409, Moshinsky J at [81] considered that s 588FF(1) conferred a discretion, at least where, as in that case, the relief sought was declarations under s 588FF(1)(h) and (j).
Secondly, the asserted “windfall” in this case is the repayment of an amount determined by operation of s 588FA to be a preference in circumstances where:
(a)the purpose of unfair preference law is to ensure that unsecured creditors are treated equally in the period leading to liquidation; and
(b)the ultimate effect doctrine and the operation of s 588FA(3) give Edenborn the benefit of the contract value of any services provided by it in return for the payments in respect of the periods where there was a continuing business relationship between the parties.
I accept the liquidator’s submission that the law’s protection against “unfairness” of this kind is dealt with by the codification of the running account principle in s 588FA(3) and the doctrine of ultimate effect. There is nothing in this case that takes it out of the ordinary.
CONCLUSION
The liquidators have proved each of the elements of their claim and are entitled to orders under s 588FF of the Corporations Act and their costs of the proceeding.
I certify that the preceding two hundred and eleven (211) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies. Associate:
Dated: 27 May 2020
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