Clifton (liquidator) v Kerry J Investment Pty Ltd trading as Clenergy

[2020] FCAFC 5

FEDERAL COURT OF AUSTRALIA

Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5

Appeal from:

Clifton v Kerry J Investment Pty Ltd trading as Clenergy [2017] FCA 1379

File numbers:

SAD 341 of 2017
SAD 342 of 2017
SAD 343 of 2017

Judges:

BESANKO, MARKOVIC AND BANKS-SMITH JJ

Date of judgment:

7 February 2020

Catchwords:

PRACTICE AND PROCEDURE - discovery - where adequacy of discovery questioned after trial of preliminary issue and prior to hearing of appeals - whether liquidators of company complied with discovery orders - where liquidators sourced documents by obtaining hard copy documents, electronic images from certain servers and computers and by obtaining production orders - where hard copy documents of company disorganised - whether reasonable searches undertaken - whether electronic search terms for image searching sufficiently broad - where no interrogation of electronic records in cloud storage - where amount or nature of material in cloud storage unknown - whether technical difficulties a reason not to interrogate material - discovery inadequate

PRACTICE AND PROCEDURE - discovery - meaning of “reasonable search” for the purposes of r 20.14 of Federal Court Rules 2011 (Cth) - whether requirement of reasonable search applies to non-standard discovery under r 20.15 - whether requirement of r 20.14 that documents be “directly relevant” applies to non-standard discovery under r 20.15 unless excluded on application

PRACTICE AND PROCEDURE - relief - where parties who failed to comply with discovery in first instance proceedings are appellants - consequences of such failure on an appeal and cross appeal - where extent and effect of inadequate discovery on matters before primary judge unknown - where failure to comply with discovery orders is ongoing - effect of ongoing failure to make proper discovery - s 28 of Federal Court of Australia Act 1976 (Cth) - assessment of what will serve interests of justice - whether appeals should be dismissed where but for the question of discovery there may have been merit in grounds - whether remittal should be ordered - whether terms of remittal should be limited

CORPORATIONS - winding up - where unfair preference claims brought by liquidators against creditors under s 588FF of Corporations Act 2001 (Cth) - whether the company was insolvent when payments made - where primary judge made findings as to date of insolvency - s 95A of Corporations Act 2001 (Cth) and “forward looking test” of insolvency - whether forecast as to future cash flow ought to have been taken into account

CORPORATIONS - winding up - security - whether renewable energy certificates (RECs) were an asset of the company able to be realised to meet debts in the ordinary course of business - where sale other than in the ordinary course of the company's ordinary business restricted by terms of loan facility and security in favour of bank by way of fixed and floating charge - whether scale of proposed sale of RECs such that outside the ordinary course of business - whether consent of bank to sale of RECs could be inferred

CORPORATIONS - winding up - tax - liability of company to Commissioner of Taxation - whether established that payment arrangement was in place under s 255-15 of Schedule 1 to Taxation Administration Act 1953 (Cth) - meaning of “due and payable” where used in s 255‑15 of Schedule 1 - statutory construction - whether open to treat tax obligation as deferred for reasons of “commercial reality”

CONTRACT - construction and interpretation - subordination deed - consideration of loan agreement in construing subordination deed - whether subordination deed abandoned - whether subordination continued such that liability under loan agreement not due and payable

Legislation:

Corporations Act 2001 (Cth) ss 9, 95A, 459G, 513B, 513C, 588, 588E, 588FF

Federal Court of Australia Act 1976 (Cth) ss 23, 25, 27, 28, 37M

Renewable Energy (Electricity) Act 2000 (Cth) s 26

Taxation Administration Act 1953 (Cth) ss 8AAZL, 255‑10, 255-15, 255-20, 269-15, Schedule 1

Federal Court Rules 2011 (Cth) rr 1.33, 5.04, 5.23, 20.14, 20.15, 20.16, 20.17, 30.01, 36.17, 36.74

Cases cited:

BB Retail Capital Pty Ltd v Alexandria Landfill Pty Ltd [2015] NSWCA 319

Boensch v Pascoe [2019] HCA 49

Brookfield v Yevad Products Pty Ltd [2002] FCA 1376

Brookfield v Yevad Products Pty Ltd [2004] FCA 1164

Clone Pty Ltd v Players Pty Ltd (In liq) (Receivers and Managers Appointed) [2018] HCA 12; (2018) 264 CLR 165

Commonwealth Bank of Australia v Quade (1991) 178 CLR 134

Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1

Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; (2008) 237 CLR 473

Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640

Emanuel Management Pty Ltd v Foster’s Brewing Group Ltd [2003] QSC 205

Federal Treasury Enterprise (FKP) Sojuzplodoimport v Spirits International B.V. (No 4) [2017] FCA 1345

Fire Nymph Products Pty Ltd v Heating Centre Pty Ltd (1988) 14 NSWLR 460

Fire Nymph Products Pty Ltd v Heating Centre Pty Ltd (in liq) (1992) 7 ACSR 365

Fitzgerald v Masters (1956) 95 CLR 420

Fox v Percy [2003] HCA 22; (2003) 214 CLR 118

Hall v Poolman [2007] NSWSC 1330

Hussain v CSR Building Products Ltd [2016] FCA 392; (2016) 246 FCR 62

JR Consulting & Drafting Pty Ltd v Cummings [2016] FCAFC 20; (2016) 329 ALR 625

Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385

Lewis v Doran [2005] NSWCA 243; (2005) 219 ALR 555

Mango Boulevard Pty Ltd v Spencer [2008] QCA 274

McDonald v McDonald (1965) 113 CLR 529

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104

Mulley v Manifold (1959) 103 CLR 341

Neutral Bay Pty Ltd v Deputy Commissioner of Taxation [2007] QCA 312

Noza Holdings Pty Limited v Commissioner of Taxation [2010] FCA 990

Pearce v Gulmohar Pty Ltd [2017] FCA 660

Porter v Sundance Resources Ltd [No 2] [2015] WASC 493

Rees v Bank of New South Wales (1964) 111 CLR 210

Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 8 ACLR 422; (1983) 1 ACLC 1333

Ryder v Frohlich [2004] NSWCA 472

Smith v Boné [2015] FCA 319

Stoljic v Deputy Commissioner of Taxation [2018] FCA 483

Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (No 2) [2018] FCA 530

Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72

Yates v AustralianCompetition and Consumer Commission [2006] FCA 1058

Date of hearing:

6-7 August 2018, 7-8 February 2019 and 15 March 2019

Registry:

South Australia

Division:

General Division

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Category:

Catchwords

Number of paragraphs:

688

Counsel for Solar Shop:

Mr B Roberts SC with Mr S Evans

Solicitor for Solar Shop:

O’Loughlins Lawyers

Counsel for Kerry J Investments Pty Ltd trading as Clenergy:

Mr P Ehrlich QC

Solicitor for Kerry J Investments Pty Ltd trading as Clenergy:

Barrett Walker Lawyers

Counsel for Wuxi Suntech Power Co. Limited:

Mr S Hay

Solicitor for Wuxi Suntech Power Co. Limited:

Holding Redlich

Counsel for SMA Solar Technology A.G:

Mr C N Bova with Mr J S Burnett

Solicitor for SMA Solar Technology A.G:

Corrs Chambers Westgarth

[A1] 

Table of Corrections
15 September 2020	In paragraph 172, “rr 20.15(1) and (2)” has been replaced with “rr 20.14(1) and (2)”.

ORDERS

SAD 341 of 2017

BETWEEN:

TIMOTHY JAMES CLIFTON AND MARK CHRISTOPHER HALL IN THEIR CAPACITY AS LIQUIDATORS OF SOLAR SHOP AUSTRALIA PTY LTD (IN LIQ) (ACN 092 562 877)

Appellant

AND:

KERRYJ INVESTMENT PTY LTD TRADING AS CLENERGY (ACN 108 633 227)

Respondent

JUDGES:	BESANKO, MARKOVIC AND BANKS-SMITH JJ
DATE OF ORDER:	7 February 2020

THE COURT ORDERS THAT:

1.Leave be granted to the respondent/cross appellant to file a further amended notice of cross appeal in the form annexed to its second further amended interlocutory application filed on 5 November 2018 (Interlocutory Application) and marked C.

2.Save to the extent provided by these Orders, the Interlocutory Application be otherwise dismissed.

3.The appeal be dismissed.

4.The respondent’s notice of contention filed on 18 July 2018 be dismissed.

5.The cross appeal be allowed:

(a)Order 1 made in proceeding SAD 261 of 2014 on 24 November 2017 be set aside; and

(b)proceeding SAD 261 of 2014 be remitted to the primary judge or another judge of the Court for determination of the following question:

Was Solar Shop Australia Pty Ltd (in liquidation) insolvent within the meaning of s 95A of the Corporations Act 2001 (Cth) on 31 July 2011?

6.The appellant/cross respondent’s notice of contention filed on 18 July 2018 be dismissed.

7.The respondent/cross appellant file and serve its submissions, not exceeding five pages in length, on the question of the costs of proceeding SAD 261 of 2014, the appeal, the Interlocutory Application and cross appeal within 14 days of the date of these Orders.

8.The appellants/cross respondents file and serve their submissions, not exceeding five pages in length, on the question of the costs of proceeding SAD 261 of 2014, the appeal, the Interlocutory Application and cross appeal within 28 days of the date of these Orders.

9.The question of costs of proceeding SAD 261 of 2014, the appeal, the Interlocutory Application and cross appeal be determined on the papers.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

SAD 342 of 2017
BETWEEN:	TIMOTHY JAMES CLIFTON AND MARK CHRISTOPHER HALL IN THEIR CAPACITY AS LIQUIDATORS OF SOLAR SHOP AUSTRALIA PTY LTD (IN LIQ) (ACN 092 562 877) Appellant
AND:	WUXI SUNTECH POWER CO. LIMITED, (PEOPLE’S REPUBLIC OF CHINA) LICENSE NUMBER 320000400001498 Respondent

JUDGE:	BESANKO, MARKOVIC AND BANKS-SMITH JJ
DATE OF ORDER:	7 February 2020

THE COURT ORDERS THAT:

1.Leave be granted to the respondent/cross appellant to file a further amended notice of cross appeal in the form annexed to its further amended interlocutory application filed on 5 November 2018 (Interlocutory Application) and marked C.

2.Save to the extent provided by these Orders, the Interlocutory Application be otherwise dismissed.

3.The appeal be dismissed.

4.The respondent’s notice of contention filed on 19 July 2018 be dismissed.

5.The cross appeal be allowed:

(a)Order 1 made in proceeding SAD 275 of 2014 on 24 November 2017 be set aside; and

(b)proceeding SAD 275 of 2014 be remitted to the primary judge or another judge of the Court for determination of the following question:

Was Solar Shop Australia Pty Ltd (in liquidation) insolvent within the meaning of s 95A of the Corporations Act 2001 (Cth) on 31 July 2011?

6.The appellant/cross respondent’s notice of contention filed on 18 July 2018 be dismissed.

7.The respondent/cross appellant file and serve its submissions, not exceeding five pages in length, on the question of the costs of proceeding SAD 275 of 2014, the appeal, the Interlocutory Application and cross appeal within 14 days of the date of these Orders.

8.The appellants/cross respondents file and serve their submissions, not exceeding five pages in length, on the question of the costs of proceeding SAD 275 of 2014, the appeal, the Interlocutory Application and cross appeal within 28 days of the date of these Orders.

9.The question of costs of proceeding SAD 275 of 2014, the appeal, the Interlocutory Application and cross appeal be determined on the papers.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

SAD 343 of 2017
BETWEEN:	TIMOTHY JAMES CLIFTON AND MARK CHRISTOPHER HALL IN THEIR CAPACITY AS LIQUIDATORS OF SOLAR SHOP AUSTRALIA PTY LTD (IN LIQ) (ACN 092 562 877) Appellant
AND:	SMA SOLAR TECHNOLOGY A.G. (JOINT STOCK COMPANY) (GERMANY) REGISTRATION NUMBER HRB 3972 Respondent

JUDGE:	BESANKO, MARKOVIC AND BANKS-SMITH JJ
DATE OF ORDER:	7 February 2020

THE COURT ORDERS THAT:

1.Leave be granted to the respondent/cross appellant to file a further amended notice of cross appeal in the form annexed to its further amended interlocutory application filed on 5 November 2018 (Interlocutory Application) and marked C.

2.Save to the extent provided by these Orders, the Interlocutory Application be otherwise dismissed.

3.The appeal be dismissed.

4.The respondent’s notice of contention filed on 19 July 2018 be dismissed.

5.The cross appeal be allowed:

(a)Order 1 made in proceeding SAD 276 of 2014 on 24 November 2017 be set aside; and

(b)proceeding SAD 276 of 2014 be remitted to the primary judge or another judge of the Court for determination of the following question:

Was Solar Shop Australia Pty Ltd (in liquidation) insolvent within the meaning of s 95A of the Corporations Act 2001 (Cth) on 31 July 2011?

6.The appellant/cross respondent’s notice of contention filed on 18 July 2018 be dismissed.

7.The respondent/cross appellant file and serve its submissions, not exceeding five pages in length, on the question of the costs of proceeding SAD 276 of 2014, the appeal, the Interlocutory Application and cross appeal within 14 days of the date of these Orders.

8.The appellants/cross respondents file and serve their submissions, not exceeding five pages in length, on the question of the costs of proceeding SAD 276 of 2014, the appeal, the Interlocutory Application and cross appeal within 28 days of the date of these Orders.

9.The question of costs of proceeding SAD 276 of 2014, the appeal, the Interlocutory Application and cross appeal be determined on the papers.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

TABLE OF CONTENTS

BACKGROUND	[4]
Solar Shop and its business	[5]
Solar Shop’s arrangements with its financiers	[9]
Renewable energy certificates	[16]
Westpac reviews	[21]
The appointment of voluntary administrators and of the Liquidators	[28]
THE FIRST INSTANCE PROCEEDINGS	[29]
The primary judge’s decision	[33]
The Solarise Loan	[36]
Solar Shop’s liability to the ATO	[43]
Overview of the Liquidators’ claims of insolvency	[45]
31 January 2011	[49]
30 April 2011	[54]
22 May 2011 and 31 May 2011	[60]
Solar Shop’s solvency as at 31 July 2011	[72]
THE APPEALS AND THE DISCOVERY ISSUE	[77]
Procedural history	[77]
The discovery issue	[88]
Discovery in the First Instance Proceedings	[91]
Sources of documents	[98]
Hard Copy Documents	[104]
Electronic documents	[115]
Third party documents	[119]
Review of discovery since the commencement of the hearing of the appeal	[128]
Analysis and ground 1A of the cross appeals	[132]
The effect of the Liquidators’ ongoing failure to make proper discovery	[190]
THE LIQUIDATORS’ GROUNDS OF APPEAL	[211]
Ground 1	[212]
Analysis	[214]
Conclusion	[235]
Ground 2	[236]
Analysis	[309]
The Construction Issue	[309]
The Abandonment Issue	[323]
The Approval Issue	[333]
Conclusion	[336]
Ground 3	[337]
The Charge Issue	[366]
The Market Issue	[381]
The No Difference Issue	[389]
The Number of RECs Issue	[390]
Conclusion	[392]
Ground 4	[393]
Analysis	[412]
Conclusion	[423]
Ground 5 of the appeals and grounds 1 and 2 of the cross appeals	[424]
The Confined Dates Issue before the primary judge	[432]
Analysis of Confined Dates Issue	[437]
Conclusion on grounds 1 and 2 of cross appeals	[455]
The 30 June 2011 Issue	[456]
Consideration of the 30 June 2011 Issue	[459]
Conclusion on ground 5 of the appeal	[471]
CROSS APPEALS	[472]
Grounds 3, 4 and 5 of the cross appeals	[474]
When was debt due to the Commissioner of Taxation (ATO)	[477]
The primary judge’s reasons	[479]
Was the payment plan within s 255-15 of Schedule 1	[498]
Meaning of “due and payable” for s 225-15	[504]
Any other basis to treat liability as deferred	[516]
Conclusion as to purported deferral	[533]
The Wuxi debt	[542]
The Kerry J debt	[552]
The Bosch debt	[557]
Access to cash and cash equivalents	[564]
Access to inventory	[576]
Primary judge’s reasons for 31 May 2011 assessment	[579]
Summary of submissions	[583]
Consideration	[585]
Conclusion	[611]
Value of the RECs receivables	[618]
Inference that trade creditors outside terms	[626]
Exclusion of potential funding from Harbert	[631]
Reliance on correspondence with Bosch, SMA and Mitsui	[644]
Use of Mr Morris’ cash flow	[648]
Use of the Lombe Reports	[649]
Reference to the May Cash Flow	[650]
Reference to the 17 August 2011 correspondence	[655]
Conclusion on grounds 3, 4 and 5 of the cross appeals	[661]
Overall conclusion on cross appeals	[662]
RESPONDENTS’ NOTICES OF CONTENTION	[663]
Other items said to be available/excluded as at 30 April 2011	[668]
Access to cash and cash equivalents/trade and other receivables	[668]
Access to RECs receivables	[672]
Access to inventory	[673]
Access to other current assets	[674]
Exclusion of tax liabilities	[675]
Other items said to be available/excluded as at 22 May 2011	[676]
Cash and cash equivalents/trade and other receivables	[676]
Access to RECs receivables	[679]
Other current assets	[680]
Reduction of Wuxi liability	[681]
Conclusion on Respondents’ notices of contention	[682]
THE LIQUIDATORS’ NOTICE OF CONTENTION	[687]
DISPOSITION	[687]

REASONS FOR JUDGMENT

THE COURT:

1. There are three appeals before the Court brought by Timothy James Clifton and Mark Christopher Hall in their capacities as joint and several liquidators (Liquidators) of Solar Shop Australia Pty Limited (in liquidation) (Solar Shop). The Liquidators challenge findings made by the primary judge in response to a separate question about the date on which Solar Shop became insolvent within the meaning of s 95A of the Corporations Act 2001 (Cth) (Corporations Act):  Clifton v Kerry J Investment Pty Ltd trading as Clenergy [2017] FCA 1379.

2. The respondents to the appeals are respectively Kerry J Investment Pty Limited trading as Clenergy (Kerry J), Wuxi Suntech Power Co Limited (Wuxi) and SMA Solar Technology A.G.  (SMA) (collectively Respondents).  Each of Kerry J, Wuxi and SMA has filed a cross appeal and a notice of contention in the appeal against it.  The Liquidators have filed notices of contention in the cross appeals.  Whilst the Respondents were separately represented and filed separate written submissions, in effect the Respondents each adopted the submissions of SMA (or, as to the issue of inventory, Kerry J).  Therefore, when we refer to the submissions of the Respondents it is on the basis that those submissions are made jointly.  On occasion for clarity we refer to the submissions of an individual Respondent but regardless those submissions are taken to have been made by the Respondents jointly.

3. The hearing of the appeals spanned some five days and assumed a level of complexity because it became apparent that two documents had not been discovered to all of the Respondents.  The effect of this revelation, and the relief sought as a consequence, is further described below.  Before turning to it and to the substantive issues raised by the appeals and cross appeals, it is convenient to set out the background facts.

   BACKGROUND

1. The following background facts, which we understand not to be in dispute, are taken substantially from the primary judge's reasons.

   Solar Shop and its business

2. Solar Shop was incorporated on 20 April 2000.  It carried on business as a supplier and installer of solar energy systems and, until 2009, solar water heating systems.

3. Solar Shop had three wholly owned subsidiaries:  Solar Hut Pty Limited (Solar Hut) which engaged in online sales under the name “SunSavers”; Solar Financial Solutions Pty Limited which offered finance to purchasers under the name “Sunworks”; and SA Commercial Solar Pty Limited which promoted large-scale solar systems for commercial applications under the name “CommSolar”.  Solar Shop also held a 50% interest in Sunray Tracker Pty Limited and a 40% interest in Metropolitan Metering Assets Pty Limited.

4. The shareholders in Solar Shop and their respective holdings changed over time such that:

   (1)from April 2003 until about 12 February 2007 Adrian and Tanya Ferraretto were its sole shareholders holding shares in their own capacity and as trustees for the A and T Ferraretto Family Trust;

   (2)on or about 12 February 2007 Solarise Pty Ltd (Solarise), a company associated with Mr Russell Mourney, acquired a substantial holding in Solar Shop and members of Solar Shop’s management also acquired shares;

   (3)on 6 May 2009 HMC Australian Private Equity Fund 1 GP, LP (HAPE 1), a private equity fund managed by Harbert Management Corporation (Harbert), acquired shares in Solar Shop for a consideration of $7 million by acquiring shares from the Ferrarettos, Solarise in its capacity as trustee for the Mourney Family Trust and Mr Stone and Ms Morris in their capacity as trustees of the Morristone Family Trust; and

   (4)in October 2010 Solar Shop bought back shares associated with the Ferrarettos for $10 million and the Ferrarettos sold shares to HAPE 1, its CEO, Anthony Thornton, and Solar Shop Australia Management Team Pty Ltd (SSAMT).

5. As at 19 October 2010 Solar Shop’s shareholders comprised:

   (1)HAPE 1 which held 36,152 shares or 50.2%;

   (2)Mr and Mrs Ferraretto who held 20,849 shares or 28.9%;

   (3)Mr Thornton who held 11,112 shares or 15.4%;

   (4)James Leggett who held 2,292 shares or 3.2%; and

   (5)SSAMT which held 1,637 shares or 2.3%.

   Solar Shops arrangements with its financiers’

6. Westpac Banking Corporation (Westpac) was Solar Shop’s banker.  On 19 October 2010 Solar Shop entered into a facility agreement with Westpac (2010 Facility Agreement) which superseded a business finance agreement that it had entered into with Westpac in 2009 dated 4 May 2009 (May 2009 Business Finance Agreement).

7. Pursuant to the 2010 Facility Agreement Westpac agreed to make six different facilities available to Solar Shop, each referred to as “tranches”.  Relevantly:

   (1)tranche A comprised an overdraft with a decreasing limit:  $3.5 million until 30 October 2010, $2.5 million in the period from 31 October to 29 November 2010 and $1.0 million from 30 November 2010; and

   (2)tranche F was a bill acceptance discount facility with a limit of $10 million.  Its principal purpose was to fund Solar Shop’s share buy-back from the Ferrarettos.

8. Clause 8.2 of the 2010 Facility Agreement required Solar Shop to make quarterly repayments of principal of $500,000 each, commencing on 31 December 2010 and ending on 30 June 2012, and to repay the balance of tranche F (and the balance owing under any other tranches) on or before the termination date, 19 October 2012.

9. Pursuant to a loan agreement dated 6 May 2009 between Solarise, Mr Mourney, Solar Shop and HAPE 1 (Solarise Loan Agreement), Solarise provided unsecured vendor finance for the shares it sold to Solar Shop (Solarise Loan).  Relevantly in that agreement:

   (1)clause 1.1 included the following definitions:

   Bank means Westpac Banking Corporation (ABN 33 007 457 141)

   Bank Debt means all the money and amounts (in any currency) that [Solar Shop] is or may become liable at any time (presently, prospectively or contingently, whether alone or not and in any capacity) to pay to, or for the account of, the Bank pursuant to the terms of the Bank Finance Documents.

   Buy-Back Date means the date on which the Share Buy-Back Agreement completes and the Buy-Back becomes effective.

   Permitted Payment means:

   (a)       any payment that the Bank has consented to in writing; or

   (b)       any payment permitted under clause 6.4.

   Repayment Date means in respect of any amount of the Principle Sum that is not a Notified Claim Amount or Respective Proportion Amount that earliest of:

   …

   (b)       the second anniversary of the Buy-Back Date; and

   …

   Solarise Debt means all money and amounts that [Solar Shop] is or may become liable at any time (presently, prospectively or contingently, whether alone or not and in any capacity) to pay to or for the account of Solarise in accordance with the terms of this agreement.

   Subordination Period means the period from the date of this document until the second anniversary of the Buy-Back Date.

   (2)clause 4.1 required Solar Shop to repay the principal sum, $5,178,682.13, to Solarise on “the Repayment Date”, 22 May 2011;

   (3)clause 5 provided that interest accrues daily on the Principal Sum (as defined) plus any capitalised interest from time to time at the interest rate calculated in accordance with the specified formula; and

   (4)clause 6 provided that:

   6.1  Solarise Debt subordinated

   Solarise acknowledges and agrees that the Solarise Debt and all related rights, claims and payments are subordinated and postponed to, and rank in priority after, the Bank Debt and all related rights, claims and payments, on the terms of this agreement.  [Solar Shop’s] obligations and liabilities in respect of the Solarise Debt are conditional (only to the extent set out in this agreement) on the Subordination Period ending.

   6.2  Solarise Debt not payable

   Despite any agreement to the contrary, during the Subordination Period none of the Solarise Debt is payable or repayable except for the purpose of a Permitted Payment.

   6.3  Continuing subordination

   The Subordination applies to the present and future balances of the Bank Debt and Solarise Debt.  Solarise agrees and acknowledges that the Subordination is irrevocable and a continuing subordination until the Subordination Period ends, and is not discharged by any payment, settlement of account, an Insolvency Event or anything else.

   6.4  Permitted Payment

   If at any time all of the following conditions are satisfied:

   (a)no Bank Debt is due and unpaid;

   (b)no Subordination Default subsists;

   (c)neither [Solar Shop] nor Solarise is in breach of the provisions of this agreement; and

   (d)no Insolvency Event had occurred in respect of [Solar Shop]or Solarise,

   [Solar Shop] will pay, repay, satisfy or discharge, and Solarise may receive and retain payment of, the following amounts due at that time in respect of the Solarise Debt:

   (a)accrued interest in accordance with the terms of this agreement; and

   (b)payments of the Principal Sum in accordance with the terms of this agreement; and

   (c)amounts notified by the Bank to [Solar Shop] in writing as being permitted under this clause.

10. On 20 May 2009 Westpac, Solarise and Solar Shop entered into a deed of subordination (Subordination Deed) which relevantly included:

    (1)at clause 1 that:

    “Business Finance Agreement” means the Business Finance Agreement dated 4 May 2008 between Westpac and the Borrower “Debts” means the Westpac Debt and the Solarise Debt;

    “Debts” means the Westpac Debt and the Solarise Debt;

    …

    “Permitted Payments” has the meaning stipulated in clause 8;

    …

    “Solarise Debt” means the aggregate of all monies, debt and liabilities owing from time to time now or in the future on any account or remaining unpaid by [Solar Shop] to Solarise pursuant to the Loan Agreement”

    “Subordination Default” means any one or more of:

    (a)the occurrence of a “Default Event” as defined in the Business Finance Agreement;

    (b)[Solar Shop’s] failure to pay any Westpac Debt or Solarise Debt when due or within any applicable grace period;

    (c)the Westpac Debt or Solarise Debt becoming due and payable before its due date other than at [Solar Shop’s] option.

    “Westpac Debt” means the aggregate of all of the amounts owing from time to time on any account by [Solar Shop] to Westpac pursuant to the Business Finance Agreement, or pursuant to the Westpac Securities, whether actual or contingent, present or future including, without limitation, all of the facilities under the Business Finance Agreement;

    “Westpac Securities” means those securities listed as security the facilities provided by Westpac to [Solar Shop] under the Business Finance Agreement;

    (2)at clause 4 titled “Subordination” that:

    4.1The Lenders and [Solar Shop] agree that the Solarise Debt is subordinated to the Westpac Debt.

    4.2Until:

    4.2.1the Westpac Debt has been paid or satisfied in full; or

    4.2.2the Solarise Debt is repaid with the written consent of Westpac, payment by [Solar Shop] to Solarise of the Solarise Debt or any part of it is postponed, despite any other arrangement to the contrary, except for the Permitted Payments and subject to this Deed.

    (3)at clause 5 that Solar Shop agrees with each of Solarise and Westpac that it may not, without Westpac’s prior written consent and for so long as any of the Westpac Debt (adopting the definition from the Subordination Deed) remains outstanding, among other things, make any payment in satisfaction of the Solarise Debt other than the Permitted Payments; and

    (4)at clause 6 that Solarise agrees with Solar Shop and Westpac that, so long as any of the Westpac Debt remains outstanding, Solarise must not, without Westpac’s prior written consent or otherwise as permitted by the Subordination Deed, among other things, receive any payment or thing of value in satisfaction of any part of the Solarise Debt other than the Permitted Payments or demand, sue for or take any other action to cause or enforce payment of any of the Solarise Debt except the Permitted Payments.

11. Clause 8 of the Subordination Deed titled “Permitted Payments” was central to the issue raised both before the primary judge and on appeal about the time at which the Solarise Loan fell due for repayment.  It relevantly provided:

    8.1      If, at any time, all of the following conditions are satisfied:

    8.1.1no Westpac Debt is due and unpaid; and

    8.1.2no default under the Business Finance Agreement subsists; and

    8.1.3neither Solarise or [Solar Shop] are in breach of the provisions of this Deed; and

    8.1.4no Insolvency Event has occurred in respect of Solarise or [Solar Shop]; and

    8.1.5no Subordination Default subsists,

    then [Solar Shop] may pay, repay, satisfy or discharge Solarise, and Solarise may receive and retain payment of the amounts contemplated in the Amortisation Schedule in the manner and at the times contemplated by the Amortisation Schedule (“Permitted Payments”).

    8.2      To avoid doubt:

    …

    8.2.2If [Solar Shop] does not make a capital payment (“Unpaid Capital Payment”) on the date which that capital payment is permitted to be made in accordance with the Amortisation Schedule (“Relevant Capital Payment Date”), [Solar Shop] may make the Unpaid Capital Payment at any time following the Unpaid Capital Payment Date, provided:

    (a)the conditions set out in this clause 8 are satisfied; and

    (b)[Solar Shop] notifies Westpac in writing within 2 business days of the date when the Unpaid Capital Payment is actually made.

    8.3Notwithstanding anything else in this Deed or the Loan Agreement, any payments by [Solar Shop] in connection with the Solarise Debt (whether to Solarise, Harbert or anyone else) which are not Permitted Payments must not be made without Westpac’s prior written consent (which will not be unreasonably withheld or delayed).

12. The Amortisation Schedule referred to in cl 8 provided:

    Note:  The interest payments set out in the table above have been calculated on the basis that capital payments will be made on the Dates of Payment.  [Solar Shop] may, but is not obliged to, make the capital payments on the Dates of Payment.  If [Solar Shop] does not make any capital payments, or makes reduced capital payments, the interest payable on each Date of Payment will increase accordingly.

    In addition, if the amount of the interest payments are increased from time to time, as a result of the [non] payment of capital, the total amount payable by [Solar Shop]to Solarise will increase over the term of the Loan such that the total amount permitted to be paid on 20 May 2011, when taken together with the total permitted payments on each of the other Dates of Payment, will need to increase to allow [Solar Shop] to make a payment to Solarise of the total amount of capital due and payable under the Loan Agreement together with all interest accrued in accordance with the terms of the Loan Agreement, provided that the total capital payable will not exceed $5,178,682.13.

    Renewable energy certificates

13. Renewable energy certificates (RECs) assumed some importance both in the proceedings before the primary judge and on appeal.  They are a form of incentive under a scheme established by the Renewable Energy (Electricity) Act 2000 (Cth) (Renewable Energy Act).  From about January 2011 the RECs which were at issue in the proceedings became known as “small scale technology certificates”, but Solar Shop continued to refer to them as RECs.

14. Relevantly s 26 of the Renewable Energy Act provides that: a REC is not valid until it has been registered; when the Regulator has been notified that a REC has been created, it must determine whether the REC is eligible for registration; and if the Regulator determines that a certificate is eligible for registration, it must create an entry for the certificate in the relevant register and record the person who created the REC as its owner.

15. Customers purchasing a solar system from Solar Shop were entitled to RECs upon installation of the system based on the power generation capacity of the system installed. That is, the higher the capacity the greater the entitlement. Once generated, RECs could be sold to a clearing house established under the Renewable Energy Act or privately to a purchaser for a negotiated price.

16. Solar Shop agreed with its customers at point of sale to purchase their RECs in exchange for a reduction in the purchase price of the system.  Solar Shop would later sell the RECs so acquired, endeavouring to do so at a profit.  However, there was a risk that the clearing house or market price would decline in the period between Solar Shop’s entry into the consumer contract with its customer and the time, usually several months later after installation was complete, when the consumer became entitled to the RECs and could assign them to Solar Shop.

17. The effect of the RECs scheme was that Solar Shop had two income streams:  the amounts paid by consumers for the solar systems they purchased and the amounts derived from the sale of RECs.

    Westpac reviews

18. On 9 December 2010 Solar Shop informed Westpac that its operating profit had declined significantly and that, as at 31 December 2010, it was likely to be in breach of covenants in the 2010 Facility Agreement.  This position was confirmed by letter dated 15 February 2011 when Solar Shop informed Westpac that it was in breach of three of the four financial covenants in cl 12.12 of the 2010 Facility Agreement.

19. On 12 January 2011 Westpac appointed John Hart of Ferrier Hodgson to undertake an independent review of Solar Shop’s financial performance and status.  The purpose of the review was to enable Westpac to obtain a better understanding of Solar Shop and to consider:

    (1)Solar Shop’s:

    (a)immediate and medium term cash flow requirements;

    (b)ability to continue to trade and to meet its obligations;

    (c)current available strategies to assist with a turnaround in profitability and cash flow; and

    (2)the alternatives available to Westpac in the event that it needed to realise its security.

20. On 28 February 2011 Ferrier Hodgson reported to Westpac (First Ferrier Hodgson Report).  In its executive summary Ferrier Hodgson reported, among other things, that:

    (1)between July 2010 and 31 December 2010 Solar Shop’s growth had slowed and it had incurred an operating loss after tax of $1 million;

    (2)Solar Shop recognised revenue on completion of installations rather than on receipt of a confirmed order with deposit paid;

    (3)as at 31 December 2010 Solar Shop had a backlog of over 3,600 installations which represented future revenue of over $70 million;

    (4)in the six months to 31 December 2010 installations had averaged 676 per month against orders received of 879 per month.  Had installations kept pace with the rate of sales, revenue may have been approximately $20 million higher and a net profit after tax of approximately $3 million achieved compared with the loss of $1 million;

    (5)evidence of mismanagement or fraud had begun to emerge in Sunsavers;

    (6)an internal review of Sunsavers completed by Solar Shop in February 2011 indicated that estimated EBITDA had been overstated by approximately $3.2 million;

    (7)the decline in net profit before tax was mainly due to:

    (a)the decline in revenue and gross margin percentage for Sunsavers;

    (b)reduced gross margin percentage for Solar Shop offsetting revenue growth;

    (c)increased costs in anticipation of growth not covered by growth in gross margins; and

    (8)as at 31 December 2010 Solar Shop had cash on hand of approximately $5.5 million.  The cash position improved in the six months from 1 July 2010 to 31 December 2010 as a result of liquidation of RECs, the deferment of approximately $3.2 million in creditor payments through arrangements with three major suppliers and the Australian Taxation Office (ATO), reduction in accounts receivable and reduction in solar rebates receivable.

21. The First Ferrier Hodgson Report contained a number of recommendations including that Westpac:

    (1)“give strong consideration to continuing to support” Solar Shop, at least in the short term including by providing additional guarantee and forex requirements sought by Solar Shop, subject to Solar Shop achieving satisfactory performance criteria based on its forecast;

    (2)give consideration to continuing to reserve its rights in respect of the existing breaches of covenants;

    (3)monitor Solar Shop’s performance on a monthly basis, including achievement of its required rate of installations;

    (4)notify Solar Shop that it should not make any repayment of the Solarise Loan without Westpac’s approval;

    (5)assess Solar Shop’s financial position as at 30 April 2011, including assessment of the then current order backlog and forecasts for the balance of 2011;

    (6)subject to Solar Shop’s financial performance, give consideration to the extent to which it may permit a part payment of the Solarise Loan; and

    (7)make any repayment of the Solarise Loan subject to a reduction in Westpac’s own debt to at least $3 million to improve Westpac’s security position.

22. On 28 April 2011 Solar Shop informed Westpac that it was “not in compliance” with the same three financial covenants in cl 21.2 of the 2010 Facility Agreement as had been notified in December 2010 and February 2011.  On 27 May 2011 Westpac wrote to Solar Shop confirming the breaches of covenants, reserving its rights to take action in relation to those breaches, noting that it did not waive the “events of default” and that as a result of those breaches all facilities provided by Westpac to Solar Shop “are on demand”.

1. On 19 July 2011 Ferrier Hodgson provided Westpac with a second independent business review of the Solar Shop group performance in the period from 1 January 2011 to 30 June 2011 (Second Ferrier Hodgson Report).  In that report Ferrier Hodgson:

   (1)noted a number of issues about the group’s performance including that revenues were down by $13 million, EBITDA was $7 million below the revised budget, there were continued below budget performances as installation targets were not met for a variety of reasons and RECs were being sold at a price less than had been paid for them; and

   (2)made recommendations including that, subject to compliance with certain conditions including that Harbert and/or other shareholders immediately inject $5 million into the business and that there be deferral of the current repayment proposal of the Solarise Loan, Westpac “may consider granting the request to 12 month deferral of debt amortisation” but that it should not “increase the overdraft facility from $1.0m to $3.0m, the deferral of vendor loan payments will alleviate the requirement for this funding”.

2. Westpac did not agree to increase the overdraft limit nor did it agree to waive payment of the amortisation payments of $500,000 per quarter in relation to the tranche F facility (see [10] above).

   The appointment of voluntary administrators and of the Liquidators

3. On 21 October 2011 the directors of Solar Shop appointed voluntary administrators.  On 25 November 2011 a meeting of creditors resolved that Solar Shop should be wound up and the Liquidators were appointed as joint and several liquidators.

   THE FIRST INSTANCE PROCEEDINGS

4. The Respondents were each suppliers to Solar Shop. The Liquidators commenced proceedings against each of those entities seeking to recover amounts for unfair preferences pursuant to s 588FF of the Corporations Act as follows:

   ·in proceeding SAD261/2014 against Kerry J (Kerry J Proceeding) the sum of $417,075.26 or, in the alternative, the sum of $327,449.46;

   ·in proceeding SAD275/2015 against Wuxi (Wuxi Proceeding) the sum of US$1,814,066.80; and

   ·in proceeding SAD276/2014 against SMA (SMA Proceeding) the sum of €2,445,850.21 or, in the alternative, €1,800,797.89,

   (collectively, First Instance Proceedings).

5. By reason of the definitions in ss 9, 513B and 513C of the Corporations Act, the relation back day for Solar Shop is 21 October 2011 and the relation back period is 22 April 2011 to 21 October 2011. The payments received by each of Kerry J, Wuxi and SMA in that period which were the subject of the First Instance Proceedings are:

   The Liquidators contended that Solar Shop was insolvent at the time it made each of these payments and the Respondents disputed that was so.

6. On 25 May 2016 orders were made in each of the First Instance Proceedings pursuant to r 30.01 of the Federal Court Rules 2011 (Cth) (Rules) that a separate question be heard and determined which was in the following terms: “did [Solar Shop] become insolvent within the meaning of s 95A of the Corporations Act and, if so, when?”. The Court also ordered that the hearing of the separate question in each of the First Instance Proceedings was to take place concurrently.

7. On 24 November 2017 the primary judge delivered judgment on the separate question. His Honour found that the Liquidators had not proved that Solar Shop was insolvent as at 31 January 2011, 30 April 2011 and 31 May 2011 and determined the separate question in each of the First Instance Proceedings by holding that Solar Shop had become insolvent by 31 July 2011: reasons at [366]‑[367]. It is from those findings that the appeals and cross appeals that are now before the Court are brought.

   The primary judges decision’

8. Before the primary judge, the Liquidators sought a finding that Solar Shop was insolvent by not later than either 31 January 2011; in the alternative, 30 April 2011; or, further in the alternative, 22 May 2011. The primary judge noted that SMA and Kerry J contended for different dates: SMA contended that Solar Shop had not become insolvent until 29 July 2011 and possibly not until 4 August 2011 and Kerry J submitted that it had not become insolvent until 9‑16 August 2011. The primary judge expressed the view that, because of the terms of the separate question, the Court was not confined to any of those dates and did not accept the Respondents’ submission that the Liquidators were confined to the three dates they had nominated: at [6].

9. The evidence before the primary judge was entirely documentary.  The Liquidators, Kerry J and SMA each obtained reports from forensic accountants.  Relevantly, the Liquidators obtained four reports from Brian Morris and SMA obtained two reports from David Lombe, one dated 4 December 2015 (First Lombe Report) and the second dated 9 September 2016 (Second Lombe Report). However, the parties agreed that, instead of the Court dealing with the numerous objections that were made to the forensic accountants’ reports, they would have the “status of an aide to the submissions of the party retaining them” which, his Honour observed, is contemplated by r 5.04(3) item 19 of the Rules and is consistent with the approach adopted by Gordon J in Noza Holdings Pty Limited v Commissioner of Taxation [2010] FCA 990: at [7].

10. Having observed that the Liquidators bore the onus of establishing Solar Shop’s insolvency, the primary judge considered each of the matters relied on by the Liquidators to establish Solar Shop’s insolvency as at the dates for which they contended.

    The Solarise Loan

11. The first matter that the primary judge considered was the Solarise Loan because, central to the Liquidators’ case, was their contention that the Solarise Loan became due and payable on 22 May 2011 and that Solar Shop did not have the resources, nor any plan, at any time during 2011 to repay that loan when it did so.  It was common ground that the question of whether the Solarise Loan became due and payable on 22 May 2011 turned principally on whether it remained subordinated after that date to the Westpac Debt.  At [83] of the reasons, his Honour noted that that question gave rise to the following issues:

    (a)did the Subordination Deed operate to make the Solarise Loan subordinate to the Westpac Debt only to 22 May 2011?

    (b)alternatively, did Westpac agree in May 2011 to [Solar Shop] executing an agreement with Solarise which rendered the whole of the Solarise Debt then due and payable on demand?

    (c)alternatively, did the Subordination Deed, by reason of the principles of abandonment, cease to be “valid and efficacious” as and from the time of the tripartite negotiations involving Westpac, Solarise and [Solar Shop] in October 2010 in relation to the negotiation of the new facility agreement?

    (d)alternatively, did an indemnity obligation in an agreement made between [Solar Shop] and Solarise in May 2011 give rise to a new debt which was immediately due and payable on [Solar Shop's] failure to pay the Solarise Debt on 22 May 2011?

12. In relation to the first issue, the primary judge found that the Subordination Deed did not operate to make the Solarise Loan subordinate to the Westpac Debt only until 22 May 2011. His Honour held that, while Solar Shop had been authorised to make the Permitted Payments which would have had the effect of repayment of the Solarise Loan by 22 May 2011, it was not required to do so. The parties thus contemplated that the Solarise Debt may continue past 22 May 2011. The primary judge found that, as Solar Shop did not make the Permitted Payments to Solarise before 22 May 2011, it could only make a payment after that date with Westpac’s prior written consent, which could not be unreasonably withheld. Accordingly the primary judge concluded that this basis for the claim that the Solarise Loan was due and payable on 22 May 2011 failed: at [96]‑[97].

13. In relation to the second issue, the primary judge found that cl 8.3 of the Subordination Deed did not have the effect of an agreement by Westpac to Solar Shop entering into a fresh agreement with Solarise which, in turn, had the effect of making the Solarise Debt due and payable on demand: at [110]‑[113].

14. In relation to the third issue, the primary judge rejected the Liquidators’ contention that Solar Shop, Westpac and Solarise were, from the time of entry into the 2010 Facility Agreement, proceeding on the basis that the Subordination Deed was no longer operative and had been abandoned: at [128]‑[133].

15. The fourth issue concerned the effect of cl 9 of an agreement referred to by the primary judge as the 2011 Solarise Agreement which was the subject of an email dated 19 May 2011 from Mr Mourney to Mr Thornton and Jeremy Steele, a director of Solar Shop appointed as a representative of Harbert.  Mr Mourney’s email attached the 2011 Solarise Agreement and noted that he had it “drafted as discussed to allow us to continue past 22 May if required”.  Clause 9 of the 2011 Solarise Agreement was titled “Indemnity” and provided:

    [Solar Shop] must indemnify Solarise against all claims and all losses, costs, liabilities and expenses incurred by Solarise, arising wholly or in part from an act or omission of [Solar Shop] or its employees, agents or contractors in relation to this agreement.

16. The primary judge rejected the Liquidators’ submissions that cl 9 of the 2011 Solarise Agreement created an obligation, distinct and separate from Solar Shop’s debt obligation, which was not subject to the Subordination Deed and that as soon as Solar Shop failed to pay the Solarise Debt, after demand was made for it on 27 May 2011, Solar Shop’s liability under the indemnity in cl 9 crystallised. The primary judge referred to his earlier finding that the Subordination Deed continued in force and that Solarise remained bound by cl 6 of that deed from receiving any payment in satisfaction of its debt, taking any action to recover its debt or receiving any money from Solar Shop directly or indirectly. Thus, even if cl 9 of the 2011 Solarise Agreement gave rise to a separate obligation, it could not have been enforced by Solarise: at [135]‑[136].

17. The primary judge concluded that Solar Shop’s liability to Solarise remained subordinated to the amounts owing to Westpac and, that being so, the Solarise Loan did not become due and payable while the indebtedness to Westpac remained outstanding. For that reason the Solarise Debt could not be taken into account at any of the alternate dates of insolvency for which the Liquidators contended: at [136].

    Solar Shop’s liability to the ATO

18. The primary judge then turned to consider Solar Shop’s liability to the ATO, which the Liquidators contended was another matter which resulted in a finding of insolvency at each of the alternate dates propounded by them.

19. Having considered the evidence, the primary judge found that it was apparent that Solar Shop was unable to meet its taxation obligations, it did not make payment arrangements with the ATO until the amounts owing were overdue and, when it did make such arrangements, it often defaulted: at [154]. The primary judge was satisfied that the Liquidators’ inclusion of Solar Shop’s liability to the ATO at each of the alternative dates at which they contended Solar Shop was insolvent was appropriate: at [170].

    Overview of the Liquidators’ claims of insolvency

20. Before the primary judge, the Liquidators sought to prove Solar Shop’s insolvency as at each of the dates on which they contended that it was insolvent by reference to the debt position at a succession of month ends.  For that purpose the Liquidators relied on an “aide memoire”, marked as exhibit P4, which analysed Solar Shop’s debt position at month end for each month in the period January to August 2011 (Aide Memoire).  The Aide Memoire included for each month the aggregate of Solar Shop’s overdraft balance, the amounts said to be due to its 14 principal trade creditors, the debt to the ATO and, for the period 31 May to 31 August 2011, the amount of the Solarise Debt said to be due and payable.

21. At [173]‑[176] of the reasons, the primary judge made the following observations about the Aide Memoire:

    Although [Solar Shop] had hundreds of trade creditors, the Aide Memoire records [Solar Shop’s] indebtedness to only 14.  The Liquidators selected these creditors as a matter of convenience because they considered [Solar Shop’s] own Aged Creditor Reports in respect of all the creditors to be unreliable.

    The Liquidators relied on the figures in the column headed “Adjusted Overdraft Account Less Stated Debts” as indicating the debts due and payable at the various month ends which [Solar Shop] was unable to pay.

    The Respondents challenged the accuracy of a number of the figures in the Aide Memoire and pointed to other features not taken into account by the Liquidators.  I will refer to them below.  The Respondents accepted, however, the accuracy of the figures in the column headed “Overdraft Account (Actual)”.  Those figures are derived from the Westpac account statements.

    In these reasons, I will adopt the framework set out in the Liquidators’ Aide Memoire.  It will be necessary in addition to have regard to the circumstances more generally concerning [Solar Shop’s] debts and the resources available to it, especially given that the Liquidators did not provide a cash flow analysis for [Solar Shop] for any of the three dates by which they contended that it was insolvent.

22. The Aide Memoire provided:

23. The primary judge considered Solar Shop’s solvency as at the three dates on which the Liquidators contended it was insolvent, 31 January 2011, 30 April 2011 and 22 May 2011, and found that the Liquidators had failed to establish that it was insolvent at any of those dates.

    31 January 2011

24. The primary judge noted at [177] that as at 31 January 2011 the Liquidators relied on the following indicia of insolvency:

    (a)[Solar Shop] was in breach of its banking facilities, rendering its bank debt of approximately $17 million payable on demand;

    (b)more than $1.2 million of amounts due to the 14 significant trade creditors were outside terms and accordingly overdue (in addition to those which were current and not overdue);

    (c)[Solar Shop] owed $2,784,112.47 to the ATO and was unable to pay that amount without a payment plan;

    (d)the combined effect of overdue creditors and the outstanding debt to the ATO was that [Solar Shop] owed $3,854,907.68 which was outside terms, and $2,854,907.68 in excess of its overdraft limit;

    (e)[Solar Shop] had sustained a trading loss of $1.946 million in January 2011 (although the evidence to which the Liquidators pointed to support this proposition was [Solar Shop’s] trading performance for the first seven months of the 2011 financial year);

    (f)       the forecast profits from one arm of the business (Sunsavers) were overstated;

    (g)by 31 January 2011, it was apparent that [Solar Shop] had no resources available to meet the repayment of the Solarise Loan of over $5.2 million which was to fall due on 22 May 2011;

    (h)by 31 January 2011, [Solar Shop’s] shortage of working capital was endemic and thereafter it was outside terms in paying its creditors and in paying the debt to the ATO.

25. The primary judge made the following findings:

    (1)while Solar Shop was in breach of covenants in the 2010 Facility Agreement it continued to have access to the facilities provided by Westpac; the monies advanced pursuant to the 2010 Facility Agreement had not been declared due and payable by Westpac; and, while the breach of covenants put Solar Shop in a vulnerable position, that was not a significant indicia of insolvency:  at [188];

    (2)as at 31 January 2011 amounts were overdue to seven of the 14 trade creditors included in the Aide Memoire.  The Respondents accepted that amounts were due to each of these creditors but disputed that the amounts were outside trading terms in relation to five of them, namely Optimum Media Direction Pty Limited (Optimum), Fasteners Australia Pty Limited (Fasteners), BlueScope Distribution Pty Limited (BlueScope), Lawrence & Hanson Group Pty Ltd (L&H) and Matrin Australia Pty Limited (Matrin).  The primary judge undertook the task of identifying the terms of trade between Solar Shop and each of those five trade creditors in order to establish whether the amounts shown as owing to each of them in the Aide Memoire as at 31 January 2011 were in fact due.  His Honour found that:

    (a)the Liquidators had not proved Solar Shop’s trading terms with Optimum such that a finding could not be made that Solar Shop was outside agreed payment terms in relation to the amount of $86,922.50 due to Optimum as at 31 January 2011 or at either of the alternative dates for which the Liquidators contended:  at [194];

    (b)Solar Shop was outside the agreed payment terms in respect of the amount of $130,000 due to Fasteners as at 31 January 2011:  at [200];

    (c)BlueScope had reached some agreement with Solar Shop which was reflected in Solar Shop’s pattern of payment to it such that his Honour was not willing to find that Solar Shop was outside the agreed trading terms in relation to the amount of $292,000 due to BlueScope as at 31 January 2011 or the amounts due as at any of the alternative dates relied on by the Liquidators:  at [206];

    (d)Solar Shop was outside the agreed payment terms in relation to the amount of $141,976.67 due to L&H as at 31 January 2011:  at [211]; and

    (e)there was an implied agreement between Solar Shop and Matrin for extensions of time within which Solar Shop was to pay Matrin’s accounts.  Thus his Honour was not satisfied that the amount of $35,860 was due and payable to Matrin:  at [217];

    (3)in relation to the January 2011 trading loss of $1.946 million, the primary judge was of the opinion that the fact that a loss is incurred in one month is not of itself a strong indicator of insolvency.  After making a number of observations about trading in January, his Honour noted that the same profit and loss statement on which the Liquidators relied to support the trading loss also showed that Solar Shop’s net profit after tax for the 12 month period ending in January 2011 was $538,000.  The primary judge concluded that he did not regard the trading loss for January 2011 as a significant factor:  at [220]‑[223];

    (4)the primary judge accepted that the apparent fraud in the Sunsavers business had a significant impact on Solar Shop at a time when it was experiencing other cash flow difficulties but noted that the Liquidators did not suggest that its effect required an adjustment to the figures in the Aide Memoire at any of the dates upon which they relied.  His Honour observed that, instead, it helped to explain the financial position of Solar Shop at the various dates under review:  at [229]; and

    (5)given the earlier finding that the Solarise Loan was not due and payable on 22 May 2011, the position in relation to it as at 31 January 2011 did not have to be considered.

26. Having regard to those findings the primary judge found that the amount for “Adjusted Overdraft Less Stated Debts” to be included in the Aide Memoire as at 31 January 2011 should be $2,899,344.94.

27. The primary judge then turned to consider whether Solar Shop was insolvent as at 31 January 2011.  At [237] his Honour accepted that in determining that question it was appropriate to have regard to all of the resources available to a company by which it could meet its debts and said:

    Even if it could be said that the whole of the trade receivables and REC receivables were not immediately available to [Solar Shop] to meet its debts, it seems probable that a sufficient amount could have been realised within a relatively short time so that [Solar Shop] could meet the due debts of $2.9 million.  Some of the cash and cash equivalents could also have been used for that purpose.

1. The primary judge was not therefore satisfied that the Liquidators had shown that Solar Shop was insolvent as at 31 January 2011.

   30 April 2011

2. In relation to 30 April 2011 the primary judge noted at [242] that, in addition to those matters relied on by the Liquidators as at 31 January 2011 to prove insolvency, they relied on:

   (a)by 30 April 2011, [Solar Shop’s] debt of $2.444 million to another supplier, Bosch Solar Energy AG (Bosch), had become overdue and was never brought back within terms;

   (b)the adjusted overdraft account less stated debts figure in the Aide Memoire was now $5,471,520.66; and

   (c)the spot price for RECs had fallen from approximately $38 to $25 during the first two weeks of April, with the effect that [Solar Shop’s] assets had declined materially, as had its proceeds from ongoing trading.

3. In relation to the amount due to Bosch Solar Energy AG (Bosch), the primary judge was satisfied that Bosch’s terms required payment of a 10% deposit and payment in full of the balance within 60 days of shipment. The primary judge found that there was an uncertainty about the dates of shipment from which the 60 days commenced to run which “precluded satisfaction that the Bosch debt on which the Liquidators relied was due and payable as at 30 April 2011, although it was probable that it had become due by at least 16 May 2011”. Thus the primary judge did not consider that the Bosch debt should be taken into account in determining Solar Shop’s solvency as at 30 April 2011: at [249]‑[252].

4. The primary judge considered the amount owing to the 14 trade creditors recorded in the Aide Memoire as at 30 April 2011 and noted that the Respondents disputed that the amounts shown as owing to Optimum, Fasteners, BlueScope, L&H and Matrin were due and payable as at that date. For the reasons already given in relation to 31 January 2011 his Honour was not satisfied that the amounts of $467,000, $476,000 and $229,000 were due and payable to Optimum, BlueScope and Matrin respectively. However his Honour was satisfied that the amounts of $105,000 and $276,000 were due and payable to Fasteners and L&H. Accordingly his Honour found that the trade creditors figure for 30 April 2011 in the Aide Memoire should be $2,825,155.59. The primary judge also found that the amount drawn on the overdraft should be excluded because it was not due and payable as at 30 April 2011. Thus the figure for the “Adjusted Overdraft Account Less Stated Debts” included in the Aide Memoire should be $3,787,848.01 or $3.8 million in round figures: at [257]‑[259].

5. The primary judge then turned to consider whether Solar Shop had resources available to it as at 30 April 2011 to meet debts of $3.8 million.  His Honour considered cash at bank, cash equivalents, trade receivables and RECs receivables, the latter of which assumed some importance to the determination of the issue.

6. In relation to the RECs receivables at [262]-[264] his Honour said:

   [Solar Shop’s] balance sheet in its management accounts showed that the RECs receivable amounted to $6.369 million.  It appears that this figure was based on an average price for RECs of $36 whereas at the end of April, the spot price was $26.  This suggests that the value of the RECs at the end of April 2011 was not $6.369 million but $4.6 million.  It also meant that [Solar Shop] could dispose of the RECs only by incurring a loss. 

   It is convenient to record here that the spot price of RECs continued to decline reaching a low of $19.75 on 21 June 2011 and did not return to $26 until 8 August 2011.

   I will refer in relation to later months to some matters bearing upon the extent to which the RECs were readily saleable.  For the present, it is sufficient to note that sale of the RECs held at 30 April 2011 would have been more than sufficient to meet the debts which were due and payable at that date.

7. The primary judge concluded that when account was taken of the trade receivables, RECs receivables and some of the cash resources, it could not be concluded that the Liquidators had proved that Solar Shop was insolvent as at 30 April 2011.

   22 May 2011 and 31 May 2011

8. The final date relied on by the Liquidators was 22 May 2011, a date which was selected because that was when, on the Liquidators’ case, the Solarise Debt became due and payable.

9. The primary judge noted that he had found that the Solarise Debt did not become due and payable on 22 May 2011, because it remained subordinated to the Westpac Debt, and that the Liquidators had not provided any other analysis of the position as at 22 May 2011 that would warrant a finding that Solar Shop was otherwise insolvent as at that date.  That being so, the primary judge considered the position as at 31 May 2011, for which there was some financial evidence and thus some analysis was possible.

10. The primary judge commenced his analysis of the position as at 31 May 2011 with the amounts said to be overdue as at that date to the 14 trade creditors in the Aide Memoire and which were recorded at [271] as follows:

    Optimum Media         (rounded) $467,000.00

    Fasteners                   (rounded) $108,000.00

    Wuxi  (rounded) $1,199,000.00

    BlueScope                 (rounded) $495,000.00

    IPD Group                 (rounded) $263,000.00

    L&H  (rounded) $250,000.00

    Matrin  $68,875.84

    Enerdrive  $180,180.00

    Clenergy  $181,484.09

    Bosch  $2,444,155.59

    Total  $5,656,695.22

11. For the reasons already given the primary judge excluded Optimum, BlueScope and Matrin from the analysis but retained Fasteners and L&H.  His Honour had already accepted that the Bosch debt was due and payable as at 22 May 2011 and thus also found that it was due and payable as at 31 May 2011.

12. That left for consideration the debts said to be due to Wuxi, IPD Group Limited (IPD Group), Enerdrive Pty Ltd (Enerdrive) and Kerry J.  His Honour concluded that Solar Shop’s debt to Wuxi was due and payable on or about 26 May 2011 and that the debts due to Wuxi, Enerdrive and Kerry J were properly included in the Aide Memoire, but found that the debt due to IPD Group should be excluded.

13. As it is an issue that assumed some importance on the cross appeals, it is useful to provide some further detail of the primary judge’s findings in relation to the debt due to Wuxi. The primary judge noted that Wuxi’s trading terms were “100% T/T net 90 days from B/L date” which he understood to mean that payment was required in full within 90 days of the bill of lading date. His Honour observed that Wuxi’s invoices did not include a bill of lading date but did include an “ETD” or “estimated time of departure” date and that Solar Shop had been generally compliant with Wuxi’s terms of trade in late 2010 and early 2011: at [273]‑[275].

14. The Liquidators relied on an invoice issued on 23 February 2011 for US$1,244,880 which was due and payable on or about 26 May 2011 and which was paid by Solar Shop in two equal instalments on 17 and 24 June 2011 respectively.

15. Before the primary judge SMA submitted that the payment of $1,199,000 should not be regarded as outside terms as at 31 May 2011 because Solar Shop had a payment arrangement in place with Wuxi which was evident from an email exchange between Mr Thornton and Wuxi in December 2010.  However, the primary judge found that the payment plan referred to by Mr Thornton in his email was not proved in evidence.  At [279]‑[280] his Honour said:

    I accept that this exchange evidences Wuxi’s agreement to a payment plan in respect of an amount then due to it (and probably explains the late payment of the debt due in January to which I referred earlier).  However, I do not consider that the exchange can reasonably be understood as evidencing an agreed departure from Wuxi’s terms of trade in respect of its subsequent supplies.  Mr Thornton’s reference to “near term” cash restraints suggests that he was seeking only some short term relaxation of Wuxi’s terms of trade, as do the reasons he gave for the request.  I also note in this respect that [Solar Shop] did not conduct itself as though it had a payment plan:  on the contrary, it complied with Wuxi’s usual terms of trade.

    It is also pertinent to record that on 1 June 2011, Mr Thornton proposed to Wuxi that it accept the transfer of RECs “over the next 45 days at a risk adjusted discount cash flow” in exchange for a payment plan.  Wuxi responded by asking for the proposed payment schedule.  That exchange is inconsistent with there having been an existing payment plan.  There is no evidence that [Solar Shop] and Wuxi later agreed upon a payment plan, and I reject the submission of counsel for SMA to the contrary.  The best I think that can be said is that given the history, [Solar Shop] may have had some prospect of negotiating a payment plan with Wuxi, but that does not alter the circumstance that its debt to Wuxi was due and payable by on or about 26 May 2011.

16. The primary judge found that, upon excluding the amounts due to Optimum, BlueScope, Matrin and IPD, the Solarise Debt and the amount that Solar Shop had drawn down on the overdraft, the figure for the “Adjusted Overdraft Account Less Stated Debts” should be $5,887,223.63 or in round terms $5.9 million: at [293]‑[294].

17. The primary judge then considered whether Solar Shop had sufficient resources available as at 31 May 2011 to meet the debts which were due and payable. His Honour noted that the RECs, which were valued in the balance sheet at $12.704 million based on an average cost of about $36.00 per REC where the average spot price as at 31 May 2011 was $25.15, could be sold but that Solar Shop would have experienced difficulty in doing so quickly. Based on Solar Shop’s sales of RECs during 2011 his Honour concluded that the RECs were liquid to an extent but that there were limitations on its ability to sell them quickly: at [307]‑[310].

18. The primary judge found that as at 31 May 2011 Solar Shop had approximately $1.7 million in cash together with whatever amount could be realised from trade and other receivables and the RECs receivables to meet debts then due and payable of $5.9 million.  His Honour noted that the question was not just whether Solar Shop was able to pay its debts but whether, ignoring temporary illiquidity, it was able to do so when they were due and payable.  His Honour said that, while it can be accepted that there may be a distinction between a failure to pay debts when due and an inability to pay them, in this case, subject to one qualification, the distinction was not real.  His Honour found that the effect of the evidence was that Solar Shop “was willing to pay its debts if only it could”.  His Honour addressed the “qualification” at [314] as follows:

    It is evident that [Solar Shop] was reluctant to sell the RECs when that would mean that it would incur a loss.  That is understandable.  I take into account therefore that its omission to sell all available RECs by 31 May should not be regarded as an inability to sell them, even if there were some limitations on their liquidity.

19. The primary judge concluded that, even taking into account the limitations on the saleability of RECs, they were sufficient to meet the debts due and payable at 31 May 2011 and that, while it was understandable Solar Shop was reluctant to sell them, the RECs were an asset which could be sold to meet its debts.  Accordingly the primary judge held that the Liquidators had not proved that Solar Shop was insolvent as at 31 May 2011.

    Solar Shop’s solvency as at 31 July 2011

20. Having considered and rejected each of the alternatives put by the Liquidators as dates on which Solar Shop was insolvent, the primary judge considered whether Solar Shop was insolvent as at 31 July 2011.  This date was selected because of SMA’s contention by reference to the “report of Mr Lombe”, that Solar Shop had become insolvent by 29 July 2011 or 4 August 2011.

21. The primary judge undertook his analysis as at 31 July 2011 by reference to the Aide Memoire.  His Honour excluded the debts owing to Optimum and IPD Group, the overdrawn balance on the overdraft and the Solarise account and found that the figure in the column headed “Adjusted Overdraft Account Less Stated Debts” should be $8,364,620.20 or $8.365 million (rounded).

22. In relation to the assets available as recorded in Solar Shop’s management accounts to meet that debt, the primary judge excluded the cash and cash equivalents and reduced the RECs receivables figure to $6.47 million.  The price used for RECs in the balance sheet was not clear.  However, his Honour assumed that it was based on an average price of $36.00 when the spot price of RECs as at 31 July 2011 was $23.00.  He made a reduction to reflect that fact.

23. The primary judge noted that the adjusted RECs receivable figure and RECs receivable CBA figure (“CBA” being a reference to the Commonwealth Bank of Australia) exceeded the “Adjusted Overdraft Account Less Stated Debts”.  His Honour observed that this might suggest that Solar Shop was solvent because it could have recourse to the RECs to meet the debts which were then due and payable.  However, his Honour considered that other factors should be taken into account including:

    (1)the limitations on the liquidity of RECs;

    (2)that the management accounts for the month of July 2011 reported trade creditors totalling $20.17 million, which exceeded the total owing by the 14 trade creditors included in the Aide Memoire.  His Honour found that it was realistic to infer that several of those trade creditors were outside terms;

    (3)Solar Shop’s own cash flow forecast for the period 27 May 2011 to 12 August 2011 which confirmed that its cash flow problems were becoming more evident.  That said the primary judge noted that he understood that the position as at 31 July 2011 was not as severe as the cash flow analysis predicted because Solar Shop had in fact sold 374,300 RECs between 26 May 2011 and 31 July 2011 and held a significant number of RECs, but there still remained a substantial cash flow deficiency as at 29 July 2011;

    (4)Harbert’s pursuit of possible further investment during July and August 2011 never came to fruition.  Relevantly, the primary judge found that during June and July 2011 Solar Shop had the prospect of additional funding from Harbert and Harbert was willing to participate in arrangements for further funding.  However, by 31 July 2011, Harbert’s own conditions had not been satisfied.  The primary judge concluded that as at 31 July 2011 funding from Harbert was not sufficiently certain such that it could be a resource to be considered in relation to Solar Shop’s solvency;

    (5)on 16 June 2011 Solar Shop made a number of requests of Westpac which only acceded to one of those requests, namely an increase in its forex facility to $10 million.  Westpac was prepared to continue its facility pending receipt of the Second Independent Business Review but was otherwise not prepared to provide additional facilities other than in limited ways;

    (6)in the Second Ferrier Hodgson Report Ferrier Hodgson recommended that Westpac’s continued support should be subject to Harbert or other shareholders immediately injecting $5 million into the business.  In addition in the First Lombe Report, Mr Lombe noted that the solvency and future trading of Solar Shop was contingent on it obtaining a cash injection of $5 million from Harbert and Westpac’s continued support and that the absence of either would be fatal to Solar Shop’s solvency; and

    (7)by 31 July 2011 Solar Shop was being harried by other of its creditors.

24. The primary judge thus concluded that Solar Shop was insolvent as at 31 July 2011.

    THE APPEALS AND THE DISCOVERY ISSUE

    Procedural history

25. The appeals were initially set down for hearing for two days commencing on 6 August 2018.

26. On the first morning of the hearing SMA foreshadowed an application to adduce fresh evidence on appeal.  That application concerned one document being the first two pages of an email chain included at tab 83 of part C of the appeal book and which was an email dated 10 June 2011 from Jenny Lu at Wuxi to Mr Thornton (10 June Email).  The balance of the email chain which was included at tab 83 of part C of the appeal book commenced at page 3 (Tab 83 Document).

27. As the Liquidators did not consent to the inclusion of the 10 June Email in the appeal book, later that day SMA filed an interlocutory application in the appeal against it (SMA Appeal) seeking an order that at the hearing of the SMA Appeal the Court receive the 10 June Email into evidence.  SMA also filed an affidavit in support sworn on 6 August 2018 by David Anthony Gordon, a solicitor in the employ of SMA’s solicitors with responsibility for the day to day conduct of the matter on behalf of SMA.  Mr Gordon’s evidence included that the 10 June Email was not in evidence in the First Instance Proceedings, was not discovered in the SMA Proceeding and was not known to SMA until after 6.00 pm on 3 August 2018, the last business day before the commencement of the appeals on 6 August 2018.  Mr Gordon also gave evidence about the relevance of the 10 June Email to the issues in the SMA Appeal including his opinion of the effect that the 10 June Email would have had on the findings made by the primary judge had it been available to and tendered by SMA in the SMA Proceeding.

28. On 7 August 2018 the Liquidators filed and served in each of the appeals an affidavit sworn on that day by Justin David Courtney, a consultant to the Liquidators’ solicitors with the primary conduct of the appeals on behalf of the Liquidators (First Courtney Affidavit).  In that affidavit Mr Courtney explained, among other things, that:

    (1)the Tab 83 Document had been discovered in the SMA Proceeding;

    (2)it was only in the course of the hearing on the preceding day that it had come to his attention that SMA had not had discovery of the whole of the Tab 83 Document and was seeking to adduce the 10 June Email as fresh evidence on appeal;

    (3)nearly two years later he could not specifically recall why he did not include within the tender bundle for trial or make discovery in the SMA Proceeding of the whole of the Tab 83 Document including the 10 June Email;

    (4)having reviewed the discovery made in the Wuxi Proceeding, the whole of the Tab 83 Document, i.e. including the 10 June Email, was discovered in that proceeding; and

    (5)in the time available he had sought out and identified a bundle of emails which were exhibited as “JDC2” to the First Courtney Affidavit and which touched on the topic the subject of the Tab 83 Document and 10 June Email but he was unable to ascertain whether that bundle of emails represented all of the documents on that topic.

29. On 7 August 2018 the appeals were adjourned part heard and orders made for the Respondents to put on any applications they wished as a result of the issues raised by the First Courtney Affidavit.

30. On 20 August 2018 SMA filed an amended interlocutory application in the SMA Appeal and Kerry J and Wuxi each filed an interlocutory application in the appeals to which they were respondents.  In those applications the Respondents each relevantly sought orders that the Liquidators provide further and better discovery in accordance with orders made in the First Instance Proceedings (see [91]-[94] below) and that at the hearing of the appeals and the cross appeals the Court receive further evidence including the 10 June Email and a second email dated 27 July 2011 from Stephanie Wu to Carey Peck which was included in JDC2 to the First Courtney Affidavit (27 July Email).  The Respondents each filed an affidavit in support of their respective interlocutory applications.

31. On 23 August 2018 the Liquidators filed an affidavit sworn by Mr Courtney on that date in each of the appeals (Second Courtney Affidavit).

32. On 24 August 2018 the appeals were listed before the Court.  Orders were made requiring the Respondents to file and serve any further affidavits and any draft amended interlocutory applications and for the Liquidators to file and serve any further affidavits.

1. The Respondents contend that the Liquidators made no reference to trade creditors other than the selected 14 and so it was unfair and prejudicial to the Respondents for the primary judge to then make a finding about those creditors.

2. Whilst the Aide Memoire analysis may have focussed on the 14 identified creditors, the accounts that were before the Court routinely disclosed the sums of all trade creditors, and the primary judge was not obliged to ignore the fact that there were other creditors.  The Respondents relied on the same accounts in asserting the value of assets to which Solar Shop might have had regard to pay its debts as and when they fell due.

3. But more to the point, the primary judge’s inference was limited, referring to the prospect that only “several” other trade creditors may have been outside terms, and his view was supported by Solar Shop’s own statement about squeezed suppliers to which we have referred.  Bearing in mind the nature of the inference drawn and its context, we do not consider the primary judge erred in his conclusion.

4. In any event, even if the primary judge erred in drawing such an inference, we do not consider it to be material to the outcome when viewed in the context of the 31 July 2011 solvency assessment as a whole.  The primary judge appears to have referred to the position of other trade creditors by way of a check as to whether there were matters that might otherwise contradict his findings, rather than as any part of his cash flow analysis.

   Exclusion of potential funding from Harbert

5. The Respondents contend that the primary judge wrongly excluded funding from Harbert as being a resource available to Solar Shop as at 31 July 2011 because that funding was sufficiently certain to be considered an available resource and because the fundraising failed only later and due to the identification of an additional “cash deficit” in August 2011.  They contend that deficit was not something known as at 31 July 2011 and that at that time all indications were that the Harbert funding would be available and significant steps were taken to advance that process during June and July 2011.

6. The submissions from the parties with respect to this aspect of the cross appeal were somewhat cursory.

7. Therefore, it is necessary to set out in some detail the primary judge’s reasons, which in our view indicate that the matter was given close consideration and his Honour’s findings were supported by the evidence.

8. The primary judge commenced by referring to the Solar Shop board meeting of 30 May 2011 at which the board had discussed potential financing options, including raising capital through Harbert.  As we have noted, Mr Steele was the representative of Harbert on the Solar Shop board.  The Investment Committee had significant information before it by way of the May Investment Committee Update, including the cash flow forecast that had been presented to Solar Shop’s board on 30 May 2011.

9. The primary judge recorded that on 17 June 2011 Harbert prepared a memorandum to its investors in which it referred to Solar Shop’s need for additional funding and indicated that it was committed to supporting the business.  Harbert indicated that it was prepared to underwrite an investment shortfall but required a commitment to funding by 30 June.  The memorandum stated that further support from Harbert was subject to “stabilising the relationship with Westpac and Solarise” to ensure the business has sufficient time to track through current issues.

10. The primary judge referred to the indication on 20 June 2011 that the Investment Committee was considering investing a further $5.05 million.  These additional investments were contingent on satisfaction of a number of conditions including a successful capital raising among Harbert’s investors; Westpac’s agreement to increase the overdraft; the sale of RECs to another entity; and the finalisation of a further investment by Mr Ferraretto.  In the end, however, none of those conditions were satisfied (although a sale of some RECs was achieved with the Commonwealth Bank of Australia).

11. On 29 June 2011 Harbert prepared another memorandum for its investors and contemplated a rights issue.  None of Solar Shop’s existing shareholders agreed to participate by further investment and that position was known by 31 July 2011.

12. On 21 July 2011 Mr Steele of Harbert and Solar Shop wrote to Mr Mourney saying, relevantly, that money for investment in Solar Shop should be available in the next 10 days and that there was a “current cash hole”.

13. The primary judge noted that Harbert’s interest in providing a capital injection was confirmed by the fact that it obtained accounting and legal advice.  His Honour also took into account that Harbert continued during July and August to pursue possible further investment but it never eventuated.

14. The primary judge made the following findings (at [346]):  (a) during June and July 2011 Solar Shop had the prospect of additional funding from Harbert; (b) Harbert was willing to be a participant in arrangements for additional funding; but (c) by 31 July Harbert’s own conditions were still not satisfied including the raising of funds from its own investors.  Therefore, the primary judge concluded that further investment by Harbert at 31 July 2011 was not sufficiently certain as a matter of commercial reality so as to constitute a resource properly to be considered in relation to Solar Shop’s solvency.

15. The primary judge also noted that the uncertainty of the position at 31 July 2011 was confirmed by evidence of events occurring shortly after that date.  In particular, it is apparent that Harbert only received subscriptions from its own investors for an amount significantly less than its proposed funding.

16. It is apparent from those reasons that his Honour had regard to the fact that Harbert appeared to be genuine in its attempts to provide a capital injection to Solar Shop but that the conditions attached to the proposals were such that the success could not be considered sufficiently certain.  It is also apparent that, contrary to the submission made by the Respondents, it was not the case that there was certainty until “the identification in August of an additional cash deficit”.  Rather, taking into account the conditions attached, the evidence to which his Honour referred supported his finding that there were real issues as to the inability to secure member interest as at 31 July 2011 and so it was not sufficiently certain as at 31 July 2011 that Harbert would be in a position to provide the proposed investment in Solar Shop. 

17. In our view the primary judge was right to find that, despite Harbert’s best intentions and efforts, there was insufficient certainty as at 31 July 2011 that funding would be available so as to justify treating it as a resource available to Solar Shop.

    Reliance on correspondence with Bosch, SMA and Mitsui

18. The primary judge noted that at 31 July 2011 Solar Shop was being harried by several of its creditors.  His Honour referred to the demands by Bosch which have already been addressed in these reasons (at [563]).  His Honour also referred to correspondence from SMA in which it stated that it would stop shipment on all orders if it did not receive payment of an overdue invoice the following day.  His Honour also referred to correspondence from Mitsui indicating it would require advance payments on certain invoices and that it might delay future shipments due to concerns about Solar Shop’s cash flow.

19. The Respondents submit that the primary judge should not have made such a finding because a company is not insolvent if it chooses not to pay debts in circumstances in which it was otherwise able to do so.  This submission was not developed in any way by the Respondents and the Liquidators did not respond to it in their submissions.

20. The Respondents did not point to evidence that Solar Shop was able to, but was choosing not to, pay Bosch, SMA or Mitsui.  We have rejected the argument that the evidence supported a finding that there was a payment plan between Solar Shop and Bosch.  Otherwise, it is sufficient to say that, even if there was some evidence (not specified on the appeals) that there were arrangements in place with SMA or Mitsui that explained the correspondence to which the primary judge referred, his Honour’s reference to other creditors harrying Solar Shop is supported by and consistent with the statement in Solar Shop’s own document to which we have already referred (part of the July 2011 board pack) that the company had lots of unhappy suppliers who were being squeezed.

21. We reject the Respondents’ argument on this point.

    Use of Mr Morris’ cash flow

22. The Respondents criticise the primary judge’s reference to the Morris report and cash flow analysis on the basis that it was received as submission only.  We have dealt with this argument elsewhere and in the context of the Lombe Reports (cross appeals ground 2) and reject it. The Respondents had the opportunity to critique the report before the primary judge and it is apparent that they did so (see [361] of reasons]).  The primary judge was entitled to have regard to the report.

    Use of the Lombe Reports

23. The Respondents criticise the primary judge’s reference to the Lombe Reports for the purpose of the July solvency assessment.  We have explained why this criticism is unfounded in the context of our reasons dismissing grounds 1 and 2 of the cross appeals.

    Reference to the May Cash Flow

24. The primary judge referred to Solar Shop’s own analysis by way of the May Cash Flow that forecast a cash shortfall of $7.419 million.  The May Cash Flow has been discussed for the purpose of grounds 1 and 3 of the appeals.

25. The Respondents’ submission on the cross appeals is that the forecast was merely a forecast and it should not be given significance for the purpose of assessing solvency as at 31 July 2011, particularly as forecasts done on other bases suggested the cash hole might be reduced over time to $4.9 million or $3.7 million.  The Respondents refer to the May Investment Committee Update which, after setting out the May Cash Flow, sets out an adjusted cash flow that is premised on conditions such as a delay in payments to suppliers (including payments to Bosch of some $2.0 million) and estimates a cash hole of $4.9 million.  It also sets out an adjusted cash flow for a scenario involving the deferral of payments to suppliers including Bosch and a sale of all RECs to an entity known as Diamond Energy, and estimates a cash hole of $3.7 million.

26. The primary judge was clearly aware of the forecast nature of the May Cash Flow.  For the 31 July 2011 assessment his Honour was able to view the May Cash Flow and the alternatives cited by the Respondents and have regard to the developments in the intervening months.  The sale of all RECs to Diamond Energy did not eventuate.  His Honour was not satisfied that the debt to Bosch was deferred.  His Honour found that there remained a substantial cash shortfall, even taking account of the sale of RECs (at [332]).

27. In our view, the Respondents’ implicit assumption that the primary judge treated the May Cash Flow as an account reflecting the actual position as at 31 July 2011 is misplaced.  His Honour did not treat it as an actual management account rather than a forecast.  However, having regard to the assumptions upon which the alternative cash flows were built, we do not consider the primary judge was wrong to have regard to the May Cash Flow.  His Honour also found that Mr Morris’ cash flow analysis was generally supportive of the difficult position indicated by Solar Shop’s own analysis in the May Cash Flow.

28. It follows that we reject the Respondents’ submissions with respect to the primary judge’s reference to the May Cash Flow.

    Reference to the 17 August 2011 correspondence

29. We have touched on the 17 August 2011 email in the context of inventory above.  The email from Mr Steele is part of a chain of emails with various other people within Harbert.  It attached a memorandum of 16 August 2011.

30. In the email, Mr Steele describes Solar Shop’s position as follows:

    With the 12 week forecast still showing us about $2.8 m short of cash (assuming the CBA deals are closed out and the $5m from Harbert goes in), this is not a supportable position.  Management and Harbert are working on a number of options to rectify this through the 12 week period, but will need the support of suppliers to agree to the plan.  If we can’t get their support for this in in the next day or so, then it is our view that the business is not solvent and we couldn’t recommend that Harbert invest the money.

31. The primary judge said that although the email is dated 17 August 2011 it is not realistic to consider that the position which Mr Steele was describing had developed only within the previous few days.  The Respondents contend that the primary judge erred in considering that was the case.  The Respondents submit that the subject of the email was a cash deficit that was only identified in August 2011 and there is no reason to think that the description also applied to July 2011.

32. Having reviewed the attachment, we note that it refers to a cash sheet received at the end of July.  It then refers to an 11 August 2011 cash sheet that indicated a deterioration in Solar Shop’s forecast position.  It noted that the previous (July) cash sheet had not been fully updated for changes that were being made to the budget for the financial year 2012.  It referred to the provision of an updated cash sheet dated 14 August 2011.  It then noted that there would be a deterioration at the end of October for reasons involving a reduction in the number of installations and a reduction in revenue per installation.  It is possible that this is the “development” to which the Respondents refer.  However, the submissions provided no further assistance and it is not for this Court to speculate as to the intent of the submission made by the Respondents.  In a cross appeal where a large number of points have been raised by the Respondents, it was incumbent upon them to provide appropriate detail and assistance to the Court, particularly where the contention is based on factual matters of some detail.

33. The Respondents have not demonstrated error.

34. Furthermore, it is apparent from the extract cited by the primary judge that any error arising from having regard to the email would not be material in circumstances where the email foreshadows the importance of support from both Harbert and suppliers, matters that were clearly live and relevant to the assessment of solvency as at 31 July 2011.

    Conclusion on grounds 3, 4 and 5 of the cross appeals

35. We reiterate what we have said earlier and in particular at [210]. On that basis we would have dismissed grounds 3, 4 and 5 of the cross appeals.

    Overall conclusion on cross appeals

36. We have already explained why we would have dismissed grounds 1 and 2 of the cross appeals, and we have now also explained why we would have dismissed grounds 3, 4 and 5.  We would, however, having regard to the discovery issues, allow ground 1A of the cross appeals.

    RESPONDENTS’ NOTICES OF CONTENTION

37. There is significant overlap in the matters raised by the Respondents in their identical notices of contention with the matters already addressed for the purpose of the appeals and cross appeals.  Very little was provided by way of submissions addressing the notices of contentions, and in general the contentions are resolved by our earlier findings.  Our reasons in this section are therefore brief.

38. Ground 3 of the Respondents’ notices of contention has been summarised and addressed in the reasons above dealing with ground 2 of the appeals and we would have dismissed it for the same reasons.  It is therefore only necessary to summarise grounds 1 and 2.

39. The Respondents’ notices of contention address additional assets that it is said the primary judge should have taken into account and a liability to the ATO that it is said should have been excluded at the respective dates of 30 April 2011 and 22 May 2011 (nothing appears to rest on their reference to 22 May 2011 as against the date as at which the substantive May assessment was made, being 31 May 2011).  The Respondents allege that if the assets were included and tax liability excluded the finding as to the insolvency of Solar Shop at those dates would have been bolstered.

40. More particularly, ground 1 contends that with respect to the assessment as at 30 April 2011, the primary judge should have included additional assets as being available to meet Solar Shop’s liabilities, being the whole of the company’s cash and cash equivalents, trade and other receivables, RECs receivables, inventories and other current assets.  In the alternative it is argued that the primary judge should not have found that the Liquidators proved those assets were unavailable to meet Solar Shop’s liabilities.  It is also contended that the primary judge should have excluded the liability to the ATO of $962,692.42 as being a liability that was due and payable on that date.

41. Ground 2 makes the same contentions but regarding the primary judge’s assessment of solvency as at 22 May 2011.  The liability to the ATO that it is contended ought to be excluded from the calculations by that date was in the sum of $1,511,403.95.

    Other items said to be available/excluded as at 30 April 2011

    Access to cash and cash equivalents/trade and other receivables

42. The position as to trade receivables and cash and cash equivalents as at 30 April 2011 has been addressed by our reasons relating to ground 4 of the appeals (see [418]-[422] above) and ground 5(a)(vi) of the cross appeals (see [564]-[567] above).

43. On the basis of those reasons, we do not consider there were grounds for the primary judge to find that any more than a modest proportion of the cash and remaining overdraft was available to meet the outstanding debts then due and payable. 

44. His Honour properly had regard to the continued operation of the business of Solar Shop and the need to meet expenses such as the substantial employee expenses.  If available cash was used to meet the debts due and payable on 30 April 2011 it would have become insolvent in any event.

45. The Respondents have not identified the “other receivables” or the basis upon which it is said they should have been considered as readily realisable assets.

    Access to RECs receivables

46. The question of whether Solar Shop could utilise RECs receivables has been addressed by ground 3 of the appeals.  The Westpac security documents prevented the sale of the RECs holding, or a substantial part thereof, outside of the ordinary course of business absent consent.

    Access to inventory

47. The question of access to and realisation of inventory as at 30 April 2011 and 22 May 2011 is addressed with respect to ground 5(a)(vii) of the cross appeals.  There it is addressed in the context of a relevant date of 31 July 2011, but the reasons also apply as at 30 April 2011 and 22 May 2011 and the parties did not submit otherwise.

    Access to other current assets

48. The Respondents do not explain the basis upon which they say other assets should have been taken into account.  The assets are not identified and no information is provided as to how they may have been realised.  That they may have been available rises to nothing more than speculation in the context of a business that was continuing to trade.

    Exclusion of tax liabilities

49. The issue as to whether tax liabilities were due and payable (whether at 30 April 2011, 22 May 2011 or 31 July 2011) is addressed in the context of ground 5(a)(i) of the cross appeals.  Contrary to the Respondents’ argument, it was not appropriate that those liabilities be excluded as debts due and payable on the given dates for the reasons given above.

    Other items said to be available/excluded as at 22 May 2011

    Cash and cash equivalents/trade and other receivables

50. The question of whether the primary judge ought to have found that as at 22 May (or 31 May 2011) Solar Shop could have utilised cash resources to meet its unpaid debts has also been dealt with as part of ground 4 of the appeals (see [418]-[422] above) and by ground 5(a)(vi) of the cross appeals (see [564]-[567] above).  We rely upon those findings in rejecting that contention.

1. As to trade receivables, the primary judge had additional evidence that by 22 May 2011 Solar Shop was doing everything it could to realise the trade receivables and on that basis his Honour did not take them into account in assessing Solar Shop’s solvency at that date. We repeat our reasons referred to at [420]-[422] above.

2. The Respondents have not identified the “other receivables” or the basis upon which it is said they should have been considered as readily realisable assets.

   Access to RECs receivables

3. The question of whether Solar Shop could utilise RECs receivables as at 22 May 2011 has been addressed by ground 3 of the appeals. 

   Other current assets

4. Again the Respondents do not explain the basis upon which they say other assets should have been taken into account.  The assets are not identified and no information is provided as to how they may have been realised.  Again, the Westpac security documents prevented the sale of the RECs holding, or a substantial part thereof, outside of the ordinary course of business absent consent. 

   Reduction of Wuxi liability

5. In oral submissions, counsel for SMA submitted that as a result of the additional discovery the Wuxi level of indebtedness should be reduced and described this as a notice of contention point.  However, on the basis that we are determining these questions without regard to the discovery position, the evidence reflects that the Wuxi debt as accounted for was due and payable at 22 May 2011 and was correctly included in the analysis for the Aide Memoire. 

   Conclusion on Respondents’ notices of contention

6. We do not consider that the Respondents have demonstrated that the matters contended for are established on the basis of the materials that were before the primary judge and we would have dismissed their notices of contention.

7. We said in our conclusion with respect to ground 3 of the appeals (at [392] above) that ground 3 would have succeeded, as absent a counter-balancing item being upheld on the notices of contention, it would appear that Solar Shop was insolvent as at 30 April 2011 and as at 31 May 2011. As is apparent from our reasons, we are not satisfied that there is any such counter‑balancing item established by the notices of contention.

   THE LIQUIDATORS’ NOTICE OF CONTENTION

8. In a notice of contention in the cross appeals, the Liquidators allege that the primary judge’s finding that Solar Shop was insolvent as at 31 July 2011 can be upheld on grounds other than grounds relied on by him.  They allege that his Honour erred in his calculation of the value of RECs available to Solar Shop as at 31 July 2011.  The primary judge had aggregated “RECs receivables” (adjusted to $6.47 million) and “RECs receivables CBA” ($3.645 million) and that involved (so the Liquidators contended) double-counting because the RECs transferred to the Commonwealth Bank of Australia (figure were still accounted for in the “RECs receivable” figure.  Therefore, on the argument, the true comparison was between adjusted overdraft account less stated debts of $8.365 million and $6.47 million for RECs and not $10.117 million for RECs.

9. For the reasons given with respect to the cross appeals, and leaving aside the discovery issue, we would not have disturbed his Honour's finding as to the assessment that Solar Shop was insolvent as at 31 July 2011.  Therefore it is not necessary to consider this ground of contention.  In any event, it is not apparent to us that the primary judge was taken to relevant evidence or that the calculations for which the Liquidators contend were properly exposed before his Honour, and therefore it is not surprising that his Honour did not make findings of the nature now pursued by the Liquidators.  The identification of the relevant figures and suggested calculations were matters of some complexity when explained before us.

10. It is appropriate that the Liquidators' notice of contention be dismissed.

    DISPOSITION

11. For the reasons given we have concluded that the appeals are to be dismissed, the notices of contention are to be dismissed and the cross appeals are to be allowed on the basis that there is to be a remittal to the primary judge or another judge for determination of the question of Solar Shop's solvency as at 31 July 2011.

12. We will invite submissions from the parties as to costs.

I certify that the preceding six hundred and eighty-eight (688) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Besanko, Markovic and Banks-Smith.

Associate:       

Dated:       7 February 2020

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