Clifton v Kerry J Investment Pty Ltd trading as Clenergy

[2017] FCA 1379

FEDERAL COURT OF AUSTRALIA

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

File numbers:

SAD 261 of 2014
SAD 275 of 2014
SAD 276 of 2014

Judge:

WHITE J

Date of judgment:

24 November 2017

Catchwords:

CORPORATIONS – unfair preference claims brought by liquidator of company against creditors under s 588FF of the Corporations Act 2001 (Cth) – whether the company was insolvent within the meaning of s 95A of the Corporations Act and, if so, when – application of principles of insolvency – analysis of solvency of company at different times.

Legislation:

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

Income Tax Assessment Act 1997 (Cth) s 995‑1(1)

Renewable Energy (Electricity) Act 2000 (Cth) s 30LA

Taxation Administration Act 1953 (Cth) of ss 3A, 8AAZA; 255‑1(1), 255‑10, 255‑15, 255‑20 of Sch 1

Federal Court Rules 2011 (Cth) rr 5.04(3), 30.01

Renewable Energy (Electricity) Regulations 2001 (Cth)

Cases cited:

Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 220 ALR 148

Australian Securities and Investments Commission v Plymin [2003] VSC 123; (2003) 175 FLR 124

Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 39 WAR 1

Bilborough v Federal Commissioner of Taxation [2007] FCA 773, (2007) 162 FCR 160

Chappuis v Filo (1990) 19 NSWLR 490

Commissioner of Taxation v Croft [2016] QSC 190; (2016) 312 FLR 216

Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd [2006] VSC 338; (2006) 58 ACSR 631

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

First Equilibrium Pty Ltd v Bluestone Property Services Pty Ltd (in liq) [2013] FCAFC 108; (2013) 95 ACSR 654

Fitzgerald v Masters (1956) 95 CLR 420

Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123

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

M & R Jones Shopfitting Co Pty Ltd (in liq) v The National Bank of Australasia Ltd (1983) 7 ACLR 445

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

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

Oswal v Commissioner of Taxation [2015] FCA 1439

Perrine v Carrelo [2017] WASCA 151

Precision Pools Pty Ltd v Commissioner of Taxation (1992) 37 FCR 554

Re Damilock Pty Ltd (in liq); Lewis & Carter as liquidators of Damilock Pty Ltd (in liq) v VI SA Australia Pty Ltd [2008] FCA 1801; (2008) 252 ALR 533

Rexel Electrical Supplies Pty Ltd v Morton (as liquidator of South East Queensland Machinery Manufacturing and Distribution (Mining No 1) (in liq) [2015] QCA 235; (2015) 110 ACSR 341

Sandell v Porter (1966) 115 CLR 666

Smith v Boné [2015] FCA 319; (2015) 104 ACSR 528

Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213

Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72; (2017) 120 ACSR 130

Trinick (as liquidator of Forgione Family Group Pty Ltd (in liq) v Forgione [2015] FCA 642; (2015) 239 FCR 285

Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 328 ALR 564

Date of hearing:

17 October and 19 December 2016

Date of last submissions:

12 January 2017

Registry:

South Australia

Division:

General Division

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Category:

Catchwords

Number of paragraphs:

367

Counsel for the Plaintiffs:

Mr B Roberts SC with Mr S Evans

Solicitor for the Plaintiffs:

O’Loughlins Lawyers

Counsel for the Defendant in SAD 261 of 2014:

Mr R Cameron

Solicitor for the Defendant in SAD 261 of 2014:

Barrett Walker Lawyers

Counsel for the Defendant in SAD 275 of 2014:

Mr S Hay

Solicitor for the Defendant in SAD 275 of 2014:

Holding Redlich

Counsel for the Defendant in SAD 276 of 2014:

Mr CN Bova with JS Burnett

Solicitor for the Defendant in SAD 276 of 2014:

Corrs Chambers Westgarth

ORDERS

SAD 261 of 2014

BETWEEN:

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

Plaintiff

AND:

KERRY J INVESTMENT PTY LTD TRADING AS CLENERGY ACN 108 633 227

Defendant

SAD 275 of 2014

BETWEEN:

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

Plaintiff

AND:

WUXI SUNTECH POWER CO., LIMITED, (PEOPLE’S REPUBLIC OF CHINA) LICENSE NUMBER 320000400001498

Defendant

SAD 276 of 2014

BETWEEN:

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

Plaintiff

AND:

SMA SOLAR TECHNOLOGY A.G., (JOINT STOCK COMPANY) (GERMANY) REGISTRATION NUMBER HRB 3972

Defendant

JUDGE:	WHITE J
DATE OF ORDER:	24 NOVEMBER 2017

THE COURT ORDERS THAT:

1.The separate question be answered as follows: Solar Shop Australia Pty Ltd had become insolvent within the meaning of s 95A of the Corporations Act 2001 (Cth) by 31 July 2011.

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

REASONS FOR JUDGMENT

Introduction	[1]
Factual setting	[11]
Shareholding	[14]
Directorships	[21]
The Westpac Business Finance Agreement	[22]
The Westpac 2010 Facility Agreement	[23]
The provision of vendor finance from Solarise	[24]
Renewable energy certificates	[27]
SSA’s financial statements	[33]
Changes in the EBIDTA and NPAT forecasts	[35]
The first independent business review	[40]
The second independent business review	[46]
Insolvency – relevant principles	[54]
The Solarise Loan	[65]
Was the Solarise Debt subordinated only until 22 May 2011?	[85]
An agreement by Westpac in May 2011?	[98]
Abandonment of the Subordination Deed?	[114]
An indemnity obligation?	[134]
Conclusion on Solarise Loan	[137]
SSA’s liability to the ATO	[139]
Overview of the Liquidators’ claims of insolvency	[171]
SSA’s solvency as at 31 January 2011	[177]
The banking facilities	[179]
Amount overdue to the 14 trade creditors	[189]
Optimum Media	[192]
Fasteners	[195]
BlueScope	[201]
Lawrence & Hanson Group (L&H)	[207]
Matrin	[212]
Trade creditors – general	[218]
January 2011 trading loss	[220]
The apparent fraud in the Sunsavers division	[224]
The Solarise Loan	[230]
Consideration	[231]
SSA’s solvency as at 30 April 2011	[240]
The Bosch liability	[244]
Other trade creditors	[257]
Consideration	[260]
SSA’s solvency as at 22 May 2011	[268]
SSA’s solvency as at 31 May 2011	[270]
The trade creditors	[271]
Wuxi	[273]
IPD Group Ltd	[282]
Enerdrive Pty Ltd	[286]
Clenergy Australia	[289]
Summary of adjustments	[293]
Consideration	[297]
SSA’s solvency as at 31 July 2011	[317]
Harbert fundraising	[334]
Other resources available to SSA	[351]
Other matters	[358]
Conclusion	[367]

WHITE J

Introduction

1. Solar Shop Australia Pty Ltd (SSA) carried on business as a supplier and installer of solar systems.  On 7 September 2011, its principal financier Westpac Banking Corporation (Westpac) appointed receivers and managers to it.  On 21 October 2011, the directors of SSA appointed administrators and, on 25 November 2011, a meeting of creditors resolved that SSA should be wound up.  The plaintiffs (the Liquidators) were appointed joint and several liquidators. 

2. The Liquidators have brought unfair preference claims pursuant to s 588FF of the Corporations Act 2001 (Cth). In one action (SAD261/2014), the Liquidators seek to recover $417,075.26 or, in the alternative, $327,449.46 from Kerry J Investments Pty Ltd (Kerry J) which traded as “Clenergy Australia”. In a second action (SAD275/2014), the Liquidators seek to recover USD1,814,066.80 from Wuxi Suntech Power Co Ltd (Wuxi). In a third action (SAD276/2014), the Liquidators seek to recover €2,455,850.21 or, in the alternative, €1,800,797.89 from SMA Solar Technology AG (SMA). I will refer to these companies collectively as the Defendants.

3. By reason of the definition of “relation back day” in s 9 and ss 513B and 513C of the Corporations Act, the relation back day for SSA is 21 October 2011. The relation back period is 22 April 2011 to 21 October 2011. The Liquidators’ claims relate to the payments which Kerry J, Wuxi and SMA received during the relation back period which were as follows:

No	Date	Payee	Amount
1	13.05.11	Wuxi	(USD) $368,622.80
2	17.05.11	SMA	€186,198.60
3	23.05.11	SMA	€495,032.50
4	24.05.11	SMA	€116,189.00
5	31.05.11	SMA	€209,944.00
6	14.06.11	SMA	€173,495.00
7	17.06.11	Wuxi	(USD) $622,440.00
8	24.06.11	Wuxi	(USD) $622,440.00
9	27.06.11	SMA	€270,368.00
10	6.07.11	SMA	€524,348.20
11	8.07.11	SMA	€113,018.04
12	12.07.11	SMA	€42,768.00
13	15.07.11	SMA	€165,960.50
14	2.08.11	Wuxi	(USD) $200,564.00
15	5.08.11	Kerry J	$379,978.31
16	8.08.11	SMA	€155,693.37
17	9.08.11	Kerry J	$37,096.95
18	19.08.11	SMA	€2835.00

1. The Liquidators contend that SSA was insolvent at the time it made each of these payments. The Defendants dispute that contention in respect of all payments.

2. On 25 May 2016, a Judge ordered, in each of the three actions and pursuant to r 30.01 of the Federal Court Rules 2011 (Cth) (the FCR), that the question “did Solar Shop Australia Pty Ltd become insolvent within the meaning of s 95A of the Corporations Act and, if so, when?” be heard and determined as a separate question. The Judge further ordered that the hearing of the separate question in each action take place concurrently. This judgment concerns that question.

3. Although the Liquidators indicated in opening that they sought a finding that SSA had been insolvent from 20 October 2010, in their final submissions they sought instead a finding that SSA was insolvent by not later than 31 January 2011; in the alternative, by not later than 30 April 2011; and, in the further alternative, by not later than 22 May 2011.  SMA contended that SSA had not become insolvent until 29 July 2011 and possibly not until 4 August 2011.  Kerry J submitted that it had not become insolvent until 9‑16 August 2011.  By reason of the terms of the separate question, the Court is not confined to any of these dates.  In particular, I do not accept the Defendants’ submission that the Liquidators were confined only to 31 January, 30 April and 22 May 2011.

4. The evidence in the trial was wholly documentary. It comprised a tender book of eight volumes, one volume of creditor invoices and one volume of bank statements. The Liquidators had obtained a report from a forensic accountant (Mr Morris). Kerry J and SMA had also obtained reports from forensic accounts (Mr Williams and Mr Lombe respectively). There were numerous objections to the reports of the accountants, not least because they had in several instances purported to conclude the factual and legal issues involved. As the primary documents to which the experts had referred would be in evidence, the parties agreed that, instead of pursuing the objections with a view to determining the parts of their reports which may be admissible, the reports of the experts could have the status of an aide to the submissions of the party retaining them. This course is contemplated by r 5.04(3) Item 19 of the FCR and is consistent with the approach adopted by Gordon J in Noza Holdings Pty Ltd v Commissioner of Taxation [2010] FCA 990.

5. The Defendants had a substantial common interest.  Each of SMA and Kerry J provided written submissions.  At the hearing, counsel for Wuxi and Kerry J adopted the oral submissions of counsel for SMA.  In these circumstances I will refer to the Defendants collectively, except when it is appropriate to distinguish between them.

6. These reasons begin with a description of the factual setting to the separate question and a statement of the principles relating to insolvency. The reasons then address two matters central to the Liquidators’ case:

   (a)whether the Solarise Loan became due and payable at 22 May 2011; and

   (b)SSA’s liability to the ATO.

7. Next, the reasons address SSA’s solvency as at:

   (a)31 January 2011;

   (b)30 April 2011;

   (c)22 May 2011 and 31 May 2011; and

   (d)31 July 2011.

   Factual setting

8. SSA’s business commenced in 1999 when it was conducted by a partnership.  SSA was incorporated on 20 April 2000.  It supplied domestic solar energy systems and, until 2009, solar water heating systems.  SSA experienced considerable growth until 2010.

9. In December 2009, SSA commenced an ambitious plan for growth which when fully implemented would have doubled its installations from 5,000 to 12,000 per annum and doubled its employees. 

10. SSA had three wholly owned subsidiaries: Solar Hut Pty Ltd which, under the name “Sun Saver”, engaged in online sales; Solar Financial Solutions Pty Ltd which, under the name “Sunworks”, offered finance to purchasers of domestic solar systems; and SA Commercial Solar Pty Ltd which, under the name “CommSolar”, promoted large‑scale solar systems for commercial applications.  In addition, SSA held a 50% interest in Sunray Tracker Pty Ltd which marketed and installed tracking devices for solar installations, and a 40% interest in Metropolis Metering Assets Pty Ltd, a company accredited to provide power meters and which installed and maintained smart meters. 

    Shareholding

11. SSA’s shareholding changed on numerous occasions between 2000 and 2010 but it is sufficient to note only those which bear upon the determination of the preliminary question. 

12. From April 2003 until about 12 February 2007, Adrian and Tanya Ferraretto were SSA’s sole shareholders.  They held shares in their own capacity and as trustees for the A and T Ferraretto Family Trust. 

13. On or about 12 February 2007, Solarise Pty Ltd (Solarise), a company associated with a Mr Russell Mourney, acquired a substantial holding in SSA.  In addition, members of SSA’s management also acquired shares at or about this time.

14. On 6 May 2009, a private equity fund managed by Harbert Management Corporation (Harbert), being HMC Australian Private Equity Fund 1 GP, LP (HAPE 1), acquired shares in SSA for a consideration of $7 million.  It did so by acquiring shares from the Ferrarettos, from Solarise Pty Ltd (in its capacity as trustee for the Mourney Family Trust), and from a Mr Stone and a Ms Morris (in their capacity as trustees of the Morristone Family Trust). 

15. The shares which Solarise sold to HAPE1 comprised approximately 50% of its 24.1% shareholding in SSA.  Solarise sold the balance of its shareholding (14,069 shares) back to SSA at a price of $5.2 million.  

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

17. From and after 19 October 2010, SSA’s shareholders comprised:

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

    (b)       Adrian and Tanya Ferraretto who held 20,849 shares (28.9%);

    (c)       Anthony Thornton who held 11,112 shares (15.4%);

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

    (e)       SSAMT which held 1.637 shares (2.3%).

    Directorships

18. The directors of SSA at the times which are material presently were as follows:

    (a)Adrian Ferraretto who was appointed on 29 June 2001 and resigned on 21 July 2010;

    (b)Russell Mourney who was appointed on 12 February 2007 and resigned on 22 May 2009;

    (c)Anthony Thornton who was appointed on 4 February 2009;

    (d)Jeremy Steele who was appointed on 22 May 2009 as a representative of Harbert; and

    (e)Brendan Anderson who was appointed on 12 October 2010 as a representative of Harbert.

    The Westpac Business Finance Agreement

19. Wespac was the banker to SSA.  It had entered into Business Finance Agreements with SSA in May 2009 (the May 2009 BFA) and again in October 2009 (the October 2009 BFA).  The latter provided, amongst other things, for an overdraft of $3 million which was to reduce to $2 million in December 2009 and to $1 million by March 2010.  The overdraft limits were varied from time to time as SSA periodically requested “temporary” increases in the facility limit. 

    The Westpac 2010 Facility Agreement

20. On 20 October 2010, SSA entered into a further Facility Agreement with Westpac (the 2010 Facility Agreement) which superseded the October 2009 BFA.  By the 2009 Facility Agreement, Westpac agreed to make available to SSA six different facilities referred to in the document as “tranches”.  The two tranches which are presently pertinent are Tranche A and Tranche F.  Tranche A comprised an overdraft which had a limit of $3.5 million until 30 October 2010, a limit of $2.5 million in the period from 31 October to 29 November 2010 and a limit of $1.0 million from 30 November 2010.  Tranche F was a bill acceptance discount facility subject to a limit of $10 million advanced predominantly for the purposes of the share buy‑back from the Ferrarettos.  Clause 8.2 of the 2010 Finance Agreement required SSA to make quarterly repayments (each of $500,000) of principal, with the first repayment to be made on 31 December 2010 and the last on 30 June 2012 (ie, a total of $3.5 million).  The balance of Tranche F (and indeed the balance owing under any other Tranches) was to be paid on or before the termination date (ie, 19 October 2012).

    The provision of vendor finance from Solarise

21. By a Loan Agreement dated 6 May 2009 between Solarise, Mr Mourney, SSA and HAPE 1, Solarise provided unsecured vendor finance (the Solarise Loan) in respect of the shares it had sold to SSA (the Solarise Loan Agreement).

22. Subject to some qualifications which are not presently relevant, cl 4.1 of the Solarise Loan Agreement required SSA to repay the principal sum ($5,178,682.13) to Solarise on “the Repayment Date” which was, relevantly, 22 May 2011. 

23. The liability of SSA to Solarise and the question of whether that liability became due and payable on 22 May 2011 assumed considerable significance in the trial.  I will return shortly to that question.

    Renewable energy certificates

24. The customers purchasing solar systems from SSA were entitled, on the installation of the system, to renewable energy certificates (RECs).  These were a form of incentive under a scheme established by the Renewable Energy (Electricity) Act 2000 (Cth) (the REE Act) and the Renewable Energy (Electricity) Regulations 2001 (Cth). From about January 2011, the RECs became known as “small‑scale technology certificates”. However, SSA continued to refer to them as RECs and it is convenient in these reasons to do likewise.

25. The quantity of RECs to which a consumer was entitled was proportional to the power‑generation capacity of the solar system installed (the higher the capacity, the greater the entitlement). Once generated, RECs could be sold to a clearing house established under the REE Act (for which a fixed price was set pursuant to s 30LA of the REE Act) or sold privately to a purchaser located by a vendor at a negotiated price.

26. Like many retailers/installers of solar systems, SSA agreed with its customers at point of sale to purchase their RECs, in exchange for a reduction in the purchase price.  Its practice was to sell the RECs later.  Of course, it hoped to do so at a profit but it ran the risk that the clearing house or market price would decline in the period between the entry into the consumer contract and the time (usually several months later after installation had been completed) when the consumer became entitled to the RECs and could assign them to SSA.

1. The effect was that SSA had two income streams: the amounts paid by consumers for their solar systems and the amounts derived from the sale of RECs.  The time at which SSA received this income was dependent on the time of installation as, apart from a deposit, consumers did not pay for their systems until installation had been completed.  Likewise, the entitlement to RECs did not arise until installation had been completed. 

2. The funds derived from the sale of RECs were an important source of income for SSA. 

3. The risk of loss from a reduction in the price of RECs became a reality for SSA in late 2010 and in 2011.  The market price for RECs reduced from approximately $40 in July 2010 to $35 in September 2010 and still further, to $30 in December 2010.  In January to March 2011, the price of RECs recovered to approximately $40 but reduced to $25 in April 2011 and to $20 in June 2011. 

   SSA’s financial statements

4. At the time SSA went into liquidation, its financial statements for the 2011 financial year had not been prepared.  SSA’s performance in the three preceding financial years can be summarised as follows:

FY 08 $’000	FY09 $’000	FY10 $’000
Revenue       Sales       Realised gain on sale of Renewable Energy Certificates	23,666 566 ‑‑‑‑‑‑‑‑‑‑‑ 24,232	67,284 4,165 ‑‑‑‑‑‑‑‑‑‑‑‑ 71,449	124,621 15,701 ‑‑‑‑‑‑‑‑‑‑‑‑ 140,322
COGS	(15,528)	(46,080)	(93,363)
Gross Profit	8,704	25,369	46,958
Total other income	303	(537)	(854)
Total expenses	(4,735) ‑‑‑‑‑‑‑‑‑‑‑‑‑‑	(15,306) ‑‑‑‑‑‑‑‑‑‑‑‑‑	(30,599) ‑‑‑‑‑‑‑‑‑‑‑‑
Profit before income tax	4,272	9,526	15,506
Income tax expense	(1,284)	(2,854)	(4,865)
Profit for the year	2,988	6,672	10,641

1. These figures demonstrate the significant growth of SSA in the 2009 and 2010 years.  This is reflected in both the sales and COGS figures.  The table also indicates the importance to SSA of the “realised gain on sale of RECs”.  Had it not been for those gains, SSA would have had a much lower profit in the 2009 year and would have made a loss in the 2010 financial year.

   Changes in the EBIDTA and NPAT forecasts

2. An indication of SSA’s deteriorating financial performance during the 2011 financial year is seen in the repeated downward revisions of the forecast EBIDTA and NPAT in the management accounts presented to the SSA Board.  At the commencement of the 2011 financial year, SSA forecast for the financial year an EBIDTA of $35.666 million and an NPAT of $23.215 million.  The following table shows the substantial reduction in those forecast amounts as the financial year progressed.  For the months of February through to June 2011, the table also shows the actual year to date figures (to the end of the preceding month) contained in the management accounts. 

EBIDTA $’000	NPAT $’000
September 2010 – Forecast	29,768	19,245
October 2010 – Forecast	19,247	11,505
November 2010 – Forecast	19,255	11,226
February 2011 -     Forecast -     Actual YTD to 31 January	11,007 152	5,583 (1,946)
March 2011 -     Forecast -     Actual YTD to 28 February	10,069 1,180	4,922 (1,184)
April 2011 -     Forecast -     Actual YTD to 31 March	7,185 1,545	2,808 (1,139)
May 2011  -     Forecast -     Actual YTD to 30 April	4,279 1,126	578 (1,980)
June 2011 -     Forecast -     Actual YTD to 31 May	4,090 3,225	948 534

1. As can be seen, the table indicates that in June 2011, SSA’s management was forecasting EBIDTA for the year of $4.09 million compared with the forecast at the commencement of the financial year of $35.66 million.  Further, SSA’s NPAT for the financial year to 30 May 2011 was only $534,000 compared with the original forecast of $23.215 million. 

2. The results for the 2011 financial year included with a preliminary draft budget for the financial year ending on 30 June 2012 presented to SSA’s Board at its meeting on 19 July 2011 indicated  EBITDA of $4.974 million and NPAT of ($6.667) million.  The corresponding figures for the month of June 2011 were $1.75 million and a negative $7.202 million.  It is apparent that SSA was not generating the cash flows necessary to meet its ordinary trading obligations in addition to its liabilities to Westpac and the ATO.

3. There was also a corresponding decline in SSA’s net equity position over the course of the 2011 financial year.  At the beginning of that financial year, SSA forecast that it would have a net equity position of $23.636 million at year end.  However, the financial statements presented to the SSA Board on 19 July 2011 indicated that SSA had, at 30 June 2011, negative net equity of $4.387 million.  By far the biggest item in the balance sheet was the asset of $24.473 million in inventories.  It is reasonable to infer (and I do) that this was a relatively illiquid form of asset.  It is also pertinent that management was then forecasting a negative net equity figure of $377,000 at 30 June 2012.

4. SSA’s difficult financial position was reflected in the request to Westpac which it made on 16 June 2011 for, amongst other things, an increase in the overdraft limit from $1 million to $3 million, an increase in the forex facility to $10 million, and postponement of four of the quarterly amortization payments (each of $500,000) due to Westpac under the 2010 Facility Agreement.  At the same time, SSA was proposing a redeemable note issue to raise $5 million.  Westpac declined the request for postponement of the amortisation payments and, subject to one qualification, deferred consideration of other aspects of the request until it received the Second Independent Business Review to which I will refer shortly (not received until 19 July 2011).  Ultimately, Westpac did not accede to the request to increase the overdraft or to the postponement of the amortisation payments. 

   The first independent business review

5. On 12 January 2011, Westpac appointed Mr John Hart of Ferrier Hodgson to undertake a wide ranging independent review of the financial performance and status of SSA.  The stated purpose of the review was to assist Westpac to assess and consider:

   ·the Company’s immediate and medium term cash flow requirements;

   ·the Company’s ability to continue to trade and to meet its obligations;

   ·the current strategies available to the Company to assist with a turnaround in its profitability and cash flow;

   ·the alternatives available to Westpac in the event that it needs to realise its security;

   ·Westpac’s recourse to other Group entities and offshore operations.

6. Westpac was prompted to make the appointment because SSA had informed it on 9 December 2010 (less than two months after entering into the 2010 Facility Agreement) that its operating profit had declined significantly and that it was likely to be in breach, as at 31 December 2010, of covenants in the 2010 Facility Agreement when it reported in February 2011.  Subsequently, by letter dated 15 February 2011, SSA confirmed the position which it had foreshadowed on 9 December 2010.  It told Westpac that it was “not in compliance” with three of the four financial covenants set out in cl 12.12 of the 2010 Facility Agreement being, as I understand it, the Leverage Ratio, the Debt Service Cover Ratio and the Shareholder Funds to Asset Ratio.   

7. Westpac then wrote to SSA on 17 February 2011, saying (relevantly):

   The Borrower is in breach of the Facility Agreement by reason of the fact that the Obligors are not in compliance with the financial covenants contained in clause 12.12 (Financial Covenants) of the Facility Agreement. 

   As a consequence of a breach of clause 12.12 of the Facility Agreement, an Event of Default under clause 14.1(b) has occurred.

   The Financier acknowledges the occurrence of this Event of Default and reserves all of its rights arising out of it including, without limitation, its rights under clause 14.2(a). 

8. Mr Hart reported to Westpac on 28 February 2011 (the First Business Review).  Key aspects of the First Business Review were:

   (a)between 1 July 2011 and 31 December 2011, SSA’s growth had slowed and it had incurred an operating loss after tax of $1 million;

   (b)SSA recognised revenue on completion of installations rather than on receipt of a confirmed order with deposit paid;

   (c)as at 31 December 2010, SSA had a backlog of over 3,600 installations representing future revenue of over $70 million;

   (d)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.  SSA had retained AT Kearney to provide recommendations for improving its monthly installation rate;

   (e)evidence of mismanagement and possibly fraud had begun to emerge in Sunsavers; 

   (f)an internal review completed by SSA in February 2011 indicated that the estimated EBITDA have been overstated by approximately $3.2 million;

   (g)the decline in NPBT was mainly due to the following factors:

   ·           the decline in revenue and gross margin percentage for Sunsavers;

   ·           reduced gross margin percentage for Solar Shop offsetting revenue growth;

   ·increased costs in anticipation of growth not covered by growth in gross margins;

   (h)as at 31 December 2010, SSA had cash on hand of approximately $5.5 million which had been achieved, in part, by the liquidation of RECs and the deferment of approximately $3.2 million in creditor payments through arrangements with major suppliers and the Australian Taxation Officer (ATO).

9. The First Business Review contained a number of recommendations, including that Westpac:

   (a)give “strong consideration” to continuing to support SSA, at least in the short term, including by providing additional guarantee and forex requirements sought by SSA, subject, however, to it achieving satisfactory performance criteria (and, in particular, installations);

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

   (c)monitor the performance of SSA on a monthly basis, including monitoring its achievement of the required rate of installations;

   (d)preclude SSA from making any repayment of the Solarise Loan without its approval;

   (e)assess, as at 30 April 2011 and 30 June 2011, the extent to which it should permit a part payment of the Solarise Loan;

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

10. I accept the submission of the Liquidators that the First Business Review is not to be understood as an endorsement of SSA’s solvency.  Mr Hart was not asked to address that question and he did not express any view on it.  The closest the Westpac brief came to that topic was the request that Mr Hart “assess [SSA’s] ability to continue to trade and to meet its obligations”.  Mr Hart answered that question in a very conditional way by saying “[i]f SSA achieves its forecasts for CY11 it will generate sufficient cash to meet all obligations, including scheduled repayments to Westpac and the [Solarise Loan]”.  Furthermore, it is plain that Mr Hart was undertaking the review in Westpac’s interest rather than addressing SSA’s solvency more generally.  Accordingly, I do not accept the Defendants’ submission that the First Independent Business Review contains an opinion as to SSA’s solvency.

    The second independent business review

11. By letter dated 28 April 2011, SSA informed Westpac that it was “not in compliance” with the same three financial covenants set out in cl 12.12 of the Facility Agreement.

12. By letter dated 27 May 2011, Westpac confirmed the breaches of the covenants relating to the Leverage Ratio, the Debt Service Cover Ratio and the Shareholder Funds to Asset Ratio and that an event of default had thereby occurred.  The Westpac letter continued:

    The Bank reserves its rights to take action in respect of the above financial undertaking breaches.  Given SSA has been unable to remedy these breaches, based on assessment of [the] Compliance Certificate provided to the Bank for the Relevant Period ending 31 March 2011 and the Bank’s analysis of Year to Date management accounts, the Bank hereby puts SSA on notice under the terms and conditions of the [facility agreement], that it is able to exercise its rights (including, but not limited to, enforcing its rights under its securities) at any point in time. 

    The Bank does not waive these Events of Default. 

    In consequence of these Events of Default all Facilities provided to SSA are on demand.

    …

    We reserve our right to take action/further action in reliance upon these Events of Default including, but not limited to, the right to require all Facilities be immediately repaid or appointment of an Investigating Account at your cost.

13. The statement that all of Westpac’s facilities were “on demand” is to be noted.

14. On 19 July 2011, Mr Shady of Ferrier Hodgson provided, at Westpac’s request, a second independent business review of SSA Group’s performance in the period 1 January to 30 June 2011 (the Second Business Review).  The key elements of Second Business Review included:

    (a)revenues were down $13.0 million or 15.6.% below the revised budget;

    (b)gross margin was 5.7% lower than the revised budget;

    (c)EBITDA was $7.0 million lower than the revised budget;

    (d)continual below budget performances as installation targets were not met for a variety of reasons some of which may recur;

    (e)recommendations provided by AT Kearney had not been implemented;

    (f)further inventory management issues had emerged highlighted by stock shrinkage of approximately $800,000 in the five months to 31 May 2011;

    (g)RECs were now being sold at a price less than the Group had paid for them.

15. Under the heading “Key issues and recommendations”, the Second Business Review recommended:

    Subject to:

    •Harbert and/or other shareholders injecting $5.0 m into the business (immediately)

    •Substantial deferral [of] the current vendor loan repayment proposal agreement

    •Independent verification of current inventories held at all key locations

    •Imposition of

    •stringent covenants around reporting monthly results, which may include cumulative YTD sales and gross profit margin targets

    •appropriate covenants to ensure that any profits the Group obtains from its recent CBA agreement

    •To assist the customer, the Bank may consider granting the requested 12 month deferral of debt amortisation.  The Bank should not in our view, increase the overdraft facility from $1.0 m to $3.0 m, the deferral of vendor loan payments will alleviate the requirement for this funding.

16. The Second Business Review contained some further recommendations which it is not necessary to record presently.  It concluded, however, with the following caution:

    Please note that the above recommendations are not without risk, in particular the Bank should be aware:

    •Management controls are weak.

    •It is possible that the Group will continue to underperform and budget EBITDA targets will not be met.  This could lead to the Group requiring additional working capital funding at which time the Bank may decide that it has no choice but to enforce its security.  Depending on the timing and status of the business at the time of enforcement, it is possible that the Bank could be in a worse position than present conditions due to stock rundown strategies and further adverse movements in the value of STCs.

    •The Group’s show term cash flow strategy is heavily reliant on a rundown of inventories (c. $5.3 in H1 FY 12) and sales and margin targets being met.  These are key risks to the budget.

    •The Group will require continued monitoring as there is still a possibility of sustained underperformance in the short to medium term.

    (Emphasis in original)

17. Again, contrary to the Defendants’ submissions, I do not consider that the Second Business Review can reasonably be understood as an endorsement of SSA’s solvency.  Mr Shady made no statement to that effect and, on the contrary, considered that SSA needed a substantial cash injection by Harbert and additional support from Westpac.  He did not address the position if neither was forthcoming.  Mr Shady also appears to have understood that Harbert was willing, without qualification, to inject another $5 million into SSA when, as will be seen, that was not the case.

18. As already noted, Westpac did not agree to increase the overdraft limit to $2 million, nor did it agree to waive payment of the amortisation payments of $500,000 per quarter in respect of the $10 million facility.  The consequences of this for the investment by Harbert of further funds in SSA are discussed later.

    Insolvency – relevant principles

19. Section 95A of the Corporations Act has the effect that a company is solvent if, and only if, it is able to pay all its debts as and when they become due and payable. Otherwise it is insolvent. Thus, s 95A enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business: Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd [2006] VSC 338; (2006) 58 ACSR 631 at [141].

20. In Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 39 WAR 1 at [1066], Owen J described the “cash flow” or “commercial insolvency” test as follows:

    The ‘cash flow’ or ‘commercial insolvency’ test is an assessment of solvency based on a company's ability to meet its debts (current liabilities), as and when they fall due.  This test assesses the financial health of a company by reference to its capacity to finance its current operations.  In other words, it looks at whether the company’s business is viable and can continue to operate by meeting the present demands upon it. … [T]he essential features of the cash flow test include an assessment of the company’s existing debts and debts that will arise in the near future, the date each debt is due for payment, the company’s present and expected cash resources and the date each inflow item will be received …

21. The application of s 95A requires close consideration of when the company’s debts became due and payable. That is to be determined by considering when the debts became legally due: Hussain v CSR Building Products Ltd [2016] FCA 392; (2016) 246 FCR 62 at [63] (Edelman J).

22. Some commercial creditors do not insist on strict compliance with their credit terms and instead allow debtors some leeway.  The way in which account is to be taken of the circumstance that introduces some complexity into the resolution of the issues.  Palmer J in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213 summarised the applicable principles at [54]:

    i)whether or not a company is insolvent for the purposes of s 95A is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole;

    ii)in considering the company’s financial position as a whole, the Court must have regard to commercial realities.  Those realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable;

    iii)in assessing whether a company’s position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency;

    iv)the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand;

    v)in assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the Court’s satisfaction, that:

    Ÿthere has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment;  or

    Ÿthere is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment;  or

    Ÿthere has been a well‑established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors’ terms of trade or are payable only on demand;

    vi)it is for the party asserting that a company’s contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence.

    (Citations omitted)

1. These principles have received frequent endorsement in the authorities: First Equilibrium Pty Ltd v Bluestone Property Services Pty Ltd (in liq) [2013] FCAFC 108, (2013) 95 ACSR 654 at [34]; Perrine v Carrelo [2017] WASCA 151 at [57]; Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72, (2017) 120 ACSR 130 at [80]‑[83].

2. The fifth of the principles accommodates the possibility that a course of conduct between the parties may reveal an implied waiver of the obligation to pay the debt when it falls dues: Hussain at [65]. Edelman J went on to say:

   … That waiver can be revoked if it has not been relied upon but otherwise it operates as a doctrine “introduced by the law to prevent a man in certain circumstances from taking up two inconsistent positions ... It looks, however, chiefly to the conduct and position of the person who is said to have waived, in order to see whether he has ‘approbated’ so as to prevent him from ‘reprobating’” …

   (Citations omitted)

3. A company need not be able to pay its debts as and when they fall due from its own cash reserves.  Regard may be had to the resources by which it may obtain funds within a relatively short time, including by borrowing, sale of assets, and capital raising.  However, short term loans repayable on demand do not enhance solvency: Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 220 ALR 148 (ASIC v Edwards) at [99].

4. The focus of the Court’s determination must be on the company’s ability to pay its debts as and when they fall due; not whether the company actually does so.  Naturally, however, the latter may inform the former.  The task of the Court is to decide whether the company is suffering from an endemic shortage of working capital as opposed to a temporary lack of liquidity: Sandell v Porter (1966) 115 CLR 666 at 670.

5. The Liquidators also referred to the 14 common features in insolvency situations identified by Mandie J in Australian Securities and Investments Commission v Plymin [2003] VSC 123; (2003) 175 FLR 124 at [386], namely, continuing losses; liquidity ratios below one; overdue Commonwealth and State taxes; poor relationship with the present bank, including inability to borrow further funds; no access to alternative finance; inability to raise further equity capital; suppliers placing company on cash on delivery or otherwise demanding special payments before resuming supplies; creditors unpaid outside trading terms; issuing of post‑dated cheques; dishonoured cheques; special arrangements with selected creditors; solicitors’ demands, summonses and the like; payments to creditors of rounded amounts not reconcilable to specific invoices; and inability to produce timely and accurate financial information to indicate trading performance and financial position, and to make reliable forecasts.

6. Mansfield J referred with approval to this list in Re Damilock Pty Ltd (in liq); Lewis & Carter as liquidators of Damilock Pty Ltd (in liq) v VI SA Australia Pty Ltd [2008] FCA 1801; (2008) 252 ALR 533 at [16] while at the same time noting that, in any particular case, one or more of those factors, or indeed other factors, may have particular significance and one or more of them may not exist. The absence of one or more of the factors does not, of itself, establish insolvency. See also Trinick (as liquidator of Forgione Family Group Pty Ltd (in liq) v Forgione [2015] FCA 642, (2015) 239 FCR 285 at [271]; Smith v Boné [2015] FCA 319; (2015) 104 ACSR 528 at [31]‑[32]; and Rexel Electrical Supplies Pty Ltd v Morton (as liquidator of South East Queensland Machinery Manufacturing and Distribution (Mining No 1) (in liq) [2015] QCA 235, (2015) 110 ACSR 341 at [30]‑[31].

7. The Liquidators have the onus of establishing SSA’s insolvency at the dates they allege: M & R Jones Shopfitting Co Pty Ltd (in liq) v The National Bank of Australasia Ltd (1983) 7 ACLR 445 at 449. But, as the last of the principles stated by Palmer J indicates, it is for the party who asserts that the company’s contract debts are not payable at the times contractually stipulated to make good that proposition.

   The Solarise Loan

8. A central contention in the Liquidators’ case was that the Solarise Loan of $5,178,682.13 became due and payable on 22 May 2011.  It was common ground that SSA had not repaid the Solarise Loan at that time, or thereafter.  There is no evidence that Solarise agreed to any extension of time in which SSA could do so.  The Liquidators also contended that SSA did not have the resources, nor any plan, at any time during 2011 to pay the Solarise Loan when it did become due and payable. 

9. These contentions gave rise to a number of issues concerning the time at which the Solarise Loan became due and payable by SSA and, in turn, to the effect of agreements subordinating the Solarise Debt to SSA’s liability to Westpac.  As these issues affected each of the Liquidators’ alternative claims as to the time of insolvency, it is convenient to address them now.  It is necessary first to record some features of the Solarise Loan Agreement and of the subordination agreements.

10. As noted earlier, cl 4.1 of the Solarise Loan Agreement required SSA to repay the sum of $5,178,682.13 to Solarise on 22 May 2011.  Clause 5 provided for interest to accrue on the principal sum. 

11. Clause 6.1 of the Solarise Loan Agreement provided that the “Solarise Debt” was subordinated and postponed to, and ranked in priority after, “the Bank Debt”.  It also provided that SSA’s liabilities in respect of the Solarise Debt were conditional on the “Subordination Period” ending.  The “Solarise Debt” was defined in cl 1.1 to mean all money and amounts for which SSA was, or may become, liable at any time to Solarise.  The “Bank Debt” was defined in cl 1.1 to mean all money which SSA was, or may become, liable at any time to Westpac pursuant to the “Bank Finance Documents”, being the documents entered into between SSA and Westpac in relation to various facilities it made available to SSA from time to time.  The term “Subordination Period” was defined in cl 1.1 to mean “the period from the date of this document until the second anniversary of the Buy‑Back Date”, namely, 22 May 2011.

12. On their face, the effect of these clauses in the Solarise Loan Agreement was to make the Solarise Loan subordinate to the Bank Debt during the two year period expiring on 22 May 2011. 

13. However, cl 6 did contemplate that some payments, described as “Permitted Payments”, could be made to Solarise during the Subordination Period:

    [6.2]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.

    …

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

    (a)       no Bank Debt is due and unpaid;

    (b)       no Subordination Debt subsists;

    (c)neither the Company nor Solarise is in breach of the provisions of this agreement; and

    (d)no Insolvency Event has occurred in respect of the Company or Solarise,

    the Company 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 the Company in writing as being permitted under this clause.

14. On 20 May 2009, Westpac, Solarise and SSA entered into a Deed of Subordination (the Subordination Deed) which provided for a different subordination regime.  By cl 4.1, the parties agreed that the Solarise Debt was subordinated to the “Westpac Debt”.  Clause 4.2 provided more particularly that, until the Westpac Debt was paid or satisfied in full, or the Solarise Debt was repaid with the written consent of Westpac, payment by SSA to Solarise of the Solarise Debt, or any part of it, was postponed, despite any other arrangement or agreement to the contrary, except for the “Permitted Payments” and subject to the Subordination Deed itself.  The term “Westpac Debt” was defined in cl 1 to mean:

    [T]he aggregate of all of the amounts owing from time to time on any account by the Borrower 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.

15. The term “Westpac Securities” was defined in cl 1 to mean “those securities listed as securit[ies] [of] the facilities provided by Westpac to the Borrower under the Business Finance Agreement”.  Clause 1 defined the term “Business Finance Agreement” to mean the Business Finance Agreement dated 4 May 2009 between Westpac and SSA.  That Agreement referred to six different facilities provided by Westpac to SSA and the security for those facilities, namely:

    (a)       Facility A: a $3 million overdraft;

    (b)       Facility B: a $271,981 banker’s undertaking for a specific project;

    (c)       Facility C: a credit card with the limit of $100,000;

    (d)Facility D: an additional $2 million to an existing banker’s undertaking for a specific project;

    (e)       Facility E: a restatement of an existing $36,408 banker’s undertaking;

    (f)        Facility F: a $300,000 equipment finance loan.

16. By cl 5 of the Subordination Deed, SSA agreed, amongst other things that, without the prior written consent of Westpac and “for so long as any of the Westpac Debt remains outstanding”, it would not make any payment in or towards satisfaction or discharge of any of the Solarise Debt, other than the “Permitted Payments”.  By cl 6, Solarise agreed that “so long as the Westpac Debt remains outstanding”, it would not, without Westpac’s consent, receive, or take action to enforce, repayment of any part of the Solarise Loan, other than a Permitted Payment.  Clause 7 elaborated the restraint on Solarise by precluding it, “so long as any of the Westpac Debt remains outstanding” from assigning or encumbering the Solarise Debt.

17. Clause 8 provided for the Permitted Payments.  First, it listed five conditions each of which had to be satisfied before a Permitted Payment could be made.  These were similar to, but not identical with, the conditions contained in cl 6.4 of the Solarise Loan Agreement:

    (a)       no Westpac Debt is due and unpaid; and

    (b)       no default under the Business Finance Agreement subsists; and

    (c)neither Solarise or the Borrower were in breach of the provisions of this Deed; and

    (d)       no Insolvency Event had occurred in respect of Solarise or [SSA]; and

    (e)       no Subordination Default subsists.

18. Secondly, cl 8.1 provided that, on satisfaction of those conditions, SSA could pay, and Solarise could retain, the amounts specified in Sch 1 under the heading “Amortisation Schedule” as follows:

SCHEDULE 1 – AMORTISATION SCHEDULE
Date of Payment	Interest	Capital	Total
14-July-2009	$      60,157.84	$             0.00	$        60,167.84
114-October-2009	$     104,424.93	$    665,575.07	$      770,000.00
14-January-2010	$      91,004.02	$    678,995.98	$      770,000.00
14-April-2010	$       75,631.78	$    694,368.22	$      770,000.00
14-July-2010	$      62,622.82	$    707,377.18	$      770,000.00
14-October-2010	$      49,047.15	$    720,952.85	$      770,000.00
14-January-2011	$      34,509.58	$    735,490.42	$      770,000.00
14-April-2011	$      19,251.07	$    750,748.93	$      770,000.00
20-May-2011	$         1,776.71	$    225,173.50	$      226,950.21

1. The figures in the “Capital” column total $5,178,682.15, being the amount of the Solarise loan rounded up by $0.02.  Thus, payment of the Permitted Payments would see the entire Solarise Loan repaid on 20 May 2011, two days before its due date of 22 May 2011.

2. The Amortisation Schedule included the following note:

   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.  [SSA] may, but is not obliged to, make the capital payments on the Dates of Payment.  If [SSA] 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 [SSA] 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 [SSA] 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. 

3. Clause 8.2 provided for the circumstance in which SSA did not make a Permitted Payment specified in the Amortisation Schedule:

   [8.2]     To avoid doubt:

   …

   [8.2.2]if [SSA] does not made a capital payment (“Unpaid Capital Payment”) on the date which that capital payment is permitted to be made in accordance with the Amortisation Schedule … [SSA] 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;

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

4. Any payments in reduction of the debt to Solarise other than the Permitted Payments could be made only with Westpac’s prior written consent.  This was the effect of cl 8.3 in the Subordination Deed:

   [8.3]Notwithstanding anything else in this Deed or the Loan Agreement, any payments by the Borrower 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).

5. The Liquidators submitted that, as was the case with the Solarise Loan Agreement, the Permitted Payments under the Subordination Deed, if made, would have allowed the Solarise Debt to be repaid in full within two years.  By reason of cl 8.2.2 and the second paragraph in the note to the Amortisation Schedule, those payments would have meant payment in full of the Solarise Debt on 20 May 2011.

6. Clause 16 of the Subordination Deed provided that, to the extent of any inconsistency, the terms of the Subordination Deed were to prevail over the Solarise Loan Agreement. 

7. It was common ground at the trial 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.

8. The issues to which that question gave rise in the present proceedings are these:

   (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 SSA 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 SSA in October 2010 in relation to the negotiation of the new facility agreement?

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

9. The Liquidators also disputed, initially, that there was a “Westpac Debt” as defined in the superseded Business Finance Agreement as at 22 May 2011 on which the Subordination Deed could operate.  However, they abandoned that contention during the hearing.

   Was the Solarise Debt subordinated only until 22 May 2011?

10. The Liquidators’ submission that the Solarise Loan was subordinated to the Westpac Debt only until 22 May 2011 rested on the provision for Permitted Payments in the Subordination Deed. 

11. As noted, cl 8.1 permitted SSA, providing five conditions were satisfied, to make the payments set out in the Amortisation Schedule.  The Liquidators noted that the total of the Permitted Payments would see the whole of the Solarise Debt repaid by 20 May 2011.  They also noted that the second paragraph of the note indicated that, if one of the Permitted Payments had not been made, the amount which could be paid on 20 May 2011 should increase so that the total of the capital and interest then due to Solarise could be paid.  The Liquidators submitted that the note contained an imperative quality, as indicated by the provision that the total amount permitted to be paid on 20 May 2011 “will need to increase”. 

12. The Liquidators sought to support the submission that the subordination of the Solarise Loan to the Westpac Debt continued only to 22 May 2011 by reference to the provisions in the Solarise Loan Agreement indicating that the subordination operated only during the “Subordination Period”.  That period was defined to conclude on 22 May 2011.  In this regard, the Liquidators submitted that the Solarise Loan Agreement and the Subordination Deed “were part of a complementary suite of documents that should be read together and consistently”.

13. It is established that in the objective determination of the rights and liabilities of parties under a contract by reference to its text, context and purpose, it is permissible to have regard to any contract, document or statutory provision referred to in a text of the contract: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 at [46]. This passage was approved by the High Court in Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 328 ALR 564 at [51]. The Liquidators also referred to Chappuis v Filo (1990) 19 NSWLR 490 in which Priestley and Handley JJA said at 508:

    There can, in our opinion, be no objection to construing each contract in the light of the other.  The purchasers retained the same solicitor, and each contract was a separate part of what was commercially, from the vendor’s point of view, one entire transaction.  Each form part of the background “matrix” of facts for the other …

14. The Liquidators submitted that this principle was applicable because Westpac had acknowledged in cl 15.2 of the Subordination Deed that it had received unsigned copies of the Solarise Loan Agreement and the Share Buy Back Agreement and that it consented to those arrangements.  Furthermore, cl 16 of the Subordination Deed provided that, to the extent of any inconsistency, the terms of the Subordination Deed were to prevail over the loan agreement.  

15. The Solarise Loan Agreement and the Subordination Deed are undoubtedly related to one another.  The former provided the subject matter for the latter.  There is therefore an extent to which they can be read together.  However, there is no basis, in my opinion, for concluding that the Subordination Deed incorporates the two year Subordination Period contained in the Solarise Loan Agreement.  On the contrary, a number of matters indicate that the subordination for which the Subordination Deed provided was more extensive than (and inconsistent with) that contained in the Solarise Loan Agreement.

16. First, the Subordination Deed provided expressly for the duration of the subordination for which it provided.  Clause 4.2 stipulated that the subordination continued until the Westpac Debt had been paid in full or until the Solarise Debt had, with Westpac’s written consent, been repaid in full.  Clauses 5, 6 and 7 elaborated the subordination by precluding payment to, recovery by or assignment of the Solarise Debt by, Solarise “so long as any of the Westpac Debt remains outstanding”.  It is not easy to see how, despite those express words, the Subordination Deed intended to provide for the subordination to continue for only two years. 

1. Secondly, cl 8 and the Amortisation Schedule to the Subordination Deed did not, by the provision for Permitted Payments, alter that position.  Contrary to the Liquidators’ submission, cl 8.1 authorised, but did not require, SSA to make the Permitted Payments.  It used the permissive word “may”.  Clause 8.2.2 contemplated expressly that SSA may not make a Permitted Payment when it was authorised to do so, and permitted, but did not require, SSA to make a catch up payment.  Given the use of the permissive “may” in cl 8.1 and cl 8.2.2, the words “will” in the first and second paragraphs of the note to the Amortisation Schedule cannot be reasonably be understood as imposing an imperative obligation, that is, of requiring SSA to make repayment of the Solarise Loan in full by 22 May 2011.  It is not to be expected that an obligation of this kind would be imposed by a note to a schedule setting out permitted payments. 

2. Further still, paragraph [1] of the note stated expressly that “[t]he Borrower may, but is not obliged to, make the capital payments on the Dates of Payment”.  The effect of the following portions of the note is to provide for a variation in the regime of Permitted Payments if SSA did not make a Permitted Payment, that is, by providing for an adjustment in the calculation of interest and for an adjustment of the final payment. 

3. Thirdly, it is not readily to be supposed that when Westpac, was negotiating the May 2009 BFA, it sought subordination for a two year period only.  It is more realistic to suppose that Westpac sought to have the subordination continue until its debt had been paid, save that the Permitted Payments could be made at times when the cl 8.1 conditions were satisfied.  It is pertinent that Westpac was not a party to the Solarise Loan Agreement.  It had never signified agreement to the two year Subordination Period to which the Solarise Loan Agreement referred.  That was an arrangement between SSA, Solarise, Mr Mourney and Harbert only.  The express mention of the two year Subordination Period in the Solarise Loan Agreement, and the absence of any reference to such a limitation period in the Subordination Deed, suggests, to my mind, that the parties to the latter were deliberately departing from such a limitation. 

4. Finally, the parties to the Subordination Deed addressed the existence of inconsistency between it and the Solarise Loan Agreement and agreed, in cl 16, that, to the extent of any inconsistency, the Subordination Deed should prevail.  There is an inconsistency between the indefinite period of subordination contemplated by cll 4, 5, 6 and 7 of the Subordination Deed, on the one hand, and the two year Subordination Period contemplated by the Solarise Loan Agreement, on the other.  That being so, the former prevails. 

5. I conclude that, while SSA 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 contemplated therefore that the Solarise Debt may continue past 22 May 2011.  As SSA did not make the Permitted Payments to Solarise before 22 May 2011, it could thereafter make a repayment only with Westpac’s prior written consent.  That consent could not be unreasonably withheld or delayed (cl 8.3). 

6. Accordingly, this basis for the claim that the Solarise Loan was due and payable on 22 May 2011 fails.  

   An agreement by Westpac in May 2011?

7. The Liquidators relied on the following events for their contention that Westpac had agreed, in accordance with cl 8.3 of the Subordination Deed, to SSA entering into a fresh agreement with Solarise which had the effect of making the Solarise Debt due and payable on demand. 

8. During April and May 2011, SSA had engaged in discussions with Mr Mourney regarding extending the time for repayment of the Solarise Loan.  It is not necessary presently to record those discussions, save only to note that Solarise was pressing for repayment on or shortly after 22 May 2011.  

9. On 19 May 2011, Mr Mourney sent an “interim Solarise Agreement” to Mr Steele and Mr Thornton at SSA which he said would “allow us to continue past 22 May if required”.  The interim agreement, to which I will refer as the “2011 Solarise Agreement”, had been prepared by Mr Mourney’s solicitors.  The Agreement contemplated four parties: Solarise, SSA, Mr Mourney and Harbert.  It contained in cl 3 an acknowledgement of the Solarise Debt:

   [3]       Acknowledgement of liability for Debt

   [3.1]SSA acknowledges and agrees that pursuant to the Loan Agreement, on and from 22 May 2011 SSA is liable to pay Solarise on demand the whole of the principal sum of A$5,178,682.13 (Debt), together with interest accrued to 22 May 2011 pursuant to the Loan Agreement of A$43,132.04, on 22 May 2011.

   [3.2]Nothing in this agreement shall be taken to limit or postpone SSA’s liability or Solarise’s rights pursuant to the Loan Agreement as acknowledged and agreed by the preceding subclause.

10. Clause 4.1 required SSA to pay monthly instalments of interest at a rate not less than 11.3%. 

11. Clause 5 contained an undertaking concerning notification to Solarise:

    [5]       SSA’s undertaking to notify Solarise

    [5.1]SSA will give Solarise notice in accordance with the notice provisions of this agreement each calendar Monday after 22 May 2011:

    (a)whether and when SSA expects to be able to repay the balance of the Debt referred to in clause 3;

    (b)the basis for this expectation; and

    (c)the source of finance or prospective finance for that repayment.

12. Clause 9 contained an indemnity on which the Liquidators relied in connection with one of their alternative contentions.  I will return to that clause later.

13. Mr Thornton provided Mr Tanner at Westpac with a copy of the 2011 Solarise Agreement later on 20 May 2011 and asked him to “advise if you/Westpac have any issues and are happy to support”. 

14. Mr Tanner’s response on Monday, 23 May 2011 to that request was as follows:

    I confirm that Westpac is not a party to the attached proposed Agreement.

    Whether SSA decides to enter into this Agreement with Solarise Pty Ltd and Russell Mourney is a matter for the directors of SSA who must consider the ability of SSA to comply with any obligations under the Agreement. 

    As you are aware, SSA’s facilities with Westpac are currently under review and we reiterate that all requirements under [the] current Facility Agreement dated 19 October 2010 must continue to be met during this period of review.

15. It is not clear whether the 2011 Solarise Agreement was executed by all parties.  However, I am satisfied that it had been executed by at least SSA and Harbert, and that Mr Mourney had been provided on 23 May 2011 with the agreement as executed by them.

16. On 24 May 2011, Mr Mourney foreshadowed to Mr Steele and Mr Thornton that he “was planning to” serve a statutory demand in respect of Solarise’s outstanding debt.  

17. Mr Mourney followed this up with an email to Mr Steele, Mr Thornton and Mr Anderson on 27 May 2011 saying:

    … I hope progress is being made in the meantime towards repaying my loan, though I have heard nothing since Wednesday. 

    I have been advised by Tony Abbott that as a precursor to sending you the Statutory Demand, I should make it very clear to you that not only is the debt due and payable as of May 22, but also that I request repayment now. 

    I attach unsigned copies of the documents that will be sent to your registered office Monday, assuming I haven’t been satisfied with repayment arrangements made before then. 

    I am sorry it has come to this, but it is clear to me that I have been compliant, and therefore the Solarise debt has been a low priority, for too long. 

    Mr Mourney attached to his email an unsigned Creditor’s Statutory Demand for payment of $5,178.682.13 and an unexecuted supporting affidavit. 

18. Counsel for SMA submitted that Mr Mourney’s correspondence of 27 May 2011 constituted only a request, and not a demand.  I do not accept that submission.  In my opinion, Mr Mourney was making a demand although expressing it in polite terms. 

19. The Liquidators submitted that Mr Tanner’s email of 23 May 2011 constituted for the purposes of cl 8.3 of the Subordination Deed a consent by Westpac to SSA entering into the 2011 Solarise Agreement, including its agreement to the terms providing for repayment of the Solarise Loan on and from 22 May 2011 upon demand. 

20. I do not accept that submission.  In the first place, the consent to which cl 8.3 refers relates to payments by SSA in connection with the Solarise Debt.  It does not speak to a consent to SSA entering into an agreement containing a term that the Solarise Loan will be repayable on demand.  Secondly, I do not consider that Mr Tanner’s response can be regarded as a “consent” of the requisite kind.  Mr Thornton’s email to Mr Tanner of 20 May 2011 had not in terms sought Westpac’s consent and Mr Tanner did not couch his response in such terms.  Instead, he pointed out that the decision whether to enter into the agreement had to be made by SSA itself.  In context, Mr Tanner appears to have been declining to proffer advice to SSA about the appropriateness of the 2011 Solarise Agreement. 

21. Finally, there is nothing in the circumstances objectively considered which indicates that Mr Tanner was intending, by his response, to alter Westpac’s position under the Subordination Deed. 

22. For these reasons, the contention that Westpac had given a relevant consent pursuant to cl 8.3 of the Subordination Deed is rejected.

    Abandonment of the Subordination Deed?

23. The Liquidators submitted in the further alternative that the evidence indicated that each of Westpac, SSA 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.  This being so, they contended that, pursuant to principles of abandonment, the Subordination Deed was no longer “valid and efficacious” on and from the time of the negotiations for the Facility Agreement in October 2010. 

24. In support of this contention, the Liquidators relied upon events within Westpac in October 2010 and July 2011 and upon the course of dealings between Westpac, SSA and Solarise from May 2011 onwards.

25. There are circumstances in which it can be inferred that the parties have agreed that their contracts should no longer be operative.  Dixon CJ and Fullagar J referred to these circumstances in Fitzgerald v Masters (1956) 95 CLR 420 at 432:

    There can be no doubt that, where what has been called an “inordinate” length of time has been allowed to elapse, during which neither party has attempted to perform, or called upon the other to perform, a contract made between them, it may be inferred that the contract has been abandoned.  …  What is really inferred in such a case is that the contract has been discharged by agreement, each party being entitled to assume from a long‑continued ignoring of the contract on both sides that … “the matter is off altogether”.

26. The principles concerning inferred abandonment (or discharge by abrogation as it is sometimes called) were summarised by Kenneth Martin J in Porter v Sundance Resources Ltd (No 2) [2015] WASC 493 as follows (omitting his Honour’s citations), at [166]:

    (a)the conduct of parties may amount to a mutual abandonment of their contract;

    (b)a contract on foot may be discharged by the inferred later agreement of the parties, such later agreement being inferred from their conduct;

    (c)discharge of a contract by abandonment is rare;

    (d)the abandonment may be either of unperformed obligations or of future performance and existing rights;

    (e)the key question is whether the parties have objectively manifested an implied intention to extinguish their contract;

    (f)abandonment requires that the inference is clear;

    (g)the subjective intention of the parties is not relevant;

    (h)the implied intentions may be manifested through silence and delay;

    (i)parties may be estopped from denying that a contract has been abandoned.  Silence and delay may be relevant in showing such an estoppel.

27. In short, the question is whether there can be inferred, on an objective assessment, a later agreement by the parties to abandon or abrogate their contract. 

28. The Liquidators referred first to an unsigned internal Westpac memorandum of 15 October 2010 in which the authors (identified only as “Relationship Manager”, “Analyst” and “Portfolio Manager”) sought approval for amendment to the conditions to the then proposed Facility Agreement on the basis that the Solarise Loan would no longer be subordinated to Westpac.  The memorandum stated:

    Our current security includes a Deed of Subordination (“D o S”) from [Solarise who sold its] shares to Harbert in May 2009.  The balance of the vendor Loan as it stands today is $5 m and it is included in budgets provided to us and … is scheduled to be fully repaid by 30/10/11.  We are aware of this repayment and have allowed for it as a “permitted repayment” in our Facility Agreement and in our credit papers.

    …  Our D o S subordinates loan repayments to Solarise in the event of default of our facilities as they stood per the [BFA] dated May 2009.  Our lawyers have assessed that as we are now changing these facilities we needed to get a new amendment to the D o S in order for it to be valid.  However, we have been advised by the Borrower that Solarise is not prepared to sign any further documents that it perceives may weaken its position further (i.e. with SSA taking a further $10 m of debt at this time). 

29. The memorandum included an extract from Westpac’s legal department which indicated a belief that the Subordination Deed referred only to amounts owing under the May 2009 BFA and would not extend to amounts advanced under the 2010 Facility Agreement.  The extract from the legal advice also set out three options:

    ·have the subordination deeds revisited to capture the whole of the new facility arrangements;

    ·amend it to capture those facilities which were under the BFA, but not the new facilities being contemplated now; or

    ·do nothing.

30. The authors supported the “do nothing” option saying:

    So accepting that by not getting an updated D of S (which it appears we cannot get anyway) we are essentially accepting that the Solarise Loan of $5 m will no longer be subordinated formally to us (although remains an unsecured creditor), it now becomes a Credit and commercial risk decision for us.

31. There is no evidence that a copy of this internal memorandum was ever provided to SSA or Solarise and, given its nature, it seems unlikely that that would have occurred.  Nor is there evidence of the response of Westpac management to the recommendation, let alone that it accepted the premise to the recommendation, that the Solarise Loan would not be subordinated to advances under the 2010 Facility Agreement.

32. The Liquidators noted, however, that a condition precedent to the Tranche F advance was that the terms of the Subordination Deed be satisfactory to Westpac, both in form and in substance.  They submitted that as there had been no amendment to the Subordination Deed and no new Deed, Westpac must, at least impliedly, have waived compliance with this condition and that this was consistent with acceptance of the “do nothing” recommendation.

33. The Liquidators also noted Westpac’s response when, on 26 July 2011, Mr Steele informed Mr Tanner that Mr Mourney considered that the Subordination Deed was no longer applicable.  Westpac had not then challenged Mr Mourney’s assertion.  I infer that this was because Mr Tanner had called for and reviewed the internal memorandum of 15 October 2010.

34. The Liquidators relied upon a course of dealings in 2011 to demonstrate that Solarise, SSA and Westpac regarded the Subordination Deed as no longer operative.  These included:

    (a)on 17 May 2011, Mr Tanner from Westpac sought information from SSA as to the “proposed re‑negotiated vendor loan term”;

    (b)an internal Westpac memorandum of 20 May 2011 referred to the Solarise Loan repayment being “due” in late May;

    (c)Mr Tanner did not refer to the Subordination Deed at all when responding on 23 May 2011 to Mr Thornton’s request concerning the 2011 Solarise Agreement;

    (d)the 2011 Solarise Agreement executed, at the least by SSA and Harbert, provided that the Solarise Debt was immediately due and payable;

    (e)SSA informed Mr Tanner on 25 May 2011 of the execution of the 2011 Solarise Agreement and that it was negotiating with Mr Mourney for him to purchase RECs in lieu of a payment of cash.  Mr Tanner did not refer to the Subordination Deed at all in this context;

    (f)Westpac gave approval for the proposed transfer of RECs to Solarise in lieu of cash without making any reference to the Subordination Deed;

    (g)on 26 July 2011, Mr Tanner again enquired about the progress of SSA’s discussions with Solarise, again without making any reference to the Subordination Deed.

35. The Liquidators submitted that in these circumstances, it should be inferred that Westpac, Solarise and SSA had manifested a common intention no longer to be bound by the Subordination Deed.

36. Counsel for SMA submitted that the Liquidators’ contention with respect to abandonment was inconsistent with a plea they had made in other proceedings and that this, in some way, counted against the Liquidators’ claim.  SMA had not raised any plea of estoppel by conduct.  It sought to adduce the evidence to support the submission only belatedly and in circumstances which would have prejudiced the trial.  There were also doubts that the evidence, even if admitted, could have the effect asserted by SMA.  For these reasons, I declined to receive the evidence.  As there is no other evidence to support the submission, it is rejected.   

37. The Defendants are correct in their submission that the subjective intention or understanding of the unidentified authors within Westpac of the memorandum of 15 October 2010 is not relevant.  The matter is to be assessed objectively and, as noted, there is no express evidence that the views of the authors were ever adopted by Westpac management, let alone communicated to SSA or Solarise. 

38. Moreover, I do not consider that any inference of a mutual intention that the Subordination Deed should no longer be operative can be drawn.  Even if Westpac had that understanding, the corresponding understanding cannot be attributed to either SSA or Solarise.  All that the unidentified authors reported was that Solarise was not prepared to sign any further documents which may weaken its position and that it was resistant to revisiting the Subordination Deed “to capture the whole of the new facility arrangements” or to amending it “to capture those facilities which were under the BFA but not the new facilities”. 

39. I accept, as the Liquidators submitted, that it can be inferred that Westpac must have waived the requirement for any amendment to the Subordination Deed.  However, that does not of itself bespeak in an objective way a common contemplation that the Subordination Deed in unamended form should cease to be operative.  The evidence that the parties conducted themselves on that basis is at best slight and, to the contrary, there is some objective evidence that SSA at least continued to regard the Subordination Deed as being applicable.  It made payments of interest to Solarise on 13 January 2011, 14 April 2011 and 20 May 2011, these being at the intervals (and very close to the dates) specified in the Amortisation Schedule in the Subordination Deed.  This suggests that SSA regarded the Subordination Deed as being in operation. 

40. It is also evident that after the 22 May 2011, SSA sought Westpac’s consent to it making payments to Solarise.  This seems consistent with the understanding on its part that the Subordination Deed continued to be applicable, although I accept that that conduct may also be attributable to SSA’s understanding of its obligations under the 2010 Facility Agreement. 

1. Accordingly, I consider that SSA’s debt of $1,199,000 was properly included in the analysis in the Liquidators’ Aide Memoire at 31 May 2011. 

   IPD Group Ltd

2. IPD Group Ltd (IPD) supplied circuit breakers, distribution equipment and switchboard systems to SSA. 

3. The analysis in the Aide Memoire showed that $263,000 was due to IPD at 31 May 2011.

4. However, the Liquidators did not adduce evidence of IPD’s invoices nor a statement from IPD for the month of May 2011.  The statements for the months either side of May 2011 indicated that “Standard IPD Group Conditions Apply”, but the Liquidators did not adduce evidence of those standard conditions.  In these circumstances, it is not possible to make findings as to the terms of IPD’s supply, let alone as to whether SSA was non‑compliant with those terms.

5. Accordingly, the debt of $263,000 to IPD at 31 May 2011 should be excluded from the analysis in the Aide Memoire for 31 May 2011.

   Enerdrive Pty Ltd

6. Enerdrive Pty Ltd (Enerdrive) supplied a variety of the componentry used in SSA’s solar systems.  Enverdrive’s invoices required payment to be made in full by the 30^th day of the month following the date of invoice. 

7. The Defendants did not dispute that $180,180 was outstanding to Enerdrive by 31 May 2011.  They noted, however, that the late payments to Enerdrive appear to have coincided with the cessation in the trading relationship between SSA and Enerdrive.  The reasons for that cessation of relationship are not known, although I note that SSA had previously been late in payment several of Enerdrive’s invoices. 

8. I accept that the sum of $180,180 due to Enerdrive is properly included in the Aide Memoire analysis. 

   Clenergy Australia

9. As noted earlier, the Defendant Kerry J Investment Pty Ltd traded as Clenergy Australia (Clenergy).  It supplied energy solutions and calculations. 

10. Clenergy’s invoices stated its payment terms to be “Net 30”.  I infer that this meant 30 days from the date of invoice. 

11. SSA did not comply with those terms.  In respect of invoices issued during the month of April, it exceeded the 30 day requirement in one instance by up to 70 days and in two instances by 68 days.  The pattern of SSA’s payments does not indicate any agreement, tacit or express, entitling SSA to delay the payments.  As a party to the litigation, Kerry J was in a position to adduce evidence of any such arrangement, and it did not do so. 

12. I consider that the amount of $181,484.09 due to Clenergy at 31 May 2011 was properly included in the Aide Memoire analysis.

    Summary of adjustments

13. When the amounts due to Optimum Media, BlueScope, Matrin and IPD are excluded from the figure for trade creditors at 31 May 2011, the figure for those whose payments were overdue is $4.375 million. 

14. The Solarise debt is also to be removed from the aggregate figure of $12.564 million, as is the amount by which SSA had drawn down on the overdraft.  Making these adjustments, the figure in the Adjusted Overdraft Account Less Stated Debts column should be $5,887,223.63 (in round terms $5.9 million). 

15. The 31 May figure was potentially even higher by reason of Westpac having put its facilities “on demand”.  By letter dated 27 May 2011, Westpac confirmed SSA’s breaches of covenant at 31 March 2011 and that an Event of Default had occurred under the 2010 Facility Agreement.  Westpac gave notice to SSA that it did not waive the Event of Default and continued:

    In consequence of these Events of Default all facilities provided to SSA are on demand.  …

    We reserve our right to take action/further action in reliance upon these Events of Default including, but not limited to, the right to require all Facilities be immediately repaid or appointment of an Investigating Accountant at your cost.

    (Emphasis added)

16. If account is taken of SSA’s liability to Westpac, then plainly it was insolvent at 31 May 2011.  However, Westpac had not in fact issued a demand and its facilities continued to be available to SSA.

    Consideration

17. May 2011 was a relatively good trading month for SSA.  The table set out earlier in these reasons indicated that it had increased its EBITDA for the year to date to 30 April 2011 from $1.126 million to $3.225 million and its NPAT from negative $1.98 million to $534,000.

18. The Defendants submitted that SSA had sufficient resources available at 31 May 2011 with which to meet the debts then due and payable.  For this purpose they relied on the assets set out in the balance sheet in SSA’s management accounts as at 31 May 2011. 

Current Assets

May 2011

($’000)

Cash and cash equivalents

1,421

Trade and other receivables

6,499

Provision for doubtful debts

(688)

Rebates receivable

(4)

RECs receivables

12,704

Provision for RECs

(851)

SFS trade debtors

5,256

Inventories

26,591

Other current assets

1,569

Total current assets

52,497

1. The SFS trade debtors figure for 31 May can be ignored as these were amounts owing by customers who arranged finance for their installations through SSA’s subsidiary Sunworks.  The Defendants did not submit that the amount of inventories comprised a resource which was readily convertible to cash.  It is in any event evident that SSA’s management had been working diligently before 31 May to reduce and monetise the inventory where possible.

2. The cash and cash equivalents figure at 31 May 2011 was comprised almost wholly of cash held by SSA at bank.  The balance of the overdraft available at 31 May 2011 was only $281,000 (rounded). 

3. Again, the RECs receivable figure of $12.704 million was based on an average cost of about $36 per REC whereas the actual spot price at 31 May 2011 was $25.15.  This figure should accordingly be adjusted to $8.875 million.  The provision of $851,000 appeared to recognise the falling market price.

4. In respect of SSA’s debtors’ position at 30 April 2011, I referred to the difficulties in regarding significant amounts of the trade and other receivables as being readily available to meet SSA’s debts which were then due and payable.  That conclusion is confirmed by a report dated 31 May 2011 which stated:

   In FY11 YTD, and in particular over the last 60 days, management have done everything possible to improve the company’s cash position – including significantly reducing debtors days, monetising and reducing inventory, and stretching out creditor payments where possible.

   Thus, the figure at 31 May can be taken to have reflected management’s best efforts to secure payment from its debtors and to monetise inventory.

5. The RECs could be sold but it is apparent that SSA would have experienced difficulties in doing so quickly.  So much is evident from the analysis which SSA had itself carried out in mid‑May 2011.  In that analysis, the author canvassed five options:

   ·sell the RECs in the spot market;

   ·sell the RECs to a “repo” program provided by the ANZ Bank;

   ·sell the RECs to Mr Ferraretto;

   ·sell the RECs to Mr Mourney or Solarise in partial reduction of the Solarise Debt;

   ·sell the RECs to the Harbert investors.

6. The author of the analysis noted difficulties with each of these alternatives.  As to selling RECs in the spot market, the author noted doubts as to whether there was sufficient liquidity in that market to enable a sale to be made.  As to sale to the ANZ Bank repo program, the author noted that it would take approximately two weeks to set up the facilities and would in any event require a “whole of business” credit review by ANZ.  A sale to Mr Ferraretto, to Solarise or to Harbert investors would require negotiation.  Further, in the case of Solarise, the sale would result only in a reduction of the Solarise Debt and would not provide SSA with additional funding. 

7. The significance of realising assets within a particular time was addressed by Palmer J in Hall v Poolman at [187]:

   An asset cannot be taken into account in assessing solvency at a particular time without reference to the time it would realistically take to effect realisation and produce cash. It is no indication of solvency — indeed, it is the opposite — to point to property as available to meet debts falling due next month when, even with the utmost expedition, that property cannot be turned into cash for 6 months. Realisable property can only be taken into account in assessing solvency “if that property is in such a position as to title and otherwise that it could be realised in time to meet the indebtedness as the claims mature” …

   (Citations omitted)

8. In my view, this reasoning is apposite. In determining whether SSA was solvent, regard must be had to the time it would take to raise the capital required to meet liabilities.

9. Some conclusions as to the liquidity of the RECs can be drawn from the record of SSA’s sales of them during 2011.  The first sales of RECs by SSA in that year occurred on 31 March 2011.  During April 2011, SSA made eight separate sales, all privately negotiated.  This was at a time when the spot price of RECs was declining significantly.  During May, SSA made three separate sales and, on 31 May, transferred 12,987 RECs to Solarise in reduction of its debt.  On 6 June, SSA transferred 78,560 RECs to the Ferrarettos (thereby raising $2.8 million).  They were a related party (being SSA’s second largest shareholder) and the sales were on advantageous terms for SSA, perhaps because the Ferrarettos were seeking by this means to provide some support to SSA.  Thereafter, SSA made only three further sales of RECs in June 2011. 

10. A sale to the Commonwealth Bank of Australia (CBA) of 180,000 RECs on 30 June 2011 was by far and away the largest of these sales.  However, it was part of a Put and Call arrangement for the sale of 480,000 RECs at a rate of $20.25 which was to be effected over a three month period, with the effect, as I understand it, that SSA was not to receive payment in full immediately.  Further still, SSA could be required to buy back the RECs at the sale price plus 10%.  This could have resulted in SSA incurring a further loss. 

11. The sales of the RECs in April, May and June 2011 occurred at a time when SSA had a need for cash and was looking to raise it by the sales.  However, the overarching problem for SSA was that there was an oversupply of RECs in the market. The fact that SSA was willing to sell such a large quantity of RECs to CBA at a significant loss is some measure of its financial difficulty at that time.

12. In my view, the sales history supports the view that the RECs were liquid to an extent but that there were limitations on SSA’s ability to sell them quickly.  Another indication that this was so is contained in the email of SSA’s CEO (Mr Thornton) sent on 1 June 2011.  Mr Thornton proposed that SSA transfer RECs to Wuxi “in exchange for supplier payments at a discounted cash flow”.  He explained to Wuxi:

    The high volume of systems being put in by June 30 especially in NSW was going to generate STC’s at an astronomical rate especially given the rather low liability that had been set.  Obviously, this reality is come to fruition as the market has become flooded at the moment and liquidity has correspondingly dropped.

13. The position at 31 May 2011 seems to have been that SSA had approximately $1.7 million in cash (the monies held in its account and the balance of the available overdraft) together with whatever amounts could be realised from the trade and other receivables, and the REC receivables with which to meet debts which were then due and payable amounting to $5.9 million. 

14. It is to be remembered that the question is not just whether SSA was able to pay its debts but whether, ignoring temporary illiquidity, it was able to do so when they were due and payable.

15. The Defendants submitted that SSA’s failure to pay its debts when due was not an indication of an inability to pay them.  It may be accepted that there is a distinction between a failure to pay debts when due and an inability to pay them: Hussain at [116]; Hall v Poolman at [147]‑[153]. However, in the present case, subject to one qualification, the distinction is not real. The submission of counsel for SMA effectively acknowledged as much when he said that SSA had “adopted a conscious approach of seeking to defer payments … where possible” in order to manage the identified cash hole. The evidence bears out that SSA was deferring payments because it could not meet them. Its approach to payment of the Bosch debt to which I referred earlier, is one instance of this. To use the language of Palmer J in Hall v Poolman, this is not a case of a company refusing to pay for fanciful or improper reasons, or because its officers were irresponsible.  Nor was it a case of a company cynically exploiting the willingness of some creditors to allow some flexibility in their payment terms.  The overall effect of the evidence is that SSA was willing to pay its debts if only it could. 

16. I mentioned a qualification.  It is evident that SSA 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.

17. For the reasons given earlier, the cash and undrawn overdraft should not be taken into account.  If SSA had used these funds to pay its outstanding debts, it would have become immediately insolvent in any event.  Despite the limitations on the saleability of the RECs, SSA was able to make a sale to the Ferrarettos on 6 June 2011, thereby realising $2.8 million, and to CBA on 30 June 2011, thereby realising $3.645 million.  SSA’s other sales of RECs in June 2011 were modest (20,000 on 16 June and 4,300 on 20 June).

18. However, even taking into account the limitations on the saleability of the RECs, they were sufficient to meet the debts due and payable at 31 May 2011.  It is understandable that SSA was reluctant to sell the RECs earlier but they remained an asset which could be sold to meet SSA’s debts.  That being so, I do not consider that the Liquidators have proven that SSA was insolvent at 31 May 2011.

    SSA’s solvency as at 31 July 2011

19. No party contended for a finding of insolvency as at 30 June 2011 so that the position at that date need not be considered.  However, as noted at the commencement of these reasons, SMA contended, by reference to the report of Mr Lombe, that SSA had become insolvent by 29 July 2011 or 4 August 2011.  It is therefore convenient to take 31 July 2011 as a reference point.

20. It also convenient to commence with the same methodology relied upon by the Liquidators as for the previous months.  For convenience, I set out the analysis of the Liquidators in the Aide Memoire as at 31 July 2011.

Month End Date	Overdraft Account (Actual)	Less 14 Trade Creditors Overdue	Less ATO Debt Due & Payable	Less Solarise Debt Due & Payable	Adjusted Overdraft Account Less Stated Debt
31/7/11	(510,762.69)	(8,463,956.19)	(365,887.02)	(4,328,682.63)	(13,669,288.53)

1. The sum of $8,463,956.19 shown as overdue to the 14 major trade creditors was comprised as follows:

Optimum Media	(rounded) $154,000.00
Fasteners	(rounded) $326,000.00
Wuxi	$4,849,577.59
IPD Group	(rounded) $311,000.00
Clenergy	(rounded) $379,000.00
Bosch	$2,444,155.59

1. For the reasons given earlier, I will exclude the debts to Optimum Media and IPD Group from this list of creditors.  The overdrawn balance on the overdraft and the Solarise account should also be excluded.  This means that the figure in the column headed Adjusted Overdraft Account Less Stated Debts should be $8,364,620.20 ($8.365 million).

2. The assets recorded in SSA’s management accounts which were available to meet these debts were as follows:

Current Assets

July 2011

($’000)

Cash and cash equivalents

984

Trade and other receivables

2,864

Provision for doubtful debts

(698)

RECs receivables CBA

3,645

RECs receivables

10,131

Provision for RECs

(887)

Inventories

20,666

Other current assets

448

Total current assets

37,153

1. For the reasons given earlier, I will again exclude the cash and cash equivalents and inventories from consideration as a resource which was available to SSA to meet the debts then due and payable. 

2. The price used for the RECs in the balance sheet is not clear.  I have assumed again that it was based on an average price of $36 whereas the spot price of RECs at 31 July 2011 was $23. I have therefore reduced the RECs receivables figure to $6.47 million. 

3. This means that the aggregate of the adjusted RECs receivables figure and RECs receivables CBA figure ($10.117 million) exceeds the Adjusted Overdraft Account Less Stated Debts figure. 

4. This might suggest that, as SSA had the ability to have recourse to the RECs to meet the debts which were then due and payable, it was solvent.  However, I consider that other factors should be taken into account. 

5. I have already referred to evidence indicating some limitations on the liquidity of the RECs.

6. The management accounts for the month of July 2011 reported that the trade creditors of SSA totalled $20.17 million, a figure which was substantially more than the total for the 14 creditors selected by the Liquidators for analysis.  It seems realistic to infer that several of those trade creditors were also outside terms.  I will refer later to a statement to SSA’s Board on 19 July 2011 which provides some confirmation of this.

7. The balance sheet in SSA’s management accounts for the month of July 2011 shows that SSA had a negative net equity of $5.37 million.  This was deterioration from the position at 31 May when SSA had net equity of $2.743 million and a further deterioration from the position at 30 June when its net equity was a negative $4.387 million was shown. 

8. Furthermore, SSA’s cash flow problems were becoming more evident, as SSA’s own cash flow analysis confirmed. 

9. The Board meeting on 30 May 2011 noted that there was a “projected cash gap of $7‑8 m” in late July.  The increasing shortfall was evident in management’s 12 week cash flow forecast for the period from 27 May 2011 to 12 August 2011 (prepared on a weekly basis).  Because of space considerations, I will set out that cash flow analysis on a fortnightly basis, commencing on 3 June 2011 and concluding on 12 August 2011.  One consequence of proceeding in this way is that the figures in the “Total” column are not the sum of the figures for the particular six weeks shown.

Week Ending
$’000	3-Jun-11	17-Jun-11	3-July-11	15-Jul-11	29-Jul-11	12-Aug-11	Total
Cash Receipts
Received from Customers	2,750	2,750	2,750	2,750	2,750	2,750	16,500
Contracted REC Sales	-	814	-	827	-	-	1,641
RECs sold to Adrian Ferraretto	-	-	-	-	-	-	-
SFS Drawdowns	-	500	-	-	-	-	500
Total	2,750	4,064	2,750	3,577	2,750	2,750	18,641
Cash Outgoings
Suppliers – Panels + Inventory	(4,569)	(5,271)	(1,391)	(2,768)	(3,790)	(732)	(18,521)
Wages/Other Employee	(313)	(170)	(300)	(272)	(170)	(240)	(1,465)
ATO – Tax Instalments	-	-	-	-	-	-	-
Suppliers – Others	(1,823)	(467)	(2,010)	(445)	(1,230)	(489)	(6,464)
Total	(6,705)	(5,908)	(3,701)	(3,485)	(5,190)	(1,461)	(26,450)
Net Weekly Cash In/Out	(3,955)	(1,844)	(951)	92	(2,440)	1,289	(1,809)
Cash Position (excluding RECS Sales)
Cash at start of week	(1,023)	(4,215)	(9,523)	(11,117)	(14,929)	(16,710)
Net weekly Cash In/Out	(3,955)	(1,844)	(951)	92	(2,440)	1,289
Cash at end of week	(4,978)	(6,059)	(10,474)	(11,025)	(17,369)	(15,421)
Additional Cashflows from REC Spot Sales
RECS on hand (not contracted to sell)	150,950	113,428	205,995	296,341	397,991	464,987
RECS Spot Price	$25.00	$25.00	$25.00	$25.00	$25.00	$25.00
Cash Value of RECS (‘000)	3,774	2,836	5,150	7,409	9,950	11,625
Adjusted Cash at end of week	(1,204)	(3,223)	(5,324)	(3,616)	(7,419)	(3,796)
(Assumes Additional RECS sold in Spot market)

1. The “cash gap” which the Board noted on 30 May was the negative figure of $7.419 million at 29 July 2011.  The analysis projected that, by 29 July 2011, SSA would have a total of 397,991 RECs with a value of $25.  In fact, the spot price for RECs at 31 July was $23 meaning that the cash which could be realised from that number of RECs at 31 July 2011 was $9.153 million. 

2. It was not suggested that SSA’s cash flow analysis was unsound.  On my understanding, the position at 31 July was not as severe as the cash flow analysis predicted because, putting to one side the RECs transferred to Solarise in reduction of its debt, SSA had in fact sold 374,300 RECs in the period from 26 May to 31 July 2011 and still held a substantial number of RECs, as the figure in the balance sheet indicates.  Even so, there remained a substantial cash flow deficiency as at 29 July 2011.  In short, the cash flow analysis is evidence of SSA’s developing cash shortfall, even taking account of the prospect of sales of RECs. 

   Harbert fundraising

3. At its meeting on 30 May, the Board had discussed potential financing options which included raising capital through Harbert.  The options included:

   ·Mr Ferraretto’s agreement to buy 80,000 RECs for $2.8 million (this transaction occurred on 6 June 2011);

   ·selling RECs in the spot market;

   ·entering into some sort of “Repo” program;

   ·temporary funding from Westpac; and/or

   ·obtaining new equity from Harbert and other shareholders.

4. The Board pursued nearly all these alternatives. 

5. Mr Steele was the representative of Harbert on the SSA Board.  He was also the Managing Director of Harbert Fund Advisors (Australia) Pty Ltd.  It was common ground that Harbert is a substantial US based investment firm.  Mr Steele approached Harbert seeking further investment.  Harbert was willing and prepared a document entitled “Investment Committee Update – Solar Shop Cash Situation” dated 31 May 2011 for consideration by Harbert’s Investment Committee in relation to an injection of capital.  That update included the same cash flow forecast as had been presented to SSA’s Board on 30 May.

6. The Investment Committee Update noted that:

   [T]he previously contemplated RECs Repo program will not be sufficient by itself to bridge the company’s short‑term funding requirements.

   (Emphasis in the original)

   And later:

   In FY11 YTD, and in particular over the last 60 days, management have done everything possible to improve the company’s cash position – including significantly reducing debtors days, monetising and reducing inventory and stretching out creditor payments where possible.  Given the need to formulate a solution with regards to the [Solarise Loan] and also secure support from Westpac for the initiatives outlined in this memo, shareholders now need to take some action and we recommend HAPE considers the ways in which it can invest between $2‑4 m to support the business through this short term liquidity issue.

   … 

   Weekly Cashflow Forecast to mid‑August 2011

   Table 3 below shows the 12‑week cashflow forecast provided by [SSA] management.  This forecast excludes any repayments of the [Solarise Loan] which was due to be repaid at the end of May 2011: discussions are continuing with a view to formulating a new repayment structure.  This forecast includes the sale of 80,000 RECs to Adrian Ferraretto for $2.8 m – at an average price of $34.25, which compares favourably to the current spot price of $25.00 and demonstrates Adrian’s continuing support for the business.  Documentation is currently being prepared and this transaction is expected to be complete … next week.  This transaction does not include the ability for Adrian to put these RECs back to [SSA]; he will only realise cash proceeds from on‑selling the RECs.  

   The forecast shows a $7.4 m cash hole in the last week of July assuming that the company’s entire RECs holding is sold in the spot market (at a current spot market price of $25).  No other cash preserving or cost‑cutting initiatives are included in the forecast below.  …

   (Emphasis added)

7. On 17 June 2011, Harbert prepared a memorandum for the HAPE1 investors in which it referred to SSA’s “short‑term liquidity issue”; to the fact that SSA could not afford to accumulate RECs on its balance sheet and not convert them into cash; and to its need for additional funding (which Harbert quantified at approximately $7 million by mid‑July.  The memorandum said:

   The Investment Team remains confident of the success of HAPE1’s investment in [SSA] and therefore is committed to support the business with capital.

8. It noted that the Fund Rules limited further investment to an additional $600,000 and therefore sought “support from HAPE1 investors” to commit up to an additional $4.4 million in a separate vehicle.

9. Harbert indicated that it was prepared to underwrite any investment shortfall by the investors and said that it required a commitment to funding by 30 June, with the capital to be invested by 15 July.  It also told investors that Westpac was willing to increase financial support for SSA, subject however to SSA’s current shareholders also increasing their financial support. 

10. The further support by Harbert was subject to an important condition, as the memorandum indicated:

    As part of this capital injection, we will also be stabilising the relationship with Westpac and Solarise to ensure the business has sufficient time to track through the current issues.  This is a prerequisite to Harbert committing to this capital raising.

    (Emphasis added)

11. On 20 June 2011, Harbert’s Investment Committee indicated that it was considering investing a further $5.05 million ($650,000 through HAPE1 and $4.4 million by another investment vehicle).  However, these additional investments were contingent on satisfaction of a number of conditions, including a successful capital raising among Harbert’s own investors; Westpac’s agreement to increase the overdraft limit to $3 million; the sale of RECs to another entity, Diamond Energy (proposed for late June and mid‑July); and the finalisation of a further investment by Mr Ferraretto.  None of these conditions was ever satisfied (nor waived): Harbert’s investors were prepared to subscribe only $3.013 million; Westpac did not increase the overdraft limit; the transfer to Diamond Energy did not proceed (although, as noted, a sale to CBA was achieved); and Mr Ferraretto did not proceed with a mooted additional investment.  Mr Ferraretto had informed Mr Steele sometime before 27 June 2011 that he did not have capital available to invest and Diamond Energy indicated, at about the same time, that it would not be able to proceed with the transaction. 

12. On 29 June 2011, Harbert prepared another memorandum for its investors explaining the need for additional capital for SSA.  A rights issue was contemplated.  Again, Harbert indicated that it would underwrite the capital raising.  The revised cash forecast, indicated a negative net cash position in late August 2011 of $5.4 million (excluding REC sales). 

13. On 30 June 2011, Mr Steele circulated to the existing SSA shareholders the proposal for additional investment by them.  None agreed to participate and that position was known before 31 July 2011. 

14. On 21 July 2011, Mr Steele wrote to Mr Mourney asking him to defer any contact with Westpac.  He said:

    [S]hareholders are seeking to invest up to an additional $5 m to sure up the balance sheet.  As I mentioned yesterday, this money will be ready to invest in the next 10 days.

    Documentation is being prepared on the s/h investment, once we meet with Westpac on its facilities, we will move to prepare the documentation for Solarise and the bank.

    As you are already aware, the current cash hole is driven by the sharp and unexpected move in the STC price, and therefore the majority of the dollars in is going to sure up the balance sheet in the short term.

    Mr Steele’s references to the money being available in the next 10 days and to the “current cash hole” are to be noted.  

15. Harbert’s interest in providing a capital injection is confirmed by the fact that it obtained accounting and legal advice concerning the capital raising.  It not necessary to summarise that advice beyond noting that Harbert was informed that its proposed warrant and redeemable note structure was not “a simple transaction” from an Australian income tax perspective. 

16. It is evident that Harbert continued during July and August to pursue possible further investment, but it never eventuated.  It is not necessary to make more detailed findings.  It is sufficient to say that: (a) during June and July 2011, SSA had the prospect of additional funding from Harbert; and (b) Harbert was willing to be a participant in arrangements for additional funding; but (c) by 31 July (two months after the cash shortfall had been identified) Harbert’s own conditions were still not satisfied, including the raising of funds from its own investors.  In my opinion, it cannot be concluded in the circumstances that further investment by Harbert was, at 31 July 2011, sufficiently certain as a matter of commercial reality so as to constitute a resource properly to be considered in relation to SSA’s solvency.

17. I accept that if, on a “realistic commercial assessment”, SSA had a firm prospect of a capital injection through Harbert, that circumstance would be relevant to an assessment of its solvency: ASIC v Edwards at [99].  One may accept that Harbert is an institution of size and resources but it is evident that any investment by it was contingent on it raising funds from its own investors (as well as an increase in the Westpac facilities).  In the events which happened, Harbert was only partially successful in the former.  Critically for present purposes, there was no clarity about its ability to do so as at 31 July 2011.  As Barrett J observed in ASIC v Edwards:

    [T]he capacity to raise funds from external sources must be judged in a practical and business like way by reference to the commercial realities of the case … Possibilities are not enough.  Genuine and realistic availability, as a matter of commercial reality, must be seen.

18. The uncertainty of the position at 31 July 2011 is confirmed by the evidence of some events occurring shortly after that date.  In an email to SSA’s other shareholders on 8 August 2011, Mr Steele said that Harbert had been able to receive subscriptions from its own investors for only $3.013 million with the effect that there was a shortfall in its proposed funding of just under $2 million.  He proposed to the existing shareholders terms pursuant to which Harbert’s investors may be willing to fund that additional $2 million.  The terms of his email indicated the contingent nature of Harbert’s willingness to provide further funding.

19. Contrary to the submissions of the Defendants, I do not consider it appropriate to proceed on the basis that additional funding from Harbert should be regarded as having been a resource available to SSA and therefore indicative of solvency until such time as it became apparent that Harbert would not make the additional investment.  

    Other resources available to SSA

20. It is necessary to consider the other resources which may have been available to SSA.

21. Earlier in these reasons, I noted that SSA had written to Westpac on 16 June 2011 seeking, amongst other things, an increase in the overdraft limit to $3 million, an increase in the forex facility to $10 million, and postponement of its obligation with respect to four of the quarterly amortisation payments of $500,000.  It described its proposal as being part of an “all in” deal with its shareholders and Solarise for its future funding.  Apart from the increase in the forex facility, Westpac did not accede to these requests. 

22. By an email dated 29 June 2011, Westpac informed SSA that it was not prepared to waive the amortisation payments until the Second Independent Business Review had been completed.  Westpac did say, however, that if the payment of the $500,000 amortisation payment on 30 June would exceed the existing overdraft:

    We would be prepared to support SSA in the interim with temporary Overdraft assistance if this payment creates an excess pending receipt of normal collections and management [of] other working capital variables. 

23. SSA then requested an increase in the overdraft limit to $1.5 million for 60 days.  Westpac did not accede to that request but did indicate that it would “honour all supplier payments and managing the excess position on a daily basis”. 

24. I am satisfied that while Westpac was prepared to continue its facility pending receipt of the Second Independent Business Review, it was not prepared to provide additional facilities other than in the limited way mentioned.  After the Second Independent Business Review was completed, Westpac continued to offer some limited support but SSA could not comply with its required covenants. 

25. As noted earlier, the recommendation in Ferrier Hodgson’s Second Business Review of 24 July 2011 was that Westpac’s continued support be subject to Harbert and/or other shareholders injecting $5 million into the business immediately.  It is very evident that Westpac’s willingness to continue support was contingent upon the injection of new capital from Harbert which, although sought some two months earlier, had still not been provided.

26. Mr Lombe noted in his first report prepared at the request of SMA that the solvency and future trading of SSA was contingent on SSA containing the cash injection of $5 million from Harbert in July and on Westpac’s ongoing financial support.  He also noted that the absence of either would be fatal to the solvency of SSA.  I agree with that assessment.  SSA did not have the cash injection from Harbert at 31 July 2011 and, as indicated, the prospect of its receipt was a highly contingent.  Westpac had not indicated its willingness to increase its facilities in the way Harbert had sought.

    Other matters

27. By 31 July 2011, SSA was being harried by several of its creditors:

    ·the demands made by Bosch to which I referred earlier included demands made on 31 May 2011 and on 24 and 27 June;

    ·SMA had told SSA on 27 May 2011 that it required payment within 30 days of invoice in respect of an order then being placed.  The reality of this requirement was made apparent on 14 July 2011 when SMA said that it would “stop shipment on all orders” if it did not receive payment on the following day;

    ·Mitsui told SSA on 11 May that it would require advance payments on the invoices currently due in June and, on the following day, told SSA that, because a payment due on 11 May had not been paid, it may delay future shipments “due to more serious deemed concerns of SSA cash flows”;

    ·the Board was informed at its meeting on 19 July 2011:

    Cash continues to be constrained.  We have lots of unhappy suppliers as we are squeezing payments for as long as possible in order to keep some cash in the bank.

28. I have not overlooked the submission of Kerry J based on the report of Mr Williams to the effect that as at 29 July 2011, SSA had met approximately 96% of its trade creditor liabilities within commercial terms.  That opinion appears to have been based on SSA’s own “aged creditor payments” reports.  Other evidence indicates that those reports were not reliable.  It is in any event inconsistent with the contemporaneous advice to the Board on 19 July 2011 to which reference has just been made.

29. The Second Independent Business Review provided to Westpac on 19 July 2011, stated:

    The Group has experienced difficult trading conditions in the past 12 months.  [A]s a result Management believes that the Group heads into FY 12 requiring an immediate working capital injection of at least $5.0 m, to bring creditors to within terms.

30. The Liquidators relied on a cash flow analysis prepared by Mr Morris which showed a cash shortfall at 1 August 2011 of $17.27 million.  That analysis overstates the extent of the cash deficiency because, on my understanding, Mr Morris assumed that all the trade creditors were due and payable at the identified dates whereas I have found that some were not, and that, contrary to my findings, SSA was liable to make payments to Solarise.  Nevertheless, Mr Morris’ analysis is generally supportive of the difficult position indicated by SSA’s own analysis.

31. The Defendants critiqued Mr Morris’ analysis on the basis that it did not take account of the additional support provided by Westpac, the prospect of a capital injection, and the prospect of accommodation by SSA’s trade creditors.  To my mind, these matters do not undermine the overall effect of the analysis: the additional support of Westpac was quite limited; the prospect of a capital injection was highly contingent; and even if some creditors may have provided some accommodation, it is evident that several were becoming increasingly insistent upon payment by SSA.  I do not regard the alternative cash flow analysis provided by Mr Lombe as indicative of a contrary position because, amongst other things, it appears to have assumed the receipt of Harbert’s $5 million capital injection in July 2011.  In any event, Mr Lombe considered that SSA was insolvent by 29 July 2011 or, at least by August 2011.

32. It is evident that SSA’s position at 31 July 2011 was parlous.  I note again that its own analysis was that by 29 July 2011, it would have a cash shortfall of $7.419 million, even after the sale of 397,991 RECs.  It did in fact have more RECs than projected but even so, the amounts involved fell well short of making up the projected cash deficiency.

33. The difficulty of SSA’s position was confirmed by Mr Steele in an email to others within Harbert on 17 August 2011 in which he said:

    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.

34. On my understanding, the “CBA deals” were the remaining tranche or tranches of the sales of RECs to CBA.  Although Mr Steele’s 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.  On the contrary, I am satisfied that it also reflected the position at 31 July, and reflected the uncertainty which existed not only with respect to the Harbert cash injection but also the position even if that cash injection was received.

35. All these matters indicate that SSA was insolvent as at 31 July 2011.

    Conclusion

36. In summary, I have found that the Liquidators have not proven that:

    (a)SSA was insolvent as at 31 January 2011;

    (b)SSA was insolvent as at 30 April 2011;

    (c)SSA was insolvent as at 31 May 2011.

37. I would determine the separate question in each action by holding that SSA had become insolvent by 31 July 2011.  I will hear from the parties with respect to the remaining matters in the proceedings.

I certify that the preceding three hundred and sixty-seven (367) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.

Associate:  

Dated:        24 November 2017