SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
DUNCAN AS LIQUIDATOR OF WDR IRON ORE PTY LTD (IN LIQUIDATION) v DOWNER EDI WORKS PTY LTD
[2020] SASC 89
Judgment of The Honourable Justice Blue
26 May 2020
CORPORATIONS - WINDING UP - WINDING UP IN INSOLVENCY
CORPORATIONS - WINDING UP - WINDING UP IN INSOLVENCY - WHAT CONSTITUTES INSOLVENCY
CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - EFFECT OF WINDING UP ON OTHER TRANSACTIONS
CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - EFFECT OF WINDING UP ON OTHER TRANSACTIONS - PREFERENCES AND VOIDABLE TRANSACTIONS - UNFAIR PREFERENCES
CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - EFFECT OF WINDING UP ON OTHER TRANSACTIONS - PROTECTED TRANSACTIONS - DEALINGS IN GOOD FAITH
The plaintiff is the liquidator of WDR Iron Ore Pty Ltd (In Liquidation) (WDRIO).
The plaintiff sues the defendant for four payments totalling $189,252 received between 17 April and 18 July 2014 as recoverable unfair preferences.
The defendant contends that the insolvency of WDRIO at the time of the first three payments has not been proved; and that it has a statutory defence under section 588FG of the Corporations Act 2001 (Cth).
Held:
1. WDRIO was insolvent at the time of the first three payments and at all times after 28 February 2014 (at [105]).
2. The defendant fails in its statutory defence under section 588FG of the Act (at [263], [267], [271], [274] and [279]-[282]).
3. The plaintiff is entitled to judgment for $189,252 plus interest (at [285]).
Corporations Act 2001 (Cth) ss 95A, 588E, 588FC, 588FF, 588FG; Supreme Court Civil Rules 2006 (SA) r 234, referred to.
Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103; Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, discussed.
JTS Property & Investments No 1 Pty Ltd (in liq) v Sadri [2010] NSWSC 1384; Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266; White v ACN 153 152 731 Pty Ltd (in liq) (2018) WAR 234, considered.
DUNCAN AS LIQUIDATOR OF WDR IRON ORE PTY LTD (IN LIQUIDATION) v DOWNER EDI WORKS PTY LTD
[2020] SASC 89Civil
BLUE J:
The plaintiff Stephen Duncan is the liquidator of WDR Iron Ore Pty Ltd (In Liquidation) (WDRIO).
The fifth defendant Downer EDI Works Pty Ltd (DEW) supplied wet mixing and conditioning services to WDRIO for the construction of a haul road in the Northern Territory.
Mr Duncan as liquidator of WDRIO sues DEW for $189,252,[1] being the total of four payments received between 17 April and 18 July 2014, as recoverable unfair preferences under sections 588FA, 588FC, 588FE and 588FF of the Corporations Act 2001 (Cth) (the Act).
[1] All dollar figures less than $2 million are rounded to the nearest whole dollar, unless otherwise shown.
DEW contends that the insolvency of WDRIO at the time of the first three payments has not been proved; and that it has a statutory defence under section 588FG of the Act. Separate trials (the insolvency trial and the good faith defence trial) were held in relation to these two separate issues.
There were originally six defendants in this action. Ultimately the claims against three of the defendants were resolved and the claim against a fourth defendant was stayed. The claim against the second defendant, SMA Industries Pty Ltd, is addressed in my reasons for judgment delivered concurrently in Duncan as Liquidator of WDR Iron Ore Pty Ltd (In Liquidation) v SMA Industries Pty Ltd.[2]
[2] [2020] SASC 88.
Elements of the cause of action
In the paradigm case of a payment to a creditor, as in the present case, the elements of a recoverable unfair preference cause of action are:
1immediately before the payment, the company owed a debt to the defendant (the debt) and the defendant was thereby a creditor of the company;
2the debt was unsecured;
3the payment was made by the company or, if the payment was made by another entity, the company was a party to the transaction involving the payment such that the creditor received a benefit from the company;
4immediately before or immediately after the payment, the company was unable to pay all its debts as and when they fell due and payable;
5the payment resulted in the creditor receiving from the company, in respect of the debt, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
6an application to recover the payment is made by the company’s liquidator; and
7the application is made within the limitation period specified by subsection 588FF(3).[3]
If these elements of the cause of action are established, a defence is available to the creditor if it establishes the matters specified by section 588FG (addressed below).
In this case, the issue relates to the fourth element of the cause of action, on which DEW puts Mr Duncan to proof. DEW admits that the remaining elements of the cause of action are established but contends that it has a defence under section 588FG.
Background to insolvency issue
WDRIO was incorporated on 14 July 2008. It acquired exploration licences at Roper Bar in the Northern Territory. Roper Bar is west of the Gulf of Carpentaria, being approximately 300 kilometres east of Katherine and 600 kilometres south-east of Darwin. Iron ore of direct shipping grade was discovered at Roper Bar in 2009.
WDRIO acquired two mineral leases covering approximately 45 square kilometres and three ancillary mineral licences for services at Roper Bar. WDRIO also held exploration licences at Mountain Creek and Chambers Bay in the Northern Territory but it did not hold any mineral leases other than at Roper Bar.
WDRIO was a wholly-owned subsidiary of Western Desert Resources Ltd (WDRL). WDRL had its shares listed on the Australian Stock Exchange.
WDRL had three other wholly-owned subsidiaries: WDR Gold Pty Ltd, WDR Base Metals Pty Ltd and Red Desert Minerals Pty Ltd. Those subsidiaries held various mining tenements, directly or via joint ventures, but did not engage in any mining or production activities or have plans to do so in the immediate future. WDRL held a geothermal exploration licence at Roper Bar but did not engage in any production activities or have plans to do so in the immediate future. The only production activity undertaken by WDRL and its subsidiaries (collectively Western Desert) was the production of iron ore by WDRIO. Western Desert’s June 2013 quarter report, 2013 annual report and December 2013 quarter report show that exploration activity on tenements other than Roper Bar was relatively minimal.
Western Desert’s 2012 annual report shows that very substantial construction activities were required as a prelude to mining, crushing, hauling and shipping iron ore from Roper Bar. This construction commenced in August 2012 and it was intended that it be commissioned and the first cargo be shipped by 30 June 2013.
WDRIO acquired a tenement at Bing Bong port on the Gulf of Carpentaria. It entered into a Loading Facility Agreement with the operator of that port, Mount Isa Mines Limited.
WDRIO was required to construct a pit, camp and airstrip at Roper Bar; a 165 kilometre long road from Roper Bar to Bing Bong port with associated bridges; and stockyard facilities and conveyor systems at Bing Bong port.
Western Desert’s 2013 annual report and December 2013 quarter report show that construction activities were not completed until December 2013.
WDRIO engaged a short-term contractor to undertake mining. On 14 January 2014 it entered into a contract with Thiess Pty Ltd (Thiess) to undertake mining using a fleet of four diggers and associated dump trucks. Thiess commenced mining on 27 January 2014.
WDRIO hired crushing and screening equipment from OPS Screening and Crushing Equipment (NT) Pty Ltd. It engaged Phoenix Mobile Pty Ltd to provide crushing services. It engaged Wagners Transport Pty Ltd to haul iron ore in 16 road trains from the mine to the port.
At Bing Bong port, the crushed iron ore was to be loaded onto barges and transported to bulk carriers approximately 35 kilometres offshore. WDRIO engaged PB Sea-Tow (Australia) Pty Ltd (PB Sea-Tow) to tranship the iron ore from Bing Bong port to markets in Asia.
WDRIO entered into an Iron Ore Off-Take Agreement with Noble Resources International Pte Ltd (Noble) for five years under which WDRIO agreed to sell and Noble agreed to buy all iron ore produced by WDRIO for five years.
WDRIO planned to ship 250,000 tonnes of iron ore per month. WDRIO entered into a hedging facility to sell 200,000 tonnes per month of iron ore at $120 per tonne from December 2013 to September 2014. If WDRIO did not supply 200,000 tonnes in a given month, it was required to purchase the shortfall on the spot market. If the spot price was more than $120 per tonne, WDRIO would make a hedge loss. If the spot price was less than $120 per tonne, WDRIO would make a hedge gain.
WDRIO operated a US dollar bank account entitled “USD proceeds account” (the Macquarie USD account) and an Australian dollar account entitled “AUD proceeds account” (the Macquarie AUD account) with Macquarie Bank. WDRL operated a cheque account with National Australia Bank (the NAB account).
Proceeds of iron ore sales received from Noble and hedge settlements were deposited into the Macquarie USD account. Funds were converted into Australian dollars and transferred into the Macquarie AUD account. Funds were then transferred into the NAB account. Payments to creditors were made out of the NAB account.
Western Desert did not in practice distinguish between the financial activities and positions of WDRL and WDRIO. The group’s MYOB accounting system operated a single company general ledger. No inter-company loan account was maintained. Monthly management accounts and board reports were prepared on a consolidated basis.
WDRL raised capital by the issue of shares. As at 31 December 2013, its issued share capital was $227.7 million.[4]
[4] All dollar figures greater than $2 million are rounded to the nearest hundred thousand dollars, unless otherwise shown.
On 11 October 2013 Western Desert entered into a Syndicated Project Facility Agreement with Macquarie Bank (the Facility Agreement) to fund construction of capital infrastructure and provide working capital for operations. The facility limit was initially to be $93 million but on 15 October 2013 it was reduced by Macquarie Bank to $80.65 million. The facility was repayable by 30 June 2015 with the first repayment of $25 million (reduced to $20 million on 15 October 2013) due on 31 March 2014.
One of the conditions of the Facility Agreement was that Western Desert was required to have in its Macquarie bank accounts at least $10 million at the end of each month from 31 January 2014 and $15 million from 30 April 2014 onwards (the Liquidity condition). On 10 March 2014 Macquarie Bank waived the Liquidity condition as at 31 March 2014 only.
Mining at Roper Bar commenced in September 2013 and crushing commenced in late November 2013. Haulage to Bing Bong port commenced in December 2013 and shipping commenced at the end of December 2013. By 31 December 2013, 338,000 tonnes[5] of commercial grade iron ore had been mined; 121,000 tonnes had been crushed; 62,000 tonnes had been hauled and 24,000 tonnes had been shipped.
[5] All tonnage figures referred to are rounded to the nearest thousand tonnes, unless otherwise shown.
As at 31 December 2013, according to its half-year report, Western Desert had accumulated losses totalling $28.7 million. In addition, the fair value of hedging instruments involved a loss of $28.0 million. Revenue for the half-year was $2.6 million and the loss before income tax benefit was $12.8 million.
Western Desert’s total assets were recorded at $407 million, of which $289.7 million comprised capitalised exploration, development and construction expenditure and $20.1 million comprised net capitalised tax losses. Other significant assets comprised $20.2 million cash and cash equivalents; $15.1 million plant, equipment and infrastructure; and $15.0 million inventory. Liabilities included $80.65 million loan facility from Macquarie Bank (the facility being fully drawn); $11.5 million finance lease liability; $46.5 million futures contract liabilities; and $41.4 million trade creditors and other payables.
In January 2014 less than 100,000 tonnes of commercial grade iron ore was mined, crushed, hauled and shipped. The tonnage shipped was 59,000 tonnes.
In February 2014 less than 100,000 tonnes of commercial grade iron ore was mined, crushed, hauled and shipped. The tonnage shipped was 92,000 tonnes.
During the three months to 31 March 2014, 298,000 tonnes of commercial grade iron ore was mined; 274,000 tonnes was crushed, 295,000 tonnes was hauled and 277,000 tonnes was shipped.
On 20 February 2014 Western Desert wrote to Macquarie requesting an increase in the facility limit by $12 million.
On 27 February 2014 the board of directors of WDRL resolved to undertake a capital raising of $50 million by a rights issue, of which it was estimated that approximately $11 million would be available to reduce trade creditors, pay a settlement with PB Sea-Tow and pay the port access fee.
On 28 February 2014 Macquarie Bank issued a letter to Western Desert offering to increase the facility limit temporarily until 18 April 2014 by $3.5 million (to $84.15 million) upon payment of an upfront fee of $290,000. The repayment of the temporary increase was premised on a capital raising by WDRL.
On 28 February 2014 Western Desert was in default of the Liquidity condition. It held $3.2 million in its Macquarie bank accounts, leaving a shortfall of $6.8 million.
On 7 March 2014 the board of directors of WDRL resolved to increase the proposed capital raising to $60 million due to a potential $10 million shortfall to June as a result of wet weather.
On 7 March 2014 Western Desert wrote to Macquarie requesting a further increase in the facility limit by $12 million.
On 10 March 2014 Macquarie Bank issued a letter to Western Desert offering to increase the facility limit temporarily until 18 April 2014 by $8.5 million (to $92.65 million) and defer the increase in the Liquidity condition to $15 million until 30 June 2014 upon payment of an upfront fee of $710,000 and various other conditions. The repayment of the temporary increase was premised on a capital raising by WDRL.
On 14 March 2014 WDRL issued an entitlement offer booklet offering to eligible shareholders up to 120 million shares at 50 cents per share. The offer was open for acceptance between 24 March and 7 April 2014. The offer was fully underwritten by Ord Minnett.
On 5 September 2014 WDRIO and WDRL were placed into voluntary administration.
On 9 April 2015 WDRIO was wound up and Mr Duncan, Mark Mentha and Scott Kershaw were appointed liquidators. Mr Mentha and Mr Kershaw resigned as liquidators on 30 June 2015.
Insolvency issue trial
DEW instructed counsel to attend at the insolvency trial to avoid the risk of Mr Duncan obtaining judgment in default of attendance under rule 234 of the Supreme Court Civil Rules 2006 (SA). DEW’s counsel was not instructed to oppose or make submissions concerning evidence tendered by Mr Duncan, cross-examine witnesses, adduce evidence, make submissions or otherwise address the Court. The role of DEW’s counsel was strictly confined to physical presence.
Mr Duncan tendered affidavits by Christopher Powell, Andrew Edmunds and George Bandes. They did not give oral evidence because they were not required for cross-examination.
Mr Duncan tendered numerous business records of Western Desert. They included annual, half yearly and quarterly reports; board papers; board minutes; agreements and related documents; and other documents arranged in chronological order.
It is extremely unusual, if not unprecedented, for a defendant to attend at trial but not participate. Usually a defendant attends for the purpose of participating in the trial or does not attend at all. The circumstances in this case are unusual in that, when the action was listed for trial on the insolvency issue, there were six defendants and DEW intended to rely on evidence adduced and submissions made by the other defendants. However, by the time the insolvency issue came on for trial, Mr Duncan had resolved the insolvency issue (if not the entire claim) with the other defendants.
It may be that it is an abuse of process for a defendant to attend, but not participate, at trial solely to avoid judgment in default of attendance. However, Mr Duncan did not so contend and I determine the insolvency issue by reference to the evidence adduced at trial.
Andrew Edmunds gave evidence that in January 2013 he was engaged by a labour hire company to undertake work for Western Desert. In July 2013 he was employed directly by Western Desert as Commercial Manager. He was based in the Darwin office but also spent time at Roper Bar and at the Adelaide office. He recruited George Bandes to work with him in the Darwin office, Mr Bandes commencing in July 2013.
Mr Edmunds gave evidence that senior management worked in the Adelaide office. George Rogers was the Finance Manager and he reported to Mark Seatree, the Chief Financial Officer. In about January 2014 James Loechel commenced in the Adelaide office. Norm Gardner was the Managing Director.
Mr Edmunds gave evidence that by October 2013 much of his time was devoted to addressing the pressure being brought to bear by suppliers for payment of invoices. From that time, the business was always battling to make payments to its creditors.
Mr Edmunds gave evidence that the procedure was that he or Mr Bandes gave or obtained authorisation for payment of invoices and emailed them to Susan Wynbergen, the Accounts Payable manager in the Adelaide office. Ms Wynbergen was responsible for entering the invoices into MYOB but frequently they had not been entered when Mr Edmunds received a demand from a creditor for payment.
Mr Edmunds gave evidence that the decision as to which creditors were to be paid, when and in what amounts was made by Mr Seatree, Mr Rogers and, after his arrival, Mr Loechel. From October 2013 onwards, Mr Edmunds was in continual discussions with them about payment of creditors and there was never enough to see creditors paid.
Mr Edmunds gave evidence that by early November 2013 Western Desert was short-paying suppliers, and paying suppliers late, because there was insufficient cash to pay them in full. From about December 2013 major creditors were put on instalment payment plans for payment of outstanding invoices. Mr Bandes and Mr Edmunds attempted to reach agreement with creditors for payment by instalments. They annotated aged payables reports to indicate those creditors who were applying the most pressure and were the most critical to the operation. Mr Edmunds produced by way of example a report dated 24 December 2013.
Mr Edmunds gave evidence that the equity raising and the funding from Macquarie Bank obtained in November 2013 had no material impact on the aged payables. The same applied once revenue started to be received from shipping iron ore. Mr Edmunds referred to various email communications within the company from January 2014 onwards about difficulties in paying suppliers.
George Bandes gave evidence that he commenced working for Western Desert in July 2013. He worked with Mr Edmunds and a receptionist in the Darwin office. He dealt with George Rogers, Finance Manager, and Mark Seatree, Chief Financial Officer, in Adelaide. Both Mr Rogers and he reported to Mr Seatree. Mr Bandes gave evidence largely to the same effect as the evidence of Mr Edmunds.
I accept the evidence given by Mr Edmunds and Mr Bandes.
Christopher Powell gave evidence that he is a chartered accountant, having been engaged in the conduct of insolvency administrations since 1986. He is a partner with Mr Duncan in the accountancy firm Duncan Powell. He is self-evidently not independent.
Mr Powell produced a report as to solvency dated 18 December 2017. In that report, he expressed the opinion that each of WDRIO and WDRL was insolvent, in the sense of being unable to pay all their respective debts as and when they became due and payable, at all times from not later than 28 February 2014. Given the absence of any challenge to Mr Powell’s evidence, it would be open to me to accept Mr Powell’s opinion in this respect as evidence of insolvency. However, because insolvency is the ultimate issue, out of an abundance of caution I do not rely on Mr Powell’s ultimate opinion. However, I do accept his opinion on the various subsidiary issues on which he expressed an opinion and which are relevant to the ultimate question of insolvency.
Mr Powell described the operations of, and relationship between, WDRIO and WDRL by reference to company records. He expressed the opinion that Western Desert operated only on a consolidated basis and that WDRIO and WDRL were financially interdependent in a practical sense. In addition, they had cross-guaranteed each other’s liabilities in order to be exempted from the obligation to produce separate accounts pursuant to an Australian Securities and Investments Commission class order.
Mr Powell undertook a financial analysis in respect of Western Desert (consolidated), WDRIO and WDRL. He calculated the current ratio (ratio of current assets to current liabilities) of Western Desert at approximately 0.5 at the end of February, March and April 2014 (0.50, 0.49 and 0.51 respectively). He calculated the current ratio of WDRIO at 0.12, 0.16 and 0.13 at the end of February, March and April 2014 respectively. He calculated the current ratio of WDRL at 0.04, 0.07 and 0.00 at the end of February, March and April 2014 respectively.
Mr Powell calculated the quick ratio (ratio of quickly realisable current assets to current liabilities) of Western Desert at 0.13, 0.10 and 0.24 at the end of February, March and April 2014 respectively. He calculated the quick ratio of WDRIO at 0.13, 0.10 and 0.28 at the end of February, March and April 2014 respectively. He calculated the quick ratio of WDRL at 0.04, 0.07 and 0.00 at the end of February, March and April 2014 respectively.
Mr Powell analysed the trading history of Western Desert with creditors. He extracted data from the MYOB accounting software. That data showed:
·at the end of January 2014 creditors totalling $34.4 million, of which $12.9 million (37 per cent) was shown as owing for in excess of 30 days;
·at the end of February 2014 creditors totalling $34.5 million, of which $21.4 million (62 per cent) was shown as owing for in excess of 30 days;
·at the end of March 2014 creditors totalling $38.3 million, of which $22.4 million (58 per cent) was shown as owing for in excess of 30 days.
Mr Powell analysed the trading terms of 21 significant creditors, some of whom had trading terms of 14 or 21 days and all of whom had trading terms of not more than 30 days.
Mr Powell observed that frequently the date entered into MYOB as the date of a creditor’s invoice was later than the actual invoice date. He made a detailed comparison of those two dates for 22 major and significant creditors. He then recalculated the data extracted at [63] above, resulting in the data showing:
·at the end of January 2014 creditors totalling $43.3 million, of which $21.0 million (49 per cent) was shown as owing for in excess of 30 days;
·at the end of February 2014 creditors totalling $48.2 million, of which $25.9 million (54 per cent) was shown as owing for in excess of 30 days;
·at the end of March 2014 creditors totalling $56.4 million, of which $31.6 million (56 per cent) was shown as owing for in excess of 30 days.
Mr Powell also recalculated the current ratio and quick ratio by reference to the same adjustments, which also deteriorated.
Mr Powell summarised dealings with creditors between February and April 2014.
Mr Powell analysed alternative sources of finance. He expressed the opinion that, after the April 2014 rights issue, WDRL was unable to raise sufficient equity to become solvent and was unable to obtain any additional loan funding from Macquarie Bank or any other alternative financier.
The meaning of insolvency
Section 588FC of the Act provides:
Insolvent transactions
A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:
(a) any of the following happens at a time when the company is insolvent:
(i) the transaction is entered into; or
(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or
(b) the company becomes insolvent because of, or because of matters including:
(i) entering into the transaction; or
(ii)a person doing an act, or making an omission, for the purpose of giving effect to the transaction.
Section 95A defines “insolvent” in the following terms:
Solvency and insolvency
(1)A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.
(2) A person who is not solvent is insolvent.
Section 588E relevantly provides:
Presumptions to be made in recovery proceedings
(1) In this section:
"recovery proceeding", in relation to a company, means:
(a) an application under section 588FF by the company's liquidator; or
…
(2)Subsections (3) to (9), inclusive, have effect for the purposes of a recovery proceeding in relation to a company.
(3) If:
(a) the company is being wound up; and
(b)it is proved … that the company was insolvent at a particular time during the 12 months ending on the relation-back day;
it must be presumed that the company was insolvent throughout the period beginning at that time and ending on that day.
…
(9)A presumption for which this section provides operates except so far as the contrary is proved for the purposes of the proceeding concerned.
Section 95A refers to a person being unable to pay all the person’s debts “as and when they become due and payable”. The question when a debt becomes due and payable is a question of fact. In most cases, the question will be determined by reference to the terms of the contract under which the debt arises. If there is no express term, the term may be implied from the course of dealings between the parties. If there is an express term, the term might be varied, for example, by an agreement to extend the time for payment. It may be that it can be implied from the course of dealings between the parties that they have agreed to extend the original time for payment.
On the one hand, the mere fact that a creditor acquiesces in being paid late for pragmatic reasons, such as a perceived inability to achieve timely payments or due to the effort required to attempt to enforce timely payments, does not give rise to an implication of a variation in the terms of the contract as to the time for payment. On the other hand, if a creditor agrees to payment of a debt that is due by future instalments, that may amount to a variation agreement deferring the time for payment even though the deferral is motivated by concerns about solvency.
Section 95A refers to a person being unable to pay “all” the person’s debts as and when they become due and payable. A person is not solvent merely because the person is able to pay some of the person’s debts as and when they become due and payable. A person is only solvent if they are able to pay all such debts.
Section 95A refers to a person being “unable” to pay all the person’s debts as and when they become due and payable. A distinction must be drawn between an inability to pay debts and an unwillingness to do so. If a debtor has the means and ability to pay all their debts as and when they become due and payable but chooses not to do so, the debtor is not insolvent within the meaning of the definition.
Having regard to the purpose of the definition of insolvency, it is necessary to take a commercial approach to the question whether a person is “unable to pay all the person’s debts, as and when they become due and payable”. There is a temporal aspect to the assessment. Thus, if a series of debts become due on 1 January and the debtor is unable to pay them on that day but prospectively will be able to pay them on 2 January, the debtor would not be regarded as insolvent within the meaning of the definition. Conversely, if the series of debts become due on 1 January and the debtor is unable to pay them on that day but will be able to pay them on 31 December, the debtor would be regarded as insolvent within the meaning of the definition.
In assessing the ability of a person to pay their debts when due and payable, it is necessary to have regard to the means available to that person on the relevant date and within a short time thereafter. However, the mere fact that at some time in the future a debtor will have the means to pay their debts will not prevent the debtor being insolvent unless those means will become available sufficiently soon after the debt has become due and payable. The temporal aspect does not involve a fixed time: it requires a holistic assessment taking into account the relevant circumstances.
The test of insolvency under section 95A is objective. Regard is to be had to the objective facts and circumstances at the time of the impugned payment, regardless of whether they were known to the debtor company. Later events may throw light on the position at the relevant time but the ultimate question remains the position at the relevant time.
In Lee Kong v Pilkington (Australia) Ltd, [6] in the context of the liability of a director for “insolvent trading” under section 592 of the Corporations Law, which referred to reasonable grounds to expect that the company “will not be able to pay its debts as and when they become due”, Owen J (with whom Franklyn and Murray JJ agreed) said:
The first aspect raised by the appellants … is how, in determining whether or not an expectation would arise that the company could not pay its debts, liabilities that may not be pressed are taken into account. The appellant claims that the fact that no letters or statutory demands had been issued was relevant and was not taken into account. However … whether or not a “debt” is “due” is to be determined by reference to the legally binding agreement between the parties. Any reluctance by creditors to enforce legal rights was not relevant to the approach under the relevant section…
The question is whether or not a particular debt has fallen “due”. The commercial likelihood of the enforcement of the company’s debts cannot override the issue of substance that is involved in the determination of that question.[7]
[6] (1997) 25 ACSR 103.
[7] At 112. (Citations omitted.)
In Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation,[8] Palmer J said:
Whether, and in what circumstances, the Court can determine a company’s inability to pay its debts by taking into account the apparent laxity of its creditors in pressing for prompt payment has been the subject of much judicial attention. There is conflict in the authorities as to whether, for the purpose of ascertaining insolvency, a trading debt is to be regarded as payable when it is required to be paid under the terms of the relevant contract or whether the Court can take into account normal or likely indulgences granted to the company by its creditors. The cases recognise that the former proposition may produce a test of unrealistic rigidity while the latter may produce a test which is so imprecise as to be impossible of consistent and principled application.
…
In my opinion, the following propositions may now be drawn from the authorities:
(i)whether or not a company is insolvent for the purposes of CA s 95A, s 459B, s 588FC or s 588G(1)(b) 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. Commercial 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:
•there has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment; or
•there 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
•there 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.[9]
[9] At [34], [54]. (Citations omitted.)
The propositions formulated by Palmer J have been referred to with approval by the New South Wales Court of Appeal,[10] Victorian Court of Appeal,[11] Queensland Court of Appeal[12] and Western Australian Court of Appeal.[13]
[10] Keith Smith East West Transport Pty Ltd (in liq) v Australian Taxation Office [2002] NSWCA 264 at [5] and [33] per Mason P (with whom Handley and Giles JJA agreed).
[11] Queensland Phosphate Pty Ltd v Korda [No 2] [2019] VSCA 215 at [99]-[100] per Kyrou, McLeish and Niall JJA.
[12] R v Young [2020] QCA 3 at [209]-[211] per Gotterson and McMurdo JJA and Mullins AJA.
[13] Barboutis v Kart Centre Pty Ltd [No 2] [2020] WASCA 41 at [118] per Buss P, Mitchell and Vaughan JJA.
In JTS Property & Investments No 1 Pty Ltd (in liq) v Sadri,[14] Bryson AJ, after referring to the propositions formulated by Palmer J, said:
My primary concern is to give effect to s 95A in accordance with its terms, which clearly relate to ability to pay by the due date, not to the ability to cope with the debtor’s commercial situation in such a way as to extricate himself from difficulty. The concept of surmountable temporary illiquidity referred to in Palmer J’s third proposition is frequently raised and from time to time relied upon judicially to support a finding against insolvency. I regard it as important to approach questions of illiquidity, whether temporary or endemic, in a way which does not depart from the terms of s 95A(1) and its reference to ability to pay all debts as and when they become due and payable; ability to raise money from assets and pay a debt before the creditor’s patience is exhausted is not enough, in my opinion.[15]
[14] [2010] NSWSC 1384.
[15] At [48].
The existence of insolvency
Mr Duncan’s primary case is that WDRIO was insolvent within the meaning of the Act on 28 February 2014 and he relies on the presumption under section 588E in relation to the dates on which the first three impugned payments were made between 17 April and 2 May 2014.
Mr Powell attached as part of annexure 12 to his report the aged creditor ledger as at 28 February 2014 extracted from Western Desert’s MYOB accounting software. As summarised by Mr Powell in his report, it shows total creditors of $34.5 million, of which $21.4 million had been owing more than 30 days.
Mr Powell identified that the MYOB report understated creditors, and understated the ageing, because the dates of invoices shown in MYOB were often significantly later than the actual date. By reference to the actual date of those invoices, total creditors were $48.3 million, of which $25.9 million had been owing more than 30 days.
Mr Powell identified that the terms of payment for the major creditors were not more than 30 days. Mr Powell identified that 19 creditors had entered into deferred payment arrangements as at 28 February 2014, of which $12.0 million had been owing in excess of 30 days. This left $13.9 million in respect of which creditors whose debts were overdue had not agreed to deferred payment.
Mr Powell identified that, as at 28 February 2014, Western Desert was in breach of the Liquidity condition, holding only $3.2 million in Macquarie bank accounts, giving rise to a shortfall of $6.8 million.
On 28 February 2014, Macquarie Bank agreed to temporarily increase the facility limit by $3.5 million, thereby rejecting the request by Western Desert for additional funding of $12 million. I find that, as at 28 February 2014, Macquarie Bank was not willing to lend any additional funds beyond the increase of $3.5 million. If it had been, it would have increased the facility limit by more than $3.5 million on that date. In making this finding, I take into account the fact that Macquarie Bank subsequently (on 10 March 2014) agreed to lend a further $8.5 million. I find that circumstances must have changed since 28 February 2014 to persuade Macquarie Bank to make that additional loan.
I find that, as at 28 February 2014, Western Desert had no money available in its bank accounts to pay its trade creditors. I find, given the fact that it was trading at a loss, that Western Desert did not have the immediate prospect of receiving substantial ongoing revenue that would not be offset by ongoing expenses.
I accept that, as at 28 February 2014, Western Desert had the prospect of a capital raising to raise $50 million, which the directors had resolved on the previous day to undertake. However, it was estimated that only approximately $11 million would be available to pay a combination of trade creditors, a settlement with PB Sea-Tow and the port access fee. This was inadequate to enable the payment of trade creditors whose payments were overdue as at 28 February 2014. In addition, a capital raising would take until 18 April 2014 (as reflected in the Macquarie Bank letter of 28 February) and by then Western Desert would have more overdue creditors to satisfy, given that it was trading at a loss. Western Desert had no other available or prospective sources of funds to pay overdue creditors.
The great majority of creditors of Western Desert were creditors of WDRIO. Given the manner in which the financial position of WDRL and WDRIO was intertwined, and their financial interdependence, it is appropriate to take into account creditors and sources of funds of both companies in determining whether WDRIO was able to pay its own debts as and when they became due and payable.
The above analysis is confirmed by the evidence of Mr Edmunds and Mr Bandes summarised above. It is confirmed by internal communications within Western Desert about the payment of creditors. It is confirmed by communications between Western Desert and its creditors in the period up to 28 February 2014.
I am satisfied that, as at 28 February 2014, WDRIO was unable to pay its debts as and when they became due and payable.
Mr Duncan’s alternative case is that WDRIO was unable to pay its debts as and when they became due and payable on 17 April 2014, being the date of the first payment to DEW, and he relies on the ongoing insolvency presumption under section 588E in relation to the dates on which the second and third impugned payments were made on 24 April and 2 May 2014.
In March 2014 Western Desert received a second temporary increase in its Macquarie Bank facility until 18 April 2014.
On 7 April 2014 the rights issue closed. WDRL was due to receive the net proceeds of the share issue of approximately $57.5 million on 18 April. The great majority of those funds were required to make repayments to Macquarie Bank and for purposes other than paying trade creditors. This left only $12.6 million to reduce trade creditors.
On 7 April 2014 Mr Loechel sent an email to Mr Seatree which commenced with the following paragraph:
Mark, I have spent some time working through our payment run on 18/4, with specific thought given to how much to pay the top 15 creditors. The $15m allocated to creditor reduction won’t go very far. As you can see below, we could easily spend all of it on just these creditors. It is therefore important that we agree on how much each one gets. We can pay off the smallest 136 creditors (everyone under $20k) for $715k. This would clean up the creditors listing and reduce follow up calls (the small guys call up the most) and therefore administrative time. Would be great to do, but is dependent on the amount the top 15 get.
Mr Loechel then set out a table derived from Western Desert’s MYOB aged payables report dated 3 April 2014 setting out for 15 creditors the total due, amount owing for less than 31 days, amount owing for less than 61 days, amount owing for less than 91 days, amount owing for more than 90 days and amount of payment on 18 April 2014 if only those 15 creditors were paid. The total owing was shown as $24.5 million. The total of the proposed payments was $12.8 million.
It transpired that the payments made to the 15 creditors set out in Mr Loechel’s table were substantially less than the amounts contemplated in his table. However, on the face of Mr Loechel’s table, it was clear, as Mr Loechel observed in his email, that the monies derived from the capital raising would be manifestly inadequate to enable Western Desert to pay its debts that were due and payable. This is especially so taking into account that Western Desert had substantial creditors apart from the 15 creditors listed in Mr Loechel’s table and, by the time the proceeds of the capital raising would be received, the ageing of the creditors would have advanced by a further two weeks, moving many amounts that had been owing as at 3 April 2014 for less than 30 days to the category of debts owing for more than 30 days.
Mr Powell in his report set out details of payments or part payments promised to outstanding creditors out of the proceeds of the capital raising compared to the payments actually made. Promises had been made to 11 creditors of payments totalling $5.6 million but only $2.1 million was paid to them. For example, Mr Loechel’s table showed the total due to BP Australia as at 3 April was $3.8 million; BP had been promised payment of $3.6 million; Mr Loechel in his email contemplated a payment of $2 million but the actual payment was only $1.5 million.
It is evident that as at 14 April 2014 WDRIO was unable to pay all its debts as and when they became due.
This conclusion is confirmed by a consideration of the position two weeks later at the end of April 2014. At that point, Mr Powell calculated that, adjusted by reference to the actual date of invoices from 22 major or significant creditors, Western Desert’s trade creditors totalled $52.8 million, of which at least $25.4 million was overdue as having been owing more than 30 days. Western Desert had $12.2 million in its Macquarie bank accounts, entailing that it only had available $2.2 million to pay creditors due to the Liquidity condition. Western Desert did not have available any other realistic sources of funds to pay its overdue creditors.
This conclusion is also confirmed by the evidence of Mr Edmunds and Mr Bandes and by other internal communications within Western Desert about payment of creditors and by communications between Western Desert and its creditors in the period up to 14 April 2014.
DEW has not rebutted the presumption of ongoing insolvency that arises under section 588E of the Act. Leaving aside that it did not adduce evidence or make submissions in support of such rebuttal, the evidence tendered by Mr Duncan does not rebut the presumption.
Mr Duncan succeeds on the insolvency issue.
Background to good faith defence issue
It was agreed that evidence from the insolvency trial would not be evidence for the good faith defence trial unless specifically tendered at the good faith defence trial.
Parties
WDRIO was a wholly-owned subsidiary of WDRL. WDRL had its shares listed on the Australian Stock Exchange.
Andrew Edmunds commenced working for Western Desert via a labour hire company in January 2013 and in July 2013 he was employed directly by Western Desert as Commercial Manager. He was based in the Darwin office but also spent time at Roper Bar and at the Adelaide office.
Senior management of Western Desert worked in the Adelaide office. George Rogers was the Finance Manager and he reported to Mark Seatree, the Chief Financial Officer. In about January 2014 James Loechel commenced in the Adelaide office. Norm Gardner was the Managing Director. Susan Wynbergen was the Accounts Payable manager in the Adelaide office, responsible for entering invoices into MYOB.
DEW is a wholly-owned subsidiary of Downer EDI Limited (DEL), whose shares are listed on the Australian Stock Exchange.
The operations and affairs of DEL and its subsidiaries (collectively Downer) were organised into corporate divisions. Divisions and corporate entities within Downer did not necessarily coincide.
One of the divisions of Downer was Downer Infrastructure East (which was half of Downer Infrastructure).[16] One of the subdivisions of that division was Downer Roads SE (which encompassed at least Victoria, Tasmania and South Australia/Northern Territory) (which was half of Downer Roads).[17] One of the sub-subdivisions of that subdivision was Downer Roads SA/NT. Projects of and contracts entered into by Downer were principally managed and administered by Downer Infrastructure East. DEW’s project for and contract with Western Desert was managed and administered by Downer Roads SA/NT.
[16] The other half was Downer Infrastructure West. The two “halves” were not necessarily the same size.
[17] The other half was Downer Roads North. The two “halves” were not necessarily the same size.
Errol Schweiger was the Construction, Stabilising and Maintenance Manager within Downer Roads SA/NT and was employed by DEW. He was based in Adelaide. He was responsible for managing projects in South Australia and the Northern Territory. He reported to Simon Abrahams, the General Manager of Downer Roads SA/NT, who was also based in Adelaide.
Mr Schweiger’s background is that he holds an Associate Diploma in Civil Engineering from the University of South Australia. He was first employed by Downer in 2000 as Construction and Stabilising Manager, remaining there until 2006. Between 2006 and 2011, he was employed as Construction Manager for QB Roads Pty Ltd and then Contract Manager for Boral Construction Materials Limited. In 2011, he returned to Downer as Construction and Stabilising Manager. His title at Downer varied over the years but in substance his position remained the same.
Zoe Pearson was the Financial Officer for Downer Roads SA/NT. Donna Gray was a project manager who reported to Mr Schweiger. She was the project manager for the Western Desert project. Danielle Micarone was a business and project support officer, who also reported to Mr Schweiger. Her duties included preparing invoices, preparing purchase orders and chasing debtors. Ms Gray, Ms Pearson and Ms Micarone were based in Adelaide.
David Hynes was the Business Financial Controller within Downer Roads, based in Melbourne.
Andrew Wilcox was the Finance Manager within Downer Infrastructure East, based in Melbourne.
The contract
In July 2013[18] WDRIO and DEW entered into a Recycling Wet Mixing Works Contract for DEW to provide wet mixing and conditioning services (collectively wet mixing) for the construction of the Western Desert Haul Road from Roper Bar to the port over 171 kilometres (the contract). The contract provided that the estimated volume was 1.7 million square metres and DEW was to ensure that equipment availability was maintained to ensure mixing and stabilisation at a minimum rate of 8,500 square metres per machine per shift. The contract provided that the commencement date was to be mid August 2013 and the date for practical completion was estimated at 66 days after commencement.
[18] The contract is not dated. It is evident from other documents that it was executed in July 2013.
The contract provided that WDRIO was to pay mobilisation and establishment costs of $140,822 (exclusive of GST). It provided for payment of $0.68 per square metre (exclusive of GST) for wet mixing using two recycler-stabilisers including operators. It also provided for payment of a standby day rate per machine of $2,844 (exclusive of GST) when weather conditions precluded work or areas for mixing or mixing additives were not available or set out as required. Based on estimated area and assuming no standby day rate charges, the total payable under the contract would have been $1,426,504 (inclusive of GST). It transpired that there were standby day rate charges and other incidental charges and the total charged was $1,515,516 (inclusive of GST).
Clause 6 of the contract provided that DEW was to submit progress claims on the fourteenth and last days of each month. WDRIO’s representative, Greg Matthews (who was Western Desert’s construction manager for the project on site), was to determine the amount properly payable and issue a certificate certifying that amount within 14 days of receipt. DEW was to issue a tax invoice for the certified amount. WDRIO was to pay that amount within 14 days.
Wet mixing involved DEW using specialised machinery to inject chemicals dissolved in water into a road pavement and clay subgrade to enable it to be shaped and compacted by other contractors.
On 19 August 2013 WDRIO submitted a commercial credit application to DEW, providing three commercial referees. Ms Micarone obtained references from two of the referees. She obtained a Dun & Bradstreet report on WDRL. Dun & Bradstreet assessed the risk of WDRL being severely delinquent in its payment manner (90 days overdue) over the next 12 months as falling within risk class D, being an average risk. The risk was about the industry average but the industry had a higher than average risk of payment in a severely delinquent manner.
Performance of the works
During the performance of the works between August and November 2013, Mr Schweiger generally dealt with Mr Matthews. Mr Schweiger did not make a material distinction between WDRL and WDRIO and understood (correctly) that WDRIO was backed by WDRL. He was aware that WDRL’s shares were listed on the Australian Stock Exchange.
Mr Schweiger was aware that the total cost of constructing the haul road was approximately $120 million.
On 29 August 2013 DEW issued an invoice to WDRL for $278,757.[19]
[19] All dollar figures in invoices are inclusive of GST, unless otherwise shown.
On 30 September 2013 DEW issued an invoice to WDRL for $470,662.
On 1 October 2013 Mr Hynes sent an email requesting that debts by seven debtors be followed up and collected quickly. This included the amount the subject of the August invoice. Ms Pearson copied the email to Mr Schweiger. On 2 October Mr Schweiger sent an email to Ms Gray, asking her to chase up Mr Edmunds regarding payment, saying that it should have been paid by then.
On 31 October 2013 DEW issued an invoice to WDRL for $377,109.
On 30 November 2013 DEW issued its final invoice for $388,977.
Payment of invoices
On 16 December 2013 Ms Micarone spoke to Ms Wynbergen about payment of the November invoice and Ms Wynbergen said that it would be paid in January 2014.
On 20 December 2013 WDRIO paid the amount of the October invoice of $377,109.
As the manager for the project on behalf of Downer, Mr Schweiger was responsible, amongst other things, for the collection of invoiced amounts.
Downer Roads SA/NT had a practice of maintaining a debtors spreadsheet, which was revised on a continuing basis. A fresh version of the spreadsheet was saved each week. Versions of the spreadsheet from January to July 2014 were tendered (the Downer debtor spreadsheets). They included narrations of communications between Downer and Western Desert. Specific details of telephone conversations between Downer and Western Desert referred to below are based on those records or on Mr Schweiger’s email dated 7 April 2014 referred to below. More general details without a specific date are based on Mr Schweiger’s evidence where it was uncontroversial.
On 6 and 7 January 2014 Ms Micarone spoke to Ms Wynbergen at Western Desert about payment of the November invoice and was told that she was waiting for the financial controller.
On 13 January 2014 Ms Micarone spoke to Ms Wynbergen or someone else at Western Desert and was told that payment would be made on 24 January.
On 13 January 2014 Ms Micarone sent an email to Ms Pearson, copied to Mr Schweiger, attaching a cash flow and saying:
Please note WDR has been pushed out until 24/01/14 - this was confirmed today.
Western Desert failed to make payment of the November invoice on 24 January 2014.
Towards the end of January, DEW’s financial team requested Mr Schweiger to chase payment of the November 2013 invoice.
On 28 January 2014 Ms Micarone spoke to Ms Wynbergen and noted that payment had not been made on 24 January as promised. Ms Wynbergen agreed to get back to her as soon as possible with a new payment date.
On 28 January 2014 Ms Micarone sent an email to Mr Edmunds and Ms Wynbergen, copied to Mr Schweiger, saying:
Can we please have a confirmation for the payment of the below invoice. This invoice was due for payment in December 2013. It is now the end of January 2014. Our financial controller would like an answer ASAP.
INV: 8027893
Amount: $388,977.35Date: 30/11/13
In addition to the email communications passing between Ms Micarone or Mr Schweiger on behalf of Downer and Mr Edmunds or Mr Loechel on behalf of Western Desert, Mr Schweiger had a number of telephone conversations with Mr Edmunds and Mr Loechel.
On 31 January 2014 Mr Schweiger telephoned Western Desert’s “commercial manager” and said that Downer wanted payment as soon as possible. The commercial manager was probably Mr Edmunds.
In late January 2014 Mr Schweiger telephoned Mr Loechel. They had a conversation to the following effect:
Mr Schweiger: James, when is this outstanding invoice going to be paid?
Mr Loechel:We will pay it as soon as we can. We are having temporary cash flow issues because we have so many contractors on this job. We have a numerous number of payments and we have to manage our cash.
Mr Schweiger: Okay. Please keep me informed.
Between late January and June or July 2014 Mr Schweiger had a number of telephone conversations with Mr Loechel to the same effect.
In February 2014 Mr Schweiger telephoned Mr Edmunds. They had a conversation to the following effect:
Mr Schweiger: Andrew, I have been speaking to James and we have not got payment of our final invoice yet. When can I expect that?
Mr Edmunds: I am on site. I will ring James and try and come back to you with something more specific but we are just trying to manage our cash.
Mr Schweiger: Okay, please come back to me.
On 4 February 2014 Mr Schweiger telephoned the Commercial Manager at Western Desert. This was probably Mr Edmunds. He did not obtain a response as to when the outstanding invoice would be paid.
On 6 February 2014, Ms Micarone sent an email to Mr Edmunds and Ms Wynbergen, copied to Mr Schweiger, saying:
We are yet to get a response from either of you in relation to our overdue invoice. Please advise us of the status of this payment ASAP.
Mr Edmunds onforwarded the email to Mr Seatree and Mr Rogers. He said, amongst other things, that he had had Downer’s General Manager chasing him as well as Ms Micarone.
Between 31 January and 10 February 2014, either Ms Micarone or Mr Schweiger telephoned either Ms Wynbergen or Mr Edmunds every second day chasing payment of the debt.
On 10 February 2014 Mr Schweiger telephoned Mr Edmunds. Mr Edmunds said that Western Desert was having cash flow problems, he would endeavour to forward a payment program and he would need to check with his financial controller in Adelaide. Mr Edmunds said that he would advise Mr Schweiger by the end of that week.
On 12 February 2014 WDRIO paid $194,488 to DEW. This was half of the outstanding invoice. This was not pursuant to any payment arrangement with Downer but was a unilateral act on the part of Western Desert.
During the second half of February and throughout March 2014, Ms Micarone telephoned Ms Wynbergen every few days chasing payment of the debt and seeking a payment plan.
On 24 February 2014 Ms Micarone sent an email to Mr Edmunds and Ms Wynbergen, copied to Mr Schweiger, saying:
Thank you, we have received half of the payment for the above invoice a couple of weeks ago.
Can you please give us an indication on when you think we will be receiving the second half – for $194,488.35.
As you can appreciate, our Financial Management team interstate are querying this.
In the first half of March 2014 Mr Schweiger spoke to Mr Loechel seeking confirmation of a payment plan.
In the third week of March 2014 Mr Schweiger spoke to Mr Edmunds by telephone requesting status of payment and, given Western Desert’s cash flow issues, requesting a payment plan and amount that Western Desert was able to pay. Mr Edmunds said that he would speak to his financial controller requesting a payment plan. Mr Schweiger confirmed the effect of this conversation in his 7 April 2014 email referred to below.
On 26 March 2014 Western Desert issued an invoice to DEW for $5,236 for repairs to the Downer equipment.
In early April 2014 Mr Schweiger telephoned for Mr Edmunds and left a message seeking feedback about payment of the amount owing. Mr Schweiger confirmed this in his 7 April 2014 email.
On 7 April 2014 Mr Schweiger sent an email to Mr Edmunds and Ms Wynbergen, saying:
As you can see below a request was made back in Feb for the status of our final payment for the work undertaken last year 2013 at Roper River.
We have not received further communication since the last email below. I contacte3d [sic] you by phone at a min 2-3 weeks ago requesting status of payment and given WDR’s cash flow issues, please inform us of a payment plan & amount that you are able to pay, in order to assist you with your payment. You indicated that following discussions with you [sic] financial controller that you would provide us with a payment plan indicating when Downer would receive its next payment. This has not occurred.
I again left a phone message for you middle of last week to obtain some feedback in regards to payment of the amount owing and I have not received a follow up phone call or communication in this regard.
I understand that cash flow is an issue at times with most businesses and Downer is trying to assist you in setting up a payment plan that can be staged over a period of time, but the most disappointing aspect in all of this, is the major lack of communication, feedback and lack of respect in updating us in regard to payment of an account that is now at 90 days +.
Can we please receive an update and a plan for payment of then [sic] amount owing to Downer. If WDR continue to remain silent and we receive nil communication on this matter, I will be forced to forward this onto Downer corporate.
Can you please be obliging and respond in the professional manner that Downer would expect.
On 7 April 2014 Mr Edmunds sent an email to Mr Schweiger in reply, saying:
I have been on site for the past two weeks. Unfortunately I have not received any phone calls during this period, nor any messages from the Darwin office. (Mobile reception on site does not exist).
I have been in discussion with Adelaide office. Payment of your account shall be made on [sic] in two instalments, on 24th April and the 2nd May of $97,244 each.
On 17 April 2014 WDRIO paid $50,000 to DEW.
On 24 April 2014 WDRIO paid $50,000 to DEW.
On 2 May 2014 WDRIO paid $50,000 to DEW.
Shortly thereafter, Mr Schweiger telephoned Mr Loechel. They had a conversation to the following effect:
Mr Schweiger: James, payment has not come in. What is happening? When are we likely to receive payment?
Mr Loechel: I will let you know that hopefully we will get it into the following week’s payment run.
The Downer debtor spreadsheets indicate that it was intended that Mr Schweiger would telephone Mr Edmunds on 14 May 2014. However, there is no record that he spoke to Mr Edmunds.
On 20 May 2014 Mr Schweiger sent an email to Mr Edmunds copied to Mr Loechel, saying:
Just following up on the final amount outstanding of $44 488.35. Could you please provide and confirm the payment date for the balance owing?
On 20 May 2014 Mr Loechel sent an email to Mr Schweiger in reply, saying:
I have the final payment on my list for our weekly payment run the on 30th of May.
On 3 June 2014 Mr Schweiger sent an email to Mr Loechel in reply, saying:
We have been awaiting the final payment that was due on 30th May as per your email below. Can you please inform us of revised payment date? As you can see above the payment is 155 days overdue. Can we have confirmation of the final payment date, which we would expect to be priority?
Thanks and awaiting your prompt response
On 10 June 2014 Mr Schweiger sent an email to Mr Loechel and Mr Edmunds, saying:
Just wondering if we could be given the courtesy of a reply to the email that was sent below on Tues 3rd June?
This is very frustrating and concerning that we are not receiving a response and that the payment date confirmed has now passed by 10 days?
Can we please have a confirmed date of final payment? This would really be appreciated.
On 10 June 2014 Mr Loechel sent an email to Mr Schweiger in reply, saying:
I can confirm payment of $44,500 is scheduled for 27th June to clear the outstanding balance.
On 19 June 2014 Mr Schweiger sent an email to Mr Loechel, saying:
Given we approaching EOF and the pressure is mounting on me from above regarding this final payment, can you please confirm that the date you indicated below for final payment is still on track and scheduled for payment?
On 30 June 2014 Mr Schweiger sent an email to Mr Loechel, saying:
I am just checking to see if the amount below was paid on the 27th. I have just received our online bank statement and there is no record of the payment from WDR?
Can you please confirm payment?
On 30 June 2014 Mr Loechel sent an email to Mr Schweiger in reply, saying:
Apologies for the delay which was due to shipment proceeds from our offtake partner being delayed. I have you in the payment run for this week.
On 8 July 2014 Mr Schweiger sent an email to Mr Loechel, saying:
…
Again, the payment date you provided has fallen over and again we have been left wondering and waiting for our final payment.
We have been patient for the outstanding balance to be paid and now embarrassed in the fact we have reported to HO financial that payment was to be last week. Unfortunately, if we do not receive an update for the outstanding amount to be paid this week, then I will be forced to forward this to our legal department.
I believe that we have acted in good faith in regard to the length of time taken to pay the final amount of monies owed, but WDR has not reciprocated and delivered on the commitment made.
On 8 July 2014 Mr Loechel sent an email to Mr Schweiger in reply, saying:
Apologies for the delay. I will try and clear the outstanding $39k in our payment run this Friday.
On 8 July 2014 Mr Schweiger sent an email to Mr Loechel in reply, saying:
I know I have asked this on two occasions now. What is and why is it only $39k? As detailed to you on previous occasions the outstanding amounts on our system and through the progress claims is: [$44,488.35]
If there are issues with the balance remaining then please forward the details to us? We are not aware of any deductions or contractual adjustments from the final progress claim etc.
Can you please confirm today of the final amount or any issues or credits to the final balance owing?
On 8 and 9 July 2014 email communications passed between Mr Schweiger and Mr Loechel about the contra invoice from Western Desert for $5,236. On 10 July 2014 it was agreed that this would be offset against the outstanding DEW invoice, leaving a net balance payable of $39,252. Mr Loechel confirmed that payment would be made by 11 July 2014.
On 15 July 2014 Mr Schweiger sent an email to Mr Loechel, saying:
I have checked our bank records and your payment has not gone through. We have lost count now with how many times you have confirmed a payment date and then failed to honour your commitment.
Can you please confirm when this final payment will be made and if the payment cannot make it through, please advise us.
On 15 July 2014 Mr Loechel sent an email to Mr Schweiger in reply, saying:
Apologies for this. The payment was scheduled and then deferred. I have rescheduled to Friday 18/7.
On 18 July 2014 WDRIO paid $39,252 to DEW.
The good faith defence
Subsection 588FG(2) of the Act provides:
A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:
(a) the person became a party to the transaction in good faith; and
(b) at the time when the person became such a party:
(i)the person had no reasonable grounds for suspecting that the company was insolvent at the time or would become insolvent as mentioned in paragraph 588FC(b); and
(ii)a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and
(c)the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.
In the case of unfair preference recoveries, disregarding the first three elements that will invariably be satisfied (and are not an issue), there are three elements of the subsection 588FG(2) defence:
1The creditor received the payment in good faith.
2When the creditor received the payment, the creditor had no reasonable grounds for suspecting that the company was insolvent at the time or would become insolvent as a result of the payment.
3When the creditor received the payment, a reasonable person in the creditor’s circumstances would have had no reasonable grounds for suspecting that the company was insolvent at the time or would become insolvent as a result of the payment.[20]
It is in issue in this case whether DEW has established each of these three elements.
Reasonable grounds to suspect
The second and third elements, that is the first and second limbs of section 588FG(2)(b), both involve negating a state of mind: namely, negating that the relevant person had reasonable grounds for suspecting that the company was insolvent at the time or would become insolvent as a result of the payment.
The difference between the limbs is that the person whose state of mind is relevant under the first limb is the creditor who received the payment in the case of an unfair preference action; whereas the person whose state of mind is relevant under the second limb is a reasonable person in the creditor’s circumstances. Under both limbs, the question is not whether the relevant person suspects insolvency. The question is whether the relevant person has reasonable grounds to suspect insolvency.
The distinction between the two limbs is essentially that, under both limbs, the relevant person is aware of the same objective facts and circumstances (subject to one potential qualification, which is addressed below[21]) but the relevant person under the second limb is an ordinary businessperson whereas the relevant person under the first limb is the creditor with the creditor’s personal characteristics such as perspicacity and acumen.[22]
[21] At [257] and following.
In relation to both limbs, the question is whether the relevant person has reasonable grounds to suspect insolvency. Insolvency is defined by section 95A to mean that the debtor company is unable to pay its debts as they become due and payable.
Both limbs refer to suspicion as a state of mind. Suspicion lies on a spectrum between speculation and belief. Whether a state of mind amounts to suspicion involves a holistic judgment based on all the facts and circumstances. The distinction between speculation, suspicion and belief has been articulated in several cases.
In Queensland Bacon Pty Ltd v Rees,[23] Kitto J said:
In the first place, the precise force of the word “suspect” needs to be noticed. A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to “a slight opinion, but without sufficient evidence”, as Chambers’ Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which “reason to suspect” expresses in sub-s. (4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section describes - a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors.[24]
[23] (1966) 115 CLR 266.
[24] At 303. Approved by the High Court in George v Rockett (1990) 170 CLR 104 at 115-116 per Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ.
In White v ACN 153 152 731 Pty Ltd (in liq),[25] Murphy and Mitchell JJA and Allanson J said:
The reference to suspicion of insolvency is suspicion of actual insolvency, and not a suspicion (or even belief) that the debtor might be insolvent. It is a suspicion of actual and existing insolvency as distinct from impending or potential insolvency.
A failure to pay a debt, or to pay it in a timely way, may of itself not ground a suspicion of insolvency. It may, instead, indicate no more than a temporary shortage of liquidity, or perhaps raise as a possibility that the debtor is insolvent, but without providing sufficient foundation for the formation of an actual suspicion that the debtor is in fact insolvent. A failure to pay a debt, or its late payment, must be considered in the context of the history of the dealings between the parties and all the commercial circumstances. The size of the debt and whether it has remained unpaid, or unpaid in part, over a substantial period of time, are generally important considerations in determining whether there were grounds for suspecting insolvency.[26]
[26] At [112]-[113].
The good faith defence trial
DEW accepted that it bears the onus of proof on the good faith defence. It was agreed that DEW be dux litis.
It was agreed that the evidence adduced at the insolvency trial would not be evidence in the good faith defence trial unless specifically tendered.
DEW called three witnesses: Mr Schweiger, Mr Hynes and Mr Wilcox. Their affidavits (subject to certain exclusions) were tendered as their evidence in chief. Mr Wilcox gave no oral evidence. Mr Schweiger and Mr Hynes gave short supplementary evidence in chief and were cross-examined.
Mr Duncan called one witness: Mr Edmunds. Subject to certain exclusions, his witness statement from the insolvency trial and an affidavit prepared for the good faith defence trial were tendered. He gave short supplementary evidence in chief and was cross-examined.
Both parties tendered various documents.
It is common ground that it is Mr Schweiger’s knowledge and state of mind that is relevant to the good faith defence and that the state of mind of Mr Wilcox and Mr Hynes are not. Accordingly, my focus is on the evidence of Mr Schweiger and, to a lesser extent, Mr Edmunds.
Mr Wilcox’s role and attention were at a much higher level than dealing with or considering a debt of the order of $400,000. He had no role in relation to or knowledge of the Western Desert project or of Western Desert. He expressed the hypothetical opinion that, if he had been aware that the amounts the subject of the payments were owed to DEW, it would not have caused him to suspect that WDRIO was insolvent. That opinion is of no assistance because Mr Wilcox was not aware of the facts and circumstances known to Mr Schweiger and was not asked to make any assumptions concerning them. DEW does not rely on Wilcox’s hypothetical opinion in its closing address.
Mr Hynes was only called by DEW to avoid any potential reliance by Mr Duncan on a Jones v Dunkel inference because, in his opening written address, Mr Duncan had said that Mr Hynes was apparently the representative of DEW who was monitoring the WDRIO liability. Mr Hynes gave evidence that he has responsibility for monitoring debts owed to DEW at a global level for the purpose of preparing consolidated reports. It was not his responsibility to monitor the payment of individual debts. This was the responsibility of Mr Schweiger. Mr Hynes had no dealings with Western Desert.
I found Mr Edmunds to be a straightforward and impressive witness. He did his best to describe the facts and his state of mind in relation to Western Desert and dealings with Downer in a neutral fashion and to the best of his ability. He ceased to be employed by Western Desert in June 2014 and had no personal interest in the issues the subject of this action.
I found Mr Schweiger not to be straightforward or impressive. When he gave his evidence, he was still employed by Downer in the same position as he had in 2013 and 2014. During the first part of his cross-examination, his answers to questions were often contradictory, illogical and evasive. I formed the clear impression that he was aware of the potential consequences for DEW if he accepted that he suspected that Western Desert might not be able to pay its debts as they fell due and he considered the consequences of his answers before giving them. This resulted in palpable tension in his trying to maintain an implausible and untenable position. During the second part of his cross-examination, his approach and demeanour changed and he became a straightforward witness. Some examples of Mr Schweiger’s evidence during the first part of his cross-examination are as follows.
The first question that Mr Schweiger was asked was whether there was any point in his dealings with Western Desert when he came to be concerned that it was unable to pay its debts as and when they fell due. His answer was evasive. He referred to what he could recall in his affidavit about his conversation with Ms Gray in September 2013. Ultimately, he said that there was no point after the November invoice was raised that he was concerned that Western Desert was unable to pay their debts as and when they fell due.
It was then suggested to Mr Schweiger that he was aware that Western Desert was having cash flow issues throughout the whole of the period January to July 2014. He said that he did not believe so. He then said that he was not aware, and it did not occur to him at all, that Western Desert was having cash flow issues between January and April 2014 and he was reminded that he was under oath.
Paragraph 38 of his affidavit was then put to him, which is extracted at [230] below. Mr Schweiger agreed that he intended by paragraph 38 to say that Mr Loechel was telling him that Western Desert was having temporary cash flow issues in the period between late January and June or July 2014. He said that that was true. He agreed that he was aware from late January through until June or July 2014 that Western Desert was having cash flow issues.
Mr Schweiger was asked why he had said in his oral evidence a few minutes earlier that he was not so aware and he said that he had been confused by the question. That explanation was plainly unconvincing and incorrect. It was clear that Mr Schweiger fully understood the question. He had, however, forgotten what he had said in his affidavit. Mr Schweiger had been attempting to downplay his beliefs and concerns about Western Desert’s cash flow difficulties.
It was put to Mr Schweiger that there was no point throughout the period between late January and 18 July 2018 when he thought that Western Desert’s cash flow issues had been alleviated. He initially asked for the question to be repeated and then asked if he could explain his answer before he gave it. He said that at some point he did not think that because of some comments that came back to him from Mr Edmunds and Mr Loechel. He said that he thought that Western Desert was having cash flow issues until about April 2014 and after that he did not. He said that he was informed that they had undertaken a capital raising revenue exercise and he was informed that that would alleviate their cash flow issues. He then said that he was informed that it had alleviated their cash flow issues and he understood that they had gone away from April 2014.
I do not accept that Mr Schweiger was being truthful when he said that he did not believe that Western Desert had cash flow issues between April and July 2014. First, he said in his affidavit that he was told by Mr Loechel throughout the period until June or July 2014 that Western Desert was having cash flow issues. Secondly, in his cross-examination, shortly before this statement, he explicitly said that he was aware from late January through until June or July 2014 that Western Desert was having cash flow issues. Thirdly, he changed his story from being aware of cash flow issues throughout the period in his affidavit to denying that he was aware of cash flow issues during any part of the period, to admitting that he was aware of cash flow issues throughout the period to denying that he was aware of cash flow issues after April. Fourthly, it is simply not credible that Mr Schweiger could have believed that Western Desert did not have cash flow issues after April when he could not obtain payment of the debt until mid July 2014 despite repeated emails, telephone conversations and broken promises.
Mr Schweiger was cross-examined about his beliefs about the existence of other debts of Western Desert and their ability to pay both those debts and the DEW debt. His answers to those questions were unconvincing, evasive and inconsistent.
During the course of questioning on that topic, Mr Schweiger was asked what he thought when he was not getting paid from April after having been told that their cash flow issues had been alleviated and he said “but they did still pay us”. There was then the following exchange:
A.But they did still pay us. They paid us in April and May which alleviated concerns that I had.
Q. They paid you some round number part-payments of an invoice in April and May.
A. Yep.
Q. And then didn't otherwise pay you until July and that alleviated your concerns.
A. It did.
During the course of those answers, Mr Schweiger volunteered that he had had concerns and said that his concerns were alleviated by the April/May payments. It was then pointed out that he was saying that he did have concerns between January and April. He said that he would like to retract that statement and said that he did not have concerns. I reject his evidence in this respect. It was contrary to his volunteering that he did have concerns. It is also not credible that he would not have had concerns. It is also inconsistent with the communications between Downer and Western Desert commencing in December 2013 summarised above.
The cross-examiner then returned to the topic whether Mr Schweiger believed that Western Desert was able to pay both the DEW debt and its other creditors. At various points, he said that did not know or think that Western Desert could not pay him and their other debts that had fallen due for payment. At other points, he accepted that he was in line with other creditors to get paid, implicitly recognising that there was a competition as to who could and would be paid. He accepted that there was never a dispute about the existence or amount of the debt and that he did not think that Western Desert was simply refusing to pay him. He accepted that he thought that Western Desert would pay him when they could. It was implicit from this that Western Desert (prioritising their payments) did not have the funds to pay DEW and this was inconsistent with his denials at other times that he believed that Western Desert could not pay both DEW and their other creditors when they became due. Again, Mr Schweiger was attempting to downplay his concerns and beliefs.
Mr Schweiger was asked whether, if the roadworks cost approximately $120 million, he thought that the creditors at the end of 2013 were at the very least in the tens of millions of dollars and he said that he would have thought so. He was asked whether, if Western Desert could not pay a debt as small as $388,000 out of debts of tens of millions, that caused him to think that the cash flow issues were very significant. He said that he was not aware that Western Desert had debts of tens of millions of dollars and maintained that he was not interested in and had no idea whether Western Desert had other creditors. I found his evidence in this respect unconvincing and inconsistent with his earlier admission during cross-examination. It was also inconsistent with paragraph 30 of his affidavit where he said that, even though Downer had completed its tasks, “WDR was having to continue to manage the payment of a significant number of contractors on what was a large and complex construction project”. Mr Schweiger was trying to downplay his concerns and beliefs.
After this point in the cross examination, Mr Schweiger’s demeanour visibly changed and he started making concessions. For example, it was put to him that he understood Mr Loechel to be saying “[w]e cannot pay you at the moment because we are having to pay other creditors that have fallen due for payment” and he effectively accepted this, saying “I guess I understood they were managing payments”.
Mr Schweiger accepted that, when Western Desert paid only half of the debt in mid-February 2014, this suggested that they were not able to pay the whole debt at the time. It was put to him that he thought “[t]hey do not have enough money at the moment to pay us and other creditors and they’re prioritising other creditors over us” and he said “I guess so”.
It was put to Mr Schweiger that, when he had the telephone conversation with Mr Edmunds in the third week of March 2014, he understood that he was being told in effect that Western Desert could not pay the full amount at that moment and would need to pay it on a staggered basis. He accepted this. It was put to him that by 7 April 2014 any cash flow concerns that he had through the period January onwards had not been alleviated. He agreed.
It was put to Mr Schweiger that, when Western Desert paid $50,000 on 17 April 2014 in circumstances where they had promised to pay $97,244 on 24 April, this indicated that they could not pay all of their creditors when due and they were juggling creditors. He agreed that that appeared at the time to be the case.
Discussion about capital raising
At paragraph 42 of his affidavit, Mr Schweiger said:
On one occasion, in about March or early April 2014, I had a conversation with Andrew Edmunds to the following effect:
Me:When are these payments that are outstanding likely to be finalised?
Andrew:We have just gone through a capital raising exercise and this will enable us to free up cash flow to ensure that all outstanding payments are made over the next couple of months or so.
Me:Okay, that sounds good.
Mr Edmunds was shown paragraph 42 of Mr Schweiger’s affidavit. In his own affidavit, Mr Edmunds said that he had no recollection of a conversation with Mr Schweiger but accepted that it was possible that he discussed the topic of the capital raising with him at some stage. However, he denied that he said “[w]e have just gone through a capital raising exercise and this will enable us to free up cash flow to ensure that all outstanding payments are made over the next couple of months or so”. He said that he was of the firm view that the capital raising would not be sufficient to deal with creditor issues.
Mr Edmunds was cross-examined on this evidence. He reiterated that he had no recollection of a conversation with Mr Schweiger on the topic of the capital raising. It was put to him that he told creditors from time to time that there was a potential to pay them from the capital raising and he said that he would only tell creditors what they were likely to receive based on information provided to him by the Adelaide office about when they would be paid.
It was put to Mr Edmunds that, if he had been told by the Adelaide office “[t]here’s the capital raising, tell the creditors to sit tight, the money is on the way, [he] would have passed that onto the creditors” and he agreed. He said that he was not instructed by the Adelaide office to tell creditors that they were going to get paid out of the capital raising. He said that, if he had been, it would have placed him in a moral dilemma because he would not have believed it and he would have recalled it.
Mr Edmunds accepted that it was possible that he told Mr Schweiger about the capital raising if he was instructed to do so by the Adelaide office. However, he said that he still did not have a recollection of doing so. He said that it was possible that he told Mr Schweiger that Downer would be paid by instalments over the next two months, but again he did not have a recollection of doing so.
In cross-examination, it was put to Mr Schweiger that he had no discussions with Mr Edmunds between mid March 2014 (being the conversation to which he referred in his email of 7 April) and 2 May 2014. Mr Schweiger accepted that this was the case. It was also put to him that there was no reference in the email communications between him and Mr Edmunds, or in the Downer debtor spreadsheets, to a capital raising. He accepted this. It was put to Mr Schweiger that, if there was any conversation about a capital raising, it must have been in mid March. He accepted this. It was not put squarely to Mr Schweiger that there was no conversation about a capital raising but the cross-examination was expressed in conditional terms such as “if there was a discussion about capital raising”.
Mr Duncan contends that, if there was a discussion about capital raising, the capital raising was not regarded as having significance in the conversation or significance to Mr Schweiger and in any event it must have been not later than mid March 2014 and was superseded by Mr Schweiger’s email of 7 April 2014 and subsequent events.
Although the onus of proof lies on DEW, I am affirmatively satisfied that there was no discussion between Mr Schweiger and Mr Edmunds about capital raising as set out at paragraph 42 of Mr Schweiger’s affidavit.
First, it is clear from Mr Schweiger’s evidence in cross-examination that there was no discussion of a capital raising after the email exchange of 7 April 2014 up to at least 2 May 2014. As the capital raising had already occurred before 2 May 2014, there was no reason for its being mentioned thereafter and, if it was, it would have been insignificant as a purely historical fact.
Secondly, it is clear from Mr Schweiger’s email dated 7 April 2014 that he had no conversation with Mr Edmunds at all since the telephone conversation in the third week of March to which he referred in the email.
Thirdly, the notes of telephone conversations between Ms Micarone or Mr Schweiger on the one hand and Ms Wynbergen or Mr Edmunds on the other hand contained in the Downer debtor spreadsheets appear to be both comprehensive and detailed. There is no mention of a capital raising in any of those notes. If capital raising had been mentioned as being relevant to paying Downer, it is highly likely that it would have been mentioned. The absence of any reference to it suggests either that it was not mentioned or that it was not regarded as significant.
Fourthly, the emails between Mr Schweiger and Mr Edmunds make no mention of a capital raising. On the contrary, Mr Schweiger’s email dated 7 April 2014 makes it clear that there had been no telephone conversation between Mr Schweiger and Mr Edmunds since the third week of March. Mr Schweiger set out the effect of the discussion on that occasion and made no mention of a discussion about a capital raising.
Fifthly, Mr Schweiger’s email of 7 April 2014 is inconsistent with the conversation to which he deposed at paragraph 42 of his affidavit having occurred during the telephone conversation in the third week of March to which he referred. Mr Schweiger recorded in the email that, in response to his request for status of payment and a payment plan given Western Desert’s cash flow issues, Mr Edmunds indicated that he would provide Downer with a payment plan following discussions with his financial controller. This is inconsistent with Mr Edmunds saying that Downer would be paid out of the capital raising.
Sixthly, Mr Schweiger’ email of 7 April 2014 is inconsistent with the conversation to which he deposed at paragraph 42 of his affidavit having occurred before the telephone conversation in the third week of March to which he referred. His email of 7 April on-forwarded Ms Micarone’s email of 24 February in which she had sought “an indication of when [Western Desert thought Downer would] be receiving the second half,” and Mr Schweiger said “[w]e have not received further communication since the last email below”.
There is no room, consistent with the contemporaneous documents, for a discussion about a capital raising that had any significance over the entire period from 24 February to 2 May 2014 or thereafter.
Seventhly, paragraph 42 of Mr Schweiger’s affidavit follows paragraphs 38 to 41 in which Mr Schweiger set out telephone conversations that he had with Mr Loechel and Mr Edmunds between January and June or July 2014 as follows:
38.During the course of late January 2014 until June or July 2014 I had a number of telephone calls with James Loechel in relation to the payment of the Invoice. Although I cannot now recall the exact words that were spoken in each of those conversations, my recollection is that they were brief and contained words to the following effect:
Me:James, when is this outstanding invoice going to be paid?
James:We will pay it as soon as we can. We are having temporary cash flow issues because we have so many contractors on this job. We have a numerous number of payments and we have to manage our cash.
Me:Okay. Please keep me informed.
39.Additionally, following the failure to and [sic] pay the outstanding balance of $44,500 by 2 May 2014 as promised in Andrew Edmunds’ email I had a follow up conversation with James Loechel to the following effect:
Me:James, payment hasn’t come in. What’s happening? When are we likely to receive payment?
James: I will let you know that hopefully we will get it into the following week’s payment run.
40.These conversations took place on a number of occasions and though it took time the account was settled in July 2014.
41.As best as I recall between February and May 2014 I also spoke with Mr Andrew Edmunds in relation to the payment of the Invoice. Although I cannot now recall the exact words that were spoken in those conversations, my recollection is that those conversations contained words to the following effect:
Me:Andrew, I have been speaking to James and we have not got payment of our final invoice yet. When can I expect that?
Andrew:I am on site. I will ring James and try and come back to you with something more specific but we are just trying to manage our cash.
Me:Okay, please come back to me.
The conversation to which Mr Schweiger deposed at paragraph 42 of his affidavit simply does not fit as coming part way through the conversations with Mr Loechel and Mr Edmunds referred to at paragraphs 38 to 41.
Eighthly, in cross examination, Mr Schweiger retreated from the account he gave at paragraph 42 of his affidavit. It was put to him that, if there was any discussion regarding the capital raising exercise with Mr Edmunds, Mr Edmunds did not ever say that Western Desert would be able to make all outstanding payments in any sense linked to the capital raising. Mr Schweiger accepted that Mr Edmunds did not. Mr Schweiger said “No, he didn't, no, he didn't make any promises but he did say that the cashflow, the capital raising would obviously alleviate the pressure on their cash position”. Mr Schweiger was asked whether Mr Edmunds said that it would fix it or just that it would help matters and he responded that Mr Edmunds just said that it would help matters from what he could recall.
There is a major difference between Mr Schweiger being told that a capital raising exercise would enable Western Desert to free up cash flow to ensure that all outstanding payments were made on the one hand and not being made any promises and merely being told that a capital raising would help matters as opposed to fix them. This major difference throws doubt on Mr Schweiger’s account of the whole conversation.
Ninthly, if the conversation had occurred in say mid March 2014, it can have provided no comfort to Mr Schweiger by 7 April 2014 because he had been seeking a payment plan for the last two or three weeks without success and reiterated a request for a payment plan.
It is possible that Mr Schweiger heard about a capital raising by Western Desert at some other time, either earlier (such as in 2013) or later (such as when WDRIO went into administration) and mistakenly attributed his knowledge of it to being told of it by Mr Edmunds in March or April 2014. In light of what was and was not put to him in cross-examination, I do not find that Mr Schweiger’s evidence that Mr Edmunds told him of a capital raising was deliberately false or impacts adversely on his credit. I find that it is unlikely that Mr Edmunds mentioned the capital raising at all. However, assuming that it was mentioned, I find that it was mentioned in an incidental way and not in a significant way and Mr Schweiger did not attach significance to it.
Reasonable grounds to suspect insolvency
I first consider whether DEW has established that it, and the reasonable person in its circumstances, had no reasonable grounds to suspect insolvency at the time of each payment.
The reasonable person test
I first apply the reasonable person in the creditor’s circumstances test. It is easier to express the test in positive terms (bearing in mind that the onus of proof lies on DEW): would a reasonable person in DEW’s circumstances have had reasonable grounds to suspect that WDRIO was insolvent at the time of each payment.
It is common ground that regard is to be had to the perceived ability of Western Desert to pay their debts out of Western Desert’s collective resources rather than to the ability of WDRIO to pay its debts out of its own resources.
17 April 2014
Subject to one issue considered at [257] and following below, it is common ground that the reasonable person in DEW’s circumstances would have known what Mr Schweiger knew.
The immediate prelude to the payment of $50,000 on 17 April 2014 was the exchange of emails between Mr Schweiger and Mr Edmunds on 7 April 2014. However, this must be seen against the background of the dealings between DEW and WDRIO up to that time.
In November 2013 DEW completed the wet mixing works. On 30 November 2013 DEW issued its final invoice for $388,977. Mr Schweiger gave evidence that DEW lodged progress claims and I infer that WDRIO’s representative had already certified the amount due pursuant to clause 6 of the contract as at 30 November 2013.
On 16 December 2013 Ms Micarone followed up payment of the invoice and Ms Wynbergen told her that it would be paid in January 2014. On 13 January, Ms Wynbergen told Ms Micarone that it would be paid on 24 January. WDRIO failed to pay.
On 28 January 2014 Ms Micarone phoned and emailed Ms Wynbergen and Mr Edmunds to no avail seeking a new payment date.
In late January 2014 Mr Schweiger telephoned Mr Loechel seeking a new payment date. Mr Loechel said that Western Desert would pay it as soon as they could; they were having temporary cash flow issues; they had many contractors to whom they had to make payments and they had to manage their cash.
On 10 February 2014 Mr Edmunds told Mr Schweiger that Western Desert was having cash flow problems; he would endeavour to forward a payment program; and he would need to check with his financial controller in Adelaide. On 12 February WDRIO unilaterally paid half of the outstanding amount to DEW.
No issue had been raised by Western Desert about the amount owing or the fact that it was owing to DEW. Mr Loechel and Mr Edmunds had told Mr Schweiger that Western Desert simply did not have the cash to pay the debt and did not have sufficient cash to pay all of its creditors then due. This was reinforced by the payment of only half the debt on 12 February.
On 24 February 2014 Ms Micarone sent an email to Mr Edmunds and Ms Wynbergen, copied to Mr Schweiger, asking for an indication of when they thought that DEW would receive payment of the other half of the invoice. Despite Ms Micarone following up Ms Wynbergen every few days, she did not receive a substantive answer.
In the third week of March 2014 Mr Schweiger spoke to Mr Edmunds requesting status of payment and, given Western Desert’s cash flow issues, requesting a payment plan and amount that it was able to pay. Mr Edmunds said that he would speak to his financial controller requesting a payment plan. No response was received up to 7 April.
At this point, it was apparent that Western Desert simply did not have the cash to pay the debt and did not have sufficient cash to pay all of its creditors then due. Taking into account the temporal aspect of insolvency, an ordinary businessperson would have suspected on reasonable grounds that Western Desert was unable to pay all its debts as and when they became due and payable.
On 7 April 2014 Mr Schweiger sent an email to Mr Edmunds and Ms Wynbergen, on-forwarding Ms Micarone’s email of 24 February and saying:
As you can see below a request was made back in Feb for the status of our final payment for the work undertaken last year 2013 at Roper River.
We have not received further communication since the last email below. I contacte3d [sic] you by phone at a min 2-3 weeks ago requesting status of payment and given WDR’s cash flow issues, please inform us of a payment plan & amount that you are able to pay, in order to assist you with your payment. You indicated that following discussions with you [sic] financial controller that you would provide us with a payment plan indicating when Downer would receive its next payment. This has not occurred.
I again left a phone message for you middle of last week to obtain some feedback in regards to payment of the amount owing and I have not received a follow up phone call or communication in this regard.
I understand that cash flow is an issue at times with most businesses and Downer is trying to assist you in setting up a payment plan that can be staged over a period of time, but the most disappointing aspect in all of this, is the major lack of communication, feedback and lack of respect in updating us in regard to payment of an account that is now at 90 days +.
Can we please receive an update and a plan for payment of then [sic] amount owing to Downer. If WDR continue to remain silent and we receive nil communication on this matter, I will be forced to forward this onto Downer corporate.
Can you please be obliging and respond in the professional manner that Downer would expect.
On 7 April 2014 Mr Edmunds sent an email to Mr Schweiger in reply, saying:
I have been on site for the past 2 weeks. Unfortunately I have not received any phone calls during this period, nor any messages from the Darwin office. (Mobile reception on site does not exist).
I have been in discussion with Adelaide office. Payment of your account shall be made in 2 instalments, on 24th April and the 2nd May of $97,244 each.
On 17 April 2014 WDRIO paid $50,000 to DEW. Although this payment was a week earlier than the date promised for the first instalment, it was only about one quarter of the total debt then outstanding and about half of the promised first instalment. It was apparent that Western Desert simply did not have the cash to pay the whole debt on 17 April and did not have sufficient cash to pay all of its debts then due.
Given the history of the broken promise to pay the full amount of the debt on 24 January; the unilateral payment of only half of the debt on 12 February; the statements made by Mr Loechel and Mr Edmunds concerning Western Desert’s cash flow difficulties; the fact that one quarter of the debt then outstanding was all that Western Desert could pay on 17 April; the length of time the debt had been outstanding; the consequential lack of any confidence about when Western Desert would pay the balance of the debt and the obvious existence of other creditors whose debts were also being managed in a similar fashion, a reasonable person in DEW’s circumstances would have suspected, and would have had reasonable grounds to suspect, that Western Desert was unable to pay all its debts as and when they became due and payable.
DEW relies on the fact that WDRL was a company whose shares were listed on the stock exchange as a contra-indicator of insolvency. However, an ordinary businessperson knows that many companies whose shares are listed on the stock exchange become insolvent and indeed end up in insolvency administration. The mere fact that a company’s shares are listed on the stock exchange is no insurance against insolvency. It is, of course, a factor that an ordinary businessperson would take into account. However, weighing all of the circumstances including this one, given the indicators of insolvency giving rise to a strong suspicion of insolvency, the fact that the shares of WDRL were listed on the stock exchange is not a sufficient countervailing factor to avoid an ordinary businessperson in DEW’s circumstances having reasonable grounds for holding the requisite suspicion.
DEW points to the fact that the payment of $50,000 on 17 April was made a week earlier than had been promised. However, the fact remains that, at this point, the debt was long overdue and clearly Western Desert was unable to pay it in full.
DEW points to the fact that Western Desert promised on 7 April to pay the full amount of the debt by 2 May. However, given past experience, an ordinary businessperson in DEW’s circumstances could have had no confidence that the debt would be so paid. In addition, an ordinary businessperson in DEW’s circumstances would have suspected on reasonable grounds that Western Desert was unable to pay other debts as they became due.
DEW contends that the information in the possession, and knowledge, of an ordinary businessperson in DEW’s circumstances is not, as a matter of law, confined to information in the possession and knowledge of DEW; an ordinary businessperson in DEW’s circumstances would have conducted a search of publicly available information provided to the stock exchange by Western Desert; and releases by Western Desert to the stock exchange as at 17 April 2014 would have allayed a suspicion on reasonable grounds.
I observe at the outset that DEW does not identify the precise releases by WDRL to the stock exchange, or the information contained in each release, upon which it relies in this respect. DEW tendered, amongst other things, the December 2013 half year and quarterly reports, and the announcements in March and April 2014 relating to the $60 million rights issue.
When these documents were tendered, Mr Duncan objected on the ground of relevance. DEW identified the relevance as twofold: general background and the state of mind of Mr Edmunds. DEW did not identify their relevance as being to the state of mind of an ordinary businessperson in the circumstances of DEW. I admitted these documents on a limited basis confined to general background and the state of mind of Mr Edmunds. DEW is precluded from using the documents for a different purpose. This is sufficient in itself to deal with DEW’s contention.
In any event, interstate intermediate appellate authority holds that, on the proper construction of section 588FG, the ordinary businessperson in the circumstances of the creditor is not to be regarded as being in possession of information that is not in the possession of the creditor. I am bound by those authorities unless they are contrary to binding South Australian appellate authority or I am persuaded that they are plainly wrong.[27] For the reasons given in Duncan as Liquidator of WDR Iron Ore Pty Ltd (In Liquidation) v SMA Industries Pty Ltd,[28] these authorities are not contrary to binding South Australian appellate authority, nor am I persuaded that they are plainly wrong.
[27] Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [135] per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ.
[28] [2020] SASC 88 at [312]-[322].
In addition, I have no basis on which to make a finding that an ordinary businessperson in DEW’s circumstances would have conducted a search of releases by Western Desert to the stock exchange. The only evidence I have is that Downer did not so act. DEW does not suggest that it did not conduct itself in the same manner as an ordinary businessperson in its circumstances would. I have no basis on which to find that its conduct in this respect was aberrant.
In addition, I have no basis on which to make a finding as to what information an ordinary businessperson in DEW’s circumstances would have sought or obtained if that person chose to make external inquiries. Which releases by Western Desert to the stock exchange would that person seek and obtain? Which passages from that material would that person read? What other inquiries would that person make? For example, would that person speak to a fellow creditor? Would that person seek an up-to-date credit report from an agency such as Dun & Bradstreet? What information would that person receive as a result of any such inquiries?
Mr Duncan succeeds on this issue in respect of the payment on 17 April 2014.
24 April 2014
The circumstances in which DEW received the payment of $50,000 on 24 April 2014, and the circumstances giving rise to suspicion of insolvency on reasonable grounds, are largely the same as in respect of the payment received on 17 April.
At this point, DEW had received $100,000 being approximately half of the outstanding balance. This would not have militated against the suspicion on reasonable grounds of the ordinary businessperson in the circumstances of DEW.
The question whether a reasonable person in DEW’s circumstances would have had reasonable grounds to suspect insolvency must be considered afresh as at 24 April 2014. Considered afresh, given the history of the broken promise to pay the full amount of the debt on 24 January; the unilateral payment of half of the debt on 12 February; the statements by Mr Loechel and Mr Edmunds concerning Western Desert’s cash flow difficulties; the fact that half of the debt then outstanding was all that Western Desert could pay by 24 April, the length of time the debt had been outstanding; the consequential lack of any confidence about when Western Desert would pay the balance of the debt and the obvious existence of other creditors whose debts were also being managed in a similar fashion, a reasonable person in DEW’s circumstances would have suspected, and would have had reasonable grounds to suspect, that Western Desert was unable to pay all its debts as and when they became due and payable.
Mr Duncan succeeds on this issue in respect of the payment on 24 April 2014.
2 May 2014
The circumstances in which DEW received the payment of $50,000 on 2 May 2014, and the circumstances giving rise to suspicion of insolvency on reasonable grounds, are largely the same as in respect of the payment received on 24 April.
At this point, DEW had received $150,000. This would not have militated against the suspicion on reasonable grounds of the ordinary businessperson in the circumstances of DEW. On the contrary, the fact that Western Desert had broken its promise to pay the full balance by 2 May 2014 and was obviously unable to do so would have increased the grounds for suspicion.
The question whether a reasonable person in DEW’s circumstances would have had reasonable grounds to suspect insolvency must be considered afresh as at 2 May 2014. Considered afresh, given the history of the broken promise to pay the full amount of the debt on 24 January; the unilateral payment of half of the debt on 12 February; the statements by Mr Loechel and Mr Edmunds concerning Western Desert’s cash flow difficulties; the fact that half of the residual debt then outstanding was all that Western Desert could pay on 2 May; the broken promise to pay the full amount of the balance of the debt on 2 May; the length of time the debt had been outstanding; the consequential lack of any confidence about when Western Desert would pay the balance of the debt and the obvious existence of other creditors whose debts were also being managed in a similar fashion, a reasonable person in DEW’s circumstances would have suspected, and would have had reasonable grounds to suspect, that Western Desert was unable to pay all its debts as and when they became due and payable.
Mr Duncan succeeds on this issue in respect of the payment on 2 May 2014.
18 July 2014
The communications between the parties between 2 May and 18 July 2014 are set out at [163] to [179] above.
The question whether a reasonable person in DEW’s circumstances would have had reasonable grounds to suspect insolvency must be considered afresh as at 18 July 2014. Considered afresh, given the history of the broken promise to pay the full amount of the debt on 24 January; the unilateral payment of half of the debt on 12 February; the statements by Mr Loechel and Mr Edmunds concerning Western Desert’s cash flow difficulties; the broken promise to pay the full amount of the balance of the debt on 2 May; the further broken promises on 30 May, 27 June, 4 July and 11 July; the length of time the debt had been outstanding, and the obvious existence of other creditors whose debts were also being managed in a similar fashion, a reasonable person would have suspected, and would have had reasonable grounds to suspect, that Western Desert was unable to pay all its debts as and when they became due and payable.
Mr Duncan succeeds on this issue in respect of the payment on 18 July 2014.
The creditor test
Given my conclusion on the second limb, it is not strictly necessary to consider the first limb. However, I do so for completeness.
It is easier to express the test in positive terms (bearing in mind that the onus of proof lies on DEW): did DEW have reasonable grounds to suspect that WDRIO was insolvent at the time of each payment.
17 April 2014
Mr Schweiger’s relevant attributes were not different from those of the ordinary businessperson. His acumen, perspicacity, resources etc were neither greater nor less than that of the ordinary businessperson.
In addition, I find that, at the time of the payment on 17 April 2014, Mr Schweiger suspected that Western Desert was unable to pay its debts as and when they became due and payable. As observed above, during the first part of his cross-examination Mr Schweiger attempted to avoid giving any evidence that might lead to this conclusion, which adversely reflects on his credit. During the second part of his cross-examination, Mr Schweiger conceded that he believed that Western Desert had no reason not to pay DEW other than an inability to do so and that it simply did not have the ability to pay DEW and its other creditors whose debts were due in full. I have summarised some of his concessions at [211] to [214] above but he also made additional concessions. Although these do not quite amount to concessions that he suspected insolvency due to the temporal aspect of that concept, I find that in his own mind he did suspect insolvency in that aspect.
This finding about Mr Schweiger’s, and hence DEW’s, state of mind is not conclusive because the question is whether objectively there were reasonable grounds for DEW to suspect insolvency rather than whether it did suspect insolvency. Even without my finding about Mr Schweiger’s state of mind, I am affirmatively satisfied that DEW had reasonable grounds to suspect that Western Desert was unable to pay all its debts as and when they became due and payable as at 17 April 2014.
24 April 2014
I make the same finding about Mr Schweiger’s state of mind as at 24 April 2014. Considered afresh, I am affirmatively satisfied that DEW had reasonable grounds to suspect that Western Desert was unable to pay all its debts as and when they became due and payable as at 24 April 2014.
2 May 2014
I make the same finding about Mr Schweiger’s state of mind as at 2 May 2014. Considered afresh, I am affirmatively satisfied that DEW had reasonable grounds to suspect that Western Desert was unable to pay all its debts as and when they became due and payable as at 2 May 2014.
18 July 2014
I make the same finding about Mr Schweiger’s state of mind as at 18 July 2014. Given the further passage of time and further broken promises, I find that Mr Schweiger was extremely relieved, and considered that DEW was lucky, to receive the final payment. Considered afresh, I am affirmatively satisfied that DEW had reasonable grounds to suspect that Western Desert was unable to pay all its debts as and when they became due and payable as at 18 July 2014.
Good faith
Given my conclusion on reasonable grounds to suspect, is not necessary to consider whether DEW proved that it received each payment in good faith.
Conclusion
Mr Duncan has proved insolvency at the relevant times. DEW has failed to prove the good faith defence at the relevant times.
Mr Duncan succeeds in the action. He is entitled to judgment for $189,252.38.
I will hear the parties as to interest and costs.
- AGLC
- Duncan as Liquidator of WDR Iron Ore Pty Ltd (in Liquidation) v Downer EDI Works Pty Ltd [2020] SASC 89
- Case
- [2020] SASC 89
- Decision Date
CaseChat Overview and Summary
The court found that the liquidator, Duncan, had proven that WDRIO was insolvent at the relevant times, thus establishing the basis for the unfair preferences claim. The court further determined that DEW had not successfully proven that it received the payments in good faith, which would have protected the transactions under section 588FG. The court held that the burden of proving good faith fell on DEW, but it had not discharged this burden to the requisite standard. As a result, the transactions were deemed to be unfair preferences, and DEW could not rely on the defence of good faith.
In light of the findings, the court ruled that Duncan, as liquidator, was entitled to recover the amounts paid to DEW, totaling $189,252.38. The court will hear submissions from the parties regarding the interest on the amount owed and the costs of the proceeding. The court’s decision thus upholds the liquidator’s claim and ensures that the unfair preferences are restored to the estate for the benefit of WDRIO’s creditors.
Orders
Orders of the court
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Background
Background to the litigation
Evidence
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Decision
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Ratio Decidendi
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