Queensland Phosphate Pty Ltd v Korda [No 2]

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2019 0016

QUEENSLAND PHOSPHATE PTY LTD (ACN 609 384 894)	First applicant
PARADISE PHOSPHATE LIMITED (ACN 154 180 882)	Second applicant
v
MARK ANTHONY KORDA AND CRAIG PETER SHEPARD AS JOINT AND SEVERAL LIQUIDATORS OF LEGEND INTERNATIONAL HOLDINGS INC (IN LIQUIDATION) (ARBN 120 855 352)	First respondent
LEGEND INTERNATIONAL HOLDINGS INC (IN LIQUIDATION) (ARBN 120 855 352) [No 2]	Second respondent

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JUDGES:	KYROU, McLEISH and NIALL JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	31 July 2019
DATE OF JUDGMENT:	30 September 2019
MEDIUM NEUTRAL CITATION:	[2019] VSCA 215
JUDGMENT APPEALED FROM:	[2018] VSC 789 (Randall AsJ)

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INSOLVENCY – Dormant mining company with insufficient cash to meet liabilities – Ownership of valuable mining tenements through subsidiary – Whether tenements realisable within reasonable period to enable payment of debts – Whether company able to pay all its debts as and when they became due and payable – Whether fact that tenements necessary for company’s ongoing business precluded them from being treated as realisable assets – Jingellic Minerals NL v Beach Petroleum NL (1991) 56 SASR 532 considered – Rees v Bank of New South Wales (1964) 111 CLR 210, Re Timbatec Pty Ltd (1974) 24 FLR 30, Switz Pty Ltd v Glowbind Pty Ltd (2000) 18 ACLC 343 applied – Re Adnot Pty Ltd (1982) 7 ACLR 212, Re Newark Pty Ltd (in liq) [1993] 1 Qd R 409 distinguished – Corporations Act 2001 (Cth) ss 95A, 459A, 585.

INSOLVENCY – Whether subsidiary insolvent – Whether subsidiary should be wound up on the just and equitable ground – Corporations Act 2001 (Cth) ss 459A, 461(1)(k).

CORPORATIONS – Uncommercial transaction – Company gave security to lender over all its shares in subsidiary which owned valuable mining tenement pursuant to bond deed and general security deed – Company received $400,000 pursuant to bond deed – Onerous provisions including events of default and consequences of default – Whether reasonable person in company’s circumstances would not have entered into transaction – Corporations Act 2001 (Cth) ss 588FB, 588FC, 588FE, 588FF.

PRACTICE AND PROCEDURE – New ground sought to be argued on appeal which had been abandoned at trial – Leave to rely on new ground refused.

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APPEARANCES:	Counsel	Solicitors
For the Applicants	Mr J Evans QC with Mr D Ratnam	Coleman Greig Lawyers
For the Respondents	Dr C G Button QC with Ms R Zambelli	Arnold Bloch Leibler

TABLE OF CONTENTS

*Introduction and summary* ...............................................................................................	1
*Facts* ………………………………………………………………………………………..	10
Business activities of Legend and Paradise ………………………………………………...	10
IFFCO dispute ……………………………………………………………………………..	10
Communications leading up to the execution of the deeds ………………………………..	11
Terms of the deeds ………………………………………………………………………….	17
Enforcement of award and appointment of receiver and manager of Paradise …………….	20
Winding up of Legend and commencement of proceeding …………………………………	21
*Trial Division proceeding* ………………………………………………………………..	21
*Issues raised on appeal* …………………………………………………………………..	25
*Issue 1: Insolvency of Legend and Paradise* …………………………………………...	26
Legislation …………………………………………………………………………………..	26
Principles …………………………………………………………………………………...	26
Associate judge’s findings ………………………………………………………………….	29
Grounds of appeal …………………………………………………………………………..	36
Parties’ submissions …………………………………………………………………...…...	36
Decision …………………………………………………………………………………….	39
*Issue 2: Void transactions* ……………………………………………………………….	46
Legislation …………………………………………………………………………………..	46
Principles …………………………………………………………………………………...	49
Associate judge’s findings ………………………………………………………………….	52
Grounds of appeal ……………………………………………………………………..........	57
Parties’ submissions …………………………………………………………………..........	58
Decision ………………………………………………………………………………….....	71
*Issue 3: Applicability of just and equitable ground to Paradise* …………………….	82
Legislation and principles …………………………………………………………………..	82
Associate judge’s findings ………………………………………………………………….	83
Grounds of appeal …………………………………………………………………………..	87
Parties’ submissions ………………………………………………………………………..	87
Decision …………………………………………………………………………………….	89
*Issue 4: Form of relief* …………………………………………………………………….	90
*Conclusion* ………………………………………………………………………………...	95

KYROU JA
McLEISH JA
NIALL JA:

Introduction and summary

This is an application for leave to appeal against an order made by an associate judge in the Trial Division.[1] The associate judge held that a bond deed and a general security deed (‘deeds’) entered into on 25 November 2015 between Legend International Holdings Inc (‘Legend’), Paradise Phosphate Ltd (‘Paradise’) and Queensland Phosphate Pty Ltd (‘Queensland Phosphate’) were void. The associate judge also decided that Paradise was insolvent and ordered that it be wound up.
[1]Re Legend International Holdings Inc (in liq) [2018] VSC 789 (‘Reasons’).

Legend is a company incorporated in the US State of Delaware on 1 May 2001 and registered with the Australian Securities and Investments Commission (‘ASIC’) under pt 5.7 of the Corporations Act 2001 (Cth). As appears from [23] below, it went into liquidation on 2 June 2016.

Paradise is an unlisted public company incorporated in Australia on 9 November 2011. At all relevant times, Legend owned 100 per cent of the shares in Paradise.

Queensland Phosphate is a company incorporated in Australia on 19 November 2015.

During the period from about August 2008 until 25 November 2015, the directors of Legend included Joseph Gutnick (‘Mr Gutnick’) and three non-executive directors, David Tyrwhitt, Allan Trench and Henry Herzog. Upon execution of the deeds on 25 November 2015, Mr Tyrwhitt and Mr Trench ceased to be directors and Mordechai Gutnick, Sholom Feldman and Pnina Feldman were appointed as directors. Ms Feldman is Mr Gutnick’s sister. Mr Feldman is Ms Feldman’s son and Mr Gutnick’s nephew. Mordechai Gutnick is Mr Gutnick’s son. On 23 March 2016, Mordechai Gutnick ceased his directorship. Ms Feldman resigned as a director on 20 April 2016 and Mr Feldman resigned on 22 April 2016. On 8 July 2016, Mr Gutnick became bankrupt and resigned as a director. During this time, Legend’s company secretary and chief financial officer was Peter Lee.

From at least January 2014 until 25 November 2015, Paradise’s directors were Mr Gutnick, Mr Lee and Mr Tyrwhitt. From 25 November 2015, Paradise’s directors were Mr Gutnick, Mordechai Gutnick, Mr Feldman and Ms Feldman. Mordechai Gutnick resigned as a director on 23 March 2016 and Mr Gutnick resigned on 8 July 2016.

At all relevant times the directors of Queensland Phosphate were Mr Feldman and Ms Feldman. Queensland Phosphate has 10,825 ordinary shares on issue, 10,000 of which are beneficially owned by the Feldman family. The remaining 825 shares were issued to external investors known as the Courtnay House Capital Trading Group, for a consideration of $650,000. David Sipina was a member of that Group.

Up until 2012, Legend’s main business was the development of a project for mining, beneficiation and processing of phosphate assets — primarily comprised of mining tenements — near Mt Isa in north-west Queensland. The main tenements were known as the ‘Paradise North Project’ and the ‘Paradise South Project’. In February 2012, Legend transferred the mining tenements to Paradise in return for Paradise issuing 100,000,000 of its shares to Legend. The transfer formed part of a restructure of Legend’s assets for the purpose of conducting an initial public offering (‘IPO’) of Paradise on the Australian Stock Exchange, which subsequently failed. Paradise’s main assets are the mining tenements.

On 14 July 2008, Indian Farmers Fertiliser Cooperative Ltd (‘IFFCO’) entered into a share options agreement with Legend whereby IFFCO acquired an option to purchase shares in Legend. Pursuant to that agreement, IFFCO purchased 20,000,000 shares in Legend for US$40,400,000. IFFCO later purchased a further 14,300,464 shares in Legend in an open market transaction. Also on 14 July 2008, Mr Gutnick entered into a shareholders agreement with IFFCO to regulate their relationship as shareholders in Legend. By an affiliate deed of adherence, IFFCO’s subsidiary, Kisan International Trading FZE (‘Kisan’), agreed to be bound by the terms of the shareholders agreement. As discussed in more detail at [35] below, a dispute between the parties was arbitrated in Singapore. On 7 May 2015, the arbitral tribunal made an award in accordance with which Legend was ordered to pay US$17,741,693 (AU$22,435,612.72) plus legal costs to IFFCO and Kisan, and Mr Gutnick was ordered to pay them US$28,050,000 plus interest and legal costs (‘award’).

For convenience, unless otherwise indicated, all further references to IFFCO are to IFFCO and Kisan and the amounts payable by Legend to those companies under the award will be referred to as the ‘IFFCO debt’.

On 15 October 2015, IFFCO filed an application in the Supreme Court of Victoria to enforce the award as a judgment of that Court pursuant to s 8(2) of the International Arbitration Act 1974 (Cth) (‘IFFCO award registration proceeding’). The proceeding was heard on 19 November 2015. Judgment was reserved.

On 25 November 2015, Legend and Paradise entered into the bond deed[2] and general security deed, referred to at [1] above, with Queensland Phosphate. The deeds are discussed in detail at [60]–[62] below. At this stage, it suffices to refer to the following features of the deeds:
[2]The full title of the bond deed is ‘Convertible Bond and Subscription Deed’.

(a)The bond deed provided for Queensland Phosphate to subscribe for up to 2,500 convertible bonds with a face value of $1,000 to be issued by Legend in a series of tranches. If Queensland Phosphate subscribed for all the bonds and converted them to shares, it would have a 53 per cent controlling interest in Legend.
(b)Under clause 3.3(b) of the bond deed, Queensland Phosphate was not required to take up the bonds if there was an event of default.

(c) Under cl 15.1, the specified ‘Events of Default’ included the following:
(d)a final judgment or judgments of an Australian or USA court or courts of competent jurisdiction for the payment of money aggregating in excess of $1,000,000 … are rendered against [Legend] or any Subsidiary and not stayed pending appeal within 21 days after entry thereof.
…
(k)there is any change to the composition of the board of either Legend or Paradise … without the consent of [Queensland Phosphate].

(d)Clause 2(a) of pt 1, sch 1 of the bond deed set out a warranty of solvency on the part of Legend in the following terms:
[Legend] is solvent and will not become insolvent by entering into and performing its obligations under [the deeds].

(e)Under cl 9.2 of the bond deed (read with cl 1.1), the interest payable on the bonds increased from 10 to 50 per cent per annum on default of any payment.
(f)Clause 12.2(d) (read with cl 1.1) of the bond deed obliged Legend to pay an ‘event of default fee’ of 50 per cent of the amounts advanced if it was required to redeem the bonds upon the occurrence of an event of default.
(g)Clause 16.3(g) of the bond deed prohibited Legend from procuring any further financing whilst a bond remained outstanding, without the prior written consent of Queensland Phosphate.
(h)Under cl 23.1, Paradise guaranteed Legend’s obligations under the bond deed.
(i)Under the general security deed, Legend and Paradise granted security over all of their assets to secure their obligations under the bond deed.

For convenience, we will refer to the above provisions of the bond deed as follows: cl 15.1(d) as the ‘final judgment event of default’; cl 2(a) of pt 1, sch 1 as the ‘warranty of solvency’; cl 9.2 as the ’50 per cent default interest rate’; cl 12.2(d) as the ’50 per cent event of default fee’; and cl 16.3(g) as the ‘prohibition on further borrowing’.

On 20 November 2015, prior to entering into the deeds, Queensland Phosphate, Mr Feldman, Ms Feldman and Zalg Exploration Pty Ltd (‘Zalg’) as trustee of the Zalg Exploration Trust entered into a shareholders deed (‘Zalg shareholders deed’) which provided as follows:

The Feldmans and [Queensland Phosphate] give Zalg or its nominee, as facilitator of the Convertible Bond Deed, the option to buy up to half of the Convertible Notes (or Shares if the Convertible Note has been converted into Shares) held by [Queensland Phosphate] under the Convertible Bond Deed from [Queensland Phosphate] anytime in the period of 18 months from the date of this Deed, at a price of $1000 per Convertible Note (or the equivalent of $0.005 per Share if the Convertible Note has been converted into Shares).

Mr Gutnick was a director of Zalg until 18 November 2015. From 18 November 2015 onwards, Mordechai Gutnick was a director of Zalg. The shares in Zalg are beneficially owned by the Gutnick family.

The option for Zalg to take up to half the notes issued to Queensland Phosphate (or shares, if already converted) translated to an option to purchase up to approximately 26 per cent of Legend’s shares for $1,250,000.

Amounts totalling $400,000 were provided pursuant to the bond deed as follows: $100,000 from Queensland Bauxite Ltd (‘Queensland Bauxite’) on 10 November 2015; $100,000 from Queensland Phosphate on 25 November 2015; and $200,000 from Queensland Phosphate on 26 November 2015. Queensland Bauxite is a listed public company incorporated in Australia whose directors are Mr Feldman and Ms Feldman.

On 21 December 2015, Croft J delivered judgment in the IFFCO award registration proceeding. He determined that the award be enforced in the same manner as a judgment of the Supreme Court.

On 18 February 2016, IFFCO served a statutory demand on Legend for payment of the IFFCO debt. The time for compliance expired on 10 March 2016.

On 11 March 2016, Queensland Phosphate appointed Christopher Palmer as receiver of Legend’s shares in Paradise pursuant to the general security deed. Mr Palmer was also appointed receiver and manager of Paradise.

On 11 April 2016, IFFCO filed a winding up application in respect of Legend.

On the day that Mr Feldman resigned as a director of Legend — 22 April 2016 — Mr Palmer, in his capacity as receiver of Legend’s shares in Paradise, caused Legend to enter into a share sale agreement with Queensland Phosphate and Paradise. Under that agreement, all of Legend’s shares in Paradise were sold to Queensland Phosphate for a consideration of $1, which was subject to adjustment based on a future valuation (‘$1 share sale agreement’). That agreement provided that the sale of the shares would not proceed if Queensland Phosphate did not pay the valuation amount within 60 days after the date of the valuation. On 26 April 2016, a share transfer was executed to give effect to the $1 share sale agreement. This is being held in escrow by Mr Palmer’s solicitors pending the outcome of the current proceeding. Mr Palmer ceased acting as receiver and manager of Paradise and receiver of Legend’s shares in Paradise on 22 December 2016.

On 2 June 2016, Randall AsJ ordered that Legend be wound up in insolvency and that Mark Korda and Craig Shepard be appointed as joint and several liquidators of Legend (‘liquidators’).[3]
[3]Indian Farmers Fertiliser Cooperative Ltd v Legend International Holdings Inc (2016) 52 VR 1.

By way of two originating processes dated 7 November 2016 (as amended on 20 November 2017) and 15 December 2017 respectively, the respondents sought orders which included that Paradise be wound up and that the deeds and the $1 share sale agreement be declared void. The proceeding was heard by Randall AsJ on 5, 6, 7 and 9 March 2018.[4]
[4]The trial was delayed due to a dispute about whether the proceeding had been settled. On 1 May 2017, Judd J decided that the proceeding had not been settled. An appeal against that decision was dismissed by this Court on 26 September 2017: Queensland Phosphate Pty Ltd v Korda [2017] VSCA 269.

On 14 December 2018, the associate judge delivered judgment. Relevantly, the judgment sets out his reasons for the following conclusions:

(a)Legend was insolvent at the time that the deeds were entered into. If necessary, the associate judge would have also determined that Legend became insolvent by virtue of entry into the deeds. In reaching that conclusion, he relevantly made the following findings:
(i) Legend was not able to pay its debts as and when they fell due.
(ii) Legend had no cash flow in November 2015.
(iii)Legend did not have a realisable asset.
(iv)The IFFCO debt was due and payable by Legend prior to the order of Croft J for the enforcement of the award as a judgment of the Supreme Court.

(b)The deeds were voidable transactions.
(c)The good faith defence in s 588FG(2) of the Corporations Act was not available to Queensland Phosphate.
(d)The $1 share sale agreement was void.
(e)Mr Palmer’s appointment as receiver of Legend’s shares in Paradise and receiver and manager of Paradise was invalid.
(f)Paradise should be wound up in insolvency pursuant to s 459A of the Corporations Act.
(g)If it had been necessary for him to do so, he would have decided that Paradise should be wound up on the just and equitable ground in s 461(1)(k) of the Corporations Act.

As appears from [30] below, the applicants seek to impugn conclusions (a)(i) and (iii), (b), (f) and (g) above.

The associate judge’s judgment was subsequently given effect in an order he made on 1 February 2019 (‘associate judge’s order’). That order was in the following terms:

1Pursuant to s 558FF(1)(h) of the [Corporations Act], each of the Bond Deed and the General Security Deed are void and unenforceable as at the time they were entered into.
2The Share Sale Agreement dated 22 April 2016 between [Legend] and [Queensland Phosphate] is void and unenforceable.
3Upon the expiry of the undertakings referred to in ‘Other Matters’, Christopher Palmer shall cause to be delivered the share transfer certificate, which purports to transfer [Legend’s] shareholding in [Paradise] to [Queensland Phosphate], to the [respondents] for destruction.
4Pursuant to section 588FF(1)(g) of the [Corporations Act], [Queensland Phosphate] is entitled to prove in the winding up of [Legend] as an ordinary unsecured creditor for an amount equal to:
(a)moneys paid by it to [Legend] under or in connection with the terms of the Bond Deed; and
(b)interest in respect of any amount paid under (a) of this paragraph, at the rate prescribed by the Penalty Interest Rates Act 1983 (Vic) from the date that any stay of these orders expires.

5[Paradise] be wound up in insolvency under section 459A of the [Corporations Act] and Messrs Mark Anthony Korda and Craig Peter Shepard jointly and severally are appointed liquidators of [Paradise] for the purposes of the winding up.
6The requirement to file the requisite notices of application for winding up [Paradise] with ASIC are dispensed with.
7[Legend’s] costs of the application for winding up [Paradise] are costs in the winding up.
8Otherwise, [the applicants] pay [the respondents’] costs of the proceedings, including reserved costs, on a standard basis.
9From the date of entry of these orders, such orders be stayed for a period of 14 days to permit [the applicants] to lodge any appeal of these orders.

The associate judge’s order declared that:

1The [bond deed] and the [general security deed] … are:
(a)uncommercial transactions within the meaning of s 588FB of the Corporations Act … ;
(b)insolvent transactions within the meaning of s 588FC of the [Corporations Act]; and
(c)voidable transactions within the meaning of s 588FE(2) and (3) of the [Corporations Act].

2        The appointment of Mr Palmer on 11 March 2016:
(a)       as receiver of [Legend’s] shares in [Paradise] was invalid; and
(b)       as the receiver and manager of [Paradise] was invalid.

The associate judge’s order also continued the undertakings of Mr Feldman, Ms Feldman, Mr Palmer and Queensland Phosphate — originally given by consent on 11 November 2016 — not to encumber or otherwise deal with the shares in Paradise or the assets of Paradise, or allow the amendment of Paradise’s share register, pending the outcome of the proceeding.[5] Those undertakings, which remain in place, may be briefly summarised as follows:

(a)The Feldmans undertook not to cause Paradise to deal with, or assist Mr Palmer in dealing with, any asset of Paradise or to exercise their powers as directors of Paradise to amend Paradise’s share register.
(b)Mr Palmer undertook not to deal with the shares in Paradise.
(c)Queensland Phosphate undertook not to: deal with the interest that it holds in the shares or assets of Paradise; cause Mr Palmer to deal with the shares in or assets of Paradise; cause Mr Palmer to deal with any interest that Legend has in any asset of Paradise, other than in the ordinary course of Paradise’s business.

[5]An application by the applicants to vary or discharge the undertakings was dismissed by the associate judge on 24 April 2017.

Initially, the applicants sought leave to appeal against the associate judge’s order on 12 grounds. At the hearing of the application for leave to appeal, they abandoned grounds 2, 5, 7 and 10 and sought leave to add a thirteenth ground. The extant grounds and proposed ground 13 are set out in full later in these reasons. In summary, they seek to impugn the following aspects of the associate judge’s decision:

(a)grounds 6 and 8 contend that the associate judge erred in concluding that Legend and Paradise were insolvent at the time they entered into the deeds on 25 November 2015;
(b)grounds 1, 3, 4 and 9 contend that the associate judge erred in concluding that the deeds constitute a void transaction;
(c)grounds 11 and 12 contend that the associate judge erred in concluding that Paradise should be wound up on the just and equitable ground in s 461(1)(k) of the Corporations Act; and
(d)proposed ground 13 contends that the associate judge’s discretion miscarried in relation to the relief he granted to the respondents consequent upon his finding that the deeds constituted a voidable transaction. The ground asserts that instead of depriving Queensland Phosphate of its security in its entirety, the associate judge should have preserved the security in respect of the amounts owing under the bond deed or alternatively the advances totalling $400,000 that were made to Legend.

The respondents opposed the applicants’ application for leave to add proposed ground 13.

For the reasons that follow, the application for leave to appeal will be granted in respect of grounds 1 and 6 only, but the appeal will be dismissed.

Facts
Business activities of Legend and Paradise

As stated at [8] above, Legend’s main business was the development of the tenements. It was engaged in the exploration stage in relation to the tenements since August 2006 and reached the development stage in February 2011. It became dormant following the failed IPO in 2012.

As at November 2015, Legend and Paradise did not engage in any income producing activities and did not have an ongoing source of revenue.

IFFCO dispute

As we have stated at [9] above, a dispute arose between IFFCO on the one hand, and Legend and Mr Gutnick on the other, in relation to the share options agreement and the shareholders agreement referred to in that paragraph. The dispute was referred to arbitration in Singapore on 18 January and 25 March 2013. On 7 May 2015, the arbitral tribunal made the award referred to at [9] above in favour of IFFCO. It found that IFFCO was entitled to rescind the two agreements on the basis that it was induced to purchase the shares in Legend by fraudulent misrepresentation.

As we have already noted at [9] above, under the award, Legend was ordered to pay US$17,741,693 (AU$22,435,612.72) plus costs to IFFCO, and Mr Gutnick was separately ordered to pay US$28,050,000 plus interest and costs to IFFCO. The award did not expressly require IFFCO to return the share certificates upon receipt of the amounts awarded.

On 22 June 2015, the High Court of Singapore granted IFFCO leave to enforce the award in the same manner as a judgment of that Court. Judgment was entered as against Mr Gutnick on 9 July 2015 and as against Legend on 2 September 2015.

As we have stated at [11] above, on 15 October 2015, IFFCO commenced the IFFCO award registration proceeding in the Supreme Court. Legend and Mr Gutnick opposed the proceeding on the ground of public policy. They contended that the arbitral tribunal’s failure to order IFFCO to return the share certificates upon receipt of the amounts awarded vitiated the award because it involved double recovery.

On 19 November 2015, — the same day that Queensland Phosphate was incorporated —the IFFCO award registration proceeding was heard before Croft J, who reserved his decision.

Communications leading up to the execution of the deeds

On 26 October 2015, — 11 days after the commencement of the IFFCO award registration proceeding — Legend obtained legal advice from Herbert Smith Freehills in relation to a proposed convertible note issue under which Legend would grant security over its shareholding in Paradise to a convertible note holder. The convertible note issue eventually evolved into the bond deed. The advice relevantly stated:

To the extent that Australian law may intersect, the granting of the security could be subject to challenge if Legend or Paradise is insolvent, or could become insolvent in the next 6 months — in which case the granting of the security may be challenged and undone as an uncommercial transaction.

On 30 October 2015, Mr Gutnick circulated a draft agreement titled ‘Convertible Note Agreement’ to Mr Feldman. This draft agreement provided for an unspecified noteholder’s subscription of 1 million notes in Legend at $1 per note and set out a boilerplate events of default clause. Clause 7.1 provided for staged security to be given over Legend’s shares in Paradise, namely:

(a)security over 25 per cent of the shares on payment of $250,000 on 2 November 2015;
(b)security over 35 per cent of the shares on payment of $350,000 on 2 December 2015; and
(c)security over 40 per cent of the shares on payment of $400,000 on 31 December 2015.

Later on the same day, Mr Gutnick circulated to Mr Feldman a second version of the convertible note agreement, cl 7 of which provided for security in the form of a charge over the assets of Legend. The events of default clause was boilerplate. The subscription amount was increased from $1,000,000 to $5,000,000 of which $1,000,000 was payable on the signing of the agreement, $1,000,000 on 2 December 2015, $2,000,000 on 31 December 2015 and $1,000,000 on 1 February 2016.

On 4 November 2015, Mr Feldman emailed a draft term sheet relating to the convertible note agreement to Mr Gutnick. The draft term sheet provided for a subscription of an unspecified number of convertible bonds for an amount of $2,500,000 secured by first ranking security over Legend and over its shares in Paradise. It was initially contemplated that the transaction with Legend and Paradise would be entered into by Queensland Bauxite. The draft term sheet provided that the purpose of the funding was for Legend to defend the ‘current court action’ — that is, the IFFCO award registration proceeding — and that any excess funds would be used for general working capital purposes. The draft term sheet also provided for events of default, the first of which was as follows:

(1)any finding by a court of law against [Legend] that causes a judgment of more than $1M to be entered against [Legend].

On 5 November 2015, Mr Feldman provided a new version of the draft term sheet to Mr Gutnick with minor changes. In that version, a clause provided that the lender at its option could require Legend to redeem any or all of the convertible bonds, at any time after an event of default occurs, at a price representing 150 per cent of the funds advanced. Such redemption would result in further accruing penalties at a rate of 50 per cent per annum until repaid.

Also on 5 November 2015, Mr Gutnick provided Mr Feldman’s version of the draft term sheet to Mr Lee, who amended and annotated it with comments which he passed on to Mr Gutnick. Mr Lee’s amendments included the insertion of the words ’other than any actions by IFFCO and/or Kisan’ in brackets at the end of the first event of default set out at [43] above. In relation to the 50 per cent interest rate in the clause referred to at [44] above, Mr Lee commented: ‘Is this legal given recent legal decisions in regard to penalties’. That same day, Mr Gutnick forwarded to Mr Feldman the term sheet with Mr Lee’s amendments and comments.

On 6 November 2015, Mr Gutnick emailed Mr Feldman stating: ‘We need to move on Legend ASAP because we need the funds and don’t want to go elsewhere. Try your best’.

Also on 6 November 2015, Mr Feldman emailed Mr Gutnick attaching a further revised term sheet. In this version, Mr Feldman rejected the change made by Mr Lee carving out the IFFCO award registration proceeding from the first event of default. The effect of Mr Feldman’s version was to ensure that there would be an event of default if IFFCO was successful in that proceeding.

On 9 November 2015, Mr Lee made the following comment to Mr Gutnick in relation to the term sheet:

As previously advised, this term sheet will be released to the [US Securities and Exchange Commission] as part of a Form 8–K filing in the USA. From a view point, it might be better to delete the reference to defending the court case and simply say working capital.

Mr Gutnick passed this on to Mr Feldman.

On 10 November 2015, an initial tranche of $100,000 was provided by Queensland Bauxite to Legend despite the fact that the term sheet had not yet been executed.

On 13 November 2015, Mr Feldman emailed a draft bond deed to Mr Gutnick. On 16 November 2015, Mr Feldman emailed a draft security deed to Mr Gutnick under cover of an email which relevantly stated:

I need to check on how we secure a US company, so I included Paradise in the deed. Paradise is probably the most important one to protect in this transaction to ensure no one can get first preference so we can protect the asset.

On 19 November 2015, the term sheet relating to the bond deed was executed by Mr Feldman and Ms Feldman on behalf of Queensland Phosphate and by Mr Gutnick and Mr Lee on behalf of Legend. As stated at [11] and [39] above, that same day Croft J heard the IFFCO award registration proceeding. It was also the day that Queensland Phosphate was incorporated. It was named as the lender in the term sheet in the place of Queensland Bauxite.

That same day, Mr Gutnick emailed Mr Feldman a copy of Legend’s and Paradise’s balance sheets as at 30 September 2015. The balance sheets suggested that both companies were insolvent at the time. In particular, as at 30 September 2015:

(a)Legend’s balance sheet indicated that it had current liabilities of AU$27,161,061 and current assets of AU$663,028; and
(b)Paradise’s balance sheet indicated that it had current liabilities of AU$2,458,358 and current assets of AU$2,537.

Also on 19 November 2015, Legend received legal advice from US lawyers which relevantly stated:

At a conversion rate of A$0.005, it appears that the Bonds are convertible into 500,000,000 shares (excluding shares issuable upon conversion of interest payments). This would represent more than 53% of the issued and outstanding shares of Legend following conversion, which would substantially dilute existing stockholders. With this level of dilution (and considering the 50% penalty interest rate), the Board needs to be satisfied, after making a reasonable inquiry, that there isn’t an alternative source of financing that would be available to the Company on more favorable terms. Also, I understand that Pnina Feldman is [Mr Gutnick’s] sister so the existence of this family relationship will impose a heightened level of scrutiny on the reasonableness of the Board’s actions.

On 20 November 2015, Mr Feldman received an email from Mr Sipina of the Courtenay House Capital Trading Group enquiring about the impact of the IFFCO award registration proceeding on Legend’s assets. Mr Feldman replied:

This is his [Mr Gutnick’s] main fight he is fighting at the moment. He is confident he will win it, but if he doesn’t then we are doing what we can through this structure to protect the asset and its value. This is precisely the point of his doing this deal, to ensure that all value is not lost to the company if he loses the battle … We as third parties will develop and control the asset for the foreseeable future, ensuring maximum value possible will be retained by the company if they lose this case …

On 22 November 2015, Mr Feldman sent an email to Mr Gutnick stating:

I made quite a number of additions to the documents, particularly surrounding Paradise as the guarantor to the deal, in case anything happens to Legend, we want to make sure that Paradise is secure and we will have the right to step in and protect the assets from any other creditor or receiver, so I put in quite a bit of wording that I feel would be necessary in such a scenario. Let’s all hope that scenario does not happen, but these documents should at least protect us as much as possible from that scenario.

On 23 November 2015, Mr Lee on behalf of Legend deleted Legend’s warranty as to solvency in his marked up copy of the draft bond deed and sent the amended draft to Mr Feldman (copied to Mr Gutnick).

Also on 23 November 2015, a number of emails were exchanged between Mr Feldman and Mr Gutnick. The following relevant exchanges occurred:

(a)At 3:14 pm, Mr Feldman sent an email to Mr Gutnick stating:
The main issue is obviously on the warranty of solvency. If the company cannot say that it is solvent then how is it able to legally do this deal. The whole basis of doing any business is that the Company thinks that its asset is worth more than its liabilities, and has the current support of its creditors to wait until the company has funds to be paid, or else the company is not legally able to trade. We then can’t take security over the asset if there is a reasonable suspicion that the company is insolvent. It is my view that the assets are worth more than the liabilities, and worth more than the funds being advanced as well, which is why we are looking to save the asset, but my understanding is that we need the directors to be able to say that is the case in their view in order to be able to legally take security.
(b)At 3:20 pm, Mr Gutnick replied to Mr Feldman’s email stating ‘[t]he problem is only the IFFCO debt’. A short time later at 3:24 pm, Mr Gutnick sent a follow up email stating ‘[w]e can [give the warranty as to solvency] if you insist’.

(c) At 3:28 pm, Mr Feldman responded to Mr Gutnick’s email of 3:20 pm stating:
[i] You are still arguing that [the IFFCO debt] is not payable.
[ii]Even if it gets enforced as payable, you still have reasonable grounds to believe that the asset is worth more than the $12M and can at that point be put up to tender to pay the debt. Until that is publicly tested, it is only a matter of reasonable belief.
[iii]You clearly are not of the belief that the company is currently insolvent, or else you wouldn’t be able to do this transaction. In order for the security to be valid, the company needs to say that to be the case. If that warranty is deleted from the deed, it effectively invalidates the deed in my understanding?

(d)At 3:37 pm, Mr Feldman responded to Mr Gutnick’s email of 3:24 pm stating ‘ok. I think it is important to ensure the validity of the security as much as possible’.

On 24 November 2015, Mr Feldman emailed a presentation to Mr Sipina. The first page of the presentation relevantly stated:

·Legend is currently under serious litigation by IFFCO
·Legend has a world class phosphate project 100% owned and unencumbered …
·Queensland Phosphate to lend $2.5M to Legend and will take first ranking security on the asset
·Control of the project to go to Queensland Phosphate from the outset in order to realise the value of the project in the short term, thereby giving significant value to Queensland Phosphate and the potential for Legend to refinance its potential liabilities to IFFCO

…
·With valuations of between approximately $200M and $4Bn on the project, depending on the options and level of development or a combination of them, Queensland Phosphate’s current value would be $50M-$1Bn.

Terms of the deeds

As stated at [1] above, on 25 November 2015, Legend and Paradise entered into the deeds with Queensland Phosphate.

The relevant terms of the bond deed were as follows:

(a)Clause 2.1 (read with cls 1.1 and 2.2) provided for Legend to issue to Queensland Phosphate up to 2,500 convertible bonds with a face value of $1,000.
(b)Under cl 3.2, Legend was required to ensure that, prior to settlement, it and Paradise had no more than three directors, two of whom had to be Mordechai Gutnick (as joint chief executive officer) and Mr Gutnick and that, upon settlement, three additional directors to be nominated by Queensland Phosphate were appointed, two of whom had to be Mr Feldman (as joint chief executive officer) and Ms Feldman.
(c)Clause 3.3 provided the following timetable for the issue of bonds: 200 bonds on completion; 200 bonds on 15 December 2015; 100 bonds on 28 February 2016, 31 March 2016, 30 April 2016, 31 May 2016, 30 June 2016 and 31 July 2016 respectively, following which it was optional for Queensland Phosphate to take up any further bonds issued up to a maximum of 1,500 additional bonds.
(d)Under cl 3.3(b) Queensland Phosphate was not required to take up any further bonds if there was an event of default.
(e)Clause 2(a) of pt 1, sch 1 set out the warranty of solvency referred to at [12(d)] above.
(f)Under cl 6, Legend undertook to apply the proceeds of the bond issue for its ‘general working capital purposes’.
(g)Clause 9.2 (read with cl 1.1) contained the 50 per cent default interest rate referred to at [12(e)] above.
(h)Under cl 10.1, the bonds were convertible at the option of Queensland Phosphate.
(i)Under cl 12.2, on default, Legend was obliged to redeem the bonds at the election of Queensland Phosphate, on three days’ notice.
(j)Clause 12.2(d) (read with cl 1.1) contained the 50 per cent event of default fee referred to at [12(f)] above;
(k)Clause 15.1 set out events of default, including the final judgment event of default referred to at [12(c)] above;
(l)Under cl 16.2, Legend gave various undertakings, including that it would not, and would not permit its subsidiaries, to dispose of or encumber their ‘Material Assets’ without the consent of Queensland Phosphate.
(m)Clause 16.3(g) set out the prohibition on further borrowing referred to at [12(g)] above.

(n)Under cl 28.1, Paradise, as guarantor, was required to pay interest at the default rate of 50 per cent per annum on amounts due and payable under the bond deed.

Under cl 2.1 of the general security deed, Legend and Paradise (as guarantor of Legend’s obligations) granted Queensland Phosphate security over all of their assets to secure their obligations under the bond deed. Clauses 10.1 to 10.6 conferred enforcement powers on Queensland Phosphate, including the power to appoint a receiver upon an event of default.

The effect of the final judgment event of default was that registration of the award as a judgment of the Supreme Court would give rise to significant adverse consequences for Legend and Paradise, including the following:

(a)Queensland Phosphate would not be required to advance any further funds to Legend;
(b)Queensland Phosphate could require Legend to redeem the bonds on three days’ notice;
(c)Legend would be required to pay a 50 per cent event of default fee and default interest of 50 per cent per annum on amounts already advanced and those obligations would be guaranteed by Paradise; and
(d)Queensland Phosphate would be able to appoint a receiver over the assets of Legend and Paradise.

Prior to executing the deeds, Mr Lee emailed a written resolution to Legend’s non-executive directors, Mr Tyrwhitt, Mr Trench and Mr Herzog, for their signature. The resolution authorised Legend to enter into the transaction as described in the resolution and authorised Mr Gutnick and Mr Lee to sign the deeds on behalf of Legend and Paradise. However, the summary of the bond deed included in the resolution failed to identify key provisions of the bond deed, including: the specified events of default; Queensland Phosphate’s right of redemption on an event of default; the 50 per cent event of default fee; the 50 per cent default interest rate; the warranty of solvency; and the prohibition on further borrowing.

On the day the deeds were executed: Mr Feldman, Ms Feldman and Mordechai Gutnick were appointed as directors of Legend and Paradise; Mr Tyrwhitt and Mr Trench resigned as directors of Legend; and Mr Lee and Mr Tyrwhitt resigned as directors of Paradise. Mr Herzog remained the sole non-executive director of Legend. As a result of these changes, the Gutnick and the Feldman families had equal representation on the boards of Legend and Paradise. Mordechai Gutnick and Mr Feldman were appointed joint chief executive officers of Legend and Paradise.

The payments totalling $400,000 that were made to Legend under the bond deed between 10 November 2015 and 26 November 2015 are set out at [17] above.

On 26 November 2015, Legend notified the US Securities and Exchange Commission of the transactions with Queensland Phosphate.

On 1 December 2015, Mr Feldman sent the following email to Mr Lee:

Can you please arrange for the original signed documents to be sent to me via registered overnight express so we can attend to stamping and registering.
This is time sensitive particularly as a decision may be forthcoming in the courts immediately.

Enforcement of award and appointment of receiver and manager of Paradise

As stated at [18] above, on 21 December 2015, Croft J delivered judgment in which he determined that the award be enforced against Legend in the same manner as a judgment of the Supreme Court. He held that the award did not involve double recovery because rescission of the two agreements entailed ‘the avoidance of the transactions from the beginning and the restoration of the parties to their previous positions’.[6] On 22 December 2015, he made an order to this effect but granted a stay until 5 February 2016.
[6]Indian Farmers Fertiliser Cooperative Ltd v Gutnick (2015) 304 FLR 199, 299 [98].

Legend and Mr Gutnick applied to this Court for leave to appeal against Croft J’s decision. On 9 February 2016, the Court refused leave to appeal.[7] The Court granted a stay until 12 February 2016. Legend and Mr Gutnick applied for special leave to appeal to the High Court but subsequently discontinued their application.
[7]Gutnick v Indian Farmers Fertiliser Cooperative Ltd (2016) 49 VR 732.

The expiration of the stays in relation to Croft J’s order of 22 December 2015 triggered the final judgment event of default under the bond deed.

As stated at [19] above, on 18 February 2016, following the expiration of the stay, IFFCO served a statutory demand on Legend for payment of the IFFCO debt. The time for compliance expired on 10 March 2016.

As stated at [20] above, on 11 March 2016, Queensland Phosphate appointed Mr Palmer as receiver of Legend’s shares in Paradise pursuant to the general security deed. Mr Palmer was also appointed as receiver and manager of Paradise.

Winding up of Legend and commencement of proceeding

As stated at [21] above, on 11 April 2016, IFFCO filed a winding up application in respect of Legend.

As stated at [22] above, on 22 April 2016, Legend entered into the $1 share sale agreement with Paradise and Queensland Phosphate. On that day, prior to the execution of that agreement, Mr Feldman resigned as a director of Legend. In his covering email to Mr Gutnick attaching his letter of resignation, Mr Feldman stated: ‘Due to potential conflicts of interest I can no longer remain on the board of Legend …’.

On 8 May 2016, Legend filed a bankruptcy proceeding under ch 11 of the Bankruptcy Code (US) in the United States Bankruptcy Court for the District of Delaware. The proceeding was dismissed on 25 July 2016.

IFFCO’s application to wind up Legend was heard on 27 and 30 May 2016. As stated at [23] above, on 2 June 2016, the associate judge made an order that Legend be wound up in insolvency and that the liquidators be appointed as liquidators of Legend. The order was affirmed by this Court on 30 June 2016.[8]
[8]Legend International Holdings Inc v Indian Farmers Fertiliser Cooperative Ltd (2016) 52 VR 40.

On 30 May 2016, Mr Palmer obtained a valuation report from John Dunlop which set out a ‘preferred valuation’ of the tenements in the amount of $3,200,000.

Trial Division proceeding

As stated at [24] above, the respondents commenced the current proceeding in the Trial Division in November 2016 and the proceeding was heard by the associate judge on 5, 6, 7 and 9 March 2018.

The key evidence comprised documents tendered by the parties, six affidavits sworn by one of the liquidators of Legend (Mr Shepard) on behalf of the respondents and two affidavits affirmed by Mr Feldman on behalf of the applicants. One of the documents tendered by the respondents was an expert valuation report dated 14 February 2017 prepared by Snowden Mining Industry Consultants in relation to the tenements (‘Snowden report’). Both Mr Shepard and Mr Feldman were cross-examined.

The associate judge did not make any adverse credit findings against Mr Shepard or Mr Feldman. In respect of Mr Feldman, the associate judge said that he had no reason to doubt his honesty as a witness.[9]
[9]Reasons [288].

Relevantly, in his first affidavit of 4 November 2016, Mr Shepard stated that ‘an ordered sale process’ to realise the tenements ‘would take three to six months to complete’.

Mr Feldman gave evidence on a range of issues, including: his extensive experience in the mining industry; sources of funding for mining projects; tensions in the relationship between the Gutnick and Feldman families; the role of Bob Katter MP in introducing him to the business opportunity involving the tenements; his communications with Mr Gutnick leading up to the execution of the deeds; his intentions regarding the strategy Legend should pursue once he became a director following the execution of the deeds; the value of the tenements; and the timeframes for developing mining assets.

In relation to the funding of mining projects, Mr Feldman stated that, in his experience, the only methods by which a company that owns a mining tenement can raise capital are: to offer equity in the mining project; to offer shares in the company; or to take a loan and offer its assets as security.

In relation to his intentions regarding the strategy Legend should pursue once he became a director following the execution of the deeds, the following exchanges in cross-examination by counsel for the respondents encapsulate Mr Feldman’s evidence:

DR BUTTON: But coming back to my question, the effect of the deal that you were proposing to Mr Gutnick was that for putting in 2.5 million, if you decided to convert?---Yes.
If you put it all in and if you decided to convert, you’d get 53 per cent of the equity for an investment of 2.5 million?---Correct. But that was — all the equity obviously, is subject to all the debts of the company.
Now it was your view, was it not, that Mr Gutnick was giving away a chunk of equity by agreeing to that deal?---Every deal that I try and do, I try and ensure there’s a win win for all parties.
That’s not my question. My question is- - - ?---So the answer to that is a chunk of equity. A chunk of equity is my, and my investors win side of the deal. The win side for Gutnick was obviously the continuation of Legend and the ability to pay its creditors.
…
HIS HONOUR: What creditors?---The creditors of Legend.
What were you going to give him 13 million? Or 25 million?---To see what happens if the company continues to operate, no. And the $2.5m was enough to keep the company alive and operating subject to now to get in the big funding enough to be able to develop the project. And if he was going to lose the battle in the Victorian Supreme Court against IFFCO, and if I was going to be creating value and investing in the project, what that would achieve is within what I believed at that time, within a short period of time, I’d be able to create that value and whenever IFFCO would then put in their demand legally in Australia, if that would be the eventuated — the eventuating position, then we would be able to pay that out.
…
DR BUTTON: … Do you also say that was part of a responsible strategy with the interests of Legend’s creditors in mind?---Yes. And the reason being that if we are able to create in that short period of time before they can enforce their debt enough value in the project, um, Legend would still have enough money to pay Kisan and IFFCO in full.[10]

[10]Transcript of Proceedings (7 March 2018) 277–8, 322–3.

Mr Feldman also gave the following evidence in cross-examination regarding the risk that Croft J may decide to register the award and the timing of any such decision:

DR BUTTON: … But you were aware that a judgment could be handed down any day?---Yes.
You really had no control over that?---Correct.
…
And you were alert to the possibility that there was a very real prospect that the decision that was coming down would be in favour of enforcement?---I saw that as a possibility and I couldn’t — I didn’t feel I could risk my investors’ funds on that basis.[11]

[11]Transcript of Proceedings (7 March 2018) 305, 313.

Mr Feldman gave evidence about the approaches he made to potential investors between February 2016 and January 2017. He said that some investors were ‘pretty keen to get involved … but people are afraid of litigation’.[12]
[12]Transcript of Proceedings (7 March 2018) 379.

In relation to the value of the tenements, Mr Feldman said that, as at November 2015, he believed the tenements were worth ‘perhaps … in the tens, if not more, millions of dollars’.[13] He also stated that in the period leading up to the execution of the $1 share sale agreement on 22 April 2016, he believed that ‘a likely valuation or possible valuation’ of the tenements was between $10,000,000 and $20,000,000.[14]
[13]Transcript of Proceedings (7 March 2018) 267.
[14]Transcript of Proceedings (7 March 2018) 351.

In relation to the timeframe for developing the tenements, Mr Feldman agreed that substantial capital was required before phosphate could be extracted and sold. He agreed that approximately $30,000,000 was required to develop the Paradise North Project. He said that if funding were in place, the Paradise North Project could be put into production in ‘maybe as quick as six months’ whereas the Paradise South Project ‘would need a few years of development’.[15]
[15]Transcript of Proceedings (7 March 2018) 265.

In relation to a possible sale of the tenements, Mr Feldman said that it was his impression that the realisation of the tenements ‘would take time’.[16] He did not give evidence that a sale of the tenements was contemplated, that any potential purchaser had been identified or as to the expected timeframe for receipt of funds following a sale.
[16]Transcript of Proceedings (7 March 2018) 306.

The Snowden report valued the tenements as at 30 November 2016 as follows: the ‘technical value’ was in the range of $16,500,000–$42,500,000, with a preferred technical value of $29,500,000; and the ‘fair market value’ was in the range of $17,000,000–$25,000,000. The report described the technical value as ‘a de-facto valuation of the technical work completed by Legend to date’.

As we have stated at [27]–[28] above, the associate judge ordered that Paradise be wound up in insolvency and declared that the bond deed, the general security deed and the $1 share sale agreement were void.

The associate judge granted a 14 day stay of execution in respect of his order dated 1 February 2019 to permit the applicants to seek leave to appeal, which they duly did. That stay remains in place as a result of further orders made by the associate judge and this Court.[17] The undertakings set out at [29] above also remain in place.
[17]See Queensland Phosphate Pty Ltd v Korda [2019] VSCA 119.

Issues raised on appeal

In their application for leave to appeal, the applicants sought orders that: the appeal be allowed; the associate judge’s order of 1 February 2019 be set aside; the undertakings noted in that order be dissolved; and the respondents pay the applicants’ costs in the Trial Division and appeal proceeding.

We have summarised the grounds of appeal at [30] above. We will discuss the issues they raise in the following order: first, whether Legend and Paradise were insolvent when they entered into the deeds on 25 November 2015; secondly, whether the deeds were voidable transactions; and thirdly, whether the associate judge erred in concluding that Paradise should be wound up on the just and equitable ground. We will then discuss the issue raised by proposed ground 13, namely, the appropriateness of the form of relief granted to the respondents by the associate judge. The legislation, legal principles, associate judge’s findings and reasons, grounds of appeal and our reasons will be set out under the issues to which they relate.

Issue 1: Insolvency of Legend and Paradise
Legislation

Section 95A of the Corporations Act stipulates when a company will be considered to be insolvent. It provides:

95A 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.

It will be recalled that Legend is a company registered under pt 5.7 of the Corporations Act. Section 585 of the Corporations Act is a deeming insolvency provision applicable to pt 5.7 bodies. The only part of that section which is presently relevant is sub-para (d) which provides as follows:

585 Insolvency of Part 5.7 body
For the purposes of this Part, a Part 5.7 body is taken to be unable to pay its debts if:
…
(d)it is … proved to the satisfaction of the Court that the Part 5.7 body is unable to pay its debts.

Principles

The applicable test as to insolvency was stated by Barwick CJ (with whom McTiernan and Windeyer JJ agreed) in Sandell v Porter as follows:

Insolvency is … an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realisation by sale or by mortgage or pledge of his assets within a relatively short time — relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.[18]

[18](1966) 115 CLR 666, 670 (‘Sandell’).

The above test has been applied by this Court.[19] It has been said that s 95A of the Corporations Act adopts a cash flow test of insolvency which focusses on the liquidity and viability of the business.[20] The test focusses upon whether a company is ‘able’ to pay its debts rather than whether it is ‘willing and able’ to do so.[21]
[19]Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation (2009) 26 VR 657, 659–60 [12]–[13] (‘Jetaway’).
[20]Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631, 652 [141].
[21]Re Sarina; Ex parte Wollondilly Shire Council (1980) 32 ALR 596, 599.

Whether a company is insolvent for the purposes of s 95A of the Corporations Act is a ‘question of fact to be ascertained from a consideration of the company’s financial position taken as a whole’.[22] In considering the company’s financial position as a whole, the court must have regard to commercial realities, which will be relevant in considering the resources available to the company to meet its liabilities as and when they fall due.[23] Commercial realities include the nature of the company’s business, the character of the debt and all of the circumstances present at the relevant time.[24]
[22]Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, 224 [54] (‘Southern Cross’) quoted in Wimpole Properties Pty Ltd v Beloti Pty Ltd [No 3] [2012] VSC 219 [40] (‘Wimpole’).
[23]Southern Cross (2001) 53 NSWLR 213, 224–5 [54]; Lewis v Doran (2004) 208 ALR 385, 408 [106]; Evans & Tate Premium Wines Pty Ltd v Australian Beverage Distributors Pty Ltd [2005] NSWSC 186 [11]; Jetaway (2009) 26 VR 657, 660 [13].
[24]Jetaway (2009) 26 VR 657, 660 [14]–[15].

Commercial realities will also be relevant to consideration of whether the company can realise funds from its assets in order to pay its debts as and when they fall due and the time in which those assets can be realised. Whether an asset is realisable requires consideration of the timeframe in which the asset can be realised and produce cash.[25] There is a temporal limit on whether an asset can be considered realisable[26] which has been described as the realisation of assets ‘within a relatively short time’,[27] ‘within a reasonable time’,[28] ‘relatively quickly’,[29] and ‘in time to meet the indebtedness as the claims mature’.[30]
[25]Southern Cross (2001) 53 NSWLR 213, 224 [54]; Hall v Poolman (2007) 215 FLR 243, 285 [187] (‘Hall’).
[26]McLellan v Carroll (2009) 76 ACSR 67, 89 [107].
[27]Sandell (1966) 115 CLR 666, 670.
[28]Re Pacific Projects Pty Ltd (in liq) [1990] 2 Qd R 541, 547.
[29]Taylor v Australia & New Zealand Banking Group Ltd (1988) 13 ACLR 780, 784.
[30]Hall (2007) 215 FLR 243, 285 [187] quoting Bank of Australasia v Hall (1907) 4 CLR 1514, 1543.

In determining whether an asset is realisable, the nature of the business and the asset, in particular whether the asset is necessary for the continuation of the business, is a relevant consideration. An asset will not be realisable where it is necessary to the conduct of the business or where its sale, other than in the ordinary course of business, would deprive the company of any future as a going concern (‘essential business asset principle’).[31] This principle is discussed in detail below.
[31]Re Timbatec Pty Ltd (1974) 24 FLR 30, 36–7 (‘Timbatec’); Rees v Bank of New South Wales (1964) 111 CLR 210, 218 (‘Rees’); Switz Pty Ltd v Glowbind Pty Ltd (2000) 18 ACLC 343, 347–8 [39]–[40] (‘Switz’). See also Hall (2007) 215 FLR 243, 286–7 [189]–[195]. Cf Re Adnot Pty Ltd (1982) 7 ACLR 212, 217 (‘Adnot’); Jingellic Minerals NL v Beach Petroleum NL (1991) 56 SASR 532, 550–1 (‘Jingellic’); Re Newark Pty Ltd (in liq) [1993] 1 Qd R 409, 415–6 (‘Newark’).

Other considerations that are relevant to whether an asset is realisable include whether realisation of the asset was contemplated; whether the asset was in a position such that it could be realised; and whether any steps were taken towards realising the asset.

Where the sale of the asset was not reasonably contemplated or not contemplated at all, this may go against a suggestion that the asset is realisable.[32]
[32]Wimpole [2012] VSC 219 [116]; Treloar Constructions Pty Ltd v McMillan (2017) 318 FLR 58, 86 [144].

How saleable an asset is may also be a relevant consideration in determining whether it is realisable. Evidence of the existence of a prospective buyer — or buyers — or of a recent sale of similar assets may point towards the asset being realisable.[33] By contrast, where there has been difficulty selling the asset previously, this will indicate that it may not be realisable within the relevant timeframe.[34]
[33]Adnot (1982) 7 ACLR 212, 214; Jingellic (1991) 56 SASR 532, 550–1; Newark [1993] 1 Qd R 409, 415–6.
[34]Re Ashington Bayswater Pty Ltd (in liq) [2013] NSWSC 1008 [16], [34]–[35] (‘Re Ashington’).

The test of insolvency in s 95A of the Corporations Act is to be applied ‘without intrusion of hindsight’.[35] Therefore, consideration of events in relation to an asset subsequent to the date at which it is relevant to determine insolvency may be of limited utility.
[35]Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran (2005) 219 ALR 555, 578 [103] (‘Lewis’).

Associate judge’s findings

In determining whether Legend was insolvent within the meaning of s 95A of the Corporations Act as at the time of entering into the deeds on 25 November 2015, the associate judge considered Legend’s cash flow, liabilities and assets.

In relation to Legend’s cash flow, the associate judge had regard to Legend’s 2013 annual report, which stated that as ‘an exploration stage company until February 2011 and a development stage company since then’, Legend has ‘not had an ongoing source of revenue’. The annual report referred to a report of Legend’s independent registered public accounting firm for the years ended 31 December 2012 and 2013 which noted that Legend had not yet commenced revenue producing operations and questioned Legend’s ability to ‘continue as a going concern’.

The associate judge noted that by 2015 Legend was not trading. He stated that on 5 August 2015, an email was sent from a debt recovery agency to Legend attaching a statement of claim for $3,163. He said that the sum appeared to be associated with levies which had been accumulating since November 2014 and that the correspondence suggested that Legend offered part payment on the same day. He also referred to correspondence regarding overdue rent payments by Legend in relation to the tenements and stated that Legend’s 30 September 2015 balance sheet showed cash of $1,028.

As to Legend’s liabilities, the associate judge concluded that for the purposes of s 95A of the Corporations Act, the IFFCO debt was due and payable by Legend from at least 7 May 2015 — that is, prior to registration of the award in Victoria — and was therefore relevant to the issue of Legend’s solvency.[36]
[36]Reasons [145], [152]–[153].

The associate judge stated that the list of Legend’s aged creditors dated 16 December 2015 identified a total of $868,504 owing for over 120 days, $14,363 over 90 days and $10,109 over 30 days. He also considered Legend’s report as to affairs (‘RATA’) submitted in accordance with s 475 of the Corporations Act signed by Mr Gutnick and dated 2 June 2016. The RATA identified a liability to IFFCO of $25,027,207 and a further $1,271,813 owing to creditors, although approximately $255,637 of that sum was said not to be owing.

The associate judge gave consideration to Legend’s 30 September 2015 balance sheet, which listed assets of $4,457,960 of which $3,027,741 was stated to be a non-current asset itemised as ‘development expenditure’. It was unclear to the associate judge whether the development expenditure and certain loans identified as assets in the RATA and materials filed in the ch 11 US bankruptcy proceeding — which were in addition to loans to Paradise discussed at [112] below — could be called upon.

The associate judge also gave consideration to intercompany loans between Legend and Paradise. He noted that the balance sheet of Legend did not list the shareholding in Paradise as a non-current asset nor did it identify, as assets, the loans from Legend to Paradise which were listed in Paradise’s 30 September 2015 balance sheet, the RATA and materials filed in the ch 11 US bankruptcy proceeding. The associate judge stated that the applicants had conceded that the intercompany loans Legend had made to Paradise totalled approximately $18,053,443.[37]
[37]Reasons [66]–[67].

Having regard to Legend’s assets, the associate judge noted that the parties agreed that the chief asset of Legend was its shareholding in Paradise and the underlying value of the tenements held by Paradise.[38]
[38]Reasons [86].

The associate judge considered that the value of the tenements was somewhat uncertain and that this resulted in uncertainty as to the value of Legend’s shares in Paradise.[39] A number of valuations of the tenements were tendered in evidence, in which the value of the tenements ranged from $3,200,000 to $29,000,000. He stated that it may not be possible to determine, on balance, the likely value of the tenements.[40] He considered that the most reliable valuation was that set out in the Snowden report, however that report was prepared 12 months after the deeds were entered into. He said that, given the ‘technical nature’ of the technical value in the Snowden report, it did not appear appropriate.[41]
[39]Reasons [68].
[40]Reasons [69].
[41]Reasons [68]. See [90] above.

Separately, the associate judge considered whether the tenements constituted a realisable asset. In doing so, he considered a number of relevant factors including: Legend’s business circumstances; the nature and size of the debts; the nature of the asset; whether it was in a realisable form; the timeframe required to realise the asset; whether realisation of the asset was open and contemplated in the circumstances; potential purchasers of the asset; and what actually happened to the asset.

Having weighed up the above factors, the associate judge concluded that the tenements should not be considered a realisable asset for the purposes of the assessment of insolvency under s 95A of the Corporations Act.[42] This was said to be so for the following reasons:

(a)On the evidence, the tenements would take three to six months to realise. Realisation within three months may be reasonable, however six months is beyond the temporal limit within which an asset can be considered realisable within a ‘relatively short’ time. The circumstances were tending towards IFFCO having to wait for Legend to pay them ‘in due course’, which is contrary to authority. To allow realisation after six months begins to undermine the cash flow test which forms the basis of s 95A.
(b)As to the essential business asset principle, if Legend were to realise the tenements it would be selling its main asset which is necessary for the continuation of its business. Although this principle has been applied in the context of property development, which is in some ways similar to mining development projects, the present case was distinguishable from cases where the key asset was held to be realisable. The cases that the associate judge distinguished — which we discuss in detail below — were Re Adnot Pty Ltd,[43] Re Newark Pty Ltd (in liq),[44] and Jingellic Minerals NL v Beach Petroleum NL.[45]
(c)No buyers were identified and the saleability of the tenements was uncertain.[46]
(d)Even if the tenements were realised, Paradise was wound up and Legend called on the loan of $18,053,443 owed by Paradise, this would not be enough to pay the IFFCO debt.
(e)The sale of the tenements did not appear to be genuinely considered. The bulk of the evidence pointed towards taking the tenements out of IFFCO’s reach.

[42]Reasons [123].

[43](1982) 7 ACLR 212.

[44][1993] 1 Qd R 409.

[45](1991) 56 SASR 532.

[46]In an un-numbered paragraph on page 58 of his reasons, the associate judge stated that there was no history regarding previous attempts to sell the tenements and no evidence of potential purchasers.

The associate judge held that even if the tenements were considered realisable prior to entering into the deeds, upon entry into the deeds viewing the tenements as realisable was commercially unrealistic.[47] He considered this to be so for the following reasons: in order to sell the tenements, the loan from Queensland Phosphate needed to be discharged or Queensland Phosphate otherwise needed to agree to the sale; at the time Legend appeared to have no other source of funds, making it unclear how it could have discharged the loan; it was unrealistic to suggest that Mr Feldman would have agreed to realise the value of the tenements to repay Queensland Phosphate, when his focus was on protecting the tenements from IFFCO; and Mr Feldman was developing the project with the intention of extracting it from Legend and investing through Queensland Phosphate, rather than to keep Legend afloat. The associate judge rejected Mr Feldman’s suggestion that he could have spent ‘a couple of months’ developing the project and following that, Mr Gutnick may have been able to obtain funds elsewhere to pay out the bonds.[48]
[47]Reasons [124], [127].
[48]Reasons [127]. Mr Feldman’s evidence on this point was as follows: ‘But if I would have spent a couple of months developing the project and if, brought in some other investors by then, it could very well be that [Mr Gutnick would] be able to get [funds] elsewhere’.

The associate judge considered the commercial realities of Legend’s position. These may be summarised as follows:

(a)Legend had been in difficult financial circumstances since at least 2012, prior to incurring the IFFCO debt.
(b)The strategy of incorporating and publicly listing an Australian company — Paradise — had not progressed the development of the tenements. Paradise was consuming significant funds and required further substantial investment to reach the production stage.
(c)Legend sold a significant asset, its interest in another company, in order to repay a creditor after the proposed IPO in 2012 did not progress.
(d)Paradise and Legend had little cash.
(e)The aged creditors list suggested that perhaps as early as August 2015, Legend had particular difficulty paying its smaller debts as they fell due.
(f)Legend and Paradise were not voluntarily wound up, even after the IFFCO debt became payable.
(g)Once the IFFCO debt was announced to the market, securing financing or ongoing funding would have been difficult.
(h)Legend sought to raise funds to defend enforcement of the IFFCO debt.
(i)The underlying value of the tenements was not a realisable asset. The reasons for this finding are discussed in detail at [115]–[116] above.
(j)Without realisation of the tenements, the IFFCO debt could not be paid at the time the deeds were entered into.[49]

[49]Reasons [71].

The associate judge distinguished the circumstances set out above to those in International Cat Manufacturing Pty Ltd (in liq) v Roderick,[50] — a case upon which the applicants had relied — in which reliable financial support was being provided to the company enabling it to cover its trade creditors until it was able to derive income from the sale of the boats it was building.[51] The associate judge found that the funds from Queensland Bauxite and Queensland Phosphate appeared aimed, at least in part, at resisting the enforcement of the IFFCO debt. He said that the provision of financial support while a company attempts to eliminate enforcement of a debt is distinct from support to pay trade creditors until income is produced or an asset is realised.[52]
[50][2013] QSC 91.
[51]Reasons [72].
[52]Reasons [72].

The associate judge ultimately concluded that Legend was insolvent as at 25 November 2015 and by virtue of entering into the deeds:

Legend had an ‘endemic shortage of working capital’, compounded by a significant debt. When the Bond Deed and General Security Deed were entered into, Legend was not suffering from a ‘temporary lack of liquidity’. That is, realisation of the tenements would not have allowed Legend to weather a temporary period of illiquidity prior to becoming income producing or establishing substantial ongoing financial support, it would have led to the cessation of Legend’s primary business purpose. Even if, prior to entry into the Bond Deed and the General Security Deed the tenements were realisable, upon entry into those documents it was not commercially realistic to suggest that Mr Feldman would have consented to sale of the tenements to repay the IFFCO debt.
…
For the reasons previously set out, I determine that Legend was insolvent on 25 November 2015. Further, if it were necessary I would also determine that Legend became insolvent by virtue of entry into the Bond Deed and the General Security Deed.
Without detracting from the consideration previously set out, I base that determination upon the following summary of conclusions namely:
(i)The IFFCO arbitral award constituted a debt for the purposes of s 95A even though Croft J’s judgment enforcing the same pursuant to s 8(2) of the International Arbitration Act was not pronounced until December 2015.

(ii) Legend could not pay its debts as and when they fell due.
(iii) Legend had no cash flow in November 2015.
(iv)Although the [30 September 2015] Balance Sheet relied upon by Mr Gutnick and Mr Feldman as referred to in the Bond Deed and General Security Deed was unreliable in that it understated the assets, there was sufficient evidence to determine the liabilities of Legend elsewhere. To the extent that the assets were of value or of substantial value was irrelevant in that I have determined that the same were not realisable.
(v)The assets of Legend being the shareholding in Paradise and the underlying value of the mining tenements held by Paradise were not a readily realisable asset. Accordingly, I have disregarded the value of the assets in consideration of whether there were funds available to Legend on 25 November 2015. Further, upon entry into the Bond Deed and the General Security Deed, the ability to realise the assets was even more hampered or improbable.
(vi)If it were necessary, I would be entitled to draw a Jones v Dunkel inference as Mr Lee did not give evidence with respect to the question of solvency. On that note, neither did Mr Gutnick provide any evidence with respect to the question of solvency.[53]
[53]Reasons [73], [164]–[165].

Grounds of appeal

Grounds 6 and 8 seek to challenge the associate judge’s finding that Legend and Paradise[54] were insolvent as at 25 November 2015. Those grounds are in the following terms:

6The learned trial Associate Justice failed to take into account the principles enunciated in International Cat Manufacturing Pty Ltd (in Liq) v Rodrick; Re Swan Services Pty Ltd (in Liq); Re Ashington Bayswater Pty Ltd (in Liq) and The Bell Group Ltd (in Liq) v Westpac Banking Corp (No 9) by not properly taking into account the commercial realities of the business of [Paradise] and Legend and the abilities of those companies to convert assets to cash within a reasonable period of time.
…
8The learned trial Associate Justice failed to accept the valuation evidence proffered by the Respondent[s] (at trial), namely the expert report of John Snowden (Snowden Valuation) which valued [Paradise’s] mining tenements in the range of $17–25 million and furthermore wrongly concluded and failed to give reasons why it was not appropriate for the Applicants to accept the upper figure of the technical range of the Snowden Valuation ($29 million).
[54]The finding regarding Paradise is dealt with at [155] below.

Parties’ submissions

The applicants submitted that, contrary to the associate judge’s decision, the tenements were a realisable asset. They argued that the associate judge had no regard to the commercial realities of the mining industry, uncontradicted evidence of which was given by Mr Feldman. According to the applicants, it is a relevant commercial reality that a tenement has the ability to generate income when it reaches the development stage and becomes a sustainable project. The applicants contended that having regard to the commercial realities, the associate judge wrongly concluded that the period in which the tenements could be realised — being three to six months — was not ‘relatively short’ or ‘reasonable’. They also contended that, ultimately what is a reasonable period is a matter of impression in individual cases. In the present case, so it was said, a period of three to six months was a reasonable period and the associate judge erred in finding otherwise.

In their oral submissions, the applicants conceded that the IFFCO debt was due and payable and that it had the effect of rendering Legend insolvent unless the tenements were treated as assets that were realisable within a reasonable period.

In relation to the essential business asset principle, the applicants submitted that it is implicit from Jingellic[55] that this principle is confined to the balance sheet test of solvency and has no application to the cash flow test of solvency which the associate judge applied. The applicants argued that this principle is not relevant in circumstances, such as in the present case, where the assets of the company exceed its liabilities and that the associate judge erred in this regard.
[55](1991) 56 SASR 532.

The applicants further submitted that the associate judge did not give proper consideration to Legend’s ability to obtain finance through the three methods of capital raising about which Mr Feldman gave evidence.[56]
[56]See [83] above.

According to the applicants, the associate judge erred in not accepting the Snowden valuation, which attributed significant value to the tenements. They argued that the associate judge failed to provide reasons for rejecting the applicants’ reliance on the ‘technical range’ in the Snowden valuation, which had a preferred figure of $29,500,000, and that there was no evidence to support that rejection.

In their written case, the respondents submitted that the associate judge gave proper consideration to the relevant principles and evidence regarding whether the tenements were a realisable asset, including the evidence of Mr Feldman. As to the associate judge’s alleged failure to take into account the commercial realities of the mining industry, they argued that the relevant commercial realities (other than the fact that the tenements only generate money when in production) have not been identified by the applicants nor have the applicants explained how having regard to them would reveal error in the associate judge’s approach. They contended that the associate judge did have regard to the nature of the tenements and the likely timeframe for realisation, along with many other factors. According to the respondents, as very substantial funding was required to bring the tenements into production, income producing capacity was in no way imminent and development potential is not tantamount to solvency.

The respondents submitted that the applicants wrongly asserted that the associate judge rejected the Snowden valuation. They argued that the associate judge simply noted its limitations, as well as the existence of other evidence concerning the potential value of the tenements. Regarding the associate judge’s statement that the technical value ‘does not appear appropriate’, the respondents contended that at trial the applicants invited the associate judge to prefer the technical value over the fair market value and this was rejected. They further argued that in the light of the associate judge’s findings that the tenements were not capable of realisation within a reasonable period, their value was irrelevant and therefore ground 8 cannot affect the outcome of the current application.

In some cases, the shareholders and general creditors of a company may be better off if a receiver and manager rather than a liquidator is appointed to control the company. That is because a receiver and manager may, by continuing to carry on the company’s business, enable it to pay its debts and continue as a going concern, whereas a liquidator’s focus will be to sell the company’s assets and wind up the company. Such an advantage did not apply in the present case, as Legend and Paradise did not have any income that could fund the payment of debts and enable their business to continue. The only viable course available to either a receiver and manager or a liquidator to enable creditors to be paid was to sell the assets of the companies.

In the light of the above analysis of the first and second criteria in s 588FB(1) of the Corporations Act, we reject the applicants’ submission that the deeds, in substance, constituted a secured litigation funding arrangement or that they were standard-form documents. Both their terms and their overall effect were highly detrimental to Legend. We are able to reach that conclusion by an objective consideration of the deeds in the circumstances existing as at 25 November 2015, irrespective of the subjective views of Mr Feldman and Mr Shepard on the commerciality of the transaction. Expert evidence on the issue of uncommerciality was not required.

The third criterion in s 588FB(1) of the Corporations Act is the benefits to other parties to the transaction of entering into it.

The detriments to Legend that we have identified above constituted benefits to Queensland Phosphate of entering into the deeds. As those detriments to Legend were significant and immediate, the corresponding benefits to Queensland Phosphate were significant and immediate.[123] In essence, Queensland Phosphate obtained a bargain of such magnitude that it lacked a commercial quality and could not be explained by normal commercial practice.[124]
[123]See in particular [235]–[238], [240] above.
[124]See [164(c)] above.

The final criterion in s 588FB(1) of the Corporations Act is ‘any other relevant matter’.

We agree with the respondents’ submission that, although the Zalg shareholders deed was separate from the bond deed and the general security deed, it constitutes a relevant matter. This is because it formed part of the overall dealings between the Gutnick and Feldman families in relation to the execution of the deeds and shows that the Gutnick family stood to gain from the overall transaction.

In our opinion, the $1 share sale agreement — under which the receiver appointed by Queensland Phosphate sold Legend’s shares in Paradise to Queensland Phosphate for $1 subject to adjustment following a valuation — is also a relevant matter. Although this agreement was not part of the transaction involving the execution of the deeds, it demonstrates that, by entering into the deeds, Legend exposed itself to the risk of a default which would result in it being controlled by a receiver appointed by Queensland Phosphate. This in turn created a risk that such a receiver may enter into a transaction with Queensland Phosphate which was not at arm’s length and not in the interests of other shareholders or creditors in general.

In our opinion, in the face of the above significant and immediate detriments to Legend and benefits to Queensland Phosphate from entering into the deeds — which wholly outweighed any potential benefits to Legend — no reasonable person in Legend’s circumstances would have entered into the deeds.

As Paradise was in a similar position to Legend in relation to the deeds, no reasonable person in Paradise’s circumstances would have entered into the deeds.

It follows that the deeds were uncommercial transactions within the meaning of s 588FB(1) of the Corporations Act.

As we have found that the associate judge was correct in finding that Legend was insolvent as at 25 November 2015,[125] the deeds were insolvent transactions within the meaning of s 588FC of the Corporations Act.
[125]See [153] above.

The applicants did not contend that if the deeds were uncommercial transactions and insolvent transactions, there was any basis for them not also being voidable transactions under s 588FE of the Corporations Act.

It follows that the associate judge correctly found that the deeds were voidable transactions.

It also follows that ground 1 is not made out.

As acknowledged by the applicants, grounds 3, 4 and 9 were effectively subsidiary to ground 1. Accordingly, we can deal with them briefly.

The applicants’ submissions in support of ground 9 were principally directed to the good faith defence which they have abandoned. To the extent that the submissions extended beyond that defence, we reject them.

We agree with the respondents’ contention that the associate judge’s statement at para 198 of his reasons — that the correspondence between Mr Gutnick and Mr Feldman reveals a common enterprise to protect the assets from enforcement by IFFCO — records a submission made by the respondents rather than a conclusion of the associate judge. In any event, we have concluded from the objective evidence that the purpose of the deeds was to ensure that Legend’s assets were controlled by a receiver appointed by Queensland Phosphate and placed beyond the reach of a liquidator appointed as a result of a successful winding up application by IFFCO. Whether Mr Gutnick and Mr Feldman had a particular common subjective intention is not determinative, as the test in s 588FB of the Corporations Act is objective. It follows that even if ground 9 is made out, the correctness of the associate judge’s conclusion that the deeds constituted an uncommercial transaction would not be undermined.

Ground 3 does not assist the applicants. That is because the Zalg shareholders deed does not form part of the transaction which is sought to be impugned as an uncommercial transaction. Only the bond deed and the general security deed form part of that transaction and the Zalg shareholders deed, while part of the context, played only a limited role in the associate judge’s reasoning. It follows that even if the associate judge wrongly concluded that Mr Gutnick stood to benefit under the Zalg shareholders deed at the expense of creditors, that would not affect the correctness of his finding that the bond deed and the general security deed constituted an uncommercial transaction.

Ground 4 also does not assist the applicants. That is because a transaction can be uncommercial based on the criteria in s 588FB of the Corporations Act even if it is not entered into with an intention to defeat, hinder or delay creditors. Thus, even if the associate judge erred in relation to the intended effect of the deeds on creditors, that would not affect the correctness of his finding that the deeds constituted an uncommercial transaction. We note that the associate judge’s declaration that the transaction was voidable was made under s 588FE(2) and (3) of the Corporations Act and not under s 588FE(5), which refers to a transaction being entered into for the purpose of ‘defeating, delaying or interfering with’ the rights of creditors on a winding up. We also note that, in considering the detriment to Legend in entering the deeds, we concluded at [241] above that the deeds were detrimental to the interests of creditors.

Issue 3: Applicability of just and equitable ground to Paradise
Legislation and principles

The legislation and principles relevant to determining whether Paradise was insolvent under s 95A of the Corporations Act at the time of the hearing before the associate judge are set out at [95]–[105] above. In addition, ss 459A and 461(1)(k) of the Corporations Act are relevant to the associate judge’s order that Paradise be wound up. Those provisions relevantly provide as follows:

459A Order that insolvent company be wound up in insolvency
On an application under section 459P, the Court may order that an insolvent company be wound up in insolvency.

…
461 General grounds on which company may be wound up by Court
(1) The Court may order the winding up of a company if:
…
(k)the Court is of opinion that it is just and equitable that the company be wound up.

…

Under s 459P(1)(b) of the Corporations Act, a creditor may apply for an order under s 459A. Under s 462(2)(b), a creditor may apply for an order under s 461.

Three ‘general fundamental principles’ relevant to winding up a company on the just and equitable ground in s 461(1)(k) of the Corporations Act were identified by Warren J in Australian Securities and Investments Commission v ABC Fund Managers as follows:

There are general fundamental principles applied by the courts with respect to a winding-up application on the just and equitable ground. First, there needs to be a lack of confidence in the conduct and management of the affairs of the company ... Second, in these types of circumstances it needs to be demonstrated that there is a risk to the public interest that warrants protection. Third, there is a reluctance on the part of the courts to wind up a solvent company.[126]

[126](2001) 39 ACSR 443, 469–70 [119] (‘ABC Fund Managers’) (citations omitted). See also Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504, 531–3 (‘AS Nominees’).

In relation to the first principle, it has been said that the lack of confidence relates to the directors’ conduct in regard to the company’s business.[127] A lack of confidence may arise where ‘“after examining the entire conduct of the affairs of the company” the court cannot have confidence in “the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company”’.[128]
[127]ASIC v Planet Platinum Ltd [2015] VSC 682 [18] (citations omitted).
[128]ASIC v Activesuper Pty Ltd [No 2] (2013) 93 ACSR 189, 195 [21] (‘Activesuper’) quoting Galanopoulos v Moustafa [2010] VSC 380 [32]. See also AS Nominees Ltd (1995) 62 FCR 504, 532–3; ASIC v International Unity Insurance Pty Ltd (2004) 22 ACLC 1416, 1428–9 [135]–[139].

Regarding the second principle, the public interest can take several forms and can include where ‘a company has not carried on its business candidly and in a straightforward manner with the public’.[129]
[129]Activesuper (2013) 93 ACSR 189, 195 [23].

As to the third principle, although courts will be reluctant to wind up a solvent company and will require a strong case for doing so, solvency is not a bar to winding up on the just and equitable ground.[130]
[130]ABC Fund Managers (2001) 39 ACSR 443, 470 [124]; ASIC v Kingsley Brown Properties Pty Ltd [2005] VSC 506 [96]; Activesuper (2013) 93 ACSR 189, 195 [24].

Associate judge’s findings

The associate judge found that Paradise was insolvent pursuant to s 95A of the Corporations Act and that it should be wound up in insolvency pursuant to s 459A.[131]
[131]Reasons [321], [338].

The associate judge observed that Legend, as an unsecured creditor of Paradise, had standing to apply to wind up Paradise in insolvency under s 459P(1)(b) of the Corporations Act.[132]
[132]Reasons [323].

In determining that Paradise was insolvent, the associate judge gave consideration to Paradise’s balance sheets, which he noted ‘can provide context for the application of the cash flow test’.[133] He stated that Paradise’s 30 September 2015 balance sheet showed net liabilities of $15,342,915, which included a current liability to Legend for $2,143,443 and a non-current liability to Legend for $15,910,000. Paradise’s 31 December 2015 balance sheet showed net liabilities of $15,399,530.40, which included two current liabilities to Legend for $781,986.92 and $1,407,996.77 and a non-current liability of $15,910,000.[134]
[133]Reasons [324] quoting Re Ashington [2013] NSWSC 1008 [3].
[134]Reasons [325].

The associate judge noted that the RATA up to 10 May 2016 as to the affairs of Paradise prepared by Mr Palmer showed that the total moneys owed by Paradise to Legend were $18,109,803.78.[135] He observed that Paradise had other creditors, but that Legend’s percentage of the total debt owed was approximately 98.2 per cent.[136] According to the associate judge, the evidence showed that the amounts owed to Legend by Paradise related to loans made by Legend to Paradise or costs incurred by Legend on behalf of Paradise which Legend on-charged to Paradise.[137] The associate judge noted that on 22 June 2016 the liquidators requested that Paradise pay the debt of $18,109,803.78 it owed to Legend and that Paradise had failed to make the payment.[138]
[135]Cf [112] above.
[136]Reasons [327].
[137]Reasons [326].
[138]Reasons [328].

The associate judge rejected the applicants’ argument that if it were not for the undertakings given by Paradise to the Court,[139] it could have borrowed moneys — in the form of a $1,000,000 loan from Queensland Bauxite — to meet its immediate liabilities. He said:

There is no indication that the $1 million loan to Paradise by [Queensland Bauxite] would have been directed toward repaying Paradise’s debt to Legend. Even if this was the case, a sum of $1 million is merely the tip of the iceberg when one considers the full debt of $18,109,803.78 that Paradise owes to Legend. In any event, a detailed consideration of whether [Queensland Bauxite’s] loan to Paradise would have been sufficient for Paradise to discharge its debt to Legend is purely hypothetical and not necessary as [Queensland Phosphate and Paradise’s] application to vary the undertakings was dismissed on 24 April 2017. [140]

[139]See [29] above.

[140]Reasons [333].

The associate judge also rejected the applicants’ contention that if the underlying value of the mining tenements is taken into account, Paradise would be able to satisfy its debt to Legend. He found that having regard to Paradise’s commercial realities, the evidence suggested that it may not be possible to realise the value of the tenements within a realistic time period.[141] This was in the light of evidence of the significant expenditure that would be required to bring the tenements into production,[142] the fact that Paradise was a ‘dormant entity’,[143] and if the tenements were to be sold, the sale process would take three to six months.[144]
[141]Reasons [335].
[142]Reasons [335].
[143]Reasons [336].
[144]Reasons [337].

The associate judge concluded as follows:

I determine that Paradise is insolvent for the purposes of s 95A of [the Corporations Act]. Paradise’s financial position has moved beyond temporary illiquidity; it is now in a state where it is unable to generate enough revenue to discharge its debts as and when they fall due and payable. Accordingly, Paradise should be wound up in insolvency pursuant to s 459A of [the Corporations Act].[145]

[145]Reasons [338].

Regarding the respondents’ argument in the alternative — that Paradise be wound up on the just and equitable ground in s 461(1)(k) of the Corporations Act — the associate judge was satisfied that the conduct of Mr Gutnick and Mr Feldman and their conflicts of interest justified the winding up of Paradise on that ground.[146]
[146]Reasons [321].

The associate judge found that as an unsecured creditor of Paradise, Legend had standing under s 462(2)(b) of the Corporations Act to bring an application for Paradise to be wound up under s 461(1)(k).[147]
[147]Reasons [341].

The associate judge had regard to the three principles identified by Warren J in ABC Fund Managers, as set out at [263] above. In relation to the first principle, the associate judge considered that: the deeds were entered into in an attempt to frustrate Legend’s creditors; at the time that the deeds were entered into, Mr Gutnick was a director of Legend and Paradise, which pointed to a potential conflict of interest; Mr Feldman and Ms Feldman have been directors of Queensland Phosphate from 19 November 2015 and of Paradise from 25 November 2015; Mr Feldman and Ms Feldman were directors of Legend from 25 November 2015 until 22 April 2016 and 20 April 2016, respectively, which pointed to a conflict of interest; there did not appear to be any indication that Mr Gutnick and the Feldmans were able to separate their duties to each company and act in the best interests of each respective company.[148] For these reasons, the associate judge held as follows:

This gives rise to a distinct lack of confidence in the ability of the directors to conduct and manage the affairs of each company with clarity and honesty. It follows that the first principle is satisfied.[149]

[148]Reasons [345].

[149]Reasons [345].

As to the second principle, namely the public interest, the associate judge stated that it did not appear that Mr Gutnick and the Feldmans had been able to conduct the affairs of Legend and Paradise in a transparent and candid manner by virtue of their conflicts of interest given that they serve, or had served, as directors ‘on both sides of the transaction’.[150]
[150]Reasons [346].

In relation to the third principle — that the court will be reluctant to wind up a solvent company on the just and equitable ground — the associate judge relied on his finding that Paradise was insolvent.

The associate judge ultimately concluded as follows:

I have determined that Paradise be wound up in insolvency. If it had been necessary, I would have considered it appropriate to wind up Paradise on the just and equitable ground in any event.[151]
[151]Reasons [348].

Grounds of appeal

Grounds 6, 8, 11 and 12 of the applicants’ written case deal with whether the associate judge erred in finding that Paradise was insolvent and should be wound up. Grounds 6 and 8 are set out at [121] above. Grounds 11 and 12 are in the following terms:

11The learned trial Associate Justice erred in concluding on the just and equitable ground pursuant to section 461(1)(k) of the [Corporations Act] that Mr Gutnick, Mr Feldman, and Ms Feldman were unable to separate their duties to each respective company and act in the best interests of each respective company which gave rise to a distinct lack of confidence in the ability of the directors to conduct and manage the affairs of each company with clarity and honesty.
12The learned trial Associate Justice erred in concluding on the just and equitable ground pursuant to section 461(1)(k) of the [Corporations Act] that Mr Gutnick, Mr Feldman and Ms Feldman were conflicted and as a result were unable to conduct the affairs of Legend and Paradise in a transparent and candid manner.

Parties’ submissions

The parties’ submissions under grounds 6 and 8 are set out at [122]–[132] above. These submissions are relevant to the insolvency of both Legend and Paradise.

Under grounds 11 and 12, the applicants submitted that the associate judge concluded against the weight of the evidence, namely the matters relied upon in grounds 1 and 9 set out above, that a conflict of interest arose on the part of Mr Gutnick and the Feldmans and that they were unable to conduct the affairs of Legend in a transparent and candid manner. They argued that he did not give adequate reasons to justify such a finding and that it conflicted with his finding that Mr Feldman was a credible witness.

In oral submissions, senior counsel for the applicants sought to impugn the winding up order made by the associate judge on the ground of insolvency in respect of Paradise. The winding up order relating to Paradise was said to be challenged fundamentally on the same basis as that in relation to Legend, that is that the tenements owned by Paradise could be realised in order to discharge the IFFCO debt.

The associate judge’s alternative finding that Paradise should be wound up on just and equitable grounds was not addressed by the applicants in oral submissions. However, the applicants did not abandon their written submissions relating to grounds 11 and 12.

The respondents submitted that there was no error in the associate judge’s findings concerning Mr Gutnick and Mr Feldman’s conflicts of interest and the conduct of the Feldmans in relation to the affairs of Legend and Paradise. They argued that even without regard to the whole of the evidence concerning the conduct of Mr Feldman, the associate judge’s finding could be supported by the conduct of the Feldmans in arranging to have Queensland Phosphate acquire Legend’s shares in Paradise for $1, subject to an adjustment mechanism. That was said to be because they were directors of Legend until very shortly before the acquisition and the vast majority of the shares in Queensland Phosphate were held by a Feldman family trust.

The respondents contended that the Feldmans have a continuing conflict between their interests as directors and indirect beneficial owners of Queensland Phosphate, and their role as directors of Paradise. According to the respondents, the fact that the associate judge saw no reason to question Mr Feldman’s honesty as a witness does not mean that he did not have a conflict of interest.

The respondents also relied on the fact that, in addition to his finding that Legend was insolvent at the time that it entered into the deeds, the associate judge found, in the alternative, that it became insolvent by virtue of entering into the deeds. They argued that the applicants’ contentions relating to Legend and Paradise’s solvency based on realisable assets do not undermine the associate judge’s alternate finding and therefore there is no basis to disturb the order that Paradise be wound up in insolvency.

Decision

At [153] above, we concluded that the associate judge correctly found that Paradise was insolvent as at 25 November 2015. The applicants did not submit that Paradise’s financial position improved between that date and the date of the associate judge’s judgment on 14 December 2018. Accordingly, the associate judge was correct to order that Paradise be wound up in insolvency.

As the associate judge’s order for the winding up of Paradise was appropriate under the insolvency ground in s 459A of the Corporations Act, that order cannot be disturbed even if the associate judge erred in concluding that the just and equitable ground was made out. This is particularly so as the winding up order was made solely by reference to the insolvency ground. The associate judge’s conclusion that it was appropriate to wind up Paradise under the just and equitable ground was prefaced by his remark that he would have reached that conclusion if it had been necessary for him to do so.[152]
[152]See [279] above.

It follows that it is not necessary for us to express a view on whether the associate judge correctly applied the just and equitable ground. Had it been necessary for us to do so, we would have accepted the respondents’ submissions in support of the associate judge’s decision.

In particular, after Legend and Paradise defaulted under the deeds and Queensland Phosphate appointed a receiver and manager over Paradise, there was a conflict between the interests of Mr Feldman and Ms Feldman as directors and indirect beneficial owners of Queensland Phosphate, and their role as directors of Paradise. It was in Queensland Phosphate’s interest to ensure that the receiver and manager managed the company in a manner that maximised the financial return to it, whereas it was in Paradise’s interest for the company to be managed in a manner that retained as much value as possible for its shareholders and general creditors, including by challenging the penalty provisions in the deeds.

Issue 4: Form of relief

As we have stated at [30] above, the applicants sought leave to rely on additional ground 13. That ground is in the following terms:

Having declared that the Bond Deed and the General Security Deed were voidable transactions, the learned Associate Justice erred in failing to apply his discretion in giving recognition to [Queensland Phosphate’s] advancement of $400,000 and [Queensland Phosphate’s] entitlement to be secured for at least that limited amount, such that the correct exercise of his discretion would have resulted in orders that the General Security Deed was varied by the deletion of the powers contained in clauses 10.1 to 10.6, but preserving the charge created by Legend and Paradise over their assets. The applicant will seek to contend that [Queensland Phosphate] having advanced the sum of $400,000 to Legend, relying upon the validity of the Bond Deed and the General Security Deed, it should not have been deprived of the benefit of its security interest in respect of those amounts, notwithstanding the finding by the learned Associate Justice that the Bond Deed and the General Security Deed were voidable transactions. [Queensland Phosphate] will seek to contend that the learned Associate Justice wrongly concluded that the advances of the $400,000 provided no tangible or commercial benefit to Legend, and that thus the exercise of his discretion in avoiding the Bond Deed and the General Security Deed in their entirety miscarried.

The applicants sought the following relief in the event that the Court granted them leave to rely upon ground 13 and upheld that ground:

(3A) Further, an order that the General Security Deed be varied by the deletion, ab initio, of clauses 10.1 to 10.6.
(3B)Further or in the alternative to 3A above, declare that the amount secured by [Queensland Phosphate’s] charge over Legend’s and Paradise’s assets under the Bond Deed exclude any amounts payable under clause 12.2(d), and any amount payable by reference to the Bond Default Interest Rate be limited to the amount payable as if the reference were to the Bond Interest Rate.

It will be recalled from [60]–[61] above that cls 10.1 to 10.6 of the general security deed conferred enforcement powers on Queensland Phosphate, including the power to appoint a receiver upon an event of default, and that cl 12.2(d) contained the 50 per cent event of default fee. Under the bond deed, the ‘Bond Interest Rate’ was 10 per cent per annum whereas the ‘Bond Default Interest Rate’ was 50 per cent per annum.

The applicants submitted that, even if this Court agreed with the associate judge’s ultimate conclusion that the deeds constituted an uncommercial transaction, it could itself exercise the discretion in relation to the form of relief to be granted under s 588FF of the Corporations Act if it did not agree with the associate judge’s process of reasoning in reaching that conclusion. They argued that if the Court rejects ground 1 but upholds grounds 3, 4 or 9, the Court could re-exercise the discretion and grant a different form of relief.

According to the applicants, a finding that the deeds constituted an uncommercial transaction did not necessitate that they be declared void in their entirety. Rather, so it was said, the Court could declare as void those features of the deeds that were uncommercial — such as the 50 per cent default interest rate, the 50 per cent event of default fee and the provisions empowering Queensland Phosphate to enforce its security — while preserving the security in place for the actual amount of $400,000 advanced to Legend. That was said to be a benefit conferred on Legend, which should be recognised by the Court in the relief granted under s 588FF (presumably by exercising the power of variation under s 588FF(1)(i)).

The applicants argued that in so far as any provisions of the deeds constituted penalties, they were unenforceable and therefore could be disregarded for the purposes of determining the appropriate relief to be granted under s 588FF of the Corporations Act.

The applicants submitted that the issue of relief is a matter purely of law as it flows from the findings made by the associate judge and is not a matter in respect of which any additional evidence could potentially have been called at trial. Therefore, so it was said, the issue could be dealt with by this Court as a new ground.

The respondents relied on six reasons in support of their submission that the applicants should not be given leave to add ground 13.

First, at trial, the applicants relied on a similar contention in their written closing submissions, namely: ‘In the event that the [deeds] are held to be voidable [Queensland Phosphate’s] entitlements under the [deeds] should retain their secured status’. However, senior counsel who then appeared for the applicants abandoned the contention in oral submissions. Senior counsel stated the following:

I accept that if Your Honour sets aside the transactions it will be very difficult for me to persuade you to nevertheless allow our funds to be other than unsecured or to give us some seniority in terms of priority, your Honour. … I’m not going to seek to persuade you of that, Your Honour.[153]

[153]Transcript of Proceedings (9 March 2018) 441.

According to the respondents, as this contention was abandoned at trial, the applicants should not be permitted to rely upon it on appeal.

Secondly, Whisprun Pty Ltd v Dixon[154] and other authorities make it clear that even where there is no question of further evidence, it may not be in the interests of justice to permit a party to raise an argument on appeal where it was not relied upon at trial. The respondents submitted that the onus is on the applicants to satisfy the Court that there are exceptional circumstances and to show that the point they seek to raise on appeal could not have been met at trial. In addition, so it was said, running an argument on appeal that was not run at trial is contrary to the objects of the Civil Procedure Act 2010. The overarching purpose in s 7 of that Act is to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute.
[154](2003) 200 ALR 447, 460–1 [50]–[51] (‘Whisprun’).

Thirdly, as the applicants abandoned the contention that the deeds should not be declared void in their entirety at trial, the respondents did not make any submissions in relation to it and the associate judge did not deal with it in his reasons. It followed that the applicants could not identify any error on the part of the associate judge that would enable this Court to exercise the discretion for itself. The respondents relied on Macedonian Orthodox Community Church St Petka Inc v Petar[155] in support of this proposition.
[155](2008) 237 CLR 66, 106 [120]–[122].

Fourthly, the respondents would be prejudiced if the applicants were permitted to raise the contention on appeal. This was said to be because, had the contention been pursued at trial, the respondents would have conducted the case differently. The respondents submitted that the contention may have affected the manner in which Mr Feldman was cross-examined and may have resulted in the calling of additional evidence, such as evidence about the law on enforceability of judgments in the United States where Legend was incorporated. The respondents further submitted that they would have also given consideration to whether the deeds could function with the removal of the impugned clauses.

Fifthly, the respondents relied on the fact that during the interlocutory stages of the application for leave to appeal, the Court had informed the applicants of the need for them to identify in their written case the contentions they proposed to pursue on the appeal and gave them ample opportunities to amend their written case. The respondents emphasised that, despite these opportunities, the applicants had not raised the contention embodied in ground 13 until two days prior to the hearing of the application for leave to appeal and did not provide any written submissions in support of ground 13.

Sixthly, in relation to the substance of the contention, the respondents argued that removing the clauses that provide for the enforcement of the security from the general security deed would not cure the uncommercial nature of the transaction. That was said to be because there are other enforcement mechanisms that Queensland Phosphate could have relied upon, including commencing proceedings for an order for sale or for a court-appointed receiver, or seizure and disposal of assets under pt 4.3 of the Personal Property Securities Act 2009 (Cth).

In our opinion, the applicants should not be given leave to add ground 13. This is because, as the applicants raised and then abandoned the contention embodied in that ground at trial, it would not be in the interests of justice to permit them to raise the contention on appeal. There is a strong public interest, which is reflected in the authorities[156] as well as the overarching purpose in the Civil Procedure Act, for there to be finality in litigation in the sense that parties should not be permitted to pursue on appeal a case that was different to the case they ran at trial. That is particularly so where, as in the present case, a party turned its mind to an issue and made a considered decision not to pursue it at trial.[157] The applicants should be bound by the manner in which they conducted the proceeding at trial.
[156]See, eg, Water Board v Moustakas (1988) 180 CLR 491, 496–7; Whisprun (2003) 200 ALR 447, 460–1 [50]–[51]; Metcalfe v Commonwealth of Australia (2008) Aust Torts Reports 81–934, 61–249 [36]; McMahon v National Foods Milk Ltd (2009) 25 VR 251, 268–9 [25]; Wallis Nominees (Computing) Pty Ltd v Pickett (2013) 45 VR 657, 672–3 [74]–[77], 674 [84], 679 [109] (‘Wallis’).
[157]Wallis (2013) 45 VR 657, 674 [84], 679 [109].

The above conclusion is sufficient to dispose of the applicants’ application for leave to rely on ground 13. However, we would add that we are not persuaded that it would be appropriate for this Court to exercise the discretion in s 588FF(1)(i) of the Corporations Act if, notwithstanding that we agreed with the associate judge’s conclusion that the deeds constituted an uncommercial transaction, we disagreed with his finding, in arriving at that conclusion, that the advances totalling $400,000 provided no tangible benefit to Legend.

In accordance with s 588FB of the Corporations Act, a transaction is uncommercial if, having regard to the four specified criteria, it would be expected that a reasonable person in the company’s circumstances would not have entered into it. In the present case, we have upheld not only the associate judge’s conclusion that the deeds constitute an uncommercial transaction but also his reasoning in the application of the four criteria. In particular, we have agreed with the associate judge’s conclusion that the deeds did not provide any tangible benefit to Legend.[158] There was also no tangible benefit to Paradise. In those circumstances, it would not be appropriate for this Court to make different orders under s 588FF which have the effect of partially preserving the validity of the deeds. That is so even if the associate judge made erroneous findings on any matters that were not material to the application of the four criteria. It follows that even if there were some substance to the applicants’ contentions under grounds 3, 4 and 9 — which are ancillary to ground 1 which we have rejected — that would not warrant this Court disturbing the associate judge’s orders under s 588FF.
[158]See [174] above.

In view of the above conclusions, it is not necessary for us to consider the other submissions made by the parties in relation to proposed ground 13.

Conclusion

As grounds of appeal 1 and 6 were arguable, we will grant leave to appeal in respect of them but refuse leave in respect of the other grounds. For the reasons set out above, we will dismiss the appeal.

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[2019] VSCA 215

30 September 2019