Treloar Constructions Pty Ltd v McMillan

[2017] NSWCA 72

Court of Appeal

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

Treloar Constructions Pty Limited v McMillan [2017] NSWCA 72

Hearing dates:

9 February 2017

Decision date:

06 April 2017

Before:

Beazley P;
Gleeson JA;
Emmett AJA

Decision:

(1)   Appeal allowed;

 

(2)   Set aside the orders made in the District Court and, in lieu thereof, direct the entry of judgment for the plaintiff in the sum of $418,991.77 together with interest and order the defendant to pay the plaintiff’s costs;

(3) The respondent to pay the appellant’s costs of the appeal and to have a certificate under the Suitors’ Fund Act 1951 (NSW) if so entitled.

Catchwords:

CONTRACTS – payment term in contract for construction and project management services – stipulation that suppliers and contractors organised and paid by contractor to be charged at cost plus management fee – whether effect of the word “paid” meant that contractor not entitled to render invoices until it had paid underlying suppliers and contractors

 

CORPORATIONS – recovery of compensation from director pursuant to Corporations Act 2001 (Cth), s 588M for insolvent trading contrary to s 588G – requirement of insolvency at time debts incurred – factors relevant in determining whether company unable to pay its debts as and when they become due and payable – relevance of non-binding offer of funding – relevance of availability of informal overdraft facility – relevance of unpaid tax debts – relevance of trade debtors of related companies

 

CORPORATIONS – recovery of compensation from director pursuant to Corporations Act 2001 (Cth), s 588M for insolvent trading contrary to s 588G – requirement of insolvency at time debts incurred – where party seeking recovery relied on report and expert evidence of insolvency practitioner to establish insolvency at relevant times – whether respondent director bore evidentiary onus to contradict expert’s evidence

CORPORATIONS – recovery of compensation from director pursuant to Corporations Act 2001 (Cth), s 588M for insolvent trading contrary to s 588G – requirement that person to whom debt owed has suffered “loss or damage” in relation to the debt because of the company's insolvency – whether non-payment of invoices sufficient to establish “loss or damage”

Legislation Cited:

Corporations Act 2001 (Cth), s 95A, 588G, 588H, 588M

Cases Cited:

Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27; [2009] HCA 41
Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148; [2005] NSWSC 831
Australian Securities and Investments Commission v Plymin (2003) 46 ACSR 126; [2003] VSC 123
Certain Lloyd’s Underwriters v Cross (2012) 348 CLR 378; [2012] HCA 56
Chan v First Strategic Development Corporation Limited (In liq) [2015] QCA 28
Charter Reinsurance Co Ltd v Fagan [1997] AC 313
Edenden v Bignall [2007] NSWSC 1122
Edwards v Australian Securities and Investments Commission (2009) 264 ALR 723; [2009] NSWCA 424
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7
Emanuel Management Pty Ltd v Foster’s Brewing Group Ltd [2003] QSC 205
Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330
Hawkins v Bank of China (1992) 26 NSWLR 562
Hussain v CSR Building Products Ltd [2016] FCA 392
Jelin Pty Ltd v Johnson (1987) 5 ACLC 463
Jones v Dunkel (1959) 101 CLR 298
Lewis v Doran (2004) 50 ACSR 175; [2004] NSWSC 608
Lewis v Doran (2005) 54 ACSR 410; [2005] NSWCA 243
Manly Council v Byrne [2004] NSWCA 123
McLellan v Carroll (2009) 76 ACSR 67; [2009] FCA 1415
Powell v Fryer (2001) 37 ACSR 589; [2001] SASC 59
Southern Cross Interiors Pty Ltd (in liquidation) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621
Spain v Union Steamship Co of New Zealand (1923) 32 CLR 138
Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201; [1999] NSWSC 581

Category:

Principal judgment

Parties:

Treloar Constructions Pty Limited (Appellant)
Brian McMillan (Respondent)

Representation:

Counsel:
T Alexis SC; D J A Mackay (Appellant)
A McGrath SC; J Shepard (Respondent)

  Solicitors:
Diamond Conway (Appellant)
Somerset Ryckmans (Respondent)

File Number(s):

2016/81735

 Decision under appeal 

Court or tribunal:

District Court

Date of Decision:

19 February 2016

Before:

Gibb DCJ

File Number(s):

2013/223785

Headnote

[This headnote is not to be read as part of the judgment]

The appellant, Treloar Constructions Pty Ltd, entered into a contract with McMillan Prestige Pty Ltd (McMillan Prestige) for construction and project management services. McMillan Prestige was a holding company and provided services to two wholly owned subsidiaries for which it received management fees.

The contract between the appellant and McMillan Prestige was concluded in December 2005 and took the form of a simple one page document. The contract contained the following term:

Suppliers and contractors organised and paid by Treloar Construction will be charged at cost + 12.5% management fee.

The appellant commenced work in December 2005, and subsequently issued various invoices to McMillan Prestige. Between 28 April and 20 September 2006, the appellant issued 11 invoices which went unpaid by McMillan Prestige.

A receiver was appointed to McMillan Prestige and its subsidiaries on 2 February 2007. On 24 July 2007, McMillan Prestige was wound up by order of the Supreme Court of New South Wales on the application of the appellant.

By proceedings commenced in the District Court of New South Wales, the appellant sought to recover an amount of $418,991.77 in unpaid invoices from the respondent, Brian McMillan, as director of McMillan Prestige, pursuant to the Corporations Act 2001 (Cth), s 588M. The primary judge, Gibb DCJ, dismissed the appellant’s claim. Her Honour held that, on the construction of the contract she had adopted, the appellant had not established that it was entitled to issue the invoices to McMillan Prestige and had not proved that McMillan Prestige was insolvent at the relevant times. On that basis, the primary judge did not examine in detail the availability to the respondent of any defence under the Corporations Act, s 588H but stated that, had she needed to consider the point, she would have found a defence had been made out.

The principal issues arising on the appeal were as follows:

(i)   whether, on the proper construction of the contract, the appellant was required to have paid underlying contractors and suppliers before it was entitled to render invoices to McMillan Prestige;

(ii)   whether the appellant established “loss or damage” for the purposes of the Corporations Act, s 588M by proof of the unpaid invoices issued to McMillan Prestige and the underlying liabilities to the suppliers and contractors;

(iii)   whether the appellant had established that McMillan Prestige was insolvent at the time it incurred debts to the appellant on the relevant invoices;

(iv)   whether the question of any defence under the Corporations Act, s 588H should be remitted to the District Court for determination.

The Court held, allowing the appeal with costs:

In relation to (i):

(1)   On its natural meaning and considered in context, the contractual term in question did not require that underlying suppliers and contractors be paid before an entitlement to render an invoice could arise. [14]-[25]

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

In relation to (ii):

(2)   On the proper construction of the contract, the appellant obtained an entitlement to payment upon the relevant invoices being issued. The appellant suffered “loss or damage” for the purposes of the Corporations Act, s 588M by the non-payment of those invoices. [49]-[62]

Edenden v Bignall [2007] NSWSC 1122; Powell v Fryer (2001) 37 ACSR 589; [2001] SASC 59; Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201; [1999] NSWSC 581

In relation to (iii):

(3)   Whether a person is unable to pay their debts as and when they become due and payable is to be determined as a question of commercial reality having regard to the particular facts of the case. [76]-[83]

Chan v First Strategic Development Corporation Limited (In liq) [2015] QCA 28; Lewis v Doran (2005) 54 ACSR 410; [2005] NSWCA 243; Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148; [2005] NSWSC 831; Lewis v Doran (2004) 50 ACSR 175; [2004] NSWSC 608; Southern Cross Interiors Pty Ltd (in liquidation) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621

(4)   The persistent late-payment of debts may give rise to an inference of insolvency, although that inference may be rebutted by evidence showing a reason, other than incapacity to pay, for the late payment. [99]-[105]

Hussain v CSR Building Products Ltd [2016] FCA 392; Emanuel Management Pty Ltd v Foster’s Brewing Group Ltd [2003] QSC 205; Australian Securities and Investments Commission v Plymin (2003) 46 ACSR 126; [2003] VSC 123

(5)   The availability of an overdraft facility or other loan funds for a short term or repayable on demand will not assist in establishing solvency. Recourse to such funds merely substitutes one form of immediate obligation for another. [125]

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

(6)   Although the legal onus of establishing insolvency was at all times on the appellant as the party seeking recovery pursuant to the Corporations Act, s 588M, the respondent director bore an evidentiary onus to point to circumstances that would deprive the expert evidence adduced by the appellant of its relevance. [141]-[144]

In relation to (iv):

(7)   The possibility of future success or business profitability will not provide reasonable grounds for a present expectation of solvency for the purposes of the Corporations Act, s 588H(2). [168]-[170]

McLellan v Carroll (2009) 76 ACSR 67; [2009] FCA 1415; Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330

Judgment

1. THE COURT:

Introduction

2. The appellant, Treloar Constructions Pty Ltd (Treloar), entered into a contract with McMillan Prestige Pty Ltd (McMillan Prestige) for the construction and project management of a motor vehicle showroom and service and repair facility. The contract was in writing, dated 21 December 2005, and required payment of invoiced amounts 30 days after the date of invoice.

3. McMillan Prestige was the holding company of what was conveniently described in these proceedings as the McMillan Group. It provided services to two wholly owned subsidiaries, McMillan NSW Pty Ltd, as trustee for the Bentley Sydney Unit Trust (Bentley NSW), and Autohaus Five Dock Pty Ltd, as trustee for Autohaus Five Dock Unit Trust (Autohaus Five Dock), for which it received management fees. Bentley NSW and Autohaus Five Dock were trading entities carrying on motor vehicle dealerships involving Bentley motor vehicles and Volkswagen motor vehicles respectively. McMillan Prestige was reliant on these two trading entities for financial support to meet its obligations.

4. A receiver was appointed to McMillan Prestige, Bentley NSW and Autohaus Five Dock on 2 February 2007. McMillan Prestige was wound up by order of the Supreme Court of New South Wales on 24 July 2007 on the application of Treloar.

5. By proceedings brought in the District Court of New South Wales, Treloar claimed the amount of $418,991.77, together with certain other costs and expenses, from the respondent Brian McMillan, the sole director of McMillan Prestige, pursuant to the Corporations Act 2001 (Cth), s 588M(3). The amount of $418,991.77 was the amount of invoices Treloar claimed remained unpaid by McMillan Prestige.

6. The trial judge rejected Treloar’s claim. Her Honour held that Treloar had not proved that the amount of the invoices remained unpaid and had not proved that McMillan Prestige was insolvent at the relevant times. In this regard her Honour considered that the inadequacies in the expert report relied on by Treloar were such that she was not in a position to determine, herself, the question of insolvency on the evidence before her.

7. Given the rejection of Treloar’s claim, her Honour found it unnecessary to consider Mr McMillan’s defence that he had reasonable grounds to expect that McMillan Prestige was solvent at the relevant times: see s 588H. Her Honour stated however, at 53, that had it been necessary to make a finding she would have accepted Mr McMillan’s evidence and upheld the defence. Accordingly, her Honour entered a verdict and judgment for Mr McMillan together with an order for costs.

8. Treloar appealed against her Honour’s dismissal of its claim for the moneys alleged to remain outstanding on the invoices. Treloar’s claim for other costs and expenses sought in the proceeding at first instance was not pursued on the appeal. Mr McMillan contended that if Treloar’s appeal were to be upheld, the Court should order that it be remitted for determination of Mr McMillan’s defence under s 588H.

Issues on the appeal

9. The following issues were raised on the appeal:

1. The proper construction of the contract between the parties;

2. Whether the contract failed for uncertainty;

3. Whether a “debt” was incurred within the meaning of s 588G(1)(a);

4. Whether Treloar had suffered loss or damage within the meaning of s 588M(1)(b);

5. Whether McMillan Prestige was insolvent when the debts were incurred.

6. Although not a ground of appeal, and there is no notice of contention by Mr McMillan, there is also a question whether Mr McMillan established the defence under s 588H or whether that question should be remitted to the District Court for determination.

Relevant legislation

10. The Corporations Act, Pt 5.7B provides for the recovery of property or compensation for the benefit of creditors of insolvent companies. Division 3 governs a director’s duty to prevent insolvent trading. Division 4 provides for the recovery of losses resulting from insolvent trading against a director. The provisions relevant to the present proceedings are as follows:

“588G   Director’s duty to prevent insolvent trading by company

(1)   This section applies if:

(a)   a person is a director of a company at the time when the company incurs a debt; and

(b)   the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

(c)   at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and

(d)   that time is at or after the commencement of this Act.

…

(2)   By failing to prevent the company from incurring the debt, the person contravenes this section if:

(a)   the person is aware at that time that there are such grounds for so suspecting; or

(b)   a reasonable person in a like position in a company in the company’s circumstances would be so aware.

…

588H   Defences

(1) This section has effect for the purposes of proceedings for a contravention of subsection 588G(2) in relation to the incurring of a debt (including proceedings under section 588M in relation to the incurring of the debt).

(2)   It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.

(3)   Without limiting the generality of subsection (2), it is a defence if it is proved that, at the time when the debt was incurred, the person:

(a)   had reasonable grounds to believe, and did believe:

(i)   that a competent and reliable person (the other person) was responsible for providing to the first‑mentioned person adequate information about whether the company was solvent; and

(ii)   that the other person was fulfilling that responsibility; and

(b)   expected, on the basis of information provided to the first‑mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.

(4)   If the person was a director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company.

(5)   It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt.

(6)   In determining whether a defence under subsection (5) has been proved, the matters to which regard is to be had include, but are not limited to:

(a)   any action the person took with a view to appointing an administrator of the company; and

(b)   when that action was taken; and

(c)   the results of that action.

…

588M   Recovery of compensation for loss resulting from insolvent trading

(1)   This section applies where:

(a)   a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and

(b)   the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency; and

(c)   the debt was wholly or partly unsecured when the loss or damage was suffered; and

(d)   the company is being wound up;

whether or not:

(e)   the director has been convicted of an offence in relation to the contravention; or

(f)   a civil penalty order has been made against the director in relation to the contravention.

(2)   The company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.

(3)   The creditor may, as provided in Subdivision B but not otherwise, recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage.

(4)   Proceedings under this section may only be begun within 6 years after the beginning of the winding up.”

The contract

11. On or about 21 December 2005, Treloar and McMillan Prestige entered into a written contract. The contract was a simple one page document and was agreed to following negotiations as to its terms. Those negotiations included a letter dated 20 December 2005 sent by Race Treloar, on behalf of Treloar, to Mr McMillan, the principal of McMillan Prestige, in the following terms:

“Attached is the Agreement for Conditions of Works at the Jubilee site.

In respect of your responses of Saturday 17 December, 2005, please note the following:

1.   Supervision: $75/hr plus GST has always been our fee and was advised to you in our correspondence regarding budget figures dated 29 November, 2005.

2.   Nominated Contractors Insurance etc: We are referring to Contractors that are engaged directly by you and paid directly by you.

3.   Suspension of Incomplete Works: Note rewording of condition.

4.   Deposits: We are not prepared to extend this line of credit and it must remain your responsibility.

Please sign and return the attached with your purchase order and deposit cheque for $30,000.00 asap.”

12. The attached document was as follows:

“1)   Treloar Construction organised suppliers and contractors

Suppliers and contractors organised and paid by Treloar Construction will be charged at cost + 12.5% management fee.

2)   McMillan Prestige nominated suppliers/contractors

Supervision of suppliers and contractors nominated and paid directly by McMillan will be charged at $75/hr + GST.

Note:   Nominated contractors will need to provide copies of current 1) Public Liability Insurance, 2) Workers Compensation policy and 3) OH & S General Induction Certificate before they are permitted to commence work.

3)   General payment terms are net 30 days from date of invoice.

4) All payment claims will be made under the Building and Construction Industry Security of Payment Act 1999.

5)   All incomplete works may be suspended without notice if invoices remain unpaid in excess of 30 days past the due date.

6)   Payment of deposits to those trades and/or suppliers that require upfront deposits are to be the responsibility of McMillan Prestige.”

13. By way of notation on the document, Mr McMillan did not agree to cl 5 of the contract document, and he made an amendment to cl 6 by striking out the words “McMillan Prestige” and replacing it with “Treloar”. He added “McMillan will re-imburse Treloar’s”. He signed the document and dated it 21 December 2005. This document in its notated form constituted the contract between the parties (the contract). The deposit of $30,000 referred to in the letter of 20 December 2005 was paid on 25 December 2005.

Proper construction of cl 1 of the contract

14. Both at trial and on appeal, there was a dispute between the parties as to the proper construction of the contract and, in particular, the proper construction of cl 1.

15. The trial judge found, at 6, that there was no ambiguity in the contract and that its terms were plain and “entirely commercially realistic in their literal application”. Her Honour construed cl 1 to mean that Treloar would invoice McMillan Prestige after it had paid the suppliers and contractors that it had organised in accordance with cl 1. Her Honour found, at 20, that:

“Payment of the relevant suppliers/contractors was thus a condition precedent to any entitlement to charge [McMillan Prestige], and, in turn, of any liability by [McMillan Prestige].”

16. Treloar challenged this construction, contending that the word “paid” in cl 1 did not mean that Treloar was required to pay the suppliers and contractors that it had organised before it was entitled to render an invoice to McMillan Prestige. Treloar pointed out that the clause was silent as to the time at which the suppliers and contractors organised by Treloar were to be paid. It also pointed out that the term “paid” was also used in cl 2 and that, if the same meaning was given to the word “paid” in that clause as her Honour gave to it in cl 1, cl 2 would be a commercial nonsense.

17. Treloar submitted that the construction for which it contended was supported by the fact that in the anterior negotiations between the parties, evidenced in the letter of 20 December 2005 at para (4), Treloar noted that, with respect to deposits, it was “not prepared to extend this line of credit and it must remain your responsibility”.

18. Treloar also submitted that the construction of cl 1 for which it contended was supported by the express terms of cl 6 which, it argued, would be otiose if the construction advanced by Mr McMillan and as found by her Honour were correct. As Treloar pointed out, although cl 6 had been amended, “there was certainly no adjustment to provide that [Treloar] would effectively fund the construction for what potentially could be a significant period of time”.

19. The principles that govern the proper construction of a contract are well established. In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 the High Court stated at [35]:

“… this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption ‘that the parties ... intended to produce a commercial result’. A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.” (footnotes omitted)

20. Leaving aside her Honour’s finding, at 20, that payment of the underlying invoices of suppliers and contractors organised by Treloar was a condition precedent to its entitlement to invoice McMillan Prestige, her Honour correctly stated the principles to be applied in the construction of a contract, referring expressly to the above passage from Electricity Generation Corporation v Woodside Energy. However, we consider that her Honour was in error in the construction she gave to the contract and that its correct construction is as contended by Treloar, for the reasons which follow.

21. As we have said, the clause directly in contention is cl 1. That clause, together with cl 2, was directed to identifying the terms upon which McMillan Prestige was to be charged, according to whose responsibility it was to pay the relevant suppliers and contractors. In the case of suppliers and contractors whom Treloar engaged directly and in respect of whom Treloar was directly liable to pay for the goods and services provided, McMillan Prestige, in accordance with the terms of cl 1, was to be charged at cost plus a 12.5 per cent management fee.

22. Most expressions have a natural meaning, in the sense of their primary meaning in ordinary speech. However, there are occasions where direct recourse to such a meaning is and disputed words must be set in the landscape of the instrument as a whole. Once that is done, the purpose of the words may take on a different complexion. Thus, by way of example, use of the phrase “the sum actually paid” in a reinsurance contract does not necessarily impose a condition precedent in relation to the disbursement of funds but, rather, emphasises that it is the ultimate outcome of a calculation that determines final liability. In that context, the word “actually” is capable of meaning “in the event when finally ascertained” and the word “paid” is capable of meaning “exposed to liability as a result of the loss insured” (see Charter Reinsurance Co Ltd v Fagan [1997] AC 313 at 386).

23. Whilst we accept that “paid” is the past participle of “to pay”, we do not accept that, in the context in which it is used in cl 1, the word “paid” bears the meaning of “paid in fact” or “having been paid”. When construed in the context of the contract as a whole, and cl 2, in particular, we are of the opinion that it does not bear that meaning. Rather, cl 1, on its natural meaning and in context, does not require that the suppliers and contractors be paid before Treloar was entitled to raise an invoice in respect of the goods and services so provided. As a matter of construction of the contract, it is irrelevant that Treloar may not have paid the suppliers and contractors at the time it issued an invoice to McMillan Prestige. Should that occur, or have occurred, the suppliers and contractors would have their own contractual remedies as against Treloar.

24. The construction which we prefer, and consider is the correct construction of cl 1, is also supported by the terms of cl 6. That clause would have no work to do on the construction of cl 1 adopted by the primary judge. We are also of the opinion that in their negotiations in relation to the deposit, as evidenced by para (4) of the letter of 20 December and the amendment to cl 6 of the contract, Treloar and McMillan Prestige had turned their minds to the extent to which they were respectively to bear various costs as between themselves.

25. Given the construction which we give to cl 1, it is unnecessary to engage in any detailed analysis of her Honour’s finding that payment of the invoices by Treloar was a condition precedent to its entitlement to charge McMillan Prestige, except to state that, even on her Honour’s construction, we would not agree that cl 1 operated as a condition precedent.

Whether the contract failed for uncertainty

26. The trial judge, at 26, held that if her construction of cl 1 were wrong, the contract would fail in its entirety for uncertainty as to the terms of payment. We do not agree that the contract was uncertain. Clause 1 of the contract contained a clear stipulation as to the terms upon which Treloar was entitled to charge McMillan Prestige and as to McMillan Prestige’s obligation to pay, both as to amount and as to time.

27. It may be that her Honour’s finding of uncertainty was based on her preferred view as to when a debt was incurred. This is discussed below. If that was the basis of her Honour’s view that the contract was uncertain, we would reject it in circumstances where the date each debt was incurred depended upon the proper construction of the contract. We have dealt with that in the preceding paragraph.

The incurring of debt within the meaning of s 588G(1)

28. Treloar’s pleaded case was that McMillan Prestige “incurred a debt” within the meaning of s 588G(1)(a) each and every time at which it was issued with an invoice. There were 11 invoices in contention in the proceedings, being those issued on 28 April 2006, 5 May 2006, 14 May 2006, 26 May 2006, 9 June 2006, 22 June 2006, 30 June 2006, 11 July 2006, 27 July 2006, 28 August 2006 and 20 September 2006. (It should be noted the statement of claim and the primary judgment incorrectly identified the first invoice as dated 24 April 2006.)

29. The trial judge found, at 33, that there were three possible times at which McMillan Prestige incurred a debt: when it entered into the contract with Treloar; when Treloar issued a proper, valid and enforceable invoice under the contract; or when the contractual work was complete.

30. Her Honour preferred the first of these alternatives, albeit she considered it was problematic, in that the price would not be ascertainable until the work had been done and Treloar’s suppliers’ contractors had fixed their prices. That was not possible to ascertain as at the contract date, thus raising, in her Honour’s consideration, issues of contractual uncertainty. Her Honour concluded, at 34, on the basis of her view that the debt was incurred on the date of entry into the contract, that there was no basis for finding that McMillan Prestige was insolvent at that time.

31. As to the second alternative, her Honour, stated, at 33, that, having regard to the construction she gave to cl 1, Treloar had not issued proper, valid and enforceable invoices under the contract, as it had not issued invoices after it had attended to payment of its suppliers and contractors. Her Honour added that the second alternative led to some absurdity in that no debt would be incurred if Treloar had failed to issue an invoice or if invoices were issued without contractual justification as, on her view, had occurred.

32. Her Honour discounted the third possibility as it was not the basis of Treloar’s claim.

33. It is not necessary to engage in any analysis of the three possible times at which the debt was incurred to which her Honour gave consideration. Once it is accepted that, on the proper construction of the contract, Treloar was not required to pay its suppliers and contractors before it was entitled to render an invoice to McMillan Prestige, it is apparent that the debts were incurred on the date of issue of each invoice. This case is not one where, there being no concluded contract, the relevant “debts” are incurred by way of quantum meruit liability upon the value of the work performed becoming “ascertainable”: see Edwards v Australian Securities and Investments Commission (2009) 264 ALR 723; [2009] NSWCA 424.

Whether Treloar suffered loss or damage within the meaning of s 588M

34. Treloar’s claim for loss and damage, insofar as it was asserted on the appeal, was for the amount of the unpaid invoices in the sum of $418,991.77. The primary judge, at 36, found that Treloar had failed to prove that it had paid the underlying debts to its suppliers and contractors. Her Honour stated that it was not appropriate to assume or infer loss or damage where no attempt had been made to adduce evidence that the underlying indebtedness had been paid. Her Honour considered that the better inference was to the contrary, citing Manly Council v Byrne [2004] NSWCA 123 and the discussion in that case as to the inferences properly drawn pursuant to the principle in Jones v Dunkel (1959) 101 CLR 298.

35. Her Honour’s conclusions were reached having regard to her construction of the contract and after analysis of certain aspects of the evidence relating to the invoices. In that regard, her Honour observed that Treloar had produced a table of payments which demonstrated that McMillan Prestige had paid a total of $677,657.49 to Treloar. Her Honour continued, at 36:

“The total paid is relevant because the payments invoked by [Treloar] are in broad brush, such as the notation on DGS Building Service’s invoice 743 about [Treloar] having made payments of $75,000 as of 13 May 2006 – against a (subcontractor) quotation of $147,130.57. The evidence does not connect the $75,000 payment with any amount charged in any of the invoices the subject of these proceedings.”

36. Her Honour concluded that the evidence did not establish that Treloar had paid its suppliers and contractors more than was paid to Treloar by McMillan Prestige.

Treloar’s submissions

37. Treloar submitted that on the proper construction of the contract, payment to the underlying suppliers and contractors was irrelevant to the question of whether Treloar had suffered loss or damage in relation to the debts. Treloar further submitted that, contrary to the primary judge’s finding, and consistently with the proper construction of the contract, all that it was required to prove was that it had incurred a liability to the respective contractors and suppliers. Treloar submitted that it had done so by adducing, in evidence, the underlying invoices and that it was not necessary to prove that the underlying invoices had been paid, citing Powell v Fryer (2001) 37 ACSR 589; [2001] SASC 59.

38. Treloar further submitted that, in the ordinary case, the loss or damage in relation to a debt will be the amount of the unpaid debt, adjusted for any dividend from the liquidation: see Edenden v Bignall [2007] NSWSC 1122 per Barrett J (as his Honour then was) at [30]. In this case, as there had been no dividend from the liquidation, its loss was the amount of the unpaid invoices.

Mr McMillan’s submissions

39. Mr McMillan acknowledged that Treloar had been invoiced by contractors and suppliers and that those invoices had been proved in evidence. However, he contended that proof that it had been invoiced by contractors and suppliers did not, on its face, represent Treloar’s loss or damage where Treloar had not proved that it had paid the contractors and suppliers.

40. In support of this submission, Mr McMillan drew a distinction between the position of a liquidator and that of a creditor. He submitted that where the action was being pursued against a director by a liquidator under s 588M(2), it may be sufficient to rely upon the face value of the invoices to establish loss. This was said to be appropriate because a liquidator could not reasonably be expected to look beyond the invoices issued to the company in liquidation. By contrast, where the claim was brought by a creditor pursuant to s 588M(3), proof of payment ought to be readily available, and that if payment is not proved it should not be accepted that loss or damage had been established.

Consideration

41. In accordance with the terms of the statutory provision, Treloar’s claim against Mr McMillan required proof of the debt or debts owed by McMillan Prestige to Treloar, proof of loss or damage in relation to the debts and proof of a causal relationship between the loss and damage and McMillan Prestige’s insolvency. If each of those matters was proved, Treloar was entitled to recover as a debt due from Mr McMillan, an amount equal to the amount of the loss or damage.

42. Each of those matters, that is, the existence of a “debt” due by McMillan Prestige to Treloar; the suffering of loss or damage by Treloar; the causal link between the loss and damage and McMillan Prestige’s insolvency and the amount of the loss or damage, was in issue in the proceedings and remained in issue on the appeal.

Existence of a debt

43. “Debt” is not a defined term in the Corporations Act and is thus to be construed in accordance with the well-established principles of statutory construction: see Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27; [2009] HCA 41 at [47]; Certain Lloyd’s Underwriters v Cross (2012) 348 CLR 378; [2012] HCA 56 at [28].

44. In accordance with those principles, and as the case law discussed below demonstrates, the meaning of the term “debt” is well understood as a matter of ordinary language. There is also the question of the meaning of “loss or damage” and how the “amount equal to the amount of the loss or damage” is to be determined within the meaning of s 588M. This has also been the subject of case law which is discussed below.

45. In Powell v Fryer, Olsson J observed of the word “debt” in the predecessor Act to the Corporations Act:

“[61]   The word ‘debt’ is not defined by the statute. It appears in a series of sections. Prima facie one would expect that it is used in a constant sense and according to its natural and ordinary English meaning.

[62]   It is pertinent to note that the normal meaning of the word is simply ‘a liability or obligation to pay or render something; that which one person is bound to pay to or perform for another’ …The obligation may be present and absolute, or contingent.

[63] There is nothing in the Corporations Law to suggest that any other special meaning is intended. That is the meaning attributed to the word, as it appeared in the context of the former s 556 of the Uniform Companies Code, by Gleeson CJ in Hawkins v Bank of China (1992) 26 NSWLR 562 at 572 ; 7 ACSR 349 ...”

46. In Hawkins v Bank of China, Gleeson CJ at 572 observed that this statutory conception of debt is “to be applied in a practical and commonsense fashion, consistent with the context and with the statutory purposes”: see also Edwards v Australian Securities and Investments Commission; Jelin Pty Ltd v Johnson (1987) 5 ACLC 463.

47. There was no suggestion in this case that the invoices were sham invoices or that they were otherwise inaccurate. Nor was the debt disputed other than by reference to the proper construction of the contract. Once it is accepted that, on the proper construction of the contract, it was not necessary for Treloar to have paid the subcontractors and suppliers before being entitled to invoice McMillan Prestige, there can be no dispute that a debt arose in accordance with the terms of the contract when Treloar issued invoices to McMillan Prestige. That the invoices rendered by Treloar were payable within 30 days of the date of issue did not alter the date on which a debt was incurred by McMillan Prestige.

48. The debt was a liquidated sum, the amount of the debt being the amount of the face value of each invoice rendered by Treloar to McMillan Prestige, or the difference between the face value of the invoice and any amount paid in respect of or in reduction of the invoiced amount, as the case many be: see Spain v Union Steamship Co of New Zealand (1923) 32 CLR 138 at 142, where Knox CJ and Starke J approved the observation in Odgers, Pleadings and Practice, 5th ed, that a liquidated debt exists “whenever the amount to which the plaintiff is entitled ... can be ascertained by calculation or fixed by any scale of charges, or other positive data”.

Loss and damage

49. Notwithstanding that Treloar proved that McMillan Prestige had incurred a debt for the purposes of s 588M(1)(a), there is still a question whether Treloar suffered loss and damage, and if so the quantum of that damage. Mr McMillan submitted that in order for Treloar to prove that it had suffered loss or damage, Treloar was required to prove that it had paid the subcontractors and suppliers whose invoices underlay the invoices rendered by Treloar to McMillan Prestige.

49. There are a number of statements in the authorities to the effect that the non-payment of a debt by an insolvent company establishes that the creditor has suffered loss and damage. Thus in Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201; [1999] NSWSC 581, Austin J stated, at [78]:

“Because of the company’s insolvency, [the debts owed to the creditors] have not been paid. [The creditors] have therefore suffered loss or damage in relation to their debts because of the company's insolvency, and consequently s 588M(1)(b) is satisfied in this case.”

51. A similar observation was made in Powell v Fryer by Olsson J at [88]:

“I entertain no doubt that, read in context, the loss and damage adverted to [in s 588M] is the amount of the unpaid debt due to the creditor in question. This is the view which was obviously taken by Austin J in Tourprint International Pty Ltd (in liq) v Bott … at 217 … and, in my experience, has always been applied to the practical administration of the statute.”

52. His Honour concluded, at [89], that “the ‘loss or damage’ in question will normally be the quantum of relevant unpaid debts.”

53. As is apparent from the observations of Austin J and Olsson J respectively, the quantum of loss or damage to which the creditor is entitled under s 588M is usually the amount of the debt owed by the insolvent company to the creditor. However, it may not necessarily be so, as is apparent from the obiter observations of Barrett J in Edenden v Bignell at [30]:

“This section does not allow recovery of the amount of the creditor’s debt as such. Rather, it is a provision allowing recovery of compensation measured by reference to loss or damage suffered by the creditor in relation to the debt because of the debtor’s insolvency. In some cases – perhaps most cases - this will be the equivalent of the amount of the debt: see, for example, Powell v Fryer (2001) 37 ACSR 589. In others – for example where a proof of debt is admitted and a substantial payment is made to all creditors rateably – the relevant loss or damage may be less than the amount of the debt. There may perhaps be circumstances in which the amount of the loss or damage exceeds the amount of the debt. The separateness of the debt, on the one hand, and the loss and damage, on the other, is emphasised by the statement in s.588M(3) that an amount equal to the loss or damage may be recovered ‘as a debt due to the creditor’.”

54. However, as foreshadowed above, at [40], Mr McMillan submitted that although the observations in the authorities that the “face value” of invoices may be an appropriate basis for establishing loss or damage in the case of a liquidator bringing proceedings under s 588M(2), that was not so in the case of a creditor bringing a claim under s 588M(3). The distinction, on Mr McMillan’s submission, was that a liquidator can not be expected to look beyond the invoices issued to the company in liquidation.

55. As the submission related to Treloar, Mr McMillan submitted that its claim did not fall into the “ordinary case” to which Austin J referred in Tourprint and which Olsson J reiterated in Fryer v Powell. Mr McMillan submitted that Treloar ought to have been able to prove that it had paid the subcontractors and suppliers but that it had not done so. Accordingly, it had not proved that it had suffered loss or damage.

56. If, and to the extent that, Mr McMillan’s submission sought to propound a difference of meaning or statutory application of the phrase “loss or damage” as between a case brought by a liquidator and a case brought by a creditor, we do not consider it to be correct. A claim by a liquidator and a claim by a creditor are subject to the same requirement in s 588M(1)(b) that loss or damage has been suffered in relation to the debt because of the company’s insolvency. The chapeau to s 588M(1) makes it clear that the requirements of that subsection apply equally to proceedings brought under s 588M(2) and s 588M(3). Rather than there being any difference of meaning or statutory application as between the two subsections, it will be a question of fact in each case as to whether loss or damage has been suffered and the amount of that loss or damage.

57. Treloar acknowledged that it had not adduced evidence that it had paid the underlying invoices of the contractors and suppliers but contended it was not necessary that it do so. It submitted that, having regard to the proper construction of the contract, it was sufficient for it to have proved a liability to pay the subcontractors and suppliers and that it had done so.

58. On the construction we have given to the contract, Treloar’s entitlement to issue invoices was not dependent on Treloar having actually paid the underlying invoices issued by the contractors or suppliers. Treloar was entitled to payment of the amounts specified in the various invoices 30 days from the date of their issue.

59. Although McMillan Prestige complained to Treloar about “cost overruns”, it did not dispute that the works were carried out, and there was no allegation that Treloar’s invoices were not genuine. It follows that the various invoices issued by Treloar gave rise to an entitlement in Treloar to be paid the sums specified. Treloar thus suffered loss or damage when it was not paid in accordance with its contractual entitlement.

Quantum of the loss or damage

60. As is apparent from the observations of Barrett J in Edenden v Bignell, the debt owed and “loss or damage” recoverable under s 588M are distinct concepts. Nonetheless, the non-payment of a debt is an available means of establishing that a creditor suffered loss or damage in relation to the debt, for the purposes of s 588M(1)(b), unless there is some evidence to the contrary such as payment or part payment of the debt, by, for example, a distribution by a liquidator on the winding up.

61. In this case, Treloar contended that the non-payment of the relevant invoices established not only that it had suffered loss or damage for the purposes of s 588(1)(b), but that the amount of compensation to which it was entitled under s 588M(3) was the amount unpaid on those invoices. We have already dealt with the first part of this submission.

62. In our opinion, this case falls within the usual class of case where the amount of the loss or damage suffered was the amount of the debt owed, being the total of the unpaid invoiced amounts.

Insolvency

Trial Judge’s reasons

63. Treloar contended that McMillan Prestige was insolvent in the period from 4 April 2006 to 20 September 2006. In proof of insolvency in that period, Treloar relied upon the expert evidence of Christopher Palmer, an insolvency practitioner, who approached the question of insolvency on the basis of the ‘cash flow test’. The trial judge, at 39, accepted that this is the primary test for determining solvency and was the relevant test to apply in this case. That this was so had been conceded by Mr McMillan before her Honour.

64. However, her Honour, at 40, considered that Mr Palmer’s report was “seriously flawed”, in that some of the assumptions he had made were incorrect and “various of the tables and figures upon which he rested his analysis were either wrong or unreliable”. In coming to this conclusion, her Honour reproduced Mr McMillan’s submissions in criticism of Mr Palmer’s report. Those criticisms were, essentially, as follows:

“(a)   Mr Palmer agreed it was a possible omission to his report that he had not addressed the commercial reality of the expansion in the operations of McMillan Prestige to include the VW franchise …;

(b)   Mr Palmer said the $700,000-$800,000 commitment for funding provided by VW Australia should have been included in his analysis and that had he been aware of it, he probably would have included it …;

(c)   Mr Palmer agreed that the Court would probably place no store on his reliance on an unpaid $57,237 tax debt to prove insolvency in circumstances where it was disputed and then paid after the dispute was determined …;

(d)   Mr Palmer said that not much reliance could be placed on the table of aged creditors on page 27 of his report, but that it gave an indication of the way McMillan Prestige was dealing with its creditors, which was to reduce its creditor amounts over the relevant period (from approximately $94,000 in May 2006 to $4,000 on 31 August 2006 for creditors aged over 121 days) …;

(e)   Mr Palmer agreed that the Court could place ‘not much’ store on his reliance on CBA’s two ‘insufficient funds’ notices, to prove insolvency where the rent cheques were made out to one McMillan Prestige account from another, might have been an administrative error, did not involve an external creditor and were, in case, reissued with sufficient funds within the week …;

(f)   Mr Palmer agreed that his table comparing the Company’s creditors to its cash at bank during the period, at page 33 of his report, is not a commercially realistic analysis for a holding or service company …;

(g)   Mr Palmer agreed that, in his experience of opining on companies’ solvency, it would not be common for insolvent companies to reduce, so dramatically, the trade creditors as McMillan Prestige had done as shown in his table on page 33 …;

(h)   Mr Palmer agreed that the table oat page 33 of his report was ‘wrong’ in that it should have taken into account the $700,000 commitment for funding from VW Australia …;

(i)   Mr Palmer agreed that it was a heavy qualification to note that without the debtor information it was difficult to draw any meaningful conclusions about the liquid resources available to [Bentley NSW] and [Autohaus], two trading entities in the McMillan Group …;

(j)   Mr Palmer agreed that if the debtor amounts were $1.232 million as at 23 January 2006, he ought to assume a similar level of debtors as at other times, despite his failure to do so in his analysis of liquid resources available to meet aged creditors at page 40 of his report …;

(k)   By failing to include debtors, Mr Palmer agreed that the amounts in the ‘Surplus/(Deficiency)’ column of the table at page 40 of his report were ‘probably wrong’ in that they may have understated the cash resources available by up to $1.2 million …;

(l)   Mr Palmer agreed that the Court could not rely upon the table at page 40, given that he had not included the debtor position of the trading entities …;

(m)   Mr Palmer agreed that the Court could not rely upon the table at page 40, given that he had not included the debtor position of the trading entities …”

65. Her Honour concluded that these matters highlighted that, by his own admission, very little or no weight could be given to Mr Palmer’s opinion as stated in his report.

66. Before the trial judge, Treloar advanced two principal responses to these criticisms. The first was that Mr McMillan’s criticisms did not affect the admissibility of Mr Palmer’s report but only raised a question as to the weight to be accorded to it. In making that response, Treloar pointed out that Mr Palmer had not been cross-examined as to how the qualifications or concessions to which he had agreed affected his ultimate conclusion as to insolvency. Secondly, Treloar submitted that the assertions or propositions that had led Mr Palmer to qualify parts of his report, or in respect of which he had made a concession, needed to be proved before the report could be rejected. This submission was directed principally to whether there had in fact been a $700,000 funding commitment from Volkswagen Group of Australia (Volkswagen Australia), or whether the arrangement merely had the status of a letter of intent. Her Honour, at 42, rejected the latter characterisation of the arrangement.

67. Her Honour made other criticisms of Mr Palmer’s report, some of which, in any event, had been signalled by Mr Palmer in his report and some aspects of which had been conceded in cross-examination. In summary, those shortcomings were: (i) the fact that the debtor information for Bentley NSW and Autohaus Five Dock for the relevant period was unavailable except in relation to the month of January 2006; (ii) that Mr Palmer’s report had no regard to the value of realisable assets of some value; (iii) that Mr Palmer had not had regard to another possible source of funding, namely, an ad hoc arrangement with the Commonwealth Bank (CBA) with an informal overdraft with a tolerance of up to $1 million; (iv) the use of figures in his analysis that were “effectively speculative”; (v) Mr Palmer’s concession that his analysis of creditors unpaid outside trade terms may not be reliable; (vi) the making of assumptions about liabilities to the Australian Taxation Office about which he knew little; and (vii) Mr Palmer’s analysis of the resources available to McMillan Prestige being “strikingly deficient”.

68. Her Honour concluded, at 48, that Mr Palmer had “failed to satisfy his own test of solvency” and had not in fact undertaken a cash flow analysis as he had purported to do in his report. Her Honour dismissed there being anything in the point that it had not been squarely put to Mr Palmer that he had not undertaken a cash flow test in circumstances where her Honour, at 49, considered that Mr McMillan’s counsel had “skilfully pulled every element apart, leaving little to be gained by an attack on the entirely dismembered whole”.

69. In the result, her Honour, at 49, did not accept Mr Palmer’s opinion, nor his report, both of which she described as “flawed”, despite Mr McMillan not having adduced any contrary evidence including by way of expert evidence. Her Honour also rejected Treloar’s submission that she should proceed to form her own view as to the question of insolvency. Her Honour at 50, considered that if Mr Palmer lacked sufficient information to form a view as to insolvency, she was in a worse position. Her Honour considered that the tables and analyses set out in Mr Palmer’s report were, on his own evidence, unreliable or wrong, such that they provided no foundation for the Court to carry out the insolvency enquiry for itself. Her Honour then summarised the deficiencies in the various tables and figures.

70. Notwithstanding the criticisms her Honour made of Mr Palmer’s evidence, she did not make an adverse credit finding against him. Rather, her Honour considered, at 41, that “[i]t is because of [Mr Palmer’s] frank concessions in the course of cross-examination that the deficiencies in and limitations of his report are manifest”.

The parties’ submissions

71. It will be convenient to deal with the submissions of the parties by reference to their respective positions in relation to the primary judge’s criticisms of Mr Palmer’s report. Before doing so, this is an appropriate place to set out the various points in time at which insolvency was required to be proved, namely, the date of issue of each invoice (the relevant dates), as identified in the first column of the following schedule which was Exhibit A in the proceedings before her Honour. Exhibit A also set out the amount of each invoice, any amount paid thereon and the amount remaining outstanding as stated in the “Amount due” column.

“Invoice Date	Invoice no.	Invoice Amount	Amount Paid	Amount due	Date Paid
…
[24/04/2006]	157	$49.840.75	$35,548.42	$0.00	7/07/2006
157	$10,000.00	$4,292.33	13/07/2006
5/05/2006	158	$61,239.40	$61,239.40
14/05/2006	159	$117,055.77	$117,055.77
26/05/2006	160	$26,714.17	$26,714.17
9/06/2006	161	$73,765.15	$73,765.15
22/06/2006	162	$67,325.12	$67,325.12
30/06/2006	163	$19,762.97	$19,762.97
11/07/2006	165	$19,136.11	$19,136.11
27/07/2006	166	$3,524.67	$3,524.67
28/08/2006	167	$10,972.39	$10,972.39
20/09/2006	168	$15,203.69	$15,203.69
$1,096,649.26	$677,657.49	$418,991.77”

(It is again noted that the correct date of the first invoice is 28 April 2006.)

72. Treloar submitted that the criticisms of and bases for rejection of Mr Palmer’s report were unjustified and that in any event the criticisms and such concessions as Mr Palmer made in his evidence were not material to the question whether at the relevant dates McMillan Prestige was insolvent. Treloar pointed out that Mr Palmer had not been questioned as to whether any of the concessions he made undermined his opinion as to insolvency.

73. Treloar also submitted that there were significant omissions in her Honour’s reasoning process including the absence of any reference to the fact that McMillan Prestige was a holding company. Treloar also drew attention to the following email, to which her Honour did not refer, from Mr McMillan to Treloar on 17 December 2005:

“… this is a very very tough time for our company at the moment and I am really and genuinely relying on you [sic] companies efforts. Our company does not have any resources at present … We are really stretched …”

74. Treloar contended that this email was “a fairly candid assessment of Mr McMillan’s corporate position at the time of the contract”. It was submitted that the email relevantly undermined the primary judge’s reasons as to McMillan Prestige’s financial health. Treloar also relied upon the fact that Mr McMillan did not, in his evidence, contradict any aspect of Mr Palmer’s report. The attack that was made upon it was only in cross-examination of Mr Palmer and then only as to its shortcomings, as opposed to the accuracy of the matters otherwise contained in it.

75. Mr McMillan, for his part, reiterated that there was insufficient material to establish that McMillan Prestige was insolvent at any of the relevant dates. As indicated above, at [47], those dates were the dates on which the debts arose, being the “Invoice Dates” set out at [71] above.

Meaning of insolvency

76. The Corporations Act, s 95A provides:

“(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.”

77. The current version of s 95A was introduced into the Corporations Act in 2002. Previously, the section had referred to payment out of a debtor’s “own monies”. The significance of the omission of those words in the new s 95A was considered in Lewis v Doran (2004) 50 ACSR 175; [2004] NSWSC 608 where Palmer J said, at [111]-[113]:

“111   … The omission leaves the Court free to determine insolvency, whether retrospective or prospective, as a question of commercial reality having regard to the particular facts of the case.

112   So, where retrospective insolvency is in issue, the Court can take into account that as at and after the alleged date of insolvency the company actually paid all its debts as they fell due because a third party made funds available to it without security. The Court can look at the arrangements which were actually made rather than artificially excluding them from consideration because the arrangements did not fall within the definition of payments from the debtor’s ‘own monies’. To look at what actually happened avoids the possibility that the Court is forced to conclude that, as a matter of law, a company could not pay all its relevant debts when, as a matter of fact, the company clearly did pay those debts.

113   On the other hand, where prospective insolvency is in issue the Court, as a general rule, would be sceptical of an assertion that a third party is willing to advance funds unsecured on such terms as would not, in any event, bring about insolvency. Such willingness on the part of a third party would have to be cogently demonstrated, if not as a matter of legal obligation, then as a matter of commercial reality.”

78. This analysis was accepted as correct by Barrett J in Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148; [2005] NSWSC 831 at [99], namely, that where on a “realistic commercial assessment” funds were capable of being raised from an outside source, that source of funds was relevant to the question of whether a company was solvent. His Honour added, however:

“… availability of loan funds for a very short term or payable on demand, as a source from which debts overdue may be paid, does not enhance solvency: it merely substitutes one form of immediate (or near immediate) obligation for another. There is also the point (emphasised by the Court of Appeal in Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2003) 45 ACSR 711) that the capacity to raise funds from external sources must be judged in a practical and businesslike way by reference to the commercial realities of the case, not by way of some theoretical textbook exercise. Possibilities are not enough. Genuine and realistic availability, as a matter of commercial reality, must be seen.”

79. Barrett J’s observation that funds available only for a very short term or repayable on demand did not enhance solvency was accepted and applied by this Court on the appeal from his Honour’s decision: Edwards v Australian Securities and Investments Commission at [163] per Macfarlan JA (Spigelman CJ and Campbell JA agreeing).

80. The test stated by Barrett J had been stated earlier in Southern Cross Interiors Pty Ltd (in liquidation) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621 at [54], where Palmer J had stated that insolvency:

“i)   … is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole …

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

81. That statement was approved by the Court of Appeal in Lewis v Doran (2005) 54 ACSR 410; [2005] NSWCA 243. In that case Giles JA stated, at [103]:

“Section 95A speaks of objective ability to pay debts as and when they become due and payable, but ability must be determined in the circumstances as they were known or ought to have been known at the relevant time, without intrusion of hindsight. There must of course be ‘consideration … given to the immediate future’ (Bank of Australasia v Hall (1907) 4 CLR 1514 at 1528 per Griffith CJ), and how far into the future will depend on the circumstances including the nature of the company’s business and, if it is known, of the future liabilities.”

82. Giles JA, in his observation at [109] , which is of particular relevance in the present case, stated:

“Particularly when the limiting words [out of the company’s own funds] are no longer part of the test, there is no compelling reason to exclude from consideration funds which can be gained from borrowings secured on assets of third parties, or even unsecured borrowings. If the company can borrow without security, it will have funds to pay its debts as they fall due and will be solvent, provided of course that the borrowing is on deferred payment terms or otherwise such that the lender itself is not a creditor whose debt can not be repaid as and when it becomes due and payable. It comes down to a question of fact, in which the key concept is ability to pay the company’s debts as and when they become due and payable.” (original emphasis)

83. In Chan v First Strategic Development Corporation Limited (In liq) [2015] QCA 28, Morrison JA, having referred, at [42], to Giles JA’s observation that “the key concept is ability to pay the company’s debts as and when they become due”, stated, at [44]:

“… in my view there is no benefit in attempting to achieve some precise formula as to likelihood, by reference to which the financial support qualifies or does not. To say that the likelihood of it being provided is ‘probable’ or ‘improbable’ adds no more to what has been said in the authorities to which I have referred. Given that the resolution of this issue will almost always depend upon an assessment of facts, in my view it is better to proceed on the basis that, where the financial support is being provided by a director or related entity, and in circumstances where there is no formalised agreement or understanding, what is required is cogent evidence which enables the court to conclude that there is such a degree of commitment on the part of the provider of the financial support to continue it, such that it can be said that at any point of time it was likely to be continued, with the result that, at any of those times, the company was able to pay its debts as and when they fell due.” (emphasis added)

84. In this case, the particular matters to be addressed in determining whether her Honour erred in finding that Treloar had not established that McMillan Prestige was insolvent are as follows:

(i)   what inferences, if any, as to McMillan Prestige’s solvency could be drawn from the Group Accounts for the period August 2005 to January 2006;

(ii)   whether McMillan Prestige suffered from a lack of working capital from at least April 2006;

(ii)   what inferences, if any, could be drawn from the fact that the invoices for the period January 2006 to July 2006 were paid outside the 30 day term specified in the invoice;

(iv)   whether McMillan Prestige had available to it funding from Volkswagen Australia in the sum of $700,000 having regard to the terms of the letter from Volkswagen Australia dated 10 August 2005;

(v)   whether Mr Palmer’s failure to have regard to the availability of the $1 million informal CBA overdraft should properly have been seen as a deficiency in his report such as to affect his opinion as to McMillan Prestige’s solvency;

(vi)   what relevance should be given to McMillan Prestige’s unpaid tax debt when considering the question of its solvency;

(vii)   whether Mr Palmer’s treatment of trade debtors was adequate.

A consideration of these questions, some of which overlap, follows.

McMillan Prestige’s and the group’s financial position as revealed by the accounts: August 2005-January 2006

85. In his report, Mr Palmer recorded that McMillan Prestige had incurred a loss of $256,003 for the year ended 30 June 2005. Mr Palmer was also able to deduce profit and loss figures for McMillan Prestige for the period December 2005 to February 2006. In each of those periods, the company suffered a loss of $117,375, $108,635 and $112,661 respectively.

86. Mr Palmer also summarised the group accounts for this period in a table which revealed that in each of the months August 2005 to January 2006, the group had a net deficiency which ranged from $424,000 in September 2005 to $1,230,000 in January 2006 as follows: August 2005: a deficiency of $623,000; October 2005: a deficiency of $719,000; November 2005: a deficiency of $893,000; and December 2005: a deficiency of $1,056,000. Mr Palmer considered that a simple explanation for these figures was that the deficiency may be indicative of trading losses being incurred.

87. According to the last balance sheet prepared for the group as at January 2006, the group had an average net deficiency of $850,000 for the 6 months up to January 2006. This was not disputed.

88. Mr Palmer then carried out a current ratio and quick ratio analysis. The current ratio is a measure of the ability of the company to meet its current liabilities with the current assets available. A current ratio of more than 1.00 may indicate that a company may be solvent. The group current ratio was 1.01 in August 2005 and decreased slightly over the following months to 0.97 as at January 2006.

89. The quick ratio is a slightly different liquidity measure that filters the current ratio by measuring the most liquid current assets available to cover current liabilities. Mr Palmer stated that the quick ratio offers a more conservative view of a company’s ability to meet its short-term liabilities with its short-term assets as it does not include inventory and other current assets that are more difficult to convert into cash.

90. Mr Palmer expressed the view that the quick ratio was more useful in assessing McMillan Prestige’s solvency in the period August 2005-January 2006 as it compared the highly liquid assets available to meet current obligations. On Mr Palmer’s calculation, making certain assumptions favourable to the group, the quick ratio revealed a “relatively dramatic” decline from 1.40 in September 2005 to 0.67 in January 2006.

91. Although this part of Mr Palmer’s report did not extend beyond the period January/February 2006, his analysis of the accounts demonstrated that both the group’s position and McMillan Prestige’s position was, at best, marginal as at January and February 2006.

The payment of invoices outside the 30 day period

92. Between 28 March and 24 April 2006, Treloar issued invoices 150 to 156. Payment of those invoices was eventually made in full, but outside the 30 day term and by way of a number of payments. For example, invoice 150 in an amount of $46,768.19, issued on 28 March 2006, was paid in two amounts, the first of $10,000 on 5 May 2006 and the second in the sum of $36,768.19 on 17 May 2006. McMillan Prestige had also failed to pay invoice 157 dated 24 April 2006 in full. It made a part payment in the period 7-14 July 2006. McMillan Prestige failed to pay any of the invoices issued between May and September 2006. The total amount of the unpaid invoices was $418,991.77.

93. It was submitted on behalf of Mr McMillan that the company’s late payment of invoices in March and April 2006 could not found an inference that it was unable to pay its debts as and when they fell due in circumstances where it had complained to Treloar that there had been a costs overrun on the construction of the new premises. In this regard, there had been correspondence between Treloar and McMillan Prestige in July 2006. It appears from that correspondence, that there were discussions between Treloar and Mr McMillan as to McMillan Prestige making weekly payments so that the contractors and suppliers could continue to be paid. In this regard, it appears that in late May 2006, workers had walked off the site because they had not been paid. According to an email of 7 July 2006 at 1:43 pm, Mr McMillan had agreed at that time, that is, late May 2006, that all outstanding invoices would be paid by 9 June.

94. On 13 July 2006, Treloar demanded an urgent payment of $51,000 by McMillan Prestige so that Treloar could:

“… comply with agreed payment schedules in accordance with ‘Building Industry Security of Payments Act 1999’ with trades people to avoid further court actions being invoked against [Treolar] and Five Dock VW.”

95. Mr McMillan replied by email on 14 July 2006, stating that McMillan Prestige was in the process of preparing a weekly payment schedule to provide to Treloar. Mr McMillan also pointed out in that email that McMillan Prestige had budgeted for a cost of about $700,000 but as at that date had spent nearly $1.4 million. In an email later that day, Mr McMillan wrote:

“I will send you $10,000 dollars today. With regards to the rest, we are unable to pay a payment of $51,000 tomorrow”.

96. On 22 July 2006, McMillan Prestige emailed Treloar, explaining that it had had a problem in establishing a payment schedule, as it had “spent over [$1.5 million] to date that was not provided for”. The email went on to state that McMillan Prestige had been paying double rent as Treloar’s time frame for completion of the work had been extended by four months.

97. Treloar responded defending its costings and work progress. For example, it asserted that McMillan Prestige had expanded the scope of the works and that the refurbishment had been completed in the most cost effective way. Treloar also contended in that email that McMillan Prestige had occupied the workshops on 14 June, three months and three weeks after Treloar received the engineering plans on 20 February, that McMillan Prestige had organised the architectural plans but that they had been provided late, and that the engineering plans could not be prepared unto all the architectural plans were available. In the latter regard, Treloar pointed out in the email that structural construction works could not legally commence until the engineering plans were in hand.

98. McMillan Prestige emailed Treloar later the same day, stating “we are placing this payment problem with another party to see if it can be resolved”.

99. It is well established that the persistent late payment of debts may give rise to an inference of insolvency. As Chesterman J observed in Emanuel Management Pty Ltd v Foster’s Brewing Group Ltd [2003] QSC 205:

“[92]   The question is not whether debts were paid on time but whether they could have been. Persistent late payment of debts often gives rise to the inference of insolvency, but the inference may be rebutted if there be evidence showing a reason for late payment, other than an incapacity to pay.

…

[94]   I would accept that, when determining questions of solvency, the answer is not to be found only in the fact that creditors were not paid in accordance with the time stipulated in their invoices. One does not need recourse to notions of ‘commercial reality’ to reach this conclusion. The question must always be whether a company was able to pay its debts as they fell due … This investigation may involve a consideration of why debts were not paid on time.

[95]   In my opinion the appropriate course is to regard the issue as one of fact and to address the question … by reference to all of the evidence which appears relevant to that question.” (emphasis added)

100. See also Australian Securities and Investments Commission v Plymin (2003) 46 ACSR 126; [2003] VSC 123, at [386], where the fact that creditors were unpaid outside trading terms was included in the indicia of insolvency enumerated by Mandie J.

101. However, the fact that debts are paid outside the agreed terms for payment is not necessarily an indicator of insolvency. In Hussain v CSR Building Products Ltd [2016] FCA 392, liquidators sought to recover alleged unfair preferences under the Corporations Act, s 588FE. The company had consistently paid debts later than they were due, and in seeking to establish insolvency at the time of the alleged unfair preferences, reliance was placed on correspondence with creditors concerning the late payment of debts: [68].

102. Edelman J acknowledged the company’s late payment of debts and its failure to comply with its superannuation statutory obligations on a number of occasions, but nonetheless concluded, at [136], that an inference of insolvency was “extremely difficult, if not impossible, to draw” in that case. In reaching this conclusion, his Honour observed, at [131], that “although [the company] routinely paid its debts late … it almost invariably met the payment arrangements that it made”. His Honour also noted, at [135], that although the company was routinely late in its payments, this was common in the industry in which the company operated.

103. As set out above, at [92], various invoices issued by Treloar in early 2006 were paid by McMillan Prestige outside payment terms. Some of the debts arising from those invoices were paid by way of payment of amounts not directly referable to the invoiced amounts. The email correspondence referred to above reveals that there were assertions and counter assertions between the parties in relation to delays, costs overruns and responsibility therefor. However, as already observed, McMillan Prestige never contended, either during the course of the work or during the trial, that the invoices were shams, that incorrect invoices had been issued, or indeed, that the particular work underlying the relevant invoices had not carried out. The email correspondence also reveals that whilst McMillan Prestige might have been able to pay some small amounts during July, it was unable to pay any significant monies in reduction of the invoices and was also unable to comply with an agreed schedule of weekly payments.

104. In our opinion, McMillan Prestige’s late payment of its debts to Treloar was relevant to the question of McMillan Prestige’s solvency.

105. McMillan Prestige further contended that the non-payment of invoices was not evidence from which insolvency could be inferred in circumstances where it had available to it Volkswagen Australia’s letter of comfort and the opportunity to obtain an informal overdraft of up to $1 million. This is dealt with below. It should be noted at this juncture that Mr McMillan’s contention that Treloar had not proved insolvency was dependent upon factoring into the analysis of McMillan Prestige’s financial position the availability of the ad hoc CBA overdraft facility of $1 million and the availability of funding from Volkswagen Group Australia Pty Ltd (Volkswagen) in the sum of $700,000.

Volkswagen Australia’s letter of 10 August 2005

106. By letter dated 10 August 2005 entitled “[Volkswagen Australia] Intent to Assist Five Dock Volkswagen Relocation and Development”, Volkswagen Australia wrote to McMillan Prestige in the following terms:

“… we agree to the following level of assistance from [Volkswagen Australia] that will enable you to get the business operating in Five Dock at the new site. What this means in exact financial terms needs to be determined as we move forward with the project.

…

Facility Development and Refurbishment Assistance

…

It is the intention of [Volkswagen Australia] to fund the works to the site which means all expenditure will be signed off by the appropriate [Volkswagen] representative working with you on this task. [Volkswagen Australia] will pay the builder direct in instalments once we have agreement with the builder on payment terms. [Volkswagen Australia’s] payment terms are thirty (30) days.

We understand there is an estimate on the works required of approximately $700,000 to $800,000. Given the level of assistance required and Volkswagen policy, [Volkswagen Australia] will require an additional estimate. Given the gravity of the situation and investment required, any saving will be sought after.

…

Financial Situation and Reporting

[Volkswagen Australia] will require financial reporting from Five Dock Volkswagen on a monthly basis. We would require these monthly financials to include a report on your cash position and for them to be presented by you. We will commence this immediately once you are in agreement with these terms.

…

Dealer Development Funding Letter

[Volkswagen Australia] will issue a formal Dealer Development Funding letter to Five Dock Volkswagen for the amount equivalent to the value of the improvements.

You will agree to the terms of this letter of intent by signing the area below allowing us to move forward and get the project underway which will enable you to be trading from the new site at the expiration of the Haberfield lease.”

107. This was the second letter relating to an offer of assistance by Volkswagen Australia in relation to the new showroom. The trial judge was critical of Mr Palmer in failing to refer to an earlier letter from Volkswagen Australia relating to its intention to fund McMillan Prestige. However, Mr McMillan agreed in his evidence that the earlier correspondence had been overtaken and that the relevant letter was that of 10 August 2005. Her Honour’s criticism of this omission may therefore be put to one side.

108. Treloar submitted that it was apparent from the terms of the 10 August letter that it was only ever a letter of intent, there being no evidence that the assistance indicated was ever provided, nor were the requirements specified in the offer by Volkswagen Australia ever put in place. In particular, there was no evidence that McMillan Prestige reported on its cash position on a monthly basis; no evidence that Volkswagen Australia had issued a formal Dealer Development Funding letter for the amount equivalent to the value of the improvements; and no evidence that Volkswagen Australia obtained an additional estimate of the cost of the works.

109. Treloar also pointed out that contrary to what was intended, namely, that Volkswagen Australia would pay the builder direct, McMillan Prestige in fact paid the invoices itself and never at any time disputed its liability to do so. In this regard, Mr McMillan gave evidence that there was no agreement with the builder for Volkswagen Australia to pay the invoices.

145. The analysis above should make clear that the primary judge’s criticisms of Mr Palmer’s report were misplaced in a number of respects, and it is unnecessary to deal further with each and every one of the primary judge’s criticisms in detail. Properly understood, the position as to solvency was as follows:

1. McMillan Prestige was a holding company. It earned a small income from its trading entities Bentley NSW and Autohaus Five Dock. This income was not sufficient to pay its major creditors, Treloar and the ATO. Immediately prior to McMillan Prestige entering the contract with Treloar it admitted to Treloar that it was “a very very tough time for our company at the moment” and that it was “really stretched”: see above at [73].

2. The group as a whole was in a marginal solvency position as at January 2006 and the position had been deteriorating in the previous months. This was apparent from Mr Palmer’s analysis of the group accounts: see above at [85]ff. In particular, the group had a net deficiency as at January 2006 of $1,230,000: see above at [86]. It could not necessarily be said, however, that as at January 2006, the group was insolvent.

3. The summary of the group balance sheets produced by Mr Palmer revealed an average net deficiency of $850,000 per month in the six months up to January 2006: see above at [87].

4. McMillan Prestige had been late in the payment of invoices 150-156 issued between 28 March and 24 April 2006. Some of those invoices were paid by way of a number of payments and McMillan Prestige failed to make full payment of invoice 157: see above at [92].

5. McMillan Prestige failed to pay invoices 158-168 which were due for payment on the dates specified above at [145] between May and September 2006.

6. McMillan Prestige failed to comply with arrangements agreed to with Treloar in about July 2006 for weekly payments: see above at [95]-[96].

7. McMillan Prestige was unable to make a payment of $51,000 on 14 July 2006, as had been requested on the previous day, 13 July 2006: see above at [94]-[95].

8. McMillan Prestige owed the ATO an amount of approximately $60,000 from 14 December 2005 through to 31 August 2006. The taxation debt was subject of a formal objection, but was paid when the objection was disallowed in August 2006. McMillan Prestige was late in lodging its Business Activity Statements for May, June, July, August and September 2006. When those statements were lodged in October 2006, the ATO issued an assessment in the sum of $879,954. That amount was never paid: see above at [127]ff.

9. As at each of 18 April, 3 May, 29 May, 14 August and 31 August 2006, McMillan Prestige had a deficiency of assets of $306,576.87, $238,779.25, $356,291.86, $505,921.93 and $523,373.88 respectively: see Mr Palmer’s report at 33. It appears that those figures do not take into account the accumulating ATO debt.

10. On each of the dates identified in the preceding paragraph [145], McMillan Prestige could not have paid its debts as and when they fell due without the support of its subsidiaries.

11. There is a question whether the subsidiaries were in a financial position to provide support to McMillan Prestige as and when it needed it, and in particular on the relevant dates. The financial analysis of Mr Palmer makes it apparent that the subsidiaries were unlikely to be in that position.

12. In any event, there was no evidence that the subsidiaries were willing to provide financial support to McMillan Prestige as and when it was required. Indeed, the fact that Bentley NSW and Autohaus Five Dock did not do so, gives rise to the inference that they were not so willing.

13. Mr McMillan conceded in argument on the appeal that even had the ad hoc CBA overdraft been available, it would not have eliminated McMillan Prestige’s deficiencies of funds as at 29 May 2006, which, at that time, was in the order of $2,398,000: see above at [126] and [139].

14. The ad hoc CBA overdraft and the letter from Volkswagen Australia of 10 August 2005 were not financial resources available to McMillan Prestige for the reasons explained above and therefore were not relevant to take into account in assessing McMillan Prestige’s solvency.

15. A weekly payment schedule agreed between the parties did not eventuate.

16. McMillan Prestige promised in May 2009 that all outstanding invoices would be paid by 9 June 2006. This did not eventuate.

17. There was no evidence to counter any of the figures relied upon by Mr Palmer or the conclusions he drew from them.

147. These factors reveal that at no time during the period 28 April 2006 to 20 September 2006, being the period covering the relevant dates at which insolvency was required to be established, did McMillan Prestige have the ability to pay its debts as and when they fell due. Nor did it have recourse to assets or funding that might have provided a source from which any of the debts that fell due on the relevant dates could be paid.

148. The evidence, taken as a whole, does not indicate that McMillan Prestige was suffering from a temporary liquidity problem. Indeed, it is known that as at 17 December 2005 it was in a stretched financial position and the evidence indicated that its position and that of the group deteriorated in the months that followed.

149. Thus, although the evidence does not pinpoint each of the dates on which insolvency had to be proved, the evidence in respect of the period in which those dates fall is such that the only inference available is that McMillan Prestige was insolvent at each point in that period. It follows that Treloar proved insolvency at each of the relevant dates.

150. Beyond the arguments that Treloar had no entitlement to issue the relevant invoices and that it had not established loss or damage because it had not adduced proof of payment to the underlying contractors and suppliers, there was no real suggestion that once insolvency was proved the cause of Treloar’s loss or damage was other than McMillan Prestige’s insolvency.

The defence under s 588H

151. As Treloar’s claim for loss or damage has succeeded, the question arises as to the status of Mr McMillan’s defence under the Corporations Act, s 588H(2). As has already been indicated, her Honour acknowledged that she had not examined the defences “in detail” but stated that she had needed to consider the point she would have found that Mr McMillan had a defence under s 588H. Her Honour said that she “accepted the … submission that Mr McMillan had reasonable grounds to expect, and did expect that [McMillan Prestige] was solvent”.

152. Her Honour set out the following aspects of Mr McMillan’s submissions at first instance which were said to “fairly and accurately” describe the relevant evidence:

“13.   … A review of the Agreement shows that Mr McMillan has put an asterisk next to item 3 ‘General Payment Terms are net 30 days from date of invoice’. He has written the words ‘progress payments’. He has also written ‘N/A’ (which may be assumed to be ‘not agreed’ or ‘not applicable’) next to item 5: ‘All incomplete works may be suspended without notice if invoices remain unpaid in excess of 30 days past the due date’. This fits with a construction that payments would not necessarily reflect the invoiced amount and would be paid in monthly ‘lump sum’ payments to fit with the Company’s cash flow. …

…

35.   The Parramatta site required to be refurbished both as to the show room and repair centre. While this was being completed, Mr McMillan knew that he would be carrying extra rents for his other premises as well as the temporary premises he had secured to house to VW dealership while the Parramatta Site was being completed ... He knew he had to complete the refurbishment quickly and that it had to be cost effective and so he took measures to ensure that this would be the case.

36.   First, he obtained multiple quotes for the refurbishments, including one for $700,000 for the ‘refurbishment of vacant showroom and factory’ from RBV Builders Pty Ltd with an anticipated completion time of 9-12 weeks … as well as from Treloar Constructions.

37.   Secondly, he reviewed the Treloar Constructions quote dated 10 November 2005 for the showroom and repair centre for $1.6 million, plus GST, and rejected it emphatically …

38.   Thirdly, Mr McMillan engaged with Treloar Constructions to bring the price for the works down and was provided with a ‘quote summary’ albeit incomplete, for ‘prices on hand at the moment’, which was in the sum of about $400,000 …

39.   Fourthly, in negotiations with Treloar Constructions, Mr McMillan made it clear that he needed the job done quickly (within 12 weeks) and within a limited budget so that it would be value for money …

40.   Fifthly, at least on Mr McMillan’s understanding, he made an arrangement for the payment of the refurbishment by regular progress payments, on a monthly basis, so that he could manage his cash flow. Mr McMillan’s understanding of ‘progress payments’ is described in later communications with Mr Treloar … and he adhered to his understanding of ‘progress payment’ under cross examination …

41.   In conclusion, the circumstances suggest that Mr McMillan was expanding his business and incurring new debt, but was prudent and cautious in doing so. When Mr McMillan had a funding commitment of $700,000 from VW Group to pay for the refurbishments on completion, a fortiori, Mr McMillan had reasonable grounds to expect and did expect that the debts he was incurring for the construction work would be met. This is particularly so where he had sought and was provided with an estimate of costs in the vicinity of $400,000 from Treloar Constructions after rejecting a fixed price quote provided by them for $1.6 million plus GST on 10 November 2005.

42.   When Treloar Construction’s own costs and the direct sub-contractor costs exceeded both the $400,000 costs originally provided and Mr McMillan’s own $700,000 budget as at November 2005, Mr McMillan took matters to hand and stopped paying the invoices … However, he never accepted that he allowed Treloar Constructions to work and did not pay the invoices because the Company could not afford to do so …

43.   This was not the case where a company was failing and falling into greater indebtedness with no prospect of recovery. Mr McMillan was engaged in a new venture which, during the Period, and based on results from trading at his temporary premises he expected to be successful and profitable … Mr McMillan’s expectations obviously changed when VW Group withdrew its support enforced its security against McMillan Prestige … However, this turn of events was not expected by Mr McMillan, nor could it reasonably have been expected during the Period and at a the time that McMillan Prestige engaged Treloar Constructions, particularly in the context of the letters of support provided by VW Group.

44.   Prior to VW Australia withdrawing its support, Mr McMillan acknowledged that there were short term cash flow issues, but he expected that these would be resolved when his business moved into the Parramatta Site … In any case, Mr McMillan always expected that he could raise the funds, if required, to meet the temporary illiquidity he was facing from the following sources.

45.   Lanox Pty Ltd and KMSJ Pty Ltd: The Boyds and their companies, Lanox and KMSJ, had provided a $2 million loan and other funds and were generally supportive of the business … It was put to Mr McMillan that an invoice dated 28 February 2006 and numbered A2153 in the amount of $49,500 from Five Dock Volkswagen to Lanox … had not been paid, despite the annotation ‘paid 8/3’. Mr McMillan did not agree with that proposition … and in fact there is a credit entry on the Autohaus bank statement dated 8 March 2006, referring to invoice A2153 and A1252 for a combined credit of $109,500, on page 167 …

46.   CBA: CBA had a 20 year plus history with the business and allowed the McMillan Group to operate an informal overdraft on its bank accounts … Mr McMillan explained the informal facility saying that at any time he wished to draw on CBA funds, he could and that he had been doing that for many years given his long association with the bank … It was put to Mr McMillan that CBA could have demanded the money if it wanted to, with which Mr McMillan agreed before pointing out that, in fact, CBA never did ask for it … There was no basis, therefore, for Mr McMillan to assume that the funds would not be available as they also had been.

47.   During the Period, Mr McMillan also had the benefit of advice from experienced and qualified staff and an external accountant, Mr Geoff Vince whom he met regularly and who never advised him that the Company was insolvent …

48. Accordingly, even if it is found that McMillan Prestige was insolvent at any time during the Period, Mr McMillan had reasonable grounds to expect, and did expect that it was solvent within the meaning of section 588H.”

153. The primary judge gave some consideration to a submission by Treloar that in the absence of any evidence from the McMillan Group’s external accountant, no s 588H defence could be made out. Treloar had submitted that by a notice of motion filed on 16 November 2015, Mr McMillan had foreshadowed evidence from the accountant, Mr Vince, by a reference to an affidavit said to be sworn two days after the drafting of the notice of motion. No evidence from Mr Vince ever being adduced. Treloar submitted that the Court was entitled to assume that his evidence would not have assisted Mr McMillan. The primary judge was not satisfied that any affidavit ever came into existence or that Mr Vince was available to give evidence. Accordingly, her Honour declined to draw any Jones v Dunkel inference.

154. As we understand the position, Mr McMillan did not contend that her Honour had finally determined the defence.

Treloar’s submissions

155. Treloar submitted that this defence should not be remitted to the trial court for determination. It pointed out that Mr McMillan was granted leave below to read and rely on his affidavit and that he was cross-examined. In circumstances where Mr McMillan bore the onus of establishing any s 588H defence, Treloar contended that Mr McMillan “had every opportunity to bring forward evidence to support a defence … and properly engage the requirements of s 588H(2) and (3)”. Treloar submitted that the evidence brought forward by Mr McMillan failed to make out the defence and that “[f]or that reason there is neither a warrant nor an occasion to send the matter back for a retrial”.

156. Treloar submitted that her Honour’s acceptance of Mr McMillan’s evidence did not “go anywhere near satisfying the rigours of the defence” and that her Honour did not identify the existence of any reasonable grounds to support the expectation of solvency on the part of Mr McMillan that is an element of the defence.

157. Treloar submitted that her Honour’s acceptance of Mr McMillan’s submissions on the s 588H defence could not stand given the errors for which it had contended in relation to the insolvency ground of appeal. In particular, it contended, for the reasons it had submitted, Mr McMillan could not rely on the supposed funding from Volkswagen Australia or the informal overdraft facility as reasonable grounds for an expectation of solvency.

158. Treloar resisted the suggestion that in the past certain private lenders had provided finance to McMillan Prestige. Although the private lenders “had apparently supported the trading entities in the past there was nothing to demonstrate that their support was assured for the future”. Absent any such evidence, it was submitted that this could not provide reasonable grounds for an expectation of solvency. It was also noted by Treloar that the private lenders had previously provided finance on secured terms.

159. Treloar next submitted that reasonable grounds for an expectation of solvency could not be established by the suggestion that Mr McMillan “had the benefit of advice from experienced and qualified staff and an external accountant”. In this regard, it was emphasised that the financial controller had resigned prior to the debts to Treloar being incurred and that there was no evidence in Mr McMillan’s affidavits that he ever discussed the actual solvency position of McMillan Prestige with the external accountant. Treloar further submitted that although Mr Vince prepared tax returns and performed other accounting functions for the McMillan Group, there was no evidence to suggest that he was a person responsible for providing Mr McMillan adequate information about whether McMillan Prestige was solvent as contemplated by s 588H(3)(a). Treloar contended that there was “a powerful Jones v Dunkel inference … against his evidence being of any assistance whatsoever”.

Mr McMillan’s submissions

160. In relation to whether the s 588H defence should be remitted to the Court below for determination, the crux of Mr McMillan’s submission was put as follows in oral argument:

“GLEESON JA: You haven’t put on a notice of contention stating what findings this Court should make to support the defence, have you?

MCGRATH: No, I haven’t.

GLEESON JA: So are we left in the position that if we got to that point it would have to go back?

MCGRATH: Yes.

…

MCGRATH: If her Honour was going to reject that defence it would be necessary for her Honour to in fact consider the credit of Mr McMillan, and that wasn’t done, there is no finding in relation to it, and there is no basis on which I could make any more of it than I have.”

161. Mr McMillan submitted that the primary judge correctly held the defence under s 588H had been made out. It was submitted that the submissions of Mr McMillan at first instance, set out above at [152] and accepted by the primary judge, “form the grounds by which Mr McMillan’s expectation of solvency was reasonable”. In this regard, it was emphasised that Mr McMillan “had been running a successful business for 20 years” and “had developed and enjoyed a strong relationship with the McMillan Group’s bank, CBA, and loyal customers” who had previously extended finance to the group. It was submitted that Mr McMillan “was expanding his business and incurring new debt, but was prudent and cautious in doing so” and that this was not a case where the company was failing and falling into greater indebtedness with no prospect of recovery. Mr McMillan was engaged in a new venture and based on results from trading at his temporary premises, he expected to be successful and profitable.

162. With respect to the latter point, at the conclusion of oral argument, counsel for Mr McMillan drew to the Court’s attention certain evidence as to performance reports for Volkswagen dealerships across Australia in the relevant period in order to demonstrate “a strongly performing business during the course of 2006”. The intention in so doing was explained by counsel for Mr McMillan as follows:

“This highlights the retrial issue, because if what's going to happen is that there is going to be a finding made with respect to what Mr McMillan considered during this period, there has to be a finding of credit made against him that he didn't have sufficient expectation that they would be generating sales such that profits would be generated within a relatively short period of time, and it highlights again the point of the commercial realities of what is happening here. This is a start up business which is making its way up through the top sellers of this product to the whole of Australia. I put that submission to indicate why it would be appropriate to send this back with respect to consideration of the defences that were raised.”

Consideration of s 588H defence

163. Section 588H(2) provides a defence in proceedings for a contravention of s 588G(2), including in proceedings for compensation under s 588M, if it is established that at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. There are thus two elements to be established before this defence was established by Mr McMillan. The first element is that Mr McMillan had reasonable grounds to expect that, at the relevant times, McMillan Prestige was solvent, and would remain solvent. The second concerns Mr McMillan’s actual expectation as to those matters.

163. Austin J explained the first requirement in the following terms in Tourprint International Pty Ltd (in liq) v Bott at [67]:

“’Expectation’, as required by s 588H(2), means a higher degree of certainty than ‘mere hope or possibility’ or ‘suspecting’. The defence requires an actual expectation that the company was and would continue to be solvent, and that the grounds for so expecting are reasonable. A director cannot rely on a complete ignorance of or neglect of duty and cannot hide behind ignorance of the company's affairs which is of their own making or, if not entirely of their own making, has been contributed to by their own failure to make further necessary inquiries.” (citations omitted)

165. This approach was adopted by Palmer J in Hall v Poolman at [262] and by Goldberg J in McLellan v Carroll (2009) 76 ACSR 67; [2009] FCA 1415 at [170].

166. In relation to the second issue, Mr McMillan’s expectation that McMillan Prestige was solvent and would remain solvent when the relevant debts to Treloar were incurred, it would have been necessary for the primary judge to consider the credit of Mr McMillan had her Honour taken a different view on the anterior issues. The inability of this Court to make findings of credit in that regard is trite.

167. However, whatever the findings in that respect might have been, it is clear that Mr McMillan’s expectation of solvency is not enough. There must have been reasonable grounds for that expectation. A consideration of the submissions of Mr McMillan relied on by her Honour in adopting the view that Mr McMillan had reasonable grounds to expect that McMillan Prestige was solvent at the relevant times does not obviously attract the same difficulties as to the lack of credit findings by the primary judge.

168. What constitutes reasonable grounds for an expectation of solvency has been considered in a number of decided cases. The courts have been critical of reliance on the possibility or hope of future successful trading as the basis for such an expectation. As was explained in Hall v Poolman at [265]:

“In order for the defence to succeed, there must be an expectation, held on reasonable grounds, that recourse to assets will enable debts to be paid, not at some indefinite time in the future, but so as to keep the companies solvent according to the definition in CA s.95A, namely, as the debts fall due for payment. It is not appropriate to base an expectation of solvency: ‘… upon the prospect that [the company] might trade profitably in the future thereby restoring its financial position. … The question is whether the company at the relevant time is able to pay its debts as they become due not whether it might be able to do so in the future if given time to trade profitably …’: Sheahan v Hertz Australia Pty Ltd (1995) 16 ACSR 765, at 769.”

169. These remarks highlight the fundamental difficultly in the proposition that the possibility of future success or business profitably could provide reasonable grounds for a present expectation of solvency at the relevant time. It is these difficulties which seem to have occupied Goldberg J in McLellan v Carroll at [179]:

“Mr Carroll also submitted that he had reasonable grounds to expect that the company was solvent during the relevant period because of Mr Rule’s advice to him that the problems with the kilns were solvable. However, that advice was not such as to give Mr Carroll a ground, let alone a reasonable ground, to expect that the company was solvent throughout the relevant period at the time that Mr Rule gave him that advice. Mr Rule’s evidence was that he believed that eventually the kilns could be made to work and that it was just a matter of working out what the problem was. Mr Rule also said that eventually he reached a conclusion that the most immediate problems lay with the pre-drying kilns and that these needed to be resolved so that the effectiveness of the final drying kiln could be properly analysed. This evidence provided no ground to enable Mr Carroll to form any view as to the solvency of the company during the relevant period.” (emphasis added)

170. The same problems attend any reliance on the Volkswagen Australia performance tables. Performance in the league tables, although potentially indicative of present and future business success, does not establish an expectation of solvency on the part of Mr McMillan at the relevant times, unless there were other bases upon which that expectation could be based. An entity could be the first or second most successful car dealership and still be insolvent.

171. In line with our reasoning above, and Treloar’s submissions, the letter from Volkswagen Australia could not provide reasonable grounds for an expectation of solvency on Mr McMillan’s part. As outlined in [110] above, Mr McMillan was aware that the procedures contemplated in the letter of intent had not been put in place and that construction had commenced without Volkswagen Australia having signed off on the design specifications, colours and dealership branding of the showroom.

172. Similarly, the existence of the CBA overdraft facility could not provide reasonable grounds for an expectation of solvency. Mr McMillan acknowledged, at least in cross-examination, that the CBA could have demanded repayment of the overdraft facility at any time. Further, there is force in Treloar’s submission that previous finance from the private lenders could not provide reasonable grounds for an expectation of solvency by Mr McMillan in the absence of any evidence as to ongoing or future support.

173. The balance of the submissions accepted by the primary judge, and the submissions advanced by Mr McMillan on the appeal, go to detailing Mr McMillan’s history in running the business and his practice of obtaining and reviewing multiple quotations and of making arrangements for progress payments. As Treloar submitted, none of this material goes to establishing that Mr McMillan had reasonable grounds for expecting solvency at the relevant times. The bare proposition that “Mr McMillan was expanding his business and incurring new debt, but was prudent and cautious in doing so” does not of itself demonstrate that Mr McMillan had reasonable grounds for expecting that McMillan Prestige was solvent at the time it incurred the relevant debts to Treloar.

174. The evidence that was available indicated that the group was running a net deficiency in each of the months August 2005 to January 2006. Even prior to the correspondence referred to above concerning cost overruns, McMillan Prestige was late in paying its invoices, for example, in March and April 2006. Indeed, in the months immediately prior to the relevant debts to Treloar being incurred, Mr McMillan himself admitted in the 17 December 2005 letter that it was “a very very tough time” for McMillan Prestige and the McMillan Group and that “[o]ur company does not have any resources at present … We are really stretched”.

175. This material tends strongly against Mr McMillan having had reasonable grounds for expecting solvency at the relevant times. The onus was on him to establish otherwise. In that regard, and bearing in mind Mr McMillan’s onus, we would incline towards the view that the foreshadowing of evidence from the McMillan Group external accountant by the notice of motion was sufficient to establish Mr Vince’s availability, at least in circumstances where no reason was provided why evidence from Mr Vince was not adduced. If that is the case, the failure to adduce evidence from Mr Vince more readily enables the Court to draw a positive inference that Mr McMillan had no reasonable grounds for an expectation of solvency.

176. For these reasons, and notwithstanding the lack of detailed findings by the primary judge, we are of the view that any s 588H defence is bound to fail. We would therefore reject the defence.

Orders

177. The orders of the Court are:

(1)   Appeal allowed;

(2)   Set aside the orders made in the District Court and, in lieu thereof, direct the entry of judgment for the plaintiff in the sum of $418,991.77 together with interest and order the defendant to pay the plaintiff’s costs;

(3)   The respondent to pay the appellant’s costs of the appeal and to have a certificate under the Suitors’ Fund Act 1951 (NSW) if so entitled.

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Decision last updated: 06 April 2017