Trinick as Liquidator of Australian Foods Company Pty Ltd (in liq) v Keller
[2009] WASC 298
•30 OCTOBER 2009
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: TRINICK as Liquidator of AUSTRALIAN FOODS COMPANY PTY LTD (in liq) -v- KELLER [2009] WASC 298
CORAM: MURPHY J
HEARD: 11-12 MAY & 3 AUGUST 2009
DELIVERED : 30 OCTOBER 2009
FILE NO/S: COR 188 of 2008
BETWEEN: GLENN DOUGLAS TRINICK as Liquidator of AUSTRALIAN FOODS COMPANY PTY LTD (in liq) (ACN 081 404 686)
Plaintiff
AND
DAVID KELLER
JODIE KELLER
Defendants
Catchwords:
Unfair preference - Insolvency - Good faith - Suspicion of insolvency - Reasonable grounds - Reasonable person in the person's circumstances - Continuing business relationship - Running account
Legislation:
Corporations Act 2001 (Cth), s 95A, s 588FA, s 588FE(2), s 588FF(1), s 588FG(2)(a)&(b)
Result:
Plaintiff succeeds on all alleged preference payments
Category: B
Representation:
Counsel:
Plaintiff: Mr C M Slater
Defendants: Mr K L Christensen
Solicitors:
Plaintiff: Wojtowicz Kelly
Defendants: Gadens Lawyers
Case(s) referred to in judgment(s):
Quick v Stoland Pty Ltd (1998) 87 FCR 371
Re Action Waste Collections Pty Ltd (in liq) [1981] VR 691
Smith v Commissioner of Taxation (1997) 75 FCR 339
Trinick as Liquidator of Australian Foods Company Pty Ltd (in liq) v EM & RM Williams & Sons [2009] WASC 297
MURPHY J:
Introduction
In these proceedings the plaintiff, who is the liquidator of Australian Foods Company Pty Ltd (in liq) (the Company), applies under s 588FF of the Corporations Act 2001 (Cth) (the Act) for orders that the defendants pay to the Company an amount of $190,000 in respect of transactions alleged to be unfair preferences within the meaning of s 588FA of the Act. These proceedings were heard in conjunction with other preference proceedings brought by the same liquidator in respect of the same company in COR 186 of 2008: Trinick as Liquidator of Australian Foods Company Pty Ltd (in liq) v EM & RM Williams & Sons [2009] WASC 297. As discussed below, much of the evidence on the issue of insolvency was common to both proceedings.
Between 24 June 2004 and 1 September 2004 the Company paid the defendants the following sums on or about the following dates, totalling $190,000 (the payments):
24 June 2004
$
50,000
2 July 2004
$
25,000
9 July 2004
$
25,000
15 July 2004
$
20,000
23 July 2004
$
20,000
4 August 2004
$
20,000
31 August 2004
$
10,000
1 September 2004
$
20,000
It is common ground between the parties that:
(a)the payments were made by the Company to the defendants;
(b)the payments are transactions within the meaning of the Act;
(c)the relation‑back day for the Company, within the meaning of s 588FE(2), is 15 December 2004;
(d)for the purposes of s 588FA(1)(b) of the Act, the transactions result in the defendants receiving from the Company, in respect of the unsecured debt that the Company owes to the defendants, more than the defendants would receive from the Company in respect of the debt if the transactions were set aside and the defendants were to prove for the debt in the winding up of the Company.
It is also common ground that the issues in the case are:
(a)whether the Company was insolvent at the time of the payments;
(b)whether the payments were received by the defendants in good faith within the meaning of s 588FG(2)(a) of the Act;
(c)whether, at the time of receiving the payments:
(i)the defendants had no reasonable grounds for suspecting that the Company was insolvent at that time or would become insolvent within the meaning of and for the purposes of s 588FG(2)(b)(i) of the Act; and
(ii)a reasonable person in the defendants' circumstances would have had no such grounds for so suspecting within the meaning of and for the purposes of s 588FG(2)(b)(ii) of the Act.
(d)whether the payments were an integral part of a continuing business relationship within the meaning and for the purposes of s 588FA(3) of the Act, and if so, the consequences of that.
The Company at all material times operated a business of trading grains and pulses. 'Pulse' is the edible seeds of leguminous plants such as beans. The defendants at all material times were growers of pulse and grain in Victoria and, in all their dealings with the Company, acted through Mr David Keller (the first‑named defendant). The Company had only one director, Mr Pavan Shivnani. His wife, Ms Kanchan Aswani was, according to Mr Keller, 'second‑in‑charge' at the Company.
The objective course of dealings between the defendants and the Company is largely not in dispute, and is principally recorded in, or is to be inferred from, the contemporaneous documents put into evidence and certain uncontested affidavit evidence. The dealings related to two contracts for the supply of grain to the Company entered into in 2003. I accept Mr Keller's account of background matters in respect of the formation of the contracts and the delivery of grain pursuant to those contracts. Other than with respect to those background matters, I have serious reservations about his credibility as a witness as discussed later in these reasons. The principal factual differences between the parties centred on the extent to which the defendants were concerned about, and were in telephone contact with, the Company regarding payment of outstanding moneys. Mr Keller said, in effect, in cross‑examination that he was not concerned about the Company's failures to pay the defendant and that his telephone contact with the Company 'could have been' about subjects other than payment, such as grain.
As regards telephone contact, the plaintiff put into evidence numerous internal emails of the Company which recorded that Mr Keller, or his wife, had called enquiring as to payment and pressing for their calls to be returned. The plaintiff also put into evidence a log of calls made by the Company to Mr Keller. The emails and log of calls provide evidence of the extent of the telephone contact between the plaintiff and the defendants. In light of the references in the emails to the defendants' calls for payment, the fact of delivery of grain by the end of 2003, and having regard to the failure by the Company to discharge its debts due to the Company in a timely manner and the size of those debts, and bearing in mind my reservations as to Mr Keller's reliability, I find that the subject matter of the telephone contact in the period from at least early March 2004 was the defendants' requests or demands for payment of the debts due to them.
The extent to which the defendants had concerns regarding payment is addressed in the section of these reasons dealing with the findings in respect of s 588FG(2) of the Act.
The course of dealing between the Company and the defendants
In about June 2003 Mr Keller, on behalf of the defendants, became aware that the Company was seeking to purchase grain through advertisements in various publications including The Weekly Times newspaper. Prior to then the defendants had sold their grain under contracts with the Australian Barley Board (ABB) and the Australian Wheat Board (AWB).
On 23 October 2003 Mr Keller caused the defendants to enter into two contracts for the sale of grain to the Company.
The first contract, no V300249 (the barley contract) was for the sale of 5,500 metric tonnes (mt) of barley (plus or minus 10%) at a price of $185 per mt delivered to GrainCorp at its Rainbow warehouse. Delivery was to be effected by the defendants delivering the required quantity of barley to GrainCorp's Rainbow facility by 30 December 2003. The Company agreed to pay 50% of the purchase price of the grain delivered 30 days from the end of the month of delivery (ie, by 30 January 2004 if delivery was on time), and the remaining 50% two months after that (ie, by 30 March 2004).
The second contract entered into on 23 October 2003 was for the sale of 300 mt of wheat into the Company's 'harvest plus pool' arrangement. The contract, no V300252 (the wheat contract) required the wheat to be delivered to GrainCorp's Rainbow facility by 30 December 2003. The Company agreed a guaranteed minimum price of between $183 and $193 per mt, depending on the type of wheat delivered. Payments were required as to 30% of the guaranteed minimum price by 31 March 2004, 40% of the guaranteed minimum price by 31 August 2004, and the balance by 30 April 2005. The Company agreed to pay interest at a rate of 6% per annum.
In accordance with those contracts, the defendants delivered the agreed amounts of barley and wheat to GrainCorp's silo at Rainbow, Victoria, on or before 30 December 2003.
On 22 January 2004 Mr Ervin Leong of the Company wrote to Mr Keller in these terms:
Dear David
Thank you for your continued support.
Please find attached a copy of our shipping schedule for the 5000mt barley Order.
As a valued partner we wish to keep you fully informed of this transaction. We do however ask that you maintain strict confidentiality on the details provided to you from time to time.
Grain Corp has expressed without reservation (to my CEO earlier today) that they do not have any obligation to speak or assist us in any way what so ever, so you are our man. We are relying on you to assist us with this hallmark transaction and set precedence for future transaction, which I'm sure will liberate the grain growing community of stifling competition.
We now require your assistance to obtain for us, early on Friday morning. Confirmation that
1.The grain is available for outturn on Friday or Saturday onwards (excluding Sunday)
2.There is a total of 5000 mt for outloading to meet the contract.
Upon receiving the confirmation (as early as possible) we will be making a Telegraphic transfer to GrainCorp for the outturn fees. We'll also provide them with our bankers contact to ensure they can confirm full clearance of the funds in order to provide us the release details.
On 30 January 2004 the Company paid the defendants $200,000.
The Company issued five invoices dated 31 January 2004, numbered 51027, 51028, 51029, 51030 and 51031, in respect of the Company's obligations to the defendants under the barley contract. The amounts the subject of the invoices totalled $814,202.89:
Invoice Number
Amount
51027 (31 January 2004)
$163,339.35
51028 (31 January 2004)
$229,472.08
51029 (31 January 2004)
$246,048.20
51030 (31 January 2004)
$111,559.59
51031 (31 January 2004)
$63,783.67
The Company issued further invoices dated 1 March 2004, numbered 51390, 51391 and 51392, in relation to the barley contract, totalling $140,764.40 as follows:
Invoice Number
Amount
51390 (1 March 2004)
$20,856.54
51391 (1 March 2004)
$101,782.82
51392 (1 March 2004)
$18,125.04
In relation to the barley contract, 50% of the total amounts invoiced fell due and payable by 30 January 2004. The remaining 50% fell due and payable on 30 March 2004. In other words, $407,101.45 of the amounts invoiced on 31 January 2004 fell due and payable on 30 January, and $70,382.20 of the amounts invoiced on 1 March 2004 had fallen due and payable on 30 January 2004. Like amounts fell due and payable on 30 March 2004.
On 11 March 2004 Mr Keller was in telephone contact with the Company demanding payment of moneys due to the defendants in respect of the first, 50%, payment under the barley contract. This resulted in the payment of $50,000 by the Company to the defendants on 12 March 2004. This payment, even with the payment of $200,000 on 30 January 2004, was nowhere sufficient to satisfy the amount then due by the Company to the defendants. Mr Keller again telephoned the Company seeking payment on 15 March 2004. No payment was then made. Ms Aswani telephoned Mr Keller on 19 March 2004 and promised a further payment. This resulted in a payment of $50,000 on or about 22 March 2004.
On 24 and 26 March 2004 Mr Keller was in further telephone contact with the Company demanding payment of outstanding debt. These communications resulted in the Company paying the defendants $30,000 on 26 March 2004.
On 26 March 2004, the Company also raised invoice no 51799 by which it reversed the receival charges which had been deducted in the Company's previous invoices to the defendants. The effect of the reversal was to acknowledge a further debt owed by the Company to the defendants in the sum of $40,958.30.
Mr Keller was in further telephone contact with the Company seeking payment on a number of occasions in the period 26 March to 8 April 2004. These communications eventually resulted in the payment by the Company of $50,000 on or about 9 April 2004.
On 31 March 2004, the first, 30%, instalment payment under the wheat contract had fallen due for payment. As recorded in the Company's invoices numbered 53067 and 53069 (see [55] below), this 30% instalment was in the sum of $16,333.76.
Mr Keller was in telephone contact with the Company on various occasions in mid to late April 2004, and in early to mid‑May 2004 demanding payment. He spoke to Mr Shivnani. Despite speaking to the Company's most senior officer, no payment was forthcoming in this period.
The Company sent a facsimile to Mr Keller dated 21 May 2004 in which it stated that it would make a payment of $25,000 per week 'starting from today until payment is complete'.
In these proceedings each party has indicated that it does not contend that the letter of 21 May 2004 constituted, or contributed to, or resulted in, a binding variation to the barley contract or to the wheat contract whereby the time for payment was extended. Nor did either party contend for any estoppel in that regard. Both parties submitted that the original terms of the barley and wheat contracts governed the dates for payment under those contracts.
Despite the arrangement proposed under the 21 May 2004 letter, no payment was made that day.
The next date for the proposed payment of $25,000 under the 21 May letter was 28 May 2004. No payment was made.
On 2 June 2004 the Company made a payment of $25,000.
4 June 2004 was the next proposed date for payment of $25,000 under the 21 May letter. No payment was made.
On 9 June 2004 Mr Keller was in telephone contact with the Company seeking payment. No payment was made.
11 June 2004 was the next proposed date for payment of $25,000 under the 21 May letter. No payment was made.
The next date for the payment proposed under the 21 May letter was 18 June 2004. On the same day, Mr Keller was in telephone contact with the Company seeking payment. No payment was made.
On 23 and 24 June Mr Keller was in telephone contact with the Company seeking payment. On 24 June 2004 the Company paid the defendants $50,000.
25 June 2004 was the next proposed date for payment of $25,000 under the 21 May letter. Mr Keller was again in telephone contact with the Company seeking payment. No payment was made.
On 30 June 2004 The Weekly Times published an article adverse to the Company entitled 'Growers Still Waiting Payment'. The article referred to investigations undertaken by the paper which indicated that growers in Victoria, Western Australia and South Australia had been waiting months to be paid for grain contracted to the Company and that growers had claimed that they had been sent forward‑dated cheques, unsigned cheques and cheques that had bounced. The article also reported that a Perth legal firm had advised more than 1,000 of its farming clients not to deal with the Company after the Company had rejected plans to improve security for payments to farmers. The report also indicated that it had seen copies of what appeared to be forward‑dated cheques. The article also stated that Mr Shivnani had said that there had not been a 'general epidemic' of late payments across Victoria, Western Australia and South Australia but that there had been some cases of late payments, due to a lack of shipping and container space. Mr Shivnani was reported to have denied that there had been any defaults under the contracts or any forward‑dated cheques.
In the business section of the same paper on the same day, the paper carried an article at page 72 under the heading 'Growers Pursue Trader'. The article referred to various court cases against the Company, the largest one of which was for nearly $170,000, by a Western Australian farming business, J & L Smith & Son of Mukinbudin. The report also detailed claims by solicitors and accounting firms against the Company. On the same page there was a further article headed 'Fight Over Wheat Price'. That article outlined claims by a Western Australian grower against the Company in respect of wheat delivered in 2002.
On 30 June 2004 Mr Keller was in further telephone contact with the Company seeking payment.
2 July 2004 was the next proposed date for payment of $25,000 proposed under the 21 May letter. Payment in that amount was made that day.
The Weekly Times, on 7 July 2004, published further articles adverse to the Company. On page 72 in the business section, there were two articles. One was headed 'Caution Before Signing' and the other was headed 'Perth Companies Accused of Imitation'. The first article referred to various features of the Company's contracts and stated that grain growers 'should carefully read the payment details before signing'. The second article referred to allegations by a commodity inspection company, SGS Australia Pty Ltd, said to be the Australian subsidiary of a Swiss company SGS SA which was founded in 1878 and had more than 1,000 offices and laboratories worldwide, that companies associated with Mr Shivnani had, in effect, copied its certificate, stationery and logo.
On 9 July 2004 Mr Keller was in telephone contact with the Company regarding payment. Payment in the sum of $25,000 was made.
On or about 13 July 2004 Mr Keller was in telephone contact with the Company demanding that the Company bring the proposed scheduled payments up to date.
On 15 July 2004 $20,000 was paid, but the Company was still behind in its scheduled payments under the 21 May letter.
16 July 2004 was the next date for payment proposed under the 21 May letter. Mr Keller was again in telephone contact with the Company seeking payment. Payment was not made.
23 July 2004 was the next date for the proposed payment of $25,000 under the 21 May letter. A payment of only $20,000 was made on that day.
30 July 2004 was the next date for the proposed payment of $25,000 under the 21 May letter. No payment was made.
On 4 August 2004 a payment was made in the sum of $20,000.
6 August 2004 was the next date for the proposed payment of $25,000. No payment was made.
13 August 2004 was the next date for the proposed payment under the 21 May letter. On the same day, Mr Keller was in telephone contact with the Company seeking payment. No payment was made.
20 August 2004 was the next date for the proposed $25,000 payment under the 21 May letter. No payment was made.
On 20, 23 and 24 August 2004 Mr Keller was in telephone contact with the Company seeking payment. No payments were then made.
The next date for payment proposed under the 21 May letter was 27 August 2004. Mr Keller was in telephone contact with the Company regarding payment. No payment was made that day.
On 30 August 2004 Mr Keller was again in telephone contact with the Company seeking payment.
On 31 August 2004 payment was made in the sum of $10,000. On the same day Mr Keller was in telephone contact with the Company regarding payment. On 1 September 2004, payment was made in the sum of $20,000.
On 1 September 2004 the Company issued invoice numbers 53067 and 53069 for $11,153.09 and $5,180.67 respectively in respect of the first, 30%, tranche under the wheat contract. It also issued invoices numbered 53068 and 53070 in respect of the second, 40%, tranche under the wheat contract, totalling $21,775.48.
3 September 2004 was the next date for the proposed payment under the 21 May letter. Mr Keller was in telephone contact with the Company on 2 September 2004 regarding payment. No payment was received that day.
No further payments were made after 1 September 2004.
Summary of the Company's liabilities and payments to the defendants
The Company's liabilities to the defendants (excluding interest accrued and payable) and its payments to the defendants may be summarised as follows:
Liabilities: Year ended 30 June 2004
Invoice no
Amount payable
Contractual date payable
Barley contract
51027 - 51031
$407,101.45
30/1/04
51390 - 51392
$70,382.20
30/1/04
51027 - 51031
$407,101.45
30/3/04
51390 - 51392
$70,382.20
30/3/04
Reversal of receival charges
51799
$40,958.30
26/3/04
Wheat contract
53067 & 53069
$16,333.76
31/3/04
TOTAL
$1,012,259.36
Payments: Year ended 30 June 2004
30/1/04
$200,000
12/3/04
$50,000
22/3/04
$50,000
26/3/04
$30,000
9/4/04
$50,000
2/6/04
$25,000
24/6/04
$50,000
TOTAL
$455,000
Amount unpaid as at 30 June 2004
$557,259.36
Liabilities: As at 1 September 2004
c/f from 30/6/04
$557,259.36
40% instalment wheat contract (invoice nos 53068, 53070 - contractual date payable 31/8/04)
$21,775.48
TOTAL
$579,034.84
Payments: 1 July ‑ 1 September 2004
2/7/04
$25,000
9/7/04
$25,000
15/7/04
$20,000
23/7/04
$20,000
4/8/04
$20,000
31/8/04
$10,000
1/9/04
$20,000
TOTAL
$140,000
Amount unpaid as at 1 September 2004
$439,034.84
Principles in relation to insolvency
I have considered the principles in proceedings COR 186 of 2008: Trinick v EM & RM Williams [92] ‑ [110]. I refer to the reasons for judgment in that matter and will not repeat the principles here.
Insolvency - the evidence generally
The evidence adduced by the plaintiff on the issue of insolvency comprised:
(a)the affidavit of Mr Barry Honey, who was appointed receiver and manager of the Company on 29 October 2004;
(b)parts of the affidavit of the plaintiff sworn 12 December 2008;
(c)parts of the affidavit of the plaintiff sworn 6 April 2009.
The defendants did not adduce any evidence on insolvency and did not cross‑examine Mr Honey or the plaintiff on their affidavits.
Mr Honey's evidence
Mr Honey's affidavit is the same affidavit which the plaintiff relied on in COR 186 of 2008. Mr Honey annexed a copy of his reports dated 30 November 2004 (first report) and 15 December 2004 (second report). Mr Honey's reports were directed to the ascertainment of the financial position of the Company as at the date of his appointment, 29 October 2004. However, in the course of his first report, he also canvassed the historical position of the Company as at 30 June 2002, 30 June 2003, 30 June 2004 and in the period 1 July ‑ 30 October 2004. Mr Honey's evidence was, relevantly, to the following effect.
The Company maintained information in relation to its activities on a computer based system supplemented by certain hardcopy source documents. Its financial transactions were recorded on computerised accounting systems. In addition, the Company maintained physical hardcopy files of supporting documentation. Up to 30 June 2003, the Company used an accounting system known as QuickBooks. On 1 July 2003 the accounting data was transferred from QuickBooks to a system known as ACCPAK.
There were some substantial differences, in aggregate terms, between the results as at 30 June 2003, and the results as at 1 July 2003, when the transfer to ACCPAK occurred. There were also differences between the QuickBooks and ACCPAK figures and the Company's balance sheet as at 30 June 2003, which was included in its tax return for that year (the tax return balance sheet). Relevantly (pars 4.8 ‑ 4.10 of the first report), the two computerised systems and the tax return balance sheet showed the following:
QuickBooks Balance Sheet
Tax Return Balance Sheet
ACCPAK Balance Sheet
30 June 2003
30 June 2003
1 July 2003
Current assets
$875,684.13
$1,552,276.69
$618,856.68
Current liabilities
$3,473,102.12
$1,967,159.29
$2,627,294.44
Total assets
$1,579,208.99
$1,594,423.34
$1,601,554.46
Total liabilities
$3,193,929.20
$3,402,798.60
$2,627,294.44
Net assets
($1,614,720.21)
($1,808,375.26)
($1,025,739.98)
Loss for period
($684,475.63)
($95,495.40)
Retained losses b/f
($1,106,108.58)
($1,106,108.58)
Negative shareholders equity
($1,614,720.21)
($1,808,375.26)
($1,025,739.98)
Accumulated losses
($1,984,239.26)
The principal differences between the QuickBooks figures and the ACCPAK figures for the year ended 30 June 2003 were that the former included an additional $256,827.45 in inventory in current assets, and an additional $845,807.68 in accounts payable in current liabilities.
Mr Honey said in his first report (at pars 4.11 and 4.12):
The accounts as at 30 June 2003 included in the company's tax return reflect a substantially poorer financial position and profit performance than the balance sheet information included in both the Quickbooks System and the ACCPAK System as at 30 June 2003. Further investigation of the differences between the respective balance sheets is necessary to determine the reasons for the differences and whether the opening position adopted for the financial year commencing on 1 July 2003 reasonably reflects the financial position of the company at that time.
The analysis above indicates that anomalies in the company's accounting system and accounts may date back to as early as 30 June 2003.
The tax return balance sheet also recorded the Company's assets and liabilities as at 30 June 2002, including as follows:
Current Assets
$
260,286
Current Liabilities
$
2,229,529
Total Assets
$
309,700
Total Liabilities
$
2,229,529
Negative Shareholders Funds
($
1,919,832)
Mr Honey summarised in his first report (par 4.13) a comparison of two balance sheets for the Company as at 30 June 2004, which he says had been annexed to an affidavit of Peter Darroch sworn 26 October 2004 referred to as 'PJD1' and 'PJD2'. He did not annex the balance sheets, nor Mr Darroch's affidavit. The financial information to which he referred is as follows:
30 June 2004 Balance sheet PJD1
30 June 2004 Balance sheet PJD2
Inventory on hand
$2,747,832.06
$4,260,018.56
Total assets
$4,371,361.66
$5,883,548.16
Accounts payable
$4,196,589.86
$2,938,247.31
Accounts payable clearing
$759,854.63
$1,856,786.47
Directors loan account
$264,129.79
$1,776,316.29
Total liabilities
$5,496,932.53
$6,847,708.32
Net deficiency in shareholder funds
($1,125,570.87)
($964,160.16)
Mr Honey then referred, in pars 4.14 ‑ 4.19, to certain anomalies in the financial information concerning the Company's position in 2004. He referred to substantial journal adjustments, which he later indicates were carried out in October 2004, as having the effect of reducing recorded liabilities; information from Mr Shivnani to the effect that the accounting system vastly overstated assets and understated liabilities; information which indicated that the aged creditors listing was likely to significantly understate the amounts owing to creditors; and other anomalies set out in section 5 of his report. (Section 5 also deals with the overstatement of assets and the understating of liabilities as at 31 October 2004.)
He concluded section 4 of his first report (par 4.20):
On the basis of the observations that I have made above, it is clear that the financial information provided by the company's accounting system should be viewed with caution and it is therefore necessary to seek confirmation of the position in relation to both assets and liabilities of the company from external sources wherever this is possible.
Mr Honey summarised his findings on the financial position of the Company as at 29 October 2004 as follows (par 5.5):
Whilst there are some information gaps and concerns over the reliability of information being obtained from the company's accounting system, it is evident from the limited review I have been able to undertake since the date of my appointment that the company has very little in the way of valuable assets and the company has very significant amounts owing to creditors. The balance sheet sourced from the company's records indicates that the company has a deficiency in excess of $1 million, while the information obtained from the director suggests that the deficiency is more likely to be in excess of $3 million. The Estimated Report as to Affairs that I have prepared from the information I have obtained suggests a shortfall exceeding $7.2 million. It is evident that the company is in a very weak financial position with no capacity to fund any restructuring plan or turnaround strategy from its own resources.
Accordingly, Mr Honey concluded that the Company had a deficiency of assets in excess of $7 million as at 29 October 2004. In the text of his affidavit he said that based on his reports, he was of the opinion that the Company was insolvent as at 30 November 2004.
In relation to the Company's profit and loss position Mr Honey said (at par 6.4.9 of his first report):
I have sighted financial statements for the financial years ended 30 June 2002, 2003, and 2004 that indicate the following profit or loss being derived in each year:
Year ended:
Reported profit/(loss)$
30 June 2002
($340,613)
30 June 2003
($356,616)
30 June 2004
$489,149
There is an anomaly in the accounts as at 30 June 2004 in that the balance sheet as at 30 June 2004 records accumulated losses brought forward from 30 June 2003 of $1,790,584 whereas the balance sheet as at 30 June 2003 records accumulated losses totalling $1,984,239. The accumulated losses brought forward amount should be equivalent to the total accumulated losses reported in the prior financial year's balance sheet. I have no explanation for the difference of $193,655. There are other anomalies in the accounting records at this time that are addressed in section 4 of this report. However, while there are anomalies that are yet to be explained, the financial statements indicate that the company has a history of incurring trading losses and that the result for the year ended 30 June 2004 appears to have been against the trend. Further, the estimated deficiency of assets as at the date of my appointment estimated to be in excess of $7 million (refer to section 5 of this report) compared to the deficiency of assets reported in the accounts for the year ended 30 June 2004 of $1.125 million indicates that further substantial losses have been incurred during the period from 1 July 2004 up to the date of my appointment and, due to the magnitude of the deterioration in the estimated financial position over the period, may well indicate that the results for the year to 30 June 2004 overstated the financial performance of the company for that year and the company's financial position as at 30 June 2004.
Section 6 of Mr Honey's first report dealt with the Company's cash flow outlook and the viability of its business. These matters were also considered in section 8 of his first report. Although his observations were in the context of addressing the Company's prospects of trading beyond 30 November 2004, he was nevertheless considering the essential nature of the business and the general characteristics necessary for it to trade as a going concern. He identified five 'critical success' factors for the Company to trade so as to be in a position to pay its liabilities as and when they fall due. The five factors he identified were the ability to:
(a)sell large quantities of grain to customers in niche markets while maintaining a positive reputation with purchasers (par 6.1.1) (the 'ability to sell factor');
(b)source the grain from farmers with competitive pricing and payment while maintaining a positive reputation with farmers (par 6.1.2) (the 'ability to source factor');
(c)have good access to appropriate infrastructure to handle the grain (par 6.1.3) (the 'infrastructure factor');
(d)maintain a satisfactory relationship with regulatory and licensing authorities (par 6.1.4) (the 'regulatory compliance factor');
(e)manage cash flow to pay creditors as and when the creditors' accounts fall due for payment (par 6.1.5) (the 'cash flow management factor').
Mr Honey said there was no evidence of achieving the critical success factors to which he referred.
As to the 'ability to sell' factor, Mr Honey considered that there was no good evidence that the Company could achieve significantly higher sales than had been achieved to 30 June 2004 (par 6.4.2). It is to be inferred from this evidence that Mr Honey considered that the Company would have needed to achieve higher sales in the next financial year than it did in the 12 months to 30 June 2004, if it were to survive.
As to the 'ability to source' factor, he said that the Company's capacity to purchase grain was likely to have been diminished due to the poor reputation the Company had developed as a result of its recent dealings with farmers, from press articles and by reason of various legal proceedings that had been taken against the Company (par 6.4.4). He referred in that regard to a small sample of correspondence, which he annexed.
The sample correspondence and summary of legal proceedings included complaints from, and claims for payment by, creditors going back to October 2003. The sample press articles to which Mr Honey referred were for the period September ‑ November 2004. I would interpolate here, however, that, as I have already mentioned, the Company had been the subject of adverse press on 30 June and 7 July 2004.
In relation to the infrastructure factor, Mr Honey's affidavit also noted (par 6.4.5, and see also annexure 4) that the Company had experienced difficulties in storing and packing grain for export. According to his first report, the difficulties went back to November 2003. Mr Honey also referred to the fact that shipping and storage companies had required payment in advance.
In relation to the 'regulatory compliance' factor, Mr Honey (par 6.4.7) referred, inter alia, to problems within the Wheat Marketing Board and to correspondence from Australian Quarantine & Inspection Service (AQIS) indicating that AQIS was investigating three alleged breaches of the Wheat Marketing Act in respect of consignments shipped by the Company in August 2003 ‑ March 2004. It was alleged that the Company had misstated the nature of the consignments as a result of which it had failed to obtain the relevant statutory export consent.
In relation to the 'cash flow management' factor, Mr Honey (pars 6.4.8 ‑ 6.6), in effect, stated that having regard to the Company's historical trading performance, there was nothing to indicate that the Company could operate profitably in the short to medium term, and that in the absence of an injection of significant funds from an external source, it was likely that creditors' accounts would not be paid as and when they fall due.
Section 7 of Mr Honey's first report gave further consideration to the historical performance of the Company prior to 29 October 2004. He said, relevantly, at par 7.2:
At the date of my appointment, [the Company] appears to have had liabilities that had fallen due [for] payment substantially in access [sic] of the assets available in the company. It appears that the payment of those liabilities is well beyond the means available to the company to pay the accounts concerned. Further, there are indications that the company had not been trading profitably for a number of years with little or no prospect of trading profitably in the foreseeable future (refer to section 6 of this report). The company has exhibited a significant deficiency in shareholder funds over several years and there is evidence of creditors actively pursuing recovery of overdue accounts over an extended period through telephone calls, correspondence, and formal recovery proceedings.
In the conclusion of his first report, in section 8, Mr Honey further considered the prospect of the Company obtaining an injection of funds, either from an external investor or from creditors seeking to convert debt to equity. Mr Honey said:
8.1.1.1Any rational investor would be likely to require a due diligence review of the company's financial position and business undertakings before committing to the investment. The investor would be looking for value in the investment and would likely not be willing to see the investment simply be utilised in paying old creditor accounts. The due diligence review will reveal the weak financial position of the company (refer to section 5 of this report), the company's past poor performance in deriving profits (refer to section 6 of this report), problems that the company has encountered that have damaged the company's reputation with farmers (refer to section 6 of this report), problems the company has with the major providers of services in storing and packing grain for export (refer to section 2 and section 6 of this report), problems that the company has in its relationship with regulatory bodies (refer to section 6 of this report), and the problems with the company's management information system (refer to section 4 of this report). The only benefit that it would appear that a potential investor may secure is the contacts that the company has in the niche markets to which it supplies. However, those contracts would appear to be largely personal contacts of Mr Shivnani and perhaps some other staff of [the Company] and there can be no guarantee that the company will hold on to those contacts should the [sic] Mr Shivnani and any relevant staff choose not to remain with [the Company] subsequent to the restructure. There are significant hurdles that would need to be overcome in order to maintain the investor's enthusiasm for an investment in [the Company].
8.1.1.2The position of farmers who may be willing to consider a debt for equity conversion is fraught with difficulties. I have met with two farmers, Williams and Kellar [sic]. Both have indicated that they are willing to consider a debt for equity conversion because they 'can't afford to see this company fall over' on the basis that they have to recover the money owing by [the Company] in the relatively short term in order to avoid their own bankruptcy. Conversion of debt for equity will not achieve their objectives of being paid the amount owing to them in the short term. If farmers convert their debt to equity, the only means of them recovering the amounts previously owing to them from the sale of grain would be either through dividends being declared by the company, which would depend upon the company having sufficient available profits from which to declare dividends, or from the sale of their shareholdings in the company, which may prove difficult in the circumstances of a proprietary limited company and which shares would have no significant market value unless and until there is a significant and sustainable improvement in financial position and profitability of the company. Further, there are GST issues that farmers will need to consider in that upon the conversion of their debt to equity the GST payable on the invoices in respect of the supply of grain to [the Company] will either become payable by the farmer to the Australian Taxation Office or, if already paid, will no longer be able to be recovered from the Australian Taxation Office should the new shares in the company ultimately prove to be valueless. It is unclear whether the farmers will maintain their enthusiasm for a debt for equity conversion once they are properly advised of the financial consequences of the proposal.
The plaintiff's affidavit evidence on insolvency
Paragraphs 65 and 66 of the plaintiff's affidavit of 12 December 2008 in these proceedings are identical to pars 65 and 66 of the plaintiff's affidavit of 12 December 2008 in proceedings COR 186 of 2008. Paragraphs 33 and 34 of the plaintiff's affidavit of 6 April 2009 herein are identical to pars 47 and 48 of the plaintiff's affidavit of 6 April 2009 in COR 186 of 2008.
In his affidavit sworn 12 December 2008, the plaintiff annexed copies of the Company's QuickBooks balance sheet as at 30 June 2003, the QuickBooks profit and loss statement for the year ending 30 June 2003, and the Company's balance sheet as at 31 July 2004 and 30 June 2004. He said:
I believe from my investigation of the Company's books and records that the Company became insolvent sometime prior to 30 June 2003 and remained insolvent after that date. I have reached that conclusion for the following reasons:
65.1.the financial records of the Company show that there were accumulated trading losses of $1,790,584.21 as at 30 June 2003;
65.2.the financial records of the Company show that there was a deficiency of assets over liabilities of $1,614,720.21 as at 30 June 2003;
65.3.the financial records of the Company show that there were accumulated trading losses of $3,749,255.47 as at 30 June 2004;
65.4.the financial records of the Company show that there was a deficiency of assets over liabilities of $3,910,651.93 as at 30 June 2004;
The balance sheet of 31 July 2004 and 30 June 2004 showed that as at 30 June 2004, there were total current assets of $3,438,125.04 and total current liabilities of $8,724,858.58, and that the Company made a loss in the 12 months to 30 June 2004 of $1,958,671.26.
The information in it may be summarised as follows:
Month of
31 July 2004
12 months ended
30 June 2004
Current assets
$2,743,049.75
$3,438,125.04
Current liabilities
$8,230,219.09
$8,724,858.58
Total assets
$4,318,970.95
$4,982,836.88
Total liabilities
$8,057,672.16
$8,556,228.35
Loss for period
($165,309.74)
($1,958,671.26)
Negative shareholders funds
($3,738,701.21)
($3,573,391.47)
In his affidavit sworn 6 April 2009 the plaintiff annexed copies of the Company's tax returns for the years ended 30 June 2001, 30 June 2002 and 30 June 2003, and a schedule of proofs of debt that he had received. He said:
32.In paragraph 65.3 of my earlier affidavit, I refer to the financial records of the Company as showing the Company's accumulated trading losses for the year ended 30 June 2004 as being $3,749,255.47. Having read again my earlier affidavit and in particular, annexure 'GDT‑17', I have identified that the amount referred to in paragraph 65.3 is incorrect. The amount referred to in paragraph 65.3 should be $3,573,391.47.
…
34.From my review of the Company's tax return for the year ended 2003, I say that the tax return shows a loss of $356,510 and total accumulated losses of $1,979,761. Trade creditors were $998,296. Total liabilities were $3,402,798 and assets of $1,352,005 resulting in a deficiency of $2,050,793. The written down value of the plant and equipment is $42,143 and other major assets comprise of trade debtors $29,773 and stock at cost value of $955,916.
35.From my records as liquidator I asked my staff to prepare a table of the proofs of debt filed for the Company. Annexed hereto and marked 'GDT-31' is a true copy of a table of the proofs of debt ordered alphabetically by claimant and a true copy of a table of the proofs of debt filed by trade creditors only (ie grain suppliers) ordered in chronological order pursuant to the 'particulars of the date of debt' specified by the credit in the particular proof of debt.
The financial information relied on by the plaintiff from the tax returns in the years to 30 June 2003 may be summarised as follows:
Year ended 30 June 2001
Year ended 30 June 2002
Year ended 30 June 2003
Year loss
$702,724
$1,019,460
$356,510
Accumulated losses
$674,863
$1,623,251
$1,979,761
Current assets
$387,711
$314,610
$1,309,859
Current liabilities
$1,134,194
$1,972,145
$1,967,159
Negative shareholders funds
($713,794)
($1,589,956)
($2,050,793)
Insolvency - parties' contentions and introductory observations
The defendants, in substance, submit that the plaintiff has not established insolvency because:
(a)whilst the plaintiff has a sufficient degree of specialised knowledge to provide an expert opinion, the plaintiff's opinion as to insolvency carries no weight in that:
(i)he does not explain the reasoning process by which he considers that the Company was insolvent by reference to the materials to which he refers;
(ii)he has relied upon books and records which were stated to be unreliable by Mr Honey;
(b)assuming the plaintiff's opinion evidence is given no weight, the only evidence of insolvency appears from:
(i)Mr Honey's affidavit - and that only establishes insolvency at 30 November 2004;
(ii)the financial statements referred to by the plaintiff - and they are inherently inaccurate according to Mr Honey;
(iii)the tax returns - and they only go to the period up to 30 June 2003; and
(iv)the proofs of debt - which evidence what is claimed but not what is due and payable;
(c)as a result of the lack of evidence arising from (a) and (b) above, the plaintiff has not adduced evidence of the matters referred to by Emmett J in Quick v Stoland Pty Ltd (1998) 87 FCR 371, and accordingly there is no evidence of insolvency.
In Quick v Stoland Emmett J observed:
In order to determine whether the Company was solvent at a given time, it would be relevant to consider the following matters:
●All of the Company's debts as at that time in order to determine when those debts were due and payable.
●All of the assets of the Company as at that time in order to determine the extent to which those assets were liquid or were realisable within a time frame that would allow each of the debts to be paid as and when it became payable.
●The Company's business as at that time in order to determine its expected net cash flow from the business by deducting from projected future sales the cash expenses which would be necessary to generate those sales.
●Arrangements between the Company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts …
●It is often accepted, as a rule of thumb, that a company will be regarded as insolvent if its current liabilities exceed its current assets. However, that cannot be more than a rule of thumb. A company might satisfy that requirement yet may be shown, on more careful analysis, not to be able to pay its debts as and when they become due and payable. Equally, a company may fail that test but still be able to demonstrate that it can pay all its debts as and when they become due and payable.
●Further, a deficiency of total assets to total liabilities is not conclusive as to insolvency. A company could have a deficiency of net assets yet, because of a very strong profit making business, be in a position to pay all its debts as and when they become due and payable. That is to say, even if a net asset deficiency exists reasonable projections may indicate that the company would generate sufficient profit to be able to eliminate that deficiency before the long term debt becomes due and payable. The company would be solvent in those circumstances. Equally, a company which has a surplus of total assets over total liabilities could still be insolvent (379 ‑ 380).
The plaintiff, on the other hand, submits that the Company's books and records are sufficiently reliable to provide a basis for finding insolvency; that the substance of the matters referred to by Emmett J in Quick v Stoland were canvassed in the evidence of the plaintiff and Mr Honey; that the proofs of debt provide evidence of the indebtedness of the Company; and that the Company's failure to pay the substantial debts to the defendant in 2004 provides good evidence of the Company's insolvency. The plaintiff also submits that the defendant's criticisms of the plaintiff's evidence lack persuasiveness in the absence of cross‑examination of either Mr Honey or the plaintiff.
In relation to the defendants' first submission, I do not accept that no reasoning process has been disclosed by the plaintiff in his affidavit evidence. Whilst there was no analysis, other than the presentation of the material and the extracts from it upon which he relied for the opinion, that process in itself discloses, in my view, a form of reasoning. It is no doubt very truncated and lacking in elaboration, but, in my opinion, that does not rob it entirely of weight. Indeed the reasoning process was sufficiently exposed for the defendant to criticise the plaintiff's opinion on the basis that he relied upon what is said to be defective records. I accept, however, that the cogency of the plaintiff's opinion is limited in the absence of detailed elaboration, and ultimately rests on the extent to which the matters to which he refers are capable of supporting it.
This leads to a consideration of the submission that the opinion can have no weight because, it is said, Mr Honey stated that the Company's books and records were unreliable.
In my opinion, the submission that Mr Honey stated that the books and records of the Company were unreliable, misconstrues the overall effect of his evidence. In my opinion, reading his first report as a whole, and in particular having regard to his evidence in [66], [69] ‑ [71] and [73] above, the effect of his evidence was that financial records produced by the Company's accounting system should be treated with caution, as certain books and records appeared to understate the weakness of the Company's financial position. I deal with this matter further in the next section of these reasons.
Nor do I accept the substance of the defendants' second and third submissions, save in relation to the proofs of debt. For the reasons outlined in the next section of these reasons for judgment, in my view, even if the plaintiff's opinion evidence is discarded as being of no weight at all, there is sufficient evidence to conclude that it is more probable than not that the Company was unable to pay its debts as they fell due and payable in the period as at and from 24 June 2004. The defendant's submissions seem to me to place an unduly restrictive and prescriptive meaning on the observations of Emmett J in Quick v Stoland. Ultimately, insolvency is a question of fact to be decided as a matter of commercial reality in the light of all the circumstances. It should be noted that in Quick v Stoland, the fact of insolvency as at 31 December 1992 in that case was inferred by the Full Court from a review of the current and total assets and liabilities and other information disclosed in a balance sheet as at 30 June 1993, ie, six months after the relevant date for determining insolvency, and an inference that insolvency arose six months prior to that time from the company's dealings with a particular creditor in January 1993: Quick v Stoland (385 ‑ 386) (Finkelstein J) (Branson J (378) and Emmett J (379) agreeing).
I accept, however, the defendants' submission that the proofs of debt are evidence of claims against the Company but do not, in themselves, evidence liabilities of the Company. The plaintiff, unlike the liquidator in Re Action Waste Collections Pty Ltd (in liq) [1981] VR 691, 703, does not depose to having accepted the proofs as valid claims.
I add for completeness that insofar as the plaintiff referred to having reviewed various bank statements in support of his opinion on insolvency, he does not reveal any basis or reasoning for his opinion, and his evidence in that regard is of no assistance.
Findings on solvency/insolvency
In assessing solvency in the period as at and from 24 June 2004, it is appropriate, in my view, to take into account, in looking forward, the debts of the Company which had been incurred by 24 June 2004, and which were payable on 31 August 2004. It is also appropriate, in my view, to consider as part of the overall background, the Company's position as at the start of the financial year ending 30 June 2004, i.e. as at 1 July 2003.
Mr Honey, in par 4.11 of his first report, was, in my view, adverting to the prospect that the financial position of the Company, as at 30 June 2003, may well have been worse than that which may be discerned from the ACCPAK balance sheet as at 1 July 2003. However, even on the ACCPAK balance sheet of 1 July 2003, the Company's current liabilities substantially exceeded its current assets, and its total liabilities substantially exceeded its total assets. Whilst there are differences, and indeed significant differences in the quantum of assets and liabilities recorded in the ACCPAK balance sheet and the QuickBooks balance sheet as at 30 June 2003, each nevertheless discloses a substantial deficit in both current assets and total assets. The differences relate to the precise degree of the substantial deficiency in both current and total assets. It is not necessary, for present purposes, to select between them. I find that as at 30 June 2003, and 1 July 2003, the Company's current liabilities substantially exceeded its current assets, and that its total liabilities substantially exceeded its total assets.
In addition, the Company had a history of substantial trading losses up to and including the financial year ended 30 June 2003 as disclosed in its tax returns.
Accordingly, I find that the Company was in a very weak financial position as at 1 July 2003, when it started the financial year ended 30 June 2004. The weak financial base from which it started that financial year meant that in the absence of a significant turnaround in its financial position from operations within the next 12 months, or a refinancing by recapitalisation or stable long‑term debt funding, there was a real risk that the Company faced the prospect of insolvency that financial year.
I also find, based on Mr Honey's evidence, that the Company was insolvent as at 29 October 2004.
It remains to consider whether the Company was nevertheless able to pay its debts as and when they fell due, in the period 24 June ‑ 1 September 2004, notwithstanding its very poor financial condition at the start of that financial year, and its incontrovertible insolvency in late October 2004. For the reasons given below, in my opinion, it is more probable than not that the Company was insolvent in that period and indeed in the whole period on and from 24 June 2004.
First, for the same reasons as given by Mr Honey in section 6 and section 8 of his report referred to earlier, I find that in the period on and from 24 June 2004, the Company's business had reached the point where it was incapable of operating as a going concern. I have already indicated that although Mr Honey's observations were made in a report on the Company's financial position as at 29 October 2004, in considering the Company's position at that time, he surveyed the historical performance of the Company prior to then, and the inherent characteristics of its business, as revealed in the financial statements of the preceding years, and by the various events and activities of and affecting the Company in the period going back to the second half of calendar year 2003. Furthermore, he was not considering some new venture upon which the Company had embarked in October 2004, or circumstances unique to the Company's trading position as at 29 October 2004. Accordingly, I find that the matters to which I have referred in [74] ‑ [83] earlier, apply with equal force to a consideration of the Company's position as at 24 June 2004
Secondly, I find that the Company's current liabilities substantially exceeded its current assets at 30 June and 31 July 2004, and that it had a substantial deficiency in shareholders' funds on each of these dates. It is apparent that the balance sheet as at 31 July 2004 and 30 June 2004 produced by the plaintiff in his affidavit reveals a worse financial position as at 30 June 2004 than either of the balance sheets referred to by Mr Honey. The balance sheet referred to by Mr Honey and described as 'PJD1', is nevertheless consistent with the broad picture which emerges from the balance sheet produced by the plaintiff. That is, that the Company as at 30 June 2004 had a substantial shortage of working capital. Whilst the summary of the balance sheets provided by Mr Honey does not disclose total current assets, even if it were assumed that the total assets figure of $4,371,361.66 was comprised of current assets only (which is unlikely), the balance sheet described as 'PJD1' would indicate a deficiency of current assets (having regard to the accounts payable figures) of approximately $585,000. As noted earlier, it also reveals negative shareholder funds of approximately $1.125 million.
The balance sheet 'PJD2' referred to by Mr Honey on the other hand, is unusual having regard to its stated high level of inventory on hand, of approximately $4.26 million. This figure is substantially out of keeping with other financial information. It is anomalous having regard to both historical levels of inventory as recorded in the 'PJD1' balance sheet ($2.74 million), and in the balance sheet as at 30 July ($2.03 million) and 30 June 2004 ($2.58 million), and the level of inventory, including stock‑in‑transit, as at 29 October 2004, only a few months later (Mr Honey's second report, annexure 13, shows book value of stock at $2.86 million and a realisable value of $269,501). In my opinion, the information regarding assets in the balance sheet 'PJD2' referred to by Mr Honey is to be regarded as substantially overstating the financial position of the Company as at 30 June 2004, and in that regard cannot be regarded as even approximating the Company's true position at that time.
Thirdly, having regard to the balance sheet as at 30 June and 31 July 2004, I also find that the Company made a substantial operating loss for the year ended 30 June 2004. For the reasons indicated by Mr Honey in par 6.4.9 of his first report, I do not regard the profit figure to which he refers for the year ended 30 June 2004 as reliable. It is so incongruous with the Company's performance in preceding years and as at the start of the financial year commencing 1 July 2003, and the position of the Company as at 31 October 2004, that it cannot be reasonably regarded as reliable.
Fourthly, as at 24 June 2004, the Company was significantly in arrears in respect of substantial debts due to the defendant. As noted previously, whilst dilatory payment in itself may not denote insolvency, the failure to pay a debt that has been due for some time may, depending on the circumstances, afford prima facie evidence of insolvency (see Trinick v EM & RM Williams [108]). Accordingly, the nature, background and circumstances of the Company's indebtedness needs to be considered.
Immediately prior to 24 June 2004 the Company was indebted to the defendants in the substantial sum of approximately $607,000. Approximately $72,000 of that amount had remained unpaid since 31 January 2004. The balance remained unpaid from 31 March 2004.
The objective facts leading up to the impugned payments were as follows.
The Company owed the defendants approximately $477,000 on 30 January 2004. It paid less than half of that amount at about that time, leaving $277,000 outstanding. No explanation was provided by the Company to the defendants for the non‑payment. There was no evidence that the defendants were assured that the default arose from a temporary lack of liquidity that would be resolved in the short term. There was no assurance by the Company that the defendants would receive payment in full. There was no agreement to extend the time for payment. The debt of $277,000 was simply left outstanding.
Nothing was paid in February 2004.
As a result of pressure from Mr Keller, three payments totalling $130,000 were received in March 2004, but they were less than half of the amount then outstanding, and were accordingly insufficient to extinguish the debt that had been due and payable at the end of January. An amount of approximately $147,000 outstanding from 30 January 2004 was still outstanding on 31 March 2004, by which time other debts had fallen due and payable in the sum of approximately $533,000. Coupled with the debt incurred and unpaid from 30 January 2004, the Company's total debts to the defendants stood at approximately $680,000 on 31 March 2004.
A small payment was received by the defendants on 9 April 2004 of $50,000, but again only as a result of pressure from Mr Keller. It reduced the outstanding debt to $630,000. The Company then stopped making any payments until after its letter of 21 May 2004.
In its letter of 21 May 2004 the Company proposed a resumption of payment on terms which, it is acknowledged by both parties in these proceedings, did not mature into a binding variation and neither party contends it constituted or contributed to an estoppel. The letter said that the Company 'will be making a payment of $25,000 per week starting from today until payment is complete'.
In the period 21 May 2004 to immediately prior to 24 June 2004, the Company did not honour its proposal to pay $25,000 per week. Out of the five proposed payments totalling $125,000 in that period, the Company paid only $25,000. Again there was no evidence that the Company provided any explanation to the defendants for the failure to honour its self‑imposed payment schedule of $25,000 per week.
Accordingly, the history of the defendants' dealings with the Company immediately prior to 24 June 2004 was that the Company had owed the defendants very substantial debts, spanning several months, with no explanation for the defaults in payment and no binding agreement being reached to reschedule the payment of the debts. The debts went to the core of its business - liabilities for the grain it traded. They related, principally, to the barley contract which was considered by the Company to be a 'hallmark' transaction. The belated non‑binding proposal of 21 May 2004 to pay by instalments was not adhered to in the first month that the Company sought to implement it. In these circumstances, the inference is open that by 24 June 2004 at the latest, the Company had an endemic shortage of working capital.
This inference is confirmed by the fact that the defendants were clearly an important supplier of the Company, as reflected in the Company's letter to the defendants dated 22 January 2004, and Mr Honey's evidence. It is to be inferred that the Company's failure even to meet its own payment schedule, against a background of serious default, to such an important supplier in such a significant transaction, reflected a deep and endemic financial malaise and not just a temporary cash flow or temporary liquidity problem.
In considering the Company's position as at 24 June 2004, it is also appropriate to 'look forward' to the wheat contract debt of approximately $22,000 which was incurred prior to 24 June 2004 and which fell due for payment on 31 August 2004. That debt fell due at a time when the Company was already in arrears in the total sum of approximately $557,000. As regards its self‑imposed payment schedule, by 31 August 2004, it had fallen behind to the extent of $190,000. The non‑payment of the debt under the wheat contract in these circumstances also tends to confirm that as at and from 24 June 2004, the Company had an endemic shortage of working capital.
Having regard to the matters referred to above in these reasons, I find that the Company was unable to pay its debts as they became due and payable on and from 24 June 2004. I should add that in the supplementary submissions dated 15 October 2009, the defendants advised, in effect, that, if the Company were found to be insolvent as at the relevant date in COR 186 of 2008 (being on and from 18 June 2004), then they would not attempt to displace, pursuant to s 588E(9) of the Corporations Act 2001 (Cth), the presumption arising by operation of s 588E(3) that the Company was insolvent for the period relevant to this matter (being as at and from 24 June 2004). I have found insolvency as at and from 18 June 2004 in Trinick v EM & RM Williams [166]. The defendants' submission was, nevertheless, made quite some time after the hearing, by which time these reasons were in the final stages of preparation. Whilst I have not gone back to remove my findings on insolvency in this matter as a consequence of this concession, the concession provides a further or alternative ground for finding insolvency as at and from 24 June 2004 for the purposes of these proceedings.
Section 588FG(2) principles
I have considered the principles relevant to s 588FG(2) of the Act in my reasons for judgment in COR 186 of 2008: Trinick v EM & RM Williams [167] ‑ [179]. I refer to those reasons and will not repeat them here.
Findings on s 588FG(2)
Mr Keller's evidence in relation to the failure to receive the payments due to the defendants by the Company on time was given in pars 12 to 14 in his affidavit sworn 24 February 2009:
12.When I did not receive payments at the times specified by the contracts I telephoned Australian Foods and spoke to either Pavan Shivnani, the director of Australian Foods, or his wife Kanchan Aswani. On each occasion I was told words to the effect of what we were to be paid and when. Payments were made immediately following each telephone call so I never considered that Australian Foods would not or could not pay us.
13.I did not consider at any time that Australian Foods was in financial difficulty. I did not become aware that it had any financial difficulties until I telephoned Australian Foods sometime in late October 2004 and spoke to Pavan Shivnani who told me that Australian Goods was going into liquidation.
14.At no time during any of my conversations referred to in paragraph 12 above, was I told anything that could suggest that Australian Foods could not pay us.
At this point I should note my observations on Mr Keller's demeanour in the witness box. I formed the impression that he was not endeavouring to give a reliable, accurate and complete account of his knowledge of, and involvement in, the circumstances in which the impugned payments occurred. I am not ultimately persuaded that he was deliberately trying to mislead, but he gave the impression that he regarded these proceedings as a waste of his time and that they did not warrant a conscientious attention to the evidence that he was giving. I do not accept his evidence that he was not worried by the defaults that had occurred in payment by the Company to the defendants in respect of the transactions that had been entered into in October 2003.
Specifically in relation to par 12 of his affidavit, I do not accept that the defendants received payment immediately following each time he was in telephone contact with the Company. It is true that after the first payment on 30 January 2004, the Company's payments were in the main attributable only to pressure applied by the defendants. But it is not accurate to suggest that the Company made payments immediately when requested. As recounted earlier in these reasons, Mr Keller was in frequent telephone contact with the Company regarding payment without immediate, and often without any, success of payment.
Nor do I accept pars 13 and 14 of his affidavit. Whilst there was no collusion or other impropriety, I find that it is more probable than not, having regard to the objective circumstances which I have outlined in [110] ‑ [118] above, that Mr Keller, on behalf of the defendants, formed the suspicion, by at least 24 June 2004, that the Company was unable to pay its debts as they fell due, and that he formed that suspicion on reasonable grounds. Other matters referred to below, tend, in my view, to confirm this.
First, the failure to pay debts for grain when they fell due was not a common feature of the industry. Mr Keller had never experienced any difficulties with payment from ABB or AWB.
Secondly, Mr Keller's evidence in cross‑examination (ts 100) in relation to the 21 May letter included the following:
A long time ago, but you remember dealing with Pavan Shivnani, do you not?---Not a - I could have.
You could have, but you recall that you did deal with him?‑‑‑I can't remember.
The next line is, 'Australian Foods will be making a payment of $25,000 per week starting from today until payment is complete.' Do you recall reading that sentence?---I could have, yes.
The substance of this sentence is that it is deferring payment owed to you and putting payment on a new footing, namely $25,000 per week 'starting today'?---I might have been happy with that payment.
You might have been happy, but you knew when you read that that it was different to what they had previously agreed?---I wasn't worried.
But you knew it was different?---So - I wasn't worried. I was happy. I wouldn't have done it otherwise if I wasn't happy.
You also knew at that date that they simply couldn't give you the money that was owed to you on the earlier contract?---No.
You can think of no reason why they would want to change payments to this rate of $25,000 per week?---No.
You can't think of any reason?---No.
It is apparent that Mr Keller could think of no commercial justification for the Company even proposing an indulgence to pay by instalments. Even less could he have conceived of any commercial justification for the Company's failure to adhere to the instalment proposal in the first month of its implementation.
Thirdly, whilst Mr Keller denied having read the press articles of 30 June and 7 July, they were published in The Weekly Times, which is a newspaper which he agreed he read, and which was one of the original sources of his knowledge in relation to the activities of the Company. He was a substantial creditor of the Company. Any news of the Company's operations would have been of significant interest to him. I am unable to accept his evidence that he was not aware of these articles, and I find that he did read the articles in question around the date of their publication. These articles would have tended to confirm Mr Keller's suspicion of insolvency.
Furthermore, the evidence of Mr Keller was perfunctory and lacking in cogency, as it failed to address with any specificity the nature and course of the communications with the Company regarding payment.
Alternatively, even if Mr Keller had not himself formed such a suspicion by 24 June 2004, having regard to the circumstances as I have found them, the defendants have not proved that they had no reasonable grounds for 'suspecting' that the Company was insolvent as at and from 24 June 2004. Further, the defendants have not established that a reasonable person in the defendants' circumstances would have had no reasonable grounds for suspecting that the Company was insolvent. The defendants have not proved the defences with respect to s 588FG(2)(b). That provision required the defendants to prove the negative, that the defendants had no reasonable grounds for suspecting insolvency and that a reasonable person in the defendants' circumstances would have had no such grounds for so suspecting. They have not done so. As Mansfield J observed in Smith v Commissioner of Taxation (1997) 75 FCR 339:
That matter [s 588FG(2)(b)], involving the proof of a negative, is a different issue from the [creditor] establishing that he had reasonable grounds, or that a reasonable person in his position, had reasonable grounds for suspecting that the company was solvent (361).
Accordingly I find that the defendants have not established a defence as provided for under s 588FG(2)(a) or (b) of the Act.
Defence under s 588FA(3)
I have again referred to the relevant principles in relation to s 588FA(3) of the Act in my reasons for judgment in COR 186 of 2008: Trinick v EM & RM Williams [197] ‑ [200]. I will not repeat those matters here.
The defendants submit that the impugned payments were made in circumstances where there was a mutual assumption that there would be a continuance of the relationship of the buyer and seller, such that the payments were an integral part of the continuing business relationship between the Company and the defendants for the purposes of s 588FA(3).
In my opinion, that submission cannot be sustained.
The contractual obligations for the supply of goods to the Company were entered into in October 2003. Delivery under the contracts had been effected by the end of December 2003. According to Mr Keller, GrainCorp would not release grain to the Company until he had authorised its release by signing a warehouse receipt form. Mr Keller said that the last warehouse receipt form that he signed was in February 2004. Accordingly, by the end of February 2004, the defendants had authorised the release of, and the Company was in a position to collect from GrainCorp, all the barley and wheat sold to it by the defendants under the two contracts. All that remained thereafter was for the defendants to be paid the debts which were due to them. There were no other new contracts even in contemplation at this time.
Accordingly, in my view, it is not possible to infer the existence of a mutual assumption, on and from 24 June 2004, that there would be a continuance of the relationship of seller and buyer. Furthermore, the proper inference to be drawn from the facts as found is that the impugned payments were made solely for the purpose of reducing a longstanding indebtedness of the Company to the defendants, and not for any purpose in relation to inducing the defendants to enter into fresh arrangements for the further supply of goods to the Company.
Conclusion
In my opinion the plaintiff has established that the payments made by the Company to the defendants on or about 24 June, 2 July, 9 July, 15 July, 23 July, 4 August, 31 August and 1 September 2004 were unfair preferences within the meaning of s 588FA of the Act. I will hear the parties in relation to the precise formulation of the orders, and in relation to interest and costs.
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