Trinick v EM & RM Williams & Sons

[2009] WASC 297

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION:   TRINICK as Liquidator of AUSTRALIAN FOODS COMPANY PTY LTD (in liq) -v- EM & RM WILLIAMS & SONS [2009] WASC 297

CORAM:   MURPHY J

HEARD:   11-12 MAY & 3 AUGUST 2009

DELIVERED          :   30 OCTOBER 2009

FILE NO/S:   COR 186 of 2008

BETWEEN:   GLENN DOUGLAS TRINICK as Liquidator of AUSTRALIAN FOODS COMPANY PTY LTD (in liq) (ACN 081 404 686)

Plaintiff

AND

EM & RM WILLIAMS & SONS (A FIRM)
Defendant

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 three out of four alleged preference payments

Category:    B

Representation:

Counsel:

Plaintiff:     Mr C M Slater

Defendant:     Mr K L Christensen

Solicitors:

Plaintiff:     Wojtowicz Kelly

Defendant:     Gadens Lawyers

Case(s) referred to in judgment(s):

Airservices Australia v Ferrier (1996) 185 CLR 483

Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 54 ACSR 583

Australian Securities and Investments Commission v Plymin [2003] VSC 123; (2003) 46 ACSR 126

Cussen (as liquidator of Akai Pty Ltd (in liq) v Commissioner of Taxation [2003] NSWSC 841; (2003) 47 ACSR 107

Cussen (as Liquidator of Akai Pty Ltd (in liq)) v Commissioner of Taxation [2004] NSWSC 383; (2004) 51 ACSR 530

Harrison v Lewis [2001] VSC 27; (2001) 19 ACLC 566

Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321

Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103

Levi v Guerlini (1997) 24 ACSR 159

Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243; (2005) 219 ALR 555; 54 ACSR 410

Lewis v Doran [2004] NSWSC 608; (2004) 50 ACSR 175

Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307

Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187

Mulherin v Bank of Western Australia Ltd [2006] QCA 175

Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451

Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651

Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266

Quick v Stoland Pty Ltd (1998) 87 FCR 371

Re Action Waste Collections Pty Ltd (in liq) [1981] VR 691

Sands & McDougall Wholesale Pty Ltd (in liq) v Commissioner of Taxation (Cth) [1998] VSCA 76; [1999] 1 VR 489

Smith v Commissioner of Taxation (1997) 75 FCR 339

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

Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290

Sutherland & Anor (as joint liquidators of Australian Coal Technology) v Hanson Construction Materials Pty Ltd [2009] NSWSC 232; (2009) 254 ALR 650

Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinx Pty Ltd [2001] NSWSC 230; (2001) 37 ACSR 477

Sutherland t/as Southern Livestock Nutrition v Lofthouse [2007] VSCA 197; (2007) 64 ACSR 655

The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239; (2008) 225 FLR 1

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165

Travers (as liquidator of Askernish Pty Ltd (in liq)) v Commissioner of Taxation [2006] FCA 1073; (2006) 58 ACSR 472

White Constructions (ACT) Pty Ltd (in liq) v White [2004] NSWSC 71; (2004) 49 ACSR 220

MURPHY J: 

Introduction

1. In these proceedings the plaintiff, who is the liquidator of Australian Foods Company Pty Ltd (in liquidation) (the Company) applies under s 588FF(1) of the Corporations Act 2001 (Cth) (the Act) for orders that the defendant 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.

2. Between 18 June 2004 and 23 July 2004 the Company paid the defendant the following sums, totalling $190,000 (the Payments):

18 June 2004	$	100,000
9 July 2004	$	40,000
15 July 2004	$	25,000
23 July 2004	$	25,000

1. It is common ground between the parties that:

   (a)the Payments were made by the Company to the defendant;

   (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 defendant receiving from the Company, in respect of the unsecured debt that the Company owes to the defendant, more than the defendant would receive from the Company in respect of the debt if the transactions were set aside and the defendant was to prove for the debt in the winding up of the Company.

2. 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 defendant 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 defendant 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 defendant's 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 course of dealing between the Company and the defendant

1. The Company at all material times operated a business of trading and exporting grains and pulses.  'Pulse' is the edible seeds of leguminous plants such as beans.  The Company had only one director, Mr Pavan Shivnani.  The defendant at all material times was a grower of pulse and grain in Victoria.

2. The objective course of dealings between the defendant and the Company is largely not in dispute, and is principally recorded in, or is to be inferred from, the contemporaneous documents in evidence.  The dealings related to six contracts for supply of pulse or grain to the Company entered into in 2004.  The principal factual differences between the parties centred on the extent to which the defendant was in telephone contact with the Company over the period of its dealings with the Company regarding payment of outstanding money, and the extent to which Mr Mark Williams, who acted on behalf of the defendant, was concerned about delays in payment.  These matters are addressed in the next section of these reasons.  In this section, below, I set out my findings with respect to the essentially uncontested evidence. 

3. Prior to harvest in 2003, Mr Williams contacted various grain merchants to compare the prices which were being offered for grain.  Mr Williams became aware that the Company was buying grain from its advertisements in the 'Stock Journal'.  He spoke to Mr Paul Munckton of the Company, who told him that the Company was offering various options including a 'cash price' paid within 90 days of the contract, and a 'pool price' by which payments would be made in three instalments over 12 months. 

4. In about December 2003, Mr Williams caused the defendant's solicitors to obtain a credit check of the Company.  The credit check was arranged by a firm of accountants and business consultants who then reported to the defendant's solicitors, who in turn reported to Mr Williams who read the credit check.  The credit check of the Company, undertaken by a firm called Baycorp Advantage, recorded:  'Relative Risk:  - 68.22 times worse than the Baycorp Advantage average'.  The credit check also referred to eight legal actions against the Company in 2002 ‑ 2003, including a District Court writ for $188,094.  The credit check said 'the existence of court writ information on the Company file is a powerful indicator of increased risk'.

5. On 23 December 2003 Mr Wells, the commercial manager/corporate solicitor of the Company, wrote to the defendant's solicitors in relation to the credit check.  The letter, a copy of which was sent to Mr Williams, commenced in these terms:

   I am advised that your firm acts for Mr Williams, who seeks tangible assurance of receiving his due remuneration if he places his grain into our Harvest Plus Pools arrangement.  I enclose for your information a copy of the Harvest Plus Payment Arrangement for harvest season 2003/2004.

   For our part, we are anxious to provide Mr Williams with all the assurance that we can give, because the tonnages on offer and his farming connections in Victoria will make him a very valued customer of this company, and because there are potentially substantial long term benefits for both parties.

6. The Company's letter of 23 December 2003 then referred to a default judgment which had been entered against the Company and which, the Company said, had subsequently been set aside.  The letter also stated that the Company had detected many errors in relation to the credit check and that the Company was writing to the provider of the credit check to update and correct its records.  The letter further indicated that the Company secured payment from its overseas buyers through letters of credit, and that the Company could arrange for its bank to assign the proceeds of sale of a consignment.  The Company also said it would have no objection to a grower including a Romalpa clause in a sale contract between the grower and the Company. 

7. On 12 January 2004 the defendant's solicitors wrote to the Company noting that the Company would be prepared to arrange an assignment of the proceeds of sale in favour of the defendant, and enquiring how the suggested Romalpa clause might be intended to operate. 

8. On 22 January 2004, the Company wrote to Mr Williams regarding prices for the defendant's grain.  The letter stated that the prices being offered to the defendant were better than prices offered to other growers in Victoria and requested that the defendant maintain confidentiality in relation to such prices.  The letter stated that the key reasons why the Company was offering these prices were, in effect, that the defendant was able to influence other major growers in the district; the defendant had expressed an interest to become a sourcing agent for the Company; the Company contemplated the possibility of Mr Williams becoming a director of the Company and bringing 'further credibility to [its] business model'; and that the defendant had been persistent in negotiations with the Company over the last month.  The letter concluded by indicating that cash terms were 30 days from the date of a title transfer, enclosing copies of two letters of credit, and stating that the Company intended to arrange for its bank to assign the proceeds of sale of the grain to the defendant.  The offer was said to be open until 6 pm 23 January 2004. 

9. Mr Williams signed this letter and faxed it back to the Company; although, in cross‑examination, he said he thought that the references to him assisting the Company were 'unusual'. 

10. In the meantime, there had been no reply to the defendant's solicitors' letter of 12 January 2004 and, on 13 February 2004, the defendant's solicitors wrote again seeking a response to their earlier letter. 

11. On 19 February 2004 the first of the contracts between the defendant and the Company was entered into.  The contract, numbered V300342 was a 'cash price' contract and not a 'pool price' contract.  It was in writing (the first contract), and its terms were as follows.  It was for the sale of 706 metric tonnes (mt) of canola at $388 or $385.50 per mt, depending on point of delivery.  The contract provided for payment within 30 days of the signing of the contract.  All storage, receival, and 'outturn' fees in respect of grain delivered to the warehouse were for the buyer's account, i.e., were to be paid for by the Company.  The grain was to be delivered by the defendant to the AusBulk grain storage warehouse at Wolseley by 28 February 2004, or to the GrainCorp bulk storage warehouses at Lillimur and Miram, Victoria, ready for 'outturn' upon request by the Company. 

12. Outturn is, in effect, a step by which the grower authorises the release, from a bulk grain storage warehouse, of a certain amount of grain held in the name of the grower at the warehouse to, or at the direction of, the buyer.  The issue of 'outturn' is discussed more fully later in these reasons.

13. Pursuant to the first contract, the defendant delivered approximately 706.6 mt of canola into GrainCorp's bulk storage, but problems soon emerged with the outturn of the canola to the Company in that GrainCorp refused to act upon the defendant's authorisation to release the grain to the Company. 

14. The Company indicated, in effect, that it would not pay for the canola until it could collect the grain.  This was notwithstanding that the first contract expressly provided for payment within 30 days of signing.

15. On or about 8 March 2004, Mr Williams contacted the Company and said that he had been informed by GrainCorp that the defendant could not outturn its grain to the Company.  Mr Williams indicated that he was concerned with this situation and he sought a solution as soon as possible, given his financial commitments.  He suggested that, in the interim, the Company do a deal in relation to the defendant's wheat so that payment could be made on that deal. 

16. This communication by Mr Williams is recorded in an internal email of the Company of 8 March 2004.  In relation to Mr Williams' request, the Company noted, in the same email, that in order for the sale of wheat to proceed, the defendant's solicitors would need further instructions as previously requested.

17. On 14 March 2004 the Company wrote to the defendant's solicitors stating, in effect, that the issue of outturn was being addressed, and advising of difficulties it foresaw with any proposed Romalpa clause. 

18. Whilst the issue of outturn to the Company remained unresolved under the first contract, on 18 March 2004 the defendant entered into a second contract.  This was for the supply of 700 ‑ 1,000 mt of 'F2 Barley' into the 'Harvest Plus pool'.  The contract, numbered V300360, was in writing (the second contract).  Under it, the F2 Barley was to be available for on‑farm pickup by 22 March 2004.  The contract provided for a guaranteed minimum price of $160 per mt.  The Company was to pay 30% of the guaranteed minimum price on 30 April 2004, 40% of the guaranteed minimum price on 31 August 2004 and the balance on 30 April 2005.  The contract also provided that the Company would 'pay interest, at a rate of 6% per annum'.

19. The defendant made available F2 Barley in accordance with the second contract, and the Company collected 794.84 mt of F2 Barley under the second contract between 29 March and 5 April 2004.

20. On 24 March 2004 the Company wrote to the defendant's solicitors in relation to the first contract.  The letter included the following:

    We are as anxious as Mr Williams to have this contract brought to a swift satisfactory conclusion as we value his good will and are concerned that he receives his due remuneration.

    We are equally keen to take delivery of the Canola because our overseas buyers are insisting on shipment by 31 March 2004.

    The purposes of this letter are:

    1.to make clear to Mr Williams our intentions that both parties proceed expeditiously to fulfil their contractual obligations towards each other;

    2.to remove confusion as to what is contractually possible under Mr Williams' Grain Warehousing Agreement (GWA) with Graincorp;

    3.to advise what is actually achievable by direct approaches to Graincorp management;

    4.to devise strategies with you to have Graincorp cooperate in an outturn of the Canola to fulfil our contract with Mr Williams.

    …

    Mr Williams repeatedly rings our office requesting payment under the contract.  Australian Foods is not liable to pay for grain that Australian Foods cannot access.  We respectfully suggest that his energies be quickly rewarded if they are redirected at strategies that achieve an outturn …

    Australian Foods does not itself currently have a Grain Storage & Handling Agreement (GSHA) with Graincorp.

    Mr Williams GWA might well preclude title transfers within Graincorp's warehousing systems.  Indeed it is common‑sense that dealings that take place within Graincorp's systems are regulated to protect Graincorp from damages claims for breach of its onerous duty as bailee for reward.

    However the same considerations do not apply to mere outturns.

    Graincorp cannot prevent mere outturns of grain as requested above …

    If in the final analysis Graincorp refused the outturn, Graincorp would be placing unnecessary hurdles in the way of our mutual commercial arrangements …

    In the strictest confidence we request that neither your firm nor Mr Williams or your respective employees and agents mention Australian Foods as being involved in this transaction, or divulge this letter or its contents to Graincorp. 

    It is intended that once the Canola is outturned to our nominated cartage contractor it will be transported to our proxy Southern Cross Grains for packing at their facility and then shipped to meet our overseas contracts.  We request that our arrangement with Southern Cross Grains also not be divulged. 

    Southern Cross Grains itself does not have a current GHSA [sic] with Graincorp though it is striving to get one following the expiry of the last GHSA [sic] it had with Graincorp.  Obviously if Southern Cross Grain had a current GSHA with Graincorp, this fax would be largely unnecessary.

    Naturally we are not in the habit of doing transactions this way and find the use of proxy arrangements distasteful.  At the time we started our grain procurement program in Victoria we anticipated we would have the same ease of dealings with Graincorp as we have had with CBH for several years, but were met with unexpected delays and burdensome preconditions for a GSHA with Graincorp that we are still endeavouring to comply with …

    If there is anything further we can do to assist the outturn, with the constraints affecting us, please advise.  I am sure that our joint persistence will result in Graincorp's cooperation.

    Australian Foods will pay Mr Williams the full purchase price within a week of the completion of packing.

    A copy of this fax is being sent to Mr Williams, with the request that he discusses it with you.

21. On 26 March 2004 the Company wrote to the defendant's solicitors and confirmed that Mr Williams had been successful in obtaining GrainCorp's approval to an outturn of the canola pursuant to the first contract.  The Company, in this letter, offered, in effect, to pay, in addition to the purchase price, within seven days after packing, interest on the amount of the purchase price at the defendant's then current bank overdraft rate or 9% per annum, whichever was the lower, covering the period between the date of outturn and the date that the purchase price was paid.  That letter was copied to Mr Williams, and to the defendant's bank manager, on the same day.  On the same day, the Company informed the defendant's bank manager that the value of the canola delivered under the first contract was approximately $280,000.  There was no response by Mr Williams to the Company's letter of 26 March 2004.  Neither party contends that there was any binding variation to the first contract, or any estoppel, arising from the communications on 26 March 2004.

22. On 1 April 2004 the defendant entered into a third contract with the Company, contract no S100323 (the third contract).  The terms were as follows.  It was for the supply of 236.32 mt of 'F1 Barley' into the 'Harvest Plus pool'.  The guaranteed minimum price was $172 per mt.  Delivery was required to be made to AusBulk, Wolseley, by 2 April 2004.  Payment was due as to 30% of the guaranteed minimum price on 30 April 2004, 40% of the guaranteed minimum price on 31 August 2004 and the balance on 30 April 2005.  Again, the Company agreed to 'pay interest, at a rate of 6% per annum'.

1. The defendant delivered the F1 Barley in accordance with the third contract.

2. Also on 1 April 2004 the defendant entered into a fourth contract with the Company numbered V300363 (the fourth contract).  The terms were as follows.  The contract was for the supply of 600 mt of 'F1 Barley' into the 'Harvest Plus pool'.  The barley had to be delivered to the GrainCorp warehouse at Kaniva, ready for outturn from 5 April 2004 onwards, upon request from the Company.  There was a guaranteed minimum price of $150 per mt.  Thirty per cent of the guaranteed minimum price was payable on 30 April 2004, 40% of the guaranteed minimum price on 31 August 2004 and the balance on 30 April 2005.  The Company agreed to 'pay interest, at a rate of 6% per annum'. 

3. The defendant delivered the barley under the fourth contract to the GrainCorp warehouse by 5 April 2004.  The Company took collection from GrainCorp in three loads, the first of which was 41.24 mt, the second of which was 125.26 mt and the third of which was 428.84 mt, on or about 5 April 2004.

4. In an internal company email dated 22 April 2004, Mr Ervin Leong, of the Company, says that Mr Williams had provided him with a copy of a letter that had been written by AusBulk Ltd to other growers, AM and CD King (the Kings), dated 14 April 2004.  A copy of the letter to the Kings was attached to the email.  It said, inter alia:

   Dear Grower

   Our delivery records show that you have delivered grain to Australian Foods Company last harvest.  Unfortunately, this company, in a radio interview on ABC's Country Hour on 26 March 2004 blamed late payments to growers on service problems that it believes it was experiencing with AusBulk in relation to packing and containerization.  Moreover, Australian Foods has also accused AusBulk of being anticompetitive.

   AusBulk has strongly refuted the allegations and believes that it has been proactive in upholding high service standards to both growers and marketers and has been ethical in its dealings with all clients.  The attack on AusBulk's integrity appears to be a strategy by Australian Foods Company to transfer blame for its apparent payment delays on to a third party and absolve itself …

   If you have had any problems with this company in relation to payments or deductions from payments, which you do not believe are correct, we would be pleased to hear from you …

5. Mr Williams, in his evidence under cross‑examination, denied having seen the communication from AusBulk and denies having contacted Mr Leong in relation to this communication.  I return to this question in the next section.

6. On 29 April 2004 the defendant received a payment of $20,000 from the Company. 

7. On 30 April 2004 the Company issued invoice no 52212 recording an amount due by the Company to the defendant under the first contract in the sum of $8,915.84. 

8. On 30 April 2004 the Company also issued invoice no 52090 recording an amount due by the Company to the defendant in respect of the first, 30%, instalment due under the third contract in the sum of $7,266.24. 

9. On 1 May 2004 the Company issued two further invoices under the first contract.  One was numbered 52400, recording an amount due by the Company to the defendant in the sum of $156,603.81.  The other was invoice no 52484, recording an amount due by the Company to the defendant, in the sum of $128,142.09.

10. On 17 May 2004 the Company paid to the defendant $50,000. 

11. On 24 May 2004 Mr Leong wrote to Mr Williams.  The subject of the letter was described as 'Payment Plan'.  The letter said, inter alia:

    As discussed with Pavan [Shivnani], I am writing to confirm your discussions.  [The Company] will make full payment of your canola deliveries plus your first payment on barley delivered into our pool.  These equate to the following and will be paid to both share parties [the defendant] and [the Kings], a total of:

    ●All Canola payments approximately $285,000 plus interest to payment date.

    ●Barley First Payments approximately $80,000 plus interest to payment date.

    ●Storage Outloading fees for barley approximately $4,324.

    These payments will be made no later than 18 June 2004.

    We are pleased to advise [the Company] have secured another 10,000 mt contract to China.  For your comfort I have included one letter of credit, of USD1 million from our Chinese Bank, to show security of asset … I look forward to being in contact with you tomorrow.

12. Insofar as the letter of 24 May 2004 refers to 'barley delivered into our pool', it is to be noted that barley under each of the second, third and fourth contracts had been delivered by 5 April 2004.  Each party indicated in submissions that it did not contend that the letter of 24 May 2004 (the 24 May letter) recorded or reflected a binding agreement to extend the date of payment for the liabilities to which it refers, to 18 June 2004.  Nor did either party contend that an estoppel in that regard arose.

13. On 26 May 2004 the defendant entered into a fifth contract with the Company, contract no V300378 (the fifth contract).  The terms were as follows.  It was for the supply of 1,821.34 mt of wheat to the Company.  Delivery was to GrainCorp at Lillimur, ready for outturn from GrainCorp from 27 May 2004 onwards, at the request of the Company.  There was a guaranteed minimum price of $193.45 per mt.  Payments were scheduled for 30% of the guaranteed minimum price by no later than '30 days eom [end of month] of final load', 40% of the guaranteed minimum price on 31 August 2004 and the balance on 30 April 2005.  Interest was payable at 6% per annum from 1 January 2004 to the 'delivery date'.  The Company was to cover all outturn fees.

14. The defendant delivered the agreed amount of wheat to GrainCorp pursuant to the fifth contract by 27 May 2004. The defendant had also, according to a facsimile from GrainCorp dated 27 May 2004, authorised by that date the outturn of 1,821.3 mt of wheat, and had received GrainCorp's confirmation that the wheat would be available for collection until 30 June 2004, subject to payment of outturn charges. GrainCorp's order number for the outturn was '3WAR099'.

15. The bulk of the wheat under the fifth contract was then collected by the Company from GrainCorp in various loads in accordance with GrainCorp order no 3WAR099 on 4, 5, 7, 8, 9, 17 and 24 June 2004. A further 132.41 mt of wheat was collected by the Company on 24 September 2004 pursuant to GrainCorp order no '3WAR202'. There is no evidence as to the circumstances in which GrainCorp came to issue order no 3WAR202, or why the Company did not collect all the wheat available pursuant to the outturn authorised by the defendant on or before 27 May 2004. I infer, however, that order no 3WAR202 was issued pursuant to some subsequent authorisation by the defendant, and that the grain collected on 24 September 2004 was pursuant to that subsequent authorisation. There is no evidence as to when, why or in what circumstances that subsequent authorisation occurred.

16. On 1 June 2004 the Company issued a number of invoices to the defendant recording amounts payable by the Company to the defendant in respect of the first, 30%, instalment due for barley under the second and fourth contracts.  Under the second contract, invoice no 52565 was issued recording the amount due from the Company to the defendant in the sum of $41,372.45.  Under the fourth contract, two invoices were issued and numbered respectively 52614 for $2,012.41, and 52616 for $3,361.10. 

17. Also on 1 June 2004, the Company paid the defendant $50,000.

18. On 4 June 2004 the defendant entered into a further contract for sale with the Company, contract no V300381 (the sixth contract).  Its terms were as follows.  It was for the supply of 180 mt of faba beans to the Company into the 'Harvest Plus pool'.  The beans were required to meet AusBulk's receival standards.  Delivery was to be effected by making the faba beans available for on‑farm pickup upon request from the Company.  The guaranteed minimum price was $300 per mt received into the AusBulk warehouse at Wolseley.  Payment was to be made as to 30% of the guaranteed minimum price by no later than '30 days eom [end of month] of final load', 40% of the guaranteed minimum price on 31 August 2004 and the balance on 30 April 2005.  Interest was payable by the Company at 6% per annum, from 1 January 2004 to the 'delivery date'.

19. The Company collected 121.9 mt of faba beans pursuant to the sixth contract, of which 22.8 mt was collected on 12 June 2004, 34.38 mt was collected on 4 July 2004, 31.66 mt was collected on 10 July 2004 and 33.06 mt was collected on 12 July 2004. 

20. On 16 June 2004 the Company recorded in an internal email that as at 18 June 2004 the Company was required to pay to the defendant the sum of $238,278.72. 

21. On 18 June 2004 the Company paid to the defendant the sum of $100,000.  (This is the first alleged voidable preference.)

22. On 28 June 2004 the Company issued to the defendant invoice no 52672 recording an amount of $125,839.13 due by the Company to the defendant under the fifth contract, in respect of the first, 30%, instalment.

23. According to an internal email of the Company of 28 June 2004, the defendant was 'expecting about $250,000?'.  The email recorded that Ms Kanchan Aswani of the Company, its Export and Business Development Manager, and the wife of Mr Shivnani, was to speak to Mr Williams later in that regard.  I infer that this was a reference to the payment of $148,000 then due and payable, and the debt that would fall due and payable under the fifth contract in July. 

24. On 30 June 2004 the Company was the subject of adverse press articles, which appeared in The Weekly Times.  An article entitled 'Growers Still Waiting Payment' 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.

25. In the business section of the paper on the same day, an article appeared 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.

26. On 1 July 2004 the Company issued invoice no 52615 recording that a sum of $20,926.75 was owing by the Company to the defendant under the fourth contract, in respect of the first, 30%, instalment.

27. On 7 July 2004 two further articles appeared in The Weekly Times in relation to the Company.  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 which had more than 1,000 offices and laboratories worldwide, that companies associated with Mr Shivnani had, in effect, copied its certificate, stationery and logo.

28. On 9 July 2004, the Company paid the defendant the sum of $40,000.  (This is the second alleged voidable preference.)

29. On 15 July 2004 the Company paid the defendant the sum of $25,000.  (This is the third alleged voidable preference.)

30. On 23 July 2004 the Company paid to the defendant the sum of $25,000.  (This is the fourth and final alleged voidable preference.)

31. On 18 August 2004 The Weekly Times published a further article adverse to the Company, under the headline 'Trader probed over shipment'.

32. On 24 August 2004 the Company issued invoice no 53029 under the fifth contract recording a sum due from the Company to the defendant of $3,252.94.

33. On 31 August 2004 the Company issued eight invoices to the defendant.  Invoices were issued in respect of the second, 40%, instalment due under the second, third, fourth and fifth contracts.  It also issued an invoice for the first, 30%, instalment, and the second, 40%, instalment, under the sixth contract.  The details are as follows.  Invoice no 53017 was issued in the sum of $55,163.85 in respect of the second contract.  Invoice no 53011 was issued in the sum of $9,687.70 under the third contract.  Invoice no 53013 for $27,902.34, invoice no 53014 for $2,682.67 and invoice no 53015 for $4,482.55 were issued in respect of the fourth contract.  Invoice no 53030 was issued under the fifth contract in the sum of $172,121.95.  Under the sixth contract, invoice no 53043 was issued in the sum of $11,621.78 in respect of the first, 30%, instalment, and invoice no 53044 was issued in the sum of $15,495.70 in respect of the second, 40%, instalment.

34. On 19 October 2004 the defendant's accountants made a written demand on behalf of the defendant for payment of outstanding moneys together with interest.  The letter said, inter alia:

    **** URGENT ACTION REQUIRED ****

    RE: OUTSTANDING GRAIN CONTRACT FOR EM & RM WILLIAMS & SONS

    I am writing on behalf of the above mentioned client in regards to the many outstanding amounts owing to them from Australian Foods Pty Ltd.  It is my understanding that Mr Andrew and Mark Williams have been in contact with you on a number of occasions and as such the client requires immediate action on the outstanding amounts already due.

    The client has incurred countless overdraft facility fees as a result of the non‑payment of the outstanding monies.  The total amount outstanding plus 6% interest from the original due dates is now due.  If the outstanding amount is not paid into the client's bank account by the 26^th of October 2004, they will be forced to seek legal action in order to recover the outstanding monies.

35. On 29 October 2004 Mr Barry Honey was appointed receiver and manager of the Company on the application of the Australian Securities and Investments Commission. 

Summary of the Company's liabilities to the defendant

1. It was not contended by either party that there were any binding variations, or estoppels, which operated to extend time for payment under the first to sixth contracts. 

2. One matter arose for consideration in relation to the first, 30%, instalment under the fifth and sixth contracts. 

3. Each party accepted that the first, 30%, instalment fell due for payment on 30 July 2004 under the fifth contract.  An issue arose as to the basis upon which the fifth contract, properly construed, led to that result.  The issue concerned the meaning of the words '30 days eom [end of month] of final load'. 

4. The wording 'eom of final load' is cryptic and its meaning must be gathered from a consideration of the contract as a whole, its purpose and object, and in light of the known surrounding circumstances, the background, the context and the market in which the parties were operating:  cf Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 [22]. The meaning of the terms of a contract is to be determined by what a reasonable person would have understood them to mean: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 [40].

5. In my opinion, the buyer's obligation to make the first tranche of payment within 30 days 'eom of final load' needs to be considered in the context of the grower's delivery obligations.  That involves further consideration of the meaning of the term 'outturn'.  Mr Williams gave evidence concerning 'outturn' in cross‑examination.  His evidence was as follows:

   Meaning a way that the grain, I think the term you used at this time was that the grain would be out‑turned?---Out‑turned, yes.

   Meaning it will be released from the bulk storage facility to a trucking company on behalf of somebody for export, is that right?---Yes.

   …

   You say there in the first line, 'We supplied 1821.34 metric tonnes of wheat to Australian Foods in relation to contract number CNV300378,' and then you say, 'Australian Foods took deliver [sic] of the wheat from Grain Corp in Lillimur'?---Yes.

   When you say 'delivered the wheat to Australian Foods' you meant you told Australian Foods that the wheat was there for them to collect?---The wheat was there for them to collect, yes.

   And it was their obligation to get the trucks to the Lillimur Grain Corp facility and to take the wheat away?---Yes.

   Not your obligation to get trucks to move the wheat?---No.

   So your arrangement only was to ensure that Grain Corp would release the wheat to the trucks for Australian Foods?---Yes.

6. Having regard to the meaning of the term 'outturn', it seems to me that the fifth contract contemplates that delivery by the grower will be effected by the performance of two steps.  One is for the grower to physically deliver the required quantity of grain to the GrainCorp bulk storage warehouse, if and to the extent that the grower does not already have the grain in storage there.  This first step is apparent from the contract's specification provision to the effect that 'Grain deliveries should meet minimum GrainCorp receival standards …' and from the parties' express intention that 'outturn' would occur from GrainCorp, Lillimur.  The second step is for the grower to authorise GrainCorp, by 27 May 2004, to release grain to the buyer so that it is available for collection thereafter upon request by the buyer.  This second step, which would complete the delivery obligation, would constitute constructive delivery of the grain in the warehouse. 

7. Accordingly, in my view, the parties objectively intended that the buyer would make the first tranche of payment within 30 days of the end of the month in which the last load of grain is collected pursuant to the authority given by the grower, under the contract, to GrainCorp to release the grain.

8. In relation to the fifth contract, the defendant gave the requisite authority in accordance with the contract on or before 27 May 2004. GrainCorp required the grain to be collected, pursuant to that authority, by 30 June 2004 under order no 3WAR099. The bulk of the grain, but not all of it, was collected in June 2004, under order no 3WAR099, pursuant to the defendant's authority given on 27 May 2004. Thirty days from the end of the month, i.e. June, in which the Company last collected grain pursuant to the defendant's authority under the fifth contract was 30 July 2004. Thus, 30% of the contract price was payable by 30 July 2004, even though the Company had not availed itself of the opportunity to collect all the grain that was contractually available to it for collection up to 30 June 2004.

9. In relation to the sixth contract, no authority was required to be given to GrainCorp for the release of grain to the Company.  The defendant's obligation was to make the faba beans available for on‑farm collection by the buyer, upon request by the buyer.  In my opinion, the reference to 'eom of final load' in this contract is a reference to the end of the month in which the Company collects the final load from the farm.

10. In the case of the sixth contract, where the last collection of faba beans occurred in July 2004, the relevant date for payment of the first, 30%, instalment was, accordingly, 30 August 2004.

1. The liabilities of the Company to the defendant, and the payments made, may accordingly be summarised as follows.  These figures referred to below do not take into account the interest which had accrued and was payable on the principal sums due in accordance with the contractual terms.

Liabilities:  Year Ended 30 June 2004
Invoice No		Amount		Date payable
First contract	52212 (30/4/04)		$8,915.84		19/3/04
52400 (1/5/04)		$156,603.81		19/3/04
52484 (1/5/04)		$128,142.09		19/3/04
Second contract	52565 (1/6/04)		$41,372.45		30/4/04
Third contract	52090 (30/4/04)		$7,266.24		30/4/04
Fourth contract	52614 (1/6/04)		$2,012.41		30/4/04
52616 (1/6/04)		$3,361.10		30/4/04

52615 (1/7/04)	$20,926.75	30/4/04
TOTAL	$368,600.69

Payments:  Year Ended 30 June 2004
29/4/04		$20,000
17/5/04		$50,000
1/6/04		$50,000
18/6/04		$100,000
TOTAL		$220,000
Amount unpaid as from 18 and 30 June 2004:		$148,600.69

Liabilities:  July 2004
Invoice No		Amount		Date payable
Fifth contract	52672 (28/6/04)		$125,839.13		30/7/04
53029 (24/8/04)		$3,252.94		30/7/04
c/f from 30/6/04	$148,600.69
TOTAL		$277,692.76

Payments:  July 2004
9/7/04		$40,000
15/7/04		$25,000
23/7/04		$25,000
TOTAL		$90,000
Amount unpaid as at 31 July 2004:		$187,692.76

Liabilities:  August to 29 October 2004
Invoice No		Amount		Date payable
Second contract	53017 (31/8/04)		$55,163.85		31/8/04
Third contract	53011 (31/8/04)		$9,687.70		31/8/04
Fourth contract	53013 (31/8/04)		$27,902.34		31/8/04
53014 (31/8/04)		$2,682.67		31/8/04
53015 (31/8/04)		$4,482.55		31/8/04
Fifth contract	53030 (31/8/04)		$172,121.95		31/8/04

Sixth contract	53043 (31/8/04)	$11,621.78	30/8/04
53044 (31/8/04)	$15,495.70	31/8/04
c/f July 2004	$187,692.76
TOTAL	$486,851.30

Payments:  August to 29 October 2004
Nil
Amount unpaid as at 29 October 2004		$486,851.30

Mr Williams' telephone communications with the Company, his concerns regarding repayment, and his dealings with the Company

1. Mr Williams in his affidavit of 24 February 2009 (exhibit 5) deposes (at pars 30 ‑ 32):

   I telephoned [the Company] some time in late August 2004 to enquire when the next payment would be made.  I do not recall whether I spoke to Ervin Leong, an employee of [the Company], or Pavan Shivnani, the director.  I was not told anything which indicated that [the Company] was in financial difficulty or could not pay us.  I had not previously telephoned [the Company] seeking payment.

   I received a telephone call from either Pavan Shivnani, or his wife Kanchan Aswani, to let me know that [the Company] had gone into external administration, some time after Mr Barry Honey had been appointed as a receiver and manager of the company.  Prior to that telephone call I was not aware that [the Company] was in any financial difficulty.

   At no time did I consider that [the Company] would not or could not pay us.

2. The plaintiff has adduced evidence, which I accept, in the form of a summary, prepared from the Company's telephone records, of the dates on which telephone calls were made by the Company to the defendant.  Mr Williams was also cross‑examined about whether and for what purpose he had telephone communications with the Company in the period prior to October 2004.  In cross‑examination he made a number of concessions in that regard.  The relevant dates on or periods in which calls occurred, and my findings as to the subject matter of those discussions, are referred to below.  The statement in his affidavit that prior to late August 2004 he had not previously telephoned the Company seeking payment, was clearly erroneous in light of his evidence in cross‑examination.

3. At the outset, it is appropriate to record my impression of Mr Williams in the witness box.  Mr Williams was not a very forthcoming witness.  He tended to be somewhat argumentative and glib.  He had an extremely limited recollection of the events in question, as he repeatedly suggested in answers to cross‑examination.  Nevertheless, I accept that, when pressed, he generally (but subject particularly to my later observations regarding his evidence concerning the position after 18 June 2004) gave grudgingly honest answers under cross‑examination.  To the limited extent that he denied conduct and communications that are recorded in or are to be inferred from the contemporaneous documents, and to the extent that his evidence is inconsistent with the contemporaneous documentary record, I have been unable to accept that evidence given his overall lack of recollection, and my impression of his demeanour. 

4. Prior to selling grain to the Company Mr Williams regarded it as prudent to get the defendant's solicitors to do a credit check on the Company.  He had not dealt with the Company before.  He had been used to dealing with the Australian Barley Board (ABB) and the Australian Wheat Board (AWB).  ABB and AWB had always paid the defendant on time and in the correct amounts.

5. Despite his denial that the poor credit rating given by the Baycorp Advantage credit check was of any concern to him, he was sufficiently concerned to instruct the defendant's solicitors to explore with the Company means by which the defendant could be assured of payment if the defendant sold grain to the Company.  Following the Company's letter of 23 December 2003, the prospect of being given some security allayed Mr Williams' concerns sufficiently for the purpose of continuing to negotiate the details of a proposed sale of canola.  The security of an assignment of the ultimate sale proceeds did not materialise, but Mr Williams was confident enough to cause the defendant to enter into the first contract, which was a 'cash price' contract, under which the Company was to pay within 30 days of signing the contract.

6. At this time, the defendant had an overdraft with the Commonwealth Bank of Australia, and was relying on payment under the first contract to manage its commitments to the bank.  Problems emerged with GrainCorp refusing to allow the outturn of the canola, and the payment of the money which the defendant expected to receive under the first contract was delayed.

7. In early to mid‑March 2004 Mr Williams concerned himself with the outturn issue that had arisen, rather than with any general concerns over the Company's capacity to pay.  The payment under the first contract was not due, according to its 30 day terms, until about 19 March 2004.  On 18 March 2004 Mr Williams, on behalf of the defendant, entered into the second contract.  That was a 'pool price' contract, the first instalment of which was payable on 30 April 2004.

8. By 26 March 2004, the 30 day period for payment under the first contract had passed, and the outturn problems had been resolved.  Mr Williams was, by then, repeatedly ringing the Company for payment under the first contract.  The Company indicated, by its letter of 26 March 2004, that it would pay within seven days after packing the canola ready for shipment overseas, and would pay interest between the date of outturn and the date of payment.  Mr Williams did not agree to that arrangement, but neither did he attempt to enforce the first contract according to its terms.  He adopted a 'wait and see' attitude.  He was in communication with Mr Shivnani about payment, and he had an expectation that payment would be made soon, with interest.

9. With that in mind, on 1 April 2004, the defendant entered into the third and fourth contracts.  At that time, the first tranche of payment was not due under the second, third and fourth contracts until 30 April 2004.

10. Despite his denial, I find, consistently with the Company's internal email dated 22 April 2004, that Mr Williams did send to the Company a copy of the AusBulk letter to the Kings dated 14 April 2004.  He was in frequent telephone contact with the Company in April expressing concerns about still not having received any payment.  This prompted the Company to make some attempt to assuage Mr Williams' concerns, by making the relatively small payment referred to below.

11. The defendant received a relatively modest sum of $20,000 on 29 April 2004.  By this time Mr Williams understood that the defendant was owed over $280,000 under the first contract.  The defendant still had not received payment in full.  Mr Williams, in cross‑examination, accepted that the defendant was owed a significant amount of money, that the $20,000 was only a very small payment, and that there was no rationale for the Company picking such a small, rounded amount to pay the defendant.  He said, however, that he 'didn't really get that worried'.  The following exchange also occurred:

    I'm just asking you about when you received this 20,000, you would have inferred that they have paid you an amount that they can pay you and it's not the amount that you were owed?---Yes, correct.

12. On 30 April 2004 payments in respect of the first instalment under the second, third and fourth contracts fell due but were not paid.  No further payments had been made, beyond the $20,000, in respect of the sum of approximately $280,000 which the defendant was expecting under the first contract.  Mr Williams' evidence was that he was not 'that' worried about non‑payment at this time.  I accept that he did not believe or suspect in April that the defendant would not receive payment in full for the debts then contracted, but I find that he nevertheless was anxious to receive payment, particularly of the amounts overdue under the first contract, and had telephone communications with the Company seeking payment on 3, 4, 6, 10, 13 and 14 May 2004.

13. Despite these communications, by mid‑May 2004, no further payments had been received.  Mr Williams accepted in cross‑examination that the sums due around this time were significant, and that he had wanted payment as soon as possible.  Mr Williams became more anxious as to when the defendant would receive payment.  He again took the matter up with Mr Shivnani directly around mid‑May 2004.  I infer that, in light of the reference to that topic in the letter of 24 May, Mr Williams inquired of the Company's progress in relation to sales of grain and Mr Shivnani assured him that sales were in place, including a recent 10,000 mt sale to China.  I also infer that Mr Shivnani assured Mr Williams that the Company would make a further down‑payment immediately, with the balance to be paid in a month.  Mr Williams' concerns were allayed to a considerable extent.  He received a payment of $50,000 on 17 May 2004, and the offer of payment in full by 18 June 2004, as recorded in the Company's letter of 24 May 2004.

14. After 24 May 2004 Mr Williams telephoned the Company, including Mr Shivnani, from time to time to see whether there would be any difficulty with the proposed payment under the 24 May letter.  He was sufficiently assured that payment would not be a problem that on 26 May 2004 the defendant entered into the fifth contract, and on 4 June 2004 the defendant entered into the sixth and final contract.  At the time of doing so, I find that Mr Williams expected payment in full under the first contract, and the first instalment payment under each of the second, third and fourth contracts by 18 June 2004, as he believed that payment would be made in accordance with the 24 May letter.  He did not expect not to be paid on 18 June 2004.

15. On 18 June 2004 the Company paid the defendant $100,000, less than half of the amount then in arrears.  Mr Williams was asked in cross‑examination about the Company not paying the full amount:  'At that date you had no other excuse as to why that [full payment] was not done?---No'.

16. After this default he was in frequent contact with the Company, pressing for payment, from late June 2004 through July 2004.  As a result of his efforts, the defendant received the other three alleged preferences, being $40,000 on 9 July, $25,000 on 15 July and $25,000 on 23 July.

17. Mr Williams continued to speak to senior officers of the Company, particularly Mr Shivnani and his wife, seeking payment in late August 2004. 

18. On 31 August 2004 Mr Williams knew that the defendant was due to be paid the second, 40%, instalment under the second, third, fourth, fifth and sixth contracts.  At that time, as he knew, a substantial liability remained unpaid with respect to the first, 30%, instalment under the second, third, fourth and fifth contracts.

19. I find that the effect of his communication with the Company on 31 August 2004 was to enquire of the Company when the defendant could expect to receive at least some further payment in part reduction of the then existing indebtedness.  He says in par 30 of his affidavit that 'I was not told anything which indicated that [the Company] was in financial difficulty or could not pay us'.  I do not accept that evidence.  First, it is not evidence of what was said by the Company in response to his inquiry.  It is in substance an assertion of conclusion or opinion, the reasonableness and veracity of which cannot be effectively considered in the absence of evidence of the underlying conversation from which the conclusion or opinion is said to have been drawn.  Secondly, if he thought the Company was able to pay this substantial indebtedness, he would, in my view, have taken steps to enforce immediate payment in full.  Although he did not cause the defendant's solicitors to write a letter of demand until October 2004, this delay, in my view, reflected a belief that the prospect of repayment was low, and that the defendant had a better chance of receiving at least some further moneys if, as in the past, Mr Williams persisted in direct contact with senior officers of the Company, being Mr Shivnani or his wife, rather than if the defendant lost or jeopardised that personal connexion by putting the matter in the hands of its solicitors.  I infer that the solicitors were instructed when Mr Williams ultimately felt that the time had passed in which there was any potential for any commercial leverage to be gained by direct contact with Mr Shivnani or his wife.

Principles in relation to insolvency

1. Section 95A of the Act 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.

2. The words 'as and when they become due and payable' make it clear that although the issue of prima facie insolvency must be determined as at a particular time, the determination calls for a degree of 'forward looking':  Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187, 198. How far into the future this 'forward looking' assessment will go will depend on all the circumstances, the nature of the company's business and, if known, its future liabilities: Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243; (2005) 219 ALR 555 [103]; 54 ACSR 410 (Lewis v Doran Appeal Decision); The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239; (2008) 225 FLR 1 [1124] ‑ [1129].

3. In The Bell Group v Westpac Banking, Owen J considered that in the circumstances the appropriate forward looking period was a 12 month period with a primary focus on the first four months ([1129]). 

4. The ability to pay debts as and when they become due is a question of fact, to be decided as a matter of commercial reality in the light of all the circumstances.  It is necessary to consider the company's financial position in its entirety, including its activities, assets, liabilities, cash and money which it could procure by sale or on the security of its assets, and its ability to obtain financial assistance by way of loan or subscription for share capital:  Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290, 329; Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213, 224.

5. A temporary lack of liquidity must be distinguished from an endemic shortage of working capital:  Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321, 328.

6. Unlike the former s 95(1) of the Bankruptcy Act 1924 (Cth) (repealed), the test for insolvency under s 95A of the Act does not require the company to be in a position to pay its debts as they fall due 'from its own money': see the decision in Lewis v Doran [2004] NSWSC 608; (2004) 50 ACSR 175 [95] ‑ [105] (Palmer J) (Lewis v Doran at first instance).  The question of whether a company, to be solvent, has to be able to pay its debts 'from its own money', assumes significance when insolvency is disputed on the basis that the company had access to unsecured borrowings to finance its current debts.

7. Generally, prior to the enactment of s 95A, the weight of authority was that access to unsecured borrowings was not taken into account in assessing solvency: Lewis v Doran at first instance [89] ‑ [92].

8. The position is otherwise in relation to s 95A, which does not contain the words 'from its own money'. In relation to s 95A, access to unsecured borrowings, even from shareholders or creditors, is regarded as an aspect of the overall commercial reality by which the company's solvency is to be judged: Standard Chartered Bank v Antico; Lewis v Doran at first instance; Lewis v Doran Appeal Decision [106] ‑ [114]; Mulherin v Bank of Western Australia Ltd [2006] QCA 175 [111] ‑ [115]; The Bell Group v Westpac Banking [1087] ‑ [1089].

9. In the Lewis v Doran Appeal Decision, the NSW Court of Appeal said:

   Particularly when the limiting words 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 [109].

10. The above observations recognise that the provision of unsecured loans will only 'cure' what would otherwise be an insolvent position, if the terms of the loan are such that the company can re‑order its affairs and pay its other debts as they fall due.  Otherwise, as Mandie J said in Harrison v Lewis [2001] VSC 27; (2001) 19 ACLC 566, in relation to access to unsecured borrowings:

    One debt would simply have been replaced with another debt which could not be repaid [49].

11. The observations of Barrett J in Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 54 ACSR 583 are also relevant:

    I accept that funds which, on a realistic commercial assessment, are capable of being raised from outside sources are relevant to the question whether a company is solvent.  But the availability of such funds in the form of a loan will not enhance solvency (or have the potential to avoid a finding of insolvency) unless the loan terms are such as to exclude the loan liability from consideration in its own right as part of the debts due or near due.  In other words, 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 ; [2003] NSWCA 163) 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 [99].

1. Similarly, in Ford's Principles of Corporations Law (loose‑leaf, 2000) cited in Lewis v Doran at first instance [103] ‑ [104], the learned authors, in my respectful view correctly, make the following observation concerning shareholders/directors loans to a company:

   Credit provided by the company's directors or proprietors may have to be rejected as a cash resource (Re RHD Power Services Pty Ltd (in liq) (1991) 3 ACSR 261 at 264) unless the court can be satisfied that the credit will continue: Re Kerisbeck Pty Ltd (1992) 10 ACLC 619. Offers of credit by directors or proprietors prompt the question as to why they do not inject the money as share capital [20.100].

2. In relation to assessing insolvency, the following propositions were enunciated by Owen J in The Bell Group v Westpac Banking [1065] ‑ [1067], [1070], [1072] ‑ [1074].  At common law, the solvency of a company is assessed by one or other (or a combination) of two measures:  the 'cash flow' test and the 'balance sheet' test.  The 'cash flow' test is an assessment of solvency based on a company's ability to meet its debts, i.e. its current liabilities, as and when they fall due.  This test assesses the financial health of a company by reference to its capacity to finance its current operations and looks at whether the company's business is viable.  The 'balance sheet' test considers whether a company's total external liabilities are greater than the value of its assets.  In Australia, the cash flow test is generally viewed as the more appropriate mechanism for assessing solvency, both for individuals and companies.  However, it would be wrong to dismiss the balance sheet test as irrelevant, as it can provide context for the proper application of the cash flow test. 

3. In Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103, Owen J (Franklyn & Murray JJ agreeing) said:

   A comparison of a corporation's current assets and current liabilities may provide a useful guide to the overall ability of the company to pay its debts …

   The comparison between current assets and liabilities, either in absolute form, or as a working capital ratio, can reveal whether a company will have sufficient funds on hand to pay the debts that will soon fall due.  But it will depend on the circumstances.

   An excess of current assets over current liabilities will not necessarily indicate ability to meet debts.  It depends on the nature of the assets.  For example, current assets might include a very high level of inventories.  Inventories can help corporations meet their debts only if the inventories can be sold, and the money recouped, before their debts fall due … If the amount of inventories is higher than could be sold before debts fall due, then to include the full amount of inventories is to overstate the level of readily realisable current assets available to the company.  The test to be applied is not whether the company could meet all its debts, after sufficient time to sell all its inventory, but rather, whether it can meet the debts as they fall due, having regard to all realisable assets including inventory (120).

4. A debt is 'due' when it is legally due, and the fact that no letter or statutory demand has been issued in respect of the debt does not in itself warrant the conclusion that the debt is not due:  Lee Kong v Pilkington (112); Southern Cross Interiors v Deputy Commissioner of Taxation (224 ‑ 225).

5. In assessing solvency, the court acts generally upon the basis that a contract debt is payable at the time stipulated for payment in the contract absent proof of an express or implied agreement extending the time for payment, or an estoppel preventing the creditor from relying on the stipulated time for payment, or a well established and well recognised course of conduct in the industry in which the company operates, or between the company and its creditors as a whole, whereby debts are payable at a time other than that stipulated in the creditor's terms of trade or are payable only on demand:  Southern Cross Interiors v Deputy Commissioner of Taxation (225); Travers (as liquidator of Askernish Pty Ltd (in liq)) v Commissioner of Taxation [2006] FCA 1073; (2006) 58 ACSR 472 [25]; White Constructions (ACT) Pty Ltd (in liq) v White [2004] NSWSC 71; (2004) 49 ACSR 220 [291]; Sutherland & Anor (as joint liquidators of Australian Coal Technology) v Hanson Construction Materials Pty Ltd [2009] NSWSC 232; (2009) 254 ALR 650 [12].

6. Further, the failure to pay a debt that has been due for some time may, in certain circumstances, be prima facie evidence of the insolvency of the debtor:  Quick v StolandPty Ltd (1998) 87 FCR 371, 385 (Finkelstein J); Australian Securities and Investments Commission v Plymin [2003] VSC 123; (2003) 46 ACSR 126 [384]. On the other hand, depending on all the circumstances, it may be inappropriate to place undue weight on dilatory payment, as 'debts are not always paid on time by solvent traders': Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinx Pty Ltd [2001] NSWSC 230; (2001) 37 ACSR 477 [46]. The nature of the debt may be relevant to a consideration of the significance of its non‑payment. For example, 'in the case of a loan made to a director … there might be any number of reasons why the loan has not been repaid. Perhaps there had been no demand for payment. Perhaps it has been agreed that the loan should remain outstanding for a further period. Perhaps the failure to repay the loan was an oversight': Quick v Stoland (385).

7. The fact that an indulgence has been sought by a debtor may be weighed, in combination with other factors, as telling against solvency of the debtor:  Sutherland v Eurolinx [66].

8. A court, in determining the question of solvency, may take into account facts available in hindsight, i.e. after the determinative date of solvency, if the facts shed light on the state of affairs at the time, and on what was, or ought to have been, known or knowable about the state of affairs:  The Bell Group v Westpac Banking [1115] ‑ [1118]; Lewis v Doran at first instance [107] ‑ [112].

Insolvency - the evidence generally

1. The evidence adduced by the plaintiff on the issue of insolvency comprised:

   (a)the affidavit of Mr Barry Honey sworn 12 December 2008, 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.

2. The defendant did not adduce any evidence on insolvency and did not cross‑examine Mr Honey or the plaintiff on their affidavits.

Mr Honey's evidence

1. 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. 

2. 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.

3. 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)

1. 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.

2. 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.

3. 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)

1. 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)

1. 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.)

2. 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.

3. 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. 

4. 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.

5. 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.

1. 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'). 

2. Mr Honey said there was no evidence of achieving the critical success factors to which he referred.

3. 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.

4. 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. 

5. 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.

6. 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.  I interpolate here that the Company's packing and storage difficulties are also clearly evident from the Company's letter to Mr Williams dated 24 March 2004, and the Company's poor relationship with AusBulk is apparent from the letter from AusBulk to the Kings dated 14 April 2004.  Mr Honey also referred to the fact that shipping and storage companies had required payment in advance.

7. 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. 

8. 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. 

9. 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. 

1. 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 relation to assets, cannot be regarded as even approximating the Company's true position at that time.

2. 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 ([124] above), 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.

3. Fourthly, as at 18 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 [108] above).  Accordingly, the nature, background and circumstances of this indebtedness needs to be considered.

4. The debt under the first contract, of approximately $294,000, fell due for payment on 19 March 2004.  A modest payment of $20,000 was made the following month, leaving $274,000 in arrears by the end of April 2004.  Also by then the Company had incurred, and failed to pay by the due date, 30 April 2004, liabilities of approximately $75,000 under the barley contracts.  There was no further payment until the sum of $50,000 was paid on 17 May 2004, leaving $224,000 still in arrears from 19 March under the first contract and $75,000 in arrears under the barley contracts.  There was no agreement to defer payment in this period of default.  By 24 May 2004 only $70,000, or less than 25% of the debt of approximately $294,000 due on 19 March under the first contract had been paid, and the debt of approximately $75,000 due under the barley contracts remained unpaid.  Throughout this period there were numerous demands for payment.

5. By the 24 May letter, the Company proposed an indulgence by which it sought to defer the payment of those debts to 18 June 2004, although there was, as the parties in this action have submitted, no binding variation operating to extend the due date for payment to 18 June.  Also neither party suggested an estoppel.  There was then a payment of $50,000 on 1 June 2004.

6. On 18 June 2004 the Company failed, however, to honour the indulgence it had sought, and paid only $100,000 of the amount then outstanding.  Again there was no agreement or an estoppel operating to defer payment beyond that date.  There was not, on this occasion, even a proposal for an indulgence to defer payment to a later date.  After the payment on 18 June 2004, over $148,000 remained owing by the Company.  Of this amount, approximately $74,000 remained in arrears from 19 March 2004 and $74,000 remained in arrears from 30 April 2004.  These debts went to the core of the Company's business - its liabilities for the grain which it traded.

7. The default in payment on 18 June 2004, in light of the nature and history of the Company's indebtedness to the defendant, raises the inference that the Company was suffering an endemic shortage of working capital as at 18 June 2004.  This inference is, I think, confirmed by the following matters.  The Company's letters of 22 January and 24 March 2004 indicate that it regarded the defendant as an important supplier, who could assist in bringing credibility to the Company's business model.  Mr Honey's evidence further confirms that the defendant (along with Mr Keller) was one of the Company's largest suppliers of grain.  The importance of the defendant as a supplier to the Company indicates, to my mind, that the Company on 18 June 2004 would have paid its debts to the defendant in full if it could or, at least, it would have proposed and entered into a binding agreement, on terms suitable to the defendant, to defer payment.  It did neither. The non‑payment was no mere oversight.  The circumstances as at 18 June 2004 indicate more than a dilatory attitude to payment, or simply a temporary lack of liquidity, but rather point to an endemic shortage of working capital.

8. The events subsequent to 18 June 2004 do not put a different complexion on matters.  Payments in July amounted to only $90,000, which were insufficient to discharge the arrears at 30 June 2004, and other debts fell due for payment that month. 

9. As I have said, it is appropriate, when considering insolvency as at 18 June 2004, to 'look forward' to July and August 2004, to the debts which, having been incurred prior to 18 June, would fall due for payment in those months.  Debts of approximately $129,000 which had been incurred in May under the fifth contract fell due for payment on 30 July 2004.  These debts were not then paid.  Next, debts which had been incurred prior to 18 June 2004 under the second, third, fourth, fifth and sixth contracts, totalling approximately $299,000, fell due for payment at the end of August 2004.  These debts also went unpaid.  The fact of non‑payment of those debts in the two months succeeding June 2004 is a fact which helps throw 'a reflected light as to the actual state of affairs' as at 18 June 2004 (cf The Bell Group v Westpac Banking [1113]), in that, it tends to confirm the conclusion that there was an endemic shortage of working capital as at 18 June 2004.

10. Taking into account all the considerations referred to in this section of these reasons, I find that the Company was insolvent in the period as at and from 18 June 2004 onwards.  The plaintiff's opinion evidence confirms that finding but is not necessary for the making of it.

Section 588FG(2) - principles

1. Section 588FG(2) of the Act provides:

   A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director related transaction of the company, and it is proved that:

   (a)the person became a party to the transaction in good faith; and

   (b)at the time when the person became such a party:

   (i)the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

   (ii)a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and

   (c)the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

2. A person acts in good faith within the meaning of s 588FG(2)(a) if he or she acts with propriety or honesty. It is a wholly subjective test. See Levi v Guerlini (1997) 24 ACSR 159, 170; Sutherland v Eurolinx [39]; Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307 [44] ‑ [45].

3. A creditor receiving payment who actually knows of the insolvent circumstances of the debtor, or who actually suspects insolvency on reasonable grounds, would not ordinarily be said to be acting in good faith. In that regard there is some overlap in the elements of s 588FG(2)(a) and s 588FG(2)(b)(i). See Sutherland v Eurolinx [38]. The test of good faith is not, however, confined to those matters: Levi v Guerlini (170); Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651, 656.

4. Where an indulgence in payment has been arranged and is intended to be relied upon, ordinarily the good faith defence is tested by reference to the extended period which reflects that indulgence:  Sutherland v Eurolinx [67].

5. The onus is on the creditor to establish the defences under s 588FG(2):  Levi v Guerlini (170); Sands & McDougall Wholesale Pty Ltd (in liq) v Commissioner of Taxation (Cth) [1998] VSCA 76; [1999] 1 VR 489, 509; Sutherland t/as Southern Livestock Nutrition v Lofthouse [2007] VSCA 197; (2007) 64 ACSR 655 [16].

6. Both parts of s 588FG(2)(b) involve a consideration of whether there was a basis for 'suspecting' that the company was or would become insolvent.  In Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266, 303 ‑ 304 Kitto J referred to a 'suspicion' as something more than a mere idle wondering whether a matter exists or not; but rather a positive feeling of actual apprehension or mistrust, 'a real apprehension though with insufficient warrant for a positive conclusion'.

7. The suspicion required is suspicion of actual insolvency, and not a suspicion (or even belief) that the debtor might be insolvent:  Queensland Bacon v Rees (291 ‑ 292).

8. A failure to pay a debt, or to pay it in a timely way, may of itself not ground a suspicion of insolvency.  It may, instead, indicate no more than a temporary shortage of liquidity, or perhaps raise as a possibility that the debtor is insolvent, but without providing sufficient foundation for the formation of an actual suspicion that the debtor is in fact insolvent:  Queensland Bacon v Rees (293, 298, 305 ‑ 306, 310 ‑ 311).  A failure to pay a debt, or its late payment, must be considered in the context of the history of the dealings between the parties and all the commercial circumstances.  The size of the debt and whether it has remained unpaid, or unpaid in part, over a substantial period of time, are generally important considerations in determining whether there were grounds for suspecting insolvency:  Queensland Bacon v Rees (293 ‑ 294, 306); Mann v Sangria [48] ‑ [52].

9. The extent to which there is a distinction between (b)(i) and (b)(ii) of s 588FG(2) has not been authoritatively determined.  As the tests are cumulative, it is rarely necessary to classify a consideration under one branch or the other.  See Cussen (as Liquidator of Akai Pty Ltd (in liq)) v Commissioner of Taxation [2004] NSWSC 383; (2004) 51 ACSR 530 [101] (Cussen Appeal Decision) (Spigelman CJ) ( Handley & Tobias JJA agreeing). 

10. Insofar as s 588FG(2)(b)(ii) is concerned, a 'reasonable person' is that of a hypothetical person who is assumed to have knowledge and experience of the 'average business person'.  In Cussen (as liquidator of Akai Pty Ltd (in liq) v Commissioner of Taxation [2003] NSWSC 841; (2003) 47 ACSR 107, Palmer J at first instance (in a passage approved in the Cussen Appeal Decision [31]) said:

    As has been emphasised by Austin J in Dean‑Willcocks v Commonwealth Bank of Australia (2003) 45 ACSR 564 at 572, [33] ‑ [35], the objective test imposed by s 588FG(2)(b)(ii) does not require an examination whether the particular creditor, acting reasonably, would have had reasonable grounds for suspecting insolvency, with the consequence that if the creditor happens to be a bank (or a tax collecting authority) one asks whether a reasonable bank (or a reasonable tax collecting authority) would reasonably have had such a suspicion. Rather, whether or not the creditor would have reasonably had a suspicion is determined according to the presumed perception of 'the ordinary person on the Bondi bus': per Young J in Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543 at 545-6; 12 ACSR 165 at 167‑9. That pithy phrase simply denotes that an objective test is to be applied and the standard of measurement is that of a hypothetical person who is assumed to have the knowledge and experience of the 'average business person', but certainly not the skills and experience of an expert financial analyst or someone with legal training or any other kind of tertiary education: ibid [64].

11. The 'reasonable person' in s 588FG(2)(b)(ii) must be assumed to have the full range of information actually available to that creditor, but not information which is not in fact available but which a 'reasonable person' would have sought and obtained:  Cussen Appeal Decision [114].

12. If the creditor receiving the impugned payment does not in fact infer insolvency or find grounds to suspect its existence, and so continues to provide credit to the company, that in itself affords some evidence, although it is not determinative, of how a reasonable business person would regard the matter:  Queensland Bacon v Rees (300, 303, 306, 311, 313 ‑ 314).

13. For the purposes of applying s 588FG(2), the matter is to be considered through the contemporary eyes of the parties in the commercial circumstances then prevailing, and without the benefit of hindsight:  Sutherland v Eurolinx [43].

Findings on s 588FG(2)

1. I find, in the circumstances recounted in the section of these reasons dealing with Mr Williams' telephone communications with the Company and his concerns, above, that Mr Williams did not know or suspect, at the time of receipt of the payment on 18 June 2004, or prior to then, that the Company was insolvent.

2. Despite my reservations as to Mr Williams' reliability as a witness, I find that had he known or suspected that the Company was insolvent in May and early June 2004, he would not have allowed the Company to delay payment under the first, second, third and fourth contracts until 18 June 2004, and he would not have caused the defendant to enter into the fifth and sixth contracts.  The fifth contract was particularly important because of its size and because it required delivery, in the sense I have described earlier, by 27 May 2004, with the first tranche of payment only falling due at the end of July 2004, the second tranche falling due one month after that, and the third not until April 2005.  In my opinion, Mr Williams would not have allowed the defendant to assume obligations under a contract with that level of exposure to the credit risk of the buyer if he knew or suspected that the buyer was insolvent at the time.

3. I am cognisant, in reaching this conclusion, that the Company was in serious default in its obligations to the defendant prior to 24 May 2004, and that the payments of $20,000 on 29 April 2004 and $50,000 on 17 May 2004 were, and I find were understood by Mr Williams to be, token payments representing all that the Company could afford to pay the defendant at the time.  Nevertheless, the fact that he did not cause the defendant to enforce the debts owed to it in this period, and caused the defendant to enter into the fifth and sixth contracts, indicates, in my opinion, that he viewed the default and conduct of the Company up to 24 May 2004 as the product of a temporary lack of liquidity that would likely be resolved by 18 June 2004.  In my view, he did not form a belief, or suspicion, that the Company was by 24 May 2004 insolvent or that it would become insolvent by 18 June 2004.

4. In my opinion, the defendant also had no reasonable grounds for suspecting that the Company was insolvent at the time of receipt of the payment on 18 June 2004 or prior to then (s 588FG(2)(b)(i)).  Also, in my opinion, a reasonable person, i.e. the average business person, in the defendant's circumstances, would have had no such grounds for so suspecting (s 588FG(2)(b)(ii)).  Undoubtedly, in my view, the events up to 24 May 2004 would have led the defendant, or a reasonable person in the defendant's circumstances, to conclude that the Company had experienced 'a serious and perhaps a dangerous lack of liquidity' (Queensland Bacon v Rees (296 ‑ 297)).  That conclusion, in my view, would be a reasonable inference to be drawn from the contents of the Company's letter to the defendant dated 24 March 2004, the difficulties which the defendant experienced in having GrainCorp act upon the defendant's instructions to release grain to the Company and the relatively modest payments made to the defendant having regard to the sizeable debt due to the defendant in the period 19 March to 24 May 2004.  In my view, it would have been apparent to the defendant, and a reasonable person in the defendant's circumstances, that a bottle‑neck had arisen in the Company's business, with liabilities for purchases of grain, particularly from Victorian growers, accumulating and not being matched by an ability to obtain access to the grain to export it and generate revenue.  The question of sales of grain was, as I have found, discussed between Mr Williams and Mr Shivnani around mid‑May and Mr Williams received assurances that sales were underway, including the then recent sale to China.  In my opinion, the defendant had, and a reasonable person in the defendant's circumstances would have had, no reason to suspect that cash‑flow would not be restored by 18 June 2004, given that exports of grain should have gradually increased, generating more and more cash‑flow, over the period following the apparent resolution of the Company's outturn problems in late March 2004.  It is important to put aside hindsight here.  Also, as I have found, Mr Williams made further inquiries of the Company in late May and early June 2004 as to whether payment could still be expected by 18 June 2004.  He was given sufficient assurance to have the confidence to cause the defendant to enter into the fifth and sixth contracts.

5. There is no evidence of collusion or other impropriety, which could be relevant to s 588FG(2)(a).

6. I find that the defendant has made out the defences under s 588FG(2)(a) and (b) of the Act in respect of the first alleged preference on 18 June 2004.

7. Nevertheless, I find that the defendant has not made out the defences under s 588FG(2)(a) and (b) of the Act in respect of the payments on 9, 15 and 23 July 2004. In my opinion, the defendant has not established that it received these payments without suspicion of insolvency on reasonable grounds. Nor did it establish that it had no reasonable grounds for suspecting that the Company was insolvent at the time it received the payments in the period 9 ‑ 23 July 2004. Further, I find that the defendant has not established that a reasonable person in the defendant's circumstances would have had no reasonable grounds for suspecting that the Company was insolvent at that time.

8. The matters on which I base these findings are as follows.

9. First, full payment of the liabilities, as proposed under the 24 May letter, never eventuated.  The defendant had been expecting to receive around $250,000 (including interest) on 18 June 2004.  It received less than half of that amount.  That kind of default, or indeed any default, could not be recalled in the 30 years in which Mr Williams had been a farmer dealing with other grain merchants such as AWB and ABB.  Secondly, the failure to honour the terms proposed in the 24 May letter was not the first default that the Company had made.  The 24 May letter itself proposed an indulgence to address earlier, substantial, defaults on 19 March and 30 April 2004.  Thirdly, prior to the start of his dealings with the Company, Mr Williams caused to be obtained a credit check of the Company which indicated that it was a high credit risk.  Whilst Mr Williams was not dissuaded, on that account, from causing the defendant to enter into the six contracts with the Company up to early June 2004, I infer that the defendant would have considered, and a reasonable person in the defendant's circumstances would have considered, the significance of that information afresh after the Company had again failed to pay as promised by 18 June 2004.  Fourthly, Mr Williams said in cross‑examination that he could provide 'no other excuse as to why … [payment in full] was not' made on 18 June 2004.  In my opinion, this is tantamount to a concession that he inferred that the Company had not 'overcome in an adequately brief time the lack of liquidity' which the earlier defaults had indicated (cf Queensland Bacon v Rees (298)).  Fifthly, after the Company had defaulted on its promise to pay by 18 June 2004, there was no further promise, assurance, or indication by the Company that it could or would pay the whole of the amount then remaining outstanding.

1. Sixthly, Mr Williams' evidence in chief on these issues, on which he carried the onus of proof, was brief to the point of perfunctory.  He did not address in his evidence in chief the 24 May letter or its aftermath.  Whilst he said that he had no telephone communications seeking payment prior to August 2004, that evidence, as I have previously noted, was clearly incorrect.  He provided no evidence of communications with the Company after 18 June 2004 which would assist the court to infer that in July 2004 he did not suspect insolvency on reasonable grounds and/or that he had no reasonable grounds for suspecting insolvency or that a reasonable person in the defendant's circumstances would have had no such grounds for so suspecting.  The very general and conclusionary nature of Mr Williams' evidence in pars 31 and 32 of his affidavit (see [73] above), in my view, lacks cogency without specific evidence of the nature and course of the communications following the Company's failure to pay on 18 June 2004.  Moreover, such evidence by its terms appears to me to address the topic of the knowledge which Mr Williams had, or the conclusion he had reached, concerning the solvency of the Company.  The evidence does not address the real question of whether he had sufficient evidence for 'suspecting' that the Company was insolvent.  Suspicion involves 'a real apprehension though with insufficient warrant for a positive conclusion':  Queensland Bacon v Rees (304). 

2. Nor did I accept Mr Williams' evidence in re‑examination that he was not 'worried' about not receiving payment after the Company failed to pay in accordance with the 24 May letter.  He was in frequent communication with the Company seeking payment of the debts owed to the defendant in late June and July 2004.  This resulted in the Company making the limited and desultory payments which it made on 9, 15 and 23 July 2004.  Throughout this period he remained concerned about the defendant's overdraft with the bank.  As early as March 2004 his communications with the Company reflected a concern about the state of the defendant's overdraft and that the defendant was reliant on its sales to the Company to reduce its overdraft.  The concern must have escalated significantly after 18 June 2004.  The defendant's letter of demand dated 19 October 2004 referred to 'countless overdraft facility fees as a result of the non‑payment of the outstanding monies'.

3. The defendant's counsel submits that notwithstanding the above matters, the defences under s 588FG(2)(a) and (b) are established having regard to the defendant's supply of wheat under the fifth contract and the supply of faba beans under the sixth contract. It is submitted that the supply of wheat and faba beans indicates that the defendant did not suspect insolvency, that it had no reasonable grounds to suspect insolvency, and that a reasonable person in the defendant's circumstances would have had no such grounds for so suspecting.

4. I am unable to accept these submissions in relation, relevantly, to the period 9 ‑ 23 July 2004. First, all of the contracts had been entered into prior to 9 July 2004. The defendant assumed no new contractual obligations to deliver grain or pulse after the contracts had been entered into, the last of which was on 4 June 2004. Secondly, in my opinion, delivery under the fifth contract was fully effected by the direction for release of the grain given by the defendant to GrainCorp on or before 27 May 2004. Thirdly, even if physical collection of the wheat by the Company, as opposed to delivery by the defendant, were regarded as important for present purposes, the vast majority of the wheat had been collected by 24 June 2004 under order no 3WAR099. Whilst 132.41 mt was collected on 24 September 2004 under order no 3WAR202, as I indicated earlier, the defendant has given no evidence as to how and in what circumstances that relatively small collection occurred then.

5. Fourthly, the defendant was contractually obliged to make available the faba beans for collection from the farm. The contract provided for payment not simultaneously with collection, but 30 days from the end of the month in which the last load was collected from the farm. I am not persuaded that the defendant's failure to breach that contract provides evidence sufficient to discharge the onus on it in respect of the matters under s 588FG(2)(a) and (b). This is particularly so where the sixth contract was, in the context of the defendant's dealings with the Company, relatively small, and approximately half the faba beans had been collected before 9 July 2004 in any event.

6. Accordingly, in all the circumstances, neither the defence under s 588FG(2)(a) nor the defence under s 588FG(2)(b) has been established by the defendant in relation to the payments on 9, 15 and 23 July 2004.

7. Moreover, even if it were accepted that the defendant had established subjective good faith under s 588FG(2)(a) in respect of the payments on 9, 15 and 23 July 2004, in the circumstances outlined above, the defendant, as I have said, has not proved the defences with respect to s 588FG(2)(b). That provision required the defendant to prove the negative, that the defendant had no reasonable grounds for suspecting insolvency and that a reasonable person in the defendant's circumstances would have had no such grounds for so suspecting. It has 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).

8. For completeness I should refer to two other matters.  The plaintiff had also urged that the communications by the Company to Mr Williams asking him to keep confidential the commercial terms of their arrangements is itself a ground for the suspicion of insolvency.  I do not accept that submission.  It seems to me that the Company may have wished its terms be kept confidential with individual grain growers for various reasons apart from the reason that it was insolvent.  Also, despite my concerns as to his reliability as a witness, I accept Mr Williams' evidence that he was not a reader of The Weekly Times and that he did not read The Weekly Times articles on 30 June and 7 July 2004.

Defence under s 588FA(3)

1. Section 588FA(3) of the Act provides:

   Where:

   (a)a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and

   (b)in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

   then:

   (c)subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

   (d)the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last mentioned paragraph is taken to be such an unfair preference.

2. The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded:  Airservices Australia v Ferrier (1996) 185 CLR 483, 504 ‑ 505.

3. The purpose of the payment will be relevant in determining whether it is part of a wider transaction or running account, as described by the High Court in the following passage from Airservices Australia v Ferrier taken from the majority judgment of Dawson, Gaudron and McHugh JJ (501 ‑ 502):

   If a payment is part of a wider transaction or a 'running account' between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors.  If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due.  But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired.  In such a case a court … looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be 'decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact'.  [Rees v Bank of New South Wales (1964) 111 CLR 210 at 221 ‑ 222]

4. Section 588FA(3) was discussed by Santow J in Sutherland v Eurolinx in these terms:

   Thus the Airservices decision regarding the last payment should not be understood as negating the starting proposition. That proposition is that knowledge, even actual suspicion of insolvency, though coupled with a purpose of getting a previous account paid, does not of itself preclude the running account or continuing business relationship defence. But this is provided there still remains at least a substantive mutual purpose of continued supply which does not come to be subordinated to a predominant purpose of getting paid. It may well be so subordinated where the payer is known to be about to go under and the payee by its actions, such as demands for payment, signals that this has now become its predominant purpose. Further supply after that point is reached will not then suffice to negate that predominant purpose. This is more especially where continued supply is explicable for reasons such as public safety, though that reason by itself will not suffice to negate a running account [151].

5. The defendant submits that the impugned payments were made in circumstances where there was a mutual assumption that there would be a continuance of the relationship of buyer and seller such that the payments were an integral part of a continuing business relationship between the Company and the defendant for the purposes of s 588FA(3). In my opinion, that submission cannot be sustained on the facts in relation, relevantly, to the payments on 9, 15 and 23 July 2004.

6. The last contractual obligation which the defendant entered into for the supply of goods to the Company was on 4 June 2004.  The defendant had, in my view, performed all its contractual obligations with respect to delivery under the first, second, third, fourth and fifth contracts by 30 June 2004.  Even if a different view of delivery were taken with respect to the fifth contract, so as to equate it with collection by the Company, the Company had collected the bulk of the defendant's wheat from GrainCorp by 24 June 2004.  The Company had collected two out of the four loads of faba beans under the sixth contract by 4 July 2004.  The other two loads were collected in pursuance of an existing contract, not a new contract.  There were no other or new contracts in contemplation at this time.  Accordingly, in my view, it is not possible to infer the existence of a mutual assumption on 9, 15 and 23 July 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 payments on 9, 15 and 23 July 2004 were made solely for the purpose of reducing a long‑standing indebtedness, and not for any predominant purpose in relation to inducing the defendant to enter into fresh arrangements for the further supply of goods to the Company.

Conclusion

1. In my opinion the plaintiff has established that the payments made by the Company to the defendant on 9 July, 15 July and 23 July 2004 were unfair preferences within the meaning of s 588FA of the Act. The plaintiff has not succeeded in relation to the payment on 18 June 2004.

2. I will hear the parties in relation to the precise formulation of the orders, and in relation to interest and costs.