White v ACN 153 152 731 Pty Ltd (in liq)
[2018] WASCA 119
•23 JULY 2018
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: HAYDEN LEIGH WHITE IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF PORT VILLAGE ACCOMMODATION PTY LTD (IN LIQ) -v- ACN 153 152 731 PTY LTD (IN LIQ) [2018] WASCA 119
CORAM: MURPHY JA
MITCHELL JA
ALLANSON J
HEARD: 9 MARCH 2018
DELIVERED : 23 JULY 2018
FILE NO/S: CACV 59 of 2017
BETWEEN: HAYDEN LEIGH WHITE IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF PORT VILLAGE ACCOMMODATION PTY LTD (IN LIQ)
Appellant
AND
ACN 153 152 731 PTY LTD (IN LIQ)
First Respondent
HICKORY GROUP PTY LTD
Second Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram: MASTER SANDERSON
Citation: WHITE & TEMPLETON -v- ACN 153 152 731 PTY LTD (in liq) [2017] WASC 52
File Number : COR 19 of 2016
Catchwords:
Corporations law - Insolvency - Alleged unfair preference payments and alleged uncommercial transaction - Where alleged unfair preference payments received by one company and correspondingly paid to parent company - Corresponding payments said to be in discharge of debts owed by payee to parent company - Liquidators' claim to recover corresponding payments made from payee to parent company - whether parent company had established a defence concerning no suspicion of insolvency - Primary court found defence established but by reference to incorrect statutory provision - Whether error vitiates primary judgment
Corporations law - Insolvency - Proper construction of defences under s 588FG(1) and s 588FG(2) of the Corporations Act 2001 (Cth)
Corporations law - Insolvency - Whether parent company receiving payments from payee received a 'benefit' 'because of' the alleged insolvent transactions
Legislation:
Corporations Act 2001 (Cth), s 588FF, s 588FG
Supreme Court Act 1935 (WA), s 58, s 59
Result:
Appeal allowed
Category: A
Representation:
Counsel:
| Appellant | : | Mr B Dharmananda SC & Ms C V Wren |
| First Respondent | : | No appearance |
| Second Respondent | : | Mr J Thompson SC & Mr R J S French |
Solicitors:
| Appellant | : | Clayton Utz |
| First Respondent | : | No appearance |
| Second Respondent | : | B2B Lawyers |
Case(s) referred to in decision(s):
Beckwith v The Queen (1976) 135 CLR 569
Burness v Supaproducts Pty Ltd [2009] FCA 893; (2009) 74 ACSR 1
Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 81 NSWLR 47
Calin v Greater Union Organisation Pty Ltd [1991] HCA 23; (1991) 173 CLR 33
Chappel v Hart [1998] HCA 55; (1998) 195 CLR 232
Cook's Construction Pty Ltd v Brown [2004] NSWCA 105; (2004) 49 ACSR 62
Cussen v Commissioner of Taxation [2003] NSWSC 841; (2003) 47 ACSR 107
Cussen v Commissioner of Taxation [2004] NSWCA 383; (2004) 51 ACSR 530
Deane v The City Bank of Sydney [1904] HCA 44; (1904) 2 CLR 198
Dean‑Willcocks v Commissioner of Taxation [2008] NSWSC 1113
Gedeon v Commissioner of New South Wales Crime Commission [2008] HCA 43; (2008) 236 CLR 120
George v Rockett (1990) 170 CLR 104
Gypsy Jokers Motorcycle Club Inc v Commissioner of Police [2008] HCA 4; (2008) 234 CLR 532
Harkness v Commonwealth Bank of Australia (1993) NSWLR 543
Levi v Guerlini (1997) 24 ACSR 159
Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307
March v E & MH Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506
McLennan v McCallum [2010] WASCA 45
New Cap Reinsurance Corporation Ltd (in liq) v Renaissance Reinsurance Ltd [2002] NSWSC 856; (2002) 192 ALR 601
Ord Irrigation Cooperative Ltd v Department of Water [2018] WASCA 83
Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651
Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355
Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266
Re Employ (No 96) Pty Ltd (in liq) [2013] NSWSC 61; (2013) 93 ACSR 48
Rivarolo Holdings Pty Ltd v Casa Tua (Sales) Pty Ltd (1997) 24 ACSR 105
Sands & McDougall Wholesale Pty Ltd (in liq) v Commissioner of Taxation (Cth) [1998] VSCA 76; [1999] 1 VR 489
Sims v ABC Tissue Products Pty Ltd [2008] NSWSC 192
Sims v Celcast Pty Ltd (1998) 71 SASR 142
Stead v State Government Insurance Commission [1986] HCA 54; (1986) 161 CLR 141
Sutherland t/as Southern Livestock Nutrition v Lofthouse [2007] VSCA 197; (2007) 64 ACSR 655
Sutherland v Eurolinx Pty Ltd [2001] NSWSC 230; (2001) 37 ACSR 477
Sydney Water Corporation v Caruso [2009] NSWCA 391
Trinick v EM & RM Williams & Sons [2009] WASC 297
Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416
Westpac Banking Corporation v Bell Group Ltd (in liq) [No 3] [2012] WASCA 157; (2012) 44 WAR 1
White & Templeton v ACN 153 152 731 Pty Ltd (in liq) [2017] WASC 52
JUDGMENT OF THE COURT:
Introduction
This is an appeal against a decision of Master Sanderson in White & Templeton v ACN 153 152 731 Pty Ltd (in liq)[1] (primary decision). The primary proceedings involved certain claims by the liquidators in the liquidation of Port Village Accommodation Pty Ltd (PVA).
[1] White & Templeton v ACN 153 152 731 Pty Ltd (in liq) [2017] WASC 52.
In 2012, the second respondent (Hickory Group) was the parent company of the first respondent, then known as Hickory Group WA Pty Ltd (HWA). In general terms, PVA paid certain amounts totalling $10,463,116 to HWA in the period between 10 August 2012 to 21 September 2012. The moneys were paid by PVA (as principal) to HWA (as builder) under a building contract. All but one of the relevant payments occurred after the grant of a mortgage by PVA in favour of HWA. HWA paid corresponding amounts to Hickory Group.
The appellants (the liquidators of PVA) sought a declaration that the payments from PVA to HWA were unfair preferences within the meaning of s 588FA of the Corporations Act 2001 (Cth) (Act), and that the mortgage granted by PVA to HWA was an unfair preference, or an uncommercial transaction, within the meaning of s 588FB of the Act. HWA itself is in liquidation. The liquidators of PVA did not seek monetary relief against HWA. Rather, their monetary claim was in respect of the payments that HWA had correspondingly made to Hickory Group. The liquidators sought an order under s 588FF(1)(c) of the Act that Hickory Group pay PVA $10,463,116 (being the sum of the corresponding payments from HWA to Hickory Group) 'or such other amount that … fairly reflects the benefits that Hickory Group received' because of the alleged preferential payments made by PVA to HWA.
The date and amount of each payment in question and the date of the mortgage given by PVA in favour of HWA are summarised in the table below:
| Payments (and mortgage) from PVA to HWA | Payments from HWA to Hickory Group | |
| 10 August 2012 | $500,000 | $500,000 |
| 30 August 2012 | Mortgage | |
| 11 September 2012 | $1,500,000 | |
| 12 September 2012 | $1,500,000 | |
| 13 September 2012 | $8,163,115.99 | |
| 14 September 2012 | $5,000,000 | |
| 14 September 2012 | $3,163,155 | |
| 21 September 2012 | $300,000.64 | $300,000.64 |
| Total Payments | $10,463,115.64 | $10,463,116.63 |
The learned master dismissed the liquidators' claims, and they now appeal from that decision. The master did not decide the questions of insolvency, whether the payments were preferential, whether the mortgage was an uncommercial transaction, or whether the liquidators had established an entitlement to relief under s 588FF and, if so, what relief. Rather, the master, in effect, assumed that even if the liquidators' claims were otherwise wholly established, Hickory Group had established a defence under s 588FG(2) of the Act.
Section 588FG of the Act provides, in general terms, that the court is not to make an order against a person who proves that he or she took the benefit of the transaction, or became a party to the transaction in good faith, and at a time when the person had no reasonable grounds for suspecting insolvency, and a reasonable person in the person's circumstances would have had no reasonable grounds for suspecting insolvency.
Section 588FG has two main subsections. In broad terms, s 588FG(1) is, in effect, directed to a person who is not a party to the relevant transaction, and s 588FG(2) is directed to a party. The liquidators' starting point in this appeal is that the master referred to and purported to apply s 588FG(2), when he should have referred to and applied s 588FG(1). That was because Hickory Group relied on the defence under s 588FG(1), on the basis that it was not a party to the (alleged) preferential payments from PVA to HWA, and was not a party to the (alleged) preferential or uncommercial transaction (the mortgage) between PVA and HWA.
It is common ground in this appeal that the master erred in his reference to s 588FG(2), as opposed to s 588FG(1), but the parties differ as to the consequences of that error.
General background[2]
[2] The general background is taken from the master's unchallenged findings of fact and other primary facts not in dispute.
Hickory Group is a building company based in Victoria. It specialises in the construction of large‑scale developments. When business is to be done interstate, it is Hickory Group's usual practice to incorporate a stand‑alone company in that State. HWA was a company registered for the purpose of undertaking business in Western Australia.[3]
[3] Primary decision [5], [7].
PVA owned land in Port Hedland from which it carried on the business of operating a caravan park and upon which it was constructing a mixed‑use accommodation facility and business park known as the 'Landing Port Hedland' (Landing Project).[4]
[4] Primary decision [5]; Mr White's affidavit sworn 28 January 2016 (liquidators' affidavit), par 5; GB 3.
PVA approached Hickory Group in relation to the possibility of Hickory Group acting as builder on the Landing Project. The project was formulated over a period of about two years prior to its commencement in March 2012. Communications at that stage were between Mr Robin Cornish on behalf of PVA, and Mr Michael Argyrou, a director of Hickory Group and HWA. Work on the project was undertaken by HWA.[5]
[5] Primary decision [5], [7], [9].
Mr Argyrou was given to understand that the proposed development was to build accommodation to house people employed at an iron ore project operated by BHP Billiton Iron Ore Pty Ltd (BHP). The building work involved was to construct 'modular' buildings. A 'modular' building is, in effect, a building which is largely manufactured off‑site in a factory, the components of which are then transported from the factory by truck to the site. Modular construction was regarded as the appropriate method because the remoteness of the development in Port Hedland made accessibility to construction resources difficult and expensive. The modular technology utilised in the Landing Project was not owned by Hickory Group or HWA. It was owned by another Hickory Group entity, Hickory Building Systems Pty Ltd (HBS).[6]
[6] Primary decision [6], [8].
Although HBS performed the majority of the work (off‑site) utilising its modular technology, HWA was directly responsible for managing and conducting the base building works for the Landing Project. HWA employed a construction team which was responsible for all aspects of the development. Mr Argyrou, however, had the final say. He was the 'controlling hand' of HWA. Mr Argyrou rarely, if ever, discussed the progress of the Landing Project with his fellow directors of Hickory Group.[7]
[7] Primary decision [7] - [8].
Throughout the course of the Landing Project, Mr Argyrou was aware that PVA, through Mr Cornish, reported to BHP as the financier of the project, and the ultimate user and beneficiary of the proposed modular homes for workers at its iron ore mines. BHP appointed a project management firm to oversee and monitor the project.[8]
[8] Primary decision [9].
Hickory Group knew, at the commencement of the project, that PVA was being principally, but not fully, funded by BHP.[9]
[9] Primary decision [50].
At the time HWA commenced work, Mr Argyrou understood that:
1.BHP was to rent all of the modular homes constructed for a term of 10 years from PVA;
2.BHP was anxious to provide accommodation for its workers; and
3.BHP was prepared to take the unusual and innovative step of financing the project effectively by pre-paying rent, in order to provide funding and working capital for HWA to ensure completion of the project.[10]
[10] Primary decision [10] ‑ [11].
In April 2012, PVA entered into finance agreements with BHP to partially finance the construction of the Landing Project and to put in place long‑term take off arrangements for both the existing accommodation at the property, and for the accommodation to be constructed as part of the Landing Project.[11] The facility from BHP was for $67 million, with provision for monthly drawdowns. There was an indicative monthly drawdown schedule for the period 9 March to 28 December 2012. The indicative drawdown amount for the months of June, July and August was $4.5 million per month. Repayments to BHP were to be made, in effect, by offsetting monthly accommodation charges to BHP. PVA also agreed to apply specified equity contributions towards Monthly Project Costs.[12]
[11] Liquidator's affidavit, par 6; GB 3.
[12] Mr Argyrou's affidavit sworn 15 April 2016; GB 211 - 280. See, in particular, the definitions of 'Facility Limit' in cl 1.1, cl 3.1, cl 3.8, cl 3.9, cl 5.3, cl 9.3(x), sch 5, sch 6.
At some time prior to September 2012, Mr Argyrou met with Mr Fiske of BHP, and there was a conversation to the following effect:[13]
Robert Fiske of BHP … advised … that BHP would step-in and take over the project and ensure its completion if PVA ever defaulted because BHP urgently needed the modular homes to service its mining interests. … Mr Fiske said … words to the effect that, the cost to BHP of having the rooms directly correlated to the revenue BHP would earn 'in the ground', that is, from the mining of iron ore. The value of each room was something like 50 times the revenue BHP would earn. He also said words to the effect that [HWA] should understand that $50m or $100m means very little to BHP when we are talking about billions of dollars coming out of the ground.
[13] Primary decision [48].
Mr Argyrou left the meeting with the knowledge that whilst Hickory was playing only a small part in the construction of the Landing Project, that role was pivotal to BHP's mining operation in that area.[14]
[14] Primary decision [48].
HWA undertook preliminary works on the Landing Project in the period between March and May 2012.[15] By 25 April 2012, there had been some issues regarding the timely payment of HWA's invoices.[16] Nevertheless, HWA's invoices of 5 March, 4 April and 4 May, totalling $5.72 million, were paid by PVA on 16 March, 1 May and 9 May respectively.[17]
[15] Primary decision [9]; second respondent's written submissions, par 2; WB 39.
[16] Primary decision [51].
[17] Primary decision [13].
A formal building contract was entered into between PVA and HWA on 23 May 2012, but problems arose almost from the time the contract was signed.[18]
[18] Primary decision [13], [15].
On 21 June 2012, a 'Step‑In Deed' was entered into between HWA, PVA and BHP. Under the Step‑In Deed, HWA consented to BHP's security interests, HWA agreed to notify BHP upon a default by PVA, and BHP had the right to step in and remedy the default.[19] The relevant provisions of the Step‑In Deed are set out in [75] ‑ [82] below.
[19] Primary decision [12].
HWA's June invoice for $4,966,929 was due for payment on 29 June 2012, but that was not then paid.[20]
[20] Primary decision [15].
On 5 July 2012, HWA was advised that the amount to be drawn down by PVA from BHP was $4.5 million. That amount was to be used to pay all creditors, and not just to pay HWA. HWA was advised that additional funding would be coming from an equity contribution.[21]
[21] Primary decision [53].
At a meeting between Mr Argyrou and Mr Cornish on 26 July 2012, Mr Argyrou sought evidence from Mr Cornish that PVA could meet its financial commitments under the entire contract.[22]
[22] Primary decision [59].
On 29 July 2012, HWA's July invoice for $6,496,187 became due and payable.[23]
[23] Primary decision [61]; amended chronology; WB 76.
On 30 July 2012, Mr Argyrou wrote to Mr Cornish seeking confirmation of payment by 7 August 2012, and seeking certain information that had been promised by Mr Cornish at the meeting on 26 July 2012.[24]
[24] Primary decision [61].
There was a newspaper article on 2 August 2012 concerning BHP. The article referred to mounting speculation that BHP had decided to delay the expansion of the Port Hedland harbour, and that a BHP email had referred to numerous challenges facing BHP. The article also reported BHP's president as saying that staff should be prepared for the potential for extended project development timelines, but that BHP is committed to its Pilbara projects already under construction and believed in the long‑term attractiveness of the iron ore market.[25]
[25] GB 486 - 487.
On 2 August 2012, HWA's June and July invoices remained unpaid.[26] PVA suspended on‑site works because PVA did not want contractors working on site whilst PVA was trying to finalise financing arrangements, as PVA did not want HWA to start on‑site works without funds being guaranteed.[27]
[26] Primary decision [15].
[27] Primary decision [64].
Mr Argyrou followed up his email of 30 July 2012 with an email on 2 August 2012.[28]
[28] GB 360.
On 2 August 2012, Mr Cornish responded to Mr Argyrou and said:[29]
Understood - Im aiming to have the update through for end of the day. The funds have been confirmed but the disbursement by the 8th [of August] is what we are waiting confirmation on. Happy to discuss this afternoon by [sic] I don't expect a full update from Sydney where our Commercial Manager Dave is until the end of the day. The point I made with Geoff this morning is while we are excruciatingly close to kicking things off, we don't want you guys to start on site until we have those funds across and physically in your account as well as confirmation of acceptance by [BHP] of the revised schedule so that once we do get going on site we can implement uninterrupted. The 8th [of August] is going to be tight given the pace of the stakeholders at this stage but I will confirm this this afternoon.
[29] Primary decision [15].
On 6 August 2012, Mr Cornish emailed Mr Argyrou and said:[30]
Not there yet. Got a phone hook up with Sydney tomorrow morning so still working towards getting you a firm confirmation.
[30] GB 364.
On 7 August 2012, Mr Cornish emailed Mr Argyrou and said:[31]
The summary process is as follows:
1.An equity line of $40m has been approved by the board for drawdown to cover any delays from the $30m Deutsche facility or [BHP] loan (remaining $22m) process requirements.
2.The funding process requires a series of share warrants to be instantiated and signed off and we are currently working through executing these.
3.Once these are completed the cash transfers can happen immediately.
[31] GB 363.
On 8 August 2012, HWA issued a notice of default to PVA in respect of the unpaid June and July invoices, giving PVA seven days to show cause why HWA should not terminate or suspend the building contract. HWA served a copy of the notice of default on BHP in accordance with the Step‑In Deed.[32]
[32] Primary decision [18], [66].
On 10 August 2012, PVA paid HWA $500,000. HWA immediately transferred that amount to Hickory Group.[33]
[33] Amended chronology; WB 77.
On 13 August 2012, HWA submitted its August invoice for $2,476,917 for payment.[34]
[34] Amended chronology; WB 77.
On 16 August 2012, Mr Argyrou met with Mr Cornish regarding outstanding payments, despite assurances given by Mr Cornish in an email some three days earlier.[35]
[35] Primary decision [67].
Also, on 16 August 2012, Hickory Group took out a short-term commercial bill facility to 31 August 2012, for short‑term working capital, pending receipt of outstanding payments from PVA.[36]
[36] Primary decision [67] - [68].
On 17 August 2012, Mr Cornish signed a letter of undertaking in favour of HWA. PVA promised to execute a second mortgage in favour of HWA, and undertook to procure BHP to provide all documents necessary to enable the second mortgage to be registered.[37]
[37] Primary decision [19].
On 17 August 2012, PVA suggested to Hickory Group that a confidentiality clause should be inserted into their agreement to ensure that there was no communication with other parties on the site. This would have confirmed in Mr Argyrou's mind that, not only had HWA not been paid, but that other subcontractors had not been paid.[38]
[38] Primary decision [69].
On 20 August 2012, Mr Cornish responded to HWA's show cause letter of 8 August 2012 and said, amongst other things:[39]
[39] Primary decision [19]; GB 383 ‑ 385.
I confirm the Notice to Show Cause was received on Monday 13th August 2012 … and that under [the building contract PVA] shall provide a detailed response … by no later than seven calendar days … being … 20th August 2012.
[PVA] provides the following information in response:
1.The Project has experienced a series of delays resulting in the inability of the Project to meet the target schedule appearing in the [building contract]. The primary cause of the delay has been uncertainty regarding the timeframes for issue of the building licence and shipping detention periods at Port Hedland, which has resulted in consequential delays, and in relation to project administration responses have been unable to mitigate the schedule risk.
2.The target schedule is material to the provision of project finance from the series of sources, including … [BHP] and Deutsche Bank (the 'Debt Financiers'), and both the existing and new equity shareholder groups debt ('Equity Financiers').
3.The Superintendent [of PVA] has submitted to both the Debt and Equity Financiers a revised baseline program for assessment.
4.The Debt Financiers have suspended further financial accommodation pending an assessment of the revised program.
5.The Superintendent [of PVA] has advised … that [PVA] has resolved to secure alternative sources of funding that provide for completing the project independent of the Debt Financier's [sic] financial accommodation, which has been proposed and agreed by the Equity Financiers.
6.[T]he Superintendent [of PVA] acknowledges that outstanding payments in relation to the June and July claims are overdue.
7.The Superintendent [of PVA] notes that [PVA] paid … $5.2m in good faith, prior to the first claim (June) being received.
8.[T]he Superintendent [of PVA] has acknowledged that the administrative procedures for the provision of payment schedules are not working as efficiently as required for the pace of the project and require improvement and restatement.
9.The Superintendent [of PVA] has advised … that the information provided in support of the June and July claims were not consistent with the work completed as assessed by the Superintendent's representative, and there are similar inconsistencies with the August Claim … The Superintendent [of PVA] has advised … that the inconsistency of information requires greater time period for the assessment to be completed, and [HWA's] representative and the Superintendent [of PVA] have agreed to vary the standard timeframe/procedure by requesting the initial financial claim from [HWA] on the 5th of each month as opposed to the 10th (The Revised Claim Assessment Timeframe).
10.The settlement of the Outstanding Payments is currently dependent upon Equity Financiers, and the Conditions Precedent for Equity drawdowns include diligence related to the valuation of equity warrants. The time required to perform this diligence has taken longer than expected, and is not under the direct control of the Superintendent [of PVA] or Principal [of PVA]. The Superintendent [of PVA] has undertaken to accelerate the Equity drawdowns as the resourcing priority.
11.[A] Deed of Amendment [has been agreed] which provides for [a Forecast Payment Claim procedure and a second registered mortgage over the assets of PVA] to the value of the Approved Scope of Works.
12.A draft Deed of Amendment has been provided … and agreed … subject to the inclusion of … the Revised Claim Assessment Timeframe.
13.A letter of undertaking has been executed by the Superintendent [of PVA] … and it is expected that the Deed of Amendment shall be finalised and executed within the week ending 24th August 2012.
14.The Superintendent [of PVA] has undertaken to provide a daily update to [HWA] in relation to the completion of the Conditions Precedent of the Equity Drawdown and subsequent settlement of the Outstanding Payments, thus providing for the project to continue to be delivered under the Contract and Deed of Amendment.
On 21 August 2012, HWA sought an extension of time for the date of practical completion by reason of the delays resulting from PVA's direction that the on‑site works not commence until external financial arrangements have been finalised.[40]
[40] GB 386.
On 22 August 2012, PVA and HWA executed the deed of amendment to the building contract.[41] It provided for a revised forecast cashflow up to March 2013 totalling $57,330,835, with an assumed on‑site start date of 3 September 2012.[42]
[41] Primary decision [19]; GB 390.
[42] GB 392.
On 22 August 2012, HWA filed a writ and statement of claim, seeking judgment against PVA for the amounts then due under the building contract. The writ was served on PVA on 23 August 2012.[43]
[43] Primary decision [20]; GB 88.
On 29 August 2012, the August invoice for $2,476,917 was due for payment.[44]
[44] Amended chronology WB 77.
On 30 August 2012, Mr George Palatianos, Hickory Group's chief financial officer, communicated to Hickory Group's bank by email that he did not believe PVA's statements that they would pay on time.[45]
[45] GB 491.
On 30 August 2012, PVA granted HWA a second mortgage (HWA Mortgage).[46]
[46] Primary decision [74]; amended chronology; WB 77.
On Friday 31 August 2012, PVA emailed HWA and advised that PVA would be settling the outstanding balances by paying the June and July invoices by 7 September 2012, and the August invoice by 14 September 2012.[47]
[47] Primary decision [21]; GB 400 ‑ 401.
PVA's email enclosed a copy of a letter from FMR Investments Pty Ltd (FMR) dated 31 August 2012 in the following terms:[48]
1.In addition to [FMR's] existing shareholding of 31% of Ordinary Class A shares in [PVA], FMR has today made application to subscribe for 20,000,000 Ordinary Class B shares … thereby providing $20,000,000 in contributed capital.
2.The proceeds are provided to PVA for the purpose of growth capital, to underpin the [Landing Project] and in particular, to fund construction of Stage 1 …
3.The funds are available to disburse and all conditions precedent to financial close have now been met, with settlement expected within 3 business days of this letter.
We look forward to continuing our strong relationship with PVA in realising this important project.
[48] Primary decision [21]; GB 400 ‑ 402.
On 4 September 2012, Ms Poly Kiosses, general counsel of Hickory Group, requested PVA to provide certain financial information, including evidence demonstrating the financial status of the project, a valuation for mortgage purposes, a valuation for equity raising, a valuation of PVA and its assets, loan balances, monthly movements, revenue agreements on completed product and loan agreements with BHP and any other financiers.[49]
[49] GB 404.
On 7 September 2012, Ms Kiosses emailed Mr Cornish (copied to Mr Argyrou), and said:
I'm getting tired of being ignored.
When you will provide us the documentation you undertook to provide.
On 8 September 2012, Mr Cornish replied:[50]
Not ignoring you, just focussed on getting cash funds across to Hickory as the first and only priority. As I have communicated to [Mr Argyrou], while I respect it is your prerogative to issue writs and decide to go straight to [BHP] which is outside what I understood we agreed, the effect is that [BHP] then accelerate a request to review of additional information and we have to throw every resource we have at that which has taken most of the week. We have no problem providing the requested information to you, we are just limited in our capacity to do so. I shall meet with Dave Murry on Monday and respond with firm timeframes.
[50] GB 403.
Ms Kiosses replied on the same day:[51]
Does that mean the moneys have not been received by PVA, contrary to FMR's 31 August letter?
[51] GB 403.
On 11 September 2012, PVA paid HWA $1.5 million. HVA transferred that amount to Hickory Group on 12 September 2012.[52]
[52] Amended chronology; WB 78.
On 13 September 2012, PVA wrote to HWA attaching a remittance advice and advising that, although the funds ($8.163 million) had not settled yet, PVA expected that they would within the next hour.[53]
[53] Primary decision [22]; GB 411.
On 13 September 2012, HWA paid Hickory Group $8,163,116.[54]
[54] Amended chronology; WB 78.
On 14 September 2012, PVA emailed HWA and said:[55]
[W]e confirm that we have been advised that the $8.5m tranche has been transferred in two payments yesterday afternoon - 1 x $5m and 1 x $3.5m. We confirm having received the $5m overnight and that this has been immediately transferred to your account … [T]he $3.5m just missed the cutoff for overnight and is being transferred to us as a priority payment this morning, which [we] shall then have $3,163,115 transferred immediately to your account (we have transaction expenses to pay from the $3.5m balance and hence the amount is limited to $3,163,115). We appreciate that this process has been protracted and thank you for your patience.
[55] Primary decision [22]; GB 417.
On 14 September 2012, PVA paid to HWA $8,163,116.[56]
[56] Primary decision [22].
On 17 September 2012, HWA wrote to PVA advising that $3,024,608.26 was owing, comprising, in effect, a sum remaining under the July invoice of $300,000, together with the unpaid August invoice. HWA foreshadowed that a further default notice and a 'Cure Notice' would be issued to BHP under the Step-In Deed, unless payment was received by 18 September 2012. HWA also sought financial information of the kind previously requested and observed that PVA had 'failed to provide … the information … promised … in order to give [HWA] comfort that [PVA] is financially capable of performing its obligations under the Contract'.[57]
[57] GB 421 - 423. In respect of the July invoice, the amount left owing was $272,727 plus GST of $27,277, equalling approximately $300,000.
On 18 September 2012, HWA issued a show cause notice to PVA in respect of the amount outstanding referred to in the letter of 17 September 2012.[58] A Cure Notice was sent to BHP.[59] Ms Kiosses sent to Mr Cornish a copy of the notice of default, a copy of the Cure Notice to BHP and a notice pursuant to the Step‑In Deed. The notices were sent by email and copied to Mr Argyrou and Mr Palatianos. Also on 18 September 2012, Mr Palatianos sent an email to Ms Kiosses and Mr Cornish, and said 'thanks Poly on what date can we terminate our contract with PVA?'[60]
[58] GB 476.
[59] GB 478.
[60] GB 380.
On 17 September 2012, HWA wrote to BHP raising matters in relation to the registration of the HWA Mortgage.[61]
[61] Primary decision [24]; GB 424.
On 19 September 2012, BHP wrote to HWA advising that the matters referred to in HWA's letter of 17 September 2012, and the project more generally, would be considered by the senior management of BHP the following week.[62]
[62] GB 480.
On 21 September 2012, PVA paid HWA $300,000.[63] HWA immediately transferred that amount to Hickory Group.[64]
[63] Primary decision [23].
[64] Amended chronology WB 79.
On 27 September 2012, Mr Cornish forwarded to Mr Argyrou a copy of a letter from PVA to BHP headed 'Absence of BHP Billiton Drawdown'. In its letter to BHP, PVA noted that the drawdown facility had been suspended since July 2012, and requested the reinstatement of the facility 'to prevent [PVA] from exposure to further Events of Default'.[65]
[65] Primary decision [26].
PVA requested a response to its letter by 28 September 2012, but no (substantive) reply was forthcoming.[66] On 28 September 2012, BHP advised PVA:[67]
We are waiting for the final report from our appointed investigating accountants, Ernst and Young, before we make any decisions in respect of the project.
[66] Primary decision [26].
[67] GB 324.
On 30 September 2012, Mr Cornish sent a further email to BHP, which also failed to draw any definitive response.[68]
[68] Primary decision [26].
HWA continued to perform works and submit claims on the project up until BHP appointed a receiver to PVA at the end of October 2012.[69]
[69] Primary decision [25].
Mr Cornish emailed Mr Argyrou on 9 October 2012 explaining the difficulties PVA was experiencing with BHP which gave no hint that BHP would not, in due course, provide further finance.[70] At that stage, clearly, Mr Argyrou was concerned.[71]
[70] Primary decision [27].
[71] Primary decision [28].
On 27 October 2012, Mr Argyrou received a letter from BHP, which advised that:
1.Ernst & Young had been acting as investigating accountants since late August 2012, and had undertaken a thorough review of the project and provided a report;
2.following receipt of the report, BHP had elected to require immediate repayment of outstanding amounts and not to advance further funds; and
3.BHP had issued default notices and had elected not to remedy PVA's defaults under the Step-In Deed.[72]
[72] Primary decision [29].
Mr Argyrou was already aware that Ernst & Young had been engaged to monitor the project but did not recall when and how he became aware of the fact.[73] However, at no time prior to the end of September 2012 did Mr Argyrou have access to any financial information in relation to PVA, such as income statements, balance sheets, cashflow forecasts, and the like.[74]
[73] Primary decision [29].
[74] Primary decision [30].
On 1 November 2012, BHP appointed receivers and managers to PVA. Mr Argyrou received an email from Ernst & Young on 1 November 2012 advising of their appointment as receivers.[75]
[75] Primary decision [29].
Over the life of the project HWA made progress claims amounting to $35.1 million. It was paid $17.2 million. That left approximately $14.2 million outstanding. This related to work which was claimed in progress claims made in September, October, November and December 2012.[76]
[76] Primary decision [14].
On 31 January 2013, PVA was placed into voluntary administration.[77]
[77] Primary decision [2]; liquidators' affidavit, par 8; GB 4.
On 18 April 2013, creditors of PVA resolved that the company be wound‑up and that the appellants be appointed its liquidators.[78]
The Step‑In Deed[79]
[78] Agreed chronology, WB 79; liquidators' affidavit, par 9; GB 4.
[79] GB 332 - 353.
Clause 1.1 of the Step‑In Deed contains a number of definitions. The term 'Cure Notice' means a notice given by HWA to BHP in respect of a Default Event, and is to include the 'Cure Period' applicable to the Default Event. The term 'Cure Period' means the period commencing on the date on which BHP receives the Cure Notice and ending, if the Default Event can be remedied by payment of money, not less than 30 business days after the later of the date of the relevant Cure Notice or the expiry of any applicable Cure Period under the building contract. The term 'Default Event' means any event or circumstance which would, amongst other things, entitle the contractor to give a notice under the Contract requesting that a default be remedied.[80]
[80] GB 336 - 337.
By cl 3.1, HWA must give written notice to BHP as soon as reasonably practicable after it becomes aware of a Default Event. By cl 3.4, HWA agrees that, despite anything to the contrary in the building contract, it cannot and will not terminate or suspend the contract unless, amongst other things, a Cure Notice has been received by BHP and the default event has not been remedied in accordance with cl 3.5 or other arrangements have not been made to the reasonable satisfaction of HWA within the Cure Period.[81]
[81] GB 343 - 344.
By cl 3.5(a), a Default Event in respect of the payment of money can be remedied if the money and any interest due and payable in accordance with the building contract is paid to HWA within the relevant Cure Period.[82]
[82] GB 344.
By cl 3.6, a Cure Period will be extended only if HWA consents in writing. HWA must not unreasonably withhold its consent if BHP has demonstrated to the reasonable satisfaction of HWA that a course of action is being diligently pursued to remedy or otherwise overcome the effect of the Default Event. More than one extension may be sought and obtained.[83]
[83] GB 344.
By cl 3.8, upon the request of BHP, HWA must promptly provide all the information reasonably requested, hold discussions in good faith and provide BHP with a reasonable opportunity, after the occurrence of a Default Event and while it is assisting, to attend and participate in all negotiations, consultations and meetings undertaken or convened in an endeavour to resolve any material dispute under the building contract.[84]
[84] GB 345.
By cl 3.9, BHP undertakes that during any part of a Cure Period, if it decides not to procure a remedy for a Default Event in accordance with cl 3.5, then it will notify HWA as soon as reasonably practicable after the decision has been made.[85]
[85] GB 345.
By cl 6.5, HWA acknowledges that PVA may undertake a refinance or a new finance and from time to time and it agrees that it will, at BHP's request, enter into a deed in the same terms as the Step‑In Deed with any financier.[86]
[86] GB 348.
By cl 2.1, HWA acknowledges, in effect, that PVA had granted security to BHP over 'its right, title and interest in, to, under and derived from' the building contract.[87]
[87] GB 341.
The liquidators' claims in the primary proceedings
In the primary proceedings, the liquidators claimed the following relief:
1.An order pursuant to section 588FF(1)(j) declaring that the mortgage granted by [PVA] on or about 30 August 2012 over its property located at … Port Hedland …, in favour of [HWA] is void and unenforceable.
2.An order declaring that the payments from [PVA] to [HWA] between 10 August 2012 and 21 September 2012 and totalling $10,463,115.64 (Payments) are:
(a)unfair preferences within the meaning of section 588FA of the Act [Corporations Act 2001 (Cth)];
(b)insolvent transactions within the meaning of section 588FC of the Act; and
(c)voidable transactions within the meaning of section 588FE(2) of the Act.
3.An order pursuant to section 588FF(1)(c) of the Act that [Hickory Group] pay to [PVA] the sum of $10,463,115.64, or such other amount that, in the Court's opinion, fairly represents the benefits that [Hickory Group] has received because of the Payments.
Section 588FG of the Corporations Act
Before referring to the master's reasons in detail, it is convenient to set out s 588FG of the Act. As indicated earlier, the master dismissed the liquidators' claims on the basis that Hickory Group had established a defence under s 588FG(2) of the Act, and the starting point for the appeal is that the master should have considered s 588FG(1) of the Act.
The two subsections of s 588FG are, in many respects, identical. As indicated earlier, one difference, relevantly for present purposes, is that s 588FG(2) is effectively directed to a party to the transaction, and s 588FG(1) is effectively directed to a person 'other than a party' to the transaction.
The provisions of s 588FG are set out below.
| (1) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction if it is proved that: (a) the person received no benefit because of the transaction; or (b) in relation to each benefit that the person received because of the transaction: | (2) 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: |
| (i) the person received the benefit in good faith; and (ii) at the time when the person received the benefit: (A) 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 | (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 |
| (B) a reasonable person in the person's circumstances would have had no such grounds for so suspecting. | (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. |
The master's reasoning in the primary decision
The master found the primary facts referred to earlier.
The master also found, in effect, that HWA, through Mr Argyrou, was an aggressive and insistent creditor. The master said:[88]
It is convenient at this point to make some comment about the tactics employed by Mr Argyrou in attempting to obtain payment from PVA. I am satisfied at all relevant times Mr Argyrou believed PVA had access to funds to allow payment of the HWA invoices and the problem was the administration within PVA. Mr Argyrou therefore felt putting pressure on Mr Cornish was warranted. It is evident from the evidence there was a degree of bluster in what Mr Argyrou had to say to Mr Cornish. That is not to say [Hickory Group] was not desperate to be paid - Mr Argyrou made that point throughout his evidence. But Mr Argyrou had no hesitation in ratcheting up the pressure on Mr Cornish and PVA by exaggeration which may, at times, have strayed into straight out untruths. I am thinking particularly of emails which exaggerated the extent to which [Hickory Group] was under pressure from its bankers to ensure payment was made of outstanding invoices. There was no doubt [Hickory Group] was under pressure; but there is equally no doubt Mr Argyrou exaggerated the extent of that pressure. All of that is no more than legitimate business practice. It is an integral part of the debt collection process.
Mr Argyrou will never be mistaken for a choir boy. He has been in project management largely in Victoria for the last 25 years. He is in a hard, ruthless business. Cash-flow is everything and extracting money from creditors is essential to survival. The fact of threat and hyperbole does not in that environment translate necessarily to a suspicion of insolvency. No doubt it can do, but intemperate language is not by itself enough.
[88] Primary decision [62] - [63].
The master nevertheless found that Mr Argyrou was an honest witness. The master set out in terms the paragraph of Mr Argyrou's witness statement in which he explained why he was not concerned about the solvency of PVA.[89] The master said:[90]
I found Mr Argyrou to be a witness of truth. He was subjected to a rigorous but by no means unfair cross-examination. He gave his evidence carefully and said from time to time his memory did not allow him to answer particular questions. He was not evasive; and he did not give the impression he was giving his evidence simply to support his case.
[89] Primary decision [48].
[90] Primary decision [45].
The master found as a fact that Mr Argyrou did not actually suspect insolvency,[91] and that both HWA and Hickory Group became a party to the transactions in good faith.[92] When the master's reasons are read as a whole, it appears that the master used the word 'transactions' in this context to mean the payments of PVA to HWA, the payments from HWA to Hickory Group, and the mortgage granted by PVA.
The master's reliance on s 588FG(2)
[91] Primary decision [45], [48], [78].
[92] Primary decision [80].
The master said that he did not need to consider whether PVA was insolvent because he found that Hickory Group had made out a defence under s 588FG)(2) of the Act.[93] The master said, with respect incorrectly, that Hickory Group relied upon s 588FG(2) of the Act, when, in fact, it had relied on s 588FG(1).[94]
The master's construction of s 588FG(2) - overview
[93] Primary decision [80] ‑ [81].
[94] Primary decision [33].
The master said, with respect to s 588FG(2)(b):[95]
The two limbs of subs (b) are generally taken together. The first limb fastens on actual awareness of insolvency; the second limb is based entirely objectively on the presumed state of mind of a reasonable person. It is sometimes said these two tests embody on the one hand a subjective test and the other an objective test. (emphasis added)
The master's construction of s 588FG(2)(b)(i)
[95] Primary decision [38].
In apparent reference to par (b)(i) of subsection (2) of s 588FG (the first limb), the master said:[96]
First the person must establish he did not actually suspect the company was insolvent. If, for instance, during cross-examination it emerged the person did actually suspect insolvency then that would be the end of the matter. On the other hand, it may be an entirely truthful witness did not actually suspect insolvency dispute [sic] overwhelming evidence to that effect. In that case no matter what the witness may actually have believed if the belief was not founded on 'reasonable grounds' then the requirements of the subsection are not satisfied. Thus there are two elements to the so-called subjective test. (emphasis added)
The master's construction of s 588FG(2)(b)(ii)
[96] Primary decision [39].
With apparent reference to par (b)(ii) of subsection (2) of s 588FG (the second limb), the master described this as an 'objective test' and said that the test postulates the 'reasonable person'. The master effectively rejected the proposition, which has been accepted in various authorities including Burness v Supaproducts Pty Ltd[97] that the 'reasonable person' in this context means a 'reasonable business person'. The master said in that regard:[98]
That reasonable person is said to be 'a reasonable business person': see Burness v Supaproducts Pty Ltd. I am not sure why the subsection should be expanded to refer to a 'business person'. The subsection refers to the reasonable person being 'in the person's circumstances'. In this case that must mean a reasonable person who is managing a business supplying goods and materials in the building industry. That excludes almost everyone - including insolvency lawyers and liquidators. Moreover the test can be seen as it once objective and subjective. If the person concerned is found as a matter of fact to be a reasonable person and he 'would have' no grounds for suspecting insolvency then the requirements of the subsection are satisfied. (emphasis added)
The master's findings that any relevant corporate 'suspicion' resided in Mr Argyrou
[97] Burness v Supaproducts Pty Ltd [2009] FCA 893; (2009) 74 ACSR 1 [52] (Gordon J) with reference to Dean‑Willcocks v Commissioner of Taxation [2008] NSWSC 1113 [11] and Cussen v Commissioner of Taxation [2004] NSWCA 383; (2004) 51 ACSR 530 [31] (Cussen Appeal).
[98] Primary decision [40].
As noted earlier, the master expressly found that Mr Argyrou was the 'controlling hand' of HWA.[99] That was an express finding to the effect that, for the purposes of the defences under s 588FG(2), the corporate mind of HWA was that of Mr Argyrou. Where the master's reasons are read as a whole, it is evident that the master also found, in effect, that the relevant corporate mind of Hickory Group was that of Mr Argyrou. That is evident from his finding that it was 'important' that Mr Argyrou, as a director of Hickory Group, 'rarely if ever' discussed the Landing Project with his fellow directors,[100] and his treatment of Mr Argyrou's state of mind as being equivalent to Hickory Group's state of mind.[101] (The question of whether the master should have looked beyond Mr Argyrou to ascertain Hickory Group's state of mind is the subject of ground 5 of the appeal.)
The master's application of s 588FG(2)(b)(i)
[99] Primary decision [7].
[100] Primary decision [7].
[101] See especially primary decision [43] - [47], [49] - [50], [56] - [81].
The master, under the subheading, 'The evidence of Mr Argyrou', considered the effect of Mr Argyrou's evidence in the course of addressing various submissions made by the liquidators on the question (as the master referred to it) of whether Hickory Group had established a defence under s 588FG(2).[102]
[102] Primary decision [48] ‑ [77].
The master, before embarking on this exercise, observed that Mr Argyrou did not actually form the view that PVA was insolvent, and said that that matter 'can be put to one side'.[103] The master said, in effect, however, that it was not enough that Mr Argyrou did not actually suspect insolvency. He said, with apparent reference to s 588FB(2)(b)(i), that Mr Argyrou also 'had to establish [that] he had no reasonable grounds for suspecting that [PVA] was insolvent'.[104] In that regard, the master said:[105]
[I]t is important to remember the circumstances in which [Hickory Group] entered into the contractual arrangements with PVA. [Hickory Group] knew BHP was the designated end user of the units when developed. Mr Argyrou along with every Australian citizen knows the financial strength of BHP. Mr Argyrou was well aware of the extent of BHP's operations in the Pilbara and the company's need to accommodation [sic] its workforce in Port Hedland. Mr Argyrou was at pains throughout his cross‑examination to emphasise the importance of BHP as the end user of the units. He maintained this gave him great confidence that the project would proceed through to completion. On that issue he was utterly convincing.
It is worth developing that point just a little further. Mr Argyrou is obviously an optimist. He believed the project would proceed and it would produce for his company substantial profits. He was not casting around for impediments to stop the progress of the project; rather, he was looking for solutions to problems as they arose. He clearly took the view most of the problems bedevilling the project could be sheeted home to a lack of organisation and system on the part of PVA. He believed these problems were temporary and could be sorted out with the application of sound management principles. (emphasis added)
[103] Primary decision [45].
[104] Primary decision [45].
[105] Primary decision [46] ‑ [47].
Although the master had said, before embarking on the exercise referred to in [96] above, that any suggestion that Mr Argyrou had actually formed a view that PVA was insolvent could be 'put to one side', the question of whether Mr Argyrou actually suspected insolvency was a recurring theme in the master's consideration of whether Hickory Group had established a defence under s 588FG(2)(b).[106]
[106] Primary decision [48], [60], [62], [63], [66], [68], [70], [76] and [77].
After the review of Mr Argyrou's evidence in the context of addressing the liquidators' submissions, the master, with apparent reference to s 588FG(2)(b)(i), summarised his findings as follows:[107]
In summary then I am satisfied Mr Argyrou had no reasonable grounds for suspecting the company was insolvent. I have reached that conclusion for the following reasons. First, based upon his evidence he did not suspect PVA was insolvent. In saying that I accept the evidence of Mr Argyrou in paragraphs [sic] 27 of his first affidavit. Second, there were no reasonable grounds for suspecting insolvency. The project had BHP with all its financial resources as its backer. BHP had an unmet demand for accommodation in Port Hedland. Repeated assurances were given by Mr Cornish to Mr Argyrou funding would be forthcoming. No external sources indicated a fundamental problem with the project itself. Mr Argyrou was familiar with delays in progress payments and believed there was a problem with internal administration rather than a fundamental problem with the financial viability of PVA. (emphasis added)
The master's application of s 588FG(2)(b)(ii)
[107] Primary decision [78].
Next, the master drew upon his discussion of Mr Argyrou's evidence referred to in [96] above and, with apparent reference to s 588FG(2)(b)(ii), summarised his findings as follows:[108]
I am also satisfied that a reasonable person in Mr Argyrou's circumstances would not have grounds for suspecting insolvency. The starting point here is to say that Mr Argyrou was, in my view, a reasonable person. That is the impression I formed of him during the course of cross-examination. That being so no other hypothetical individual slotted into the circumstances as they existed would, in my view, have suspected insolvency. (emphasis added)
The master's conclusion
[108] Primary decision [79].
The master concluded:[109]
On balance I am satisfied [Hickory Group] has made out a defence under s 588FG(2) of the Corporations Act. All four requirements of that section have been satisfied. The defendants became a party to the impugned transactions in good faith. I am satisfied Mr Argyrou had no reasonable grounds for suspecting the company was insolvent. I am satisfied that a reasonable person in Mr Argyrou's position had no reasonable grounds for suspecting the company was insolvent. Furthermore, I am satisfied Mr Argyrou was such a reasonable person. Finally, the defendants provided valuable consideration under the transaction. (emphasis added)
[109] Primary decision [80].
Grounds of appeal
The liquidators' grounds of appeal are to the following effect.
1.The master erred in law by applying the defence in s 588FG(2) of the Act in circumstances where s 588FG(2) could not apply to Hickory Group and the parties had argued the case based on the defence in s 588FG(1)(b), and the parties were not given an opportunity to make submissions regarding s 588FG(2).
2.Further and in any event, the master erred in law in formulating and applying the wrong test for the purposes of s 588FG(2)(b)(ii)[110] by:
[110] And, for that matter, s 588FG(1)(b)(ii)(B)).
(a)treating the requirements of s 588FG(2)(b)(ii) as satisfied if the requirements in s 588FG(2)(b)(i) are satisfied and the 'person' is found to be a reasonable person; and
(b)consequently, having undue regard to subjective inferences drawn by a director of Hickory Group, Mr Argyrou, in applying s 588FG(2)(b)(ii).
3.With respect to a defence under s 588FG(2)(b)(ii) of the Act,[111] the master should have separately considered whether a hypothetical reasonable person endowed with Hickory Group's knowledge of factual matters, but not with Mr Argyrou's personal characteristics and subjective appreciation of matters, would have had no reasonable grounds for suspecting insolvency.
4.The master erred in fact and law in concluding that there were no reasonable grounds for suspecting insolvency in all the circumstances by:
(a)placing undue weight on BHP's backing of the relevant project as a factor supporting reasonable grounds; and
(b)concluding that, from 31 August 2012 until Mr Argyrou learned of the appointment of receivers, a reasonable person would have put aside any concern about insolvency by drawing comfort from FMR's equity investment when the circumstances surrounding this investment did not support this conclusion.
5.The master erred in fact and in law in finding that Hickory Group did not actually suspect insolvency in circumstances where Hickory Group did not discharge its onus by leading direct evidence from both (alternatively either) Ms Kiosses (Hickory Group's general counsel) and Mr Palatianos (Hickory Group's chief financial officer) as to their non-suspicion of insolvency.
[111] The corresponding provision in s 588FG(1), being s 588FG(1)(b)(ii)(B).
Hickory Group's notice of contention
Hickory Group contends that the primary decision should be affirmed on the following grounds:
1.Section 588FG(1)(a) of the Act applies to prevent the court making any order under s 588FF against Hickory Group, in the following circumstances:
(a)the orders sought by the liquidators would materially prejudice the rights or interests of Hickory Group;
(b)Hickory Group was not a party to the transactions in respect of which the liquidators seek orders under s 588FF; and
(c)Hickory Group received no benefit because of the transactions in respect of which the liquidators seek orders under s 588FF.
2.Alternatively, s 588FG(1)(b) applies to prevent the court making any order under s 588FF against Hickory Group:
(a)in the circumstances referred to in pars (1)(a) and (b) above; and
(b)further, having regard to the findings of the master that the elements of s 588FG(2)(a) and (b) have been satisfied.
By par 2 of the notice of contention, Hickory Group relies upon the master's findings that it was a person who received a benefit because of the relevant transactions in good faith, and at a time when it had no reasonable grounds for suspecting that PVA was insolvent, and that a reasonable person in Hickory Group's circumstances would have had no such grounds for so suspecting.[112]
[112] Second respondent's written submissions, par 17; WB 41.
Section 588FG
It is convenient at this point to outline a number of the principles relevant to the scope and effect of s 588FG(2) of the Act.
General observations - s 588FG(2)
The onus is on the creditor to establish the defences under s 588FG(2).[113]
[113] Levi v Guerlini (1997) 24 ACSR 159, 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]; Trinick v EM & RM Williams & Sons [2009] WASC 297 [171].
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.[114]
Good faith
[114] Sutherland v Eurolinx Pty Ltd [2001] NSWSC 230; (2001) 37 ACSR 477 [43]; Trinick [179].
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.[115]
[115] See Levi (170); Sutherland v Eurolinx [39]; Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307 [44] ‑ [45]; Trinick [168].
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.[116] The test of good faith is not, however, confined to those matters.[117] Further, it may be that a failure to make enquiries will, in some cases, be of considerable significance when determining whether a creditor has established the good faith element of the defence under s 588FG(2)(a): Cussen Appeal.[118]
[116] Sutherland v Eurolinx [38]; Trinick [169].
[117] Levi (170); Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651, 656; Trinick [169].
[118] Cussen Appeal [123].
Where an indulgence in payment has been arranged and is intended to be relied upon, ordinarily the good faith defence in s 588FG(2)(a) is tested by reference to the extended period which reflects that indulgence.[119]
Suspicion
[119] Sutherland v Eurolinx [67]; Trinick [170].
Both limbs of s 588FG(2)(b) involve a consideration of whether there were grounds for 'suspecting' that the company was or would become insolvent. In Queensland Bacon Pty Ltd v Rees,[120] 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'.
[120] Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266, 303 - 304; Trinick [172].
The reference to suspicion of insolvency is suspicion of actual insolvency, and not a suspicion (or even belief) that the debtor might be insolvent.[121] It is a suspicion of actual and existing insolvency as distinct from impending or potential insolvency.[122]
[121] Queensland Bacon (291 - 292).
[122] Burness [52] citing Dean‑Willcocks [13].
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.[123] 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.[124] In Queensland Bacon, Kitto J observed, with respect to the dishonouring of cheques, that 'it may indicate, to those who are constantly dealing with the drawer and know the general course he is pursuing in his business, no more than a policy of wringing the last ounce of credit out of everyone who can be fobbed off with promises'.[125]
The first and second limbs of s 588FG(2)(b) of the Act - general observations
[123] Queensland Bacon (293), (298), (305 - 306), (310 - 311).
[124] Queensland Bacon (293 - 294), (306); see also Cussen v Commissioner of Taxation [2003] NSWSC 841; (2003) 47 ACSR 107 [65] (Palmer J), and Cussen Appeal [39] ‑ [41].
[125] Queensland Bacon (302).
The ordinary rule of construction is that no word or sentence is to be regarded as superfluous or insignificant.[126] Accordingly, ordinarily the differences in language between the two limbs of s 588FG(2)(b) would indicate that they are intended to have their own spheres of operation, albeit with some potential for overlap, rather than merely be wholly repetitious of each other.
[126] Beckwith v The Queen (1976) 135 CLR 569, 574; Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355, 382.
The principal difference between the two limbs is that the first opens with the words 'the person', whereas the second opens with the words 'a reasonable person in the person's circumstances'.
In the first limb, the reference to 'the person' would ordinarily be taken to mean that particular person in that person's circumstances. The second limb broadens and makes the enquiry more objective than the first limb. It concerns 'a reasonable person' in the person's circumstances. That is not to say that the first limb is wholly subjective, as discussed below.
'The person had no reasonable grounds for suspecting' - the first limb: s 588FG(2)(b)(i)
The phrase 'reasonable grounds for suspecting' is not an unfamiliar one in statutory instruments. In George v Rockett,[127] the High Court dealt with a statute which provided for the issue of a warrant to a police officer 'if it appears to a justice, on complaint made on oath, that there are reasonable grounds for suspecting [certain specified matters]'. The High Court said that the provision did not require the justice himself or herself to entertain the relevant suspicion, in addition to being satisfied that there are reasonable grounds for suspicion.[128]
[127] George v Rockett (1990) 170 CLR 104.
[128] Rockett (111 - 112).
The High Court continued:[129]
When a statute prescribes that there must be 'reasonable grounds' for a state of mind - including suspicion and belief - it requires the existence of facts which are sufficient to induce that state of mind in a reasonable person. … Therefore it must appear to the issuing justice, not merely to the person seeking the search warrant, that reasonable grounds for the relevant suspicion and belief exist.
…
It follows that the issuing justice needs to be satisfied that there are sufficient grounds reasonably to induce that state of mind.
[129] Rockett (112 - 113). See also Gypsy Jokers Motorcycle Club Inc v Commissioner of Police [2008] HCA 4; (2008) 234 CLR 532 [28].
That was a case in which there was a statutory duty on the justice to be satisfied on reasonable grounds for suspecting certain matters, before exercising his or her power to issue a warrant. The requirement for the justice to be so satisfied was, in administrative law parlance, a jurisdictional fact.[130]
[130] Gedeon v Commissioner of New South Wales Crime Commission [2008] HCA 43; (2008) 236 CLR 120 [43] - [44].
Although s 588FG(2)(b)(i) does not import any concept of jurisdictional fact, the High Court's observations in Rockett are nevertheless pertinent to the proper construction of the first limb. Read in light of the second limb and in the context of s 588FG and pt 5.7B as a whole, the first limb appears to be directed to the facts and matters actually (subjectively) appreciated by 'the person'. If the facts and matters appreciated by 'the person', from the range of information in the possession of 'the person', were sufficient to induce a suspicion of insolvency in the mind of a reasonable person, the first limb cannot be satisfied. Moreover, it is the negative which must be proved. Under the first limb, unless the relevant creditor can prove that the facts and matters appreciated by the creditor were insufficient to induce a suspicion of insolvency in the mind of a reasonable person, the defence in that regard is not made out.
Under the first limb,[131] it is insufficient for 'the person' merely to establish that, on the facts and matters which the person appreciated, the person had no actual (subjective) suspicion of insolvency. Indeed, consistently with Rockett (see [117] above), the first limb (ie, the limb in s 588FG(2)(b)(i)) does not appear to require the creditor to prove that it did not actually suspect insolvency. It is sufficient to prove that it had no reasonable grounds for suspecting insolvency. If, however, the creditor in fact suspected insolvency, that would ordinarily provide good evidence that it had reasonable grounds for suspecting insolvency, it being difficult for the creditor to contend that its suspicion of insolvency was other than on reasonable grounds.[132]
[131] And all the more so under the second limb.
[132] As noted in [109] above, actual suspicion of insolvency will also be relevant to good faith.
In considering, in relation to the first limb, what facts and matters 'the person' appreciated, regard would ordinarily be had to the training, skills and experience of 'the person' in question. Thus, for example, the matters appreciated by a sophisticated creditor such as a merchant bank with its accounting and economic expertise, may be different from the matters appreciated by a relatively unsophisticated sole trader.[133]
'A reasonable person in the person's circumstances' - the second limb: s 588FG(2)(b)(ii)
[133] cf Sims v Celcast Pty Ltd (1998) 71 SASR 142, 144 ‑ 148.
In Cussen Appeal, the New South Wales Court of Appeal considered the construction and operation of s 588FG(2)(b)(ii). The following propositions may be drawn from that case:
1.The words 'in the person's circumstances' refer to the actual circumstances as they exist at the time they entered into the relevant transaction, and denote external, objective factors or circumstances rather than factors personal to the person concerned, such as their particular perspicacity, financial acumen and the like.[134]
2.The reference to whether a 'reasonable person' in the person's circumstances 'would have had' reasonable grounds for suspecting that the company was insolvent is a reference to the 'reasonable person's' assessment of the information in fact in the possession of the creditor.[135]
3.In this context, the information in the possession of the creditor includes the fact (if it be the fact) of the absence of enquiries, but not information which a 'reasonable person' would theoretically have obtained had enquiries been made and responded to.[136]
4.The test is an objective test, 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'. It does not require an examination of whether the particular creditor, with their skills, training and experience, acting reasonably, would have had reasonable grounds for suspecting insolvency.[137]
[134] Cussen Appeal [29] - [31], [120]; cf the reference in Sims v Celcast at (144) to the particular creditor's knowledge and business qualifications.
[135] Cussen Appeal [122].
[136] Cussen Appeal [114] - [121].
[137] Cussen Appeal [17], [31].
We would respectfully accept, and adopt, those propositions as to the proper construction of s 588FG(2)(b)(ii). In relation to proposition 1, we would add that the objective circumstances may include the nature and practices of the industry in which the relevant transactions occurred, insofar as they are established as objective matters of fact, but not merely the particular creditor's subjective views as to the operation of the industry and its practices.
If the creditor receiving the impugned payment does not in fact infer insolvency or find grounds to suspect its existence, and, in particular, so continues to provide credit to the company, that in itself may provide some evidence, although it is not determinative, of how a reasonable person in the person's circumstances would regard the matter.[138] As Kitto J observed in Queensland Bacon:[139]
To consider the actual reactions of a business man whom the primary Judge has thought a reliable witness is not without its utility as a check on one's own endeavours to draw the correct inferences with due wariness of hind sight.
The difference between the first limb and the second limb in s 588FG(2)(b)
[138] Queensland Bacon (300), (303), (306), (311), (313 - 314); see also Cussen Appeal [25] ‑ [28], [31] with reference to Harkness v Commonwealth Bank of Australia (1993) NSWLR 543, 545 ‑ 546.
[139] Queensland Bacon (313).
Accordingly, the question raised by the first limb is whether the facts and matters actually appreciated by 'the person', ie, the particular creditor, were sufficient to induce a suspicion as to insolvency in the mind of a reasonable person. The question raised by the second limb is whether the facts and matters which would have been appreciated by a hypothetical person with the knowledge and experience of the average business person in the creditor's circumstances,[140] were sufficient to induce a suspicion as to insolvency in such a hypothetical person. In each case, the negative must be proved by the creditor.
Section 588FG(1)
[140] In the sense referred to in [123.1] above.
The same principles apply to s 588FG(1), on the basis that the observations on s 588FG(2)(a) apply to s 588FG(1)(b)(i), the observations on s 588FG(2)(b)(i) apply to s 588FG(1)(b)(ii)(A), and the observations on s 588FG(2)(b)(ii) apply to s 588FG(1)(b)(ii)(B).
Disposition
Ground 1
The master erred in law in finding that Hickory Group had established a defence under s 588FG(2) when Hickory Group had not relied on that provision as a defence to the liquidator's claims and the case was not fought with reference to that provision. Ground 1 should be upheld.
The consequence of that is another matter. Section 588FG(2) applies to a party to the transaction and s 588FG(1) applies to a person who is not a party to the transaction and who receives no benefit because of the transaction. That aside, the provisions are virtually identical, and the appeal was conducted on the basis that the issues concerning the construction and application of s 588FG(1)(b) and s 588FG(2) are substantially the same for present purposes.
By s 58(1)(a) of the Supreme Court Act 1935 (WA), this court has jurisdiction to hear and determine applications for a new trial or rehearing of any cause or matter, or to set aside or vary any verdict finding or judgment in any cause or matter. By s 59(3), a new trial may be ordered as to part only of any matter in controversy or as to any question or issue without disturbing any finding or decision as to any other part of the controversy, or on any question or issue, and final judgment may be given as to any such other part or on any such other question or issue. By s 59(4), on the hearing of any such application, this court has and may exercise all such powers as are exercisable by it upon the hearing of an appeal and may, if satisfied that it has before it all the materials necessary for finally determining the question in dispute or any of them, or for awarding any remedy or relief sought, give judgment accordingly and, for that purpose, has and may exercise all the jurisdiction, powers and duties of the court.
At least ordinarily, an appellate court would not exercise its power to set aside a judgment where an error of law appears in the primary court's reasons, unless the error is one upon which the decision depends. The relevant cases were examined in Sydney Water Corporation v Caruso.[141] In Caruso there was a difference of opinion between Allsop P and Tobias JA as to who bears the burden of persuasion of the existence of vitiating error and what that entails. The third judge, Sackville AJA, expressed no concluded view on that matter.[142] In Ord Irrigation Cooperative Ltd v Department of Water,[143] this court preferred the approach of Allsop P in the context of an appeal under s 105 of the State Administrative Tribunal Act 2004 (WA). In that case, an error was found to be vitiating where there was a reasonable possibility that the primary decision was influenced by legal error. It is unnecessary to further consider the differences in opinion for the resolution of this appeal.
[141] Sydney Water Corporation v Caruso [2009] NSWCA 391.
[142] See Caruso [25] ‑ [26] (Allsop P); [135] ‑ [136] (Tobias JA); and [191] ‑ [199] (Sackville AJA).
[143] Ord Irrigation Cooperative Ltd v Department of Water [2018] WASCA 83 [130] ‑ [131], [137].
A related principle is that an appellate court would not, at least generally, order a new trial if it would inevitably result in the making of the same order as that made by the primary judge in the first trial.[144] The exercise of the court's jurisdiction to order a new trial ultimately depends upon the demands of justice.[145]
[144] Stead v State Government Insurance Commission [1986] HCA 54; (1986) 161 CLR 141, 145; Deane v The City Bank of Sydney [1904] HCA 44; (1904) 2 CLR 198, 213.
[145] Calin v Greater Union Organisation Pty Ltd [1991] HCA 23; (1991) 173 CLR 33, 39; McLennan v McCallum [2010] WASCA 45 [90] ‑ [91].
The exercise of an appellate court's jurisdiction in this regard is also to be considered in the context of the rules of court which allow a respondent who seeks to uphold the primary court's decision on a ground not relied on by the primary court, to file a notice of contention to that effect.[146]
[146] Part 5, r 33(4)(a)(ii), (4)(c) and (7) of the Supreme Court (Court of Appeal) Rules 2005 (WA).
Hickory Group contends, in effect, that no error can be shown with respect to the master's reasoning and findings in relation to the elements of s 588FG(2). Accordingly, as the same elements are contained in s 588FG(1)(b), the master's erroneous reference to s 588FG(2) is, Hickory Group contends, immaterial. Hickory Group contends that in that event, the liquidators have failed to establish a vitiating error and are not entitled to orders setting aside the master's judgment and for a retrial. Alternatively (and this is really the other side of the coin), Hickory Group relies on par 2 of its notice of contention that the master's judgment should be upheld on the basis of his findings in relation to the elements of s 588FG(2).
The master heard and made findings concerning the parties' arguments directed to s 588FG(1)(b), but misattributed them to s 588FG(2). In the absence of any material difference, for present purposes, between the two provisions, the master's erroneous statement that Hickory Group had established the elements of s 588FG(2), rather than the elements of s 588FG(1)(b) on which Hickory Group had relied, is not an error which, on its own, would warrant the exercise of the powers of this court to set aside the master's judgment and order a new trial. There was no reasonable possibility that the master's error as to the applicable subsection influenced his decision in the case.
In determining what orders, if any, should flow from the error referred to in [128] above, it is appropriate, in the particular circumstances of this case, to treat the reference to s 588FG(2) as effectively a slip, and to proceed on the basis that the master's findings are to be taken as purporting to deal with s 588FG(1)(b).
Moreover, the liquidators accepted, in effect, that they would need to succeed on at least grounds 2 and 3, and par 2 of the notice of contention, in order to have the orders of the master disturbed in a material way.[147]
Ground 2(a)
[147] Appeal ts 5 ‑ 6.
In this case, the master approached the construction and application of s 588FG(2)(b)(ii) on the bases that:
1.It is not directed to a hypothetical person who is assumed to have the knowledge and experience of the 'average business person'. Rather, it requires an examination of whether the particular creditor, being in this case a creditor supplying goods and materials in the building industry, acting reasonably would have had reasonable grounds for suspecting insolvency.[148]
2.In that regard, the starting point is to make a finding of fact, based on the judge's impression of the person in the witness box, as to whether the creditor is a reasonable person.[149]
3.If it is found as a fact that the creditor is a reasonable person, the next question is whether, by reference to s 588FG(2)(b)(i), that person neither suspected insolvency nor had reasonable grounds for suspecting insolvency.[150]
4.If the particular creditor is in fact a reasonable person, and if that person neither suspects insolvency nor has reasonable grounds for suspecting insolvency, then the defence under s 588FG(2)(b)(ii) is established because that person is, effectively, by definition, 'a reasonable person in the person's circumstances' within the meaning of s 588FG(2)(b)(ii).[151]
[148] Primary decision [40].
[149] Primary decision [40], [79].
[150] Primary decision [40], [79], read with [78].
[151] Primary decision [80], read with primary decision [40], [78], [79].
The master's approach referred to in the preceding paragraph is contrary to the principles referred to in [123.1], [123.2] and [123.4] above. Section 588FG(2)(b)(ii) assumes the existence of a hypothetical, reasonable, person without any finding of fact based on the judge's assessment of the creditor in the witness box. A finding of fact that the creditor gave the impression of being a reasonable person deflects attention from the correct starting point, which is the hypothetical, average, reasonable business person. The effect of the master's approach is to rob s 588FG(2)(b)(ii) of any independent operation, and ground, impermissibly, it in considerations which focus attention on whether the particular creditor, with their skills, training and experience, acting reasonably, would have had reasonable grounds for suspecting insolvency.
Ground 2(a) should be upheld.
Grounds 2(b) and 3 and par 2 of the notice of contention
The consequence of the master's approach to the construction and application of s 588FG(2)(b) was to give particular prominence to Mr Argyrou's subjective appreciation of matters. The master brought to bear expressly and emphatically Mr Argyrou's lack of suspicion of insolvency as a separate consideration under s 588FG(2)(b)(i),[152] which he then effectively incorporated into his consideration of s 588FG(2)(b)(ii).[153]
[152] Primary decision [78].
[153] Primary decision [79].
Other matters, related to Mr Argyrou's absence of suspicion of insolvency, which the master effectively incorporated into his consideration of s 588FG(2)(b)(ii), were Mr Argyrou's own familiarity with delays in progress payments and his perception that there was a 'problem' with the 'internal administration' of PVA, which induced in him a belief that there was no fundamental problem with the financial viability of PVA.[154] These matters identified by the master concerned Mr Argyrou's subjective appreciation of events. The master did not purport to find as a fact that the periods of delay in payment were reflective of, or consistent with, industry practices, or that the hypothetical reasonable person with the knowledge and experience of the average business person in Hickory Group's circumstances would have attributed the delays to, in effect, merely administrative problems. Further, Mr Argyrou's belief that the late payments were attributable to internal administrative difficulties rather any fundamental problem with the financial viability of PVA was, in part, on the master reasons properly construed, a reflection of Mr Argyrou's inherent optimism. As noted earlier, the master said:[155]
Mr Argyrou is obviously an optimist. He believed the project would proceed and it would produce for his company substantial profits. He was not casting around for impediments to stop the progress of the project; rather, he was looking for solutions to problems as they arose. He clearly took the view most of the problems bedevilling the project could be sheeted home to a lack of organisation and system on the part of PVA. He believed these problems were temporary and could be sorted out with the application of sound management principles. Mr Argyrou actually said to this day despite the significant losses his company experienced, he believed the project was sound and, properly managed, would have been seen through to completion. He may well be right. (emphasis added)
[154] Primary decision [78].
[155] Primary decision [47].
Rivarolo's liquidators also sought to recover from Mr Eberle, a shareholder of Sales and, it appears, a director and shareholder of Rivarolo, the sum of approximately $761,000, which was said to reflect the value of the transferred assets. Windeyer J said there was no basis in the evidence for valuing the assets in that sum. Further, his Honour said:[195]
An ordinary reading of ss 588FF and 588FG together would indicate that orders could be made against third parties to the challenged transaction who were not innocent and who took a benefit from it. The power to make an order under s 588FF against a 'person' does not, I think, encompass misfeasance‑type proceedings against directors. There is no evidence that Mr Eberle benefitted from the transaction; his position as a shareholder of Sales is, I consider, too remote to be regarded as bringing him a benefit from the transaction. … [H]owever wide the power given by s 588FF are to make orders against third parties, the place within the [Corporations Law] where those powers appear must be taken into account; what is sought to be dealt with is the transaction and not the liability of directors for the transaction.
[195] Rivarolo (109).
His Honour dismissed the claim against Mr Eberle.[196]
[196] Rivarolo (109).
In Re Employ, the first and second defendants were Mr de Vries (Mr D) and Mr Tayeh (Mr T). Mr D and Mr T were accountants who practised as partners in a partnership known as de Vries Tayeh (the Partnership), and also through associated entities, including the third defendant, a company called 'DVT Services', of which they were directors. DVT Services was the trustee of a trust (Trust). There was an issue in the case as to whether the Partnership, or DVT Services, provided the relevant accounting services to the plaintiff company (Employ). Black J found that DVT Services (and not the Partnership) provided the relevant accounting services to Employ. On 1 May 2007, Employ owed DVT Services $198,229. On that date, DVT Services agreed to do further work for Employ, but only the basis that its fees for further work would be pre‑paid, and that Employ would be charged 'special rates'. Those rates were effectively double the commercial rate.[197]
[197] Re Employ [2] - [3], [8], [12], [18], [21], [31].
Employ subsequently made payments to DVT Services totalling $280,240.[198] Black J held that the transactions constituted by those payments after 1 May 2007 amounted to an uncommercial transaction.[199] The liquidators of Employ sought to recover the $280,240 from Mr D and Mr T, alternatively from DVT Services. Mr D and Mr T asserted a defence under s 588FG(1)(a) on the basis that they were not parties to the transaction (as the payments were made to DVT Services), and they received no benefit because of the transaction.[200]
[198] Re Employ [12].
[199] Re Employ [75], [83].
[200] Re Employ [81], [85] - [87].
As to whether Mr D and Mr T were parties to the transaction, Black J said:[201]
I have held above that the Partnership was not party to the transactions and the findings that I have made above do not support a conclusion that [Mr D] and [Mr T], in their personal capacities or as the partners in the Partnership, were sufficiently connected with or impacted by the transactions so as to be treated as party to them; compare Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corp above at [519] ‑ [521]; Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd above per Young JA at [142]. The first element of the defence under s 588FG(1)(a) is therefore established in respect of [Mr D] and [Mr T].
[201] Re Employ [86].
His Honour then considered whether Mr D and Mr T received a 'benefit', given that the payments were made to DVT Services, DVT Services was the trustee of the Trust, and the taxable income of the Trust in the relevant years had been distributed to trusts associated with Mr D and Mr T. His Honour referred to the issue as follows:[202]
The [liquidators] contend that benefit to [Mr D] and [Mr T] is sufficiently established by the fact that DVT Services was the trustee of the … Trust; the payments in issue were deposited into a bank account of DVT Services as trustee for that Trust and the adjustable taxable income of the … Trust in the years ended 30 June 2007 and 30 June 2008 was distributed to trusts associated with [Mr D] and [Mr T]. [Mr D and Mr T] contend that monies received by DVT Services in discharge of amounts owing to it were not received by [Mr D] and [Mr T] as a matter of fact and they did not benefit from those payments other than in the same indirect way that all employees or creditors benefit when a company receives funds and is better able to discharge its obligations. They contend that the voidable transaction provisions do not extend to expose persons such as company directors, employee or shareholders in respect of monies paid to a company. [Mr D and Mr T] also contend that, if the Court were to find that [Mr D] and [Mr T] were to receive a 'benefit' from the transaction, any order under s 588FF should be limited so that they are only required to pay the amount actually received by each of them, by a process akin to a tracing exercise. The [liquidators] concede that they could not establish that a benefit was received on that basis.
[202] Re Employ [87].
His Honour rejected the contention that Mr D and Mr T received a benefit on the basis that they were beneficiaries under trusts, which were themselves beneficiaries of the Trust. His Honour said:[203]
Subsection 588FG(1)(a) refers to a benefit received 'because of' the transaction, and that term appears to contemplate a direct causative relationship. As [Mr D and Mr T] point out, the monies paid by Employ … to DVT Services were paid into an operating account from which numerous expenses and payments were made. While [Mr D] and [Mr T] are potential beneficiaries of other trusts that are in turn beneficiaries of the … Trust, of which DVT Services is trustee, I accept that it cannot be said that this is sufficient to give rise to a benefit to them received because of any particular transaction undertaken by DVT Services, including the particular transactions undertaken between DVT Services and Employ ... It seems unlikely that the intent of the sections is to expose each shareholder in a company which receives, for example, a preference to personal liability, and the relationship between DVT Services and [Mr D] and [Mr T] is significantly more remote than that of, for example, a shareholder of a company which receives a preference. As [Mr D and Mr T] point out:
'If it was the case that the section could operate in this fashion then directors, shareholders, employees and even creditors could be rendered liable to repay amounts received as unfair preferences if it could be shown that in some indirect way the prior receipt of those monies enabled or even assisted the recipient creditor to make payments to those parties or to entities with which they were associated. Such would constitute a very significant enlargement of the reach of the law as it existed before 1993 in respect of void transactions.'
I accept that, as [Mr D and Mr T] point out, there is no indication of any intention to expand the voidable transaction regime by this means in the Explanatory Memorandum in respect of the introduction of Pt 5.7B into the Corporations Act; to the contrary, the amendments substantially continued the pre-1992 law: Re Emanuel (No 14) Pty Ltd; Macks v Blacklaw and Chadforth Pty Ltd above at 294.
For these reasons, I consider that, were it necessary for them to do so, [Mr D] and [Mr T] would have established defences under s 588FG(1)(a) of the Corporations Act so as to avoid orders being made against them personally under s 588FF of the Corporations Act.
[203] Re Employ [88] - [89].
His Honour's reference to Buzzle Operations is a reference to a decision of the New South Wales Court of Appeal in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd.[204] The principal judgment was given by Young JA with whom, relevantly, Hodgson and Whealy JJA agreed.[205] In that case, Buzzle was incorporated on 3 July 2000. It acquired the stock and businesses of six retailers of Apple products. These retailers (resellers) took shares in Buzzle's holding company, Buzzle Ltd. They expected that their merged business would be more profitable than the sum of the individual businesses, and the intention was that after the merged businesses, Buzzle Ltd, the holding company, would be floated and listed on the Australian Securities Exchange. Apple's consent to the merger was required. Apple gave its consent and entered into a Reseller Agreement with Buzzle, pursuant to which it thereafter provided stock on credit to Buzzle. It took a charge over Buzzle's assets. The proposed float did not proceed. Buzzle's business failed. Apple appointed receivers and Buzzle subsequently went into liquidation.[206]
[204] Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 81 NSWLR 47.
[205] Buzzle [6], [286].
[206] Buzzle [21], [26] - [27].
The consideration for the transfer by the resellers of their assets to Buzzle was to comprise cash payments by Buzzle, plus the issue of shares in Buzzle Ltd. The amount of cash to be paid to each reseller depended upon a valuation of each reseller's stock, plant and equipment. Buzzle had to pay cash for all the stock acquired from each reseller by 31 October 2000. The remaining element of the cash payment was deferred until Buzzle Ltd was listed on the Australian Securities Exchange, or its directors had formed the view that Buzzle's cashflow was sufficient to make the additional payments. The resellers were, at the time, indebted to Apple for stock supplied by Apple to the resellers. At the time of the merger, the resellers collectively owed Apple $15.2 million. The stock transferred to Buzzle was valued at $6.3 million. At the time of the merger, Apple debited Buzzle with $6.3 million, and credited the resellers with their respective proportions of the value of the stock transferred to Buzzle. Thus, the combined debts owed by the resellers to Apple were reduced to $8.9 million.[207]
[207] Buzzle [30] - [31], [33].
In late 2000, Buzzle made four payments to Apple on behalf of the resellers, including what were described as the November and December Payments. These payments were credited by Apple to the resellers' accounts. None was credited to Buzzle's own account with Apple. In other words, none of the payments reduced the debt payable by Buzzle to Apple for the Apple stock valued at $6.2 million. The liquidator of Buzzle said that the November and December Payments by Buzzle to Apple did not discharge any debt then due and payable by Buzzle to the resellers. The liquidator contended that the November and December Payments were uncommercial transactions, and sought an order under s 588FF directing Apple to pay Buzzle the amounts of the November and December Payments. Apple, relevantly, relied on the defence under s 588FG(2).[208]
[208] Buzzle [34] - [38].
Amongst other things, there was a submission by Apple that, although it received the November and December Payments from Buzzle, it was not a 'party' to those transactions. It was put that the November and December Payments merely discharged a pre‑existing debt due to Apple from the resellers.[209] That submission was rejected. Young JA said:[210]
As a general rule, a transaction is a dealing with two or more parties in different interests. The prefix 'trans' with the word 'action' denotes an activity which crosses amongst parties.
Thus, if a payment by a corporation is a transaction, the parties to the transaction include at least the person to whom the monies are paid.
Thus, here it was the moneys of Buzzle that were paid to Apple. The fact that Buzzle may have been making the payments on behalf of a third party is of peripheral relevance to that fact. Buzzle made a payment, the payment was a transaction, another party to that transaction was Apple which received the payment.
In any event, the proposition that the payment is not really from Buzzle to Apple, but rather from Buzzle to the Resellers to Apple, satisfying debts due and payable by the Resellers, involves an oversimplification of the commercial relationships involved and a confusion of the payment made. Whatever the account being satisfied, it is clear that money was transferred from Buzzle to Apple. Apple was aware of the source of the payment and able to correspondingly direct its assessment of the commerciality of the transaction.
[209] Buzzle [105], [136] - [139].
[210] Buzzle [142] - [145].
With respect to whether Apple received a benefit from the payments made by Buzzle, Young JA said:[211]
In my view, Apple did benefit in that a significant part of its distribution empire was kept intact and it actually received a significant amount in cash instead of an obligation to repay on persons [the resellers] who might not be able to honour them.
[211] Buzzle [158].
In Weaver, Mr Harburn was the sole director of the company that subsequently went into liquidation (the Company). In 2007, Mr Harburn decided to purchase a boat for his wife, Ms Chivers. On 19 July 2007, Ms Chivers entered into a contract to buy a boat for $385,000. In July and August 2007, the Company (by Mr Harburn) paid the purchase price to the vendor of the boat, and Ms Chivers became the sole registered owner of the boat (boat transaction).[212] The court held, in effect, that the boat transaction was an unreasonable director‑related transaction within the meaning of s 588FDA of the Act.[213] Mr Harburn relied on the defence in s 588FG(1)(a).[214] McLure P (with whom Buss & Murphy JJA agreed) said:[215]
It is apparent from the opening line that s 588FG limits the exercise of powers that would otherwise fall within the scope of s 588FF(1). The logical first question is whether the court has power under s 588FF(1) to make an order against [Mr Harburn].
Under s 565 of the former legislative scheme, a transaction of a type which was void against a trustee in bankruptcy under the Bankruptcy Act 1966 (Cth), s 120 - s 122, was, without the intervention of the court, void against a liquidator.
By contrast, s 588FF(1) gives the court very wide powers to make orders in respect of voidable transactions which fit the particular circumstances of the case. …
The court's powers in s 588FF(1) are not confined to a person who is a party to the transaction. The power extends to a non-party who, for example, receives (directly or indirectly) property of the company the subject of the voidable transaction.
It is clear from the text and purpose of s 588FF(1) that the relief is intended to be restitutionary in nature, in the sense that its purpose is to recover company property, or the value thereof, that is or has been in the hands of the defendant. It is not concerned with compensation for loss or damage suffered by the company. (emphasis added)
[212] Weaver [1], [3], [6] - [7].
[213] Weaver [17], [94] - [103].
[214] Weaver [108].
[215] Weaver [110] - [114].
The court found that s 588FG(1) had no application to Mr Harburn. Mr Harburn was not a party, ie, he was a person 'other than a party' to the boat transaction within the meaning of the chapeau of s 588FG(1). However, he had not himself received any 'benefit' because of the boat transaction within the meaning of s 588FG(1)(a).[216]
[216] Weaver [117] - [118], [122] - [123].
McLure P continued:[217]
It follows that even if s 588FF(1) is wide enough to permit relief against [Mr Harburn] (a non-party who received no benefit because of the transaction), the defence in s 588FG(1)(a) would apply.
[217] Weaver [124].
Her Honour nevertheless had doubts as to whether s 588FF(1) extended to the making of orders against a person who was neither a party to the transaction nor received a benefit from the transaction. Her Honour said with respect to s 588FF(1) and its operation with s 588FG(1)(a):[218]
In those circumstances it is unnecessary to determine the scope of s 588FF(1). However, it is arguable that the purpose of s 588FG(1)(a) is to prevent the making of an order against a party to the transaction which has the effect of materially prejudicing rights and interests of a person who is a non-party to the transaction and who has received no benefit because of the transaction. So for example, the court could not make an order [under s 588FF(1)] declaring an agreement void ab initio if that would materially prejudice a non-party to the transaction who had received no benefit because of it. Otherwise, it is difficult to envisage circumstances in which the court could make an order under s 588FF(1) directly against a non-party who has received no relevant benefit. (original emphasis)
[218] Weaver [125].
It is also unnecessary, for present purposes, to form a concluded view on her Honour's observations referred to in the preceding paragraph.
The words 'because of' in s 588FG(1)(a) and s 588FF(1)(c) are, it may be accepted, words of causation. Although causation is essentially a question of fact determined by the application of common sense,[219] a common sense answer must be given in the context of, and informed by, the relevant legal framework in which the question is asked.[220]
[219] March v E & MH Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506, 515.
[220] cf Chappel v Hart [1998] HCA 55; (1998) 195 CLR 232, 238, 255 ‑ 256.
As McLure P observed in Weaver, the relief under s 588FF(1) is intended to be restitutionary in nature.[221] It is designed to 'remedy depletion' of the assets of the insolvent company, principally for the benefit of its unsecured creditors.[222]
[221] Weaver [114].
[222] New Cap Reinsurance Corporation Ltd (in liq) v Renaissance Reinsurance Ltd [2002] NSWSC 856; (2002) 192 ALR 601 [23].
In the present case, the master did not make any findings of fact about whether there was a 'voidable transaction' for the purposes of s 588FF(1) and, if so, what that transaction was. In the primary proceedings, the liquidators advanced a number of contentions as to what was the relevant transaction or transactions. They included that the mortgage and the payments taken together were transactions constituting an unfair preference.[223] For the purposes of the present discussion, it will be assumed that each of the payments from PVA to HWA was a voidable transaction, that the mortgage was a voidable transaction and/or alternatively that the payments together with the mortgage constituted an overall voidable transaction. In other words, it will be assumed that, one way or another, there was a voidable transaction for the purposes of s 588FF(1) under which HWA received the sum of (approximately) $10 million.
[223] Liquidators' written submissions dated 28 November 2016 (in the primary proceedings), pars 15, 70 ‑ 83; BB 37 ‑ 38, 51 ‑ 53.
A party who has given up the benefit of an unfair preference may prove for the debt in the liquidation of the debtor: s 588FI(3). In this case, had HWA during the life of that company returned the sum of $10 million to PVA, HWA could have proved in PVA's liquidation for that sum and received a dividend on its debt. That did not occur.[224] Rather, it appears that HWA has retained the full benefit of the $10 million, and applied it in the course of its business prior to itself going into liquidation. Had HWA itself been solvent at the time of the receipt of the $10 million from PVA, and had it applied a sum of $10 million to, eg, 1,000 ordinary, individual, non‑related, trade creditors of $10,000 each, it would be difficult to see, prima facie, how each creditor's receipt of $10,000 would be a 'benefit' received 'because of' the assumed voidable transaction. There is prima facie no 'benefit' to an ordinary unsecured third party creditor in receiving payment from its debtor of a debt due to it where the debtor is a solvent company.[225] Even if there were a 'benefit' in that regard, there is prima facie no causation between the assumed preferential payment of $10 million to HWA and the payment of an amount of $10 million to the 1,000 ordinary trade creditors in the example given. That is because, by definition, as a solvent company, HWA can pay its debts as and when they fall due in any event. That is so whether or not the assumed trade creditors knew that HWA had received a preferential payment of $10 million prior to them being paid themselves.
[224] Theoretically, even though HWA is in liquidation, if it had sufficient assets it could still return the sum of $10 million to PVA and prove in the liquidation of PVA. However, there appears to be no suggestion that HWA is in a position to return the $10 million to PVA.
[225] cf Buzzle [144].
It may also be noted in this context that the solvency of a subsidiary company may depend upon funding from and arrangements such as forbearances with its parent company. Those arrangements with its parent company may allow the subsidiary company to continue to pay the debts owed to its third party creditors, as and when they fall due, and thereby avoid insolvent trading.
Further, even if the payee company receiving the preferential payments was insolvent, any payments made by the insolvent payee to its third party creditors would prima facie be 'because of' the insolvent trading of the payee. Payments received by third party creditors of the insolvent company would not prima facie be 'because of' the original voidable transaction.
Other considerations may be relevant where, for example, the subsidiary company has no or few assets of its own, and few if any external liabilities, and effectively relies on credit from the parent company for its day‑to‑day operations. The cash from a preferential payment (the voidable transaction) received by the subsidiary company, from the subsidiary company's debtor, may be the only asset available to the subsidiary company to repay the debt to its parent company. The repayment by the subsidiary company to the parent company of the debt it owes to the parent company from that asset may be a benefit to the parent company because without it, the parent company might not recover the debt owed to it. That benefit may also be, when regard is had to all the relevant circumstances, received by the parent company 'because of' the voidable transaction.
Paragraph 1 of the notice of contention proceeds, primarily, on the basis that Hickory Group received no benefit because of any voidable transaction, because it was a pre‑existing creditor of HWA.[226] As the preceding discussion indicates, the fact that Hickory Group was an existing creditor of HWA is not in itself necessarily determinative of that question. Whether Hickory Group received a benefit and, if so, whether it was because of a voidable transaction, and the amount of the benefit, will depend upon an examination of all the relevant facts and circumstances, including, prima facie, the financial position of HWA at each relevant point in time, and its financial relationship with Hickory Group. It should be added, although it is perhaps unnecessary to say so in terms, that the examples given are not intended to provide a comprehensive illustration of the scope and potential application of s 588FF(1)(c) and s 588FG(1)(a).
[226] There is also the separate contention that the sum of $8.163 million was paid out of the NAB overdraft - as to which see [165] above.
The 'difficulty' referred to by Hickory Group in [164] above is not evident on the facts of this case.[227] It does not appear that HWA's liquidator has sought to recover the payments from HWA to Hickory Group. Hickory Group seems to have retained, undisturbed, the $10 million. More fundamentally, the submission that there is an inherent 'difficulty' with the construction and application of s 588FG(1)(a) unless Hickory Group's argument is accepted,[228] is less than compelling. The suggested difficulty appears to be predicated upon concurrent liquidations of PVA and HWA. If HWA, by its liquidator, had obtained, or were to obtain, an order that Hickory Group disgorge to HWA the $10 million in payments from HWA to Hickory Group as an unfair preference, it is prima facie difficult to see how PVA's liquidator could have an equal claim on the same $10 million for the purposes of s 588FF(1)(c). That is because Hickory Group would have no entitlement to the money, yet the postulated benefit to Hickory Group is effectively a derivative one, based on the $10 million having ended up with Hickory Group.
[227] Nor is it clear whether the winding up of HWA was a voluntary winding up.
[228] That is, its argument that a person who has received payment of a pre‑existing debt in the present circumstances is necessarily a person who has 'received no benefit because of the transaction' for the purposes of and within the meaning of s 588FG(1)(a).
Moreover, the point is a theoretical one at this stage. The master has made no findings about whether some or all of the payments from PVA to HWA, and/or the mortgage, constituted a 'voidable transaction' for the purposes of s 588FF(1). There were different payments at different times. The relevant circumstances of each payment would need to be considered to determine whether some or all of them were voidable transactions. The payments totalling $8.163 million from HWA to Hickory Group on 13 and 14 September 2012 may, at least, arguably be unfair preferences if, for example, all of the payments together with the mortgage constituted the relevant voidable transaction. A detailed examination of all the facts is required and appropriate findings must be made.
We would dismiss ground 1 of the notice of contention.
Conclusion
The liquidators have succeeded on grounds 1 ‑ 3. It is unnecessary to deal with ground 4. They have failed on ground 5. The notice of contention should be dismissed.
The parties should be invited to make further submissions on final orders in light of these reasons.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
CL
ASSOCIATE TO THE HONOURABLE JUSTICE MURPHY23 JULY 2018
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