ASIC v Plymin, Elliott & Harrison [2003] VSC 123

2. This is a civil penalty proceeding brought by the plaintiff, Australian Securities and Investments Commission, against three company directors in relation to alleged insolvent trading by two companies, Water Wheel Mills Pty Ltd and Water Wheel Holdings Limited. At all relevant times the defendant Plymin was the Managing Director, the defendant Harrison was the Chairman of the Board of Directors and the defendant Elliott was a non-executive director of the companies.

5. Administrators were appointed to the companies by their directors on 17 February 2000. The case is concerned with insolvent trading alleged to have commenced on or about 14 September 1999 and the evidence in the case primarily dealt with events occurring in 1999.

8. Plymin defended this proceeding in person but did not give evidence. Harrison admitted "liability" in the course of the trial and took no further part in it; the question of any orders as against him has been deferred. Elliott was represented by Counsel in his defence and gave sworn evidence.

11. It will be convenient to refer to the persons involved in this proceeding by the abbreviations which follow. I mean no disrespect to the defendants, witnesses or other persons where I refer to them by their surname and without any title of Mr. or Mrs. etc, an expedient adopted simply for convenience and ease of reference.

Plaintiff, Australian Securities and Investments Commission

First Defendant, Bernard Henry Plymin, Managing Director of Water Wheel

Second Defendant, John Dorman Elliott, non-executive director of Water Wheel

Third Defendant, William Maxwell Harrison, Chairman of directors of Water Wheel

Albright & Wilson Australia Pty Ltd, chemical company

Nicholas John Allen, Senior Credit Specialist with AWB

Douglas John Atcheson, Manager, Group Credit Management section of ANZ Bank

AWB Limited, company associated with the Australian Wheat Board

Nicholas Brooke, partner of PWC, joint and several administrator of Water Wheel

John Anthony Calvert-Jones, former director of Water Wheel

Christopher Thomas Daly, partner of PWC, investigating accountant appointed by the ANZ Bank and joint and several administrator of Water Wheel

Derrick & Son (Grain) Pty Ltd, grain traders and grain merchants

Lupangelo Di Lorenzo, former Senior Manager, Finance, at Vicgrain

Geoffrey Hughes (Export) Pty Ltd, a company exporting rice and grain

Douglas Charles Goldsworthy, office manager of Tristate

Hannagan Bushnell, PR Consultants employed by Water Wheel

Graham Hodges, ANZ Bank's State Manager for Business Banking

Michael James Humphris, expert accounting witness for Elliott

Peter Gregory Jeffries, General Manager, Marketing, NSWGB

Leila Grace Kippax, certified practising accountant for Grainco, successor to NSWGB

Graham Maxwell Lawrence, former Chief Executive Officer, NSWGB

Robert Stephen Lee, former Senior Manager, Marketing and Business at Vicgrain

Mark Gross, employee of KPMG Corporate Finance and consultant to Water Wheel

Lindsay Phillip Maxsted, expert accounting witness for the plaintiff

Ken Cornelius Meyer, National Credit Manager, Albright & Wilson

Andrew Glenn Mullen, manufacturing manager at Bridgewater mill

Stephen John Nankervis, financial controller of Water Wheel from 1 February 1999 to 19 April 1999

Jan Gilman Neil, Managing Director of the Neil's group of companies

The Neil's group of companies, including but not limited to Neil's Transport Pty Ltd

Christopher Pawlowicz, former employee of Swire Shipping Agencies

Paul Francis Pereira, grain buyer for Tristate working in Deniliquin

Purtills Nominees Pty Ltd, trading as Purtill Bros, a bus and transport company

RiceGrowers Co-operative Limited, rice marketing company for the NSW Rice Marketing Board

Charles Rosedale, partner at Clayton Utz and legal advisor to Water Wheel

Allan Snape, consultant to Water Wheel, director of ARH and associated with Elliott

Josephine Spargo, accounts payable officer employed by Water Wheel from October 1999

Ross Harris Stankovich, Manager in ANZ Bank Corporate Banking Department

Swire Shipping Agencies, a division of John Swire & Sons Pty Ltd, a shipping company

Phillip Rex Traill, purchasing officer for Tristate (Bridgewater stockfeed mill)

Tristate Commodities, grain merchant business owned by Mills

Gary Ronald Tucker, certified practising accountant for NSWGB

Geoffrey Charles Wales, partner at HPW, audit partner

David Christopher Wilson, financial controller of Water Wheel from 9 August 1999 to 16 February 2000

15. ASIC alleges that each of Holdings and Mills was insolvent on and after 14 September 1999, or alternatively on and after 3 October 1999, and that each of the defendant directors contravened s.588G of the Corporations Law of Victoria ("the Corporations Law" or "the Law") with respect to the insolvent trading of Mills and Holdings on and after the date of their insolvency.

18. ASIC says that by virtue of the transitional provisions of the Corporations Act 2001 (Clth) ("the Act") (ss.1382 and 1401) when read with s.1473 of the Law as in force immediately before the introduction of the Act, the pre-13 March 2000 provisions of the Law continue to apply to this proceeding and are to be treated as if they were part of the Act[1].

21. By its amended Originating Process dated 27 November 2000, ASIC seeks the following relief:

* A declaration pursuant to s.1317EA(2) of the Law that each of the defendants has contravened s.588G of the Law with respect to the insolvent trading of each of Mills and Holdings on or after 14 September 1999, alternatively, on or after 3 October 1999. * An order pursuant to s.588J of the Law that each of the defendants pay compensation to each of Mills and Holdings equal to the loss or damage suffered by their respective creditors as a result of the contravention of s.588G. * An order pursuant to s.1317EA(3)(a) of the Law prohibiting each of the defendants from managing a corporation for such period as the Court deems appropriate. * An order pursuant to s.1317EA(3)(b) of the Law that each of the defendants pay to the Commonwealth a pecuniary penalty of up to $200,000 for each contravention of s.588G.

25. In support of its case the Plaintiff provided evidence, both oral and by way of a very large number of affidavits and documentary exhibits, broadly from the following sources:

* creditors; * former Water Wheel officers, employees, auditors and consultants; * Water Wheel's administrators and investigating accountants appointed by the ANZ Bank; * a variety of other sources including expert opinion and material relating to funding, sale and other options available to Water Wheel.

31. Mills was incorporated on 14 June 1888 as Water Wheel Flour Mills Pty Ltd. and was the trading entity of the Group. Holdings was the parent company of the Group. It was listed on the ASX in 1960. Other entities in the Group were dormant. Holdings was a pure holding company. It did not have any trade receivables or cashflow in its own right or any bank account. Holdings' solvency depended on the solvency of Mills. To the extent that it, rather than Mills, incurred any debts, its solvency depended entirely on financial support from Mills. As the parties did throughout the trial, it will be convenient in this judgment to use the term Water Wheel as covering either or both of Mills and Holdings.

34. The share structure of Holdings is as follows: 6,079,723 fully paid ordinary shares on issue; 22,500 fully paid ordinary employee shares; and 750,000 10% Cumulative Converting Non-Redeemable Participating Preference Shares held by ARH. Elliott is a director of ARH and these preference shares are described in the 3 December 1998 Annual Report dated 3 June 1999 as being "indirectly held" by Elliott.

37. At the time of the appointment of the Administrators the directors of Holdings were Plymin (since May 1997),[2] Elliott (since May 1997),[3] Harrison (since October 1987);[4] and Carnie (since 29 September 1999) and the directors of Mills were Harrison, Plymin and Elliott. Calvert-Jones had resigned as a director of Holdings on 19 April 1999 and John Gross had resigned as a director of Holdings and Mills on 30 July 1999.

40. The main business of Water Wheel was the procurement and milling of wheat and paddy rice and the distribution of the resulting products which included flour, stockfeed and rice. The business activities of Water Wheel were conducted by Mills, which also owned the assets and employed the staff. These activities were carried on at its mill at Bridgewater on the Loddon River in Victoria and also at Mitiamo, 50 km from Bridgewater. Water Wheel's head office was at 364 Albert Street, Melbourne

43. Water Wheel entered the rice industry in 1997. A rice mill was purchased and installed at Bridgewater at a cost of about $3M. The mill had a capacity of 48,000 tonnes per annum (based on 95% efficiency, 24 hours, 6 days per week, 50 weeks per year). I note that during the 1998 financial year, Water Wheel undertook a rights issue and private placement, options were exercised and partly paid shares were called up. These actions raised $5.045M. According to the 1998 Annual Report, this enabled the stockfeed plant to be rebuilt (at a cost of $4M), a rice flour mill to be purchased and the wheat flour mill to be upgraded. Drying and storage facilities were purchased by Water Wheel and they were located at Mitiamo on premises owned by Vicgrain. The relationship between Vicgrain and Water Wheel was governed by an agreement dated 23 December 1997. Under this agreement, Vicgrain met the costs of providing a wet rice storage facility, a dried rice storage shed and the installation of aeration units required for dried rice storage. These costs were repayable by Water Wheel by 40 quarterly instalments of $36,600 (being principal and interest) and payable from 1 August 1997 to 1 May 2007.[5] In addition, Water Wheel was liable to pay certain other amounts for a licence fee and for operating charges for services provided by Vicgrain.

46. Water Wheel's rice milling capacity exceeded its drying and storage capacity, but capital works to increase the drying and storage capacity had been initiated or were being planned. 1998 was the first full year of rice production for Water Wheel and it was looking to expand rice operations during 1999. In the 1999 year, Water Wheel generated revenue of approximately $12.5M from its flour business, approximately $9M revenue from rice and $5.7M from its stockfeed business. Water Wheel also engaged in low margin rice tolling on behalf of RiceGrowers.

49. Due to the vesting provisions in the Marketing of Primary Products Act 1983 (NSW), all rice grown in New South Wales (where most of Australia's rice is grown) vests in the Rice Marketing Board. In turn, the Rice Marketing Board has vested the power to process and market the NSW rice crop in RiceGrowers. As a result of Water Wheel's inability to secure a sufficient supply of rice, Water Wheel's rice mill operated at about 40% of its capacity.

52. On 21 March 1997 Mills entered into an agreement with APT, a company associated with Elliott and of which he was a director, for supply of rice produced by Elliott. The agreement also provided for payment to APT of a maximum fee of $250,000 per annum for technical and support services. The last such fee became due and payable within 7 days of 30 June 1999.

55. In order to conduct its operations, Water Wheel needed to purchase large quantities of wheat and paddy rice and this depended on seasonal availability. To finance the purchases, Mills entered into "off-balance sheet" arrangements with financiers: Derrick & Son in respect of rice, and NSWGB in respect of wheat.

58. By a deed made 15 June 1999 between Derrick & Son and Water Wheel (Holdings and Mills) the parties arranged for the financing of a maximum of 20,000 tonnes of rice comprising grain sourced from the 1998 and 1999 harvests. The agreement applied to all transactions between 1 May 1999 and 30 April 2000. There was a prior agreement dated 10 December 1997 along the same lines covering earlier harvests.

61. The agreement with Derrick & Son operated as follows:

* "Sourced grain" was defined as paddy rice sourced and purchased by Mills off-farm and stored in approved storage facilities owned by Vicgrain (at Mitiamo). * Derrick & Son and Mills would enter into back-to-back sale and re-purchase contracts in relation to sourced grain purchased by Mills under nominated contracts. Mills would sell the paddy rice to Derrick & Son which would transfer the original purchase price into Mills' bank account and obtain title to the rice. * Interest was payable by Mills at a specified rate on moneys so advanced by Derrick & Son. * Mills was to advise Derrick & Son of tonnage drawn down from time to time for milling, whereupon Derrick & Son would issue invoices to Mills that were payable within 30 days of receipt. Derrick & Son therefore relied on Mills to advise it of tonnage drawn down and used in production. * All financed grain had to be delivered to Mills by the agreed expiry date (in this case 30 April 2000). Derrick & Son was entitled to invoice Mills for any grain remaining undelivered on 30 April 2000 and such invoice was due and payable on or before 31 May 2000.

65. There was an agreement with NSWGB relating to approximately 50,000 metric tonnes of grain covering the 1997/98 wheat season. The agreement operated in a similar fashion to the agreement with Derrick & Son, except that the wheat was stored in silos at Bridgewater controlled by Water Wheel. The agreement provided for Holdings to pay for all grain the subject of the agreement by 30 November 1998.

68. Until it ceased trading with Water Wheel in or around 15 October 1999, Neil's Transport transported all of Water Wheel's products from the Bridgewater mill to customers, and to Neil's Transport's rented warehouse in Melbourne for storage and packing for export. In or about August 1997, Neil on behalf of Neil's Transport reached an agreement with Plymin on behalf of Water Wheel that, inter alia, Neil's Transport would provide transportation services to Water Wheel and would be paid within 30 days of receipt of an end-of-month statement, and that in the event of any non-payment, Neil's Transport was entitled to claim a lien in respect of any good stored by it for and on behalf of Water Wheel.

71. The principal relevant facts, but by no means every pertinent fact contained in the large volume of evidence, are set out, so far as practicable, in chronological order below. Where appropriate, the evidence of key witnesses is expressly dealt with.

75. AWB is Australia's main national and international grains marketing organisation, marketing predominantly wheat. AWB had a longstanding commercial relationship with Water Wheel and its standard terms of trade with Water Wheel were payment within 30 days from the Saturday of the week of delivery. In late September 1998 Water Wheel was indebted to AWB in the sum of $339,000 of which $158,000 was overdue (dating back to 24 August 1998). Water Wheel had advised AWB that it was sending a cheque but it was not received. Water Wheel's then financial controller, Terry Crowe, informed AWB that Water Wheel was not mailing any cheques "as they were restructuring their finances". Mr Aucher, AWB's manager of trade finance, told Crowe that until the funds were received, Water Wheel's credit limit ($400,000) was suspended and there would be no further deliveries.

79. By letter dated 6 October 1998, AWB requested Water Wheel to pay the sum of $102,844.43 (all overdue for payment, and some of it 30 days overdue). The letter sought immediate payment "to ensure that deliveries are not suspended".

82. A meeting of the Board of Directors of Water Wheel was held on 12 October 1998. Harrison, Plymin, Elliott, Crowe and John Gross were present at the meeting. The Board resolved that the following financial information was required for future Board meetings:

* Identification of Profit Improvement Programs * Cashflow and Working Capital Usage * Sales Volume Variances by Division * Program to reduce Inventory * Profit & Loss Statement by Division * Revised Sales Budgets excluding Budgeted Internal Sales

87. In December 1998, when carrying out the audit of the accounts for the financial year ended 3 December 1998, the auditors sighted a trial balance as at 31 October 1998 prepared by management. This trial balance suggested that a profit would be made for the 11 months to 31 October 1998 of approximately $1M.

91. On 15 January 1999 Crowe ceased to be the Company Secretary and financial controller of Water Wheel.

94. Under a June 1998 finance (or purchase and resale) transaction between NSWGB and Water Wheel, grain to the value of $569,607 was financed by NSWGB. The final date for payment in full by Water Wheel, irrespective of delivery of the grain, was 30 November 1998. The said sum of $569,607 plus certain other costs resulted in a total liability of $571,452.73. This sum was invoiced by NSWGB to Water Wheel on or about 31 January 1999. Although NSWGB did not press Water Wheel for payment of this amount prior to October 1999, the sum was in fact due and payable from 30 November 1998 onwards and was never paid.

98. On 1 February 1999, Nankervis was appointed as General Manager, Finance and Administration, of Water Wheel.

101. At all relevant times, HPW, a firm of chartered accountants, were the auditors of Water Wheel. The auditors were required to produce audited financial accounts for Holdings and Mills, and audited consolidated accounts as required by law. Wales was the partner responsible for the audit, and Montesano, who had been continuously involved with the audit of Water Wheel for a number of years, was responsible for the day to day activities in auditing Water Wheel. HPW commenced the audit of Water Wheel's consolidated financial accounts for the financial year ended 3 December 1998 in early December 1998. In early February 1999, it became obvious to Montesano that the result for the financial year to 3 December 1998 was likely to be a substantial loss. He then spoke with Harrison and asked him what he thought the financial result for the year would be. Harrison said that he thought Water Wheel had made a profit of approximately $1M. Montesano said that the likely result was going to be a large loss. Harrison said that he would talk to Plymin.

104. Shortly before 9 February 1999, Harrison contacted Brown of Deloittes and requested a meeting which was held on that day or shortly thereafter. Harrison told Brown that the year end accounting records of Water Wheel had revealed a "significant" loss for the six months to 3 December 1998. After the meeting with Harrison, Brown had discussions both with Harrison and with Plymin in which it was agreed that Deloittes would assist Water Wheel to ascertain the cause of the loss reported in the accounts.

107. Montesano and Wales attended a meeting with Plymin, Harrison, and Nankervis at Water Wheel's head office on 12 February 1999 where the results of the audit and the preliminary audited consolidated accounts were discussed. Montesano and Wales informed the others that the result of the audit was that Water Wheel was going to make a loss in the region of $1.5M. Plymin said that he was incredulous about the result and that he had doubts over the accuracy of the figures. Montesano and Wales explained that it was the increased expenditure on overheads which was the major contribution to the large loss. At the meeting, they went over the accounts in detail with the others and showed them a rough working sheet which disclosed that overheads had increased significantly in the second half of the financial year. Plymin said to Montesano and Wales that he did not agree with the accounts but he did not say in what way he considered them to be inaccurate. Plymin said that the increased overheads were justified because Water Wheel had experienced an increase in sales. Montesano and Wales said that the reason that the management accounts to 31 October 1998 were disclosing a profit was principally due to major oversights in the recording of wheat and rice costs. Montesano told Plymin that once grain sales were excluded [ie, because they were low profit], sales had not increased sufficiently to cover the increase in overheads. Plymin said that something must be wrong with the sales figure.

110. A Board meeting was held at Water Wheel's head office on 16 February 1999. The directors present were Harrison, Elliott and Plymin. Also in attendance were Rosedale and Nankervis. Calvert-Jones was not in attendance.[6] The minutes of the meeting record that the audit had recently exposed significant discrepancies between the monthly accounts and the statutory accounts and that it was decided that, due to the magnitude of the discrepancies, the ASX should be advised that it was inappropriate for Water Wheel to lodge annual accounts until further investigative work was undertaken and that Deloittes were to be appointed to lead this investigation. In evidence, Elliott recalled that he was expecting a profit of around $890,000, but the Board was told that the draft accounts showed a loss in the order of $1.5M for the year ended 3 December 1998.[7] Elliott testified that he demanded a full explanation, and that Plymin told them that over $1M, maybe up to $1.8M, of sales had not been recorded from the general ledger into the sales ledger. Elliott was not sure whether Plymin had made that statement at that meeting or later; however, he testified that the directors' consensus was that the loss figure was wrong, and that sales had not been recorded. The missing sales were said to be in relation to flour. In cross-examination, Elliott agreed that $1.2M of missing flour sales would be about 100 deliveries (about 200,000 tonnes of flour). Elliott said that the directors were also told that the new computer system was not recording the sales. The information was being "lost down the wire" from Bridgewater to head office, where the invoices were sent out. Elliott testified that the directors considered that there were only two possibilities: either the sales had not been invoiced, or someone had stolen the flour. The directors were told that Deloittes had been engaged to investigate. Elliott said in evidence that he did not make any enquiries of the auditors, a matter which he left to Harrison and Plymin - he added that he did not have any great faith in the auditors.

113. Wales and Montesano (the auditors) attended at Water Wheel's office for the 16 February Board meeting and waited outside the Boardroom. During the Board meeting, Harrison came outside and told Wales and Montesano that the directors were not comfortable with the accounts and had resolved to defer lodgement of them, knowing that this would lead to the shares in Holdings being suspended from trading on the ASX.

116. After the results were presented to the Board on 16 February 1999, Harrison wrote to the ASX a letter of the same date as follows:

"The Board of Water Wheel advised it has determined it is inappropriate to lodge with ASX today, its accounts for the year ended 3 December 1998, due to material anomalies identified in the year end accounts. These anomalies have been identified during the commissioning of a new computer system installed to ensure the Company is Year 2000 compliant. The Board of Water Wheel has appointed Deloitte Touche Tohmatsu to assist in addressing the situation. The Company will keep the market informed as to progress in resolving the anomalies, so that the accounts can be finalised and lodged with ASX at the earliest opportunity."

120. As far as the evidence shows, neither the directors nor the auditors nor anyone else had at that stage "identified" any "material anomalies" and the reference to their identification during the commissioning of a new computer system is puzzling. Elliott had a copy of this letter, which he produced to ASIC in the course of its investigations.

123. Trading in the listed shares in Holdings was suspended as from the commencement of trading on 17 February 1999 and was not reinstated until 11 June 1999, following lodgement of the preliminary final report for the period ended 3 December 1998.

126. Shortly after the announcement of the suspension of trading in shares in Holdings, Lawrence of NSWGB had a conversation with Elliott, in which Elliott informed Lawrence that Water Wheel had not lost any money, that there was a computer problem in that invoices issued at the mill were not being received via the computer link to head office, and therefore sales were not being invoiced, and that most of the money would be recouped. Clearly Elliott, knowing that NSWGB was an important financier of Water Wheel, was concerned to keep NSWGB informed and reassured.

129. Under a finance (or purchase and resale) transaction between NSWGB and Water Wheel in October 1998, grain to the value of $719,659.80 was financed by NSWGB. Most of this grain was delivered to Water Wheel by 6 November 1998 and all of it was delivered to Water Wheel by 2 December 1998. The full amount was invoiced to Water Wheel on or about 25 February 1999. Even on the view of the evidence best for the defendants, most of this amount was never paid. The evidence shows that the said sum of $719,659.80 had been entered by NSWGB in a general ledger account, which also covered numerous ordinary trading transactions. Due to a number of payments or offsets in that general ledger account, a balance of $623,441 was due and payable (among other debts due to NSWGB) and was never paid.

132. On 6 January 1999, following the delivery of 9.214 tonnes of paddy rice by RiceGrowers to Mills, RiceGrowers had invoiced Mills by two invoices for the sums of $1,126,623.15 (invoice 90036375) and $1,242,270.19 (invoice 90036376). The agreed trading terms with RiceGrowers were payment within 14 days of delivery. Invoice 90036375 was paid on 22 January 1999. Invoice 90036376 was part paid by instalments on 2 February ($500,000), 5 February ($200,000) and 10 February ($242,270.19). On 26 February 1999 RiceGrowers' credit officer retained the services of a debt collection agency to recover the outstanding balance of $300,000. On 2 March 1999 a further payment of $100,000 was made. On or about 30 March 1999, following action by the debt collector, payment of $50,000 was made. Payment of the final outstanding amount of $150,000 was made on 3 May 1999.

135. By letter dated 26 February 1999, AWB again wrote to Water Wheel complaining of late payments. The sum of $104,930.74 was overdue for payment, and AWB indicated that Water Wheel's credit limit might be reduced or withdrawn.

139. The amount requested by AWB remained unpaid and by letter to Water Wheel dated 10 March 1999, marked for the attention of Harrison, AWB said, inter alia:

"It has been brought to my attention that your recent payment record has been somewhat tardy with the AWB's invoices being paid every 45 days on average based on the payment of the last 20 invoices. As you are no doubt aware, the AWB's standard trading terms are strictly payable 30 days from the week end of delivery. ... I advise that unless the sum of $104,930.74 is paid [...] by 17 March 1999, I have been instructed to issue legal proceedings for recovery of the same without notice. ..."

143. Shortly after 10 March 1999, AWB decided that Water Wheel's credit limit was to be deactivated and that all future grain sales would be on a cash with order basis. The outstanding sum was paid by Water Wheel on or about 17 March 1999.

146. On 9 March 1999, Harrison advised the ASX that Water Wheel should be in a position to lodge its annual accounts by 16 March 1999.

149. The Board of Directors of Water Wheel met on 12 March 1999. Present at the meeting were Harrison, Elliott, Plymin and John Gross. In attendance were Nankervis and Mark Gross. Calvert-Jones was not in attendance. The minutes record that Plymin outlined the results of the investigations into the "discrepancies" in the 1998 Annual Statutory Accounts. The minutes further record that Brown of Deloittes was invited to present his view on the investigations and his view is summarised as being that "[w]hile a number of possibilities had been eliminated, there were no satisfactory explanations for the apparent discrepancies". At that stage, Brown did not express any opinion to the Board as to the reasons for the loss. John Gross recommended (according to the minutes) that the company, with the help of Deloittes, undertake further investigation.

152. Presumably the "discrepancies" referred to in these minutes are the same things described earlier as "anomalies", but again, as far as the evidence goes, the discrepancies cannot be identified unless it is simply a reference to the discrepancy between the large loss reported by the auditors and the large profit expected by the directors.

155. At the meeting on 12 March 1999, Nankervis informed the Board "of the Group's tightening liquidity, the increased legal recourse suppliers were taking to recover debts and the difficulty being experienced in paying debts when they fell due", which Nankervis said to the Board raised concerns that Water Wheel might be insolvent. One or more of the directors made statements to Nankervis which were to the effect that the Board were aware of the situation, they better appreciated the nature of the grain industry than he did, but they acknowledged that there was a "funding issue" to be dealt with and were considering options to address it, ranging from a proposed equity injection, additional debt finance, or selling parts of the business.

158. At the meeting on 12 March 1999, Mark Gross[8] presented to the Board a memorandum of that date entitled "Rice Expansion". In the memorandum he noted that the expected results for 1998 [ie, the large loss] were most likely going to have a material impact on the future fundraising capabilities of the company [ie, set them back] and hence materially influence any proposed rice expansion [ie, make it more difficult to finance any proposed rice expansion]. The memorandum sought to address only the immediate issues facing Water Wheel for the 1999 harvest. The memorandum noted that a total of 8,500 tonnes of Victorian grain was expected in the 1999 harvest, all of which was expected to be purchased by Water Wheel; that there had been no public announcement as to the form or timing of the proposed deregulation of the rice industry; and that Water Wheel's offer to purchase 35,000 tonnes of dried paddy from RiceGrowers had not been accepted. The memorandum went on to assess that if Water Wheel was restricted to Victorian rice purchases, and taking into account that Water Wheel had committed capital expenditure of $900,000 for the upgrade of Mitiamo facilities, "[a]n annual negative cashflow of approximately $670,000 would be anticipated". The memorandum went on to consider the commercial and legal implications of an attempt to break RiceGrowers' legal monopoly in NSW (should RiceGrowers not reach agreement with Water Wheel for the sale of grain). The memorandum noted that Water Wheel's existing rice infrastructure had a relatively high fixed cost and therefore all incremental tonnage was beneficial.

161. After attending the Water Wheel Board meeting on 12 March, Brown and a team from Deloittes attended at Water Wheel's mill at Bridgewater on Saturday 13 March 1999. Deloittes' investigations discovered that:

* the Water Wheel computer system reported that all orders input into the system (other than current orders) had been invoiced; * an analysis of wheat purchases, and gross margins on wheat sales, disclosed that Water Wheel's gross margin had suffered a significant deterioration; * an analysis of Water Wheel's operating expenditure for the 6 months to 3 December 1998 revealed that Water Wheel's expenses had increased by approximately $1.2 million in the period.

165. In the week after he returned from Bridgewater, Brown had a meeting with Plymin. During this meeting, he explained to Plymin that Deloittes' review of sales invoicing procedures at the mill did not reveal any major weaknesses. Brown also showed Plymin the analysis of additional expenditure of $1.2M in the second half of the financial year compared with the first half of the financial year. Plymin did not disagree but stated that Water Wheel had achieved a greater volume of sales than that being shown in the draft accounts. Plymin said that his view was based on calculations that he had done, using his own understanding of costs and the volume of wheat purchased and processed.

168. Brown decided to do further work to find out if Plymin's belief could be supported by delivery and invoice records. Plymin had told him that all transport was carried out using Neil's Transport. Deloittes obtained all Neil's Transport invoices from the mill, which recorded Water Wheel's delivery docket numbers and randomly selected items to confirm that selected items were recorded in the computer system as sales. A number of test checks were performed and none revealed any unrecorded sales.

171. On 16 March 1999, Harrison informed the ASX that Water Wheel would not be lodging its annual accounts by March 16, 1999, as previously advised, but would do so "at the earliest opportunity". He also advised the ASX that the review of the annual accounts by Deloittes, who had been appointed to "investigate anomalies identified in the annual accounts during the commissioning of a new computer system to ensure that the Company is Year 2000 compliant", was continuing.

the Water Wheel Board had set out the form of information which it required for future Board meetings, including monthly cashflow statements and profit and loss statements in relation to each division of Water Wheel's business, viz. flour, stockfeed and rice. Elliott testified that by March 1999, the Board was still not being supplied with such statements. Elliott said that by March 1999, the directors had not been given any progressive trading results for the period beyond 3 December 1998. He agreed that the provision of accurate, informative and timely management accounts and proper cashflow statements were "standard things that you would expect" and that it was important for the directors to know whether the company was making continuing losses from December 1998 to March 1999, but he said that he considered that the "un-invoiced sales problem" was more important, and the critical matter to resolve first. He did not explain why both matters could not have been dealt with at the same time.

179. On or about 16 March 1999, HPW issued an "audit management letter" to the directors of Water Wheel. The letter, according to Wales, outlined matters identified during the course of the 1998 year audit which, whilst not serious enough to warrant qualification of the accounts, were serious enough to bring to the Board's attention. On or about 16 March 1999, Wales visited Harrison at his office and handed to him a copy of the audit management letter. It was also handed or posted to Plymin. Neither Elliott nor Calvert-Jones had any recollection of seeing the audit management letter or of hearing about it. It would seem that neither Harrison nor Plymin took any steps to supply the other directors with a copy of the audit management letter or to advise them of its existence. The audit management letter, which was 28 pages long, set out the auditors' belief that there were a number of areas that needed "urgent attention to enable an acceptable standard of internal control and reporting systems to be put in place". The letter raised issues in respect of Water Wheel's internal controls and accounting procedures.

182. The covering letter dated 16 March 1999 addressed to the directors of Water Wheel, which accompanied the audit management letter, offered to discuss in greater detail the matters reported if the directors so required and sought "your written response to these matters so as to assist us to plan future audits". However, Harrison and Plymin did not invite Wales to discuss the matters raised with them nor was any written response to the audit management letter received by HPW. According to Wales, he did not receive either a written or "any meaningful oral response" to the audit management letter.

185. On 18 March 1999, a meeting of the Board of Directors was held at Elliott's office which was situated at Level 1, 411 Collins Street Melbourne. Present at the meeting were Harrison, Plymin, Elliott and Calvert-Jones. Nankervis was also in attendance. The minutes record that the meeting was informed as to the progress of "the investigation" with the loss now approximately $800,000 compared to the February situation of $2,400,000.[10] I note that by this stage, the auditors had completed their audit of the 3 December 1998 full year accounts. The audited loss for the year was $878,889. The Board papers for this meeting included an Appendix 4B report for the period ended 3 December 1998 showing an operating loss of $879,000. The minutes went on to record that a profit report by major product groups was presented to the meeting and that this report isolated the flour section as the area generating the loss.

188. On 23 March 1999, there was a meeting of the Board of Water Wheel at which were present Harrison, Plymin, Elliott, Calvert-Jones and John Gross, and in attendance was Nankervis. The minutes record that the meeting was informed (presumably by Plymin) as to the results of the continuing investigation into the "discrepancies" in the 1998 Annual Accounts and that, although no further adjustments had been recorded, "both stock discrepancies and inaccurate reconciliations have been identified". The Board resolved to continue to employ Deloittes to manage the investigation and to appoint "a special investigator to review securing procedures at the mill". The directors were presented with a summary of the audited results for the year ended 3 December 1998. Nankervis testified that the directors discussed the large losses incurred by Water Wheel in the previous financial year and the possibility of stock having been stolen or deliveries not recorded rather than there being errors in the financial accounts. The Board resolved to apply for an extension of time for the holding of the Annual General Meeting and for the lodgement of the 1998 Annual Accounts.

191. On 31 March 1999 Plymin informed the ASX by letter that Water Wheel had sought and received an extension from ASIC of the deadline for financial reporting until 3 May 1999, and an extension of the deadline by which Water Wheel had to hold its Annual General Meeting from 3 May 1999 to no later than 3 June 1999. The letter went on to state that "the extensions were required to ensure that a full and thorough investigation of anomalies identified in the 1998 year-end accounts could be completed" and that the anomalies had now been identified "as relating to volume discrepancies between flour production and sales". As far as the evidence goes, there does not appear to have been any basis for stating that any so-called anomalies had been identified as relating to "volume discrepancies" between flour production and sales - certainly I am satisfied that Deloittes had reached no such conclusion. Nor, by this time, did the auditors consider that there were any anomalies or discrepancies requiring explanation.

194. In or about March 1999, Neil of Neil's Transport complained on the telephone to Plymin about how slow Water Wheel was in paying invoices. Plymin told Neil that he was working on the basis that Neil's Transport was undertaking about $200,000 worth of work per month for Water Wheel and he was treating all accounts as being 60 day accounts so that at any one time Water Wheel would owe Neil's Transport about $400,000. In fact, during the period that Neil's Transport was trading with Water Wheel, it was rare that invoices would be paid by Water Wheel within 75 days, and it was not unusual for the debt outstanding by Water Wheel to Neil's Transport to be $500,000 or more.

198. Nankervis testified, and I accept, that during March and April 1999, many trade creditors of Water Wheel were demanding immediate action on their overdue accounts and that in order to have the cash to meet such demands, he and Plymin and other employees were trying all means possible to achieve speedy debt collection. Nankervis said that, during his time with Water Wheel, he had discussions on a regular basis with Plymin regarding liquidity. He would receive telephone calls from a number of creditors each day seeking payment, and would speak to Plymin almost daily about which of the creditors were to be paid and as to the source of funds for such payments. Nankervis prepared, at the request of Plymin, a daily summary of the cash position of Water Wheel. At or about the start of April 1999, Nankervis prepared a table summarising instalment payments agreed by Water Wheel with some of its creditors and showing payment commitments taking priority over the next few weeks. A typical table is in evidence, showing instalment promises made to some 14 creditors totalling $1,127,218 and providing for payment by instalments on one or more of the following dates: 14 May, 21 May, 28 May and 4 June.

201. Nankervis also testified that Powercor, Water Wheel's electricity supplier, had in March or early April 1999 threatened to stop supply unless a large debt was paid within two hours. That debt was paid but it is convenient to note here that the evidence shows that Water Wheel's account with Powercor was consistently in debit and overdue for payment from July 1999 onwards. The overall pattern shown by the account is that payments of $12,000 to $15,000 were made by Water Wheel at approximately monthly intervals, that the amount due to Powercor between 20 July 1999 and 1 October 1999 was never lower than $30,822.41 and that in the period from 18 October 1999 to 22 November 1999 it was never lower than $43,690.51. After November 1999, the outstanding account at all times exceeded $100,000. I specifically note that on 24 September 1999, after payment of the sum of $15,000, the balance of account due was $44,617.35, representing the August electricity account and half of the July electricity account.

204. By mid-March 1999 (or at the latest by April 1999) Nankervis had found that Water Wheel was under "continual pressure from creditors to pay accounts" and had ascertained that Water Wheel "would need at least $2M to relieve the pressure from the cashflow point of view." Nankervis had also ascertained that "creditors between 90 and 100 days were running at around one million dollars." His $2M estimate was derived by Nankervis from three components: cheques drawn up and held by Water Wheel "in drawers" ($0.5M), creditors between 90 and 100 days ($1M) and 4-5 months old purchases by other creditors as yet unrecorded (mainly NSWGB) ($0.5M). The cheques held in drawers represented debts treated in the Water Wheel accounting system as paid but for which there were no funds available, from bank overdraft or otherwise, to honour the cheques.[11]

207. By 12 April 1999, Nankervis' concerns about the continued financial viability of Water Wheel had increased. He was also concerned about his own legal position as the General Manager, Finance and Administration. Indeed on 9 April 1999, Nankervis had written to his solicitor, Mr Peter Kennedy of Madgwicks, stating inter alia:

"The company is making losses that they were not previously aware of. The company has a severe cashflow shortage. It appears to be unable to meet is [sic] obligations when they fall due within normal trading terms: Trade creditors are on average 90 - 120 days trading terms. This situation appears to have been in existence for at least the last 6 - 12 months and getting worse. As Creditors place the company on Stop Credit, the situation gets worse. The company is currently suspected [sic] from trading on the ASX & has deferred its AGM. This causes shareholder concerns and heightens creditor fears... ...In my view the company is trading dangerously close to insolvency." "I receive a number of calls from irate creditors and concerned shareholders on a daily basis"

211. A Board meeting was held on 12 April 1999 at which were present Harrison, Plymin, Elliott, Calvert-Jones and John Gross, and Nankervis was in attendance for part of the meeting.

214. Mark Gross provided a further memorandum entitled "Rice Expansion" (dated 30 March 1999) to the Board at this 12 April meeting. The memorandum stated:

"1. Further to the Directors meeting on Friday 12 March, [Water Wheel] have been informed by VicGrain that they are not prepared to provide off balance sheet finance for rice paddy purchases. In addition, [Derrick & Son] and [NSWGB] the current providers of off-balance sheet finance have for both rice and wheat purchases respectively have also advised that any expansion or even an extension of existing facilities beyond 30 June 1999 is unlikely. 2. Victorian paddy for the 1999 harvest is estimated to cost $2.8 million and current off balance sheet funding is $4.1 million. Of this approximately $2.5 million is paddy and $1.6 million is wheat. Based on our preliminary numbers we estimate a cashflow deficit for grain funding of $3.7 million by June 1999. 3. In addition [NSWGB] has refused to re-finance a further $0.8 million in wheat purchases for [Water Wheel] and a further $1.2 million in cash is required to bring existing creditors in line with agreed trading terms. 4. As a result [Water Wheel] needs approximately $5.7 million in working capital. Furthermore [Water Wheel] has planned capital expenditure (including rice, flour packing line) of $3.8 million of which $0.9 million, for the Mitiamo expansion has already been committed. 5. As a result we believe [Water Wheel] may need to raise approximately $6.5 million in new equity and additional $3.0 million in debt facilities. 6. It is important to note that these are preliminary numbers only. A 1999 or 2000 budget has not been fully developed and more work is required to determine the exact future funding requirements of [Water Wheel]. 7. This memo seeks to inform Directors that additional equity will most likely be required and give the lengthy equity raising process recommend that the equity raising process be initiated as soon as possible." [emphases added]

218. A copy of the Gross memorandum was produced to ASIC from the possession of Elliott and Elliott testified that he had read the document prior to the Board meeting. Elliott said that management (ie, Plymin) had agreed with the statement in the memorandum that "a further $1.2M in cash is required to bring existing creditors in line with agreed trading terms". When cross-examined about the statement that Water Wheel needed approximately $5.7M in working capital, I thought that Elliott was evasive about Water Wheel's need for working capital and was reluctant to concede that the directors had decided to find additional funding in order to bring existing trade creditors into line. However, Elliott acknowledged in his evidence that it was critical for Water Wheel to obtain rice supplies from RiceGrowers in NSW and to do so quickly.

221. A copy of the Gross memorandum was also produced to ASIC by Calvert-Jones, which bore the following notation in Calvert-Jones' handwriting:

"Issues Raise only enough to keep the business going. We are in survival mode."

225. The 12 April meeting commenced by Plymin giving the directors a report on the activities of the company and during that early part of the meeting, Calvert-Jones asked whether Water Wheel was solvent and received an answer from Plymin in the affirmative. Elliott recalled that Calvert-Jones also voiced a concern that the directors had not yet seen any current results from the first three months of 1999.

228. I interpolate that on the morning of the Board meeting Nankervis had obtained oral advice from his solicitor in response to his above letter, and arrived late for work to discover that a Board meeting was in progress, and that he was required to attend, which he did at about 10:30 am. Nankervis took handwritten notes during the meeting which he typed up shortly after the meeting.

231. After Nankervis' arrival, financial matters affecting the company were discussed in more detail. Nankervis provided the directors with figures relating to debtors and creditors (which were recorded by Calvert-Jones in his notebook). Nankervis told the Board in substance that Water Wheel could not meet creditors on reasonably accepted credit terms, that nine legal demands from creditors had been received from creditors over the past few weeks and that Water Wheel needed $2M of funds to keep the business going. The directors discussed the issue of a possible capital raising by Water Wheel and the difficulty of raising further equity created by the poor financial results. The Board resolved to defer capital expenditure proposals. According to Nankervis' notes, which I accept to be accurate, the deferral was in substance expressed to be "while [Water Wheel] was experiencing financial liquidity problems". The topic of Water Wheel's superannuation payments for its employees was also raised (see below).

234. During the meeting, Plymin advised the Board that there was a likelihood that Derrick & Son and NSWGB would not provide funding for the new season (the year commencing May 1999). I interpolate that Nankervis testified that the likely non-renewal of such funding had been communicated to Nankervis by his counterparts at Derrick & Son and NSWGB on a number of occasions during telephone conversations concerning moneys owed to them by Water Wheel which were overdue. Plymin went on to say in substance that the he had had discussions with the ANZ Bank and with GE Capital with a view to them replacing the previous financiers, but it was unlikely that either of them were prepared to do so. Elliott undertook to investigate possible funding arrangements with a finance provider, Prime Mortgage.

237. Nankervis testified, and I accept, that during the meeting he was asked by Calvert-Jones about the "liquidity status" of Water Wheel and that he replied that Water Wheel had a shortfall in liquidity of a minimum of $2M. Calvert-Jones confirmed Nankervis' evidence to this effect. Nankervis went on to say in substance that Water Wheel was not able to pay creditors within normally accepted trading terms, and uttered words to the effect that initial legal advice indicated that this constituted trading while insolvent. Calvert-Jones also asked whether Water Wheel's superannuation contributions for employees were up to date, and Nankervis replied that Water Wheel was three months behind in paying those contributions.

240. Calvert-Jones, had come to Australia in 1965 and worked as a stockbroker. He became the chairman and chief executive of an American owned stockbroking and investment banking company (Prudential Bache Securities) which was involved in all aspects of financial markets, with offices around Australia and in other parts of the world. He was with that company for 28 years. He was a director of Cochlear Limited from December 1995 to late 1999. He had been a director of a number of other public companies. Calvert-Jones came to the meeting with handwritten notes containing a number of questions, which read, inter alia, as follows (the italicised parts are those added by Calvert-Jones during the meeting):

"1. What are the issues we have to have an answer to by end of meeting? Off bal sheet financing - capital needed - final ¼ results - cash flow - announcement to ASX update - how long can we keep operating? Are we solvent? ... 4. What is the basic amount we need to survive? 2 million Cashflow requirements for 12 months - critical. Capital requirements Do we have a starting point? ... 6. Do we have confidence in management? Stephen [Nankervis] etc. ... What is my duty to the [shareholders] as a whole? ... 10. [Yuml] Can the Company meet its commitments? [Yuml] Other outstanding accounts? Behind? CR $1 mil 90 days + YES See notebook ... 12. Are superannuation contributions - up to date? Stephen [Nankervis] - 3 months behind ... 17. What other information should we have before us? 18. Current operating issues. not enough rice [therefore] can we earn a profit this year?"

244. Calvert-Jones testified that between 3 December 1998 and 12 April 1999 the Board had not been provided with any progressive trading results, whether monthly or quarterly, so he did not know whether the Group was trading profitably or at a loss during the first 4 months of the 1998-1999 year. Calvert-Jones, in addition to the notes on his memorandum referred to above, wrote in his notebook during the meeting, inter alia, as follows:

"...2/ Are we solvent? Yes ... [Here there are notes relating to the amounts and aging of debtors and creditors - followed by:] [therefore]need $2 mil of funds What we have lost... Stephen [Nankervis]: `Cannot meet CRs on reasonably accepted credit terms' NB St [Nankervis] definitely edgy. Body language... 9 legal demands from creditors over past few weeks. ... Superfund payments Company may be behind by 3 months. This will be checked. ... Key issues Don't know where we are financially. Solvency? Unlikely to subscribe to new issue Management ?? I don't know about the insolvency situation Low business controls. Management and information services still being installed. long term before fixed Concerns can't be satisfied... Key issues [Yuml] In view of Finance Manager "the Company cannot meet its creditors on reasonably accepted credit terms." [Yuml] Nine legal demands from creditors over past few weeks [Yuml] In my view doubtful that Debtors numbers are correct [Yuml] No figures since January for a public Company Where are we financially?? [Yuml] Not comfortable that the Banks really know where we are. [Yuml] Concern our management's ability to see the company through this phase [Yuml] 3 months behind in super payments [Yuml] We will not meet our rice targets [Yuml] Fearful that Deryk [sic] & Son + NSW Grain will not continue off b/s funding [Yuml] Last Board meeting we are promised cash flows for 12 months plus annual prelim profit - none available... [Yuml] SFA [Sea First Australia, Calvert-Jones's family company] will not be subscribing to the any new issue [Yuml] Low business Controls. Management and information services still be installed. In view of Stephen. Long term before fixed. [Yuml] In summary I do not have confidence that the Company can meet its obligations Decision to resign now while there is still hope that the Company can survive. Wait until confronted by results -.- [Yuml] I am will be personally vulnerable if I stay. Been very loose financially."

248. The minutes of the Board meeting of 12 April 1999 record that the rice strategy paper was presented to the meeting, "[t]he key elements being the small tonnage available would only contribute approx. $250,000". The minutes further record under the topic "Off-Balance Sheet Funding" that the meeting was informed "as to the status of both the rice and wheat facilities" and that the "rice facility expires at the end of April", and that the Board instructed Elliott and Plymin to negotiate an extension of the rice facility. Under the topic of "Cash Flow", the minutes record that "the Board was informed as to the daily cash position of [Water Wheel] and although the seasonal influences had contributed to tightness in liquidity, [Water Wheel] was continuing to trade in a solvent manner". The minutes go on to note that Plymin was instructed to negotiate a review of facilities with the ANZ Bank and to investigate alternatives to the off-balance sheet funding arrangements.

251. By letter dated 14 April 1999, Calvert-Jones tendered his resignation as a director. His letter of resignation gave no reason for resigning. Elliott testified that he did not see Calvert-Jones' resignation as a warning sign that Water Wheel was heading towards insolvency.

254. On 19 April, Nankervis tendered his resignation, to take effect on 30 April 1999. His letter of resignation, addressed to the Board of Directors and dated 16 April 1999, was tabled at a Board meeting on 19 April 1999. In his letter he stated as follows:

"It appears that the company is unable to meet its obligations when they fall due within normal trading terms as indicated by a high and permanent proportion of creditors remaining in the 90 - 120 day trading terms... I have kept the Managing Director informed on...material facts as they have unfolded on a daily basis. These circumstances portray a very bleak view of the long-term viability of the organization and raise concerns of the company trading while insolent [sic]. A concern that I expressed at the March 12th Board meeting. These concerns have prompted me to obtain legal clarification on what constitutes "the ability to meet obligations when they fall due." Legal advice sought has confirmed that the present circumstances in which the company is trading would be viewed by the courts are [sic] trading while insolvent. This places the management of the organization in a position of being personally liable in the event that the company was to be liquidated. No comfort can be taken from the fact that the company has Directors & Officers Indemnity Insurance. Trading while insolvent is a criminal offence and will not be covered by such a policy. When again asked for my opinion at the board meeting held on Monday (12th April 1999), regarding the status of the company's trading ability, I informed the board that the status had not changed, and that legal advice indicated that the company would be regarded as trading while insolvent. This position cannot be rectified without an immediate injection of funds. I question the ability of the organisation to continue trading until the proposed AGM on 3rd June 1999, where the company will be seeking approval for an equity raising... It appears that the company is unable to meet its obligations when they fall due within normal trading terms as indicated by a high and permanent proportion of creditors remaining in the 90-120 day trading terms...continual telephone calls from irate suppliers demanding long outstanding accounts to be settled".

258. The Board of Water Wheel met on 19 April 1999. The directors present were Harrison, Plymin and John Gross, and an apology was received from Elliott. Also in attendance at the meeting were Nankervis, Rosedale and Brown. Letters of resignation from Calvert-Jones and Nankervis were tabled and accepted. Nankervis attended parts of the meeting and gave the Board a summary of his reasons for resigning, as outlined in his letter. He was asked to leave the meeting for a short period, and when he returned he was informed that his resignation had been accepted. He was then asked how long it would take to provide the Board with the first 4 months trading results for the year commencing 4 December 1998. He advised it would take only a few hours. He left and returned about 2½ hours later with the requested trading results, which took the form of a balance sheet and profit and loss statement produced by the computer accounting system. They showed trading losses of the order of $500,000 per month, i.e. a loss of approximately $2M from the 4 months trading to 3 April 1999. Concerns were expressed by members of the Board about the poor trading results. The Board resolved to convene a further meeting the next day to discuss the trading results.

261. By letter dated 19 April 1999, Plymin informed the ASX that Water Wheel had accepted the resignation of Calvert-Jones as a director but made no reference to the acceptance of Nankervis' resignation as General Manager, Finance and Administration.

264. The Board met again on the following day (20 April 1999). Present were Harrison, Plymin, Elliott and John Gross, and Rosedale and Brown were in attendance. Nankervis attended for part of the meeting. The minutes record that current cash position (as provided by Nankervis) was as follows:

* Collectible debtors $6,600,000 * Payable creditors $6,300,000 * Net off-balance sheet funding $3,200,000 (supported by wheat and rice stocks) * Current stocks $4,100,000 (excluding those funded off-balance sheet)

268. In addition to this summary cash position, the Board was presented with a balance sheet and profit and loss statement for the 4 months to the end of March 1999.

271. Nankervis was asked at the Board meeting why "he" (Water Wheel) was not able to pay debts as and when they fell due, given that debtors appeared to outweigh creditors. He replied in substance as follows:

"The debtors are only 0-30 days old, whereas our creditors are up to 120 days old. This difference in timing causes cash flow problems. It is not sufficient in assessing whether the company is solvent to simply compare the figures for total debtors and total creditors. It is also necessary to inquire into the maturity of the respective amounts."

275. At the 20 April meeting the Board instructed management to implement a cost reduction program and a profit improvement program, to prepare a detailed full year forecast of cash flow and profit and to identify assets that could be sold. The minutes go on to state that:

"Following a review of all current assets and liabilities, the Board is of the opinion that the Company is in a solvent position. Management is to continually review and monitor the current assets and advise the Board if there is a material variance to this position."

279. Nankervis was not asked to stay at the meeting for any length of time but no view about solvency was expressed while he was present.

282. Brown of Deloittes also attended the 20 April Board meeting. Brown advised the Board (including all three defendants) that Deloittes had not been able to discover any unrecorded sales but he probably also said that it was not possible to conclude definitively that no sales were omitted because of the state of the computer accounting system. Elliott testified that he could not recall what Brown said at this meeting, but that "he hadn't found the solution to the problem, I agree with that". I accept Brown's evidence, and I am satisfied that Elliott learned from Brown's statement at the meeting that no evidence of un-invoiced sales had been discovered, albeit that Brown did not definitively exclude that possibility. When Elliott was asked in cross-examination whether he knew that the auditors were saying that there was nothing to support the idea that there were un-invoiced or unrecorded sales, he gave an unresponsive answer and added "I must admit I was getting more and more annoyed with them all because nobody seemed to be coming up with any rational explanation". I am satisfied that Elliott knew that neither Brown nor the auditors had found any evidence for the existence of un-invoiced sales and certainly none of the order of $1.2M.

285. The Board meeting ran from 9.00am until close to lunch time. Elliott recalled that the directors were shown results indicating losses for the first three months of 1999 in the order of $500,000 per month. In response to a question in cross-examination as to whether these losses must have been a serious concern, Elliott answered that the same problem of un-invoiced sales might have been continuing into 1999. During the meeting, Brown was asked to arrange for an insolvency expert from Deloittes to attend the meeting to advise the Board. Brown left the meeting and by telephone arranged for Mr Wallace-Smith of Deloittes to attend. When he arrived, Mr Wallace-Smith addressed the Board on the general concept of solvency, and the operation of the voluntary administration provisions of the Corporations Law. The evidence does not disclose the details of what was said by Mr Wallace-Smith. Elliott said that Harrison organised the attendance of Wallace-Smith and that he (Elliott) was not at this stage concerned about the solvency of Water Wheel. It is very hard to accept that the directors, including Elliott, could not have been concerned about the solvency of Water Wheel, having regard to the report of continuing losses and the request for Mr Wallace-Smith to advise the Board on the concept of solvency and the operation of voluntary administrations.

288. Deloittes took no further steps in relation to the December 1998 accounts. It is convenient to note here that Water Wheel failed to pay to Deloittes a total debt of $62,791.57[12] of which a substantial part related to the investigations concerning the "missing sales".

291. On 22 April 1999, Allen of AWB again found it necessary to write to Water Wheel requesting that an outstanding sum of $130,964.87 be paid. This amount related to four deliveries of grain that were made prior to AWB's decision to deactivate Mills' credit facility[13 ]

, but were invoiced after that time. The amount was not paid by Mills until 5 May 1999.

296. On 23 April 1999, Plymin wrote a memorandum to Edwards of the ANZ Bank. The memorandum stated, under the heading "Overview", that Water Wheel was seeking to obtain an additional $2.9M in "seasonal finance facilities" and that the funds were required to purchase paddy rice from Victorian growers and "meet existing unsecured trading creditors of the company", that the company was "in advanced discussions to sell its stockfeed business" and that the company was continuing to reduce staff and maximise "operating efficiencies to bring the business back into profitability". Under the heading "Cash Requirements", the memorandum stated that Water Wheel required $2.9M to acquire this years' Victorian rice crop and "to bring existing trade creditors in line with agreed trading terms". The memorandum explained that $1.9M was required to complete the purchase of the rice crop and $1M represented the approximate amount of "outstanding creditors, over 90 days". The memorandum stated:

"18. WWH has made an unexpected loss of $800,000 for the 12 month period ending 3 December 1998. Management, the auditors and the independent advisers are still confused as to why the loss has occurred. Investigations continue. 19. Trading for the first four months to the end of March is good in terms of sales but our liquidity position is outlined above." 20. To address the current issues facing the company, management has instituted a profit improvement program, which among other things includes staff reduction of approximately 14 staff. Management is confident that with the additional facilities the company will be able to meet its future obligations and trade profitably or at least breakeven as assumed in our forecasts above."

300. The memorandum concluded by saying that in order to negotiate the highest price for the stockfeed business Water Wheel needed to be in a position of financial strength and "to this end the company needs to bring its creditors back into trading terms and needs the support of ANZ to do so". Apparently, the ANZ Bank required further information from Water Wheel, but it ultimately did not agree to Water Wheel's request for additional finance.

303. A copy of the Plymin memorandum was produced by Elliott to ASIC in the course of its investigation. When asked about this memorandum in cross-examination, Elliott emphasised the reference in it to funding the rice crop and sought to avoid the point that the money was also required to meet existing unsecured trade creditors. Elliott said that he was aware at the time of the fact stated in the memorandum that Water Wheel had outstanding creditors, over 90 days, of approximately $1M. Elliott commented that the creditors included his company, and he was not concerned. Elliott tended to be evasive concerning the Board's discussion about the need for additional equity, saying in effect that Mark Gross was interested in that as a financial consultant and broker, but that the directors were more interested in finalising the previous year's accounts.

306. The Board met again on 26 April 1999 and the directors present were Harrison, Plymin and Elliott. Plymin informed the others that the ANZ Bank had been asked for $2.9M "to replace the rice off-balance sheet funding" and that further information was required by the Bank before approval would be given. The "daily cash position" was noted in the minutes as follows:

- Collectible debtors $6,340,669 - Payable creditors $6,066,163 - Surplus $ 274,506

There was no reference to the age of the debtors or the creditors.

311. At the 26 April meeting Elliott informed the Board as to his negotiations with RiceGrowers regarding additional supplies of paddy rice.

314. On 30 April 1999, Water Wheel sought and received from ASIC a further extension of the deadline for financial reporting and the holding of the Annual General Meeting to no later than 30 July 1999.

318. The next Board meeting took place on 3 May 1999 and present were Harrison, Plymin, Elliott, and John Gross. The minutes recorded that Plymin informed the meeting that the investigation had revealed that the shortfall appeared to be non-invoiced product and that investigations were to continue to check source documentation in order to identify products and customers. The minutes also show that Plymin informed the meeting that:

(a) the excess of debtors over creditors was $148,500; (b) Communicat had been engaged to install a digital line between Bridgewater and Melbourne; (c) Derrick & Son had agreed to finance all Victorian rice purchases under a new funding contract commencing May 1999 and ending on 30 April 2000; (d) discussions with the ANZ Bank about all facility requirements were continuing.

322. On 5 May 1999, Harrison stated to both shareholders and to the ASX, in relation to "accounting discrepancies" in connection with the 1998 year end accounts:

"Water Wheel Holdings Limited wishes to advise shareholders that it has made significant progress in resolving the accounting discrepancies that came to light in preparation of the 1998 year-end accounts. Company staff assisted by consulting firm Deloitte Touche Tohmatsu have identified the problem which led to the delay in publishing the accounts as one involving electronic data systems. Investigations of product costing and security arrangements have eliminated other areas of potential concern. The extensive investigation has narrowed the cause to the communications link between the mill site at Bridgewater and Head Office in Melbourne. Data has been lost through interruptions to the link and consequently certain invoices have not been raised. These discrepancies surfaced during the audit program in February and identified in late April 1999. The problem has caused a difference between a profit and loss in the year to 3 December, 1998. The amount of sales to be invoiced is about $1.2 million, and if confirmed, will result in the company recording a profit for the 12 months. This is now being verified by laboriously checking all account entries against the computer records. A great deal more work has to be done, but the company hopes to lodge its 1998 results within two weeks. The Annual General Meeting will be held as soon as possible. The latest date that it can be held is 31 July, 1999."

326. In evidence, Elliott recalled the Harrison statement, and said that Plymin had conveyed its contents to the directors. Elliott said that he had not seen a listing of the unrecorded sales, but he had seen some document in relation to the figure of $1.2M. He said that Plymin had not told him that the cost of production had escalated by about $1.2M in the 1998 year, thus accounting for the loss.[14]

329. Kerry Gill, a temporary accountant employed by Water Wheel, sent a fax to HPW, attaching the Harrison statement of 5 May 1999. Concerning his reaction to that fax, Wales deposed that:

"18. ...The announcement makes reference to an "amount of sales to be invoiced" of "about $1.2 million and, if confirmed, will result in the company recording a profit for the twelve months." Although prior to this date Plymin had expressed his view that the accounts we had audited were materially wrong and he indicated that they were wrong by an amount of approximately $1.0 million, this is the first occasion that I had seen or heard about the assertion that the reason the accounts were materially wrong was due to about $1.2 million of sales that still needed to be invoiced. ... 20. In relation to the matter of "sales to be invoiced of about $1.2 million", I and Hall Puddy & Wales audit staff had not found, nor have I or they since found, evidence to support un-invoiced sales of this amount or any amount. During the course of the audit of the 1998 Accounts, no matter had come to our attention that indicated that any material amount of sales had been delivered but not invoiced by Water Wheel as at 3 December 1998. The only occurrence of Water Wheel invoices containing errors that I know of was bought to my attention by Plymin during the audit of the accounts for the six months to 3 June 1999. Plymin claimed that a number of invoices raised by Water Wheel in the year ending 3 December 1998 were raised for a "nil" value instead of the correct value. Plymin produced a list of these invoices that totalled $161,079 and comprise part of the $303,000 abnormal income reported in the half year ended 3 June 1999. I did not do any audit verification work on these `nil invoices', nor did I examine the collectability of this amount. ... 30. During the course of the audit of the 1998 Accounts and the Review of the 1999 Half-year Accounts, no matters were brought to my attention or the attention of the Hall Puddy & Wales audit staff, or were found by me or them, that provide evidence that there was an amount of approximately $1.2 million in un-invoiced sales at 3 December 1998. Nor has any matter since been brought to my or their attention. The only correction needed in relation to invoices raised during the year ended 3 December 1998 was to allow an amount of $161,079 relating to invoices that were raised for a "Nil invoices', as described in paragraph 20 above."

333. Also in relation to that fax, Montesano deposed that:

"32. ...The announcement makes reference to an "amount of sales to be invoiced of "about $1.2 million and, if confirmed, will result in the company recording a profit for the twelve months." This is the first occasion that I had heard of a claimed error of an amount of $1.2 million which had been caused by uninvoiced sales. The announcement dated 5 May 1999 suggests that discrepancies in relation to invoices "surfaced during the audit conducted by Hall Puddy & Wales." It was my belief that the audited result, which revealed that Water Wheel had made a loss of $878,889, accurately reflected the result of Water Wheel for the financial year. Our testing of the accounts, debtors circularisation and systems testing did not reveal evidence of any uninvoiced sales. ... 33. On 18 May 1999 Plymin contacted me and said that Deloitte Touche Tohmatsu had discovered no significant errors and the Board planned to publish the accounts as they stood. Plymin said that there were some stale cheques that the board had considered writing back, but the amounts were immaterial."

337. A document dated 21 May 1999, copies of which were produced by Harrison and Elliott to ASIC in the course of its investigation, contained the following information:

Water Wheel Debtors/Creditors as at 21 May 1999

345. The above document disclosed to the directors that the current creditors of Water Wheel exceeded Water Wheel current debtors by $1,133,112.62, that creditors outstanding for more than 90 days amounted to $680,879.23 and that creditors between 60 days and 90 days old amounted to a further $917,339.33. Thus creditors 60 days and over totalled $1,598,218.56. In addition, the document showed that there were debtors to the value of $1,522,081.22 outstanding for more than 90 days thus raising questions as to the collectability of those debts. In cross-examination, Elliott reluctantly conceded in substance that the amount of these debts exceeding 90 days was a warning sign that the amount might include doubtful debts (depending on whether "terms have been agreed with the debtor").

348. By this time it was established that the company had made a loss of approximately $900,000 for the year ended 3 December 1998 and the Board knew that Deloittes had discovered no evidence to support the so-called "lost sales" of $1.2M.

351. In May 1998, Water Wheel had entered a lease with a Neil's Transport company in respect of premises at Oglivie Avenue, Echuca for a term of five years commencing 25 May 1998 at an annual rental of $75,000, payable at the rate of $6250 per month in advance. In or about December 1998, it was agreed that the rent should be paid quarterly. The rental payment due in May 1999 was not paid until August 1999 at which time the payment was $1980 short. No rent was paid in respect of any period after May 1999 and Neil's Transport terminated the lease in early October 1999 at which time the unpaid rent amounted to $33,230, an amount which was never paid. I note also that the sum of $13,000 due for 12 months rental in advance payable on 1 January 1999 in respect of warehouse premises at Echuca Street, Moama leased by Water Wheel from Neil's Transport had not been paid and in fact was never paid.

354. On 27 May 1999, HPW wrote to Plymin advising that the question of giving an unqualified audit report on the statutory financial accounts was dependent upon a number of factors "among which are the declaration by the directors that at the date of the report the accounts show a true and fair view of the results of the group for the stated period and that there are reasonable grounds to believe that the company is able to pay its debts as and when they become due and payable".

357. The Board met on 27 May 1999 and authorised the Chairman and the Managing Director to sign the Appendix 4B statement (the preliminary final results for the period to 3 December 1998 which showed a loss of $879,000) and to file it with the ASX.

361. On 1 June 1999, Water Wheel reported its results for the 12 months ending 3 December 1998. In the covering letter to the ASX, Harrison inexplicably persisted with the following explanation:

"...As previously advised the report was delayed by difficulties in finalising the accounts because of material anomalies relating to volume discrepancies between flour production and sales...The flour tonnage of approximately $1.2 million has been recorded as being produced and delivered but it is not recorded as sales. Work is continuing via source documents to identify and record these sales".

"Management has identified communication links as a source of the poor quality data and flour sale discrepancies. These links have consequently been upgraded to ensure such discrepancies do not reoccur. Further work is being undertaken to ensure the integrity of the system. The revenue and profit shortfalls from prospectus forecasts only became apparent after the financial year-end during compilation of the statutory accounts. Directors believed up to then that the forecasts would be achieved."

369. Harrison went on to state that Water Wheel's growth prospects remained strong and "based on full year forecasts and barring any unforeseen circumstances [the directors] are confident of a profitable business going forward".

372. On 2 June 1999, the amount owing by Water Wheel to Derrick & Son which was overdue for payment was $520,869 and Plymin reached an arrangement with Graham of Derrick & Son that the amount should be repaid by instalments of $180,000 commencing 4 June 1999 and weekly thereafter.

375. On 3 June 1999 HPW signed the Independent Auditor's Report for Water Wheel.

378. On 8 June 1999, Water Wheel lodged its audited and signed annual accounts for the year ended 3 December 1998. In the Chairman's report it was said that:

"Directors of Water Wheel Holdings are approaching the future with confidence. The company is sound and its business solid, although the 1998 accounts are disappointing. The loss of $0.9 million reported for the 12 months to December 1998 was in large part shaped by factors peripheral to Water Wheel's production of flour, pre mixes, rice and stock feed. Production and sales actually rose significantly in the year and this trend has continued into 1999. Directors believe growth prospects are strong for a number of key reasons: ... This report has been delayed by difficulties in finalising the accounts. Compilation of the statutory accounts after the end of the financial year revealed material anomalies relating to volume discrepancies between flour production and sales. These discrepancies are a major cause of the revenue and profit shortfalls from prospectus forecasts. Directors believe until after the end of the financial year that the forecasts would be achieved. Management has identified difficulties with communication links and a new accounting system - installed to overcome potential Y2K problems in the old system - as sources of the flour sales discrepancies and other poor quality data. The links have been upgraded to ensure the integrity of the system and prevent the recurrence of such discrepancies. The primary focus of the results were:

Flour tonnage worth about $1.2 million recorded as having been produced and delivered but not recorded as sales. Work is continuing via source documents to identify and record these sales.

Delay in commissioning the stockfeed capital expansion program and deterioration in the end-user market for pelletised stockfeed.

Tightening in the domestic flour market, exacerbated by the Victorian gas supply crisis which disrupted a number of bakery customers.

Poor quality data generated by the new accounting system which effected business costings and pricings.

Resolution of the difficulties with the new computer system, which is Y2K-compliant, will ensure more accurate tracking of accounts than in the past and provide a wide range of real time management data. A profit improvement plan has been developed and is being implemented as a result of a comprehensive review of all markets, customers and products. Trading in 1999 has been satisfactory and the directors anticipate a profitable year, subject to unforeseen economic circumstances."

387. In the Review of Operations the following statement is made:

"The Federal Government has announced that the New South Wales rice industry is to be deregulated. Upon deregulation all NSW rice will be open to competition allowing the company to expand its business by sourcing supplies directly from NSW growers."

391. Elliott testified that he had read the Chairman's above report. He was asked whether he had approved of the following sentence: "Trading in 1999 has been satisfactory and the directors anticipate a profitable year, subject to unforeseen economic circumstances". Elliott said that Chairman had approved that statement, based on the substantial sales increases. He evaded conceding that he knew about the losses at that point. He admitted that he had the March and April results. Elliott said that he didn't know whether they were not anticipating a profitable year at that time "because of the un-invoiced sales issue".

394. Elliott was referred to another passage in the Chairman's report stating "Water Wheel is a very low cost producer of stockfeed...and is well positioned to take advantage of strengthening markets". Elliott said that Water Wheel was a low cost producer, and (trying to justify what the Chairman had said) said that the report did not say that markets were strengthening, merely that Water Wheel was well positioned to take advantage of strengthening markets.[15]

397. The annual accounts contained a declaration by the directors that the financial statements gave a true and fair view of the company's financial position, and that in the directors' opinion there were reasonable grounds to believe that the company would be able to pay its debts as and when they became due and payable.

400. On 9 June 1999 Plymin attended the ANZ Bank and met with Edwards and another bank officer. Plymin was informed of the ANZ Bank's concerns in relation to Water Wheel's inability to provide financial information. Plymin was advised that ANZ Bank had decided to appoint an investigative accountant, at Water Wheel's cost, to provide information on the Group's business. Daly of PWC was appointed for that purpose on 9 June 1999. Elliott learnt of Daly's appointment at about that time. When asked whether Daly's appointment "must have rung alarm bells with you about the financial position of Water Wheel", Elliott attempted to evade answering the question twice. His final answer was unimpressive: "well, the alarm bells were - we had alarm bells because we were trying to get the result and I think the ANZ had the same view, they weren't getting a satisfactory explanation of the profit result [ie, losses] in - to the end of December and for the first quarter of the year." Elliott said that he was not concerned about the appointment of an investigating accountant because it would be another person having a look at the situation and doing the figures, so from a director's point of view it could be quite helpful.

403. The ANZ Bank advised Plymin, by letter dated 10 June 1999, that PWC was to review relevant aspects of Water Wheel to better inform the Bank on the financial results and business of Water Wheel, and that the review was to include gaining an understanding and or providing an opinion on the reliability of various matters, including the last result forecasts including cashflow forecasts, prospects of the business and "any other issue that may impact on the Bank's facilities".

406. On 10 June 1999, Plymin responded to a request from the ASX to clarify the situation in relation to discrepancies between flour tonnage produced and delivered but not recorded as sales in the year to 3 December 1998, as referred to in Water Wheel's letter to the ASX of 1 June 1999. In his response Plymin stated:

"1. All costs associated with the production and delivery of the flour has been expensed in the 12 month period ended 3 December 1998. Any revenue recovered from these sales in the period 3 December 1998 to 3 December 1999 will be recorded as an abnormal item in the profit and loss account for the 12 month period ending 3 December 1999. 2. As previously stated work is continuing via source documents to identify and record these sales. ..."

410. On 11 June 1999 suspension of trading in the securities of Water Wheel Holdings was lifted consequent upon the filing of the preliminary final report for the year ended 3 December 1998 accounts and the response to the ASX query.

413. On 17 June 1999, Traill sent an e-mail to Polzella noting inter alia that Water Wheel was outside of trading terms with Incitec Ltd, that as a result Water Wheel was on a "cash" basis with Incitec and that they were "going to raise a cheque for $30,000 for Incitec today as we received $30,000 for McClellands Tpt today".

416. Elliott testified that he was familiar with a letter from Water Wheel to RiceGrowers dated 30 June 1999 seeking to purchase 15,000 tonnes of rice at $255 per tonne, payment to be weekly in advance against order_._ Elliott said that Plymin was negotiating that contract, but that it would have been RiceGrowers who insisted on those payment terms.

420. The first report to the ANZ Bank by Daly of PWC was issued on 5 July 1999. A draft of the report had first been given to Plymin for his comments upon factual matters. In evidence, Elliott said that he did not know if he had ever received a copy of this report. I note that Elliott went on to say that "the first time that I was really informed of the Bank's concern was I think in that August meeting when they wrote a letter putting the facilities on demand**,** now that certainly does sound alarm bells".

423. In his report Daly informed the ANZ Bank that Water Wheel had reported a loss after interest and taxes of $1.232M for the five months to 30 April 1999 (as against an expected profit of $628,000 for that period). He also informed the ANZ Bank that on 8 August 1998, Water Wheel had replaced its existing management information systems with an accounting package ("Dynamics"), and that management said that, since the introduction of Dynamics, information provided in relation to sales, debtors, creditors, stock and standard costing had been unreliable. In particular, Daly said:

"- These problems resulted in the delayed release of Water Wheel's year ended 3 December 1998 financial statements because management were of the opinion that the reported loss of $879,000 should have been a profit of $1.84 million. Ultimately the company proved the year end financial position by auditing balance sheet items and the directors signed the accounts as they could not disprove the stated position. During our investigation management indicated that they have since discovered 2,290 tonnes of product (flour, rice and stockfeed) was not invoiced during the changeover between computer systems. However, at this time they have not quantified the dollar value of these uninvoiced sales or their recoverability. More recently, these computer problems have resulted in Water Wheel not providing the [ANZ Bank] with current financial information on a timely basis. This is again for the reason that management do not believe the information being generated by the system is reliable. In particular, management believe sales are understated by $1.897 million for the five months to 30 April 1999 due to a posting error between the subledgers and the general ledger. If found, this quantum of sales would result in adjusted sales of $16.122 million and a trading profit after interest but before taxes of $665,000 for the five months to 30 April 1999. ... In relation to Water Wheel's expenditure, management have advised that there has been a review, and that they are satisfied with the level of costs reported for the five months to 30 April 1999. However, actual overheads of $1.709 million exceeded the budget of $1.240 million by $469,000 during this period. In spite of this, management continue to budget at the same low levels of budgeted expenditure for the remainder of the 1999 financial year. Management justify this low figure by perceived operational efficiencies gained through voluntary redundancies and the reduction in stockfeed production. ... In relation to the reliability of the financial forecasts generally, we have concerns regarding the ability of Water Wheel to achieve them, due to our inability to compare them to any meaningful information regarding past financial performance and a possible understatement in standard costs which we cannot quantify without significant work being performed in this regard. However, we note that should costs of production as a percentage of sales, and overheads as a monthly average, continue at the rate reported for the five months to 30 April 1999, of 89% and $341,000 respectively, against budgeted sales of $19.385 million, Water Wheel could possibly report a loss of $1.82 million for the seven months to 3 December 1999." [emphases added]

427. Elliott was referred to Appendix C of the 5 July 1999 Daly report containing 3 December 1999 financial forecasts, showing a loss to April 1999 of $1,487,875. He said that he may well have seen those results, but he couldn't recall whether he did. He said that "I presume I would have got these documents here." He was referring to the full year forecast for each division on the succeeding pages. He said he did not know that management was saying that there were unidentified sales of $1.897M in the 1999 year. He wasn't sure whether that related to the same unidentified sales said to have occurred in the 1998 year. He had not heard of any assertion of such un-invoiced sales in 1999. He did not know that ANZ Bank was later told that this suggestion had been abandoned. Referring to page 16 of the 5 July 1999 Daly report, Elliott said he did not know that overheads for the five months to 30 April 1999 were $341,000 average per month, which was $108,000 greater than the average monthly amount forecast for 1999. Elliott said that the directors would have been told (as stated on page 16) that if costs of production and overheads achieved the same levels reported in the five months to 30 April, this would result in a potential loss of $1.82M for the year.

430. On 8 July 1999, Plymin told Leon Follett of Follett & Anderson (farmers and suppliers of wheat to Water Wheel) in response to Follett's question as to whether Water Wheel was experiencing financial problems, that Water Wheel's finances "looked good for now and in the future" and that Water Wheel was dealing with a merchant bank to make "different financial arrangements". These comments were made during a meeting to discuss outstanding debts then owed by Water Wheel to Follett & Anderson. Plymin asked Follett how much money did he want that day, and Follett replied that this was not necessary, as long as he had an assurance from Plymin that payments would be made in future according to the terms of the contract. Plymin assured him that this would be the case. Plymin told Follett that he was hoping that there would be a deregulation of the rice industry in September 1999 which would help Water Wheel's financial outlook and Plymin also said that Water Wheel had been experiencing implementation difficulties with a new computer accounting system. On 7 August 1999, Follett & Anderson made a decision to cease trading with Water Wheel because no payment of outstanding amounts had been received. I note that, in the end, a total of some $175,000 remained due and unpaid to Follett & Anderson.

433. A meeting of the Board of Directors took place on 12 July 1999. Present were Harrison, Plymin, Elliott and John Gross. The meeting resolved that the Managing Director should develop and circulate a summary of the weekly cashflow position.

436. Water Wheel's Annual General Meeting was held on 16 July 1999. In his Chairman's address, Harrison presented the accounts for the year ended 3 December 1998. Harrison said:

"...The reasons for this poor result are complex and we have stated them as clearly as we can in company reports to shareholders, the stock exchange and in the annual report. I shall go into those a little later. First I wish to reiterate the board's confidence in the future of Water Wheel Holdings. Your company is sound and it has a strong strategic vision. Growth prospects are bright. Current trading is good. The improvement in flour sales noted for the second half of 1998 has continued into this year, especially in exports. ... Bridgewater is working three shifts a day, five days a week. Production to 3 June was more than 17,5000 tonnes, up 18 per cent from the first half last year. ... The rice division is developing promisingly. Sales volume increased by nearly a third in the second half of 1998 and tonnages are still growing. Rice is where we see the future of Water Wheel. While the traditional wheat flour operations will remain significant, rice is being developed to become the company's core business. Water Wheel's processing facilities are the most efficient in Australia. We have an attractive product mix - medium grain brown and white rice, and rice flour - and we have created export niches for 80 per cent of our product, in the Pacific, Saudi Arabia and Asia. The company is therefore well positioned to expand rice operations when, as we expect, rice supplies are freed up by deregulation of the New South Wales rice industry ... The Federal Government has announced its commitment to deregulation and has apparently reached an accommodation with the NSW Government. We have every reason to be confident that deregulation will be in place in the next crop year. The future looks encouraging. In the shorter term, your directors do not expect a repeat of the difficulties experienced in 1998. Sales fell significantly short of prospectus forecasts, mainly in flour and stockfeed because of a tightening in domestic markets. ... Profit was affected by the difficulties we have reported in our accounting systems - in the disappearance from the records of flour tonnage worth $1.2 million, and also in the compilation of the annual accounts using our new software system. We have been working hard with our accounting, audit and computing consultants to resolve these difficulties. The job is not yet complete but we are getting there. The company is trading well at present and we expect to report the result for the half year to 3 June next month..."

440. Elliott testified that he attended the Annual General Meeting on 16 July 1999 and had been provided with a copy of the Chairman's address and associated briefing papers. In cross-examination, Elliott tended to minimise the attention he had paid to these documents at the time. Elliott said that he might have read the Chairman's address and he heard it presented to shareholders. He was referred to the following statements in the Chairman's address: "Current trading is good" and "In the shorter term, your directors do not expect a repeat of the difficulties experienced in 1998" and "The company is trading well at present and we expect to report the result for the half year to 3 June next month". Asked whether it occurred to him that this was inaccurate, Elliott referred to the sales being up and then referred again to the un-invoiced sales which, he said, probably continued throughout the first half.

443. On 19 July 1999, the ANZ Bank wrote to Water Wheel noting the recent engagement of PWC to undertake a review of Water Wheel's financial results and business operations. The letter noted that the Bank had serious concerns in relation to a number of matters including significant trading losses, inadequacies of the existing accounting systems/controls, and unreliable financial data, the lack of a financial controller, breached financial covenants and other events of default, a material adverse change in Water Wheel's financial position and the safety of the Bank's exposure. The letter went on to state that, under the circumstances, ongoing provision of banking facilities would be subject to the Board providing the Bank with an action plan by 30 July, a external valuation of Water Wheel's assets, an ongoing monitoring role for PWC (pending a return to profitable trading) and:

"The Bank's rights will remain fully reserved pursuant to the events of default that have occurred. We propose a meeting with yourselves, including your Chairman of Directors, during the course of next week, to further discuss the foregoing matters, and also introduce new Relationship Managers, who will be assuming control of your account..."

447. When asked about the ANZ Bank's letter of 19 July 1999, Elliott said that he was unsure as to whether he had seen it at the time but that he was made aware at the time of the Bank's serious concerns as to matters mentioned in the letter including as to such matters as "significant trading losses", "material adverse change in Water Wheel's financial position" and "safety of the Bank's exposure." He said that the material adverse change was "obvious". He said that he was probably told that the Bank urgently required an action plan to address those concerns. Elliott added that it was at about that time that the Board seriously decided to sell both the flour business and the stockfeed business.[16]

452. Knowing that Water Wheel was continuing to make significant losses and knowing of the Bank's concerns and that the Bank was "looking over their shoulders", it is apparent that the directors considered that it was necessary to attempt to sell these principal business assets in an attempt to avoid sales of these assets in less favourable circumstances, such as receivership, and it must have been apparent to Elliott and would have been apparent to a reasonably competent director that the sale of these principal business assets was necessitated by Water Wheel's lack of liquidity and failure to locate alternative finance.

455. On 19 July 1999 NSWGB sent a fax to Plymin relating to overdue invoices totalling some $1.37M (comprising $571,452.73 under an invoice dated 31 January 1999 and a further $800,000 under a series of invoices dated from February 1999 to July 1999).

458. On 21 July 1999, Mark Graham of Derrick & Son demanded payment from Water Wheel of the sum of $579,388.40 and two days later, decided not to make further deliveries to Water Wheel without payment of "cash upfront".

461. On or about 22 July 1999, Plymin informed the ANZ Bank that Water Wheel proposed to lodge its half year accounts with the ASX during the week commencing 27 July 1999 and that the accounts would report a loss of $2M. Plymin said that he believed this purported operating loss was not correct and that, but for inadequacies in the accounting and invoicing systems, a break-even result would have been recorded.

464. On 23 July 1999, RiceGrowers determined that all future orders by Water Wheel were to be paid prior to delivery.

467. The "weekly cash position" as at close of business on 23 July 1999 presented to the Board showed "collectable trade debtors" to be $5,879,663, "payable trade creditors" to be $4,645,195, the NSWGB funding account was said to be $1,217,000 and an excess of debtors over creditors of $17,468 was revealed. No information as to the age of debtors and creditors was given.

470. On 26 July 1999, Plymin and Harrison met with a number of ANZ Bank representatives, including Edwards, Daly and Stankovich. At all relevant times, Stankovich was employed by the ANZ Bank as a manager in the Bank's high risk section of its Corporate Banking Department located at its Collins Street Business Centre. During the meeting, Plymin produced a strategy plan for Water Wheel. Plymin and Harrison maintained that the reported loss for the 1998 year was not accurate and that the results were affected by invoices being sent out showing a sales price of zero. Stankovich testified that Plymin and Harrison were unable to provide any further details. Immediately after the meeting, as Stankovich testified, the relationship between Water Wheel and the Bank was given a "high risk" classification and became a part of Stankovich's direct responsibility.

473. Elliott was referred to notes dated 26 July 1999, being notes of the discussion between representatives of Water Wheel and the ANZ Bank, mentioning such matters as: rectification of accounting systems, appointment of a competent financial controller, strategy to restore profitability, cost control and monitoring performance to budget. Elliott said he did not know whether he had seen the notes or not, but the matters of the financial controller and of strategies to restore profitability had been discussed at Board meetings.

476. On 27 July 1999, Traill sent an e-mail to Plymin stating inter alia:

"...we are just about to go into 90 Day terms with Incitec ($78,000). Incitec has stated to me today that they will close our account, pursue legal action and withdraw our Dealership if this $78,000 is not paid within the next 36 hours. Due to our appalling payment history with Incitec, they are not prepared to negotiate this position..."

480. On 28 July 1999, John Gross resigned as a director of Holdings. He gave no reasons.

483. On or about 28 July 1999 Sam Paton & Associates Pty Ltd were instructed by Stankovich to prepare a valuation report covering the 14 hectare property owned by Mills at Bridgewater. In particular, Stankovich asked for a report on the auction realisation value of the property.

486. On 29 July 1999, Wales told Harrison that Water Wheel had incurred a large loss of $2,740,420 in the first six months of the 1999 financial year. Harrison said that he thought the company was not going so badly. Wales then sent Harrison a facsimile explaining his concerns. The faxed material showed that the loss was attributable to increases in the cost of goods sold.

489. On 30 July 1999, Water Wheel informed the ASX of John Gross's resignation. The announcement quoted Harrison as stating that it appeared that satisfactory progress was being made in domestic rice market deregulation and that the "National Competition Council had reported this week that it was pressing the New South Wales Government to implement the NCC deregulation proposal to which it had agreed in principle".

492. By letter dated 30 July 1999, Plymin told Stankovich of the ANZ Bank, that "an order has been placed with [RiceGrowers] for 15,000 MT of paddy rice to supplement export sales. Total contribution is approximately $460,000". In fact no contract was made with RiceGrowers until 6 December 1999.

495. By 30 July 1999, Water Wheel had cleared its previous debt payable to Derrick & Son which had been the subject of an arrangement in early June 1999, but was soon behind again.

498. A finance transaction was entered into between NSWGB and Water Wheel in January 1999. The total value of grain the subject of the relevant series of contracts was $873,834, but NSWGB provided finance only to the extent of $800,000, to be repaid pursuant to 5 monthly invoices of $140,000 (commencing February 1999) and a final invoice of $100,000 in July 1999. The invoices were sent in the relevant months, but none of them was paid. The total debt of $800,000 was thus due and unpaid from July 1999 onwards, and in fact it was never paid by Water Wheel.

501. Water Wheel's payroll tax liabilities from July 1999 onwards were never paid. After examination of Water Wheel's records relating to the actual wages paid during the period 1 July 1999 to 17 February 2000, the administrator admitted a proof of debt in the sum of $102,217.98 (which included additional tax for late payment).

504. By the end of July 1999, Elliott said that the directors had taken the decision to see whether they could sell the stockfeed business. He said that the stockfeed business was struggling by then - there was no profitability in selling bran and pollard (offshoots of flour processing) for stockfeed.

507. Elliott also testified that, by late July 1999, he had some concerns about the reliability and quality of the financial information being provided to him as a director, but he was being assured that the problem was being fixed.

511. On 3 August 1999, Friswell e-mailed Traill, Mullen and Chiswell as follows:

"Attached is a list of raw materials we currently have in stock that we do not need. Can you give me an indication of any product you can sell, so as we can create extra cash flow. You may need to question Ivan on the quality, and state of these raw materials as some have been here for quite a long time".

515. Also on 3 August 1999, a member of staff of the credit department of Pivot (which supplied fertiliser products to Water Wheel) spoke to Nicholls of Water Wheel concerning outstanding debts and Nicholls advised that Water Wheel had cash flow problems, they would pay, but she did not know exactly when. Nicholls said that she would phone within the next seven days with more details.

518. On 5 August 1999 Plymin told representatives of KPMG that Water Wheel needed to raise approximately $2M for working capital and that the ANZ Bank was not prepared to extend its facilities and was requiring fortnightly meeting to maintain its existing exposure ($5.5M). Plymin also told them that should any asset sales be effected, it was likely that the ANZ Bank would require a debt reduction. Plymin said that as a result, Water Wheel was considering all other available options, including sale or lease of flour and stockfeed facilities.

521. On 9 August 1999, Stankovich called a meeting (the second of the scheduled fortnightly meetings) to review developments at Water Wheel. The meeting was attended by Harrison and Plymin, Stankovich and one Sue Carey (Assistant Manager) on behalf of the ANZ Bank and Daly of PWC. There was again discussion concerning the loss for the year ending 3 December 1998. Plymin maintained that "lost" sales could amount to about $1.2M, and if located, would reverse the reported loss. He then referred to a variety of items totalling $461,000, a good part of which were not related to sales. The directors said that it would take up to two months of further work to complete the investigation process. In relation to the loss of $2M being reported for the half-year ended 3 June 1999, the directors said that there was a "cost of goods sold problem, specifically with raw materials". Plymin said that the problem might stem from duplication of costings or a duplication of invoicing. Again it was estimated that the process of investigation would take up to two months to complete. In relation to the sale of assets, the directors said that discussions with parties continued, but there was nothing further to report. They spoke of a longer term strategy of getting out of flour and stock feed.

524. David Wilson began acting as Water Wheel's Group Financial Controller on 9 August 1999, initially on a contract basis, and from 1 November 1999 as a full time employee.

527. In the week commencing 9 August 1999, one creditor refused to continue to do work for Water Wheel unless accounts dating back up to 90 days were paid, and another creditor (Bundaberg Molasses) threatened to stop credit unless outstanding invoices were paid, and then stopped credit when those invoices were not paid. The total amount owing to Bundaberg Molasses in relation to invoices issued in May and June 1999 was $12,313.81. The evidence shows that there were a number of other aggrieved creditors at about this time requiring urgent payment of overdue amounts.

530. On 11 August 1999, there was an exchange of e-mails between Traill and Polzella in which Traill said that he had been instructed by Plymin to collect money for the payment of Incitec and to tell them that a minimum amount of $43,049 would be forwarded to them on the Friday of that week, and in which Polzella replied that he was not sure whether he would be able to pay the amount in full, but would know by Friday morning as to the exact amount that would be paid.

533. On 12 August 1999, HTW Plant & Equipment Pty Ltd was engaged by Sam Paton & Associates (on behalf of the ANZ Bank) to prepare a valuation report covering the plant, equipment and other contents at the premises of Water Wheel at Bridgewater.

536. On 13 August 1999, Water Wheel's results became available for the half-year to 3 June 1999. They disclosed a loss of $2.135M on sales of $18.5M. The results showed that creditors (current liabilities) were $10.4M, the ANZ Bank debt was $5.7M, other provisions were $223,000 and current assets were $12.3M. Elliott said in evidence that he did not recall when he first received these results and "I didn't know whether they were correct or not either".

539. On 13 August 1999, Wales and Montesano met with Harrison and Plymin. At this meeting Wales and Montesano told Harrison and Plymin that the large loss incurred for the half year to 3 June 1999 was effectively being funded by trade creditors. Harrison said "I can't believe we are going so badly, why haven't I been told?" Harrison then said that, given these facts, "it may be appropriate for an administrator to be appointed" and that this would be discussed in full at a directors' meeting to be held on 16 August 1999. Prior to the meeting, Montesano had determined that an increase in creditors of $2,051,423 reflected the trading loss being financed by creditors. Montesano noted in an internal memorandum that the auditors were satisfied that Water Wheel's trading loss was a true reflection of its trading status, that freight costs had increased significantly and that other overheads had increased at a rate not commensurate with the gross return.

542. On or about 13 August 1999, Neil of Neil's Transport had a meeting with Plymin at Water Wheel's head office. Neil told Plymin that Water Wheel owed Neil's Transport approximately $600,000. Plymin replied that, although he acknowledged that Water Wheel owed a substantial sum, he was unable to be specific as Water Wheel's accounts were in such a poor state. He referred to staffing problems and to problems with the computer accounting system. At about this time, Neil and Plymin agreed to offset against the Water Wheel debt an amount owing by Neil's Transport to Water Wheel of about $200,000 for trucks leased by Neil's Transport from Water Wheel.

545. On 16 August 1999, the ANZ Bank wrote to Plymin as follows:

"...the Bank is very concerned with the half year loss to be reported this week, and in particular, the Cost of Goods Sold issue, which appears to be yet another problem which the Bank had previously [not] been aware of. As you are aware from discussions with...Daly, [PWC]'s role is now being expanded to a weekly review of your working capital position, and its staff are meeting with you tomorrow. Up until now you had been put on notice that facilities with the Bank were in breach, with our rights reserved. In view of the large half year loss being reported, we are now placing facilities on demand. A letter to this effect is attached. As outlined in this letter we are not proposing at this stage to demand repayment of facilities, subject to the conditions outlined in the letter, which includes PWC's weekly reviews, however our rights remain reserved..."

549. On the same date, the ANZ Bank sent a letter to the directors of Water Wheel stating:

"We refer to our recent meetings, correspondence and telephone discussions with...Plymin and...Harrison through which the Bank was advised of: - * The significant loss expected to be reported to the ASX for the half year ending 3 June 1999 * Investigation by...ASIC in relation to alleged or suspected contraventions of Sections 995, 996 and 1001A of the Corporations Law * The steps put in place by the Directors to improve the reliability of financial reporting [items listed]. We appreciate the action taken by the Directors in seeking to overcome the current deficiencies in financial reporting, nonetheless, in our opinion there has been further change in the position of your company, such that there is now a material adverse effect on your company's business, assets or financial condition, or your company's ability to perform its obligations under any transaction document. Accordingly your company is in default of its facility arrangements, and in the circumstances the Bank's facilities are now repayable on demand. To the extent necessary all the Bank's other rights remain reserved. In agreeing to allow the now on demand facilities to continue, and entirely without prejudice to any of the Bank's rights (and in particular the Bank's right to require immediate repayment of all our facilities and to proceed with any appointments or actions as provided in the Bank's security documents), and to protect the Bank's rights in relation to priority employee payments, the Bank is prepared to withhold its demand for repayment subject to the following conditions:- (1) Weekly Monitoring by [PWC] ... (2) Establishment of a designated Wages Account - "Wages Account" - As from the next payroll date, all drawings for employee entitlements (including salaries and wages) are to be drawn on this Wages Account. - This account is to be used exclusively to facilitate drawing for the above purposes and is to be maintained on a debit basis at all times. - All deposits, and drawings for purposes other than salaries and wages will continue to be channelled through the existing Water Wheel Operating Accounts (all of which are repayable on demand.) - The combined balances of the Operating Accounts and Wages Account are not to exceed the existing Overdraft limit (currently $900,000.) ... A request has been made by Water Wheel for a preshipment financing facility to fund rice sales to Saudi Arabia.... To enable us to evaluate your request we have requested information from you.... However, at this point in time we provide no commitment...and you should also consider alternative sources of finance for this contract. ..."

553. It was not contended that the effect of the ANZ Bank letter was to call up the Water Wheel debt, but it is clear that when the Bank placed all facilities on "demand", they were "at call" thereafter. Maxsted testified that in his opinion, as a result, the bank facilities of $3.97M, which had been remained classified as non-current liabilities in the accounts of Water Wheel, should have been reclassified as current liabilities in the accounts as at 3 September 1999, 1 October 1999 and 20 October 1999. I accept Maxsted's evidence. The currently applicable accounting standard[17] confirms what was previously a generally accepted accounting principle.

556. A Board meeting had been called for 17 August 1999 for the purpose of working out how Water Wheel would report the half year's results, and the meeting was held on that date at the office of Hannagan (a public relations consultant for Water Wheel). Present at the meeting were Harrison, Plymin and Elliott (also in attendance were Rosedale, Bushnell and Hannagan). The minutes recorded that Plymin tabled a letter from the ANZ Bank advising that all facilities were now on demand. The minutes recorded that Clayton Utz (Rosedale) outlined the ASX Listing Rule on continuous disclosure requirements and advised that the withdrawal of the ANZ letter would remove the need for the Board to decide whether or not the letter required disclosure. The directors agreed that Harrison should ring the Bank immediately, as Elliott testified, "to understand what the purpose of the letter was". Harrison phoned the Bank from the meeting and then reported to the meeting, as Elliott testified, that "it's basically a technical matter, and...they weren't going to call the funds". As Elliott understood it, what the Bank were doing "essentially was moving from a term facility so that if they did become really unhappy they could close the bag". The minutes as originally prepared recorded that Harrison contacted Stankovich and then advised the meeting that Stankovich had stated that the Bank was not demanding immediate repayment and at this stage, subject to conditions as outlined, had no intention of demanding facility repayments. The minutes then noted a determination that, in the light of this additional information, the Listing Rules did not require disclosure of the letter.

559. However it is necessary to mention that the minutes were corrected as a result of a telephone meeting held on 20 September 1999. The correction replaced the sentence about Harrison contacting Stankovich with the following:

"[Harrison] contacted...Stankovich from the Bank and he advised the meeting that...Stankovich had stated the Bank did not intend its letters to be read as requiring repayment on demand and at this stage, subject to conditions as outlined, had no intentions of demanding facility repayments."

I am satisfied on the basis of Stankovich's evidence that he told Harrison that the credit facilities ("their lines") were payable on demand, that the Bank was not making a demand at that stage (and had no present intention to do so), but nevertheless could do so at any time. I think that any reasonable director would have known from this date that the ANZ Bank debt was at call (and, as Elliott's testimony shows, that was at least his understanding).

564. The minutes of the 17 August meeting also note that Plymin was to report the profit and loss statement based on subsidiary records and that this system was to continue until the computer based accounting system proved reliable.

567. In cross-examination, Elliott was again referred to the two letters from the ANZ Bank dated 16 August 1999 which were presented to directors at the Board meeting on 17 August. Elliott was asked whether the two letters rang alarm bells with him about the financial position of Water Wheel. He answered:

"No, well it was a concern, because they were technically shifting the account from a normal account into [sentence not completed]; I suppose they are asset restructuring or some other...where they would be closely monitoring it, and they had been closely monitoring it for some time. I think the important matter which was discussed at the time was for the Chairman to ring the Bank, which he did, to determine that, to ensure that the moneys weren't going to be demanded, and the Bank made it clear to him that that was the case."

571. Elliott was also referred to the Bank's requirement of the establishment of a designated wages account. He was asked: "As an experienced company director, you appreciated that the establishment of a designated wages account was a step the Bank was taking to protect itself in the event of a liquidation of Water Wheel, did you not?" He answered: "Well, not for a liquidation, just a normal way of doing things because employees have a priority ahead of the Bank." It was put to Elliott that the Bank would get the same priority as employees if the wages were paid to the special account. Elliott professed not to know the answer and then said "No nothing to do with the liquidation". He was then pressed that that was when employees got priority, and said "Well they get priority even if you go into receivership or voluntary administration or any form of control and banks tend to want to separate those amounts out."

574. On 17 August 1999, the Board had before it and agreed to sign the half-year Appendix 4B Report and submit it to the ASX by close of business on 17 August 1999, which was done. It reported an operating loss of $2.161M and a consolidated loss of $2.173M for the half-year ended 3 June 1999.[18] The Report showed current assets of $12.384M and current liabilities of $11.622M, but included the ANZ Bank borrowings in the non-current liabilities.

577. The Appendix 4B Report also included an abnormal item being a prior year adjustment of $303,000.[19] Elliott said in evidence that he was under the impression that this was the un-invoiced sales coming through, but he could not be sure whether composition of that figure had been explained.

580. Elliott was also directed to the comment on page 13 of the Appendix 4B Report that "despite the strong sales performance the net result was disappointing and reflects significant increases in costs incurred in the previous year flowing through into the first quarter of 1999." When asked whether he recalled any discussion of that comment, he instead referred again to un-invoiced sales. Elliott said that he was not sure whether management had provided the directors with a breakdown of the significant increases in costs referred to in that passage. He said he could have demanded an explanation, but when asked whether he did, said "well, I think probably one of them was clearly in raw materials". He said he couldn't recall asking for an explanation.

583. Elliott then tried to avoid a question as to whether he was satisfied, when signing the Report, that the loss had been incurred, by referring to further un-invoiced sales for 1999 curiously stating that "the problem had not been solved, therefore, to the extent that it was there it was still continuing".

586. On 20 August 1999, Traill of Tristate (a division of Water Wheel) wrote to Plymin attaching a spreadsheet showing purchases from Derrick & Son which had not been paid. Traill noted that there might be other transactions in the Dynamics system that had not been invoiced, but he was unable to access the information. The spreadsheet showed total amounts of about $166,000 and included some invoices outstanding since early June and early July 1999.

589. A Board meeting was held on 23 August 1999 at Elliott's office at which were present Harrison, Plymin and Elliott. The minutes noted in relation to the ANZ Bank that the conditions under the facility agreement had commenced in the previous week with the company working with PWC to establish a weekly working capital report. The minutes further recorded that the profit statement for June was tabled. It showed a $5,000.00 profit and was based on "subsidiary records". The minutes noted that this method of accounting was to continue until the electronic system was stabilised. The Board also "approved" a proposed supply agreement with RiceGrowers, but subject to a number of conditions which remained to be negotiated.

592. Elliott testified that he still had a great deal of uncertainty at that time as to whether or not there were "still a lot of un-invoiced sales and differences in the general ledger and the sales ledger" - "Plymin kept informing us of that" - "And there were also technical problems relating to communication between the mill and head office". He was still uncertain in his mind whether the first half result was correct because "whether the invoicing was correct or not still hadn't been resolved". He thought at that time, despite a forecast profit of $437,187 for June, that the $5,000 actual profit figure for June showed that the Company was turning around and that "our margins were a lot better, at least in flour". Elliott said that the reason for the small profit was connected with an unsuccessful tender for rice into Japan so that the big profit expected in June was not achieved. He said that he thought the thing was turning around because of the big losses which had been made earlier.

595. On or about 27 August 1999, Air Express International (Australia) Pty Ltd by letter of that date made a final demand upon Water Wheel for the sum of $296 which had been due and payable since 11 June 1999 in respect of a small delivery service provided to Water Wheel on 12 May 1999. As threatened by the letter, a default report was listed with Credit Reference Association of Australia on 7 September 1999, but a cheque in payment was not received from Water Wheel until 22 September 1999.

598. On 30 August 1999, Chiswell sent an e-mail to all staff at Echuca and also to Mullen, Plymin and Polzella in relation to procedures that had been put in place "regarding Creditors queries re Payment", indicating to whom queries were to be forwarded, what details were to be taken, and who was then to reply to such queries in order that Wilson and Polzella could "schedule payments in a more orderly manner".

601. On or about 31 August 1999, the auditors invoiced Water Wheel (Holdings and Mills) for their services for the six months ended 3 June 1999 in the total sum of $49,250. None of this amount was ever paid. I note that further amounts totalling $22,980 were invoiced on 27 October 1999 and also were not paid.

604. An aged trial balance[20] of Water Wheel's debtors and creditors as of 31 August 1999 showed total creditors of $4,692,280.59 of which $4,325,829 (or 92%) were overdue for more than 30 days - indeed creditors to the value of $2,012,587.57 were overdue for 91 days and over. It should be emphasised that this document does not contain a full statement of Water Wheel's creditors at this date (the total being about $6.2M) because, for example, major finance debts owing to NSWGB and Derrick & Son and Vicgrain were not included.

608. On 1 September 1999, Daly of PWC sent his second report to the ANZ Bank. In it he noted that as at 22 August 1999 Water Wheel had debtors of $5.58M, of which debtors to the value of $923,000 were more than 120 days old and an additional $305,000 were more than 90 days old. Daly noted that, as at the same date, Water Wheel had $1.3M owing to creditors for over 60 days and $1.754M owing for over 90 days. Daly went on to note that "Bernie Plymin advised that a number of smaller creditors have begun to press for payment of their outstanding accounts. However, he further advised that Water Wheel has not received any formal demands to date." Daly's report noted that there were 126 "other creditors" to whom was owed an average of $2,595, whose debts were then outstanding for between 61 to 90 days, and 141 "other creditors", to whom was then owed an average of $3,418 and whose debts were then outstanding for more than 90 days.

611. Goldsworthy, who was employed from June 1999 as manager of the Echuca office of Tristate (a division of Water Wheel), testified that in or around September 1999 he became "more aware" that payment to creditors for purchases from them was gradually slowing down. Also in September 1999 he was aware through constant creditor complaints that "we were still experiencing a cash flow shortage" and that Tristate was "unable to honour purchase contract[s] within agreed timeframes".

614. In or about September 1999, Meyer of Albright & Wilson (which supplied baking powder to Water Wheel) noted that amounts due by Water Wheel totalling $14,422 were overdue, with invoices dating back to January 1999.[21] Meyer spoke to a person in Water Wheel's accounts department, and advised that Water Wheel's account was suspended until payment had been received in full. Subsequently, on several occasions in October 1999, Meyer spoke to Wilson of Water Wheel concerning payment of the outstanding debt. By the end of October, Meyer was threatening legal action. On 29 October 1999, Albright & Wilson received from Water Wheel a cheque for the sum of $3,770, which related to debts from the oldest invoice. The outstanding balance (after an amount owed by Albright & Wilson was offset) was paid in November 1999.

617. Also in or about September 1999, Patel of Satake became aware the Water Wheel had placed a number of orders with Satake which were not being processed because of a debt due by Water Wheel in the sum of $12,785 outstanding from February 1999 invoices. Indeed Patel had regularly spoken to Friswell and Nicholls of Water Wheel between February 1999 and September 1999 in an attempt to obtain payment of these invoices. Patel testified that Nicholls frequently told him that Water Wheel "was unable to pay Satake's invoices as insufficient funds had been allocated by head office to pay creditors". In the result, Satake was paid on or about 1 October 1999 and accepted the further orders which it had received from Water Wheel. The moneys ($6,884.65) which became due as a result of the fulfilment of these orders were invoiced in October and November 1999 and were not paid.

620. In early September 1999, Water Wheel sought to draw down 650 metric tonnes of paddy rice owned by Derrick & Son. Derrick & Son was not prepared to authorise the release of the paddy rice until its outstanding account with Water Wheel was brought "into order". At this time Water Wheel owed Derrick & Son an amount of $1,070,814 (of which $873,232 was overdue for payment by more than 30 days). On or about 7 September 1999, Derrick & Son negotiated an arrangement which involved the receipt by it of post-dated cheques[22] totalling $873,232 which could be presented by Derrick & Son over a 6 week period from 19 September to 15 October, based on Water Wheel's expected cash receipts.

623. Commencing in or about early September 1999, Water Wheel sought to arrange a sale of the flour business. Indicative non-binding offers for the flour business were received in the middle of October 1999 but the offers did not proceed.

626. On 7 September 1999, Stankovich and Hodges of the ANZ Bank met with Plymin and Elliott. Stankovich and Hodges outlined the Bank's concerns arising from the PWC reports by Daly dated 5 July and 1 September regarding Water Wheel's trading losses. Elliott said in evidence that he did not recall reading either of those reports, either before or after the meeting and that he did not recall the Bank being concerned about ongoing trading at a loss. Although Elliott testified that he did not recall the Bank being concerned about ongoing trading at a loss, it is evident that the Bank was concerned. Stankovich and Hodges also pointed out, in relation to the Bank's security position, that the latest PWC report showed that the value of the stock subject to the Bank's debenture had reduced. Plymin, who did most of the talking, said that they had not seen this report and did not accept that the stock had reduced. Elliott told the Bank representatives that Water Wheel was providing seed to growers and that that was using up working capital. Elliott also stated to the Bank representatives that he believed that the deregulation of the NSW rice industry would be in place by the end of the month and that this would assist with the sale of the mill at Bridgewater. Plymin then confirmed that Water Wheel had retained KPMG to assist in selling the flour mill and that KPMG had produced an information memorandum for potential buyers. He told the Bank representatives that Water Wheel expected to realise $3M from the sale of its customer base and that there were potential buyers.

629. Freight Victoria Ltd provided rail and road transport services to Water Wheel for the delivery of grain to Bridgewater, from time to time as required. A number of deliveries took place on 30 and 31 August 1999 and on 1, 2, 3, 6, 7, 8, 9, 10 and 13 September 1999. Some of the invoices for services provided on the foregoing dates were never paid.

632. On 13 September 1999 Pawlowicz of Swire Shipping Agencies received a letter from Polzella. The letter enclosed a cheque and stated:

"Please find attached a cheque for $29,532.46 which covers certain...invoices. I know that this cheque does not cover the total amount outstanding that you are after, but we kindly ask that we are given a little more time in settling this debt. We also understand that Swires has been more than patient with our accounts and we are very [grateful] for this. Therefore we will ensure the payments will be made on weekly basis in order to settle the account...again we are sorry that this account has gone out of [its] trading terms..."[23]

636. On 14 September 1999, a meeting was held at premises of the ANZ Bank, at which were present Stankovich of the ANZ Bank, Plymin, Daly and one Fung from PWC and Atcheson and one Seychell from the Group Credit Management (GCM) section of the ANZ Bank. A number of matters were discussed at the meeting, including the financial position of Water Wheel, the proposed sale of the flour business and notices received from ASIC. As regards the sale of the flour business, the Bank representatives advised Plymin that any funds received would be required for reduction of the Bank's debt. At the conclusion of the meeting, Atcheson told Plymin that Water Wheel's account had been transferred to GCM because the Bank had decided to end its relationship with Water Wheel and that whilst no demand had been made, facilities were repayable on demand.

639. Water Wheel was late in its payment of July and August group tax to the Australian Taxation Office. The sum of $91,759 due for July 1999 (payable by 21 August 1999) was not paid until 17 September 1999. The sum of $94,767.21 due for August 1999 (payable by 21 September 1999) was not paid until 25 October 1999.

642. On 15 September 1999, Neil of Neil's Transport had a meeting with Chiswell of Water Wheel during which it was agreed that Neil's Transport would continue to provide services to Water Wheel on the understanding that Water Wheel would pay about $50,000 per week primarily for future work, but also payment of some of the existing debt. Chiswell referred Neil to Wilson in relation to the question of the reconciliation of the accounts. Wilson told Neil that he did not know how much was owing to Neil's Transport or to other creditors as there were a substantial number of invoices which still had to be processed. Wilson pointed to four piles of documents on the floor of his office, and said that each of those piles related to one of Water Wheel's creditors which was yet to be processed. He said that there was so much paperwork that he simply did not know where to start and that, as a result, he did not know how much Water Wheel owed the various creditors, including Neil's Transport.

645. On 16 September 1999, ASIC wrote to the Board of Water Wheel stating that it was conducting an investigation into the affairs of Water Wheel. The letter stated that ASIC had watched with concern the deterioration in Water Wheel's profit performance. The letter went on to say:

"Further, ASIC has recently become aware that the ANZ Bank has issued a letter advising you that [Water Wheel's] overdraft facility is now repayable immediately upon demand by the Bank. In the circumstances, ASIC is concerned about the solvency of [Water Wheel]. Therefore, please advise ASIC by facsimile message...by no later than 11 am Monday 20 September 1999 whether [Water Wheel] is able to pay all of its debts as and when they become due..."

649. Shortly prior to 16 September 1999, Plymin distributed to the other directors an agenda and Managing Director's report for a Board meeting to be held on that date. In his report Plymin noted that the contract with RiceGrowers was still being negotiated and that "some capital expenditure" would be required in the event that deregulation were to occur for the year 2000 harvest. The report attached an estimated profit and loss statement for June and July, which showed a small profit of $13,912 for June and a loss of $75,368 for July. Elliott said that these figures presented to the 16 September Board meeting, reporting "a combined loss of about $62,000", showed him that there had been "a substantial turn around".

652. A Board meeting was held on 16 September 1999 at which were present Harrison, Plymin and Elliott and in attendance was Carnie (who was appointed a director on 29 September 1999). The meeting resolved that the results as presented should be reissued comparing actual with forecast.

655. On 17 September 1999, ASIC wrote again to the Board of Water Wheel stating that on the evidence available to ASIC it appeared that Water Wheel was in breach of its continuous disclosure obligations because of its failure to disclose the contents of the letter from the ANZ Bank dated 16 August 1999.

658. On 17 September 1999, Chiswell sent an e-mail to all staff at the Tristate office in Echuca stating, in relation to trade in grain and fertiliser:

"Can we restrict our trading for time being and if we need to trade you will have to collect ex-Debtors to pay for the grain...What we do not want to do is to lose all business...but at the same time you need to collect what is owed to you to pay for any additional trading..."

662. Although Neil's Transport and Water Wheel were not in agreement about the exact amount of Water Wheel's debt, Water Wheel never suggested that a substantial amount was not due and payable. On 17 September 1999, Chiswell of Water Wheel informed Neil of Neil's Transport by facsimile that "It is our intention to pay $50,000 per week however we will struggle some weeks to meet this target figure." A number of telephone conversations also occurred on this date between representatives of the two groups, the upshot of which was Water Wheel promised to forward a payment of $25,000 to Neil's Transport that afternoon.

665. On 20 September 1999, Vicgrain invoiced Water Wheel for the provision of services in relation to rice in the sum of $19,423.58. This invoice was never paid. A number of smaller debts due to Vicgrain arising out of various transactions were never paid. These debts totalled $4,708.11 and included amounts invoiced in June, July and August 1999, as well as further amounts invoiced in September, October, November and December 1999 (for example, there was an unpaid invoice for an amount of $2629.49 dated 24 June 1999).

668. On 20 September 1999, Plymin sent a memorandum to Harrison and Elliott attaching copies of the letters received from ASIC dated 16 and 17 September 1999 and copies of two notices also received from ASIC. The memorandum stated that:

"[t]he most urgent request relates to the statement of Solvency. This must answered by 11:00am today. The summary of Debtors and Creditors as at 9:00am today is:

The creditors include invoices received and do not include accruals. Accruals as at 3rd September 1999 was $1,377,000 giving total payables of:

I have excluded from debtors all Doubtful Debts. The excess of Debtors to Creditors is therefore $187,000. This does not include any amounts owed to the ANZ Bank. ... Rosedale is advising on the response to...ASIC..."

677. Elliott testified that Plymin's memorandum attaching the ASIC letters "came as quite a shock" and that "I found it quite odd because under no circumstances did I think that the company was insolvent". Elliott said that it was clear to him at the time that neither the ANZ Bank nor NSWGB were calling up their loans and that he spoke to Plymin and asked him "Are you having any trouble paying your creditors?" and the reply from Plymin was "No. They are all under control." Under cross-examination, Elliott said that he didn't know if he got any additional information, but he did have a discussion with Plymin and with Rosedale and he was confident that Water Wheel was not insolvent at this point. He again said that he asked Plymin whether he had any problems with his creditors and Plymin said no, there were a few little ones which were a bit behind, but generally no. Plymin also told him that he had excluded all doubtful debts from the figures. Elliott did not ask Plymin for an aging of debtors and creditors, or for a cashflow statement. Elliott said that his "definition of solvency was quite clear, it's where the current assets exceed current liabilities, and excluding bank debt, and I knew the ANZ Bank were not calling their funds,...I was satisfied and I knew the Chairman and the Chief Executive would be working on it with Mr Rosedale."

680. Elliott testified that he did not ask Plymin how the company had funded the loss of $75,000 which he had just been told that it had incurred in July. Elliott said that "they were very technical letters from ASIC and, therefore, I took great comfort from the fact that [Plymin] said...Rosedale is advising on the response to both ASIC and the ASX".

683. Plymin responded to the ASIC letter of 17 September 1999 relating to disclosure by letter dated 20 September 1999 and marked "Strictly Private and Confidential" as follows:

"...As a preliminary matter the Board wishes to record its protest to your letter being copied to the Company's Bank. The matters raised in your letter are not accepted by the Company. They are highly sensitive and confidential in nature. Regarding the matters raised in your letter the Board of Directors has instructed me to advise as follows: (1) As a consequence of ANZ Bank on 17 August 1999 informing our Chairman Mr Harrison that its letters of 16 August 1999 were not to be read as requiring repayment of the banking facilities on demand and taking into account legal advice received in respect of the matter it was determined that disclosure to ASX of the ANZ letters was not necessary..."

687. I note that in a letter to ASIC dated 20 September 1999, Atcheson stated on behalf of the ANZ Bank:

"Whilst the facilities are repayable on demand, the Bank's letter to [Water Wheel] of 16 August 1999 also makes it clear that the Bank, at that stage, did not intend to make demand for immediate repayment. The current position of the Bank is the same as that set out in its letter of 16 August 1999, ie though the facilities are repayable on demand, the Bank is prepared to withhold its demand for repayment subject to certain conditions".

691. By letter of the same date, Plymin also responded to ASIC in relation to ASIC's letter of 16 September 1999 relating to solvency. In this letter, Plymin stated:

"The Board of Directors of Water Wheel Holding Limited believe that in the normal course of business the Company is able to pay all of its debts as and when they become due".

695. Copies of Plymin's two letters to ASIC were provided by him to Harrison and Elliott. Elliott testified that he had the belief at that date as to solvency as stated in the letter, but had not authorised the terms of the actual letter. Elliott asserted that it was absolutely irrelevant that the ANZ Bank was a current creditor because the Bank had not demanded the money.

698. On 24 September 1999, Plymin wrote to Harrison and Elliott informing them that the results for the quarter ending 3 September 1999 showed a loss after all expenditure including abnormals of $298,258 and an operating loss before abnormals of $124,396. Elliott said he had been pleased by this information because on analysis the cash loss was small. Elliott was referred to a document containing additional financial information provided to him concerning that quarter's loss. He had noted on it at the time that he wanted a comparison of budget and forecast with the actual result, which he did not ever get. It was put to him that there was a large negative turnaround from a profit forecast of $385,000 and the actual loss of $298,000. He attributed a large part of the loss to the failure by Water Wheel to sell supplies of a certain strain of rice (Koshikari rice).

701. A meeting of the Board of Directors was held on 27 September 1999 at Elliott's office at which were present Harrison, Plymin and Elliott and in attendance was Carnie. The minutes recorded that Plymin updated the meeting as to the notices issued by both ASIC and the ASX, that RiceGrowers had agreed to amendments to the proposed contract which was now being drawn up for signing, and that KPMG had been appointed to assist in assessing the possible sale of the flour business.

704. Elliott testified that during that year there was no margin in the stockfeed business and, for various reasons, profitability of the stockfeed business was not good; that the Board had decided on Plymin's recommendation to try and sell the stockfeed business, as well as the flour business, and that Plymin had talked to a couple of parties and that the Board had decided "that if we could get rid of that business, we would do so".

707. On 27 September 1999, Rosedale sent a fax to each of the directors including Elliott, attaching "for the consideration by the Board" a draft statement to the ASX. On 29 September 1999, Hannagan Bushnell sent a fax to Elliott and Carnie enclosing a further draft statement. Consequently, on 29 September 1999, Harrison forwarded an announcement to the ASX stating as follows:

"1. Appointment of director Directors have appointed Mr Ken Carnie B. Comm. MBA to the board. Mr Carnie, 53, is a marketing consultant with extensive international experience in the brewing, food processing and hospitality industries, and a former marketing director of Carlton & United Breweries. 2. Financing Water Wheel has reclassified $3.97 million in bank facilities as current debt. These facilities were mistakenly[24] reported as non-current debt in Water Wheel's balance sheet at 3 June 1999. ... 4. Accounts adjustments As previously advised, an estimated $1.2 million identified as missing flour sales was not recorded in the 1998 accounts. The amount was identified through a physical reconciliation of production, sales and inventory. Of the total, $303,000 was recorded as an abnormal prior year adjustment in the statutory accounts for the six months to 3 June 1999. Continuing investigation has identified a further $211,987 of unrecorded sales from an accounting point of view for the quarter ended 3 September 1999. Work is continuing to identify any further adjustments relating to both 1998 sales and losses in the first half of 1999. The causes are being addressed as they are identified..."

711. Elliott said in evidence that he had no idea what "from an accounting point of view" meant in the statement to the ASX. He presumed it meant unreported sales in that quarter. Elliott professed ignorance or lack of interest in the change of story about un-invoiced sales from the September announcement to the November announcement. He said he probably had not looked at them together.

714. When Elliott was asked whether he would say that he had an attitude, from September 1999 onwards, that he did not want to know too many details about the company, he rejected this suggestion, saying that he wanted to know as much as he could find out: "I was just busy doing a lot of other things as well, trying to be helpful."

718. On 1 October 1999, Water Wheel asked Derrick & Son to defer presentation of three of the post-dated cheques the subject of the arrangement made on 7 September 1999. Either Plymin or Wilson told Graham of Derrick & Son that Water Wheel did not presently have enough available funds to honour payment of the cheques on the days agreed. At that time, Water Wheel owed Derrick & Son about $723,000 "out of terms".

721. Also on or about 1 October 1999, Sugar Australia Pty Ltd, a supplier of industrial sugar, invoiced Water Wheel for 400 25kg bags of sugar which had been delivered to it on or about that date at a price of $6878.40. Further invoices for subsequent deliveries of sugar followed in that month and in November and December 1999. No payment in respect of the total amount of these invoices, namely the sum of $25,129.27, was ever made by Water Wheel to Sugar Australia Pty Ltd.

724. In early October 1999, Goldsworthy of Tristate arrived at Tristate's offices at Oglivie Street, Echuca premises where he was informed by Neil of Neil's Transport that the rent was in arrears and that Neil was evicting Tristate from the premises. The locks had been changed. Goldsworthy informed Plymin who said that Neil's Transport's accounts were in dispute. Later that day, Plymin instructed Goldsworthy to remove all fittings and records from the offices, which he did. Tristate relocated its offices to "sparse and primitive" premises at 1 Darling Street, Echuca (a former bus shed).

727. Goldsworthy testified that in October 1999 the outstanding 30 day accounts of Tristate were not being serviced and that "[a]t this time I was receiving a significant number of complaints from Tristate employees Pereira, Bryant and Traill in relation to creditors claiming that Tristate were not meeting the terms of payments". Goldsworthy contacted Wilson at Water Wheel's head office seeking an explanation of proposals for servicing the outstanding debts. Wilson told Goldsworthy that about $200,000 was due in the next month as payment for exported product and these funds would be used for the purposes of meeting current debt commitments.

730. On 5 October 1999, Daly of PWC produced a further report for the ANZ Bank. In it he noted that the operating losses of Water Wheel were continuing. For the period 4 June 1999 to 3 September 1999, on the basis of the information provided to him by Water Wheel, he estimated the operating loss to be $124,396 and $298,258 after abnormals. Daly noted that trade creditors had decreased as a result, in his opinion, of Water Wheel reducing its inventory levels "to the detriment of the Bank". Daly also noted that no further information had come to hand to suggest that deregulation of the Australian rice industry was likely to occur before 31 January 2004 when it would become legislation. He went on to outline three potential contingency plans described by Plymin to deal with any delayed deregulation (including a plan to compensate for lack of rice through growing rice on land degraded by soil salinity). Daly concluded his report as follows:

"The results to 3 September 1999 show that Water Wheel is continuing to make trading and cash losses. Following significant losses for the six months to 3 June 1999, Water Wheel cannot continue to sustain trading losses without risking viability and further eroding the Bank's security position in inventory and debtors (or further delaying payments to trade creditors). Refinancing is desirable but unlikely. The sale of the flour milling operations should realise funds which would need to be directed to the Bank...In view of the uncertainty surrounding deregulation of the Australian rice industry and the uncertainty in Water Wheel's contingency plans, we recommend that the Bank does not allow these funds to be reinvested in Water Wheel..."

734. By 8 October 1999, Water Wheel owed to Derrick & Son the sum of $835,410 "out of terms" of which $472,556 was "covered" by post-dated cheques. On that date, Derrick & Son requested personal guarantees from the directors of Water Wheel. The request was refused on or about 11 October 1999, but the debt was not disputed.

737. On 12 (or 13) October 1999, Jeffries of NSWGB had a meeting in Melbourne with Plymin. Jeffries told Plymin that NSWGB was concerned about Water Wheel's outstanding debt and needed to have it brought back within terms. Plymin told Jeffries that Water Wheel was looking for a way to settle the debt. He said that Water Wheel was looking to obtain a letter of credit from its customer, GHE. Plymin said that GHE was contracting with Water Wheel to ship flour products and that it would raise a letter of credit against the bills of lading. Jeffries replied that he did not know if this would work, but in any event, Water Wheel would need to find a way to repay the debt quickly. During the meeting Plymin made a statement to Jeffries to the effect that Water Wheel was now operating absolutely hand to mouth.

740. Also on 12 October 1999, Traill sent an e-mail to Wilson which in part read as follows:

"1. I have ordered linseed from Golden Harvest Products. They have informed me that they require $3846 from July invoices before they will release the product. 2. I have Meat Meal, Skim Milk Powder, Whey Powder, Fish Meal and Blood Meal ordered for the Mill for the next week or so. AP Ag Products will release these products to us when they receive $8159.70 which they claim was due on the 10/10/99. I can alternate suppliers of these products but I think we may be on stop with most other suppliers of these products... 3. Three tonne of Gluten is required ASAP for the Mill. At this stage the only place I can locate Gluten is Weston Bioproducts and they require a $6000 prepayment before they will release product..."

744. On or about 12 October 1999, after instructing Neil's Transport's solicitors to serve a notice of lien on Water Wheel (pursuant to the Warehousemen's Liens Act 1958 (Vic)), Neil had a telephone conversation with Chiswell of Water Wheel. Chiswell told Neil that although he acknowledged Water Wheel's obligation to pay Neil's Transport $50,000 per week, Water Wheel was only in a position to pay $20,000 per week. Chiswell told Neil that any payments in excess of $20,000 per week could only be made on an ad hoc basis when Water Wheel were in a position to do so.

747. On 13 October 1999, Traill sent an e-mail to Wilson relating to "FERMEX" (which was a division of Bakels-Lesaffre Yeast Pty Ltd) a supplier of dry yeast, bread improver and sundry baking ingredients. The e-mail read in part as follows:

"Sorry to spring this on you but I have just been informed that FERMEX of Dandenong will not release product that is on order for our food division unless a commitment by yourself is made that outstanding Moneys will be paid. Their account is as follows, according to Dynamics: Current to 30 days - $6460 30 to 60 days - $5520 60 - 90 - $6672."

751. On the same date, Wilson sent an e-mail to Friswell asking him to arrange for cheques to be drawn, to be paid on Monday 18 October, for the following suppliers: Golden Harvest ($3846 - July invoices), Fermex ($6672 - July invoices) and Weston Bioproducts ($6400 - prepayment for delivery of gluten).

754. Again on the same day, Traill sent an e-mail to Wilson stating:

"I sell fertilizer (Bags) to Hydroponic Tomato Growers at Echuca. These growers rely heavily on Tristates supply of fertilizer. Could we ASAP factor into our cashflow a cheque of approximately $3000 to Incitec so I can purchase a couple of months supply for these growers. I believe Incitec will supply on a prepaid basis."

758. In a further e-mail of the same date from Traill to Wilson, Traill said that he had just ordered "3 Semiloads of Molasses drums" and that he had noticed they were outside of terms with Bundaberg Molasses. He added that he would be purchasing the empty drums from Drumworld and had noticed that their account was "in sixty days for $2120".

761. On 15 October 1999, Tucker of NSWGB sent a fax to Wilson of Water Wheel stating, inter alia:

"Further to our discussions this week concerning payment for weekly deliveries by the NSWGB to Water Wheel Bridgewater Mill this is to confirm that there is a substantial shortfall under the previous agreement wherein payments would as a minimum equate to weekly deliveries with provision for additional monies to be included in weekly payments to cover arrears. This shortfall on deliveries for the months of September 1999 and October 1999 total $349,770.00. In addition your mill has ordered grain deliveries for week ending 22 October with a value of $180,500.00. We therefore require payment of the arrears of $349,770.00 on Monday 18 October in the form of a cheque for immediate presentation...and a further cheque amounting to $180,500.00 for next weeks delivery and to be deposited...Friday 22 October 1999. Completion of deliveries...to your mill next week will be conditional on receipt and successful presentation by the NSWGB of both of the above cheques. We would also add that a number of calls to your office on Thursday and Friday have resulted in no response on the above."

765. Also on 15 October 1999, Friswell sent an e-mail to Wilson requiring urgent payments to creditors totalling about $78,000.

768. On 15 October 1999, Neil's Transport exercised its lien over Water Wheel's grain held by it. Also on or around this date, Neil's Transport ceased trading with Water Wheel.

771. On or about 15 October 1999, Plymin had a discussion with Atcheson of the ANZ Bank in which they disagreed about the history and terms of Water Wheel's overdraft facility (the details are irrelevant). During the course of his conversation with Atcheson, Plymin asserted that the overdraft limit was $500,000 and needed to be increased to $900,000 "as working capital is required for the company to continue to trade". The upshot of the conversation was that the Bank "reinstated" a temporary overdraft facility of $400,000 until 15 November 1999 "to allow the customer to continue to trade and hence help facilitate sale of flour business as a going concern".

774. On 18 October 1999, by letter from Jeffries to Plymin, the NSWGB claimed that the total amount due and payable by Water Wheel to NSWGB was $1.994M. This total included an invoice from January 1999[25]

for $571,452, five invoices, one for each month from February to June 1999, each for the sum of $140,000, and an invoice from July 1999 for $100,000.[26]

In addition, reference was made to un-invoiced deliveries in September ($544,766) and October ($494,000). The letter concluded:

"As a matter of urgency I need to discuss with you your proposals to bring the account back into approved trading terms. As this moment we have a stop supply in place, and must have a firm commitment before we can release stock against this weeks [sic] orders."

After this letter, NSWGB made no further deliveries to Water Wheel without receiving payment in advance.

783. On or about 20 October 1999, Neil's Transport received the sum of $200,000 from GHE, on behalf of Water Wheel. This payment was organised by Water Wheel in order to obtain the release of 398,933 kg of rice which Neil's Transport was holding in its West Melbourne warehouse under its lien. Neil's Transport continued to hold other goods of Water Wheel under its lien which it proposed to sell in order to reduce the debt which it claimed from Water Wheel. Litigation was commenced on both sides in December 1999. Neil's Transport claimed a substantial sum and Water Wheel challenged Neil's Transport's lien.

786. It is here unnecessary to determine what sum was due by Water Wheel to Neil's Transport over and above the sum of $200,000 paid by GHE on Water Wheel's behalf, although the evidence suggests that a substantial sum in excess of $0.5M remained unpaid by Water Wheel, subject to some counterclaims. I also note that on 13 December 1999 (after payment of the above sum of $200,000), Water Wheel stated in an ASX announcement that the amount of the alleged indebtedness to Echuca Transport Pty Ltd (part of the Neil's Transport group) could be _"_no more than $100,000". It also appears that there were disputes between Neil's Transport and Water Wheel as to the allocation of payments by Water Wheel to the various members of the Neil's Transport group and as to the quantum of individual debts to particular members of the group. These disputes are not material to the principal issues in this proceeding.

789. Group tax payable to the Australian Taxation Office in the sum of $83,685.10 for September 1999 (due on 21 October 1999) was not paid until 20 December 1999 and group tax deducted by Water Wheel from the wages of employees for each month from October 1999 to 17 February 2000 (totalling $449,419.19) was never remitted to the Australian Taxation Office.

792. On 21 October 1999, ASIC wrote again to the Board.[27] ASIC referred to its letter of 16 September and Water Wheel's response dated 20 September. The letter noted that ASIC had come into possession of information that since 20 September 1999 Water Wheel's contract carrier Neil's Transport had ceased doing business with Water Wheel and was owed at least $400,000. The letter said that ASIC was again concerned about the solvency of Water Wheel.

795. On or about 22 October 1999 Plymin sent a memorandum ("the undated memo") to Harrison, Elliott and Carnie, stating:

"Subject: ASIC Insolvency Issue As you are aware ASIC has requested a letter from the Board stating that Water Wheel...is in a position to pay its debts as and when they become due. The liquid asset situation as of Friday 22nd October 1999 is as follows:

This situation changed adversely last week as a result of Neil's Transport action in failing to deliver export orders of approximately $600,000 FOB value. In addition, his actions are now known in the market and as such most suppliers require cash with order. To accommodate this situation we have reduced the flour mill operations to 2 shifts, 5 days per week. The major creditors are [NSWGB] (incl Derrick & Son) who are owed as Trade Creditors approx $2,460,000 ie 50% of the total I have requested a meeting with the [NSWGB] board early next week. Peter Jeffries recommended that Graham Lawrence and John Elliott attend the meeting. Geoffrey Hughes Export, a large customer, has offered to pre-pay against paddy rice security if...[RiceGrowers] agree to supply. [RiceGrowers] have advised that they will not walk away from the contract but that a final decision will be given Friday 29th October 1999. The summary working capital situation is as follows:

Inventory includes items held by Neil's and the Creditors include all amounts owed to Neil's. The last export shipment to Geoffrey Hughes is not included in the Debtors approx FOB value is $335,000 of which $200,000 has been paid to Neil's Transport.

810. Elliott said that when he received the undated memo (around 22 October), he thought that that the letter from ASIC mentioned in the memo had resulted from Neil's Transport contacting ASIC. Elliott said that Plymin had told him that he regarded Neil's Transport "as a bunch of crooks" who were issuing false invoices to Water Wheel and that the amount of the debt supposed owed to Neil's Transport was not correct, and that Neil's Transport were in financial difficulty, and therefore had taken "very nasty" action against Water Wheel (a reference to action under the lien). Elliott testified that Hughes (of GHE), who was a big exporter of rice throughout the Pacific, desperately needed his product so he (ie, GHE) did pay up $200,000 to get some product out, and Plymin told the directors that that probably squared the ledger with Neil's Transport. Elliott said that the ASIC letter was "of concern" to him but that, in effect, he was "quite comfortable" with the situation depicted in Plymin's memorandum because, inter alia, the debt of $2.46M owed to NSWGB was included in the trade creditors and "they certainly weren't harassing the company for payment at that point".

813. In cross-examination, Elliott reiterated that he believed that NSWGB were not putting any pressure on Water Wheel to repay the amounts referred to in the undated memo. Elliott denied that Plymin had told him that by letter dated 18 October 1999 NSWGB had placed Water Wheel on stop order and was demanding payment of $1.9M. He said that he did not learn of the "no deliveries without cash" until 29 November. Elliott testified that it certainly would have made a difference had NSWGB been pressing for payment - "In early November,...they certainly didn't give me that indication". Asked whether the undated memo and ASIC's request for another letter about solvency had caused him to have grave concerns about the solvency of Water Wheel, Elliott first repeated his theory that Neil's Transport had prompted ASIC to write the letter, and he then denied that it had caused him to have grave concerns about solvency. He said that the fact (stated in the undated memo), that most suppliers were requiring cash with order, did not give him grave concerns about solvency. Elliott said that he did not did not inquire whether Water Wheel had cash available to it to pay its suppliers with order - it wasn't his job to do that.

816. In October 1999, because Tristate was unable to pay farmers for purchases of grain for the purpose of on-selling, Tristate entered into an agreement with Derrick & Son whereby Derrick & Son would finance all the purchases for Tristate's commodities trading. The margins made on the trading were split 60% to Derrick & Son and 40% to Tristate.

819. Also in October 1999 Preston of Derrick & Son informed Pereira of Water Wheel that Derrick & Son would not deliver any further grain to Water Wheel as its account with Derrick & Son was well beyond acceptable credit terms. As Water Wheel was well behind in its lease payments in respect of a storage facility (leased by Water Wheel from Purtill Bros) situated at 162 Harding Street Deniliquin, Pereira suggested to Preston that Derrick & Son should sublet the facility from Purtill Bros. Preston agreed to this. Thereafter Derrick & Son paid the rent direct to Purtill Bros.

822. A meeting of the directors of Water Wheel was held on 25 October 1999 at Elliott's office. Present were Harrison, Plymin, Elliott and Carnie and Rosedale was in attendance. On the subject of "Solvency", the minutes recorded:

"[Plymin] tabled a summary of the Company's working capital as at Friday 22nd October 1999. The table showed a surplus of assets of $120,000. The meeting agreed that to prove solvency a more detailed cash forecast would be required. The key assumptions to be:

[RiceGrowers] contract of 15,000mt to start in November

Current trading terms with NSW Grains Board and Derrick & Son to continue.

Subject to this forecast showing a positive position the Managing Director is authorised to issue the solvency statement to ASIC."

832. Commenting on the minutes of 25 October 1999 which referred to the further matters required in order to prove solvency, Elliott said that Rosedale had advised that a weekly cashflow was required in order to test solvency because the debtors and inventory versus trade creditors and off-balance sheet funding "was so close that really you had to look more carefully on a weekly basis to ensure that the company could meet its debts as they fall due." Elliott avoided answering a question about whether anyone (on the Board) had asked about the current position with NSWGB or Derrick & Son.

835. The minutes of the 25 October Board meeting went on to note the position in relation to the warehousemen's lien asserted by Neil's, noting that partial release was given on payment of $200,000 (which payment was made by GHE, not Water Wheel) and that: "The balance of the account is in dispute with charge backs to Neil's almost negating the outstanding balance". The minutes record that Plymin was to meet with GHE to firm up a funding arrangement and discuss increased sales. That meeting was to take place in Sydney on 27 October. On the subject of ASIC's disclosure notice about the subject of "lost sales", the 25 October minutes stated that:

"The Board's comment on the lost sales issues is to announce that the company cannot give any assurance that any further monies will be recovered."

839. The reference in the minutes of 25 October 1999 to a "surplus of assets of $120,000" should be contrasted with the contents of the undated memo[28]

reporting a shortfall in liquid assets as at Friday 22 October 1999 of $508,202.

844. In cross-examination, Elliott said that he did not know that Water Wheel was behind in paying group tax and payroll tax. He said that as of 25 October he had been told that there were "a few" creditors outside terms - he conceded that he had already known from earlier in the year that $1.2M was required to bring creditors back into line, as stated by Gross and Plymin. Of course, Elliott had also seen the document dated 21 May 1999.[29]

849. Asked whether the company's finances as disclosed on 25 October 1999 showed a precarious financial position, Elliott said that he would call it a "tight financial position" (and he had asked for a three month cash forecast at that meeting). Elliott denied that careful monitoring by directors was required after 25 October and said that he did not think the company was anywhere near insolvent. He said that he could not recall making inquiries about the trading results for the month of September in late October or asking for the end of October results prior to 20 December. I note that no Board meeting was held at all between 25 October and 20 December 1999.

852. By facsimile dated 26 October 1999, Plymin replied to ASIC's 21 October solvency query by baldly stating:

"...The Board of Directors of Water Wheel...believe that in the normal course of business that the Company is able to pay all of its debts as and when they become due."

856. On 26 October 1999, Friswell sent an e-mail to Wilson saying that Bendigo Forklifts were upset about not being paid and were threatening to withdraw the forklifts on hire and also St. Regis Bates needed confirmation of payment "this week by Friday, $20079.45 before releasing current bag order".

859. On 29 October 1999, Jeffries of NSWGB had a further meeting with Plymin in which he said to Plymin that the debt situation had not improved and that something had to be done immediately. Plymin replied that the letter of credit was "beginning to look better and we will put it in writing and sign". Jeffries replied that they needed to do something quickly to bring the debt back within terms. On the same date, Tucker of NSWGB wrote to Plymin and Wilson enclosing schedules detailing the debts owed to NSWGB.

862. Pope Packaging supplied bags for Water Wheel's rice business. At some time in October 1999, a meeting was held between Wilson of Water Wheel and Trevor Pope and Brian Quirk of Pope Packaging. Quirk told Wilson that Pope Packaging was no longer prepared to accept non-payment of its account and required immediate payment. It was agreed with Wilson that Pope would continue supplying bags to Water Wheel but payment would be made fortnightly at an amount greater than any order placed by Water Wheel in order to reduce the previously outstanding debt. Further goods were supplied on this basis but not without Pope Packaging experiencing difficulty in obtaining payment and being obliged to pursue Water Wheel for the necessary cheque. Quirk or some other representative of Pope Packaging found it necessary to attend Water Wheel's head office on each occasion to ensure collection of the cheque. In the end, a balance of $95,725.72 for goods supplied in the period from 12 October 1999 to 17 February 2000 remained unpaid.

865. Elliott testified that he received a cashflow statement subsequent to the meeting of 25 October (he could not recall when) and it seemed satisfactory. He could not recall whether he had spoken to the other directors after receiving this cashflow statement. There was a deal of evidence about material errors in this statement but Elliott said that he had not picked up these errors as he did not study the figures.

869. Spargo commenced employment with Water Wheel at some time in October 1999 as an accounts payable officer. The evidence does not disclose the precise date. However, it is clear from her evidence that by November 1999 she had observed that many invoices which she processed were outstanding beyond the usual trading terms stipulated by the creditors, and that there were numerous invoices that were more than 60 or 90 days overdue, and some were 120 days overdue. From that time until the appointment of administrators, she received on an average day five complaints from creditors (usually farmers) about unpaid invoices. She told complaining creditors that she had raised a cheque, and that the creditor could expect payment soon. She then held the cheques awaiting Wilson's decision as to which creditors would be paid, and kept the cheques which were not sent out. Often a creditor called back a second or third time, and she then told the creditor that the cheque had been raised but was waiting to be signed, and the creditor should expect payment soon.

872. No employee superannuation contributions were made by Water Wheel from 1 November 1999 onwards. The amount involved was some $92,000.

875. As at 1 November 1999, overdue payments by Water Wheel to Follett & Anderson totalled approximately $210,000 and Wilson proposed a repayment schedule approximating to $70,000 per month for three months, with initial payments of $28859.51 on 28 October and $22837.98 on 5 November 1999. The payment due on 28 October 1999 was received by Follett & Anderson on 3 November 1999, but the payment due on 5 November 1999 had not been received by 8 November 1999.

878. On or shortly after 3 November 1999, Plymin, Harrison and Elliott each received, by registered post at his residential address, a letter of that date from the auditors, HPW, stating, inter alia:

"Over recent months certain actions by the member companies of the Water Wheel Holdings Ltd group indicate an inability to readily meet the payment of debts due by them. [The auditors referred to s.311 of the Corporations Law and to s.588G of the Corporations Law] ...The circumstances that have been brought to our attention and give rise to our concern are debt related...[and are] as follows: (i) claims for outstanding debt made by Neil's Transport resulting in that organisation implementing a warehouseman's lien; (ii) the requirement to make up-front payments to suppliers of grain rather than by normal credit arrangements. In fact we understand that grain stocks are extremely low due to inability to make payments; (iii) general suppliers of goods and services are being required to wait considerable periods of time beyond the due and payable date before receiving payment. In addition we believe that the companies have not yet achieved a positive cash flow from trading with the result that the above difficulties are not able to be overcome from trading. ... If our concerns are legitimate we are of the opinion that they will not be capable of being dealt with adequately by commenting on them in our auditor's report because the next audit is several months away. Accordingly we would advise that our only course of action is: * to bring this matter to the attention of each director; and * to request directors to respond to our concerns as a matter urgency. We must ask directors collectively to respond to us promptly on the matters raised and with other information relevant to the companies solvency and trading position. On receipt of that response we will decide our future action. If we fail to receive any or any satisfactory response by 12 noon on 12 November 1999 we will communicate our concerns with the ASIC."

882. Elliott said that at this time Water Wheel had tight liquidity - "that was very obvious" - but that the auditors' letter did not ring alarm bells with him; it was written just to protect themselves legally. Elliott said that he did not have anything to suggest that Water Wheel was insolvent at that point in time. A reply was sent to the auditors on 12 November (see below).

885. On 3 November 1999, Lawrence and Jeffries of NSWGB met with Plymin and Harrison at the Water Wheel head office in East Melbourne. I accept Lawrence's evidence that Plymin conceded to him at this meeting, despite mentioning some disputed invoices, that a large amount was overdue for payment and that Plymin mentioned the "letter of credit" proposal which he said would facilitate a payment by Water Wheel of $1.2M and that there was discussion of the necessity for a schedule of dates for repayment by Water Wheel of further amounts (additional to the sum of $1.2M) on account of its indebtedness to NSWGB. Elliott joined the meeting after Lawrence had left. According to Jeffries, Plymin said to Elliott on his arrival, that NSWGB had stopped all supply to Water Wheel, other than on cash prior to delivery terms, due to outstanding debts which were out of terms and that this requirement was causing problems for Water Wheel's operations. Elliott denied that Plymin told him this: "No, I don't think he told me that at all". I am satisfied that Jeffries' version is the correct one. According to Jeffries, Plymin also said to Elliott that NSWGB was demanding a substantial up-front payment of outstanding debts which were out of terms and a repayment schedule for the balance of outstanding moneys, failing which NSWGB would have to commence legal action to recover the outstanding debt and that Water Wheel had put a proposal for repayment to NSWGB based on receiving funds from a letter of credit which it hoped to obtain, from which Water Wheel would make up-front payments of $1.2M to NSWGB, $600,000 to Derrick & Son and a further amount to RiceGrowers. Jeffries said to Plymin and Elliott that NSWGB did require substantial up-front payment of debts which were out of terms and would keep Water Wheel on payment before delivery until it came back within approved trading terms and that NSWGB required something substantial from Water Wheel to confirm that it was under control and had its debt position back within its approved credit limit. Elliott told Plymin to take care of the situation and said to Jeffries "don't worry, you will get 100% of your money".

888. Under cross-examination, Elliott said that he did learn that NSWGB was demanding a substantial payment of the order of $1.2M in reduction of the outstanding debt. He testified that he did not know that Water Wheel did not have the funds to make such a payment, but added that "Plymin alerted us to the point about that time that he was going to seek that letter of credit with...Hughes". Elliott then repeated his denial that he knew that otherwise Water Wheel did not have the funds. Elliott further denied that Plymin had told him of the exact situation with NSWGB and he avoided answering the question whether he had therefore inquired with Plymin after the meeting about the precise amount of the debt. In all the circumstances I find that Elliott must have known that the NSWGB debt substantially exceeded $1.2M and that Water Wheel could not substantially reduce the debt unless and until the proposed letter of credit was obtained and discounted.

891. On 4 November 1999 Water Wheel finally informed the market, in essence, that there were no "lost sales". Its letter to the ASX stated:

" Subject: Lost Flour Sales - Update Water Wheel Holdings Limited advises shareholders that the investigation into the previously advised $1.2 million uninvoiced flour sales discrepancy for the year ended 3 December 1998 is continuing, utilising only company personnel. The company had identified a possible shortfall by reconciling wheat intake with production records compared to sales quantities within the computerised systems. However, other than noted below, the company's accounting records, including delivery dockets, have not provided evidence of any flour sales discrepancy. The investigation by Deloitte Touche Tohmatsu previously referred to in an announcement to the ASX dated 5 May 1999 concluded in April 1999 with Deloitte Touche Tohmatsu reporting to the Water Wheel board in late April 1999 that while they could find no evidence of the existence of uninvoiced sales, nor were they able to say conclusively that sales were not understated. Water Wheel's auditors, Hall Puddy and Wales, have also concluded that sales as reported in the accounts published for the year ended 3 December 1998 were materially correct and that there is no evidence of uninvoiced sales. The company has previously announced that amounts of $303,000 and $211,987 have been taken into account as prior period adjustments. The company now wishes to clarify this announcement. The company has identified sales as not recorded totalling $234,554 for the year ended 3 December 1998. All these invoices have now been identified, corrected and will be accounted for as an abnormal item in the statutory accounts. The remainder of the prior period adjustment of $280,433 does not relate to uninvoiced sales. The company cannot give any assurances that any further monies will be recovered."

895. In evidence, Elliott pointed out that the above announcement (which he said was a matter dealt with by Harrison, Plymin and Rosedale) did say that unrecorded sales had been identified totalling $234,554 for the year ended 5 December 1998. Elliott indicated that he did not know the facts about Deloittes, he had never seen any written report from Deloittes and he did not know they had finished their work in April 1999. He said that he simply assumed that the contents of the announcement to the ASX were correct. He kept repeating that the company had to make a statement, and this was the statement they made. He could not recall whether he had asked for any explanation of the figures on page 2 of the announcement.

898. On 4 November 1999, Graham of Derrick & Son confirmed by a facsimile to Plymin and Wilson that Water Wheel was indebted to Derrick & Son in the total sum of $1,929,376.53 (of which $112,033.84 was three months old, $113,506.40 was two months old and $247,681.45 was one month old) and that additional post-dated cheques were required in an amount of $701,768.53 to cover the full amount of the debt.

901. A cash flow projection (the "detailed cash forecast" contemplated by the Board at its meeting of 25 October 1999), was produced on or about 5 November 1999. The document projected "total payments_"_ for November 1999 of $2,876,969 and "total receipts" of $2,914,009. However, total receipts included a supposed loan of $870,000 from GHE. The evidence shows that there was no basis for including this amount as a loan receipt, nor does this projection appear to make any provision for repayment thereof. The projection also appeared to assume "straight line_"_ payments to creditors, when many creditors were by then well overdue for payment. The projection further assumed that Water Wheel would be supplied rice in November 1999 by RiceGrowers (a supply contract which was not finally agreed until December).

904. On 5 November 1999, Friswell sent an e-mail to Wilson advising that Bonlac Foods had stopped credit, that Water Wheel required skim milk powder as soon as possible and that the amount due on the July account was $3612.96.

907. A Board of Directors' meeting was scheduled for 5 November 1999. One of the main items on the agenda was consideration of the cash flow. However it appears that, for whatever reason, this meeting did not go ahead.

910. On 9 November 1999, Follett of Follett & Anderson had a meeting at the head office of Water Wheel with Wilson and Chiswell. Wilson said to Follett that NSWGB could wait for payment that month as they were "big enough to carry it". Follett was assured by Wilson and Chiswell that Follett & Anderson would be paid all amounts outstanding in the near future. Some further payments were received (after the scheduled dates) and as a result, Follett & Anderson delivered further wheat to Water Wheel. By 17 February 2000, Water Wheel remained indebted to Follett & Anderson in the sum of approximately $175,000. The calculation of that amount is complicated by a number of arrangements and transactions between Water Wheel, Follett & Anderson, and another party, but it is sufficient to note that the said sum includes amounts due by Water Wheel to Follett & Anderson dating back to February, June and July 1999.

913. On 10 November 1999, Nicholls sent an e-mail to Wilson advising that Bendigo Forklifts would not accept that Water Wheel would send them "some money in the next fortnight" and was demanding "at least July a/c by Friday $5,872.00 (this amt also includes 1 invoice for May)...". On the same date, Nicholls e-mailed Wilson, saying that she had a call from a creditor from whom Water Wheel had "many invoices as April 99 and they want their a/c brought up to date. Could you please pay some of this ASAP".

916. On 10 November 1999, Derrick & Son commenced supplying rice to Water Wheel on a cash on delivery basis and informed Water Wheel that "further deliveries will remain on a cash basis until the re-scheduled post-dated cheques are presented". Post-dated cheques previously made out to Derrick & Son by Water Wheel in early September 1999 were returned unpaid in December 1999.

919. In a faxed letter of 10 November 1999, Jeffries of NSWGB wrote to Plymin and Harrison in relation to the outstanding accounts and noted:

"Thank you for arranging the meetings of last Wednesday with Bill Harrison and John Elliott, at which time we discussed the matter of outstanding accounts for supply of grain. As we had explained in our letters of 18 October and 29 October, some of these accounts are well overdue and your account is outside of approved trading limits... I have this morning reviewed your repayment proposal as contained in David Wilsons' [sic] note of 9 November 1999 and must advise that the proposal is unacceptable to NSW Grains Board. As an alternative, acceptable to the NSW Grains Board, I would propose the following: - * Current deliveries continue on the basis of cash deposit to account with the order... * The overdue General Ledger balance of $623,441.50 be paid within 7 days. * The account for "September" deliveries ($545,766.00), be paid by 30th November 1999. * The account for "October" deliveries ($494,000.00), be paid by 15th December 1999. * The outstanding balance of $1,371,452.73 be converted to a repayment program, repayable at the rate of $25,000.00 per week...".

923. The evidence shows that Elliott received the above fax from NSWGB dated 10 November 1999 and had it filed but Elliott said that he could not recall seeing it. I find that he did read it. It refers to the various amounts claimed to be owing. Elliott admitted that, without the proposed discounting of the letter of credit, Water Wheel was not in a position to pay the amounts listed in the fax but "it was an ambit claim."

926. On 11 November 1999, Nicholls e-mailed Wilson in relation to Powercor saying that she had just noticed that Water Wheel had two power accounts in the system, and were due to get another one shortly, and she expected to get a request for payment from them any day.

929. By letter dated 12 November 1999, signed by Harrison as Chairman of Water Wheel, the directors replied to HPW's letter to each director dated 3 November 1999 as follows:

"The Directors have received your letter dated 3 November, 1999 and have considered the contents. The Corporations Law requires that the Company must be able to pay all its debts as and when they become due and payable. The test is not "an inability to readily meet the payment of debts due by them". Each of the Directors is well aware of his obligations pursuant to Section 588G of the Corporations Law."

933. The letter of 12 November went on to state that Water Wheel disputed the debt claimed by Neil's Transport, that the only upfront payments to grain suppliers were "a result of newspaper reports on the Company" and that:

"It is not the ability to make payments that has caused grain stocks to become low, it is because of shortage of specific types of grain and managing inventory on a just in time basis."

937. The letter to HPW then took issue "in the strongest terms" with the assertion that suppliers were being required to wait considerable periods beyond the due and payable date before receiving payments and made what can only be described as astounding statements, that Water Wheel "continues to pay its general suppliers in accordance within [sic] its agreed terms with individual creditors" and that "the Bank is comfortable with the trading position of the Company".

940. At first Elliott said that he could not recall seeing Harrison's letter in reply to HPW. He said that the matter was handled by Harrison and Rosedale He could not recall whether the contents of the proposed letter had been discussed with him. He then said that he got a copy of it after the matter had been dealt with but he was not sure that he had read it. At another point in his cross-examination, Elliott said that he was not involved in writing the 12 November 1999 letter - that was left to Harrison, Rosedale and Plymin.

943. On 15 November 1999, Kenneth Canfield, a member of a grain farming partnership, delivered oats to Water Wheel pursuant to an agreement that he would be paid at the weighbridge at the time of delivery. He was not so paid. He was told by Water Wheel staff to collect a cheque on the Friday at the end of each week. When he attended at Bridgewater to collect the cheque, he was told that it was not ready. When he attended the following week (further oats having been delivered), he was told that the cheque was not ready and "should be in the mail". On 23 December 1999, after a further small delivery under another agreement, he was told on the telephone by a member of Water Wheel office staff in Melbourne that "your cheque is in the pipeline". Despite numerous further requests, he was never paid the total amount due of $6,402.05.

946. On 16 November 1999, Lee and Di Lorenzo of Vicgrain met with Plymin and Wilson at Water Wheel's Head Office. I note that during the first half of 1999, at the request of Water Wheel, Vicgrain had constructed additional facilities at Mitiamo at a cost to Vicgrain of about $827,000. The method of repayment of this amount by Water Wheel had not been agreed. Plymin told the meeting in substance that Water Wheel was experiencing financial difficulties as a result of the losses recorded in the first half of the year and would be unable to pay the cost of these additional facilities "at this time" and that its ability to pay its debts was unlikely to improve and it did not expect to have good cash flow until deregulation of the rice industry in NSW which would take at least 12 months. I am satisfied that the mode of repayment of the cost of the additional facilities had not been agreed prior to this meeting and was discussed but not agreed at the meeting.

949. On 22 November 1999, Goosens sent an e-mail to Wilson concerning outstanding accounts and, in relation to Goulburn Murray Water, he said:

"There are two bills outstanding with them going back many months. GM2410 for $3740 and GM2408 for $20,000. The last is our commitment for the Salinity project. I would like you to give [Goulburn Murray Water] a call...and perhaps discuss a payment plan? The original invoices went to [Plymin]."

953. On the same date, Nicholls e-mailed Wilson reminding him that Bendigo Forklifts was expecting a cheque for the August account to be sent out that week. Bendigo Forklifts was continually obliged to follow up with requests for payment of later overdue monthly accounts.

956. On 23 November 1999, Goosens e-mailed Wilson stating: "I have another one for you. I need to pick up some Rice bags and Popes are waiting for some money before they will release them. Can you see what you can do?" The reference to "Popes" is a reference to Pope Packaging.

959. On 25 November 1999, Vicgrain decided that further credit would be withdrawn from Water Wheel and that future transactions should be on a cash only basis.

962. Also, as at 25 November 1999, payments due on 47 invoices from Freight Victoria Ltd to Water Wheel, which were due within 14 days of invoice, were an average of 50 days overdue.

965. In or about mid-November 1999, Plymin produced for the directors a document containing a variety of financial information, including a draft budget for the next financial year, a number of divisional budgets and profit statements and cash flow forecasts. Elliott had received a copy of this document prior to 29 November 1999.

968. On 29 November 1999, in a facsimile to Harrison, Elliott and Carnie, Plymin advised that GHE had offered to open a letter of credit and stated that Water Wheel, in conjunction with Snape, had held discussions with the State Street Bank regarding the discounting of the letter of credit. The facsimile went on to say:

"With the discounting of the LC and the isolation of 50 per cent of the debt to a long term supplier loan [Water Wheel] should be within trading terms by January 2000. This is subject to obtaining enough wheat of the correct specifications to operate the Mill on a three shift basis. In addition the 15,000 MT of paddy will allow for the operation of the Rice Mill on a three shift basis".

972. A meeting was held at Elliott's office on 29 November 1999 between Lawrence and Jeffries of NSWGB and Elliott, Harrison and Plymin. Elliott testified that, at the meeting, NSWGB were looking for a concrete repayment package, that Lawrence had voiced the complaint that nothing had happened to reduce their unpaid debt since 3 November and that Lawrence explained to the meeting that up until some time in November he had been totally responsible for the Water Wheel account, but that now he had an audit committee to deal with and therefore it was very important that he get a letter describing a basis for repayment over time of the outstanding amounts. I find that Lawrence said that the NSWGB internal audit committee would not sign off on the accounts until it had a guarantee that Water Wheel could, and would, pay its accounts when due. I am satisfied on the whole of the evidence that the existence of a debt to NSWGB of around $3M was not disputed by Water Wheel and was acknowledged by Elliott. The directors asked Lawrence what he wanted and, according to Elliott, after Plymin had "explained various things to him", Lawrence prepared a draft letter for Water Wheel to provide to NSWGB. The evidence shows that the "things" which were explained by Plymin to Lawrence related to the proposal that Water Wheel obtain a letter of credit from GHE, and discount that letter of credit with State Street Bank (a discount facility which Plymin said had been agreed), and then provide $1.2M of the proceeds to NSWGB in part payment of the debt. Plymin also told the meeting that Water Wheel owed its bank $4.8M which it was currently working to refinance.

975. There is a conflict in the evidence as to precisely how the letter dated 29 November 1999 from Water Wheel to NSWGB was drafted and by whom. It is unnecessary to resolve this conflict. The fact is that the contents of the letter were known to each of the directors present at the meeting and the letter was signed by Harrison and Plymin and given to Lawrence. The letter stated that Water Wheel had reached agreement with a major grain supplier and that:

"We have a client who has agreed to sign a purchase contract for this product upon sight of the agreement. Simultaneously our Bank, State Street Bank, 9th Floor, West Tower, 60 City Road, South Bank, has agreed to favour us with our client's letter of credit. The same bank has agreed to discount this LC to Water Wheels Mills Pty Ltd. This can be expected to take place within 10 days. The discounted value of the LC is $3.3 million. Water Wheel guarantee to immediately pay the NSWGB $1.2 million, from this amount, with the balance being used to pay for raw material. The outstanding balance (of $1.87m) be converted to a principal repayment program, repayable at the rate of $25,000:00 per week, commencing immediately, until repaid in full (approx 75 weeks)... Interest on the outstanding balance on the last calendar day of each month, to be calculated at the rate of 3% over 90 day bank bills on the last day of the month, and invoiced separately... Water Wheel propose that [NSWGB] re-establish its 30 day trading terms upon receipt of the $1.2 million..."

979. Asked in cross-examination whether he had appreciated on 29 November 1999 that Water Wheel was, in the absence of the letter of credit arrangement,[30] unable to make the substantial payment demanded by NSWGB, Elliott's answer made reference to the proceeds of the letter of credit and the prospect of a profit from the forthcoming RiceGrowers' agreement. Despite the reference in the letter to $1.2M plus a further large outstanding amount, Elliott tried to say that it was still subject to reconciliation.

982. In or around November 1999 a grower from Maldon named Kevin Gallagher arrived at the office of Mullen, who was then the manager of Water Wheel's Bridgewater mill. Gallagher had previously telephoned Water Wheel on several occasions and had spoken with Mullen in relation to non-payment of an invoice. Gallagher told him that he was owed payment for grain purchased by Tristate and that he would not be leaving the office until it had been paid. Mullen called the accounts department and told Wilson of the situation and asked for payment to Gallagher to be organised urgently. Gallagher remained at Mullen's office for approximately 3 hours until a cheque was drawn.

985. On 30 November 1999, Wilson received the following plaintive e-mail from Nicholls:

"Subject: URGENT David, Our phones have been barred from making STD phone calls until we pay our a/c. Someone will need to phone Sam at Telstra...We can make local calls & receive calls. Can you please confirm you have received my message as I can't ring you."

990. On 1 December 1999, Nicholls e-mailed Wilson, advising that she had received a call from a farmer who was owed $1,238.30 delivered 21 October 1999, that he said someone had told him that a cheque would go out the previous Friday and she asked Wilson to let her know when he could expect the cheque as she had to phone him back.

993. On 2 December 1999, Freight Victoria Ltd faxed a letter to Water Wheel referring to a balance of account of $30,152.61 overdue from August, September and October 1999 and advising that credit facilities were suspended, and that unless payment was received by 9 December 1999, the account would be referred to collection agents for legal action.

996. On 6 December 1999 Plymin wrote to Harrison, copied to each of Elliott, Carnie and Snape, attaching a copy of the rice supply agreement signed by RiceGrowers.

999. On 8 December 1999, a meeting was held at the premises of NSWGB in Sydney between Lawrence and Jeffries of NSWGB and Plymin and Snape on behalf of Water Wheel. After referring to the proposed discounting by State Street Bank of a letter of credit which should be available in the next few days, Plymin said that if Water Wheel was not supported by NSWGB then it would be unable to continue trading and would have to close the business and that the commercial reality was that either NSWGB supported Water Wheel and helped Water Wheel trade on and got its money back, or NSWGB could try and recover it as an unsecured creditor. Snape spoke along similar lines.

1002. During a further meeting between Plymin and Snape and Lawrence and Jeffries on 9 December 1999, Plymin said that Water Wheel was not in a position to pay the amount of $1.2M as promised. Either Plymin or Snape made statements to the following effect at this meeting: that Water Wheel was in financial stress; that Water Wheel needed the indulgence and facility of a repayment program with NSWGB to allow Water Wheel to continue to trade; that if it anyone pulled out it would dramatically effect Water Wheel's ability to continue and the whole shooting match would go up; that receivership was possible but Water Wheel would not initiate any winding up; and that Water Wheel was not in a position to pay its accounts. Jeffries told Plymin that he thought that Water Wheel had drawn down more grain than had been invoiced and that NSWGB would be conducting a stocktake of the grain held in Water Wheel's silos pursuant to the finance agreements. A stocktake was conducted later that day which revealed that there was no grain in the Bridgewater silos. Jeffries then told Plymin that Water Wheel had taken 4,000 tonnes of NSWGB's grain without authority and that $800,000 must be paid immediately. Plymin replied that "your actions in putting us on COD forced us to use up the stocks".

1005. Water Wheel's management accounts for the 11 months ended 29 October 1999 detailing the company's monthly performance for the period 1 May 1999 to 29 October 1999 were made available in early December 1999. According to the management accounts, Water Wheel made a trading loss before taxes for the 11 months of $3.863M, and for the 5 months to 29 October 1999 its trading loss before taxes was $1.711M. There were trading losses of $840,000 and $604,000 for the months of September and October 1999 respectively. The Board knew that the management accounts in the past had understated the extent of the company's losses by approximately $2M for the year ended 3 December 1998 and approximately $400,000 for the six months to 3 June 1999. These are significant discrepancies on their own but even more so when it is borne in mind that Water Wheel's annual sales were only in the range of $26M.

1008. From 6 December to 10 December 1999, Brooksby & Widgee Pty Ltd delivered oats to Water Wheel pursuant to contracts made in late November 1999. The total amount due was $5800.80 and no payment was ever made.

1011. On 9 December 1999, The Young Roller Flour Mill Co. Ltd invoiced Water Wheel in the sum of $10,308.75 for grain sold and delivered shortly prior to that date and payable within 30 days of the end of the week in which the invoice was dated. No payment was ever made.

1014. On or about 16 December 1999, Plymin wrote to the ANZ Bank directing that a number of cheques payable to Derrick & Son bearing dates as early as 29 October 1999 were not to be accepted or paid. Two of those cheques (totalling $330,000) were returned to Derrick & Son unpaid.

1017. There was apparently no Board meeting after 25 October 1999 until 20 December 1999.

1020. A Board meeting was held on 20 December 1999 at Elliott's office. Present were Harrison, Plymin, Elliott and Carnie and in attendance was Snape. The minutes recorded that Snape informed the meeting as to progress on negotiations regarding GHE's letter of credit to be discounted by State Street Bank and that the "major area of concern is isolating the transactions from the ANZ charge". The minutes further recorded that the accounts for the year to October 1999 were tabled showing a loss before abnormals and other adjustments of $3.835M. Elliott testified that when this projected loss was reported he "hit the roof" because he found that loss "extraordinary in the circumstances, given we'd had the previous profit results". Elliott testified that on "closer discussion", Plymin felt that "it may be quite wrong". When asked to elaborate on what he meant by his hitting the roof, Elliott in substance said that he wanted some explanation, but he did not get a very satisfactory one, and that "it was rather a difficult meeting, I think, for Mr Plymin." When asked what he had determined to do about the lack of a satisfactory explanation for this large loss, Elliott gave a lengthy reply which, as I understood it, amounted to saying that, given that the summer holidays were pending, he decided to wait and see until the end of January 2000. In that regard, I note that it was on 1 February 2000 that the directors paid a visit to the Bank (see further below).

1023. In cross-examination, Elliott said that he had had no forewarning of the loss of $3.835M before the Board meeting on 20 December. He was "ropeable" when told. Despite that, Elliott agreed that the stockfeed business was unprofitable and had been since the middle of the year; he denied that the flour business was the source of ongoing losses: he thought there was a turnaround and he didn't know that production costs had increased, or at least he could not recall whether he did or not; and he knew there was very little rice production.

1026. The balance sheet for the 11 months to 29 October 1999 showed a deficiency of current assets over current liabilities of $1M. The minutes recorded that further analysis of the accounts was required on a product by product grouping.

1029. On 21 December 1999, Plymin wrote to Jeffries of NSWGB proposing a finance facility with NSWGB. The letter was copied to all of the directors and Snape. In it, Plymin referred to the facility for discounting letters of credit having "taken longer than anticipated" and "as yet is still to be finally negotiated".

1032. On 23 December 1999, Daly in his report to the ANZ Bank of that day noted Plymin's advice that there were no longer any parties interested in the acquisition of any aspect of Water Wheel's flour business. Daly also noted that Water Wheel was paying above market prices for rice supplied by APT.

1035. On 23 December, Jeffries of NSWGB proposed a facility agreement involving personal guarantees from the Directors. None were forthcoming.

1039. During this period, correspondence continued between Water Wheel and NSWGB in relation to the debt owed to NSWGB but no arrangements for payment were agreed. All directors were consulted and kept informed as to the contents and progress of the correspondence between Water Wheel and NSWGB.

1042. On 24 January, a trial balance became available from the computer system which showed a trading loss to 3 December 1999 of $4,086,118, prior to adjustments being made.

1045. On 27 January 2000, Daly produced another report for the ANZ Bank. In that report Daly noted that RiceGrowers did not sign the contract for the supply of 15,000 metric tonnes of rice in November, and that Water Wheel "may have incurred a loss of approximately $200,000 for the month due to the lack of rice available from [RiceGrowers] to process and sell".

1048. On 1 February 2000, Elliott, Plymin, Harrison, Carnie and Snape met with Atcheson, Seychell and Emery of the ANZ Bank. Elliott acknowledged at the meeting that Water Wheel was not able to operate full shifts due to liquidity problems and was losing $25,000 per week. Harrison asked the Bank to provide ongoing support for six months so that Water Wheel could realise its assets as a going concern.

1051. On 3 February 2000, Jeffries wrote to Plymin giving notice of NSWGB's reservation of right to take action to recover debts and requesting full disclosure of Water Wheel's financial position. This correspondence was faxed from Plymin to Harrison, Elliott, Snape and Carnie on 4 February 2000 and the recipients were given copies of the proposed response.

1054. On 3 February 2000, solicitors for Derrick & Son wrote to Water Wheel demanding payment of outstanding debts.

1057. On 15 February 2000, Baker & McKenzie, solicitors for NSWGB, sent a letter to each of the directors of Water Wheel stating NSWGB's concerns as to the solvency of Water Wheel and that Water Wheel had been trading whilst insolvent.

1060. A further trial balance was produced on 15 February 2000 which showed a trading loss to 3 December 1999 of $6,743,558.

1063. The Board of Directors of Water Wheel met on 16 February 2000 at Elliott's office. Present were Harrison, Plymin, Elliott and Carnie, and in attendance were Rosedale and Snape. The unsigned minutes recorded the following:

"Solvency: The board reviewed the annual accounts as presented to the meeting. A decision was made to appoint a voluntary administrator and request suspension from the Australian Stock Exchange. The results for the year ended 3rd December have revealed an increased loss of $6.7 million. The major adjustments were: * Notification by Derrick & Son of shortfall in paddy rice stocks at Mitiamo * Notification of total debt owed to the New South Wales Grains Board received Thursday 10th February 2000. ANZ Bank The Chairman and Managing Director to meet with the ANZ Bank to explain the appointment and seek their support. Australian Stock Exchange The Board agreed to request the ASX to suspend trading as at 2.30pm 16th February 2000. Voluntary Administrator The Board authorised the Chairman and Managing Director to request Mr Christopher Daly of PricewaterhouseCoopers to accept the appointment as voluntary administrator."

1067. Elliott testified that he had been told that a loss of somewhere around $4M was expected but at the meeting he was informed that the loss was well over $6M. Elliott testified that he was absolutely shocked and at that point in time, the directors decided that they would have to put the company into voluntary administration. Elliott further testified that he was annoyed that the opportunity to recapitalise the company, on which he had done "a bit of work" over the Christmas period (thinking at that time that Water Wheel was going to lose about $4M) - the opportunity to sell the flour business and recapitalise the company - was lost. Elliott said that before this meeting, he certainly did not think that Water Wheel was insolvent:

"[p]rovided the bank continued to support the company, and we'd had every indication they certainly hadn't said anything to the contrary, and provided the [NSWGB] didn't demand their payment, and I was led to believe that they were not going to, the company still had, even with those losses, about 7 million of net shareholders funds. Clearly it either had to sell the flour business and/or raise capital, but we couldn't do that until the profit result was finalised, and I was just aghast when we met on the 16th, really left us nowhere to go but to go into voluntary administration at that point, because the current assets for the first time were lower than the current liabilities."

1071. On 16 February, Harrison and Plymin met with the ANZ Bank and advised that the company was unable to continue trading. The ANZ Bank was told that there was a reported loss for the financial year ended 3 December 1999 of $6.7M.

1074. Also on 16 February, Daly and Brooke were appointed joint and several administrators of the Water Wheel companies.

1077. Mills and Holdings entered into deeds of company arrangement on 30 June 2000. Brooke is the administrator of the deeds. Each of the deeds provides for payment of the admitted claims of creditors out of the available assets, and for a release of the claims of creditors upon payment of the "Total Dividend" as defined. The deeds remain on foot. The process of realising assets and determining the liabilities of Mills and Holdings is continuing. Brooke has paid 10 cents in the dollar in relation to amounts admitted under proofs of debt lodged by creditors of Mills. In an affidavit sworn 9 August 2002, Brooke said that he expected there to be a further distribution to creditors of Mills "in the order of 4.5 cents in the dollar" and that he expected the return to creditors of Holdings to be "in the order of 32 cents in the dollar."

III. APPLICABLE PROVISIONS OF THE CORPORATIONS LAW

1081. The provisions of the Corporations Law of Victoria[31] which applied in the period relevant to this proceeding (14 September 1999 to 17 February 2000) were the provisions of the Corporations Law as amended from time to time up to 14 September 1999, in particular by the Corporate Law Reform Act 1992 (Cth). There were no relevant operative amendments between 14 September 1999 and 17 February 2000. For ease of reference, I will deal with the provisions in the present tense. Provisions dealing with insolvent trading are contained in "Chapter 5 - External Administration" in Part 5.7B thereof entitled "Recovering Property or Compensation for the Benefit of Creditors of Insolvent Company".

1084. In Division 1 of Part 5.7B there are set out certain presumptions to be made in recovery proceedings. A "recovery proceeding" is defined by s.588E(1)(e) to include "proceedings for a contravention of section 588G in relation to the incurring of a debt by the company". Section 588E(3) contains a presumption of insolvency which is, however, only available if a company is being wound up. Section 588E(4)(a) contains a presumption of insolvency where it is proved that the company had failed to keep financial records in relation to a period as required by s.286(1). That provision was relied upon in the present proceeding and I will briefly refer to it later.

1087. Division 3 of Part 5.7B is entitled "Director's duty to prevent insolvent trading" and the key section, s.588G, is headed "Director's duty to prevent insolvent trading by company". Section 588G(1) sets out the circumstances in which that section applies, namely (so far as relevant):

(a) A person is a director of a company at the time when a company incurs a debt (I note that each of the defendants was a director at all of the times when Water Wheel incurred the debts which are the subject of this proceeding);

(b) The company is insolvent at that time (there are issues in the proceeding both as to whether Water Wheel was insolvent and when, and if insolvent, whether particular debts were incurred at the time of insolvency);

(c) At each time when a debt was incurred during insolvency, there were reasonable grounds for suspecting that the company was insolvent (this is also an issue in the proceeding);

(d) Each relevant time was at or after the commencement of Part 5.7B (that is not an issue).

1093. Section 95A(1) of the Corporations Law provides that a "person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable" and, by s.95A(2), a "person who is not solvent is insolvent".

1096. Section 588G(2) obliquely states the director's duty by providing:

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

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

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

1103. The section does not explain what constitutes "failing to prevent the company from incurring the debt", but the terms of the various defences provide some guidance as to what is intended.

"(3) This section is a civil penalty provision as defined by section 1317DA, so Part 9.4B provides for civil and criminal consequences of contravening it, or of being involved in a contravention of it.

(4) The provisions of Division 4 of this Part are additional to, and do not derogate from, Part 9.4B as it applies in relation to a contravention of this section."

1111. Section 588H contains a number of defences which may be relied upon, if proved, by a director. Section 588H(2)[32] makes it a defence if a director proves that, at the time when the debt was incurred, the director had reasonable grounds to expect, and did expect, that the company was solvent at that time. Without limiting the generality of that defence, s.588H(3) makes it a defence if a director proves that at the time when the debt was incurred, the director had reasonable grounds to believe and did believe that a competent and reliable person was responsible for providing to the director adequate information about whether the company was insolvent and that that person was fulfilling that responsibility and the director expected on the basis of information provided by that person that the company was solvent at that time.

1114. Section 588H(4) provides for a further defence where a director proves that, at the time when the debt was incurred, the director did not take part in the management of the company because of illness or for some other good reason.

1117. Section 588H(5) throws particular light on the nature of the director's duty by making it a defence if it is proved that the director "took all reasonable steps to prevent the company from incurring the debt". It would seem to follow (subject to the precise language of each defence) that the essence of a failure by a director to prevent a company from incurring a debt is a failure by that director to take all reasonable steps within his power to prevent the company from incurring such debt. The effect of the provisions, shortly stated, is that if the requirements of s.588G(1) are proved in circumstances where either subsection (a) or subsection (b) of s.588G(2) is also proved, a director will be taken to have failed to prevent the company from incurring the debt unless it is proved that the director took all reasonable steps to prevent the company from incurring the debt (or one of the other specific defences is proved). I note also that s.1317JA contains provisions dealing with relief from liability for contravention of a civil penalty provision.

1120. Division 4 of Part 5.7B entitled "Director liable to compensate company" contains s.588J(1).[33] That section empowers the Court, where the Court is satisfied that the director has committed a contravention of s.588G, that the debt is wholly or party unsecured and the relevant creditor has suffered loss or damage in relation to the debt because of the company's insolvency, to make an order that the director pay to the company compensation equal to the amount of the loss or damage. A number of such orders are sought in this proceeding.[34]

1123. Section 588M empowers a liquidator to bring a proceeding against a director in relation to loss resulting from insolvent trading, but it is to Part 9.4B that one must turn for the origin of the present proceeding.

1126. Part 9.4B is entitled "Civil and Criminal Consequences of Contravening Civil Penalty Provisions". Section 1317DA lists the civil penalty provisions and includes s.588G. Division 2 of Part 9.4B headed "Civil penalty orders" contains a number of relevant sections.

1129. Section 1317EB(1)(a) provides that an application for a civil penalty order may be made by ASIC. Section 1317EA(1) provides that the section applies if the Court is satisfied that a person has contravened a civil penalty provision and s.1317EA(2) provides that (translated to the circumstances relevant here) the Court is to declare that a director has, by a specified act or omission, contravened s.588G in relation to a specified corporation. Section 1317EA(3) additionally empowers the Court to make against a director either or both of the following orders:

"(a) An order prohibiting the [director], for such period as is specified in the order, from managing a corporation;

(b) An order that the [director] pay to the Commonwealth a pecuniary penalty of an amount so specified that does not exceed 2,000 penalty units."

1134. Succeeding provisions qualify or explain the Court's powers.[35]

1137. Section 1317ED entitled "Application for civil penalty order is a civil proceeding" provides:

(1) In hearing and determining an application for a civil penalty order, the Court is to apply the rules of evidence and procedure that it applies in hearing and determining civil matters.

(2) Subsection (1) has effect subject to the rules.

1143. After the period during which the events concerned in the present proceeding had occurred, certain amendments to the Corporations Law which arose as a consequence of the Corporate Law Economic Reform Program Act 1999 (Cth) (the CLERP Act 1999) commenced operation from 13 March 2000. Section 3 of the CLERP Act 1999 amended the Corporations Law, so far as here relevant,[36] by repealing Part 9.4B of the Corporations Law and substituting a new Part 9.4B. Section 1473(1)(a) of the Corporations Law (as so amended) provides that Part 9.4B of the old Law[37] continues to apply in relation to a contravention of a civil penalty provision listed in s.1317DA of the old Law despite its repeal. As a consequence, I consider that the new Part 9.4B was not applicable to any contraventions of s.588G which were committed by a director during the period in question in this proceeding and the repealed Part 9.4B remained applicable to such contraventions at the time when this proceeding was commenced (27 November 2000). As s.1473(2) of the post 12 March 2000 Corporations Law makes clear, the new Part 9.4B only applies in relation to a contravention of a civil penalty provision listed in the new Law (by s.1317E). Section 1473(2) does not in my opinion have the construction, if the same section is listed as a civil penalty provision both in the old s.1317DA and the new s.1317E, that a pre 13 March 2000 contravention becomes subject to the new Part 9.4B. Accordingly, this proceeding was commenced by ASIC pursuant to s.1317EB(1)(a) of the old Part 9.4B of the Corporations Law (as it stood prior to 13 March 2000).

1146. From 15 July 2001, the Corporations Act 2001 (Cth) commenced operation and the former scheme of corporate regulation was repealed. What effect, if any, did that change have upon the current proceeding?

1149. Chapter 10 of the Corporations Act 2001 contains transitional provisions and Division 4 of Part 10.1 is concerned with court proceedings and orders. Section 1401 of the Corporations Act 2001 provides as follows:

"1401 Creation of equivalent rights and liabilities to those that existed before the commencement under repealed provisions of the old corporations legislation

(1) This section applies in relation to a right or liability (the "pre-commencement right or liability"), whether civil or criminal, that:

(a) was acquired, accrued or incurred under a provision of the old corporations legislation of a State or Territory in this jurisdiction that was no longer in force immediately before the commencement; and

(b) was in existence immediately before the commencement.

However, this section does not apply to a right or liability under an order made by a court before the commencement.

(2) For the purposes of subsections (3) and (4), the new corporations legislation is taken to include:

(a) the provision of the old corporations legislation (with such modifications (if any) as are necessary) under which the pre-commencement right or liability was acquired, accrued or incurred; and

(b) the other provisions of the old corporations legislation (with such modifications (if any) as are necessary) that applied in relation to the pre-commencement right or liability.

(3) On the commencement, the person acquires, accrues or incurs a right or liability (the "substituted right or liability" ), equivalent to the pre-commencement right or liability, under the provision taken to be included in the new corporations legislation by paragraph (2)(a) (as if that provision applied to the conduct or circumstances that gave rise to the pre-commencement right or liability).

Note: If a time limit applied in relation to the pre-commencement right or liability under the old corporations legislation, that same time limit (calculated from the same starting point) will apply under the new corporations legislation to the substituted right or liability -- see subsection 1402(3).

(4) A procedure, proceeding or remedy in respect of the substituted right or liability may be instituted after the commencement under the provisions taken to be included in the new corporations legislation by subsection (2) (as if those provisions applied to the conduct or circumstances that gave rise to the pre-commencement right or liability).

Note: For pre-commencement proceedings in respect of substituted rights and liabilities, see sections 1383 and 1384."

1164. In my opinion s.1401(1) applies to the situation which existed in this proceeding prior to the commencement of the Corporations Act 2001. The civil liability of the defendant directors (if any) for contraventions of s.588G of the Corporations Law (in the form applicable between 14 September 1999 and 17 February 2000) was incurred under provisions of "the old corporations legislation" of Victoria which were no longer in force immediately before the commencement of the Corporations Act 2001. It is true that s.588G of the Corporations Law was in existence at all times from its inception in 1992 until its repeal in 2001, but that section of itself created no civil liability. The civil consequences of a contravention of s.588G, so far as relevant to this proceeding, arose under Part 9.4B of the Corporations Law as it stood prior to 13 March 2000. Section 588G(3) expressly so provides. Section 588J(1) is also dependent upon the existence of an application for a civil penalty order under Part 9.4B. Thus any liability incurred by the defendant directors as a result of a contravention of s.588G stems from the provisions of the old Part 9.4B, in particular s.1317EB (dealing with who may apply for a civil penalty order) and s.1317EA(2) and (3) (dealing with the declarations and orders which may be made on such an application). It follows that the provisions essential to the existence of any liability of the defendant directors were repealed as a result of the CLERP Act 1999, and thus were "no longer in force immediately before the commencement" within the meaning of s.1401(1)(a) of the Corporations Act 2001. However, any liability incurred by the defendant directors was nevertheless "in existence immediately before the commencement" within the meaning of s.1401(1)(b) of the Corporations Act 2001 because that liability had been preserved by s.1473(1)(a) of the post 12 March 2000 Corporations Law. I conclude that any liability of the defendant directors in this proceeding for a contravention of s.588G of the Corporations Law as applicable at the relevant time is a "pre-commencement liability" dealt with by s.1401 of the Corporations Act 2001.[38]

1167. Consequently, pursuant to s.1401(3) of the Corporations Act 2001, on the commencement of the Act, any pre-commencement liability of the defendant directors became a "substituted liability" equivalent to the pre-commencement liability under provisions "taken to be included in the new corporations legislation"[39] by s.1401(2)(a) as if those provisions "applied to the conduct or circumstances that gave rise to the pre-commencement...liability". By virtue of s.1401(2), the new corporations legislation is taken to include the provisions of the old corporations legislation (with such modifications (if any) as are necessary) under which the pre-commencement liability was incurred, together with the other provisions of the old corporations legislation (with such modifications (if any) as are necessary) that applied in relation to the pre-commencement liability. In other words, for the purposes of this proceeding, the Corporations Act 2001 is taken to include the provisions of Parts 5.7B and 9.4B of the Corporations Law which were operative before 13 March 2000.

1170. Section 1384(1) of the Corporations Act 2001 applies to a proceeding started but not concluded in a court before the commencement of that Act, which proceeding was a "federal corporations proceeding that related to a matter to which a provision of the old corporations legislation of a State" applied. "Federal corporations proceeding" is defined by s.1382(1) to include a proceeding in which the Commonwealth was seeking an injunction or a declaration or to which the Commonwealth was a party. It would seem that this proceeding was a federal corporations proceeding as so defined because ASIC is the Commonwealth for this purpose. In ASIC v Edensor Nominees Pty Ltd (2001) 204 CLR 559 at 584, Gleeson CJ, Gaudron and Gummow JJ held[40] that the proceeding brought by ASIC in that case satisfied the limitations contained in s.39B(1A) of the Judiciary Act 1903 (Cth), that is, the proceeding was one in which the Commonwealth was seeking both an injunction and a declaration. There is no reason to think that "the Commonwealth" bears any different meaning in s.1382(1) of the Corporations Act 2001 (Cth). Accordingly, s.1384 of the Corporations Act 2001 applies to this proceeding, which continues in the same court and which, by s.1384(3)(b) relates, and as so continuing, is taken always to have related, to the substituted rights and liabilities created by s.1401.

1173. Alternatively, s.1383 of the Corporations Act 2001 (Cth) (which would apply if this proceeding were not a federal corporations proceeding) makes it clear that a proceeding instituted prior to the commencement of the Corporations Act 2001, under the old corporations legislation of a State, is to continue and be treated as a "new proceeding" equivalent to the "old proceeding" brought in the same court (exercising federal jurisdiction) and, so far as relevant here, relating to the substituted liability created by s.1401(3).

1176. The consequence of the foregoing provisions is that this proceeding (although in law a new federal proceeding under the new Act) continues, for all practical purposes, under the provisions by which any liability was initially incurred being those which also governed the proceeding when it was commenced.[41] That accords with the object of Part 10.1 of the Corporations Act 2001 as expressed in s.1370(1) thereof, namely:

"to provide for a smooth transition from the regime provided for in the old corporations legislation of the states...to the regime provided for in the new corporations legislation, so that individuals, bodies corporate and other bodies are, to the greatest extent possible, put in the same position immediately after the commencement as they would have been if:

(a) that old corporations legislation had from time to time when it was in force, been valid Commonwealth legislation applying throughout those states...; and

(b) the new corporations legislation (to the extent that it contains provisions that correspond to provisions of the old corporations legislation as in force immediately before the commencement) were a continuation of that old corporations legislation as so applying."

1183. The foregoing analysis expands upon but substantially accepts the submissions put on behalf of ASIC in this regard in a written submission dated 5 September 2002. I note that the written submission erroneously states that s.588G, as in force at the time of the alleged contraventions, was repealed by the CLERP Act 1999. However, despite submissions on behalf of the second defendant to the contrary, this error does not in my opinion affect the substance of the plaintiff's submissions. The second defendant advanced a different interpretation of the operation of s.1473 of the post 12 March 2000 Corporations Law. The argument put was that, because s.588G was not repealed and was listed in the new s.1317E (which replaced s.1317EB), s.1473(2) rather than s.1473(1) was applicable, and that the new Part 9.4B which commenced on 13 March 2000 applied to any contravention of s.588G which occurred prior to 13 March 2000. For the reasons which I have already given above, I am of the opinion that this argument is incorrect. In any event, the consequences which would flow from an acceptance of the second defendant's argument are very limited, because the applicable provisions have not changed very much. The second defendant referred to s.206C of the Corporations Act 2001, governing the Court's power, on an application by ASIC, to disqualify a person from managing corporations, and pointed to the changes from the previous legislation. Apart from that, I do not think that the second defendant was able to point to any other difference in the provisions which had any impact in this proceeding.

1187. It was common ground that in order for ASIC to be lawfully empowered to bring this proceeding, it had to be duly empowered by Commonwealth as well as State legislation but the second defendant submitted that ASIC was not so empowered.

1190. As to Commonwealth legislation, s.11 of the Australian Securities and Investments Commission Act 1989 (Cth) ("ASIC Act 1989"), which was in force at all relevant times prior to 15 July 2001, provided by sub-s.(1)(a) that ASIC had such functions and powers as were conferred on it by or under the Corporations Act 1989 (Cth) and further provided by sub-s.(7) that ASIC had "any functions and powers that are expressed to be conferred on it by a national scheme law of another jurisdiction".

1193. "National scheme law" was defined by s.5(1) of the ASIC Act 1989 as follows:

(i) the Corporations Act 1989;

(ii) the Corporations Law of the Capital Territory;

(b) a law of another jurisdiction that corresponds to an Act or Law referred to in paragraph (a)."

1202. Section 66(1) of the Corporations (Victoria) Act 1990 (Vic) provided that ASIC had the "functions and powers conferred or expressed to be conferred on it under a national scheme law of this jurisdiction". "National scheme law of this jurisdiction" was defined by s.3(1) to include the Corporations Law of Victoria.

1205. It seems to me that ASIC had clear authority to bring this proceeding under Commonwealth legislation (s.11(7) of the ASIC Act 1989) the requirements or terms of which were satisfied or met by a national scheme law, namely, the Corporations Law of Victoria (s.1317EB(1)).

1208. A further source of power provided by Commonwealth legislation is to be found by reference to s.47(1) of the Corporations Act 1989 (Cth) which enacted that regulations under s.73 might provide that prescribed authorities and officers of the Commonwealth have prescribed functions and powers that are expressed to be conferred on them by or under corresponding laws. "Corresponding law" was defined by s.38 of the Corporations Act 1989 (Cth) to include in effect any State Act corresponding to the Corporations Act 1989 (Cth) and also the Corporations Law of a State. Regulation 3(1)(h) of the Corporations (Commonwealth Authorities and Offices) Regulations 1990 (Cth) had the effect of granting ASIC, as a Commonwealth authority,[42] such functions and powers as were expressed to be conferred on it by a corresponding law, thus picking up s.66 of the Corporations (Victoria) Act 1990 (Vic) and s.1317EB(1) of the Corporations Law of Victoria.

1211. As to State legislation, s.1317EB(1)(a) of the pre 13 March 2000 Corporations Law of Victoria, as I have said, purportedly empowers ASIC to make an application for a civil penalty order. It was submitted on behalf of the second defendant that s.1317EB(1) (or its successor, s.1317J(1)) [43] did not confer a power upon ASIC but was "permissive only of use by ASIC of a power" which had to be expressly conferred on it by both State and Commonwealth legislatures, and that no such legislative provisions existed. I do not accept that submission. In my opinion, s.1317EB(1) does on its plain meaning confer power on ASIC to make an application for a civil penalty order. In any event, the existence of s.66(1) of the Corporations (Victoria) Act 1990 (Vic) is, I think, a complete answer to the second defendant's submission so far as the State is concerned. As far as the Commonwealth is concerned, I consider that s.11(7) of the ASIC Act 1989 does expressly confer such powers on ASIC as are expressed to be conferred on it by State law. Further, the existence of s.47(1) of the Corporations Act 1989 (Cth) and the regulation thereunder provides a further answer to the second defendant's submission.

1214. It is fair to say that greater emphasis was placed by Counsel for the second defendant upon what was said to be the unconstitutionality of the Commonwealth grant of power to ASIC than was placed upon the alleged non-existence of the grant of power by Commonwealth or State. Proceeding, then, upon the basis that both Commonwealth and State have given ASIC the power to institute this proceeding, I turn to the second defendant's arguments that the Commonwealth grant of power was unconstitutional.

1217. The second defendant, in summary, submitted that:

* Section 11(7) of the ASIC Act was not supported by any head of power other than s.122 of the Constitution. Act 110 of 1990 (Cth) relied on s.122 of the Constitution to underpin the ASIC Act - s.1(4) of the ASIC Act confirmed that it was a law for the government of a Territory; * Section 51(xxxvii) (referral of power by States) did not empower the Commonwealth to pass retrospective legislation; * Sections 5 & 6 of the Corporations (Administrative Actions) Act 2001 (Vic) ("CAA Act") were invalid; and * Section 47 of the Corporations Act 1989 was inapplicable because ASIC was not an authority of the Commonwealth.

1221. The essence of the principal argument raised by the second defendant was considered, and dismissed, in The Queen v Hughes (2000) 202 CLR 535 ("Hughes"). In Hughes, it was argued that the Corporations (Western Australia) Act 1990, together with s.47(1) of the Corporations Act 1989 (Cth) and Regulation 3(1)(d) of the Corporations (Commonwealth Authorities and Officers Regulations) 1990 (Cth), which was said to authorise the Commonwealth DPP to prosecute breaches of a State Corporations Law, were not supported by any head of constitutional power. Gleeson CJ, Gaudron, McHugh, Gummow, Hayne and Callinan JJ said as follows:[44]

"In addition to those functions specified in s 6(1), the functions of the DPP include "functions that are conferred" on the DPP "by or under any other law of the Commonwealth" (s 6(2)(a)). This invites attention to Div 3 (ss 46-48) of Pt 8 (ss 37-38) of the Corporations Act. Section 3(1) of the Act specifies the object of the statute as follows:

The object of this Act (other that Part 8) is to make a law for the government of the Australian Capital Territory in relation to corporations, securities, the futures industry and some other matters."

Division 3 of Pt 8 is headed "Performance of functions that corresponding laws of States confer on Commonwealth authorities and officers". From this heading, as well as from the reservation in respect of Pt 8 from the statement of object in s 3(1), it is apparent that Div 3 is not merely a law for the government of the Australian Capital Territory. No other head of power is specified. However, as Starke J observed seventy-five years ago (56):

"A law enacted by a Parliament with power to enact it, cannot be unlawful. The question is not one of intention but of power, from whatever source derived."

1229. And, also in Hughes[45], Kirby J said:

"In this case there is no express or implied prohibition in the Constitution against the conferral of such functions and powers by State law on the Commonwealth officer or authority concerned, as was held in Re Wakim to exist in respect of the purported federal consent to the conferral of State jurisdiction upon federal courts. On the contrary, it is established beyond argument that State functions and powers maybe conferred upon officers and authorities of the Executive Government of the Commonwealth. There are many such arrangements to which the Federal Parliament has consented. ... On its face, the Corporations Act, as it was amended following the decision in the Incorporation Case, rests for its constitutional validity on the legislative power conferred on the Federal Parliament to make laws for the Territories of the Commonwealth together with the express incidental power. The Corporations Act as it was first enacted relied upon a range of heads of federal constitutional powers (notably the corporations power in s.51(xx) of the Constitution). However, such express reliance was withdrawn when the "novel legislative device" was adopted of providing a federal "template" for the Australian Capital Territory, which could be picked up and applied as local law in every State of Australia and in the Northern Territory. Whilst the holding in the Incorporation Case stands, it would be impossible to justify a federal law (such as s.47 of the Corporations Act and reg 3(1)(d) of the Regulations) as valid in relation to the State of Western Australia based on no more than the operation of the Corporations Act in the Australian Capital Territory and matters incidental thereto. The absence of express reference in the Corporations Act to other relevant heads of federal legislative power is not fatal to its constitutional validity beyond the Capital Territory. What is in issue is the existence of constitutional authority for the impugned law as it operates in the particular case. It is not whether, as a matter of drafting of that law, the relevant federal head of power is that expressly nominated. The prosecution and the Commonwealth pointed to various additional sources of power which, they suggested, supported the law authorising the Commonwealth DPP in this case to perform the functions and exercise the powers conferred on it by the law of Western Australia. Amongst the sources of power mentioned were (1) the express incidental power, in aid of the execution of the Executive power of the Commonwealth; (2) the powers supporting the establishment of the office of the Commonwealth DPP and the express incidental power enlarging those functions in the context of a national co-operative scheme; (3) the implied legislative power to make provision for the acceptance of a State function and the power to give effect to such a scheme; (4) the corporations power; (5) the powers in relation to trade and commerce with other countries and amongst the States and external affairs; and (6) the implied nationhood power, being that which facilitates national co-operation and co-ordination of governmental activities in response to the "complexity ... of a modern national society."" [Footnotes omitted and emphasis added]

1233. I note also that in ASIC v Edensor Nominees Pty Ltd (2001) 204 CLR 560 ("ASIC v Edensor"), Gleeson CJ, Gaudron and Gummow JJ[46] appeared to accept, in passing, ASIC's contention, as recorded in footnote 98, the following:

"The effect of s 11(7) of the ASIC Act was that ASIC had any functions expressed to be conferred upon it by the Corporations Law (Vict), and thus by ss 737 and 739 of that legislation. ASIC submitted that, in its operation in the present litigation, s 11(7) was supported by s 51(i) and (xx) of the Constitution and that, in applying to the Federal Court, ASIC was embarked upon a matter "arising under" s 11(7); this then engaged par (c) of s 39B(1A) of the Judiciary Act."

1237. I consider that s.11(7) of the ASIC Act (1989) (Cth) is valid Commonwealth legislation which operates when and if a State confers functions and powers on ASIC.[47] I note that Mills and Holdings are trading or financial corporations formed within the limits of the Commonwealth and Mills was engaged in interstate and international trade.

1240. The heads of power which do support the validity of s.11(7) of the ASIC Act 1989 (Cth) in my view are:

* s.51(i) - the trade and commerce power;[48] * s.51(xx) - the corporations power;[49] * s.51(xvii) - the bankruptcy and insolvency power;[50] * s.51(xxxix) - the incidental power.[51]

[I note that other sources of power are also arguable.][52]

1245. It was submitted by ASIC that, in any event, all of the problems raised by the second defendant were resolved by ss.1370, 1372, 1384 and 1401 of the Corporations Act 2001 (Cth)[53] and ss.253, 255 and 268 of the ASIC Act 2001 (Cth), together with the provisions of the CAA Act. It is unnecessary to consider the correctness of that submission in detail. However I agree with, and would in any event follow, the decision of the Queensland Court of Appeal in Commonwealth Director of Public Prosecutions v Corbett [2002] QCA 340 which, it seems to me, resolves the questions of law raised by the second defendant adversely to him (and that, as I understood it, was recognised by Counsel for the second defendant).

1248. To the extent that there are some submissions on this topic by the second defendant which are not covered by the foregoing, I reject such submissions because no logical argument and no authority was advanced to support them.

1252. It was submitted on behalf of the second defendant that ASIC had to prove its case beyond a reasonable doubt. It was said, given that the Court was empowered to punish any contravention by imposing a pecuniary penalty (up to 2000 penalty units) on a director and by prohibiting the director from managing a corporation for a specified period, that the proceeding was "quasi-criminal" in nature. What was involved was a contravention of public law for which forms of punishment were provided and the fact that the word "offence" was not used did not detract from this submission.

1255. Counsel for the second defendant referred to a series of cases, many conflicting, concerning taxation and customs prosecutions, dealing with the questions, inter alia, as to whether such prosecutions were criminal or civil in nature (or perhaps hybrid) and as to what was the standard of proof.[54] These questions arose in those cases in a variety of contexts and sometimes different statutory provisions were involved. It is difficult to discern a principled consensus. A number of the cases are more concerned with whether the proceeding or prosecution was criminal in nature, without necessarily adverting to the question of standard of proof. There appears to be a direct clash as to the appropriate standard of proof in certain customs prosecutions between what was decided by the Court of Appeal of New South Wales in Wong v Kelly and the Court of Appeal of Queensland in Labrador Liquor.

1258. On the other hand, in Re HIH Insurance Limited; ASIC v Adler [2002] NSWSC 171; (2002) 41 ACSR 72 ("Adler"), a proceeding alleging contraventions of the Corporations Act and seeking declarations, compensatory relief, civil penalties and orders prohibiting persons from managing a corporation, Santow J said at 80 - 81:

"Though not therefore criminal proceedings it has been common ground that proceedings of this character invoke requirements for prosecutorial fairness and a standard of proof commensurate with the gravity of the allegations."

1262. In Adler, at 180, Santow J said that he was applying "the stricter Briginshaw standard (Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 362-3; 44 ALR 334), urged by the second defendant". It would seem that there was no submission in Adler that the criminal standard of proof applied.

1265. In ASIC v Whitlam [2002] NSWSC 591; (2002) 42 ACSR 407 ("Whitlam"), a civil penalty proceeding seeking declarations as to breaches of duties as a director and consequential orders as to pecuniary penalties and an order prohibiting a person from managing a corporation, Gzell J said at 442:

"The Evidence Act 1995 (Cth), s 140 prescribes the standard of proof in civil proceedings as the balance of probabilities and provides that the court may take into account in deciding whether it is so satisfied the nature of the cause of action or defence, the nature of the subject matter of the proceedings and the gravity of the matters alleged. This provision reflects the common law position. In Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336; at 361-2; [1938] HCA 34; [1938] ALR 334 the High Court discussed the quality of persuasion required for this purpose, when the law requires the proof of any fact the tribunal must feel an actual persuasion of its occurrence or existence before it can be found. In civil matters the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal:

"But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters "reasonable satisfaction" should not be produced by inexact proofs, indefinite testimony, or indirect inferences. Everyone must feel that, when, for instance, the issue is on which of two dates an admitted occurrence took place, a satisfactory conclusion may be reached on materials of a kind that would not satisfy any sound and prudent judgment if the question was whether some act had been done involving grave moral delinquency."

To similar effect is the statement of the majority of the High Court in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd [1992] HCA 66; (1992) 110 ALR 449; at 449-50."

1271. Although it does not appear in the judgment of Gzell J in Whitlam that it was argued that the criminal standard of proof applied, I was told by counsel for ASIC that in hearings on 1 and 2 July 2002, Gzell J raised in court and discussed with counsel whether the applicable standard of proof was affected by the decision in Labrador Liquor.

1274. In my opinion, the civil standard of proof applies in this proceeding. Part 9.4B of the applicable Corporations Law is headed "Civil and criminal consequences of contravening civil penalty provisions". The civil consequences of contravening civil penalty provisions are dealt with in Division 2, which is concerned with civil penalty orders and the criminal consequences of contravening civil penalty provisions are dealt with in Division 3, which is concerned with criminal proceedings. A clear distinction is made between proceedings for a civil penalty order and criminal proceedings. A contravention of a civil penalty provision is not an offence, except as provided by s.1317FA(1).[55] That section provides that a person is guilty of an offence if the person contravenes a civil penalty provision "knowingly, intentionally or recklessly; and ... either ... dishonestly and intending to gain ... an advantage ... or ... intending to deceive or defraud someone". Section 1317FB provides that criminal proceedings for an offence cannot be started if a person has already applied for a civil penalty order in relation to the same contravention, and Division 4 is concerned with the effect of any criminal proceedings once begun on any subsequent application for a civil penalty order.

1277. Further, sub-s.(1) of s.1317EA provides that that section applies "if the court is satisfied that person has contravened a civil penalty provision, whether or not the contravention also constitutes an offence because of s.1317FA".

1280. Section 1317ED(1) expressly provides that in hearing and determining an application for a civil penalty order, the court is not only to apply the rules of "procedure that it applies in hearing and determining civil matters" but also "the rules of evidence"[56] that it applies in hearing and determining civil matters.

1283. The orders which may be made under Division 2 are not only described as civil penalty orders, but in the main can be seen to be civil rather than criminal in nature. There is no language of "offences" or "conviction". In addition to a declaration as to any contravention the court is empowered to prohibit a person from managing a corporation. Such an order is protective of the public and also deterrent in nature, but not punitive.[57] An order that a person pay a pecuniary penalty has a punitive aspect but is principally a personal and general deterrent to prevent the corporate structure from being used in a manner contrary to commercial standards.[58] Orders for compensation are of course civil in nature.

1286. Considering the structure of the legislation, the language used, the nature of the orders which may be made and the specific legislative direction contained in s.1317ED(1), I have concluded that the civil standard of proof - the balance of probabilities - is applicable. I accept that the "stricter" Briginshaw approach should be adopted and I have adopted it throughout , but at the same time bearing in mind what was said in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd [1992] HCA 66; (1992) 110 ALR 449; at 449-50:

"The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities. That remains so even where the matter to be proved involves criminal conduct or fraud. On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary "where so serious a matter as fraud is to be found". Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct. As Dixon J commented in Briginshaw v Briginshaw at 362:

"The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved...""

1293. There was no debate between the parties about the relevant legal tests of insolvency. For that reason, it is unnecessary to indulge in a lengthy excursus upon that topic. It is convenient, however, to shortly refer to the well-accepted approach laid down in the authorities, before turning to the facts.

1296. Section 9 of the Corporations Law provided that "insolvent" has the meaning given by s.95A(2) of the Law which stated that a person who is not solvent is insolvent. In turn, s.95A(1) of the Law provided that a person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

1299. This is the so-called "cash flow test" of insolvency:

"The cash flow test provides that a company is insolvent when it is unable to pay its debts as they fall due. It is of no consequence, under this test, that assets exceed liabilities. The important point is: can the company pay its way in carrying on its business? The court, in examining whether a company is suffering cash flow insolvency, will consider whether the company is actually paying its debtors"[59]

1303. As Griffith CJ said in Bank of Australasia v Hall [1907] HCA 78; (1907) 4 CLR 1514 at 1528:

"It was suggested, but the argument was not pressed, that the debtor's affairs should be regarded from the point of view of a balance sheet of assets and liabilities. This is not what the Statute[60] says...The question is not whether the debtor would be able, if time were given to him, to pay his debts out of his assets, but whether he is presently able to do so with moneys actually available. The most favourable construction that can be put on the words "his own moneys" is that they include any moneys of which the debtor can obtain immediate command by sale or pledge of his assets."

1307. In Re Tweed Garages Ltd [1962] Ch 406, 410, Plowman J quoted with approval from Buckley on the Companies Acts in which the following was said:

"The particular indications of insolvency...are all instances of commercial insolvency, that is, of the company being unable to meet current demands upon it . In such a case it is useless to say that if its assets are realized there will be ample to pay 20 shillings in the pound: this is not the test. A company may be at the same time insolvent and wealthy. It may have wealth locked up in investments not presently realisable; but although this be so, yet if it have not assets available to meet its current liabilities it is commercially insolvent..."

1311. In Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210 Barwick CJ, in considering whether a trader was able to pay its debts as and when they fell due, said (at 218):

"It is quite true that a trader, to remain solvent, does not need to have ready cash by him to cover his commitments as they fall due for payment, and that in determining whether he can pay his debts as they become due regard must be had to his realizable assets. The extent to which their existence will prevent a conclusion of insolvency will depend on a number of surrounding circumstances, one of which must be the nature of the assets and in the case of a trader, the nature of his business."

1315. In Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 the High Court (in considering the meaning of insolvency under s.95 of the Bankruptcy Act) observed that it was important not to confuse insolvency with a temporary lack of liquidity and said (per Barwick CJ at 670-671):

"Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor`s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due."

1319. Counsel for ASIC made reference to many other reported decisions but it is unnecessary to detail all of them.[61]

1322. In Lee Kong v Pilkington (Aust) Ltd (1997) 25 ACSR 103, a decision of the Full Court of the Supreme Court of Western Australia, Owen J (at 112) said:

"...as Carruthers J pointed out in Pioneer Concrete Pty Ltd v Ellston (1985) 10 ACLR 289, whether or not a "debt" is "due" is to be determined with reference to the legally binding agreement between the parties. Any reluctance by creditors to enforce legal rights was not relevant to the approach under the relevant section. This statement was followed in Re Toowong Trading Pty Ltd (in liq) (1988) 13 ACLR 121. In Standard Chartered Bank of Australia Ltd v Antico (Nos. 1 & 2) [1995] NSWSC 31; (1995) 38 NSWLR 290...Hodgson J said at...331:

"I agree with the views of Carruthers J in Ellston that if a debt is legally due, the mere fact that a creditor refrains from taking enforcement action (whether by suing for the debt, seeking to bankrupt or wind up the debtor, or seeking to enforce any security) does not negative the debt being "due" for the purposes of the provision. If, as a matter of substance, the company is not able to pay its debts as they become due, the circumstance of the relevant creditors may give the company some time before they actually seek to enforce their remedies, and the company may well be able to pay them out given that time, will not negative application of the section."

The question is whether or not a particular debt has fallen "due". The commercial likelihood of the enforcement of the company's debts cannot override the issue of substance that is involved in the determination of that question."

1328. Further in Lee Kong v Pilkington (Aust.) Ltd Owen J said (at 120):

"A comparison of a corporation's current assets and current liabilities may provide a useful guide to the overall ability of the company to pay its debts. [Passage from Sandell v Porter omitted] The comparison between current assets and liabilities, either in absolute form, or as a working capital ratio, can reveal whether a company will have sufficient funds on hand to pay the debts that will soon fall due. But it will depend on the circumstances."

1332. In Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 39 ACSR 305, 316-7_,_ Palmer J summarised the relevant principles (at [54]) as follows:

"(i) whether or not a company is insolvent...is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole: Sandell v Porter; Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 and Powell v Fryer; (ii) in considering the company's financial position as a whole, the court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable: Sandell v Porter; Taylor v ANZ; Newark and Sheahan v Hertz; (iii) in assessing whether a company's position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency: Bank of Australasia v Hall [1907] HCA 78; (1907) 4 CLR 1514; at [1907] HCA 78; 1528; 14 ALR 51; Norfolk Plumbing at 615; Taylor v ANZ at 784; Guthrie v Radio Frequency Systems Pty Ltd [2000] WASC 152; (2000) 34 ACSR 572; at 575; (iv) the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand: Antico at 331; Hall, above; Melbase, above at 199; Carrier, above at 253; Cuthbertson & Richards Sawmills Pty Ltd v Thomas, above at 320; Lee Kong, above at 112; (v) in assessing solvency, the court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the court's satisfaction, that: * there has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment; or * there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or * there has been a well established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors' terms of trade or are payable only on demand: Newark at 260; Antico, above at 331; Melbase, above; Cuthbertson & Richards Sawmills Pty Ltd v Thomas, above; Powell v Fryer, above at 600; (vi) it is for the party asserting that a company's contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence: Powell v Fryer, Melbase, Cuthbertson & Richards Sawmills Pty Ltd v Thomas."

1336. In Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330, Young CJ in Eq said:

"[40] Solvency and insolvency are defined in s.95A of the Corporations Act as meaning a company which is unable to pay all its debts as and when they become due and payable. This, as Lindgren J pointed out in Melbase Corp Pty Ltd v Segenhoe Ltd [1995] FCA 1225; (1995) 17 ACSR 187, requires a cashflow test rather than a balance sheet test. Again, as His Honour said in that case, when one is applying the cash flow test, it is relevant to take into consideration the relationships between creditor and debtor, any agreement and the course of conduct. In Hamilton [v BHP Steel (JLA) Ltd (1995) ACLC 1548] I indicated that that course of conduct may mean that despite what is written on the invoices etc as to time for payment, industry practice or dealings between the parties demonstrate that everyone accepts that debtors will often not pay creditors within normal trading terms. In business circumstances sometimes it is quite necessary in an industry which is experiencing recession because otherwise creditors may not be able to sell their product at all. Even though they would prefer people to stick to their 30 day terms it is better to have recalcitrant debtors than sell no product at all. [41] What I said in Hamilton seems to have been developed into a much stronger statement by counsel in Emwest Products Pty Ltd v Olifent (1996) 22 ACSR 202, 209-210 and in Southern Cross [Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 39 ACSR 305] at 315. However, if what is said in Hamilton is properly examined, it will be seen that the proposition expounded is not only quite in accordance with authority, but is also good commercial and legal common sense."

1340. I note that the parties in this case did not debate whether there was any conflict between what was said by Owen J in Lee Kong v Pilkington (Aust.) Ltd and what was said by Young CJ in Eq in Manpac Industries Pty Ltd v Ceccattini concerning the principles applicable to situations where creditors were not insisting upon their strict rights as to payment. To the extent that the approach proposed by Young CJ in Eq is a more lenient one (which I doubt), I do not think that it affects the conclusions which I reach below.

1344. I am satisfied on the whole of the evidence and particularly for the reasons which follow that Water Wheel was insolvent within the meaning of the Corporations Law from 14 September 1999 onwards. It is unnecessary, having regard to ASIC's case, to decide whether Water Wheel was insolvent prior to that date, although it is quite possible that it was.

1347. The evidence shows that throughout 1999 Water Wheel was not in fact paying many of its debts, including some very large debts, as and when they fell due. For example, the sum of $571,452.73 due and payable to NSWGB on 30 November 1998 and invoiced in January 1999 was never paid and a substantial part of the sum of $719,659.80 invoiced by NSWGB on or about 25 February 1999 was never paid. Another example is the difficulty which Water Wheel experienced in paying RiceGrowers for some 9.412 tonnes of paddy rice purchased in January 1999 at a price of about $2.368M due and payable on 20 January 1999. RiceGrowers was obliged to retain a debt collector and to institute legal proceedings in order to recover the balance of $300,000 which was the subject of a final payment by Water Wheel of $150,000 on 3 May 1999. Another example is that AWB found it necessary to threaten legal proceedings and to require future orders to be made on a cash with order basis when a sum of $104,930.74 was overdue for payment for some months.[62]

By March and April 1999, many trade creditors were demanding immediate action on their overdue accounts. Nankervis was having discussions with Plymin on an almost daily basis about which of the creditors were to be paid, and as to the source of funds for such payments, and there was a threat to Water Wheel's electricity supply unless a large debt to Powercor was paid within two hours. The account with Powercor was consistently in debit and overdue for payment from July 1999 onwards. By April 1999, due to the continual pressure from creditors to pay accounts, Nankervis considered that Water Wheel needed "at least $2M to relieve the pressure from the cashflow point of view". Cheques in payment of creditors were being held in drawers until funds became available to honour the cheques. By 12 April 1999, management had informed the Board that Water Wheel required a further $1.2M in cash to bring existing creditors in line with agreed trading terms. Water Wheel failed to pay to Deloittes a total debt of $62,791.57 in relation to invoices dated from March to June 1999. In mid-July 1999, NSWGB faxed Plymin concerning overdue invoices totalling $1.7M, and Derrick & Son, after demanding payment of the sum of $579,388.40, decided to make no further deliveries to Water Wheel without payment of "cash upfront", and RiceGrowers determined that all future orders were to be paid prior to delivery. Again, the sum of $800,000 owing to NSWGB which was supposed to have been paid by instalments from February to July 1999 was and remained unpaid. Payroll tax liabilities from July 1999 onwards were never paid. In mid-August 1999, Water Wheel was being pressed for payment of a substantial sum due to Neil's Transport (in excess of $200,000, a sum which was later paid when a lien was exercised and only then by obtaining the funds in advance from a customer). Invoices dated 31 August 1999 for auditors' fees were never paid to HPW. A Water Wheel aged trial balance as at 31 August 1999 showed that 92% of creditors (some $4.3M odd) were due and payable 30 days or over. By early September 1999, Water Wheel owed Derrick & Son over $1M, of which $873,232 was overdue for payment by more than 30 days, and in respect of which Water Wheel negotiated an arrangement with Derrick & Son for payment by post-dated cheques over a six week period ending on 15 October, based on Water Wheel's expected cash receipts during that period and by early November 1999, Water Wheel was indebted to Derrick & Son in the total sum of $1,929,376.53 (of which $112,033.84 was three months old, $113,506.40 was two months old and $247,681.45 was one month old) and additional post-dated cheques were required by Derrick & Son in an amount of $701,768.53 to cover the full amount of the debt.

1352. From September 1999 onwards, there are numerous examples (to which I have referred in the course of the chronological summary of the facts) of unpaid creditors, many of whom were never paid. Many affidavits from creditors were filed in this proceeding, which I have not specifically mentioned, relating to the overdue payment or non-payment of debts. There are also about 140 overdue debts, ranging from very large to very small (although in many cases ultimately paid), which are not referred to specifically in these reasons, and which were the subject of constant reminders and demands from the relevant creditors, especially from September 1999 onwards. This is evidenced by many invoices, statements and letters exhibited to an affidavit of the administrator, Brooke. In addition, a large number of debts were incurred between 14 September 1999 and 17 February 2000 which were wholly or partly unpaid, and which are dealt with in Part IX of these reasons. The non-payment of these debts is strong evidence of insolvency throughout the relevant period.

1355. Of course, that a company was not in fact paying many of its debts as and when they fell due does not necessarily mean that it was unable to do so, but, in the case of Water Wheel, certain of the debts were very large, and the delay in their payment or, more particularly, their permanent non-payment is such as to justify the inference, even in the absence of other known circumstances, that Water Wheel was indeed at all relevant times unable to pay them. However, there are other known circumstances. The stockfeed business was losing money. The flour business was unprofitable due to increased costs of production. The rice business was not providing funds due to the unavailability of rice from New South Wales. As a result, Water Wheel was incurring large and continuing trading losses throughout 1999, and these losses were being financed by non-payment of certain large and many smaller creditors. Other sources of finance could not be located and none were obtained. For example, on 23 April 1999, Plymin sought additional $2.9M from the ANZ Bank, inter alia, to "bring existing trade creditors in line with agreed trading terms" - specifically, $1M represented the approximate amount of "outstanding creditors, over 90 days". This application for additional finance was unsuccessful.

1358. I think that the meeting which occurred on 14 September 1999 between the representatives of Water Wheel and of the ANZ Bank was an important event. On 16 August 1999, the Bank had already told Water Wheel that all facilities were now payable on demand (although the Bank would not presently be making such a demand), and that a separate designated wages account was to be set up. Then, at the meeting of 14 September 1999, the Bank advised Plymin that funds from the proposed sale of the flour business would be required for reduction of the Bank's debt. Furthermore, at the conclusion of the meeting, Atcheson told Plymin that Water Wheel's account had been transferred to GCM (Group Credit Management) because the Bank had decided to end its relationship with Water Wheel and that whilst no demand had been made, facilities were repayable on demand. From that date on, Water Wheel could not count on any proceeds from the sale of its assets being available to pay any creditors other than the Bank, nor could Water Wheel rely upon any prospect of obtaining long term finance, or for that matter any additional short term finance, from the Bank to pay any of its current and overdue creditors.

1361. Humphris, an accountant called as an expert on behalf of Elliott, agreed that a checklist of matters put to him as being indicators of insolvency, was a fairly extensive list, albeit in general terms, and brought to mind very common features in insolvency situations. The list may be paraphrased as follows:

"1. Continuing losses. 2. Liquidity ratios below 1. 3. Overdue Commonwealth and State taxes. 4. Poor relationship with present Bank, including inability to borrow further funds. 5. No access to alternative finance. 6. Inability to raise further equity capital. 7. Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply. 8. Creditors unpaid outside trading terms. 9. Issuing of post-dated cheques. 10. Dishonoured cheques. 11. Special arrangements with selected creditors. 12. Solicitors' letters, summons[es], judgments or warrants issued against the company. 13. Payments to creditors of rounded sums which are not reconcilable to specific invoices. 14. Inability to produce timely and accurate financial information to display the company's trading performance and financial position, and make reliable forecasts."

1365. The evidence shows that most of these indicators were present in the case of Water Wheel, many of them well before September 1999. As far as liquidity ratios are concerned, Humphris said that the working capital ratio related current assets to current liabilities whereas the quick ratio excluded inventory from current assets, and bank overdraft from current liabilities. A ratio of less than 1 was an indication that a company would struggle to meet its short term commitments as and when they fell due. Treating the ANZ Bank's debt as a non-current liability, Humphris said that the working capital ratio of Water Wheel was 1.06 on 3 June 1999, 1.03 on 3 September 1999, and 0.89 on 29 October 1999 and that the corresponding quick ratios on those dates were 0.57, 0.78 and 0.76.

1368. Humphris said that the quick ratio of 0.57 as at 3 June 1999 was an indicator that the company was suffering significant liquidity problems. When asked whether this was a weasel word for the possibility of insolvency, he agreed that it could be extended to a possibility of insolvency at that time, and it could be a reason to suspect insolvency. He agreed that the significance of the ratios was that they demonstrated that the company was in a fairly serious financial position at the various dates.

1371. Humphris indicated that, treating the ANZ Bank's debt as a current liability, the working capital ratio of Water Wheel was about 0.73 on 3 September 1999, and about 0.59 on 29 October 1999.

1374. It is convenient at this point to refer to Humphris' evidence generally.

1380. Humphris said (as was not disputed) that the relevant date or period for considering insolvency was the same for Holdings and Mills given the closely intertwined manner in which both entities conducted their operations, in that Holdings was reliant upon Mills in generating cash flow so as to allow Holdings to discharge its liabilities and all of Holdings' assets and equity were directly invested in Mills.

1383. Humphris said that on sales revenue of $26.386M, Water Wheel incurred a loss of $879,000 for the year ended 3 December 1998. On increased sales revenue of $34.565M (31%) for the year ended 3 December 1999, Water Wheel incurred a substantially increased loss of $6.165M (falling by 601%). Water Wheel's working capital at 3 December 1998 was $1.212M but in 12 months became negative to the extent of $7.603M. This occurred as a result of substantial reductions of debtors and inventories at the same time as current liabilities increased. The losses accelerated in the latter half of 1999, there being a loss for September 1999 of $840,408, for October 1999 of $604,215 and from November to 3 December of $2.907M. I note that the large loss in November is probably explicable by an adjustment relating to earlier months (as was deposed to by Wilson).

1386. Unusually, trade creditors fell from $10.4M to $8.9M from June 1999 to December 1999. This was achieved by reductions of stock and of debtors.

1389. Humphris formed the view that the Bank's debt was not a current liability prior to 3 December 1999, and that Water Wheel had the support of the Bank until the appointment of the administrators. He thus overlooked the fact that after 14 September 1999 the Bank facilities were repayable on demand, and that the support of the Bank was limited in the sense that any proceeds of sales of the business would have been applied to the Bank's debt. Humphris relied on para 4.6 of AASB 1040 which in substance says that if a liability is payable on demand, it must be categorised as current unless the lender has agreed not to demand payment, and it is not probable that further breaches will occur. His reasoning was faulty because the Bank did not agree not to demand payment, but merely said that it had no present intention to do so. Nor was there was in my opinion any basis for a conclusion that it was not probable that further breaches of covenants with the Bank would not occur.

1392. Humphris said that even if the Bank loan liability was non-current, Water Wheel had a "significant liquidity problem" as at 3 December 1999.

1395. Humphris noted that despite the fall in creditors between June and December 1999, he was "advised" that Water Wheel was trading out of terms with major suppliers. Humphris had not been provided with an ageing of creditors at relevant dates, and therefore was not, in my opinion, in a good position to assess the question of solvency.

1398. Humphris also used loose language in his report: for example, he said that "the creditors of primary importance" to Water Wheel and "its ongoing ability to operate" were the ANZ Bank and NSWGB. But the question is not Water Wheel's ability to operate, but its ability to pay its debts as and when they fell due. A company may operate for some time and yet be insolvent. He also referred in the context of these two creditors to their "support". The support of the Bank was limited to not calling up the facility; the support of NSWGB was not constituted by any arrangement for non-payment of due debts, but simply NSWGB's laxity in enforcing collection. If a company is unable to pay a large debt to a particular creditor, it is not per se more solvent simply because that creditor is failing to demand or sue for the debt. In any event, Humphris' conclusion that NSWGB "supported" Water Wheel as a minimum up to the end of January 2000 was incorrect in my view having regard to the pressure applied by NSWBG from at latest November 1999 onwards. Humphris' statement that NSWGB's extreme tardiness in processing invoices contributed to slow payment is a generalisation contradicted by the facts that invoices for very large amounts went unpaid throughout 1999 and in fact were never paid. Humphris referred to the correspondence in late 1999 between Water Wheel and NSWGB as indicating an ongoing relationship and a clear intent between the parties to negotiate terms of a new arrangement. This is simply incorrect. The NSWGB was trying to obtain payment of its debt, and no satisfactory arrangement was agreed. This is not evidence of "support" and is certainly not evidence of solvency.

1401. Humphris also referred to creditors generally as not having initiated legal proceedings or served statutory demands, and said that correspondence from creditors did not necessarily amount to a withdrawal of support. But the question is not support or lack thereof, the question is whether Water Wheel was able to pay its debts as and when they were due and payable, and in the absence of agreed terms for extended payment, the mode in which creditors were pressing for payment is not particularly relevant to the overall assessment of the facts. I note that Humphris' consideration of the material exhibited to Brooke's affidavit appears to be superficial.

1404. In his report, after dealing with the separate question of the adequacy of Water Wheel's books, Humphris immediately jumped to his conclusion about insolvency and asserted that it was likely that Water Wheel was insolvent during November 1999. His report therefore, to the extent that it is of any value, supported a conclusion that Water Wheel was insolvent from some time in November 1999 until administrators were appointed.

1407. However, Humphris did not in his report appear to attempt seriously to consider the issues relating to whether there was insolvency prior to November 1999.

1410. He then moved to what he described as the "timing of the appointment of administrators". That is not as such one of the questions in the case. One of the factors he stressed in that regard was that the pressure from creditors, especially the major creditors "appears to have been at a manageable level and not threatening to the immediate solvency of Water Wheel". This confuses the question of solvency with the question whether pressure from overdue creditors has become unbearable in the sense that the company no longer has any alternative but to face reality. The two questions are different, and the question of whether pressure is manageable is not as such determinative of solvency. Humphris appeared to treat solvency as something like the capacity of a company to continue to trade notwithstanding that many debts are long overdue provided creditors were not pressing too much.

1413. Despite the undeniable expertise of Humphris, his report was in my view unimpressive, illogical and failed to scrutinise the real issues with any care. In his defence, it should be said that he was afforded a relatively short time to prepare his report and provided with less than full documentation.

1419. Humphris identified a paper which he had delivered entitled "Understanding why businesses underperform and sometimes fail". The "crisis path model" set out in that paper is as follows:

"1. Hidden Crisis - Optimism "no change necessary" - Self preservation - Creative accounting 2. Crisis Denial - Complacency/Arrogance - Signals ignored - Lack of control systems 3. Disintegration Begins - Some actions taken, but severity of crisis underestimated - Secrecy begins - Reliance on supporters of the prevailing wisdom (most able people leave) - Optimistic press reports/unrealistic forecasts/advertising campaigns 4. Organisational Collapse - Decreased commitment to organisational goals - Declining morale - Expectation of failure 5. STOP! (TOO LATE)"

1423. Without suggesting that the history of Water Wheel in 1998-2000 exactly follows this crisis path model or illustrates all of its features, there is in this model, I think, an uncanny resemblance to many features of Water Wheel's path to collapse.

1426. Humphris agreed, in effect, that because his assessment of insolvency related to a continuous period, he had selected a particular month rather than a particular date - it was somewhat subjective and dependent upon the material which he had available.

1429. Humphris acknowledged that, in his report, he had concentrated on events from 3 June 1999 onwards in assessing the solvency of Water Wheel, but he failed to give any satisfactory reason for doing so. He had not read the affidavit of Calvert-Jones concerning events in April 1999. When the Nankervis letter to the Board, concerning insolvency, was put to him, Humphris attempted to play down the letter by saying: "I am not sure whether he has actually taken into account the arrangements that management had made with certain creditors", but what arrangements he had in mind were not identified.

1432. A number of other matters were put to him, which he agreed were (in the period March to April 1999) highly visible signs of potential liquidity problems, which could "combine to become a problem with insolvency". Although aware of a considerable volume of creditors in excess of 120 days, he treated everything which had happened before 3 June as irrelevant, because "it had been addressed to the satisfaction of the auditors that the company was a going concern". He had not seen the application to the ANZ Bank for additional $2.9M finance which was refused, but he said "well, it would appear that without this finance they continued to trade". Humphris explained that his reference to continuing support by the Bank simply meant that the Bank had not withdrawn its existing facilities or attempted to call them up.

1435. Humphris said that if management persisted in maintaining that there were lost sales in order to explain a loss when that loss had been reported, and there was no evidence found to support the lost sales, "you would be seriously concerned as to whether management was on top of things", but he had not looked at this issue in any depth.

1438. Humphris agreed that the history of Water Wheel relating to payroll tax and group tax was in itself an indicator of insolvency. He was unaware of the deal reached with Neil's Transport to release the lien.

1441. Humphris said that, in his opinion, Water Wheel may well have been trading while insolvent as early as 1 November 1999. When it was put to him that they may have been trading while insolvent as of 22 October 1999 having regard to the contents of Plymin's memo to the directors of that date showing a $0.5M shortfall, Humphris said that he would have to see the cashflows and then referred to "arrangements that were in place". By his subsequent answers, he indicated a clear confusion between arrangements for extended payment being in place, and unsuccessful negotiations for the repayment of a debt already due and payable.

1444. In relation to the indicators of insolvency to which I have earlier referred, Humphris said that the following were present: continuing losses over a prolonged period of time, overdue Commonwealth and State taxes, inability to obtain further or other bank finance, inability to raise equity capital, placement of orders by suppliers on COD terms, issue of post-dated cheques some of which were dishonoured, legal proceedings and payments of rounded sums to creditors.

1447. Humphris was then asked about the setting up of the designated wages account under ss.560-561 of the Corporations Law. He agreed that the Bank was not advancing new funds, but simply dividing its existing overdraft facilities, in order that it might be able to stand in the shoes of employees to the extent that their wages were advanced from the designated account.[63]

1453. Maxsted, an experienced accountant and an expert in insolvency matters, was called on behalf of the plaintiff, and expressed the opinion that Water Wheel was insolvent as from 14 September 1999. He considered on the material supplied to him that there were many indicators of insolvency from much earlier dates, but that, as I understood it, the change in the attitude of the ANZ Bank made the date of 14 September 1999 of critical significance. Apart from analysing Water Wheel's ability to pay its debts on the basis of the material supplied to him (which constituted a substantial part, but not all, of the evidence before the Court), Maxsted also analysed the finances of Water Wheel from a balance sheet point of view, and looked at the deterioration of Water Wheel's working capital position. In Maxsted's written opinion which was produced in evidence, there were some misconceptions and errors, mostly of detail, but I consider that overall his opinion represents a reasonable analysis of Water Wheel's financial position and it is generally supportive of ASIC's case. However in the end, I do not find it necessary to rely on his opinion in reaching my conclusions concerning insolvency. I have reached those conclusions in the manner set out above on an application of the law to the particular facts in evidence which I have described in some detail.

(f) Submissions on behalf of the second defendant (Elliott) in relation to insolvency

1457. It was submitted on behalf of the second defendant that ASIC had failed to prove the insolvency of Water Wheel as at 14 September 1999. Apart from a general submission that ASIC had failed to make out its case, no specific or detailed attempt was made to argue that ASIC had failed to prove insolvency as at 3 October 1999 (the alternative date alleged) or at any later date.

1460. It was submitted that the Court should prefer the evidence of Daly and Humphris to that of Maxsted. The second defendant submitted that Daly, who was dealing with Water Wheel at the critical time, had not formed the view that Water Wheel was insolvent and that his unequivocal evidence was that he did not at any time prior to his appointment as administrator consider that Water Wheel was insolvent or needed to cease trading immediately. This submission is, in part, quite incorrect. Daly did not give any evidence that he had not at any relevant time considered that Water Wheel was insolvent or needed to cease trading. Indeed he was not questioned on this topic. Further, it is true that there is no expression of opinion about solvency in his written reports to the Bank but, given the purpose of those reports, I see no basis for making an assumption that Daly considered the question or considered it part of his role to do so. Nor is it apparent that management made available to Daly sufficient material to enable him to reach a view on the question of solvency, even had he wished to do so. I have already expressed my views in relation to the evidence of Humphris. Counsel for the second defendant did not embark upon any detailed analysis of the evidence in order to support a contention that Water Wheel remained solvent beyond the dates alleged by ASIC and did not attempt to contend either that Water Wheel remained solvent until shortly before administrators were appointed, or until any other date after the dates advanced by ASIC. I do not think that those representing the second defendant treated this aspect of the case as constituting an important line of defence.

(g) Submissions on behalf of the first defendant (Plymin) in relation to insolvency

1466. Plymin provided the Court with a document headed "Unsworn Statement" which constituted his written submissions. The submission makes a variety of factual points, most of them concerned with the question of grounds for suspecting insolvency. In relation to the question of insolvency itself, the main points made in the document appear to be that although the ANZ Bank had placed its facilities on demand, it had at no stage called them up or withdrawn its support, and that the major creditor of Water Wheel was NSWGB and that Water Wheel and NSWGB "continued to work to resolve all outstanding issues up and until the appointment of Administrators". The submission did not in my opinion advance any coherent analysis of, or response to, the evidentiary case for the existence of insolvency at the relevant dates. The submission made no attempt to grapple with the history of the continuing and substantial failure by Water Wheel to pay its debts as and when they fell due.

1470. ASIC presented an alternative case in relation to insolvency based upon the presumption of insolvency available under s.588E(4) of the Corporations Law where a company has failed to keep financial records as required by s.286(1) of the Law. Evidence, including expert evidence, was called seeking to show that Water Wheel failed to keep written financial records that correctly recorded and explained its financial position and enabled true and fair financial statements to be prepared and audited. Having regard to my findings as to actual insolvency, it is unnecessary to determine this question.

VII. THE DIRECTOR'S DUTY TO PREVENT INSOLVENT TRADING[64]

1474. Under earlier corporations legislation, it was a defence for a director to prove that a debt was incurred without the director's express or implied authority or consent but it was insufficient for this purpose to establish that the director was but one of a number of directors and had no power to prevent the debt from being incurred. If the director knew or suspected that a debt might be incurred, and took no step to prevent the incurring of the debt, at least by trying to prevent this (eg, by persuasion or by calling a meeting), the director would have failed to show that the debt was incurred without his authority or consent.[65] As was said by Ormiston J in Morley v Statewide Tobacco Services [1993] VicRp 32; [1993] 1 VR 423, 439:

"If a director were entitled to rest supinely and protest that he could not act without the concurrence of one or more of his colleagues when he knew that the company was in fact insolvent, then the section would have little practical purpose. It would be wrong if the word "authority" were so narrowly construed and the director was not in those circumstances obliged to take all steps practicable to prevent the company from trading while insolvent. The fact that often a single director may be unable to prevent the authorised person contracting a debt is irrelevant. If he is unable to persuade his fellow directors to withdraw that authority when the company is insolvent, he should seek to have the company wound up or resign. If each director took account of his obligations the company would soon cease trading."

1478. On the other hand, the provisions applicable in this proceeding do not provide for a defence that the debt was incurred without the director's authority or consent. Rather, it is an element of the contravention described in s.588G(2) that the director has failed to prevent the company from incurring the debt. The section is somewhat curiously worded in that the opening words are: "By failing to prevent the company from incurring the debt, the person contravenes this section if [etc]".

1481. In the context of the facts involved in the present proceeding, it is clear that the Board of Directors of Water Wheel, as a body, at all relevant times acquiesced in Water Wheel's continuing to trade and thereby acquiesced in the company continuing to incur all such debts as it would incur in the ordinary course of business. So it can readily be seen that the Board as a whole failed to prevent Water Wheel from incurring each debt which was incurred after the date of insolvency. What of an individual director? I do not think that the requirement that a director must have failed to prevent the company from incurring the debt means that it must be shown that the individual director had the power by himself to prevent either the incurring of each debt or, more realistically in the present context, to prevent Water Wheel's continuing to trade. By analogy with the previous Law and the reasoning referred to above, inactivity or the failure to attempt to prevent the company from trading or incurring the debt will be sufficient to constitute a failure to prevent the company from incurring the debt within the meaning of s.588G(2). This analysis is in my view supported by the existence of the particular defences expressly provided for by s.588H(4) and (5). Section 588H(4) provides that it is a defence if it is proved that "because of illness or for some other good reason", the director did not take part at the relevant time in the management of the company. Section 588H(5) provides that it is a defence, if it is proved that the director "took all reasonable steps to prevent the company from incurring the debt". In that regard I note that s.588H(6) provides that the matters to which regard is to be had in determining whether the director took all reasonable steps are to include any action a director took with a view to appointing an administrator of the company, when that action was taken and the results of that action. This latter provision suggests what the legislature had in mind in relation to the kind of steps which an individual director might take in any attempt to prevent a company from incurring a debt or debts. The constructional effect of providing for these defences is, it seems to me, that the legislation, read as a whole, treats a director, or at least an inactive or acquiescent director, as having failed to prevent the incurring of a debt unless the director satisfies the onus of proving one or more of the matters referred to in those sections. Put another way, the language in which these defences is couched depicts the obverse of a failure to prevent the company from incurring a debt.

1484. In James v Andrews [2001] NSWSC 1149; (2001) 166 FLR 11 a company registered and in liquidation in New South Wales and its liquidator were seeking compensation from a director of the company in relation to failing to prevent the company from incurring debts in New South Wales while insolvent. The director was at all relevant times a citizen of and resident in New Zealand. Issues of jurisdiction, nexus and the like arose before Young CJ in Eq on appeal from a master's order granting leave to proceed against the director. In the course of his judgment, Young CJ in Eq said at 13 - 15:

"The question that one must address when considering whether there was a contravention of s 588G(2) is, assuming that the actions set out in the statement of claim assert a failing to prevent a company from incurring a debt, where did that failure take place in the case of a director, who we will assume for present purposes, never left New Zealand. It seems to me that before addressing that question one must look to see what the words "failing to prevent" comprehend. The word "failure" is a word which can have various shades of meaning. Jordan CJ dealt with the question in Ingram v Ingram (1938) 38 SR (NSW) 407 at 410, which was summarised by Mahoney JA in CBS Productions Pty Ltd v O'Neill (1985) 1 NSWLR 601 at 616, as in many cases requiring, in circumstances such as the present, what Mahoney JA described as "volitional delinquency", that is, one must look to see some delinquency occurring in the will of the propositus, where there has been an omission to comply with an obligation. Then one must look at the word "prevent". One finds in the legal dictionaries all sorts of shades of meaning for the word, but it must never be forgotten that it is derived from the word "prevenio", which means "I go before" or "proceed" and the basic concept in the word is that someone intervenes to control a state of affairs, usually these days by stopping it. So the general flavour of s 588G(2) is that someone has an obligation to deal with the company's affairs in such a way to stop it incurring a debt, and that that person is guilty of volitional delinquency in and about that obligation. The question then is where does that volitional delinquency take place, where the propositus is at all stages physically in New Zealand? ... In this day and age, it is not usually a requirement that a person be physically present when a tort or crime is committed: see, for example, Re Al Fawwaz [2001] 1 WLR 1234; [2001] 4 All ER 149. One can have a tort or crime committed in cases where there is absolutely no activity at all on the part of the defendant, such as the situation discussed in the Victorian Full Court in Foster v Aloni [1951] VicLawRp 69; [1951] VLR 481, where the defendant was asleep and so did not switch his lights off at 9pm as the regulations required. It would have been no different if, instead of being asleep, the defendant had been in Queensland or New Zealand or otherwise. The matter still would have been occurred in Victoria against the Victorian regulations. Where a New South Wales statute creates an obligation on a company director, then that obligation attaches to the company director wherever that company director may physically be. He is bound to discharge obligations and the mere fact that he is outside the jurisdiction is no answer. It is always difficult to deal with omissions, but when one casts the omission in terms of some sort of positive delinquency, as I have done, one looks to see the duty, looks to see what did not happen, and then asks where did it not happen, which is, of course, an Alice in Wonderland type question, but it has to be addressed and that then focuses on what possibly can happen to fulfil the obligation. Mr Blake says that really the second defendant was not in a position to do anything. He was not a shareholder, he was only one of two directors. For most of the period he was not the managing director. He could have called a meeting, but he probably would have been voted out of office anyhow. However, this is really to take too narrow a view of the possible acts that the second defendant could have done. Again, what might be done may only become exposed at the trial, but certainly some of the acts that the second defendant could have taken were acts that could only have been done in New South Wales, or perhaps in Australia, in view of the extended jurisdiction given in the unique cross-vesting scheme in the Corporations Law, that is, applying to the New South Wales court for provisional liquidation, as well as making attempts to take commercial steps in New South Wales in order to bring any co-director or shareholder, who was not complying with the law, to book. Failure to do acts, which could have been done in New South Wales, seems to me to make the delinquency occur in New South Wales. It may well be that some of the failure occurred in New Zealand, and some in New South Wales, but it would seem to me that that is sufficient to give this Court jurisdiction. Accordingly, in my view, the learned acting master was correct in giving leave to proceed." [emphasis added]

1488. In the present case, neither Plymin nor Elliott took any steps to prevent Water Wheel's continuing to trade during the relevant period and that is sufficient to demonstrate, and I am satisfied, that each of them failed to prevent Water Wheel from incurring each of the relevant debts within the meaning of s.588G(2).

VIII. AWARENESS OF REASONABLE GROUNDS FOR SUSPECTING INSOLVENCY

1493. In order to satisfy the requirements of s.588G(1) of the Law, it is necessary for the plaintiff, in addition to showing that Water Wheel was insolvent as at 14 September 1999 and thereafter ("the relevant period"), to prove that at each time a debt was incurred during the relevant period, there were reasonable grounds for suspecting such insolvency. In effect, the plaintiff has to prove that throughout the relevant period there were reasonable grounds for suspecting such insolvency. "Reasonable" in this context imports the standard of reasonableness appropriate to a director of reasonable competence and diligence, seeking properly to perform his duties as imposed by law (when viewed as a whole) and capable of reaching a reasonably informed opinion as to a company's financial capacity.[66] In other words, facts and matters must be shown to exist which would give grounds for a director acting in accordance with that standard to suspect insolvency. I am content to make the assumption that it is correct, as submitted on behalf of the second defendant, that the appropriate standard is that of a reasonably competent and diligent non-executive director and I proceed on that basis.

1496. I was referred by counsel for the second defendant to a series of cases relating, to a greater or lesser extent, to the duty of non-executive directors.[67] As I understood it, the passages cited or extracted were advanced in aid of the proper understanding of the objective test of "reasonable grounds for suspecting". Attention was directed to the role of a non-executive director as being different from that of the managing director or chairman, and as involving duties of an intermittent nature to be performed at periodic Board meetings. Reference was made to the entitlement of a non-executive director to rely on management's judgment, information, advice and supply of financial information. Of course, as is well known, both common law and statute have placed an increasing onus on non-executive directors. A non-executive director is expected to take steps to put himself in a position to monitor the company and to exercise and form an independent judgment and to take "a diligent and intelligent interest in the information either available to him or which he might with fairness demand from the executives or other employees and agents of the company".[68] In particular I note the passages from three American decisions which were referred to with approval by the New South Wales Court of Appeal in Daniels v Anderson (1995) 37 NSWLR 438 (per Clarke and Sheller JJA at 502-504):

"Directors are charged with keeping abreast of the bank's business and exercising reasonable supervision and control over the activities of the bank...a director may not rely on the judgment of others, especially when there is notice of mismanagement. Certainly, when an investment poses an obvious risk, a director cannot rely blindly on the judgment of others." (Federal Deposit Insurance Corporation v Bierman [1993] USCA7 862; 2 F 3d 1424 (7th Cir, 1993), a decision of the United States Court of Appeal, 7th Circuit). "If nothing has come to the knowledge to awaken suspicion that something is going wrong, ordinary attention to the affairs of the institution is sufficient. If, upon the other hand, directors know, or by the exercise of ordinary case should have known, any facts which would awaken suspicion and put a prudent man on his guard, then a degree of care commensurate with the evil to be avoided is required and a want of that care makes them responsible. Directors cannot, in justice to those who deal with the bank, shut their eyes to what is going on around them." (Rankin v Cooper (1907) 149 F 1010 at 1013, cited in Federal Deposit Insurance Corporation v Bierman at 1433). "Directors are under a continuing obligation to keep informed about the activities of a corporation...Directors may not shut their eyes to corporate misconduct and then claim that because they did not see the misconduct, they did not have a duty to look. The sentinel asleep at his post contributes nothing to the enterprise he is charged to protect...A director is not an ornament, but an essential component of corporate governance. Consequently, a director cannot protect himself behind a paper shield bearing the motto "dummy director." (Francis v United Jersey Bank 1432 A 2d 814 (NJ, 1981) per Pollock J, giving the opinion of the Supreme Court of New Jersey) [Pollock J's opinion also refers to a general monitoring of corporate affairs and policies and maintenance of familiarity with the financial status of the corporation by a regular review of financial statements which may give rise to a duty to inquire further into matters revealed by those statements.]

1500. It was submitted on behalf of the second defendant that because ASIC did not allege that Elliott was in breach of his duties as a director, the Court must assume that he was not in breach. This submission is illogical and also not to the point. The question is whether there has been any contravention of s.588G. The relevance of a director's duty is that "reasonable grounds" imports the standard of care of a non-executive director acting with reasonable competence and diligence. It is then necessary to determine whether the particular director was aware of grounds for suspecting insolvency which were "reasonable grounds" in the light of that standard.

1503. It is unnecessary for the purposes of this proceeding to determine, as it were, at large or in abstract, all of the facts and matters which can be said to have existed during the relevant period and which gave rise to reasonable grounds for suspecting that Water Wheel was insolvent. It is sufficient to determine, pursuant to s.588G(2)(a), whether a particular director who is a defendant was aware at all times during the relevant period of specified facts and matters constituting or giving rise to reasonable grounds for suspecting the insolvency of Water Wheel. Section 588G(2)(a) does not require the plaintiff to establish that the particular director had an actual suspicion[69] that Water Wheel was insolvent, nor does it, in my opinion, require the plaintiff to prove that the director had an awareness that the specified facts and matters which were within his knowledge in fact constituted grounds, or reasonable grounds, for suspecting insolvency. Such a requirement would be no different in practice to a requirement that it be proved that the director had an actual suspicion of insolvency. What s.588G(2)(a) requires is proof of a subjective awareness by the director of grounds, whether or not the director had a "subjective suspicion" of insolvency, which grounds may be objectively characterised as reasonable grounds for suspecting such insolvency. If, on the other hand, it cannot be shown that the director was aware of such grounds, s.588G(2)(b) provides an alternative basis for the plaintiff to establish a contravention. That is to say, under that provision, if a reasonable person (in a like position to the particular director in a company in Water Wheel's circumstances) would be aware of the existence of reasonable grounds for suspecting insolvency, it does not matter that the particular director was not so aware. Section 588G(2)(b) would therefore typically deal with the case where the particular director was unaware of the facts and matters constituting reasonable grounds for suspecting insolvency because he had failed to ascertain them, but a reasonable person in a like position would or ought to have ascertained those facts and matters.[70] Some commentators have suggested[71] that sub-s.(a) of s.588G(2) is superfluous to prove a contravention given the alternative of sub-s.(b). That may be so, however proof under sub-s.(a) may affect the nature and quality of the contravention by the particular director, and therefore have consequential relevance in relation to that director.

1506. As far as "grounds for suspecting" is concerned, I would refer to and adopt what was said by Kitto J in Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1965) 115 CLR 266 at 303:

"A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to "a slight opinion, but without sufficient evidence", as Chambers's Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which "reason to suspect" expresses...is, I think, of something which in all the circumstances would create in the mind of a reasonable person...an actual apprehension or fear... - a mistrust of the payer's ability to pay his debts as they become due..." [72]

(b) Was the second defendant (Elliott) aware of reasonable grounds for suspecting insolvency?

1511. On the assumption that at all relevant times on and after 14 September 1999, Elliott failed to prevent Water Wheel from incurring relevant debts, the question arises under s.588G(2)(a) whether Elliott was aware at each of those times that there were reasonable grounds for suspecting that Water Wheel was insolvent.

1514. There were numerous facts and matters which Elliott knew and of which he learned prior to 14 September 1999 that in my opinion, when taken together, constituted or gave rise to reasonable grounds for suspecting the insolvency of Water Wheel as at 14 September 1999. It is unnecessary to determine whether those matters created reasonable grounds for suspecting insolvency prior to that date. His awareness of those matters of course continued and he subsequently learned of other matters from time to time such that, I am satisfied, he continued to be aware at all relevant times of reasonable grounds for suspecting Water Wheel's insolvency.

1517. I note that, as far as the evidence shows, Elliott's primary source concerning events affecting Water Wheel's financial position was the information provided to the directors at Board meetings by Plymin and, to a lesser extent, others who were invited to attend Board meetings.

1520. In February 1999, Elliott became aware that the auditors had concluded that Water Wheel had made a substantial loss for the year ended 3 December 1998 but that management considered that a loss had not been incurred and that the explanation lay in a failure to record a large number of flour sales - as a result, perhaps, of defects in Water Wheel's computer system. He was also aware that Deloittes had been engaged to investigate the matter. Elliott knew that the ASX had been informed of this investigation, pending which the Water Wheel accounts for the year ended 3 December 1998 had not been lodged.

1523. At the Board meeting of 12 March 1999, Elliott heard Nankervis speak of Water Wheel's tightening liquidity, the increased legal recourse suppliers were taking to recover debts and the difficulties being experienced in paying debts when they fell due, which, Nankervis said to the Board, raised concerns that Water Wheel might be insolvent. One or more of the directors (it does not appear who) said to Nankervis at the meeting that there was a "funding issue" to be dealt with and they were considering options to address it, ranging from a proposed equity injection, additional debt finance or selling parts of the business.

1526. By mid-March 1999, Elliott knew that the audited loss for the previous financial year was $879,000 and that the flour section of the business appeared to have generated that loss. Elliott knew that Brown of Deloittes was continuing to investigate whether there was some explanation (other than losses in the ordinary course of business).

1529. On 12 April 1999, Elliott learned that VicGrain was not prepared to provide off-balance sheet finance for purchases of paddy rice, and that Derrick & Son and NSWGB had advised that an expansion or even an extension beyond 30 June 1999 of existing off-balance sheet finance for rice and wheat purchases respectively was unlikely. Elliott learned that (according to Mark Gross) Water Wheel needed approximately $5.7M in working capital (and further funds for planned capital expenditure). Specifically, Elliott learned that, according to Mark Gross, Water Wheel required $1.2M "to bring existing creditors in line with agreed trading terms" and that management agreed with this assessment. Thus, by 12 April 1999, Elliott knew that Water Wheel had not paid creditors to the value of $1.2M as and when their debts had fallen due. He was from this time on notice that Water Wheel had a serious liquidity problem and that some means had to be found for raising substantial money for additional working capital, either through outside finance or within the business. As to outside finance, Elliott learned of the status of both the rice and wheat off-balance sheet funding and thus would have been aware of the substantial amounts overdue for payment, inter alia, to NSWGB. Elliott also heard that Plymin had so far been unable to find a financier who was willing to replace the existing off-balance sheet providers of finance. As to raising money within the business, he was aware that probably the only way that Water Wheel could make substantial additional profitable sales was if it obtained greater rice supplies from RiceGrowers.

1532. At the 12 April 1999 Board meeting, Elliott also heard Calvert-Jones ask whether Water Wheel was solvent and express concern that the directors had not seen any current results for the first three months of 1999. Furthermore, Elliott heard from Nankervis that Water Wheel could not meet creditors on reasonably accepted credit terms, that nine legal demands from creditors had been received in the past few weeks, and that Water Wheel needed $2M to keep the business going. Elliott further learned that Water Wheel was three months behind in meeting its superannuation obligations to its employees. Elliott heard Nankervis refer to the question of assessing whether Water Wheel was solvent.

1535. Elliott learned of Calvert-Jones' resignation as a director a mere two days after the 12 April Board meeting.

1538. On 20 April 1999, Elliott learned that Deloittes had been unable to discover any evidence of unrecorded sales, and notwithstanding that this possibility had not been definitively excluded, it was thereby reasonably apparent that it was probable that the large loss for the previous financial year had been incurred in the ordinary course of business. At the Board meeting on 20 April 1999, Elliott further learned that the results for the first three months of the new financial year indicated losses in the order of $0.5M per month. Notwithstanding Elliott's evidence that he thought that the same problem of unrecorded sales might have explained these further losses, I am satisfied that Elliott must have been aware by this stage that Water Wheel was in financial difficulty. This must have been apparent in circumstances where the directors were addressed by Mr Wallace-Smith of Deloittes on the general concept of solvency and the operation of the voluntary administration provisions of the Corporations Law. In late April 1999, Elliott learned from a memorandum by Plymin to the ANZ Bank that Water Wheel had outstanding creditors, over 90 days, of approximately $1M and he also learned that Water Wheel had sought (but not so far obtained) $2.9M from the ANZ Bank to replace the rice off-balance sheet funding. Whether or not Elliott was aware of the precise amounts of all of the off-balance sheet funding, he was aware that Water Wheel needed to find replacement finance for substantial amounts which were overdue and had not yet done so.

1541. In early May 1999, Elliott became aware of a statement by Harrison to the ASX referring to accounting discrepancies and computer problems causing the difference between a profit and a loss for the previous financial year. Even if Elliott believed as a result of statements from management that these matters remained a possible explanation, he was aware that Brown of Deloittes had found no evidence to support this explanation, and must have known that Harrison's statement was misleading.

1544. In early June 1999, Elliott learned that the ANZ Bank had appointed PWC (Daly) as an investigating accountant, thereby demonstrating that Water Wheel's relationship with its banker was at a potentially critical point. I would infer from Elliott's answers in evidence when questioned about the appointment of the investigating accountant that "alarm bells" did ring for him about the financial position of Water Wheel.

1547. By early July 1999, I am satisfied that Elliott was aware that Water Wheel had incurred a loss to April 1999 of nearly $1.5M and that if costs of production and overheads continued at the same level, there was a potential for a very substantial loss for the year.

1550. By mid-July 1999, Elliott was aware of the ANZ Bank's serious concerns as to Water Wheel's significant trading losses and the safety of the Bank's exposure, and of the Bank's view that there had been a material adverse change in Water Wheel's financial position, a view which, in evidence, Elliott described as "obvious". At about this time, the Board decided to sell both the flour and the stockfeed business, a decision which demonstrates, in all the circumstances, the awareness of all members of the Board of Water Wheel's critical financial situation. Elliott knew that both businesses were unprofitable.

1553. By mid-August 1999, Elliott knew that Water Wheel had made a loss for the half year to 3 June 1999 of $2.135M, that creditors (current liabilities) were $10.4M, that the ANZ Bank debt was $5.7M and that current assets were $12.3M. On 17 August 1999, Elliott learned that the ANZ Bank considered that Water Wheel was in default of all of its facility arrangements and had placed them on demand, ie, at call, a matter which, on Elliott's own evidence, "certainly does sound alarm bells". I am satisfied that it did ring alarm bells with Elliott in relation to Water Wheel's financial position.

1556. On 7 September 1999, Elliott was present at a meeting with representatives of the ANZ Bank and I am satisfied that he was aware both from the fact and content of the meeting that the Bank was concerned about Water Wheel's ongoing losses and also the Bank's security position, having regard to the reduction in the value of stock held by Water Wheel. Elliott endeavoured to placate the Bank representatives by putting forward some reasons why Water Wheel was using up its working capital and by expressing optimism concerning deregulation of the New South Wales rice industry, and also the likely sale of the flour mill and related customer base. Shortly prior to 16 September 1999, Elliott learned that Water Wheel had realised a small profit for June and a loss for July. I am unable to accept his evidence that he believed, as a result, that there had been "a substantial turn-around". On the contrary, I am satisfied that it was apparent to Elliott, and would have been apparent to any director of reasonable competence, that Water Wheel was in a state of continuing financial crisis and no solution was in sight.

1559. I am satisfied that all of the matters to which I have referred of which Elliott was aware by about 7 September 1999, when taken together, constituted reasonable grounds for suspecting that Water Wheel was insolvent. I include in those matters the unexplained resignations of Calvert-Jones and John Gross which, in all the other circumstances, would in my view add to the concerns as to Water Wheel's financial position which would be held by any director of reasonable competence. I am satisfied that the grounds of which Elliott was aware were such as would cause a director of reasonable competence and diligence to have an actual apprehension or fear concerning, or a mistrust of, Water Wheel's ability to pay all of its debts as and when they became due and payable. I do not positively find, because the legislation does not require a finding, that Elliott suspected that Water Wheel was by this time insolvent, but I am satisfied that he was aware of reasonable grounds for so suspecting. From this date onwards, Elliott remained aware of reasonable grounds for suspecting the insolvency of Water Wheel, which grounds grew in strength in September 1999 and in succeeding months.

1562. On 20 September 1999, Elliott learned, that by letter dated 16 September 1999, ASIC had written to the Water Wheel Board expressing its concern about the solvency of Water Wheel. In response to that information, Elliott received a brief memorandum from Plymin relating to Water Wheel's current assets and liabilities and an oral assurance from Plymin that Water Wheel's creditors were "all under control". However I cannot accept that Elliott took this assurance at face value because he was aware that nothing significant had occurred since April 1999 to put Water Wheel in a position either to pay its outstanding and overdue creditors or to repay or replace its overdue off-balance sheet financing. Elliott was aware and had present to his mind the position relating to the off-balance sheet funding, because he stressed in his evidence that it was clear to him at the time that NSWGB was not "calling up" its loan. He had known for months that the off-balance sheet finance from NSWGB was due for payment and that replacement finance had not been found.

1565. Later in September 1999, Elliott became aware of Water Wheel's operating loss for the quarter ending 3 September 1999. He further became aware that Water Wheel had reclassified the ANZ Bank debt as a current liability.

1568. On or about 22 October 1999 Elliott became aware that ASIC had expressed further concern as to Water Wheel's solvency. On or about the same date, Elliott received a memorandum from Plymin containing a variety of financial information which would cause a director of reasonable competence and diligence considerable relevant concern, including the fact that most suppliers to Water Wheel were requiring cash with order.

1571. On 25 October 1999, Elliott was present at a Board meeting which resolved that "to prove solvency a more detailed cash forecast would be required". In my opinion, this resolution shows that the directors were not satisfied that they had sufficient material to hand to prove the solvency of Water Wheel. I regard this as further reinforcing the proof of the existence of reasonable grounds for suspecting insolvency of which Elliott was aware. Elliott was aware from information received in April and May 1999[73]

that substantial amounts were overdue to creditors and there is no evidence that Elliott learned of anything which had occurred since that time to bring creditors back into line.

1576. By the end of October 1999 and the beginning of November 1999, Elliott was aware, on his own evidence, that Water Wheel was in a "tight financial position" and had "tight liquidity". In November 1999, Elliott's participation in the meetings with representatives of NSWGB gave rise to further reasonable grounds for suspecting insolvency. Elliott knew that the NSWGB debt well exceeded $1.2M and that Water Wheel could not substantially reduce that debt (unless a proposed "letter of credit" arrangement could be brought to fruition). It is unnecessary to specifically refer to any other matters from November 1999 onwards, because nothing happened to negative the existing reasonable grounds for suspecting insolvency of which Elliott was, in my opinion, aware, and the known position only got worse.

1579. Having regard to the foregoing conclusions, it is unnecessary to detail the particulars of ASIC's alternative submission, which I accept, that the requirements of s.588G(2)(b) have also been satisfied in relation to Elliott. However, I specifically accept ASIC's contention that the reasonable person envisaged by s.588G(2)(b) would have obtained from management on a regular basis a list of debtors and creditors by age and amount (including off-balance sheet finance), regular profit and loss and cashflow statements and reports on negotiations (if any) with creditors whose debts were outside trading terms and that the information thereby obtained would have made such a director aware of reasonable grounds for suspecting insolvency at the relevant times (to the extent that such director was not already aware of such grounds).

(c) Was the first defendant (Plymin) aware of reasonable grounds for suspecting insolvency?

1583. It is clear that Plymin was aware of all of the matters of which Elliott was aware, and it is therefore unnecessary to repeat them. It is obvious that Plymin, as Managing Director, was also aware of numerous other matters and of considerable more detail than Elliott. Indeed I am satisfied on the whole of the evidence that Plymin had at all times a good knowledge of the status of Water Wheel's major creditors and of many of its smaller creditors. Plymin performed the role of Financial Controller from 16 May 1999, when Nankervis left, until 9 August 1999, when Wilson commenced employment as Group Financial Controller. During that period he was directly and personally involved in monitoring the financial performance of Water Wheel. After that date Plymin worked closely with Wilson and they had regular discussions about Water Wheel's liquidity and financial position. Plymin must have known throughout that the sum of $571,452.73 invoiced by NSWGB to Water Wheel in January 1999 had not been paid. Given that I am satisfied that Elliott knew of facts and matters giving rise to an awareness in the relevant period of reasonable grounds for suspecting the insolvency of Water Wheel, I am likewise satisfied that Plymin, having knowledge of the same facts and matters, was aware of reasonable grounds for suspecting such insolvency throughout the same period. It is therefore strictly unnecessary to refer to further matters within Plymin's knowledge. However, it is appropriate to mention some of the principal matters which, in my opinion, add strength to the conclusion which I have reached in any event: that ASIC has made out the requirements of s.588G(2)(a) in relation to Plymin for the whole of the relevant period. I also accept ASIC's submission that the requirements of s.588G(2)(b) have been satisfied in relation to Plymin.

1586. In February 1999, the auditors informed Plymin of the large loss suffered made by Water Wheel in the previous financial year, and informed him that it was the increased expenditure on overheads which was the major contribution to this loss. Despite Plymin's apparent belief to the contrary and the investigations by Deloittes to which I have referred, Plymin was never supplied with any evidence to contradict the substance of what he was so informed by the auditors in February 1999.

1589. During March and April 1999, Plymin had discussions with Nankervis on an almost daily basis about which of the creditors of Water Wheel who were pressing for payment should be paid, and as to the source of funds for such payment. For this purpose and indicating the critical liquidity situation, Nankervis prepared at Plymin's request a daily summary of Water Wheel's cash position. I would infer that Plymin was well aware of the practice of holding cheques in drawers, representing debts treated in the Water Wheel accounting system as paid but for which there were no funds available, from bank overdraft or otherwise, to honour the cheques.

1592. On or shortly prior to 19 April 1999, Plymin received Nankervis' letter of resignation which stated that it appeared that Water Wheel was unable to meet its obligations when they fell due within normal trading terms "as indicated by a high and permanent proportion of creditors remaining in the 90-120 day trading terms". Nankervis said in his letter that the "circumstances portray a very bleak view of the long-term viability of the organisation and raise concerns of the company trading while [insolvent]". His letter also referred to continual telephone calls from irate suppliers, demanding that long-outstanding accounts be settled. At the Board meeting on 20 April 1999, Nankervis told those present, including Plymin, that Water Wheel was not able to pay its debts as and when they fell due, notwithstanding that debtors appeared to outweigh creditors, because the debtors were only 0-30 days old, whereas the creditors were up to 120 days old, and the difference in timing caused cash flow problems.

1595. On 23 April 1999, Plymin sought an additional $2.9M from the ANZ Bank, in part to meet "existing unsecured trade creditors of the company" and "to bring existing trade creditors in line with agreed trading terms" and that $1M represented the approximate amount of "outstanding creditors, over 90 days". Plymin knew at all times thereafter that that finance was never obtained.

1598. On 19 July 1999, Plymin received a fax from NSWGB relating to overdue invoices totalling some $1.37M, a substantial part of which dated back to January and February 1999. On 27 July 1999, Plymin received an e-mail from Traill advising that Incitec was threatening legal action in relation to a debt of $78,000 overdue for 90 days, in which e-mail Traill referred to "our appalling payment history with Incitec".

1601. On 5 August 1999, Plymin was aware that Water Wheel needed approximately $2M for working capital and that not only was the ANZ Bank not prepared to extend its existing facilities, but was likely to require reductions in its facilities should any asset sales be effected by Water Wheel. On 13 August 1999, the auditors told Harrison and Plymin that Water Wheel's large loss for the half-year to 3 June 1999 was being funded by trade creditors, whereupon Harrison said in Plymin's presence that it might be appropriate for an administrator to be appointed. On or about the same date, Plymin met with Neil of Neil's Transport in relation to overdue debts and, without admitting the whole of the sum claimed by Neil's Transport ($600,000), acknowledged that Water Wheel owed Neil's Transport a substantial sum. On 16 August 1999, Plymin received a letter from the ANZ Bank placing its facilities on demand. On 20 August 1999, Traill advised Plymin of debts overdue for payment to Derrick & Son of about $166,000, including some amounts going back to early June and early July 1999.

1604. As I have previously outlined, in early September 1999, Derrick & Son was requiring that its outstanding account with Water Wheel be brought "into order". An amount of $1,070,814 was due (of which $873,232 was overdue for payment by more than 30 days). On or about 7 September 1999, Derrick & Son negotiated an arrangement which involved the receipt by it of post-dated cheques totalling $873,232 which could be presented by Derrick & Son over a 6 week period from 19 September to 15 October, based on Water Wheel's expected cash receipts. It is apparent from what appears later that Plymin was probably aware of this arrangement.

1607. On 14 September 1999, in a meeting with representatives of the ANZ Bank, Plymin was advised that any funds from the sale of the flour business would be required for reduction of the Bank's debt and that the Bank had decided to end its relationship with Water Wheel.

1610. On 1 October 1999, Water Wheel asked Derrick & Son to defer presentation of three of the post-dated cheques which had been arranged on 7 September 1999. The evidence was that either Plymin or Wilson told Derrick & Son that Water Wheel did not presently have enough available funds to honour payment of the cheques on the days agreed. Even if Plymin did not himself speak to Derrick & Son, I would infer that he was aware of the relevant circumstances, and also knew that at that time Water Wheel owed Derrick & Son about $723,000 "out of terms".

1613. In early October 1999, Water Wheel (Tristate) was evicted from its offices in Echuca as a result of being in arrears of rent. Plymin was informed and gave instructions for the removal of all fittings and records which were relocated to "sparse and primitive" premises.

1616. On 12 (or 13) October 1999, Jeffries of NSWGB told Plymin of NSWGB's concern about Water Wheel's outstanding debt, and a need to have it brought back within terms. Plymin told Jeffries that Water Wheel was looking for a way to settle the debt, and further made a statement to Jeffries that Water Wheel was now operating "absolutely hand to mouth". On 18 October 1999, NSWGB wrote to Plymin in relation to a total debt of $1.994M.[74]

In my opinion it is a strong inference that Plymin was aware at all relevant times of the very substantial amounts which were overdue for payment to NSWGB, but in any event, this letter put Plymin on notice and made the position sufficiently clear. The continuing pressure by NSWGB in October and November 1999 and thereafter were in my view sufficient of themselves to constitute reasonable grounds for suspecting the insolvency of Water Wheel. IX. ISSUES RELATING TO DEBTS INCURRED

1622. In order to establish each alleged contravention, it is necessary for the plaintiff to prove the alleged debt and that it was incurred during the relevant period. That proof is also relevant to the power contained in s.588J(1) which provides that where, on an application for a civil penalty order in relation to a contravention of s.588G, the Court is satisfied that the director committed the contravention in relation to the incurring of a debt by a company and the debt is wholly or partly unsecured and the person to whom the debt is owed (the creditor) has suffered loss or damage in relation to the debt because of the company's insolvency, the Court may order the director to pay to the company compensation equal to the amount of that loss or damage.

1625. Put into the context of the present proceeding, where the defendant directors by a continuous course of conduct may have committed numerous contraventions in relation to the incurring of debts by Water Wheel on and after 14 September 1999, it is necessary to identify the debts so incurred by Water Wheel and their amount. It is convenient at this juncture to then ascertain whether any loss or damage has been suffered by each relevant creditor because of Water Wheel's insolvency. A number of issues have arisen in relation to when debts were incurred and in what amount and some issues have arisen in relation to loss and damage.

1628. ASIC submitted that there were a number of debts which were the subject of evidence in respect of which it had been shown that an affirmative answer could be given to all of the following five questions:

1. Are all the relevant invoices or receipts identified in the evidence?

2. Has the total amount claimed been correctly added from the invoiced or receipted amounts?

3. In respect of each claimed item, did all of the relevant contracts, orders, deliveries and invoices occur between 14 September 1999 and 17 February 2000?

4. Is the debt unchallenged by all the defendants?

5. Has the claimed debt been corroborated as accepted by the administrators?

1636. ASIC produced written submissions and a spreadsheet which, inter alia, identified the debts which met what was described as "the above 5 point prima facie test", and then pointed out that some debts which did not meet the 5 point prima facie test could readily be excluded from controversy by way of appropriate adjustments. These adjustments were also made in the spreadsheet, and the most common adjustments were:

(a) Where the administrators had accepted an amount less than the amount claimed in the proof of debt, the lesser amount was claimed;

(b) Where part or all of the debt was clearly incurred either before 14 September 1999 or after 17 February 2000, the relevant amount was not claimed;

(c) Where some part or parts of the debt was not supported by any evidence, the relevant amount was not claimed;

(d) In respect of those creditors of Mills who had already received a 10% interim dividend from the administrator, the net amount claimed was reduced by 10% in the spreadsheet.

1642. In respect of debts which did not meet the 5 point prima facie test, ASIC attempted to summarise the issues for determination in a further column of the spreadsheet. Subsequently to the production of ASIC's written submissions in relation to these matters, the first defendant provided a written answering submission and the second defendant provided a substantial written answering submission dealing with each debt in tabular form. I have considered all of these written submissions. For the purpose of dealing with the debts, it is necessary, unlike in other areas, to distinguish between the two Water Wheel companies, Mills and Holdings. I will deal first with the debts allegedly incurred by Mills on and after 14 September 1999.

1645. I first note that in respect of a number of the creditors whose claims related to goods that it was submitted on behalf of the second defendant simply that there was insufficient evidence to prove the delivery of the goods. With a number of creditors, this submission was not particularised in any greater detail. In the case of each of these creditors, there is admissible and unchallenged evidence of the amount and nature of the debt and a reasonable and probable inference is open that the goods were delivered and there is nothing to suggest that they were not. I would so infer. In my opinion, it is not incumbent upon the plaintiff, where the amount and nature of the debt (ie, goods sold and delivered) has been proved by admissible affidavit evidence exhibiting relevant documents (including statements, invoices or other books of account or extracts therefrom), to produce in addition the delivery dockets or other contemporaneous evidence of delivery where there is no evidence that the goods have not been delivered. Accordingly, I am also satisfied of the proof of those debts and the loss and damage suffered by the creditors, and those amounts have been included in the first table below.

1648. An argument was also raised by the second defendant, in relation to a large number of the alleged debts, to the effect that no loss and damage had been proved because there was "no evidence that any gross margin/profit has been lost". I reject that argument. In my opinion, if it is proved that a debt was incurred by Water Wheel on and after 14 September 1999 and that debt was not paid by Water Wheel, then in the absence of other evidence, the creditor has been shown to have suffered loss and damage in the amount of the debt (less any dividend received or likely to be received from the administrator). Obviously, the debt represents, as well as any gross margin or profit of the creditor, the costs of producing the goods or providing the services the subject of the debt.

1651. I now deal with the debts of Mills that meet the 5 point prima facie test or are the subject of adjustment by ASIC and that are not the subject of any particular challenge by the first or second defendant (other than the points which I have already mentioned concerning insufficient evidence of delivery and "gross margin/profit"). I am satisfied that the following debts have been shown to be incurred on and after 14 September 1999 and before 17 February 2000 and not paid to the creditor. The "net amount" is the debt less any interim dividend received by the creditor. I will use in respect of each debt the number and creditor name set out in the ASIC spreadsheet.

1658. There is one debt of Holdings that meets the 5 point prima facie test and that is not the subject of any particular challenge in the second defendant's answering submission (other than the points which I have already rejected). I am satisfied that the following debt has been shown to be incurred on and after 14 September 1999 and before 18 February 2000 and not paid to the creditor:

1662. I will now deal with each of the debts allegedly incurred by Mills in respect of which other specific issues have been raised for determination by the Court (again using the name appearing in ASIC's spreadsheet, followed by the number also from the spreadsheet).

473 Air Express International (Australia) Pty Ltd (No. 1): The defendants contended that there was no loss and damage suffered by the creditor because no proof of debt had been lodged. It was also submitted that there was no evidence that any goods or services had been provided by the creditor. ASIC submitted that the fact that no proof of debt had been lodged "does not invalidate the debt". In my opinion the failure to lodge a proof of debt is at best a failure to mitigate any loss and damage suffered by the creditor, and if a relevant debt to the creditor was incurred by Water Wheel, the creditor will have suffered loss and damage in the amount of the debt less the dividend which it would have received if it had lodged a proof of debt. The evidence in respect of this debt was contained in an affidavit of Kerrie Michele Butler sworn 1 February 2001. I am satisfied on the basis of the affidavit that transport services were provided to Mills and that a debt of $15,827.00 was incurred by Mills. I note that Butler was not cross-examined upon her affidavit. Allowance should be made for the 10% interim dividend paid to creditors of Mills so that the net amount is $14,244.30.

474 Amcor St Regis Bates (No. 3): The second defendant submitted that the sum of $5,675 should be subtracted from the amount claimed, that sum being the amount of a purchase order dated 9 September 1999 and that therefore the debt was incurred prior to 14 September 1999. The second defendant further submitted that no delivery dockets were produced in relation to a number of purchase orders. In relation to the second point, I am satisfied that the debt is proved by the material in the affidavit of Gregory Lennox Fox, irrespective of the failure to produce all of the delivery documents. In relation to the first point, the affidavit of Fox shows that seven payments were made by Mills to this creditor in full settlement of unpaid invoices issued in October 1999 and prior months and in partial settlement of unpaid invoices issued to Mills in November 1999. Accordingly the amount claimed relates to debts incurred in November 1999 and thereafter. The first defendant submitted that there was a retention of title clause in the documentation and that it was therefore incumbent upon ASIC to show that this creditor had mitigated its loss and damage by exercising its rights under that clause, and that if the creditor did not, no claim for loss or damage could be made. However, there is no evidence that there was any retention of title clause in any contract between Mills and this creditor or in the "documentation" generally. I note that the deponent in relation to this debt (Fox) was not cross-examined. The net amount is $101,955.29.

475 Ampol Bendigo Pty Ltd (No. 4): No proof of debt was lodged by this creditor. The same reasoning applies as mentioned in relation to Air Express International. The net amount is $27,478.26.

476 BP Australia Limited (No. 11): The second defendant submitted that there was no evidence showing that Mills was the debtor, referring to paragraph 12 of an affidavit of Paul Anthony Kettle. That paragraph in fact shows that a joint account was established with the creditor in the name of Neil's Transport Pty Ltd and Mills. The affidavit goes on to show that the unpaid balance of the account was $21,759.03. I am satisfied that the debt was incurred by Mills but I am not satisfied that there was any loss or damage due to the lack of evidence concerning the involvement of the joint creditor, Neil's Transport Pty Ltd, from whom, prima facie, the debt might have been recovered.

477 CCD Animal Health (No. 14): The second defendant submitted that there was insufficient evidence to prove all of the alleged deliveries, but I am satisfied on the basis of the affidavits of Jonothon Doubleday and Robert McLeod (neither of whom were cross-examined) that the debt and all relevant deliveries have been proved. In addition, both defendants referred to the existence of a retention of title clause, the second defendant saying that "a portion of the amount claimed was subject to a retention of title claim". I am unable to identify in the evidence the retention of title clause to which the defendants refer or the portion of the amount claimed which is said to be subject to a retention of title claim. The evidence does show that there was a purchase contract dated 17 December 1999 for 27 tonnes of meat & bone meal, incorporating the terms of trade of the National Commodities Marketing Inc. (NACMA) issued 1 October 1994, but the NACMA terms of trade issued 1 October 1994 are not in evidence. The same comment applies to a purchase contract dated 17 December 1999 for 20 tonnes of whey powder. In any event, it is not incumbent upon ASIC to prove a negative and unless there was evidence both that there was a retention of title clause, and that there was some factual basis for contending that it might have been utilised by the creditor to any good purpose, no issue arises for determination. The net amount proved is $113,888.50.

478 Chep Equipment and Pooling Systems (Brambles Australia Limited) (No. 16): The second defendant submitted that part of this debt was incurred by contract prior to the relevant period. However, ASIC has made an adjustment for this. The net amount is $13,011.82.

479 Clayton Utz (No. 17): The evidence shows that the debt was incurred by Holdings, although the proof of debt was submitted to Mills. The amended statement of claim alleges that the debt was incurred by Holdings, and it should be included in relation to the claim for compensation based on debts incurred by Holdings. The net amount is $16,694.01.

480 Commonwealth Department of Agriculture, Fisheries and Forestry (No. 19): The second defendant submitted that the majority of this debt was incurred prior to the beginning of the relevant period. However, ASIC had made an adjustment in relation to that matter, and the net amount is $6,651.45.

481 Elgas Limited (No. 23): The second defendant submitted that there was insufficient evidence to prove the alleged deliveries to Mills, and that, according to paragraph 19 of an affidavit of Stephen Kenneth Irons, the relevant delivery documents were printed out by the Elgas truck driver from his handheld personal computer immediately after delivery was made, but that most of the delivery documents exhibited to Irons' affidavit did not prove delivery. The second defendant did not explain this submission. However I am satisfied on the whole of the evidence contained in the affidavit of Irons (who was not cross-examined) that that the deliveries took place and the relevant debt was incurred. The evidence shows that the debt was incurred by Holdings, although the proof of debt was submitted to Mills. The amended statement of claim alleges that the debt was incurred by Holdings, and it should be included in relation to the claim for compensation based on debts incurred by Holdings. The net amount is $10,919.56.

482 Fermex-BLY (No. 25): The second defendant submitted that there was insufficient evidence to prove that relevant deliveries in fact took place, referring to paragraphs 12 and 13 of John Andrew Bowyer. However, I am satisfied on the basis of the whole of the evidence contained in the affidavit of Bowyer (who was not cross-examined) that the deliveries took place and the debt was incurred. The net amount is $26,784.00.

483 Freight Victoria Limited (No. 28): It was submitted that the evidence did not substantiate the time at which the creditor provided its services to Mills. According to paragraph 28 of the affidavit of Alexander Boctor sworn 9 February 2001, the services provided by the creditor to Mills on and after 14 September 1999 had a total value of $26,046.51. However, a table to paragraph 28 shows a total value of invoices of $22,806.60. Further, an examination of the invoices listed in that table substantiates only a total value of services provided on and after 14 September 1999 of $16,798.75. ASIC has not explained these discrepancies but there is no reason to reduce the debt said to have been incurred below the sum of $16,798.75 because the payments made by Water Wheel reduced the balance of account as at 17 February 2000 to $20,945.10, of which, I am satisfied, the sum of $16,798.75 represents the debt incurred on and after 14 September 1999. The net amount therefore is $15,118.88.

484 GE Capital Returnable Packaging Systems (No. 29): An affidavit of Jerry De Freitas deposes that the creditor hired wooden pallets to Mills during the period 14 September 1999 to 17 February 2000, and that only some of those pallets were returned. The amount of the debt is said to be $44,557.83 which is comprised of hire charges totalling $3132.83 (for December 1999 and January 2000) and the sum of $41,425.00, being the amount charged by the creditor as "compensation costs for pallets deemed lost or no longer in your physical custody" (1657 pallets at $25 each). I am satisfied that the hire charges constitute a debt incurred in the relevant period. An issue arises as to the charge for pallets not returned. There is no evidence as to any terms of the contract between the creditor and Mills which would justify a charge of $25 per pallet not returned. Nor is there any evidence of what would be a reasonable charge for pallets not returned. There was evidence that Friswell, an employee of Water Wheel agreed to this invoice being issued by the creditor, but I am not satisfied that he had the authority to do so. In addition, the evidence of the creditor's deponent, De Freitas, suggests that these pallets still exist somewhere in "the system" and I am not satisfied that the creditor has suffered any loss and damage as a result of Water Wheel's non-payment of this charge. Accordingly, the debt established is $3132.83 and the net amount is $2819.55.

485 Glen Cameron Nominees (No. 30): The second defendant submitted that there was insufficient evidence to prove each and every delivery making up the debt claimed, referring to exhibits JMD-21 and JMD-22 to an affidavit of Jennifer Marion Dixon sworn 1 February 2001. An examination of those exhibits which are, in the main, consignment notes in relation to the transport and warehouse services provided by the creditor to Mills, shows that almost all of the documents are dated on or after 14 September 1999. A couple of the notes are undated and one or two are dated earlier than 14 September 1999, but this is of no significance, because Dixon's affidavit discloses that the creditor was paid for services invoiced up to 28 November 1999. I am satisfied that the debt is proved and the net amount is $13,255.99.

486 Golden Harvest Speciality Seeds (No. 31): The second defendant submitted that there was insufficient evidence to prove the deliveries the subject of this claim, and further that the invoices exhibited to an affidavit of Peter Cory sworn 9 January 2001 were raised after 17 February 2000. However, I am satisfied on the basis of the evidence contained in the affidavit of Cory (who was not cross-examined) that this debt is established. In particular, paragraph 11 of his affidavit establishes that the relevant orders from Mills were received on and between 9 November 1999 and 20 January 2000. I am further satisfied that the goods were delivered. The net amount is $27,855.00.

487 Lienert Australia Pty Ltd (No. 37): The second defendant submitted that certain invoices (numbered 53660, 53033 and 52510) each for an amount of $2,400.00 were for consulting fees which were incurred in February 1999 and that therefore the sum of $7,200.00 should be deducted from the claimed debt. An examination of those invoices discloses that they related to nutritionist consultancy fees for services provided in November and December 1999 and January 2000. However, it may be, in the light of the cross examination of Warren Reichstein upon the contents of his affidavit sworn 21 January 2001 (see in particular paragraphs 6 and 11), that the debt for these services was incurred when the original oral agreement for their provision was made and was payable whether or not Mills chose to use the services each month. I am therefore not satisfied that this part of the debt was incurred in the relevant period. The total net amount is $40,496.00.

488 McLelland's Transport Bealiba Pty Ltd (No. 38): The first defendant cross-examined the deponent (Wesley Arthur Jolley) in relation to this debt, and suggested that there was a much larger debt due from the creditor to Mills which the creditor had continued to pay off to the administrator, and had only recently finished paying. Mr Jolley was unable to shed any light on this suggestion, and it appears that there is no further evidence on the subject. However, the creditor did not lodge a proof of debt for the amount in question ($6,459.92) with the administrator which, in these circumstances, raises sufficient uncertainty to prevent a finding with the necessary degree of satisfaction.

489 Meto Australia Pty Ltd (No. 40): A proof of debt was lodged with the administrators against Holdings and rejected. The evidence shows that the debt was incurred by Mills. The net amount is $6,401.22.

490 Neils Group (No. 42): The amount claimed (after allowing for adjustments and concessions by ASIC) is the sum of $130,500.60 made up as follows:

- Neil's Transport & Tristate: $5,336.85 - Neil's Transport & Mills: $128,650.64 - SUBTOTAL: $133,987.49 - Less credit adjustments: -$3,486.89 - TOTAL: $130,500.60

1684. In relation to Neil's Transport and Tristate, the second defendant submitted that the sum of $4,797.09 should be deducted in relation to deliveries that according to the documents were not to or from Tristate or Water Wheel. In an affidavit sworn 9 February 2001, Basil Mcauley Martin generally deposed that all of the invoices related to services provided to Water Wheel and in cross-examination, asserted that the invoices were correct. The second defendant submitted, however, that the consignment descriptions in the invoices did not support his evidence, and there was no general evidence about any arrangements between Neil's Transport and Tristate to support the nature of the consignments disclosed by the documents. Martin was not an impressive witness, and did not appear to have any personal knowledge of the matters contained in the documents - he was simply verifying them in his capacity as an employee accountant of Neil's Transport. I do not have sufficient confidence in the evidence to reach the conclusion that these debts were incurred by Mills (Tristate). The correct amount to be deducted is $4,787.09 leaving a balance of $549.76.

1687. In relation to Neil's Transport and Mills, the second defendant submitted that the evidence on the invoices as to the consignment date was insufficient evidence of "delivery", ie, insufficient evidence that the relevant transport services were provided. However, I am satisfied that the invoices provide sufficient evidence that the services were provided in the absence of any evidence to the contrary. A further submission was made by the second defendant that $2,192 should be deducted from the amount claimed because the invoices related to deliveries which were not to or from Mills. As with Tristate, I accept that submission, and, therefore the sum of $2,192 should be deducted, leaving a balance of $126,358.64.

1690. The first defendant submitted that no amount could be claimed in relation to Neil's Transport because the administrator had refused or failed to admit its proof of debt. I do not regard this as of itself as a bar to any claim, but cross-examination of Martin disclosed that there appeared to have been a considerable reconstruction by Neil's Transport employees of the various accounts of Neil's Transport with Water Wheel, including a number of changes to the allocation of payments from one invoice to another or one group of accounts to another. This leads me to doubt whether it is possible on the scanty evidence available to say whether any particular invoice has been paid or not so that, whereas it is clear that a substantial debt was incurred and remains unpaid, it is difficult on the evidence to make any conclusion as to which portion of that debt is unpaid and whether the unpaid portion was incurred on or after 14 September 1999. Accordingly, I am not satisfied on the evidence that any relevant loss or damage has been established.

494 OE & DR Pope Pty Ltd (No. 44): The second defendant submitted that there was no evidence to support 14 deliveries to Mills in the period between 12 October 1999 and 17 February 2000. The amount involved is $18,758.32 and the second defendant submitted that at least that amount should be subtracted from the debt claimed. The first defendant submitted that there was a retention of title clause in the documentation. Accepting that there is no precise evidence of the 14 deliveries referred to by the second defendant, the affidavit of Brian Patrick Quirk sworn 9 February 2001 nevertheless discloses that the creditor issued invoices on a daily basis and very close to the time when each delivery occurred. Given that the earliest invoice the subject of this claim is dated on or about 12 October 1999, I am satisfied that the questioned deliveries occurred after 14 September 1999. As to the second point, there is no evidence of any retention of title clause - indeed there is no evidence of any written agreement. The net amount is $85,924.97.

495 Pivot Limited (No. 45): The second defendant submitted that "ultimate liability for these debts did not rest with Mills" but the amounts were payable by particular rice growers. There is no satisfactory evidence to support this submission and I am satisfied that the debt claimed was incurred by Mills in the relevant period. The net amount is $14,826.59.

496 Purtill Bros Nominees Pty Ltd (No. 47): The principal submission by the second defendant was acceded to and the net amount is only $845.94.

497 Ravyler Pty Ltd (No. 49): The second defendant submitted that there was insufficient evidence to prove the alleged provision of road transport services, or alternatively, their provision in the relative period. I do not accept that submission. The affidavit of Georgina Joan Rawiller (who was not cross-examined) sworn 25 January 2000 shows that deliveries occurred and the debt was incurred on and between 18 January 2000 and 16 February 2000. The net amount is $10,731.17.

498 Roche Vitamins Australia Pty Ltd (No. 51): The second defendant submitted that there was insufficient evidence to prove actual delivery, or alternatively, the times at which the alleged deliveries were made. I do not accept that submission. The affidavit of Stella Roberts (who was not cross-examined) sworn 21 January 2001 shows that deliveries occurred and the debt was incurred on and between 3 October 1999 and 17 February 2000. The net amount is $17,234.98.

499 Satake Australia Pty Ltd (No. 52): There is a disputed amount of $235 in respect of which I am not satisfied that the debt was incurred on and after 14 September 1999. The net amount is $2,384.10.

500 Sugar Australia Pty Ltd (No. 56): The second defendant complains that no delivery records are exhibited to an affidavit of Manmohan Kaur Sian sworn 2 February 2001. However I am satisfied on the basis of the content of his affidavit that deliveries in fact occurred and the incurring of relevant debt in the relevant period is proved by his affidavit and by an affidavit of John Fowler sworn 2 February 2001. The evidence shows that the debt was incurred by Holdings, although the proof of debt was submitted to Mills. The amended statement of claim alleges that the debt was incurred by Holdings, and it should be included in relation to the claim for compensation based on debts incurred by Holdings. The net amount is $22,616.34.

501 Swire Shipping Agencies Pty Ltd (No. 57): The objection raised by the second defendant in relation to this claim has been acceded to by ASIC and the adjusted net amount is $22,521.82.

502 Ward McKenzie Pty Ltd (No. 61): The second defendant has raised a dispute in relation to the sum of $3,292.38 as to which I am not satisfied that it was incurred prior to the appointment of the administrators. The adjusted net amount is $16,972.55.

(b) Were certain debts incurred at date of contract or at date of delivery of goods or provision of services?

1703. An issue arises in respect of a number of the creditors whether the debt was incurred at the time of the entering into of the contract or the ordering of the goods and services, or at the time of delivery of the goods or provision of the services.

1706. In Hussein v Good (1990) 1 ACSR 710, a director of a company which operated a clothing boutique inspected a range of clothing samples at the premises of a manufacturer's agent and, then and there, gave a detailed written order for a large number of clothing products with a stated delivery date (some four months later) and a specified price. Subsequently, an agreement was reached between the parties for the delivery of part of the order and for cash on delivery for that part of the order. The delivery took place in exchange for payment partly by bank cheque and partly by an ordinary cheque (which was subsequently dishonoured). The balance of the goods were delivered (before the ordinary cheque was dishonoured) and no further payment was made. The company then went into liquidation and the vendor took proceedings against the director under the then insolvent trading provisions of the Companies (Victoria) Code for the unpaid balance of the price. It was submitted on behalf of the director that the debt was incurred at the time when the goods were ordered and the agreement to purchase them made and that, while no money was actually owed until the delivery of the goods, there was a contingent debt in the amount of the agreed price, the contingency being the delivery of the goods and that "debt" under the relevant provisions included a contingent debt. Southwell J (at 718-719) said:

"The Oxford Dictionary definition of "debt" is "what is owed, state of owing something". In the present case, of course, nothing was owed until the delivery of the manufactured garments. ...I see some difficulty in drawing an analogy between the particular circumstances surrounding transactions between a purchaser of shares and his agent, the broker, where the creation of a contingent liability can usually be expected to become a present indebtedness very quickly, perhaps upon the same day, and a case where, as in the present case, a trader in goods places an order with a manufacturer in circumstances where any contingent liability, if there was one, would not become a present indebtedness until some months thereafter. Section 556(1) is a penal statute subjecting an offender to a penalty of $5000 or imprisonment for one year or both. Clearly, such a provision must be strictly construed... I have said that the parties were in agreement as to liability for payment -- that was to be made upon delivery of the goods. In the circumstances of the present case, I am of opinion that the company did not "incur a debt" within the meaning of s 556(1) until the goods were delivered. Some of the relevant goods were delivered on 3 May, the remainder on an unstated date some days later. Accordingly, I am of the view that the magistrate was correct in looking at that period as the relevant period."

1711. In an article entitled "Insolvent Trading" by A Herzberg,[77] the author says in relation to Hussein v Good:

"...a distinction was drawn between a contingent debt and a debt simpliciter. Section 592 does not state expressly whether "debt" includes a contingent debt. Given the aim of the section, such a distinction focuses on the wrong issue. Directors should bear responsibility in both situations. ... It is arguable that the Hussein v Good distinction between contingent and non-contingent debts places directors in an unfair position. They may order goods for their company at a time when it is solvent yet nevertheless bear personal liability if it becomes insolvent by the date of delivery, even though this could be a considerable time later. Directors, in order to avoid personal liability, will cause their insolvent company to breach the contract for the supply of goods by refusing to take delivery of them and thus detrimentally affect the supply. However, a supplier will be in a better position if goods ordered are not delivered to the insolvent company than would be the case if the company accepted delivery without payment. The very purpose of an effective insolvent trading provision should be to encourage directors of insolvent companies to cease trading and invoke some form of insolvency administration."

1715. The real difficulty of defining "incur" in the light of the purpose of the statute is highlighted by contrasting the reasoning in Hussein v Good with the comments extracted above from this article.

1718. In Rema Industries and Services Pty Ltd v Coad [1992] FCA 114; (1992) 107 ALR 374, a creditor applied under the then provisions of the Corporations Law for orders against three directors of a company (Taspac) in relation to debts allegedly incurred at a time when there were reasonable grounds to expect that Taspac would not be able to pay all of its debts as and when they fell due. The debts in question arose from the sale to Taspac of raw materials for the purpose of producing moulded trays for pre-packaged meat and other foodstuffs. There was evidence before the court as to the history of the trading relationship between the creditor and Taspac, including as to the orders made, invoices rendered, correspondence concerning terms of payment and the like. Lockhart J said (at 381):

"The time when a debt is "incurred" will vary from case to case, depending principally upon the terms of the agreement between the parties, express or implied... I am satisfied that the debts were incurred by Taspac to [the creditor] at the time of delivery of goods pursuant to invoice during the trading relationship between Taspac and [the creditor]. The exception to this was where any particular debt was subject to the agreement for prepayment."

1722. In Hawkins v Bank of China (1992) 26 NSWLR 562, the New South Wales Court of Appeal was concerned with s.556 of the Companies (New South Wales) Code, a predecessor of the present provision. In that case a company (Equiticorp) executed a guarantee in respect of liabilities to the Bank of China of two other companies in the same group. The bank alleged that Equiticorp thereby incurred a debt in circumstances which rendered certain of its directors liable. The amount due by the two companies was $5M being the balance owing by them on maturity of certain bills of exchange. The case was concerned with the meaning of "incurs a debt" in the particular context of a guarantee.

"Where a debt results from a guarantee, the sequence of events is commonly as follows. At the time of the execution of the guarantee, the guarantor undertakes a contingent liability...Subsequently, events may occur by reason of which the contingent liability matures into a presently payable debt... Guarantees are sometimes executed in advance of any principal debt coming into existence. A person may execute a guarantee in favour of a bank in a case in which the bank has not yet made an advance to its customer. In such circumstances it is not normally said that the guarantor, upon the execution of the guarantee, incurs a debt. Nor would it normally, and apart from some special context, be said that a person who gives a guarantee in respect of a debt incurred by another thereupon himself incurs a debt, at least if the principal debtor is apparently solvent and not in default. Equally, however, on any use of language, in the events that have occurred in a case such as the present, there ultimately comes a time when the guarantor would be said to be indebted to the creditor. In the present case, a guarantee was executed, the principal debtors became insolvent and went into default, and demand was made by the creditor under the guarantee. In those circumstances it seems difficult to deny that at some stage Equiticorp incurred a debt to the Bank. The difficulty about concluding that such a debt was only incurred when demand was made is that it produces a result which in many cases involving the application of s 556 would be unjust, and, indeed, absurd. Suppose, for example, that company A gave a guarantee to a bank in respect of the liabilities to the bank of company B, and the guarantee was executed in Year 1. At the time, both companies were financially sound. Suppose that some years later, at a time when both companies are in serious financial difficulties, company B goes into default and the bank then calls upon the liability of company A under the guarantee. It would be unjust to fix the directors of company A with criminal or civil responsibility under s 556 by reference to expectations as to the financial capacity of company A at the time when the bank made a demand under the guarantee, because the commitment was undertaken in Year 1 and (let it be assumed) could not thereafter be abrogated. Yet that would be the consequence that would follow if company A were treated as having incurred a debt to the bank when demand was made... ... It may be accepted that in some commercial or legal contexts it would be unusual to describe Equiticorp as having incurred the debt in question upon executing the guarantee. It is equally true, however, that even in those contexts it would be natural and proper to say that at some stage Equiticorp incurred a debt to the Bank. The appellants (for reasons explained above) are concerned to argue that Equiticorp did not at any stage incur a debt to the Bank within the meaning of the section. This demonstrates that, whichever way the present dispute is resolved, the result will involve some departure between the language of the statute as construed by the Court and the use of language in the contexts to which reference has just been made... It is necessary, of course, to guard against the error of considering the operation of the statutory language only by reference to the problem currently under consideration. Words such as `conditional' or `contingent', when used in relation to different types of obligation, can have different shades of meaning. There are types of contractual arrangement, of which the cases on s 556 referred to above provide examples, where it is entirely reasonable for a provision such as s 556 to operate upon the basis that a debt is incurred, not when a contract is entered into, but when some later event under the contract occurs... `Debt' is capable of including a contingent liability. The word was used in that sense in s 291 of the Companies Act 1961, which referred to `debts payable on a contingency'. That expression did not involve a contradiction in terms. Dictionaries define `debt' as a liability or obligation to pay or render something. Such a liability may be conditional as well as present and absolute... Similarly, the word `incurs' takes its meaning from its context and is apt to describe, in an appropriate case, the undertaking of an engagement to pay a sum of money at a future time, even if the engagement is conditional and the amount involved uncertain. Once it is accepted that `debt' may include a contingent debt then there is no obstacle to the conclusion that, in the present context, a debt may be taken to have been incurred when a company entered a contract by which it subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future time. This is such a case."

"In Hussein v Good (1990) 1 ACSR 710; 8 ACLC 390, Southwell J, in a thorough consideration of the issue now before this Court, held that the phrase `incurs a debt' should be given a strict construction in accordance with the well established canon applicable to legislative provisions imposing criminal liability. So far as there was ambiguity about the phrase `incurs a debt', Southwell J held that it should be resolved by limiting the `debt' referred to that which is actually owed immediately it is incurred so as to exclude contingent debts, such as those incurred upon the operation of a guarantee. The foregoing decisions were criticised by Abe Herzburg `Insolvent Trading' (1991) 9 Company and Securities LJ 285 at 294ff. Herzburg's criticism affected Rogers CJ Comm D at first instance in the present case. Reaching his conclusion, his Honour said:

"...in circumstances where, between the date of an order and its due date for delivery, the financial position of the purchaser deteriorates to the point it cannot pay for the goods the purpose of an effective insolvency provision will be better served by the directors of the purchaser refusing delivery. Why should they accept delivery with impunity knowing the company cannot pay for the goods? Surely s 556 was intended to extend their personal liability in such a case. With respect to the fulfilment of the legislative purpose of preventing insolvent businesses from engaging in liabilities I was struck by [this] example...Assuming Company A incurs a debt in 1989. No grounds for invoking s 556 are present. However, in 1991, when the debt is still outstanding, Company A is insolvent. To obtain time, Company A procures a guarantee from Company B. If s 556 were to apply to contingent liabilities and therefore to guarantees s 556 would apply to Company B. It surely cannot have been intended that the section not apply simply because the guarantee of B is only a contingent debt. As it appears to me, there is nothing in the text of s 556 which could disqualify a contingent debt from inclusion in the expression `debt'. The legislative history supports the inclusion. The purpose of the legislation is served by the inclusion..."

The proper approach to the task is plain. Both the common law and statute law enjoin the Court to give effect to the purpose of the legislation. But clearly, that purpose may be ascertained only within the words used by Parliament: see Re Bolton; Ex parte Beane [1987] HCA 12; (1987) 162 CLR 514 at 518. The expression `incurs a debt' in s 556(1) is, in isolation, entirely apt to describe an act on the part of a corporation whereby it renders itself liable to pay a sum of money in the future as a debt. The act of `incurring' happens when the corporation so acts as to expose itself contractually to an obligation to make a future payment of a sum of money as a debt. The mere fact that such sum of money will only be paid upon a future contingency does not make the assumption of the obligation any less `incurring' a `debt'. As the Bank pointed out, many debts are incurred on a contingent basis. Goods are ordered by a buyer from a seller for future delivery. In such cases, the buyer is exposed to a future liability to pay the price upon delivery of the goods, absent some special condition requiring prepayment... I agree in the conclusion of Gleeson CJ that once it is accepted that a `debt' in s 556(1)(a) may include a contingent debt, there is no difficulty in the present facts, in holding that a `debt' may be taken to have been incurred when Equiticorp entered a contract by which it subjected itself to a conditional, but unavoidable, obligation to pay a sum of money at a future time. This was such a case. It fell within the first of the two categories of guarantee identified by Mason CJ in Sunbird Plaza (at 255). There was therefore the incurring of a `debt' not merely the acquisition of a right to sue for damages. I agree with what Gleeson CJ has written about the character of the obligation assumed under the present guarantee."

1735. I note that the criticism of Hussein v Good was directed to that aspect of the decision which held that "debt" was limited to that which was actually owed immediately it was incurred, so as to exclude contingent debts. The main point decided in Hawkins v Bank of China is that a debt may be incurred on entering into a guarantee, notwithstanding that it is a contingent debt at that stage. With respect, that makes sense because the voluntary act of incurring liability can only take place when the guarantee is entered into and the remaining contingencies are not necessarily within the control or power of the guarantor. This may be contrasted with a sale of goods, where the delivery of goods can be a relevant contingency and may be a contingency within the control or power of the purchasing company and its directors. This point is recognised in the passage from the judgment of Rogers CJ Comm D quoted by Kirby P (above), where Rogers CJ says

"...in circumstances where, between the date of an order and its due date for delivery, the financial position of the purchaser deteriorates to the point it cannot pay for the goods the purpose of an effective insolvency provision will be better served by the directors of the purchaser refusing delivery. Why should they accept delivery with impunity knowing the company cannot pay for the goods? Surely s 556 was intended to extend their personal liability in such a case. With respect to the fulfilment of the legislative purpose of preventing insolvent businesses from engaging in liabilities I was struck by [this] example..."

1739. In Leigh-Mardon Pty Ltd v Wawn (1995) 17 ACSR 741, a company placed orders for goods (packaging products for potato chips) on 15 September 1989 and 17 November 1989. Delivery of the goods ordered in September commenced on 10 November 1989. I would adopt what was said by Hodgson J in Leigh-Mardon Pty Ltd v Wawn (1995) 17 ACSR 741, 749 - 750:

"It is submitted for Wawn that debts for goods delivered by the plaintiff to the company were incurred when the relevant goods were delivered: see Hussein v Good (1990) 1 ACSR 710; 8 ACLC 390, Rema Industries and Services Pty Ltd v Coad [1992] FCA 114; (1992) 107 ALR 374 at 381; 7 ACSR 766, Taylor v Powell [1993] FCA 87; (1993) 113 ALR 374 at 379; [1993] FCA 87; 10 ACSR 174. Accordingly, all of the $674,000 claimed by the plaintiff was incurred at times when there were the requisite reasonable grounds. In my opinion, there is no hard and fast rule that a company incurs the debt for goods sold and delivered at the time when the goods are delivered to the company, and not at any earlier time. In Hussein v Good, goods were ordered in November 1987 and delivered in May 1988. There had been a part payment for the goods, and the balance was not payable until delivery. Southwell J in the Supreme Court of Victoria held that the debt for the balance of the price was not incurred until delivery in May 1988. He held that "debt" should be limited to that which is actually owed immediately it is incurred, so as to exclude contingent debts. Insofar as the decision was based on that reasoning, it does seem inconsistent with Hawkins v Bank of China (1992) 26 NSWLR 562; 7 ACSR 349, in which it was held that a company incurs a debt for the purposes of s 556 of the Code when it enters into a guarantee by which it subjects itself to a conditional but unavoidable obligation to pay a sum of money at a future time; so that a relevant debt was incurred when the company in that case entered into a guarantee under which it was obliged to pay a liquidated amount contingent upon demand following default. As I stated in Standard Chartered Bank of Australia Ltd v Antico..., in my opinion, a company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable. In relation to sale of goods, it seems to me that, in some cases, it will be the order which in substance and commercial reality renders the company liable for the price of the goods, even if that price is not actually payable until delivery; while in other cases, it will be the acceptance of delivery which, as a matter of substance and commercial reality, so renders the company liable. And intermediate positions are possible. For example, if the goods which are ordered are readily saleable by the vendor elsewhere at the same price, so that to refuse delivery not only precludes any liability for the price, but also involves at worst minimal damages, one might readily say that the debt is incurred, not by placing the order, but by accepting delivery. On the other hand, if what is ordered is goods which are to be specially manufactured for the company, and are not saleable elsewhere, so that to refuse delivery would be a breach of contract sounding in damages approximating to the full price of the goods, then, as a matter of substance and commercial reality, one would regard the debt as having been incurred by placing the order and binding the company to it, or possibly by not cancelling the order at a time before the damages flowing from such cancellation would be of a similar order to the price of the goods."

1743. In Shepherd v Australia and New Zealand Banking Group Limited (1996) 20 ACSR 81, one of the questions for determination was when a company had "incurred" debts within the meaning of s.556 of the Companies (New South Wales) Code. The company had a taken a large number of deposits and prepayments for the supply and erection of kit homes and garages, but was wound up with insufficient funds to honour the contracts or repay the customers. Bryson J said (at 88-9):

"There is no purportedly exhaustive judicial exposition of what is meant by "incurred" in subs 556(1), and I think that there could not be. It is important to keep in view that the obligation incurred must be a debt. Usually a liability to pay a debt comes into existence as a result of a series of acts and events, not all of which take place at the same time. After some of those events have happened, the completion of the series and the accrual of a liability to pay a debt may not be avoidable by the company, and it could conceivably be said that the debt has been incurred by the company even before the debt is actually in existence and could be sued for. The word "incurs" is often found in contexts in revenue law and in accounting where it is important to allocate a debt to a period of time so as to recognise the period to which the debt is best related; and that is quite commonly not the period when the debt accrues due or becomes payable. If the true intention is to identify the time when the debt accrues or becomes payable, the word "accrue" and its derivatives are ready to hand and it is unlikely that "incur" would be used. The difficulties of applying the words "incurs" were illustrated rather than resolved by the following passage in the judgment of Gleeson CJ in Hawkins v Bank of China (1992) 26 NSWLR 562; 7 ACSR 349 at NSWLR 572: [quotation omitted - set out earlier above] ...For obligations other than rent the position must be addressed in the broad way indicated by Gleeson CJ in Hawkins' case. It was in my view essential for the decision in Hawkins' case that the company had no opportunity after giving the guarantee to avoid the obligation by any action of its own, and could do no more than wait and observe whether the conditions including the passage of time were fulfilled." [emphasis added]

1747. Bryson J went on to quote the passage from the judgment of Hodgson J in Standard Chartered Bank of Australia Limited v Antico, in which Hodgson J emphasised the element of choice, and Bryson J then said:

"In my respectful view the text of subs 556(1) does not in any way express an element of choice, and the practical implications to which Hodgson J referred in earlier passages do not require any limitation of the language so as to apply only to the consequences of acts or omissions of the company's choice or to obligations which the company chose to be involved in. In my opinion obligations imposed by law, including revenue law and the law of restitution, can be debts for this purpose, whether or not acts or omissions which the company chose to be involved in brought them into existence; there is nothing expressed or implied in s 556 to the contrary..."

1751. I would respectfully agree with Bryson J that the relevant section does not express an element of choice, but nevertheless, in my opinion, the exercise of choice will often be relevant to the question as to when a company has incurred a debt. For example, in the case of obligations imposed by revenue law, the choice will of course not be exercised in relation to incurring the taxation liability, but there will still be a choice exercised, namely, the decision to continue trading or the decision to proceed with whatever activity is likely to attract or involve the attraction of the relevant impost.[78]

1754. The weight of authority[79] shows that a debt can be incurred when the contract giving rise to the debt is entered into, even if contingencies affect the debt or the debt is a future debt. In the case of a future debt, it may be incurred at the time of entering the contract if it is then an ascertained or ascertainable amount. By the same token, a debt may in appropriate circumstances be incurred within the meaning of the section at a time later than the entry of the contract under which the debt arises or may arise.[80] Although it is necessary to consider the terms of the relevant contract, the question when the debt is incurred within the meaning of the section does not depend on strict legal analysis but turns on when, in substance and commercial reality, the company is exposed to the relevant liability.[81] The reason for the emphasis upon substance and commercial reality lies in the need to ensure that the language is interpreted, or applied to the facts, in a way which serves the purpose, or fits the context, of a provision aimed at preventing insolvent trading and in a way which avoids absurd results.

1757. The words "incurs a debt" cannot be disregarded but, because of the aim and intent of the section, the focus must be on the conduct and choice of the alleged insolvent company. It will often be necessary to identify the time when the conduct and choice of the company caused the debt to be incurred, or brought about the circumstances in which the debt was incurred, because it is at that time that it must be shown that the director failed to prevent the company from incurring the debt in the relevant sense, and it is also at that time that it must be shown that the director had or ought to have had the requisite awareness that there were reasonable grounds for suspecting insolvency. Relevantly to this proceeding, I think that it will often be the case, for the purposes of the section, that under a contract for the sale of goods where delivery times are left for future orders or instructions that, as a matter of substance and commercial reality, a debt will be incurred on each occasion when a delivery is ordered. Whether under such a contract a director may also be exposed to liability at an earlier point of time (ie, when the contract is entered into), in relation to a contingent debt, need not be decided for the purposes of this case.

1760. The creditors in relation to whom such issues were raised are referred to hereunder.

519 ConAgra Trade Group Pty Ltd (No. 20): The second defendant submitted that this debt was incurred prior to the relevant period, in that it related to a contract signed on 23 June 1999 for a delivery period until 31 August 1999. The contract was for the supply of Australian premium white wheat, minimum 10% protein, as per AWB specifications currently in force. The evidence shows that the deliveries under this contract, for which no payment was made, all took place in November 1999. The contract provided for "prepayment to apply, made on the day prior to release/delivery of grain". The contract was endorsed that it was "governed by the standard terms, conditions and general trade rules currently in force of the National Commodity Marketing Association Inc [NACMA] contract" when not in conflict with the above terms and conditions. The evidence shows that the NACMA rules in force included provisions that the title to the goods and risk of loss or damage remained with the seller until the goods were conveyed to the buyer. ASIC also referred to NACMA rules which, it was submitted, required the seller to complete delivery and give documentary evidence thereof before any liability for payment would arise. It seems to me, however, that reliance cannot be placed on those rules because the contract itself required payment prior to delivery. It was also submitted on behalf of ASIC, relying on what was said by Hodgson J (quoted above) that the wheat was readily saleable by the vendor elsewhere and not specially manufactured for Mills, and that if Mills had not elected to accept each relevant delivery, it would have incurred no liability (unless the market price of the wheat had fallen since the date of the contract, and then only to that extent). It is arguable that this debt was incurred by Mills at the time when it agreed to purchase the wheat on terms requiring payment prior to delivery. It is also arguable that the debt was not really incurred until the purchaser arranged for a particular delivery and therefore became liable to make a prepayment for that delivery. However, the evidence does not disclose when the relevant deliveries were arranged. Further, ASIC's submission in part depended on the proposition that the wheat would have been readily saleable by the vendor elsewhere at the same price, but there was no evidence to support that submission. I do not think that the Court can take judicial notice of the ready saleability of a product at a particular time, even a staple such as wheat. It seems to me that the Court is not able to determine the "commercial reality" in relation to this transaction without more and better evidence of the circumstances surrounding the particular transaction and dealing with the condition of the market for the particular commodity at the relevant times. The evidence, including the affidavits of Wyper and Cattanach, is inadequate. I am not satisfied that the debt was incurred on or after 14 September 1999.

520 Shepherds Producers Cooperative Limited (No. 53): On 17 June 1999, the creditor entered into a contract with Mills for the supply of 250 tonnes of lupins at $190 per tonne. The total debt involved in this claim is the sum of $62,564.05 of which $47,095.03 related to the delivery of lupins after 14 September 1999. The contract provided for delivery of the lupins from June 1999 to August 1999. The contract also provided for the price to be increased by $1.75 per tonne for each month to August 1999. It was subject to the same NACMA rules as mentioned in relation to ConAgra. According to the affidavit of Scott Robert Bradley, it was the standard practice between Mills and the creditor for Mills periodically to place orders against the contract. It was submitted on behalf of ASIC that because, under the NACMA rules, payment was due 30 days after the end of the week of delivery, no debt was incurred until the goods were delivered. I do not accept that submission. It appears from the affidavit of Scott Robert Bradley that it was the practice for orders to be placed against the contract, but the evidence does not show when the relevant orders were placed. I am not satisfied that the debts comprising the amount claimed were incurred on or after 14 September 1999. The net amount is therefore reduced to $14,003.12.

521 Symco Pty Ltd (No. 58): On 6 January 1999 a written contract was entered into between the creditor and Mills for the sale of triticale. The contract incorporated the NACMA terms of trade and provided for payment 30 days after the end of the week of delivery. Between 14 September 1999 and 17 February 2000 the creditor received 6 orders from Mills for the supply of triticale pursuant to the contract dated 6 January 1999. I am satisfied that the debt was incurred when the delivery orders were placed. The net amount is $11,106.99.

522 Follett and Anderson (No. 27): A written purchase contract was made between Mills and Follett and Anderson on 4 December 1998 relating to the sale to Mills of approximately 2000 tonnes of wheat which was to be stored for Mills and to be delivered as required. The contract provides for delivery from February 1999 to September 1999 and for payment 30 days after the end of the week of delivery, and incorporates the NACMA terms of trade issued 1 October 1994. It seems to me that the debt was incurred when the contract was made or, at the latest, when the wheat was stored. I am not satisfied that the debt was incurred when the deliveries were ordered or made.

523 Powercor (No. 46): Mills incurred charges for electricity used between 14 September 1999 and 16 February 2000 in a total sum of $129,310.87. ASIC says that there is an issue whether the debt for use of electricity is incurred as at each date of drawing power or at the time when Mills first entered into a contract with Powercor to supply power (30 June 1997). I am not sure that the defendants in the end maintained that this was an issue. In any event, it clearly is not. Both as a matter of substance and as a matter of commercial reality, a debt in relation to the supply of electricity is normally not incurred until the electricity is used and that is the position in this case. The net amount is $116,379.79.

1769. I will now deal with each of the debts allegedly incurred by Holdings in respect of which other specific issues have been raised for determination by the Court (again using the name appearing in ASIC's spreadsheet, followed by the number also from the spreadsheet).

525 Derrick & Son (No. 1): The claim relating to Derrick & Son comprises a series of debts allegedly incurred by Holdings after 14 September 1999, totalling $1,288,713.49 and made up as follows:

1790. The above tables are derived from the table contained in paragraph 11 in an affidavit of William George Preston sworn 14 February 2001, subject to certain revisions based on his evidence and certain concessions by ASIC. Further evidence relating to these debts is contained in the affidavit of Mark Sydney Graham sworn 6 November 2000.

1793. I will deal first with the third account, "Tristate", totalling $30,428.10 and the first account "Water Wheel" totalling $7,046.32. The evidence shows that the Tristate account related to sundry grain purchases by Derrick & Son from Tristate (ie, Mills). The delivery dates of the grain under the invoices and sales delivery sheets exhibited as WGP-14 to WGP-21 are all after 14 September 1999 and either the same date as or a few days or weeks prior to the date of the invoice, except the invoice exhibited as WGP-21 dated 26 April 2000 where the delivery date was 1 November 1999. There is no evidence as to when the goods the subject of these invoices and delivery sheets were ordered. Although it is quite possible that most of the orders were made shortly prior to or on the date of delivery, there is no evidence one way or the other, and for the purposes of determining when the debt was incurred, it cannot, I think, be assumed that any order was made after to 14 September 1999. The invoices exhibited as WGP-3 and WGP-5, comprising the first account, "Water Wheel" fall into the same category and give rise to the same issue. I am not satisfied that any of these debts were incurred on or after 14 September 1999.

1796. The second account, "Water Loan", totalling $1,251,239.07 relates to an off-balance sheet finance agreement. By an agreement dated 15 June 1999 between Derrick & Son, Holdings and Mills, provision was made for the financing of 20,000 tonnes of rice (it is common ground that the debt is due to Holdings - for convenience, I will refer to Water Wheel). In substance, Derrick & Son agreed to purchase the rice from Water Wheel (the purchase contract) and Water Wheel agreed to repurchase the rice from Derrick & Son (the resale contract). Water Wheel agreed to pay interest on the sum advanced by way the purchase contract and certain other charges to Derrick & Son. Under cl. 2.4 of the agreement, the arrangement as to resale was that Derrick & Son would, on receipt of a fax order form specifying the tonnage to be "out-termed" from a nominated storage site, issue a movement order authorising the "out-term". Water Wheel was then to fax to Derrick & Son copies of all weighbridge dockets relating the movements of such grain at the end of each working week, and upon the receipt of the weighbridge dockets, Derrick and Son would invoice Water Wheel for payment, which was to be made within 30 days from the end of the week of delivery. It was agreed that the grain would be utilised in approximately equal monthly spreads. Clause 2.10 of the agreement provided that all grain finance thereunder should be delivered to Water Wheel on or before the agreed expiry date of 30 April 2000, and any grain remaining undelivered on such expiry date would be invoiced in full on 30 April 2000.

1799. All of the debts claimed under the "Water Loan" account represent the amounts of invoices issued pursuant to the resale contract in accordance with cl. 2.4 of the agreement. ASIC submitted that the debt with respect to repayment of the amount advanced was not incurred upon the entry into the agreement, but rather on each and every "drawdown", and that by electing to draw down rice, Water Wheel chose to take on a debt for a sum representing the agreed value of that "drawdown". At the time of entering the agreement, it was submitted, Water Wheel undertook to buy grain at regular intervals and that obligation converted into a debt when the events specified in cl. 2.4 were complete. Prior to any delivery, Derrick & Son was in a position not unlike that of a secured creditor in that it retained title over the grain for which it had "advanced" money, whereas once rice had been drawn down, Derrick & Son became an unsecured creditor for the amount representing the value of the rice drawn down. A debt was incurred, as a matter of substance and commercial reality, whenever Water Wheel elected to draw down a quantity of grain. On the other hand, the second defendant submitted that the debt was incurred at the time that the agreement was made, and that the "delivery mechanism" embodied in cl. 2.4 of the agreement "related to the timing of repayment of portions of the loan".

1802. In substance, I accept the submission made on behalf of ASIC. At the time of entering the agreement, Water Wheel became obliged at the expiry date to repay whatever amount was then outstanding, but the amount outstanding at the expiry date (if any) depended on the extent to which Water Wheel did not repurchase the grain during the currency of the agreement. The obligation under cl. 2.10 might be described as a contingent debt, but it was a different debt to that which might be incurred by drawing down the rice. The agreement contemplated that the repurchases would occur in "approximately equal monthly spreads" (cl. 2.5) - this obligation was described as "an essential term of the Agreement". It is clear in my opinion that a debt was incurred at the time of each "drawdown" of rice, and accordingly, ASIC has proved that debts were incurred by Holdings after 14 September 1999 in the total sum of $1,251,239.07.

531 NSW Grains Board (No. 4): I am satisfied on the evidence, including the evidence of Leila Kippax (by affidavit and viva voce) that for the period 14 September 1999 to 17 February 2000, Holdings took delivery of goods sold to it by NSWGB for not less than the total value of $739,535.28 made up as follows:

- 14/09/99 - 18/10/99: $537,125.86 - 18/10/99 - 17/02/00: $202,409.42

1807. ASIC submitted that the above total represented debts incurred on and after 14 September 1999 as all deliveries occurred on and after that date. The second defendant submitted that each debt was incurred at the date of the contract pursuant to which each delivery was made, but did not specify what those dates were. However, ASIC conceded that if the relevant date was the date of entry of the contract then the total debt incurred in respect of contracts entered into after 14 September 1999 was $172,076.13. The contracts pursuant to which these deliveries were made form part of exhibit LK-5 to the affidavit of Leila Kippax sworn 1 February 2001, but there was no attempt on behalf of ASIC to analyse these contracts or to investigate the question what terms there were or what practice there was (if any) in relation to delivery under these contracts. As a result, I am not satisfied that, apart from debts to the value of $172,076.13, any debts were incurred by Holdings to NSWGB after 14 September 1999.

533 Neil's Transport (No. 5): The claim here is for the sum of $24,562 for transport services provided to Holdings between 14 September 1999 and 17 February 2000. It was submitted on behalf of the second defendant that there was no evidence to establish the alleged deliveries and consignments pursuant to the relevant invoices and that a substantial number of the invoices related to deliveries that were not to or from any entity forming part of the Water Wheel group, and no evidence of the basis on which the debt could be said to be a debt of Holdings. I accept this submission made on behalf of the second defendant. Only two of the relevant invoices make any reference to Water Wheel in the consignment details. In addition, for the reasons stated in paragraph [493] above, I am not satisfied that any of these debts, insofar as incurred by Holdings, were unpaid.

1812. The following table sets out the creditors in respect of whom I have found that debts were incurred by Mills on or after 14 September 1999 and before 17 February 2000. As already indicated, the total amount of each debt has been reduced by 10% as part of the process of ascertaining the loss and damage suffered. So far as contraventions are concerned, it should be noted that there was at least one contravention committed in respect of each of the creditors mentioned below. In some cases, there will have been more than one contravention where a number of debts were incurred over a period of time to a particular creditor. The same comment is applicable when I come to deal with the debts incurred by Holdings. The table incorporates the information contained in the table which appears at para [470].

Chep Equipment and Pooling Systems (Brambles Australia Limited)

Commonwealth Department of Agriculture, Fisheries and Forestry

1817. In order to determine the loss and damage suffered by the above creditors in relation to the said debts because of the insolvency of Mills, it is necessary to consider a number of further matters. Prima facie, the creditor's loss and damage is the amount of the unpaid debt.[82] However, I note that the amounts in the above table have already been reduced by 10% in order to take account of the interim dividend distributed by the administrator to creditors of Mills. An allowance should be made for any further dividend which those creditors are likely to receive. The affidavit of Brooke sworn 9 August 2002 shows that it is expected that there will be a further distribution to creditors of Mills "in the order of 4.5 cents in the dollar". Accordingly, the total sum of the amounts in the above table must be reduced by a further 4.5%. To the extent that any allowance for actual and expected dividends is contrary to what was decided concerning the meaning of "loss and damage" in Powell v Fryer [2001] SASC 59; (2001) 37 ACSR 589, 602-3, I understand the plaintiff to have conceded that such allowance should be made and I tend, with respect, to think that the concession was correct in principle.

1820. The first and second defendants further submitted that the creditors had suffered no loss and damage because of the provisions of the deed of company arrangement dated 30 June 2000 executed by Mills pursuant to a resolution of creditors at a meeting held pursuant to s 439A(1) of the Corporations Law.

1823. Clause 15 of the deed of arrangement provides that if various conditions precedent are satisfied, and following the receipt by a creditor of the "Total Dividend" which that creditor is entitled to receive under the deed, the total dividend will have been paid in full satisfaction and complete discharge of the claim of the creditor against the company and the creditor's claim will be wholly released and extinguished. "Total Dividend" is defined by cl. 1 of the deed to mean "collectively all the payments of dividend, including any interim dividends paid or payable by the Administrators to a Creditor under...this deed". The first and second defendants submitted that this release had the effect, or would have the effect, that the creditors could not suffer any loss and damage. I reject that submission. Assuming for the sake of the argument that all relevant conditions precedent have been satisfied and that the full dividend which can be paid has been paid, the release of the debt does not have the consequence that the creditor has not suffered loss and damage "in relation to the debt because of the company's insolvency" within the meaning of s.588J(1)(c). Clearly enough, to the extent that the dividends do not fully repay to the creditor the amount of the debt, the creditor has still suffered loss and damage because of the company's insolvency, even if the debt is extinguished and the company has the benefit of a release under the deed of arrangement. The same argument was raised in relation to the deed of company arrangement entered into by Holdings, and the argument is rejected for the same reasons.

1826. The following table sets out the creditors in respect of whom I have found that debts were incurred by Holdings on or after 14 September 1999 and before 17 February 2000. The table incorporates the information contained in the table which appears at para [471].

1830. In order to determine the loss and damage suffered by the above creditors in relation to the said debts because of the insolvency of Holdings, it is necessary to make an allowance for a dividend which those creditors are likely to receive. The affidavit of Brooke sworn 9 August 2002 shows that it is expected that there will be a distribution to creditors of Holdings "in the order of 32 cents in the dollar." Accordingly, the amounts in the above table must be reduced by a further 32% (or 22% where 10% has already been deducted).

1833. It was also submitted by the second defendant that s.588J applied to liquidations, but did not apply where the creditors of a company determined to place it under a deed of company arrangement. The argument referred to the difficulty of determining the loss to creditors in the absence of a liquidation, but it is difficult to discern precisely what argument was being put. I see no basis for a conclusion that s.588J does not apply to a company in administration or to such a company where a deed of company arrangement has been made.

1836. The second defendant further submitted that if the administrator brought a proceeding against the auditors, this might result in damages being payable to Holdings in such an amount which would lead to the creditors receiving payment for their outstanding debts. This is speculative, and it seems to me that all the Court can do is act on the best evidence available at the time of the hearing as to the likely amount of any future dividend, and this I have attempted to do.

1839. The total loss and damage suffered by the above creditors of Mills because of the insolvency of Mills is approximately $1.695M (less a total estimated future dividend of approximately $76,275) and the total loss and damage suffered by the above creditors of Holdings because of the insolvency of Holdings is approximately $1.48M (less a total estimated future dividend of approximately $473,600). Therefore the total net amount which might become the subject of compensation orders is approximately $2.619M.

X. OTHER SUBMISSIONS AND DEFENCES OF DEFENDANTS

1844. As I have already mentioned, the first defendant (Plymin) produced to the Court as his closing argument a document entitled "Bernard Henry Plymin Unsworn Statement". He had earlier elected not to give evidence, having had a more than adequate opportunity to obtain legal advice as to his position in that regard. He was informed that his unsworn statement could not be treated as evidence, but could be treated as his submission or as part of his submission, and that matters in the statement which were not supported by the evidence could not be evidence simply because they were in his document. I have read the first defendant's unsworn statement and treated it as a submission, and have disregarded those matters which are not supported by the evidence, in particular, statements concerning his own conduct and state of mind insofar as not supported by any independent evidence. To the extent that the factual matters dealt with in the first defendant's submission are relevant to any of the findings which I have made, I have considered the first defendant's submissions in the course of arriving at those findings. I should add that the plaintiff provided, as part of its written submissions, a critique of the first defendant's "Unsworn Statement" listing assertions contained in that statement which were unsupported, or even contradicted, by the evidence. It is unnecessary to refer to those criticisms in detail, although they are for the most part correct. The relevance of a number of the assertions is unclear and most of them would have required sworn evidence from the first defendant in order for the Court to act upon them. A number of the assertions were not put to relevant witnesses.

1848. It was submitted on behalf of the second defendant that the essentially criminal nature of the proceeding dictated that the principles of prosecutorial fairness should apply and that this had been recognised by Santow J in Adler.[83] It was submitted that ASIC had an obligation to act fairly, a duty owed not to the defendants but to the Court to ensure standards of fairness which assisted the Court in ensuring the defendants had a fair trial. Reference was made to Cannon v Tahche [2002] VSCA 84 in which the Court of Appeal referred to the prosecutor's obligation to act fairly as springing from practices established by judges over the years which had been designed to ensure that an accused person received a fair trial, such practices including giving the accused adequate notice of the particulars of the offence and providing the names of witnesses whom it was not proposed to call. Reference was also made to R v Tran [2000] FCA 1888; (2001) 105 FCR 182, 202-206 in which the Full Court of the Federal Court referred to the duty of the prosecutor to present the case against the accused fairly and honestly and not to use any tactical manoeuvre legally available in order to secure a conviction, to call all witnesses who may give relevant evidence, whether that evidence assists the Crown case or not, and to formulate the basis upon which the Crown put its case against the accused, and, essentially, to adhere to that case.

1851. It was submitted that ASIC was bound by its pleaded case, and that the Court could not take into account evidence or allegations beyond that case. It was further submitted that the Court allowed cross-examination of Elliott beyond the particulars of ASIC's pleaded case.

1854. It was further submitted that ASIC was obliged to call the defendants Harrison and Plymin and Carnie (the director who was not a defendant) because they were all vital and material witnesses as to facts relevant to key issues.

1857. Assuming without deciding that ASIC had a duty to act with prosecutorial fairness, or at least an analogous duty having regard to the nature of the proceeding, I am satisfied that ASIC did not act in breach of such a duty.

1860. It is important to record that the defendants were provided with advance notice of the whole of ASIC's case, not only with the amended statement of claim dated 11 April 2001 together with various further and better particulars, but also with the copies of the voluminous affidavit evidence and exhibits of all but a very few witnesses. Some affidavits were provided or updated later than the time allowed by the directions of the Court but in the end it was not maintained that there was incurable or any prejudice thereby suffered by the defendants. In addition, it is important to record that, in accordance with the direction of the Court, ASIC provided a full opening which was made available in writing to the defendants at the commencement of the proceeding. Some limited supplementary oral evidence was given by a number of witnesses, but again no prejudice was thereby caused to the defendants. The second defendant has not specified the respects in which it is said that the evidence (substantially on affidavit) departed from the case as pleaded or particularised, but even if it did, I am unable to identify any resulting prejudice or unfairness to the defendants. I reject the submission that cross-examination was permitted beyond the pleaded case. In my view, the cross-examination properly went to relevant matters or to credit, and the number of objections upon which it was necessary to rule was few in the context of a case of this factual detail and length.

1863. Further, in my opinion, whatever might be the position in criminal proceedings, in a proceeding governed by the rules of evidence and procedure in civil matters, there was no obligation upon ASIC to call Harrison, Plymin or Carnie, or any other persons as witnesses. In any event, the second defendant would have been well aware of the matters as to which the other directors might give evidence and, in the case of Harrison and Plymin, they were co-defendants in the proceeding. I perceive no unfairness resulting from ASIC's failure to call the other directors.

1866. Presumably it would not be the case that any breach, however trivial, of the alleged duty to act with prosecutorial fairness would amount to a miscarriage of justice or vitiate the proceeding in such a way as to call for a new trial or the dismissal of the proceeding. The second defendant's submissions did not seek to elucidate how any and what breach of the alleged duty had resulted in such a miscarriage of justice, or had such a vitiating effect.

1870. It was submitted on behalf of the second defendant that the failure by ASIC to call any of the directors, Harrison, Plymin, Carnie and John Gross, in circumstances where ASIC had conducted examinations of each of them, should give rise to an inference not simply that those persons would not have given evidence that assisted ASIC in making out its case against Elliott, but rather an inference that their evidence would have harmed ASIC's case.

1873. I do not think that ASIC ought reasonably to have been expected to call these directors. Harrison and Plymin were co-defendants. All of the directors were, if anything, in the camp of the defendants, and they were certainly not in ASIC's camp. In addition, each of them would have been entitled to rely on their privilege against self-incrimination and against self-exposure to a penalty. Nor am I able to identify the particular facts and matters in respect of which it might be said that their evidence would not have assisted ASIC, let alone would have harmed ASIC's case. The second defendant seemed to be submitting that the issue in respect of which inferences should not be drawn against Elliott as a result of the failure to call these directors was the issue of Elliott's awareness of reasonable grounds for suspecting insolvency. The evidence in relation to that issue was for the most part uncontradicted evidence as to what was known by Elliott or learned by him as a result of his attendance at Board or other meetings. The second defendant did not identify precisely what inferences ought not to be drawn as a result of the "failure" to call these directors. I note that it was submitted in this regard on behalf of the second defendant that the evidence adduced by ASIC in its case against Elliott failed to give rise to a reasonable and definite inference that Elliott suspected Water Wheel to be insolvent. That submission is beside the point, because it was not part of ASIC's case that Elliott had any such suspicion, as opposed to awareness of reasonable grounds for suspecting.

1876. I therefore reject the submission that there should be an inference that any evidence from these directors would have harmed, or would not have assisted, ASIC's case.

1880. Section 588H(2) provides, so far as relevant, that it is a defence if it is proved that, at the time when the debt was incurred, the director has reasonable grounds to expect, and did expect, that the company was solvent at that time.

1883. Section 588H(3) provides, so far as material, that it is a defence if it is proved that, at the time when the debt was incurred, the director:

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

(i) that a competent and reliable person ("the other person") was responsible for providing to the [director] adequate information about whether the company was solvent; and

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

(b) expected on the basis of information provided to the [director] by the other person, that the company was solvent at that time..."

1890. Neither the first defendant by his defence dated 11 November 2002 nor the second defendant by his amended defence dated 7 October 2002 relied upon the defence contained in s.588H(2). Nor was this defence referred to in written submissions. In any event, in my opinion, the defence is not made out because it was not proved that any time during the relevant period that either Plymin or Elliott had reasonable grounds to expect that Water Wheel was solvent. No doubt it is possible to have a case where a director is aware of reasonable grounds to "suspect" insolvency, but nevertheless has reasonable grounds to "expect" solvency, although such a case would perhaps be unusual. However, in the present case, it is difficult to identify any reasonable grounds upon which a director might have expected that Water Wheel was solvent during the relevant period and neither the first defendant nor Counsel for the second defendant made any attempt to identify any such grounds.

1893. In paragraph 6 of the second defendant's said amended defence, it is alleged that at all material times prior to 15 February 2000, Elliott, as he was entitled to do, relied upon information provided to him by the management of Water Wheel (namely Plymin and others), and upon such reports, financial analyses etc. as were provided to him for the purposes of his attendance at Board meetings which information at no time put him on notice that Water Wheel was insolvent or that there were reasonable grounds for suspecting that Water Wheel was insolvent. Paragraph 6A of the amended defence goes on to allege that at all material times prior to 15 February 2000, Elliott had reason to believe, and did believe, that Plymin either directly or indirectly was responsible for providing to him adequate information about whether the Group was solvent and that Plymin was fulfilling that responsibility and that Elliott expected, on the basis of the information provided to him by or via Plymin, that Water Wheel was solvent and would remain solvent.

1896. Apart from containing a denial that there were reasonable grounds for suspecting that Water Wheel was insolvent, the above paragraphs of the amended defence appear to raise the defence provided for by s.588H(3). The same paragraphs are repeated, where appropriate, in other parts of the amended defence.

1899. I am not satisfied that Elliott had reasonable grounds to believe that Plymin, or management generally, was fulfilling the responsibility of providing adequate information to him about whether Water Wheel was solvent. On the contrary, I am satisfied that Elliott did not have any reasonable grounds to so believe and that such information as was provided to him was not adequate enough to provide such reasonable grounds. For example, Elliott admitted that by late July 1999, he had concerns about the reliability and quality of the financial information being provided to him as a director, and that the form of financial reporting which the Board had asked for in October 1998 was still not forthcoming, and that the Board was not being provided with up to date information about the trading performance and financial position of Water Wheel.[85]

1904. Further, I am not satisfied that Elliott, an experienced businessman and company director, who showed himself in the witness box to be a very intelligent and astute individual, did not know at all relevant times that he could and should have obtained from management on a regular basis a list of debtors and creditors by age and amount (including the age and amount of off-balance sheet finance), regular profit and loss and cashflow statements and reports on negotiations (if any) with creditors whose debts were outside trading terms. I am therefore not satisfied that at any relevant time Elliott believed that Plymin and management generally were competent and reliable persons who were fulfilling the responsibility to provide him with adequate information about whether the company was solvent. Indeed, having seen and heard Elliott give evidence, I consider that Elliott turned a blind eye to the details of Water Wheel's liquidity crisis in the hope that "something would turn up" to rescue the company and his own associated financial interests. In any event, I consider that the evidence negatives the existence of reasonable grounds for Elliott to believe that Plymin was a competent and reliable person within the meaning of s.588H(3). For example, as already mentioned, Plymin continued to fail to comply with the requirements for financial information laid down by the Board in its meeting of 12 October 1998. I would also refer to the acquiescence by Plymin in Water Wheel making persistent and often public references to the so-called problem of "un-invoiced sales", in circumstances where Deloittes and the auditors had been unable to find any evidence to support the existence of un-invoiced sales. This conduct is suggestive of a person lacking reliability, if not competence. The provision by Plymin of totally inadequate information to the Board after the receipt of queries from ASIC concerning the solvency of Water Wheel is further suggestive of a person lacking both competence and reliability.

1907. Another element which must be proved in the defence under s.588H(3) (and also in the defence under s.588H(2)) is that the director at the relevant times in fact "expected"[86] that the company was solvent.

1910. On the whole of the evidence, and notwithstanding Elliott's assertions in his testimony of his confidence and lack of any concern as to Water Wheel's financial position and his evidence as to his shock when the true position became undeniable, I am not satisfied that any time on and after 14 September 1999 Elliott expected that, by continuing to trade, Water Wheel was or would be able to pay its debts as and when they fell due.

1913. Turning to the first defendant (Plymin), in paragraph 6 of his defence dated 11 November 2002 (and incorporated by reference in paragraphs 8, 15, 17, 24, 26, 35, 37 and 39 thereof), it is alleged that:

"... at all material times prior to the 17 February 2000 I relied upon information provided to him by the senior financial staff of Holdings and Mills (namely the Financial Controller Wilson) whose responsibility it was to produce monthly management accounts and cashflow forecasts as required. I refer to the fourth affidavit of David Wilson sworn on the 24 June 2002 and in particular paragraph 9 in which he states that his responsibilities as Financial Controller included the production of monthly management accounts, cashflow projections, budgets and controlling the cashflow of the business. Furthermore during the period June 1999 to February 2000, PricewaterhouseCoopers ("PWC") was contracted by the company's banker's ("ANZ") to work with the company to monitor its performance. At no stage within this period did PWC advise myself or any member of staff or management that the company may have been trading while insolvent. Furthermore, immediately Wilson and the Auditors ("Hall Puddy and Wales") had completed the 1999 statutory accounts revealing a consolidated loss of approx $6.8m for the Group, I supported the Board resolution to voluntary administrators."

1917. There is no direct evidence of Plymin's beliefs or state of mind as alleged at the relevant times. It is sufficient to say that I am not at all satisfied that at any relevant time Plymin expected, on the basis of information provided to him or otherwise, that Water Wheel was solvent.

1921. It was submitted by the second defendant that two letters from ASIC to the Board of Water Wheel should not have been admitted in evidence. The first letter was the letter to the Board of Directors of Water Wheel dated 16 September 1999, which, among other things, expressed ASIC's concern about the solvency of Water Wheel and sought advice as to whether Water Wheel was able to pay all its debts as and when they came due. The second letter was the letter to the Board of Directors of Water Wheel dated 21 October 1999, again expressing concern about the solvency of Water Wheel and seeking advice as to whether Water Wheel was able to pay all its debts as and when they came due. The basis of the objection was that the admission of the letters was improper or unfair and would materially prejudice the second defendant in obtaining a fair trial, because, in effect the letters were "manipulative" and designed to trap the directors into an awareness of grounds for suspecting insolvency without any warning from ASIC. The discretion to exclude the material was said to derive from a Bunning v Cross discretion.[87] I reject this submission for a number of reasons. First, at the time when these letters were admitted into evidence as part of Exhibit 62 on 19 September 2002, no objection was taken to their admission on these or any other grounds. Secondly, I do not accept that there was anything manipulative or in the nature of a trap involved in ASIC expressing its concern as to the solvency of Water Wheel to the directors of Water Wheel. One would have thought that ASIC was doing them a service by putting them on notice to make careful inquiry as to the financial condition of Water Wheel. Finally, I do not think that the letters add to any evidence of awareness of reasonable grounds for suspecting insolvency. They simply form part of the circumstances in which the directors were carrying out their duties and no doubt, given the source of the letters, put them on notice of a matter about which they should have been very concerned in any event. A reasonable director, one would have thought, would have been alerted to an important concern and acted accordingly.

1925. Section 1317JA(2) empowers the Court to relieve a director either wholly or partly from a liability to which he would otherwise be subject, or that might otherwise be imposed on him, because of the contravention of a civil penalty provision if it appears to the Court that:

(b) having regard to all of the circumstances of the case...the person ought fairly to be excused for the contravention."

1930. I suggested to the parties, and it was agreed, that it was appropriate to defer argument about the application of this section until after the Court had decided whether any contravention or contraventions had been established, and the nature thereof.

(a) The Water Wheel companies, Mills and Holdings, were each insolvent at all times on and between 14 September 1999 and 17 February 2000 ("the relevant period");

(b) The said Water Wheel companies each incurred various debts during the relevant period (as found above);

(c) The defendants Plymin and Elliott were each directors of the said Water Wheel companies throughout the relevant period and thus were directors when each of the said debts was incurred;

(d) Throughout the relevant period, there were reasonable grounds for suspecting that each of the said Water Wheel companies was insolvent and thus such reasonable grounds existed when each of the said debts was incurred;

(e) The defendants Plymin and Elliott each failed to prevent the said Water Wheel companies from incurring each of the said debts;

(f) The defendants Plymin and Elliott were each aware throughout the said period, and thus at the time that each of the said debts was incurred, of reasonable grounds for suspecting that the Water Wheel company incurring the said debt was insolvent;

(g) At the time of each of the said debts being incurred, a reasonable person in a like position to that of Plymin, in a company in the circumstances of the Water Wheel company incurring that debt, would have been aware of reasonable grounds for suspecting that that company was insolvent;

(h) At the time of each of the said debts being incurred, a reasonable person in a like position to that of Elliott, in a company in the circumstances of the Water Wheel company incurring that debt, would have been aware of reasonable grounds for suspecting that that company was insolvent.

1940. Accordingly, Plymin and Elliott have each contravened a civil penalty provision, namely s.588G of the Law, on each occasion when each of the said debts was incurred. The defendants Plymin and Elliott have failed to establish any of the defences provided for by s.588H.

1943. Submissions remain to be heard under s.1317JA(2) of the Law concerning whether the Court should relieve the defendants Plymin or Elliott either wholly or partly from any liability to which they or either of them might otherwise be subject, or that might otherwise be imposed on them, because of the contraventions.

1946. The Court is also satisfied that the debts incurred by each of the said Water Wheel companies throughout the relevant period were wholly unsecured and that the persons to whom the debts are owed have suffered loss and damage in relation to such debt because of the insolvency of the relevant Water Wheel company. Submissions remain to be heard whether, in those circumstances, the Court should order the defendants Plymin and Elliott or either of them to pay to the relevant Water Wheel company compensation equal to the amount of such loss or damage, pursuant to s.588J(1) of the Law.

1949. Part 9.4B of the Law provides for further civil consequences of the said contraventions of s.588G. Declarations will be made, if appropriate, as to relevant contraventions pursuant to s.1317EA(2) of the Law.

1952. Submissions will be heard as to whether the Court should make orders pursuant to s.1317EA(3) of the Law, if the defendants are not otherwise relieved from liability, prohibiting the defendants Plymin and Elliott or either of them from managing a corporation for any specified period, and/or requiring the defendants Plymin and Elliott or either of them to pay to the Commonwealth any, and if so, what, pecuniary penalty.

1955. In addition to the remaining matters referred to above, submissions will also be heard from the third defendant, Harrison, and as to costs. A date will need to be fixed for the purpose of a preliminary discussion as to the outstanding matters, giving any further necessary directions and fixing a date in the near future for the final disposition of all such outstanding matters.

I certify that this and the 213 preceding pages are a true copy of the reasons for Judgment of the Honourable Justice Mandie of the Supreme Court of Victoria delivered on 5 May 2003.

[1] see Shum Yip Properties Development Ltd v Chatswood Investment and Development Co Pty Ltd [2002] NSWSC 13; (2002) 40 ACSR 619 at 621-623.

[2] As at 3 June 1999 Plymin "directly" held 1,700 fully paid ordinary shares and 125,000 options over unissued fully paid ordinary shares

[3] As at 3 June 1999 Elliott "indirectly held" 711,820 fully paid ordinary shares (through ARH) amounting to 11.71% of the issued shares and 750,000 preference shares

[4] As at 3 June 1999 Harrison "directly" held 69,483 and "indirectly held" 103,189 fully paid ordinary shares in Holdings .

[5] In fact, the last payment made by Water Wheel under this agreement was made on 29 November 1999, leaving an amount outstanding to Vicgrain of approximately $750,000.

[6] The Board minutes incorrectly record that Calvert-Jones was in attendance.

[7] Water Wheel's financial year ended on 3 December.

[8] In the middle of February 1999, a paper by Mark Gross containing an interesting review of the world rice industry and of Water Wheel's rice operations was circulated to all directors. The paper is undated but on 5 February 1999 Plymin sent a memorandum to the other Board members attaching a letter from the Office of the Federal Treasurer and noting that "the Rice Strategy Paper will be circulated next week". Plymin's note records his conversation with an Alistair Davey of the Federal Treasurer's Office who told Plymin that deregulation would take many months and "not before the end of the year". Gross's paper noted (at p 23) that "Depending on the form of deregulation of the rice industry, Water Wheel's export opportunities might be limited" and that "Upon deregulation other competitors may enter the market".

10] It is unclear where the latter figure comes from, or whether it is simply a mistake, as the auditor advised in February that a loss in the region of $1.5M had been made.

[11] Compare the similar facts in Lee Kong v Pilkington (Aust.) Limited (1997) 25 ACSR 103.

[12] The relevant invoices bear dates from 30 March 1999 to 2 June 1999.

14] Plymin had been so advised by the auditors on 12 February 1999, and also by Brown of Deloittes in late March 1999.

[15] Contrast this statement with the Managing Director's reported comment on stockfeed in June 1999: "...margins being almost non-existing. I do not see any improvement in this situation for the medium term."

[16] See too para [[] below

17] AASB 1040 defines current liabilities to include liabilities that are "at call or due or expected to be settled within twelve months of the reporting date".

[18] Wales and Montesano had prepared a preliminary set of accounts by 29 July which showed a loss of $2,740,420. Subsequently, Plymin made a number of adjustments. These included an upward adjustment by Plymin to the value of inventory of $618,521.85.

[19] The origin of this was explained by the auditor's evidence as follows. During the course of the half year audit Plymin had produced a list of abnormal items to Montesano that totalled $303,467. These items included a figure of $161,079 for zero invoices, i.e. invoices that Plymin claimed had been raised for a "nil" value rather than the correct value. This item was included in the half year result in reliance on Plymin's statements. The auditors were not engaged to audit the half-year results, and did not do any audit verification work on the figure of $161,079 nor did they examine its collectability.

[20] This document was provided by Plymin to Atcheson of the ANZ Bank on 27 October 1999.

[21] $3,780 (invoice dated 27/01/99); $224 (invoice dated 19/05/99); $3,780 (invoice dated 27/05/99); $1,890 and $242 (invoices dated 02/07/99); $3,780 (invoice dated 23/07/99) and $726 (invoice dated 03/08/99).

[22] Further post-dated cheques totalling $975,000 were given to Derrick & Son on or about 4 November 1999.

[23] I note that Mills continued to make payment to Swire in relation to overdue amounts for the rest of 1999, and that the last payment received by Swire on 14 January 2000 was still insufficient to settle the full amount of the debt.

[24] When the auditor, Wales, subsequently learned that Water Wheel had announced that the half year results contained a "mistake" he took strong exception to it. He met with Plymin in about October 1999 and expressed his annoyance, as the classification as at 3 June was correct. I note that it was only the subsequent actions by the ANZ Bank which raised the question of how the debt was to be classified for the future - actions of which the directors were aware, but about which Wales was not informed.

27] On 22 October 1999, ASIC also wrote to Water Wheel concerning disclosure issues in relation to the alleged "lost sales" of $1.2M.

29] See paras [[] and [] above.

30] I note that the entities said to be involved with the proposed letter of credit never in fact committed to it and that the arrangements for the letter of credit never came to fruition.

[31] See s.7 of the Corporations (Victoria) Act 1990 (Vic) (Act No. 80 of 1990), which provides that the Corporations Law set out in s.82 of the Corporations Act 1989 (Cth) as in force for the time being applies as a law of Victoria and may be referred to as the Corporations Law of Victoria.

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

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

(1) Where, on an application for a civil penalty order against a person in relation to a contravention of section 588G, the Court is satisfied that:

(a) the person committed the contravention in relation to the incurring of a debt by a company; and

(c) the person to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency;

the Court may (whether or not it makes an order under subsection 1317EA(3)) order the first-mentioned person to pay to the company compensation equal to the amount of that loss or damage."

[34] I note that under s.588L an order to pay compensation may be enforced as if it were a judgment of the Court.

(4) The Court is not to make an order under paragraph (3)(a) if it is satisfied that, despite the contravention, the person is a fit and proper person to manage a corporation.

(5) The Court is not to make an order under paragraph (3)(b) unless it is satisfied that the contravention is a serious one.

(6) The Court is not to make an order under paragraph (3)(b) if it is satisfied that an Australian court has ordered the person to pay damages in the nature of punitive damages because of the act or omission constituting the contravention.

(7) Section 91A defines what, for the purposes of this section, constitutes managing a corporation."

Where the Court makes under paragraph 1317EA(3)(b) an order that a person pay a pecuniary penalty:

(a) the penalty is payable to the Commission on the Commonwealth's behalf; and

(b) the Commission or the Commonwealth may enforce the order as if it were a judgment of the Court."

[36] See paragraph 6 of Schedule 1 of the CLERP Act 1999.

[37] Section 1466 of the CLERP Act 1999 defines "old Law" as the Corporations Law as in force immediately before the commencement of Schedule 1 to the CLERP Act 1999.

[38] See too s.109E of the Corporations Law.

[40] The same view was expressed by McHugh J at 606 in para [120]; Hayne and Callinan JJ agreed generally with the reasons of Gleeson CJ, Gaudron and Gummow JJ.

[41] See Shum Yip Properties Development Ltd v Chatswood Investment and Development Co Pty Ltd [2002] NSWSC 13; (2002) 40 ACSR 619 at 621-623 in paras [6] - [12].

[42] See the definition of "authority" in s.38, Corporations Act 1989 (Cth).

[43] A substantially similar power was granted to ASIC by s.1317J(1) of the post 12 March 2000 Corporations Law of Victoria, but that section for reasons already stated is inapplicable in this proceeding.

[44] At 548, in paras [14] and [15]. See too Bank of New South Wales v The Commonwealth [1948] HCA 7; (1948) 76 CLR 1 at 186-187; Actors and Announcers Equity v Fontana [1982] HCA 23; (1982) 150 CLR 169 at 184, 202.

[45] At 579-581, in paras [109], [111]-[113].

[47] This was done by s.66 of the Corporations Act (Vic) and s.7 of the Corporations Act (Vic), the latter of which applied the Corporations Law as set out in s.82 of the Corporations Act 1989 (Cth) as a law of Victoria.

[48] See Hughes, per Gleeson CJ, Gaudron, McHugh, Gummow, Hayne and Callinan JJ at 556 in para [42]; and per Kirby J at 582 in para [115]; and ASIC v Edensor, per Gleeson CJ, Gaudron and Gummow JJ at 584 in para [47] and footnote 98.

[49] See Hughes, at 555-556 in paras [40] and [41] and at 581 in para [113]; Re Wakim [1999] HCA 27; (1999) 198 CLR 511, at 594 per Gummow and Hayne JJ

[50] This extends to corporate insolvency, as recognised in Victoria v Commonwealth [1957] HCA 54; (1957) 99 CLR 575 at 612; and Bank of New South Wales v Federal Commissioner of Taxation [1979] HCA 64; (1979) 145 CLR 438 at 454-455

[51] In aid of the executive power of the Commonwealth - see Davis v The Commonwealth [1988] HCA 63; (1988) 166 CLR 79 at 113; R v Duncan [1983] HCA 29; (1985) 158 CLR 535 at 553 and 591, and Hughes at 554-555.

[52] For example, the implied legislative power to make provision for the acceptance of a state function and the power to give effect to such a scheme: R v Duncan; see also Hughes at 581 and the implied nationhood power: Hughes at 581; Davis, supra, at 93; Re Wakim [1999] HCA 27; (1999) 198 CLR 511 at 614-616; State of Victoria v Commonwealth of Australia [1975] HCA 52; (1975) 134 CLR 338 at 412; and State Chamber of Commerce and Industry v The Commonwealth of Australia [1987] HCA 38; (1987) 163 CLR 329 at 357.

[53] For the operation of these provisions, see the discussion in Part III hereof.

[54] See Jackson v Butterworth [1946] VicLawRp 51; [1946] VLR 330; Mallan v Lee [1949] HCA 48; (1949) 80 CLR 198; Naismith v McGovern [1953] HCA 59; (1953) 90 CLR 336; Murphy v KRM Holdings Pty Ltd [1985] FCA 495; (1985) 8 FCR 349; Moore v Jack Brabham Holdings Pty Ltd (1986) 7 NSWLR 470 and on appeal Jack Brabham Holdings Pty Ltd v Button (1988) 85 ALR 640; Comptroller General of Customs v D'Aquino Bros Pty Ltd (1996) 135 ALR 649; Wong v Kelly [1999] NSWCA 439; (1999) 154 FLR 200 ("Wong v Kelly"); Evans v Button (1988) 13 NSWLR 57; Kelly v JRA Limited (1990) 92 ALR 651; CEO of Customs v Jiang [2001] FCA 145; (2001) 111 FCR 395; CEO of Customs v Labrador Liquor Wholesale Pty Ltd [2001] QCA 280; (2002) 188 ALR 493 ("Labrador Liquor").

[56] I note that s.247 of the Customs Act 1901 (Cth) refers to "the usual practice and procedure of the court in civil cases" but makes no mention of rules of evidence in civil cases.

[57] See Re HIH Insurance Limited; ASIC v Adler [2002] NSWSC 483; (2002) 42 ACSR 80, 97-8 (and cases there cited).

[58] See, Ibid, 114-5 (and cases there cited).

[59] AR Keay, "The insolvency factor in the avoidance of antecedent transactions in corporate liquidations" [1995] MonashULawRw 12; (1995) 21 Monash University Law Review 305 at 307.

[61] See, for example: Melbase Corporation Pty Ltd v Segenhoe Ltd [1995] FCA 1225; (1995) 17 ACSR 187, 198-9 per Lindgren J; Hymix Concrete Pty Ltd v Garritty (1997) 13 ALR 321, 327-8; Powell v Fryer [2001] SASC 59; (2001) 37 ACSR 589.

63] The special wages account (account no. 8369 40625) for Water Wheel was opened on 31 August 1999 and the overdraft in that account gradually increased. By 31 December 1999 it was $1,031,239.48, and by 16 February 2000 it was $1,475,027.48. As at 31 August 1999, the ordinary business cheque account (account no. 8369 13109) of Water Wheel was overdrawn in the sum of $795,836.34. As at 31 December 1999, it was in credit, and as at 27 January 1999 it was in credit.

[64] See the language used in the heading of Division 3 and the heading to s.588G.

[65] Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405; Heide Pty Ltd v Lester (1990) 3 ACSR 159; Group Four Industries Pty Ltd v Brosnan (1992) 59 SASR 22; Byron v Southern Star Group Pty Ltd (1996) 136 FLR 267, 275-279; Credit Corporation Australia Pty Ltd v Atkins [1999] FCA 335; (1999) 30 ACSR 727, 771-2.

[66] See Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, 122-126 (and cases there cited); Standard Chartered Bank of Australasia Ltd v Antico [1995] NSWSC 31; (1995) 38 NSWLR 290; Kenna and Brown Pty Ltd v Kenna [1999] NSWSC 533; (1999) 32 ACSR 430, 444; Credit Corporation Australia Pty Ltd v Atkins [1999] FCA 335; (1999) 30 ACSR 727, 741.

[67] See Re City Equitable Fire Insurance Co Limited [1925] Ch 407, 426; Statewide Tobacco Services Limited v Morley [1993] VicRp 32; [1993] 1 VR 423; Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115; AWA Limited v Daniels (1992) 7 ACSR 759 and on appeal Daniels v Anderson (1995) 37 NSWLR 438; ASC v Gallagher (1993) 10 ACSR 43, 52; Re Property Force Consultancy Pty Ltd [1997] 1 QdR 300; Duke Group v Pilmer [1998] SASC 6529; (1998) 27 ACSR 1 and [1999] SASC 97; (1999) 31 ACSR 213; Spies v R [2000] HCA 43; (2001) 201 CLR 603; ASIC v Adler [2002] NSWSC 171; (2002) 41 ACSR 72; ASIC v Whitlam [2002] NSWSC 591; (2002) 42 ACSR 407.

[68] Statewide Tobacco Services Limited v Morley [1993] VicRp 32; [1993] 1 VR 423, 448 per Ormiston J.

[69] Compare cases to a somewhat similar effect decided under earlier legislation: Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (No. 2) [1994] FCA 1117; (1994) 51 FCR 425, 433; Hawcroft General Trading Co Limited v Edgar (1996) 20 ACSR 541, 548.

[70] See Credit Corporation Australia Pty Ltd v Atkins [1999] FCA 335; (1999) 30 ACSR 727, 769; Powell v Fryer [2001] SASC 59; (2001) 37 ACSR 589, 601.

[71] See Niall Coburn, Coburn's Insolvent Trading (2nd ed, Law Book Co, 2003) at 62.

[72] See too George v Rockett [1990] HCA 26; (1990) 170 CLR 104, 115-6.

[73] See above paras [[], [] and [].

74] For the breakdown of this amount see para [[].

75] This includes $8,060.97 for Fringe Benefits Tax, calculated on a pro rata basis.

[76] The amount for one delivery has been deducted in accordance with a submission by the second defendant.

[77] (1991) 9 Company and Securities Law Journal 285.

[78] See too Powell v Fryer [2001] SASC 59; (2001) 37 ACSR 589,605.

[79] In addition to the cases cited above, see: Russell Halpern Nominees Pty Ltd v Martin [1987] WAR 150; Versteeg v Versteeg (1988) 36 A Crim R 68 (discussed by Ipp J in DCT (WA) v Pollock (1993) 12 ACSR 217, 232-3); Bans Pty Ltd v Ling (1995) 16 ACSR 404; Powell v Fryer [2001] SASC 59; (2001) 37 ACSR 589, 598-9.