Q. So the, what I might call the net entries from the reports generated by the Grain Trader program were then used to create a single entry in the accounting program each month?
A. Indeed they were.
46 There was no challenge to Ms Tourle's explanation of the functions of the Grain Trader program or of the need which it imposed to print out cheques in advance of the time when they were required to be remitted to the creditors. Ms Tourle said in evidence to the effect that the trade creditors were not significantly in arrears, and this was not challenged.
47 In my opinion the hearing was not conducted on the basis that the Claimant set out to prove that there was a serious shortcoming in the Company's business methods and in the information available about the amount of trade creditors of the kind which Mr Russell's evidence would suggest. Reading the transcript gives me the impression that Ms Tourle's evidence, and later passages in the evidence of Mr D. J. Kidd which showed that he dealt with the cheques in the manner which she stated, dispelled the issue and any supposed significance it had.
48 Far from it being the case that the circumstances call for a new trial so that the issue can be dealt with, I would regard it as procedurally unjust to order a new trial and allow the Claimant to open up and give attention to this issue when it has been definitively established that the Claimant should not succeed on the issue upon which the Claimant chose to fight the trial. If it were the case that a facade of solvency was being maintained by manipulating the times when cheques were remitted, or by following business methods which intentionally or not had the effect of obscuring the total trade creditors, that would have left a very large impression on the evidence adduced and on the conduct of the case generally. It is not appropriate to grant a new trial to enable this to be explored further when it was not explored during an earlier four-day trial. I regard it as unfortunate that the Trial Judge dealt so shortly with Mr Russell's evidence and did not mention this aspect at all, but I am of the view that there has been no miscarriage of justice and there are no circumstances calling for a new trial.
49 In my opinion the Court of Appeal should order:-
Dismiss the appeal with costs.
50 BASTEN JA: On 29 May 2001 David Kidd Grain Trading Pty Ltd ("the Company") signed an agreement to purchase a quantity of sorghum from Box Valley Pty Ltd ("the Claimant"). The Claimant executed the agreement on 1 June 2001 and, between approximately 5 and 15 June 2001 delivered the sorghum to the Company. The net price payable by the Company was $95,570.63.
51 On 21 June 2001 the Company went into voluntary administration, as a result of its contingent liabilities under a number of unrelated sale contracts involving white cottonseed. Prior to entering into the contract with the Claimant, the Company had entered into sale contracts for 35,000 tonnes of white cottonseed, deliverable on 31 July 2001, at an average price of $182 a tonne. At the same time, it had contracted to purchase 6,000 tonnes of white cottonseed on or before that date. To honour the commitments under the sale contracts it would need to have purchased approximately 30,000 tonnes but, as at 29 May, the price was $228 per tonne and by 20 June had risen to $250 per tonne. Thus, as at 29 May, if it had purchased on that date, it would have made a loss of approximately $40 per tonne on some 30,000 tonnes, being an amount of approximately $1.2 million.
52 The evidence reviewed by Bryson JA demonstrates that the Company did not have the resources, as at 29 May, to meet debts of $1.2 million, if they had been incurred at that time. However, all that had been incurred at that time was a contingent liability to provide goods at a price which, if the liability had crystallized at that time, would have led to a loss of approximately $1.2 million. Whether that loss would in fact eventuate depended on whether the market price of white cottonseed changed between 29 May and the date at which the contractual liability under the sale contracts were to be met, namely 31 July 2001.
53 The statutory provisions pursuant to which the Claimant brought its proceedings against Mr Kidd are now to be found in s 588M of the Corporations Act 2001 (Cth). That provision permits a creditor, who has suffered loss or damage "in relation to the debt because of the company's insolvency" to recover from a director an amount equal to the amount of loss or damage: s 588M(1) and (2). A condition of seeking such recovery is that the director has contravened sub-s 588G(2) or (3) in relation to the incurring of the debt by the company. Relevant parts of s 588G are set out by Bryson JA at [5] above.
54 The debt to the Claimant was incurred either on 29 May, when the Company signed an offer to purchase a specified quantity of sorghum at a specified price, or on 1 June, when the Claimant accepted the offer, or was incurred progressively as the Claimant delivered sorghum to the Company between 5 and 15 June. In this case, nothing turns on the resolution of this question, because the contingent liabilities with respect to white cottonseed had been incurred prior to 29 May and, apart from a possible increase in the market price of white cottonseed, nothing significant in the financial or commercial affairs of the Company changed between 29 May and 15 June. However, I will assume for present purposes that the Company incurred the debt when the Claimant executed the agreement on 1 June. That, accordingly, is the time at which it is necessary to determine whether the Company was insolvent, for the purposes of s 588G(1)(b). (It was not suggested that the Company became insolvent by incurring that debt, nor by incurring other debts at that time.)
55 The Corporations Act contains a definition of when a person "is solvent", in s 95A, set out at [6] above. That statutory test requires that the Company was, at 29 May 2001, "able to pay all [its] debts, as and when they [became] due and payable".
56 Although s 95A uses the present tense, namely that the person "is" able to pay its debts, it refers to an ability or capacity, not a fixed state of affairs at a point in time. That is reflected in the use of the words "able to pay", rather than has paid or is paying, and the reference to being able to pay debts "as and when" they become due and payable. Accordingly, the statutory definition in s 95A does not affect the well-established principle that a temporary lack of liquidity does not constitute insolvency: Sandell v Porter (1966) 115 CLR 666 at 670 (Barwick CJ).
57 In other respects, the Corporations Act does not mirror provisions in earlier statutes, such as s 556 of the Companies (New South Wales) Code, considered in Hawkins v Bank of China (1992) 26 NSWLR 562 (set out by Gleeson CJ at 565D). The liability for a director under that provision is continued by s 592 of the Corporations Act, but only in relation to liability for debts incurred before 23 June 1993. Significantly, that provision (and hence Hawkins) did not depend on whether the company was insolvent at the time the debt was incurred, but whether there were "reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due". At least as at 21 June 2001, when the Company went into voluntary administration, that terminology may have been satisfied. If it had been, a further question of fact would have been whether the same grounds and expectation existed three weeks earlier on 1 June 2001. But that is not the test which is presently relevant.
58 Although it has been said on many occasions that whether or not a company is insolvent is a question of fact, it is necessary, nevertheless, to identify the legal principles relevant to determining that fact: see generally, Sycotex Pty Ltd v Baseler & Ors [No. 2] (1994) 51 FCR 425 at 434 (Gummow J) and Iso Lildo' Aliphumeleli Pty Ltd (In liq) v Commissioner of Taxation (2003) 42 ACSR 561 (Davies AJA) and other authorities referred to by Chesterman J in Emanuel Management Pty Ltd v Fosters Brewing Group Ltd [2003] QSC 205 at [72]-[95]; and see White ACT (in liq) v G B White & Ors (2004) 49 ACSR 220 (McDougall J). The statutory test requires consideration of when a debt becomes "due and payable". In particular, questions have arisen as to the relevance and effect of indulgence granted, either as a matter of commercial practice, or in specific circumstances, with respect to payment. The authorities in relation to this issue were discussed by Palmer J in Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, a discussion which has been referred to in the cases cited, decided subsequent to his Honour's judgment.
59 There have been fewer cases dealing with the proper approach to contingent liabilities, which have not yet fallen due. One case in this Court where such a matter has been considered was Hawkins v Bank of China (supra). In that case, the Court held that a company "incurs a debt" for the purposes of s 556 of the Code, when it entered into a guarantee by which it subjected itself to a conditional, but unavoidable obligation, to pay money at a future time. However, that statement of principle, to be found in the headnote to the report, does less than full justice to the principles with respect to guarantees established by the case. For example, Gleeson CJ noted at 568D-E:
"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."
60 Gleeson CJ then noted that it was conceded in that case that the liability to pay unliquidated damages could not constitute a debt and referred to a passage in the judgment of Mason CJ in Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 255, where his Honour discussed two separate kinds of liability arising under a guarantee - see Hawkins at 569G:
"If the subject of the guarantee is payment of a debt or a sum of money which has accrued due, the creditor may, on default by the principal debtor, sue the guarantor instead of the principal debtor for the debt or sum of money, his claim being for a liquidated amount. If, on the other hand, the subject of the guarantee is the performance of some other obligation, then the person having the benefit if the guarantee may, upon default, sue the guarantor for damages for breach of contract."
61 It was not argued in this case that the Company incurred a debt by entering into an agreement to sell white cottonseed to a third party. However, in order to complete such a sale, the Company needed to acquire white cottonseed. Accordingly, it may be said to be an inevitable consequence of entering into a sale contract that the Company would also need to enter into a purchase contract, which would involve a debt. Purchase contracts with respect to 30,000 tonnes of white cottonseed were not entered into prior to the voluntary administration. Trading in futures inevitably involves a level of speculation and risk. As the white cottonseed market rose, the likelihood of default under the sale contracts increased until it became at least highly probable, around 21 June 2001. The likelihood that the Company would therefore become liable to damages for breach of the sale contracts rose to a similar level. However, whilst a breach would have given rise to damages which were unliquidated, it could not be said that the Company had thereby incurred a debt. The position of the Company may, on that approach, have become commercially untenable, but it was not insolvent in the sense defined by s 95A, at any time prior to 15 June 2001.
62 In seeking to avoid this result, the Claimant argued that default under the sale contracts triggered a right of the purchaser to purchase "against the defaulter" with a consequential entitlement of the defaulter to make good the loss resulting from the alternative purchase. The Claimant argued that prospective liabilities under the white cottonseed contracts, which would probably become liquidated debts at a point no more than two months from 1 June, (the bulk of the contracts fell for completion on 31 July) were liabilities of the Company which could be taken into account in determining whether on 1 June it was able to pay its debts as and when they became due and payable.
63 The Claimant sought to rely on a passage in the judgment of Gleeson CJ in Hawkins, at 572F:
"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."
64 The issue before the Court in Hawkins was whether a company incurred a debt when it entered into a guarantee. On one view, that obligation was not dissimilar to the obligation incurred under the default clause of the white cottonseed contracts in the present case. However, the question in Hawkins was when the "debt" was incurred: in the present case the Court is concerned with the different question, namely whether at a point in time, the Company was able to pay debts when they became due and payable. In the present case, as demonstrated by Bryson JA, the Claimant did not prove that, absent its potential liabilities under the white cottonseed contracts, the Company was not able to pay its debts as and when they fell due and hence either should not have entered into the contract for purchase of the sorghum from the Claimant, or should not have accepted delivery.
65 The trial judge identified the question as requiring application of the principles stated by Palmer J in Lewis v Doran (2004) 50 ACSR 175 at [107]-[108]. In the latter paragraph his Honour stated:
"[108] Where the question is retrospective insolvency, the court has the inestimable benefit of the wisdom of hindsight. One can see the whole picture, both before, as at and after the alleged date of insolvency. The court will be able to see whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due and whether it did, or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and commonsense, had to be considered as at the date of insolvency. By reference to what actually happened, rather than to conflicting experts' opinions as to the implications of balance sheets, the court's task in assessing insolvency as at the alleged date should not be very difficult."
66 The Court is entitled to look at debts which were not due and payable as at the date in question, if they were debts which arose under an existing agreement. If the white cottonseed contracts required the Company to purchase white cottonseed at a fixed price, the Court would be entitled to consider whether the Company could pay for those purchases when they fell due. On that hypothesis, payment would have been contingent upon delivery, but the amount was a liquidated sum and the date for payment was fixed. By contrast, where the existing agreements required the sale of white cottonseed, the Company had then incurred no debt. It had an obligation (which it may not have been likely to meet) to deliver goods at a particular price on a particular date. However, if it failed to purchase the necessary supplies and defaulted, no liquidated debt would arise until the purchasers took further steps, namely to obtain white cottonseed from alternative sources, at a price which was not then known.
67 Although, in commercial terms, the distinction between these two situations may not be critical (if the company will not be able to meet its obligations) nevertheless, in legal terms the distinction is important in determining insolvency. The trial judge held that he was not entitled to take into account prospective liabilities arising from default on the white cottonseed sale contracts: in my view his Honour was correct in that respect. Because the Claimant did not establish that the Company was not otherwise unable to pay its debts as and when they fell due, the Claimant failed to establish its insolvency as at the date on which the Company incurred debts payable to the Claimant. I agree with the orders proposed by Bryson JA.
68 GZELL J: I agree with Bryson JA. I have had the great advantage of his analysis of the facts and the law. I add some brief observations of my own.
69 In Hawkins v Bank of China (1992) 26 NSWLR 562 it was common ground that an obligation to pay unliquidated damages rather than a liquidated sum was not a debt for the purposes of the Companies (New South Wales) Code, s 556, the forerunner of the Corporations Act 2001 (Cth), s 588G(1) which is in issue in this case. Furthermore, the guarantee executed by the company in Hawkins subjected it to a conditional but unavoidable obligation to pay a sum of money at a future time. The contingent liability incurred by the company in executing the guarantee was thus for a liquidated amount rather than for damages for breach of contract, in terms of the distinction drawn by Mason CJ in Sunbird Plaza Pty Ltd v Maloney (1987-1988) 166 CLR 245 at 255.
70 These points of distinction were referred to by Abadee AJA, with whom Meagher JA agreed, in Shepherd & Ors v ANZ Banking Corporation Ltd & Anor (1996) 41 NSWLR 431 at 443-444.
71 In the present case the exposure of David Kidd Grain Trading Pty Ltd under its futures trading in white cottonseed did not give rise to a contingent liability to pay a liquidated sum. The exposure consisted of insufficient forward purchase contracts to meet forward sales obligations.
72 At the time the question of insolvency of the company was to be determined, the likelihood was that it would default on its forward sales contracts because of the increase in market price of cottonseed. The consequences were that it would become liable to a claim for damages for breach of contract or the default clause in the sales contracts would be activated by the purchasers giving notice hereunder and purchasing on the market against the company.
73 On the authorities, a claim for damages for breach of contract is not a debt for the purposes of the definition solvency and insolvency in the Corporations Act 2001 (Cth), s 95A. Nor, in my view, would a claim under the default clause in a forward sales contract constitute a debt until notice was given under it.
74 Thus the prospect that the company would sustain a loss in the future on its dealings in white cottonseed did not, in my view, constitute a debt for the purposes of the Corporations Act 2001 (Cth), s 95A when the company's solvency or insolvency had to be considered.
75 In considering the working capital of the company, Mr Russell included $595,713.00 of unrealised losses on white cottonseed contracts (offset by $20,202.70 of unrealised profits on sorghum contracts) in arriving at his estimate of the deficiency in the working capital of the company of $1,079,520.33 as at 30 April 2001.
76 Hughes DCJ rejected these inclusions as irrelevant to the determination of solvency. In my view, his Honour was correct to do so.
77 But that is not the end of the matter. As Bryson JA has pointed out, Mr Russell's analysis showed a deficiency of working capital, excluding the unrealised profits and losses on futures trading, of $504,010.03 as at 30 April 2001. The trial judge did not consider this matter.
78 Mr Russell arrived at this figure by including trade creditors at $2,823,073.39. That figure was taken from what Mr Russell described as the management accounts, by which he presumably meant the grain trader account. There was a lower figure in the creditors' ledger of $2,027,492.00.
79 Had that figure been included in the analysis (and Mr Russell said the balance in the creditors' ledger appeared to be more accurate a figure for creditors outstanding at the end of the month), far from a deficiency of working capital being shown up, $291,570.97 of working capital would have been identified.
80 I agree with Bryson JA that this issue should have been analysed by his Honour and a determination made as to which figure for trade creditors should have been included in Mr Russell's analysis. If a deficiency in working capital was demonstrated, his Honour ought to have gone on to determine whether the company was insolvent at the material time.
81 That is not a task that this Court can undertake. There are insufficient findings of primary fact. I agree with the analysis by Bryson JA of the conduct of the parties in the Court below and agree that the appeal should be dismissed with costs.
82 I add a note on a problem of construction that has arisen as a result of a transposition from the Companies (New South Wales) Code, s 556(1)(b)(ii) to the Corporations Act 2001 (Cth), s 588G(1)(b).
83 The former provision created a liability in a director of a company that incurred a debt, when there were reasonable grounds to expect that if the company incurred the debt, it would not be able to pay all its debts as and when they became due.
84 The latter provision replaces reasonable grounds of expectation with the fact of insolvency. The sub-section provides as follows:
"This section applies if:
(a) a person is a director of a company at the time when the company incurs a debt; and
(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and
(d) that time is at or after the commencement of this Act."
85 Since insolvency is constituted by an inability to pay debts when they become due and payable, the only contemporaneous debts to which reference is made in the Corporations Act 2001 (Cth), s 588G(1)(b) on a literal construction must be debts which are immediately due and payable.
86 The Companies (New South Wales) Code, s 556(1)(b)(ii) maintained a distinction between the time at which a debt is incurred and the time of its discharge and preserved that well known distinction encapsulated in the Latin phrase debitum in praesenti solvedum in futuro.
87 There is nothing in the Public Exposure Draft and Explanatory Paper to the Corporate Law Reform Bill 1992 to suggest there was to be any change in the concept of the contemporaneous debt referred to in the Corporations Act 2001 (Cth), s 588G(1)(b) from that contained in the Companies (New South Wales) Code, s 556(1)(b)(ii). It may be, therefore, that the Court will need to construe s 588G(1)(b) accordingly.
88 This is not a matter, however, that requires resolution in these proceedings.
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