Box Valley Pty Ltd v Kidd & Anor

Corporations Act 2001 s.588G, 588H(2) & (3), 588M(1) and (3), 588R, 1317S, 1318 LEGISLATION CITED: Companies (NSW) Code s.556(1) District Court Act 1973 (NSW) s.83A Supreme Court Rules 1970 (NSW) Pt.51 r.23(1)

Alexander v Ajax Insurance [1956] VLR 436; [1956] ALR 1077 CASES CITED: Shephard & Ors v ANZ Banking Corporation Ltd & Anor (1997) 15 ACLC 1802 Shepherd v Australia & New Zealand Banking Group Ltd (1996) 14 ACLC 987 Hawkins v Bank of China (1992) 26 NSWLR 562

Box Valley Pty Limited - Appellant PARTIES: Elizabeth Kidd - First Respondent David John Kidd - Second Respondent

COUNSEL: J.T. Johnson - Appellant R.J. Brender - First and Second Respondents

SOLICITORS: Sally Nash & Co. - Appellant Bamford Marcellos O'Connor - First and Second Respondents

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

40039/2005 BRYSON JA BASTEN JA GZELL J

24 February 2006 BOX VALLEY PTY LIMITED v Elizabeth KIDD and David John KIDD

Judgment 1 BRYSON JA: The Claimant Box Valley Pty Ltd, plaintiff in the District Court, appeals against judgment for the defendants given by his Honour Judge Hughes for reasons published on 6 December 2004. In the District Court the Claimant sued for $95,570.63 and alleged that the Opponents were liable as directors for insolvent trading of David Kidd Grain Trading Pty Ltd (the Company). The Claimant also claimed interest pursuant to s.83A of the District Court Act; the claim for interest was not contractually based. If interest were allowed judgment would exceed $100,000. If leave to appeal is necessary (which was not examined at the hearing) I am of opinion that it should be granted, in view of the amount in dispute and the nature of the issues. 2 The Company was incorporated on 1 February 1993 and traded in grains, principally sorghum and white cottonseed, and other rural commodities. Its principal figure and Managing Director was Mr David Blair Kidd. The defendants and now the Opponents are his wife and one of their sons. Mr David Blair Kidd and Mrs Elizabeth Kidd were directors of the Company from its formation and throughout the relevant events, and each owned one of its two issued shares. The second opponent Mr David John Kidd became a director on 28 June 2000 and resigned on 18 June 2001. Mr David Blair Kidd was the first defendant when the District Court proceedings were commenced, but he became bankrupt on 2 March 2004 and the proceedings against him were discontinued before the District Court hearing. 3 The Company entered into administration on 21 June 2001 when Mr A.R. Nicholls was appointed Voluntary Administrator by a resolution of the directors under section 436A of the Corporations Act 2001. The Company went into liquidation on 27 June 2001 upon a resolution of its creditors and Mr Nicholls became its liquidator. The Claimant is a creditor of the Company under an agreement in writing for the sale to the Company of a quantity of sorghum; the Purchase Contract Confirmation (Tab 8, p41) incorporating NACMA Standard Terms & Conditions was signed on behalf of the Company on 29 May 2001 and on behalf of the Claimant on 1 June 2001. (NACMA refers to National Commodity Marketing Association Inc., which issues Standard Terms and Conditions and maintains Trade Rules for trade in agricultural commodities.) The Purchase Contract Confirmation provided among other things for the Company to buy a quantity of 600 to 650 tonnes of sorghum, stated specifications and provided for delivery ex farm in June 2001 at $145 per tonne or $159.50 including GST. Under "Payment Terms" the Confirmation said, partly in handwriting and partly in typewriting "30 days end week delivery BUT NO LATER THAN 30 JULY 2001." The Standard Terms included the following (White book 2 - Tab 13, p231 DEFAULT: In the event of Default in fulfilment of Contract by either party, the other at their discretion shall have the right, after giving written notice by letter, or facsimile, or telex, to sell or purchase, as the case may be, against the Defaulter and the Defaulter shall make good the loss, if any, on such purchase or sale as set forth below:

If the Buyer or Seller suspend payments of debts, or convenes or holds a meeting of creditors, or commits an act of bankruptcy, or being a company shall have a receiver appointed, or hold a meeting for the purpose of considering a resolution that the company be wound up or go into liquidation, such Buyer or Seller shall be deemed to be in Default. 4 The Company took a series of 22 deliveries of sorghum from early June 2001 to 15 June 2001 and tax invoices show prices totalling $100,600.68. Deduction of a dividend of $5,030.05 in the liquidation produced the amount claimed. 5 The liquidator decided not to bring proceedings against the directors but under s.588R of the Corporations Act he consented to the Claimant's bringing proceedings for its own debt. A creditor may recover the amount of loss or damage caused by contravention of s.588G(2) or (3); see s.588M(1) and (3). The Statement of Claim does not allege facts which would invoke subs.588G(3). Section 588G so far as relevant provides in subss. (1) and (2) as follows: 588G Director's duty to prevent insolvent trading by company (1) 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.

(2) 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. Note: This subsection is a civil penalty provision (see subsection 1317E(1)). 6 Solvency and insolvency are established according to s.95A: 95A Solvency and insolvency (1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (2) A person who is not solvent is insolvent. 7 The principal facts on which liability under section 588G turns can be summarised as: - the company was insolvent - there were reasonable grounds for suspecting that the company was insolvent - awareness of insolvency; which can alternatively be - actual awareness of reasonable grounds for suspecting insolvency, or - a reasonable person would be so aware. 8 Section 588H creates defences including two summarised as reasonable grounds to expect company solvent (s.588H(2)) and reliance on a competent and reliable person (s.588H(3)). The Opponents pleaded these defences, and thereby undertook the onus of proof of their own relevant states of mind. The Trial Judge was also of the view that claims for relief from liability under s.1317S and s.1318 of the Corporations Act were before him; these were raised in the Further Amended Notice of Grounds of Defence which appears to have been filed in Court on behalf of the second defendant Mrs Elizabeth Kidd during the hearing. The Trial Judge did not make findings of fact upon which these defences could be disposed of, because his Honour found against the Claimant at an earlier stage relating to proof of insolvency. These are not issues which the Court of Appeal could undertake to decide; there was no consideration of issues relating to the Opponents' states of mind at first instance, and the second opponent Mr David John Kidd was subject to cross-examination and it would not be just to make findings about his state of mind without having seen and heard his evidence being given. 9 At the hearing, which took four days, oral evidence was given on three different days and a large mass of written material was put in evidence. The Trial Judge said that the evidence was not essentially controversial. The issue to which his Honour gave attention was the issue whether the Company was insolvent when the Company incurred its debt to the Claimant. It can be taken that its debt was incurred by the series of events beginning on 1 June 2001 when a representative of the Claimant signed the Purchase Contract Confirmation and ending on 15 June 2001 with the last delivery of sorghum. Insolvency is a state of affairs, not an event at a single point of time, and the question of solvency cannot be addressed in a narrow timeframe. 10 From the terms in which the Trial Judge addressed the facts in his judgment it should be understood that his Honour regarded the Claimant's case that the Company was insolvent as consisting of and turning on evidence including opinion evidence given by Mr Paul Alexander Russell, a chartered accountant and a principal of Sims Partners, who practise in Business Recovery, Reconstruction and Insolvency Services. Mr Russell made an Expert Report (White Book 2 Tab 13) as to solvency dated 22 October 2003 for the purpose of these proceedings, and that Report was put in evidence by the Claimant; Mr Russell also gave oral evidence on the first hearing day. The Trial Judge dealt with Mr Russell's evidence in these words: Judgment (35). Mr Russell a Chartered Accountant gave a report and was effectively cross-examined by the defendant. Mr Russell took into account unrealised losses from the trading in white cottonseed in determining the insolvency of the Company at the earlier dates. For the reasons I have already given I am not satisfied that this is a relevant factor in determining solvency. I therefore reject the evidence of Mr Russell. 11 What underlies this is a considerable body of evidence and views expressed by Mr Russell about the significance for solvency of large obligations which the Company incurred by futures trading in primary products, principally white cottonseed and sorghum. It seemed to the Managing Director Mr David Blair Kidd on 21 June 2001, when the Company went into Voluntary Administration, that the Company was about to be completely overwhelmed; yet those obligations had not at that time reached the point where any recognisable debt or ascertainable amount was payable, and the most that could be known was that, under the then state of the market for sorghum and white cottonseed, it was highly likely that when the time arrived for performance of forward contracts the Company would be unable to meet its obligations to sell and deliver, either by matching sale contracts with purchase contracts, or by buying-in product on the market and delivering it. Market prices had risen to a level where, in Mr David Blair's Kidd's judgment of what the future held, the Company would default on many purchase contracts when their times for performance arrived, with severely adverse results including inability to continue to trade in grains. 12 In illustration of the development of difficulty in futures trading, the Company's position report dated 30 April 2001 dealing with trading in commodities showed that it then had purchase contracts for white cottonseed totalling 6000 tonnes at an average price of $170.33, for delivery on 31 July 2001 as to 2250 tonnes and on 25 May 2001 as to 3000 tonnes. On the other hand the Company had outstanding sale contracts for 35,000 tonnes, deliverable on 31 July 2001 and another 1000 tonnes deliverable on 17 August 2001, at an average price of $182.24 a tonne. If the company were to comply with the sale contracts it would be necessary to obtain from somewhere and deliver 31,000 tonnes of white cottonseed; if it did this it would receive $182.24 per tonne; yet, according to the evidence of Mr D. B. Kidd, the market price on 29 May 2001 was $228 a tonne and on 20 June $250 a tonne. For a company whose internal management balance sheet for 30 April 2001 showed net assets of (-$32,984.19) a completely unmanageable crisis was looming on 31 July 2001 unless the price of white cottonseed fell below $182.24 a tonne in the meantime. Mr D. B. Kidd's view on 21 June 2001 that a fall like that was unlikely to happen precipitated the decision to go into voluntary administration. (As it happens, although it does not affect what I have in hand, his foresight of what was to happen in the white cottonseed market was correct, and there were huge claims for damages from the holders of defaulted forward sale contracts in the liquidation). 13 It is necessary to look at the operation of NACMA standard terms and conditions relating to default to understand what would be the consequence of a default. It would of course be an event of default if the time for completion of a forward sale contract arrived and the Company did not deliver the goods. (There would also be and I take it there actually were deemed defaults in the circumstances set out in the Default clause when the Company went into Administration and suspended payments of debts, and also when in association with the Administration it held a meeting of creditors, and again when it went into liquidation.) When a default happens, purchasers have the right to sue for damages on default. A purchaser would also have the right to follow the machinery in the Default clause, give written notice which would require compliance within a reasonable time, in the circumstances a very short time and more or less forthwith, and then purchase on the market "against the defaulter" (in the words of the Contract), meaning that the purchaser could claim against the Company the amount of money which would make good the loss, the difference between the two prices. 14 The debts referred to in the test of solvency in s.95A are only part of the debts or claims provable in winding-up referred to in s.553(1); and for the purposes of s.588G the debts which come under consideration are not be identified in the case of an insolvent company with the debts provable referred to in s.553E. The word "debt" is used in s.95A of the Corporations Act without any supporting definition. An entitlement to claim damages for breach of a contractual obligation to sell and deliver goods is not a debt within the ordinary meaning of that word. Entitlement to purchase against the defaulter after notice and to have the defaulter make good the loss on such purchase in accordance with the Default clause could well create a debt within the meaning of the Default clause, because the amount would be clearly ascertainable and not a matter for assessment (see Alexander v Ajax Insurance) [1956] VLR 436; [1956] ALR 1077), but there would only be a debt on completion of the events referred to, which include giving notice and purchasing against the defaulter; and those events had not happened when the debt to the Claimant was incurred, or indeed when the Company went into voluntary administration. 15 This view of the reference to "debt" and the phrase "incurs a debt" in s.556(1) of the Companies (NSW) Code was adopted by the Court of Appeal in Shephard & Ors v ANZ Banking Corporation Ltd & Anor (1997) 15 ACLC 1802; see Giles AJA at 1805 and Abadee AJA (with whom Meagher JA agreed) at 1813 to 1814. Abadee AJA referred to passages in Hawkins v Bank of China (1992) 26 NSWLR 562 at 572 (Gleeson CJ, 578 Kirby P) which show that a contingent debt may be a debt for the purposes of s.556(1). Abadee AJA's holding and the passages cited from Hawkins v Bank of China tend to confirm that a contingent debt may have the character of a debt, the central concept of which is that the amount of the obligation is liquidated. Abadee AJA's holding also shows that an obligation which will come into existence only upon the exercise of an election, or which when it comes into existence will be an obligation for unliquidated damages, is not a debt; see the passages from my judgment at first instance 14 ACLC 987 at 996 cited at 26 NSWLR 1809. 16 It was the evidence of Mr D.B. Kidd and was not disputed that Management Accounts were prepared and were made available to the other directors at monthly meetings in the third or fourth week of each month. This led to attention being concentrated, by Mr Russell in his report and also elsewhere, on what was made known by internal Management Accounts showing the financial position of the Company on 30 April 2001; these are important for issues under s.588G which relate to the Opponents' actual knowledge or reasonable grounds for suspecting or being aware of insolvency. Mr D.B. Kidd himself had other and better sources of knowledge as the Managing Director in control of affairs day by day; but as the claim against him had been discontinued his state of mind was no longer relevant. Mr D.J. Kidd's knowledge about the Company's solvency when the debt to the Claimant was incurred is a matter which could reasonably be inferred from the Management Accounts for 30 April 2001; Mrs Elizabeth Kidd's evidence was that she was not taking any significant part in the Company's business in April, but the Management Accounts would tend to show the knowledge of a reasonable person in her position as a non-executive director. The Management Accounts as at 30 April are of less use in showing the matter directly the subject of s.588G(1)(b), whether the Company was insolvent during the period from 1 to 15 June. Attention appears to have been concentrated, both at first instance and on appeal, on the position shown by the Management Accounts. 17 There are no instances in evidence of defaults in meeting obligations to pay debts, whether trading debts or other debts, in accordance with the appropriate payment terms. There is no record of any dishonoured cheque or of any other indication of a cash flow difficulty. Quite unlike what is usually encountered in insolvency, there are no instances of failure or of late payment of taxation or group tax obligations, and there are no notices of demand, statutory demands, late payment of wages, judgments or summonses for debt, attempted levies of execution or other usual indications of insolvency. Nor are there any indications of difficulties in the Company's maintaining its relationship and dealings on overdraft with its bank. The Company was also indebted to National Australia Bank for a term loan which at 30 April 2001 amounted to $217,086. It must be said that the Bank was in a very strong position, with a fixed and floating charge over all assets, and was, as events fell out, fully protected by its securities, for the overdraft and for the other lendings. The Bank was not the source of any of the troubles which led to the Company's going into voluntary administration. 18 There were very wide ranges in the bank balance. There is no reason to think that the overdraft might not have continued to be available for as long as the Bank's existing approval continued, that is until October 2002; or later, other than the development of difficulty over futures trading. It is true that the Bank could reverse its position at any time and call in the overdraft, and this possibility seems to have influenced Mr Russell's thinking; see t.34-36; but it had no basis in terms of assessing the Company's position on the assumption that reasonable dealings with the Bank would continue throughout April, May and June 2001. 19 Mr Russell's report made a review of the resources available to the Company when considering ability to pay all the Company's debts as and when they became due and payable. These included a number of assets of kinds which could not be readily converted into cash and would not be converted into cash if the business were to continue, such as office equipment, furniture and fittings and plant and equipment; and other assets as to which it is plain that there was no plan or project in hand in May or June 2001 to convert them into money for the purpose of paying debts, nor was there any basis on which that could readily be done within the scale of time indicated by the need to pay trading debts from time to time as incurred. It was Mr D. B. Kidd's evidence on affidavit (Tab 19 p.3, para 16) that all the Company's creditors were on 30-day accounts, and by reference to documents in evidence this can be understood as meaning that with small variations trading debts were payable (as in the Claimant's case) within 30 days from the end of the week of delivery; some purchase contract documents in evidence referred to 30 days from the end of the month of delivery. 20 In Mr Russell's review of assets and sources of funds he discounted a house at Boomerang Beach owned by the Company as a possible contribution to funds for working capital, as any proceeds of its sale could be expected to be appropriated by National Australia Bank under its charge. I add that there was no project in hand for selling it. Mr Russell also discounted an investment holding of shares in Australian Grains Fund Ltd with a cost value of $76,000 and several loan accounts to persons associated with the Kidd family totalling $109,176.42. There were no prospects of early realisation of these. 21 Mr Russell then addressed current assets as at 30 April 2001, substantially comprised of:

Trade debtors - $2,710,059 Stock on hand - at cost $90,583.71 CPOT Trading Account - $9,044.77 He observed that the majority of outstanding debtors were relatively current. In dealing with the Company's overdraft account with National Australia Bank Mr Russell said that according to Management Accounts the bank overdraft was effectively in excess of its limit by approximately $69,000. What the balance sheet in fact showed was that the bank overdraft account on 30 April 2001 was $468,948.75. Mr Russell's statement was based on correspondence from the National Australia Bank which shows that on 15 November 2000 the bank set a limit of $400,000 on the overdraft approval until 31 October 2001. 22 As Mr Russell said, the bank statements showed that the account was overdrawn on 30 April 2001 at (-$380,623.91). It seems markedly anomalous that the bank statement shows the overdraft considerably lower than the Company's internal Management Accounts. This appears to arise from a strange practice which the Company followed of drawing cheques for creditors in advance of the time when the creditors were entitled to be paid; the cheques were retained until the appropriate time to send them out arrived, usually the end of the month, but entries reflecting the fact that the cheques had been drawn appeared in a Grain Trader program which the Company operated. This program dealt not only with receipts and payments of money, but also with trading transactions, forward purchase and sale contracts which were yet to mature; essential records for understanding the Company's trading position and what its position was likely to be in the future, but not, in the practices of the Company, records of movements of money in and out. The Company maintained another accounting program called Cash Manager, in which cheques paid were entered up when they were sent out, a process more likely to reveal the true cash position, but not the process which appears to have been relied on in preparing the internal Management Accounts. 23 The bank statements in evidence (or those which I have located in the large volume of material) do not show the position on 30 April 2001 but do show the position for 26 May to 20 June 2001. During that period there was one occasion when the overdraft limit of (-$400,000) was exceeded: it was (-$450,563.99) at the close of 30 May but returned to +$67,104.81 the following day. Otherwise the account was always under the approved limit during that period, frequently far under it and sometimes in credit. The account was in credit from 5 June 2001 until 18 June 2001, sometimes for very large amounts the maximum being +$557,045.14 at the close of business on 12 June 2001. This is remarkable for a company which is alleged to have then been unable to pay all its debts as and when they became due and payable. 24 Mr Russell says in his report: "It is clear from an analysis of the National Australia Bank overdraft that even without accounting for payments not yet presented, [the Company] was struggling to operate within its overdraft limit, particularly during March and April 2001." This conclusion could not, in my view, be reached on the bank's statements for the period in May and June when the debt to the Claimant was incurred. Mr Russell includes a table as Annexure B to his report with a summary of balances of the bank overdraft. This table shows that the approved limit was usually exceeded in the second half of March 2001 and was often but not usually exceeded in April 2001; but only exceeded on two days in May 2001. In my opinion the reasonable conclusion from this table is that the company experienced no difficulty in obtaining credit from its bank in excess of its approved overdraft for short periods, but typically operated well within the approved limit. 25 Mr Russell dealt with the amount due to outstanding trade creditors. He referred to the anomaly between the Management Accounts (by which I understand him to refer to the Grain Trader account) and the creditor's ledger, which he sometimes refers to as the subsidiary ledger, and which I understand to be maintained in the Cash Manager program. Mr Russell said "the balance reflected in the general ledger for trade creditors does appear to be the more accurate figure for the creditors outstanding at month end." However Mr Russell was of the view that anomalies in the treatment of outstanding trade creditors meant that there was significant uncertainty regarding the ageing of trade creditors balances. 26 Section 5 of Mr. Russell's Report is headed FINANCIAL POSITION OF KIDD (meaning the Company) and includes these passages: 5.14 The management accounts for KIDD as at 30 April 2001 indicate that the amount due to outstanding trade creditors, as at that date is $2,823,073. I note that the creditors aged trial balance as at that date indicates that the total amount due to trade creditors at 30 April 2001 is $2,027,491.50 and that the aging of this debt is as follows:

Total Current 30 Days 60 Days 90 Days $ $ $ $ $ 2,027,491 1,768,440 107,511 130,153 21,387 87% 5% 6% 2%

5.15 The difference between the amount recorded in the management accounts and the subsidiary ledger is $795,582.

5.16 A further review of the subsidiary ledger and management accounts of KIDD for the period September 2000 to May 2001 indicates the following significant variations:

Month End Management Accounts Creditors Ledger Difference $ September 2000 1,180,774 859,851 320,923 October 2000 1,381,215 931,634 449,581 November 2000 662,663 479,268 183,395 December 2000 1,558,268 1,119,239 439,029 January 2001 3,047,602 2,413,323 634,729 February 2001 1,493,040 748,564 744,476 March 2001 1,083,689 560,259 523,430 April 2001 2,823,073 2,027,492 795,581 May 2001 3,784,704 2,633,032 1,151,672

It appears from the information provided that the differences relate to cheques drawn as payments to creditors that were posted to the subsidiary ledger during the relevant month and not to the General Ledger. I am unsure as to the reasons why this practice would have been adopted.

5.17 An unfortunate effect of this practice is that it results in significant uncertainty regarding the aging of the trade creditors balances reported in the creditors subsidiary ledger.

5.18 From the accounting records of KIDD provided to my instructing solicitor I am unable to determine the precise aging of the additional creditors balances that were effectively eliminated from the creditors ledger each month whilst the creditor remained unpaid.

5.19 Given the level of KIDD's overdraft it would not have had the ability to forward the cheques on to creditors at month end and the cheques would have to have been held back. The balance reflected in the General Ledger for Trade Creditors would thus appear to be the more accurate figure for creditors outstanding at month end. The aging of the creditors balances is unable to be determined with certainty from the subsidiary ledgers and other information provided.

5.20 The Collins Report addresses the balances due to creditors according to the subsidiary ledger and fails to note that the amounts are different from the amounts reported in the management accounts. Its findings and conclusions, based upon the incorrect figures are thus flawed.

5.21 The effect of the "rolling" of the unremitted payments to creditors out of the creditors ledger upon the aging of creditors balances is potentially substantial. It is significant that from the information provided by the directors of KIDD that it is not possible to accurately determine the aging of outstanding creditors balances. 27 Mr Russell's report discussed working capital in section 6. After referring to s.95A and describing the test for insolvency, correctly, as a cash flow test, Mr Russell said: 6.3 Working capital is the difference between the company's current assets and current liabilities. Current assets are those assets, which will be realised in the day to day activities of the company such as cash, debtors and inventory. Current liabilities are short-term liabilities, which become due in the day to day activities of the company such as trade creditors, bank overdrafts, employee entitlements etc.

6.5 Positive working capital is an indicator that a company will be able to realise sufficient assets to pay its current liabilities. Negative working capital indicates that a company will have difficulty paying its debts as they fall due from trading activities.

6.6 I have reviewed the Management Accounts for KIDD for the months ended 28 February 2001 to 31 May 2001 inclusive.

6.7 As noted at Section 4 of this report the information contained within the Management Accounts does not include the contingent liabilities and contingent assets existing in respect of grain contracts. 28 Mr Russell proceeded to comment on the deficiency in working capital which in his opinion existed in the Company, and gave a summary in Annexure C to his Report of the working capital position on the last days of February, March, April and May 2001. For 30 April 2001 Annexure C showed a deficiency of working capital of $504,010.03. In Annexure C Mr Russell went on to bring under consideration what in his calculations were unrealised profits on sorghum contracts and unrealised losses on white cottonseed contracts, and when these were brought under consideration the deficiency of working capital including unrecognised gains and losses was $1,079,520.33. For reasons I have given earlier, it was in my opinion incorrect to have regard to what Mr Russell spoke of as unrealised profits and unrealised losses when calculating working capital and deficiency of working capital as a means of assessing solvency within the meaning of s.95A. 29 The conclusions expressed in Annexure C to the effect that there were deficiencies of working capital on the last day of each month from February 2001 to May 2005 depend upon the adoption by Mr Russell of the figures for outstanding trade creditors appearing in the Management Accounts, and on not adopting the figures for outstanding trade creditors appearing in the Creditors Ledger, which were lower. If the figures in the Creditors Ledger are adopted, there is no deficiency of working capital in any of those four months. I find Mr Russell's view difficult to understand as Mr Russell said (Page 14 para 5.19) "The balance reflected in the general ledger for trade creditors would thus appear to be the more accurate figure for creditors outstanding at month end." 30 If there was, at 30 April 2001, a deficiency of working capital of $504,010.03 without having regard to unrecognised gains and losses in trading, there was, in my opinion, a prima facie case of insolvency which required to be addressed by the Trial Judge and to be the subject of findings. It was far from being an overwhelmingly convincing case; it needed to be addressed, analysed and assessed. Continuing deficiency of working capital in the order calculated by Mr Russell is likely to have meant continuing acute difficulty in paying creditors within the usual credit terms of 30 days after the month of delivery; yet there is no evidence of the signs which can be expected as a matter of probability to accompany persistent late payment of suppliers. 31 After dealing extensively with working capital Mr Russell went on to deal with net assets. In this exercise he adjusted the values of a number of non current assets from the values in the Company's balance sheet prepared for Management Accounts as at 30 April 2001; the adjustments had regard to realisations later effected in the liquidation and this exercise produced an adjustment of the net assets shown in the balance sheet from (-$32,984) to (-$107,984). The solvency of the Company was not assisted by prospects of realisation of non-current assets, and I do not think that this part of Mr Russell's report has any importance. Mr Russell brought under consideration, as further balance sheet items, unrealised losses for white cottonseed contracts and unrealised profits for sorghum contracts, to produce a potential deficiency of (-$683,495). 32 In s.9, p.25 of his Report Mr Russell expressed his conclusions in these terms: 9.1 As detailed in Section 7 of this report KIDD was trading with a substantial deficiency of assets as at 30 April 2001. Taking account of the net position in respect of white cottonseed and sorghum contracts this deficiency was at least $683,495.

9.2 As determined at Section 6 of this report as at 30 April 2001 KIDD had a deficiency of working capital of at least $504,010.03. It had traded with a deficiency of working capital from at least February 2001. When account is taken of the unrecognised net liability in respect of exposure to grain trading contracts this deficiency of working capital increased by an amount of $575,510 as at 30 April 2001 to $1,079,520.33.

9.3 KIDD utilised accounting packages that provided its directors with detailed information in relation to its financial position and its obligations in respect of grain trading contracts. Utilising this information it was clear as at 30 April 2001 and probably significantly earlier that the company was insolvent. 33 For reasons I have given, I regard the opinion in Para 9.1 as irrelevant. The opinion in the first two sentences of Para 9.2 is relevant to the issue of solvency, but that opinion should not be brought under consideration on the issue of solvency unless and until the underlying factual basis is established; essentially, if the trade creditors were the higher figure adopted by Mr Russell from the Management Accounts, there was a basis for the view that there was a deficiency of working capital of $504,010.33, and that view could and should have been brought to bear when proceeding to the subject which it was for the Trial Judge to determine, that is whether on the facts before him the Company was insolvent. The existence (if it did exist) of a deficiency of working capital of at least $504,010.33 is not conclusive on that subject. The material in the third sentence in paragraph 9.2 is not relevant to the issue of insolvency. 34 Mr Russell refers from time to time to a report by Ms Kim Collins, accountant, on behalf of the Opponents; the Opponents did not tender or rely on that report and observations by counsel on both sides when it was tendered (t.20-21) showed that it was admitted in evidence on a limited basis so as to be available to understand what Mr Russell said. At the point of admitting the Collins Report the Trial Judge said to the effect that he should not rely on the truth of anything that Ms Collins had to say. 35 The Trial Judge rejected Mr Russell's report with few words and without analysis on the ground that Mr Russell took into account unrealised losses from trading in white cottonseed in determining the insolvency of the Company. This was a correct ground for rejecting the parts of Mr Russell's opinion which were affected by these unrealised losses, but did not deal with the whole of the material put forward by Mr Russell. It was not correct of the Trial Judge to reject Mr Russell's opinion out of hand for reasons shortly stated. It may well have been correct to reject Mr Russell's opinion, but a decision whether or not to do so was dependent on findings of facts which the Trial Judge did not address. For this reason the Trial Judge did not in my opinion consider all that he should have considered before concluding against the Claimant. 36 In particular, it was not correct to conclude against the Claimant solely on the basis of the large looming losses which would follow the maturation of the white cottonseed sale contracts which were not covered by purchase contracts, and could not be covered unless the market price fell (which as is retrospectively known, it did not). But leaving that basis out of consideration, the Claimant still had a case of fact in support of its allegations of insolvency, which was worthy of adjudication if the Claimant obtained findings that the total amount due to trade creditors was the higher figure shown in the Management Accounts and not the lower figure shown in the Creditors Ledger, and specifically that the total amount due to trade creditors on 30 April 2001 was $2,823,073 from the Management Accounts and not $2,027,492 from the Creditors Ledger. Those findings in turn would not be conclusive of insolvency; but unless the Claimant were to obtain those findings it does not appear to me that, in the world of practicalities, there was any real prospect of obtaining a conclusion favourable to the Claimant on the complex factual resolution required for a finding of insolvency. 37 This issue, and the other issues which would have to be determined if the Claimants were to succeed, cannot be decided by the Court of Appeal. They could only be decided upon a new trial, and under Pt.51 r.23(1) of the Supreme Court Rules the Court of Appeal is not to order a new trial unless it appears that some substantial wrong or miscarriage has been occasioned by the ground upon which the new trial is to be ordered. A new trial would be a very undesirable outcome in this case. There has already been a trial, of four days, upon a claim for $95,570.63. Although Mr Russell's Report, if read quite closely, contains material supporting a conclusion that the Company was insolvent even if the effect of forward trading is left out of account, that is not primarily or prominently the basis of his conclusion. The terms in which the Trial Judge disposed of the proceedings suggest that it was not made known to the Trial Judge, or not made known with emphasis or clarity that there was in Mr Russell's Report an alternative basis for a conclusion of insolvency. I am reluctant to order a new trial in these circumstances. I will review the strength of the Claimant's case upon the factual issue I have identified with a view to determining whether it can be regarded as sufficiently compelling. 38 In his opening address counsel for the Claimant referred, in the context of insolvency, to evidence from Mr Russell about continual exposure in respect of grain trading; counsel said (not accurately) that that left an exposure of about $1 million and would be falling due during June in respect of white cottonseed trading. Counsel referred in more detail to futures trading and dealt with the price movements in white cottonseed, the figures given for trade creditors on 21 June and the date of liquidation related to closing out futures contracts. Counsel referred to the accounting systems and said that there were two, but did so in the course of explaining that the financial records only recorded net profit or net loss in respect of each grain transaction and did not reflect the contingent exposure. In the opening address counsel did not refer to the contention that there was a continuing and large deficiency of working capital, or to there being different figures given in different accounts for outstanding trade creditors, or to any implications of there being so, and did not point out that Mr Russell's evidence or any other evidence supported a finding of insolvency in any other context than the futures trading obligation. 39 On tendering Mr Russell's Report the Claimant's counsel made an extended exposition of its contents including (t.25) reference to the passages dealing with outstanding trade creditors and aging analysis. Counsel pointed out, briefly, the existence of the passages at 5.15, 5.16, 5.18, 5.19, 5.20, 5.21 dealing with unremitted payments to creditors. Counsel did not in doing so point out that Mr Russell's Report supported a finding of insolvency on an additional basis to that related to futures trading. 40 A reading of the transcript shows that both during the adduction of evidence and in addresses of counsel (and the final addresses of counsel at the conclusion of the evidence are not recorded) attention was principally directed to the more prominent basis of Mr Russell's opinion on insolvency relating to the adverse Futures trading position. The alternative basis received relatively little attention in evidence. 41 The terminology used by Mr Russell it is not clear. In my understanding, with the advantage of reading the transcript of evidence, Mr Russell's references to "the management account" should be taken to refer to the Management Accounts for the information of directors relating to the state of trading at the end of each month, and although I do not regard this as completely clear, "subsidiary accounts" refers to the ledger page for trade creditors in the general ledger. The general ledger represents dealings in money and does not reflect trading positions, favourable or adverse, unless and until they have matured into transactions in which money becomes due or passes hands. No doubt the Company's accounts, if they were to show the true and fair position, would have to include statements about developing adverse trading positions; but the matter in hand relates to solvency and ability to pay debts, not to the position of the company generally and not to what should appear in its accounts as a whole. 42 In his opening address to the Trial Judge counsel for the Claimant did not refer to this aspect of Mr Russell's evidence. In the course of cross-examining Mr Russell counsel for the Opponent referred to the subject when putting some assumptions to Mr Russell for questions which, in the context of Mr Russell's evidence generally, were hypothetical (t.46-48). The subject received little attention in the course of Mr Russell's evidence, and in particular Mr Russell said nothing in evidence which would explain more fully or clearly the passage from his Report which I have set out above. In the cross-examination of Mr D. B. Kidd there were references (t.138-140) to bank reconciliation reports prepared at the end of trading months and (t.140) to there being unpresented cheques as at 30 April 2001. There was no cross-examination of Mr D. B. Kidd such as upholding the contention apparently underlying Mr Russell's observation would seem to require; that is, a suggestion that as a matter of system and in particular on 30 April 2001 the total trade creditors figure made known to the directors, or to the other directors, was distorted by preparing a number of cheques in favour of trade creditors, but not sending them out until a later date. I suppose the underlying suggestion would be to the effect that the amount appearing to be due to trade creditors was distorted and reduced by treating debts for which cheques have been drawn as having been paid although in fact cheques had been retained, and were not sent out until later. If that was the underlying suggestion, or if there was any suggestion to the same effect, it was never clearly articulated in evidence at any point. It was a forensic necessity to articulate it in the cross-examination of Mr D. B. Kidd if it were seriously contended that information about the total trade creditors was distorted in this way. 43 Mr Stephen Matthews, Chartered Accountant, the Company's external accountant, referred in his evidence (t.150 and following) to the function of the Grain Trader account and of the Cash Manager account in preparing reports, but the suggestion that there was, systematically, deliberately or otherwise, any distortion of the trade creditors position associated with holding back cheques was not explored in his evidence. Ms Ruth Tourle, who was at the relevant time the accounts manager working within the Company's organisation, was shown in evidence in chief the creditor trial balance as at 30 April 2001 and its summary and age analysis and was then asked (t.155-156): Q. Just want to ask, could you explain what happens at the end of the month in the accounting package which is prepared to prepare the management accounts at the end of the month in relation to creditors? A. Okay. This document in front of me has actually arisen from the Grain Trading Program which is called Grain Trader. Grain Trader is not an accounting program, it's actually a trading program so it has not a lot of the facilities that an accounting program would have. So this document has come from that program. At the end of the month, just prior to the end of the month, in the Grain Trader Trading Program, I would run the cheques payable from the company, created in the Grain Trader. The Grain Trader program, as I said, was not an accountancy program so we had to clear all cheques prior to the end of the month out of the Grain Trader. In effect we had to draw all of our credited cheques. The Grain Trader program will not carry those balances over to allow us to draw the cheques later. That information was not available in the form that we could print a cheque from it. That was the way the program was written. Not ideal, but that's the way it was because it wasn't an accountancy program. So I would draw all those cheques prior to the end of the month. Now that was not necessary that month. It probably wouldn't have been until about the 12th, 13th of the following month because we had to wait for final weights, we had to wait for things like dockages that did occur. They had to be taken into account before we drew the cheque to the grower and all these -- there were adjustments that had to be made. So I'd run the cheque run, about the 12th, 13th, depending when the information came in to finalise the loads to be able to print the cheques and that would clear out the trial balance, in effect, according to the Grain Trader, everyone had been paid. In effect of course, that didn't happen in that in the accounting program I would then transpose or key into the accounting program the cheques as they actually were sent to the growers from a handwritten cashbook that was kept. So in effect the Grain Trader showed that all the growers had been paid at that point on the 12th of the month, when they really weren't even -- they were drawn on the 12th of the month or they were drawn showing that they were paid, when in effect they weren't even due at that point. Q. So what was done with the cheques that had been created off the system? A. Okay all the cheques had been drawn, matched to the relevant recipient, created tax invoices and they were put in a folder and given to David John Kidd. Q. And when were the cheques due? A. In varying times. The cheques were due in relation to the contract terms of the contract. Sometimes they were 30 days end of the week, sometimes they were 30 days end of month, depending on the contract. Q. That's 30 days from the end of the week or the month of delivery? A. Of delivery, of receipted delivery, yeah. Q. And so the cheques would be held by David John Kidd? A. Yes. Q. Until they were due? A. Yes. Q. And then what, what happened? A. And then when they were due he would write them up in a cashbook, in a handwritten cashbook and he would mail them and at the end of the month I would post that cashbook into my accounting package, called Cash Manager. He actually kept a handwritten list of the cheques that I had given him for his own record and he would mark when they were due for his own purpose and we would reconcile and made sure that our totals were correct, that we were in balance, that he hadn't misplaced one or something like that.

44 In evidence in chief Ms Tourle also said (t.157-158)

Q. Now just going back to the creditor trial balance, it looks as if the majority, vast majority of the creditors are current. Were any creditors not paid on 30, 60, or 90 days because of any liquidity problem of which you know? A. No. Q. Well if you just look at, you see the 90 day column, can you explain why the accounting system is showing $21,000 as having been owed for 90 days? A. It's showing $21,386 made up of primarily two largish entries. There's one for $4,959.82 and that was a dispute with that particular company that at a later stage that was reversed as a credit, bringing that account down to zero. There's another large amount $15,950 outstanding and that also was reversed the following month, being a dispute that was resolved.

Q. And if you look at the 60 day amount, it's apparently showing $126,000? A. Yes.

Q. Owing on one item. On 30 days there seems to be a reversal to the effect of 119,000? A. Correct.

Q. So does that mean that that 60 day amount was not in fact owing? A. Correct. This being as I said for a trading program, not an accounting program, if I had to do a credit for a dispute or for any reason, I couldn't actually do what's called ageing back to the correct month. That credit would automatically go into the current month. So if I was reversing something that was two months old, it would show as a credit in the current and that debit that was two months old would still be there even though the net effect would be zero. So in effect the ageing wasn't a hundred per cent correct that that was the computer system I was using that I had no control over. 45 The creditor trial balance became Exhibit 1. In cross-examination of Ms Tourle some of these subjects were referred to in terms which confirmed some aspects Ms Tourle's explanation (t.163, 165), including a passage (t.166) which epitomises the explanation why the aging accounts were unreliable (t.166, line 17):

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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