FACTS AND EVIDENCE
19 Badenoch provided harvesting and haulage services to Gunns in the south east region of South Australia and south west Victoria (the Green Triangle). As stipulated in the 2003 and 2008 contracts, Gunns provided a recipient created tax invoice at the end of each calendar month and payment was due the last working day of the following month. From 2010 onwards, Gunns was regularly late in making payment and Badenoch was constantly chasing payment and seeking advice as to when an invoice would be paid.
20 In evidence are emails which show that Badenoch, by July 2011, was aware that the late and irregular payments were due to lack of cash flow, payments were being made at least partly out of asset sales and it was not the only contractor not receiving payment on time. In a bulk email to contractors in the Green Triangle region sent on 1 July 2011, Philip Lloyd from Auspine apologised to contractors that the May invoice payment was likely to be delayed to the following week and gave as the explanation that there had been "a delay in some cash flows expected yesterday in relation to asset sales and receivables, particularly shipping invoices". Kenneth and Peter both acknowledged in cross-examination that they knew in July 2011 that a lot of contractors in the region were being paid late by Gunns.
21 Payment was not made as foreshadowed and on 8 July 2011, in another group email to the Green Triangle contractors, Mr Lloyd explained that "Gunns didn't receive some payments by Wednesday as anticipated" but expected to make payments that day (which was a Friday) and the following Monday. Badenoch did not receive any payment on the Friday or the Monday. When Terry Graney, Badenoch's office manager, followed this up with Mr Lloyd in an email dated 12 July 2011, Mr Lloyd was unable to say when payment would be made. It appears that payments were not made to any of the contractors on the Friday or the Monday. In another group email on 12 July 2011, Mr Lloyd advised that Gunns were still waiting on some anticipated payments. Payment was eventually made in early August for the May invoice but Mr Lloyd was unable to advise when the June invoice would be paid.
22 The problems with payment continued. When the July invoice was not paid on time, Mr Graney asked Mr Lloyd by email on 5 September 2011 to determine with Head Office "with urgency" the plan for full or part payment of the amounts outstanding from July. Mr Lloyd responded that "things are looking tight today for payment". Mr Lloyd also wrote that he was "not aware of exactly what [was] happening behind the scenes on asset sales".
23 Gunns released its audited financial statements for the financial year ended 30 June 2011 to the Australian Securities Exchange (ASX) in September 2011. The financial statements recorded, relevantly, a loss in the financial year from all operations of $355.486 million; total comprehensive income of negative $454.687 million; retained earnings of negative $156.726 million; and total liabilities of $858.108 million.
24 From late 2011 onwards, there was a significant amount of media coverage and ASX releases from Gunns regarding Gunns' financial position. An article published in The Age newspaper on 25 November 2011, entitled "Gunns directors under fire", stated that "Shareholders in loss-making forestry group Gunns have used the company's annual meeting to question whether the company can pay its bills, asking whether it has a back-up plan should it fail in its bid to build a controversial $2.3 billion pulp mill". The article further reported that a major shareholder had asked if the company would "be insolvent if the pulp mill did not go ahead". Kenneth agreed in cross-examination to keeping abreast of Gunns' financial position primarily by reading newspapers (being the Herald Sun and The Age on Saturdays). He also agreed he was aware that Gunns was involved in various asset sales. Peter denied believing what the media was saying about Gunns' financial position, saying that he had a long-standing distrust of media reporting. He said that he believed what he was told by Gunns' executives, who he understood had responsibilities because Gunns was a publicly listed company, over what the media was saying.
25 On 22 December 2011, Gunns gave a market update to the ASX which stated that it had revised its expected earnings before interest and tax for the financial year ending 30 June 2012 down to $30 million. The update also mentioned that Gunns was in negotiation with its core debt facility providers to extend existing finance facilities until 31 December 2012. The update stated that Gunns' senior debt facility would mature on 31 January 2012. The balance of the facility was then currently $340 million with around $216 million to be re-financed following repayments from asset sale transactions. The update also stated that negotiations to secure an equity investment partner for the Bell Bay pulp mill were continuing and site earthworks were expected to be completed in March 2012, on schedule.
26 In about January or February 2012, Peter was informed by Bryan Hayes, the general manager of Gunns Forest Products Division, and Mr Lloyd that Gunns was involved in "refinance" discussions.
27 An article in The Sydney Morning Herald newspaper published on 7 February 2012 entitled "Gunns bid for more capital" stated that Gunns had ended 2011 with a $10 million to $20 million forecast downgrade to 30 June 2012 and was "trading at historic lows" on the ASX. It also mentioned that Gunns had secured a refinancing of a $340 million senior debt facility and of primary working capital facilities through to the end of 2012.
28 In February 2012 Gunns announced a proposed capital raising of up to $280 million, stating that "[i]n combination with [Gunns'] current asset sales program, the proposed recapitalisation will facilitate a further significant reduction in [Gunns'] debt".
29 On 27 February 2012 Gunns released its financial statements to the ASX for the financial half year ended 31 December 2011, which recorded a loss in the half-year period of $173.321 million, a total comprehensive income of negative $173.323 million, retained earnings of negative $333.910 million and total liabilities of $798.760 million with net assets of $876.125 million.
30 An article in The Age newspaper published on 28 February 2012 entitled "Gunns records loss" stated that Gunns had recorded "a 40 per cent revenue slump for the half to $217.4 million, and posted a $173.3 million loss on the back of impairments and asset write-downs". It also recorded Gunns' managing director, Greg L'Estrange, as saying that "the future of Gunns is clearly driven by the completion of the pulp mill project".
31 As at the end of February 2012, Auspine owed Badenoch approximately $1.64 million.
32 On 1 March 2012, Peter sent an email to Mr Hayes stating: "I wish to express our concern about current problems with payments by Gunn's [sic] as per my conversation with Phil Lloyd of the 29th February". Peter wrote in the email that "Gunn's [sic] are our only customer and we are solely reliant on you for the timely payment to continue to operate" and asked Gunns to respond to the following questions:
1. Are Gunn's [sic] solvent?
2. What are the timelines for payment of amounts outstanding?
3. Currently our overdraft rate is 9.12 per cent. We do not think it is unreasonable to ask that Gunn's [sic] pay interest at these rates on overdue amounts.
4. Will the proposed asset sales improve cash flow to the extent that we would in the near future return to normal trading terms?
Peter also stated "Given the support that we have shown Gunn's [sic] over the past 12-18 months we ask that you give serious consideration to the extension / rolling over of our current contract".
33 On 7 March 2012, Mr Hayes replied that he would respond to the specific queries after consulting with Mr Lloyd "in the next day or so".
34 On 9 March 2012, Mr Hayes sent an email to Peter, stating:
1. Yes, Gunns is solvent. The current cash shortage is the result of planned asset sale settlements not occurring on the due dates.
2. We will have guaranteed access to funds on March 19th. which will pay outstanding November and December accounts along with priorities identified from the outstanding January accounts. The balance of January outstandings will be paid by March 30th.
3. We do not accept to pay interest charges on your business finance costs. We are not a party to your business's internal financial arrangements and do not wish to be. Gunns is also incurring interest charges on overdrafts as a result of the delay to asset sale completion.
4. Yes. We expect to return to normal trading terms in April as the asset sales are completed and nett cash is made available to sue from the participating financial institutions.
Mr Hayes further noted, in the context of responding to Peter's enquiry about extending the existing contract, that "[o]ur current trading environment is characterised by falling timber and woodchip prices with no relief in the foreseeable future".
35 Peter responded by return email the same day:
Bryan,
We acknowledge receipt of your email and thankyou [sic] for making comment on our points of concern.
…
Whilst we do not understand all of your current financial difficulties we do appreciate that current cash flow issues are presenting challenges to Gunn's [sic].
Over the last two years these challenges have resulted in Gunn's [sic] trading outside the terms of our contract.
We have been very patient given the current financial situation as we understand it but the last few months have resulted in us also trading under financial stress which in turn has meant that we have had to make financial arrangements at a cost as a direct response to cashflow constraints brought on by Gunn's [sic] late payment.
We are not asking for you to be involved in our internal affairs but merely for your support and signs of good faith in these difficult times.
36 In cross-examination, Peter was asked about the email he sent on 1 March 2012. His evidence was that "broadly speaking the whole thing was a provocation". The following exchange then occurred:
Okay?---I was angry. I lashed out. So in that context, yes. That I didn't expect to have anything satisfied in - in a specific sense, but by this time I had the opinion that Gunns were happy just to keep avoiding the conversation until they were ready, and I wanted to have the conversation. So I was provocative.
Well, you had been told for at least a year that they were paying you late because they were not in a position to pay you on time, hadn't you?---Yes.
And in March 2012, when you used the term "solvent", I want to suggest to you, you knew that the definition, or that solvency means, not being able to pay your debts on time?---I've had a - a lot of difficulty with my own legal team trying to understand exactly what solvent does mean.
Well, can I suggest to you that, in this context it means, and it meant then, that the question you were asking of Gunns was, whether or not they were able to pay their debts as and when they fell due for payment?---The question I was asking Gunns was, how - how much longer do I have to put up with this? I - you - you said to me that I thought they - well, I'm asking a question now. Did you say to me that you thought that I thought they were insolvent, that's why I asked the question?
No. I did not ask you that?---Before that.
No. I did not ask you that question. The question - - -?---Can you repeat the question?
I will repeat what I did ask you?---Thank you.
Okay. I want to suggest to you that, you were asking a question about whether they - you asked the question in this email, "Are Gunns solvent?" Yes?---Yes. I asked that question.
And I will suggest to you that, you knew at the time that what was meant by "solvent" was that, whether or not Gunns could pay their debts on time, when they fell due for payment?---That's not - that wasn't my view. No.
Okay. If I asked you that question in March 2012, did you believe that Gunns were not able to pay their debts on time - - -?---Gunns were not paying their debts to me on time. That is correct.
And they had not done so for more than 12 months?---That had been their pattern of behaviour. Yes.
And I suggest to you that at that time you suspected that the reason they were not paying you on time was because they were not able to pay you on time?---Well, I knew they weren't able to pay me on time.
37 I found Peter's answers evasive and not forthcoming. The term used in the email was "solvent" and Peter agreed that he dictated the email to Mr Graney to send on his behalf. Against the background that Gunns at the time had been paying Badenoch's invoices late for around 18 months, there is no reason to doubt that what Peter meant by "solvent" was whether or not Gunns could pay their debts. In cross-examination, Kenneth said that he knew Peter was sending this email to Mr Hayes, that they had been discussing whether or not Gunns was solvent and it was a matter of real concern to him at the time that Badenoch's monthly payments return to being paid on time.
38 When asked about his response on 9 March 2020 to the email from Mr Hayes, Peter's evidence was that:
I still had faith in Gunns' plan. They still had the backing of their banks. They'd recently rolled over their debt facility with their lending syndicate. They were still investing in the mill. I still had faith in that, despite their difficulties.
39 Kenneth could not recall in cross-examination whether he discussed Mr Hayes' email dated 9 March 2020 with Peter, but he did recall that they and Mr Graney had a lot of discussions between themselves about Gunns. In cross-examination he colourfully gave the evidence that he knew Gunns was "blowing in the breeze". When asked to explain, he said "that they had issues. But they also had plans". When asked whether he knew what those plans involved he said "get that pulp mill up and running". He denied that he knew that there was a significant risk that the pulp mill would not get up and running.
40 Also on 9 March 2012, Gunns made an announcement to the ASX of a halt in trading in its shares pending the release of an announcement to the market. Peter was aware of this suspension in trading and considered that it was a significant event.
41 The same day an article was published in the Sydney Morning Herald newspaper entitled "Gunns blames Greens for billionaire blow", which stated that Richard Chandler Capital Corporation Pte Limited (Richard Chandler Corporation) had withdrawn from a proposed equity investment of $150 million into Gunns. The article stated that Gunns had "staked its future on the value-adding pulp mill project" and quoted Mr L'Estrange, Managing Director of Gunns, as stating "if the project doesn't go ahead I'm not sure where the company will end up". The article also stated that "[Gunns] shares have lost more than 70 per cent of their value [between March 2011 and March 2012], as investors fret over the future of the company". A similar article was published in the Sydney Morning Herald newspaper on 13 March 2012. Peter admitted that he was aware of Gunns' failure to obtain the Richard Chandler Corporation investment and his awareness of this occurred around the time of the trading halt. He also agreed in cross-examination that he was aware that Gunns' future was in part dependent upon the pulp mill and if the pulp mill was not able to proceed that would have been a significant event for Gunns.
42 The trading halt was never subsequently lifted, including at any time prior to the liquidators' appointment as administrators of Gunns and the Gunns Group of companies on 25 September 2012.
43 On 20 March 2012, the Australian Financial Review newspaper published an article entitled "Moelis joins Gunns runners", which stated "Credit Suisse is advising Gunns on the raising that investors hope will wipe the company's debt and right its balance sheet once and for all. Gunns wants to pay down its $580 million debt pile as it looks for a joint-venture partner for its planned $2.3 billion pulp mill".
44 On or about the same day, Scanlan Carroll, solicitors for Badenoch, sent a letter of demand to Gunns demanding payments of outstanding debts owed by Gunns. The letter stated that:
(a) unless payment of $645,951.75 owed for work and labour performed in January 2012 was made within 7 days, legal proceedings against Gunns for recovery of the debt would be commenced forthwith and without further notice;
(b) unless payment of $820,532.33 owed for work and labour performed in February 2012 was made by 31 March 2012, Scanlan Carroll was instructed by Badenoch to issue proceedings immediately upon default and without further notice; and
(c) Badenoch would not be providing any further services to Gunns until non-payment for prior services was rectified.
45 In his examination conducted under Pt 5.9, Div 1 of the Corporations Act on 20 August 2015 (liquidator's examination), Peter said that they were "worried at that time" and "sick of getting stuffed around", though he denied that he had a heightened concern about Gunns' solvency at the time.
46 Badenoch ceased to provide services to Auspine for about 10 days. Peter admitted it was a serious step for Badenoch to stop supplying services, as Gunns was their only customer and there were serious ramifications for Badenoch, Badenoch employees, Gunns and the Tarpeena mill arising from a "stop supply" decision. Kenneth would not agree to the proposition that it was a serious step, but I found his response evasive. Although he admitted that making a threat to stop was a serious thing to do, he likened stopping supply of services to "just turn[ing] the tap off" and said that he never thought about what it would mean for his employees at the time. He did however admit that there would be consequences for the Tarpeena Mill, unless Gunns got someone else to "fill [Badenoch's] boots". He also said he had 38 years hard work behind him, and that was enough to walk away from the business.
47 On 22 March 2012, Peter had a conversation with Mr Lloyd in which he advised Mr Lloyd that "he had talked to Dad" and they wanted an agreed credit limit of $1 million, with a bank guarantee for that amount. Mr Lloyd put that proposal to Mr Hayes by email for his response. Later that day, Mr Hayes responded that Gunns was unable to provide a bank guarantee as requested by Badenoch. In cross-examination, Peter accepted that he was aware that the effect of a bank guarantee would be to give Badenoch security for the work it was doing, but denied that the reason for asking for a bank guarantee was because he was concerned that without it Badenoch might find itself unpaid if Gunns was in fact insolvent.
48 On 23 March 2012, Mr Lloyd informed Peter by email that Gunns was "max'd out on the bank guarantee front and any more require[d] [Gunns] to deposit an equivalent amount of cash with the bank" so "we may as well pay the money to you in order to get deliveries back on track asap". Mr Lloyd proposed that Gunns pay 50% of the January invoice on 26 March 2012, the other 50% on 28 March 2012, and 50% of the February invoice on 30 March 2012 with the balance of the February invoice on 13 April 2012. Mr Lloyd also enquired whether Badenoch would be willing to provide "almost normal" deliveries the following week on the basis that the proposed payment schedule would put the parties back on terms at least until the February invoice fell due for payment at the end of March, and resume sawlog deliveries in the week before and after Easter pending the payment of the outstanding 50% of the February invoice.
49 Peter responded to Mr Lloyd's email the same day, stating that "we are understanding of your position however we need to ensure that we have adequate measures in place to protect our exposure and business". Peter accepted the payment proposal on the basis that "there will be no further flexibility with respect to the timeframes proposed" and stated that if Gunns' liability to Badenoch exceeded $1 million at any stage, "our services will immediately cease". Peter also wrote that Badenoch "reserve[d] the right to enforce the terms of the contract at any time notwithstanding the indulgence granted herein and particularly in the event of a default of [sic] pursuant to your proposal".
50 On 26 March 2012, Gunns released a market update to the ASX outlining its intention to undertake an equity raising of approximately $400 million to reduce debt facilities and strengthen its balance sheet. Gunns also noted that the suspension of trade of its securities would continue. In cross-examination, Peter agreed that he was aware that there was a trading halt extension.
51 Payments were received as promised on 26, 28 and 30 March and 13 (or 16) April 2012.
52 As at the end of March 2012, Badenoch was owed approximately $1.07 million by Auspine, although $660,347.78 related to work done in March and was not due to be paid until 30 April 2020.
53 Throughout the course of April and May 2012, Gunns made further announcements to the ASX regarding the continued suspension of its shares from trading (which began on 9 March 2012), pending completion of its efforts to raise further capital of approximately $400 million. Those announcements were widely reported in the press.
54 Badenoch continued providing services to Gunns throughout April, May and June. Despite Badenoch's threat to cease services immediately if the debt rose above $1 million, at the end of April 2012, Badenoch was owed approximately $1.34 million (although that included the two invoices for April of $674,368.12 and $4,561.41 not due for payment until the end of May 2012), as at the end of May 2012, Badenoch was owed approximately $1.42 million (although that included the invoice for May of $737,733.68 not due for payment until the end of June 2012), and at the end of June 2012, Badenoch was owed approximately $1.37 million (although that included the invoice for June of $627,687.34 not due for payment until the end of July 2012).
55 On 15 and 22 May 2012, Gunns released announcements to the ASX regarding the sale of its Heyfield sawmill for approximately $28 million. That asset sale was widely reported in the press.
56 An undated file note of Mr Hayes recorded:
Peter Badenoch - out of contract + agreement - if they need to stop it will be permanent!
…
Phil - spoken to Peter Badenoch. Family meeting tonight. Deliver 3-4 days log stocks. [Gunns] to pay w/ in fortnight.
57 In cross-examination Peter said he recalled having a conversation with Mr Lloyd at the start of July 2012 regarding the potential termination of the contractual services and saying to Mr Lloyd that he was going to have a family meeting that night. Peter said that his father would not have been involved in the meeting because he was overseas at the time, but he would have had a talk with his brothers.
58 In an email from Mr Lloyd to Mr Hayes sent on 2 July 2012, Mr Lloyd wrote:
Had another call from Peter Badenoch.
He is going to stop harvesting today, but will continue to deliver all his bush stocks which should keep deliveries going until end Thursday. He will then stop delivering for shut down pending payment. His workers will take days off owing to them and he certainly won't be making anything public, it's just a wind down of harvesting for the shut.
He would like a letter from Gunns indicating the plan going forward in relation to timing of his next payment (which I've already told him would be before the end of next week), and whether Gunns plans to or will use a portion of the asset sale proceeds to get working capital under control.
Are you able to put something together for him?
59 Peter also recalled having that conversation.
60 Also on 2 July 2012, Gunns announced in a market update to the ASX that Gunns:
(a) was analysing the impact of a substantial decline in stumpage prices in the woodchip market on the values of Gunns' forestry assets;
(b) was continuing negotiations regarding proposed capital raising; and
(c) on the basis of the above developments, had decided that it was in the interests of Gunns that no distribution be declared on FORESTS for the period to 14 July 2012.
61 The ongoing suspension of trading in Gunns shares and Gunns' ASX market update of 2 July 2012 were reported in the press. On 2 July 2012, the Australian Financial Review newspaper published an article entitled "Low prices cut value for Gunns" which stated that:
(a) Gunns' review of stumpage values reduced standing timber valuation by nearly $40 million and Tasmanian wood plant and equipment by $25 million; and
(b) Gunns was reviewing its Tasmanian land and tree values and a lower valuation on its Tasmanian estate "[was] not good news as Gunns ha[d] listed that land, plantation and infrastructure as its $600 million equity contribution to the pulp mill project".
62 On 3 July 2012 articles published in the Examiner newspaper described companies with such lengthy trading suspensions as usually being in receivership or administration and reported, according to an analyst, that Gunns' decision not to pay quarterly distribution on $1.2 million of redeemable securities indicated that Gunns did not have the money to profit from them.
63 On 3 July 2012, Scanlan Carroll sent a letter of demand to Gunns demanding payment of outstanding debts relating to work and labour performed by Badenoch in May 2012. This invoice had only fallen due for payment on 29 June 2012, two business days earlier. The letter also stated that unless payment was received by 11 July 2012, Scanlan Carroll were instructed to commence legal proceedings against Gunns for recovery of the debt totalling $737,633.68. Scanlan Carroll's letter also stated that, once Badenoch had "finalised those services which have been agreed to between it and your Regional Management", Badenoch would cease to provide any further services to Auspine and Gunns until non-payment was rectified. The letter further stated that should payment not be forthcoming, given that this was the second instance where Gunns had breached the payment terms of the contract, Badenoch reserved its rights to terminate the contract. Peter confirmed in cross-examination that he had given his solicitors instructions to issue legal proceedings without further notice if payment was not forthcoming. It was put to him that the reason why he had the letter of demand sent was because, by that stage, he had become deeply concerned about Gunns' ability to pay the outstanding invoices, which he denied. He gave as the reason that he had decided to shut down the business because he didn't want to continue with the work anymore as it was putting a strain on his employees and on him.
64 On 10 July 2012, Badenoch ceased to provide services to Gunns. Peter agreed in cross-examination that this was a serious step to take and meant that Badenoch lost its only customer and more than $5 million in revenue a year, removed Badenoch's ability to provide employment to its 18 employees, and meant that the significant machinery Badenoch used to harvest and haul woodchips would sit idle and potentially need to be sold.
65 On 11 July 2012, Mr Lloyd sent a letter to Scanlan Carroll in response to their letter of 3 July 2012, stating that Gunns was unable to make the requested payment of $737,633.68 by that day, and offering instead a payment schedule of $150,000 per week commencing 20 July 2012. Mr Lloyd advised that the payment schedule would be reviewed after completion of the Portland Export Woodchip Terminal sale, when Gunns proposed to "bring the payments back to contract terms". In cross-examination, Peter denied that Gunns' response indicated to him that it was not in a position to pay Badenoch immediately. His evidence was he was "no longer thinking about a future with Gunns" and he was "over it". He said that he:
.. realised that Gunns no longer viewed me as important to their plans going forward, because I didn't offer the same level of service - the level of service that I was now offering didn't carry the same importance. Basically, I belted an arrogant [man] with a big stick and - in March or whenever it was - and stood up and said, "I'm not going to work for you." I was just as arrogant as he was.
66 That evidence is to be contrasted with his evidence in his liquidators' examination. When it was put to him that knew as at early July 2012 that Gunns' financial position was poor, he responded "everyone knew Gunns' position was poor" and later said "they were juggling their money, I knew that, a blind Freddy could see that, the market knew that".
67 On 16 July 2012, Gunns announced to the ASX that it had executed an agreement for the sale of its woodchip export facility in Portland, Victoria, subject to customary conditions including regulatory approval. The Sydney Morning Herald newspaper published an article the same day entitled "Gunns offloads Portland woodchip plant for $61.8m", which stated that Gunns was to sell its woodchip plant in Portland, Victoria, as part of an asset sell down it was undertaking to fund its "ambitious $400 million capital raising" for the Bell Bay pulp mill project.
68 On 18 July 2012, Scanlan Carroll sent a letter to Gunns advising that Badenoch reserved its rights in relation to Gunns' failure to comply with the contract and meet its payment obligations. The letter also advised that Scanlan Carroll was waiting for instructions from Badenoch in relation to Mr Lloyd's letter of 11 July 2012, but "in the interim our client has queried whether Gunns could also provide some additional security for payment". The letter requested that Gunns advise whether it could provide a bank guarantee or security interest in addition to the proposed payment plan outlined in the letter dated 11 July 2012. The letter further stated that Gunns had foreshadowed the completion of an export sale by the end of July, pending Foreign Investment Review Board (FIRB) approval, and Badenoch sought further details of this transaction, in particular details of the settlement date, the status of the FIRB approval, copies of any contracts relating to the export "which substantiate same", and "whether there is the possibility of our client being paid from the settlement monies".
69 On 20 July 2012:
(a) Mr Lloyd advised Scanlan Carroll by email that Gunns was preparing a response to the 18 July 2012 letter, which would be sent early the following week;
(b) Five minutes later, Scanlan Carroll sent an email to Mr Lloyd advising that Peter was "most concerned about the delay" and the solicitors held instructions as of that morning (being a Friday) to issue proceedings on Monday, but that if Mr Lloyd advised of a "definite timeframe" for Gunns' response, they would seek instructions to agree to an extension;
(c) Mr Lloyd responded that Gunns would respond by close of business Monday;
(d) Scanlon Carroll followed up with another email, which stated their client's instructions were "2pm Monday is the deadline given… Failing a satisfactory resolution…we hold instructions to issue a Statutory Demand".
70 No statutory demand was issued. Peter's evidence in cross-examination was that it was never his intention to issue a statutory demand but he used the threat as a negotiating tactic.
71 On 23 July 2012, Gunns sent a letter to Scanlan Carroll in which Gunns stated that it was unable to provide a bank guarantee and that it intended to utilise funds retained from the sale of the company's Portland export facilities to fund creditor payments and "normal operation of the business".
72 Also on 23 July 2012, the Australian Financial Review newspaper published an article with the headline "All Gunns blazing for Korda Mentha", reporting "[Gunns'] lenders…have called in KordaMentha", who were described in the article as "insolvency specialists".
73 By a letter dated 23 July 2012 from Mr Lloyd on behalf of Gunns to Kenneth titled "Notice to Remedy Breach", Mr Lloyd wrote that Gunns had been informed that Peter Badenoch had contacted Philip Mason from New Forests Assets Management Pty Ltd (New Forests) to discuss that "Badenoch Logging had stopped working for Gunns and may not start again". Mr Lloyd stated that "Peter's deliberate decision to recklessly discuss confidential aspects of [Gunns and Badenoch's] contract with New Forests could not only adversely affect [Gunns'] contractual relationship with New Forests but have the potential to further destabilise Gunns operating position". Mr Lloyd further wrote that Gunns considered this was a material and wilful breach of contract and required Badenoch to take all necessary actions to remedy the breach.
74 When asked about the contact with Mr Mason in his liquidators' examination, Peter said he informed Mr Mason in "probably a 30 second phone call" that he initiated, that Badenoch was "finished up with Gunns" because Badenoch was "not being paid on time".
75 On 25 July 2012, Peter responded by letter to the allegations raised in Mr Lloyd's letter to Kenneth of 23 July 2012. Aside from denying any breach of confidentiality, Peter wrote that:
It is Auspine Ltd that is in breach of the agreement with our company, and Auspine/Gunns has been put on notice that unless you make firm arrangements to pay our company what it is owed for the services provided, then we intend to instruct our lawyers to serve a creditor's statutory demand.
76 In his affidavit sworn on 21 June 2018, Peter deposed that he thought Gunns was prioritising other creditors over Badenoch for prompt payment. He was aware that once Badenoch had stopped providing services in mid to late 2012, Gunns brought in two other main contractors to do the work Badenoch was previously doing and he did not believe these contractors would have taken over unless there was an arrangement in place to ensure prompt payments to them, and he did not want to wait for those contractors to be paid before Badenoch. He further deposed that he assumed that Auspine and Gunns would be able to meet the statutory demand and was using it as a tool to move Badenoch closer to the top of the list of Gunns' creditors to be paid earlier and otherwise maintain pressure on Gunns to comply with payment plans. In his liquidators' examination Peter admitted that he understood by this time that Badenoch would not be paid in the ordinary course of business.
77 On 31 July 2012, Peter sent a letter to Gunns in which he wrote that Auspine and Gunns currently owed Badenoch more than $1.36 million in outstanding invoices and the non-payment was a breach of a fundamental term of the contract, amounting to a repudiation of the agreement. The letter continued:
Before we accept Auspines [sic] repudiation, we propose to investigate the opportunity for a transition to a mutually acceptable termination of the agreement at the end of three or four months.
We understand that you would regard it as helpful if we were to supply logs. Subject to the following arrangements, we are willing to meet this need in the short term with a gradual tapering off while another contractor gets up to speed.
Peter proposed a termination of Badenoch's agreement with Auspine on the basis of a payment plan comprising an immediate payment of $300,000 and weekly instalments of $150,000 until all outstanding debt was paid. In the meantime, Badenoch would not take action in respect of the current debt whilst instalments were paid and would cooperate with Gunns to meet timber supply requirements in the course of a structured handover to another contractor. The proposal was open until 2 August 2012. Peter wrote that "[i]f we haven't been able to reach a satisfactory agreement by that time, we will do whatever we have to do to protect ourselves".
78 As at the end of July 2012, Badenoch was owed approximately $1.36 million by Gunns, plus an invoice was issued on 31 July 2012 for $194,273.06 (but not payable until 31 August 2012).
79 On 2 August 2012, Mr Lloyd sent a letter to Peter accepting the proposal as outlined in Badenoch's letter dated 31 July 2012 and stating that an initial payment of $300,000 would be made on 6 August 2012, with the weekly instalments of $150,000 to commence the following week.
80 The first instalment of $300,000 was paid on 6 (or 8) August 2012.
81 Also on 6 August 2012, Gunns released a market update to the ASX which reported that Gunns estimated that, for the financial year ended 30 June 2012, Gunns would record an impairment in its financial statements of between $700 million to $800 million, and that subject to end of year financial adjustments Gunns' net tangible asset value would fall to between negative $50 million and negative $150 million.
82 On 7 August 2012, the Australian Financial Review newspaper published an article regarding Gunns' announcement to the ASX of 6 August 2012 entitled "Gunns faces huge write-down". The article stated that "[b]attered timber company Gunns is clinging to survival after flagging an impairment of up to $800 million for 2011-12 on lower commodity prices and conceded that its $2.3 billion pulp mill project may fail because of its weak financial position". The article also quoted a "market watcher" as having commented that "[t]he person who had the most access to the books was Richard Chandler and he walked, which tells you everything". Numerous other media articles were published at or around this time regarding Gunns' financial position.
83 On 17 August 2012, Gunns paid Badenoch $150,000 in implementation of the payment plan agreed on.
84 On or about 20 August 2012, a Deed of Variation and Release (Deed) was executed by Auspine and Badenoch in which the parties agreed (inter alia) that Auspine owed Badenoch the sum of $1,559,594.08 and that the agreement between the parties (dated 15 August 2003) was terminated by mutual consent upon the final delivery by Badenoch of some limited harvesting and delivery services outlined in the Deed.
85 On 24 August 2012, the Australian Financial Review newspaper published an article entitled "Critical point for wobbly Gunns" stating that "KordaMentha [were] poised to present a final report on the company's vitals to its syndicate of 10 banks" and that "some of Gunns' Asian lenders… [had] had enough and [were] considering selling their loans".
86 On 24 (or 27) August 2012, Gunns paid a further instalment of $150,000 to Badenoch.
87 On 31 August 2012, Gunns released to the ASX a Preliminary Final Report of its financial position and performance for the financial year ended 30 June 2012, which recorded a net loss after tax of $903.9 million, a total comprehensive income of negative $1.02 billion, retained earnings of negative $1.07 billion, total liabilities of $879.267 million, and total net assets of $24.251 million.
88 On 31 August 2012, ABC Online published an article entitled "Gunns announces massive $900m loss" which stated that the Gunns Annual Report recorded a "massive annual loss" of $904 million, that Gunns had "devalued its net tangible assets by more than $1 billion" and that "Gunns' creditors would have difficulty recovering more than $500 million [of repayments owed to them]". Numerous other media articles were published at or around this time regarding this further deterioration in Gunns' financial position.
89 In August 2012, limited final work was done by Badenoch to the value of $129,687.69. In cross-examination, Peter Badenoch agreed that this work was done to enable the Tarpeena Mill to continue to operate until such time as Gunns sourced someone else to perform the work and to increase Badenoch's chances of getting paid.
90 As at the end of August 2012, Badenoch was owed approximately $1.09 million by Gunns.
91 On around 7 (or 10), 14 (or 17) and 21 (or 24) September 2012, Gunns paid further instalments of $150,000 each to Badenoch.
92 On 12 September 2012, the Business Review Weekly published an article entitled "With Gunns on its knees what hope for Tasmania's economy?", recording that "Debt-laden but still clinging to solvency, Gunns has faced the reality of entrenched community opposition to the pulp mill and conceded a $793 million write-down against the mill and its forestry assets".
93 In September 2012, limited final work was done by Badenoch to the value of $76,008.68.
94 Gunns appointed administrators on 26 September 2012.