FACTS AND EVIDENCE
23 Until April 2011 Gunns paid Bluewood largely in accordance with contractual terms with no significant delays.
24 From April 2011 onwards, Gunns was often late in making payments and sometimes did not pay the full amount of an invoice and instead payed in rounded sum part payments, sometimes with two separate payments making up the total of one invoice.
25 By April 2011, Mr Rayner knew that Gunns was also paying other contractors in the region late.
26 On 19 April 2011, payment had not been received by Bluewood for its 1 April 2011 invoice, which had been due for payment on 15 April 2011. Brent Donaldson, Gunns' regional manager in Western Australia at the time, emailed Bluewood that morning advising that he had just been informed that "the necessary funds have been not transferred to Gunns at this stage" but the funds were expected at any time, though he could not guarantee that the funds would be there in time for money to be transferred to Bluewood's account in the morning. Later that day, Mr Donaldson sent a group email to various contractors, including Bluewood, informing them that he was still unable to provide an exact time for payment that month, but had been advised that payment would occur "within a very short time frame". Mr Donaldson also wrote that "[t]he gut feeling of the people in the know is that we will be moving from famine to feast by some time during the latter part of the year".
27 Payment had still not been made on 27 April 2011, causing Bluewood to overdraw its account in order to pay its fuel account and wages. Mrs Rayner asked for an update from Mr Donaldson on 27 April 2011, telling him in an email that she "had the bank allow [her] to pay wages today, but it is going to rear its ugly head again soon, when machine payments try to automatically come out, let alone [her] other obligations by the end of the month". By reply email the same day, Mr Donaldson told her that he had been informed that afternoon that Gunns was expecting funds that day and "so were hoping to pay you tomorrow". Only $200,000 of the $353,418.26 1 April 2011 invoice was paid on 28 April 2011. The balance was paid on 2 May 2011.
28 On 29 April 2011, Gunns wrote to Bluewood under cover of a letter with the subject line "Re: Rationalisation of Payment Terms", informing Bluewood that "fortnightly contractor payments is not aligned to the business and market situation of Gunns" and that from 1 July 2011 payments would be made to all Gunns contractors on a monthly basis, 30 days after the end of the month. In cross-examination, Mr Rayner said that he "did accept [the change in payment terms] to some degree", but that they did not execute a new contract and "nothing changed". Mrs Rayner confirmed in cross-examination that Gunns continued to issue fortnightly invoices that expressly stated that payment was due within 14 days up until September 2012, despite what was stated in the letter.
29 As at 8 July 2011, other than $50,000 paid on 4 July 2011, Gunns had not paid Bluewood since 1 June 2011. On 8 July 2011, Mr Donaldson sent an email to an unidentified group of people, which included Bluewood, stating:
Dear All
I have spoken to some of you by phone today regarding payments. However, I thought I would include all in this email.
I have been advised that the funds that were to arrive this week that were to be used for creditor payments have not materialised as forecast and will now not arrive till next week.
There are also other funds that are forecast to arrive at Gunns early in the new week.
Payment will therefore commence from next week.
…
Mrs Rayner recalled this email and recalled speaking with Mr Donaldson by telephone before receiving the email. Mrs Rayner agreed in cross-examination that she was aware, based on the email and on her discussions with Mr Donaldson, that Gunns did not have the available cash to pay contractors' invoices and was selling assets out of which contractors would be paid when the funds were released. She also agreed that she also knew that Gunns was only proposing to make part payments out of cash as and when funds became available.
30 Mr Rayner agreed that he was aware by at least July 2011 that:
(a) Gunns was not paying Bluewood in accordance with its contractual obligations;
(b) Gunns was not always willing or able to honour its contractual obligations;
(c) on occasion, Gunns had told Bluewood that Gunns did not have the money to pay Bluewood's invoices in full as and when due;
(d) Gunns was not paying its other contractors in the Great Southern region on time; and
(e) Gunns was not "stockpiling" funds and this was not the reason for non-payment.
31 On 27 July 2011, Mr Donaldson sent an email to undisclosed recipients, one of which was Bluewood, advising that "a large volume of contractor payments" were expected to be made in the next two days. Bluewood did not, however, receive any payment until 8 August 2011. In cross-examination Mrs Rayner said it was a concern to her that that Gunns was not honouring its contractual obligations to Bluewood or its own statements as to when it would make (late) payment. Mrs Rayner said that it was "a trend that was occurring".
32 Payments were received on 7, 9, 16 and 22 September 2011. On 29 September 2011, Mr Donaldson sent an email to Bluewood and other Western Australian Gunns contractors advising them that the "next target date for contractor payments" was 7 October 2011 and this was "based on the scheduled payments to be received by the company for woodchip sales". Bluewood received payment as promised.
33 On 25 November 2011 The Age newspaper published an article entitled "Gunns directors under fire", which stated that "[s]hareholders 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". This is a reference to the development of a pulp mill in Bell Bay, Tasmania that Gunns was undertaking at the time (pulp mill development).
34 On 22 December 2011, Gunns gave a market update to the Australian Securities Exchange (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.
35 On 4 January 2012, Mr Donaldson sent an email to Bluewood and five other contractors in the region, advising that he was aware that there were some overdue payments to contractors and he had been advised that:
… possibly due to the time of the year, some funding scheduled to the company in mid-late December was delayed; in addition, a anticipated [sic] asset sale has not yet proceeded as planned, and that other creditor payments had been made in anticipation.
This has unfortunately resulted in a short term cash flow constraint situation.
…
Mr Donaldson noted that he expected payments to recommence the following week. At this time, Bluewood had not been paid since 1 December 2011, the balance of the running account was $826,184.58 and payments were 20 days outside terms. Mr Rayner recalled reading this email. Mr Rayner also acknowledged that things were "very tight" for Bluewood at the start of 2012 as a result of this delay.
36 On 5 January 2012, Mr Rayner rang Mr Donaldson to complain about the non-payment of debts. During this conversation Mr Rayner told Mr Donaldson that if payment was not made, Bluewood would be unable to continue providing services to Gunns because Bluewood could not pay its fuel account. Mr Donaldson agreed to have $100,000 paid immediately. In cross-examination Mr Rayner agreed that he was "definitely" concerned about the amount then outstanding to Bluewood.
37 On 9 January 2012, Mr Rayner sent an email to Mr Donaldson stating:
I refer to our discussions last Thursday the 5th, in regards to overdue payments to [Bluewood]. At that time you arranged $100k payment which was appreciated, although unfortunately did not go very far as we are again in a position that we will be unable to continue harvesting operations for Gunns beyond Wednesday 11th unless full payment is confirmed or received.
Another situation that has materialised since we last talked is our fuel supplier Caltex is very nervous about Gunns current position, in particular not having securing an extension of their senior debt facility, of which the deadline is looming quickly.
They have again reduced [Bluewood's] fuel/oil credit limit to minimise their exposure to Gunns until there is some positive information in relation to this matter, this effectively means we are on a 7 day fuel account and as such have no room to move with payment terms from Gunns.
I am currently seeking alternate fuel supplies, however I am unable to confirm when or if an alternative arrangement will be in place.
Although under the name of her husband, Mrs Rayner's evidence was that she wrote the email. Mrs Rayner agreed in cross-examination that at the time of this email, she believed that Caltex had concerns about Gunns' financial position and was attempting to mitigate its risk due to a concern that Bluewood could potentially end up as an unsecured creditor of Gunns. However, she denied in cross-examination that when she sent this email she was requiring full payment of the outstanding debt because Gunns' financial position was also a concern to her. Mrs Rayner's evidence was that she was "taking the opportunity to ask for full payment, like any creditor would at that time… not specifically because Caltex had issues". In her affidavit, Mrs Rayner deposed that, prompted by the concerns Caltex had raised, she also looked up the ASX announcements relating to Gunns in around January 2012 and recalled learning, amongst other things, that "Gunns was gradually selling off assets that did not fit with its core plan centred around wood chipping and the development of the pulp mill in Tasmania". Mr Rayner agreed in cross-examination that he was also aware of Caltex's concern through his discussions with his wife and he also recalled searching through Gunns' the ASX announcements to see if it lined up with what Caltex was saying. In his affidavit evidence, Mr Rayner deposed that after his conversation with Mrs Rayner about Caltex's concerns he had a brief read of some of the ASX announcements that Gunns had made in respect of its finance facility. He recalled that the facility was due to expire in January 2012 and that Gunns had been negotiating an extension with its lenders. He also deposed that "[a]ny short lived concerns" that he had from Caltex in respect of Gunns' finance facility "were allayed" when he heard only a few weeks later that Gunns had negotiated an extension of that facility for another 12 months or so. Mr Rayner also deposed that "[l]ooking back I think that I exaggerated the situation a little in my email to Mr Donaldson as I was wanting to get a little more money through to help us with our cash flow at that particular time".
38 I find the evidence of Mr and Mrs Rayner as to their level of concern about Gunns' then financial position self-serving and implausible. First, the late payments had been going on for several months and were impacting Bluewood's cash flow and its ability to pay its own creditors at the time. Secondly, Gunns' invoices made up a large portion of Bluewood's revenue. Thirdly, Caltex had reduced the credit limit on Bluewood's fuel supply account because of its concerns about Gunns not having confirmed an extension of the finance facility due to expire in January 2012. Fourthly, Caltex's concern had prompted both Mr and Mrs Rayner to look at the ASX announcements concerning Gunns. Fifthly, whilst Mr Rayner did not include amongst the announcements he said in his evidence he recalled reading the announcement that Gunns made to the ASX on 22 December 2011 that it had revised down to $30 million its expected earnings for the financial year ending 30 June 2012, given the proximity of publication of that announcement to the 9 January 2012 email, it is reasonable to infer that it is probable that Mr Rayner read that announcement or at the least was aware that Gunns had provided a very recent market update of its financial position.
39 On 31 January 2012, Steven Butt, an accountant employed in Gunns' head office in Launceston, sent a letter to Mr Rayner proposing a payment schedule outside of the contractual terms to address the current outstanding payments. Three payments totalling $480,000 were proposed: one on 3 February 2012 in the amount of $100,000; another on 6 February 2012 in the amount of $200,000; and a third payment on 10 February 2012 in the amount of $180,000. The letter advised that Gunns would "endeavour" to make the third payment of $180,000 by the nominated date and that "Gunns' ability to process further payments will be advised over the course of the next week". Mr Rayner agreed in cross-examination that he understood from reading that letter that Gunns did not have the money to pay Bluewood immediately in accordance with its contractual obligations and would not make any promise as to when the balance owed to Bluewood would be paid in full. At this time, the oldest debt owed to Bluewood was 31 days outside payment terms. Bluewood did receive payments from Gunns to an amount of $480,184.58 on or around the dates foreshadowed. However, the pattern of partial and late payment continued in relation to new invoices that issued, with Mrs Rayner regularly chasing up payment.
40 Mr and Mrs Rayner were both aware at the time that Gunns' late and partial payment of invoices was also a continuing problem for other contractors in the region. Mr Rayner also recollected that one contractor may have threatened not to work on the following Saturday (4 February 2012) if payments were not made on time.
41 At some stage Mr and Mrs Rayner became aware that Gunns' finance facilities had been extended for 12 months to the end of December 2012.
42 On 7 February 2012 the Sydney Morning Herald newspaper published an article entitled "Gunns bid for more capital", which stated that Gunns had forecast an overall profit downgrade of $10 to $20 million to 30 June 2012 and was "trading at historic lows" on the ASX;
43 On 27 February 2012 Gunns released its financial statements for the financial half year ended 31 December 2011 to the ASX. The statements 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. Mr Rayner's evidence in cross-examination was that he could not recall reading the report but if he had read any part of it, it would have been relating to the forestry assets. He agreed that this part of the report showed that forestry assets were being revalued negatively. Mrs Rayner's evidence in cross-examination was that she would have seen this document. She agreed that the information caused her to be concerned about Gunns' future viability. She also agreed that in February 2012 she knew that Gunns was not paying its contractors on time because it did not have sufficient funds available.
44 On 28 February 2012 the Age newspaper published an article entitled "Gunns records loss", which 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".
45 On 9 March 2012, Gunns announced that the proposed equity investment of $150 million into the company by Richard Chandler Capital Corporation Pte Limited (Richard Chandler Corporation) was not proceeding and a further trading halt was placed on Gunns shares. This trading halt never lifted. In cross-examination Mrs Rayner said she probably saw this market release at some point on the ASX website but could not recall when. She was also aware that Richard Chandler Corporation was not proceeding with the $150 million investment and knew that this would have a significant, negative impact on Gunns by jeopardising the future of the pulp mill development, which she was aware was "an important part of [Gunns'] business". She also agreed that she was aware at the time that it would be a matter of very significant concern for Gunns' future viability if the pulp mill development did not proceed. Mr Rayner stated that he was not aware that the proposed Richard Chandler Corporation investment was not proceeding as he had never heard of Richard Chandler.
46 Also on 9 March 2012, the Sydney Morning Herald newspaper published an article entitled "Gunns blames Greens for billionaire blow", which stated that Richard Chandler Corporation had withdrawn from a proposed equity investment of $150 million into Gunns. The article stated that Gunns had "staked their future on the value-adding pulp mill project" and quoted Greg L'Estrange, chief executive 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". Mr and Mrs Rayner both gave evidence that they had not read this article. The withdrawal of Richard Chandler Corporation from the proposed equity investment in Gunns was also reported by a number of other media outlets.
47 Also on 9 March 2012, Bryan Hayes (the general manager of Gunns' Forest Products division) sent a letter to Mr Rayner, advising that Gunns would pay $293,000 on 20 March 2012 in reduction of the current outstanding amount, then $628,804.86. Mr Hayes wrote that "Gunns' ability to process further payments will be advised on 14/03/2012, in line with anticipated developments aligned to the company's asset sale programme". In cross-examination, Mr Rayner acknowledged that the letter did not contain any concrete promise to return to payment terms. Mrs Rayner agreed that she understood that Gunns was not offering or proposing to pay the whole of the money that was owed to Bluewood, but instead make a part payment of it only. A payment of $288,528.25 was made on 19 March 2012.
48 On 13 March 2012 the Sydney Morning Herald newspaper published an article entitled "Gunns suspended from ASX quotation", which stated that Gunns had suspended trading on the ASX while it negotiated a capital raising. The article noted Richard Chandler Corporation's decision not to proceed with an investment in Gunns and that its negotiation of a capital raising "will be material to the company's financial position and strategy".
49 On 23 March 2012, Peter Merry (who replaced Mr Donaldson as regional manager for Western Australia) emailed Mr and Mrs Rayner a payment schedule letter from Mr Butt, referring in the covering email to a discussion they had had earlier that day. The letter advised that $127,000 would be paid on 26 March 2012, that "Gunns' ability to process further payments will be advised in line with anticipated developments aligned to the company's asset sale programme" and "[i]t remains Gunns' intention to be substantially back on payment terms by early April, 2012". At the time, Bluewood was owed $618,969.78 by Gunns. Gunns paid Bluewood $124,722.46 on 26 March 2012.
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 in order to "significantly reduce its debt facilities", with the trading halt to continue in the interim. Both Mr and Mrs Rayner were aware of the proposed equity raising.
51 On 29 March 2012, Mr Merry emailed Mr and Mrs Rayner a payment schedule letter from Mr Butt, referring in the covering email to a discussion they had had the previous day. The letter advised that Gunns would pay $125,000 on 2 April 2012. The letter repeated that "Gunns' ability to process further payments will be advised in line with anticipated developments aligned to the company's asset sale programme" and said it remained Gunns' intention to be substantially back on payment terms "during April, 2012".
52 Payments of $125,000, $90,504.15 and $110,000 were made on 2, 5 and 18 April 2012 respectively in part payment of outstanding invoices. However, despite the representation in Mr Butt's letter of 29 March 2012, Gunns did not return to payment in accordance with contractual terms in April, nor at any time thereafter.
53 On 30 April 2012, Gunns released another update to the ASX requesting that the suspension on securities trading in its shares (which began on 9 March 2012) remain in place until it finalised a proposed equity offer. As at 30 April 2012, Bluewood was owed $634,333.79 by Gunns. The oldest part of this debt was 30 days outside terms and Gunns was not making payments substantially back on payment terms as represented was its intention in the 23 and 29 March 2012 letters
54 On 7 May 2012, Mr Merry emailed Mr and Mrs Rayner a payment schedule letter from Mr Butt, referring in the covering email to a discussion they had had the previous Friday (being 4 May 2012). The letter advised that Gunns would pay $110,000 on 10 May 2012. The letter again contained the advice that "Gunns' ability to process further payments will be advised in line with anticipated developments aligned to the company's asset sale programme" and it was "Gunns' intention to be substantially back on payment terms during the next month".
55 Payments of $110,000 and $108,693.17 were made on 4 and 9 May 2012 respectively, in part payment of outstanding invoices. On 15 May 2012, the level of Gunns' indebtedness to Bluewood reached $989,800.30 (on the basis that invoice ATS023 issued on 15 May 2012 and created a liability for the skidder later quantified in the amount of $1,465.20). The oldest part of this debt was then 30 days outside of the 15-day payment terms stipulated in the contract.
56 Also on 15 May 2012, Mr Merry emailed Mr and Mrs Rayner another payment schedule letter from Mr Butt, referring in the covering email to previous discussions. The letter advised that Gunns would pay $110,000 on 16 May 2012. The letter again contained the advice that "Gunns' ability to process further payments will be advised in line with anticipated developments aligned to the company's asset sale programme" and it was "Gunns' intention to be substantially back on payment terms during the next month". On 16 May 2012, Gunns made the foreshadowed payment of $110,000.
57 On 17 May 2012, Gunns gave written notice to Bluewood of a force majeure event under the contract relating to "non-settlement of commercial matters between Gunns and [Elders]". The letter advised that "all Gunns Western Australian based harvesting / processing / haulage operations will need to be suspended until further notice". Bluewood ceased work for Gunns on about this date and did not resume work until around 9 August 2012. When Gunns invoked the force majeure clause, Mr and Mrs Rayner were both aware that this meant an indefinite suspension to Gunns' trading, though Mr Rayner's evidence in cross examination was that at the time they were led to believe that it was going to be a couple of weeks. At this time, Mrs Rayner knew that Gunns was 32 days outside their payment terms and their debt had reached over $878,000. Mrs Rayner acknowledged that she read the suspension notice and discussed it with Mr Rayner.
58 Shortly prior to 28 May 2012, Mr and Mrs Rayner sought legal advice from lawyers regarding the force majeure event. Mr Rayner said in cross-examination that during the meeting with Bluewood's lawyers they also discussed payment issues and whether there was "some sort of legal avenue to hurry them up in paying us."
59 On 28 May 2012, Bluewood sent a letter to Mr Hayes of Gunns in which Bluewood:
(a) requested further details of Gunns' dispute with Elders;
(b) expressed suspicion that the dispute with Elders related to the non-payment of monies owed by Gunns to Elders;
(c) sought confirmation that Gunns would continue to pay Bluewood in accordance with its contractual obligations; and
(d) requested payment of outstanding amounts (totalling $558,069.12) within 7 days, stating that Bluewood could not "permit this situation to persist".
60 Mrs Rayner admitted in cross-examination that it crossed her mind at the time of the dispute between Elders and Gunns that the dispute was over money, as she knew that Bluewood and other contractors had not been paid for a long period of time.
61 Also on 28 May 2012, Mrs Rayner had a discussion with Mr Merry. Mr Merry reported on that conversation to Mr Hayes in an email in which he wrote that Bluewood was "becoming increasingly desperate". Although Mrs Rayner could not recall whether she put in terms to Mr Merry that Bluewood was "desperate" for payment, she agreed that she spoke to Mr Merry about payments and at the time it was the case that Bluewood was desperate for payment from Gunns, though she maintained in cross-examination that at no stage did she think that Gunns would not be able to pay in the future.
62 As at 1 June 2012, Bluewood was owed $941,809.65 by Gunns. Mr Rayner admitted he was aware of this. The oldest part of this debt was then 47 days outside the 15-day payment terms. On 5 June 2012, Mr Merry emailed Mr and Mrs Rayner a letter from Mr Hayes advising that a payment of $55,000 would be made on 8 June 2012 and that "Gunns' ability to process further payments will be advised over the course of the next week". In the covering email, Mr Merry noted that the payment schedule letter was provided "in line with what we have discussed".
63 On 25 June 2012, Mr Rayner met with Mr Merry regarding "[Bluewood's] concerns with the lack of information, direction and payment of overdue accounts from Gunn's [sic]". In his affidavit, Mr Rayner deposed that he conveyed to Mr Merry at this meeting that Bluewood was "not happy that we had not had much info from Gunns about the force majeure and that payments were getting behind". Mr Rayner further deposed that "Mr Merry was not able to give me any firm commitment on what would be happening with Gunns resumption [sic] of works and when Gunns would make some payments against their outstanding account". An email from Mr Rayner, written by Mrs Rayner, to Mr Merry later that day referred to the meeting and stated:
To date no response has been received to our letter emailed both to Brian Hayes and yourself on 28th May 2012 regarding the Force Majeure Notification.
We have had regular meetings/discussions with yourself trying to ascertain payment of outstanding monies and operational direction of Gunn's [sic], we understand the information you are privy too [sic] is limited. It would seem Gunn's [sic] "corporate" has continued to avoid clarification in regards to payment terms of our outstanding monies and has left us no alternative but to seek legal advice.
As a last resort we ask for Gunn's [sic] to provide by close of business tomorrow, payment or at least a written commitment outlining a payment schedule of the outstanding monies, deemed acceptable by [Bluewood]. If no response is received by this time or unsatisfactory terms are presented, [Bluewood] has no alternative but to issue a Statutory Demand notice to Gunn's [sic].
It is disappointing that the situation has deteriorated to this point and I would Gunn's [sic] endeavour to work towards honouring their contractual obligations and improving their working relationships between themselves and their contractors.
64 At the time, Mrs Rayner was aware that there was around $886,000 of outstanding monies outside the terms. Mr Rayner was also aware of the debt outstanding and was "to some degree" very concerned about the payment terms. The oldest part of the outstanding debt (being approximately $7,900 referrable to the invoice issued on 1 April 2012) was 71 days outside of payment terms. Mrs Rayner understood that Gunns was acting on the basis that Bluewood would proceed with legal action if they did not comply with Bluewood's request for payment or a written commitment to payment.
65 Mr Merry forwarded Bluewood's email of 25 June 2012 to Mr Hayes later that afternoon, stating that:
(a) Bluewood had announced that it now had no option but to issue a statutory demand notice to Gunns "relating to rectifying the current outstanding payments"; and
(b) Gunns' "effort to stall [Bluewood] from proceeding with legal action now appears to have reached a point where we are no longer able to locally manage the situation",
and requested advice whether Gunns could support developing a payment schedule "in an effort to avoid [Bluewood] actually pressing ahead and taking legal action".
66 Gunns responded to Bluewood's letter of 28 May 2012 on 25 June 2012. In his response, Mr Hayes broadly explained the reason for the dispute with Elders and advised that the matter was to "proceed to Court", so he was unable to provide any further details. Mr Hayes advised that Elders and Gunns were co-operating regarding resumption of woodchip deliveries in the meantime and Gunns was "hopeful of an outcome in the near future". With regard to the outstanding payments, he advised that Gunns was "planning on making partial payments in the short term until settlement of one or both major asset sale transactions completes". He anticipated that would be "sometime in July" and would "enable our working capital position to be improved". The letter finished: "please be reassured that Gunns intention [sic] is to make full payment of outstanding amounts as soon as reasonably possible".
67 An internal Gunns email from Mr Merry to Mr Hayes dated 26 June 2012 records that Mr Merry had a discussion with Bluewood that day, during which Gunns put a proposal to pay Bluewood $100,000 per week until the outstanding payments situation had been rectified and Bluewood had "presented that they could accept" the payment plan, provided $200,000 was paid by 30 June 2012, with nil payment the following week and weekly payments of $100,000 to commence from 9 July 2012. The email also recorded that Bluewood had indicated that it could only afford to recommence chipping operations for Gunns working under a maximum liability of $450,000. In cross-examination Mr and Mrs Rayner were both vague on the details of this discussion, but both of them could recall having some such discussion with Mr Merry and Mrs Rayner recalled that Bluewood had indicated it could accept a proposal where $200,000 was paid by 30 June 2012, with weekly instalments of $100,000 to follow. They both denied however having told Mr Merry that Bluewood could only afford to recommence chipping operations if Gunns' liability to Bluewood was capped at a maximum $450,000. I reject their denials as there is no reason to doubt the accuracy of the record of the discussion in the contemporaneous email sent by Mr Merry.
68 The same day Mr Hayes sent an email to Mr Butt asking whether Bluewood's proposal was "doable".
69 On 27 June 2012, Mr Hayes sent a letter to Mr Rayner, in which Gunns committed to making payments to Bluewood as follows: $100,000 on 29 June 2012; $50,000 on 2 July 2012; $50,000 on 6 July 2012; and thereafter $100,000 per week until the total then current outstanding payment was paid in full. Mr Rayner considered at the time that Gunns was paying contractors at the time "as they felt necessary" and were not paying the full amount outstanding in a lump sum, as this would "leave themselves short for other people" if they had a "huge amount of money outstanding" to other creditors. Mr Merry emailed Mr Hayes the same day to confirm that Bluewood accepted Gunns' offer as set out in the letter and indicated that they would not proceed to issue a statutory demand.
70 As at 1 July 2012, Bluewood was owed $836,764.54 by Gunns. The oldest part of this debt was 62 days outside the 15-day payment terms under the contract. Far from returning to contract terms in June 2012 as represented in the 7 May 2012 letter, Gunns was still offering only partial and late payment and, tellingly, even the threat of legal action did not result in compliance with contractual terms.
71 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.
Both Mr and Ms Rayner recalled seeing the ASX update (or at least some of the content of the update) at some time, and were aware of the substantial decline in stumpage prices. In cross-examination Mrs Rayner agreed she was aware that this would adversely affect Gunns' business operations.
72 On 9 July 2012, Gunns announced to the ASX that it had been issued with amended income tax assessments totalling more than $60 million in relation to a sale and leaseback transaction entered into in the 2007 income year. Mrs Rayner's evidence was that she was not aware that Gunns had been hit by a $64 million tax bill, although she agreed that she was continuing to look at the ASX website from time to time to ascertain what Gunns was reporting about its financial performance.
73 On 16 July 2012, The Sydney Morning Herald newspaper published an article entitled "Gunns offloads Portland woodchip plant for $61.8m", which stated that Gunns had sold its woodchip export plant in Portland, Victoria as part of an asset sell down it was undertaking to fund its "ambitious $400 million capital raising" for the pulp mill development. In cross-examination, Mr Rayner agreed that he had read that article and was aware of the sale of the Portland woodchip plant at the time.
74 On 23 July 2012, the Australian Financial Review newspaper published an article entitled "All Gunns Blazing for Korda Mentha", which explained that Gunns had engaged "insolvency specialists" to review Gunns' balance sheet. Mrs Rayner's evidence was that she read this article at some time prior to Gunns' administration. Mr Rayner's evidence was that he did not read the article or discuss the engagement of KordaMentha with his wife.
75 Until 20 July 2012 Gunns substantially complied with the payment plan to which it committed on 27 June 2012. However, the $100,000 instalments due on 27 July and 3 August 2012 were not paid. As of 27 July 2012, Gunns was more than 70 days outside its payment obligations in respect of the oldest part of the debt, being $102,428.50 outstanding on the invoice issued on 1 May 2012, due for payment on 15 May 2012.
76 On 3 August 2012, Adam Crook (Gunns' harvest and processing manager) sent an email to Bluewood and two other contractors, stating:
I have just been advised by Corporate that the Portland sale has gone through, but unfortunately no letters outlining payment schedules will be released this afternoon.
The CFO and Mr Bryan Hayes are to have discussions Mon 06/08 to review contractor payment schedules in detail, prior to formally advising contractors of what and when they will be paid.
I am hopeful that payment and letters will be issued Mon 06/08, so that we all can resume work as originally planned.
77 On 6 August 2012, Gunns released a market update to the ASX which reported (amongst other things) 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 position would fall to between negative $50 million and negative $150 million. Mr Rayner "definitely read the first page" and "scanned bits and pieces" of this announcement. Further, he admitted to knowing that Gunns was there providing an estimate that it would record an impairment in the range of $700 to $800 million in its financial statements for the financial year ended 30 June 2012. Mr Rayner also acknowledged that he read that Gunns' net tangible assets value would be in the range of negative $50 million to a negative $150 million as at 30 June 2012 (though he was not sure that he understood what this meant) and there was a substantial decline in stumpage prices achieved in the current woodchip market. Mr Rayner acknowledged that this was not a good scenario and "definitely was a concern". Mrs Rayner's evidence was that she did not read the market update to the ASX, but she was aware prior to Gunns going into administration that the value of Gunns' forestry assets had reduced due to the decline in prices achieved in the international woodchip market.
78 Also on 6 August 2012, Mr Butt sent a letter to Mr Rayner advising that Gunns would pay $486,169 on 6 August 2012 and that "Gunns' ability to process further payments will be advised in line with anticipated developments aligned to the company's capital raising and asset sales programme". Payment was received as foreshadowed.
79 On or around 9 August 2012, Bluewood recommenced providing services to Gunns following the lifting of the suspension caused by the force majeure event.
80 On 14 August 2012, Mrs Rayner sent Mr Crook an email which stated, in the context of providing an update about Bluewood's progress in setting up a second infield chipping system at Gunns' request:
We are however highly concerned with the fact that we are incurring 3rd party costs and compounding our exposure by introducing a 2nd system to Gunn's [sic] considering the companies [sic] track record of failing to honour our previous agreement, and the growing uncertainty surrounding the company's stability and financial position.
We will be forwarding a letter over the next couple of days outlining these concerns and a proposal as discussed previously regarding limiting our exposure.
81 On 17 August 2012, Mr Crook confirmed with Mrs Rayner by email that a payment of $79,954.89 had "left Gunns account this afternoon". After that payment was received, Gunns was $30,000 ahead on payments, with the first invoice since Bluewood had resumed work (issued on 15 August 2012 for $64,870.72) not due for payment until 31 August 2012. No further payment was received until 19 September 2012 and then only for $27,000 despite $34,870.72 remaining outstanding from the 15 August 2012 invoice and a further invoice being issued on 1 September 2012 in the amount of $187,679.55 for services provided following the resumption of work.
82 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".
83 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 $903.865 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. The report stated:
…
Gunns Limited ("the Company") has reported a net loss after tax for the year ended 30 June 2012 of $903.9 million. This compares to a net loss after tax for the previous financial year of $355.5 million. The net loss after tax reflects the effects of non-cash impairment charges and non-operating costs associated with the Company restructure. Impairment charges in the half reduced the carrying value of forestry assets by $749.2 million. In addition to these impairment charges the Company has reduced the carrying value of timber processing assets which are held for sale by $43.8 million…
…
The Mill Project has been progressed by the Company over many years and the Company has obtained all of the applicable State and Federal permits for the Mill Project to proceed. In order to continue to value these related assets on the basis of a domestic pulp mill being established, the Company makes a regular determination as to whether the Mill Project is "probable to proceed" or not.
The impact of the decline in stumpage prices on the Company and its asset position has raised material uncertainty regarding the Company's current financing strategy including for the Mill Project. In that context, the Company's board has been unable to reach a view for the purposes of the Company's 30 June 2012 financial accounts that the Mill Project is "probable to proceed" in terms of the concepts defined in relevant accounting standards.
…
Mrs Rayner agreed that she had read the report but was unable to say when. Mr Rayner's evidence was that he did not read the report.
84 Also on 31 August 2012, ABC Online published an article entitled "Gunns announces massive $900m loss" (updated on 2 September 2012) which stated that Gunns' annual report recorded a "massive annual loss" of $904 million, that Gunns had "devalued its net tangible assets by more than $1 billion", that "Gunns' creditors would have difficulty recovering more than $500 million [of repayments owed to them]" and that Gunns needed a "massive injection of capital or someone with deep enough pockets to be able to buy out [Gunns'] debt" to continue as a going concern. Numerous other media articles were published at or around this time regarding this further deterioration in Gunns' financial position. Mrs Rayner accepted that she saw that article.
85 On 14 September 2012, Mr Hayes sent a letter to Mr Rayner advising that "[d]ue to a delay in receiving payment for a recent woodchip shipment and the impact that this event has had on available cash flow" Gunns would pay Bluewood $150,000 on 18 September 2012 and $72,550 on 21 September 2012. Payments were made, but of $27,000 and $195,550.27 on 19 and 21 September 2012 respectively.
86 On 25 September 2102 Gunns was placed into voluntary administration and the liquidators were appointed as joint and several administrators.