Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd

STATUTORY PROVISIONS 4 Section 588FF(1) relevantly provides that: Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders: (a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction; … 5 Section 588FE prescribes when a transaction is voidable for the purposes of s 588FF. Relevantly, s 588FE(2) provides: The transaction is voidable if: (a) it is an insolvent transaction of the company; and (b) it was entered into, or an act was done for the purpose of giving effect to it: (i) during the 6 months ending on the relation-back day; or (ii) after that day but on or before the day when the winding up began. 6 Section 588FC prescribes when a transaction is an insolvent transaction. The section provides: A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and: (a) any of the following happens at a time when the company is insolvent: (i) the transaction is entered into; or (ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or (b) the company becomes insolvent because of, or because of matters including: (i) entering into the transaction; or (ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction. 7 Section 588FA prescribes when a transaction is an unfair preference. The section relevantly provides: (1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if: (a) the company and the creditor are parties to the transaction (even if someone else is also a party); and (b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency. … (3) Where: (a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and (b) in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship; then: (c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and (d) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference.

ISSUES 8 In a separate hearing, the Court determined that Gunns was insolvent on and from 30 March 2012: Bryant (liquidator) v LV Dohnt & Co Pty Ltd, in the matter of Gunns Limited (in liquidation) (receivers and managers appointed) [2018] FCA 238 (the insolvency judgment). Further, it was not in dispute that Bluewood was paid the amounts in question (although the exact dates of the payments were not agreed), nor that Bluewood was an unsecured creditor of Gunns in respect of the payments it received, nor that each of the payments formed part of a single transaction for the purposes of s 588FA(1). In issue in these proceedings is: (a) whether the single transaction (constituted by the payments and subsequent services) was an unfair preference within the meaning of s 588FA and, if so, the quantum of that preference (the unfair preference issue); (b) whether the "peak indebtedness rule" applies for the purposes of s 588FA(3) (the peak indebtedness issue); (c) whether Bluewood has established a "good faith" defence pursuant to s 588FG(2) (the good faith defence); and (d) whether, pursuant to s 553C of the Corporations Act, Bluewood is entitled to set-off, against any sum it is ordered to pay in the proceeding, the sums owed by Gunns to Bluewood as at the relation back day (25 September 2012) (the set-off issue). 9 Some of these issues are common to two other preference actions brought by the liquidators against other creditors of Gunns (the Gunns preference claims) in which judgment is handed down at the same time: see Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Badenoch Integrated Logging Pty Ltd [2020] FCA 713 and Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Edenborn Pty Ltd [2020] FCA 715. 10 There is also a minor dispute (which is relevant to the peak indebtedness issue) as to whether invoice ATS023 was issued on 15 May 2012 (as the liquidators contend) or 16 May 2012 (as Bluewood contends) and whether this invoice was for the sum of $321,731.18 (as the liquidators contend) or $320,265.98 with a separate invoice for $1,465.20 (as Bluewood contends).

THE GUNNS GROUP 11 The following background to Gunns is taken from the insolvency judgment in this proceeding. 12 Gunns is the parent company of the Gunns Group. The Gunns Group was organised on a divisional basis by reference to its major operating business units rather than by reference to individual legal entities or groups of entities and, as the parent company, Gunns performed various functions for the group, including providing a centralised treasury and banking system. The principle financier to the Gunns Group was a syndicate of 10 banks led by ANZ Cavell Court as syndicate agent. 13 The principle activities of the Gunns Group were: (a) the processing, manufacturing and selling of sawn timber products and veneers including merchandising; (b) forest management and development, milling, processing and export of hardwood woodchip products; (c) responsible entity management of various forestry and horticultural managed investment schemes; and (d) financing managed investment scheme investors. 14 The Gunns Group operated from various sites, namely: (a) sawmills in Tarpeena, South Australia and Bell Bay, Tasmania; (b) a woodchip export facility at the Port of Portland, Victoria (sold in August 2012); (c) hardwood plantations (owned) located in the south east of South Australia; (d) plantations (owned and managed under managed investment schemes) in Tasmania; (e) plantations owned by investors under various managed investment schemes located in several states of Australia; (f) softwood plantations in the area known as the "green triangle" (Auspine softwood plantations) located in the south east of South Australia and Victoria; and (g) vineyards and wineries located in Tasmania. 15 During 2010 and 2011 the trading performance of the Gunns Group was impacted by several external factors and the Gunns Group suffered significant declines in revenue. From mid-2011 onwards there were ongoing delays in the payment of creditors and in September 2011, Gunns identified that it was unlikely to repay its finance debt which was repayable by 31 January 2012 and would require an extension of the repayment date. On 31 January 2012 the term was extended to 31 December 2012. Despite steps taken by the Gunns Group to reduce its finance debt the Gunns Group remained reliant on the lenders to fund its working capital requirements. A capital raising announced in early February 2012 did not proceed and alternative equity raising options did not eventuate. On 25 September 2012, the liquidators were appointed as joint and several administrators of Gunns and its subsidiaries by resolution of the directors of Gunns pursuant to s 436A of the Corporations Act. On 5 March 2013, at a meeting of the creditors of Gunns, the creditors of Gunns resolved that Gunns be wound up pursuant to s 439C of the Corporations Act and that the liquidators be appointed joint and several liquidators of Gunns in the winding up. As at 25 September 2012, the creditors of the Gunns Group totalled $780,798,000, which included unsecured trade creditors of $61,820,000 and other unsecured creditors of $73,016,000.

BLUEWOOD 16 Bluewood carries on business as a timber harvesting contactor in Western Australia. It originally commenced operations in 2004 under the name Albany Timber Services Pty Ltd and changed its name to Bluewood Industries Pty Ltd in 2014. Bluewood was predominantly engaged in the business of tree harvesting in and around Albany, Western Australia, delivering cut and debarked logs. Bluewood's first logging contract was with Great Southern Limited and it started providing those services in or around early 2005. In 2009, Great Southern Limited went into went into administration and in late January 2010 Gunns took over some of the contracts of Great Southern. Bluewood's contract with Great Southern was one of the contracts novated to Gunns and Gunns became Bluewood's major customer. 17 On or around 10 March 2011, Gunns entered into a new contract with Bluewood for the provision of harvesting and in-field wood chipping services (the contract), which included the felling of trees, in-field chipping of plantation trees into woodchips and the loading of the woodchips onto haulage trucks. The woodchips were then transported to the Albany Port, which at the time was run by Elders Forestry Limited (Elders). The contract provided for Gunns to issue a recipient created tax invoice by the 12th day of each month in respect of the work commencing from the 16th day of the previous month and ending on last day of the previous month; and by the 28th day of each month in respect of the work commencing from the 1st day of that month and ending on the 15th day of that month. For invoices issued on the 12th day of the month, payment was due by no later than the 15th day of that month, and for invoices issued on the 28th day of the month, payment was due by no later than the last day of that month (or within two days in February). 18 In late April 2011, Gunns advised Bluewood that the method of fortnightly contractor payments was "not aligned to the business and market situation of Gunns" and that payment terms were to change to a monthly basis as from 1 July 2011. However, it appears that the terms of the contract were not formally altered. 19 During the relation back period, the following payments were made and invoices raised for the services Bluewood provided to Gunns: Date Invoice Payment 26 March 2012 $124,772.46 1 April 2012 (invoice) ($222,937.32) 2 April 2012 $125,000.00 5 April 2012 $90,504.15 16 April 2012 (invoice) ($242,703.30) 18 April 2012 $110,000.00 1 May 2012 (invoice) ($252,428.50) 4 May 2012 $110,000.00 9 May 2012 $108,693.17 16 May 2012 (invoice) ($320,265.98) 16 May 2012 $110,000.00 17 May 2012 (invoice) ($1,465.20) 1 June 2012 (invoice) ($62,009.35) 7 June 2012 $55,000.00 29 June 2012 $100,000.00 1 July 2012 (invoice) ($49,954.89) 2 July 2012 $49,937.32 6 July 2012 $50,000.00 13 July 2012 $100,703.30 20 July 2012 $100,000.00 6 August 2012 $486,169.03 15 August 2012 (invoice) ($64,870.72) 17 August 2012 $79,954.89 1 September 2012 (invoice) ($187,679.55) 15 September 2012 (invoice) ($149,941.44) 19 September 2012 $27,000.00 21 September 2012 $195,550.27 24 September 2012 (invoice) ($61,503.25)

20 There is not complete correlation between the dates of payments in this table and the dates in the table of impugned payments at [2] above, though it does not appear that anything materially turns on whether one date is accepted over another except in the case of invoice ATS023, issued on 15 May 2012, which is discussed in detail below.

WITNESSES 21 Evidence was given on behalf of the liquidators by Craig Crosbie, one of the liquidators of the Gunns Group. Mr Crosbie was not subject to cross-examination. 22 Bluewood adduced evidence from Mr Clinton Rayner and Mrs Sharon Rayner. Mr Rayner is the sole director of Bluewood and Mrs Rayner is an accounts administrator employed by Bluewood. Both witnesses were cross-examined.

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.

THE UNFAIR PREFERENCE ISSUE 87 Subject to the good faith defence in s 588FG(2) of the Corporations Act, the liquidators otherwise have established that the single transaction constituted by the payments and invoices recorded in running account between Gunns and Bluewood was an unfair preference within the terms of s 588FA(1), as the unchallenged affidavit evidence of Mr Crosbie was to the effect that unsecured creditors of Gunns are unlikely to receive any dividend in the winding up. Thus, the impugned payments received by Bluewood during the relation back period resulted in it receiving more than it would receive in respect of its debts than if the single transaction constituted by the payments and invoices recorded in running account between Gunns and Bluewood was set aside and Bluewood was to prove in the winding up. 88 In issue, however, is the quantum of the preference (if Bluewood's good faith defence fails). The points of contention in calculating the quantum of the preference are the application of the peak indebtedness rule and the date and quantum of recipient created tax invoice ATS023.

THE PEAK INDEBTEDNESS ISSUE 89 On the basis there was no break in the continuing business relationship between Gunns and Bluewood, the liquidators picked the point of peak indebtedness in the running account during the relation back period as the beginning of the "single transaction" for the purposes of s 588FA(1). In issue is whether the peak indebtedness rule continues to apply following the introduction of Pt 5.7B of the Corporations Act in 1993. 90 The peak indebtedness rule has its genesis in Rees v Bank of New South Wales [1964] HCA 47; 111 CLR 210 (Rees). In that case, Barwick CJ said that it was open to a liquidator in a preference proceeding to choose the highest point of indebtedness in a running account during the relation back period as the "starting point", rather than the balance as at the start of the relation back period. His Honour said at 220-1: It was also said in argument for the bank that it was not permissible for the liquidator to choose a date within the period of six months and to make a comparison of the state of the overdrawn account at that date and its state at the date of the commencement of the winding up. It was submitted that the proper comparison was between the debit in the account at the commencement of the statutory period of six months and the debit at the commencement of the liquidation…In my opinion the liquidator can choose any point during the statutory period in his endeavour to show that from that point on there was a preferential payment and I see no reason why he should not choose, as he did here, the point of the peak indebtedness of the account during the six months period. The principle has continued to be applied in the application of s 588FA. 91 Olifent v Australian Wine Industries Pty Ltd (1996) 130 FLR 195 (Olifent) was the first case in which the application of the rule in the context of s 588FA of the Corporations Act (then the Corporations Law) was substantially considered. In that case, Master Burley rejected the submission that the rule had no application under the current provisions, holding that the nature and ambit of the running account defence under the old provisions was essentially the same as the defence provided for under the current provisions, indicating that the legislature did not intend to alter the law as it was: Olifent at 202-3. Accordingly, the liquidator could choose any point during the statutory period, including the point of peak indebtedness, to establish a preferential payment. The correctness of Olifent does not appear to have been challenged in subsequent cases and the rule has continued to be applied by single and appellate courts in the application of s 588FA: see eg CSR Ltd trading as the Readymix Group v Starkey (as liquidator) of Allan Fitzgerald Pty Ltd (in liq) (1994) 14 ACSR 321 (CSR Ltd) at 325 per Fitzgerald P and Mackenzie J, Pincus J agreeing; Sydney Appliances Pty Ltd (in liq) v Eurolinx Pty Ltd [2001] NSWSC 230 (Sutherland v Eurolinx) at [140]; Sutherland v Lofthouse [2007] VSCA 197; 214 FLR 157 (Lofthouse) at 171 [50] per Nettle JA (Neave and Redlich JJA agreeing); Clifton (as liquidator of Adelaide Fibrous Plasterboard Linings Pty Ltd (in liq)) & Anor v CSR Building Products Pty Ltd [2011] SASC 103 (Clifton v CSR Building Products) at [89]; In the matter of Employ (No 96) Pty Limited (in liquidation) [2013] NSWSC 61 (Re Employ (No 96)) at [43]. 92 It was argued for Bluewood that s 588FA(3) does not codify the peak indebtedness rule and it is reasonable to infer that the wording of s 588FA(3) was in fact intended to alter the law as it related to peak indebtedness. It was submitted that s 588FA(3) makes clear that where there is a running account, all transactions in the running account must be treated as a single transaction for determining whether there is an unfair preference given to a creditor. To allow a liquidator to pick a point during that continuing business relationship to determine "from that point on there was a preferential payment" was said to be in direct conflict with the wording of s 588FA(3), which requires the determination as to whether there is a preference to be considered on the relationship as a whole and in relation to all transactions forming part of the relationship. In support of that contention, Bluewood relied on the New Zealand Court of Appeal decision in Timberworld v Levin [2015] 3 NZLR 365 (Timberworld). 93 Timberworld concerned s 292(4B) of the Companies Act 1993 (NZ) (NZ Act), which was enacted in 2007 in materially the same terms as s 588FA(3) of the Corporations Act. The question of whether the Australian peak indebtedness rule applied to s 292(4B) was considered by the New Zealand Court of Appeal, which held that the wording of s 292(4B) did not give the liquidator any right to disregard transactions which formed part of the continuing business relationship but, rather, the plain wording of the provision required all transactions forming part of the relationship to be treated as amounting to a single transaction, with the sole limitation being that only transactions occurring in the relation back period can be considered. In reaching that conclusion the Court of Appeal held, as a matter of statutory construction, that the plain meaning of the phrase in s 292(4B)(c) "all the transactions forming part of the relationship as if they together constituted a single transaction" was "all transactions constituting an integral part of the continuous business relationship and therefore falling within the running account": at 386 [69]. The Court of Appeal stated that "to arrive at some artificial point during the course of all the relevant transactions and to select the date of peak indebtedness (resulting in the transactions prior to this point being disregarded) would be to ignore the express wording used by Parliament": at 386 [69]. The Court of Appeal also considered the High Court decision in Airservices Australia v Ferrier [1996] HCA 54; 185 CLR 483 (Airservices Australia) and concluded that the decision was contrary to the peak indebtedness rule applying to s 588FA, reasoning at 388 [81] that "[i]f the principle in Airservices Australia is that the ultimate effect must be considered in ascertaining the results of a running account, there is no doubt the peak indebtedness rule does violence to that principle". 94 The Gunns preference claims appear to be the first occasion when an Australian court has been asked to consider Timberworld as I was not referred to any Australian cases which have considered Timberworld and researches have not come up with any cases. Having considered the reasons given by the New Zealand Court of Appeal, I am, with respect, not persuaded that the peak indebtedness rule no longer applies under Australian law with the enactment of s 588FA or that the Australian authorities which have applied the rule in the application of s 588FA were clearly wrong, albeit that s 292(4B) of the NZ Act is in materially the same terms as s 588FA(3). 95 Airservices Australia concerned events occurring before s 588FA came into effect and the application of the peak indebtedness rule was neither an issue before, nor considered by, the High Court in that case. With respect I do not agree with the New Zealand Court of Appeal that the peak indebtedness rule "does violence" to the ultimate effect doctrine as explained by the High Court in Airservices Australia. It is clear on the authorities that the rationale for the running account doctrine is the connection between payments and the ongoing supply of goods or services. It is the fact that "future supply and continuing payments [are] inextricably joined" (to use the language of the majority in Airservices Australia at 509) which is the hallmark of a continuing business relationship for the purposes of the application of the preference provisions. That is, the connection between a payment and subsequent supplies: Airservices Australia at 509. Once it is recognised that it is the relationship between the provision of future services and the making of payments which gives rise to a continuing business relationship for the purposes of the application of the preference provisions, the peak indebtedness rule is reconcilable with the "ultimate effect" doctrine because, as the majority in Airservices Australia stated at 509, "the whole point of the doctrine emanating from [Richardson v Commercial Banking Co of Sydney Ltd [1952] HCA 8; 85 CLR 110], Queensland Bacon and Rees [is] to ensure that the effect of a payment that induces the further supply of goods and services is evaluated by the ultimate effect that it has on the financial relationship of the parties". 96 The weight of authority is that the current provisions of the Corporations Act were not intended substantively to change the law with respect to preferences. In VR Dye & Co (a firm) v Peninsula Hotels Pty Ltd (in liquidation) [1999] 3 VR 201 (VR Dye) Ormiston JA (with whom Winneke P and Tadgell JA agreed) held at 212 [34] that "no change was intended to be made to the nature of a preference under the new legislation, whatever other alterations were made to the law". None of the appellate cases that have considered VR Dye have found that Ormiston JA was "plainly wrong": see Beveridge v Whitton [2001] NSWSC 6 at [30] per Heydon JA (with whom Mason P and Powell JA agreed); McKern v Minister Administering the Mining Act 1978 (WA) [2010] VSCA 140; 28 VR 1 at [25]-[27] per Nettle JA, [118] per Mandie JA (with whom Beach AJA agreed); Federal Commissioner of Taxation v Kassem [2012] FCAFC 124; 205 FCR 156 at 163 [50]. Furthermore, as noted above at [91], the peak indebtedness rule had been applied under the current provisions in numerous cases, including appellate authority (see eg CSR Ltd; Sutherland v Eurolinx; Lofthouse; Clifton v CSR Building Products; Re Employ (No 96)) and the correctness of the decision in Olifent has not been called into question in any of those cases. Far from being persuaded that those cases were clearly wrong to apply the peak indebtedness rule and I should depart from those cases, I am of the view that those cases were plainly correct to continue to apply the peak indebtedness rule under the new provisions: Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492. 97 There is nothing in the extrinsic material which indicates that the peak indebtedness rule was not intended to continue to have application. Although the rule is not specifically mentioned, the explanatory memorandum to the Corporate Law Reform Bill 1992 (Cth) stated at [1042] that proposed subsection 588FA(2) (which became sub-s (3)): …is aimed at embodying in legislation the principles reflected in the cases of Queensland Bacon Pty Ltd v Rees (1967) 115 CLR 266 and Petagna Nominees Pty Ltd v A E Ledger 1 ACSR 547. Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 (Queensland Bacon) is one of the trilogy of High Court cases from which the ultimate effect doctrine emanated. In Petagna Nominees Pty Ltd v A E Ledger (1989) 1 ACSR 547, the other case referred to in the explanatory memorandum at [1042], Franklyn J of the Full Court of the Supreme Court of Western Australia (with whom Malcolm CJ agreed) expressly noted at 564 "the liquidator can choose any point during the statutory period in his endeavour to show that from that point on there was a preferential payment." The Court also applied the decision of Barwick CJ in Queensland Bacon, and cited with approval the decision of Gibbs J in Re Weiss; Ex parte White v John Vicars & Co Ltd [1970] ALR 654, a case involving preferential payments by a bankrupt, which are analogous to preferential payments by a company in liquidation for the purposes of the application of the peak indebtedness rule. In that case, Gibbs J cited Barwick CJ in Rees and found that the applicant trustee, having failed to impugn earlier payments within the relevant period due to the running account defence, may choose any later point as the starting point to examine the net effect of the bankrupt's payments to the defendant creditor: at 661. 98 Further, it was submitted by Bluewood that in any event, the present case is a situation where the application of the peak indebtedness rule causes unfairness to Bluewood because, in the three months after the date chosen by the liquidator as the date of peak indebtedness, Bluewood was prevented from providing its services by the enforcement of Gunns' force majeure rights. As a consequence, Bluewood could not provide services under the contract and render invoices but Gunns' obligations to make payments were not suspended. It was submitted this was a very unusual situation where, from the date of peak indebtedness as chosen by the liquidators, services were not being provided not because Bluewood did not wish to provide, or had refused to provide, services but because it could not provide services due to circumstances entirely outside the parties' control. It was submitted that the application of the peak indebtedness rule (if it otherwise had some validity) in this case would, by reason of these circumstances, produce a gross unfairness for Bluewood. It was submitted that in effect, the liquidators would be avoiding payments made by Gunns, the purpose of which was to continue the business relationship with Bluewood and repay indebtedness, but which also had the further purpose of maintaining the existing contract so that a right which had arisen thereunder, that is, the right to rely on the force majeure clause, was maintained. 99 There are two answers to this submission. First, the policy basis for the unfair preference provisions is that of securing equality of distribution between creditors of the same class (G and M Aldridge Pty Ltd v Walsh [2000] HCA 27; 203 CLR 662 at 675 [30]), so that if a creditor is paid a greater proportion of what they are owed than the other creditors in a winding up, the preference provisions operate to enable such payments to be clawed back so that the pool of money may be divided equally between the creditors in proportion to the debts they are owed. Secondly, the fact that, but for the force majeure, other services might have been provided is not to the point. Moreover, in fact, the subsequent services which Bluewood did provide were to a lesser value than payments received so that the ultimate effect of the course of dealings was a reduction of past debts, giving Bluewood an advantage over other creditors. There is no "unfairness" by the liquidators clawing back the preferential payments where Bluewood received more than it would have received if the payments had not been made and Bluewood was to prove with the other creditors in the winding up. 100 Accordingly I reject Bluewood's contention that the peak indebtedness rule has no application to s 588FA(3). I find that the liquidators are entitled to nominate the point of Gunns' peak indebtedness to Bluewood during the period of the continuing business relationship within the relation back period as the starting point from which the dealings between Gunns and Bluewood are to be treated as a single transaction for the purposes of establishing a preferential payment. Since the liquidators do not press the argument that there was a break in the continuing business relationship between the parties, subject to the below discussion regarding ATS023, the point of peak indebtedness which can relied upon by the liquidators for that period is 15 May 2012, at which time Gunns owed Bluewood $989,800.30. At the conclusion of the continuing business relationship on 25 September 2012, Gunns owed Bluewood $211,444.69, representing a reduction in the debt owed to Bluewood. The quantum of the preference is $778,355.61, being the difference.

RECIPIENT CREATED TAX INVOICE ATS023 101 The liquidators claim that invoice ATS023 was originally issued on 15 May 2012 in the amount of $320,265.98 and subsequently updated to add the further amount of $1,465.20 for skidder (a machine used in the harvesting and chipping process) hire, making a total sum of $321,731.18. The further amount relating to the skidder hire had been referenced in the original invoice created by Gunns in the description "Cheynes Beach - skidder hire quarry restoration" with the amount left unquantified. 102 The issue about the date and quantum of recipient created tax invoice ATS023 is that: (a) if the court finds that ATS023 was issued by Gunns on 15 May 2012 in the sum of $321,731.18, as the liquidators contend, then the quantum of the preference on a running account basis is $778,355.61, being the difference between the peak indebtedness on 15 May 2012 ($989,800.30) and the balance of the running account on the relation back day ($211,444.69); (b) if the court finds that Gunns was liable on 15 May 2012 for the sum of $320,265.98, and the liability for the $1,465.20 did not arise until a later date, then the quantum of the preference on a running account basis is $776,890.41; (c) if the amount and date of invoice ATS023 was $320,265.98 on 16 May 2012, with a separate amount of $1,465.20 on 17 May 2012, as Bluewood contends, then the quantum of the preference is $666,890.41. 103 Bluewood relies on its own internal invoices numbered 377 (dated 16 May 2012) for the sum of $320,265.98 and 373 (dated 17 May 2012) for the sum of $1,465.20, created after the recipient created tax invoice ATS023 had been issued. However, under the terms of the contract, it is the issue of the recipient created tax invoice that created the relevant liability: see cl 2.8(a) and (e), which provides that Gunns' liability to pay Bluewood arises from the generation by Gunns, at its election, of either a recipient created tax invoice or a statement. In this case, Gunns issued a recipient created tax invoice. 104 I accept the submission for the liquidators that by issuing recipient created tax invoice ATS023 on 15 May 2012, Gunns acknowledged on that day a liability of $320,265.98. I also accept the submission that by referencing the skidder hire in the original invoice created by Gunns in the description "Cheynes Beach - skidder hire quarry restoration" with the amount left unquantified, Gunns acknowledged on that day a liability for the cost of that hire, as yet to be quantified. Once quantified, the invoice issued on 15 May 2012 was updated by including the quantified cost of the skidder hire in that invoice. Accordingly I find that ATS023 was issued by Gunns on 15 May 2012 in the sum of $321,731.18.

GOOD FAITH DEFENCE 105 The good faith defence is found in s 588FG(2) of the Corporations Act. That sub-section provides: A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that: (a) the person became a party to the transaction in good faith; and (b) at the time when the person became such a party: (i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and (ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction. 106 There are four limbs that must be satisfied by Bluewood: first, that it became a party to the transactions in good faith: s 588FG(2)(a); secondly, that it had no reasonable grounds for suspecting that the company was insolvent at the relevant time or would become insolvent: s 588FG(2)(b)(i); thirdly, that a reasonable person in Bluewood's circumstances would have had no such grounds for suspecting insolvency: s 588FG(2)(b)(ii); and fourthly, that Bluewood provided valuable consideration under the transactions or changed its position in reliance on the transactions. 107 As s 588FA(3)(c) requires that all transactions forming a part of a continuing business relationship be treated as a single transaction, the four limbs of the defence must established over the relevant period of the continuing business relationship. In the present case that means at least from 16 May 2012, being the date of the first impugned payment. 108 The liquidator accepted that Bluewood had discharged its onus on the first and fourth limbs of the test. 109 To discharge the onus on the second and third limbs, Bluewood must establish that it had no reasonable grounds for suspecting that Gunns was insolvent at the relevant times or would become insolvent and, viewed objectively, a reasonable person in Bluewood's circumstances would have had no grounds for suspecting insolvency. The parties were not in dispute about the relevant principles that apply in establishing those elements of the defence. The law is well settled that a suspicion of insolvency requires more than a mere idle wondering whether the debtor company is insolvent or not. It is a positive feeling of actual apprehension or mistrust, amounting to a slight opinion, but without sufficient evidence: Queensland Bacon at 303 per Kitto J. "Suspicion" for that purpose means a mistrust of the debtor company's ability to pay its debts as they become due and payable and of the effect which acceptance of a payment would have as between the creditor and the company's other creditors: Queensland Bacon at 303 per Kitto J. The relevant suspicion must be a suspicion of actual and existing insolvency, as distinct from impending or potential insolvency or even a suspicion that the debtor company might be insolvent: Sheahan v Fabienne Pty Ltd [1999] SASC 335 at [30]. As Kitto J explained in Queensland Bacon at 303, the requisite suspicion requires: …something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section describes - a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors. In Sutherland v Eurolinx, Santow J explained at [43]: The case law illustrates that there is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion. Rather it is a question of looking not in hindsight but through the contemporary eyes of the parties, at the commercial circumstances then prevailing between them. This is to identify in that context those factors pointing towards insolvency of the debtor. This in turn is in order to ascertain which of those factors were apparent to the payee, and then the cumulative impact that knowledge of them should have had, or did have, upon the payee. There will also be potentially countervailing factors and circumstances to be weighed in the balance which could have tended to dispel suspicion at the time. Thus, to establish the second limb, Bluewood must prove that it had no reasonable grounds for suspecting insolvency based on the factors and circumstances of which it was aware over the period of the single transaction (constituted by the continuing business relationship) between 16 May 2012 and 25 September 2012. The "reasonable person" under the third limb is a "reasonable business person": Cussen (as liquidator of Akie Pty Ltd) v Commissioner of Taxation [2004] NSWCA 383 at [31], citing Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543 (Harkness) at 545-‍6. The "reasonable person" is assumed to have the knowledge and experience of an average business person but not the skills and experience of an expert financial analyst or lawyer: Harkness at 546. 110 In determining whether the requirements of s 588FG(2)(b) were satisfied, it was argued for Bluewood that it must be relevant that Bluewood: (a) knew that Gunns had resources that could be made available including by way of sale, was taking active steps to realise those assets and was regularly informing creditors and the market that sales were progressing; (b) was not insisting on payments strictly in accordance with the terms stipulated in its contract and never had throughout the course of the relationship; (c) knew that other creditors likewise did not insist on payments strictly in accordance with their contracts, and that Gunns had arrangements with its creditors in the region that it would make regular payments to the creditors not necessarily in accordance with their contracts; and (d) knew that Gunns did make regular payments, substantially complied with its promises for payments and paid within a reasonable time, although outside trading terms. 111 It was submitted that the "simple fact" that Bluewood knew Gunns was paying later and had some concerns as to whether it was able to pay on time was not sufficient to show a suspicion of present insolvency. It was submitted that Bluewood understood, as a matter of commercial reality, that creditors were giving leeway and Gunns was able to pay its debts within a reasonable time over the entire relation back period. 112 Further, it was submitted that each of the following factors would mitigate significantly over the course of the relationship any worries or concerns that a reasonable creditor might have about late payment or rounded-sum payments: (a) from the beginning of the relationship Gunns paid outside the strict terms of the contract, but that was a continuous and accepted practice and course of conduct adopted by the parties; (b) rounded-sum payments were also common practice since at least April 2011 and accepted by the parties as a common course of conduct and as part of Gunns meeting its payment obligations; (c) Gunns, through emails, kept Bluewood regularly informed of the timing of current payments and other relevant financial matters; and (d) Gunns had a positive and consistent payment history over the entire course of the relationship: (i) Gunns substantially honoured commitments to pay and in the main kept all payment promises; (ii) between September 2010 and September 2012 Gunns paid $8,982,415 to Bluewood (or nearly 98% of all invoices); (iii) in 2012 as late as mid-August the running account was as low as $34,870.72 and that debt was current; (iv) on 17 August 2012 the amount then outstanding was already paid two days ahead of the contractual timeframe; and (v) between 17 May and 6 August 2012 (during the force majeure shut down period) Gunns paid $941,809 to Bluewood when it had no income from woodchips in Western Australia, in fact paying all of its pre-force majeure outstanding invoices except for a "reconciliation account" of $49,954.89 issued on 1 July 2012. 113 It was also submitted that although Bluewood knew, in general terms, that other contractors in the region were also not being paid on time by Gunns, it knew that those creditors supported Gunns as a whole and there was no evidence that any contractor ever stopped work or took legal action against Gunns - leading to a reasonable commercial assumption on the part of Bluewood that Gunns had in place arrangements with those creditors. Furthermore, Bluewood never stopped working for Gunns. 114 Regarding the information in the public domain, which is relevant to the third limb of the good faith defence, it was submitted although there was some negative news about Gunns (the examples given were: "trading halt, stumpage prices down, assets revaluations and reported losses"), there was also positive news affecting Gunns, including an extension of finance facilities, the support of its lenders, successful asset sales, equity raisings and new capital raising proposals. It was submitted that this information, taken individually or as a whole, would not lead a reasonable person to suspect present insolvency at any time during the relevant period. It was submitted that the "leading indicator" is not a trading halt or a profit or asset downgrade or a reduction in commodity price but, as Palmer J made clear in Southern Cross Interiors Pty Ltd & Anor v Deputy Commissioner of Taxation & Ors [2001] NSWSC 621; 53 NSWLR 213, the leading indicator is whether there are resources other than cash that are available to the company. Here, it was submitted, Gunns had, and Bluewood knew that Gunns had, the support of its lenders and assets to sell which, together with income from production, was providing working capital. 115 It was also submitted that care needed to be taken with the weight to be given to publicly available information, taking into account which articles and ASX announcements Mr and Mrs Rayner actually saw or were aware of, and ascribing, by reference to the reasonable business person, a reasonable level of comprehension only, particularly in regard to information concerning a large, diverse public company with multiple subsidiaries and a complex financial structure. It was submitted that it would be very difficult for a reasonable business person to conclude from the publicly available information that Gunns was presently insolvent at any particular point during the relevant period. It was submitted that a reasonable business person turning their mind to the financial position of Gunns would have had regard to the fact that the directors of Gunns traded Gunns as a going concern and lenders provided Gunns with working capital right up until 21 September 2012. Further, in Bluewood's submission, a reasonable business person was entitled to assume that the directors of a large public company are cognisant of, and will comply with, the law and will actively turn their minds to whether or not the company can lawfully continue to trade. Mrs Rayner had read that KordaMentha had been appointed by Gunns' lenders in July 2012 and was due to report back to the lenders by late July 2012 but, it was argued, having received a substantial payment on 6 August 2012 which was said to come from asset sales, a reasonable business person would make a reasonable assumption that the KordaMentha report had not been adverse and lenders (as was, it was submitted, the fact) continued to support the company. 116 Reliance was also placed on the administrators' report pursuant to s 439A of the Corporations Act, dated 25 February 2013. It was submitted by reference to that report that "[e]ven once professional administrators were appointed, the financial complexity, the complexity of the Gunns' group structure and large scale of operations of the Gunns' group made it very difficult for the professional administrators, with the benefit of not only hindsight but access to all of Gunns' records, to determine with any degree of certainty when Gunns was insolvent". 117 Finally it was submitted that, as at the day of commencement of these proceedings in September 2015, being almost 3 years after their appointment, the liquidators did not themselves consider Gunns insolvent prior to July 2012. 118 In considering these arguments, it is important to bear in mind the statutory requirements that must be established for the good faith defence to apply, namely in order to establish the defence, Bluewood must prove that it had no reasonable grounds for suspecting insolvency at the time of the payments, and that a reasonable person in Bluewood's circumstances would have had no such grounds for so suspecting. Whether there were no reasonable grounds for suspecting insolvency must be based on the facts and circumstances of which Bluewood was aware (through Mr and Mrs Rayner) at the time. It is necessary to examine those facts and circumstances and, with reference to those facts and circumstances, to ask the question whether there were no reasonable grounds to suspect insolvency. It is immaterial to that task that the determination of the date as to when Gunns actually became insolvent (which the Court found in a separate hearing was on and from 30 March 2012 at the latest) was a complex and difficult task for the external administrators. Their task was different. 119 In their affidavit evidence, Mr and Mrs Rayner addressed the history of their dealings with Gunns, what they knew about Gunns' financial position and what they knew about the payment issues of other contractors. Mr and Mrs Rayner both deposed that they never had any real concerns about Gunns' future or that Gunns was insolvent or at any real risk of being insolvent. 120 Mr Rayner deposed that at no time did either Mr Donaldson or Mr Merry tell him anything that even suggested that there was a risk of Gunns being insolvent, going into administration or that Gunns would not be able to pay Bluewood's invoices. Although he was aware that other contractors in the region were also not being paid on time, he maintained that he was not aware of the extent of Gunns' debts to those contractors at any time and did not have any knowledge of any instances where any of the contractors refused to do work for Gunns due to late payments or terminated their services due to late payments. He deposed that "[i]t always seemed to [him] that this was just how Gunns operated". 121 Mr Rayner further deposed that he did not actively seek out news stories but from time to time would see and read articles about Gunns published by various news sources, including the local newspaper, and this on occasion would prompt him to look at the ASX announcements made by Gunns to see what they were saying on the matter. He deposed that "generally" the matters he recalled reading about Gunns either on the ASX or in the media matched up with what Mr Donaldson had been telling him about what Gunns was doing. The matters he recalled included: (a) Gunns was developing a pulp mill in Tasmania and this was a key part of Gunns' plan to restructure its business; (b) Gunns had experienced some opposition in Tasmania from "greenies" to the construction of the pulp mill - this was a matter that Mr Donaldson had also spoken to him about on occasion but he did not think that it would ultimately impact on Gunns' ability to develop the mill; (c) Gunns had some level of debt and in late 2011 and early 2012 it was seeking an extension of its debt facility from its lenders; (d) in January 2012 Gunns announced that its lenders had agreed to extend its debt facility for another year; (e) Gunns continued to have the ongoing support of its lenders - Mr Rayner recalled this being a recurring statement by Gunns both in its ASX announcements and in discussions with either Mr Donaldson or Mr Merry; and (f) Gunns was selling non-core assets to pay down its debt and fund the pulp mill development - he recalled from time to time that the ASX announcements made note of specific assets having been sold, including a ship at one stage. 122 Mr Rayner further deposed that "speaking generally" he recalled that he was "generally re-assured by the information that [he] read about Gunns on the ASX announcements and there was nothing in those ASX announcements that caused [him] any real concerns about Gunns' future or that it was insolvent or at any real risk of being insolvent". 123 Mrs Rayner likewise in her affidavit evidence deposed that: The thing that I found with Gunns was that although they were often late in paying their invoices they were generally upfront about when the next payments would be made. They also made regular payment instalments against their indebtedness to Bluewood … I did not ever suspect that Gunns was in any real trouble or that they were trading insolvently, rather that their own cash flow was lumpy. 124 Their evidence cannot be accepted uncritically and does not bear up against the wealth of indicia for suspecting insolvency. In my opinion, the following facts and matters of which Bluewood was aware (through Mr and Mrs Rayner) strongly tell against the establishment of the second and third limbs of the good faith defence at any time during the relation back period: (a) the delays in payment and rounded-sum payments had commenced back in April 2011. Mr Rayner knew back in July 2011 that Gunns was also paying other contractors in the region late and the reason for the late payment was not because "this was just how Gunns operated" - ie that is merely a matter of Gunns' industry practice - but was because Gunns had told Bluewood that it did not have available funds to pay invoices as and when due; (b) by January 2012 at the latest, Bluewood knew that Gunns was selling off assets in order to pay creditors and that the amount and timing of payments, not just to Bluewood but to other contractors as well, consistently depended upon the receipt of proceeds of asset sales; (c) in January 2012, Mr and Mrs Rayner learnt that Caltex had become "very nervous" about Gunns' financial position, causing Caltex to reduce Bluewood's fuel credit limit to minimise its exposure to Gunns; (d) tellingly, although Bluewood told Gunns in January 2012 that unless it was paid it would not be able continue to provide harvesting services because it could not pay its fuel account, Gunns would only confirm two payments to be made within the following week, with no guarantees for further payments; (e) by March 2012, Bluewood, through Mrs Rayner, was aware that Gunns' attempt to raise equity capital through a proposed investment by Richard Chandler Corporation was not proceeding; (f) also by March 2012, Bluewood knew that Gunns' future was in part dependent upon the pulp mill development, and if the pulp mill development did not proceed, this would be of very significant concern for Gunns' financial position; (g) tellingly also, although Mr and Mrs Rayner became aware some time before the end of March 2012 that Gunns had secured an extension to its finance facilities, Bluewood's invoices continued to be paid late and by partial payments and, as Mr and Mrs Rayner knew, the late and partial payment of invoices continued also to be an issue for other contractors in the region. (h) as at the end of March 2012, despite the extension, Bluewood continued to be told that Gunns' ability to process payments was dependent upon the realisation of assets. Gunns was also unable to provide timely or accurate information on when the amounts owing to Bluewood would be paid in full. 125 These facts and matters of which Mr and Mrs Rayner were aware provided reasonable grounds to suspect that Gunns' inability to pay its debts on time was not just a short term cash flow problem, but was indicative of insolvency as at the end of March 2012, notwithstanding the extension of its finance facilities. The position did not improve. To the contrary, reason to suspect insolvency was heightened: (a) in March 2012, Bluewood was told that Gunns hoped to be back to contract payment terms in early April 2012 - that did not happen; (b) in May 2012, Bluewood was told that Gunns intention was to be substantially back on payment terms during in June 2012 - that did not happen; (c) Gunns did not respond to Bluewood's request in May 2012 for advice as to when payment of the outstanding amounts would be paid until 25 June 2012, after Bluewood had threatened to issue a statutory demand earlier that day, and only then to indicate that payment of all outstanding amounts would be made "as soon as reasonably possible"; (d) in early June 2012, Gunns committed to making one partial payment with no firm commitment to pay any additional amounts. The proposal to pay $55,000 was made in the context where Bluewood was owed $941,809.65 as at 5 June 2012 and Mrs Rayner had informed Gunns that Bluewood was "desperate" for payment; (e) significantly, on several occasions Gunns failed to pay Bluewood in accordance with the schedules that Gunns itself proposed outside of contract terms; (f) in June 2012, Bluewood was told that settlement of anticipated major asset sales sometime in July 2012 would "enable [Gunns'] working capital position to be improved". Tellingly, despite the threat of the issue of a statutory demand in late June 2012, and although Gunns committed to a payment plan in late June 2012 (under threat of legal action), the payments due on 27 July and 3 August 2012 were not made; (g) in July 2012, Gunns announced to the ASX that it was assessing the impact of a substantial decline in stumpage prices in the woodchip market on the value of Gunns' forestry assets. Mr and Mrs Rayner were aware of that announcement and Mrs Rayner was aware that this would adversely affect Gunns' business operations; (h) Mrs Rayner also became aware at some point that KordaMentha was appointed to review Gunns' balance sheet. I reject the contention that having received a substantial payment on 6 August 2012 said to come from asset sales, a reasonable assumption that a reasonable business person would make was that the KordaMentha report had not been adverse and lenders continued to support the company, as the asset sale predated the appointment of KordaMentha, a fact of which Mr and Mrs Rayner were aware. Furthermore, the entirety of the evidence must be considered, including the context of the continued failures to meet payments plans - even under the threat of legal action - and the July 2012 ASX announcement; (i) in August 2012, Gunns' market update to the ASX reported a predicted impairment in its financial assets for the financial year ended 30 June 2012 of between $700 million to $800 million, of which fact Mr Rayner was aware. 126 I find on the evidence that Bluewood, during the whole of relation back period, had reason to suspect that Gunns was insolvent. I further find that a reasonable person in Bluewood's circumstances would have had grounds for suspecting insolvency as at and from March 2012. These findings are not gainsaid by the fact that Gunns continued to trade as a going concern throughout the period, or that lenders provided Gunns with working capital up until 21 September 2012. Furthermore, the publicly available information of which Mr and Mrs Rayner were aware would, in my view, have caused a reasonable person, against the background of the other facts and circumstances of which Mr and Mrs Rayner were aware, to suspect insolvency. 127 Accordingly, Bluewood has failed to discharge the onus to prove the good faith defence in s 588FG(2) of the Corporations Act.

SET-OFF UNDER SECTION 553C OF THE CORPORATIONS ACT 128 Bluewood seeks to set-off under s 553C of the Corporations Act the sum of $211,444.69, being the amount said to be still owing by Gunns to Bluewood, against any amount that the Court finds Bluewood is liable to pay the liquidators as an unfair preference under s 588FA of the Corporations Act. This debt is constituted by the following invoices: (a) 15 September 2012 invoice: $149,941.44; (b) 25 September 2012 invoice: $61,503.25. 129 Section 553C of the Corporations Act provides that: (1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent. 130 It has been held that right of set-off under s 553C (and cognate provisions) is not available in unfair preference claims: see eg Re a Debtor [1927] 1 Ch 410; Re Clements; Ex parte Trustee; Goldsbrough Mort & Co Ltd (Respondent) (1931) 7 ABC 255 (Re Clements); Re Smith; Ex parte Trustee; J Bird Pty Ltd and Tully (Respondents) (1933) 6 ABC 49 (Re Smith); Calzaturuficio Zenith Pty Ltd (in liq) v NSW Leather & Trading Co Pty Ltd; Victorian Leather Co Pty Ltd [1970] VR 605, adopting Re Clements, Re Smith and Re Grezzana; Painter v Charles Whiting & Chambers Ltd (1932) 4 ABC 203; and Re Buchanan Enterprises Pty Ltd (No 2) (1982) 7 ACLR 407. However, there are cases which have held or suggested that a set-off under s 553C may be available: see Hussain v CSR Building Products Ltd [2016] FCA 392; 246 FCR 62 and the cases cited at 106 [227]. Justice Edelman noted at 106 [228]-[230] that the line of authority began: … in Re Parker [(1997) 80 FCR 1], where Mansfield J allowed a set-off under s 553C to a claim for recovery of a payment from a holding company under s 588W, which was based on insolvent trading under s 588V. The conclusion in Re Parker was considered in the context of s 588FF in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia [[2011] NSWCA 109; (2011) 81 NSWLR 47]. In that case, Young JA (with whom Hodgson and Whealy JJA agreed) held that two payments made by Buzzle to Apple Computer were uncommercial transactions. Strictly the set-off defence did not need to be considered because the "good faith" defence in s 588FG(2) applied. However Young JA observed that Senior Counsel for Buzzle had not ultimately submitted that the court should depart from Re Parker (at [276]). Instead, he had submitted that Re Parker should be confined to allowing a set-off for a claim for recovery under s 588W, but not extended to recovery under s 588FF. This submission was not accepted (at [277]-[278]). Young JA assumed that Re Parker was correctly decided and, on that basis, refused to distinguish a claim for recovery of payments made in insolvent trading under s 588W from claims for recovery under s 588FF based on commercial transactions. The conclusion in Re Parker was again applied in the Federal Court by Gleeson J in Smith v Boné [[2015] FCA 319] at [420]. Justice Edelman was of the view that there were "powerful contrary arguments … to suggest that a set-off is not available against a liquidator's claim to recover preference payments" (at 107 [235]), but his Honour ultimately did not decide the point because, amongst other reasons, the Court did not have the benefit of full argument on the issue. 131 In this case, the Court has detailed submissions from the liquidators on this issue but not from Bluewood, which merely cited Re Parker (1997) 80 FCR 1 and Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia [2011] NSWCA 109; (2011) 81 NSWLR 47 as authority for the right of set-off. If it was necessary to deal with this issue in order to decide whether s 553C had application in the present case, I would have called for further submissions from Bluewood to address the arguments put forward by the liquidators. It is, however, unnecessary to decide this threshold issue because Bluewood is caught by s 553C(2). That is, I am satisfied on the evidence that Bluewood had notice at the relevant times of the fact that Gunns was insolvent. 132 Section 553C(2) was considered in Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation [2009] VSCA 319; 26 VR 657. In that case the Victorian Court of Appeal said at 661-2 [21]-[22]: A person will have "notice of the fact" that a company is insolvent if the person has actual notice of facts which disclose that the company lacks the ability to pay its debts when they fall due, within the meaning of s 95A. It is unnecessary to show that the person actually formed the view that the company lacked that ability. As the NSW Court of Appeal said in Hathaway Shirt Co Pty Ltd v B Rawe GmbH Co, it is "well established that there is a difference in law between receiving notice of a fact and being made fully and subjectively aware of the fact". What is required is proof of facts known to the creditor which warranted the conclusion of insolvency. Since "grounds for suspecting" insolvency will not suffice, it is not enough that insolvency is a possible inference from the known facts. Whether it must be the only reasonable inference open is a question we need not decide. Thus, it does not follow from the rejection of Bluewood's good faith defence under s 588FG(2) that s 553C(2) is engaged. A finding must be made that Bluewood had actual notice of facts which disclosed that Gunns lacked the ability to pay its debts when they fell due. I am satisfied that such a finding can be made in this case. 133 As at 15 and 25 September 2012, Bluewood had notice that: (a) Gunns relied on asset sales for funds to pay its contractors; (b) Gunns was unable to pay Bluewood's debts even on a compromised timetable, having failed to comply with the payment plan to which Gunns had committed on 27 June 2012; (c) Gunns' lenders had called in KordaMentha to review Gunns' balance sheet in July 2012; (d) Gunns had announced to the ASX on 6 August 2012 that it predicted it would record an impairment in its financial assets for the financial year ended 30 June 2012 of between $700 million to $800 million; (e) on 25 September 2012, Gunns announced to the ASX that a Voluntary Administrator had been appointed. 134 At the time each debt to Bluewood sought to be set-off arose, Bluewood had notice of facts that were more than sufficient to disclose that Gunns lacked the ability to pay its debts as and when they fell due. It follows that, even if set-off under s 553C is available in the context of unfair preferences, Bluewood is not entitled to set-off either of the claimed amounts by reason of s 553C(2).

CONCLUSION 135 The liquidators have proved each of the elements of their claim and are entitled to orders under s 588FF of the Corporations Act and their costs of the proceeding. I certify that the preceding one hundred and thirty-five (135) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.