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

STATUTORY PROVISIONS 7 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; … 8 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. 9 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. 10 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 11 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 Edenborn was paid the amounts in question (save that Edenborn claimed that payment 2 was paid and received on 28 June 2012), nor that Edenborn was an unsecured creditor of Gunns in respect of the payments it received. In issue in these proceedings is: (a) whether the payments constituted unfair preferences within the meaning of s 588FA and, if so, the quantum of that preference (the unfair preference issue); (b) whether there was, or remained, a "continuing business relationship" within the meaning of s 588FA(3)(a) of the Corporations Act between Gunns and Edenborn at the time that each of the payments was received by Edenborn, and (if so) whether the payments were an integral part of the relationship, such that the making of some or all of the payments is to be treated as a single transaction for the purposes of s 588FA(1) (the continuing business relationship issue); (c) if there was a continuing business relationship for the purposes of s 588FA(3)(a) at the time each payment was received and each payment formed part of and was integral to that relationship: (i) whether the Court can, or should, have regard to the "ultimate effect" of the transaction(s); (ii) if so, whether the ultimate effect of the transaction(s) was to confer on Edenborn an unfair preference within the meaning of s 588FA(1) (the ultimate effect issue); (d) whether the "peak indebtedness rule" applies for the purposes of s 588FA(3) (the peak indebtedness issue); (e) whether the Court has a discretion under s 588FF to reduce the amount otherwise payable as a preference, and, if so, whether the Court's discretion should be exercised (the discretion issue); and (f) whether Edenborn has established a "good faith" defence pursuant to s 588FG(2) (the good faith defence). 12 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 Bluewood Industries Pty Ltd [2020] FCA 714.

THE GUNNS GROUP 13 The following background to Gunns is taken from the insolvency judgment in this proceeding. 14 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. 15 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 wood chip products; (c) responsible entity management of various forestry and horticultural managed investment schemes; and (d) financing managed investment scheme investors. 16 The Gunns Group operated from various sites, namely: (a) sawmills in Tarpeena, South Australia and Bell Bay, Tasmania; (b) a wood chip 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. 17 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.

EDENBORN 18 Edenborn carries on business as a harvester, wood-chipper and haulage contactor. It commenced operations in the late 1990s, initially planting trees on a contractual basis on behalf of various entities which promoted and conducted managed investment schemes based on tree planting, growing and harvesting for the eventual creation, sale and exporting of wood chips. Amongst others, Edenborn did work for Great Southern Limited, the scheme manager of a number of managed investment schemes in the Great Southern region of Western Australia. 19 In 2009 Great Southern Limited went into administration and in early 2010 Gunns acquired Great Southern Limited's tree assets. At the time, Edenborn had two contracts on foot with Great Southern Limited - a Woodchip Processing and Haulage agreement and a Log Harvesting and Processing agreement (the contracts) - and, in May 2010, Great Southern Limited novated those contracts to Gunns. Shortly after that, Edenborn began working for Gunns on the former Great Southern Limited tree assets, conducting harvesting, chipping and haulage, substantially on the same terms as it had previously done for Great Southern Limited. 20 During the relation back period the following payments were made and invoices raised for the services Edenborn provided to Gunns: Date Invoice Payment 31 March 2012 (invoice) ($403,219.49) 2 April 2012 $228,354.13 5 April 2012 $150,000.00 15 April 2012 (invoice) ($371,335.33) 17 April 2012 $220,000.00 30 April 2012 (invoice) ($505,661.54) 4 May 2012 $218,660.55 9 May 2012 $220,000.00 15 May 2012 (invoice) ($519,934.39) 16 May 2012 $220,000.00 31 May 2012 (invoice) ($123,479.53) 29 June 2012 $101,465.47 6 July 2012 $100,000.00 6 August 2012 $1,340,216.36 15 August 2012 $388,839.93 15 August 2012 (credit note) ($4,573.99) 15 August 2012 (invoice) ($189,740.67) 31 August 2012 (invoice) ($395,629.04) 3 September 2012 $189,740.67 15 September 2012 (invoice) ($255,874.13) 19 September 2012 $43,000.00 21 September 2012 $352,629.04 25 September 2012 (invoice) ($91,060.69)

Total payments: $3,772,906.15 Total invoices: ($2,855,934.81) Credit note: ($4,573.99)

WITNESSES 21 Evidence was given on behalf of the liquidators in this case by Craig Crosbie, one of the liquidators of the Gunns Group, and Bryan Hayes, the general manager of the Forest Products Division of Gunns from June 2010 until 4 September 2014. Only Mr Crosbie was subject to cross-examination. 22 The defendant adduced evidence from Peter "Murray" Howson, the sole director and company secretary of Edenborn, Craig Fildes, who was employed by Edenborn in the role of operations manager between 2005 until July 2016, and from Steven Butt, who was employed as an accountant by Gunns between 2001 and 2012. All three witnesses were subject to cross-examination. 23 Both parties also adduced expert evidence directed at the question as to whether the "ultimate effect" of the payments that formed part of the continuous business relationship was to give Edenborn a preference or preferences. The parties' experts prepared a joint report and gave concurrent evidence, during which each expert was subject to cross-examination.

EVIDENCE OBJECTIONS 24 The liquidators' tender bundle included a number of internal Gunns' emails which they sought to tender on the basis they are business records containing representations to which the hearsay rule does not apply by virtue of s 69 of the Evidence Act 1995 (Cth) (Evidence Act). 25 Section 69 of the Evidence Act relevantly provides: (1) This section applies to a document that: (a) either: (i) is or forms part of the records belonging to or kept by a person, body or organisation in the course of, or for the purposes of, a business; or (ii) at any time was or formed part of such a record; and (b) contains a previous representation made or recorded in the document in the course of, or for the purposes of, the business. (2) The hearsay rule does not apply to the document (so far as it contains the representation) if the representation was made: (a) by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact; or (b) on the basis of information directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact. … (5) For the purposes of this section, a person is taken to have had personal knowledge of a fact if the person's knowledge of the fact was or might reasonably be supposed to have been based on what the person saw, heard or otherwise perceived (other than a previous representation made by a person about the fact). 26 Edenborn accepted that the emails are business records but contended that s 69(2) of the Evidence Act was not satisfied. The ground of the objection was the same with respect to each document. C172 was put forward as an example. C172 is an email from Peter Merry, Gunns' regional manager in Western Australia at the time, to Mr Hayes sent on 17 June 2012. The subject matter of the email was "WA Region update". Mr Merry wrote: .. Contractor payment situation - WA region General points:- As expected the situation here with contactors (particularly ATS and Edenborn) is becoming increasingly desperate. Gunns met with ATS & Edenborn on Friday am to establish their 'here and now' expectations / preparedness / ability to resume providing services to Gunns. Contractors are desperate for Gunns to process a progressive payment to assist with easing their cash flow issues, & re-commencement of the WA harvesting programme. I have advised all contractors that it is predicted the earliest return to work date has been pushed back to 2/7/2012. Contractors recognise they have to work with Gunns to ensure their outstanding liabilities are cancelled in time. Both ATS, SRT & Edenborn have indicated they remain supportive of maintaining a business relationship & want to work with Gunns. … Edenborn Current liability -$1,930,000 They advised if Elders Forestry had not recommenced harvesting they would have been forced to cease trading, and are of the view they have not been given any assistance by Gunns since last payment date (15/5). Cash flow is critical, compounded by 0.8% interest / month on outstanding payments, business is liable for GST on YTD RCTI's [sic], & standard end of financial year tax liabilities. To recommence operations Edenborn have indicated they would a) require a significant payment (not prepared to put a $ figure on the table), and b) have advised they will issue a letter of demand to ensure there is an alignment between contract & actual trading terms going forwards (used the analogy of not prepared to keep offering Gunns an unsecured bank loan equivalent). Murray is frustrated with you not returning several calls recently, recognises Gunns local support - can you please call him when you have an opportunity? 27 It was submitted for Edenborn that the statement "Gunns met with … Edenborn on Friday" did not say who from Gunns met representatives of Edenborn, and with whom from Edenborn they met, nor was it apparent from the email - or any other evidence - that Mr Merry was personally present. Thus, it was said, the liquidators had not established that Mr Merry was a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact. It was also submitted that the comment "contractors are desperate" and the passage under the heading "Edenborn" were not evidence in admissible form of what the representative of Edenborn allegedly said. 28 The objection was not well-founded. First, the evidence showed that Mr Merry at the time was Gunns' regional manager in Western Australia and, as noted above, Mr Hayes at the time was Gunns' general manager of the Forest Products Division. The subject of the email was "WA Region Update". It is reasonable to infer from his position within Gunns and from the fact that he was reporting to the general manager of forest products at Gunns that Mr Merry either himself had personal knowledge of the matters referred to in that email or was conveying information that was directly or indirectly supplied to him by persons within Gunns who had or might reasonably be supposed to have had personal knowledge of those matters. Secondly, if s 69 applies to the email, the effect of the section is that the hearsay rule "does not apply to the document (so far as it contains the representation)…". That is to say, the email stands as evidence of the representation that was made 29 There is no merit in the s 69(2) point in relation to the following emails to which Edenborn also objected: (a) C174 is another email from Mr Merry to Mr Hayes; (b) C203 is an email from Adam Crook to Mr Hayes, copied to Mr Butt. Mr Crook was the harvest and processing manager at Gunns at the time. As noted above, Mr Butt was employed by Gunns as an accountant; (c) C205 is an email from Mr Butt to Mr Hayes; (d) C205A is an email from Mr Hayes to Mr Butt; (e) C210 is an email from Mr Crook to Mr Butt; (f) C262 is an email from Mr Merry to Mr Hayes, copied to Mr Crook; (g) C263 is an email from Mr Hayes to Mr Merry, copied to Mr Butt; (h) C267 is an email from Mr Butt to Mr Merry, copied to Mr Hayes. 30 In view of the positions that each of these persons held within Gunns, it might reasonably be supposed that they either had personal knowledge of the matters recorded in the emails or that such information was directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of such matters. 31 C89 and C228 do not require consideration as C89 was in any event an exhibit to Mr Howson's first affidavit and put into evidence by Edenborn, and C228 is an article, not an internal Gunns email, and appears to have been wrongly included in Edenborn's list of objections. 32 Edenborn also relied on s 135(a) of the Evidence Act, submitting that the Court should refuse to admit the emails into evidence on the basis that their probative value was substantially outweighed by the danger that the evidence might be unfairly prejudicial to Edenborn. The basis of this objection was that the authors of those emails were not called to give evidence and there was no opportunity to cross-examine them. Moreover, it was submitted: (a) the documents were not third party documents but are business records of the company of which the plaintiffs are the liquidators; (b) the authors of the documents were not third parties but are employees of Gunns; (c) there was no evidence before the Court establishing any, let alone any satisfactory, reason as to why the authors of the emails were not called to give evidence in the usual way; (d) the documents were not of peripheral relevance but were relied on by the liquidators as central to the issue of good faith; (e) the documents were tendered for the sole purpose of seeking to invite the Court to accept what is recorded there as factually correct in preference to the evidence given by witnesses called for Edenborn; and (f) the statements in the emails are summaries only and evidence in that form would not have been permitted if sought to be given orally. 33 It was submitted that to allow the liquidators to rely on the documents would be inconsistent with the rationale of Jones v Dunkel [1959] HCA 8; 101 CLR 298. 34 In response, the liquidators argued that despite the amended tender list being served on Edenborn on 18 January 2019, which included the emails in question save for C205A: (a) no request was made by Edenborn pursuant to s 167 of the Evidence Act for the liquidators to call the authors of those emails, such request being required to be made within 21 days of receipt of the notification that the evidence would be sought to be relied on: s 168(1); (b) no objection to the tender of the emails was raised until the Friday before the trial commenced, almost three months after the amended tender list was served, and the grounds of objection relied on, even then, did not include the claim that Edenborn would be unfairly prejudiced by the failure of the liquidators to call the authors of the emails. The grounds then relied on were that: These documents are all internal Gunns' emails. Unless they were read by someone within Edenborn (and then depending upon whom) they are irrelevant. Also, insofar as the same are sought to be tendered to establish the truth of their contents, objection is taken on the basis of hearsay; and (c) Edenborn first raised s 135 of the Evidence Act as a ground of objection at the hearing, by which time it was too late to call the authors as witnesses. 35 The liquidators additionally argued that the admission of the emails would not be unfairly prejudicial to Edenborn, submitting that: (a) more than six years had passed since the emails were created and it is unlikely that the recollection of the authors of the emails would be extensive or of much assistance to the Court; (b) the representations sought to be tested were representations attributed to Edenborn; (c) there was no unfair prejudice in not having an opportunity to cross-examine the authors of the emails in relation to statements attributed to Edenborn and of which the authors of the emails were not the makers; and (d) both Mr Howson and Mr Fildes were subject to cross-examination on the material. 36 Both parties referred to Roach & Ors v Page & Ors (No. 11) [2003] NSWSC 907 for a helpful summary of the considerations relevant to the exercise of discretion under s 135 of the Evidence Act where the opposing party is unable to cross-examine. Justice Sperling stated at [74]: Considerations relevant to "unfair prejudice" Having regard to the terms and context of ss 135, 136 and 137 and the case law to which I have referred, I set out my view of considerations relevant to "unfair prejudice" as follows. (a) To say that any prejudice must be unfair prejudice is to state the obvious. (b) The phrase "unfair prejudice" is not defined. The legislature imposed no restriction on the criteria for unfairness. (c) The exceptions to the hearsay rule evince a legislative intention to allow evidence notwithstanding its hearsay character. But ss 135, 136 and 137 evince a legislative intention to allow any evidence, otherwise admissible, to be rejected or its use to be limited if the conditions specified in those sections are met; (d) Where hearsay evidence is made admissible by an exception to the hearsay rule it would be wrong to exclude it or to limit its use merely because it is hearsay and therefore of inherently less reliable quality. That would be to frustrate the intention of the legislature in making hearsay evidence admissible where it is covered by an exception to the hearsay rule. But that is not the same as saying that there is scope for the application of ss 135, 136 and 137 in relation to hearsay evidence which is covered by such a statutory exception but where there is some additional factor, for example, where the maker of the representation is not to be called. (e) Inability to test the truth of the representation is a legitimate ground for rejecting or limiting the use of evidence which is covered by an exception to the hearsay rule. Thus, whether the maker of the representation will be called as a witness is a relevant consideration. (f) However, where hearsay evidence is admissible under an exception to the hearsay rule because of the unavailability of the maker of the representation, there is a special reason for not disallowing the evidence or limiting its use on the ground that the evidence cannot be tested by cross-examination. That is because the legislature has made the evidence admissible notwithstanding that consideration. (g) Conversely, where the maker of the representation is available or is not shown to be unavailable and the party tendering the evidence does not call the person, that is a legitimate consideration in favour of a finding of unfair prejudice. … As the authorities show, the inability of the opposing party to cross-examine the maker of a statement because of the unavailability of that person as a witness may constitute a legitimate ground for the exclusion of evidence under s 135 of the Evidence Act, but the mere fact that the maker of the statement is not available for cross-examination may not be reason enough in itself. In each case, the issue for the Court is whether the probative value of the evidence is substantially outweighed by the danger that the evidence might be unfairly prejudicial to the opposing party. 37 I am not persuaded that the emails should be excluded from evidence because the authors of the emails have not been called. First, any prejudice arises from the failure of Edenborn to put the liquidators on notice at a much earlier point in time than at the hearing of its intention to rely on s 135 of the Evidence Act on the basis that the authors of the emails had not been called to give evidence. Edenborn claimed that it approached the trial on the basis that Mr Hayes, who was one of the authors, was going to give evidence as he had sworn an affidavit, but it was only the Thursday before the trial that Edenborn was informed that he would not be called. However, of the emails in issue, only C263 was sent by Mr Hayes. The content of the portion of that email chain on which the liquidators sought to rely concerns an initial payment plan for Edenborn (and other contractors), followed the next day by a revised payment plan said to be "due to the 7 day delay in loading the Portland vessel", as a result of which "[Gunns] have had to split and spread payments to match cash inflows". It is not apparent on the face of that email chain how it could be said that the inability of Edenborn to cross-examine Mr Hayes makes the admission of that email unfairly prejudicial, nor was one suggested. Secondly, the evidence was to the effect the persons at Edenborn who dealt with Gunns were Mr Howson and Mr Fildes, and both of them gave evidence and were cross-examined on their dealings with Gunns, including on C172, C174, C205A (which includes the entire content of C205), C210 and C262. Thirdly, the reliability of the evidence sought to be relied on by the admission of the emails in question, including C203, C263 and C267, can be rationally assessed in the context of the evidence considered as a whole, notwithstanding the absence of cross-examination of the authors of the emails. Accordingly, I also reject the s 135 application. 38 Edenborn also objected to the admission of media articles not seen by Mr Howson or Mr Fildes on the ground of relevance but the real issue is the weight to be afforded to such articles, not admissibility.

FACTS AND EVIDENCE 39 Edenborn harvested and chipped bluegums for Gunns in the South Western region of Western Australia, which it then hauled to the Port of Albany for shipping. Edenborn was paid fees calculated by multiplying the agreed harvesting, processing and haulage rates applicable to each plantation (or part of plantation) by the quantity of timber or woodchips in green metric tonnes (GMT) for its services. Gunns prepared and issued recipient created tax invoices approximately fortnightly to Edenborn payable under the terms of each novated contract on the 15th day and final day of each month. The evidence showed that from the outset, Gunns was tardy in paying Edenborn for its services and, on many occasions, Gunns did not just pay late, it also did not pay the full invoiced amount. Moreover, from at least January 2012 Gunns was making rounded sum payments to Edenborn that did not correspond with the outstanding invoices that were due. 40 In September 2011, at Gunns' request, Edenborn agreed to monthly payment terms on the condition that there be a maximum debt limit of $1.2 million. It is unclear on the evidence whether the agreement was put into effect, as although Mr Howson's evidence was that payment terms changed to monthly, Gunns continued to issue recipient created tax invoices on a fortnightly basis that expressly stipulated that payment was due on either the 15th or final day of the month. 41 Mr Howson's evidence was that Gunns "mostly stayed within the 30 day terms and the $1.2m agreed debt limit", but that evidence was not accurate. By the end of September 2011, Edenborn was owed just over $1.3 million. In his examination conducted under Pt 5.9, Div 1 of the Corporations Act on 15 September 2015 (liquidator's examination), Mr Howson acknowledged that he was concerned at the time by the size of the amount owing and Mr Fildes "was having to keep a pretty weather eye on the extent to which Gunns were or were not making payments". The evidence also showed Edenborn chasing Gunns for payment from October 2011 onwards, with Gunns promising payment but payments often being received later than promised and usually only in part payment of the invoiced amounts. Mr Fildes' evidence was that he was "regularly chasing up payments from Gunns, because it was a habitual late payer". 42 On 25 November 2011, The Age newspaper published an article under the heading "Gunns directors under fire" stating 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". The article further reported that a major shareholder had asked if the company would "be insolvent if the pulp mill did not go ahead". 43 On 22 December 2011, Gunns announced to the Australian Securities Exchange (ASX) that it had revised its market guidance for the year ended 30 June 2012, with underlying earnings before interest and tax for the year expected to be approximately $30 million. 44 As at 31 December 2011, the debt owed to Edenborn was around $1.7 million, with no payments made at all in December 201l, though a payment of $640,828.12 had been due on 15 December 2011. 45 On 4 January 2012, Brent Donaldson, the regional manager for Gunns in Western Australia, sent an email to Mr Howson, copied to Mr Fildes, Mr Hayes and Mr Merry, advising him that Edenborn would receive $200,000 that day, but additional payments would not be possible until early to mid-week the following week, when additional funds were due to arrive. He also advised that he would shortly be sending an email to all contractors stating that payments would not occur until the following week, but Mr Howson could disregard that email "as obviously you will be receiving some funds today". Mr Howson was unable to explain why Edenborn was receiving a payment when other contractors were not, but it is reasonable to infer that it was because Edenborn had been pressing Gunns for payment. In an email sent on 3 January 2012, Mr Donaldson had informed Gunns' Forest Product Division Group Financial Controller that "we have some relatively urgent payments to make", noting that Edenborn had "pretty well reached its maximum liability allowed by its financiers, and so are not expected to recommence working until paid". 46 Also on 4 January 2012, Mr Donaldson sent a group email to Gunns' contractors in the Great Southern region advising them that: .. there are some over-due payments to contractors to be made, and so have made enquiries as to the status of the said payments. I have 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 [sic] anticipated 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. It is now expected that payments will recommence from early next week. Mr Howson accepted during cross-examination that he "probably" read that email. He also acknowledged in his liquidator's examination that he was aware at this time that "there were things happening to [Gunns'] cash flow that meant [Gunns] couldn't make full payments". Mr Howson also said during his liquidator's examination that he understood at this time that Gunns' other contractors were "being paid in similar ways" - with the exception of one company he believed "had different contractual arrangements that were getting some priority in payment" - and he believed Gunns' late payment to contractors was "an Australia-wide" problem. He also stated that he was aware that payments were dependant on asset sales and that the bank, as a secured creditor, would get "first bite of the cherry" from asset sales. Mr Fildes' evidence was that he could not recall whether or when he read Mr Donaldson's email of 4 January 2012 but there is no reason to doubt that he did read that email either at or around the time it was sent, or by the latest in January 2012 when he returned to work after the Christmas break. Further, Mr Fildes admitted to hearing rumours that other creditors of Gunns in the Great Southern region were not being paid on time. 47 As promised, Edenborn received $200,000 from Gunns on 4 January 2012. On 9 January 2012, in an email chain between Mr Donaldson and Mr Fildes with the subject line "Payment", Mr Donaldson advised Mr Fildes that: … From what I can tell, you may not get all the monies owing this week, but part payments are likely to continue… You will need to get Murray Howson to talk to me if the intention of Edenborn is to halt all or part of your activities in Gunns' managed forests tomorrow… I reiterate that while the company is in a tight cash flow situation at the present time, based on forecast in-flows over the next few weeks and months, it is of narrow duration… 48 Mr Fildes responded by email that day as follows: It was Edenborn's intention to stop production if the two payments due were not made early this week, which was the last indication in your email last week. [Mr Howson] is away on holidays for 6 weeks so all decisions for the next 6 weeks will have to come from me, but [Mr Howson] did have this discussion with me on Friday before he left. Gunn's [sic] has been in a tight cash flow position for quite some time now and with so much negative press at the moment and the share price sitting on 10.5 cents giving Gunns and [sic] market cap of only $89,000,000 we are feeling quite vulnerable. We have one major supplier who is seriously looking at cutting our credit limit until Gunn's [sic] gets past the 31st January loan refinance commitment. This is not a good position to be in as it could impact our other harvesting activities. There are two outstanding invoices totalling $1,289,136 of which $200,000 has been paid leaving a balance of $1,089,136. We have another invoice due very early next week for $447,429. With last week's activities the total amount is getting too high to ignore. As there are so many of your crucial people away today I will leave my final decision until tomorrow, but if a substantial payment cannot be made by Wednesday night I will have to stand all systems down until we are up to date with all payments. I feel Edenborn has been very reasonable up to now with slow payments from Gunns, but there are serious ramifications for this company if we continue to expose ourselves without payment. 49 Mr Fildes agreed in cross-examination that he was aware at the time there were negative media articles about Gunns' financial position and also agreed he "probably" held the view at the time that Gunns had been in a tight cash flow position for quite some time. When asked about the sentence "we are feeling quite vulnerable", Mr Fildes' answer was that he could not recall whether it was a true statement. His evidence also was that he did not discuss the email with Mr Howson before he sent it, contrary to the representation made in the email, and that his threat to stand down all systems was a "bluff" as he did not have the authority to carry it out. 50 When Mr Howson was asked in his liquidator's examination about whether he had a discussion with Mr Fildes as referred to in the email, his answer was that the discussion "certainly took place" although he was not sure of the context of those discussions. He then contradicted that evidence in this proceeding by asserting that he did not have such a discussion with Mr Fildes. He also gave evidence that it was not his view that Edenborn was "feeling quite vulnerable" because of the debt owed to it by Gunns, and that he did not give instructions to Mr Fildes that systems were to be stood down if a substantial payment was not made. 51 I do not accept the evidence of Mr Howson or Mr Fildes that Mr Fildes sent the email without discussing it with Mr Howson first or Mr Fildes' evidence that the threat to stand down all systems was a "bluff". I find their answers in cross-examination self-serving and not plausible. First, Mr Howson and Mr Fildes both gave evidence that Mr Fildes would consult Mr Howson on "significant" matters. Mr Howson deposed in his affidavit that he was overseas in January 2012 and in his absence Mr Fildes had day-to-day control of Edenborn "but always subject to conferral with [Mr Howson] as regards significant decisions". Similarly, Mr Fildes' affidavit evidence was that Mr Howson contacted him every day whilst he was away from the office on holiday wanting to know what was going on with the business and he would discuss with Mr Howson "[a]ny abnormal or important decisions" that he needed to make. Given Mr Fildes' evidence that he could not make the decision to withdraw Edenborn's services to Gunns, it is not plausible that Mr Fildes would send an email threatening withdrawal, even as a bluff, without first consulting with Mr Howson before sending the email. Tellingly, Mr Fildes was also in email communication with Mr Howson at the time. On 10 January 2012, Mr Donaldson sent an email to Mr Fildes advising that Gunns was unlikely to give a "concise date for full payment" until the Friday - being three days later - and it was Mr Donaldson's "gut feeling" that there would be some "drip feed payments made", but that Edenborn would not be fully paid up to date until closer to the end of the month. Mr Fildes forwarded that email to Mr Howson promptly after receipt. Given the regularity of Mr Fildes' contact with Mr Howson, I find it improbable that Mr Fildes was making threats to Gunns without instructions or the authorisation of Mr Howson. 52 Secondly, Mr Donaldson clearly did not regard the email as a bluff. On 9 January 2012, Mr Donaldson forwarded the email chain of 9 January 2012 to Mr Butt explaining that "we will have significant difficulties meeting our forward orders if there are crew shut-downs. As you are aware, Edenborn has been burnt twice before and so they are serious about minimising their exposure; it is pretty much a directive from their financiers". In response to the 9 January 2012 email from Mr Fildes, Mr Donaldson, by email sent the same day, asked Mr Fildes to get Mr Howson to advise Mr Donaldson that all decision-making was in Mr Fildes' hands. Mr Donaldson also wrote that he was hopeful that a payment would be made prior to Wednesday night (ie within two days) and he should get confirmation of this the following morning. More particularly, Mr Fildes' assertion that he sent the email as a bluff is contradicted by an email of 11 January 2012 between Mr Donaldson and other Gunns' employees, where Mr Donaldson noted that: Edenborn had already ceased one of three systems; one is being suspended tomorrow; they are likely to suspend the remaining one by Friday - and by an email from Mr Merry (who replaced Mr Donaldson as the Gunns' Western Australian regional manager) to Mr Hayes on 23 January 2012 in which he stated that: Production in the past fortnight has been negatively impacted by Gunns cashflow crisis - Edenborn & ATS parked up operations for approx. 1.5 weeks & actively sought short term work opportunities with other plantation management companies. These emails are probative evidence that the threat of suspension was not merely a bluff but was actually carried out. It may also reasonably be inferred it was carried out with Mr Howson's authority as there is nothing to suggest that Mr Fildes did not have Mr Howson's authority. 53 I also do not accept Mr Howson's evidence that he was not concerned about the non-payment of the invoices. First, there is no reason to doubt the accuracy of the advice given by Mr Merry to Mr Hayes on 23 January 2012 by email that Edenborn had "parked up operations for approx. 1.5 weeks & actively sought short term work opportunities with other plantation management companies". Secondly, in an email that Mr Howson sent to Mr Fildes on 16 January 2012, Mr Howson advised they "need[ed] a firm commitment of payment" of $750,000 by lunch time Friday (ie four days later). Thirdly, it appears that Edenborn threatened to shut down its harvesting and haulage services to Gunns if it did not receive further payments. On 27 January 2012, Mr Merry sent an email to Mr Hayes and Mr Butt with the subject line "[Gunns] Payment Priorities 30-31/1/2012" advising that he had spoken to contractors to form an understanding of their position. Mr Merry reported with respect to Edenborn that: nil payment & approx. $1.02 M outstanding on 29/1 is likely to result in Edenborn shutting down it's [sic] infield chipping /haulage operation for [Gunns] effective from 31/1, it is imperitave [sic] [Gunns] retains Edenborn in the system producing between now & 15/2 due to their production capacity, $ indicated should be sufficient to ensure Edenborn continues its operation from 31/1 to 4/1 inclusive. 54 On 30 January 2012, Mr Fildes sent an email to Mr Howson extracting a media statement from Gunns. The media statement stated: EXTENSION OF FINANCING FACILITIES Gunns Limited confirms that the terms for an extension to 31 December 2012 of its syndicated debt facility (currently $340m) and primary working capital facilities, have been agreed with its primary banking syndicate… The facility balance is expected to be progressively reduced in the course of the 2012 year, as the company completes asset sale processes in progress and finalises the Bell Bay pulp mill project investment. The finance facility extension provides the certainty necessary for the continued implementation of the Company's business strategy as outlined at the recent Annual General Meeting. 55 Mr Howson and Mr Fildes each recalled learning in late January 2012 that Gunns had received an extension to its debt facility in the order of $340 million to 31 December 2012. Mr Howson agreed in cross-examination that he understood that, despite the extension, it was likely that the banks would be entitled to call in that debt at some earlier date if certain criteria were not met. During cross-examination, Mr Howson also admitted that he understood in 2012 that Gunns' financiers had required Gunns to sell down its assets in order to reduce its debt to the banks. He also agreed that he understood that the finalisation of the development of the Bell Bay pulp mill (pulp mill development) by Gunns was an important part of its financial arrangements. 56 On 31 January 2012, Mr Fildes sent an email to Mr Merry, copying Mr Howson, in relation to Edenborn adding another "system" (ie, harvesting and chipping machine) on 7 February "as requested": Given that we originally requested full payment of current invoices before this system was being made available…I believe, Edenborn is really going above and beyond what is normally expected. The email enclosed a proposed payment plan for payment of outstanding debt as follows: Friday 3rd payment of $150,000 Monday 6th payment of $450,000 Friday 10th payment of $500,000 Further payments to be advised ASAP 57 Also on 31 January 2012, Mr Butt sent a letter to Mr Howson formally advising of a payment schedule for progressive payments of the current outstanding debt as follows: Payment Date Amount Confirmation Status 3/02/2012 $150,000.00 confirmed 6/02/2012 $450,000.00 confirmed 10/02/2012 $501,200.00 58 The letter stated that Gunns would endeavour to make the last payment by the nominated date and that Gunns' ability to process further payments would be advised over the course of the following week. The payment schedule was substantially met. However, the pattern of partial and late payment continued in relation to new invoices that issued, with Edenborn regularly inquiring when payment would be received and for how much. 59 It appears that a meeting between Mr Howson and Gunns was arranged for early February 2012. On 2 February 2012, Mr Fildes sent an email to Mr Howson (who was still away) stating that: Few thoughts for your meeting on Monday - I went into Gunns yesterday and sat down with Pete Merry to understand when other payments would be forth coming [sic]. I think you will need to do the same when you get back, but it was very clear "to me" that we will probably be in this situation for the best part of the year, if they [Gunns] survive that long. All their spare money is going into the earth works for the pulp mill and an example that was given yesterday was the Cassandra just left Albany with 54,000 tonnes and that payment is due into their bank on Monday. That should cover our harvesting & haulage, but the most part of this is going to cover the earth works for the pulp mill. Because they are still trying to lure a joint party to make the pulp mill successful they have to pump a lot of money into the mill to make it look attractive. If a joint party does not come along soon they will run out of money. They are basically using our money. The reason why I am mentioning this as I now think it dangerous to put in additional systems with Gunns on a long term basis and perhaps parking the machines up and going for a makeup payment is much safer … Probably change my mind again in few days, but that's today's thoughts. 60 During his liquidator's examination, Mr Howson could not recall whether the meeting had taken place. He indicated that it could not have been a "physical" meeting because he was out of the country, but acknowledged that a meeting by telephone may have taken place. Mr Fildes agreed in cross-examination that he had no reason to doubt that what he said in his email of 2 February 2012 was an accurate representation of his views at the time he sent it. The common evidence of Mr Fildes and Mr Howson was that Mr Howson did not agree with the views expressed by Mr Fildes. 61 On 6 February 2012, the ASX announced that, at the request of Gunns, pending the release of an announcement by Gunns, Gunns shares were to be placed in a trading halt until 8 February 2012 or until the announcement was made. 62 On 7 February 2012, The Sydney Morning Herald newspaper published an article under the heading "Gunns bid for more capital" stating that at the end of 2011, Gunns had forecast an overall profit downgrade of $10 million to $20 million up to 30 June 2012 and was "trading at historic lows" on the ASX. The article further quoted an industry analyst as stating "there was no indication that a joint-venture announcement for the pulp mill was near". 63 On 8 February 2012, Gunns announced that it had signed a term sheet with Richard Chandler Capital Corporation Pte Limited (Richard Chandler Corporation) to facilitate an equity investment of $150 million in the Gunns Group. The announcement noted that the terms were non-binding and were subject to approvals from the ASX, Gunns shareholders and lenders within a 90 day exclusivity period, as well as due diligence and Foreign Investment Review Board approval. 64 On 29 February 2012, Mr Merry provided an update to Mr Hayes by email of the responses from contractor parties with whom he had had discussions. He reported in relation to Edenborn that it was "very concerned re: their current exposures as they ramped up to producing 34,000 GMT for the month (equivalent to 400K p.a.), and feel particularly vulnerable". Mr Merry also reported that Mr Howson could not provide an answer "re: how they are able to proceed" and that Mr Howson had "indicated they do want to continue to work with Gunns however the recurrence of payment issues presented as a real impediment to moving forwards". 65 It was recorded in an email chain between Mr Merry, Mr Fildes and Mr Howson (among others) that Mr Fildes had a meeting with Mr Merry on 1 March 2012. Mr Fildes appears to have been told there would be no further payments until 16 March 2012 and Mr Fildes requested a "firm payment schedule to rectify the current outstanding payment situation". In cross-examination Mr Fildes claimed to have no recollection of the meeting taking place. Despite Mr Fildes' apparent lack of recollection, there is no reason to doubt the accuracy of what was recorded in the email chain. 66 Mr Merry informed Mr Hayes in an internal Gunns email on 1 March 2012 that "[w]hat the contractors are searching for is certainty in payment dates to make the smartest decision to protect their respective businesses. To date the 16/3 has been offered to them as an unconfirmed/possible resumption of creditor payment. They are concerned that this date will come & go with nil payment". The email noted that Edenborn was offering a lower production capacity until payment was received. 67 On 2 March 2012 in an email from Mr Fildes to Mr Merry, copied to Mr Howson and others, Mr Fildes stated: The last 2 months have seen Edenborn commit 80% of our resources to Gunns to ensure you meet your shipping schedule. Given that Gunns have stated that there will be no further payments until the 16th of March, we now find ourselves in a very awkward situation with both outstanding payments and our cash flow position. By the 16th of March Edenborn will be owed just over 1.7 million and will have just under 2.3 million outstanding for all work completed… I would ask that a single payment of $280,000 be made next week to keep out [sic] total outstanding debt to less than 2 million. Can you also provide in writing a clarification of when all our outstanding invoices will paid? [sic] 68 At that time there were two overdue amounts of approximately $140,000 and $800,000 and a further amount of approximately $758,000 which would become due on 15 March 2012. Mr Merry did not respond to the request for an immediate payment of $280,000 and it was not paid. 69 On 5 March 2012, Mr Merry informed Mr Fildes and Mr Howson, and others, by email that he did not have a "firm payment schedule received from Corporate to pass on today - indication is possibly re-forecasting exercise this Wednesday may enable a schedule to be drawn up & passed on". 70 On 9 March 2012, Gunns announced that the proposed equity investment of $150 million into the company by Richard Chandler Corporation was not proceeding and a further trading halt was placed on Gunns shares. Mr Howson said in cross-examination he had been aware of Richard Chandler's offer and knew around March/April of the withdrawal. Both Mr Howson and Mr Fildes agreed in cross-examination that they were aware that Gunns had put its shares in a trading halt. Mr Fildes admitted that he was aware of this in mid-March 2012, however Mr Howson could not recall when he first learned of the trading halt. As it turned out, the trading halt was never lifted. 71 Also on 9 March 2012, The Sydney Morning Herald newspaper published an article under the heading "Gunns blames Greens for billionaire blow" reporting that Richard Chandler had withdrawn from a proposed equity investment of $150 million into the company. The article stated that Gunns had "staked its 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". During cross-examination, Mr Fildes denied ever having read this article and there was no indication in the evidence that Mr Howson or Mr Fildes read it. 72 By mid-March 2012, Edenborn was owed just over $2 million and in his liquidator's examination, Mr Howson agreed that Edenborn's cash flow by March 2012 would have been a "major concern" as a result of Gunns' non-payment of invoices. 73 On 13 March 2012, Gunns again requested that the ASX suspend trading in its shares and noted the withdrawal of Richard Chandler Corporation from its proposed equity investment in the Gunns Group. 74 On the same day, The Sydney Morning Herald newspaper published an article under the heading "Gunns suspended from ASX quotation" stating that Gunns had suspended trading on the ASX in order to negotiate 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". 75 On 14 March 2012, The Mercury newspaper published an article under the heading "Gunns reloads cash bid Shares suspended again as company plans new capital raising", stating that Gunns shares were suspended on the ASX, following the withdrawal of the Richard Chandler Corporation, while it tried to attract a potential new investor. The article noted that "Gunns, which has a $580 million debt burden, urgently needs new equity to give it any chance of advancing the $2.3 billion Bell Bay pulp mill project". The article also stated that "[b]efore the Chandler announcement, Gunns was aiming to raise $132 million … [i]t is now believed to be seeking more than $200 million in a pro-rate entitlements issue". 76 On 19 March 2012, Gunns announced to the ASX that it was unable to provide a definitive timeframe for the finalisation of its equity offer and that it expected the trading halt to extend for at least five business days 77 Also on 19 March 2012, Mr Fildes sent an email to Mr Merry, copying in Mr Howson and others, stating that Edenborn had decreased production levels for the purposes of "maintaining debt levels below what we believe is reasonable in the current climate" and that production levels would only be increased again upon "further confirmation of further payments". Mr Howson was aware that Mr Fildes sent this email. 78 In an email from Mr Merry to Mr Butt on 23 March 2012, Mr Merry advised that Edenborn had agreed to a payment of $224,000 on 26 March 2012. The email further noted that "[c]ontractors… have stressed the need for a clearer picture as to what is forecasted to be realised over the next 4-6 weeks… [t]hey are all trying to best manage fixed costs & have indicated from the start of next month they will be releasing employees unless their current $ exposures are resolved via significant progressive payments by Gunns". 79 Also on 23 March 2012, Mr Butt of Gunns sent a letter to Mr Howson, advising that payment of $224,000 would be made to Edenborn on 26 March 2012 to "substantially reduce current outstanding payments". The letter further noted that Gunns' ability to process further payments would be advised in line with anticipated developments aligned to the company's asset sale programme and it remained Gunns' intention to be substantially back on payment terms by early April 2012. Although the 26 March 2012 payment was made, Gunns did not get back on track with payments by early April 2012. 80 Mr Fildes agreed in cross-examination he was aware in March 2012 that Gunns was using the proceeds of its woodchip sales for purposes other than the payment of contractors and was instead paying contractors from the sale of assets. 81 On 26 March 2012, Gunns released a market update outlining the Gunns Group's intention to undertake an equity raising of approximately $400 million, to reduce debt facilities and strengthen Gunns' balance sheet. The market update also stated that the suspension of trade of Gunns' securities would continue until the details of the proposed equity raising and associated preparation of documents had been finalised. The same day, Mr Howson's wife, Sue Howson, sent a ninemsn article to Mr Howson by email with a subject line "Gunns may seek to raise $400 million". The article stated that the amount of the proposed new capital raising was much larger than the $280 million capital raising previously proposed by Gunns, "which was derailed when New Zealand billionaire Richard Chandler pulled out", and quoted an analyst who likened Gunns to a "very speculative mining company" and who described the proposed capital raising as Gunns' "last throw of the dice… They (Gunns) get this away or they don't". Mr Howson admitted that he was aware of this article, but Mr Fildes said he did not recall reading this article. 82 On 27 March 2012, The Examiner newspaper published an article "Gunns plans to raise $400m" regarding the proposed $400 million equity raising. The article quoted an analyst who stated: To raise that amount of money will mean that about 80 per cent will be new money and existing shareholders will have about 20 per cent… That's much closer to a float than capital raising and will need shareholders' approval… [y]ou believe it when money is in the bank… There's a credibility issue with these announcements in itself considering the number that there have been. 83 On 2 April 2012, Gunns announced in an ASX market update that it had requested a further extension of its suspension from trade until it had finalised the details of its proposed equity raising and associated preparation of documents. 84 On 10 April 2012, Gunns made a further market announcement to the ASX recording that it "confirms it is proceeding to formulate an equity offer" as detailed in the announcement on 26 March 2012, and "requests that its suspension from trading continue until details of the proposed equity raising, and associated document preparation have been finalised". 85 On 11 April 2012, Mr Fildes sent an email to Mr Howson advising that Gunns owed Edenborn $1.5 million. In a separate email to Mr Howson also sent the same day, Mr Fildes raised with Mr Howson and Brian Macomish that another principal, Australian Bluegum Plantations (ABP), had approached Edenborn to provide chipping services until 8 June 2012. Mr Fildes stated that: If we actually believe there will be no more Gunns soon then ABP has to be the best option, but for how long with the above statement? It may reasonably be inferred that Mr Fildes and Mr Howson had prior discussions regarding whether or not Gunns would continue to trade. However, Mr Howson denied that they had such discussions and Mr Fildes could not recall whether they did or did not. Whether they did or did not have prior discussions, they were both plainly on notice by that time that Gunns was in financial difficulty. Mr Howson acknowledged in his liquidator's examination that he was aware at this stage that the problems with non-payment were happening to "everybody". 86 On 15 April 2012, The Examiner newspaper published an article entitled "a scent of desperation, by any name: Should we read anything into how Enpax sounds suspiciously like a name one would give a laxative?" which referred to Gunns' "seemingly all-or-nothing bid to build a pulp mill" and observed, in the context of a rumoured proposed company name change for Gunns, that "[f]air or not, at least in Tasmania and probably beyond the Gunns brand has been trashed. That is not helpful when your survival depends on attracting investment". 87 On 24 April 2012, Mr Fildes sent an email to Mr Crook, copying Mr Merry, Mr Howson and Mr Macomish, advising that Edenborn was "quite concerned about [its] position with Gunns right now". In his response to Mr Fildes, Mr Merry stated that he appreciated "Edenborn's current level of concern over outstanding payment" and that Mr Howson had "indicated we need to catch up to discuss payment situation, exposure to Edenborn & discuss impact going forwards into next week". 88 Throughout March and April 2012, there was a gradual increase in the outstanding invoiced amounts, notwithstanding a tranche of payments. On 14 May 2012, Mr Fildes chased up "this week's payment (date of payment)) [sic] and how much it will be". By return email later that day, Mr Merry told him that Gunns would pay $220,000 on 17 or 16 May 2012 and that Mr Merry was still awaiting feedback as to what could be offered to Edenborn for the week starting 21 May 2012. On 15 May 2012, Mr Butt of Gunns sent a letter to Mr Howson in the same terms as the letter sent on 23 March 2012, containing a proposed payment schedule and the statement: Gunns' ability to process further payments will be advised in line with anticipated developments aligned to the company's capital raising program. It remains Gunns' intention to be substantially back on payment terms during within [sic] the next month. That did not occur. 89 On 16 May 2012, Gunns made a payment of $220,000 to Edenborn. 90 On 17 May 2012, Gunns gave Edenborn notice by letter of a force majeure event under Edenborn's contract as a result of Elders Forestry Limited (Elders) implementing a "lock out" of Gunns from Elders' plantation pulpwood terminal (Elders lock out notification). Edenborn was advised that as a consequence of the lock out "all Gunns Western Australian based harvesting / processing / haulage operations will need to be suspended until further notice". At that time the debt to Edenborn had reached just over $1.81 million, although $519,934.39 of that amount was not yet due for payment. 91 Following the Elders lock out notification, Edenborn moved its systems to harvest and chip for its other principals and did not resume work for Gunns until around 8 August 2012. 92 On 30 May 2012, Mr Merry sent an email to Mr Hayes, copying Mr Butt, regarding payment schedules to contractors. Mr Merry noted that "[b]oth ATS & Edenborn have communicated that their cash flow positions are extremely low to the extent their businesses are most vulnerable". 93 On 1 June 2012, Mr Crook emailed Mr Fildes regarding a proposed $9,369.66 adjustment to a recipient created tax invoice in Gunns' favour. Mr Fildes responded stating: Tensions are extremely high at the moment in the office and not even sure if we can make next week's pay run so discussing amounts Edenborn owe Gunns is not a matter I am keen to discuss with anyone in our office at the moment. How about we leave until we see some money coming through? 94 In cross-examination, Mr Fildes agreed there were "some tensions" in the office at Edenborn regarding the outstanding debt owed by Gunns in June 2012 and the fact that although the full debt was due, no payment was even suggested by Gunns. However, he stated that his statement in the email that he was concerned about making Edenborn's next pay run was false. His evidence was that he "fired back" the email to Mr Crook in anger that Gunns was asking for money when it owed money to Edenborn. However, he agreed that he was unwilling to entertain the possibility of an adjustment due to the size and timing of Gunns' liability to Edenborn. 95 On 5 June 2012, Mr Hayes sent a letter to Mr Howson advising him: This letter is to formally advise the payment schedule and terms in respect to timber harvesting and woodchip haulage services provided by your Company to Gunns for achieving Mill Door Sales to APEC during the May 2012 period. As agreed APEC will pay Edenborn direct for harvesting and haulage services. In recognition of Gunns and Edenborn's current cash flow situation, APEC have agreed to process 7 day payment of proceeds for the Mill Door sales of Bluegum Chip. APEC will pay Edenborn direct for the following amount:- Payment date Amount Confirmation status 8/06/2012 $71,205.76 confirmed $71,205.76 Gunns ability to process outstanding payments will be advised over the course of next week We thank you for your co-operation and understanding, and look forward to a continuation of our relationship. 96 I infer that Mr Fildes must have had discussions with someone at Gunns concerning payment and the arrangement for a third party to pay Edenborn directly. The email contained no firm commitment to return payment to terms, contrary to Gunns' earlier letters of 23 March and 15 May 2012. 97 Mr Fildes agreed in cross-examination that by mid-June 2012 he was aware that Gunns' debt to Edenborn had reached over $1.9 million and this was a "substantial sum of money" for a company such as Edenborn. 98 An internal Gunns email sent on 17 June 2012 from Mr Merry to Mr Hayes recorded that Mr Merry had a meeting with Edenborn and another of Gunns' Western Australian contractors on 15 June 2012 "to establish their 'here & now' expectations / preparedness / ability to resume providing services to Gunns". Mr Merry wrote that the situation with Edenborn (and the other contractor) was "becoming increasingly desperate". Gunns' liability to Edenborn at that time was $1.93 million and Edenborn had "advised if Elders Forestry had not recommenced harvesting they would have been forced to cease trading". The email stated: [Edenborn] advised if Elders Forestry had not recommenced harvesting they would have been forced to cease trading, and are of the view they have not been given any assistance by Gunns since last payment date (15/5). Cash flow is critical, compounded by 0.8% interest / month on outstanding payments, business is liable for GST on YTD RCTI's, & standard end of financial year tax liabilities. To recommence operations Edenborn have indicated they would a) require a significant payment (not prepared to put a $ figure on the table), and b) have advised they will issue a letter of demand to ensure there is an alignment between contract & actual trading terms going forwards (used the analogy of not prepared to keep offering Gunns an unsecured bank loan equivalent). [Mr Howson] is frustrated with you not returning several calls recently... 99 On 22 June 2012, Mr Merry sent an email to Mr Butt asking whether there had been further progress that morning with the CFO "re approving programme to pass on $" to Edenborn and another contractor. Later that day Mr Merry sent a further email to Mr Butt stating: I see it critical Gunns retains an effective working relationship with contractors to ensure Gunns a) minimises the likelihood of contractors pursuing legal action against Gunns, and b) contractor resources remain in plain to meet future requirements of Gunns H&M programme. 100 On 25 June 2012, Mr Merry advised Mr Hayes by email that another contractor, ATS, had threatened to issue a statutory demand. In a later email in the same email chain on 26 June 2012, Mr Merry wrote: It's critical we consider what can be offered to both ATS & Edenborn. Other contractors have deep concerns however are less likely to pursue legal action here & now …. ATS & Edenborn have both indicated they have significant payroll tax/superannuation payments/GST liabilities to pay due 30/6/2012 - if this is recognised by Gunns via issuing timely payments this will go a long way in easing tensions. Need to demonstrate [Gunns] has clear intent to actively reduce outstanding payment issues - pass on what we can - no more no less. … Edenborn offer suggestion:- 29/6 payment of $100,000 6/6 payment of $1000 schedule of further payments to be advised 101 Consistently with the proposal outlined by Mr Merry, a payment of $101,465.47 was paid by 29 June 2012 and another payment of $100,000 was made on 6 July 2012. 102 Mr Howson and Mr Fildes each gave evidence that they could not recall the meeting on 15 June 2012 referred to in the internal Gunns email sent on 17 June 2012 from Mr Merry to Mr Hayes. Both denied during cross-examination that they told anyone at Gunns that Edenborn required a significant payment to recommence operations and denied they intended to issue a letter of demand. They each also denied they told Mr Merry, or anyone at Gunns, that Edenborn had "significant payroll tax/ superannuation payments/ GST liabilities to pay due 30/06/2012" as Mr Merry reported to Mr Hayes in the email sent on 26 June 2012. I do not accept their denials as reliable or truthful evidence. First, Mr Howson's denial was inconsistent with the answer he gave in his liquidator's examination. When it was put to him that it was right that Edenborn would not continue work unless Gunns sorted out the outstanding payments, Mr Howson's answer was that "well, as it says there, significant payment reduction would be required" and he agreed that Edenborn had been asking for "a year, or close to" for payment of outstanding amounts. Secondly, there is no reason to doubt the reliability of what Mr Merry reported to Mr Hayes in relation to Edenborn against the background of the increased indebtedness of Gunns to Edenborn, the lack of "firm" commitment to pay the outstanding invoices, and evidence that in fact, Edenborn had ceased providing some of its services to Gunns in January 2012 and threatened to suspend all services to Gunns because of payment issues at the time. Thirdly, there is a wealth of documentary evidence to show that Edenborn had been regularly pressing Gunns for a substantial payment of the outstanding invoices and had become increasingly concerned about Edenborn's exposure. 103 On 2 July 2012, The Australian Financial Review newspaper published an article under the heading "Low prices cut value for Gunns", which noted that Gunns shares had been suspended for more than three months during its attempted $400 million equity raising and that "the chances of raising such a large amount of equity amid terrible capital market conditions is getting harder by the day. This is further compounded by Gunns' battered credibility". The article further noted that Gunns' review of its forestry assets in light of an estimated reduction in future stumpage values "reduced standing timber valuation buy [sic] nearly $40 million", that the Tasmanian wood plant and equipment "was reduced by $25 million", and that Gunns was in "cash preservation mode". There is no indication in the evidence that Mr Howson or Mr Fildes read that article. 104 Also on 2 July 2012, Gunns announced to the ASX that it was reviewing the value of its forestry assets, including the impact of the substantial decline in stumpage prices in the woodchip market. The announcement noted that the analysis was "currently incomplete and indefinite" and Gunns expected to make a further announcement on completion of that analysis. 105 On 3 July 2012, Mr Howson forwarded to Mrs Howson and others an update from "Daily Timber News", which included a headline "Gunns revalues assets". The extract noted that Gunns had been forced to revalue its forestry assets because of the "ailing woodchip market". The full article, which was not included in the email, also reported that Gunns shares had been suspended for 117 days at that point and that the "prolonged share trading halt has triggered fears it will never trade again". Mr Howson could not recall whether he read the full article or not, but accepted that it was "probable" that he had "clicked through" to the full article before forwarding it on. 106 On 7 July 2012, Mr Merry sent an email to Mr Hayes advising him that: Contractor payment situation:- payments made to ATS & Edenborn over past fortnight has successfully held off contractors pursuing legal action. Can you confirm outlook for next fortnight re: continuation of payments to ATS in line with written commitment & what can be offered to Edenborn? 107 On 10 July 2012, the Mercury newspaper published an article entitled "Tax bill blow for Gunns", which noted that Gunns had received an amended income tax assessment of up to $42 million and quoted an analyst as stating that the tax dispute "was another negative hanging over the company's head, which would make capital raising more difficult. The company almost certainly has to repay $340 million to an ANZ-led consortium by December 31". An article describing the tax dispute was also published on Daily Timber News. In cross-examination Mr Howson's evidence was that he could not recall seeing the article before. 108 On 12 July 2012, Daily Timber News published an article entitled "$60m lift on cards for Gunns", which described the progress of the sale by Gunns of its Portland woodchip loading facility. The article noted that "a need to liquidate assets forced the Portland sale" and that the sale was "a rare bit of good news for Gunns since suffering a hammer blow with the withdrawal of a $150 million investment by the Richard Chandler Corporation" and the announcement of the $42 million tax reassessment. Mr Howson denied reading the article in July 2012. 109 On 15 July 2012, Mr Merry sent an email to Mr Hayes advising him that a start date of 1 August 2012 for the resumption of Gunns' harvesting program was required to achieve a shipment date of 13 September 2012 and also: recommended to minimise risk of increased demands presented to [Gunns] by contractors (if force majeure situation resolved .. prior to 31/7, SRT demand full payment of current outstanding $ prior to startup - Edenborn have indicated a similar requirement - they are both desperate for work. Mr Fildes could not recall whether he told anyone at Gunns in July 2012 that Edenborn required full payment before recommencement and Mr Howson said that he did not tell Gunns this, stating that he was out of the country again in "late July". There is no reason though to doubt the accuracy of what was said in the email. 110 On 16 July 2012, Mr Howson forwarded to Mr Fildes, Fran Leary (Edenborn's Chief Financial Officer) and Mr Macomish an ASX Release from Gunns which announced the sale of the Portland woodchip export facility (the Portland sale). 111 In an email sent on 20 July 2012, Mr Merry informed Mr Hayes that he had met with WA harvesting and haulage contractors that week about the current return to work plan and reported that Edenborn required the liability to be below $800,000 and that they would need to cap net liability after services were resumed to between $1 million and $1.2 million. Mr Merry wrote that could be achieved by processing March/April 2012 outstanding payments. The evidence of Mr Howson in cross-examination was that he was overseas at that time and he could not recall any discussion with anyone at Edenborn regarding a proposed reduction of Edenborn's credit limit with Gunns to $800,000. Mr Fildes was also asked in cross-examination whether he had any recollection of having discussions with anyone at Gunns about requiring the liability to be below $800,000. Mr Fildes could not recall such a meeting but there is no reason to doubt that it took place and that was the advice communicated to Gunns. 112 On 24 July 2012 Mr Crook informed Mr Hayes that "[c]ontractors [had] asked for further clarity with regards to timing of payments before 01/08/12 restart, so that they can hire necessary employees & arrange floats for machinery etc.". 113 On 25 July 2012, Mr Crook advised Edenborn and other contractors that he had not received an update from "Corporate" as to whether a 1 August 2012 restart was likely. 114 On 26 July 2012, Daily Timber News published an article entitled "ANZ seeks review of Gunns balance sheet". The article stated that: Gunns' move to recapitalisation has been slow and full of setbacks and there is no end in sight. It appears that lenders to the embattled timber company are becoming nervous about the $500 million they are owed by the end of the year. The article noted that creditors had asked "insolvency specialists" KordaMentha to review Gunns' balance sheet and that Gunns owed "$340 million to a banking syndicate led by ANZ". Mr Howson's evidence was that he could not recall reading the article in July 2012. 115 On 27 July 2012, Mr Crook sent an email to Mr Hayes, copying Mr Butt, stating that: As [Mr Merry] communicated in 15/07 email, Edenborn require liability to be below $800,000 and for downward pressure to continue to control actual liability… Gunns will need to implement a revised payment schedule to keep Edenborn working. 116 On 1 August 2012, Mr Butt sent an email to Mr Hayes advising that Mr Crook had called him earlier that day and Edenborn had told Mr Crook it would not restart unless all amounts then owing were paid in full. 117 On 2 August 2012, Ms Leary sent an email to Mr Fildes and Mr Howson stating that the balance of the Gunns account was $1,733,630.26. The same day Mr Fildes sent an email to Mr Crook suggesting a payment plan that Gunns pay $1.34 million by 6 August 2012 with Edenborn to commence work on 8 August 2012, the balance of all outstanding amounts of $393,630.26 by 15 August 2012 and payment for work performed between 1 August and 15 August 2012 to be made by 31 August 2012. Later that day, Mr Crook sent an email to Mr Butt and Mr Hayes, copying Mr Merry, stating: I have spoken to Edenborn again this morning about resuming harvesting at various intensities with progressive payment options, and they have communicated that they will not resume with [Gunns] unless the full outstanding payment ($1,729,000) is made. They have communicated that they are NOT prepared to come back to work even if [Gunns] offers a payment schedule that progressively reduces their liability. Murray Howson communicated that as a last resort they are looking at issuing [Gunns] a Statutory Demand, unless some payments are forth coming… 118 Mr Howson and Mr Fildes both gave evidence that they did not recall making such statements to Gunns, though Mr Howson said that to the best of his knowledge he "never said that". However, there is no reason to doubt the accuracy of what was recorded in the email and tellingly, on 6 August 2012, Gunns paid the amount of $1.34 million to Edenborn, which Edenborn applied against the outstanding tax invoices from March to May 2012. The balance was paid on 15 August 2012 in discharge of the whole of Gunns' debt to Edenborn. 119 On 3 August 2012, Mr Crook sent an email to Mr Fildes stating that corporate was waiting for the Portland sale to be confirmed and would then release a letter stating that "payment (100%) will be made Mon 06/08". Later that day, Mr Crook sent an email to Mr Fildes, and two other contractors, advising that the Portland sale had gone through but letters outlining payment schedules would not be released that afternoon. He wrote that he was hopeful that payments would be made on 6 August 2012. Mr Fildes forwarded that email to Mr Howson, Mr Macomish, Ms Leary and Mrs Howson. 120 On 6 August 2012, Gunns released to the ASX a market update which reported that: (a) for the financial year ending 30 June 2012, the Gunns Group would record an impairment of its assets of between $700 million to $800 million and its net tangible asset position would fall to between negative $50 million and negative $150 million; (b) the impact of the decline in stumpage prices on Gunns and its asset position had raised material uncertainty regarding Gunns' current financing strategy, including for the pulp mill development, and that Gunns' board had been unable to reach a view for the purpose of its 30 June 2012 financial accounts that the pulp mill development was "probable to proceed"; (c) the net present value of Gunns' interests in Tasmanian managed investment schemes was negative $100 million; (d) earnings for the financial year ending 30 June 2013 were likely to be materially less than the earnings for the financial year ending 30 June 2012 due to the state of the woodchip markets; and (e) the share trading suspension would continue until Gunns was in a position to provide more specific detail regarding the proposed capital raising, restructuring or alternative form of potential transaction, and it was "not feasible" at that stage to say when the suspension would be lifted. 121 Also on 6 August 2012, Mr Butt sent a letter to Mr Howson formally advising of a payment schedule in the terms proposed by Mr Fildes on 2 August 2012. The payments proposed, when made, would have the effect of reducing Gunns' liability to Edenborn to zero. The letter also stated that Gunns undertook to forward payment for services provided during the period 1 August to 15 August 2012 by 31 August 2012. 122 Payment of $1.34 million was made later that day. Mr Howson was aware that the $1.34 million paid on 6 August 2012 had come from the proceeds of the Portland sale rather than out of the ordinary cash flow of Gunns. 123 It was only after agreement was reached for payment of the outstanding invoices in full and the first payment received that Edenborn recommenced work for Gunns on 8 August 2012. 124 On 7 August 2012, The Australian Financial Review newspaper published an article under the heading "Gunns faces huge write-down" stating that "[b]attered timber company Gunns is clinging to survival after flagging an impairment of up to $800 million for 2011-12 on lower commodity prices and conceded that its $2.3 billion pulp mill project may fail because of its weak financial position". The article also quoted a "market watcher" as saying "The person who had the most access to the books was Richard Chandler and he walked, which tells you everything". A similar article was also published on Daily Timber News, which noted that Gunns' impairment was "at least five times its last available market capitalisation". In cross-examination Mr Howson stated that he could not recall reading this article. 125 On 14 August 2012, Mr Crook sent Mr Fildes an email advising him that the Forest Harmony vessel was due to arrive early on 26 August 2012 and requested that Edenborn implement an increased tonnage program as quickly as possible. 126 On 16 August 2012, Mr Fildes responded to Mr Crook's email of 14 August agreeing to offer additional tonnage but on restructured payment terms. Under the proposed payment terms, Edenborn was to be paid at five to ten day intervals. 127 On 17 August 2012, Mr Crook forwarded this email to Mr Butt, Mr Hayes and Mr Merry, noting that: … Edenborn are concerned about their live exposure exceeding $700K, [sic] The following two options presented have scheduled payments being made (outside RCTI terms), so that their running liability does not exceed $700K… In order to meet the Daio vessel we need to implement Option 2... 128 On 19 August 2012, Mr Hayes sent an email to Mr Crook in response to the email of 17 August 2012 stating that he was concerned that the contractors were seeking seven day terms, which was contrary to Gunns' objective of getting all contractors onto 30 day terms. Mr Hayes told Mr Crook that he needed to resist the contractors dictating terms and getting extremely favourable concessions. 129 On 20 August 2012, Mr Crook responded to Mr Hayes' email stating that: I agree they are very favourable terms, but contractors are extremely nervous about working for [Gunns] right now for obvious reasons… Edenborn have refused to start up a second chipping systems, unless [Gunns] can supply them with payment schedules going forward. 130 Also on 20 August 2012, Mr Fildes forwarded to Mr Howson, Mr Macomish, Ms Leary and Mrs Howson (and separately to Mr Crook) an email he had received from another contractor extracting an article from the Tasmanian Times entitled "The Second Coming is more likely" commencing with the following: Is Gunns likely to be a takeover target? Highly unlikely. A takeover implies assuming all the contingent liabilities as well, the ATO debts, class actions liabilities etc. A buyer would need to be extremely desperate or badly advised to venture into that spider's web. The article went on to observe: Can Gunns just keep trading? The ASX announcement on 6th August was a statement that its liabilities exceeded its assets. This doesn't necessarily mean that Gunns will be unable to pay its debts as and when they fall due, because asset values may increase or trading in the future may produce enormous profits. However this is unlikely to happen. … But whether suppliers are willing to keep dealing with Gunns is the question, or whether they will require payments in advance that will necessarily put Gunns at risk of breaching the aforementioned banking covenants. Whether Gunns lasts until the formal solvency declaration in September is questionable. The recent ASX announcement is very much akin to an announcement of appointment of a Voluntary Administrator, because the Directors have in effect told the market they are insolvent… … Will Gunns be handed over to a Voluntary Administrator, a Receiver or a Liquidator? There's not much left of the company. … With the MIS assets gone, the wind up becomes a more orthodox exercise. A Liquidator in other words for both Gunns and GPL. 131 Mr Howson admitted in cross-examination that he read this article in August 2012. During his liquidator's examination, Mr Howson also admitted that he was aware at this time that Gunns had written down about $1.2 billion of assets. Mr Fildes stated that he only "read one or two lines of the article" but he agreed that he read enough to satisfy himself that it was an article worth sending to Mr Howson, Mr Macomish, Ms Leary and Mrs Howson. 132 On 21 August 2012, Mr Crook sent an email to Mr Fildes stating: I'm feeling even more depressed now, after reading that article. Future for Gunns doesn't look good. Sounds like New Forests will get the gig. 133 Mr Fildes' evidence was that he could not recall receiving the email or his reaction to it. 134 On 24 August 2012, the Australian Financial Review newspaper published the following article: Critical point for wobbly Gunns After close to six months in suspension, it's not looking good for Gunns as insolvency firm KordaMentha reports to the timber company's lenders. It is believed KordaMentha is poised to present a final report on the company's vitals to its syndicate of 10 banks, led by ANZ. It appears that some of Gunns' Asian lenders, which include Mizuho, [CCB] … have had enough and are considering selling their loans. Mizuho and CCB are the largest lenders after Australia and New Zealand Banking Group, which is not yet seeking to sell its position. Sources said brokers at Merrill Lynch, Morgan Stanley and Macquarie have been trying to find buyers but it's a tough sell to the point the banks might only get 20c on the dollar for their loans. Given Gunns' cash flow problems, lenders may be worried the value of the company's assets might not be enough to cover the senior loan, as well as a $65 million tax liability revealed last month. 135 Also on 24 August 2012, Mr Fildes sent an email to Mr Crook containing an extract of that article or a version of that article which stated: It's not looking good for timber company Gunns which hangs by a thread as insolvency firm KordaMentha reports to the company's lenders…. Its [sic] appears some lenders have had enough and are looking to sell their positions in the lead syndicate. It is not known which banks are looking to exit but it is thought that ANZ, which has the largest exposure, is not seeking to sell its position yet…. Given Gunns's [sic] cash flow problems, lenders may also be worried the value of the company's assets might not be enough to cover the senior loan, as well as a $65 million tax liability revealed last month … 136 On 28 August 2012, Mr Fildes informed Mr Crook by email that: As you are aware we need to regain some confidence with Gunns before stepping up another level and as I have already forwarded to you over the past few weeks there is still a lot of negative press out there that is still making us very nervous. 137 Mr Fildes gave evidence that he was "not sure" if the email accurately reflected his state of mind, and with regard to the "negative press" he referred to in the email, Mr Fildes stated that he could not confirm whether he read it or heard it. He also stated that he did not believe that the email expressed his personal concerns based on what he had read regarding whether or not Gunns was insolvent. I found Mr Fildes' evidence evasive and self-serving. There is no reason to doubt the accuracy of what he wrote at the time. 138 On 31 August 2012, Mr Merry sent an email to Mr Hayes, copying Mr Crook and Mr Butt, stating that: … Edenborn have communicated late today that they have plans in play to suspend their infield chipping operation … on the basis that they will not be paid on 31/8 as previously promised. They have provided assurances that providing payment does occur on 3/9 they will resume their operation on 4/9 and continue to work for the remainder of the 1-15/9 RCTI period. This reactive position taken by Edenborn demonstrates a deterioration in level of both confidence & exposure that they are prepared to accept. Previously they have been far more willing to accept risk to ensure continuity of work for their business. 139 Also 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, relevantly: (a) a net loss after tax of $903.865 million; (b) a total comprehensive income of negative $1.02 billion; (c) retained earnings of negative $1.07 billion; and (d) total liabilities of $879.267 million, and total net assets of $24.251 million. 140 On the same date, ABC Online published an article under the heading "Gunns announces massive $900m loss", stating that the Gunns annual financial report had recorded a "massive annual loss" of $904 million, that Gunns had "devalued its net tangible assets by more than $1 billion", and that "Gunns' creditors would have difficulty recovering more than $500m [of repayments owed to them]". 141 On 1 September 2012, Mr Fildes sent an email to Mr Howson and others within Edenborn with hyperlinks to three articles concerning Gunns published that day. One of the articles was published on the website of The Australian and was entitled "Slash and burn: woodchipper clings to life as banks hover". That article noted that Gunns was "teetering on the edge of collapse" and that "the company's future is firmly in the hands of a syndicate of 10 lenders that is owed more than $300m". The other linked articles were entitled "Gunns hit with $800m writedown", published in The Sydney Morning Herald, and "ON THE BRINK: Gunns Limited Timber company announces $904 loss $904m loss [sic] has Gunns on brink", published in The Mercury. The latter article noted that Gunns' lenders were still owed $559 million despite major asset sales, and that other creditors were owed $200 million. Mr Howson admitted to reading "some or part of" the article entitled "Gunns hit with $800m writedown". This article noted that Gunns lacked confidence that the pulp mill development would proceed and advisory firm KordaMentha had been engaged in July 2012 to examine Gunns' solvency on behalf of its lenders. Mr Fildes admitted he would have been searching the internet to find news about Gunns in order to send this email, and he was possibly looking for information regarding Gunns' financial position. 142 On 4 September 2012, Daily Timber News published an article entitled "Gunns solvent but profits slide", which noted that "[a]ccording to the Sydney Morning Herald insolvency firms [were] circling" Gunns and that the ANZ-led banking syndicate was owed $560 million and was "considering appointing receivers last month". The article further described Gunns' recent $904 million 2011-12 loss and its lack of confidence that the pulp mill development would proceed. Mr Howson's evidence in cross-examination was that he could not recall seeing this article in September 2012. 143 On 9 September 2012, Mr Merry sent an email to Mr Hayes informing him that as an alternative to fortnightly processing of invoices, "Edenborn [had] communicated they would be prepared to consider a 'trust account' approach to payment which would align payment to sales transactions". 144 On 11 September 2012, Mr Fildes sent an email to Mr Merry requesting "any news on payment being made this Friday". Mr Fildes accepted that this email represented an attempt by him to chase up payment notwithstanding that payment was not due for a further three days. 145 On 14 September 2012, Mr Hayes sent a letter to Mr Howson informing Mr Howson that Gunns proposed to pay its debt due on 14 September 2012 on 18 and 21 September 2012. The letter stated that: Due to a delay in receiving payment for a recent woodchip shipment and the impact that this event has had on available cash flow, Gunns will attend to progressive payment of the following amount in line with the schedule below to process the RCTI that is due on 14/09/2012. Payment date Amount Confirmation status 18/09/2012 $200,000.00 confirmed 21/09/2012 $185,629.00 confirmed $395,629.00 146 Also on 14 September 2012, Mr Merry notified Mr Hayes by email that Edenborn had informed Mr Merry that: [Edenborn] will suspend their chipping operation next Mon-Tues with the intention to re-commence on Wednesday following receipt of partial payment…. Providing the 30/9 RCTI payment is made by Gunns they will increase their daily production further… 147 Despite Gunns' commitment to pay Edenborn $200,000 on 18 September 2012, only $43,000 was paid, and not until 19 September 2012. On 21 September 2012, Gunns paid the balance of $352,629.04, leaving the $255,870.16 remaining from the recipient created tax invoice issued on 15 September 2012 payable by 30 September 2012. 148 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.

CONTINUING BUSINESS RELATIONSHIP ISSUE 149 It is convenient to commence with this issue as Edenborn contended that Gunns and Edenborn had a continuing business relationship for the entirety of the relation back period and the seven payments in question were an integral part of that continuing business relationship. By s 588FA(3), transactions that are an integral part of a continuing business relationship between the company and a creditor, such as a running account, are treated as a single transaction for the purposes of s 588FA(1) in determining whether an unfair preference was given to the creditor. Thus, it was submitted, s 588FA(3) applies to treat all the transactions within the relation back period as a single transaction for the purposes of s 588FA(1). 150 The liquidators accepted that a continuing business relationship existed from the start of the relation back period until 17 May 2012 and again after 15 August 2012 until the appointment of administrators on 25 September 2012. However, the liquidators disputed a continuing business relationship existed between 17 May 2012 and 15 August 2012, alternatively between 2 August and 15 August 2012. 151 The relevance of the date of 17 May 2012 is that on that day, Gunns suspended the operation of the contracts by reason of a force majeure event and operations did not resume until around 8 August 2012. As at 17 May 2012, Gunns owed Edenborn a total of $1,811,612.25 on outstanding invoices, which were paid in full by three payments which Gunns made during the period in which Edenborn was not providing services to Gunns because of the suspension, namely - on 29 June 2012 in the amount of $101,465.47; on 6 July 2012 in the amount of $100,000; and on 6 August 2012 in the amount of $1,340,216.36 - and by a fourth payment of $388,839.93 on 15 August 2012, just after Edenborn resumed operations. The liquidators' case is that Edenborn required payment of its prior invoices in full as a condition of resuming the provision of services to Gunns and, thus, it was submitted, those four payments were not made in the context of a continuing business relationship within the meaning of s 588FA(3). 152 Edenborn's case is that the contracts remained on foot during the period of suspension and the dominant purpose of the payments was the mutual purpose of inducing Edenborn to provide further services to Gunns. Thus, it was contended, although services were suspended by reason of the force majeure event, there was no break in the continuing business relationship. 153 Section 588FA(3), by its terms, embodies and gives statutory effect to the principal expressed in Richardson v Commercial Banking Co of Sydney Ltd [1952] HCA 8; 85 CLR 110 (Richardson) at 129 that where a payment "forms an integral, an inseparable, part of an entire transaction its effect as a preference involves a consideration of the whole transaction": Airservices Australia v Ferrier [1996] HCA 54; 185 CLR 483 (Airservices Australia) at 488; VR Dye & Co (a firm) v Peninsula Hotels Pty Ltd (in liquidation) [1999] 3 VR 201 (VR Dye) at [27] per Ormiston JA, Winneke P and Tadgell JA agreeing; Cashflow Finance Pty Ltd (in liq.) v Westpac Banking Corp [1999] NSWSC 671 (Cashflow Finance) at [507]; Sydney Appliances Pty Ltd (in liq) v Eurolinx Pty Ltd [2001] NSWSC 230 (Sutherland v Eurolinx) at [137]-[138]. In that circumstance, pursuant to s 588FA(3)(c), the "transaction" for the purposes of s 588FA(1) comprises "all the transactions forming part of the relationship". The paradigm of such a transaction is a running account. The rationale for treating running accounts as a single transaction for the purposes of determining whether a payment gave a preference to a creditor was explained in Richardson at 133: A running account of any debtor who has reached insolvency must present difficulties under s. 95. A debtor who pays something off his grocer's account in order to induce the shop keeper to give him further supplies of groceries can hardly be held, as it seems to us, to give the grocer a preference, if that was the clear basis of the payment. If the grocer credited the money as a payment for the future deliveries instead of the past deliveries of groceries he would in the end be in exactly the same position and yet he could not be attacked as having received a preference. But without stating any principle with an application beyond the facts of this case, it is enough to decide that the payments into the office account possessed in point of fact a business purpose common to both parties which so connected them with the subsequent debits to the account as to make it impossible to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed and so to be adjudged a preference. The principal was affirmed in Airservices Australia. The majority (Dawson, Gaudron and McHugh JJ) similarly observed at 501-3: If a payment is part of a wider transaction or a "running account" between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. … If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off. Thus, a debtor does not prefer a creditor to the other creditors if he or she pays a debt, or part of it, to induce the creditor to supply goods of equal or greater value than the amount of the payment. In that situation, it is of no relevance that the debt that is discharged happens to be a stale one. If the present value of the goods supplied is equal to or greater than the payment, the other creditors are no worse off. They are in the same position that they would have been in if the parties had so structured the transaction that the debtor paid for the new supply of goods instead of discharging the old debt. … If at the end of a series of dealings, the creditor has supplied goods to a greater value than the payments made to it during that period, the general body of creditors are not disadvantaged by the transaction - they may even be better off. The supplying creditor, therefore, has received no preference. (footnotes omitted) As noted, it is the relationship between the payments and the subsequent supply of services which is the rationale for the principle that a continuing business relationship is to be treated as a single transaction for the purposes of the preference provisions. If the purpose of a payment is to secure an asset or assets of equal or greater value the payee receives no advantage over other creditors, save to the extent that the payment exceeds the value of the services. The majority emphasised at 505 that "it is not the label 'running account' but the conclusion that the payments in the account were connected with the future supply of goods or services that is relevant" because, as the majority explained, it is that connection which indicates a continuing relationship of debtor and creditor. As the majority noted at 504-5, "the essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded". Where the nexus between a payment and the subsequent provision of goods or services in that account is broken because the purpose of inducing further supply becomes subordinated to a predominant purpose of discharging past indebtedness, the payment is not part of the continuing business relationship, even if some services continue to be provided: Sutherland v Eurolinx at [148]-[151]. Airservices Australia is such an example. 154 In Airservices Australia, the High Court considered whether payments made to the appellant by Compass Airlines Pty Ltd (Compass) during the six month period before Compass went into provisional liquidation were preferential payments and void as against the liquidators of Compass. The issue was considered in the context of s 122 of the Bankruptcy Act 1966 (Cth) which, pursuant to s 565 of the Corporations Law, applied to corporations in liquidation. The majority held that the Full Federal Court had erred in holding that there was no running account: at 507. In the cross appeal of the liquidators, the liquidators claimed that the payment which Compass made to the appellant the day before Compass went into provisional liquidation did not form part of the running account because the appellant had, at the very least, a strong suspicion that Compass would "fold" the next day and was demanding that Compass pay it $3,081,102.63 supported by an irrevocable authority and direction to its bank. The majority held that the payment did not form part of the running account, notwithstanding the appellant did provide further services to Compass after the payment and, as the majority stated, it seemed certain that the appellant believed at the time of payment that it would continue to provide services to Compass after that date. The majority reasoned that the "better view on the evidence" was that in making a demand for payment of the outstanding debt the appellant was "looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services" and therefore the payment should be regarded as a preference notwithstanding the fact that subsequent services were provided: at 510. 155 As the cases make clear, it is an essential element of a continuing business relationship for s 588FA(3) to apply that payments are made in the mutual expectation that the creditor will continue to supply services to the debtor. Both parties must be looking to the ongoing provision of services in return for payment for a continuing business relationship to exist: see eg Sutherland v Eurolinx at [147]-[148]; 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 [73]. Applying that principle, a continuing business relationship may exist despite a suspicion on the part of the creditor of the debtor's insolvency: Sutherland v Eurolinx at [163]; Clifton v CSR Building Products at [69]. However, s 588FA(3) will not apply to a payment when it may be inferred from the circumstances of the particular payment that it was made not as an integral part of a continuing supply of services but for the payment or partial repayment of a past debt: Sutherland v Eurolinx at [148]; Clifton v CSR Building Products at [73]. 156 It was argued for Edenborn that the payments made on 28 (or 29) June 2012, 6 July 2012, 6 August 2012 and 15 August 2012 respectively were all made during the course of a continuing business relationship - also comprising the payments on 16 May 2012 and 19 and 21 September 2012 - and therefore form part of a "single transaction" for the purposes of s 588FA(1). It was submitted that the force majeure event giving rise to the suspension of operations in May 2012 was unconnected with Edenborn, arising from contractual issues between Gunns and other entities and, despite the suspension of operations, there was no break in the contractual relations between Gunns and Edenborn. It was further submitted that the evidence showed that Edenborn did not consider that the suspension was more than a temporary interruption, that Edenborn delivered woodchips for Gunns to a third party company, "APEC", during the lock out, and Edenborn immediately commenced rendering services to Gunns under the same contracts when the lock out ended. It was submitted that there was nothing in the evidence to suggest that the four payments in issue were materially divorced in events and time from the corresponding services provided. 157 With respect to the first 2 payments, it was submitted that the evidence established that only the following occurred between 17 May 2012 and the payments made on 28 (or 29) June and 6 July 2012, namely, Edenborn harvested and delivered woodchips for Gunns to APEC during May 2012 and Mr Hayes, the then general manager of Gunns' Forest Products Division, stated in a letter on 5 June 2012 to Mr Howson that Gunns "look forward to a continuation of our relationship". That submission is simply incorrect, as the chronology of events detailed under the heading "Facts and Evidence" demonstrates. In particular, the submission disregards key pieces of evidence: (a) the email sent by Mr Merry to Mr Hayes on 17 June 2012 in which Mr Merry described a meeting that had taken place between representatives of Gunns and representatives of Edenborn on 15 June 2012, and wrote that: To recommence operations Edenborn have indicated they would a) require a significant payment (not prepared to put a $ figure on the table), and b) have advised they will issue a letter of demand to ensure there is an alignment between contract & actual trading terms going forwards (used the analogy of not prepared to keep offering Gunns an unsecured bank loan equivalent). (b) the emails Mr Merry sent Mr Butt and Mr Hayes on 22 June 2012 and 26 June 2012 advising that it was "critical" to consider what could be offered to Edenborn and urging the "need to demonstrate [Gunns] has clear intent to actively reduce outstanding payment issues"; and (c) the email from Mr Merry to Mr Hayes on 7 July 2012 advising that the payments made to Edenborn (and another contractor) "over past fortnight has successfully held off contractors pursuing legal action". 158 There is no warrant for disregarding this evidence, which I find both probative and relevant. For the reasons earlier given at [102], I have rejected Mr Howson's and Mr Fildes' evidence that they did not tell anyone at Gunns that Edenborn required a significant payment to recommence operations and I have also not accepted their evidence that they did not tell Gunns that Edenborn intended to issue a letter of demand. There is no reason to doubt the accuracy or reliability of the information that Mr Merry conveyed to Mr Hayes, including in his email of 17 June 2012. Further, as the email of 26 June 2012 evidences, it was in that context that Mr Merry suggested that Gunns make the payments to Edenborn that were made on 29 June and 6 July 2012. 159 I accordingly find that the two payments of 28 (or 29) June and 6 July 2012 were made in circumstances where Edenborn had told Gunns that it required a "significant payment" of past debts to recommence operations for Gunns. Further, the evidence showed that Gunns made the payments on 28 (or 29) June and 6 July 2012 in the context where it was thought it was more likely that Edenborn and ATS would take legal action than other contractors. The evidence, in my view, strongly supports the finding, which I make, that in requiring the outstanding debt to be reduced significantly both parties were "looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services". The fact that the suspension of work in the first place was occasioned by a force majeure event which had nothing to do with Edenborn does not require any different answer in light of Edenborn's requirement that it be paid a substantial portion of the outstanding invoices as a condition of recommencing operations once the suspension was lifted. 160 Further, I place no weight on the fact that Edenborn provided services to APEC following the suspension of operations, as the letter of 5 June 2012 from Gunns to Mr Howson evidences that Edenborn, by agreement, was paid directly by APEC directly for the harvesting and haulage services it provided to APEC. 161 For completeness, I also reject Edenborn's submissions on the liquidators' alternative case that the continuing business relationship ceased on 2 August 2012. Edenborn submitted that the dominant purpose of the payments in August 2012 was to continue to induce Edenborn to provide ongoing services to Gunns, noting that a resumption of work was referred to by Mr Fildes on behalf of Edenborn in the email of 2 August 2012, by Mr Crook on behalf of Gunns in an email of 3 August 2012 and by Mr Butt on behalf of Gunns on 6 August 2012. The provision of further services by Edenborn was said to be clearly at the forefront of the parties' minds. It is undoubted on the evidence that Gunns, in making the payments on 6 August and 15 August 2012, was keen to ensure the continuation of Edenborn's services. However, as the evidence showed, the payments were made in the context where Edenborn had insisted on Gunns making payment in full of the outstanding invoices before Edenborn would recommence operations after the suspension was lifted. That requirement was referred to in contemporaneous internal Gunns emails: see the emails of 15 July 2012, 1 August 2012 and 2 August 2012 detailed at [109] and [116]-[117] above. As stated earlier, there is no reason to doubt the accuracy and reliability of the content of those emails. The demand for full payment represented a shift in Edenborn's position, as it had previously indicated during negotiations it would recommence work if Gunns' liability was reduced to $800,000 and there was a future cap on liability between $1 million and $1.2 million: see contemporaneous internal Gunns emails of 20 July 2012 and 27 July 2012 at [111] and [115] above. Consistently, Mr Fildes sent an email to Gunns on 2 August 2012 setting out a payment plan which would have the amount owing to Edenborn substantially paid in full before resumption of operations by Edenborn on 8 August 2012 and the balance due by no later than 15 August 2012. It was submitted for Edenborn that it was "inherently unlikely" that the subject matter of the conversation reported by Mr Butt in his email to Mr Hayes on 1 August 2012, in which Mr Butt advised that Mr Crook had told him (that is, Mr Butt) that Edenborn had said it would not restart unless all amounts then owing were paid in full, would only be dealt with orally. It was further submitted that the alleged conversation was inconsistent with Mr Fildes' email of 2 August 2012. I disagree. True it is that Mr Fildes' payment plan did not have the whole debt paid before Edenborn resumed, but under that payment plan all but $393,630.26 of the total liability of $1,733.630.26 was required to be paid before Edenborn resumed work, with the balance within a week of Edenborn restarting. There is no manifest inconsistency. Further, for the reasons given at [118], I have rejected Mr Howson's and Mr Fildes' denials that they (or one of them) had the conversation referred to in Mr Butt's email of 1 August 2012 and, contrary to Edenborn's submissions, I do not consider that it is inherently unlikely that such a matter would have been dealt with only orally in circumstances where both Mr Howson and Mr Fildes had been in regular contact with Gunns. 162 The contemporaneous correspondence and fact of payment in full of the outstanding invoices all support the finding, which I make, that Edenborn had communicated to Gunns that it was not prepared to recommence operations without payment of the outstanding amounts. The payments had the effect and purpose of reducing Gunns' debt to $0, as agreed. Gunns was also acting to avoid legal action by Edenborn, a prospect that it considered likely, and the threat of a statutory demand being issued. I am thus satisfied on the evidence that Edenborn, in seeking substantial payment of the outstanding debt, was "looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services" and the mutual purpose of inducing further supply was subordinated to a predominant purpose of recovering past indebtedness. The fact that a small quantity of services (relative to the debt that was repaid) was provided between 6 and 15 August 2012 does not negate a finding of a break in the continuing business relationship. As noted in Clifton v CSR Building Products at [75] and as found in Airservices Australia at 510, a cessation in a continuing business relationship may be found notwithstanding the continuing provision of services if the payments were "looking backwards rather than forwards, looking to the partial payment of the old debt rather than the provision of continuing services". Similarly, the resumption of services does not necessarily mean that a new continuing business relationship has commenced if the context surrounding payments made after services resumed indicates that the mutual purpose of inducing further supply was subordinated to a predominant purpose of recovering past indebtedness. Here, the payment on 15 August 2012 was made as part of an agreement to pay all of Gunns' outstanding debts to Edenborn in full. In the circumstances, notwithstanding the recent resumption in services, the payment of 15 August 2012 was plainly looking backwards rather than forwards. 163 I accordingly find that the continuing business relationship ceased on or after 17 May 2012 and before the payment on 29 June 2012. Albeit the final payment on 15 August 2012 was made after the resumption of services, the evidence showed that payment formed part of the arrangement agreed on with respect to payment of the balance owing in order for Edenborn to recommence operations. Thus, the four payments in question do not form part of a "single transaction" with the surrounding payments for the purposes of s 588FA. The liquidators concede that there was a continuing business relationship commencing after 15 August 2012 and terminating with the appointment of administrators on 25 September 2012.

ULTIMATE EFFECT ISSUE 164 Under the law as it was before the enactment of s 588FA, a payment made to a creditor within six months of the presentation of a petition against the debtor was void as against the debtor company's liquidator if the payment had the effect of the giving the creditor a preference, priority or advantage over other creditors of the debtor at the time the payment was made. Where the payment was part of a running account between the debtor and creditor, whether the payment had the effect of the giving the creditor a preference, priority or advantage over other creditors of the debtor was determined by the "ultimate effect" of the course of dealings between the debtor and creditor, not by considering the immediate effect of the individual payment in isolation from the subsequent course of dealings: Airservices Australia at 501-2 per Dawson, Gaudron and McHugh JJ. This principle, known as the "ultimate effect doctrine", emanated from the trilogy of cases of Richardson, Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 (Queensland Bacon) and Rees v Bank of New South Wales [1964] HCA 47; 111 CLR 210 (Rees): Airservices Australia at 488-94 (per Brennan CJ); 509 (per Dawson, Gaudron and McHugh JJ); 517-20 (per Toohey J). The doctrine was affirmed in Airservices Australia. In Airservices Australia the plurality at 509 observed that the ultimate effect doctrine emanating from those cases: [was] designed 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… [if] the payment was made to induce the further supplies, the creditor is entitled to have the ultimate effect of the transaction examined. Thus, in the case of a running account, payments to induce further supplies were not preferences unless the "ultimate effect" was that the value of the payments exceeded the value of the goods or services provided. If the ultimate effect of the course of dealings was not a reduction or discharge of past debt, but rather that the debtor obtained goods or services to an equivalent or greater value than the payments made to the creditor to secure those goods or services (even if those payments were referrable to an earlier debt), then the payments did not have the effect of giving the creditor who received payment a preference, priority or advantage over other creditors, as the general body of creditors were not disadvantage - and indeed may have been advantaged - by the payments. If the ultimate effect of the payments was to reduce the initial indebtedness, only the amount of the reduction was regarded as a preferential payment: Airservices Australia at 502-4. 165 It was the common position of the parties that the doctrine of "ultimate effect" continues to apply under the present law in determining whether the creditor has received an unfair preference in a running account scenario: see [146]-[147] of the liquidators' closing submissions and [83] and [85] of Edenborn's closing submissions. The parties arrived at this conclusion differently, with the liquidators submitting that s 588FA(3) codifies and subsumes the doctrine such that there is no work for the earlier authorities to do, and Edenborn submitting that the cases preceding s 588FA(3) remain relevant to its interpretation. Despite the common position of the parties, it appears there is no binding authority on this Court on that question and both parties properly drew the Court's attention to conflicting single judge and state court appellate authority which have considered the issue. Both parties also assisted the Court with comprehensive submissions in support of their common position. Ultimately, for reasons which are addressed below, it is unnecessary to form any concluded view, but if it were necessary to form a view in this case as to whether the doctrine of ultimate effect continues to have operation under s 588FA in order to determine whether the payments to Edenborn during the relation back period gave it an unfair preference, I would be disposed to hold that the doctrine still applied. First, it is undoubted that s 588FA(3) codifies the running account principle and for the purposes of determining whether there is an unfair preference under s 588FA(1), the course of dealings in the running account (ie the debits and credits) must be considered as a "single" transaction: s 588FA(3)(c). That is to say, the "transaction" for the purposes of the subsection is the totality of the dealings. Secondly, it seems to me as a matter of construction of s 588FA(1)(b), read with s 588FA(3), that the ultimate effect doctrine is codified in s 588FA(1)(b). By s 588FA(1)(b), the single transaction, to constitute a preference, must result in the creditor receiving more in respect of a debt that the company owes the creditor than the creditor would receive in respect of that debt if the transaction were set aside and the creditor were to prove for the debt in a winding up scenario. Where there is a running account, if the ultimate effect of the course of dealings was not a reduction or discharge of past debt, but the debtor obtained goods or services to an equivalent or greater value than the payments made to the creditor to secure those goods or services, s 588FA(1)(b) is not engaged. If the aggregate amount of the payments in the single transaction exceeds the aggregate value of the goods or services provided, the payments effect a reduction in the balance of the account, so that the transaction must result in the creditor receiving more than the creditor would receive if it had not received the payment and the creditor were to prove for the debt in a winding up scenario. As a matter of construction, it does not strain the language of s 588FA(1)(b) to conclude that the "ultimate effect doctrine" is encapsulated in that statutory formulation. Furthermore, such a construction gives coherence to the codification of the running account principle in s 588FA(3) and is supported by the extrinsic materials. The explanatory memorandum to the Corporate Law Reform Bill 1992 (Cth), which introduced s 588FA, stated at [1042] that sub-s (2) (which became sub-s (3)): … provides that where a transaction is, for a commercial purpose, an integral part of a continuing business relationship such as a running account between a creditor and the company (including such a relationship to which other persons are parties), it should not be attacked as a preference, but rather the effect of all the transactions which formed the relationship between that creditor and the company should be taken into account as though they constituted a single transaction. This provision 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 & Anor v A E Ledger 1 ACSR 547. The effect of these principles is that it is implicit in the circumstances in which payments are made to reduce the outstanding balance in a running account between purchaser and supplier that there is a mutual assumption that the relationship of purchaser and supplier would continue as would the relationship of debtor and creditor. The net effect, therefore, is that such payments "in" are so integrally connected with payments "out" that the ultimate effect of the course of dealings should be considered to determine whether the payments are preferences. There is nothing to suggest that the new provisions intended to alter the law. 166 If I am wrong and the doctrine of ultimate effect has no application, the liquidators have established that the payments were preferential within the terms of s 588FA(1), as the evidence was to the effect that unsecured creditors of Gunns are unlikely to receive any payment in the winding up. Thus, the payments received by Edenborn during the relation back period resulted in it receiving more than it would receive in respect of its debts than if the payments were set aside and Edenborn was to prove in the winding up. 167 If the doctrine of ultimate effect has application, where the parties departed on the applicable principles related to whether the "ultimate effect doctrine" simply involves a comparison of the face value of the services provided as against the value of payments made (as the liquidators contended), or (as Edenborn contended) the liquidators must allege and prove that the transaction resulted in an overall reduction in the net assets available to other creditors. In this regard, Edenborn contended that only to take account of the face value of the services that a creditor provided to the debtor would be inconsistent with an enquiry into the actual effect of those services and the payments for them. Edenborn tendentiously argued that the liquidators' preference claim must fail because the liquidators have not alleged as part of their case that the ultimate effect of the "single" transaction was a reduction in the net assets available to creditors of Gunns. That argument rests on the incorrect premise that s 588FA(1) incorporates a requirement that the "single" transaction must result in a decrease in the net value of other assets available to creditors. No authority was cited by Edenborn in support of this proposition, though in Airservices Australia, on which Edenborn generally relied in support of its "ultimate effect doctrine" submissions, the plurality stated at 502 that: To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors. Edenborn's argument takes the principles cited in that passage out of context. 168 The authority cited by the plurality for that proposition was Re Discovery Books Pty Ltd (1973) 20 FLR 470 (Re Discovery Books) where, at 475, Fox J stated, in discussing a passage from Richardson's case: What I understand from the passage cited is that the effect of a payment is to be judged after bankruptcy, with due regard for events occurring after the payment was made, and that one must ultimately come back to considering whether by reason of the payment, or dealing, there is less money available for the general body of creditors than otherwise might have been expected to be the case. The issue in Re Discovery Books was whether rent and premium payments paid under a lease by the debtor company to the creditor were void as preferences. It was held "no" on the basis that the payments were for the current use of the premises and the debtor company received benefits which were of value "in a business sense" and inured for the benefit of other creditors and thus the payments did not constitute a preference. After citing Re Discovery Books, the plurality in Airservices Australia continued at 502-4: Thus, where the payment is a step in a wider transaction, "its actual business character must be seen and when it forms part of an entire transaction which if carried out to the intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference". If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off. Thus, a debtor does not prefer a creditor to the other creditors if he or she pays a debt, or part of it, to induce the creditor to supply goods of equal or greater value than the amount of the payment. In that situation, it is of no relevance that the debt that is discharged happens to be a stale one. If the present value of the goods supplied is equal to or greater than the payment, the other creditors are no worse off. They are in the same position that they would have been in if the parties had so structured the transaction that the debtor paid for the new supply of goods instead of discharging the old debt. Thus, a customer does not prefer his or her banker to other creditors where, pursuant to an antecedent arrangement between the banker and its customer, the customer deposits money to meet a liability already incurred in respect of specific cheques that the banker has met on the faith of the arrangement. A court, exercising jurisdiction under s 122 of the Bankruptcy Act, does not allow itself to be unsighted by the shadow of the legal form when it can see that the economic effect of the transaction does not give the creditor any preference, priority or advantage over the general body of creditors. … If at the end of a series of dealings, the creditor has supplied goods to a greater value than the payments made to it during that period, the general body of creditors are not disadvantaged by the transaction - they may even be better off. The supplying creditor, therefore, has received no preference. Consequently, a debtor does not prefer a creditor merely because it makes irregular payments under an express or tacit arrangement with the creditor that, while the debtor makes payments, the creditor will continue to supply goods. In such a situation, the court does not regard the individual payments as preferences even though they were unrelated to any specific delivery of goods or services and may ultimately have had the effect of reducing the amount of indebtedness of the debtor at the beginning of the six-month period. If the effect of the payments is to reduce the initial indebtedness, only the amount of the reduction will be regarded as a preferential payment. (footnotes omitted) In the immediately following paragraph the plurality then note that "[w]hen the initial indebtedness has been reduced" the creditor may nevertheless be entitled to the good faith defence. 169 It is abundantly plain that Airservices Australia is not authority that it is a requirement for an unfair preference that the transaction must result in a diminishing of the debtor's net assets. Nothing said in Airservices Australia nor in the passage from Re Discovery Books to which the plurality referred can be taken as authority for such a proposition. Nor is such a requirement expressly encapsulated in s 588FA(1)(b): Federal Commissioner of Taxation v Kassem [2012] FCAFC 124; 205 FCR 156 (Kassem) at 164 [59]. It follows that I reject Edenborn's tendentious argument that the liquidators' preference claim must fail because the liquidators have not alleged as part of their case that the ultimate effect of the "single" transaction was a reduction in the net assets available to creditors of Gunns. That argument proceeds on the premise that the liquidators must allege and prove that the ultimate effect of the transaction was a reduction in the net assets available to creditors of Gunns, which, for the reasons given, is an incorrect premise. 170 In case I am wrong and there is such a requirement, I should deal with Edenborn's claim that the payments were not unfair preferences because the purpose and ultimate effect of the payments, viewed in the context of the entire, ongoing business relationship between Edenborn and Gunns, was not to reduce the net value of the assets of Gunns that were available to meet the demands of other creditors but, to the contrary, the dealings had the opposite effect. Edenborn argued that the services provided by Edenborn to Gunns during the relation back period enabled Gunns to convert the timber assets Gunns managed for various managed investment schemes into marketable export product, namely, woodchips, and the value to Gunns of the services provided by Edenborn is to be measured by the "downstream" revenues and profits that Gunns made in that period as a direct consequence of Edenborn's services. It was alleged that Gunns in that period earned revenue of approximately $5,600,000 and, based on statements made by Gunns in an ASX announcement on or about 27 November 2009, net profit in the order of approximately $840,000. 171 Edenborn cited no authority for the proposition that such downstream benefits are capable of being considered by a Court in assessing the ultimate effect of the course of dealings constituting the single transaction for the purposes of s 588FA(1) and nothing in Airservices Australia or Re Discovery Books provides support for that contention. The contention misconceives the ultimate effect doctrine which, as explained above, looks to the net result of the series of payments and whether such payments effected a reduction in the balance of the running account in circumstances where there is a continuing business relationship between the debtor and creditor: Airservices Australia at 502-4. The authorities do not require a liquidator to go beyond the transaction in question and establish that the services provided by the defendant, in return for payment, did not have some downstream or indirect benefit to the company that went beyond the agreed value or face value of the services themselves, in order to prove that the transaction in issue was an unfair preference. To the contrary, in Beveridge v Whitton [2001] NSWCA 6 (Beveridge v Whitton), the New South Wales Court of Appeal (Heydon JA with whom Mason P and Powell JA agreed) rejected the notion that the "ultimate effect" of a transaction is to be determined, not by reference to the face value of services supplied, but by reference to the overall result of the impugned transaction taken with all other circumstances affecting the company. His Honour said at [26]-[27] and [29]: To my mind it is irrelevant that in fact, as matters turned out, the defendant's services "achieved nothing other than to the detriment of the other creditors of the company". Underlying this finding appears to be a conclusion that the creditors of the company at the time the defendant was engaged would have been better off if Mr Miller had never approached the defendant, or if the defendant had refused to supply any services to the company. The underlying reasoning appears to be that even if the result of the defendant not giving assistance would have been that the company entered liquidation in July 1994 rather than February 1995, the creditors would have had access to $52,000 more than was otherwise the case. The fact that the defendant's intervention was, in that sense, ultimately detrimental to the creditors is not determinative, though the trial judge appeared so to treat it. This is because the "doctrine of ultimate effect" does not depend on an evaluation of whether the overall result of the impugned transaction, taken with all other circumstances affecting the company, was to improve or worsen the company's position. Rather, the doctrine looks to the "ultimate effect" of the particular transaction. If a company gives up $1,000 in cash, but gains goods which are unquestionably worth $1,000 or more, the ultimate effect has not been to decrease the net value of the assets. … It is not the case that a failure to show any quantifiable addition to turnover or inventory means that the services supplied are without value, or that a payment made for them necessarily decreases the company's net assets. There is here no evidence of, and no endeavour by the liquidator to establish, any "dishonest attempt to overvalue particular … services". Nor is there any other reason to conclude that the services were not worth what was paid for them. Likewise, in McKern v Minister Administering the Mining Act 1978 (WA) [2010] VSCA 140; 28 VR 1 (McKern), the Victorian Court of Appeal rejected the submission that the "ultimate effect" of a transaction may be determined by reference not to the face value of the services provided but to the "economic effect" of the transaction (in that case preserving a valuable asset that might otherwise have been forfeited): at 11 [30] per Nettle JA; 42-3 [125] per Mandie JA (with whom Beach AJA agreed). Accordingly I reject Edenborn's contention that whether Edenborn received a preference falls to be determined by reference to whether the downstream economic benefits of the services that Edenborn provided exceeded the quantum of payments made. 172 As evidence was led by both parties on this issue, I should also address and make findings on that evidence in case I am wrong and it is necessary to inquire into the downstream profit or revenue generated as a product of Edenborn's services in order to determine the existence of a preference. Both parties adduced expert accounting evidence in support of their competing positions. The liquidators relied on expert evidence from Brian Morris and Edenborn relied on expert accounting evidence from Justin Audcent, both of whom are chartered accountants. On Mr Morris's analysis, the Western Australian region of Gunns' plantations subdivision incurred losses of $4.929 million in the period from April 2012 to September 2012, and the services provided by Edenborn to Gunns during the relation back period contributed to the decrease in net assets available to creditors. On Mr Audcent's analysis, the services that Edenborn provided to Gunns in the period from April 2012 to September 2012 resulted in a pre-tax profit of $652,378. Both sets of calculations proceeded on the assumption that Gunns had the right to charge a 15% administration fee in respect of the costs incurred and/or allocated to the production and sale of woodchips from managed investment scheme trees. Where the differences lay in the calculations related to three items: (a) whether the responsible entity fee payable to Gunns referrable to the woodchips harvested by Edenborn should be included in or excluded from Edenborn's contribution to profits; (b) whether lease and maintenance costs should be allocated to Edenborn and treated as an expense; and (c) whether corporate overhead costs should be allocated to Edenborn and treated as an expense. 173 Dealing first with the 15% administration fee, the evidence was that out of the sale proceeds of woodchips from managed investment schemes, Gunns took a 15% administration fee on top of the actual costs incurred in the production of the woodchips through the harvesting process. The experts both confirmed and agreed that the accounting records showed that the 15% margin on costs was charged by Gunns to the schemes and in the relation back period such fees totalled $1,062,614. The experts also agreed that $573,425 of the administration fee charges in that relation back period were referrable to the woodchips produced by Edenborn. The liquidators submitted that although the experts' calculations proceeded on the basis that Gunns had the right to charge the 15% administration fee, there was no evidence of Gunns' entitlement to charge such a fee and to retain such amount from the proceeds of sale of the woodchips payable to the growers in the managed investment schemes. Further, Mr Morris stated he was not able to identify any document in his review of Gunns' financial records that established Gunns' right to charge an administration fee to managed investment scheme investors. Contrary to the liquidators' submission, there is evidence in that the 15% fee was recorded in Gunns' books of account and by s 1305(1) of the Corporations Act, the financial records are prima face evidence of the right of Gunns to charge that fee. However, s 1305(1) does not require the Court to conclude from the entries in those accounts that it did have that right. In Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 at [395]-[398], Austin J observed: The defendants referred to the definition of the words "prima facie" in the Macquarie Dictionary (2nd revised edn), as meaning "at first appearance; at first view, before investigation". They compared that with the definition of "prima facie evidence" as "evidence sufficient to establish a fact, or to raise a presumption of fact, unless rebutted." They submitted that the former meaning is the one intended in s 1305, and that the words "prima facie" are not used in the sense that, absent some satisfactory contrary evidence on the part of the defendants, the matters said to be recorded in the books have been conclusively proved. In my view the true meaning of the words "prima facie" lies between the alternatives identified in the defendants' submission. The statement in s 1305(1) that the company's books are prima facie evidence of a matter stated or recorded in them does more than merely to convey that they are the starting point to proof or a "first view". All other things being equal, the fact that a matter is stated in a book kept by a company is sufficient to prove that matter in civil proceedings. That does not reverse the onus of proof in the proceedings in any general way, but it means that the tendering of the book is evidence of the matter recorded in it, and that matter will be thereby proven unless other evidence convinces the tribunal of fact to the contrary, on the balance of probabilities. Section 1305(1) does not make the company's books conclusive evidence of the matters they contain, in the sense of requiring the tribunal of fact to make a finding in terms of the content of the books in the absence of proof to the contrary by the opposing party. The books are prima facie evidence of the matters stated in them, but the weight of that evidence is to be measured in accordance with the common sense of the tribunal of fact (Phipson on Evidence, 16th edn (2005), at [7-17]). In my view it would be open to the tribunal of fact to find that the prima facie evidence constituted by the company's books is outweighed by other evidence (including evidence adduced by the proponent of the books, even if the opponent does not give evidence about them); or by some quality or characteristic of the books themselves, even if there is no other evidence. In particular, if a book has the appearance of a draft or (being electronic) has a file title indicating that it is a draft, that alone may be sufficient (all other things being equal) for the tribunal of fact to reject the book as evidence of the matter stated in it, notwithstanding that the book is prima facie evidence of that matter; a fortiori if, in addition to having the appearance of a draft, the book contains inconsistencies or ambiguities or the matter otherwise demands explanation. See also Manzi v Smith [1975] HCA 35; 132 CLR 671 at 673-4. In considering whether the books of account should be accepted as proof of Gunns' entitlement to charge the fee, it is pertinent that the liquidators did not identify any contract or other document evidencing that Gunns had the legal entitlement to charge the fee. The only evidence addressing the right to charge the fee was given by Mr Butt, Gunns' accountant, who prepared Gunns' monthly reports. In cross-examination he said that he included the 15% margin fee based on instructions from the company secretary, Wayne Chapman. Mr Chapman was not called as a witness and absent any documentary evidence showing that Gunns' had the legal entitlement to charge the fee I am not prepared to accept the company's accounting records as establishing that fact and accordingly, the administration fee should be excluded from the calculations. 174 The liquidators also submitted that if the administration fee was properly included in the calculations, the attribution to Edenborn's benefit of the whole of the administration fee was conceptually flawed as, on Mr Morris' calculations, the 15% margin directly relating to the Edenborn services was $362,000, being 15% of the $2,413,661 (excluding GST) invoiced by Edenborn for services provided during the relation back period. The balance of $211,000 related to a 15% charge on port expenses, road construction, regional overheads and national overheads associated with the generation of the woodchips, which, the liquidators submitted, were not referrable to Edenborn's services and should be excluded. I disagree. There does not seem to me to be any reason to doubt the correctness of the view expressed by both experts that it was proper to allocate to Edenborn a percentage of the 15% administration fee not just on the costs of Edenborn in providing the haulage and woodchipping services to Gunns but upon the other costs associated with the generation of the woodchips. As both experts explained, the other costs nonetheless were associated with the generation of the woodchips produced from the Edenborn services, and the basis upon which the amount of the 15% margin allocated to Edenborn with respect to those associated costs was calculated was by reference to the volume of woodchips that was produced from the Edenborn services relative to the services provided by all Gunns contractors during the relevant period. In other words, on the basis of the proportion of woodchips produced by Edenborn to total woodchip deliveries. In the circumstances, it seems to me that the inclusion of the 15% fee on associated costs based on the proportion of woodchips produced by Edenborn to total woodchip deliveries is properly justifiable. 175 The responsible entity fee was similarly apportioned to the Edenborn services but Mr Morris opined that the responsible entity fee should not have been included at all. During the relation back period, the total responsible entity fees received by Gunns (being a fixed percentage of net harvest proceeds) in respect of Western Australian scheme wood was $526,307, relating to both woodchip and stumpage sales. Of this amount, Mr Audcent allocated the amount of $239,358 to Edenborn. Mr Morris did not agree with that approach, arguing that Gunns' general ledger and management accounts had incorrectly recorded Gunns' share of net proceeds from the sale of woodchips produced from the harvesting of trees from managed investment schemes as income, when it should have been treated as the realisation of an existing asset, namely the future right to obtain income from the sale of the timber when eventually sold. This error was corrected in the Gunns' 2012 Preliminary Final Report, which reversed the recognition of the share of net harvest proceeds as income. Mr Morris reasoned that as the fee was not income for accounting purposes, it should be excluded from the assessment of whether Gunns derived a profit during the relation back period. Mr Audcent agreed that the responsible entity fee was an asset in accounting terms, namely the right to receive future income, but until the responsible entity fee was actually able to be charged on completion of the harvest and sale of the woodchips, the "asset" was not realisable and had no value for the benefit of creditors. Mr Audcent reasoned that it was the harvesting and sale of the woodchips that gave rise to the entitlement of Gunns to charge and receive the responsible entity fee, which gave rise to an asset that then had value to meet the demands of creditors. On this analysis, the responsible entity fee resulted in an increase in the value of Gunns' assets. Such analysis has superficial attraction but the realisation of the asset arising from the crystallisation of the right to the responsible entity fee did not, according to Mr Morris, increase the value of Gunns' net assets. Mr Morris reasoned that as the responsible entity fee received by Gunns was less than the costs associated with managing the plantations, which were taken as a de facto measure of the future fee that would be received, so that in the accounts, the share of harvest proceeds was written down to a value that reflected future harvest proceeds, with no impact on the net assets of Gunns. In the circumstances I do not accept that the responsible entity fee should have been taken into account. 176 The liquidators further argued that Mr Audcent's apportionment of the responsible entity fee to Edenborn should not be accepted in any event. The quantum of the responsible entity fee that Mr Audcent allocated to Edenborn was based on the proportion of the woodchip harvested by Edenborn to the total fee received. It was submitted that Mr Audcent's method of apportionment by proportion of woodchip was an inherently inaccurate measure, as it disregarded those services provided which were not directly referrable to the provision of the woodchips, such as the resourcing of Gunns to harvest and conduct sale activities and the services of third parties that facilitated the loading and dispatch of woodchips. The submission highlights the arbitrariness of the apportionment methodology adopted. It also highlights the artificiality of the downstream economic benefit analysis in determining whether the payments made by Gunns to Edenborn during the relation back period gave Edenborn an unfair preference. If it were necessary to decide, I would not conclude that the apportionment methodology used was so flawed as to be wholly unreliable in determining what portion of the responsible entity fee is apportionable to the services provided by Edenborn, but with the quid pro quo to apply in respect of lease and maintenance costs and corporate overheads. 177 As to the leasing and maintenance costs, Mr Morris argued that these costs were incorrectly capitalised in Gunns' accounts each month when they should have been reported as expenses, and had they been recognised as expenses, they should be taken into account in the calculation of the downstream benefits of the provision of Edenborn's services during the relation back period. Mr Audcent agreed with Mr Morris that the leasing and maintenance costs should have been recorded as expenses, but disagreed with Mr Morris that those expenses had any nexus with the Edenborn services and were not expenses relevant to or a factor of the services provided by Edenborn on the net value of the assets which were available to creditors. Mr Audcent expressed the view that the lease and maintenance costs were incurred, and would have been incurred, irrespective of the provision of services and the delivery of woodchips by Edenborn, so that none of the costs are related and attributable to the timber that was harvested by Edenborn. Mr Audcent expressed a similar view with respect to the corporate overheads. Mr Morris, on the other hand, argued that such costs should be apportioned to the Edenborn services, as they were costs connected with the continuing operation of the managed investment schemes and should be recognised in ascertaining the net profit to the Western Australian region of Gunns' plantations. I accept that submission. In my view the enquiry into the downstream economic effect of Edenborn's services must be undertaken by reference to all relevant expenses that allowed the generation of that revenue, which includes factoring into the calculation of the profit, if any, attributable to Edenborn's services during the relation back period the lease and maintenance costs and corporate overheads. 178 Accordingly, it follows that I prefer Mr Morris' calculations over those of Mr Audcent and if it were relevant to take into account the downstream economic benefits to Gunns from Edenborn's services during the relation back period, I would conclude that Edenborn nonetheless was given an unfair preference by the payments made, as Edenborn's services during the period from April 2012 to September 2012 did not increase the assets available to creditors.

PEAK INDEBTEDNESS ISSUE 179 Within the first continuing business relationship period (which ended on or after 17 May 2012), the liquidators have picked the peak indebtedness during the relation back period - being $2,031,616.22 on 15 May 2012 - as the beginning of the "single transaction", with the difference between $2,031,616.22 and the balance of the running account immediately prior to the break ($1,811,616.22) being $220,000. Within the second continuing business relationship period, the liquidators have identified the peak indebtedness during the relation back period as $651,503.17 on 15 September 2012, with the difference between $651,503.17 and the running account immediately prior to the appointment of the liquidators ($346,934.82) being $304,568.35. The liquidators have claimed that the amount of the unfair preference for which Edenborn is liable is $2,455,090.11, being the sum of $220,000 and $304,568.35, plus the sum of the payments of $1,930,521.76 made during the break. In issue is whether the peak indebtedness rule continues to apply following the introduction of Part 5.7B of the Corporations Act in 1993. 180 The peak indebtedness rule has its genesis in 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. 181 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 judge 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) 13 ACSR 321 (CSR Ltd) at 325 per Fitzgerald P and Mackenzie J, Pincus J agreeing; 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 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]. 182 In this case Edenborn has contended that this Court should not follow the authorities which have applied the rule in the application of the current provisions, arguing that there is no appellate authority of the Federal Court binding this Court on this issue, and the cases where the peak indebtedness rule has been applied in the context of s 588FA are "plainly wrong". It was argued that the rule was formulated before the current form of s 588FA(3) of the Corporations Act and is inconsistent with the plain wording of that provision and the running account and ultimate effect concepts, and that the application of the rule would be unjust because it would give the liquidators a windfall at Edenborn's expense. In support of this contention, Edenborn has relied on the New Zealand Court of Appeal decision in Timberworld Ltd v Levin [2015] 3 NZLR 365 (Timberworld). 183 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 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". 184 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). 185 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, 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". 186 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 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 at [30] per Heydon JA (with whom Mason P and Powell JA agreed); McKern at [25]-[27] per Nettle JA, [118] per Mandie JA (with whom Beach AJA agreed); Kassem at 163 [50]. Furthermore, as noted above at [181], 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. 187 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 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. 188 The submission by Edenborn that the application of the peak indebtedness rule would lead to Gunns receiving a "windfall" because it will be permitted to retain the benefit of services provided by Edenborn in circumstances where Edenborn may be ordered to repay the money paid for those services is misconceived. 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. There is no "windfall" to the company in liquidation by clawing back the unfair preference where the creditor received more than it would have received if the payment had not been made and the creditor was to prove with the other creditors in the winding up. 189 Accordingly, I find that the liquidators are entitled to nominate the point of Gunns' peak indebtedness to Edenborn during each of the continuing business relationships within the relation back period as the starting point from which the dealings between Gunns and Edenborn are to be treated as a single transaction for the purposes of establishing a preferential payment. In both cases, when the continuing business relationship came to an end - in the first case, sometime in June 2012 and in the second case, when the liquidators were appointed - the debt owed to Edenborn had been reduced.

GOOD FAITH DEFENCE 190 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. 191 There are four limbs that must be satisfied by Edenborn: 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 Edenborn's circumstances would have had no such grounds for suspecting insolvency: s 588FG(2)(b)(ii); and fourthly, that Edenborn provided valuable consideration under the transactions or changed its position in reliance on the transactions. 192 As s 588FA(3)(c) treats all transactions forming a part of a continuing business relationship as a single transaction, the four limbs of the defence must be established over the period of each continuing business relationship. In the present case that means from 26 March 2012, being the start of the relation back period, to June 2012, when the first continuing business relationship ended, and after 15 August 2012, when the liquidators conceded a second continuing business commenced, to 25 September 2012, when the liquidators were appointed. Each of the four payments made between June and August 2012 are treated as standalone transactions under s 588FA, as I have found that these payments were not made as part of a continuing business relationship. 193 The liquidators accepted that Edenborn has discharged its onus on the first and fourth limbs of the test. 194 To discharge the onus on the second and third limbs, Edenborn 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 Edenborn'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, Edenborn must prove that it had no reasonable grounds for suspecting insolvency based on the factors and circumstances of which it was aware at the time of the transactions. 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. 195 Edenborn argued that both limbs were satisfied on the evidence. In short, it was submitted that the facts and matters actually appreciated by Edenborn, or which would have been appreciated by the hypothetical average business person in Edenborn's circumstances, were not sufficient to induce in Edenborn's "mind" (which Edenborn claimed was the mind of Mr Howson, as the sole director of the company) a suspicion of actual insolvency because: (a) whilst Edenborn regularly had to chase Gunns for payment, this does not of itself indicate actual insolvency, as opposed to cash flow problems, for example, particularly given there was evidence that delayed payment practices were not uncommon in the industry; (b) whilst Edenborn became aware of various newspaper articles regarding Gunns, none of those articles concluded that Gunns was actually insolvent; (c) although some of the matters may justify a suspicion of potentially impending insolvency, viewed in context, such matters were not sufficient to induce a suspicion that Gunns was actually insolvent and not just might be, or might become, insolvent; (d) those other matters included, most importantly, that Edenborn knew, throughout the relation back period, that Gunns had the support of its bankers for the remainder of 2012. To Edenborn, and to a reasonable person in Edenborn's circumstances, this was powerful evidence of a source of ongoing money to pay creditors; and (e) the commercial reality was that, over a relatively long period of time, Gunns made regular payments to Edenborn and regularly ordered further work. There was an ongoing, and to all appearances sustainable, business relationship. Further, Gunns was continuing with cash flow positive forestry operations and asset sales. In the latter case, the effect of the sale by Gunns of its Portland woodchip facility confirmed to Edenborn, and would have confirmed to the "reasonable person" in the circumstances of Edenborn, that Gunns' asset sale process was working and had freed up money to pay creditors. 196 In considering this defence, I accept that Mr Howson was the controlling mind of Edenborn, as its sole director, but the evidence showed, and I find, that Mr Howson was kept at all times fully informed by Mr Fildes in relation to Edenborn's dealings with Gunns. 197 I am, with respect, unable to accept the submissions for Edenborn. In my opinion, the following matters in the lead up to the relation back period strongly tell against the establishment of the second and third limbs in the present case at any point in the relation back period: (a) in December 2011, no payments at all were received although a payment of $640,828.12 had been due on 15 December 2011; (b) From January 2012 onwards, Gunns paid invoices late and in rounded amounts not linked to specific invoices; (c) by January 2012, Edenborn understood that Gunns had severe cash flow restraints and knew that Gunns was not paying other contractors on time or the full amounts. Mr Howson at the time understood it was an "Australia-wide" problem. Based on emails exchanged between Edenborn and Gunns during that month, it would have been clear that the non-payment was not merely a matter of industry practice but due to a lack of funds; (d) Edenborn had ceased providing some of its services to Gunns in January 2012 and threatened to suspend all services to Gunns because of payment issues at the time; (e) although Mr Howson became aware in January 2012 that the banks had extended their facility to Gunns to the end of December 2012, Mr Howson also knew that the banks were requiring Gunns to sell down its assets in order to reduce its debt to the banks. He was also aware that the pulp mill development was an important part of Gunns' financial arrangements; (f) when Edenborn put a payment schedule to Gunns at the end of January 2012, Gunns agreed to pay only the first two instalments by the due dates, with its ability to process further payments to be advised; (g) Edenborn knew at the time that Gunns was reliant on the sale of its assets to make creditor payments; (h) the email from Mr Fildes to Mr Howson on 2 February 2012 is illuminating about the level of concern Mr Fildes had at that time regarding Gunns' capacity to pay its debts. That email is extracted at paragraph [59] above. This email shows that as early as 2 February 2012, Mr Fildes had concerns that Gunns would not survive. Mr Fildes told Mr Howson that Gunns' "spare money" was going into the earth works for the pulp mill development and "[i]f a joint party [did] not come along soon, [Gunns would] run out of money". Tellingly, Mr Fildes expressed that concern despite his awareness that the banks had extended the finance facility to 31 December 2012. Although the common evidence of Mr Fildes and Mr Howson was that Mr Howson did not agree with Mr Fildes at the time, Mr Howson was plainly on notice both of the fact of Mr Fildes' concern and his reasons for such concern; (i) although payments were received in February 2012, Gunns' debt to Edenborn was not fully discharged. On 2 March 2012, Mr Fildes sought clarification of when all outstanding invoices would be paid and requested immediate payment of $280,000 to keep the debt under $2 million. Gunns did not give an indication. Nor did it respond to Edenborn's request for an immediate payment of $280,000, and no such payment was received; (j) as at mid-March, Mr Fildes and, it may be inferred, Mr Howson were aware that the equity-raising through Richard Chandler Corporation had fallen through and that Gunns shares were in a trading halt; (k) Edenborn was also aware that Gunns was using the proceeds of its woodchip sales for purposes other than the payment of contractors and that Gunns was instead paying contractors from the sale of assets and its ability to make payments going forward depended upon asset sales; (l) as at mid-March 2012, the debt owed to Edenborn had escalated to over $2 million with no firm commitment to a payment schedule from Gunns. (m) by 26 March 2012, Edenborn was aware that Gunns was seeking to raise $400 million. Mr Howson was also aware of an article in which an analyst was quoted as likening Gunns to a "very speculative mining company" and who stated further "this is the last throw of the dice … [Gunns] get this away or they don't". 198 I do not accept the submission that the fact Edenborn regularly had to chase Gunns for payment did not of itself indicate actual insolvency, as opposed to cash flow problems. That submission disregards Edenborn's knowledge of, and level of concern regarding, Gunns' financial position. It also disregards Edenborn's knowledge that Gunns' capacity to pay Edenborn was dependant on asset realisations. I also do not accept the submission that to Edenborn, and to a reasonable person in Edenborn's circumstances, knowledge that Gunns had the support of its bankers for the remainder of 2012 "was powerful evidence of a source of ongoing money to pay creditors". To the contrary, notwithstanding the active and persistent attempts by Edenborn to have the amount outstanding to it reduced, the debt outstanding to Edenborn increased throughout February and March 2012 to just over $2 million, with the delays in payment a matter of great concern and a chronic issue for Edenborn, which fact Edenborn conveyed to Gunns on numerous occasions. Threats of stopping or reducing work for Gunns did not result in the regularisation of payments, nor even a firm commitment to a progressive payment plan to reduce the debt owed to Edenborn. The continuation and exacerbation of irregular payments not linked to any specific invoices was, as Mr Howson well knew, an issue for other contractors in the region, which were similarly having difficulty getting payment out of Gunns. There was nothing in the evidence to indicate that Edenborn had any reason to believe that its invoices would be paid in a more timely fashion following the extension of Gunns' syndicated debt facilities in January 2012, or that the extension was likely to alleviate Gunns' liquidity problems. Nothing changed. Despite the extension, Edenborn was aware that Gunns' ability to process payments was dependant on the realisation of assets. Gunns was also unable to provide timely or accurate information on when the amounts owing to Edenborn would be paid. Although on 23 March 2012 Gunns told Edenborn that it was its intention to be substantially back on payment terms by early April 2012, Edenborn also knew at the time that the proposed equity raising through Richard Chandler Corporation had fallen through and knew as at 26 March 2012 that Gunns was looking for an equity injection of $400 million, which, according to an analyst reported in a newspaper article read by Mr and Mrs Howson, "was the last throw of the dice" for Gunns. Those matters were sufficient to induce a suspicion that Gunns was actually insolvent at the beginning of the relation back period. I therefore do not accept that Edenborn had no reasonable grounds as at the end of March 2012 for suspecting that Gunns was insolvent or would become insolvent, nor do I accept that a reasonable person in Edenborn's circumstances would not have had reasonable grounds for such a suspicion. The late payments by Gunns could not be dismissed by Edenborn as a temporary liquidity problem. Significantly, Edenborn was on notice that Gunns required a significant injection of capital to stay afloat, without which there were serious questions as to whether it would survive. 199 The position did not improve. By April 2012, Edenborn was plainly aware that Gunns was in financial difficulty and that the problems with non-payment were happening to "everybody", added to which there was a gradual increase in the outstanding invoiced amounts due to Edenborn, notwithstanding a tranche of payments. On 11 April 2012, Mr Fildes wrote an email to Mr Howson stating that "[i]f we actually believe there will be no more Gunns soon then APB has to be the best option". That evidence is probative evidence of Mr Fildes' state of mind at the time, namely that he suspected that Gunns was then insolvent or would become insolvent. Even if Mr Howson did not actually have that same state of mind, there were at least reasonable grounds for a reasonable person in Edenborn's position to hold that view. In response to inquiries as to when payments would be received, Mr Butt told Mr Howson that Gunns' ability to process further payments "will be advised in line with anticipated developments aligned to the company's capital raising program". Despite the representation to Edenborn on 23 March 2012 that it was Gunns' intention to be substantially back on payment terms by early April 2012, this did not happen. Payments did not return to terms but continued to be intermittent and Gunns continued to be evasive about payment. That situation continued through May 2012 and the following months. Moreover, by July 2012, Edenborn was aware that Gunns had been forced to revalue its forestry assets because of the "ailing woodchip market" and there were fears that Gunns shares would not trade again. By that time, Edenborn had threatened to issue a letter of demand, was regularly pressing Gunns for a substantial reduction payment of the outstanding invoices and had become increasingly concerned about Edenborn's exposure. Edenborn did eventually get the debt to it paid in full in mid-August 2012, but that only followed Edenborn's refusal to resume work for Gunns after the Elders lock out without first being paid in full. Edenborn was also aware that the August payments were made out of the Portland sale. By August 2012, Edenborn was also aware of at least one newspaper article advising that Gunns had made an ASX announcement that its liabilities exceeded its assets and that it was likely that Gunns would be able to pay its debts as and when they fell due. I therefore reject the submission that "to all appearances" Edenborn and Gunns had a "sustainable, business relationship". I also reject the submission which is not supported by the evidence and facts that the effect of the sale by Gunns of its Portland woodchip facility confirmed to Edenborn, and would have confirmed to the "reasonable person" in the circumstances of Edenborn that Gunns' asset sale process was working and had freed up money to pay creditors. That submission is contradicted by the 28 August 2012 email from Mr Fildes to Mr Crook at Gunns, in which Mr Fildes wrote that Edenborn needed to regain some confidence in Gunns and there was "still a lot of negative press [about Gunns] out there that is still making us feel very nervous". By 1 September 2012, Edenborn knew from news articles that advisory firm KordaMentha had been engaged in July 2012 to examine Gunns' solvency. 200 I reject as implausible and unreliable Mr Howson's affidavit evidence that in January 2012 he "regarded Gunns as a large long term customer with a fundamentally good business" and he "was not, and never became concerned" about Gunns' liquidity until after Gunns was put into administration. I also reject as implausible Mr Fildes' evidence in cross-examination that he never believed that Gunns was insolvent. It must have been plain to Mr Howson and Mr Fildes by the end of March 2012 that Gunns' inability to pay its debts on time was not merely a short term cash flow problem. I find on the evidence that Edenborn, as at, and from, March 2012 at the latest, had reason to suspect that Gunns was insolvent. I further find that a reasonable person, in Edenborn's circumstances, would had have grounds for suspecting insolvency as at, and from, March 2012 at the latest. Accordingly, the good faith defence is not made out in respect of any of the impugned transactions. 201 The further submission was made by the liquidators that the onus of proof was not discharged by reason of Edenborn's failure to call Fran Leary as a witness. Ms Leary was Edenborn's Chief Financial Officer and a chartered accountant. Ms Leary's responsibilities included the company's cash flow management, entering and recording invoices rendered and payments received, and preparation of aged creditor and debtor reports. Mr Fildes' evidence was that it was Ms Leary who would inform him of the amounts outstanding from Gunns and provide him with an aged debtor listing. He admitted he would discuss with Ms Leary from time to time the aged debtors of Edenborn, how many days late in making payments those debtors were, any issues which he perceived with respect to principals making payment, and issues concerning the ability of principals to make payment on time. He admitted that this was because these matters fell within the scope of Ms Leary's role. Mr Fildes also admitted discussing with Ms Leary media reporting of Gunns' financial position from time to time throughout 2012. Mr Fildes also admitted to becoming aware of Edenborn's cash flow position from time to time as a result of his discussions with Ms Leary. Specifically, Mr Fildes said that he had discussions with Ms Leary regarding Gunns' running account with Edenborn. Ms Leary was also frequently copied into communication to and from Gunns regarding issues with payment. Mr Howson admitted that Ms Leary had an interest in receiving information regarding the financial status of Edenborn's creditors, and that letters from Gunns which detailed payment plans, including letters which noted that payment would be delayed and dependent on asset sales, were actioned by Ms Leary rather than Mr Howson. It was submitted for the liquidators that Ms Leary should therefore reasonably be thought to have a relevant opinion to prove Edenborn did not suspect that Gunns was insolvent and the failure to call her as a witness was a sufficient basis in itself for finding that Edenborn's onus of proof under s 588FG(2) was not discharged. It was submitted for Edenborn that it was unnecessary to call Ms Leary as there was no suggestion that Ms Leary had any separate communication with Gunns. 202 Although it is not necessary to decide, I would not find that Edenborn's onus of proof under s 588FG(2) was not discharged simply on the basis that Ms Leary was not called. First, there was an absence of evidence that either of Mr Howson or Mr Fildes relied on or had regard to anything told to them by Ms Leary as the foundation for their asserted lack of concern about Gunns' financial position. Secondly, as submitted by Edenborn, there was an absence of evidence to indicate that Ms Leary had any separate communication with Gunns. Thirdly, nothing in the documentary evidence indicated that Ms Leary expressed any view, one way or the other, to Mr Howson or Mr Fildes concerning Gunns' financial position.

DISCRETION ISSUE 203 Edenborn submitted that the powers given to the Court by s 588FF(1) are discretionary and by s 588FF(1)(a), the Court must consider whether to order Edenborn to repay some, or all, of the payments constituting the unfair preference. It was submitted that the Court, in the exercise of its discretion, should not order Edenborn to repay the preferential payments by reason that because of the payments made by Gunns, Edenborn provided ongoing services to Gunns and committed substantial resources for Gunns' benefit. It was submitted that Edenborn should not be in a worse position for having continued to provide services than had it terminated its services and in circumstances where: (a) all of the sums claimed by the liquidators related to services provided by Edenborn to Gunns during the relation back period, and this was not a case of payments being received in reduction of liabilities that existed at the start of the relation back period or where the payments in issue were not for fresh consideration; (b) because of the unusual nature of Gunns' contractual rights, payments made by Gunns to Edenborn not only resulted in Gunns earning an income (and profit) that it otherwise would not have earned, but gave rise to an entitlement to recover those payments from the scheme owners; (c) both experts were agreed that the relevant profit that Gunns made from Edenborn's services was $652,378, so that as a result of making the payments which are now challenged, Gunns was $652,378 better off. It was submitted that an order for payment would provide the liquidators with a windfall gain. Reference was made to Re Cyberduck Software Pty Ltd (in liq) & Anor [2018] VSC 122 (Cyberduck) at [82]-[89], where the discretion was exercised to refuse to make an order for payment of a preference because it would, in effect, be a windfall to the liquidator. 204 The liquidators argued that s 588FF(1) confers jurisdiction and power on the Court and not a discretion, but if it does confer a discretion, the discretion must be exercised in light of the purpose of s 588FF, being "to ensure that a creditor did not receive a benefit over and above that received by other creditors": Cashflow Finance at [570]. The liquidators argued that there would be no windfall gain to the liquidators if Edenborn was required to repay the moneys in question but, to the contrary, permitting Edenborn to retain what would otherwise be preferential payments by reference to downstream profits of Gunns allegedly generated by Edenborn instead of the contract value of the services provided, would advantage Edenborn over all other unsecured creditors, contrary to the purpose and object of s 588FA. It was submitted that there is nothing in Edenborn's circumstances in the present case that appears to differ from any unsecured trade creditor supplying commercial goods or services on credit on an arm's length basis as part of its business functions. 205 In Great Investments Ltd v Warner [2016] FCAFC 85; 243 FCR 516 the Full Court of the Federal Court at 553-4 [141] noted that different views had been expressed as to whether s 588FF(1) confers a discretion or, rather, a jurisdiction. The Court stated: The latter view was taken by Einstein J in Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corporation [1999] NSWSC 671 at [569] and Nicholas J in Cussen v Sultan (2009) 74 ACSR 496 at [24]-[30]. However, the view that s 588FF(1) confers a discretion was assumed or held in BP Australia Ltd v Brown (2003) 58 NSWLR 322 at [157], [171] (Spigelman CJ, Mason P and Handley JA agreeing); Ansell Ltd v Davies (2008) 219 FLR 329 at [52] (Doyle CJ, Anderson and David JJ agreeing); and New Cap Reinsurance Corporation Ltd v AE Grant (2009) 3 BFRA 766; 257 ALR 740 at [59] (Barrett J). See also Buzzle Operations Pty ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47 at [244], [258]-[261] (Young JA); Assaf F, Shields B and Kincaid H, Voidable Transactions in Company Insolvency (LexisNexis Butterworths, 2015) at [8.43]. In that case, the Court proceeded on the assumption that s 588FF(1) does provide a discretion, but held that appellants had not demonstrated why an order under s 588FF(1) should not be made. 206 I note that in neither of the cases mentioned by the Full Court where it has been held that there is no discretion did the Court consider s 33(2A) of the Acts Interpretation Act 1901 (Cth) (Acts Interpretation Act). That sub-section provides: Where an Act assented to after the commencement of this subsection provides that a person, court or body may do a particular act or thing, and the word may is used, the act or thing may be done at the discretion of the person, court or body. 207 Section 33(2A) of the Acts Interpretation Act was introduced by the Statute Law (Miscellaneous Provisions) Act 1987 (Cth), which commenced on 18 December 1987. Therefore, subject to s 2(2) of the Acts Interpretation Act, the provision applies to s 588FF of the Corporations Act, as the Corporations Act received royal assent after the commencement of s 33(2A). Section 2(2) of the Acts Interpretation Act prescribes that the application of a provision of the Acts Interpretation Act to a provision of an act is "subject to a contrary intention". The liquidators submitted that a contrary intention is evinced in Part 5.7B. I doubt the correctness of that submission and, in my view, the power of the Court under s 588FF in relation to the orders it can make where a creditor receives an unfair preference is a discretionary power. However, the discretion whether to make one or more of the orders prescribed in s 588FF(1) must be exercised judicially, in light of the purpose and object of the preference provisions in Part 5.7B of the Corporations Act. In the present case, none of the matters submitted by Edenborn warrant the exercise of discretion that no repayment of the preference transactions should be ordered. 208 First, the cases which have considered the exercise of discretion under s 588FF are distinguishable. In Cyberduck, upon which Edenborn placed reliance, the discretion was exercised in circumstances where the Australian Tax Office had applied an input tax credit in reduction of a company's tax debt. That company then went into liquidation and the liquidators argued that the application of that credit was a preference. It was later discovered that the company had no entitlement to the benefit of the input tax credit in question. Associate Justice Efthim found that the application of the credit to reduce the tax debt was a preference, but declined to make an order under s 588FF as the company "was never entitled to claim the credit" and would receive a "windfall" if it was to receive money to which it had not had an entitlement in the first place: at [89]. In BP Australia Ltd v Brown [2003] NSWCA 216; 58 NSWLR 322, the question of whether a discretion did in fact exist did not fall for determination but, in the course of considering whether an extension of time in which to bring a preference action should be granted, the New South Wales Court of Appeal considered at 352 [157] that delay in applying for an extension of time "would also play a part in the exercise of the discretion to make orders under s 588FF(1)". In D Pty Ltd (in liq) v Calas (Trustee), in the matter of D Pty Ltd (in liq) [2016] FCA 1409, Moshinsky J at [81] considered that s 588FF(1) conferred a discretion, at least where, as in that case, the relief sought was declarations under s 588FF(1)(h) and (j). 209 Secondly, the asserted "windfall" in this case is the repayment of an amount determined by operation of s 588FA to be a preference in circumstances where: (a) the purpose of unfair preference law is to ensure that unsecured creditors are treated equally in the period leading to liquidation; and (b) the ultimate effect doctrine and the operation of s 588FA(3) give Edenborn the benefit of the contract value of any services provided by it in return for the payments in respect of the periods where there was a continuing business relationship between the parties. 210 I accept the liquidator's submission that the law's protection against "unfairness" of this kind is dealt with by the codification of the running account principle in s 588FA(3) and the doctrine of ultimate effect. There is nothing in this case that takes it out of the ordinary.

CONCLUSION 211 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 two hundred and eleven (211) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.