131 Earlier in the 14 March 2023 Report, Project Sea Dragon's total liability to lenders within the Seafarms Group was reported to be approximately $64.85 million.
132 The overall indebtedness of Project Sea Dragon grew in essentially two main ways. First, as the company commenced and then progressed the project, it entered into several contracts under which it incurred substantial liabilities. They included the Framework Agreement with Canstruct, pursuant to which the three Work Orders were issued in relation to approximately $57.5 million (excluding GST) worth of work. They also included subleases for the Legune Station site. Secondly, the process by which it acquired funds to support its operations meant that it continued to incur liabilities to Seafarms Group Limited and other companies in the Seafarms Group.
133 It was also not in dispute in these proceedings that Project Sea Dragon had not entered into an agreement with any entity for the provision of funding to allow it to meet the liabilities that it stood to incur during the development phase of the project. It also did not make arrangements with any entity pursuant to which it obtained a specific promise, commitment or assurance that funding would be provided. Although funds were advanced by Seafarms Group Limited from time to time when requested by Project Sea Dragon, in accordance with the process described earlier in these reasons and as explained in Mr Dyer's affidavit evidence, the amounts in question simply became debts of the company. There was no agreement as to when those debts were to be repaid to Seafarms Group Limited, or any agreement as to the terms on which the funds were provided. There was also no agreement that funding would continue at any time in the future.
134 Project Sea Dragon had no control over whether Seafarms Group Limited would continue to provide funds upon its request. Although, for the reasons addressed below, one might assume that the latter company would ordinarily be inclined to provide those funds, that ultimately depended in each instance upon whether or not it took a favourable view of such a course. It was at liberty to cease funding whenever it wished to do so. Indeed, it did cease funding quite abruptly on 13 February 2023, when it determined to terminate the flow of funds to Project Sea Dragon without notice. In doing so, it did not breach any agreement, commitment or understanding in place between the two companies.
135 Importantly, at all relevant times, there was nothing preventing Seafarms Group Limited from calling for the immediate repayment of the amounts owed to it by Project Sea Dragon.
136 In these circumstances, Canstruct submitted that Project Sea Dragon had remained insolvent since at least the 2020 financial year because, whatever state of affairs might have existed between it and Seafarms Group Limited, it could not be said that the company was able to pay its debts as and when they fell due. This was disputed by Project Sea Dragon and Seafarms Group Limited, which maintained that the former company was solvent at all times until the latter decided not to provide further funds.
137 In resolving these competing positions, it must be acknowledged at the outset that Project Sea Dragon was undeniably "balance sheet insolvent" from the 2020 financial year onwards, in that, having regard to its assets and liabilities, it was unable to pay all of its debts as and when they fell due. That is enough to justify a finding of insolvency at law unless it can be established that the company had sufficient access to resources not reflected in its balance sheet - specifically, in this case, through the provision of funding by Seafarms Group Limited.
138 The starting point is the definition of solvency and insolvency that appears in s 95A of the Corporations Act:
95A Meaning of solvent and insolvent
(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.
(2) A person who is not solvent is insolvent.
139 As Palmer J observed in Lewis v Doran (2004) 208 ALR 385 (Lewis v Doran), the omission of the words "from its own monies" from this definition is significant. His Honour explained the following at 409 [111] - [113]:
In my opinion, the omission of the words "from its own monies" from the definition of insolvency in s 95A now leaves the court free to determine the question of retrospective insolvency free of a qualification which might well be appropriate to determine only prospective insolvency. The omission leaves the court free to determine insolvency, whether retrospective or prospective, as a question of commercial reality having regard to the particular facts of the case.
So, where retrospective insolvency is in issue, the court can take into account that as at and after the alleged date of insolvency the company actually paid all its debts as they fell due because a third party made funds available to it without security. The court can look at the arrangements which were actually made rather than artificially excluding them from consideration because the arrangements did not fall within the definition of payments from the debtor's "own monies". To look at what actually happened avoids the possibility that the court is forced to conclude that, as a matter of law, a company could not pay all its relevant debts when, as a matter of fact, the company clearly did pay those debts.
On the other hand, where prospective insolvency is in issue the court, as a general rule, would be sceptical of an assertion that a third party is willing to advance funds unsecured on such terms as would not, in any event, bring about insolvency. Such willingness on the part of a third party would have to be cogently demonstrated, if not as a matter of legal obligation, then as a matter of commercial reality.
140 These observations were quoted by Barrett J in Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148, 175 - 176 [97] - [98] (ASIC v Edwards), where his Honour noted that the reference to the debtor's "own moneys" had appeared in Barwick CJ's formulation of insolvency in Sandell v Porter (1966) 115 CLR 666, 670. His Honour went on (at 176 [99]) to accept that "funds which, on a realistic commercial assessment, are capable of being raised from outside sources are relevant to the question whether a company is solvent". However, he then stated, in the same paragraph, that:
[T]he availability of such funds in the form of a loan will not enhance solvency (or have the potential to avoid a finding of insolvency) unless the loan terms are such as to exclude the loan liability from consideration in its own right as part of the debts due or near due. In other words, availability of loan funds for a very short term or payable on demand, as a source from which debts overdue may be paid, does not enhance solvency: it merely substitutes one form of immediate (or near immediate) obligation for another. There is also the point (emphasised by the Court of Appeal in Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711; [2003] NSWCA 163) that the capacity to raise funds from external sources must be judged in a practical and businesslike way by reference to the commercial realities of the case, not by way of some theoretical textbook exercise. Possibilities are not enough. Genuine and realistic availability, as a matter of commercial reality, must be seen.
141 His Honour's opinion that funds borrowed only "for a very short term or payable on demand" did not enhance solvency was upheld on appeal: Edwards v Australian Securities and Investments Commission (2009) 264 ALR 723, 753 - 754 [163] (Edwards v ASIC). See also Treloar Constructions Pty Ltd v McMillan (2017) 120 ACSR 130, 146 [79], 154 [125] (Treloar Constructions).
142 With respect, his Honour's observations are entirely correct and ought to be followed - as they have been already in numerous cases: see, for example, Hall v Ficema Pty Ltd (2022) 409 ALR 558, 626 - 627 [345]; Barboutis v The Kart Centre Pty Ltd (No 2) [2020] WASCA 41 [144] (Barboutis); Westgem Investments Pty Ltd v Commonwealth Bank of Australia Ltd (No 6) [2020] WASC 302 [1056]. It is also relevant to note what was said, to similar effect, by Giles JA (with whom Hodgson and McColl JJA agreed) in Lewis (as liq of Doran Constructions Pty Ltd (in liq)) v Doran (2005) 219 ALR 555, 579 [109]:
Particularly when the limiting words [referring to the debtor's "own moneys"] are no longer part of the test, there is no compelling reason to exclude from consideration funds which can be gained from borrowings secured on assets of third parties, or even unsecured borrowings. If the company can borrow without security, it will have funds to pay its debts as they fall due and will be solvent, provided of course that the borrowing is on deferred payment terms or otherwise such that the lender itself is not a creditor whose debt can not be repaid as and when it becomes due and payable. It comes down to a question of fact, in which the key concept is ability to pay the company's debts as and when they become due and payable.
(Emphasis in original).
143 The second point made by Barrett J in ASIC v Edwards was that, where the alleged insolvency is denied by a claimed ability to raise funds from external sources, it is necessary to demonstrate that those funds are genuinely and realistically available as a matter of commercial reality. As was noted by the New South Wales Court of Appeal in Treloar Constructions at 146 - 147 [80], this "test" had been stated earlier by Palmer J in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, 224 - 225 [54].
144 The cases following ASIC v Edwards, and other authorities to similar effect, have emphasised that, whilst it is appropriate to take into account the company's ability to raise funds in the form of unsecured loans as part of assessing its ability to pay its debts as and when they become due, the availability of such loans needs to be appropriately considered. In this context, there is a real difference between the ability to borrow from an arm's-length commercial credit provider and the mere ability to borrow from related entities. That is particularly so when the question is concerned with prospective solvency: Lewis v Doran at 409 [113].
145 When assessing solvency, there is nothing inherently objectionable about taking into account loans from related parties, such as directors or parent companies, where the evidence discloses that, as a matter of commercial reality, the related parties are likely to continue to provide finance. In Williams (as liquidator of Scholz Motor Group P/L (in liq)) v Scholz [2008] QCA 94 (Williams v Scholz), Muir JA noted (at [110]) that "[t]he most important consideration is the degree of commitment to the continuation of financial support". In that respect, in Chan v First Strategic Development Corporation Limited (in liq) [2015] QCA 28 (Chan), Morrison JA (with whom Gotterson JA and Boddice J agreed) considered the degree of certainty that funds would be available that is required in order to establish solvency. His Honour observed (at [43]) that, where the provision of funds cannot be compelled by legal arrangement (such as in the case of an enforceable finance facility, for instance), there must be a degree of assuredness that the financial support will be forthcoming and at such a level that one could say that the company was able to pay its debts as and when they fell due, rather than being possibly able to do so. Although the financial support does not have to be absolutely certain in order to establish solvency, it is not necessary for it to be absolutely uncertain in order for it to be insufficient to do so. His Honour went on to hold at [44]:
[I]n my view there is no benefit in attempting to achieve some precise formula as to likelihood, by reference to which the financial support qualifies or does not. To say that the likelihood of it being provided is "probable" or "improbable" adds no more to what has been said in the authorities to which I have referred. Given that the resolution of this issue will almost always depend upon an assessment of facts, in my view it is better to proceed on the basis that, where the financial support is being provided by a director or related entity, and in circumstances where there is no formalised agreement or understanding, what is required is cogent evidence which enables the court to conclude that there is such a degree of commitment on the part of the provider of the financial support to continue it, such that it can be said that at any point of time it was likely to be continued, with the result that, at any of those times, the company was able to pay its debts as and when they fell due.
(Footnote omitted).
146 As the inquiry is concerned with commercial realities, the funds that are said to be sufficient to maintain solvency must be genuinely and realistically available, when judged in a practical and businesslike way. As was said by the Court of Appeal (comprising Buss P, Mitchell and Vaughan JJA) in Barboutis at [141], "[p]ossibilities are not enough; there must be genuine and realistic availability as a matter of commercial reality". Their Honours went on to identify instances of the availability of finance and their relevance to a company's solvency at [143] - [144]:
Offers of credit by the company's shareholders or directors may have to be rejected as an available resource unless the court can be satisfied that the credit will continue. Such offers may prompt a question as to why the shareholders do not inject the money as share capital.
Nor will access to unsecured borrowings be sufficient unless the borrowing is on deferred repayment terms. It cannot be enough if the potential to borrow simply provides for payment of one debt by another which itself cannot be repaid. To substitute one immediate obligation for another does not enhance solvency.
(Footnotes omitted).
147 In the present case, there was limited evidence from the directors of Seafarms Group Limited that the company was committed to providing the financial support for Project Sea Dragon into the future, and that it would not demand immediate repayment of a debt. Clearly, no director was able to give such evidence in the circumstances that prevailed as at the time of the hearing, when Seafarms Group Limited had ceased providing financial support and had submitted a proof of debt to the administrators. Although, as set out above, Mr Dyer deposed that a demand for payment would "never be made" by Seafarms Group Limited, and that it was "commercially illogical and against commercial reality" for the company to call up its loans to Project Sea Dragon while the project was ongoing, the facts as they stand diminish the force of this evidence quite substantially. On the first and third defendants' own view of the events that transpired, Seafarms Group Limited did cause Project Sea Dragon to become insolvent.
148 It is useful, at this juncture, to articulate the key difficulty that Project Sea Dragon and Seafarms Group Limited face in making out their case as to the solvency of the former company. On their characterisation of the facts, funding from Seafarms Group Limited was assured and Project Sea Dragon was therefore solvent until, upon the emergence of a particular debt that the Seafarms Group found intolerable, that was suddenly no longer the case. The natural question to be asked is whether the funding was ever truly assured, and whether Project Sea Dragon was ever truly solvent, in circumstances where the state of affairs between it and its parent company could (and did) change instantly at the parent's whim. Though it is true that, in the past, Project Sea Dragon had been able to meet its debts consistently with funds from Seafarms Group Limited, which might have seemed to have little incentive to call upon the growing debt that was owed to it, one is left to wonder whether that situation existed only by coincidence and as a matter of convenience. If, hypothetically, an intolerable debt had been incurred much earlier, and Seafarms Group Limited had proceeded to withdraw funding in the same way that it did in response to the adjudication debt, then it would have no scope to say that it had historically provided funding on a number of occasions to meet the liabilities of its subsidiaries. Would it still try to maintain that Project Sea Dragon was solvent if it had only provided funding to it on a few occasions before it resolved to cease doing so? What if it had only provided funding once? Asking whether a history of funding is sufficiently lengthy as to demonstrate solvency in circumstances where there only exists a "history" to speak of because, by chance, the problem that ultimately arose did not arise sooner, seems rather unsatisfying.
149 Project Sea Dragon and Seafarms Group Limited placed reliance for their contentions as to the assuredness of funding and solvency on International Cat Manufacturing Pty Ltd (in liq) v Rodrick (2013) 97 ACSR 200. That decision concerned a commercial boat manufacturing company that had encountered financial difficulties, and which was thereafter supported by third parties which were closely involved in its business operations. A charge to secure repayment of the mounting indebtedness was granted, and the issue became whether the company was solvent when the charge was granted. The answer turned on the level of assuredness that the third parties would continue to provide finance at the relevant time. The Court found that there was a sufficient degree of commitment to continue providing finance, as there was, among other things, an acceptable agreement that the funding would continue into the future and so some definition as to the duration of the finance. The arrangements between the parties also provided some definition as to the extent of the finance which would be provided; namely which creditors would be paid.
150 It was also concluded in that case that the debt which was generated by the third parties' provision of finance was not one where repayment was likely to be demanded ahead of the agreed time, even if it was legally possible. The person in control of the provision of funding made it clear that he would not have made an immediate demand for repayment and that was not surprising as he regarded himself as a part owner of the business and desired to participate in its future growth. In those circumstances, the Court accepted (at 224 [106]) that the commercial realities supported the conclusion that the most important consideration, being that of the degree of commitment to the continuation of financial support, was satisfied. However, in that case there were many factors which bound the third party providers of finance to the company, and which raised the assuredness of further finance beyond a mere discretionary payment. None of those, nor anything similar, existed in the present matter.
151 The analysis in that case demonstrates that to reach the required level of assuredness, there must be more than a mere discretion in the external funder to advance funds. In that context, where objective evidence of a degree of assuredness of the future provision of finance is required, the proof is more likely to be derived when the alleged third party funder is compelled to provide the financial support such as where it has provided a guarantee in respect of the company's obligations: Ross (Liquidator) in the matter of Print Mail Logistics (International) Pty Ltd (In Liq) v Elias [2021] FCAFC 203 [47]; Chan [43] - [44].
152 It is useful to pause to consider why it is necessary, in the assessment of solvency, for a requirement that the funds sought to be relied upon as negating insolvency are genuinely and realistically available as a matter of commercial reality. The answer, so it seems, lies in the definition of solvency and the essentiality of the debtor, itself, being able to pay its debts when they fall due. Its ability to do so necessarily rests upon the coexistence of an indebtedness and the real availability of funds with which to discharge it, such that it is able to place itself the position of no longer having that indebtedness: Williams v Scholz. The ability does not exist in the absence of funds actually being available, though necessarily that concept is not rigid and there are degrees of certainty as to the "availability" of funds. For that reason, the line is drawn at a point where it can be objectively ascertained that a sufficient degree of assuredness exists that funds will be forthcoming to discharge the indebtedness. Conversely, the debtor has no ability to discharge their indebtedness where all they have is a hope or mere expectation that a third party will favourably exercise their unfettered discretion to make, or continue to make, funds available.
153 Seafarms Group Limited and Project Sea Dragon submitted that the fact that the company is a "special purpose vehicle" used for development purposes is a relevant consideration to be taken into account in determining solvency. Reference was made to the decision of the Queensland Court of Appeal in Mulherin v Bank of Western Australia Ltd; McCann v Bank of Western Australia Ltd [2006] QCA 175, which concerned, in part, the solvency of a corporate vehicle through which construction work was being undertaken. Muir J (with whom McMurdo P agreed, and Jerrard JA substantially agreed) noted (at [115]) the recent recognition that in assessing solvency it is permissible to take into account the support of a company by directors or shareholders, through unsecured loans or otherwise, and that the possibility of such support may be a significant factor in assessing the solvency of a "development project vehicle", such as the one in question in that case. That factor was particularly relevant to the case before that Court because the development company's only ability to pay its debts on or before the conclusion of the project was dependent upon the sale of the developed real estate at a profit, and therefore dependent upon the continued support of financiers, directors and shareholders. Though it must be recognised that, in that case, the company's debts were relatively modest and it was shown that the directors had a real interest in continuing support for the company by reason of the guarantee which they had granted.
154 However, the question of the solvency of special purpose companies is not to be assessed differently because they are often used for speculative undertakings and have little in the way of assets of their own. Whilst the support of directors and shareholders without security may be more common with such companies, neither the applicable test for insolvency nor its application are different from that which is ordinarily applied.
155 At the hearing, Mr Martin KC, counsel for Project Sea Dragon and Seafarms Group Limited, submitted that the concept of a "special purpose vehicle" was not a foreign one, that the use of such companies was "how business is conducted", and that "most developments in this country" are conducted through such mediums. It was not entirely clear what point was there being made. If it amounted to a suggestion that it is an accepted practice that developments are conducted through effectively insolvent companies, it must be rejected. There is no evidence of that, and it is contrary to the intention of the Corporations Act that insolvent companies should not be engaged in business.
156 Reference was also made to the decision of Jackson J in Re Cube Footwear Pty Ltd [2013] 2 Qd R 501, which involved a contested winding up application where, in the light of the application, the two relevant debtors of the company entered into agreements to defer their debts for a period of time such that, at the date of the hearing of the winding up application, their debts were not due and payable. In response to this, the applicant amended its application to contend that the company was not solvent within the meaning of s 95A of the Corporations Act, despite the fact that, at that point in time, the company was trading profitably. It was observed that, in circumstances where the company's total liabilities exceeded its total assets, the debtor company may not be able to pay the two debts when they fell due in the future. However, his Honour regarded that as being irrelevant to the question of whether the company was then solvent. He held (at 511 [60] - [62]) that, as the company's two major creditors, who were related parties, had supported it over several years and would continue to support it by the provision of further financial support into the future, it remained solvent.
157 Whilst that case is illustrative of the Court taking into account the commercial realities of a company's financial circumstances, it emphasises that any such conclusion is largely fact dependent. Importantly, the two major creditors had not ceased their support for the debtor company and had provided financial comfort by deferring payment of their debts for an extended and certain period. The position in the present case is entirely different. When Project Sea Dragon incurred a liability with which Seafarms Group Limited was displeased, it determined to withhold funds and it made no commitment to continue funding in relation to any other debts or for any period of time. In addition, Project Sea Dragon's existing liability to Seafarms Group Limited was repayable on demand. Although Seafarms Group Limited's "loan" was not called up, neither had it been advanced on deferred terms.
158 In the context of the first and third defendants' submissions as to special purpose vehicles, it is appropriate to observe that it may well be in the interests of a corporate group to use one entity as a stalking horse for the carrying on of business. Such a company might assume the commercial risks of a venture but, having no assets of its own, shield the group from liability. However, to be an effective shield, it is necessary that any liquidator of the special purpose vehicle is not able to call upon any group member to provide funding which they may have promised. For that reason, the group companies will seek to avoid agreeing to any obligation or commitment, or providing any comfort to the special purpose vehicle in respect of its debts, lest that be relied upon by a liquidator. By distancing themselves from the special purpose company and its obligations, however, the other members of the group risk leaving the special purpose vehicle in a state of permanent insolvency because, as a matter of commercial reality, it will not have access to sufficient funds so as to be able to pay its debts as and when they fall due.