CORPORATIONS - WINDING UP - INSOLVENCY - Whether s.95A Corporations Act has changed the law as established by Sandell v Porter - whether a company must show ability to pay all debts "from its own monies" - whether availability of unsecured borrowings may be taken into account - authorities and principles discussed - UNCOMMERCIAL TRANSACTION - Whether company in group may reasonably act for benefit of another company in group. - [2004] NSWSC 608 - NSWSC 2004 case summary — Zoe

NSWNSWSC

CORPORATIONS - WINDING UP - INSOLVENCY - Whether s.95A Corporations Act has changed the law as established by Sandell v Porter - whether a company must show ability to pay all debts "from its own monies" - whether availability of unsecured borrowings may be taken into account - authorities and principles discussed - UNCOMMERCIAL TRANSACTION - Whether company in group may reasonably act for benefit of another company in group.

[2004] NSWSC 608

Supreme Court of NSW|2004-07-09|Before: Palmer J

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Court

Supreme Court of NSW

Decision date

2004-07-09

Before

Palmer J

Source

Original judgment source is linked above.

Judgment (137 paragraphs)

[1]

Reported Decision : 50 ACSR 175 (2004) 22 ACLC 1009

[2]

CITATION : Lewis & Anor v. Doran & Ors [2004] NSWSC 608 HEARING DATE(S) : 8 to 12 March, 2004 JUDGMENT DATE : 9 July 2004 JURISDICTION: Equity Division JUDGMENT OF : Palmer J DECISION : Liquidator's Amended Originating Process dismissed.

[3]

CATCHWORDS : CORPORATIONS - WINDING UP - INSOLVENCY - Whether s.95A Corporations Act has changed the law as established by Sandell v Porter - whether a company must show ability to pay all debts "from its own monies" - whether availability of unsecured borrowings may be taken into account - authorities and principles discussed - UNCOMMERCIAL TRANSACTION - Whether company in group may reasonably act for benefit of another company in group. - Bankruptcy Act 1914 UK - s.44(1) - Bankruptcy Act 1925 (Cth) - s.95(1) - Bankruptcy Act 1966 (Cth) - s.122 - Companies Act 1929 (UK) - s.265 LEGISLATION CITED : - Companies Act 1936 (NSW) - s.208 - Companies Act 1961 (NSW) - s.222, s.293 - Companies Code 1981 (NSW) - s.451 - Corporations Act 2001 (Cth) - s.95A, s.232, s.597(14), s.588FA, s.588FB, s.588FC, s.588M, s.588FE, s.588FF, s.598, s.1317HB, s.1318 - Corporations Law - s.497, s.592 - Supreme Court Rules 1970 (NSW) - Pt 72 - Adnot Pty Ltd, Re, and the Companies Act (1982) 7 ACLR 212, (1982) 1 ACLC 307 - Armour, Re (1956) 18 ABC 69 - Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124, (2003) 46 ACSR 126, [2003] VSC 123 - Bank of Australasia v Hall (1907) 4 CLR 1514 - Bush v Wardair Pty Ltd [2003] NSWSC 955 - Emanuel Management Pty Ltd v Foster's Brewing Group Ltd [2003] QSC 205, (2003) 178 FLR 1 - Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 - Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711, (2003) 21 ACLC 1354, [2003] NSWCA 163 - Geraldton Building Co Pty Ltd v Woodmore (1992) 8 ACSR 585 - Harrison v Lewis (2001) 19 ACLC 566, [2001] VSC 27 - Iso Lilodw' Aliphumeleli Pty Ltd (In liq) v Commissioner of Taxation (2002) 42 ACSR 561, (2002) 50 ATR 391, [2002] NSWSC 644 - Keith Smith East West Transport Pty Ltd (In liq) v Australian Taxation Office (2002) 42 ACSR 501, [2002] NSWCA 264 - Kerisbeck Pty Ltd, Re (1992) 10 ACLC 619 CASES CITED : - Kyra Nominees Pty Ltd (In liq) v National Australia Bank Ltd (1986) 4 ACLC 400 - McVeigh v Commissioner of Taxation [2004] FCA 653 - Metledge v Bambakit Pty Ltd [2004] NSWSC 176 - Norfolk Plumbing Supplies Pty Ltd v Commonwealth Bank of Australia (1992) 6 ACSR 601 - Rees v Bank of New South Wales (1964) 111 CLR 210 - RHD Power Services Pty Ltd (In liq), Re (1990) 3 ACSR 261, (1990) 9 ACLC 27 - Sandell v Porter (1966) 115 CLR 666 - Southern Cross Interiors Pty Ltd (In liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, (2001) 188 ALR 114, (2001) 164 FLR 430, (2001) 39 ACSR 305 - Taylor v Australia and New Zealand Banking Group Ltd (1988) 13 ACLR 780 - Re United Medical Protection Ltd (Prov Liq appointed) (2003) 47 ACSR 705, (2004) 22 ACLC 56, [2003] NSWSC 1031 - White Constructions (ACT) Pty Ltd (In liq) v White [2004] NSWSC 71, [2004] NSWSC 71 - CCH Australian Corporations Commentary (loose-leaf, CCH Australia, 2004) - s141-010 - Ford's Principles of Corporations Law (loose-leaf Butterworths, 2000), p.20,158 - McPherson: The Law of Company Liquidation (4th Ed, LBC, 1999) p.438 Alan Edward Lewis - First Plaintiff Doran Constructions Pty Ltd (In liq) - Second Plaintiff Paul Adrian Doran - First Defendant PARTIES : Peter Joseph Doran - Second Defendant Michael Leo Doran - Third Defendant John Cerriti Doran - Fourth Defendant Doran Holdings Pty Ltd - Fifth Defendant Doran Constructions (Australia) Pty Ltd (In liq) - Sixth Defendant FILE NUMBER(S) : SC 4406/00 S.R. Donaldson SC, P.S. Braham - Plaintiffs COUNSEL : A.S. Martin SC, S. Wells - 1st to 5th Defendants P. Parker (Sol) - 6th Defendant - Submitting appearance Purcell Insolvency Lawyers - Plaintiffs SOLICITORS : Christopher C. Freeman & Co - 1st to 5th Defendants Kemp Strang - 6th Defendant - Submitting appearance

[15]

12 The Doran family has had long history in the building and construction industry in and around the Newcastle area. The Directors' father was a builder and commenced the family business some time prior to 1950. All of the Directors left school before their final year and began working as apprentices in their father's business. From their evidence in the witness box, it is very apparent that all Directors took a personal pride in the success of the Doran group of businesses and were jealous of its reputation. 13 Constructions was incorporated on 18 February 1977 to take over the family construction business. At that time the Directors were all appointed as directors of Constructions, its immediate parent, DCA, its ultimate parent, Holdings, and of some fourteen other companies in the Doran Group. The activities of the companies in the Group were varied: building and construction, property development, plant and machinery hire, operating a real estate agency, a tavern, two large shopping centres, two private hospitals and a medical centre. By June 1991, Constructions had an annual turnover of some $50M. 14 The managing director of Constructions and of the Doran Group was the First Defendant, Paul Doran. For convenient reference, and without intending disrespect, I will refer hereafter to each of the Directors by his first name. 15 Paul was born in 1942. Although the youngest of the Directors, he is clearly the most experienced in business, management, finance and accounting. He oversaw all of the business activities of the Group and is a highly intelligent, articulate and capable businessman. In 1982 and 1983 he was President of the Newcastle Master Builders Association, and in 1998 and 1999 he was the National President of the Master Builders Association of Australia. 16 Peter was born in 1935. He has less experience in accounting and management than Paul and was primarily responsible for the property development activities of the Group. 17 John was born in 1928. He was a carpenter by trade, but in the latter years before his retirement he was engaged in the plant hire activities of the Group. He had no involvement in management of the Group's business. 18 Michael was born in 1923. He was principally involved in day-to-day construction and supervision on building sites and he had no participation in management in the Group's business. 19 Until 1989, Paul was responsible for supervising a small number of accounting staff employed by the Group, who prepared the primary accounting records. From 1989 the Doran Group employed Mr Bradley S. Joyce, a qualified accountant, as the Group Financial Controller. In about 1994, Mr Joyce became Group General Manager. 20 From the time of its incorporation until its liquidation in December 1997, Constructions had engaged Price Waterhouse as its external accountants and auditors. A partner of Price Waterhouse, Mr Linz, was the responsible audit partner. Price Waterhouse prepared the company's annual accounts and documents for the Annual General Meetings and provided accounting advice as required. 21 Between about February 1989 and July 1992, the Doran Group sought advice from Ernst & Young and a firm of solicitors concerning the rationalising and restructuring of the Group. It seems that one of the purposes of the restructuring was the saving of tax and another was to separate the property holding activities of the Group from the construction activities. Accordingly, DCA was to be the parent company of those companies in the Group carrying out building, construction and associated activities, and Holdings was to be the parent of the property owning companies. As part of the restructuring, in July 1992 Holdings lent DCA $3,156,662 to enable DCA to purchase from Holdings all of the share capital in Constructions, and $1,655,069 to enable it to purchase from Holdings the share capital of another company in the Group, Doran Property Services. This indebtedness of DCA to Holdings was the subject of the Restructure.

[16]

22 At a meeting of the Directors, as directors of Constructions, on 28 October 1994, Mr Linz presented them with the audited accounts of Constructions for the year ended 30 June 1994. The accounts recorded Constructions as having an excess of current assets over current liabilities in an amount of $2,812,707. The accounts were approved by the Directors. On the same day the Directors, representing their family companies as shareholders, attended an Annual General Meeting of Constructions at which they adopted the accounts. 23 On 1 November 1994, the Directors attended directors' meetings of Holdings and Constructions. Also present were Mr Joyce, Mr C. Freeman, the Doran Group solicitor, and Mr Linz. The Directors assert that they have almost no actual recollection of what was discussed at the meetings, why the meetings were called, and what was the particular purpose which the Restructure was intended to achieve. 24 Evidence as to the purpose of the meetings was given by Mr Linz in a public examination conducted by the Liquidator in March 1999. The transcript of that examination has been tendered by the Liquidator, without objection. Mr Linz has not been called to give evidence in the proceedings but the tender of his evidence in the examination reveals clearly enough what he would have said. Mr Freeman, in an affidavit dated 28 November 2003, has also given evidence of what transpired at the meetings. Mr Freeman was not cross examined on this evidence. I will return to the evidence of Messrs Linz and Freeman shortly. 25 Mr Joyce also gave evidence and confirmed that he attended the meeting. He insisted that he had virtually no recollection of the meeting or the circumstances in which the Restructure was effected. His recollection was that it was part of the "tidying up" of the balance sheets of the Doran Group. 26 I should say at this point that I do not regard the evidence of the Directors and of Mr Joyce to the effect that they have almost no actual recollection of the Restructure and its purpose as reflecting adversely on their credit. I do not regard it as implausible or improbable that these witnesses have very little recollection of a single event which occurred almost ten years ago amongst all the other activities of an obviously large, complex and active group of companies, which involved a purely internal accounting transaction with the advice of their auditor, Mr Linz, and their solicitor, Mr Freeman, at a time when Constructions and the Doran Group generally were not facing an obvious financial crisis which the Restructure was designed to alleviate. 27 Further, in stating absence of recollection during cross examination, none of the Directors or Mr Joyce gave me the impression that he was intending to prevaricate or evade answering awkward questions. Accordingly, I accept that the Directors and Mr Joyce generally have no, or very little, recollection of the particular circumstances in which the Restructure came about. 28 There are two Minutes of directors' meetings for Holdings and one for Constructions, all dated 1 November 1994 and signed by Paul as Chairman. Clearly enough, the Minutes were prepared to show events occurring in an appropriate chronological sequence although there was probably only one discussion amongst the Directors. It is as well to follow the same sequence here. 29 The first Minute for Holdings relevantly records the following: " BUSINESS The meeting was called to discuss the payment of the money due by Doran Constructions Australia Pty Limited to this Company being the money lent to Doran Constructions Australia Pty Limited to enable it to purchase shares in Doran Constructions Pty Limited and Doran Property Services Pty Limited. It was noted during the course of discussions that there existed no arrangements for repayment and that the loan was repayable on demand. The Balance Sheet of the Company needed to be tidied up to give a better view of the assets and liabilities of the Company to Financiers and inter group and intra group loans needed to be rationalised to limit any problems which may arise from the charging or payment of interest on those loans.

[32]

35 The directors deny that the Restructure was effected for any purpose related to the proceedings between Constructions and Beresfield. They point to the following uncontroverted facts. 36 Constructions maintained that it had a claim against Beresfield arising out of the construction of the Gosford Hospital which Constructions quantified in February 1993 at $532,551. On 4 June 1993, Beresfield asserted that it had a claim against Constructions for $401,492. 37 On 26 July 1993 the Project Architect determined that Beresfield's claim against Constructions was "unsubstantiated" except for minor adjustments. On 10 November 1993 the Project Superintendent rejected Beresfield's claim against Constructions except for the sum of $53,779. On 17 February 1994, the New South Wales Department of Health, as Principal, rejected Beresfield's claim. 38 On 18 October 1994, Beresfield amended its claim against Constructions to $449,100. 39 Beresfield's claim against Constructions was finally determined by arbitration in 1998, after Constructions was placed in liquidation. 40 Constructions' balance sheet as at 30 June 1994 did not recognise Beresfield's claim against Constructions as a debt or even as a contingent liability, nor did it recognise Constructions' claim against Beresfield as an asset. The Liquidator's accounting expert, Mr S.D. Pascoe, conceded that, on the facts recounted above, Constructions' accounts were correct in this regard. 41 These circumstances suggest that as at 1 November 1994 Beresfield's claim could reasonably have been regarded as unlikely to succeed and, in any event, would have appeared remote from resolution. The amount involved would not have seemed formidable in the context of Constructions' operations, quite apart from the fact that Constructions' claim against Beresfield exceeded Beresfield's claim against Constructions. 42 I am not satisfied that an inference should be drawn that Beresfield's claim against Constructions was regarded by the Directors as at 1 November 1994 as a present and substantial financial threat either to Holding or to Constructions. I am not satisfied that Beresfield's claim played any part in the Directors' reasons for the Restructure.

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43 Likewise, the Directors deny that the Restructure was effected to protect Holdings from a demand for repayment if a liquidator was appointed to Constructions as a result of the University's claim against Constructions being successful. They point to the following uncontroverted facts. 44 By 7 October 1993, Constructions had commenced arbitration proceedings against the University claiming $354,961 for variations and extras. On 12 October 1993 the University filed a counter claim for alleged defective work. By early July 1994, the University had provided an "indicative cost estimate" of $2.583M for rectification work. 45 On 7 July 1994 the hearing of the arbitration proceedings was vacated and adjourned to a date to be fixed. In early December 1994, Constructions commenced proceedings in the Supreme Court of New South Wales against the University seeking damages in the sum of $4.375M. 46 It was not until 22 October 1996 that the University filed a Cross Claim in those proceedings seeking damages of $1,971,000. A letter from Constructions' solicitors to Constructions dated 9 August 1996 gives some idea of the complexity of the proceedings and suggests that there had been previous indications that the University would not pursue its defects claim against Constructions. 47 On 26 March 1997, the Supreme Court ordered that the proceedings between Constructions and the University, together with related proceedings, be referred to a Reference under Pt 72 of the Supreme Court Rules 1970 (NSW). After Constructions was placed in liquidation on 27 December 1997, the Liquidator advised the Court that he would withdraw from the proceedings, relevantly leaving only the University's Cross Claim against Constructions for determination. Accordingly, the Court formally dismissed Constructions' claim against the University. 48 On 13 May 1997, the Referee delivered a report of 151 pages in which he found that the University had established its Cross Claim against Constructions in the sum of $1,772,038. The Referee noted that no evidence had been filed by Constructions. 49 The Liquidator's expert, Mr Pascoe, conceded in cross examination that as at 1 November 1994 there was no quantifiable debt owed by Constructions to the University and that a balance sheet of Constructions as at that date would not be required to show such a debt.

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63 I find that as at 1 November 1994 the Directors were aware that Constructions had a claim against the University and that the University would probably make a substantial claim against Constructions. I find that that matter was discussed at the meeting on 1 November. Paul and, probably, Peter were aware of the foreshadowed amount of the University's claim but the other two directors were probably not made aware. This circumstance in itself suggests that the foreshadowed claim by the University was not seen by Paul and, probably, Peter in November 1994 as being of such disastrous consequences to Constructions that Michael and John should be fully apprised of it. 64 I find, as a matter of inference, that by November 1994 it was clear to Paul and to Mr Joyce, if not to the other Directors, that a major litigious battle with the University was looming. Constructions commenced its proceedings against the University in the Supreme Court in early December 1994, claiming $4.37M; Constructions could expect a substantial Cross Claim in response. The Cross Claim was not forthcoming, however, until October 1996, which indicates that the University's position was not clear cut and well known to Constructions by November 1994. What would have been clear to Paul and to Mr Joyce was that the dispute with the University, if it went the full distance, would not be resolved for a long time and would be very expensive to fight. 65 In my opinion, the most reliable evidence as to the purpose of the Restructure, as discussed at the Directors' meeting on 1 November 1994, is given by Messrs Freeman and Linz. On the basis of that evidence, which I accept, I find that the foreshadowed claim by the University against Constructions was not the driving factor for the Restructure. The driving factor was a desire on the part of the Directors to separate the financial affairs of the property holding companies in the Doran Group, embodied in Holdings, from the financial affairs of the building and construction companies, embodied in Constructions. That desire for separation did not originate in a fear that the University's claim against Constructions would be successful and would result in a liquidator being appointed to Constructions and making a demand upon Holdings. The desire for separation originated in a perception, held for some time before November 1994, that it would be easier to obtain finance for the property holding activities of the Group if they were segregated from the building and construction activities. 66 I am satisfied that the Directors' desire to achieve separation of the financial affairs of Holdings and Constructions was given a sense of impetus and focus by the impending litigation with the University. That litigation would have exemplified the problems and difficulties which could be caused to the property holding activities of the Group by litigation arising from the Group's building and construction activities. However, I accept that the Directors did not actually believe that the University's claim against Constructions would ultimately be successful and that it would result in the liquidation of Constructions. I accept Paul's evidence that he believed that the litigation would result in money being paid to Constructions. 67 Having regard to the evidence of Messrs Freeman and Linz and to the evidence of the Directors, which I accept, and to the objective factors referred to in paragraphs 60 to 62 above, I find that the Directors did not have an actual intention, in effecting the Restructure, to remove the assets of Holdings from the reach of the creditors of Constructions. I accept that they believed that at the time of the Restructure Constructions was solvent. 68 I now turn to the question whether Constructions was, in fact, solvent at the time of the Restructure.

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77 The Liquidator's expert, Mr Pascoe, was of the opinion that as at 31 October 1994 Constructions was unable to pay its debts as they fell due despite the undoubted fact that, as the evidence shows, it actually did so for about three years thereafter. With respect, Mr Pascoe's analysis is flawed in at least three important respects. 78 The first flaw is that, although Mr Pascoe concedes that the test for insolvency is the cash flow test, Mr Pascoe did not actually apply that test to Constructions. What he did was to apply the "working capital test" and the "profits test", which he said "are a given approximation of the cash flow test" : T34.54. 79 Mr Pascoe conceded, however, that the "working capital test" attempts to look at only those debts which may become due and payable over the next twelve months out of those assets of a company which can be realised within that period; it does not look at those debts due and payable as at the alleged date of insolvency or at the assets available to pay those debts at that time. Likewise, Mr Pascoe conceded that the "profits test" is a separate and distinct test from the cash flow test. He conceded that the "working capital test" is not determinative of insolvency because a working capital deficiency may not prevent a company with sufficient cash flow at the relevant time from paying its debts as they fall due. 80 The second flaw is that Mr Pascoe never ascertained what debts of Constructions were actually due and payable as at 31 October 1994 and whether those debts were paid as and when they fell due. He took the total figure of $2.661M for trade creditors shown in the reconstructed balance sheet as at 31 October 1994 and applied the "working capital test" to that figure. 81 But, in truth, as Mr Bryant's analysis shows - and Mr Pascoe does not dispute it - only about $160,000 was owing to trade creditors as at 31 October 1994 and there is no evidence to suggest that those creditors were not paid according to their normal trading terms. The absence of any indicia of insolvency as at 31 October 1994 and for about three years later suggests strongly that as at 31 October 1994 trade creditors were being duly paid and that that situation continued for a long time afterwards. 82 The third flaw is that Mr Pascoe disregarded the cash resources within the Doran Group which were available to pay its external creditors, both as at 31 October 1994 and thereafter. As I have noted, funds of $5.1M were provided to Constructions by other companies in the Doran Group between 1 November 1994 and 24 December 1997. Mr Pascoe takes the view that the cash flow test as prescribed by s.95A CA requires that a company's ability to pay its debts is determined, in all circumstances, only by reference to that company's own assets so that what he termed "voluntary payments" by other members of a group of companies must be disregarded. 83 Whether Mr Pascoe's view is correct has some significance in the case. The Directors concede that on and after 31 October 1994 Constructions was unable to pay all its debts solely from the revenue derived from its trading and from its own assets. They concede that it was not able to discharge all of its liabilities except by means of advances from other companies in the Doran Group, principally from Holdings. However, they say that the ability and willingness of other companies in the Doran Group to make cash available to Constructions as needed and not to call up those advances except at times when Constructions was conveniently able to repay was a resource available to Constructions at all relevant times which must be taken into account when determining its solvency.

[116]

No explanation of why the critical words were omitted from s.95A as enacted is to be found in the Harmer Report or in the Explanatory Memorandum. 87 It might be argued that the omission of the words "from his or her own money" removes the qualification on the definition of insolvency which had previously given rise to some difficulty, namely, whether or not a debtor's ability to obtain funds by means of unsecured loans was to be taken into account when assessing solvency. 88 In Sandell v Porter (1966) 115 CLR 666 the High Court had held that a debtor's ability to pay "from his own monies" , as required by s.95 Bankruptcy Act , included an ability to raise money by sale, pledge or mortgage of his assets. The decision was consistent with earlier authorities concerned with definitions of insolvency dependent upon the debtor's ability to pay "from his own monies" : see e.g. Bank of Australasia v Hall (1907) 4 CLR 1514, at 1528; Rees v Bank of New South Wales (1964) 111 CLR 210 at 218. 89 Founding upon those decisions, Courts considering definitions of insolvency which required ability to pay "from his own monies" have held that money obtained by unsecured borrowings is not treated as the debtor's "own money" : see e.g. Re Armour (1956) 18 ABC 69, at 74; Kyra Nominees Pty Ltd (In liq) v National Australia Bank Ltd (1986) 4 ACLC 400, at 405; Taylor v Australia and New Zealand Banking Group Ltd (1988) 13 ACLR 780, at 786; Norfolk Plumbing Supplies Pty Ltd v Commonwealth Bank of Australia (1992) 6 ACSR 601, at 615. 90 Yet even under the definitions of insolvency prior to s.95A CA , there were tensions in applying this proposition in all its strictness. In Re RHD Power Services Pty Ltd (In liq) (1990) 3 ACSR 261 at 263-264, (1990) 9 ACLC 27, McPherson SPJ said: "But, in any event, the test of insolvency for the purpose of s.122(1) means the inability of the debtor 'utilizing such cash resources as he has or can command, through the use of his assets, to meet his debts as they fall due' : see Sandell v Porter (1966) 115 CLR 666, at 670, per Barwick CJ. To pay its debts the company here was using not its own assets but those of its holding company or of other members of the group. It has been said that under s.122(1) 'money obtainable by unsecured borrowing is not treated as the debtor's own money' : see Taylor v Australia & New Zealand Banking Group Ltd (1988) 13 ACLR 780, at 784, per McGarvie J. That may not always or necessarily be so because a person's ability to borrow without security may in some circumstances provide compelling evidence of his strong financial standing; but it is certainly true of a case like this, where the company has been able to trade only by receiving continuing financial assistance from its parent company." 91 In Re Adnot Pty Ltd and the Companies Act (1982) 7 ACLR 212, (1982) 1 ACLC 307, Kearney J took into account in holding that a company was not insolvent the fact that any shortfall in meeting its liabilities would be met by another company in its group. At 217, his Honour said: "The company, instead of having to resort to some outside lender, is in the fortunate position of having its fellow member of the group of companies to which it belongs, available in effect as a banker to provide funds required to meet any shortfall." 92 Nevertheless, as the law prior to the enactment of s.95A CA stood, the weight of authority founded upon Sandell v Porter was heavily in support of the view that the requirement that a debtor be able to pay "from his own money" in order to demonstrate solvency excluded from consideration the debtor's ability to obtain unsecured loans. 93 Since the enactment of s.95A CA there have been only two judicial statements which I have been able to discover which have directly commented upon whether the omission of the words "from his own money" from the definition has changed the law. 94 In Geraldton Building Co Pty Ltd v Woodmore (1992) 8 ACSR 585 the plaintiff sued the directors of a company with which it had contracted and which became insolvent, seeking to recover its loss under the insolvent trading provisions of the then Corporations Law , s.592(1). The defendants sought an order summarily dismissing the plaintiff's claim on a number of grounds, one of which was that the company was solvent at the time that the debt was incurred. The defendants proved that at the time of the alleged insolvency the company had available to it an undrawn bank facility of more than $5M, although the facility was not secured over the company's assets. 95 The plaintiff argued, on the basis of the line of authority flowing from Sandell v Porter , that the phrase in s.592 "will not be able to pay all its debts as and when they become due" should be interpreted as meaning "will not be able to pay … from its own money", so that in accordance with authorities such as Re Armour and Kyra Nominees an unsecured borrowing could not be taken into account in determining solvency. 96 Master Bredmeyer, after referring to these authorities, said at 598: "The principle enunciated there, and in the cases cited in support, is that one can look at moneys obtainable by the company by borrowing on its own assets, but the court should not look at moneys borrowable or obtainable by the company by borrowing on unsecured assets or on assets from directors or third parties. Thus, when a company is prima facie unable to pay its debts as and when they fall due, it is not relevant that a director could borrow money for the company on the collateral security of his own house. That principle does not apply, in my view, to the facts of this case. That principle is concerned with the company's ability to borrow. It looks to the future. In considering the company's assets the court can take into account its ability to borrow only on the security of its own assets. That does not mean that the court should disregard previous borrowings, even though those borrowings were not secured on its own assets . In this case, the bank facility of $30m was granted to the company on 18 July 1991, well before the critical period. It is true that it was secured against letters of set-off by certain named Indonesians, but it was a loan granted to the company and in the critical period between 15 February and 2 March 1992, $5.7m remained to be drawn down. That is, in my view, definitely an asset of the company available to it at that time for the payment of debts. The position would be different if that loan facility had been fully utilised at that time and the company deposed that it could borrow further moneys on securities provided by its directors. That is not the case here, and I consider I should regard this $5.7m loan facility as being moneys available to pay debts as and when they fall due. Of course, being a loan facility, it in itself is a debt owed by the company, but I am here concerned with the payment of debts falling due in that period or thereabouts, and there is no evidence before me that the repayment of moneys to the Standard Chartered Bank of Singapore was falling due at that time." (Emphasis added.) 97 In Harrison v Lewis (2001) 19 ACLC 566, [2001] VSC 27, the liquidator sued the company's sole director under s.588M CA to recover losses from insolvent trading. The director conceded that as at the alleged date of insolvency the only way in which the company could have repaid all its debts then due was if the director utilised a credit facility in his own name, secured over his own assets, to borrow money and lend it to the company. 98 Mandie J referred to Taylor v ANZ Banking Group Ltd and Sandell v Porter and quoted the passage from Re RHD Power Services which I have set out above. His Honour was conscious that those cases were concerned with the definition of insolvency which required the debtor to be able to pay "from his own money" . His Honour continued (at 579; para 49): "I do not think that the absence in s.95A of the words 'from its own money' alters the proper approach to this question as referred to in the passages quoted above. Wine Bank was unable to pay its debts, in particular the debt to McGuigan which was then incurred and soon to fall due, from its own cash resources. I am satisfied that it had no expectation of significant income and no assets which could readily be sold or hypothecated. No sale of the nearly defunct business was reasonably imminent. The Citibank credit facility was the source of a potential loan, but a loan secured on the defendant's assets and not on the assets of Wine Bank. One debt would simply have been replaced with another debt which could not be repaid. Looking at the total picture, I would have concluded that Wine Bank was insolvent as at 6-12 February 1998." 99 Two points should be made about the decision in Harrison v Lewis . First, his Honour does not give any reasons for his conclusion that the change in the definition of insolvency in s.95A CA has not changed the law. Second, his Honour's ultimate conclusion of insolvency was founded upon the particular factual circumstances of the case before him. 100 There have been a number of decisions since s.95A CA came into effect which have continued to apply the Sandell v Porter definition of insolvency: see Metledge v Bambakit Pty Ltd [2004] NSWSC 176; McVeigh v Commissioner of Taxation [2004] FCA 653; Re United Medical Protection Ltd (Prov Liq appointed) (2003) 47 ACSR 705, (2004) 22 ACLC 56, [2003] NSWSC 1031; Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124, (2003) 46 ACSR 126, [2003] VSC 123; Bush v Wardair Pty Ltd [2003] NSWSC 955; and Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711, (2003) 21 ACLC 1354, [2003] NSWCA 163. However, in none of those cases has there been any discussion of the absence in s.95A CA of the words "from its own monies" , which was the critical feature of the discussion in Sandell v Porter and in the line of authority flowing from it. The decisions implicitly assume that s.95A has not changed the pre-existing law but none of them turns on whether insolvency depends upon the availability of unsecured loans from a third party. 101 It has been observed extra-curially that one may conclude from the change in the definition of insolvency effected by s.95A CA that the pre-existing law has, indeed, been changed. Professor A.R. Keay in McPherson: The Law of Company Liquidation (4th Ed, LBC, 1999) says at p.438: "The omission of the words may simply mean that the legislature was intending to ensure that the position adopted in the cases - namely that a debtor was not required to have cash to pay the debts due provided there were assets that could be sold or mortgaged within a reasonable time was confirmed in the legislation. However, this was not necessary because the case law clearly provided that the words 'from his or her own money' prohibited neither a debtor's assets (where they could be sold) nor money raised on secured loan from being taken into account in determining solvency.

[119]

Available resources include the value of property that can be readily sold, the amount that the company could borrow on the security of its property generally and in some cases what it can borrow by unsecured loan." 104 Later on the same page, they say under the heading "Unsecured borrowing" : "Money obtainable by unsecured borrowing will not ordinarily be treated as an asset available: Taylor v Australian and New Zealand Banking Group Ltd ; Re Norfolk Plumbing Supplies Pty Ltd . However, in some circumstances, ability to borrow without security from external sources provides compelling evidence of strong financial standing. Credit provided by the company's directors or proprietors may have to be rejected as a cash resource ( Re RHD Power Services Pty Ltd (in liq) at 261) unless the court can be satisfied that the credit will continue: Re Kerisbeck Pty Ltd . Offers of credit by directors or proprietors prompt the question as to why they do not inject the money as share capital." 105 Re Kerisbeck Pty Ltd (1992) 10 ACLC 619 was an application to wind up a company in insolvency. The applicant submitted that the company was unable to pay a substantial unsecured debt which was payable on demand to its director. The director gave evidence, which was accepted, that he did not intend to demand repayment of the debt in the immediate future. Harper J, therefore, refused to regard the debt as payable for the purpose of determining insolvency. In effect, as the learned authors of Ford say, his Honour was satisfied that the company was able to pay its other debts with the benefit of continuing unsecured credit from its director. 106 I think that I must approach the application of s.95A CA with two considerations in mind. First, the words of s.95A must be construed as they stand, without addition or subtraction. Second, the law both before and after the enactment of s.95A is unequivocally and emphatically clear that insolvency is, first and last, a question of fact "to be ascertained from a consideration of the company's financial position taken as a whole. In considering the company's financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable" : Southern Cross Interiors Pty Ltd (In liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 at 224 (citations of authority omitted), (2001) 188 ALR 114, (2001) 164 FLR 430, (2001) 39 ACSR 305. Those propositions have been approved in Australian Securities and Investments Commission v Plymin (No 1) (supra), Emanuel Management Pty Ltd v Foster's Brewing Group Ltd [2003] QSC 205, (2003) 178 FLR 1, Iso Lilodw' Aliphumeleli Pty Ltd (In liq) v Commissioner of Taxation (2002) 42 ACSR 561, (2002) 50 ATR 391, [2002] NSWSC 644, White Constructions (ACT) Pty Ltd (In liq) v White (2004) 49 ACSR 220, [2004] NSWSC 71, and Keith Smith East West Transport Pty Ltd (In liq) v Australian Taxation Office (2002) 42 ACSR 501, [2002] NSWCA 264. 107 The question of a company's solvency may arise retrospectively or prospectively. The question arises retrospectively where, for example, a liquidator is seeking to recover an unfair preference or to set aside an insolvent transaction so that the issue is solvency as at a date prior to the winding up. The question may arise prospectively where a company is sought to be wound up in insolvency and the company's ability to pay its debts must be determined not only by reference to debts payable as at the date of trial but also by reference to its ability to pay debts which will fall for payment some time in the near future. 108 Where the question is retrospective insolvency, the Court has the inestimable benefit of the wisdom of hindsight. One can see the whole picture, both before, as at and after the alleged date of insolvency. The Court will be able to see whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due and whether it did, or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and common sense, had to be considered as at the date of insolvency. By reference to what actually happened, rather than to conflicting experts' opinions as to the implications of balance sheets, the Court's task in assessing insolvency as at the alleged date should not be very difficult. 109 Where the question is prospective insolvency, however, the Court's task is more difficult simply because foresight, rather than hindsight, is called into play. One can appreciate the Court's reluctance to conclude that a company will be able to pay those debts which must be taken into account as a matter of commercial reality as at the relevant date only because it claims to have access to funds which a third party is said to be willing to lend without security. 110 In such a case there is a considerable measure of trust, if not speculation, that 'things will turn out all right in the end'. If the third party is free to change its mind after the winding up application is dismissed, the company's creditors are left with their hopes disappointed and their debts unpaid. Doubtless, it is this consideration which brought about the requirement in the predecessors of s.95A CA that a company's solvency must depend on its ability to pay by recourse to its own assets rather than by recourse to the benevolence or to the whim of others. 111 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. 112 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. 113 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. 114 The different considerations which arise in cases of retrospective insolvency and prospective insolvency were clearly recognised by Bredmeyer M in Geraldton Building (supra), a case of retrospective insolvency. The learned Master recognised as a fact that the company had a resource available to it at the relevant time in the form of a bank facility, even though the facility was not secured over assets of the company. In recognising that facility as a resource of the company the Court simply acknowledged a commercial reality. Likewise, in Re Kerisbeck (supra), a case of prospective insolvency, Harper J accepted as a fact that the director would continue to make existing unsecured credit available to the company, so that the company was not insolvent. 115 In my opinion, s.95A can work effectively as a definition of both retrospective and prospective insolvency if it is shorn of a gloss derived from the words "from its own monies" . Those words have been deliberately omitted from the definition and if the gloss which they have acquired in previous decisions is applied to questions of retrospective insolvency, the definition can operate to produce a commercially unrealistic, if not an absurd, result. 116 For those reasons I conclude that s.95A CA has changed the pre-existing law as to the definition of insolvency as stated in cases such as Sandell v Porter , and that it is no longer necessary in order to assess solvency to ascertain whether the company is able to pay all of its debts "from its own monies" , in the sense discussed in those cases. In my opinion, s.95A requires the Court to decide whether the company is able, as at the alleged date of insolvency, to pay all its debts as they become payable by reference to the commercial realities. If the Court is satisfied that as a matter of commercial reality the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party.

[133]

(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." 122 For the reasons which I have given, I am not satisfied that Constructions was insolvent when the Restructure was entered into on 1 November 1994, or in September 1995, when the book entries giving effect to the Restructure were made. Neither am I satisfied that Constructions became insolvent by reason of the Restructure. For those reasons alone, I am not satisfied that the passing of the resolution effecting the Restructure by the Directors, as directors of Constructions, and giving effect to the Restructure by the book entries was "an insolvent transaction" and therefore liable to be avoided under s.588FE(4). 123 For the sake of completeness I should give my conclusions as to whether the Restructure was "an uncommercial transaction" . 124 I accept that a transaction which provides a direct benefit for one company in a group of companies may provide an indirect benefit for another. In Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50, (1993) 11 ACSR 642, (1993) 11 ACLC 952, Clarke and Cripps JJA said (at 146-147): "Problems may, however, arise when particular companies form part of a group of companies. Mason J referred to them in Walker v Wimborne and pointed out that each transaction must be viewed according to the criterion of the interests of the company in the group which is about to participate in the transaction. Nonetheless, his Honour recognised that a transaction involving two companies in a group may benefit one of the companies directly but as well have derivative benefits for the other company: see also Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 183, per Brennan J. It may be accepted, therefore, that actions carried out for the benefit of the group as a whole may, in particular circumstances, be regarded as benefiting as well one or more companies in the group. This may occur even where, for instance, a company is providing a guarantee for its holding company or another company in the group. Similarly a transaction carried out for the benefit of one of the companies in the group, company A, may be seen to be for the benefit of another company in the group, company B." 125 The evidence in the present case shows that the shareholding of the Doran Group of companies was held in equal shares by the four Directors, indirectly through their family companies. I accept the evidence of Michael Doran to the effect that the businesses in the Group were regarded as in reality one family business and that decisions by the Directors had to be unanimous if they were to be carried into effect. He said: "If we weren't unanimous, we didn't do it." 126 The evidence also shows that Holdings was regarded as the banker of the Group, providing money to the subsidiaries as required. It fulfilled that role both before and after 1 November 1994. The Group had also given cross guarantees: Holdings had given unlimited guarantees to secure Constructions' overdraft. The continuing financial welfare of Holdings was, therefore, of material benefit to Constructions. 127 As I have found in paragraph 65, the purpose of the Restructure was to segregate the property holding activities of the Group from the construction activities so that it would be easier to obtain finance for the property holding activities. But, as is evident from the advances made by Holdings to Constructions after 1 November 1994, money coming into Holdings from borrowings could be made available to Constructions if required. 128 In my opinion, having regard to Holdings' role as banker to the Doran Group, it could be seen as reasonably in the interests of Constructions to facilitate the Restructure so that Holdings could find it easier to borrow. 129 Similarly, because Holdings was unarguably solvent as at 1 November 1994 and would be ready to provide money to Constructions or to DCA thereafter, if needed, I do not think that Constructions suffered an unreasonable detriment in that the Restructure replaced the debt from Holdings with the debt from DCA. I do not accept that DCA must have been seen at that time as incapable of repaying its debt to Constructions. There is no reason to suppose that if Constructions had required repayment of the DCA debt shortly after the Restructure and DCA itself had insufficient funds, Holdings would not have advanced the necessary funds to DCA. 130 For these reasons, if it had been necessary to do so, I would not have found that the Restructure was an "uncommercial transaction" on the part of Constructions.

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