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.

1 On 24 December 1997 the First Plaintiff ("the Liquidator") was appointed liquidator of the Second Plaintiff ("Constructions") by a resolution of creditors under s.497 Corporations Law (now the Corporations Act 2001 (Cth) (" CA ")). 2 Constructions, which carried on business as a builder, was a member of a group of companies ("the Doran Group") of which the First to Fourth Defendants were the directors ("the Directors"). Constructions was a wholly owned subsidiary of the Sixth Defendant ("DCA") and DCA was, in turn a wholly owned subsidiary of the Fifth Defendant ("Holdings"). 3 These proceedings arise out of a restructuring of debt within the Doran Group on 1 November 1994. By a series of resolutions passed on that day by the Directors as directors of Holdings, Constructions and DCA, Holdings agreed to repay to Constructions a loan of $4.1M, Constructions agreed to lend $4.1M to DCA, and DCA agreed to pay $4.1M to Holdings in part repayment of its then indebtedness to Holdings. 4 The Liquidator asserts that immediately prior to the passing of these resolutions Holdings was a company with substantial assets and had the capacity to repay its debt of $4.1M to Constructions, whereas DCA had no substantial assets and did not have the capacity to repay the debt to Constructions which it incurred by virtue of the resolutions. The Liquidator claims that the effect of the resolutions on Constructions was to substitute for a realisable asset, namely a debt owing by Holdings, an unrealisable asset, namely a debt owing by DCA. 5 By an Amended Originating Process, amplified by Amended Points of Claim, the Liquidator alleges that Constructions was insolvent on 1 November 1994 when the resolutions effecting the debt restructure ("the Restructure") were passed. Alternatively, he alleges that Constructions became insolvent as a result of the Restructure. 6 The Liquidator claims that:

• in consenting to or permitting the Restructure, each of the Directors breached his fiduciary and statutory duty to Constructions to act bona fide in its interests, to exercise reasonable skill, care and diligence in the performance of his duties, and to take into account the interests of its creditors;

• Holdings, through the Directors, knowingly assisted the breaches of fiduciary duty by the Directors and was involved in their breach of s.232 CA ;

• the Restructure was an uncommercial transaction under s.588FA CA that is voidable under s.588FE(4) CA . 7 By deed dated 18 July 1995, Constructions gave a charge over its assets to secure its indebtedness to Holdings ("the Charge"). The Liquidator alleges that as at the date of the Charge Constructions was insolvent and that the Charge is an unfair preference under s.588FA and is voidable under s.588FE(4). 8 The Liquidator claims:

• damages against the Directors and Holdings both under the general law and under s.232 and s.1317HB CA ;

• a declaration that the resolution passed by the Directors as directors of Constructions on 1 November 1994 effecting the Restructure is a voidable transaction under s.588FE CA ;

• an order under s.588FF(1) or s.598 CA that the Directors and Holdings pay $4.1M to the Liquidator;

• an order under s.588FF(1)(e) releasing or discharging the Charge. 9 The Directors and Holdings deny that:

• as at 1 November 1994 Constructions was insolvent or that it became insolvent by reason of the Restructure;

• the Directors had any reasonable ground to suspect as at 1 November 1994 or 18 July 1995 that Constructions was, or was about to become, insolvent;

• the Directors breached any duty to Constructions, whether under the general law or under statute. 10 If the Directors are found to have acted in breach of their duties, they seek to be excused under s.1318 CA . 11 Although DCA has been joined as a defendant, no relief has been sought against it and it has filed a submitting appearance.

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.

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.

RESOLVED The Company shall demand the repayment by Doran Constructions Australia Pty Limited of the sum of $4,592,145.62." 30 The Minute for Constructions relevantly records: " BUSINESS The Company has received a request from Doran Constructions Australia Pty Limited, the holder of all of the issued shares in this Company, for a loan of $4,100,000.00 for a minimum term of six (6) years (with the right for early repayment without penalty) at such interest rate or rates as may from time to time be agreed upon by and between this Company and Doran Constructions Australia Pty Limited. The purpose of the loan was to enable Doran Constructions Australia Pty Limited to discharge part of the amount lent by Doran Holdings Pty Limited to Doran Constructions Australia Pty Limited. Doran Holdings Pty Limited required the payment to enable it to rationalise inter group and intra group lending and avoid any problems which might arise in the payment of interest. Doran Constructions Australia Pty Limited also requested a loan from this Company for the same purpose. This Company from time to time advanced moneys to Doran Holdings Pty Limited while Doran Holdings Pty Limited was the holder of the shares issued in this Company and the amount of that loan stood in excess of $4,100,000.00. The Board agreed that it would be in the interests of this Company to rationalise inter group and intra group loans and understood the commercial benefit to all parties to commence with a fixed term. The Board also thought that the loan should be used only for the purpose of rationalisation of loans and made this a condition of the giving of a loan.

RESOLVED 1. To demand repayment by Doran Holdings Pty Limited of the sum of $4,100,000.00 forthwith; and 2. to loan the sum of $4,100,000.00 received from Doran Holdings Pty Limited to Doran Constructions Australia Pty Limited. Such sum to be used solely for the purpose of repaying an amount of $4,100,000.00 to Doran Holdings Pty Limited. The minimum term of the loan is to be six (6) years and the interest rate payable by Doran Constructions Australia Pty Limited will be that rate that shall from time to time be agreed upon by and between this Company and Doran Constructions Australia Pty Limited." 31 The second Minute for Holdings relevantly records: " BUSINESS The meting was called to: 1. Discuss the request for payment of $4,100,000.00 by Doran Constructions Pty Limited being part of the loan moneys due to Doran Constructions Pty Limited. The Board noted that Doran Constructions Pty Limited stipulated that this money was to be utilised solely for the purpose of a loan to Doran Constructions Australia Pty Limited to enable Doran Constructions Australia Pty Limited to repay the amount due to this Company.

2. Discuss the request for payment of $492,145.62 by Doran Property Services Pty Limited being part of the loan moneys due to Doran Property Services Pty Limited. The Board noted that Doran Property Services Pty Limited stipulated that this money was to be utilised solely for the purpose of a loan to Doran Constructions Australia Pty Limited to enable Doran Constructions Australia Pty Limited to repay the amount due to this Company.

3. The Board was prepared to accept that this was the purpose of the repayments and that this was in the interests of this Company as it was part of the rationalisation of the inter group and intra group loans which was suggested should take place by the Group's Accountants at the Annual General Meeting of this Company.

RESOLVED 1. To repay to Doran Constructions Pty Limited the sum of $4,100,000.00.

2. To acknowledge the purpose of the repayment and to agree with both Doran Constructions Pty Limited and Doran Constructions Australia Pty Limited that the method of payment be by way of Journal Entry in the books of the Company and that accordingly the loan account of the Company to Doran Constructions Australia Pty Limited be reduced by $4,100,000.00 and by Doran Constructions Pty Limited be reduced by the same amount.

3. To repay to Doran Property Services Pty Limited the sum of $492,152.62.

4. To acknowledge the purpose of the repayment and to agree with both Doran Property Services Pty Limited and Doran Constructions Australia Pty Limited that the method of payment be by way of Journal Entry in the books of the Company and that accordingly the loan account of the Company to Doran Constructions Australia Pty Limited be reduced by $492,152.62 and by Doran Property Services Pty Limited be reduced by the same amount." 32 In accordance with the last resolution, journal entries effecting the Restructure were posted on 3 September 1995. There is no explanation in the evidence for the delay. It should be noted, however, that the Liquidator does not contest that the resolutions effecting the Restructure were actually passed on 1 November 1994.

33 The Liquidator contends that the Restructure was effected by the Directors with an actual improper purpose, so that they have thereby breached their fiduciary and statutory duties to Constructions. The Liquidator says that the Restructure was carried out at a time when the Directors knew that Constructions was facing large claims against it by a company called Beresfield Aluminium and by the University of Newcastle. The object of the Restructure, the Liquidator says, was nothing to do with the interests of Constructions itself but was, rather, to protect Holdings, a company of substance, from the consequences if these claims against Constructions were successful. If this purpose were established as the real purpose of the Restructure, it could be said that the Directors, as directors of Constructions, were acting with an ulterior purpose and were therefore in breach of their fiduciary and statutory duties to Constructions. 34 The Directors strongly deny that they had the purpose alleged by the Liquidator. The Liquidator concedes that there is no direct evidence in support of his allegation of improper purpose but he says that such a purpose should be inferred from the following circumstances:

• the currency of litigation between Beresfield, Newcastle University and Constructions as at the date of the Directors' meetings;

• the fact that the Restructure had the effect of reducing Holdings' exposure to an unsuccessful outcome of those proceedings;

• the absence of any coherent or meaningful explanation by the Directors of any other purpose for the Restructure which might have been achieved;

• the fact that the transaction had no benefit to Constructions because a realisable asset, namely the loan to Holdings, was replaced by an unrealisable asset, namely the loan to DCA;

• the Directors' failure to call Mr Linz, upon whose advice the Restructure was allegedly entered;

• the admission by Mr Linz in his examination that the purpose of the Restructure conveyed to him by Mr Joyce was related in some way to Constructions' foreshadowed court proceedings against the University and the need to "make sure that everything was tidy in the companies" , coupled with Mr Joyce's enquiry about "voidable transactions" .

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.

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.

Mr Freeman's evidence as to the purpose of the Restructure

50 Mr Freeman gave the following unchallenged evidence as to what transpired on 1 November 1994: "During the Meetings there was a general discussion at which either Mr Paul Doran or Mr Bradley Joyce said words to the following effect: 'Doran Holdings is under pressure from bankers to regularise the loan accounts within the Doran Group.' Mr Bradley Joyce set out details of the balances of the loan accounts on a white board. Mr Joyce then said words to the following effect: 'Doran Holdings and the rest of the property group should become liable for its own transactions and the construction group liable for its own transactions and that the loan accounts should be adjusted to reflect this principle.' Mr Joyce then wrote on the white board the result that was to be achieved.

Mr Peter Doran, I believe it was, who outlined the reasons for the banks' concern, said words to the following effect: 'The banks find the combined accounts of the property group [DH and its subsidiaries] and the construction group [DCA and its subsidiaries, which included DC] are too complex.' He then said words to the effect: 'The banks want to see 2 separate groups - the property group and the construction group - so that when processing a loan for one group, they only need concern themselves with that group's accounts.' He further said words to the effect: 'One of the things that must be done to satisfy the banks is to remove the cross collateralisation of the loan accounts between the 2 groups, so that each group will stand alone. What is being considered today will continue the process of separating the 2 groups.'

Mr Paul Doran or Mr Bradley Joyce said words to the following effect: 'If this result is to be achieved what are to be carried out what are the legal ramifications?'

I then said to Mr Martin Linz words to the following effect: 'If this result is to be achieved what would that lead to any company being insolvent or subsequently becoming insolvent?' Mr Martin Linz said words to the following effect: 'The companies have each just held their annual general meetings and there is no possibility of any insolvency arising.'

Mr Martin Linz said to me words to the following effect in response to a question from me that I cannot now recall: 'Movements in the loan accounts within the group are not uncommon, even in these amounts. They happen regularly, there is nothing unusual in the proposed movement of the loan accounts.'

I then said to the directors of DH, DC and DCA words to the following effect: 'Before moving the loan accounts you, as directors, must look at each company individually and ensure that the transactions do not lead to any one of the companies being insolvent or subsequently becoming insolvent. As directors of each company you have an obligation to each company, its shareholders and creditors to ensure that each company, as a result of the transaction, remains solvent.'

Later during the meeting Mr Bradley Joyce said to me words to the following effect: 'How would you suggest that the transactions be structured?' I replied with words to the following effect: 'I would suggest that Holdings make a demand on Constructions Australia for the repayment of the $4,100,000 due by Constructions Australia to Holdings. Constructions Australia would then ask Constructions for a loan of $4,100,000.00 to enable Constructions Australia to repay Holdings. I would suggest that you give Constructions Australia some time to repay the loan to Constructions, say 5 to 6 years. This should ensure that DCA can repay the loan out of profit. Constructions would then make a demand on Holdings for the repayment of part of the moneys, amounting to $4,100,000.00, due by Holdings to Constructions to enable Constructions to loan such moneys to Constructions Australia so that Constructions Australia could repay Holdings. Holdings would repay the loan to Constructions on condition that Constructions lent such money to Constructions Australia for the purpose of Constructions Australia making the repayment to Holdings.' Mr Joyce then wrote the transactions on the white board for the directors to see."

51 In his public examination by the Liquidator Mr Linz gave evidence as to what transpired at the Directors' meetings on 1 November 1994. As I have said, the transcript of his evidence was tendered by the Liquidator. The Directors did not object to its tender, as they might have done, because it was not made admissible under s.597(14) CA . The Directors did not seek to have Mr Linz called for cross examination. In these circumstances, I take both sides to accept Mr Linz's evidence. 52 Relevantly, Mr Linz's evidence was as follows: "And what was the specific matter you were asked to give advice on? Transaction in general, but in particular under what circumstances would it be considered inappropriate.

Would what be considered inappropriate? The … a transaction between a forgiveness or a round robin of those loan accounts between the companies, repayment of loans.

What did Mr Joyce say to you as best you can recall that you were asked to then give advice about? Um, he was continuing with the rationalisation of the group which had been going on for a number of years. He wanted to tidy up loan accounts. Continued to tidy up loan accounts between the entities. He was … the company was about to take action against the University and he wanted to make sure that everything was tidy within the companies and he wanted to know under what circumstances - or just to ensure that those transactions, that the repayment of loans - in what circumstances they would be seen to be voidable. He didn't actually ask that but that's what he meant.

Yes, and no doubt you would have been concerned to ensure that the advice you gave was correct advice? Well, the advice I - well what I gave Brad was a copy of certain copies of the Corporations Law in terms of voidable transactions and gave him a brief explanation of that, but also noting that I am not a lawyer, nor was I an insolvency expert, so really I could - my advice went no further than that." 53 On the following day, Mr Linz was questioned more closely by examining counsel. It is, unfortunately, necessary to reproduce the transcript at some length because Counsel sought on occasion to put words in Mr Linz's mouth which he seemed to accept. Yet by the end of his evidence he succeeded, somewhat inarticulately, in making his position clear enough. "Now, in relation to the meeting on 1 November 1994 or at about that time, you gave evidence yesterday that you could recall Mr Joyce outlining the proposed round robin, correct? ~~ Yes.

And you said that he had referred to a desire to tidy up loan accounts? ~~ Yes.

What did he say about that? ~~ I can't remember much more than that.

The fact that he wanted to tidy up loan accounts? ~~ Yes.

You said that he said the company was about to take action against the University? ~~ Yes.

What did he say about that? ~~ Um - he said that he wanted the - wanted the group in a secure position before he - before they embarked upon action against the University.

Did he explain anything more about that? ~~ Um - No, I can't remember exactly what was said at that time.

Was he talking about the Holdings Group being secure? ~~ I would have thought so. But I - I can't remember that being discussed at the meeting, but that would make sense.

Do you recall whether he was explaining that before the proceedings were commenced against the University, he wanted to try and ensure that there was a separation between the Holdings Company and the Construction group of companies? ~~ That - that would have largely happened as a result of the transactions discussed.

Yes. What I am asking you though is whether he said that that was what he wanted to achieve before the proceedings were commenced against the University? ~~ I- um- generally. I can - I can't remember exactly, but that was part of - part of what I can remember as discussions.

And part of the considerations then was the fact that the claim was going to [be] made against the University and there was a desire to make Doran Holdings more secure in its position, having regard to that future claim? ~~ Yes.

And more secure by being separated from the Construction companies, correct? ~~ Well, that is correct. I can't remember it word for word what was actually discussed at the meeting I've had with Brad.

And in particular the reason for wanting some security or separation was the possibility of the counter claim being made by the University against Doran Constructions, correct? ~~ Um - it was specifically put like that, I don't think.

Of course, you knew that there was anticipated to be a very significant counter claim by the University, didn't you? ~~ Um - I - I can't remember what the situation was with the University at that time.

Do you remember yesterday we looked at the audit papers where that was referred to and the possibility of a $2.6 million dollar claim by the University ~~ ? ~~ Yes, I can.

~~ against the company? ~~ I can remember that being discussed yesterday from the audit file, yes.

And so at the time when this meeting took place, you were aware of that possibility of a very significant claim being made by the University against the Company? ~~ Um - I can remember that claim from you taking me through the file yesterday. I can't remember whether I was aware of it at that meeting.

Well, certainly at the meeting, it would have been apparent to you that the only reason to talk about securing Holdings, having regard to this claim being made, was in the event that the claim went against Constructions? ~~ Um - I don't know that it was that definitive. I think it was more explained that there was obviously a risk attached to any litigation, that it could go either way.

Then, in particular in relation to this litigation, was it not mentioned the fact that there was a potentially very large claim to be made by the University against Constructions? ~~ Well - the - the audit files indicate that. I can't remember it from those discussions.

Well, let me put it another way, when you were at this meeting and Mr Joyce refers to the university claim and the wanting to secure Holdings and separate it from Constructions what did you think he was talking about? ~~ Yes, I - I thought he was trying to - well, with the benefit of all the knowledge of going through and looking at the files and that now but not - not remembering what I was thinking about at that time he would have been wanting to secure the Holding Group. I can remember Paul Doran, in particular, thinking and telling his fellow directors that he thought that the university would be a positive result for them. So that was in my mind as well but, nevertheless, as I said, any litigation there was a risk attached to it and therefore you need to taken what defences you have to.

And the need to take these defences in contemplation of the risk was something that was discussed at the meeting you attended, is that right? ~~ It would have - yes.

What was the protection that was discussed, lest there was a negative result in the litigation at the university? ~~ It would have been the rationalisation of - continued rationalisation of this Group and separation of Constructions from Holdings. … You went to the meeting in your professional capacity to advise specifically on the topic of whether or not the transaction could be set aside at some later stage as being voidable? ~~ I knew it was one of the issues to be discussed. … And you've said that when you went to the meeting Mr Freeman spoke before you on the topic of the need for the Directors to satisfy themselves about the reasonableness of the transactions, correct? ~~ I can remember - yes, I - I can remember Mr Freeman discussing that with the brothers.

Do you recall hearing any discussion amongst the Directors about the reasonableness of the transactions? ~~ I can remember it being discussed, so the other brothers would have been involved. I can't remember whether all of them were or just one, I'm not sure.

What can you recall being said by the Directors? ~~ I can remember the commerciality of the transaction being discussed.

What can you recall being said? ~~ I can only - I can remember discussions about the rationalisation carried out by - well, I'm not sure whether it was actually - Ernst and Young were actually referred to but I can remember discussions about previous rationalisations. This is very difficult because I've seen the minutes and I know what they say but you're asking me what I can remember of the meeting that I attended.

Of the Directors. That's right; of the Directors discussing you said the commerciality of the transactions? ~~ Yes.

What can you recall them saying? ~~ I - I can't remember precisely or even half precisely. I can remember a - a feeling or I have vague memory of - that they had carried out these kind of transactions previously. I can remember them saying that all their creditors were paid - being paid, have always been paid. I can remember - well, I can remember, again, the potential for a positive result from the university but I - I can't remember whether that was discussed at that meeting I attended or whether it was just discussed at that time generally.

You can recall being discussed at this meeting the possibility of a negative result from the university claim, can't you? ~~ I can remember - well, I can - I can remember the awareness that there was some risk attached to the litigation that they were about to embark upon.

Indeed, the whole conversations about these transactions was predicated, was it not, on the basis of a desire to separate Holdings from Constructions because of this claim? ~~ Yes.

In that context? ~~ And as part of the general rationalisation of the Group as well. If you like, I think this claim was - it presented some urgency to it, to something which had been carried on in the past as well.

Sorry, I didn't understand what you said. The claim had some urgency attaching to it? ~~ No, I think …

Could you explain your last answer? ~~ I mean what they were discussion is - is something that had been discussed at these type of transactions, the rationalisation of the Group, this is why it's difficult. There have been discussions at just about every AGM I've been to, every second meeting I've been to with - not every second meeting but often with the Doran brothers, so how much of that was discussed at the time at the particular meeting that I attended I can't remember. What I am saying is these issues, continuing issues, were given some - certainly given some urgency because they were about to embark upon litigation against the university. … But nevertheless you discussed the commerciality of the transaction. What did you say? ~~ I would have discussed reasons why it was a - why - why - justification for it being a commercial transaction but I would have also said that I wasn't a lawyer, not an insolvency expert and I imagine it's - it's something they didn't have expertise in.

Of course, at the time of this meeting you had been intimately involved with the preparation of the accounts for the three relevant companies, correct? ~~ Yes.

On what basis did you say that it was a commercial - or did you present - I'll start the question again. What matters did you put forward as justifying the commerciality of the transaction? ~~ Um, it was a continuation of the rationalisation of the Doran Group which - you can go back over the years it's done - it's a continual process year by year, so it wasn't out of the ordinary for the Doran Group on that basis - um - it simplified the Group had been - that both the Directors, or in particular Paul Doran, Brad Joyce, wanted a simpler presentation to financiers and always pushed for that."

54 Paul Doran says that as at 1 November 1994 he believed that the University owed money to Constructions, not the other way around. He says that he appreciated that the proceedings against the University would cost Constructions a considerable sum of money, but he says that it "never entered his head" at the time that if a liquidator were appointed to Constructions the liquidator would call up the debt from Holdings in order to pay Constructions' creditors. He says that he believed Constructions to be solvent at that time. He resolutely denies that he understood the Restructure to be undertaken for the purpose of depriving a liquidator of Constructions of the right to claim repayment of Holdings' debt to Constructions. 55 The evidence of Peter Doran is vague as to when he became aware of the fact that the University was making a substantial claim against Constructions. He says that as at 1 November 1994 he was aware that Constructions was making a substantial claim against the University, but he says that he does not remember a claim by the University against Constructions until about 1996. He readily concedes that if such a claim by the University was known as at 1 November 1994 he would have been made aware of it. He resolutely denies that the Restructure was effected for the purpose of removing Holdings' assets from the reach of a liquidator of Constructions. 56 Peter gave the following evidence with some warmth: "Q. I suggest to you the reason for the transaction on 1 November was to eliminate or reduce the exposure of Holdings' assets to Constructions' creditors? A. No, that's not right.

Q. You don't recall the transaction? A. That's not right. We would not enter into any transaction that was tainted in any way, shape or form with that type of situation. We just wouldn't do that.

Q. You consider that a wrong thing to do? A. Yes." 57 Michael Doran's recollection of the 1 November 1994 meetings is virtually non-existent. He is completely inexperienced in financial affairs. As he said: "I had nothing to do with the financial side of the business. I grew up as a hands-on man as an apprentice, and what-have-you, and that's all I know of building" . 58 Michael recalls that in 1994 Constructions was involved in a dispute with the University, but he recalls virtually nothing about the dispute as he had more or less retired by that time. He says that in passing the resolutions effecting the Restructure he relied on Price Waterhouse to inform him whether there was any problem. 59 John Doran retired from working in the Doran Group in about 1990 although he continued as a director, attending only formal meetings as required. His experience was working in the erection of steel structures and in the hire of building equipment. He has only a rudimentary knowledge of finance and accounting. He says, and I accept, that he relied entirely on Price Waterhouse as to the accuracy of financial accounts and that to the extent that he can recollect anything about the Restructure he relied upon the fact, as he thought, that Price Waterhouse recommended it and that his brothers agreed to it. He said that he was aware that there was some claim by the University against Constructions, but could not remember whether it was bigger or smaller than Constructions' claim against the University. He said that he thought that the Restructure was done "to pay our debts" .

60 In assessing whether I should accept the Liquidator's submission that the Restructure was effected with the actual purpose of removing from the reach of Constructions' creditors the funds of Holdings I take into account the following considerations. 61 As a result of the Restructure, as at 1 November 1994 Holdings still owed $1.189M to Constructions. Holdings repaid that sum after 1 November 1994 but advanced $1.225M to Constructions after 30 June 1996. Such an advance, exposing the assets of Holdings to a fresh claim by Constructions, would be inconsistent with a preconceived plan by the Directors to shield Holdings' assets from claims by Constructions' creditors. 62 Further, the Directors and other companies in the Doran Group had given unlimited guarantees to Westpac to secure Constructions' overdraft liabilities. As a matter of reality, it must have been apparent to the Directors that if Constructions became insolvent shortly after 1 November 1994 it was likely that not only the assets of Constructions, but also the assets of Holdings and their own personal assets would, directly or indirectly, be exposed to the claims of Constructions' creditors.

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.

69 Although both parties agree that the test prescribed for solvency by s.95A CA is a cash flow test, it is instructive to commence by examining the balance sheet position of Constructions as at 31 October, 1994. 70 Both sides' experts have prepared reconstructed balance sheets for Constructions showing its position immediately prior to the Restructure taking effect on 1 November, 1994. The differences may be summarised thus:

Plaintiff's reconstruction Defendants' reconstruction $ '000 $ '000 CURRENT ASSETS Cash 6 6 Receivables 1,872 1,872 Work in Progress (150) (150) Outstanding Claims 0 1,005 Outstanding Claims 0 28 Other 115 115 Loan - Holdings 5,289 5,289 Total Current Assets $ 7,132 $ 8,165

CURRENT LIABILITIES Trade Creditors (2,661) (2,063) Bank Overdraft (1,812) (1,812) Loan - DCA (99) (99) Employee Provisions (111) (111) Accrued Charges (17) (17) Tax Provision 2 2 Total Current Liabilities $( 4,698 ) $( 4,100 )

NON CURRENT ASSETS Property, Plant & Equipment 56 56 Loan - Dyspane 1,210 1,210 Total Non Current Assets $ 1,266 $ 1,266

NON CURRENT LIABILITIES Mortgage Loan (1,200) (1,200) Trade Creditors - Retentions 0 ( 598 ) Total Non Current Liabilities $( 1,200 ) $( 1,798 )

71 The adjustment of $1,005,000 to Outstanding Claims is explained in the Report of the Directors' expert, Mr Bryant, in Appendix 4 as based on evidence as to the position of various claims given in Paul Doran's affidavits, which evidence was not challenged in cross examination. 72 The adjustment of $598,000 to trade creditors results from a re-categorisation between current and non-current liabilities and does not affect the competing calculations of Constructions' nett asset position. 73 I accept the analysis of the balance sheet position of Constructions expressed by Mr Bryant in his report. I note that the Liquidator's expert, Mr Pascoe, said that he did not challenge Mr Bryant's analysis of the data underlying Mr Bryant's reconstruction of the balance sheet. 74 Mr Pascoe did not disagree with the following conclusions which emerged in Mr Bryant's report:

• as at 31 October 1994, Constructions' recorded liabilities were $5.9M;

• included in the sum of $5.9M were trade creditors of $2.7M of which only approximately $160,000 was analysed as due and payable at 31 October 1994;

• also included in the sum of $5.9M was a bank overdraft of $1.8M of which only $994,000 was analysed as due and payable at 31 October, 1994.

i) as at 1 November 1994 there were present none of the usual indicia of insolvency;

• there was no history of dishonouring Constructions' cheques;

• suppliers had not been delivering goods only on a COD basis;

• Constructions had not been issuing post-dated or 'rounded sum' cheques;

• Constructions had made no special arrangements with its creditors;

• Constructions was able to produce timely, audited accounts;

• Constructions had no unpaid group tax, payroll tax, workers compensation premiums or superannuation contributions;

• Constructions had received no demands from its bankers to reduce overdraft limits and it had a good relationship with its bankers;

• Constructions had received no statutory demands, solicitors' letters requiring payment of debts or legal proceedings for the payment of trade debts;

ii) as at 1 November 1994, Constructions' reconstructed balance sheet showed nett total assets of $3.5M and positive nett current assets;

iii) all of the $5.9M recorded as Constructions' liabilities as at 31 October was paid (or written back as no longer a liability) prior to Constructions' liquidation on 24 March 1997;

iv) funds of $5.1M were provided to Constructions by other companies in the Doran Group between 1 November 1994 and 24 December 1997;

v) as at 30 June 1995, shortly before the date upon which the Charge was given by Constructions to Holdings, Constructions had recorded liabilities of $3.5M, all of which had been paid or written back prior to 24 December 1997;

vi) of the $1.4M disclosed in Constructions' Report as to Affairs upon its liquidation, only $234,000 was owed to external creditors and none of the external creditors resulted from trading operations prior to 31 October 1994 or 30 June 1995;

vii) there were major decreases in the overdraft facility of Constructions during September and November 1996 and the overdraft was extinguished entirely in November 1996 when Holdings advanced a sum of $400,000 to Constructions;

viii) as at 24 December 1997, Constructions had no outstanding liability in relation to a mortgage facility of $1.2M previously taken out with St George Partnership Banking Limited;

ix) a loan from DCA to Constructions of $98,737 existing as at 31 October 1994 had been discharged by 24 December 1997;

x) as at 31 October 1994, total employee liabilities for Constructions were $110,666 but by 24 December 1997 Constructions had no employees and all of these amounts had either been paid or transferred to the account of Holdings;

xii) there is no evidence of any of the indicia of insolvency to which I have referred between 1 November 1994 and the winding up of Constructions in December 1997. 76 In short, for slightly more than three years after 1 November 1994 Constructions continued to subsist, paying its external debts with the assistance of funds provided by other companies in the Doran Group, without any complaint from its creditors or its financiers.

Mr Pascoe's opinion as to solvency as at 31 October 1994

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.

84 The fundamental question for determination is whether the definition of insolvency which now appears in s.95A CA has changed the pre-existing law which had developed around its predecessors in insolvency legislation. The predecessors of s.95A defined insolvency as an inability to pay the debtor's debts "from his own monies" : see e.g. s.44(1) Bankruptcy Act 1914 UK; s.95(1) Bankruptcy Act 1925 (Cth); s.265 Companies Act 1929 (UK); s.208 Companies Act 1936 (NSW); s.222 and s.293 Companies Act 1961 (NSW); s.122 Bankruptcy Act 1966 (Cth); and s.451 Companies Code 1981 (NSW). 85 The Exposure Draft Bill of the Corporate Law Reform Bill (Cth) published in February 1992, in the clause that ultimately became s.95A, defined insolvency as a debtor's inability to pay his or her debts as they became due and payable "from his or her own money" . It is legitimate to assume that the inclusion of those words was intended to convey that the case law which had developed around those words in prior insolvency legislation was to continue to be applicable. 86 However, when the Bill became law, the words "from his or her own money" were dropped. Section 95A now reads: " Solvency and insolvency

(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.

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.

It is submitted that there is a strong argument in favour of the proposition that the omission of these words signifies the legislature's intention that unsecured loan funds can be taken into account when determining a debtor's solvency ie the legislature omitted the words to reverse the position established by the cases that refused to consider unsecured borrowings in deciding whether a debtor was solvent at a particular point in time. This would be consistent with commercial practice. It is submitted that if a company can obtain funds from a lender of some substance, then a court should carefully consider the fact that that, in itself, may indicate that the debtor company is not insolvent." 102 The editors of CCH Australian Corporations Commentary (loose-leaf, CCH Australia, 2004) seem to suggest that s.95A now permits a pragmatic consideration as to whether unsecured borrowings from directors can be taken into account. At s141-010 they say: "Consideration will not, however, usually be taken of finance which can be obtained from the personal assets of a director of the company. Such finance cannot be described as the company's own money and will not put an otherwise insolvent company in the position of being able to pay its debts as they become due 'from its own money' (noting that the solvency/insolvency test in sec 95A does not expressly require that the ability to pay must be from the company's 'own money' ): Re Mike Electric (Aust) Pty Ltd (in liq) (1983) 1 ACLC 758. It is suggested, with respect, that the case may be different if the directors have an established history of supporting the company, for two reasons: if it is likely that the directors will support the company, the position of the company would be no different than if it had a reasonable expectation of obtaining finance from an arm's length third party (such as a bank or investor);

the insolvent trading provisions of the Act provide a positive disincentive to directors to promise and then withdraw financial support." 103 Likewise, the learned authors of Ford's Principles of Corporations Law (loose-leaf, Butterworths, 2000) suggest that unsecured borrowings are not now necessarily excluded from consideration. At p.20,158 under the heading "The assets to be taken into account" they say: "According to Isaacs J in Bank of Australasia v Hall (1907) 4 CLR 1514. If … the debtor's position is such that he has property either in the form of assets in possession or of debts, which if realised would produce sufficient money to pay all his indebtedness, and if that property is in such a position as to title and otherwise that it could be realised in time to met the indebtedness as the claims mature, with money thus belonging to the debtor, he cannot be said to be unable to pay his debts as they become due from his own moneys.

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.

117 In the present case, I have regard primarily to the following facts in determining Constructions' solvency as at 31 October 1994:

• there is no evidence that, as at that date, Constructions had not been paying all of its debts as they became payable;

• the evidence is that all debts payable by Constructions as at that date were subsequently paid or otherwise discharged without complaint from its creditors;

• the evidence is that Constructions was able to continue paying its debts for some three years afterwards without complaint from its creditors. 118 In my view, it does not matter whether Constructions was able to pay its debts as at 31 October as well for about three years thereafter because other companies in the Doran Group made funds available to it. What actually occurred in this respect proves that the funds of the other companies in the Group were a resource available to Constructions as a matter of commercial reality. 119 For these reasons, and also because I am of the view that the opinion of the Liquidator's expert, Mr Pascoe, is flawed in the ways I have described, I conclude that the Liquidator has failed to prove that Constructions was insolvent as at 31 October 1994. However, I should go further: I find that as at that date Constructions was, in fact, solvent.

120 The factors to which I have referred in paragraph 75 were present also as at 1 November 1994 and as at the time the Charge was given, i.e. 18 July 1995. For the reasons which I have explained, I conclude that the Liquidator has failed to prove that Constructions became insolvent as a result of the Restructure and that the company was insolvent as at 18 July 1995. Again, I find that as at that those dates Constructions was, in fact, solvent.

121 Section 588FB(1) provides: " Uncommercial transactions

(1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:

(a) the benefits (if any) to the company of entering into the transaction; and

(b) the detriment to the company of entering into the transaction; and

(c) the respective benefits to other parties to the transaction of entering into it; and

Section 588FE(4) provides that a transaction is voidable if: "(a) it is an insolvent transaction of the company; and (b) a related entity of the company is a party to it; and (c) it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation-back day."

Section 588FC relevantly provides that a transaction is an insolvent transaction if, and only if it is: "… 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." 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.

131 It will have become clear from the foregoing reasons that I am not satisfied that Constructions was insolvent, near to insolvent, or at any risk of insolvency as at 1 November 1994. 132 Accordingly, in considering whether to enter into the Restructure, the Directors in exercising their statutory and fiduciary duties as directors of Constructions, had no duty, or even occasion, to consider the effect which the Restructure might have on the rights of Constructions' creditors: see e.g. Equiticorp at 144-146 and the cases there cited. 133 As I have held, the Directors did not enter into the Restructure for the purpose of replacing a valuable asset of Constructions with a worthless one, in order to deprive the University or Beresfield of the fruits of their litigious success, if that should be the outcome. The purpose which I have found motivated the Directors was not ulterior to the interests of Constructions nor was it unreasonable having regard to the interests of Constructions. 134 Further, I take into account the fact that the Directors expressly sought the advice of the Group's auditor and of its solicitor, neither of whom advised that what was proposed in the Restructure was wrong. 135 In all of these circumstances, I am unable to find that, in effecting the Restructure, the Directors did not act in good faith in the interests of Constructions or with lack of appropriate care and skill in the discharge of their duties as directors of Constructions.

136 As I have held that the Liquidator has failed to prove that Constructions was insolvent as at 18 July 1995 when the Charge was given to Holdings, the giving of the Charge was not an insolvent transaction within s.588FC CA and it is not voidable under s.588FE(4) CA .

137 For the reasons which I have given, I am of the opinion that the Liquidator has made out against the Directors none of the claims made in the Amended Originating Process. The Amended Originating Process will, therefore, be dismissed. 138 If so requested, I will stand these proceedings over for a short time to enable the parties to consider these reasons and to make submissions on costs. - oOo -

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