CONSIDERATION
182 Turning first to the date of insolvency, the principles are not in dispute and have been set out above. The fundamental difference between the parties is the weight or significance to be placed on the claim that Mr Kingsbury was able and willing to support the company financially to enable it to pay its debts as and when they fell due prior to his resignation.
183 The plaintiffs point out that there was no contractual obligation on Mr Kingsbury or any of his related companies to provide financial support or accommodation to Pilbara Bakeries. That may be so, but is clearly not determinative on the authorities: Chan (at [43]). I accept the evidence given by Mr Kingsbury that he was prepared until receipt of the ATO statutory demand in August 2016 to financially support Pilbara Bakeries. I accept that it is clear that he had the capacity to do so. Mr Kingsbury's evidence was not challenged on this point.
184 The ability and intention of Mr Kingsbury and Malaga to continue to support Pilbara Bakeries is a central plank of the defendants' case which, in my view, has been ignored in the analysis by Mr Cribb. The independent analysis by Ms Low is to be preferred. It is supported by the actual facts of significant financial support being given to Pilbara Bakeries by Mr Kingsbury and Malaga. Ms Low was not significantly cross-examined as to her opinions going to the date of insolvency. The cross-examination went largely to the question of what a reasonable director would have done in the circumstance. Her evidence as to the date of insolvency effectively being unchallenged accords with my own view as to the date of insolvency, but having regard primarily to the ongoing actual and intended support by Mr Kingsbury and Malaga which he controlled.
185 As noted in Chan (at [40]), in assessing the relevant date of insolvency the company's position must be considered not only as to its legal rights and obligations, but also to the relative likelihood that it will have funds available to it, albeit from sources in respect of which there is no formalised agreement or understanding. There was no challenge to the capacity of Mr Kingsbury or Malaga to provide financial support if needed on an ongoing basis. I find that his willingness to continue to support Pilbara Bakeries was established on his evidence.
186 With regard to the reasoning in Chan and the decisions in Westgem and Mulherin cited by the defendants, the plaintiffs misapprehend the test to the extent they suggest that the company must have a legal right to funds from a third party or that those funds be 'under its control' or 'at its command'. All that is required is a necessary degree of assuredness that funding support will be provided. That standard is highly fact dependent and requires careful consideration of the commercial realities of the case. I recently considered this issue in Carna Group Pty Ltd v The Griffin Coal Mining Company (No 6) [2021] FCA 1214, albeit in a very different commercial context in which a mining company was reliant on its parent company and broader corporate group to pay its debts. At [228] I said:
In the 2014 calendar year, both Mr Roy and Mr Riordan estimated Griffin received about $50 million in parent funding. But as has been made plain, not only did Griffin have absolutely no control over when or if parent funding would arrive, the reality was that such funding consistently failed to arrive on time. The letters of support from Lanco do nothing to overcome this fact. This repeated in-principle commitment does not reflect what actually occurred. I find both that Griffin was primarily reliant on its parent to pay its debts when they fell due and that in practice, Griffin did not have the necessary degree of assuredness that financial support would be forthcoming: Chan (at [43]). On numerous occasions Mr Roy contacted the parent, and when that failed, the parent's financing bank, requesting urgent assistance and giving details of numerous debts that required immediate payment. The evidence suggests those requests went unanswered, at least within the time required.
(Emphasis added.)
187 By contrast, the evidence here demonstrates that Mr Kingsbury had the financial capacity to support the company throughout his directorship and, most importantly, he repeatedly provided that support through various mechanisms when requested by Mr Catlin in a timely manner. Indeed, it is extremely telling that the only significant creditor of the company besides Malaga itself was the ATO, whose debt was the subject of Mr Catlin's sustained and extensive concealment from Mr Kingsbury. The evidence clearly demonstrates that Mr Kingsbury acted to support the company to meet all of its other debts.
188 In addition to the absence of any consideration of this crucial fact in the Solvency Report, the consideration of the other factors going to insolvency advanced by the liquidator in my view, have been exaggerated. Further and despite being aware of the very significant deception by Mr Catlin, the plaintiffs have largely diminished that factor in their assessment. A similar difficulty with provision of the expert evidence by the liquidator, rather than an independent expert was discussed in Hussain v CSR Building Products Ltd [2016] FCA 392; (2016) 246 FCR 62 where Edelman J said (at [1] and [111]):
1 This litigation was unfortunate and uncommercial. It involved a claim by the liquidators of FPJ Group Pty Ltd (FPJ Group) to recover payments from CSR Building Products Pty Ltd (CSR) in circumstances in which, as they were told from early directions hearings, their legal costs to trial were extremely likely to exceed any possible recovery. If the liquidators' own time and costs were added to the legal costs then it must have been clear from the inception that this would eclipse any possible recovery. In some circumstances the public interest in recovery proceedings being brought by a liquidator might justify a risk being taken that legal costs might exceed recovery. But that public interest diminishes substantially where, as here, some of the liquidators' claims are ambitious.
…
111 Although there was significant cross-examination about Mr Ross' independence and impartiality, I am satisfied that he approached his evidence honestly. But Mr Ross was not independent. Nor was he impartial. He properly accepted that he was not merely a plaintiff in these proceedings, in his capacity as liquidator, but also that he had done considerable work which would not be remunerated if the liquidators were unsuccessful in the proceedings. Although Mr Ross was honest, and although he was aware of his obligations as an expert, the conflict which he faced as both expert and party was apparent at times in his evidence.
(Emphasis added.)
189 The position here is similar.
190 In conclusion on the date of insolvency, it may be that the objectively assessed date of insolvency was somewhat before the date of resignation of Mr Kingsbury, when he first learned of the ATO debt. It was certainly not anywhere near as early as the plaintiffs suggest because Mr Kingsbury was prepared for a considerable number of years to continue to finance Pilbara Bakeries. His resignation was caused, not so much by the existence of the ATO debt, but because of its existence when he had been repeatedly assured by Mr Catlin that arrangements with the ATO were in hand. It was discovery of the deception which was the main problem. In those circumstances, I am unable to find that the plaintiffs have proven that the necessary support would not have continued so as to enable Pilbara Bakeries to meet its debts as and when they fell due.
191 However, assuming that I am wrong with regards to the date of insolvency, and in considering the reasonableness of Mr Kingsbury's conduct in relation to the directors' duties claim, I do not consider Mr Kingsbury should reasonably have suspected that the company was insolvent at some time prior to his resignation. Nor do I consider that it was unreasonable for him not to have taken the courses of action urged by the plaintiffs to have uncovered Mr Catlin's deception at an earlier time. Although the garnishee notice did raise a 'red flag', in my assessment Mr Kingsbury reasonably relied upon the explanation provided in relation to that circumstance and did put in place further protections from that time to ensure that he received proper information. He also financed payment of the debt. The plaintiffs effectively contend that Mr Kingsbury should have distrusted Mr Catlin from the moment that the first garnishee notice came to his attention, and continuously checked these aspects of the company's financial position completely independently of Mr Catlin into the future.
192 It is easy with hindsight to be critical of a person's lack of suspicion of a co-director, but for most people in business with a person whom they have trusted and on whom they have placed fiscal reliance, it is not in the nature of things to suspect plain deception and dishonesty about reports, let alone repeated and extensive dishonesty over a number of years. Viewing things in hindsight is a great advantage. Although a number of possibilities were put to Mr Kingsbury in cross-examination as to the further steps he might have taken to satisfy himself as to the correctness of the information, it is easy with the benefit of hindsight in a courtroom and the accumulation of much more knowledge than was available at the relevant time to be critical of the willingness to accept the financial reporting which was being made.
193 The plaintiffs also submitted that it was extraordinary for Mr Kingsbury to have held a directorship for as long as he did without having any contact with Pilbara Bakeries' accountant. I am not convinced that this is so, given the conduct of the day-to-day affairs of Pilbara Bakeries were in the hands of Mr Catlin and there was no evidence to indicate that the accountants did anything more than prepare the company's financial statements in line with its statutory obligations. Indeed, Mr Catlin's evidence suggests the accountants' involvement did not extend beyond this annual role. Mr Kingsbury received assurances from him with which he was satisfied. He saw documents from Pilbara Bakeries' accountant which he assessed and took into account. One might put this submission the other way and say that if there was a circumstance which should be brought to the attention of the directors of the company, it might be expected that the company's accountant would do so. No information of concern was conveyed to Mr Kingsbury from Pilbara Bakeries' accountant. There was no such factor putting Mr Kingsbury on alert that he might need to check the financial affairs with Pilbara Bakeries' accountants. This is not a factor, in my view, which detracts from the reasonableness of Mr Kingsbury's reliance on Mr Catlin.
194 Indeed, in my view, it would be an extraordinary state of affairs if a serious notice, such as a statutory demand from the ATO addressed personally to the client of an accountant, albeit in his capacity as a director of the company, would not be brought to the attention of that director by the accountants. Even where the client was the company (i.e., Pilbara Bakeries), Mr Kingsbury would be entitled to expect that the accountants would inform him of such a notice if it was addressed to him in his name as a director. There is no more he should be required to do to ensure that occurred.
195 The plaintiffs emphasise that there was a period of some 18 months from September 2013 to April 2015 when no payments were made to the ATO, yet Mr Kingsbury's evidence was that he was checking the bank statements to see that there were regular payments to the ATO. Mr Kingsbury said in cross-examination that there may have been a 'payment holiday' meaning, as I understand it, an accepted arrangement with the ATO. Again, no doubt with the benefit of hindsight, Mr Kingsbury would wish that he had explored that question more closely at the time, but given what is now known, it is hard to believe that he would have received any different information from Mr Catlin other than that payments being made to the ATO were in accordance with the arrangements reached and that Pilbara Bakeries was not in default of its obligations to the ATO.
196 Ms Low's evidence was also to the effect that it may not be obvious to a director reviewing bank statements that there is an absence of payments that should be occurring, as opposed to the presence of payments that should not be occurring. She said however that once on notice about any issue in relation to the payment of an obligation, any prudent director could be expected to review the bank statements with an eye for such matters. In circumstances where the only previous issue with ATO payments was (to Mr Kingsbury's knowledge) the garnishee notice in September 2012 which had been promptly resolved almost a year before the company's 18 month hiatus from making ATO payments, I do not consider it would have been expected of Mr Kingsbury to be monitoring the bank statements for non-compliance in this regard. He was repeatedly assured by Mr Catlin that ATO payments were up to date.
197 As to payments to Malaga, there is no evidence at all that those arrangements were anything other than commercial and necessary. I am not satisfied that it has been demonstrated that the payments were unreasonable in the circumstances where Mr Kingsbury had been misled as to the state of affairs, and thus the solvency, of Pilbara Bakeries.
198 Some criticism is made by the plaintiffs of the fact that Malaga purchased certain assets in its own name and made them available to the Business. In some instances, Malaga did not do so using its own funds. It paid for the fit-out of the Premises, purchased the bakery equipment and various vehicles using funds provided by the CBA. Malaga then required Pilbara Bakeries to repay the fit-out cost in instalments which included a commercial interest rate incurred by Malaga to the CBA.
199 It is difficult to understand the complaint in this situation. Pilbara Bakeries got the benefit of these items and made payment in respect of that benefit. The benefit was provided commercially. It is not known whether it would have been possible for Pilbara Bakeries to borrow the funds directly to finance the fit-out, but it may certainly be reasonable to infer that it would have had difficulty doing so in the absence of a guarantee from Mr Kingsbury or Malaga. The plaintiffs led no evidence on this topic. A reasonable commercial solution was to provide the equipment by Malaga borrowing the funds from the CBA. The plaintiffs complain that Pilbara Bakeries did not acquire any beneficial interest in respect of the equipment because of this arrangement, but there is really no adequate evidence one way or the other as to whether it would have been possible to structure this funding arrangement in some other way which would have been financially viable. Instead, it was simply asserted that Malaga could have loaned funds to Pilbara Bakeries for it to purchase the equipment and vehicles for itself with Malaga to retain a security interest over the assets to protect its investment. That is certainly an alternative arrangement that the parties could have agreed, and one that perhaps may have been more favourable to Mr Catlin. But again, no evidence has been led in this regard and the mere hypothetical existence of an alternative business structure does not demonstrate the unreasonableness of the one agreed to, particularly where it is not challenged that the parties' dealings were at arms-length and on commercial terms. I see no difficulty in this funding arrangement. It was logical and reasonable.
200 As to the payments which have been described as the Kingsbury Loans, receipt of some payment is acknowledged, but the plaintiffs say there is no evidence that Pilbara Bakeries owed any sum directly to Mr Kingsbury and therefore Pilbara Bakeries was not indebted to Mr Kingsbury at any time. Nor were the payments made by way of a gift. It seems clear that the amounts paid to him were in respect of amounts owed by Pilbara Bakeries to Malaga under the Lease. The plaintiffs assert that there is no evidence of any direction by Malaga to Pilbara Bakeries to pay to Mr Kingsbury these amounts. Mr Kingsbury, it is said, derived a benefit as a result of those payments because they went into his home mortgage account, despite the fact that the payments were ultimately attributed to the bank accounts of Malaga. But the plaintiffs say there was no evidence identified as to how this occurred and no basis on which the payment should have been made to Mr Kingsbury rather than to Malaga.
201 This complaint is also difficult to understand. While the payments under the Lease, for example, were due to Malaga, rather than to Mr Kingsbury, there is no debate that the payments were due. The fact that Pilbara Bakeries paid them to the controller of Malaga personally or to a related entity of Malaga (no doubt at some express or implied direction from Mr Kingsbury or Mr Catlin) has not caused any loss to Pilbara Bakeries or any proven benefit to Mr Kingsbury at the expense of Pilbara Bakeries or either of the other entities. The payment was accepted in satisfaction of Pilbara Bakeries' obligations to Malaga. The question is whether Pilbara Bakeries has sustained some loss by those payments being made to Mr Kingsbury, rather than to Malaga. Pilbara Bakeries has not suffered any loss because these payments were due. Similarly, the fact that the payments were made to Malaga's controller has not caused the defendants to sustain any proven benefit to which they were not entitled. But further, and obviously if the plaintiffs' claim were correct and, in my view, it is not, Malaga would have a substantial set-off claim against Pilbara Bakeries for unpaid rental payments.
202 I accept the submission for the plaintiffs that as observed in Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 236 FLR 1, the minimum standard of diligence requires every director to keep informed about the company's activities and to maintain familiarity with the financial status of the company including a review of the company's financial statements. But it is not the case here that Mr Kingsbury simply accepted at face value everything he was told by Mr Catlin. He received a substantial quantity of financial information. Mr Catlin's deception was so significant that the written financial information supplied was deceptive and false. I accept the evidence of Mr Kingsbury that he made regular enquiries and insisted on the provision of financial information and received that information. (After all his funds and Malaga's funds were at risk.) I also accept the submission for the plaintiffs that reliance on assurances in the absence of more concrete proof of the financial state of affairs may be unreasonable, depending on the circumstances. But the plaintiffs extrapolate this assertion to a submission that from the date of the issue of the garnishee notice onwards there should have been distrust. With the benefit of hindsight such a submission is reasonable and it may be that some directors would have taken a more suspicious view of the information being supplied by Mr Catlin, but taking into account the steps that Mr Kingsbury did take, I cannot be satisfied that his reliance upon the information he received was unreasonable. It is true, as Ms Low said, that he could have taken, without great difficulty, additional steps which may have uncovered the concealment or deception of Mr Catlin, but this concession by Ms Low was a concession made with the benefit of hindsight and all the knowledge that has now accrued. Ms Low did not adjust her conclusion that the reliance placed by Mr Kingsbury at the time was reasonable. Nor, in my view, was she required to do so.
203 It is possible that had Mr Kingsbury compared the financial year-end statements prepared by Pilbara Bakeries' accountant and the monthly management accountants that discrepancies may have been disclosed. But again, such scrutiny of the different financial reports of the company would have required Mr Kingsbury to harbour significant suspicions about the veracity of Mr Catlin's monthly management accounts, in circumstances where the year-end statements were received by him often times a number of months after the end of the relevant financial year. Importantly as well, the monthly management statements always indicated to Mr Kingsbury that the company's receivables exceed its payables.
204 I am also not satisfied that it was unreasonable that Mr Kingsbury did not request Mr Catlin for access to the ATO portal given the specific assurances that he had received from Mr Catlin. To do so in circumstances where these affairs were, by agreement, under Mr Catlin's control, would have effectively amounted to suggesting Mr Catlin was deceiving Mr Kingsbury about the state of the tax affairs of Pilbara Bakeries. No doubt with the benefit of hindsight, Mr Kingsbury may wish he had done so at an earlier time, but I am not satisfied that such a confrontation would reasonably be expected in all the circumstances described in the evidence of this case. In any event, there was evidence from Ms Low which I accept, that accessing the ATO tax portal would not have shown the superannuation guarantee balance that was due, so that even if Mr Kingsbury had taken this step, he would not have been any the wiser with respect to easily the most significant aspect of the ATO liability.
205 It is true also that Mr Kingsbury conceded that soon after the Business commenced trading he became aware that Mr Catlin had managed a failed bakery business in the same town, but made no further inquiries about that failure. Perhaps more relevantly, it might be thought that Mr Kingsbury would be concerned that Mr Catlin had not disclosed to him such failure at an earlier stage of their business dealings. I accept that Mr Kingsbury should have been mindful of this aspect of Mr Catlin's history when reviewing Mr Catlin's operation of the Business. However, Mr Kingsbury had weekly communication with Mr Catlin and insisted on the provision of monthly statements of the accounts. In my view, the fact of a previously unsuccessful business venture would not put a reasonable person on notice as to the possibility of a complete concealment and deception of a significant aspect of a company's liabilities. The two concepts are quite distinct. Again, with hindsight, perhaps Mr Kingsbury wishes he had made further enquiries as to the circumstances in which Mr Catlin's previous business failed, but there is no evidence of those circumstances in this proceeding from which to infer that Mr Kingsbury should have been alive to the possibility that Mr Catlin would deceive him to the extent that he did.
206 There is a significant difference between a business failure on the one hand and plain, large scale deception on the other. The false information given by Mr Catlin to Mr Kingsbury was the total cause of the difficulties of Pilbara Bakeries. The extent of deception by Mr Catlin was so substantial that it would be unlikely to be anticipated or predicted by most business people. Even accumulating all the factors to which the plaintiffs point, I do not think there were sufficient red flags earlier than the date of resignation of Mr Kingsbury when the true position with the ATO came to his attention.
207 Mr Kingsbury or someone in his position would have expected that creditors were being paid because of the financial support he was giving, the assurances and documentation that he was receiving. This is certainly not a case where Mr Kingsbury sat back and did nothing and allowed Pilbara Bakeries to trade with impunity whilst creditors accrued. Nor is there any evidence of any profit by Mr Kingsbury or Malaga as a result of any contravention as asserted by the plaintiffs. Any payments made to those entities were made in good faith pursuant to commercial arm's-length agreements.
208 For these reasons, none of the plaintiffs' claims is established. I do not consider the company to have been insolvent for any substantial period prior to Mr Kingsbury's resignation, nor do any of the payments made to Mr Kingsbury or Malaga meet the criteria for unreasonable director-related transactions or unwritten loan agreements. The negligent or unreasonable conduct allegations of Mr Kingsbury fall a long way short of establishing any breach of statutory or fiduciary duty.
209 In light of those conclusions, it is unnecessary to consider the claim of set-off raised by the defendants.