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[2016] WASC 145
General information, not legal advice.
Supreme Court of WA
2016-05-12
Chaney J
Original judgment source is linked above.
1 The first defendant (Perrine Architecture) was incorporated in 1989 and, until November 2011, carried on business as an architectural design firm. The second defendants, Mr and Mrs Perrine, were, at all material times, directors and shareholders of Perrine Architecture.
2 The plaintiff is the liquidator of a company called Perrinepod Pty Ltd (PPL), which was incorporated in July 2007 and was ordered to be wound up on the ground of insolvency on 1 March 2012. PPL was in the business of providing residential and commercial prefabricated buildings, including multistorey projects. Perrine Architecture held 39 million of the 49,500,100 issued shares in PPL.
3 In these proceedings, the plaintiff seeks remedies in relation to what he asserts:
(a) were failures by the second defendants to prevent PPL incurring debts while insolvent;
(b) was Perrine Architecture's liability, as holding company of PPL, for insolvent trading by PPL;
(c) were voidable transactions under the Corporations Act 2001 (Cth) for which Perrine Architecture is liable to pay compensation, and in particular:
4 The total amount claimed by the plaintiff against Perrine Architecture is $5,692,896.24 plus interest from the date of the issue of proceedings until judgment. Of that total, the insolvent trading claim amounts to $4,215,922.13, which is the amount claimed against the second defendants. The claim for unfair preferences amounts to $434,200. The claims in relation to uncommercial transactions and unreasonable directorrelated transactions total $1,476,974.11, but that total includes the transactions which are said to be unfair preference payments. Exclusive of the overlap with the unfair preferences claim, the claim in relation to uncommercial transactions and unreasonable directorrelated transactions is for $1,042,774.11. Those totals are made up of a series of transactions occurring between 2009 and the appointment of a liquidator in March 2012. A claim under s 588G(1A) against the second defendants in relation to insolvent trading by failing to prevent PPL from entering uncommercial transactions was abandoned at the commencement of the trial (ts 70).
5 As can be seen, the bulk of the quantum of the total claim is based upon the claims for insolvent trading. The claims against Mr and Mrs Perrine in relation to insolvent trading are based upon the proposition that they contravened s 588G of the Corporations Act. That section applies where a person is the director of a company at the time when the company incurs a debt, the company is insolvent at that time or becomes insolvent by incurring the debt, and there are reasonable grounds for suspecting that the company is insolvent or would become insolvent by incurring the debt. Section 588M provides that where a director has contravened s 588G and the person to whom an unsecured debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency, the company's liquidator my recover the amount of the loss or damage from a director as a debt due to the company.
6 The claim for insolvent trading against Perrine Architecture is made under s 588V and s 588W of the Corporations Act. Those sections enable a liquidator to recover from a holding company of the company in liquidation the amount of any loss or damage suffered by a person to whom a debt is incurred by the company in liquidation where the holding company, or one or more of its directors, are, or should reasonably have been, aware that there were grounds to suspect insolvency. In this case, because the directors of the holding company, Perrine Architecture, were also directors of PPL, which incurred the debts, it would follow that if Mr and Mrs Perrine are liable under s 588M, Perrine Architecture would be liable under s 588W.
7 Whether any losses suffered by creditors are recoverable on the basis of insolvent trading requires a determination as to whether, at the time particular debts were incurred, PPL was insolvent and there were reasonable grounds for suspecting that it was, at that time, insolvent. It also requires determination of whether Mr and Mrs Perrine were aware at the time that PPL incurred debts that there were grounds for suspecting that the company was insolvent or whether a reasonable person in their position would, in PPL's circumstances, be so aware.
8 Whether or not PPL was insolvent, and whether or not Mr and Mrs Perrine had reasonable grounds for suspecting PPL's insolvency, while not elements of liability for uncommercial transactions or unreasonable directorrelated transactions, inform consideration of the transactions said to be uncommercial or unreasonable. I therefore turn first to the question of whether, and if so when, PPL became insolvent, and to the question of whether there were reasonable grounds to suspect insolvency at the time particular transactions were entered into.
9 Before doing so, I will make some observations on the credibility of Mr and Mrs Perrine, both of whom gave evidence and were crossexamined at length, and then turn to some background to PPL's establishment.
10 In closing submissions, the plaintiff's counsel submitted that, while the plaintiff's case is largely based upon the documents exhibited to various affidavits, the credibility of Mr and Mrs Perrine's evidence is relevant to questions of their actual knowledge of insolvency at any particular time, and also as to matters of context relevant to what should be made of various documents. A number of submissions were made to the effect that Mr and Mrs Perrine's evidence was unreliable.
11 The first of those was said to be Mrs Perrine's 'candid concession that there had been a significant degree of collaboration' between her and her husband, Mr Perrine, in the way that the evidence was prepared (ts 470). Mrs Perrine was crossexamined about her statement in her affidavit where she said that she had read her husband's affidavit and was satisfied that the statements made in it were true and correct and accord with her recollection. Something was sought to be made of Mrs Perrine's admission in crossexamination that the affidavits were prepared simultaneously, and that each of them read the other's affidavits during the course of preparation. Mrs Perrine was also crossexamined about the fact that she did not give an independent account of events to which she was a party, but simply endorsed references to her in Mr Perrine's affidavit.
12 I do not consider that those matters affect Mrs Perrine's, or Mr Perrine's, credibility. They were selfrepresented in these proceedings. Crossexamination as to particular events to which either Mr or Mrs Perrine were party did not, for the most part, significantly undermine accounts of events in respect of which either Mr or Mrs Perrine gave evidence. Each of Mr and Mrs Perrine had different responsibilities within PPL and Perrine Architecture. Mrs Perrine's responsibilities were largely of a bookkeeping nature. Mr Perrine is an architect, and was the person was at the forefront of the operations of PPL and Perrine Architecture. The way that they prepared their evidence was consistent with those different roles. Mrs Perrine said that the reason that she did not give a separate account of events dealt with in her husband's affidavit was that, because they were dealt with by Mr Perrine, she did not feel that she needed to cover them in her own affidavit (ts 213). That decision does not constitute a reason to disbelieve Mrs Perrine's evidence.
13 The second basis upon which it was suggested Mrs Perrine's evidence should not be accepted was her failure to make concessions that PPL was insolvent. The question of whether or not PPL was insolvent at any particular time is a question central to these proceedings. It is a question to be determined not by reference to the subjective views of witnesses, but rather an analysis of all of the evidence. To the extent that Mrs Perrine's beliefs as to solvency are relevant, her assertions as to her subjective belief are to be assessed against the objective facts. As will be seen, there came a point where PPL was clearly insolvent and it could not reasonably have been thought otherwise. To that extent, I would not accept Mr or Mrs Perrine's evidence as to their subjective beliefs as to solvency.
14 That does not, however, cause me to conclude that Mr and Mrs Perrine's evidence as to particular transactions and events, and the context in which they occurred, is unreliable. Having seen and heard Mr and Mrs Perrine give their evidence, I am satisfied that they, alone of all the witnesses, had an intricate knowledge of PPL's business and the various transactions which it undertook. That is particularly so of Mr Perrine, given that Mrs Perrine has had a far less active role in those transactions. In general, I am satisfied that Mr and Mrs Perrine's account of events involving PPL as they occurred is generally reliable, although, as will be seen, in some particular respects their evidence is not accepted.
15 Mr Perrine is an architect and has worked as an architect since 1983, initially as a graduate architect, and then as a registered architect since 1987. With his wife, he formed Perrine Architecture in 1989, and at all times Mr and Mrs Perrine have been the sole directors and shareholders of Perrine Architecture.
16 In 2007, PPL was established for the purpose of developing and bringing to market an affordable modular concrete based construction system which Mr Perrine had designed. The modular units were called Perrinepods. During 2007, Mr and Mrs Perrine gathered together a group of people with expertise in various areas with a view to commercialising Perrinepods. Those persons included:
17 Mr Sergeant was introduced to Mr and Mrs Perrine by Mr Davin and Mr Ali. Mr Sergeant was the managing director of a company called Evolution Capital Partners Pty Ltd (Evolution Capital), and had expertise in setting up corporate structures.
18 Mr Sergeant provided several proposals on behalf of Evolution Capital to capitalise an entity to allow it to deliver the Perrinepod system to the market. That eventually led to the establishment of PPL with Mr Sergeant and Mr Bontempo being appointed as directors along with Mr and Mrs Perrine in September 2007. Mr Perrine was appointed chairman of directors. As part of the initial establishment of PPL, various documents were executed assigning the rights to the intellectual property of the Perrinepod system to PPL.
19 A proposal by Mr Sergeant was that entities associated with Evolution Capital would invest $3 million in shares in the entity to be established. Two million dollars was proposed to be paid to Perrine Architecture by way of reimbursement of its work and expenditure on development of Perrinepods. The remaining $1 million was to be used for working capital. Mr Perrine said, and I accept, that he declined the $2 million reimbursement for Perrine Architecture on the basis that it was not then required. He said that $1 million was invested by entities associated with Evolution Capital. That sum was used to buy inventory for 10 Perrinepods. The inventory consisted of precast concrete modules to be fabricated by ACCUE, kitchens, bathrooms, fixtures and fittings, windows, doors, tiling and internal partitions. Mr Perrine said that that inventory was intended to enable, and was capable of enabling, substantial completion of the Dwyer Project, the Millington Project and the Ali Project, all of which are discussed below.
20 Mr Perrine described Mr Impicciatore and Mr Pecoult as special advisors to the board who remained associated with PPL on a commercial basis via their companies, JADD and ACCUE. Mr Ali, Mr Davin and another investor introduced through Evolution Capital, Mr Didier Maingard, remained advisors to the board. Mr Perrine said that the board was effectively managing PPL in September 2007 with initial responsibility for compliance matters resting with Mr Sergeant and at times Mr Davin or Mr Ali. In September 2007 there was an official launch of PPL to the market which attracted considerable media attention.
21 In October 2007, PPL's board appointed a general manager, Ms Diane Greville.
22 Ms Greville gave evidence at the hearing. She explained that the Perrinepod was not the type of product that could be sold off the shelf to a customer, but rather required considerable consultation with the client as to their particular needs and then substantial design work was required to produce a design solution which satisfied those requirements. In the initial stages of PPL's operation, Ms Greville said that there was a heavy reliance on Perrine Architecture because there was no inhouse designer at PPL at that stage. Mr Perrine said that Ms Greville's employment marginally decreased Mrs Perrine's daytoday involvement with PPL but made no significant change to his own involvement, which involved a range of what he described as 'key roles' in the development of PPL's business.
23 Mr Sergeant resigned as a director in December 2007 to work in Africa. Mr Davin replaced him as a director but resigned in March 2009. Mr Ali replaced Mr Davin on the board. Mr Bontempo resigned as a director in May 2008. Those resignations left Mr and Mrs Perrine with substantial additional responsibilities.
24 The company is solvent if, and only if, it is able to pay all of its debts as and when they become due and payable. A company which is not solvent is insolvent: Corporations Act s 95A.
25 The onus of establishing a contravention of s 588G lies on the party asserting the contravention: Playspace Playground Pty Ltd v Osborn [2009] FCA 1486 [43]; Smith v Bone [2015] FCA 319; (2015) 104 ACSR 528 [23]. The standard of proof is the balance of probabilities: Australian Securities and Investments Commission v Plymin [2003] VSC 123; (2003) 46 ACSR 126 [367].
26 A helpful analysis of the applicable principles was undertaken by Palmer J in Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213, where his Honour said:
In my opinion, the following propositions may now be drawn from the authorities:
27 Those propositions, or at least extracts from them, have been frequently cited: see for example Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239; (2008) 39 WAR 1; Smith v Bone [25], [26] and [28].
28 In the assessment of solvency for the purposes of pt 5.7B of the Corporations Act, what is referred to as the 'cash flow test' is generally viewed as the more appropriate mechanism, as opposed to what is referred to as the 'balance sheet test'. The cash flow test is an assessment of solvency based on the company's ability to meet its current liabilities as and when they fall due. The balance sheet test considers a company's total external liabilities by comparison to the value of its assets and if the assets are insufficient to satisfy all claims on the company, the company is insolvent. Although not generally applicable for the purposes of determining solvency for the purposes of s 95A, the balance sheet test is not irrelevant. In Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [1073], Owen J referred with approval to the passage in Coburn's Insolvent Trading (2nd ed, 2003) where the author says:
The courts have moved to a far wider consideration of solvency, rather than just applying a cash flow test, which is viewed as a basic starting point in the consideration of solvency. This is because the statutory emphasis is on 'solvency' rather than 'liquidity'. The consideration will be as a question of fact: in the light of commercial reality, all things considered, could the company pay its debts as and when they became due? Such an approach includes the balance sheet test, and other commercial realities such as access to money from third parties, raising capital or credit and financial support are all relevant considerations in determining a company's ability to pay debts (66).
29 Where directors are likely to continue to support a company, whether by unsecured loans or otherwise, the existence of that support is a relevant consideration in assessing solvency: Mulherin v Bank of Western Australia Ltd [2006] QCA 175 [115].
30 In order to succeed in relation to the insolvent trading claims, it is necessary for the plaintiff to establish that PPL was insolvent at the time each of the debts which form the basis of the claim was incurred. The debts said to comprise the insolvent trading claim are set out in [140] to [202] of the statement of claim. They are said to have been incurred on a variety of dates, the earliest being in relation to invoices from CID Consultants in July and August 2009. The majority of the debts which form the basis of the claim relate to the 2010 calendar year, and some extend into 2011 and 2012.
31 The plaintiff argued that PPL was insolvent by 30 June 2009 at the latest and his claims are quantified on that basis. Mr Carrello gave evidence at [56] of his affidavit of 13 February 2014 that, based on his review of PPL's books and records and his investigations into the affairs of the company, '[PPL] was insolvent at 30 September 2009 and was probably insolvent from as early as April 2009'.
32 Attached to Mr Carrello's third affidavit, sworn 10 April 2014, is a report of the same date containing Mr Carrello's opinion that PPL was insolvent by no later than June 2009. He reached that conclusion based on a review of PPL's financial records and consideration of what he referred to as specific indicators of insolvency. Those indicators were apparently drawn from a checklist of matters referred to by Mandie J in Australian Securities Investment Commission v Plymin [386]. The list was paraphrased by Mandie J in the course of reciting the evidence of an expert accountant who agreed that the list was 'a fairly extensive list, albeit in general terms, and brought to mind very common features in insolvency situations'. The list reads as follows:
33 Mr Carrello's analysis referred to various transactions which are pleaded in the statement of claim, including many matters occurring after June 2009. A number of the indicators in the list are not present in the case of PPL either as at June 2009 or subsequently. The report does not purport to examine in any detail the transactions to which reference is made in the way that they have been examined in the trial of this matter. It is necessary to undertake an analysis of the various transactions that are pleaded as material to determine whether the plaintiff has established that PPL was insolvent at any point and, if so, when PPL was insolvent.
34 Mr Carrello referred to the financial statements of PPL for the financial year ended 30 June 2009 (2009 PPL accounts) which showed that in that year PPL incurred a gross loss of $1,128,019 having previously reported a profit in the previous year of $726,991. The 2009 PPL accounts reported current liabilities of $1,861,184 against current assets of $706,261 and total assets of $802,312. Of the current liabilities, trade creditors amounted to $977,547. A current liability of $800,000 was described as 'other creditors - building costs (Ali)'. The company's dealings with Mr Ali are discussed below. The 2009 PPL accounts balance sheet showed a net deficiency of $1,223,880.
35 The 2009 PPL accounts do not, by themselves, enable conclusions to be drawn as to PPL's capacity to pay its debts as and when they fell due. As I apprehend the plaintiff's case, he invites examination of the trading history of PPL up until mid2009 and particular transactions prior to that time that gave rise to unmet financial obligations, considered in the light of PPL's financial statements, to support the conclusion that PPL was insolvent as at 30 June 2009. Unfortunately, neither the lengthy statement of claim, nor the very large volume of documents tendered by the plaintiff, nor the plaintiff's written or oral submissions, identify with any precision the particular transactions or documents predating June 2009 upon which it contends the conclusion as to insolvency should be drawn. Rather, in the presentation of its case, the plaintiff pleaded or drew attention to numerous transactions between 2008 and 2012 from which it contends the court should draw conclusions as to the various causes of action pleaded against the various defendants and as to the solvency of PPL at particular times. In the context of pleadings exceeding 300 pages and evidence comprising 15 lever arch files of documents compiled in no particular order other than as annexed to affidavits, the task of analysis is particularly difficult. It is necessary however to identify the principal transactions leading up to mid2009 to assess whether the plaintiff has established that PPL was insolvent at that time.
36 Mr Perrine said that in late 2007, the board was intent on the delivery of one or two key commercial projects.
37 The first commercial project undertaken by Perrinepod was the construction of six twostorey motel units in Carnarvon for John Joseph Dwyer and Jillian Anne Dwyer (Dwyer Project). The contract price was $1 million plus GST. Mr Perrine said that there were difficulties obtaining development approval, which delayed the project for several months. He said that Mr Impicciatore, on behalf of JADD, agreed to undertake the building works at cost excluding any of JADD's internal costs and excluding Mr Impicciatore's own time. Mr Impicciatore said that he had a discussion with Mr Perrine in late 2007 to the effect that the Dwyer Project would allow BHP Billiton (BHPB), which was interested in purchasing Perrinepods, to see a finished PPL project, which could in turn lead to future projects for PPL and JADD. Mr Impicciatore said that he told Mr Perrine that JADD would complete the works at Carnarvon within PPL's budget on the understanding that JADD could also benefit by being the builder on the job if BHPB 'liked what it saw'. In crossexamination he confirmed that he had agreed to do the Dwyer Project at cost. The budgeted cost for the project was $486,055.
38 The evidence is unclear as to precisely when construction of the Dwyer Project was undertaken or completed, although it was sometime in late 2008 or, more likely, early 2009. Mr Impicciatore said that for a period of six to eight months after completion of the Dwyer Project he went to PPL's premises to enquire as to when he would be paid for his outstanding account. That evidence is inconsistent with Mr Perrine's evidence that by February 2009, JADD had not presented a formal claim as to what the Dwyer Project cost (ts 357).
39 According to a summary of invoices in relation to the Dwyer Project prepared by JADD in July 2009 (GMC 23, page 603), JADD invoiced PPL for a total of $736,588 including GST. That amount was made up of the 'project value' of $486,055 together with variations of $250,533. The total amount recorded as having been paid by PPL was $498,778 leaving a balance payable of $237,810. Mr Perrine's position was that those variations had not been agreed, and that the balance claimed by JADD was not payable by PPL.
40 That contention is inconsistent with the acknowledgement by Mr Graham O'Neill, acting general manager of PPL, in a letter to JADD dated 26 November 2009 (GMC 23, page 608). In that letter Mr O'Neill 'acknowledged and confirmed' JADD's final reconciliation in correspondence of 19 May 2009 in relation to the Dwyer Project and concluded 'we confirm that $237,810 is due and outstanding'. The dispute between PPL and JADD in relation to that outstanding claim remained unresolved at the time that the order to wind up PPL was made.
41 Mr Perrine's position was that JADD was not paid because it had agreed to complete the project at an agreed cost and that the variations underlying the claim were not agreed, despite Mr O'Neill's letter to the contrary. His assertion is therefore that payment was not made to JADD because PPL chose not to pay, rather than that it was not able to pay. Although I accept that cash flow for PPL was tight and had to be carefully managed throughout 2009, I am not satisfied that PPL was unable to pay JADD had it chosen to do so rather than dispute liability.
42 In crossexamination, Mr Perrine acknowledged that there was ultimately an overall loss in the vicinity of $800,000 on the Dwyer Project. He said that that loss was constituted by JADD's claim for $250,000 for variations which he said were not agreed, an overpayment by Ms Greville to ACCUE in relation to its precasting work, and a planned loss of $100,000 to $200,000 which was said to be, in effect, an investment in research and development in respect of the delivery of PPL's first commercial project (ts 323). The asserted overpayment to ACCUE became the basis of a dispute between PPL and ACCUE.
43 Mr Perrine said that in late 2007, the board of PPL decided that the delivery of one or two local 'high end residential projects' would create further commercial credentials for the Perrinepod system. Mr Davin introduced a friend, Mr Martin Millington, who was interested in the construction of a small two bedroom modular home. Mr Millington negotiated a contract with PPL's sales staff (Millington Project). The contract was dated 12 October 2007. Completion of the contract was specified as being 'as soon as possible but no later than 2 months from date contract is unconditional' (sic).
44 Mr Ali was also interested in the construction of a residence. He appointed Perrine Architecture as an architect to design a residence which might be built using the Perrinepod system. On 31 January 2008, Mr Ali signed a contract with PPL for the construction of a residence in Coolbinia (Ali Project). The purchase price was $1,262,217. There was to be a deposit of $82,044.10, paid within 10 days of the date of the agreement. Two instalments, each of $472,069.16, were payable on the commencement of production and the completion of production respectively, and a final instalment of $236,034.64 was payable on delivery. The proposed commencement date for production was 3 March 2008 and the completion date for production was 31 March 2008. The proposed delivery date was 30 June 2008.
45 There were delays in the commencement of both the Ali and Millington Projects. Mr Perrine explained that those delays arose because of difficulties experienced with Mr Pecoult and ACCUE. He said that Mr Pecoult had slowed down in the delivery of precast inventories for the Ali and Millington Projects, and had forced PPL to pay additional costs in relation to the Dwyer Project. ACCUE claimed variations and additions in relation to the Dwyer Project which PPL 'deemed unacceptable' but paid to him so that the Dwyer Project would be completed expeditiously.
46 A letter dated 1 September 2008 (JMP 19, page 335) to ACCUE from Mr Graham O'Neil, who was by then the chief operating officer for the Perrine Group, records that payments totalling $652,126.60 had been made to ACCUE in relation to the Dwyer Project, and that progress payments had been made for the Millington Project for a total of $131,030.90. No payments had then been made in relation to the Ali contract. The letter proposed an immediate advance payment in relation to the Ali contract to assist ACCUE with its cash flow requirements. That payment was $120,822.64. Mr Perrine said that, subsequently, a further amount of $195,822.64 was paid to ACCUE for the Ali Project. He said that, however, ACCUE failed to deliver either the Millington or Ali precast units, and PPL and ACCUE entered into a dispute which ultimately led to a termination of the relationship between PPL and ACCUE. ACCUE made no further claims against PPL.
47 The minutes of a meeting of PPL's board of 22 May 2008 refer to a cash flow report by the general manager, Ms Greville. It reports there was $25,000 in the bank, that cash reserves had been impacted by delays in the Dwyer Project and that $120,000 was due for payments for taxation and superannuation requirements. The minutes record that Mr Bontempo 'enquired as to availability of cash flow shortfall if projects delayed' (sic). The minutes then record that 'Mr Davin indicated that there would be an ability to bring forward progress payments from the Millington transaction and Mr Ali indicated the same for his contract'. Ms Greville was to liaise with Mr Davin and Mr Ali 'should cash flow requirements dictate such a need'.
48 In early June 2008, Mr Davin advanced $160,000 to PPL as an advance payment of the Millington Project. The terms of that advance were set out in a letter from Ms Greville to Mr Davin on 4 June 2008. The letter confirmed that the advance payment was to be repaid in full once the final payment had been received by PPL from Mr Millington's bank at the conclusion of the project. That letter and an email from Mr O'Neill to Mr Ali on 22 July 2008 are inconsistent with Mr Perrine's evidence that Mr Davin made arrangements with Mr Millington's bank that repayment of the $160,000 would be made by the bank directly to Mr Davin. Although an email from Mr Davin to Ms Greville of 3 July 2008 suggested such an arrangement, it is unlikely that a bank would have advanced funds to discharge Mr Millington's liability under his building contract without the concurrence of PPL. Mr Millington's evidence, tendered by consent, was that Mr Davin told him that he had paid PPL $160,000 to assist with the construction of Mr Millington's home only after that payment had been made.
49 I find that in substance the payment by Mr Davin of $160,000 to PPL was a loan to PPL to enable PPL to progress Mr Millington's residence, the loan being repayable at the time that the final payment for the Millington Project was received by PPL from Mr Millington's bank. Repayment was no doubt expected to occur in the short term rather than the long term, although an assertion, contained in a tabulation of PPL debts prepared by the plaintiff, that the due date for the debt was no later than 31 July 2008 is not supported by the evidence. Correspondence from Mr Davin to Mr Perrine in the second half of 2010 makes clear that repayment of his loan was due on completion of Mr Millington's house rather than on any particular date, and I am satisfied that Mr Davin, by reason of his involvement with PPL, was generally aware of the status of the Millington Project throughout that period.
50 Mr Perrine said that PPL came to an agreement with Mr Millington not to complete Mr Millington's house and to return his deposit. He produced a copy of an agreement dated 19 April 2011. That agreement makes no mention of a return of the deposit. It records that the parties agreed that the building contract was at an end and that '[n]either party shall seek further payment as redress from the other party for the termination of the contract'. It appears, however, that PPL repaid Mr Millington's deposit of $50,000 on 3 October 2010 (LP 15, page 224). The report as to PPL's affairs completed by Mr and Mrs Perrine in April 2012 records Mr Davin as an unsecured creditor in the sum of $160,000.
51 Mr Ali died before the hearing of this matter. An affidavit by Mr Ali, sworn 26 May 2014, was received in evidence pursuant to s 79C of the Evidence Act 1906 (WA). In that affidavit, Mr Ali said that, at the time he signed the contract with PPL, he knew that PPL was experiencing cash flow problems and agreed that he would pay for his new house in advance provided that the money was used to build his house. He subsequently paid the first three contract instalments on 14 February 2008, 3 March 2008 and 3 June 2008 respectively. He said that in late August or early September 2008, Mr Perrine asked him to pay the final instalment of his contract saying that, if that instalment was paid, PPL could get started on his house immediately. Mr Perrine offered to include landscaping to the value of $100,000. Mr Ali paid the final instalment of $236,034.64 to PPL around 12 September 2008. On 20 November 2011, Mr Ali and PPL entered into a new contract which included provision for landscaping to a maximum value of $100,000, the contract sum being the same as the January 2008 contract. The dates for commencement of production and for completion were left blank.
52 Work on the Ali and Millington Projects was not completed by PPL. Emails passing between Mr Perrine and Mr Ali between February 2009 and October 2009 reveal ongoing attempts by Mr Perrine to negotiate with various parties so as to enable the works to proceed, and assurances being given to Mr Ali that work would commence shortly. The exchanges demonstrate an increasing level of concern and anxiety on Mr Ali's part having regard to financial difficulties that he was facing.
53 In crossexamination, Mr Perrine acknowledged that, as at June 2009, PPL was unable to meet its obligations to Mr Ali (ts 336) because of its cash flow problems without the support of the Georgiou Group. The arrangements made with Georgiou Group are examined later in these reasons.
54 On 6 November 2009, Mr Perrine wrote on behalf of PPL to Mr Ali. The letter confirmed that payment for Mr Ali's project totalling $1,147,470 plus GST (being a total of $1,262,217) had been received in full and that the funds had been 'treated as a shareholder loan in accordance with previous board agreement' (sic). The reference to 'previous board agreement' is a reference to a meeting of the board of PPL on 25 February 2009 in which it is recorded that funds paid in advance of projects to be completed should be recorded in the company's accounts as loans rather than sales. As noted earlier, PPL's accounts for 30 June 2009 recorded a current liability in relation to Mr Ali in the sum of $800,000.
55 Eventually, the existing house on the Coolbinia property was demolished in order to allow work to proceed, and foundations were laid for the construction of the home by PPL. However, because of the delays and his financial problems, Mr Ali determined that he needed to sell the land. Mr Ali instructed that the foundations be removed and demanded the return of the money he had paid.
56 The plaintiff pleads that it is implied by law that the Ali debt was repayable on demand. It is pleaded that, despite demand, Mr Ali was not repaid. The demands are said to have been made in correspondence exchanged between Mr Perrine and Mr Ali annexed to Mr Ali's affidavit (SC [12(f)]). The correspondence between February 2010 and December 2011 attached to Mr Ali's affidavit comprises in excess of 300 pages. At least until early 2011, that correspondence more accurately reflects expressions of concern by Mr Ali about completion of his house, rather than demands for repayment of the funds which he had paid in advance. In midJuly 2011, Mr Ali emailed Mr Perrine (WCA 17, page 479) saying that he required, 'at the bare minimum, around $100K' to be repaid by the end of that month. The email also referred to a suggestion that Mr Perrine had indicated some three months earlier that there would be sufficient cash flow to repay Mr Ali.
57 As at mid2009, it is apparent, and I find, that Mr Ali was aware of PPL's cash flow difficulties, and was proceeding on the basis that PPL had a contractual obligation to undertake and complete construction of his house but at that time did not intend to, and did not in fact, make any demand for repayment of the funds he had provided under the building contract. I am also satisfied that Mr Ali was aware of Mr Perrine's attempts to progress the works through Georgiou Group and subsequently others.
58 Although the funds advanced by Mr Ali were described in the books of PPL as a current liability, the true nature of the liability was that PPL had a liability to complete construction of his house and the liability was to be discharged in that way.
59 Mr Perrine said that, from the earliest establishment of PPL, the directors determined that PPL would be best served to rely on Perrine Architecture's existing business infrastructure, including using its office, equipment and facilities, and its staff. PPL initially occupied part of the Perrine Architecture office at Level 1, 16 Milligan Street, Perth. Perrine Architecture did not charge PPL any rental for that space between 2007 and 2008.
60 In 2008, Mr and Mrs Perrine resolved to move Perrine Architecture to 317 Murray Street, Perth on a fully refurbished first floor of the building at that site. A portion of the Murray Street premises was then set aside for use by PPL, and Perrine Architecture and PPL shared use of some common areas. The separate office areas of each of PPL and Perrine Architecture were separately partitioned. On the basis of the shared common areas, the proportion of the overall premises occupied by PPL was calculated at 40%. From June 2008, PPL was charged for 40% of the rent on the premises. The base net rental payable under the lease of the Murray Street premises was around $315 per square metre in 2008, escalating to $400 per square metre in 2011. By comparison, Mr Perrine produced a monthly tenancy report in relation to premises which had previously been occupied by Perrine Architecture and PPL which showed that rent in the vicinity of $813 per square metre was being paid in that building in 2010.
61 From June 2008, charges were raised by Perrine Architecture to PPL in relation to rent.
62 Mr Perrine explained that, as PPL was a start-up company in 2008, he and the other directors of PPL thought it important for PPL to be able to present a professional space in order to host potential clients, investors, government officials and others with whom PPL had dealings.
63 As Ms Greville said, there was a heavy reliance by PPL on Perrine Architecture in the early stages of PPL's existence. The minutes of the meeting of the board of PPL on 22 May 2008 (JMP 18, page 332) record under the heading 'General Business':
6.1. JM advised the board that approx 6070% of his time and 50% of PA staff time was currently being spent on PP activity.
6.1.1 DG had been provided with invoices from PA reflecting allocation of costs for time spent and rental costs
6.1.2 Board acknowledged that this reflected the true cost of running the business
6.1.3 JM advised that demand for payment would not be made to the detriment of PP's cash flow but would remain as an outstanding debtor until such time as payment could be made
[Reference to JM is a reference to Mr Perrine, and the reference to DG is to Ms Greville.]
64 Mr Perrine's evidence was that the rate of charging for the services provided by Perrine Architecture to PPL was well within general commercial rates for architectural services. I accept that evidence.
65 Mrs Perrine described the financial arrangements between PPL and Perrine Architecture as a running account relationship. She said that as part of that ongoing relationship, Perrine Architecture tendered invoices to PPL on a regular basis in relation to architectural and project fees, management fees, staff costs, office rent and outgoings, and project and administrative disbursements. At various times, Perrine Architecture transferred funds to, or made payments on behalf of, PPL and PPL made payments on behalf of Perrine Architecture. Mrs Perrine described those transactions as forming part of the running account. They were recorded through a loan account. The charges by Perrine Architecture to PPL for services were debited to an account referred to as the invoice account in the books of PPL. I will return to that evidence, and the objections to it, later in these reasons.
66 Mrs Perrine said that the payment arrangements between PPL and Perrine Architecture in respect of the combined running account was flexible and payments were only made by PPL to Perrine Architecture as and when PPL had funds to make a payment. That is consistent with Mr Perrine's advice to the board in September 2008 in the minutes referred to above. I accept that that was the basis of the financial relationship between PPL and Perrine Architecture.
67 By March 2009, PPL's board no longer enjoyed the commercial expertise of Mr Sergeant, Mr Bontempo or Mr Davin. Mr Perrine said that by that time the global financial crisis had begun to strongly impact on financial institutions and the market locally. He therefore decided to seek advice from a business acquaintance as to an appropriate person who might collaborate with PPL in the commercialisation and delivery of the Perrinepod concept. As a result, he was introduced to Mr John Georgiou in early March 2009. Mr Georgiou was the chief executive officer of Georgiou Group Pty Ltd (Georgiou Group). Companies associated with Georgiou Group included Georgiou Building Pty Ltd (Georgiou Building) and Georgiou Precast Pty Ltd (Georgiou Precast). Mr Perrine said that he gave Mr Georgiou a frank assessment of PPL to the effect that it needed a 'cashed up' partner to make headway in the market.
68 On 12 March 2009, Mr Georgiou wrote to Mr Perrine (JMP 21, page 351). Mr Georgiou said that the Georgiou Group was 'excited by the opportunity' to work with PPL. He proposed a six month marketing campaign funded jointly by PPL and Georgiou Group. The letter proposed that any projects generated during that six month period would be shared by PPL and Georgiou Group on the basis that PPL would receive its design fees; Georgiou Group would manufacture, supply and install the Perrinepods on a cost plus agreed margin basis; and any profits earned on a project above those fees would be shared 'in an equitable manner' by PPL and Georgiou Group.
69 Continuing negotiations were subsequently conducted by PPL's chief operating officer, Mr O'Neill. Negotiations on behalf of Georgiou Group were carried on by Mr Pangiarella.
70 By 7 May 2009, Georgiou Group and PPL had developed a statement of principles as to their ongoing relationship (JMP 23, page 363). By this time, PPL had negotiated and agreed with BHPB to construct seven multioccupancy two storey residences at Robinson Street, Port Hedland using the Perrinepod system for a price of $2.98 million (Robinson Street Project). Mr Perrine had been in discussions with Mr Frank Dilizia of Georgiou Building, with a view to Georgiou Building undertaking the work on the Robinson Street Project.
71 The statement of principles contemplated that Georgiou Group would be the exclusive builder and project delivery company for all nonresidential uses of Perrinepods where the number of pods used in a development is greater than three. PPL was to continue to develop the residential market requiring less than three Perrinepods per dwelling. PPL was to provide design, architectural and engineering services for any project identified by Georgiou Group, and Georgiou Group were to provide a range of services from sales and marketing to tendering and construction management. The statement of principles contemplated Georgiou providing 'interim funding' in respect to various costs, including losses on the Robinson Street Project. The repayment of that funding was to take place at the end of 12 months or some other earlier period to be determined, at which time Georgiou Group would be entitled to either repayment of the amount it had funded or conversion of that amount to equity in PPL, the conversion to take place broadly on the basis that $1.25 million represented 20% of the value of PPL.
72 Mr Perrine said that, in any of the negotiations with Georgiou Group to Mr O'Neill, he stipulated to Mr O'Neill that PPL's priorities in discussions with Georgiou Group included:
73 On 4 September 2009, Mr O'Neill emailed Mr Martin Pugh of Georgiou Group (JMP 24, page 365) outlining a number of matters to be resolved between Georgiou Group and PPL. Among those was a reference to Georgiou Group supporting the completion of the Ali and Millington residences under the proposed heads of agreement on the basis that 'contribution would be defrayed against forward project profits'.
74 On 28 September 2009, Mr Perrine prepared a memorandum to Mr Georgiou concerning the meeting that had been arranged for execution of the heads of agreement between Georgiou Group and PPL. The memorandum referred to 'agreements reached' in relation to the provision by Mr and Mrs Perrine of personal guarantees to secure Georgiou Group's funding under the heads of agreement. Reference is then made to it being imperative that Georgiou Group undertake some smaller projects which PPL was not then in a position to complete, and in particular the Ali and Millington residences. The memorandum suggested that '[t]hese projects have to be formally acknowledged as being part of the JV process'. It continued:
I believe that we agreed informally that these projects (including Millington and Ali) can immediately flow to Georgiou project management for implementation, whether by GBC or independent builders, but under the control of GG. It is essential for me to have this acknowledgement with the signing of the JV agreement, that this is the case in moving forward.
75 The memorandum concluded by Mr Perrine asking that he be advised if he had misunderstood any element of the discussions.
76 On 30 September 2009, a meeting to sign the heads of agreement was held at Perrine Architecture's office. According to Mr Perrine, it was attended by Mr Georgiou, Mr Pangiarella, Mr Anthony Richard Vowles, Mr Pugh, Mr Dilizia, Mr O'Neill and Mr Perrine. Mrs Perrine was elsewhere in Perrine Architecture's office.
77 According to Mr Perrine, Mr O'Neill opened the meeting by saying words to the effect 'Jeanmic has sent you all a memorandum, which I have printed copies of here in front of you. It is very important to Jeanmic and Mercedes that these matters be acknowledged by Georgiou Group'. Mr Perrine said that he then briefly reiterated the contents of his memorandum, to which Mr Pangiarella responded to the effect that Mr Perrine's position had not changed in respect of those matters and that the heads of agreement had provision for what he wanted. He said that Mr Georgiou then nodded and said 'yes'. On that basis, Mr Perrine said that he agreed to sign the heads of agreement and Mrs Perrine, who said that she had overheard that conversation although she did not formally attend the meeting, agreed to sign the personal guarantee.
78 Apart from Mr Perrine, the only other person present at that meeting to give evidence was Mr Vowles. He is the general manager of risk at Georgiou Group and in 2009 was its commercial manager. He said that negotiations regarding the heads of agreement were predominantly held between Mr Pangiarella on behalf of Georgiou Group, Mr O'Neill, and Mr and Mrs Perrine. Mr Vowles' role was to incorporate the terms of the agreement into the heads of agreement. Mr Vowles said, at the meeting, Mr Perrine said that he did not require Georgiou to be the builder on every project but wanted to know there was a system in place which would enable him to deliver the product and complete smaller projects which would attract interest in the product. Mr Vowles said that Mr Pangiarella replied that he was aware of discussion of those kinds of matters at the steering committee level and that the arrangements under the heads of agreement were flexible enough to cover small projects 'but there needed to be more discussion with the steering committee about how this might happen'.
79 Mr and Mrs Perrine were unrepresented at trial, and Mr Perrine's crossexamination of Mr Vowles did not challenge Mr Vowles' evidence as to the meeting on 30 September 2009.
80 Mr Perrine was not directly cross-examined on his account of what was said at the meeting on 30 September 2009 when the heads of agreement were signed. Mrs Perrine was crossexamined as to whether or not some amendment to the heads of agreement to provide for completion of the Ali and Millington residences was discussed at the meeting. Although she was not participating in the meeting, she said that she was able to overhear what was said as she was within five metres of where the meeting was taking place in an open plan office. She said that certain amendments were agreed to be made to the heads of agreement to reflect what was said in the memorandum of 28 September 2009, but those amendments were never made.
81 There is some common ground between Mr Vowles' account of what occurred at the meeting of 30 September 2009 and Mr Perrine's account of that meeting. Mr Vowles acknowledged that Mr Perrine 'wanted to know there was a system in place which would enable him to deliver the product and complete smaller projects which would attract interest in the product'. It is reasonable to conclude that that was a reference to the Ali and Millington projects, which were always intended to be utilised for marketing purposes. Mr Vowles said that Mr Pangiarella replied that he was 'aware that these kinds of matters had been discussed at the steering committee level but was not aware of the detail', and that 'arrangements under the heads of agreement were flexible enough to cover smaller projects but there needed to be more discussion with the steering committee about how this might happen'. Mr Vowles also referred to Mr Perrine saying he wanted to avoid having to deal with a number of builders 'because he had jobs which needed action or which would otherwise lead to complaints if he hadn't delivered'. The only jobs which needed action at that time, other than the Robinson Street Project, were the Millington and Ali Projects. Mr Vowles said that Mr Georgiou said in reply that 'they could discuss these matters further after he returned from leave'.
82 Mr Perrine's account of the exchange was that Mr O'Neill made reference to the memorandum of 28 September 2009 to which Mr Pangiarella responded by acknowledging Mr Perrine and saying 'I can tell you that the heads of agreement has provision for what you want', before suggesting that the matter could be dealt with on Mr Georgiou's return from Japan.
83 The thrust of both Mr Vowles' evidence and Mr Perrine's evidence is to the effect that the Ali and Millington Projects could be undertaken within the terms of the existing heads of agreement. It is apparent that Georgiou Building had taken steps in relation to the Ali Project well before the heads of agreement were signed. On 13 November 2009, Mr Vowles sent an email to Mr Dilizia (JMP 29, page 569) confirming that house indemnity insurance had been effected in accordance with an email sent by Mr Dilizia on 15 June 2009. On 18 November 2009, Mr Lelio Gaudieri, general manager of Georgiou Precast, emailed Mr Perrine (JMP 28, page 572) advising that production of the precast panels for the Ali Project was scheduled for commencement and would take 33 days to complete.
84 I accept Mr and Mrs Perrine's evidence that they were willing to provide personal guarantees, which they did contemporaneously with the signing of the heads of agreement, because they expected the arrangements with Georgiou Group would enable PPL to meet its obligations to Mr Ali and Mr Millington. That necessity was made clear in Mr Perrine's memorandum of 28 September 2009. The likelihood is, and I find, that Mr Perrine reiterated the position outlined in that memorandum, and signed the heads of agreement and guarantee on the strength of an assurance as to the position. I find that, although the details of precisely how financial arrangements for completion of those jobs were not resolved, the outcome of the meeting on 30 September 2009 was that those projects would be undertaken by Georgiou Group broadly along the lines that the costs of completion of the project were treated as a loan which would either be met from future profits on other projects or through Georgiou Group taking equity in PPL as contemplated under the heads of agreement.
85 The heads of agreement as ultimately executed reflected the statement of principles that had been agreed in May 2009. At the same time as the heads of agreement were signed, Georgiou Group signed a contract with PPL to complete the Robinson Street Project as builder so as to enable PPL to fulfil its contract with BHPB.
86 Mr Perrine said that the Robinson Street Project came about after a number of the key accommodation asset decision makers in BHPB stayed at the Dwyer Motel sometime in late 2008 or early 2009. Mr Perrine said he was subsequently contacted by one of BHPB's representatives, a Ms Truman, who asked Mr Perrine to negotiate with another representative of BHPB, Mr John Bunt, for delivery of the seven multioccupancy two storey residences in Robinson Street. It is clear that Mr Perrine saw this as an opening to a potentially lucrative relationship with BHPB, and as a precursor to more work in the north west of Western Australia.
87 Mr Perrine said that, with the background of known costs from the Dwyer Project, he was confident that the Robinson Street Project could be profitable and viable. He said that he was influenced by the fact that he had located alternative precasting options which would achieve efficiencies, and the fact that early discussions with Georgiou Precast were pointing to significant cost improvement in relation to precasting panels.
88 Before engaging Georgiou Group for the Robinson Street Project, Mr Perrine's relationship with Mr Impicciatore and JADD had become strained over the issue of additional costs on the Dwyer Project and disagreement in relation to another project which JADD had done for Mr and Mrs Perrine. Mr Perrine had approached JADD in relation to the Robinson Street Project but Mr Impicciatore had offered him only a 'ball park figure', which Mr Perrine considered was well outside the comparative costs, including the additional costs claimed by JADD, in relation to the Dwyer Project. Mr Perrine did not proceed with using JADD for the Robinson Street Project.
89 Instead, Mr Perrine carried out a costs analysis based on information available to PPL, and asked another builder, Jamm Industries Pty Ltd (Jamm) to provide an estimate of fitout costs. Mr Perrine said that he calculated that PPL could agree to BHPB's target price of around $3 million and make a profit, and in doing so consolidate an opportunity to become a preferred BHPB contractor. Accordingly, Mr Perrine said that he instructed Mr O'Neill to make an offer to BHPB of $2.98 million, which was then accepted in or about March 2009 (although the figure of $2.98 million does not appear correct - the actual contract sum was $2,905,000). Mr Perrine said that he subsequently negotiated further terms of the contract with BHPB which were advantageous to PPL. One of those was an ability of PPL to claim for cost variations. Another was the elimination of any penalties for late completion and any requirement for security being provided to BHPB.
90 BHPB made an advance payment on the contract of $290,000 plus GST to PPL in March 2009.
91 Mr Perrine said that, in early March 2009, he asked Mr Dilizia of Georgiou Building to price the Robinson Street Project. Georgiou Building produced a cost estimate which exceeded PPL's expected costing and the contract price. In an email from Mr Perrine to Mr Dilizia of 13 May 2009 (JMP 27, page 566), Mr Perrine suggested that the estimate resulted in a cost overrun of $600,000 to $800,000. In that email, Mr Perrine identified the discrepancies between PPL's costing and Georgiou Building's costing, and asked that consideration could be given to various suggestions for a cost reduction. The email concluded:
The two flow on projects (RSL - negotiated & sports club - tender [with favourable conditions for ppod] are at least in part funded by BHPB. Each has strong opportunities for offsetting any deficit that occurs on this Robinson Street Project. This project sets up significant opportunities in the region. Our mutual aim is to reach the leanest possible deliverable model and to subsequently agree on suitable margins for the parties on flow on projects.
92 Mr Dilizia responded the following day (JMP 27, page 568). He said that Georgiou Building's current updated figure reflected certain reductions which resulted in a total project cost of $3,382,520. He said that based on that cost, and a contract value of $2,905,000, the shortfall would be in the order of $477,520. He said that Georgiou Building were 'still looking at the other areas of cost savings that you noted in your email' and would revert by the time the parties next met.
93 Mr Perrine said that well before the heads of agreement was executed and the building contract signed between Georgiou Building and PPL for the Robinson Street Project on 30 September 2009, Georgiou Building were already acting as builder for the project. He said they had all necessary insurances and preliminaries in place and had fully tendered and contracted the project to its subcontractors. Mr Perrine said that Georgiou Building began physical work on the precast elements of the Robinson Street Project in early May 2009 and began managing the project fully in late May 2009 when works began on site.
94 That evidence is consistent with the contents of the statement of principles as to the relationship between Georgiou Group and PPL referred to above (JMP 23, page 363). Paragraph 9(b) of the statement of principles provided:
Losses (if any) on the BHP Robinson Road job (with the exception of those items excluded in the contract between Georgiou and Perrine re LDs etc). All Direct Costs will be subject to the scrutiny of 'open book' principles. Any shortfall (loss) incurred by Georgiou in recovering its Direct Costs from the Robinson Road project shall be a debt owing to Georgiou by Perrine and shall fall under this principle of interim funding.
95 As already noted, the contract between PPL and Georgiou Building for the construction of the Robinson Street Project was eventually signed on 30 September 2009, at the same time as the heads of agreement were signed. The contract price was $2,905,000, being the same as the contract price between PPL and BHPB. Special condition 12.0 of the contract with Georgiou Building provided:
This agreement shall be read in conjunction with the separate agreement entitled 'heads of agreement' signed by both parties and dated 30 September 2009.
Where there is inconsistency between this agreement and the heads of agreement, the terms of the heads of agreement shall take precedence (JMP 26, page 396).
96 Mr Perrine said that the Robinson Street Project progressed relatively well between May 2009 and October 2009. He said that there were significant construction management failings by Georgiou Building and issues with the precast by Georgiou Precast. BHPB sought variations, and Mr Perrine said that there were some engineering design failures by CID Consultants Pty Ltd (CID) which required redress on site.
97 It is clear that there were cost overruns in relation to the Robinson Street Project, although the state of the evidence is such that the extent of those is difficult to identify.
98 Mrs Perrine was responsible for recording and maintaining the financial records of the various companies associated with herself and her husband, including Perrine Architecture and PPL. She carried out an analysis of PPL's financial position, in particular the state of its creditors in each of the financial years 2008/2009 to 2010/2011, and for the period leading up to the order for PPL's winding up on 1 March 2012. The accuracy of the figures which she presented was generally not in issue.
99 Set out below is a table of current liabilities reproduced from Mrs Perrine's affidavit of 3 August 2015. Objection was taken to the second column of the table headed 'Status' on the basis that the comments as to status are conclusions, submissions, inadmissible opinions or hearsay evidence. Mrs Perrine was intimately involved in the accounts and financial dealings of PPL. She expanded on the comments in the status column subsequently in her affidavit. She is qualified to give evidence as to her reasons for the treatment of various entries in the books of PPL and as to the existence or otherwise of a dispute concerning debts recorded in the books. I will deal more specifically with Mrs Perrine's evidence in relation to recorded debts below.
100 In the financial year 2008/2009, PPL received $1,013,566.43 in trade income, principally from BHPB and Mr and Mrs Dwyer. That sum also included payments slightly in excess of $150,000 in relation to other projects which were in various stages of early planning. In addition, PPL received $123,688 in GST funds and government grants, so that PPL's total income, excluding any loan funds, was $1,137,254.43. At the end of the financial year, PPL had trade receivables of $356,402.24. In the year, PPL made supplier payments totalling $934,436.61 to suppliers other than Perrine Architecture. Those payments were made either directly by PPL or through what Mrs Perrine described as the Perrine Architecture running account.
101 Mrs Perrine said that at the end of financial year 2008/2009, the creditors making up the current liabilities shown in the company's accounts of $977,547.25 were made up as follows:
102 Mrs Perrine said that PPL did not consider the amount of $67,786.46 to be a debt due by PPL to ACCUE, and that the debt was reversed from the books of PPL on 30 June 2010. That is consistent with Mr Perrine's evidence as to the circumstances in which the relationship between PPL and ACCUE came to an end (see [46] above). In the circumstances, I am not satisfied that the plaintiff has established that the sum recorded in the books of PPL as a debt to ACCUE as at 30 June 2009 was in fact payable.
103 As to the Cardno Saraceni debt of $2,335.30, Mrs Perrine said that she was unaware of the basis of the dispute as to that invoice, which related back to the previous financial year during the period of Ms Greville's employment. She said that the amount was never pursued by the supplier and it was reversed out of the books of PPL on 30 June 2010. Given that Cardno Saraceni apparently did not seek payment, I am not satisfied that that debt was due and payable as at 30 June 2009.
104 As to the debt to Diversified Exhibition, Mrs Perrine said that during the period of Ms Greville's employment, Ms Greville committed PPL to participate in a building exhibition in the eastern states. In the financial year 2007/2008, Diversified Exhibitions invoiced, and PPL paid, a total of $2,718.65 in commitment fees. PPL subsequently opted out of the exhibition. Mrs Perrine said that on 13 August 2008 PPL received an invoice for $6,043.95 from Diversified Exhibitions, which PPL disputed on the basis that it was bound only to the commitment fee which it had already paid. Mrs Perrine said that following Ms Greville's departure, Mr O'Neill agreed to pay Diversified Exhibitions a portion of the disputed invoice, and $1,000 was paid on 10 December 2008 and a further $2,000 was paid on 20 May 2009. No further claim was made by Diversified Exhibitions and the balance reflected in the books as at 30 June 2009 was reversed out on 31 December 2010.
105 The balance of $590.80 in relation to Forbes was thought by Mrs Perrine to relate to an invoice adjustment in the financial year 2007/2008. It was reversed out of the books of PPL on 30 June 2010. The plaintiff has not established that that bill was due and payable as at 30 June 2009.
106 The debt of $29,700 to Georgiou Group Pty Ltd was not in dispute at 30 June 2009, but Mrs Perrine said that it related to the terms of the heads of agreement (perhaps more accurately, the statement of principles) between PPL and Georgiou Group and was thus not then due and payable. Mrs Perrine's evidence that the debt was not payable is inadmissible as an opinion or conclusion. It is, in effect, a submission, and whether or not the debt was due and payable requires an examination of the evidence which relates to it. I was not taken to any evidence as to the precise nature of this alleged debt. All of the evidence concerning the dealings between Georgiou Group and PPL is related to the statement of principles and the heads of agreement. Those documents contemplated deferral of PPL's liability for debts to Georgiou Group until the latter made its election to take equity or seek payment. In the circumstances, I am not satisfied that the debt to Georgiou Group was due and payable as at 30 June 2009.
107 As to the JADD Projects debt, Mrs Perrine said that as at 30 June 2009, the amount shown as a debt to JADD in PPL's books was not in dispute but that, shortly after the end of that financial year, $278,249.28 of the debt became the subject of dispute. I have referred above (at [40]) to the fact that Mr O'Neill acknowledged a debt of $237,810 as due from PPL to JADD on 26 November 2009. Having regard to the commercial reality of PPL's position as at 30 June 2009, the amount of $341,749.83 should be taken as due and owing by PPL to JADD.
108 Mrs Perrine calculated that once allowance was made for the debts which were not payable as at 30 June 2009, being the debts to ACCUE, Cardno Saraceni, Diversified Exhibitions, Forbes, Georgiou Group and Perrine Architecture, the balance of debts due and payable as at 30 June 2009 was $404,074.10. Against that, the trade receivables recorded in the books of PPL were $356,402.24. After allowance was made for the receivables, the deficit available for payment of debts due was $47,671.86. Mrs Perrine said that she had every expectation that that shortfall could be covered from customer receipts due to be invoiced by PPL, or by ongoing support from Perrine Architecture, which in the financial year 2009/2010 received income unrelated to PPL of $762,884.43 and showed a net profit of $83,247.
109 I am not satisfied that, having regard to the commercial realities of PPL's trading position as at 30 June 2009, the plaintiff has established that PPL was insolvent at that time. There is no doubt that, particularly in the last six months of that year, PPL was encountering difficulties with cash flow. That was a matter acknowledged by Mr Perrine both at the time in directors' meetings and when he gave evidence in this matter. It was the realisation of PPL's need for cash that led to PPL engaging in negotiations with parties capable of providing working capital which would enable commercialisation of the Perrinepod concept so as to realise its potential in the market. There seems no doubt that the Perrinepod concept was viewed as having significant potential by those external directors or consultants who were involved in PPL's early formation, and by external parties like Georgiou Group and others with whom Mr Perrine subsequently undertook negotiations with a view to some form of joint enterprise.
110 The commercial realities to which I have had regard in reaching the conclusion that the plaintiff has failed to establish that PPL was insolvent as at 30 June 2009 are that:
111 On 22 July 2009, Mr Serdar of JADD emailed Mr Perrine (GMC 23, page 601). The email stated that unless a substantial payment could be made on outstanding accounts and guaranteed payments could be established for the Millington Project, JADD could not continue to finance the Perrinepod Projects and would be unable to continue with the Millington Project. A further email was sent by Mr Serdar to Mr O'Neill on 22 October 2009 seeking confirmation of acceptance of the 'final invoicing on the Dwyer Project' (GMC 23, page 602). As noted earlier, on 26 November 2009, a reconciliation of the debt in relation to the Dwyer Project was sent by JADD to PPL. JADD also sought to terminate its building contracts in relation to the Ali and Millington Projects.
112 On 26 February 2010, Mr O'Neill emailed Mr Serdar concerning outstanding payments to JADD (GMC 23, page 606). The email referred to some previous proposals in relation to the JADD debt which had been rejected by JADD and concluded by saying:
[W]e are hopeful that activity currently being experienced will be sufficient to cover construction costs on current projects and to generate some surplus levels during the first half of 2010 that will enable us to commence paying down the current outstandings to JADD.
113 On 6 October 2010, Hotchkin Hanly, lawyers acting on behalf of JADD, made formal demand for payment within 14 days of the amount of $237,810, being the amount that had been acknowledged by Mr O'Neill on 26 November 2009 as being due and owing.
114 The second defendants admit in their defence that on 30 July 2009, PricewaterhouseCoopers (PWC) rendered an invoice, number 29072747, to PPL in respect of services rendered to PPL (TB 28, pages 86 87). The plaintiff pleads that that invoice was payable by no later than 14 August 2009 but was not paid in full until 30 June 2010. That assertion is supported by the invoice which contains a footnote saying '[y]our remittance within 14 days is requested'. The defendants deny that payment was due by 14 August 2009 on the basis that PPL had a flexible agreement with PWC that PWC would be fully paid for their work, which related to obtaining a tax offset for research and development, calculated as 20% of the payment received by the company. That pleading is consistent with a reference to an arrangement to that effect in the body of the invoice and with an email from Mr O'Neill to Mr and Mrs Perrine of 29 April 2009 (JMP 70, page 947).
115 The plaintiff adduced no evidence of further demands by PWC for payment of the 30 July 2009 invoice. That is to be contrasted with PWC's attitude to payment of later invoices in late 2010 (GMC 19, page 581) when PWC made clear demands for payment. I do not consider that the request for remittance within 14 days, which appears to be a standard footer note on PWC's invoice, provides a basis to reject the defendants' assertion that a payment arrangement, tied to receipt of the taxation offset, had been made with PWC.
116 The second defendants admit that the pleaded invoice was paid in full by 30 June 2010. I am unable to make any findings as to whether or not it was paid in accordance with the terms of any applicable arrangement between PWC and PPL or, more particularly, to find that payment was outside the agreed terms.
117 PPL's accounts showed CID as an undisputed creditor in the sum of $23,061.50 as at 30 June 2009.
118 On 1 September 2009, Mr Etelaaho of CID sent an email to Mr Ashley West of Georgiou Building. Notwithstanding that it is an email to an officer of Georgiou Building, the plaintiff relies on that email as a demand on PPL by CID (SC [12(b)]). The email recites the reluctance by CID to do any further work on the Robinson Street Project until they receive some payment. It continues:
Perrine has indicated that some of our payment for this project are due from Georgiou, can you follow up on payment of these invoices.
119 On 4 September 2009, Mr O'Neill sent an email to Mr Pugh of Georgiou Group (TB 31). That email dealt with various projects being considered under the heads of agreement, but also referred to CID. It recited that CID are currently working on a number of projects for the Perrine Group, and the payment arrangements had been advised to CID and agreed. The email recites that CID had claimed $38,836.40 to date for work on the Robinson Street Project, of which $12,784.20 had been paid (presumably by PPL). The email continued:
Residual balance of $26,052.40 is to be submitted to Georgiou Building as a consultant creditor for payment.
120 In crossexamination, Mr Perrine said that the works the subject of the outstanding balance had been undertaken at the direction of Georgiou Building and that the Georgiou Group paid the amount of $26,052. There is nothing to suggest that that evidence should not be accepted.
121 The plaintiff adduced no evidence as to the course of the Robinson Street Project and other projects investigated by the management committee established under the heads of agreement. The only evidence as to the activities under the heads of agreement was given by Mr Perrine. As noted above, difficulties with completion of the Robinson Street Project emerged after October 2009 and cost overruns were encountered.
122 Mr Perrine said that, in October 2009, BHPB provided PPL with an opportunity to tender against three other contractors for a residential development in Port Hedland known as Northern Lights, which was estimated to have a contract value of between $28 million and $40 million. He said that PPL's representatives on the management committee introduced several projects for consideration under the heads of agreement, being projects referred to as Summers Street, Colin Matherson Club House, Kimberley Georgiou, Culture Centre Pods and Northern Lights. In late 2009, PPL sought payment of accounts for design work done on projects being pursued under the heads of agreement. Mr Perrine said that 'indecision and obfuscation' by the Georgiou Group management committee members, and problems in the operation of the management committee, 'led to inaction on all fronts' of the management committee.
123 In late 2009, PPL was negotiating with Vicon Properties for the development of two projects in Karratha which had a value of around $100 million. Mr Perrine said that Perrine Architecture had by then obtained the necessary development approvals for the project for PPL.
124 Perrine said that Mr O'Neill had sought costings from Georgiou Building in respect to the Vicon Projects but, in late 2009, Georgiou Building declined to provide costings. That adversely affected PPL's relationship with Vicon Properties.
125 The Ali Project and the Millington Project did not proceed with Georgiou Building's involvement as had been anticipated by PPL. Mr Perrine said, and I accept, that by March 2010, PPL's relationship with Georgiou Group had soured. As a result of various concerns which Mr Perrine had with Georgiou Group's conduct under the heads of agreement, he resolved to apply payments of $647,790 made by BHPB to PPL under the Robinson Street Project to meet PPL's own requirements. He called a meeting with Mr Georgiou, Mr Pangiarella and the Georgiou/PPL joint venture manager, Mr Boyd, at the office of PPL. He advised Mr Georgiou of his intention not to make a payment to Georgiou Group because of Georgiou Group's multiple failures under the heads of agreement 'and also to redress what [he] saw as a fundamental disbalance in the financial relationship between PPL and Georgiou Group'. That is a reference to nonpayment by Georgiou Group of PPL's design work invoices.
126 Mr Perrine said that Mr Georgiou advised him at that meeting that PPL could 'keep the money' to assist PPL with its cash flow and that the position would be reviewed when the Robinson Street Project was completed.
127 On 14 May 2010, Georgiou Building sent an invoice to PPL, being claims for 'milestone payments 3 and 4 plus variations', for the sum of $1,575,912.57. That sum was made up of the contract price together with variations of a total of $365,293.79, less the amount previously paid.
128 On 24 May 2010, Mr Perrine wrote an email to various representatives of Georgiou Group and others, complaining about the failure by Georgiou Group to be open about the cost blowouts on the Robinson Street Project (JMP 31, pages 604 to 605). That was followed by a lengthy letter from Mr Perrine to Mr Georgiou. Reference was made to the progress claim of 14 May 2010, to advice given by an officer of Georgiou Group to Mr Perrine on 17 May 2010 that the total cost of the Robinson Street Project was $6.2 million, and to subsequent advice on 25 May 2010 that Georgiou Group was now seeking to justify a total price of $6.78 million with a variations claim against PPL of $3.778 million. Mr Perrine expressed dismay at Georgiou Group's failure to conduct its operations under the heads of agreement on an 'open book' arrangement as stipulated under the heads of agreement, and at various other alleged failings by Georgiou Group to comply with the requirements of the heads of agreement.
129 On 2 June 2010, Mr Georgiou and Mr Perrine met to endeavour to resolve their dispute. Mr Perrine said that Mr Georgiou's precondition to reaching any agreement was that Georgiou Building should be paid the full amount of the 14 May 2010 invoice. Mr Perrine said that he advised Mr Georgiou that PPL's costs as claimed against Georgiou Group had to be agreed as part of any resolution.
130 Later on 2 June 2010, Mr Georgiou sent an email to Mr Vowles (JMP 33, page 617). It purported to be a file note of the meeting with Mr Perrine that morning. It asserted that Mr Perrine acknowledged that the contract value and approved variations in relation to the Robinson Street Project should be paid but would not be paid until Georgiou Group agreed on what was owed to the Perrine Group. Mr Georgiou's note concludes with the suggestion that Mr Perrine wanted the arrangements under the heads of agreement terminated, effective immediately. Mr Perrine referred to Mr Georgiou's email to Mr Vowles in his written evidence. He did not dissent from the statement that he wanted the heads of agreement terminated immediately.
131 On 24 June 2010, Georgiou Building served an application for adjudication under the Construction Contracts Act 2004 (WA) in relation to the amount claimed under the 14 May 2010 invoice. On 16 July 2010, the adjudicator determined that PPL was liable to pay Georgiou Building $1,575,912.57 and that that sum was due to be paid by close of business on Monday, 2 August 2010. In making that determination, the adjudicator refused to decline jurisdiction on the basis of complexity. An attempt by PPL to have that decision reviewed by the State Administrative Tribunal was rejected on the basis that the Tribunal lacked jurisdiction to review a decision to decline to dismiss an application on the basis of complexity: see Perrinepod Pty Ltd and Georgiou Building Pty Ltd [2010] WASAT 136. An appeal against that decision was ultimately dismissed by the Court of Appeal in October 2011: Perrinepod Pty Ltd v Georgiou Building Pty Ltd [2011] WASCA 217; (2011) 43 WAR 319.
132 On 12 August 2010, an acting master of this court ordered that Georgiou Building have leave to enforce the determination as a judgment of the court, and entered judgment for Georgiou Building against Perrinepod in the sum of $1,575,912.57 plus interest and costs. The failure to pay any part of that judgment debt provided the principal foundation upon which Allanson J ordered the winding up of PPL on the ground of insolvency: see Georgiou Building Pty Ltd v Perrinepod Pty Ltd [2012] WASC 72; (2012) 86 ACSR 713.
133 As noted above, the adjudicator ordered that Perrinepod pay the amount of the determination by 2 August 2010. Section 39 of the Construction Contracts Act imposes an obligation on a party that is liable under a determination to pay the amount of the determination on or before the date specified in the determination. Accordingly, PPL's contentions that it should not have been found liable for the whole of the amount of the determination, and that it had counterclaims in an amount which exceeded the amount of the determination, do not alter the fact that as at 2 August 2010 it had a debt due to Georgiou Building in excess of $1.5 million.
134 It might be thought that, by reason of the fact that the invoice claiming the amount subsequently determined as being due was issued on 14 May 2010, the debt should be found to have been due and payable from that date. It is clear, however, that Mr Perrine, acting as a representative of PPL, disputed that liability. There were several bases upon which liability was disputed, including alleged breaches of the heads of agreement. In the context of these proceedings, it is not possible to assess the merits of PPL's contentions, which subsequently became the basis of proceedings commenced by PPL against Georgiou Group in this court, being action CIV 2257 of 2010. Those proceedings were not pursued by the liquidator following his appointment. It is clear, however, that the existence of the debt was unarguable as from the date upon which the adjudicator determined that the amount should be paid.
135 Mr and Mrs Perrine do not contend that PPL was able to meet, either from its own resources or from external support, the liability to Georgiou Group as a result of the Construction Contracts Act determination. PPL was certainly insolvent as from the date of that determination because there was at that time no prospect that PPL could meet its debts to Georgiou Group and other creditors as and when they fell due.
136 It is necessary to consider whether, having regard to PPL's financial position and other transactions relied upon by the plaintiff which occurred during the earlier part of 2010, PPL was insolvent at any time after 30 June 2009 but prior to 16 July 2010.
137 In his statement of claim, the plaintiff refers to the financial position of PPL as at 30 September 2009 (SC [16]), December 2009 (SC [26] [27]) and 30 June 2010 (SC [33]). Those references are set out in the context of a series of pleas as to various invoices rendered to PPL which were paid late, various demands made, and other matters generally related to PPL's financial position between late 2009 and February 2012. Presumably, those matters are said to be material to the plaintiff's primary contention that PPL was insolvent at least from 30 June 2009, a proposition which I have found not to have been established. It is necessary to consider what facts the plaintiff has established as to the company's financial position at particular times during 2010, and to consider whether those facts are sufficient to establish insolvency.
138 The first date after 30 June 2009 on which the financial position of the company is pleaded is 30 September 2009. Some of the matters pleaded by the plaintiff are admitted, including that, in September 2009, PPL had a deficiency in net assets of $1,770,873.07 and that it had a total in its various banking accounts of $417.08. It is also admitted that PPL had no borrowings with any financier or banking institution as at that date. Various debts are pleaded as remaining due, including a debt of $11,000 to PWC, a debt to Mr Davin for $160,000 and various other debts to creditors totalling $672,052.93 said to be outstanding for various lengths of time, including $299,746.83 being due in excess of 90 days. That latter sum was principally made up of a debt to JADD for $261,749.28. All of those pleaded debts are denied in the second defendants' defence.
139 I was not directed during the trial to the evidence upon which the plaintiff's plea as to the company's financial position at 30 September 2009 was based. I have been unable to locate in the tendered material any financial statements prepared as at that date.
140 In her analysis of the trading position of PPL during the financial year 2009/2010, Mrs Perrine said that PPL received total income of in excess of $4.3 million during the financial year 2009/2010 and made creditor payments of slightly under $2.9 million. I am not able to reliably ascertain how those receipts and payments related to the various debts pleaded as being payable as at September 2009. The plaintiff has not established that PPL was insolvent as at that date.
141 The statement of claim pleads that, as to December 2009, PPL had a deficiency in net assets of $2,549,751 (SC [26]). The evidence relied upon as to that figure is found in a balance sheet spreadsheet annexed to PPL's financial statements for the financial year ended 30 June 2010 (GMC 33, page 54). In response, the defendants plead that an element of the net deficiency was a shortfall between the amount which had been invoiced by Georgiou Building in relation to the Robinson Street Project and the amount yet to be passed on to BHPB for payment under PPL's contract with BHPB. That shortfall was said to be $841,133.84. The plaintiff also pleads that, in the six month period ending 31 December 2009, PPL incurred a loss of at least $1,325,871.91. Evidence of that is said to be extracted from a profit and loss spreadsheet for the period July 2009 through to June 2010 showing the monthly profit or loss recorded in PPL's books during that period. In response (D [27]), the defendants plead that the trade creditors shown in the balance sheet spreadsheet in the sum of $3,566,350 as at December 2009 was made up of a combination of:
142 I do not consider that the matters pleaded, based, as they are, simply on what appear to be unaudited spreadsheets extracted from PPL's accounting records, are a sufficient basis to conclude that PPL was insolvent as at December 2009.
143 The plaintiff pleads (SC [33]) that as at 30 June 2010, PPL had accumulated losses of at least $5,612,356 and the average monthly sales for PPL were exceeded by the value of the average monthly direct expenses and overheads by approximately $240,000. The financial statements for PPL for the financial year ended 30 June 2010 are relied upon as proof of those assertions. In response, the defendants plead that, excluding the retained loss for the previous financial period, the balance of the loss reported as at 30 June 2010 included slightly in excess of $1 million which was duplicated in PPL's books when the invoice of 14 May 2010 for claim four on the Robinson Street Project included $1,001,000 which comprised claim three. The total of both invoices were entered into PPL's books. A review of the invoices from Georgiou Building to PPL (MP 21, pages 105 to 109) supports that contention. The defendants also plead that the figures shown in the accounts as due to trade creditors:
144 Mrs Perrine's evidence did not refer to that extraordinary expense in excess of $200,000 and I am unable to identify any evidence to support the contention. I have previously noted the difficulty in determining whether, up until the adjudication determination in relation to the Georgiou Building debt, PPL's entitlement to set off or to deny the claim had merit. In the circumstances, I am not satisfied that, having regard to the unusual arrangements which existed in relation to many of the substantial components of what were recorded in the books as debts of PPL, the plaintiff has established PPL's insolvency in the relevant sense at any time prior to the adjudicator's determination in July 2010.
145 There can be no doubt that, upon delivery of the adjudicator's determination, there were reasonable grounds to suspect PPL's insolvency. The cash flow difficulties of PPL, the need to carefully manage PPL's cash flow, and the need for additional funding to enable PPL to continue and expand its operation, were the source of constant discussions at board meetings of PPL. By 30 June 2010, PPL's balance sheet showed cash and cash equivalents available as $232,478.13, trade and other receivables of $2,416.57 and a current tax asset of $88,496. PPL had a liability to complete the Ali and Millington residences which, with Georgiou Building's refusal to complete those projects, had become effectively an unfunded liability. There was no prospect of substantial receipt of funds in the early months of the financial year 2010/2011. The crystallisation of a liability in excess of $1.5 million, which came about as a result of the adjudicator's determination payable by 2 August 2010, was clearly beyond PPL's capacity to meet from its own resources.
146 Nor was there any capacity in Perrine Architecture, or other companies within the Perrine Group, to support PPL to enable it to meet a liability of that size. Perrine Architecture's balance sheet as at 30 June 2010 reported total current assets of $1,438,267 and total current liabilities of $2,340,915. It is not clear from the financial statements of Perrine Architecture how much of the current assets was made up of the debt due from PPL to Perrine Architecture but a MYOB payables reconciliation summary for PPL as at 30 June 2010 (MP 20, page 104) records PPL's liability to Perrine Architecture as at that date at $586,514.58.
147 The requirement of s 588G(1)(c), as at 16 July 2010, is made out.
148 It follows that Mr and Mrs Perrine contravened s 588G by failing to prevent PPL from incurring debts after it became insolvent if they were aware at the time that there were grounds for suspecting PPL's insolvency or a reasonable person in a like position in PPL's circumstances would be so aware: s 588G(2).
Reasonable grounds to expect that PPL was solvent and s 588H(2)
149 By virtue of s 588H(2) of the Corporations Act 2001 (Cth), it is a defence if it is proved that, at the time when a debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent and would remain solvent even if the debt was incurred.
150 Mr and Mrs Perrine rely on that defence as well as asserting that they were not aware of grounds to suspect insolvency. The basis for the contention that they had reasonable grounds to expect that PPL was solvent is said to be found in [13], [203] and [205] of the defence. Paragraph 13 identifies a number of matters said to support that expectation.
151 Paragraph 13(a) pleads that funds were available to PPL by way of loans from the directors and shareholders of PPL from time to time. While I accept that there was funding provided by Perrine Architecture, and occasionally other entities within the Perrine Group, in relation to PPL's operations, I have concluded above that as at July 2010 neither Perrine Architecture nor any other entity within the Perrine Group was in a position to provide financial assistance sufficient to enable PPL to discharge its obligation to Georgiou Building, let alone other liabilities of PPL due at that time. I am satisfied that Mr and Mrs Perrine were well aware of that inability, and their assertion as to the capacity to meet liabilities assumes that the debt to Georgiou Building was not payable because they had a basis to set aside the determination. As I have previously noted, the debt was due and payable as of 2 August 2010, and PPL was in no position to meet that liability and had no capacity to rely on other members of the Perrine Group to enable it to do so. That remained the case until the liquidator was appointed. I am satisfied that Mr and Mrs Perrine were well aware of the fact that PPL did not have the resources, or access to resources, that would enable PPL to meet its debts including the debt to Georgiou Building.
152 Paragraph 13(b) of the defence refers to the entry into the joint venture arrangements with Georgiou Group which secured working capital funding. The arrangement with Georgiou Group had come to an end by July 2010. Rather than providing a basis for a belief on the part of Mr and Mrs Perrine that those arrangements would enable the company to remain solvent at that time, the failure of the arrangements resulted in the company's insolvency.
153 Paragraph 13(c) of the defence pleads that PPL commissioned PWC to produce an independent valuation of the company having regard to its full financial position and its market position.
154 In February 2010, PPL engaged PWC to prepare a report as to the value of PPL for the purpose of assisting in potential capital raising. The indicative valuation prepared by PWC (JMP 7, page 169), was dated 20 April 2010.
155 The effective date of the valuation was 31 December 2009 and was based on financial information up to and including 31 December 2009. Assumptions upon which the report was based included that there has been no material change in the financial position of PPL between 31 December 2009 and 20 April 2010, and that PPL is and would continue to be a going concern. The report noted that, as at 31 December 2009, PPL had a deficiency in net assets of $2.6 million and a working capital deficiency of $2.4 million. The valuation was prepared on the basis of an assumption that PPL would be able to secure sufficient funding to finance the contracts which underpinned the valuation.
156 The indicative value assessed by PWC for the equity of Perrinepod was in the range of $7 million to $8.6 million. That valuation was assessed by a discounted cash flow method. The figures used for the assessment were financial forecasts for the business over a five year period, ended 31 December 2014, prepared by PPL's management. Those figures forecast revenue sales of $17.7 million in the calendar year 2010, increasing to $64.4 million in calendar year 2014. As to the year 2010, the figure was based on the assumption that particular contracts which were then in an early state of negotiation would be won. Assumptions were also made as to increases in subsequent years based on certain longer term proposals in which PPL was involved.
157 Relevant to issues of the commerciality of arrangements between PPL and Perrine Architecture which will be discussed later in these reasons, PWC said the following:
Another significant expense of the business has been management fees. These are general fees charged by Perrine Architecture to [PPL] for management and accounting services rendered. We note that had [PPL] employed additional staff to handle these tasks, this expense would have been significantly higher. Management expect this expense to decrease over time as PPL generates sufficient cash flows to support the hiring of additional internal staff to complete these tasks.
158 The PWC valuation may fairly be seen as a source of comfort to PPL and its directors that, if it remained a going concern and the assumptions upon which the valuation was based were to come to fruition, PPL had the potential to generate significant cash flows and meet future liabilities. The report says nothing, however, as to PPL's capacity to meet its present debts as they became due and payable. When the liability to Georgiou Building crystallised in July 2010, the PWC report provides no reasonable basis for believing that PPL was solvent.
159 Paragraph 13(d) of the defence pleads that from October 2010 until March 2011, PPL was engaged in negotiations for a significant investment by Walltech Systems Pty Ltd (Walltech) to raise capital. Those negotiations could not, of course, affect PPL's insolvency as at July 2010 or provide a basis for belief at that time as to PPL's solvency. It is necessary to review the evidence in relation to discussions with Walltech to consider whether, by reason of the negotiations with Walltech, Mr and Mrs Perrine had reasonable grounds at any time after those negotiations commenced to expect that PPL was solvent at the times that later debts were incurred.
160 In September 2010, Mr Perrine learnt through Mr Bill Redman, a solicitor in Brisbane with whom Mr Perrine had had dealings, that Walltech had expressed an interest in discussing the Perrinepod system 'as a parallel to their own wall technology manufacturing business'. Mr Perrine said that, at his request, prior to Mr Perrine meeting with Walltech's representatives, Mr Redman disclosed to Walltech the unresolved issues between PPL and Georgiou Group. Subsequent to the meeting, Walltech wrote to Mr Perrine stipulating the basis upon which it might progress discussions further (GMC 52, page 188). The letter suggested that in relation to any proposed acquisition, 'there is to be a clean break from the past operations of [PPL]', and that Walltech would not 'assume the existing business and operational structuring' of PPL or 'take an assignment of existing contractual relationships' of PPL. The letter then proposed that existing shareholders, other than entities associated with Mr Perrine, would be paid $1 million for their interest in the capital of PPL or alternatively have options which enabled them to take shares in a new entity which would be formed to progress the further development of the Perrinepod technology.
161 On the same day, Walltech wrote to Mr Perrine confirming that shareholders who have an interest in three houses yet to be built by PPL should be told that if the offer in respect of their shares was accepted, and should Walltech successfully conclude negotiations with Mr Perrine, then Walltech would provide the necessary funding to PPL, not exceeding $1 million, to enable completion of construction of those houses. That was clearly a reference to the Ali and Millington Projects.
162 Mr Perrine said that all shareholders of PPL who had been made the offer accepted it around late November 2010. On 10 November 2010, Mr Redman wrote to PPL confirming that Walltech and PPL had agreed to instigate an interim board to 'direct the business opportunities between the companies'. Mr Redman wrote that immediate decisions of the board to be addressed included facilitating the completion of three residences, which included the Millington and Ali Projects, finalising the buyout of minority shareholders and determining cash flow requirements during the interim period of transition. The letter suggested that the companies were moving towards a successful implementation of a business model by midFebruary 2011 (JMP 37, page 731).
163 In early January 2011, Mr Perrine was advised by the representatives of Walltech that one of the members of the family that controlled Walltech had suddenly passed away and that the family was unable immediately to deal with PPL's shareholder buy out and investment. Mr Perrine said that up until the end of March 2011, he and Mrs Perrine worked with Mr Redman and Walltech to endeavour to finalise the transaction, but by early April 2011 it became evident that, for reasons associated with the death of the family member, Walltech were not able to proceed with the transaction.
164 It may well have been that, had the Walltech transaction come to fruition, the new entity formed may have been able to resurrect PPL's business. The terms of the original letter of offer suggests, however, that Walltech would not have assumed responsibility for PPL's existing debts other than the liability to construct the Ali and Millington residences. Even if it was contemplated that Walltech would discharge PPL's existing liabilities, PPL was not justified in incurring further debts on the assumption that the Walltech transaction would be completed. Until such time as it was completed, PPL was not in a position to meet its existing debts and any new debts which might be undertaken. The mere possibility of the transaction coming to fruition did not constitute reasonable grounds to expect that PPL was solvent.
165 As noted earlier, in late 2009, PPL was negotiating with Vicon Properties in relation to two projects in Karratha. Paragraph 13(e) of the defence refers to the memorandum of understanding reached between PPL and Vicon Properties. It is not altogether clear on the evidence what ultimately happened in relation to the Vicon Properties proposals, but it is clear that PPL did not ultimately undertake the projects. There is no suggestion that, by July 2010, the Vicon Properties projects were likely to be a source of cash flow for PPL. Those projects are not mentioned in the PWC valuation amongst the 'key contracts in pipeline', so it would seem that, by April 2010, PPL did not see the Vicon Properties project as a potential source of revenue. There can be no doubt that Mr and Mrs Perrine were aware by July 2010 that the Vicon Properties projects would not proceed.
166 Paragraph 13(h) of the defence refers to PPL entering into a memorandum of understanding with Miro and Helen Cecich for a project with a value of approximately $4.5 million in July 2011, and for a further project with a value of approximately $1.8 million in October 2011. It is pleaded that the projects did not proceed with the company because development approval was not received prior to the order for the winding up of the company.
167 Again, accepting that those memoranda of understanding were signed, by October 2011, the debt to Georgiou Building, and various other debts of PPL, remained outstanding. The prospect of a future revenue source does not provide a reasonable ground for Mr and Mrs Perrine to expect that PPL was solvent at the time that the memoranda of understandings were signed, or at any time leading up to the appointment of the liquidator.
168 Paragraphs 13(i) and 13(j) of the defence refer to a joint venture between Hospitality Inns Pty Ltd and PPL, and to discussions between PPL and ECC (said to be a contractor for the US Government) in relation to a large construction on the island of Guam. While those projects may, had they come to fruition, have enabled PPL at some time in the future to meet its debts, that is not a reasonable ground for a belief that, in July 2010, or indeed any time thereafter, PPL was in a position to meet its debts then due and payable.
169 Paragraph 203 of the defence principally contains denials of the plaintiff's plea as to the director's knowledge of, and grounds for suspecting, insolvency. The only substantive matters pleaded are that:
170 Both of those matters, even if they are accepted as correct, do not address the critical question of PPL's capacity to meet debts due and payable before those prospects came to fruition. They do not provide reasonable grounds to believe that PPL was solvent at the relevant time.
171 Paragraph 205 of the defence merely contains admissions and denials of the plaintiff's plea that Mrs Perrine was aware of reasonable grounds for suspecting the company was insolvent by reason of her responsibility for the financial records of PPL and her involvement in the operation of the business of the company. No positive factual matters are asserted.
172 None of the matters relied upon by Mr and Mrs Perrine in support of their defence under s 588H(2) constitutes a reasonable ground to expect, from July 2010 until the company's liquidation, that PPL was solvent. I do not accept Mr and Mrs Perrine's evidence that they did in fact believe that PPL was solvent during that period. They were both fully aware of PPL's inability, either from its own resources or from any external resources, to meet its outstanding liabilities after July 2010. They were fully aware of PPL's financial position and of the grounds to suspect insolvency from July 2010 onwards. The requirement of s 588G(2) is met and the defence under s 588H(2) is not made out.
174 Mr and Mrs Perrine are therefore liable to pay to the liquidator the amount of any losses suffered by creditors to whom debts were incurred whilst PPL was insolvent. I turn therefore to the debts which the plaintiff claims were incurred whilst PPL was insolvent. Those debts are found at [140] to [202] of the statement of claim. A number of those claims were abandoned at trial on the basis that the relevant debts had been paid and the creditors had therefore not suffered losses.
175 In Australian Securities and Investments Commission v Plymin, Mandie J reviewed the authorities dealing with the question as to the proper construction of the expression 'incurs a debt'. Relying on observations made by Gleeson CJ and Kirby P in Hawkins v Bank of China (1992) 26 NSWLR 562, 568 572, 574 578, Mandie J said:
The weight of authority shows that a debt can be incurred when the contract giving rise to the debt is entered into, even if contingencies affect the debt or the debt is a future debt. In the case of a future debt, it may be incurred at the time of entering the contract if it is then an ascertained or ascertainable amount. By the same token, a debt may in appropriate circumstances be incurred within the meaning of the section at a time later than the entry of the contract under which the debt arises or may arise. Although it is necessary to consider the terms of the relevant contract, the question when the debt is incurred within the meaning of the section does not depend on strict legal analysis but turns on when, in substance and commercial reality, the company is exposed to the relevant liability. The reason for the emphasis upon substance and commercial reality lies in the need to ensure that the language is interpreted, or applied to the facts, in a way which serves the purpose, or fits the context, of a provision aimed at preventing insolvent trading and in a way which avoids absurd results.
The words 'incurs a debt' cannot be disregarded but, because of the aim and intent of the section, the focus must be on the conduct and choice of the alleged insolvent company. It will often be necessary to identify the time when the conduct and choice of the company caused the debt to be incurred, or brought about the circumstances in which the debt was incurred, because it is at that time that it must be shown that the director failed to prevent the company from incurring the debt in the relevant sense, and it is also at that time that it must be shown that the director had or ought to have had the requisite awareness that there were reasonable grounds for suspecting insolvency [516] [517].
176 That approach is consistent with the approach taken in relation to liability for the payment of rent created by a covenant in a lease executed prior to the relevant company's insolvency, which was dealt with in Russell Halpern Nominees Pty Ltd v Martin [1987] WAR 150. In that case, Burt CJ (with whom Smith and Olney JJ agreed) concluded that a tenant company did not incur a debt within the meaning of s 556(1) of the Companies (Western Australia) Code whenever a present liability to pay rent is created by the tenant's covenant in the lease operating upon the passage of time (153). The relevant act on the part of the company was the entry into the lease in the first instance.
177 The propositions outlined above were not in issue in these proceedings.
178 Paragraph 141 of the statement of claim refers to six invoices rendered by Perrine Architecture to PPL in relation to rent of the premises at Murray Street occupied in part by PPL and in part by Perrine Architecture (GMC 31, pages 726 to 734). The first two are dated 30 March 2010 and 27 May 2010, prior to the date on which I have concluded that PPL's insolvency is established. The remainder date from 30 September 2010 to 29 February 2012. The plaintiff pleads that PPL incurred the debt to Perrine Architecture on each date on which the rent invoices were rendered. Although the invoices refer to 'sublease of premises', it is apparent that PPL's occupation of the premises, of which Perrine Architecture was the head lessee, was never formally documented and no lease for a fixed term was in place. In effect, therefore, PPL occupied the premises as a monthly tenant, and the arrangement could have been terminated by the directors of PPL, who were also the directors of Perrine Architecture, at any time. This is not, therefore, a case of the type dealt with in Russell Halpern Nominees Pty Ltd v Martin, where the liability to pay rent from time to time was created by the covenant in a lease for a fixed term. It is correct, therefore, to say that PPL incurred the debt to Perrine Architecture when it continued to occupy the premises and the rental amounts were invoiced by Perrine Architecture.
179 The four debts postdating PPL's insolvency were as follows:
180 Those invoices have not been paid, and Perrine Architecture has suffered loss in respect to the amount of those invoices. Mr and Mrs Perrine plead in their defence that the rent invoices were credited to the invoice account on about the date that they rendered, refer to the arrangement between PPL and Perrine Architecture as to the deferral of payments until cash flow permitted, and also plead in their defence that Perrine Architecture could at any time release PPL from its obligation to pay the rent invoices. None of those matters is capable of disproving that PPL incurred the debts or that Perrine Architecture suffered a loss for the amount of the invoices.
181 Paragraph 144 of the statement of claim pleads that Perrine Architecture rendered four invoices to PPL in respect of management fees for the periods particularised in each of those invoices (GMC 29, pages 709 to 716).
182 The first of those is an invoice for $1,251,993.60 for management fees from 1 July 2007 to 30 June 2010. It is pleaded that the debt to Perrine Architecture was incurred on the date on which the management fee invoices were rendered. The invoice refers to management fees 'in accordance with board agreements'. It is clear that there was an ongoing arrangement, sanctioned by PPL's board, for Perrine Architecture to provide management services to PPL on an ongoing basis, and on the basis that the liability for those fees would be met as and when PPL's cash flow permitted. Having regard to the approach explained by Mandie J in Hawkins v Bank of China, which is referred to above, I do not accept that the debt in relation to management fees was incurred on 1 July 2010. The debt was incurred as a result of the agreement between PPL and Perrine Architecture, which had been reached long before the date on which I have found PPL's insolvency to be established. PPL's liability for the services provided accrued as those services were provided. Mr and Mrs Perrine are not liable for any losses suffered by Perrine Architecture in relation to the invoice dated 1 July 2010.
184 Those invoices relate to services provided after PPL was insolvent. Those debts were therefore incurred after 16 July 2010, and Perrine Architecture suffered a loss by the nonpayment of the invoices by reason of PPL's insolvency.
185 It is admitted on the pleadings that Perrine Architecture rendered invoices in the following amounts in respect of work undertaken by Perrine Architecture on behalf of PPL:
186 The invoice rendered on 23 February 2010 predated the date on which I have determined that PPL's insolvency is established. The balance of the other two accounts is $154,000. The two invoices related to services rendered in relation to a project in Morgans Street, Port Hedland. The work done was done after July 2010 and the debt was incurred after that date. Perrine Architecture suffered a loss of $154,000 by reason of PPL's insolvency.
Perrine Architecture employees' work on behalf of PPL
187 Throughout 2010 and through to November 2011, Perrine Architecture rendered invoices to PPL in relation to time spent by employees of Perrine Architecture on PPL work and for certain other miscellaneous charges. Paragraph 151 of the statement of claim identifies nine invoices of that type (GMC 30, pages 717 to 725). Six of those postdate 16 July 2010 and relate to services provided after that date. It would have been open to Mr and Mrs Perrine to prevent those debts being incurred. They are as follows:
188 Perrine Architecture suffered a loss in that amount by reason of PPL's insolvency.
189 After July 2010, Perrine Architecture rendered the following invoices to PPL in respect to disbursements incurred by Perrine Architecture. The invoices were:
31 January 2011 (incorrectly dated 31 March 2011 in SC [15a])
190 Mr and Mrs Perrine could have prevented those debts being incurred but failed to do so. Perrine Architecture suffered a loss in the amount of those invoices by reason of PPL's insolvency.
191 The plaintiff seeks to recover $75,000, being loss said to have been suffered by PWC when it settled a claim by the liquidator that PWC had received a preferential payment from PPL in August 2011. It is admitted on the pleadings that PPL paid amounts outstanding on the following invoices:
192 The first of those invoices rendered on 24 February 2010 was addressed to Perrine Architecture, not to PPL. The description of the work done does, however, suggest that it was work done on behalf of PPL, and it would appear that PPL has accepted it as its liability and ultimately paid that invoice along with the others which were rendered to PPL. It is appropriate to treat the reference to Perrine Architecture on the invoice of 24 February 2010 (GMC 19, page 569) as an error.
193 The total of the three invoices which postdate 16 July 2010 is $45,100. The total preference claim made against PWC by the liquidator was $112,200, being the full amount paid to PWC. The amount by which the claim was compromised represented 66.84% of the claim. In other words, PWC made a loss of 66.84% of the amount of its invoices to PPL. In order to assess the loss in relation to those debts incurred by PPL to PWC after 16 July 2010, it is appropriate to apply the same percentage. Those invoices total $45,100. The loss suffered by PWC in relation to the insolvent trading debts amounts to $30,144.84.
194 The plaintiff's claim in relation to invoices rendered to Metaxas & Hager was not pursued because the invoices were eventually paid and Metaxas & Hager suffered no loss.
195 In late 2009, Mr and Mrs Perrine resolved to find other parties willing to undertake small projects using the Perrinepod system, and willing to complete the Ali and Millington Projects in view of Georgiou Group's failure to do so. Mr Perrine began negotiations with David Reid Homes (DRH), a building company operating in Australia and New Zealand which had recently commenced a franchise operation in Perth. The Perth franchisee was a Mr Angelo Carmonara. Mr Perrine said that Mr Carmonara was excited about the prospect of working with PPL and using the Perrinepod system. He said that agreement on the following principles was agreed with Mr Carmonara:
(a) PPL would provide the projects and basic components;
(b) DRH would manage and supervise the projects and appoint subcontractors where necessary, all at the real cost paid by DRH in so doing. This 'cost' would be passed to PPL in keeping with the timing of PPL's contractual drawdown schedule. PPL would drawdown its contractual payments from the homeowner and make payments to DRH;
(c) a fixed fee for DRH would be negotiated on a project by project basis for their profit and attendance.
196 It is apparent that, sometime prior to 14 July 2010, DRH commenced work on the Millington Project. DRH issued a tax invoice directed to 'Martin Millington, C/O Perrinepods' on 14 July 2010 for scaffold hire, some site costs and for a 'management fee at pods complete (sic)', for a total amount of $12,998.84. It is not apparent from the invoice (LP 16, page 289) when the work was undertaken, but the liability to meet that debt clearly arose, and the debt was therefore incurred, prior to 16 July 2010.
197 Between 29 July 2010 and 2 September 2010, DRH rendered the following invoices to PPL. Although each of the invoices is directed to what appears to be the relevant client of PPL, Mr and Mrs Perrine admit that the invoices were rendered to PPL. The invoices were as follows:
198 Mrs Perrine gave evidence that, on 31 January 2011, she reversed an amount of $33,209.21 showing as a debt to DRH out of the books of PPL. She said that that was done on the basis that the claims were the subject of dispute. I am unable to reconcile that amount with the total of the invoices set out in the table above and the total of the invoice of 14 July 2010 for $12,998.84.
199 DRH subsequently issued proceedings in the Magistrates Court of Western Australia against PPL and Mr Perrine. Mrs Perrine gave evidence that a settlement of those proceedings was reached and, on 7 August 2012, $12,500 was paid to the solicitors for DRH. The settlement reached with DRH was approved by Mr Carrello (JMP 68, page 943). The claim was subsequently dismissed by consent (MP 28, page 126).
200 The plaintiff maintains a claim for the total amount of the invoices referred to above together with the invoice of 14 July 2010, reduced by $12,500 to reflect the settlement and thus the reduction in the loss ultimately suffered by DRH. He contends that, notwithstanding that the matter was settled, DRH effectively suffered a loss of the balance of its claim. That contention assumes that there was no merit in the dispute and that the debts to DRH were in fact incurred. There is no evidence before me which would enable any assessment of that assumption to be made. If, as may be the case, the settlement reflected what DRH considered was properly due to it, then it cannot be said that debts for a greater amount were incurred.
201 In the circumstances, I am unable to conclude that PPL incurred the debts the subject of DRH's invoices and thus that DRH suffered a loss by reason of PPL trading while insolvent.
202 The plaintiff's claim in relation to insolvent trading by incurring debts to CID relies on invoices rendered between 6 July 2009 and 1 January 2010. The debts therefore were incurred prior to the date on which I have concluded that PPL was insolvent, and accordingly that aspect of the claim is not made out.
203 On 23 July 2010, Nuway Rendering Group rendered an invoice, number L123, for a total of $3,594 plus GST. A figure of $3,594 was made up of $3,000 for what it described as 'final payment' and $594 for 'window masking as per 29/3/10'. It is admitted on the pleadings that on 1 September 2010, PPL paid, or caused to be paid, $2,500 in reduction of the amount outstanding to Nuway Rendering Group. In her evidence, Mrs Perrine says that the balance, namely $1,453.40, was disputed on the basis that work performed by Nuway Rendering Group was defective. It is implicit that the payment of $2,500 was as a result of a compromise, apparently negotiated by Mr O'Neill on behalf of PPL, of the dispute as to defective workmanship. The balance of $1,453.40 was reversed out of the books of PPL on 30 June 2011, and Nuway Rendering Group lodged no proof of debt in the liquidation.
204 It appears that the debt was incurred before 16 July 2010 and thus, even if there were a loss, it would not be recoverable on the basis of Mr and Mrs Perrine allowing PPL to trade whilst insolvent. In any event, given the compromise of the claim, I would not have concluded that the balance of the invoices was properly payable.
205 The claim in relation to a debt to Formcraft founded at [179] to [182] of the statement of claim was abandoned at trial.
206 It is common ground that Mr Ali caused a total amount of $1,262,217.06 to be paid to PPL on the following dates:
207 The plaintiff relies on the letter of 6 November 2009 from PPL to Mr Ali, advising that the funds had been received and would be treated as a shareholder loan, as a basis for contending that PPL incurred a debt to Mr Ali in that amount on that date. Even if that contention were to be made out, the debt would have been incurred prior to the time by which I have concluded that PPL was insolvent. In any event however, whilst the moneys advanced by Mr Ali were treated in the books of PPL as a loan, the liability to Mr Ali was, at least until early 2011, to be discharged by construction of his house. The treatment of the funds in PPL's books did not change the nature of the transaction, and the liability to complete Mr Ali's house was undertaken well before PPL became insolvent. Mr and Mrs Perrine have no liability for the repayment of the funds advanced by Mr Ali on the basis of insolvent trading by PPL.
208 The claim for insolvent trading in relation to JADD pleaded at [195] [197] of the statement of claim was abandoned by the plaintiff at trial.
209 The claim for insolvent trading by incurring debts to Jamm relies on two invoices rendered by Jamm. They were invoice number 11, dated 18 November 2009 in the sum of $14,520, and invoice number 26, dated 2 September 2010 for $11,164.50. There is an issue on the pleadings as to whether or not invoice 11 was fully satisfied by subsequent payments made to Jamm. In any event, it relates to a debt incurred prior to July 2010 and would not be recoverable on the basis of insolvent trading by PPL.
210 The plaintiff pleads that on 8 September 2010, PPL paid a further $10,000 to Jamm, so that the final outstanding balance was $5,266.90, which represents the loss suffered by Jamm.
211 The defendants plead that invoice number 26 was paid in full, the final payment being made on 30 September 2010 by Perrine Architecture on PPL's behalf.
212 In notes attached to a table of debts incurred provided by the plaintiff's counsel as an aid to final submissions, it is submitted that claims for debts outstanding to Jamm should be adjusted to increase the amount claimed from $5,266.90 to $25,946.90 to take account of admissions made at [7(c)(i)] of the defence. Paragraph 7(c)(1) (3) of the defence reads as follows:
(c) deny that Jamm Industries was a creditor as at the Commencement Date:
(1) say that Jamm Industries was a contingent creditor on the basis that the Company only had a future liability to pay a retention amount held of $25,946.90 with respect to the Newood contract, pending the expiry of the defects liability period on or about October 2012, 12 months following the completion of the contract works;
(2) say further that the future liability would only crystallise upon the satisfactory performance of the contract works at the end of the defects liability period without latent defects;
(3) but say that due to defects in the works performed by Jamm Industries under the Newood contract, the contingent liability of the Company to Jamm Industries did not crystallise into an actual liability;
Particulars
The retention amount held of $25,946.90 is evidenced by the invoice dated 6 October 2011 from Jamm Industries to the Company.
213 That plea was not specifically addressed in the plaintiff's reply.
214 Mr Perrine was crossexamined as to an acknowledgement in the report as to affairs completed by Mr Perrine following PPL's liquidation (GMC 6, page 61) which recorded an amount admitted as owing to Jamm in the sum of $25,946.90. It was suggested to Mr Perrine that that outstanding amount related to the two invoices relied upon by the plaintiff (ts 420). Mr Perrine said, and I accept, that it was a reference to the retention amount referred to in [7(c)] of the defence. Mr Perrine gave evidence consistently with the contents of [7(c)] of the defence.
215 The question of whether or not the retention monies might ever have been payable was never raised or investigated at trial. The amendment of the claim by way of a footnote to a 36page tabulated aid to submissions did not give Mr and Mrs Perrine adequate notice of the basis upon which a claim was to be made. Mr and Mrs Perrine approached the trial on the basis of the claim pleaded against them. What is asserted to be an admission as to the existence of a debt in [7(c)] of the defence ignores the plea that the contingent liability to Jamm never crystallised. I would not allow amendment to the claim in the way proposed by the plaintiff.
216 Beyond seeking to increase the claim, the plaintiff did not address the precise evidentiary basis upon which the pleaded claim is said to be established. I am not satisfied that the sum of $5,266.90 remained outstanding in relation to the invoice of 2 September 2010.
217 For the reasons explained above, I do not consider Mr and Mrs Perrine to be liable in respect of insolvent trading in respect of debts to DRH, Metaxas & Hager, CID, Nuway, Formcraft, Ali or Jamm Industries.
218 I find that Mr and Mrs Perrine are liable for failing to prevent insolvent trading when the company incurred debts in the following amounts:
Perrine Architecture's liability under s 588V and s 588W
219 Sections 588V(1) of the Corporations Act provides:
(a) the corporation is the holding company of a company at the time when the company incurs a debt; and
(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and
(d) one or both of the following subparagraphs applies:
(i) the corporation, or one or more of its directors, is or are aware at that time that there are such grounds for so suspecting;
(ii) having regard to the nature and extent of the corporation's control over the company's affairs and to any other relevant circumstances, it is reasonable to expect that:
(A) a holding company in the corporation's circumstances would be so aware; or
(B) one or more of such a holding company's directors would be so aware; and
(e) that time is at or after the commencement of this Act.
220 Section 588W provides that where a corporation has contravened s 588V, the person to whom the debt is owed has suffered loss or damage because of the company's insolvency, and where the debt was unsecured and the company is being wound up, the liquidator may recover from the corporation an amount equal to the loss or damage.
221 Mr and Mrs Perrine were the directors and controlling minds of Perrine Architecture. Perrine Architecture was the holding company of PPL when PPL incurred the debts in respect of which I have concluded Mr and Mrs Perrine are liable by reason of insolvent trading. I am satisfied therefore that the requirements of s 588V(1) are met, in particular the requirement of s 588V(1)(d). Consistent with my earlier findings, no defence under s 588X is available to the claim under s 588W.
222 I am conscious that the application of s 588V and s 588W gives rise to what might be thought to be a harsh outcome. That is that the amount recoverable by the liquidator is measured by the loss suffered by the entity to which the debt was incurred. In the normal course, that entity would be some creditor independent of the company which incurs the debt. Here, the effect of the sections is that, not only does the holding company suffer the loss, but it must then pay the amount of its loss to the liquidator. It therefore suffers the loss twice, less whatever proportion of the original loss might be recoverable as a dividend in the liquidation. Notwithstanding that that might be thought a harsh result, it is the effect of the relevant provisions of the Corporations Act as I construe them. The object of the recovery by a liquidator, although measured in terms of loss to a creditor, is not an action for the benefit of that creditor or to compensate that creditor specifically. Rather, the successful claim for insolvent trading by the liquidator is directed to the benefit of the creditors as a whole. The scheme of the Act is to discourage trading by corporations while insolvent and to impose liabilities on those who are in a position to prevent that happening but fail to do so.
223 That underlying purpose is illustrated by the provisions of s 588Y, which deals with the position where the injured party knew of insolvency. It permits the court to order that the amount paid to the company not be available to pay that creditor's debts unless all of the company's unsecured debts have been paid in full. The section illustrates that there can be adverse consequences to a party who becomes a creditor of a company knowing the company to be insolvent at the time it incurs the debt.
224 It was submitted by the plaintiff that an order should be made pursuant to s 588Y(2) in relation to the amount payable by the defendants in relation to insolvent trading. Having regard to the findings which I have made as to Mr and Mrs Perrine's knowledge of the insolvency of PPL after July 2010, I consider that an order under s 588Y(2) is appropriate.
225 A transaction to which a company and a creditor are parties is an unfair preference given by the company to the creditor if the transaction results in the creditor receiving from the company, in respect of an unsecured debt, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove in a winding up of the company: Corporations Act s 588FA(1).
226 An unfair preference given by the company is an insolvent transaction of the company if the transaction is entered into, or an act is done for the purpose of giving effect to the transaction, at a time when the company is insolvent: Corporations Act s 588FC.
227 Pursuant to s 588FE(4), a transaction is voidable if it is an insolvent transaction to which a related entity of the company is a party and it was entered into, or given effect to, during the four years ending on the relationback day, which in this case is 14 February 2011. Therefore, in this case, any unfair preference given by PPL after 16 July 2010 (being the date on which I have determined PPL was insolvent) is a voidable transaction. Where a transaction is voidable because of s 588FE, the court may, on the application of the company's liquidator, make various orders, including an order directing a person to pay the company the amount which the company paid under the transaction: Corporations Act s 588FF(1).
228 The plaintiff claims that a number of payments made by PPL to Perrine Architecture which were recorded in PPL's loan account with Perrine Architecture between June and November 2011 constitute unfair preferences, and seeks judgment against Perrine Architecture for the amount of the payments.
229 Mrs Perrine gave evidence that there was a 'running account relationship' between PPL and Perrine Architecture dating back to the commencement of PPL in 2007. She said that, at all relevant times, Perrine Architecture had similar running accounts with other related companies within the Perrine Group. As part of the ongoing relationship with PPL, Perrine Architecture rendered invoices to PPL on a regular basis. As has been seen, the invoices related to architectural project fees, management fees, staff costs, office rent and disbursements. Within the books of PPL, PPL's financial relationship with Perrine Architecture was recorded in two separate accounts. One was referred to as the invoice account, and the other as the loan account. Mrs Perrine said that the invoice account and the loan account together formed the 'combined running account'.
230 Objections were taken to Mrs Perrine's affidavit whenever she referred to a 'running account'. The objections were essentially that the use of that expression constituted an opinion or a conclusion. What Mrs Perrine meant when she used that expression can be seen in her affidavit of 3 August 2015, where she said:
The running account relationship between PP and PA dates back to the commencement of PP in 2007. At all relevant times PA had similar running accounts with other related companies within the Perrine group. In its daytoday interactions with its various related entities, PA has generally operated on the basis of a running account with each of those entities, as funds and payments have always tended to flow between the entities at various times.
As part of the ongoing relationship with PP, PA tendered invoices to PP on a regular basis. These invoices generally related to architectural and project fees, management fees, staff costs, office rent and outgoings and project and administrative disbursements. These invoices formed part of the running account between PP and PA, referred to as the invoice account.
At various times PA transferred funds to and made payments on behalf of PP and vice versa. These transactions formed part of the running account and were recorded through a loan account, referred to as the loan account [27] [29].
231 Those statements do no more than explain the treatment of PPL's financial interactions with Perrine Architecture in the books of each company. Mrs Perrine was able to give that evidence by reason of her role as bookkeeper. Mrs Perrine's use of the expression 'running account' is of no particular significance. It is merely a label she uses to describe an accounting process. I do not uphold the plaintiff's objections to the use of that expression or her explanation of the accounting procedure. The accounting procedure can, in any event, be observed in PPL's accounting records that were in evidence.
232 In crossexamination, Mrs Perrine stated that she had been familiar with the expression 'running account' for some time, but had no reason to put a name to the transactions at the time they took place (ts 227 228). The significance of the nature of the account as between PPL and Perrine Architecture arises by virtue of s 588FA(3) of the Corporations Act, which invokes a particular approach to unfair preferences in the context of a continuing business relationship. I will return to that issue later.
233 It should be noted, however, that, in crossexamination, Mr Carrello said that he 'had always thought that there was a doubleup with the loan accounts and you could have shown all of the transactions through one account'. He gave as an example a book entry which substantially cleared the invoice account but debited the loan account with the corresponding amount (ts 133).
234 The first payment said to be an unfair preference is that referred to at [102] [111] of the statement of claim (1 July payment). As of 30 June 2011, Perrine Architecture were shown in the loan account to be indebted to PPL in the amount of $5,382.37. On 1 July 2011, Perrine Architecture rendered an invoice, number 744, in the amount of $309,354.09 (GMC 27, page 704). The invoice is described as being for 'Terrace Hotel Supply Order Amount due in relation to the deed of assignment and novation dated 1 July 2011'.
235 The second defendants admit that Perrine Architecture owed PPL $5,382.37 as at 30 June 2011 and that invoice 744 was rendered by Perrine Architecture to PPL on 1 July 2011. In [103(b)] of their defence, the second defendants:
(b) say that the Terrace Invoice was raised and given effect to in the following circumstances:
(1) the Company received deposits from The Terrace Hotel Perth Pty Ltd (THP) with respect to a contract (Terrace Contract) between THP and the Company for the supply of pre-cast modules at the site of the development of the Terrace Hotel, amounting to some $309,354.09 (Deposit), by way of:
The Terrace Contract is evidenced by the Supply Order #00035 dated 3 February 2011 and the Supply Order #00039 dated 11 April 2011, which together comprise the Terrace Contract.
(A) cash from Hospitality Pty Ltd (Hospitality) being a 50% shareholder of THP; or
(B) credits to the Loan Account by Perrine Architecture on account of Blueline Asset Pty Ltd (Blueline), being the other 50% shareholder of the THP (in circumstances where, as a consequence, a Loan Account arose between Blueline and, Perrine Architecture);
(I) On or about 15 February 2011 Hospitality paid $27,888.88 in partial satisfaction of THP's obligation to pay 50% of the Deposit, by paying that amount to Perrine Architecture, as a consequence of which, the Loan Account was debited with an equivalent amount (on the basis that the Company was the ultimate intended recipient of that sum of $27,888.88).
(II) The Company was paid the following amounts by Hospitality on behalf of THP, being the balance of the Deposit payable by those shareholders:
(III) The Loan Account was debited with the sum of $154,677.05 on 1 April 2011, constituting the proportion of the Deposit payable by Blueline on behalf of THP:
(2) the Company did not commence work under the Terrace Contract;
(3) on or about 1 July 2011, the Company and Perrine Architecture agreed that Perrine Architecture should perform the Terrace Contract in place of the Company;
The agreement is evidenced by:
(A) the unexecuted Novation Agreement, which may be inspected at the offices of the Defendants solicitors; and
(B) the Terrace Invoice.
236 None of the parties addressed this aspect of the case in submissions, nor was it dealt with in any substantive way in the evidence. The terms of the invoice of 1 July 2011 are consistent with the matters pleaded by the defendant, and PPL's books show a debit of $27,888.88 in Perrine Architecture's loan account. In Mr Carrello's affidavit of 13 February 2014, he sets out a number of matters said to have emerged from his review of the books and records of PPL. One of those ([56(ii)]) is said to be that Perrine Architecture was paid by, or otherwise received from, PPL an amount of $309,354.09 on or about 1 July 2011. That is true only in so far as that amount was debited to in PPL's loan account with Perrine Architecture. To the extent that Perrine Architecture had received a payment from Hospitality Pty Ltd, it was entitled to retain that sum by reason of the novation of the Terrace Hotel contract.
237 The five other payments which the plaintiff contends were unfair preferences in favour of Perrine Architecture were as follows:
238 PPL's payment of $88,000 to Perrine Architecture on 4 August 2011 reduced the amount outstanding to Perrine Architecture on the loan account to $257,305.70. The payment of $277,000 on 26 August 2011 extinguished the indebtedness of PPL to Perrine Architecture and left a balance in favour of PPL of $23,135.98. The payment of $65,000 on 20 October 2011 reduced the amount outstanding to Perrine Architecture on the loan account to $116,477.77. The payment of $1,000 on 18 November 2011 reduced the amount outstanding to Perrine Architecture on the loan account to $160,247.37, and the payment of $3,200 on 24 November 2011 reduced the amount outstanding on the loan account to $157,067.37.
239 The second defendants contend that the payments identified by the plaintiff were transactions on the running account, comprised of the combined loan account and invoice account, and seek to invoke the provisions of s 588FA(3) of the Corporations Act, which provides:
(a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and
(b) in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;
(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and
(d) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference.
240 The effect of that section is that, where a continuing business relationship exists, the measure of any preference is to be ascertained by reference to the highest amount owed during the relationback period, which is not necessarily at the beginning, compared to the amount owing on the last day: Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinx Pty Ltd [2001] NSWSC 230; (2001) 37 ACSR 477 [140] (Santow J).
241 The continuing business relationship defence raises several questions. They are:
242 Section 588FA(3) refers to transactions which are an integral part of a 'continuing business relationship'. A running account is an example of a continuing business relationship.
243 The relationship between Perrine Architecture and PPL was multifaceted. PPL engaged Perrine Architecture to supply professional services, management and administration services, premises and loans, all of which were necessary for PPL to carry out its business.
244 In Airservices Australia v Ferrier [1996] HCA 54; (1996) 185 CLR 483, Dawson, Gaudron and McHugh JJ said:
Since the decision of this court in Richardson v Commercial Banking Co of Sydney Ltd, the term 'running account' has achieved almost talismanic significance in determining when the ultimate, rather than the immediate and isolated, effect of a payment is to be examined for the purpose of a determination under s 122 of the Bankruptcy Act. However, the significance of a running account lies in the inferences that can be drawn from the facts that answer the description of a 'running account' rather than the label itself. A running account between traders is merely another name for an active account running from day to day, as opposed to an account where further debits are not contemplated. The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded. Ordinarily, a payment, although often matching an earlier debit, is credited against the balance owing in the account. Thus, a running account is contrasted with an account where the expectation is that the next entry will be a credit entry that will close the account by recording the payment of the debt or by transferring the debt to the bad or doubtful debt a/c (504 505). (references omitted)
245 It is apparent that it was always contemplated that there would be an ongoing relationship between Perrine Architecture and PPL, and that the state of the accounts between them would fluctuate from time to time. Putting aside for present purposes the question of good faith and suspicion of insolvency, I am satisfied that the relationship between PPL and Perrine Architecture was a continuing business relationship in the sense relevant to s 588FA(3).
246 Mrs Perrine produced three schedules as an attachment to her affidavit of 3 August 2015. Those schedules depicted the PPL/Perrine Architecture loan account transactions from 18 July 2007 through to 2 March 2012, the PPL/Perrine Architecture invoice account transactions from 13 September 2007 to 29 February 2012 and a combination of those schedules showing what she described as a 'combined running balance' throughout the whole period. The paragraph of Mrs Perrine's affidavit in which she refers to the three schedules was the subject of objection. The paragraph commenced with the words '[t]ogether the invoice account and the loan account form the combined running account'. The objection to the paragraph, apparently including the schedules, was that it constituted 'inadmissible opinion'. If the objection is that the introductory words contain an opinion as to the application of s 588FA(3), it would be valid. I do not read Mrs Perrine's evidence in that sense. The schedules produced (MP 5, pages 48 62) do no more than reproduce the figures from the books of PPL. It was clarified during the trial that Mr Carrello accepted that there was no difference between the books upon which he was relying and the books upon which Mrs Perrine was relying in their respective evidence. An examination of PPL's general ledger (GMC 39, page 195) as against Mrs Perrine's schedule A demonstrates the correlation of Mrs Perrine's schedule to the books of PPL.
247 I should add that I have given no weight to Mrs Perrine's description of the schedules at MP 5 as 'running accounts' to my conclusion as to the existence of a continuing business relationship as between PPL and Perrine Architecture.
248 In my view, the substance of the ongoing business relationship between PPL and Perrine Architecture involved transactions reflected in both the loan account and the invoice account from time to time. On occasions, amounts were debited to the loan account and credited to the invoice account (for example, on 30 June 2010, on 1 July 2011 and on 15 October 2011). As Mr Carrello acknowledged, he could not understand why there were two separate accounts in the books of PPL. To the extent that the overall state of indebtedness of PPL to Perrine Architecture should be assessed, it should be done by reference to the combined balance of the two accounts maintained in the books of PPL.
249 On that basis, it is apparent that from July 2010, after which any unfair preferences given by PPL to Perrine Architecture could, by virtue of s 588FE(4) and s 588FC, be susceptible to orders under s 588FF, PPL's indebtedness to Perrine Architecture progressively and substantially increased from approximately $575,000 to in excess of $2.9 million as at March 2012. If s 588FA(3) is applicable, no unfair preference has been given by PPL to Perrine Architecture.
250 The plaintiff contends that Perrine Architecture is not entitled to the benefit of s 588FA(3) because the existence of knowledge or suspicion of insolvency by the creditor deprives the relationship of a vital characteristic of a continuing business relationship. Reliance is placed on Olifent v Australian Wine Industries Pty Ltd (1996) 19 ACSR 285 and Clifton v CSR Building Products Pty Ltd [2011] SASC 103. In both those cases, the defendants sought to rely on s 588FG of the Corporations Act. That defence is not available to Perrine Architecture because, as I have concluded, Mr and Mrs Perrine, who were its guiding minds, did have reasonable grounds for suspecting that PPL was insolvent. It is a separate question, however, as to whether the absence of good faith, or the existence of reasonable grounds for the creditor to suspect insolvency, has a bearing on whether or not the continuing business relationship could be said to exist.
251 In Olifent, Burley M referred to observations of Barwick CJ in Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266, where, in the context of the 'running account defence' for the purposes of s 122 of the Bankruptcy Act 1924 (Cth), his Honour spoke of the necessity for 'mutual assumption by the parties that there will be a continuance of the relationship of buyer and seller with resultant continuance of the relation of debtor and creditor in the running account' (286). Master Burley observed that if payments were not received in good faith or were not made in the ordinary course of business, or were made with bankruptcy in view, then the 'mutual assumption by the parties' would cease to exist (293). His Honour concluded, however, that in the case before him, there was no evidence that the creditor suspected insolvency.
252 In Clifton, Peek J referred to the explanation by Dawson, Gaudron and McHugh JJ in Airservices Australia v Ferrier (502 503) of the operation of the 'running account defence', and continued [68]:
Essential elements of the running account defence are therefore a continuing relationship of debtor and creditor and that payments are made in the mutual expectation that the creditor will continue to supply the debtor. In order to determine whether such an expectation exists, it is necessary to look at the particular circumstances from which it may be inferred since usually there will be no express statement that a payment is being made in the expectation that the supplier will continue to supply. As Barwick CJ said in Queensland Bacon Pty Ltd v Rees:
'In my opinion, it is enough if, on the facts of any case, the court can feel confident that implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relationship of buyer and seller with the resultant continuance of the relation of debtor and creditor in the running account, so that, to use the expressions employed in Richardson's case at 113: "it is impossible" I interpolate, in a business sense "to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed ..."' (references omitted)
253 Justice Peek concluded that it is possible to have a continuous business relationship notwithstanding the presence of a suspicion of insolvency. His Honour said [69] [70]:
I find that from the start of the relation back period on 3 April 2006 until 13 July 2006, there was a running account between CSR and AFPL. I do so notwithstanding my previous findings that CSR had reasonable grounds for suspecting the insolvency of AFPL during that same period. I respectfully agree with the view expressed by Santow J in Sutherland v Eurolinx, that it is possible to have a running account despite the presence of a suspicion of insolvency. His Honour said:
'[163] ... If it be put that actual knowledge of insolvency must invariably terminate the necessary business relationship then I would not accept that proposition. That would presuppose, incorrectly, that a subjective suspicion of insolvency cannot coexist with an assumption of a continuing business relationship between creditor/payee and debtor/payer. That is incorrect as an invariable proposition, on the authority of Airservices Australia. Knowledge of insolvency in that case did coexist for all the payments, including the nine not set aside. The statements of principle by the High Court clearly do admit of that coexistence of knowledge and running account; they make no distinction between subjective and objective knowledge.
[164] However, the Plaintiff's qualification may legitimately be put somewhat lower. One may accept that a level of actual suspicion, if it finally reaches actual subjective knowledge of insolvency, may, but not necessarily, lead to the termination of that continuing business relationship and its associated mutual purpose of payment to induce further supply. Thus the fact of such actual knowledge may (but need not necessarily) rebut, as even one of two purposes, that purpose of inducing the creditor to maintain the relationship by providing further supply. An example of the latter case is to be found in the circumstances surrounding the last payment in Airservices Australia itself. There, as I have explained, the latter purpose was subordinated to getting the creditor's money back.' (Emphasis in italics in original; emphasis in bold added)
Despite there being reasonable grounds for CSR to suspect the insolvency of AFPL at the time of the first two payments, and despite the particular problems that CSR had had with AFPL in the payment of the October 2005 account in December 2005 and January 2006, I consider that there was still a relationship based on mutual benefit subsisting up to 13 July 2006. (references omitted)
254 I accept that Mr and Mrs Perrine genuinely believed that PPL had good prospects of success in their claims against Georgiou Group in respect of which they commenced proceedings in August 2010 (LP 15, pages 225 260). They had legal advice to that effect. Whilst the debt under the adjudication was due and payable, a successful claim against Georgiou Group would have resulted in an adjustment of the respective liabilities of PPL and Georgiou Group: Construction Contracts Act s 45(4). PPL had undertaken proceedings directed to setting aside the adjudication. Those proceedings were not finally completed until the Court of Appeal delivered its decision on PPL's appeal in October 2011. Although PPL had other debts and liabilities which predated July 2010, some of which were in dispute, it is apparent that PPL undertook several projects after July 2010 that appear to have been successfully completed and in respect of which no creditors have proved in the liquidation. It is clear that, throughout that period, PPL enjoyed the financial support of Perrine Architecture both in the form of forbearance on payment of Perrine Architecture's invoices (in accordance with the terms on which these two companies had always operated) and by the payment of PPL's creditors by Perrine Architecture from time to time. There is no reason to conclude that that ongoing arrangement altered at any time in the second half of 2011. The support provided by Perrine Architecture, and the payments made by Perrine Architecture on behalf of PPL from time to time, were designed to facilitate the continuing supply of services and funding by Perrine Architecture which enabled PPL to continue operating, and provided the benefit to Perrine Architecture in the sense that PPL was a consumer of its services.
255 There is no basis to conclude that the payments which are claimed as unfair preferences were made with PPL's insolvency in mind.
256 Perrine Architecture is entitled to the benefit of s 588FA(3), and the claim for unfair preference payments is not made out.
Uncommercial transactions and unreasonable directorrelated transactions
257 The plaintiff claims that certain transactions undertaken by PPL were voidable transactions by reason that they were uncommercial transactions as defined in s 588FB or unreasonable directorrelated transactions within the meaning of s 588FDA: see s 588FE(3) and s 588FE(6A).
258 Section 588FB(1) describes what is an uncommercial transaction. It provides that:
(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
(d) any other relevant matter.
259 An unreasonable directorrelated transaction relevantly includes a payment made by the company to the director of the company, or a close associate of a director , or a person on behalf of or for the benefit of a director or close associate of a director, where it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction having regard to:
(1) the benefits (if any) to the company of entering into the transaction; and
(2) the detriment to the company of entering into the transaction; and
(3) the respective benefits to other parties to the transaction of entering into it; and
Defendants' evidence as to uncommercial transactions
260 As noted at the beginning of these reasons, in opening the plaintiff's case at trial, counsel for the plaintiff announced that he was instructed that the liquidator did not press [210] to [214] of the statement of claim, which asserted liability on behalf of Mr and Mrs Perrine in relation to the transactions said to be uncommercial transactions (which are discussed below) on the basis that entry into those transactions contravene to s 588G and Mr and Mrs Perrine were liable for failing to prevent those transactions occurring. It was submitted that the consequence of the abandonment of that aspect of the claim was that none of the evidence filed by Mr and Mrs Perrine in the proceedings could be received as evidence in defence of the position of Perrine Architecture. That was said to be so because, on 9 April 2015, I made orders declaring that the solicitors previously on the record for all defendants had ceased to act. By reason of O 4 r 3(2) and O 12 r 1(2) of the Rules of the Supreme Court 1971 (WA), Perrine Architecture was precluded from taking a step in the proceedings other than through a practitioner. The plaintiff's position was that, although the evidence of Mr and Mrs Perrine which went to the question of the commerciality of the alleged uncommercial transactions would have been relevant and admissible when their affidavits were filed and had the claims at [210] to [214] of the statement of claim been maintained, it was not open to them to adduce that evidence after the claims had been abandoned. The particular evidence covered by that proposition was not identified. Thus, it was submitted that none of the evidence filed by Mr and Mrs Perrine could be received as evidence in defence of the position of Perrine Architecture. To uphold that submission, an analysis of all of the evidence adduced by Mr and Mrs Perrine is required to assess whether or not the evidence is directed to defence of a claim against them, or directed to a claim against Perrine Architecture, or both. Fortunately, that is not a task which I consider is necessary to undertake.
261 The issue of PPL's solvency, the question of reasonable grounds to suspect that the company was insolvent, and the defence under s 588H, necessarily involved an examination of PPL's trading history and, in particular, the many transactions identified in the plaintiff's pleading. The particular transactions that are asserted to be uncommercial transactions are relevant in that context. It would be artificial to compartmentalise the evidence in relation to particular transactions by reference to the particular cause of action upon which compensation is sought in relation to the transaction. The evidence of Mr and Mrs Perrine that relates to the alleged uncommercial transaction, and for that matter the alleged unfair preferences, was relevant to the question of solvency of PPL and grounds for suspicion of insolvency. Having received the evidence in that context, it becomes evidence in the trial to which regard can be had in dealing with all the issues to be determined, including the claims against Perrine Architecture. The adducing of that evidence by Mr and Mrs Perrine does not offend the requirement that a corporation not take a step in a proceeding other than through a legal practitioner. Although Perrine Architecture was not represented at trial, the plaintiff must prove his claim: Stone v Smith (1887) 35 Ch D 188, 190; O 34 r 2 of the Rules of the Supreme Court. The court is entitled, and indeed bound, to have regard to all relevant evidence before it in assessing whether the plaintiff's case is proved.
262 In September 2010, PPL received a tax refund in the amount of $75,697.48. That tax refund was paid to Perrine Architecture, and the amount of the tax refund was credited to the Perrine Architecture loan account on 2 September 2010. At the time, PPL was indebted to Perrine Architecture on the invoice account in the sum of $1,838,508.18. Perrine Architecture was indebted to PPL in the sum of $382,780.03, so that the net position was that PPL owed $1,455,728.15 to Perrine Architecture.
263 There are several bases upon which the plaintiff contends that the tax refund payment was an uncommercial transaction. It is not in issue that it was a transaction made within the relation back period, and I have concluded that the payment was made when PPL was insolvent.
264 The plaintiff pleads that the payment was made at a time when PPL was not taking on any new work. In response, the defendants admit that PPL was not taking forward building orders, but say that PPL had viable existing understandings of various parties in relation to projects on its books and continued to actively pursue new fully funded work and other income producing opportunities. I accept that throughout 2010 and 2011, PPL continued to explore projects which had realistic prospects of realising significant future profits. PPL can hardly be criticised for not taking on new projects unless they were fully funded.
265 The plaintiff contends that the tax refund payment benefitted Perrine Architecture by increasing the net asset position of that company by the amount of the tax refund payment. I do not accept that contention. Prior to receipt of the payment, Perrine Architecture had a debt owed to it by PPL in excess of $1.5 million. Receipt of the tax refund payment decreased value of the debt owed to it by the amount of the payment. There was no net change in Perrine Architecture's asset position.
266 It is said by the plaintiff that the tax refund payment benefitted Mr and Mrs Perrine in their capacity as directors and shareholders of Perrine Architecture. That contention is denied by the defendants. Given that the net asset position of Perrine Architecture did not change, the basis of that contention is unclear.
267 The plaintiff also contends that the payment could have been used to pay other outstanding creditors some of whom were pressing for payment of amounts due to them, and at a time when Mr Ali was pressing for progress on the construction of his house at 10 Warralong Way. It will be recalled that throughout the latter part of 2010, DRH were carrying out works in relation to the Millington Project and negotiations were underway in relation to arrangements with Walltech which would have included completion of the Ali contract. It is apparent that throughout September and October 2010, Perrine Architecture made payments to, or on behalf of, PPL. While it might have been preferable that PPL had retained funds and paid its creditors directly, the commercial effect of the arrangements between PPL and Perrine Architecture was that the amount of the tax refund payment appears to have been utilised by Perrine Architecture to meet PPL's ongoing creditors.
268 The final matter relied upon by the plaintiff is that PPL was insolvent at the time that the tax refund payment was made. That is true. It is not, by itself, a reason to conclude that the tax refund payment was an uncommercial transaction. The payment benefited PPL by reducing its overall debt to Perrine Architecture. PPL suffered no detriment in the sense of any change in its asset position. In essence, it was simply a transaction on the ongoing running account between PPL and Perrine Architecture which enabled PPL to pursue its prospective projects with a view ultimately to establishing a profitable business.
269 The loan account for Perrine Architecture in PPL's books shows the following debits being made:
270 These are referred to in the statement of claim as the 'PA payments'.
271 The plaintiff contends that these were uncommercial transactions or alternatively unreasonable directorrelated transactions. The plaintiff pleads that the payments were uncommercial transactions because PPL was insolvent at the time that it made them, PPL was not taking on any new work, the payments benefited Perrine Architecture by increasing the net value of its assets and benefited Mr and Mrs Perrine in their capacity as directors of Perrine Architecture, and was made at a time when Perrine Architecture was insolvent.
272 The last of those contentions, that Perrine Architecture was insolvent at the time that the payments were made, invites an examination of Perrine Architecture's financial position which was only lightly addressed during the course of the hearing and was not developed in submissions. Reference is made in the pleadings (SC [98(f)]) to Perrine Architecture's financial statements as at 30 June 2011 and various bank account statements contained in the trial bundle, but is not otherwise referred to in submissions or evidence.
273 Paragraph 98 of the defence pleads that Perrine Architecture received just under a $1 million in income from independent sources in the financial year ended 30 June 2011, that the net operating loss recorded in Perrine Architecture's books and accounts was a result of bad debts being written off, and that Perrine Architecture had access to loans from Casas (WA) Pty Ltd, the trustee of the Perrine Trust. The financial records of Perrine Architecture produced at the hearing support those contentions. I am unable, from that limited information, to conclude that Perrine Architecture was insolvent at the time the various payments were made.
274 Beyond the entries in the books of PPL which reflect the PA payments, I was not taken to any evidence which explains the circumstances in which they were made. The defendants plead that the debit of $154,677.05 made on 1 April 2011 was not a payment of cash by the company to Perrine Architecture but was the transaction on the loan account in relation to the Terrace Hotel which occurred in the circumstances pleaded at [103] of the defence [D 97(a)(1)]. Paragraph 103(b) of the defence is set out above at [235].
275 The evidence goes no further than to identify that Perrine Architecture's loan account was debited with the PA payments. It is reasonable to infer from the terms of the defence that, other than the payment on 1 April 2011, the defendants admit that the funds reflected in the books were actually paid to Perrine Architecture. The Perrine Architecture loan account reveals that at the same time, or shortly after each payment, substantial payments were made by Perrine Architecture to or on behalf of PPL. In the context where there was clearly some juggling of funds between PPL and Perrine Architecture, and where no detailed analysis of the transactions has been undertaken by the plaintiff, I am not satisfied that the PA payments constitute either uncommercial transactions or unreasonable directorrelated transactions.
276 The net asset position of PPL did not change as a result of any of the transactions. Although the reasons for payment of PPL's creditors by Perrine Architecture is not clear, each advance of funds by PPL to Perrine Architecture was followed by credits to the loan account which appear to reflect payments made by Perrine Architecture to or on behalf of PPL, in each case for amounts greater than the amount advanced. It cannot be said that a reasonable person in PPL's circumstances would not have entered into the transactions.
277 The plaintiff also contends that the payments which are said to be unfair preference payments (SC [112] [119]) were also uncommercial transactions or unreasonable directorrelated transactions. In the circumstances which the running account was conducted and given the continuous business relationship between PPL and Perrine Architecture, which I have discussed above, I do not consider that a reasonable person in the company's circumstances would not have entered into the transaction notwithstanding that PPL was insolvent.
278 Paragraph 120 of the statement of claim lists nine invoices rendered by Perrine Architecture to PPL between 1 October 2009 and 23 February 2010 which it is said PPL paid to Perrine Architecture on or about 30 June 2010. The invoices referred to are as follows:
279 Invoices 594, 604 and 612 are invoices for rent and outgoings on the premises occupied by PPL. The balance of the invoices relate to professional services rendered in relation to various projects which PPL was endeavouring to progress including the Northern Lights Project, the Kimberley Georgiou (Ord River) Project, the project in Pearce Street, the project referred to as Colin Matherson Oval and a project at Claisebrook in East Perth (GMC 53, pages 196 200 and LP 16, page 316). The defendants admit that the invoices were issued and that they were credited to the Perrine Architecture's invoice account so as to increase the balance of the debt owed by PPL to Perrine Architecture. The defendants deny that payments were made by PPL in satisfaction of those invoices.
280 It is not clear whether or not the plaintiff maintains that the various invoices referred to were paid in the sense of money passing from one entity to the other. The particulars as to the plea that the invoices were paid on 30 June 2010 read as follows:
(i) The transactions recorded in and evidenced by the Company's clearing account in respect of Perrine Architecture;
(ii) The Company's remittance advice dated 30 June 2010;
(iii) The Company's recipient created tax invoices for each of the invoices pleaded in paragraph 62 of the Statement of Claim;
(iv) The handwritten annotations which appear on the Company's purchase order 00000621 dated 23 February 2010 and on the Perrine Architecture Invoice 00000612 dated 1 December 2009 rendered to the Company.
281 It is correct that each invoice is recorded against the Perrine Architecture invoice account. On 30 June 2010, the invoice account was debited with the sum of $1,070,315.81 and Perrine Architecture's loan account was credited with the same amount. Those entries had the effect of reducing the balance due to Perrine Architecture on the invoice account, and reducing Perrine Architecture's debt to PPL in the same amount. The net indebtedness of PPL to Perrine Architecture did not change.
282 The remittance advice dated 30 June 2010 (TB 53, pages 205 - 206) was tendered in evidence by consent but was not referred to in the course of the trial by any witness or counsel. It purports to record payment of 42 invoices dating from 31 December 2008 to 23 February 2010, including the nine invoices referred to in [120] of the statement of claim. The total of all the invoices referred to in the remittance advice is $1,070,315.81. The remittance advice by itself says nothing about the manner in which the invoices are said to have been paid.
283 Item (iii) of the particulars is correct but takes the matter nowhere. I am unable to locate in the evidence the document described as PPL's purchase order 000000621 dated 23 February 2010. The handwritten annotation on invoice 612 dated 1 December 2009 (GMC 30, page 728) reads:
Paid 30/6/10
$1,026,275.32
(P + $1,070,315,81)
284 The matters referred to in the particulars do not assist in identifying evidence that the invoices were paid. The evidence goes no further than the book entries of 30 June 2010.
285 The transactions are said to be uncommercial because:
286 I do not accept that there was not commercial value in the transactions the subject of the invoices. Throughout 2009 and 2010, despite undoubted cash flow difficulties, PPL continued to endeavour to carry on its business. Its arrangements with the Georgiou Group were finally put in place in September 2009, as were discussions with DRH which continued through into the latter half of 2010. It was not objectively unreasonable for PPL to maintain the premises it occupied. There was no suggestion that the rental being paid was not a reasonable commercial rental. Nor has the plaintiff adduced any evidence to suggest that the charges made by Perrine Architecture were not at appropriate commercial rates. An observation was made in the PWC valuation that management and accounting expenses would have been significantly higher had PPL employed additional staff rather than utilising Perrine Architecture to supply those services. There was no challenge to Mr Perrine's evidence that the architectural charges made by Perrine Architecture to PPL were less than those charged to other commercial clients.
287 A further factor upon which the plaintiff contends payment of these invoices was an uncommercial transaction was that it depleted the funds available to PPL to carry on its business in the ordinary course. Given that it does not appear that any cash payment was made to Perrine Architecture in relation to the invoices, that contention is not made out. It is not established that PPL could have applied funds to pay other outstanding creditors, and the transactions did not increase the net asset position of Perrine Architecture or decrease PPL's net assets. The plaintiff has not established that a reasonable person in PPL's circumstances would not have entered into the transaction on 30 June 2010. That aspect of the claim is not made out.
288 I have dealt with the 1 July payment in the context of the discussion of unfair preference payments. In the circumstances discussed there, the payment reflected an adjustment necessary, between PPL and Perrine Architecture, in light of the novation of the Terrace Hotel contract. I am not satisfied that that transaction was either an uncommercial transaction or an unreasonable directorrelated transaction.
289 It follows that I am of the view that the plaintiff is not entitled to the orders which it seeks as to uncommercial transactions or unreasonable directorrelated transactions, and that aspect of its claim should be dismissed.
290 For the foregoing reasons, there should be judgment against each of the first defendant, under s 588W of the Corporations Act, and the second defendants, under s 588 of the Corporation Act, for $1,327,911.85 together with interest on the amount of each invoice making up the sums set out in [218] above, pursuant to s 32 of the Supreme Court Act 1935 (WA), from the date of each invoice to the date of judgment.
291 Pursuant to s 588Y(2) of the Corporations Act, there should be an order that the amount paid by the defendants pursuant to this judgment not be available to pay the debts of PPL to Perrine Architecture unless all of PPL's other unsecured debts have been paid in full.
(2001) 53 NSWLR 213
(1996) 185 CLR 483
(2008) 39 WAR 1
(2011) 43 WAR 319
(1992) 26 NSWLR 562
(1966) 115 CLR 266