The progress of the project and Denham's declining financial position
32 The evidence establishes the following facts concerning the progress of the project and Denham's financial position.
33 In late 2013, Denham commenced construction work on the project. When Mr Barry commenced his role as Superintendent under the building contract and as project manager in June 2014, the project appeared to him to be a typical project in its inception and progress. Denham had subcontracted the whole or the majority of the works to Denham Constructions Project Company 890 Pty Ltd (Denham 890). Mr McGrath was the sole director of this company in the period 8 December 2014 to 14 June 2015.
34 Progress on the project began to slow in the latter part of 2014 at a time when Denham began to experience difficulty meeting its taxation obligations. I note that, according to Denham's Running Balance Account with the Australian Taxation Office (ATO), its tax liability of $115,736.34 as at 23 June 2014 had substantially increased to $1,242,969.48 as at 7 August 2014.
35 On 24 October 2014, Slattery issued Progress Report No. 16. In that report, Slattery stated:
The works are not progressing as quickly as we would have anticipated, however, the Contractor is aware of this and is pushing for more resources from its subcontractors to ensure that progress is improved to meet the required milestones. The Contractor is to issue a revised program by the end of November 2014 to show how it plans on achieving the revised Contract Completion Date of 19 June, 2015.
36 This was the first time that Slattery had made such an observation about the project. Hakea's Chairman, Mr Pardy, read this report. He did not consider this observation to be of concern at the time because there were no other reported difficulties on site and he noted Slattery's reference to Denham's efforts to overcome the apparent slowdown.
37 However, unbeknown to Hakea, on 30 October 2014 Denham defaulted on a payment arrangement it had with the ATO, which required it to pay $300,000.00 as a part payment to extinguish its tax debt. The ATO regarded this default to be a serious matter. On 17 November 2014, a Case Officer recorded that Mr McGrath was requested to provide, by close of business that day, a payment proposal which addressed Denham's capacity to pay. The ATO's case notes record that Mr McGrath was advised that recovery action would be commenced without further notice if the ATO did not receive this information.
38 On 25 November 2014, Mr McGrath made a payment proposal to the ATO. By that time, Denham owed a tax debt of $930,311.52. The proposal was that Denham would pay $250,000.00 plus $142,731.00 by no later than the end of November 2014; $250,000.00 by 31 December 2014 or early January 2015; and the balance by the end of January 2015.
39 On 27 November 2014, Slattery issued Progress Report No. 17. In that report, Slattery repeated the observation it had made in Progress Report No. 16. Mr Pardy read this report. Once again, he did not consider that this observation raised any significant matters of concern, especially absent any indication from Mr McGrath that there were problems with the project.
40 On 2 December 2014, the ATO wrote to Denham advising that it would accept instalment payments for Denham's, then, owed tax debt of $939,199.56 as follows: $392,731.00 on 3 December 2014; $250,000.00 on 7 January 2015; and $296,468.56 on 7 February 2015. The letter stated that Denham's failure to meet this arrangement (and other conditions which the ATO imposed) may result in the commencement of legal action without further notice. The evidence reveals that Denham only made the December 2014 payment. The failure to make the payment for January 2015 meant that, from that time onwards, Denham was at risk that the ATO would take legal action against it, without notice.
41 On 10 December 2014, Slattery issued Progress Report No. 18. In that report, Slattery stated:
As previously reported the works are not progressing as quickly as we would have anticipated. The Contractor is aware of this but has not yet provided the Superintendent and ourselves with a copy of its revised program which was due at the end of November 2014, to show how they plan on achieving the revised Contract Completion Date of 19 June, 2015. We will provide details of our assessment of the viability of this program when we receive it.
42 Progress did not improve. On 23 January 2015, Slattery issued Progress Report No. 19. In that report, Slattery repeated its observation that works were not progressing as quickly as it anticipated. Importantly, Slattery added that the works were "running significantly behind projected cash flow", thereby indicating that not enough resources were being spent on site.
43 On 24 February 2015, Slattery issued Progress Report No. 20. By this time, Denham had provided its revised program to indicate how it planned on achieving the revised contract completion date of 31 July 2015. However, Slattery noted that the works were still running significantly behind projected cash flow.
44 In around March 2015, Denham began to fall significantly behind schedule. Mr Barry reported this fact to Mr Pardy in March 2015. He referred to it as "a concerning lack of construction activity on the site". According to Mr Barry, this was reflected in the payment claims submitted by Denham in March and April 2015. Mr Barry's evidence was that, for the size of the project, a competent contractor in Denham's position would be expected to complete more than $1,500,000.00 worth of work per month in the middle of the project. However, the value of work completed by Denham in the March and April 2015 claim periods was assessed as $370,863.33 and $274,920.22, respectively.
45 Mr Barry said that, at this time, he not only observed a significant drop in the work activity on site, but also a significant drop in the attendance on site by subcontractor employees.
46 On 20 March 2015, the ATO gave a statutory notice to Australia and New Zealand Banking Group Limited (ANZ) under s 260-5 of Sch 1 of the Taxation Administration Act 1953 (Cth) (a statutory garnishee notice) requiring it to deduct money to the value of $890,114.61 from any account held by Denham with the bank and to pay that money to the Commissioner of Taxation. Hakea contended that the giving of this notice constituted execution being levied against Denham by a creditor, thereby triggering Hakea's rights under cl 39.11(b) of the building contract, which included its right to take out of Denham's hands the whole or part of the work remaining to be completed. Hakea contended that a reasonable director in Mr McGrath's position would have been familiar with the importance of cl 39.11 of the building contract and would have told Hakea about these matters.
47 Mr McGrath knew about the garnishee notice shortly after it was given because, on 24 March 2015, he contacted the ATO and discussed it with a Case Officer. Also on 24 March 2015, a solicitor acting on behalf of Denham contacted the ATO and requested that the garnishee notice be lifted so that Denham could pay its employees. The ATO's case notes record that, at that time, Denham had a taxation debt of $1,786,144.32. Importantly, when asked when Denham's taxation debt could be paid in full, the solicitor advised that the debt could not be paid in full, although Denham could make an immediate payment of $100,000.00. The solicitor also advised that Denham wanted to set up a further payment plan. The request to lift the garnishee notice was refused.
48 On about 23 March 2015, Denham transferred all its employees to another company then called DCPC 760 Pty Ltd (Denham 760). Although internal correspondence within the Hakea Group (written by Mr McGrath) refers to this change as "restructuring the company for efficiencies and the future direction of the company with respect to development alliances", the timing of this change is conspicuous as it coincides with the ATO's issue of the garnishee notice on ANZ and Denham's stated inability to pay its employees from that account because of that notice.
49 I also note that, on 23 March 2015, Denham raised an invoice (Invoice No 890-21) on Hakea for Progress Claim No. 21, requesting payment into Denham's account with ANZ. However, on 20 April 2015, Denham raised an invoice (Invoice No 890-22) on Hakea for Progress Claim No. 22 - this time requesting payment into Denham's account with Commonwealth Bank of Australia (CBA). I infer that this request was made to avoid the consequences of the statutory garnishee notice given to ANZ.
50 On 26 March 2015, Slattery issued Progress Report No. 21. This report repeated the observations made in Progress Report No. 19 and Progress Report No. 20, noted above.
51 It appears that, following the approach to the ATO on 24 March 2015, Denham made a payment offer to the ATO which involved a lump sum payment being made in late June 2015 from funds sourced from an anticipated finance facility, with further (unspecified) instalment payments being made at some later time. The ATO's case notes record that "no set amount" for the lump sum payment was provided, and the amounts for the instalments were "not stipulated". The case notes also record that, by 21 April 2015, Denham's tax debt would escalate to $1,891,498.80. The case notes further record that Denham had defaulted in payment arrangements on a number of previous occasions. The notes state:
The offer is not clear and definite and without the supporting financial information requested cannot be determined if the business is viable to enter into a payment plan and/or clear the debt within a timeframe acceptable to the ATO.
52 On 13 April 2015, the ATO sent a letter to Denham rejecting the offer. The letter stated:
…
We have fully considered your offer but we are unable to agree to it in its current form.
We are unable to assess the viability of entering into an arrangement as the following information has not been provided.
• a proposal to pay all amounts owed to us in the shortest possible timeframe, while allowing all future tax obligations to be met by the due date
• the most recent statement for each bank of financial institution account held
• the following documents for the year to date and the two preceding financial years
₋ detailed profit and loss statement or statement of financial performance
₋ detailed balance sheet or statement of financial position
• details of any overdraft or loan facilities, including term loans, hire purchase and leasing facilities (include the balances owing, the monthly repayment amount for each debt commitment and the limit for overdraft/s)
• aged creditors listing
• aged debtors listing
• any other relevant information which may assist us in assessing your proposal
53 Therefore, the position by this time was that Denham could not pay its considerable tax debt in full, and the ATO had rejected its offer to pay that debt by instalments. The ATO's case notes show that, on 13 April 2015, the decision had been taken to issue a demand to Denham under s 459E of the Corporations Act.
54 On 14 April 2015, a creditor of Denham 890 obtained a garnishee order from the Local Court of New South Wales at Newcastle for the sum of $82,618.77. The order named Denham as the garnishee. Hakea contends that the issue of this order was a separate event triggering cl 39.11 of the building contract.
55 On 14 April 2015, the ATO issued a garnishee notice to Denham in respect of Mr McGrath's personal tax debt of $1,013,349.00.
56 On 21 April 2015, Slattery issued Progress Report No. 22. In that report, Slattery stated:
As previously reported the works are not progressing as quickly as we would have anticipated with the cash flow running majorly behind schedule. The Contractor is aware of this and is now revising the recently released program of works. This will indicate how it plans on achieving the revised Contract Completion Date of 12 August, 2015.
We have not as yet seen this revised program and we have serious concerns regarding the Contractors (sic) ability to meet the current Contract Completion Date.
57 On 28 April 2015, the ATO wrote to Denham noting that it may not have met its superannuation guarantee obligations for the period 1 October to 31 December 2014.
58 On 4 May 2015, a Deputy Commissioner of Taxation issued a demand to Denham under s 459E of the Corporations Act for the amount of $1,812,615.05. The evidence shows that, in the period 6 May 2015 to 20 November 2015, 13 further statutory demands were issued on Denham by other creditors.
59 On 6 May 2015, Mr Barry received a Notice of Delay from Denham under cl 34.2 of the building contract for the period from 24 February to 29 May 2015 (94 days). The notice was sent by Neil Nguyen, Denham's Project Director. The cause for the delay was attributed to:
Relocation of Existing Authority Services on Louisiana Road
60 Throughout May 2015, Mr Pardy was becoming concerned about the delay to the progress of the project. On 20 May 2015, he sent an email to Mr McGrath raising the question of a new revised date for practical completion, which Denham had proposed as 13 October 2015. In his email, Mr Pardy said:
…
Revised Date for Practical Completion
Neil has prepared a revised critical path (attached for clarity) which is looking at a revised date for practical completion on or about 13 October 2015.
I think where we are before the revised critical path was a practical completion date of about 3 September 2015.
From my perspective, the real issues taking us to 13 October 2015 is the Louisiana Road upgrade, contractor problems, and re-energising the project with tradies.
Neil has issued, and I don't think you were across this when we spoke, five claims for principal delays totalling $1,964,000.00. I know this is a defensive strategy under the Construction Contract.
In the relationship, I know that neither of us want these issues addressed by reference to the technicalities of the Contract.
The Way Forward
I would like a revised date for practical completion agreed between us. I would like to bring the 13th October 2015 back to 30 September 2015 - but I am happy to discuss.
My concern here is that I want Hakea to get a three month run at getting residents in before Christmas. If we can't do it by 30 September 2015 - then we can't - but I want to discuss it with you.
…
61 It seems that Mr Pardy and Mr McGrath discussed this email that evening. On 21 May 2015, Mr McGrath sent an email to Mr Pardy in which he attributed the previous delays in the project to five matters, identified in the email as:
A. Nurse call and subsequent changes
B. FF&E
C. Ongoing changes to Design
D. Dementia location
E. Kitchen and Laundry changes
62 In his email, Mr McGrath also acknowledged a delay caused by a plastering contractor. He said, however, that:
… a new contractor has been appointed and the project has been flooded with staff and the delay has been nearly fully recovered.
63 Mr Pardy accepted Mr McGrath's explanation for the delays in the project. Conspicuously, Mr McGrath's email made no reference to Denham's obvious financial difficulties at this time, including the fact that the ATO's statutory demand had been made.
64 Hakea contends that this was the last point at which a reasonable director, in Mr McGrath's position, should have known, and should have informed Hakea, that it (Hakea) had the power under cl 39.4(a) to take the Works out of Denham's hands. Hakea contends that Mr McGrath should have known, and should have informed Hakea, that this power had been triggered as a result of execution being levied against Denham and because, by this time, Denham was insolvent or financially unable to proceed with the building contract: see cl 39.11(a).
65 Hakea contends, further, that, by his email of 21 May 2015, Mr McGrath represented that Denham could complete the works by 13 October 2015.
66 Mr Barry's evidence was that there was an increase in activity on the site in June 2015 compared to previous months, but not to the level that he would have expected for that period of the project. Progress Report No. 24 issued by Slattery on 23 June 2015 noted:
The Superintendent has informed us recently that trade numbers on site has increased in the last two weeks, particularly in regards to the partitioner, indicating that the Contractor is beginning to make efforts to get back on track.
67 The report also stated:
We have been advised the current construction programme currently shows a completion date of 15 October, 2015. This is significantly beyond the current Practical Completion (PC) date of 1 September, 2015. The revised construction programme date is based on the estimated additional time that it will take to complete services relocation works associated with the road widening works. The Superintendent is currently reviewing the impact of this in terms of time and costs. Once the Superintendent has completed his review we will comment further on this.
68 Despite the increase in activity on site in June 2015, progress on the project soon slowed again.
69 Hakea relies on an expert report prepared by Tamara Lindsay, a Chartered Accountant and forensic accountant. Ms Lindsay was initially asked to opine on whether, and if so when, Denham was insolvent. She was also asked to opine on whether, and if so when, Denham first showed obvious signs of severe financial distress that would/could affect its operations.
70 Ms Lindsay was not able to ascertain whether, in fact, Denham was solvent or insolvent as at 30 June 2015, because she did not have all the necessary financial information to make that assessment and because the financial information she did have was, in her view, likely to be inaccurate. However, by reference to a table listing indicia of insolvency, and by reference to certain documents provided to her, Ms Lindsay did express the opinion that, by 30 June 2015, Denham was experiencing "severe financial distress". This fact is not disputed.
71 On 23 July 2015, Mr McGrath sent an email to Mr Barry (with a copy to Mr Pardy and others including Mr Nguyen from Denham) seeking a meeting "to discuss [the] program and risks to the project".
72 A meeting was held on 30 July 2015 at Caverstock's office in Sydney. Mr Pardy and Mr Christopher Di Losa (one of Hakea's directors) attended on behalf of Hakea. Mr McGrath and Mr Nguyen attended on behalf of Denham. Others were in attendance.
73 At the meeting, Mr Pardy asked:
Why have there been continuing delays on the project? What are the problems?
74 Mr McGrath responded:
There have been some disputes with trade subcontractors, however, these disputes have now been resolved. Subject to extensions of time that may be required in the future, we will meet the revised program that we have prepared.
75 A revised program from the project was tabled, with a date of practical completion of 17 November 2015. When asked whether the revised date of 17 November 2015 could be met, Mr McGrath said that it could. Mr Pardy expressed his preference for a completion date of 30 October 2015.
76 On 3 August 2015, Mr McGrath sent an email to Mr Pardy. In that email, Mr McGrath thanked Mr Pardy for the meeting, which Mr McGrath described as "a productive session identifying ALL project risks for both Hakea and Denham". (Original emphasis.) Once again, conspicuously, Mr McGrath made no reference to Denham's financial difficulties.
77 On 27 August 2015, at a meeting of Hakea's directors, Mr McGrath said:
Denham will meet the current program. Hakea should be able to commence its fit out by 30 October 2015.
78 On 26 October 2015, Mr McGrath sent an email to Mr Pardy and Donald Ross (also one of Hakea's directors) concerning delays to the project. Mr McGrath said:
I have spoken with Neil pash and Neil n
They are resolving site resources now and have it ramped up within the week or so
If the project is delayed its denham fault and the provisions of the contract should apply In terms of delay costs …
(As in original.)
79 On the evening of 27 October 2015, Mr Pardy had a telephone conversation with Mr McGrath. The conversation concerned Stevden's loan of $2,000,000.00 that was to be made under the loan agreement. Mr McGrath informed Mr Pardy that he expected to make a "contribution" of $500,000.00 within the next 10 days, but that the balance of $1,500,000.00 would be funded by way of set off against the contract sum: see [23] above. In the course of that conversation, Mr Pardy asked Mr McGrath about unpaid trade creditors. Mr McGrath said that there was a dispute with two trade creditors. However, unpaid trade creditors would not operate to prevent the ramp up which, Mr McGrath had previously said, would occur within the week or so.
80 By October 2015, there was minimal activity on site and, by early November 2015, all substantive work on the project had ceased.
81 On 4 November 2015, Mr Pardy circulated an email to those who were to attend a meeting with representatives of Denham on 5 November 2015. In that email, Mr Pardy said (with respect to the revised program that Denham had submitted on 30 July 2015):
It is clear that the last 4 months has seen an inability in Denham's (sic) to perform the project at the ramped up scale required of them under the Revised Program.
82 In cross-examination, Mr Ross confirmed that, prior to 5 November 2015, he and some of the other directors of Hakea had been discussing the fact that Denham was having liquidity problems. On 18 September 2015, an article appeared in The Canberra Times under the headline: Subcontractors seek assurances from Bupa for work on Canberra aged care facility. The article said:
A peak body that represents subcontractors says some Canberra businesses are collectively owed hundreds of thousands of dollars in certified claims by builders Denham Constructions.
83 The article continued:
Subcontractors' Alliance spokesman Les Williams said Canberra businesses, in a variety of trades, that are owed money for work on the project had urged Bupa to take action against Denham Constructions in a bid to secure payment.
Correspondence with Bupa, shown to Fairfax Media, show the international healthcare group had been told that the builder had set up a shelf company, Denham Construction Project Company 940 Pty Ltd, to engage subcontractors.
Businesses feared this company could then be folded and they would be left out of pocket.
Subcontractors asked Bupa to not release further funds to the builder and the money instead be used to directly pay businesses that had been put under financial stress as a result of the disputes.
84 A link to the article was circulated by Mr Watson (one of Hakea's directors) to Mr Pardy, Mr Ross, Mr Di Losa, Mr Pearse and Mr Yeo (who were also directors of Hakea) on 28 October 2015. Mr Pardy said in cross-examination that he discussed this article with them.
85 At the meeting on 5 November 2015, which involved representatives from Hakea, Denham, and Caverstock, the representatives from Denham (Neil Pash and Neil Nguyen) disclosed, for the first time, that Denham had liquidity problems. The minutes of that meeting record that:
1 The meeting had been requested by Hakea to understand the delays that are occurring with the completion of the project at Hamlyn Terrace.
2 Neil Pash advised that Denhams had been suffering from lack of liquidity and this had impacted on the project. He stated that he hadn't been involved as he had been completing a project in ACT.
3 Neil Nguyen confirmed that the subcontractors would not return to the job because they had not been paid.
4 Neil Pash advised that Steve McGrath was in the process of fixing the liquidity problem and that he had been advised that funds would be available on 16 November 2015. On that basis the payment issue would be rectified and the site should start to ramp up by the following week.
5 Neil Pash was asked whether Denhams would be able to complete the project. Neil stated that they could based on the liquidity issue being rectified. Neil confirmed that Steve McGrath has agreed to compensate Hakea $85k for costs (bank finance issue) incurred with the delays which had been caused by Denham. Neil further stated that he and the executive could not comment any further as the funding issue was being addressed by Steve who owns and controls the business.
6 Based on funding occurring as in point 4 Neil Nguyen stated that the project would be completed by March 2016. Neil was asked if this could be fast tracked. He stated that it could by paying subcontractors on a fortnightly basis and working weekends. He stated that the subcontractors are long term contractors and they just wanted payment.
7 A program was tabled and the representatives from Caverstock viewed the program.
8 Neil Nguyen advised that he would issue the program to Caverstock by the next day.
9 The delay for the construction of the right hand turn lane into the property from Lousianna Rd was discussed. Neil Nguyen advised that NBN wanted $60,000 upfront to process the application and Denhams didn't have the money and this was the reason that the relocation application for the fibre cable had not been proceeded.
10 It was suggested that if Hakea was aware of this issue then they could have funded the application fee to assist Denhams.
11 The representatives from Denhams made it clear that they could only make comment on the program on the basis that Steve McGrath would be providing the funding in the week of 16 November 2015.
12 The meeting closed at 12.10pm with Denhams confirming that the program would be supplied to Caverstock by the end of the week.
86 Mr Pardy said that this disclosure by Denham led him to be very concerned about its liquidity and capacity to finish the project in a timely manner. On 11 November 2015, he had a telephone conversation with Mr McGrath in which Mr McGrath said that he had "resolved the liquidity issues"; that Denham could complete the project with a $1,500,000.00 set off; and that Denham would reimburse Hakea for the interest that Hakea was incurring under its facility with NAB. However, Hakea's attempts, in the period 12 to 20 November 2015, to document Denham's offer to reimburse interest failed.
87 As it happens, on 11 November 2015, Denham submitted Progress Payment Claim No. 29 for works completed to 31 October 2015. The claim was for $409,869.78 excluding GST. Mr Barry's evidence is that he was surprised by the amount of the claim given the negligible activity he had observed on site for the relevant period. The claim was disproportionately large compared to other claims in respect of which there had been more activity on site.
88 Mr Barry decided to conduct a thorough site inspection and assessment of the progress of the work. He attended the site on four occasions in December 2015 to review the amount of work performed against the amount claimed in Progress Payment Claim No. 29. He also took the opportunity to check on previous items paid to Denham against the percentage of the work assessed as having been completed at that time.
89 As matters transpired, Mr Barry revalued the work that, previously, had been certified. He formed the view that Denham had over-claimed the amount of work it had completed, and that Denham had been overpaid. As a result, he certified Progress Payment Claim No. 29 for a negative amount.
90 Having failed to document Denham's offer to reimburse Hakea for the additional interest it was incurring under its facility with NAB, Mr Pardy began the process of terminating the building contract. He instructed Mr Barry to commence looking for a replacement builder.
91 On 1 December 2015, Hakea issued a notice to show cause under cll 39.2 and 39.3 of the building contract. The notice listed a significant number of matters which Hakea regarded as substantial breaches of the building contract by Denham, including its failure to proceed diligently with the work (which, amongst other things, involved its departure from the program without reasonable cause or the Superintendent's approval); its failure to respond to correspondence and requests from Hakea and the Superintendent concerning the progress of the work; its misrepresentation as to the progress of the work; and its submission of a materially deficient program for the work. The notice stated that, based on these matters, Hakea had formed the view that Denham was no longer ready, willing, and able to perform the building contract.
92 On 2 December 2015, Denham issued a notice of dispute under cll 41.1 and 42.2. On 9 December 2015, it attempted to show cause in response to the notice that Hakea had served. Its attempt did not satisfy Hakea. On 10 December 2015, Hakea issued a letter of termination under cl 39.4 and terminated the contract.
93 Given the time of year, it was difficult for Hakea to contact builders to discuss working on the project. However, in the latter part of January 2016, Hakea engaged Insight Building Services Pty Ltd to complete the project under a Construction Management Agreement. The project reached practical completion on 30 June 2016.
94 On 1 September 2016, the Supreme Court made an order that Denham be wound up.
95 Mr Pardy gave evidence that had he been informed at any time after the building contract had been entered into that Denham was in severe financial difficulty, or was insolvent, he would have immediately commenced steps to terminate the building contract or, if the contract could not be terminated, to exercise such other rights as Hakea may have had to take the work out of Denham's hands and procure another builder to complete the work. He said that he did not discover that Denham was in severe financial distress, or insolvent, until sometime after March 2016.
96 The other directors of Hakea gave similar evidence. Mr Ross (who was also Hakea's Managing Director at all relevant times), Mr Di Losa, Mr Pearse, and Mr Watson each said that had he been informed at any time after the building contract had been entered into that Denham was in severe financial difficulty, or was insolvent, he would have immediately recommended that Hakea terminate the building contract and procure another builder to complete the work. Each said that he did not discover that Denham was in severe financial distress, or insolvent, until sometime after March 2016.