Hall & Ors v Poolman & Ors [2007] NSWSC 1330 | Case summary

Hall & Ors v Poolman & Ors [2007] NSWSC 1330 | Case summary | Zoe

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ACN 076 673 875 Ltd (in liq), Re (2002) 42 ACSR 296 - Addstone Pty Ltd (in liq), Re (1998) 83 FCR 583 - Anstella Nominees Pty Ltd v St George Motor Finance (2003) 21 ACLC 1347 - Australian Beverage Distributors Pty Ltd v Evans & Tait Premium Wines Pty Ltd [2007] NSWCA 57 - Australian Machinery & Investment Co Pty Ltd v Deputy Commissioner of Taxation (No 2) (1945) 20 ALJR 326 - Australian Securities & Investments Commission v Adler (2002) 42 ACSR 80 - Australian Securities & Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305 - Australian Securities & Investments Commission v Vines (2005) 56 ACSR 528 - Bank of Australasia v Hall (1907) 4 CLR 1514 - Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243 - Battenberg v Union Club (2005) 53 ACSR 263 - Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1 - Bialkower v Acohs Pty Ltd (1998) 83 FCR 1 - Bloemen Pty Ltd, F.J., v Commissioner of Taxation (Cth) (1981) 147 CLR 360 - Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357 - Burke v LFOT Pty Ltd (2002) 209 CLR 282 - Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) 80 ALJR 1441 - Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 15 ACSR 682 - Clyne v Deputy Commissioner of Taxation (NSW) (No 3) (1983) 57 ALJR 673 - Collector of Customs v Gaylor Pty Ltd & Dahlia Mining Co Ltd (1995) 35 NSWLR 649 - Commissioner for Corporate Affairs (Vic) v Harvey [1980] VR 669 - Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 - Companies Act, Re; Ex parte Watson (1888) 21 QBD 301 - Coventry v Charter Pacific Corporation Ltd (2005) 80 ALJR 132 - Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (2006) 58 ACSR 631 - Cywinski v Deputy Federal Commissioner of Taxation (Vic) [1990] VR 193 - Daniels v Anderson (1995) 37 NSWLR 438 - Deputy Commissioner of Taxation v Dick [2007] NSWCA 190 - Deputy Commissioner of Taxation v Van Phu Ho (1996) 131 FLR 188 - Deputy Commissioner of Taxation v Mackey (1982) 13 ATR 547 - Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 - Deputy Commissioner of Taxation v Stjepovic (1991) 91 ATC 4,715 - Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184 - Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820 - Farah Constructions Pty Ltd v Say Dee Pty Ltd (2007) 81 ALJR 1107 - Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246 - Federal Commissioner of Taxation v Myer Emporium Ltd (No 1) (1986) 160 CLR 220 - Fermoyle Pty Ltd (in liq), Re; Commonwealth of Australia v Brown (1982) 62 FLR 413 - Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83 - Gye v McIntyre (1991) 171 CLR 609 - Hoare Bros Pty Ltd v Deputy Federal Commissioner of Taxation (1995) 16 ACSR 213 - Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 19 ACSR 125 - Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (No 2) (1996) 21 ACSR 449 - Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302 - Houvardas v Zaravinos (2003) 202 ALR 535 - Hughes, Re; ex parte Westpac Banking Corporation [1997] FCA 1324 - Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559 - Imobridge Pty Ltd (in liq) (No 2), Re [2000] 2 Qd R 280 - Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 CASES CITED : - Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191 - Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430 - AP & PJ King Pty Ltd (in liq), Re [2006] NSWSC 315 - Koadlow v Deputy Commissioner of Taxation (1985) 85 ATC 4147 - Langdon v Gruber [2001] NSWSC 276 - Lewis v Doran (2004) 50 ACSR 175 - Love, Re (2003) 44 ACSR 367 - McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 - MacIntosh v Lobel (1993) 30 NSWLR 441 - Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304 - Moutere Pty Ltd v Deputy Commissioner of Taxation (2000) 34 ACSR 533 - Movitor Pty Ltd (in liq) v Sims (1996) 64 FCR 380 - Newark Pty Ltd (in liq), Re; Taylor v Carroll (1991) 6 ACSR 255 - Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434 - Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87 - Oates v Federal Commissioner of Taxation (1990) 27 FCR 289 - Official Trustee in Bankruptcy v Mateo (2003) 202 ALR 571 - Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation (2006) 94 SASR 269 - Palmer v Commissioner of Taxation [2006] NSWSC 1253 - Pollack, Re; ex parte Deputy Federal Commissioner of Taxation (1991) 32 FCR 40 - Powell v Fryer (2001) 37 ACSR 589 - Public Prosecutions, Director of v Ashley [1955] Crim LR 565 - Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 - Reynell v Sprye (1852) 42 ER 710 - Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 - Sarina, Re (1980) 32 ALR 596 - Scope Data Systems Pty Ltd v BDO Nelson Parkhill (2003) 199 ALR 56 - Scott v Williams [2002] SASC 424 - Sheahan v Hertz Australia Pty Ltd (1995) 16 ACSR 765 - Silvera v Slavic (1999) 46 NSWLR 124 - Smallcombe v Olivier (1844) 13 M&W 77 - Snow v Deputy Federal Commissioner of Taxation (WA) (1987) 14 FCR 119 - Softex Industries v Commissioner of Taxation (2001) 187 ALR 448 - Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 - Spika Trading Pty Ltd v Harrison (1990) 19 NSWLR 211 - Stanilite Pacific Ltd (in liq) v Seaton (2005) 55 ACSR 460 - Stewart, re Newtronics Pty Ltd [2007] FCA 1375. - Street & Halls v Retravision (NSW) Ltd (1995) 56 FCR 588 - Sycotex Pty Ltd v Baseler (No 2) (1994) 13 ACSR 766 [(1994) 51 FCR 425 ?] - Taylor v Australia & New Zealand Banking Group Ltd (1988) 13 ACLR 780 - Taylor v Carroll (1991) 6 ACSR 255 - Tosich Construction Pty Ltd, Re (1997) 73 FCR 219 - Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201 - Uysal v Deputy Commissioner of Taxation (2003) 54 ATR 214 - Vines v Australian Securities & Investments Commission (2007) 62 ACSR 1 - Walker v Wimborne (1976) 137 CLR 1 - West End Networks Ltd (in liq), Re [2004] 2 AC 506 - Wilde v Australian Trade Equipment Co Pty Ltd (1981) 145 CLR 590 - Willemse Family Company Pty Ltd v Deputy Commissioner of Taxation [2003] 2 Qd R 334 - Wobelea Pty Ltd v Deputy Commissioner of Taxation (1996) 20 ACSR 436

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ii) in the event Mr Irving's cross claim against Mr Martini is successful, Mr Martini claims equitable contribution against another director of Wines and Vineyards, Sandra Lee Yates ("Ms Yates"); 8 On 30 May 2005, the Court directed that the Main Proceedings be heard together with proceedings 2685 of 2004 ("the Unfair Preference Proceedings"), with evidence in one being evidence in the other. 9 In the Unfair Preference Proceedings, pursuant to CA s.588FF, the Liquidators claim recovery of payments totalling $582,934 made by Wines to the Commissioner of Taxation ("the Commissioner") as unfair preferences. The Commissioner admits that the payments were unfair preferences and does not oppose the orders sought by the Liquidators. 10 The Commissioner has, however, claimed an indemnity for any amounts which he is ordered to pay to the Liquidators. Pursuant to CA s.588FGA(2), the Commissioner claims the sum of $537,100 from each of Mr Irving, Mr Poolman and Mr Martini, and the sum of $311,916 from Ms Yates. They have been granted leave to appear in, and to defend, the Liquidators' claim against the Commissioner notwithstanding the Commissioner's admission of liability to the Liquidators. Mr Poolman's trustee has not defended the Commissioner's claim. 11 In relation to any liability which may be established on the part of Mr Irving to the Commissioner in the Unfair Preference Proceedings, Mr Irving claims indemnity against Wines, pursuant to an Indemnity and Access Deed dated 5 September 2001 and under Clause 38.1 of Wines Constitution. He says that the amount to which he would be entitled by way of indemnity against Wines should be set off against the amount, if any, which he is ordered to pay to the Liquidators of Wines in respect of their claim under s.588M for insolvent trading. 12 The claims by Mr Irving and Mr Martini for contribution or indemnity against Mr Clifton-Bligh in the Unfair Preference Proceedings were settled by consent orders during the trial. As noted, Mr Poolman is an undischarged bankrupt. The Commissioner has not obtained leave to proceed against him and has discontinued his claim against Mr Poolman. 13 Also before the Court is proceeding 4870 of 2005 ("the Caveat Proceedings") brought by the receivers and managers of Wines and Vineyards against Mrs Poolman. The receivers and managers seek to maintain a caveat over property currently owned by Mrs Poolman. As a result of arrangements between the parties reflected in previous orders made in the Caveat Proceedings, the outcome of the Section 37A Claim will govern the outcome of the Caveat Proceedings. The beneficiaries of this litigation

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14 The collapse of the Reynolds Group resulted in a shortfall of over $30M to secured creditors. Thus, there were no assets available for unsecured creditors, whose claims amount to just under $99M, and insufficient funds even to pay the costs of the voluntary administration and the winding up. The only potential assets to be realised were recoveries of voidable preference payments to the Australian Taxation Office ("ATO") and the present claims against directors of the Group for insolvent trading. The Liquidators had no funds to pursue these claims. In 2004, they entered into a funding agreement with a litigation funder. 15 The total amount which the Liquidators seek to recover in these proceedings from the directors and from the ATO is approximately $9.6M, including interest and costs. As noted, the value of unpaid creditors' claims exceeds $130M. When the trial commenced, the Court was informed that, even if the Liquidators recovered the full amount of their claims, including costs and interest, after payment of the litigation funder's costs and "success fee" and the costs of the Liquidators and their solicitors, unsecured creditors would receive no more than a fraction of a cent in the dollar of their claims: T127.7-.11. 16 I expressed concern that such huge costs could be incurred in prosecuting claims by liquidators when virtually every cent of the proceeds of the claims, even if wholly successful, would go to a litigation funder and to the costs and disbursements of the professionals engaged in conducting the litigation. Near the close of the trial, I was informed that the Liquidators had renegotiated their agreement with the litigation funder. Even so, it is impossible to ascertain whether the renegotiated agreement will result in the creditors actually receiving any more than under the original agreement. 17 The true beneficiaries of this huge piece of litigation are a litigation funder, the Liquidators and their lawyers, not the creditors. The Defendants say that this circumstance, coupled with the fact that they have acted honestly, should defeat the Liquidators' claims: they say that the Court should exercise its discretionary powers under CA s.1317S(2) and s.1318 to relieve them from any liability which they might otherwise have. I will return to this disquieting aspect of the litigation later in the judgment. Background of the Reynolds Group

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18 The following account is taken largely from the Administrators' Report to Creditors dated 15 September 2003. 19 During the Period the Reynolds Group comprised Wines and the following wholly owned subsidiaries: Vineyards, CH Finance Pty Ltd (CHF"), Cabonne Cellars Exports Pty Ltd, CHM Capital Pty Ltd, Cabonne Cellars Pty Ltd, and The Reynolds Wine Company Pty Ltd. Also included in the Group, according to Mr Spicer, the Chief Financial Officer, were the entities CHM Unit Trust and CHM Wirrilla Trust. Messrs Irving, Poolman and Martini were directors of all companies in the Group and Mr Spicer was the Chief Financial Officer and Company Secretary. 20 The principal business of Wines was operating a vineyard, managing investment schemes and acting as a holding company. The principal business of Vineyards was operating a winery, and marketing and selling wine. CH Finance and CH Capital provided finance and managed investments arising out of grape growing projects. 21 According to Mr Spicer's undisputed evidence, the Reynolds Group: "… operated as one business with consolidated accounts. Each separate member was treated as a cost centre for accounting and statutory purposes, with the income derived from the various members being used by all the members collectively. The Group had one central source of credit, a facility with (ANZ Bank), which was cross-collateralised by the members of the Group": affidavit 13 August 2004, paras 11-12. 22 Wines, formerly Cabonne Ltd, was incorporated in 1993. Its business was originally to act as manager of four prescribed interest schemes which were promoted in the mid-1990s. Three of the schemes were conducted on a property situated at Molong near Orange, called Little Boomie. Wines acquired a 50% interest in another property south of Orange, called Angullong, as tenant in common with Angullong Pty Ltd. It also owned an interest in a property called Warilla, near Gundagai. 23 Wines earned revenue from development and management of vineyards on behalf of persons described in the documentation as "Farmers". It entered into a contract to supply grapes to Southcorp Wines on behalf of Farmers. 24 In 1999, Wines raised $35M through a public offering and listed on the Australian Stock Exchange. The capital raised was used to establish a winery to process Farmers' grapes into wine, develop additional vineyards, develop brands and establish domestic and export wine markets. The Southcorp Wines contract was terminated and Wines entered into contracts to acquire grapes from Farmers in order to produce wine on its own behalf. At the same time, Wines also issued $7.5M in Redeemable Converting Preference Shares ("RCPS") which were due for redemption in November 2002. 25 A winery was established at Orange for a cost of $17M, with an annual capacity to convert 10,000 tonnes of grapes into wine, and a storage capacity of 7.4M litres. A bottling plant was purchased but was never installed or commissioned. 26 In December 2000, an alliance was established with Trinchero Family Estates ("TFE"), which is a large wine distributor in the United States and Canada. 27 In mid-2002, Wines raised $8M in capital through a renounceable rights issue. The funds were to be applied in capital expenditure and in providing additional working capital. Around the same time, Wines raised $12.5M by way of Cumulative Converting Preference Shares ("CCPS"), secured by a charge. These funds were to provide further working capital to assist in expansion and for the repayment of $3M in short term funding. However, the $20.5M raised in mid-2002 was not in fact employed in funding capital expenditure but, rather, was used to pay outstanding creditors. 28 Throughout its history the Reynolds Group has been in dispute with the ATO relating to the original structure of the prescribed investment schemes, deductions claimed by Farmers, income received by the Reynolds Group, and the Group's claims for tax deductions, partially offsetting this income. The ATO issued tax assessments, some dating back to 1998, against the Group in amounts totalling $14.8M. The Group disputed that liability. By 30 June 2002, the tax liability, including accrued penalties and interest, was claimed by the ATO to amount to $17.4M. 29 The Reynolds Group endeavoured to negotiate with the ATO to reduce or extinguish its liability under the tax assessments. The liability for tax claimed by the ATO severely inhibited the Group from raising further capital. On 31 July 2003, the ATO formally advised the Group that it had rejected the Group's offer of compromise of the tax liability. The directors resolved to appoint voluntary administrators to the Group on 4 August 2003. Wines and Vineyards were placed in liquidation on 25 November 2003. 30 As at the date of appointment of the voluntary administrators the Group had two secured creditors: the ANZ Bank held a first charge over the assets of all Group companies supported by cross guarantees and first registered mortgages over all real property. The debt secured to the ANZ was in the order of $30M plus accruing interest and costs. On 7 August 2003, the ANZ appointed receivers and managers to the Group. 31 IWC Nominees Pty Ltd held a second ranking charge as trustee on behalf of the holders of the CCPS, which were issued for $12.5M in mid-2002. Mr Malcolm Irving

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61 A preliminary issue between the parties is whether the solvency of Wines and Vineyards can be determined by looking at the position of the Reynolds Group on a consolidated basis, as the Liquidators and Commissioner contend. 62 Mr Jackman SC, who appears with Ms J. Shepard of Counsel for Mr Irving, submits: "… the plaintiffs seek to combine the position of [Wines] and [Vineyards], together with various other subsidiary or sibling companies, in an attempt to show that the "Reynolds group of companies" was insolvent. This is wrong in principle, and contrary to the express language of sections 588G and 95A. While it is permissible in ascertaining the solvency of one of the group companies to look at the assets held by the other group companies, given the ready ability of companies within a group to lend money to others in the group, there is no justification for aggregating the liabilities of group companies and attributing them to each company in the group. Each company is a separate legal entity: Walker v Wimborne (1976) 137 CLR 1 at 6 (Mason J, with whom Barwick CJ agreed); Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 at 577 (Mason J, with whom Stephen, Jacobs, Murphy and Aickin JJ agreed)." 63 I do not think that Mr Jackman's formulation of the Liquidators' position is accurate. Further, it really does not address the proper issue in the present case. The Liquidators do not say that the debts of all Reynolds Group companies are to be treated as the debts of Wines. They say that in order to assess the solvency of Wines one cannot have regard to assets of other Group companies which may be available as resources to Wines without having regard to the liabilities of those other companies. 64 It is trite that the test of solvency of a company under CA s.95A is, first and last, a question of fact and that the Court approaches that question as a matter of commercial reality. If one member of a group of companies has, as a matter of commercial reality, ready recourse to the assets of another member of the group for payment of the first company's debts as they fall due, and that recourse will not result in the insolvency of the second company or in merely delaying the insolvency of the first, then the Court may have regard to that fact in assessing whether the first company is able to pay its debts as they fall due: Lewis v Doran (2004) 50 ACSR 175 at [116]. 65 It is beyond question in the present case that whatever cash and asset resources were available to Wines were regarded by the Boards of Wines and Vineyards as available to Vineyards for the payment of its debts, and vice versa. Even Mr Irving, in his submissions, takes the same approach. In Exhibit 2D1, which are hypothetical worked examples put forward by Mr Irving in an endeavour to show that Wines and Vineyards had sufficient asset resources to meet their respective liabilities as they fell due, assets such as the Quandong property, bulk wine sales and debt finance are treated as producing cash for both companies, regardless of which company actually owned the particular asset. 66 If commercial reality requires the Court, in assessing the solvency of company A in a group, to have regard to the assets of assets in company B in the group, commercial reality will also require the Court to look at the liabilities of company B. Company B's liabilities may be such that it cannot use its assets to assist company A without becoming insolvent itself. In such a case, company B's assets cannot be regarded as available to pay company A's debts: the law does not condone robbing Peter to pay Paul. 67 The uncontested evidence is that the Reynolds Group operated as one business with consolidated accounts. The income derived from the individual members was used by all members collectively and there were regular transfers of funds between the bank accounts of Wines and Vineyards, whenever required for operational purposes. The Group had a loan facility of $30M with the ANZ Bank which was secured under cross-collateralised fixed and floating charges given by all members of the Group. The Bank was the major creditor of each company in the Group. IWC Nominees Pty Ltd, as trustee on behalf of the holders of CCPS issued by Wines, held a second-ranking charge given by all Group companies. 68 There were extensive loans between companies in the Group. As at the end of the Period, Vineyards owed Wines $33.9M which was almost the whole of the nett assets of Wines of $34.9M disclosed by the Directors in the Report as to Affairs of Wines. Vineyards was shown as having a nett asset deficiency at book value of $4.5M, so that it could not have fully repaid the loan from Wines. 69 These circumstances demonstrate that in assessing whether Wines or Vineyards was able to pay its own debts as they fell due it is not justifiable to have regard to its own assets and to the assets of other companies in the Group as possible sources of cash in isolation from the financial position of the Group as a whole. The Commissioner's tax debts

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Notice of Assessment issued on 9 March 2001 in respect of the financial year ending 30 June 1997 for an amount of $1,316,336. The Notice assesses tax relating to employee benefit plans. The assessment states that the amount assessed "is due on 11 April 2001" and is payable on that date. 72 In short, the Notices of Assessment purported to make the sum of $4,252,915 due and payable by Wines on 4 April 2001, and the sum of $1,316,336 due and payable on 11 April 2001. 73 There is no issue that on 18 June 2001 Wines delivered timely objections to both assessments, the effect of which was to deny any liability for tax. Likewise, there is no issue that the disputes which Wines raised as to the assessments were genuine. Wines had had the advice of Mr Jessup, who had in turn briefed Mr R.F. Edmonds SC (as his Honour then was). On 13 June 2002, Mr Jessup provided lengthy written submissions to the Commissioner in support of Wines' objections. Mr Fryer of Deloitte submitted to the Commissioner in a letter dated 15 November 2002 that Wines' case was at least "reasonably arguable". Neither the Liquidators nor the Commissioner in these proceedings have attacked the genuineness of the opinions expressed by Mr Jessup and by Mr Fryer, nor has there been any submission that those opinions are not reasonably arguable. 74 The Commissioner did not actually decide to disallow Wines' objections to the Notices of Assessment until after 4 August 2003. As at the date of trial, Wines' objections to the assessments were still awaiting determination by the Administrative Appeals Tribunal. 75 The Liquidators say that the tax debts, even though disputed, were nevertheless payable at all times during the Period and that Wines was unable to pay them so that it was insolvent. Mr Irving concedes that if the tax debts were payable, for the purposes of CA s.95A, at any time during the Period then Wines could not have paid them, either from its cash resources or from realisation of its assets. The result would be that Wines was insolvent; there would be no necessity to enquire whether it could have paid its trade creditors by recourse to its available assets, as Mr Irving contends Wines could have done. 76 If Wines was insolvent by reason of the tax assessments and had been placed in liquidation during the Period, it would have followed that Vineyards would also have been insolvent and would have been wound up: see the discussion at paragraphs 21, 65-69. Wines' liquidator would have called upon Vineyards to repay the $33.9M debt, which Vineyards could not have done in full. There would have also been an event of default under the Group's credit facility with ANZ Bank, which would have called upon Vineyards to repay the $30M facility. It would have been inevitable in such circumstances that Vineyards would have become insolvent and would have to be placed in liquidation. Mr Jackman SC frankly conceded that this was the reality: T172.3-173.26; T1072.47-.52. No other defendant disagreed. 77 Mr Jackman's contention was, however, that Wines was not insolvent because of the tax assessments. Vineyards was not insolvent during the Period because Wines had not called upon it to pay the $33.9M debt. Wines and Vineyards could, as a matter of commercial reality, pay their due and payable debts out of their own resources. The same contention was adopted by the other defendants. 78 Mr Jackman says that the Commissioner's assessments were not debts payable by Wines, within the meaning of CA s.95A, at any time during the Period, broadly for two reasons:

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79 There are four arguments which Mr Irving advances in support of the proposition that the disputed assessments should not be treated as liabilities of Wines which were "due and payable" for the purposes of the solvency test prescribed by CA s.95A. Each of the arguments is said to be based on the underlying proposition that "the question (of solvency) must be approached by focussing attention on the perspective of someone operating in a practical business environment": Written Submissions, 23 February 2007, para 53. The authority cited in support of this proposition, said to be applicable in the present context, is Sycotex Pty Ltd v Baseler (No 2) (1994) 13 ACSR 766, at 775 per Gummow J. Also said to be fundamental to the four arguments is the proposition that the issue of solvency is a question of fact to be decided as a matter of commercial reality: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, at paras [48]-[49], [54]; Lewis v Doran (supra) at [106]. 80 The first argument is that where a corporation genuinely disputes a certain liability - including a liability said to arise under a tax assessment - and there has not yet been a determination on the merits of the disputed liability, that liability is not to be taken into account in assessing whether the corporation is solvent. The authority cited for that proposition is Taylor v Carroll (1991) 6 ACSR 255, at 255 and 258. Mr Jackman says that this proposition applies a fortiori where, as here, the Court hearing a claim founded upon insolvency does not have jurisdiction to determine a dispute as to tax liability. Accordingly, Mr Jackman says, the tax debt claimed by the Commissioner must be regarded as a contingent liability because it will not be ascertained that Wines is indeed indebted to the Commissioner under the tax assessments unless and until the objections which Wines has raised are decided adversely to it in the AAT. 81 The argument, in summary, proceeds along the following lines:

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82 The Commissioner and the Liquidators submit that even if there is a genuine dispute as to liability under a tax assessment - in the sense that the taxpayer has at least an arguable case in support of its objections to the assessment - and even if that dispute is awaiting determination by the AAT or by the Courts, nevertheless the effect of the income tax legislation is to make the tax assessment a debt due and payable to the Commonwealth on the date stated in the Notice of Assessment. The Liquidators and the Commissioner say that a dispute as to liability under a tax assessment - while it may be regarded as genuine by the AAT or the Federal Court for the purpose of review proceedings under Pt IVC of the Taxation Administration Act 1953 (Cth) ("TAA") - is not classified as a "genuine dispute" for the purposes of determining solvency of a corporation under the Corporations Act. 83 The Liquidators and the Commissioner rely on a number of provisions of the Income Tax Assessment Act 1936 (Cth) ("ITAA") and the TAA. It should be noted that s.204 ITAA was amended with effect from 1 July 2000 but the amendment was not applicable to tax payable for the years of income the subject of the Notices of Assessment against Wines. Similarly, s.208 and s.209 ITAA were repealed with effect from 14 September 2006 but not so as to affect tax assessments made prior to that date. Part 4-15 of Schedule 1 of the TAA governs the recovery of tax liabilities becoming due and payable on or after 1 July 2000, so that it is applicable to the Notices of Assessment in the present case. 84 Section 204(1) Income Tax Assessment Act 1936 (Cth) provided: " When tax payable (1) Subject to the provisions of this Part, any income tax assessed shall be due and payable by the person liable to pay the tax on the date specified in the notice as the date upon which tax is due and payable, not being less than 30 days after the service of the notice, or, if no date is so specified, on the thirtieth day after the service of the notice."

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87 Mr Jackman invokes the proposition that solvency has to be determined with regard to the commercial realities of the company's financial position: he cites authorities such as Taylor v Australia & New Zealand Banking Group Ltd (1988) 13 ACLR 780, at 784; Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (supra) at paras 54-59; Lewis v Doran (supra) at para 106. Certainly, in Southern Cross one of the questions discussed was whether the commercial reality that creditors will normally allow some latitude in time for the payment of their debts warrants the conclusion that the debts are not payable at the times contractually stipulated: para 54(iv). 88 Mr Jackman submits that as a matter of commercial reality the Commissioner's debts founded on the Notices of Assessment were not payable by Wines at the times stipulated - or, at least, did not have to be taken into account for the purposes of the cash flow solvency test prescribed by CA s.95A - because if the Commissioner had served a statutory demand on Wines, Wines could have had that demand set aside under CA s.459J(1)(b) and if the Commissioner had moved to obtain and enforce a judgment, Wines could have had the judgment stayed until the review processes under Pt IVC TAA had been completed. 89 The fact is, however, that the remedies which Wines might have invoked are discretionary and whether Wines would have been successful in setting aside a statutory demand, or in obtaining a stay of judgment founded upon the Notices of Assessment, is now a matter of speculation: no action was taken by the Commissioner during the Period which occasioned any application to the Courts by Wines. Speculation today as to what Wines may have been able to achieve gives no reliable guide to what was commercial reality five years ago. 90 The view expressed by Mr Jessup to Mr Fryer and Mr Irving in an e-mail dated 7 November 2002 gives no comfort to the speculative submission that Wines would have been able to set aside a statutory demand founded upon the Notices of Assessment. The e-mail says: "The [Australian Government Solicitor's office] are not convinced that the ATO's position is protected and are not withdrawing the Summonses at this stage and have engaged a financial expert to look at the matter. John Evans and Cameron Jeffs will not intervene. They are still taking the view that the liability and settlement side is their job and recoveries have a separate job to recover the debt.

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(ii) the amount of the liability cannot be measured reliably" 94 The liability imposed on Wines under the Notices of Assessment does not fall within this definition. In my opinion, it is not correct to describe the immediate liability for tax imposed by the Notices of Assessment as a "possible liability … which will be confirmed … by the occurrence or non-occurrence of … [an] uncertain future event…" within subparagraph (a) of the definition. It is true that the immediate liability which the legislative scheme imposes by service of a Notice of Assessment will disappear if the taxpayer is ultimately successful in review proceedings under Pt IVC TAA. But, unless and until that possibility occurs, the tax liability is actual, not contingent. 95 In the present case, it was not legitimate for Wines' directors to regard the tax liabilities as falling within the definition of contingent liability in AASB 1044 para 16.1(b). For good reason, neither Wines' solicitors nor its auditors advised that it was "not probable" that payment of the assessments would not be required, as will be seen from the evidence to be discussed shortly: see paragraphs 219 and 240-247. The liability, which was a present liability, could not be said to be incapable of reliable measurement. It was stated precisely in the Notices of Assessment and, by virtue of s.177(1) ITAA, that amount was correct for all purposes save in the review process under Pt IVC TAA: see Batagol (supra) at 76; Richard Walter (supra) at 191-192. 96 In short, what Wines and its auditors have done in their accounting for the liability arising under the Notices of Assessment is to treat a liability which is presently payable but which may possibly in the future cease to be payable as a liability which is not presently payable but is possibly payable in the future. I can certainly see the argument and its attraction and convenience when a company's accounts will be scrutinised by the financial market, its creditors and shareholders: disclosing in published financial accounts a present liability which the company cannot pay will set alarm bells ringing very loudly and may create an event of default under the company's lines of credit. However, I do not think that inverting the true legal position, as Wines and its auditors did, is permissible, however convenient it may be. 97 The scheme imposed by the tax legislation of making tax debts immediately payable even though still subject to the review process under the TAA reflects a deliberate policy of the legislature "which may make life uncomfortable both for the taxpayer and perhaps others who owe money to the taxpayer": per Mason and Wilson JJ in F.J. Bloemen Pty Ltd v Commissioner of Taxation (supra) at 375. "Uncomfortable" may be much too mild a description for the position of a company faced with a large tax debt which it cannot pay and genuinely disputes. However, the legislative policy applies just as much to such a company as to a temporising tax evader. 98 The legislature trusts the Commissioner not to abuse the enforcement policy of the tax legislation: Bloemen (ibid); Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246, at 276. If the Commissioner abuses that trust, the taxpayer's remedy lies in the Courts. The taxpayer may not avoid the possibly ruinous consequences of having to account for a present liability imposed by a genuinely contested tax assessment by the expedient of ascribing to that liability a character which it does not truly have in law. 99 To characterise a contested tax liability as "contingent" for the purposes of AASB 1044 para 7.1 is not to be frank - to the financial market, to creditors or to shareholders. Further, directors who resort to such an expedient are not being frank with themselves; they risk making errors of judgment as to the future viability of the company because they blind themselves to the company's financial position as it really is. Whether solvency concept excludes "technical considerations"

[125]

iii) the evidentiary presumption of s.177 is not relevant to a retrospective judicial evaluation of decisions made by directors in the course of assessing the commercial realities facing a company. If a director has competent professional advice that there are good prospects of setting aside a tax assessment or of compromising with the Commissioner, it is not reasonable to expect that the director will be guided in commercial assessments by the evidentiary presumption provided by s.177. If it were otherwise, a company would have to go into insolvent administration whenever the ATO issued a Notice of Assessment which the company could not pay, regardless of whether the assessment lacked merit. Such an assessment is impractical from the perspective of someone operating in a practical business environment: Sycotex (supra) at 775. 101 I am unable to accept these submissions, for the following reasons. 102 As to (i): for the reasons I have given above, the issue and service of a valid Notice of Assessment creates, on the expiry of the time stipulated for payment, an immediately payable debt which is given full recognition by the law. Enforcement of the debt may be stayed in certain cases on discretionary grounds but the debt exists in fact and in law unless and until the review procedure sets aside the Notice of Assessment. I am unable to accept that the effect which the scheme of the tax legislation gives to the Notice of Assessment, even while it is subject to review, is a "technical consideration" within the context discussed by Derrington J in Taylor v Carroll. 103 In that case, his Honour agreed with Thomas J who said (at 259) that whether a company was unable to pay its debts as they fell due from its own money was a question of fact to be decided as a matter of commercial reality in the light of all of the circumstances "not merely by looking at the accounts and making a mechanical comparison of assets and liabilities". Derrington J agreed with the reasons of Thomas J and added his own remarks by way of emphasis. 104 Derrington J drew attention to the concept of insolvency as a practical one, its purpose being primarily to protect creditors although "it must not be wrongly used to liquidate a company and affect a variety of transactions when that remedy is not called for": at 266.5. His Honour proceeded "this approach excludes the intervention of technical considerations which are not sympathetic to the purpose behind the concept". By way of example, he said that it was necessary to have regard to matters of futurity when considering solvency at a particular time; that temporary lack of liquidity was not the same as an endemic shortage of working capital and that the pattern of behaviour of creditors in requiring payment in accordance with terms of credit was also relevant. 105 Clearly, his Honour was concerned to underline the statement of Thomas J to the effect that insolvency was not identified by some mechanical comparison of financial figures but was ascertained as a matter of commercial practicality and realism. However, Derrington J did not suggest - and his words taken in context cannot suggest - that in having regard to commercial practicality and realism one is entitled to ignore the existence of a debt which statute says is immediately payable. 106 As to (ii): for the reasons I have given above, I am unable to accept that the scheme of the tax legislation operates only in the context of direct enforcement proceedings as between the Commissioner and the taxpayer. If the taxpayer is a corporation, its directors must face the legal and commercial reality that the company is indebted to the Commissioner unless and until the Notice of Assessment is set aside in the review process. How they deal with that reality may have consequences for them if the company becomes insolvent. 107 As to (iii): in my opinion, it is unnecessary and undesirable to make general pronouncements about what the law expects of a director who is advised that a tax assessment against the company may be set aside or compromised. Each case of insolvent trading will depend on its own facts. 108 However, as I have explained above, directors and their advisers have to accept the legal and commercial reality that the scheme of the tax legislation imposes a present liability on a company upon expiry of the time for payment imposed by a validly issued and served Notice of Assessment. This reality is an "uncomfortable" one - as recognised in Bloemen above - and it is particularly uncomfortable if the company is unable to pay the tax debt but has arguments as to why the assessment should be set aside. The debt is, in law and in fact, presently payable and must be acknowledged as such in the company's financial accounts unless something has been done effectively to defer payment of the debt until the review process under Pt IVC TAA has been completed. 109 So, for example, a tax debt will not be presently payable if the company has secured the written agreement of the Commissioner to defer time for payment in accordance with s.255-10 in Schedule 1 TAA. If the Commissioner does not agree to a deferment until the review process is completed and commences recovery proceedings, the company may seek from the Court a stay of those proceedings, as discussed above. If that application is successful, the debt will nevertheless remain payable but at least the company will be able to state in its financial accounts that payment of the debt cannot be enforced except in accordance with the Court's orders. 110 If the company obtains either an agreed deferment of payment under s.255-10 or a stay of enforcement proceedings from the Court, obviously a director of the company may take that fact into account as a commercial reality in ascertaining the company's present and projected cash flow position. But if the company obtains neither a deferment nor a stay, the director must take account of the fact that the debt, as a matter of law and commercial reality, is not a contingent liability and remains presently payable. 111 I think that what I have said under this heading and earlier, answers Mr Jackman's third submission also. This submission is to the effect that the tax debts should not be included in assessing solvency because if the Commissioner had sued to enforce them, Wines would have obtained a stay of the enforcement proceedings on discretionary grounds and would have been successful in setting aside any statutory demand founded upon the assessments. For the reasons I have given in paragraphs 88 to 90, this assertion is mere speculation. 112 Mr Jackman submits (Written Submissions para 65) that it would be absurd to conclude that the directors would have been better off in establishing solvency if the Commissioner had actually sued to recover the tax debt, thereby leading to a stay being granted, rather than being in the position where the Commissioner did not sue. However, far from this result being absurd, for the reasons I have given the Defendants would indeed have been better off if the Commissioner had sued and if the Court had stayed enforcement until the review process had been completed. They, and this Court, would then have had to deal with a reality rather than a speculation. Whether s.43(6) AATA trumps s.14ZZM TAA

[133]

vi) the Liquidators have elected to bring these proceedings to trial before the AAT proceedings have been heard and determined. Accordingly, the Liquidators cannot discharge their burden of proof that the Notices of Assessment were lawful at the time they were issued and the Court cannot, therefore, be satisfied that the Notices of Assessment created valid and presently payable debts. 114 I am unable to accept these submissions for the following reason. 115 The submission takes no account of - and, indeed, it does not even refer to - the provisions of s.14ZZM and s.14ZZR TAA. Those two sections deal with the status of a tax decision during the pendency of a review or an appeal for the purposes of any action to be taken during that time based on the decision. Section 43(6) AATA is directed to a different purpose, namely, adjusting the consequences of actions taken on the basis of a decision later overturned or varied in the AAT. In short, s.14ZZM TAA applies only before the decision of the Tribunal is made, and s.43(6) applies only after the decision of the Tribunal is made. 116 It is true that s.43(6) AATA makes the Tribunal's decision retrospective and deems it to have been the decision of the original decision maker. Statutes often provide that a state of affairs is to have a retrospective effect. Sometimes the consequence is that everything done previously is completely undone; sometimes the consequence is that what can be undone is undone and what cannot, or should not, is not. 117 There are many examples illustrating this proposition. If a bankruptcy is annulled, the person is treated as if he or she had never been made bankrupt in the first place … yet not for all purposes. If an interest under a settlement ceases upon bankruptcy and passes to another, that cessation is effectual and is not undone if the bankruptcy is subsequently annulled. If a person, while bankrupt, commits an offence by doing an act prohibited to be done by a bankrupt, the subsequent annulment of the bankruptcy does not destroy the offence and he or she may be prosecuted for it even after the annulment: Smallcombe v Olivier (1844) 13 M&W 77, at 86 [153 ER 32]; Director of Public Prosecutions v Ashley [1955] Crim LR 565; Oates v Federal Commissioner of Taxation (1990) 27 FCR 289; Australian Securities & Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305, at [318]-[322]. 118 Again, if a civil judgment is reversed on appeal it is treated as never having determined the rights of the parties, yet acts done pursuant to or in reliance on the judgment before its reversal are valid: Wilde v Australian Trade Equipment Co Pty Ltd (1981) 145 CLR 590, at 603; MacIntosh v Lobel (1993) 30 NSWLR 441, at 459-465. For many other illustrations of the proposition, see the judgment of Campbell J, as his Honour then was, in Battenberg v Union Club (2005) 53 ACSR 263, paras [41]-[67]. 119 These cases illustrate a principle which, in my opinion, reconciles any potential conflict between s.43(6) AATA and s.14ZZM and s.14ZZR TAA. Taken together, the sections are part of a legislative scheme which recognises that the consequences of a tax decision which is reversed on appeal will be undone so far as they can be undone and that the original decision will have no further force and effect in the future, but that what was done in reliance on the tax decision prior to its reversal was valid at the time and retains its character as valid at the time, even after the tax decision is reversed. 120 It follows that when a Court is considering the issue of solvency and a significant factor is a tax debt which is still subject to review under Pt IVC TAA at the time of trial, the Court must act on the basis that the tax debt is valid and payable. If, as a result, the company is wound up and a liquidator is appointed, the winding up order and the appointment of the liquidator will not retrospectively be invalidated under s.43(6) AATA if the company succeeds in reversing the tax decision in the AAT: see generally MacIntosh v Lobel (supra) at 459G, 473C-D, 477C. This may be thought to be hard on the company - but it is the policy of the tax legislation, as I have explained, and the possibility of such hardship is a factor in the exercise of the Court's discretion in a taxpayer's application under CA s.459J(1)(b) to set aside a statutory demand founded on a disputed notice of assessment. 121 The Liquidators have, therefore, proved that the debts created by the issue of the Notices of Assessment are valid and must be taken into account in determining the solvency of Wines during the Period. Whether an agreement with the Commissioner

[143]

Q. You never then informed Mr Irving or any member of the Board or staff that the due date of payment had been deferred? A. Yes." 127 The last two answers given by Mr Fryer were clearly assents to the propositions put to him. What Mr Fryer was saying was not that an agreement had been made for deferral of liability for payment but, rather, that an agreement had been made for deferral of recovery action. The Liquidators and the Commissioner denied that such an agreement had been made. 128 In paragraph 9 of his affidavit of 27 September 2006, Mr Fryer gave evidence about a discussion or discussions with Mr Jeffs and Mr Evans "between June and October 2002" about deferral of recovery action. This evidence was so lacking in particularity that I rejected the paragraph and gave leave to Mr Jackman SC to lead the evidence orally from Mr Fryer. Mr Jackman availed himself of this leave. 129 Mr Fryer said at first that he had many discussions about deferral of recovery action against the Reynolds Group with ATO staff "from June 2002 onwards": T610.55-T611.1. 130 A little later he said that these discussions "would have started" as early as 2001 but were a very substantial part of the discussions "we were having with the Tax Office during that period post-June 2002": T612.18-.20. 131 Mr Aldridge SC in cross examination took Mr Fryer through a number of letters and e-mails from June 2002 onwards. Mr Fryer was progressively driven to agree that he had not had conversations with Mr Jeffs or Mr Evans about deferring tax recovery prior to 30 August 2002, or prior to the end of September 2002. It emerged clearly from Mr Fryer's cross examination that, as at 7 November 2002, there had been no discussions with ATO officers which could have formed any reasonable belief on the part of Mr Fryer that the ATO had agreed to defer recovery proceedings. 132 The ATO had served a statutory demand on CHF on 2 August for $5,741,971. The resolution of the tax debt claimed by the Commissioner against CHF was an integral part of the settlement proposals being discussed between the Reynolds Group and the Commissioner: see e.g. Deloitte's letter dated 15 November 2002 to the Commissioner enclosing a settlement proposal. In October the Commissioner had served a winding-up Summons on CHF and Cabonne Management Limited ("CML"). On 7 November 2002 Mr Jessup sent an e-mail to Mr Irving and Mr Fryer, saying: "The AGS are not convinced that the ATO's position is protected and are not withdrawing the Summonses at this stage and have engaged a financial expert to look at the matter. John Evans and Cameron Jeffs will not intervene. They are still taking the view that the liability and settlement side is their job and recoveries have a separate job to recover the debt." 133 By 11 November 2002, the ATO had informed Mr Jessup that it was assessing Wines' request to withdraw the winding up Summons and had appointed Ferrier Hodgson to advise it. The ATO agreed to adjourn the Summons until 6 February 2003. The ATO eventually agreed to dismiss the winding up Summonses against CHF and CML on 31 March 2003, with the defendants being ordered to pay its costs. By letter dated 31 March 2003, the AGS advised Mr Jessup "we expect that [the ATO] will not pursue the costs orders until a settlement is reached regarding your clients' taxation liabilities". 134 It may be inferred that by 31 March 2003 the ATO had determined that enforcement of tax debts against CML and CHF would await the result of settlement discussions. 135 As far as the tax liability of Wines itself was concerned, on 21 November 2002 Mr Whitehouse of the ATO wrote to the Directors referring to an outstanding tax debt of $4,567,420 arising from the 1998 Fringe Benefits Tax assessments. The letter noted that no objection had been lodged against the assessment and that "there are no settlement negotiations in progress". Accordingly, the letter made demand on Wines for payment of the tax debt within fourteen days, otherwise the ATO would commence proceedings for recovery of the debt. 136 The letter, read as a whole, shows that it was a form letter not directed to the particular circumstances of Wines' tax debt. The threat to take legal action must be seen in that light. However, the fact that the letter was sent shows that the Recoveries section of the ATO did not have any record as at 21 November 2002 of an agreement by the Commissioner to defer recovery proceedings against Wines. 137 On 5 December 2002, Mr Fryer wrote to Mr Whitehouse responding to the letter of 21 November. Mr Fryer referred to discussions between Wines and Mr Jeffs in relation to the tax assessments issued to the Reynolds Group. He requested that, in view of those discussions, the ATO "defer action to recover the amount due of $4,567,420.08 pending resolution of the tax disputes". That Mr Fryer should have seen the need to write such a letter on 5 December suggests strongly that he had not earlier made any oral agreement with any responsible officer of the ATO for deferral of recovery action against Wines, as he asserted. 138 The ATO did not respond to Mr Fryer's request in the 5 December letter. The inference is that the ATO merely adopted a 'wait and see' attitude to enforcing the tax debt of Wines pending some decision on its part as to the Group's proposals for an overall settlement of the Group's tax liabilities. 139 There is nothing in the evidence to suggest any agreement or understanding between Wines and the ATO made at any time from December 2002 up to the appointment of the Administrators in August 2003 which would have inhibited the ATO in taking proceedings immediately to enforce the tax liabilities of Wines by instituting recovery proceedings. 140 Mr Fryer's evidence about having reached an agreement prior to November 2002 with Mr Jeffs and Mr Cameron for deferral of recovery proceedings was not at all convincing, because of its vagueness and the manner in which Mr Fryer gave it: see especially at T671.36 to T672.47. I am far from satisfied, in the face of denials by Mr Jeffs and Mr Evans, that Mr Fryer made an oral agreement with Mr Evans and Mr Jeffs between June and October 2002 that the ATO would defer recovery proceedings against the Reynolds Group while settlement discussions were proceeding. In any event, it is fair to say that during this time whatever settlement discussions were taking place were not detailed and could not be fairly described as "negotiating a settlement". 141 Mr Irving and the other Directors have the onus of proving that the tax debts of Wines were not payable at the times stipulated under the Notices of Assessment and under the tax legislation by reason of an agreement between Wines and the Commissioner: Southern Cross Interiors (supra) [54(vi)]. I am not satisfied by the evidence that there was any agreement between Wines and the Commissioner during the Period that recovery proceedings against Wines would be deferred for any particular time. It follows that I am not satisfied that there was any agreement between Wines and the Commissioner which could operate to extend time for payment of that liability so as not to make the tax debt due and payable throughout the whole of the Period. 142 Further, I am not satisfied that there was any course of conduct on the part of the Commissioner during the Period which could give rise to an estoppel preventing the Commissioner from insisting on immediate payment by Wines of the tax debt. Nor am I satisfied that there is any well established course of conduct between the Commissioner and taxpayers generally, or between the Commissioner and the Reynolds Group in particular which could be relied upon in the circumstances of this case to establish that the liability of Wines under the Notices of Assessment did not create a debt payable at the time stipulated in the Notices of Assessment. If the Commissioner adopted a 'wait and see' attitude to enforcement of Wines' tax liability, reserving the right to commence recovery proceedings whenever he thought fit - as I infer was the case - that is not enough to defer the liability for payment of the debt for the purpose of the solvency test prescribed by CA s.95A: see generally Southern Cross Interiors (supra) at 54 and (vi). 143 As a result, I am satisfied that Wines' liability under the Notices of Assessment was at all times during the Period due and payable to the Commissioner. It is conceded by Mr Irving and the Directors that Wines was unable to pay that debt at any time during the Period. Accordingly, Wines was insolvent during the whole of the Period. Cash flow test of Wines' and Vineyards' solvency

[144]

144 In case I am wrong in concluding that Wines was insolvent at all times during the Period because it was unable to pay an immediate tax liability to the Commissioner, I will examine its financial position by reference to its other debts. I will do so in the context of determining Vineyards' solvency by reference to its separate debts. The debts of both companies were incurred largely in the course of the companies' trading activities so that I will refer to them, for convenience, as trade debts. 145 The Liquidators and the Commissioner contend that as at 1 October 2002 and throughout the Period both Wines and Vineyards were unable to pay all their trade debts as and when they became due and payable, so that each was insolvent according to the definition of solvency in s.95A CA. In the alternative, they contend that Wines and Vineyards had become insolvent at various later dates during the Period. 146 It is beyond dispute that Wines and Vineyards did not in fact pay all their trading debts as and when they became due during the Period. Certain debts incurred by both Wines and Vineyards in each month from the commencement of the Period onwards were never paid, as the following table from the Liquidators' solvency report (Exhibit P3) shows: "Month incurred Wines Vineyards Total Cumulative Total Oct-02 5,711.14 36,007.10 41,718.24 41,718.24 Nov-02 22,486.98 157,094.23 179,581.21 221,299.45 Dec-02 8,950.33 265,596.94 274,547.27 495,846.72 Jan-03 135,949.46 254,953.79 390,903.25 886,749.97 Feb-03 307,550.35 481,445.77 788,996.12 1,675,746.08 Mar-03 148,879.45 655,738.72 804,618.17 2,480,364.25 Apr-03 366,506.27 217,850.65 584,356.92 3,064,721.17 May-03 143,521.99 388,713.46 532,235.45 3,596,956.62 Jun-03 75,030.00 166,051.95 241,081.95 3,838,038.57 Jul-03 317,687.15 381,022.36 698,709.51 4,536,748.08 Aug-03 5,913.32 70,820.63 76,733.95 4,613,482.03 Total unpaid $ 1,538,186.44 $ 3,075,295.59 $ 4,613,482.03

[145]

It is not suggested that all, or any, of these debts remained unpaid because they were genuinely disputed by Wines or Vineyards. 147 Mr Irving and the Directors contend, however, that the fact that Wines and Vineyards did not pay all their debts is not the end of the matter. They say that the test of solvency is whether the companies were able to pay their debts, not whether they did, in fact, pay their debts. They say that at all times during the Period Wines and Vineyards would have been able to pay all their due trade debts if they had realised the assets and resources available to them but the companies were not willing to do that. 148 It is as well to note at the outset that in ascertaining what assets were available to meet the trade debts of Wines and Vineyards no distinction was made by the Directors during the Period between assets owned by Wines and those owned by Vineyards. As I have mentioned several times, cash and other assets of the companies in the Reynolds Group were regarded as available to meet the needs of each. Nevertheless, Mr Jackman SC, who appears for Mr Irving, submits that one has to look separately at the financial position of Wines and of Vineyards. In my opinion, this is not realistic or possible: it was not the way the companies conducted their affairs. 149 So, for example, Mr Jackman put forward to the Liquidator, Mr Hall, in cross examination some hypothetical examples in which Mr Jackman endeavoured to show that Wines and Vineyards had sufficient asset resources to enable them to meet their liabilities throughout the Period: Exhibit 2D1. The examples are worked separately for Wines and for Vineyards, but the same assets appear in both sets of examples, namely, sales of bulk wine, sale of the Quandong property and debt finance. The directors of both companies would have treated the assets in the same way. 150 Mr Irving submits that "able to pay" one's debts does not mean "willing and able to pay", for the purposes of the test of solvency. That proposition is certainly correct, so far as it goes: see Re Sarina (1980) 32 ALR 596, upon which Mr Irving relies. However, I do not think that the principle discussed in Re Sarina has any application in the present case. 151 In Re Sarina, a debtor owed money to a council for rates and taxes, but he stubbornly refused to pay the debt as a matter of personal principle. There was no question that he had ample means to pay the debt. It was held that he was not "unable" to pay the debt for the purposes of an application to sequestrate his estate in bankruptcy; rather, he was able to pay but was not willing to pay so that the debt had to be enforced by obtaining a judgment and levying execution. 152 The position of the Reynolds Group was very different. No one has suggested that Wines and Vineyards did not pay their respective trade creditors within normal trading terms because the companies refused to do so for fanciful or improper reasons, such as in order to obtain credit with no intention of paying, or because the directors or the companies' other officers were irresponsible or careless about prompt discharge of the companies' liabilities. 153 Indeed, the evidence is quite to the contrary. The overall picture which emerges is of companies which were, throughout the Period, only too willing and anxious to pay their debts as they fell due - if only they could. 154 It is clear that by the beginning of October 2002, Wines and Vineyards were experiencing an endemic shortage of working capital which grew steadily worse as the months progressed. 155 Messrs Irving, Poolman and Martini and Ms Yates attended a board meeting of Wines on 11 October 2002. Mr Irving advised that because the ATO had served a winding up Summons on CHF in respect of the tax liability of $5.7M and had had served another winding up Summons on CML, the Directors and auditors needed to reassess the notes to the balance sheets of Wines. It was noted that "the actions by the ATO may impact the recovery of the $26M owed by CML" to Wines. It was noted that management and auditors advised that instead of an $8.1M profit recorded for the sale of CML by Wines, a provision for this amount as a doubtful debt should be shown in Wines' balance sheet. It was also noted that, by reason of these changes to the balance sheet, profit would reduce to $1.3M "subject to a re-check of tax accruals". Management and advisers had recommended, that the financial accounts of Wines be withdrawn. 156 It was resolved at the meeting that Wines request the ASX to halt trading in the company's shares, the company prepare an information release and brief the company's brokers and its bankers. These resolutions were put into effect shortly afterwards. 157 On 15 October 2002, the Reynolds Group's bank, the ANZ, decided to issue a notice of default under its Facility Agreement with the Group in order to protect its position. An internal report of the bank noted that the Group's revised financial accounts indicated that it would breach the gearing covenants in the Facility Agreement with the bank. Under that Facility Agreement the Group had a credit facility with the bank of $30M, of which $26.5M had already been drawn down. 158 On 16 October 2002, the ASX suspended trading in Wines' shares. On 17 October the ANZ Bank served its notice of default. 159 By 30 October, it was apparent that Wines would not be able to meet its obligations to redeem its Redeemable Convertible Preference Shares ("RCPS") which were due for redemption on 10 November 2002 for a total amount of $7.5M. On 8 November, the Board resolved to authorise Mr Irving to continue negotiating with the holders of the RCPS for an agreement to defer payment of the redemption amount until at least the end of February 2003. 160 A Management Report as at 15 November 2002, prepared by Mr Martini and considered by the Board of Wines on 27 November, disclosed a year-to-date loss of $2,195,126. The Report also stated: " Trade Creditors are higher at $2.6 million due to non availability of draw down from the ANZ bill facility. ANZ Bank facility is utilised to $26.5 million. With further draw down in early November only $2.5 million remains available. The solving of the ATO issues and sale of bulk wine are crucial to ongoing financial support. Discussions continue with ANZ and Gerling on these issues." 161 The Board Minutes of 27 November note that Directors would be provided with a weekly report as to management of the cash position. Clearly, the Board was aware that there was a serious cash flow problem and that the Group's facility with the ANZ Bank was almost fully drawn. 162 On 10 December 2002, Mr Spicer sent an e-mail to the Board members attaching a summary of the cash position as at 6 December 2002. It showed: "Reynolds Vineyard Total Cash at Bank 12,891.69 154,236.19 167,127.88 (per Bank Statement) Unpresent cheques - issued (16,942.81) (44,263.28) (61,206.10) Unpresent cheques - held ( 69,956.94 ) ( 6,407.50 ) ( 76,364.44 ) Total unpresented cheques ( 86,899.76 ) ( 50,670.78 ) ( 137,570.54 ) Cash at bank/GL ( 74,008.07 ) 103,565.41 29,557.34 "

[155]

The Directors considered other possible options to raise finance including sale of all or part of the Quondong property, sale of the Company's 50% interest in the Angullong vineyard, sale of the lease and management contract of the Wirilla vineyard." 171 At the meeting Mr Martini tabled a document entitled "Cash Options/Bankers". It summarised possible ways of raising capital for Wines and Vineyards. Under the heading "Sources of cash", Mr Martini listed: " Acceleration of TFE payments [i.e. payments from Trinchero Family Estates for wine sales in the United States of America] Immediate bulk wine sales - January Direct Sales - February Asset Management Line Expansion Emergency Loan Receivables/Inventory Financing International Wine Fund" 172 The minutes of a Board meeting of Wines on 28 February 2003 state: " 3. Adoption of the Revised 2002 Annual Accounts The Chairman moved that the revised 2002 annual accounts, as drafted, be adopted. The meeting discussed the question of solvency and it was noted that Mr Jessup had been requested by the Chairman to advise on the implications to the Company and its Directors and Officers if a voluntary administrator was appointed, that Mr Bev Walters had been appointed to assist the Company in obtaining some form of trade finance facilities, and the Company is exploring other avenues to raise finance. These avenues included through the International Wine Investment Fund, and other financiers and advisors, and the Company would shortly be signing a contract for sale of the land at Quondong, Cudal. The Directors also noted that whilst current liabilities exceeded current assets, this did not represent or indicate insolvency as it was due to the classification of the facility with the Bank being reclassified due to the Bank issuing formal notices of default." 173 The Management Report for March 2003 states: "Debtors continue to be very closely monitored and a successful approach made to TFE to bring forward payment of some monthly remittances. Creditors continue to age due to the cash constraints and continue to be managed on a daily basis. Many creditors are now demanding payment and increasing pressure being exerted, including legal and debt collection.

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Q. And you told the board that? A. Yes." 182 As I have mentioned, Mr Irving and the Directors dispute the inference that, because Wines and Vineyards did not pay their debts as they fell due, they could not. They say that there were assets of Wines and Vineyards which could have been realised and if realised, would have paid the companies' debts as they fell due. 183 The immediate response to that submission is: if assets could have been sold to pay debts as they fell due why, then, did not the Directors, as honest and responsible directors, actually sell the assets and actually pay the creditors in due time? 184 Mr Irving's answer to the question is: "(Wines) and (Vineyards) did not need to sell all the assets they could have sold, due largely to the successful exercise undertaken by management of explaining to trade creditors the cashflow difficulties facing the companies, and either discussing and concluding repayment schedules or requesting creditors' forbearance. This was part of the commercial reality, even if it did not, with respect to every creditor, vary the times when debts were contractually stipulated to be due and payable: see Southern Cross Interiors , supra, at [54], propositions (iii) and (iv). Such a practice can be likened to that identified by Jacobs J in Hymix Concrete Pty Limited v Garrity (1977) 13 ALR 321 at 328 as the 'desire on the part of the company to extend its effective working capital at no cost to itself by obtaining as long terms of credit as its creditors would tolerate, a business manoeuvre not necessarily related to an inability to pay' ." 185 I do not accept the suggestion inherent in this submission that the companies' "management" of creditors had succeeded to any substantial degree at all in deferring the companies' liabilities to pay their trading debts as they fell due. The evidence of Ms Carroll and Mr Martini, which I have recounted above, is all to the contrary: it shows that creditors were being made promises of payment but, far from accepting those assurances meekly, they were becoming increasingly loud and insistent that the debts be paid. 186 Neither do I accept the submission that there was no perceived "need" to sell assets to pay creditors. The evidence which I have recounted shows that the Directors were being told by Mr Martini and by Mr Spicer from January 2003 onwards that there was increasingly urgent need to realise assets. Mr Martini and Mr Spicer made strenuous efforts to realise assets and to seek refinancing. Because of the Group's unresolved dispute with the ATO, all they could do was to sell the Quondong property, obtain accelerated payments from TFE, and sell some additional bulk wine. As I have said, those realisations did not produce sufficient cash to pay the companies' debts as they fell due. 187 An asset cannot be taken into account in assessing solvency at a particular time without reference to the time it would realistically take to effect realisation and produce cash. It is no indication of solvency - indeed, it is the opposite - to point to property as available to meet debts falling due next month when, even with the utmost expedition, that property cannot be turned into cash for six months. Realisable property can only be taken into account in assessing solvency "if that property is in such a position as to title and otherwise that it could be realised in time to meet the indebtedness as the claims mature": Bank of Australasia v Hall (1907) 4 CLR 1514, at 1543; see e.g. Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (2006) 58 ACSR 631 at 652 per Dodds-Streeton J and Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87 at [14] and [15] per Barrett J. 188 A great deal of time was spent in evidence and submissions in debating the value of the bulk wine stocks held by Vineyards and whether and when those wine stocks could have been realised to meet debts. I do not think that is necessary for me to go into the debate in great detail. Bulk wine was certainly sold and was sold vigorously and at the best prices Mr Martini could achieve in circumstances other than a forced sale. However, the bulk wine was not all sold during the Period and the proceeds of what was sold were nowhere near sufficient to pay the companies' trading debts as they fell due. Mr Martini said that even if all bulk wine had been sold, Wines and Vineyards could not have paid all their creditors and would still have had cash problems: see para 181 above. 189 Mr Irving submits that Vineyards could have sold additional bulk wine so as to receive a total of $5M in cash in rolling amounts by 4 August 2003: written submissions, 23 February 2007. The ability of Vineyards to sell bulk wine generating that amount by August 2003 is disputed but Mr Irving's submissions are, in any event, hypotheses which are based on reports of experts obtained after the collapse of the Group. 190 The reason that all the bulk wine was not sold to pay outstanding trade debts during the Period was given by Mr Martini, whose frank and helpful evidence I accept. Mr Martini regarded the bulk wine as the companies' nearest equivalent to cash. He said: "Q. Yes. But just taking that step by step, are you saying that you could have sold more of it had you been given permission to do so by the Board of Directors? A. It could have all been sold. I would put one other observation out there; that bulk wine was the closest we had to a cash equivalent.

[189]

Q. But what was left over, which is in Mr Gaetjens' report, was not sold, despite presumably your best efforts to sell it? A. No. I'll back up again and go back to my cash equivalent. I had six or seven or eight different options I was pursuing to raise funds. Most of - many of those were relatively illiquid, they may or may not have occurred or eventuated in 60 days or in 90 days or in 120 days, or may have taken a different form. The one thing I was very sure of was I could turn bulk wine into cash. The question is at what dollar value per litre? So if you're sitting there with that series of options, in the situation I'm in, you hang on to the thing closest to cash as long as you can, unless it's absolutely necessary. Then you turn it into cash." 191 What Mr Martini was saying, in effect, was that the other asset resources which might have been available to produce cash were not so assured or readily realisable as the bulk wine: if all of the bulk wine was sold and the proceeds exhausted in payment to creditors before the companies had successfully resolved their dispute with the ATO and thereby regained their ability to refinance and raise further cash, then the companies would have had nothing at all left with which to pay creditors. As he said (at T897), if the companies had sold all the bulk wine to pay outstanding debts, they would have run out of cash more quickly. They were therefore selling as much as was needed pay "essential creditors" and deferring payment to other creditors more and more. 192 This strategy did not demonstrate unwillingness to use an asset to pay creditors, in the sense discussed in Re Sarina: rather, it demonstrated an inability to pay creditors if the companies were to avoid "burning all their bridges behind them" by exhausting their most readily available resource when the ability to realise other resources was so uncertain. 193 This was a business decision, no doubt thought to be prudent, and made in the hope that eventually all would come right when the dispute with the ATO was successfully settled. However, the decision necessarily meant that the companies continued to leave a great many of their unpaid debts to age. 194 Mr Martini gave a second reason for not selling all bulk wine as soon as possible. Mr Irving wished to avoid selling large quantities of bulk wine quickly, resulting in sales at below book value. This would have had an adverse impact on the Group's financial statements for 2002. Mr Martini said that Mr Irving did not tell him in so many words that he was concerned about the effect on the Group's accounts of selling bulk wine at below book value, and that that was the reason that he did not want bulk wine to be sold as quickly as Mr Martini desired. However, that is the inference which Mr Martini drew from Mr Irving's words, and I think that he was correct in doing so: T884.27 - T885.36. 195 In any event, Mr Hall, the Liquidator, had doubts about whether a quick sale of virtually all of the bulk wine stocks was commercially realistic if the companies were to have any future as a going concern: see T163.22 - .50. It seems to me that these considerations also could lie behind the Directors' decision not to sell all bulk wine within the Period. Doing so could have spelt the end of the companies. 196 Some of the sources of cash referred to in the list which Mr Martini presented to the Board of Wines on 6 January 2003 were realised during the Period. Payment of accounts due from TFE were accelerated and provided additional cash. A property owned by Wines at Quandong was sold in February and the sale was completed in April 2003, realising nett proceeds of about $2M. Receipt of these proceeds went nowhere near paying all overdue creditors of Wines and Vineyards, and outstanding creditors' debts continued to age. 197 Mr Jackman took Mr Hall through a number of worksheets, intending to summarise assets available to meet the liabilities of Wines and Vineyards from 17 October 2002 onwards in an endeavour to show that Wines and Vineyards could have paid all of their due debts during that period and were, therefore, solvent. The worksheets became Exhibit 2D1. 198 Despite Mr Jackman's perseverance with Mr Hall in this exercise, I did not find it of assistance. Mr Hall was asked to make a series of assumptions as to what the companies could have done, and when. Mr Hall was not willing to accept a significant number of those assumptions as realistic: see, for example, at T163.23 - T164.19. 199 In the course of this part of Mr Jackman's cross examination of Mr Hall, I raised with Mr Jackman the significance of this evidence. The following exchange occurred: " His Honour: It would be an interesting exercise to count up how many assumptions already you have asked the witness to make and how many he will asked to make before the end of this exercise. I can't stop myself thinking that if the problems could have been solved by a couple of figures on a piece of paper at the time, why didn't this extremely capable and experienced Board jot down those figures and solve the problem.

[194]

A little later, I returned to the point: T164.21 - T165.56. 200 In these passages Mr Jackman, with customary clarity, stated his case in a nutshell: the companies could have realised sufficient assets to pay all their debts in the Period as they fell due, but did not do so because they did not need to do so. The companies did not need to do so because their creditors were showing forbearance and were not issuing statutory demands. 201 However, I have found as a fact that many of the creditors of both companies were insistent in demanding payment of their overdue debts during the Period. The fact that they did not immediately issue statutory demands or commence debt recovery proceedings did not operate to defer the companies' present liability for those debts: see Southern Cross Interiors (supra) at 224. 202 Therefore, it is not correct, nor is it to the point, to say that the companies did not need to realise assets to pay their overdue debts. The companies had a legal liability to pay those debts; they needed to realise assets to pay those debts, if they could, to avoid the Directors engaging in insolvent trading. 203 Solvency is a question of fact and in finding whether or not a company was solvent at a particular point of time in the past the Court does not proceed upon possibility or speculation as to what might have happened when it has clear evidence as to what did, in fact, happen. The Board Minutes and the evidence of Mr Spicer and Ms Carroll make it clear that the Directors and the Executive Officers of Wines and Vineyards were well intentioned, capable, professional people, trying hard to pay the creditors of the companies while keeping the companies afloat. To suggest that there was a ready means of paying the companies' debts as they fell due which those Directors and officers failed to appreciate is unrealistic. The Board, Mr Martini and Mr Spicer were in the best position to decide what could realistically be achieved in paying creditors. 204 Mr Martini accurately summarised the position of the companies in general terms thus: " His Honour: Before you move on, can you explain what you saw as the situation which made it in your opinion severe from January onwards? A. I saw it as severe from December onwards given the fact that the budget that I had inherited was clearly in tatters. We were not going to get close, we were only going to get to, perhaps, 60% of what was the forecasted revenue. Cash flows were grossly understated and our cash position was overstated. Our expenses were, particularly the hired expenses, where we had a huge array of consultants that gobbled up our cash, were high. I had about seven indicator lights all going the wrong way.

[208]

208 The critical and insuperable obstacle to the Reynolds Group's ability to refinance, sell real estate charged to the Bank, and raise further capital from the market was the unresolved dispute with the ATO over the tax liability created by the Notices of Assessment. If the tax liability had to be paid in full, Wines and the Reynolds Group were insolvent, as the Directors, the Group's financiers and the market well appreciated. The Board of Wines was, therefore, extremely anxious to resolve the disputes as quickly as possible - but with a favourable result. That meant an agreement by the ATO that the Group would have to pay none, or very little, of the amounts stated in the Notices of Assessment. However, the achievement of any sort of settlement with the ATO, favourable or not, seemed to be constantly slipping over the horizon. 209 On 15 October 2002, Mr Jessup wrote to Mr Irving confirming that he had lodged an application for deferral of legal action by the ATO to recover the tax debts. Mr Jessup advised that he had spoken with Mr Cameron Jeffs of the Brisbane ATO, who had been appointed as National Director and had the responsibility for resolving the tax issues with the Reynolds Group. Mr Jessup said that Mr Jeffs had "indicated on a without prejudice basis" a number of steps which Mr Jeffs was contemplating in order to advance discussions. Mr Jessup concluded: "We are confident that a settlement is likely to be achieved from the tone of our conversation with Cameron Jeffs. The tone was totally different to the last few months where a meeting became impossible. It would appear that the previous blockage referred to by John Evans of the ATO is now free and there is a genuine attempt now being made by the ATO to resolve matters. His tone was conciliatory." 210 On 24 October 2002, Mr Poolman, Mr Jessup and Mr Fryer attended a meeting with officers of the ATO, including Mr Evans and Mr Jeffs. The ATO officers kept a diary note of the meeting. The possibility of a settlement between the ATO and the Reynolds Group was discussed at length. The ATO officers raised the difficulty that there was a perception that Wines had been involved in the promotion of a tax scheme - a proposition which Mr Jessup and Mr Fryer strongly denied. The minute records the following: "John Evans noted that … any settlement with a promoter was breaking new ground and would have to be approved at a very high level within the ATO. Considering the Commissioner's views on promoters of mass marketed schemes, it will not be easy to convince senior management that it is in the ATO's interests to settle. However it is recognized that Cabonne is not in the business of marketing tax schemes."

[212]

Why settling by 14 January 2003 is critical for the Reynolds Group." 214 On 20 December 2002, Mr Spicer sent an e-mail to the Directors advising that he had now drawn down the final $1.5M available under the ANZ Bank Facility. Mr Spicer forwarded with that e-mail a statement of the cash position as at 17 December 2002. It showed that Wines was overdrawn at the Bank by $12,375 and that it had drawn, but not issued, cheques in favour of creditors for $24,131. Taking into account cheques drawn but not issued and cheques issued but unpresented, Wines was overdrawn at the Bank in the amount of $108,369. 215 Also attached to Mr Spicer's e-mail was a cash-flow forecast for the year ending 30 June 2003. It showed that the Reynolds Group required an additional $5M in funding to be able to meet its projected outgoings until the end of the June 2003, and that it required $1M of that funding before the end of January. 216 On 23 December 2002, Mr Spicer, Mr Martini, Mr Poolman, Ms Yates and Mr Irving had a telephone conference call to discuss the revised budget and the cash flow issues. According to Mr Spicer, in that conference call Mr Irving said: "If what you are saying in the revised budget is correct, then it's pretty serious and we will have to discuss at Board level". According to Mr Martini's evidence, he said in that conference call: "The situation is critical. The company is in serious danger of bankruptcy. You have to accept that drastic measures are required. We have to start selling assets". 217 On the same day Mr Martini and Mr Spicer attended a meeting with Mark Cox of Rabobank to discuss the possibility of refinancing the Group's ANZ facility. Mr Cox told them that refinancing could not be discussed until the Group had resolved the tax dispute with the ATO. 218 On 9 January 2003 Ms Anne Richardson, a member of Deloitte who was assisting Mr Fryer, had a telephone discussion with Mr Evans which she then reported to Mr Poolman. The substance of the discussion is set out in an e-mail as follows: " JE [Mr Evans] indicated he was not entirely happy with the final report prepared by Cameron Jeffs and needed certain aspects to be redone. He also had various outstanding queries which needed to be resolved before JE could make a final recommendation to the Second Commissioner of Taxation. JE indicated that he would come back to AR [Ms Richardson] with a likely timeframe for completion of the outstanding matters once he has discussed the issues with the relevant people within the ATO.

[231]

Clearly, at the conclusion of his meeting with Mr Evans on 5 February Mr Irving did not expect any immediate decision from the ATO: he realised that there could well be no decision for a further ninety days, i.e., not until early May 2003. In the meantime, as Mr Irving acknowledges, Wines was not able to approach the markets for refinancing. Further, as Mr Irving must have known, Wines and Vineyards were not paying all their respective debts as they fell due and creditors were continuing to age. There was no realistic prospect of this position substantially improving for another three months, during which time Wines and Reynolds would continue to incur new debts. 221 There was no decision by the ATO as at the end of May 2003. On 4 June 2003, at a Board meeting of Wines, Mr Irving advised that he had spoken to Mr Evans and that Mr Evans would be responding "in seven to ten days". No further time frame for decision was given. However, Mr Spicer left the meeting in no doubt that the Group's position was desperate. The minutes record: " Cashflow The Chief Financial Officer explained the cash at bank and daily cash flow schedules. He emphasized that timing was critical and that the Company must have significant funds in place by 13 June 2003. The Board acknowledged this." 222 A diary note dated 6 June 2003 made by a senior officer of the ANZ Bank records a meeting between the Bank and Mr Irving, Mr Poolman and Mr Martini and others on 30 May 2003. The diary note records: " Funding Support From today's discussion RW [Reynolds Wines] are still reliant on establishing an accounts receivable facility in the US (Silicon Valley Bank) to further bring forward accounts receivable owing by TFE. This proposal would require ANZ to release its security over these receivables. ANZ has very clearly advised RW that it would not do this unless ANZ debt was permanently paid down by the value of security released. IWC was today advised of ANZ's position. IWC made remarks about discussions taking place with a number of entities to secure bridging finance, however very little detail was provided. Although not expressed at today's meeting it is likely that the uncertain position of the settlement with the ATO would not be assisting efforts to secure any external financing. … ATO There is still no certain time frame around conclusion of the tax dispute with the ATO. Chairman Irving indicated at the 30 May meeting that 30/06/03 is possible for a final settlement with the ATO. RW's position remains that the ATO will settle with a payment of cash and tax credits or just tax credits. The RW chairman has been conducting discussions with the ATO with the support of Deloittes." 223 At a meeting of the directors of Wines on 10 June 2003, at which Mr Irving, Mr Poolman, Mr Martini, Ms Yates and Mr Spicer were present, various proposals for refinancing were discussed. Mr Wahab of IWC joined the meeting and advised that he had spoken to various potential financiers to gauge their interest. He said that he hoped to get confirmation of some commitment by 13 June. After Mr Wahab left the meeting the Directors continued their discussions. The Minutes record: "The Directors then continued their deliberations, with the following points being made:

[245]

MI agreed to look at $ number. The meeting concluded shortly thereafter." 225 Mr Irving says that he understood from this discussion that the ATO was suggesting in this meeting that it wished Wines to put forward a cash figure which it would accept from the ATO in settlement of Wines' claim for a tax refund. Mr Irving says that this suggestion encouraged him to believe that a favourable settlement with the ATO was imminent. The file note taken by the ATO does not support this assertion at all. I regard the file note as more reliable evidence of what was discussed at the meeting than Mr Irving's recollection, and later interpretation, of what was said. Mr Evans was making it plain that the ATO rejected an argument that because Wines had paid Deloitte a lot of money to put together a proposal resulting in a refund to Wines rather than a payment by Wines to the ATO, that in itself supported Wines' claim for a refund. What Mr Evans was conveying when he said: "We would still need to look at the numbers", was that the ATO would consider a figure put forward by Wines in settlement of the tax debt. He made this plain in emphasising that there was a major conceptual difficulty as to whether there could be a settlement of any description, let alone a settlement whereby the ATO paid money to Wines. The concluding statement of Mr Evans: "Any suggestion of a refund would be very difficult. So what we would need from you is a number …" is taken now by Mr Irving to indicate a formally stated reluctance on the part of the ATO to consider a settlement resulting in payment to Wines, but an indication that, nevertheless, as a matter of commercial realism the ATO was willing to negotiate on a number for payment to Wines. Mr Evans denies that he conveyed anything of the kind to Mr Irving. He said that what he suggested was that Wines should put forward a figure for payment to the ATO. Having regard to the content of the file note as a whole and to the tendency of Mr Irving to put a favourable gloss on the evidence whenever possible, I conclude that Mr Evans' evidence should be accepted. 226 It may be that Mr Irving misinterpreted Mr Evans' statements at this meeting, and understood Mr Evans to be requesting a figure which Wines would accept from the ATO in settlement of its claim for a tax refund. This is certainly the impression which he gave the Directors of Wines at a Board meeting on 13 June 2003, when the Board authorised him to negotiate to settle the ATO dispute on terms that the ATO pay Wines anything between $0 to $12M on terms that the settlement be finalised by 30 June 2003. In view of what Mr Evans had told Mr Irving repeatedly about the difficulties of any settlement involving a payment by the ATO to Wines, it is hard to understand the Board's confidence that the settlement with the ATO would not involve any payment by Wines to the ATO but would, rather, more likely result in a payment by the ATO to Wines. 227 On 18 June 2003, Mr Irving wrote to Mr Evans offering to settle the tax dispute upon payment by the ATO to Wines of $9M, provided that $5M of that amount was received in cash by 30 June 2003. 228 At a Board meeting of 23 June 2003, the possibility of refinancing and raising further cash from asset sales was discussed. It was clear that no firm proposals had yet been received and that no timing for the refinancing could yet be ascertained. 229 No decision had been made by the ATO by 30 June 2003. On that day Wines advised the ASX that it expected a response from the ATO by 31 July 2003. The ATO had not advised that a decision would be given by that date: the evidence suggests that it was Mr Irving himself who thought that that date was appropriate to announce to the ASX as an anticipated date for decision: T476.25. 230 On 1 August 2003, the Board of Wines was formally advised that the ATO rejected Wines' proposal for settlement and intended to enforce the tax assessments. On 4 August 2003 the Boards of Wines and Vineyards resolved that the companies would be placed in voluntary administration. THE CLAIM AGAINST MR IRVING

[250]

would those facts have constituted reasonable grounds for suspicion of insolvency. 234 Suspicion of insolvency falls somewhere between a belief that insolvency exists, on the one hand, and a mere wondering whether it exists, on the other. Suspicion is a positive feeling of apprehension, an admittedly tentative belief, without sufficient evidence to form a concluded and supportable opinion: see e.g. Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, at 303. 235 Mr Irving has made no submission as to the appropriate finding which should be made in respect of s.588G(1)(c). His submissions focus on his defences under s.588H. However, I cannot assume that he concedes a finding against him under s.588G(1)(C). 236 I deal first with the consequences of the issue of the Notices of Assessment. As at 1 October 2002, the tax assessments had been outstanding since March 2001. Wines had not procured an agreement from the Commissioner to defer payment nor had it obtained a stay of enforcement proceedings. A reasonable director of Wines could not simply refuse to think about the consequences of this state of affairs for the solvency of Wines. A reasonable director of Vineyards could not refuse to think about the consequences to Vineyards if Wines had to be wound up because it was insolvent. It would have been the duty of a director of Wines and of Vineyards to obtain legal advice as to whether the tax assessed against Wines was due and payable, and then to consider the impact of that advice directly on the solvency of Wines and, indirectly, on the solvency of Vineyards. 237 If Mr Irving had asked Mr Fryer at any time during the Period: "Are the tax debts presently due and payable?", he would not have received an answer that they were not. Mr Fryer agrees that he did not understand the ATO ever to have agreed to defer the due date for payment for the Notices of Assessment; rather, he says, but I do not accept, that there was an agreement to defer recovery proceedings: see paragraphs 122 to 140 above. Mr Fryer says that he never informed the Directors that the due date for payment of the tax debts had been deferred: para 126. 238 As at 1 October 2002 there was no reasonable basis for Mr Irving to believe that the ATO would not seek to enforce payment of the tax debts. As I have noted, the ATO issued winding up summonses against CHF and CML in the first week of October 2002. 239 After the winding up summonses were discontinued in March 2003, Mr Fryer may well have told Mr Irving that the ATO would probably not take recovery proceedings until a decision about settlement of the tax dispute had been made, but there is no evidence that either Mr Fryer or Mr Jessup told Mr Irving that deferral of recovery proceedings meant that the tax debts were not presently due and payable. 240 There is no evidence that Mr Jessup or Mr Fryer told Mr Irving that the fact that Wines had objected to the assessments meant that it was unlikely that Wines would have to pay the tax debt or that a settlement was likely to be achieved in which Wines would not be required to pay a substantial sum to the ATO. At a meeting between Mr Irving and Mr Fryer on 22 January 2003, Mr Irving asked if a meeting could be arranged between him and Mr Evans alone to discuss the status of the settlement discussions. He explained that he was "intent on getting from them (ATO) an indication of when we were going to get an answer": T328.5. 241 In the course of discussion, Mr Irving said that the Board of Wines wanted to finalise the accounts for 2002. He was of the view that the "worst case scenario" in the dispute with the ATO was that there would be a settlement with no tax payable by Wines and no refund of tax payable by the ATO. Mr Fryer, however, said that this scenario was "unlikely" as there was no basis for it in tax law. Mr Fryer said that the worst case scenario was, in fact, that all the tax assessments would remain "intact" - i.e., that all tax assessed would have to be paid. 242 Mr Irving said that the Board wanted to finalise the 2002 accounts on the basis that a settlement with the ATO was achieved but recognising that no refund of tax would be made by the ATO. He asked Deloitte to give a "comfort letter" supporting this approach. Mr Fryer said that he was not in a position to do this "as we cannot predict what decision the ATO will take …". Mr Irving said that he understood that position. 243 Mr Irving gave the following evidence: "Q. Did not Mr Fryer on that occasion confront you with his professional view that there was no real technical basis in taxation law for that result? A. He did.

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Q. And you had no real basis, given the advice that he gave you on this occasion for saying otherwise other than a bare hunch that you might be able to do a commercial deal of that kind with the Department; isn't that right? A. Well, you have probably expressed it a little more crudely than I would but yes that's true." 244 Mr Irving made a brief diary note of this meeting. Relevantly, it states "letter re (June) 02 accounts and tax position … most likely outcome … too hard". I infer that this note records Mr Irving's request for the "letter of comfort" from Deloitte as to the most likely outcome of the tax dispute and summarises Mr Irving's understanding of Mr Fryer's response: the outcome was too hard to predict. 245 It is highly significant that Mr Fryer gave Mr Irving the response which he did after Deloitte had delivered their detailed submissions to the ATO on 15 November 2002. These submissions put Wines' case at its strongest and highest, yet Mr Fryer was not prepared to give any prediction to Mr Irving about the prospects of a settlement, saying, in effect, that such a prediction was too hard - and this is what Mr Irving understood from Mr Fryer's response. Yet Mr Irving now says that at all times during the Period he had reason to be confident that Wines would achieve a favourable settlement of the tax dispute with the ATO, on the basis that while no tax refund would be paid to Wines, Wines would not have to pay any substantial sum to the ATO. 246 Mr Irving's evidence in this regard was, to some extent, supported by Mr Fryer. Frequently, during the course of his evidence, Mr Fryer expressed the opinion that the arguments which had been advanced by Deloitte in their submissions to the ATO, particularly in the letter of 15 November 2002, were strong. I discount that evidence; the impression which I gained of Mr Fryer's evidence as a whole was that he was anxious to assist Mr Irving's case, if he could. Mr Fryer's assertive but unsatisfactory evidence as to the making of an agreement with the ATO for deferral of recovery proceedings illustrates his tendency to assist Mr Irving by generalities which are not in accord with contemporaneous documents. 247 I regard what was said by Mr Irving in the meeting of 22 January 2003, of which a diary note was kept, as more indicative of Mr Fryer's statements of opinion to Mr Irving as to the prospects of success of settlement of the dispute with the ATO than the evidence which Mr Fryer, and Mr Irving, now give. In the same vein, the opinion expressed on 22 January 2003 was the opinion which Mr Fryer expressed in a letter dated 19 March 2003, a copy of which was sent to Mr Irving. Mr Fryer referred to a recent tax decision of the Federal Court relating to tax schemes and to a subsequent announcement by the Commissioner as to the circumstances in which he would deny deductions and run test cases. Mr Fryer continued: "In terms of what this means for the Reynolds Group, we consider that it is likely that the Commissioner will seek to disallow:

[266]

These views could not reasonably have been regarded by Mr Irving as encouraging. 248 In this regard, I bear in mind that the "symmetrical basis" upon which Deloitte argued in their submissions to the ATO on 15 November, that a refund of tax was in fact owing to Wines, had been put previously by Wines to the ATO and had been rejected on 15 June 2001. On 18 October 2001, Wines had requested an amendment to its tax return, but its request was rejected on 13 May 2002. 249 Mr Irving relies on what he says were remarks of Mr Jeffs and Mr Evans made at various times in 2002 and in 2003 which could lead one to believe that the ATO was disposed to resolve the tax dispute in Wines' favour, i.e., by agreeing that Wines should not have to pay any substantial amount of the Notices of Assessment: see e.g. Mr Irving's Written Submissions paragraphs 76-95. However, these remarks, even taken at their highest, never amounted to anything like an outright assurance or guarantee by Mr Evans or Mr Jeffs of the outcome of the dispute. 250 From my observations of Mr Jeffs and Mr Evans in the witness box, both are cautious and reserved in their manner of expression, particular Mr Evans. I find it hard to accept that Mr Jeffs and Mr Evans would have ventured anything like an assurance to Mr Irving or Mr Fryer that the dispute would be settled upon Wines' terms. On the other hand, it is possible that, in interpreting remarks made by Mr Jeffs and Mr Evans, Mr Irving and, to a lesser extent, Mr Fryer read into them a note of comfort which Mr Jeffs and Mr Evans did not actually intend to convey. 251 For these reasons, I conclude that a reasonable person in the like position of Mr Irving would have been aware at all times during the Period that there was no more than a hope or chance that the tax dispute between Wines and the ATO would be resolved on the terms proposed by Wines. Mr Irving himself conceded that, as a result of the advice Mr Fryer had given him on 22 January 2003, he had no more than "a bare hunch" that he might be able to negotiate a commercial settlement with the ATO: see par. 243. A reasonable director in Mr Irving's position must have contemplated the real possibility that the "worst case scenario" described by Mr Fryer to Mr Irving in January 2003 would eventuate, namely, that the Notices of Assessment would remain "intact", the ATO would enforce payment, and the insolvency of Wines would be manifest. 252 I conclude that at all times throughout the Period there were reasonable grounds for suspecting that Wines was insolvent, having regard to the existence of the Notices of Assessment. 253 I now turn to a consideration of the position of Wines and Vineyards, leaving aside the Notices of Assessment. 254 Bearing in mind the information coming to the Boards of both Wines and Vineyards with increasing frequency from October 2002 onwards, only some of which I have recounted above, it would have been very difficult to argue that a reasonable person in the position of a director of those companies would not have had reasonable grounds for suspecting that both companies were insolvent by 1 October. Debts incurred in that month were never paid. Creditors of both companies were already aging beyond thirty days. At a Board meeting of Wines on 11 October the Directors were informed that the ATO had served winding up summonses on CHF and CML. It was noted that "the actions by the ATO may impact on the recovery of the $26M owed by CML to Wines". Management had advised that the financial accounts of the Group be withdrawn. 255 On 16 October 2002, the ASX suspended trading in Wines' shares at Wines' request. On 17 October the ANZ Bank served its Notice of Default under its Facility Agreement. As I have noted, the assets of the whole Group were secured by cross charges. 256 As at 1 October, no one could reasonably have formed a view as to when the dispute with the ATO would resolve. No one could reasonably have formed the view that Wines would not have to pay the Notices of Assessment. It was obvious even then that if the ATO enforced payment of the Notices of Assessment, Wines, Vineyards and, indeed, the whole Reynolds Group, would have to go into liquidation. 257 The continuing inability of Wines and Vineyards to raise sufficient cash by realising resources in order to pay trade debts as they fell due existed as at 1 October and was brought to the attention of the Directors with increasing frequency throughout the Period. I am satisfied that as at 1 October 2002, and at all times thereafter during the Period, there were reasonable grounds for suspecting that both Wines and Vineyards were insolvent. Whether Mr Irving aware of reasonable grounds for suspecting insolvency

[267]

258 CA s.588G(2)(a) requires the Liquidators to establish that Mr Irving was aware, throughout the Period, that there were reasonable grounds for suspecting that Wines and Vineyards were insolvent. Again, Mr Irving has made no submission as to the appropriate finding on this question. His submissions are focussed on a defence under CA 588H(2). He says, in effect, that although he was aware of facts which afforded reasonable grounds for suspecting that both companies were insolvent, he expected, on reasonable grounds, that both companies were in fact solvent throughout the Period. I will come to that defence shortly. 259 The evidence makes it clear that Mr Irving was kept closely informed throughout the Period of the companies' increasing difficulties in "managing creditors", i.e., staving off statutory demands and debt recovery proceedings: see, for example, Mr Spicer's e-mail of 21 March 2003, which was copied to Mr Irving (para 174). He was acutely aware that the protracted and indefinite delay in resolving the dispute with the ATO prevented the companies from realising their resources to provide sufficient cash to pay the companies' outstanding creditors. He was aware that the companies were not able to say with any degree of assurance whether and when Wines would be able to resolve its dispute with the ATO in a manner which would remove its substantial tax liabilities. 260 I conclude that Mr Irving was aware that there were reasonable grounds for suspecting that both Vineyard and Wines were insolvent throughout the Period, for the purposes of s.588G(2)(a). In view of that finding, it is not necessary to make a finding in respect of s.588G(2)(b). If a finding had been necessary, I would have had no hesitation in concluding that a reasonable person in Mr Irving's position in companies in the circumstances of Wines and Vineyards would have been aware of reasonable grounds for suspecting the insolvency of those companies at all times during the Period. MR IRVING'S DEFENCE

[284]

he relied upon the advice of respected, experienced and qualified external advisers with relation to taxation and audit matters, namely, Mr Fryer and Mr Jessup. 265 The Liquidators have focussed on what they say is a critical gap in the elements of Mr Irving's defence. In order for the defence to succeed, there must be an expectation, held on reasonable grounds, that recourse to assets will enable debts to be paid, not at some indefinite time in the future, but so as to keep the companies solvent according to the definition in CA s.95A, namely, as the debts fall due for payment. It is not appropriate to base an expectation of solvency: "… upon the prospect that [the company] might trade profitably in the future thereby restoring its financial position. … The question is whether the company at the relevant time is able to pay its debts as they become due not whether it might be able to do so in the future if given time to trade profitably …" : Sheahan v Hertz Australia Pty Ltd (1995) 16 ACSR 765, at 769; Powell v Fryer (supra) at [75]. 266 The law recognises that there is sometimes no clear dividing line between solvency and insolvency from the perspective of the directors of a trading company which is in difficulties. There is a difference between temporary illiquidity and "an endemic shortage of working capital whereby liquidity can only restored by a successful outcome of business ventures in which the existing working capital has been deployed": Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559, at 566; Re Newark Pty Ltd (in liq); Taylor v Carroll (1991) 6 ACSR 255. The first is an embarrassment, the second is a disaster. It is easy enough to tell the difference in hindsight, when the company has either weathered the storm or foundered with all hands; sometimes it is not so easy when the company is still contending with the waves. Lack of liquidity is not conclusive of insolvency, neither is availability of assets conclusive of solvency: Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820, at 837. 267 Where a company has assets which, if realised, will pay outstanding debts and will enable debts incurred during the period of realisation to be paid as they fall due, the critical question for solvency is: how soon will the proceeds of realisation be available: see the authorities cited at para 187 above. Bearing in mind the commercial reality that creditors will usually prefer to wait a reasonable time to have their debts paid in full rather than insist on putting the company into insolvency if it fails to pay strictly on time, I think it can be said, as a very broad general rule, that a director would be justified in "expecting solvency" if an asset could be realised to pay accrued and future creditors in full within about ninety days. 268 The position becomes murkier the less certain are the outcomes. The market value of the asset may not be ascertainable until the market is tested, so that it is not certain that the realisation will pay in full both existing debts and those to be accrued during the realisation period. The time at which the proceeds of realisation become available may depend upon the state of the market and the complexity of the transaction. 269 There comes a point where the reasonable director must inform himself or herself as fully as possible of all relevant facts and then ask himself or herself and the other directors: "How sure are we that this asset can be turned into cash to pay all our debts, present and to be incurred, within three months? Is that outcome certain, probable, more likely than not, possible, possible with a bit of luck, possible with a lot of luck, remote, or is there is no real way of knowing?" 270 If the honest and reasonable answer is "certain" or "probable", the director can have a reasonable expectation of solvency. 271 If the honest and reasonable answer is anywhere from "possible" to "no way of knowing", the director can have no reasonable expectation of solvency. 272 If the honest and reasonable answer is "more likely than not", the director runs the risk that a Court will hold to the contrary in an insolvent trading claim. 273 If the honest and reasonable answer is "no way of knowing yet, we need more information", the director must then ask: "How long before we have the information so that we can give a final answer?" 274 If the honest and reasonable answer to that question is: "By a definite date which will not extend the realisation period (if there is to be one) beyond three months", the director may reasonably say: "Let's wait until then before deciding". 275 If the honest and reasonable answer is "there is no way of knowing yet when we will have the information to make a decision", the director must say: "Then there is no way that we can now have a reasonable expectation of solvency and there is no way we can reasonably justify continuing to trade without knowing when we will know whether the company is insolvent. Call the administrators". By this series of questions and answers I do not mean to lay down some pro forma test of directors' liability for insolvent trading. Each case depends on its particular facts. These questions and answers merely serve to illustrate that when a company is struggling to pay its debts, the directors must face up to the issue of insolvent trading directly and with brutal honesty: they must not shirk from asking themselves the hard questions and from acting resolutely in accordance with the honest answers to those questions. 276 The Liquidators say that there is no basis upon which Mr Irving could have held a reasonable expectation at any time during the Period that debts already incurred by Wines and Vineyards, and debts to be incurred in the future, would be paid by recourse to the assets of the company at the time those debts fell due for payment. They say that I should not accept Mr Irving's evidence that he believed at all times during the Period that there was no need to realise assets because he was reliably informed that creditors were not sufficiently pressing. They directly attack Mr Irving's credit. 277 At the commencement of his cross examination, Mr Irving was asked directly about "creditor management". Management Reports presented to the Board from January 2003 onwards are replete with phrases using the words "creditors … continue to be managed on a daily basis". Mr Irving could not have had any doubt as to what the phrase "creditor management" meant. Nevertheless, he courteously quibbled with definitions and responded in a way which skilfully avoided giving a direct answer to a direct question: "Q. Mr Irving, the issue of creditor management came up at just about every Board meeting between November 2002 and the end of July 2003; didn't it? A. Mr Slattery, I know 'creditor management' is one of your favourite expressions. The issue of the cash flow management of the company including debtors and creditors and inventory did come up at virtually every Board meeting.

[292]

Q. The questions were focused on creditors. But all I was wanting to clear up is whether you had it in your mind, you were being asked whether you had used the words 'manage creditors' as a phrase rather than said something to that effect; whether you used those precise words or not? A. Well, I do not remember using the expression 'manage creditors'. I do however acknowledge that in the course of that Board meeting that I talked about managing process, well, I beg your pardon, managing the plan because management came up with a plan to address that and the Board addressed the plan." 278 Mr Irving was fencing with Mr Slattery in this passage, rather than answering a fairly straightforward question. He fenced often during his cross examination; I will give a few more examples in the course of these reasons. Mr Irving, I think, did himself a disservice in this regard. By the conclusion of his cross examination, I had gained the distinct impression that Mr Irving was reluctant to face up directly to the obvious when he was confronted with it, and was concerned to put a gloss favourable to himself on all his evidence while not being deliberately inaccurate or untruthful. This tendency weakened the reliability of his evidence generally. 279 In stark contrast was the evidence of Mr Martini. He answered questions directly and frankly, and on several occasions in a way contrary to his own interests. It is for that reason, coupled with the fact that Mr Martini's evidence was consistent with contemporaneous records, that I generally prefer the evidence of Mr Martini where he disagrees with Mr Irving. 280 Mr Irving says that Mr Martini and Mr Spicer reported to the Directors that "they had contacted the creditors and explained the situation and he understood that the creditors had agreed to defer payment": submissions para 103; T278.3. This assertion seems to be the basis for Mr Irving's alleged belief that there was no pressing need for Wines and Vineyards to realise assets. 281 I do not accept this evidence. From the Board meeting of 27 November 2002 onwards, the Directors were being informed that the debts of trade creditors of Wines and Vineyards were rising and that solving the "ATO issue" and sale of bulk wine were "crucial" to ongoing financial support: Reynolds Wines Limited, Management Report as at 15 November 2002. It was at that meeting that Mr Spicer was asked to prepare weekly reports as to the Group's cash position. 282 On 10 December 2002, Mr Spicer advised the Directors, including Mr Irving, that as at 6 December Wines and Vineyards had drawn cheques for creditors totalling $76,364 but were holding the cheques back. He forecast a cash deficit of $277,000 by 5 January 2003. 283 The Management Reports to the Directors and other communications from Messrs Spicer and Martini from 15 December 2002 onwards consistently refer to the critical position of the companies. According to Mr Martini, whose evidence I accept, he told Mr Irving on 23 December 2002: "The situation is critical. The company (i.e. the Group) is in serious danger of bankruptcy. You have to accept that drastic measures are required. We have to start selling assets". 284 Mr Irving places great weight on what are said to be assurances of solvency contained in "management representation" letters. In a management representation letter dated 19 March 2003 and signed by Mr Martini as CEO and Mr Spicer as CFO, the following statement appears: "The financial report has been prepared on a going concern basis. We are of the opinion that this basis is appropriate despite the issues set out in Appendix 2, Note 1(z) to the financial report. We expect that following satisfactory resolution of the ATO disputes that the default issued by ANZ will be withdrawn and further finance will be able to be obtained. It should be noted that whilst ANZ have issued notices of default they have continued to rollover the facility and also have advanced further funds within the facility."

[293]

A statement to the same effect appears in a management representation letter dated 27 February 2003. 285 It should be noted that the management representation letters do not say that Wines was paying its debts as they fell due. Mr Irving could hardly have interpreted the letters to be indicating that Wines was solvent in that sense: an e-mail from Mr Spicer to Mr Irving, also dated 19 March 2003, attached a statement of the current cash position and cash flow which showed that the debts outstanding for ninety days and more were $4,902,457, and cash at bank was $128,643. 286 The statement "We expect that following satisfactory resolution of the ATO dispute … etc" told Mr Irving nothing which he did not already know. Further, as he, not Messrs Martini and Spicer, was in direct discussion with the ATO officers at that time he was better placed than they were to form a view as to whether the dispute would be resolved satisfactorily and, most importantly, when. 287 Mr Irving also places great weight on roll-over notices sent by Mr Spicer to the ANZ Bank between 3 January and 25 July 2003. Mr Spicer was required in the notices to specify in respect of Wines and Vineyards whether an Event of Default under the Facility Agreement had occurred or might occur. Becoming insolvent was an Event of Default. Mr Spicer certified in each of the roll-over notices that no Event of Default had occurred. The ANZ Bank continued to roll over its Facility, as Mr Irving was aware. 288 Mr Spicer gave evidence on behalf of the Liquidators. He proved the endemic cash shortage of Wines and Vineyards, non-payment of creditors, and the communication of those facts to the Boards of the companies. In cross examination, Mr Jackman SC took him to the roll-over notices which he had repeatedly signed, without qualification. 289 To my observation, Mr Spicer was visibly uneasy when pointedly asked whether, at the time he gave the warranties of solvency in the roll-over notices, he believed Wines and Vineyards to be solvent. On the one hand, the evidence which he had given on behalf of the Liquidators showed, at the very least, a strong likelihood of insolvency - as he himself must have realised as a chartered accountant and former insolvency practitioner. On the other hand, he had repeatedly signed roll-over notices warranting the solvency of the companies. 290 Ultimately, Mr Jackman pressed Mr Spicer to say that when he gave the roll-over notices he did so because he believed Wines and Vineyards were solvent: "Q. You understood that you were representing in the document of 17 July at 574 to 5, that in your opinion, each of Reynolds Wines and Reynolds Vineyards was solvent and was expected to be able to continue to pay their debts as and when they fell due? A. That they would pay their debts, yes.

[303]

Q. But, taking into account all of the ability of Reynolds Wines and Reynolds Vineyards with regards to raising cash from all of their resources, it was your view, was it not, on 17 July that each of Reynolds Wines and Reynolds Vineyards was able to pay their debts as and when they fell due? A. On that basis, yes." 291 Mr Spicer, though very uncomfortable that he had warranted solvency when he knew Wines and Vineyards were not paying their debts as they fell due, to his credit did not simply adopt the line of least resistance and accept the statements which Mr Jackman was urging on him. He added a qualification to the effect that Wines and Vineyards were not paying their debts in accordance with their contractual terms but were paying them "in the course of business". By that, he was referring to the practice of paying those creditors who were most insistent and not paying others. However, he was grateful to adopt Mr Jackman's last suggestion, namely, that he believed Wines and Vineyards were solvent because they could pay their debts by raising cash from all their resources. 292 Mr Jackman did not explore with Mr Spicer how he could have believed that resources of Wines and Vineyards could have been realised in time to pay their debts as they fell due when, to Mr Spicer's knowledge, there was never any time frame set throughout the Period for a settlement of the dispute with the ATO and for realisation of assets to proceed. 293 I do not accept the submission that Mr Spicer had a positive belief that Wines and Vineyards were solvent throughout the Period. Mr Spicer, as a chartered accountant and as a former insolvency practitioner, knew the definition of solvency. I think it much more likely that, throughout the Period, Mr Spicer was very anxious as to whether Wines and Vineyards were solvent and, at heart, doubted that they were. 294 I infer that at the time that Mr Spicer signed the roll-over notices, he felt himself to be in an extremely difficult position. He knew the companies were not paying their debts as they fell due and that there would be no realisation of assets immediately occurring which would be sufficient to enable all debts existing and to be incurred to be paid as they fell due. Yet, if he refused to sign the notices and to certify solvency, it was highly probable, if not certain, that the Bank would immediately call in the Facility, thereby abruptly putting the companies into receivership or liquidation and destroying once and for all any chance that they might be saved. 295 I do not accept that Mr Spicer believed with any degree of conviction at any time during the Period that Wines and Vineyards were solvent. 296 Mr Spicer said that at no time did he explicitly tell the Board of Wines or Vineyards that the companies were insolvent. He gave this evidence: "Q. Mr Spicer, Mr Jackman has drawn your attention to a number of rollover applications, ANZ Bank facility, the latest being 17 July 2003, and to a cash flow projection and budgets and so on. I think you said in evidence just a few minutes ago, that when you signed the 17 July 2003 rollover application, you understood that you were representing to the ANZ that the Reynolds companies were solvent? A. Yes.

[309]

Q. They would in the future become insolvent? A. Yes, if we didn't resolve the tax office issues, and also arrange refinancing." 297 There is no evidence that Mr Spicer was ever asked point blank by the Board whether Wines and Vineyards were solvent. Possibly, the Directors felt that they did not need to ask; possibly, they felt they did not want to ask, in case they got an answer which forced them to make an extremely difficult decision: whether to continue with their efforts to save the companies and thereby risk insolvent trading liability, or else place the companies immediately in liquidation, resulting in loss of jobs and loss to creditors. 298 Mr Irving places weight on the fact that at a meeting of Directors of Wines on 29 April 2003 "Mr Spicer either represented, or did not express disagreement with, the proposition that the receipts from the TFE receivables would provide immediate funds to meet outstanding liabilities": submissions para 107. 299 Whatever was said by Mr Spicer and Mr Martini at the meeting of 29 April was far removed from a statement that Wines and Vineyards were able to pay all their debts as they fell due and that they would be able to do so in the future, out of the TFE receivables. What was said was in the context of a discussion about how the companies could continue to survive until the dispute with the ATO was resolved and refinancing could occur. Cash statements provided to the meeting by Mr Spicer showed that prior to receipt of the first tranche of receivables from TFE, cash at bank was $28,320 and total debts outstanding for ninety days or more were $5,733,909. After receipt of the first tranche, cash at bank was $926,028.73, which was obviously insufficient to pay the debts outstanding for ninety days or more. 300 Mr Irving knew throughout the Period that Wines and Vineyards were unable to pay in full the debts which they had already incurred and which were about to be incurred without recourse to assets which might, or might not, become available for realisation at some indefinite time in the future. In that circumstance, I am unable to accept that he was reasonably able to form an expectation that Wines and Vineyards were solvent on the strength of the statements made in the management representation letters, the roll-over notices, and in the absence of an express and unequivocal statement from Mr Spicer that, despite all the other circumstances known to the Directors, the companies were solvent. 301 The whole weight of the evidence, other than that of Mr Irving, shows that Mr Irving could not have been given assurances by Mr Martini and Mr Spicer from October 2002 onwards which could have led him to believe that there was no pressing need to sell assets because creditors were being successfully "managed", i.e., the creditors were content to wait for payment as long as it took to resolve the dispute with the ATO and to refinance or sell assets. 302 The following evidence encapsulates Mr Irving's attitude to payment of creditors throughout the Period, while Wines was awaiting a decision one way or another from the ATO: "Q. At the board meeting at which the directors were informed that the ATO hadn't decided by 30 June but a decision was expected by 31 July, did anybody say anything to the effect 'Well, what will the company do if a decision isn't made by 31 July'"? A. No. I believed by the end of June there were signs that there was activity in the tax department to bring this thing to a conclusion.

[314]

Q. Did anybody ask 'If we continue trading in normal business operations up until 31 July, how much additional debt will we incur?' Did anybody ask that? A. No, not in those specific terms. Mr Spicer, you know, in his position as chief financial officer, informed the board as to, you know, what he had in cash; what cash was in prospect. My recollection was there was additional money coming in from TFE in the month of July, and my recollection was that that was a view that we would be able to continue in business in that period. But our confidence in a resolution was - within the timeframe that you're talking about - was for stronger in July. I mean, before I mentioned the 90 days and how we got to it and we received assurances in that period that they were still trying to make the 30 June. I was then informed at the meeting on 4 July. I was then informed the meeting had been held and they were working on the outcome of that. No date was given me as to an answer, but it seemed to me that there was an imminent answer coming from the ATO." 303 This evidence, I think, summarises well the way in which Mr Irving and the Directors dealt with the fact that Wines and Vineyards were continuing to incur trading debts throughout the Period when they knew that all debts could not be paid as they fell due from the cash resources then available. Mr Irving and the Directors never addressed frankly and directly the hard questions: see paras 267 to 275 above. They simply hoped that a decision by the ATO would be given soon, it would be favourable, and that the rather vague and conditional proposals for refinancing and sale of assets could be implemented and the proceeds realised to pay creditors before one or some of them decided to wait no longer and sought to wind the companies up. Mr Irving never admitted in his evidence that this was his attitude; he was studious to avoid even mentioning the word "liquidation" in discussing the consequences for Wines and Vineyards if the ATO delayed giving its decision beyond 31 July 2003, or if the ATO's decision was adverse. All Mr Irving would concede was that if the "worst scenario" - as Mr Fryer had put it - occurred, then the companies' position would be "difficult" and the Board would have to discuss the matter: T329.18-.36 304 The passage I have set out above also exemplifies how Mr Irving, during cross examination, repeatedly avoided answering a direct straightforward question with a direct and straightforward answer but insisted on appending statements justifying his own position, usually in very general terms. As I have said earlier, for this reason, I found his evidence less helpful than it could have been and of much less assistance than the evidence of Mr Martini. 305 I find that Mr Irving did not have, at any time during the Period, reasonable grounds to expect that Wines and Vineyards were able to pay their debts, incurred and to be incurred, as they fell due. That conclusion is founded upon Mr Irving's knowledge, at all times during the Period, of the following facts and circumstances:

[330]

(1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit." 311 Section 1317S clearly applies in an insolvent trading case because a claim under CA s.588M for a contravention of s.588G is expressly included in the definition of "eligible proceeding". There is a rather sterile debate in the authorities as to whether s.1318(1) also applies to an insolvent trading case. In Kenna & Brown Pty Ltd v Kenna (supra), Bergin J held that it did (at [155]-[157]). Her Honour's decision was followed by Young CJ in Eq in Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304. 312 In Scott v Williams [2002] SASC 424, Lander J disagreed, holding that because s.1317S(3) referred expressly to a contravention of s.588G, the section constituted an exclusive code for discretionary relief from liability under s.588M: at [101]-[103]. 313 With respect, I am unable to agree with the construction which Lander J has placed on s.1317S. It is clear that s.1318 applies to relieve directors and officers against liability deriving from their office not only under the general law but also for contraventions of the Corporations Act: see e.g. Deputy Commissioner of Taxation v Dick [2007] NSWCA 190, at [15]-[20] per Spigelman CJ. Section 1317S(7) requires that s.1318 be construed as if s.1317S did not exist. So read, s.1318 applies to relieve against liability for all contraventions of the Corporations Act, including contraventions of s.588G. That reasoning is, I think, supported by the remarks of Spigelman CJ in Dick, to which I have referred. Accordingly, I respectfully agree with the reasoning of Bergin J in Kenna & Brown at [156]. 314 However, I agree also with the observation of Lander J in Scott v Williams at [103] that ultimately it does not matter whether s.1318 applies concurrently with s.1317S to a contravention of s.588G because, under both sections, the Court will have regard to the same considerations. 315 The sections confer a very wide discretion. Their purpose is "to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are businessmen and women who act in an environment involving risk in commercial decision-making": Daniels v Anderson (1995) 37 NSWLR 438, at 525 per Clarke and Sheller JJA. 316 In the present case, the Liquidators concede that Mr Irving acted "honestly" in permitting Wines and Vineyards to continue trading during the Period, in the sense that he endeavoured to gain nothing personally by that course of action nor did he intend that creditors of the companies be cheated. However, they say that "honesty" for the purposes of the discretionary defences under CA s.1317S and s.1318 is not confined to a consideration of personal gain or conscious dishonest intent. 317 In Powell v Fryer (supra), the trial judge considered that "honesty", for the purposes of the discretionary defence to an insolvent trading claim, included the requirement that the director had acted bona fide in the interests of the company, including its unsecured creditors. He drew upon the principle expressed in cases such as Walker v Wimborne (supra). Those principles have been more recently expressed by Giles JA in Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191, at [162]: "At least where the company is facing insolvency as well as considering the company's interests the directors must consider the interests of its creditors: Walker v Winborne (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722. In Grove v Flavel (1986) 43 SASR 410 the Court said at 421 that the interests of creditors must be considered where to the knowledge of the directors there is a real and not remote risk of insolvency, and of course the risk includes the effect of the dealing in question. ( Grove v Flavel was disapproved in Spies v R (2000) 201 CLR 603 at [95] so far as it suggested a direct duty owed to and enforceably by creditors, but not as to this matter.) It is sufficient for present purposes that, in accord with the reason for regard to the interests of creditors, the company need not be insolvent at the time and the directors must consider their interests if there is a real and not remote risk that they will be prejudiced by the dealing in question." 318 With respect, I do not think that it is helpful or desirable to categorise failing to act in the interests of the company in all cases as dishonesty for the purposes of CA s.1317S(2)(b)(i) and s.1318(1). The descriptions "dishonesty" and "failing to act honestly" have a plain and pejorative meaning in ordinary usage. They carry connotations of fraud, shameful conduct and lack of integrity, particularly in relation to the acquisition of gain by unfair means. In McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, at [55]-[56], Kirby J said: "Dishonesty is an ordinary concept, not a term of art. It is, on that account, difficult to define in any comprehensive manner. However, dishonesty is a matter to be determined by reference to the mental state of the person whose conduct is in issue. …

[331]

Leaving aside the situation in which there is an honest claim of right, the question whether a failure to act is dishonest is usually answered by considering whether that failure was motivated by a desire to conceal the truth or to obtain an advantage to which the person concerned knew he or she was not entitled." 319 In everyday usage, "dishonesty" and "fraud" are intimate bedfellows. They are not so in legal usage. Historically, "fraud" has had a special meaning for Chancery lawyers. In Nocton v Lord Ashburton [1914] AC 932, at 954, Viscount Haldane LC said: "… when fraud is referred to in the wider sense in which the books are full of the expression, used in Chancery in describing cases which were within its exclusive jurisdiction, it is a mistake to suppose that an actual intention to cheat must always be proved. A man may misconceive the extent of the obligation which a Court of Equity imposes on him. His fault is that he has violated, however innocently because of his ignorance, an obligation which he must be taken by the Court to have known, and his conduct has in that sense always been called fraudulent, even in such a case as a technical fraud on a power. It was thus that the expression 'constructive fraud' came into existence. The trustee who purchases the trust estate, the solicitor who makes a bargain with his client that cannot stand, have all for several centuries run the risk of the word fraudulent being applied to them. What it really means in this connection is, not moral fraud in the ordinary sense, but breach of the sort of obligation which is enforced by a Court that from the beginning regarded itself as a Court of conscience." 320 Because the Courts of Equity in the United Kingdom and in New South Wales have administered the Companies Acts, it has been easy to transpose into the word "honest" in that legislation the special meaning attributed to "fraud" in Chancery parlance so that, in Powell v Fryer (supra), a failure to perform one's duty as a director, even if by genuine mistake or ignorance of the law, can be described as "failing to act honestly". 321 In my opinion, Courts should not describe as "dishonest" or "fraudulent" conduct which would not attract those descriptions in ordinary usage. A judge's choice of words in a judgment can blight a person's reputation. As Mason P has recently said extra-curially: "…when a judge's reasons are published they speak to the world at large. With the internet they pass instantaneously across the city and across the globe without hope of retraction.

[332]

The more strident a rebuke in a judgment the more likely it is to be picked up by the legal public, reported by the media (usually out of context), and viewed as a slight on the reputation of the person rebuked" : "Throwing Stones", Judicial Conference of Australia, 6 October 2007. 322 There is a great deal of difference between acting in discharge of an office without prudence, skill or judgment and acting dishonestly. Imprudence is not in itself dishonesty unless it is so reckless as to lead to the conclusion that the person could not have been making any genuine attempt at all to act in accordance with his or her duty: see Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1, at [419] (CA); Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, at 389B-H (PC). 323 If, following the suggestion in Powell v Fryer, I were to say that Mr Irving had failed to act honestly for the purposes of a defence under CA s.1317S(2)(b)(i) and s.1318, when all I had found was that, although with good intentions, Mr Irving had made errors of commercial judgment and had not paid sufficient regard to the interests of creditors of Wines and Vineyards, the phrase "failed to act honestly" would almost surely be picked up by the financial and other press. Mr Irving has a high profile in the business world. Being publicly branded as "having failed to act honestly", out of context, would be most hurtful, damaging and unfair to him and to anyone in his position. I emphasise that these observations are not occasioned by the consideration that Mr Irving has a high profile: I would have made the same observations about anyone, regardless of his or her profile in the community. 324 Lest it be thought that these observations betoken undue modern sensitivity (sometimes ironically termed "political correctness"), I point out that I do no more than echo the words of a more robust judge in a more robust age: "'Fraud', in my opinion, is a term that should be reserved for something dishonest and morally wrong and much mischief is, I think, done, as well as much unnecessary pain inflicted by its use where 'illegality' and 'illegal' are the really appropriate expressions" : per Wills J in Re Companies Act; Ex parte Watson (1888) 21 QBD 301, at 309. 325 In my view, when considering whether a person has acted honestly for the purposes of a defence under CA s.1317S(2)(b)(i) or s.1318, the Court should be concerned only with the question whether the person has acted honestly in the ordinary meaning of that term, i.e., whether the person has acted without deceit or conscious impropriety, without intent to gain improper benefit or advantage for himself, herself or for another, and without carelessness or imprudence to such a degree as to demonstrate that no genuine attempt at all has been to carry out the duties and obligations of his or her office imposed by the Corporations Act or the general law. A failure to consider the interests of the company as a whole, or more particularly the interests of creditors, may be of such a high degree as to demonstrate failure to act honestly in this sense. However, if failure to consider the interests of the company as a whole, including the interests of its creditors, does not rise to such a high degree but is the result of error of judgment, no finding of failure to act honestly should be made, but the failure must be taken into account as one of the circumstances of the case to which the Court must have regard under CA s.1317S(2)(b)(ii) and s.1318. 326 These conclusions are, I think, supported by authority. In Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, an insolvent trading claim brought against directors, Tadgell J had to consider a defence under a predecessor to CA 1317S and s.1318. His Honour considered whether the director's conduct was dishonest, in the sense of "involving some moral turpitude": at 196, 198. It is clear that his Honour did not regard the fact that the director had breached his duty to prevent insolvent trading and had failed to make out a defence as constituting dishonesty for the purpose of the exonerating provisions: ex hypothesi, a director would never be entitled to call upon the exoneration provisions unless he or she had breached his or her duty and had failed in all other defences: see at p.198. 327 Likewise, in Australian Securities & Investments Commission v Vines (2005) 56 ACSR 528, Austin J, following Friedrich, considered that "honesty" for the purpose of the sections meant "without moral turpitude": at [43]. His Honour's conclusion as to the meaning of honesty was upheld in the Court of Appeal: Vines v Australian Securities & Investments Commission (2007) 62 ACSR 1, at [568] per Ipp JA and at [797], [800] per Santow JA. 328 As I have recounted above, Mr Irving was aware at all times during the Period that the debts of a large number of trade creditors of Wines and Vineyards continued to age. Only the most insistent creditors were paid; the rest had to take their chances on the Reynolds Group being able to secure a favourable settlement with the ATO and then hold out long enough to sell assets, re-finance and, hopefully, begin to trade more profitably. 329 As I have discussed above at para 266ff, it is sometimes a difficult decision for a director of a trading corporation suffering from liquidity problems to decide whether, and when, to abandon hope of a change in the company's fortunes and to summon the administrators. There are often pressing interests involved in the decision: the jobs of employees will be lost, the investment of shareholders will evaporate, and a promising venture in which a great deal of personal effort may have been expended will end in failure. On the other hand, the livelihood of creditors whose businesses depend on reasonably prompt payment may also be ruined if a company continues to trade while insolvent. When confronted with the necessity of making a decision involving these factors, a director cannot afford to procrastinate or to avoid confronting realities. He or she must ask and honestly answer the hard questions: see paras 269ff above. 330 In the present case, for the reasons which I have already given, I am unable to accept Mr Irving's submission that at all times during the Period he reasonably expected that Wines and Vineyards were able to pay their debts as they fell due, in reliance on assurances from Mr Spicer, Mr Martini or Mr Fryer. He knew that the companies were not paying their debts as they fell due and he had no more than a hope that they would soon be able to do so. For that reason, his defences under CA s.588H(2) and (3) have failed. But it is at this point that the Court embarks on the consideration of the discretionary exoneration defence under CA s.1317S and s.1318: given that a breach of s.588G(2) is proved, given that Mr Irving acted honestly, and given that he had a difficult commercial decision to make, should he be exonerated in all the circumstances of the case? 331 Experienced company directors such as Mr Irving would appreciate that, in some cases, it is not commercially sensible to summon the administrators or to abandon a substantial trading enterprise to the liquidators as soon as any liquidity shortage occurs. In some cases a reasonable time must be allowed to a director to assess whether the company's difficulty is temporary and remediable or endemic and fatal. The commercial reality is that creditors will usually allow some time for payment beyond normal trading terms, if there are worthwhile prospects of an improvement in the company's position. The ATO, likewise, will often defer recovery proceedings in certain circumstances, as the evidence shows. In the present case, the Bank issued a Notice of Default under the Facility Agreement in October 2002, but it did not immediately call in its debt. 332 In the present case, as at the beginning of October 2002, Mr Irving had received advice from Mr Fryer and Mr Jessup that Deloitte would be making a detailed submission to the Commissioner and that Wines had at least a reasonable prospect of achieving a favourable settlement. I accept that reasonable commercial people could decide to wait to see whether the written submission lodged by Deloitte with the ATO on 15 November 2002 produced a quick and positive response such as to enable an asset sale programme and a restructuring to restore solvency to the Reynolds Group. I accept that if a quick and positive response from the ATO had been received, the Group could have set about a restructuring which very probably would have restored solvency. I accept that as at 15 November 2002 there was no reason to predict that a response from the ATO would be negative and might be up to eight months in coming. 333 On 6 December 2002, Mr Jeffs informed Mr Fryer and Mr Jessup that a decision by 15 January 2003 would be difficult because many people in the ATO would be on leave over Christmas. I accept that reasonable commercial people could decide to wait until mid-January 2003 to see whether the ATO would then be able to say with reasonable certainty when a decision could be expected. 334 By the time of Mr Irving's meeting with Mr Fryer on 22 January, it was clear that no progress had been made. Mr Fryer would give no letter of comfort as to Wines' liability or the prospects of settlement. Mr Irving appreciated that he could not simply wait passively until the ATO responded, however long it took: he had to do his best to encourage a quick decision by talking to Mr Evans. He arranged a special meeting between himself, Mr Evans and other ATO officers on 5 February 2003. However, at the end of that meeting, Mr Irving formed the view that it could take up to ninety days more for the ATO to make its decision. 335 In my opinion, it was on 5 February 2003 that Mr Irving ought to have appreciated that there was no reasonable prospect of the Reynolds Group resolving in the short term its dispute with the ATO, and of Wines and Vineyards being able to realise assets quickly enough to pay their debts as they fell due. He ought to have appreciated that debts incurred in October 2002 were already some ninety days overdue and would probably be at least 180 days overdue by the time a decision by the ATO was made. He ought to have realised that there could be no reliable prediction that the decision would be favourable. But, even if the decision were favourable, a further, possibly considerable, time would have to elapse before funds from asset sales and refinancing could flow to the companies. 336 In that situation, in my opinion, Mr Irving should have realised that there was no way of forming a justifiable view that Wines and Vineyards could pay the debts already incurred and about to be incurred in anything like the time frame, or with anything like the degree of probability, that creditors would have allowed when they supplied goods and services. One might ask whether a prospective creditor would have extended credit to Wines and Vineyards on 5 February 2003 if it had known what Mr Irving then knew about the chances of a favourable decision from the ATO and when the cash from realisation of assets might begin to flow. I do not think that many would have chosen to take the gamble. 337 When he came away from the meeting with Mr Evans, Mr Irving should immediately have recommended to the Boards the appointment of administrators. As Mr Irving had primary responsibility for negotiation with the ATO and as he was obviously held in high regard by the other Directors, I have no doubt that had he recommended the appointment of administrators on 5 February, the Group would have been in administration by 6 February 2003. But even if the other Directors had rejected his recommendation and out-voted him, Mr Irving would have been exonerated from liability because he had done what he could to procure cessation of insolvent trading. 338 As I have noted, the Liquidators do not suggest that, in permitting Wines and Vineyards to continue trading during the Period, Mr Irving acted deceitfully or with conscious impropriety or in order to gain any advantage for himself or others. On the contrary, I find that at all times Mr Irving sought and considered the advice of highly competent professionals: not only Mr Spicer as the Group's Chief Financial Officer and Mr Martini as a person experienced in the wine industry, but Messrs Fryer and Jessup whose experience and competence are unquestioned. Mr Irving formed a view and exercised his commercial judgment as to the prospects of Wines being able to resolve its dispute with the ATO in time to restore solvency to the Reynolds Group. That judgment was made in very difficult circumstances; it was made in the knowledge that a large and potentially profitable public company could be placed in liquidation simply because the ATO did not seem to be dealing with a commercial settlement proposal with any degree of expedition. What if the administrators were summoned and the Reynolds Group collapsed, only to be told days later that the ATO agreed to settle the dispute on favourable terms? It is not hard to envisage the Directors' sense of frustration in such circumstances. Mr Irving's commercial judgment proved erroneous, in my view, but I cannot say that it was made recklessly. 339 I conclude that, in failing to prevent Wines and Vineyards trading throughout the Period, Mr Irving acted honestly, for the purposes of a defence under CA s.1317S(2)(b)(i) and s.1318. I find that up to the conclusion of his meeting with Mr Evans on 5 February 2003, but only up to that time, Mr Irving acted as other reasonable, commercially experienced directors might have acted in waiting to see when a decision from the ATO could be expected with some certainty. I would, therefore, hold that, having regard to the conduct of Mr Irving and to the circumstances of the case at the time of his contravention of s.588G(2), Mr Irving should be wholly relieved, pursuant to CA s.1317S and s.1318, of liability for contravention of CA s.588G in respect of debts incurred by Wines and Vineyards from 1 October 2002 up to and including 5 February 2003, but no further. 340 I now turn to the other circumstances of the case, extraneous to the conduct of Mr Irving, in order to determine whether Mr Irving ought fairly to be excused in respect of any liability at all. Is it relevant that Mr Irving has no D&O insurance

[334]

343 I return to the question which I raised at the commencement of the judgment and which I consider to be of great difficulty. Is one of the circumstances relevant to the exercise of the Court's discretion under CA s.1317S and s.1318 the fact that possibly the whole, or at least the vast majority, of the fruits of the Insolvent Trading Claim will go, not to those who have suffered, namely the creditors, but rather to those who have made an investment in conducting the litigation: the litigation funder and the Liquidators. 344 Mr Slattery QC says that I should not even entertain this question. He submits that the circumstances which the Court has to consider in exercising its discretion under CA s.1317S and s.1318 are limited to those relating to the commission of the act giving rise to the liability from which exoneration under the sections is sought. I am unable to accept this submission. The making of orders under the section is discretionary and the Court may take into account a wide range of factors: Australian Securities & Investments Commission v Adler (2002) 42 ACSR 80, at 97-99 per Santow J (as he then was); Australian Securities & Investments Commission v Vines (2005) 56 ACSR 528, at [50] per Austin J. 345 The Liquidators of Wines and Vineyards were appointed at the second meetings of creditors of the companies held pursuant to CA s.439A on 25 November 2003. On that day, Committees of Inspection comprising a total of five persons were appointed. On the same day, the Committees jointly approved an agreement between the Liquidators and Insolvency Litigation Fund Pty Ltd, a subsidiary of IMF (Australia) Ltd to fund the costs of further investigations and public examinations. This agreement is not in evidence. For convenience, I will refer to the litigation funder as "IMF". 346 The Minutes of meetings of the Committees of Inspection of Wines and Vineyards for 23 February 2006 record the following: "The Chairman stated that the Insolvency Litigation Fund Pty Ltd had offered to provide additional funding in relation to the insolvent trading litigation. A draft agreement was provided to the Committees on 22 February 2006 which proposed that the litigation funder's success fee be increased to 60% post trial or 50% if settled before trial. The Chairman highlighted that Stephen Vaughan, of the Liquidators office, negotiated a reduced pre-trial success fee of 45%. The Chairman then negotiated a success fee of 45% under a pre and post-trial scenario.

[362]

Q. That was pursuant to a contract for a funding which you entered into with them? A. Yes, yes." 349 I found Mr Hall's evidence troubling. When I asked him whether he had done an exercise to work out what benefit to creditors of the companies the proceedings could have had and whether the proceedings were worthwhile, Mr Hall gave a lengthy, non-responsive answer. He referred to the possibility of taking other proceedings and that IMF may possibly fund those other proceedings. As appears later, no such other proceedings have been commenced, and IMF has not entered into any agreement to fund any other proceedings. 350 However, I pressed the question. I regarded myself as entitled to do so, not only to clarify what Mr Hall had been saying, but also because Mr Hall, as a liquidator, is administering this liquidation supposedly in the interests of creditors and in the public interest. The Court may, on its own motion, enquire into the conduct of liquidators: CA s.536(1)(a). In the light of what Mr Hall had been saying, it seemed to me that I should understand why the proceedings were prosecuted, particularly when the Liquidators had never sought directions from the Court as to whether they were justified in doing so. 351 When I asked Mr Hall again how many cents in the dollar return to creditors he had estimated as a result of the successful prosecution of these proceedings, he said "Again it would be relatively small" before once more embarking a non-responsive answer. He concluded by saying: "… so the ongoing pursuit of this matter is funded by IMF so the exercise, as you are pointing out, clearly in terms of recovery is first for the benefit of the funding creditor" (i.e. IMF). 352 I have no doubt that Mr Hall and his legal representatives were able to see that I was troubled by what had been revealed. Later in the trial I was informed that the funding agreement with IMF had been "renegotiated". Ultimately, the Liquidators tendered their Annual Report to Creditors dated 22 February 2007: Exhibit P9. The renegotiated terms of the funding agreement were explained in outline in that Report. 353 At page 2 of the Report the following appears: "At a joint meeting on 11 March 2004 the Committees of Inspection considered a further agreement with IMF to obtain funding for recovery actions in respect of insolvent trading claims against directors, unfair preferences claims and ancillary actions to preserve the directors' assets. The likely return to creditors from such actions was discussed. Notwithstanding the prospect of a low or nil return, the Committees of Inspection approved the further funding agreement with IMF, it being recognised that any recovery actions would not require a funding commitment from creditors but that creditors had an opportunity to benefit from any successful outcome." 354 This statement shows that as early as March 2004 the Liquidators recognised that, with the "benefit" of funding from IMF, the present proceedings could result in a nil return to creditors. Nevertheless, the Liquidators and the Committees of Inspection seemed to take the view that, as the litigation could not proceed without a litigation funder, it would be a windfall for creditors if anything at all came to them as a result of the funding agreement with IMF. 355 The Report showed that as at December 2006, the Liquidators were owed $322,727 in respect of unpaid fees as Administrators, and $437,719 in respect of unpaid fees as Liquidators, a total of $760,446. Total time costs of $1,143,346 had been approved by creditors, but only $604,150 of Administrators' and Liquidators' fees had been paid so far. 356 The Report continued: "It was intended that outstanding costs be recouped from any proceeds of recovery actions including the Proceedings, after making the payments required under the funding agreement, however any recoupment has now been capped pursuant to an amendment of the funding arrangements, as discussed in (a) below.

[378]

$1,350,000 for the Liquidators' costs of these proceedings recovered against the Defendants. 361 After deducting from the total amount recovered, IMF's costs of the proceedings, IMF's "success" fee of 50% of the balance, and the total costs of adjudicating the admission to proofs of debt, the amount available for distribution to creditors would be $3,726,844.64. Creditors would receive $0.0285 in the dollar of their claims, i.e., less than three cents. The largest creditor, whose debt is $19,128,464, would receive $545,992; a creditor whose debt was $100,000 would receive just over $2,800. 362 The medium return case assumes recovery from the insolvent trading claim of $3,200,000. Full recovery from the ATO is assumed. Interest is calculated accordingly. The costs recovery amount remains the same. The estimated return to creditors is $0.0163, i.e. less than two cents in the dollar. The largest creditor would receive $312,671 and a creditor whose debt was $100,000 would receive $1,632. 363 The lowest return case assumes recovery from the insolvent trading claim of $825,000. Full recovery from the ATO is assumed. Interest is calculated accordingly. The costs recovery amount remains the same. The estimated return to creditors is $0.0040, i.e. less than half a cent in the dollar. The largest creditor would receive $77,332, and a creditor whose debt was $100,000 would receive $403. 364 If the insolvent trading claim results in recovery of a judgment of less than $825,000, the creditors receive nothing. 365 I have held that Mr Irving's discretionary defence under CA s.1317S and s.1318 succeeds to the extent that he should not be liable under CA s.588M for debts incurred by Wines and Vineyards up to 5 February 2003. He is therefore liable for debts incurred from 6 February 2003 to 4 August 2003. The amount of those debts, and whether any of them were paid after 4 August 2003, remains to be quantified, as I shall explain shortly. 366 It is clear that, if my decision is correct, Mr Irving will not be liable for debts incurred in four months out of the total of ten months of the Period. The judgment ultimately entered against him will be substantially less than the recovery in the highest return case shown in the schedule, i.e. creditors would get less than 2.85 cents in the dollar. However, it is impossible to say at this stage whether the return to creditors will be better or worse than the medium return case, i.e. whether they would get more or less than 1.3 cents in the dollar. 367 From the fact that the Committees of Inspection were informed on 11 March 2004 that, under the funding agreement with IMF, there could be a nil return to creditors, and from Mr Hall's evidence to which I have referred above, I infer that the possible returns to creditors shown in the schedule were known, or could readily have been calculated, by the Liquidators before these proceedings were commenced. 368 Mr Jackman SC submits that "these proceedings are a money making exercise for the litigation funder, the Liquidator and his lawyers, rather than seeking to compensate creditors in any meaningful way": written submissions para 164. He submits that the Court can, and should, take this circumstance into account in exercising its discretion under CA s.1317S and s.1318. Why should Mr Irving personally suffer a heavy judgment, he says, when he has been guilty, not of dishonesty, but of error of judgment and those who have suffered, the creditors, get very little or nothing in the result? 369 The facts of this case raise difficult questions:

[392]

if a funder, driven by profit motive, attempts to interfere with, or manipulate due process in the litigation or if funder's lawyers, for the same reason, commit breaches of their professional duties, the Court has sufficient power available to cure those ills without staying the litigation itself. 373 The views of the majority in Campbells do not yet command universal acceptance. The minority Judges, Callinan and Heydon JJ, are eloquent in their condemnation of the concept of litigation funding as merely another form of business investment. At [266], their Honours say: "Further, it is not the law that proceedings funded by a litigation funder can only be stayed on the ground of abuse of process if there is an actual corruption, or a tendency to corruption, of the processes of the court. The approach stated by the Court of Appeal is much stricter than, and does not accord with, that which is suggested by the expression 'abuse of process'. The expression is a wide one, capable of application in very diverse circumstances. But, in general, the aspect of 'abuse of process' which is relevant for present purposes is that the process of the court is abused when it is employed for some purpose other than that which it is intended by the law to effect. The justifications for the court's intervention against this kind of abuse of process as exemplified by some forms of litigation funding are diverse. Court process is expensive for the state to supply and for litigants to participate in. It is coercive and otherwise injurious both to litigants and to third parties and should not be employed beyond legitimate necessity. To the extent that people with urgent claims are held out from having them heard by actions in abuse of process, the latter actions should be stayed so that the former may be heard. Normal litigation is fought between parties represented by solicitors and counsel. Solicitors and counsel owe duties of care and to some extent fiduciary duties to their clients, and they owe ethical duties to the courts. They can readily be controlled, not only by professional associations but by the court. The court is in a position to deploy, speedily and decisively, condign and heavy sanctions against practitioners in breach of ethical rules. The appearance of solicitors is recorded on the court file. Institutions like Firmstone & Feil, which are not solicitors and employ no lawyers with a practising certificate, do not owe the same ethical duties. No solicitor could ethically have conducted the advertising campaign which Firmstone & Feil got Horwath to conduct. The basis on which Firmstone & Feil are proposing to charge is not lawfully available to solicitors. Further, organisations like Firmstone & Feil play more shadowy roles than lawyers. Their role is not revealed on the court file. Their appearance is not announced in open court. No doubt sanctions for contempt of court and abuse of process are available against them in the long run, but with much less speed and facility than is the case with legal practitioners. In short, the court is in a position to supervise litigation conducted by persons who are parties to it; it is less easy to supervise litigation, one side of which is conducted by a party, while on the other side there are only nominal parties, the true controller of that side of the case being beyond the court's direct control. Finally, the function of court proceedings is to provide a means of quelling real and active controversies that have arisen between persons who are unfortunate enough to have fallen into disputes with each other and that exist independently of and anterior to the commencement of the proceedings. The purpose of court proceedings is not to provide a means for third parties to make money by creating, multiplying and stirring up disputes in which those third parties are not involved and which would not otherwise have flared into active controversy but for the efforts of the third parties, by instituting proceedings purportedly to resolve those disputes, by assuming near total control of their conduct, and by manipulating the procedures and orders of the court with the motive, not of resolving the disputes justly, but of making very large profits. Courts are designed to resolve a controversy between two parties who are before the court, dealing directly with each other and with the court: the resolution of a controversy between a party and a non-party is alien to this role. Further, public confidence in, and public perceptions of, the integrity of the legal system are damaged by litigation in which causes of action are treated merely as items to be dealt with commercially." 374 The minority judges say that the following factors indicated that the litigation in Campbells was an abuse of process:

[398]

on the other hand, IMF will, if successful, profit to the tune of millions of dollars. 376 Many judges have voiced strong objection to the notion of claims to justice being treated as investment opportunities. Knight Bruce LJ called it "merchandising in quarrels" and "huckstering in litigation discord": see Reynell v Sprye (1852) 42 ER 710, at 720. To such judges, justice is a balanced concept in which the rights of the injured party are vindicated in a manner which is fair also to the wrongdoer and goes no further than is necessary to remedy the injury done. To introduce a profit motive into justice is to tip the scales, so that one side is encouraged to think that it may gain more than just restoration of the position had the injury not been done. 377 When not only litigation funders but law firms themselves are listing on the Stock Exchange, the day will probably not be long in coming when one will be able to trade in "litigation derivatives". Had these proceedings commenced a few years hence, one might have been able to speculate quite profitably in "Reynolds Futures". According to the reasoning of the majority in Campbells, no policy of the law would be offended. However, I question whether defendants would accept as fair and balanced a system of justice which encourages speculative trading in the prospect of their ruin. 378 It is truly said that hard cases make bad law. The facts of this case may be thought to be more extreme even than those in Campbell in showing how a mammoth piece of litigation can be instigated, perhaps to the ruin of a defendant, with negligible "access to justice" for those who have suffered a wrong but with lucrative reward for those who make a business of investing in law suits. 379 The majority judgment in Campbells requires that I hold that the circumstances of the litigation funding in this case and the derisory return to creditors afford no right of complaint to Mr Irving. He cannot say that the proceedings are an abuse of process. He cannot say that the policy of the law discountenances such a proceeding. He cannot say that the law pays any regard to his complaint that the proceeds of a judgment against him will not go to those persons whom the legislature intended to be the beneficiaries of the suit. For these reasons, I cannot hold that a nil or negligible return to creditors as a result of successful prosecution of a claim under CA s.588M may be taken into consideration as affording a discretionary defence under CA s.1317S and s.1318. The Court's ability to control litigation funding

[399]

380 What the majority judgment in Campbells tells me I can and should do, however, is to exercise the powers of the Court if I see that there have been abuses of "the other procedural and substantive elements of the Court's processes" or if officers of the Court - liquidators and lawyers - have not discharged their responsibilities as they should have done: Campbells at [93]. 381 I am gravely concerned at the extent and cost of this litigation and that the Liquidators seek to throw the whole burden of those costs onto the Defendants. The case has occupied seventeen days of Court time; there are twenty-five volumes of exhibits (most pages never referred to). There are hundreds of pages of written submissions (all of very high standard, as one would expect of the very able Counsel who have appeared in this case). It is little wonder that the Liquidators' costs of the proceedings will be in the order of $2M. 382 At the core, however, the issues in these proceedings are not unduly difficult or complex. Insolvent trading cases are not rare in this Court. The law is fairly well settled. The position of Wines and Vineyards appears from their financial statements most, if not all, of which the Liquidators had collated by the time they produced their first Report to Creditors in 2003. The Period under investigation is only about ten months. What the Directors knew about the financial position of Wines and Vineyards and what Mr Irving was discussing with the ATO and Reynolds Group's advisers are fairly straightforward questions of fact and are mostly evident from Board Minutes, e-mails and other correspondence. What legal consequences flow from the Directors' knowledge of the circumstances of the Group should not have taken long to debate. 383 If the Liquidators had had only $500,000 to spend in the costs of this litigation, the trial would have been concluded in five days or less, without the masses of exhibits, and the result would doubtless have been the same. 384 What has happened, it seems, is that the complexity and cost of this litigation has expanded to fill the funding budget available. $2M has been spent to recover a possible maximum of $6M. In my view, this expenditure is quite out of proportion. 385 As I have earlier noted, the Liquidators must have appreciated before they commenced these proceedings what the cost of the proceedings was likely to be and what the return to creditors was likely to be. They should have approached the Court for directions under CA s.511(1)(a) as to whether they were justified in commencing the litigation in view of the terms of the proposed funding agreement with IMF, the likely return to creditors even if the proceedings were wholly successful, and the cost of the proceedings generally. Applications to the Court by liquidators for directions as to whether funded litigation should be commenced are frequent: see e.g. Movitor Pty Ltd (in liq) v Sims (1996) 64 FCR 380; Re Tosich Construction Pty Ltd (1997) 73 FCR 219; Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583; Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357; Re Imobridge Pty Ltd (in liq) (No 2) [2000] 2 Qd R 280; Re ACN 076 673 875 Ltd (in liq) (2002) 42 ACSR 296; Anstella Nominees Pty Ltd v St George Motor Finance (2003) 21 ACLC 1,347; Re AP & PJ King Pty Ltd (in liq) [2006] NSWSC 315; Stewart, re Newtronics Pty Ltd [2007] FCA 1375. 386 In such applications ASIC may be given notice so that it may make its own submissions. The terms of the funding agreement are usually disclosed to the Court although not necessarily published in the judgment. As Austin J has identified in ACN 076 673 875 and in AP & PJ King, the factors which the Court may take into account in determining whether the liquidator is justified in proceeding include:

[403]

The list is certainly not exhaustive. It will be seen that in such an application the effect of the funded litigation on the proposed defendant is not left out of consideration. The Court is essentially assessing whether the interests of creditors are likely to be served by the funded litigation proceeding and whether the proposed litigation will be conducted in a way consistent with justice to all concerned. 387 As Gleeson CJ said extra-curially in "Some Legal Scenery" (Judicial Conference of Australia, 5 October 2007): "Litigation funding is now with us. Entrepreneurial activity in this respect raises issues that have come before the courts. It is not in all respects attractive, but subject to certain controls it may be a necessity. There is a need for some pragmatism about this, because the cost of access to justice is essentially a practical matter. Yet, a basic problem of access to civil justice is the remorseless mercantalisation of legal practice. This reflects the dominance of the culture of the market, with its tendency to reduce society to the single dimension of producers and consumers." 388 A liquidator proposing to enter into a litigation funding agreement should apply to the Court for directions as a matter of course: the application enables the Court to control, so far as it can, the use of litigation funding so that it does not destroy the very system of justice upon which it feeds. The law countenances litigation funding only because it provides access to justice for those who would otherwise be denied justice. If a liquidator's funding arrangements provide no more than a token benefit to the creditors and are in truth a means for the litigation funder and the liquidator to profit handsomely, the liquidator should be directed not to proceed. 389 In the present case, the Liquidators have never sought the directions of the Court as to whether they were justified in undertaking or continuing with the funded litigation in the circumstances which I have recounted. 390 The Court does not know whether ASIC might have regarded the alleged contraventions of CA s.588G(2) as warranting prosecution for a civil penalty order. If ASIC had been willing to prosecute so that breaches of the Corporations Act would not go unpunished, the Liquidators and the creditors might have been able to obtain compensation under CA s.588J or s.588K, with minimal expense. On the other hand, ASIC may have taken the view that the contraventions were the result of honest errors of judgment and did not warrant prosecution. The Court would have been assisted by ASIC's views in giving directions to the Liquidators. The Court might have concluded that if ASIC did not consider that the contraventions were so serious and culpable as to warrant prosecution in all the circumstances, then the Liquidators were not justified in commencing proceedings for the benefit of the litigation funder and themselves, and not for the benefit of the creditors. 391 The Court is now presented with the Liquidators' expenditure in these proceedings as a fait accompli. That does not mean, however, that the Court is powerless to correct what has happened. CPA s.98 provides: " Courts powers as to costs

[405]

(4) In particular, at any time before costs are referred for assessment, the court may make an order to the effect that the party to whom costs are to be paid is to be entitled to: (a) costs up to, or from, a specified stage of the proceedings, or (b) a specified proportion of the assessed costs, or (c) a specified gross sum instead of assessed costs, or (d) such proportion of the assessed costs as does not exceed a specified amount." 392 In applying the wide discretion conferred by CPA s.98 the Court must have regard to the principle that the purpose of the Act and the Rules is to promote the just, quick and cheap resolution of the real issues in proceedings in such a way that the cost to the parties is in proportion to the importance and complexity of the matter in dispute: CPA s.56(1), (2), s.60. It is the cost/benefit to the parties themselves which the Court must promote, not the cost/benefit to the parties' litigation funders. 393 A liquidator who enters into a litigation funding agreement and promotes expensive litigation resulting in little or no return to creditors without first seeking the Court's direction that he or she is justified in doing so runs the risk that the Court will, at an appropriate stage in the proceedings and of its own motion, exercise the power to enquire into the liquidator's conduct conferred by CA s.536(1)(a). 394 Liquidators appointed by the Court are officers of the Court and all liquidators act in the public interest; accordingly, the Court has not only the power, but also the duty, to see that liquidators are performing their duties in a prudent and proper manner: see, e.g. Re Fermoyle Pty Ltd (in liq); Commonwealth of Australia v Brown (1982) 62 FLR 413; Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434, at 438; Re Love (2003) 44 ACSR 367; Commissioner for Corporate Affairs (Vic) v Harvey [1980] VR 669, at 689. The Court need not wait for a complaint from a party to the litigation or from a creditor before exercising its power to investigate a liquidator's conduct, as s.536(1)(a) makes clear. The Court should be ready to exercise the power whenever it can see for itself conduct by a liquidator which calls for explanation. 395 A liquidator is appointed to salvage as much as possible for the benefit of creditors. If a proposed course of action - whether it be a legal proceeding or a commercial transaction - is not likely to produce a worthwhile benefit for creditors, the liquidator should not undertake it simply because it will generate enough to pay the liquidator's fees in undertaking that very transaction or litigation - a practice which is familiarly known in the market place as 'churning and burning'. 396 As I have recounted above, when Mr Hall was asked how $2M in costs had come to be spent for so little benefit to the creditors, he said: "It is an extraordinary amount of costs. It does not make me feel particularly comfortable about it but that is the position we find ourselves in and I found myself in this position for the last year or so …". At the appropriate time in the proceedings - i.e. when I am dealing with costs - I will wish to make some further enquiry from Mr Hall, in exercise of the Court's power under s.536(1)(a). Without limiting the range of enquiry, I would wish to know from Mr Hall why he was uncomfortable about the costs expenditure and why he did not apply to the Court for directions to guide him. I would wish to know why it has been thought necessary to spend up to $2M in costs when, from what I can see so far, a quarter of that sum might well have been sufficient to prosecute the Liquidators' case properly. 397 Mr Hall will have the fullest opportunity, by evidence and submissions, to meet the concerns which I express. It may be that the answers I receive will cast the facts in a different light and will show that the Liquidators' costs have been reasonable in view of the positions adopted by other Defendants. However, if I come to the conclusion that the Liquidators' expenditure on costs was unjustified and improper, I will give consideration to whether a costs limiting order should be made under CPA s.98(4). QUANTUM OF DAMAGES

[428]

Clause 38.1 of Wines' Constitution is to exactly the same effect but, obviously, applies to all Directors. 411 Mr Slattery's first submission is that Clause 2.1(a)(iii) of the Deed and Clause 38.1 of the Constitution do not indemnify Mr Irving in respect of the Commissioner's claim under CA s.588FGA(2) because Mr Irving's liability to the Commissioner "did not arise out of conduct in good faith", as required by the provisions of the Deed and the Constitution. That is so, Mr Slattery says, because Mr Irving had actual knowledge that Wines was insolvent at the time that the preferential payments were made to the Commissioner; permitting Wines to trade with actual knowledge of insolvency cannot be "conduct in good faith". 412 In my view, "good faith" for the purposes of Clause 2.1 of the Deed and Clause 38.1 of Wines' Constitution means "honestly" in the sense that I have described in paragraphs 318 to 327 above. I have held that, although Mr Irving knew that Wines was unable to pay its debts as they fell due from October 2002 onwards, he acted honestly and reasonably up to 5 February 2003 in permitting Wines to trade. From 5 February 2003 onwards he acted honestly, but not reasonably, in permitting the companies to trade so that his defence under CA s.1317S and s.1318 succeeded only up to 5 February 2003. 413 While I have held that Mr Irving did not act reasonably in all of the circumstances from 5 February 2003 onwards, I cannot find that that failure was so reckless and of such a character that I can describe it as dishonest or lacking in good faith. It was an error of judgment - a serious error but not a dishonest one. I cannot find that Mr Irving's liability to the Commissioner arose out of conduct which was not in good faith. 414 Accordingly, I conclude that Clause 2.1(a)(iii) of the Deed and Clause 38.1 of Wines' Constitution indemnify Mr Irving in respect of the Commissioner's claim against him under CA s.588FGA(2). Whether set off available under CA s.553C

[440]

if Mr Irving was contingently liable for the debt to the Commissioner, Wines was contingently liable to indemnify him under the Indemnity Deed and under Clause 38.1 of the Constitution. 419 I will deal first with Mr Slattery's submission that there have been no mutual dealings between Wines and Mr Irving such as to engage s.553C. 420 In Gye v McIntyre (1991) 171 CLR 609, the High Court considered s.86 of the Bankruptcy Act 1966 (Cth) which is, so far as is relevant, in the same terms as CA s.553C. In a unanimous judgment, the Court observed that the object of these sections in insolvency law was to do "substantial justice" between the parties, and that the provisions should be given "the widest possible scope" in order to achieve that object: at 619. 421 In Gye, a creditor had a debt which would have been provable against the bankrupt's estate and the bankrupt's estate had a claim against the creditor for damages for fraudulent misrepresentation. The estate's claim for damages would not have been provable in the creditor's bankrupt estate had the creditor gone bankrupt. The question was whether the "mutuality" envisaged by s.86 of the Bankruptcy Act required that both the bankrupt's claim and the creditor's must be provable in a bankruptcy. The High Court held (at 628) that while the creditor's claim had to be provable, the bankrupt's claim did not have to be provable. This decision was applied and explained by the High Court in Coventry v Charter Pacific Corporation Ltd (2005) 80 ALJR 132, at [54]. 422 In the present case, Mr Irving's contingent claim against Wines, being founded on the Indemnity Deed entered into prior to Wines' liquidation, would be admissible to proof in Wines' liquidation: CA s.553(1). However, Wines' claim under CA s.588M(2) for insolvent trading, being a claim for unliquidated damages arising from a liability imposed by statute, would not be a provable debt if Mr Irving went into bankruptcy: Bankruptcy Act 1966 (Cth) s.82(2). Nevertheless, as held in Gye, the mutuality requirement of CA s.553C is not lacking; that is so because Mr Irving's claim is provable in Wines' liquidation. "Mutuality", as required by s.553C, requires that the claims to be set off are between the same parties, that the parties be indebted in the same interests or capacities, and that both claims ultimately sound in money. Whether the claims are similar in nature is irrelevant: Gye at 623; Re West End Networks Ltd (in liq) [2004] 2 AC 506. All of the requirements for mutuality are satisfied in the present case. 423 Finally, Mr Slattery says that there have been no "dealings" between Wines and Mr Irving for the purpose of the section: whatever Mr Irving has done which has given rise to his claim against Wines under the Indemnity Deed was done by him as a director of Wines, that is, as Wines' agent or alter ego - and that does not constitute a "dealing" between Mr Irving and Wines. 424 The answer to this submission is given succinctly in the following passage from the joint judgment in Gye (at 625): "The word [dealings] is, none the less, one of very wide scope which embraces far more than a legally binding contract or 'deal'. Even if it be correct to construe 'dealings' in s 86 as confined to a commercial or business setting, it covers the communings, the negotiations, verbal and by correspondence, and other relations which occur or exist in that setting. Whatever may be the outer limits of the word 'dealings' in s 86, it encompasses, as a matter of ordinary language, commercial transactions and the negotiations leading up to them." 425 "Mutual dealings" for the purposes of CA s.553C is a phrase of the widest import. Its construction is not to be limited by strict legal analysis of relationships. A common sense and pragmatic approach is required in order to do substantial justice, which is the very purpose of the section. A director acting in the course of his or her duties as such is "dealing" with the corporation in this pragmatic sense, within the meaning of the section. Likewise, the corporation is "dealing" with the director even though, as an incorporeal creature, it is passive in the relationship. For the purposes of the section, in this pragmatic sense the "dealing" between the director and the corporation is "mutual". 426 Mr Slattery's second submission is that Mr Irving is not entitled to a set off because "at the time of giving credit to the company or at the time of receiving credit from the company" he had notice of the fact that Wines was insolvent: CA s.553C(2). Mr Slattery submits that the time of giving or receiving credit for the purposes of the present case is the time when Mr Irving incurred contingent liability to the Commissioner, i.e. the time when the preferential payments were made by Wines. Mr Slattery says, correctly, that at that time Mr Irving knew that Wines was insolvent. 427 Mr Slattery has cited no authority in support of his submission. 428 The words of CA s.553C(2) are apt to a dealing involving a purchase, sale or other transaction in which credit for a sum of money is given by one party to another. However, the section is intended to have a far wider application than to such straightforward dealings. As the decision in Gye makes clear, "dealings" for the purposes of the section may not involve the exchange of any goods or services, let alone an exchange for valuable consideration. Accordingly, "giving credit" and "receiving credit" must be construed so as to find meaning in the particular context of any "mutual dealing" which is within the contemplation of the section. 429 In my opinion, the time of "giving credit" by Wines in the present case was when a contractual liability to indemnify Mr Irving was first undertaken by Wines pursuant to the Indemnity Deed, i.e. 5 September 2001. That Deed was intended to establish a contingent entitlement on the part of Mr Irving which could crystallise into a present entitlement on the occurrence of all kinds of unforseen events during the course of his directorship, some possibly occurring as a result of actions taken by him, some possibly occurring independently of any act or omission on his part. The only qualification to his entitlement under the Deed was that he had acted in good faith. 430 There is no suggestion that at the time that Mr Irving entered into the Indemnity Deed he knew that Wines was insolvent. 431 For these reasons, I hold that Mr Irving is entitled, pursuant to the Indemnity Deed and under CA s.553C, to set off against his liability to Wines under s.588M(2) the amount which he is required to pay to the Commissioner under CA s.588FGA(2). Set off under CPA s.21

[452]

437 I will deal first with the issues which are determined by the findings I have already made. 438 I have found that the Liquidators have proved the insolvency of Wines and Vineyards throughout the Period. This ground of Mr Martini's defence fails. 439 In the course of consideration of Mr Irving's defences, I have reviewed the facts known to the Boards of both companies as to the inability of Wines and Vineyards to pay their debts as they fell due. There can be no question that Mr Martini was acutely aware of the companies' inability to pay their debts as they fell due. He was the person with day-to-day responsibility for the running of the companies and he was obviously so concerned about the illiquidity of the Group that he voiced his concerns to the Boards "probably forty or fifty times" over the course of "hundreds of conversations" from December 2002 onwards: see paragraphs 181 and 204 above. 440 In a conference call with the other Directors on 23 December 2002, Mr Martini said that he regarded the companies' situation as "critical" and that the Group was "in serious danger of bankruptcy": see para 216 above. 441 I find that, regardless of whatever was said to him by Mr Spicer, accountants, lawyers and tax advisers, Mr Martini knew as a fact at all times during the Period that Wines and Vineyards were not paying their creditors' debts as and when they fell due. 442 Mr Martini was directly involved in negotiations with banks and financiers in attempts to sell assets and to effect a refinancing or restructuring of the Group. He knew at all times that the ability of Wines and Vineyards to raise new capital depended upon a quick and favourable resolution of the tax dispute with the ATO. 443 Mr Martini says that he relied on Mr Irving, who was conducting negotiations with the ATO, in forming the belief that the tax dispute would be resolved quickly and favourably. However, Mr Irving never told Mr Martini or the other directors that the ATO had given a firm assurance that it would accept Wines' settlement proposal, nor did he say that the ATO had given a firm commitment to give its decision by a certain date. 444 Mr Martini appreciated only too well that the timing of resolution of the tax dispute was completely "up in the air". In his affidavit of 13 February 2007 he gave this evidence (which I accept): "Regularly in the period from November 2002 to July 2003 Simon Spicer and I had conversations with Peter Poolman and Malcolm Irving both at Board meetings and generally in the day-to-day conduct of the business to the following effect:

[462]

Our financiers have been kept fully informed and are reviewing their positions." 452 In a letter to the Directors of Wines dated 27 February 2003, Mr Martini and Mr Spicer say: "There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable, provided that, as outlined in Note 1(z) to the financial statements, alternative finance arrangements are finalised for the Redeemable Convertible Preference Shares, that no significant amount is payable to the Australian Taxation Office ("ATO"); and that sufficient working capital will be available upon release of the ATO application to wind up a subsidiary company." 453 From these documents it is plain that as at 7 February 2003 Mr Martini must have been aware that a time frame for the Reynolds Group being able to settle its dispute with the ATO and realise assets to pay Wines' and Vineyards' debts as they fell due was no clearer than it had been at the end of December 2002. He must have been aware that Wines and Vineyards, if they continued to trade, would continue to incur debts, many of which could not be paid within anything like their normal trading terms. Indeed, as evidenced by his letter of 27 February 2003, he must have realised that if the dispute with the ATO was not resolved favourably and very quickly, Wines and Vineyards could not be rescued from their present insolvency. 454 As in the case of Mr Irving, there is no evidence to suggest that in permitting Wines and Vineyards to trade from October 2002 onwards, Mr Martini acted with anything other than complete honesty and with an earnest desire to achieve the best result for the creditors, shareholders and employees of the Reynolds Group. 455 The evidence does not enable me to decide whether Mr Irving told Mr Martini of the result of his discussion with Mr Evans earlier than 7 February 2003. I conclude that by at least that date, Mr Martini knew that resolution of the dispute with the ATO was, at best, several months away. 456 Mr Martini says that, in effect, he relied reasonably on assurances from Mr Irving and Mr Poolman that the dispute with the ATO "will get solved". He says that he was told: "Patience, hang in there … just keep working your end of it. We'll get this thing sorted out." : see para 444. 457 Mr Martini was no mere employee of Wines and Vineyards; he was also a director. In discharging the duties of that office, he was not subordinate to Mr Irving or Mr Poolman. He was obliged to form his own judgment as to whether he could properly permit the companies to keep trading while insolvent. The law does not permit him to abrogate that responsibility by obeying a direction from Mr Irving or Mr Poolman to "have patience" or "hang in there". He could not justifiably leave it to Mr Irving and Mr Poolman to "sort out" the problem which both created Wines' and Vineyards' insolvency and prevented their rescue from insolvency, no matter how long that process of "sorting out" might take. He, like all the Directors, had to ask and honestly answer the hard questions: see par 269ff. 458 For the reasons which I have given in respect of Mr Irving's discretionary defence, I conclude that Mr Martini could not justifiably have permitted Wines and Vineyards to continue trading insolvently past 7 February 2003. 459 I find that if the Liquidators had claimed under s.588M(2) against Mr Martini, Mr Martini's defence under s.588H(2) and (3) would not have succeeded and his defence under s.1317S and s.1318 would have been successful only to the extent of exonerating him from liability for debts incurred up to and including 7 February 2003. He would have been liable under s.588M(2) to pay compensation for debts incurred on and from 8 February 2003. Whether equitable contribution available

[464]

The doctrine of equitable contribution applies both at common law and in equity. It is usually expressed in terms requiring contribution between parties who share 'co-ordinate liabilities' or a 'common obligation' to 'make good the one loss'. More recently, in BP Petroleum Development Ltd v Esso Petroleum Co Ltd , the right to contribution was said to depend on whether the liability was 'of the same nature and to the same extent'." 461 Mr Jackman relies upon the decision of Giles J (as he then was) in Spika Trading Pty Ltd v Harrison (1990) 19 NSWLR 211 in which his Honour held that the joint and several liability for insolvent trading which s.556(1) of the Companies (NSW) Code (1982) expressly imposed on co-directors gave rise to a common obligation or co-ordinate liability, so that where one director was sued he could claim equitable contribution from his co-directors who had not been sued. 462 Mr Stoljar of Counsel, who appears for Mr Martini, submits that the law, as stated in Spika Trading, is no longer applicable because, unlike s.556(1) of the Companies Code, CA s.588M(2) does not expressly impose joint and several liability on co-directors. He says that the structure of CA Pt 5.7B now requires that for any director to be liable for insolvent trading, he or she must be sued directly by a person authorised under s.588J, s.588K, s.588M(2) or s.588M(3), i.e. by ASIC, the liquidator or a creditor of the company. He submits that a director who has not been sued under one of these provisions cannot be made liable indirectly for insolvent trading by a claim for contribution brought by another director who has been sued. 463 I am unable to accept Mr Stoljar's submission. If correct, long established law would have been radically altered by implication, for no apparent policy reason. 464 The reference in s.556(1) of the Code to joint and several liability on the part of directors was superfluous and unnecessary. The section imposed liability on each person who was a director at the time of insolvent trading; each director could be sued alone, or together with other directors, at the election of the plaintiff. The liability of one director was common to all, as the claim was for recovery of a specific debt, or specific debts. In those circumstances, even if s.556(1) had omitted reference to joint and several liability, the law itself would have classified the liability of co-directors as joint and several. 465 The doctrine of equitable contribution, well understood as part of the common law since Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184, clearly applied to enable a single director who had been sued under s.556(1) to claim contribution from co-directors who had not been sued. In Spika, Giles J did not suggest that the doctrine of equitable contribution would not have been applicable as between co-directors had it not been for the express reference to joint and several liability in s.556(1). His Honour merely referred to the explicit statement of the nature of the liability as confirming the application of the common law doctrine. 466 This must be so, because liability to equitable contribution under the common law does not depend upon the existence of joint and several liability. The doctrine applies where there is joint or several liability. What is essential is that the person from whom contribution is sought is liable for the same loss as the person claiming contribution, even though their liabilities arise under different causes of action: see Burke (supra); Street & Halls v Retravision (NSW) Ltd (1995) 56 FCR 588, at 597; Bialkower v Acohs Pty Ltd (1998) 83 FCR 1, at 12. 467 As was the case under s.556(1) of the Code, joint and several liability of co-directors for insolvent trading follows, as a matter of law, from the nature of the liability created by CA s.588M(2) and (3): each person who was a director during the period of insolvent trading, and who cannot make out a defence, is liable to compensate for the same loss by reason of contravention of the same statutory prohibition in s.588G(2). That is sufficient to attract the doctrine of equitable contribution. 468 I am unable to accept Mr Stoljar's next submission that Mr Martini could not be liable for contribution because he has not been sued directly by the Liquidators. Ex hypothesi, the doctrine of equitable contribution is applicable where the person from whom contribution is sought has not been sued although he or she could have been sued. The person claiming contribution must show that, had the co-obligor been sued, he or she would have been liable for the same loss, or a proportionate part of the same loss. 469 In the present case, I have found that Mr Irving is liable under s.588M(2) for debts incurred from 6 February 2003 onwards. I have found that Mr Martini, if he had been sued by the Liquidators, would have been liable for debts incurred from 8 February 2003 onwards. Mr Irving and Mr Martini therefore have a common liability for debts incurred on and from 8 February 2003. I conclude that the doctrine of equitable contribution requires that, as between Mr Irving and Mr Martini, Mr Martini is liable to contribute fifty per cent of the amount for which Mr Irving is liable to the Liquidators in respect of debts incurred on and from 8 February 2003 Set off or contribution

[465]

470 Paragraph 8 of Mr Martini's Amended Defence to Mr Irving's Cross Claim reads: "In further answer in whole or part to the Cross Claim, the First Cross Defendant says that by operation of section 553C of the Corporations Act 2001 and by way of equitable set-off, he is entitled to a set-off for any monies ordered to be paid by him to the Cross Claimant (which is denied) for any monies paid by the First Cross Defendant to the Commissioner of Taxation pursuant to orders made in proceedings no 2685 of 2004." 471 I do not follow what this pleading means. First, I do not see what relevance CA s.553C has. Mr Irving is not a corporation in liquidation. I do not understand how a set off under the Corporation Act can be available against him. 472 Second, the words of the pleading do not make literal sense. I think that there must be typographical error and that what the pleading intends to claim is a set off against any monies ordered to be paid by Mr Martini to Mr Irving equal to the amount of any monies paid by Mr Martini to the Commissioner in respect of the Unfair Preference Proceedings. 473 Mr Stoljar has made no submissions on this claim. However, I suspect that what is meant is that if Mr Martini pays the Commissioner more than his proportionate share of the judgment debt in the Unfair Preference Proceedings, Mr Martini will be able to set off the excess against the amount he owes to Mr Irving under Mr Irving's Cross Claim. 474 Mr Martini, Mr Irving and Ms Yates have a common liability to the Commissioner under s.588FGA(2). All three are liable for those preferential payments made to, and recoverable from, the Commissioner up to 30 June 2003, when Ms Yates resigned. Mr Martini and Mr Irving have a common liability for the preferential payments made after 30 June 2003. 475 For the reasons discussed earlier, each of Mr Martini, Mr Irving and Ms Yates is liable in equity to make equal contribution to the judgment for their common liability. If Mr Martini pays to the Commissioner the whole of the judgment debt in respect of the preference payments made during the period up to 30 June 2003, he would be entitled to call on Mr Irving to repay to him one-third of that amount, and he would be entitled to set off what Mr Irving owes to him by way of equitable contribution against the amount which he owes to Mr Irving under Mr Irving's Cross Claim for equitable contribution to the judgment for insolvent trading. 476 The same principles apply if Mr Martini pays to the Commissioner the whole of the judgment debt in respect of the preference payments made after 30 June 2003. Mr Martini would be entitled to equitable contribution of one-half of that amount and would be entitled to a corresponding set off against what he owes to Mr Irving under Mr Irving's Cross Claim. 477 These consequences follow as a matter of law. I do not think that I need to make orders or declarations about them, unless a particular problem arises in the working out of the orders to be made in accordance with these reasons for judgment. MR MARTINI'S CROSS CLAIM

[470]

481 For the reasons earlier given in relation to Mr Irving's defence and Mr Martini's Cross Claim, the first and second grounds of Ms Yates' defence cannot succeed. I will deal now with her contentions as to her defences under s.588H(2) and (3) and s.1317S and s.1318. 482 Ms Yates' experience is primarily in international marketing. She says that prior to joining the Boards of Wines and Vineyards, Mr Irving told her that her responsibilities would be to attend Board meetings, to serve on one or two committees and, in particular, to focus on the Group's sales and marketing operations. 483 Ms Yates is far from inexperienced in financial matters. Prior to accepting appointment as a director of Wines and Vineyards she spoke to key staff, and asked her accountant to investigate and report on the Group's operations. She was aware of the nature of the tax dispute between Wines and the ATO before she accepted appointment as a director. Before and after her appointment, she says, she relied on Mr Irving's assurances that the tax dispute would be resolved. 484 Ms Yates says, and I accept, that throughout her directorship of Wines and Vineyards she attended Board meetings either in person or by telephone, diligently read the Board papers provided before each meeting, and diligently read the Board Minutes to ensure that they accurately recorded what had transpired. She also attended monthly sales and marketing meetings with key staff. She, in common, with the other Directors, regularly received e-mails from Mr Martini and Mr Spicer, including those which showed that the companies were not paying their debts as they fell due, and that their liquidity crisis was worsening. Ms Yates says, and I accept, that she diligently read these e-mails. 485 There can be no dispute that, from October 2002 onwards, Ms Yates was aware that Wines and Vineyards were not paying their debts as they fell due. She was party to the Board's discussions in which the possibilities of selling assets and raising new capital were explored. She was fully aware that funds were necessary to pay the debts of Wines and Vineyards in full as they fell due could not be raised unless and until the dispute with the ATO was resolved in favour of the Group. 486 I find that from 1 October 2002 onwards Ms Yates was aware that there were reasonable grounds for suspecting that Wines and Vineyards were insolvent. For the same reasons I have given in relation to Mr Irving's and Mr Martini's defences under s.588H(2) and (3), because of Ms Yates' actual knowledge of the financial positions of Wines and Vineyards, I am not satisfied that she had reasonable grounds to expect that the companies were solvent at any time from 1 October 2002 onwards. Ms Yates' discretionary defences

[471]

487 I turn now to Ms Yates' discretionary defences under s.1317S and s.1318. 488 For the reasons I have given in relation to Mr Irving's and Mr Martini's discretionary defences, I think it was commercially justifiable for Ms Yates to wait to see if Wines' submissions to the ATO on 15 November 2002 would produce a quick and satisfactory resolution of the tax dispute, so that Wines and Vineyards could be rescued quickly from illiquidity. 489 Ms Yates says that while she did not attend the Board meeting of 31 January 2003, she later read the Minutes of that meeting and was aware that Mr Irving was to have a meeting with the ATO on 6 February 2003 at which he would attempt to bring the tax dispute to some resolution. 490 There is no direct evidence that Mr Irving told Ms Yates shortly after his meeting with Mr Evans on 5 February 2003 that in Mr Irving's view it could be another three months before a decision was made by the ATO. While I am prepared to infer that Mr Martini, as CEO of Wines, saw the ASX announcement of 7 February 2003, I do not feel justified in drawing that inference for a non-executive director such as Ms Yates. 491 However, part of the Board papers for Board meetings of Wines and Vineyards for 17 February 2003 was a Management Report which contained the statement "the settlement discussions with ATO continue". Ms Yates cannot recollect if such a Board meeting took place (there is no Minute of that meeting in evidence). However, I am satisfied that Ms Yates read the Board papers for that meeting not later than 17 February 2003, whether or not she attended such a meeting. 492 It is reasonable to deduce that at some in February 2003, Ms Yates was informed of Mr Irving's estimate of the further time required for a resolution with the ATO, as it had appeared in the ASX announcement. She received the letter dated 27 February 2003 signed by Mr Martini and Mr Spicer, which stated that there were reasonable grounds to believe that Wines was solvent provided that the tax dispute was resolved satisfactorily. 493 If Ms Yates did not actually enquire from Mr Irving shortly after 5 February 2003 what was his view as to the time required to settle the tax dispute, she ought reasonably to have done so. She was far from naive in commercial matters, particularly in regard to the dangers inherent in insolvent trading. In cross examination, she said that she had been Chair of another company, Terra Planet, which had had financial difficulties and in late 2002 and in 2003 she had been receiving legal advice as to her possible liability for insolvent trading. 494 Ms Yates resigned on 30 June 2003 but had been nervous about her position long before that. In her e-mail to Mr Irving giving notice of her resignation she had said that "the ATO deferment", i.e. the ATO's failure to give a decision, was "the last straw". She gave this evidence: "Q. There is a sentence that says 'I'm no longer able to make any worthwhile contribution to the Reynolds board and the ATO deferment was just the last straw'. Do you see that? A. Yes, I do.

[494]

519 The Liquidators were appointed as Administrators of the Reynolds Group on 4 August 2003. On 18 September 2003 they reported to creditors of the Reynolds Group that, in their preliminary view, there was a strong prima facie case of insolvent trading by the directors of the Group, including Mr Poolman. Litigation to enforce the claim was foreshadowed as possible. Mr Poolman received a copy of that Report at the time of its issue. 520 On 10 November 2003, the Administrators issued a second Report to Creditors. Mr Poolman received a copy. In that report, the Administrators confirmed their opinion that an insolvent trading claim lay against the directors of the Group and advised that, since none of the directors had Directors and Officers Insurance, recovery would be limited to their available personal assets. 521 On 25 November 2003, Wines and Vineyards were placed in liquidation. On 28 November 2003 the Liquidators filed Summonses for the examination of Mr Poolman and other Directors. The Summons was served on Mr Poolman on 3 December 2003. 522 Mr Poolman was examined before the Registrar on 17 December 2003. No question was then asked about ownership of Bowan Downs. The examination of Mr Poolman was stood over, part-heard, to 19 February 2004. 523 Prior to the resumption of Mr Poolman's examination, the Liquidators discovered that a property, resembling in description Bowan Downs, had been placed on the market for sale in January at a price of about $4.35M. However, the advertisement described the property as "on the Cudal Road", rather than "in Cargo Road". Apparently, Cargo Road leads to the township of Cudal. 524 On 5 February 2004, the Liquidators' solicitors wrote to Mr Poolman's solicitors, saying that on their instructions a "property in Cudal Road" in which Mr Poolman had an interest had been place on the market for sale. The letter advised that it was the Liquidators' intention to commence insolvent trading proceedings against Mr Poolman for a sum exceeding $2M. The letter sought an undertaking to provide three days' notice of an intention to accept an offer for sale of the property, and to provide information relation to the proposed sale. 525 Mr Poolman's solicitors responded by a letter dated 10 February 2004 as follows: "1. We are instructed that Mr Poolman does not have an interest, either proprietary, beneficial or commercial in a property in Cudal Road, Orange. Mr Poolman has never resided nor has he ever owned a property in Cudal Road, Orange.

[496]

As this information is clearly incorrect, our client requests the source of the information so that he can address this issue to prevent further misinformation in the future." 526 On resumption of Mr Poolman's examination on 19 February 2004, Mr Poolman admitted, after some questioning, that the property described at "Cudal Road", which had been placed on the market, was indeed Bowan Downs. He said that it had been placed on the market in January 2004 by his wife. He denied having an interest in the property. He said that on a date in December 2003, which he could not then remember, he had transferred his share in Kalivise to his wife for one dollar. He said that that consideration was "at full value". 527 Mr Poolman said that he had not obtained a "formal" valuation of Bowan Downs before making the transfer of the share in Kalivise. However, he said that he had obtained informal valuations in November and December 2003 which placed the market value of the property in the range of $3M to $3.5M. Those valuations were not in writing. 528 Mr Poolman said that, in deciding to effect the transfer, he had obtained advice from his accountant and solicitor (who happened to be Mr Alan Jessup). He said that the transfer of his share in Kalivise was not in performance of any contract with Mrs Poolman. 529 Mr Poolman explained that the value of his share in Kalivise was no more than a dollar because Kalivise owed $1.75M to a company called Centre for Agricultural Management Pty Ltd ("CARM"), the value of Kalivise's interest in Bowan Downs, about $1.75M according to his "informal valuations", was reduced to nil by Kalivise's indebtedness to CARM. CARM was co-owned by Poolmans Pty Ltd, the shareholding of which was owned equally by Mr and Mrs Poolman. 530 Mr Poolman was asked in his examination why he transferred the share in Kalivise to Mrs Poolman if he considered it valueless. He gave this evidence: "Q. You said to us this morning that you transferred the share at the time that you did - these may not be the exact words - because you wanted to regularise the position in December 2003, at a time when you became aware that the liquidator may be conducting examinations? A. Privilege. I wanted to regularise the position, I think you are quite right, but I'll say it in a slightly different way.

[511]

535 Section 37A(1) Conveyancing Act provides: "Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930 , with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced." 536 There is no doubt that the Liquidators, as persons intending to bring proceedings on behalf of Wines and Vineyards against Mr Poolman at the time of the share transfer, were persons "prejudiced" by the transfer within the meaning of the section, and that they thereby had standing to make this application. The transfer had the effect of placing beyond the Liquidators' reach an asset which would otherwise have been available to satisfy a judgment debt obtained against Mr Poolman: see Silvera v Slavic (1999) 46 NSWLR 124; Langdon v Gruber [2001] NSWSC 276 at [59], [60] per Austin J. 537 I am satisfied on the evidence provided by the Liquidators that they have proved the facts which they assert. 538 I accept the submissions of the Liquidators as to the conclusion which should be drawn from the facts proved. The timing of the transfer, the informality of the transaction, the lack of support documentation - particularly, documentation giving any substance to Mr Poolman's assertion that the share was valueless - all strongly suggest that the transfer was effected with the express intent of placing Mr Poolman's interest in Bowan Downs beyond the reach of the Liquidators if they should launch these proceedings. 539 I am confirmed in this inference by the content of the letter which Mr Poolman's solicitors sent in response to the Liquidators' enquiries about Mr Poolman's interest in Bowan Downs. That letter, obviously written on instructions from Mr Poolman, was deliberately misleading. Mr Poolman could not have been in any doubt that the property referred to by the Liquidators, described in the real estate agent's advertisement as "on the Cudal Road", was Bowan Downs. 540 I am satisfied that Mrs Poolman was aware of the share transfer and its purpose. The evidence shows that in early January 2004 a loan of $2.4M from the ANZ Bank was obtained by a company of which Mr and Mrs Poolman were directors. The approval letter is dated 8 January 2004 and was sent to Mr and Mrs Poolman at Bowan Downs. The letter was addressed: "Dear Peter and Constance". Mrs Poolman subsequently signed the loan documents. Mr Poolman said that it was Mrs Poolman who placed Bowan Downs in the hands of real estate agents. There is no evidence to suggest that Mr and Mrs Poolman were estranged at this time. The evidence strongly suggests that they were co-operating in ordering their financial affairs. I infer that Mr Poolman told Mrs Poolman about the transfer of his share in Kalivise and why he thought it necessary. There is no suggestion that Mrs Poolman was a purchaser for value of the share. I am satisfied that Mrs Poolman acquired the share with notice of Mr Poolman's intent to defeat his creditors. 541 I conclude that the Liquidators are entitled to a declaration that the transfer of Mr Poolman's share in Kalivise to Mrs Poolman on or about 1 December 2003 is void, pursuant to s.37A Conveyancing Act. Is the issue of a share "an alienation of property"

[512]

542 While the transfer to Mrs Poolman of Mr Poolman's share in Kalivise may readily be declared void and of no effect, so that the share register of Kalivise should be rectified accordingly, the question of the issue of a new share to Mrs Poolman is more complicated. 543 As I have found, Mrs Poolman became the sole shareholder and director of Kalivise, in place of Mr Poolman, pursuant to a scheme to defraud Mr Poolman's creditors. The issue of a new share in Kalivise directly to Mrs Poolman, after she had become a director and thus empowered to resolve that the new share be issued, dilutes the capital of Kalivise. If only the share transferred by Mr Poolman to Mrs Poolman is restored to Mr Poolman's bankruptcy trustee, Mrs Poolman will retain a fifty percent interest in the assets of Kalivise, whereas previously Mr Poolman's share in the company represented a one hundred percent interest. Is the issue of Mrs Poolman's share in Kalivise voidable as "an alienation of property" under s.37A Conveyancing Act? 544 The Liquidators say that, "although it is accepted that the issue of the share itself is not a disposition of property", the issue of the share was "consequent" upon the voidable transfer of Mr Poolman's share to Mrs Poolman so that the Court should order that the new share be transferred to Mr Poolman, or his bankruptcy trustee. No authority is cited for the power of the Court to make such an order. 545 In my opinion there is a more direct path to the result which justice requires in this case. 546 As I have observed, the evidence supports the conclusion that the new share in Kalivise was issued to Mrs Poolman shortly after the transfer of Mr Poolman's share to her in furtherance of an intention, common to both Mr and Mrs Poolman, that Mr Poolman's interests in Bowan Downs be placed beyond the reach of his creditors. It may well have been thought that the issue of a new share in Kalivise would not be as vulnerable to attack under s.37A as the transfer of Mr Poolman's existing share. No other commercially justifiable reason for the issue of the share to Mrs Poolman appears from the evidence. If this was the intention of Mr and Mrs Poolman - and I infer that it was - then the issue of the new share can be seen as simply a step in the overall scheme to defraud Mr Poolman's creditors. 547 In Silvera v Slavic (supra), Mr Slavic, anticipating a judgment against him in District Court proceedings, obtained orders by consent from the Local Court for the transfer of virtually all of his assets to his de facto wife under the (then) De Facto Relationship Act 1984. The plaintiff, having obtained judgement against Mr Slavic, applied to the Supreme Court pursuant to s.37A for orders avoiding the transfers made pursuant to the Local Court orders. 548 Hodgson CJ in Eq (as he then was) found that the consent orders made in the Local Court were procured by Mr Slavic and his de facto wife pursuant to a common intention to defraud Mr Slavic's creditors. However, it was argued for Mr Slavic that the Court could not make an order avoiding the transfer because such an order would be inconsistent with a valid order made by the Local Court. 549 Hodgson CJ in Eq concluded that the order setting aside the transfer made by Mr Slavic would indeed be inconsistent with the Local Court's orders. However it did not follow that the purpose of s.37A was frustrated. His Honour said at [72]: "What s 37A says is that the 'alienation' is 'voidable'. In my opinion, when an application is made under s 37A to the Supreme Court, that Court can achieve the effect of avoiding the alienation by such measures as seem appropriate in the particular case. For example, the Court could declare that the effect of the Local Court order is spent by reason of its being carried out by the subsequent transfers, and then order appropriate re-transfers of the property. Such orders would not be inconsistent with the Local Court orders, nor could they give rise to any possible embarrassment by reason of the existence of conflicting court orders." 550 The purpose of s.37A is to defeat fraud no matter by what device it is implemented. The reach of the section is not foreshortened by technical obstructions placed in the way of recovery proceedings in furtherance of the original fraudulent intent. The words of the section are of the widest possible application; they focus on the effect of what is done, not on the means by which it is done. The word "alienation" encompasses every conceivable means whereby property might be removed from the reach of a person's creditors. The section does not say that the alienation must be by the act of the fraudulent debtor. 551 If a person acts collusively with a fraudulent debtor in such a way as to cause ownership of property to move, or to remain away, from the apparently passive debtor, there nevertheless has been an alienation of property for the purposes of the section. In this regard, s.37A Conveyancing Act is wider in reach than s.121(1) of the Bankruptcy Act 1966, which catches only "a transfer of property by a person who later becomes bankrupt": cf. Official Trustee in Bankruptcy v Mateo (2003) 202 ALR 571, at [61] per Wilcox J. 552 So, for example, if a mortgagee exercised a power of sale in collusion with the fraudulent debtor, there will have been an alienation within the meaning of the section even though the debtor has not signed a transfer or done any other overt act in aid of the transfer. If Mr Slavic had not complied with the Local Court's order to transfer his property and a Registrar of the Court had signed the transfer in his place, there would still have been an alienation within the reach of the section. 553 "Alienation" includes taking steps to frustrate recovery of property under s.37A. It would defeat the purpose of the section if property, once removed from creditors' reach, could be kept permanently out of their reach by the collusive defensive acts of a third party, even though those acts could not have been undertaken by the fraudulent debtor. Section 37A therefore empowers the Court to declare void the acts of a collusive third party calculated to maintain the fraudulent alienation, and the Court may order the third party to re-transfer the property. 554 These propositions are, in my opinion, supported by the general reasoning of the Hodgson CJ in Eq in Silvera and in the cases which have followed it: see in particular Houvardas v Zaravinos (2003) 202 ALR 535, at [128] per Bergin J. 555 I am satisfied that the issue of the new share in Kalivise to Mrs Poolman was part of the scheme between Mr and Mrs Poolman to alienate the property of Mr Poolman so as to defeat the Liquidators' claim. I will make a declaration that the issue of the new share to Mrs Poolman is void and that the register of Kalivise be rectified accordingly. SUMMARY OF ORDERS AND RELIEF

Hall & Ors v Poolman & Ors

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