Harrison v Lewis [2001] VSC 27

(a) a person (in this section called the 'director') has contravened subsection 588G(2) ... in relation to the incurring of a debt by a company; and

(b) the person (in this section called the 'creditor') to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and

(c) the debt was wholly or partly unsecured when the loss or damage was suffered; and

(2) The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage."

(a) a person is a director of a company at the time when the company incurs a debt and

(b) the company is insolvent at that time, or becomes insolvent by incurring that debt or by incurring at that time debts including that debt; and

(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would become insolvent, as the case may be; ...

(2) By failing to prevent the company from incurring the debt, the person contravenes this section if:

(a) the person is aware at that time that there are such grounds for so suspecting; or

(b) a reasonable person in a like position in a company in the company's circumstances would be so aware."

24. It was common ground in the circumstances of this case that Lewis had been a director of Wine Bank when it incurred a debt to Brian McGuigan Wines Ltd ("McGuigan"), that McGuigan had suffered loss and damage in relation to the debt because of Wine Bank's insolvency, that the debt was wholly unsecured when the loss and damage was suffered and that Wine Bank was being wound up. The principal factual issues remaining, notwithstanding some pleading deficiencies, were agreed to be:

(a) Was the debt incurred prior to 31 January 1998? If so, the plaintiff conceded that the claim failed because the plaintiff did not seek to prove any case on a date prior to 31 January 1998.

(b) If the debt was incurred on 31 January 1998, or in February 1998, was Wine Bank insolvent at that time or in that period ("the said time") or did it become so insolvent at the said time, by incurring the debt?

(c) At the said time were there reasonable grounds for suspecting that the company was insolvent, or would so become insolvent?

(d) Was Lewis aware at the said time that there were such grounds for so suspecting, or would a reasonable person in a like position in a company in Wine Bank's circumstances be so aware?

When was the debt incurred?

30. Wine Bank conducted a business of finding persons ("investors" or "depositors") who were interested in investing in Australian wine, purchasing Australian wine from various suppliers to Wine Bank (one of whom was McGuigan), transporting the wine to a wine storage facility and storing each depositor's wine in that depositor's name. Each depositor received on ownership certificate and a storage receipt identifying that depositor's wine. At the time of investing, each depositor also paid storage and insurance costs for three years. The wine was tested prior to purchase and periodically tested thereafter by members of an expert panel and after approximately three years was offered for sale in the export market, if sufficiently mature (alternatively a depositor could opt for a further period of storage pending maturity of the wine). Wine Bank had a number of agents ("licensees") who found depositors and earned a commission on sales to them. The wine was sold to investors in "bins" of 60 dozen unlabelled bottles. The aim of the business was to generate sufficient turnover to make a profit after payment of all expenses such as commissions and overheads.

33. On 24 September 1997 Lewis received a fax from McGuigan (signed by Brod Vallance, Production Manager) advising that McGuigan had 6,000 dozen cabernet and 10,000 dozen shiraz put aside for Wine Bank. The fax said that McGuigan would need to get at least $43.50 for the cabernet and $42.50 for the shiraz and really needed "some form of commitment from you very soon [a]s we are stalling negotiations with other customers". After conversations between Lewis and Brian McGuigan of McGuigan, Wine Bank sent a fax dated 13 October 1997 signed by Ron Dinan, Wine Bank's export manager, to McGuigan stating inter alia:

"Further to conversations between Brian McG. and Robert Lewis, we would like to confirm the following.

Price to be $40 per case delivered to our Botany store. (Please invert the bottles.)

2. the P4's and your internal analyses of the wines?

As soon as our panel members give us the nod, we shall give the go ahead for delivery to Botany."

47. After 13 October 1997 McGuigan supplied Wine Bank with samples of the wine as requested. The samples were submitted to the expert panel and approved by them. In December 1997 Wine bank's licensees commenced making sales of this wine to investors. Fifty-six "bins" were sold (ie. 3,360 dozen) mostly by a licensee in New Zealand.

50. On 5 January 1998 Wine Bank faxed McGuigan a handwritten letter requesting McGuigan to "run 6,000 cases cab. sauv. to start - followed by the shiraz". In response, on 28 January 1998 Vallance of McGuigan faxed Dixon of Wine Bank advising that "your 6,000 cases of cabernet is bottled [and] ready to go" (although this turned out not to be true).

53. I am satisfied that the Wine Bank letter of 13 October 1997 shows that on that date, if not earlier in conversations, a binding agreement had been reached between Wine Bank and McGuigan for the sale and purchase of the specified cases of wine at $40 per case, all wine to be taken by Wine Bank by the end of January 1998, subject only to approval of the wine by the expert panel. If that finding is incorrect then such an agreement was concluded by the time of Wine Bank's letter of 5 January 1998 requesting, in effect, that the ordered wine be bottled and packed.

56. On 31 January 1998 Vallance of McGuigan raised an invoice to Wine Bank in the sum of $122,400 for 3,060 cases (dozen) 1997 cabernet sauvignon which had been bottled at that stage. None of the wine had yet been delivered to Wine Bank and the invoice was not received until after delivery. Vallance gave evidence that invoices were payable 30 to 60 days from date of receipt.

59. On 4 February 1998 Wine Bank faxed McGuigan requesting that it "arrange ASAP transfer to our store at Botany 3,900 cases of the '97 Cabernet Sauvignon blended for us". On 5 February 1998 Vallance of McGuigan advised Dinan of Wine Bank by fax that he had "only bottled 3,100 dozen cab. sauv. so far and that "Vintage started so early, I haven't had time to bottle the rest".

62. McGuigan delivered the 1997 cabernet sauvignon wine to storage at Wine Bank's direction as follows:

66. The sum due for the 3,360 dozen bottles delivered was $134,400, the amount claimed in this proceeding. The remaining 2,640 dozen bottles of cabernet sauvignon were never delivered, nor any of the shiraz.

69. Vallance gave the following evidence which was not challenged and which I accept. He said that had Wine Bank informed McGuigan at any stage that it no longer required the wine, even after delivery of the wine, McGuigan would not have sought payment of the wine from Wine Bank. He said that McGuigan could have sold the wine to another purchaser at no loss to either McGuigan or Wine Bank, as it had done with the whole of the balance of the Wine Bank order.

72. On the basis of the foregoing facts, it could be argued that the date when the debt was incurred was:

(i) 13 October 1997 (or no later than 5 January 1998) when the wine was ordered; or

(ii) 31 January 1998 when the wine had been bottled, packed and appropriated to Wine Bank's order and an invoice raised; or

(iii) on each date in February 1998 when delivery instructions were given or when delivery was accepted.

78. Counsel for Lewis submitted that the debt was incurred on 13 October 1997 when Wine Bank, by its fax of that date, asked McGuigan to "allocate" the specified cases of wine at an agreed price for later delivery subject only to approval of samples by the expert panel. It was a contingent debt at that stage, so it was submitted, but that was when the debt was incurred. Counsel for the liquidator submitted that the debt was incurred on the four dates of delivery of the wine in February 1998.

81. In Versteeg v Versteeg (1988) 36 A Crim R 68 (discussed by Ipp J in DCT (WA) v Pollock (1993) 12 ACSR 217 at 232-3) it was held that debts are incurred when amounts owing to a contractor or supplier for work done and services rendered become ascertainable, albeit that such debts are contingent.

84. In Hussein v Good (1990) 1 ACSR 710, a director of a clothing boutique ordered certain garments from a clothing manufacturer to be delivered some four months later and to be paid for on delivery. Southwell J held that the debt was incurred when the goods were delivered, pointing out (at 718) that nothing was owed until the goods were delivered. He distinguished a case where a contingent liability was likely to turn very quickly into a present indebtedness, adding that a penal statute should be strictly construed. This decision has been the subject of some criticism in later cases and by commentators.

87. In Rema Industries and Services Pty Ltd v Coad [1992] FCA 114; (1992) 7 ACSR 251, Lockhart J said (at 258) that the "time when a debt is `incurred' will vary from case to case, depending principally upon the terms of the agreement between the parties, express or implied". In that case, which involved the sale of goods, the court found that the debts were incurred at the time of delivery of goods pursuant to invoice during the trading relationship.

90. In Hawkins v Bank of China (1992) 26 NSWLR 562, the New South Wales Court of Appeal was concerned with s.556 of the Companies (New South Wales) Code, a predecessor of the present provision. In that case a company (Equiticorp) executed a guarantee in respect of liabilities to the Bank of China of two other companies in the same group. The bank alleged that Equiticorp thereby incurred a debt in circumstances which rendered certain of its directors liable. The amount due by the two companies was $5 million being the balance owing by them on maturity of certain bills of exchange.

93. The case was concerned with the meaning of "incurs a debt" in the particular context of a guarantee but the judgments of Gleeson CJ and Kirby P, (with whom Sheller JA agreed), repay reading in full.

"Where a debt results from a guarantee, the sequence of events is commonly as follows. At the time of the execution of the guarantee, the guarantor undertakes a contingent liability. The contingencies normally include, although they are not necessarily limited to, default on the part of the principal debtor, and the making of demand upon the surety by the creditor. At the time of executing the guarantee, such a liability would not normally be shown as, or included in, a liability in the company's balance sheet, but it would be referred to in a note to the accounts. Of course, the circumstances of any individual case may require special consideration, and I refer only to the usual position. ... Subsequently, events may occur by reason of which the contingent liability matures into a presently payable debt.... Guarantees are sometimes executed in advance of any principal debt coming into existence. A person may execute a guarantee in favour of a bank in a case in which the bank has not yet made an advance to its customer. In such circumstances it is not normally said that the guarantor, upon the execution of the guarantee, incurs a debt. Nor would it normally, and apart from some special context, be said that a person who gives a guarantee in respect of a debt incurred by another thereupon himself incurs a debt, at least if the principal debtor is apparently solvent and not in default. Equally, however, on any use of language, in the events that have occurred in a case such as the present, there ultimately comes a time when the guarantor would be said to be indebted to the creditor. In the present case, a guarantee was executed, the principal debtors became insolvent and went into default, and demand was made by the creditor under the guarantee. In those circumstances it seems difficult to deny that at some stage Equiticorp incurred a debt to the Bank. The difficulty about concluding that such a debt was only incurred when demand was made is that it produces a result which in many cases involving the application of s 556 would be unjust, and, indeed, absurd. Suppose, for example, that company A gave a guarantee to a bank in respect of the liabilities to the bank of company B, and the guarantee was executed in Year 1. At the time, both companies were financially sound. Suppose that some years later, at a time when both companies are in serious financial difficulties, company B goes into default and the bank then calls upon the liability of company A under the guarantee. It would be unjust to fix the directors of company A with criminal or civil responsibility under s 556 by reference to expectations as to the financial capacity of company A at the time when the bank made a demand under the guarantee, because the commitment was undertaken in Year 1 and (let it be assumed) could not thereafter be abrogated. Yet that would be the consequence that would follow if company A were treated as having incurred a debt to the bank when demand was made.... Before going to the appellants' primary submission, it is convenient to deal with a subsidiary argument which directs attention to the nature of Equiticorp's obligations under the guarantee. This argument begins with the proposition that a liability cannot be a debt for the purposes of s 556 if it entails an obligation to pay unliquidated damages as distinct from a liquidated sum. This was not challenged by the respondent, and it is unnecessary to examine the proposition further, or to seek to explore the boundaries between liquidated and unliquidated claims: cf Jelin Pty Ltd v Johnson (1987) 5 ACLC 463. The argument goes on to contend that, as a matter of construction of the guarantee presently in question, any liability under it is a liability for damages, and there is no debt involved: cf Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245 at 254-257. As Mason CJ pointed out in Sunbird Plaza, a creditor's rights against a guarantor depend upon the terms of the guarantee and the nature of the obligation performance of which is guaranteed. In the present case the obligations of the two members of the Equiticorp group to the Bank were simply to pay their debts to the Bank. They had received financial accommodation from the Bank, and the Bank and the two companies were referred to in the instrument of guarantee and indemnity as lender and borrowers respectively. The relevant terms of the instrument are set out above. Clause 1 provides that Equiticorp guarantees the due and punctual payment of moneys owing to the Bank by the two borrowers. Clause 2 provides that, on default by the borrowers, Equiticorp will on demand pay to the Bank the moneys secured, that is to say, the moneys owing by the borrowers to the Bank including fees, interest and similar charges." Mason CJ said (at 255): `If the subject of the guarantee is payment of a debt or a sum of money which has accrued due, the creditor may, on default by the principal debtor, sue the guarantor instead of the principal debtor for the debt or sum of money, his claim being for a liquidated amount. If, on the other hand, the subject of the guarantee is the performance of some other obligation, then the person having the benefit of the guarantee may, upon default, sue the guarantor for damages for breach of contract.' The present case falls within the first of those two categories. The Bank's claim against Equiticorp is properly to be regarded as a claim for a liquidated sum: cf Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129; [1980] 2 All ER 29; Re Standard Insurance Co Ltd (In Liq) and the Companies Act 1936 (1969) 91 WN (NSW) 654 at 657-658; [1970] 1 NSWR 392 at 395 per Street J. For that reason the appellants' subsidiary argument must fail. The same conclusion presents an initial difficulty for the appellants' main argument. Equiticorp (on the factual assumptions made for the purposes of the separate question of law being considered) owes a debt to the Bank. The Bank's claim for a liquidated sum flows from the making of a conditional agreement and the subsequent fulfilment of the condition, that is to say, the failure of the borrowers to pay their debts to the Bank, and the making of demand upon Equiticorp. It may be accepted that in some commercial or legal contexts it would be unusual to describe Equiticorp as having incurred the debt in question upon executing the guarantee. It is equally true, however, that even in those contexts it would be natural and proper to say that at some stage Equiticorp incurred a debt to the Bank. The appellants (for reasons explained above) are concerned to argue that Equiticorp did not at any stage incur a debt to the Bank within the meaning of the section. This demonstrates that, whichever way the present dispute is resolved, the result will involve some departure between the language of the statute as construed by the Court and the use of language in the contexts to which reference has just been made.... It is necessary, of course, to guard against the error of considering the operation of the statutory language only by reference to the problem currently under consideration. Words such as `conditional' or `contingent', when used in relation to different types of obligation, can have different shades of meaning. There are types of contractual arrangement, of which the cases on s 556 referred to above provide examples, where it is entirely reasonable for a provision such as s 556 to operate upon the basis that a debt is incurred, not when a contract is entered into, but when some later event under the contract occurs..... `Debt' is capable of including a contingent liability. The word was used in that sense in s 291 of the Companies Act 1961, which referred to `debts payable on a contingency'. That expression did not involve a contradiction in terms. Dictionaries define `debt' as a liability or obligation to pay or render something. Such a liability may be conditional as well as present and absolute.... Similarly, the word `incurs' takes its meaning from its context and is apt to describe, in an appropriate case, the undertaking of an engagement to pay a sum of money at a future time, even if the engagement is conditional and the amount involved uncertain. Once it is accepted that `debt' may include a contingent debt then there is no obstacle to the conclusion that, in the present context, a debt may be taken to have been incurred when a company entered a contract by which it subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future time. This is such a case."

"In Hussein v Good (1990) 1 ACSR 710; 8 ACLC 390, Southwell J, in a thorough consideration of the issue now before this Court, held that the phrase `incurs a debt' should be given a strict construction in accordance with the well established canon applicable to legislative provisions imposing criminal liability. So far as there was ambiguity about the phrase `incurs a debt', Southwell J held that it should be resolved by limiting the `debt' referred to that which is actually owed immediately it is incurred so as to exclude contingent debts, such as those incurred upon the operation of a guarantee. The foregoing decisions were criticised by Abe Herzburg `Insolvent Trading' (1991) 9 Company and Securities LJ 285 at 294ff. Herzburg's criticism affected Rogers CJ Comm D at first instance in the present case. Reaching his conclusion, his Honour said: `... in circumstances where, between the date of an order and its due date for delivery, the financial position of the purchaser deteriorates to the point it cannot pay for the goods the purpose of an effective insolvency provision will be better served by the directors of the purchaser refusing delivery. Why should they accept delivery with impunity knowing the company cannot pay for the goods? Surely s 556 was intended to extend their personal liability in such a case. With respect to the fulfilment of the legislative purpose of preventing insolvent businesses from engaging in liabilities I was struck by [this] example ... Assuming Company A incurs a debt in 1989. No grounds for invoking s 556 are present. However, in 1991, when the debt is still outstanding, Company A is insolvent. To obtain time, Company A procures a guarantee from Company B. If s 556 were to apply to contingent liabilities and therefore to guarantees s 556 would apply to Company B. It surely cannot have been intended that the section not apply simply because the guarantee of B is only a contingent debt. As it appears to me, there is nothing in the text of s 556 which could disqualify a contingent debt from inclusion in the expression `debt'. The legislative history supports the inclusion. The purpose of the legislation is served by the inclusion.'..... The proper approach to the task is plain. Both the common law and statute law enjoin the Court to give effect to the purpose of the legislation. But clearly, that purpose may be ascertained only within the words used by Parliament: see Re Bolton; Ex parte Beane [1987] HCA 12; (1987) 162 CLR 514 at 518. The expression `incurs a debt' in s 556(1) is, in isolation, entirely apt to describe an act on the part of a corporation whereby it renders itself liable to pay a sum of money in the future as a debt. The act of `incurring' happens when the corporation so acts as to expose itself contractually to an obligation to make a future payment of a sum of money as a debt. The mere fact that such sum of money will only be paid upon a future contingency does not make the assumption of the obligation any less `incurring' a `debt'. As the Bank pointed out, many debts are incurred on a contingent basis. Goods are ordered by a buyer from a seller for future delivery. In such cases, the buyer is exposed to a future liability to pay the price upon delivery of the goods, absent some special condition requiring prepayment..... I agree in the conclusion of Gleeson CJ that once it is accepted that a `debt' in s 556(1)(a) may include a contingent debt, there is no difficulty in the present facts, in holding that a `debt' may be taken to have been incurred when Equiticorp entered a contract by which it subjected itself to a conditional, but unavoidable, obligation to pay a sum of money at a future time. This was such a case. It fell within the first of the two categories of guarantee identified by Mason CJ in Sunbird Plaza (at 255). There was therefore the incurring of a `debt' not merely the acquisition of a right to sue for damages. I agree with what Gleeson CJ has written about the character of the obligation assumed under the present guarantee."

104. In Bans Pty Ltd v Ling (1995) 16 ACSR 404, John Bryson J held that a debt for rent under an agreement for lease was incurred at the time the lease was entered into (following Russell Halpern Nominees Pty Ltd v Martin [1987] WAR 150) and that a debt for interest following default under the lease was incurred when the default occurred. His Honour said (at 408): "The contingencies which must occur before there is an obligation to pay have to be appraised in a practical and commonsense fashion".

107. In Leigh-Mardon Pty Ltd v Wawn (1995) 17 ACSR 741, a company placed orders for goods (packaging products for potato chips) on 15 September 1989 and 17 November 1989. Delivery of the goods ordered in September commenced on 10 November 1989. Hodgson J said (at 749):

"It is submitted for Wawn that debts for goods delivered by the plaintiff to the company were incurred when the relevant goods were delivered: see Hussein v Good (1990) 1 ACSR 710; 8 ACLC 390, Rema Industries and Services Pty Ltd v Coad [1992] FCA 114; (1992) 107 ALR 374 at 381; 7 ACSR 766, Taylor v Powell [1993] FCA 87; (1993) 113 ALR 374 at 379; [1993] FCA 87; 10 ACSR 174. Accordingly, all of the $674,000 claimed by the plaintiff was incurred at times when there were the requisite reasonable grounds. In my opinion, there is no hard and fast rule that a company incurs the debt for goods sold and delivered at the time when the goods are delivered to the company, and not at any earlier time. In Hussein v Good, goods were ordered in November 1987 and delivered in May 1988. There had been a part payment for the goods, and the balance was not payable until delivery. Southwell J in the Supreme Court of Victoria held that the debt for the balance of the price was not incurred until delivery in May 1988. He held that `debt' should be limited to that which is actually owed immediately it is incurred, so as to exclude contingent debts. Insofar as the decision was based on that reasoning, it does seem inconsistent with Hawkins v Bank of China (1992) 26 NSWLR 562; 7 ACSR 349, in which it was held that a company incurs a debt for the purposes of s. 556 of the Code when it enters into a guarantee by which it subjects itself to a conditional but unavoidable obligation to pay a sum of money at a future time; so that a relevant debt was incurred when the company in that case entered into a guarantee under which it was obliged to pay a liquidated amount contingent upon demand following default."

111. However, Hodgson J went on to say, in a passage which has considerable relevance for this case (at 749-750):

"As I stated in Standard Chartered Bank of Australia Ltd v Antico (unreported, 31 May 1995) at 123-4, in my opinion, a company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable. In relation to sale of goods, it seems to me that, in some cases, it will be the order which in substance and commercial reality renders the company liable for the price of the goods, even if that price is not actually payable until delivery; while in other cases, it will be the acceptance of delivery which, as a matter of substance and commercial reality, so renders the company liable. And intermediate positions are possible. For example, if the goods which are ordered are readily saleable by the vendor elsewhere at the same price, so that to refuse delivery not only precludes any liability for the price, but also involves at worst minimal damages, one might readily say that the debt is incurred, not by placing the order, but by accepting delivery. On the other hand, if what is ordered is goods which are to be specially manufactured for the company, and are not saleable elsewhere, so that to refuse delivery would be a breach of contract sounding in damages approximating to the full price of the goods, then, as a matter of substance and commercial reality, one would regard the debt as having been incurred by placing the order and binding the company to it, or possibly by not cancelling the order at a time before the damages flowing from such cancellation would be of a similar order to the price of the goods."

115. The weight of authority shows that a debt can be incurred when the contract giving rise to the debt is entered into, even if contingencies affect the debt or the debt is a future debt. In the case of a future debt, it may be incurred at the time of entering the contract if it is then an ascertained or ascertainable amount or perhaps even if the only potential liability under the contract at that stage is for unliquidated damages. By the same token, a debt may in appropriate circumstances be incurred within the meaning of the section at a time later than the entry of the contract under which the debt arises or may arise. Although it is necessary to consider the terms of the relevant contract, the question when the debt is incurred within the meaning of the section does not depend on strict legal analysis but turns on when, in substance and commercial reality, the company is exposed to the relevant liability. The reason for the emphasis upon substance and commercial reality lies in the need to ensure that the language is interpreted, or applied to the facts, in a way which serves the purpose, or fits the context, of a provision punishing insolvent trading and in a way which avoids absurd results.

118. The words "incurs a debt" cannot be disregarded but, because of the aim and intent of the section, the focus must be on the conduct and choice of the alleged insolvent company. It is necessary to identify the time when the conduct and choice of the company caused the debt to be incurred because it is at that time that it must be shown that the director who has failed to prevent the company from incurring the debt had or ought to have had the requisite awareness that there were reasonable grounds for suspecting insolvency.

121. Adopting that approach on the facts of the present case, it seems to me that in substance and commercial reality the debt was incurred no later than 5 January 1998 when McGuigan was instructed to bottle and pack the wine. By this stage, the wine had been on-sold to investors and Wine Bank had no alternative but to organise delivery of what was to be the investors' wine. It was not suggested that it was a realistic or affordable option by then to refund the investors. The conduct of Wine Bank which exposed it to liability for the debt thus occurred at latest by 5 January 1998.

124. It follows in accordance with the plaintiff's concession that the plaintiff's claim fails. In case I am wrong, I will record my findings on the other issues on the alternative view that the debt was incurred at the times of delivery (6-12 February 1998).

Was Wine Bank insolvent as at 6-12 February 1998?

128. The background to this question may be briefly summarised as follows. Wine Bank purchased an existing wine export business in 1995. The details of the purchase were not made very clear but are not relevant. The purchase included some existing stocks of maturing wine. Lewis established a credit facility for the use of Wine Bank, but in his own name, with Citibank Ltd. The account was secured by mortgages of real estate in his name. A "Deed" dated 15 August 1995 signed by Lewis and executed under common seal by Wine Bank provided that this account was held by Lewis as nominee for Wine Bank (and a recital said that Wine Bank was the "beneficial holder" of the bank account). The account was described as a "mortgage power account" and the credit limit as from about 30 October 1997 was $200,000. Wine Bank itself had a cheque account with the ANZ bank for daily operations.

131. Apart from Lewis, Wine Bank had two employees: Mr Ron Dinan, the export manager and Ms Kathleen Westhorpe, personal assistant to Lewis. Time and effort was expended by Lewis and Dinan up to about the end of 1997 in attempting to develop export markets for the investors' wines but these efforts were, with at best minor exceptions, unsuccessful. Moreover, in November 1997, a number of varieties of wine which had been purchased by Wine Bank from the previous owner of the business in 1995 were, in whole or in part, refused export approval by the Australian Wine and Brandy Corporation. On 16 January 1998, Lewis caused Wine Bank to repay $85,000 to the Citibank "Mortgage Power" account effectively reducing his debit balance to nil. The credit available on this account continued to be $200,000.

134. As part of the management accounts, Westhorpe had printed out from Wine Bank's computer a balance sheet for Wine Bank as at 31 January 1998. This showed net assets of $266,941 but that figure was reached by valuing the Wine Bank licences (i.e. goodwill) at $480,000. Of more significance, the balance sheet and other evidence showed the following position in relation to current assets and liabilities as at 31 January 1998:

The evidence showed that the item "Triad Group Receivables" represented wine which Wine Bank had sent to Antwerp, Belgium in October 1996 which had not been sold and which I am satisfied had no realisable value. As a result, Wine Bank's current assets as at 31 January 1998 were valued at about $89,000.

Wine Bank's current liabilities totalled $379,506, according to the balance sheet. However, that total included insurance and storage charges for the financial years ending 30 June 1999-2001 totalling some $104,000, so a more accurate value for "current" liabilities was about $275,000. The current liabilities of $275,000 included the following items:

The balance sheet and other evidence thus showed that as at 31 January 1998 the current liabilities of Wine Bank exceeded its current assets by some $185,000.

144. By mid-February 1998 some of Wine Bank's licensees had refused to make any further sales to investors unless export sales were achieved by Wine Bank.

147. On 20 February 1998 Lewis arranged a meeting attended by himself, Nicholas Brooke of PriceWaterhouseCoopers (Corporate Finance and Recovery), Richard Loveridge, David Reichenberg (both of Freehill Hollingdale & Page) and John Roden (formerly of Price Waterhouse) to discuss the operations of Wine Bank. Lewis told the meeting that in late 1997 and early 1998 he was attempting to sell the business as a going concern; that Wine Bank could sell wine in Europe, Asia and Australia, and that the potential for such sales, coupled with strong support from the investors, meant that Wine Bank had valuable goodwill in its business; that he had not yet been successful in finding a buyer for the business but had a number of interested parties; that the failure of a batch of wine to receive export approval, due to problems with that wine's quality, had been a blow and had placed pressure on cash flow, as Wine Bank could only realise a low price on the wines if sold in the domestic market; and that he had funded much of Wine Bank's operations "with his own money", and could no longer afford to fund the business's cash requirements unless sales of wine stocks occurred or there was an imminent sale of the business.

150. By 23 February 1998 Lewis had become sufficiently concerned about Wine Bank's continuing solvency that he had placed a "moratorium" on the incurring by Wine Bank of any further debts or obligations and, on that date, Lewis instructed Dinan not to sell any more wine to investors.

153. On 25 February 1998 there was a further meeting between Lewis, Brooke, Loveridge, Reichenberg and Roden at which a discussion about potential purchasers for the business took place.

156. At the 25 February 1998 meeting Lewis said that:

(a) he wanted advice on how to protect the goodwill of the business in the face of short-term cash flow problems;

(b) a Mr Craig Nodder, from New Zealand, was interested in purchasing the business, and that Lewis expected to receive some offers to purchase the business by early March;

(c) a debt owed to McGuigan was now two weeks overdue and there was also a payment due to the Australian Taxation Office;

(d) he hoped a sale of Wine Bank wine stocks held on behalf of depositors would be concluded by the following Friday;

(e) there were possible sales of wine stocks to potential depositors which could generate about $220,000 in gross proceeds, although there were no wine stocks available to fill these orders; and

(f) he had advised the Wine Bank licensees by facsimile on 23 February 1998 to either return sales proceeds to depositors or hold the funds on trust pending clarification of Wine Bank's future cash flow.

165. I interpolate that notwithstanding what Lewis said to Brooke, I am satisfied that Wine Bank's debt to McGuigan was not overdue for payment until about mid-April 1998.

168. On 14 April 1998 Lewis, in his capacity as sole director of Wine Bank, resolved that Wine Bank was insolvent, or likely to become so at some future time, and that Nicholas Brooke be appointed administrator. The administrator sold the business in June 1998 and shortly thereafter the company went into liquidation as the result of a resolution passed at a meeting of creditors.

171. The plaintiff submitted that the following assortment of matters disclosed by the evidence as to Wine Bank's position as at 31 January 1998 was important on the question of insolvency:

(a) it had a deficiency of current assets as against current liabilities of $217,370 according to its January 1998 balance sheet;

(b) it did not have goodwill valued at $480,000 as represented in the balance sheet;

(c) it had made no overseas sales, which was the ultimate reason for its existence;

(d) it had made no sales after its export manager's two overseas trips and the defendant's sole overseas trip;

(e) it had not sold any of the wine sent to Belgium in October 1996;

(g) it had been refused permission by the Australian Wine and Brandy Corporation to export some of the wine;

(h) it had no stock and no other wine to sell to investors;

(i) its licensees were no longer prepared to sell investors the wine;

(j) it instructed licensees not to sell any more wine to investors on 23 February 1998, prior to the final delivery of wine to the company by McGuigan;

(k) it had paid $85,000 into the account of Lewis with Citibank (the `Mortgage Power' Account) on 15 January 1998.

185. The defendant called as an expert witness on the insolvency question, John Spark, a partner in Ferrier Hodgson (Vic) since 1989 and a specialist in corporate recovery and insolvency. Mr Spark was of the view on "reconfiguring" Wine Bank's balance sheets for each month in the period October 1997 to March 1998 that the ratio of current assets to current liabilities was at all times less than 1.0 and was worst in February 1998 (at 51%). This pointed to a likely inability of Wine Bank to pay all of its debts as they became due from current assets. However Mr Spark referred to the continuing availability of the Citibank mortgage power account with its credit limit of $200,000. In his opinion the availability of that credit facility meant that Wine Bank was at all times able to pay its debts as they fell due. In particular, taking into account that facility, Wine Bank had on his figures a surplus of current assets over current liabilities in February 1998 of some $95,000.

188. There were some discrepancies between Mr Spark's "reconfiguring" and the figures as to current assets and liabilities set out earlier above. However I think that the only arithmetical adjustment of significance that need be made to Mr Spark's figures would be to remove from current assets the sum of $72,975 in relation to the wine in Belgium. That would result in a much smaller surplus in February 1998 but still a surplus, if the Citibank facility is to be taken into account.

191. The defendant submitted that the plaintiff had failed to provide clear and cogent proof to satisfy the Court on the balance of probabilities that Wine Bank was at the relevant time unable to pay its debts as and when they fell due. However counsel for the defendant in substance conceded on the evidence that the defence depended on the existence of the $200,000 Citibank facility. I refer to the following exchange with counsel:

They were stopped I think by a letter of 23 February, Your Honour. The licensees were told not to make any further sales.

It still had, Your Honour, the ability to derive income from the sales of investors' wine overseas.

But if one finds that that was an unreasonable expectation, there wasn't any other source of income.

So then you have to return to look at the $200,000 facility.

In the absence of that, there isn't anything, is there?

No, the $200,000 facility is the light on the hill, so to speak, throughout this period..."

195. In response, counsel for the plaintiff contended that this facility was no longer available to Wine Bank in February 1998 because, although it still existed, the defendant (having reduced his liability thereunder to nil in January 1998) had no intention of making it available to Wine Bank thereafter. Such a contention was not put to the defendant and I am, in any event, not prepared to draw that inference. On the other hand, there is no reason to infer that Wine Bank (via the defendant) would have used this facility to pay the McGuigan or any other existing debt then payable or about to become payable. In fact it did not do so thereafter.

198. Even assuming the likelihood of the availability and use of the credit facility, is the plaintiff unable to prove the insolvency of Wine Bank: namely, that Wine Bank as at 6-12 February 1998 was unable to pay all of its debts, as and when they became due and payable (s. 95A Corporations Law)?

201. In Taylor v ANZ Banking Group Ltd (1986) 13 ACLR 780, 783-4, McGarvie J said:

"Commercial insolvency of the company The first question is whether at the time immediately before the payment was made the company was unable to pay its debts as they fell due from its own money. Re F P & C H Matthews Ltd [1982] 1 All ER 338 at 343; Queensland Bacon Pty Ltd v Rees, supra, at 303. This question of fact is to be decided as a matter of commercial reality in the light of all the circumstances. As Barwick CJ said of the section which in the earlier Bankruptcy Act was the equivalent of s 122: `An essential step in making out that a payment is a preference within s 95 is to establish by evidence to the satisfaction of the court that the payer was at the time of the payment insolvent. Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realisation by sale or by mortgage or pledge of his assets within a relatively short time -- relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of affairs has arrived is a question for the court...' Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 at 670. It is appropriate to consider the terms of credit available to the debtor in the sense of the time available to the debtor to pay debts owed to creditors. Calzaturificio Zenith Pty Ltd (in liq) v New South Wales Leather & Trading Co Pty Ltd [1970] VicRp 80; [1970] VR 605 at 609 The question is not to be answered by merely looking at the accounts or making a mechanical comparison of assets and liabilities. While the debtor's own money is treated as including not only cash resources but also money which can be obtained relatively quickly by the sale, conversion, mortgage or pledge of assets, money obtainable by unsecured borrowing is not treated as the debtor's own money. Bank of A'sia v Hall [1907] HCA 78; (1907) 4 CLR 1514 at 1528 and 1543; Re Armour; Ex parte Official Receiver v Commonwealth Trading Bank of Australia (1956) 18 ABC 69 at 74; Kyra Nominees Pty Ltd (in liq) v National Australia Bank Ltd (1986) 4 ACLC 400 at 405." (Emphasis added.)

205. In Re RHD Power Services Pty Ltd (in liq) (1990) 3 ACSR 261, 263-4, McPherson SPJ said on the question of insolvency of a company:

"Its principal current assets consisted of cash at bank and trade debtors. At 30 June 1987 the former stood at $94,494 and the latter, after making allowance for doubtful debts, at $217,605. Those were not inconsiderable sums; but the company had entered into a factoring agreement with Heller Financial Services Ltd with respect to its trade debtors. Heller was secured by a registered mortgage debenture given by the company in 1985, and on 15 October 1987, it appointed a receiver in respect of all money due to the company. Subsequently, the plant and equipment was sold to satisfy this secured debt. Against this, it was said that the company remained solvent as long as its holding company was prepared to continue lending it funds for its operations. As to that, s 122(1) of the Bankruptcy Act speaks of a person who is unable to pay his debts as they become due `from his own moneys'. To the extent, if at all, that the company was paying its way before 15 October 1987, it was succeeding in doing so by means of money provided by the holding company. Even if, upon receipt of such a loan, the money lent became on each occasion its `own moneys', it remains true to say that each such loan increased the company's indebtedness, so making it correspondingly less able to pay its debts as they fell due from its own moneys. But, in any event, the test of insolvency for the purpose of s 122(1) means the inability of the debtor `utilizing such cash resources as he has or can command, through the use of his assets, to meet his debts as they fall due': see Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666, at 670 per Barwick CJ. To pay its debts the company here was using not its own assets but those of its holding company or of other members of the group. It has been said that under s 122(1) `money obtainable by unsecured borrowing is not treated as the debtor's own money': see Taylor v Australia & New Zealand Banking Group Ltd (1988) 13 ACLR 780, at 784 per McGarvie J. That may not always or necessarily be so because a person's ability to borrow without security may in some circumstances provide compelling evidence of his strong financial standing; but it is certainly true of a case like this, where the company has been able to trade only by receiving continuing financial assistance from its parent company."

209. I do not think that the absence in s. 95A of the words "from its own money" alters the proper approach to this question as referred to in the passages quoted above. Wine Bank was unable to pay its debts, in particular the debt to McGuigan which was then incurred and soon to fall due, from its own cash resources. I am satisfied that it had no expectation of significant income and no assets which could readily be sold or hypothecated. No sale of the nearly defunct business was reasonably imminent. The Citibank credit facility was the source of a potential loan, but a loan secured on the defendant's assets and not on the assets of Wine Bank. One debt would simply have been replaced with another debt which could not be repaid. Looking at the total picture, I would have concluded that Wine Bank was insolvent as at 6-12 February 1998.

At 6-12 February 1998 were there reasonable grounds for suspecting that Wine Bank was insolvent?

213. This question would have to be answered in the affirmative. The financial affairs of Wine Bank, a one man company, were not complex and the same analysis which shows the existence of insolvency demonstrates that reasonable grounds for suspecting insolvency also existed. Confirmation is provided, if any be needed, by the fact that the defendant called in "company doctors" on 20 and 25 February 1998. Most of the information available then was available to the defendant and to Wine Bank at the beginning of February 1998.

Was the defendant aware at 6-12 February 1998 that there were such reasonable grounds for suspecting that Wine Bank was insolvent, or would a reasonable person in a like position in a company in Wine Bank's circumstances be so aware?

217. It would be unnecessary to affirmatively decide that Lewis was in fact aware of the grounds for suspecting insolvency because in my opinion it was clear that a reasonable person in his position - sole director and controller - in a small company in Wine Bank's circumstances could not fail to be so aware. Finally, the s. 588H defence would not have been made out. For reasons which have been made apparent the defendant did not have reasonable grounds to expect that Wine Bank was or would remain solvent at 6-12 February 1998. Nor would I have been satisfied on the evidence that the defendant had such an expectation.

221. Because the plaintiff failed to show that the debt was incurred on or after 31 January 1998, there will be judgment for the defendant with costs including reserved costs.