Assessment of the plaintiff's case
48 The two questions which require further examination are, firstly, whether the transactions have been shown by the plaintiff to be uncommercial transactions, and therefore to be insolvent transactions, and therefore to fall within s 588FH(1)(a).
49 The remaining question is whether the transactions had the effect of discharging a liability of the defendant (s 588FH(1)(c)).
50 The question whether a transaction is uncommercial must be examined from the perspective of the company (Tosich Construction Pty Ltd (In Liq) v Tosich (1997) 78 FCR 363 ("Tosich") at 366-7. In Tosich, at 367C-D, the Full Court said:
The company's circumstances must include the state of its knowledge, that is, of the knowledge of those who were relevantly its directing mind. Only if the Court can conclude that a reasonable person in the company's circumstances would not have entered into the transaction does the section make that transaction uncommercial.
51 To similar effect, Gordon J (with whom Heerey J agreed) said in Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83 at [129]:
129 In seeking to address the third of the requirements, the principles to be applied may be summarised as follows:
…
(3) the objective criteria are not considered in some vacuum but by reference to "the company's circumstances" which must include the state of knowledge of those who were the directing mind of the company, such as its controlling director or directors: Tosich Construction 78 FCR at 367; …
52 In the present case the "directing mind" of Highup at the time the payments were made was Mr Gubas, who has given no evidence. Apart from the fact that there is documentary evidence tracing the payments from Highup's bank accounts into the hands of the liquidator, and the fact that some rough correspondence exists with the proposed schedule of payments under the proposed deed, no other light has been shed on the purpose of the payments by the evidence. Mr Slaven has given no evidence, based on his investigations, beyond volunteering the opinion that the terms of the proposed deed "were performed and satisfied" by the payments.
53 Upon this foundation the plaintiff invites the inference that the payments were of no commercial utility to Highup and can only be (or at least should be) explained as a "gift" to the defendant.
54 There are too many imponderables involved to permit me to accept this submission.
55 One purpose of the establishment of CSS was the provision of employment and related services to Highup. There is no evidence about how any debt was incurred by CSS by trading while it was insolvent or what such debts relate to. I am not prepared to simply assume, in favour of the plaintiff, that the payments by Highup to CSS "cannot" be explained by normal commercial practice. I know nothing about whether Highup may have had a legitimate commercial reason for making a payment on its own behalf to CSS, or a legitimate commercial reason for making such a payment on behalf of Mr Gubas, on the assumption that he had assumed some such obligation. I am not prepared to conclude that the only explanation for the payments lies in a desire to acquit a liability on behalf of the defendant, or that the terms of the proposed, unexecuted deed should be regarded as legally effective, much less that they should be regarded as explanatory of the conduct of Highup, which was not proposed to be a party to it.
56 I am not satisfied, therefore, that the plaintiff has established that the transactions were uncommercial transactions (s 588FB(1)), insolvent transactions (s 588FC) or fell within s 588FH(1)(a).
57 The plaintiff's case, based on s 588FH(1)(c) also faces difficulties which were, in my view, not overcome by the evidence.
58 The evidence did not establish that the defendant was subject to a liability to CSS, much less in any particular amount.
59 There was no evidence, aside from the terms of the proposed deed, which might be relied upon to fix the defendant with such a liability. There was no evidence in the present proceedings that CSS had traded whilst insolvent, or incurred debt as a result which represented relevant loss or damage to CSS beyond the possible formation of an opinion to that effect by Mr Lo Pilato (which was accepted by the creditors of CSS for the purpose of the meeting on 18 April 2012). There was no direct evidence that any demand had been made against the defendant, or in what amount. I am not prepared to regard the terms of Recital D or E of the proposed deed as probative evidence of the suggested fact that a demand for payment of $291,801.09 had been made by Mr Lo Pilato, much less that a unilateral demand of this kind would suffice to establish the existence of a liability within the meaning of s 588FH(1)(c).
60 Whatever significance they may have, the fact of the payments by Highup will not establish the terms of a binding agreement (or an assumption of liability) by the proposed parties to the proposed deed. The deed (if executed in those terms) was intended to operate without admission of liability by the defendant or Mr Gubas with respect to the alleged debt.
61 Furthermore, although the fact of the payments may suggest the existence of some form of arrangement, it is not one which may be attributed to Highup by means of reference to the terms of the proposed deed. If the payments made by Highup breached Mr Gubas' duties as director, that might expose him to civil, or criminal, proceedings, but the terms of the proposed deed cannot, in my view, be used to base a submission that Highup (which was not to be a party) was acting in furtherance of that proposal.
62 I also cannot conclude that the final arrangement (whatever it was) was reflected by the terms of the proposed deed. The payments might equally have reflected some modified stance on the part of the proposed parties. I simply do not know.
63 In his compulsory examination, Mr Gubas gave the following evidence:
This is the third liquidation that has been effectively done through Mr Lo Pilato of RSM Bird Cameron. What happened in the course of this liquidation?---We agreed to pay $150,000.
Who is "we" in this instance?---Well, Highup; I did.
Which one, Highup or you?---Well, privilege. I can't remember what we did as a settlement deed under me or under the Highup.
And do you have a copy of that settlement deed?---Privilege. Not right here.
Would you be able to provide one tomorrow to the liquidator here in court?---Privilege. Yes.
64 Mr Gubas did not provide the promised copy at that time. The summons issued by Mr Slaven sought a copy of any such document. I infer that none was provided in response to the summons either. Although this evidence (which was permitted without objection after notice was given under s 67 of the Evidence Act 1995 (Cth)) may also be taken, if relevant, to constitute an admission (see ss 81 and 87 of the Evidence Act) that does not take the plaintiff's position far enough. Mr Gubas is not a party to the present proceedings. Such value as his statements might have as representations of fact in their own right cannot provide a sufficient basis for concluding that the terms of the proposed deed constitute evidence of a liability within the meaning of s 588FH(1)(c). They do not constitute an admission of any kind by the defendant. The plaintiff cannot rely upon them as an "admission" by itself.
65 The plaintiff submitted that s 588FH(1)(c) was satisfied in the present case because a demand from Mr Lo Pilato that the defendant pay $291,801.09 raised a contingent liability which was, in part, satisfied by the payments by Highup. There are also a number of difficulties with this argument.
66 First, there was no evidence that such a demand, in those terms, had been made. The plaintiff relied on Recital D in the proposed deed but in my view that does not constitute material which is probative of the proposition.
67 The second difficulty is that I am not able to accept the bald submission, unsupported by reference to authority, that a mere demand raises a contingent liability of the kind referred to in s 588FH(1)(c).
68 In Hawkins v Bank of China (1992) 26 NSWLR 562 ("Hawkins"), Gleeson CJ (then of the New South Wales Supreme Court ) said (at 572):
"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. In Williams v Harding (1866) LR 1 HL 9, there was an issue as to the effect of a statute dealing with insolvency which made a debt incurred by a non-trader insufficient to found an adjudication of bankruptcy unless it was contracted after a certain date. The debt in question in that case was a liability to pay calls made by a joint stock company. The question was whether the appellant's debt was contracted when he signed the deed of settlement making him a shareholder, or when the calls were made. It was held that the former was the case. Lord Cranworth LC said (at 21) that the date of the appellant's debt was when he executed the deed, and Lord Chelmsford (at 24) referred to the amount of the calls as a debt to which the appellant was "antecedentally liable".
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.
(Emphasis added.)
69 Kirby P said (at 576):
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.
(Emphasis added.)
70 Much depends on the statutory context (Hawkins at 572D; ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2014) 309 ALR 445 at [684]).
71 The exact reference in s 588FH(1)(c) is to: "a liability (whether under a guarantee or otherwise and whether contingent or otherwise)".
72 This formulation is apt to include potential liabilities which have not yet crystallised, such as those voluntarily assumed as a guarantor on behalf of another, or those which depend upon the fulfilment of a stated condition (i.e. contingent liabilities). However, I do not see any foundation for regarding the statutory formulation in s 588FH(1)(c) as extending to a unilaterally asserted debt or obligation, without more.
73 In Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, Mason CJ, Dawson, Gaudron and McHugh JJ referred (at 524) with apparent approval to observations by a Full Court of this Court about the circumstances in which a liability of the State of Western Australia for debts of Rothwells Ltd to the National Australia Bank Ltd was rightly seen to be "contingent and executory". The liability arose under an indemnity which was contingent in the sense that:
… before the Bank might make any claim under the indemnity upon the State, Rothwells would have to have failed to satisfy in full its liability under the facility and the Bank would have to have proceeded to the fullest extent of its rights against Rothwells to obtain payment out of the assets of Rothwells.
(Western Australia v Wardley Australia Ltd (1991) 30 FCR 245 at 252).
74 I can readily see how discharge of a potential liability made under a contingent arrangement of that kind, or under a guarantee, falls within s 588FH(1)(c), even though the liability has not crystallised. A potential obligation of that kind has been assumed, even if it depends on future events. I do not, at present, see the foundation for treating a demand in the same way.
75 Even if an arrangement to discharge an asserted liability might fall within s 588FH(1)(c), it would still need to be shown that the impugned transaction had that "effect". For the reasons given earlier, that has not been established.
76 As a result, the plaintiff in my view has also failed to satisfy s 588FH(1)(c).