HRNG ADELAIDE, 2 October 1991 #DATE 1:11:1991 Counsel for the appellant: Mr. T. A. Gray QC with Mr. J.R. Sulan QC and Mr. C.N.H. Bagot Solicitors for the appellant: Piper Alderman Counsel for the respondent: Mr. V. C. Oslington QC with Mr. S. P. White Solicitors for the respondent: Baker O'Loughlin Counsel for the intervener Australian Securities Commission: Mr. M. E. Hoile

ORDER Appeal allowed and winding up summons dismissed.

JUDGE1 MATHESON J. This litigation arises out of the purchase by the appellant Beach Petroleum N.L. ("Beach") of an interest in the Burbank Oil Field, Oklahoma, U.S.A. in mid 1989 and out of a subsequent agreement dated 19 October, 1989 between Beach and other companies, including the respondent Jingellic Minerals N.L. ("Jingellic"), which was called a Syndicated Cash Advance Facility Agreement ("the SCAF Agreement"). Before setting out the history of the litigation and the arguments on appeal, it is necessary to look closely at the background. 2. At all relevant times the respondent Jingellic, Claremont Petroleum N.L. ("Claremont"), Enterprise Gold Mines N.L. ("Enterprise") and Spargos Mining N.L. ("Spargos") have been companies in the Independent Resources Limited ("IRL") Group of Companies. It is unnecessary to discuss the complex shareholding structure of the Group, but it is necessary to note that Beach is a subsidiary of Claremont. It is also necessary to note that at least by 1 January, 1988, Michael John Fuller ("Fuller") was a director of all the companies mentioned, but that he had ceased to be a director of Claremont by 6 December, 1990 and of Beach by 18 January, 1991. He is still a director of IRL and Jingellic. He had ceased to be a director of Spargos by 21 September, 1990. Joseph Patrick Cummings ("Cummings") was a director of Jingellic, Enterprise, IRL and Spargos by 16 December, 1988, and became a director of Claremont and Beach on 23 December, 1988. He had ceased to be a director of Spargos by 21 September, 1990, of Claremont by 29 November, 1990 and of Beach by 21 December, 1990. Christopher Paul Main ("Main") became an alternate director of both Claremont and Beach on 2 May, 1989 and a director of both those companies on 6 June, 1989. He became a director of Enterprise, IRL and Spargos on 29 May 1989, and is still a director of IRL and Enterprise. He had ceased to be a director of Claremont, Beach and Spargos by 23 March, 1990. He has never been a director of Jingellic. 3. Dr. David William King ("Dr. King") became a director of Claremont on 6 December, 1990 and of Beach on 24 January, 1991 and is still a director of those companies. Beach's argument before Zelling A.J. and on appeal rests to a substantial extent on his five affidavits sworn herein, the first on 18 April, 1991 and the last on 30 April, 1991 and the many exhibits to those affidavits. The argument also derives support from the affidavit of Stephen John Menzies sworn herein on 18 April, 1991, ("the Menzies Affidavit"). He is a staff member of the Australian Securities Commission. The Commission intervenes in these proceedings pursuant to s.1330 of the Corporations Act. 4. The starting point of the argument for Beach was a sales agreement entered into on 31 August, 1988 between McKenzie Management Inc. as seller and Burbank Petroleum Company Inc. as buyer, McKenzie Management Inc. having obtained title in the Burbank Oilfield in Oklahoma, U.S.A. to a minimum 36% working interest from Chevron U.S.A. Inc., Atlantic Richfield Co., Texaco, Sonio Petroleum Co., and Colonial Royalties Co. The agreement provided that McKenzie Management Inc. would assign its interest to Burbank Petroleum Company Inc. on payment of US$150,000 earnest money two weeks from the date of the sales agreement and the balance of a total purchase sum of US$3,000,000 six weeks from the date of the agreement. 5. By facsimile message dated 9 September, 1988 sent to Fuller by a man called Trevor Bailey on behalf of Burbank Petroleum Company in London, Bailey referred to their "telecon", and asked Fuller to forward the sum of U.S.$150,000 earnest money deposit for the purchase of interests held in the Burbank Oilfield units totalling 36%. By facsimile message on IRL letterhead dated 12 September, 1988 Fuller advised Norman Hilton, a director of Claremont, as follows: "Our London Office has been looking at securing an interest in the Burbank Oilfield. This is potentially a huge deal. It is something I think fits Claremont rather than any of our companies. It comes technically highly recommended. For US$150,000 remitted immediately as per accompanying fax you will have in effect first option. Your technical people can then assess for themselves whether they want to take the whole 36% interest or only a part. You will have no trouble dealing any part off. I strongly recommend you act today. I will arrange for technical summary to be forwarded by courier." 6. On or about 13 September, 1988, Claremont forwarded U.S.$150,000 which was credited to the trust account of Brenman Raskin, attorneys for Burbank Petroleum Company in Denver, Colorado, U.S.A. 7. By facsimile message dated l1 October, 1988, Fuller advised Gardner Weller and Company, London solicitors for Burbank Petroleum Co., that he intended, subject to formal Claremont Board approval being obtained, to remit U.S.$2.9 million. He added: " Would you kindly confirm that in exchange for same we will have a call over your client's interest for a period of say three months and will have a charge over your client's interest." 8. By memorandum dated 11 October, 1988, Bailey advised Gardner Weller and Co.: "Re: CLAREMONT PETROLEUM and BURBANK PETROLEUM Referring to Claremonts Fax of 11th October this confirms Burbanks instructions that it is prepared in return for an advance to it of US$2.990 MN by Claremont for a 3 month period, to give as security a charge over its 39% interests in the Burbank Oilfield. The advance will also act as consideration for Claremont to have the right to require Burbank to sell the field to Claremont but only exercisable whilst the loan is outstanding. By copy of this fax I am instructing the Denver attorney and agent for Burbank Petroleum Company, Herrick Lidstone Jr, to immediately assist you in preparing the necessary documentation ..." 9. By facsimile dated 12 October, 1988, Fuller advised Gardner Weller and Co. that U.S.$2.99 million had been transmitted to Gardner Weller and Co.'s nominated account. Bailey retained U.S.$40,000 "as advance against management fees". 10. Between August, 1988 and March, 1989 Beach alleges that Burbank Petroleum Company acquired a further 10% interest in the oilfield, (making a total of 46%)in small parcels with Claremont money at a cost of U.S.$600,000. 11. The Court was next referred to the involvement of Main. On 26 April, 1989 Main sent Burbank Petroleum Company an account for U.S.$10,000 "for consulting services in relation to the ongoing negotiations and management of the Company's oil and gas interests, performed as a service to Mazeley Ltd." I identify Mazeley Ltd. a little later in these reasons. On 1 June, 1989 Main sent an account for $25,000 to Fuller in his capacity as Chairman of Claremont for $25,000 for "consultancy services rendered" in 1989 between February 22 and March 17, and between April 2 and May 11. 12. It is convenient now to quote from paragraph 44 of Dr. King's affidavit sworn on 18 April, 1991 wherein he deposed: "I am aware from a perusal of the records of Beach and Claremont that Mr Dene Rogers was a senior petroleum engineer employed by the Claremont Group since at least November 1988 and visited the Burbank Oil field on behalf of Claremont in December 1988. Rogers had been charged with evaluating the Burbank Oil fields and on 4th May 1989 he signed a report entitled 'Burbank Oil fields - Evaluation of 46% interest' addressed to J Worthington, General Manager of Finance of

Claremont and G Scott, General Manager Operations of Claremont. This comprises the final report of Mr Dene Rogers and is the only evaluation relevant to the acquisition of the approximate 47% interest agreed to be acquired on 30th June 1989. Mr Rogers says under the heading 'Conclusions and Recommendations':- '2.1 Unless immediate full field development can begin with Phillips consent and CPNL as operator, CPNL should not purchase the 47% of the Burbank fields from Burbank Petroleum Corp; 2.2 If CPNL can operate and Phillips agrees to a development schedule at least equivalent to that proposed in earlier reports on Burbank evaluation, a reasonable return and payout would occur if a purchase price of 8 - 10mm$US was paid with a ceiling at 12mm$US ...'" 13. On 11 May, 1989 the then Board of Beach resolved: "1) To exercise the option to acquire a 47% interest in the Burbank Oil Fields in Oklahoma if an appropriate and satisfactory price can be negotiated in the region of US$21 million to US$26 million, subject to satisfactory evidence of title and appropriate documents.

2. To authorise and instruct Sheldon Cordell of Joelson, Wilson and Co Solicitors acting on the Company's behalf, to

begin negotiations on the price to be paid within the range above, commencing at the lowest price." 14. The resolution was signed by Fuller, Cummings and Main. 15. On 2 June, 1989, in a facsimile message from Fuller to Sheldon Cordell, Fuller said: "I confirm that we are prepared to go to U.S.$28 m if necessary to close the deal. The final instruction on price

and timing of closure will come from (Main). (Main) will have Power of Attorney to execute on behalf of Beach. The management of Mazeley can remain as is for the moment." 16. On 29 June, an agreement called a Charge and Option Agreement between Firstway Limited ("the Vendor"), Beach and Claremont was executed. Main executed it on behalf of both Beach and Claremont. The recitals state that Firstway Limited was incorporated in the Republic of Liberia and was the beneficial owner of the entire issued share capital of Mazeley Limited, another company incorporated in the Republic of Liberia, and that Mazeley Limited was the beneficial owner of the entire issued share capital of Burbank Petroleum Company, a company incorporated in the State of Colorado, U.S.A. and of the entire issued share capital of Burbank Oil and Gas Limited, a company incorporated in the Bahamas. 17. The agreement gave Beach an option to purchase from Firstway its 46% interest in Burbank for U.S.$28 m. The agreement further stated that payments already made by Claremont of U.S.$8,197,564 (including the moneys paid under the sales agreement dated 31 August, 1988, supra) were to be treated as part payment, and that Claremont had negotiated the arrangements between Beach and the Vendor "as a duly appointed and authorised agent for its principal Beach". 18. By letter dated 30 June, Main writing for and on behalf of Beach, wrote to Firstway Limited referring to clause 7.3.1 of the Charge and Option Agreement and giving notice of Beach's exercise of the option referred to therein. 19. On 3 July, the following monies were paid to Firstway Limited: Beach Petroleum N.L. US$ 3,989,866 Spargos Mining N.L. l,582,808 Enterprise Goldmins N.L 5,741,785=$10,428,927 Jingellic Minerals N.L. 3,104,394 US$14,418,853 20. Between 28 September, 1989 and 19 January, 1990 Beach paid a further U.S.$4,743,800. 21. On 19 October, 1989 Beach, Spargos, Jingellic and Enterprise entered into the SCAF Agreement, supra, pursuant to which Beach was to repay U.S.$10,428,987 with interest. Under related security documents, repayment to Jingellic, Enterprise and Spargos was secured by Beach. Jingellic held as security the single bearer share comprising the entire issued capital of Mazeley Limited. A memorandum prepared by Main for the Board of Directors of Beach and dated 9 February 1990 sets out details of payments that were made for the purchase of Mazeley Limited, and is Exhibit DWK24 to Dr. King's affidavit of 18 April, 1991. 22. On 7 January, 1991, purportedly "in its capacity as Agent as defined in and for the purposes of" the SCAF Agreement, Jingellic gave Notice of Demand under the Corporations Act claiming payment of $5,398,166.60 including accrued interest from Beach. 23. On 18 January, Beach entered into a Heads of Agreement with Jingellic, the terms of which were inter alia as follows: 1. on 18 January Beach would repay Jingellic $300,000.00; 2. as long as Beach complied with its obligations under this agreement; 2.1 the Notice of Demand would be withdrawn and no further action taken; 2.2 Jingellic would take no action to enforce payment or to enforce any security. 3. Subject to 2.5 Beach was to repay the balance owing by instalments each month until July when the monies remaining were to be paid.

4. Beach was not to create any security over its assets until the full amount was paid. 5. 2.2, 2.3 and 2.4 hereof were conditional upon the preparation of further documentation. 6. Jingellic entered into the Heads of Agreement as an agent under the SCAF agreement and warranted its authority as agent for the three financiers.
5. The Heads of Agreement were executed by Cummings on behalf of Jingellic and Mr. G. F. Towner on behalf of Beach, and they were approved by Claremont under the hand of its Chairman, Mr. P.C. Dunn.
6. Pursuant to the Heads of Agreement, Beach made the following payments: 1. $300,000.00 on 18 January, 1991; 2. $100,000.00 on 25 January, 1991; 3. $100,000.00 on 18 February, 1991.

By letter dated 14 March, Beach gave notice to Jingellic that it was unable to make its payment due on 18 March, 1991. 27. On 18 March, Jingellic wrote to Beach asking for details of Beach's management accounts and cash flow budgets and projections to allow Jingellic to consider rescheduling the payments. 28. On 19 March, Beach wrote back pointing out the effect of the falling oil prices on Beach's cash flow but not producing the documents asked for. By the following day Beach proposed a thirty day deferral which, if accepted, would be followed by discussions. Later that same day a fax from Dr. King advised that a letter would follow that afternoon from Beach after discussions among the directors. 29. On 21 March, Fuller wrote back on behalf of Jingellic pointing out that the information requested still had not been supplied and reserved the right to take action. Mr. Atkins, on behalf of Beach replied the same day requiring time, but did not provide any of the information requested. The following day Jingellic replied requiring the information to be supplied by Beach that day. 30. On 27 March Beach made an offer of $40,000.00 to be paid off the March instalment, provided no further payment was required until 30 April, and the payment was to be made without prejudice to Beach's legal rights or position. Jingellic responded that same day requiring $60,000.00 to be paid by the next day and an acknowledgement of the validity and enforceability of the Jingellic loan in terms of an annexed document, and a similar acknowledgement from Claremont. This request was refused the next day. 31. On 28 March, Jingellic issued a Summons to wind up Beach. I was at first surprised that these proceedings were commenced by Jingellic rather than Spargos as the SCAF agreement envisages Spargos acting as agent for all the financiers named therein, but as Zelling A.J. said in his first judgment at p 6: "Clause 23.2 gives the financiers as well as the agent the right to exercise remedies under the agreement and Clause 23.6 provides that the rights given by the agreement are cumulative on those given by law so the agreement does not, as was argued, vest the prosecution of rights and remedies solely in the agent." 32. On 18 April, Beach issued a Summons to dismiss the winding up Summons. The grounds upon which Beach sought the dismissal were: "(i) the alleged debt, the foundation of the summons for winding up was subject to a genuine dispute on substantial grounds namely that the SCAF Agreement was void and/or unenforceable having been entered into in pursuance of a fraud and/or in breach of the duties of the then directors of Beach: Fuller, Cummings and Main. (ii) that the SCAF Agreement was entered into in breach of the Articles of Beach and was ultra vires the powers of Beach. (iii) that Jingellic had actual notice that Beach's entry into the SCAF Agreement was in excess or abuse of the powers of Beach and accordingly Jingellic was precluded from enforcing the transaction against Beach. (iv) The Section 460 demand of Jingellic had lost its statutory force by reason of the compounding of the debt. (v) The debt alleged was secured to the reasonable satisfaction of the alleged creditor." 33. After hearing argument, Zelling A.J. reserved his judgment and delivered it on 24 April. He found that a genuine dispute on substantial grounds existed as to whether the SCAF Agreement was entered into in breach of the articles and that a genuine dispute on substantial grounds existed as to whether the debt had been compounded. His Honour rejected the other grounds, and in his judgment expressed grave doubts about Beach's solvency. He made the following orders: "1. That the Summons of the plaintiff dated the 18th day of March, 1991 for the winding up of the defendant be stayed. 2. That the costs of and incidental to the application and this

order be reserved for the consideration of the trial Judge. AND further consideration of the application is adjourned." 34. On 26 April, Zelling A.J. proposed a timetable to enable Beach to raise such defences as he had found it might have and on the basis that Jingellic would be plaintiff. Jingellic has not yet commenced these proceedings. Subsequently, Beach applied to re-open the argument on the issue of solvency, and Jingellic applied to appoint a provisional liquidator. 35. On 1 May, Zelling A.J. heard argument on Beach's application to re-open. On 2 May, he delivered judgment granting Beach leave to re-open on the issue of solvency, and subsequently his Honour heard the re-opened case. On 5 July Beach issued proceedings in the Federal Court against Jingellic alleging, inter alia, fraud. On 2 September, his Honour delivered his third judgment and found that the appellant was insolvent. He ordered: "1. That the plaintiff's application for the appointment of a provisional liquidator dated the 26th April 1991 be

dismissed. 2. That the defendant pay to the plaintiff the plaintiff's taxed costs of the application dated the 18th day of April 1991. 3. That the plaintiff pay to the defendant the defendant's taxed costs of and incidental to the plaintiff's application for the appointment of a provisional liquidator dated the 26th day of April 1991. AND further consideration of the application is adjourned." 36. Beach applied to the Full Court for leave to appeal and on 13 September, the Full Court (Matheson, Mullighan and Debelle JJ.) ordered: "1. That insofar as it is necessary, the defendant be granted an extension of time within which to apply for leave to appeal to the Full Court of this Honourable Court from the order of Acting Justice Zelling made herein on the 24th day of April 1991 up to and including the 5th day of September 1991. 2. That the defendant be at liberty to appeal to the Full Court of this Honourable Court from the orders of Acting Justice

Zelling made herein on the 24th day of April, 1991. 3. That the defendant be at liberty to appeal to the Full Court

of this Honourable Court from the order as to costs of Acting Justice Zelling made herein on the 2nd day of September, 1991. 4. That the defendant's appeal to the Full Court of this Honourable Court be listed for hearing with priority in the sittings of the Full Court commencing on the 30th day of September 1991. 5. That the costs of and incidental to this application and this order be reserved for the consideration of the Full Court." 37. I have reached the clear conclusion that this appeal should succeed. With utmost respect, I think his Honour erred first in not finding that there was a bona fide dispute on substantial grounds on Beach's allegations of fraud and breach of directors' duties. Secondly, I also think his Honour erred in holding that Beach was insolvent. Either of those conclusions should, in my opinion, compel this Court to allow the appeal, and to dismiss the winding up summons, but in combination they make such a decision inevitable. 38. In his judgment of 24 April, Zelling A.J. said (the emphasis is mine): "The allegation of fraud is put on an alternative basis:- 1. The directors knew the price was grossly inflated; 2. Notwithstanding that knowledge they let Beach be saddled with payment of the purchase price, and in particular with the repayment of the moneys advanced by Spargos, Enterprise and Jingellic; 3. The SCAF agreement was a mere sham designed to facilitate the fraud. I will deal with point 3 in detail when I come to the agreement. It will suffice here to say that the agreement in my opinion is not a sham and operates and was intended to operate according to its tenor. As to point 1, it would appear that Fuller at least thought the value of the oil interest was much greater than the valuation and I am not prepared to infer on the basis of the information

in front of me that the directors were guilty of anything more than an error of judgment, if that. Point 2 of course depends on point 1. As I said to counsel arguendo, the presumption of the law is against fraud, illegality and adultery. In

addition, the onus of proof of allegations of fraud is a high one within the civil onus. Bearing those things in mind, I do not think a prima facie case of fraud has been made out on the quality of this evidence so as to raise a genuine dispute on substantial grounds of the fraud allegations. Further, there are a number of security interests which exist as a result of the transaction and it is not suggested that some at least of those security interests were made with notice of the alleged fraud." 39. Mr. Gray, QC, counsel for the appellant, did not dispute what his Honour said about the presumption of the law or about the onus of proof of allegations of fraud, but he submitted that to require it to make out a "prima facie case of fraud" is to place a gloss on the correct question bearing in mind the nature and stage of the proceedings, which is to ask whether the debt is disputed on "some substantial ground and not on some ground which is frivolous or without substance" (see Mann v. Goldstein (1968) 2 All ER 769 per Ungoed-Thomas J. at p 773), or on "some ground which is not trivial or insubstantial but based on solid grounds" (see In Re Lympne Investments Ltd. (1972) 1 WLR 523 at p 526). Counsel argued that to place a gloss on the substantial ground test by the use of the words "prima facie case of fraud" represents an error of law. He referred us to Paringa Mining v. North Flinders Mines (1988) 165 CLR 453 at p 458 where, so he claimed, in a directly analogous situation concerning the principles relating to the granting of an injunction, the High Court (Mason C.J., Brennan and Gaudron JJ.) said: "And it is by no means clear that His Honour had posed for himself the relevant question: Was there a serious issue to be tried? Although His Honour expressly referred to the existence

of a serious issue to be tried and the balance of convenience, his reliance on Queensland v Commonwealth suggests he was

putting some gloss on the first of these elements by requiring Paringa to establish a clear and strong case for interlocutory relief." (See also the unreported judgment of the Full Court No. 1094 delivered on 31 October, 1988.) 40. Counsel argued that to require a prima facie case of fraud is to impose a higher onus than a requirement simply to demonstrate "a substantial ground". He argued that the learned Judge appeared to equate the two when he said: " A prima facie case of fraud ... so as to raise a genuine dispute on substantial grounds of the fraud allegations." 41. It does appear that his Honour treated "the presumption of the law against fraud" and the high civil onus on a party proving allegations of fraud as if they were separate and cumulative elements. 42. I do not think it much matters whether his Honour put an improper gloss on the question to be asked or not - although I am inclined to think he did - because I think the question should in any event have been answered in favour of the appellant. Fuller, Cummings and Main clearly knew that Firstway Ltd. had purchased the 46% (or 47%) interest in Burbank Oilfield for U.S.$3.6 million. The moneys used were borrowed from Claremont, the parent company of Beach. Subsequently that interest was sold by Firstway to Beach, Claremont's subsidiary, for U.S.$28 million. The difference in Australian dollars is approximately $32 million. 43. It may be that upon a trial when all the evidence is weighed, including any evidence to be given by or on behalf of Fuller, Cummings and Main, that a Court might then say that those directors were merely guilty of an error of judgment, but at the interlocutory stage and on the evidence before Zelling A.J., it seems to me that Beach's allegations of fraud and breach of directors' duties were not frivolous and were made bona fide and on solid grounds. I am driven to the view that his Honour failed adequately to take into account the memorandum of Mr. Dene Rogers dated 4 May, 1989 (supra), and in particular the fact that what Mr. Rogers called his "ceiling" valuation of U.S.$12 million was subject to two conditions which were never met. 44. His Honour appeared to have been influenced against the appellant's argument on this aspect because of what to him seemed to be the late hour of the allegations. He said: " ... right up to a very late stage Beach was treating the original loan and the Heads of Agreement as valid. Then it fell into financial difficulties and the attitude changed." 45. But Dr. King in a letter to Enterprise dated 10 January, 1991 said: " We have reason to believe that there are valid grounds for Beach to dispute the debt the subject of such demand." 46. And in his affidavit sworn on 18 April, 1991 Dr. King said, inter alia: "74 At the time the March 1991 payment was due pursuant to the Heads of Agreement, the Board of Beach (as newly constituted on the 24th January 1991 as referred to in paragraph 72 hereof) had formed the view on the basis of its own consideration of the matter and of legal advice that the acquisition of Mazeley Limited and matters associated therewith, including the SCAF agreement, were illegal, void and unenforceable. 75 Accordingly, on the 14th March 1991 Beach corresponded with Jingellic advising that it was unable to make the payment of $200,000.00 due on the 18th March 1991 pursuant to the Heads of Agreement ... 76 Between the 18th March 1991 and 27th March 1991 correspondence of various dates passed between Beach and Jingellic regarding the March payment due under the Heads of Agreement ... 77 By correspondence dated the 27th day of March 1991 Beach offered to Jingellic, without prejudice, a payment of $40,000.00 in relation to the March payment due under the Heads of Agreement, provided that no further payments be required until 30th April 1991. Such offer was put on the basis that if accepted, it would allow the Board of Beach further time to complete its investigations regarding the unlawfulness of the Mazeley Limited transaction and the SCAF agreement. 78 By a letter dated the 27th day of March 1991, Jingellic responded to the offer of Beach referred to in the preceding paragraph herein stating that a cheque for $60,000.00 was required and that Beach and Claremont provide the acknowledgements and covenants sought therein.

79 As a result of the investigations being undertaken, by letter dated the 28th March 1991 Beach replied to the letter of Jingellic referred to in paragraph 78 to this my affidavit, informing Jingellic that it was unable to provide the

undertakings and covenants sought ... 80 By facsimile transmission dated the 28th March 1991 Jingellic responded ... by advising that 'remedial action' would be taken without further notice. 81 No further correspondence or discussions took place between Beach and Jingellic prior to the service of proceedings upon Beach in this matter on the 10th April 1991. 82 I instructed the defendant's solicitors to request that Jingellic withdraw its summons on the basis that there was a disputed debt. I am informed by Mr Bagot that such a letter was sent to the solicitors for Jingellic on the 16th April 1991 and a letter declining to so withdraw was received on 17th April 1991." 47. l agree with the appellant's counsel that the fraud alleged is complex in nature, involving companies incorporated in Australia, the U.S.A., the Bahamas and Liberia, and involving consideration of documents from offices in Australia, Colorado, the Bahamas, the Channel Islands and four separate offices in London. Given this degree of complexity, the Board of Beach was understandably and rightly cautious about making allegations as serious as fraud, and, of course, during the period under consideration they had to deal with Jingellic's attempt to wind up the company. 48. Finally, with great respect, I think his Honour should have attached more weight to the Menzies affidavit, and in particular the following paragraph, to which there was no challenge by the respondent: "15. By reason of the matters to which I have referred, the Commission believes that there are reasonable grounds to suspect that the acquisition by Beach of the share in Mazeley Limited, and the financing of that acquisition by, inter alia, Jingellic Minerals N.L., formed a part of a fraudulent scheme whereby the Burbank interests were acquired for the purpose of later being assigned to a company or companies within the IRL Group - ultimately determined to be Beach, at a price grossly above the initial acquisition price of those interests, in order that the profits on the transaction could be realised for the benefit of Firstway Limited and perhaps others, including Independent Resources Limited." 49. Apparently, the appellant's counsel before Zelling A.J. devoted much time to arguing that the whole transaction was part of a fraud perpetuated by and at the insistence of a man well known to this Court, Malcolm Johnson. That argument was not developed in this Court, and I express no view on it. 50. I turn now to consider his Honour's ruling on insolvency. 51. Mr. Gray argued that Zelling A.J. applied an incorrect test of insolvency and he referred the Court to the leading authorities, which were especially relevant to Beach's argument that it could raise money within a relatively short time by the realisation of assets. The first of such authorities is Sandell v. Porter and Anor. (1966) 115 CLR 666. At p 670 Barwick C.J., (with whom McTiernan J. agreed) said: "Insolvency is expressed in s.95" (of the Bankruptcy Act)

"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 realization 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, utilizing 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." 52. In the case of Re Adnot Pty. Ltd. and The Companies Act (1982) 7 ACLR 212, Kearney J. had to consider a summons by a petitioner in a creditor's petition for the appointment of a provisional liquidator of the company. At p 216-217 he said: "The test to determine insolvency is succinctly expressed in the judgment of Barwick C.J. in Sandell v Porter (1966) 115 CLR 666 at 670 where his Honour points out that whilst insolvency is expressed in the relevant bankruptcy provisions as an inability to pay debts as they fall due out of the debtor's own money, nevertheless, the debtor's own moneys are not limited to his cash resources immediately available. His Honour points out that they extend to moneys procurable by realisation or mortgage or pledge of assets within a relatively short time, bearing in mind the nature and the amount of debts and the circumstances of the debtor. This view echoes what both his Honour and Taylor J. said in Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210, Taylor J., in particular, referring at 230 to the judgment of Isaacs J. in Bank of Australasia v Hall [1907] HCA 78; (1907) 4 CLR 1514 at 1543. Isaacs J.'s remarks concluded with the following: ' In other words, if the debtor can by sale or mortgage of property which it owns at the time of assignment change the form of the property into cash wholly or partly but sufficient for the purpose of paying his debts as they become due, that requirement of the section is satisfied.'" 53. Finally, we were referred to Re Bond Corporation Holdings Ltd. (1990) 1 ACSR 350. At p 358 Ipp J. said: "I have to determine whether BCH is able to meet its current liabilities as they fall due. It is not part of my task to determine now whether the probabilities are that circumstances will arise at some future time which will then cause BCH to be in a position whereby it will not be able to meet its liabilities which will then exist." and later at p 361 he said: "It is apparent that BCH's financial future depends upon a number of uncertain factors. However it is not now helpful to speculate upon, whether, at some time in the future, those factors will be resolved adversely to BCH's financial position. I am presently concerned with BCH's ability at the present time, to pay particularly its

current liabilities. The SGIC has not satisfied me that BCH will not be able to meet those liabilities. A winding

up should not be allowed to proceed on the speculative basis that a company may possibly at a future date experience severe financial difficulties." 54. In his judgment dated 2 September, 1991, Zelling A.J. said: "Beach called three witnesses on the issue of solvency: Dr. King, a director of the company, Mr. Gregory Couttas, a partner in the accountancy firm of Deloitte Ross and the current auditor of Beach, and Mr Robert Michael Kennedy, a chartered accountant and a partner of Edwards Marshall and Co. a firm of accountants in Adelaide. It put in the affidavit of Mr Brenton Wayne Ellery, a partner of Mr Kennedy, because Mr Ellery was overseas at the time. In addition it produced a number of documents mainly because counsel for Jingellic discovered their existence in the course of cross-examination and called for their production. Dr. King was not an impressive witness. He was evasive and had memory lapses on some matters of importance. His answers were sometimes unhelpful because he did not have the necessary knowledge to answer adequately the question put to him. His evidence on oil swaps, loan fund raising, inter company loans, management accounts, cash flows and directors' meetings all suffered to a greater or less degree from these characteristics. Beach's primary submission was that it could if necessary pay

its debts with the aid of a loan from Westpac contained in a letter of 29 April 1991. The difficulty with this primary submission was that Westpac required security over Beach's assets, and Jingellic has security over the Oklahoma oilfield. In any event the offer of a loan was limited to $5,000,000 whereas it became obvious, as the evidence proceeded, that if Jingellic was to be paid in full, let alone other creditors, the figure was $6,000,000 or upwards. No-one was called from Westpac to tell me how much the bank was prepared to lend in these circumstances. The carriage of the negotiations was obviously in the hands of Mr Atkins, managing director of Beach, and he was not called before me either. I am unable to find that Beach could get such a loan from Westpac nor what the terms of the loan might be if one were forthcoming.

The next suggestion was that Beach could raise the needful money by selling assets. It has three major assets: a 22%

interest in the Bodalla Block in Queensland, an interest in the Burbank oilfield in Oklahoma, and a 10% interest in a venture in the Timor Sea. As to Bodalla, I am satisfied that it is a saleable asset, but at what price and on what terms, and how long it would take to realize were not proved. As to Burbank, I think it is probably saleable but I have no reliable evidence proved before me as to value, terms, likely buyer, or length of time to realize. Valuations existed in relation to these two assets but the valuers were not proffered for cross-examination. The Timor Sea project is a much more speculative one. It requires payment of a sum of $739,000 in October 1991 and if it does not meet that payment, Beach may have to relinquish its interest in this project. A projected cash flow was also produced before us. It was prepared on assumptions made by Mr Patrick Sam Yue, Beach's Financial Controller. Mr Sam Yue was not called as a witness. It made no contingency provision at all for payment of Jingellic's loan, nor for other likely but not yet payable debts. It did not impress me at all. Mr Couttas was, as might be expected, an accountant of high repute and a good witness so far as his evidence extended. The difficulty was that he had had minimal time to consider the problems inherent in this litigation and was largely dependent on information selected by Dr King and Mr Sam Yue. There were quite a number of important documents of whose existence or contents he was unaware. His view was that Beach was solvent. My view is that he was unable to add to the basal evidence which I have summarized, so as to take any further the factual aspect needed to back up his opinion. Mr Kennedy was called in the absence of Mr Ellery, whose views,

contained in his affidavit, Kennedy agreed with. Kennedy had had only the most cursory opportunity of acquainting himself

with Beach's affairs. Like Couttas, his evidence assumed that if Jingellic's debt became due, Beach would have a 'time frame' within which to pay it. That is not so. Kennedy had no real opportunity to consider how Beach could use its assets to obtain funds and his evidence on this did not impress me, although his views were without doubt sincerely held.

All witnesses thought that Beach could raise funds by issuing further equity capital. No acceptable evidence was forthcoming as to what money could be raised in this way. Given Beach's lack of liquidity, a very lay knowledge of capital issues would suggest that there would be unlikely to be many investors interested. I cannot see that Beach has any realistic expectation of paying its debts as they fall due. In saying that, I have borne in mind what is said in the leading cases on the point. Without quoting extensively, they are: Bank of Australasia v. Hall [1907] HCA 78; (1907) 4 CLR 1514 per Isaacs J. at 1543; Rees v. Bank of New South Wales (1964) lll CLR 210 per Taylor J. at 230; Sandell v. Porter 1966) 115 CLR 666 per Barwick C.J. at 670; and Dunn v Shapowloff (1988) 3 ACLR 775 per Mahoney J.A. at 784 and again at 789. Beach's argument before me tended to stress that the references in the cases to moneys procurable by sale mortgage or pledge of assets 'within a relatively short time', gave Beach a 'time frame' within which to get the money after it became due and payable. This is simply not so. All the cases stress that the proceeds from such assets must be available to meet debts as they fall due, not at some future time thereafter, if the company is to be treated as solvent. Applying the tests in the cases I have cited, I am satisfied that Beach has not demonstrated that it is able to meet its debts as they become due, and is not solvent." 55. Before considering these reasons, I must deal with one particular criticism of his Honour's judgment. In his judgment of 24 April, and after referring to what he called the two "reasonably arguable points" (supra), he said at p 12: "They are not suitable for argument in winding up proceedings and these must stand over. But the points do sound to me like desperation points, taken by a company in financial difficulties seeking to stave off the evil hour, and so I intend to put Beach on a strict timetable to bring the questions on for speedy determination by a Judge of this Court." 56. On 26 April, his Honour had a discussion with counsel. Mr. Sulan QC, who was then appearing as senior counsel for the appellant, told his Honour that the appellant intended to issue proceedings in the Federal Court against Jingellic, which it subsequently did. Counsel appearing for the respondent then agreed to be dux litis in this Court, and his Honour allowed the respondent ten days to bring proceedings. He then allowed the appellant fourteen days for filing its defence, and allowed the respondent seven days thereafter for filing its reply. His Honour then proceeded to direct that mutual discovery should be made within a month and that inspection of documents should take place one week after discovery. In fact, it is the respondent who has not commenced the proceedings envisaged by his Honour in this Court, and in his judgment delivered on 2 September, 1991, he seems to be overlooking what happened on 26 April when he said: "Beach, I am told from the bar table, has taken proceedings in the Federal Court, pursuing the wider allegations of fraud which are referred to in my first judgment in this matter and which did not impress me at all when I saw them set out in affidavit form. It has done nothing in this Court to bring on and argue the points on which I gave it a stay to have the opportunity of argument. These were points which could be isolated and disposed of quite speedily before a Judge of this Court. I doubt if Beach ever intended to do so. The grant of leave has simply become a further opportunity for procrastination to put off the evil day of repayment. Beach's attitude tends to suggest that it has no faith in the sufficiency of its points, which does not surprise me. The overall position is that Beach had money lent to it by (inter alia) Jingellic, which it used to buy an oil asset in the United States. It now wants to keep the asset and not repay the money. That is a proposition which is unlikely to be found attractive by any Court." 57. This oversight may well have coloured his Honour's assessment of the appellant's evidence on solvency. It is true that he has made some unfavourable remarks about one of the appellant's witnesses, and criticised the others to some extent, but on the issue of insolvency I consider this Court is concerned essentially with inferences to be drawn from primary facts. In this connection, we were referred to the oft quoted dictum in the joint judgment of Gibbs A.C.J., Jacobs and Murphy JJ. in Warren v. Coombes [1979] HCA 9; (1979) 142 CLR 531, admittedly in a negligence case. At pp 552-553 they said: "... we can see no justification for holding that an appellate

court, which, after having carefully considered the judgment of the trial judge, has decided that he was wrong in drawing inferences from established facts, should nevertheless uphold his erroneous decision. To perpetuate error which has been demonstrated would seem to us a complete denial of the purpose of the appellate process. The duty of the appellate court is to decide the case - the facts as well as the law - for itself. In so doing it must recognize the advantages enjoyed by the judge who conducted the trial. But if the judges of appeal consider that in the circumstances the trial judge was in no better position to decide the particular question than they are themselves, or if, after giving full weight to his decision, they consider that it was wrong, they must discharge their duty and give effect to their own judgment. Further there is, in our opinion, no reason in logic or policy to regard the question whether the facts found do or do not give rise to the inference that a party was negligent as one which should be treated as peculiarly within the province of the trial judge. On the contrary we should have thought that the trial judge can enjoy no significant advantage in deciding such a question. The only arguments that can be advanced in favour of the view that an appellate court should defer to the decision of the trial judge on such a question are that opinions on these matters very frequently differ, and that it is in the public interest that there should be finality in litigation. The fact that judges differ often and markedly as to what would in particular circumstances be expected of a reasonable man seems to us in itself to be a reason why no narrow view should be taken of the appellate function. The resolution of these questions by courts of appeal should lead ultimately not to uncertainty but to consistency and predictability, besides being more likely to result in the attainment of justice in individual cases. The interest of the community in the speedy termination of litigation might, no doubt, be an argument in favour of the complete abolition of appeals, although that would be far too high a price to pay merely for finality. However, if the law confers a right of appeal, the appeal should be a reality, not an illusion; if the judges of an appellate court hold the decision of the trial judge to be wrong, they should correct it." 58. Mr. Gray QC pointed out that Jingellic conceded before Zelling A.J. that the amount of the debt it had claimed was wrong. As at 30 April, at most it was $5,078,617.05 including default interest. I do not think his Honour was correct to state that if Jingellic "was to be paid in full, let alone the creditors, the figure was $6,000,000 or upwards". I agree with the appellant that Zelling A.J. has taken a disputed debt and estimated its quantum at a future time, including legal costs and a judgment on a possible damages claim not yet brought. He has then determined that a loan from Westpac offered and available now will not be enough to meet the amount of the future liability assuming the future liability to be due now. I think His Honour should have found that in April Beach could have paid the Jingellic debt of $5,078,017.05 through the Westpac loan and cash in hand. I think Beach proved to His Honour that it could have paid the Jingellic debt if it fell due in April 1991. Beach was not required to do any more in respect of solvency. 59. Next his Honour said: "Beach's primary submission was that it could if necessary pay its debts with the aid of a loan from Westpac contained in a letter of 29th April 1991. The difficulty with this primary submission is that Westpac required security over Beach's assets and, Jingellic has security over the Oklahoma Oil Fields." 60. Counsel for the appellant criticised his Honour's use of the phrase "primary submission". He pointed out that a forty-six page written submission was put to the Judge and only three pages dealt with the Westpac letter. He pointed out that oral submissions devoted similar amounts of time. The appellant's primary submission rested on oral evidence that the company was solvent. 61. Be that as it may, I agree that Zelling A.J. has misapprehended the relevance of the fact that Jingellic has security over the Burbank Oil Field in Oklahoma. If the Westpac loan is to be used to pay out Jingellic, the security then would be released and, contrary to His Honour's reasoning, Beach would be able to provide the security contemplated by Westpac. With respect, I think this in itself is a fatal flaw in his judgment. 62. Next, as appears in the passage of his judgment, supra, his Honour criticised the projected cash flow that was produced, but he seems to have overlooked that the document was actually prepared on what Mr. Gray called "a worst case scenario" and does allow for payment of Jingellic's loan and other payments such as a doubtful tax debt and the amount owing to the parent company, not demanded. 63. Now, even if the evidence of Dr. King is ignored, the evidence of the witness Couttas took Beach's case of solvency a long way. I refer to what Zelling A.J. said about Couttas, supra, and will not repeat it. With greatest respect, I think his Honour has lost sight of the fact that Couttas is the partner in charge of the independent audit of Beach, the auditors being Deloitte, Ross Tomahtsu, and that he had been responsible for the audit for 1988, 1989, 1990 and 1991. Furthermore, in February, 1991 he had reviewed the Company's position in relation to the preparation of a Part V statement. 64. In his affidavit sworn on 30 April, 1991 Couttas said, inter alia: "In conclusion, subject to the limitations described, in my opinion as at today Beach is able to meet its liabilities as and when they fall due whether or not it is found liable to pay the debt claimed by Jingellic ... in these proceedings." 65. And I quote this exchange from the cross-examination:

"Q. If the Jingellic money was due now and the Claremont money was due now then would you still consider Beach to be

solvent? A. Yes, I think so, I do think so, yes." 66. I do not understand how his Honour could wholly reject the evidence of Kennedy, uncontested as it was. He was an independent chartered accountant, a registered company auditor and liquidator with extensive experience in giving expert accounting evidence. In paragraph 13 of his affidavit sworn on 30 May, 1991 he said: "In my opinion, on the basis of the documents I have considered and the information supplied to me by Dr. King, Beach is meeting its current liabilities as they fall due as at the date of swearing this, my affidavit." 67. In cross-examination he said: "I say that the company is solvent today. That it may be solvent in the future, will depend on the timing of those

events." 68. It is true that his Honour was not impressed by Dr. King's evidence, but it was not disputed that he had had considerable experience as an executive and director of public listed companies. I quote the following questions and answers from his examination in chief: "Q. Putting aside the Jingellic disputed figure is Beach currently meeting all of its obligations? A. Yes it is. Q. Does it pay its debts as and when they fall due? A. It does, yes." 69. These answers were not challenged in cross-examination. In re-examination the following exchange occured: "Q. Apart from the Jingellic debt are you aware as to whether there are any creditors who have not been paid as and when the debt falls due. A. Yes I'm aware there are no outstanding debtors which have debts older than 30 days. Q. Are there any court proceedings other than the proceedings before this Court relating to any debt owed or purportedly owed by Beach to any creditor by a creditor to recover that debt? A. No. Q. Are there any notices of demand that have been served on the company in relation to any debt other than the debt in this court.

A. No there are not. Q. Are there any Section 460 demands currently in existence against the company. A. No there are not. Q. And is there a direction to the executives by the board that if any such event occurs the board has to be informed. A. Most certainly yes." 70. Beach had three primary assets: (i) a 22% interest in the Bodalla Block, an oil exploration and production area in south-west Queensland. (ii) it is the holder of an approximately 46% interest in the Burbank Oil Field. (iii) it holds a 10% interest in a Timor Sea exploration permit. 71. Now, leaving to one side the evidence of Dr. King, it seems to me that there was uncontested evidence as to the value and saleability of these assets within a relatively short time. 72. As far as the Bodalla block was concerned, there was documentary evidence that there had been recent sales of interests of other companies in the Bodalla block, affording independent support for Dr. King's value of Beach's interest at between A$6-7 million. Couttas said that the sale of Beach's interest "typically ... would take a few months..." In answer to a question as to the saleability of Beach's interest in the Bodalla block, Couttas stated: "Yes, I, in fact, made enquiries as part of my audit for the year ended 30 June, 1990 of people involved in the oil and gas industry as to to the saleability of an interest in the Bodalla field, and the advice I received was that it was saleable. The other point I would make reference to is that I am aware that towards the end of 1990 calendar year, there have been sales of interests in the Bodalla block." 73. As far as the interest of Beach in the Burbank Oilfield is concerned, that was independently valued by Mr. Thomas R. Laverty who lives and works in Oklahoma in March 1991 at U.S.$12.1 million, or approximately A$15 million. Couttas gave evidence which was uncontested that Beach's interest was also saleable. Kennedy gave evidence that the operator, Phillips Petroleum, had also expressed some interest in acquiring Beach's interest in the field. 74. As far as the Timor Sea exploration permit is concerned, Couttas stated in evidence: "I have seen a valuation which has been prepared of the interest in the Timor Sea Permits, the valuation being the one prepared by Doyle Financial Service, or Consulting Services. I have also seen a draft valuation prepared by a firm called Petro Consultants, and a draft valuation was addressed to Deloitte Corporate Advisory Services, and I have also made enquiries of people in the oil and gas industry. Those enquiries were made in conjunction with my audit for the year ended 30 June, 1990, and the material which I have seen in the enquiries which I have made lead me to believe that the interest in the Timor Sea Permits could be sold, and that a likely figure related to sale of those permits is $11/2." 75. I am persuaded by the appellant's counsel that his Honour should have found that Beach held readily saleable assets and that the realisation of such assets could be used to pay debts if need be. 76. With respect, I do not think that Beach should have been criticised for not proffering the valuers of the Bodalla and Burbank interests for cross-examination. Apart from the fact that Laverty would have had to come from Oklahoma, the valuations in question were not contested and no suggestion was made by Jingellic that the valuers should be called. 77. Finally, his Honour expressed doubts about Beach's ability to raise funds by issuing further equity capital. The fact remains, however, that there was uncontested evidence before him that Beach did have that ability. 78. I think his Honour should have found that Beach was solvent. 79. For all these reasons, I would allow the appeal. I would set aside the orders made on 24 April and substitute an order dismissing the winding up summons. I would set aside paragraph 2 of the order of 2 September. I would hear the parties on other questions of costs.

JUDGE2 MOHR J. I agree with the decision of Matheson J. in this matter.

JUDGE3 MULLIGHAN J. I agree that the appeal should be allowed for the reasons expressed by Matheson J. and I agree with the orders he proposes.