Did Constructions become insolvent as at 1 November 1994 as a result of entering into the transaction?
93 The Liquidator did not submit that the judge was in error in the view he took that s 95A called for regard to the "commercial realities", or in the view he took, earlier expressed in Southern Cross Interiors Pty Ltd (in liquidation) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 at 224 and repeated at his [106] in this case, that insolvency is a question of fact -
" … to be ascertained from a consideration of the company's financial position taken as a whole. In considering the company's financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable".
94 The Liquidator's submissions were to the following effect. As at 1 November 1994, Constructions' principal current assets were trade debtors of $1.872 million, a debt of $1.189 million payable by Holdings and a debt of $4.1 million payable in six years time by DCA. Its principal current liabilities were trade creditors of $2.063 million and a bank overdraft of $1.812 million. (These excluded the unliquidated claims of Beresfield and the University, which were correctly not brought to account in the balance sheet at that time. Mr Pascoe had taken trade creditors of $2.661 million, but the judge accepted Mr Bryant's figure of $2.063 million; I have substituted this figure in the submission.) Constructions had sustained a trading loss for the year to 31 October 1994 of nearly $300,000, and Paul acknowledged in his evidence that it could not meet the demands of its creditors from its cash flow from its building activities. It had been dependent on recoverability of the Holdings debt in order to pay its creditors, it was said, and after the debt restructuring was dependent on recoverability of the DCA debt; but DCA had had no operating revenue in 1993-1994 year, its principal assets were its shareholdings in Constructions and DPS, and it had no realistic capacity to repay the debt which in any event was not repayable for six years. So, it was said, the judge correctly noted in his [83] the concession that Constructions could only pay its debts by means of advances from other companies in the group. The Liquidator submitted that the judge erred so far as he reasoned that, because it in fact paid its debts for three years after 1 November 1994, Constructions was solvent as at that date, and that the judge's further and more fundamental error was that Constructions was not solvent when its ability to pay its debts required voluntary assistance from related entities.
95 The judge did not simply reason that, because it in fact paid its debts for three years after 1 November 1994, Constructions was solvent as at that date. Such simple reasoning would have involved error, consider a hopelessly insolvent person who wins the lottery. His Honour took account of a host of matters in coming to his conclusion, prominent in which was that Constructions' debts had been paid for the three years but not as sufficient in itself; rather, as proof "that the funds of the other companies in the Group were a resource available to Constructions as a matter of commercial reality", see his [118].
96 The directors submitted that they did not concede, as the judge noted in his [83], that as at 1 November 1994 Constructions could only pay its debts by means of advances from other companies in the group. They acknowledged Paul's evidence that Constructions could not meet the demands of its creditors from its cash flow from its building activities. But they said that it remained that Constructions could meet the demands of its creditors from its assets, and pointed to their counsel's statements, in answer to questions from the judge, that their contention was that Constructions' liabilities as at 1 November 1994 were satisfied from Constructions' cash flow together with repayment of loans by other companies in the group, and that at no stage did Constructions have to depend on voluntary payments "for" (I think meaning "from") Holdings. With respect, it may be that the judge misunderstood their position.
97 The directors submitted that as at 1 November 1994 Constructions was able to pay its debts from its cash flow and repayment of loans by other companies in the group, but that in any event regard to the commercial reality of repayment by DCA and provision of funds by Holdings was permissible and determinative in establishing its solvency.
98 As at 1 November 1994, the directors said, Constructions was owed $1.189 million by Holdings and $1.21 million by Dyspane. The worth of the Holdings debt was not in question, and in fact it was repaid by 17 July 1995. There was no reason to doubt the worth of the Dyspane debt, which was also repaid by 24 December 1997. In addition, Constructions was entitled to payment from the Department under the Gosford Hospital contract, a payment which in mid-January 1995 crystallised as a payment of $1.005 million and put its bank account in credit for $0.479 million, at which time it also had an undrawn overdraft facility of $0.59 million, increased on 13 February 1995 to $0.8 million. (Paul gave evidence to the effect that at all times the group's banks were content with the conduct of its accounts and were not pressing for reduction in overdraft accommodation.)
99 Further, the directors said, DCA did have a realistic capacity to repay its debt. They said that its balance sheet as at 30 June 1994 showed net assets of $658,761, which would remain after balancing adjustments in the debt restructuring; and that the directors' evidence that they believed it was able to repay the $4.1 million had the reasonable basis that it could sell its shares in Constructions and DPS and could expect provision of funds by other companies in the group.
100 So far as the directors contended that DCA could have paid the $4.1 million from its own resources, they had the difficulty that Paul agreed in his evidence that, from its 1994 accounts, "unless funded in some way by Doran Holdings, there was no chance in the world that Doran Constructions Australia Pty Ltd would be able to repay such a debt". Paul thereafter asserted an expectation of repayment, but his explanation involved provision of funds by Constructions and DPS. Palmer J did not find that DCA could pay the DCA debt independently of provision of funds by other companies in the group, and in fact the part repayment was with funds of Holdings via DCA. In my opinion, when considering Constructions' solvency and otherwise it should be accepted that DCA could not have paid the $4.1 million from its own resources.
101 That notwithstanding, after the debt restructuring Constructions could call in $1.189 million from Holdings and $1.21 million from Dyspane, and was entitled to expect receipt of what proved to be over $1 million from the Department. It was necessary to consider when the amounts due to trade creditors were payable according to their terms of trading, see the judge's [80]-[81], and also whether the overdraft was immediately repayable; it was not suggested that the banks required reduction. Many companies would be insolvent if the test was whether they could immediately pay all their debts, but it is not. The Liquidator's submissions on appeal did not rely on a cash flow analysis of Constructions' position as at 1 November 1994 which took account of when debts were payable. The Liquidator's balance sheet comparison as at 1 November 1994, even given unprofitable trading, did not establish insolvency when there were available resources (Holdings' and Dyspane's debts, the claim on the Department), unless it was shown that as a matter of cash flow creditors could not be paid as and when payment fell due.
102 The Liquidator said that the $1.005 million from the Department could not be taken into account as funds available to Constructions unless there was also taken into account "the corresponding liabilities, such as the amounts from the $1.005m payable to subcontractors (including Beresfield Aluminium)". His submissions did not descend to identification of the corresponding liabilities. Assuming the Beresfield claim of $449,100, there remained some $0.65 million available to Constructions. But that claim was at the time an unliquidated claim, and Constructions had a counterclaim for a greater sum. The net indebtedness was only established more than three years later, and even then the Liquidator seems to have thought that outcome sufficiently doubtful to warrant years of further litigation, up to the High Court.
103 The full $1.005 million was in fact available for Constructions' cash flow. Solvency or insolvency is a state on which directors and others act in current conduct, for example if the issue is trading while insolvent. Section 95A speaks of objective ability to pay debts as and when they become due and payable, but ability must be determined in the circumstances as they were known or ought to have been known at the relevant time, without intrusion of hindsight. There must of course be "consideration … given to the immediate future" (Bank of Australasia v Hall (1907) 4 CLR 1514 at 1528 per Griffith CJ), and how far into the future will depend on the circumstances including the nature of the company's business and, if it is known, of the future liabilities. Unexpected later discovery of a liability, or later quantification of a liability at an unexpected level, may be excluded from consideration if the liability was properly unknown or seen in lesser amount at the relevant time. The Beresfield claim was only established as a liability some years later, and then only with rejection of Constructions' counterclaim. In my opinion, the $1.005 million could be taken into account as funds available to Constructions.
104 The Liquidator pointed out that, according to its balance sheet as at 30 July 1995, Constructions still had trade creditors of $1.10 million. He said that by that date the balance of Holdings' debt had been repaid and the bank overdraft stood at $1.37 million. This, however, does not show that Constructions was insolvent as at 1 November 1994. It is still consistent with ability as at that date to pay debts as they fell due.
105 In my opinion, the Liquidator did not establish insolvency as at 1 November 1994, quite apart from the question of availability of funds of other companies in the group.
106 Palmer J found positively that Constructions was solvent, considering it sufficient that as a matter of commercial reality a company had available as a resource to pay its debts the voluntary extension of credit by another company, see his [116] above. His Honour was satisfied that the funds of other companies in the group were a resource so available to Constructions, see his [118].
107 Even when the test of insolvency referred to payment out of the debtor's own money, funds which could be gained from the use of the company's assets were a resource available to it: Sandell v Porter (1966) 115 CLR 666 at 670 per Barwick CJ -
"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 entirely 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."
108 The directors submitted that there was more than voluntary assistance from other companies in the group, and that Constructions raised money on the security of its assets because Holdings held the charge granted on 18 July 1995. The charge was executed when the balance of Holdings' debt had almost been eliminated, with the result that future provision of funds would be by way of loan. There are difficulties in the submission. The payment of $1.449 million by DCA, in fact by Holdings via DCA, was not secured by the charge, and the provision of funds by Holdings does not seem to have been with regard to the security provided by the charge, which was not sound security. The charge was incidental, no doubt thought to be for the benefit of Holdings but not determinative in the provision of funds. The commercial reality of provision of the funds included that they were not of the nature of which Barwick CJ spoke.
109 Particularly when the limiting words are no longer part of the test, there is no compelling reason to exclude from consideration funds which can be gained from borrowings secured on assets of third parties, or even unsecured borrowings. If the company can borrow without security, it will have funds to pay its debts as they fall due and will be solvent, provided of course that the borrowing is on deferred payment terms or otherwise such that the lender itself is not a creditor whose debt can not be repaid as and when it becomes due and payable. It comes down to a question of fact, in which the key concept is ability to pay the company's debts as and when they become due and payable.
110 Even before the wording of s 95A, in re RHD Power Services Pty Ltd (1991) 9 ACLC 27 McPherson SPJ was prepared to pay regard to ability to borrow without security. Kearney J in re Adnot Pty Ltd (1982) 1 ACLC 307 took into account that the company "instead of having to resort to some outside lender, is in the fortunate position of having its fellow member of the group of companies to which it belongs, available in effect as banker to provide funds required to meet any shortfall" (at 311; the shortfall was until completion and sale of a shopping centre). In re a company (1986) BCLC 261 Nourse J declined to find that a company was unable to pay its debts as they fell due although it was being "propped up by loans made to it by associated companies and possibly by others" (at 262; his Lordship noted at 263 that he had evidence from a director to the effect that there was no question of the loans being withdrawn, the loans not being repayable for some eighteen months).
111 The Liquidator's emphasis on voluntary assistance from other companies in the group was rather off the point. Provision of funds by a third party on the security of the company's assets is voluntary - the third party can decline. Voluntariness is material to whether the company is able to acquire funds, as part of ability to pay its debts as and when they become due and payable, but if the evidence establishes that the company is able to obtain funds, albeit they are voluntarily provided, that can suffice.
112 This approach is consistent with the acceptance that creditors may voluntarily defer payment whereby solvency is promoted. An illustration is re Kerisbeck Pty Ltd (1992) 10 ACLC 619. An unsecured debt was payable on demand to the company's director. The director gave evidence that he did not intend to demand repayment in the immediate future. The debt was therefore not regarded as due and payable. This was determinative of solvency. In substance, voluntary continuance of an unsecured borrowing brought solvency; it is difficult to see why the result would have been different if there had been acceptable evidence of voluntary provision of an unsecured borrowing.
113 In the present case, there was ample support for Palmer J's regard to availability of funds from other companies in the group, relevantly Holdings, additional to the $1.189 million balance of Holdings' debt and Dyspan's $1.21 million, sufficient to establish Constructions' ability to pay its debts as and when they fell due. Importantly, I do not think it was suggested that the funds made available, apparently repayable on demand, were to be regarded as immediately repayable so that Holdings itself was a creditor whose debt could not be repaid as and when it was due and payable. Nor was it suggested that regard could not be had to the availability of the funds because their provision by Holdings was in breach of the directors' duties owed to Holdings.
114 It was clear that Holdings had acted and continued to act as "banker to the Doran Group" (the judge's [128]). Mr Joyce said in terms in his affidavit that "Whilst I worked for the Doran Group of Companies DH acted as the 'banker' for the Group. It lent money out to other members of the Group, including DC, as and when monies were required by that member." In cross-examination it was put to him, and he accepted, that money "moved back and forth between Holdings and Constructions throughout the whole of the time that [he was] with the Group".
115 A snapshot in time is Holdings balance sheet as at 30 June 1995, in which a schedule set out receivables for 1994 and 1995 all involving group entites-
1995 1994
Loan - JC ML PJ PA Doran 20,836 20,836
Loan - Wharf Road Unit Trust 515,534 780,334
Loan - Wharf Road Unit Trust No 2 1,935 843 1,837,003
Loan - Wharf Road Unit Trust No 3 1,165,978 2,025,548
Loan - Doran Property Trust 100 100
Loan - Elermore Tavern Pty Limited 740,413 967,074
Loan - Doran Constructions
(Australia) Pty Limited - 4,592,146
Loan - Doran Health Care
Pty Limited 2,461,055 1,443,146
Loan - Doran Nominees
Pty Limited 100 100
Loan - Daytona Pty Limited - 540
Loan - Aldo Unit Trust 355,832 832
Other loan -
Grantlex Pty Limited 149,829 189,189
Other loan -
Denprime Pty Limited 149,829 189,189
116 In July 1992 Holdings had lent to DCA the money for the alteration of the group composition. As Mr Joyce accepted, the traffic was not one-way, and as at 31 October 1994 Holdings owed Constructions a significant sum; at least prior to 1 November 1994, there had been intra-group support as necessary. After 1 November 1994 Holdings did act as banker in that, after repayment of the $1.189 million balance of its debt, it paid $1.225 million to Constructions and $1.449 via DCA, and only ceased to do so upon withdrawing its support on 16 December 1997. At least on appeal, the Liquidator accepted that Holdings was capable of supporting Constructions so long as its directors were minded to do so, and that Holdings provided support until 16 December 1997.
117 As to intra-group support as necessary, Paul's affidavits included a description of arrangements with Westpac over the period 1992-1996 in which other companies in the group provided security and guarantees for facilities provided to Constructions. He specifically asserted, "As at 1 November 1994 I say, as a director of the other members of the Doran Group of companies, that the assets and revenue of those companies were also available to provide whatever financial assistance may have been required by DC." Peter's affidavit included that as at 1 November 1994 he was aware that from 1990 onwards Constructions had borrowed from and lent to other companies in the group and that other companies were "in a financial position to provide further assistance to [Constructions] as and when required". Michael and John gave evidence to the same effect.
118 None of the directors was cross-examined to the contrary of these states of mind, which together with the evidence of what had occurred amply founded an expectation that, if Constructions needed money to pay its creditors, the money would be made available from within the group. The directors had the control whereby they could put the expectation into effect, and they did so until late in 1997.
119 I do not overlook the Liquidator's submission that the withdrawal of support in December 1997 showed the frailty of Constructions' position. The Liquidator said that it was at the mercy of Holdings and the other companies, and that the withdrawal of support showed that the funds of the other companies in the group were really not a resource available to Constructions. As a finding of fact, however, the ability as at 1 November 1994 was real, notwithstanding that in the latter part of 1997 circumstances changed and, with the withdrawal of support, the ability was lost.
120 In my opinion, error has not been shown in Palmer J's finding that Constructions was solvent.