157 Further, a financial statement prepared by Mr Vince recorded a loss on the revenue account for McMillan Prestige Car Repairs for the financial year ending 30 June 2001 of $77,774.31.
158 Mrs McMillan submitted as a threshold issue that, while any business carries risk, Mr McMillan was able to continue trading for some 16 years after the Property Transfer. She submitted that this provided strong evidence that Mr McMillan had sufficient assets, as at the time of the Property Transfer, to meet the existing and expected future liabilities of the business.
159 The Trustee submitted in response that this submission by Mrs McMillan overlooks the fact that receivers were appointed to McMillan Prestige Car Repairs on 2 February 2007 and that it was subsequently wound up by the New South Wales Supreme Court on 24 July 2007.
160 We make two observations in response to the Trustee's submission.
161 First, it is important to bear in mind that, ultimately, the relevant issue is whether an inference can be drawn that Mr McMillan's main purpose was to defeat his creditors, not whether his main purpose was to defeat the creditors of McMillan Prestige Car Repairs. Of course, to the extent that he had personally guaranteed the obligations of McMillan Prestige Car Repairs the distinction would not be material. The critical consideration in the present context is that whatever the arrangements may have existed between Mr McMillan and McMillan Prestige Car Repairs, Mr McMillan did not commit an act of bankruptcy until 21 March 2018 and a sequestration order was not made against the estate of Mr McMillan until 6 November 2018.
162 Second, in the absence of any consideration as to the reasons for the appointment of receivers to McMillan Prestige Car Repairs on 2 February 2007, nearly five years after the Property Transfer and after the commencement of the VW Dealership in 2004, it is not possible to determine what, if any, weight can be placed on this event in determining with any degree of certainty the risk inherent in the business of the company as at the time of the Property Transfer.
163 Mrs McMillan advanced the following further submissions in support of her challenge to the finding of the primary judge that the entry into the Bentley Dealership could be characterised as a risky venture.
164 First, Mr McMillan had been operating a very successful repair business for Rolls-Royce and Bentley since 1987. It was Rolls-Royce that had regarded Mr McMillan's business as sufficiently promising to approach him to set up what appeared to be a flagship and exclusive dealership in New South Wales and the Australian Capital Territory. Further, Rolls-Royce were prepared to provide Mr McMillan with an interest free loan of $450,000 that he would not be required to repay if the dealership continued for three years.
165 Second, the core repair business of Mr McMillan was continuing unchanged in addition to, not in substitution for, the new dealership business.
166 Third, the best picture as to how Mr McMillan's new combined dealership/repair business was performing at the time of the Property Transfer emerges from the financial statements of McMillan Prestige Motors as at 30 June 2002 (June 2002 financial statements).
167 The June 2002 financial statements record net assets of $648,656.62, cash at bank of $564,277.00, total current assets of $4.443 million and total current liabilities of $4.264 million, resulting in working capital of some $180,000. The statements also record that the amount outstanding on the VWFS floorplans was $2.188 million against inventories for new vehicles of $1.410 million and stock used vehicles of $0.959 million, in aggregate an amount of $2.369 million. This aggregate figure was in excess of the amount owing to VWFS.
168 The profit and loss statement for the year ended 30 June 2002 included in the June 2002 financial statements, recorded a gross profit of $2,571,700.75 but a net loss of $35,996.32. The gross profit for the previous financial year was recorded as $1,605,866.48 with a net loss of $77,774.31.
169 The net loss of $35,996.32 for the 30 June 2002 financial year was generated from gross revenue from ordinary activities of $9,496,967.43.
170 Fourth, the monthly profit and loss statements for McMillan Prestige Car Repairs, summarised by the primary judge at J [112], record that in August 2001, the first month of the new dealership, a net profit of $49,442.00 was achieved and in six of the twelve months a net profit was recorded. In analysing the profit and loss statements, consistently with the approach taken by the primary judge at J [112], the budgeted profits could be ignored. In July 2002, the month immediately following the last month considered by the primary judge, the profit and loss statements recorded a net profit of $101,744.00. In the following three months, net profits of $78,598.00, $7,133.00 and $7,460.00 respectively and then in November 2002 a net loss of $42,760.00 were recorded in the profit and loss statements.
171 The Trustee submits that it is necessary to have regard to the accumulated year to date losses and the variations from budget recorded in the monthly profit and loss statements.
172 The year to date losses as at September 2001 were $62,789. By the end of calendar year 2001, they had increased to nearly $200,000 against a budgeted year to date profit of $444,402. In March 2002, there was a monthly profit of just over $110,000 but a year to date loss in excess of $41,000. By the end of May 2002, the year to date loss had increased to a figure of over $140,000 against a budgeted year to date profit of $921,623.
173 The Trustee submits that the monthly profit and loss statements beyond May 2002 are of little relevance because the decision to make the Property Transfer and the "other associated arrangements" were well in place by the beginning of May 2002.
174 The Trustee further submits that, irrespective of any considerations of solvency, the authorities, citing Alvaro, Mackay, Russell and Williams, establish that if a person intends to embark on a commercially or financially hazardous undertaking and moves to secure assets against claims of future creditors a disposition of property is made that falls within s 121(1) of the Act.
175 We have concluded that the primary judge erred in finding that the entry into the Bentley dealership was a risky venture and erred in placing weight on that finding in drawing an inference that the main purpose contended for by the Trustee had been established. We have reached that conclusion for the following principal reasons.
176 First, we do not consider that the entry by Mr McMillan into the Bentley Dealership could be construed as analogous to the circumstances in which courts have concluded that dispositions of property made by voluntary settlements shortly prior to the entry into a risky or hazardous undertaking were made for the purpose of defeating creditors.
177 Mr McMillan was diversifying an existing, profitable business into a related activity in the same industry. He was dealing with the same products and customers. The dealership had the added complexity of the need to have in place floor plan financing but Rolls-Royce assisted him in that regard by introducing him to VWFS. However, Mr McMillan had been personally selected by Rolls-Royce to operate the Bentley Dealership and appeared to have its full support, not least by reason of his exclusive appointment and the financial support that he was offered.
178 This was not an entry into a business activity that could be characterised as "a rather reckless" business, such as was found in Mackay. In that case the bankrupt had entered into a partnership in which the operation of a new business was left entirely to another partner and where the voluntary settlement was made only months before the new business failed and the bankrupt became insolvent: Mackay at 118-20 (Malins VC). Nor was it an entry into an entirely new business activity, as was the position in Russell in which a baker commenced a new business as a grocer: Russell at 599 (Jessel MR). Nor was it equivalent to the making of speculative investments by a retiree in companies promoted by another person: Williams at 359-60 (Starke J).
179 Further, the extension of an existing successful business to include a dealership was of a very different character to the position in Alvaro. In that case, the establishment of trusts and the application of funds through those trusts to purchase and improve real estate properties raised likely exposure to investigations as to the source of all income earned, assessments for tax and potential penalty tax and criminal sanctions; which in fact occurred: Alvaro at 421-2 (Wilcox and Cooper JJ).
180 Second, we consider that the financial information concerning the performance of McMillan Prestige Car Repairs in the period leading up to the Property Transfer was equivocal and provided little material support for any "risky venture" finding. The dealership component of the combined dealership/car repair business was in a start-up phase and there were significant fluctuations in the performance of the business from month to month.
181 Moreover, as submitted by Mrs McMillan, for the financial year ending 30 June 2002, there was a surplus of working capital, current assets exceeded current liabilities, there was significant cash at bank, and the operating loss of $35,996.32 was relatively insignificant when compared with gross revenue from ordinary activities.
182 Third, on balance we consider that little weight can be placed on the failure to achieve the budgeted profits.
183 As the primary judge observed at J [112], the basis upon which those budgeted profits had been prepared "was left unexplored" in the evidence, save that they had been prepared in consultation with Rolls-Royce.
184 This finding would appear to have been made in the context of the following evidence given by Mr McMillan in the course of his cross examination:
Do you accept from me that Mr Dixon became your financial controller of McMillan Prestige Car Repairs from approximately July 2001?---Yes.
…
And you typically set the budget, I gather, with Mr Dixon at the beginning of the financial year, or at some point?---No.
When did you normally set the budget?---I set the budgets the beginning of the year, but I never gave those to the internal financial controllers to set.
I see. And were those budgets influenced, to some extent, by any targets that Rolls Royce and Bentley management required of you under the dealer agreement?---Yes, there was consideration; so there would be some influence, yes.
Yes. So your budgets were intended to meet and satisfy the requirements of Rolls-Royce and Bentley, is that how we should understand things?---They were two separate distinctions, but as you previously asked the question, the answer is yes. There's a level of consideration given, yes.
185 The primary judge found at J [116] that the "new dealership was performing well under the budget [Mr McMillan] had set for himself, albeit a budget described by him as 'crystal ball stuff'". This finding would appear to have been based on the following evidence given by Mr McMillan:
And so it would have been obvious to you, I gather, that by the end of August 2001the business was operating under budget?---Under my budget, yes, which was created sometime before that.
All right?---Yes. Crystal-ball stuff.
186 When pressed further about failure to reach budgeted profit Mr McMillan gave the following evidence (at T85.22-31):
And so his Honour should understand that, by the month of May 2002, you well understood that the business was operating under budget to the tune of over $1 million?---To my budget.
And did that not concern you?---I set the budget 12 months in advance. I wasn't going to change my mind in front of my managers; I wasn't going to change my mind in front of my staff.
Alright?---You know, I'm there to drive the business, and if I set a high budget and a hard budget, that's how I look at it.
187 Fourth, in the absence any forensic accounting evidence as to the significance or implications that can be drawn from this conflicting or incomplete evidence as to profitability and financial performance, we do not consider that it is possible to draw any definitive conclusions as to the significance of any losses or failure to meet budget to the prospects of success or risks inherent in the new combined dealership/car repair business, including, whether any monthly losses were due to timing issues or the incurring of costs incidental to the commencement of a new business operation.