Re BBY Limited (Receivers and Managers Appointed) (in liq) and BBY Holdings Pty Limited (Receivers and Managers Appointed) (in liq) [2022] NSWSC 29 - NSWSC 2020 case summary — Zoe

NSWNSWSC

Re BBY Limited (Receivers and Managers Appointed) (in liq) and BBY Holdings Pty Limited (Receivers and Managers Appointed) (in liq) [2022] NSWSC 29

[2022] NSWSC 29

Supreme Court of NSW|2020-11-12|Before: Gleeson J

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At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2020-11-12

Before

Gleeson J

Source

Original judgment source is linked above.

Judgment (60 paragraphs)

[1]

Background

BBY was the principal operating entity of a group of companies known as the BBY Group, of which BBY Holdings was the ultimate parent company. The BBY Group operated a financial services business providing a range of financial services to clients, including stockbroking, trading in financial products, asset management, financial advice and research.
Glenn Rosewall was a director and executive chairman of companies in the BBY Group, including BBY and BBY Holdings. Ken Rosewall became a director of the BBY companies on 17 March 2008 at the invitation of Glenn. The other director of BBY and BBY Holdings was Mr David John Perkins.
Ficema was a shareholder of BBY Holdings. Other entities associated with Ken Rosewall and his son Glenn made up the largest shareholders of BBY Holdings. They acquired these shareholdings in 2006. Ken Rosewall, through a related entity, acquired further shares in BBY Holdings in June 2011.
The chief executive officer of BBY from February 2012 until February 2015 was Mr Arunesh (Arun) Maharaj. He was previously the chief financial officer of the BBY Group between June 2005 and February 2012. He was assisted closely by Ms April Yuen, who had a finance and accounting role in the BBY Group and had access to BBY's bank accounts. Ms Yuen was employed by Broker Services Australia Pty Ltd, a member of the BBY Group, in various positions between 2007 and 2015. From early 2014 her title was "Manager - Strategy", reporting directly to Glenn Rosewall and Mr Maharaj.
BBY was a registered participant on the Australian Securities Exchanges (ASX) operated by ASX Limited, the Chi-X Exchange (Chi-X) operated by Chi-X Australia Pty Ltd and the Australia Pacific Stock Exchange (APX) operated by Australia Pacific Stock Exchange Limited. BBY held an Australian Financial Services License and acted as the main operating entity through which the BBY Group conducted its financial services business. BBY Advisory Services Pty Ltd conducted a corporate finance business which included advising corporate clients in capital raising on the ASX, via mergers or acquisitions, or through issuing various debt instruments. Broker Services Australia acted as the main employment company for BBY. BBY Nominees Pty Ltd (BBY Nominees) was a trustee company used for transactions organised by BBY or BBY Advisory Services in which a custodian or a trustee was required to complete the transaction or hold assets on behalf of BBY's clients.

[2]

Interest payments on loans from Ficema

Ficema made the following loans to BBY Holdings and BBY: 1. on 16 November 2011, Ficema lent $2 million to BBY Holdings pursuant to a loan agreement dated 25 October 2011. The loan was for an initial term of 12 months with interest to be paid at 15 per cent per annum; 2. on 26 June 2013, Ficema lent a further $500,000 to BBY Holdings; 3. on 16 June 2014, Ficema lent $3 million to BBY; 4. on 1 December 2014, Ficema lent $1 million to BBY Holdings; and 5. on 11 December 2014, Ficema lent $3 million to BBY.
In pars 26 and 27 of the points of claim, the plaintiffs contended that BBY and BBY Holdings made the six interest payments totalling $341,890.37 on account of the interest that was payable in respect of the loans referred to in pars [20], [21], [23] and [24] of the points of claim, being the loans to BBY Holdings and BBY referred to in [29(1), (2), (4) and (5)] above, and that each of the interest payments was accepted by Ficema in satisfaction of BBY and/or BBY Holdings' obligations to pay interest on those loans. Further, par [28(c)] of the points of claim contended that each of the interest payments resulted in Ficema receiving more, in respect of an unsecured debt owed to it by BBY Holdings, than it would receive from BBY Holdings in respect of that debt if it were set aside and Ficema were to prove for that debt in the winding up of BBY Holdings.
In its points of defence, Ficema admitted that it received $341,890.27 between 8 January 2014 and 16 April 2015 (being the amount of the six payments set out in the table at [5] above), and otherwise denied the balance of par [26], denied par [27] and did not admit par [28] of the points of claim.
On the evidence, all six payments totalling $341,890.37 referred to in the table at [5] above were on account of interest owing on the loans made by Ficema to BBY Holdings. This is apparent from the invoices issued by Ficema to BBY Holdings claiming interest on the loan for $2 million dated 3 July 2013, and the invoices claiming interest on the loans for $2.5 million dated 3 October 2013, 14 January 2014, 2 April 2014, 2 July 2014 2 October 2014, 6 January 2015 and 16 April 2015. The three payments originating from BBY on 8 and 20 January 2014 and 26 May 2014 were not in respect of interest owing by BBY to Ficema on the loan to BBY referred to at [29(5)] above, since the loan to BBY in December 2014 post-dated those three payments.
Although Ficema did not take any issue in its submissions that the three payments made by BBY totalling $186,526.64 were not an unfair preference within s 588FA, these payments were not received by Ficema qua creditor of BBY. Rather, the inference to be drawn is that although the originating source of these payments was BBY, the payments were made on behalf of BBY Holdings and received by Ficema qua creditor of BBY Holdings for the following reasons.
First, the three payments originating from BBY were made from the main BBY operating account with National Australia Bank (account 0891), which was used for the operations of the BBY Group business. Operational expense payments were made out of this account: see memorandum entitled "Operation of BBY House accounts", par A1.3, referred to in par 3.3(a) solvency report.
Second, although there is no evidence of a written direction given by BBY Holdings to BBY to make these payments to Ficema, I infer that such a direction was given by BBY Holdings having regard to the fact that BBY operated as the main operating entity of the BBY Group companies, the companies were managed by the same persons and had common directors and the payments were made from the main BBY operating account from which, on the evidence, expense payments were made on behalf of related companies in the BBY Group, which included BBY Holdings.
Third, the proper characterisation of the payments is similar to the analysis in Federal Commissioner of Taxation v Kassem (2012) 205 FCR 156; [2012] FCAFC 124, where Jacobson, Siopis and Murphy JJ said at [40]-[42]: [40] It is clear, as the primary judge found, that the originating source of the payments to the Commissioner was, on each occasion, the bank account of Mortlake's related entity, Antqip. But, as the primary judge found, this was a clear example of a lender paying moneys advanced to a creditor of the borrower in accordance with the borrower's directions. [41] The position as between Mortlake and Antquip was no different from a drawing by Mortlake on an overdraft from its bank with a direction to the bank to pay the creditor directly. Such a payment constitutes a loan by the bank to its customer: see eg Andrews v ANZ Banking Group Ltd (2011) 86 ACSR 292 at [82] per Gordon J. [42] Moreover, even if it is not correct to describe the transaction between Mortlake and Antqip as a loan, what is important is the finding that the payment by Antqip to the Commissioner was a payment that was made by or on behalf of Mortlake. So much is plain from the evidence to which we were taken.
Thus, notwithstanding that the originating source of the payments to Ficema was the bank account of BBY, I infer that BBY Holdings directed the three interest payments to be made on its behalf, being loans by BBY to BBY Holdings advanced to Ficema at the direction of BBY Holdings, or, even if the payments were not a loan by BBY to BBY Holdings, each involved a payment being "made by or on behalf of" the debtor BBY Holdings. It follows that these three payments were made by BBY Holdings and received by Ficema qua creditor of BBY Holdings. Each of these payments was an unfair preference within s 588FA of the Act and, subject to proof of insolvency of BBY Holdings at the time of the impugned payments, each of the payments was voidable on the application of the plaintiffs in their capacity as liquidators of BBY Holdings.

[3]

16 June 2014 - $3 million advance by Ficema to BBY

Following a conversation between Ken Rosewall and Glenn Rosewall on 11 June 2014 (Phoenix time) while they were holidaying in Arizona, Ficema advanced $3 million to BBY as a short-term loan on 16 June 2014. The terms of the loan were oral. Ken Rosewall instructed Mr Peter Collier, the accountant for Ficema, to attend to the mechanics of the loan by Ficema, including arranging a temporary $2 million overdraft for Ficema with Westpac Banking Corporation (Westpac).
The genesis of this loan was a liquidity difficulty for BBY in June 2014 arising from a large transaction which BBY was facilitating for one of its clients, Mineral Resources Pty Ltd (Mineral Resources), in acquiring $192 million worth of shares in Aquila Resources Pty Ltd (Aquila). This transaction was referred to in submissions as the "Aquila trade". Given a shortage of funds to meet margin calls by the ASX in relation to this transaction, BBY sought short-term financial assistance from its shareholders, including Ficema. As events happened, the $3 million advance by Ficema was not needed or used by BBY to pay any margin calls and BBY repaid the sum of $3 million to Ficema on 24 June 2014.
Ficema contends that the $3 million loan by Ficema was impressed with a "Quistclose trust" because the funds were advanced to BBY for a particular purpose in relation to the Aquila trade, and that the parties did not intend that the funds, once advanced, would become BBY's property absolutely. Ficema says that the payment of $3 million by BBY to Ficema on 24 June 2014 was not a preference because it was the return to Ficema of property held on trust by BBY for Ficema.
It is common ground that Ficema bears the onus of proof of establishing the existence of such a trust, which is fact dependent: Re Armstrong (1960) VR 202; Peter Cox Investments Pty Ltd (in liq) v International Air Transport Association [1999] FCA 27; (1999) 161 ALR 105 at [49]; Gliderol International Pty Ltd v Hall (2001) 80 SASR 541; [2001] SASC 355 at [20]. Before addressing the facts, it is convenient to refer to some matters of principle.

[4]

Quistclose trust

The term "Quistclose trust" is derived from the decision of the House of Lords in Barclays Bank Ltd v Quistclose Investments Ltd. In Rambaldi v Federal Commissioner of Taxation [2017] FCAFC 217; (2017) 107 ATR 1, the Full Federal Court (Allsop CJ, Dowsett and Burley JJ) said of Quistclose at [21]-[22]: [21] That case was concerned with circumstances in which one party (the "lender") advanced money to another party (the "debtor") who owed money to a third party (the "creditor") on the agreed basis that the advance would be used only to discharge the relevant debt, the debtor agreeing to pay the lender, at some future time, the amount of the advance. In [Quistclose at 580], Lord Wilberforce observed: That arrangements of this character for the payment of a person's creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognized in a series of cases over some 150 years. [22] At 580581, referring to the decision in Toovey v Milne (1819) 106 ER 574 concerning a similar arrangement, his Lordship said: The basis for the decision was thus clearly stated, viz., that the money advanced for the specific purpose did not become part of the bankrupt's estate. This case has been repeatedly followed and applied. These cases have the support of longevity, authority, consistency and, I would add, good sense.
Quistclose recognised at 581-582 that where the relationship between parties is that of debtor and creditor, there may also be equitable obligations including those of trust in relation to monies advanced: see also JD Heydon and MJ Leeming, Jacobs' Law of Trusts in Australia (8th ed, 2016, LexisNexis Butterworths) at [12-06]. Critical to the reasoning in Quistclose is that the liability of Rolls Razor, the company in receipt of the loan, to repay the amount to Quistclose arose on the application of the loan monies to the intended purpose, in that case, the payment of a dividend by Rolls Razor. Lord Wilberforce said at 581: "when the purpose has been carried out (ie, the debt paid) the lender has his remedy against the borrower in debt".
In Australasian Conference Association Limited v Mainline Constructions Pty Limited (in liq) (1978) 141 CLR 335 at 353; [1978] HCA 45, Gibbs ACJ said (Jacobs and Murphy JJ agreeing) that the decision in Quistclose was authority for the proposition that: ….where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust.
In Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491, Gummow J said of Quistclose at 500-501: However, in the House of Lords, Lord Wilberforce said ... that a necessary consequence of the mutual intention of Quistclose and Rolls Razor to create arrangements which gave rise to a "primary" trust in favour of those entitled to the dividend was that, if the dividend could not be paid for any reason, the money, as a "secondary" trust, was to be returned to Quistclose; the intention was clear to create the secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out. This characterisation of what occurred is indicative of an express trust with two limbs rather than an express trust in favour of the shareholders and a resulting trust in favour of Quistclose which arose by reason of an incomplete disposition by Quistclose of the whole of its interest in the money lent to Rolls Razor. But, on either characterisation, Quistclose had a beneficial interest (although not at all relevant times an exclusive beneficial interest) in the money in question. Thus, it was not merely in the position of a lender with the benefit of a promise to repay. Nor was Quistclose a settlor who had fully settled a fund upon other parties and did so not retain for itself a beneficial interest sufficient for it to ensure performance of the trust.
Importantly, a "Quistclose trust" is not a new or distinct species of trust and it must satisfy the requirements for any private trust: Re Australian Elizabethan Theatre Trust at 502; Compass Resources Ltd v Sherman (2010) 42 WAR 1; [2010] WASC 41 at [72]. Thus, there must be certainty of intention to create a trust: Korda v Australian Executor Trustees (SA) Limited (2015) 255 CLR 62; [2015] HCA 6 at [7]; George v Webb [2011] NSWSC 1608 at [202] (Ward J).
The question of whether such a trust arises depends on the mutual intentions of the parties, assessed objectively: Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135 at [48]. Subjective intentions are irrelevant as the Court is concerned not with "the real intentions of the parties" but with the outward manifestation of those intentions: Commissioner of State Revenue (Vic) v Snowy Hydro Limited (2012) 43 VR 109; [2012] VSCA 145 at [83], citing Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26 at [59], [114]-[115].
Where the language employed by the parties for the transaction is inexplicit, the court is left to infer the relevant intention from other language used by them, from the nature of the transaction and from the circumstances attending the relationship between the parties: Re Antqip Hire Pty Limited (subject to deed of company arrangement) (in liquidation) [2020] NSWSC 487 at [90], citing Associated Alloys Pty Limited v ACN 001 452 106 Pty Limited (in liq) (2000) 202 CLR 588; [2000] HCA 25 at [34], Walker v Corboy (1990) 19 NSWLR 382 at 397; Alston v Cormack Foundation Pty Limited (2018) 358 ALR 263; [2018] FCA 895 at [190]; Re Kit Digital Australia Pty Ltd (in liq) [2014] NSWSC 1547 at [64]; Compass Resources at [69]. Nonetheless, there is no need for particular caution in drawing the inference that a trust was intended: Re Australian Elizabethan Theatre Trust at 503; Raulfs v Fishy Bite Pty Ltd at [47].
There is some debate in the authorities as to the juristic nature of a Quistclose trust and whether it is a resulting or express trust. As indicated, in Re Australian Elizabethan Theatre Trust, Gummow J preferred the view that the characterisation of the circumstances giving rise to a Quistclose trust leads to the conclusion that the trust is an express trust with two limbs, rather than an express trust in favour of the intended payee (being the beneficiary under the primary trust) and a resulting trust in favour of the original payer arising by reason of the incomplete disposition.
By contrast, in Twinsectra Ltd v Yardley [2002] 2 AC 164, Lord Millett favoured the view that a Quistclose trust is a resulting trust, explaining at [100]: … The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and in so far as he does not it is held on a resulting trust for the lender from the outset. … When the purpose fails, the money is returnable to the lender, not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the borrower to make use of the money. Whether the borrower is obliged to apply the money for the stated purpose or merely at liberty to do so, and whether the lender can countermand the borrower's mandate while it is still capable of being carried out, must depend on the circumstances of the particular case.
In Salvo v New Tel Limited [2005] NSWCA 281, the Court of Appeal divided on the juristic nature of a Quistclose trust. Spigelman CJ and Young CJ in Eq were of the view that an express trust was created: at [53] and [96]; whereas Handley JA considered that a "resulting trust seems to accord more closely with the realities": at [78]. In the present case, neither party suggested that anything turned on this distinction.
Whether a Quistclose trust is understood as an express or resulting trust, the legal analysis with respect to the beneficial interest in the property remaining in the payer/transferor unless and until the purposes for which it has been paid/transferred have been fulfilled is essentially the same. If the money/property is applied by the payee/transferee for the stated purpose, then the obligation of the payee/transferee is that of debtor to its creditor, but if the property is not applied for the stated purpose, then the obligation of the payee/transferee is that of trustee to its beneficiary: Quistclose at 581-582.
As Briggs LJ explained in Bellis v Challinor [2015] EWCA Civ 59 at [63] (Underhill and Moore-Bick LJJ agreeing), ignoring the infelicity in the reference to "purpose" in the expression "primary purpose trust": Where property is transferred on terms that do not leave it at the free disposal of the transferee then the Quistclose-type trust thereby established is one under which the beneficial interest in the property remains in the transferor unless and until the purposes for which it has been transferred have been fulfilled: see Twinsectra at paragraph 100. That beneficial interest ceases to exist if and to the extent that the property is used for the stated purposes, but not otherwise. The application of the property for the stated purpose is a power vested in the transferee, not (usually at least) a primary purpose trust.
In Raulfs v Fishy Bite Pty Ltd at [49], Campbell JA (Meagher and Barrett JJA agreeing) referred with approval to the following statement in Young, Croft and Smith On Equities (2009, Law Book Co) at [6.1020]: Cases in this area will often depend on a close analysis of the facts, and in particular, whether the person who provided the money annexed a trust or equitable obligation that it was only to be used for the nominated purpose. The mutual intention of the parties ... will be important. A trust will not necessarily arise just because a lender inquires (sic) into the purpose for which a loan is sought and money is paid over for that particular purpose.
Importantly, the test is not merely whether the parties intended the money to be at the free disposal of the borrower: Compass Resources at [59]-[60]. Nor is it sufficient to show that the parties intended that the funds advanced by way of loan were to be used only for a specified purpose communicated between the parties; that is because a trust does not necessarily arise because money is advanced or lent for a particular purpose: Ralphs v Fishy Bite at [50]-[51]; Compass Resources at [59]-[60], [67]. As Lord Millett explained in Twinsectra at [73]: A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire (sic) into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do no ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cash-flow. Commercial life would be impossible if this were not the case.
Beech J expressed a similar view in Compass Resources at [67]: … In my opinion, the test of the necessary intention is the composite test stated in the cases to which I have referred. Is it intended that the moneys not become part of the general assets of the company and be used only for the particular purpose? It is not sufficient, in order to establish a trust, to show that the parties intended that the moneys be used only for a particular purpose. Not every contractual obligation to use loan funds for a specified purpose gives rise to a trust of the moneys lent.
One important indicator of whether the parties intend to create a trust in the nature of a Quistclose trust is whether or not there is an intention that the subject monies be kept separate from other general monies of the recipient: Re Australian Elizabethan Theatre Trust at 505-506. In Quistclose, the borrower (Rolls Razor) had taken the step of establishing a special and separate account with Barclays Bank to receive the loan monies which had been provided to pay a dividend to shareholders. If the lender (Quistclose) had paid the monies into an existing account, it would not have been possible to deduce a common intention that the monies were to be held on trust until the purpose of the loan was achieved.
In Henry v Hammond [1913] 2 KB 515 at 521 Channell J said: It is clear that if the terms upon which the person receives the money are that he is bound to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a separate fund to the person entitled to it, then he is a trustee of that money and must hand it over to the person who is his cestui que trust. If on the other hand he is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he pleases, and when called upon to hand over an equivalent sum of money, then, in my opinion, he is not a trustee of the money, but merely a debtor.
These remarks of Channell J were approved in Cohen v Cohen (1929) 42 CLR 91 at 101; [1929] HCA 15; Walker v Corboy at 397; and Georges (in his capacity as joint and several liquidator of Sonray Capital Markets Pty Ltd (in liq)) v Seaborn International Pty Ltd (as trustee for the Seaborn Family Trust) (2012) 206 FCR 408; [2012] FCAFC 140 at [41].
In Bellis v Challinor at [60], Briggs LJ observed that usually the question of whether the essential restrictions upon the transferee's use of the money or property have been imposed so as to create a trust turns upon the true construction of the words used by the transferor, however "where … the transferor says or writes nothing but responds to an invitation to transfer the property on terms, then it is the true construction of the invitation which is likely to be decisive": at [59]. Briggs LJ continued at [61]: In such cases the invitation usually comes from the transferee. In Twinsectra it took the form of a solicitor's written undertaking, the terms of which, as Lord Millett put it, were "crystal clear" in restricting the use of the money transferred for the specified purpose of the acquisition of property.
The description of the transferee's invitation in Twinsectra as "crystal clear" was based on Lord Millett's finding at [75] that the solicitor, Mr Sims, who was acting for the transferee of the money, "undertook that the money would be used solely for the acquisition of property and for no other purpose; and was to be retained by his firm until so applied" (emphasis in original). Whether BBY undertook to Ficema that the $3 million advance would be used solely for the Aquila trade and for no other purpose and was to be retained by BBY until so applied, is one of the critical issues addressed below.

[6]

Assessment of the witnesses

Mr Maharaj and Ms Yuen were both disinterested witnesses with no personal stake in the outcome of the proceedings. Mr Maharaj's evidence was unchallenged, and I accept his evidence as credible and reliable.
Ms Yuen was an impressive witness. There was no challenge to her credibility, which I accept. I reject the challenge in cross-examination to her reliability. She did not prevaricate when giving evidence; her answers were responsive, straightforward and direct. I accept her evidence without hesitation
Mr Collier did not have an independent recollection of events unassisted by his file note (Ex K), emails and telephone logs, other than that he recalled having a telephone conversation with Glenn and Ken Rosewall in June 2014, and that he arranged a temporary overdraft facility for Ficema with Westpac (T199-200). Whilst I accept that he was attempting to give honest evidence in his affidavit, given the lapse of time since the events in issue his affidavit evidence was not entirely reliable. It was readily apparent from cross-examination that his affidavit was based on his reconstruction of events from his file note and other documents, rather than an independent recollection of events. He made appropriate concessions in cross-examination as to the accuracy of his affidavit evidence.
The parties diverged as to whether the evidence of Ken Rosewall should be accepted. The plaintiffs submitted that he was not an impressive witness and that his evidence was unsatisfactory, giving several examples. Ficema submitted that he was a frank witness whose evidence was truthful and should be accepted, taking into account that he is of advanced years, has seen several years of litigation following his involvement in the BBY companies, and has never made any claims of commercial sophistication.
In assessing Ken Rosewall's evidence, I have had regard to my notes of the impressions I formed at the time of his giving evidence and upon reading the transcript immediately after the trial concluded. I have reread the transcript of his evidence. Notwithstanding his advanced age, his relatively limited commercial sophistication, and the emotional strain of the collapse of the BBY Group and this litigation, I find that Ken Rosewall was an unsatisfactory witness. His evidence generally was unreliable as it was affected by self-interest and poor recollection. His poor recollection of events included, most importantly, the critical conversation with Glenn Rosewall on 11 June 2014 (Phoenix time) (T157.23-25 and .45-48) and he did not recall the telephone conversation with Mr Collier and Glenn Rosewall on 12 June 2014 (Sydney time). He accepted at his public examination in September 2016 that he did not particularly recall the events in question in June 2014 (Ex J, T 685.46-48), and there is no reason to think that his recollection had improved four years later at the trial, yet he was slow to make obvious concessions in cross-examination, including as to inconsistencies between his affidavit evidence and his earlier testimony at his examination under s 19 of the Australian Securities and Investments Commission Act 2001 (Cth) in March 2016. He was also less than forthcoming in his affidavit, which unlike his evidence at the ASIC examination and his public examination, did not mention the word "loan" being used in his conversation with Glenn Rosewall in June 2014. The well-known remarks of McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315 at 319 are apposite: the human memory is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time.
Additionally, I find that in parts his evidence was unpersuasive and somewhat argumentative in attempting to downplay the concerns he held in 2013 and 2014 as to financial difficulties in which the BBY Group found itself. I do not accept Ken Rosewall's affidavit evidence that in January 2014 he was not concerned about BBY's ability to repay loans to Ficema and that his offer to halve the 15 per cent interest payable on those loans was for reasons unrelated to BBY companies' financial position. This evidence cannot be reconciled with his evidence given at his public examination that he was the one who suggested the rebate of 50 per cent of the interest payable on the loans because he was concerned about the financial position of the BBY companies at the time, which he accepted in cross-examination was a truthful answer. (T161.10-12; 163.18-22) Notwithstanding those answers, he sought to justify the last sentence in par [44] of his affidavit as "partly true" (T163.36). That was an example of the witness not being prepared to make an obvious concession.
There were other difficulties in accepting Ken Rosewall's affidavit evidence; he asserted in par [88] that he did not have any concerns about the BBY companies' ability to pay their debts as and when they fell due throughout 2014. (Affidavit, par [88]) His affidavit evidence was contradicted by the evidence earlier given on oath at his public examination that: (a) he was of the view that BBY was in a "financial crisis" back in September 2013, which he accepted in cross-examination was a truthful answer and that remains his view (T170.48-171.6, 171.20-.24); (b) he was "very worried" about BBY after June 2014 (Exhibit J, T695.20-25), which he again accepted in cross-examination was a truthful answer (T172.40-.50); and (c) that he had an increasing concern that BBY "would financially fail, that is, become insolvent" (Exhibit J, T695.45-50), which after initially answering in cross-examination that he did not remember exactly giving this answer at his public examination, accepted that he must have said it as it was on paper (T173.10) and that the answer given in the public examination was true (T173.38-45). When pressed on the accuracy of his affidavit evidence at par [88], Ken Rosewall denied that he had an increasing concern that there was a prospect that the company (BBY) could not pay its debts as and when they fell due by June 2104. Given his earlier evidence under oath at his ASIC examination and public examination, I cannot accept that evidence as either credible or reliable (T174.8-11).
Overall, I do not accept Ken Rosewall's evidence unless it is against Ficema's interest or is corroborated by contemporaneous documents.

[7]

The facts

The evidence of the circumstances of the Aquila trade and the $3 million loan from Ficema is as follows. On Wednesday 11 June 2014, Mineral Resources provided a security deposit of $29 million to BBY, and BBY executed a "buy" order for $192 million of Aquila shares at an average price of $3.74. Settlement was due on Monday 16 June 2014.
The Aquila share price closed on 11 June 2014 at $3.61. On 12 June 2014, the ASX made a margin call on BBY for $40 million ($18 million initial margin, $7 million variation margin, and $15 million Capital-Based Position Limits (CBPL) margin, relating to BBY's counter-party settlement risk). The CBPL margin was required to be met from BBY's own funds, not those of its client, because at the time BBY was a self-declaring participant and the CBPL margin was to protect the ASX from a counter-party failure by BBY. BBY could not meet the CBPL margin call and the ASX agreed that, to avoid a default by BBY, the ASX would delay making the full CBPL call of $15 million but would make an additional Cover CBPL call of $5 million as a "general requirement additional cover" under rule 14.6.1 of the ASX Clear Operating Rules (the Operating Rules), which it made at 10:40 am on 12 June 2014.
After a telephone discussion with Glenn Rosewall, Mr Maharaj emailed Glenn Rosewall in Phoenix, Arizona at 2:30 pm on 12 June 2014 (11 June 2014 Phoneix time) advising him of the position in relation to the Aquila trade and the CBPL call: Hi Glenn - as discussed here is a summary of where we are with the AQA and cbpl call. St George have covered the margin to today but tomorrow we will need an extra 10m in additional margin funds for Friday/sat/sun/mon repaid by the ASX on Tuesday. We can fund 5m of this margin but will need an additional $4 to $5m Friday morning rtgs. Can you please urgently speak to Ken on drawing on his facility for a few days. We will pay interest plus a fee. Please call me in the morning to discuss. We will need to fund the margin by 11am, Friday morning. (Emphasis added)
Following this email, Mr Maharaj received a phone call from Glenn Rosewall who requested that he inform the ASX that he had spoken to Ken Rosewall and that he would be arranging an urgent loan from the shareholders to cover the margin. Mr Maharaj gave evidence that Glenn Rosewall told him: My Dad has a line of credit with Westpac he can draw on that facility to provide us with some funding. I will also speak to April [Yuen] about borrowing from my super account.
Ken Rosewall gave affidavit evidence, which was admitted, subject to a limitation under s 136 of the Evidence Act 1995 (NSW) as evidence of what was said and not the truth of the conversation, that whilst in Phoenix, Arizona, on about 11 June 2014 (Phoenix time) Glenn Rosewall told him that something was happening with the Aquila transaction and the BBY Group urgently needed $3 million in order to proceed with the transaction; asked him to arrange Ficema to "transfer" this money to the BBY Group "so we can pay this"; told him that "[w]e only need the money for a short period of time and it will be returned to Ficema within a week"; and also told him that "Arun" (being Mr Maharaj) was assisting and organising it.
Ken Rosewall deposed that he responded: Ok, if you need it, I can do it. You and Peter [Collier] can work out the details.
I do not accept that Ken Rosewall's affidavit evidence of his conversation with Glenn Rosewall is reliable or complete. In cross-examination, Ken Rosewall candidly acknowledged that at the time of this conversation he was on holidays and was not focused on BBY-related matters (T144.32-34). He could only recall having one conversation with Glenn Rosewall about the need for $3 million in relation to the Aquila transaction (T145.17-19). He agreed that his evidence given at his public examination in September 2016 of his conversation with Glenn Rosewall was truthful, namely, that because of the financial stress of the arrangement with Aquila getting done, Glenn Rosewall asked him "if the $3 million could be arranged on a loan basis just for the week" (T146.12-17). He accepted that both he and Glenn referred to the money Glenn was asking for as a loan or a short-term loan; he said that the loan was agreed to be returned within ten days (T146.49, 147.1-2 and .27-29). He was prepared to cause Ficema to advance the money on the basis that it would be repaid within a short period of time (T147.35-37). The main consideration from his perspective was that the "loan would be repaid within a week or ten days, or thereabouts" (T147.39-41)). He accepted that he was not told the details of why the money was needed, other than that it had something to do with the Aquila trade (T150.44-47)), and that he was not aware of the details of that transaction (T145.30-32), including the ASX margin calls until he returned to Australia several weeks later (T149.24-150.2). He did not ask where the funds went after the transfer from Ficema to BBY on 16 June 2014 (T154.36-155.4) and he did not know whether the monies advanced were even used in connection with the Aquila trade (T150.11-24).
As the plaintiffs correctly submitted, there is a telling omission in the affidavit, importantly, the word "loan" is not mentioned, yet in cross-examination Ken Rosewall readily agreed that both he and Glenn each referred to the money requested as a "loan or short-term loan" (T147.27-29). He also gave the following evidence: Q: Can I suggest this to you, Mr Rosewall: the conversations you had with Glenn about the $3 million that was needed from Ficema at this time were along the lines of "BBY needs some money on a short term loan basis because of a problem with an Aquila trade"? It was about as much as that, wasn't it? A: Yes. (T151 (29-34))
And after ultimately accepting that he did not have a specific recollection of the conversation with Glenn Rosewall (T157.47-48), Ken Rosewall gave the following evidence of his conversation with Glenn Rosewall: Q. What I want to suggest to you, Mr Rosewall, is that the real tenor of the conversation was that your son, Glenn, said to you, "There's a problem with the Aquila trade, we need $3 million. Can you lend it to us, please?" And your answer was, "Yes, as long as it's paid back to me within a short period of time." That's right, isn't it? A. That's right, yes.
That evidence was consistent with the answers given by Ken Rosewall at his ASIC examination on 15 March 2016 (Ex H, p 110, 102-103), in which he said: Q: So you said that Glenn asked you whether you could loan $3M from Ficema, is that correct? A: Right. … Q: Did you know about the request from the ASX regarding margin calls for the Aquila trade? A: … No.
Although Ken Rosewall had no recollection of another conversation with Glenn Rosewall concerning the Aquila trade, I find that following their conversation in Phoenix, Glenn and Ken Rosewall had a telephone conversation with Mr Collier on 12 June 2014 (Sydney time). In his affidavit, Mr Collier deposed that Glenn Rosewall told him that: (a) the BBY Group was completing a transaction on 16 June 2014 and it needed a short-term $3 million loan where the monies would be placed into a BBY Group trust account by Friday, 13 June 2014 in order for the BBY Group to satisfy a condition under that transaction; (b) he had spoken to his father about it and Ken Rosewall had agreed that Ficema would provide a short-term loan to BBY in order for it to satisfy the conditions of the transaction; (c) the money would need to go in by 13 June 2014 and would be repaid early the following week; and (d) that Ken Rosewall said to him "Peter, please call Mark Mason at Westpac to arrange it all", and that he agreed to do so.
In cross-examination, Mr Collier agreed that other than a recollection that the phone call happened and that he arranged the loan facility, he did not have an independent recollection of the conversation without looking at his file note of the conversation and the emails referred to in his evidence, as well as telephone logs. (T199.46-49, 200.1-8). I accept that Mr Collier was told that the reason why Ficema was being asked to advance money was because of a large share trade that BBY had executed on behalf of a client, that a facility was required for a deposit relating to a transaction that was occurring by Monday, 16 June 2014, and that it was a holding deposit required for this transaction (T203.8-10). He readily accepted that it was possible that nobody mentioned the phrase "trust account" in the telephone conversation he had with Glenn and Ken Rosewall, and that the reference to a "trust account" in his affidavit could simply have been to a bank account (T209.19-26).
I find that it is most unlikely that Glenn Rosewall referred to the loan from Ficema being deposited into a BBY Group "trust account" during the conversation with Mr Collier. This is for four reasons. First, there was no mention by Glenn Rosewall of a trust account in his earlier conversation with Ken Rosewall, when he requested the loan from Ficema. Second, there is no reference in Mr Collier's file note to holding Ficema's funds in a trust account: see [85] below. Third, there is no evidence that Glenn Rosewall instructed Mr Maharaj that Ficema's funds were to be held in a trust account. Fourth, the identification of an account of BBY to receive the funds from Ficema was made by Ms Yuen, on instructions from Mr Maharaj, later in the afternoon of 12 June 2014 (Sydney time), which instructions did not involve the use of a trust account: see [88] below.
The file note to which Mr Collier referred in his evidence was subsequently produced by Ficema (after cross-examination of Mr Collier had concluded) and was tendered by the plaintiffs (Ex K). The file note is headed "KR GR PC phone call", records that it was made at "approx" 1:15 pm on 12 June 2014 (Sydney time) and is in these terms: USA Time 11/6/14 approx 9.15pm - Spoke to GR and KR in USA - We're outside the restaurant as mobile phones are not permitted in the restaurant - Wants a $3 mil facility for large transaction occurring Friday/Monday 16/6/14 - Funds need to be banked Friday or Monday latest held as security deposit for transaction - GR and KR instructed me to speak to Mason Westpac to arrange the short-term facility - GR said facility would be repaid next week once transaction finalised - Said to GR and KR hopefully Ficema has enough security so we are not required to obtain valuations as the facility won't be done by Friday - Told KR and GR I was not in office at present and will ring Mason as soon as I am back there about 2:30 pm.
The reasonable inference is that Mr Collier made this file note sometime after about 2:30 pm on 12 June 2014 when he returned to his office. This inference is supported by the inclusion of the abbreviated word "approx." when recording the time of the telephone conversation as 1:15 pm on that day, and the final bullet point referring to him speaking to Mr Mason of Westpac as soon as he was back in the office at about 2:30 pm.
Ms Yuen was copied in on Mr Maharaj's 12 June 2014 email at 2:30 pm to Glenn Rosewall: see [74] above. After receipt of this email, Ms Yuen had a conversation with Mr Maharaj. He told her that both Ken and Glenn Rosewall were going to transfer money to BBY to cover the remaining amount of the second margin call and "once we get it back from the ASX, the loans will be used to cover BBY's capital requirements": Yuen, par [42]. Although this evidence was admitted subject to a limitation under s 136 of the Evidence Act 1995 (NSW), as evidence of what was said, not the truth of the conversation, senior counsel for Ficema challenged the reliability of Ms Yuen's recollection of this conversation in cross-examination on the basis that the second sentence, referring to using the loans when received back from the ASX to cover BBY's capital requirements, was not included in any email from Mr Maharaj. Ms Yuen acknowledged that she could not recall the second sentence being included in any email from Mr Maharaj but was adamant that she was not mistaken in what Mr Maharaj had told her (T55 (13-22)). I accept her evidence in that regard. I am satisfied that she had a genuine recollection of the conversation.
On the afternoon of 12 June 2014, Ms Yuen discussed with Mr Maharaj where he intended the "Rosewalls' money to be deposited". Mr Maharaj told her to "[h]ave a look and see if [she] could find any empty St George bank account that is currently not being used", as this would make it "easier for us to keep track of the money going forward and to calculate interest payable and the balances owing on their loans": Yuen, pars [47], [74(a)]. This evidence was also admitted subject to a limitation under s 136 of the Evidence Act as evidence of what was said, not the truth of the conversation. Again, it was suggested to Ms Yuen in cross-examination that her recollection of the second sentence of par [47] of her affidavit was mistaken. She was adamant that she was not mistaken, and I accept her evidence (T 56-57).
After this conversation with Mr Maharaj, Ms Yuen identified a bank account held by BBY with St George which at that point in time had a zero balance (account 9217) which was styled BBY Trust Account 3. At 4:48 pm on 12 June 2014, Ms Yuen emailed Glenn Rosewall, copied to Mr Maharaj, the bank details for "Trust Account 3" (described in her email as "BBY Limited Trust Ac") in relation to "the BBY loan transfer". Glenn Rosewall forwarded this email to Ken Rosewall on 12 June 2014 at 11:30 pm. Ken Rosewall gave evidence, which I accept, that he did not recall reading this email at the time; he said that he was not reading his emails whilst on holidays (T148.22-23).
At 5:00 pm on 12 June 2014, after Mr Maharaj had relayed to Mr Luscombe of the ASX what he had been told by Glenn Rosewall concerning the funding of the margin call, Mr Maharaj sent an email to Glenn Rosewall, copied to Ms Yuen, noting "… settlement [of the Aquila trade] will be Monday. … So tomorrows [sic] margin is $14M … CBPL large trade $10m … CMM AQA $4M". The email stated that Mr Maharaj had informed the ASX that the shareholders will be "loaning the $8m short-term to fund the CBPL and St George will look to funding the $4m margin" (emphasis added). Mr Maharaj explained that unfortunately the Aquila price had closed at $3.54 down from $3.61 the night before, "hence the additional $4m CMM margin". He also noted that Ken Rosewall's bank would need to arrange "a RTGS transfer first thing in the morning".
At 5:08 pm on 12 June 2014, Glenn Rosewall responded by email to Ms Yuen authorising the transfer of $2.5 million from the "GARF Super Fund ... to BBY Trust AC for the purpose below". Later on 12 June 2014, Ms Yuen transferred the sum of $2.5 million from the account of GARF Pty Ltd (GARF) to BBY Trust Account 3. GARF was the trustee of the Glenn A Rosewall National Pro Superfund. Also on 12 June 2014, BBY paid $25.7 million to the ASX in respect of the initial and variation margin, funded out of Aquila's security deposit, and $5 million of the CBPL additional margin.
On Friday 13 June 2014, following a further fall in the Aquila share price, an additional variation margin of $3.2 million was called by the ASX. The total required to be paid by BBY to the ASX was the additional variation margin of $3.2 million, together with the deferred CBPL margin of $10 million, which was also called on. Mr Maharaj discussed the matter by telephone with Glenn Rosewall who told him that they would need to borrow the funds in the Saxo and Futures (CSA) accounts to pay the ASX and that "my dad will be transferring the funds today to offset this loan. We will then repay all these loans once these funds are returned by the ASX".
At 10:50 am, Mr Maharaj received an email from Mr Luscombe of the ASX demanding that BBY post the sum of $10 million within the next 30 minutes to meet the margin requirements. Mr Maharaj telephoned Glenn Rosewall and told him of the ASX demand and said "[w]e need Ken's money and we need it now", to which Glenn Rosewall replied, "I have been working with Dad's accountant to get you the money. It is definitely coming but it won't be with you in the next 30 minutes".
At 11:03 am, Mr Maharaj approved Ms Yuen's request to pay the $10 million margin call by processing transfers to the ASX of $4.5 million from BBY Trust Account 1 and $5.5 million from BBY Trust Account 3. Earlier on 13 June 2014 Ms Yuen, on instructions from Mr Maharaj, had transferred funds from various CSAs ($1.8 million from the Saxo buffer client account and $6.8 million from the Futures client account) to the BBY Funding Account (account 9284). Following the execution of these transfers, Ms Yuen had another meeting with Mr Maharaj who asked, "[h]as the money from Ken landed yet?", to which she replied that it had not. Mr Maharaj then said: We will need to borrow some money from the BBY funding account to cover Ken's money. So please transfer $3 million from the BBY funding account to trust account 3. When Ken's money is in then we will transfer Ken's money to top-up the BBY funding account.
After this conversation, Ms Yuen transferred $3 million from the BBY Funding Account to Trust Account 3. Ms Yuen then emailed Mr Joseph Vu, the relationship banker with whom BBY primarily dealt with at St George Bank, to arrange the transfer of $10 million from BBY to the ASX, comprising $4.5 million from Trust Account 1 and $5.5 million from Trust Account 3. As indicated, the $5.5 million in Trust Account 3 comprised the $3 million transferred from the BBY Funding Account and the $2.5 million received from GARF. At 11:37 am, Mr Maharaj and Ms Yuen received confirmation from Ms Fiona Bilton, a manager in the BBY Group, that these payments had been processed and the funds were now with the ASX.
At 11:37 am on 13 June 2014 (Sydney time), Mineral Resources informed BBY by email that "payments totalling $163,913,381.86 will be credited to the BBY Trust account on Monday morning (NAB have confirmed all is in order with the transfer)". At 2:58 pm, Mineral Resources sent BBY copies of "the two RTGS payments made today". At 3:27 pm, Ms Yuen sent an email to Glenn Rosewall and Mr Maharaj confirming that "$63,913,318.87 has hit our accounts … still waiting on the $99,999,999". Glenn Rosewall on-forwarded this email chain, commencing with Ms Yuen's email, to Ken Rosewall, Mr Collier and Mr Maharaj. Ken Rosewall gave evidence, which I accept, that he was not reading his emails at this time while he was overseas.
Earlier at 12:33 pm on 13 June 2014, Glenn Rosewall sent an email to Mr Maharaj and Mr Collier, attaching an email he had received from Mr Mark Mason at Westpac on 13 June 2014 at 12:17 pm requesting completion of the attached transfer letter with BBY's account details and the signature of two account signatories of Ficema. Mr Maharaj onforwarded this email to Ms Yuen at 12:38 pm.
At 12:40 pm on 13 June 2014, Mr Collier sent an SMS text message to Glenn Rosewall: I think it is simpler to drawdown $3M facility and when funds come back next week repay it again. Arun is going to fill out details and email it back. Yuen can sign it. Regards, Peter.
At 1:17 pm on 13 June 2014, Ms Yuen sent an email to Glenn Rosewall attaching an undated authority letter addressed to Westpac containing the bank account details for account 9217 completed by her. This was the BBY Trust Account 3, although that was not stated on the face of the authority.
At 4:30 pm on 13 June 2014 (11:30 pm on 12 June 2014 (Phoenix time)), Glenn Rosewall sent an email to Ms Yuen, copied to Mr Maharaj and Ken Rosewall, stating "Dad, fyi" and attaching the email from Ms Yuen to Glenn Rosewall providing the BBY account details for the "BBY loan transfer" (see [97] above). As indicated, I accept Ken Rosewall's evidence that he did not recall seeing or responding to, or asking anyone else to respond to, this email, on which he was copied (T148.22-30).
At 4:33 pm on 13 June 2014 (11:33 pm on 12 June 2014 (Phoenix time), Glenn Rosewall responded to Mr Maharaj's 12 June 2014 email at 5:00 pm (see [90] above), asking "[h]ow much is required from krr?". This was a reference to Ken Rosewall.
At 5:07 pm on 13 June 2014, Glenn Rosewall sent an email to Mr Collier, Mr Maharaj and Ken Rosewall headed, "Urgent transfer of funds to BBY Ltd" and attaching "docs for signing" which had been sent by Mr Mason of Westpac to Glenn Rosewall at 4:15 pm. Those documents included a letter from Westpac to Ficema offering a temporary overdraft of $2 million until 17 June 2014, guaranteed by Mrs Wilma Rosewall, Glenn Rosewall, and Ken Rosewall. Mr Collier accepted in cross-examination that when he received the documents to be executed by Ficema he was aware that BBY was due to receive all the monies in connection with the Aquila trade by Monday morning (16 June 2014) and that he did not ask any questions about whether the monies were still required by BBY from Ficema, nor was he instructed to make any enquiries in that regard, and that he did not express to anybody, in writing or orally, any stipulation or condition as to the manner in which BBY was to use the money to be advanced by Ficema (T205.12-47). He also agreed that he left it to BBY personnel to fill in the relevant bank details for BBY on the letter of instruction to Westpac to be signed by Ficema (T207.39-50) and that there was no reference in any of the communications he received to a trust account being the account at BBY to receive the monies (T208).
At 5:17 pm on 13 June 2014, Mr Maharaj onforwarded to Glenn Rosewall, an email from the ASX in which Mr Luscombe confirmed that the ASX would not call on Monday morning, 16 June 2014, the market margin that would ordinarily be triggered on the relevant Aquila acquisition and provided the acquisition was settled through CHESS on Monday, 16 June, then the ASX would initiate a return of the associated cash market margin, together with the $15 million additional margin call paid on 12 June ($5 million) and 13 June ($10 million) following the completion of the CHESS batch process. The email also stated that the ASX reserved the right to impose an additional margin call at any time under r 14.6.1 of the Operating Rules.
The Westpac facility documents with Ficema were signed and dated 13 June 2014 and returned by email by Glenn Rosewall to Mr Mason on 14 June 2014 at 9:10 am. Ken Rosewall and Glenn Rosewall also signed an authority letter (with the typed date of 12 June 2014) authorising Westpac to transfer $3 million from Ficema's account to a nominated BBY account, which on the evidence, was the BBY Trust Account 3. As mentioned, Ms Yuen had selected this account for the deposit. Although this account was a trust account, that fact was not referred to on the face of the authority, nor did the authority contain any restriction or condition on the use of the money. As to the terms of this authority, Ken Rosewall was not told by anybody about which bank account Ficema's funds would be transferred into (T151.45-48), he did not discuss with anyone whether Ficema's money had to remain in a particular account, nor did he give any instructions to anyone, including Glenn Rosewall, Mr Collier or Mr Mason, about how Ficema's money was to be maintained by BBY (T152.8-11 and 18-23). Ken Rosewall accepted in cross-examination that he could have instructed Mr Mason of Westpac to inform BBY of any restrictions to be placed on the use of Ficema's money, but did not do so, and that he could have recorded any such instruction on the loan documents that he signed, but again did not do so (T154.1-25). Nor did Mr Collier express to anyone any stipulation or condition as to the use of the money advanced by Ficema, and he accepted so much (T205.44-47).
At 9:19 am on Monday 16 June 2014, Ms Fiona Bilton emailed Ms Yuen and Mr Maharaj, copied to Glenn Rosewall, confirmation that the funds required for the settlement of the Aquila trade had been received into BBY's Facilitation Account with St George Bank. At 9:28 am, Ms Bilton again emailed Ms Yuen and Mr Maharaj, copied to Glenn Rosewall, advising that the vendor of the Aquila shares had failed to deliver all of the stock to BBY. As a consequence, settlement of the balance of the Aquila trade was deferred to 17 June 2014. At 10:44 am, Glenn Rosewall instructed Mr Maharaj by email, in response to Mr Maharaj forwarding an email he had received from Mr Ian Chensen of the ASX at 10:38 am stating that BBY must immediately lodge updated liquidity returns with the ASX "by cob today 14 June 2014", as follows: Ok, make sure the $3m is drawn this am from WBC.
This was a reference to drawing down on Ficema's loan of $3 million. According to Westpac records, the telegraphic transfer of $3 million from Westpac on behalf of Ficema to BBY took place on 16 June 2014 at 1:28 pm.
On 16 June 2014, BBY obtained a one-off advance from St George Bank for $26 million, which BBY repaid on 17 June 2014 as it did not utilise this temporary advance.
The balance of the Aquila trade settled on 17 June 2014. BBY paid the total of the amount due to the seller on settlement from funds paid by its client, Mineral Resources.
Also on 17 June 2014, the ASX returned to BBY the $15 million in additional margin calls paid by BBY on 12 June 2014 ($5 million) and 13 June 2014 ($10 million), together with a further $28 million in margins previously paid in relation to the Aquila trade.
On 22 June 2014, Mr Collier sent an email to Mr Maharaj and Ms Yuen, copied to Glenn Rosewall, with the subject heading "Ficema Loan" asking whether "the $3 million loan from Ficema to BBY [has] been repaid as the transaction was to happen last Monday, 16 June 2014?". Mr Maharaj replied by email that day to Mr Collier: "[it] will be Monday, Peter, I have spoken to the banker".
From the funds returned by the ASX on 17 June 2014, BBY repaid $2.5 million to GARF on 24 June 2014 and on the same day paid $3 million to Ficema from BBY's Trust Account 3. The balance of the funds from the ASX was retained by BBY and was not repaid to the Saxo and Futures CSAs. As the plaintiffs correctly submitted, one outcome of the Aquila trade was that funds misappropriated from the CSAs were not replenished and instead related party loans from GARF and Ficema were repaid. This is one of the significant matters relied upon by the plaintiffs on the issue of insolvency.

[10]

Was there a restriction on the use of Ficema's money?

Although Ficema correctly accepted that Ken Rosewall did not claim to have a recollection of expressly asking or expressly being told that the $3 million would only be used for the purpose of the Aquila trade (closing written submissions (par [8])), Ficema submitted that the transaction should be "understood" in such a way that the $3 million lent by Ficema could "only" be used for the Aquila trade. I reject this submission.
As the plaintiffs correctly submitted, the asserted "understanding" misapprehended the critical question. Whether or not a trust arises is an objective test which depends on the outward manifestations of the parties' intentions, not subjective understandings or expectations: Byrnes v Kendle at [59]. Ficema's submissions conflated an expectation or general understanding that funds will be used for a specific purpose with the mutual intentions of the parties. The question is whether the objective intention of the parties was that the funds advanced would remain the beneficial property of the lender (even if not an exclusive beneficial interest) until the borrower applied those funds in the manner required by the stipulated purpose. A trust does not necessarily arise because money is advanced or lent for a particular purpose: Raulfs v Fishy Bite at [50]-[51]; Compass Resources at [59]-[60], [67]; Jin Niu Investments Pty Ltd v Wang (No 2) [2020] NSWSC 649 at [159]; Twinsectra at [73]. As Tate JA (Nettle and Ashley JJA agreeing) said in Legal Services Commission v Brereton (2011) 33 VR 126; [2011] VSCA 241 at [96]: It is not sufficient that funds are provided with an expectation that they will be used for a specific purpose. An expectation or general understanding falls short of the necessary mutual intention that funds have been provided on the express condition that they will be earmarked for use exclusively in accordance with an agreed purpose.
The statement by Briggs LJ in Bellis v Challinor at [59]-[60] that the restriction on the use of the money can come from the transferee, does not assist Ficema's contention that the parties intended to create a trust in respect of the $3 million loan. Here, the "reason" given by BBY when requesting the loan from Ficema was no more specific than that there was a "problem" with the Aquila trade. Glenn Rosewall did not tell Ken Rosewall that the money was required by BBY for the purpose of paying a margin call in respect of the Aquila trade, or that the money would be used solely for that purpose, and would be retained by BBY until it was so applied. The loan was not provided by Ficema on an exclusive basis that the funds only be used by BBY to pay a margin call to the ASX.
Nor is Ficema's contention that there was a trust assisted by the reference in Mr Collier's file note to the purpose of the funds as a "security deposit". Accepting that Glenn Rosewall used words to that effect in the telephone conversation with Mr Collier and Ken Rosewall, although Ken Rosewall had no recollection of that conversation, the use of such language without more does not manifest an undertaking by BBY to Ficema to use the money advanced by Ficema solely for the purpose of a security deposit (or payment of a margin call) in respect of the Aquila trade and for no other purpose, and to be retained by BBY until so applied: Twinsectra at [75]. On the evidence, the invitation by Glenn Rosewall to Ken Rosewall to advance a short-term loan of $3 million was not made on this condition; rather, the invitation was made by BBY and accepted by Ficema on the express basis that the $3 million loan would be repaid in a short period.
There are several other matters inconsistent with the asserted restriction on the use by BBY of Ficema's funds.
First, no instruction was given to Mr Maharaj by either Glenn Rosewall on behalf of BBY or anyone on behalf of Ficema as to any limitations to be placed on how the funds were to be used by BBY, or any restriction on the ability of BBY to mix the funds with other monies from the BBY companies.
Second, in Mr Maharaj's email to Glenn Rosewall on the afternoon of 12 June 2014 when requesting that Ken Rosewall draw on Ficema's facility to lend money to BBY, there is no suggestion of that any restrictions or conditions which were to be placed on the use by BBY of the funds requested from Ficema, and indeed, Mr Maharaj offered to "pay interest plus a fee" which is a contra indication to an intention to create a trust. It is most unlikely that Glenn Rosewall would have suggested to Ken Rosewall that restrictions or conditions be placed on the use of the funds requested to be advanced by Ficema, including undertaking not to mix Ficema's funds with the general assets of BBY, without having first discussed this with Mr Maharaj (as to which there is no evidence), when Mr Maharaj as the CEO of BBY had not suggested any such restrictions or conditions and had offered to pay interest on the loan, even though this offer does not seem to have been communicated by Glenn Rosewall to Ken Rosewall.
Third, the stated intention of Mr Maharaj when giving instructions to Ms Yuen on 13 June 2014 for the payment of the $10 million margin call to the ASX, was that after paying the margin call from the monies which included $5.5 million in Trust Account 3, of which $3 million had been transferred from the BBY Funding Account, BBY would subsequently use Ficema's funds of $3 million, when received, to reimburse the BBY Funding Account which had been used to partially fund the $10 million margin call (see [94]-[95] above). Plainly, before receipt of Ficema's funds, BBY intended that these funds be mixed with the general assets of BBY.
Fourth, in the email from Ms Yuen to Glenn Rosewall on 12 June 2014 describing the proposed transaction as the "BBY loan transfer", which was on-forwarded by Glenn Rosewall to Ken Rosewall late on 12 June 2014, there is no expression of the purpose for which the funds were to be used or any restriction or condition placed on the use of the proposed funding.
Fifth, Ken Rosewall was not told of any details about how Ficema's advance was to be used when he and Glenn Rosewall signed the documents on behalf of Ficema drawing down on its facility from Westpac to transfer the funds to BBY, nor did he ask any questions about the reason for the loan requested by BBY. This is consistent with Ficema advancing the funds for no sole purpose.
One further matter should be mentioned concerning the terms of the trust asserted by Ficema. It was not submitted by Ficema and there is no evidence to support a finding that the mutual intention of the parties was to create arrangements which gave rise to a trust with two limbs: a "primary" trust in favour of the ASX, as the entity entitled to receive payment of the margin calls due by BBY (although not an exclusive beneficial interest), with the money as a "secondary" trust, to be returned for the benefit of Ficema as the lender if the margin call in relation to the Aquila trade could not be paid by BBY to the ASX for any reason; that is, returned under the second limb of an express trust, as referred to by Gummow J in Re Australian Elizabethan Theatre Trust at 500-501, or under a resulting trust, as referred to by Lord Millett in Twinsectra.
Rather, Ficema's case involved the proposition that the $3 million loan to BBY was impressed with a trust in favour of Ficema, giving it an exclusive beneficial interest in the funds, subject to a power conferred on BBY as trustee of the funds to use the funds solely for the purpose of paying margin calls to the ASX in relation to the Aquila trade, and for no other purpose. The evidence of the outward manifestations of the parties' intentions does not support a finding that Ficema advanced the funds to BBY subject to such a restriction on the use of the funds by BBY.

[12]

Payment of the $3 million loan into trust account

It is not in dispute that Ficema's $3 million loan was paid into BBY's Trust Account 3. However, the evidence does not establish that this was done, as contended by Ficema, for the purpose of keeping the monies separate from BBY's general assets.
First, I reject the submission that Glenn Rosewall communicated to Ken Rosewall by email on 12 June 2014 that BBY was obliged to keep the funds in a separate trust account until they were used for the contemplated purpose. The 12 June email provides account details for the "BBY loan transfer" to be made by Westpac on behalf of Ficema to BBY. That the nominated BBY account was styled "BBY Limited Trust Ac" says nothing about an obligation undertaken by BBY to segregate the funds to be advanced by Ficema, or that they would be used for a specific purpose and none other. Further, and importantly, Ken Rosewall was unaware of the nomination of this account by BBY; he did not read this email at the time as he was not reading his emails when holidaying in Phoenix in June 2014. Nor did he respond to this email or ask anyone else to respond on his behalf.
Second, no undertaking was given by Glenn Rosewall that Ficema's loan would be paid into a trust account with BBY for the purpose of keeping the monies separate from BBY's general assets. Further, and contrary to Mr Collier's affidavit evidence, I have found that there was no mention by Glenn Rosewall that the money be paid into a trust account during the telephone conversation with Mr Collier on 11 June 2014 (Phoenix time).
Third, Glenn Rosewall left the administrative arrangements for the Ficema loan to Mr Maharaj, who in turn instructed Ms Yuen to identify a dormant account which had a zero balance, not for the purpose of segregating the advance from the general assets of BBY, but for administrative convenience, including for the convenient calculation of interest. No instructions were given by anyone on behalf of Ficema to Mr Maharaj as to which account the funds were to be placed in by BBY. The BBY bank account identified by Ms Yuen for the receipt of the loan from Ficema accorded with the instructions given to her by Mr Maharaj. It was not selected for the purpose of keeping the monies separate from BBY's general assets.
Fourth, Ficema's funds were not kept separate from other monies transferred into Trust Account 3, which included the loan from GARF of $2.5 million (being general assets of BBY) and $3 million from the BBY Funding Account (being misappropriated trust monies from CSA's, transferred via the BBY Funding account). The mixing of the Ficema funds with other general assets of BBY, such as the GARF funds, is a contra indication to the intention to create a trust.
Fifth, no instruction was given by Ken Rosewall or any other person on behalf of Ficema as to how the Ficema funds were to be held by BBY, let alone whether the funds were to remain in a particular account of BBY. Ken Rosewall accepted in cross-examination that he could have instructed Mr Mason of Westpac to give such an instruction (when transferring the money to BBY) or otherwise record such an instruction on the loan documents (with Westpac) that he signed. That he did not do so is another contra indication to an intention to create a trust (T154.1-34).

[13]

Other matters

The plaintiffs submitted that the alleged purpose for which the funds were to be used by BBY (to pay margin calls) had been satisfied before the Ficema funds were advanced on 16 June 2014, and that this was inconsistent with the funds being impressed with a trust. The plaintiffs further submitted that confirmation that the funds to meet the Aquila trade had been received by BBY in an amount of $63,913,318.87 and were "in process" in relation to the balance of $99,999,999, was communicated to both of Ficema's directors, Glenn and Ken Rosewall, in the email from Glenn Rosewall sent to Ken Rosewall on the afternoon of Friday, 13 June 2014 at 3:31 pm, copied to Mr Collier and Mr Maharaj. The difficulty with the latter submission is that Ken Rosewall, whose knowledge was the knowledge of Ficema for the purposes of the $3 million loan transaction, was unaware of the margin calls in respect of the Aquila trade, or the details of that transaction, and did not at that time read the 13 June email from Glenn Rosewall.
Ficema submitted that there was always the chance of an "additional" margin call by the ASX, as referred to in the email from Mr Luscombe to Mr Maharaj on 13 June 2014 at 5:17 pm, and hence the alleged purpose for which the funds were to be used by BBY had not been satisfied prior to the making of the advance by Ficema on 16 June 2014. Accepting the possibility of a further non-specific margin call by the ASX, even though the funds for the Aquila trade had been partly received and otherwise were in the process of being transferred to BBY on 13 June 2014, and that the balance of funds had been received by BBY on the morning of 16 June 2014, the difficulty with Ficema's submission is that it ignores the stated intention of Mr Maharaj on 13 June 2014 to use Ficema's funds of $3 million, when received, to reimburse the BBY Funding Account: see [126] above.
Ficema's submission is also inconsistent with Glenn Rosewall asking Mr Maharaj on 16 June 2014 to ensure that Ficema's funds were available, following an email from the ASX that morning expressing concerns about BBY's own capital position, having required three separate ad hoc returns to be prepared by BBY showing the capital position at close of business on 11, 12 and 13 June 2014 respectively. The inference is that BBY pressed for the Ficema loan to be advanced on 16 June 2014 because the ASX had expressed concerns about BBY's own capital position, not because it anticipated a margin call in respect of the Aquila trade, which was expected to settle that day, and the only reason that the trade did not settle in full that day was because of a difficulty experienced by the vendor in obtaining all of the stock for transfer. That apparent concern of Glenn Rosewall, when pressing for the Ficema advance on 16 June 2014, is inconsistent with the parties having a mutual intention that Ficema's funds be kept separate from BBY's general assets.

[15]

Jones v Dunkel inference

The conclusion above does not depend on any Jones v Dunkel inference from Ficema's failure to call Glenn Rosewall. The parties diverged as to whether such an inference should be drawn. Ficema submitted that Glenn Rosewall cannot be said to be a person who would be expected to be called by Ficema and not by the plaintiffs. It was emphasised that Glenn Rosewall ceased to be a director of Ficema on 15 May 2015 but is still a director of BBY and BBY Holdings. Although this question is not dispositive, I will briefly indicate my views.
As to the closeness of the relationship between Glenn Rosewall and Ficema (Cadwallader v Bajco Pty Ltd [2002] NSWCA 328 at [29]), as a director of Ficema at the time of the $3 million loan, and as a signatory on behalf of Ficema to the $2 million temporary overdraft from Westpac and the letter authority letter addressed to Westpac, it would be natural for Ficema to call Glenn Rosewall, and he would be expected to be available to Ficema, rather than the liquidators of BBY. Ficema's submission, that Glenn Rosewall is still a director of BBY and BBY Holdings, is incorrect. He became a bankrupt on 12 March 2019. As such, he was disqualified from managing a corporation: s 206B(3) of the Act.
Addressing the three conditions referred to by Glass JA in Payne v Parker [1976] 1 NSWLR 191 at 201-202, I find that Glenn Rosewall: (a) is a witness who would be expected to be called by Ficema, rather than the plaintiffs (b) his evidence would elucidate the conversations he had with Ken Rosewall, Mr Collier, and Mr Maharaj concerning his request for the $3 million loan and any instructions given by him to Mr Maharaj, including as to which account the funds were to be placed, any limitation or condition placed on how the funds were to be used, or any restriction on the ability of BBY to mix the funds with other monies of the BBY companies; and (c) his absence is unexplained by Ficema, given the evidence of Ken Rosewall that Glenn Rosewall was in good health and otherwise able to give evidence in the proceedings (T192.4-14).
If it were necessary to decide, an inference should be drawn that the evidence of Glenn Rosewall, if called, would not have assisted Ficema: Manly Council v Byrne [2004] NSWCA 123 at [51].

[16]

Whether unfair preference even if $3 million loan subject to a Quisclose trust

The plaintiffs submitted, in the alternative, that even if the $3 million loan by Ficema to BBY was impressed with a trust in the nature of a Quistclose trust, that does not operate to take the transaction outside the scope of s 588FA(1).
Accepting that a trust can coincide with a creditor-debtor relationship (Re Australian Elizabethan Theatre Trust at 502; Marriner v Australian Super Developments Pty Ltd (2012) 46 VR 213; [2012] VSCA 171 at [67]), the plaintiffs say that the payment of the $3 million to Ficema on 24 June 2014 answers the description of a "transaction" within s 588FA(1)(a), and the "result" of the transaction was an unfair preference within the meaning of s 588FA(1)(b). Although it is not necessary to determine this question, I will briefly indicate my views.
The premise of the plaintiffs' alternative submission primarily relied upon the observation by Gummow J in Re Australian Elizabethan Theatre Trust at 500-501, that in Quistclose, the lender did not at all relevant times have an exclusive beneficial interest in the money in question. On the facts, that was because in Quistclose there was a "primary" trust in favour of those entitled to the dividend which Rolls Razor had declared (Lord Wilberforce at 580). Applying this analysis to the present case, the plaintiffs say that, on the present hypothesis, both Ficema and BBY would have a beneficial interest in the monies advanced by Ficema to BBY. The submission continued that the requirement in s 588FA(1)(b) of the Act would be satisfied when BBY paid $3 million to Ficema on 24 June 2014 since that payment would result in Ficema "receiving from the company" in respect of "an unsecured debt that the company owes" more than Ficema would receive if it had to prove in the winding up (T 256 (1-23)). I reject that submission as it misapplies the reasoning in Quistclose.
In Quistclose, the parties with a beneficial interest in the monies in question were the lender (Quistclose) and the shareholders entitled to the dividend from Rolls Razor. Rolls Razor, the trustee of the monies received from Quistclose, did not have a beneficial interest in the monies and the money advanced for the specific purpose of paying the dividend did not become an asset of Rolls Razor.
By contrast, on the present hypothesis, the party(s) with a beneficial interest in the monies advanced by Ficema would not include BBY, the trustee of the monies. Assuming Ficema retained a beneficial interest in the monies advanced to BBY, the money would have been returned by BBY to Ficema as beneficiary either under an express trust, as the condition on which the money had been advanced could not be carried out, or alternatively under a resulting trust. Further, on the present hypothesis, a debt owed by BBY would only arise in respect of the $3 million advance when the money was applied by BBY for the specified purpose. Since the money was never applied for the (assumed) specific purpose, no debt arose in favour of Ficema: Twinsectra at [100]; Bellis v Challinor at [63]; Re Australian Elizabethan Theatre Trust at 500-501. Accordingly, the requirement in s 588FA(1)(b) of the Act would not have been satisfied.
I note for completeness that no argument was advanced by the plaintiffs that the proper characterisation of the facts in this case involved an unfair preference on a different basis: that BBY received the payment beneficially from the lender and then declared itself to hold the funds on trust for the lender.

[17]

B. Insolvency - relevant principles

Section 588FC directs attention to the solvency of the company at the time of the transaction, which in turn directs attention to the provisions of s 95A of the Act which provides: (1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (2) A person who is not solvent is insolvent.
Whilst s 95A is principally concerned with the "cash flow" test of insolvency, the state of the company's balance sheet remains of subsidiary relevance: Sutherland & Another (as joint liquidators of Australian Coal Technology) v Hanson Construction Materials Pty Ltd and Others [2009] NSWSC 322; (2009) 254 ALR 650 at [8]-[9], and the cases there cited.
A useful summary of principles for the determination of solvency for the purpose of s 95A was provided by Palmer J in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621 at [54]. Several matters deserve repeating. Solvency or insolvency is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole. An assessment of solvency requires regard to commercial realities when 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 whether such realisations are achievable. It is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade, but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency.
In Lewis (as liq of Doran Constructions Pty Ltd (in Liq)) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 at [103], after noting that the test of insolvency is objective, Giles JA (Hodgson and McColl JA agreeing) emphasised the need for consideration to be given to the immediate future: … 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; 14 ALR 51 at 54-5 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.
Addressing the relevance of the provision of funds by a third party, Giles JA said at [109]-[110]: [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 (1990) 3 ACSR 261; 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).
In Chan v First Strategic Development Corporation (in liq) [2015] QCA 28 at [44], the Queensland Court of Appeal approved the statement by Wigney J in Soundwave Festival Pty Ltd v Altered State (W.A.) Pty Ltd (No 2) [2014] FCA 562 at [25], which included: It is clear, however, that if reliance is to be placed upon the provision of funds by a third party, there must be some acceptable evidence that, as a matter of commercial reality, the company has available to it a resource in the form of unsecured borrowing. The Court has reason to be sceptical of bare assertions that someone is prepared to advance unsecured funds to a company to enable it to pay its debts.
It is necessary to distinguish between a temporary lack of liquidity and an endemic shortage of working capital. As Barrett J observed in Australian Coal Technology v Hanson Construction Materials at [10], "s 95A requires a decision whether the company is suffering from a temporary lack of liquidity or an endemic shortage of working capital" [citations omitted]. Barrett J continued at [11]: The emphasis must be upon the extent of cash and other liquid assets compared with the quantum of debts due and payable and to become due and payable in the immediate future. Insufficiency of cash or liquid resources to pay those debts is indicative of insolvency. The insufficiency becomes determinative if it is shown that it is more than a temporary lack of liquidity. In essence, there is a question whether the inability to pay is purely temporary.
In Australian Securities and Investments Commission v Plymin [2003] VSC 123; (2003) 46 ACSR 126 at [386], Mandie J referred to the following indicia of insolvency: 1. Continuing losses. 2. Liquidity ratios below 1. 3. Overdue Commonwealth and State taxes. 4. Poor relationship with present Bank, including inability to borrow further funds. 5. No access to alternative finance. 6. Inability to raise further equity capital. 7. Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply. 8. Creditors unpaid outside trading terms. 9. Issuing of post-dated cheques. 10. Dishonoured cheques. 11. Special arrangements with selected creditors. 12. Solicitors' letters, summons[es], judgments or warrants issued against the company. 13. Payments to creditors of rounded sums which are not reconcilable to specific invoices. 14. Inability to produce timely and accurate financial information to display the company's trading performance and financial position and make reliable forecasts. See also Lewis v Doran [2004] NSWSC 608; (2004) 50 ACSR 175 at [75] (Palmer J).
The presence of one or more of the above indicia of insolvency is not necessarily conclusive of insolvency: Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 at 655 (Doyle CJ). Nor is the absence of one or more of the above indicia inconsistent with the conclusion that a company is insolvent: Re Ashington Bayswater Pty Ltd (in liq) [2013] NSWSC 1008 at [5] (Black J).
Where a liquidator is seeking to recover an unfair preference, the issue of solvency as at a date prior to the winding up necessitates an inquiry into what actually happened. Palmer J described this as 'retrospective insolvency' in Lewis v Doran at [108] when remarking: Where the question is retrospective insolvency, the court has the inestimable benefit of the wisdom of hindsight. One can see the whole picture, both before, as at and after the alleged date of insolvency. The court will be able to see whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due and whether it did, or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and common sense, had to be considered as at the date of insolvency. By reference to what actually happened, rather than to conflicting experts' opinions as to the implications of balance sheets, the court's task in assessing insolvency as at the alleged date should not be very difficult.
The liquidator has the onus to prove that the company was insolvent at the relevant time(s): Welcome Homes Real Estate Pty Limited v Ziade Investments Pty Limited [2007] NSWCA 167 at [40], [46(2)] and [70] (Hodgson JA, Spigelman CJ and Santow JA agreeing); mere suspicion of insolvency cannot substitute for proof: M & R Jones Shopfitting Co Pty Ltd (in liq) v National Bank of Australasia Ltd (1983) 68 FLR 282 at 288-289; (1983) 7 ACLR 445 at 450-451 (Wootten J).

[18]

Insolvency of BBY: presumption of insolvency

Given the finding in the GARF proceedings that BBY was insolvent at all times from 1 January 2014 to 17 May 2015, the effect of the statutory presumption of insolvency arising under s 588E(8) is that it must be presumed in these proceedings that BBY was insolvent at all times from 1 January 2014 to 17 May 2015, unless the contrary is proved by Ficema: s 588E(9).
Ficema did not attempt to prove that BBY was solvent at all times from 1 January 2014 to 17 May 2015. Rather, Ficema took the position in its closing written submissions that the presumption of insolvency in s 588E(8) was irrelevant because reliance upon that provision had not been pleaded by the plaintiffs in the points of claim filed 29 May 2018. That was before judgment in the GARF proceedings was delivered. Notwithstanding the late amendment to the points of claim to plead reliance upon the presumption in s 588E(8), allowed over objection, Ficema did not specifically contend in closing oral argument that there was evidence which established that BBY was solvent from 1 January 2014 to 17 May 2015.
Although Ficema submitted that the plaintiffs had not established that BBY was in fact insolvent from 1 January 2014 to 17 May 2015 and that the audited consolidated financial statements of the BBY Group at 30 June 2014 were the best evidence of BBY's financial position, Ficema did not affirmatively contend that those 2014 financial statements rebutted the presumption of insolvency in relation to BBY from 1 January 2014 to 17 May 2015. In any event, for the reasons given below, the 2014 financial statements do not demonstrate that BBY was solvent throughout that period: see [305] ff.
I find that Ficema has not rebutted the presumption of insolvency arising under s 588E(8) in relation to BBY from 1 January 2014 to 17 May 2015. Accordingly, BBY is to be presumed under s 588E(8) to be insolvent at all times from 1 January 2014 to 17 May 2015.
Against the possibility that the plaintiffs should not be permitted to rely upon the presumption arising under s 588E(8) in relation to BBY, I address below whether the plaintiffs have proved that BBY was in fact insolvent at the time of the impugned payments.

[20]

Mr Vaughan's solvency report

The solvency report addressed the solvency of each of BBY, BBY Holdings, BBY Advisory Services, Broker Services Australia, and BBY Nominees. Given the corporate structure of the BBY Group, Mr Vaughan adopted the approach that the assessment of each company's solvency be on a consolidated group basis. There was no challenge to this approach, which I accept is appropriate for the reasons given in pars 1.2 and 2.2 of the solvency report. Plainly, the solvency of BBY Holdings depended on the solvency of BBY and there is no reason to consider the financial position of the BBY companies separately. Mr Vaughan expressed the opinion, relevantly, that BBY and BBY Holdings were insolvent at all times between August 2014 and 17 May 2015 (par 1.4). As will be seen, in his further affidavit of 26 March 2019, Mr Vaughan expressed the opinion that BBY and BBY Holdings were insolvent at all times between 1 January 2014 and 17 May 2015.
Section 2 of the solvency report provided a summary of the trading history of the BBY Group and the most significant events that impacted upon the companies' solvency, including: 1. the investment of about $8 million in convertible notes in Firestone between 2009 and 2011, which depleted the capital resources of the BBY Group; 2. the decision for BBY to become a self-clearing participant with the ASX on 5 December 2011, a consequence of which was that BBY was required to hold additional capital; 3. the change to the trading arrangements effected by Saxo Capital Markets (Australia) Pty Ltd (Saxo) on 9 December 2013 in respect of clients of BBY who used the Saxo trading system by orders placed through BBY, which had the consequence that BBY was required to transfer clients monies held by BBY to Saxo, however, BBY did not hold sufficient client monies to transfer all of the amount required to be transferred to Saxo and entered into an instalment arrangement; 4. the Aquila trade in June 2014 and the related liquidity difficulties for BBY in meeting margin calls by the ASX, which required short-term shareholder loans, and had the consequence that BBY misused monies in the CSA's totalling $8.6 million to meet margin calls due to the ASX; and 5. the liquidity crisis experienced by BBY in December 2014 when Saxo demanded payment of the balance of client monies outstanding by BBY in excess of $13 million, and BBY was forced to call on shareholder loans from Ficema and GARF.
The summary of these events in the solvency report was supported by the documents tendered in evidence. The significance of these events is addressed below.
Mr Vaughan applied a cash-flow test to assess the solvency of each company at the end of each month from 31 January 2014 to 17 May 2015, which was described as the month-end working capital analysis. The purpose of the analysis was to assess how each company's cashflow position improved or deteriorated over time and whether they suffered from short-term periods of ill-liquidity or endemic shortage of working capital.
In assessing the cash-flow position at the end of each month Mr Vaughan took into account the findings by the liquidators in their client monies investigation reports dated 22 December 2015 (CSA Report) and 15 June 2016 (Supplementary CSA Report), which analysed the unauthorised use by BBY of client monies held in CSA's. In the Supplementary CSA Report the liquidators estimated the shortfall between clients claims and the amounts held in the in the CSA's, including recoveries from counterparties, to be $23.3 million, an increase of $6.3 million from the shortfall estimated in the initial CSA Report. Taking the Saxo CSAs as an example, the liquidators calculated a shortfall of $7.1 million of the funds held in the Saxo CSA's as at 17 May 2015, and identified that the deficiency was as high as approximately $20 million as at 1 April 2014 (which the plaintiffs referred to in submissions as the Saxo hole"), and that the Saxo funds had been used for other purposes between August 2011 and April 2014.
After noting that client assets received by BBY were subject to the client money provisions in Div 2 of Pt 7.8 of the Act, Mr Vaughan observed that at the date of his appointment BBY had 47 CSAs open, which were split and managed along product lines with CSAs designated for clients trading in Equities, ETOs, Futures, FX, IB (Interactive Brokers) and Saxo products. Given the client money provisions in the Act, Mr Vaughan adopted the approach that client assets (including client monies) were not a cash resource available to the companies to pay their debts, other than as authorised by the Act and the Corporations Regulations 2001 (Cth). For this reason, Mr Vaughan's month-end working capital analysis did not include a line item for the client monies as a cash resource available to the companies to pay general creditors. Rather, he adopted the approach that the client assets were a cash resource that was only available to pay client entitlements.
In assessing the available cash resources of the companies, Mr Vaughan had regard to available cash resources comprising revenue, qualifying debtors, St George facilities, related party loans and asset disposals, client assets (being client monies held by the companies in CSAs, counter-party cash held in respect of client trading and client debtors) (par 3.3)), and current, and overdue debts comprising clients, broker/dealers, trade creditors, landlords, employee entitlements (payroll), commissions payable to employees and stockbrokers, amounts payable to statutory creditors, interest payable by BBY to St George on the balance drawn on the facilitation account and related party loans from Ficema and GARF (par 3.4). It is necessary to say something further about some of these cash resources and debts.
Mr Vaughan noted that from December 2012, the BBY companies had access to three loan facilities provided by St George Bank: (a) commercial overdraft with an $8 million limit, to provide BBY with finance to pay clearing obligations owing to the ASX; (b) transaction negotiation authority with a limit of $3 million, to provide BBY with finance to pay clearing obligations owing on specific transactions for which St George had agreed to provide coverage prior to BBY entering into those transactions; and (c) treasury dealing limit of $1 million, to provide BBY with finance to cover settlement risk on FX transactions entered into by BBY for which St George had agreed to provide coverage prior to BBY entering those transactions. Importantly, as St George did not provide the BBY Group with finance for their general working capital needs, and its facilities were only available to provide BBY with funds required to meet its ASX obligations, Mr Vaughan did not incorporate the funding available from St George in the working capital analysis (par 3.3(c)).
The operation of the St George Facilitation Account was explained by Mr Vaughan as follows. Each day, funds would flow back and forth between BBY and the ASX as clients bought and sold securities on the Exchange. BBY was obliged to meet net commitments to the ASX each day on behalf of clients, as well as margins required to be covered by BBY. The balance of the Facilitation Account would fluctuate depending on whether monies were drawn from the account to pay the ASX or returned to the account from the ASX. When monies were drawn to pay the ASX, the account would be debited and, if there were insufficient funds held, BBY would in effect draw on the overdraft facility (subject to the $8 million limit) and the debt due to St George would increase (par 3.7(f)).
Mr Vaughan identified that current and overdue debts included debts due to clients, brokers/dealers, trade creditors, landlords, payroll (employee entitlements), commissions due to employees and independent contractors, statutory creditors, interest due to St George on the Facilitation Account (which was not included in the working capital analysis as St George allowed interest to be capitalised), and related party loans from Ficema and GARF.
It is necessary to say something further about the debts due to clients who had sold their financial products or were otherwise entitled to seek the withdrawal of funds they had previously deposited with BBY in a particular CSA, as client monies were at "call". As part of the month-end working capital analysis, Mr Vaughan assessed whether BBY had sufficient client assets available to pay client entitlements at the end of each month for each product line. The line item for "unfunded client entitlements" in the month-end working capital analysis reflected the instances in which client entitlements exceeded client assets at the end of each month in respect of particular product lines. That is, instances where entitlements payable to clients at the end of each month could not be funded out of the client assets then held by BBY. Mr Vaughan adopted the approach that BBY had an obligation to pay unfunded client entitlements out of its own resources and the line item reflected the quantum of that liability at the end of each month. I accept that this is appropriate.
Mr Vaughan set out the results of the month-end working capital analysis in the table in par 3.5(a) of the solvency report, which showed consistent month end working capital deficiencies in the period January 2014 to May 2015, excluding any liabilities owed to St George through the Facilitation Account for the reason given in par 3.3(c) of the solvency report: see [179] above. As this table was subsequently updated in Mr Vaughan's 7 September 2020 affidavit (see below at [186] ff), it is not necessary to set out the results in the initial table.
The solvency report also addressed the issues of client and creditor pressure between 1 July 2014 and 17 May 2015 (par 3.6), provided a financial trend analysis, which included reference to revenue, expenses, trading losses, adjusted working capital analysis and current ratio, aging of trade creditors, bank liabilities, among other matters (par 3.7), and addressed the issue of debt and equity funding initiatives (par 3.8).
Mr Vaughan noted among other matters, that: 1. BBY incurred significant trading losses between 2011 and 2015 which were never budgeted for (par 3.7(3)(c)); 2. the adjusted working capital analysis in the financial year 2014 was approximately -($6 million), the current ratio (excluding segregated assets/liabilities) based on audited accounts was less than 1 in the financial year 2014, that a ratio of 1:1 would be a concern, and a ratio of less than 1 would be a "red flag" indicator that there are insufficient readily available assets to meet current liabilities (par 3.7(d)); 3. the aged trade creditor analysis revealed that the value of aged creditors greater than 60 days increased from $1.5 million in January 2014 to $3.1 million as at May 2015 (par 3.7(3)(e)); 4. from January 2014 to 15 May 2015, the outstanding balance owing by BBY to St George on the Facilitation Account was rarely below $6 million (par 3.7(f)); and, 5. in November 2014, BBY used the Facilitation Account to draw over $2 million for purposes other than clearing purposes by misrepresenting to St George that certain client contracts represented "open buys" after those contracts had in fact settled (par 3.7(g)).
As to the last matter, the evidence establishes that on 14 November 2014, Ms Fiona Bilton, head of Operations at BBY, overstated the "open buys" in emails to St George by $2,537,991.15. This practice of overstating "live" confirmations provided to St George for the purposes of providing security for funding settlement obligations was discussed at a BBY directors meeting on 8 May 2015, when a direction was given to Ms Bilton to cease the practice. The assumption by Mr Vaughan that BBY resorted to drawing upon the Facilitation Account for general purposes because it had insufficient funds in its operating account to pay its debts due and owing is reasonable. An inference should be drawn that this is the reason for the practice of BBY overstating "live" confirmations provided to St George in the second half of 2014 and in 2015.
Insofar as pars 4.4 and 4.5 of the solvency report assessed the loss suffered by creditors and clients of the companies as a result of the companies' insolvency, those sections are not directly relevant to this proceeding.

[22]

7 September 2020 affidavit

In his affidavit of 7 September 2020, Mr Vaughan said that, he having reviewed the line item for "unfunded client entitlements" in the working capital analysis, it warranted further clarification. He explained that this line item did not calculate the net sum of money of "unfunded client entitlements" owing to clients at the end of each month, rather it calculated each additional dollar of the amount owing to clients by the BBY Group (based on the deficiency in client funds) as a debt that was incurred by the BBY Group during the period between 31 January 2014 and 17 May 2015, as well as the month in which it was incurred. This calculation had been made in the context of determining when debts were incurred by the BBY Group in the event of a claim by the liquidators against its directors for insolvent trading. That is, the line item for "unfunded client entitlements" did not reflect the amount of the net deficiency (or surplus) in client funds maintained by the BBY Group at each monthly point in time across this time period, but rather, referred to the change in the amount of that deficiency from month-to-month. Mr Vaughan said that, for this reason, the working capital analysis and the table in par 3.5 of the solvency report did not present a complete and accurate summary of the "unfunded client entitlements" owing to clients at the end of each month in the period 31 January 2014 to 17 May 2015.
Having updated the working capital analysis to include the net monthly deficiency or surplus in client funds, Mr Vaughan annexed to his affidavit an updated table of the working capital analysis in which the net cumulative total of the "unfunded client entitlements" owed to clients included the amount as at or about the end of each month in the period between January 2014 and May 2015. That table, which is reproduced in Appendix 1 to these reasons, shows consistent month end working capital deficiencies in the period January 2014 to May 2015, excluding any liabilities owed to St George through the Facilitation Account. The deficiencies are significantly greater than those shown in the equivalent table in par 3.5 of the solvency report. For example, the updated table shows a deficiency of ($21.917 million) in January 2014, ($14.380 million) in November 2014, ($1.171 million) in December 2014, ($0.458 million) in January 2015, and then increasing to ($6.503 million) in February 2015 and ($18.819 million) in May 2015.
Mr Vaughan provided a summary of the shortfall in client entitlements by product line for three products, FX, Futures and Saxo, together with detailed tables for these three product lines. The summary for these three products is reproduced in Appendix 2 to these reasons. I accept Mr Vaughan's evidence in re-examination that summary table was prepared on a conservative basis (T130.14- 131.2). As Mr Vaughan explained, by reference to the work sheet underlying this table in relation to the Saxo product line (annexure "A" to his affidavit), the liquidators made an assumption for the months of January, February and March 2014 that client entitlements for the Saxo product line was $35 million in each month, however, an email from Mr Maharaj to Mr Torben Jorgensen of Saxo dated 18 September 2014 recorded the Saxo client entitlements as at 31 March 2014 were $41,634,835.21 (Exhibit D). Thus, the assessment of the shortfall on the Saxo CSAs as at 31 March 2014 was conservative by at least $6 million. For this reason, his evidence was that the overall shortfall payable on the three product lines (FX, Futures and Saxo) as at 31 March 2014 was in the order of $24 million, not $18.071 million.
Mr Vaughan also addressed the consequences of the Aquila trade in June 2014, explaining that upon the return of funds from the ASX, $7.5 million was transferred to high interest term deposit accounts on 25 June 2014 and essentially represented part of the CSA monies that had been withdrawn from the Saxo CSAs ($1.8 million) and the Futures CSAs ($6.8 million) to meet the ASX margin call in respect of the Aquila trade. Mr Vaughan noted that his analysis in the solvency report of "client entitlements" did not treat this money totalling $7.5 million as a component of the shortfall in client funds whilst it was held in the term deposit accounts, and that it was only when the term deposits matured and those funds were transferred to BBY's general operating account (between 4 August 2014 and 14 October 2014) that he took the view that the funds of $7.5 million were no longer in CSAs and should be counted as comprising part of the shortfall in client monies. This was reflected in the shortfall calculations for the months from September 2014 onwards in the solvency report and Mr Vaughan took the same approach in the revised analysis in his 7 September 2020 affidavit.
Mr Vaughan stated that his updated analysis showed: 1. that the client monies were persistently (although not exclusively) in shortfall in the period between 31 January 2014 and 17 May 2015. This is shown by a deficit of $20.363 million at 31 January 2014, $9.563 million at 30 June 2014 and $15.151 million at 17 May 2015; 2. the temporary surplus in client funds that occurred as at late 2014/early 2015 was a result of the BBY Group using funds from all available sources, including other client monies and fresh capital (in the form of loans) injected at that time by entities associated with Glenn Rosewall and Ken Rosewall, to meet the requirements that Saxo client monies be transferred to Saxo (pars 2.4(i) and 2.4(o)); and 3. the BBY Group experienced a general cash deficiency during that period of between $458,000 and $24.177 million.
Mr Vaughan expressed the view that this reflected a conservative approach because the actual deficiency of client funds is about $21 million, which is more than $5 million greater than the end shortfall amount of $15,150,512 (as at 17 May 2015) as set out in the calculations by Mr Vaughan. Mr Vaughan explained that the calculation of the net deficiency of $21 million reflected the position in 2020 after the outcome of asset realisation and completion of the client proving process, and that this calculation does not include the term deposit monies of $7.5 million within the shortfall until those monies were transferred to the BBY general funding accounts between August and October 2014.
Mr Vaughan said that the updated working capital analysis provided a more accurate analysis of the BBY Group's working capital in the period from January 2014 to May 2015 than the table in par 3.5 of the solvency report.

[24]

Cross-examination of Mr Vaughan

In cross-examination, Mr Vaughan agreed that the working capital analysis should also take into account the surplus on the IB product line and the Equities/ETO product line (T 64.36-39, 66.31-33).
Addressing the Equities/ETO product line, Mr Vaughan agreed that the working capital analysis did not include as an asset available to BBY, debts owed by clients who were net debtors on this product line. (T84.29-32) Mr Vaughan said that as St George was funding debtors through the Facilitation Account, if you added the debtors you would need to take into account the debt to St George on the Facilitation Account (T84.34-37). He said that the Facilitation Account had a limit of $8 million and was used in conjunction with the General Account and that throughout the second-half of 2014 and 2015, BBY was inflating open contracts and therefore inflated debtors which were funded by St George by an amount of $3 million. He said there were also debtors that were not recoverable of at least $2 million (T84-85). Although he agreed with the proposition that to accurately assess the Equities/ETO product line it was necessary to ascertain the quantum of net debtors on that product line (T86.23-25), he said that as debtors were increasing so did the Facilitation Account limit and the effect was that this balanced out, although he had not analysed this in the solvency report (T86.27-.43).
In re-examination, Mr Vaughan said that the Equities/ETO and IB product lines were not included in the working capital analysis because that analysis focused on the shortfalls and the Equities/ETO product line was "whole", and had been the subject of a lot of intense scrutiny from the ASX with respect to reconciliation of CSAs every day and there was never going to be large surpluses in that account, "because it just wasn't meant to be the case". He said the position in relation to the IB product line was similar but was also partly because almost all of the funds were held on the IB platform and not with BBY. Mr Vaughan said that he did not think there would be any material change in the shortfall if any surplus or deficiency on those product lines was taken into account (T132).
Mr Vaughan disagreed that any surplus on the General Account should have been taken into account in calculating the surplus on the Equities/ETO product line (T69-70). Although he could not recall the reason why the General Account was not included in the table of Equities/ETO CSA trust accounts in the clients entitlements memorandum referred to in the solvency report (T71.4), the premise of the cross-examiner's question was flawed; the table referred to in par A 1.2(a) of the client entitlement memorandum was a list of CSA trust accounts, whereas the General Account was a house account. The reason why several House accounts including the General Account and the Facilitation Account were excluded from the analysis is stated in par A1.1 of the "Operating cash analysis" memorandum, which addresses 5 BBY House accounts used for the purposes of the Equity/ETO business: In total, we identified 19 House accounts across NAB and STG, including 2 USD accounts and 5 House accounts which were used for the purposes of the Equity/ETO business (which have been excluded for the purposes of our analysis on the basis that these accounts were only used for the purposes of the Equity/ETO business e.g. funding for ASX margin calls, and therefore were not readily available for general operating purposes).
Mr Vaughan was also cross-examined in relation to the methodology of his adjusted working capital analysis and current ratio calculations in the solvency report (par 3.7(d)). The approach taken was to exclude segregated assets and segregated liabilities, which related to client monies, trust accounts and obligations. Additionally, the clearing receivables and bank overdraft with St George were also excluded as this related to clearing and settling transactions on behalf of clients. The solvency report stated that "by adjusting the working capital position to exclude any assets or liabilities that could not be used for general purposes, this highlighted the ability of BBY to use readily available cash assets to cover its short-term liabilities". For the 2014 year, the current ratio was calculated as a little over 0.5. It was put to Mr Vaughan that if the current ratio was calculated by also taking into account both clearing receivables and the bank overdraft with St George, the current ratio was a higher number closer to 1. Mr Vaughan agreed that if the assumption was made that only segregated assets and segregated liabilities (both recorded in the same amount of $40.225 million) were excluded, then based on the BBY Holdings accounts current ratio would effectively be what appears in the June 2014 financial statements as total current assets and total current liabilities (T99.20-21).
In relation to trust accounts of BBY (NZ) Ltd (BBY(NZ)), Mr Vaughan accepted in cross-examination that the surplus or shortfall on some of the trust accounts had not been included in the working capital analysis and all should be included as CSA accounts, subject to the qualification that the corresponding clients entitlements were also included (T118.49-119.8). Those accounts were the BNZ Futures NZ Dollar Account for the period 1 January 2014 to 26 June 2014, the BNZ Omnibus NZ Dollar Account, the Ebridge buffer account for Saxo (for the period 1 January 2014 to 26 June 2014), and the IB buffer account (T116-117). He agreed that the relevant information was contained in the account balances document for BBY(NZ) (Exhibit 1, Tab 4) and that the way to include those accounts was to adopt the figures set out in that document with the corresponding client entitlements (T119.6-.8). In re-examination, Mr Vaughan said that the account balances for BBY(NZ) were not available for BBY operating purposes because they were CSAs and these accounts were only relevant to the client shortfall calculation in the working capital analysis (T133).

[25]

Submissions

The plaintiffs advanced the following essential propositions on the issue of insolvency: 1. the BBY Group was a significantly undercapitalised business, fatally weakened by events dating back to the period 2009 to 2011 involving investment of a significant sum (about $8 million) in convertible notes issued by Firestone, which were ultimately worthless when Firestone was placed in external administration in October 2017; 2. from December 2011, when BBY became a self-clearing participant with the ASX, it was required to hold greater capital and exposed itself to capital-based trading limits and margin calls because of ASX counter-party risk. By June 2014, as a result of the Aquila trade, BBY was unable to meet a $15 million capital-based position limit margin call by the ASX and $10 million of the margin call was agreed with the ASX to be deferred for 24 hours to avoid triggering an "insolvency event" within BBY, that is, a default by BBY as a participant under the Operating Rules, r 15.1.1. Even then, BBY could only meet that liability by misappropriating $8.6 million of client monies from the CSAs; 3. as early as August 2011, BBY had improperly withdrawn funds from the Saxo CSAs, and by late 2013 there was at least a $20 million deficiency in client monies for Saxo. As a consequence, in December 2013 when Saxo varied the "white label" arrangements with the BBY companies, which required them to remit to Saxo by 1 April 2014 client funds in respect of clients who traded BBY on the Saxo platform, BBY requested and Saxo agreed to a payment arrangement by which the Saxo client monies would be repaid by instalments over the course of 2014; 4. the BBY Group sustained continuing trading losses totalling about $12 million in the 2012, 2013 and 2014 financial years, and there was insufficient fresh capital being injected into the group to meet the adverse capital consequences stemming from these losses; 5. the BBY Group management accounts contained profitability estimates that were overly optimistic, both as to revenue (which was consistently over-estimated compared to actual results) and expenses (which were continually under-estimated compared with actual results); 6. there was a persistent shortfall of available money to pay debts due (or overdue) to creditors of the BBY companies throughout the period January 2014 to May 2015; 7. creditors were not being paid on time and were consistently chasing payment of their debts from at least January 2014, some creditors ceased supply and insisted on alternative arrangements, and trailing commissions due to brokers in 2012, 2013 and 2014 totalling at least $1.5 million were not paid. From 1 January 2014 onwards, BBY Holdings and Broker Services Australia were not meeting statutory debts owing to the Australian Taxation Office (ATO) and the Office of State Revenue; 8. from at least June 2014, the CSAs were drawn upon to meet non-client expenses of the BBY Group, commencing with $8.6 million withdrawn to pay the $10 million of the margin call in relation to the Aquila trade. From 1 August 2014 to 17 May 2015, BBY withdrew $14,859,999 from the Futures, FX and Saxo CSAs to pay non-client expenses of the BBY Group; and 9. the ultimate $40 million deficiency in the winding up of the BBY companies represented a shortfall in client funds, an inability of the secured creditor St George to recover its loan after enforcing its security and appointing receivers and managers, and unsecured creditors receiving nothing with respect to their debts and claims.
In submitted that the plaintiffs had failed to prove insolvency, Ficema advanced the following essential propositions: 1. the best evidence of BBY's financial position as at 30 June 2014 are the audited consolidated financial statements of BBY Holdings which show that in the 2014 year the company was profitable, had a small surplus of working capital and positive net equity. According to the submission, the 2014 financial statements indicate a "relatively healthy position" (T270.23); 2. the 2014 financial statements do not take into account the availability of additional funds through Ken Rosewall and entities associated with him. For this reason, the solvency of the BBY companies should be assessed on the basis that the working capital available to BBY in 2014 included funds of at least an additional $4 million through Ken Rosewall and his related entities; 3. Mr Vaughan's working capital analysis is defective in a number of ways; specifically, it is incomplete in its treatment of the Equities/ETO product line because there is no analysis of this product line prior to 30 January 2015 and the analysis after that time is incomplete, and the analysis also fails to include as available working capital surplus funds available through the IB product lines and various funds in "other trust" bank accounts and in New Zealand accounts; 4. no inferences favourable to the plaintiffs should be drawn from the emails relied upon by the plaintiffs as evidence of creditor pressure in circumstances where neither Ms Yuen or Mr Maharaj were asked to give evidence on this issue, and with limited exceptions the emails are not suggestive of an indicator of insolvency; 5. the financial trend analysis in par 3.7 of the solvency report is either irrelevant or of marginal weight; and 6. the Court would not infer that BBY was insolvent prior to August 2014 in circumstances where Mr Vaughan in 2018 did not hold this view.

[28]

The Firestone transaction

The Firestone transaction involved a significant investment by the BBY Group in convertible notes in Firestone, an Australian coal exploration company listed on the ASX and the Johannesburg Stock Exchange. Firestone and Sekoko Coal Ltd (Sekoko) were parties to a joint venture relating to the Waterberg coal project, a thermal coal development project in the Limpopo Province of South Africa. Firestone was voluntarily suspended from trading on the ASX on 19 March 2015 until it was delisted on 30 August 2016. External administrators were appointed to Firestone on 9 October 2017 pursuant to s 436A of the Act. Two of the three administrators were appointed liquidators of Firestone by order of the Federal Court of Australia on 6 December 2017 (Ex F, p 7). It is common ground that the shares in Firestone and convertible notes issued by Firestone were ultimately worthless.
By way of overview, the plaintiffs say that (a) the BBY Group expended about $8 million of capital between 2009 and 2011 to acquire the convertible notes in Firestone which depleted if not exhausted BBY's capital reserves by 2011, (b) Firestone failed to pay interest on the notes and, in 2012, the BBY Group received shares in Firestone in satisfaction of outstanding interest, (c) the Firestone notes and shares were ultimately worthless, (d) to the extent that BBY transferred the Firestone notes to Ficema and GARF in December 2014 and January 2015, those transfers did not produce any additional cash which BBY could draw upon to pay its debts as and when they fell due, and (e) insofar as Jaguar Funds Management Pty Ltd (Jaguar), a company wholly owned and controlled by Glenn and Ken Rosewall, also expended about $15 million in capital on Firestones notes between 2009 and 2011, that investment was also worthless in 2014 and 2015.
BBY became involved with Firestone in 2009 initially as an adviser and underwriter of a $25 million convertible note issue, and subsequently as an investor. In September 2009, BBY agreed with Firestone to underwrite the placement of unsecured convertible notes up to a maximum sum of $25 million with a conversion price of $0.04 per share. The funds raised were to be used to fund a feasibility study for the Waterberg coal project and financial commitments due to the joint venture partner, Sekoko. BBY was unable to attract significant interest amongst its clients in the convertible notes on offer from Firestone. As a result, BBY and Jaguar (as a sub-underwriter) acquired 25 million convertible notes in Firestone between October 2009 and October 2011. According to the note register of Firestone, BBY and Jaguar together made 22 payments to Firestone totalling over $20.5 million to acquire convertible notes with a face value of $25 million. BBY Nominees, a wholly owned subsidiary of BBY Holdings, acquired convertible notes with a face value of $10 million for an amount of $7,187,498 and Jaguar acquired convertible notes with a face value of $15 million for an amount of about $13.4 million.
Firestone failed to pay interest on the notes which was payable at 10 per cent per annum each six months in arrears. On 16 August 2010, BBY agreed to defer payment of interest until 31 January 2011. Subsequently, Firestone agreed to restructure the investment and on 29 April 2012, Firestone entered into a term sheet with BBY (on behalf of holders of the Firestone notes, that is, BBY Nominees and Jaguar) and Ariona Company SA (Ariona), to redeem the existing convertible notes and provide interim funding to Firestone totalling $30.7 million. It seems that Ariona represented a consortium of lenders who were interested in financing the development of the Waterberg coal project.
This arrangement was formalised in an investment agreement dated 23 July 2012 which was amended and re-stated on 9 December 2012 (which included Jaguar as a party), by which (a) BBY and Jaguar agreed to accept additional shares in Firestone in satisfaction of the outstanding interest owing to BBY and Jaguar on the existing convertible notes, (b) Ariona agreed to subscribe for 30,700,000 new secured convertible notes issued by Firestone, 22,145,000 of which were to be immediately transferred to BBY in satisfaction of the existing convertible notes held by BBY and Jaguar, and (c) Ariona agreed to invest an additional $8,555,000 in cash into the Waterberg coal project to fund the completion of the bankable feasibility study.
Completion of this agreement was to occur in two stages. After an extension was granted, the first stage completed on 31 August 2013 and BBY Nominees received 22,145,000 secured $1.00 convertible notes in Firestone from Ariona which were due to mature on 31 January 2017. (BBY Nominees held some of these secured convertible notes for Jaguar.) The second stage of the completion, which was due on 28 February 2013 and required Ariona to provide the balance of its funding whereby Ariona's nominees would assume control of Firestone's board, did not occur. On 5 March 2013, BBY terminated the investment agreement and a dispute ensued as to control of the Waterberg coal project.
On 30 May 2013, Glenn Rosewall sent an SMS text message to Ms Nevine Rottinger indicating his concern that if he could not fix things soon Mr Maharaj may leave BBY and leave him with an "unfixable mess", and that "we are getting desperate, need result on FSE …". The dispute was subsequently resolved and in early 2014 the Waterberg Coal company staged a hostile takeover of Firestone's board which had the effect of sidelining Glenn Rosewall and BBY from the affairs of Firestone. As a result of these arrangements, both BBY and Jaguar became dependent upon the success of the Waterberg coal project to obtain any return on their respective investments in Firestone.
In a BBY Holdings board memorandum from Mr Maharaj and Glenn Rosewall dated 27 September 2013, the current value of the Firestone notes held by BBY Holdings at that time was stated as $6 million and the notes held by Jaguar were also valued at $6 million. The memorandum recorded that following discussions with Firestone directors, the expectation in a worst case scenario was that within the next 9 to 18 months, Firestone would have to redeem the notes as part of the finalisation of its project financing obligations of building a mine which "at the moment will cost circa $300m". The memorandum stated that the redemption of the notes, plus interest accrued at a redemption of about $1 million, will increase cash liquidity by $13 million for the BBY Group, which would be used to reduce inter-company balances at that point in time. It is apparent that the authors of the memorandum included Jaguar as part of the BBY Group. The memorandum also noted that as a result of tough market conditions, the BBY Group had suffered a loss of about $8 million over the last two to three years. A handwritten note on a copy of the board memorandum, apparently made by Mr Tim Sydenham, the auditor of the BBY Group, recorded: Should the FSE project not proceed as expected, the shareholders and directors acknowledge they will need to support the group, including BBY Ltd and may need to inject capital of $5-10 million. The shareholders have the capacity to do this as has been previously.
The plaintiffs submitted that this note recorded a recognition by the directors of BBY as early as September 2013 that should the Firestone project not proceed, and thus the convertible notes not be redeemed, which is what ultimately happened, there would need to be an injection of $5-10 million of capital into the BBY Group. I agree that is a fair reading of the auditor's note. The plaintiffs further submitted that, although there were subsequent advances by the Rosewall family in June and December 2014, the amount of those advances was nowhere near $10 million. That is correct. The advances in June 2014 by GARF and Ficema in relation to the Aquila trade totalled $5.5 million; these were short-term loans only, not an injection of capital, and were repaid by BBY within about 10 days. The advances in December 2014 by GARF and Ficema in relation to the liquidity crisis following the termination by Saxo of the 1:1 Funding Agreement totalled $6,245,100, comprising $2,244,900 from GARF ($1,868,800 and $376,300) and $4 million from Ficema. The character of these advances is addressed at [218] below.
I accept the view expressed by Mr Vaughan in the solvency report (par 2.4(h)), that the Firestone notes were a long-term investment by the BBY Group which was unlikely to generate significant cashflow in the short-term. That was recognised by Glenn Rosewall at the time in SMS messages to Ms Rottinger on 30 May 2014 acknowledging the need to "get money back from South Africa Firestone and Waterberg Coal company" and on 12 June 2014 acknowledging that "… Sth Africa is in real trouble".
In the 2014 financial statements, the Firestone shares were recorded as a current financial asset of $2.722 million at "fair value through profit and loss", and the Firestone notes were recorded as a non-current asset as an unlisted investment "at cost" of $7.883 million (being the loans and receivables (for unpaid interest) in respect of the Firestone notes). These financial statements were approved by the directors on 30 March 2015 and included the following notes: 1. Note 9: that subsequent to year end, $7.883 million of the Firestone convertible notes had been sold and transferred to director-related entities, of which $5.868 million of consideration was received and $2.015 million were transferred to director-related entities by way of reducing the loan owing to the director, as disclosed in note 16; 2. Note 16: that "subsequent to year end, $2.015m of the director loans were transferred to the purchase of $2.015m [Firestone] convertible notes"; and 3. Note 27: which provided a clearer explanation of the post balance-date events: In December 2104, 5.868 million of the Firestone Convertible Notes held by the Group were sold to Director related entities at face value of $1 per note for total consideration of $5.868m. In January 2015, it was agreed between the directors that the loan of $4.500 million as at 30 June 2014 will contribute to the purchase of a further 2.015 million Firestone Convertible Notes for total consideration of $2.015m.
There is evidence from Ken Rosewall of conversations with Mr Maharaj in relation to the transfer of Firestone notes to Ficema in late 2014 and documentary evidence of several transfers of the Firestone notes signed by BBY Nominees and GARF and Ficema respectively in December 2014/January 2015. Although the documentary evidence of the number of notes transferred by BBY Nominees is conflicting in parts, it is possible that some of the transfers were backdated, and there is no document recording any forgiveness of the related party loans. I infer that the following occurred: 1. of the 5.869 million notes "sold" by BBY Nominees in December 2014, 1,868,600 notes were sold to GARF on 5 December 2014 for $1,868,600 and 4 million notes were transferred by BBY Nominees to Ficema on 12 December 2014 in consideration of the foregiveness of the loans of $1 million and $3 million made by Ficema to BBY Holdings and BBY on 1 December and 11 December 2014; 2. on about 14 January 2015, BBY Nominees transferred 3 million Firestone notes to Ficema by a transfer signed only by Glenn Rosewall on behalf of Ficema; 3. on 23 March 2015, Firestone issued a convertible note certificate recording Ficema as the holder of 7 million notes; and 4. although there is evidence of several transfers of Firestone notes (in varying amounts) to GARF, there is no evidence of the registration of such transfers to GARF. It seems that as between GARF and Ficema, there was an agreement that Ficema receive 7 million Firestone notes, notwithstanding the earlier sale by BBY Nominees of 1,868,600 notes to GARF.
As to the character of the transactions between BBY Nominees and Ficema, the evidence of Ken Rosewall's "understanding" that the payments by Ficema in December 2014 totalling $4 million were in consideration of the purchase of 4 million Firestone notes is not relevant. I accept Ken Rosewall's evidence at his public examination that the transfer of the Firestone notes was instigated by Mr Maharaj based on his advice that this was the only way in which these December 2014 loans could be repaid (Ex 7, T709.33-710.17). I infer from the convertible note certificate issued by Firestone recording Ficema as the holder of 7 million notes that Ken Rosewall agreed to the further transfer by BBY Nominees to Ficema of 3 million Firestone notes in forgiveness of the debts totalling $2.5 million owing by BBH Holdings as at 30 June 2014. The evidence in relation to the forgiveness of loans by GARF is limited to Note 27 to the financial statements. I infer that in January 2015, GARF also forgave loans totalling $2 million owing to it by the BBY Group as at 30 June 2014 in consideration of the transfer of 3 million notes to Ficema.
The plaintiffs say that the significance of the transfers of the Firestone notes is that although these transfers may have reduced the indebtedness of BBY Holdings and BBY to Ficema and GARF, the transfers did not produce any additional cash which BBY could draw on to pay its debts as and when they fell due (solvency report (par 2.4(r)). That submission requires qualification given my findings that the consideration for the transfer of BBY Nominees' 7.883 million Firestone notes in December 2014/January 2015 (although as between GARF and Ficema, 7 million of the notes were transferred to Ficema, and by deduction, only 883,000 notes were available to be transferred to GARF) comprised: 1. $1,868,600 received from GARF on 5 December 2014; 2. the forgiveness of $4 million of director-related loans owing by BBY Holdings and BBY to Ficema in respect of the December 2014 loans; and 3. the forgiveness of $4.5 million of director-related loans owing by the BBY Group as at 30 June 2014, comprising $2.5 million owing by BBY Holdings to Ficema and $2 million owing by the BBY Group to GARF.
Contrary to the plaintiffs' submission, the amount of $1,868,800 paid by GARF to the BBY Group on 5 December 2014 improved the cash position of the BBY Group by realising a non-current asset for cash. On the other hand, the forgiveness of debt owing to Ficema and GARF (see [216(2) and (3) above) did not produce any additional cash for the BBY Group. However, the reduction in current liabilities consequent upon the forgiveness of debts owing to Ficema (and GARF) and an equivalent reduction in non-current assets consequent upon the disposal of the Firestone notes would have resulted in a slight improvement in the working capital ratio of the BBY Group.
Plainly, the Firestone notes and the shares in Firestone were ultimately worthless. This is evident from: 1. the report by the administrators of Firestone dated 3 November 2017 (Ex G) which noted that: 1. Firestone's consolidated operating net profit/loss for the three preceding years were 30 June 2014 ($4,802,197), 30 June 2015 ($5,843,767); and 30 June 2016 ($7,300,389) (unaudited); 2. the company generated significant trading losses due to the nature of the company's operations as a mineral exploration company, that the company had no primary source of income and was reliant on obtaining funding from Waterberg, capital raisings and third-party lenders to meet its liabilities, and that revenue generated for the period comprised primarily rental income and transfer duty refunds (in par 8); 3. Firestone had a significant working capital deficit for the entire period of 31 January 2015 to 9 October 2017 in excess of $12 million. And, even after certain adjustments to the amount of current liabilities reduced the working capital deficit, there remained a deficit throughout the entire period ranging from $615,269 to $2,324,987 (par 9.3.2); and 1. the statutory report of the liquidators of Firestone dated 2 March 2018 (Ex F) recorded that the liquidators of Firestone estimated a deficiency of assets over liabilities of $(52,792,485).
Ficema says that the subsequent financial collapse of Firestone in 2017 is not probative of the value of BBY's investment in the Firestone notes during 2014 and 2015. That submission is contradicted by several matters. First, BBY Nominees and Jaguar only acquired the convertible notes in Firestone following the failed placement of the notes which was underwritten by BBY. Second, Firestone had failed to pay all interest on the notes, which were not listed on any exchange and there was no observable market price for the notes. Third, Ariona had failed to provide funding to Firestone under the second stage of the investment agreement in February 2013. Fourth, the historical financial information recorded in the reports of the administrators and liquidators of Firestone indicated that Firestone was making substantial losses and lacked the capital to fund its joint venture arrangement in South Africa. Fifth, the BBY Group and Jaguar were unable to realise their investments in the Firestone in 2014 or 2015, except insofar as BBY entered into transactions with related parties to dispose of the Firestone notes.
I accept the plaintiffs' submission that the approximately $8 million of capital that was paid by BBY to acquire the Firestone notes depleted if not exhausted BBY's capital reserves by 2011. However, I do not accept, without qualification, the plaintiffs' submission that no amount was realised by BBY in respect of the Firestone notes prior to the appointment of the administrators of the BBY Group in May 2015. That submission ignored the evidence of the transfer of its Firestone notes by BBY Nominees in December 2014/January 2015 to related parties of the BBY Group, namely GARF and Ficema.
I find that the Firestone notes held by BBY Nominees were not readily realisable in 2014 either by sale, pledge, mortgage or charge, other than by a transaction with related parties, such as occurred in December 2014/January 2015. Those transactions only produced cash for the BBY Group to the extent of $1,868,600 and otherwise reduced the current liabilities owing by the BBY Group to GARF and Ficema: see [219]-[220] above.
The 2014 financial statements recorded the Firestone shares as a current asset of $2.722 million, applying level 2 of the fair value hierarchy referred to in Note 26 to the financial statements, using inputs other than quoted prices, not level 1 of the fair value hierarchy, using current bid prices in active markets, even though Firestone was a listed entity on the ASX. The inference is that there was no active market for these shares in 2014. That inference is supported by Firestone's consolidated operating net profit/loss for the year 30 June 2014 of ($4,802,197), together with the other matters referred to at [222] above. I find that the Firestone shares were of immaterial value in 2014 and were not readily realisable by the BBY Group in 2014 or 2015 either by sale, pledge, mortgage or charge.

[32]

Variation of the Saxo arrangement - December 2013

In June 2011, BBY acquired Stonebridge Securities Limited and related entities. Subsequently, BBY entered into an institutional trading agreement and a "white label" trading system agreement with Saxo on 21 June 2012. Under the "white label" agreement, Saxo agreed to make its trading platform available to clients of BBY who would enter into transactions with BBY as principal and BBY in turn would enter into offsetting contracts with Saxo on a principal-to-principal basis.
On 9 December 2013, Saxo emailed BBY advising that it was amending its terms and conditions of the white label agreement to take effect on 1 April 2014, including requiring each white label client to transfer all client monies to Saxo. Following a meeting between Mr Maharaj and Anthony Griffin, the Chief Executive Officer of Saxo, on 13 December 2013, Saxo and BBY entered into an instalment arrangement on 19 December 2013, which was referred to as the "1:1 Funding Agreement". Under this agreement, BBY was required to pay all of the client monies it held on behalf of clients to Saxo by instalments of all Saxo clients' balances as follows: 33.3 per cent by 1 April 2014, 66.67 per cent by 1 September 2014, and 100 per cent by 1 December 2014. This process was referred to as the "Saxo upload".
As the plaintiffs correctly submitted, the significance of this arrangement was that a supposedly well-capitalised stockbroker was unable to remit client funds on request, having been given over three months' notice. I reject Ficema's submission that no such inference can be drawn in the absence of direct evidence from Mr Maharaj of his discussions with Saxo that led to the instalment arrangement agreed in December 2013.
First, the evidence establishes that there was a shortfall in the Saxo CSAs in December 2013 in the amount of about $20 million. Second, given that shortfall, it is reasonable to infer that BBY was unable to pay the whole of the client monies to Saxo by 1 April 2014. Third, approximately $20 million of funds were transferred to Saxo from sources outside of the Saxo CSAs to meet the 1:1 funding requirements, highlighting the $20 million shortfall or "hole" in Saxo client money as at 1 April 2014. The evidence establishes that on 1 April 2014, Saxo already held about $14.4 million of BBY Saxo client money and between 1 April and 12 December 2014, BBY transferred a total of $28.7 million to Saxo. Of this amount $21.6 million was transferred from the Saxo buffer account, which in turn was funded by transfers into that account during the same period from other sources both external and other BBY trust accounts.

[33]

Aquila trade

As indicated, BBY was required to pay margin calls to the ASX in relation to the Aquila trade, including CBPL margins from its own monies. The evidence establishes that BBY was unable to meet the $15 million CBPL margin call on 12 June 2014, and that $10 million of the margin call was agreed with the ASX to be deferred for 24 hours to avoid triggering a default by BBY (see [74] above].
BBY paid the $10 million CBPL margin and a further $3.2 million variation margin to the ASX on 13 June 2014 from monies largely sourced from the Saxo CSA ($1.8 million) and the Futures CSA ($6.8 million). The $10 million CPBL margin was not funded from the shareholders, as BBY had advised the ASX, except for GARF's $2.5 million loan to BBY on 12 June 2014.
Ficema says that margin calls are not a debt but a form of security deposit which is returned to BBY by the ASX. That submission misses the point. A participant on the ASX, such as BBY, is required to deposit or provide and maintain cash or collateral for its margin obligations as determined by the ASX: Operating Rules, r 14.6.1. All such collateral, which includes cash cover and collateral, is subject to a security interest in favour of the ASX securing performance by the participant of its obligations to the ASX: Operating Rules, r 14.6.7. The failure by a participant to pay margin calls to the ASX is an event of default under the Operating Rules, r 15.1.1, giving the ASX the rights under r 15.2.1.
The significance of what occurred in June 2014 is that BBY lacked the financial resources to meet margin calls to the ASX and misused $8.6 million of client monies in CSAs to meet its own obligations to the ASX. That gave rise to a debt immediately owing by BBY in that amount to the clients of the affected CSAs; the Saxo and Futures CSAs. And, BBY was unable to pay that debt from its financial resources at that time.
When the margin call funds were returned to BBY by the ASX on 17 June 2014, the funds were retained by BBY and not repaid to the Saxo and Futures CSAs. On 24 June 2014 part of the funds were used by BBY to repay $2.5 million to GARF. On 25 June 2014, $11.027 million was transferred from BBY Trust account 4 as follows: $3.527 million was transferred to the BBY General Trust account and $7.5 million was deposited into various high interest term deposits. The liquidators observed that it is not possible to apportion the $6.8 million Futures CSAs' monies and $1.8 million Saxo CSAs' monies between those individual transfers (Supplementary CSA Report, par 6.3). The term deposits were subsequently withdrawn by BBY on 14 August 2014 ($2 million and $1 million) and 14 September 2014 ($4.5 million) and paid into the BBY General Trust account, from which $7.1 million was transferred to the Saxo buffer account. Even if $1.8 million of the amount paid into the Saxo buffer account is to be treated as BBY as a defaulting trustee accounting to the Saxo CSA for the earlier breach of trust on 13 June 2014, BBY failed to account to the Futures CSA for the breach of trust in relation to the $6.8 million of client monies misappropriated from the Futures CSA. This remained a debt immediately due and owing by BBY to the clients of the Futures CSAs, which BBY failed to pay.

[35]

Liquidity crisis - December 2014

On 1 December 2014, Saxo asserted that BBY had failed to pay the final instalment required by the 1:1 Funding Agreement and terminated its trading agreement with BBY to take effect on 1 February 2015. Saxo informed BBY that it would no longer allow clients of BBY to place new trades on Saxo's trading platform. Internal BBY emails described this termination as being a "cataclysmic event" that "destroyed" BBY's New Zealand business. It led to a flood of client withdrawal requests from BBY's clients to retrieve their funds from the Saxo platform.
On 4 December 2014, Saxo demanded that BBY pay $16.640 million which included the $3 million buffer which BBY had previously been allowed to retain to pay client redemptions. Saxo reported these events to ASIC and the ASX who subsequently notified BBY of its intention to investigate the termination of Saxo's relationship and the financial position of BBY more generally. As part of this investigation, the ASX required the directors of BBY to consider whether BBY was solvent and to make a declaration by the board to that effect.
On 8 December 2014, the solicitors for Saxo demanded payment of $16,085,413 by 12 noon on 9 December 2014, failing which court proceedings were threatened, including seeking a freezing order to restrain BBY dealing with the client funds required to be paid to Saxo. Later, on 8 December 2014, the board of BBY met to consider a response to Saxo and the solvency of BBY more generally. The minutes of the board meeting record that Mr Maharaj addressed the Board about the circumstances giving rise to that meeting and expressed his concern that paying money to Saxo could cause a "mismatch of liquidity" to arise between the date in which Saxo clients would call upon BBY to pay them money following the closure of their positions on the Saxo platform and the date on which BBY could obtain that money from Saxo.
The minutes record that Mr Maharaj tabled four forms of documents to be provided to the ASX: a balance sheet as at 5 December 2014, an income statement year-to-date as at 5 December 2014, and an ad hoc calculation of BBY's liquid capital and liquid margin as at 5 December 2014. This information had been requested by the ASX from Mr Maharaj following a meeting the previous day. Mr Maharaj had delegated authority to lodge returns with the ASX on behalf of BBY. The minutes record Mr Maharaj advising the Board that the company had traded marginally profitable year-to-date, that on its face the balance sheet indicated that the company was solvent and the cashflow outlook for the company on ordinary trading conditions to the end of the year was slightly positive.
Although the documents tabled at this meeting by Mr Maharaj were not in evidence, Ficema submitted that they could only have indicated solvency on a cashflow and balance sheet basis. Even assuming that be the content of those documents, it does not follow that BBY or the other companies in the BBY Group were in fact solvent at that time. Ficema's reliance upon these documents ignored the significant liability of BBY for unfunded client entitlements. I infer from the terms of the 8 December 2014 board memorandum that this liability was not included in any of the documents prepared by Mr Maharaj, nor disclosed by him or Glenn Rosewall to the other directors at this meeting.
Ficema further submitted that the minutes of the 8 December 2014 meeting are evidence of the truth of their contents, referring to Warner Capital Pty Ltd v Shazbot Pty Ltd [2020] NSWCA 121 at [113]. The submission continued that to establish insolvency as at December 2014, the Court would need to infer that there was some error or mis-recording in what Mr Maharaj told the Board and that such an inference should not be drawn in circumstances where Mr Maharaj could have, but did not, address this issue.
I agree that an inference should be drawn that there was an error in what Mr Maharaj told the board; he did not inform the board of the significant liability of BBY for unfunded client entitlements. I do not agree that it was necessary for the plaintiffs to adduce evidence from Mr Maharaj on this issue. There was other evidence from which the inference can be drawn, namely, the CSA Report and the solvency report, as updated by Mr Vaughan, which established that there was a shortfall in client monies in the CSAs.
The minutes of 8 December 2014 also record that the board resolved that BBY would raise an additional $9 million through (a) a stand-by credit facility of up to $4 million that was to be provided by Ken and Glenn Rosewall at commercial rates, and (b) a longer term funding of $5 million in the form of new equity to be raised by 1 February 2015. Following these resolutions, a declaration was signed by the directors that the BBY companies were solvent.
Ken and Glenn Rosewall arranged for their companies, Ficema and GARF, to provide BBY and BBY Holdings with the loans as promised during the 8 December Board meeting. Ficema had already provided a loan of $1 million on 1 December 2014; it provided a further loan of $3 million on 11 December 2014. GARF had paid $1,868,800 and $376,300 to the BBY Group on 5 December 2014, the first payment being in consideration of the sale of 1,868,800 Firestone notes and provided a loan of $180,000 on 9 December 2014.
On 9 December 2014, BBY reached a settlement with Saxo under which it agreed to pay Saxo $13 million by equal instalments of $6.5 million on 9 December and 12 December 2014. Of the payment of $6.5 million to Saxo on 9 December 2014, $1,868,600 was funded from the payment made by GARF to BBY on 5 December 2014. Of the payment to Saxo on 12 December 2014, $3 million was funded using the loan provided by Ficema on 11 December 2014. Mr Vaughan noted that the balance of the loans advanced by Ficema and GARF were absorbed into BBY's operating accounts and used as working capital.
In December 2014, Ms Yuen prepared a cashflow analysis which showed that BBY was trading at a significant deficit and projected a cash shortage of over $10 million by June 2015. As at 23 December 2014, an internal BBY email noted that BBY had at least $3.35 million in outstanding trade creditors and had committed to pay or arranged a payment plan with $3.1 million of those creditors to the extent it had not already paid them in that month. BBY did not adhere to those commitments or payment plan.

[36]

Events in 2015

As referred to in the solvency report, there is evidence of demands being made against the BBY companies by clients in the period of January to May 2015, often originating from stockbrokers who received withdrawal requests from their clients but were unable to get BBY's clearing team to pay money to their clients. This was because insufficient monies were remaining in the relevant CSAs. There is evidence that stockbrokers made complaints to various members of the BBY finance team who then sought authorisation from Glenn Rosewall or Mr Maharaj to pay these monies from other CSAs. There is evidence of emails from Glenn Rosewall approving withdrawals from CSAs in order to meet payments to clients in other product lines or to meet BBY's obligations to the ASX.
In early 2015, several senior managers of the BBY Group resigned. On 20 February 2015, Mr Maharaj tendered his resignation to the board of BBY, effective 20 March 2015. On 21 February 2015, Ms Amy Fung, a financial controller at BBY, tendered her resignation. In April 2015, Ms Yuen also resigned.
On 6 March 2015, Ms Erin Wang, who had replaced Ms Yuen, emailed Glenn Rosewall informing him that the operating bank balance would only be $134,000 after payment to Saxo of certain monies that day and that there would be a big shortage of funds of $1.3 million in the following week. Glenn Rosewall did not respond to that email. He forwarded this email to another employee noting that it presented "challenges for the next week".
By March 2015, BBY owed its three biggest suppliers (GBST Holdings Limited (GBST), IRESS Market Technology Limited (IRESS), and Agility Applications Pty Ltd (Agility)) over $1.5 million and a creditors' statutory demand from a stockbroker was served on Broker Services Australia on 24 March 2015 seeking payment of $458,261.08 in unpaid commissions.
In mid to late March 2015, the ASX attended the Sydney office of BBY to undertake an AXS counterparty risk assessment. This was subsequently given by the ASX to BBY along with a requirement that BBY appoint an independent accountant to prepare updated liquidity returns and other reconciliation documents required by the ASX. Further restrictions were imposed on BBY by the ASX following margin calls totalling $7.7 million on 7 May 2015 which BBY failed to pay. In effect, BBY was required to close its ETO business.
As indicated, the liquidators were appointed as voluntary administrators on 17 May 2015. On the following day, St George Bank appointed receivers and managers to companies in the BBY Group, including BBY and BBY Holdings.

[37]

(b) the working capital analysis

Ficema submitted that the working capital analysis in the solvency report, as supplemented by the updated analysis in Mr Vaughan's September 2020 affidavit, is not a reliable indicator of BBY's working capital at any particular point of time for four reasons: (a) the analysis of the Equities/ETO product line is incomplete, (b) the analysis does not include surplus amounts on the IB product line as available to pay creditors, (c) the analysis does not include, in the period prior to 27 June 2014, the balances of various bank accounts as available to pay creditors, and (d) the analysis does not use the most accurate information about the cash held by Saxo.
Appendix A to Ficema's closing submissions itemises some of the amounts which Ficema says should be included as additional working capital in particular months, noting the absence of information in the Equities/ETO product line before 1 January 2015. Ficema says that it not possible to undertake any complete analysis at any point in time. Appendix A is reproduced as Appendix 3 to these reasons.
Ficema acknowledged that when the amounts included in its Appendix A are added to the updated working capital analysis, the overall deficit recorded in that analysis does not produce an overall surplus, with the exception of January 2015. Nonetheless, it submitted that the amounts in Appendix A "go some way towards doing that" (closing submissions, par 66). Taking June 2014 as an example, Ficema says that the working capital analysis records an overall deficit of $11.345 million, however Appendix A suggests that this figure should be reduced by $2.955 million.
The plaintiffs say that even after the various adjustments that Ficema proposes be made to Mr Vaughan's analysis of client money deficiencies (which are disputed by the plaintiffs), these adjustments do not create a surplus, with the exception of January 2015, as Ficema acknowledged in its closing submissions. The plaintiffs say that the criticisms of the working capital analysis, even though misplaced, do not establish that there was surplus working capital.

[39]

I accept Ficema's submission that this monthly surplus should be taken into account as available working capital.
As to (c), the issue is whether several BBY House accounts should have been included in the analysis of available working capital. Ficema says that the analysis is incomplete because of the six BBY House/Clearing accounts, only the Operating Account was included in the analysis. The other five House/Clearing accounts were the General Account, Facilitation Account, OD Excess account, Clearing Account and USD Operating Account. Ficema's submission ignored the reasons given in the "Operating cash analysis" memorandum (par A1.1) to the CSA report for not including the five BBY House accounts in the analysis of operating cash. These House accounts were excluded from the analysis on the basis that they were only used for the purposes of the Equities/ETO business, such as funding for margin calls, and therefore were not readily available for general operating purposes. I accept that was a reasonable approach. It is necessary to say something further about the General Account.
General Account: I reject Ficema's submissions that the exclusion of this account from the working capital analysis was an error or oversight, and that the funds in the General Account could be substantial. As explained in the CSA Report, the General Account was a "flow through" account in respect of ASX margin payments, receiving funds from the Equity/ETO client trust account and transferring funds into the Facilitation Account. From early 2015, the General Account also provided funding to the Equity/ETO client trust account to cover dishonoured client receipts and paid monthly Equity/ETO commissions to the NAB Operating account (par 6.2.2). Given the nature and purpose of the General Account as a flow through account, there was no error in not including the surplus/shortfall on this account in the working capital analysis.
Moreover, Mr Vaughan's 4 December 2020 affidavit established that the funds in the General Account were not substantial: see [195] above. Indeed, there was a shortfall in January and September 2014 and May 2015. Otherwise, there was a balance of less than $100,000 in February, March, June, July, August, November and December 2014 and February and March 2015, and only intermittent larger balances in April, May 2014 and October 2014 and January 2015 and April 2015.
As to (d), Ficema drew attention that for all other product lines the solvency report calculated client entitlements net of debtors, but client debtors were not included in the analysis of the Equities/ETO product line. Mr Vaughan accepted that "net" client debtors are not included in the analysis of the Equities/ETO product line for the period January 2015 to May 2015 (T82.9, 84.32). The "Qualifying debtors" memorandum (par A1.4(b)) to the CSA report, explained the reasons for this approach: We have excluded client debtors in respect of product line trading accounts from this analysis as client accounts in debit position relating to Equity/ETO are likely to have been funded using the STG Facilitation Account (by virtue of the funding arrangement) and BBYL would have been required to repay STG at the time the debt was collected.
Facilitation Account: the operation of this account has been referred to at [179] above. It was an overdraft facility provided by St George with an $8 million from December 2012. The account was used to settle the daily market obligations and support business funding requirements of the Equities/ETO business. Up until early 2015, the Facilitation Account provided daily overnight funding to the Equities/ETO client trust account to cover open buys and client direct debits, which did not clear until the following day. Through the overdraft facility provided by St George, the Facilitation Account funded the daily trading activities for the BBY companies on behalf of clients that were traded on the ASX. As soon as clients paid money to settle trades that were executed on their behalf by BBY, that amount was netted off against the amount to the overdraft provided by St George Bank, by reducing the overdraft accordingly.
The CSA report noted that the client debtors in respect of the Equities/ETO product line which excluded from the analysis as client accounts in a debit position were likely to have been funded using the Facilitation Account and BBY would have been required to repay St George Bank at the time the debt was collected. For this reason, the amount of client debtors on the Equities/ETO product line was not treated as a source of funding available to the BBY companies as working capital. Consistent with that approach, Mr Vaughan's analysis did not take into account the amount of the overdraft facility provided by St George, which as a debt repayable on demand constituted a debt presently due and payable.
Mr Vaughan gave evidence that if client debtors were to be taken into account then so too should the balance of the Facilitation Account (T84.36, 86.30). So much was accepted by Ficema. However, Ficema submitted that the evidence does not justify such an assumption that if the Facilitation Account and client debtors were taken into account, there would be no surplus available to be used as working capital.
The first matter to which Ficema pointed was that the amounts owed by clients could be substantial. Reference was made to debtors recorded as at 15 May 2015 were $7.061 million. There are difficulties with this submission. One is that the facility limit on the Facilitation Account on 15 May 2015 had been exceeded; on that date, the overdraft balance of $8.4 million exceeded the debtors, which was consistent with Mr Vaughan's evidence as to what would be expected. Another is the evidence of Mr Vaughan that debtors of at least $2 million were not recoverable (T84.36). A further difficulty is that the debtors were overstated by at least $3 million submission, given the fraudulent and manipulative practice of BBY in the second half of 2014 and in 2015 of overstating the quantum of open client contracts than was actually needed to clear trades executed on behalf of clients (T86.30).
The second matter to which Ficema referred was that other clearing receivables could be set-off against amounts owing on the Facilitation Account. I take this to be a reference to the refund of amounts to BBY, such as margin calls. One example given was that clearing receivables as at 30 June 2014 amounted to $13.4 million and note 16 to the 2014 financial statements stated that the bank overdraft offsets the clearing receivable balance. Ficema's submission conflated debtors and clearing receivables. As at June 2014, trade debtors were recorded as $3.284 million, which was significantly less than the overdraft on the Facilitation Account of $7.891 million. Another example given was the Aquila transaction; Ficema says that the clearing receivable in relation to this transaction was substantially greater than $8 million. Accepting that to be the case, it will be recalled that the $10 million of the CBPL margin paid on 13 June 2014, was not paid from the Facilitation Account; and when the margin call funds were returned to BBY by the ASX in June 2014, the amount included $8.6 million of client monies which BBY had misused to pay the CBPL margin call. That amount was a debt owing by BBY to the clients of the affected CSAs.
The third matter to which Ficema referred was the recovery by the receivers appointed by St George of at least $5.3 million in margin repayments and $2.5 million from debtors. This misses the point. As indicated, as at 15 May 2018, the debit balance of the Facilitation Account was $8.4 million, which exceeded the two amounts referred to by Ficema, even if $5.3 million in margin repayments had been initially paid from the Facilitation Account.
I accept Mr Vaughan's evidence that client debtors for the Equities/ETO product line and the balance of the Facilitation Account would likely balance each other out (T84.36, 86.36), and that for the relevant period the Facilitation Account was mostly fully drawn (T131.14-20). It is also to be borne in mind that the client debtors on the Equities/ETO product line were overstated, given the inflated debtors funded through the Facilitation Account by an amount of about $3 million and that debtors of at least $2 million were not recoverable.

[41]

Other bank accounts

Ficema says that the working capital analysis leaves out two categories of bank accounts which for the most part is confined to part of the period prior to 27 June 2014. The first category is referred to in the CSA Report as "Other Trust" accounts, as they did not appear to be aligned to any particular product line (par 6.2.3). The second category is referred to as "The New Zealand Accounts".
Addressing the first category, the CSA report included three of the "Other Trust" accounts: two as a Saxo CSA and one as a Futures CSA. Ficema's criticism is directed to five "Other Trust" accounts that are not included in the solvency report. Ficema submitted that three of these trust accounts held significant funds which were available to BBY in the period January 2014 to May 2014; these were the St George BBY Trust Account 4 (9372), NAB BBY Trust Account 4 (5357), and NAB Corporate Cheque Trust Account 5. The plaintiffs did not contend to the contrary. I accept that the balances in the three "Other Trust" accounts in the period January 2014 to May 2014 should be taken into account in the working capital analysis.
Addressing the second category, Ficema pointed to the Supplementary CSA Report which stated that BBY(NZ) did not operate independently of BBY, rather BBY facilitated trading by New Zealand residents in BBY administrative accounts, and CSAs held with the Bank of New Zealand were considered to be and utilised as part of the product lines to which they were designated in the same way as CSAs maintained by BBY in Australia. In addition, New Zealand clients were included as clients on BBY client ledgers and BBY executed trades on their behalf.
Ficema accepted that the working capital analysis included balances in two New Zealand bank accounts from 27 June 2014, specifically in the analysis of the surplus/shortfall on the Futures and Saxo product lines: the BBY Future SEG BNZD (5025) and Ebridge Buffer BNZ (Saxo) (5028) for the period June 2014 to May 2015, but not in respect of the earlier period from January to May 2014. However, it does not follow, as Ficema submitted that the credit balances in the New Zealand bank accounts should be added to the analysis for the period prior to 27 June 2014; that is because, as Mr Vaughan explained, this would ignore the amount of client entitlements of BBY(NZ)'s clients. (T119.8)
Ficema further submitted that the balances in two other New Zealand bank accounts styled BBY WLP Omnibus BNZ NZD (5027) and the BBY IB Buffer (5029) for the months of January 2014 to December 2014 had not, and should have been, included in the analysis. The CSA report (par 5.2.1) explained that amounts in the New Zealand bank accounts were not included because those details were not available in circumstances where the liquidators were not appointed to BBY(NZ). However, the plaintiff liquidators subsequently obtained copies of those bank statements for all four BBY(NZ) bank accounts and evidence of those balances was tendered by Ficema (Ex 1, tab 4).
Even putting aside client entitlements, which must be taken into account, the credit balance in the WLP Omnibus account between 31 January 2014 and 31 December 2014 is immaterial, ranging from about $100,000 in January 2014, $14,000 in April 2014, $39,000 in August 2014 and $13,000 in December 2014. The credit balance in the IB Buffer account is not significant, being less than $80,000 between January and May 2014, and around $200,000 or less between June and December 2014.
Ficema did not reply to the plaintiffs' submission that amounts of held in New Zealand bank accounts by BBY(NZ) as client monies were not funds available to the BBY companies as BBY(NZ) was not a wholly owned subsidiary of BBY Holdings, which only held 51 per cent of its shares, and therefore the New Zealand entity was not a part of the consolidated group. I accept that BBY(NZ) was not a controlled entity of BBY Holdings; it is not listed in Note 23 to the 2014 financial statements as an investment in a controlled entity. I find that, aside from these credit balances being immaterial or insignificant, and do not take into account client entitlements, these amounts were not available to BBY as a source of funding to be included in the working capital analysis.

[42]

Cash held by Saxo

Ficema submitted that there was more cash was held by Saxo at various points in time from April 2014 to 28 November 2014 than is recorded in the "cash held with SCMA" column in Mr Vaughan's calculations in annexure A to his September 2020 affidavit. Reference was made to the schedule of payments to Saxo by BBY in the document headed "Saxo upload transactions", totalling $28,664,469.52 in the period 1 April to 12 December 2014: Appendix 65 to the CSA report (par 6.9.1) (Ex 1, Tab 3). Ficema says that the shortfall on the Saxo CSAs for the period April to November 2014 is reduced by the amounts set out in the table in Appendix A to its submissions (see Appendix 3 to these reasons).
The plaintiffs say that Appendix 65 is not a Saxo document recording the cash held by it at a particular time; it merely records the cash advanced by BBY pursuant to the 1:1 Funding Agreement made in December 2013. So much can be accepted. The plaintiffs further say that the payments by BBY to Saxo identified in Appendix 65 do not include amounts that may have come back from Saxo with respect to clients who may have asked to recover monies from their accounts. Mr Vaughan suggested in his evidence that this was a possible explanation for the difference between the amount of cash held by Saxo as shown in annexure A to his September 2020 affidavit and the inference which Ficema says should be drawn from Appendix 65 as to the amount of cash held by Saxo. (T108.19-44) Whilst that explanation is a possibility, I find it unlikely given the acceptance by Mr Vaughan in cross-examination that it was not until January 2015 that cash started coming back from Saxo to BBY (following the termination of the 1:1 Funding Agreement) and that before that time, client redemptions were made from BBY's CSAs and other accounts. He also agreed that it would not be expected that monies would have come back from Saxo to BBY prior to January 2015 (T108.31-50).
I accept Ficema's submission and infer that the cash held with Saxo for the months of April to November 2014 was more likely greater than the amounts set out in annexure A to Mr Vaughan's September 2020 affidavit. It follows that in calculating the surplus/shortfall on the Saxo CSAs, the cash held by Saxo for the months of April to November 2014 should be increased by the amounts set out in the table in Appendix A to Ficema's closing submissions.
One further matter arises in relation to the Saxo CSAs. The plaintiffs submitted that the Saxo shortfall was calculated by Mr Vaughan on a conservative basis for the months of January to March 2014, which assumed that client entitlements were a constant $35 million each month, however there is evidence that the shortfall of about $20 million as at the end of March 2014 was understated and there was an additional deficiency in the Saxo CSAs of $6 million as at 31 March 2014, which was not included in the working capital analysis (Ex D) (T130.18-131.2). I accept that submission. The consequence is that the position as at March 2014 far worse by this amount.

[43]

Conclusions on updated working capital analysis

The plaintiffs submitted that the analysis by the liquidators was prepared conservatively, given that the ultimate shortfall in client entitlements in the winding-up exceeds $20 million, which is greater than the end calculation in the working capital analysis of $15.151 million. That can be accepted.
Nevertheless, the plaintiffs accepted in closing submissions that the surplus in the Equities/ETO product line (for January 2015 to May 2015) and the IB product line (for June 2014 to May 2015) could have been included in assessing the total shortfall in client funds. I accept that this adjustment to the working capital analysis is appropriate. If that were done, the plaintiffs say that these additional amounts are outweighed by the additional deficiency of the $6 million in the Saxo product line that was not included in the analysis of total client shortfall set out in the solvency report: see [293] above. However, that is only a partial answer to Ficema's criticism because it only addressed the shortfall position as at 31 March 2014.
I accept Ficema's submission that the cash held by Saxo for the months of April to November 2014 should be increased by the amounts set out in the table in Appendix A to Ficema's closing submissions
I accept Ficema's submission that the balances in the three "Other Trust Accounts" for the months of January 2014 to May 2014 should be included in the working capital analysis.
I reject Ficema's submission that the balances in the New Zealand Bank accounts relating to the BBY(NZ) should have been included in the working capital analysis.
Adopting these adjustments to the amount of surplus/(shortfall) in client entitlements the result, by way of example, for each of the months in which the impugned payments were received by Ficema is as follows (ignoring rounding of some integers in the calculation): 1. as at January 2014, the total shortfall in client entitlements of $(20,362,802) is reduced by $4,835,076, and the adjusted working capital deficiency is $(17,081,924); 2. as at May 2014, the total shortfall in client entitlements of $(15,070,082) is reduced by $5,171,704, and the adjusted working capital deficiency is $(12,208,296); 3. as at June 2014, the total shortfall in client entitlements of $(9,562,630) is reduced by $2,959,464, and the adjusted working capital deficiency is $(8,388,563); 4. as at July 2014, the total shortfall in client entitlements of $(13,894,916) is reduced by $2,955,700, and the adjusted working capital deficiency is $(13,721,300); 5. as at November 2014, the total shortfall in client entitlements of $(11,180,790) is reduced by $5,090,544, and the adjusted working capital deficiency is $(9,289,456); and 6. as at April 2014, the total shortfall in client entitlements of $(14,070,207) is reduced by $1,813,012, and the adjusted working capital deficiency is $(14,722,988).
Adopting the adjustments referred to in [295]-[297] above, there remains a significant shortfall in working capital (which consistently amounted to many millions of dollars), other than January 2015. Moreover, that remains the case even if, contrary to my view, an adjustment is also made for the monies held by BBY(NZ) in the four New Zealand bank accounts, notwithstanding that these amounts were not available to BBY as a source of funding as BBY(NZ) was not a controlled entity.
January 2015: as to the adjusted working capital surplus of about $1.5 million in January 2015, that is exceptional throughout the period January 2014 to May 2015. It is largely explained by the related party payments received by the BBY Group in December 2015 totalling about $6.14 million. That injection of funds was necessary to permit BBY to meet its revised arrangements with Saxo in December 2014. As indicated, whilst those payments produced an immediate cash injection in that amount, that was insufficient to enable the BBY Group to pay all of its debts which fell due in January 2015 and the months thereafter: see [355]-[368] below.
I conclude that BBY Holdings and BBY were both suffering from an endemic shortage of working capital throughout the period 1 January 2014 to 17 May 2015, rather than simply a temporary lack of liquidity.

[44]

Ficema submitted that the best evidence of BBY's financial position as at 30 June 2014 are the audited consolidated financial statements of BBY Holdings Group. The financial statements were relied upon as prima facie evidence of the matters they contain (s 1305 of the Act), given the requirement in s 286 of the Act that the company keep financial records: see Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 236 FLR 1 at [396] (Austin J).
Ficema submitted that the 2014 audited financial statements did not suggest insolvency, either on a balance sheet basis or a working capital basis. The BBY Group's net assets were $8.897 million and a small working capital surplus of $138,000 (current assets of $66.826 million less current liabilities of $66.688 million).
I am satisfied that the plaintiffs have demonstrated that the 2014 financial statements do not accurately reflect the financial position of the BBY Holdings Group at that date. The financial statements are materially incorrect in the following respects.
First, the updated working capital analysis taking into account the adjusted deficiency in client entitlements as at June 2014 (see [295]-[297] above) demonstrates a working capital deficiency of about $8.883 million as at June 2014, not a working capital surplus of $138,000 as shown in the 2014 financial statements.
Second, accepting that the balance sheet test can provide some context for the assessment of solvency (Campbell Street Theatre Pty Ltd v Commercial Mortgage Trade Pty Ltd [2012] NSWSC 669 at [23] (Black J)), the asserted balance sheet surplus of assets over liabilities of $8.897 million as at June 2014 is wrong for several reasons.
One is that the shortfall in client monies in the CSA's was a debt owing by BBY to its clients which was not recognised as a current liability in its financial statements. Consequently, the current liabilities of BBY were understated as at 30 June 2014 by about $6.603 million ($9.563 million less $2.955 million).
Next, the value of current financial assets of $2.772 million in the 2014 financial statements, represented by the Firestone shares, was materially overstated: see [225] above.
Next, the value of non-current assets of $7.883 million in the 2014 financial statements, represented by the convertible notes in Firestone "at cost", was also materially overstated: see [224] above.
Additionally, the 2014 financial statements did not include any provision for the liability of Broker Services Australia to pay trailing commissions to independent contractors associated with the Stonebridge business, as to which a substantial part of the commission claim was subsequently undisputed: $648,618 in 2012, $573,202 in 2013, and $467,856 in 2014 (inclusive of GST): see [360]ff below.
Ficema also submitted that the financial statements in the period 2009 to 2014 indicate a trend of improving profitability, given the reduction in the quantum of before tax losses of $7.728 million in 2009, $4.704 million in 2010, $3.274 million in 2011, $1.453 million in 2013, and a before tax profit of $1.967 million in 2014. The difficulty with this submission is that the reported before tax profit in the 2014 financial statements ignores the deficiency in client entitlements, as adjusted, of $6.603 million, that the value of the Firestone shares and notes were overstated and the absence of a provision for the liability for trailing commissions.

[45]

(d) the financial trend analysis

The financial trend analysis in the solvency report has been referred to above at [183]-[184]. Ficema submitted that this evidence is either irrelevant or of marginal weight. I do not agree.
The periodic reporting to the board which indicated that BBY consistently failed to meet budgeted revenue predicted in the period August 2012 to November 2104. Ficema submitted that the probative value of these documents was diminished by the absence of any analysis of whether these reported figures were correct, as Mr Vaughan accepted in cross-examination (T88.5-12), and the failure of the plaintiffs to ask Mr Maharaj to explain the reported figures in his evidence. These submissions overlooked two matters.
One is that the periodic reported figures to which Mr Vaughan referred in the solvency report are derived from the reports to the board which are business records of BBY and BBY Holdings: Evidence Act, s 69. Absent any challenge to the material in the solvency report based on the reported figures, there was nothing for the plaintiffs to seek to explain by adducing evidence from Mr Maharaj.
The other matter is that the weight to be given to these periodic reports is strengthened by the evidence of Ken Rosewall in his public examination that there was a pattern that estimated profits fell short of, and often well-short of actual, profit. He explained that the strategy of Glenn Rosewall and Mr Maharaj to expand and take on more staff and more traders and to boost the stockbroking business was not successful because of the costs associated with the attempt to grow the business in that manner and the opening of other offices in different parts of Australia and New Zealand which were unsuccessful. He also gave evidence that through 2013 and 2014 there were always a lot of difficulties with the business and that the costs and expenses of running the business were getting too much.
Next, Ficema submitted that so far as the reported figures are inconsistent with the audited accounts, they should be rejected as unreliable. The submission continued that the reporting to the Board of actual losses of over $4 million for each of the financial years 2013 and 2014 cannot be reconciled with the audited accounts which record profits in the 2014 year of $1.987 million before tax and $1.453 million after tax, and losses in the 2013 year of $1.947 million before tax and $2.117 million after tax. I reject this submission.
Mr Vaughan agreed in cross-examination that the reported profit and loss position in the financial statements showed an improvement between the 2013 and 2014 financial years, but did not accept this was the best way to assess the profitability of the company because there was a very material error in the financial statements for 2014 (T101.10-16). He referred to evidence of a shortfall in the Saxo CSAs of about $20 million from late 2013 and as at 1 April 2014, and the shortfall in client monies in the middle of 2014. The updated working capital analysis showed a shortfall in client entitlements as of 30 June 2014 of $9.563 million. Taking into account the adjustments proposed by Ficema, to the extent that I have accepted them, there is a shortfall in client monies of about $6.603 million as at June 2014. Mr Vaughan said that the 30 June 2014 financial statement of BBY Holdings was "fundamentally wrong" (T104.45-47). For the reasons given above, I accept that evidence. As indicated, there were material errors in the 2014 financial statements and no weight can be given to the reported profit before tax of $1.987 million and $1.453 million after tax in the 2014 financial statements.
Mr Vaughan acknowledged in the solvency report that although unprofitability and incurring significant trading losses does not necessarily mean that a company is insolvent, continued losses must be funded in some way and can be a critical contributor to a company's insolvency. That is undoubtedly correct. Here, the reported actual profit and loss against budget for the 2013 and 2014 financial years revealed losses in the order of $4 million each year. Plainly that was a critical contributor to the insolvency of BBY Holdings and BBY as the companies were not generating profits to enable them to meet their debts as and when they fell due in circumstances where actual revenue was below budget and actual expenses exceeded budget.

[47]

Willingness to provide funding to BBY Group

In assessing the willingness to provide funding to a company, a degree of assurance as to a director's commitment to provide funds to the company is essential: Williams (as liquidator of Scholz Motor Group Pty Ltd (in liq)) v Scholz [2008] QCA 94 at [110]; International Cat Manufacturing Pty Ltd (in liq) v Roderick (2013) 97 ACSR 200; Chan v First Strategic Development Corporation (in liq) at [42]-[44]; Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72; (2017) 120 ACSR 130 at [119]-[121]. As Morrison JA said in Chan v First Strategic Development at [44]: Given that the resolution of this issue will almost always depend upon an assessment of facts, in my view it is better to proceed on the basis that, where the financial support is being provided by a director or related entity, and in circumstances where there is no formalised agreement or understanding, what is required is cogent evidence which enables the court to conclude that there is such a degree of commitment on the part of the provider of the financial support to continue it, such that it can be said that at any point of time it was likely to be continued, with the result that, at any of those times, the company was able to pay its debts as and when they fell due.
Insofar as Ficema submitted that an inference can be drawn from the previous contributions by Ken Rosewall to the BBY Group in the form of shareholdings acquired by his related entities in BBY Holdings in 2006 and 2011 and prior loans by Ficema in 2011 and 2013 totalling $2.5 million, little weight can be given to those historical matters. Those contributions reflected Ken Rosewall's commitment to the BBY Group at an earlier point in time, before his view of the BBY Group had changed. By the second half of 2103 Ken Rosewall considered that BBY was in a financial crisis in September 2013, he was "very worried" about BBY after June 2014, and he had an increasing concern throughout 2014 and 2015 that BBY "would financial fail, that is, become insolvent". In an SMS message to Ms Rottinger dated 29 June 2014, Glenn Rosewall recorded his observation that, "… my dad is very worried about bby".
Insofar as Ficema relied upon an inference from the actual financial support provided by Ficema during 2014, it is an error to equate ad hoc financial support with an asserted willingness to provide at least $4 million working capital throughout the whole of 2014.
There was no pre-existing assurance to provide funding of at least $3 million, when Glenn Rosewall requested a short-term loan from Ken Rosewall in June 2014. The $3 million advanced by Ficema in June 2014 was on the express basis that the funding would be repaid within several days, a week to ten days at the most. Ken Rosewall was only prepared to provide funding of limited duration. The temporal qualification on the term of the funding in June 2014 reflected Ken Rosewall's earlier concerns commencing in September 2013 as to BBY's financial position.
On 16 October 2014, Ficema accepted an offer from Westpac of a 2-year interest only bank bill business loan of $1 million for the purpose "[t]o assist with capital injections or loans required to be advanced to BBY Ltd by Ken". The terms of that offer included the existing guarantees of $1 million each from Glenn Rosewall and Mrs Wilma Rosewall, Ken Rosewall's wife. On 17 October 2014, Mr Maharaj forwarded to Glenn Rosewall a capital injection proposal for the BBY Group in October 2014 involving directors' loans of $4 million repayable on 30 June 2015. Ken Rosewall gave evidence at his public examination that he did not remember seeing this document. He also gave evidence that in the second half of 2014 the only source of further funding for BBY under contemplation was selling parts of the company, either by way of share sale or business sale of parts of the company. Plainly, there was no realistic possibility of such a sale on either basis; Ficema did not submit otherwise (Exhibit J, T700.7-29).
On 1 December 2014, Ficema drew down on its business loan with Westpac and advanced $1 million to BBY Holdings. The first assurance by Ken Rosewall to provide funding to BBY during 2014 was given on 8 December 2014 in the commitment letter signed by Glenn and Ken Rosewall agreeing to provide a stand-by debt facility of up to $4 million, as discussed at the 8 December board meeting. That commitment was given by the directors in response to the liquidity crisis in early December 2014 following Saxo's termination of the 1:1 Funding Agreement on 1 December 2014 and its demand on 4 December 2014 for immediate payment of about $16 million and a further demand on 8 December 2014 for payment of that amount and threats of litigation against BBY if not paid.
Although the 8 December board minutes referred to an expectation that the stand-by credit facility, if drawn, would be paid by 1 February 2015 when the current positions on the Saxo platform would be unwound, the terms of the stand-by credit facility were not reduced to writing. Ken Rosewall acknowledged in his evidence that the December 2014 loans were repayable, essentially on demand (T176.34-46). On 11 December 2014, Ficema advanced $3 million to BBY, drawing on its cheque account which had a credit balance of $1,546,770.77. This resulted in a debit balance of $(1,453,229.23). Ken Rosewall described this drawing as a temporary overdraft, albeit there was no formal overdraft facility in place for Ficema's cheque account at the time.
That the December 2014 loans were essentially repayable upon demand and were almost immediately forgiven by an asset transfer because there was no other way for Ficema to obtain repayment (Ex J at T709.39-710.17), is inconsistent with an inference that Ken Rosewall and related entities were willing to provide funding to the BBY Group of at least $4 million throughout the whole of 2014.
Whilst Ficema obtained the $1 million business loan in October 2014 for the purpose of providing funding in that amount to BBY, and it did so on 1 December 2014, no assurance of any funding was given by Ken Rosewall to BBY prior to the 8 December 2014 letter, and that commitment was qualified insofar as the funding was essentially repayable on demand. I reject Ficema's submission that Ken Rosewall and related entities were willing to provide funding of at least $4 million as working capital throughout the whole of 2014.

[48]

Ability to provide at least $4 million in funding

Given the above conclusion, the question of Ken Rosewall's ability to provide funding does not strictly arise. Nevertheless, I will indicate my views.
It is common ground that the resources readily available to Ficema and Ken Rosewall included cash in Ficema's cheque account totalling up to $1.5 million at its highest, and about $1.17 million in Ken Rosewall's superannuation fund. The parties diverged as to the value of the investments of held by Ficema and Ken Rosewall in the "Jaguar Australian Leaders Long Short Unit Trust" (Jaguar Trust). The plaintiffs submitted that these investments were worth a few hundred thousand dollars at most, whilst Ficema contended that the the combined value of Ken Rosewall's and Ficema's unit holdings in the Jaguar Trust were over $7 million. For the reasons that follow, the dispute as to the value of the investments in the Jaguar Trust can be put aside.
Accepting that the available cash in Ficema's cheque account during 2014 was in the order of $1.5 million and that Ken Rosewall's "cash pension" in KRR Superannuation Fund had funds available for immediate draw down of about $1.17 million, Ficema says that Ken Rosewall was able to provide funding of $4 million to the BBY Group in 2014 because of his ability to obtain finance from Westpac for the balance.
I accept that Ken Rosewall's prior dealings with Westpac in June and December 2014 is a fair indicator of his likely ability to obtain finance from Westpac throughout 2014. It will be recalled that in June 2014 Ficema obtained at very short notice a temporary $2 million facility, in October 2014 Ficema obtained a $1 million "bank bill business loan", and on 11 December 2014 Ficema obtained a temporary overdraft on its cheque account of about $1.4 million.
The plaintiffs drew attention to the absence of evidence from Glenn Rosewall and Mrs Rosewall of their preparedness to consent to an extension of their liability under their existing guarantees of Ficema's obligations to Westpac, if Ficema had sought a new facility of $4 million from Westpac in 2014. As indicated, Westpac was prepared to advance the $1 million business loan in October 2014 based on the existing guarantees of $1 million from Glenn Rosewall and Mrs Rosewall. The evidence is silent as to whether Westpac required the consent of Glenn Rosewall and Mrs Rosewall in December 2014 to an extension of their liability under their existing guarantees in respect of Ficema's obligations in respect of the temporary overdraft of about $1.4 million. It seems, given the lack of formality surrounding that drawing, that no consent was required from the guarantors for that temporary overdraft.
Assuming that the consent of the guarantors would have been required in relation to a hypothetical borrowing by Ficema of either $1.4 million or $4 million during 2014, the inference to be drawn is that it would have been given by Glenn Rosewall and Mrs Rosewall, having regard to their close connection to BBY and its financial fortunes, and their conduct in June 2014 in consenting to an extension of their liability under existing guarantees. I conclude that an inference is available that Ken Rosewall and his related entities had the ability to provide financial support to the BBY Group in 2014 of up to $4 million.
As to the disputed value of the investments held by Ken Rosewall and Ficema in the Jaguar Trust, if it were necessary to decide, I would disregard these investments as a source of readily available cash because the main assets of the Jaguar Trust was the notes in Firestone and accrued interest on the notes. The balance sheet of the Jaguar Trust as at 30 June 2013 recorded the value of those notes as $6.5 million, after an unrealised capital loss of $3.5 million, and interest receivable on the notes of $3,335,201. That remained the position as at 30 June 2014.
Ficema submitted that it does not follow from the fact that the main asset of the Jaguar Trust, being the Firestone notes, was later worthless, that units in that trust were worthless in 2014, let alone that Ken Rosewall knew or should have known that. Ficema pointed to the investor statements issued by the administrator of the Jaguar Trust in 2015 stating that the combined value of Ken Rosewall's and Ficema's unit holdings were over $7 million; the administrator of the Jaguar Trust issued statements showing that Ficema's unit holding in the Jaguar Trust was $4,375,922.50 as of 31 March 2015 and Ken Rosewall's unit holding in the Jaguar Trust was $3,311,184.06 as of 31 January 2015. Ficema says that there is no reason to impugn that assessment, let alone to find that Ken Rosewall knew that it was wrong.
Ken Rosewall's subjective knowledge or belief as to the value of the Jaguar investments is irrelevant. As the plaintiffs correctly submitted, he sought to rely upon the existence of the units in the Jaguar Trust as a source of his ability to provide further funding to the BBY companies. His affidavit referred to the value of his and Ficema's investment in the Jaguar Trust as being worth many millions of dollars (pars [103]-[107]), however, cross-examination exposed that the assets of the Jaguar Trust consisted mostly of worthless Firestone notes and the unpaid interest on the notes.
For the reasons given above, the Firestone notes were not a readily available source of cash by either sale, pledge, mortgage or other security in 2014: see [224] above. As at 30 June 2014, the net assets of the Jaguar Trust, excluding the Firestone notes and accrued interest, totalled about $430,000. Only to that extent, less transaction costs and management fees for disposal of assets, should the investments of Ken Rosewall and Ficema in units in the Jaguar Trust be considered a readily realisable source of funding to Ken Rosewall.

[49]

Would funding from Ken Rosewall of $4 million have made any difference for solvency?

There is a further issue, although it also does not strictly arise. The plaintiffs submitted that it is inevitable that any further funding from Ficema or Ken Rosewall would simply have involved the provision of indebtedness that was repayable either on demand or in the very short term and that would not have improved the solvency of BBY or BBY Holdings.
Ficema responded that this is not what actually occurred in December 2014 when Ficema transferred $4 million to BBY, either as a purchase of the Firestone notes for $4 million or as a loan of $4 million followed by its immediate forgiveness in exchange for the notes. I have found that the transactions involved a loan followed by a forgiveness of debt. Ficema says the result in either characterisation was an increase in the working capital of BBY in the amount of $4 million because the Firestone notes were not current assets and their disposal did not result in any decrease in the working capital available to BBY. That can be accepted in relation to the December 2014 transactions. However, as indicated, the funding in December 2014 was essentially on-demand and the BBY Group could only repay by an asset transfer. That is different to the contention by Ficema, which I have rejected, that Ken Rosewall was willing to provide funding of at least $4 million as working capital throughout 2014.
In any event, as the as the plaintiffs correctly submitted, the $4 million advanced by Ficema in December 2014 did not even come close to assisting the BBY companies to return to a state of solvency. Rather, it merely prevented the foreshadowed enforcement action by Saxo to recover its debt. I accept the plaintiffs' submission that it cannot realistically be said that if those funds were advanced earlier in 2014, the BBY companies would have been solvent. The working capital analysis, as adjusted, demonstrates why that is so. The misuse of $8.6 million of client monies in June 2014 in connection with the Aquila trade is one example of why $4 million in funding during 2014 would have been insufficient to return the BBY companies to solvency, recalling that BBY had borrowed as short-term loans $3 million from Ficema and $2.5 million from GARF in June 2014.
One further matter should be mentioned. Ficema did not dispute the plaintiffs' submission that there is no suggestion that any further advance from Ficema or Ken Rosewall would have involved the injection of equity or subordinated debt. Although the issue of up to $5 million of new ordinary shares in BBY was approved at a meeting of directors held on 8 December 2014 with an expectation that the capital raised settled on or about 21 January 2015, that never occurred. To the extent that any advance from Ficema or Ken Rosewall would have involved the BBY companies incurring a further debt that was immediately due and payable, that would not have enhanced the solvency of the companies as it would simply have involved replacing one debt with another presently owing: Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 220 ALR 148 at [99]; Treloar Constructions v McMillan at [125].

[50]

(f) creditor pressure

In his affidavit of 26 March 2019, Mr Vaughan annexed an updated schedule of emails detailing creditor and client pressure experienced by the BBY companies between 1 January 2014 and May 2015.
Ficema submitted that (a) no inference favourable to the plaintiffs should be drawn from the emails in circumstances where neither Ms Yuen nor Mr Maharaj were asked to give evidence on this issue, (b) the concept of creditor pressure is relevant to solvency only insofar as it bears upon one or more of the criteria referred to in ASIC v Plymin, and (c) with limited exceptions and even ignoring the failure to call Ms Yuen and Mr Maharaj, the emails are not suggestive of an indicia of insolvency.
The first submission is misconceived. The second and third submissions misunderstand the significance of the evidence of creditor pressure for the issue of insolvency.
As to (a), the drawing of an inference from a failure to call evidence does not arise where a party has led other evidence sufficient to establish that part of the case: Samm Property Holdings Pty Ltd v Shye Properties Pty Ltd [2017] NSWCA 132 at [162] (McColl JA, Gleeson JA and Sackville AJA agreeing), citing Manly Council v Byrne [2004] NSWCA 123 and Cross on Evidence at [1215]. And, as noted by Campbell J in Manly Council v Byrne at [64]-[66], if the evidence not adduced is comparatively unimportant, or cumulative or inferior to what is already utilised, then no adverse inference may be drawn. Here, Mr Vaughan's solvency report and his subsequent affidavits addressed the significance of the documentary evidence of creditor pressure. Ficema made a forensic decision not to cross-examine Mr Maharaj or Ms Yuen as to these matters.
As to (b) and (c), Mr Vaughan expressed the view, which I accept, that the evidence in the emails reflected the correlation between available cash and creditor pressure; that is, as the cash available to BBY companies decreased, client and creditor pressure increased as clients and creditors proved increasingly unable to have their debts paid in full or, in some cases, to even receive a meaningful response from the companies. The strategy adopted by BBY management was to find the minimum payments necessary to ensure that the companies would survive by dissuading clients and creditors from taking more drastic enforcement action, that it was never sufficient to return the companies to solvency (par 3.6). It is not to the point that creditor pressure is not expressly referred to in ASIC v Plymin as an indicia of insolvency, nor did Mr Vaughan suggest that it was.
Turning to the evidence of creditor pressure, Ficema accepted that there was evidence of: 1. payment arrangements being made to pay off outstanding debts for the months of June, July, August, September, October and December 2014 and a request for promised payment plan by one creditor (BDO, the auditors) in February 2014; 2. accounts being put on hold or services cut off pending payment in April, June and December 2014; 3. threats of legal action against BBY or to report BBY to ASIC or the ASX in July, August and December 2014; 4. constant telephone calls and emails from creditors and clients chasing payment between January and December 2014; and 5. management and accounts payable staff failing to pay pressing creditors and clients in each month from January to December 2014.
Contrary to Ficema's submissions, I am satisfied that the emails also show evidence of the creditor pressure in other months. Without intending to be exhaustive, the evidence includes: 1. January 2014: A payment arrangement with BDO prior to January 2014 is to be inferred from BDO's email of 6 January 2014 referring to "on receipt of the agreed payment of $48,708 due on 20 December 2013"; 2. January 2014: In an email from Indicium dated 10 January 2014 it was noted that BBY was paying 130 days plus "which was never agreed". In an email from GBST dated 16 January 2014, after noting the balance over 90 days is $118,563.81, it was noted "as agreed with BBY the account needs to stay below 90 days range"; 3. February 2014: In an email dated 20 February 2014, Telstra threatened to issue a Disconnection of Services letter for non-payment, if no payment was received by the following day. 4. March 2014: In an email dated 1 March 2014, GBST noted that two invoices were still overdue 90 days. In an email dated 25 March 2014, IRESS noted that of amounts outstanding for the months of December 2013, January, February and March 2014 totalling $775,329.22, "only $186,758.24 is under 30 days and currently within payment terms"; 5. September 2014: In an email from GBST dated 23 September 2014, it was noted that there was a significant amount of about $200,000 outstanding over 90 days and that it had been previously agreed that this would not occur, that is, debts going past 90 days. In an email from Telstra dated 26 September 2014, it was noted that the amount of $21,755.89 due on 1 September 2014 was four weeks overdue; 6. November 2014: In an email from Talent Connect Australia dated 26 November 2014 it was noted that payment terms had been adjusted to accommodate BBY's pay cycle, however, invoices for September and October had not been paid, nor November 2014 and that having followed up weekly with BBY's accounts department team there was still no response in terms of date for payment; 7. December 2014: the New South Wales Office of State Revenue noted in an email dated 3 December 2014 that the monthly payroll tax for October 2014 was outstanding. In an email from Indicium dated 5 December 2014, it was noted that BBY's account was probably on hold and hence support was not able to take calls (in relation to internet access) as nothing had been done despite contact with Mr Maharaj, Glenn Rosewall and BBY's Accounts personnel. In an email dated 9 December 2014, CGQ noted that their account was over three months past due. In an internal email from Ms Amy Fung to Ms Yuen dated 23 December 2014, it was noted that BBY currently had $3.35 million outstanding in trade creditors of which $3.1 million had either already been paid, committed to pay or arranged a payment plan, including CGQ (committed to pay by 29 December 2014). However, in an email from CGQ dated 21 February 2014, it was noted that no payment had been made since the end of December 2014 and accounts were outstanding for December ($6,219.86) and for December to March services of $59,110.15 and $14,393.82, as to which payments were due in advance; 8. January 2015: In an email from Indicium dated 6 January 2015, it was noted that payment for outstanding amounts which were to be processed by the end of December 2014 had not been received. In an email from BDO dated 28 January 2015, it was noted that the agreed final instalment of the previous payment plan of $38,868 due to be paid on 23 January 2015 had not been received.
Addressing the specific communications with Rees Pritchard Pty Ltd between April and June 2014, Ficema submitted that the communications showed no more than a desire on the part of Rees Pritchard to get the matter finalised but there is no evidence of the terms of any arrangement or what "matter" was sought to be "finalised". I reject this submission. It is plain from the email commencing on 10 April 2014 that having calculated an additional amount owing of $8,337.21, Rees Pritchard claimed a final payment of $146,957.88 and requested BBY to check its internal records and indicate agreement or otherwise with this amount and to credit the amount to the nominated bank account of Rees Pritchard. The subsequent emails on 29 April 2014, 14, 16 and 26 June 2014 show that Rees Pritchard was chasing payment of this amount. The reasonable inference is that the amount claimed was ultimately paid sometime after 26 June 2014. The significance of these email communications is that there was a period of delay of about 2.5 months in payment by BBY after the first demand by Rees Pritchard. The failure of BBY to provide any meaningful response in the interim was an example of what Mr Vaughan observed was one of the strategies adopted by BBY to delay payment of creditors.

[52]

Ageing of trade creditors

The "Trade creditor analysis" memorandum referred to in the solvency report records that the value of the monthly trade creditor balance increased from $2.674 million in January 2014 to $4.810 million in May 2015, an increase of 80 per cent. During the period 1 January 2014 and 17 May 2015, the percentage of BBY trade creditors aged more than 60 days was on average 37 per cent of the monthly total trade creditor balance, and the monthly trade creditor balance generally increased during this period with the value of aged creditors greater than 60 days increasing from $1.5 million in January 2014 to $3.1 million as at May 2015. That increase reflected the BBY Group's increasing inability to meet its obligations to trade creditors.
Significantly, as at November 2014, the quantum of aged creditors greater than 60 days was in excess of $2 million. Although aged creditors greater than 60 days decreased in December 2014 to $695,000, the balance increased to $834,000 in January 2015. The solvency report noted that the fluctuations from December 2014 in the quantum of aged trade creditors greater than 60 days appears to be attributable to three significant instalment payment plans that were entered into in December 2014 with the three largest creditors of the BBY companies during this period, Agility, IRESS and GBST.
The payment plan with Agility dated 18 December 2014 required payments totalling $511,304.55 from December 2014 to April 2015, of which $360,000 was paid between December 2014 and March 2015. The payment plan with GBST dated 18 December 2014 (which was extended by email on 13 March 2015) required payments totalling $791,124 from December 2014 to April 2015, of which $475,717 was paid between December 2014 and March 2015. The payment plan with IRESS dated 23 December 2014 required payments totalling $1,738,378 from December 2014 to May 2015, of which $1,314,509 was paid between December 2014 and April 2015.
The significance of these payment plans is twofold. First, the BBY Group was unable in late 2014 to pay the debts when they fell due to its major suppliers of services necessary to conduct its business. Second, although it was able to negotiate payment plans with its three largest creditors in December 2014, the BBY Group did not in fact meet its obligations under those plans to pay its debts in accordance with the extended terms of credit afforded to the BBY Group by those creditors. This was another indicator of insolvency.

[53]

Failure to pay trailing commissions

In June 2011 in connection with the acquisition of the Stonebridge business, Broker Services Australia entered into associated independent contractor agreements with corporate vehicles controlled by several Stonebridge brokers, collectively referred to as G4. Each agreement provided for the payment to the contractor of other annual payments and incentives as set out in schedules 5 and 6 (cl 6.3). The incentive pool in Schedule 6 was to be calculated as 4 per cent of the revenue generated from the "Rock Business" as defined, and was to be in place for three years, with the allocation of it to be determined by the G4. The agreement also provided that payments were to be made by electronic funds transfer to the contractor's nominated bank account no later than 15 days from the date that Broker Services Australia received invoices from the contractor (cl 6.4). The contractor was required to provide a tax invoice five days prior to the day each payment was made, and Broker Services Australia was under no obligation to pay any amount payable unless it had received the contractor's invoice (Cl 6.10).
The solvency report noted that during the first year, post-acquisition of the Stonebridge business, Broker Services Australia provided inconsistent information about the Rock Business revenue to several independent contractors and this and other discrepancies led to a dispute by them. The independent contractors sought further information from Broker Services Australia for the purpose of verifying the revenue reported by it. Ultimately, Broker Services Australia reported the following revenue for the Rock Business: (a) $14,741,333 in the first year; (b) $13,027,320 in the following year; and (c) $10,633,093 in the final year, and based on these figures a substantial part of the commission claim was undisputed. In December 2014, Capital Trading Pty Ltd (CTG) asserted that an agreement was reached with Broker Services Australia to calculate the incentive pool on the basis of revenue of $15 million for each year and on 9 January 2015, and CTG issued invoices for 50 per cent of the incentive pool on that basis. Following a meeting to resolve the dispute held in February 2015, at which a $15 million revenue figure was agreed for the first year, CTG issued fresh invoices on 25 March 2015 on that basis and a statutory demand was served. That demand was withdrawn, and a fresh demand was served on 8 May 2015. None of the invoices were paid.
The solvency report notes that even if the Rock Business revenue reported by Broker Services Australia is assumed to be correct, that company incurred contingent liabilities to G4 collectively of $648,618 in 2012, $573,202 in 2013, and $467,856 in 2014 (inclusive of GST) and no part of the G4 revenue trail was ever paid by Broker Services Australia. Importantly, the 2014 financial statements did not include any provision in respect of this contingent liability (insofar as part of the commission claim was undisputed) or any note in respect of a contingent liability (insofar as the balance of the commission claim was disputed).

[54]

Statutory creditors

There was no challenge to the memorandum entitled "Statutory Creditors" referred to in the solvency report, which summarised the instances of statutory creditor pressure on BBY from both the ATO and various State revenue bodies since 2010.
Relevantly, the running balance account for Broker Services Australia with the ATO increased from $88,577.26 on 12 August 2013 to $2,802,732.53 on 3 July 2014. On 16 July 2014, the ATO sent a letter to Broker Services Australia warning of intended debt collection action due to an outstanding amount of $2,600,170.46. On 1 August 2014, the ATO rejected a payment plan proposal put forward by Broker Services Australia for reasons including that BBY had four previous defaulted payment arrangements and a poor compliance history meeting its tax obligations for PAYG withholding and fringe benefits tax instalments. Subsequently, a payment arrangement was entered into between Broker Services Australia and the ATO by letter dated 13 August 2014 for unpaid PAYG withholding tax which provided for eight monthly instalments totalling $2,177,077 for the period 22 August 2014 to 22 March 2015. The liquidators verified a payment of $2 million by Broker Services Australia to the ATO.
The statutory creditors memorandum noted that BBY Holdings had failed to pay an outstanding amount in full in February 2015 and requested to enter a payment arrangement in respect of the amount of $281,311.93 outstanding on the integrated client account and that the business activity statement for January 2015 was also outstanding.
On 5 March 2015, BBY Holdings entered into a payment arrangement with the ATO for unpaid GST which provided for nine monthly instalments totalling $273,028 for the period 16 March 2015 to 16 November 2015. The liquidators were able to verify the payment of $80,000 by BBY Holdings to the ATO.
The statutory creditors memorandum also noted that Broker Services Australia did not lodge an annual return or any monthly returns for payroll tax to the New South Wales Office of State Revenue from July 2014 to 17 May 2015, that the running balance account for Broker Services Australia increased from $79,974.86 in June 2013 to $457,467.02 in June 2014 and to $581,534.97 in November 2014. In June 2014, and that Broker Services Australia entered into a payment plan arrangement to pay outstanding payroll tax of $142,774.70 for the months of March to May 2014 by seven equal monthly instalments of $25,000 commencing on 7 July 2014 and a final instalment of $10,791 on 9 February 2015. The total amount of the payment plan arrangement of $185,791 may be taken to have included interest. Notices of demand for payroll tax were sent to Broker Services Australia on 23 June 2014 for an outstanding amount of $133,392.48 (including interest), on 4 February 2015 for an outstanding amount of $83,145.30 (including interest), on 11 March 2015 for an outstanding amount of $232,512.17 (including interest), and on 10 April 2015 for unpaid payroll tax of $1,034.16 for the period from 1 November to 30 November 2014 which was due on 24 April 2015.
BBY also consistently failed to pay amounts of payroll tax to the Queensland Office of State Revenue during the period January 2014 to May 2015. It is significant that BBY was unable to pay even small debts when falling due. For example, the Queensland Office of State Revenue made demands on 11 January 2015 for an outstanding tax law liability of $8,561.92 for November 2014, and on 25 January 2015 for an outstanding tax law liability of $7,687.75 for December 2014 and $8.596.50 for November 2014. The December 2014 debt remained outstanding as at 8 February 2015.
It is evident that the BBY Group consistently failed to pay when due debts owing to its statutory creditors during 2014 and 2015, entered into payment plans to defer payment of such debts, and even then, failed to meet all of those arrangements. This was another indicator of inability to meet its debts as and when they fell due.

[56]

Relief

The relief claimed by the plaintiffs is an order that Ficema pay to BBY the sum of $3,186,526.64 and an order that Ficema pay to BBY Holdings the sum of $155,363.73. In the originating process, the plaintiffs also sought such further orders as the Court deems fit. For the reasons explained at [31]-[38] above, the first plaintiffs in their capacity as liquidators of BBY Holdings are the proper plaintiffs in respect of all six interest payments. The appropriate relief is an order that Ficema pay to BBY the sum of $3 million and an order that Ficema pay to BBY Holdings the sum of $341,890.37.
The plaintiffs also seek orders for payment of pre-judgment interest in accordance with s 100 of the Civil Procedure Act 2005 (NSW), relying upon the decision of Barrett J (as his Honour then was) in Woodgate v Network Associates International BV [2007] NSWSC 1260 at [33]. It was submitted that interest should run from the date of demand or, at the latest, the date on which the proceedings were commenced: Ferrier & Knight (as liquidators of Compass Airlines Pty Ltd) v Civil Aviation (1994) 55 FCR 28 at [91]-[93]; Capital Finance Australia Ltd v Tolsher (2007) 164 FCR 83; [2007] FCAFC 185 at [150]; Kazar (liquidator) v Kargarian; In the matter of Frontier Architects Pty Ltd (in liq) (2011) 197 FCR 113; [2011] FCAFC 136 at [93]-[94].
As to the power to award interest, in NewCap Reinsurance Corporation Ltd v AE Grant, Lloyds Syndicate No 991 [2009] NSWSC 662; (2009) 72 ACSR 638 at [62]-[66], Barrett J revised his views in Woodgate v Network Associates International BV and concluded that the payment of an amount on account of or in the nature of interest may, pursuant to s 588FF(1)(c), be ordered and that such sum will represent, rather, reallocation of the benefit of the kind which s 588FF(1)(c) is concerned.
No argument was advanced by Ficema against the award of interest in the present case whether under s 100 of the Civil Procedure Act or under s 588FF(1)(c) of the Act.
As to the date from which interest should be computed and at which rate should interest be calculated, the Court was not taken to any evidence of a demand prior to the commencement of proceedings. Accordingly, the appropriate date from which interest should be computed is the date of the commencement of the proceedings on 15 May 2018. As no argument was advanced against calculating interest at the rate provided by s 100 of the Civil Procedure Act, pre-judgment interest should be calculated at the rates provided under that provision.

Legislation Cited (6)

Corporations Act 2001(Cth)

Civil Procedure Act 2005(NSW)

Australian Securities and Investments Commission Act 2001(Cth)

Corporations Regulations 2001(Cth)

Evidence Act 1995(NSW)

Uniform Civil Procedure Rules 2005(NSW)

Cases Cited (77)

WCA Civ 59 Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26 Cadwallader v Bajco Pty Ltd [2002] NSWCA 328 Campbell Street Theatre Pty Ltd v Commercial Mortgage Trade Pty Ltd [2012] NSWSC 669 Capital Finance Australia Ltd v Tolsher (2007) 164 FCR 83; [2007] FCAFC 185 Chan v First Strategic Development Corporation (in liq) [2015] QCA 28 Cohen v Cohen (1929) 42 CLR 91; [1929] HCA 15 Commissioner of State Revenue (Vic) v Snowy Hydro Limited (2012) 43 VR 109; [2012] VSCA 145 Compass Resources Ltd v Sherman (2010) 42 WAR 1; [2010] WASC 41 Federal Commissioner of Taxation v Kassem (2012) 205 FCR 156; [2012] FCAFC 124 Ferrier & Knight (as liquidators of Compass Airlines Pty Ltd) v Civil Aviation (1994) 55 FCR 28 George v Webb [2011] NSWSC 1608 Georges (in his capacity as joint and several liquidator of Sonray Capital Markets Pty Ltd (in liq)) v Seaborn International Pty Ltd (as trustee for the Seaborn Family Trust) (2012) 206 FCR 408; [2012] FCAFC 140 Gliderol International Pty Ltd v Hall (2001) 80 SASR 541; [2001] SASC 355 G & M Aldridge Pty Ltd v Walsh (2001) 203 CLR 662; [2001] HCA 27 Henry v Hammond [1913] 2 KB 515 International Cat Manufacturing Pty Ltd (in liq) v Roderick (2013) 97 ACSR 200 Jin Niu Investments Pty Ltd v Wang (No 2) [2020] NSWSC 649 Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8 Kazar (liquidator) v Kargarian; In the matter of Frontier Architects Pty Ltd (in liq) (2011) 197 FCR 113; [2011] FCAFC 136 Korda v Australian Executor Trustees (SA) Limited (2015) 255 CLR 62; [2015] HCA 6 Legal Services Commission v Brereton (2011) 33 VR 126; [2011] VSCA 241 Lewis (as liq of Doran Constructions Pty Ltd (in Liq)) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 Lewis v Doran [2004] NSWSC 608; (2004) 50 ACSR 175 Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 Manly Council v Byrne [2004] NSWCA 123 Marriner v Australian Super Developments Pty Ltd (2012) 46 VR 213; [2012] VSCA 171 M & R Jones Shopfitting Co Pty Ltd (in liq) v National Bank of Australasia Ltd (1983) 68 FLR 282; (1983) 7 ACLR 445 NewCap Reinsurance Corporation Ltd v AE Grant, Lloyds Syndicate No 991 [2009] NSWSC 662; (2009) 72 ACSR 638 Payne v Parker [1976] 1 NSWLR 191 Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 Peter Cox Investments Pty Ltd (in liq) v International Air Transport Association [1999] FCA 27; (1999) 161 ALR 105 Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567 Rambaldi v Federal Commissioner of Taxation [2017] FCAFC 217; (2017) 107 ATR 1 Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135 Re Antqip Hire Pty Limited (subject to deed of company arrangement) (in liquidation) [2020] NSWSC 487 Re Armstrong (1960) VR 202 Re Ashington Bayswater Pty Ltd (in liq) [2013] NSWSC 1008 Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491 Re BBY Limited (Receivers & Managers Appointed) (in liquidation) [2019] NSWSC 1271 Re Kit Digital Australia Pty Ltd (in liq) [2014] NSWSC 1547 Salvo v New Tel Limited [2005] NSWCA 281 Samm Property Holdings Pty Ltd v Shye Properties Pty Ltd [2017] NSWCA 132 Soundwave Festival Pty Ltd v Altered State (W.A.) Pty Ltd (No 2) [2014] FCA 562 Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621 Sutherland & Another (as joint liquidators of Australian Coal Technology) v Hanson Construction Materials Pty Ltd and Others [2009] NSWSC 322; (2009) 254 ALR 650 Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72; (2017) 120 ACSR 130 Twinsectra Ltd v Yardley [2002] 2 AC 164 Walker v Corboy (1990) 19 NSWLR 382 Warner Capital Pty Ltd v Shazbot Pty Ltd [2020] NSWCA 121 Watson v Foxman (1995) 49 NSWLR 315 Welcome Homes Real Estate Pty Limited v Ziade Investments Pty Limited [2007] NSWCA 167 Williams (as liquidator of Scholz Motor Group Pty Ltd (in liq)) v Scholz [2008] QCA 94 Woodgate v Network Associates International BV [2007] NSWSC 1260 Texts Cited: Cross on Evidence, Australian Edition, LexisNexis (loose-leaf) JD Heydon and MJ Leeming, Jacobs' Law of Trusts in Australia (8th ed, 2016, LexisNexis Butterworths) Young, Croft and Smith, On Equities (2009, Law Book Co) Category: Principal judgment Parties: Ian Richard Hall and Stephen Ernest Vaughan (First plaintiff) BBY Limited (Receivers and Managers Appointed) (in liq) (Second plaintiff) BBY Holdings Pty Limited (Receivers and Managers Appointed) (in liq) (Third plaintiff) Ficema Pty Ltd (Defendant) Representation: Counsel: Mr D Krochmalik (Plaintiffs) Mr R Scruby SC / Mr J Anderson (Defendant)

Voidable transaction

Section 588FE(4) provides that a transaction is voidable if it is an insolvent transaction of the company, a related entity of the company was a party to the transaction, and it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation-back day. "Transaction" includes "an unfair preference given by the company to the creditor": s 588FE(2A)(a)(ii). It is not in dispute that Ficema is a related entity of each of BBY and BBY Holdings (see [4] above), or that each of the impugned payments was made during the 4 years ending on the relation-back day (17 May 2015).
As the Full Federal Court observed in Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 at [29], the statutory purpose of the avoidance or conclusion of voidableness of preferences and of the preference action, is the just remedying of dislocation of the equality of creditors reflected in pari passu distribution, citing G & M Aldridge Pty Ltd v Walsh (2001) 203 CLR 662 at 674-675 [29] and [30]; [2001] HCA 27 (Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ).

Issues

The parties identified two issues for determination.
First, whether the payment of $3 million to Ficema on 24 June 2014 was received by Ficema qua creditor of BBY or qua beneficiary of a trust created by Ficema on 16 June 2014. That turns on whether an advance of $3 million by Ficema to BBY on 16 June 2014 was a short-term loan, as the plaintiffs contend, or was impressed with a trust in favour of Ficema within the principles in Barclays Bank Limited v Quistclose Investments Ltd [1970] AC 567, as Ficema contends.
Second, whether each of BBY and BBY Holdings was insolvent at the date of the impugned transactions with Ficema in the period from January 2014 to April 2015.
There is a third issue raised on the pleadings, which the parties did not address, namely whether the three payments made by BBY to Ficema on 8 January 2014, 20 January 2014, and 26 May 2014 totalling $186,526.64 were received by Ficema qua creditor of BBY or qua creditor of BBY Holdings.
With respect to proof of insolvency, the plaintiffs rely in the case of BBY on the presumption of insolvency arising under s 588E(8) of the Act, given the earlier finding by Rees J in Re BBY Limited (Receivers and managers appointed) (in liq) [2019] NSWSC 1271 (the GARF proceedings) that BBY was insolvent at all times from 1 January 2014 to 17 May 2015. The presumption of insolvency in s 588E(8) operates except so far as the contrary is proved by Ficema in this proceeding: s 588E(9). Objection was taken by Ficema in its closing written submissions to the plaintiffs' reliance on the presumption in s 588E(8)(a), arguing that this was outside the pleaded case. The plaintiffs responded that Ficema was on notice from pre-trial correspondence and the plaintiffs' written and oral opening that they relied upon the presumption with respect to BBY and that this was the case run at trial. In addition, the plaintiffs sought and obtained leave to expressly plead reliance upon s 588E(8) with respect to BBY. My reasons for that ruling are set out in Re BBY Limited (Receivers and Managers Appointed) (in liq) and BBY Holdings Pty Limited (Receivers and Managers Appointed) (in liq) (No 2) [2022] NSWSC 30.
Additionally, the plaintiffs sought to prove that each of BBY and BBY Holdings was in fact insolvent at the time of the impugned payments. The plaintiffs relied upon expert evidence from one of the liquidators, Mr Vaughan, who expressed the opinion that each of BBY and BBY Holdings was insolvent at all times from 1 January 2014 to 17 May 2015. Mr Vaughan was challenged on his report in cross-examination. Ficema served an expert report on the question of solvency but ultimately did not rely upon this report at trial.

[2003] VSC 123

[2015] QCA 28

[2012] VSCA 145

[2010] WASC 41

[2001] SASC 355

[2011] VSCA 241

[2012] VSCA 171

[2008] QCA 94

(2018) 358 ALR 263

(2000) 202 CLR 588

(2009) 236 FLR 1

(2005) 220 ALR 148