The evidence
102 To establish that PMLI became insolvent by entering into the Wellington Agreement, the plaintiffs relied upon the expert evidence of Ms Trenfield already mentioned above. Ms Trenfield's opinions on this issue were summarised in two documents included in the evidence: in her original report and in the joint experts' report. The former is an extensive and detailed document. Despite this, the main focus of the parties was on the opinions Ms Trenfield expressed at 5.4.2 to 5.4.5 as follows:
5.4.2.Effect of the [Wellington Agreement] on PMLI's solvency
Substituting $420,000 of the loan owing to PML with a new loan owing to Wellington did not make a difference to the net asset position of PMLI as at 29 July 2015, being a deficiency of approximately $178,050.69 (using the adjusted balance sheet as at 30 June 2015).
However, it did have a significant effect on PMLI's solvency as:
- While the PML debt was "at call" it was unlikely to be demanded;
- The FY16 adjusted profit and loss statement for PMLI shows it would incur a much larger loss ($79,715.65) after inclusion of the interest payable on the Wellington Loan at 8% (I have no evidence to suggest interest was payable on the PML loan account); and
- The Wellington Loan was due and payable in full plus interest on 31 January 2016.
PMLI's conceivable options to deal with the debt due and payable on 31 January 2016 were to:
a) Sell assets to repay the Wellington Loan;
PMLI's only asset of substance was the Property, which based on the 2013 valuation of $675,000, was insufficient to discharge debts secured by the Property totalling $852,595.46:
- The Maitland loan, the balance of which was $432,595.46 as at 30 June 2015; plus
- The Wellington Loan, the balance owing being $420,000 plus accrued interest.
I note the evidence I have received does not indicate PMLI took any steps to try and sell the Property prior to 31 January 2016.
b) Refinance the Wellington loan;
Given the significant shortfall on the value of the property compared to loans secured against it, and that it had no other assets of substance, PMLI would have not been able to refinance the Wellington loan based on its own financial credentials.
c) Seek an extension of the Wellington loan due date; or
Based on the evidence I have received, a reasonable person in PMLI's position as at 29 July 2015 would not have expected this option to be available given on 4 June 2015, Ms Hutson, Wellington and Armstrong demanded repayment of their debts from PML and [Mr] Elias. There was an expectation the consolidated loans (now formalised and consolidated into the Wellington Loan with security) would be repaid sooner rather than later.
Although on 29 February 2016 PMLI did ultimately obtain an extension of the due date of the loan to 1 July 2017, I do not believe this bears weight on the outlook of a reasonable person at 29 July 2015 as on 4 February 2016 Wellington wrote to PMLI noting the loan was in default and the balance plus interest was payable. This indicates that as at 4 February 2016 Wellington still wanted the loan to be repaid.
That Wellington extended the loan due date without any interest or principal being paid (as evidenced by the proof of debt lodged by Wellington dated 8 October 2018) and released PML from its guarantee for consideration of $2,000. This release lacks commerciality on the basis of the evidence I have received. I understand some other factors may however have contributed to this decision, including:
- Mr Elias advised at paragraph 29 in the 2018 Elias Affidavit Ms Hutson was being investigated by ASIC and he was interviewed by ASIC and provided statements to them in May and August 2016 [sic];
- At paragraph 32 of the 2018 Elias Affidavit, Mr Elias advises his relationship with Ms Hutson rapidly and significantly deteriorated after he provided information to ASIC [sic];
- There appeared to be a significant security shortfall on the Property at the time and PML lacked sufficient assets to pay the Wellington Loan; and
- As discussed later in the report, the value of a guarantee from PML was questionable given it appears to have had financial difficulties of its own.
d) Obtain funds from PML to pay amount due under the Wellington Loan.
As discussed later in this report, the evidence in my possession suggests PML did not have the financial capacity to pay the $420,000 plus interest by 31 January 2016 and a reasonable person in the position of the Directors of PM LI, many of whom were also Directors of PML, would have been aware of the financial circumstances of PML preventing it from doing so.
5.4.3.Cash Flow Test as at 29 July 2015
Given PMLI primarily held the Property asset and did not trade, the Directors of PMLI should have known when entering into the [Wellington Agreement] on 29 July 2015 that PMLI's financial position would not change significantly between then and 31 January 2016. As such, I consider the Wellington Loan due on 31 January 2016 should be considered when assessing the solvency of PMLI as at 29 July 2015.
PMLI would not be expected to have the financial capacity to pay the $420,000 plus interest on 31 January 2016 as:
- PMLI had negligible assets;
- PMLI had no ongoing revenue and predictable expenses;
- PMLI incurred a net loss of $8,915.65 in FY16 including the settlement recovery; and
- Even if the Property were sold, based on the most recent valuation, there would have been a shortfall and PMLI held insufficient assets to pay the shortfall.
Therefore based on the cash flow test, I consider PMLI became insolvent on 29 July 2015 upon entering into the [Wellington Agreement].
5.4.4.Balance Sheet Test at 29 July 2015
The adjusted net asset position for PMLI as at 30 June 2015 indicates it was solvent on the balance sheet test because the PML loan would not likely be called upon in full.
When the PML loan was substituted with the Wellington Loan to the extent of $420,000, this assessment changed given a repayment date of 31 January 2016. Additionally, Wellington demanded the loan be repaid in full. Ms Hutson, Wellington and Armstrong had even demanded the precursor loans be repaid in full prior to 29 July 2015.
PMLI would therefore be considered insolvent using the balance sheet test as at 29 July 2015 after entering into the [Wellington Agreement].
5.4.5.lndicia of Insolvency as at 29 July 2015
I note most of the usual indicia of insolvency are not applicable to PMLI as an asset-holding entity which did not trade.
The primary indicia of insolvency to consider for PMLI as at 29 July 2015 was whether it could rely on PML to provide the financial support required to assist in paying the Wellington Loan when it became due on 31 January 2016.
PMLI was dependent on PML for any financial support for the following reasons:
I. PMLI did not generate any significant income in its own right and it historically relied upon ongoing financial support from PML;
II. Although PMLI had a number of different shareholders, from the evidence I have received it appears any capital raised was through PML; and
III. Based on the current shareholder register for PMLI, the largest shareholding after PML was for 75,000 shares, being a 14% shareholding in the Company. In my opinion, other shareholders would not have had any significant incentive to sustain the solvency of the Company, given any such benefit they could have provided would have largely flowed through to PML as the largest shareholder.
In my opinion, on and after 29 July 2015, PMLI could not expect to receive financial support from PML to pay the Wellington Loan when due as PML had significant financial difficulties of its own and PML did not expect to have sufficient cash and cash equivalents by 31 January 2016 to repay the Wellington Loan. This is consistent with my opinion that PMLI was insolvent on 29 July 2015 under the cash flow and balance sheet tests of solvency.
I discuss PML's financial circumstances below.
(Footnotes omitted)
103 At the direction of the Court, the two expert witnesses called by the parties - Ms Trenfield and Mr Cotter - consulted and produced a joint experts' report in which they outlined their areas of agreement and disagreement. Ms Trenfield summarised her opinions at [15]-[26] of that report. While there is an amount of repetition of the opinions in her original report above, it is appropriate in the circumstances to set those paragraphs out in full as follows:
15 In Mrs [sic] Trenfield's opinion, PMLI became insolvent on 29 July 2015 upon entering into the [Wellington Agreement] and associated transactions whereby all of the loan proceeds were transferred to PML.
16 The terms of the [Wellington Agreement] provided that PMLI was required to pay $420,000 plus interest by 31 January 2016. Given each of Ms Hutson, Wellington and Armstrong had earlier issued demand for payment in relation to debts owing by PML and Mr Elias, in Ms Trenfield's opinion it was evident the loan was expected to be repaid on time. Prior to the Wellington Loan due date being extended, Wellington issued a demand for the overdue debt.
17 Ms Trenfield is of the opinion based on the available evidence, the directors of PMLI at 29 July 2015 should not have considered it likely the Wellington Loan due date would be extended and therefore the fact it happened to later be extended after 31 January 2016 is of no relevance to the assessment of insolvency at 29 July 2015.
18 Ms Trenfield is of the opinion PML's guarantee of the Wellington and Maitland Loans to be of little relevance to its intention (or lack thereof) to provide funding to PMLI to repay the Wellington Loan.
19 Ms Trenfield notes PMLI was entirely dependent upon PML for ongoing financial support and PMLI's only asset of material value was the Property. The evidence suggests the market value of the Property at 29 July 2015 was significantly less than the loans secured by mortgages over the Property and the adjusted net asset position for PMLI shows it had a shortfall of approximately $178,050.69.
20 Ms Trenfield notes the evidence indicates no steps were taken by PMLI to sell the Property. Ms Trenfield is of the opinion PMLI may have faced difficulty selling the Property given prevalent market conditions and PMLI may not have been able to secure a release of Wellington's mortgage to facilitate any sale. Ms Trenfield considers PML may have been unwilling or unable to provide the necessary funds to secure the release of the Wellington mortgage.
21 Ms Trenfield notes there was considerable overlap of directors between PMLI and PML and therefore the Directors of PMLI can be expected to have significant knowledge of the financial circumstances of PML Group and its financial capacity to support PMLI.
22 Ms Trenfield notes financial forecasts prepared by PML Group do not indicate the Wellington Loan was to be repaid. In Ms Trenfield's opinion, the forecasts indicate PML Group did not project having available cash resources to repay the Wellington Loan. Ms Trenfield notes the progressive forecasts indicate a deteriorating financial performance and financial position for PML Group.
23 Ms Trenfield notes the financials indicate PML and PML Group had significant current liabilities due within the same period as the Wellington Loan and they had insufficient assets and profits to discharge these. In Ms Trenfield's opinion, if PML were to divert funds to repay the Wellington Loan, it may have jeopardised its own solvency.
24 Ms Trenfield is of the opinion PML Group had limited ability to raise additional funding and the evidence indicates the funds that were raised appears [sic] to have been used to discharge existing liabilities.
25 Ms Trenfield notes the evidence received indicates PML Group strongly displayed a number of indicators of insolvency. Further, it suggests PML Group did not have the financial capacity, and possibly the intention, to pay the Wellington Loan when due or to cover any shortfall upon any sale of the Property (noting it does not appear steps were taken by PMLI to sell the property).
26 Ms Trenfield is of the opinion that PMLI's Directors, or a reasonable person in their circumstances, should have been aware that by entering into the [Wellington Agreement] on 29 July 2015:
a PMLI became insolvent;
b PMLI could not repay the Wellington Loan on 31 January 2016; and
c PML would not be able to provide financial support required to repay the Wellington Loan.
(Errors in original)
104 In cross-examination, Ms Trenfield said that she adopted a staged approach to the application of the cash flow and balance sheet tests mentioned in these opinions. In particular, she said that she first determined whether or not PMLI was insolvent by reference to those tests and only then looked to whether it had other resources available to address that insolvency, in particular the support of PML.
105 As alluded to above, the defendants relied upon expert evidence from Mr William Cotter, a Chartered Accountant and a registered liquidator. In his original report, Mr Cotter summarised his opinion about the solvency of PMLI as at 29 July 2015 in the following terms:
4.1 Opinion 1 - Was PMLI solvent as at the date it entered into the [Wellington Agreement]?
Based on my analysis, I do not consider that PMLI was insolvent at the date it entered into the [Wellington Agreement] on 29 July 2015, nor did it become insolvent by entry into the [Wellington Agreement].
Key reasons for this opinion include:
• At 29 July 2015 PMLI accounts record positive net assets, that is, it appeared [PMLI] could have realised its assets within a reasonable period and paid out all of its debts in full if required to do so, particularly having regard to the likely due date of each of its liabilities;
• The primary asset of PMLI was the [property]. Being real property, it was capable of being realised on the open real estate market in the usual means, by private treaty or auction. In my view, a realistic time frame for realisation of most commercial real property assets may be considered to be in the order of 3 - 6 months;
• The Wellington Loan at inception was guaranteed by PML, a publicly listed entity with substantial assets and activities;
• PMLI had the support of its parent entity PML. That support was real and in-fact occurred, as evidenced by a loan account existing between PML and PMLI, with a loan balance of $427,441.49 having been advanced by PML as at 30 June 2015 per the accounts, and transactions continuing post that date up to the date of the appointment of Administrators, as reflected in the loan ledger at Annexure V of the Pleash Solvency Report;
• The ongoing support of PML was sustainable having regard to the circumstances of PML as set out at section 15 of this Report;
• Even if a reduced realisable value of the [property] at the July 2015 date of entry into the Wellington Loan is utilised, a substantial portion of [PMLI's] known liabilities could have been paid from PMLI's own resources, before requiring to call upon support of it's [sic] parent company, PML to meet any shortfall.
As at 29 July 2015 it is clear that [PMLI] had available assets of its own from which to fully or partially satisfy its debts as and when they fell due. Further, it was able to reasonably rely on the support of its parent entity, PML, to meet any potential shortfall on its debts, if any. On this basis, [PMLI] was not insolvent as at the 29 July 2015 being the date it entered into the [Wellington Agreement].
4.2 Opinion 2 - Could, as is alleged by the liquidators, the directors of PMLI have formed a reasonably held opinion that PML (the parent company) was not in a position to meet PMLI's obligations under the [Wellington Agreement]?
From my analysis, I do not consider that the directors of PMLI could have formed a reasonably held opinion that PML (the parent company) was not in a position to meet PMLI's obligations under the [Wellington Agreement].
Key reasons for this opinion include:
• PMLI had actual real and ongoing support from PML. As identified in the Pleash Solvency Report, "most of the liabilities discussed above in section 7.2.3 (Liabilities associated with the Property) and 7.2.4 (The Warratah Loan) were directly discharged by the parent company, PML" and "loans provided by PML to [PMLI] from 22 July 2013 to 20 September 2018 were in the sum of $595,429." (Pleash Solvency Report - 7.2.6);
• As at 30 June 2015 PML had consistently provided support to PMLI up to that balance date, as reflected in the loan account balance recorded in the financial accounts outstanding to PML of $427,441.49 at that date and support continued post that date and up to the date of the appointment of Administrators, as reflected in the loan ledger at Annexure V of the Pleash Solvency Report;
• PML had in fact guaranteed the PMLI obligation under the Wellington Loan as at 29 July 2015;
• PML in fact, paid the fee of $1,000 on or about 29 February 2016 securing the extension of the term of the Wellington Loan for an additional period of some 18 months;
• PML was a listed public company with substantial revenue and assets and access to a range of debt and equity financing facilities;
• As addressed elsewhere in this Report, PMLI at first instance had recourse to the sale of the [property] to satisfy its debts firstly to Maitland and secondly to Wellington. Subject to the property valuation assessments available at various dates, that potential shortfall which PML may have been called upon to meet, ranged from Nil (if the historical cost values are relied upon) to approximately $138,000 (if the October 2013 valuation of $675,000 is relied upon) to $311,000 (if the later October 2017 valuation of $502,000 is relied upon). In all of these scenarios, it appears reasonable for the Directors of PMLI to have reasonably expected that PML could be so relied upon.
(Emphasis in original)
106 In the joint experts' report, Mr Cotter provided a further summary of his opinions about PMLI's solvency. As with Ms Trenfield, while there is a significant degree of repetition of the opinions above, it is still appropriate to set that summary out in full as follows:
8 Mr Cotter makes the following comments and summarises his opinions with respect to the issues set out in his instructions as follows:
a The entry into the Wellington Loan and the related transactions whereby Loan funds were required to be used to repay other related borrowings, did not in fact alter the total debts owing by PMLI or PML as at 29 July 2015, although did alter repayment time periods and security arrangements on the outstanding debts;
b At the time of entry into the Wellington Loan on 29 July 2015 the [property] was available to be sold on the open market by private treaty or auction. Mr Cotter considers a realistic time frame for realisation of most commercial property assets to be in the order of 3-6 months;
c Albeit the Property value is recorded in the financial accounts of PMLI and audited consolidated accounts of PML at its historical cost of $922,792, after adjusting the value of the Property to the independent valuation figure then being available, of $675,000, a shortfall of net assets in the balance sheet of PMLI existed on 29 July 2015 in the amount of $178,050.69;
d Recognised case law on the subject of determination of Solvency clearly indicates that provision of related party financial support is relevant to the assessment of an entity's solvency or otherwise;
e The only basis on which PMLI may be considered to have been insolvent at the time of entry into the Wellington Loan on 29 July 2015 was if there was no reasonable basis to consider that support of PML would be available to PMLI to assist it to repay the Wellington Loan or any shortfall thereon;
f PML had guaranteed the repayment of the Wellington Loan as at 29 July 2015 by entry into the Deed of Guarantee with Wellington. PML at that time was a publicly listed entity with substantial assets and activities;
g PML did in fact meet payment of all ongoing Property holding costs and other expenses of PMLI throughout the period PMLI held the Property. Per the Pleash Solvency Report PMLI debts were directly discharged by PML via an inter company loan account which from 22 July 2013 to 20 September 2018 provided funds amounting to some $595,429;
h As at the date of entry into the Wellington Loan on 29 July 2015 the following factors are considered to have been relevant and within the reasonable knowledge of the Directors of PMLI regarding the likelihood that the support of PML would be available to meet repayment of the Wellington Loan principle [sic - principal] and/ or any shortfall thereon, on its due date of 31 January 2016, and that such expectation was reasonable:
i PML had in fact provided a guarantee of repayment of the debt by virtue of the formal Deed of Guarantee dated 29 July 2015;
ii Wellington, Hutson and related parties had in fact received the bulk of the Wellington Loan funds immediately (on or about 29 July 2015) back in repayment of other debts then owing and due by PML thereby improving the financial position of PML at that date;
iii The forecast accounting data available to the Directors reflect that there was cash resources expected to be available to PML to assist it to meet any shortfall amount as at the due date for repayment of the Wellington Loan on 31 January 2016. The relevant available forecast accounting data being that attached to the email of 4 March 2015 to PML's external auditor, which highlights an expected surplus cash balance at 31 January 2016 of $224,000 being available, prior to relevant adjustments which in my view increased that expected available cash resource to $274,000;
iv Analysis of the available forecast accounting data combined with the expectation of sale of the Property and payout of the first mortgage indicates that sufficient funds (estimated to be in the order of $517,000) would have been available at 31 January 2016 to repay the Wellington Loan together with costs and interest;
v The accounting forecasts for the consolidated PML Group available to the directors at 29 July 2015 include a forecast EBITDA (earnings before interest, tax and depreciation) for the 12 month reporting period of $753,000 and an EBDA (earnings before depreciation) of $525,000;
vi There was a reasonable expectation of recovery of funds by PMLI from a dispute with a neighbour, such that cash payments of some $50,667.35 were in fact received by it, in a series of monthly payments commencing on 27 August 2015 and concluding on 10 December 2015;
vii PML had in fact engaged in a program of acquisition of new equipment during 2014 and 2015 and held substantial relevant equipment to efficiently carry out its business;
viii There was a willingness and actual capacity, evidenced by historical dealings, of parties related to PML, including particularly Mr Nigel Elias, to provide substantial and regular loans to PML for working capital. By way of example, loans were in fact advanced to PML in the relevant 2016 financial year by related parties, totalling $1,284,053 (source Note 27 2016 FY Accounts).
ix At least some of the reported current trade creditor debt of PML identified in or about March 2015 was not in fact considered properly due and payable at that time due to it being subject of a dispute, these being amounts recorded as owing to Fuji Xerox Australia Pty Ltd totalling some $463,000 as at 4 March 2015;
x There was numerous potential opportunities available to PML to raise funding via securing finance against certain of its printing assets, as set out in the 4 March 2015 email to the External Auditor, this included the HP indigo machine (potential finance raising of $50,000 to $100,000), Pitney Bowes MSE #2 (potential finance raising of $250,000), and Platemaker (potential finance raising of $100,000);
xi A third party financier to the PML Group, being the Commonwealth Bank, had granted a temporary extension to the Groups overdraft facility, and was in discussions with Directors regarding a permanent extension to same, with such extension being ultimately approved in September 2015 following provision and review of relevant accounting data and forecasts;
xii The independent external auditor of the PML Group did in fact sign off on the audits of the PML Group consolidated financial accounts for the relevant 2015 and 2016 financial years on a going concern basis;
xiii PML has in fact survived to date and has not failed or entered into any formal external insolvency administration, despite any concerns or allegations raised regarding its solvency and financial position as at 29 July 2015.
107 At this point, it is convenient to interpolate that, in determining this issue, I have not had regard to the report in evidence prepared by Mr Pleash, one of the Liquidators. That is so because that report does not meet the requirements of the Federal Court Rules 2011 (Cth) relating to expert evidence. Moreover, it is essentially self-serving (see Asden Developments Pty Ltd (in liq) v Dinoris (No 3) (2016) 114 ACSR 347; [2016] FCA 788 at [118]).
108 Both Mr Elias and Mr Pereira gave evidence of their views as Directors of PMLI in respect of PMLI's solvency as a result of it entering into the Wellington Agreement. Both acknowledged that PMLI was entirely dependent upon PML to meet its financial obligations, but both expressed the opinion that it was reasonable for PMLI to hold the expectation that PML's support would continue to be provided. In his outline of evidence, Mr Elias expressed his views on this question in the following terms:
52. Although PMLI held assets (being the Property, and some intangible assets and cash at bank), PMLI did not generate income and was always reliant on its parent company, PML, to meet its financial obligations. There was always a significant overlap in the directorship of PML and PMLI, and as such both companies were always aware of each other's financial circumstances and intentions.
53. PML itself had numerous sources of income. It generated income through its business activities; it held assets which it could borrow against, and it had a pool of investors who could be relied upon to provide short-term unsecured funding (for example, to support cash flow) and longer-term funding on a secured or unsecured basis.
…
56. In short, PML was able to raise capital quickly and reliably. PMLI through its directors (who overlapped significantly with PML's directors) were aware of this and could rely on PML for support to meet PMLI's financial obligations.
109 To support his statement in [53] above about the "pool of investors" who could be relied upon to provide short term unsecured funding to PML, Mr Elias listed 16 people who were shareholders of PML and/or PMLI. He said the majority of those people had provided such short term financial support in the past. In his oral evidence, Mr Elias provided further details in respect of each of those persons and summarised why it was that he was confident they would continue to provide such short term support. He said this confidence existed because:
In all instances that I can remember, these people had advanced monies on an as-requested basis. Most of the time, interest free. Most of the time, with no security, and most of the time, advanced purely because of their personal relationship with me, and all of that still stood, and in all instances, there was - let me just check before I come out with this statement - in all instances that I could see, there were, with a couple of exceptions - what is the correct terminology - I had looked after their best interests - nothing to do with PML.
110 Mr Elias was also asked whether he had any concerns about PML guaranteeing PMLI's obligations to Wellington and he made the following response:
No … [b]ecause I've referred already, to the cyclical nature of the cashflow of PML, and if PML was required to meet the obligation in full, then it could have done so on any one of the nominated sequential months. In addition to that, I would have not anticipated that PML would be required, under its guarantee, to pay for the full amount. I would have thought that the land would have been disposed of and effectively, PML would be up for the shortfall. And then, if it all went pear shaped, we have a list of people who - I would hesitate to say any one of them could have come up with $400,000 on 48 hours' notice. But it would have been perfectly practical to assume that, you know, 400 thousand-odd dollars could be produced within two or three weeks.
111 Mr Pereira gave similar evidence. He was asked what his expectation was as at 29 July 2015 in respect of PML's ability to meet its guarantee of PMLI's obligations to Wellington. He said:
… So my expectation was at that date that PMLI would have sold the land, so that would have met the substantial portion so firstly, to the Maitland, and then secondly a substantial - or the overwhelming portion of the 420 that was due to [Wellington]. Unfortunately it didn't after that date as the matters that I've just described, but if PML was then called on, it then had the appropriate [means] to meet the liability or the shortfall due to [Wellington] from its own cashflows. We had prepared very details [sic] cashflows for auditors, for bankers that showed that there was going to be sufficient cash available at January of 2016 to meet an estimated shortfall. Otherwise there was opportunity to finance equipment which I've just mentioned just previously. And then thirdly, there was also opportunity for [Mr Elias] to go to his potential funders, either on a secured or unsecured basis to raise the money that was going to be required to pay out [Wellington].