Grounds 6 to 9
40 Grounds 6 to 9 of the Notice of Appeal relate to the critical finding of the primary judge at [126] that "I do not consider incurring the Wellington loan debt, and entering into the Wellington Agreement transaction" had the pleaded effect on PMLI's solvency (that is, that it became insolvent by reason of its entry into the Wellington Agreement): [100] and [102]).
41 One of the reasons that the primary judge did not consider that entry into the Wellington Agreement affected the solvency of PMLI was (at [126]):
To begin with, the Wellington loan debt was not an additional debt for PMLI but rather one that replaced the debt that it already owed to PML. Unsurprisingly, therefore, the evidence of Mr Pleash, one of the Liquidators, Mr Pereira, one of the defendants, and both expert witnesses called by the parties was variously to the effect that PMLI owed approximately the same level of debt after it incurred the Wellington loan debt and that there was no material change to its balance sheet.
42 The appellants did not challenge the finding in [126] but, by ground 7 of the Notice of Appeal, contended to the effect that, notwithstanding that one liability was replaced with another, there was a material change to the affairs of PMLI in that the Wellington loan now had a fixed repayment date (being 31 January 2016) rather than no fixed repayment date and this made a material difference to PMLI's solvency as at 29 July 2015.
43 At [128] of the reasons, the primary judge considered the fact that the date for the repayment of the Wellington loan debt was fixed at 31 January 2016. However, this was done in the context of considering whether there was a reasonable ground to suspect that, by entering the Wellington Agreement, PMLI would become insolvent (at [127]) rather than as a basis for concluding that PMLI became insolvent in fact by reason of the entry into that transaction.
44 Similarly, the appellants' outline of submissions filed 18 October 2021, at paragraph 20, developed ground 7 of the Notice of Appeal by reference to the fact that, as the loan now had a fixed repayment date, the primary judge erred in finding that there ought not to have been a concern about insolvency at the time of the entry into the Wellington Agreement.
45 During the hearing of this appeal, counsel for the appellants submitted that the expert called by them at the trial had expressed an opinion to the effect identified in ground 7, and that therefore the primary judge had (in effect) erred in failing to accept that opinion. However, the reason that that this was an error was not further developed by the appellant. In any event, as discussed further below, the primary judge did not accept the evidence of the appellant's expert as to solvency and this decision has not been shown to be incorrect.
46 As to the issue of solvency generally and the failure by the primary judge to "consider or adopt the reasoning of" the appellants' expert in relation to solvency, which is raised by grounds 6 and 9 of the Notice of Appeal, all parties accepted below that PMLI depended on its parent company, PML, for financial support. This meant that, if PMLI could not repay the Wellington loan at maturity from its own resources, it would be reliant on PML to make good any shortfall.
47 There was no challenge by the appellants to the summary of the main legal principles by the primary judge which included at [101(a) - (c)] that:
(a) whether a company is solvent is a question of fact to be ascertained from a consideration of its financial position taken as a whole and having regard to commercial realities;
(b) in considering the commercial realities, the Court can consider whether resources other than cash are realisable by sale or borrowing with or without security and the availability of funds provided by other companies in a group of companies;
(c) when a company is relying on financial support from a third party to enable it to pay its debts, it must have a "degree of assuredness" of that support. That degree of assuredness is more certain where the third party is compelled to provide the financial support, for example, where it has provided a guarantee in respect of its obligation.
48 In this case, PML, the parent company of PMLI, had guaranteed the Wellington loan in full. As the primary judge stated in relation to the guarantee at [129]:
This gave a high level of assuredness to PMLI that PML would continue to provide the financial support to it that it had in the past and that it would, in particular, do so in respect of the Wellington loan debt.
49 Further, the evidence before the primary judge, which was accepted by him at [130], was that the commercial reality was that PML would have met its obligations under the guarantee because PML was the operating company for the whole PML group of companies and failure to comply with the guarantee risked the existence of the whole corporate group. This was regarded by the primary judge as reinforcing the level of assuredness which was provided by the guarantee. This finding is not challenged on this appeal.
50 As to whether PML had the ability to provide the requisite financial support to PMLI, the primary judge found at [133] that PML could make sufficient funds available to PMLI based on funds available from five different sources. In making that finding, the primary judge accepted the evidence of Mr Elias and Mr Pereira which was to the effect that, in or about the period from July 2015, including January 2016 and beyond, PML could have reasonably expected funds to become available to it from the following sources:
(a) the imminent reduction in its lease guarantee with its lessor of approximately $50,000;
(b) the negotiated increase in its overdraft facility with the CBA of approximately $70,000;
(c) making use of the periodic cash flow fluctuations available from its business activities, noting Mr Cotter's evidence that in January 2016 that amounted to a sum in excess of $200,000 and that PML had an estimated annual turnover at the time of $753,000 EBITDA and $525,000 EBDA;
(d) securing finance against some or all of the equipment which it owned, noting Mr Cotter's evidence that between $50,000 and $250,000 may be available from this source; and
(e) raising short term unsecured loans from the pool of investors and shareholders as outlined by Mr Elias.
51 Only one of these sources (being the last one) is challenged by the appellants on this appeal on the basis that it was not "compelling in any meaningful way" because none of the pool of investors and shareholders were called by the respondents to be witnesses at the trial.
52 However, Mr Elias gave evidence at trial to support a finding that this was a potential source of funds (as it had been in the past). Either no objection was taken to this evidence by the appellants at the trial or, if objection was taken, there is no appeal from any ruling against the appellants as to the admission of this evidence.
53 The evidence of Mr Elias about this issue is addressed at [108] and [109] of the reasons. The primary judge accepted this evidence even though the investors were not themselves called as witnesses. It was plainly open to the primary judge to do so. No error has been identified by the appellants in relation to the approach taken by the primary judge.
54 Based on these identified sources of funds, the primary judge found at [134] and [136] that PML had the ability to provide financial support up to the full amount of the Wellington loan of $420,000. Having regard to the quantum of the amounts identified in [133] of the reasons and referred to above, and with respect to the primary judge, that conclusion was undoubtedly correct.
55 This is so even if the fifth source of funds (being the source of funds from informal investors) is removed from the list.
56 At [135], the primary judge considered the assets which PMLI itself had available to satisfy the Wellington loan and, taking into account these assets, made the finding that the level of likely financial support required from PML would be between $128,000 and $178,000. In making this finding, the primary judge had regard to the evidence of the experts called by the parties.
57 At [136], and taking into account the sources of funds identified in [133] of the reasons, the primary judge concluded that:
To sum up, whether the financial support that PMLI required from PML in this period was $128,000, $178,000 or $420,000, I consider this evidence shows that PML had the ability to provide it. This conclusion means that PML would have had the capacity to avoid PMLI defaulting on the payment of the Wellington loan debt entirely, or if not, to itself meet any demand under the guarantee, assuming that demand was issued shortly after PMLI's partial default. ...
58 Having regard to the quantum of the amounts identified in [133] of the reasons and referred to above, and with respect to the primary judge, that conclusion was also correct.
59 The appellants have not demonstrated any error by the primary judge in relation to the findings in [135] and [136] of the reasons.
60 The asserted error because of the primary judge's failure to adopt the reasoning of the appellants' expert in relation to the solvency of PMLI (ground 9) must also fail. The primary judge stated at [138] that he did not gain a great deal of assistance from the appellants' expert because, among other things, she:
(a) disregarded the significance of the guarantee which PML provided to Wellington, contrary to the conclusions reached by the primary judge as to the relevance of that guarantee given by PML when considering the solvency of PMLI as discussed above;
(b) relied on PML being in financial distress in the apposite period in 2015. As to this, the primary judge accepted the evidence of Mr Pereira that PML was not in financial distress in or about July 2015 at [73] of the reasons and there was no appeal from this finding; and
(c) did not take sufficient account of the range of sources of funds available to PML as outlined in [133] of the reasons, which demonstrated that not only was PML willing to pay the debt owed by PMLI, if necessary, but that it was able to do so.
61 No error has been shown by the appellants in relation to the primary judge's reasons at [138].
62 For these reasons, grounds 6, 7 and 9 must fail.
63 The final ground of appeal which falls to be considered is ground 8 which complains that the primary judge failed to identify that there were no reasonable grounds and could be no reasonable expectation to believe that PMLI could rely on PML or other lenders for the financial support necessary to satisfy the Wellington loan debt.
64 However, this ground of appeal cannot be made out in circumstances where:
(a) the Wellington loan debt replaced another debt. This meant that PMLI owed approximately the same level of debt after it incurred the Wellington loan debt and that there was no material change to its balance sheet. This was common ground at the trial: see [126] of the reasons;
(b) it was common ground at the trial that PMLI was solvent immediately before the Wellington loan debt was incurred: see [127] of the reasons;
(c) PML provided a guarantee and PML had the ability to meet the debt owed by PMLI if necessary (and likely would do so because of its position in the corporate group). The primary judge found that this gave a high level of assuredness to PMLI that PML would continue to provide the financial support to it that it had in the past and that it would, in particular, do so in respect of the Wellington loan debt. Contrary to paragraph 21 of the appellants' outline of submissions, it was relevant and in accordance with the authorities cited by the primary judge (to which no challenge has been raised by the appellants) for the primary judge to have regard to the fact that PML had provided the guarantee.
65 For these reasons, ground 8 of the Notice of Appeal also fails.