vi) it is for the party asserting that a company's contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence … ."
290 Davies AJ in ILA accepted the first three propositions enunciated by Palmer J. However, his Honour expressed reservations about the fourth, fifth and sixth propositions because, as he said at 566, he considered "that, as enunciated, the principles may imply a legality or inflexibility which is inconsistent with the point that the ultimate issue is a question of fact". His Honour cited the judgment of Mahoney JA in Dunn v Shapowloff (1978) 2 NSWLR 235, 244 in support of this view:
"On the other hand, the fact that there is a reasonable or probable ground of expectation that the company will be able to pay the debt at a time distant from the time when the debt falls due will not normally be an answer … it will be necessary in each case to take into account the particular facts; I think the words "being able to pay the debt" admits some flexibility in this regard."
291 For my part, I do not think that Palmer J, in the fourth, fifth and sixth propositions that he stated, was seeking to lay down exhaustively the circumstances in which indulgences that creditors may allow will be taken into account, or the manner in which such indulgences will be taken into account. It is certainly possible to read the fifth proposition as being expressed in prescriptive terms; but even there, I think, his Honour was stating, in effect, the basis upon which the courts have generally assessed the significance of indulgences that were shown to have been granted.
292 If, contrary to my understanding, his Honour were intending, in the fourth, fifth and sixth propositions, to state exhaustively the circumstances in which indulgences will be considered relevant, and the weight that will be attributed to them, then I would share the reservations expressed by Davies AJ. But I do not so read what Palmer J said.
293 Of course, as Palmer J pointed out at 220-221, the significance of indulgences granted by creditors will vary according to whether the question for consideration is "actual" insolvency or "reasonable grounds to expect" insolvency. The case before his Honour fell into the former category. The case before me, on the pleadings, is likewise a case of actual insolvency; as the defendants point out in paragraph 2 of their written submissions "this is not a case of insolvent trading".
294 Before I leave the decision of Palmer J in Southern Cross Interiors, I should note that his Honour expressed the view that, for the purposes of s 95A of the Corporations Act, the words "due" and "payable" were synonymous. I agree. I therefore do not accept the submission for the defendants that "the debt to WCL may have been due but it was not payable". I do not accept that, either for the purposes of the statutory test of insolvency or for any test in substantially similar terms, there is any distinction to be drawn.
Analysis and conclusions
295 The intercompany debts within the White Group appear to have built up as a result of the trading activities that I have summarised in paras [271] and [272] above. It does not appear that the directors, or for that matter management, of any of the companies ever turned their minds specifically to the terms by which intercompany debts were regulated. There was no evidence of any document dealing with that topic, at least at the level of policy or principle.
296 The basis for White ACT's submission that the relevant debts were due and payable is found, as I understand it, in the circumstance that they were recorded in its accounts as "current liabilities". On ordinary accounting principles, that would indicate that they were regarded as debts payable within twelve months of the relevant balance date. Further, as I understand the case for White ACT, it was submitted that, the debts being both recognised and classified as current in the financial statements, they must be presumed, in the absence of evidence to the contrary, to have been payable on demand.
297 However, given my conclusion that there was at all material times a practice in place within the White Group that intercompany debts would not be called upon unless the debtor were in a position to pay them, it is necessary to examine whether it can properly be said that the relevant debts were "payable on demand" at all.
298 The manner in which the debts came into existence may be clear enough in outline, but there is no detailed evidence showing how the balances moved from time to time. Nor is there evidence of the precise transactions in respect of which the debts arose. However, I conclude that the debts arose on a basis understood by all concerned: that a demand for payment would not be made unless the debtor could afford to pay the debt. On that basis, I think it is not correct to classify the debts as being payable on demand. Where a debt is payable on demand, it is taken to be payable forthwith because the creditor has an uncontrolled discretion to make demand at any time. However, the effect of the arrangement that I have found proved was to fetter the discretion of the creditor to demand repayment. The creditor could not demand repayment unless the debtor were able to meet the demand. In those circumstances, the better analysis is that the debt was due not on demand but upon a contingency: the contingency being, of course, the ability of the debtor to meet any demand.
299 On this analysis, the facts of this case are quite different to those considered in the many cases reviewed by Palmer J in Southern Cross Interiors, by Mandie J in Plymin and by Chesterman J in Emanuel Management. The cases there reviewed concerned debts that were payable in accordance with defined trading terms (for example, within seven or thirty days of invoice, or upon some other defined basis) or on demand. The question was whether, that being the legal position, some practice of granting indulgences, either as between particular creditors and the debtor or within the industry generally in which the debtor operated, could bear upon the legal character of the debts. In the present case, the arrangement that has been proved is not an arrangement in respect of a debt otherwise due and payable on demand. It is the equivalent of the trading terms in those other cases: it fixes the basis upon which the debt will be, or become, payable. The arrangement characterises, and determines, the payability of the debt. It is not simply an arrangement in relation to a debt that is otherwise, in law, characterised as payable on demand (or at some contractually fixed time).
300 I therefore do not accept the submission for White ACT, to the effect that the arrangement cannot be binding in contract to alter the character of a debt otherwise payable on demand. Nor do I accept, as White ACT submitted, that the arrangement was unenforceable for want of consideration. On the contrary, if the debts in question came into being upon the basis of the arrangement, the transactions which gave rise to the particular debts would provide sufficient consideration not only for the obligation to pay but also for the limitation upon the creditor's right to call for payment.
301 However, White ACT submits that, in any event, any such arrangement was only referable to companies within the White Group. It points out that it ceased to be a member of the White Group upon completion of the sale of its issued capital to Mr Frank McAlary. The latter point is, of course, correct. But the evidence to which I have referred in paras [263] to [268] above, and which I accept, shows that the arrangement did continue to apply to White ACT.
302 It will be seen that, as at 30 June 1988 and 14 October 1988, the assets of White ACT were sufficient to enable it to meet its debt on overdraft to the State Bank of New South Wales. It is also the case that the other debts of White ACT to external creditors - presumably, trade creditors whose debts arose out of the contracts that White ACT was undertaking - were debts in respect of which White ACT was entitled to be indemnified, or reimbursed, by WCL or some other company in the White Group. It therefore seems to me that, as at those two dates, White ACT was in a position to meet its obligations to external creditors.
303 Although the evidence was not explicit for the year ended 30 June 1989 and for subsequent years, there is no evidence that White ACT, for that or subsequent years, had external creditors other than trade creditors whose debts arose in the course of performance by White ACT of its contractual obligations. For that year and following years, it must also, I think, be the position that White ACT was entitled to be indemnified or reimbursed.
304 It therefore seems to me that the question of insolvency, at any material time, is to be considered by reference to the ability of White ACT to pay its debts to other White Group creditors; and indeed, with the exception of ADC's claim (to which I will turn shortly), the submissions for White ACT appear to accept this.
305 As at both 30 June 1988 and 14 October 1988, the analysis that I just have set out leads to the conclusion that White ACT was not insolvent by reason of the fact that the claims of other companies in the White Group exceeded its assets. Further, given the matters that I have referred to in paras [263] to [268] above, the same conclusion must apply explicitly for the years ended 30 June 1989 and 30 June 1990. Finally, given the absence of any evidence to show that the policy in force in those years had altered, I think that the same conclusion must follow for subsequent financial years, at least up until 30 June 1992 which, as I have said, I think to be the last year that requires consideration.
306 White ACT submitted that, in any event, an analysis of its position that did not include what it said was the claim of ADC was insufficient. It said that ADC was a creditor of White ACT at every material date. It said that, for example, if White ACT had been wound up as at 30 June 1988 or 14 October 1988, ADC would have been entitled to prove in the winding up for whatever its claim might be shown to be, and, upon its proof being admitted or established, would rank as a creditor accordingly.
307 The latter part of the analysis may be accepted. However, the fact that ADC had a claim against White ACT, even when coupled with the further fact that, upon the liquidation of White ACT, that claim could be admitted to proof, and somehow valued, does not mean that, absent winding up, there was a debt due and payable by White ACT to ADC in respect of that claim. ADC's claim was not a claim for debt. It was a claim for unliquidated damages for breach of contract. There was no debt due and payable in respect of that claim until the claim was established by the judgment of this Court. That did not happen until, ultimately, Einstein J adopted the reports of Mr Morrisey on 11 June 1999. (Indeed, it was not until Mr Morrisey's report, issued on 1 June 1998, that there was a realistic assessment of the amount of what would become the "debt".)
308 It is not to the point to say that, at some stage, White ACT should have recognised ADC's claim and should have provided for it, either in whole or in part, depending upon the evidence available to it. The question is whether, at any material time, an assessment of the ability of White ACT to pay its debts as and when they fell due required there to be taken into account ADC's claim for unliquidated damages. In my view, until that claim was transmuted by order of this Court into a judgment, there was no such requirement.
309 This analysis is, I think, consistent with what Scott J said in Totterdell v Nicol-Burmeister (1995) 13 ACLC 1521. That was an action to set aside a payment as preferential, relying on s 588FA of the then Corporations Law. The company was said to be insolvent because, among other things, it was a defendant in a defamation action; its defence had been struck out; and the action had been set down for assessment of damages. At the relevant time, as Scott J recorded at 1527, it was not known what damages, if any, would be assessed. It was likely, but not inevitable, that some award of damages would be made. His Honour held that there was no debt at the relevant time and that although there was "the potential for a future debt" it did not follow that the directors of the company "would have known of the existence of such a debt as, indeed, the damages could have been assessed at nil".
310 Whilst his Honour's decision appears, with respect, to elide the distinction between existence of the debt on the one hand, and appreciation of the possibility that it would come into existence on the other, it does seem to me to support the approach that I have taken in setting it to one side, in my analysis of insolvency at the material times, of ADC's claim.
311 White ACT relied on two decisions. The first (as reported) was the decision of Hoare J in Re Saebar: Official Receiver v Saebar (1971) 18 FLR 317. The other was the decision of Gibbs J in Re Hyams: Official Receiver v Hyams (1970) 19 FLR 232.
312 In each case, the question for decision was whether a voluntary settlement of property, made by an individual who later became bankrupt, was void as against the trustee in bankruptcy. In each case, the person taking the benefit of the settlement asserted that the settlor was, at the time of making the settlement, able to pay all his debts without the aid of the property comprised in the settlement. In each case, the question was whether the "debts" of the settlor included a prospective liability for damages. Saebar was decided by reference to s 120(2)(a) of the Bankruptcy Act 1966 (Cth). Hyams was decided by reference to s 94(1)(a) of the Bankruptcy Act 1924 (Cth).
313 In Saebar, Hoare J at 320 stated the question as being "whether the prospective liability for damages is to be taken into account when assessing the liabilities of the bankrupt". His Honour answered the question by saying, on the same page:
"I am satisfied that it is necessary to consider all liabilities, not merely liabilities immediately provable in bankruptcy when determining the solvency of the settlor for the purposes of s 120(2)(a)."
314 In Hyams, Gibbs J concluded, at 258, "that in enquiring what were all the settlor's debts for the purpose of s 94(1)(ii) it is necessary to have regard to contingent liabilities if the evidence shows that there was a reasonable possibility that the settlor would have to meet them".
315 The decision of Hoare J in Saebar does not appear to have been cited to Gibbs J in Hyams. It may also be noted that Hoare J referred to, but Gibbs J did not, the decision of the Court of Appeal in Re Wise: ex parte Mercer (1886) 17 QBD 290, where Lord Esher MR, dealing with the equivalent provisions then in place, said at 300:
"It was entirely a matter of speculation what the amount of the verdict would be. Therefore he was not insolvent."
316 Hoare J adapted his Lordship's remarks, saying at 322:
"It would seem that the correct approach is to consider the whole of the circumstances and if the liability can be regarded as purely speculative and without any real likelihood of being established then the liability can be ignored … ."
317 I do not think that the decisions in Saebar and Hyams are conclusive, having regard to the test that the parties have propounded. As I have noted in para [287] above, the test propounded was whether White ACT, at material times, was able to pay all its debts as and when they became due and payable. The decisions in Saebar and Hyams, and the decisions discussed in those cases, recognise that an unestablished (and unquantified) liability may be required to be taken into account for the purposes of the particular exercise propounded by the legislation. They do not show that a claim for unliquidated damages is a debt, let alone a debt that is due and payable. I therefore do not think that the decisions are of direct relevance to the issue of insolvency as it has been framed.
318 Even if I am wrong in this, I would not conclude that it was, in June or October 1988, necessary to take into account, for the purposes of assessing the solvency of White ACT, the claim that was subsequently brought by ADC. There was no claim at those dates, let alone one that could be characterised as "speculative" (or otherwise). As the chronology set out in para [16] above shows, it was not until August 1991 that ADC even commenced proceedings; and it was not until June 1999, after a number of litigious spills and thrills, that judgment was entered. I do not think that the huffing and puffing set out in correspondence passing between ADC and White ACT in the first half of 1988 requires any different conclusion. Correspondence of that nature, including such threats, is (for better or for worse) a recurrent feature of commercial life.
319 I therefore conclude that White ACT was not, at any material time up until 30 June 1992, insolvent.
THE DIRECTOR DEFENDANTS' STATE OF MIND : INSOLVENCY
320 Because I have found that White ACT was not insolvent at any material time, it must follow that the director defendants could not have known that it was insolvent at any material time. That is because I think that to know something involves, at a minimum, that the thing that is said to be known exists in fact. One cannot know that which does not in fact exist. In this, I think, knowledge is distinct from belief (as in turn belief is distinct from suspicion), notwithstanding that it may be said, in general terms, that there is a spectrum of "understanding" ranging from knowledge at one end to suspicion at the other, and that the dividing points between the component parts of that spectrum may not always be easy to identify. See, for example, the decision of the Court of Appeal of Queensland in Wicks v Marsh, ex parte Wicks [1993] 2 Qd R 583, 585.
321 In any event, the evidence of the director defendants was that they did not at any given time believe White ACT to be insolvent. (For present purposes, I put aside the controversy as to who was a director of White ACT at any given time.)
322 Each of the director defendants said that, at all material times, he was cognisant of the practice, that I have found existed, as to when intra-group debts could be called upon for payment. As I have said, White ACT could only be regarded as insolvent at the material times if those debts were due and payable forthwith. If they were not, and if (as they said) the director defendants were aware of the practice that meant that they were not, there is no other basis, apart from any claim by ADC, for the director defendants to have held any belief that White ACT was, at those times, insolvent.
323 Their evidence is corroborated by some other matters. Firstly, it is very hard to understand why Mr Frank McAlary would have offered or agreed to acquire the issued share capital of White ACT if he had believed, at the time, that it was insolvent. Secondly, to the knowledge of the director defendants (at times when they were directors of White ACT), the accounts of White ACT were prepared on a going concern basis and at no material time did the auditors qualify the accounts. The director defendants who knew of this were entitled to assume (and Mr White and Mr Frank McAlary said that they did assume) that this indicated that the auditors did not regard White ACT as being, at any material time, insolvent. Thirdly, there is the circumstance that I refer to in paras [386] and [462] below - the provision by WCL to White ACT of funds to enable the latter to continue to defend ADC's claim. It is hardly likely that Messrs White, Duncan and Spinks would have committed substantial funds of WCL to defence of the ADC litigation if they had believed that White ACT was then insolvent. This last circumstance also indicates that those gentlemen did not believe that ADC had a claim of such magnitude and certainty to show that, on any rational analysis, White ACT should have been regarded, even before that claim was quantified, as insolvent.
324 The other matter that is relevant in this context is the knowledge or state of mind of the director defendants relating to the Quadrant project and ADC's claim. Again, I propose to look at that issue without differentiating between them as to who was, or was not, at any given time, a director of White ACT.
325 Each of the director defendants put forward a case that, in substance, he was not (to the best of his present recollection) aware, in 1987 and 1988, of any detailed information relating to the Quadrant contract. However, each accepted that, to the extent that the Quadrant contract was the subject of material that went to and was considered by the board, or was shown to have been discussed at board meetings at which he was present, then he would have been aware of the relevant material.
326 Each of the director defendants, in his capacity as a director of either WCL or (in some cases) WIL/WIAL, was consistently provided with information, from at least 5 February 1988 on, showing that White ACT was likely to make a loss on the Quadrant contract. The board papers for WCL of 5 February 1988 quantified the loss at $500,000. By the time the then managing director (Mr Wells) reported to the board for its 4 March 1988 meeting, the projected loss had increased to $4,789,000. That figure again increased by 6 May 1988 to $4,855,000. It was noted that the loss might increase because of the continuing industrial dispute.
327 However, when it became apparent that ADC was going to terminate the contract (and when the contract was terminated) the loss was reduced to $3,000,000. Although White ACT sought to characterise both the reduction in the projected loss, and the manner in which the reduction was announced to the board as evidence of an underlying improper motive, I do not find that this was so. The evidence showed that WCL and its subsidiaries brought to account losses on the performance of contracts as those losses were perceived and quantified. The losses so brought to account were the losses expected to be made over the life of the contract and not just in a particular accounting period. Thus, the figures referred to in the preceding and succeeding paragraphs (noting that the latter were not shown to have come to the attention of the director defendants) were projected losses over the life of the contract. Once the contract was terminated, it was clear that White ACT would not sustain operational losses referable to its future performance. It might, of course, sustain further losses if ADC had a valid claim against it; but that topic, and the director defendants' state of mind in relation to it, requires separate consideration.
328 The other material on which White ACT placed reliance was the Rawlinsons report, which concluded that the end cost of the Quadrant project would be $26,498,000. When compared to the contract price of $19,535,000, this would have indicated (to anyone who read it) a loss of $6,953,000. It has not been suggested that Rawlinsons' assessment was manifestly unreliable, or defective or inaccurate, at the time it was made.
329 Each of the director defendants said, and I accept, that the report did not come to his notice in 1988 or at any relevant time thereafter. The report was commissioned by management. It was not referred to in terms in any report shown to have been provided by management to the board. Its prognostications were not (with or without attribution) included in any report that was shown to have been provided to the board. Further, White ACT did not call any of its former employees, or any employee of WCL, to demonstrate that either the Rawlinsons report or its substance was communicated to the director defendants. Nor, in the case of employees who might be supposed to have received it, or learned of the report and are still alive, did it offer any explanation for its failure to do so. Although I do not regard this consideration as conclusive (particularly given that at least some of the relevant employees may have been employed by WCL rather than White ACT) it does provide some support for my acceptance of the director defendants' evidence in this regard.
330 I therefore accept the evidence of the director defendants that they did not at any material time believe that White ACT was insolvent.
THE QUADRANT INDUSTRIAL DISPUTE
Industrial background
331 White ACT and a number of unions appear to have entered into a Site Agreement that was intended to regulate industrial relations on the Quadrant project. No signed or dated agreement has been produced. However, an unsigned document purporting to be the Site Agreement was tendered without objection. Its terms included the following:
"20. DISMISSAL PROCEDURES
Any acts of gross misconduct will mean instant dismissal.
For acts of general misconduct or breaches of safety requirements the following procedure will be adopted:
The employee will be given a verbal warning in the presence of the appropriate Union Site Delegate. The date and time must be recorded in the foreman's diary.
Should the employee continue to fail to respond to instructions regarding misconduct or breaches of safety, he shall be given a written warning in the presence of the appropriate Union Site Delegate. A copy of the notice will be placed on employee's personal file.
Should the employee still fail to respond to further instruction regarding misconduct or breaches of safety, he shall be issued with a notice of dismissal in the presence of the appropriate Union Site Delegate."
332 Clause 20 was amplified by the following:
" CODE OF CONDUCT