JUDGMENT NO. oan2.2 Sond CATCHWORDS CORPORATIONS - Winding up - preference - recovery by liquidator from payee creditor - whether company unable to pay its debts as they became due from its own money - notion of debts "commercially due" - whether payments "in good faith" and "in the ordinary course of business". BANKRUPTCY - preference - "unable to pay his debts as they become due from his own money" - notion of debts "commercially due" - whether payments "in good faith" and "in the ordinary course of business". Corporations Law s. 565 Bankruptcy Act 1966 s. 122 Robertson v Grigg (1932) 47 CLR 257 Downs Distribution Company Pty Ltd v Associated Blue Star Stores Pty Ltd (in lig.) (1949) 76 CLR 463. Taylor v White (1964) 110 CLR 129 Taylor v ANZ Banking Group (1988) 13 ACLR 780. GREGORY WINFIELD HALL & Anor v PRESS PLUMBING A_ DIVISION OF AUST-AMEC PTY LTD No. NG3244 of 1993 Lindgren J 20 September 1994 Sydney RECEIVF 1) 21 SEP 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION ee ee No.G3244 of 1993 IN THE MATTER OF: NEETA HOMES PTY LIMITED (IN LIQUIDATION) (ACN 000 674 466) AND SECTION 565 OF THE CORPORATIONS LAW GREGORY WINFIELD HALL in his capacity as Liquidator of Neeta Homes Pty Limited (In Liquidation) (ACN 000 674 466) First Applicant NEETA HOMES PTY LIMITED (In Liquidation) (ACN 000 674 466) Second Applicant PRESS PLUMBING, A DIVISION OF AUST-AMEC PTY LIMITED (ACN 003 066 715) Respondent CORAM: LINDGREN J PLACE: SYDNEY DATE: 20 SEPTEMBER 1994 M IRDER THE_COURT 1. DECLARES that the payments referred to in the schedule below are void as against the first applicant. 2. ORDERS that the respondent pay to the first applicant the sum of $222,000. ge! shy ORDERS that the respondent pay the applicants' costs of 'f+ vthe: 'proceeding to date. orf bye 49, 94 - Joa a a) Ve ' SCHEDULE Date on Cheque Cheque No. Date Presented Amownt 20.11.91 9903 20.11.91 57,000.00 27.11.91 9904 27.11.91 50,000.00 04.12.91 9905 06.12.91 50,000.00 11.12.91 9906 13.12.91 50,000.00 24.01.92 10503 28.01.92 5,000.00 07.02.92 10557 05.02.92 5,000.00 14.02.92 10678 24.02.92 5,000.00 NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) GENERAL DIVISION ) No.G3244 of 1993 IN THE MATTER OF: NEETA HOMES PTY LIMITED (IN LIQUIDATION) (ACN 000 674 466) AND SECTION 565 OF THE CORPORATIONS LAW GREGORY WINFIELD HALL in his capacity as Liquidator of Neeta Homes Pty Limited (In Liquidation) (ACN 000 674 466) First Applicant NEETA HOMES PTY LIMITED (In Liquidation) (ACN 000 674 466) Second Applicant PRESS PLUMBING, A DIVISION OF AUST-AMEC PTY LIMITED (ACN 003 066 715) Respondent CORAM: LINDGREN J PLACE: SYDNEY DATE: 20 SEPTEMBER 1994 NS FOR NT NATURE OF PROCEEDINGS On 1 May 1992 Barry Raymond Cook ("Mr Cook") was appointed liquidator of the second applicant provisionally by order of the Court made pursuant to an application filed that day. By a further order of the Court made on 25 September 1992,the second applicant (""Neeta Homes") was ordered to be wound up and Mr Cook was appointed liquidator for that purpose. On 4 March 1994, the first applicant, Gregory Winfield Hall ("the Liquidator" and "Mr Hall") was appointed liquidator of Neeta Homes in place of Mr Cook. These proceedings were commenced by Mr Cook as liquidator of Neeta Homes as first applicant and that company (in liquidation) as second applicant. I ordered that Mr Cook cease to be a party and that the Liquidator be added as first applicant in his place, and gave leave for the filing of an amended application and an amended statement of claim to reflect the change in the identity of the liquidator of Neeta Homes. An amended application and an amended statement of claim were filed on 7 September 1994, reflecting nothing more than that change. The applicants seek a declaration that certain payments totalling $222,000 made by Neeta Homes to the respondent ("Press Plumbing") between 15 November 1991 and 28 February 1992 had the effect of giving Press Plumbing a preference, priority or advantage over other creditors of Neeta Homes and are void as against the Liquidator, and an order for payment by Press Plumbing to the Liquidator or alternatively to Neeta Homes of the sum of $222,000 and interest. It has been held by the Full Court of the Supreme Court of Western Australia that the party entitled to recover an amount paid as an undue preference is the liquidator as distinct from the company in liquidation: Bibra Lake Holdings Pty Ltd (in Lig.) v Fixrmadoor Australia Pty Ltd (t/a "Cleveland Industries WA") (1992) 7 ACSR 380(WA/Full Court). N INE At all material times, Neeta Constructions Pty Ltd ("Neeta Constructions") was a wholly owned subsidiary of Neeta Homes. By a written contract dated 6 April 1989 between Neeta Constructions and Press Plumbing ("the Drainage Contract"), Press Plumbing undertook the supply and installation of hydraulics and drainage services for Neeta Constructions as head contractor on a site at Smart and Nelson Streets and Court Road, Fairfield. The project was known variously as the "Fairfield Court Shopping Centre Project", "Neeta City" and "Neeta City Shopping Centre". Neeta Constructions did not pay Press Plumbing in accordance with the latter's contractual entitlement. Press Plumbing had outstanding performance obligations under the Drainage Contract to Neeta Constructions, in particular, for rectification work. On 7 October 1990 it was agreed that the amount of Neeta Constructions' indebtedness to Press Plumbing be reduced from an amount in the order of $528,000 to $480,000; that Press Plumbing be released from any further performance obligations under the Drainage Contract; and that Neeta Homes pay the sum of $480,000 to Press Plumbing at the rate of $23,000 per month, the first payment to be made on 1 September 1990. This arrangement, if adhered to, would have seen Press Plumbing paid $480,000 over a period of 21 months, the final payment being made on 1 May 1992. Neeta Homes did not make any payment of $23,000 on 1 September 1990, 1 October 1990 or 1 November 1990, but did pay $23,000 on 29 November 1990 and on 31 January 1991, a total of $46,000. As at 1 February 1991, Neeta Homes should have paid six instalments of $23,000 each but had paid only two, leaving four instalments totalling $92,000 outstanding on that date. In March 1991, Neeta Homes advised Press Plumbing that it would have difficulty in maintaining the payments of $23,000 per month. Neeta Homes wrote to Press Plumbing on 22 April 1991 noting that over and above the two instalments of $23,000 each which had been paid, a further nine instalments of $23,000 each (totalling $207,000) would be due for payment as at 1 September 1991 (in fact, by 1 September 1991 a further 11 instalments of $23,000 totalling $253,000 would have fallen due), and proposing that Neeta Homes assign to Press Plumbing the proceeds of sale of four cottages the sales of which were due for settlement by September 1991 in order to "ensure" that the $207,000 would be paid. The letter said, "The position can then be reassessed in September 1991". In April or May, 1991, it was agreed that $434,000 (being the amount of $480,000 less the two payments of $23,000 each) should be paid as to $270,000 in October 1991, and as to what would then be a balance of $164,000, in June 1992. On 10 July 1991, Neeta Homes wrote a letter to its solicitor, a copy of which it forwarded to Neeta Homes, proposing to pay the amount of $434,000 ($480,000 minus $46,000) as to $207,000 out of the proceeds of four sales of land at Narellan by 30 September 1991 (comprising $51,750 per sale) and as to what would then be a balance of $227,000 by instalments of $23,000 per month beginning in October 1991. On 4 September 1991 Neeta Homes, accepting that only two of the lots at Narellan had been sold, proposed a variation in the terms of payment to the effect that the sum of $207,000 not be paid by 30 September 1991, but be paid as to $107,000 by 15 October 1991 and $100,000 by 15 November 1991, and that the balance which would then remain of $227,000 be paid by nine monthly instalments of $23,000 each commencing on 15 November 1991 and terminating on 15 July 1992 and a tenth and final instalment of $20,000 on 15 August 1992. A formal agreement in writing dated 24 September 1991 was entered into by Neeta Constructions, Press Plumbing and Neeta Homes ("the Principal Agreement"). By the Principal Agreement the parties released and discharged each other in respect of the Drainage Contract and work carried out by Press Plumbing under it. By clause 4, Neeta Constructions undertook to pay to Press Plumbing the said sum of $434,000 by the instalments referred to in the immediate preceding paragraph. By clause 6.1 Neeta Homes guaranteed to Press Plumbing punctual payment by Neeta Constructions of the instalments. On 14 October 1991, the eve of the date on which the payment of $107,000 fell due under the Principal Agreement, Russell John Green, the managing director of Neeta Homes, sent a fax to Michael Daly of Press Plumbing referring to the fact that the sum of $207,000 was to be paid from the proceeds of the settlement of four sales; and that one of the four cottages, although constructed, had not been sold, and that the other three were in a situation which did not enable Neeta Homes to pay the amount of $107,000 on 15 October. The letter said this: "Press Plumbing have acknowledged the difficulty with Neeta paying this debt and in such circumstances I hereby undertake that the due amounts of $107,000 and $100,000 will be paid on or before 15 November 1991 notwithstanding any of the four properties still remaining unsettled." The following day, 15 October 1991, Press Plumbing faxed Neeta Homes as follows: "Press Plumbing acknowledge your guarantee of payment of $207,000 on or before 15 November 1991, but stress, that we will have no option but to take further action should this commitment not be adhered to." Neeta Homes did not pay the amount of $207,000 on 15 November 1991. By a Deed of Variation the cover sheet of which was dated 13 November 1991 ("the Deed of Variation") executed by Neeta Constructions, Press Plumbing and Neeta Homes the terms of payment of the sum of $207,000 were again varied. As prepared, the Deed of Variation had provided for payments as set out in the first column below, but these were altered by hand in the document, apparently at the request of Neeta Homes, to the respective dates (all five days later) appearing in the second column below, prior to execution of the Deed of Variation: Original Date Altered Date Amount $ 15.11.91 20.11.91 57.000.00 22.11.91 27.11.91 50,000.00 29.11.91 04.12.91 50,000.00 06.12.91 11.12.91 50,000.00 $ 207,000.00 The balance of the amount of $434,000, namely $227,000 remained payable in accordance with the Principal Agreement by 9 monthly instalments of $23,000 each on the fifteenth day of each month from November 1991 to July 1992 and a tenth instalment of $20,000 on 15 August 1992. The Deed of Variation provided that if any of the instalments going to make up the sum of $207,000 should not be paid on or before the date specified for payment of it, the total amount of $434,000 referred to in the Principal Agreement should become immediately due and payable. It was probably intended that the dates for payment of the nine monthly instalments of $23,000 and the tenth instalment of $20,000 be postponed by one calendar month, so that the first instalment of $23,000 would become due and payable on 15 December 1991 rather than 15 November 1991. However, the Deed of Variation did not so provide. Apparently on 13 November 1991 Neeta Homes drew four cheques post-dated to 20 November 1991 for $57,000, to 27 November 1991 for $50,000, to 4 December 1991 for $50,000, and to 11 December 1991 for $50,000, and these were delivered to Press Plumbing and in due course honoured upon presentation by it. These four payments totalling $207,000 are the first four payments sought to be recovered by the Liquidator from Press Plumbing. Not only did Neeta Homes not pay $23,000 on 15 November 1991: it did not pay that amount on 15 December 1991 or 15 January 1992 either. On 22 January 1992, Press Plumbing wrote to Neeta Homes seeking a cheque for $23,000, and on 24 January 1992, Neeta Homes wrote to Press Plumbing offering to pay $5,000 per week in reduction of the balance of $227,000 and enclosing a cheque for $5,000 which was honoured upon presentation by Press Plumbing. This is the fifth payment sought to be recovered by the Liquidator. On 31 January 1992 Neeta Homes paid to Press Plumbing a further sum of $5,000 leaving a balance unpaid of $217,000 of the original agreed figure of $480,000. This payment of $5,000 is the sixth payment sought to be recovered by the Liquidator. On 14 February 1992 Neeta Homes paid a third sum of $5,000 to Press Plumbing leaving a balance of $212,000 of the original sum of $480,000 agreed to be paid. This payment of $5,000 is the seventh payment sought to be recovered by the Liquidator. It is convenient to set out in tabular form the seven payments sought to be recovered by the Liquidator. They appear to be as follows (the particulars of payments as pleaded by the applicants were admitted by the respondent but in certain minor respects they did not accord with the evidence): Date on Cheque Cheque No. Date Presented Amount 20.11.91 9903 20.11.91 57,000.00 27.11.91 9904 27.11.91 50,000.00 04.12.91 9905 06.12.91 50,000.00 11.12.91 9906 13.12.91 50,000.00 24.01.92 10503 28.01.92 5,000.00 07.02.92 10557 05.02.92 5,000.00 14.02.92 10678 24.02.92 2000.00 $222,000.00 Depending upon whether the date of the first instalment of $23,000 is taken to be 15 November 1991 (the alternative possibility being 15 December 1991), as at 24 February 1992, over and above the four payments totalling $207,000 which had been paid, four (or three) monthly payments of $23,000 each should also have been paid under the Principal Agreement as varied by the Deed of Variation, totalling $92,000 (or $69,000), yet only three payments of $5,000 each totalling $15,000 had in fact been made. The applicants pleaded that at the respective times of the making of the seven payments referred to, Neeta Homes was unable to pay its debts as and when they became due from its own money, and that the payments had the effect of giving Press Plumbing a preference priority or advantage over the creditors of Neeta Homes. PROVISI Sub-section 565(1) of the Corporations Law ("the Law") provides that a payment made before the commencement of Part 5.7B of the Law, by a company that, if it had been made by a natural person, would, in the event of his or her becoming a bankrupt, be void against the trustee in the bankruptcy, is, in the event of the company being wound up, void as against the liquidator. All the payments sought to be recovered were made before the commencement of Part 5.7B. For the purpose of sub-section 565(1), the date that corresponds with the date of presentation of the bankruptcy petition in the case of a natural person is, relevantly, the "relation-back day", and the date which corresponds with the date on which the person becomes a bankrupt is also the "relation-back day". The expression "relation-back day" is defined in section 9 of the Law. In the context of the facts of this case it signifies 1 May 1992, the date of the appointment of Mr Cook as provisional liquidator. The particular provision of the Bankruptcy Act 1966 (Cth)("the Act") on which the Liquidator relied was section 122 which, relevantly, is as follows: "122(1) A... payment made ... by a person who is unable to pay his debts as they become due from his own money (in this section referred to as "the debtor"), in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors, being a ... payment ... made ... ; (a) within 6 months before the presentation of a petition on which, or by virtue of the presentation of which, the debtor becomes a bankrupt; or (b)...- is void as against the trustee in bankruptcy. (2) Nothing in this section affects: (a) the rights of a... , payee ... in good faith and for valuable consideration and in the ordinary course of business; (3) The burden of proving the matters referred to in sub- section(2) lies upon the person claiming to have the benefit of that sub-section. (4) For the purposes of this section: (A) ccc revevens pee eer eeee tee een een enee eee ce oeves (D) ccc ccceeccceeteceeeecees bocce eeeeeeeee vuceeeeee (c) a creditor shall be deemed not to be a... payee ... in good faith if the ... payment was ... made ... under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect: (i) that the debtor was unable to pay his debts as they became due from his own money; and (ii) that the effect of the ... payment ... would be to give him a preference priority or advantage over other creditors." All seven payments sought to be recovered in the proceedings were made by Neeta Homes within six months before 1 May 1992. THE HEARING ON 9 AND 10 AUGUST 1994 At the hearing, Mr D.J.Fagan of counsel appeared for the Liquidator and for Neeta Homes, and Mr A.S. Martin of counsel appeared for Press Plumbing. The evidence comprised affidavit evidence, documentary exhibits and oral evidence. THE_ISSUES The following were the issues on which the case was contested: 1. Was Neeta Homes unable to pay its debts as they became due from its own money at the respective times of the making of the seven payments sought to be recovered, namely 20 November 1991, 27 November 1991, 6 December 1991, 13 December 1991, 28 January 1992, 5 February 1992 and 24 February 1992? 2. Was Press Plumbing, in relation to the respective seven payments, a payee "in good faith"? 3. Was Press Plumbing in relation to the respective seven payments, a payee "in the ordinary course of business"? It is useful to note certain matters as to which there was no dispute. There was no issue that Press Plumbing was a "creditor" to which Neeta Homes made the seven payments; that the effect of the payments was to give Press Plumbing a preference, priority or advantage over other creditors of Neeta Homes; that the relevant period for the purposes of sub- section 122 (1) was the period of six months from 1 November 1991 to 1 May 1992; that the Liquidator bore the onus of establishing insolvency; that Press Plumbing bore the onus of proving the matters referred to in sub-section 122 (2) by reason of the express provision to that effect in sub-section 122 (3); and that the Liquidator bore the onus of proving the matters referred to in paragraph (c) of sub-section 122 (4) if the Liquidator wished to rely upon the "deemed not to be a payee in good faith" provision. The common ground as to onus of proof enables the three issues referred to above to be refined as follows: (1) Has the Liquidator established that Neeta Homes was was unable to pay its debts as they became due from its own money at the respective times of the making of the seven payments sought to be recovered, namely 20 November 1991, 27 November 1991, 6 December 1991, 13 December 1991, 28 January 1992, 5 February 1992 and 24 February 1992? (2) Has the Liquidator established facts by which Press Plumbing is deemed, in relation to the respective seven payments, not to be a payee "in good faith"? (3) Has Press Plumbing established that in relation to the respective seven payments, it was a payee "in the ordinary course of business"? It is convenient to address these three issues in turn. INSOLVENCY 1. Has the Liquidator established that Neeta Homes was unable to pay its debts as they became due from its own money at the respective times of the making of the seven payments sought to be recovered, namely 20 November 1991, 27 November 1991, 6 December 1991, 13 December 1991, 28 January 1992, 5 February 1992 and 24 February 1992? Test of insolvency: There was no disagreement over the test to be applied by me to determine whether Neeta Homes was, at the relevant times, "insolvent", that is to say, and in terms of sub-section 122 (1), "unable to pay [its] debts as they become due from [its] own money". The authorities establish that this question is "a question of fact to be decided as a matter of commercial reality in the light of all the circumstances" (Taylor v ANZ Banking Group (1988) 13 ACLR 780 (Vic/McGarvie J) at 784); that due regard must be had to assets which are realisable within an appropriately short time; (Bank of Australasia v Hall (1907) 4 CLR 1514 at 1528 per Griffith CJ, at 1543 per Isaacs J ; Rees v Bank of New South Wales (1964) 111 CLR 210 at 218 per Barwick CJ, at 229-230 per Taylor J; Sandell v Porter (1966) 115 CLR 666 at 670 per Barwick CJ); that "temporary illiquidity" is to be distinguished from "an endemic shortage of working capital whereby liquidity can only be restored by a successful outcome of business ventures in which the working capital has been deployed" (Hymij et Pty Ltd v Garritty (1977) 13 ALR 321 at 328 per Jacobs J ; and see Norfolk Plumbing Supplies Pty Ltd v Commonwealth Bank of Australia (1992) 6 ACSR 601 (NSW/Kearney J) at 616); that it is appropriate to consider "the terms of credit available to the debtor in the sense of the time available to the debtor to pay debts owed to creditors" pursuant to working arrangements with creditors (Taylor v ANZ Banking Group (1988) 13 ACLR 780 (Vic/McGarvie J) at 784; and see Calzaturificio Zenith pty ltd (in lig.) v N.S.W. Leather & Trading Co Pty Ltd [1970] VR 605 (Vic/Menhennitt J) at 609); and that the question is not to be answered by merely looking at accounts or making a mechanical comparison of assets and liabilities (Taylor v ANZ Banking Group (1988) 13 ACLR 780 (Vic/McGarvie J) at 784; Taylor v Carrol] (1991) 6 ACSR 255 (Qld/Full Court) at 259 per Thomas J). In sum, it is necessary as at any particular point of time, to compare the amounts of debts (including "liabilities" - see definition of "debt" in sub-section 5(1) of the Act) which are already due and those which are becoming due or are shortly to become due on the one hand, with the debtor's already available cash resources, monies which will be timeously paid to him and his timeously realisable assets on the other hand. In the present case there was much evidence of the insolvency of Neeta Homes throughout the period from 10 November 1991 to 21 February 1992. It is convenient to refer to these in categories. ci Eli to ess Plumbi It was put by the applicant, and not contested, that Neeta Homes became indebted to Press Plumbing for $480,000 in October 1990 when it agreed to pay that amount by instalments of $23,000 per month, the first payment being due on 1 September 1990. There were no less than six re-schedulings of the promised payments at the request of Neeta Homes. The first was on 22 April 1991 when Neeta Homes indicated that it could not maintain the monthly payments of $23,000 and proposed paying $207,000 in September 1991 and thereafter monthly payments of $23,000 each. The second occurred in September 1991 when, according to the draft of the Principal Agreement, Neeta Homes was proposing to pay $207,000 on 15 October 1991 rather than in September 1991. The third occurred also in September 1991 when the proposal was to pay, not $207,000 on 15 October but $107,000 on 15 October and $100,000 on 15 November. The fourth occurred on 14 October 1991 when Mr Green of Neeta Homes faxed Michael Daly of Press Plumbing indicating that $107,000 would not be paid the next day but that the whole $207,000 would be paid by 15 November. The fifth occurred when the Deed of Variation was prepared providing for the payment of the $207,000 by one instalment of $57,000 and three instalments of $50,000, all on dates specified in the document. The sixth occurred when those dates were altered by being postponed for five days. Under the arrangement made in October 1990, by 1 November 1991 Neeta Homes should have paid fifteen monthly instalments of $23,000 but had paid only two. The thirteen unpaid instalments totalling $299,000 had been outstanding for periods ranging from some days to twelve months. Since Neeta Homes' numerous defaults and requests for indulgences and re-schedulings occurred in spite of its desire to pay (see under "GOOD FAITH" below); the inescapable inference is that they were due to its inability to pay. idator' z neral bac. o insolvency a. Homes and Neeta Group: There was much evidence in a report dated 21 March 1994 of the Liquidator and its annexures (together "the Liquidator's report") which suggested insolvency. The report's statement of the "background" of Neeta Homes' insolvency is useful: "3.1.1 3.1.2 3.1.3 3.1.4 3.1.5 3.1.6 3.1.7 3.1.8 Neeta Homes is part of a group of private companies and trusts owned by Mr R J Green and his family [... elsewhere the Liquidator's report stated that the Neeta Group comprised in excess of 100 companies and trusts ultimately controlled by Mr Russell John Green and his family; that Neeta Homes' sole activity was to act as trustee of the Neeta Homes Trust; and that Neeta Constructions functioned as trustee of the Neeta City Trust. ] All group companies with any significant assets were placed into provisional liquidation on 1 May 1992. Neeta Homes was the banker to the group receiving revenues and paying expenses on its own behalf and on behalf of other group entities. Transactions on behalf of other group entities were applied to intercompany loan accounts. The group had borrowings from about 14 financial institutions many of which were cross-collateralised amongst group entities. Neeta Homes had guaranteed loans amounting to $28.8 million to other group companies. Due to the cross-collateralisation, and because the cash flow of the Neeta Group was managed through Neeta Homes ' bank account, the financial position of the Neeta Group should also be considered in examining Neeta Homes financial position. Neeta Homes' core business was the construction and sale of house and land packages for the first home buyers' market. However, heavy exposure to commercial property, and in particular the Neeta City Shopping Centre, ultimately caused the group's failure. As at 30 June 1991 non-core assets represented the majority of the group's assets by value. The only source of funds to service debts arising from some of these non-core activities was from the group's homebuilding business, principally conducted through Neeta Homes and MMC [Mighty Mix Concrete Pty Ltd, a company in the Neeta Group, and trustee of the "Neeta Trust"j. Neeta Homes paid substantial amounts towards such non-core debts during and prior to the relation-back-period. Such payments had the effect of weakening Neeta Homes own financial position." 4 rts of indicatjons insolvenc In paragraphs 3.2 - 3.5 of the Liquidator's report, the Liquidator summarised the evidence of pressure applied by lenders to the Neeta Group, evidence of pressure applied to the Group by other creditors, and the position as revealed by the balance sheet and profit and loss accounts, then expressed the following conclusion: "ZB veces cece c cr eranevere ener e scree ssrec este eeerensnsseressees e From June 1991 Neeta Homes and the Neeta Group were: - substantially in arrears with a large proportion of their lenders and some of their creditors; - paying many of their creditors in round sums; - in breach of agreements to pay by instalments debts that were already overdue. e There was a substantial deficiency in shareholders funds prior to and throughout the relation-back- period; e There were consistent losses, particularly on a group basis; ° Neeta Homes had given substantial guarantees under which it was liable to pay, or in my view, virtually certain to be called upon to pay. e Sale or mortgage of Neeta Homes or Neeta Group's assets would not have generated significant funds." or' e :_ balanc ts__an ofj s sccounts The Liquidator's report stated that after the Liquidator made simple adjustments to the Neeta Homes and Neeta Group accounts for irrecoverable loans and overstated property values, the results could be summarised as follows: "3.4 Balance Sheet Pe ee ee rar seme ereeeeceeces Deficiency in 3.4.2 3. 3.4.4 Shareholders Funds $M For Neeta Homes as at 31 October 1991 (11.4) as at 31 December 1991 (10.6) as at 30 April 1992 (12.9) For Neeta Group as at 30 June 1991 (9.2) as at 31 December 1991 (9.1) (Note; the deficiency in shareholders funds is equal to the amount by which liabilities exceed assets). On a short-term basis the financial position was even worse. For example the 30 June 1991 Neeta Group accounts showed that current liabilities exceed current asets by $29.2 million. (Note; current assets and current liabilities refer to assets expected to be realised within 12 months of the balance date, and liabilities due for payment within 12 months of the balance date). 3.5 Profit/(loss) 3.5.1 3. 3. 5. -3 Profit and loss for Neeta Homes and the group are summarised as follows: $M For Neeta Homes 1 July to 31 October 1991 (0.5) 1 November to 31 December 1991 1.3 1 January to 30 April 1992 (2.8) For Neeta Group Year to 30 June 1991 (6.5) 1 July to 31 December 1991 0.3 1 January to 30 April 1992 (5.7) The profits disclosed for the period to December reflect profits taken to account in the month of December which were due to the unusual impact of the settlement of a sale of 81 homes to the Department of Housing and a one-off profit on sale of a commercial property. In my opinion, these profits were temporary and unusual in the normal pattern of trading at this time and insufficient to make any significant impact on the deficiency in wi shareholders funds." tor's x4 : Neeta L in e_ and Newc vi L ion Offic. As at 30 June 1991 and throughout the period to 1 May 1992, the Neeta Group had two "off-balance sheet" assets. They, and their approximate development costs, were as follows: Neeta City Shopping Centre $53M Newcastle Taxation Office $30M Rental income from the Newcastle Taxation Office building was sufficient to pay interest on debts incurred in relation to it, so that it had no significant impact on the cash flow of Neeta Homes, although debts due to financiers secured by mortgages on it exceeded its value. The Neeta City Shopping Centre, however, presented a disastrous picture. It was, in the view of the Liquidator, the main cause of the Neeta Group's failure. Its development cost of $53 million was funded by secured debt of $45 million and unsecured advances by Neeta Homes of $8 million. In February 1992, the State Bank of South Australia (""SBSA"), which was, directly or indirectly the second mortgagee (I shall refer to it as such) had the Centre valued by Baillieu Knight Frank("BKF"), and the valuer's assessment of its "as is" value was only some $17 million. The first mortgagee was Chase AMP Bank which was owed approximately $28 million. Apparently the amount owed to the SBSA secured by the second mortgage, was $17 million. As at 30 June 1991, Neeta Homes had the exposure to Press Plumbing of $434,000 ($480,000 - $46,000) previously referred to, and at least $500,000 per year in interest to the first mortgagee, Chase AMP Bank, which debts were not brought to account as liabilities in the books and records of Neeta Homes or of the Neeta Group. Neeta Homes' unsecured loan of $8 million to Neeta Constructions in respect of the Neeta City Centre development could not be considered as recoverable. The Group's auditors would not certify the Group's accounts as at 30 June 1991 so long as they continued to show the net investment of $8 million ($53 million minus $45 million) as an asset of Neeta Homes, unless the SBSA wrote off the liability to it in respect of the Centre. This was one of the issues to which a report dated 12 February 1992 which Mr Hall made to the SBSA ("the SBSA report") was directed (see later). In the SBSA report, Mr Hall expressed the opinion that even if the SBSA wrote off its second mortgage debt, there would not be justification for showing Neeta Homes as having an investment in the Centre of $8 million, because this would suggest that the Centre's value was $36 million ($28 million for the first mortgagee and $8 million for Neeta Homes) whereas it was understood that the "as is" valuation of BKF would be only some $16 million (in fact, it was made nine days later on 21 February 1992 in an amount of $17 million). Liguidator's yeport: Evidence of pressure from lenders The Neeta Group was in arrears with most of its commercial and investment lenders from 30 June 1991 onwards. The Liquidator's report set out the position in tables which had been prepared from the consolidated trial balances as at 30 June 1991 and 31 December 1991 as follows: "The position at 30 June 1991 was: Current Overdue Total *Arrears $'000 $'000 $'000 (Months ) Mercantile Credits 40 326 366 9 Newcastle Permanent 45 318 363 8 St George 73 148 221 3 Perpetual Trustee 34 185 219 6 Permanent Finance 40 41 81 2 Other 107 — 207 339 «©6018 1.357 The overall position at 31 December 1991, worsened to: Current Overdue Total *Arrears $'000 $'000 $'000 (Months ) Mercantile Credits 46 513 559 12 St George 49 347 396 8 Newcastle Permanent 41 248 289 7 Department of Housing 50 151 201 4 Permanent Finance 33 110 143 4 Macquarie Bank 70 30 100 1.5 Perpetual Trustee 34 38 72 2 Other 163 §37 486 4437 1.923 (*The age of arrears includes the current month's interest). " Of those lenders, only the Department of Housing was a direct creditor of Neeta Homes. In respect of the debts to St George and Macquarie Bank, Neeta Homes was a guarantor, though the Liquidator expressed an opinion that Neeta Homes was an actual rather than a contingent debtor of Macquarie Bank. Although the other lenders were not creditors of Neeta Homes and Neeta Homes had not guaranteed the debts owed to them, they had an impact on Neeta Homes' financial position in ways which were explained in the Liquidator's report. 7 rts iti with rticular o djitors Chase AMP Bank Ltd: There was an amount of $2,000,000 due and payable by Neeta Homes to Chase AMP Bank Limited by December 1991 of which only $143,000 had been paid in April 1991, $347,000 had been paid in June 1991, and $240,000 had been paid in September 1991, resulting in a balance to be found by December 1991 of $1,270,000. By a letter dated 5 September from Neeta Homes to that Bank, Neeta Homes proposed paying $600,000 from the settlements of six property sales, and what would be a balance thereafter of $670,000 out of rentals to be received from leasings of areas in Neeta City. Department of Housing : According to the material under Tab 14 to Liquidator's report, Neeta Homes owed to the Department of Housing amounts totalling $373,499.57 as at 22 May 1992. This figure included amounts of $173,966.08 which had been outstanding since 1989, an amount of $117,873.78 which had been outstanding since 1990, and an amount of $81,659.71 in respect of 1991. Macquarie Bank Limited: Pursuant to a loan agreement dated 10 August 1989 Macquarie Bank Limited agreed to provide to Ferndown Pty Ltd ("Ferndown"), a company in the Neeta Group, funds up to a limit of $8,800,000. Neeta Homes, in its own right and as trustee of the Neeta Homes Trust, was a guarantor. The evidence of the Liquidator was that as at 1 May 1992, Ferndown was indebted to the Bank under the facility in an amount of some $9,263,000, and that there had been no material change in this respect in the period 1 November 1991 to 1 May 1992. Prima facie, this was an amount for which Neeta Homes was liable as guarantor. Ferndown had no source of cash flow, and the value of Ferndown's property which was security for the Bank's exposure was insufficient to cover the liability. According to paragraph 10.4.1 of his Report, the Liquidator was of the opinion that because of an indemnity given by Neeta Homes, the debt to the Bank was properly to be treated as an actual liability rather than as a contingent liability of that company. By a letter dated 3 October 1991, the Bank advised Neeta Homes that the Ferndown facility had expired, that the value of the security properties had diminished significantly, and that the Bank required payment of $180,000 if the facility was to be extended. Payments made by Neeta Homes to Macquarie Bank over the period 26 November 1991 to 28 February 1992 were in round figures ranging from $20,000 up to $50,000, and totalled $240,000. This was not sufficient to keep pace with interest on the facility let alone pay the sum of $180,000 called for by the Bank. The Liquidator's report explained that the Neeta Group's core business for approximately 30 years was the development of house and land packages, principally for first home buyers, and that using that core business as a base, the Group had invested heavily in commercial property, funded largely by debt. The result was that by the late 1980's the financial significance of the Group's commercial properties far exceeded that of its core business activities (according to the 30 June 1991 accounts, 76% of the Group's assets were related to "non- core" activities). The Neeta City Shopping Centre was, in the Liquidator's opinion, the main cause of the Group's failure (see above under "Liquidator's report: Neeta City Shopping Centre and Newcastle Taxation Office"). From prior to June 1991, the cashflow from the core business was insufficient to support the holding costs of the non-core activities. The directors attempted to protect the core business as far as possible, and commitments to creditors of the home-building business were being met, albeit in 60-120 days. idator's re t: seeking of moratorium ende fe) inve les nd continuation o Mr Hall first became involved with the Neeta Group on 24 January 1992 in connection with the preparation of an investigating accountant's report for the State Bank of South Australia. A copy of that report dated 12 February 1992 ("the SBSA report" referred to earlier) was annexed under Tab 16 to the Liquidator's report (see later). After submission of the SBSA report, Mr Hall convened two meetings on 13 March 1992 and 1 April 1992 of lenders in respect of the "commercial and investment" properties of the Neeta Group, and lenders in respect of the homebuilding business of Neeta Homes, respectively. In his memorandum dated 13 March 1992 to lenders of the former class he said "The Group is unable to pay any principal, interest or holding costs in connection with commercial or investment properties and requests a moratorium from 31 December 1991 to 30 June 1993." The memorandum also contained the statement "Currently the level of sales is below the break-even level and unless a recovery occurs by mid-year the Group will probably be unable to continue to trade." Mr Hall sought from all lenders of the former class (subject to one minor exception not presently important) a moratorium for eighteen months on all payments of principal and interest. This was not agreed to. Mr Hall sought from the lenders to the homebuilding business ongoing financial support. His memorandum to them dated 1 April 1992 spoke of the need to restructure the Group's homebuilding business "in the short term in order to allow the Group to continue to operate given current market conditions." The proposed restructuring involved a shift of focus from predominantly speculative stock homebuilding to contract homes and Department of Housing homes. Clearly, just as the Neeta Group proposed to concentrate on homebuilding business contracted with commercial and investment properties, so within the homebuilding business itself it proposed to concentrate on the more conservative and less speculative kinds of homebuilding. The last paragraph in the memorandum was as follows: "Neeta needs the ongoing support of its homebuilding lenders for the restructuring plan to work. Indeed, without that future support, we consider that the Group will be unable to continue to trade." Consequently, the directors of Neeta Homes took the initiative of applying to the Court on 1 May 1992 for appointment of a provisional liquidator. t' Issions on insolvency: The attack which the respondent made on the applicants' submission that Neeta Homes was insolvent at the relevant times can be understood from a reading of the affidavit of John Henry Banks, sworn 8 August 1994, which was read for the respondent. Mr Banks is a director of KPMG Corporate (NSW) Pty Limited and is a partner in KPMG Peat Marwick, in its Corporate Advisory Services Division and is the KPMG National Co-ordinator, Forensic Accounting Services. Mr Banks challenged the proposition that the Liquidator's report established the insolvency of Neeta Homes on three grounds of which the first two were inter-related. The first ground was that there was no evidence in the Liquidator's report that the Liquidator had "considered in detail the cash flow forecasts of Neeta/Neeta Group from November 1991 when reaching his conclusion". It was implicit in this criticism that according to Mr Banks, in the absence of such evidence the Liquidator's report should not be accepted as demonstrating the insolvency of Neeta Homes. The second ground was that a contemporaneous assessment of the insolvency of a company was to be preferred to one made with the benefit of hindsight, and that therefore the assessment contained in the SBSA report by Mr Hall dated 12 February 1992 was to be preferred to the Liquidator's report dated 21 March 1994. It was implicit in this criticism by Mr Banks that the SBSA report either established solvency or at least prevented the Liquidator's report from being accepted as establishing insolvency. The third ground was that for the purpose of determining whether a company is insolvent, a distinction is to be drawn between its debts which are 'commercially due" and other debts, it being only the former which are to be taken into account. It was implicit in this criticism that' the Liquidator's report had wrongly taken into account debts not describable as "commercially due", and that for this reason it should not be accepted as establishing insolvency. It is convenient to deal with these three grounds of challenge in turn. However, since an understanding of them depends to some extent upon an understanding of what Mr Hall had said in the SBSA report, it is first desirable to note the genesis and the purpose of that report. esis t. eport The SBSA had financed or partly financed the development of the Neeta City Shopping Centre and the Australian Taxation Office building in Newcastle (referred to as the "Newcastle ATO"). These two "off balance sheet" assets have been referred to earlier. The SBSA's exposure in respect to the Neeta Group arose from loans and also from undertakings given by it to other lenders. In respect of the Centre, it had made a term loan of $13.5 million maturing in November 1999 on which apparently some $17 million was owing as at February 1992, and in effect guaranteed for payment of the principal of $28 million lent by the first mortgagee, Chase AMP Bank. The SBSA had done this by means of a put option exercisable by that Bank in November 1993. The indebtedness to the SBSA of some $17 million was secured by a second mortgage over the Centre. As noted earlier on the basis of BKF's "as is" valuation of the Centre in February 1992 of $17 million, if there was an immediate sale the first mortgagee, Chase AMP Bank, would not be paid out, and there was no prospect of any recovery by the SBSA. As Mr Hall said in the SBSA report, minimisation of the exposure to Chase AMP Bank under the put option had to be the SBSA's top priority. It was in the SBSA's interest to ensure that the Group survive if this might possibly see Chase AMP Bank paid out. The SBSA report assessed the SBSA exposure on Neeta City at $25.5 million. In relation to the Newcastle ATO, SBSA's exposure comprised $5.7 million including capitalised interest, and a debt servicing guarantee to the first charge-holder over the property, the Advance Bank, which was owed $28 million in principal. As at September 1991, the property had been valued at $29.3 million. Rental income from the Newcastle ATO sufficed to cover interest on the Advance Bank's lending, and so the debt-servicing guarantee had not been called upon. The SBSA report assessed the SBSA's exposure on the Newcastle ATO at $4.4 million. As well, SBSA might suffer a loss of some $3.2 million on another property at O'Connell Street/Smart Street, Parramatta. The summary in the SBSA report (at para 7.1 on page 31) was that the SBSA was facing a loss of $33.1 million which could itself be increased if certain eventualities occurred. The task confronting Mr Hall in February 1992 had been to advise SBSA on what, if any, strategies might be open to it, and in particular, as to whether there was any course available which might avoid the apparently imminent collapse of the Group and at some future time possibly lead to some recovery. He described the options available to the SBSA as "severely limited"; reported that the valuations of the properties over which the SBSA had security were "insufficient to allow any return to the Bank were the properties to be sold at those prices"; said that the SBSA's strategy must be "primarily concerned with damage limitation"; and recommended that the SBSA "seriously consider" writing off its loan on Neeta City, or allowing Neeta Homes to rank for its $8 million investment in Neeta City after Chase AMP Bank and ahead of SBSA, in order that the auditors would certify the accounts for the year ended 30 June 1991 (Mr Hall did not necessarily agree that this would be justified but it is something which the auditors were prepared to do if either condition was satisfied). The criticisms of the Liquidator's report made by Mr Banks may, at first blush, suggest that in the SBSA report, Mr Hall had reported to the effect that the Neeta Group was solvent. This was not so0 at all. It is instructive to note the following particular statements made by Mr Hall in the SBSA report: "The foray into speculative development has brought the Group to the brink of collapse. Its current financial position is very weak and it is technically insolvent. The Group survives only with the support of its secured lenders, who were owed a combined $43 million at 30 June 1991." (page 1) "We are particularly concerned with the mismatch between the timing of the Group's assets and liabilities. The assets are by their nature incapable of swift realisation in the current climate. The liabilities, however, are principally due to secured providers of the finance, many of whose loans are due to expire in the near future and whose interest is overdue or in default. As a consequence, net current liabilities of the Group were $29 million at 30 June 1991. The arrears element of overdue interest at that date was just over $1 million; by 31 December 1991, the position had worsened to over $1.4 million. Management are acutely aware of the Group's problems and have implemented a strategy for recovery, which will concentrate their efforts on re-establishing the Group's home-building business to the desired level of 650 home settlements per annum from the level of 350-450 per annum to which it has fallen in recent years. Coupled with this is the intended rationalisation of the majority of the Group's commercial and investment properties. We have assisted management in preparing abridged profit and loss account and cash flow forecasts for the four years to 30 June 1995. These indicate that, if it is able to rationalise properties as intended and attain the desired level of 650 home settlements per annum, the Group appears capable of generating sufficient cash to retain its reduced investment property portfolio and honour its offer to SBSA to inject $3 million into the Neeta Village Shopping Centre over the next three years. The forecast activity levels of 550 settlements in the year to 30 June 1991 and 650 per annum thereafter appear achievable if the improvement in the number of settlements in the six months ended 31 December 1991 (306 settlements) can be sustained. This is, however, contingent on the continued support of the key home building lenders, notably St George, Orix and Metway Finance. " (page 2) "We consider that the Group's (and possibly SBSA's) interests would be best served by some form of moratorium arrangement with the major lenders to the Group, ideally, with an ongoing monitoring of the Group's performances against forecast. Whilst this arrangement would not eradicate the risks which the Neeta Group faces, it would allow them to be minimised in a controlled environment by encouraging the informed support of the Group's lenders. With specific regard to SBSA's position, the cash flow forecast based on 650 home settlements per annum gives some comfort that the Group are capable of funding Neeta City by $3 million over the next three years (although the availability of cash in the current year is only $800,000). However, given the prevailing uncertainties with respect to the attitude of the Group's other lenders, we are concerned that the Group is very much at risk to the withdrawal of funding by its key lenders. Accordingly, we would strongly caution the Bank against any further exposure at this stage." (page 3) In his oral evidence, Mr Hall said that by "technically insolvent" he meant simply "insolvent", and had included the word "technically" in an attempt not to be "too harsh" (194). It is clear that Mr Hall was saying that the strategy of Neeta Homes' returning to its core business of building and selling homes and increasing the rate of selling to 650 homes per year was dependent for its success on (a) the granting of a moratorium by the commercial and investment property lenders, and (b) the ongoing support of the key home building lenders, namely St George Building Society, Orix Australia Corporation Ltd and Metway Finance Ltd. As noted earlier, the moratorium was refused in March 1992 and the support came to an end in about April 1992. : [ round of a eto the Ligui f as. fe] Mr Banks said that he would expect to see a cash flow analysis of the type which Mr Hall had included in his SBSA report, section 6.2 and Appendixes X and XI. That forecast was summarised at section 6.2 (page 29) of the SBSA report in these terms: "The forecast is summarised as: Years to 30 June 1992 1993 1994 1995 Total $m Sm $m $m $m Cash flow from: Land and housing 0.7 3.0 3.0 3.1 9.8 Commercial properties (0.7) 0.6 - - (0.1) Investment properties 0.8 (1.1) (0.7) (0.8) (1.8) Group Cash Flow 0.8 2.5 2.3 2.3 22 The cash flow forecast for the period illustrates the Group's position well: the homebuilding division generates cash, the commercial properties are broadly cash neutral and the investment properties cost money. Indeed, the net outflow through the latter division would have been considerably worse if it had not been for the generation of $2 million in equity by the recent sale of the property at Appin Road. The forecast shows that, if the assumptions made can be adhered to by management, the Group appears to have the ability to generate sufficient funds to contribute $3 million over the next three years to the Neeta City project, as envisaged by the current negotiations with SBSA. However, it should be noted that the Group's ability to provide funds in the current year is uncertain, given that the forecast above implicitly assumes that none of the lenders to the Group withdraw their financing." Mr Banks referred, in particular, to Mr Hall's statement that "if the assumptions made can be adhered to by management, the Group appears to have the ability to generate sufficient funds to contribute $3 million over the next 3 years to the Neeta City Project," But the very next sentence in the SBSA report made it clear that the forecast assumed that none of the lenders to the Group withdrew their financing. In fact they did so. The SBSA report, properly understood, was that jf the volume and rate of sales forecast by Mr Green were achieved, and if the moratorium was granted, and if the lenders to the homebuilding business continued to "support" it, the cash flow forecasts set out in the SBSA report were achievable. In his oral evidence, Mr Hall explained (T86-87) what he meant by "support". His evidence was that the three principal homebuilding lenders (Metway Finance Ltd, Orix Australia Corporation Ltd and St George Building Society), would fund progress payments to suppliers of goods and services up to about $80,000 and that the house and land packages would retail at about $120,000, leaving $40,000 for Neeta Homes' overheads and working capital. He explained that if the lenders insisted that 100% of the proceeds of the sale proceeds be applied in reduction of the mortgage debt, the business would not be able to continue to trade. This, Mr Hall said, is what happened when the homebuilding lenders withdrew their support in April 1992. The cash flow forecast set out in the SBSA report was a contingent one. The contingencies were a moratorium from the commercial and investment financiers and ongoing support from the homebuilding lenders. Since the moratorium did not eventuate and the support of the homebuilding lenders did not continue, it would be erroneous to determine the issue of Neeta Homes' solvency as at the relevant dates by reference to that hypothetical and contingent cash flow forecast. But even if there had been an unconditional forecast that, given time, Neeta Homes would pay out all its creditors in full, this would not be an ability to pay its debts out of its own money as they became due: Re Attiwill; ici i v Braithwaite Bros (1932) 5 ABC 54 (Paine J) at 56; Re FP & CH Matthews Ltd [1982} 1 All ER 338 (CA) at 343d. The language of sub-section 122(1) requires that a person's ability to pay his debts as they become due from his own moneys be determined as at the date of the making of the payment the amount of which is sought to be recovered as a preference. Although the words "as they become due" invite attention to something more than the balance of assets and liabilities as at an instant of time, the element of futurity permissible to be considered must necessarily be short. Certainly the fact that a debtor will, given substantial time, be able to pay out all his creditors does not signify that as at the time when he made a particular payment impugned, he was able to pay his debts as they became due from his own money. Both the second and third grounds of Mr Banks' challenge to the Liquidator's report appear in paragraph 4.9 of his own report. That paragraph is as follows: "We believe that it is relevant to consider a contemporaneous assessment of the solvency of Neeta (as done by Mr Hall in the SBSA report), rather than analysing the historical prospects of Neeta with hindsight. Further, when considering whether debts were not being met when they became due, this should be considered in the context of "commercially due". This notion of a debt being commercially due recognises that creditors and lenders do not always immediately legally enforce payment and may accept revised terms of repayment after considering the circumstances of the debtor/borrower." Insolvency is a question of fact to be determined as at a point of time. A contemporaneous assessment of the factual position may be correct or incorrect. If "hindsight" shows that a contemporaneous understanding was incorrect, hindsight is shown to be preferable on that occasion. An unqualified cash flow forecast may be shown, with the benefit of hindsight, to have been made without foundation. It is a misconception to think that the question whether a person can pay his debts as they become due from his own money is concluded by contemporaneous opinions of whether he is able to do so. In any event, so far as the facts of the present case are concerned, as indicated above, the cash flow forecast stated in the SBSA report was heavily conditioned. : issions_on insolvency: "distinction betwee. " Lal due" xr debts" Mr Banks' third ground of challenge on the Liquidator's report was that erroneously it failed to distinguish between debts which were "commercially due" and other' debts. The distinction was, according to Mr Banks' oral evidence, in broad terms between creditors who were still willing to "gsupport" the company and those who were not. The distinction was not made entirely clear. Mr Banks gave evidence that a debt is not "commercially due" if there had not been a demand for payment (T110.9); that a debt becomes "commercially due" when legal proceedings are commenced by the creditor (T122.1); and that the making of a demand under the Corporations Law suffices to make a debt "commercially due" (T124.27). While there is an obvious distinction for commercial purposes between creditors who are and creditors who are not, for the time being, seeking to enforce their legal right to be paid in full, it is not a distinction of significance in the context of sub-section 122(1) of the Act. The sub-section refers to a person who "is unable to pay his debts as they become due from his own money". The notion of "becoming due" is a legal one. A debt is not rendered "not yet due" for the purpose of the sub-section merely by reason of the fact that the creditor chooses to forbear from enforcing legal rights of recovery. According to the contrary view, forbearance would prevent even a debtor of little property and income who was being "gupported" for the time being by all his creditors in the hope that eventually they would be paid and in the knowledge that bankruptcy would give them virtually nothing, from being described as " unable to pay his debts as they become due from his own money"! The absurdity of that result shows that the distinction referred to is a false one. Sub-section 122(1) is concerned with "ability" to pay "debts" as they "become due" from the debtor's "own money". Temporary and gratuitous forbearance and support by creditors is irrelevant to these notions. "IN GOOD FAITH" 2. Has the Liquidator established facts by which Press Plumbing is deemed, in relation to the respective seven payments, not to be a payee "in good faith"? The basis on which the Liquidator submitted that Press Plumbing was not a payee "in good faith" was that provided for in paragraph (c) of sub-section 122(4) of the Bankruptcy Act 1966 (Cth). The Liquidator submitted that the evidence showed that the seven payments were made under such circumstances as to lead to the inference that Press Plumbing (a) knew, or (b) had reason to suspect: i. that Neeta Homes was unable to pay its debts as they became due from its own money; and ii. that the effect of the payment would be to give Press Plumbing a preference, priority or advantage over other creditors. The word "knew" denotes a subjective test, whereas the words "had reason to suspect" denote an objective test in the sense that the test is whether there existed reason for Press Plumbing to suspect, not whether in fact Press Plumbing consciously adverted to matters which constituted reasons to suspect: Downs Distributing Company Pty Ltd v Associated Blue Star Stores Pty Ltd (in lig.) (1948) 76 CLR 463 at 475-476 (Latham CJ), 480 (Williams J). There was, in my view, ample evidence that Press Plumbing knew that Neeta Homes was unable to pay the instalments of $23,000 per month agreed upon in October 1990 to constitute payment of the sum of $480,000. The account given earlier of the dealings between Press Plumbing and Neeta Homes, and in particular, of the six re-schedulings of the timetable for the making of payments, coupled with the evidence next referred to, shows that the officers of Press Plumbing were aware that Neeta Homes could hot, as distinct from would not, pay the monthly instalments of $23,000 from its available cash resources, monies which would be timeously paid to it and its timeously realisable assets. There was much evidence that the officers of Press Plumbing believed that Mr Green, the managing director of Neeta Homes, genuinely wanted payment to be made, and that the problem was Neeta Homes' inability to pay. Ian Wallbank, the managing director of Press Plumbing said (T59), "We were confident that he was sincere and a genuine person and that he was endeavouring to pay his debt". Mr Wallbank agreed that the only reason why Press Plumbing was not being paid was that the money "simply was not there to be had" (T59). Mr Wallbank said that it was unusual, though not unique, for Press Plumbing to have assigned to it the benefit of the proceeds of sale of a builder's properties as security for payment of the builder's indebtedness to Press Plumbing, but that such an arrangement was always associated with a financial difficulty of the debtor (T61). The following frank evidence of Mr Wallbank is significant: "4... We could have actually taken action to fold up Neeta Homes and if we had, we could have probably put pressure on to get - for the same reason, to get paid our money earlier, because Russell Green was jealously guarding his name and fighting hard to keep his business, obviously, above water and we decided to go down the track of assisting him by continuing with the monthly payments, so we decided not to pull the plug on the company. Q. But you recognised that as being an option open to you? A. It certainly was and it may have actually got us the money, because as I say, Russell Green was fighting hard to save his company. Q. It might have got you the money at the expense of some other creditor who did not push as hard? A. Yes." (T63-64) Mr Wallbank did say that he always expected Neeta Homes to pay ultimately. His understanding was that its problem probably was that the volume and rate of home building and selling by Neeta Homes was not meeting Mr Green's forecast and so was not generating sufficient cash flow. But he expected that this problem would be overcome and that there would then be sufficient surplus to enable Neeta Homes to pay Press Plumbing (T66-67). The effect of Mr Wallbank's evidence seems to me to be that he knew that Neeta Homes was unable to pay its debts out of its cash flow, but that he believed that given time, Neeta Homes would trade out of its difficulties and be able to pay out Press Plumbing. Anthony Gordon Maclure, the Company Secretary and Finance Director of Amec Construction Pty Ltd (the holding company of Press Plumbing), Michael Denis Daly, who was at the relevant time the Divisional Manager of the relevant division of Press Plumbing, and Norman Argent, General Manager of Press Plumbing, all gave evidence that their understanding had been that Neeta Homes was unable, as distinct from unwilling, to pay the instalments which it had agreed in October 1990 to pay to Press Plumbing. The evidence of Mr Daly includes the following: "... Russell Green never indicated to me that he was not going to pay anything and he just - all he wanted to do is just hold the payments in abeyance. Q. Yes, and he wanted them held because he could not for the time being? A. He couldn't, he was just juggling his monies around at the time, his exact words." (175) I find that Press Plumbing knew that Neeta Homes was unable to pay the instalments which it had, in October 1990, agreed to pay, in the sense that it was unable to pay those instalments if it was also to pay its other debts as they became due. I find that Press Plumbing knew that Neeta Homes was unable to pay its debts as they became due from its own money. While I think that the inference which I have drawn as to the state of mind of the officers of Press Plumbing is clear, it is also clear that there was ample reason for a reasonable person placed in their position to suspect that Neeta Homes was not able to pay its debts as they became due from its own money. "ORDINARY COURSE OF BUSINESS" 3. Has Press Plumbing established that it was in relation to the respective seven payments, a payee, "in the ordinary course of business"? There appear to have been two views as to the meaning of "in the ordinary course of business" in paragraph (a) of sub- section 122(2), although the difference between them may not be significant on the facts of particular cases such as the present one. One view is that the expression points to a conveyance, transfer, charge, payment or obligation which is " a fair transaction, and what a man might do without having any bankruptcy in view": Robertson v Grigg (1932) 47 CLR 257 at 267 (per Gavan Duffy CJ, Starke J). The alternative formulation is that the expression refers to a transaction which must "fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no an or particular situation": tributi v Associated tore t iq.) (1949) 76 CLR 463 at 477 (per Rich J), or what must be a part of "transactions regularly taking place in a sustained course of activity or some usual process naturally passing without examination" (Taylor v White (1964) 110 CLR 129 at 136 (per Dixon CJ). The alternative test has been applied in recent years in Taylor v ANZ Banking Group (1988) 13 ACLR 780 at 798 (per McGarvie J); Re Cummins: Ex parte Harris (1985) 62 ALR 129 at 134-7 (per Pincus J); Spedley Securities Ltd (in lig.) v Tennyson Holding Ltd (1992) 7 ACSR 1 (NSW/CA) at 4 (per Samuels AP with whom Meagher JA agreed); Hamilton v onw' th Bank of Australi (1992) 9 ACSR 90 (NSW/Hodgson J) at 111. In my view the payments were not made in the ordinary course of business according to the latter conception of the meaning of that expression. It is sufficient to refer to the tardiness and re-scheduling of the payments. Moreover, in my view, the payments were made "with bankruptcy in view". The evidence of Mr Wallbank was that Press Plumbing was confronted with a choice between "pulling the plug" on Neeta Homes in the sense of insisting upon its paying the agreed instalments, the result of which would be, as he knew, a winding up of Neeta Homes, on the one hand, and merely pressuring Neeta Homes into making what payments it could manage to make, with a view to postponing and perhaps avoiding a liquidation, on the other hand. It chose the latter course. The payments extracted, always late and always the subject of re-scheduling, are of a kind associated with insolvency: but for the spectre of liquidation, Press Plumbing would long since have enforced its rights. In this respect also, the payments were not made "in the ordinary course of business". CONCLUSIONS In relation to the issues on which the case was contested, I conclude that the seven payments in question were made by Neeta Homes which, at the respective times of payment, was unable to pay its debts as they became due from its own money, and that Press Plumbing was not a payee "in good faith" or "in the ordinary course of business" for the purpose of sub- section 122 (2) of the Bankruptcy Act (1966) (Cth) in respect of those payments. I also record that the evidence satisfies me that Press Plumbing, at the time of receiving the respective seven payments, knew both that Neeta Homes was unable to pay its debts as they became due from its own money and that the effect of each payment was to give Press Plumbing a preference, priority or advantage over other creditors. Against the possibility that on the evidence I am not entitled to make that finding of actual knowledge of Press Plumbing, I am satisfied that the seven payments were made under such circumstances as to lead to the inference that a reasonable person placed as Press Plumbing was, should have known or have had reason to suspect both that Neeta Homes was unable to pay its debts as they became due from its own money and that the effect of the respective payments would be to give Press Plumbing a preference, priority or advantage over other creditors. I was asked by counsel for the respondent that if I should conclude that the respondent was liable, to allow an opportunity to the parties to make submissions in relation to the applicant's claim for interest and I said that I would do that. Accordingly, the proceedings will be listed for that purpose pursuant to an arrangement to be made between the representatives of the parties and my Associate. The formal orders of the Court at this stage are as follows: 1. I_DECLARE that the payments referred to in the schedule below are void as against the first applicant. 2. I ORDER that the respondent pay to the first applicant the sum of $222,000. 3. I ORDER that the respondent pay the applicants' costs of the proceedings to date. Date o Cheque 20.11. 27.11. 04.12. 11.12. 24.01. 07.02. 14.02. 919192 Cheque No. 99049906 10503 10557 10678 SCHEDULE Date Presented 20.11.91 27.11.91 06.12.91 13.12.91 28.01.92 05.02.92 24.02.92 I certify that this preceding 38 pages copy of the Reasons for Judgment of the Lindgren Honourable Amount $ 57,000. 50,000. 50,000. 50,000. 5,000. 5,000. 5,000. rsscciare: te) Dated: LO September 1994 9,10 August 1994 Sydney 20 September 1994 Mr D.J.Fagan of counsel instructed by Rosenblum & Partners appeared for the applicants. Mr A.S.Martin of counsel instructed by Clayton Utz appeared for the respondent. 000000 and the are a true Justice