FEDERAL COURT OF AUSTRALIA Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Badenoch Integrated Logging Pty Ltd [2020] FCA 713 File number: SAD 341 of 2015 Judge: DAVIES J Date of judgment: 27 May 2020 Catchwords: CORPORATIONS – voidable transactions – unfair preferences – interpretation of s 588FA of the Corporations Act 2001 (Cth) – whether there was a continuing business relationship in the form of a running account – where there was a break in continuing business relationship during the relation back period – peak indebtedness rule applied – good faith defence under s 588FG(2) of the Corporations Act 2001 (Cth) not made out – where defendant creditor claims set-off under s 553C of the Corporations Act 2001 (Cth) – defendant had notice of insolvency – unnecessary to decide threshold question of whether set-off available in unfair preference claims Legislation: Bankruptcy Act 1966 (Cth), ss 122 Companies Act 1993 (NZ), s 292(4B) Corporations Act 2001 (Cth), Pt 5.7B, Pt 5.9, Div 1, ss 436A, 439C, 553C, 588FA, 588FC, 588FE, 588FG(2), 588FF Cases cited: Airservices Australia v Ferrier [1996] HCA 54; 185 CLR 483 Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 Beveridge v Whitton [2001] NSWCA 6 Bryant (liquidator) v LV Dohnt & Co Pty Ltd, in the matter of Gunns Limited (in liquidation) (receivers and managers appointed) [2018] FCA 238 Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd [2020] FCA 714 Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Edenborn Pty Ltd [2020] FCA 715 Calzaturuficio Zenith Pty Ltd (in liq) v NSW Leather & Trading Co Pty Ltd; Victorian Leather Co Pty Ltd [1970] VR 605 Cashflow Finance Pty Ltd (in liq.) v Westpac Banking Corp [1999] NSWSC 671 Clifton (as liquidator of Adelaide Fibrous Plasterboard Linings Pty Ltd (in liq)) & Anor v CSR Building Products Pty Ltd [2011] SASC 103 CSR Ltd trading as the Readymix Group v Starkey (as liquidator) of Allan Fitzgerald Pty Ltd (in liq) (1994) 14 ACSR 321 Cussen (as liquidator of Akie Pty Ltd) v Commissioner of Taxation [2004] NSWCA 383 Federal Commissioner of Taxation v Kassem [2012] FCAFC 124; 205 FCR 156 Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543 Hussain v CSR Building Products Ltd [2016] FCA 392 In the matter of Employ (No 96) Pty Limited (in liquidation) [2013] NSWSC 61 Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation [2009] VSCA 319; 26 VR 657 McKern v Minister Administering the Mining Act 1978 (WA) [2010] VSCA 140 Olifent v Australian Wine Industries Pty Ltd (1996) 130 FLR 195 Petagna Nominees Pty Ltd v A E Ledger (1989) 1 ACSR 547 Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 Re a Debtor [1927] 1 Ch 410 Re Buchanan Enterprises Pty Ltd (No 2) (1982) 7 ACLR 407 Re Clements; Ex parte Trustee; Goldsbrough Mort & Co Ltd (Respondent) (1931) 7 ABC 255 Re Grezzana; Painter v Charles Whiting & Chambers Ltd (1932) 4 ABC 203 Re Smith; Ex parte Trustee; J Bird Pty Ltd and Tully (Respondents) (1933) 6 ABC 49 Re Weiss; Ex parte White v John Vicars & Co Ltd [1970] ALR 654 Rees v Bank of New South Wales [1964] HCA 47; 111 CLR 210 Richardson v Commercial Banking Co of Sydney Ltd [1952] HCA 8; 85 CLR 110 Sheahan v Fabienne Pty Ltd [1999] SASC 335 Sutherland v Lofthouse [2007] VSCA 197; 214 FLR 157 Sydney Appliances Pty Ltd (in liq) v Eurolinx Pty Ltd [2001] NSWSC 230 Timberworld Ltd v Levin [2015] 3 NZLR 365 VR Dye & Co (a firm) v Peninsula Hotels Pty Ltd (in liquidation) [1999] 3 VR 201 Date of hearing: 12, 13, 14 and 15 March 2019 Registry: South Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 133 Counsel for the Plaintiffs: Mr J Evans QC with Mr B Gibson Solicitor for the Plaintiffs: Johnson Winter & Slattery Counsel for the Defendant: Mr M G R Gronow QC with Ms R G Morison Solicitor for the Defendant: Scanlan Carroll Pty Ltd ORDERS SAD 341 of 2015 IN THE MATTER OF GUNNS LIMITED (IN LIQUIDATION) (RECEIVERS & MANAGERS APPOINTED) (ACN 009 478 148) BETWEEN: DANIEL MATHEW BRYANT, IAN MENZIES CARSON AND CRAIG DAVID CROSBIE (IN THEIR CAPACITIES AS JOINT AND SEVERAL LIQUIDATORS OF GUNNS LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) (ACN 009 478 148)) Plaintiffs AND: BADENOCH INTEGRATED LOGGING PTY LTD (ACN 097 956 995) Defendant JUDGE: DAVIES J DATE OF ORDER: 27 May 2020 THE COURT ORDERS THAT: 1. The parties provide to the Court draft orders giving effect to this judgment within 14 days. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT DAVIES J: INTRODUCTION 1 The plaintiffs are the liquidators of Gunns Limited (in liquidation) (receivers and managers appointed) (Gunns) and its wholly owned subsidiary Auspine Limited (in liquidation) (receivers and managers appointed) (Auspine) (collectively Gunns). They have alleged that Gunns made payments to the defendant (Badenoch) in the period between 30 March 2012 and 24 September 2012 which are voidable under s 588FE of the Corporations Act 2001 (Cth) (Corporations Act) as insolvent transactions. The total amount claimed by the liquidators is $3,360,876.16. 2 The claim concerns the following 11 payments made by Gunns (on behalf of Auspine) to Badenoch during the period from 26 March 2012 to 25 September 2012 (the relation back period): No Date Amount 1 30 March 2012 $410,000.00 2 16 April 2012 $410,956.07 3 2 May 2012 $660,347.78 4 8 June 2012 $678,929.63 5 8 August 2012 $300,000.00 6 17 August 2012 $150,000.00 7 27 August 2012 $150,000.00 8 3 September 2012 $150,633.68 9 10 September 2012 $150,000.00 10 17 September 2012 $150,000.00 11 24 September 2012 $150,000.00 Total $3,360,876.16 STATUTORY PROVISIONS 3 Section 588FF(1) relevantly provides that: Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders: (a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction; … 4 Section 588FE prescribes when a transaction is voidable for the purposes of s 588FF. Relevantly, s 588FE(2) provides: The transaction is voidable if: (a) it is an insolvent transaction of the company; and (b) it was entered into, or an act was done for the purpose of giving effect to it: (i) during the 6 months ending on the relation-back day; or (ii) after that day but on or before the day when the winding up began. 5 Section 588FC prescribes when a transaction is an insolvent transaction. The section provides: A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and: (a) any of the following happens at a time when the company is insolvent: (i) the transaction is entered into; or (ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or (b) the company becomes insolvent because of, or because of matters including: (i) entering into the transaction; or (ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction. 6 Section 588FA prescribes when a transaction is an unfair preference. The section relevantly provides: (1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if: (a) the company and the creditor are parties to the transaction (even if someone else is also a party); and (b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency. … (3) Where: (a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and (b) in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship; then: (c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and (d) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference. ISSUES 7 In a separate hearing, the Court determined that Gunns was insolvent on and from 30 March 2012: Bryant (liquidator) v LV Dohnt & Co Pty Ltd, in the matter of Gunns Limited (in liquidation) (receivers and managers appointed) [2018] FCA 238 (the insolvency judgment). Further, it was not in dispute that Badenoch was paid the amounts in question (although the exact dates of the payments were not agreed), nor that Badenoch was an unsecured creditor of Auspine in respect of the payments it received. In issue in these proceedings is: (a) whether all or some of the payments sought to be impugned are unfair preferences within the meaning of s 588FA(1) and voidable transactions (the unfair preference issue); (b) whether there was, or remained, a "continuing business relationship" within the meaning of s 588FA(3)(a) of the Corporations Act between Gunns or Auspine and Badenoch at the time that each of the payments was received by Badenoch and, if so, whether, or when, that continuing business relationship came to an end (the continuing business relationship issue); (c) if there was a continuing business relationship within the meaning of s 588FA(3)(a), whether the "peak indebtedness rule" applies for the purposes of s 588FA(3) (the peak indebtedness issue); (d) whether Badenoch has established a "good faith" defence pursuant to s 588FG(2) of the Corporations Act (the good faith defence); and (e) whether, pursuant to s 553C of the Corporations Act, Badenoch is entitled to set-off, against any sum it is ordered to pay in the proceeding, the sum of $569,321.81, being the amount of the unsecured debts still owed to Badenoch by Auspine and Gunns (the set-off issue). 8 Some of these issues are common to two other preference actions brought by the liquidators against other creditors of Gunns (the Gunns preference claims) in which judgment is handed down at the same time: see Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd [2020] FCA 714 and Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Edenborn Pty Ltd [2020] FCA 715. THE GUNNS GROUP 9 The following background to Gunns is taken from the insolvency judgment in this proceeding. 10 Gunns is the parent company of the Gunns Group. The Gunns Group was organised on a divisional basis by reference to its major operating business units rather than by reference to individual legal entities or groups of entities and, as the parent company, Gunns performed various functions for the group, including providing a centralised treasury and banking system. The principle financier to the Gunns Group was a syndicate of 10 banks led by ANZ Cavell Court as syndicate agent. 11 The principle activities of the Gunns Group were: (a) the processing, manufacturing and selling of sawn timber products and veneers including merchandising; (b) forest management and development, milling, processing and export of hardwood wood chip products; (c) responsible entity management of various forestry and horticultural managed investment schemes; and (d) financing managed investment scheme investors. 12 The Gunns Group operated from various sites, namely: (a) sawmills in Tarpeena, South Australia and Bell Bay, Tasmania; (b) a wood chip export facility at the Port of Portland, Victoria (sold in August 2012); (c) hardwood plantations (owned) located in the south east of South Australia; (d) plantations (owned and managed under managed investment schemes) in Tasmania; (e) plantations owned by investors under various managed investment schemes located in several states of Australia; (f) softwood plantations in the area known as the "green triangle" (Auspine softwood plantations) located in the south east of South Australia and Victoria; and (g) vineyards and wineries located in Tasmania. 13 During 2010 and 2011 the trading performance of the Gunns Group was impacted by several external factors and the Gunns Group suffered significant declines in revenue. From mid-2011 onwards there were ongoing delays in the payment of creditors and in September 2011, Gunns identified that it was unlikely to repay its finance debt which was repayable by 31 January 2012 and would require an extension of the repayment date. On 31 January 2012 the term was extended to 31 December 2012. Despite steps taken by the Gunns Group to reduce its finance debt the Gunns Group remained reliant on the lenders to fund its working capital requirements. A capital raising announced in early February 2012 did not proceed and alternative equity raising options did not eventuate. On 25 September 2012, the liquidators were appointed as joint and several administrators of Gunns and its subsidiaries by resolution of the directors of Gunns pursuant to s 436A of the Corporations Act. On 5 March 2013, at a meeting of the creditors of Gunns, the creditors of Gunns resolved that Gunns be wound up pursuant to s 439C of the Corporations Act and that the liquidators be appointed joint and several liquidators of Gunns in the winding up. As at 25 September 2012, the creditors of the Gunns Group totalled $780,798,000, which included unsecured trade creditors of $61,820,000 and other unsecured creditors of $73,016,000. BADENOCH 14 Badenoch carries on business as a harvester and haulage contactor. In August 2003, Badenoch executed a harvesting agreement with Auspine (the 2003 contract) under which Badenoch was contracted for a period of five years to provide harvesting and hauling services to Auspine for 340,000 cubic metres of logs per annum. The 2003 contract expired in December 2007 and with Badenoch's agreement, Auspine renewed the contract in September 2008 for the period 1 January 2008 to June 2013 on substantially similar terms to the 2003 contract (the 2008 contract). That contract was varied in August 2012, providing for more limited harvesting services prior to a mutually agreed early termination of the contract. 15 During the relation back period the following relevant payments were made and invoices raised for the services that Badenoch provided to Gunns: Date Invoice Payment 30 March 2012 $410,000.00 31 March 2012 (invoice) ($660,347.78) 13 April 2012 $410,965.07 30 April 2012 (invoice) ($674,368.12) 30 April 2012 (invoice) ($4,561.51) 1 May 2012 $660,347.78 31 May 2012 (invoice) ($737,633.68) 7 June 2012 $678,929.63 30 June 2012 (invoice) ($627,687.34) 31 July 2012 (invoice) ($194,273.06) 6 August 2012 $300,000.00 17 August 2012 $150,000.00 24 August 2012 $150,000.00 31 August 2012 (invoice) ($129,687.69) 31 August 2012 $150,633.68 1 September 2012 (invoice) ($4,665.04) 7 September 2012 $150,000.00 14 September 2012 $150,000.00 21 September 2012 $150,000.00 25 September 2012 (invoice) ($76,008.68) 16 There is not complete correlation between the dates of payments in this table and the dates in the table of impugned payments at [2] above, though it does not appear that anything materially turns on whether one date is accepted over another. WITNESSES 17 Evidence was given on behalf of the liquidators in this case by Craig Crosbie, one of the liquidators of the Gunns Group. Mr Crosbie was not subject to cross-examination. 18 The defendant adduced evidence from Kenneth Badenoch, who was the sole director of Badenoch from February 2002 to 10 April 2014 and from his son, Peter Badenoch, who took over management of the business and operations of Badenoch around 2008 and became a director on 10 April 2014. I intend no disrespect by referring to Kenneth Badenoch as "Kenneth" and Peter Badenoch as "Peter" but do so as a matter of convenience because they have the same surname. Both Kenneth and Peter were cross-examined. Badenoch also put into evidence an expert report of Mark Lipson, who was asked to provide his opinion in respect of the unfair preference amounts payable to Gunns in a running account scenario. Mr Lipson's evidence was not the subject of cross-examination. FACTS AND EVIDENCE 19 Badenoch provided harvesting and haulage services to Gunns in the south east region of South Australia and south west Victoria (the Green Triangle). As stipulated in the 2003 and 2008 contracts, Gunns provided a recipient created tax invoice at the end of each calendar month and payment was due the last working day of the following month. From 2010 onwards, Gunns was regularly late in making payment and Badenoch was constantly chasing payment and seeking advice as to when an invoice would be paid. 20 In evidence are emails which show that Badenoch, by July 2011, was aware that the late and irregular payments were due to lack of cash flow, payments were being made at least partly out of asset sales and it was not the only contractor not receiving payment on time. In a bulk email to contractors in the Green Triangle region sent on 1 July 2011, Philip Lloyd from Auspine apologised to contractors that the May invoice payment was likely to be delayed to the following week and gave as the explanation that there had been "a delay in some cash flows expected yesterday in relation to asset sales and receivables, particularly shipping invoices". Kenneth and Peter both acknowledged in cross-examination that they knew in July 2011 that a lot of contractors in the region were being paid late by Gunns. 21 Payment was not made as foreshadowed and on 8 July 2011, in another group email to the Green Triangle contractors, Mr Lloyd explained that "Gunns didn't receive some payments by Wednesday as anticipated" but expected to make payments that day (which was a Friday) and the following Monday. Badenoch did not receive any payment on the Friday or the Monday. When Terry Graney, Badenoch's office manager, followed this up with Mr Lloyd in an email dated 12 July 2011, Mr Lloyd was unable to say when payment would be made. It appears that payments were not made to any of the contractors on the Friday or the Monday. In another group email on 12 July 2011, Mr Lloyd advised that Gunns were still waiting on some anticipated payments. Payment was eventually made in early August for the May invoice but Mr Lloyd was unable to advise when the June invoice would be paid. 22 The problems with payment continued. When the July invoice was not paid on time, Mr Graney asked Mr Lloyd by email on 5 September 2011 to determine with Head Office "with urgency" the plan for full or part payment of the amounts outstanding from July. Mr Lloyd responded that "things are looking tight today for payment". Mr Lloyd also wrote that he was "not aware of exactly what [was] happening behind the scenes on asset sales". 23 Gunns released its audited financial statements for the financial year ended 30 June 2011 to the Australian Securities Exchange (ASX) in September 2011. The financial statements recorded, relevantly, a loss in the financial year from all operations of $355.486 million; total comprehensive income of negative $454.687 million; retained earnings of negative $156.726 million; and total liabilities of $858.108 million. 24 From late 2011 onwards, there was a significant amount of media coverage and ASX releases from Gunns regarding Gunns' financial position. An article published in The Age newspaper on 25 November 2011, entitled "Gunns directors under fire", stated that "Shareholders in loss-making forestry group Gunns have used the company's annual meeting to question whether the company can pay its bills, asking whether it has a back-up plan should it fail in its bid to build a controversial $2.3 billion pulp mill". The article further reported that a major shareholder had asked if the company would "be insolvent if the pulp mill did not go ahead". Kenneth agreed in cross-examination to keeping abreast of Gunns' financial position primarily by reading newspapers (being the Herald Sun and The Age on Saturdays). He also agreed he was aware that Gunns was involved in various asset sales. Peter denied believing what the media was saying about Gunns' financial position, saying that he had a long-standing distrust of media reporting. He said that he believed what he was told by Gunns' executives, who he understood had responsibilities because Gunns was a publicly listed company, over what the media was saying. 25 On 22 December 2011, Gunns gave a market update to the ASX which stated that it had revised its expected earnings before interest and tax for the financial year ending 30 June 2012 down to $30 million. The update also mentioned that Gunns was in negotiation with its core debt facility providers to extend existing finance facilities until 31 December 2012. The update stated that Gunns' senior debt facility would mature on 31 January 2012. The balance of the facility was then currently $340 million with around $216 million to be re-financed following repayments from asset sale transactions. The update also stated that negotiations to secure an equity investment partner for the Bell Bay pulp mill were continuing and site earthworks were expected to be completed in March 2012, on schedule. 26 In about January or February 2012, Peter was informed by Bryan Hayes, the general manager of Gunns Forest Products Division, and Mr Lloyd that Gunns was involved in "refinance" discussions. 27 An article in The Sydney Morning Herald newspaper published on 7 February 2012 entitled "Gunns bid for more capital" stated that Gunns had ended 2011 with a $10 million to $20 million forecast downgrade to 30 June 2012 and was "trading at historic lows" on the ASX. It also mentioned that Gunns had secured a refinancing of a $340 million senior debt facility and of primary working capital facilities through to the end of 2012. 28 In February 2012 Gunns announced a proposed capital raising of up to $280 million, stating that "[i]n combination with [Gunns'] current asset sales program, the proposed recapitalisation will facilitate a further significant reduction in [Gunns'] debt". 29 On 27 February 2012 Gunns released its financial statements to the ASX for the financial half year ended 31 December 2011, which recorded a loss in the half-year period of $173.321 million, a total comprehensive income of negative $173.323 million, retained earnings of negative $333.910 million and total liabilities of $798.760 million with net assets of $876.125 million. 30 An article in The Age newspaper published on 28 February 2012 entitled "Gunns records loss" stated that Gunns had recorded "a 40 per cent revenue slump for the half to $217.4 million, and posted a $173.3 million loss on the back of impairments and asset write-downs". It also recorded Gunns' managing director, Greg L'Estrange, as saying that "the future of Gunns is clearly driven by the completion of the pulp mill project". 31 As at the end of February 2012, Auspine owed Badenoch approximately $1.64 million. 32 On 1 March 2012, Peter sent an email to Mr Hayes stating: "I wish to express our concern about current problems with payments by Gunn's [sic] as per my conversation with Phil Lloyd of the 29th February". Peter wrote in the email that "Gunn's [sic] are our only customer and we are solely reliant on you for the timely payment to continue to operate" and asked Gunns to respond to the following questions: 1. Are Gunn's [sic] solvent? 2. What are the timelines for payment of amounts outstanding? 3. Currently our overdraft rate is 9.12 per cent. We do not think it is unreasonable to ask that Gunn's [sic] pay interest at these rates on overdue amounts. 4. Will the proposed asset sales improve cash flow to the extent that we would in the near future return to normal trading terms? Peter also stated "Given the support that we have shown Gunn's [sic] over the past 12-18 months we ask that you give serious consideration to the extension / rolling over of our current contract". 33 On 7 March 2012, Mr Hayes replied that he would respond to the specific queries after consulting with Mr Lloyd "in the next day or so". 34 On 9 March 2012, Mr Hayes sent an email to Peter, stating: 1. Yes, Gunns is solvent. The current cash shortage is the result of planned asset sale settlements not occurring on the due dates. 2. We will have guaranteed access to funds on March 19th. which will pay outstanding November and December accounts along with priorities identified from the outstanding January accounts. The balance of January outstandings will be paid by March 30th. 3. We do not accept to pay interest charges on your business finance costs. We are not a party to your business's internal financial arrangements and do not wish to be. Gunns is also incurring interest charges on overdrafts as a result of the delay to asset sale completion. 4. Yes. We expect to return to normal trading terms in April as the asset sales are completed and nett cash is made available to sue from the participating financial institutions. Mr Hayes further noted, in the context of responding to Peter's enquiry about extending the existing contract, that "[o]ur current trading environment is characterised by falling timber and woodchip prices with no relief in the foreseeable future". 35 Peter responded by return email the same day: Bryan, We acknowledge receipt of your email and thankyou [sic] for making comment on our points of concern. … Whilst we do not understand all of your current financial difficulties we do appreciate that current cash flow issues are presenting challenges to Gunn's [sic]. Over the last two years these challenges have resulted in Gunn's [sic] trading outside the terms of our contract. We have been very patient given the current financial situation as we understand it but the last few months have resulted in us also trading under financial stress which in turn has meant that we have had to make financial arrangements at a cost as a direct response to cashflow constraints brought on by Gunn's [sic] late payment. We are not asking for you to be involved in our internal affairs but merely for your support and signs of good faith in these difficult times. 36 In cross-examination, Peter was asked about the email he sent on 1 March 2012. His evidence was that "broadly speaking the whole thing was a provocation". The following exchange then occurred: Okay?---I was angry. I lashed out. So in that context, yes. That I didn't expect to have anything satisfied in – in a specific sense, but by this time I had the opinion that Gunns were happy just to keep avoiding the conversation until they were ready, and I wanted to have the conversation. So I was provocative. Well, you had been told for at least a year that they were paying you late because they were not in a position to pay you on time, hadn't you?---Yes. And in March 2012, when you used the term "solvent", I want to suggest to you, you knew that the definition, or that solvency means, not being able to pay your debts on time?---I've had a – a lot of difficulty with my own legal team trying to understand exactly what solvent does mean. Well, can I suggest to you that, in this context it means, and it meant then, that the question you were asking of Gunns was, whether or not they were able to pay their debts as and when they fell due for payment?---The question I was asking Gunns was, how – how much longer do I have to put up with this? I – you – you said to me that I thought they – well, I'm asking a question now. Did you say to me that you thought that I thought they were insolvent, that's why I asked the question? No. I did not ask you that?---Before that. No. I did not ask you that question. The question - - -?---Can you repeat the question? I will repeat what I did ask you?---Thank you. Okay. I want to suggest to you that, you were asking a question about whether they – you asked the question in this email, "Are Gunns solvent?" Yes?---Yes. I asked that question. And I will suggest to you that, you knew at the time that what was meant by "solvent" was that, whether or not Gunns could pay their debts on time, when they fell due for payment?---That's not – that wasn't my view. No. Okay. If I asked you that question in March 2012, did you believe that Gunns were not able to pay their debts on time - - -?---Gunns were not paying their debts to me on time. That is correct. And they had not done so for more than 12 months?---That had been their pattern of behaviour. Yes. And I suggest to you that at that time you suspected that the reason they were not paying you on time was because they were not able to pay you on time?---Well, I knew they weren't able to pay me on time. 37 I found Peter's answers evasive and not forthcoming. The term used in the email was "solvent" and Peter agreed that he dictated the email to Mr Graney to send on his behalf. Against the background that Gunns at the time had been paying Badenoch's invoices late for around 18 months, there is no reason to doubt that what Peter meant by "solvent" was whether or not Gunns could pay their debts. In cross-examination, Kenneth said that he knew Peter was sending this email to Mr Hayes, that they had been discussing whether or not Gunns was solvent and it was a matter of real concern to him at the time that Badenoch's monthly payments return to being paid on time. 38 When asked about his response on 9 March 2020 to the email from Mr Hayes, Peter's evidence was that: I still had faith in Gunns' plan. They still had the backing of their banks. They'd recently rolled over their debt facility with their lending syndicate. They were still investing in the mill. I still had faith in that, despite their difficulties. 39 Kenneth could not recall in cross-examination whether he discussed Mr Hayes' email dated 9 March 2020 with Peter, but he did recall that they and Mr Graney had a lot of discussions between themselves about Gunns. In cross-examination he colourfully gave the evidence that he knew Gunns was "blowing in the breeze". When asked to explain, he said "that they had issues. But they also had plans". When asked whether he knew what those plans involved he said "get that pulp mill up and running". He denied that he knew that there was a significant risk that the pulp mill would not get up and running. 40 Also on 9 March 2012, Gunns made an announcement to the ASX of a halt in trading in its shares pending the release of an announcement to the market. Peter was aware of this suspension in trading and considered that it was a significant event. 41 The same day an article was published in the Sydney Morning Herald newspaper entitled "Gunns blames Greens for billionaire blow", which stated that Richard Chandler Capital Corporation Pte Limited (Richard Chandler Corporation) had withdrawn from a proposed equity investment of $150 million into Gunns. The article stated that Gunns had "staked its future on the value-adding pulp mill project" and quoted Mr L'Estrange, Managing Director of Gunns, as stating "if the project doesn't go ahead I'm not sure where the company will end up". The article also stated that "[Gunns] shares have lost more than 70 per cent of their value [between March 2011 and March 2012], as investors fret over the future of the company". A similar article was published in the Sydney Morning Herald newspaper on 13 March 2012. Peter admitted that he was aware of Gunns' failure to obtain the Richard Chandler Corporation investment and his awareness of this occurred around the time of the trading halt. He also agreed in cross-examination that he was aware that Gunns' future was in part dependent upon the pulp mill and if the pulp mill was not able to proceed that would have been a significant event for Gunns. 42 The trading halt was never subsequently lifted, including at any time prior to the liquidators' appointment as administrators of Gunns and the Gunns Group of companies on 25 September 2012. 43 On 20 March 2012, the Australian Financial Review newspaper published an article entitled "Moelis joins Gunns runners", which stated "Credit Suisse is advising Gunns on the raising that investors hope will wipe the company's debt and right its balance sheet once and for all. Gunns wants to pay down its $580 million debt pile as it looks for a joint-venture partner for its planned $2.3 billion pulp mill". 44 On or about the same day, Scanlan Carroll, solicitors for Badenoch, sent a letter of demand to Gunns demanding payments of outstanding debts owed by Gunns. The letter stated that: (a) unless payment of $645,951.75 owed for work and labour performed in January 2012 was made within 7 days, legal proceedings against Gunns for recovery of the debt would be commenced forthwith and without further notice; (b) unless payment of $820,532.33 owed for work and labour performed in February 2012 was made by 31 March 2012, Scanlan Carroll was instructed by Badenoch to issue proceedings immediately upon default and without further notice; and (c) Badenoch would not be providing any further services to Gunns until non-payment for prior services was rectified. 45 In his examination conducted under Pt 5.9, Div 1 of the Corporations Act on 20 August 2015 (liquidator's examination), Peter said that they were "worried at that time" and "sick of getting stuffed around", though he denied that he had a heightened concern about Gunns' solvency at the time. 46 Badenoch ceased to provide services to Auspine for about 10 days. Peter admitted it was a serious step for Badenoch to stop supplying services, as Gunns was their only customer and there were serious ramifications for Badenoch, Badenoch employees, Gunns and the Tarpeena mill arising from a "stop supply" decision. Kenneth would not agree to the proposition that it was a serious step, but I found his response evasive. Although he admitted that making a threat to stop was a serious thing to do, he likened stopping supply of services to "just turn[ing] the tap off" and said that he never thought about what it would mean for his employees at the time. He did however admit that there would be consequences for the Tarpeena Mill, unless Gunns got someone else to "fill [Badenoch's] boots". He also said he had 38 years hard work behind him, and that was enough to walk away from the business. 47 On 22 March 2012, Peter had a conversation with Mr Lloyd in which he advised Mr Lloyd that "he had talked to Dad" and they wanted an agreed credit limit of $1 million, with a bank guarantee for that amount. Mr Lloyd put that proposal to Mr Hayes by email for his response. Later that day, Mr Hayes responded that Gunns was unable to provide a bank guarantee as requested by Badenoch. In cross-examination, Peter accepted that he was aware that the effect of a bank guarantee would be to give Badenoch security for the work it was doing, but denied that the reason for asking for a bank guarantee was because he was concerned that without it Badenoch might find itself unpaid if Gunns was in fact insolvent. 48 On 23 March 2012, Mr Lloyd informed Peter by email that Gunns was "max'd out on the bank guarantee front and any more require[d] [Gunns] to deposit an equivalent amount of cash with the bank" so "we may as well pay the money to you in order to get deliveries back on track asap". Mr Lloyd proposed that Gunns pay 50% of the January invoice on 26 March 2012, the other 50% on 28 March 2012, and 50% of the February invoice on 30 March 2012 with the balance of the February invoice on 13 April 2012. Mr Lloyd also enquired whether Badenoch would be willing to provide "almost normal" deliveries the following week on the basis that the proposed payment schedule would put the parties back on terms at least until the February invoice fell due for payment at the end of March, and resume sawlog deliveries in the week before and after Easter pending the payment of the outstanding 50% of the February invoice. 49 Peter responded to Mr Lloyd's email the same day, stating that "we are understanding of your position however we need to ensure that we have adequate measures in place to protect our exposure and business". Peter accepted the payment proposal on the basis that "there will be no further flexibility with respect to the timeframes proposed" and stated that if Gunns' liability to Badenoch exceeded $1 million at any stage, "our services will immediately cease". Peter also wrote that Badenoch "reserve[d] the right to enforce the terms of the contract at any time notwithstanding the indulgence granted herein and particularly in the event of a default of [sic] pursuant to your proposal". 50 On 26 March 2012, Gunns released a market update to the ASX outlining its intention to undertake an equity raising of approximately $400 million to reduce debt facilities and strengthen its balance sheet. Gunns also noted that the suspension of trade of its securities would continue. In cross-examination, Peter agreed that he was aware that there was a trading halt extension. 51 Payments were received as promised on 26, 28 and 30 March and 13 (or 16) April 2012. 52 As at the end of March 2012, Badenoch was owed approximately $1.07 million by Auspine, although $660,347.78 related to work done in March and was not due to be paid until 30 April 2020. 53 Throughout the course of April and May 2012, Gunns made further announcements to the ASX regarding the continued suspension of its shares from trading (which began on 9 March 2012), pending completion of its efforts to raise further capital of approximately $400 million. Those announcements were widely reported in the press. 54 Badenoch continued providing services to Gunns throughout April, May and June. Despite Badenoch's threat to cease services immediately if the debt rose above $1 million, at the end of April 2012, Badenoch was owed approximately $1.34 million (although that included the two invoices for April of $674,368.12 and $4,561.41 not due for payment until the end of May 2012), as at the end of May 2012, Badenoch was owed approximately $1.42 million (although that included the invoice for May of $737,733.68 not due for payment until the end of June 2012), and at the end of June 2012, Badenoch was owed approximately $1.37 million (although that included the invoice for June of $627,687.34 not due for payment until the end of July 2012). 55 On 15 and 22 May 2012, Gunns released announcements to the ASX regarding the sale of its Heyfield sawmill for approximately $28 million. That asset sale was widely reported in the press. 56 An undated file note of Mr Hayes recorded: Peter Badenoch – out of contract + agreement – if they need to stop it will be permanent! … Phil – spoken to Peter Badenoch. Family meeting tonight. Deliver 3–4 days log stocks. [Gunns] to pay w/ in fortnight. 57 In cross-examination Peter said he recalled having a conversation with Mr Lloyd at the start of July 2012 regarding the potential termination of the contractual services and saying to Mr Lloyd that he was going to have a family meeting that night. Peter said that his father would not have been involved in the meeting because he was overseas at the time, but he would have had a talk with his brothers. 58 In an email from Mr Lloyd to Mr Hayes sent on 2 July 2012, Mr Lloyd wrote: Had another call from Peter Badenoch. He is going to stop harvesting today, but will continue to deliver all his bush stocks which should keep deliveries going until end Thursday. He will then stop delivering for shut down pending payment. His workers will take days off owing to them and he certainly won't be making anything public, it's just a wind down of harvesting for the shut. He would like a letter from Gunns indicating the plan going forward in relation to timing of his next payment (which I've already told him would be before the end of next week), and whether Gunns plans to or will use a portion of the asset sale proceeds to get working capital under control. Are you able to put something together for him? 59 Peter also recalled having that conversation. 60 Also on 2 July 2012, Gunns announced in a market update to the ASX that Gunns: (a) was analysing the impact of a substantial decline in stumpage prices in the woodchip market on the values of Gunns' forestry assets; (b) was continuing negotiations regarding proposed capital raising; and (c) on the basis of the above developments, had decided that it was in the interests of Gunns that no distribution be declared on FORESTS for the period to 14 July 2012. 61 The ongoing suspension of trading in Gunns shares and Gunns' ASX market update of 2 July 2012 were reported in the press. On 2 July 2012, the Australian Financial Review newspaper published an article entitled "Low prices cut value for Gunns" which stated that: (a) Gunns' review of stumpage values reduced standing timber valuation by nearly $40 million and Tasmanian wood plant and equipment by $25 million; and (b) Gunns was reviewing its Tasmanian land and tree values and a lower valuation on its Tasmanian estate "[was] not good news as Gunns ha[d] listed that land, plantation and infrastructure as its $600 million equity contribution to the pulp mill project". 62 On 3 July 2012 articles published in the Examiner newspaper described companies with such lengthy trading suspensions as usually being in receivership or administration and reported, according to an analyst, that Gunns' decision not to pay quarterly distribution on $1.2 million of redeemable securities indicated that Gunns did not have the money to profit from them. 63 On 3 July 2012, Scanlan Carroll sent a letter of demand to Gunns demanding payment of outstanding debts relating to work and labour performed by Badenoch in May 2012. This invoice had only fallen due for payment on 29 June 2012, two business days earlier. The letter also stated that unless payment was received by 11 July 2012, Scanlan Carroll were instructed to commence legal proceedings against Gunns for recovery of the debt totalling $737,633.68. Scanlan Carroll's letter also stated that, once Badenoch had "finalised those services which have been agreed to between it and your Regional Management", Badenoch would cease to provide any further services to Auspine and Gunns until non-payment was rectified. The letter further stated that should payment not be forthcoming, given that this was the second instance where Gunns had breached the payment terms of the contract, Badenoch reserved its rights to terminate the contract. Peter confirmed in cross-examination that he had given his solicitors instructions to issue legal proceedings without further notice if payment was not forthcoming. It was put to him that the reason why he had the letter of demand sent was because, by that stage, he had become deeply concerned about Gunns' ability to pay the outstanding invoices, which he denied. He gave as the reason that he had decided to shut down the business because he didn't want to continue with the work anymore as it was putting a strain on his employees and on him. 64 On 10 July 2012, Badenoch ceased to provide services to Gunns. Peter agreed in cross-examination that this was a serious step to take and meant that Badenoch lost its only customer and more than $5 million in revenue a year, removed Badenoch's ability to provide employment to its 18 employees, and meant that the significant machinery Badenoch used to harvest and haul woodchips would sit idle and potentially need to be sold. 65 On 11 July 2012, Mr Lloyd sent a letter to Scanlan Carroll in response to their letter of 3 July 2012, stating that Gunns was unable to make the requested payment of $737,633.68 by that day, and offering instead a payment schedule of $150,000 per week commencing 20 July 2012. Mr Lloyd advised that the payment schedule would be reviewed after completion of the Portland Export Woodchip Terminal sale, when Gunns proposed to "bring the payments back to contract terms". In cross-examination, Peter denied that Gunns' response indicated to him that it was not in a position to pay Badenoch immediately. His evidence was he was "no longer thinking about a future with Gunns" and he was "over it". He said that he: .. realised that Gunns no longer viewed me as important to their plans going forward, because I didn't offer the same level of service – the level of service that I was now offering didn't carry the same importance. Basically, I belted an arrogant [man] with a big stick and – in March or whenever it was – and stood up and said, "I'm not going to work for you." I was just as arrogant as he was. 66 That evidence is to be contrasted with his evidence in his liquidators' examination. When it was put to him that knew as at early July 2012 that Gunns' financial position was poor, he responded "everyone knew Gunns' position was poor" and later said "they were juggling their money, I knew that, a blind Freddy could see that, the market knew that". 67 On 16 July 2012, Gunns announced to the ASX that it had executed an agreement for the sale of its woodchip export facility in Portland, Victoria, subject to customary conditions including regulatory approval. The Sydney Morning Herald newspaper published an article the same day entitled "Gunns offloads Portland woodchip plant for $61.8m", which stated that Gunns was to sell its woodchip plant in Portland, Victoria, as part of an asset sell down it was undertaking to fund its "ambitious $400 million capital raising" for the Bell Bay pulp mill project. 68 On 18 July 2012, Scanlan Carroll sent a letter to Gunns advising that Badenoch reserved its rights in relation to Gunns' failure to comply with the contract and meet its payment obligations. The letter also advised that Scanlan Carroll was waiting for instructions from Badenoch in relation to Mr Lloyd's letter of 11 July 2012, but "in the interim our client has queried whether Gunns could also provide some additional security for payment". The letter requested that Gunns advise whether it could provide a bank guarantee or security interest in addition to the proposed payment plan outlined in the letter dated 11 July 2012. The letter further stated that Gunns had foreshadowed the completion of an export sale by the end of July, pending Foreign Investment Review Board (FIRB) approval, and Badenoch sought further details of this transaction, in particular details of the settlement date, the status of the FIRB approval, copies of any contracts relating to the export "which substantiate same", and "whether there is the possibility of our client being paid from the settlement monies". 69 On 20 July 2012: (a) Mr Lloyd advised Scanlan Carroll by email that Gunns was preparing a response to the 18 July 2012 letter, which would be sent early the following week; (b) Five minutes later, Scanlan Carroll sent an email to Mr Lloyd advising that Peter was "most concerned about the delay" and the solicitors held instructions as of that morning (being a Friday) to issue proceedings on Monday, but that if Mr Lloyd advised of a "definite timeframe" for Gunns' response, they would seek instructions to agree to an extension; (c) Mr Lloyd responded that Gunns would respond by close of business Monday; (d) Scanlon Carroll followed up with another email, which stated their client's instructions were "2pm Monday is the deadline given… Failing a satisfactory resolution…we hold instructions to issue a Statutory Demand". 70 No statutory demand was issued. Peter's evidence in cross-examination was that it was never his intention to issue a statutory demand but he used the threat as a negotiating tactic. 71 On 23 July 2012, Gunns sent a letter to Scanlan Carroll in which Gunns stated that it was unable to provide a bank guarantee and that it intended to utilise funds retained from the sale of the company's Portland export facilities to fund creditor payments and "normal operation of the business". 72 Also on 23 July 2012, the Australian Financial Review newspaper published an article with the headline "All Gunns blazing for Korda Mentha", reporting "[Gunns'] lenders…have called in KordaMentha", who were described in the article as "insolvency specialists". 73 By a letter dated 23 July 2012 from Mr Lloyd on behalf of Gunns to Kenneth titled "Notice to Remedy Breach", Mr Lloyd wrote that Gunns had been informed that Peter Badenoch had contacted Philip Mason from New Forests Assets Management Pty Ltd (New Forests) to discuss that "Badenoch Logging had stopped working for Gunns and may not start again". Mr Lloyd stated that "Peter's deliberate decision to recklessly discuss confidential aspects of [Gunns and Badenoch's] contract with New Forests could not only adversely affect [Gunns'] contractual relationship with New Forests but have the potential to further destabilise Gunns operating position". Mr Lloyd further wrote that Gunns considered this was a material and wilful breach of contract and required Badenoch to take all necessary actions to remedy the breach. 74 When asked about the contact with Mr Mason in his liquidators' examination, Peter said he informed Mr Mason in "probably a 30 second phone call" that he initiated, that Badenoch was "finished up with Gunns" because Badenoch was "not being paid on time". 75 On 25 July 2012, Peter responded by letter to the allegations raised in Mr Lloyd's letter to Kenneth of 23 July 2012. Aside from denying any breach of confidentiality, Peter wrote that: It is Auspine Ltd that is in breach of the agreement with our company, and Auspine/Gunns has been put on notice that unless you make firm arrangements to pay our company what it is owed for the services provided, then we intend to instruct our lawyers to serve a creditor's statutory demand. 76 In his affidavit sworn on 21 June 2018, Peter deposed that he thought Gunns was prioritising other creditors over Badenoch for prompt payment. He was aware that once Badenoch had stopped providing services in mid to late 2012, Gunns brought in two other main contractors to do the work Badenoch was previously doing and he did not believe these contractors would have taken over unless there was an arrangement in place to ensure prompt payments to them, and he did not want to wait for those contractors to be paid before Badenoch. He further deposed that he assumed that Auspine and Gunns would be able to meet the statutory demand and was using it as a tool to move Badenoch closer to the top of the list of Gunns' creditors to be paid earlier and otherwise maintain pressure on Gunns to comply with payment plans. In his liquidators' examination Peter admitted that he understood by this time that Badenoch would not be paid in the ordinary course of business. 77 On 31 July 2012, Peter sent a letter to Gunns in which he wrote that Auspine and Gunns currently owed Badenoch more than $1.36 million in outstanding invoices and the non-payment was a breach of a fundamental term of the contract, amounting to a repudiation of the agreement. The letter continued: Before we accept Auspines [sic] repudiation, we propose to investigate the opportunity for a transition to a mutually acceptable termination of the agreement at the end of three or four months. We understand that you would regard it as helpful if we were to supply logs. Subject to the following arrangements, we are willing to meet this need in the short term with a gradual tapering off while another contractor gets up to speed. Peter proposed a termination of Badenoch's agreement with Auspine on the basis of a payment plan comprising an immediate payment of $300,000 and weekly instalments of $150,000 until all outstanding debt was paid. In the meantime, Badenoch would not take action in respect of the current debt whilst instalments were paid and would cooperate with Gunns to meet timber supply requirements in the course of a structured handover to another contractor. The proposal was open until 2 August 2012. Peter wrote that "[i]f we haven't been able to reach a satisfactory agreement by that time, we will do whatever we have to do to protect ourselves". 78 As at the end of July 2012, Badenoch was owed approximately $1.36 million by Gunns, plus an invoice was issued on 31 July 2012 for $194,273.06 (but not payable until 31 August 2012). 79 On 2 August 2012, Mr Lloyd sent a letter to Peter accepting the proposal as outlined in Badenoch's letter dated 31 July 2012 and stating that an initial payment of $300,000 would be made on 6 August 2012, with the weekly instalments of $150,000 to commence the following week. 80 The first instalment of $300,000 was paid on 6 (or 8) August 2012. 81 Also on 6 August 2012, Gunns released a market update to the ASX which reported that Gunns estimated that, for the financial year ended 30 June 2012, Gunns would record an impairment in its financial statements of between $700 million to $800 million, and that subject to end of year financial adjustments Gunns' net tangible asset value would fall to between negative $50 million and negative $150 million. 82 On 7 August 2012, the Australian Financial Review newspaper published an article regarding Gunns' announcement to the ASX of 6 August 2012 entitled "Gunns faces huge write-down". The article stated that "[b]attered timber company Gunns is clinging to survival after flagging an impairment of up to $800 million for 2011-12 on lower commodity prices and conceded that its $2.3 billion pulp mill project may fail because of its weak financial position". The article also quoted a "market watcher" as having commented that "[t]he person who had the most access to the books was Richard Chandler and he walked, which tells you everything". Numerous other media articles were published at or around this time regarding Gunns' financial position. 83 On 17 August 2012, Gunns paid Badenoch $150,000 in implementation of the payment plan agreed on. 84 On or about 20 August 2012, a Deed of Variation and Release (Deed) was executed by Auspine and Badenoch in which the parties agreed (inter alia) that Auspine owed Badenoch the sum of $1,559,594.08 and that the agreement between the parties (dated 15 August 2003) was terminated by mutual consent upon the final delivery by Badenoch of some limited harvesting and delivery services outlined in the Deed. 85 On 24 August 2012, the Australian Financial Review newspaper published an article entitled "Critical point for wobbly Gunns" stating that "KordaMentha [were] poised to present a final report on the company's vitals to its syndicate of 10 banks" and that "some of Gunns' Asian lenders… [had] had enough and [were] considering selling their loans". 86 On 24 (or 27) August 2012, Gunns paid a further instalment of $150,000 to Badenoch. 87 On 31 August 2012, Gunns released to the ASX a Preliminary Final Report of its financial position and performance for the financial year ended 30 June 2012, which recorded a net loss after tax of $903.9 million, a total comprehensive income of negative $1.02 billion, retained earnings of negative $1.07 billion, total liabilities of $879.267 million, and total net assets of $24.251 million. 88 On 31 August 2012, ABC Online published an article entitled "Gunns announces massive $900m loss" which stated that the Gunns Annual Report recorded a "massive annual loss" of $904 million, that Gunns had "devalued its net tangible assets by more than $1 billion" and that "Gunns' creditors would have difficulty recovering more than $500 million [of repayments owed to them]". Numerous other media articles were published at or around this time regarding this further deterioration in Gunns' financial position. 89 In August 2012, limited final work was done by Badenoch to the value of $129,687.69. In cross-examination, Peter Badenoch agreed that this work was done to enable the Tarpeena Mill to continue to operate until such time as Gunns sourced someone else to perform the work and to increase Badenoch's chances of getting paid. 90 As at the end of August 2012, Badenoch was owed approximately $1.09 million by Gunns. 91 On around 7 (or 10), 14 (or 17) and 21 (or 24) September 2012, Gunns paid further instalments of $150,000 each to Badenoch. 92 On 12 September 2012, the Business Review Weekly published an article entitled "With Gunns on its knees what hope for Tasmania's economy?", recording that "Debt-laden but still clinging to solvency, Gunns has faced the reality of entrenched community opposition to the pulp mill and conceded a $793 million write-down against the mill and its forestry assets". 93 In September 2012, limited final work was done by Badenoch to the value of $76,008.68. 94 Gunns appointed administrators on 26 September 2012. CONTINUING BUSINESS RELATIONSHIP ISSUE 95 Badenoch contended that Gunns/Auspine and Badenoch had a continuing business relationship for the entirety of the relation back period and each of the payments in issue was an integral part of that continuing business relationship. By s 588FA(3), transactions that are an integral part of a continuing business relationship between the company and a creditor, such as a running account, are treated as a single transaction for the purposes of s 588FA(1) in determining whether an unfair preference was given to the creditor. Thus, it was submitted, s 588FA(3) applies to treat all the transactions within the relation back period as a single transaction for the purposes of s 588FA(1). It was accepted by Badenoch that the amount of any preference (if otherwise established) was $251,643.26. The amount was not disputed by the liquidators if all the payments in question were part of a continuing business relationship and the peak indebtedness rule was found not to apply. However, the liquidators disputed that there was a continuing business relationship at any point of time during the relation back period. The liquidators contended that if a continuing business relationship was found, it came to an end when Badenoch ceased to provide services in July 2012 or, alternatively, upon termination of the contract on or about 2 August 2012. 96 Section 588FA(3), by its terms, embodies and gives statutory effect to the principal expressed in Richardson v Commercial Banking Co of Sydney Ltd [1952] HCA 8; 85 CLR 110 (Richardson) at 129 that where a payment "forms an integral, an inseparable, part of an entire transaction its effect as a preference involves a consideration of the whole transaction": Airservices Australia v Ferrier [1996] HCA 54; 185 CLR 483 (Airservices Australia) at 488; VR Dye & Co (a firm) v Peninsula Hotels Pty Ltd (in liquidation) [1999] 3 VR 201 (VR Dye) at [27] per Ormiston JA, Winneke P and Tadgell JA agreeing; Cashflow Finance Pty Ltd (in liq.) v Westpac Banking Corp [1999] NSWSC 671 at [507]; Sydney Appliances Pty Ltd (in liq) v Eurolinx Pty Ltd [2001] NSWSC 230 (Sutherland v Eurolinx) at [137]–[138]. In that circumstance, pursuant to s 588FA(3)(c), the "transaction" for the purposes of s 588FA(1) comprises "all the transactions forming part of the relationship". The paradigm of such a transaction is a running account. The rationale for treating running accounts as a single transaction for the purposes of determining whether a payment gave a preference to a creditor was explained in Richardson at 133: A running account of any debtor who has reached insolvency must present difficulties under s. 95. A debtor who pays something off his grocer's account in order to induce the shop keeper to give him further supplies of groceries can hardly be held, as it seems to us, to give the grocer a preference, if that was the clear basis of the payment. If the grocer credited the money as a payment for the future deliveries instead of the past deliveries of groceries he would in the end be in exactly the same position and yet he could not be attacked as having received a preference. But without stating any principle with an application beyond the facts of this case, it is enough to decide that the payments into the office account possessed in point of fact a business purpose common to both parties which so connected them with the subsequent debits to the account as to make it impossible to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed and so to be adjudged a preference. The principal was affirmed in Airservices Australia. The majority (Dawson, Gaudron and McHugh JJ) similarly observed at 501–3: If a payment is part of a wider transaction or a "running account" between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. … If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off. Thus, a debtor does not prefer a creditor to the other creditors if he or she pays a debt, or part of it, to induce the creditor to supply goods of equal or greater value than the amount of the payment. In that situation, it is of no relevance that the debt that is discharged happens to be a stale one. If the present value of the goods supplied is equal to or greater than the payment, the other creditors are no worse off. They are in the same position that they would have been in if the parties had so structured the transaction that the debtor paid for the new supply of goods instead of discharging the old debt. … If at the end of a series of dealings, the creditor has supplied goods to a greater value than the payments made to it during that period, the general body of creditors are not disadvantaged by the transaction – they may even be better off. The supplying creditor, therefore, has received no preference .. (footnotes omitted) As noted, it is the relationship between the payments and the subsequent supply of services which is the rationale for the principle that a continuing business relationship is to be treated as a single transaction for the purposes of the preference provisions. If the purpose of a payment is to secure an asset or assets of equal or greater value the payee receives no advantage over other creditors, save to the extent that the payment exceeds the value of the services. The majority emphasised at 505 that "it is not the label 'running account' but the conclusion that the payments in the account were connected with the future supply of goods or services that is relevant" because, as the majority explained, it is that connection which indicates a continuing relationship of debtor and creditor. As the majority noted at 504–5, "the essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded". Where the nexus between a payment and the subsequent provision of goods or services in that account is broken because the purpose of inducing further supply becomes subordinated to a predominant purpose of discharging past indebtedness, the payment is not part of the continuing business relationship, even if some services continue to be provided: Sutherland v Eurolinx at [148]–[151]. Airservices Australia is such an example. 97 In Airservices Australia, the High Court considered whether payments made to the appellant by Compass Airlines Pty Ltd (Compass) during the six month period before Compass went into provisional liquidation were preferential payments and void as against the liquidators of Compass. The issue was considered in the context of s 122 of the Bankruptcy Act 1966 (Cth) which, pursuant to s 565 of the Corporations Law, applied to corporations in liquidation. The majority held that the Full Federal Court had erred in holding that there was no running account: at 507. In the cross appeal of the liquidators, the liquidators claimed that the payment which Compass made to the appellant the day before Compass went into provisional liquidation did not form part of the running account because the appellant had, at the very least, a strong suspicion that Compass would "fold" the next day and was demanding that Compass pay it $3,081,102.63 supported by an irrevocable authority and direction to its bank. The majority held that the payment did not form part of the running account, notwithstanding the appellant did provide further services to Compass after the payment and, as the majority stated, it seemed certain that the appellant believed at the time of payment that it would continue to provide services to Compass after that date. The majority reasoned that the "better view on the evidence" was that in making a demand for payment of the outstanding debt the appellant was "looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services" and therefore the payment should be regarded as a preference notwithstanding the fact that subsequent services were provided: at 510. 98 As the cases make clear, it is an essential element of a continuing business relationship for s 588FA(3) to apply that payments are made in the mutual expectation that the creditor will continue to supply services to the debtor. Both parties must be looking to the ongoing provision of services in return for payment for a continuing business relationship to exist: see eg Sutherland v Eurolinx at [147]–[148]; Clifton (as liquidator of Adelaide Fibrous Plasterboard Linings Pty Ltd (in liq)) & Anor v CSR Building Products Pty Ltd [2011] SASC 103 (Clifton v CSR Building Products) at [73]. Applying that principle, a continuing business relationship may exist despite a suspicion on the part of the creditor of the debtor's insolvency: Sutherland v Eurolinx at [163]; Clifton v CSR Building Products at [69]. However, s 588FA(3) will not apply to a payment when it may be inferred from the circumstances of the particular payment that it was made not as an integral part of a continuing supply of services but for the payment or partial repayment of a past debt: Sutherland v Eurolinx at [148]; Clifton v CSR Building Products at [73]. 99 The evidence, in my view, supports the finding that only payments 3 and 4, namely the payments on 1 (or 2) May and 7 (or 8) June 2012, were made as part of a continuing business relationship between Gunns and Badenoch. The evidence substantiated, and I find, that all the other payments were made in circumstances where both parties were "looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services". That finding is based on the following facts and circumstances: (a) the relation back period commenced 26 March 2012. On 20 March 2012, Badenoch's solicitors had sent a letter of demand to Gunns, demanding payments of outstanding debts owed by Gunns and threatening legal action unless the January 2012 and February 2012 invoices were paid within seven days and by 31 March 2012 respectively. Payments 1 and 2, namely the payments made by Gunns on 30 March and 13 (or 16) April 2012 were made in discharge of Gunns' past indebtedness to Badenoch in respect of the January 2012 and February 2012 invoices pursuant to the payment plan negotiated in circumstances where Badenoch had ceased providing services to Gunns pending receipt of payment for the prior services, albeit for only 10 days; (b) during the months of March through to June, work continued and invoices for the work performed were raised for that work at the end of each of those months. The payments made on 1 (or 2) May and 7 (or 8) June 2012 related to the March 2012 and April 2012 invoices. Although those payments were slightly outside the terms of payment, there was no evidence to show that those payments were other than referrable to a mutual assumption of a continuing business relationship, following the payment of the overdue amounts for January and February 2012; (c) the remaining payments 5 to 11, namely the payments on 6 (or 8), 17, and 24 (or 27) August 2012, 31 August (or 3 September) 2012, and 3 (or 7), 14 (or 17) and 21 (or 24) September 2012, were all made pursuant to the payment plan negotiated in early August 2012 relating to the unpaid amounts on the May 2012 and subsequent invoices following Badenoch's threat in July 2012 to issue a statutory demand unless prior debts were paid in full. Albeit that Badenoch continued to provide limited services during August and September 2012, the predominant purpose of those payments was to reduce past indebtedness rather than to secure the ongoing provision of services. PEAK INDEBTEDNESS ISSUE 100 On the basis that the Court finds there was a continuing business relationship, the liquidators have picked the peak indebtedness in the running account during the relation back period as the beginning of the "single transaction", namely $1,416,563.31 on 31 May 2012 if the running account ended before 31 July 2012 and otherwise $1,559,594.10 on 31 July 2012. On the basis of my findings above, the continuing business relationship ended before 31 July 2012. In issue is whether the peak indebtedness rule continues to apply following the introduction of Pt 5.7B of the Corporations Act in 1993. 101 The peak indebtedness rule has its genesis in Rees v Bank of New South Wales [1964] HCA 47; 111 CLR 210 (Rees). In that case, Barwick CJ said that it was open to a liquidator in a preference proceeding to choose the highest point of indebtedness in a running account during the relation back period as the "starting point", rather than the balance as at the start of the relation back period. His Honour said at 220–1: It was also said in argument for the bank that it was not permissible for the liquidator to choose a date within the period of six months and to make a comparison of the state of the overdrawn account at that date and its state at the date of the commencement of the winding up. It was submitted that the proper comparison was between the debit in the account at the commencement of the statutory period of six months and the debit at the commencement of the liquidation… In my opinion the liquidator can choose any point during the statutory period in his endeavour to show that from that point on there was a preferential payment and I see no reason why he should not choose, as he did here, the point of the peak indebtedness of the account during the six months period. The principle has continued to be applied in the application of s 588FA. 102 Olifent v Australian Wine Industries Pty Ltd (1996) 130 FLR 195 (Olifent) was the first case in which the application of the rule in the context of s 588FA of the Corporations Act (then the Corporations Law) was substantially considered. In that case, Master Burley rejected the submission that the rule had no application under the current provisions, holding that the nature and ambit of the running account defence under the old provisions was essentially the same as the defence provided for under the current provisions, indicating that the legislature did not intend to alter the law as it was: Olifent at 202–3. Accordingly, the liquidator could choose any point during the statutory period, including the point of peak indebtedness, to establish a preferential payment. The correctness of Olifent does not appear to have been challenged in subsequent cases and the rule has continued to be applied by single and appellate courts in the application of s 588FA: see eg CSR Ltd trading as the Readymix Group v Starkey (as liquidator) of Allan Fitzgerald Pty Ltd (in liq) (1994) 14 ACSR 321 (CSR Ltd) at 325 per Fitzgerald P and Mackenzie J, Pincus J agreeing; Sutherland v Eurolinx at [140]; Sutherland v Lofthouse [2007] VSCA 197; 214 FLR 157 (Lofthouse) at 171 [50] per Nettle JA (Neave and Redlich JJA agreeing); Clifton v CSR Building Products at [89]; In the matter of Employ (No 96) Pty Limited (in liquidation) [2013] NSWSC 61 (Re Employ (No 96)) at [43]. 103 In this case Badenoch has contended that this Court should not follow the authorities which have applied the rule in the application of the current provisions, arguing that the cases where the peak indebtedness rule has been applied in the context of s 588FA have been wrongly decided and should not be followed. In support of this contention, Badenoch has relied on the New Zealand Court of Appeal decision in Timberworld Ltd v Levin [2015] 3 NZLR 365 (Timberworld). 104 Timberworld concerned s 292(4B) of the Companies Act 1993 (NZ) (NZ Act), which was enacted in 2007 in materially the same terms as s 588FA(3) of the Corporations Act. The question of whether the Australian peak indebtedness rule applied to s 292(4B) was considered by the New Zealand Court of Appeal, which held that the wording of s 292(4B) did not give the liquidator any right to disregard transactions which formed part of the continuing business relationship but, rather, the plain wording of the provision required all transactions forming part of the relationship to be treated as amounting to a single transaction, with the sole limitation being that only transactions occurring in the relation back period can be considered. In reaching that conclusion the Court of Appeal held, as a matter of statutory construction, that the plain meaning of the phrase in s 292(4B)(c) "all the transactions forming part of the relationship as if they together constituted a single transaction" was "all transactions constituting an integral part of the continuous business relationship and therefore falling within the running account": at 386 [69]. The Court of Appeal stated that "to arrive at some artificial point during the course of all the relevant transactions and to select the date of peak indebtedness (resulting in the transactions prior to this point being disregarded) would be to ignore the express wording used by Parliament": at 386 [69]. The Court of Appeal also considered the High Court decision in Airservices Australia and concluded that the decision was contrary to the peak indebtedness rule applying to s 588FA, reasoning at 388 [81] that "[i]f the principle in Airservices Australia is that the ultimate effect must be considered in ascertaining the results of a running account, there is no doubt the peak indebtedness rule does violence to that principle". 105 The Gunns preference claims appear to be the first occasion when an Australian court has been asked to consider Timberworld, as I was not referred to any Australian cases which have considered Timberworld and researches have not come up with any cases. Having considered the reasons given by the New Zealand Court of Appeal, I am, with respect, not persuaded that the peak indebtedness rule no longer applies under Australian law with the enactment of s 588FA or that the Australian authorities which have applied the rule in the application of s 588FA were clearly wrong, albeit that s 292(4B) of the NZ Act is in materially the same terms as s 588FA(3). 106 Airservices Australia concerned events occurring before s 588FA came into effect and the application of the peak indebtedness rule was neither an issue before, nor considered by, the High Court in that case. With respect I do not agree with the New Zealand Court of Appeal that the peak indebtedness rule "does violence" to the ultimate effect doctrine as explained by the High Court in Airservices Australia. It is clear on the authorities that the rationale for the running account doctrine is the connection between payments and the ongoing supply of goods or services. It is the fact that "future supply and continuing payments [are] inextricably joined" (to use the language of the majority in Airservices Australia at 509) which is the hallmark of a continuing business relationship for the purposes of the application of the preference provisions. That is, the connection between a payment and subsequent supplies: Airservices Australia at 509. Once it is recognised that it is the relationship between the provision of future services and the making of payments which gives rise to a continuing business relationship for the purposes of the application of the preference provisions, the peak indebtedness rule is reconcilable with the "ultimate effect" doctrine because, as the majority in Airservices Australia stated at 509, "the whole point of the doctrine emanating from Richardson, Queensland Bacon and Rees [is] to ensure that the effect of a payment that induces the further supply of goods and services is evaluated by the ultimate effect that it has on the financial relationship of the parties". 107 The weight of authority is that the current provisions of the Corporations Act were not intended substantively to change the law with respect to preferences. In VR Dye Ormiston JA (with whom Winneke P and Tadgell JA agreed) held at 212 [34] that "no change was intended to be made to the nature of a preference under the new legislation, whatever other alterations were made to the law". None of the appellate cases that have considered VR Dye have found that Ormiston JA was "plainly wrong": see Beveridge v Whitton [2001] NSWCA 6 at [30] per Heydon JA (with whom Mason P and Powell JA agreed); McKern v Minister Administering the Mining Act 1978 (WA) [2010] VSCA 140; 28 VR 1 at [25]–[27] per Nettle JA, [118] per Mandie JA (with whom Beach AJA agreed); Federal Commissioner of Taxation v Kassem [2012] FCAFC 124; 205 FCR 156 at 163 [50]. Furthermore, as noted above at [102], the peak indebtedness rule had been applied under the current provisions in numerous cases, including appellate authority (see eg CSR Ltd; Sutherland v Eurolinx; Lofthouse; Clifton v CSR Building Products; Re Employ (No 96)) and the correctness of the decision in Olifent has not been called into question in any of those cases. Far from being persuaded that those cases were clearly wrong to apply the peak indebtedness rule and I should depart from those cases, I am of the view that those cases were plainly correct to continue to apply the peak indebtedness rule under the new provisions: Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492. 108 There is nothing in the extrinsic material which indicates that the peak indebtedness rule was not intended to continue to have application. Although the rule is not specifically mentioned, the explanatory memorandum to the Corporate Law Reform Bill 1992 (Cth) stated at [1042] that proposed subsection 588FA(2) (which became sub-s (3)): …is aimed at embodying in legislation the principles reflected in the cases of Queensland Bacon Pty Ltd v Rees (1967) 115 CLR 266 and Petagna Nominees Pty Ltd v A E Ledger 1 ACSR 547. Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 (Queensland Bacon) is one of the trilogy of High Court cases from which the ultimate effect doctrine emanated. In Petagna Nominees Pty Ltd v A E Ledger (1989) 1 ACSR 547, the other case referred to in the explanatory memorandum at [1042], Franklyn J of the Full Court of the Supreme Court of Western Australia (with whom Malcolm CJ agreed) expressly noted at 564 "the liquidator can choose any point during the statutory period in his endeavour to show that from that point on there was a preferential payment". The Court also applied the decision of Barwick CJ in Queensland Bacon, and cited with approval the decision of Gibbs J in Re Weiss; Ex parte White v John Vicars & Co Ltd [1970] ALR 654, a case involving preferential payments by a bankrupt, which are analogous to preferential payments by a company in liquidation for the purposes of the application of the peak indebtedness rule. In that case, Gibbs J cited Barwick CJ in Rees and found that the applicant trustee, having failed to impugn earlier payments within the relevant period due to the running account defence, may choose any later point as the starting point to examine the net effect of the bankrupt's payments to the defendant creditor: at 661. 109 Accordingly I reject Badenoch's contention that the peak indebtedness rule has no application to s 588FA(3). I find that the liquidators are entitled to nominate the point of Gunns' peak indebtedness to Badenoch during the period of the continuing business relationship within the relation back period as the starting point from which the dealings between Gunns and Badenoch are to be treated as a single transaction for the purposes of establishing a preferential payment. As I have found that the continuing business relationship existed between April and the end of June 2012 (inclusive), the point of peak indebtedness which can relied upon by the liquidators for that period is 31 May 2012, at which time Gunns owed Badenoch $1,416,563.31. At the conclusion of the continuing business relationship on 30 June 2012, Gunns owed Badenoch $1,365,321.02, representing a reduction in the debt owed to Badenoch. GOOD FAITH DEFENCE 110 The good faith defence is found in s 588FG(2) of the Corporations Act. That sub-section provides: A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that: (a) the person became a party to the transaction in good faith; and (b) at the time when the person became such a party: (i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and (ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction. 111 There are four limbs that must be satisfied by Badenoch: first, that it became a party to the transactions in good faith: s 588FG(2)(a); secondly, that it had no reasonable grounds for suspecting that the company was insolvent at the relevant time, or would become insolvent: s 588FG(2)(b)(i); thirdly, that a reasonable person in Badenoch's circumstances would have had no such grounds for suspecting insolvency: s 588FG(2)(b)(ii); and fourthly, that Badenoch provided valuable consideration under the transactions or changed its position in reliance on the transactions. 112 In the present case, the four limbs of the defence must established for each transaction over the relation back period. Since the dealings between Gunns and Badenoch in the period April 2012 to 30 June 2012 (inclusive) are to be treated as a "single transaction" pursuant to s 588FA(3), good faith must be established during that entire period. The liquidators submitted that Badenoch did not satisfy the first, second and third limbs of the defence. The liquidators did not concede the fourth limb, but nor did they make any positive submissions about it. 113 Badenoch contended there was no evidence that it and its directors did not act in good faith, or that they did not provide valuable consideration. It may readily be accepted on the evidence that Badenoch "provided valuable consideration under [each] transaction" (namely the provision of logging and transport services to Auspine and Gunns) within the meaning of s 588FG(2)(c) of the Corporations Act up until the day of the appointment of administrators on 25 September 2012. For the reasons that follow, I am also prepared to accept that the first limb, being the good faith requirement, was met but not the second and third limbs. 114 To discharge the onus on the second and third limbs, Badenoch must establish that it had no reasonable grounds for suspecting that Gunns was insolvent at the relevant times or would become insolvent and, viewed objectively, a reasonable person in Badenoch's circumstances would have had no such grounds for suspecting insolvency. The parties were not in dispute about the relevant principles that apply in establishing those elements of the defence. The law is well settled that a suspicion of insolvency requires more than a mere idle wondering whether the debtor company is insolvent or not. It is a positive feeling of actual apprehension or mistrust, amounting to a slight opinion, but without sufficient evidence: Queensland Bacon at 303 per Kitto J. "Suspicion" for that purpose means a mistrust of the debtor company's ability to pay its debts as they become due and payable and of the effect which acceptance of a payment would have as between the creditor and the company's other creditors: Queensland Bacon at 303 per Kitto J. The relevant suspicion must be a suspicion of actual and existing insolvency, as distinct from impending or potential insolvency or even a suspicion that the debtor company might be insolvent: Sheahan v Fabienne Pty Ltd [1999] SASC 335 at [30]. As Kitto J explained in Queensland Bacon at 303, the requisite suspicion requires: …something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section describes—a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors. In Sutherland v Eurolinx, Santow J explained at [43]: The case law illustrates that there is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion. Rather it is a question of looking not in hindsight but through the contemporary eyes of the parties, at the commercial circumstances then prevailing between them. This is to identify in that context those factors pointing towards insolvency of the debtor. This in turn is in order to ascertain which of those factors were apparent to the payee, and then the cumulative impact that knowledge of them should have had, or did have, upon the payee. There will also be potentially countervailing factors and circumstances to be weighed in the balance which could have tended to dispel suspicion at the time. Thus, to establish the second limb, Badenoch must prove that it had no reasonable grounds for suspecting insolvency based on the factors and circumstances of which it was aware at the time of the transactions. The "reasonable person" under the third limb is a "reasonable business person": Cussen (as liquidator of Akie Pty Ltd) v Commissioner of Taxation [2004] NSWCA 383 at [31], citing Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543 (Harkness) at 545–6. The "reasonable person" is assumed to have the knowledge and experience of an average business person but not the skills and experience of an expert financial analyst or lawyer: Harkness at 546. 115 The evidence of both Kenneth and Peter was to the effect that they were aware that Gunns had cash flow issues and that Gunns' failure to pay on time was an issue for other contractors in the region. However, based upon assurances from Mr Hayes and Mr Lloyd, they believed that the debts owed to Badenoch by Gunns would be paid. Kenneth's evidence was that he trusted what they said to him, namely that Gunns and Auspine were fundamentally sound and were in the process of solving any short-term liquidity problems they may have had. Peter deposed that he was also aware through general public knowledge and through talking to Mr Lloyd and Mr Hayes in 2012 that Gunns' banks had approved a refinance for the Gunns facility and that the fee alone for the refinance was about $29 million. He believed that since Gunns could afford a fee of that size the banks must have had confidence that Gunns could continue to trade. He believed the assurances that Auspine and Gunns were solvent and had bank support. He was annoyed that Badenoch was being ignored but did not think there was a risk of the debts ultimately not being able to be paid by Gunns or Auspine. Had he thought Auspine and Gunns were unable to pay Badenoch and other creditors he would not have continued to provide logging transport services and to incur the associated costs. Even after Badenoch ceased supplying services in July 2012, Peter still expected that Badenoch's outstanding accounts would eventually be paid for the work done in August and September, and Badenoch would not have undertaken that work had he known that it was not going to be paid. 116 I accept that Peter and Kenneth both genuinely believed that Gunns ultimately would be in a position to pay all of Badenoch's outstanding invoices. However, to establish the defence it is not sufficient that they may genuinely have held the belief that Gunns' financial difficulties were short term. The defence requires Badenoch to prove it had no reasonable grounds for suspecting insolvency based on the factors and circumstances of which it was, or a reasonable person in Badenoch's position would have been, aware at the time of the transactions. 117 The evidence showed that by at least March 2012, Gunns had been late in paying Badenoch's invoices for about 18 months, and Badenoch regularly had to chase up payment. Badenoch also: (a) was aware that Gunns was facing cash flow constraints and difficulties; (b) knew that other contractors in the region were also consistently facing issues in being paid on time; (c) knew that Gunns was selling assets; (d) knew that the timing and amount of payments it received from Gunns were directly dependant on the sale of assets; (e) knew that the late and irregular payments were not due to any dispute or complaint about Badenoch's services; (f) was concerned that Gunns could not pay its accounts in full or on time; (g) knew that Gunns was prioritising payments to its contractors; (h) was plainly concerned about Gunns' financial position because on 1 March 2012 it took the step of asking Gunns by email to advise whether it was solvent, what the timelines were for payments of amounts outstanding, and whether the proposed assets sales would improve cash flow to the extent that Gunns would return to normal trading terms. That email is probative evidence of Peter's state of mind at the time, namely that he did suspect that Gunns was then insolvent or would become insolvent. If he did not have that state of mind, there were reasonable grounds to hold that view; (i) knew that Gunns' future was in part dependant on the pulp mill and if the pulp mill was unable to proceed, that would have been a significant event for Gunns; (j) was aware that Richard Chandler Corporation was not proceeding with its proposed equity investment and that Gunns shares were in a trading halt; (k) was unable to secure Gunns' agreement to pay its outstanding invoices within the timeframes prescribed by the letter of demand dated 20 March 2012 that Badenoch instructed its solicitors to send to Gunns, notwithstanding that it took the drastic step of ceasing to provide services to Gunns for non-payment of invoices, as threatened; and (l) wanted, but could not secure, a bank guarantee from Gunns for payment of its accounts. 118 These facts and matters of which Badenoch was aware as at the end of March 2012 provided reasonable grounds for Badenoch to suspect that Gunns was insolvent or would become insolvent, despite the representations from Mr Lloyd and Mr Hayes that Gunns was solvent and its cash flow problems were only temporary. I also find, having regard to these facts and matters, that a reasonable person, in Badenoch's circumstances, would have had grounds for suspecting insolvency as at, and from, March 2012 at the latest. 119 The position did not thereafter improve: (a) apart from the payments referrable to the March and April invoices, payments continued to be outside terms, irregular and not for the full amount of Badenoch's invoices; (b) Gunns would not meet the payment schedule demanded by Badenoch's solicitors in the further letter of demand dated 3 July 2012, even with the threat of legal action if payment was not received; and (c) despite the further letter of demand and threat of legal action, the debt owed to Badenoch increased to $1.56 million at the end of July 2012. 120 These additional facts and matters of which Badenoch was aware were further reasons for Badenoch to suspect that Gunns was insolvent or would become insolvent and, in my view, further grounds for a reasonable person in Badenoch's circumstances to suspect insolvency. Knowledge that Gunns had the support of its bankers for the remainder of 2012 does not gainsay these conclusions, in view of the fact the extension of Gunns' finance facilities did not alleviate Gunns' liquidity problems or its reliance on asset sales to pay its accounts to contractors. Nor does knowledge of the fact that Gunns was generating moneys from assets sales, given the chronic history of late and irregular payment notwithstanding the asset sale process and given that the assets sales did not result in a return to payment on terms, aside from the March and April 2012 invoices. Further, the publicly available material such as the newspaper articles which Peter and Kenneth read should have caused them to have serious concerns about the solvency of Gunns. 121 I find on the evidence that Badenoch, as at, and from, March 2012 at the latest, had reason to suspect that Gunns was insolvent. I further find that a reasonable person, in Badenoch's circumstances, would had have grounds for suspecting insolvency as at, and from, March 2012 at the latest. Accordingly, the good faith defence is not made out. SET-OFF UNDER SECTION 553C OF THE CORPORATIONS ACT 122 Badenoch seeks to set-off under s 553C of the Corporations Act the sum of $569,321.81, being the amount said to be still owing by Gunns and Auspine to Badenoch, against any amount that the Court finds Badenoch is liable to pay the liquidators as an unfair preference under s 588FA of the Corporations Act. This debt is constituted by the following invoices: (a) 30 June 2012 invoice: $164,687.34 (of the total invoice of $627,687.34); (b) 31 July 2012 invoice: $194,273.06; (c) 31 August 2012 invoice: $129,687.69; and (d) 1 September 2012 invoice: $4,665.04; (e) 25 September 2012 invoice: $76,008.68. 123 Section 553C of the Corporations Act provides that: (1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent. 124 It has been held that right of set-off under s 553C (and cognate provisions) is not available in unfair preference claims: see eg Re a Debtor [1927] 1 Ch 410; Re Clements; Ex parte Trustee; Goldsbrough Mort & Co Ltd (Respondent) (1931) 7 ABC 255 (Re Clements); Re Smith; Ex parte Trustee; J Bird Pty Ltd and Tully (Respondents) (1933) 6 ABC 49 (Re Smith); Calzaturuficio Zenith Pty Ltd (in liq) v NSW Leather & Trading Co Pty Ltd; Victorian Leather Co Pty Ltd [1970] VR 605, adopting Re Clements, Re Smith and Re Grezzana; Painter v Charles Whiting & Chambers Ltd (1932) 4 ABC 203; and Re Buchanan Enterprises Pty Ltd (No 2) (1982) 7 ACLR 407. However, there are cases which have held or suggested that a set-off under s 553C may be available: see Hussain v CSR Building Products Ltd [2016] FCA 392; 246 FCR 62 and the cases cited at 106 [227]. Justice Edelman noted at 106 [228]–[230] that the line of authority began: … in Re Parker [(1997) 80 FCR 1], where Mansfield J allowed a set-off under s 553C to a claim for recovery of a payment from a holding company under s 588W, which was based on insolvent trading under s 588V. The conclusion in Re Parker was considered in the context of s 588FF in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia [[2011] NSWCA 109; (2011) 81 NSWLR 47]. In that case, Young JA (with whom Hodgson and Whealy JJA agreed) held that two payments made by Buzzle to Apple Computer were uncommercial transactions. Strictly the set-off defence did not need to be considered because the "good faith" defence in s 588FG(2) applied. However Young JA observed that Senior Counsel for Buzzle had not ultimately submitted that the court should depart from Re Parker (at [276]). Instead, he had submitted that Re Parker should be confined to allowing a set-off for a claim for recovery under s 588W, but not extended to recovery under s 588FF. This submission was not accepted (at [277]-[278]). Young JA assumed that Re Parker was correctly decided and, on that basis, refused to distinguish a claim for recovery of payments made in insolvent trading under s 588W from claims for recovery under s 588FF based on commercial transactions. The conclusion in Re Parker was again applied in the Federal Court by Gleeson J in Smith v Boné [[2015] FCA 319] at [420]. Justice Edelman was of the view that there were "powerful contrary arguments … to suggest that a set-off is not available against a liquidator's claim to recover preference payments" (at 107 [235]), but his Honour ultimately did not decide the point because, amongst other reasons, the Court did not have the benefit of full argument on the issue. 125 In this case, the Court has detailed submissions from the liquidators on this issue but not from Badenoch, which merely submitted that "[t]he better view is that s 553C can be applied in relation to a successful voidable preference recovery claim". If it was necessary to deal with this issue in order to decide whether s 553C had application in the present case, I would have called for further submissions from Badenoch to address the arguments put forward by the liquidators. It is, however, unnecessary to decide this threshold issue because Badenoch is caught by s 553C(2). That is, I am satisfied on the evidence that, at each of the relevant dates, Badenoch had notice of the fact that Gunns was insolvent. 126 Section 553C(2) was considered in Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation [2009] VSCA 319; 26 VR 657. In that case the Victorian Court of Appeal said at 661–2 [21]–[22]: A person will have "notice of the fact" that a company is insolvent if the person has actual notice of facts which disclose that the company lacks the ability to pay its debts when they fall due, within the meaning of s 95A. It is unnecessary to show that the person actually formed the view that the company lacked that ability. As the NSW Court of Appeal said in Hathaway Shirt Co Pty Ltd v B Rawe GmbH Co, it is "well established that there is a difference in law between receiving notice of a fact and being made fully and subjectively aware of the fact". What is required is proof of facts known to the creditor which warranted the conclusion of insolvency. Since "grounds for suspecting" insolvency will not suffice, it is not enough that insolvency is a possible inference from the known facts. Whether it must be the only reasonable inference open is a question we need not decide. Thus, it does not follow from the rejection of Badenoch's good faith defence under s 588FG(2) that s 553C(2) is engaged. A finding must be made that Badenoch had actual notice of facts which disclosed that Gunns lacked the ability to pay its debts when they fell due. I am satisfied that such a finding can be made in this case. 127 As at 31 March 2012, Badenoch had notice that: (a) Gunns had not been paying Badenoch's invoices on time or for the full amount for at least 15 months; (b) Gunns had not been paying other contractors on time or for the full amount; (c) Gunns was facing cash flow constraints and was making payments to contractors based on priorities; (d) the timing and amount of payments it received from Gunns were directly dependant on the sale of assets; and (e) Gunns was not prepared to agree to pay its outstanding invoices to Badenoch within the timeframes prescribed by the letter of demand dated 20 March 2012 that Badenoch instructed its solicitors to send to Gunns, notwithstanding that Badenoch took the drastic step of ceasing to provide services to Gunns for non-payment of invoices, as threatened; (f) Gunns had "max'd out" its bank guarantees; and (g) Badenoch had openly questioned whether Gunns was solvent and knew that Gunns was not able to pay Badenoch on time. 128 In addition to those matters, as at 30 June 2012, Badenoch also had notice that: (a) Gunns shares continued to remain in a trading halt pending its efforts to raise further capital of approximately $400 million; and (b) Gunns was still reliant on asset sale proceeds to pay contractors. 129 By 31 July 2012, Badenoch also had notice that: (a) Gunns was "unable" to pay the $737,533.68 owing on the May 2012 invoice due and payable at the end of June 2012, despite Badenoch ceasing to provide services and threats by Badenoch to commence legal proceedings immediately in the event of non-payment; (b) Gunns was prepared only to offer a payment schedule of $150,000 per week commencing 20 July 2012; (c) Gunns had failed to make any payment in reduction of the outstanding debt, despite its offer; and (d) despite Badenoch's request, Gunns did not provide any security for payment of the outstanding debts. 130 By early September 2012, Badenoch also had notice that: (a) the debt outstanding on the May invoice had only just been discharged; (b) Gunns' indebtedness for services performed in the month of June 2012 remained undischarged (save as to around $13,000); and (c) Gunns was willing to terminate, and had in fact agreed to terminate, the contract with Badenoch. 131 As at 25 September 2012, Gunns had announced to the ASX that a Voluntary Administrator had been appointed. 132 At the time each debt to Badenoch sought to be set-off arose, Badenoch had notice of facts that were more than sufficient to disclose that Gunns and Auspine lacked the ability to pay their debts as and when they fell due. It follows that, even if set-off under s 553C is available in the context of unfair preferences, Badenoch is not entitled to set-off any of the claimed amounts by reason of s 553C(2). CONCLUSION 133 The liquidators have proved each of the elements of their claim and are entitled to orders under s 588FF of the Corporations Act and their costs of the proceeding. I certify that the preceding one hundred and thirty-three (133) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies. Associate: Dated: 27 May 2020