KARAVELLAS T/AS SAVAS KITCHENS v KREY SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MAHONEY AP, CLARKE and SHELLER, JJA 15 February 1996, 7 March 1996 [1996] NSWCA 294 COMPANIES — directors — s556(1) Companies Code — liability for debts — defence — s556 (2) whether 'reasonable grounds' to expect inability to pay debt In September 1989, the appellant began proceedings under s556(1) of the Companies (NSW) Code to recover from a director the amount of a debt incurred by a company which subsequently went into liquidation on the ground that at the time the debt was incurred, there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due. The director relied upon a defence under s556(2) that at the time the debt was incurred he did not have reasonable cause to expect that the company would not be able to pay all its debts as and when they became due. McCredie DCJ was not satisfied that, at the time the debt was incurred, there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due and in particular the appellant's debt. The appellant appealed on the ground that the trial judge had erred as to the appropriate test to be applied. HELD 1. The words "able to pay" admitted of some flexibility in regard to the time by reference to which the ability to pay had to be assessed; Dunn v Shapowloff (1978) 2 NSWLR 235. 2. Whether there were reasonable grounds to expect the company would not be able to pay its debts when they fell due is to be judged by the standard appropriate for a director or manager of ordinary competence; 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371. 3. The findings of McCredie DCJ should not be disturbed. ORDER Appeal dismissed with costs. Mahoney AP I agree with the judgment of Sheller JA and generally with his reasons. The case was litigated upon the basis that the debt in question was a debt which was incurred on 2 March 1989. It might have been argued that on 2 March 1989 a contract was entered into creating contractual obligations but that no debt was incurred until, under the contract, a sum certain fell to be paid. It is not necessary to consider whether such an argument, if advanced, would have been successful. lam satisfied that, as his Honour recorded, the case was conducted upon the basis that 2 March 1989 was the relevant date and, in the circumstances, there is no sufficient reason why the appeal should be conducted on a different basis. I am satisfied that it was proper for the judge to conclude that, on that day, Mr Krey did not have reasonable cause to expect that the company would not be able to pay all its debts as and when they became due. (I state the relevant effect of the statute in this way and without dealing precisely with its verbiage and the onus which it creates). Mr Krey maintained that his relationship with his then banker was such that, on 2 March 1989, he did not have such cause to expect that the company would not be able to pay its debts accordingly; he believed, and he 2 UNREPORTED JUDGMENTS asserted it was the fact, that it was then the intention of the bank to provide all relevant moneys for the purpose by overdraft. If this was so, the defence provided for by the statute was established. In my opinion the trial judge accepted the case put by Mr Krey in this regard. If, as he did, he believed the evidence which Mr Krey advanced for the purpose, the judge could, and did, accept the case advanced by Mr Krey. I am not satisfied that the Court should not accept the judge's finding in relation to Mr Krey's evidence or otherwise that it should depart from the finding that the judge made. I agree with the orders proposed by Sheller JA. Clarke JA I agree with the reasons and orders of Sheller JA. Sheller JA INTRODUCTION Savas Karavellas, trading as Savas Kitchens, appeals from the decision of his Honour Judge McCredie in the District Court at Sydney of 7 May 1992. His Honour had found for the first defendant, the respondent John Krey, in proceedings the appellant began in September 1989 to recover from Mr Krey $27,780. the balance due for the supply of materials and the installation of kitchens and vanity units by the appellant for the second defendant, Krey Investments Pty Ltd. Krey Investments, of which Mr Krey was a director at all material times, went into liquidation on 29 November 1990. The appellant did not pursue the proceedings against it. S556 OF THE COMPANIES (NSW) CODE The appellant based his case against Mr Krey on s556(1) of the Companies (NSW) Code as then in force, which, relevantly provided that, if immediately before the time when a company incurred a debt, there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due and the company was, when the debt was incurred, or became at a later time, a company to which the section applied, a director of the company at the time was liable for the payment of the debt. S556 applied to a company that had been wound up (s553(1)(a)). S556(2) provided that in any proceedings under subs(1) it was a defence if the defendant proved that at the time when the debt was incurred, he did not have reasonable cause to expect that the company would not be able to pay all its debts as and when they became due. JUDGMENT AT FIRST INSTANCE Judge McCredie referred to authorities on the meaning of s556 and a predecessor of that section and set out the material facts and his findings. As will appear I agree with his Honour's conclusion and substantially with the reasons he gave for it. It is convenient that rather than repeating extended passages from his Honour's judgment, I annex it and incorporate it in the reasons for judgment. TIME DEBT INCURRED Mr Hogg of Counsel, who appeared for the appellant, put his submissions under two heads. First he said that Judge McCredie erred in treating 2 March 1989 as the date upon which the company, Krey Investments, incurred the debt to the appellant. On that date, or the next day, a contract was made for the future supply of goods. Ordinarily payment and delivery would be concurrent conditions and no debt would be incurred until Krey Investments received the goods. On 16 May 1989 the appellant submitted an invoice for a progress payment of $12,000 for six units, which, presumably, had been supplied by that time, and on | June 1989 a further invoice for $24,000 (the balance due, the first invoice remaining unpaid) indicating that more units had been supplied. On 29 June 1989 part payment in an amount of $11,760 was made. On 30 June 1989 URJ KARAVELLAS T/AS SAVAS KITCHENS v KREY (Sheller JA) 3 the appellant submitted a further invoice for $24,221.40 (the balance due) which indicated that more units had been supplied and acknowledged the part payment. Whatever merits this submission might otherwise have it is not open on this appeal. At pages 2-3 of his judgment his Honour said that it had been expressly agreed, and the whole case had been litigated, on the basis that the relevant date when the debt was incurred was 2 March 1989. Mr Hogg acknowledged this agreement and that it had never been withdrawn. This Court cannot on appeal consider the appellant's claim to recover from Mr Krey on the different basis that the company incurred the debt at a later date. This first ground of appeal necessarily fails. OTHER GROUNDS OF APPEAL The appellant's remaining submissions were gathered under the general head of an alleged error as to the appropriate test to be applied in considering a claim based on s556(1) of the Code. His Honour referred to three cases in the Supreme Court for guidance about the meaning of the subsection. The first was Dunn v Shapowloff (1978) 2 NSWLR 235 in the Court of Appeal. This case, which went on appeal to the High Court; Shapowloff v Dunn (1981) 148 CLR 72, concerned a predecessor of s556, s303(3) of the New South Wales Companies Act 1961, as then in force. The language of s303(3) and s556 contained distinct differences which Foster J carefully and clearly identified in 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371 at 375ff. Notably the prima facie liability of a director under s556(1) could be established by proving that immediately before the time when the debt was incurred there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due, without the necessity, which s303(3) imposed, of demonstrating that the director of the company had, at the time the debt was contracted, no reasonable or probable ground of expectation of the company being able to pay, not all its debts as and when they became due, but the debt. Questions about the director's knowledge arose if the defendant raised a defence under s556(2) when the director would have to prove that at the time the debt was incurred 'he did not have reasonable cause to expect' that the company would not be able to pay all its debts as and when they became due. Despite the differences, Judge McCredie was right to take from the judgment of Mahoney JA in Dunn v Shapowloff (1978) 2 NSWLR 235 at 244D the statement that the words 'able to pay' admit of some flexibility in regard to the time by reference to which the ability to pay has to be assessed. I agree with the statement of the relevant considerations Judge McCredie outlined at 5 of his judgment. Mr Hogg challenged his Honour's statement that, although solvency and the existence of a sufficient surplus of assets over liabilities to meet debts are relevant, what will constitute ability to pay must be determined in a realistic way by reference to the facts of the particular case after taking into consideration the matters his Honour referred to. In my opinion, the authorities amply support his Honour's approach. Judge McCredie referred to Foster J's opinion, in 3M Australia Pty Ltd v Kemish at 373, that whether there are reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due must be judged by the standard appropriate for a director or manager of ordinary competence. Finally his Honour referred to Carruthers J's decision in Pioneer Concrete Pty Ltd v Elston (1985) 10 ACLR 289 at 301. I can see no error in the way his Honour stated the tests to be applied relevant to the issues in the case in hand which were, as he indicated at 3, whether as at 2 March 1989 there were reasonable grounds to expect the company would not 4 UNREPORTED JUDGMENTS be able to pay all its debts when they fell due and, if the plaintiff succeeded on this first issue, whether the defendant had established that as at that date he did not have reasonable cause to expect that the company would not be able to pay all its debts as and when they became due. There was no need for his Honour to consider these questions with regard to the particular debt, a factor which harks back to the form of s303(3), but I do not regard this as being of any significance. At 6ff Judge McCredie dealt with the matters that the appellant relied on before him to establish his case, conveniently collected under eight heads in the report of Young Barnsdall and Joye (YBJ) of 28 November 1991. As to the first Mr Hogg submitted that the balance sheet, which was not in evidence, but which was not apparently prepared until May 1990 and made available to the directors in December 1990, was some evidence of the company's future ability to pay its debts as at the beginning of March 1989. Mr Krey's expert accountant doubted the value of the 1989 accounts for this purpose. In my opinion it was open to his Honour to conclude on the evidence that the balance sheet relied on did not assist the appellant. Mr Hogg challenged his Honour's rejection of the YBJ's conclusion that, as at the beginning of March 1989, building work Krey Investments had undertaken was coming to completion. There was ample evidence to support his Honour's conclusion. Mr Hogg relied compendiously on material in items c, d, e, f and g in YBJ's report about the company's overdraft position, the dishonouring of twenty-six cheques in February 1989, the analysis of creditors YBJ had done and the fact that on 5 May 1989 a new company had been formed which took over the company's contracts. His Honour dealt with each of these items. Mr Hogg advanced no submission which persuaded me that his Honour's conclusions in respect of any of these matters were ill-founded. The findings his Honour made were open and led to the conclusions he reached. OVERDRAFT ARRANGEMENT Pivotal to the question of whether at the beginning of March 1989 there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due was its overdraft arrangement with its bank. The cash flow projection in evidence, which was prepared in February 1989, indicated an improving situation to the point where the company would be out of overdraft by February 1990. There was no evidence of an overdraft limit. There was evidence of what was described as a 'come and go' situation without a precise limit. The twenty-six cheques were apparently mistakenly dishonoured by a temporary manager and subsequently met. Thereafter there was no further dishonouring of cheques before 6 May 1989 when the main cheque from a debtor of the company was dishonoured. His Honour found that it was only from that time on that the situation in fact got out of control causing the company to go into liquidation. The company had the benefit of a credit facility from its bank which his Honour found would have kept it going. Substantially for the reasons Judge McCredie gave, I agree with the conclusions stated at 11 and 12 of his judgment. CONCLUSION I propose that the appeal be dismissed with costs. ANNEXURE KARAVELLAS TRADING AS SAVAS KITCHENS v KREY TRADING AS KREY INVESTMENTS THE DISTRICT COURT OF NEW SOUTH WALES CIVIL JURISDICTION Coram: McCredie DCJ No. 7729 of 1989 URJ KARAVELLAS T/AS SAVAS KITCHENS v KREY (Sheller JA) 5 Delivered: 7 May 1992 McCREDIE DCJ: The plaintiff, Savas Karavellas trading as Savas Kitchens brings a claim for $27,720 plus interest, in accordance with an amended statement of claim filed 29 May 1991, claiming that amount as a balance of account for supplying and fixing kitchens and vanity units. There is a useful chronology document, which became Ex G in the proceedings, and that was finally accepted as an agreed statement of relevant dates and material. That confirms that the second-named defendant, Krey Investments Pty Ltd, went into liquidation on 29 November 1990 and the plaintiff proceeds only against the first-named defendant, Mr John Krey. The plaintiffs claim was originally based on two bases; the first was that the contract was made with the individual, Mr Krey. In view of the evidence, that claim has not been pressed and I find that the plaintiff has not made out a case on that first basis. The second basis, which was strenuously pressed, is a claim by the plaintiff against the first defendant based on what was then s556(1) of the Companies (NSW) Code seeking to make the first defendant personally liable as a director of the company for this particular debt of the company, the company being Krey Investments Pty Ltd. First of all it is accepted by the parties that, notwithstanding some change in the legislation, the relevant provisions for the purposes of these proceedings are as set out in the previously existing Companies Code and the relevant provisions are set out in s556(1), "If a company owes a debt and immediately before the time when the debt is incurred there is reasonable grounds to expect that the company will not he able to pay all its debts as and when they become due, and the company is, at the time the debt is incurred, or becomes at a later time, a company to which this section applies, then there is provision for a civil liability." The proceedings for recovery of the debt are set out in the further provision of s556, "Any person who was a director of the company at the relevant time is firstly made liable for possible criminal penalties". Then under s556(3), "The proceedings may he brought for recovery of the debts regardless of any conviction for an offence". The standard of proof as set out in the legislation is on the balance of probabilities. S556(2) provides a defence provision and it has been accepted that that applies to the present proceedings. That defence provision is that "It is a defence if the defendant proves that at the time when the debt was incurred he did not have reasonable cause to expect that the company would not be able to pay all its debts as and when they became due", and again it is accepted that that carries a civil onus of proof. For purposes of these proceedings, it has been common ground that those provisions as stated continue in force to the present time. It has keen expressly agreed, and the whole case has been litigated, on the basis that the relevant date when the debt was incurred was 2 March 1989. Further common ground, as clearly supported by the evidence, was that at all relevant times the first defendant was a director, and indeed very much the main executive director of the company, that the debt was incurred, there has been no issue as to the amount claimed, and further it has been agreed in accordance with the evidence that the debt became due and payable on or about 30 June 1989. 6 UNREPORTED JUDGMENTS The issues in the case therefore are: Firstly, has the plaintiff proved,on the balance of probabilities that as at 2 March 1989 "there are reasonable grounds to expect" that the company, Krey Investments Pty Ltd, will not be able to pay its debts when they fall due and in particular this debt to this plaintiff becoming due on or about 30 June 1989. If the plaintiff were to succeed on that first issue, then following the provisions of s556(2), there is a second issue, viz: Has the defendant established on the balance of probabilities that as at 2 March 1989 he did not have reasonable cause to expect that the company would not be able to pay all its debts as and when they became due, and in particular this debt to the plaintiff becoming due on or about 30 June 1989. The evidence in the case consisted of the oral evidence of the plaintiff, the oral evidence of Mr Banks, the plaintiff's accountant, and his report which became Ex F in the proceedings, then the oral evidence of Mr Krey and the oral evidence of his accountant, Mr Rinn(?) and the written report from Mr Rinn which became Ex 4 in the proceedings. There is then other documentation as set out in the exhibits list. The plaintiff's case, shortly, was that it is an objective test and the factors for measuring the situation on the plaintiffs case are that he has shown on the probabilities that there were reasonable grounds to expect that the company would not be able to pay all its debts, and that those essentially are as set out in the plaintiff's accountant's report, and confirmed in the final submissions by the plaintiff's, counsel, which I will refer to shortly. The defendant's case was firstly that it is important to bear in mind at all times that the agreed date at which these matters are to be measured is 2 March 1989, and that as at that date, the company certainly expected to be able to pay all its debts, that being the expectation according to the evidence of Mr Krey as director and the defendant relies heavily on its case on a cash flow estimate document which became Ex 3 in the proceedings. The defendant's evidence was that that was prepared at the vital time, what is late February/beginning of March 1989, and that shows a credible and realistic situation of trading out of overdraft and into credit, whilst continuing to pay his creditors in the normal course, including paying this plaintiff this bill in due course. The defendant's case further is that it was only on or about 6 May 1989 that a cheque for some $68,000 from its major client was dishonoured, and it was only from that time on that the situation in fact got out of control, and ultimately the major client became insolvent, and that had a domino effect on the defendant company who was extremely heavily involved with this one major developer, and when that developer became insolvent, that ultimately caused the second defendant to go into liquidation. The law on the matter has now been considered by a number of Courts. In some instances there would seem to be some conflict with the decisions of other Courts As far as this Court is concerned the authorities to be followed are those of the New South Wales Supreme Court. The leading case is a decision of the Court of Appeal in Dunn v Shapowloff (1978) 3ACLR 775. In dealing with the question of ability to pay, that authority says that the words "able to pay" where they appear in the section "Admit of some flexibility in regard to the time by reference to which the ability to pay has to be assessed. That which is in question is not whether the company at the relevant time will be solvent, or whether it will on an assumed and instant liquidation have a sufficient surplus to meet the debt. Though these may he relevant in considering the statutory question what will constitute ability to pay must be determined in a realistic way by reference to the URJ KARAVELLAS T/AS SAVAS KITCHENS v KREY (Sheller JA) 7 facts of the particular case after taking into consideration inter alia the company's assets and liabilities and the nature of them and the nature and circumstances of the company's activities. The case expected to be available at the particular time will be relevant but not necessarily determinative. It will for example be relevant to consider whether the company could be expected to pay the debt by borrowing". Further, on this question of whether the company is unable to pay its debts, Mr Justice Foster, then of the Supreme Court of New South Wales, sitting in a case of 3M Australia Pty Ltd v Kemish, reporting at 1OACLR 371 said, "It is said that the test is whether the Court is satisfied that at the relevant time an ordinary competent officer would have felt that the company would certainly be unable to pay its debts as they fell due on any existing trading terms or any reasonably envisaged extension of them". At 303 at about point 5, Foster, J, having considered the situation with the manager of the trading company continuing to run up debts with its suppliers, said "I ask myself therefore whether on the evidence and in the absence of compelling expert evidence to the contrary, I am satisfied that an ordinary competent manager at that point of time would have felt that the company would certainly be unable to pay its debts as they fell due on existing trading terms or any reasonably envisaged extension of them I am not so satisfied. I am satisfied that such a manager would have reason to be cautiously optimistic especially if a loan could be obtained in terms of the proposal". In my view that passage has particular relevance to the present situation. In Pioneer Concrete Pty Ltd v Elston, reported at 1985-6 1OACLR 289, Justice Carruthers of the Supreme Court of New South Wales confirmed that in determining whether the plaintiff had established the matters in s556(1B) of the Companies NSW Code the test to be applied was solely an objective one. Then he further held that in deciding whether a defendant had established a defence, in 556(2) of the Companies NSW Code, the test to be applied involved a blending of subjective and objective considerations so that in the present case the defendant had to prove that at the time when each debt was incurred he had no cause reasonably grounded in the whole of the circumstances then existing as he knew them to expect that the company would not be able to pay all its debts as and when they became due. Turning then to the factors that the plaintiff relies on to establish its case they are summarised in Ex F at 4, that is in the plaintiff's accountant's report of 28 November 1991. The first matter that the plaintiff's accountant relies on is that the company traded at a loss during the year ending 30 June 1989 in substantial figures. Firstly that is a balance sheet done as at 30 June 1989, there was evidence from the defendant's counsel that in any event that balance sheet was slanted because of the liquidation situation. On any view, however, it is a balance sheet to 30 June 1989. It clearly was not in existence at 2 March 1989 and, in my view, does not assist the plaintiff. The second factor is that the building work being undertaken appears to have been coming to completion. That is not borne out by the evidence, in my view. The defendant's evidence is totally to the contrary. He accepts that their two major projects of over $2 million were certainly coming to completion but he says that he had other very substantial work on hand and he mentioned a figure in excess of $4 million. On the evidence, I find that at that time there was continuing work so that that item has not been made out. 8 UNREPORTED JUDGMENTS Item C is that the company was continuously in overdraft during February and March 1989 and this position was getting worse as indicated by the bank statements for the period. It certainly is correct that the company was continuously in overdraft during those periods. The defendant says, as reflected in its cash flow document, that it was expected indeed that the overdraft position would continue to get worse until June because of a variety of factors and that is freely accepted. But then the defendant says that there was a continuing cash flow protection that would show a continuing improving situation until, according to Ex 3, the defendant company would be out of overdraft by February the following year. Item D, relied on as one of the factors, was that the bank diary notes contain references that the company was exceeding its agreed overdraft limit. This is a curious situation but there is no evidence which satisfies the Court that there was a precise overdraft limit. That is the evidence of Mr Krey and that is supported by Mr Rinn, the defendant's accountant, who says that it was A "come and go" situation without a precise limit, clearly it was being very carefully monitored and the supposedly neutral term was "keeping in touch", but the fact is that there is no evidence before me which satisfies me that there was a precise limit and that the company was exceeding its agreed limit. The next factor relied on was 7 February 1989, 26 cheques were dishonoured. That is clearly correct and at first glance that is a most important item. Mr Krey says that that was a particular situation occurring on one day when his regular manager, with whom he had the continuing arrangement was away, and a temporary manager came in and disallowed those cheques. However Mr Krey's evidence was that that situation was restored urgently, that those cheques in fact were subsequently paid, that the continuing arrangements were in fact continued with the bank manager who was familiar with the situation. There is no evidence called to contradict that version and that version of the defendant seems to be supported by the fact that there were no ongoing dishonouring of cheques, until the cheque from the major developer client on or about 6 May 1989. Then the next factor relied on was that an analysis of creditors shows that the company was not meeting all its creditors as and when they fall due. It is common ground that the defendant certainly was not paying all its creditors right at that time. The explanation put forward is that at least in a number of cases there was a dispute and only one instance was. given by the defendant, which is not challenged, and that is that lune of the creditors was overclaiming by an amount of $50,000 and that that claim for $50,000 later went to arbitration and was dismissed. The next point G was that on 5 May 1989 a new company had been formed, which apparently took over the contracts. That again occurred on 5 May 1989, and there is no evidence that that was in existence at 2 March 1989. Finally, the accountant relies on the fact that Mr John Krey was an active director of the company and was the person to whom the bank referred to. There is no issue that Mr Krey was virtually running a one-man business and he accepts that he was totally aware of the situation and was totally responsible as the main executive director. Those are the main matters relied on by the plaintiff and have been further summarised by the plaintiff's counsel incorporating those same factors. Those are the matters which the plaintiff says make out a case on an objective test. URJ KARAVELLAS T/AS SAVAS KITCHENS v KREY (Sheller JA) 9 As I say, the defendant's main points are: Firstly, the fact that the vital date is 2 March 1989; secondly, that it is only on 6 May 1989 that the main cheque from the developer was dishonoured and up until that time there was no indication that the company would not be able to pay its debts. Vitally, from the defendant's point of view, they rely heavily on its cash flow estimate document, which became Ex 3. The Court is then left with expert evidence from two accountants, the accountant for the plaintiff expressing a view that there was a reasonable basis for coming to the view that the defendant company was unable to pay its debts. There is expert evidence from the defendant's accountant that the defendant company certainly would expect to be able to pay its debts as at 2 March 1989. In my view, there was no successful attack made on the estimated cash flow projection document, Ex 3. The situation is that the defendant company was clearly in overdraft. I do not accept what was put forward as the rosy picture of the defendant's company situation. Clearly it was a very tight time, but the test is to take a realistic look at what was happening at that time. An "ability to pay must be determined in a realistic way by reference to the particular facts at the time". On the evidence, it is clear the defendant company was at the time a significant building company; it had two particular projects nearing completion which, by themselves, were over $2 million. There is no challenge to the evidence that there were a considerable number of other building projects approved and some of them at least under way. There is no evidence to the contrary, so that unless I am prepared to totally reject Mr Krey's evidence on those matters, which I am not prepared to do, then there is credible evidence that at the end of February/beginning of March 1989, the vital period, there is a credible and realistic cash flow projection showing that whilst the overdraft would in fact continue to deteriorate for a period, nonetheless the company, by continuing to trade, including continuing to pay its creditors as and when they fell due, admittedly stretching payment as far as possible, would trade out of overdraft and into a profitable cash flow situation. The plaintiff's accountant, in coming to his conclusion at 5 Of Ex F says that "Having regard to the foregoing points which I have dealt with in detail, it is our opinion that in the absence of a further injection of funds into the business, either as revenue from Jobs or loans from another source, in March 1989 Krey would not have been in a position to meet all of its creditors as and when they fell due". That simply begs the question, and there is no dispute, that the question is whether there was going to be a further injection of funds into the business either as revenue from Jobs or loans from another source. Mr Krey's evidence is that there was continuing revenue with substantial payments expected from the jobs and, for example, there were the additional payments which were in fact received, on an ongoing basis, and it was expected that a bank would continue to provide a very substantial financial facility. On the uncontested evidence of the defendant's accountant, the defendant's submission to the State Bank was accepted, and they were prepared to supply the sort of facility that would in fact have kept the defendant going, even with the existing Bank facility, although there are comments, in what may be the relieving manager's diary, about $174,000 being an unacceptable overdraft, in fact the records show that it went to over $182,000 shortly thereafter, and cheques were still being honoured. 10 UNREPORTED JUDGMENTS For those reasons I am not satisfied that the plaintiff has made out a case on the probabilities that at the vital time, namely 2 March 1989, there was reasonable cause to expect that the company would not be able to pay all its debts as and when they became due and in particular this debt to the plaintiff on 30 June 1989. Further, if I was wrong on that aspect, in my view the defendant has established the defence which is accepted as being provided under 556(2). Using the language of Mr Justice Foster in Kemish's case, I certainly would not be satisfied that the first defendant would have felt that the company would certainly be unable to pay its debts as they fell due on existing trading terms or any reasonably envisaged extension of them. Order In the circumstances, I find for the defendant, the first-named defendant, in relation to the matter, and there will be a verdict for the defendant. Costs will follow the event. Exhibits to be returned. Appeal dismissed with costs. Counsel for the Appellant: AC Hogg Solicitors for the Appellant: George Shad and Co Counsel for the Respondent: MJ Heath Solicitors for the Respondent: Somerville and Co