New South Wales Supreme Court CITATION : Hall & Ors v Poolman & Ors [2007] NSWSC 1330 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 31 January, 1, 2, 5-19 and 26-28 February 2007, and written Outlines of Closing Submissions received from the Plaintiffs on 23.02.07, 27.02.07, 28.02.07, 31.05.07, 08.06.07 and 15.06.07, from Mr Irving on 23.02.07, 25.05.07, 28.05.07 and 26.06.07, from Mr Martini on 23.02.07, from the ATO on 23.02.07 and from Ms Yates on 23.02.07 JUDGMENT DATE : 23 November 2007 JURISDICTION : Equity DIvision JUDGMENT OF : Palmer J DECISION : See paragraphs 557 to 564. CATCHWORDS : INSOLVENCY – Related companies – whether companies insolvent – whether solvency of company A independent of solvency of company B – whether disputed tax debt "due and payable" – whether companies insolvent because of trade debts. - INSOLVENT TRADING – Directors' liability – whether reasonable grounds to suspect insolvency – whether director aware of reasonable ground for suspecting insolvency. - INSOLVENT TRADING – DEFENCES – whether reasonable grounds to expect solvency – discretionary defences under s.1317S(2) and s.1318(1) Corporations Act 2001 (Cth) – whether s.1318 applies for contraventions of Corporations Act – whether director acted "honestly" – whether lack of Directors and Officers Insurance relevant to discretion – liquidator enters litigation funding agreement – liquidator knows almost all of proceeds will go to liquidator and litigation funder with negligible return to creditors – whether return to creditors relevant to discretionary defences – control by Courts of abuse of litigation funding – costs under s.98 Civil Procedure Act – liquidators' duty to seek direction of Court. - INSOLVENT TRADING – UNFAIR PREFERENCES – Where payments by ATO were unfair preferences – whether ATO entitled to indemnity from directors – whether directors entitled to indemnity and set off. - EQUITY – Cross claims between directors – whether directors entitled to equitable contribution to their common liability for insolvent trading. - FRAUD – Director transferred share in company to his wife – whether alienation of property with intent to defraud creditors – ambit of s.37A Conveyancing Act 1919 (NSW) – meaning of "alienation" – whether acts of person other than debtor can be avoided. - Administrative Appeals Tribunal Act 1975 (Cth) – s.43(6) - Bankruptcy Act 1966 (Cth) – s.58(3), s.82(2), s.86 - Civil Procedure Act 2005 (NSW) – s.21, s.56, s.60, s.98 LEGISLATION CITED : - Conveyancing Act 1919 (NSW) – s.37A - Corporations Act 2001 (Cth) – s.95A, s.296(1), s.459E, s.459H, s.459J, s.511, s.536, s.553(1), s.553C, s.588FC, s.588FE, s.588FF, s.588FG, s.588FGA, s.588FGB, s.588G, s.588H, s.588J, s.588K, s.588M, s.588U, s.1317S, s.1318 - Income Tax Assessment Act 1936 (Cth) – s.177, s.204(1), s.208, s.209 - Taxation Administration Act 1953 (Cth) – Pt IVC, s.14ZZM, s.14ZZR; and Schedule 1 Pt 4.15, 255-5, 255-10 - ACN 076 673 875 Ltd (in liq), Re (2002) 42 ACSR 296 - Addstone Pty Ltd (in liq), Re (1998) 83 FCR 583 - Anstella Nominees Pty Ltd v St George Motor Finance (2003) 21 ACLC 1347 - Australian Beverage Distributors Pty Ltd v Evans & Tait Premium Wines Pty Ltd [2007] NSWCA 57 - Australian Machinery & Investment Co Pty Ltd v Deputy Commissioner of Taxation (No 2) (1945) 20 ALJR 326 - Australian Securities & Investments Commission v Adler (2002) 42 ACSR 80 - Australian Securities & Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305 - Australian Securities & Investments Commission v Vines (2005) 56 ACSR 528 - Bank of Australasia v Hall (1907) 4 CLR 1514 - Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243 - Battenberg v Union Club (2005) 53 ACSR 263 - Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1 - Bialkower v Acohs Pty Ltd (1998) 83 FCR 1 - Bloemen Pty Ltd, F.J., v Commissioner of Taxation (Cth) (1981) 147 CLR 360 - Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357 - Burke v LFOT Pty Ltd (2002) 209 CLR 282 - Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) 80 ALJR 1441 - Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 15 ACSR 682 - Clyne v Deputy Commissioner of Taxation (NSW) (No 3) (1983) 57 ALJR 673 - Collector of Customs v Gaylor Pty Ltd & Dahlia Mining Co Ltd (1995) 35 NSWLR 649 - Commissioner for Corporate Affairs (Vic) v Harvey [1980] VR 669 - Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 - Companies Act, Re; Ex parte Watson (1888) 21 QBD 301 - Coventry v Charter Pacific Corporation Ltd (2005) 80 ALJR 132 - Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (2006) 58 ACSR 631 - Cywinski v Deputy Federal Commissioner of Taxation (Vic) [1990] VR 193 - Daniels v Anderson (1995) 37 NSWLR 438 - Deputy Commissioner of Taxation v Dick [2007] NSWCA 190 - Deputy Commissioner of Taxation v Van Phu Ho (1996) 131 FLR 188 - Deputy Commissioner of Taxation v Mackey (1982) 13 ATR 547 - Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 - Deputy Commissioner of Taxation v Stjepovic (1991) 91 ATC 4,715 - Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184 - Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820 - Farah Constructions Pty Ltd v Say Dee Pty Ltd (2007) 81 ALJR 1107 - Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246 - Federal Commissioner of Taxation v Myer Emporium Ltd (No 1) (1986) 160 CLR 220 - Fermoyle Pty Ltd (in liq), Re; Commonwealth of Australia v Brown (1982) 62 FLR 413 - Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83 - Gye v McIntyre (1991) 171 CLR 609 - Hoare Bros Pty Ltd v Deputy Federal Commissioner of Taxation (1995) 16 ACSR 213 - Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 19 ACSR 125 - Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (No 2) (1996) 21 ACSR 449 - Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302 - Houvardas v Zaravinos (2003) 202 ALR 535 - Hughes, Re; ex parte Westpac Banking Corporation [1997] FCA 1324 - Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559 - Imobridge Pty Ltd (in liq) (No 2), Re [2000] 2 Qd R 280 - Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 CASES CITED : - Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191 - Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430 - AP & PJ King Pty Ltd (in liq), Re [2006] NSWSC 315 - Koadlow v Deputy Commissioner of Taxation (1985) 85 ATC 4147 - Langdon v Gruber [2001] NSWSC 276 - Lewis v Doran (2004) 50 ACSR 175 - Love, Re (2003) 44 ACSR 367 - McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 - MacIntosh v Lobel (1993) 30 NSWLR 441 - Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304 - Moutere Pty Ltd v Deputy Commissioner of Taxation (2000) 34 ACSR 533 - Movitor Pty Ltd (in liq) v Sims (1996) 64 FCR 380 - Newark Pty Ltd (in liq), Re; Taylor v Carroll (1991) 6 ACSR 255 - Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434 - Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87 - Oates v Federal Commissioner of Taxation (1990) 27 FCR 289 - Official Trustee in Bankruptcy v Mateo (2003) 202 ALR 571 - Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation (2006) 94 SASR 269 - Palmer v Commissioner of Taxation [2006] NSWSC 1253 - Pollack, Re; ex parte Deputy Federal Commissioner of Taxation (1991) 32 FCR 40 - Powell v Fryer (2001) 37 ACSR 589 - Public Prosecutions, Director of v Ashley [1955] Crim LR 565 - Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 - Reynell v Sprye (1852) 42 ER 710 - Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 - Sarina, Re (1980) 32 ALR 596 - Scope Data Systems Pty Ltd v BDO Nelson Parkhill (2003) 199 ALR 56 - Scott v Williams [2002] SASC 424 - Sheahan v Hertz Australia Pty Ltd (1995) 16 ACSR 765 - Silvera v Slavic (1999) 46 NSWLR 124 - Smallcombe v Olivier (1844) 13 M&W 77 - Snow v Deputy Federal Commissioner of Taxation (WA) (1987) 14 FCR 119 - Softex Industries v Commissioner of Taxation (2001) 187 ALR 448 - Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 - Spika Trading Pty Ltd v Harrison (1990) 19 NSWLR 211 - Stanilite Pacific Ltd (in liq) v Seaton (2005) 55 ACSR 460 - Stewart, re Newtronics Pty Ltd [2007] FCA 1375. - Street & Halls v Retravision (NSW) Ltd (1995) 56 FCR 588 - Sycotex Pty Ltd v Baseler (No 2) (1994) 13 ACSR 766 [(1994) 51 FCR 425 ?] - Taylor v Australia & New Zealand Banking Group Ltd (1988) 13 ACLR 780 - Taylor v Carroll (1991) 6 ACSR 255 - Tosich Construction Pty Ltd, Re (1997) 73 FCR 219 - Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201 - Uysal v Deputy Commissioner of Taxation (2003) 54 ATR 214 - Vines v Australian Securities & Investments Commission (2007) 62 ACSR 1 - Walker v Wimborne (1976) 137 CLR 1 - West End Networks Ltd (in liq), Re [2004] 2 AC 506 - Wilde v Australian Trade Equipment Co Pty Ltd (1981) 145 CLR 590 - Willemse Family Company Pty Ltd v Deputy Commissioner of Taxation [2003] 2 Qd R 334 - Wobelea Pty Ltd v Deputy Commissioner of Taxation (1996) 20 ACSR 436 Gregory Winfield Hall – First Plaintiff (2032/04, 2685/04) Philip Patrick Carter – 1st Plaintiff (2032/04), 2nd Plaintiff (2685/04) Reynolds Wines Ltd (R&M Appointed) (in liq) – 2nd Plaintiff (2032/04), 2nd Respondent (2685/04), 1st Plaintiff (4870/05) Reynolds Vineyards Pty Ltd (R&M App) (In liq) – 3rd Plaintiff (2032/04), 2nd Plaintiff (4870/05) Peter Renwick Poolman – 1st Defendant (2032/04), 1st Respondent (2685/04) Malcolm Geoffrey Irving – 2nd Defendant/Cross Claimant (2032/04), 2nd Respondent/Applicant (2685/04) PARTIES : Constance Helen Poolman – 3rd Defendant (2032/04), Defendant (4870/05) Kalivise Pty Ltd – 4th Defendant (2032/04) Sennabeau Pty Ltd – 5th Defendant (2032/04) Morecraft Kitchens & Joinery Pty Ltd – 6th Defendant (2032/04) John Giske Martini – 1st Cross Defendant/Cross Claimant (2032/04), 3rd Respondent (2685/04) Rupert Clifton-Bligh – 2nd Cross Defendant (2032/04), 1st Respondent (2685/04) Sandra Lee Yates – 1st Cross Defendant (2032/04), 4th Respondent (2032/04) Commissioner of Taxation – Defendant/Applicant (2685/04) FILE NUMBER(S) : SC 2032/04; 2685/04; 4870/05 M.J. Slattery QC, P.W. Flynn – Plaintiffs (2032/04, 2685/04, 4870/05), 2nd Respondent (2685/04) I.M. Jackman SC, J. Shepard – M.G. Irving (2032/04, 2685/04) COUNSEL : J. Stoljar – J.G. Martini (2032/04, 2685/04) J.M. White – R. Clifton-Bligh (2032/04, 2685/04) P.G.Cutler – Ms S.L. Yates (2032/04, 2685/04) M.R. Aldridge SC, P.D. Rodionoff – Defendant/Applicant (2685/04) Blake Dawson Waldron – Plaintiffs (2032/04, 2685/04, 4870/05), 2nd Respondent (2685/04) Addisons – M.G. Irving (2032/04, 2685/04) SBA Lawyers – J.G. Martini (2032/04, 2685/04) SOLICITORS : Kemp Strang – R. Clifton-Bligh (2032/04, 2685/04) Deacons – Ms S.L. Yates (2032/04, 2685/04) Australian Government Solicitor – Defendant/Applicant (2685/04) PMF Legal – 1st & 3rd to 6th Defendants (2032/04), Defendant (4870/05) PALMER J. 2032/04 Hall & Ors v Poolman & Ors 2685/04 Hall & Ors v Commissioner of Taxation 4870/05 Reynolds Wines Ltd (R&M App) (In liq) & Anor v Poolman JUDGMENT 23 November, 2007 INTRODUCTION The proceedings 1 The Reynolds Group of companies owned vineyards and a winery near Orange in New South Wales. The Group went into voluntary administration in August 2003 and into liquidation in November 2003, owing secured and unsecured creditors a total of approximately $130M. 2 Three separate but related proceedings are before the Court. In proceedings 2032 of 2004 ("the Main Proceedings"), the Plaintiffs are the liquidators, and the receivers and managers of Reynolds Wines Limited ("Wines") and its subsidiary, Reynolds Vineyards Pty Ltd ("Vineyards"). The active Plaintiffs, however, have been the liquidators, Messrs Gregory Hall ("Mr Hall") and Phillip Carter ("Mr Carter") ("the Liquidators"). 3 Between 1 October 2002 and 4 August 2003 ("the Period"), the First Defendant, Peter Renwick Poolman ("Mr Poolman") was the Deputy Chairman of directors of Wines and a director of Vineyards. The Second Defendant, Malcolm Geoffrey Irving ("Mr Irving") was the Chairman of Directors of Wines and Vineyards. 4 In the Main Proceedings, the Plaintiffs claim: a) against Mr Poolman and Mr Irving, loss and damage suffered by creditors as a result of Wines and Vineyards trading while insolvent in the Period, pursuant to CA s.588M of the Corporations Act 2001 (Cth) ("CA"): "the Insolvent Trading Claim"; b) against Mr Poolman, a declaration pursuant to s.37A of the Conveyancing Act 1919 (NSW) in respect of the transfer of Mr Poolman's share in the Fourth Defendant, Kalivise Pty Limited ("Kalivise") to the Third Defendant, Constance Helen Poolman ("Mrs Poolman") in December 2003. The Plaintiffs claim that the alienation was made with the intention of defrauding creditors and is voidable ("the Section 37A Claim"). 5 Mr Poolman and Mrs Poolman are undischarged bankrupts. Mr Poolman, Mrs Poolman, Kalivise and the Fifth Defendant, Sennabeau Pty Ltd (of which Mr Poolman was the sole director and shareholder) ("Sennabeau"), have not taken an active part in these proceedings. On 7 June 2006 the Federal Court granted leave to the Plaintiffs to rely on documentary evidence to prove their case against Mr Poolman in the Section 37A Claim. Mr Poolman's trustee in bankruptcy neither consents to nor opposes the orders sought by the Plaintiffs and will submit to any order the Court may make, save as to costs. 6 The Plaintiffs also sought declarations and orders against the Sixth Defendant, Morecraft Kitchens & Joinery Pty Ltd ("Morecraft"). Mrs Poolman was the sole director and sole shareholder of Morecraft. However, Morecraft is in liquidation and the Plaintiffs do not now press for relief against Morecraft. 7 Cross claims have been made in the Main Proceedings between various directors of Wines and Vineyards: i) if Mr Irving is found to have contravened CA s.588G(2) and is liable to pay any sums as a result, then Mr Irving claims equitable contribution from directors of Wines and Vineyards, namely John Giske Martini ("Mr Martini") and Rupert Clifton-Bligh ("Mr Clifton-Bligh"). Mr Martini was a director and CEO of both Wines and Vineyards throughout the Period; ii) in the event Mr Irving's cross claim against Mr Martini is successful, Mr Martini claims equitable contribution against another director of Wines and Vineyards, Sandra Lee Yates ("Ms Yates"); 8 On 30 May 2005, the Court directed that the Main Proceedings be heard together with proceedings 2685 of 2004 ("the Unfair Preference Proceedings"), with evidence in one being evidence in the other. 9 In the Unfair Preference Proceedings, pursuant to CA s.588FF, the Liquidators claim recovery of payments totalling $582,934 made by Wines to the Commissioner of Taxation ("the Commissioner") as unfair preferences. The Commissioner admits that the payments were unfair preferences and does not oppose the orders sought by the Liquidators. 10 The Commissioner has, however, claimed an indemnity for any amounts which he is ordered to pay to the Liquidators. Pursuant to CA s.588FGA(2), the Commissioner claims the sum of $537,100 from each of Mr Irving, Mr Poolman and Mr Martini, and the sum of $311,916 from Ms Yates. They have been granted leave to appear in, and to defend, the Liquidators' claim against the Commissioner notwithstanding the Commissioner's admission of liability to the Liquidators. Mr Poolman's trustee has not defended the Commissioner's claim. 11 In relation to any liability which may be established on the part of Mr Irving to the Commissioner in the Unfair Preference Proceedings, Mr Irving claims indemnity against Wines, pursuant to an Indemnity and Access Deed dated 5 September 2001 and under Clause 38.1 of Wines Constitution. He says that the amount to which he would be entitled by way of indemnity against Wines should be set off against the amount, if any, which he is ordered to pay to the Liquidators of Wines in respect of their claim under s.588M for insolvent trading. 12 The claims by Mr Irving and Mr Martini for contribution or indemnity against Mr Clifton-Bligh in the Unfair Preference Proceedings were settled by consent orders during the trial. As noted, Mr Poolman is an undischarged bankrupt. The Commissioner has not obtained leave to proceed against him and has discontinued his claim against Mr Poolman. 13 Also before the Court is proceeding 4870 of 2005 ("the Caveat Proceedings") brought by the receivers and managers of Wines and Vineyards against Mrs Poolman. The receivers and managers seek to maintain a caveat over property currently owned by Mrs Poolman. As a result of arrangements between the parties reflected in previous orders made in the Caveat Proceedings, the outcome of the Section 37A Claim will govern the outcome of the Caveat Proceedings. The beneficiaries of this litigation 14 The collapse of the Reynolds Group resulted in a shortfall of over $30M to secured creditors. Thus, there were no assets available for unsecured creditors, whose claims amount to just under $99M, and insufficient funds even to pay the costs of the voluntary administration and the winding up. The only potential assets to be realised were recoveries of voidable preference payments to the Australian Taxation Office ("ATO") and the present claims against directors of the Group for insolvent trading. The Liquidators had no funds to pursue these claims. In 2004, they entered into a funding agreement with a litigation funder. 15 The total amount which the Liquidators seek to recover in these proceedings from the directors and from the ATO is approximately $9.6M, including interest and costs. As noted, the value of unpaid creditors' claims exceeds $130M. When the trial commenced, the Court was informed that, even if the Liquidators recovered the full amount of their claims, including costs and interest, after payment of the litigation funder's costs and "success fee" and the costs of the Liquidators and their solicitors, unsecured creditors would receive no more than a fraction of a cent in the dollar of their claims: T127.7-.11. 16 I expressed concern that such huge costs could be incurred in prosecuting claims by liquidators when virtually every cent of the proceeds of the claims, even if wholly successful, would go to a litigation funder and to the costs and disbursements of the professionals engaged in conducting the litigation. Near the close of the trial, I was informed that the Liquidators had renegotiated their agreement with the litigation funder. Even so, it is impossible to ascertain whether the renegotiated agreement will result in the creditors actually receiving any more than under the original agreement. 17 The true beneficiaries of this huge piece of litigation are a litigation funder, the Liquidators and their lawyers, not the creditors. The Defendants say that this circumstance, coupled with the fact that they have acted honestly, should defeat the Liquidators' claims: they say that the Court should exercise its discretionary powers under CA s.1317S(2) and s.1318 to relieve them from any liability which they might otherwise have. I will return to this disquieting aspect of the litigation later in the judgment. Background of the Reynolds Group 18 The following account is taken largely from the Administrators' Report to Creditors dated 15 September 2003. 19 During the Period the Reynolds Group comprised Wines and the following wholly owned subsidiaries: Vineyards, CH Finance Pty Ltd (CHF"), Cabonne Cellars Exports Pty Ltd, CHM Capital Pty Ltd, Cabonne Cellars Pty Ltd, and The Reynolds Wine Company Pty Ltd. Also included in the Group, according to Mr Spicer, the Chief Financial Officer, were the entities CHM Unit Trust and CHM Wirrilla Trust. Messrs Irving, Poolman and Martini were directors of all companies in the Group and Mr Spicer was the Chief Financial Officer and Company Secretary. 20 The principal business of Wines was operating a vineyard, managing investment schemes and acting as a holding company. The principal business of Vineyards was operating a winery, and marketing and selling wine. CH Finance and CH Capital provided finance and managed investments arising out of grape growing projects. 21 According to Mr Spicer's undisputed evidence, the Reynolds Group: "… operated as one business with consolidated accounts. Each separate member was treated as a cost centre for accounting and statutory purposes, with the income derived from the various members being used by all the members collectively. The Group had one central source of credit, a facility with (ANZ Bank), which was cross-collateralised by the members of the Group": affidavit 13 August 2004, paras 11-12. 22 Wines, formerly Cabonne Ltd, was incorporated in 1993. Its business was originally to act as manager of four prescribed interest schemes which were promoted in the mid-1990s. Three of the schemes were conducted on a property situated at Molong near Orange, called Little Boomie. Wines acquired a 50% interest in another property south of Orange, called Angullong, as tenant in common with Angullong Pty Ltd. It also owned an interest in a property called Warilla, near Gundagai. 23 Wines earned revenue from development and management of vineyards on behalf of persons described in the documentation as "Farmers". It entered into a contract to supply grapes to Southcorp Wines on behalf of Farmers. 24 In 1999, Wines raised $35M through a public offering and listed on the Australian Stock Exchange. The capital raised was used to establish a winery to process Farmers' grapes into wine, develop additional vineyards, develop brands and establish domestic and export wine markets. The Southcorp Wines contract was terminated and Wines entered into contracts to acquire grapes from Farmers in order to produce wine on its own behalf. At the same time, Wines also issued $7.5M in Redeemable Converting Preference Shares ("RCPS") which were due for redemption in November 2002. 25 A winery was established at Orange for a cost of $17M, with an annual capacity to convert 10,000 tonnes of grapes into wine, and a storage capacity of 7.4M litres. A bottling plant was purchased but was never installed or commissioned. 26 In December 2000, an alliance was established with Trinchero Family Estates ("TFE"), which is a large wine distributor in the United States and Canada. 27 In mid-2002, Wines raised $8M in capital through a renounceable rights issue. The funds were to be applied in capital expenditure and in providing additional working capital. Around the same time, Wines raised $12.5M by way of Cumulative Converting Preference Shares ("CCPS"), secured by a charge. These funds were to provide further working capital to assist in expansion and for the repayment of $3M in short term funding. However, the $20.5M raised in mid-2002 was not in fact employed in funding capital expenditure but, rather, was used to pay outstanding creditors. 28 Throughout its history the Reynolds Group has been in dispute with the ATO relating to the original structure of the prescribed investment schemes, deductions claimed by Farmers, income received by the Reynolds Group, and the Group's claims for tax deductions, partially offsetting this income. The ATO issued tax assessments, some dating back to 1998, against the Group in amounts totalling $14.8M. The Group disputed that liability. By 30 June 2002, the tax liability, including accrued penalties and interest, was claimed by the ATO to amount to $17.4M. 29 The Reynolds Group endeavoured to negotiate with the ATO to reduce or extinguish its liability under the tax assessments. The liability for tax claimed by the ATO severely inhibited the Group from raising further capital. On 31 July 2003, the ATO formally advised the Group that it had rejected the Group's offer of compromise of the tax liability. The directors resolved to appoint voluntary administrators to the Group on 4 August 2003. Wines and Vineyards were placed in liquidation on 25 November 2003. 30 As at the date of appointment of the voluntary administrators the Group had two secured creditors: the ANZ Bank held a first charge over the assets of all Group companies supported by cross guarantees and first registered mortgages over all real property. The debt secured to the ANZ was in the order of $30M plus accruing interest and costs. On 7 August 2003, the ANZ appointed receivers and managers to the Group. 31 IWC Nominees Pty Ltd held a second ranking charge as trustee on behalf of the holders of the CCPS, which were issued for $12.5M in mid-2002. Mr Malcolm Irving 32 Mr Irving was appointed a non-executive director of Wines and Vineyards on 10 September 1999. He was Chairman of the Boards of both companies until the appointment of the administrators on 4 August 2003. 33 Mr Irving holds a Bachelor of Commerce degree and commenced his professional life as an accountant. He has had a long and highly distinguished career as a director of many substantial companies. He has been Chairman of companies such as Australian Industry Development Corporation, Australian Medical Insurance Ltd, FAI Life Ltd, Willis Australia Ltd Group, Anxiom Funds Management Corporation and David Jones Superannuation Fund Pty Ltd. He has been Managing Director of CIBC Australia Ltd and a director of companies such as Caltex Australia Ltd and Telstra Corporation. He has been a member of many government and non-government advisory boards. He has been awarded the Australia Medal. 34 Mr Irving was undoubtedly the most highly experienced director on the Boards of Wines and Vineyards. There can be no doubt that the other directors accorded him respect and authority as Chairman. While the Liquidators and the ATO call into question in these proceedings Mr Irving's judgment in what he did or failed to do in respect of the Group's continued trading from October 2002 to August 2003, there is no issue as to his integrity. Mr Peter Poolman 35 Mr Poolman was a director of Wines from 13 September 1993 and a director of Vineyards from 26 August 1998. He was also the Chief Executive Officer of Wines until April 2002. Upon his resignation as Chief Executive Officer, he was appointed a non-executive director and Deputy Chairman of the board of directors of Wines. 36 Up until 30 November 2003 and about December 2003, Mr Poolman was the sole director and sole shareholder of Kalivise. In early December 2003, Mrs Poolman became the sole director and shareholder of Kalivise. Mrs Poolman was also the sole director and shareholder of Sennebeau and Morecraft. Since 1999, Kalivise and Sennabeau were joint proprietors of a property known as "Bowan Downs" at Cargo Road, Orange. This property has been sold and nett proceeds are held in trust account pending determination of these proceedings. 37 Mr and Mrs Poolman were declared bankrupt on 26 July and 9 June 2005 respectively. Leave to proceed with the Insolvent Trading Claim against Mr Poolman has been obtained by the Liquidators under s.58(3)(b) of the Bankruptcy Act 1966 (Cth). Leave to proceed against Mrs Poolman in respect of the claim under s.37A Conveyancing Act 1919 (NSW) is not necessary because the claim against her is not in respect of a debt provable in her bankrupt estate: S.58(3)(b) Bankruptcy Act. Mr John Martini 38 On 23 September 2002, Mr Martini was appointed as Chief Executive Officer of Wines, and a director of Wines and its subsidiaries. 39 Mr Martini has had extensive experience in large wine businesses in the United States. His experience includes managing sales, marketing, distribution, merchandising, pricing, spending, strategic development and public relations. Before his appointment to the Boards of Wines and Vineyards, he had never been a company director, nor did he have experience with corporate governance or the management of legal or tax affairs in Australia. 40 Immediately prior to his employment by the Reynolds Group, Mr Martini was a senior adviser for TFE in the United States. During 2000, Mr Martini formed the view that TFE should become involved with the Australian wine industry. He was introduced to Mr Poolman in California in about May or June 2000. A joint venture between Reynolds Wines and TFE was established in March 2002. In April 2002, Mr Poolman resigned as Chief Executive Officer of the Reynolds Group. After discussions between Mr Martini and the other directors of the Reynolds Group, Mr Martini agreed to replace Mr Poolman and moved from California to Australia in September 2002. Ms Sandra Yates 41 Ms Yates was appointed as a director of Wines and Vineyards on 20 March 2001 and resigned as a director of each of those companies on 30 June 2003. 42 Ms Yates has experience in international sales and marketing. She attended board meetings and monthly sales and marketing meetings in which she provided advice on a broad range of marketing issues. Mr Simon Spicer 43 Mr Spicer has been a chartered accountant since 1986 and holds a Bachelor of Economics (Accounting & Business Taxation/Law). Prior to joining the Reynolds Group, he was a senior manager in the Melbourne insolvency group of Price Waterhouse (as it was then) from 1987 to 1995, a principal of Financial and Business Consulting from 1995 to 1996, the Group Business & Finance Manager of the Estée Lauder Group from 1996 to 1999 and the Chief Financial Officer of the Dymocks Group from 2000 to 2002. 44 Mr Spicer commenced his employment with the Reynolds Group on 18 November 2002 as its Chief Financial Officer and Company Secretary. His main responsibilities included the overall management of the Group's financial affairs, which included the management and payment of its trade creditors and financiers such as ANZ Bank, the financial reporting of the Group, compliance with the ASX Listing Rules and the Corporations Act 2001 and liaising with external auditors. 45 Mr Spicer worked closely with Mr Martini in managing all aspects of the business of the Reynolds Group. According to Mr Spicer's evidence, from January 2003 he also supervised the Financial Controller of the Group, Ms Deborah Carroll, who was responsible for the maintenance of records relating to the accounts payable of the Reynolds Group. Mr Roan Fryer 46 Mr Fryer has been a taxation accountant for over twenty years and is a partner of Deloitte Touche Tohmatsu chartered accountants ("Deloitte"), and a director of Deloitte Touche Tohmatsu Ltd ("DTT Ltd"). 47 At all material times, Deloitte acted as auditors and of the Reynolds Group and DTT Ltd provided tax advice to the Reynolds Group. Mr Alan Jessup 48 Mr Jessup was the solicitor for the Reynolds Group from approximately 1996 until the Group was placed in administration. For most of that time, he was a partner of Hunt & Hunt. In February 2003, he became a partner of Piper Alderman. He has specialised in the field of taxation for about twenty years. Mr John Evans 49 Mr Evans is a solicitor and an Assistant Commissioner of Taxation. Mr Evans engaged in settlement negotiations on behalf of the ATO with the Reynolds Group prior to and during the Period. Mr Cameron Jeffs 50 Mr Jeffs is a director of the GST Business Line within the Australian Taxation Office. 51 In 2001, he was the audit team leader in the review of Reynolds Wines' Central Highlands Wine Grapes scheme. Later, he was involved in the settlement negotiations with the Reynolds Group. ISSUES Insolvent trading claims 52 The issues to be decided arise out of the provisions of the Corporations Act imposing liability and affording defences. CA s.588G relevantly provides: " Director's duty to prevent insolvent trading by company (1) This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; … (2) By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware." Section 588H relevantly provides: " Defences (1) This section has effect for the purposes of proceedings for a contravention of subsection 588G(2) in relation to the incurring of a debt (including proceedings under section 588M in relation to the incurring of the debt). (2) It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. (3) Without limiting the generality of subsection (2), it is a defence if it is proved that, at the time when the debt was incurred, the person: (a) had reasonable grounds to believe, and did believe: (i) that a competent and reliable person (the other person) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and (ii) that the other person was fulfilling that responsibility; and (b) expected, on the basis of information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. (4) If the person was a director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company. (5) It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt. (6) In determining whether a defence under subsection (5) has been proved, the matters to which regard is to be had include, but are not limited to: (a) any action the person took with a view to appointing an administrator of the company; and (b) when that action was taken; and (c) the results of that action." Section 588M relevantly provides: " Recovery of compensation for loss resulting from insolvent trading (1) This section applies where: (a) a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and (b) the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and (c) the debt was wholly or partly unsecured when the loss or damage was suffered; and (d) the company is being wound up; whether or not: (e) the director has been convicted of an offence in relation to the contravention; or (f) a civil penalty order has been made against the director in relation to the contravention. (2) The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage." 53 The issues to be determined in the Liquidators' claims against Mr Irving for insolvent trading may be summarised thus: i) whether Wines or Vineyards was insolvent at any time in the Period when it incurred a debt which remains unpaid; ii) whether there were reasonable grounds for suspecting that Wines or Vineyards was insolvent at such time; iii) if so, whether Mr Irving was aware at the relevant time of reasonable grounds for suspecting that Wines or Vineyards was insolvent; iv) whether a reasonable person in a like position would have been so aware; v) whether at the time any relevant debt was incurred, Mr Irving had reasonable grounds to expect, and did expect, that Wines and Vineyards were solvent, so that a defence under CA s.588H(2) is made out; vi) as a sub-issue in such defence, whether Mr Irving actually believed, and had reasonable grounds to believe, that competent and reliable persons were responsible for providing to him adequate information about Wines' and Vineyards' solvency and that those persons were fulfilling their responsibility; vii) whether Mr Irving expected on the basis of such information that the companies were solvent and would remain solvent during the Period even if they continued to incur debts. 54 If Mr Irving's defence under CA s.588H fails, the issues are: i) whether, having regard to all the circumstances of the case, pursuant to CA s.1317S(2) or s.1318(1) Mr Irving ought fairly to be excused from any default, contravention or breach of duty established; ii) whether it is otherwise appropriate for the Court to exercise its discretion to relieve Mr Irving wholly or partly from liability to which he would otherwise be subject. 55 If these issues are resolved against Mr Irving, the Court must determine: i) the quantum of damages for which Mr Irving is liable. This will involve the determination of the quantum of debts incurred by Wines and Vineyards in the Period, or such part of it as is relevant on the findings made, and the amount of loss, if any, suffered by unpaid creditors; ii) whether Mr Irving is entitled to set off against any monies ordered to be paid by him in the Insolvent Trading Claim any amount to which he is entitled under a Deed of Indemnity executed by Wines. 56 With respect to Mr Irving's cross claim in the Main Proceedings against Mr Martini, the issues are: i) whether Mr Irving is entitled, as a matter of law, to allege that Mr Martini contravened CA s.588G(2) and to file a cross claim against Mr Martini in the Main Proceedings; ii) if Mr Irving is so entitled, whether Mr Martini has also contravened CA s.588G(2); iii) whether Mr Martini, in accordance with CA s.588H(2), had reasonable grounds to expect and did expect that Wines and Vineyards were solvent and would remain solvent in the Period; iv) as a sub-issue of the foregoing, whether Mr Martini, in accordance with CA s.588H(3), had reasonable grounds to believe, and did believe, that competent and reliable persons were responsible for providing him with adequate information about the solvency of Wines and Vineyards; v) if Mr Martini's defences fail, whether the failure of such defences is a consequence of Mr Irving's alleged breach of his duty to inform the Board of Wines of the true financial position and performance of Wines; vi) if Mr Irving has not breached the above duty, whether, having regard to all the circumstances of the case, pursuant to CA s.1317S(2) or s.1318(1), Mr Martini ought fairly to be excused from any default, contravention or breach of duty established; vii) whether it is otherwise appropriate for the Court to exercise its discretion to relieve Mr Martini wholly or partly from a liability to which he would otherwise be subject; viii) if Mr Irving is held liable to the Liquidators, whether Mr Martini shares with Mr Irving a co-ordinate liability or common obligation to Wines and Vineyards so as to make good the loss or damage suffered by the creditors of Wines and Vineyards to attract the doctrine of equitable contribution; ix) in the event that Mr Irving's cross claim is successful, what is the quantum of damages for which Mr Martini is liable; x) "whether Mr Martini is entitled to set off any monies ordered to be paid by him to Mr Irving against any monies ordered to be paid by Mr Martini to the Commissioner in the Unfair Preference Proceedings" (sic – Statement of Issues). 57 The issues arising in Mr Irving's cross claim against Mr Martini arise also in Mr Martini's cross claim against Ms Yates, subject to minor adjustments of detail. Unfair Preference Proceedings 58 The issues arising from the defences of Messrs Irving and Martini and Mrs Yates to the Commissioner's claim for indemnity against them are: i) whether Wines was insolvent at any time in the Period; ii) whether the payments made by Wines to the Commissioner, identified by the Liquidators in paragraph 7 of their Statement of Claim, were insolvent transactions within the meaning of CA s.588FC; iii) whether any of the payments are voidable as against the Commissioner pursuant to CA s.588FE and thus not repayable by the Commissioner; iv) whether Mr Irving and Mr Martini can establish that the Commissioner is entitled to resist the Liquidators' claim under CA s.588FG. This in turn raises the following issues: v) whether the Commissioner became a party to the alleged transactions in good faith; vi) whether the Commissioner had reasonable grounds to suspect that Wines was insolvent at the time of making payments; vii) whether a reasonable person in the Commissioner's circumstances would have had no such grounds for suspicion; viii) whether the Messrs Irving and Martini and Mrs Yates can rely on the defences available under CA s.588FGB(3) and (4) as to reasonable expectation as to solvency and reasonable reliance on others for adequate information as to solvency; ix) whether Messrs Irving and Martini and Ms Yates are entitled to seek relief under CA s.1318 and if so, whether they ought to be relieved of liability pursuant to that section; x) the extent of indemnity sought by the Commissioner. 59 If the Commissioner succeeds in his claim for indemnity against Mr Irving, the principal issues between Mr Irving and Wines are: i) whether the Commissioner's claim against Mr Irving is a claim falling within Clause 2.1 of the Indemnity and Access Deed dated 5 September 2002 between Wines and Mr Irving; ii) whether the Constitution of Wines operates to confer any rights of indemnity upon Mr Irving. Section 37A Claim 60 Since the Plaintiffs' Section 37A Claim is not contested, the only issues to be determined are: – whether the evidence establishes that the transfer of Mr Poolman's interest in Kalivise to Mrs Poolman in December 2003 was done with the intention to defraud creditors; – whether the issue of a new share in Kalivise to Mrs Poolman was an "alienation" for the purposes of s.37A Conveyancing Act . WHETHER WINES AND VINEYARDS INSOLVENT Whether solvency of Wines independent of solvency of Vineyards 61 A preliminary issue between the parties is whether the solvency of Wines and Vineyards can be determined by looking at the position of the Reynolds Group on a consolidated basis, as the Liquidators and Commissioner contend. 62 Mr Jackman SC, who appears with Ms J. Shepard of Counsel for Mr Irving, submits: "… the plaintiffs seek to combine the position of [Wines] and [Vineyards], together with various other subsidiary or sibling companies, in an attempt to show that the "Reynolds group of companies" was insolvent. This is wrong in principle, and contrary to the express language of sections 588G and 95A. While it is permissible in ascertaining the solvency of one of the group companies to look at the assets held by the other group companies, given the ready ability of companies within a group to lend money to others in the group, there is no justification for aggregating the liabilities of group companies and attributing them to each company in the group. Each company is a separate legal entity: Walker v Wimborne (1976) 137 CLR 1 at 6 (Mason J, with whom Barwick CJ agreed); Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 at 577 (Mason J, with whom Stephen, Jacobs, Murphy and Aickin JJ agreed)." 63 I do not think that Mr Jackman's formulation of the Liquidators' position is accurate. Further, it really does not address the proper issue in the present case. The Liquidators do not say that the debts of all Reynolds Group companies are to be treated as the debts of Wines. They say that in order to assess the solvency of Wines one cannot have regard to assets of other Group companies which may be available as resources to Wines without having regard to the liabilities of those other companies. 64 It is trite that the test of solvency of a company under CA s.95A is, first and last, a question of fact and that the Court approaches that question as a matter of commercial reality. If one member of a group of companies has, as a matter of commercial reality, ready recourse to the assets of another member of the group for payment of the first company's debts as they fall due, and that recourse will not result in the insolvency of the second company or in merely delaying the insolvency of the first, then the Court may have regard to that fact in assessing whether the first company is able to pay its debts as they fall due: Lewis v Doran (2004) 50 ACSR 175 at [116]. 65 It is beyond question in the present case that whatever cash and asset resources were available to Wines were regarded by the Boards of Wines and Vineyards as available to Vineyards for the payment of its debts, and vice versa. Even Mr Irving, in his submissions, takes the same approach. In Exhibit 2D1, which are hypothetical worked examples put forward by Mr Irving in an endeavour to show that Wines and Vineyards had sufficient asset resources to meet their respective liabilities as they fell due, assets such as the Quandong property, bulk wine sales and debt finance are treated as producing cash for both companies, regardless of which company actually owned the particular asset. 66 If commercial reality requires the Court, in assessing the solvency of company A in a group, to have regard to the assets of assets in company B in the group, commercial reality will also require the Court to look at the liabilities of company B. Company B's liabilities may be such that it cannot use its assets to assist company A without becoming insolvent itself. In such a case, company B's assets cannot be regarded as available to pay company A's debts: the law does not condone robbing Peter to pay Paul. 67 The uncontested evidence is that the Reynolds Group operated as one business with consolidated accounts. The income derived from the individual members was used by all members collectively and there were regular transfers of funds between the bank accounts of Wines and Vineyards, whenever required for operational purposes. The Group had a loan facility of $30M with the ANZ Bank which was secured under cross-collateralised fixed and floating charges given by all members of the Group. The Bank was the major creditor of each company in the Group. IWC Nominees Pty Ltd, as trustee on behalf of the holders of CCPS issued by Wines, held a second-ranking charge given by all Group companies. 68 There were extensive loans between companies in the Group. As at the end of the Period, Vineyards owed Wines $33.9M which was almost the whole of the nett assets of Wines of $34.9M disclosed by the Directors in the Report as to Affairs of Wines. Vineyards was shown as having a nett asset deficiency at book value of $4.5M, so that it could not have fully repaid the loan from Wines. 69 These circumstances demonstrate that in assessing whether Wines or Vineyards was able to pay its own debts as they fell due it is not justifiable to have regard to its own assets and to the assets of other companies in the Group as possible sources of cash in isolation from the financial position of the Group as a whole. The Commissioner's tax debts 70 The debts of Wines relevant to the issue of its solvency during the Period fall into two categories: debts said to be owing to the Commissioner by virtue of tax assessments and trade debts owing to unsecured creditors. 71 The relevant assessments against Wines are made in: – a Notice of Assessment issued on 2 March 2001 in respect of the financial year ended 30 June 1998 for an amount of $4,252,915. The assessment results from the denial by the Commissioner of a loss transfer. The Notice of Assessment states that the amount assessed "is due … on 4 April 2001" and "is … payable by the date previously advised" ; – Notice of Assessment issued on 9 March 2001 in respect of the financial year ending 30 June 1997 for an amount of $1,316,336. The Notice assesses tax relating to employee benefit plans. The assessment states that the amount assessed "is due on 11 April 2001" and is payable on that date. 72 In short, the Notices of Assessment purported to make the sum of $4,252,915 due and payable by Wines on 4 April 2001, and the sum of $1,316,336 due and payable on 11 April 2001. 73 There is no issue that on 18 June 2001 Wines delivered timely objections to both assessments, the effect of which was to deny any liability for tax. Likewise, there is no issue that the disputes which Wines raised as to the assessments were genuine. Wines had had the advice of Mr Jessup, who had in turn briefed Mr R.F. Edmonds SC (as his Honour then was). On 13 June 2002, Mr Jessup provided lengthy written submissions to the Commissioner in support of Wines' objections. Mr Fryer of Deloitte submitted to the Commissioner in a letter dated 15 November 2002 that Wines' case was at least "reasonably arguable". Neither the Liquidators nor the Commissioner in these proceedings have attacked the genuineness of the opinions expressed by Mr Jessup and by Mr Fryer, nor has there been any submission that those opinions are not reasonably arguable. 74 The Commissioner did not actually decide to disallow Wines' objections to the Notices of Assessment until after 4 August 2003. As at the date of trial, Wines' objections to the assessments were still awaiting determination by the Administrative Appeals Tribunal. 75 The Liquidators say that the tax debts, even though disputed, were nevertheless payable at all times during the Period and that Wines was unable to pay them so that it was insolvent. Mr Irving concedes that if the tax debts were payable, for the purposes of CA s.95A, at any time during the Period then Wines could not have paid them, either from its cash resources or from realisation of its assets. The result would be that Wines was insolvent; there would be no necessity to enquire whether it could have paid its trade creditors by recourse to its available assets, as Mr Irving contends Wines could have done. 76 If Wines was insolvent by reason of the tax assessments and had been placed in liquidation during the Period, it would have followed that Vineyards would also have been insolvent and would have been wound up: see the discussion at paragraphs 21, 65-69. Wines' liquidator would have called upon Vineyards to repay the $33.9M debt, which Vineyards could not have done in full. There would have also been an event of default under the Group's credit facility with ANZ Bank, which would have called upon Vineyards to repay the $30M facility. It would have been inevitable in such circumstances that Vineyards would have become insolvent and would have to be placed in liquidation. Mr Jackman SC frankly conceded that this was the reality: T172.3-173.26; T1072.47-.52. No other defendant disagreed. 77 Mr Jackman's contention was, however, that Wines was not insolvent because of the tax assessments. Vineyards was not insolvent during the Period because Wines had not called upon it to pay the $33.9M debt. Wines and Vineyards could, as a matter of commercial reality, pay their due and payable debts out of their own resources. The same contention was adopted by the other defendants. 78 Mr Jackman says that the Commissioner's assessments were not debts payable by Wines, within the meaning of CA s.95A, at any time during the Period, broadly for two reasons: – first, the assessments were genuinely disputed as to the whole of the amounts and, further, if Wines is entitled to approximately $14M in tax refunds, which it has claimed in respect of the 1998 and 1999 tax years, the Commissioner's debts are wholly extinguished; – second, there was an oral agreement between the Reynolds Group and the Commissioner that the Commissioner would take no recovery action while the parties were endeavouring to settle their dispute by negotiation, so that the tax debts were not payable within the meaning of s.95A unless and until the negotiations concluded unsuccessfully – an event which did not occur until 31 July 2003. Mr Irving's submission: genuinely disputed tax assessments are not payable 79 There are four arguments which Mr Irving advances in support of the proposition that the disputed assessments should not be treated as liabilities of Wines which were "due and payable" for the purposes of the solvency test prescribed by CA s.95A. Each of the arguments is said to be based on the underlying proposition that "the question (of solvency) must be approached by focussing attention on the perspective of someone operating in a practical business environment": Written Submissions, 23 February 2007, para 53. The authority cited in support of this proposition, said to be applicable in the present context, is Sycotex Pty Ltd v Baseler (No 2) (1994) 13 ACSR 766, at 775 per Gummow J. Also said to be fundamental to the four arguments is the proposition that the issue of solvency is a question of fact to be decided as a matter of commercial reality: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, at paras [48]-[49], [54]; Lewis v Doran (supra) at [106]. 80 The first argument is that where a corporation genuinely disputes a certain liability – including a liability said to arise under a tax assessment – and there has not yet been a determination on the merits of the disputed liability, that liability is not to be taken into account in assessing whether the corporation is solvent. The authority cited for that proposition is Taylor v Carroll (1991) 6 ACSR 255, at 255 and 258. Mr Jackman says that this proposition applies a fortiori where, as here, the Court hearing a claim founded upon insolvency does not have jurisdiction to determine a dispute as to tax liability. Accordingly, Mr Jackman says, the tax debt claimed by the Commissioner must be regarded as a contingent liability because it will not be ascertained that Wines is indeed indebted to the Commissioner under the tax assessments unless and until the objections which Wines has raised are decided adversely to it in the AAT. 81 The argument, in summary, proceeds along the following lines: – because one has to deal with the issue of solvency as a matter of commercial reality, one must look at how the disputed tax liability was required to be treated in Wines' financial accounts as at 30 June 2002 and 31 December 2002; – AASB 1044 forbids the recognition of "contingent liabilities" in a company's statement of financial position (AASB 1044, para 7.1) and the liability under the disputed assessments was contingent; – AASB 1044 has statutory force under the Corporation Act : CA s.296(1); Stanilite Pacific Ltd (in liq) v Seaton (2005) 55 ACSR 460, at para [62]; – it would be anomalous if CA s.95A treated as due and payable for the purposes of a solvency test a debt which s.296(1) forbids a company's financial accounts to recognise as a liability. The Commissioner's submission: genuinely disputed tax assessments are immediately payable 82 The Commissioner and the Liquidators submit that even if there is a genuine dispute as to liability under a tax assessment – in the sense that the taxpayer has at least an arguable case in support of its objections to the assessment – and even if that dispute is awaiting determination by the AAT or by the Courts, nevertheless the effect of the income tax legislation is to make the tax assessment a debt due and payable to the Commonwealth on the date stated in the Notice of Assessment. The Liquidators and the Commissioner say that a dispute as to liability under a tax assessment – while it may be regarded as genuine by the AAT or the Federal Court for the purpose of review proceedings under Pt IVC of the Taxation Administration Act 1953 (Cth) ("TAA") – is not classified as a "genuine dispute" for the purposes of determining solvency of a corporation under the Corporations Act. 83 The Liquidators and the Commissioner rely on a number of provisions of the Income Tax Assessment Act 1936 (Cth) ("ITAA") and the TAA. It should be noted that s.204 ITAA was amended with effect from 1 July 2000 but the amendment was not applicable to tax payable for the years of income the subject of the Notices of Assessment against Wines. Similarly, s.208 and s.209 ITAA were repealed with effect from 14 September 2006 but not so as to affect tax assessments made prior to that date. Part 4-15 of Schedule 1 of the TAA governs the recovery of tax liabilities becoming due and payable on or after 1 July 2000, so that it is applicable to the Notices of Assessment in the present case. 84 Section 204(1) Income Tax Assessment Act 1936 (Cth) provided: " When tax payable (1) Subject to the provisions of this Part, any income tax assessed shall be due and payable by the person liable to pay the tax on the date specified in the notice as the date upon which tax is due and payable, not being less than 30 days after the service of the notice, or, if no date is so specified, on the thirtieth day after the service of the notice." Section 208(1) ITAA provided: " Tax a debt due to the Commonwealth (1) Income tax when it becomes due and payable shall be a debt due to the Commonwealth, and payable to the Commissioner in the manner and at the place prescribed." Section 209(1) ITAA provided: " Recovery of tax (1) Any tax unpaid may be used for and recovered in any Court of competent jurisdiction by the Commissioner or a Deputy Commissioner suing in his official name." 255-5 of Schedule 1 TAA is to the same effect as s.208(6) and s.209(1) ITAA. Section 177 ITAA provides: "(1) The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct." Section 14ZZM TAA provides: " Pending review not to affect implementation of taxation decisions The fact that a review is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no review were pending." Section 14ZZR TAA provides: " Pending appeal not to affect implementation of taxation decisions The fact that an appeal is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no appeal were pending." When is a disputed tax assessment payable 85 The following propositions are now, I think, established by authority: i) the scheme of the tax legislation – s.177, s.204(1) ITAA and s.14ZZM and s.14ZZR TAA – is that the issue and service of a Notice of Assessment creates, upon expiry of the prescribed period for payment, a debt which is immediately due and payable to the Commonwealth: Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243, at 251-252; Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168, at 191-192, 195; Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302; ii) the correctness of the assessment and the amount of the debt can be challenged in the review procedures provided by Pt IVC TAA, but not in proceedings wherein the Commissioner seeks to enforce payment of the debt created by the assessment, whether directly, as in proceedings to obtain or execute a judgment, or indirectly, such as by the service of a statutory demand under CA 459E: Batagol (supra) at 252; F.J. Bloemen Pty Ltd v Commissioner of Taxation (Cth) (1981) 147 CLR 360, at 376; Deputy Commissioner of Taxation v Richard Walter Pty Ltd (supra) at 187; Uysal v Deputy Commissioner of Taxation (2003) 54 ATR 214 . iii) the fact that objection has been taken to an assessment and a review of the assessment is pending under Pt IVC TAA does not, in itself, demonstrate the existence of a "genuine dispute" for the purposes of CA s.459H(1)(a): Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (supra) 62 FCR 302, at 685; Wobelea Pty Ltd v Deputy Commissioner of Taxation (1996) 20 ACSR 436. iv) a company served with a statutory demand founded upon a Notice of Assessment may demonstrate a "genuine dispute" as to the existence of the debt for the purposes of CA s.459H(1)(a) only if it demonstrates that one or other of the prerequisites for the creation of liability under the Notice of Assessment has not been met, namely, the Commissioner has not actually assessed the amount of taxable income and the tax payable there, or notice of the assessment has not been served on the taxpayer, or the prescribed period for payment of the tax assessment has not expired: Hoare Bros Pty Ltd v Deputy Federal Commissioner of Taxation (1995) 16 ACSR 213, at 223; approved on appeal, Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 19 ACSR 125, at 135-136; see also Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (No 2) (1996) 21 ACSR 449, at 451ff; Moutere Pty Ltd v Deputy Commissioner of Taxation (2000) 34 ACSR 533, at paras [45]-[49]; v) the scheme of the tax legislation does not preclude the taxpayer company from seeking to have set aside a statutory demand founded upon a Notice of Assessment, otherwise validly issued, on the ground that the taxpayer has a genuine offsetting claim, within the meaning of CA s.459H(1)(b) and (v): Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation (2006) 94 SASR 269, at paras [74]-[76], [81]; Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83, at 102; vi) a statutory demand founded on a Notice of Assessment may be set aside in the Court's discretion under CA s.459J(1)(b), notwithstanding that the company cannot demonstrate a "genuine dispute" as to the existence of the tax debt for the purposes of CA s.459H(1)(a), if the company can show that there is "some other reason" why the statutory demand should be set aside, for example, the Commissioner's reliance upon the statutory demand is oppressive and would cause substantial injustice: Softex Industries v Commissioner of Taxation (2001) 187 ALR 448; Moutere (supra); Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 15 ACSR 682, at 695. vii) a Court may, in the exercise of its inherent discretion to control and protect its processes, refuse an application for summary judgment, or may stay execution of a judgment, founded upon the issue and service of a Notice of Assessment which is still subject to review under Pt IVC TAA. Such discretion, which is open-ended in terms of the factors which may be taken into account, is, however, only exercised in very unusual and clear circumstances, such as where it appears that recovery proceedings are an abuse of process or will cause extreme personal hardship to the taxpayer. The exercise of the discretion may take account of the taxpayer's prospects of success in the review proceedings – especially if it is clear that the taxpayer's objections are frivolous – but the Court must give considerable weight to the policy evident in s.204(1) ITAA and s.14ZZM and s.14ZZR TAA that the Commissioner is entitled to recover the debt created by a Notice of Assessment even though it is still subject to review or appeal under Pt IVC TAA: Australian Machinery & Investment Co Pty Ltd v Deputy Commissioner of Taxation (No 2) (1945) 20 ALJR 326; Clyne v Deputy Commissioner of Taxation (NSW) (No 3) (1983) 57 ALJR 673, at 674; Deputy Commissioner of Taxation v Mackey (1982) 13 ATR 547, at 550, 551-552; Snow v Deputy Federal Commissioner of Taxation (WA) (1987) 14 FCR 119, at 139; Koadlow v Deputy Commissioner of Taxation (1985) 85 ATC 4147, at 4151; Cywinski v Deputy Federal Commissioner of Taxation (Vic) [1990] VR 193; Deputy Commissioner of Taxation v Van Phu Ho (1996) 131 FLR 188; viii) the probability that the taxpayer will be forced into liquidation or bankruptcy by recovery of a tax assessment which is still under review under Pt IVC TAA may constitute "extreme personal hardship" warranting the refusal of summary judgment, or a stay of execution, or may constitute a reason to set aside a statutory demand under CA s.459J(1)(b): Deputy Commissioner of Taxation v Stjepovic (1991) 91 ATC 4,715 at 4,728; Federal Commissioner of Taxation v Myer Emporium Ltd (No 1) (1986) 160 CLR 220, at 222-223; Moutere v Deputy Commissioner of Taxation (supra, at 543)); Softex Industries v Commissioner of Taxation (2001) 187 ALR 448; Willemse Family Company Pty Ltd v Deputy Commissioner of Taxation [2003] 2 Qd R 334, at paras [38]-[43]; ix) the fact that the Court has, in the exercise of its discretion, stayed execution on a judgment debt founded on a Notice of Assessment which is still subject to review or appeal, or that the Court has, pursuant to CA s.459J(1)(b), set aside a statutory demand founded upon such a Notice of Assessment does not mean that the debt created by valid issue of the assessment ceases to be due and payable and cannot be taken into account in assessing solvency. The debt remains due and payable by force of the scheme of the tax legislation and only the means of its enforcement has been stayed: Re Pollack; Ex parte Deputy Federal Commissioner of Taxation (1991) 32 FCR 40, at 51, 56; Re Hughes; Ex parte Westpac Banking Corporation [1997] FCA 1324; Scope Data Systems Pty Ltd v BDO Nelson Parkhill (2003) 199 ALR 56 at paras [10]-[16]; Australian Beverage Distributors Pty Ltd v Evans & Tait Premium Wines Pty Ltd [2007] NSWCA 57, at para [34]. 86 In the present case, no Defendant has submitted that the Notices of Assessment against Wines were not validly issued and served and that the times stipulated for their payment had not expired by the commencement of the Period. No Defendant has taken the point that the conclusiveness of the Notices of Assessment provided by s.177(1) ITAA cannot be relied upon now because the originals or signed copies have not been produced to the Court. Photocopies are in Exhibit TB 1-24 and they were admitted without objection. Commercial reality and the scheme of the tax legislation 87 Mr Jackman invokes the proposition that solvency has to be determined with regard to the commercial realities of the company's financial position: he cites authorities such as Taylor v Australia & New Zealand Banking Group Ltd (1988) 13 ACLR 780, at 784; Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (supra) at paras 54-59; Lewis v Doran (supra) at para 106. Certainly, in Southern Cross one of the questions discussed was whether the commercial reality that creditors will normally allow some latitude in time for the payment of their debts warrants the conclusion that the debts are not payable at the times contractually stipulated: para 54(iv). 88 Mr Jackman submits that as a matter of commercial reality the Commissioner's debts founded on the Notices of Assessment were not payable by Wines at the times stipulated – or, at least, did not have to be taken into account for the purposes of the cash flow solvency test prescribed by CA s.95A – because if the Commissioner had served a statutory demand on Wines, Wines could have had that demand set aside under CA s.459J(1)(b) and if the Commissioner had moved to obtain and enforce a judgment, Wines could have had the judgment stayed until the review processes under Pt IVC TAA had been completed. 89 The fact is, however, that the remedies which Wines might have invoked are discretionary and whether Wines would have been successful in setting aside a statutory demand, or in obtaining a stay of judgment founded upon the Notices of Assessment, is now a matter of speculation: no action was taken by the Commissioner during the Period which occasioned any application to the Courts by Wines. Speculation today as to what Wines may have been able to achieve gives no reliable guide to what was commercial reality five years ago. 90 The view expressed by Mr Jessup to Mr Fryer and Mr Irving in an e-mail dated 7 November 2002 gives no comfort to the speculative submission that Wines would have been able to set aside a statutory demand founded upon the Notices of Assessment. The e-mail says: "The [Australian Government Solicitor's office] are not convinced that the ATO's position is protected and are not withdrawing the Summonses at this stage and have engaged a financial expert to look at the matter. John Evans and Cameron Jeffs will not intervene. They are still taking the view that the liability and settlement side is their job and recoveries have a separate job to recover the debt. The law is pretty clear that it is highly unlikely we would get a stay of the Summonses. The only cases where a stay has been granted is where there were decisions on the tax pending in the AAT or the Court . If (?) they are not going to withdraw the Summonses at this stage then we are of the view that we should try to get an long adjournment which may take us beyond a settlement date. This does not help your position with the ANZ. However at the moment the ATO are not budging on the Summonses and will not withdraw." (Emphasis added.) 91 However, the decisive answer to the Defendants' appeal to "commercial reality" in their submission that the Commissioner's debt was not payable during the Period is that the tax legislation clearly and unequivocally made that debt payable. If the legislature clearly says that a tax debt is payable at a certain time, neither the Court nor a company director can disregard that statutory imperative by an appeal to commercial reality. Absent an agreement by the Commissioner to defer payment, it is not commercial reality to treat a present liability, statutorily imposed, as if it does not exist. Is a disputed tax assessment a contingent liability? 92 Finally, I am unable to accept Mr Jackman's submission that Wines' liability under the Notices of Assessment was, by reason of the currency of review proceedings under Pt IVC TAA, merely a contingent liability and was properly treated as such by Wines and its auditors in Wines' June and December 2002 financial accounts in accordance with the requirements of AASB 1044, para 7.1. 93 Contingent liability is defined in AASB 1044 para 16.1 as follows: "(a) a possible liability that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or (b) a liability that is not recognised because: (i) it is not probable that a future sacrifice of economic benefits will be required; or (ii) the amount of the liability cannot be measured reliably" 94 The liability imposed on Wines under the Notices of Assessment does not fall within this definition. In my opinion, it is not correct to describe the immediate liability for tax imposed by the Notices of Assessment as a "possible liability … which will be confirmed … by the occurrence or non-occurrence of … [an] uncertain future event…" within subparagraph (a) of the definition. It is true that the immediate liability which the legislative scheme imposes by service of a Notice of Assessment will disappear if the taxpayer is ultimately successful in review proceedings under Pt IVC TAA. But, unless and until that possibility occurs, the tax liability is actual, not contingent. 95 In the present case, it was not legitimate for Wines' directors to regard the tax liabilities as falling within the definition of contingent liability in AASB 1044 para 16.1(b). For good reason, neither Wines' solicitors nor its auditors advised that it was "not probable" that payment of the assessments would not be required, as will be seen from the evidence to be discussed shortly: see paragraphs 219 and 240-247. The liability, which was a present liability, could not be said to be incapable of reliable measurement. It was stated precisely in the Notices of Assessment and, by virtue of s.177(1) ITAA, that amount was correct for all purposes save in the review process under Pt IVC TAA: see Batagol (supra) at 76; Richard Walter (supra) at 191-192. 96 In short, what Wines and its auditors have done in their accounting for the liability arising under the Notices of Assessment is to treat a liability which is presently payable but which may possibly in the future cease to be payable as a liability which is not presently payable but is possibly payable in the future. I can certainly see the argument and its attraction and convenience when a company's accounts will be scrutinised by the financial market, its creditors and shareholders: disclosing in published financial accounts a present liability which the company cannot pay will set alarm bells ringing very loudly and may create an event of default under the company's lines of credit. However, I do not think that inverting the true legal position, as Wines and its auditors did, is permissible, however convenient it may be. 97 The scheme imposed by the tax legislation of making tax debts immediately payable even though still subject to the review process under the TAA reflects a deliberate policy of the legislature "which may make life uncomfortable both for the taxpayer and perhaps others who owe money to the taxpayer": per Mason and Wilson JJ in F.J. Bloemen Pty Ltd v Commissioner of Taxation (supra) at 375. "Uncomfortable" may be much too mild a description for the position of a company faced with a large tax debt which it cannot pay and genuinely disputes. However, the legislative policy applies just as much to such a company as to a temporising tax evader. 98 The legislature trusts the Commissioner not to abuse the enforcement policy of the tax legislation: Bloemen (ibid); Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246, at 276. If the Commissioner abuses that trust, the taxpayer's remedy lies in the Courts. The taxpayer may not avoid the possibly ruinous consequences of having to account for a present liability imposed by a genuinely contested tax assessment by the expedient of ascribing to that liability a character which it does not truly have in law. 99 To characterise a contested tax liability as "contingent" for the purposes of AASB 1044 para 7.1 is not to be frank – to the financial market, to creditors or to shareholders. Further, directors who resort to such an expedient are not being frank with themselves; they risk making errors of judgment as to the future viability of the company because they blind themselves to the company's financial position as it really is. Whether solvency concept excludes "technical considerations" 100 Mr Jackman's second major submission (Written Submissions 23 February 2007, para 58ff) may be summarised thus: i) the solvency concept excludes the intervention of technical considerations which are not sympathetic to the purpose behind the concept: Taylor v Carroll (supra) at 266.5 per Derrington J, with whom Moynihan J agreed; ii) s.177 ITAA is an evidentiary provision benefiting the Commissioner and is applicable only in enforcement proceedings brought by the Commissioner against the taxpayer. It has no application in proceedings brought by a liquidator against a former director, particularly as the director has no standing to invoke the review procedures of Pt IVC TAA; iii) the evidentiary presumption of s.177 is not relevant to a retrospective judicial evaluation of decisions made by directors in the course of assessing the commercial realities facing a company. If a director has competent professional advice that there are good prospects of setting aside a tax assessment or of compromising with the Commissioner, it is not reasonable to expect that the director will be guided in commercial assessments by the evidentiary presumption provided by s.177. If it were otherwise, a company would have to go into insolvent administration whenever the ATO issued a Notice of Assessment which the company could not pay, regardless of whether the assessment lacked merit. Such an assessment is impractical from the perspective of someone operating in a practical business environment: Sycotex (supra) at 775. 101 I am unable to accept these submissions, for the following reasons. 102 As to (i): for the reasons I have given above, the issue and service of a valid Notice of Assessment creates, on the expiry of the time stipulated for payment, an immediately payable debt which is given full recognition by the law. Enforcement of the debt may be stayed in certain cases on discretionary grounds but the debt exists in fact and in law unless and until the review procedure sets aside the Notice of Assessment. I am unable to accept that the effect which the scheme of the tax legislation gives to the Notice of Assessment, even while it is subject to review, is a "technical consideration" within the context discussed by Derrington J in Taylor v Carroll. 103 In that case, his Honour agreed with Thomas J who said (at 259) that whether a company was unable to pay its debts as they fell due from its own money was a question of fact to be decided as a matter of commercial reality in the light of all of the circumstances "not merely by looking at the accounts and making a mechanical comparison of assets and liabilities". Derrington J agreed with the reasons of Thomas J and added his own remarks by way of emphasis. 104 Derrington J drew attention to the concept of insolvency as a practical one, its purpose being primarily to protect creditors although "it must not be wrongly used to liquidate a company and affect a variety of transactions when that remedy is not called for": at 266.5. His Honour proceeded "this approach excludes the intervention of technical considerations which are not sympathetic to the purpose behind the concept". By way of example, he said that it was necessary to have regard to matters of futurity when considering solvency at a particular time; that temporary lack of liquidity was not the same as an endemic shortage of working capital and that the pattern of behaviour of creditors in requiring payment in accordance with terms of credit was also relevant. 105 Clearly, his Honour was concerned to underline the statement of Thomas J to the effect that insolvency was not identified by some mechanical comparison of financial figures but was ascertained as a matter of commercial practicality and realism. However, Derrington J did not suggest – and his words taken in context cannot suggest – that in having regard to commercial practicality and realism one is entitled to ignore the existence of a debt which statute says is immediately payable. 106 As to (ii): for the reasons I have given above, I am unable to accept that the scheme of the tax legislation operates only in the context of direct enforcement proceedings as between the Commissioner and the taxpayer. If the taxpayer is a corporation, its directors must face the legal and commercial reality that the company is indebted to the Commissioner unless and until the Notice of Assessment is set aside in the review process. How they deal with that reality may have consequences for them if the company becomes insolvent. 107 As to (iii): in my opinion, it is unnecessary and undesirable to make general pronouncements about what the law expects of a director who is advised that a tax assessment against the company may be set aside or compromised. Each case of insolvent trading will depend on its own facts. 108 However, as I have explained above, directors and their advisers have to accept the legal and commercial reality that the scheme of the tax legislation imposes a present liability on a company upon expiry of the time for payment imposed by a validly issued and served Notice of Assessment. This reality is an "uncomfortable" one – as recognised in Bloemen above – and it is particularly uncomfortable if the company is unable to pay the tax debt but has arguments as to why the assessment should be set aside. The debt is, in law and in fact, presently payable and must be acknowledged as such in the company's financial accounts unless something has been done effectively to defer payment of the debt until the review process under Pt IVC TAA has been completed. 109 So, for example, a tax debt will not be presently payable if the company has secured the written agreement of the Commissioner to defer time for payment in accordance with s.255-10 in Schedule 1 TAA. If the Commissioner does not agree to a deferment until the review process is completed and commences recovery proceedings, the company may seek from the Court a stay of those proceedings, as discussed above. If that application is successful, the debt will nevertheless remain payable but at least the company will be able to state in its financial accounts that payment of the debt cannot be enforced except in accordance with the Court's orders. 110 If the company obtains either an agreed deferment of payment under s.255-10 or a stay of enforcement proceedings from the Court, obviously a director of the company may take that fact into account as a commercial reality in ascertaining the company's present and projected cash flow position. But if the company obtains neither a deferment nor a stay, the director must take account of the fact that the debt, as a matter of law and commercial reality, is not a contingent liability and remains presently payable. 111 I think that what I have said under this heading and earlier, answers Mr Jackman's third submission also. This submission is to the effect that the tax debts should not be included in assessing solvency because if the Commissioner had sued to enforce them, Wines would have obtained a stay of the enforcement proceedings on discretionary grounds and would have been successful in setting aside any statutory demand founded upon the assessments. For the reasons I have given in paragraphs 88 to 90, this assertion is mere speculation. 112 Mr Jackman submits (Written Submissions para 65) that it would be absurd to conclude that the directors would have been better off in establishing solvency if the Commissioner had actually sued to recover the tax debt, thereby leading to a stay being granted, rather than being in the position where the Commissioner did not sue. However, far from this result being absurd, for the reasons I have given the Defendants would indeed have been better off if the Commissioner had sued and if the Court had stayed enforcement until the review process had been completed. They, and this Court, would then have had to deal with a reality rather than a speculation. Whether s.43(6) AATA trumps s.14ZZM TAA 113 Mr Jackman's fourth major submission (Written Submissions para 66ff) may be summarised thus: i) Wines, through its receivers and managers, has commenced proceedings in the AAT challenging the assessments of Wines' income for the 1998 and 1999 years and claiming a refund of $5,432,217 for the 1998, and a refund of $8,675,441 for the 1999 year; ii) the receivers have obtained legal advice that they have a better than even chance of success in the AAT proceedings; iii) if those proceedings are successful, the claimed refunds, totalling about $14M, would comfortably exceed the tax debts claimed against Wines by the Commissioner under the Notices of Assessment; iv) if Wines succeeds in the AAT, the Commissioner's Notices of Assessment will be exposed as unlawful from the outset by reason of s.43(6) of the Administrative Appeals Tribunal Act 1975 (Cth) ("AATA"), which provides: "A decision of a person as varied by the Tribunal, or a decision made by the Tribunal in substitution for the decision of a person, shall, for all purposes (other than the purposes of applications to the Tribunal for a review or of appeals in accordance with section 44), be deemed to be a decision of that person and, upon the coming into operation of the decision of the Tribunal, unless the Tribunal otherwise orders, has effect, or shall be deemed to have had effect, on and from the day on which the decision under review has or had effect." Mr Jackman also relies on Collector of Customs v Gaylor Pty Ltd & Dahlia Mining Co Ltd (1995) 35 NSWLR 649, at 654G, 655C-D and 662E-G; v) in an insolvent trading case the issue of solvency is determined retrospectively and the Court can legitimately use hindsight to ascertain the company's position at a particular time: Lewis v Doran (supra) at [107]-[115]. Accordingly, a successful outcome for Wines in the AAT proceedings can be taken into account in these proceedings to determine whether Wines was solvent during the Period. If in the future it is ascertained by the AAT that the tax debt claimed by the Commissioner was not, in truth, owing at all, then this Court would find that Wines was solvent during the Period; vi) the Liquidators have elected to bring these proceedings to trial before the AAT proceedings have been heard and determined. Accordingly, the Liquidators cannot discharge their burden of proof that the Notices of Assessment were lawful at the time they were issued and the Court cannot, therefore, be satisfied that the Notices of Assessment created valid and presently payable debts. 114 I am unable to accept these submissions for the following reason. 115 The submission takes no account of – and, indeed, it does not even refer to – the provisions of s.14ZZM and s.14ZZR TAA. Those two sections deal with the status of a tax decision during the pendency of a review or an appeal for the purposes of any action to be taken during that time based on the decision. Section 43(6) AATA is directed to a different purpose, namely, adjusting the consequences of actions taken on the basis of a decision later overturned or varied in the AAT. In short, s.14ZZM TAA applies only before the decision of the Tribunal is made, and s.43(6) applies only after the decision of the Tribunal is made. 116 It is true that s.43(6) AATA makes the Tribunal's decision retrospective and deems it to have been the decision of the original decision maker. Statutes often provide that a state of affairs is to have a retrospective effect. Sometimes the consequence is that everything done previously is completely undone; sometimes the consequence is that what can be undone is undone and what cannot, or should not, is not. 117 There are many examples illustrating this proposition. If a bankruptcy is annulled, the person is treated as if he or she had never been made bankrupt in the first place … yet not for all purposes. If an interest under a settlement ceases upon bankruptcy and passes to another, that cessation is effectual and is not undone if the bankruptcy is subsequently annulled. If a person, while bankrupt, commits an offence by doing an act prohibited to be done by a bankrupt, the subsequent annulment of the bankruptcy does not destroy the offence and he or she may be prosecuted for it even after the annulment: Smallcombe v Olivier (1844) 13 M&W 77, at 86 [153 ER 32]; Director of Public Prosecutions v Ashley [1955] Crim LR 565; Oates v Federal Commissioner of Taxation (1990) 27 FCR 289; Australian Securities & Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305, at [318]-[322]. 118 Again, if a civil judgment is reversed on appeal it is treated as never having determined the rights of the parties, yet acts done pursuant to or in reliance on the judgment before its reversal are valid: Wilde v Australian Trade Equipment Co Pty Ltd (1981) 145 CLR 590, at 603; MacIntosh v Lobel (1993) 30 NSWLR 441, at 459-465. For many other illustrations of the proposition, see the judgment of Campbell J, as his Honour then was, in Battenberg v Union Club (2005) 53 ACSR 263, paras [41]-[67]. 119 These cases illustrate a principle which, in my opinion, reconciles any potential conflict between s.43(6) AATA and s.14ZZM and s.14ZZR TAA. Taken together, the sections are part of a legislative scheme which recognises that the consequences of a tax decision which is reversed on appeal will be undone so far as they can be undone and that the original decision will have no further force and effect in the future, but that what was done in reliance on the tax decision prior to its reversal was valid at the time and retains its character as valid at the time, even after the tax decision is reversed. 120 It follows that when a Court is considering the issue of solvency and a significant factor is a tax debt which is still subject to review under Pt IVC TAA at the time of trial, the Court must act on the basis that the tax debt is valid and payable. If, as a result, the company is wound up and a liquidator is appointed, the winding up order and the appointment of the liquidator will not retrospectively be invalidated under s.43(6) AATA if the company succeeds in reversing the tax decision in the AAT: see generally MacIntosh v Lobel (supra) at 459G, 473C-D, 477C. This may be thought to be hard on the company – but it is the policy of the tax legislation, as I have explained, and the possibility of such hardship is a factor in the exercise of the Court's discretion in a taxpayer's application under CA s.459J(1)(b) to set aside a statutory demand founded on a disputed notice of assessment. 121 The Liquidators have, therefore, proved that the debts created by the issue of the Notices of Assessment are valid and must be taken into account in determining the solvency of Wines during the Period. Whether an agreement with the Commissioner 122 At the outset of the trial, Mr Irving asserted that the debts created by issue of the Notices of Assessment were not payable by Wines during the Period because: "… an express oral agreement was entered into in the period between June and October 2002 between the ATO, on the one hand, and RWL together with the other companies in the Reynolds Group, on the other hand, to the effect that in consideration of RWL and its group companies continuing to engage in settlement discussions with the ATO, the ATO would not take recovery action or require the amended assessments to be paid while negotiations towards such a settlement were on foot. The agreement was made by Mr Jeffs and Mr Evans on behalf of the ATO, and Mr Fryer of Deloitte on behalf of RWL and the Reynolds group of companies." 123 The Liquidators and the Commissioner deny that any such oral agreement had been made. Alternatively, they submitted that even if such an agreement had been made it was of no legal effect because it was not in writing. They relied upon Subdivision 255B TAA which provides: " To defer the payment time (1) The Commissioner may, having regard to the circumstances of your particular case, defer the time at which an amount of a tax-related liability is, or would become, due and payable by you (whether or not the liability has already arisen). If the Commissioner does so, that time is varied accordingly. (2) The Commissioner must do so by written notice given to you." 124 Further, the Liquidators and the Commissioner asserted that the oral agreement, if made, would be unenforceable as a matter of public policy, for want of consideration and also as beyond the power of the Commissioner to make. 125 The Liquidators submissions are directed to a supposed agreement by the Commissioner to defer the liability arising from issue of the Notices of Assessment: written submissions, 27 February 2007, paras 65ff. If the Commissioner had indeed agreed to defer the time at which the amounts referred to in the Notices of Assessment would become due and payable then, in accordance with s.255-10(1) TAA, there could have been no doubt that Wines' liability to make payment would not arise until the deferred date for payment had arrived. 126 However, Mr Fryer agreed in cross examination that he had not made any agreement on behalf of Wines with Mr Jeffs and Mr Evans for deferral of time for payment of the Notices of Assessment, in the sense referred to in s.255-10(1) TAA. He gave this evidence (T717.56-T718.45): "Q. Finally, can I ask you this, the conversations you say you had with Mr Evans and Mr Jeffs were conversations about whether or not they would take recovery proceedings or legal action? A. Yes. Q. You understood that deferring the due date for the payment of the tax is something quite different? A. Yes. Q. Because that actually means that tax was not due at some date in the past but becomes due and payable at some date in the future? A. Yes. Q. You didn't have any discussions with Mr Jeffs or Mr Evans about deferral of the due date for the payment of the tax? A. I honestly cannot recall form the conversations were, whether we are talking about affirmative legal action or deferment of payment but the flavour of conversation was that the tax would not pursue the debts until such time we could work out what we could do in verifying or dealing with the settlement offer. Q. Deferment of the due date for payment of tax is a very serious step because it means, for example, that the general interest charge becomes payable in relation to new dates and not the old date? A. I don't think so. Q. If you change the due date, interest runs from the due date, does it not? A. I see what you are saying. The official due date, they would not change the official due date. What they would normally agree to do is to defer or will do is to defer forcing payment of the amount by whatever means. Q. So what I am getting at, you didn't have any conversation within which whereby the official date was deferred? A. Now I understand you, yes. Q. You never then informed Mr Irving or any member of the Board or staff that the due date of payment had been deferred? A. Yes." 127 The last two answers given by Mr Fryer were clearly assents to the propositions put to him. What Mr Fryer was saying was not that an agreement had been made for deferral of liability for payment but, rather, that an agreement had been made for deferral of recovery action. The Liquidators and the Commissioner denied that such an agreement had been made. 128 In paragraph 9 of his affidavit of 27 September 2006, Mr Fryer gave evidence about a discussion or discussions with Mr Jeffs and Mr Evans "between June and October 2002" about deferral of recovery action. This evidence was so lacking in particularity that I rejected the paragraph and gave leave to Mr Jackman SC to lead the evidence orally from Mr Fryer. Mr Jackman availed himself of this leave. 129 Mr Fryer said at first that he had many discussions about deferral of recovery action against the Reynolds Group with ATO staff "from June 2002 onwards": T610.55-T611.1. 130 A little later he said that these discussions "would have started" as early as 2001 but were a very substantial part of the discussions "we were having with the Tax Office during that period post-June 2002": T612.18-.20. 131 Mr Aldridge SC in cross examination took Mr Fryer through a number of letters and e-mails from June 2002 onwards. Mr Fryer was progressively driven to agree that he had not had conversations with Mr Jeffs or Mr Evans about deferring tax recovery prior to 30 August 2002, or prior to the end of September 2002. It emerged clearly from Mr Fryer's cross examination that, as at 7 November 2002, there had been no discussions with ATO officers which could have formed any reasonable belief on the part of Mr Fryer that the ATO had agreed to defer recovery proceedings. 132 The ATO had served a statutory demand on CHF on 2 August for $5,741,971. The resolution of the tax debt claimed by the Commissioner against CHF was an integral part of the settlement proposals being discussed between the Reynolds Group and the Commissioner: see e.g. Deloitte's letter dated 15 November 2002 to the Commissioner enclosing a settlement proposal. In October the Commissioner had served a winding-up Summons on CHF and Cabonne Management Limited ("CML"). On 7 November 2002 Mr Jessup sent an e-mail to Mr Irving and Mr Fryer, saying: "The AGS are not convinced that the ATO's position is protected and are not withdrawing the Summonses at this stage and have engaged a financial expert to look at the matter. John Evans and Cameron Jeffs will not intervene. They are still taking the view that the liability and settlement side is their job and recoveries have a separate job to recover the debt." 133 By 11 November 2002, the ATO had informed Mr Jessup that it was assessing Wines' request to withdraw the winding up Summons and had appointed Ferrier Hodgson to advise it. The ATO agreed to adjourn the Summons until 6 February 2003. The ATO eventually agreed to dismiss the winding up Summonses against CHF and CML on 31 March 2003, with the defendants being ordered to pay its costs. By letter dated 31 March 2003, the AGS advised Mr Jessup "we expect that [the ATO] will not pursue the costs orders until a settlement is reached regarding your clients' taxation liabilities". 134 It may be inferred that by 31 March 2003 the ATO had determined that enforcement of tax debts against CML and CHF would await the result of settlement discussions. 135 As far as the tax liability of Wines itself was concerned, on 21 November 2002 Mr Whitehouse of the ATO wrote to the Directors referring to an outstanding tax debt of $4,567,420 arising from the 1998 Fringe Benefits Tax assessments. The letter noted that no objection had been lodged against the assessment and that "there are no settlement negotiations in progress". Accordingly, the letter made demand on Wines for payment of the tax debt within fourteen days, otherwise the ATO would commence proceedings for recovery of the debt. 136 The letter, read as a whole, shows that it was a form letter not directed to the particular circumstances of Wines' tax debt. The threat to take legal action must be seen in that light. However, the fact that the letter was sent shows that the Recoveries section of the ATO did not have any record as at 21 November 2002 of an agreement by the Commissioner to defer recovery proceedings against Wines. 137 On 5 December 2002, Mr Fryer wrote to Mr Whitehouse responding to the letter of 21 November. Mr Fryer referred to discussions between Wines and Mr Jeffs in relation to the tax assessments issued to the Reynolds Group. He requested that, in view of those discussions, the ATO "defer action to recover the amount due of $4,567,420.08 pending resolution of the tax disputes". That Mr Fryer should have seen the need to write such a letter on 5 December suggests strongly that he had not earlier made any oral agreement with any responsible officer of the ATO for deferral of recovery action against Wines, as he asserted. 138 The ATO did not respond to Mr Fryer's request in the 5 December letter. The inference is that the ATO merely adopted a 'wait and see' attitude to enforcing the tax debt of Wines pending some decision on its part as to the Group's proposals for an overall settlement of the Group's tax liabilities. 139 There is nothing in the evidence to suggest any agreement or understanding between Wines and the ATO made at any time from December 2002 up to the appointment of the Administrators in August 2003 which would have inhibited the ATO in taking proceedings immediately to enforce the tax liabilities of Wines by instituting recovery proceedings. 140 Mr Fryer's evidence about having reached an agreement prior to November 2002 with Mr Jeffs and Mr Cameron for deferral of recovery proceedings was not at all convincing, because of its vagueness and the manner in which Mr Fryer gave it: see especially at T671.36 to T672.47. I am far from satisfied, in the face of denials by Mr Jeffs and Mr Evans, that Mr Fryer made an oral agreement with Mr Evans and Mr Jeffs between June and October 2002 that the ATO would defer recovery proceedings against the Reynolds Group while settlement discussions were proceeding. In any event, it is fair to say that during this time whatever settlement discussions were taking place were not detailed and could not be fairly described as "negotiating a settlement". 141 Mr Irving and the other Directors have the onus of proving that the tax debts of Wines were not payable at the times stipulated under the Notices of Assessment and under the tax legislation by reason of an agreement between Wines and the Commissioner: Southern Cross Interiors (supra) [54(vi)]. I am not satisfied by the evidence that there was any agreement between Wines and the Commissioner during the Period that recovery proceedings against Wines would be deferred for any particular time. It follows that I am not satisfied that there was any agreement between Wines and the Commissioner which could operate to extend time for payment of that liability so as not to make the tax debt due and payable throughout the whole of the Period. 142 Further, I am not satisfied that there was any course of conduct on the part of the Commissioner during the Period which could give rise to an estoppel preventing the Commissioner from insisting on immediate payment by Wines of the tax debt. Nor am I satisfied that there is any well established course of conduct between the Commissioner and taxpayers generally, or between the Commissioner and the Reynolds Group in particular which could be relied upon in the circumstances of this case to establish that the liability of Wines under the Notices of Assessment did not create a debt payable at the time stipulated in the Notices of Assessment. If the Commissioner adopted a 'wait and see' attitude to enforcement of Wines' tax liability, reserving the right to commence recovery proceedings whenever he thought fit – as I infer was the case – that is not enough to defer the liability for payment of the debt for the purpose of the solvency test prescribed by CA s.95A: see generally Southern Cross Interiors (supra) at [54](v) and (vi). 143 As a result, I am satisfied that Wines' liability under the Notices of Assessment was at all times during the Period due and payable to the Commissioner. It is conceded by Mr Irving and the Directors that Wines was unable to pay that debt at any time during the Period. Accordingly, Wines was insolvent during the whole of the Period. Cash flow test of Wines' and Vineyards' solvency 144 In case I am wrong in concluding that Wines was insolvent at all times during the Period because it was unable to pay an immediate tax liability to the Commissioner, I will examine its financial position by reference to its other debts. I will do so in the context of determining Vineyards' solvency by reference to its separate debts. The debts of both companies were incurred largely in the course of the companies' trading activities so that I will refer to them, for convenience, as trade debts. 145 The Liquidators and the Commissioner contend that as at 1 October 2002 and throughout the Period both Wines and Vineyards were unable to pay all their trade debts as and when they became due and payable, so that each was insolvent according to the definition of solvency in s.95A CA. In the alternative, they contend that Wines and Vineyards had become insolvent at various later dates during the Period. 146 It is beyond dispute that Wines and Vineyards did not in fact pay all their trading debts as and when they became due during the Period. Certain debts incurred by both Wines and Vineyards in each month from the commencement of the Period onwards were never paid, as the following table from the Liquidators' solvency report (Exhibit P3) shows: "Month incurred Wines Vineyards Total Cumulative Total Oct-02 5,711.14 36,007.10 41,718.24 41,718.24 Nov-02 22,486.98 157,094.23 179,581.21 221,299.45 Dec-02 8,950.33 265,596.94 274,547.27 495,846.72 Jan-03 135,949.46 254,953.79 390,903.25 886,749.97 Feb-03 307,550.35 481,445.77 788,996.12 1,675,746.08 Mar-03 148,879.45 655,738.72 804,618.17 2,480,364.25 Apr-03 366,506.27 217,850.65 584,356.92 3,064,721.17 May-03 143,521.99 388,713.46 532,235.45 3,596,956.62 Jun-03 75,030.00 166,051.95 241,081.95 3,838,038.57 Jul-03 317,687.15 381,022.36 698,709.51 4,536,748.08 Aug-03 5,913.32 70,820.63 76,733.95 4,613,482.03 Total unpaid $ 1,538,186.44 $ 3,075,295.59 $ 4,613,482.03 It is not suggested that all, or any, of these debts remained unpaid because they were genuinely disputed by Wines or Vineyards. 147 Mr Irving and the Directors contend, however, that the fact that Wines and Vineyards did not pay all their debts is not the end of the matter. They say that the test of solvency is whether the companies were able to pay their debts, not whether they did, in fact, pay their debts. They say that at all times during the Period Wines and Vineyards would have been able to pay all their due trade debts if they had realised the assets and resources available to them but the companies were not willing to do that. 148 It is as well to note at the outset that in ascertaining what assets were available to meet the trade debts of Wines and Vineyards no distinction was made by the Directors during the Period between assets owned by Wines and those owned by Vineyards. As I have mentioned several times, cash and other assets of the companies in the Reynolds Group were regarded as available to meet the needs of each. Nevertheless, Mr Jackman SC, who appears for Mr Irving, submits that one has to look separately at the financial position of Wines and of Vineyards. In my opinion, this is not realistic or possible: it was not the way the companies conducted their affairs. 149 So, for example, Mr Jackman put forward to the Liquidator, Mr Hall, in cross examination some hypothetical examples in which Mr Jackman endeavoured to show that Wines and Vineyards had sufficient asset resources to enable them to meet their liabilities throughout the Period: Exhibit 2D1. The examples are worked separately for Wines and for Vineyards, but the same assets appear in both sets of examples, namely, sales of bulk wine, sale of the Quandong property and debt finance. The directors of both companies would have treated the assets in the same way. 150 Mr Irving submits that "able to pay" one's debts does not mean "willing and able to pay", for the purposes of the test of solvency. That proposition is certainly correct, so far as it goes: see Re Sarina (1980) 32 ALR 596, upon which Mr Irving relies. However, I do not think that the principle discussed in Re Sarina has any application in the present case. 151 In Re Sarina, a debtor owed money to a council for rates and taxes, but he stubbornly refused to pay the debt as a matter of personal principle. There was no question that he had ample means to pay the debt. It was held that he was not "unable" to pay the debt for the purposes of an application to sequestrate his estate in bankruptcy; rather, he was able to pay but was not willing to pay so that the debt had to be enforced by obtaining a judgment and levying execution. 152 The position of the Reynolds Group was very different. No one has suggested that Wines and Vineyards did not pay their respective trade creditors within normal trading terms because the companies refused to do so for fanciful or improper reasons, such as in order to obtain credit with no intention of paying, or because the directors or the companies' other officers were irresponsible or careless about prompt discharge of the companies' liabilities. 153 Indeed, the evidence is quite to the contrary. The overall picture which emerges is of companies which were, throughout the Period, only too willing and anxious to pay their debts as they fell due – if only they could. 154 It is clear that by the beginning of October 2002, Wines and Vineyards were experiencing an endemic shortage of working capital which grew steadily worse as the months progressed. 155 Messrs Irving, Poolman and Martini and Ms Yates attended a board meeting of Wines on 11 October 2002. Mr Irving advised that because the ATO had served a winding up Summons on CHF in respect of the tax liability of $5.7M and had had served another winding up Summons on CML, the Directors and auditors needed to reassess the notes to the balance sheets of Wines. It was noted that "the actions by the ATO may impact the recovery of the $26M owed by CML" to Wines. It was noted that management and auditors advised that instead of an $8.1M profit recorded for the sale of CML by Wines, a provision for this amount as a doubtful debt should be shown in Wines' balance sheet. It was also noted that, by reason of these changes to the balance sheet, profit would reduce to $1.3M "subject to a re-check of tax accruals". Management and advisers had recommended, that the financial accounts of Wines be withdrawn. 156 It was resolved at the meeting that Wines request the ASX to halt trading in the company's shares, the company prepare an information release and brief the company's brokers and its bankers. These resolutions were put into effect shortly afterwards. 157 On 15 October 2002, the Reynolds Group's bank, the ANZ, decided to issue a notice of default under its Facility Agreement with the Group in order to protect its position. An internal report of the bank noted that the Group's revised financial accounts indicated that it would breach the gearing covenants in the Facility Agreement with the bank. Under that Facility Agreement the Group had a credit facility with the bank of $30M, of which $26.5M had already been drawn down. 158 On 16 October 2002, the ASX suspended trading in Wines' shares. On 17 October the ANZ Bank served its notice of default. 159 By 30 October, it was apparent that Wines would not be able to meet its obligations to redeem its Redeemable Convertible Preference Shares ("RCPS") which were due for redemption on 10 November 2002 for a total amount of $7.5M. On 8 November, the Board resolved to authorise Mr Irving to continue negotiating with the holders of the RCPS for an agreement to defer payment of the redemption amount until at least the end of February 2003. 160 A Management Report as at 15 November 2002, prepared by Mr Martini and considered by the Board of Wines on 27 November, disclosed a year-to-date loss of $2,195,126. The Report also stated: " Trade Creditors are higher at $2.6 million due to non availability of draw down from the ANZ bill facility. ANZ Bank facility is utilised to $26.5 million. With further draw down in early November only $2.5 million remains available. The solving of the ATO issues and sale of bulk wine are crucial to ongoing financial support. Discussions continue with ANZ and Gerling on these issues." 161 The Board Minutes of 27 November note that Directors would be provided with a weekly report as to management of the cash position. Clearly, the Board was aware that there was a serious cash flow problem and that the Group's facility with the ANZ Bank was almost fully drawn. 162 On 10 December 2002, Mr Spicer sent an e-mail to the Board members attaching a summary of the cash position as at 6 December 2002. It showed: "Reynolds Vineyard Total Cash at Bank 12,891.69 154,236.19 167,127.88 (per Bank Statement) Unpresent cheques – issued (16,942.81) (44,263.28) (61,206.10) Unpresent cheques – held ( 69,956.94 ) ( 6,407.50 ) ( 76,364.44 ) Total unpresented cheques ( 86,899.76 ) ( 50,670.78 ) ( 137,570.54 ) Cash at bank/GL ( 74,008.07 ) 103,565.41 29,557.34 " 163 Mr Spicer advised in the e-mail that Wines and Vineyards were holding a total of $76,364 in cheques drawn in favour of creditors but not issued. The holding back of cheques drawn in payment of creditors is one of the indicia of insolvency: see e.g. Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430, at para [88]. 164 Mr Spicer proceeded in the e-mail: "Of the $30,000,000 facility with ANZ we are currently drawn down to $28,500,000. The cashflow forecast for December 2002 is also attached. At this stage it does not include the proposed drawdown of $1.5m on 23 December 2002. John Martini and I are meeting with our financiers, including ANZ, this week to discuss further draw downs and the company's funding requirements into next year." 165 The attached cash-flow forecast, which did not distinguish between Wines and Vineyards, showed that the Group required a further $1.77M in cash by 5 January 2003. Only $1.5M was available from the ANZ facility so that there was a forecast deficit of $277,000 by 5 January 2003. 166 On 13 December 2002 Mr Martini and Mr Spicer attended a meeting with the ANZ Bank. The financial information which had been supplied by the Group to the Bank for the purposes of this meeting and which was recorded in the Bank's diary note showed, amongst other things, that "Trade Creditors were $3.4M higher than expected due to cash conservation pending drawdown of the final $1.48M available under the [Bank] facility. Trade Creditors over 60 days amounted to $787K while those greater than 90 days amounted to $201K". 167 At the meeting, the Bank informed Mr Martini and Mr Spicer that it would not extend the credit facility beyond the current limit of $30M. The Bank's diary note records the Bank's view that the Group was experiencing: "An ongoing operating cash flow deficit which may manifest as a liquidity crunch with no clear solution currently in place". 168 A Management Report as at 15 December 2002 shows that the Group was strenuously endeavouring to liquidate its bulk wine stocks to provide cash: "We are now re-shopping this wine on the Australian and international market for whatever price the market will bear ($.65 - $1.00) [i.e. per litre]. This will clearly require an inventory write-down of approximately $2.5 million". The Report noted a year-to-date loss of $2,699,805 and stated: "ANZ Bank facility is utilised to $28.5 million. The remaining $1.5 million will be drawn down prior to Christmas. The solving of the ATO issues, sale of bulk wine and assessing additional working capital are crucial to ongoing financial viability. Discussions continue with ANZ, Gerling and other parties on these issues." 169 On 17 December 2002, Mr Spicer sent a facsimile to Board members in the following terms: "Cash Requirement The other issue which Directors must be very aware of is the cash requirements of the business. I intend to draw down in the next few days the remaining $1.5million on our facility with ANZ, subject to its approval and that of the 'guarantor', Asset Underwriting/Gerling. In any event, the cashflow projections indicate that we will require a further $1.6 million in January 2003. At this stage, we have no source for this cash requirement as we cannot 'bring-forward' any receivables and have been unable to sell sufficient bulk wine inventories to make a difference. Future bulk wine sales will only provide funds in February 2003 at the earliest. ANZ and Gerling are unable/unwilling to advance any further funding until they have at the very least reviewed the revised budgets to be completed in the next few days. Having met with them last Friday, they are both very concerned about our cash and financial position, and that is before we consider the CCPS dividend ($700,000 due 10 January 2003) and RCPS redemptions. Accordingly, I very strongly recommend that Directors consider the situation and we arrange to meet the week commencing 6 January 2003 to consider the financing or other options available. Please also consider who (eg advisors, investors, financiers) if any should also attend. I would appreciate your feedback and comments." 170 The Minutes of a Board meeting of Wines for 6 January 2003 record: "Cash position The Directors reviewed the cashflows as provided as part of the 2003 budget. Mr Martini outlined the situation regarding possible inventory/receivable financing, difficulties in raising financing because of the non-lodgement of 2002 accounts, the uncertainty regarding the ATO settlement and the complicated security structure. He also appraised the Board of recent discussions including those with ABN AMRO, Asset Underwriting, Rabobank and ANZ. Mr Martini tabled the schedule detailing various cash options, together with an analysis of the Company's strengths and weaknesses. The Directors resolved that the option to re-finance with an institution other than the ANZ should be deferred until the various issues currently facing the Company are resolved. The Directors considered other possible options to raise finance including sale of all or part of the Quondong property, sale of the Company's 50% interest in the Angullong vineyard, sale of the lease and management contract of the Wirilla vineyard." 171 At the meeting Mr Martini tabled a document entitled "Cash Options/Bankers". It summarised possible ways of raising capital for Wines and Vineyards. Under the heading "Sources of cash", Mr Martini listed: " Acceleration of TFE payments [i.e. payments from Trinchero Family Estates for wine sales in the United States of America] Immediate bulk wine sales – January Direct Sales – February Asset Management Line Expansion Emergency Loan Receivables/Inventory Financing International Wine Fund" 172 The minutes of a Board meeting of Wines on 28 February 2003 state: " 3. Adoption of the Revised 2002 Annual Accounts The Chairman moved that the revised 2002 annual accounts, as drafted, be adopted. The meeting discussed the question of solvency and it was noted that Mr Jessup had been requested by the Chairman to advise on the implications to the Company and its Directors and Officers if a voluntary administrator was appointed, that Mr Bev Walters had been appointed to assist the Company in obtaining some form of trade finance facilities, and the Company is exploring other avenues to raise finance. These avenues included through the International Wine Investment Fund, and other financiers and advisors, and the Company would shortly be signing a contract for sale of the land at Quondong, Cudal. The Directors also noted that whilst current liabilities exceeded current assets, this did not represent or indicate insolvency as it was due to the classification of the facility with the Bank being reclassified due to the Bank issuing formal notices of default." 173 The Management Report for March 2003 states: "Debtors continue to be very closely monitored and a successful approach made to TFE to bring forward payment of some monthly remittances. Creditors continue to age due to the cash constraints and continue to be managed on a daily basis. Many creditors are now demanding payment and increasing pressure being exerted, including legal and debt collection. The cash flow requirements of the business continue to be discussed with our financiers, ANZ, Asset Underwriting/Gerling and with International Wine Investment Fund. Management continues to investigate all opportunities for increasing the availability of working capital. These efforts have included discussions with St Malo Australia Pty Ltd, Huntley Consultancy Pty Limited, ABN Amro Morgans, Winstar, RaboBank and Beerworth & Partners. We also continue our efforts to obtain finance lease facilities for the acquisition of $360,000 of oak barrels and the upgrade to the Power Correction Factor & Electrical Switchboard upgrade. Due to the ongoing issues with the ATO existing Finance Lease providers, Comlease and BankWest, have declined to advance further facilities to the Company at this time. John Deere Finance, when requested to quote on a new tractor for Little Boomey, quoted an uncommercial rate again citing the unresolved ATO situation. We are currently waiting for a response from Synergy Finance and GE Commercial. The presentation made to the ANZ in conjunction with International Wine Consultants and International Wine Investment Fund in the first week of April 2003, setting out the company's proposal for refinancing and restructuring was apparently cautiously but positively received by the Bank. A copy of the presentation is attached. Also attached is a copy of a letter from ANZ advising the Company of its position. ANZ has also indicated its intention to serve a notice on the Company in accordance with the Farm Debt Mediation Act. Legal advice will be sought upon receiving a formal notice." 174 The following exchange of e-mails between Ms Carroll and Mr Spicer on 21 March 2003 illustrates what was happening on a day-to-day basis: "From: Deb Carroll Sent: Friday, 21 March 2003 12:55pm To: Simon Spicer Subject: Cash flow ( or rather, lack of cash flow) Simon, The only $ around are 2 cheques we are holding – ARG $19,000 (which is due to be cancelled as TEYS have now invoiced us, unless it belongs to a prior period) and $25,000 for the Feb payroll tax – which we'll have to wear a fine on. If we pay Computershare we're bust – but I think we'd better and I'll get on the phone to debtors this afternoon. Cheers Deb Carroll" "From: Simon Spicer Sent: Friday, March 21, 2003 1:21pm To: Deb Carroll cc: Malcolm Irving; Peter Poolman (external); Sandra Yates; John Martini; M. Irving Subject: Cash flow ( or rather, lack of cash flow) Thanks Deb. Currently working on raising funds. Can we not hold off paying Computershare until Wednesday when we will have the sale proceeds? Also had to undertake to pay Rescrete 50% of its balance or they were commencing action. Allan Jessup has requested that we contact Hunt and Hunt and offer to pay their account by instalment. (they are threatening Statutory Demands too!) Simon Spicer" "From: Deb Carroll Date: Mar 21, 2003 1:28:20pm To: Simon Spicer Subject: Cash flow (or rather, lack of cash flow) Simon I'm starting to get a few like that too … and Bill Crossing is urgent as he has a power bill to pay. I've put in a call to Computershare – will see how I go, but would like to send Bill some $ if they can be put off. Good luck Deb Carroll" 175 The Management Report for April 2003 states: "Debtors continue to be very closely monitored and a temporary agreement to vary trading terms with TFE where they are paying 180 days from invoice date. Creditors continue to age due to the cash constraints and continue to be managed on a daily basis. Many creditors are now demanding payment and increasing pressure being exerted, including legal and debt collection. This takes up considerable management time and is having a significant effect on staff morale across the Company. Discussions continue on an urgent basis with our advisors International Wine Consultants and the ANZ Bank. Two meetings have so far been held in May 2003 with ANZ and its position is set out in its letter to the Company of 19 May 2003, attached. All opportunities for increasing the availability of working capital and financial restructuring alternatives are being pursued and investigated. We also continue our efforts to obtain finance lease facilities for the acquisition of $360,000 of oak barrels. At this time, ANZ has indicated its intention to withhold service of the Farm Debt Mediation Notice pending the Company presenting a financial restructuring program acceptable to ANZ." 176 At all times during the Period Ms Carroll, the Group's Financial Controller, and later Mr Spicer were under constant and increasing pressure to "manage" the complaints and demands of unsecured creditors. "Managing creditors" was a threadbare euphemism: it meant keeping unpaid creditors from serving statutory demands or cutting off supply for as long as possible by paying some of them and assuaging others with promises and assurances. 177 Ms Carroll summed up the financial position of Wines and Vineyards throughout the Period accurately and succinctly in her affidavit thus: "From the time that I took up my position in January 2003 until Reynolds Wines was placed into administration in August 2003, there were never sufficient funds available to pay all the creditors whose claims were due during that period. As a result of this, it was necessary for me, in consultation with Mr Spicer, to determine which creditors would be paid on a weekly basis. Annexed and marked DC2 is an example of a list of creditors that we decided to pay on 17 January 2003. It records that we had not paid Phipps [in the UK] , a creditor of Reynolds Wines 'for a while – 4400 pounds/month – owe them about $32000'. In deciding which creditors to pay, I would bear in mind commitments that I had made or Mr Spicer had made to the specific creditor previously. These commitments arose after creditors had spoken to me and Mr Spicer demanding payment. Because there were a number of creditors I cannot recall each and every conversation I had with creditors." 178 Ms Carroll's summary of the position is amply supported by the detailed evidence which she gives later in her affidavit. 179 For example, Ms Carroll prepared a list in January 2003 to show which of the outstanding creditors of Wines and Vineyards would be paid. Ms Carroll gives a summary of the outstanding creditors as follows: "Creditors Vineyards P/L Wines Ltd Total Vinpac (included in Vineyards Current 35,529 35,529 0 30 533,003 308,892 841,895 214,321 60 675,191 74,146 749,337 407,974 90+ 659,416 139,703 799,119 391,800 Total 1,903,139 522,741 2,425,880 1,014.095 We haven't paid Phipps in the UK for a while – 4400 pounds/month – owe them about $32000." 180 Ms Carroll prepared a similar document for February 2003 and a more detailed document for March 2003. The notations on the March list showed that unpaid creditors were becoming increasingly insistent and annoyed. The reaction of Ms Carroll in having to deal with unpaid creditors is illustrated by the comment which appears against the name of the first outstanding creditor in the list: "They haven't threatened to kill yet …". At the end of the document is a list of creditors below the heading "Legal action/supply cut etc threatened (and there are more) – some included above". There are eighteen creditors on this list; their debts total $1,394,225. 181 Mr Martini's evidence in cross examination frankly summarised what the financial records in evidence show: T897 "Q. You said in 2002 you started managing creditors. I take it you meant you decided to pay some creditors and not to pay others? A. No, we decided to pay different creditors different amounts depending on the amount of time it had not been paid and the balance. Q. Some people had to be paid every week? A. Yes. Q. So you could not … A. There are also different classes of creditors which could be classed in two ways. 1: You cannot operate without a workforce, so that becomes absolutely something you have to do. Or 2: They provided goods and/or services; in other words, if you do not have electricity it is pretty hard. Q. And you had a commitment to financiers that had to be met? A. Yes. Q. So there were a number of creditors that had to be paid whatever happened? A. Including the Tax Department, yeah. Q. And taxes were being incurred in the ordinary course? A. Yes, they were. Q. In order to pay those creditors some creditors whose debts were due and payable were not paid in full? A. That is probably true of everyone. [I take "everyone" to mean "every creditor".] Q. What happened throughout 2003 was that the amount of creditors in the 90 day plus category steadily increased? A. I am not sure about steadily, but it certainly increased. Q. You could have sold more bulk wine and sold bulk wine more quickly to have prevented that happening, but you were prepared to keep that bulk wine up your sleeve? A. No, couldn't have prevented it happening, could have mitigated it. Q. So even if you sold all of the bulk wine as quickly as possible, you would have still had cash problems? A. Certainly when all the cash was gone. Q. So if you sold the bulk wine earlier you would have involved the short term problem but run out of cash quicker? A. Yes. Q. You were running out as much as you could to pay the essential creditors later on if necessary? A. Yes. Q. That meant putting off other creditors more and more? A. To a degree, yes. Q. And those creditors you would be putting off so far as you understood had debts that were due and payable? A. Yes. Q. And because of the decisions you and the board made, the company were not in a position to pay them when they were due and payable? A. Yes. Q. And you knew that from January 2003, at least? A. Yes. Q. And you told the board that? A. Yes." 182 As I have mentioned, Mr Irving and the Directors dispute the inference that, because Wines and Vineyards did not pay their debts as they fell due, they could not. They say that there were assets of Wines and Vineyards which could have been realised and if realised, would have paid the companies' debts as they fell due. 183 The immediate response to that submission is: if assets could have been sold to pay debts as they fell due why, then, did not the Directors, as honest and responsible directors, actually sell the assets and actually pay the creditors in due time? 184 Mr Irving's answer to the question is: "(Wines) and (Vineyards) did not need to sell all the assets they could have sold, due largely to the successful exercise undertaken by management of explaining to trade creditors the cashflow difficulties facing the companies, and either discussing and concluding repayment schedules or requesting creditors' forbearance. This was part of the commercial reality, even if it did not, with respect to every creditor, vary the times when debts were contractually stipulated to be due and payable: see Southern Cross Interiors , supra, at [54], propositions (iii) and (iv). Such a practice can be likened to that identified by Jacobs J in Hymix Concrete Pty Limited v Garrity (1977) 13 ALR 321 at 328 as the 'desire on the part of the company to extend its effective working capital at no cost to itself by obtaining as long terms of credit as its creditors would tolerate, a business manoeuvre not necessarily related to an inability to pay' ." 185 I do not accept the suggestion inherent in this submission that the companies' "management" of creditors had succeeded to any substantial degree at all in deferring the companies' liabilities to pay their trading debts as they fell due. The evidence of Ms Carroll and Mr Martini, which I have recounted above, is all to the contrary: it shows that creditors were being made promises of payment but, far from accepting those assurances meekly, they were becoming increasingly loud and insistent that the debts be paid. 186 Neither do I accept the submission that there was no perceived "need" to sell assets to pay creditors. The evidence which I have recounted shows that the Directors were being told by Mr Martini and by Mr Spicer from January 2003 onwards that there was increasingly urgent need to realise assets. Mr Martini and Mr Spicer made strenuous efforts to realise assets and to seek refinancing. Because of the Group's unresolved dispute with the ATO, all they could do was to sell the Quondong property, obtain accelerated payments from TFE, and sell some additional bulk wine. As I have said, those realisations did not produce sufficient cash to pay the companies' debts as they fell due. 187 An asset cannot be taken into account in assessing solvency at a particular time without reference to the time it would realistically take to effect realisation and produce cash. It is no indication of solvency – indeed, it is the opposite – to point to property as available to meet debts falling due next month when, even with the utmost expedition, that property cannot be turned into cash for six months. Realisable property can only be taken into account in assessing solvency "if that property is in such a position as to title and otherwise that it could be realised in time to meet the indebtedness as the claims mature": Bank of Australasia v Hall (1907) 4 CLR 1514, at 1543; see e.g. Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (2006) 58 ACSR 631 at 652 per Dodds-Streeton J and Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87 at [14] and [15] per Barrett J. 188 A great deal of time was spent in evidence and submissions in debating the value of the bulk wine stocks held by Vineyards and whether and when those wine stocks could have been realised to meet debts. I do not think that is necessary for me to go into the debate in great detail. Bulk wine was certainly sold and was sold vigorously and at the best prices Mr Martini could achieve in circumstances other than a forced sale. However, the bulk wine was not all sold during the Period and the proceeds of what was sold were nowhere near sufficient to pay the companies' trading debts as they fell due. Mr Martini said that even if all bulk wine had been sold, Wines and Vineyards could not have paid all their creditors and would still have had cash problems: see para 181 above. 189 Mr Irving submits that Vineyards could have sold additional bulk wine so as to receive a total of $5M in cash in rolling amounts by 4 August 2003: written submissions, 23 February 2007. The ability of Vineyards to sell bulk wine generating that amount by August 2003 is disputed but Mr Irving's submissions are, in any event, hypotheses which are based on reports of experts obtained after the collapse of the Group. 190 The reason that all the bulk wine was not sold to pay outstanding trade debts during the Period was given by Mr Martini, whose frank and helpful evidence I accept. Mr Martini regarded the bulk wine as the companies' nearest equivalent to cash. He said: "Q. Yes. But just taking that step by step, are you saying that you could have sold more of it had you been given permission to do so by the Board of Directors? A. It could have all been sold. I would put one other observation out there; that bulk wine was the closest we had to a cash equivalent. Q. But what was left over, which is in Mr Gaetjens' report, was not sold, despite presumably your best efforts to sell it? A. No. I'll back up again and go back to my cash equivalent. I had six or seven or eight different options I was pursuing to raise funds. Most of – many of those were relatively illiquid, they may or may not have occurred or eventuated in 60 days or in 90 days or in 120 days, or may have taken a different form. The one thing I was very sure of was I could turn bulk wine into cash. The question is at what dollar value per litre? So if you're sitting there with that series of options, in the situation I'm in, you hang on to the thing closest to cash as long as you can, unless it's absolutely necessary. Then you turn it into cash." 191 What Mr Martini was saying, in effect, was that the other asset resources which might have been available to produce cash were not so assured or readily realisable as the bulk wine: if all of the bulk wine was sold and the proceeds exhausted in payment to creditors before the companies had successfully resolved their dispute with the ATO and thereby regained their ability to refinance and raise further cash, then the companies would have had nothing at all left with which to pay creditors. As he said (at T897), if the companies had sold all the bulk wine to pay outstanding debts, they would have run out of cash more quickly. They were therefore selling as much as was needed pay "essential creditors" and deferring payment to other creditors more and more. 192 This strategy did not demonstrate unwillingness to use an asset to pay creditors, in the sense discussed in Re Sarina: rather, it demonstrated an inability to pay creditors if the companies were to avoid "burning all their bridges behind them" by exhausting their most readily available resource when the ability to realise other resources was so uncertain. 193 This was a business decision, no doubt thought to be prudent, and made in the hope that eventually all would come right when the dispute with the ATO was successfully settled. However, the decision necessarily meant that the companies continued to leave a great many of their unpaid debts to age. 194 Mr Martini gave a second reason for not selling all bulk wine as soon as possible. Mr Irving wished to avoid selling large quantities of bulk wine quickly, resulting in sales at below book value. This would have had an adverse impact on the Group's financial statements for 2002. Mr Martini said that Mr Irving did not tell him in so many words that he was concerned about the effect on the Group's accounts of selling bulk wine at below book value, and that that was the reason that he did not want bulk wine to be sold as quickly as Mr Martini desired. However, that is the inference which Mr Martini drew from Mr Irving's words, and I think that he was correct in doing so: T884.27 – T885.36. 195 In any event, Mr Hall, the Liquidator, had doubts about whether a quick sale of virtually all of the bulk wine stocks was commercially realistic if the companies were to have any future as a going concern: see T163.22 - .50. It seems to me that these considerations also could lie behind the Directors' decision not to sell all bulk wine within the Period. Doing so could have spelt the end of the companies. 196 Some of the sources of cash referred to in the list which Mr Martini presented to the Board of Wines on 6 January 2003 were realised during the Period. Payment of accounts due from TFE were accelerated and provided additional cash. A property owned by Wines at Quandong was sold in February and the sale was completed in April 2003, realising nett proceeds of about $2M. Receipt of these proceeds went nowhere near paying all overdue creditors of Wines and Vineyards, and outstanding creditors' debts continued to age. 197 Mr Jackman took Mr Hall through a number of worksheets, intending to summarise assets available to meet the liabilities of Wines and Vineyards from 17 October 2002 onwards in an endeavour to show that Wines and Vineyards could have paid all of their due debts during that period and were, therefore, solvent. The worksheets became Exhibit 2D1. 198 Despite Mr Jackman's perseverance with Mr Hall in this exercise, I did not find it of assistance. Mr Hall was asked to make a series of assumptions as to what the companies could have done, and when. Mr Hall was not willing to accept a significant number of those assumptions as realistic: see, for example, at T163.23 – T164.19. 199 In the course of this part of Mr Jackman's cross examination of Mr Hall, I raised with Mr Jackman the significance of this evidence. The following exchange occurred: " His Honour: It would be an interesting exercise to count up how many assumptions already you have asked the witness to make and how many he will asked to make before the end of this exercise. I can't stop myself thinking that if the problems could have been solved by a couple of figures on a piece of paper at the time, why didn't this extremely capable and experienced Board jot down those figures and solve the problem. Jackman: There is a very simple answer your Honour. There were outstanding creditors throughout 2003. There is no doubt about that, creditors whose terms were not being complied but none of them sued. His Honour: That's a different – Jackman: Not quite but what it meant was that the company was in a position where there was forbearance by its creditors, therefore it did not need to go about an exercise of selling bulk wine of under a dollar a litre. His Honour: That's a solid point. I can see how you were getting to that with evidence about demands and people willing to wait. I am not sure what this exercise is doing. Jackman: It is proving the solvency of the company by proving there were assets available to be realised in cash in sufficient time to meet the demands of the creditors at those particular times." A little later, I returned to the point: T164.21 – T165.56. 200 In these passages Mr Jackman, with customary clarity, stated his case in a nutshell: the companies could have realised sufficient assets to pay all their debts in the Period as they fell due, but did not do so because they did not need to do so. The companies did not need to do so because their creditors were showing forbearance and were not issuing statutory demands. 201 However, I have found as a fact that many of the creditors of both companies were insistent in demanding payment of their overdue debts during the Period. The fact that they did not immediately issue statutory demands or commence debt recovery proceedings did not operate to defer the companies' present liability for those debts: see Southern Cross Interiors (supra) at 224. 202 Therefore, it is not correct, nor is it to the point, to say that the companies did not need to realise assets to pay their overdue debts. The companies had a legal liability to pay those debts; they needed to realise assets to pay those debts, if they could, to avoid the Directors engaging in insolvent trading. 203 Solvency is a question of fact and in finding whether or not a company was solvent at a particular point of time in the past the Court does not proceed upon possibility or speculation as to what might have happened when it has clear evidence as to what did, in fact, happen. The Board Minutes and the evidence of Mr Spicer and Ms Carroll make it clear that the Directors and the Executive Officers of Wines and Vineyards were well intentioned, capable, professional people, trying hard to pay the creditors of the companies while keeping the companies afloat. To suggest that there was a ready means of paying the companies' debts as they fell due which those Directors and officers failed to appreciate is unrealistic. The Board, Mr Martini and Mr Spicer were in the best position to decide what could realistically be achieved in paying creditors. 204 Mr Martini accurately summarised the position of the companies in general terms thus: " His Honour: Before you move on, can you explain what you saw as the situation which made it in your opinion severe from January onwards? A. I saw it as severe from December onwards given the fact that the budget that I had inherited was clearly in tatters. We were not going to get close, we were only going to get to, perhaps, 60% of what was the forecasted revenue. Cash flows were grossly understated and our cash position was overstated. Our expenses were, particularly the hired expenses, where we had a huge array of consultants that gobbled up our cash, were high. I had about seven indicator lights all going the wrong way. Q. Did you explain all that to Mr Irving and the board? A. I did. Q. On more than one occasion? A. Many occasions. Q. Throughout the period December to July, that is December 2002 to July 2003? A. Probably 40 or 50 times. Q. In your opinion did the group's position become more severe as time progressed? A. Yes. Slattery: When you say the cash position was overstated and the cash flow understated, was that the situation which you found yourself in September/October 2002? A. Yes. Bear in mind, when I got there we had [not had] a CFO since May/April 2002, we had an accounting system running on two different platforms. We had a controller that had a nervous breakdown earlier in the year, who left shortly thereafter. I hired a new CFO in November. We had a frantic four weeks trying to figure out what was and what was not. Q. You said in answer to his Honour's questions that you would have explained those matters. You used the number of some 40 to 50 times? A. Over the course of hundreds of conversations. Q. Between October 2002 and August 2003? A. That's correct. Q. In the course of those conversations, did there remain disagreement about those issues, that is the cash flow requirements of the company were understated and the cash position overstated, did you get in further closer debate in which there was agreement or just what happened? A. Well, as time went on, the settlement that was going to eventuate with the ATO did not eventuate, it was postponed and deferred. Many of the things that I had indicated were areas of concern in October and November and certainly in early December it remained the same. It was a bit like being in a state of siege for 10 months and I think everyone started to come to terms with the fact that we were in very tough situation. Initially, the thought was that this will all be over in 60 days. It is hard to keep that mindset 120 days or 140 days later. Q. Can I just take you back to where I was going. Could you have a look at … His Honour: Before you go on, you described being in a state of siege for that period of time, if the ATO had not made the decision at all by the end of July, had you thought about that at that time before you knew what the decision was, what the company's future would be if a decision kept on being deferred, the decision by the ATO? A. I did. Q. What was your opinion about the company's future? A. We would have run out of cash. Q. By when? A. It is a bit of a guesstimate, but sometime late September early October." By "run out of cash" , I take Mr Martini to mean that there would have been no cash at all to pay any creditors, "essential" or "not essential", so that the companies would have had no ability at all to continue trading. 205 The companies' own records show that when they went into administration some creditors' debts had been outstanding since October 2002 and that debts had been aging for ninety days and more, to increasingly strident protest from creditors, despite the best efforts of Mr Spicer and Ms Carroll to placate them. Even allowing for the fact that a forced sale of assets in an insolvency administration usually results in realisations significantly less than what could have been achieved if the sale had been on a "going concern" basis, nevertheless there has been a massive deficiency in the assets of Wines and Vineyards available to pay the debts of both secured and unsecured creditors. 206 To take the creditors' figures piecemeal, month by month, and to hypothesize that certain assets could have been sold to meet those debts as they fell due so that at all times during the Period the companies were solvent is simply unrealistic. It ignores what actually happened. 207 I conclude that the Liquidators have established that both Wines and Vineyards were insolvent for the whole of the Period. Negotiations for settlement with ATO 208 The critical and insuperable obstacle to the Reynolds Group's ability to refinance, sell real estate charged to the Bank, and raise further capital from the market was the unresolved dispute with the ATO over the tax liability created by the Notices of Assessment. If the tax liability had to be paid in full, Wines and the Reynolds Group were insolvent, as the Directors, the Group's financiers and the market well appreciated. The Board of Wines was, therefore, extremely anxious to resolve the disputes as quickly as possible – but with a favourable result. That meant an agreement by the ATO that the Group would have to pay none, or very little, of the amounts stated in the Notices of Assessment. However, the achievement of any sort of settlement with the ATO, favourable or not, seemed to be constantly slipping over the horizon. 209 On 15 October 2002, Mr Jessup wrote to Mr Irving confirming that he had lodged an application for deferral of legal action by the ATO to recover the tax debts. Mr Jessup advised that he had spoken with Mr Cameron Jeffs of the Brisbane ATO, who had been appointed as National Director and had the responsibility for resolving the tax issues with the Reynolds Group. Mr Jessup said that Mr Jeffs had "indicated on a without prejudice basis" a number of steps which Mr Jeffs was contemplating in order to advance discussions. Mr Jessup concluded: "We are confident that a settlement is likely to be achieved from the tone of our conversation with Cameron Jeffs. The tone was totally different to the last few months where a meeting became impossible. It would appear that the previous blockage referred to by John Evans of the ATO is now free and there is a genuine attempt now being made by the ATO to resolve matters. His tone was conciliatory." 210 On 24 October 2002, Mr Poolman, Mr Jessup and Mr Fryer attended a meeting with officers of the ATO, including Mr Evans and Mr Jeffs. The ATO officers kept a diary note of the meeting. The possibility of a settlement between the ATO and the Reynolds Group was discussed at length. The ATO officers raised the difficulty that there was a perception that Wines had been involved in the promotion of a tax scheme – a proposition which Mr Jessup and Mr Fryer strongly denied. The minute records the following: "John Evans noted that … any settlement with a promoter was breaking new ground and would have to be approved at a very high level within the ATO. Considering the Commissioner's views on promoters of mass marketed schemes, it will not be easy to convince senior management that it is in the ATO's interests to settle. However it is recognized that Cabonne is not in the business of marketing tax schemes." Mr Poolman advanced the proposition that, if the ATO accepted Wines' arguments, Wines would be due a cash refund of tax. The diary note records that Mr Evans said that "this issue may make settlement 'too hard'" . The following time frame was agreed: " [Wines] would request next week in writing for the applications to wind up to be withdrawn. Matthew Walsh and Diana Russo-James to consider Initial settlement offer in writing within two weeks to Cameron Jeffs Another meeting within a couple of weeks of the ATO getting the submission Look to December for finalization" 211 On 15 November 2002, Mr Fryer delivered to the ATO a lengthy written submission in support of Wines' arguments. Mr Fryer said that he believed Wines' position to be "strongly arguable". 212 On 6 December 2002, Mr Poolman, Mr Fryer and Mr Jessup attended another meeting with the representatives of the ATO, including Mr Jeffs. Mr Jeffs emphasised that settlement of the tax dispute with the Reynolds Group raised important and highly sensitive issues. Again, he referred to the perception within the ATO that the Reynolds Group had promoted a tax scheme. The notes of the meeting record that Mr Jeffs said: "The ATO had to ensure that such a sensitive issue as settling with promoter entities was open to scrutiny – there must be consideration of the Code of Settlement, the process must be transparent, ethical and as such the Ombudsman may be briefed. The issue could be seen as setting a precedent. The Senate had made recommendations in relation to promoters of tax schemes and there was a public perception in view of the large numbers of unsophisticated investors caught up in mass marketed schemes." The representatives of Wines said that the Group needed to lodge revised financial accounts by 15 January 2003. Mr Jeffs said: "… ATO decision by 15 January would be difficult. The submission would go to Michael D'Ascenzo [Assistant Commissioner] for approval. He may want further advice and many people were on leave over Christmas. All CJ [Mr Jeffs] could promise was that SB's submission would be sent up by the end of next week. Reynolds would be given the opportunity to comment on a draft of the submission before it was escalated." 213 In an endeavour to expedite a decision by the ATO, Mr Fryer sent the following facsimile to Mr Evans on 20 December 2002: "I refer to our discussions regarding your availability to progress discussions on the Reynolds Group's settlement proposal dated 15 November 2002 prior to the Christmas and New Year break. As previously discussed, the timing of the settlement is critical for the future viability of the Reynolds Group as it would result in the withdrawal of the application to wind up CH Finance Pty Limited and remove the current uncertainty regarding the financial viability of the Group. I understand from our discussions that it is unlikely that the ATO will be in a position to settle with the Reynolds Group by 14 January 2003 and that the best case scenario is a recommendation to the Second Commissioner, Michael D'Ascenzo, by 31 January 2003. As the deadline of 14 January 2003 is critical for the Reynolds Group in terms of being able to obtain funding for its day-to-day business operations, I would like to meet with you to better understand the key concerns from the ATO's perspective and what can be done to assist in progressing settlement. A proposed agenda for our meeting is as follows: Why settling by 14 January 2003 is critical for the Reynolds Group." 214 On 20 December 2002, Mr Spicer sent an e-mail to the Directors advising that he had now drawn down the final $1.5M available under the ANZ Bank Facility. Mr Spicer forwarded with that e-mail a statement of the cash position as at 17 December 2002. It showed that Wines was overdrawn at the Bank by $12,375 and that it had drawn, but not issued, cheques in favour of creditors for $24,131. Taking into account cheques drawn but not issued and cheques issued but unpresented, Wines was overdrawn at the Bank in the amount of $108,369. 215 Also attached to Mr Spicer's e-mail was a cash-flow forecast for the year ending 30 June 2003. It showed that the Reynolds Group required an additional $5M in funding to be able to meet its projected outgoings until the end of the June 2003, and that it required $1M of that funding before the end of January. 216 On 23 December 2002, Mr Spicer, Mr Martini, Mr Poolman, Ms Yates and Mr Irving had a telephone conference call to discuss the revised budget and the cash flow issues. According to Mr Spicer, in that conference call Mr Irving said: "If what you are saying in the revised budget is correct, then it's pretty serious and we will have to discuss at Board level". According to Mr Martini's evidence, he said in that conference call: "The situation is critical. The company is in serious danger of bankruptcy. You have to accept that drastic measures are required. We have to start selling assets". 217 On the same day Mr Martini and Mr Spicer attended a meeting with Mark Cox of Rabobank to discuss the possibility of refinancing the Group's ANZ facility. Mr Cox told them that refinancing could not be discussed until the Group had resolved the tax dispute with the ATO. 218 On 9 January 2003 Ms Anne Richardson, a member of Deloitte who was assisting Mr Fryer, had a telephone discussion with Mr Evans which she then reported to Mr Poolman. The substance of the discussion is set out in an e-mail as follows: " JE [Mr Evans] indicated he was not entirely happy with the final report prepared by Cameron Jeffs and needed certain aspects to be redone. He also had various outstanding queries which needed to be resolved before JE could make a final recommendation to the Second Commissioner of Taxation. JE indicated that he would come back to AR [Ms Richardson] with a likely timeframe for completion of the outstanding matters once he has discussed the issues with the relevant people within the ATO. AR indicated that the Reynolds Group is currently in a difficult position and required resolution to the tax disputes with the ATO ASAP. JE did not believe meeting with RF [Mr Fryer] / the Reynolds Group would progress the settlement as various matters needed to be resolved internally within the ATO. AR stressed that the Reynolds Group would like to meet with JE in any case. JE advised he will be on leave for 2 weeks from 13/1/2003 but could come back to meet up with the Reynolds Group if required. JE again reiterated that a settlement with a 'promoter' is a first time event for the ATO and politically sensitive in view of the senate's inquiry into aggressive tax schemes. As a result, JE indicated that there is a possibility that there may not be a settlement with the Reynolds Group and that this was made clear to the Group at the initial meeting on 24/10/2002. AR then queried what is a 'promoter' from the ATO's perspective and suggested that this be discussed further if it is a key issue which is delaying the settlement process. JE did not give a clear response in this regard. JE agreed to call AR tomorrow (ie, 10/1/2003) to discuss further. AR noted to PP [Mr Poolman] that she would try to arrange a meeting with JE next Monday when RF returns from annual leave. PP advised that when the Reynolds Group initially met with the ATO on 24/10/2002, JE indicated he supported a settlement with the Reynolds Group. In PP's view, nothing has happened since that date to adversely impact on the settlement process and therefore did not understand why JE is now holding the view that a settlement may not be achieved at the end of the day." It is clear from this note that Mr Evans was expressing extreme caution about the prospects of any settlement being achieved with Wines. Certainly, Mr Evans was giving no assurance that the dispute would be resolved quickly. 219 On 22 January 2003, Mr Irving attended a meeting at Deloitte with Mr Fryer at which the prospects of achieving a settlement with the ATO were discussed. Mr Irving asked Mr Fryer to arrange a meeting between himself and Mr Evans on 29 January 2003 to discuss the status of the settlement and requested that a meeting be arranged between himself and Mr Evans alone. The diary note of the meeting kept by Deloitte records: "2002 ACCOUNTS Per MI [Mr Irving] , Board wants to finalise and issue to shareholders ASAP. MI was of the view that worse case scenario re ATO settlement is no tax payable/no tax refundable (although unlikely as no technical basis per RF). RF noted that the worse case scenario is that all the amended assessments for income tax & FBT remain intact. Board wants to prepare a/cs on basis there is a settlement but not recognise any benefit (i.e., net refund based on Reynold's proposal). MI wanted DTT [Deloitte] to provide comfort letter to the Reynolds Group re likely settlement position. RF advised we are not in a position to do this as we cannot predict what position the ATO will take especially with regard to the issue of derivation of the management fees & other income from the CHWG Projects. MI understood our position given the circumstances." 220 On 5 February 2003, Mr Irving met Mr Evans and other officers of the ATO. Mr Irving summarised what was discussed at that meeting in a letter dated 7 February 2003 which he wrote to Mr Evans. Relevant parts of the letter are as follows: "As agreed I confirm herein the information I shared with you and your colleagues. (1) Banking Facilities The Group's banking facilities are provided by the ANZ Bank and are supported by a short fall guarantee bond provided by Asset Underwriting on behalf of Gerling Global Reinsurance of Australia Limited. The writ is an event of default and the facility providers have reserved their rights for the time being whilst our discussions are occurring. However, the writ has had the practical effect of freezing the facilities at their present level at a time when needs are in excess of those levels. (ii) Redeemable Preference Shareholders Reynolds had retained ABN-Amro Morgans to raise funds to finance redemption of these preference shares which matured on November 8, 2002. As soon as the writ was served and was unsatisfied, on the advice of ABN-Amro Morgans all efforts to raise the finance ceased and the company defaulted in its obligation. The Preference Shareholders are being paid interest and expect redemption early in March 2003. As a result of our discussion this date will need to be extended. ABN Amro advise us not to reapproach the capital markets until the substantive issues are resolved with the ATO. (iii) Cumulative Converting Preference Shares (CCPS) These instruments have security ranking behind the Guarantee Bond providers and the CCPS Trustee has also provided the ANZ Bank with a deed of priority. The writ has been an event of default but for the time being the trustee for the CCPs holders is reserving its rights whilst the discussion with the ATO continue. As a result of our inability to increase the banking facilities the company defaulted on the dividend due in January on these shares. (iv) The Writ Whilst removal of the writ would cure the event of default and would be welcomed by the company, in a practical sense, the company's financial needs cannot be satisfied until the substantive issues are resolved with the ATO. The company's ability to continue is gravely impaired by the current position. … (v) Summary You have informed me that you are seeking advice from Brendan Sullivan SC and Jim Momsen JC on the derived income aspect of this matter following which you will make your recommendations to your ATO colleagues. Recognising the complexity of this matter and assuming counsel's advice is received within 30 days, after that, it will probably take a further 30 to 60 days for a decision to be made within the department. In view of the adverse effect this matter is having on the company's operation I can only request resolution as soon as possible and repeat my offer to provide expeditiously any information which you require from the Reynolds Group." Clearly, at the conclusion of his meeting with Mr Evans on 5 February Mr Irving did not expect any immediate decision from the ATO: he realised that there could well be no decision for a further ninety days, i.e., not until early May 2003. In the meantime, as Mr Irving acknowledges, Wines was not able to approach the markets for refinancing. Further, as Mr Irving must have known, Wines and Vineyards were not paying all their respective debts as they fell due and creditors were continuing to age. There was no realistic prospect of this position substantially improving for another three months, during which time Wines and Reynolds would continue to incur new debts. 221 There was no decision by the ATO as at the end of May 2003. On 4 June 2003, at a Board meeting of Wines, Mr Irving advised that he had spoken to Mr Evans and that Mr Evans would be responding "in seven to ten days". No further time frame for decision was given. However, Mr Spicer left the meeting in no doubt that the Group's position was desperate. The minutes record: " Cashflow The Chief Financial Officer explained the cash at bank and daily cash flow schedules. He emphasized that timing was critical and that the Company must have significant funds in place by 13 June 2003. The Board acknowledged this." 222 A diary note dated 6 June 2003 made by a senior officer of the ANZ Bank records a meeting between the Bank and Mr Irving, Mr Poolman and Mr Martini and others on 30 May 2003. The diary note records: " Funding Support From today's discussion RW [Reynolds Wines] are still reliant on establishing an accounts receivable facility in the US (Silicon Valley Bank) to further bring forward accounts receivable owing by TFE. This proposal would require ANZ to release its security over these receivables. ANZ has very clearly advised RW that it would not do this unless ANZ debt was permanently paid down by the value of security released. IWC was today advised of ANZ's position. IWC made remarks about discussions taking place with a number of entities to secure bridging finance, however very little detail was provided. Although not expressed at today's meeting it is likely that the uncertain position of the settlement with the ATO would not be assisting efforts to secure any external financing. … ATO There is still no certain time frame around conclusion of the tax dispute with the ATO. Chairman Irving indicated at the 30 May meeting that 30/06/03 is possible for a final settlement with the ATO. RW's position remains that the ATO will settle with a payment of cash and tax credits or just tax credits. The RW chairman has been conducting discussions with the ATO with the support of Deloittes." 223 At a meeting of the directors of Wines on 10 June 2003, at which Mr Irving, Mr Poolman, Mr Martini, Ms Yates and Mr Spicer were present, various proposals for refinancing were discussed. Mr Wahab of IWC joined the meeting and advised that he had spoken to various potential financiers to gauge their interest. He said that he hoped to get confirmation of some commitment by 13 June. After Mr Wahab left the meeting the Directors continued their discussions. The Minutes record: "The Directors then continued their deliberations, with the following points being made: The Chairman advised that the ATO had confirmed that it wished to resolve the outstanding issues by 30 June 2003; The Chairman authorised Mr Clifton Bligh to approach International Wine Investment Fund ('IWIF') to discuss the Company's position and to determine any other alternatives that IWIF may have to offer; It was noted that the CPPS Holders interests would be greatly diluted under the proposed arrangements, as would those of ordinary shareholders. However, it is unlikely that the Company has any other options at this time; There is concern as the proposal has not yet been confirmed by IWC/potential financiers; The Chairman noted that he was not in a position to support this proposal as he didn't have the required information at this time. The Directors principal concern was to be certain that by entering into the proposed arrangements the Company would not be committing an act of insolvency." 224 On 12 June 2003, Mr Irving attended a meeting with Mr Evans and other officers of the ATO. A file note taken by one of the ATO officers records that Mr Evans said: "JE [John Evans] – You have requested this meeting – so I guess we're here to hear what you want to say. Just so that you understand where we are – we would like to resolve the disputes, one way or the other. However, we're not sure about the present circumstances of the group. If there is going to be a settlement - it can't be on the basis that you say 'we've paid Deloittes a lot of $ to put together a proposal that gives us a refund'. We also need to weigh up our litigation risks. We don't see those risks as being high. In any event, conceptually there is a difficulty as to whether we can settle. But that is a means to an end, and we would still need to look at the numbers. … MI [Malcolm Irving] - … But if you were to say 'no cash', then we'd say we'd give litigation a go, even if we had to go to a litigation funder. If on the other hand it's a question of the number of dollars; we'd have to seriously consider our position. MW [Matthew Walsh, an AGS solicitor] – What do you mean by 'no cash'? MI – no tax refund. We've paid a lot of tax … And incidentally in relation to the figures – the figures in Appendix D of the Deloittes document have been agreed to with Cameron Jeffs. JE – there are a number of things to be done before 30 June. One thing it would be useful to have from you would be a number … a settlement number … MI – there is a Board meeting on tomorrow – convenient – might be able to discuss $ figures. But would we have to wait anor 7 months for consideration of that number by the ATO? JE – no, we are still working to 30 June as the date. There is still the 1st hurdle – the conceptual difficulty as to whether we can settle still has to be overcome … … JE – well, we would need a $ number … a number that we can settle on … MI – where are you at? In terms of resolution – have your superiors approved? JE – as I've said, the biggest hurdle is the conceptual difficulties against the basis of the settlement you've suggested … We've received some advice from counsel – frankly settlement would not be easy – it would be difficult. Any suggestion of a refund would be very difficult. So what we would need from you is a number … MI agreed to look at $ number. The meeting concluded shortly thereafter." 225 Mr Irving says that he understood from this discussion that the ATO was suggesting in this meeting that it wished Wines to put forward a cash figure which it would accept from the ATO in settlement of Wines' claim for a tax refund. Mr Irving says that this suggestion encouraged him to believe that a favourable settlement with the ATO was imminent. The file note taken by the ATO does not support this assertion at all. I regard the file note as more reliable evidence of what was discussed at the meeting than Mr Irving's recollection, and later interpretation, of what was said. Mr Evans was making it plain that the ATO rejected an argument that because Wines had paid Deloitte a lot of money to put together a proposal resulting in a refund to Wines rather than a payment by Wines to the ATO, that in itself supported Wines' claim for a refund. What Mr Evans was conveying when he said: "We would still need to look at the numbers", was that the ATO would consider a figure put forward by Wines in settlement of the tax debt. He made this plain in emphasising that there was a major conceptual difficulty as to whether there could be a settlement of any description, let alone a settlement whereby the ATO paid money to Wines. The concluding statement of Mr Evans: "Any suggestion of a refund would be very difficult. So what we would need from you is a number …" is taken now by Mr Irving to indicate a formally stated reluctance on the part of the ATO to consider a settlement resulting in payment to Wines, but an indication that, nevertheless, as a matter of commercial realism the ATO was willing to negotiate on a number for payment to Wines. Mr Evans denies that he conveyed anything of the kind to Mr Irving. He said that what he suggested was that Wines should put forward a figure for payment to the ATO. Having regard to the content of the file note as a whole and to the tendency of Mr Irving to put a favourable gloss on the evidence whenever possible, I conclude that Mr Evans' evidence should be accepted. 226 It may be that Mr Irving misinterpreted Mr Evans' statements at this meeting, and understood Mr Evans to be requesting a figure which Wines would accept from the ATO in settlement of its claim for a tax refund. This is certainly the impression which he gave the Directors of Wines at a Board meeting on 13 June 2003, when the Board authorised him to negotiate to settle the ATO dispute on terms that the ATO pay Wines anything between $0 to $12M on terms that the settlement be finalised by 30 June 2003. In view of what Mr Evans had told Mr Irving repeatedly about the difficulties of any settlement involving a payment by the ATO to Wines, it is hard to understand the Board's confidence that the settlement with the ATO would not involve any payment by Wines to the ATO but would, rather, more likely result in a payment by the ATO to Wines. 227 On 18 June 2003, Mr Irving wrote to Mr Evans offering to settle the tax dispute upon payment by the ATO to Wines of $9M, provided that $5M of that amount was received in cash by 30 June 2003. 228 At a Board meeting of 23 June 2003, the possibility of refinancing and raising further cash from asset sales was discussed. It was clear that no firm proposals had yet been received and that no timing for the refinancing could yet be ascertained. 229 No decision had been made by the ATO by 30 June 2003. On that day Wines advised the ASX that it expected a response from the ATO by 31 July 2003. The ATO had not advised that a decision would be given by that date: the evidence suggests that it was Mr Irving himself who thought that that date was appropriate to announce to the ASX as an anticipated date for decision: T476.25. 230 On 1 August 2003, the Board of Wines was formally advised that the ATO rejected Wines' proposal for settlement and intended to enforce the tax assessments. On 4 August 2003 the Boards of Wines and Vineyards resolved that the companies would be placed in voluntary administration. THE CLAIM AGAINST MR IRVING Whether reasonable grounds for suspecting insolvency 231 CA s.588G(1)(c) provides that a director of an insolvent company is exposed to liability for insolvent trading if, at the time the debts are incurred: "… there are reasonable grounds for suspecting that the company is insolvent… ." 232 The test described by s.588G(1)(c) is an objective one (Powell v Fryer (2001) 37 ACSR 589, at [76]-[77]) per Olsson J (with whom Duggan and Williams JJ agreed): "… the state of knowledge of a particular director and any assessment which he may have made as to the ability of the company to pay its debts is irrelevant. The court must make its own judgment on the basis of facts as they existed at the relevant time and without the benefit of hindsight. [77] By reason of s 588G(2)(b) it is sufficient that a reasonable person in a like position in a company in the company's circumstances would be so aware. Regard is to be had to the facts and circumstances that the director ought to have known, as well as to the facts and circumstances that were actually known to him: Credit Corp Australia Pty Ltd v Atkins (1999) 30 ACSR 727 at 769." 233 I must ascertain: – what facts concerning the ability of Wines and Vineyards to pay their debts as they fell due were, or should have been, known to Mr Irving as a competent director of those companies during the Period; – would those facts have constituted reasonable grounds for suspicion of insolvency. 234 Suspicion of insolvency falls somewhere between a belief that insolvency exists, on the one hand, and a mere wondering whether it exists, on the other. Suspicion is a positive feeling of apprehension, an admittedly tentative belief, without sufficient evidence to form a concluded and supportable opinion: see e.g. Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, at 303. 235 Mr Irving has made no submission as to the appropriate finding which should be made in respect of s.588G(1)(c). His submissions focus on his defences under s.588H. However, I cannot assume that he concedes a finding against him under s.588G(1)(C). 236 I deal first with the consequences of the issue of the Notices of Assessment. As at 1 October 2002, the tax assessments had been outstanding since March 2001. Wines had not procured an agreement from the Commissioner to defer payment nor had it obtained a stay of enforcement proceedings. A reasonable director of Wines could not simply refuse to think about the consequences of this state of affairs for the solvency of Wines. A reasonable director of Vineyards could not refuse to think about the consequences to Vineyards if Wines had to be wound up because it was insolvent. It would have been the duty of a director of Wines and of Vineyards to obtain legal advice as to whether the tax assessed against Wines was due and payable, and then to consider the impact of that advice directly on the solvency of Wines and, indirectly, on the solvency of Vineyards. 237 If Mr Irving had asked Mr Fryer at any time during the Period: "Are the tax debts presently due and payable?", he would not have received an answer that they were not. Mr Fryer agrees that he did not understand the ATO ever to have agreed to defer the due date for payment for the Notices of Assessment; rather, he says, but I do not accept, that there was an agreement to defer recovery proceedings: see paragraphs 122 to 140 above. Mr Fryer says that he never informed the Directors that the due date for payment of the tax debts had been deferred: para 126. 238 As at 1 October 2002 there was no reasonable basis for Mr Irving to believe that the ATO would not seek to enforce payment of the tax debts. As I have noted, the ATO issued winding up summonses against CHF and CML in the first week of October 2002. 239 After the winding up summonses were discontinued in March 2003, Mr Fryer may well have told Mr Irving that the ATO would probably not take recovery proceedings until a decision about settlement of the tax dispute had been made, but there is no evidence that either Mr Fryer or Mr Jessup told Mr Irving that deferral of recovery proceedings meant that the tax debts were not presently due and payable. 240 There is no evidence that Mr Jessup or Mr Fryer told Mr Irving that the fact that Wines had objected to the assessments meant that it was unlikely that Wines would have to pay the tax debt or that a settlement was likely to be achieved in which Wines would not be required to pay a substantial sum to the ATO. At a meeting between Mr Irving and Mr Fryer on 22 January 2003, Mr Irving asked if a meeting could be arranged between him and Mr Evans alone to discuss the status of the settlement discussions. He explained that he was "intent on getting from them (ATO) an indication of when we were going to get an answer": T328.5. 241 In the course of discussion, Mr Irving said that the Board of Wines wanted to finalise the accounts for 2002. He was of the view that the "worst case scenario" in the dispute with the ATO was that there would be a settlement with no tax payable by Wines and no refund of tax payable by the ATO. Mr Fryer, however, said that this scenario was "unlikely" as there was no basis for it in tax law. Mr Fryer said that the worst case scenario was, in fact, that all the tax assessments would remain "intact" – i.e., that all tax assessed would have to be paid. 242 Mr Irving said that the Board wanted to finalise the 2002 accounts on the basis that a settlement with the ATO was achieved but recognising that no refund of tax would be made by the ATO. He asked Deloitte to give a "comfort letter" supporting this approach. Mr Fryer said that he was not in a position to do this "as we cannot predict what decision the ATO will take …". Mr Irving said that he understood that position. 243 Mr Irving gave the following evidence: "Q. Did not Mr Fryer on that occasion confront you with his professional view that there was no real technical basis in taxation law for that result? A. He did. Q. And he indicated to you, did he not, that given that there was no technical basis in taxation law for it that it seemed to him to be an improbable result? A. Not necessarily. I had formed the view that there would be a negotiation eventually in relation to where we stood and the Tax Department would seek to reach a position, the neutral position. Q. Could we come back to my question Mr Irving? I was asking you about what he said to you rather than your view. What I am asking you is, did he not say to you, given that it was unlikely as there was no technical basis for this, that he regarded it as unlikely or improbable? A. He expressed the view that there was no technical basis for arriving at the neutral position and in fact he said theoretically the worst case is that the assessments stand. Q. Did not say theoretically, he said the worst case scenario is that all the amended tax assessments for income tax and FBT simply remain intact? A. That's correct. His Honour: Just pausing there, the words in the memorandum are 'no technical basis'. What did you understand that to mean? A. Your Honour, very early on in - I mean - this dispute with the Tax Department had been going on for quite a number of years. One of the bases that had been discussed between the company, with which I was not involved in, was symmetry and effectively there is no provision in the Income Tax Assessment Act that relates to symmetry however that was one of the bases that was being discussed. Eventually the word 'symmetry' was still used but it was on the basis that the income had not been derived and it related to, on the other side of the symmetry theory, to what the Tax Department had settled with the farmer investors because they were the people that were bringing the money in so the idea that a decision would be reached which was a commercial decision as distinct from one strictly in accordance with the Act was discussed. Q. Just to summarise that, the words 'no technical basis' meant, according to your understanding, that as tax law presently stood in Mr Fryer's opinion there was no basis for the company's assertion? A. You either got it or you did not get it. … Q. But he was clearly signalling to you that in current taxation law he regarded there as being no technical basis for the particular worst case scenario that you were asserting? A. That's correct. Q. And that being so, you appreciated that that would be in effect another obstacle to the Australian Taxation Office in effect even commercially adopting that result; didn't you? A. Although it was many years previous to this situation, I have been in discussions with the Tax Office where a commercial result was negotiated. Q. Whether you had done that in the past or not, you appreciated from what Mr Fryer told you that this would be another obstacle for the Taxation Office coming to that position didn't you? A. Well, I appreciated that there was no technical basis. You either got it or you did not get it according to the law. Q. And Mr Fryer was saying to you that he regarded that outcome, either as a matter of law or at all, as unlikely? A. The neutral position. Q. Yes? A. Yes, as a matter of law. Q. And you had no real basis, given the advice that he gave you on this occasion for saying otherwise other than a bare hunch that you might be able to do a commercial deal of that kind with the Department; isn't that right? A. Well, you have probably expressed it a little more crudely than I would but yes that's true." 244 Mr Irving made a brief diary note of this meeting. Relevantly, it states "letter re (June) 02 accounts and tax position … most likely outcome … too hard". I infer that this note records Mr Irving's request for the "letter of comfort" from Deloitte as to the most likely outcome of the tax dispute and summarises Mr Irving's understanding of Mr Fryer's response: the outcome was too hard to predict. 245 It is highly significant that Mr Fryer gave Mr Irving the response which he did after Deloitte had delivered their detailed submissions to the ATO on 15 November 2002. These submissions put Wines' case at its strongest and highest, yet Mr Fryer was not prepared to give any prediction to Mr Irving about the prospects of a settlement, saying, in effect, that such a prediction was too hard – and this is what Mr Irving understood from Mr Fryer's response. Yet Mr Irving now says that at all times during the Period he had reason to be confident that Wines would achieve a favourable settlement of the tax dispute with the ATO, on the basis that while no tax refund would be paid to Wines, Wines would not have to pay any substantial sum to the ATO. 246 Mr Irving's evidence in this regard was, to some extent, supported by Mr Fryer. Frequently, during the course of his evidence, Mr Fryer expressed the opinion that the arguments which had been advanced by Deloitte in their submissions to the ATO, particularly in the letter of 15 November 2002, were strong. I discount that evidence; the impression which I gained of Mr Fryer's evidence as a whole was that he was anxious to assist Mr Irving's case, if he could. Mr Fryer's assertive but unsatisfactory evidence as to the making of an agreement with the ATO for deferral of recovery proceedings illustrates his tendency to assist Mr Irving by generalities which are not in accord with contemporaneous documents. 247 I regard what was said by Mr Irving in the meeting of 22 January 2003, of which a diary note was kept, as more indicative of Mr Fryer's statements of opinion to Mr Irving as to the prospects of success of settlement of the dispute with the ATO than the evidence which Mr Fryer, and Mr Irving, now give. In the same vein, the opinion expressed on 22 January 2003 was the opinion which Mr Fryer expressed in a letter dated 19 March 2003, a copy of which was sent to Mr Irving. Mr Fryer referred to a recent tax decision of the Federal Court relating to tax schemes and to a subsequent announcement by the Commissioner as to the circumstances in which he would deny deductions and run test cases. Mr Fryer continued: "In terms of what this means for the Reynolds Group, we consider that it is likely that the Commissioner will seek to disallow: the objection lodged by RWL in respect of its income tax assessment for the 30 June 1997 income year by denying the contribution of $2,900,000 made to EBP in respect of Glen Stotter; and the objections lodged by CML in respect of its amended income tax assessment for the 30 June 1997 income year by denying contributions of $5,800,000 made to EBP 1 in respect of Peter Poolman ($2,900,000), Peter Lucas ($1,450,000) and Dennis Lear ($1,450,000). With regard to CML's objection to its amended income tax assessment for the 30 June 1998 income year, there is uncertainty as to whether the Commissioner will seek to disallow the objection by denying the entire deduction of $14,500,000 or whether the Commissioner will seek to disallow the objection only to the extent of denying the EBP deductions of $10,500,000 relating to non arm's length employees (ie, directors of CML). The $10,500,000 is made up of $5,500,000 contributed to EBP 1 in respect of Peter Poolman and Peter Lucas and $5,000,000 contributed to EBP 2 in respect of non executive and associate Directors of CML. Of the total contribution of $14,500,000, we understand $4,000,000 relates to arm's length employees, being the Administration ($1,550,000 contributed to EBP 3) and Production ($2,450,000 contributed to EBP 4) staff. As noted above, the Commissioner may not at this stage seek to disallow CML's objection to the extent that it relates to arms' length employees as he has indicated an intention to clarify the issues of income tax deductibility and the application of FBT in such circumstances through representative cases in the Courts. In relation to the amended FBT assessments issued to RWL and CML for the years ended 31 March 1998 and 31 March 1999, we note that the companies have not yet lodged objections due to the Reynolds Group's current discussions with the ATO. Even if objections have been lodged, it is unlikely that they will be considered by the Commissioner as he has stated that he intends to test his views on the application of FBT through litigation of other cases." These views could not reasonably have been regarded by Mr Irving as encouraging. 248 In this regard, I bear in mind that the "symmetrical basis" upon which Deloitte argued in their submissions to the ATO on 15 November, that a refund of tax was in fact owing to Wines, had been put previously by Wines to the ATO and had been rejected on 15 June 2001. On 18 October 2001, Wines had requested an amendment to its tax return, but its request was rejected on 13 May 2002. 249 Mr Irving relies on what he says were remarks of Mr Jeffs and Mr Evans made at various times in 2002 and in 2003 which could lead one to believe that the ATO was disposed to resolve the tax dispute in Wines' favour, i.e., by agreeing that Wines should not have to pay any substantial amount of the Notices of Assessment: see e.g. Mr Irving's Written Submissions paragraphs 76-95. However, these remarks, even taken at their highest, never amounted to anything like an outright assurance or guarantee by Mr Evans or Mr Jeffs of the outcome of the dispute. 250 From my observations of Mr Jeffs and Mr Evans in the witness box, both are cautious and reserved in their manner of expression, particular Mr Evans. I find it hard to accept that Mr Jeffs and Mr Evans would have ventured anything like an assurance to Mr Irving or Mr Fryer that the dispute would be settled upon Wines' terms. On the other hand, it is possible that, in interpreting remarks made by Mr Jeffs and Mr Evans, Mr Irving and, to a lesser extent, Mr Fryer read into them a note of comfort which Mr Jeffs and Mr Evans did not actually intend to convey. 251 For these reasons, I conclude that a reasonable person in the like position of Mr Irving would have been aware at all times during the Period that there was no more than a hope or chance that the tax dispute between Wines and the ATO would be resolved on the terms proposed by Wines. Mr Irving himself conceded that, as a result of the advice Mr Fryer had given him on 22 January 2003, he had no more than "a bare hunch" that he might be able to negotiate a commercial settlement with the ATO: see par. 243. A reasonable director in Mr Irving's position must have contemplated the real possibility that the "worst case scenario" described by Mr Fryer to Mr Irving in January 2003 would eventuate, namely, that the Notices of Assessment would remain "intact", the ATO would enforce payment, and the insolvency of Wines would be manifest. 252 I conclude that at all times throughout the Period there were reasonable grounds for suspecting that Wines was insolvent, having regard to the existence of the Notices of Assessment. 253 I now turn to a consideration of the position of Wines and Vineyards, leaving aside the Notices of Assessment. 254 Bearing in mind the information coming to the Boards of both Wines and Vineyards with increasing frequency from October 2002 onwards, only some of which I have recounted above, it would have been very difficult to argue that a reasonable person in the position of a director of those companies would not have had reasonable grounds for suspecting that both companies were insolvent by 1 October. Debts incurred in that month were never paid. Creditors of both companies were already aging beyond thirty days. At a Board meeting of Wines on 11 October the Directors were informed that the ATO had served winding up summonses on CHF and CML. It was noted that "the actions by the ATO may impact on the recovery of the $26M owed by CML to Wines". Management had advised that the financial accounts of the Group be withdrawn. 255 On 16 October 2002, the ASX suspended trading in Wines' shares at Wines' request. On 17 October the ANZ Bank served its Notice of Default under its Facility Agreement. As I have noted, the assets of the whole Group were secured by cross charges. 256 As at 1 October, no one could reasonably have formed a view as to when the dispute with the ATO would resolve. No one could reasonably have formed the view that Wines would not have to pay the Notices of Assessment. It was obvious even then that if the ATO enforced payment of the Notices of Assessment, Wines, Vineyards and, indeed, the whole Reynolds Group, would have to go into liquidation. 257 The continuing inability of Wines and Vineyards to raise sufficient cash by realising resources in order to pay trade debts as they fell due existed as at 1 October and was brought to the attention of the Directors with increasing frequency throughout the Period. I am satisfied that as at 1 October 2002, and at all times thereafter during the Period, there were reasonable grounds for suspecting that both Wines and Vineyards were insolvent. Whether Mr Irving aware of reasonable grounds for suspecting insolvency 258 CA s.588G(2)(a) requires the Liquidators to establish that Mr Irving was aware, throughout the Period, that there were reasonable grounds for suspecting that Wines and Vineyards were insolvent. Again, Mr Irving has made no submission as to the appropriate finding on this question. His submissions are focussed on a defence under CA 588H(2). He says, in effect, that although he was aware of facts which afforded reasonable grounds for suspecting that both companies were insolvent, he expected, on reasonable grounds, that both companies were in fact solvent throughout the Period. I will come to that defence shortly. 259 The evidence makes it clear that Mr Irving was kept closely informed throughout the Period of the companies' increasing difficulties in "managing creditors", i.e., staving off statutory demands and debt recovery proceedings: see, for example, Mr Spicer's e-mail of 21 March 2003, which was copied to Mr Irving (para 174). He was acutely aware that the protracted and indefinite delay in resolving the dispute with the ATO prevented the companies from realising their resources to provide sufficient cash to pay the companies' outstanding creditors. He was aware that the companies were not able to say with any degree of assurance whether and when Wines would be able to resolve its dispute with the ATO in a manner which would remove its substantial tax liabilities. 260 I conclude that Mr Irving was aware that there were reasonable grounds for suspecting that both Vineyard and Wines were insolvent throughout the Period, for the purposes of s.588G(2)(a). In view of that finding, it is not necessary to make a finding in respect of s.588G(2)(b). If a finding had been necessary, I would have had no hesitation in concluding that a reasonable person in Mr Irving's position in companies in the circumstances of Wines and Vineyards would have been aware of reasonable grounds for suspecting the insolvency of those companies at all times during the Period. MR IRVING'S DEFENCE Did Mr Irving have reasonable grounds to expect solvency 261 CA s.588H(2) and (3) provide: "(2) It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. (3) Without limiting the generality of subsection (2), it is a defence if it is proved that, at the time when the debt was incurred, the person: (a) had reasonable grounds to believe, and did believe: (i) that a competent and reliable person (the other person) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and (ii) that the other person was fulfilling that responsibility; and (b) expected, on the basis of information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time." 262 An "expectation" of solvency, as required by the section, means: "… a higher degree of certainty than 'mere hope or possibility' or 'suspecting'. The defence requires an actual expectation that the company was and would continue to be solvent, and that the grounds for so expecting are reasonable. A director cannot rely on a complete ignorance of or neglect of duty and cannot hide behind ignorance of the company's affairs which is of their own making or, if not entirely of their own making, has been contributed to by their own failure to make further necessary inquiries." Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201, at [67] per Austin J (citations omitted). 263 The essence of Mr Irving's defence is that, although he knew that Wines could not pay the Notices of Assessment and that Wines and Vineyards were not paying all their trading debts as they fell due during the Period, he believed on reasonable grounds that: – the tax dispute with the ATO would soon be resolved, with no substantial payment due from Wines to the ATO; – in the meantime, there was no need to realise substantial assets of the Group because creditors were not sufficiently pressing; – the debts already incurred and which would continue to be incurred by Wines and Vineyards could be paid by recourse to the assets of Wines and Vineyards; – when the tax dispute was resolved, Wines and Vineyards would be free to refinance and raise fresh capital, so that existing debts and debts to be incurred could be paid. Accordingly, Mr Irving says, he had an expectation, reasonably based, at all times during the Period that Wines and Vineyards were solvent. 264 Mr Irving says that he had reasonable grounds to form these beliefs because: – as a non-executive director, he relied upon advice from senior management as to the operations, cash flow, solvency and general outlook of Wines and Vineyards; – Mr Martini had extensive experience in running large wine businesses and was familiar with the business of the Group through his employment with TFE prior to joining the Reynolds Group; – Mr Spicer was a qualified chartered accountant and had extensive experience as an insolvency accountant; – Mr Irving was aware of, and relied upon, the experience and qualifications of both executives; – he relied upon the advice of respected, experienced and qualified external advisers with relation to taxation and audit matters, namely, Mr Fryer and Mr Jessup. 265 The Liquidators have focussed on what they say is a critical gap in the elements of Mr Irving's defence. In order for the defence to succeed, there must be an expectation, held on reasonable grounds, that recourse to assets will enable debts to be paid, not at some indefinite time in the future, but so as to keep the companies solvent according to the definition in CA s.95A, namely, as the debts fall due for payment. It is not appropriate to base an expectation of solvency: "… upon the prospect that [the company] might trade profitably in the future thereby restoring its financial position. … The question is whether the company at the relevant time is able to pay its debts as they become due not whether it might be able to do so in the future if given time to trade profitably …" : Sheahan v Hertz Australia Pty Ltd (1995) 16 ACSR 765, at 769; Powell v Fryer (supra) at [75]. 266 The law recognises that there is sometimes no clear dividing line between solvency and insolvency from the perspective of the directors of a trading company which is in difficulties. There is a difference between temporary illiquidity and "an endemic shortage of working capital whereby liquidity can only restored by a successful outcome of business ventures in which the existing working capital has been deployed": Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559, at 566; Re Newark Pty Ltd (in liq); Taylor v Carroll (1991) 6 ACSR 255. The first is an embarrassment, the second is a disaster. It is easy enough to tell the difference in hindsight, when the company has either weathered the storm or foundered with all hands; sometimes it is not so easy when the company is still contending with the waves. Lack of liquidity is not conclusive of insolvency, neither is availability of assets conclusive of solvency: Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820, at 837. 267 Where a company has assets which, if realised, will pay outstanding debts and will enable debts incurred during the period of realisation to be paid as they fall due, the critical question for solvency is: how soon will the proceeds of realisation be available: see the authorities cited at para 187 above. Bearing in mind the commercial reality that creditors will usually prefer to wait a reasonable time to have their debts paid in full rather than insist on putting the company into insolvency if it fails to pay strictly on time, I think it can be said, as a very broad general rule, that a director would be justified in "expecting solvency" if an asset could be realised to pay accrued and future creditors in full within about ninety days. 268 The position becomes murkier the less certain are the outcomes. The market value of the asset may not be ascertainable until the market is tested, so that it is not certain that the realisation will pay in full both existing debts and those to be accrued during the realisation period. The time at which the proceeds of realisation become available may depend upon the state of the market and the complexity of the transaction. 269 There comes a point where the reasonable director must inform himself or herself as fully as possible of all relevant facts and then ask himself or herself and the other directors: "How sure are we that this asset can be turned into cash to pay all our debts, present and to be incurred, within three months? Is that outcome certain, probable, more likely than not, possible, possible with a bit of luck, possible with a lot of luck, remote, or is there is no real way of knowing?" 270 If the honest and reasonable answer is "certain" or "probable", the director can have a reasonable expectation of solvency. 271 If the honest and reasonable answer is anywhere from "possible" to "no way of knowing", the director can have no reasonable expectation of solvency. 272 If the honest and reasonable answer is "more likely than not", the director runs the risk that a Court will hold to the contrary in an insolvent trading claim. 273 If the honest and reasonable answer is "no way of knowing yet, we need more information", the director must then ask: "How long before we have the information so that we can give a final answer?" 274 If the honest and reasonable answer to that question is: "By a definite date which will not extend the realisation period (if there is to be one) beyond three months", the director may reasonably say: "Let's wait until then before deciding". 275 If the honest and reasonable answer is "there is no way of knowing yet when we will have the information to make a decision", the director must say: "Then there is no way that we can now have a reasonable expectation of solvency and there is no way we can reasonably justify continuing to trade without knowing when we will know whether the company is insolvent. Call the administrators". By this series of questions and answers I do not mean to lay down some pro forma test of directors' liability for insolvent trading. Each case depends on its particular facts. These questions and answers merely serve to illustrate that when a company is struggling to pay its debts, the directors must face up to the issue of insolvent trading directly and with brutal honesty: they must not shirk from asking themselves the hard questions and from acting resolutely in accordance with the honest answers to those questions. 276 The Liquidators say that there is no basis upon which Mr Irving could have held a reasonable expectation at any time during the Period that debts already incurred by Wines and Vineyards, and debts to be incurred in the future, would be paid by recourse to the assets of the company at the time those debts fell due for payment. They say that I should not accept Mr Irving's evidence that he believed at all times during the Period that there was no need to realise assets because he was reliably informed that creditors were not sufficiently pressing. They directly attack Mr Irving's credit. 277 At the commencement of his cross examination, Mr Irving was asked directly about "creditor management". Management Reports presented to the Board from January 2003 onwards are replete with phrases using the words "creditors … continue to be managed on a daily basis". Mr Irving could not have had any doubt as to what the phrase "creditor management" meant. Nevertheless, he courteously quibbled with definitions and responded in a way which skilfully avoided giving a direct answer to a direct question: "Q. Mr Irving, the issue of creditor management came up at just about every Board meeting between November 2002 and the end of July 2003; didn't it? A. Mr Slattery, I know 'creditor management' is one of your favourite expressions. The issue of the cash flow management of the company including debtors and creditors and inventory did come up at virtually every Board meeting. Q. The expression creditor management was used at these Board meetings both by you and by Mr Spicer and Mr Martini; wasn't it? A. Presuming that that's in the minutes which I don't recall, it is not an expression I use but. Q. At virtually every Board meeting they reported to you that they were in a position where they had to manage creditors who were over 30 days overdue; didn't they? … Irving: A. Mr Slattery, against the background that the Board meeting of 6 January, Mr Martini and Mr Spicer took the Board through their assessment of the company's situation. They informed the Board that they had spoken to suppliers and that the company was going through cash constraints aggravated of course by the ATO situation and the bank situation and in that context, the situation was spoken about. Q. At the meeting of 6 January, didn't you say to Mr Martini in relation to the subject of creditors, 'Manage the process. Just keep doing it until we get resolution of the ATO issues'? A. 'Manage the process' I don't recall that exact quote. 'Manage process' I am not sure what that entails. Certainly the managers came to the Board with a forward plan of how they would address the situation and the Board endorsed that plan. Q. I will be going to that Mr Irving but did you say anything like, 'Manage the process and just keep doing it until we get resolution of the ATO issues' in relation to the subject of creditors? A. I don't recall using that expression. Q. Do you deny saying that? A. Well, it is difficult to deny something I don't recall. His Honour: Q. Mr Irving, you may be a little at cross purposes with Mr Slattery. I think you earlier said 'manage creditors' is a term you wouldn't use or you don't customarily use. I think Mr Slattery is asking you, not whether you used precisely those words, but said something to the effect of 'manage creditors'? A. Your Honour, certainly I may have said to management who came up with the plan, 'Well manage that' the plan. I felt that Mr Slattery's questions were focused just on creditors. Q. The questions were focused on creditors. But all I was wanting to clear up is whether you had it in your mind, you were being asked whether you had used the words 'manage creditors' as a phrase rather than said something to that effect; whether you used those precise words or not? A. Well, I do not remember using the expression 'manage creditors'. I do however acknowledge that in the course of that Board meeting that I talked about managing process, well, I beg your pardon, managing the plan because management came up with a plan to address that and the Board addressed the plan." 278 Mr Irving was fencing with Mr Slattery in this passage, rather than answering a fairly straightforward question. He fenced often during his cross examination; I will give a few more examples in the course of these reasons. Mr Irving, I think, did himself a disservice in this regard. By the conclusion of his cross examination, I had gained the distinct impression that Mr Irving was reluctant to face up directly to the obvious when he was confronted with it, and was concerned to put a gloss favourable to himself on all his evidence while not being deliberately inaccurate or untruthful. This tendency weakened the reliability of his evidence generally. 279 In stark contrast was the evidence of Mr Martini. He answered questions directly and frankly, and on several occasions in a way contrary to his own interests. It is for that reason, coupled with the fact that Mr Martini's evidence was consistent with contemporaneous records, that I generally prefer the evidence of Mr Martini where he disagrees with Mr Irving. 280 Mr Irving says that Mr Martini and Mr Spicer reported to the Directors that "they had contacted the creditors and explained the situation and he understood that the creditors had agreed to defer payment": submissions para 103; T278.3. This assertion seems to be the basis for Mr Irving's alleged belief that there was no pressing need for Wines and Vineyards to realise assets. 281 I do not accept this evidence. From the Board meeting of 27 November 2002 onwards, the Directors were being informed that the debts of trade creditors of Wines and Vineyards were rising and that solving the "ATO issue" and sale of bulk wine were "crucial" to ongoing financial support: Reynolds Wines Limited, Management Report as at 15 November 2002. It was at that meeting that Mr Spicer was asked to prepare weekly reports as to the Group's cash position. 282 On 10 December 2002, Mr Spicer advised the Directors, including Mr Irving, that as at 6 December Wines and Vineyards had drawn cheques for creditors totalling $76,364 but were holding the cheques back. He forecast a cash deficit of $277,000 by 5 January 2003. 283 The Management Reports to the Directors and other communications from Messrs Spicer and Martini from 15 December 2002 onwards consistently refer to the critical position of the companies. According to Mr Martini, whose evidence I accept, he told Mr Irving on 23 December 2002: "The situation is critical. The company (i.e. the Group) is in serious danger of bankruptcy. You have to accept that drastic measures are required. We have to start selling assets". 284 Mr Irving places great weight on what are said to be assurances of solvency contained in "management representation" letters. In a management representation letter dated 19 March 2003 and signed by Mr Martini as CEO and Mr Spicer as CFO, the following statement appears: "The financial report has been prepared on a going concern basis. We are of the opinion that this basis is appropriate despite the issues set out in Appendix 2, Note 1(z) to the financial report. We expect that following satisfactory resolution of the ATO disputes that the default issued by ANZ will be withdrawn and further finance will be able to be obtained. It should be noted that whilst ANZ have issued notices of default they have continued to rollover the facility and also have advanced further funds within the facility." A statement to the same effect appears in a management representation letter dated 27 February 2003. 285 It should be noted that the management representation letters do not say that Wines was paying its debts as they fell due. Mr Irving could hardly have interpreted the letters to be indicating that Wines was solvent in that sense: an e-mail from Mr Spicer to Mr Irving, also dated 19 March 2003, attached a statement of the current cash position and cash flow which showed that the debts outstanding for ninety days and more were $4,902,457, and cash at bank was $128,643. 286 The statement "We expect that following satisfactory resolution of the ATO dispute … etc" told Mr Irving nothing which he did not already know. Further, as he, not Messrs Martini and Spicer, was in direct discussion with the ATO officers at that time he was better placed than they were to form a view as to whether the dispute would be resolved satisfactorily and, most importantly, when. 287 Mr Irving also places great weight on roll-over notices sent by Mr Spicer to the ANZ Bank between 3 January and 25 July 2003. Mr Spicer was required in the notices to specify in respect of Wines and Vineyards whether an Event of Default under the Facility Agreement had occurred or might occur. Becoming insolvent was an Event of Default. Mr Spicer certified in each of the roll-over notices that no Event of Default had occurred. The ANZ Bank continued to roll over its Facility, as Mr Irving was aware. 288 Mr Spicer gave evidence on behalf of the Liquidators. He proved the endemic cash shortage of Wines and Vineyards, non-payment of creditors, and the communication of those facts to the Boards of the companies. In cross examination, Mr Jackman SC took him to the roll-over notices which he had repeatedly signed, without qualification. 289 To my observation, Mr Spicer was visibly uneasy when pointedly asked whether, at the time he gave the warranties of solvency in the roll-over notices, he believed Wines and Vineyards to be solvent. On the one hand, the evidence which he had given on behalf of the Liquidators showed, at the very least, a strong likelihood of insolvency – as he himself must have realised as a chartered accountant and former insolvency practitioner. On the other hand, he had repeatedly signed roll-over notices warranting the solvency of the companies. 290 Ultimately, Mr Jackman pressed Mr Spicer to say that when he gave the roll-over notices he did so because he believed Wines and Vineyards were solvent: "Q. You understood that you were representing in the document of 17 July at 574 to 5, that in your opinion, each of Reynolds Wines and Reynolds Vineyards was solvent and was expected to be able to continue to pay their debts as and when they fell due? A. That they would pay their debts, yes. Q. Yes, as they fell due? A. Not strictly within the terms of their contractual agreement, if you like, terms of trade. Q. Well, you agreed yesterday that when you sent the 3 March rollover notice, you understood you were representing that Reynolds Wines and Reynolds Vineyards were able to pay their debts as and when they fell due, and were expected to continue to be able to. Do you recall? A. Yes. Q. And you make no qualification at 5775 concerning the ability of either Reynolds Wines or Reynolds Vineyards to pay their debts as and when they fell due; correct? A. Yes. Q. When you sent the document, you must have understood that you were representing to the ANZ that in your view Reynolds Wines and Reynolds Vineyards were solvent and were expected to remain solvent? A. Yes. Q. And you understand the meaning of solvency set out in the facility agreement concerned the ability of each of the borrower parties to pay their debts as and when they fell due; correct? A. Yes. Q. And in other words, you understood when you sent the 17 July document that you were representing to the ANZ that in your view Reynolds Wines and Reynolds Vineyards were able to pay their debts as and when they fell due, and were expected to be able to continue to do so. Correct? A. Yes. Q. And that was … Mr Slattery: The witness wanted to say something else. Mr Jackman: Sorry. A. Yes, my understanding was yes, we would be able to pay the debts, as they were incurred, but as far as strictly in terms, in accordance with their terms of trade, it was obvious that we weren't able to do that, and we were paying them in the course of business. Q. You are referring there to the fact that by 17 July, Reynolds Wines and Reynolds Vineyards didn't have enough cash on hand to pay their debts as they fell due; is that right? A. Correct. Q. But, taking into account all of the ability of Reynolds Wines and Reynolds Vineyards with regards to raising cash from all of their resources, it was your view, was it not, on 17 July that each of Reynolds Wines and Reynolds Vineyards was able to pay their debts as and when they fell due? A. On that basis, yes." 291 Mr Spicer, though very uncomfortable that he had warranted solvency when he knew Wines and Vineyards were not paying their debts as they fell due, to his credit did not simply adopt the line of least resistance and accept the statements which Mr Jackman was urging on him. He added a qualification to the effect that Wines and Vineyards were not paying their debts in accordance with their contractual terms but were paying them "in the course of business". By that, he was referring to the practice of paying those creditors who were most insistent and not paying others. However, he was grateful to adopt Mr Jackman's last suggestion, namely, that he believed Wines and Vineyards were solvent because they could pay their debts by raising cash from all their resources. 292 Mr Jackman did not explore with Mr Spicer how he could have believed that resources of Wines and Vineyards could have been realised in time to pay their debts as they fell due when, to Mr Spicer's knowledge, there was never any time frame set throughout the Period for a settlement of the dispute with the ATO and for realisation of assets to proceed. 293 I do not accept the submission that Mr Spicer had a positive belief that Wines and Vineyards were solvent throughout the Period. Mr Spicer, as a chartered accountant and as a former insolvency practitioner, knew the definition of solvency. I think it much more likely that, throughout the Period, Mr Spicer was very anxious as to whether Wines and Vineyards were solvent and, at heart, doubted that they were. 294 I infer that at the time that Mr Spicer signed the roll-over notices, he felt himself to be in an extremely difficult position. He knew the companies were not paying their debts as they fell due and that there would be no realisation of assets immediately occurring which would be sufficient to enable all debts existing and to be incurred to be paid as they fell due. Yet, if he refused to sign the notices and to certify solvency, it was highly probable, if not certain, that the Bank would immediately call in the Facility, thereby abruptly putting the companies into receivership or liquidation and destroying once and for all any chance that they might be saved. 295 I do not accept that Mr Spicer believed with any degree of conviction at any time during the Period that Wines and Vineyards were solvent. 296 Mr Spicer said that at no time did he explicitly tell the Board of Wines or Vineyards that the companies were insolvent. He gave this evidence: "Q. Mr Spicer, Mr Jackman has drawn your attention to a number of rollover applications, ANZ Bank facility, the latest being 17 July 2003, and to a cash flow projection and budgets and so on. I think you said in evidence just a few minutes ago, that when you signed the 17 July 2003 rollover application, you understood that you were representing to the ANZ that the Reynolds companies were solvent? A. Yes. Q. Was that your own opinion, as at the time you signed that document on 17 July? A. As I recall, yes. Q. Do I take it that you did not actually tell the board of directors at any time up to and including July 2003 that in your opinion the Reynolds companies were insolvent or immediately likely to become insolvent? A. I can't recall explicitly saying that, no. Q. Anything to that effect? A. I had indicated that the cash flows indicated that unless refinancing occurred, or we resolved the issue with the tax office, that would be the outcome. Q. But what I'm really inquiring about is whether you told the board at any time up to, say up to certainly 17 July 2003, anything to the effect that, in your opinion, the companies were now insolvent? A. No. I didn't explicitly say that at that particular time. Q. Or were highly likely to become insolvent in the very near future? A. I indicated that they would, in the future, not necessarily in the very near future. Q. They would in the future become insolvent? A. Yes, if we didn't resolve the tax office issues, and also arrange refinancing." 297 There is no evidence that Mr Spicer was ever asked point blank by the Board whether Wines and Vineyards were solvent. Possibly, the Directors felt that they did not need to ask; possibly, they felt they did not want to ask, in case they got an answer which forced them to make an extremely difficult decision: whether to continue with their efforts to save the companies and thereby risk insolvent trading liability, or else place the companies immediately in liquidation, resulting in loss of jobs and loss to creditors. 298 Mr Irving places weight on the fact that at a meeting of Directors of Wines on 29 April 2003 "Mr Spicer either represented, or did not express disagreement with, the proposition that the receipts from the TFE receivables would provide immediate funds to meet outstanding liabilities": submissions para 107. 299 Whatever was said by Mr Spicer and Mr Martini at the meeting of 29 April was far removed from a statement that Wines and Vineyards were able to pay all their debts as they fell due and that they would be able to do so in the future, out of the TFE receivables. What was said was in the context of a discussion about how the companies could continue to survive until the dispute with the ATO was resolved and refinancing could occur. Cash statements provided to the meeting by Mr Spicer showed that prior to receipt of the first tranche of receivables from TFE, cash at bank was $28,320 and total debts outstanding for ninety days or more were $5,733,909. After receipt of the first tranche, cash at bank was $926,028.73, which was obviously insufficient to pay the debts outstanding for ninety days or more. 300 Mr Irving knew throughout the Period that Wines and Vineyards were unable to pay in full the debts which they had already incurred and which were about to be incurred without recourse to assets which might, or might not, become available for realisation at some indefinite time in the future. In that circumstance, I am unable to accept that he was reasonably able to form an expectation that Wines and Vineyards were solvent on the strength of the statements made in the management representation letters, the roll-over notices, and in the absence of an express and unequivocal statement from Mr Spicer that, despite all the other circumstances known to the Directors, the companies were solvent. 301 The whole weight of the evidence, other than that of Mr Irving, shows that Mr Irving could not have been given assurances by Mr Martini and Mr Spicer from October 2002 onwards which could have led him to believe that there was no pressing need to sell assets because creditors were being successfully "managed", i.e., the creditors were content to wait for payment as long as it took to resolve the dispute with the ATO and to refinance or sell assets. 302 The following evidence encapsulates Mr Irving's attitude to payment of creditors throughout the Period, while Wines was awaiting a decision one way or another from the ATO: "Q. At the board meeting at which the directors were informed that the ATO hadn't decided by 30 June but a decision was expected by 31 July, did anybody say anything to the effect 'Well, what will the company do if a decision isn't made by 31 July'"? A. No. I believed by the end of June there were signs that there was activity in the tax department to bring this thing to a conclusion. Q. No, just before we go to the tax department. Was there any discussion at this meeting along the lines 'Well, what will we do if, again, the ATO disappoints us and there isn't a decision by 31 July?' Was there any discussion along those lines? A. No, not that I recall, your Honour, because, as I say, we had had I will use the word 'assurances', which will probably be too strong that they were working towards 30 June for a resolution. They – as I recall – informed us they couldn't meet that timetable, but they were still working for a resolution. Q. And was there any discussion at this meeting 'Well, what is the company going to do? Keep paying its creditors up till 31 July?' A. Well, at that period we had this $10 million facility developing very strongly and we were receiving oral advice from IWC that they were putting people putting investors in place. Q. Wasn't that funding dependent upon the successful resolution with the ATO? A. That was. That was a requirement of the board. Now … Q. What was the company going to – was there any discussion about how the company is going to survive until 31 July? A. Well, there was. There was a proposal in place for a bridging finance arrangement with the $10 million. Now, that slipped during the month of July, but not extensively, and we were encouraging the tax department to give us a response but, you know, they were not reacting to our encouragement. Q. Did anybody ask 'If we continue trading in normal business operations up until 31 July, how much additional debt will we incur?' Did anybody ask that? A. No, not in those specific terms. Mr Spicer, you know, in his position as chief financial officer, informed the board as to, you know, what he had in cash; what cash was in prospect. My recollection was there was additional money coming in from TFE in the month of July, and my recollection was that that was a view that we would be able to continue in business in that period. But our confidence in a resolution was – within the timeframe that you're talking about – was for stronger in July. I mean, before I mentioned the 90 days and how we got to it and we received assurances in that period that they were still trying to make the 30 June. I was then informed at the meeting on 4 July. I was then informed the meeting had been held and they were working on the outcome of that. No date was given me as to an answer, but it seemed to me that there was an imminent answer coming from the ATO." 303 This evidence, I think, summarises well the way in which Mr Irving and the Directors dealt with the fact that Wines and Vineyards were continuing to incur trading debts throughout the Period when they knew that all debts could not be paid as they fell due from the cash resources then available. Mr Irving and the Directors never addressed frankly and directly the hard questions: see paras 267 to 275 above. They simply hoped that a decision by the ATO would be given soon, it would be favourable, and that the rather vague and conditional proposals for refinancing and sale of assets could be implemented and the proceeds realised to pay creditors before one or some of them decided to wait no longer and sought to wind the companies up. Mr Irving never admitted in his evidence that this was his attitude; he was studious to avoid even mentioning the word "liquidation" in discussing the consequences for Wines and Vineyards if the ATO delayed giving its decision beyond 31 July 2003, or if the ATO's decision was adverse. All Mr Irving would concede was that if the "worst scenario" – as Mr Fryer had put it ­– occurred, then the companies' position would be "difficult" and the Board would have to discuss the matter: T329.18-.36 304 The passage I have set out above also exemplifies how Mr Irving, during cross examination, repeatedly avoided answering a direct straightforward question with a direct and straightforward answer but insisted on appending statements justifying his own position, usually in very general terms. As I have said earlier, for this reason, I found his evidence less helpful than it could have been and of much less assistance than the evidence of Mr Martini. 305 I find that Mr Irving did not have, at any time during the Period, reasonable grounds to expect that Wines and Vineyards were able to pay their debts, incurred and to be incurred, as they fell due. That conclusion is founded upon Mr Irving's knowledge, at all times during the Period, of the following facts and circumstances: i) large scale refinancing and asset sales sufficient to alleviate Wines' and Vineyards' endemic cash shortage were commercially feasible only if the tax dispute with the ATO was resolved substantially in Wines' favour; ii) a favourable settlement of the dispute with the ATO could not be predicted with any assurance, particularly in light of the fact that Wines' settlement proposals prior to 15 November 2002 had been rejected, and that on 22 January 2003, after Deloitte had made their latest and strongest submission to the ATO, Deloitte was not prepared to give any comfort letter to Wines as to the likely result; iii) the ATO had not made any firm commitment to give a decision as to the settlement proposal by any particular time during the Period, and had repeatedly failed to meet suggested estimates for a time for decision; iv) Wines and Vineyards were suffering an endemic cash shortage which could only be alleviated by large scale refinancing and realisation of assets; v) while some additional cash could be generated by selling the Quondong property, accelerating payments from TFE, and bulk wine sales, realisations from those sources would not be sufficient to enable Wines and Vineyards to pay all existing creditors and to pay future trading debts as and when they fell due for payment. vi) Wines and Vineyards had incurred trade debts in October 2002 and throughout the Period which were not being paid in full according to their trading terms, and were continuing to age; vii) Wines and Vineyards were continuing to incur substantial trade debts every month during the Period when there was no means of knowing whether large scale refinancing and asset sales could be achieved in sufficient time to enable those debts to be paid in full when they fell due. 306 Bearing in mind the complexities of finalising a settlement with the ATO, even if one were successfully achieved, and bearing in mind the complexities of large scale refinancing and asset sales which were contemplated by Wines and Vineyards, Mr Irving could not reasonably have held the belief that sufficient cash could have been generated to pay all creditors' debts incurred by Wines and Vineyards, month by month throughout the Period, as those debts became due for payment. 307 In those circumstances, I cannot hold that, at any time during the Period, Mr Irving had an expectation of solvency which was reasonably based. He did not hold more than a hope – a "bare hunch", as he put it ­– that the dispute with the ATO would be resolved favourably and quickly enough to enable refinancing to occur before Wines and Vineyards ran out of cash completely. That is not sufficient to afford Mr Irving a defence under CA s.588H(2) and (3). Ought Mr Irving be fairly excused 308 Mr Irving raises discretionary defences under both CA s.1317S(2) and s.1318(1). 309 Section 1317S relevantly provides: " Relief from liability for contravention of civil penalty provision (1) In this section: eligible proceedings : (a) means proceedings for a contravention of a civil penalty provision (including proceedings under section 588M, 588W, 1317H or 1317HA); and (b) does not include proceedings for an offence (except so far as the proceedings relate to the question whether the court should make an order under section 588K, 1317H or 1317HA). (2) If: (a) eligible proceedings are brought against a person; and (b) in the proceedings it appears to the court that the person has, or may have, contravened a civil penalty provision but that: (i) the person has acted honestly; and (ii) having regard to all the circumstances of the case (including, where applicable, those connected with the person's appointment as an officer, or employment as an employee, of a corporation or of a Part 5.7 body), the person ought fairly to be excused for the contravention; the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention. (3) In determining under subsection (2) whether a person ought fairly to be excused for a contravention of section 588G, the matters to which regard is to be had include, but are not limited to: (a) any action the person took with a view to appointing an administrator of the company or Part 5.7 body; and (b) when that action was taken; and (c) the results of that action. … (7) Nothing in this section limits, or is limited by, section 1318." 310 Section 1318(1) provides: " Power to grant relief (1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit." 311 Section 1317S clearly applies in an insolvent trading case because a claim under CA s.588M for a contravention of s.588G is expressly included in the definition of "eligible proceeding". There is a rather sterile debate in the authorities as to whether s.1318(1) also applies to an insolvent trading case. In Kenna & Brown Pty Ltd v Kenna (supra), Bergin J held that it did (at [155]-[157]). Her Honour's decision was followed by Young CJ in Eq in Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304. 312 In Scott v Williams [2002] SASC 424, Lander J disagreed, holding that because s.1317S(3) referred expressly to a contravention of s.588G, the section constituted an exclusive code for discretionary relief from liability under s.588M: at [101]-[103]. 313 With respect, I am unable to agree with the construction which Lander J has placed on s.1317S. It is clear that s.1318 applies to relieve directors and officers against liability deriving from their office not only under the general law but also for contraventions of the Corporations Act: see e.g. Deputy Commissioner of Taxation v Dick [2007] NSWCA 190, at [15]-[20] per Spigelman CJ. Section 1317S(7) requires that s.1318 be construed as if s.1317S did not exist. So read, s.1318 applies to relieve against liability for all contraventions of the Corporations Act, including contraventions of s.588G. That reasoning is, I think, supported by the remarks of Spigelman CJ in Dick, to which I have referred. Accordingly, I respectfully agree with the reasoning of Bergin J in Kenna & Brown at [156]. 314 However, I agree also with the observation of Lander J in Scott v Williams at [103] that ultimately it does not matter whether s.1318 applies concurrently with s.1317S to a contravention of s.588G because, under both sections, the Court will have regard to the same considerations. 315 The sections confer a very wide discretion. Their purpose is "to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are businessmen and women who act in an environment involving risk in commercial decision-making": Daniels v Anderson (1995) 37 NSWLR 438, at 525 per Clarke and Sheller JJA. 316 In the present case, the Liquidators concede that Mr Irving acted "honestly" in permitting Wines and Vineyards to continue trading during the Period, in the sense that he endeavoured to gain nothing personally by that course of action nor did he intend that creditors of the companies be cheated. However, they say that "honesty" for the purposes of the discretionary defences under CA s.1317S and s.1318 is not confined to a consideration of personal gain or conscious dishonest intent. 317 In Powell v Fryer (supra), the trial judge considered that "honesty", for the purposes of the discretionary defence to an insolvent trading claim, included the requirement that the director had acted bona fide in the interests of the company, including its unsecured creditors. He drew upon the principle expressed in cases such as Walker v Wimborne (supra). Those principles have been more recently expressed by Giles JA in Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191, at [162]: "At least where the company is facing insolvency as well as considering the company's interests the directors must consider the interests of its creditors: Walker v Winborne (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722. In Grove v Flavel (1986) 43 SASR 410 the Court said at 421 that the interests of creditors must be considered where to the knowledge of the directors there is a real and not remote risk of insolvency, and of course the risk includes the effect of the dealing in question. ( Grove v Flavel was disapproved in Spies v R (2000) 201 CLR 603 at [95] so far as it suggested a direct duty owed to and enforceably by creditors, but not as to this matter.) It is sufficient for present purposes that, in accord with the reason for regard to the interests of creditors, the company need not be insolvent at the time and the directors must consider their interests if there is a real and not remote risk that they will be prejudiced by the dealing in question." 318 With respect, I do not think that it is helpful or desirable to categorise failing to act in the interests of the company in all cases as dishonesty for the purposes of CA s.1317S(2)(b)(i) and s.1318(1). The descriptions "dishonesty" and "failing to act honestly" have a plain and pejorative meaning in ordinary usage. They carry connotations of fraud, shameful conduct and lack of integrity, particularly in relation to the acquisition of gain by unfair means. In McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, at [55]-[56], Kirby J said: "Dishonesty is an ordinary concept, not a term of art. It is, on that account, difficult to define in any comprehensive manner. However, dishonesty is a matter to be determined by reference to the mental state of the person whose conduct is in issue. … Leaving aside the situation in which there is an honest claim of right, the question whether a failure to act is dishonest is usually answered by considering whether that failure was motivated by a desire to conceal the truth or to obtain an advantage to which the person concerned knew he or she was not entitled." 319 In everyday usage, "dishonesty" and "fraud" are intimate bedfellows. They are not so in legal usage. Historically, "fraud" has had a special meaning for Chancery lawyers. In Nocton v Lord Ashburton [1914] AC 932, at 954, Viscount Haldane LC said: "… when fraud is referred to in the wider sense in which the books are full of the expression, used in Chancery in describing cases which were within its exclusive jurisdiction, it is a mistake to suppose that an actual intention to cheat must always be proved. A man may misconceive the extent of the obligation which a Court of Equity imposes on him. His fault is that he has violated, however innocently because of his ignorance, an obligation which he must be taken by the Court to have known, and his conduct has in that sense always been called fraudulent, even in such a case as a technical fraud on a power. It was thus that the expression 'constructive fraud' came into existence. The trustee who purchases the trust estate, the solicitor who makes a bargain with his client that cannot stand, have all for several centuries run the risk of the word fraudulent being applied to them. What it really means in this connection is, not moral fraud in the ordinary sense, but breach of the sort of obligation which is enforced by a Court that from the beginning regarded itself as a Court of conscience." 320 Because the Courts of Equity in the United Kingdom and in New South Wales have administered the Companies Acts, it has been easy to transpose into the word "honest" in that legislation the special meaning attributed to "fraud" in Chancery parlance so that, in Powell v Fryer (supra), a failure to perform one's duty as a director, even if by genuine mistake or ignorance of the law, can be described as "failing to act honestly". 321 In my opinion, Courts should not describe as "dishonest" or "fraudulent" conduct which would not attract those descriptions in ordinary usage. A judge's choice of words in a judgment can blight a person's reputation. As Mason P has recently said extra-curially: "…when a judge's reasons are published they speak to the world at large. With the internet they pass instantaneously across the city and across the globe without hope of retraction. The more strident a rebuke in a judgment the more likely it is to be picked up by the legal public, reported by the media (usually out of context), and viewed as a slight on the reputation of the person rebuked" : "Throwing Stones", Judicial Conference of Australia, 6 October 2007. 322 There is a great deal of difference between acting in discharge of an office without prudence, skill or judgment and acting dishonestly. Imprudence is not in itself dishonesty unless it is so reckless as to lead to the conclusion that the person could not have been making any genuine attempt at all to act in accordance with his or her duty: see Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1, at [419] (CA); Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, at 389B-H (PC). 323 If, following the suggestion in Powell v Fryer, I were to say that Mr Irving had failed to act honestly for the purposes of a defence under CA s.1317S(2)(b)(i) and s.1318, when all I had found was that, although with good intentions, Mr Irving had made errors of commercial judgment and had not paid sufficient regard to the interests of creditors of Wines and Vineyards, the phrase "failed to act honestly" would almost surely be picked up by the financial and other press. Mr Irving has a high profile in the business world. Being publicly branded as "having failed to act honestly", out of context, would be most hurtful, damaging and unfair to him and to anyone in his position. I emphasise that these observations are not occasioned by the consideration that Mr Irving has a high profile: I would have made the same observations about anyone, regardless of his or her profile in the community. 324 Lest it be thought that these observations betoken undue modern sensitivity (sometimes ironically termed "political correctness"), I point out that I do no more than echo the words of a more robust judge in a more robust age: "'Fraud', in my opinion, is a term that should be reserved for something dishonest and morally wrong and much mischief is, I think, done, as well as much unnecessary pain inflicted by its use where 'illegality' and 'illegal' are the really appropriate expressions" : per Wills J in Re Companies Act; Ex parte Watson (1888) 21 QBD 301, at 309. 325 In my view, when considering whether a person has acted honestly for the purposes of a defence under CA s.1317S(2)(b)(i) or s.1318, the Court should be concerned only with the question whether the person has acted honestly in the ordinary meaning of that term, i.e., whether the person has acted without deceit or conscious impropriety, without intent to gain improper benefit or advantage for himself, herself or for another, and without carelessness or imprudence to such a degree as to demonstrate that no genuine attempt at all has been to carry out the duties and obligations of his or her office imposed by the Corporations Act or the general law. A failure to consider the interests of the company as a whole, or more particularly the interests of creditors, may be of such a high degree as to demonstrate failure to act honestly in this sense. However, if failure to consider the interests of the company as a whole, including the interests of its creditors, does not rise to such a high degree but is the result of error of judgment, no finding of failure to act honestly should be made, but the failure must be taken into account as one of the circumstances of the case to which the Court must have regard under CA s.1317S(2)(b)(ii) and s.1318. 326 These conclusions are, I think, supported by authority. In Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, an insolvent trading claim brought against directors, Tadgell J had to consider a defence under a predecessor to CA 1317S and s.1318. His Honour considered whether the director's conduct was dishonest, in the sense of "involving some moral turpitude": at 196, 198. It is clear that his Honour did not regard the fact that the director had breached his duty to prevent insolvent trading and had failed to make out a defence as constituting dishonesty for the purpose of the exonerating provisions: ex hypothesi, a director would never be entitled to call upon the exoneration provisions unless he or she had breached his or her duty and had failed in all other defences: see at p.198. 327 Likewise, in Australian Securities & Investments Commission v Vines (2005) 56 ACSR 528, Austin J, following Friedrich, considered that "honesty" for the purpose of the sections meant "without moral turpitude": at [43]. His Honour's conclusion as to the meaning of honesty was upheld in the Court of Appeal: Vines v Australian Securities & Investments Commission (2007) 62 ACSR 1, at [568] per Ipp JA and at [797], [800] per Santow JA. 328 As I have recounted above, Mr Irving was aware at all times during the Period that the debts of a large number of trade creditors of Wines and Vineyards continued to age. Only the most insistent creditors were paid; the rest had to take their chances on the Reynolds Group being able to secure a favourable settlement with the ATO and then hold out long enough to sell assets, re-finance and, hopefully, begin to trade more profitably. 329 As I have discussed above at para 266ff, it is sometimes a difficult decision for a director of a trading corporation suffering from liquidity problems to decide whether, and when, to abandon hope of a change in the company's fortunes and to summon the administrators. There are often pressing interests involved in the decision: the jobs of employees will be lost, the investment of shareholders will evaporate, and a promising venture in which a great deal of personal effort may have been expended will end in failure. On the other hand, the livelihood of creditors whose businesses depend on reasonably prompt payment may also be ruined if a company continues to trade while insolvent. When confronted with the necessity of making a decision involving these factors, a director cannot afford to procrastinate or to avoid confronting realities. He or she must ask and honestly answer the hard questions: see paras 269ff above. 330 In the present case, for the reasons which I have already given, I am unable to accept Mr Irving's submission that at all times during the Period he reasonably expected that Wines and Vineyards were able to pay their debts as they fell due, in reliance on assurances from Mr Spicer, Mr Martini or Mr Fryer. He knew that the companies were not paying their debts as they fell due and he had no more than a hope that they would soon be able to do so. For that reason, his defences under CA s.588H(2) and (3) have failed. But it is at this point that the Court embarks on the consideration of the discretionary exoneration defence under CA s.1317S and s.1318: given that a breach of s.588G(2) is proved, given that Mr Irving acted honestly, and given that he had a difficult commercial decision to make, should he be exonerated in all the circumstances of the case? 331 Experienced company directors such as Mr Irving would appreciate that, in some cases, it is not commercially sensible to summon the administrators or to abandon a substantial trading enterprise to the liquidators as soon as any liquidity shortage occurs. In some cases a reasonable time must be allowed to a director to assess whether the company's difficulty is temporary and remediable or endemic and fatal. The commercial reality is that creditors will usually allow some time for payment beyond normal trading terms, if there are worthwhile prospects of an improvement in the company's position. The ATO, likewise, will often defer recovery proceedings in certain circumstances, as the evidence shows. In the present case, the Bank issued a Notice of Default under the Facility Agreement in October 2002, but it did not immediately call in its debt. 332 In the present case, as at the beginning of October 2002, Mr Irving had received advice from Mr Fryer and Mr Jessup that Deloitte would be making a detailed submission to the Commissioner and that Wines had at least a reasonable prospect of achieving a favourable settlement. I accept that reasonable commercial people could decide to wait to see whether the written submission lodged by Deloitte with the ATO on 15 November 2002 produced a quick and positive response such as to enable an asset sale programme and a restructuring to restore solvency to the Reynolds Group. I accept that if a quick and positive response from the ATO had been received, the Group could have set about a restructuring which very probably would have restored solvency. I accept that as at 15 November 2002 there was no reason to predict that a response from the ATO would be negative and might be up to eight months in coming. 333 On 6 December 2002, Mr Jeffs informed Mr Fryer and Mr Jessup that a decision by 15 January 2003 would be difficult because many people in the ATO would be on leave over Christmas. I accept that reasonable commercial people could decide to wait until mid-January 2003 to see whether the ATO would then be able to say with reasonable certainty when a decision could be expected. 334 By the time of Mr Irving's meeting with Mr Fryer on 22 January, it was clear that no progress had been made. Mr Fryer would give no letter of comfort as to Wines' liability or the prospects of settlement. Mr Irving appreciated that he could not simply wait passively until the ATO responded, however long it took: he had to do his best to encourage a quick decision by talking to Mr Evans. He arranged a special meeting between himself, Mr Evans and other ATO officers on 5 February 2003. However, at the end of that meeting, Mr Irving formed the view that it could take up to ninety days more for the ATO to make its decision. 335 In my opinion, it was on 5 February 2003 that Mr Irving ought to have appreciated that there was no reasonable prospect of the Reynolds Group resolving in the short term its dispute with the ATO, and of Wines and Vineyards being able to realise assets quickly enough to pay their debts as they fell due. He ought to have appreciated that debts incurred in October 2002 were already some ninety days overdue and would probably be at least 180 days overdue by the time a decision by the ATO was made. He ought to have realised that there could be no reliable prediction that the decision would be favourable. But, even if the decision were favourable, a further, possibly considerable, time would have to elapse before funds from asset sales and refinancing could flow to the companies. 336 In that situation, in my opinion, Mr Irving should have realised that there was no way of forming a justifiable view that Wines and Vineyards could pay the debts already incurred and about to be incurred in anything like the time frame, or with anything like the degree of probability, that creditors would have allowed when they supplied goods and services. One might ask whether a prospective creditor would have extended credit to Wines and Vineyards on 5 February 2003 if it had known what Mr Irving then knew about the chances of a favourable decision from the ATO and when the cash from realisation of assets might begin to flow. I do not think that many would have chosen to take the gamble. 337 When he came away from the meeting with Mr Evans, Mr Irving should immediately have recommended to the Boards the appointment of administrators. As Mr Irving had primary responsibility for negotiation with the ATO and as he was obviously held in high regard by the other Directors, I have no doubt that had he recommended the appointment of administrators on 5 February, the Group would have been in administration by 6 February 2003. But even if the other Directors had rejected his recommendation and out-voted him, Mr Irving would have been exonerated from liability because he had done what he could to procure cessation of insolvent trading. 338 As I have noted, the Liquidators do not suggest that, in permitting Wines and Vineyards to continue trading during the Period, Mr Irving acted deceitfully or with conscious impropriety or in order to gain any advantage for himself or others. On the contrary, I find that at all times Mr Irving sought and considered the advice of highly competent professionals: not only Mr Spicer as the Group's Chief Financial Officer and Mr Martini as a person experienced in the wine industry, but Messrs Fryer and Jessup whose experience and competence are unquestioned. Mr Irving formed a view and exercised his commercial judgment as to the prospects of Wines being able to resolve its dispute with the ATO in time to restore solvency to the Reynolds Group. That judgment was made in very difficult circumstances; it was made in the knowledge that a large and potentially profitable public company could be placed in liquidation simply because the ATO did not seem to be dealing with a commercial settlement proposal with any degree of expedition. What if the administrators were summoned and the Reynolds Group collapsed, only to be told days later that the ATO agreed to settle the dispute on favourable terms? It is not hard to envisage the Directors' sense of frustration in such circumstances. Mr Irving's commercial judgment proved erroneous, in my view, but I cannot say that it was made recklessly. 339 I conclude that, in failing to prevent Wines and Vineyards trading throughout the Period, Mr Irving acted honestly, for the purposes of a defence under CA s.1317S(2)(b)(i) and s.1318. I find that up to the conclusion of his meeting with Mr Evans on 5 February 2003, but only up to that time, Mr Irving acted as other reasonable, commercially experienced directors might have acted in waiting to see when a decision from the ATO could be expected with some certainty. I would, therefore, hold that, having regard to the conduct of Mr Irving and to the circumstances of the case at the time of his contravention of s.588G(2), Mr Irving should be wholly relieved, pursuant to CA s.1317S and s.1318, of liability for contravention of CA s.588G in respect of debts incurred by Wines and Vineyards from 1 October 2002 up to and including 5 February 2003, but no further. 340 I now turn to the other circumstances of the case, extraneous to the conduct of Mr Irving, in order to determine whether Mr Irving ought fairly to be excused in respect of any liability at all. Is it relevant that Mr Irving has no D&O insurance 341 It is said that Mr Irving does not have relevant Directors and Officers Liability Insurance for the Period so that he will have to meet any judgment debt out of his own resources. I accept that the personal and financial situation of a director may be a relevant consideration under the sections: Kenna & Brown (supra) at [181]-[183]. However, I have no evidence as to Mr Irving's personal financial situation. He may be able to satisfy a judgment debt comfortably out of his own assets, or he may not. 342 The fact that a director has no insurance to meet a judgment debt arising from an insolvent trading claim cannot, without more, play a part in the consideration of discretionary defences under s.1317S and s.1318. Most creditors are not insured against the insolvency of their debtors. The Court should not, in the exercise of discretion under s.1317S or s.1318, hold accountable only a director whose insurer will absorb the pain of a judgment. Is the quantum of dividend to creditors relevant to a defence under s.1317S and s.1318 343 I return to the question which I raised at the commencement of the judgment and which I consider to be of great difficulty. Is one of the circumstances relevant to the exercise of the Court's discretion under CA s.1317S and s.1318 the fact that possibly the whole, or at least the vast majority, of the fruits of the Insolvent Trading Claim will go, not to those who have suffered, namely the creditors, but rather to those who have made an investment in conducting the litigation: the litigation funder and the Liquidators. 344 Mr Slattery QC says that I should not even entertain this question. He submits that the circumstances which the Court has to consider in exercising its discretion under CA s.1317S and s.1318 are limited to those relating to the commission of the act giving rise to the liability from which exoneration under the sections is sought. I am unable to accept this submission. The making of orders under the section is discretionary and the Court may take into account a wide range of factors: Australian Securities & Investments Commission v Adler (2002) 42 ACSR 80, at 97-99 per Santow J (as he then was); Australian Securities & Investments Commission v Vines (2005) 56 ACSR 528, at [50] per Austin J. 345 The Liquidators of Wines and Vineyards were appointed at the second meetings of creditors of the companies held pursuant to CA s.439A on 25 November 2003. On that day, Committees of Inspection comprising a total of five persons were appointed. On the same day, the Committees jointly approved an agreement between the Liquidators and Insolvency Litigation Fund Pty Ltd, a subsidiary of IMF (Australia) Ltd to fund the costs of further investigations and public examinations. This agreement is not in evidence. For convenience, I will refer to the litigation funder as "IMF". 346 The Minutes of meetings of the Committees of Inspection of Wines and Vineyards for 23 February 2006 record the following: "The Chairman stated that the Insolvency Litigation Fund Pty Ltd had offered to provide additional funding in relation to the insolvent trading litigation. A draft agreement was provided to the Committees on 22 February 2006 which proposed that the litigation funder's success fee be increased to 60% post trial or 50% if settled before trial. The Chairman highlighted that Stephen Vaughan, of the Liquidators office, negotiated a reduced pre-trial success fee of 45%. The Chairman then negotiated a success fee of 45% under a pre and post-trial scenario. Mr Knox said in his view the assets of the directors are unlikely to exceed $2m. The Chairman mentioned that before the insolvent trading actions commenced, examinations of certain director's assets were undertaken. Mr Whiston indicated that he considered it reasonable for the Liquidator to continue actions to recover his, and his solicitors, costs. The Chairman advised that the total outstanding costs of the Liquidator and his solicitors were approximately $1m. He also explained that the litigation funder had so far incurred costs of approximately $1m, and this was likely to reach approximately $2m by the conclusion of proceedings. Mr Knox enquired about the likely allocation of funds in the event of success in the insolvent trading actions. The Liquidator explained that total recoveries could be in the order of $5.9m plus interest, plus costs, as well as an ATO preference claim of approximately $600k. The Liquidator then explained that the broad outcomes would be as follows: "$2m recovery – IMF costs recovered $3m recovery – IMF costs and a substantial portion of their success fee recovered $4m recovery – IMF costs and success fee covered, and approx-imately $400k of the Liquidator's and their solicitor's costs recovered $5m recovery – IMF costs and success fee covered, and a substantial portion of the Liquidator's and their solicitor's costs recovered $6m recovery – IMF costs and success fee covered, Liquidator's and their solicitor's costs covered, plus approximately $500k available for creditors." 347 The Committees of Inspection voted to approve the amended litigation funding agreements. 348 When this document was drawn to my attention during the cross examination of Mr Hall on 1 February 2007, the second day of the trial, I asked Mr Hall for clarification: "Q. Before you move on, Mr Hall, the schedule of possible recovery scenarios referred to on page 7777, the most successful scenario would seem to be the $6 million recovery generating $500,000 for creditors. Would you be able to tell me how many cents in the dollar? A. Creditors are well over 100 million and in some of these reports I have set out that it is about 150 million so it would be a very, very low dividend. Q. What is the point of these proceedings? A. Recovering costs incurred in pursuing the matter and also hopefully Q. You don't commence proceedings for the purpose of running up costs in order to recover them, do you? A. That is not my understanding your Honour. Q. I am just asking what is the purpose of these proceedings? At a fraction of a cent, if these proceedings are successful, as you could possibly hope, what fraction of a cent? A. Well, less than one cent in the dollar. Q. Can you tell me what is the purpose of these proceedings? A. To recover costs incurred. Q. For what? A. Funding creditors in pursuing actions for example your Honour. Q. Costs in, explain that? A. The liquidator has incurred costs with a funder seeking recovery and a lot of the costs that have been incurred have been incurred in costs with these proceeding something in the order of $2 million. It is an extraordinary amount of costs. It does not make me feel particularly comfortable about it but that is the position we find ourselves in and I found myself in this position for the last year or so with a funder who is prepared to continue to fund the proceedings. So, those numbers are still fundamentally the same as they were twelve months ago or whenever that exit meeting was held. Q. Let me follow this through. At some point of time early on in the piece after your appointment, you are considering, I imagine, what recovery action can be taken against various people – A. I – Q. – Allow me to voice my question. 'What recovery proceedings can I take for the benefit of creditors and how will I fund them.' You look at figures and you say 'there is a possible recovery action against directors for insolvent trading' and you look at the figures and you say 'how much, maximum, could I possibly recover?' I presume that you came up fairly early in the piece with a figure of $6 million? A. That is correct. We also, if I step back, one of the first steps was to arrange a public examination with the funder – Q. Let me follow through the process and then you can tell me where it is all wrong? A. Well, I will try. Q. You come up with the realisation that if you commence recovery proceedings for insolvent trading against the directors the maximum you can recover is $6 million? A. Correct. Q. I presume you also formed some estimate of how much it would cost to run that litigation? A. We did. Q. No doubt the estimate proved to be wildly under, as it always does? A. Yes. Q. And anybody who does insolvency work knows that is a sad fact? A. Yes. Q. But you are looking at a very expensive litigation to recover a maximum $6 million less substantial costs for the benefit of creditors totalling over $100 million? A. That is correct. Q. Did you do an exercise to work out what benefit to creditors that could possibly mean and whether it was worthwhile? A. Your Honour, we also considered at those early stages there were potential claims against a variety of people and indeed that is still a possibility following the completion of these proceedings. For example, there are advisors and other parties that were involved in the past with Reynolds Wines where there is potentially good claims. That is complicated by the circumstances we also find ourselves in where there is a receiver. There was the first receiver and then a subsequent receiver who has first claim to those claims and let's say these matters are dealt with and finalised successfully, IMF may be prepared to fund some other action and some of those things came out of the public examination that we did in '03, '04. Q. I am looking at this claim, the insolvent trading claim, and I am wondering: did you, at an early stage of the liquidation, do an exercise to calculate whether the conduct of this litigation and the incurring of the costs necessarily involved would be worthwhile for the benefit of the creditors? A. In the early stages, yes. Q. What decision did you come to as to cents in the dollar that creditors may hope to receive from the successful conclusion of this action? A. Again it would be relatively small and if you like one of the early actions we took is to pursue the preference against the ATO and we took that without doing a lot of work on solvency reports and so forth because we thought that may be an early success and there is cash and other options to pursue a return to creditors and the same with the funder and that is what we are really looking into in the event there was a settlement. The funder is prepared to keep funding this and I feel I have a duty on the funder's behalf to keep funding this to try and recover a return where I believe it is a good action. After all, there have been attempts with both the tax office and with the directors to seek some sort of settlement. This could have been settled, well, early. Indeed most of the time for all the reasons we are discussing we resolve those differences and it is very difficult once you start to back off. We either stop or you keep funding it because certainly, as Mr Jackman was raising, I owe the duty to my partners not to incur fees so the ongoing pursuit of this matter is funded by IMF so the exercise, as you are pointing out, clearly in terms of recovery is first for the benefit of the funding creditor. His Honour : Yes, well, this is a little diversion, perhaps, on my part but it may well be something that I have to return to in due course. Jackman: Q. IMF were not a creditor of Reynolds Wines or Vineyards until you entered into a funding agreement? A. Yes, that is correct. Q. You have never – A. They became a creditor as a result of funding the public examination in late '03, early '04. Q. That was pursuant to a contract for a funding which you entered into with them? A. Yes, yes." 349 I found Mr Hall's evidence troubling. When I asked him whether he had done an exercise to work out what benefit to creditors of the companies the proceedings could have had and whether the proceedings were worthwhile, Mr Hall gave a lengthy, non-responsive answer. He referred to the possibility of taking other proceedings and that IMF may possibly fund those other proceedings. As appears later, no such other proceedings have been commenced, and IMF has not entered into any agreement to fund any other proceedings. 350 However, I pressed the question. I regarded myself as entitled to do so, not only to clarify what Mr Hall had been saying, but also because Mr Hall, as a liquidator, is administering this liquidation supposedly in the interests of creditors and in the public interest. The Court may, on its own motion, enquire into the conduct of liquidators: CA s.536(1)(a). In the light of what Mr Hall had been saying, it seemed to me that I should understand why the proceedings were prosecuted, particularly when the Liquidators had never sought directions from the Court as to whether they were justified in doing so. 351 When I asked Mr Hall again how many cents in the dollar return to creditors he had estimated as a result of the successful prosecution of these proceedings, he said "Again it would be relatively small" before once more embarking a non-responsive answer. He concluded by saying: "… so the ongoing pursuit of this matter is funded by IMF so the exercise, as you are pointing out, clearly in terms of recovery is first for the benefit of the funding creditor" (i.e. IMF). 352 I have no doubt that Mr Hall and his legal representatives were able to see that I was troubled by what had been revealed. Later in the trial I was informed that the funding agreement with IMF had been "renegotiated". Ultimately, the Liquidators tendered their Annual Report to Creditors dated 22 February 2007: Exhibit P9. The renegotiated terms of the funding agreement were explained in outline in that Report. 353 At page 2 of the Report the following appears: "At a joint meeting on 11 March 2004 the Committees of Inspection considered a further agreement with IMF to obtain funding for recovery actions in respect of insolvent trading claims against directors, unfair preferences claims and ancillary actions to preserve the directors' assets. The likely return to creditors from such actions was discussed. Notwithstanding the prospect of a low or nil return, the Committees of Inspection approved the further funding agreement with IMF, it being recognised that any recovery actions would not require a funding commitment from creditors but that creditors had an opportunity to benefit from any successful outcome." 354 This statement shows that as early as March 2004 the Liquidators recognised that, with the "benefit" of funding from IMF, the present proceedings could result in a nil return to creditors. Nevertheless, the Liquidators and the Committees of Inspection seemed to take the view that, as the litigation could not proceed without a litigation funder, it would be a windfall for creditors if anything at all came to them as a result of the funding agreement with IMF. 355 The Report showed that as at December 2006, the Liquidators were owed $322,727 in respect of unpaid fees as Administrators, and $437,719 in respect of unpaid fees as Liquidators, a total of $760,446. Total time costs of $1,143,346 had been approved by creditors, but only $604,150 of Administrators' and Liquidators' fees had been paid so far. 356 The Report continued: "It was intended that outstanding costs be recouped from any proceeds of recovery actions including the Proceedings, after making the payments required under the funding agreement, however any recoupment has now been capped pursuant to an amendment of the funding arrangements, as discussed in (a) below. (a) Amendment to Funding Agreement In our previous report to creditors, we advised creditors that recoveries from the Proceedings alone would not be likely to result in any or any significant returns to creditors. However, it was recognised that such recoveries could fund further actions, the cumulative effect of which may be to the benefit of creditors. Such further actions are mentioned in Section I and VII of this report. In light of the increased complexity of the case, the longer than anticipated trial and, in particular, the inability to achieve a settlement prior to the significant costs of the trial being incurred, the Liquidators recently approached IMF to negotiate an amendment to the funding agreement regarding the distribution of any successful recovery from the Proceedings. In particular the Liquidators wished to secure, if possible, a revised agreement which would have the potential to provide a greater return to the unsecured creditors of Wines and Vineyards than would otherwise occur under the pre-existing funding agreement. The amendment which has now been agreed by the Liquidators with IMF reflects, in their view, a more appropriate funding agreement in the current climate of significantly increased costs, a 4-6 week trial and no prior settlement. The Liquidators and IMF have agreed a cascading arrangement whereby proceeds recovered from the Proceedings (Recovery Sum) are to be paid in a priority which differs to that set forth in Section 556 of the Act and elevates the entitlement of unsecured creditors to payment of a dividend of an agreed amount, dependant on the quantum of the Recovery Sum. The amendment which has been agreed is confidential and accordingly, summary details only are provided in this report to creditors, to advise the effect of the amendment and in particular, the manner in which the amendment may benefit creditors. The amended agreement defers: payment of most of the legal costs and Liquidators' fees which have not been indemnified by IMF; IMF's entitlement to be paid its success fee and other fees due under the funding agreement. IMF retains its priority entitlement to be reimbursed the costs it has actually paid in the Proceedings. Pursuant to the amendment: 50% of any return which exceeds IMF's costs (which are approximately $1.9 million subject to any appeal) will be set aside for the unsecured creditors of Wines and Vineyards, to be paid to them by way of a dividend, subject however to that pool of funds being at least $500,000; 50% of any return exceeding IMF's costs will be distributed in satisfaction of the Liquidators; and BDW's unpaid costs related directly to the Proceedings, capped at $80,000 each, and IMF's success and other fees to which it is entitled. Practically, this arrangement requires a return of $2.9 million or greater for there to be a payment to creditors. The Liquidators note that this threshold is much improved on the pre-existing funding agreement. The threshold of $500,000 has been agreed because, given that the quantum of unsecured creditors in Wines and Vineyards is high (combined over $100 million), any return by way of a dividend distribution of an amount less than $500,000 will approximate zero rendering the distribution futile. The Liquidators' necessary fees and costs associated with dealing with proofs of debt and making payment of dividends will be deducted from the pool of funds available to creditors prior to distribution. … VII Likelihood of Return to Creditors We advised, in our report of 2 February 2006, that whilst several recovery initiatives were being taken, these alone were not likely to result in any significant returns to creditors. If a favourable Judgment is obtained in the insolvent trading Proceedings, and this debt is paid, funds may become available, as a result of the amended funding agreement, for distribution to creditors. The potential quantum of creditor claims that are likely to rank for dividend is in excess of $100 million between Wines and Vineyards. As a very approximate indication, any dividend would not be likely to be more than 3 cents in the dollar. The actual proportions of any Judgment debt in favour of Wines and Vineyards will differ depending on the determined date of insolvency and there are different creditor claims in each liquidation. Therefore the actual potential rates of dividend in the respective liquidations of Wines and Vineyards will differ depending on the outcome of the Proceedings. … As discussed in our report to creditors and shareholders, dated 8 February 2005, early in the liquidations, IMF expressed interest in perhaps funding pursuit of an action against third parties for compensation in respect of losses by shareholders who had invested in the Group at the time of or after the June 2002 capital raising. Although IMF has continued to express its interest, we understand it has not taken the matter further at this point. Such an action would ideally involve a degree of cooperation between the Liquidators and shareholder claimants. If successful, it was recognised that any claimants could possibly rank for entitlements along with creditors in the liquidation of Wines and that such proceedings may also present an opportunity for some recovery on behalf of other creditors. We understand that the possibility of an action remains on foot but have no further information at present." 357 The renegotiated funding agreement with IMF has not been tendered. After the close of submissions, I sought clarification of what returns to creditors might be available under the renegotiated funding agreement. The Liquidators prepared a schedule and circulated it to the other parties. The schedule and the comments of the other parties are taken as further written submissions. However, for the purposes of this discussion I accept as accurate the summary of the effect of the renegotiated funding agreement given by the Liquidators' solicitors in the schedule. 358 The schedule takes $130,567,437 as the total estimated amount of creditors' claims for the purposes of calculating a dividend. It emphasises that precise calculation of a dividend is impossible because the amount of creditors' claims admitted to proof in the liquidations of Wines and Vineyards is not yet known, nor is the amount and timing of any recovery from the Defendants in these proceedings. 359 The schedule uses three scenarios to illustrate the possible returns to creditors: the highest return case, in which the Liquidators obtain full recovery of their maximum claims by 31 December 2007; the lowest return case, in which the Liquidators recover the minimum amount to give any return at all to creditors; and the medium return case, in which the Liquidators recover an amount mid-way between the highest and the lowest returns. I have set out the schedule as an appendix to this judgment. 360 The schedule shows that, on the highest return case, the total sum recovered in these proceedings is $9,653,689.28, comprising: – $5,562,751.17 for the insolvent trading claims against Mr Irving; – interest on that sum of $1,951,230.23; – $582,934 for the preference claim against the ATO; – interest on that sum of $206,773.88; – $1,350,000 for the Liquidators' costs of these proceedings recovered against the Defendants. 361 After deducting from the total amount recovered, IMF's costs of the proceedings, IMF's "success" fee of 50% of the balance, and the total costs of adjudicating the admission to proofs of debt, the amount available for distribution to creditors would be $3,726,844.64. Creditors would receive $0.0285 in the dollar of their claims, i.e., less than three cents. The largest creditor, whose debt is $19,128,464, would receive $545,992; a creditor whose debt was $100,000 would receive just over $2,800. 362 The medium return case assumes recovery from the insolvent trading claim of $3,200,000. Full recovery from the ATO is assumed. Interest is calculated accordingly. The costs recovery amount remains the same. The estimated return to creditors is $0.0163, i.e. less than two cents in the dollar. The largest creditor would receive $312,671 and a creditor whose debt was $100,000 would receive $1,632. 363 The lowest return case assumes recovery from the insolvent trading claim of $825,000. Full recovery from the ATO is assumed. Interest is calculated accordingly. The costs recovery amount remains the same. The estimated return to creditors is $0.0040, i.e. less than half a cent in the dollar. The largest creditor would receive $77,332, and a creditor whose debt was $100,000 would receive $403. 364 If the insolvent trading claim results in recovery of a judgment of less than $825,000, the creditors receive nothing. 365 I have held that Mr Irving's discretionary defence under CA s.1317S and s.1318 succeeds to the extent that he should not be liable under CA s.588M for debts incurred by Wines and Vineyards up to 5 February 2003. He is therefore liable for debts incurred from 6 February 2003 to 4 August 2003. The amount of those debts, and whether any of them were paid after 4 August 2003, remains to be quantified, as I shall explain shortly. 366 It is clear that, if my decision is correct, Mr Irving will not be liable for debts incurred in four months out of the total of ten months of the Period. The judgment ultimately entered against him will be substantially less than the recovery in the highest return case shown in the schedule, i.e. creditors would get less than 2.85 cents in the dollar. However, it is impossible to say at this stage whether the return to creditors will be better or worse than the medium return case, i.e. whether they would get more or less than 1.3 cents in the dollar. 367 From the fact that the Committees of Inspection were informed on 11 March 2004 that, under the funding agreement with IMF, there could be a nil return to creditors, and from Mr Hall's evidence to which I have referred above, I infer that the possible returns to creditors shown in the schedule were known, or could readily have been calculated, by the Liquidators before these proceedings were commenced. 368 Mr Jackman SC submits that "these proceedings are a money making exercise for the litigation funder, the Liquidator and his lawyers, rather than seeking to compensate creditors in any meaningful way": written submissions para 164. He submits that the Court can, and should, take this circumstance into account in exercising its discretion under CA s.1317S and s.1318. Why should Mr Irving personally suffer a heavy judgment, he says, when he has been guilty, not of dishonesty, but of error of judgment and those who have suffered, the creditors, get very little or nothing in the result? 369 The facts of this case raise difficult questions: – is it right to afford a remedy under CA s.588M when the purpose of the section, namely, to provide compensation to creditors suffering loss by insolvent trading, will not be achieved to any worthwhile degree; – is it right to condone liquidators in undertaking proceedings under s.588M which offer no worthwhile return to creditors when it is open to ASIC to punish contravention of s.588G(2) by prosecuting for a civil penalty order under s.1317G, or seeking a disqualification order under s.206C; – is it right for liquidators to incur huge costs in undertaking litigation in order to recover sufficient only to pay their own fees and the fees of litigation funders and lawyers; – does a defendant who has contravened s.588G and who is facing a claim by liquidators under s.588M have any right to complain about how the fruits of the judgment will be apportioned; – if no discretionary defence is allowed to Mr Irving in this case and the degree of ultimate benefit to creditors is held immaterial to the Liquidators' success, will litigation funders in future be encouraged to seek even larger shares of recovery proceeds and will liquidators and their lawyers be encouraged to 'churn and burn', i.e. to generate and escalate litigation so as to use up all of the recovery proceeds in paying their own fees. 370 It is fair to say that courts in Australia have not yet fully explored the ramifications of litigation funding. The majority of the High Court in Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) 80 ALJR 1441 (Gleeson CJ, Gummow, Kirby, Hayne and Crennan JJ) accepted that litigation funding is a reality of commercial life. They endorsed the view of Mason P in Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd (2005) 63 NSWLR 203, at [105], that: "The law now looks favourably on funding arrangements that offer access to justice so long as any tendency to abuse of process is controlled" : at [65]. 371 Gummow, Hayne and Crennan JJ, with whom Gleeson CJ agreed, said at [88]-[93]: "Shorn of the terms of disapprobation, the appellants' submissions can be seen to fasten upon Firmstones' seeking out those who may have had claims, and offering terms which not only gave Firmstones control of the litigation but also would yield, so Firmstones hoped and expected, a significant profit to Firmstones. But none of these elements, alone or in combination, warrant condemnation as being contrary to public policy or leading to any abuse of process. As Mason P rightly pointed out in the Court of Appeal, many people seek profit from assisting the processes of litigation. That a person who hazards funds in litigation wishes to control the litigation is hardly surprising. That someone seeks out those who may have a claim and excites litigation where otherwise there would be none could be condemned as contrary to public policy only if a general rule against the maintenance of actions were to be adopted. But that approach has long since been abandoned and the qualification of that rule (by reference to criteria of common interest) proved unsuccessful. And if the conduct is neither criminal nor tortious, what would be the ultimate foundation for a conclusion not only that maintaining an action (or maintaining an action in return for a share of the proceeds) should be considered as contrary to public policy, but also that the claim that is maintained should not be determined by the court whose jurisdiction otherwise is regularly invoked? Two kinds of consideration are proffered as founding a rule of public policy – fears about adverse effects on the processes of litigation and fears about the 'fairness' of the bargain struck between funder and intended litigant. In Giles , Lord Mustill said that the law of maintenance and champerty could best 'be kept in forward motion' by looking to its origins; these his Lordship saw as reflecting 'a principle of public policy designed to protect the purity of justice and the interests of vulnerable litigants'. Neither of these considerations, whatever may be their specific application in a particular case, warrants formulation of an overarching rule of public policy that either would, in effect, bar the prosecution of an action where any agreement has been made to provide money to a party to institute or prosecute the litigation in return for a share of the proceeds of the litigation, or would bar the prosecution of some actions according to whether the funding agreement met some standards fixing the nature or degree of control or reward the funder may have under the agreement. To meet these fears by adopting a rule in either form would take too broad an axe to the problems that may be seen to lie behind the fears. It is necessary to bear steadily in mind that questions of illegality and public policy may arise when considering whether a funding agreement is enforceable. So much follows from s 6 of the Abolition Act. Further, to ask whether the bargain struck between a funder and intended litigant is 'fair' assumes that there is some ascertainable objective standard against which fairness is to be measured, and that the courts should exercise some (unidentified) power to relieve persons of full age and capacity from bargains otherwise untainted by infirmity. Neither assumption is well founded. As for fears that 'the funder's intervention will be inimical to the due administration of justice', whether because '[t]he greater the share of the spoils … the greater the temptation to stray from the path of rectitude' or for some other reason, it is necessary first to identify what exactly is feared. In particular, what exactly is the corruption of the processes of the court that is feared? It was said, in Re Trepca Mines Ltd (No 2) , that '[t]he common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses'. Why is that fear not sufficiently addressed by existing doctrines of abuse of process and other procedural and substantive elements of the court's processes? And if lawyers undertake obligations that may give rise to conflicting duties there is no reason proffered for concluding that present rules regulating lawyers' duties to the court and to clients are insufficient to meet the difficulties that are suggested might arise." 372 It is true that these observations are obiter dicta, the case having been decided on another point. However, being the considered observations of a majority of the High Court, they must be accorded obedience: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 81 ALJR 1107, at [134]. From these observations I extract the following propositions: – the justification for litigation funding is that it offers access to justice to those who could not otherwise afford to vindicate their legal rights; – the fact that a litigation funder has sought out a piece of litigation in which to invest for profit is not objectionable as a matter of public policy; – the terms upon which litigation is funded may be so onerous and unreasonable as between the intended litigant and the funder as to be unenforceable as between them, but that is no concern of other parties to the litigation and does not, in itself, make the prosecution of the proceeding by the funder an abuse of process which the Court may stay; – if a funder, driven by profit motive, attempts to interfere with, or manipulate due process in the litigation or if funder's lawyers, for the same reason, commit breaches of their professional duties, the Court has sufficient power available to cure those ills without staying the litigation itself. 373 The views of the majority in Campbells do not yet command universal acceptance. The minority Judges, Callinan and Heydon JJ, are eloquent in their condemnation of the concept of litigation funding as merely another form of business investment. At [266], their Honours say: "Further, it is not the law that proceedings funded by a litigation funder can only be stayed on the ground of abuse of process if there is an actual corruption, or a tendency to corruption, of the processes of the court. The approach stated by the Court of Appeal is much stricter than, and does not accord with, that which is suggested by the expression 'abuse of process'. The expression is a wide one, capable of application in very diverse circumstances. But, in general, the aspect of 'abuse of process' which is relevant for present purposes is that the process of the court is abused when it is employed for some purpose other than that which it is intended by the law to effect. The justifications for the court's intervention against this kind of abuse of process as exemplified by some forms of litigation funding are diverse. Court process is expensive for the state to supply and for litigants to participate in. It is coercive and otherwise injurious both to litigants and to third parties and should not be employed beyond legitimate necessity. To the extent that people with urgent claims are held out from having them heard by actions in abuse of process, the latter actions should be stayed so that the former may be heard. Normal litigation is fought between parties represented by solicitors and counsel. Solicitors and counsel owe duties of care and to some extent fiduciary duties to their clients, and they owe ethical duties to the courts. They can readily be controlled, not only by professional associations but by the court. The court is in a position to deploy, speedily and decisively, condign and heavy sanctions against practitioners in breach of ethical rules. The appearance of solicitors is recorded on the court file. Institutions like Firmstone & Feil, which are not solicitors and employ no lawyers with a practising certificate, do not owe the same ethical duties. No solicitor could ethically have conducted the advertising campaign which Firmstone & Feil got Horwath to conduct. The basis on which Firmstone & Feil are proposing to charge is not lawfully available to solicitors. Further, organisations like Firmstone & Feil play more shadowy roles than lawyers. Their role is not revealed on the court file. Their appearance is not announced in open court. No doubt sanctions for contempt of court and abuse of process are available against them in the long run, but with much less speed and facility than is the case with legal practitioners. In short, the court is in a position to supervise litigation conducted by persons who are parties to it; it is less easy to supervise litigation, one side of which is conducted by a party, while on the other side there are only nominal parties, the true controller of that side of the case being beyond the court's direct control. Finally, the function of court proceedings is to provide a means of quelling real and active controversies that have arisen between persons who are unfortunate enough to have fallen into disputes with each other and that exist independently of and anterior to the commencement of the proceedings. The purpose of court proceedings is not to provide a means for third parties to make money by creating, multiplying and stirring up disputes in which those third parties are not involved and which would not otherwise have flared into active controversy but for the efforts of the third parties, by instituting proceedings purportedly to resolve those disputes, by assuming near total control of their conduct, and by manipulating the procedures and orders of the court with the motive, not of resolving the disputes justly, but of making very large profits. Courts are designed to resolve a controversy between two parties who are before the court, dealing directly with each other and with the court: the resolution of a controversy between a party and a non-party is alien to this role. Further, public confidence in, and public perceptions of, the integrity of the legal system are damaged by litigation in which causes of action are treated merely as items to be dealt with commercially." 374 The minority judges say that the following factors indicated that the litigation in Campbells was an abuse of process: – the funder's motive was merely to derive a profit from a speculative investment, not to assist those who could not otherwise afford justice: [266], [269]; – the funder sought out the plaintiffs: [270]; – but for the funding, the persons who suffered loss would not have thought it financially worthwhile to sue at all: [274]; – on the other hand, the gain to the funder was potentially enormous and the funder had control of the proceedings: [277]. 375 In the present case, many of these factors are present: – IMF's involvement in these proceedings is not due to altruistic concern to vindicate the rights of creditors of Wines and Vineyards but, rather, is an investment driven by profit motive; – if "access to justice" for the creditors were the justification for these proceedings, that justification fails when creditors will be lucky to get anything at all, and the amounts which they will receive are, in most cases, derisory; would the creditor whose debt was $19,128,000 have incurred the expense of this litigation for a maximum return of $545,000? Such a return would hardly cover its costs. Would a creditor whose debt was $100,000 have bothered to sue for a maximum return of $1,632? – on the other hand, IMF will, if successful, profit to the tune of millions of dollars. 376 Many judges have voiced strong objection to the notion of claims to justice being treated as investment opportunities. Knight Bruce LJ called it "merchandising in quarrels" and "huckstering in litigation discord": see Reynell v Sprye (1852) 42 ER 710, at 720. To such judges, justice is a balanced concept in which the rights of the injured party are vindicated in a manner which is fair also to the wrongdoer and goes no further than is necessary to remedy the injury done. To introduce a profit motive into justice is to tip the scales, so that one side is encouraged to think that it may gain more than just restoration of the position had the injury not been done. 377 When not only litigation funders but law firms themselves are listing on the Stock Exchange, the day will probably not be long in coming when one will be able to trade in "litigation derivatives". Had these proceedings commenced a few years hence, one might have been able to speculate quite profitably in "Reynolds Futures". According to the reasoning of the majority in Campbells, no policy of the law would be offended. However, I question whether defendants would accept as fair and balanced a system of justice which encourages speculative trading in the prospect of their ruin. 378 It is truly said that hard cases make bad law. The facts of this case may be thought to be more extreme even than those in Campbell in showing how a mammoth piece of litigation can be instigated, perhaps to the ruin of a defendant, with negligible "access to justice" for those who have suffered a wrong but with lucrative reward for those who make a business of investing in law suits. 379 The majority judgment in Campbells requires that I hold that the circumstances of the litigation funding in this case and the derisory return to creditors afford no right of complaint to Mr Irving. He cannot say that the proceedings are an abuse of process. He cannot say that the policy of the law discountenances such a proceeding. He cannot say that the law pays any regard to his complaint that the proceeds of a judgment against him will not go to those persons whom the legislature intended to be the beneficiaries of the suit. For these reasons, I cannot hold that a nil or negligible return to creditors as a result of successful prosecution of a claim under CA s.588M may be taken into consideration as affording a discretionary defence under CA s.1317S and s.1318. The Court's ability to control litigation funding 380 What the majority judgment in Campbells tells me I can and should do, however, is to exercise the powers of the Court if I see that there have been abuses of "the other procedural and substantive elements of the Court's processes" or if officers of the Court – liquidators and lawyers – have not discharged their responsibilities as they should have done: Campbells at [93]. 381 I am gravely concerned at the extent and cost of this litigation and that the Liquidators seek to throw the whole burden of those costs onto the Defendants. The case has occupied seventeen days of Court time; there are twenty-five volumes of exhibits (most pages never referred to). There are hundreds of pages of written submissions (all of very high standard, as one would expect of the very able Counsel who have appeared in this case). It is little wonder that the Liquidators' costs of the proceedings will be in the order of $2M. 382 At the core, however, the issues in these proceedings are not unduly difficult or complex. Insolvent trading cases are not rare in this Court. The law is fairly well settled. The position of Wines and Vineyards appears from their financial statements most, if not all, of which the Liquidators had collated by the time they produced their first Report to Creditors in 2003. The Period under investigation is only about ten months. What the Directors knew about the financial position of Wines and Vineyards and what Mr Irving was discussing with the ATO and Reynolds Group's advisers are fairly straightforward questions of fact and are mostly evident from Board Minutes, e-mails and other correspondence. What legal consequences flow from the Directors' knowledge of the circumstances of the Group should not have taken long to debate. 383 If the Liquidators had had only $500,000 to spend in the costs of this litigation, the trial would have been concluded in five days or less, without the masses of exhibits, and the result would doubtless have been the same. 384 What has happened, it seems, is that the complexity and cost of this litigation has expanded to fill the funding budget available. $2M has been spent to recover a possible maximum of $6M. In my view, this expenditure is quite out of proportion. 385 As I have earlier noted, the Liquidators must have appreciated before they commenced these proceedings what the cost of the proceedings was likely to be and what the return to creditors was likely to be. They should have approached the Court for directions under CA s.511(1)(a) as to whether they were justified in commencing the litigation in view of the terms of the proposed funding agreement with IMF, the likely return to creditors even if the proceedings were wholly successful, and the cost of the proceedings generally. Applications to the Court by liquidators for directions as to whether funded litigation should be commenced are frequent: see e.g. Movitor Pty Ltd (in liq) v Sims (1996) 64 FCR 380; Re Tosich Construction Pty Ltd (1997) 73 FCR 219; Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583; Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357; Re Imobridge Pty Ltd (in liq) (No 2) [2000] 2 Qd R 280; Re ACN 076 673 875 Ltd (in liq) (2002) 42 ACSR 296; Anstella Nominees Pty Ltd v St George Motor Finance (2003) 21 ACLC 1,347; Re AP & PJ King Pty Ltd (in liq) [2006] NSWSC 315; Stewart, re Newtronics Pty Ltd [2007] FCA 1375. 386 In such applications ASIC may be given notice so that it may make its own submissions. The terms of the funding agreement are usually disclosed to the Court although not necessarily published in the judgment. As Austin J has identified in ACN 076 673 875 and in AP & PJ King, the factors which the Court may take into account in determining whether the liquidator is justified in proceeding include: – the liquidator's prospects of success; – the amount of costs likely to be incurred in the conduct of the liquidator's case and the extent to which the litigation funder is to contribute to them; – the extent to which the funder is to contribute to the costs of the defendant if the liquidator's action is not successful; – the extent to which the liquidator has canvassed other funding options; – the level of the funder's "premium"; – the risks involved in the claim; – the wishes of the creditors. The list is certainly not exhaustive. It will be seen that in such an application the effect of the funded litigation on the proposed defendant is not left out of consideration. The Court is essentially assessing whether the interests of creditors are likely to be served by the funded litigation proceeding and whether the proposed litigation will be conducted in a way consistent with justice to all concerned. 387 As Gleeson CJ said extra-curially in "Some Legal Scenery" (Judicial Conference of Australia, 5 October 2007): "Litigation funding is now with us. Entrepreneurial activity in this respect raises issues that have come before the courts. It is not in all respects attractive, but subject to certain controls it may be a necessity. There is a need for some pragmatism about this, because the cost of access to justice is essentially a practical matter. Yet, a basic problem of access to civil justice is the remorseless mercantalisation of legal practice. This reflects the dominance of the culture of the market, with its tendency to reduce society to the single dimension of producers and consumers." 388 A liquidator proposing to enter into a litigation funding agreement should apply to the Court for directions as a matter of course: the application enables the Court to control, so far as it can, the use of litigation funding so that it does not destroy the very system of justice upon which it feeds. The law countenances litigation funding only because it provides access to justice for those who would otherwise be denied justice. If a liquidator's funding arrangements provide no more than a token benefit to the creditors and are in truth a means for the litigation funder and the liquidator to profit handsomely, the liquidator should be directed not to proceed. 389 In the present case, the Liquidators have never sought the directions of the Court as to whether they were justified in undertaking or continuing with the funded litigation in the circumstances which I have recounted. 390 The Court does not know whether ASIC might have regarded the alleged contraventions of CA s.588G(2) as warranting prosecution for a civil penalty order. If ASIC had been willing to prosecute so that breaches of the Corporations Act would not go unpunished, the Liquidators and the creditors might have been able to obtain compensation under CA s.588J or s.588K, with minimal expense. On the other hand, ASIC may have taken the view that the contraventions were the result of honest errors of judgment and did not warrant prosecution. The Court would have been assisted by ASIC's views in giving directions to the Liquidators. The Court might have concluded that if ASIC did not consider that the contraventions were so serious and culpable as to warrant prosecution in all the circumstances, then the Liquidators were not justified in commencing proceedings for the benefit of the litigation funder and themselves, and not for the benefit of the creditors. 391 The Court is now presented with the Liquidators' expenditure in these proceedings as a fait accompli. That does not mean, however, that the Court is powerless to correct what has happened. CPA s.98 provides: " Courts powers as to costs (1) Subject to rules of court and to this or any other Act: (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis. … (4) In particular, at any time before costs are referred for assessment, the court may make an order to the effect that the party to whom costs are to be paid is to be entitled to: (a) costs up to, or from, a specified stage of the proceedings, or (b) a specified proportion of the assessed costs, or (c) a specified gross sum instead of assessed costs, or (d) such proportion of the assessed costs as does not exceed a specified amount." 392 In applying the wide discretion conferred by CPA s.98 the Court must have regard to the principle that the purpose of the Act and the Rules is to promote the just, quick and cheap resolution of the real issues in proceedings in such a way that the cost to the parties is in proportion to the importance and complexity of the matter in dispute: CPA s.56(1), (2), s.60. It is the cost/benefit to the parties themselves which the Court must promote, not the cost/benefit to the parties' litigation funders. 393 A liquidator who enters into a litigation funding agreement and promotes expensive litigation resulting in little or no return to creditors without first seeking the Court's direction that he or she is justified in doing so runs the risk that the Court will, at an appropriate stage in the proceedings and of its own motion, exercise the power to enquire into the liquidator's conduct conferred by CA s.536(1)(a). 394 Liquidators appointed by the Court are officers of the Court and all liquidators act in the public interest; accordingly, the Court has not only the power, but also the duty, to see that liquidators are performing their duties in a prudent and proper manner: see, e.g. Re Fermoyle Pty Ltd (in liq); Commonwealth of Australia v Brown (1982) 62 FLR 413; Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434, at 438; Re Love (2003) 44 ACSR 367; Commissioner for Corporate Affairs (Vic) v Harvey [1980] VR 669, at 689. The Court need not wait for a complaint from a party to the litigation or from a creditor before exercising its power to investigate a liquidator's conduct, as s.536(1)(a) makes clear. The Court should be ready to exercise the power whenever it can see for itself conduct by a liquidator which calls for explanation. 395 A liquidator is appointed to salvage as much as possible for the benefit of creditors. If a proposed course of action – whether it be a legal proceeding or a commercial transaction – is not likely to produce a worthwhile benefit for creditors, the liquidator should not undertake it simply because it will generate enough to pay the liquidator's fees in undertaking that very transaction or litigation – a practice which is familiarly known in the market place as 'churning and burning'. 396 As I have recounted above, when Mr Hall was asked how $2M in costs had come to be spent for so little benefit to the creditors, he said: "It is an extraordinary amount of costs. It does not make me feel particularly comfortable about it but that is the position we find ourselves in and I found myself in this position for the last year or so …". At the appropriate time in the proceedings – i.e. when I am dealing with costs – I will wish to make some further enquiry from Mr Hall, in exercise of the Court's power under s.536(1)(a). Without limiting the range of enquiry, I would wish to know from Mr Hall why he was uncomfortable about the costs expenditure and why he did not apply to the Court for directions to guide him. I would wish to know why it has been thought necessary to spend up to $2M in costs when, from what I can see so far, a quarter of that sum might well have been sufficient to prosecute the Liquidators' case properly. 397 Mr Hall will have the fullest opportunity, by evidence and submissions, to meet the concerns which I express. It may be that the answers I receive will cast the facts in a different light and will show that the Liquidators' costs have been reasonable in view of the positions adopted by other Defendants. However, if I come to the conclusion that the Liquidators' expenditure on costs was unjustified and improper, I will give consideration to whether a costs limiting order should be made under CPA s.98(4). QUANTUM OF DAMAGES 398 Mr Irving's defences to the insolvent trading claim have succeeded only to the extent that he has been relieved of liability to compensate in respect of debts incurred by Wines and Vineyards from 1 October 2002 to 5 February 2003. Towards the end of the trial, an issue as to quantum, which Mr Irving had raised at the outset, gained more prominence. 399 Mr Irving said that many of the debts of Wines and Vineyards claimed by the Liquidators to make up the sum for which compensation should be awarded under s.588M had not been properly proved in that they were not supported by invoices, so that it was not possible to ascertain whether they had been incurred in any relevant part of the Period. 400 Further, Mr Irving said, the Liquidators had not shown that all debts claimed were still outstanding. It was said that there was no evidence that showed that any investigation had been made as to whether creditors had been paid by the Receivers and Managers of the Group, by the subsequent purchaser of the Group's business, or by creditors themselves exercising liens or retention of title clauses. 401 The possibility that a number of creditors' debts had been paid since the date of liquidation was demonstrated sufficiently, in my opinion, to require the Liquidators to prove the quantum of loss claimed in respect of debts which Mr Irving did not concede were incurred during the relevant part of the Period and which remained unpaid. 402 Mr Irving also contests liability for: – debts which, on the face of the invoice, were not incurred by Wines or Vineyards but by some other company in the Reynolds Group; – debts for legal costs rendered by various solicitors where the invoices are said not to comply with the requirements of the Legal Profession Act 1987 (NSW) and the Regulations. (These debts are said not to be owing at all and therefore cannot be included in the assessment of solvency, but the total amount in issue would be $176,527, which would not have made any difference to the findings on solvency); – interest on the tax assessments; – other debts, on grounds which it is now not necessary to identify. 403 The Liquidators sought to meet these criticisms at the close of oral evidence by issuing subpoenas to creditors. The identification of debts which properly form part of the "loss and damage" for which Mr Irving is liable under s.588M(2) will require detailed consideration of the claims of very many creditors, and a great deal of documentary material. Part of that consideration will, no doubt, be carried out by the Liquidators themselves in determining what debts should be admitted to proof in the liquidations of Wines and Vineyards. I could not myself carry out this exercise without spending many more days in Court, at great expense to the parties. I do not think that it is necessary or appropriate that I should do so. 404 On 11 September 2007, in the course of a further directions hearing, I suggested that questions of quantum await my decision on liability. That decision ought to make the issues on quantum clearer. I also suggested that the quantification exercise be carried out by a Court expert or by a referee, depending on the issues to be resolved. No party dissented from that suggestion. That is the course I propose to follow. SET OFF UNDER INDEMNITY AGREEMENT Whether Mr Irving liable to indemnify Commissioner 405 The Commissioner does not dispute the Liquidators' claim that payments totalling some $582,000 were received from Wines and payments totalling $77,750 were received from Vineyards between 3 March 2003 and 28 July 2003. The Commissioner does not dispute that those payments, totalling $659,750, are void as unfair preferences under CA s.588FE and must be repaid to the Liquidators. However, the Commissioner claims indemnity from Mr Irving and the other Directors pursuant to s.588FGA. That section relevantly provides: " Directors to indemnify Commissioner of Taxation if certain payments set aside (1) This section applies if the Court makes an order under section 588FF against the Commissioner of Taxation because of the payment of an amount in respect of a liability under any of the following provisions of the Income Tax Assessment Act 1936: (aa) former section 220AAE, 220AAM or 220AAR; (a) former section 221F (except subsection 221F(12)), former section 221G (except subsection 221G(4A)) or former section 221P; (b) former subsection 221YHDC(2); (c) former subsection 221YHZD(1) or (1A); (d) former subsection 221YN(1); (e) section 222AHA; or under a provision of Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953. (2) Each person who was a director of the company when the payment was made is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order. (3) An amount payable to the Commissioner under subsection (2): (a) is a debt due to the Commonwealth and payable to the Commissioner; and (b) may be recovered in a court of competent jurisdiction by the Commissioner, or a Deputy Commissioner of Taxation, suing in his or her official name. (4) The Court may, in the proceedings in which it made the order against the Commissioner, order a person to pay to the Commissioner an amount payable by the person under subsection (2). (5) A person who pays an amount under subsection (2) has the same rights: (a) Whether by way of indemnity, subrogation, contribution or otherwise; and (b) against the company or anyone else; as if the payment had been made under a guarantee: (c) of the liability referred to in subsection (1); and (d) under which the person and every other person who was a director of the company as mentioned in subsection (2) were jointly and severally liable as guarantors." 406 Mr Irving has defended the Commissioner's claim on the grounds that: – Wines was not insolvent at the time of the payments to the Commissioner so that the Liquidators' claim against the Commissioner fails and the Commissioner's claim against him for indemnity does not arise; – if the companies were insolvent, he has a defence to the Cross Claim under s.588FGB(3) in that he had reasonable grounds to believe that the companies were solvent at the relevant times; – alternatively, he has a defence under s.588FGB(4) in that he reasonably relied upon others to provide him with information and on the basis of that information expected that the companies were solvent; – alternatively, he has a defence under CA s.1317S and s.1318. 407 For the reasons I have given in the course of dealing with the Liquidators' insolvent trading claim against Mr Irving, the defences under CA s.588FGB(3) and (4) cannot succeed. I have exonerated Mr Irving under CA s.1317S and s.1318 from liability for insolvent trading only up to 5 February 2003. The payments by Wines and Vineyards to the Commissioner were made after that date, when the companies should not have been trading at all. In my opinion, Mr Irving should not be exonerated in respect of liability to the Commissioner under CA s.1317S and s.1318. 408 To the extent that Mr Irving's defences fail, he says that he is entitled to indemnity against Wines pursuant to an Indemnity and Access Deed dated 5 September 2001 and under Clause 38.1 of Wines' Constitution. He says that, pursuant to CA s.553C or CPA s.21(1) he is entitled to set off against the Liquidators' insolvent trading claim the amount for which Wines is liable to indemnify him in respect of the Commissioner's claim against him. 409 The parties' submissions on this aspect of the case were remarkably scant – three brief paragraphs at the end of Mr Jackman's written submissions and five brief paragraphs in Mr Slattery's written submissions in reply. Oral submissions merely repeated in brief the written submissions. Neither party entered into any discussion of the quite technical questions involved in interpreting the legislation in relation to set off. 410 Clause 2.1 of the Indemnity and Access Deed relevantly provides: "2.1 To the extent permitted by law, the Company indemnifies the Officer (whether or not he is still in office): (a) against any liability (other than legal costs) incurred by the Officer in his capacity as a director, secretary and/or executive officer of the Company or its Subsidiaries other than: … (iii) a liability that is owed to someone other than the relevant company or a Related Body Corporate and did not arise out of conduct in good faith." Clause 38.1 of Wines' Constitution is to exactly the same effect but, obviously, applies to all Directors. 411 Mr Slattery's first submission is that Clause 2.1(a)(iii) of the Deed and Clause 38.1 of the Constitution do not indemnify Mr Irving in respect of the Commissioner's claim under CA s.588FGA(2) because Mr Irving's liability to the Commissioner "did not arise out of conduct in good faith", as required by the provisions of the Deed and the Constitution. That is so, Mr Slattery says, because Mr Irving had actual knowledge that Wines was insolvent at the time that the preferential payments were made to the Commissioner; permitting Wines to trade with actual knowledge of insolvency cannot be "conduct in good faith". 412 In my view, "good faith" for the purposes of Clause 2.1 of the Deed and Clause 38.1 of Wines' Constitution means "honestly" in the sense that I have described in paragraphs 318 to 327 above. I have held that, although Mr Irving knew that Wines was unable to pay its debts as they fell due from October 2002 onwards, he acted honestly and reasonably up to 5 February 2003 in permitting Wines to trade. From 5 February 2003 onwards he acted honestly, but not reasonably, in permitting the companies to trade so that his defence under CA s.1317S and s.1318 succeeded only up to 5 February 2003. 413 While I have held that Mr Irving did not act reasonably in all of the circumstances from 5 February 2003 onwards, I cannot find that that failure was so reckless and of such a character that I can describe it as dishonest or lacking in good faith. It was an error of judgment – a serious error but not a dishonest one. I cannot find that Mr Irving's liability to the Commissioner arose out of conduct which was not in good faith. 414 Accordingly, I conclude that Clause 2.1(a)(iii) of the Deed and Clause 38.1 of Wines' Constitution indemnify Mr Irving in respect of the Commissioner's claim against him under CA s.588FGA(2). Whether set off available under CA s.553C 415 Mr Slattery QC submits that, even if Mr Irving succeeds in establishing liability against Wines under the Indemnity Deed and the Constitution, the amount of Wines' liability cannot be set off against his liability to the Liquidators pursuant to CA s.553C or CPA s.21. 416 CA s.553C provides: " Insolvent companies – mutual credit and set-off (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." 417 Mr Slattery submits that CA s.553C is not available to Mr Irving because: – there have been no "mutual dealings" between Wines and Mr Irving, within the meaning of CA s.553C(1); – CA s.553C(2) deprives Mr Irving of any right to set off because he knew Wines was insolvent at the time he received "credit" from Wines under the Indemnity Deed. 418 In summary, the position of the parties as at the date of liquidation of Wines was as follows: – Mr Irving had breached CA s.588G(2) and was liable under CA s.588M(2) to pay compensation to Wines, recoverable as a debt, if the Liquidators prosecuted a claim. It may be said that Mr Irving was contingently liable for this debt to the company; – the Commissioner had received preferential payments and was liable to repay them to Wines under CA s.588FF(1)(a) if the Liquidators prosecuted a claim. It may be said that the Commissioner was contingently liable for these repayments to Wines; – the Commissioner could claim indemnity in respect of these payment to Wines from Mr Irving under CA s.588FGA(2). It could be said that Mr Irving was contingently liable for the debt created by s.588FGA(3); – if Mr Irving was contingently liable for the debt to the Commissioner, Wines was contingently liable to indemnify him under the Indemnity Deed and under Clause 38.1 of the Constitution. 419 I will deal first with Mr Slattery's submission that there have been no mutual dealings between Wines and Mr Irving such as to engage s.553C. 420 In Gye v McIntyre (1991) 171 CLR 609, the High Court considered s.86 of the Bankruptcy Act 1966 (Cth) which is, so far as is relevant, in the same terms as CA s.553C. In a unanimous judgment, the Court observed that the object of these sections in insolvency law was to do "substantial justice" between the parties, and that the provisions should be given "the widest possible scope" in order to achieve that object: at 619. 421 In Gye, a creditor had a debt which would have been provable against the bankrupt's estate and the bankrupt's estate had a claim against the creditor for damages for fraudulent misrepresentation. The estate's claim for damages would not have been provable in the creditor's bankrupt estate had the creditor gone bankrupt. The question was whether the "mutuality" envisaged by s.86 of the Bankruptcy Act required that both the bankrupt's claim and the creditor's must be provable in a bankruptcy. The High Court held (at 628) that while the creditor's claim had to be provable, the bankrupt's claim did not have to be provable. This decision was applied and explained by the High Court in Coventry v Charter Pacific Corporation Ltd (2005) 80 ALJR 132, at [54]. 422 In the present case, Mr Irving's contingent claim against Wines, being founded on the Indemnity Deed entered into prior to Wines' liquidation, would be admissible to proof in Wines' liquidation: CA s.553(1). However, Wines' claim under CA s.588M(2) for insolvent trading, being a claim for unliquidated damages arising from a liability imposed by statute, would not be a provable debt if Mr Irving went into bankruptcy: Bankruptcy Act 1966 (Cth) s.82(2). Nevertheless, as held in Gye, the mutuality requirement of CA s.553C is not lacking; that is so because Mr Irving's claim is provable in Wines' liquidation. "Mutuality", as required by s.553C, requires that the claims to be set off are between the same parties, that the parties be indebted in the same interests or capacities, and that both claims ultimately sound in money. Whether the claims are similar in nature is irrelevant: Gye at 623; Re West End Networks Ltd (in liq) [2004] 2 AC 506. All of the requirements for mutuality are satisfied in the present case. 423 Finally, Mr Slattery says that there have been no "dealings" between Wines and Mr Irving for the purpose of the section: whatever Mr Irving has done which has given rise to his claim against Wines under the Indemnity Deed was done by him as a director of Wines, that is, as Wines' agent or alter ego – and that does not constitute a "dealing" between Mr Irving and Wines. 424 The answer to this submission is given succinctly in the following passage from the joint judgment in Gye (at 625): "The word [dealings] is, none the less, one of very wide scope which embraces far more than a legally binding contract or 'deal'. Even if it be correct to construe 'dealings' in s 86 as confined to a commercial or business setting, it covers the communings, the negotiations, verbal and by correspondence, and other relations which occur or exist in that setting. Whatever may be the outer limits of the word 'dealings' in s 86, it encompasses, as a matter of ordinary language, commercial transactions and the negotiations leading up to them." 425 "Mutual dealings" for the purposes of CA s.553C is a phrase of the widest import. Its construction is not to be limited by strict legal analysis of relationships. A common sense and pragmatic approach is required in order to do substantial justice, which is the very purpose of the section. A director acting in the course of his or her duties as such is "dealing" with the corporation in this pragmatic sense, within the meaning of the section. Likewise, the corporation is "dealing" with the director even though, as an incorporeal creature, it is passive in the relationship. For the purposes of the section, in this pragmatic sense the "dealing" between the director and the corporation is "mutual". 426 Mr Slattery's second submission is that Mr Irving is not entitled to a set off because "at the time of giving credit to the company or at the time of receiving credit from the company" he had notice of the fact that Wines was insolvent: CA s.553C(2). Mr Slattery submits that the time of giving or receiving credit for the purposes of the present case is the time when Mr Irving incurred contingent liability to the Commissioner, i.e. the time when the preferential payments were made by Wines. Mr Slattery says, correctly, that at that time Mr Irving knew that Wines was insolvent. 427 Mr Slattery has cited no authority in support of his submission. 428 The words of CA s.553C(2) are apt to a dealing involving a purchase, sale or other transaction in which credit for a sum of money is given by one party to another. However, the section is intended to have a far wider application than to such straightforward dealings. As the decision in Gye makes clear, "dealings" for the purposes of the section may not involve the exchange of any goods or services, let alone an exchange for valuable consideration. Accordingly, "giving credit" and "receiving credit" must be construed so as to find meaning in the particular context of any "mutual dealing" which is within the contemplation of the section. 429 In my opinion, the time of "giving credit" by Wines in the present case was when a contractual liability to indemnify Mr Irving was first undertaken by Wines pursuant to the Indemnity Deed, i.e. 5 September 2001. That Deed was intended to establish a contingent entitlement on the part of Mr Irving which could crystallise into a present entitlement on the occurrence of all kinds of unforseen events during the course of his directorship, some possibly occurring as a result of actions taken by him, some possibly occurring independently of any act or omission on his part. The only qualification to his entitlement under the Deed was that he had acted in good faith. 430 There is no suggestion that at the time that Mr Irving entered into the Indemnity Deed he knew that Wines was insolvent. 431 For these reasons, I hold that Mr Irving is entitled, pursuant to the Indemnity Deed and under CA s.553C, to set off against his liability to Wines under s.588M(2) the amount which he is required to pay to the Commissioner under CA s.588FGA(2). Set off under CPA s.21 432 CPA s.21 provides: " Defendant's right to set-off (1) If there are mutual debts between a plaintiff and a defendant in any proceedings, the defendant may, by way of defence, set off against the plaintiff's claim any debt that is owed by the plaintiff to the defendant and that was due and payable at the time the defence of set-off was filed, whether or not the mutual debts are different in nature. … (6) In this section, debt means any liquidated claim." 433 I would not have held that Mr Irving was entitled to a set off under CPA s.21(1). That section applies only where both debts to be set off are liquidated and the plaintiff's debt to the defendant is owing at the time that the defence is filed. Mr Irving would have to show that his claim against Wines under the Indemnity Deed was for a debt due as at the filing of his defence to the Insolvent Trading Claim. 434 Mr Irving could not claim indemnity under the Indemnity Deed until the Commissioner established a claim against him under CA s.588FGA(2). The Commissioner could not claim against Mr Irving until Wines had obtained judgment against the Commissioner: s.588FGA(1). Wines could not obtain judgment against the Commissioner until the Court had determined the defences to Wines' claim against the Commissioner which the Directors had been permitted to raise and conduct. Mr Irving could not, therefore, say that his right to indemnity against Wines under the Indemnity Deed was a liquidated claim which was due and payable at the time that he filed his defence to the Liquidators' claim under s.588M(2). MR IRVING'S CLAIM FOR CONTRIBUTION The issues 435 By his Cross Claim, Mr Irving claims equitable contribution from Mr Martini in respect of any amount for which he is found liable to the Liquidators under CA s.588M(2). Mr Irving submits that he and Mr Martini, as directors of Wines and Vineyards throughout the Period, were liable under CA s.588G(2) to perform the same obligation, namely, to prevent Wines and Vineyards from incurring debts when insolvent. He submits that, if both he and Mr Martini had been sued by the Liquidators, both of them would have been found liable for the same loss. Accordingly, he says, Mr Martini should be held liable to contribute 50% of any amount which Mr Irving is ordered to pay to the Liquidators. 436 In defence of the Cross Claim, Mr Martini says: – under CA s.588M(2), co-directors of a company who fail to prevent insolvent trading are not expressly made jointly and severally liable for a contravention and therefore do not have a common obligation or co-ordinate liability for the purposes of the doctrine of equitable contribution. Previous authority on the liability of co-directors for equitable contribution is no longer relevant because the terms of the legislation have changed; – Mr Martini can have no liability under s.588M(2) because he has not yet been found guilty of a contravention of s.588G(2); – Mr Martini cannot be found guilty of a contravention of s.588G(2) because, by s.588U, only the Liquidators in the present case could have brought such a claim and they have not done so. By his Cross Claim, Mr Irving seeks to subvert the decision of the Liquidators not to claim against Mr Martini; – Mr Martini would not have had a common, or any, liability under s.588G(2) if he had been sued by the Liquidators because: the Liquidators have not proved the insolvency of Wines and Vineyards during the Period; Mr Martini would have had a good defence under s.588H(2) in that he had reasonable grounds to expect, and did expect, that Wines and Vineyards were solvent and would remain solvent; Mr Martini would have had a good defence under s.588H(3) in that he had reasonable grounds to believe, and did believe, on the basis of information provided to him by competent and reliable people, that Wines and Vineyards were solvent; if he would otherwise have been liable, he would have had a discretionary defence under CA s.1317S and s.1318. Factual findings 437 I will deal first with the issues which are determined by the findings I have already made. 438 I have found that the Liquidators have proved the insolvency of Wines and Vineyards throughout the Period. This ground of Mr Martini's defence fails. 439 In the course of consideration of Mr Irving's defences, I have reviewed the facts known to the Boards of both companies as to the inability of Wines and Vineyards to pay their debts as they fell due. There can be no question that Mr Martini was acutely aware of the companies' inability to pay their debts as they fell due. He was the person with day-to-day responsibility for the running of the companies and he was obviously so concerned about the illiquidity of the Group that he voiced his concerns to the Boards "probably forty or fifty times" over the course of "hundreds of conversations" from December 2002 onwards: see paragraphs 181 and 204 above. 440 In a conference call with the other Directors on 23 December 2002, Mr Martini said that he regarded the companies' situation as "critical" and that the Group was "in serious danger of bankruptcy": see para 216 above. 441 I find that, regardless of whatever was said to him by Mr Spicer, accountants, lawyers and tax advisers, Mr Martini knew as a fact at all times during the Period that Wines and Vineyards were not paying their creditors' debts as and when they fell due. 442 Mr Martini was directly involved in negotiations with banks and financiers in attempts to sell assets and to effect a refinancing or restructuring of the Group. He knew at all times that the ability of Wines and Vineyards to raise new capital depended upon a quick and favourable resolution of the tax dispute with the ATO. 443 Mr Martini says that he relied on Mr Irving, who was conducting negotiations with the ATO, in forming the belief that the tax dispute would be resolved quickly and favourably. However, Mr Irving never told Mr Martini or the other directors that the ATO had given a firm assurance that it would accept Wines' settlement proposal, nor did he say that the ATO had given a firm commitment to give its decision by a certain date. 444 Mr Martini appreciated only too well that the timing of resolution of the tax dispute was completely "up in the air". In his affidavit of 13 February 2007 he gave this evidence (which I accept): "Regularly in the period from November 2002 to July 2003 Simon Spicer and I had conversations with Peter Poolman and Malcolm Irving both at Board meetings and generally in the day-to-day conduct of the business to the following effect: Martini: 'We've been down this road until I'm tired of asking this question and you're probably tired of answering. What the hell is really going on with the ATO? There is no time line, no memo, nothing except your assurances that discussions are continuing. Is it really going to end?' Mr Irving or Mr Poolman: 'Patience, hang in there. It will get solved. Just keep working your end of it. We'll get this thing sorted out. We're working with the ATO and we're confident we'll get there. Plus, we're working with due diligence through the proper channels with our tax advisers and their advice is that there will be a settlement.'" 445 I find that, from 1 October 2002 onwards, Mr Martini was aware that there were reasonable grounds for suspecting that Wines and Vineyards were insolvent. For the same reasons I have given in relation to Mr Irving's defences under CA s.588H(2) and (3), I am not satisfied, in the light of what Mr Martini actually knew, that he had reasonable grounds to expect that the companies were solvent at any time from 1 October 2002 onwards. Had Mr Martini been sued by the Liquidators together with Mr Irving, Mr Martini's defences would have failed for the same reasons. 446 The failure of Mr Martini's defences is not the result of any failure on the part of Mr Irving to disclose to the Boards of Wines and Vineyards information as to their true financial position, as Mr Martini alleges. Mr Irving was doubtless sanguine in what he told the other Directors as to the imminence of a decision from the ATO but he did not say, falsely, that a decision had been promised by any particular date. Mr Martini's discretionary defences 447 I turn now to Mr Martini's discretionary defences under s.1317S and s.1318. 448 For the reasons I have given in relation to Mr Irving's discretionary defences, I think that it was reasonable for Mr Martini to wait to see if Wines' submission to the ATO on 15 November 2002 would produce a quick and satisfactory resolution, enabling Wines and Vineyards to be rescued from insolvency. 449 At a Board meeting of Wines on 31 January 2003 at which Mr Martini was present, Mr Irving advised that he would be meeting Mr Evans on 6 February to advise of the effect that protracted resolution of the tax dispute was having on the Group's business. It was reasonable for Mr Martini to wait to see what would come of that meeting. 450 Mr Irving, in fact, met Mr Evans on 5 February. At that meeting Mr Irving formed the view that a decision by the ATO would not be made for some time, possibly up to ninety days. I infer that he communicated that view to Mr Martini by 7 February 2003 as, on that day, Wines sent a letter to the ASX, signed by Mr Spicer, advising that "a final resolution with the Australian Tax Office is not expected for some months". I assume that Mr Martini, as the CEO of Wines, was informed of the content of that announcement. 451 On 11 February 2003, Mr Spicer forwarded to the Directors, including Mr Martini, schedules detailing the current cash position and the debtors and creditors of the Group as at 7 February 2003. They showed creditors outstanding for ninety days and more were $1,208,477. A Management Report as at 15 February 2003, signed by Mr Martini and Mr Spicer: "The ANZ Bank facility is now fully drawn at $29,980,000, the remaining $20,000 being utilized for a guarantee with Australia Post Logistics. Debtors continue to be very closely monitored and approaches have been made to TFE to bring forward payment of amounts owing. For various reasons, TFE are not in a position to do this. Creditors continue to age due to the cash constraints and are being managed on a daily basis. The cash flow requirements of the business have been discussed at length with our financiers, ANZ, Asset Underwriting/Gerling and with International Wine Investment Fund. They remain concerned and are reconsidering their respective positions now that they have the preliminary 2004 budget and 2005 projections. Management continues to reassess and refine these budgets/projections and to investigate all opportunities for increasing the availability of working capital either through new facilities or some form of equity. Updates year end forecast The February 2003 month end results are currently being finalised and accordingly the year end forecast will be included with these reports, as will the balance sheet. Efforts continue to sell excess bulk wine to generate cash flow and provide capacity for the 2003 Vintage. It should be noted that some operational constraints have been imposed for the second half of fiscal 2003 due to the postponement of planned capital expenditure. Debt Covenants The balance sheet ratios at 31 December 2002 indicate that certain bank covenants are not being complied with. This occurred when the provision for bad debt associated with CML was adjusted in the final revised 30 June 2002 accounts. The summons to wind up CH Finance has been deferred until 7 March 2003 and the settlement discussions with ATO continue. Our financiers have been kept fully informed and are reviewing their positions." 452 In a letter to the Directors of Wines dated 27 February 2003, Mr Martini and Mr Spicer say: "There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable, provided that, as outlined in Note 1(z) to the financial statements, alternative finance arrangements are finalised for the Redeemable Convertible Preference Shares, that no significant amount is payable to the Australian Taxation Office ("ATO"); and that sufficient working capital will be available upon release of the ATO application to wind up a subsidiary company." 453 From these documents it is plain that as at 7 February 2003 Mr Martini must have been aware that a time frame for the Reynolds Group being able to settle its dispute with the ATO and realise assets to pay Wines' and Vineyards' debts as they fell due was no clearer than it had been at the end of December 2002. He must have been aware that Wines and Vineyards, if they continued to trade, would continue to incur debts, many of which could not be paid within anything like their normal trading terms. Indeed, as evidenced by his letter of 27 February 2003, he must have realised that if the dispute with the ATO was not resolved favourably and very quickly, Wines and Vineyards could not be rescued from their present insolvency. 454 As in the case of Mr Irving, there is no evidence to suggest that in permitting Wines and Vineyards to trade from October 2002 onwards, Mr Martini acted with anything other than complete honesty and with an earnest desire to achieve the best result for the creditors, shareholders and employees of the Reynolds Group. 455 The evidence does not enable me to decide whether Mr Irving told Mr Martini of the result of his discussion with Mr Evans earlier than 7 February 2003. I conclude that by at least that date, Mr Martini knew that resolution of the dispute with the ATO was, at best, several months away. 456 Mr Martini says that, in effect, he relied reasonably on assurances from Mr Irving and Mr Poolman that the dispute with the ATO "will get solved". He says that he was told: "Patience, hang in there … just keep working your end of it. We'll get this thing sorted out." : see para 444. 457 Mr Martini was no mere employee of Wines and Vineyards; he was also a director. In discharging the duties of that office, he was not subordinate to Mr Irving or Mr Poolman. He was obliged to form his own judgment as to whether he could properly permit the companies to keep trading while insolvent. The law does not permit him to abrogate that responsibility by obeying a direction from Mr Irving or Mr Poolman to "have patience" or "hang in there". He could not justifiably leave it to Mr Irving and Mr Poolman to "sort out" the problem which both created Wines' and Vineyards' insolvency and prevented their rescue from insolvency, no matter how long that process of "sorting out" might take. He, like all the Directors, had to ask and honestly answer the hard questions: see par 269ff. 458 For the reasons which I have given in respect of Mr Irving's discretionary defence, I conclude that Mr Martini could not justifiably have permitted Wines and Vineyards to continue trading insolvently past 7 February 2003. 459 I find that if the Liquidators had claimed under s.588M(2) against Mr Martini, Mr Martini's defence under s.588H(2) and (3) would not have succeeded and his defence under s.1317S and s.1318 would have been successful only to the extent of exonerating him from liability for debts incurred up to and including 7 February 2003. He would have been liable under s.588M(2) to pay compensation for debts incurred on and from 8 February 2003. Whether equitable contribution available 460 In Burke v LFOT Pty Ltd (2002) 209 CLR 282, Gaudron ACJ and Hayne J said at [114]: "In general terms, the principle of equitable contribution requires that those who are jointly or severally liable in respect of the same loss or damage should contribute to the compensation payable in respect of that loss or damage, either equally where they are liable in the same amount or proportionately, where the amount of their liability differs. The principle has regularly been applied between co-sureties, co-insurers, partners, co-owners, where payment is made by one in discharge of a common liability, and co-trustees who are in pari delicto. The doctrine of equitable contribution applies both at common law and in equity. It is usually expressed in terms requiring contribution between parties who share 'co-ordinate liabilities' or a 'common obligation' to 'make good the one loss'. More recently, in BP Petroleum Development Ltd v Esso Petroleum Co Ltd , the right to contribution was said to depend on whether the liability was 'of the same nature and to the same extent'." 461 Mr Jackman relies upon the decision of Giles J (as he then was) in Spika Trading Pty Ltd v Harrison (1990) 19 NSWLR 211 in which his Honour held that the joint and several liability for insolvent trading which s.556(1) of the Companies (NSW) Code (1982) expressly imposed on co-directors gave rise to a common obligation or co-ordinate liability, so that where one director was sued he could claim equitable contribution from his co-directors who had not been sued. 462 Mr Stoljar of Counsel, who appears for Mr Martini, submits that the law, as stated in Spika Trading, is no longer applicable because, unlike s.556(1) of the Companies Code, CA s.588M(2) does not expressly impose joint and several liability on co-directors. He says that the structure of CA Pt 5.7B now requires that for any director to be liable for insolvent trading, he or she must be sued directly by a person authorised under s.588J, s.588K, s.588M(2) or s.588M(3), i.e. by ASIC, the liquidator or a creditor of the company. He submits that a director who has not been sued under one of these provisions cannot be made liable indirectly for insolvent trading by a claim for contribution brought by another director who has been sued. 463 I am unable to accept Mr Stoljar's submission. If correct, long established law would have been radically altered by implication, for no apparent policy reason. 464 The reference in s.556(1) of the Code to joint and several liability on the part of directors was superfluous and unnecessary. The section imposed liability on each person who was a director at the time of insolvent trading; each director could be sued alone, or together with other directors, at the election of the plaintiff. The liability of one director was common to all, as the claim was for recovery of a specific debt, or specific debts. In those circumstances, even if s.556(1) had omitted reference to joint and several liability, the law itself would have classified the liability of co-directors as joint and several. 465 The doctrine of equitable contribution, well understood as part of the common law since Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184, clearly applied to enable a single director who had been sued under s.556(1) to claim contribution from co-directors who had not been sued. In Spika, Giles J did not suggest that the doctrine of equitable contribution would not have been applicable as between co-directors had it not been for the express reference to joint and several liability in s.556(1). His Honour merely referred to the explicit statement of the nature of the liability as confirming the application of the common law doctrine. 466 This must be so, because liability to equitable contribution under the common law does not depend upon the existence of joint and several liability. The doctrine applies where there is joint or several liability. What is essential is that the person from whom contribution is sought is liable for the same loss as the person claiming contribution, even though their liabilities arise under different causes of action: see Burke (supra); Street & Halls v Retravision (NSW) Ltd (1995) 56 FCR 588, at 597; Bialkower v Acohs Pty Ltd (1998) 83 FCR 1, at 12. 467 As was the case under s.556(1) of the Code, joint and several liability of co-directors for insolvent trading follows, as a matter of law, from the nature of the liability created by CA s.588M(2) and (3): each person who was a director during the period of insolvent trading, and who cannot make out a defence, is liable to compensate for the same loss by reason of contravention of the same statutory prohibition in s.588G(2). That is sufficient to attract the doctrine of equitable contribution. 468 I am unable to accept Mr Stoljar's next submission that Mr Martini could not be liable for contribution because he has not been sued directly by the Liquidators. Ex hypothesi, the doctrine of equitable contribution is applicable where the person from whom contribution is sought has not been sued although he or she could have been sued. The person claiming contribution must show that, had the co-obligor been sued, he or she would have been liable for the same loss, or a proportionate part of the same loss. 469 In the present case, I have found that Mr Irving is liable under s.588M(2) for debts incurred from 6 February 2003 onwards. I have found that Mr Martini, if he had been sued by the Liquidators, would have been liable for debts incurred from 8 February 2003 onwards. Mr Irving and Mr Martini therefore have a common liability for debts incurred on and from 8 February 2003. I conclude that the doctrine of equitable contribution requires that, as between Mr Irving and Mr Martini, Mr Martini is liable to contribute fifty per cent of the amount for which Mr Irving is liable to the Liquidators in respect of debts incurred on and from 8 February 2003 Set off or contribution 470 Paragraph 8 of Mr Martini's Amended Defence to Mr Irving's Cross Claim reads: "In further answer in whole or part to the Cross Claim, the First Cross Defendant says that by operation of section 553C of the Corporations Act 2001 and by way of equitable set-off, he is entitled to a set-off for any monies ordered to be paid by him to the Cross Claimant (which is denied) for any monies paid by the First Cross Defendant to the Commissioner of Taxation pursuant to orders made in proceedings no 2685 of 2004." 471 I do not follow what this pleading means. First, I do not see what relevance CA s.553C has. Mr Irving is not a corporation in liquidation. I do not understand how a set off under the Corporation Act can be available against him. 472 Second, the words of the pleading do not make literal sense. I think that there must be typographical error and that what the pleading intends to claim is a set off against any monies ordered to be paid by Mr Martini to Mr Irving equal to the amount of any monies paid by Mr Martini to the Commissioner in respect of the Unfair Preference Proceedings. 473 Mr Stoljar has made no submissions on this claim. However, I suspect that what is meant is that if Mr Martini pays the Commissioner more than his proportionate share of the judgment debt in the Unfair Preference Proceedings, Mr Martini will be able to set off the excess against the amount he owes to Mr Irving under Mr Irving's Cross Claim. 474 Mr Martini, Mr Irving and Ms Yates have a common liability to the Commissioner under s.588FGA(2). All three are liable for those preferential payments made to, and recoverable from, the Commissioner up to 30 June 2003, when Ms Yates resigned. Mr Martini and Mr Irving have a common liability for the preferential payments made after 30 June 2003. 475 For the reasons discussed earlier, each of Mr Martini, Mr Irving and Ms Yates is liable in equity to make equal contribution to the judgment for their common liability. If Mr Martini pays to the Commissioner the whole of the judgment debt in respect of the preference payments made during the period up to 30 June 2003, he would be entitled to call on Mr Irving to repay to him one-third of that amount, and he would be entitled to set off what Mr Irving owes to him by way of equitable contribution against the amount which he owes to Mr Irving under Mr Irving's Cross Claim for equitable contribution to the judgment for insolvent trading. 476 The same principles apply if Mr Martini pays to the Commissioner the whole of the judgment debt in respect of the preference payments made after 30 June 2003. Mr Martini would be entitled to equitable contribution of one-half of that amount and would be entitled to a corresponding set off against what he owes to Mr Irving under Mr Irving's Cross Claim. 477 These consequences follow as a matter of law. I do not think that I need to make orders or declarations about them, unless a particular problem arises in the working out of the orders to be made in accordance with these reasons for judgment. MR MARTINI'S CROSS CLAIM The issues 478 In the event, as has happened, that Mr Martini is found liable on Mr Irving's Cross Claim for equitable contribution, Mr Martini cross claims against Ms Yates for equitable contribution to whatever amount he is required to pay to Mr Irving. 479 Ms Yates was a director of Wines and Vineyards from the commencement of the Period until she resigned on 30 June 2003. Ms Yates resigned because she was uncomfortable with the protracted delay in resolving Wines' dispute with the ATO. 480 Ms Yates' defences to Mr Martini's Cross Claim mirror Mr Martini's defences to Mr Irving's Cross Claim. She contends that equitable contribution is not available from her because if she had been sued by Mr Irving directly, together with Mr Martini, the claim would have failed because: – the Liquidators have not proved the insolvency of Wines or Vineyards; – a cross claim for equitable contribution to a judgment obtained under s.588M(2) which is made by a co-director against another co-director is bad in law; – Ms Yates would not have been found liable under s.588M(2) if she had been sued directly by the Liquidators or by Mr Irving for contribution, because she has good defences under s.588H(2) and (3) or would have been exonerated under CA s.1317S and s.1318. Findings 481 For the reasons earlier given in relation to Mr Irving's defence and Mr Martini's Cross Claim, the first and second grounds of Ms Yates' defence cannot succeed. I will deal now with her contentions as to her defences under s.588H(2) and (3) and s.1317S and s.1318. 482 Ms Yates' experience is primarily in international marketing. She says that prior to joining the Boards of Wines and Vineyards, Mr Irving told her that her responsibilities would be to attend Board meetings, to serve on one or two committees and, in particular, to focus on the Group's sales and marketing operations. 483 Ms Yates is far from inexperienced in financial matters. Prior to accepting appointment as a director of Wines and Vineyards she spoke to key staff, and asked her accountant to investigate and report on the Group's operations. She was aware of the nature of the tax dispute between Wines and the ATO before she accepted appointment as a director. Before and after her appointment, she says, she relied on Mr Irving's assurances that the tax dispute would be resolved. 484 Ms Yates says, and I accept, that throughout her directorship of Wines and Vineyards she attended Board meetings either in person or by telephone, diligently read the Board papers provided before each meeting, and diligently read the Board Minutes to ensure that they accurately recorded what had transpired. She also attended monthly sales and marketing meetings with key staff. She, in common, with the other Directors, regularly received e-mails from Mr Martini and Mr Spicer, including those which showed that the companies were not paying their debts as they fell due, and that their liquidity crisis was worsening. Ms Yates says, and I accept, that she diligently read these e-mails. 485 There can be no dispute that, from October 2002 onwards, Ms Yates was aware that Wines and Vineyards were not paying their debts as they fell due. She was party to the Board's discussions in which the possibilities of selling assets and raising new capital were explored. She was fully aware that funds were necessary to pay the debts of Wines and Vineyards in full as they fell due could not be raised unless and until the dispute with the ATO was resolved in favour of the Group. 486 I find that from 1 October 2002 onwards Ms Yates was aware that there were reasonable grounds for suspecting that Wines and Vineyards were insolvent. For the same reasons I have given in relation to Mr Irving's and Mr Martini's defences under s.588H(2) and (3), because of Ms Yates' actual knowledge of the financial positions of Wines and Vineyards, I am not satisfied that she had reasonable grounds to expect that the companies were solvent at any time from 1 October 2002 onwards. Ms Yates' discretionary defences­ 487 I turn now to Ms Yates' discretionary defences under s.1317S and s.1318. 488 For the reasons I have given in relation to Mr Irving's and Mr Martini's discretionary defences, I think it was commercially justifiable for Ms Yates to wait to see if Wines' submissions to the ATO on 15 November 2002 would produce a quick and satisfactory resolution of the tax dispute, so that Wines and Vineyards could be rescued quickly from illiquidity. 489 Ms Yates says that while she did not attend the Board meeting of 31 January 2003, she later read the Minutes of that meeting and was aware that Mr Irving was to have a meeting with the ATO on 6 February 2003 at which he would attempt to bring the tax dispute to some resolution. 490 There is no direct evidence that Mr Irving told Ms Yates shortly after his meeting with Mr Evans on 5 February 2003 that in Mr Irving's view it could be another three months before a decision was made by the ATO. While I am prepared to infer that Mr Martini, as CEO of Wines, saw the ASX announcement of 7 February 2003, I do not feel justified in drawing that inference for a non-executive director such as Ms Yates. 491 However, part of the Board papers for Board meetings of Wines and Vineyards for 17 February 2003 was a Management Report which contained the statement "the settlement discussions with ATO continue". Ms Yates cannot recollect if such a Board meeting took place (there is no Minute of that meeting in evidence). However, I am satisfied that Ms Yates read the Board papers for that meeting not later than 17 February 2003, whether or not she attended such a meeting. 492 It is reasonable to deduce that at some in February 2003, Ms Yates was informed of Mr Irving's estimate of the further time required for a resolution with the ATO, as it had appeared in the ASX announcement. She received the letter dated 27 February 2003 signed by Mr Martini and Mr Spicer, which stated that there were reasonable grounds to believe that Wines was solvent provided that the tax dispute was resolved satisfactorily. 493 If Ms Yates did not actually enquire from Mr Irving shortly after 5 February 2003 what was his view as to the time required to settle the tax dispute, she ought reasonably to have done so. She was far from naive in commercial matters, particularly in regard to the dangers inherent in insolvent trading. In cross examination, she said that she had been Chair of another company, Terra Planet, which had had financial difficulties and in late 2002 and in 2003 she had been receiving legal advice as to her possible liability for insolvent trading. 494 Ms Yates resigned on 30 June 2003 but had been nervous about her position long before that. In her e-mail to Mr Irving giving notice of her resignation she had said that "the ATO deferment", i.e. the ATO's failure to give a decision, was "the last straw". She gave this evidence: "Q. There is a sentence that says 'I'm no longer able to make any worthwhile contribution to the Reynolds board and the ATO deferment was just the last straw'. Do you see that? A. Yes, I do. Q. Continuing on with your metaphor, what were the other straws before the last straw? Jackman: Well – if the witness understands – Witness : The deferment before that, and the deferment before that, and the deferment before that. We had, from about January of 2003, been expecting imminently a settlement with the ATO, and it just seemed to be being pushed ever further into the future. Flynn: And was it as a result of your concern that no resolution with the ATO was imminent that you resigned or was there some other reason? A. I didn't know if it was imminent or not. It was the uncertainty that caused my resignation. Q. Did you have any conversations with Mr Irving prior to 30 June 2003 in which you expressed to him the view that you were getting nervous of the position of either Reynolds Wines Limited, or any of the other companies in the group, and that nervousness arose as a result of your involvement in the insolvency of Terra Planet? A. I did discuss the insolvency of Terra Planet and the fact that I was involved in those proceedings, because the chairman of Reynolds had a right to know that. I did tell him some of the issues that I was dealing with. I did not discuss with him the possibility of insolvency with Reynolds because I didn't believe that to be an issue at the time. Q. So your concern in resigning was, it was simply the fact that you didn't know when the ATO proceedings were going to resolve? A. That's right. Q. But merely not knowing when the ATO proceedings were going to resolve wouldn't in itself be a reason to resign, would it? A. It would be true to say I was in a heightened state of awareness of insolvency issues because of Terra Planet. I did not believe Reynolds to be insolvent at the time but I knew that the longer that it was deferred that that moment must inevitably come and, given my experience with Terra Planet, I lost my nerve." 495 As I have noted, the evidence does not enable me to say exactly when in February 2003 Ms Yates learned from Mr Irving that a decision from the ATO was months away. Her curiosity as to the result of Mr Irving's meeting with Mr Evans on 5 February must have been aroused when she read statements in the Board papers of 17 February and in Mr Martini's letter of 27 February that the dispute with the ATO was still continuing. To my observation, Ms Yates is a capable, energetic and forthright person. From late 2002 onwards she was anxious about her own possible liability for insolvent trading as a director of the Reynolds Group. I do not doubt that she would have made it her business to enquire directly from Mr Irving what had been the result of his meeting with Mr Evans. I infer that she obtained Mr Irving's answer by the end of February 2003, at the very latest. 496 Ms Yates was in no doubt that a favourable settlement with the ATO was by no means assured. At T923.57-T924.30 she said: "Q. You were very well aware of the consequences that could flow from a non payment of tax? A. Yes. Q. And in business you don't know, in any sort of negotiation, what the other side are going to do, do you? A. No. Q. It is speculation, isn't it? A. When Mr Irving reported to the board that the ATO wished to settle the matter, I didn't regard that as speculation. Q. But the terms of any settlement were entire speculation, weren't they? A. They were, although the board had provided an outline to Mr Irving of the sort of framework in which they thought a settlement would occur. Q. But that depended on the ATO, didn't it? A. Pardon? Q. That depended on the ATO? A. Well, it seemed to me there were two parties to the dispute; there were issues that remained unresolved; and we believed that there might be ground for some – I hesitate to use the word – 'settlement', but there were issues in dispute and we believed that we might be successful. Q. Well, it just might be, mightn't it? A. There was no certainty." 497 For the reasons which I have explained in relation to Mr Irving's and Mr Martini's discretionary defences, I conclude that, from 1 March 2003 onwards, Ms Yates could not justifiably hold the view that Wines and Vineyards could pay the debts which they had incurred, and which they were about to incur, in anything like the time frame, or with anything like the degree of probability, that creditors would have allowed when they supplied goods and services. If Ms Yates had been sued by the Liquidators together with Mr Irving under CA s.588M(2) she would have had a good discretionary defence under CA s.1317S and s.1318 for debts incurred up to 28 February 2003, but not for the period from 1 March 2003 to 30 June 2003. Ms Yates and Mr Martini therefore have a common liability for debts incurred for that period. I conclude that the doctrine of equitable contribution requires that, as between Mr Martini and Ms Yates, Ms Yates is liable to contribute fifty percent of the amount for which Mr Martini is liable to Mr Irving in respect of debts incurred from 1 March 2003 to 30 June 2003. UNFAIR PREFERENCE PROCEEDINGS Findings 498 The Liquidators have proved all the elements of their claim against the Commissioner for the unfair preference payments alleged in paragraphs 7 and 14 of the Statement of Claim. The issues arising from the defences of Mr Irving, Mr Martini and Ms Yates ("the Directors") to the Commissioner's claim for indemnity CA s.588FGA(2) may be dealt with summarily because of the findings I have previously made. 499 The Directors fail in their defences that: – the Liquidators have not proved Wines' insolvency at any time in the Period; – the payments by Wines to the Commissioner were not insolvent transactions within the meaning of CA s.588FC. 500 The Commissioner has conceded that he has no defence to the Liquidators' claims under s.588FG(1). The Directors have adduced no evidence which could support the contention that, had the Commissioner sought to maintain any such defence, it would have succeeded. Defences to the Commissioner's indemnity claim 501 In defence of the Commissioner's claim under s.588FGA(2) the Directors seek to raise defences under s.588FGB(3) and (4). Those defences rely upon exactly the same facts and circumstances as the Directors' defences, or putative defences, under s.588H(2) and (3) to an insolvent trading claim brought by the Liquidators. For the reasons which I have given earlier in relation to those defences, the Directors' defences under s.588FGB(2) and (4) also fail. 502 In further defence of the Commissioner's claim, the Directors rely upon the exoneration provisions of CA s.1317S and s.1318B. Mr Stoljar of Counsel very properly draws attention to the recent decision of White J in Palmer v Commissioner of Taxation [2006] NSWSC 1253 in which his Honour held that no order under s.1318 could be made in respect of a claim by the Commissioner against a director under s.588FGA because the Commissioner's proceedings were not brought for "negligence, default, breach of trust or breach of duty" within the meaning of s.1318 but, rather, arose from the fact that the directors held office at the relevant time and could not establish defences under s.588FGB. 503 Mr Stoljar submits that I should not follow the decision in Palmer and he advances a learned argument in support of his submission. 504 I have resisted the temptation to add a dozen or so unnecessary pages to this judgment. Even if a defence under s.1318 were available in law, it would have failed. For the reasons I have given, by the time of the first preferential payment to the Commissioner on 3 March 2003, the exoneration from liability which I would have afforded the Directors under s.1317S and s.1318 for insolvent trading had come to an end. Conclusion 505 For these reasons, I conclude that: – the Liquidators are entitled to judgment against the Commissioner in proceedings 2685 of 2004 in the amount of the preferential payments, together with interest; – Mr Irving, Mr Martini and Ms Yates are liable to indemnify the Commissioner under CA s.588FGA(2) in respect of the amounts claimed against them respectively by the Commissioner. 506 I will deal with costs on another occasion. THE CLAIM AGAINST MR POOLMAN Findings 507 The Liquidators, with leave under s.58(3) Bankruptcy Act, claim against Mr Poolman under CA s.588M(2) for the purpose of proving in his bankrupt estate. Neither Mr Poolman nor his trustee in bankruptcy have contested the Liquidators' claim. However, Mr Poolman filed a Verified Defence raising the same defences as did Mr Irving. I must be satisfied on the evidence that the Liquidators' case is proved and that Mr Poolman's defences do not succeed. 508 The factual findings which I have made in relation to Mr Irving's defences enable me to deal with the issues summarily. 509 The Liquidators have proved the insolvency of Wines and Vineyards throughout the Period. Mr Poolman, as a director of both companies, participated in Board meetings and received all of the financial information from Mr Martini and Mr Spicer which was sent to Mr Irving and the other Directors. His knowledge of the state of negotiations with the ATO was at least equal to, and probably better than, that of Mr Martini because Mr Poolman had been involved directly in negotiations with the ATO before Mr Irving took over in December 2002. Conclusions 510 I am satisfied that, because of the actual state of Mr Poolman's knowledge of the financial position of Wines and Vineyards throughout the Period, his defences under CA s.588H(2) and (3) fail. 511 For the same reasons as apply to Mr Irving, I am satisfied that although Mr Poolman contravened CA s.588G(2) he nevertheless acted honestly, for the purposes of a defence under CA s.1317S and s.1318. 512 There is no direct evidence as to when Mr Poolman learned of Mr Irving's discussion with Mr Evans on 5 February 2003, and that Mr Irving had then formed the view that a decision could not be expected from the ATO for some months. For the same reasons as I have given above in relation to Ms Yates, I infer that Mr Poolman must have learnt of Mr Irving's view by the end of February 2003 at the latest. For the reasons given above in relation to Mr Martini and Ms Yates, I would exonerate Mr Poolman for liability for debts incurred by Wines and Vineyards from 1 October 2002 to 28 February 2003. He will be liable for debts incurred on and from 1 March 2003. SECTION 37A CLAIM Introduction 513 The Liquidators originally sought declarations pursuant to s.37A Conveyancing Act 1919 (NSW) against Mr Poolman and his wife avoiding three transactions into which they had entered, as having been carried out with the intent of defrauding Mr Poolman's creditors. 514 Since the commencement of these proceedings Mr and Mrs Poolman have been made bankrupt. The Liquidators now do not seek relief in respect of the second and third transactions. They have obtained leave to continue these proceedings against Mr Poolman for relief in respect of the first transaction. Leave is not required under s.58(3)(b) Bankruptcy Act to proceed against Mrs Poolman in respect of this claim because the claim is not in respect of a debt provable in her bankrupt estate. 515 Nevertheless, Mr and Mrs Poolman and their bankruptcy trustees have been duly notified of the proceedings in case any of them wished to participate in any way. Neither Mr and Mrs Poolman nor their respective trustees have appeared. 516 I am satisfied that it is appropriate to determine the Liquidators' claim in the absence of Mr and Mrs Poolman and their respective trustees. Although the claim is not contested, I must be satisfied by the evidence that the Liquidators are entitled in law to the relief which they seek. The facts 517 As at 1 December 2003 Mr Poolman was the sole director of Kalivise Pty Ltd. There was one issued share in Kalivise, which was owned by Mr Poolman. Kalivise was co-owner with Sennabeau Pty Ltd as tenant-in-common in equal shares of a property known as "Bowan Downs", in Cargo Road, Lidster near Orange. Mrs Poolman was the sole director and sole shareholder of Sennabeau. 518 Bowan Downs was a property of about 700ha and was the residence of Mr and Mrs Poolman. As at December 2003 it had a market value in excess of $3.5M. There was no registered mortgage or other encumbrance over the property. 519 The Liquidators were appointed as Administrators of the Reynolds Group on 4 August 2003. On 18 September 2003 they reported to creditors of the Reynolds Group that, in their preliminary view, there was a strong prima facie case of insolvent trading by the directors of the Group, including Mr Poolman. Litigation to enforce the claim was foreshadowed as possible. Mr Poolman received a copy of that Report at the time of its issue. 520 On 10 November 2003, the Administrators issued a second Report to Creditors. Mr Poolman received a copy. In that report, the Administrators confirmed their opinion that an insolvent trading claim lay against the directors of the Group and advised that, since none of the directors had Directors and Officers Insurance, recovery would be limited to their available personal assets. 521 On 25 November 2003, Wines and Vineyards were placed in liquidation. On 28 November 2003 the Liquidators filed Summonses for the examination of Mr Poolman and other Directors. The Summons was served on Mr Poolman on 3 December 2003. 522 Mr Poolman was examined before the Registrar on 17 December 2003. No question was then asked about ownership of Bowan Downs. The examination of Mr Poolman was stood over, part-heard, to 19 February 2004. 523 Prior to the resumption of Mr Poolman's examination, the Liquidators discovered that a property, resembling in description Bowan Downs, had been placed on the market for sale in January at a price of about $4.35M. However, the advertisement described the property as "on the Cudal Road", rather than "in Cargo Road". Apparently, Cargo Road leads to the township of Cudal. 524 On 5 February 2004, the Liquidators' solicitors wrote to Mr Poolman's solicitors, saying that on their instructions a "property in Cudal Road" in which Mr Poolman had an interest had been place on the market for sale. The letter advised that it was the Liquidators' intention to commence insolvent trading proceedings against Mr Poolman for a sum exceeding $2M. The letter sought an undertaking to provide three days' notice of an intention to accept an offer for sale of the property, and to provide information relation to the proposed sale. 525 Mr Poolman's solicitors responded by a letter dated 10 February 2004 as follows: "1. We are instructed that Mr Poolman does not have an interest, either proprietary, beneficial or commercial in a property in Cudal Road, Orange. Mr Poolman has never resided nor has he ever owned a property in Cudal Road, Orange. 2. Therefore the questions and undertaking requested by you are not applicable to our client. 3. As this information is clearly incorrect, our client requests the source of the information so that he can address this issue to prevent further misinformation in the future." 526 On resumption of Mr Poolman's examination on 19 February 2004, Mr Poolman admitted, after some questioning, that the property described at "Cudal Road", which had been placed on the market, was indeed Bowan Downs. He said that it had been placed on the market in January 2004 by his wife. He denied having an interest in the property. He said that on a date in December 2003, which he could not then remember, he had transferred his share in Kalivise to his wife for one dollar. He said that that consideration was "at full value". 527 Mr Poolman said that he had not obtained a "formal" valuation of Bowan Downs before making the transfer of the share in Kalivise. However, he said that he had obtained informal valuations in November and December 2003 which placed the market value of the property in the range of $3M to $3.5M. Those valuations were not in writing. 528 Mr Poolman said that, in deciding to effect the transfer, he had obtained advice from his accountant and solicitor (who happened to be Mr Alan Jessup). He said that the transfer of his share in Kalivise was not in performance of any contract with Mrs Poolman. 529 Mr Poolman explained that the value of his share in Kalivise was no more than a dollar because Kalivise owed $1.75M to a company called Centre for Agricultural Management Pty Ltd ("CARM"), the value of Kalivise's interest in Bowan Downs, about $1.75M according to his "informal valuations", was reduced to nil by Kalivise's indebtedness to CARM. CARM was co-owned by Poolmans Pty Ltd, the shareholding of which was owned equally by Mr and Mrs Poolman. 530 Mr Poolman was asked in his examination why he transferred the share in Kalivise to Mrs Poolman if he considered it valueless. He gave this evidence: "Q. You said to us this morning that you transferred the share at the time that you did – these may not be the exact words – because you wanted to regularise the position in December 2003, at a time when you became aware that the liquidator may be conducting examinations? A. Privilege. I wanted to regularise the position, I think you are quite right, but I'll say it in a slightly different way. Q. How would you say it? A. I wanted to regularise the position when I realised that I had no further assets to support my borrowings. Q. Well, that's why [sic] want to question you, Mr Poolman. Whether you did this transaction or not, that is you transferred the share, your evidence would be, would it not, that your asset position was unchanged other than – well, it was unchanged? A. Privilege. That's correct. Q. Why did you do that transaction at all? A. Privilege. Exactly the reason that I said. I was holding a share and that share was valueless. I wanted, to use your words, regularise my position. I have also, as you would know and no doubt have seen, resigned all directorships simply seeking to get on with my life. Q. Why would you bother to transfer a valueless share at that particular time. A. Privilege. Simply to clarify the actual position. Q. Well, what advantage by way of clarification did you seek to derive from the transfer? I'm just trying to understand what it was that you say … A. Privilege. The ownership is seen as the ownership is. Q. What does that mean? A. Well, I had no equity in the whole venture. Q. Well, why didn't you just leave it in your name? A. Privilege. I preferred not to. Q. Why? A. Privilege. I have no further explanation. I've given you every response that I have." 531 In a later affidavit, Mr Poolman swore that the transfer of his share in Kalivise had been executed on 1 December 2003 and that, simultaneously, Mrs Poolman had been appointed a director and he had resigned as a director. He said that on 17 December 2003 a further share in Kalivise had been issued to Mrs Poolman, although he did not disclose this information in his examination on 19 February 2004. 532 A Notice of Change to Company Details filed with ASIC on 2 December 2003 records Mr Poolman's resignation as a director of Kalivise, but it does not record the transfer of Mr Poolman's share to Mrs Poolman. The Liquidators' submissions 533 The Liquidators submit that I should conclude that in transferring the share in Kalivise to Mrs Poolman on 1 December 2003, Mr Poolman had an actual intent to remove from the reach of the Liquidators a valuable asset, i.e. a share representing half the value of Bowan Downs. They say that this conclusion is supported by the following facts and circumstances: – the transfer took place very shortly after Mr Poolman learned that there was a real and imminent prospect that the Liquidators would commence insolvent trading proceedings against him; – the transfer was for one dollar; – the transfer was to his wife; – no proper and documented valuation of the share or of Bowan Downs was obtained in support of the transaction; – no accounts of Kalivise, Sennabeau and CARM were available at the time of the transaction, nor were they produced afterwards, showing the alleged state of indebtedness of Kalivise and showing that Mr Poolman's share could be accepted as having a nil value; – Mr and Mrs Poolman had placed Bowan Downs on the market in January 2004, shortly after the transfer of Mr Poolman's share; – when the Liquidators' solicitors enquired from Mr Poolman's solicitors whether Bowan Downs had been placed on the market, a disingenuous answer was given that Mr Poolman had no interest in any property at "Cudal Road", despite the fact that that was the address of Bowan Downs shown in the advertisement for sale of the property. 534 The Liquidators submit that Mrs Poolman must have been aware of Mr Poolman's intent in carrying out the share transfer so that Mrs Poolman was not a purchaser for value without notice. Whether share transfer void 535 Section 37A(1) Conveyancing Act provides: "Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930 , with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced." 536 There is no doubt that the Liquidators, as persons intending to bring proceedings on behalf of Wines and Vineyards against Mr Poolman at the time of the share transfer, were persons "prejudiced" by the transfer within the meaning of the section, and that they thereby had standing to make this application. The transfer had the effect of placing beyond the Liquidators' reach an asset which would otherwise have been available to satisfy a judgment debt obtained against Mr Poolman: see Silvera v Slavic (1999) 46 NSWLR 124; Langdon v Gruber [2001] NSWSC 276 at [59], [60] per Austin J. 537 I am satisfied on the evidence provided by the Liquidators that they have proved the facts which they assert. 538 I accept the submissions of the Liquidators as to the conclusion which should be drawn from the facts proved. The timing of the transfer, the informality of the transaction, the lack of support documentation – particularly, documentation giving any substance to Mr Poolman's assertion that the share was valueless – all strongly suggest that the transfer was effected with the express intent of placing Mr Poolman's interest in Bowan Downs beyond the reach of the Liquidators if they should launch these proceedings. 539 I am confirmed in this inference by the content of the letter which Mr Poolman's solicitors sent in response to the Liquidators' enquiries about Mr Poolman's interest in Bowan Downs. That letter, obviously written on instructions from Mr Poolman, was deliberately misleading. Mr Poolman could not have been in any doubt that the property referred to by the Liquidators, described in the real estate agent's advertisement as "on the Cudal Road", was Bowan Downs. 540 I am satisfied that Mrs Poolman was aware of the share transfer and its purpose. The evidence shows that in early January 2004 a loan of $2.4M from the ANZ Bank was obtained by a company of which Mr and Mrs Poolman were directors. The approval letter is dated 8 January 2004 and was sent to Mr and Mrs Poolman at Bowan Downs. The letter was addressed: "Dear Peter and Constance". Mrs Poolman subsequently signed the loan documents. Mr Poolman said that it was Mrs Poolman who placed Bowan Downs in the hands of real estate agents. There is no evidence to suggest that Mr and Mrs Poolman were estranged at this time. The evidence strongly suggests that they were co-operating in ordering their financial affairs. I infer that Mr Poolman told Mrs Poolman about the transfer of his share in Kalivise and why he thought it necessary. There is no suggestion that Mrs Poolman was a purchaser for value of the share. I am satisfied that Mrs Poolman acquired the share with notice of Mr Poolman's intent to defeat his creditors. 541 I conclude that the Liquidators are entitled to a declaration that the transfer of Mr Poolman's share in Kalivise to Mrs Poolman on or about 1 December 2003 is void, pursuant to s.37A Conveyancing Act. Is the issue of a share "an alienation of property" 542 While the transfer to Mrs Poolman of Mr Poolman's share in Kalivise may readily be declared void and of no effect, so that the share register of Kalivise should be rectified accordingly, the question of the issue of a new share to Mrs Poolman is more complicated. 543 As I have found, Mrs Poolman became the sole shareholder and director of Kalivise, in place of Mr Poolman, pursuant to a scheme to defraud Mr Poolman's creditors. The issue of a new share in Kalivise directly to Mrs Poolman, after she had become a director and thus empowered to resolve that the new share be issued, dilutes the capital of Kalivise. If only the share transferred by Mr Poolman to Mrs Poolman is restored to Mr Poolman's bankruptcy trustee, Mrs Poolman will retain a fifty percent interest in the assets of Kalivise, whereas previously Mr Poolman's share in the company represented a one hundred percent interest. Is the issue of Mrs Poolman's share in Kalivise voidable as "an alienation of property" under s.37A Conveyancing Act? 544 The Liquidators say that, "although it is accepted that the issue of the share itself is not a disposition of property", the issue of the share was "consequent" upon the voidable transfer of Mr Poolman's share to Mrs Poolman so that the Court should order that the new share be transferred to Mr Poolman, or his bankruptcy trustee. No authority is cited for the power of the Court to make such an order. 545 In my opinion there is a more direct path to the result which justice requires in this case. 546 As I have observed, the evidence supports the conclusion that the new share in Kalivise was issued to Mrs Poolman shortly after the transfer of Mr Poolman's share to her in furtherance of an intention, common to both Mr and Mrs Poolman, that Mr Poolman's interests in Bowan Downs be placed beyond the reach of his creditors. It may well have been thought that the issue of a new share in Kalivise would not be as vulnerable to attack under s.37A as the transfer of Mr Poolman's existing share. No other commercially justifiable reason for the issue of the share to Mrs Poolman appears from the evidence. If this was the intention of Mr and Mrs Poolman – and I infer that it was – then the issue of the new share can be seen as simply a step in the overall scheme to defraud Mr Poolman's creditors. 547 In Silvera v Slavic (supra), Mr Slavic, anticipating a judgment against him in District Court proceedings, obtained orders by consent from the Local Court for the transfer of virtually all of his assets to his de facto wife under the (then) De Facto Relationship Act 1984. The plaintiff, having obtained judgement against Mr Slavic, applied to the Supreme Court pursuant to s.37A for orders avoiding the transfers made pursuant to the Local Court orders. 548 Hodgson CJ in Eq (as he then was) found that the consent orders made in the Local Court were procured by Mr Slavic and his de facto wife pursuant to a common intention to defraud Mr Slavic's creditors. However, it was argued for Mr Slavic that the Court could not make an order avoiding the transfer because such an order would be inconsistent with a valid order made by the Local Court. 549 Hodgson CJ in Eq concluded that the order setting aside the transfer made by Mr Slavic would indeed be inconsistent with the Local Court's orders. However it did not follow that the purpose of s.37A was frustrated. His Honour said at [72]: "What s 37A says is that the 'alienation' is 'voidable'. In my opinion, when an application is made under s 37A to the Supreme Court, that Court can achieve the effect of avoiding the alienation by such measures as seem appropriate in the particular case. For example, the Court could declare that the effect of the Local Court order is spent by reason of its being carried out by the subsequent transfers, and then order appropriate re-transfers of the property. Such orders would not be inconsistent with the Local Court orders, nor could they give rise to any possible embarrassment by reason of the existence of conflicting court orders." 550 The purpose of s.37A is to defeat fraud no matter by what device it is implemented. The reach of the section is not foreshortened by technical obstructions placed in the way of recovery proceedings in furtherance of the original fraudulent intent. The words of the section are of the widest possible application; they focus on the effect of what is done, not on the means by which it is done. The word "alienation" encompasses every conceivable means whereby property might be removed from the reach of a person's creditors. The section does not say that the alienation must be by the act of the fraudulent debtor. 551 If a person acts collusively with a fraudulent debtor in such a way as to cause ownership of property to move, or to remain away, from the apparently passive debtor, there nevertheless has been an alienation of property for the purposes of the section. In this regard, s.37A Conveyancing Act is wider in reach than s.121(1) of the Bankruptcy Act 1966, which catches only "a transfer of property by a person who later becomes bankrupt": cf. Official Trustee in Bankruptcy v Mateo (2003) 202 ALR 571, at [61] per Wilcox J. 552 So, for example, if a mortgagee exercised a power of sale in collusion with the fraudulent debtor, there will have been an alienation within the meaning of the section even though the debtor has not signed a transfer or done any other overt act in aid of the transfer. If Mr Slavic had not complied with the Local Court's order to transfer his property and a Registrar of the Court had signed the transfer in his place, there would still have been an alienation within the reach of the section. 553 "Alienation" includes taking steps to frustrate recovery of property under s.37A. It would defeat the purpose of the section if property, once removed from creditors' reach, could be kept permanently out of their reach by the collusive defensive acts of a third party, even though those acts could not have been undertaken by the fraudulent debtor. Section 37A therefore empowers the Court to declare void the acts of a collusive third party calculated to maintain the fraudulent alienation, and the Court may order the third party to re-transfer the property. 554 These propositions are, in my opinion, supported by the general reasoning of the Hodgson CJ in Eq in Silvera and in the cases which have followed it: see in particular Houvardas v Zaravinos (2003) 202 ALR 535, at [128] per Bergin J. 555 I am satisfied that the issue of the new share in Kalivise to Mrs Poolman was part of the scheme between Mr and Mrs Poolman to alienate the property of Mr Poolman so as to defeat the Liquidators' claim. I will make a declaration that the issue of the new share to Mrs Poolman is void and that the register of Kalivise be rectified accordingly. SUMMARY OF ORDERS AND RELIEF 556 I propose to make orders to the following effect. 557 In proceedings No 2032 of 2004: i) declaration that Mr Poolman is liable under CA s.588M(2) to pay the loss and damage suffered by Wines and Vineyards in respect of unpaid debts of those companies incurred on and from 1 March 2003 to 4 August 2003; ii) declaration that Mr Irving is liable under CA s.588M(2) to pay the loss and damage suffered by Wines and Vineyards in respect of unpaid debts of those companies incurred on and from 6 February 2003 to 4 August 2003; iii) declaration that Mr Irving is entitled in equity to contribution from Mr Martini in respect of Mr Irving's liability to the Liquidators as declared in paragraph (ii) to the extent only of debts incurred by Wines and Vineyards on and from 8 February 2003 to 4 August 2003; iv) declaration that Mr Martini is entitled in equity to contribution from Ms Yates in respect of Mr Martini's liability to Mr Irving as declared in paragraph (iii) to the extent of debts incurred by Wines and Vineyards on and from 1 March 2003 to 30 June 2003; v) direct that the amounts of loss and damages and contribution for which the parties are liable be ascertained by reference under UCPR 20.14, or by a Court appointed expert, in accordance with directions to be made; vi) declaration pursuant to s.37A Conveyancing Act 1919 (NSW) that the transfer of one share in Kalivise Pty Ltd from Mr Poolman to Mrs Poolman made on or about 1 December 2003 is void ab initio; vii) declaration that the issue of one share in Kalivise Pty Ltd to Mrs Poolman on or about 17 December 2003 is void ab initio; viii) order pursuant to CA s.175 that the share register of Kalivise Pty Ltd be rectified accordingly. 558 In proceedings No 2685 of 2004: i) declaration that each of the payments made to the Commissioner by Wines as alleged in paragraph 7 of the Statement of Claim and by Vineyards as alleged in paragraph 14 of the Statement of Claim is: a) an unfair preference pursuant to CA s.588FA; b) an insolvent transaction pursuant to CA s.588FE; c) a voidable transaction pursuant to CA s.588FE; ii) order pursuant to CA s.588FF that the Commissioner repay to Wines and Vineyards respectively the amounts of the payments referred to in paragraph (i); iii) declaration that Mr Irving and Mr Martini are liable to indemnify the Commissioner pursuant to CA s.588FGA(2) in respect of the loss and damage sustained by the Commissioner as a result of the order in paragraph (ii) to the extent of payments for liabilities under Sub-division 16B in Schedule 1 to the Taxation Administration Act 1953 (Cth); iv) declaration that Ms Yates is liable to indemnify the Commissioner pursuant to CA s.588FGA(2) in respect of the loss and damage sustained by the Commissioner as a result of the order in paragraph (ii) to the extent of payments received by the Commissioner before 30 June 2003 for liabilities under Sub-Division 16B, as aforesaid; v) declaration that Wines is liable to indemnify Mr Irving pursuant to Clause 2.1 of the Indemnity and Access Deed dated 5 September 2001 in respect of the liability, loss or damage incurred by Mr Irving as a consequence of the declaration in paragraph (ii) and the orders to be made in accordance with that declaration; vi) order that the amount payable by Wines to Mr Irving in accordance with paragraph (v) be set off pursuant to CA s.553C against the liability of Mr Irving to Wines pursuant to the declaration in paragraph (ii) in proceedings 2032 of 2004. 559 Interest will be payable on the amounts found due as between the parties. The interest cannot be calculated until the amounts for which the parties are liable are ascertained. 560 Pursuant to CA s.536(1)(a), I will enquire into the conduct of the Liquidators in: – entering into a funding agreement and commencing these proceedings when they were aware that there was a substantial risk that the creditors would receive no, or very little, dividend; – permitting costs to amount to approximately $2M; – failing to obtain the directions of the Court before proceeding. 561 I will formulate questions for the Liquidators after submissions from the parties and I will give directions as to how the enquiry is to proceed. 562 Questions of costs will be reserved until my enquiry into the Liquidators' conduct is concluded and the amounts payable as between the parties are ascertained. 563 The Liquidators have commenced proceedings against Mrs Poolman, No 4870 of 2005, the outcome of which is said to depend on the fate of the s.37A claim. No submissions have been made as to what orders are appropriate in proceedings No 4870 of 2005. I will expect such orders to be formulated in Short Minutes of Orders. 564 I will stand the hearing of these proceedings over to a date to be fixed for the bringing in of Short Minutes of Order to reflect these reasons for judgment and for submissions as to the appropriate directions for the further conduct of the case. – oOo – – oOo – 03/12/2007 - Para 172 - Correction of date to read "2002" instead of "202".Para 224 - Correction of words: "an ATO officer" should read "an AGS solicitor".Para 237 - Deletion of second occurrence of "not have".Para 327 - Correction of plaintiff cited to "Australian Securities & Investments Commission".Para 406 - Correction of words in first bullet point: "so that the Commissioner's claim against the companies fails" should read "so that the Liquidators' claim against the Commissioner fails".Para 407 - Second sentence deleted and the following substituted: "I have exonerated Mr Irving under CA s.1317S and s.1318 from liability for insolvent trading only up to 5 February 2003. The payments by Wines and Vineyards to the Commissioner were made after that date, when the companies should not have been trading at all. In my opinion, Mr Irving should not be exonerated in respect of liability to the Commissioner under CA s.1317S and s.1318."Para 512 - "above" substituted for "below" where twice occurring.Para 557(iv) - "30 June 2003" substituted for "4 August 2003". - Paragraph(s) 172, 224, 237, 327, 406, 407, 512, 557(iv) DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.