FEDERAL COURT OF AUSTRALIA

Tru Floor Service Pty Ltd v Jenkins (No 2) [2006] FCA 632

CORRIGENDUM

TRU FLOOR SERVICE PTY LTD, PAUL ANDREW FLETCHER, VICKIE ANNE FLETCHER, COMPLEX AIR CONDITIONING PTY LTD, A P DELANEY & CO PTY LTD, KIEWA VALLEY ENGINEERING PTY LTD, C & C PRZIBELLA PTY LTD, TORNEY & ALLEN PTY LTD and EXVON PTY LTD v DAVID JOHN JENKINS and VIVIENNE ELLEN JENKINS

VID 3021 OF 2001

SUNDBERG J

26 MAY 2006 (CORRIGENDUM 31 MAY 2006)

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 3021 OF 2001

BETWEEN:	TRU FLOOR SERVICE PTY LTD (ACN 056 201 631) FIRST PLAINTIFF PAUL ANDREW FLETCHER SECOND PLAINTIFF VICKIE ANNE FLETCHER THIRD PLAINTIFF COMPLEX AIR CONDITIONING PTY LTD (ACN 064 927 939) FOURTH PLAINTIFF A P DELANEY & CO PTY LTD (ACN 000 297 549) FIFTH PLAINTIFF KIEWA VALLEY ENGINEERING PTY LTD (ACN 005 311 286) SIXTH PLAINTIFF C & C PRZIBELLA PTY LTD (ACN 004 716 901) SEVENTH PLAINTIFF TORNEY & ALLEN PTY LTD (ACN 000 759 106) EIGHTH PLAINTIFF EXVON PTY LTD (ACN 054 370 357) NINTH PLAINTIFF
AND:	DAVID JOHN JENKINS FIRST DEFENDANT VIVIENNE ELLEN JENKINS SECOND DEFENDANT
JUDGE:	SUNDBERG J
DATE OF ORDER:	26 MAY 2006
WHERE MADE:	MELBOURNE

CORRIGENDUM

1. In the first line of [12] of the Reasons for Judgment, “defendants” should read “plaintiffs”.

I certify that the preceding one (1) numbered paragraph is a true copy of the Corrigendum to the Reasons for Judgment of the Honourable Justice Sundberg.

Associate:

Dated: 31 May 2006

FEDERAL COURT OF AUSTRALIA

Tru Floor Service Pty Ltd v Jenkins (No 2) [2006] FCA 632

CORPORATIONS – director’s duty to prevent insolvent trading by company – submission of no case to answer that company insolvent – whether company insolvent – relevance of company’s accounts

PRACTICE AND PROCEDURE – submission of no case to answer – whether Rules of Court preclude a party who has tendered a document from making no case submission – whether party making no case submission should be put to election before no case submission decided – discretion of Court not to require election – circumstances in which discretion can be exercised – task for Court in deciding no case submission

Held: Defendants not to be put to their election as condition of deciding no case submission, no case submission upheld, company not insolvent

Corporations Act 2001 (Cth) ss 95A, 588G, 588M

Evidence Act 1995 (Cth) s 140

Federal Court Rules 1979 (Cth) O 32 r 4

Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 49.01

Rules of the Supreme Court O 35 r 7

Tru Floor Service Pty Ltd v Jenkins [2006] FCA 119 cited

Weller v O’Brien [1962] 1 WLR 885 cited

Rasomen Pty Ltd v Shell Company of Australia Ltd (1997) 144 ALR 497 followed

Protean (Holdings) Ltd (rec and mgr apptd) v American Home Assurance Co [1985] VR 187 followed

Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 followed

William H Muller & Co’s Algemeene etc v Ebbw Vale Steel, Iron & Coal Co Ltd [1936] 2 All ER 1363 cited

J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (Western Australian Branch) (No 2) (1992) 38 FCR 458 cited

Union Bank of Australia Ltd v Puddy [1949] VLR 242 followed

Sampson v Edwards [1949] VLR 6 followed

Stevenson v Barham (1977) 136 CLR 190 cited

Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1989) 52 SASR 54 explained

Sarkis v Deputy Commissioner of Taxation [2005] VSCA 67 cited

Quick v Stoland Pty Ltd (1998) 157 ALR 615 followed

Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321 cited

Lewis v Doran (2005) 219 ALR 555 cited

Re New World Alliance Pty Ltd (rec and mgr apptd); Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 cited

Carrier Air Conditioning Pty Ltd v Kurda (1993) 11 ACSR 247 cited

Powell v Fryer [2000] SASC 97 cited

Lee Kong v Pilkington (Australia) Ltd(1997) 25 ACSR 103 cited

Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 cited

Iso Lilodw’ Aliphumeleli Pty Ltd (in liq) v Commissioner of Taxation [2002] NSWSC 644 cited

White Constructions (ACT) Pty Ltd (in liq) v White (2004) 49 ACSR 220 cited

Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123 followed

Briginshaw v Briginshaw (1938) 60 CLR 336 applied

Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 applied

Re Lamb; Ex parte Registrar in Bankruptcy (1984) 1 FCR 391 cited

Lamb v Registrar of Bankruptcy (1984) 4 FCR 269 cited

S Odgers, Uniform Evidence Law (6^th ed, 2004)

J D Heydon, Cross on Evidence (6^th Australian ed, 2000)

VID 3021 OF 2001

SUNDBERG J

26 MAY 2006

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 3021 OF 2001

BETWEEN:	TRU FLOOR SERVICE PTY LTD (ACN 056 201 631) FIRST PLAINTIFF PAUL ANDREW FLETCHER SECOND PLAINTIFF VICKIE ANNE FLETCHER THIRD PLAINTIFF COMPLEX AIR CONDITIONING PTY LTD (ACN 064 927 939) FOURTH PLAINTIFF A P DELANEY & CO PTY LTD (ACN 000 297 549) FIFTH PLAINTIFF KIEWA VALLEY ENGINEERING PTY LTD (ACN 005 311 286) SIXTH PLAINTIFF C & C PRZIBELLA PTY LTD (ACN 004 716 901) SEVENTH PLAINTIFF TORNEY & ALLEN PTY LTD (ACN 000 759 106) EIGHTH PLAINTIFF EXVON PTY LTD (ACN 054 370 357) NINTH PLAINTIFF
AND:	DAVID JOHN JENKINS FIRST DEFENDANT VIVIENNE ELLEN JENKINS SECOND DEFENDANT
JUDGE:	SUNDBERG J
DATE OF ORDER:	26 MAY 2006
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1. The proceeding be dismissed.

2. The plaintiffs pay the defendants’ costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 3021 OF 2001

BETWEEN:	TRU FLOOR SERVICE PTY LTD (ACN 056 201 631) FIRST PLAINTIFF PAUL ANDREW FLETCHER SECOND PLAINTIFF VICKIE ANNE FLETCHER THIRD PLAINTIFF COMPLEX AIR CONDITIONING PTY LTD (ACN 064 927 939) FOURTH PLAINTIFF A P DELANEY & CO PTY LTD (ACN 000 297 549) FIFTH PLAINTIFF KIEWA VALLEY ENGINEERING PTY LTD (ACN 005 311 286) SIXTH PLAINTIFF C & C PRZIBELLA PTY LTD (ACN 004 716 901) SEVENTH PLAINTIFF TORNEY & ALLEN PTY LTD (ACN 000 759 106) EIGHTH PLAINTIFF EXVON PTY LTD (ACN 054 370 357) NINTH PLAINTIFF
AND:	DAVID JOHN JENKINS FIRST DEFENDANT VIVIENNE ELLEN JENKINS SECOND DEFENDANT
JUDGE:	SUNDBERG J
DATE:	26 MAY 2006
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

INTRODUCTION

1 This proceeding arises from the collapse in 2001 of a building contractor based in Albury, A B & M A Chick (Vic) Pty Ltd (Chick Vic).

2 Chick Vic was incorporated on 7 April 1987. From 1 February 1992, its directors were Alan Chick and the first defendant, David Jenkins.

3 On 30 April 1999, Mr Chick, Mr Jenkins, their wives and certain related companies entered into a “Business Dissolution Deed” (the Deed). By the Deed, the Chicks and their related companies ended their involvement in Chick Vic. From that date, Chick Vic’s directors were Mr Jenkins and the second defendant, his wife Vivienne Jenkins.

4 Mrs Jenkins formally resigned as a director on 22 September 2000.

5 The nine plaintiffs are eight building sub-contractors based in Albury and Wodonga. (The second and third plaintiffs, Mr and Mrs Fletcher, were members of a partnership at the relevant time.) In the period from 30 April 1999, Chick Vic had engaged each of them in relation to a variety of building projects. Those projects were not confined to the
Albury-Wodonga region.

6 By a resolution of Mr Jenkins, Christopher Chamberlain, a partner in the firm of Nicholls & Co based at Wagga Wagga, was appointed as Chick Vic’s administrator on 11 January 2001. By a resolution of creditors, Mr Chamberlain was appointed as Chick Vic’s liquidator on 7 February 2001. Chick Vic’s winding up is yet to be completed.

7 The plaintiffs claim that the defendants contravened ss 588G(2) or (3) of the Corporations Law (the Law) or, alternatively, the Corporations Act 2001 (Cth) (the Act). Sub-section (1) provides that:

“This section applies if:

(a) a person is a director of a company at the time when the company incurs a debt;

(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 ….”

Sub-section (2) provides that:

“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 position would be so aware.

Sub-section (2) is a “civil penalty provision”. Sub-section (3) provides that:

“A person commits an offence if:

(a) a company incurs a debt at a particular time; and

(aa) at that time, a person is a director of the company; 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) the person suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts (as in paragraph (1)(b)); and

(d) the person’s failure to prevent the company incurring the debt was dishonest.”

8 Section 95A provides that:

“(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent.”

9 The remedy sought by the plaintiffs is found in s 588M. That section relevantly provides that:

“(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

(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.

…

(3) The creditor may, as provided in Subdivision B but not otherwise, recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage.

...”

10 The plaintiffs’ case is that:

(a) the defendants were directors – within the meaning of the Law or the Act – of Chick Vic when it incurred a substantial number of unsecured debts to them (totalling $2,116,464.20) that remain unpaid;

(b) Chick Vic was insolvent at the time it incurred those debts or became insolvent as a result of incurring those debts;

(c) at the time those debts were incurred, there were reasonable grounds for suspecting that Chick Vic was insolvent or, as a result of incurring those debts, would become insolvent;

(d) at the time those debts were incurred, the defendants were, or a reasonable person in a like position in a company in Chick Vic’s position would have been, aware that there were the grounds referred to in par (c); and

(e) as a result, the defendants ought to compensate them for Chick Vic’s failure to pay the debts referred to in par (a).

That case is pleaded in a statement of claim that was first filed on 6 September 2001. It was amended from time to time. Notwithstanding its age, it was heavily amended only a week before the trial commenced: see Tru Floor Service Pty Ltd v Jenkins [2006] FCA 119. I will call the current amended pleading “the statement of claim”.

THE DEFENDANTS’ ENTITLEMENT TO MAKE A NO CASE SUBMISSION

11 At the conclusion of the plaintiffs’ case counsel for the defendants submitted that there was no case for them to answer. Argument then ensued as to whether the defendants were disabled from making a no case submission by reason of having tendered exhibits during cross-examination of the plaintiffs’ witnesses.

12 The defendants relied on O 32 r 4(4) of the Rules of Court for the proposition that a party who has tendered documents in evidence may not make a no case submission. Subrule (1) empowers the Court to give directions as to the “order of evidence and addresses and generally as to the conduct of the trial”. Subrule (2) deals with “the order of evidence and addresses … as provided by the following sub-rules of this rule”, namely sub-rs (3) to (6). Subrule (3) provides that the party to begin may make an address opening his case and may then adduce evidence. Subrule (4) provides:

“Where, at the conclusion of the evidence for the party to begin, no document or thing has been admitted in evidence on tender by the opposite party, the opposite party may elect to adduce evidence or not to adduce evidence.”

If the opposite party does not adduce evidence, the party to begin may make a closing address and the opposite party then makes its address: sub-r (5). If the opposite party adduces evidence, that party may make an opening address before adducing evidence, and after the conclusion of that evidence may make a closing address, whereupon the party to begin may make a closing address: sub-r (6).

13 Subrule (4) does not expressly provide for the case where, at the conclusion of the plaintiff’s evidence, the defendant has tendered a document or thing in evidence. Subrules (5) and (6) deal only with cases that fall within sub-r (4). In that situation the gap is to be filled pursuant to sub-r (1): the Court gives directions as to the order of evidence and addresses. Likely directions will be to the effect of those contained in r 49.01(6)(b) of the Rules of the Supreme Court of Victoria. Rule 49.01(1) corresponds with this Court’s O 32 r 4(1). Rule 49.01(3) is to substantially the same effect as O 32 r 4(2). Rule 49.01(4) corresponds with O 32 r 4(3). Rule 49.01(5) is to substantially the same effect as O 32 rs 4(4) to (6). What is not expressly dealt with in O 32 r 4(4) is covered by r 49.01(6):

“When, in the course of the case for the party who begins, any document or thing is admitted in evidence on tender by the opposite party, and at the conclusion of that case –

(a) the opposite party adduces evidence, the order of proceedings shall be as provided by paragraph (5)(a);

(b) the opposite party does not adduce evidence, he may make an address and then the party who began may make a closing address.”

The “order of proceedings” referred to in r 49.01(6)(a) is that the opposite party makes an opening address, and after adducing evidence makes a closing address, and then the party who began makes a closing address. Subrule (6)(b) states the effect of Weller v O’Brien [1962] 1 WLR 885, which held that a defendant who elects to call no evidence loses the right of last address if he has put a document in evidence in the course of cross‑examining on the plaintiff’s case.

14 Weller was displaced in England and Wales by O 35 r 7(3) of the Rules of the Supreme Court (RSC), introduced in 1967. It read:

“If the defendant elects not to adduce evidence, then, whether or not the defendant has in the course of cross‑examination of a witness for the plaintiff or otherwise put in a document, the plaintiff may, after the evidence on his behalf has been given, make a second speech closing his case and the defendant shall then state his case.”

In lieu of giving a direction under O 32 r 4(1) along the lines of the Supreme Court of Victoria’s r 49.01(6)(b), this Court could give a direction along the lines of RSC O 35 r 7(3). Which course it chooses to follow would depend on how it viewed Weller.

15 I do not think O 32 r 4(4) has any bearing on a no case submission. As indicated, subrules (2) to (4) are concerned with the order of evidence and addresses. Subrule (4) does not itself deal with a defendant who has tendered a document or thing in the course of
cross-examining the plaintiff’s witnesses, and who does not adduce further evidence. However, that gap is to be filled by directions as to the order of evidence and addresses: for example, that the defendant does not have the right of last address enjoyed by a defendant who has not so tendered a document or thing and who does not adduce evidence, or alternatively, that he does have that right.

16 That O 32 r 4(4) does not operate in the manner suggested by the plaintiffs is supported by what the Full Court said in Rasomen Pty Ltd v Shell Company of Australia Ltd (1997) 144 ALR 497 at 503:

“Apart from O 32, r 4(4) of the Federal Court Rules which gives a general discretion to the court to regulate the conduct of the trial, there is no statutory provision or Rule of Court which provides for the procedure to be adopted in the Federal Court in a civil case where a ruling of no case to answer is sought.”

Further, what is said in Rasomen at 505 cannot stand with what the plaintiffs seek to derive from sub-r (4). Similarly, in a passage concerned solely with no case submissions in this Court, the sixth Australian edition of Cross on Evidence renders (at 297) the presently relevant effect of Rasomen and Protean (Holdings) Ltd (rec and mgr apptd) v American Home Assurance Co [1985] VR 187 at 237 (Full Court), namely that there is no general rule that requires a party making a no case submission to elect to call no further evidence if some evidence has already been led, or if exhibits have been tendered during cross-examination, without any reference to sub-r (4).

THE COURSE ADOPTED

17 The defendants’ counsel then developed his no case submission, without then being required to elect. The plaintiffs’ counsel responded. I then reserved my decision on the no case submission and on whether the defendants should be required to elect not to call further evidence. This course was followed in reliance on Protean at 237-240, Rasomen at 498-499 and Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 at 6-9. In those cases approval was given to the approach to a no case submission described by Tadgell J in Protean at 237:

“[The Judge] might allow the submission to be made without putting the moving party to any election at that stage but leaving, until he had heard it, the question whether or not he would rule on it without requiring an election to be made; and having heard the submission, and any answer to it by the respondent party, he could either rule on it or not, perhaps requiring an election to be made as a prerequisite to his doing so….”

(His Honour had earlier indicated that the expression “moving party” meant the defendant making the no case submission and “respondent party” meant the plaintiff responding to the submission.) Young CJ expressed a similar view at 215 and Fullagar J agreed with what Tadgell J had said.

18 In Protean the trial judge had not adopted the course I have described at [17]. Rather he had indicated that he would both entertain the no case submission and rule on it without requiring an election to be made by the moving party. While Tadgell J did not think this an incorrect approach, his Honour clearly considered preferable that described at [17]. At
238-239 he said:

“In deciding whether or not the general rule [requiring an election] should be followed the Judge will sometimes be assisted to know the basis on which the moving party seeks to rest his submission of no case. To that end the Judge might find it useful to allow the submission to be made and answered without first requiring an election to be made, before deciding whether he will rule on it, ie to take the second course summarized above …. When that course is followed the Judge will know, before he commits himself to rule, whether the no case submission is (a) that there is no evidence at all in support of the respondent party’s case, ie accepting all the evidence at face value, no case has been established in law …, or (b) that, although there is some evidence in support of the respondent party’s case, the Judge should not act on it because, for example, it is so unsatisfactory or inherently unreliable or equivocal that he should find that the burden of proof resting on the respondent party has not been discharged …, or (c) a combination of (a) and (b).”

MUST THE DEFENDANTS ELECT NOT TO CALL FURTHER EVIDENCE?

19 The general rule is that a decision will not be given on a submission of no case unless the moving party elects to call no evidence. However, the judge has a discretion to depart from the general rule where the particular circumstances require it. It has been said that in deciding which course to follow, the judge will be guided by the nature of the case, the stage it has reached, the particular issues involved and the evidence that has been given. The imposition of the requirement that the moving party make an election before the judge entertains the submission or rules on it will depend on the just and convenient disposition of the litigation. See Protean at 238 and Rasomen at 504.

20 In William H Muller & Co’s Algemeene etc v Ebbw Vale Steel, Iron & Coal Co Ltd [1936] 2 All ER 1363 at 1365-1366 Branson J said:

“It seems to me that it must be a matter for the judge who is to try the case to decide for himself whether, in the particular case before him, and having regard to all the circumstances of it, it is likely to save the litigants before him expense and time and trouble to deal with the case by way of ruling upon the submission without putting any terms upon counsel upon either side, or whether it is better to say: ‘In this case I think it would be desirable that before I rule I should hear the whole of the evidence.”

This passage has been referred to or quoted with approval in many cases. See, for example, Protean at 238, Rasomen at 504, J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (Western Australian Branch) (No 2) (1992) 38 FCR 458 at 461-462 and Union Bank of Australia Ltd v Puddy [1949] VLR 242. In Puddy at 245-246, after reviewing the earlier decisions on the circumstances in which, in the exercise of the discretion, it is appropriate to depart from the general rule requiring an election, Fullagar J said:

“I would add only two observations of my own. In the first place … something may turn on the nature of the case itself. … [W]here, as in the case before me, fraud is alleged, it may often be wrong to suggest that a party should submit himself to cross-examination before it is seen that there is really some evidence against him. In the second place, it would seem that the exercise of the discretion must generally involve an estimating of probabilities. If I accede to the application made to me, I may save the parties a great deal of time and expense, or I may cause them much greater expense and delay in the event of a new trial being ordered. In order to assess these probabilities, it seems to me that it must generally be necessary to form some preliminary estimate of the evidence before ruling as to whether the submission is to be entertained without election.

In the present case I felt no doubt that I ought to entertain and rule on the submission without requiring the plaintiff to elect to call no evidence. I felt clearly of opinion that the balance of convenience was heavily in favour of this course. The case for the defendant, consisting of the opening and examination in chief, with very little cross-examination, had lasted over three and a half days. Then, coming to determine the application on its merits, I have felt satisfied that there was no case for the plaintiff to answer on defence or counterclaim.”

Other cases which show that the discretion to depart from the general rule requiring an election is more readily exercised where fraud is alleged are Protean at 215 and 236 and Merry at 7.

21 In Sampson v Edwards [1949] VLR 6 Lowe J said:

“The plaintiffs’ case has been closed with the exception of his evidence as to damages which, by consent, is standing over until the issue of liability is determined.

…

The substance of the matter argued before me is whether I should allow [counsel] to make that [no case] submission without putting him to his election as to whether he will call evidence or not on the issue of liability.

In my opinion, I have a discretion as to whether or not to adopt that course, and I think that two of the factors, at any rate, which should operate with the Court in exercising that discretion are the saving of expense by hearing the application and the saving of time. They may not be, and probably are not, the only considerations, but those are two and I think both are present in this case. This action has now been going for the best part of four days and I have heard the evidence only of the plaintiffs and their witnesses and that only on the issue of liability. The particulars with regard to damages which were given this morning are such as to indicate that the plaintiffs’ case before it is concluded will take some further considerable time, and on both those aspects of liability and of damage the defendants would have the opportunity to call evidence, and there has been an indication in cross-examination that if the case goes to its full conclusion evidence will be called by the defendants on both those aspects.

Now with those matters in my mind it seems to me that convenience does point to my adopting the course which was adopted in Hannah v Stott [1928] VLR 168, and which I think has been adopted since then in many other cases. Those cases, and this case it is to be noted, are cases in which the Judge is sitting without a jury, and while jury cases stand on a somewhat different footing, even in those cases the Court has recognised … that where there may be an unnecessary loss of time and money, it may be proper for a Judge to hear, at the close of the plaintiff’s case, an application for judgment for the defendant.

…

I only propose to add that I think the question of putting a defendant to his election is one which arises for the protection of the Court and is not, I think, a right which is given by law to the opposing party.”

The propriety of this last observation is confirmed by Protean at 238 where Tadgell J said:

“The imposition of such a requirement [ie to elect] is not a right of the respondent party, for the fate of the submission of the moving party, once made, is in no sense dependent on election or no election.”

THE TASK FOR THE JUDGE IN DETERMINING A NO CASE SUBMISSION

36 In Protean the owner of premises which were damaged by fire sued its insurer for indemnity. The insurer raised defences that the insured had lit or connived at lighting the fire and had falsely represented, and failed to disclose, to the insurer material facts. The trial judge allowed the insured to split its case. The insured adduced evidence on matters on which it had the onus of proof, but elected to call no evidence in relation to the defences until all the evidence for the insurer on the defences had been called. The insurer then went into evidence on its defences. At the close of the insurer’s case the judge allowed the insured to submit that it had no case to answer in respect of the defences without being put to its election whether or not to call evidence in relation to the defences. The insured’s submission was upheld, and being of opinion that the insured had made out its case for indemnity, the judge entered judgment for it.

37 On appeal it was contended by the appellant that, in deciding the no case submission, the trial judge “embarked upon the wrong exercise”. It was said his Honour had proceeded as if his function was to reach a final judgment on the facts, with inferences drawn and applied, as if he were deciding at the end of the whole case. His proper function, it was contended, was to decide whether the evidence before him (treating it in the most favourable way to the defendant) permitted the inferences to be drawn in favour of the affirmative defences, and not to decide whether to draw those inferences. An alternative argument was that the evidence revealed a prima facie case in respect of each of the defences, sufficient to require an answer by the insured.

38 All members of the Full Court rejected those contentions. Tadgell J, with whom Fullagar J agreed, distinguished (at 239) between a case where the no case submission is that there is no evidence at all in support of the respondent party’s case and one where it is that, although there is some evidence to support it, the judge should not act on it because, for example, it is so unsatisfactory or inherently unreliable or equivocal that he should find that the burden of proof resting on the respondent party has not been discharged. His Honour went on (at 239):

“If a judge sitting alone receives a submission of the second kind and decides to rule on it, whether the moving party is put to or makes his election or not, he must be entitled in doing so to assess the quality of the evidence. Were it otherwise the Judge, being the tribunal of fact, would be placed in an impossible position: he would have to assess the validity of the case for the respondent party without being able to assess the worth or weight of the evidence led in support of it. It has been said that ‘when there is no jury, the proposition ‘no case to answer’ may obviously mean far more than, ‘is there evidence on which a jury could find for the plaintiff?’ It merely means, would you, the Judge, on the evidence given, find for the plaintiff?’”

THE NO CASE SUBMISSION

41 In order to succeed, the plaintiffs must before anything else show that Chick Vic was insolvent at the times it incurred the debts they seek to recover or that it became insolvent by incurring the same. To that end, the statement of claim pleads that Chick Vic was insolvent:

· “[a]s at 30 April 1999”;

· “[i]n the year ended 30 June 1999”;

· “[i]n the year ended 30 June 2000”;

· “[i]n the period [from] 30 June 2000 [to] 7 February 2001”; and

· “[f]urther, or in the alternative, in the whole of the period from 30 April 1999 to 7 February 2001”.

(The statutory definition of insolvency can be found at [8].)

42 The no case submission is put on the basis that there is no evidence that Chick Vic was insolvent in the period between 30 April 1999 and the commencement of its winding up or, alternatively, that such evidence as there is that Chick Vic was insolvent in that period is so unsatisfactory that it should not be acted upon.

THE LAW ON INSOLVENCY

43 It is beyond doubt that s 95A mandates a “cash flow” rather than “balance sheet” approach to determining solvency. Therefore, an excess of current liabilities over current assets is not conclusive of a company’s insolvency and “cannot be more than a rule of thumb” as to the same: Quick v Stoland Pty Ltd (1998) 157 ALR 615 at 623 per Emmett J. Further, “[a] temporary lack of liquidity must be distinguished from an endemic shortage of working capital whereby liquidity can only be restored by a successful outcome of business ventures in which the existing working capital has been deployed”: Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321 at 328 per Jacobs J. Finally, a failure to pay a debt is not, without anything else, conclusive of insolvency. For example, as Jacobs J pointed out in Hymix Concrete at 328, such a failure:

“could be explained by a 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.”

(This observation needs to be read subject to the matters canvassed at [45] to [48].)

44 In Lewis v Doran (2005) 219 ALR 555 at [79], Giles JA (with whom Hodgson JA and McColl JA agreed) quoted with apparent approval the following passage from the reasons of the primary judge (Palmer J):

“I think that I must approach the application of s 95A of the [Act] with two considerations in mind. First the words of s 95A must be construed as they stand, without addition or subtraction. Second, the law both before and after the enactment of s 95A is unequivocally and emphatically clear that insolvency is, first and last, a question of fact ‘to be ascertained from a consideration of the company’s financial position taken as a whole. In considering the company’s financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realizations are achievable’: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 at 224.”

(The emphasis is mine.) I agree “that insolvency is, first and last, a question of fact”. Giles JA went on to say at [103]:

“Solvency or insolvency is a state on which directors and others act in current conduct, for example if the issue is trading while insolvent. Section 95A speaks of objective ability to pay debts as and when they become due and payable, but ability must be determined in the circumstances as they were known or ought to have been known at the relevant time, without intrusion of hindsight.”

It must also be borne in mind that the plain words of s 95A (“as and when they become”) require anticipated debts to be taken, to some extent, into account in determining solvency.

45 Notoriously, there is an apparent conflict in the authorities as to whether, and to what extent, a court should take into account creditors’ forbearance in pursuing (by whatever means) the payment of debts that, according to the terms of the relevant agreement, are due and payable. That is, if a debtor is entitled to, say, 45 days’ credit, when is that debt due and payable in a s 95A sense? At the end of the 45 days? Or at the end of some longer period which the creditor has, customarily, tolerated – as opposed to one supported by, say, an estoppel or a variation of the relevant agreement? Before reviewing some of the authorities said to be in conflict, I note the following passage from Re New World Alliance Pty Ltd (rec and mgr apptd); Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 at 434 per Gummow J:

“Any conflict between the authorities may be more illusory than real and factual rather than legal. I would not consider such an issue to be a question of law to be decided by the application of a rigid rule. Rather, the statute appears to focus attention upon what it is reasonable to expect in a given set of circumstances, such a consideration being made by someone operating in a practical business environment. Attention is focused at whether a person would expect that at some point the company would be unable to meet a liability. Such a question is necessarily a factual one to be decided in light of all the circumstances in the case. At one end of the spectrum a company may be operating in an industry where a code of practice of paying 60 days after invoicing has arisen, despite stated terms of 30 days. If the company has a large number of creditors, it may be reasonable to expect that all of them would not suddenly insist on being paid in 30 days. At the other end of the spectrum would be a case where a single creditor had granted an indulgence on one occasion. It may well not be reasonable to expect a repetition of that event.”

46 The ‘strict’ approach can be found in Carrier Air Conditioning Pty Ltd v Kurda (1993) 11 ACSR 247 (Full Court of the Supreme Court of South Australia) at 254-255 per Debelle J:

“[T]he inquiry required by [the relevant section] is concerned with the obligations of the company as to the payment of its debts, not with periods of grace which might have been obtained by creditors not insisting on payment strictly in accordance with agreed terms.

A reasonable and prudent company director would assess whether a company is in a position to pay its debts as and when they fall due by reference to the legal obligations of the company not by reference to any indulgences which the company might have received from its creditors. He would have regard to the fact that the credit policy of any particular creditor might suddenly change and require any outstanding debts to be paid forthwith. The possibility of such a change could result from any one of a number of factors including the fact that the creditor is itself experiencing financial stringency or, as the circumstances of this case illustrate, a change in management. A reasonable and prudent director must found his expectations on reasonable grounds. An expectation that creditors will continue to permit late payment of accounts is founded on hope and optimism, not on reason. It is a policy fraught with danger and would only be adopted if the company was experiencing a temporary lack of liquidity. A reasonable and prudent director would acknowledge that, while his company might have enjoyed periods of grace in the payment of its debts, there could be no reasonable expectation that that situation would continue. Apart from these considerations, he would recognize that the very fact that the ability of a company to continue to trade depends on indulgences from its creditors points to the conclusion that it is unable to pay its debts as and when they fall due. In other words, a reasonable and prudent director will, generally speaking, be directing his attention to whether the company will be able to pay its debts on the date stipulated for payment.”

Cox J and Duggan J agreed with Debelle J that the appeal should be dismissed, but did not feel it necessary to express a view on the issue canvassed by his Honour in the passage quoted above. (See also Powell v Fryer [2000] SASC 97 at [32]-[33] per Prior J.) Similarly, Owen J (with whom Franklyn J and Murray J concurred) said in Lee Kong v Pilkington (Australia) Ltd(1997) 25 ACSR 103 at 112:

“whether or not a ‘debt’ is ‘due’ is to be determined by reference to the legally binding agreement between the parties. Any reluctance by creditors to enforce legal rights was not relevant to the approach under the relevant section.

…

The question is whether or not a particular debt has fallen ‘due’. The commercial likelihood of enforcement of the company’s debts cannot override the substance of what is involved in the determination of that question.”

For reasons that will become apparent, the plaintiffs urge the Court to adopt the ‘strict’ approach.

47 In Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, Palmer J reviewed at length the authorities on determining solvency. His distillation thereof (at [54]) bears repeating:

“[T]he following propositions may now be drawn from the authorities:

(i) whether or not a company is insolvent for the purposes of the Corporations Act (Cth), ss 95A, 459B, 588FC or 588G(1)(b), is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole …;

(ii) in considering the company’s financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable …;

(iii) in assessing whether a company’s position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency …;

(iv) the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand …;

(v) in assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the Court’s satisfaction, that:

· there has been an express or implied agreement between the company and the creditor for an extension of time stipulated for payment; or

· there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or

· there has been a well established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors’ terms of trade or are payable only on demand …; [and]

(vi) it is for the party asserting that a company’s contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence ….”

(I have omitted the numerous citations.)

48 In Iso Lilodw’ Aliphumeleli Pty Ltd (in liq) v Commissioner of Taxation [2002] NSWSC 644, Davies AJ, though he accepted Palmer J’s first, second and third propositions, said at [14]:

“I do not cite principles (iv), (v) and (vi) as enunciated by his Honour … as I consider that, as enunciated, the principles may imply a legality or inflexibility which is inconsistent with the point that the ultimate issue is a question of fact.”

In White Constructions (ACT) Pty Ltd (in liq) v White (2004) 49 ACSR 220, McDougall J said at [291]-[293]:

“I do not think that Palmer J, in the fourth, fifth and sixth propositions that he stated, was seeking to lay down exhaustively the circumstances in which indulgences that creditors may allow will be taken into account, or the manner in which such indulgences will be taken into account. It is certainly possible to read the fifth proposition as being expressed in prescriptive terms; but even there, I think, his Honour was stating, in effect, the basis upon which the courts have generally assessed the significance of indulgences that were shown to have been granted.

If, contrary to my understanding, his Honour were intending, in the fourth, fifth and sixth propositions, to state exhaustively the circumstances in which indulgences will be considered relevant, and the weight that will be attributed to them, then I would share the reservations expressed by Davies AJ. But I do not so read what Palmer J said.

Of course, as Palmer J pointed out at NSWLR 220-1; ALR 120-1; ACSR
312-13, the significance of indulgences granted by creditors will vary according to whether the question for consideration is ‘actual’ insolvency or ‘reasonable grounds to suspect’ insolvency. The case before his Honour fell into the former category. The case before me, on the pleading, is likewise a case of actual insolvency; as the defendants point out in para 2 of their written submissions ‘this is not a case of insolvent trading’.”

THE STANDARD OF PROOF

49 Section 140 of the Evidence Act 1995 (Cth) provides that:

“(1) In a civil proceeding, the court must find the case of a party proved if it is satisfied that the case has been proved on the balance of probabilities.

(2) Without limiting the matters that the court may take into account in deciding whether it is so satisfied, it is to take into account:

(a) the nature of the cause of action or defence; and

(b) the nature of the subject-matter of the proceeding; and

(The defendants did not dispute that the instant proceeding is “a civil proceeding” within the meaning of s 140: cf Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123 at [357].)

50 There is some debate as to the extent to which s 140 calls for the application of “the Briginshaw test”: see, for example, S Odgers, Uniform Evidence Law (6^th ed, 2004) at [1.4.100]. In Briginshaw v Briginshaw (1938) 60 CLR 336, Dixon J said at 361-362:

“[W]hen the law requires proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found. It cannot be found as a result of a mere mechanical comparison of probabilities independently of any belief in its reality … it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature or consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent likelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters ‘reasonable satisfaction’ should not be produced by inexact proofs, indefinite testimony, or indirect inferences.”

(The emphasis is mine.) As noted at [7], the plaintiffs claim that the defendants contravened ss 588G(2) and (3) of the Law or the Act. Section 588G(2) is a civil penalty provision. Section 588G(3) creates an offence requiring proof of dishonesty. I think it appropriate, in deciding whether the case against the defendants has been proved, to, in the words of s 140, “take into account the nature of the cause of action [and] the gravity of the matters alleged”. In doing so, I consider that the correct approach to take is to apply Briginshaw while bearing in mind what was said in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 at 449-450 per Mason CJ, Brennan, Deane and Gaudron JJ:

“The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities. That remains so even where the matter to be proved involves criminal conduct or fraud. On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary ‘where so serious a matter as fraud is to be found’. Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct.”

(Their Honours then quoted the passage from Briginshaw that I emphasized earlier.) That was the approach taken to s 588G by Mandie J in Plymin at [367]. As to the “debate” I referred to in the opening sentence of this paragraph, it is also the approach supported by Mr Odgers SC in his text I referred to earlier.

THE NATURE OF THE PLAINTIFFS’ CASE

51 Before I turn to the evidence, I should say something about the peculiar nature of the plaintiffs’ case. It involves eight substantial sub-contractor creditors of Chick Vic (see [5]). This multiplicity of creditors in a proceeding under s 588G (and its predecessors) is itself uncommon. Most of the cases cited at [43] to [48] involved a liquidator or a single creditor seeking to recover one debt (or a series of debts).

52 However, the multiplicity of creditors is far exceeded by the multiplicity – and variety – of debts they seek to recover. Some arose when those creditors entered into written contracts with Chick Vic. Generally, those debts are for substantial sums. Those contracts necessarily described in some detail the scope of the works to be performed by the relevant sub-contractor. Inevitably and invariably, that scope changed in the course of the relevant project. Sub-contractors received oral instructions to perform works outside the scope. At the latest, the performance of those instructions gave rise to variations of the initial contract. The amounts involved in the plethora of variations pleaded in the statement of claim range from tens to tens of thousands of dollars. The statement of claim goes to great lengths to outline when the relevant instruction was given by Chick Vic, when it was confirmed in writing by Chick Vic and when the relevant sub-contractor invoiced Chick Vic for the work. Unfortunately, that leaves unanswered the crucial question of when exactly the instruction was accepted, whether by some statement to that effect or its performance, thus giving rise to a contract. Further, some of the debts sought to be recovered are in the nature of unpaid retention moneys. That is, amounts that, pursuant to the relevant written contract, Chick Vic deducted from payments to sub-contractors and retained pending practical completion of the relevant project and the expiry of the relevant defects liability period.

53 The circumstances described at [51] and [52] explain the form of the pleading as to Chick Vic’s insolvency. Though I quoted it at [41], I will repeat it here – Chick Vic was insolvent:

· “[a]s at 30 April 1999” (the starting point);

· “[i]n the year ended 30 June 1999” (the first period);

· “[i]n the year ended 30 June 2000” (the second period);

· “[i]n the period [from] 30 June 2000 [to] 7 February 2001” (the third period); and

· “[f]urther, or in the alternative, in the whole of the period from 30 April 1999 to 7 February 2001” (the duration).

54 That is, in four out of five instances, insolvency is pleaded as having been “in” a period rather than “at” a point in time. However, s 95A speaks of a person who “is solvent [because] the person is able to pay all the person’s debts, as and when they become due and payable”. (The emphasis is mine.) Additionally, s 588G makes liable a person who fails to prevent the occurrence of a particular event – the incurring of a debt – at a time when the company of which he or she is a director is insolvent (or will become insolvent because of that occurrence).

55 I will deal with the no case submission in the following manner. First, I will decide whether Chick Vic was insolvent at the starting point. Then, I will decide whether Chick Vic was insolvent in the first, second and/or third periods. If Chick Vic was not insolvent in any of those periods, then I must find that Chick Vic was not insolvent for the duration.

THE STARTING POINT

56 I explained the significance of the starting point at [3]. The Deed entered into on that date annexed Chick Vic’s financial accounts for the nine months up to 31 March 1999 (the Deed accounts). According to the Deed accounts, Chick Vic had a trading loss of $1,094,243.00 in that period and a net asset deficiency of $1,285,503.00 at 31 March 1999 – being the shortfall between total assets of $2,607,811.00 and total liabilities of $3,893,314.00. Further, according to Kenneth Lamb, a chartered accountant of the firm Scott Partners called by the plaintiffs as an expert witness, the Deed accounts show that Chick Vic had a working capital deficiency – a shortfall between current assets and current liabilities – of $2,367,778.00 as at 31 March 1999.

Mr Lamb

57 Mr Gunst QC vigorously cross-examined Mr Lamb with a view to showing that he was not an impartial expert witness. I will deal with the matters raised by Mr Gunst before I deal with Mr Lamb’s evidence as to Chick Vic’s insolvency at the starting point.

Mr Lamb’s impartiality

58 The following exchange took place on the first of the three days on which Mr Lamb was cross-examined:

“I am asking you about your position as a registered liquidator and a registered trustee in bankruptcy which you told his Honour this morning you have been since 1983?‑‑‑That is what I believe.

Do you remember Sweeney J of this Court?‑‑‑Yes.

Do you remember the Registrar of Bankruptcy bringing an application before his Honour in May 1984?‑‑‑Yes.

Do you remember being struck off as a registered trustee in bankruptcy on 15 May 1984 because you lacked independence, as his Honour found?‑‑‑And I appealed and won.

And you appealed – the first report, your Honour, is volume one of the Federal Court Reports at page 390. And you appealed and the matter was sent back for a retrial. Is that right? The Full Court report is in volume four of the Federal Court Reports at page 269, your Honour. On appeal the matter was sent back for a retrial?‑‑‑I don't think that is right, is it. The – on appeal the earlier decision was turned over.

The gist of it was you had been a member of a firm, Scott and Lamb ‑ ‑ ‑?‑‑‑Yes.

‑ ‑ ‑ and you had then gone from there to being an employee of Deusbury's?‑‑‑Yes.

And the Registrar of Bankruptcy had brought an application to have your registration cancelled and that is what Sweeney J heard in 1984?‑‑‑Yes.

Because you lacked independence, the independence required of a trustee in bankruptcy because you were an employee, is that right?‑‑‑Only because I was an employee.

Yes and on appeal do you recall Northrop J saying this – at page 277, volume four of the Federal Court Reports, your Honour:

‘In this case it would appear that the employee and the employer have failed to grasp the real issue of the employee's independence in the performance of acting as a trustee in any estate. They have approached the matter only in the most general manner.’

Do you remember his Honour saying that on your appeal?‑‑‑No.

You don't remember that. Right, well, you do remember in general terms that the Registrar of Bankruptcy put you up for striking off and a Judge of this Court made such an order in May 1984, now that I jog your memory, don't you?‑‑‑I remember that, yes.”

That line of questioning, which was clearly intended to insinuate that Mr Lamb was “struck off” because of some deficiency in his character and/or competence, was both shabby and sloppy. In Re Lamb; Ex parte Registrar in Bankruptcy (1984) 1 FCR 391 at 399, Sweeney J said: “The status of [Mr Lamb] as an employee is … fatal to his continued registration as a person qualified to act as a trustee.” However, at 400, his Honour said: “Nothing in these reasons is intended in any way to reflect upon the character or competence of the respondent or of his employers.” On appeal, in Lamb v Registrar of Bankruptcy (1984) 4 FCR 269 at 277, Smithers ACJ said what Mr Gunst attributed to Northrop J and immediately went on to say that: “However, on the evidence it does not appear that [Mr Lamb] will not have the necessary independence.” The Full Court upheld Mr Lamb’s appeal and did not order a
re-trial – only Jenkinson J thought one necessary.

59 Mr Gunst also took Mr Lamb to the letter containing his terms of engagement. It is addressed to Mr Lamb and David Wright (also of Scott Partners) from James Sloan, solicitor for the plaintiffs. According to Mr Gunst, the letter made clear to Mr Lamb that his task was to report – come what may – that Chick Vic was insolvent at the relevant time. Though the letter could have been more circumspect, it does not bear such an interpretation. In any case, the real questions raised by the letter are whether Mr Lamb thought it was pressuring him to reach a certain conclusion and, if so, whether he resisted that pressure. I am satisfied that the answer to the first of those questions is clearly that he did not.

60 Much was also made of the fact that Mr Lamb had not, until a few days before the trial, been provided with or read the “Guidelines for Expert Witnesses in Proceedings in the Federal Court of Australia” (the Guidelines) nor, before the trial, been an expert witness in this Court. Before he read the Guidelines, Mr Lamb had sworn five affidavits in the proceeding – including that which exhibited his report. There is nothing inside or outside the Guidelines that suggests that the evidence of an expert witness who has failed to read them should not be admitted – or should be given less weight than otherwise would be the case – for that reason alone. Of course, a failure to comply with the Guidelines might, on the facts of a particular case, produce one or other of those results.

61 Finally, Mr Gunst pointed to two errors in Mr Lamb’s evidence as proof of his partiality. Re-examination made clear that one of them – in relation to the extent of Chick Vic’s overdraft and guarantee facility with the National Australia Bank – was not an error at all. As to the other, paragraph 17 of Mr Lamb’s report purports to list the projects Chick Vic was engaged in at the starting point, ascribing to them a value of $386,496.00. Mr Lamb said during examination-in-chief that paragraph 17 was incorrect. Rather than the amount relating to then current projects, it pertained to the bank guarantees given by Chick Vic in respect of completed and current projects that were outstanding at the starting point. Mr Gunst suggested that Mr Lamb’s failure to correct that error – which had been drawn to his attention by Mr Jenkins in one of his affidavits – in one of his four affidavits following that to which he exhibited his report, showed that he saw his task as that of an advocate for the plaintiffs. In my view, that failure does not bear the weight that Mr Gunst seeks to put on it. However, the error itself is something that I must take into account when assessing the report on its merits.

62 The attack on Mr Lamb as a mere advocate for the plaintiffs was mounted on many fronts. It failed. I will not exclude his evidence on the ground that he was not an impartial expert witness. Mr Lamb admitted the error to which I referred at [61]. Otherwise, he maintained his views in a manner that did not cause me to doubt his impartiality. Indeed, he remained remarkably composed during cross-examination despite Mr Gunst’s frequently argumentative and provocative questions.

The authorship of Mr Lamb’s report

63 The authorship of the report and the method by which it was prepared were also called into question. It was put to Mr Lamb that:

(a) his colleague Mr Wright had written the report;

(b) Mr Wright was “the lead operator in respect of this investigation and report job”;

(c) the method Mr Lamb and his colleagues (including Mr Wright) used to examine the primary documents meant that he relied on them to bring important documents to his attention; and

(d) the report was “a quick lash-up job”.

In support of those propositions, Mr Gunst pointed to the fact that:

· the letter of engagement referred to at [59] was addressed to Messrs Lamb and Wright;

· Mr Wright’s signature, name and initials appeared on other correspondence between Scott Partners and certain of the plaintiffs and their solicitor; and

· only a week before the date of the report, a fax was sent from the office of Chick Vic’s liquidator to Mr Wright rather than Mr Lamb attaching financial information of Chick Vic.

64 Mr Lamb agreed that Mr Wright no longer worked for Scott Partners because of “dishonesty offences” in that he had embezzled moneys from the firm.

65 Mr Lamb denied the propositions set out at [63](a) to (d). He added that he was, in any case, “responsible” for the report. In so far as the propositions set out at (a) and (b) were meant to suggest that the report did not reflect Mr Lamb’s opinion, that suggestion should be rejected: nobody who observed Mr Lamb give evidence could say that he was not intimately familiar with the report and its contents. The proposition set out at (c) is irrelevant as there was no suggestion that the report omitted to deal with particular documents that contradicted Mr Lamb’s opinion. Whether the proposition set out at (d) is correct is something that will emerge from my assessment of the report on its merits.

Mr Lamb’s evidence

66 At paragraph 13 of his report, Mr Lamb sets out the trading loss, net asset deficiency and working capital deficiency figures shown at [56]. At paragraph 14 he quotes a note to the Deed accounts. Paragraph 15 says that Chick Vic’s overdraft and guarantee facility with the National Australia Bank had a limit of $1,500,000.00. According to a bank document attached to the Deed, that facility consisted of:

· an overdraft and/or guarantee facility with a limit of $900,000.00; and

· a guarantee facility – to be used only for defects liability period guarantees – with a limit of $600,000.00.

According to paragraph 16, the overdraft was $950,182.00 at 31 March 1999. Paragraph 17 is the erroneous list to which I referred at [61]. What follows in paragraphs 18 and 19 is this:

“The situation of Chick Vic as at 30 April 1999 was that it was unable to pay all its debts as and when due at that time, and its overdraft facility was fully used at that time. The available work on hand had a gross value of $386,496. The company needed an injection of equity to enable it to continue, and subsequent projects had to be profitable to contribute to ongoing costs and profit to improve the Chick Vic financial position.

Unfortunately, there appears to be no introduction of equity after 30 April 1999, and subsequent trading was carried out at a loss.”

67 Mr Lamb’s opinion in paragraph 18 that Chick Vic could not, as at the starting point, pay all its debts as and when they became due and payable is largely based on the matters canvassed in paragraphs 13 and 17. However, those matters cannot alone be the basis of a finding that Chick Vic was insolvent at the starting point. The trading loss and the net asset deficiency figures are balance sheet rather than cash flow measures of Chick Vic’s position. As to the working capital deficiency figure, I refer to what I cited at [43] from Quick. Further, Mr Lamb has admitted that the work on hand figure is incorrect. In
cross-examination, a work on hand figure of approximately $8,000,000.00 was put to him. However, notwithstanding his concession of error, the incorrect figure must be taken to have remained a basis for the opinion expressed in his report.

The withholding of cheques

68 Under this heading I deal not only with Mr Lamb’s evidence about the deliberate withholding of cheques but with a point that can be made about the plaintiffs’ case generally. Chick Vic may have suffered from a substantial, though variable, working capital deficiency at the starting point and throughout the duration. But, on the other hand, Chick Vic did not in that period exhibit some of the classic characteristics of insolvent companies. I was taken to only one instance where a cheque it drew was dishonoured upon presentation. There is no evidence as to why the cheque was dishonoured. According to its book-keeper, it only exceeded its overdraft limit once – and that was due to an oversight on her part. Its books were properly kept and they did not need to be reconstructed when it went into administration. Indeed, the administrator was able to account for all moneys. The staff’s salaries, superannuation and other entitlements were paid on time. Taxes and charges (including workers’ compensation premiums) were paid on time. There was no evidence that it frequently changed suppliers or was subjected to the indignity of only being able to procure supplies on a cash on delivery basis. Of course, it is by no means necessary or sufficient that a company display some or all of these characteristics before it can be found to have been insolvent. However, for a Court to be able to find as a fact that a company was insolvent – in that it was not able to pay its debts as and when they became due and payable – it must normally have some evidence apart from the company’s accounts.

69 The plaintiffs have recognised the need for such evidence. Though it is not the only such evidence, the plaintiffs make much of a purported practice by Chick Vic of holding cheques “in the drawer”. That is, they say that Chick Vic habitually drew cheques in favour of creditors – thus reducing the relevant creditor’s balance in its books – and then retained those cheques until a point in time at which it could be confident that their presentation would not cause Chick Vic to exceed its overdraft limit. If it were proved that such a practice existed, it would be powerful evidence that Chick Vic was insolvent – and not just because it would help explain why Chick Vic did not display some of the characteristics to which I referred earlier.

70 At paragraph 36 of his report Mr Lamb says:

“During the period 30 December 1998 to 2 July 1999 Chick Vic have cancelled 41 cheques totalling $1,176,441. Some of these cheques have been signed and therefore it would seem these cheques have been authorised for payment, however it appears that Chick Vic had insufficient facilities to release the cheques to the creditors.”

In that paragraph, Mr Lamb expresses an opinion that Chick Vic was in the habit of drawing cheques for payment to creditors but not delivering them if their presentation would cause Chick Vic to exceed the limits of its banking facilities. However, in cross-examination Mr Lamb:

· agreed that 32 of those cheques were drawn before 31 March 1999;

· did not agree that meant they were irrelevant when it came to determining whether Chick Vic was insolvent at the starting point;

· agreed that “in the absence of knowing why they were cancelled you can’t possibly express a conclusion one way or another”;

· said that “the probability is that they are cancelled because they can’t be sent out now”;

· could not say what proportion of the number or value of the total cheques drawn by Chick Vic in the last two or three years of its existence the cancelled cheques constituted; and

· failed to answer the question whether “without knowing [those] proportion[s] … and especially without knowing the reason for them having been cancelled it would be imprudent for an expert to use them as a basis for forming an opinion”.

(The emphasis is mine.)

71 Mr Lamb then shifted from using the cancelled cheques as a basis for the opinion I described at [70] as follows:

“[T]hat [opinion] was a complete guess on your part, Mr Lamb, I suggest to you, without any basis in fact?‑‑‑Well, there was substantial unpresented cheques on the bank reconciliation so I think that that is the basis of making that statement.

You are talking about some other cheques now, are you?‑‑‑I am just talking about the background in which the company's records were. There were substantial unpresented cheques drawn and not issued.

You are saying there was a disparity as at 30 June 2000 between the balance on the bank overdraft and the amount of cheques that had been drawn?‑‑‑There was a – the period I was talking about was actually according to the information of the meeting of the restructure which was April '99.

I see, right. There was a disparity between cheques that had been written at that time and the balance in the cheque account?‑‑‑Yes.

And from that you draw the conclusion that this company was deliberately holding cheques back and not sending them out?‑‑‑Yes.

And from that you drew this conclusion that you express in paragraph 36 that it appears that the company had insufficient credit facilities to pay cheques and was therefore cancelling them?‑‑‑Yes.”

(The emphasis is mine.) In the emphasised part of the above exchange, Mr Lamb seems to be referring to financial information that Chick Vic provided to its then accountants in April 1999. That material included a summary document entitled “Chick Group Cash / Cash Equivalent Projections – Immediate Outlook” which showed, under “Amounts Owed”, that Chick Vic had $963,000 worth of cheques “held / in mail” at 14 April 1999. (Mr Lamb’s second affidavit refers to that document and that figure.) That document also projected, on the basis of figures as at 14 April 1999, that Chick Vic would have a working capital deficiency of $2,350,000.00 at 30 June 1999.

72 Later in cross-examination Mr Lamb:

· agreed that he had “inferred” from the disparity between the value of cheques drawn and the value of cheques presented at 31 March 1999 that Chick Vic was “holding cheques back”;

· said that the “basis for that opinion” was that “if there is $993,000 [though he probably meant to say $963,000] of unpresented cheques and the bank facilities are such that [creditors] can’t present them, then it follows that [Chick Vic was] holding them back”; and

· conceded that he had not investigated whether such cheques had been drawn in respect of debts that were due and payable at some later point in time.

The following exchange then took place:

“Do you know anything about the method this company had, how many times it printed cheques, did they do one every time one was needed or did they do a print run once or twice a month, who did it, what the system was?‑‑‑No.

You have got no idea have you?‑‑‑No idea who ‑ ‑ ‑

And if in fact it had a system of doing a cheque print run once or twice a month and only sending out cheques because of the terms of trade with suppliers, at some time during the following month, then necessarily I suggest to you, at any given time, there will be a disparity between the total of cheques that have been physically printed in the office and the bank balance?‑‑‑Certainly.

And it follows from that, doesn't it – and this company will be sending out cheques of $1,000,000 or more every month wouldn't it, when you look at its turnover?‑‑‑Yes.

And I suggest to you that the disparity that you have used to form a very damning opinion of the directors of this company at that time, is based on nothing, Mr Lamb, based on a fiction?‑‑‑Well, it is not based on a fiction at all.”

(The emphasis is mine.) As appears from the evidence of Ms Mann at [116], the hypothesis put to Mr Lamb found in the emphasised part of the above exchange accurately describes Chick Vic’s practice in drawing and delivering cheques.

73 Clearly, Mr Lamb’s evidence cannot support a finding that Chick Vic had a practice of deliberately withholding cheques until they could be safely presented – whether at the starting point or in any of the periods.

Paragraph 35 of the report

74 Despite his earlier denial, Mr Lamb conceded that Mr Wright may have written parts of the report. In particular, he said that Mr Wright “worked on the … issue … that is in paragraph 35”. Paragraph 35 is as follows:

“During the period May 1998 until the appointment of the Administrator, Chick Vic in not less than 31 cases has received letters of demand from creditors for payments and/or entered into long term repayment schedules. Chick Vic admit in their own correspondence that it is experiencing cash flow problems and have advised that ‘if and when we are able to recover outstanding progress payments, delay costs and retention monies we will pay any outstanding instalments ….’ The repayment schedules are over long terms and therefore this is an indication that Chick Vic was unable to pay its debts when they fell due. The majority of the repayment schedules have been signed by David Jenkins. During the inspections of the books and records of Chick Vic it appears that creditor correspondence for the period January 2000 to September 2000 was missing.”

75 The reference to paragraph 35 in Mr Lamb’s cross-examination was the only occasion on which it was drawn to my attention. The plaintiffs did not mention it in their comprehensive written submissions, examination-in-chief or their closing oral submissions. Indeed, I was not taken to any correspondence of the sort described and quoted in paragraph 35. Having regard to this and the doubt as to its provenance, I will attach no weight to paragraph 35.

Mr Tobin

76 The plaintiffs called Peter Tobin as a witness. According to his first affidavit:

· he had been a partner of the firm KPMG in its Albury office for 24 years;

· “[u]p until about May 1999, KPMG was engaged to carry out some tax work for [Chick Vic] primarily limited to preparing the statutory financial statements and income tax returns”;

· in April 1999, Chick Vic provided KPMG with the financial information referred to at [71] for the purposes of a meeting to be held at Chick Vic’s premises on 16 April 1999;

· Mr Tobin reviewed that information before the meeting and “noted the following concerns”:

“(a) lack of accurate accounting system to determine the company’s financial position;

(b) the overheads were too high;

(d) unable to see the financial position;

(e) not enough margin on jobs for the business to be viable (as an example, the Commercial Club job had a turnover of $4.8m with the loss of $540,000.00, the Saudi Embassy job had lost $348,000.00 since 30 June 1998);

(f) variations on jobs not being reviewed.”

· in attendance at the meeting were himself, David Baird (also of KPMG), Mr and Mrs Jenkins and Mr Chick and Mrs Chick (and possibly John Jennings, also of KPMG);

· “[t]he general gist of the meeting was that the company was in a parlous financial position”;

· after the meeting, Mr Jenkins indicated to him that (a) the Chicks would end their involvement in Chick Vic and (b) Mr Jenkins would “tip in half a million dollars”; and

· KPMG had no further significant involvement with Chick Vic thereafter.

77 Mr Tobin conceded certain errors in that affidavit. He deposed in his second affidavit that the Commercial Club project resulted in a loss of only $5,400.00 to Chick Vic. He also deposed that he had been told that the Saudi Arabian Embassy project resulted in a loss of $348,000.00 and was unaware at that time that it had actually resulted in a profit of $1,700,000.00. (The $348,000.00 figure represented a reduction in projected profit – which reduction became a loss for accounting purposes.) In cross-examination, he admitted that he had been a partner of KPMG in its Albury office for 14 not 24 years. Nonetheless, I do not consider these errors affect the weight I should accord to his evidence.

78 However, apart from the financial information referred to at [71], Mr Tobin’s evidence as to Chick Vic’s solvency was limited. According to him, KPMG never saw the Deed accounts. Further, notwithstanding his concerns in April 1999, he did not at that time – or at any other point in 1999 – think Chick Vic was insolvent.

Conclusion as to the starting point

79 It has not been proved that Chick Vic was insolvent at the starting point. When one:

· takes into account the error described at [61];

· puts aside the matters canvassed in paragraph 35 of the report; and

· takes into account that Mr Lamb’s evidence cannot support a finding that Chick Vic had a practice of deliberately withholding cheques until they could be safely presented;

one is left with nothing but Chick Vic’s accounts as a basis for Mr Lamb’s opinion. There is insufficient evidence to supplement that opinion to an extent that would allow me to find that Chick Vic was insolvent at the starting point. The fact that the transaction effected by the Deed was for no consideration is of scant probative value. So is Chick Vic’s receipt of a letter of demand on 28 April 1999 from Ross Ried Bricklaying Pty Ltd – which seems to be in respect of an invoice in the amount of $80.00. Finally, as appears from [78], Mr Tobin’s evidence destroys the plaintiff’s case.

THE PERIODS

80 Rather than deal with each of the first, second and third periods under separate headings, I will deal with them together. Each of Mr Lamb, the two witnesses subpoenaed by the plaintiffs and the plaintiffs themselves gave evidence relevant to all three periods. On occasion, it may be necessary to refer to evidence that goes to the starting point rather than, or in addition to, the periods. Notwithstanding its location in these reasons, I took such evidence into account in reaching my conclusion at [79]. Its apparently anomalous location is simply a matter of convenience.

Mr Lamb’s report

81 Mr Lamb’s report concludes as follows:

“1. Chick Vic was insolvent at 30 April 1999.

2. Chick Vic was insolvent at 31 January 2000.

3. Pursuant to section 588E(3) of the Corporations Law, Chick Vic was and remained insolvent for the period 31 January 2000 to 23 January 2001, when an Administrator was appointed.”

82 The part of the report that deals with the first, second and third periods is as follows:

“21. The trading result for the year ended 30 June 1999 was a loss of $357,049. Construction revenue was $13,347,214 and construction margin was $715,380 or 5.36% of construction revenue.

22. Reviewing the balance sheet as at 30 June 1999, the following is noted:

(a) Overdraft is shown at $1,101,684 even though the limit is $900,000. This indicates that cheques were being drawn and held before being issued.

(b) The working capital deficiency is $1,863,453.

23. Chick Vic was insolvent as at 30 June 1999.

…

26. As at 30 June 2000, the working capital deficiency was $3,785,753, without making any provision for uncollectable trade debtors which were carried in the balance sheet at $3,410,936. As at 30 June 2000, $687,097 of trade creditors were over 90 days old. The actual listing of trade creditors showed $4,101,579 as owing, whereas the balance sheet showed only $3,552,895 owing to trade creditors. The overdraft in the balance sheet was $1,589,550 against a facility of $900,000.

27. The trading result for the 2000 year was disastrous with a gross construction loss of $869,847 and an overall loss of $1,986,611.

28. Chick Vic was clearly insolvent at 30 June 2000.

29. Chick Vic prepared a schedule showing Project Margin Contributions. The Republic Apartments contract in Sydney had a gross loss of $1,680,437 in the 2000 financial year. It is clear that the Republic Apartments, Sydney contract has been a major cause of the poor 2000 year trading result. According to the Chick Vic file the Republic Apartments, Sydney contract commenced in 1999.

The original budget for the Republic Apartments, Sydney contract was $5,665,725, which included $320,000 as overhead and margin. The budgeted margin was 5.65% of total expected revenue. The total costs of the project were $8,580,368 according to company records against which $5,872,208 was recovered.

30. By the end of January 2000, the Republic Apartments, Sydney job had proceeded to a stage where the directors of Chick Vic would have known it was exceeding the cost estimate and was trading at a loss.

31. The working capital position of Chick Vic as at the end of January 2000 was as follows according to the records:

	$
Current Assets	2,161,310
Current Liabilities	3,320,123
Deficiency	1,158,813

This working capital deficiency makes no allowance for uncollectable debts included as debtors in current assets.

Of the trade creditors of $1,830,924, $817,334 or 44.6% was owing for in excess of ninety days.

32. Chick Vic was clearly insolvent at 31 January 2000 and having regard to the huge loss on the Republic Apartments project, should have ceased trading.

33. Chick Vic continued to trade after the end of January 2000, and commenced a contract in January 2000, known as West End Plaza Redevelopment. The practical completion of the contract was achieved on 26 November 2000. The West End Plaza contract showed a gross margin of $1,216,163 to 30 June 2000 and with works cost adjustments an expected project margin of $282,727.

34. As at the date of Administration, namely 23 January 2001, a summary of the creditor position was [total creditors of $4,311,673 – made up of Republic Apartments creditors of $830,142, West End Plaza creditors of $3,121,883 and other creditors of $359,648.]

It is clear that the proceeds of the West End Plaza contract have been used to pay the creditors of the Republic Apartments, Sydney contract. The creditors for the West End Plaza contract have remained unpaid notwithstanding that the West End Plaza contract was profitable. This is a clear indication of insolvent trading.”

Paragraphs 35 and 36 are set out at [74] and [70]. The report’s conclusions are set out at [81].

83 Appendix 2 to the report shows Chick Vic’s working capital deficiency and profit or loss in each month in the year 2000:

Month	Working capital deficiency	Profit / (Loss)
January	$1,158,813	$186,060
February	$1,561,927	($423,134)
March	$2,128,459	($113,281)
April	$2,687,909	($549,500)
May	$2,445,472	$860,702
June	$3,696,905	($213,485)
July	$5,157,570	($1,431,350)
August	$5,251,600	($327,258)
September	$5,437,386	($60,199)
October	$5,803,985	($196,936)
November	$7,305,860	($1,490,758)
December	$6,217,357	$1,100,933
Total profit / (loss) for the year 2000		($2,658,206)

84 Appendix 4 to the report shows the proportion of Chick Vic’s creditors’ balance that was at least 90 days old in each month from July 1999 to January 2001 (inclusive):

July 1999	37.39%
August 1999	43.93%
September 1999	38.29%
October 1999	35.34%
November 1999	31.51%
December 1999	52.47%
January 2000	44.64%
February 2000	32.47%
March 2000	26.89%
April 2000	25.32%
May 2000	22.11%
June 2000	16.75%
July 2000	17.14%
August 2000	19.63%
September 2000	25.12%
October 2000	32.52%
November 2000	34.99%
December 2000	50.80%
January 2001	61.24%

However, such a proportion is only of probative value if there is some evidence to suggest that it results from the debtor’s inability to pay its debts as and when they become due and payable. The proportion alone does not disclose why creditors are not being paid on time.

85 It was put to Mr Lamb that in the report he:

(a) failed to acknowledge Chick Vic’s ability to borrow more funds;

(b) placed undue weight on Chick Vic’s failure to make provision for doubtful debts;

(d) incorrectly took into account Chick Vic’s current liabilities in respect of hire-purchase contracts and leases when determining that it was insolvent at the starting point and throughout the duration; and

(e) incorrectly took into account depreciation when determining that Chick Vic was insolvent at the starting point and throughout the duration.

It was also put to Mr Lamb that the fact that Chick Vic’s statutory accounts were prepared on a going concern basis tended to show that it was not insolvent when they were prepared. I will deal with each of these points in turn. However, I reiterate what I said at the end of [68].

86 I am dealing with a no case submission. Although Mr Lamb agreed that an increase in the value of a property available to Chick Vic would enable it to seek an increase in its overdraft limit, resort to the defendants’ evidence would be necessary to sustain the contention at [85](a).

87 As to the matter raised at [85](b), the following exchange took place:

“In paragraph 21 you record, as is the fact, that the trading result for the whole year ended 30 June '99, was a loss of $357,000?---Yes.

And there is a net asset deficiency of, and this is in paragraph 22(c), $515,000, although you do say with no provision for doubtful debts, is that right?---Yes.

So the position is this, isn't it, if we compare paragraphs 13 and 21 and 22 of your report, the company was trading at a loss of a bit over $1,000,000 for the nine months to the end of March '99?---Yes.

But after the overheads are reduced by the departure of the Chick family, and Mr Jenkins is running the company, in that three month period there is a $700,000 improvement in round terms?---Yes.

That is a $700,000 improvement in the profitability of this company in a three month period under Mr Jenkins leadership?‑‑‑Subject to whether the debtor's figure is collectable.”

At paragraphs 26 and 31 of his report, Mr Lamb also points out that the relevant figures do not include a provision for doubtful debts.

88 In his second affidavit, Mr Lamb points to three particular instances where such a provision should have been made. They relate to the starting point and the second and third periods. First, though the financial information referred to at [71] showed a debtors’ balance of $944,068.76, “the amount included as recoverable on the calculation of the overall cash position was $796,000 as at 14 April 1999.” That suggested that Chick Vic had doubts as to the collectability of the difference between the two amounts. However, that disparity – which is not a large one in the context of this case – does not alter my view that Chick Vic was not insolvent at the starting point. Secondly, by December 1999 the proprietor of the Sturt Mall project made clear that a claim by Chick Vic for $1,272.344.00 was disputed. That dispute led Chick Vic to commence proceedings. However, Chick Vic sought only $800,000.00 in those proceedings. Further, consultants engaged by Chick Vic to assess the amount sought in the proceedings advised that it was “valid” as to between $580,000.00 and $600,000.00. (In fact, the proceedings were settled in November 2000 for $200,000.00.) Thirdly, in April, September and November 2000, the proprietor of the Republic Apartments project made clear that a claim by Chick Vic for $505,239.00 would not be paid. Otherwise, Mr Lamb was unable to say what provisions should have been made. As to the first period, all he could point to was the fact that in October 1999 Chick Vic wrote back its debtors’ balance by $287,000.

89 In any case, the argument over whether or not provisions should have been made is one that goes to the reliability of Chick Vic’s accounts and illustrates the point made by Emmett J in Quick (see [43]).

90 As to the overdraft (see [85](c)), the following exchange took place:

“And in the ordinary way of overdrafts, although it is expressed as being operative for a 12 month period, you know, don't you, from your business experience, that so long as the company was continuing to trade the overdraft would, as a matter of course, be rolled over?‑‑‑Yes.

Yes. You have a review, you have got to put in your financials as often as not, but as long as you are continuing to trade the overdraft will roll over. Now, let me suggest to you again, as I did before we turned to that document, that from the point of view of considering the solvency of a company as distinct from writing a balance sheet for it, it is quite – it was quite wrong for you to take into account the outstanding bank overdraft limit?‑‑‑I don't agree with that.

Tell us the date on which the money due to the National Australia Bank by this company under its overdraft facility agreement was due and payable?‑‑‑Well, it could be due and payable in 12 months. But the point of my assessment is that it is on the basis of the total current assets and the total current liabilities.

You assumed, in forming your opinion that this company – as you did, that this company was insolvent on 30 April 1999, that is what you did?‑‑‑Yes.

And you formed the view that it was insolvent on 30 June 1999?‑‑‑Yes.

And on 30 June 2000?---Yes.

In forming each of those opinions you took into account the proposition that this company owed, was obliged to pay on that day, $1 or $1.5 million to the National Bank didn't you?‑‑‑I took into account the existence of the debt in measuring the position of the company.

When in fact, as you know, that money was not in fact due and payable on any of those dates or any other date in between was it?‑‑‑Well, you have to measure the total position of the company, you can't just delete one liability and compare what is left.

But it is not due, Mr Lamb. Let us say this company had borrowed this money not on overdraft but on a fixed 20 year mortgage with capitalised interest so that there were no interest payments payable year by year and the money wasn't repayable for 20 years. Would you take that into account in determining the question of solvency of this company in let us say 30 June 2000?‑‑‑No, because it wouldn't be a current liability.

So it is the difference between being a current liability and a non current liability that plays in your mind is it?---Yes.

So if it might become due sometime in the next 12 months then you think it should be taken into account on the question of solvency?‑‑‑Yes.

If it might become due sometime in the next 12 months you proceed upon the assumption that it is due on the day you are considering solvency?‑‑‑No, it is a matter to be considered – no, it is considered – the current assets and the current liabilities are measured to form your view about solvency.”

Again, that exchange illustrates the point made by Emmett J in Quick (see [43]). Much the same can be said of the point about Chick Vic’s hire-purchase contracts and leases (see [85](d)) and depreciation (see [85](e)). Mr Lamb’s position in respect of the
hire-purchase contracts and leases was similar to that in respect of the overdraft. By contrast, he conceded that depreciation was irrelevant to his determination that Chick Vic was insolvent at the starting point and throughout the duration. Despite the limited nature of the concession, I accept as sound the propositions put by Mr Gunst to Mr Lamb in respect of the overdraft, hire-purchase contracts, leases and depreciation. Mr Lamb’s answers to Mr Gunst’s questions on all those issues – of which the passage set out above is but one example – showed that, though he purported to espouse the (correct) view that insolvency could not simply be divined from a company’s accounts, he proceeded – most likely unconsciously – on the basis that Chick Vic’s continuing working capital deficiency showed that it was insolvent at the starting point and through to 31 January 2000. It may be that Mr Lamb’s treatment of those issues was correct from an accounting point of view. But that is not the basis upon which I must approach them.

91 Finally, the fact that statutory accounts are prepared on a going concern rather than liquidation basis is of scant probative value in determining whether the company that is the subject of those accounts was insolvent at the time they were prepared.

Conclusion on Mr Lamb’s evidence

92 Mr Lamb’s evidence cannot, on its own, support a finding that Chick Vic was insolvent in any of the periods. I have already explained:

· that it cannot support a finding that Chick Vic had a practice of deliberately withholding cheques until they could be safely presented (see [73]);

· why paragraph 35 of the report should be put aside (see [75]); and

· the (incorrect) approach Mr Lamb took in determining that Chick Vic was insolvent at the starting point and through to 31 January 2000 (see [90]).

Mr Chamberlain

93 Christopher Chamberlain is Chick Vic’s liquidator. He was subpoenaed to give evidence by the plaintiffs.

The circumstances of Mr Chamberlain’s appointment as administrator

94 Mr Chamberlain’s involvement with Chick Vic began at a meeting in October 2000. That meeting was organised, at the defendants’ behest, by Brian Curphey, a solicitor of the firm Kell Moore. Mr Chamberlain’s evidence is that

“Brian indicated to me at the time that the meeting, as I mentioned earlier, was very much just for me to give some general advice to Mr and Mrs Jenkins, who had a large building company in the Albury-Wodonga district and was just seeking some sort – some – and having the – were having some difficulty in respect of potentially recovering a large debt and they just wanted some general advice.

Was anything said about the identity of the debt that you have just mentioned?‑‑‑No, I believe at some stage I think Mr Jenkins probably reiterated what Mr Curphey mentioned to me, that he was just there to glean some general information and I think he may have indicated that there – the company was experiencing some difficulty in recovering a large debtor – even though, I think, my understanding was that he felt confident that he would be successful in recovering that debtor he was basically just, from his own perspective as a director, getting some general advice.

And were you provided with any financial documentation in relation to the company or this debt?‑‑‑Nothing whatsoever.

And do you recall how long the meeting lasted?‑‑‑My recollection, because the nature of the meeting was very brief and very basic, was that it would have been 20 minutes to possibly half an hour at max, but I would argue around the 20 minute to be perfectly honest with you.

And did you make any notes of what was said at the meeting?‑‑‑No, I didn't take any notes at the meeting at all.”

95 Mr Chamberlain’s account of the meeting was vigorously challenged by Mr Gunst. It was put to him that he did more than give “general advice” as to the meaning of insolvency as defined by s 95A. In particular, it was put that, having explained some of the classic characteristics of insolvent companies that I described at [68] (and others, including the commencement of proceedings), he went on to ask Mr Jenkins whether Chick Vic displayed any of them and, on the basis of Mr Jenkins’ answers in the negative, advised Mr Jenkins that there was “good reason to believe” that Chick Vic was not insolvent. Further, it was put that at the end of the meeting, he

“told Mr Jenkins that until he was told by the various debtors that they would not be paying their money and in your opinion he, Mr Jenkins, had a more than reasonable expectation that the moneys owing would be paid and that he could continue to trade the company.”

Mr Chamberlain emphatically denied both propositions.

96 I accept Mr Chamberlain’s evidence that at the meeting he gave only “general advice” as to the meaning of insolvency (as defined by s 95A) and gave no opinion as to whether or not Chick Vic was insolvent. This is consistent with his unchallenged evidence that neither before nor at the meeting was he provided with any document outlining Chick Vic’s financial position. I do not accept that it is inherently improbable that he did no more than give such “general advice” on the ground that Mr Curphey could have given such advice, which indeed he did, in writing, after the meeting. However, I find that Mr Jenkins volunteered the information as to Chick Vic’s lack of the characteristics to which I referred at [95] in response to Mr Chamberlain’s enumeration thereof. In his evidence, Mr Chamberlain allowed that that may have happened.

97 According to Mr Chamberlain, he heard nothing more of Chick Vic until December 2000 when he received a telephone call from Mr Jenkins who was at Sydney Airport:

“It was a very brief conversation, I think [Mr Jenkins] rang up to indicate that the debtor that he had referred to at our earlier meeting back in October, it was more than likely that he may – that they wouldn't be getting – they wouldn't be able to recover. And he was concerned about his position, and he may have to consider the appointment of an administrator.”

Mr Chamberlain then indicated that he would be prepared to accept an appointment as administrator. Later, in early January 2001, he met the defendants at their home, where Mr Jenkins “indicated that … as a consequence of his inability to recover, in particular, this large debtor, he now seriously had to consider the appointment of an administrator”.

98 Mr Chamberlain was appointed as administrator on 11 January 2001.

Mr Chamberlain’s reports

99 As Chick Vic’s administrator and liquidator, Mr Chamberlain prepared three reports on its financial affairs. In none of them did he investigate whether Chick Vic was insolvent before 30 June 2000. Nor did he otherwise so investigate. Thus, his evidence is largely confined to the third period.

100 The first report was delivered on 30 January 2001 and can be described as provisional. It estimates that Chick Vic had a deficiency of $3,622,259.00 at 11 January 2001. Under the heading “Background to Company’s Insolvency”, Mr Chamberlain says that because of

“considerable losses experienced on the Republic Apartments [project] (approximately $2.7 million) [Chick Vic] was placed in a position whereby without the injection of considerable working capital from outside sources it could not recover from this loss and an administrator’s appointment [was] inevitable”.

Under the heading “Trading Whilst Insolvent”, Mr Chamberlain says that “a critical time from my investigation appears to be September / October 2000”. At that time, Mr Jenkins “became aware not only of the trading losses incurred on the Republic [Apartments] project, which were crystallizing well before this period” but that the proprietor of that project was disputing the claim to which I referred at [88]. Mr Chamberlain’s view – expressed in somewhat garbled language that doubtless reflects the short time in which the first report had to be prepared – was that that situation

“placed [Mr Jenkins or the defendants together] in a position where to continue incurring debt in respect to the completion of the West End Plaza project after this period was with the knowledge (noting that some West End progress payments have been drip fed back to Republic related creditors) that there was to be insufficient revenue and in particular margin to satisfy all debts as and when they fell due.”

Mr Chamberlain goes on to say that

“in November 2000 [Chick Vic] received a letter of intent in respect to a project at [Shellharbour, New South Wales] to build some cinemas.

This may have provided [Chick Vic] with further cash flow however the profitability was never going to be sufficient to arrest [Chick Vic’s] parlous position with creditors with the outcome inevitable unless there was a material injection of working capital funds from an outside source.

To support also [Chick Vic’s] inability to service its debts in the ordinary course is the ageing of creditors over the last approximately four months of trade which shows those creditors in the 90 days and over [column] contributing to between 30% and 35% of [Chick Vic’s] total unsecured debt. This figure [is] considered high.”

In light of the foregoing, Mr Chamberlain expresses the view that “there [are] reasonable grounds to support the [proposition that Chick Vic] was by definition insolvent from at least September / October 2000 onwards”.

101 The second report was delivered on 24 October 2001. Under the heading “Trading Whilst Insolvent”, Mr Chamberlain says that

“I indicated [in my first report] that I was of the opinion that [Chick Vic] was insolvent back as far as September / October 2000 and this is even further supported by the transfer of [a piece of land at Tangambalanga, Victoria to Chick Vic from a related company in consideration of a debt. H]owever, I believe this can be extended back to include at least 1 July 2000.”

Mr Chamberlain then refers to s 588E(3) of the Act. That sub-section relevantly provides that:

“If:

(a) the company is being wound up; and

(b) it is proved … that the company was insolvent at a particular time during the 12 months ending on the relation-back day;

it must be presumed that the company was insolvent throughout the period beginning at that time and ending on that day.”

(In this case, the relation-back day is 11 January 2001.) Mr Chamberlain goes on to say that:

“If we are to look at the position as at 30 June 2000 the Draft Financials at this date would indicate that there was a deficiency of … $2,502,562.

This figure would even extend out further as within the debtor figures provided (ie approximately $3.706 million) there was no provision for doubtful debts which would include acknowledgment of those difficulties in recovering from [the proprietor of] the Sturt Mall project and some provision for the [Republic Apartments] project etc.

A balance sheet test though is not totally conclusive in assisting in determining insolvency as the courts will look at the financial support available to [Chick Vic] to pay its debts as and when they fall due.

[Chick Vic] had a banking facility with the [National Australia Bank] to a limit of $1.5 million (inclusive of both overdraft facility and bank guarantees).

If we are to look at a history of [Chick Vic’s] account balances with the National since 1 July 2000 we see the following:

	30/06/2000	01/08/2000	06/09/2000	29/09/2000
Bank overdraft balance	$792,399	$1,032,928	$958,424	$637,771
Bank guarantees	$499,413	$145,002	$724,920	$724,920
Unpresented cheques	$555,443	$739,383	$2,612,654	$1,206,269
Total	$1,847,255	$1,917,311	$4,295,998	$2,568,960

	31/10/2000	30/11/2000	30/12/2000
Bank overdraft balance	$873,533	$1,014,624	$782,549
Bank guarantees	$655,464	$416,777	$416,777
Unpresented cheques	$1,429,519	$1,316,064	$1,480,993
Total	$2,958,516	$2,747,465	$2,680,319

What these figures appear to show is that [the defendants] were very mindful of keeping below the bank’s trading limit, however before the close of each month a considerable number of cheques were drawn and effectively placed in the drawer until funds became available, in some instances weeks and others in excess of a month.

In processing these payments prior to month end, it effectively painted a false picture on the Aged Creditors Analysis as even though these creditors were not paid they were not reflected as outstanding on this Report.

In addition the [defendants] were I believe during this period acknowledging the disputes with [the proprietors of the Republic Apartments and Sturt Mall projects] aware that their only income was to come from the West End Plaza project and this was not only insufficient to pay past debts but also [Chick Vic] had no capacity to pay those ongoing orders issuing in respect of West End Plaza.”

(The emphasis is mine.) Notwithstanding the foregoing, Mr Chamberlain told Chick Vic’s creditors that he did not intend to pursue the defendants for insolvent trading – but said that he had already given his consent to this proceeding.

102 The third report is dated September 2003. It maintains that Chick Vic was insolvent at 30 June 2000.

103 Annexed to the third report are Chick Vic’s accounts for the year ending on 30 June 2000 prepared by Chick Vic’s then accountants, Howard and Schnelle. Those accounts disclose a deficiency of $2,502,562.00, trade debtors of $3,410,936.00 (plus retentions receivable of $295,405.00) and trade creditors of $3,552,894.00 (plus retentions payable of $526,433.00). However, Mr Chamberlain observes that the figure for trade debtors does not include a provision for two doubtful debts. (By far the largest of those is that in respect of the Sturt Mall project to which I referred at [88].) Making provision for those reduces the figure for trade debtors to $2,583,843.00. Further, making provision for unpresented cheques worth $562,210.00 increases the figure for trade creditors to $4,641,537.00. A comparison of the revised figures for trade creditors and trade debtors discloses a working capital deficiency of $2,057,694.00.

104 The third report goes on to say:

“In addition at 30 June 2000 [Chick Vic] had experienced a gross loss of $1,680,437 for the year in respect of [the Republic Apartments project.]

…

On 22 December 2000 [Chick Vic] raised an invoice for $1,205,181 for prolongation and variations against the [proprietor]. This debt has never been acknowledged by the [proprietor] as due and in turn they have lodged a claim in this administration for damages of $629,760 as a consequence of the purported breach of contract.

The [Republic Apartments project] commenced in the 1998/99 financial year and was budgeted initially to be completed at $5,665,725. Actual costs however were $8,560,368 whilst total revenue equated to $5,872,208 exposing a loss of $2,708,160, most of which was incurred pre-30 June 2000 ….

The only other major project undertaken by [Chick Vic] over the year 2000 was in respect of the refurbishment and extension of West End Plaza, Albury.

…

At the date of my appointment there was and still is approximately $304,000 outstanding and disputed as due by the [proprietor] to [Chick Vic] whilst unpaid creditor claims in this administration specific to this project are in excess of $2,000,000.

In relation to the prospects of future work for [Chick Vic] I have on file … copy correspondence from Shellharbour Properties Pty Ltd indicating an intention to exclusively negotiate with [Chick Vic] for the construction of a number of cinemas at an unspecified date.

The contract was to be if granted a “turnkey” arrangement, which meant [Chick Vic] would have to fully fund the development with no payment due until 21 days from practical completion. I am unaware of the figures involved nor the anticipated period of the contract if granted.

…

To further evidence [Chick Vic’s] inability to service its debts in the ordinary course from 30 June 2000 I provide hereunder a schedule of [Chick Vic’s] overdraft and bank guarantee balances at various stages post-11 July 2000. The schedule also reflects [Chick Vic’s] habit of drawing cheques prior to the close of the month and holding same until funds became available. I am of the opinion the processing of these payments prior to month’s end was done to keep the Aged Creditors Analysis reflecting [Chick Vic] operating within terms of trade. The cheques were then randomly released upon funds becoming available.

…

Date	30.06.00	31.07.00	06.09.00	29.09.00
Overdraft account balance	$1,020,739	$1,032,928	$958,424	$637,771
Bank guarantees	$499,413	$145,002	$724,720	$724,720
Total	$1,520,152	$1,177,930	$1,683,144	$1,362,491
Unpresented cheques	$562,210	$739,383	$2,616,654	$1,206,269
Level account exceeded if cheques were presented when drawn	$582,362	$417,313	$2,799,798	$1,068,760

Date	31.10.00	30.11.00	31.12.00
Overdraft account balance	$873,533	$1,014,624	$782,849
Bank guarantees	$655,484	$416,777	$416,777
Total	$1,529,017	$1,431,401	$1,199,626
Unpresented cheques	$1,429,519	$1,316,064	$1,480,993
Level account exceeded if cheques were presented when drawn	$1,458,536	$1,247,465	$1,180,319

(The emphasis is mine.) Mr Chamberlain was unable to explain the discrepancy between the figure for the overdraft account balance at 30 June 2000 shown in the table above and the same figure in the table set out in the last passage quoted at [101]. Nor could he say which was the correct figure. (Other evidence shows that the former figure is the correct figure.)

Mr Chamberlain’s cross-examination

105 At [101], I quoted the following passage from Mr Chamberlain’s second report:

However, in cross-examination, the following exchange took place:

“What is it about that transfer that leads you to conclude that the company was insolvent at an earlier date than you had hitherto expressed as your opinion?‑‑‑In respect of that particular transfer itself, nothing as we speak.”

106 Despite the structure of the first passage quoted at [105], a careful reading thereof suggests that Mr Gunst’s question involves a mischaracterisation of the reasons for Mr Chamberlain’s belief that Chick Vic’s insolvency commenced as early as 30 June 2000 rather than “September / October 2000”. According to the second report, “the [transfer] clearly occurred in late October 2000 with the documents backdated to 30 June 2000”. I cannot see how the backdating supports the belief – if that is what Mr Chamberlain was suggesting in the second report. Rather, the reasons for the belief – which appear in the last passage set out at [101] – are as follows:

· Chick Vic’s working capital deficiency at 30 June 2000 – which would have been even larger had provision been made for doubtful debts;

· Chick Vic’s purported practice of deliberately withholding cheques; and

· the fact that revenues in respect of the West End Plaza project had to fund payments to creditors in relation to that project as well as previous projects where proprietors were disputing Chick Vic’s claims.

That assortment of reasons explains the following exchange:

“And you say this: ‘The schedule also reflected the company's habit of drawing cheques prior to the close of the month and holding the same until funds became available’?‑‑‑Yes.

Now, that is, in essence, what underpins your conclusion that this company was insolvent from either September / October or 30 June 2000, isn't it?‑‑‑Not specifically, no.

It is a very significant matter when you are forming your opinion, isn't it?‑‑‑It is part of the package, yes.”

I understand Mr Chamberlain in the answer to the last question to be agreeing with Mr Gunst’s last proposition.

107 As to Chick Vic’s “habit” of withholding cheques, the following exchange took place:

“If the company had a practice of doing a print run on all its cheques, hundreds every month, once a month in about the middle of month or perhaps the third week, but held them back until they were due, which might be as long as 45 days after the end of that month, locked them away in a filing cabinet for security purposes, that would be another explanation, wouldn't it?‑‑‑That is correct, yes.

And if that was true, the fact that there was a large – in dollar terms large volume of unpresented cheques, you would have to revisit your opinion, wouldn't you?‑‑‑That is correct.”

Later, Mr Gunst having taken Mr Chamberlain through the table set out at [104], the following exchange took place:

“… so that is the method that you have adopted. Month by month ‑ ‑ ‑?‑‑‑Yes.

‑ ‑ ‑ it is bank overdraft balance plus guarantees equals the total column and then you say plus the unpresented cheques written at the – held in the drawer at the end of that month therefore they are – whatever the figure in the final column is – over their limit if those had all been cashed at the one time?‑‑‑Yes.

Right and the assumption in all of that is that they were all due and payable as at that month's end date that you picked?‑‑‑That is correct.

If in fact the evidence that his Honour accepts is that the company – I will put to you what the evidence is. The terms of trade of this company were, at least for sub-contractors, that invoices would be received. If they were received during a month but by the 28th and not thereafter, they would be noted as received in that month. If it was the 28th or later they would be rolled over and noted as received in the following month. That they would then become due and payable 45 days after the end of the month in which they were so noted as received. Now, do you have some understanding; have you heard that before?‑‑‑Yes, yes, most definitely.

You either heard that from company officers or you have read it in documentation?‑‑‑I have an awareness, yes.

…

Hundreds of cheques every month would be what you would understand would be about the number that [Chick Vic] was writing every month?‑‑‑Potentially.

Well, you have looked at the banking records?‑‑‑Yes.

There were, in fact ‑ ‑ ‑?‑‑‑There were a considerable number of cheques.

‑ ‑ ‑ hundreds of cheques that this company was writing every month, weren't there?‑‑‑Yes.

And if that is the case - let us say the cheque run is done on the 20th of the month and payments are not due and payable until 45 days after the end of that month – then let us say it is done on the 20th, you have got possibly 55 days until some particular debt has to be paid; do you follow that?‑‑‑I understand what you are saying.

And that would make this analysis rather a false one, wouldn't it?‑‑‑If that was – if that was the correct scenario, potentially that would create issues in respect to that analysis, yes.

And, in fact, just so we understand it – this company – you have looked at the bank records and this company was paying out hundreds of cheques a month ‑ ‑ ‑?‑‑‑Yes.

‑ ‑ ‑ but it was also, in fact, receiving money on a regular basis, wasn't it?‑‑‑Yes

For all the projects it had?‑‑‑Yes, yes.

It wasn't getting much from the Republic Apartments?‑‑‑No.

But it was being paid by ‑ ‑ ‑?‑‑‑West End.”

(The emphases are mine.) Mr Gunst then, again, took Mr Chamberlain through the table set out at [104]. Mr Chamberlain agreed that it showed that moneys were flowing in to and out of Chick Vic. The cross-examination then concluded as follows:

What I want to suggest to you is that this is the classic picture of a company where the directors were no doubt sweating on money coming in in each month so that the debts could be paid as and when they fell due, but it is not evidence of a company that is unable to pay its debts as and when they fell due?‑‑‑I accept your determination under that situation.

Further, in re-examination the following exchange took place:

“… you said in evidence to his Honour that you were aware of the 45 day terms of trade issue?‑‑‑Yes.

Did you take that issue into account in forming your views about cheques being held and released as expressed [in the emphasised passage in the quote at [104]]?‑‑‑I didn't go back specifically and marry each cheque up to each creditor to determine as and when they – you know, whether it was the cheque being held was due and payable at that particular point in time, or was being released as and when it fell due and payable.

108 In the light of the foregoing, as with Mr Lamb, Mr Chamberlain’s evidence cannot support a finding that Chick Vic had a practice of deliberately withholding cheques until they could be safely presented. His evidence discloses an untenable assumption on his part thatall unpresented cheques at any date were due and payable on or before that date. His evidence that he failed to test that assumption fatally undermines the only basis on which he could say that Chick Vic had that practice. He admitted as much.

109 In each of the first two passages set out at [107], Mr Gunst put to Mr Chamberlain a situation where debts in respect of which cheques were drawn and held were not due and payable until 45 days after the end of the month in which those cheques were printed. That was not the situation at Chick Vic. However, that does not affect my conclusion at [108]. In any case, Mr Gunst correctly described the situation at Chick Vic in the second emphasised passage in the second quote at [107]. Mr Chamberlain replied that he was aware of it.

110 There remains the question of the import of Mr Chamberlain’s answer to Mr Gunst’s last question (see the third quote at [107]). Does it amount to a retraction of his opinion that Chick Vic was insolvent – whether at 30 June 2000 or “September / October 2000”? The passage quoted at [106] suggests that it does not. Rather, the answer is a retraction of that opinion to the (substantial) extent it is based on Chick Vic’s purported practice of deliberately withholding cheques until they could be safely presented. It is another reason why Mr Chamberlain’s evidence alone cannot support a finding that Chick Vic had such a practice.

111 Moreover, contrary to what I have set out at [103], Mr Chamberlain agreed with Mr Gunst that there was “nothing unusual” about the fact that Chick Vic’s accounts made no provision for the debt in respect of the Sturt Mall project to which I referred at [88].

112 Finally, Mr Chamberlain agreed with the proposition that, except in the case of the first and fourth plaintiffs – against whom, in his capacity as Chick Vic’s liquidator, he had initiated proceedings seeking to recover alleged unfair preferences paid to them by Chick Vic,

“[w]ithout doing an investigation of what debts were paid by [Chick Vic] to what creditors on what dates, it is not possible for you to express a view or to stipulate any particular creditor at all that was not paid as and when its debts fell due.”

As to the first and fourth plaintiffs, he agreed with the proposition that:

“[w]ithout going back and doing an analysis of what invoices each of those cheques [enumerated in the relevant statements of claim] was paid in respect of you couldn't say whether or not any of those cheques was paid inside the time it was due or outside.”

(The proceeding against the first plaintiff was settled. The proceeding against the fourth plaintiff remains on foot.)

Conclusions as to Mr Chamberlain’s evidence

113 Mr Chamberlain’s evidence cannot, on its own, support a finding that Chick Vic was insolvent in the third period. I have already explained that it cannot support a finding that Chick Vic had a practice of deliberately withholding cheques until they could be safely presented (see [108]). The remainder of his evidence largely relates to Chick Vic’s accounts. Further, his observation in his second report that revenues in respect of the West End Plaza project were insufficient to pay past, current and anticipated debts (see the last paragraph of the third passage quoted at [101]) is, on its own, neither here nor there – particularly in light of the fact that he could not say that any particular creditor was not paid on time (see [112]). Mr Lamb made a similar observation, though in stronger terms, in his report (see paragraph 34 of the extract therefrom at [82]). Those observations are to some extent contradicted by Ms Mann’s evidence (see the second passage quoted at [117]) and the evidence of each of those plaintiffs who signed a standard form of statutory declaration (see [137] to [139]).

Ms Mann

114 Cheryl Mann was Chick Vic’s book-keeper from August 1998 to March 2001. She was subpoenaed to give evidence by the plaintiffs, which she did before Mr Chamberlain gave his evidence.

115 Ms Mann impressed me as a conscientious witness. In her evidence, she was careful not to stray beyond the bounds of her essentially administrative and clerical role at Chick Vic. She emphasised that, whatever her concerns as to Chick Vic’s financial position, she did not have the “big picture” – that is, an awareness of the potential contracts that Mr Jenkins was working to secure. For the same reason, she was the “eternal pessimist” to his “eternal optimist”.

Chick Vic’s practice in drawing and delivering cheques

116 At [72], I adverted to Ms Mann’s evidence as to Chick Vic’s practice in drawing and delivering cheques. It was as follows:

(a) Chick Vic’s terms of trade with sub-contractors were that payment in respect of an invoice received from a sub-contractor was due on the forty-fifth day from the end of the month in which that invoice was received.

(b) However, any invoice received after the twenty-eighth day of the month was deemed to have been received in the following month.

(c) Therefore, for example, payment in respect of an invoice received on 28 September was due “in the middle of November”.

(d) Cheques were drawn by way of Chick Vic’s accounting software.

(e) Once a cheque had been drawn, that software assumed that it had been presented (and paid).

(f) Therefore, the drawing of a cheque reduced a creditor’s balance as shown in the accounting software – even if that cheque had not been presented (and paid).

(g) Ordinarily, a large batch of cheques – over a hundred – in respect of payments due in the following month was drawn in a monthly “cheque run” that took place “usually around the middle of the month or perhaps in the third week of the month or thereabouts”.

(h) Therefore, the vast bulk of cheques drawn in a cheque run did not need to be delivered immediately because the payments in respect of which they were drawn were not due.

(i) Instead, such cheques were signed – largely by Mr Jenkins – and then placed in a locked cabinet. They were withdrawn from the cabinet when the time came to deliver them.

(Sub-paragraphs (d) to (f) mean that any financial information derived from the accounting software will give a misleading picture of Chick Vic’s liabilities if it does not also take into account unpresented (and unpaid) cheques.)

The “juggling act”

117 Ms Mann’s evidence about Chick Vic’s arrangements for paying creditors, at the commencement of her employment, was as follows:

“I am not really sure but from my recollection I think when we received payment for a claim that was due to us [Mr Jenkins] would advise me to pay out what was owing, maybe up to a certain amount, and to ensure that I didn't exceed the overdraft limit at the time. And I may have discussed some people or he would have told me who it was important to pay. But my recollection is fairly vague in the beginning but there was – I know there was a process and maybe we interacted and discussed it at some time. But I just generally felt that the most important thing was that the bank overdraft was not exceeded, which goes without saying, I guess, and that the people were paid in accordance with when they were owed.”

However, of the position from December 1999 she said:

“I can't remember any specific subcontractor that was paid late, your Honour, because there were hundreds of cheques drawn every month, and if this one had to be checked out specifically, you would only need to check from a sub-contractor's payment report, when a cheque – when an invoice came in, and when a cheque was presented. But certainly, I wouldn't have been getting many calls every day if payments were out on time, and it was a juggling act to ensure that subcontractors remained on site. There was no problem with [the] West End Plaza [project], they were paid. But with the Republic [Apartments project], we weren't realising the claims that were lodged, and therefore, the claims were paid for a lot less than what was being lodged due to those variations that hadn't been approved. So when, I think the question was, what did I do when things were tight, and there wasn't any money to pay, it became a juggling act to sort out who needed to be paid the most, and whose cheque would be delayed.”

(In fact, none of those plaintiffs who worked on the Republic Apartments project threatened to walk off the site.)

118 According to Ms Mann, “the situation got worse” throughout the year 2000, right up to Chick Vic’s administration. She had to consult Mr Jenkins more and more frequently as to whether specific cheques should be delivered – though Mr Jenkins “always scrutinised the invoices”.

119 Further, Ms Mann had to deal with sub-contractors who would call Chick Vic’s office to inquire as to when they would receive payment. The number of those calls – many of them repeated calls from the same sub-contractors – increased markedly throughout that year. At any one time, she had on her desk a “pile” or “pyramid” of about eighty messages to return such calls made in the last few days.

120 Moreover, in March 2000, Chick Vic was forced to stop work on the West End Plaza project for about two months due to site contamination. In cross-examination, the following exchange took place:

“The stoppage of the West End job posed considerable, sort of, dislocation difficulties for Chick Vic, didn't it?---Yes, it did.

There were trades who had been lined up, and materials lined up for the site, that all had to be put on hold?‑‑‑Yes.

Yes, and there was – I know you weren't involved in the project management side, but you would have understood from talk around the office in Albury, that a considerable amount of juggling had to be done, to reorganise all of that?---I understood it created difficulty, yes.

121 Immediately after that exchange, the following exchange took place:

And now, it is right to say, isn't it, that there were considerable difficulties in the last couple of months before the administrator was appointed in paying cheques?‑‑‑Correct.

That there was a considerable difficulty with the flow of money into the company in those last several months?‑‑‑Correct.

Yes. Can you recall any particular occasion on which bills haven't been paid because of a lack of funds prior to October 2000?‑‑‑No, I can't remember any specific creditor that had not been paid on time, and I think when you draw, maybe, hundreds of cheques a month, it is possibly – yes, I mean, that is too difficult for me to answer.

Thank you?‑‑‑But, I mean, it could easily be shown by looking at when a cheque was drawn, comparing it to when it was due, the payment, and then researching it through the bank statement, when it was actually presented.

Yes?‑‑‑So that could easily be identified, with actual verification, from the Chick Vic documents.”

However, in re-examination, the following exchange took place:

“Ms Mann, you were just asked a moment ago, about the last several months, difficulty paying money. And you were asked if you could recall any specific creditor not being paid on time, and you said you couldn't recall a specific creditor not being paid on time. What was your recollection in general, as to payment of creditors. Were they being paid on time?‑‑‑Well, I think if they were being paid on time, it was with a great deal of difficulty. And as I said, I can't nominate a specific creditor that was not paid on time. I was asked about the last two months, and it was extremely tight then, and I think that – you would only need to look through that final list of creditors, and that would show the current creditors, say, in January, would be current, December would be 30 days, and go back to November, and see who was outstanding there, and see if the company could pay those outstanding claims from November in the middle of January, if it was 45 days. And I can't say for sure, or nominate one creditor, that wasn't paid on time, but as I say, the – to find that out, you only need to research the records of Chick Vic.

When you gave evidence about juggling and you were cross-examined about this – of payments. When did that juggling process that you have mentioned commence?‑‑‑Well, from my recollection of it it commenced in December 1999.

And when that commenced – or after that commenced was everyone paid, as you recall it, on time?‑‑‑No, my recollection is that people weren't paid, in general, on time but as I said I can't be any more specific than that.”

That evidence is consistent with the following evidence adduced during examination-in-chief:

“And focusing on about January 2000 what about trade creditors, were they always paid on time?‑‑‑Well, to my recollection that is when money started to get – the liquidity started to get very tight and I would probably say, no.”

Problems with the Republic Apartments project

122 The evidence of almost all of the witnesses made it clear that the Republic Apartments project was the death of Chick Vic.

123 In December 1999, Ms Mann (presciently) remarked to Chick Vic’s receptionist that “we wouldn’t be here in 12 months’ time” because of the Republic Apartments project. She did not convey that concern to Mr Jenkins. In examination-in-chief the following exchange took place:

“And I was asking you, and I will put this question to you, just giving your own opinion, did you at the time, as at December 1999, form a view about the profitability or otherwise of the Republic Apartments project?---Yes, I did. The [progress] claim [by Chick Vic], it must have been November's claim came in and from memory it was in excess of 600,000 and I think we realised a bit over 300,000. And at that time, because it was on Christmas, the cash flow is stretched to the limit because you close down over Christmas and so did the sub-contractors and they also had wages to pay because they close down for a period of time. Everyone demands to get paid which is fair enough, and on the face of it I couldn't, only in my opinion, I couldn't see that the Republic would improve in a way that it was going and I really felt that in 12 months time it probably would break the company's back.”

However, in cross-examination Mr Gunst drew Ms Mann’s attention to a Chick Vic document that shows that, in respect of the claim referred to in the above passage, Chick Vic received an amount in excess of the claim. Ms Mann described that discrepancy as “unusual”. Moreover, the document does not show when that amount was paid. In any case, Ms Mann did not agree that she would “necessarily have to revisit [her] memory of those events, and when it was that the tightness of liquidity started” and said that though

“I may have been wrong in the amounts … I am still clear about the liquidity, and what it had in store for the next 12 months … [b]ecause I … made that comment to the receptionist, and that is exactly what I felt at the time I made it.”

Further, in cross-examination Ms Mann said that though she did not think Chick Vic “broken” in December 1999, she did think it “broken” in February 2000. Again, she did not convey her concern to Mr Jenkins.

124 It was not until September 2000 that Ms Mann shared with Mr Jenkins her concerns as to the damage the Republic Apartments project was causing to Chick Vic’s financial position. A document she had prepared for the purposes of the accounts disclosed that Chick Vic had suffered a loss of approximately $1,700,000.00 on that project. When she showed the document to Mr Jenkins, she said “there is your black hole”. She agreed that Mr Jenkins was “devastated” at the news – which, it seems, was the catalyst for the meeting described at [94].

Other matters arising from Ms Mann’s evidence

125 One of Ms Mann’s regular tasks was to prepare cash flow analyses including cash flow projections. Though she was unable to say how frequently she prepared them, she said it was “probably weekly or monthly”. However, Ms Mann stopped preparing them “maybe six months before” Chick Vic went into administration after Ms Jenkins described one of them as “bullshit”. In examination-in-chief, the following exchange took place:

“And was there anything different about the content of that cashflow that you prepared that led to this discussion to any of the earlier ones?‑‑‑I think – I think in this cashflow I probably left out the Sturt Mall [debt referred to at [88]] and I probably left out the money from Pacific Shopping Centres as well from Morrie Alter. Because they were – they were debts that were longstanding, particular Pacific Holdings. I think that was outstanding since I arrived there. And when you are looking at doing a short term cashflow, you can't count on a court case may be happening in the next four weeks, it’s long term projection.”

In relation to the Pacific Holdings debt, Ms Mann had earlier said that “I didn't think that Chick Vic would ever see a dollar of that money off Morrie Alter”. However, in
cross-examination she agreed with Mr Gunst that “Mr Jenkins … would be in the best position to know the likelihood of Mr Alter paying money”. Further, in relation to the Sturt Mall debt referred to at [88], she agreed that she was not “across the detail of the rights and wrongs of [the dispute] or the likelihood of recovery … [or] whether it was likely that that money would be recovered, or whether the proprietor had the money”.

126 Ms Mann was also asked about the cancelled cheques referred to at paragraph 36 of Mr Lamb’s report (see [70]). Various – for want of a better word – innocent explanations for the cancellation of those cheques were put to her. In one instance she disagreed with the explanation. In seven instances she was unable to say whether she agreed or disagreed. In all other instances, she agreed.

Conclusions as to Ms Mann’s evidence

127 I accept Ms Mann’s evidence as set out at [116].

128 The overwhelming burden of Ms Mann’s evidence was as to the period from December 1999 until Chick Vic’s administration – that is, as to the second and third periods. Her evidence was that she did not see Chick Vic’s financial position as problematical until December 1999 – almost half way through the second period.

129 Ms Mann’s evidence suggests that Chick Vic deliberately withheld some cheques until they could be safely presented. However, her evidence does not disclose the extent to which Chick Vic engaged in that practice.

130 Moreover, Ms Mann’s evidence as to the late payment of sub-contractors is of a very general nature. Not surprisingly, she could not recall a specific instance where a
sub-contractor had received late payment. That is not intended as a criticism of her. However, she said “you would only need to check from a sub-contractor's payment report, when a cheque – when an invoice came in, and when a cheque was presented” (see the second passage quoted at [117]) and “it could easily be shown by looking at when a cheque was drawn, comparing it to when it was due, the payment, and then researching it through the bank statement, when it was actually presented” (see the first passage quoted at [121]). The plaintiffs had not undertaken such an exercise by the time I reserved my decision on the no case submission.

131 Ms Mann’s concerns as to Chick Vic’s financial position are those of a person with an intimate knowledge of important aspects of the company’s financial affairs – but by no means a complete knowledge. Indeed, as I noted at [115], Ms Mann was careful not to claim such knowledge for herself. Further, the catalyst for her concerns may have arisen from a misunderstanding on her part (see [123]).

132 For those reasons, Ms Mann’s evidence cannot, on its own, support a finding that Chick Vic was insolvent in the second or third periods.

The plaintiffs

133 The evidence of the plaintiffs as to Chick Vic’s insolvency was scant and of an even more general nature than that of Ms Mann. In addition, that evidence – such as it was – tended to undermine their case.

134 On 22 December 2000, the first plaintiff initiated two proceedings against Chick Vic. Ian Paterson, general manager of the first plaintiff, deposed in his second affidavit in this proceeding that “I had no reason to believe that the payment claims sought in [those] proceedings would not be met once the ‘prodding’ of [those] proceedings brought pressure on David Jenkins to pay these claims”. It is unclear whether that happened. Mr Chamberlain’s evidence was that Mr Jenkins mentioned those proceedings to him either at the meeting referred to at [97] or in a telephone call requesting that meeting.

135 In cross-examination, the following exchange took place:

“It is your evidence isn't it, Mr Paterson, that it wasn't unusual for Chick Vic to pay invoices outside the usual terms?‑‑‑That wasn't unusual.

And in fact payments were more often late than on time?‑‑‑Correct.

And that is quite common in the building industry?‑‑‑Correct.

And whilst Chick Vic's payments were often more overdue than others, there was nothing unusual about the payments made during the course of the construction of the West End Plaza project?‑‑‑Correct.

So there was no discernible difference in 2000 as compared with say 1997, '98 and '99?‑‑‑If anything it was getting longer. It wasn't reducing.

But it was still a situation that you regarded as quite common in the building industry?‑‑‑Correct.

And there was nothing – to you, in your view, there was nothing unusual about the way Chick Vic made payments during the West End Plaza project?‑‑‑It was starting to stretch out but it was, again, what happened in the building industry.

There was nothing unusual about the way Chick Vic made payments to Tru Floor during the course of the West End Plaza project?‑‑‑No, it was – the payments were being drawn out. They were getting longer.

Mr Paterson was then taken to another passage in his second affidavit where he deposed that “[w]hilst Chick Vic's payments were often more overdue than others there was nothing unusual about the way it made payments during the course of construction of the West End Plaza project.” He agreed that that statement was correct.

136 Moreover, the first plaintiff provided eleven trade references for Chick Vic in the period from 11 October 1999 to 20 November 2000. They seem to have been completed by staff of the first plaintiff other than Mr Paterson. The references were in forms issued by the entity seeking them. The first plaintiff was called upon to complete the form and return it. The forms sought the duration and volume of the first plaintiff’s trade with Chick Vic and the terms on which Chick Vic paid the first plaintiff’s invoices. Most forms also sought an indication as to whether Chick Vic in fact paid those invoices within those terms and, sometimes, as to its payment record in a general sense. The first plaintiff’s responses were that Chick Vic paid invoices within 45 to 60 days and that the first plaintiff considered its payment record “good”, “OK” or “satisfactory”. Moreover, Mr Paterson himself provided a laudatory trade reference for Chick Vic on 30 March 1999. However, that document is addressed “TO WHOM IT MAY CONCERN”.

137 Further, Mr Paterson made a statutory declaration on 13 October 2000 that:

“As at [that date] I confirm that all monies due and payable to Sub-contractor in relation to the Works have been paid to them save for unapproved variations and retentions in respect of any work which they have carried out or materials or goods which they have supplied or services which they have rendered for or in relation to the Works.”

Despite the use of the word “them”, it is clear that the import of the declaration was that the first plaintiff had been paid by Chick Vic. Mr Paterson confirmed that the passage quoted above was correct.

138 The second plaintiff made a statutory declaration containg the passage quoted at [137]. Though he could not recall seeing or signing the declaration, he confirmed that it was his signature on the declaration. Moreover, he accepted the proposition that he was “not positively saying [he had] never seen it at any time in the last five and a half years”. Although the second plaintiff could not recall signing the declaration, he confirmed that the passage quoted at [137] was correct.

139 David Allen of the eighth plaintiff, Terrence Jones of the fourth plaintiff and Andrew Robin of the sixth plaintiff also made statutory declarations contaning the passage quoted at [137]. Each confirmed that his declaration was correct.

140 Beyond confirming that their declarations were correct, the second plaintiff and Mr Robin said nothing of note in relation to Chick Vic’s insolvency.

141 Russell Delaney of the fifth plaintiff, Cyril Przibella of the seventh plaintiff and Vincent Robertson of the ninth plaintiff also said nothing of note in relation to Chick Vic’s insolvency.

142 The following exchange took place during Mr Allen’s cross-examination:

“And at all times up until the appointment of the administrator you expected that Torney and Allen would be paid in full by Chick Vic didn't you?---Yes.

And you had no reason to expect that that wouldn't be the case did you?‑‑‑No.

As far as you were concerned up until that time it was simply business as usual between Chick Vic and Torney and Allen?---Yes.

And you say in paragraph 10 [of your first affidavit in this proceeding], at the end of paragraph 10:

Had I believed there was a likelihood we would not have been paid I would have ceased work.

Do you see that?---Yes.

And Torney and Allen never ceased work on West End Plaza due to
non-payment did they?‑‑‑That is right.

And it never even threatened to?‑‑‑No.”

143 Finally, two persons gave evidence for the fourth plaintiff. I have already referred to Mr Jones at [139]. Some time after Chick Vic went into administration, he was succeeded as general manager of the fourth plaintiff by John Wagner. In cross-examination, Mr Jones said that some of Chick Vic’s payments to the fourth plaintiff were late, but that late payment was not unusual in the building and construction industry. However, after about July 2000 Chick Vic’s payments were no longer “consistent”. Nonetheless, Mr Jones agreed with the proposition that “at no time in the year 2000 was there any conduct by Chick [Vic] that made [him] suspect that Chick [Vic] wouldn't be able to make payment[s].” In cross-examination, Mr Wagner agreed with a similar proposition that in the period leading up to Chick Vic’s administration “[t]here was nothing unusual about the commercial arrangements, the terms of trade, the doing of work or the paying of bills that might have given rise to any suspicion at all that Chick Vic was in any sort of financial trouble”.

Conclusion as to the periods

144 I have already said that:

(a) Mr Lamb’s evidence cannot, on its own, support a finding that Chick Vic was insolvent in any of the periods (see [92]);

(b) Mr Chamberlain’s evidence cannot, on its own, support a finding that Chick Vic was insolvent in the third period (see [113]);

(c) Ms Mann’s evidence cannot, on its own, support a finding that Chick Vic was insolvent in the second or third periods (see [132]); and

(d) the plaintiffs’ evidence – such as it was – as to Chick Vic’s insolvency tended to undermine their case (see [133]).

145 I must now turn to what emerges from the totality of that evidence – namely, whether it has been proved on the balance of probabilities that Chick Vic was insolvent in any of the periods. In deciding that question, I take the approach set out at [50].

146 It has not been proved that Chick Vic was insolvent in any of the periods. It follows that it has not been proved that Chick Vic was insolvent for the duration (see [55]). It is clear that Chick Vic suffered from a substantial, though variable, working capital deficiency throughout the duration. It is also clear that Chick Vic suffered substantial losses throughout the duration. Further, Chick Vic’s accounts disclose a relatively high proportion of aged creditors. Beyond that, the evidence that Chick Vic was in fact unable to pay its debts as and when they became due and payable is scant and far too vague to act upon. The extent to which Chick Vic deliberately withheld cheques until they could be safely presented remains unclear. Similarly, the extent to which sub-contractors were paid late remains unclear. Those extents might have been made clearer had the plaintiffs undertaken the detailed scrutiny of Chick Vic’s records suggested by Ms Mann (see [130]). After all, neither Mr Chamberlain nor Mr Lamb had done so – thus exposing their evidence to the (well-founded) criticism that it relied on assumptions that had not been tested. Further, the reasons why
sub-contractors were paid late remain unclear. There is some evidence that it was because of liquidity problems. However, there is also some evidence that the plaintiffs saw it as common practice in the building and construction industry. In any case, the evidence is, again, far too vague to act upon. Indeed, it is so vague that any question that may arise from the (apparent) conflict between the authorities on the relevance of creditors’ forbearance – canvassed at [45] to [48] – does not arise for determination in these reasons.

147 Of course, common sense dictates that, even if it has not been proved that Chick Vic was insolvent in the third period, Chick Vic must have been insolvent at some point in the period before its winding up commenced. The company did not simply fall in a heap on 7 February 2001. However, it is for the plaintiffs to prove the point at which insolvency began. The evidence is such that that date can only be guessed at. Hazarding such a guess – thus potentially making the defendants liable to pay debts incurred by Chick Vic on and after that date – would be contrary to the approach set out at [50].

CONCLUSION

148 At [41] I said that in order to succeed, the plaintiffs must before anything else show that Chick Vic was insolvent at the times it incurred the debts they seek to recover or that it became insolvent by incurring the same. As it has not been proved that Chick Vic was insolvent at the starting point or in any of the periods, I must uphold the no case submission and dismiss the proceeding. I see no reason why the ordinary rule that the plaintiffs pay the defendants’ costs should not apply.

I certify that the preceding one hundred and forty-eight (148) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg.

Associate:

Dated: 26 May 2006

Counsel for the Plaintiffs:	J Delany SC with J Barber

Solicitor for the Plaintiffs:	James G Sloan

Counsel for the Defendants:	C Gunst QC with M McNamara

Solicitor for the Defendants:	Pryles & Co

Date of Hearing:	27 and 28 February and 1 to 3, 6 to 10 and 14 March 2006

Date of Judgment:	26 May 2006

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