FEDERAL COURT OF AUSTRALIA

Pearce v Gulmohar Pty Ltd [2017] FCA 660

TABLE OF CONTENTS

ORDERS

THE COURT ORDERS THAT:

1.    The matter is listed for hearing on 6 July 2017 at 9.30 am as to the form of orders and as to costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

RANGIAH J:

1    Before going into liquidation, the first plaintiff, Grass Valley Formulators Pty Ltd (in liquidation) (GVF), engaged in a series of transactions with the first to fifth defendants. The plaintiffs allege that these transactions are “voidable transactions” within s 588FE of the Corporations Act 2001 (Cth). The plaintiffs also allege that the fifth and sixth defendants breached their duties as directors of GVF by causing the company to enter the transactions.

2    GVF’s problems began on 24 March 2009 when a fire broke out at its factory, resulting in chemical contamination of its site. GVF engaged Toxfree Solutions Ltd (Toxfree) to collect contaminated material from the site. Whether Toxfree was engaged to do any other work and its charges are matters in dispute. The maximum amount of GVF’s insurance cover was $1,549,000 after deduction of the excess. The insurer paid GVF that amount, but it was not enough to cover Toxfree’s invoices. GVF did not use the insurance proceeds to pay any part of Toxfree’s invoices, but instead made a series of payments to its undisputed creditors, including the first to fifth defendants.

3    Toxfree commenced proceedings against GVF in the Supreme Court of Western Australia. While those proceedings were pending, GVF made an application in the Supreme Court of Queensland for orders that it be wound up in insolvency. That application was granted on 17 November 2010.

4    The plaintiffs seek orders for the repayment of money paid by GVF to the first to fifth defendants. The plaintiffs’ case that the transactions are voidable transactions within s 588FE of the Corporations Act relies substantially on the allegation that GVF was insolvent when the transactions were entered.

5    I propose to describe the parties and the issues in the case before summarising the evidence. I will then address the question of GVF’s solvency. That depends principally upon the extent of the Toxfree debt, which was the area of greatest factual and legal debate in the case. I will then turn to the question of whether the transactions are voidable transactions and whether the fifth and sixth defendants breached their duties as directors.

THE PARTIES

6    The first plaintiff, Mark William Pearce, was appointed as liquidator of GVF under orders made by the Supreme Court of Queensland on 17 November 2010. Mr Pearce also gave expert accounting evidence at the trial.

7    The period of time relevant to the present proceedings is from March 2009 to November 2010. The positions of the defendants in that period were as follows.

8    The fifth defendant, Peter Karl Heyn, and the sixth defendant, Geoffrey Martin Vaughan, were directors of GVF. There also was a third director, Terrence Armstrong, who died in 2014. There was little evidence led about Mr Armstrong’s role in the management of the company.

9    Mr Heyn was the sole director and secretary of the first defendant, Gulmohar Pty Ltd (Gulmohar). Gulmohar provided stock to GVF on credit from time to time. GVF was indebted to Gulmohar throughout the relevant period.

10    Mr Heyn was also the director and secretary of, and a shareholder in, the second defendant, Palacimo Pty Ltd (Palacimo). Mr Heyn’s wife, Monique Heyn, was the other shareholder in Palacimo. Palacimo owned the shares in Gulmohar.

11    Mr Vaughan was a director and the secretary of the third defendant, Vaudell Pty Ltd (Vaudell).

12    Mr Vaughan was also a director and the secretary of the fourth defendant, Superway Garden AG & Pest Products Pty Ltd (Superway Garden).

13    The shares in GVF were owned by Palacimo, Vaudell and Mr Armstrong.

14    The defendants accept that each of them was a “related entity” of GVF within the meaning of that expression in s 9 of the Corporations Act.

THE ISSUES

15    In the period from 30 April 2009 to 17 November 2010, GVF paid the following amounts to the first to fifth defendants, totalling $857,031:

(a)    $582,031 to Gulmohar (this was the net amount paid by GVF after deducting the value of stock supplied by Gulmohar);

(b)    $100,000 to Palacimo;

(c)    $90,000 to Vaudell;

(d)    $42,500 to Superway Garden; and

(e)    $42,500 to Mr Heyn as trustee of the Heyn Family Trust.

16    It is these payments, together with the granting to Gulmohar of a fixed and floating charge over GVF’s assets, which are said to be the voidable transactions. Those transactions also found the claim that Mr Heyn and Mr Vaughan breached their duties to GVF as its directors.

17    The plaintiffs allege that GVF was insolvent throughout the period from 30 April 2009 to 17 November 2010. The date 30 April 2009 seems to have been selected because the first payment among the impugned transactions was $50,000 to Gulmohar on 1 May 2009.

18    The allegation of insolvency requires consideration of three issues, namely:

(a)    the extent of the debts due and payable by GVF in the period from 30 April 2009 to 17 November 2010;

(b)    what funds GVF had available to pay such debts; and

(c)    whether funding from related third parties was available to allow GVF to pay such debts.

19    The first issue, the extent of the debts due and payable, requires assessment of the debt owed by GVF to Toxfree. This requires examination of the terms of the contracts between GVF and Toxfree, the nature and extent of the work done by Toxfree and a determination as to what amounts were payable at what times.

20    The owner of the premises leased by GVF, Hamcor Pty Ltd (Hamcor), also claimed that it was owed a debt for unpaid rent. GVF disputed the debt and Hamcor was not paid. In the course of submissions the plaintiffs accepted that the Hamcor claim is not determinative of insolvency and can be left aside. I therefore do not propose to deal specifically with the Hamcor claim.

21    The second issue depends largely upon the evidence given by two expert accountants as to the funds GVF had available to it from its own assets and from an overdraft facility.

22    As to the third issue, Mr Heyn and Mr Vaughan gave evidence that they and companies they controlled were willing to provide financial support to GVF if required. Mrs Heyn also says she could have allowed her assets to be used to provide financial support. It is necessary to determine their capacity and willingness to provide such support as would allow GVF to pay its debts.

23    The remaining issues include whether the transactions are unfair preferences within s 588FA of the Corporations Act, uncommercial transactions within s 588FB, insolvent transactions within s 588FC, or unreasonable director-related transactions within s 588FDA, and whether the “good faith” defence in s 588FE is made out. It is also necessary to decide whether Mr Vaughan and Mr Heyn breached their fiduciary duties to GVF and their duties under ss 181, 182 and 183 of the Corporations Act.

EVIDENCE CONCERNING GVF’s ENGAGEMENT OF TOXFREE

24    GVF manufactured, or formulated, pesticides for sale to the agricultural industry. It operated from premises at Grass Valley, near Northam in Western Australia. The premises consisted of a factory and a separate administration building.

25    Karl Haslberger was GVF’s factory manager. At about 4 am (Western Australian time) on Tuesday, 24 March 2009, Mr Haslberger became aware that the factory was on fire. The fire brigade was called and the fire was extinguished.

26    The fire and the spraying of water by the fire brigade resulted in chemical contamination of the site. A pond on the site became filled with contaminated liquid. The soil at the site became contaminated. There was also contamination of containers and other equipment.

27    At about 7 or 8 am on the morning of the fire, Mr Haslberger was told by Ken Raine of the Western Australian Department of Environment and Conservation (DEC) that it would be a good idea to have someone on stand-by to carry out a clean up and removal of contaminated liquid. Mr Haslberger then telephoned Betty Carr, who was employed by Gulmohar as personal secretary to Mr Heyn, and gave her some names of companies that could assist to clean up the contaminated liquid, including Toxfree.

28    Toxfree provides waste management and industrial services, including providing emergency response services in relation to chemical spills. Toxfree is certified by the relevant government department in Western Australia as an emergency responder to dangerous goods incidents. Toxfree had previously been engaged by GVF to dispose of waste materials in 2007.

29    The witnesses have differing recollections of the precise sequence of relevant conversations and the content of those conversations. That is unsurprising, given the passage of time. Many of the differences are unimportant and need not be resolved. Other differences are more significant and I will deal specifically with these.

30    Errol Beere, a Business Development Manager employed by Toxfree, spoke to Mr Haslberger by telephone on the morning of 24 March 2009. Mr Haslberger said that storage tanks which contained chemicals were about to overflow and could spill into the Avon River. Mr Beere said that Toxfree could not commence providing its emergency response services until GVF raised a purchase order confirming that it accepted Toxfree’s terms. Mr Haslberger asked Mr Beere to liaise with Ms Carr to arrange a purchase order.

31    Mr Beere then spoke to Ms Carr by telephone. I accept Mr Beere’s version of the discussion. Mr Beere told Ms Carr that Toxfree would require a purchase order before it could start providing its emergency response services. Ms Carr asked Mr Beere for an estimate of costs. Mr Beere had already spoken to Mr Raine of the DEC, and had been told that approximately 500 tonnes of contaminated soil and approximately 300 kilolitres of liquid waste would need to be removed from the site. Mr Beere informed Ms Carr of the estimated quantities and said that it was extremely difficult to give an estimate of costs without seeing the site. Ms Carr informed Mr Beere that she required a figure solely for the purpose of preparing a purchase order. Mr Beere said that it would be not less than $160,000, exclusive of GST, for Toxfree’s emergency response services and he would provide her with a table of Toxfree’s rates along with his estimate.

32    Mr Beere told Ms Carr that he could not provide an estimate with respect to disposal costs until an analysis of the waste had been performed and the full extent of the chemicals involved was known. Ms Carr told Mr Beere that she understood that the estimate did not include Toxfree’s disposal rates and would confirm this on the purchase order.

33    Mr Beere then sent the following email to Ms Carr at 1.38 pm on 24 March 2009:

Hello Betty,

Please find attached our rates for Emergency Response callouts.

As discussed it is very difficult to pinpoint an estimated figure at this early stage. We will need to run sampling of both the contaminated water and contaminated soil before we can quote a rate for treatment and disposal.

The Department of Environment & Conservation representative onsite has said there could be up to 300 kilolitres of contaminated water and 500 tonnes of contaminated soil – he too has stressed that this is a rough estimation only.

Based on these figures though I can also give you a rough estimation of cost.

If we were to collect this amount of waste with the vehicles, equipment & personnel currently onsite then a rough estimation of this service/hire would be $160,000. Please note this does not include the treatment and disposal costs of the wastes mentioned.

As we progress on the job we will be able to provide a more accurate estimation of costs.

If you have any queries please either (sic) myself on 0419 870 077 or Toby Edmunds (Emergency Response Coordinator onsite) on 0428 927 827.

34    Mr Beere’s email attached a document addressed to Ms Carr with the heading “Emergency Response Rates – Grass Valley Formulators Fire”. The document said:

35    Ms Carr faxed a purchase order to Mr Beere. Ms Carr was in Victoria. The fax marking on the purchase order shows a time of “16:17”. I infer that the fax was sent at 4.17 pm Victorian time, or 2.17 pm Western Australian time. That timing seems to fit with Mr Beere’s earlier email which was sent to Ms Carr at 1.38 pm Western Australian time. The purchase order reads as follows:

36    Ms Carr says that she received the information for her wording of the “Remarks” section from the Toxfree representative she spoke to (Mr Beere) and obtained approval for the wording from Mr Haslberger.

37    Mr Beere says that the purchase order did not accurately reflect the conversation he had with Ms Carr because his estimate of $160,000 was exclusive of treatment or disposal costs. Despite this, he did not then draw that matter to Ms Carr’s attention. It may also be noted that the purchase order referred only to the removal of contaminated water, and not to the removal of contaminated soil or equipment.

38    Gerrard Styles was employed by Toxfree as its General Manager, Operations. On 24 March 2009, Mr Styles sent an email to Ms Carr at 3.37 pm Western Australian time:

Hi Betty

Thanks for forwarding your PO for the work to Errol and myself. Lynda has forwarded the credit application forms, so we look forward to their return.

I would like to confirm a few details for clarity, to avoid any confusion following the clean up operation.

•    Toxfree will only deal direct with Grass Valley Formulators and their nominated holding companies/subsidiaries. Toxfree will not deal direct with Grass Valley Formulators Insurance company with regard to the Northam Incident. The order number is a contract between Grass Valley Formulators and Toxfree Solutions.

•    Toxfree will determine the method of disposal for all arisings it collects from the Northam incident, and disposes of the material as quickly as possible to avoid hold up on its current operation.

•    Toxfree has issued a quotation for estimated rates on quotation 8307-09 KW, issued to yourself today 24/03/09.

If you have any questions, please do not hesitate to contact me on the numbers below.

39    Mr Styles appears to have assumed that the contract encompassed disposal of the waste.

40    Tobias Edmunds was employed as an Emergency Response Manager by Toxfree. Mr Edmunds had received a phone call from Mr Raine of the DEC suggesting that Toxfree deploy staff and emergency response equipment to GVF’s site as he was concerned that waste could leak into the Avon River. Mr Edmunds says he arrived at the site at about 10 am on 24 March 2009 and liaised with Mr Haslberger. Mr Edmunds says that the purpose of his discussion with Mr Haslberger was to explain the emergency response services that Toxfree would be providing and the schedule of rates. They did not discuss disposal of the waste. Mr Edmunds says that Toxfree began providing its emergency response services immediately after that discussion, which suggests that the work started not long after 10 am. However, Mr Edmunds also says that Toxfree deployed its emergency response unit to GVF’s site upon receipt of the purchase order. Mr Edmunds seems to be mistaken as to the time the work was commenced. It appears that Toxfree had deployed its staff and equipment to the site in anticipation of the purchase order being provided, but the purchase order was not provided until 2.17 pm. The work must have commenced sometime after that.

41    On the afternoon of 24 March, Mr Haslberger was handed documents headed “Environmental Field Notice” and “Pollution Response Unit Clean Up/Recovery Scope of Work” by Mr Raine of the DEC. Mr Edmunds was present when Mr Haslberger was given those documents. Earlier, Mr Raine had walked Mr Haslberger and Mr Edmunds through the site to point out what needed to be done in terms of the clean up and containment of waste. Mr Haslberger says that Toxfree “was left to continue with the clean up”, and “took over the clean up”, at about 4 pm. Mr Haslberger’s evidence suggests that the documents must have been handed to him shortly before that time.

42    The Environmental Field Notice stated:

43    The “Pollution Response Unit Clean Up/Recovery Scope of Work” document stated:

44    Mr Edmunds deposes that the job for GVF involved two defined stages: the emergency stage which commenced when the environmental field notice was issued and which finished once the site was cleared of all contaminated materials and the post-emergency stage, which covered the transport, storage and ultimate disposal of the contaminated material.

45    Mr Edmunds states that Toxfree’s emergency response services involved containing and collecting all of the contaminated material from the premises in accordance with the Environmental Field Notice from 24 March to 1 April 2009. It appears that the work on the first day consisted principally of securing leaking tanks and pumping the contaminated liquid from the pond into tanker trucks and transporting the liquid to Toxfree’s sites at Kwinana.

46    Mr Vaughan was in Queensland. He received a call on the morning of 24 March 2009 from Mr Haslberger telling him that GVF’s factory was on fire. Mr Vaughan arrived at the site that evening. He observed that by about 10.30 pm, about half the water had been removed from the pond and it appeared to him that there was no longer any risk of contaminated liquid flowing into the environment.

47    Mr Vaughan attended the GVF site each day until 31 March. He says that as a result of the fire there was no power to the site and no telephone or fax lines working. He says he had no access to any emails until he returned to Queensland on 1 April 2009.

48    Mr Styles says he telephoned Ms Carr on the day after the fire, Wednesday, 25 March 2009, to inform her that the value of the purchase order had almost been reached. He says he told Ms Carr that she should inform Mr Vaughan of this so that Mr Vaughan could advise Toxfree what he wanted Toxfree to do going forward. He says that Ms Carr responded with words to the effect that GVF would require Toxfree’s rates concerning the continuation of the services to determine the cost going forward. Mr Styles says Ms Carr also said that GVF would continue with the initial purchase order and she would consult Mr Vaughan. Mr Styles says that Ms Carr did not request that Toxfree cease providing the emergency response services.

49    Mr Styles states that Mr Vaughan had asked him if GVF could store the waste at Toxfree’s facility until GVF had determined if the liquid waste could be salvaged. He states that because of this request, he introduced a storage fee as Toxfree could not use its facilities for other clients while GVF’s wastes were stored. Mr Styles says that Toxfree stored the waste at its Kwinana and Port Headland facilities awaiting the results of analysis of the waste and further instructions from GVF. Mr Vaughan denies that he spoke to Mr Styles until 27 March 2009.

50    Mr Styles followed up his discussion with Ms Carr with an email to her, copied to Mr Vaughan, in the following terms:

Hi Betty

Further to our telephone conversation, I can confirm we are close to the original estimated PO of $ 160,000 + GST.

On your instruction we will continue to use the same PO (0557) and provide you with cost and operational updates.

We are currently freighting the liquid material to our Kwinana Operation, and will be charging storage at $0.0261 per litre, per day, until a decision is made of the fate of the material.

Additional charges to quote 8307-09KW will be made up as follows, please note this is purely an operational estimate at this stage.

•    Additional PPE (Personal Protective Equipment) required for the ongoing operation EST only $ 300.00 per person (est. 8 personnel)per day

•    Accomodation (sic), meals for all the team (est. 2 nights total) EST only $ 250 per person

•    Lab analysis for disposal assessment – Est only $ 400.00

•    Out of hours opening (including labour) for treatment plant opening, and transfer of existing products to make space. EST only $ 5480.00

•    Decontamination of all plant and equipment post job, and disposal of all residues TBA

•    Controlled Waste bulk liquid transfer of material transport (pocket road train configuration) to Kwinana ex. Northam EST $ 520.00 / hr

If you have any questions, please do not hesitate to contact myself on the numbers below. Please acknowledge your receipt of these charges.

51    GVF did not provide acknowledgement of the receipt of the new charges, despite the email seeking such acknowledgement.

52    It appears that Mr Styles had another conversation with Ms Carr later on 25 March 2009. He sent an email to various people within Toxfree referring to that conversation. That email reads:

Hi all

Just a brief update, spoke with Betty from Gulmohar (Grass Valley Formulators), they had received my email this morning detailing the extra charges for storage PPE etc. She had forwarded on to both directors and the Insurance Company. All parties want to proceed on the open PO (0557), and no comments have come back.

I will update you when more information becomes available.

53    Ms Carr disputes Mr Styles’ assertion that she said GVF would continue with the original purchase order. She says that Mr Styles said that Toxfree was close to the original estimate of $160,000 and would require a further purchase order for the additional work that was required. Ms Carr says she did not have the authority to authorise another purchase order, but said that Mr Styles should email her the details and she would forward the information to Mr Heyn and Mr Haslberger. She also denies that she agreed that the purchase order was to be an “open” purchase order. Ms Carr says that she understood the email to her of 25 March to mean that upon receiving GVF’s further instruction, Toxfree would use the same purchase order to provide any further work. She says her only role was to relay information between Toxfree and the directors of GVF. Mr Heyn was in Europe at that time, but she was in touch with him by email. Ms Carr forwarded Mr Styles’ email of 25 March to Mr Heyn shortly after she received it.

54    On 27 March 2009, Mr Styles and Mr Vaughan had a telephone conversation. Mr Styles says he told Mr Vaughan of the quantities of liquid and solid waste that had been removed from the site and the amounts that remained to be removed in the coming days. Mr Vaughan said that he would discuss this with Mr Heyn and they would review the figures. Mr Styles states that Mr Vaughan did not instruct him to not proceed with the work order or to cease doing work. He says that he explained to Mr Vaughan that the waste needed to go to Port Headland as this was where the liquid waste was to be disposed if it could not be salvaged. Toxfree’s Port Headland facility had the only industrial waste incinerator in Western Australia and was licensed for chemical incineration by the DEC. Mr Styles says Mr Vaughan told him that GVF would assess whether there were any other options available to it, but Mr Styles said there were no other options as there was no other licensed facility in Western Australia to store the waste.

55    Mr Styles sent Mr Vaughan a fax on 27 March. The fax states:

Further to our conversation today, I can confirm the following estimates of literage of pesticide contaminated material moved as of this evening;

•    250,000 litres (liquid, which will be transferred to Toxfree Solutions High Temperature facility in Port Hedland)

•    Approx. 70 tonnes of pesticide contaminated soil which will be processed through TOxfree (sic) Solutions thermal desorption unit in Kwinana

After discussing with site there are an additional 60,000 litres to be transported from site tomorrow (liquid) and an additional 200 tonnes of contaminated soil.

Indications from site are that there is a certain amount of packaged waste in IBC’s to be pumped out and disposed of, and additional contaminated material for disposal.

As discussed, I will forward a copy of this email (faxed to Northam) to the DEC at your request.

After evaluation from both treatment plants, processing of the material will be at the following rates excluding GST and associated costs on the quote issued by Errol Beere

•    Disposal only – Liquid (persicide(sic)/pesticide contaminated washwater (sic)- $ 3.14 per litre (Blending to Incineration specification and Incineration)

•    Disposal only – pesticide contaminated soil - $ 1.62 per kg (thermal Desorption)

Work is being carried out against your original order (0557)

56    Mr Vaughan denies that Mr Styles had said during the conversation earlier that day that the waste would have to be disposed of by high temperature incineration or that the waste was being transported to Port Headland. Mr Vaughan says that Mr Styles said that the costs to date, including disposal, were in the vicinity of $1.6 million. Mr Vaughan says he requested an urgent meeting to discuss what Toxfree had done and how it had arrived at the figure. Mr Vaughan denies that he had agreed that Toxfree could carry out further work against GVF’s purchase order.

57    Mr Styles states that by 27 March 2009, the initial containment work had been completed in that Toxfree had averted the waste spilling in the Avon River and off-site, but there were still a number of issues listed in the DEC’s “Pollution Response Unit Clean Up/Recovery Scope of Work” document. He states that Toxfree had a skeleton staff on-site on 28 and 29 March 2009. Toxfree’s equipment was also on-site, and was charged to GVF.

58    Mr Edmunds recalls that on about 27 March 2009, Mr Vaughan asked him if Toxfree would store the following wastes at its storage facilities in Kwinana and Port Headland: 100,000 litres of liquids at Kwinana; 200,000 litres of liquids at Port Headland; and 200 tonnes of contaminated soil at Kwinana. Mr Edmunds understood that the split was based on Mr Styles’ fax of 27 March 2009. Mr Edmunds states that while he was on-site, Mr Vaughan instructed Toxfree to dispose of approximately 127 tonnes of contaminated soil removed from the GVF site. Mr Vaughan denies having such a discussion with Mr Edmunds. Mr Edmunds states that the solid waste that was held at Kwinana was disposed of within several months of Toxfree completing its services (ie by mid 2014).

59    On 30 March 2009, Mr Edmunds and Mr Styles met with Mr Vaughan and Mr Haslberger. Mr Styles said that the costs to date for the services were approximately $1.5 million for the emergency response services and the disposal costs. Mr Styles says that at the time of the meeting the most pressing issue still to be addressed was the disposal of the waste. He says that Mr Vaughan said he wanted Toxfree to provide him with the sequence of events for use by GVF’s insurer, QBE Insurance (Australia) Ltd (QBE). Mr Vaughan also said that Toxfree’s invoices would be covered by GVF’s insurance policy with QBE. Mr Vaughan discussed engaging an expert, Bruce Heath, and said that Mr Heath would analyse the waste to assess what options other than disposal of the waste might be available to GVF. Mr Styles said that was fine, but Toxfree was a waste disposal company and not a storage company and that storage rates would apply.

60    Mr Vaughan says that during that meeting Mr Styles said Toxfree would be issuing invoices which would detail how the costs were broken up. Mr Vaughan says he said he would not be able to receive the invoices because he had no email access. He said he could not understand how Toxfree could get to $1.6 million for the job. Mr Styles also said that now that the emergency was over, Toxfree would be going back to its regular rates.

61    On 31 March 2009, Mr Styles sent an email to Mr Vaughan, copied to Ms Carr, in the following terms:

Thanks for the courtesy extended to myself and Toby during our visit yesterday to discuss the progress with the clean up of the site following the fire last week. Please find a summary of the points raised, outcomes and actions going forward.

•    The conditions of the Environmental Field Notice (EFN) issued by the Dept, of Environment and Conservation (DEC) will be completed by today (Tuesday) – conditions 2 & 3 are complete.

•    The remainder of the contaminated soil will be removed by today to avoid any recontamination with rain filling up the containment dam. This will be verified by an Environmental Consultant (sampling today, results as soon as possible, by 3rd party laboratory), and further works (if any) will be identified.

•    Copies of all non commercial documentation will be provided to DEC on Grass Valley Formulators request.

Insurances and financial liability

•    Toxfree will provide a Sequence Of Events (SOE) to Grass Valley Formulators and DEC for Insurance and audit purposes

•    Estimated total costs to date, attributable to Grass Valley Formulators are approximately $ 1,500,000 as of Monday 30th March. This includes labour, equipment and disposal costs.

•    Samples of liquid will be made available to Grass Valley Formulators and their Insurance Company (QBE Insurance).

•    The majority of the cost is the disposal of pesticide liquid residues currently approx. 100,000 L at Toxfree Solutions (Kwinana), the remainder approx. 200,000 L is at Toxfree Solutions Port Hedland Operation (OEC), where it was transferred due to capacity constraints at Toxfree (Kwinana). All liquid residues will be disposed of via High Temperature Incineration following blending.

•    Contaminated Soil is currently stored at Toxfree (Kwinana) where it will be treated by thermal desorption.

•    Total Invoice Value for the Emergency Response Component value for the work once complete will be in the region of $ 1,600,000

•    Financial surety will be attained by submitting invoices as soon as possible, and detailing transport & labour components.

•    Toxfree’s terms are standard 30 days

•    In terms of cash flow, Toxfree will need prompt payment due to paying its labour up front for Emergency Response Work and disposal processing.

Other

•    Toxfree to provide an up to date quote of all aspects top the cleanup aspect (non ER) of the operation

•    All personnel included in the above email to be cc.d in all documentation

If you have any questions, please do not hesitate to contact myself or Toby

62    Mr Vaughan says that to the best of his recollection there was no discussion at the meeting on 30 March 2009 about transportation of waste to Port Hedland or Kwinana. He says he first became aware that waste had been transported to Port Hedland when he got email access on 2 April 2009. Ms Carr forwarded the email of 31 March 2009 to Mr Heyn.

63    On 31 March 2009, Toxfree provided invoice # 2318 to GVF. The invoice contained the heading “Description”. Under that heading, appeared the words:

Collection and disposal of pesticide contaminated water using Vehicles, equipment and Personnel at Grass Valley Site (Northam) as directed by the Department of Environment and Conservation on 24/03/09.

64    The invoice then set out a number of items of work for 24, 25, 26, 27, 28 and 29 March 2009. The invoice listed items of equipment or personnel, the number of hours charged for each item and the rate per hour. The rates were in accordance with Toxfree’s emergency response rates provided to Ms Carr on 24 March 2009. The invoice contained totals for each item for each day.

65    Although the invoice stated that it was for collection and disposal of pesticide contaminated water, this was wrong in two respects. Firstly, the invoice was in respect of the collection and removal of both solid waste and contaminated water. Second, the invoice was for collection and removal of waste, but not for its “disposal” (in the sense of its destruction).

66    The total amount of the invoice was $275,279.40 (incl GST). This exceeded the estimate of $160,000 (plus GST) by $99,279.40. Mr Beere states that the excess was accounted for by his underestimation of the time it would take for trucks to travel to and from Toxfree’s site at Kwinana. He says that additional time was required because GVF’s site only allowed one truck to enter or leave the site at a time, because a detour had to be taken to access a weighbridge which added an extra 30 minutes to each round trip and because it took longer to unload the waste at Toxfree’s Kwinana depot than it had estimated. There were also additional amounts for items which were first noted in Mr Styles’ email of 25 March 2009.

67    Toxfree sent a second invoice (# 2340) to GVF also dated 31 March 2009. Under the heading “Description”, the invoice referred to “Grass Valley Formulators Pesticide Spill. Disposal of”. The invoice included items for disposal of pesticide solutions and “wash waters” at $3.14 per litre, disposal of contaminated soil at $1,620 per tonne and transport costs from Kwinana to Port Headland by road train. The total of the invoice was $1,592,910.23.

68    Mr Edmunds states that by 1 April 2009, the emergency response services had been provided and emergency response rates no longer applied as the contaminated material had been removed and the premises no longer presented a pollution or combustion risk. He says that after 1 April 2009, Toxfree continued to provide services to GVF related to the DEC requirement that GVF provide a “section 72” closeout report. This was part of the work set out in the Pollution Response document. Preparation of that report required analysis of samples of liquid and soil removed from GVF’s site.

69    On 2 April 2009, Mr Edmunds provided a quotation for analysis of the material collected from the GVF site and a report. The amount quoted for analysis was $39,988 and the amount for the report was $950. Toxfree indicated that it would need a purchase order. On 9 April 2009, GVF provided a purchase order for these services.

70    On 2 April 2009, Mr Vaughan sent an email to Mr Edmunds stating:

Hi Toby, Sorry I have not been in touch since our meeting, I have had to return to Qld early yesterday to attend a family emergency. At this stage I will be remaining in Qld in the short term.

Thanks to both you and Ged on Monday for you (sic) time. As I mentioned to you both then, both Company Directors and our Insurers are seeking clarification on quite a number of issues. I am still awaiting your clarification of costs with our first and main issue being the vast difference between your original quote of $160,000 to remove the approx 300k Literage of contaminated water in question as well as 500 tonnes soil. The estimates of quantities to be removed that were given for you to quote on were surprisingly accurate (in particular the liquids) at the time. I do not believe the contaminated soil was anywhere near 500 tonnes, however we have not yet been advised final quantities. The second main issue as we discussed is the cost of disposal. I understand that you have been requested to supply a copy of analysis results by Bruce Heath of Chemical Consulting Services. I also understand to date he has not received analysis results. Can you please forward as soon as possible so that we can progress this matter forward.

71    In Mr Vaughan’s email, he disputed both invoices that Toxfree had sent. By then, GVF had retained Mr Heath of Chemical Consulting Services Pty Ltd to help and advise with regard to Toxfree’s fees and work.

72    On 4 April 2009, Mr Styles wrote to Mr Vaughan as follows:

Hi Geoff

Toby has forwarded me a copy of your request for clarification following our meeting last week, I hope your family emergency has been resolved.

Please find the following information for yourself and Insurance company;

•    Costing, this has been provided out in the split quotes Toby has issued, as detailed as possible covering equipment, labour, tank rental and waste disposal.

•    The PO issued (0557) on the 24th was a rough estimate (as detailed in the remarks section) primarily to cover Emergency Response, Equipment and labour, this PO was issued prior to determination of what disposal route the material had to be processed by.

•    Liquid estimates are reasonably accurate (I think there is approx 350 k of washings/product etc.) and soils in the vicinity of 200 te(sic), final quantities will be advised.

•    The majority of the bulk liquids are at our Port Hedland facility awaiting disposal via incineration. The contaminated soils and packaging remain at our Kwinana operation for thermal desorption.

•    I have discussed with Bruce Heath of Chemical Consulting Services, and analysis is being provided as quickly as possible, I have advised Bruce verbally our storage tanks and transport are for waste products.

I hope this answers your queries to date, myself, Toby and Steve Gostlow (MD) are in Melbourne (Mt. Waverley) on Monday and Tuesday. If you require us to meet at your Ricketts Road office, we would be happy to do so.

Please do not hesitate to contact me if you have any questions

73    Mr Vaughan responded by email on 6 April 2009 saying:

In regards to disposal we have requested that liquid and solid waste be held for the time being until independent party (Chemical Consulting Services) can have a look at the analysis from which you determined your disposal costs. You have mentioned that you were arranging. I would have thought this was readily available as you have already determined what the disposal costs would be, based I assume upon this analysis.

74    On 7 April 2009, Mr Styles attended a meeting with Mr Heyn and Mr Vaughan to address GVF’s concerns with the invoices and explain how the costs in the invoices were calculated. Mr Heyn referred to the lower pricing for the job that Toxfree was involved in 2007. Mr Styles said that this was a different job with a different set of circumstances, that a price had been set and Toxfree was not going to move on the issue and that there would not be any further negotiation on the cost of disposal.

75    On 9 April, Mr Styles sent an email saying that GVF and Mr Heath would be provided with the basis for Toxfree’s costings for disposal and the chemical analysis, once received.

76    Mr Vaughan sent an email to Mr Styles on 15 April 2009. In that email Mr Vaughan said:

I have arranged to forward your invoices direct to our insurer, who will no doubt have numerous questions for you regarding your account. I am trying to organize a meeting possibly next week for both our assessor and ourselves to meet with you and work through some of these questions and discuss your accounts on a line by line basis. As soon as I hear back from our assessor, I will contact you to organize.

The matter regarding disposal costs has already been raised with you in a meeting with Peter Heyn last week. I note, we still have not seen any communication as to what basis you have arrived at your costing nor the analysis used to arrive at this figure. As we have indicated and have provided written evidence to you, there is a big difference in what we have paid you in the past (70c per Litre for incineration at Port Headland (your invoice 27956) and $3.14 per litre you now seek. The transport and disposal method is the same however the difference in the account would be in the vicinity of $886k approx. As you will appreciate, this huge difference is of extreme concern to GVF and its insurers.

In regard to your account for expenses (invoice 2318), again, there are a lot of questions being asked by GVF Directors and its insurers as to how the invoice amount has been arrived at. As we have mentioned before your estimate for removal was $160k (our purchase order based upon this) and yet we have an invoice tendered for $250k approx. How can this estimate be so far out?

77    Mr Vaughan’s email went on to question what he saw as excessive amounts in invoice # 2318, such as the cost of $27,250 plus GST for hire of a trailer and 4WD.

78    On 15 April 2009, Neil Armstrong of Toxfree responded by email, saying that Mr Styles was on annual leave, but that Mr Armstrong would look into Mr Vaughan’s queries and respond as soon as possible. Mr Armstrong also said that he would forward the analytical results once received. The results had in fact been received by Toxfree on 9 April 2009. The results were not provided to GVF until 24 April 2009.

79    There is in evidence an email sent by Mr Armstrong to Mr Styles and others within Toxfree on 23 April 2009 saying:

Please review attachment response to last weeks email and provide comment.

Note: I have not provided analysis results to the client as yet but shall send onwards tonight – results showed much lower contamination levels than expected.

Disposal rate suggested is based on revised contaminant levels and current incineration rates charged to Nufarm and others. Market rate unknown Geocyle tentative $1.80/1 and WRR? (No quote as yet)

Meeting scheduled 2pm tomorrow please confirm attendance.

80    The attachment provided a detailed response to Mr Vaughan’s email of 15 April. It is not entirely clear, but the attachment may have been sent to Mr Vaughan at some later stage.

81    On 24 April, Mr Vaughan attended a meeting with Mr Armstrong, Mr Edmunds, Mr Beere and Steve Gostlow of Toxfree. Mr Vaughan’s note of the meeting is as follows:

…

…

82    On 30 April 2009, Toxfree provided GVF with an invoice # 00002451 in the amount of $738,433.58 including GST. That consisted of $39,988 for the analysis of samples, $77,500 for the transport of waste to Port Headland, with almost all of the remainder consisting of storage costs for the solid and liquid waste material.

83    On 15 May, Mr Vaughan sent an email to Toxfree in the following terms:

I have just earlier this week received your invoice 2451 dated 30 April 2009 and must say GVF are very disappointed in the way Tox free is handling this storage/disposal of waste water. In particular we must question your invoice detailing $300k approx for storage of waste.

A point of contention from day one way has been getting an analysis of the waste water to determine what it consists of and sourcing the best/ cheapest method of disposal. Our reasoning, the less contaminated, the cheaper the disposal costs.

It was not until after our meeting.(sic) 24 April that we finally got a copy of the analysis report dated 9th April 2009 and that Toxfree kindly offered a reduction in the disposal costs by 32%. (Little did we realize at the time that the reduction in costs offered by Tox free had been quickly overtaken in storage costs).

84    On 22 May 2009, Toxfree issued an amended invoice # 2340A, which lowered the rate for disposal of liquid waste to $2.12 per litre, so that the total was $1,185,287.63.

85    On 28 May 2009, Toxfree issued invoice # 2495 to GVF for storage costs (described as “Tank and DG pad rental”) from 4 May 2009 to 1 June 2009 in an amount of $363,800.28 including GST.

86    In June 2009, Mr Vaughan set an email to Mr Armstrong of Toxfree saying:

As a result of the above, as soon as our insurer’s decision is known, Grass Valley management have some serious decisions which need to be taken, especially if there is a shortfall in what insurance are prepared to pay towards Toxfree claimed costs. Obviously, the ongoing viability of Grass Valley must also be taken into account if we are unable to replace equipment loss. We must also comply with current company law legislation.

87    On 11 June 2009, Mr Vaughan wrote to Mr Armstrong and Mr Styles saying:

Ged mentioned in an earlier meeting that storage costs had been applied in an effort to get us to decide on course of action a lot sooner. Whilst I can appreciate it is in everyone’s interest to get this matter finalized, you must understand that, from the very 1st days of cleanup, we have advised you that your costs will be a matter for our insurance company and our assessor could not enter into the discussions until fire investigation had been completed. I do not believe unrealistic invoicing (Storage in particular) is in anyones best interest in having this matter resolved quickly. The delay being encountered is outside GVF control whilst insurance claim progresses.

88    On 29 May 2009, GVF received a report from Bruce Heath. Mr Heath advised, inter alia, that the storage charges were unreasonable, that GVF had good cause to refuse to pay more than $0.70 per litre for disposal and that GVF should consider alternative methods of disposal.

89    On 15 July 2009, Toxfree issued a further invoice # PSHE00058 to GVF for storage of liquid waste in an amount of $352,064.79 for the period from 1 June 2009 to 30 June 2009.

90    On 15 January 2010, Toxfree commenced proceedings against GVF in the Supreme Court of Western Australia. The Statement of Claim alleged that GVF was indebted to Toxfree in the amount of $2,914,865.68. On 5 February 2010, GVF filed a Defence, Set-Off and Counterclaim. The counterclaim was based on the allegation that Toxfree had further contaminated the liquid waste with heavy metals, causing GVF unspecified loss and damage. It may be noted that in this proceeding, the plaintiffs do not dispute that the liquid waste was contaminated as a result of the presence of heavy metals in some of the tankers used by Toxfree. The tankers had not been cleaned before they were sent to the GVF job.

91    On 28 July 2010, Toxfree’s lawyers wrote to GVF’s lawyers, asking that GVF collect the waste stored at Toxfree’s facilities. It was not collected.

92    In the end, GVF provided no authorisation for Toxfree to proceed with the disposal of the liquid waste collected from the site and stored at Toxfree’s Port Headland facility. Neither did GVF provide any instructions for the return of the waste or its transfer elsewhere.

93    In late 2014, Toxfree transported the liquid waste from its Port Headland facility to Laverton in Victoria to allow it to make other use of its storage capacity. Approximately 363,000 litres of liquid was stored at Laverton. Between January and March 2015, the liquid waste was disposed of by high temperature incineration by Toxfree’s competitor, Geocycle. Mr Edmunds states that the costs incurred by Toxfree associated with the disposal of the liquid waste, not including any profit margin, were approximately $750,000. This consisted of $250,000 for transportation costs of the liquid waste from Port Headland to Laverton and $500,000 to incinerate the liquid waste.

EVIDENCE CONCERNING OTHER EVENTS

94    Mr Vaughan deposes that GVF was able to recommence trading within about a month after the fire occurred. It operated with one tank, whereas it would normally have six or seven tanks operating at the same time. GVF was able to progressively get other tanks operational over the following months, but its manufacturing capacity remained limited. There were delays in having the factory repaired because the owner of the property, Hamcor, delayed in paying its insurance excess. There were subsequent problems with defective work done by Hamcor’s builder. The factory was not fully reinstated until early 2010. Mr Heyn’s evidence is to similar effect.

95    GVF lost sales as a result of the fire because it was unable to meet orders. Mr Vaughan states that the company found itself with a huge inventory, but limited capacity to fill its orders. Mr Heyn also states that GVF had earlier stocked up in anticipation of a busy period, so the timing of the fire could not have been worse.

96    Mr Vaughan states that GVF paid all its debts, other than the disputed invoices from Toxfree and some of the rent claimed by Hamcor. He says that in order to ensure that it remained solvent, GVF scaled down its production levels and related expenses. Mr Heyn says that casual staff were laid off.

97    GVF received an initial payment of $199,000 from its insurer, QBE, on 27 July 2009. By that time QBE had accepted liability for the claim, but had not determined the quantum of the amount it was required to pay out. GVF received a second payment of $68,481.81 on 1 September 2009. On 27 November 2009, QBE and GVF signed a deed of release, settling the insurance claim. GVF received a final payment of $1,281,518.10 from the insurer on 2 December 2009. The amounts received from the insurer totalled approximately $1,549,000. These amounts were paid in respect of the Toxfree invoices and other costs resulting from the fire.

98    By July 2009, the invoices rendered by Toxfree had increased to approximately $2,900,000. Mr Vaughan says that GVF had delayed in posting those invoices into its MYOB accounting software because of the dispute and because it was hoped that the dispute could be settled. In July 2009, the full amount of Toxfree’s invoices was included in GVF’s accounts. This allowed GVF to claim a GST input credit based on the full amount. GVF received $264,988 for the GST input credit on 22 September 2009.

99    There were negotiations between GVF and the solicitors for Toxfree for settlement of the dispute. On 30 July 2009, GVF offered to settle by paying $850,000. Toxfree offered to settle for $1,600,000. GVF made a final offer on 25 August 2009 to pay $1,050,000 which was rejected. Mr Vaughan states that the offer was certainly not an admission that GVF owed Toxfree that amount of money. He says that the way Toxfree had conducted itself, including charging GVF about $300,000 per month for storage, was unconscionable. Mr Heyn states that he considered the Toxfree claim to be “unwinnable” (ie Toxfree could not win). Mr Heyn said the advice from GVF’s lawyers, Mason Siers Turnbull (MST Lawyers) was that GVF “had good prospects to defend the Tox Free Proceedings and also to pursue the counterclaim.”

100    Mr Vaughan says that in late 2009, following a discussion with Mr Heyn, he approached Graham Bendeich, whom he knew to be a insolvency practitioner, to obtain specialist advice. Mr Bendeich is a consultant to the firm Pearce & Heers. The first plaintiff, Mr Pearce, is a partner in that firm.

101    Mr Vaughan met with Mr Bendeich on 13 November 2009. They discussed a number of issues concerning Toxfree’s claims, GVF’s dispute with Hamcor and the proceeds of the insurance claim. Mr Vaughan asked whether the insurance proceeds had to be utilised for Toxfree’s claim, or whether the proceeds could be used to pay out GVF’s secured creditors and free up cash flow. He says that Mr Bendeich said that GVF could use the money for whatever business purposes were required and that payout of the loans would not be an issue. Mr Vaughan says that he asked about payment of Gulmohar’s loans or accounts. He says that Mr Bendeich told him that Gulmohar was entitled to be paid for its services or goods, being a major supplier to the company and a secured creditor, provided these had been supplied during the normal course of business.

102    Mr Bendeich gave evidence concerning his discussion with Mr Vaughan on 13 November 2009. He contemporaneously prepared a diary note of that discussion. Mr Vaughan vigorously contests a number of aspects of Mr Bendeich’s account of the discussion. Although there is inaccuracy in some aspects of Mr Bendeich’s diary note, where their recollections differ, I generally prefer the evidence of Mr Bendeich. That said, I do not think that there is any significant difference in their recollections of the important parts of the discussion.

103    I accept that Mr Vaughan told Mr Bendeich that GVF disputed Toxfree’s claim and that he considered the claims were excessive and unjustified. Mr Vaughan told Mr Bendeich he believed GVF was solvent and would be able to continue, but this was something that might change depending on how future matters panned out, including GVF’s dispute with Toxfree. Mr Vaughan requested advice from Mr Bendeich as to whether there were any difficulties or problems with paying the insurance proceeds to secured creditors. Mr Bendeich said that the directors of GVF had the ability to decide how to use the insurance proceeds, but if there was a liquidation further down the track, the payments were likely to come under the scrutiny of a liquidator if GVF was insolvent. Mr Bendeich also informed Mr Vaughan that in the event of an insolvency appointment, the charge in favour of Gulmohar was likely to be subject to scrutiny and might be vulnerable, given its recent creation.

104    GVF consulted MST Lawyers on 26 November 2009. In a file note, Mark Skermer of MST Lawyers, recorded that:

I met with Peter Heyn and Geoff Vaughan on Thursday 26 November and we proceeded to have a discussion with respect to the following matters:

1.    QBE release;

2.    Defending the Toxfree litigation; and

3.    Corporate options and potential consequences.

I will address these in turn:

…

Corporate advice

I gave the client general corporate advice with respect to receiverships and liquidation without giving any advice as to whether they should engage either process at this point in time.

I advised the client that they needed to take extreme care in avoiding insolvent trading and preference payments. The client and I discussed this in detail and I supplied the client with an indepth knowledge of how the processes worked and what the client should do to avoid these sorts of claims.

I also advised the client that in the event that it wished to sell its plant and equipment, valuations should be obtained (minimum of 2 maximum of 3) before such items were sold and that a book valuation was not appropriate in this case.

I was instructed by the client to proceed and defend the Toxfree litigation.

…

105    Mr Vaughan states that he and Mr Heyn decided to clear GVF’s debts to its secured creditors and thereby free up the company’s cash flow. Their intention was to allow GVF to trade through the difficult period in anticipation of having a really good season in 2010. He says that GVF’s business was seasonal in nature and that the peak season was from March to July, August or September each year. After GVF received the insurance proceeds on 2 December 2010, it paid out its loan from Westpac Bank and an overdraft from ANZ and reduced some of its liability to Gulmohar. Mr Vaughan says that this improved GVF’s monthly cash flow by $15,155.

106    Mr Vaughan says he had seen a report in September 2009 which said that Australia’s wheat crop was expected to reach its highest levels in four years. It contributed to his belief that GVF would have a successful 2010 and to the decision to use the insurance proceeds to pay the secured creditors. However, a drought occurred in 2010, which affected GVF’s sales. The effects were felt from about February or March 2010. Orders slowed down and this had a detrimental impact on sales, which had become worse by the end of 2010, when the decision was made to liquidate the company. There is evidence supporting Mr Vaughan’s statement that the wheat-belt area of Western Australia was drought-affected in 2010.

107    On 15 January 2010, Mr Vaughan sent an email using his grassvalley.com.au email address, and describing himself as a director of GVF, to Darren Sommers of MST Lawyers. Mr Heyn was copied into the email. The email said:

At present time, GVF is trading minimally however with litigation that Mark is handling for us, in all probability the company will be liquidated as insurance settlement was insufficient to cover exorbitant and disputed clean up costs. As and when this happens is yet to be decided and open to advice.

GVF has been using the insurance funds received from QBE to replace damaged P & E destroyed in the fire as well as clearing majority of secured creditors/private loans.

With the company in its current form and unlikely to continue trading for the longer term, we have been having plant and equipment valued as well as the real estate which we currently rent.

…

Questions I have are as follows:

1.    Directors Peter Heyn and myself are looking at buying (in some form of trading entity) P & E from GVF. The valuations are being done on market and forced (auction) value. With the transaction not being at arms’ length as such, can we purchase the P & E at auction value? The valuation advises that if goods are taken from site, the amount realised will be even further reduced. Concern is a challenge by liquidator, especially if we have Toxfree in the background getting most proceeds. My thought is that we are able to sell the assets, it is just the price paid which can be argued. Am I correct?

…

Intention was originally for Peter (secured creditor) to appoint a Receiver/Manager (all prior charges have been paid out) however if GVF can do the sale and renegotiate lease, we could probably just appoint administrator after the event to wind the company up and deal with the remaining creditor (Toxfree). Is this appropriate.

108    Mr Vaughan’s evidence is that he was not seeking advice on behalf of GVF, but was instead seeking advice for Mr Heyn and himself in their personal capacities.

109    On 26 July 2010, MST Lawyers provided a letter of advice in relation to GVF’s prospects of success in the proceeding in the Supreme Court of Western Australia. The letter of advice noted that Toxfree had claimed $2,914,865.68 for breach of contract plus interests and costs. MST Lawyers expressed the view that GVF was “in a strong position”. The letter said GVF’s argument that Toxfree was entitled to only $176,000 under the contract would probably fail, but that GVF was expected to have success “in reducing the quantum”, contingent upon obtaining experts’ reports. The letter said that one component of the counter-claim was based upon Toxfree depositing heavy metals on GVF’s property and advised that this aspect of the counter-claim was strong (although, it may be noted, such a case was never pleaded). The letter said that the second component of the counter-claim that Toxfree had made misleading representations concerning the cost and breadth of its services - would probably fail. MST Lawyers advised that GVF was expected to have “considerable success” in relation to reducing the quantum of Toxfree’s claim and that at least one component of the counter-claim was likely to have the effect of further reducing the amount payable to Toxfree. The letter also noted that the legal fees incurred by GVF to MST Lawyers to date were $65,427.68. MST Lawyers’ estimate of costs for the further conduct of the litigation, including a five to ten day trial, was in the order of $230,000.

110    Mr Heyn states that after receiving the advice from MST Lawyers, he and Mr Vaughan discussed the future of GVF. Mr Heyn states:

It was shortly after the time we received the MST Lawyer’s Advice that Geoff and me started to discuss whether we continue with the Tox Free Proceedings and with the Company. The MST Lawyer’s Advice pointed out the enormous cost of taking the Tox Free Proceedings all the way to a Court trial. Apart from the chances of winning or losing the shear (sic) amount of money involved in just getting the Company to a Court trial was more or less a main reason why the decision was made to liquidate the Company. The solvency of the Company didn’t even cross my mind because it continued to pay all its debts (excluding of course the disputed and unjustifiable Tox Free invoices), the decision to liquidate the Company was purely a commercial decision primarily based on the fact that the Company would have to raise the funds to litigate because it could not have raised sufficient funds just from its own trading.

111    Mr Vaughan and Mr Heyn say they made a decision to wind down the business, clear the debts (other than the disputed debts), pay all taxes that were due, pay all the staff entitlements, terminate the employment of its remaining staff and apply for an order to wind up the company.

112    On 27 October 2010, Mr Vaughan met with Mr Bendeich and Mr Pearce. Mr Vaughan told them that the directors had formed the view that it was no longer viable for GVF to continue and that they had decided to cease operating GVF’s business. They discussed the main issues involved in the likely liquidation of GVF. On 29 October 2010, Mr Vaughan sent an email to Mr Bendeich saying that he had spoken to his lawyers and that the directors had decided to make an application to wind up GVF.

113    On 15 November 2010, Gregg Lawyers, acting on behalf of GVF, filed an application seeking orders the company be wound up in insolvency. The application was accompanied by an affidavit of Mr Vaughan sworn on 15 November 2010 in which he deposed that GVF could not afford to continue with the litigation with Toxfree. He said that the directors had formed the view that it was not viable for the company to continue trading or to continue with the Toxfree litigation. He deposed that the company was “unable to meet its debts”.

114    Mr Vaughan’s affidavit of 15 November 2010 annexed a document in which he provided his assessment of the Toxfree debt:

My thoughts on whole matter and what Tox free are owed based on Tox free previous costing

Clean up cost (equipment) say $300k (this is without questioning account should be closed to $200k)

Liquid disposal $1.0 per liter) $375k. Nearly 50% than previously charged.

Solid disposal $1620 per tonne 319k without questioning cost.

Close to $1.0M or up. In my opinion this is more than generous.

We capped an offer to Tox at $1.050M in order to allow us to remedy the site allowing up to $200k to do so. With the $270k already paid by insurance this bought us to close to policy cap.

115    In this proceeding, Mr Vaughan deposes that the decision to liquidate GVF was not made on the basis that the company was insolvent. He says that GVF was “very solvent” in that it had paid all its debts except for the “unreasonable and unjustifiable claims” by Toxfree and, to a lesser extent, part of the rent claimed by Hamcor. Mr Vaughan says that he was concerned with how “we were going to continue the Company” and deal with the Toxfree proceedings. He understood MST Lawyers to have advised that GVF was going to be held liable for some amount, but it was a question of how much. He says he considered the Toxfree proceedings to be “vindictive” and he was concerned that the costs that would actually be incurred would be greater than the estimate. He says that if the drought were to persist through to 2011 and beyond, GVF was going to end up with bigger problems and most likely become insolvent. Mr Vaughan says that he and Mr Heyn had a discussion in early August 2010 with regard to how long GVF should continue to litigate with Toxfree and the utility of the company continuing to trade while the proceedings remain unresolved.

116    After GVF went into liquidation, Hamcor commenced proceedings against Mr Vaughan and Mr Heyn as guarantors of GVF’s lease. Those proceedings were settled out of court in 2011.

RELIABILITY OF WITNESSES

117    The plaintiffs called four current or former employees of Toxfree to give evidence. These were Mr Styles, Mr Beere, Mr Edmunds and Dr Morton. In assessing the reliability of those witnesses’ evidence, it is appropriate to consider them as a group. That is because all of them seemed anxious to justify Toxfree’s conduct and charges and, in addition, they were shown each other’s affidavits before they swore or affirmed their own affidavits. The fact that they were shown each other’s affidavits gives me cause for concern as to extent to which they were influenced by each other’s evidence.

118    Further, there is some evidence consistent with an overzealous desire amongst Toxfree’s employees to maximize its revenue from the GVF emergency. For example, Dr Morton sent an email to Mr Styles and Mr Edmunds on 26 March 2009 saying:

Men, I have just seen photos of the fire site from Rick…

Any chance we could make the argument to take the whole structure away?...burnt, pesticide affected steel…??????

119    In an email dated 24 March 2009 to Mr Beere and others, Mr Styles said:

Individual semi’s are fine, we’ll just charge more for transport, so good work, get all the gear out!

120    Further, despite Mr Beere saying that Toxfree could not provide a price for disposal of waste, until it had been analysed, Mr Styles proceeded to impose a price of $3.14 per litre for disposal of the liquid. At that stage, Toxfree provided no explanation to GVF as to how that rate was arrived at. Mr Armstrong of Toxfree prepared a document for internal use responding to questions raised by GVF, saying that the rate of $3.14 per litre “was to represent a worst case scenario in order to give GVF immediate estimates of disposal costs”. However, the rate of $3.14 per litre was never presented to GVF as an estimate or as a worst case scenario – it was the invoiced price. On 7 April 2009, Mr Styles said that Toxfree would not negotiate on the cost of disposal, but, on 24 April 2009, reduced the price to $2.12 per litre. In my view, GVF’s action in charging the “worst case” rate reflected an element of what Mr Vaughan described as “price gouging”. Toxfree’s inconsistent conduct contributed significantly to the ensuing dispute between the parties.

121    Having regard to these matters, I approach the evidence of the Toxfree witnesses with caution. That said, many aspects of their evidence were supported by emails or faxes sent shortly after relevant conversations.

122    It is understandable that Mr Vaughan and Mr Heyn were shocked by the invoices delivered on 31 March 2009, which totalled nearly $1,600,000. Their outrage and anger at Toxfree’s conduct is also understandable. That outrage and anger remained apparent when they were giving evidence. However, it is also clear that Toxfree was entitled to the payment of a substantial amount for work it did.

123    There are a number of aspects of the evidence of Mr Vaughan and Mr Heyn which I found to be inconsistent or implausible. I will give only a few examples for the moment.

124    In Mr Vaughan’s affidavit of 15 November 2010 in support of the application to wind up GVF, he swore that the company was “unable to meet its debts”. In contrast, in this proceeding, he swore that the decision to liquidate GVF was “not a decision, in my mind, that was made because the Company was insolvent” and that GVF was “very solvent”. Under cross-examination, Mr Vaughan initially appeared to blame the solicitor who prepared the affidavit filed in the Supreme Court of Queensland. He accepted that there was conflict between his affidavits. This conflict reflects what I consider was a tendency for Mr Vaughan to adapt his evidence to suit his present purpose.

125    Mr Vaughan and Mr Heyn defended proceedings brought against them by Hamcor in the District Court of Queensland for non-payment of rent on the basis that, following the fire, the premises “could not be occupied or used.” Mr Vaughan accepted the Hamcor defence was consistent with the instructions he had given. Inconsistently, he swore in this proceeding that within a month after the fire, GVF was able to produce pesticides, although in a limited capacity. It seemed to me that Mr Vaughan’s instructions in the Hamcor litigation were adapted to suit his extant purpose.

126    I thought that Mr Vaughan’s evidence in his affidavits and under cross-examination was evasive at times. For example, Mr Styles sent Mr Vaughan a fax on 27 March 2009 and, rather than acknowledging that it was received, Mr Vaughan merely deposed he had not seen it on that day. Under cross-examination, Mr Vaughan initially failed to accept that he had a Superway email account in 2009, before later acknowledging that he did. His answers under cross-examination were frequently unresponsive, leaving the impression that he was trying to avoid giving direct answers when confronted with difficult questions.

127    I also have substantial doubts about the reliability of Mr Heyn’s evidence. He was cross-examined about the defence in the Hamcor proceedings which alleged that GVF’s premises were unfit for occupation and use from the date of the fire until the termination of the lease on 17 November 2010. He said that the allegations in the defence were true and correct. In this proceeding, Mr Heyn’s evidence was that GVF was able to return to trading at full capacity at the start of 2010. Mr Heyn did not accept that there was an inconsistency, when there clearly was.

128    Mr Heyn was cross-examined about a consultation with Mr Skermer of MST Lawyers on 26 November 2009. Mr Heyn insisted that he could not recall discussing the issue of liquidation. He accepted the accuracy of Mr Skermer’s file note, but said that if receivership and liquidation was discussed “it must have been a sideline, otherwise I would recollect it”. He accepted that Mr Skermer would not have just volunteered advice. Mr Skermer’s file note shows that advice about receiverships and insolvency was not merely given as a “sideline”, but was a central part of the discussion. The file note shows that Mr Skermer gave advice with respect to receivership and liquidation, advised “in detail” that they needed to take care in avoiding insolvent trading and preference payments and gave advice as to the proposed sale of GVF’s plant and equipment in light of possible receivership and insolvency. It is implausible that Mr Heyn would have no recollection of discussing receivership and liquidation. Further, in this context, Mr Heyn’s statement in his affidavit of 23 October 2014 that the solvency of the company “didn’t even cross my mind” is implausible.

129    In his affidavit of 27 November 2015, Mr Heyn refers to his discussion with Mr Vaughan about getting advice from Mr Bendeich. He said that they wanted to ensure that they were acting appropriately as company directors and wanted to get advice from “someone who specialised in advising companies in difficult circumstances”. Under cross-examination, he denied that he was referring to companies experiencing financial difficulty. He said that he was instead referring to a company facing an exorbitant claim and being sued by Toxfree and difficulties with builders. But that is implausible since GVF was already receiving legal advice about the Toxfree debt and litigation, and Mr Bendeich is a liquidator. It is implausible that the “difficult circumstances” Mr Heyn was referring to were not financial difficulties.

130    My views as to the unreliability or implausibility of these aspects of Mr Vaughan’s and Mr Heyn’s evidence colour the approach I take to the remainder of their evidence.

THE IMPUGNED TRANSACTIONS

131    Gulmohar supplied stock to GVF from time to time. Mr Heyn says he received advice from an accountant in 2008 to obtain a mortgage debenture to secure Gulmohar’s interest in the stock it was supplying, but which had not been paid for. Mr Heyn deposes that Mr Vaughan and Mr Armstrong agreed in 2008 that GVF would provide security by way of a mortgage debenture, but that it took some time for the documents to be prepared and signed.

132    On 4 May 2009, Mr Heyn wrote on behalf of Gulmohar to Mr Vaughan, in his capacity as a director of GVF, saying:

Please refer to the discussion we have had over the last week regarding the outstanding payments of Grass Valley to Gulmohar.

Gulmohar is owed approx. $800k by Grass Valley and for us to be able to provide ongoing support we require security towards the loans given to Grass Valley in the form of a mortgage debenture.

Could you please confirm this will be in order and I will arrange for necessary documentation to be forwarded.

133    The minutes of a meeting of Mr Vaughan and Mr Heyn, as GVF’s directors dated 22 May 2009 record the following:

Letter from Gulmohar Pty Ltd (“Gulmohar”) 4th May 2009 refers. Gulmohar has over the past few years provided financial support to the company in providing extended terms. They are owed in the vicinity of $800k and have requested that, for them to continue ongoing support in the same manner that we provide mortgage Debenture as security.

…

In order to secure Gulmohar’s ongoing support Directors have agreed to execute mortgage debenture documentation as requested by Gulmohar.

134    On 22 May 2009, GVF executed a Deed of Charge in favour of Gulmohar over GVF’s assets securing $800,000 plus interest plus any further advances.

135    Mr Vaughan says that GVF gave Gulmohar a mortgage debenture shortly after he and Mr Armstrong had agreed to it. He says that it was a mere coincidence that by the time the paperwork was in order, the fire had occurred in March 2009.

136    GVF’s financial statements and its MYOB accounting records record a number of debts owed to GVF’s related entities.

137    At the time of the fire on 24 March 2009, GVF owed Gulmohar $637,892.17 for the supply of stock on credit. After the fire, GVF’s accounts showed purchases from Gulmohar which totalled $957,546.39. GVF made payments to Gulmohar of $1,356,999.47. At the date of liquidation the amount owed to Gulmohar was $238,439.09. After the date of the fire the debt to Gulmohar was reduced by $399,453.08.

138    The payments made by GVF to Gulmohar were as follows:

139    At the date of the fire, GVF owed Superway Garden $42,500 under a loan agreement. The loan was not required to be repaid until 2016. GVF repaid Superway Garden $17,500 on 27 November 2009 and the remaining $25,000 on 9 December 2009.

140    At the date of the fire, GVF owed Mr Heyn, as trustee of the Heyn Family Trust, $42,500. GVF repaid $17,500 on 27 November 2009 and the remaining $25,000 on 16 December 2009.

141    Mr Vaughan states that he provided management services to GVF through Vaudell. GVF’s accounting records show that GVF had incurred a debt of $40,000 to Vaudell for management fees prior to the date of the fire. GVF paid $90,000 to Vaudell between May 2009 and February 2010 for management fees. The payments made to Vaudell were as follows:

142    Mr Heyn deposes that he provided management services to GVF through Palacimo. According to Mr Pearce, Palacimo was owed $45,000 at the date of the fire. GVF paid $100,000 to Palacimo between May 2009 and February 2010. The payments made to Palacimo were:

143    The only payments previously made to Vaudell and Palacimo were $10,000 each in December 2008.

SOLVENCY

Principles for assessment of solvency

144    Under s 95A(2) of the Corporations Act, a person who is not solvent is insolvent. Under s 95A(1), a person is solvent only if they are able to pay all their debts as and when they become due and payable.

145    The test for solvency requires application of a number of guiding principles recognised by the authorities. The principles include the following.

146    Insolvency is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole. The Court must have regard to the 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: see Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 at [54]; Emanuel Management Pty Ltd (in liq) v Foster’s Brewing Group Ltd (2003) 178 FLR 1 at 26 [75] per Chesterman J; Hussain v CSR Building Products Limited, in the matter of FPJ Group Pty Ltd (in liq) (2016) 246 FCR 62 at [58].

147    The definition focuses on a “cash flow test” of insolvency, and not simply a “balance sheet test”: Hussain at [58]. That said, a company’s balance sheet remains relevant because the cash flow position must be assessed by reference to the company’s financial position as a whole: Hussain at [58]; Smith v Bone (2015) 104 ACSR 528 at [24].

148    Insolvency is an “endemic shortage of work capital”: Smith v Bone at [25]; Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321 at 328. Such a position is to be distinguished from a temporary lack of liquidity: Sandell v Porter (1966) 115 CLR 666 at 670. Thus, a temporary lack of liquidity is not equivalent to insolvency and, conversely, neither is availability of surplus assets at a particular point in time conclusive of solvency: Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820 at 837; Hussain at [58].

149    In assessing when debts are due and payable, the test is what debts are legally due, having regard to the agreement between the parties: Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103 at 112, Hussain at [63]. This approach allows for situations where there is sufficient evidence of waiver of legal requirements, but reluctance by creditors to enforce legal rights is not sufficient. It does not matter that a creditor is unlikely to enforce its debt because the statutory test is whether the debt is due and payable at law: Hussain at [63].

150    On this test, it is immaterial that a company disputes a claimed debt. Such a dispute may require some form of determination, but does not alter whether the debt is legally due. The defendants have not contended to the contrary.

151    Where there are contract debts, it is for the party asserting that those debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence: Southern Cross Interiors at [54].

152    The words “as and when they become due” are forward looking. That is, consideration is given to not only debts presently payable, but those that will become payable in the near future: Bank of Australasia v Hall (1907) 4 CLR 1514 at 1528; Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820 at 838.

153    In assessing the assets available to pay the company's debts, the relevant question is as to what assets are capable of realisation within time to meet the company’s indebtedness: Bank of Australasia v Hall at 1543; Hall v Poolman (2007) 65 ACSR 123 at [187].

154    Where the company is trading with no intention of selling stock-in-trade or inventory outside the ordinary course of business, the value of that inventory ought be excluded from the solvency analysis: Rees v Bank of New South Wales (1964) 111 CLR 210 at 218-9; Ex parte Russell; Re Butterworth (1882) 19 Ch D 588 at 601-2; Re Damilock; Lewis v VI SA Australia Pty Ltd (2008) 252 ALR 533 at 550. Similarly, assets required to operate the business as a going concern (such as plant and equipment) are also excluded. In Re Timbatec Pty Ltd [1974] 1 NSWLR 613, Bowen CJ said that a debtor cannot rely on realising assets that would involve a cessation or breaking up of its business. If a company has to resort to selling assets that are essential to the continuation of its business, those assets are not to be included in a determination of solvency.

155    In proving insolvency, expert evidence from the liquidator may be relied upon: Sheahan v Hertz Australia Pty Ltd (1994) 14 ACSR 209 at 213; Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651.

156    In ASIC v Plymin (No 1) (2003) 46 ACSR 126 at [386], the Court identified a number of common, albeit not essential, features in insolvency situations. That judgment has been referred to with approval in many subsequent decisions, including Bluestone Property Services Pty Ltd (in liq) v First Equilibrium Pty Ltd [2013] FCA 876 at [42]; Smith v Bone at [24] and McLellan v Carroll (2009) 76 ACSR 67 at [106]. The features are:

1.    Continuing losses.

2.    Liquidity ratios below 1.

3.    Overdue Commonwealth and State taxes.

4.    Poor relationship with present Bank, including inability to borrow further funds.

5.    No access to alternative finance.

6.    Inability to raise further equity capital.

7.    Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply.

8.    Creditors unpaid outside trading terms.

9.    Issuing of post-dated cheques.

10.    Dishonoured cheques.

11.    Special arrangements with selected creditors.

12.    Solicitors’ letters, summons[es], judgments or warrants issued against the company.

13.    Payments to creditors of rounded sums which are not reconcilable to specific invoices.

14.    Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.

157    Importantly, this is a guide, not a checklist. It is merely a list of factors, the presence of one or more of which may indicate insolvency. Likewise, not all factors need be present. Further, certain factors present in a given case may carry different weight according to the circumstances of the particular case: Deputy Commissioner of Taxation v Barblance Pty Ltd (2010) 80 ATR 468 at [13].

Financial support principles

158    A factor which may be relevant to the assessment of solvency is the likelihood that directors or associated companies will continue to support a company by lending it money or deferring debt: Re a Company [1986] BCLC 261 at 262; Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran (2005) 219 ALR 555 at [113]); Mulherin v Bank of Western Australia Ltd [2006] QCA 175 at [113]-[115]).

159    In Williams v Scholz [2008] QCA 94, the Queensland Court of Appeal observed that:

[109]    It is well established that in considering a company's financial position as a whole, reference may be had, not merely to strict legal rights and obligations under agreements with creditors and debtors, but to “commercial realities”. …

[110]     …There is some authority for the proposition that unsecured loans by directors cannot be taken into account. There should, however, be no objection in principle to regarding such financial support as relevant where the evidence establishes that the directors are likely to continue. Loans by related corporations have been regarded as relevant to the determination of solvency. And there is no reason in principle why a loan from directors should be treated any differently to loans from companies controlled by directors. The most important consideration is the degree of commitment to the continuation of financial support.

160    In International Cat Manufacturing Pty Ltd v Rodrick (2013) 97 ACSR 200 at [105], Morrison JA (Holmes and Gotterson JJA agreeing) confirmed that “regard can be had to such financial support where the evidence establishes that the directors are likely to continue it”.

161    In First Strategic Development Corporation Ltd (in liq) v Chan [2014] QSC 60, McMurdo J said:

[67]     … [A] company's position must be considered by reference to not only its legal rights and obligations but also other circumstances such as the relative likelihood that it will have funds available to it from sources with which it has no formalised agreement or understanding. And there is no objection in principle to a consideration of the prospect of loans from related corporations or directors. …

[69]     In Lewis v Doran, Giles JA (with whom Hodgson and McColl JJA agreed) emphasised that “the key concept is ability to pay the company‘s debts as and when they fall due”. That emphasis on “ability” is important here. The prospects of obtaining necessary funds from a party, which is not obliged to provide them, must be such as to give the company something more than a chance of paying its debts: the prospects must be sufficient to make the company able to do so. That does not mean that the provision of the funds must be free of any uncertainty or contingency. But there must be a sufficient likelihood for the company, and those directing it, to be able to rely upon the availability of those funds when incurring the relevant debts.

(Citations and emphasis omitted.)

His Honour concluded:

[81]    …[S]tatements by the first defendant now as to his preparedness to fund the company's activity have to be assessed against what he did or did not do. As I have mentioned, he gave no credible explanation for not paying the debts which had been incurred to August 2010. And the ability or otherwise of the company to pay its debts must be assessed by looking at, from the company's perspective at the time it incurred a debt, the reliability of the first defendant as a source of funds, which is an assessment undertaken more accurately by reference to the surrounding facts and circumstances which I have discussed than by the first defendant's evidence of what was in his mind.

162    On appeal, in Chan v First Strategic Development Corp Ltd (in liq) [2015] QCA 28, Morrison JA (Gotterson JA and Boddice J agreeing) said, referring to McMurdo J’s analysis at [67]-[69]:

[43]     I agree respectfully with those observations. They reflect the need, in cases where the financial support is from a source which cannot be compelled by legal arrangement, for there to be a degree of assuredness that the financial support will be forthcoming and at such a level that one could say the company was able to pay its debts as and when they fall due, rather than being possibly able to do so. Just as a conclusion that the relevant financial support does not have to be absolutely certain in order to be sufficient to meet the test in Lewis v Doran, Scholz and International Cat, equally the financial support does not have to be absolutely uncertain in order to be insufficient to qualify. Between the two extremes the factual circumstances of each case will provide a variety of points at which one might conclude that the financial support was of such a degree of commitment that it was likely to continue, and with the result that the company was able to pay its debts, and therefore that it has sufficient financial support to draw the conclusion of solvency.

[44]    However, in my view there is no benefit in attempting to achieve some precise formula as to likelihood, by reference to which the financial support qualifies or does not. To say that the likelihood of it being provided is “probable” or “improbable” adds no more to what has been said in the authorities to which I have referred. Given that the resolution of this issue will almost always depend upon an assessment of facts, in my view it is better to proceed on the basis that, where the financial support is being provided by a director or related entity, and in circumstances where there is no formalised agreement or understanding, what is required is cogent evidence which enables the court to conclude that there is such a degree of commitment on the part of the provider of the financial support to continue it, such that it can be said that at any point of time it was likely to be continued, with the result that, at any of those times, the company was able to pay its debts as and when they fell due.

(Citations omitted.)

163    In ASIC v Edwards [2005] NSWSC 831 at [98], Barrett J said:

…[W]here retrospective insolvency is in issue, the Court can take into account that as at and after the alleged date of insolvency the company actually paid all its debts as they fell due because a third party made funds available to it without security. The Court can look at the arrangements which were actually made rather than artificially excluding them from consideration because the arrangements did not fall within the definition of payments from the debtor’s “own monies”. To look at what actually happened avoids the possibility that the Court is forced to conclude that, as a matter of law, a company could not pay all its relevant debts when, as a matter of fact, the company clearly did pay those debts.

(Emphasis omitted.)

His Honour continued at [99]:

…There is also the point (emphasised by the Court of Appeal in Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2003) 45 ACSR 711) that the capacity to raise funds from external sources must be judged in a practical and businesslike way by reference to the commercial realities of the case, not by way of some theoretical textbook exercise. Possibilities are not enough. Genuine and realistic availability, as a matter of commercial reality, must be seen.

164    There must be cogent evidence of a degree of commitment and capacity on part of a financier if the Court is to conclude that financial support sufficient to avoid insolvency was likely to be offered or continued.

The parties’ submissions as to the Toxfree debt

165    The plaintiffs plead that as at 30 April 2009, GVF was indebted to Toxfree an amount of at least $1,100,000 (including GST) for work performed by Toxfree at GVF’s request, summarised as follows:

(a)    $275,274.40 (including GST) for the emergency clean up work that was subject to the prescribed rates as indicated in Toxfree’s schedule of 24 March 2009.

(b)    $0.0261 (plus GST) per litre per day for storage of liquid waste, or such other price per litre determined to be reasonable by the Court.

(c)    $351,588.60 (including GST) for the disposal of contaminated soil.

(d)    Not less than $1.80 per litre (plus GST) for the disposal of liquid waste plus costs for the transport of the liquid waste, or such other price determined to be reasonable by the Court.

(e)    $45,031.80 (including GST) for the close-out report dated 7 April 2009.

166    The plaintiffs’ pleading proceeds on the basis that the Toxfree debt was at least $1,100,000 throughout the period from 30 April 2009 to the date of liquidation, 17 November 2010.

167    The defendants plead that:

(a)    The only contract between GVF and Toxfree was for Toxfree to collect and remove contaminated liquid and soil from GVF’s premises for a price of approximately $160,000 (plus GST).

(b)    Alternatively, Toxfree’s estimate of $160,000 (plus GST) amounted to a misleading or deceptive representation in contravention of s 52 of the Trade Practices Act 1974 (Cth).

(c)    There was no contract for testing or disposal of the waste, the parties having agreed that Toxfree would provide a quotation to GVF for the testing and disposal once the quantities of the waste and the extent and nature of the contamination were determined, that quotation to be based on commercial rates that GVF was previously charged by Toxfree.

168    In the defendants’ closing oral submissions, their position was:

(a)    There was a contract for the collection and removal of liquid waste (but not solid waste) from the site. The emergency rates notified by Toxfree were only to be charged for the emergency part of the work, which was completed on the first day.

(b)    There was no contract for the disposal (in the sense of destruction) of the waste removed from the site, but Toxfree was entitled to payment for such disposal on a quantum meruit basis.

(c)    There was no contract for storage of the waste, but Toxfree was entitled to payment for storage on a quantum meruit basis. Alternatively, there was a contract for storage at the rate of $0.0261 per litre per day for a reasonable length of time.

Analysis of contractual arrangements between GVF and Toxfree

Contract for collection and removal of waste from GVF’s site

169    The plaintiffs submit that there was a contract for Toxfree to carry out the work set out in the DEC’s Environmental Field Notice and Pollution Response document. In deciding whether such a contract was formed, the parties’ intentions must be objectively ascertained: Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548-550; New South Wales Lotteries Corporation Pty Ltd v Kuzmanovski (2011) 195 FCR 234 at [55].

170    On 24 March 2009, Mr Beere of Toxfree told Mr Haslberger of GVF that Toxfree could not begin providing its emergency response services until GVF raised a purchase order confirming that it accepted Toxfree’s terms. Mr Beere provided Ms Carr with GVF’s emergency response rates for the collection of contaminated waste. He also provided a “rough estimate of cost” for that work. From their discussions with Mr Raine, Mr Beere and Mr Haslberger both understood that the DEC required the contaminated waste to be removed from the site. The contaminated waste was both solid and liquid waste. The solid waste consisted of contaminated soil and equipment.

171    Ms Carr, with Mr Haslberger’s authorisation, provided a purchase order to Toxfree which said, “We herewith confirm having bought from you as per the details mentioned below...” The price set out in the purchase order was $160,000 plus $16,000 GST, a total of $176,000. Under the heading “Product Name”, appeared the words “Miscellaneous” and “See Remarks”. The “Remarks” said:

To collect and dispose of pesticide contaminated water using vehicles, equipment & personnel at Grass Valley Site, Lot 8, Leeming Rd, Northam, as directed by the Dept of Environment and Conservation on 24/03/09

This is a rough Estimate and will arrive at real figures once the work has commenced and progressed

172    The purchase order did not accurately reflect the communications between Mr Beere and Ms Carr in two respects. Firstly, the estimate of $160,000 given by Mr Beere was only for collection of waste, and did not include disposal costs. Secondly, the purchase order referred only to the collection of liquid waste, and not to the collection of solid waste.

173    Both Toxfree and GVF failed to pick up the fact that the purchase order did not refer to solid waste. In fact, that was not an issue identified in the pleadings in the Western Australia Supreme Court, or in this proceeding. The issue was not raised until the closing submissions of counsel for the defendants.

174    Toxfree treated the purchase order as creating a contract for the disposal of waste, as well as its collection and removal. That led Toxfree to deliver an invoice for $1,592,910.23 for disposal of the waste on 31 March 2009. Toxfree apparently considered that it was entitled to unilaterally impose a rate for disposal. It imposed a rate of $3.14 per litre for liquid waste, despite Mr Beere saying that no rate could be determined until the waste had been analysed and no analysis having been done by the time the invoice was delivered. It imposed a rate of $1.62 per cubic litre for contaminated soil.

175    The purchase order must be read together with Toxfree’s email giving an estimate of $160,000 for the collection of “contaminated water and contaminated soil”. Toxfree proceeded to collect and remove both types of waste.

176    In my opinion, Mr Beere’s email to Ms Carr of 24 March 2009 attaching Toxfree’s emergency response rates and giving an estimate of costs, was an offer to contract with GVF to contract for the collection and removal of solid and liquid waste from the site at the quoted rates. By then, Toxfree had sent its emergency response crew to the site, but had said it could not begin providing its services until GVF raised a purchase order confirming that it accepted Toxfree’s terms. Toxfree was willing to carry out the work it had quoted for upon the purchase order being provided. GVF accepted Toxfree’s offer by providing the purchase order.

177    The purchase order referred only to the “collection” of waste, not its removal. The collection was to be done by using, inter alia, tankers. It was necessary to take the waste somewhere after it was collected so that it could be stored or disposed of. Therefore, the parties must have contemplated that the collection of waste also encompassed its removal from the site.

178    Although the purchase order referred only to collection of “pesticide contaminated water”, the estimate given by Toxfree, the discussions between the parties, their discussions with the DEC officers and their subsequent conduct, are consistent with an intention to contract for the collection and removal of solid waste, as well as liquid waste. GVF did not raise any dispute with Toxfree’s invoices on the basis that the contract was only for the collection and removal of liquid waste.

179    Upon the provision of the purchase order, GVF and Toxfree entered a contract. The terms required Toxfree to collect and remove contaminated solid and liquid waste from GVF’s site in accordance with directions to do so that had been given by the DEC to GVF. The work was to be carried out using Toxfree’s vehicles, equipment and personnel. Toxfree’s charges were to be at the emergency response rates that had been provided to GVF. Payment was to be made within 30 days of Toxfree delivering its invoice.

180    The plaintiffs argue that the contract required Toxfree to carry out all the work described in the DEC’s “Environmental Field Notice” and “Pollution Response” document. The plaintiffs rely, in particular, on the words “as directed by the Dept of Environment and Conservation on 24/04/09” in the purchase order. The purchase order was provided at 2.17 pm (Western Australian time), while the DEC’s documents were not served until about 4 pm. An email from Mr Styles at 3.37 pm acknowledged that there was a contract in place. The Pollution Response document, signed by Mr Haslberger, describes Toxfree as “contractor for co” also suggests that Toxfree had been engaged by the time the document was completed. I find that the DEC’s documents were given to GVF after the purchase order had been provided to Toxfree and the contract was formed. Therefore, the DEC’s documents are not contractual documents.

181    However, prior to the purchase order being provided, Mr Raine had made known the DEC’s concerns and requirements to both parties. Mr Raine talked separately to Mr Beere and Mr Haslberger and later walked around the site with Mr Edmunds and Mr Haslberger pointing out what needed to be done in terms of the clean up and containment of waste. Mr Raine told the parties that up to 300 kilolitres of liquid waste and 500 tonnes of contaminated spoil would have to be removed. They knew that the DEC’s concern was the risk that contaminated waste might spread into the environment, including the Avon River, presumably through overflowing, leaking or leaching. They knew that the DEC required that GVF eliminate that risk by having contaminated waste removed from the site. This was work that the parties understood, prior to the provision of the purchase order, which the DEC had or would direct to be done. This was what was meant when the purchase order said “as directed by the Department of Environment and Conservation”.

182    These were also the principal tasks later described in the “Pollution Response” document. Other tasks described in the “Pollution Response” document, such as environmental sampling and analysis, did not form part of the contract entered on 24 March 2009.

183    The defendants argue that under the contract, Toxfree was only entitled to charge its emergency response rates for the emergency part of the work. They argue that the emergency was over by the evening of 24 March 2009 when the pond had been substantially drained and there was no further risk of the pond overflowing into the Avon River. The plaintiffs submit that the contract entitled Toxfree to charge its emergency response rates for the whole of the task of collecting and removing the liquid and solid wastes, and that task was not complete until 31 March 2009.

184    There was a great deal of evidence about the subjective views of witnesses as to what constituted the emergency and when the emergency ended. However, the question as to what work Toxfree was entitled to charge emergency response rates for depends on the proper construction of the contract. This must be done on an objective basis.

185    As I have said, the contract was for Toxfree to collect and remove contaminated solid and liquid wastes from GVF’s site in accordance with the DEC’s directions. The DEC evidently regarded the whole of that task as urgent because there was a risk that the contaminated waste might escape into the environment, whether through the pond overflowing or through leaching or leaking of contaminated water. The DEC’s requirement that the collection and removal of the waste be done on an urgent basis was demonstrated by the fact that Mr Raine suggested that Toxfree urgently deploy a crew to the site and by the “Pollution Response” document later issued which required the work to be done as soon as possible. In my opinion, the contract was for Toxfree to perform the whole of the task of collection and removal of the waste at its emergency response rate. The contract was not for Toxfree to do some portion of the work contracted for at one rate and the remainder at a lower rate. The work was completed by 31 March, and was described in Toxfree’s invoice # 2318.

186    The defendants plead that the contract was to collect and remove contaminated soil and liquid waste for a charge of approximately $160,000 (plus GST). The defendants also plead that Toxfree engaged in misleading or deceptive conduct, in breach of s 52 of the Trade Practices Act, by providing an estimate of costs for collection and removal of wastes that was greatly understating the actual costs.

187    Mr Beere’s estimate was a representation as to a future matter. The question under s 51A of the Trade Practices Act is whether there were reasonable grounds for making the representation. Mr Beere made it clear in his discussion with Ms Carr and in his subsequent email that the figure of $160,000 was an estimate only and that it was very difficult to provide precise figures because, inter alia, he had not seen the site. The purchase order acknowledged that the figure was a “rough estimate” and “real figures” would be arrived at after the work had commenced and progressed. Mr Beere explains that the work proved to be more expensive because, amongst other things there were problems with more than one truck accessing the site at a time, increasing the time it took to do the work. There are reasonable grounds for the estimate, given the urgent circumstances. I find that the estimate was not misleading or deceptive.

188    Further, I find that the contract was not a contract for the work to be done at a fixed price.

189    The purchase order stated “We herewith confirm having bought from you as per the details mentioned below” and set out a total price of $160,000 plus $16,000 GST. The defendants submit that the contract was subject to a term that any work beyond the value of $160,000 plus GST required authorisation by GVF. I accept that submission. The defendants then argue that no authorisation of the further work was provided.

190    Mr Edmunds states that Mr Haslberger provided him with oral authority on site to continue to use the purchase order on about 25 March 2009. It is unclear what this means. Mr Edmunds states that Toxfree “may maintain file notes” of conversations with customers and that this procedure applied to Toxfree’s dealings with GVF. No file note of Mr Edmunds conversation with Mr Haslberger has been produced, and there is no other contemporary documentation consistent with the instruction being given. The first record of the conversation appears in Mr Edmunds affidavit, prepared some six years after the event. I have substantial doubts about Mr Edmunds’ recollection of this matter.

191    On 25 March, Mr Styles told Ms Carr by telephone that Toxfree was close to the value of the purchase order. I accept that Mr Styles asked for another purchase order for the additional work. Mr Styles requested that Ms Carr inform Mr Vaughan of this so he could advise Toxfree of what he wanted to do. Ms Carr said that GVF required Toxfree’s rates to determine the costs going forward. Mr Styles says that Ms Carr said GVF would continue with the original purchase order and she would consult Mr Vaughan. Mr Styles also sent an email to Ms Carr on the same day saying that Toxfree’s work was close to the $160,000 limit. The email continued “On your instruction we will continue to use the same PO (0557) and provide you with cost and operational updates”.

192    Ms Carr denies that she told Mr Styles that GVF would continue with the same purchase order. Ms Carr says that she understood the statement in the email to mean that upon receiving GVF’s further instruction, Toxfree would continue to use the same purchase order to provide any work. Ms Carr says, in effect, and I accept, that she was a mere conduit for communications between Toxfree and GVF. Ms Carr was acutely aware of the limits of her role, and I think it is unlikely that she gave any instruction to Toxfree to continue to do work after the $160,000 limit of the purchase order had been reached. Mr Styles appears to have mistakenly taken her as giving such an instruction. A tendency to enthusiastically proceed on a version of events favourable to Toxfree characterised several aspects of Mr Styles’ conduct. That misunderstanding is reflected in Mr Styles’ email to other Toxfree staff on the same date.

193    However, there is no reason to think that Ms Carr did not consult Mr Vaughan about her discussion with Mr Styles, as she said she would do. Mr Vaughan was available to Ms Carr by telephone. He was on site and knew that Toxfree was continuing to do the work. Further, Ms Carr forwarded Mr Styles email to Mr Heyn. No-one from GVF told Toxfree to stop working.

194    In Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 at 535, McHugh JA (Samuels JA agreeing) held:

[W]here an offeree with a reasonable opportunity to reject the offer of goods or services takes the benefit of them under circumstances which indicate that they were to be paid for in accordance with the offer, it is open to the tribunal of fact to hold that the offer was accepted according to its terms…

The ultimate issue is whether a reasonable bystander would regard the conduct of the offeree, including his silence, as signalling to the offeror that his offer has been accepted.

See also Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at [82].

195    GVF gave no express instruction to Toxfree to continue its work of collection and removal of the waste after its costs reached $160,000. However, the whole of the circumstances must be considered. Toxfree had already done much of the work and had conveyed to GVF that it had nearly reached the $160,000 limit. The parties knew that the DEC required the whole of the contaminated waste to be collected and removed. GVF had the opportunity to instruct Toxfree not to continue with the work, but did not do so, and was content to take the benefit of the ongoing work. From the perspective of a reasonable bystander, GVF’s conduct, including its silence, provided tacit authorisation for Toxfree to continue to do the work once its charges had reached $160,000.

196    If this analysis is wrong, the question arises as to whether Toxfree is entitled to reasonable remuneration on a quantum meruit basis for its work after the $160,000 mark.

197    For the purposes of considering solvency, the word “debt” is not a word of “precise and inflexible denotation”: Hawkins v Bank of China (1992) 26 NSWLR 562 at 572. A debt can include a claim on a quantum meruit basis: see ASIC v Edwards (2009) 264 ALR 723. Such a debt can arise where services are provided at the request of a party, but where there was no fixed price agreed, or the work requested falls outside the scope of the original contract. In such a case, the law implies a term that a reasonable price shall be paid: Horton v Jones (No 2) (1939) 39 SR (NSW) 305 at 319-320; Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221 at 256; Benedetti v Sawiris [2014] AC 938 at 954. The starting point is the objective market value, or market price, of the services: Benedetti v Sawaris at 956. In Flett v Deniliquin Publishing Co Ltd [1964-5] NSWR 383, Herron CJ said at 386:

In seeking a measure of reasonable reward, the parties’ ineffective contract may be looked at for this purpose and in some cases the degree of benefit conferred on the defendant may be taken into account; Way v Latilla [1937] 3 All ER 759. But there must be some evidence of a market or prevailing price…put in another way, there was no external standard to which a trial judge could refer to define the quantum of the claim.

198    The Court may have regard to the terms of an ineffective contract in estimating the value of the services, although such terms are not necessarily determinative: Iezzi Constructions Pty Ltd v Watkins Pacific (Qld) Pty Ltd (1995) 2 Qd R 350 at 370.

199    The parties had agreed that Toxfree’s emergency response rates were to apply to work up to the value of $160,000. The remainder of the work involved in the collection and removal of the waste still had to be done as part of the work that the DEC required to be done on an urgent basis. I am satisfied that, in the circumstances, Toxfree’s emergency response rates were reasonable for the remainder of the work.

200    The defendants next argue that GVF only authorised the transportation of liquid waste to Toxfree’s plant at Kwinana, and not to Port Hedland. The defendants contend that Toxfree was not entitled to charge for transport to Port Hedland. Mr Vaughan’s evidence is that he was unaware that the liquid waste had been transported to Port Hedland until after it had been transported there.

201    Mr Edmunds’ evidence was that on 27 March 2009, Mr Vaughan asked if Toxfree could store the bulk of the liquid waste at Port Hedland. While I accept that Mr Vaughan asked Mr Edmunds if Toxfree could store the waste, I do not accept that Mr Vaughan asked if it could be stored at Port Hedland. There was no reason for Mr Vaughan to be so specific about where it was to be stored.

202    On 25 March 2009, Mr Styles sent an email to GVF saying that the liquid waste was being transported to Kwinana. Mr Vaughan claims not to have seen the email until 2 April. On 27 March, Mr Styles sent a fax to Mr Vaughan saying that 250,000 litres would be transferred to Toxfree’s Port Hedland facility. Mr Vaughan does not deny receiving the fax, but says only that he did not see it on the day it was sent. I also accept that before sending the fax, Mr Styles told Mr Vaughan by telephone that the liquid waste would be sent to Port Hedland. Mr Vaughan made no complaint about the waste being taken to Port Headland after he saw the fax, and that is consistent with Mr Styles having previously told him where it would be taken.

203    The terms of the contract formed on 24 March 2009 did not specify where the liquid waste was to be transported to. It must have been within the contemplation of the parties that the liquid waste would be transported to Port Hedland, since, as I will discuss later, GVF indicated in the purchase order that it wished to engage Toxfree to dispose of the waste and GVF knew from dealings in 2007, that Toxfree’s incineration facility was in Port Hedland. Toxfree was entitled to charge for the costs of such transportation.

204    The plaintiffs concede that Toxfree was not entitled to charge for a number of items, totalling $73,589.50, set out in Toxfree’s invoices # 2318 and # 2451 for work done between 24 March and 1 April 2009. The defendants’ submissions do not descend to the details of the invoices. Taking into account other items that may be disputed at the margins, the plaintiffs submit that the amount owed by GVF under invoice # 2318 since 30 April 2009 can be taken to be $200,000 (plus GST). I accept that submission.