FEDERAL COURT OF AUSTRALIA

Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (No 2) [2018] FCA 530

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 588FA(1)(a) of the Corporations Act 2001 (Cth) the defendant pay Cardinal Project Services Pty Ltd (in liq) the sum of $197,068.38 (Sum).

2.    The defendant pay interest on the Sum.

3.    On or before 3 May 2018 the parties file and serve submissions, not exceeding 3 pages in length, on the questions of calculation of interest on the Sum, including the period for which interest should be paid, and costs of the proceeding and to indicate in those submissions whether those issues can be dealt with on the papers.

4.    If an oral hearing is required on the questions of interest and costs referred to in Order 3 then the matter will be listed on a date convenient to the parties and the Court for that purpose.

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

REASONS FOR JUDGMENT

MARKOVIC J:

1.    INTRODUCTION

1    On 1 February 2012 the plaintiffs, Richard Andrew Stone and Peter William Marsden (Liquidators), were appointed as liquidators of Cardinal Project Services Pty Ltd (in liq) (CPS), having previously been appointed as joint and several administrators pursuant to s 436A of the Corporations Act 2001 (Cth) (Act).

2    The Liquidators seek orders under s 588FF of the Act that 18 payments made to the defendant, Melrose Cranes & Rigging Pty Ltd (Melrose Cranes), totalling $308,544.58, are voidable transactions within the meaning of s 588FE(2) of the Act because those transactions were unfair preferences within the meaning of s 588FA of the Act. The payments in issue are:

3    It is not in dispute that CPS made the payments the subject of the Liquidators’ claim to Melrose Cranes and that those payments were transactions within the meaning of s 9 of the Act. However, in summary, Melrose Cranes:

    denies that the payments were unfair preferences within the meaning of s 588FA of the Act and relies on s 588FA(3) of the Act, alleging that any payments that have been made are an integral part of the continuing business relationship between Melrose Cranes and CPS and thus those transactions are exempted from the operation of s 588FA(1);

    denies that CPS was insolvent at the time that each of the payments were made;

    says that the Court should not make an order prejudicing it pursuant to s 588FG(2) of the Act; and

    says that in the event that the Liquidators are entitled to an order directing it to pay an amount to them, it seeks a set-off pursuant to s 553C of the Act for the amount that it says CPS was indebted to it as at the relation-back day.

4    This proceeding was heard over a period of seven days. The parties were seemingly unwilling to agree to any matter which might have narrowed the issues. Indeed until the first day of the hearing, when Melrose Cranes sought leave to file its further amended defence, it had denied that the payments in issue had been made. While parties are of course entitled to take issue with allegations made against them, proceedings in this Court should be conducted having regard to ss 37M and 37N of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act). In my opinion this proceeding taking two years to come to trial; running over seven days; and involving over 4,000 pages of material tendered in evidence was not conducted in that manner, particularly when viewed in light of the amount in issue.

2.    LEGISLATIVE FRAMEWORK

5    Part 5.7B of the Act provides for the recovery of property or compensation for the benefit of creditors of insolvent companies.

6    Section 588E sets out presumptions to be made in a recovery proceeding which includes an application under s 588FF of the Act by a company’s liquidator. Pursuant to s 588E(9), a presumption for which s 588E provides, operates except so far as the contrary is proved for the purposes of the proceeding concerned. Section 588E(3) provides:

If:

(a)    the company is being wound up; and

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

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

7    The Liquidators seek relief under s 588FF of the Act. Relevantly, s 588FF(1)(a) empowers the Court, where it is satisfied that a transaction of a company is voidable because of s 588FE, to make an order directing, in this case, Melrose Cranes to pay some or all of the money that the company paid under the transaction.

8    Section 588FA of the Act provides:

(1)    A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a)    the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b)    the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

…

(3)    Where:

(a)    a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and

(b)    in the course of the relationship, the level of the company’s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

then:

(c)    subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

(d)    the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last‑mentioned paragraph is taken to be such an unfair preference.

9    The term “transaction” is defined in s 9 of the Act to mean a transaction to which the company is a party including, among other things, a payment made by the company. It is not in issue between the parties that each of the payments made by CPS to Melrose Cranes was a transaction for the purposes of s 588FA of the Act.

10    Section 588FC of the Act provides:

A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

(a)    any of the following happens at a time when the company is insolvent:

(i)    the transaction is entered into; or

(ii)    an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b)    the company becomes insolvent because of, or because of matters including:

(i)    entering into the transaction; or

(ii)    a person doing an act, or making an omission, for the purpose of giving effect to the transaction.

11    The term “insolvency” is defined in s 95A of the Act. It provides that a person is solvent if, and only if, the person is able to pay all of their debts as and when they become due and payable. A person who is not solvent is insolvent: s 95A(2) of the Act.

12    Section 588FE concerns voidable transactions. Section 588FE(2) provides that a transaction is voidable if it is an insolvent transaction of the company and it was entered into, or an act was done for the purpose of giving effect to it, during the six months ending on the relation-back day; or after that day but on or before the day when the winding up began.

13    The relation-back day is the day on which the winding up is taken to have begun, which in this case, is the day on which the administrators were appointed to CPS, 15 December 2011: see ss 9 and 513C, and since 1 March 2017, s 91 of the Act.

14    In its further amended defence Melrose Cranes relies on s 588FG(2) of the Act which provides that:

A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director‑related transaction of the company, and it is proved that:

(a)    the person became a party to the transaction in good faith; and

(b)    at the time when the person became such a party:

(i)    the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

(ii)    a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and

(c)    the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

3.    CPS

3.1    Part of the Cardinal Group

15    CPS was a wholly owned subsidiary of Cardinal Group Pty Ltd (Cardinal). CPS’ directors were Sam Ebeid, Andrew Travers and Michael Burns.

16    Cardinal was also the trustee for the Cardinal Group Unit Trust, the Reefway Asset Trust and the Reefway Environmental Services Trust. In its capacity as trustee for the Cardinal Group Unit Trust, it held all of the shares in Complete Concrete Cutting Pty Ltd (CCC) and Cardinal Logistics Services Pty Ltd (CLS). I will collectively refer to CPS and these entities as the Cardinal Group.

17    Messrs Ebeid, Travers and Burns were also directors of Cardinal, CCC and CLS.

18    Card Services Pty Ltd (Card Services) was a labour hire company which employed all of the staff that worked in the Cardinal Group. The sole shareholder in Card Services was Douglas Bell. On 15 December 2011 the Liquidators were appointed as liquidators of Card Services. Card Services was deregistered on 25 August 2013. Prior to the incorporation of Card Services, Cardinal Group Services Pty Ltd (CGS), a wholly owned subsidiary of Cardinal, provided labour hire services to the Cardinal Group. CGS was deregistered on 7 November 2014.

19    On 1 February 2012 the Liquidators were also appointed as joint and several liquidators to Cardinal, CCC and CLS having previously been appointed as joint and several administrators of those companies.

20    According to the report to creditors dated 23 January 2012, issued pursuant to s 439A of the Act by the Liquidators of Cardinal, CPS, CCC and CLS, (January 439A Report) the Cardinal Group was a large privately owned environmental services business specialising in waste management, recycling, hazardous waste management, site remediation, demolition and industrial and building services. The trading names of the businesses were Reefway Environmental Services, Recycled Resources, Smartskip, Cardinal Project Services and Complete Concrete Cutting.

21    Reefway Environmental Services provided waste management and recycling services to the construction and infrastructure industry; Smartskip provided additional waste management services; Recycled Resources produced road base, aggregates, sand, soil, decorative gravel and timber mulches for the building, construction and landscaping markets by reprocessing waste material; and Complete Concrete Cutting provided concrete coring, wire sawing and concrete bursting services.

22    CPS provided contracting services in the construction, infrastructure and industrial sectors in four divisions: hazmat management; demolition and site reconfiguration; civil works and industrial services contracting. The divisions worked in conjunction with and utilised the services of Reefway Environmental Services, Recycled Resources and Smartskip for waste disposal.

3.2    The Cardinal Group from 2008 to 2010

23    It is instructive to set out the financial position of the Cardinal Group and CPS in the period leading up to the appointment of the administrators.

24    For the year ended 30 June 2008, the period in which the business known as Reefway Waste Management was acquired, the Cardinal Group reported a profit attributable to members of the group of $1,963,940. Its balance sheet recorded total current assets of $10,593,214 and total current liabilities of $11,936,693. There was negative working capital of approximately $1.3m.

25    For the year ended 30 June 2009 the Cardinal Group reported a profit attributable to members of the group of $515,140. Its balance sheet recorded total current assets of $10,119,278 and total current liabilities of $9,253,987. There was a working capital surplus of approximately $800,000.

26    For the year ended 30 June 2010 the Cardinal Group reported a profit attributable to members of the group of $39,901. Its balance sheet recorded total current assets of $13,990,313 and total current liabilities of $12,635,217. There was a working capital surplus of approximately $1.3m.

27    In December 2010 the Cardinal Group sought up to $20m in equity financing. The information memorandum issued for that purpose informed prospective investors that the funds raised would be used to complete the acquisition program, provide working capital and fund other acquisitions. The equity financing was sought at a time when the Cardinal Group was in the process of what it described as “the second stage of its development through the acquisition of Smartskip”. In relation to that acquisition the information memorandum provided:

The acquisition is being fully debt funded by NAB who have completed financial and legal due diligence on both the Group and the target company in November 2010. The financial due diligence was carried out by Price Waterhouse Coopers (PWC) and the legal due diligence by Coors (sic) Chambers Westgarth and Maddocks.

NAB have approved a facility of $27 million to replace existing ANZ debt and revolving lease facility ($16 million), to complete the stage 2 acquisition including costs ($7 million) and to provide a revolving working capital facility ($3 million). NAB have also agreed to provide funding for future acquisitions subject to due diligence and meeting their funding criteria.

The Sale and Purchase agreement has been signed for this acquisition and the anticipated take over date is the 4th of January 2011. An analysis by PWC has identified synergies of $3.1 million of which the Group has included $480,000 in the first year of operations.

28    The information memorandum also included a summary of the four acquisitions referred to therein and their financial impact on the Cardinal Group in a table headed “Acquisition Assumptions”. For the financial year ended 30 July 2011 the amount shown for actual revenue was $62,774,000 and for actual EBITDA $8,197,000.

29    Cardinal Group failed to raise the equity finance it sought.

3.3    Finance facility

30    By letter dated 6 December 2010 the NAB agreed to provide finance to Cardinal. Four facilities were to be provided:

    an amortising term loan facility in the amount of $7m;

    a non-amortising term loan facility in the amount of $9.8m;

    a revolving lease facility in the amount of $6m; and

    a revolving working capital facility in the amount of $4.2m.

Cardinal’s obligations as borrower were to be guaranteed on a joint and several basis by it and all entities within the group. The term sheet enclosed with the letter from the NAB provided under the heading “Security” that the facilities would be secured by:

(a)    First Mortgage over all freehold land and buildings;

(b)    First Fixed & Floating charge over all local group entities; and

(c)    Interlocking Guarantee and Indemnity between all consolidated entities.

(d)    Limited Director's guarantee for $5m based on the proportional shareholding of each shareholder*.

(e)    Consents and undertaking for leased properties

*To be released once leverage ratio, for the reporting period, is below 2.50x on an LTM basis.

31    On 23 December 2010 Cardinal, as borrower and each of the companies specified as a guarantor in schedule 1, which included CPS, entered into a loan facilities agreement with the NAB (NAB Facility) pursuant to which $27m was made available to Cardinal. The NAB Facility provided for monies to be advanced as follows:

(1)    $7m to be made available to Cardinal for an “Amortising Term Facility” to finance a portion of the purchase consideration of the acquisition of the “Smartskip NSW” business and any acquisition costs;

(2)    $9.8m to be made available to Cardinal for a “Bullet Term Facility” to repay and fully discharge the Loan Facilities Agreement with the Australia and New Zealand Banking Group Ltd (ANZ);

(3)    cash advances or asset leases to Cardinal upon request by it from time to time with the aggregate not to exceed the “Asset Lease Facility Limit”, to be used to repay and discharge all outstanding commitments under the ANZ Asset Lease Facility or to finance any necessary equipment for the “Core Business” of Cardinal and each guarantor; and

(4)    a working capital facility to be made available to the “Obligors” who were Cardinal and each guarantor, by way of cash advances, L/Cs or bank guarantees when requested and a business card facility to finance or support the working capital needs of Cardinal and each guarantor and for their general corporate purpose.

32    Clause 23 of the NAB Facility headed “Guarantee and indemnity” provided, among other things, that each guarantor guaranteed the payment to the NAB of the “Guaranteed Money” as defined and indemnified the NAB against any liability or loss arising and any costs the NAB suffers or incurs in the circumstances set out, including where a guarantor defaults under the guarantee.

33    By deed of charge and mortgage of shares and units dated 23 December 2010 CPS, among others, as beneficial owner charged its “Charged Property” to the NAB to secure the payment of the “Secured Money”. The “Charged Property” was defined to mean “any legal or equitable estate or interest of [CPS] in any present and future undertaking and property other than the Mortgaged Property, including [CPS’s] uncalled capital and called but unpaid capital from time to time and the uncalled premiums and called but unpaid premiums from time to time on its shares”. On 24 December 2010 a form 309 – notification of details of a charge – was lodged with the Australian Securities and Investments Commission (ASIC) for the charge given by CPS in favour of the NAB.

3.4    Review of the NAB Facility

34    Approximately eight months after entry into the NAB Facility, on 30 August 2011 Laura Beard, a senior relationship manager for the NAB’s strategic business services, sent an email to Mr Travers in which she wrote:

I refer to your recent discussions with John Diamontopoulos and confirm that the Cardinal Group has been referred to our Strategic Business Services area. In conjunction with John (who will continue to manage the banking relationship) I will also be managing your relationship with NAB in particular all credit related decisions will now be approved by myself and the strategy moving forward.

As you are aware the Bank has concerns given the recent decline in profitability, stretched creditor position, ATO arrears and request for increased funding. Accordingly, to assist the Bank in considering how we move forward we will be organising the engagement of an Investigative Accountant’s (‘IA’) review of the Cardinal Group which I understand John has discussed this with you. The investigative accountant will be Chris Hill from PPB and he will be in contact with you shortly.

In this regard, please find attached a letter to yourself regarding the engagement of the IA and a letter to the IA. If you could kindly execute the letter as soon as possible and I will liaise with Chris Hill to contact you directly.

Should you have any queries or concerns regarding this matter please do not hesitate in contacting myself or John.

35    By letter dated 29 August 2011 from Ms Beard to Mr Hill of PPB Advisory (PPB), the NAB confirmed Mr Hill’s appointment to conduct a business review in respect of its facilities with the Cardinal Group and an additional entity, Pike River Pty Ltd as trustee for 25 Pike Street Unit Trust. In its letter the NAB noted that it had identified issues including: cash flow constraints resulting in a request for increased funding; covenant breaches; deferral of amortisation; creditor pressure and ATO arrears; decline in profitability; and set out the scope of the review to be undertaken.

36    On 28 September 2011 James Brown, the financial controller for the Cardinal Group, sent an email to Mr Diamantopoulos in which he said, among other things:

As discussed, an amount has been taken from our account unexpectedly overnight. This is in relation to a court judgement made in December last year against Cardinal Project Services (which has just been brought to my attention). As you are aware, we are carefully managing our cash flow and working towards giving a financial presentation outlining our actuals and budget moving forward, and ask that we get covered for $250,000 until then.

The judgment referred to by Mr Brown had been obtained by Nahas Construction Pty Ltd (Nahas) in the District Court of New South Wales (District Court) and was the subject of a garnishee order issued in the Local Court of New South Wales (Local Court) and served on the NAB (see [64] below).

37    In an email dated 28 September 2011 addressed to Mr Diamantopoulos and later copied to others including Ms Beard, Mr Ebeid said:

Further to James’ email below.

I note that as discussed yesterday, the directors of cardinal loaned $265,000 to Cardinal Projects, to cover the overdrawn overdraft and CLS accounts.

Unfortunately this garnishee has been drawn from the Cardinal Projects account and accordingly that loan is presently unable to be used as intended. The service of this order is in dispute, although I note that this is not relevant to NABs current position.

We will transfer $200,000 from Cardinal Projects to bring the overdraft within its limits, however, wages payments of approximately $150,000 need to be processed from that account today and a further $80,000 will need to be processed tomorrow.

We are expecting some large payment over the coming week … and once received we will use these monies to bring our facilities back into line.

We respectfully request that the NAB allow the wages payments to be processed from the overdraft account with a view to this account being brought back into line in by Wednesday, 4 October 2011.

38    On 11 October 2011 Ms Beard sent a further engagement letter to Mr Hill of PPB in substantially the same terms as the letter dated 29 August 2011. The facility schedule included in the letter had been updated to show the total amount owing to the NAB as $25,767,931, with the amount owing under the facility known as the “multi option facility” (the facility made available to the Obligors which included CPS) being $9,169,931.

39    On 25 October 2011 Mr Ebeid sent an email to Mr Diamantopolous copied to, among others, Ms Beard, requesting the NAB to allow wage payments of approximately $200,000 to be processed from the overdraft account “with a view to this account being brought back into line on or before Friday, 4 November 2011”. Ms Beard responded by email of the same date stating:

NAB confirms payment of wages tomorrow and Thursday, however, no further payments will be honoured until both accounts (Cardinal Projects and Cardinal Logistics) are brought back within limit. In terms of managing cashflow going forward we would expect that you advise the Bank prior to any excess occurring (regardless of the initial excess being caused by principal and interest payments) and detail receipts due in with evidence so the Bank can make an informed position.

(original emphasis)

40    On 23 November 2011 Cardinal Group provided a proposal to the NAB for its consideration. The email from Mr Ebeid under cover of which the proposal was sent provided:

We enclose a proposal for your consideration and look forward to discussing it with the Bank and its advisors tomorrow. You will note the proposal involves a substantial injection of equity from third parties, whilst several profit enhancement and cost cutting initiatives are implemented. This is a relevant point given the capital injection demonstrates the extent of the directors (sic) commitment and their desire to sort through the Bank’s current concerns with the Group.

We are seeking some concessions from the Bank in return for this equity injection but wish to negotiate such terms in a cooperative spirit.

We look forward to working with the Bank to achieve a satisfactory result for all stakeholders and to avoid, what could otherwise be, a significant shortfall to the Bank if the business was wound up and/or receivers appointed.

41    Under the heading “Current situation” the proposal analysed what it described as a “Bank asset sale scenario” as follows:

The following assumptions and commentary accompanied that analysis:

-    Current net debt balance as at 23 November 2011

-    Realisable value analysis detailed on slide 13

-    Priority payments ahead of security basket

o    employee leave and other entitlements of $1.1m

-    Transaction costs represent:

o    estimated receivership costs

o    legal expenses

o    accounting/taxation advice

-    Personal guarantees detailed on slide 19

-    Excludes director and CBS loans

-    Net assets as at 30 September 2011

42    A recapitalisation proposal was then outlined. It foreshadowed a cash injection, directors’ loans for working capital, loans from an entity described as CBS, waiver of directors’ fees and salaries for 12 months and a monthly contribution from CBS making a total new funding commitment of $3.918m. On the other side of the ledger, the proposal was subject to a request for a loan principal reduction of $6.3m or 25% of the debt; the waiving of personal guarantees; and the resetting of covenants.

43    On 8 December 2011 PPB issued its report. It recommended that it was not in the NAB’s interests to lend additional funds to the Cardinal Group and that a fundamental restructure was required, in particular of “the loss making (sic) entities of Reefway, Smartskip and Recycling Resources”. Key findings included that:

    the Group’s cash flow forecast indicated a cash requirement of $4.12m in March 2012 over the existing funding facilities and that the directors were proposing to fund $0.9m in the short-term leaving a funding shortfall of $3.2m;

    the current debt levels of $26m appeared unsustainable based on EBITDA forecasts of $4.9m for FY12; and

    the Group use seven separate management information systems across the different business units resulting in questionable financial information.

44    PPB’s recommended strategy was for a restructure and recapitalisation. It advised that the best result for the NAB in the short-term would be an equity injection sufficient to cover the forecast funding shortfall which, given the directors’ limited capacity to inject capital, would require the involvement of a third party. PPB then said that:

Without an equity injection to cover any funding shortfall, or a credible proposal from the directors, we consider the best available alternative for the Bank to be as follows:

•    The Recycling businesses (being Reefway, Smartskip and Recycled Resources) are put into administration with a view to “stopping the bleeding” and then sold to repay a portion of the Bank’s indebtedness. The businesses could be “groomed” for sale during the administration process with a view to maximising value.

•    CPS, the profitable subsidiary, continues as a going concern to service the reduced debt levels. The directors’ equity injection of $900k ideally would be utilised to reduce current debt levels, however, this may be required for working capital for the restructured Group.

45    On 19 December 2011, four days after the appointment of the administrators, the NAB appointed Mr Hill and Mr Robinson as receivers and managers to Cardinal, CPS, CCC and CLS and they took control of all of the assets of the companies pursuant to the fixed and floating charges held by the NAB.

3.5    The Liquidators’ reports

46    The January 439A Report discloses that the directors estimated the total liabilities of the Cardinal Group to be $48.4m which comprised amounts owing to the NAB; amounts owing to partly secured and unsecured creditors; and tax liabilities. The directors estimated a net deficiency of liabilities over assets for the Cardinal Group of $36.495m and a net deficiency in CPS of $5.67m in circumstances where the estimated amounts owing by CPS to the NAB and to partly secured creditors were unknown. The administrators expressed the view that they expected the directors’ estimated net deficiency of the Cardinal Group to increase.

47    In that report, as part of their initial investigation into whether the companies in the Cardinal Group were trading while insolvent, the administrators undertook a detailed review of the ageing of trade creditors. They noted the ageing of trade creditors deteriorated from July 2011 until the date of their appointment, with a dramatic increase in deterioration from September 2011 when the Cardinal Group implemented repayment arrangements with a significant number of creditors. The administrators concluded that, given the large number of creditors across the Cardinal Group, both in terms of number and value, it was clear that there was an argument that the directors may have continued to trade while insolvent but advised against pursuing such a claim in light of their opinion that the directors would not have the capacity to meet any judgment.

48    The administrators’ ultimate recommendation was that the companies in the Cardinal Group be wound up. In particular in relation to CPS, the administrators advised:

•    We, do not consider it would be in the creditors (sic) best interests for the Administrations to end given CPS is insolvent.

•    We, do not consider a DOCA should be accepted as there is no proposal submitted.

•    We do consider in the interests of all creditors that CPS be wound up.

(emphasis in original)

49    In their report to creditors dated 30 April 2013 issued by the Liquidators pursuant to s 508 of the Act, the Liquidators noted that they had received total creditor claims by way of proofs of debt for the companies in the Cardinal Group of $20,275,671, of which $7,174,583 were claims made by creditors of CPS. The Liquidators also noted that they had formed the view that the directors may have committed an offence by trading the companies’ businesses whilst they were insolvent.

50    In their report to creditors dated 15 January 2014 the Liquidators noted that they had lodged their preliminary report pursuant to s 533 of the Act with ASIC about the affairs of the Cardinal Group and possible offences committed by its directors; that they had been requested by ASIC to prepare a supplementary report; and that they had lodged a funding request with the ASIC administration fund. They also noted that, at that stage, insufficient funds had been realised to allow a dividend to be paid to unsecured creditors; realisations were insufficient to meet all of the costs of the winding up; and any return was subject to the success of recovery actions.

51    In their report to creditors dated 29 April 2015, the Liquidators noted that the requested funding was approved and that the Liquidators had lodged their supplementary report with ASIC on 17 July 2014. The Liquidators also set out creditor claims. As at that time the Liquidators had received creditor claims by way of proofs of debt from creditors of CPS in the amount of $7,148,143.

3.6    Mr Stone’s evidence

52    Mr Stone is one of the Liquidators and gave evidence about the Cardinal Group and CPS.

53    In Mr Stone’s opinion CPS was insolvent at the time that it made the payments to Melrose Cranes the subject of the Liquidators’ claim; or, alternatively, CPS was insolvent at the time when an act was done or an omission was made for the purpose of giving effect to those payments or, alternatively, CPS became insolvent by reason of matters including making those payments.

3.6.1    The Cardinal Group

54    Mr Stone was provided with consolidated management accounts for the Cardinal Group and Card Services prepared up to 31 May 2011. The management accounts were prepared on an individual entity basis up to 15 December 2011. Mr Stone said that, according to the consolidated management accounts, as at 31 May 2011 the Group which he defines as comprising the Cardinal Group (see [16] above) and Card Services (Group) had:

(1)    a current ratio of 0.95 indicating that liquidity issues were present at the time;

(2)    a debt to equity ratio of 8.29 which showed the Group’s heavy reliance on debt funding to finance its operation;

(3)    a positive net asset position of $4.4m. However, intangibles, wholly comprising good will, were carried in the balance sheet at $8m in 2010 and $12m in 2011. In Mr Stone’s opinion, given the trading losses and difficulties that the Group began to experience, the carrying value of good will at those dates should have been much less and he believes that the balance sheets overstated the Group’s net asset position; and

(4)    a gross profit percentage for the 11 months to 31 May 2011 of 17.95% indicating a reasonable margin. However, Mr Stone said that this did not flow through to the bottom line and that business expenditure and overheads were significant and resulted in a net loss of $100,000 for the period.

55    Mr Stone noted that from 1 March 2011 the following notable events occurred:

(1)    in March 2011 the Group began incurring losses;

(2)    the Group had multiple financial reporting systems that had to be manually consolidated resulting in substantial problems in producing timely and accurate financial information about its trading performance, position and the ability to produce forecasts;

(3)    Cardinal Group employees were transferred to Card Services. Mr Stone believes that the transfer of employees was possibly part of a strategy to transfer a large amount of liabilities to another entity and present other companies in the Cardinal Group in a more favourable financial position prior to seeking additional funds from external sources;

(4)    Cardinal was the primary borrower for the Group which had an overdraft facility with the NAB that had a limit of $4m. The overdraft limit was reached and extended on more than one occasion. In November 2011 a request was made to extend the overdraft for seven days to facilitate salary and wage payments. As at the date of the appointment of the administrators the balance of the overdraft was $4.3m;

(5)    the Group was insolvent on a cash flow basis from at least 1 January 2011. Mr Stone’s evidence is that the cash flow statements show a cash flow short fall for the six months up until 31 December 2010 of $496,000 followed by monthly cash flow short falls for each month from January to May 2011;

(6)    a consolidated cash flow budget was prepared for the Group for the financial year ended 30 June 2012 predicting net cash inflows of $1.6m. However, the budget indicated that the Group would still require a $2.1m overdraft at the end of the financial year. The forecast overdraft balance as at 31 December 2011 was $3.4m. As at the date of the appointment of the administrators, the actual balance of the overdraft was $4.3m. In Mr Stone’s opinion the cash flow forecast was optimistic and could not be achieved;

(7)    from August 2011 the NAB increased its monitoring of the Group’s borrowings and in or around October 2011 requested that PPB prepare an investigative accountant’s report. The Group had requested an additional $4.6m in funding from the NAB prior to PPB’s engagement;

(8)    the Group experienced difficulties in obtaining additional finance from external sources. No equity funding was obtained following the issuing of an information memorandum in December 2010;

(9)    a director’s proposal to personally provide a cash injection either failed or was abandoned;

(10)    the working relationship between the directors deteriorated in the lead up to the Group being placed into administration;

(11)    the Group’s financial controller resigned in July 2011;

(12)    the Group’s insurance coverage lapsed on 30 November 2011 due to the non-payment of premiums; and

(13)    across the Group there were outstanding income tax returns for the financial year ended 30 June 2011 and outstanding GST lodgements from 1 July 2011.

56    A quantity of the Group’s books and records were destroyed on 29 and 30 November 2011 and the Group’s electronic record keeping system was tampered with. According to a tax invoice dated 30 November 2011 from Shredlock, it undertook “secure on site shredding” of 55 x 240 litre bins on 29 November 2011 and 20 x 240 litre bins on 30 November 2011.

3.6.2    CPS

57    CPS used MYOB to maintain and prepare management accounts from June 2011. It previously used a different system, CHEOPS, to maintain its accounts. Mr Stone said that CPS continued to use CHEOPS until the date of appointment of the administrators for the project management side of its business.

58    On the date of their appointment as administrators, the Liquidators obtained a backup copy of the MYOB files for each of the companies in the Cardinal Group. They also obtained a hard copy of the records in CHEOPS but did not take an electronic copy of that data as CHEOPS was a bespoke system and the Liquidators did not have the software to support it.

59    Mr Stone undertook an analysis of CPS’ balance sheets to determine the level of working capital assets together with an analysis of monthly liabilities. That analysis disclosed the following:

(1)    CPS held virtually no assets and only minimal cash at bank. Its primary asset was receivables. Thus movements in the net asset position and liquidity of CPS were linked directly to movements in receivables;

(2)    for each period from June 2011 to the date of appointment of the administrators, CPS had insufficient assets to pay its liabilities with the deficiency fluctuating between $147,279 and $3.752m;

(3)    for the majority of the period from June 2011 to the date of appointment of the administrators, CPS (on an adjusted basis) had a current ratio of less than one, indicating a likely inability to meet all short-term debts due and payable during the period;

(4)    CPS’s net cash at bank position varied significantly from month to month, ranging from $92,000 to $817,000. CPS’ NAB account went from having a balance of $583,000 in October 2011 to being overdrawn by $50,000 as at the date of appointment of the administrators;

(5)    CPS had problems collecting debts as evidenced by the ageing of the debtors’ ledger. At the date of appointment of the administrators, the balance outstanding was over $3.3m with debtors in the 90+ days category of over $1.6m;

(6)    the receivables balance reported on the MYOB balance sheet fluctuated between $3.2m and $5.7m during the period from June 2011 to the date of appointment of the administrators;

(7)    CPS made loans to several related entities totalling $3.3m at the time of appointment of the administrators. Those loans were not recoverable because they were made to companies that were put into liquidation simultaneously with CPS. The loans appeared in the balance sheet in June 2011 and grew to $3m by the date of appointment of the administrators. In Mr Stone’s opinion, the unrecoverable intercompany and related party receivables meant that CPS’ reported net asset position was significantly overstated although, in cross-examination Mr Stone accepted that, in order to come to a view about the recoverability of an intercompany loan at any particular time, it was necessary to review the solvency situation of the particular company owing money at that time;

(8)    creditors were paid outside the usual payment terms which resulted in demands being made for payment. As at the date of the administrators’ appointment $6.8m in trade creditors was outstanding of which a total of $3.5m had been outstanding for 90+ days. Creditors lodged proofs of debt in the amount of $7.1m; and

(9)    special payment arrangements were entered into with a number of creditors. Mr Stone was provided with a schedule of payment plans for the Cardinal Group upon his appointment as administrator. The schedule, commencing in September 2011, showed average weekly payments of $361,000 to pay off debts in excess of $1.7m. Mr Stone noted that 38 creditors received payments through these arrangements and that payments made in accordance with these arrangements were not reconcilable to specific invoices.

60    Mr Stone also identified and considered other indicia of insolvency. He noted that:

(1)    solicitor’s letters, demands and judgments were issued to CPS including statutory demands, letters of demand and statements of claim. Details of these are set out at [64] below;

(2)    CPS had outstanding ATO lodgements namely, its 2011 tax return and business activity statements for the September and December 2011 quarters. CPS’ balance sheet indicated it was indebted to the ATO for approximately $587,000 although, at the time the ATO had not yet formally advised the amount it was owed; and

(3)    CPS was placed on a prepayment arrangement with suppliers.

61    Mr Stone was extensively cross-examined about the MYOB accounts for CPS for each month from June to November 2011 and as at 15 December 2011, the date of appointment of the administrators. The following emerged:

(1)    the aged payable summaries for each month end and as at 15 December 2011 record the same total payable of $6,786,720.59. The effect is that the identity of the creditors recorded on the aged payable summary for CPS as at 30 June 2011 and for each month end thereafter are in fact the creditors as at 15 December 2011;

(2)    the aged receivable summaries for each month end and as at 15 December 2011 record the same total outstanding figure of $3,261,418.64. The effect is that the total debtor amount recorded on the aged receivable summary as at 30 June 2011 and for each month end thereafter is in fact the total debtor amount as at 15 December 2011;

(3)    the ageing information in the aged payable and the aged receivable summaries is not accurate and cannot be relied upon in any way to identify the actual age of creditors;

(4)    the totals recorded in the aged payable summary and in the aged receivable summary as at 30 June 2011 do not support or correlate with the figures for total trade payables and for total receivables in the balance sheet as at 30 June 2011. The same issue arises as between the totals recorded in the aged payable and the aged receivable summaries and the balance sheets as at July 2011, August 2011, September 2011, October 2011 and November 2011;

(5)    the balance sheet as at 30 June 2011 under current liabilities includes negative amounts for some credit cards. Mr Stone agreed that if an amount is owed on a credit card it should be recorded as a positive amount and that it is a “peculiar” balance for a credit card but that he did not investigate;

(6)    the total due in the aged payables summary as at 15 December 2011 does not correlate with the amount for total trade payables in the balance sheet as at 15 December 2011;

(7)    no investigations were undertaken in relation to the October 2011 trading loss to the extent that it was inconsistent with the pattern of profits in prior months and in November 2011; and

(8)    Mr Stone said that, as a matter of accounting, ordinarily the profit shown on a profit and loss statement is reconciled at the foot of a cash flow statement rather than the top. He also agreed that the cash flow statements came from the same database as the profit and loss and balance sheet and that it would follow that if the profit and loss in the balance sheet are wrong then the cash flow statements are going to be wrong.

62    Mr Stone was also cross-examined about the MYOB accounts which were in evidence for the Reefway Asset Trust; Reefway Environmental Services; the Cardinal Group Unit Trust; Smartskip; CLS; and CCC. Mr Stone conceded that there were issues with those accounts. For example, aged payable and aged receivable summaries for all entities, other than the Reefway Asset Trust for which there were no such summaries, suffered from the same issue as identified for those summaries for CPS; the balance sheets for the Reefway Asset Trust for October, November and December 2011 were identical; and in some cases, the totals in the aged payable and aged receivable summaries as at 15 December 2011 did not correlate with the amounts for trade creditors and/or trade debtors in the balance sheet as at 15 December 2011.

63    Ultimately, Mr Stone gave evidence that none of the discrepancies identified affected his opinion as to the solvency of CPS.

3.7    Demands and other claims

64    A number of outstanding accounts, demands and other forms of claims against CPS and attempts by CPS to compromise amounts owing by it were in evidence before me as was a schedule referred to by Mr Stone headed “Cardinal Project Services” which set out a “Summary of demands” (Summary Schedule). Those documents included:

(1)    a statement of claim filed on 6 July 2011 in the Local Court by the Water Cart Pty Ltd, trading as North Western Truck Services, claiming $5,500 plus interest and costs for services provided between 3 March 2011 and 27 April 2011;

(2)    a demand from Medibank Health Solutions Pty Ltd dated 21 July 2011 for unpaid invoices relating to five employees from March and April 2011;

(3)    a final demand from National Commercial Services Pty Ltd dated 25 August 2011 for a debt owing to Sydney Southwest Area Health from 4 December 2010 in the amount of $105;

(4)    a statement of account from Future Air dated 1 September 2011 for an invoice for $1,936 dated 28 June 2011 which included a notation that “if payment not received within seven days this account will be handed over to our collection agency”;

(5)    an email dated 6 September 2011 from Kim Grylls, credit collections manager of Corporate Transpacific Industries Group Ltd, attaching a final demand and “the default against [CPS] with Veda Advantage” in which Ms Grylls noted that she was preparing the file for legal action. The email attached a letter dated 25 August 2011 to CPS demanding payment of $40,665.88 by 4.00 pm on 1 September 2011, failing which Transpacific noted that it may be forced to register a payment default with Veda Advantage for the balance owing and that further action, including legal proceedings, may be taken forthwith. The enclosed outstanding accounts were for the period 19 May 2011 to 9 June 2011;

(6)    the Summary Schedule noted that a notice of demand dated 13 September 2011 had been served by Concrete Recyclers (Group) Pty Ltd (Concrete Recyclers) claiming $36,637.00 for outstanding invoices since May 2011;

(7)    a letter dated 26 September 2011 from McIntosh McPhillamy & Co, solicitors for Screenmasters Australia Pty Ltd, which included:

We refer to our previous correspondence of 14 September 2011 wherein we served upon you on behalf of our client a Creditor’s Statutory Demand for Payment of Debt dated 14 September 2011, requiring payment of outstanding debts owing to our client as at that date in the amount of $59,609.79 within twenty-one (21) days after service of the Statutory Demand.

We note that subsequent to service of the Statutory Demand upon you, part payments have been made by you to our client in reduction of the outstanding debt.

Please be advised that our client, in acceptance of both part payments, does not waive its entitlement to require payment of the outstanding debt in full in compliance with the Statutory Demand. Further, we confirm our instructions that in the event the payment of the debt has not been made in full by you in compliance with the Statutory Demand … we are instructed to commence proceedings … seeking an order of the Court that you be placed into liquidation for reason of your deemed insolvency as a consequence of your failure to comply with the Statutory Demand.

(8)    a letter dated 28 September 2011 from the NAB notifying CPS that the NAB had been served with a garnishee order obtained in the Local Court in proceeding 2011/71761 by Nahas. The NAB informed CPS that it was “required by law to comply with the Garnishee Order and has debited … the amount of $226,866.25”;

(9)    a letter dated 7 October 2011 from Colman Moloney & Co, solicitors for Acrow Formwork & Scaffolding Pty Ltd (Acrow), requiring payment of the sum of $131,346.70 owing to their client for goods or services provided to CPS plus their costs of $150 within seven days. In the event of a failure to pay, those solicitors were instructed to issue recovery proceedings;

(10)    a letter dated 14 October 2011 from Elliott May lawyers, issued on behalf of Transpacific Industries Pty Ltd, enclosing a creditor’s statutory demand for payment of debt, demanding payment of $40,665.86 and an affidavit in support;

(11)    a statement of claim filed in the District Court in proceeding 11/369314 between Acrow as plaintiff and CPS and Messrs Ebeid, Travers and Burns as defendants claiming an amount of $129,850, being the “balance due for the use and hire of labour and equipment supplied by [Acrow] at the request of [CPS] during and between the months of May 2011 and August 2011” plus interest and costs;

(12)    an email exchange between MSB lawyers, solicitors for BU Hazardous Material Removal & Demolition Pty Ltd (in liquidation) (BU Hazardous) and Avondale Lawyers, solicitors for CPS, and terms of settlement in Local Court proceeding 2011/197174 between BU Hazardous as plaintiff and CPS as defendant. The latter provided for full and final settlement of BU Hazardous’ claim by payment of $35,000 in instalments over the period 23 September 2011 to 23 December 2011. In the event of failure to pay, judgment would be entered in favour of BU Hazardous in the amount claimed in the statement of claim filed on 16 June 2011 being $48,863.75. The terms of settlement were filed in the Local Court on 5 October 2011 and the first instalment paid in accordance with those terms on 23 September 2011;

(13)    an email dated 22 September 2011 from Mr Ebeid to Renato Cocchietto and Kenneth Johnson at SITA, with the subject line: “SITA payment plan” in which Mr Ebeid said, among other things:

Thank you both for your time yesterday to discuss our account.

We appreciate your understanding and assistance during this difficult time.

As discussed we will make payments of $25,000 on the Friday of every week for the next 10 weeks, with a view to increasing these amounts and having our account brought into line in December/January.

As a sign of good faith, please find attached a remittence (sic) advice for the initial $25,000 payment which was made yesterday.

(14)    a letter dated 17 October 2011 from Bibby Financial Services in relation to supplier Zwf NSW Pty Ltd seeking payment of an overdue amount of $66,766.28;

(15)    a notice of intention to issue legal proceedings dated 24 October 2011 issued by EC Credit Control Pty Ltd on behalf of Metro Tipper Hire notifying CPS, among other things, that unless settlement of the amount claimed of $45,666.89 was received within seven days of the date of the notice, Metro Tipper Hire may commence legal proceedings without further notice;

(16)    an email dated 3 November 2011 from Sarah Ferguson, administration manager of CPS, to Jake Elliott and Mr Ebeid attaching a letter of demand from I-recruit. In her email Ms Ferguson wrote by reference to the letter of demand that “it states they need payment in full of 168k by tomorrow or they go legal. They have called today saying if it isn’t paid by tomorrow, they will go legal but they will also pull all their labour hire off the job sites, can someone please give them a call”;

(17)    a letter dated 25 November 2011 from Recoveries National, debt recovery agents acting on behalf of Kennards Hire Pty Ltd (Kennards), demanding immediate payment of the amount of $7,069.70 owing to Kennards for the period 3 August 2011 to 21 September 2011 and noting that, if payment was not received within 48 hours, Kennards would “have no further options but to instruct their solicitors to commence formal proceedings without further notice”;

(18)    a letter dated 29 November 2011 from Bowsers Fire Protection Experts seeking payment of invoices totalling $20,641.50 which remained outstanding despite “many requests for payment and assurances given by [CPS] that [they] would be paid”. The letter stated:

We require full payment in the amount of $20,641.50 by the close of business on 1 December 2011. Please ensure this amount is received by that date. Failing receipt of the full amount on or before that date, we will have no option but to immediately suspend all works and to take appropriate steps to recover payment. This will include … referral of the matter to our legal advisers for appropriate action.

Obviously having regard to our 10 year working relationship our preference is not to have to resort to these measures to recover payment. However the current situation, where we have not been paid for work completed as far back as July, and in light of the failure by [CPS] to honour its promises of payment … we currently see no alternative.

(19)    a letter dated 30 November 2011 from Galluzzo Lawyers seeking payment on behalf of their client, Concut (NSW) Pty Ltd, of $66,598.60 within seven days for invoices issued in September and October 2011. Failure to pay would result in action being taken pursuant to the Building and Construction Industry Security of Payment Act 1990 (NSW);

(20)    a statutory demand for $163,034 issued by North Shore Paving Co Pty Ltd on 5 December 2011 as set out in the Summary Schedule;

(21)    a statement of claim filed in District Court proceeding 11/398537 on 9 December 2011 by Boral Ltd as plaintiff against CPS and Messrs Travers, Ebeid and Burns as defendants claiming $138,727.41 plus interest and costs;

(22)    a letter dated 12 December 2011 from Caroline Najjar Lawyer enclosing, by way of service, a creditor’s statutory demand for payment of debt and accompanying affidavit on behalf of her client Corporate Ventures (Aust) Pty Ltd;

(23)    a letter dated 13 December 2011 from Nexus Collections enclosing a creditor’s statutory demand for payment of a debt that was issued by Lindores Personnel No 2 Pty Ltd claiming payment of $221,687.03 and an affidavit in support; and

(24)    a letter dated 15 December 2011 from Oceanic Mercantile Pty Ltd enclosing a creditor’s statutory demand for payment of debt issued by Force Corp Pty Ltd for $30,522.23 for invoices issued in the period 10 July 2011 to 20 November 2011 and an affidavit in support.

4.    MELROSE CRANES

4.1    Background to the Melrose Cranes’ business

65    Melrose Cranes is a family business established in 1998 by Gregg Peter Melrose (Mr Melrose), its managing director and Debbie Melrose (Mrs Melrose), the administration manager.

66    Melrose Cranes provides cranes for hire, usually to the construction industry, on a short-term and sometimes on a longer term basis. It operates approximately 110 pieces of heavy plant, of which more than 30 are mobile cranes, and provides mobile crane and transport services throughout the east coast of Australia. In 2011 Melrose Cranes had approximately 99 pieces of heavy plant, 28 of which were mobile cranes.

67    As managing director, Mr Melrose is in charge of the day-to-day operations of Melrose Cranes. It was clear from his evidence that he takes a “hands-on” approach to the business. He knows where each piece of equipment that Melrose Cranes owns is at any time and the jobs the company has on a daily basis. During the course of the day Mr Melrose monitors the company’s operations through conversations and telephone calls with senior staff members and major customers. Mr Melrose said, and I accept, that very little happens within the business without him being aware of it, either as it happens or soon after. I pause here to observe that Mr Melrose struck me as an experienced businessman who had invested a lot of time and energy in building up the Melrose Cranes business, a family owned and run business. But in his eagerness and understandable desire to protect the business, I found some of Mr Melrose’s evidence to be self-serving. While it may not have been Mr Melrose’s intention to be less than frank in his responses, it was difficult to reconcile some of his evidence with the objective facts and to accept some of his evidence in the circumstances described below.

68    As administration manager, Mrs Melrose’s day-to-day tasks included finance, accounts and office administration as well as overseeing staff (of which there were five including Mrs Melrose) and undertaking administrative tasks, including payroll and invoicing.

69    As part of her role, Mrs Melrose followed up payment of tax invoices issued to clients. She described her usual procedure as follows:

(1)    she monitored the age of the customers’ accounts. Mrs Melrose said that, while Melrose Cranes’ payment terms were 30 days from the date of invoice, it was usual to be paid by larger clients with multiple invoices each month anywhere between 45 to 60 days from the end of the month and that, in her experience, payment around 45 to 60 days from the end of month was standard in the industry. Mr Melrose gave evidence to similar effect about the time in which payment was usually made, noting that in some cases the arrangements were the subject of agreement and in other cases Melrose Cranes simply permitted it to happen;

(2)    she called clients to follow up payment if payment had not been received within 30 to 45 days from the end of the month. This sometimes resulted in a client being called before they would usually make payment in the ordinary course but that procedure assisted Mrs Melrose in identifying if there were any issues that might arise regarding payment. A call would usually involve following up whether all invoices due for payment had been authorised; what the expected payment date would be; and whether it was necessary for authority for payment to come from site, and if so, whether the client or she would follow up the authorisations;

(3)    if any issues were identified at that stage, Mrs Melrose corresponded with or talked to the engineer or Melrose Cranes’ project manager responsible for the job;

(4)    if an account went beyond a client’s usual payment time, Mrs Melrose called to follow up payment and kept calling a client until a definite payment date was fixed;

(5)    if a payment date was fixed, Mrs Melrose followed up that payment on the agreed date. If no date for payment could be arranged or the date nominated by the client went beyond 60 days, or earlier depending on the particular circumstances of the client or the reasons given, or alternatively, if an issue was identified, then Mrs Melrose informed Mr Melrose and the project manager handling the job and asked either of them to ring the client. Mr Melrose or the project manager would then call the client and after that Mr Melrose made a decision on any further action to be taken; and

(6)    when payments were received, unless otherwise instructed or it was obvious from the amount of the payment made, the payment was ordinarily allocated to the oldest outstanding invoice.

70    Practically, in following up payment of accounts, at the end of each month Mrs Melrose generated a receivables list from the MYOB system maintained by Melrose Cranes and created a handwritten alphabetical list by client of all amounts due in a document headed “Receivables – Contact List” (Receivables List) with five columns headed respectively: company, phone number, contact, amount and date/remarks. Mrs Melrose reviewed the Melrose Cranes cheque account daily to monitor any incoming payments. She recorded any payment in MYOB, made a note of it on the Receivables List and then contacted debtors in the Receivables List by telephone to follow up payment.

71    Mr Melrose said that he informally monitored payment of large accounts quite closely and that he became involved in following up payment of accounts when Mrs Melrose brought an overdue account to his attention or if he thought that the size of particular invoices deserved his attention. Given Mr Melrose’s hands-on approach to the business, this is not surprising. He noted that some clients had a practice of not paying until followed up and that he tended to get involved with clients who he thought were employing that strategy.

72    According to Mr Melrose the crane business is quite competitive on price and rigid insistence on payment within 30 days would be likely to put off good clients. For that reason he did not pay close attention to whether clients were paying within 30 days. However, if Mr Melrose became aware that a particular client was not adhering to its usual payment times, he looked at what was happening in relation to payment of accounts and, if necessary, contacted the client.

73    Mr Melrose operated a diary in which he recorded matters that related to Melrose Cranes, its staff, jobs being undertaken or the follow up of payment of accounts as well as personal reminders every now and then. A copy of Mr Melrose’s diary for the 2011 calendar year (2011 Diary) was in evidence. It was a day to a page diary and was complete save for the pages for 22 to 29 October 2011 inclusive. Mr Melrose was provided with his original diary and agreed in cross-examination that those pages were missing. He was unable to provide a satisfactory explanation as to why that was so. The following exchange took place:

Q.    Where are they?

A.    I don’t know.

Q.    Do you have any recollection where they could be?

A.    No, I don’t.

Q.    Who has access to your diary?

A.    Only me.

Q.    So it’s only you that could have --- ?

A.    It’s left on my desk.

Q.    --- removed the pages?

A.    Generally, I’m the only one that uses it.

Q.    Yes. Where is your desk?

A.    In my office.

Q.    Who has got access to your office?

A.    Everybody.

Q.    But, to your knowledge, no one touches your diary?

A.    To my knowledge, yes.

Q.    I mean, for example, when one looks at the handwriting in the diary throughout the calendar year, that’s all your handwriting, isn’t it?

A.    Yes. Yes. Yes, it is.

Q.    So you’ve got no recollection at all as to why that week is missing?

A.    No, I don’t.

4.2    Dealings with CPS

74    In early 2008 Mr Melrose was contacted by Glen Felstead, a person with whom he had had previous dealings, who at that time was working for CPS. From that time, Melrose Cranes began a business relationship with CPS.

75    On 25 February 2008 CPS provided a completed credit application to Melrose Cranes. The application included a declaration which had been signed by Mr Travers in which it was declared that CPS understood that the terms of payment to Melrose Cranes were “strictly net thirty (30) days” and that “[t]his means that payment for goods and services is due within 30 days from invoice date”. The terms and conditions included in the application also relevantly provided:

20.    Payment will be required thirty (30) days from the date of the invoice unless other arrangements have been quoted/arranged between the Contractor and the Client. In the event of failure of the Client to pay the invoice within the timeframe stipulated or arranged, then the Contractor reserves the right to charge interest on such sum or sums which remain outstanding beyond the time stipulated or arranged at the rate of two percent per month, and recover all costs incurred in the collection of any outstanding monies including debt collections and solicitors expenses and costs.

The credit application included a personal guarantee which had been signed by Messrs Ebeid and Travers.

76    The credit application required trade references to be provided. Two completed trade references were provided to Melrose Cranes: one given by Concrete Recyclers noting that its payment terms were 30 days, that payment was usually received in 45-50 days and that average monthly trading was between $4,000 and $15,000; and a second given by Blacktown Waste Service noting, among other things, that its payment terms were 30 days, that payment was usually received in 45-60 days and that average monthly trading was $55,000-$110,000.

77    Mr Melrose said that from 2008 some of the invoices Melrose Cranes issued to CPS provided for payment 30 days from the invoice date but that the most common arrangement between Melrose Cranes and CPS was for payment to be made by the last day of the following month and that payment up to 45 days after the end of the month in which the invoice was issued was not unusual. Mr Melrose also said that sometimes no specific agreement was made in relation to payment but that, even so, he accepted payment within those times and, on the whole, payments from Cardinal were regular and consistent. However, it was clear from the invoices themselves and from Mr Melrose’s evidence in cross-examination that nearly all, not some, of the invoices issued by Melrose Cranes in the period from June 2010 to December 2011 provided for payment within 30 days from the date of invoice.

78    On 28 September 2010 Melrose Cranes suspended CPS’ credit account. Mr Melrose’s email to Mr Felstead dated that day recorded that Melrose Cranes “have had no satisfaction with advice regarding payment of our July Account” and that after Mr Melrose spoke with Sarah he was told that a “partial payment of $20,218 would be made only with no specific advice regarding the remainder”. Accordingly Mr Melrose notified Mr Felstead that he was not left with any alternative and temporarily suspended CPS’ credit account. As at 22 September 2010, prior to receipt of $20,218, CPS owed Melrose Cranes $206,962.88 with the amount owing as at 30 July 2010 being $116,248.06. In cross-examination Mr Melrose said that he suspended the account because there was a significant amount owing and he was concerned about CPS’ capacity to pay its debts.

79    The Receivables Lists for March 2011, April 2011, May 2011, June 2011 and July 2011 each include CPS. In the Receivables List for:

(1)    March 2011 a balance of $88,882.75 is recorded as owing by CPS. Against that Mrs Melrose recorded part payments of $20,000 and $40,000 on 27 May 2011 and 1 June 2011 respectively. Mrs Melrose also recorded that on 1 June she “spoke to and faxed urgent/processing payment March balance with Vicky [Leftakis]” and included a further note: “ring Friday. Tell GM to ring Tom”. Mrs Melrose requested payment and made the latter note as a reminder to ask Mr Melrose to ring CPS to follow up payment because the invoice was not paid on time;

(2)    April 2011 a carried forward amount of $13,882.75 is recorded. Mrs Melrose made notations in the date/remarks column including:

GM dealing with Vicky [Leftakis]/Tom.

$6,000 tonight = $6,651.15 Pd EFT 21/6

2 Liverpools Fri night . $7,231.60 due + April $922.90 = Total $8,154.50

$6,587.40 EFT = 24/6

$374.20 – will pay next Friday 1/7

    Mrs Melrose accepted that of the amount due at the end of April 2011, $10,034.20 related to an invoice dated 20 March 2011 in relation to which a payment of $9,660 was made on 3 June 2011 leaving a balance of $374.20. She accepted that the payment was late and that the reason why she was keeping Mr Melrose up to date was because CPS had overdue invoices;

(3)    May 2011 Mrs Melrose recorded amounts owing from pre-May and May. On 29 July 2011 Mrs Melrose sent a copy of a statement dated 29 July 2011 as a reminder by fax to Ms Leftakis in relation to those amounts with a message that included:

Reminder: Has this been paid today by EFT. See above old March, April & May Invoices marked * Please call me on your return from lunch to confirm you are paying April 52823 & May $2,339.70 today as previously advised And… to advise reason/request for SHORTPAID Invoice 52453. Please call today…

(4)    June 2011 the initials “GM” were recorded by Mrs Melrose in the “phone number” column. That was a reference to Mr Melrose who was handling the follow up because there was a large amount outstanding. On 1 June 2011 Mrs Melrose sent a fax to Ms Leftakis at CPS chasing up monies and payment of the outstanding balance for March 2011.

80    In about May 2011 CPS engaged Melrose Cranes for a job in Akuna Street, Canberra (Canberra Job). Mr Melrose was initially contacted by Bobby Jovanovski, who he understood was assisting Mr Felstead with the Canberra Job. Subsequently Mr Melrose contacted Mr Felstead and discussed the requirements of the Canberra Job. After providing a quote, Melrose Cranes entered into a contract dated 18 May 2011 with CPS which provided, among other things, that payment claims were to be made on the 25th day of each month valued up to the 30th day of the month and that payment of the claim as agreed or approved would be made by the 30th day of the next month after the payment claim was submitted, provided the claim was submitted by the due date.

81    On 1 June 2011 Mrs Melrose sent an invoice by facsimile to Ms Leftakis as part of what she said was her usual procedure to follow up payment. The invoice, which showed an outstanding balance for invoices rendered prior to April 2011 of $28,882.75 and a total amount due of $43,634.03, included a handwritten note in the following terms:

For your reference to chase up invoices. Thanks Vicky for your assistance. Please follow up with the relevant Site manager for urgent authorization & payment of the outstanding balance for MARCH. The last 4 Invoices were sent to you on 11/4/11. I will check up with you in a day or so. Thanks…

82    On 21 June 2011 Andrew Gray, one of the principal people working on the Canberra Job as senior project manager and heavy crane manager, and Mr Melrose received an email from Mr Jovanovski in relation to the Canberra Job in which Mr Jovanovski notified them that CPS would potentially need the crane for an additional week’s hire “from 7/7/11–13/7/11 under the same hire agreement of $30,000/week”. Mr Gray responded on behalf of Melrose Cranes noting that they were “happy to do the 1 week extension of time 7/7/11–13/7/11 under the same agreement but need your written Order”. On 23 June 2011 Mr Jovanovski sent an email to Messrs Gray and Melrose confirming “the requirement of the 250t crane for an additional one week hire from 7/7/11–13/7/11 at $30,000/week. The existing contract still stands with the date for practical completion new (sic) extended to 13/7/11”.

83    On 4 July 2011 Julie-Anne Leslie, who managed accounts for Melrose Cranes, sent an email to Ms Leftakis setting out the amounts outstanding “after your payment was applied”. As at that date the total outstanding was $3,636.80.

84    On 16 July 2011, as the work was finalised, the crane left the Canberra Job. Mr Melrose had received no complaints from anyone about the job nor had any of Melrose Cranes’ staff raised any issue about payment of its accounts. Melrose Cranes issued its last invoice for the Canberra Job on 16 July 2011.

85    On 29 July 2011, in accordance with her usual procedure for following up payment, Mrs Melrose sent an invoice by facsimile to Ms Leftakis which showed a total amount due of $221,633.98 of which $1,297.10 was for invoices issued prior to May 2011 and $2,339.70 was for invoices issued in May 2011.

86    Because payments for the Canberra Job were due 30 days from the date of invoice and because of the amounts involved, Mr Melrose, rather than Mrs Melrose, principally undertook the follow up with CPS for payment for that job. A handwritten note made by Mrs Melrose on 5 August recorded:

June 30 days $146.497.18 was due under Bobby’s 30 day contract @ 30/7/11. Will f/up with Bobby. Note GM emailed Bobby!!

87    On 5 August 2011 Mr Melrose sent an email to Mr Jovanovski in relation to the Canberra Job in which he said:

Under the terms of your contract 1924312 you owe me $146,497.18 which was due and payable on 30 July 2011. Your accounts department (Vicki [Leftakis]) has no knowledge of this payment and I can’t afford to wait for her to find out. During the course of the project, which we were appreciative to get, you often drove the contract details back to me with regard to credits etc. We did the job cheap. We did the job well. I’d like to be paid on Monday. Please ring me, not email me, to tell me what time I can pick up a cheque on Monday.

A further $71,500 will be due and payable on 30 August 2011. Please confirm that payment will be ready on that day.

88    Mr Melrose said that, despite his email dated 5 August 2011, he had no concern about payment. He simply wanted to put pressure on CPS to pay as soon as possible. Mr Melrose said that it was not unusual for Melrose Cranes to undertake large contracts; that he liked to monitor payment of significant amounts quite closely; and that, given the amount due was over $100,000, he kept an eye on it as he would with any client that owed that amount. Mr Melrose also said that the style and tone of the email he sent to Mr Jovanovski was not unusual for him but was a way of “getting attention” and was very similar to emails he has sent to any number of other clients in similar circumstances becoming “something like a standard style email”. But this evidence does not sit comfortably with Mr Melrose’s evidence (at [69(1)] above) that the most common arrangement between Melrose Cranes and CPS was for payment to be made by the last day of the month following issue of the invoice and that payment up to 45 days after the end of the month in which the invoice was issued was not unusual. I do not accept Mr Melrose’s evidence that he was not concerned about payment. The evidence set out below reinforces that view.

89    Shortly after sending his email dated 5 August 2011 to Mr Jovanovski, Mr Melrose had a conversation with him to the following effect:

Mr Melrose:    Can you find out what’s going on with my money mate? Obviously you haven’t paid, unless there is an issue with us being paid. Is there? There is a fair bit owing and I need to know when payment will be made.

Mr Jovanovski:    Yeah I’ll check it out and get back to you.

90    Mr Melrose does not recall the response he subsequently received from Mr Jovanovski but he does recall that, after hearing back from him, he called Mr Felstead with whom he had more of a relationship and from whom he felt he would “get an upfront response”. Mr Melrose had a conversation with Mr Felstead to the following effect:

Mr Melrose:    Mate, I have spoken with Bobby and I didn’t get much of an answer out of him. What is happening with payment for Canberra?

Mr Felstead:    I’m not quite sure. I know that we were having some issues with Canberra and were working through them. As I understand it, our estimators might have underquoted the job, but don’t quote me on that. I have been given assurances that everything is under control. There are no issues with Melrose Cranes at all...

Mr Melrose    Thanks for that Glen. I need to know what is happening so can you get someone to call me back and let me know what they are going to do about it.

Mr Felstead:    Sure. No worries.

91    On 9 August 2011, only 9 days after the invoice was due, Mr Melrose sent an email to Mr Felstead in relation to the Canberra Job attaching a letter of the same date. The letter, a copy of which was provided to, among others, John O’Shannassy of O’Shannassy Lawyers and Tom Simonds of Chase Building Group Pty Ltd, included:

Under the terms of the contract between Melrose Cranes & Rigging Pty Limited (MCR) and Cardinal Project Services (CPS) at Clause #18 notice is officially given of a major dispute regarding the non-payment of our outstanding account of $149,855.13 which is predominantly in relation to the Akuna Street Canberra Job. Your contract terms are quite specific and payment should have been made on 30 July 2011. Under your terms a meeting is required to resolve the issue within five (5) days of this notice. Under my terms (also signed) interest is compounding at the rate of 1.2% daily until paid in full.

MCR reserves the right to utilise the Building and Construction Industry Security of Payment Act 1999 to obtain payment if the meeting does not resolve this issue. The Head Contractor in Canberra, Chase, has been informed of the situation. At the same meeting it is imperative that the outstanding amount of $71,500 which is due and payable on the 30 August 2011 also be discussed.

This situation is not of my doing or choice. As a Director I have many responsibilities and putting MCR at risk for $221,355.13 (plus interest) has to be managed. As you know CPS had a budget and MCR had a crane. We assisted each other for mutual benefit. The contract was verbally quoted to me more than once during demolition by Bobby and we complied as required. All I am asking is that CPS does the same.

Unfortunately your credit account is now frozen pending an agreeable outcome.

(underlining in original)

(emphasis added)

In cross-examination Mr Melrose conceded that at the time of sending this letter he was concerned about payment.

92    As notified in Mr Melrose’s letter, on 9 August 2011 Melrose Cranes froze CPS’ credit account. Mr Melrose said that he does this regularly with clients in circumstances where no satisfactory explanation is given for payment delays. He often finds that, if clients have been too busy to call him back, when they receive notice that their account is frozen it focuses their mind and they then pay their account. Mr Melrose said that, in his experience, it was not uncommon for people in this industry to overlook payments because there are so many things going on at the same time. However, in the case of CPS, its credit account remained frozen until the appointment of the administrators.

93    On 9 August 2011 at 12.05 pm Mr Felstead sent an email to Mr Ebeid copied to Mr Travers and Mr Colm Burke attaching Melrose Cranes’ letter of the same date in which, among other things, Mr Felstead said:

I need to respond today as Melrose Cranes have contacted our Client (Chase Developments PTY Ltd) directly as you will see from the attached covering letter.

I will not be using Melrose cranes again following the situation, I am V pissed off that they have contacted our client directly after I spoke to him yesterday and informed him that I would have some answers for him today.

94    On 9 August 2011 at 4.42 pm Mr Felstead sent a further email to Mr Ebeid copied to Messrs Travers and Burke with the subject line “Melrose-T Fabrications-M Wheelan Haulage” in which he said:

Sam,

I will call you in 30 mins.

Have spoken to Gregg Melrose, he is ok being paid at end the end (sic) of the month but wants commitment in writing signed by directors.

T Fabrications, he is ok being paid at end the end of the month (sic) but wants commitment in writing signed by directors.

M Whelan Haulage- Slightly confused. Vicki [Leftakis] said 1/2 there (sic) account would be paid on Friday and 1/2 this week. Overall account is $14,000.

They didn’t receive anything last week. He is threatening to block the Canberra site with his trucks.

Please advise if ok to offer the commitment as I need to call them both back by COB today.

At 4.46 pm Mr Ebeid responded to Mr Felstead in the following terms:

Both will have to be the end of the month at the earliest.

I don’t have a choice glen

95    Following the letter sent by Mr Melrose on 9 August 2011, a meeting was arranged but subsequently cancelled.

96    Between 9 and 12 August 2011, Mr Melrose had a number of conversations with people at CPS but mainly with Mr Felstead. Those conversations were to the following effect:

Mr Melrose:    Mate what’s the story. What’s going on with us getting paid?

Mr Felstead:    I have spoken with the boss and the boss says that there are apparently some problems with the Canberra job and we haven’t been paid.

97    After a number of calls, Mr Melrose said to Mr Felstead: “[c]an you get one of your bosses to call me. I want to speak with them direct and find out what’s going on…” Mr Melrose then had a conversation with one of the directors, he thinks Mr Travers, which he recollects as follows:

Mr Melrose:    I need to know what’s going on with payment. You guys have always been good payers.

Mr Travers:    I know I am sorry about that. We have had all sorts of issues with the Canberra Job and although we have not done anything wrong, we are not being paid. We are trying to get everything sorted out and we are meeting with our bankers to see if we can get some cash to tide us over until the dispute on the Canberra job is resolved. I assure you it is all only temporary and Melrose will get paid. There is nothing for you to be concerned about.

Mr Melrose:    That’s all well and good but payment is already late so I need to know when it is going to get sorted?

Mr Travers:    Look we are meeting with the bank again in the next day or two so once I know something further from them, I’ll get back to you.

Mr Melrose:    I need this sorted out now.

Mr Travers:    It will be, I promise.

98    On 10 August 2011 Melrose Cranes received a payment of $1,297.10 for invoice 52453 dated 20 March 2011 for $10,034.20 and invoice 52823 dated 4 April 2011 for $9,222.90. According to Mr Melrose, CPS had raised a query in relation to those invoices and the reduced payment was acceptable to Melrose Cranes.

99    Mr Melrose said that it was not unusual for him to request assurances from clients and sometimes even personal guarantees in relation to the payment of an invoice. His experience was that such a request made the client, especially one that was simply slow or tardy with its accounts, address payment. Mr Melrose decided that making such a request of CPS might have the same effect. At around this time Mr Melrose had a conversation with Mr Felstead to the following effect:

Mr Melrose:    Come on Glen we have been working together for a long time now, you can tell me straight what’s going on? When am I going to get paid?

Mr Felstead:    I know the directors have been meeting with the bankers to put an overdraft in place to deal with the fallout from the Canberra Job. Apparently they are trying to do that so that our contractors get paid while they deal with suing the head contractor. It should all be sorted out shortly. They haven’t been around much at the moment that’s what I have been told.

Mr Melrose:    If this doesn’t get resolved real quick, I am going to need some sort of assurance that I will get paid once the overdraft comes through. Some sort of firm agreement to pay.

Mr Felstead:    Okay. I’ll have another talk with them.

100    On 12 August 2011 Mr Felstead sent Mr Melrose an email attaching a draft letter from Mr Ebeid which provided:

Over the past two years we have worked together with a mutually beneficial outcome for both parties. Our payment history to date has been good and we have ensured that we have only used your services on our projects often at times when an alternative supplier could have been sourced.

In response to your letter dated 9-8-11 and the subsequent conversations over the past few days, we ask for understanding in the additional time it will take to settle your account and we hereby give assurances on behalf of Cardinal Project Services Pty Ltd that monies due to settle your account will be paid.

With your understanding we will be able to work through this difficult period and going forward maintain our successful working relationship.

101    In cross-examination Mr Melrose accepted that, as at 12 August 2011 when it provided the letter referred to in the preceding paragraph, CPS was trying to buy time and that it was using Melrose Cranes as its bank because it could not pay the amount due at that time.

102    By letter dated 15 August 2011 Mr Melrose responded to the letter attached to Mr Felstead’s email of 12 August 2011 in the following terms:

The letter from Mr S Ebeid (attached) is not what I require.

1)    It is not dated.

2)    It does not give reference to the outstanding amount/s and due date/s.

3)    It does not give me guaranteed payment dates.

4)    It does not refer to the interest payment accruals.

5)    It is not signed by way of Personal Guarantee by both directors including their full names, addresses etc with witness signatures.

A copy of your statement and our Aged Receivables printouts are also attached.

Please have this rectified today.

(emphasisi in original)

The statement attached to the letter indicated that CPS owed Melrose Cranes a total of $221,602.43 as at 15 August 2011 for invoices dated between 30 May 2011 to 29 July 2011, with the majority of the invoices by number and value having been rendered in June 2011.

103    Mr Melrose said that at the time he sent his letter dated 15 August 2011 he was unhappy that neither of the directors could be bothered contacting him directly, which was reflected in the tone of his letter. Mr Melrose thought as the directors did not have an answer from the bank yet, they did not have anything to tell him and so found it easier to avoid his call. Because CPS was a good customer, Mr Melrose wanted it to put something in writing about the arrangements that it was going to put in place so that he could consider the next step. Mr Melrose said he thought that the draft letter dated 12 August 2011 from Mr Ebeid, where he indicated that they “give assurances”, meant that they were offering to guarantee the payment and were trying to reassure him that Melrose Cranes would be paid. Mr Melrose believed that whatever CPS was experiencing related to the Canberra Job and was going to be temporary. Notwithstanding his explanation for sending the letter, I find Mr Melrose’s evidence to be disingenuous given the tone and content of his letter dated 15 August 2011.

104    After sending his letter Mr Melrose waited a day or two then called Mr Felstead and had a conversation with him to the following effect:

Mr Melrose:    The email that I sent the other day, I haven’t heard anything back. Do you think you could get ‘S Ebeid’ to call me?

Mr Felstead:    Yeah mate, I’ll talk to him and get him to call.

105    Shortly after that conversation, Mr Melrose received a call from Mr Ebeid. Mr Melrose said this was the first time that he had spoken with Mr Ebeid about the matter and that he had a conversation with him to the following effect:

Mr Ebeid:    Hi Gregg it’s Sam Ebeid here. I’m sorry I have been difficult to catch. We have had a lot going on.

Mr Melrose:    I just want to know what (sic) going on with my account. I have spoken to Glen maybe 15 times and he assures me that everything is OK but I want to know from you what’s happenin?g

Mr Ebeid:    Look I’m sorry about the situation. I assure you it is only temporary. What happened was that we ended up underestimating in our quote for Canberra and then there were a few hiccups with it and we are dealing with that. It’s nothing that is insurmountable. I am certain that we will be back on track with everything soon.

We have also taken over a waste bin service that has probably thrown complications in at the wrong time. That company was apparently trading poorly for different reasons and we are trying to get it all up and going which I’m really confident we will do and won’t take long. The combination of the under estimation on Canberra and the bin business means that we had ended up needing a bit more cash temporarily but things are looking fine.

Generally we are trading very well in Sydney so we will work towards getting this sorted out for you.

I can assure you that we have further meetings in place this week with our bankers. We’re just trying to square away an overdraft or whatever is needed to rectify the situation. I can’t thank you enough for your patience. It will all be over soon I promise.

106    Mr Melrose took this conversation to mean that CPS was only experiencing difficulties with the Canberra Job and that all other jobs would be business as usual. Mr Ebeid’s confirmation to him that they were meeting with their bank made Mr Melrose feel confident that there would be a resolution about payment very shortly. Mr Melrose also recalled that he thought at the time that there had never been any difficulties with any other job that Melrose Cranes had undertaken for CPS so there was no reason for him to believe that this was anything other than an isolated incident. In the context of Mr Melrose’s persistent follow up for payment and his clear dissatisfaction with CPS’ attitude and the responses it provided, I do not accept this evidence.

107    Mr Melrose made a few further attempts to call Mr Ebeid who did not return his calls. Accordingly, Mr Melrose called Mr Travers leaving messages for him to return his call. On about 24 August 2011 Mr Melrose had a conversation with Mr Travers to the following effect:

Mr Travers:    Sorry that Sam hasn’t got back to you yet. We have been in meetings and negotiations about the issues which are going on at the moment.

Mr Melrose:    I’ve been told what’s going on with Canberra but I have also been told that you have been paid. I need to know what you are doing about it for the amounts owing to Melrose.

Mr Travers:    I promise you that this is a short-term problem. We will get things sorted out with this other division and work our way through it. We will have the loans paid shortly and everyone will get paid what is owing to them.

Mr Melrose:    You are overdue now. I need to know the results of the meetings with the banks and what can be done and when it can be done.

Mr Travers:    We are doing everything that we can to make arrangements to ensure that we pay all of our faithful subcontractors. We have other good contracts coming up so things (sic) still going strong and will all get sorted out soon.

108    Mr Melrose recalled thinking that Mr Travers had effectively said the same things as Mr Ebeid and that both stories gelled. For that reason he felt confident that it was a temporary predicament and that payment would not be far away. Again, I am unable to accept this evidence in light of the surrounding circumstances and the evident concern Mr Melrose had about receiving payment from CPS.

109    On 25 August 2011 Mr Melrose left another message for Mr Travers. On or about 26 August 2011 Mr Melrose had a further conversation with Mr Travers to the following effect:

Mr Travers:    Sorry we haven’t been able to get back to you. I promise that we will have more open lines of communication from hear in. We assure you that everything is being sorted out and Melrose will get paid.

Mr Melrose:    Thanks for the effort but that really means nothing to me without payment or paper guarantees.

Mr Travers:    We are going to get this sorted out.

Mr Melrose:    OK, you have until close of business on Monday and if I don’t get something concrete from you in writing I will have to get my lawyers onto it.

Mr Travers:    I will get it sorted.

110    In the meantime, in late August to early September 2011, Mr Melrose had discussions with Mr Felstead in relation to a job that CPS was to undertake at Randwick racecourse (Randwick Job) for the Australian Turf Club (ATC). Mr Melrose said that during the course of those conversations he may have mentioned payment for the Canberra Job. Mr Melrose delegated the task of preparing the quote for the Randwick Job to Michael Melrose, the project manager at Melrose Cranes.

111    On about 29 August 2011 Mr Melrose had a further conversation with Mr Travers to the following effect:

Mr Travers:    We have made arrangements for funds to come in so we want to put something in place for payment.

Mr Melrose:    If you want to put something in place, show me something that is reasonable and I will work with you. I just want to get this sorted so we can move on with other jobs.

Mr Travers:    So do we. We’ll get something to you.

112    On 31 August 2011 Melrose Cranes received a payment of $20,000 from CPS.

113    On 2 September 2011 Ms Leftakis and Mr Melrose exchanged emails. In her email sent at 10.30 am Ms Leftakis wrote:

Here at Cardinal we have set out a payment plan that will reduce the outstanding debt owed to you. We have put in place a payment (sic) $7500 this will be paid in weekly instalments as well as maintaining all current amounts due. This will commence on 9th September and continue until the debt has been paid.

We thank you for your patience and commitment to our ongoing operations.

114    Mr Melrose felt that the payment plan proposed by CPS was imposed on Melrose Cranes with no prior discussion. He agreed that was so because CPS did not have the ability to pay Melrose Cranes’ outstanding debt when it fell due, which CPS had admitted to be the case. At 1.16 pm on the same day Mr Melrose responded in the following terms:

The $20,000 payment on 31/8/11 was a start but it only alleviated my risk slightly. Thanks for your email earlier but this is not what I expected at all. If I understand your offer correctly it will take until 9/3/12 to pay back the remaining principal debt/s accrued in June ($128,558.03) and July ($73,044.40).

Comments

1)    No one consulted me prior regarding what is, or is not, acceptable to MCR.

2)    They have assumed that I will just accept a short email as confirmation of Cardinal’s commitment (wrong).

3)    MCR is not a bank, nor do we wish to be.

4)    If MCR are asked to be a bank (and if I agree) then I will expect 8.75% interest from the initial overdue date/s of 1/8/11 and 1/9/11 respectively, until paid in full. I am not going to pay for MCR’s overdraft and Cardinal’s as well

5)    MCR will then require an officially written document signed and witnessed by both parties by C.O.B. on Monday 5/9/11

I have written to you because neither Andrew Travers or Sam Ebeid answer my calls. To be honest I am quite tired of being treated like the “poor cousin” and I will not accept it anymore.

Please pass this immediately to them as I do not even have their email addresses.

They have until C.O.B. today (5pm) and hopefully negotiate a mutual agreement to the problem. If not a STATUTORY DEMAND will be filed on Monday 5/9/11.

I have been patient for long enough.

(emphasis in original)

115    On the afternoon of 2 September 2011 Mr Melrose received a call from Mr Travers. They had a conversation to the following effect:

Mr Travers:    Sorry for the lack of verbal communication, we have been dealing with the banks. Meeting after meeting. I can assure that we are committed to the terms in the email from Vicki [Leftakis] and working with (sic) on future projects. We have a lot of work in the pipeline. As you know we have won the ATC job and a few smaller projects.

Mr Melrose:    Yeah, thanks. I am already talking with Glen about it.

116    Mr Melrose’s diary for 5 September 2011 includes an entry in the following terms:

FILE STAT DEMAND? – CARDINAL (via deed) (if not court)

117    On 5 September 2011 Mr Melrose had a conversation with his solicitors in which he instructed them to draft a deed setting out the terms on which CPS would pay the amount outstanding to Melrose Cranes in instalments. By email dated 6 September 2011 Karen Mclean of Mclean & Associates, the solicitors for Melrose Cranes, confirmed that they were drafting a deed.

118    On 8 September 2011 Mr Melrose sent an email to Tara Baker at CPS, copied to a number of people including Mr Felstead, which attached a letter and a document titled “Deed of Acknowledgement of Debt”. The letter from Melrose Cranes to Ms Baker relevantly stated:

As discussed, it is imperative that the Deed (12x pages attached) is initialled and dated at the bottom right corner of each page and then signed and witnessed by all Directors asap so we can get back to normal. Sam is aware of this.

Glen Felstead has issues at the ‘AJC’ and we are willing to reopen your credit account as soon as the document is signed and returned. We have a crane available.

Please email me a completed copy and return the original by Express Post. I will then countersign the document and email/post copies Cardinal. This is very important.

(emphasis in original)

The Deed of Acknowledgement of Debt provided, among other things, for payment by CPS of the amount owing on the Canberra Job plus interest in weekly instalments of $7,500, with a final payment of less than that amount as set out in the schedule to the deed; a warranty by CPS that it was “presently solvent”; a guarantee and indemnity from Cardinal and Messrs Ebeid, Travers and Burns in their capacity as directors of CPS and Cardinal; and that, if upon the insolvency of CPS, Melrose Cranes was required to pay any amount pursuant to the Act to a liquidator or administrator then the indemnity provided by Cardinal and the directors would be extended to include any such amount which Melrose was required to pay.

119    Mr Melrose accepted that providing the Deed of Acknowledgment of Debt to CPS was about more than making CPS take action and was about Melrose Cranes trying to protect itself in the event that CPS went into liquidation. CPS did not sign the deed.

120    On 9 September 2011 Melrose Cranes received a payment of $7,500 from CPS.

121    On the same day Michael Melrose sent an email to Mr Felstead attaching a quotation for the Randwick Job which provided for the supply of a crane on 11 September 2011 for a maximum of 20 consecutive days. The notes/conditions to the quotation included that “[p]ayment terms are to be agreed with Gregg Melrose only in writing prior to crane arrival on site Sunday the 11.9.11” (original emphasis).

122    After despatch of the quote for the Randwick Job, Mr Melrose had a conversation with Mr Felstead to the following effect:

Mr Felstead:    We would like to get a crane on site at Randwick as soon as possible.

Mr Melrose:    Given what’s going on at the moment, what can we arrange regarding payment terms for this job? I know that the crap only relates to the ACT but I have to think of Melrose.

Mr Felstead:    I completely understand. I thank you for taking on the job. With this one, I can guarantee payment through the ATC because the ATC are paying us. It has all been approved by the board.

Mr Melrose:    OK. How will it work?

Mr Felstead:    I have spoken with Andrew Steventon from the ATC. You can do me an invoice in advance which will get the ball rolling for payment early. They want the job started as soon as possible. Here I’ll give you his details.

Mr Melrose:    That’s fine. Look OK. I’ll get the crane in place and I’ll talk to Andrew. Is there anything else that I need to do for you?

Mr Felstead:    No. That’s it. Thanks for helping us out.

123    On or about 12 or 13 September 2011 Mr Melrose had a conversation with Mr Steventon from the ATC to the following effect:

Mr Melrose:    Hi it’s Gregg Melrose from Melrose Cranes. I am calling about the job at the turf club.

Mr Steventon:    Yes, I am aware of your discussion with Glen regarding payment. If you have any issues with Cardinal on this job I can guarantee you that the ATC will meet the payments required.

Mr Melrose:    Glen has asked for an invoice in advance.

Mr Steventon:    Yes I know about that and I’m happy for that to happen. We are totally funded for this job. I will deal with it as soon as it comes to me and get final approval from the board as quickly as possible so payment is ready to go for you.

Mr Melrose:    Thank you.

124    According to Mr Melrose invoicing in advance reduced the possibility of delay in payment and made a customer aware of the bill’s amount in advance of the due date for payment so that any issues could be raised in advance. He described such an arrangement as a “cash on completion arrangement” or a funded job.

125    On 15 September 2011 Melrose Cranes issued invoice 00054162 to CPS for $88,866.80 for the supply of one crane and associated labour and equipment from 11 to 25 September 2011 for the Randwick Job (First Randwick Invoice) by email to Mr Felstead. The only reason Mr Melrose provided crane hire services to CPS for the Randwick Job was because of the assurance he received from Mr Steventon of the ATC about payment.

126    On 16 September 2011 there was an exchange of emails between Sarah Ferguson, the administration manager at CPS, Messrs Ebeid and Felstead and Jake Elliott. The first email from Ms Ferguson requested Mr Ebeid ring Mr Felstead about Mr Melrose who “will pull his cranes out of Randwick”. Ms Ferguson said that Mr Felstead said “if that happens we are in big trouble”. Mr Ebeid then informed Mr Felstead that Melrose Cranes was on a payment plan and “that is all we can do” and suggested that Mr Felstead “use an alternative crane supplier”. In response Mr Felstead said, among other things, “I informed you in my email on Wednesday what had to happen. I don’t understand you (sic) tactics with this one, you should have called Greg Melrose and Kohinor prior to now. You need to speak to them, not me”. In the last email in the series Mr Ebeid said, among other things, that Melrose Cranes had already been put on a payment plan and that he had suggested “previously to use another crane company as [Mr Melrose] might blackmail us now as he is on site”.

127    On 16 September 2011 Melrose Cranes received a payment of $7,500 from CPS.

128    On 19 September 2011 Mr Melrose received a call from Mr Ebeid. They had a conversation to the following effect:

Mr Ebeid:    Thanks so much for your patience Gregg. All of the finances have been arranged so everything should get back on track in no time. We have just been so busy and I know I should have rung you back many times.

Mr Melrose:    Yeah Sam but what can you do for me? What’s going to happen from here?

Mr Ebeid:    It’s all coming together. I have been doing some numbers and we should be able to do better in clearing out the old debt for Canberra.

Mr Melrose:    Why don’t you stick it in an email to me and I will have a look at what you are proposing.

Mr Ebeid:    OK.

129    On both 19 and 20 September 2011 Mr Ebeid sent an email in the same terms to Mr Melrose. In the emails Mr Ebeid said:

Following our conversation this morning I would like apologise for the way we treated you and the payment plan should have been communicated to you in a more personal way.

The payment plan from cardinal project services is $32,500 per month

I have looked at our cash position and can now look to extend our selves (sic) further for Melrose Cranes to $43,000 per month for old debt only.

Any new projects will be payed (sic) at normal payment terms.

Greg I appreciate your ongoing assistance and patience. I hope this is acceptable

130    On 19 September 2011, following a discussion on Friday, 16 September 2011, Mr Felstead provided the First Randwick Invoice to Mr Steventon at the ATC. On 20 September 2011 Mr Steventon sent an email to Mr Melrose informing him that the ATC would pay Melrose Cranes directly for the Randwick Job if CPS did not pay the First Randwick Invoice on its due date. If that process for payment of the First Randwick Invoice was implemented then any such payment was to be deducted from CPS’ payment claims.

131    Between 8 August and 19 September 2011 Mr Melrose made entries in the 2011 Diary every few days about CPS. Those entries included for example:

    on 8 August 2011 “$ Cardinal (146) Bobby Glen chase”;

    on 10 August “Cardinal $? Sign off”;

    on 12 August “Cardinal $ (chase)”;

    on 17 August “$ Cardinal – Fri”;

    on 19 August “$ Cardinal – o’draft”; and

    on 31 August “(McLean) Cardinal $ payment plan”.

132    Mr Melrose said that by this time, that is 19 September 2011, there were arrangements in place for the Randwick Job and there were no issues with any of Melrose Cranes’ other jobs in Sydney. However, it emerged during cross-examination that there were no other jobs being undertaken by Melrose Cranes in Sydney at the time. The only jobs undertaken by Melrose Cranes for CPS after completion of the Canberra Job were the Randwick Job and a small job at Casula. Mr Melrose also said that Mr Ebeid’s proposal for increased payment made him confident that what he had been told was true and that CPS was back on track. Mr Melrose recalls thinking that they were over the hurdle they had faced with the Canberra Job; they could now move forward together; the old contract was “put to bed and fixed up”; and a new contract was in place for the Randwick Job and Mr Melrose was “very comfortable with the situation”. I find it difficult to accept that evidence given the lengths to which Mr Melrose had gone to follow up payment for the Canberra Job, his concerns about the failure to pay and his engagement of lawyers to draft a deed by which he sought to protect Melrose Cranes in the event of CPS’ liquidation. Further, despite Mr Melrose feeling “comfortable with the situation”, he did not reinstate CPS’ credit account.

133    Melrose Cranes received payments of $10,750 from CPS on 23 and 30 September 2011, 7, 14, 21 and 28 October 2011 and 4, 11 and 18 November 2011 and a payment of $10,000 on 1 December 2011.

134    In the meantime, on 25 September 2011 Melrose Cranes put an additional crane on site at the Randwick Job; on 27 September 2011 Melrose Cranes issued invoice 00054412 for $22,609.40 for work done on the Randwick Job from 25 to 27 September 2011 (Second Randwick Invoice); on 11 October 2011 Melrose Cranes received $88,866.80 from CPS in full payment of the First Randwick Invoice; on 28 and 31 October 2011 Melrose Cranes received payment of the Second Randwick Invoice which Mr Melrose had required be paid by 31 October 2011; and on 11 November 2011 Melrose Cranes provided services to CPS for a job at Cedar Road, Casula.

135    On 8 November 2011 Mr Melrose sent an email to Mr Felstead with the subject line “Reinstatement of Credit Account” in which he said:

As you know, your account was closed when the financial difficulties arose regarding payment for MCR’s work at Chase (ACT). Your Directors have never signed any formal guarantee regarding this debt however they have been diligent in paying $10,750 each week to reduce the outstanding amount. At the moment the original $250k has been reduced to about $111k. Based on this and in good faith, I am considering re-opening the account so we can service your needs. The criteria to be met is:

1.    Complete the attached credit application form.

2.    Continue to pay off the ‘Chase debt’ at the same (or greater) rate until it is cleared.

3.    Pay all new invoicing between 30 and 45 days (maximum).

Please pass this information to your Directors for consideration. I will require the completed account application forms duly signed etc together with formal recognition of the contents of this email.

136    In late November 2011 Mr Melrose had discussions with Mr Felstead about a job at White Bay expected to take place in December 2011 and January 2012 including a discussion to the following effect:

Mr Felstead:    We have one job at White Bay. Can we double check the numbers? Do you remember it? It’s the power station, brick and steel building structure. It’s going to be a bit tricky. Probably starting later in December or early next year.

Mr Melrose:    Yeah, I’ll get Ryan to go back over the figures. With regard to payment, do you reckon that we can do it on the same basis as the ATC job while everything is getting sorted out with the rest of the amount?

Mr Felstead:    Yes. Sure that shouldn’t be a problem. I’ll get the same thing in place. Just send me a letter that I can use in a meeting that I have with them.

Mr Melrose:    I’ll get something across. Do you need me to come to the meeting?

Mr Felstead:    No it should be all fine. But if I need you at some stage later I’ll let you know.

137    In December 2011 Melrose Cranes corresponded with CPS about the White Bay job. It provided a quotation which had been prepared by Ryan Melrose, a project manager at Melrose Cranes, and a letter signed by Mr Melrose in which a request was made that the job be treated “in a similar fashion to the recently completed ‘AJC Grandstand’ demolition at Randwick Racecourse”, noting that it was “happy to be transparent by working for Cardinal Project Services Pty Ltd (CPS) but having payment/s guaranteed by Mr Duncan Stirling of Sydney Ports Corporation”. Mr Melrose required this arrangement as he was not prepared to extend credit to CPS.

138    On about 14 December 2011 Mr Melrose had a conversation with Mr Felstead to the following effect:

Mr Felstead:    Gregg there is a problem here at Cardinal. I don’t want you to lose the job at White Bay because of us, so I’ll give you the details of someone to talk to.

Mr Melrose:    What’s going on?

Mr Felstead:    I can’t really say much but I think you should contact this guy about White Bay.

Mr Melrose said this was the first time that he had concerns about being paid the balance due from the Canberra Job which at that time amounted to $80,774.23.

139    On 15 December 2011 Mr Melrose received notice that CPS had been placed into administration.

5.    WAS CPS INSOLVENT IN THE PERIOD 15 JUNE 2011 TO 15 DECEMBER 2011?

5.1    Legal principles

140    A liquidator, in seeking to establish an entitlement to relief under the voidable transaction provisions of the Act, bears the onus of proof in establishing each of the elements of the relevant cause of action on the balance of probabilities. That includes the onus of establishing insolvency.

141    Because of the way the case unfolded and Melrose Cranes’ submission that the Liquidators had failed to establish that CPS was insolvent, it is useful to first refer to authorities that address the standard of proof on the balance of probabilities.

142    The proof of facts to the civil standard of proof requires the Court to be “satisfied” or “reasonably satisfied” of “the affirmative of the issue”: see Murray v Murray (1960) 33 ALJR 521 at 524 (Murray). In Murray Dixon CJ, in addressing the standard of proof on the balance of probabilities, went on to say that that did not mean that the tribunal of fact “is to balance probabilities and say which way they incline”. His Honour continued: “[i]f in the end he has no opinion as to what happened, well it is unfortunate but he is not ‘satisfied’ and his speculative reactions to the imaginary behaviour of the metaphorical scales will not enable him to find the issue mechanically”.

143    In Bradshaw v McEwans (1951) 217 ALR 1 at 5 the High Court (Dixon, Williams, Webb, Fullagar and Kitto JJ) said that the civil standard of proof in its application to circumstantial evidence requires “circumstances raising a more probable inference in favour of what is alleged” and that it is enough if the circumstances appearing in the evidence give rise to a reasonable and definite inference. They must do more than give rise to conflicting inferences of equal probability.

144    In Henderson v Queensland (2014) 255 CLR 1 at [89] Gageler J said:

Generally speaking, and subject always to statutory modification, a party who bears the legal burden of proving the happening of an event or the existence of the state of affairs on the balance of probabilities can discharge that burden by adducing evidence of some fact the existence of which, in the absence of further evidence, is sufficient to justify the drawing of an inference that is more likely than not that the event occurred or that the state of affairs exists.

145    Turning then to the issue of solvency. The test for solvency set out in s 95A(1) of the Act (see [11] above), is a cash flow test. It “focuses on liquidity and the viability of the business” in question: see Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (2006) 58 ACSR 631; [2006] VSC 338 at [141]. That is, the ability of the company to pay its debts as and when they fall due.

146    The question of whether a company is able to pay its debts as and when they fall due is a question of fact: see Lewis v Doran (2004) 208 ALR 385; [2004] NSWSC 608 at [106] (Lewis v Doran) (Palmer J), approved on appeal in Lewis v Doran (2005) 219 ALR 555; [2005] NSWCA 243 at [79] (Giles JA with whom Hodgson and McColl JJA agreed).

147    In Southern Cross Interiors Pty Ltd v Deputy Commission of Taxation (2001) 53 NSWLR 213 Palmer J considered the concept of commercial reality in the context of considering the issue of solvency. At [54] his Honour summarised the position as follows:

In my opinion, the following propositions may now be drawn from the authorities:

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

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

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

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

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

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

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

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

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

(citations omitted)

148    In Australian Securities and Investments Commission v Plymin (2003) 46 ACSR 126; [2003] VSC 123 (ASIC v Plymin) Mandie J considered the question of solvency in the context of claims of insolvent trading by directors. Commencing at [368] his Honour set out what he described as the “well-accepted approach laid down in the authorities” to the question of determining solvency. At [386] his Honour then set out a check list of indicia of insolvency as follows:

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.

149    In Hancock v Conergy Pty Limited (in liquidation), in the matter of DCM Solar Pty Limited (in liquidation) [2015] FCA 738 at [63], Yates J referred to in the indicia of insolvency identified in ASIC v Plymin and other cases and observed at [63]:

In Morris v Danoz Directions Pty Ltd (in liq) (No 2) [2010] FCA 836, Perram J described (at [13]) such indicia [of insolvency] as “commonsense indicators of insolvency”. In Damilock, Mansfield J observed (at [16]) that, in any particular case, one or more of these indicia may have particular significance and that the absence of one or more of them does not, of itself, establish solvency.

150    Melrose Cranes referred the Court to Quick v Stoland Pty Ltd (1998) 87 FCR 371 (Quick v Stoland) which was an appeal from a judgment entered in favour of the respondent for $241,249.73, representing the aggregate amount of debts incurred by a company in liquidation. The appellant was a director of the company at the time when each of the debts were incurred. The respondent’s claim was made under s 592 of the Corporations Law for debts incurred prior to 23 June 1993 and under ss 588M and 588R of the Corporations Law for debts incurred on and after that date. The appeal raised two issues: first, whether the primary judge erred in allowing into evidence a report by Mr Madden; and secondly, whether the primary judge erred in concluding that there were, at the time the debts were incurred, reasonable grounds to expect or suspect that the company would not be able to pay all of its debts as and when they became due.

151    In his judgment at 379, Emmett J noted that he had read in draft the reasons for judgment of Finkelstein J and Branson J. His Honour agreed, for the reasons given by Finkelstein J, that the respondent was only entitled to recover from the appellant the sum of the debts incurred after 31 December 1992. Having regard to the conclusions reached by Finkelstein J and his reasons for reaching those conclusions, Emmett J found the admissibility of Mr Madden’s report was not critical to the outcome. While his Honour agreed with Branson J’s analysis of the scheme of the Evidence Act 1995 (Cth) (Evidence Act), he wished to make some observations concerning its application. Those observations related to the extent to which the opinions in Mr Madden’s report could be said to be wholly or substantially based on Mr Madden’s specialised knowledge arising from his relevant training, study and experience as required by s 79 of the Evidence Act.

152    In that context Emmett J, noting that Mr Madden’s report was concerned with whether the company was insolvent at various times, relevantly said at 379:

In order to determine whether the Company was solvent at a given time, it would be relevant to consider the following matters:

•    All of the Company’s debts as at that time in order to determine when those debts were due and payable.

•    All of the assets of the company as at that time in order to determine the extent to which those assets were liquid or were realisable within a time frame that would allow each of the debts to be paid as and when it became payable.

•    The Company’s business as at that time in order to determine its expected net cash flow from the business by deducting from projected future sales the cash expenses which would be necessary to generate those sales.

•    Arrangements between the Company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts.

153    Melrose Cranes attacks the reliability of the financial information relied on by the Liquidators. In Trinick (as liquidator of Australian Foods Company Pty Ltd (in liq)) v Keller [2009] WASC 298 (Trinick) and Treloar Constructions Pty Ltd v McMillan (2017) 318 FLR 58; [2017] NSWCA 72 (Treloar Constructions) similar allegations were made about the reliability of financial information.

154    Trinick concerned an application by the liquidator of Australian Foods Company Pty Ltd (in liq) (Australian Foods) under s 588FF of the Act for orders that the defendants pay $190,000 for transactions alleged to be unfair preferences within the meaning of s 588FA of the Act. The plaintiff relied on the affidavit of Mr Honey, the receiver and manager of Australian Foods, as well as parts of affidavits sworn by the plaintiff. The defendants did not adduce any evidence going to the issue of solvency. At [90] Murphy J summarised the defendants’ submissions:

The defendants, in substance, submit that the plaintiff has not established insolvency because:

(a)     whilst the plaintiff has a sufficient degree of specialised knowledge to provide an expert opinion, the plaintiff’s opinion as to insolvency carries no weight in that:

(i)     he does not explain the reasoning process by which he considers that the Company was insolvent by reference to the materials to which he refers;

(ii)     he has relied upon books and records which were stated to be unreliable by Mr Honey;

(b)     assuming the plaintiff’s opinion evidence is given no weight, the only evidence of insolvency appears from:

(i)     Mr Honey’s affidavit — and that only establishes insolvency at 30 November 2004;

(ii)     the financial statements referred to by the plaintiff — and they are inherently inaccurate according to Mr Honey;

(iii)     the tax returns — and they only go to the period up to 30 June 2003; and

(iv)     the proofs of debt — which evidence what is claimed but not what is due and payable;

(c)     as a result of the lack of evidence arising from (a) and (b) above, the plaintiff has not adduced evidence of the matters referred to by Emmett J in Quick v Stoland Pty Ltd (1998) 87 FCR 371, and accordingly there is no evidence of insolvency.

155    At [93] Murphy J rejected the defendants’ first submission. His Honour did not accept that there had been no reasoning process disclosed by the plaintiff in his affidavit. At [96]-[97] his Honour also rejected the substance of the defendants’ second and third submissions, save in relation to the proofs of debt. His Honour said:

96.    … For the reasons outlined in the next section of these reasons for judgment, in my view, even if the plaintiff’s opinion evidence is discarded as being of no weight at all, there is sufficient evidence to conclude that it is more probable than not that the Company was unable to pay its debts as they fell due and payable in the period as at and from 24 June 2004. The defendant’s submissions seem to me to place an unduly restrictive and prescriptive meaning on the observations of Emmett J in Quick v Stoland. Ultimately, insolvency is a question of fact to be decided as a matter of commercial reality in the light of all the circumstances. It should be noted that in Quick v Stoland, the fact of insolvency as at 31 December 1992 in that case was inferred by the Full Court from a review of the current and total assets and liabilities and other information disclosed in a balance sheet as at 30 June 1993, ie, six months after the relevant date for determining insolvency, and an inference that insolvency arose six months prior to that time from the company’s dealings with a particular creditor in January 1993: Quick v Stoland (385–386) (Finkelstein J) (Branson J (378) and Emmett J (379) agreeing).

97.    I accept, however, the defendants’ submission that the proofs of debt are evidence of claims against the Company but do not, in themselves, evidence liabilities of the Company. The plaintiff, unlike the liquidator in Re Action Waste Collections Pty Ltd (in liq) [1981] VR 691 at 703, does not depose to having accepted the proofs as valid claims.

156    Commencing at [99] Murphy J made findings on solvency. The company had used an accounting system known as QuickBooks up to 30 June 2003 and on 1 July 2003 its accounting data was transferred from QuickBooks to a system known as ACCPAK. There were substantial differences between the results as at 30 June 2003 and the results as at 1 July 2003 when the transfer to ACCPAK occurred. At [100]-[101] his Honour said:

100.    Mr Honey, in para 4.11 of his first report, was, in my view, adverting to the prospect that the financial position of the Company, as at 30 June 2003, may well have been worse than that which may be discerned from the ACCPAK balance sheet as at 1 July 2003. However, even on the ACCPAK balance sheet of 1 July 2003, the Company’s current liabilities substantially exceeded its current assets, and its total liabilities substantially exceeded its total assets. Whilst there are differences, and indeed significant differences in the quantum of assets and liabilities recorded in the ACCPAK balance sheet and the QuickBooks balance sheet as at 30 June 2003, each nevertheless discloses a substantial deficit in both current assets and total assets. The differences relate to the precise degree of the substantial deficiency in both current and total assets. It is not necessary, for present purposes, to select between them. I find that as at 30 June 2003, and 1 July 2003, the Company’s current liabilities substantially exceeded its current assets, and that its total liabilities substantially exceeded its total assets.

101.    In addition, the Company had a history of substantial trading losses up to and including the financial year ended 30 June 2003 as disclosed in its tax returns.

157    Murphy J concluded, based on Mr Honey’s evidence, that the company was insolvent as at 29 October 2004 and that it was more probable than not that the company was insolvent in the period 24 June 2004 to 1 September 2004 and indeed in the whole period on and from 24 June 2004: at [104].

158    Treloar Constructions concerned an appeal from a judgment of the District Court rejecting a claim against the respondent, Brian McMillan, pursuant to s 588M(3) of the Act for payment of $418,991.77 for invoices that Treloar Constructions Pty Ltd (Treloar) claimed remained unpaid by McMillan Prestige Pty Ltd (McMillan Prestige). Treloar had entered into a contract with McMillan Prestige for the construction and project management of a motor vehicle showroom and service and repair facility which required payment of invoices 30 days after the date of invoice. McMillan Prestige was the holding company of the McMillan Group. It provided services to two wholly owned subsidiaries. A receiver was appointed to McMillan Prestige and its two subsidiaries and McMillan Prestige was later wound up.

159    The primary judge rejected Treloar’s claim holding that it had failed to prove that the amount of the invoices remained unpaid and that McMillan Prestige was insolvent at the relevant times. The primary judge considered that the inadequacies in the expert report relied on by Treloar were such that her Honour was not in a position to determine the question of insolvency based on the evidence before her.

160    One of the issues which the New South Wales Court of Appeal (Court of Appeal) identified for determination was whether McMillan Prestige was insolvent when the debts were incurred. Treloar contended that McMillan Prestige was insolvent in the period from 4 April 2006 to 20 September 2006. Before the primary judge, Treloar relied upon the expert evidence of Christopher Palmer who approached the question of insolvency on the basis of the cash flow test: at [63]. The primary judge considered that Mr Palmer’s report was seriously flawed because some of the assumptions he had made were incorrect and some of the tables and figures upon which he based his analysis were either wrong or unreliable: at [64]. The primary judge concluded that, by Mr Palmer’s own admission, very little or no weight could be given to his opinion set out in his report.

161    After setting out a summary of the authorities addressing the test for solvency in s 95A of the Act, the Court said at [84] that:

84.    In this case, the particular matters to be addressed in determining whether her Honour erred in finding that Treloar had not established that McMillan Prestige was insolvent are as follows:

(i)    what inferences, if any, as to McMillan Prestige’s solvency could be drawn from the Group Accounts for the period August 2005 to January 2006;

(ii)     whether McMillan Prestige suffered from a lack of working capital from at least April 2006;

(ii)     what inferences, if any, could be drawn from the fact that the invoices for the period January 2006 to July 2006 were paid outside the 30 day term specified in the invoice;

(iv)     whether McMillan Prestige had available to it funding from Volkswagen Australia in the sum of $700,000 having regard to the terms of the letter from Volkswagen Australia dated 10 August 2005;

(v)     whether Mr Palmer’s failure to have regard to the availability of the $1 million informal CBA overdraft should properly have been seen as a deficiency in his report such as to affect his opinion as to McMillan Prestige’s solvency;

(vi)     what relevance should be given to McMillan Prestige’s unpaid tax debt when considering the question of its solvency;

(vii)     whether Mr Palmer’s treatment of trade debtors was adequate.

162    Their Honours then proceeded to consider each of those factors. In relation to the payment of invoices outside the 30 day period their Honours said at [99]-[100]:

99.    It is well established that the persistent late payment of debts may give rise to an inference of insolvency. As Chesterman J observed in Emanuel Management Pty Ltd v Foster’s Brewing Group Ltd [2003] QSC 205:

[92]    The question is not whether debts were paid on time but whether they could have been. Persistent late payment of debts often gives rise to the inference of insolvency, but the inference may be rebutted if there be evidence showing a reason for late payment, other than an incapacity to pay.…

[94]    I would accept that, when determining questions of solvency, the answer is not to be found only in the fact that creditors were not paid in accordance with the time stipulated in their invoices. One does not need recourse to notions of ‘commercial reality’ to reach this conclusion. The question must always be whether a company was able to pay its debts as they fell due … This investigation may involve a consideration of why debts were not paid on time.

[95]    In my opinion the appropriate course is to regard the issue as one of fact and to address the question … by reference to all of the evidence which appears relevant to that question.” (emphasis added)

100.    See also Australian Securities and Investments Commission v Plymin (2003) 46 ACSR 126; [2003] VSC 123 at [386], where the fact that creditors were unpaid outside trading terms was included in the indicia of insolvency enumerated by Mandie J.

163    Their Honours considered whether there was an evidentiary onus on Mr McMillan to contradict Mr Palmer’s evidence. In relation to that issue their Honours said at [142]-[143]:

142.    The legal onus to prove insolvency at all times remained upon Treloar. That carried with it the evidentiary onus of proof sufficient to establish insolvency or at least to establish matters from which insolvency could be inferred at each of the relevant dates. We have referred above to the observations of Morrison JA in Chan that for financial support from a related financial entity to be relevant there is a need for cogent evidence establishing a degree of commitment from the related entity to the continuance of the financial support for the company whose solvency is in contention.

143.    In this case, whilst there were deficiencies in the material available to Mr Palmer there were undoubted indicators of insolvency. There were a number of features of Mr Palmer’s report, which if not countered by evidence, were relevant to a determination as to whether McMillan Prestige was insolvent at each of the relevant times. To that extent, Mr McMillan bore an evidentiary onus to point to circumstances that would deprive Mr Palmer’s report of that relevance or at least make the matters to which he referred in the report an unsatisfactory basis upon which to determine insolvency.

164    Their Honours concluded that the primary judge’s criticisms of Mr Palmer’s report were misplaced in a number of respects and then set out the position as to solvency: at [146]. At [148]-[149] their Honours said:

148.    The evidence, taken as a whole, does not indicate that McMillan Prestige was suffering from a temporary liquidity problem. Indeed, it is known that as at 17 December 2005 it was in a stretched financial position and the evidence indicated that its position and that of the group deteriorated in the months that followed.

149.    Thus, although the evidence does not pinpoint each of the dates on which insolvency had to be proved, the evidence in respect of the period in which those dates fall is such that the only inference available is that McMillan Prestige was insolvent at each point in that period. It follows that Treloar proved insolvency at each of the relevant dates.

5.2    Consideration

165    The parties agree that the Liquidators bear the onus of proof of insolvency.

5.2.1    MYOB records, board reports and s 1305 of the Act

166    The Liquidators rely on s 1305(1) of the Act in relation to the MYOB records including profit and loss statements, balance sheets and board reports. They contend that each of these documents are “books” kept by CPS under a requirement of the Act, though their argument focused on the former categories rather than the latter category of board reports.

167    Section 1305 provides:

(1)    A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.

(2)    A document purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).

168    The term “books” is relevantly defined in s 9 of the Act to include a register; any other record of information; financial reports or financial records, however compiled, recorded or stored; and a document. The word “document” is relevantly defined in s 25 of the Acts Interpretation Act 1901 (Cth), as in force on 1 January 2005, to include any paper or other material on which there is writing and any article or material from which writings can be reproduced with or without the aid of any other article or device: see s 5C of the Act.

169    The term “financial records” is also defined in s 9 of the Act to include:

(a)    invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and

(b)    documents of prime entry; and

(c)    working papers and other documents needed to explain:

(i)    the methods by which financial statements are made up; and

(ii)    adjustments to be made in preparing financial statements.

170    Section 286 of the Act imposes an obligation to keep financial records. It relevantly provides that a company must keep written financial records that correctly record and explain its transactions and financial position and performance, and would enable true and fair financial statements to be prepared and audited.

171    Section 1306 deals with the form and evidentiary value of books. It relevantly provides that:

(5)    If:

(a)    because of this Act, a book that this Act requires to be kept or prepared is prima facie evidence of a matter; and

(b)    the book, or a part of the book, is kept or prepared by recording or storing matters (including that matter) by means of a mechanical, electronic or other device;

a written reproduction of that matter as so recorded or stored is prima facie evidence of that matter.

(6)    A writing that purports to reproduce a matter recorded or stored by means of a mechanical, electronic or other device is, unless the contrary is established, taken to be a reproduction of that matter.

172    Melrose Cranes submitted that the Liquidators’ reliance on s 1305 of the Act in relation to the MYOB records does not assist them because it does not operate to elevate any accounting documents generated by the Liquidators to the status of prima facie proof of the matters to which those documents refer. Relying on Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1; [2009] NSWSC 1229 at [396] (ASIC v Rich (2009)), Melrose Cranes further submitted that, even if s 1305 were to operate that way, any presumption derived from it may be displaced by matters going to reliability.

173    Melrose Cranes submitted that the MYOB records relied upon by the Liquidators were generated after CPS went into liquidation and, for the most part, were printed a week before Mr Stone swore his affidavit on 23 August 2016. It also submitted that the Court should infer that the records were generated merely to be appended to Mr Stone’s affidavits. Melrose Cranes further submitted that the documents do not attract the benefit of the “prima facie evidence” aspect of s 1305 of the Act because the evidentiary effect of that section is confined to a “book” kept by a body corporate under a requirement of the Act. Relying on Valoutin Pty Ltd v Furst (1998) 154 ALR 119 (Valoutin), it submitted that the relevant provisions of the Act, including s 286, do not require the preparation of monthly balance sheets, profit and loss accounts, aged debtor or creditor summaries or cash flow statements.

174    Melrose Cranes submitted that the evidence made plain that the MYOB records relied upon were not maintained contemporaneously or completely for the whole period. It also submitted that the most likely inference is that sometime in August or September 2011, CPS began the process of transitioning over to MYOB, a process which involved the entry of transactions from the beginning of the 2011 financial year, and that parts of that process were never completed. Melrose Cranes submitted that not only did Mr Stone concede he knew nothing to contradict the proposition that MYOB was not in use in August 2011, but the CHEOPS system was still in use, in conjunction with MYOB, when he was appointed. Melrose Cranes further submitted that the Liquidators had hard copies of some of the CHEOPS output but none of it was relied upon and that, in fact, no hard copies of any contemporaneously produced accounting material for the relevant period were in evidence.

175    Melrose Cranes submitted that the fact that there was a problem with the accounting system was known to Mr Stone early in the administration, as noted in the administrators’ report dated 23 January 2012. Melrose Cranes further submitted that the accounting function for the companies within the Cardinal Group was centralised and, given that fact, patent errors and omissions in the accounts of other entities within the group support a general inference that other accounts produced by the same authors are likely to be unreliable, even if specific errors may not be identifiable.

176    In summary, Melrose Cranes submitted that if there was a significant body of evidence which demonstrated that the MYOB program produced nonsensical reports and unexplained inconsistencies in what should be consistent values and unpopulated fields, the Court is entitled to infer that the exercise of aggregation is not reliable. It further submitted that where those defects are manifest on the face of the material relied upon by the Liquidators and, at least in part, identified by the Liquidators prior to the hearing, the absence of an explanation should prevent the Court from drawing a relevant inference favourable to the Liquidators and that one such inference would be that the defects are confined to those that Melrose Cranes, a stranger to CPS, has been able to identify.

177    In Australian Securities and Investments Commission v Rich (2005) 216 ALR 320; [2005] NSWSC 417 (ASIC v Rich (2005)) Austin J considered the admissibility of nine categories of documents under s 1305 of the Act. After setting out the section and its legislative history, his Honour described the effect of ss 1305 and 1306(5) at [227]:

Where it applies, s 1305 allows a document properly tendered to become prima facie evidence of any matter stated in it, regardless of whether the stated matter offends an exclusionary rule of the Evidence Act, such as the hearsay rule or the opinion rule. Subsection (2), where applicable, avoids the need to prove the authenticity of the document, unless the presumption is rebutted. Where information is recorded on a computer hard-drive, s 1306(5) permits the tender of a printout of the recorded information…

178    At [233] his Honour observed that s 1305 would apply to the nine categories of documents if they were “books”; were “kept by a body corporate”; and were so kept “under a requirement of [the Corporations] Act”. In relation to the second requirement Austin J had to consider the meaning of “kept” as used in s 1305, in particular, whether the word meant either “retained or held” (the wider construction) or “maintained or used to record or store information systematically” (the narrower construction). His Honour noted that there were lines of authority supporting each of those approaches but, after reviewing the authorities and considering the legislative purpose behind s 1305, preferred the wider construction. At [265] Austin J held that a document is “kept” for the purpose of s 1305 if it is retained or held and, it followed, would be “kept” if the document were maintained systematically and periodically.

179    Austin J also considered whether books kept by a liquidator were books “kept by a body corporate”. His Honour outlined several statutory obligations that were imposed on the liquidators, who in that case had been appointed earlier as voluntary administrators, and concluded at [270]-[271]:

270    When performing their functions and exercising their powers as such, liquidators occupy the position of agent of the company: A R Keay, McPherson’s Law of Company Liquidation, 4th ed, LBC Information Services, Sydney, 1999, p 288, and cases there cited. If, therefore, the liquidators take some authorised step in carrying on the business of the company, that step is binding on the company as principal, just as if it had been taken by or on behalf of the company’s board of directors prior to commencement of the voluntary administration. It would have been a step taken by the company as principal.

271    In my opinion the same consequences flow when the liquidators take a step in the administration of the affairs of the company, since in doing so they are acting as the company’s agent. The liquidators’ keeping of reports to creditors prepared by them in their capacity as liquidators or administrators, by retaining them, is conduct by them as agent for the company. It follows that the reports are kept by the body corporate, and therefore those documents are books kept by a body corporate for the purposes of s 1305. Clearly, they are books kept under requirements of the Act, namely the requirements set out above which oblige liquidators to keep and retain such documents.

180    As to the requirement that books be kept “under a requirement of this Act”, Austin J recognised at [282] that the principal source of statutory obligation to keep books was s 286 of the Act. His Honour reviewed the cases that had considered the scope of the term “financial records”, or in the earlier cases “accounting records”, and concluded that the term extended beyond documents of prime entry to “derivative” documents, including those prepared using judgment or prediction and those involving the interpretation of financial data: at [284]-[295]. At [296]-[300] his Honour continued:

296    The inclusive nature of the definition permits the concept of “financial records” to be shaped by reference to the legislative purpose of s 286. Section 286 requires the company to keep written financial records that correctly record or explain its transactions, financial position and performance, and would enable true and fair financial statements to be prepared and audited. It seems to me that the financial records necessary to achieve these matters will go beyond the records expressly identified in paras (a), (b) and (c) of the definition, in the case of any large business enterprise. The farm books in Caratti and the monthly sales reports in Linfox Transport are examples. Documents of these kinds are “financial records” because they are documents created as part of the process by which the company discharges its statutory obligation under s 286. On this view, a document is a financial record if the company uses it for any of the purposes identified by s 286: for example, to record the company’s financial position or to facilitate the preparation or auditing of annual or half-yearly financial statements.

297    With respect, that Mullighan J’s approach does not adequately take into account the scale and complexity of financial systems, recording and reporting in a large business enterprise. Recording and explaining the transactions, financial position and performance of a large business enterprise will involve much more than the preservation of documents of prime entry and the maintenance of a cashbook, general ledger and journal. It will involve, with the aid of computers, a variety of strategies designed to keep track of such matters as sales, cost of sales, cash, debtors, creditors, and banking and financial arrangements. The company’s strategies will be likely to include, as essential parts of the process of providing explanations which enable directors and management to understand the company’s financial position and performance, the preparation of snapshot reports on a regular basis and when needed, and assessments of actual figures against projections made in various ways (for example, in budgets and business plans).

298    … In my opinion the critical question under s 286 is whether the document fits into the process of recording and explaining the company’s transactions, financial position or performance and enabling true and fair financial statements to be prepared and audited. A financial record is a record prepared by the company as part of this process of recording and explaining, a process that may well involve preparation of projections and assessments of historical figures against those projections.

299    I do not mean to say that a company (or company of at least a certain size) must always prepare particular kinds of documents such as budgets or business plans or trial balances or sensitivity analyses of key variables. Section 286 leaves it open to a company to select the most efficacious system of recording and explaining in its particular circumstances. In Caratti, the farm books were held to be accounting records, and in Linfox Transport the monthly sales reports were held to be financial records, without any finding in either case that preparation of records of that precise nature would be necessary to comply with the statutory requirement. What was significant was that these documents were in fact prepared and kept, in circumstances where the court could infer that they were used as part of the process of recording and explaining, and therefore understanding, the company’s transactions, financial position and financial performance and enabling the preparation and auditing of financial statements.

300    It is possible that in the case of some documents, the court would not be in a position to conclude that they are financial records in this sense in the absence of evidence as to how and why they were created and how they were used. But for many documents, inferences sufficient to warrant their classification as financial records will be available to be drawn from inspection of the documents themselves. For example, one can readily infer from a document entitled “business plan” or “budget” which sets out projections on a periodical basis that it was prepared for use as a point of reference against which to assess the company’s actual figures and therefore to understand the company’s financial position and performance. It would not be necessary, for the purpose of classifying the document as a financial record, for the tendering party to adduce evidence that the document was in fact used in this manner. To require such evidence, in effect on a voir dire before tender, would run counter to the legislative purpose of s 1305.

181    In ASIC v Rich (2009) Austin J again considered s 1305 of the Act. On that occasion the issue was about the meaning of the words “prima facie” in the section. After referring to the defendants’ submissions his Honour said at [396]-[397]:

396.    In my view the true meaning of the words “prima facie” lies between the alternatives identified in the defendants’ submission. The statement in s 1305(1) that the company’s books are prima facie evidence of a matter stated or recorded in them does more than merely to convey that they are the starting point to proof or a “first view”. All other things being equal, the fact that a matter is stated in a book kept by a company is sufficient to prove that matter in civil proceedings. That does not reverse the onus of proof in the proceedings in any general way, but it means that the tendering of the book is evidence of the matter recorded in it, and that matter will be thereby proven unless other evidence convinces the tribunal of fact to the contrary, on the balance of probabilities.

397.     Section 1305(1) does not make the company’s books conclusive evidence of the matters they contain, in the sense of requiring the tribunal of fact to make a finding in terms of the content of the books in the absence of proof to the contrary by the opposing party. The books are prima facie evidence of the matters stated in them, but the weight of that evidence is to be measured in accordance with the common sense of the tribunal of fact.

(citations omitted)

At [400] after referring to the relevant part of the explanatory memorandum to the Companies Bill 1981 which introduced the provision, his Honour said:

Therefore s 1305(1) allows a company’s books to be introduced into evidence as they are, without any “authenticating” evidence by any witness, and allows the books to be relied upon to prove transactions recorded in them. But it does not elevate matters contained in the books to a plane of probative value that requires the court to disregard the context in which the matters relied on appear in the tendered document. If, for example, there is some doubt as to whether a particular transaction is “recorded” in a book because of some uncertainty about the status of the document or ambiguity about what it contains, s 1305(1) does not overcome the problem.

182    In my opinion the MYOB records including the profit and loss statements and balance sheets tendered by the Liquidators are admissible under s 1305 of the Act as prima facie evidence of the matters stated or recorded in them. Those documents satisfy the requirements of s 1305, namely, they are “books”; are “kept by a body corporate”; and are so kept “under a requirement of [the Corporations] Act”. Alternatively, in the case of the MYOB records, they are so admissible because they satisfy each of the criteria in s 1305 and the profit and loss statements and balance sheets are, for the purposes of s 1306, written reproductions of the matters recorded in the MYOB records. I have not reached the same conclusion in relation to the board reports. My reasons follow.

5.2.2    MYOB records

(a)    Books

183    The MYOB records are records, in electronic form, of CPS’ financial information. They clearly fall within the broad definition of “books” in s 9 of the Act, either because they comprise “any other record of information”; “financial records, however compiled, recorded or stored”; or “a document”. The profit and loss statements and balance sheets are also records of CPS’ financial information and could similarly be characterised as books under any of those heads of the definition in s 9 of the Act.

(b)    Kept by a body corporate

184    Melrose Cranes submitted that the MYOB records, among other things, were not maintained contemporaneously or completely for the period that they cover: see [173]-[174] above. In oral submissions counsel for Melrose Cranes alluded to the wider and narrower views of the meaning of “kept” for the purposes of s 1305 but did not submit that the MYOB records were not “kept” by CPS because they were not maintained or used to record or store information systematically. I understood Melrose Cranes’ submissions to be directed to the issue of whether the MYOB records were kept “under a requirement of the Act”. Before turning to consider that submission, I note for completeness that I would prefer the wider construction of the word “kept” for the reasons given by Austin J in ASIC v Rich (2005); see also Valoutin at 128-129. That is, “kept” has the wider meaning of “retained or held” and is not restricted to those documents “maintained systematically”. Consequently, because the MYOB records and the board reports were retained or held by CPS as part of its records, albeit not maintained systematically, I consider that they were relevantly kept by CPS.