FEDERAL COURT OF AUSTRALIA

Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Edenborn Pty Ltd [2020] FCA 715

ORDERS

THE COURT ORDERS THAT:

1.    The parties provide to the Court draft orders giving effect to this judgment within 14 days.

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

REASONS FOR JUDGMENT

DAVIES J:

INTRODUCTION

1    The plaintiffs are the liquidators of Gunns Limited (in liquidation) (receivers and managers appointed) (Gunns). They have alleged that Gunns made payments to the defendant (Edenborn) in the period between 16 May 2012 and 25 September 2012 that are voidable under s 588FE of the Corporations Act 2001 (Cth) (the Corporations Act) as insolvent transactions. The total amount claimed by the liquidators is $2,455,090.11, or alternatively $1,684,681.40.

2    There are seven payments in issue, which the liquidators contend comprise six transactions:

3    The liquidators concede that the payment of $220,000 on 16 May 2012 was made during a period when there was a continuing business relationship between Gunns and Edenborn for the purposes of s 588FA(3) of the Corporations Act. On the liquidators’ case (but disputed by Edenborn), that continuing business relationship came to an end after the 16 May 2012 payment and before the 29 June 2012 payment so that there are no transactions after the payment on 16 May 2012 forming part of the “single transaction” for the purposes of s 588FA(1). The liquidators claim a preferential payment of $220,000 in relation to this “single transaction”, being the difference between the point of peak indebtedness in the continuing business relationship during the period 26 March 2012 to 25 September 2012 (the relation back period) and the amount Gunns owed to Edenborn when, as claimed by the liquidators, that continuing business relationship came to an end.

4    Transactions two to five, totalling $1,930,521.76, were said by the liquidators to be individual payments made by Gunns to Edenborn at a time when there was no continuing business relationship and thus, they contended, the preferential effect of these payments is to be assessed by reference to their immediate effect upon Gunns.

5    The sixth transaction comprises two payments that the liquidators accept were made as part of a second continuing business relationship between Gunns and Edenborn, which began once Gunns had paid its liabilities to Edenborn in full (on 15 August 2012), and continued until the appointment of administrators on 25 September 2012. As the liquidators accept that the invoice of $91,060.69 issued by Edenborn to Gunns for services rendered formed part of the second continuing business relationship, the amount claimed in relation to the sixth transaction is $304,568.35.

6    In the alternative, if the Court accepts Edenborn’s case that there was no interruption to the continuous business relationship during the relation back period, the liquidators seek to impugn as the “single transaction” for the purpose of s 588FA all payments made and invoices raised between 16 May 2012 and 25 September 2012, the effect of which, it is claimed, is a preference of $1,684,681.40.

STATUTORY PROVISIONS

7    Section 588FF(1) relevantly provides that:

Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:

(a)     an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;

…

8    Section 588FE prescribes when a transaction is voidable for the purposes of s 588FF. Relevantly, s 588FE(2) provides:

The transaction is voidable if:

(a)     it is an insolvent transaction of the company; and

(b)     it was entered into, or an act was done for the purpose of giving effect to it:

(i)     during the 6 months ending on the relation-back day; or

(ii)     after that day but on or before the day when the winding up began.

9    Section 588FC prescribes when a transaction is an insolvent transaction. The section 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.

10    Section 588FA prescribes when a transaction is an unfair preference. The section relevantly 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.

ISSUES

11    In a separate hearing, the Court determined that Gunns was insolvent on and from 30 March 2012: Bryant (liquidator) v LV Dohnt & Co Pty Ltd, in the matter of Gunns Limited (in liquidation) (receivers and managers appointed) [2018] FCA 238 (the insolvency judgment). Further, it was not in dispute that Edenborn was paid the amounts in question (save that Edenborn claimed that payment 2 was paid and received on 28 June 2012), nor that Edenborn was an unsecured creditor of Gunns in respect of the payments it received. In issue in these proceedings is:

(a)    whether the payments constituted unfair preferences within the meaning of s 588FA and, if so, the quantum of that preference (the unfair preference issue);

(b)    whether there was, or remained, a “continuing business relationship” within the meaning of s 588FA(3)(a) of the Corporations Act between Gunns and Edenborn at the time that each of the payments was received by Edenborn, and (if so) whether the payments were an integral part of the relationship, such that the making of some or all of the payments is to be treated as a single transaction for the purposes of s 588FA(1) (the continuing business relationship issue);

(c)    if there was a continuing business relationship for the purposes of s 588FA(3)(a) at the time each payment was received and each payment formed part of and was integral to that relationship:

(i)    whether the Court can, or should, have regard to the “ultimate effect” of the transaction(s);

(ii)    if so, whether the ultimate effect of the transaction(s) was to confer on Edenborn an unfair preference within the meaning of s 588FA(1)

(the ultimate effect issue);

(d)    whether the “peak indebtedness rule” applies for the purposes of s 588FA(3) (the peak indebtedness issue);

(e)    whether the Court has a discretion under s 588FF to reduce the amount otherwise payable as a preference, and, if so, whether the Court’s discretion should be exercised (the discretion issue); and

(f)    whether Edenborn has established a “good faith” defence pursuant to s 588FG(2) (the good faith defence).

12    Some of these issues are common to two other preference actions brought by the liquidators against other creditors of Gunns (the Gunns preference claims) in which judgment is handed down at the same time: see Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Badenoch Integrated Logging Pty Ltd [2020] FCA 713 and Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd [2020] FCA 714.

THE GUNNS GROUP

13    The following background to Gunns is taken from the insolvency judgment in this proceeding.

14    Gunns is the parent company of the Gunns Group. The Gunns Group was organised on a divisional basis by reference to its major operating business units rather than by reference to individual legal entities or groups of entities and, as the parent company, Gunns performed various functions for the group, including providing a centralised treasury and banking system. The principle financier to the Gunns Group was a syndicate of 10 banks led by ANZ Cavell Court as syndicate agent.

15    The principle activities of the Gunns Group were:

(a)    the processing, manufacturing and selling of sawn timber products and veneers including merchandising;

(b)    forest management and development, milling, processing and export of hardwood wood chip products;

(c)    responsible entity management of various forestry and horticultural managed investment schemes; and

(d)    financing managed investment scheme investors.

16    The Gunns Group operated from various sites, namely:

(a)    sawmills in Tarpeena, South Australia and Bell Bay, Tasmania;

(b)    a wood chip export facility at the Port of Portland, Victoria (sold in August 2012);

(c)    hardwood plantations (owned) located in the south east of South Australia;

(d)    plantations (owned and managed under managed investment schemes) in Tasmania;

(e)    plantations owned by investors under various managed investment schemes located in several states of Australia;

(f)    softwood plantations in the area known as the “green triangle” (Auspine softwood plantations) located in the south east of South Australia and Victoria; and

(g)    vineyards and wineries located in Tasmania.

17    During 2010 and 2011 the trading performance of the Gunns Group was impacted by several external factors and the Gunns Group suffered significant declines in revenue. From mid-2011 onwards there were ongoing delays in the payment of creditors and in September 2011, Gunns identified that it was unlikely to repay its finance debt which was repayable by 31 January 2012 and would require an extension of the repayment date. On 31 January 2012 the term was extended to 31 December 2012. Despite steps taken by the Gunns Group to reduce its finance debt the Gunns Group remained reliant on the lenders to fund its working capital requirements. A capital raising announced in early February 2012 did not proceed and alternative equity raising options did not eventuate. On 25 September 2012, the liquidators were appointed as joint and several administrators of Gunns and its subsidiaries by resolution of the directors of Gunns pursuant to s 436A of the Corporations Act. On 5 March 2013, at a meeting of the creditors of Gunns, the creditors of Gunns resolved that Gunns be wound up pursuant to s 439C of the Corporations Act and that the liquidators be appointed joint and several liquidators of Gunns in the winding up. As at 25 September 2012, the creditors of the Gunns Group totalled $780,798,000, which included unsecured trade creditors of $61,820,000 and other unsecured creditors of $73,016,000.

EDENBORN

18    Edenborn carries on business as a harvester, wood-chipper and haulage contactor. It commenced operations in the late 1990s, initially planting trees on a contractual basis on behalf of various entities which promoted and conducted managed investment schemes based on tree planting, growing and harvesting for the eventual creation, sale and exporting of wood chips. Amongst others, Edenborn did work for Great Southern Limited, the scheme manager of a number of managed investment schemes in the Great Southern region of Western Australia.

19    In 2009 Great Southern Limited went into administration and in early 2010 Gunns acquired Great Southern Limited’s tree assets. At the time, Edenborn had two contracts on foot with Great Southern Limited – a Woodchip Processing and Haulage agreement and a Log Harvesting and Processing agreement (the contracts) – and, in May 2010, Great Southern Limited novated those contracts to Gunns. Shortly after that, Edenborn began working for Gunns on the former Great Southern Limited tree assets, conducting harvesting, chipping and haulage, substantially on the same terms as it had previously done for Great Southern Limited.

20    During the relation back period the following payments were made and invoices raised for the services Edenborn provided to Gunns:

Total payments: $3,772,906.15

Total invoices: ($2,855,934.81)

Credit note: ($4,573.99)

WITNESSES

21    Evidence was given on behalf of the liquidators in this case by Craig Crosbie, one of the liquidators of the Gunns Group, and Bryan Hayes, the general manager of the Forest Products Division of Gunns from June 2010 until 4 September 2014. Only Mr Crosbie was subject to cross-examination.

22    The defendant adduced evidence from Peter “Murray” Howson, the sole director and company secretary of Edenborn, Craig Fildes, who was employed by Edenborn in the role of operations manager between 2005 until July 2016, and from Steven Butt, who was employed as an accountant by Gunns between 2001 and 2012. All three witnesses were subject to cross-examination.

23    Both parties also adduced expert evidence directed at the question as to whether the “ultimate effect” of the payments that formed part of the continuous business relationship was to give Edenborn a preference or preferences. The parties’ experts prepared a joint report and gave concurrent evidence, during which each expert was subject to cross-examination.

EVIDENCE OBJECTIONS

24    The liquidators’ tender bundle included a number of internal Gunns’ emails which they sought to tender on the basis they are business records containing representations to which the hearsay rule does not apply by virtue of s 69 of the Evidence Act 1995 (Cth) (Evidence Act).

25    Section 69 of the Evidence Act relevantly provides:

(1)     This section applies to a document that:

(a)     either:

(i)     is or forms part of the records belonging to or kept by a person, body or organisation in the course of, or for the purposes of, a business; or

   (ii)     at any time was or formed part of such a record; and

(b)     contains a previous representation made or recorded in the document in the course of, or for the purposes of, the business.

(2)     The hearsay rule does not apply to the document (so far as it contains the representation) if the representation was made:

(a)     by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact; or

(b)     on the basis of information directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact.

…

(5)     For the purposes of this section, a person is taken to have had personal knowledge of a fact if the person's knowledge of the fact was or might reasonably be supposed to have been based on what the person saw, heard or otherwise perceived (other than a previous representation made by a person about the fact).

26    Edenborn accepted that the emails are business records but contended that s 69(2) of the Evidence Act was not satisfied. The ground of the objection was the same with respect to each document. C172 was put forward as an example. C172 is an email from Peter Merry, Gunns’ regional manager in Western Australia at the time, to Mr Hayes sent on 17 June 2012. The subject matter of the email was “WA Region update”. Mr Merry wrote:

..

Contractor payment situation – WA region

General points:-

As expected the situation here with contactors (particularly ATS and Edenborn) is becoming increasingly desperate.

Gunns met with ATS & Edenborn on Friday am to establish their ‘here and now’ expectations / preparedness / ability to resume providing services to Gunns.

Contractors are desperate for Gunns to process a progressive payment to assist with easing their cash flow issues, & re-commencement of the WA harvesting programme.

I have advised all contractors that it is predicted the earliest return to work date has been pushed back to 2/7/2012.

Contractors recognise they have to work with Gunns to ensure their outstanding liabilities are cancelled in time. Both ATS, SRT & Edenborn have indicated they remain supportive of maintaining a business relationship & want to work with Gunns.

…

Edenborn

Current liability -$1,930,000

They advised if Elders Forestry had not recommenced harvesting they would have been forced to cease trading, and are of the view they have not been given any assistance by Gunns since last payment date (15/5).

Cash flow is critical, compounded by 0.8% interest / month on outstanding payments, business is liable for GST on YTD RCTI’s [sic], & standard end of financial year tax liabilities.

To recommence operations Edenborn have indicated they would    a) require a significant payment (not prepared to put a $ figure on the table), and b) have advised they will issue a letter of demand to ensure there is an alignment between contract & actual trading terms going forwards (used the analogy of not prepared to keep offering Gunns an unsecured bank loan equivalent).

Murray is frustrated with you not returning several calls recently, recognises Gunns local support – can you please call him when you have an opportunity?

27    It was submitted for Edenborn that the statement “Gunns met with … Edenborn on Friday” did not say who from Gunns met representatives of Edenborn, and with whom from Edenborn they met, nor was it apparent from the email – or any other evidence – that Mr Merry was personally present. Thus, it was said, the liquidators had not established that Mr Merry was a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact. It was also submitted that the comment “contractors are desperate” and the passage under the heading “Edenborn” were not evidence in admissible form of what the representative of Edenborn allegedly said.

28    The objection was not well-founded. First, the evidence showed that Mr Merry at the time was Gunns’ regional manager in Western Australia and, as noted above, Mr Hayes at the time was Gunns’ general manager of the Forest Products Division. The subject of the email was “WA Region Update”. It is reasonable to infer from his position within Gunns and from the fact that he was reporting to the general manager of forest products at Gunns that Mr Merry either himself had personal knowledge of the matters referred to in that email or was conveying information that was directly or indirectly supplied to him by persons within Gunns who had or might reasonably be supposed to have had personal knowledge of those matters. Secondly, if s 69 applies to the email, the effect of the section is that the hearsay rule “does not apply to the document (so far as it contains the representation)…”. That is to say, the email stands as evidence of the representation that was made

29    There is no merit in the s 69(2) point in relation to the following emails to which Edenborn also objected:

(a)    C174 is another email from Mr Merry to Mr Hayes;

(b)    C203 is an email from Adam Crook to Mr Hayes, copied to Mr Butt. Mr Crook was the harvest and processing manager at Gunns at the time. As noted above, Mr Butt was employed by Gunns as an accountant;

(c)    C205 is an email from Mr Butt to Mr Hayes;

(d)    C205A is an email from Mr Hayes to Mr Butt;

(e)    C210 is an email from Mr Crook to Mr Butt;

(f)    C262 is an email from Mr Merry to Mr Hayes, copied to Mr Crook;

(g)    C263 is an email from Mr Hayes to Mr Merry, copied to Mr Butt;

(h)    C267 is an email from Mr Butt to Mr Merry, copied to Mr Hayes.

30    In view of the positions that each of these persons held within Gunns, it might reasonably be supposed that they either had personal knowledge of the matters recorded in the emails or that such information was directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of such matters.

31    C89 and C228 do not require consideration as C89 was in any event an exhibit to Mr Howson’s first affidavit and put into evidence by Edenborn, and C228 is an article, not an internal Gunns email, and appears to have been wrongly included in Edenborn’s list of objections.

32    Edenborn also relied on s 135(a) of the Evidence Act, submitting that the Court should refuse to admit the emails into evidence on the basis that their probative value was substantially outweighed by the danger that the evidence might be unfairly prejudicial to Edenborn. The basis of this objection was that the authors of those emails were not called to give evidence and there was no opportunity to cross-examine them. Moreover, it was submitted:

(a)    the documents were not third party documents but are business records of the company of which the plaintiffs are the liquidators;

(b)    the authors of the documents were not third parties but are employees of Gunns;

(c)    there was no evidence before the Court establishing any, let alone any satisfactory, reason as to why the authors of the emails were not called to give evidence in the usual way;

(d)    the documents were not of peripheral relevance but were relied on by the liquidators as central to the issue of good faith;

(e)    the documents were tendered for the sole purpose of seeking to invite the Court to accept what is recorded there as factually correct in preference to the evidence given by witnesses called for Edenborn; and

(f)    the statements in the emails are summaries only and evidence in that form would not have been permitted if sought to be given orally.

33    It was submitted that to allow the liquidators to rely on the documents would be inconsistent with the rationale of Jones v Dunkel [1959] HCA 8; 101 CLR 298.

34    In response, the liquidators argued that despite the amended tender list being served on Edenborn on 18 January 2019, which included the emails in question save for C205A:

(a)    no request was made by Edenborn pursuant to s 167 of the Evidence Act for the liquidators to call the authors of those emails, such request being required to be made within 21 days of receipt of the notification that the evidence would be sought to be relied on: s 168(1);

(b)    no objection to the tender of the emails was raised until the Friday before the trial commenced, almost three months after the amended tender list was served, and the grounds of objection relied on, even then, did not include the claim that Edenborn would be unfairly prejudiced by the failure of the liquidators to call the authors of the emails. The grounds then relied on were that:

These documents are all internal Gunns’ emails. Unless they were read by someone within Edenborn (and then depending upon whom) they are irrelevant. Also, insofar as the same are sought to be tendered to establish the truth of their contents, objection is taken on the basis of hearsay;

and

(c)    Edenborn first raised s 135 of the Evidence Act as a ground of objection at the hearing, by which time it was too late to call the authors as witnesses.

35    The liquidators additionally argued that the admission of the emails would not be unfairly prejudicial to Edenborn, submitting that:

(a)    more than six years had passed since the emails were created and it is unlikely that the recollection of the authors of the emails would be extensive or of much assistance to the Court;

(b)    the representations sought to be tested were representations attributed to Edenborn;

(c)    there was no unfair prejudice in not having an opportunity to cross-examine the authors of the emails in relation to statements attributed to Edenborn and of which the authors of the emails were not the makers; and

(d)    both Mr Howson and Mr Fildes were subject to cross-examination on the material.

36    Both parties referred to Roach & Ors v Page & Ors (No. 11) [2003] NSWSC 907 for a helpful summary of the considerations relevant to the exercise of discretion under s 135 of the Evidence Act where the opposing party is unable to cross-examine. Justice Sperling stated at [74]:

Considerations relevant to “unfair prejudice”

Having regard to the terms and context of ss 135, 136 and 137 and the case law to which I have referred, I set out my view of considerations relevant to “unfair prejudice” as follows.

(a)     To say that any prejudice must be unfair prejudice is to state the obvious.

(b)     The phrase “unfair prejudice” is not defined. The legislature imposed no restriction on the criteria for unfairness.

(c)    The exceptions to the hearsay rule evince a legislative intention to allow evidence notwithstanding its hearsay character. But ss 135, 136 and 137 evince a legislative intention to allow any evidence, otherwise admissible, to be rejected or its use to be limited if the conditions specified in those sections are met;

(d)     Where hearsay evidence is made admissible by an exception to the hearsay rule it would be wrong to exclude it or to limit its use merely because it is hearsay and therefore of inherently less reliable quality. That would be to frustrate the intention of the legislature in making hearsay evidence admissible where it is covered by an exception to the hearsay rule. But that is not the same as saying that there is scope for the application of ss 135, 136 and 137 in relation to hearsay evidence which is covered by such a statutory exception but where there is some additional factor, for example, where the maker of the representation is not to be called.

(e)     Inability to test the truth of the representation is a legitimate ground for rejecting or limiting the use of evidence which is covered by an exception to the hearsay rule. Thus, whether the maker of the representation will be called as a witness is a relevant consideration.

(f)     However, where hearsay evidence is admissible under an exception to the hearsay rule because of the unavailability of the maker of the representation, there is a special reason for not disallowing the evidence or limiting its use on the ground that the evidence cannot be tested by cross-examination. That is because the legislature has made the evidence admissible notwithstanding that consideration.

(g)     Conversely, where the maker of the representation is available or is not shown to be unavailable and the party tendering the evidence does not call the person, that is a legitimate consideration in favour of a finding of unfair prejudice.

…

As the authorities show, the inability of the opposing party to cross-examine the maker of a statement because of the unavailability of that person as a witness may constitute a legitimate ground for the exclusion of evidence under s 135 of the Evidence Act, but the mere fact that the maker of the statement is not available for cross-examination may not be reason enough in itself. In each case, the issue for the Court is whether the probative value of the evidence is substantially outweighed by the danger that the evidence might be unfairly prejudicial to the opposing party.

37    I am not persuaded that the emails should be excluded from evidence because the authors of the emails have not been called. First, any prejudice arises from the failure of Edenborn to put the liquidators on notice at a much earlier point in time than at the hearing of its intention to rely on s 135 of the Evidence Act on the basis that the authors of the emails had not been called to give evidence. Edenborn claimed that it approached the trial on the basis that Mr Hayes, who was one of the authors, was going to give evidence as he had sworn an affidavit, but it was only the Thursday before the trial that Edenborn was informed that he would not be called. However, of the emails in issue, only C263 was sent by Mr Hayes. The content of the portion of that email chain on which the liquidators sought to rely concerns an initial payment plan for Edenborn (and other contractors), followed the next day by a revised payment plan said to be “due to the 7 day delay in loading the Portland vessel”, as a result of which “[Gunns] have had to split and spread payments to match cash inflows”. It is not apparent on the face of that email chain how it could be said that the inability of Edenborn to cross-examine Mr Hayes makes the admission of that email unfairly prejudicial, nor was one suggested. Secondly, the evidence was to the effect the persons at Edenborn who dealt with Gunns were Mr Howson and Mr Fildes, and both of them gave evidence and were cross-examined on their dealings with Gunns, including on C172, C174, C205A (which includes the entire content of C205), C210 and C262. Thirdly, the reliability of the evidence sought to be relied on by the admission of the emails in question, including C203, C263 and C267, can be rationally assessed in the context of the evidence considered as a whole, notwithstanding the absence of cross-examination of the authors of the emails. Accordingly, I also reject the s 135 application.

38    Edenborn also objected to the admission of media articles not seen by Mr Howson or Mr Fildes on the ground of relevance but the real issue is the weight to be afforded to such articles, not admissibility.

FACTS AND EVIDENCE

39    Edenborn harvested and chipped bluegums for Gunns in the South Western region of Western Australia, which it then hauled to the Port of Albany for shipping. Edenborn was paid fees calculated by multiplying the agreed harvesting, processing and haulage rates applicable to each plantation (or part of plantation) by the quantity of timber or woodchips in green metric tonnes (GMT) for its services. Gunns prepared and issued recipient created tax invoices approximately fortnightly to Edenborn payable under the terms of each novated contract on the 15th day and final day of each month. The evidence showed that from the outset, Gunns was tardy in paying Edenborn for its services and, on many occasions, Gunns did not just pay late, it also did not pay the full invoiced amount. Moreover, from at least January 2012 Gunns was making rounded sum payments to Edenborn that did not correspond with the outstanding invoices that were due.

40    In September 2011, at Gunns’ request, Edenborn agreed to monthly payment terms on the condition that there be a maximum debt limit of $1.2 million. It is unclear on the evidence whether the agreement was put into effect, as although Mr Howson’s evidence was that payment terms changed to monthly, Gunns continued to issue recipient created tax invoices on a fortnightly basis that expressly stipulated that payment was due on either the 15th or final day of the month.

41    Mr Howson’s evidence was that Gunns “mostly stayed within the 30 day terms and the $1.2m agreed debt limit”, but that evidence was not accurate. By the end of September 2011, Edenborn was owed just over $1.3 million. In his examination conducted under Pt 5.9, Div 1 of the Corporations Act on 15 September 2015 (liquidator’s examination), Mr Howson acknowledged that he was concerned at the time by the size of the amount owing and Mr Fildes “was having to keep a pretty weather eye on the extent to which Gunns were or were not making payments”. The evidence also showed Edenborn chasing Gunns for payment from October 2011 onwards, with Gunns promising payment but payments often being received later than promised and usually only in part payment of the invoiced amounts. Mr Fildes’ evidence was that he was “regularly chasing up payments from Gunns, because it was a habitual late payer”.

42    On 25 November 2011, The Age newspaper published an article under the heading “Gunns directors under fire” stating that “[s]hareholders in loss-making forestry group Gunns have used the company’s annual meeting to question whether the company can pay its bills, asking whether it has a back-up plan should it fail in its bid to build a controversial $2.3 billion pulp mill”. The article further reported that a major shareholder had asked if the company would “be insolvent if the pulp mill did not go ahead”.

43    On 22 December 2011, Gunns announced to the Australian Securities Exchange (ASX) that it had revised its market guidance for the year ended 30 June 2012, with underlying earnings before interest and tax for the year expected to be approximately $30 million.

44    As at 31 December 2011, the debt owed to Edenborn was around $1.7 million, with no payments made at all in December 201l, though a payment of $640,828.12 had been due on 15 December 2011.

45    On 4 January 2012, Brent Donaldson, the regional manager for Gunns in Western Australia, sent an email to Mr Howson, copied to Mr Fildes, Mr Hayes and Mr Merry, advising him that Edenborn would receive $200,000 that day, but additional payments would not be possible until early to mid-week the following week, when additional funds were due to arrive. He also advised that he would shortly be sending an email to all contractors stating that payments would not occur until the following week, but Mr Howson could disregard that email “as obviously you will be receiving some funds today”. Mr Howson was unable to explain why Edenborn was receiving a payment when other contractors were not, but it is reasonable to infer that it was because Edenborn had been pressing Gunns for payment. In an email sent on 3 January 2012, Mr Donaldson had informed Gunns’ Forest Product Division Group Financial Controller that “we have some relatively urgent payments to make”, noting that Edenborn had “pretty well reached its maximum liability allowed by its financiers, and so are not expected to recommence working until paid”.

46    Also on 4 January 2012, Mr Donaldson sent a group email to Gunns’ contractors in the Great Southern region advising them that:

.. there are some over-due payments to contractors to be made, and so have made enquiries as to the status of the said payments.

I have been advised that, possibly due to the time of the year, some funding scheduled to the company in mid-late December was delayed; in addition a [sic] anticipated asset sale has not yet proceeded as planned, and that other creditor payments had been made in anticipation.

This has unfortunately resulted in a short term cash flow constraint situation.

It is now expected that payments will recommence from early next week.

Mr Howson accepted during cross-examination that he “probably” read that email. He also acknowledged in his liquidator’s examination that he was aware at this time that “there were things happening to [Gunns’] cash flow that meant [Gunns] couldn’t make full payments”. Mr Howson also said during his liquidator’s examination that he understood at this time that Gunns’ other contractors were “being paid in similar ways” – with the exception of one company he believed “had different contractual arrangements that were getting some priority in payment” – and he believed Gunns’ late payment to contractors was “an Australia-wide” problem. He also stated that he was aware that payments were dependant on asset sales and that the bank, as a secured creditor, would get “first bite of the cherry” from asset sales. Mr Fildes’ evidence was that he could not recall whether or when he read Mr Donaldson’s email of 4 January 2012 but there is no reason to doubt that he did read that email either at or around the time it was sent, or by the latest in January 2012 when he returned to work after the Christmas break. Further, Mr Fildes admitted to hearing rumours that other creditors of Gunns in the Great Southern region were not being paid on time.

47    As promised, Edenborn received $200,000 from Gunns on 4 January 2012. On 9 January 2012, in an email chain between Mr Donaldson and Mr Fildes with the subject line “Payment”, Mr Donaldson advised Mr Fildes that:

… From what I can tell, you may not get all the monies owing this week, but part payments are likely to continue…

You will need to get Murray Howson to talk to me if the intention of Edenborn is to halt all or part of your activities in Gunns’ managed forests tomorrow…

I reiterate that while the company is in a tight cash flow situation at the present time, based on forecast in-flows over the next few weeks and months, it is of narrow duration…

48    Mr Fildes responded by email that day as follows:

It was Edenborn’s intention to stop production if the two payments due were not made early this week, which was the last indication in your email last week. [Mr Howson] is away on holidays for 6 weeks so all decisions for the next 6 weeks will have to come from me, but [Mr Howson] did have this discussion with me on Friday before he left.

Gunn’s [sic] has been in a tight cash flow position for quite some time now and with so much negative press at the moment and the share price sitting on 10.5 cents giving Gunns and [sic] market cap of only $89,000,000 we are feeling quite vulnerable. We have one major supplier who is seriously looking at cutting our credit limit until Gunn’s [sic] gets past the 31st January loan refinance commitment. This is not a good position to be in as it could impact our other harvesting activities.

There are two outstanding invoices totalling $1,289,136 of which $200,000 has been paid leaving a balance of $1,089,136. We have another invoice due very early next week for $447,429. With last week’s activities the total amount is getting too high to ignore.

As there are so many of your crucial people away today I will leave my final decision until tomorrow, but if a substantial payment cannot be made by Wednesday night I will have to stand all systems down until we are up to date with all payments.

I feel Edenborn has been very reasonable up to now with slow payments from Gunns, but there are serious ramifications for this company if we continue to expose ourselves without payment.

49    Mr Fildes agreed in cross-examination that he was aware at the time there were negative media articles about Gunns’ financial position and also agreed he “probably” held the view at the time that Gunns had been in a tight cash flow position for quite some time. When asked about the sentence “we are feeling quite vulnerable”, Mr Fildes’ answer was that he could not recall whether it was a true statement. His evidence also was that he did not discuss the email with Mr Howson before he sent it, contrary to the representation made in the email, and that his threat to stand down all systems was a “bluff” as he did not have the authority to carry it out.

50    When Mr Howson was asked in his liquidator’s examination about whether he had a discussion with Mr Fildes as referred to in the email, his answer was that the discussion “certainly took place” although he was not sure of the context of those discussions. He then contradicted that evidence in this proceeding by asserting that he did not have such a discussion with Mr Fildes. He also gave evidence that it was not his view that Edenborn was “feeling quite vulnerable” because of the debt owed to it by Gunns, and that he did not give instructions to Mr Fildes that systems were to be stood down if a substantial payment was not made.

51    I do not accept the evidence of Mr Howson or Mr Fildes that Mr Fildes sent the email without discussing it with Mr Howson first or Mr Fildes’ evidence that the threat to stand down all systems was a “bluff”. I find their answers in cross-examination self-serving and not plausible. First, Mr Howson and Mr Fildes both gave evidence that Mr Fildes would consult Mr Howson on “significant” matters. Mr Howson deposed in his affidavit that he was overseas in January 2012 and in his absence Mr Fildes had day-to-day control of Edenborn “but always subject to conferral with [Mr Howson] as regards significant decisions”. Similarly, Mr Fildes’ affidavit evidence was that Mr Howson contacted him every day whilst he was away from the office on holiday wanting to know what was going on with the business and he would discuss with Mr Howson “[a]ny abnormal or important decisions” that he needed to make. Given Mr Fildes’ evidence that he could not make the decision to withdraw Edenborn’s services to Gunns, it is not plausible that Mr Fildes would send an email threatening withdrawal, even as a bluff, without first consulting with Mr Howson before sending the email. Tellingly, Mr Fildes was also in email communication with Mr Howson at the time. On 10 January 2012, Mr Donaldson sent an email to Mr Fildes advising that Gunns was unlikely to give a “concise date for full payment” until the Friday – being three days later – and it was Mr Donaldson’s “gut feeling” that there would be some “drip feed payments made”, but that Edenborn would not be fully paid up to date until closer to the end of the month. Mr Fildes forwarded that email to Mr Howson promptly after receipt. Given the regularity of Mr Fildes’ contact with Mr Howson, I find it improbable that Mr Fildes was making threats to Gunns without instructions or the authorisation of Mr Howson.

52    Secondly, Mr Donaldson clearly did not regard the email as a bluff. On 9 January 2012, Mr Donaldson forwarded the email chain of 9 January 2012 to Mr Butt explaining that “we will have significant difficulties meeting our forward orders if there are crew shut-downs. As you are aware, Edenborn has been burnt twice before and so they are serious about minimising their exposure; it is pretty much a directive from their financiers”. In response to the 9 January 2012 email from Mr Fildes, Mr Donaldson, by email sent the same day, asked Mr Fildes to get Mr Howson to advise Mr Donaldson that all decision-making was in Mr Fildes’ hands. Mr Donaldson also wrote that he was hopeful that a payment would be made prior to Wednesday night (ie within two days) and he should get confirmation of this the following morning. More particularly, Mr Fildes’ assertion that he sent the email as a bluff is contradicted by an email of 11 January 2012 between Mr Donaldson and other Gunns’ employees, where Mr Donaldson noted that:

Edenborn had already ceased one of three systems; one is being suspended tomorrow; they are likely to suspend the remaining one by Friday -

and by an email from Mr Merry (who replaced Mr Donaldson as the Gunns’ Western Australian regional manager) to Mr Hayes on 23 January 2012 in which he stated that:

Production in the past fortnight has been negatively impacted by Gunns cashflow crisis – Edenborn & ATS parked up operations for approx. 1.5 weeks & actively sought short term work opportunities with other plantation management companies.

These emails are probative evidence that the threat of suspension was not merely a bluff but was actually carried out. It may also reasonably be inferred it was carried out with Mr Howson’s authority as there is nothing to suggest that Mr Fildes did not have Mr Howson’s authority.

53    I also do not accept Mr Howson’s evidence that he was not concerned about the non-payment of the invoices. First, there is no reason to doubt the accuracy of the advice given by Mr Merry to Mr Hayes on 23 January 2012 by email that Edenborn had “parked up operations for approx. 1.5 weeks & actively sought short term work opportunities with other plantation management companies”. Secondly, in an email that Mr Howson sent to Mr Fildes on 16 January 2012, Mr Howson advised they “need[ed] a firm commitment of payment” of $750,000 by lunch time Friday (ie four days later). Thirdly, it appears that Edenborn threatened to shut down its harvesting and haulage services to Gunns if it did not receive further payments. On 27 January 2012, Mr Merry sent an email to Mr Hayes and Mr Butt with the subject line “[Gunns] Payment Priorities 30-31/1/2012” advising that he had spoken to contractors to form an understanding of their position. Mr Merry reported with respect to Edenborn that:

nil payment & approx. $1.02 M outstanding on 29/1 is likely to result in Edenborn shutting down it’s [sic] infield chipping /haulage operation for [Gunns] effective from 31/1, it is imperitave [sic] [Gunns] retains Edenborn in the system producing between now & 15/2 due to their production capacity, $ indicated should be sufficient to ensure Edenborn continues its operation from 31/1 to 4/1 inclusive.

54    On 30 January 2012, Mr Fildes sent an email to Mr Howson extracting a media statement from Gunns. The media statement stated:

EXTENSION OF FINANCING FACILITIES

Gunns Limited confirms that the terms for an extension to 31 December 2012 of its syndicated debt facility (currently $340m) and primary working capital facilities, have been agreed with its primary banking syndicate… The facility balance is expected to be progressively reduced in the course of the 2012 year, as the company completes asset sale processes in progress and finalises the Bell Bay pulp mill project investment. The finance facility extension provides the certainty necessary for the continued implementation of the Company’s business strategy as outlined at the recent Annual General Meeting.

55    Mr Howson and Mr Fildes each recalled learning in late January 2012 that Gunns had received an extension to its debt facility in the order of $340 million to 31 December 2012. Mr Howson agreed in cross-examination that he understood that, despite the extension, it was likely that the banks would be entitled to call in that debt at some earlier date if certain criteria were not met. During cross-examination, Mr Howson also admitted that he understood in 2012 that Gunns’ financiers had required Gunns to sell down its assets in order to reduce its debt to the banks. He also agreed that he understood that the finalisation of the development of the Bell Bay pulp mill (pulp mill development) by Gunns was an important part of its financial arrangements.

56    On 31 January 2012, Mr Fildes sent an email to Mr Merry, copying Mr Howson, in relation to Edenborn adding another “system” (ie, harvesting and chipping machine) on 7 February “as requested”:

Given that we originally requested full payment of current invoices before this system was being made available…I believe, Edenborn is really going above and beyond what is normally expected.

The email enclosed a proposed payment plan for payment of outstanding debt as follows:

Friday 3rd payment of $150,000

Monday 6th payment of $450,000

Friday 10th payment of $500,000

Further payments to be advised ASAP

57    Also on 31 January 2012, Mr Butt sent a letter to Mr Howson formally advising of a payment schedule for progressive payments of the current outstanding debt as follows:

Payment Date             Amount         Confirmation Status

3/02/2012                  $150,000.00           confirmed

6/02/2012                  $450,000.00           confirmed

10/02/2012                $501,200.00

58    The letter stated that Gunns would endeavour to make the last payment by the nominated date and that Gunns’ ability to process further payments would be advised over the course of the following week. The payment schedule was substantially met. However, the pattern of partial and late payment continued in relation to new invoices that issued, with Edenborn regularly inquiring when payment would be received and for how much.

59    It appears that a meeting between Mr Howson and Gunns was arranged for early February 2012. On 2 February 2012, Mr Fildes sent an email to Mr Howson (who was still away) stating that:

Few thoughts for your meeting on Monday –

I went into Gunns yesterday and sat down with Pete Merry to understand when other payments would be forth coming [sic]. I think you will need to do the same when you get back, but it was very clear “to me” that we will probably be in this situation for the best part of the year, if they [Gunns] survive that long. All their spare money is going into the earth works for the pulp mill and an example that was given yesterday was the Cassandra just left Albany with 54,000 tonnes and that payment is due into their bank on Monday. That should cover our harvesting & haulage, but the most part of this is going to cover the earth works for the pulp mill. Because they are still trying to lure a joint party to make the pulp mill successful they have to pump a lot of money into the mill to make it look attractive. If a joint party does not come along soon they will run out of money. They are basically using our money.

The reason why I am mentioning this as I now think it dangerous to put in additional systems with Gunns on a long term basis and perhaps parking the machines up and going for a makeup payment is much safer …

Probably change my mind again in few days, but that’s today’s thoughts.

60    During his liquidator’s examination, Mr Howson could not recall whether the meeting had taken place. He indicated that it could not have been a “physical” meeting because he was out of the country, but acknowledged that a meeting by telephone may have taken place. Mr Fildes agreed in cross-examination that he had no reason to doubt that what he said in his email of 2 February 2012 was an accurate representation of his views at the time he sent it. The common evidence of Mr Fildes and Mr Howson was that Mr Howson did not agree with the views expressed by Mr Fildes.

61    On 6 February 2012, the ASX announced that, at the request of Gunns, pending the release of an announcement by Gunns, Gunns shares were to be placed in a trading halt until 8 February 2012 or until the announcement was made.

62    On 7 February 2012, The Sydney Morning Herald newspaper published an article under the heading “Gunns bid for more capital” stating that at the end of 2011, Gunns had forecast an overall profit downgrade of $10 million to $20 million up to 30 June 2012 and was “trading at historic lows” on the ASX. The article further quoted an industry analyst as stating “there was no indication that a joint-venture announcement for the pulp mill was near”.

63    On 8 February 2012, Gunns announced that it had signed a term sheet with Richard Chandler Capital Corporation Pte Limited (Richard Chandler Corporation) to facilitate an equity investment of $150 million in the Gunns Group. The announcement noted that the terms were non-binding and were subject to approvals from the ASX, Gunns shareholders and lenders within a 90 day exclusivity period, as well as due diligence and Foreign Investment Review Board approval.

64    On 29 February 2012, Mr Merry provided an update to Mr Hayes by email of the responses from contractor parties with whom he had had discussions. He reported in relation to Edenborn that it was “very concerned re: their current exposures as they ramped up to producing 34,000 GMT for the month (equivalent to 400K p.a.), and feel particularly vulnerable”. Mr Merry also reported that Mr Howson could not provide an answer “re: how they are able to proceed” and that Mr Howson had “indicated they do want to continue to work with Gunns however the recurrence of payment issues presented as a real impediment to moving forwards”.

65    It was recorded in an email chain between Mr Merry, Mr Fildes and Mr Howson (among others) that Mr Fildes had a meeting with Mr Merry on 1 March 2012. Mr Fildes appears to have been told there would be no further payments until 16 March 2012 and Mr Fildes requested a “firm payment schedule to rectify the current outstanding payment situation”. In cross-examination Mr Fildes claimed to have no recollection of the meeting taking place. Despite Mr Fildes’ apparent lack of recollection, there is no reason to doubt the accuracy of what was recorded in the email chain.

66    Mr Merry informed Mr Hayes in an internal Gunns email on 1 March 2012 that “[w]hat the contractors are searching for is certainty in payment dates to make the smartest decision to protect their respective businesses. To date the 16/3 has been offered to them as an unconfirmed/possible resumption of creditor payment. They are concerned that this date will come & go with nil payment”. The email noted that Edenborn was offering a lower production capacity until payment was received.

67    On 2 March 2012 in an email from Mr Fildes to Mr Merry, copied to Mr Howson and others, Mr Fildes stated:

The last 2 months have seen Edenborn commit 80% of our resources to Gunns to ensure you meet your shipping schedule. Given that Gunns have stated that there will be no further payments until the 16th of March, we now find ourselves in a very awkward situation with both outstanding payments and our cash flow position. By the 16th of March Edenborn will be owed just over 1.7 million and will have just under 2.3 million outstanding for all work completed…

I would ask that a single payment of $280,000 be made next week to keep out [sic] total outstanding debt to less than 2 million.

Can you also provide in writing a clarification of when all our outstanding invoices will paid? [sic]

68    At that time there were two overdue amounts of approximately $140,000 and $800,000 and a further amount of approximately $758,000 which would become due on 15 March 2012. Mr Merry did not respond to the request for an immediate payment of $280,000 and it was not paid.

69    On 5 March 2012, Mr Merry informed Mr Fildes and Mr Howson, and others, by email that he did not have a “firm payment schedule received from Corporate to pass on today – indication is possibly re-forecasting exercise this Wednesday may enable a schedule to be drawn up & passed on”.

70    On 9 March 2012, Gunns announced that the proposed equity investment of $150 million into the company by Richard Chandler Corporation was not proceeding and a further trading halt was placed on Gunns shares. Mr Howson said in cross-examination he had been aware of Richard Chandler’s offer and knew around March/April of the withdrawal. Both Mr Howson and Mr Fildes agreed in cross-examination that they were aware that Gunns had put its shares in a trading halt. Mr Fildes admitted that he was aware of this in mid-March 2012, however Mr Howson could not recall when he first learned of the trading halt. As it turned out, the trading halt was never lifted.

71    Also on 9 March 2012, The Sydney Morning Herald newspaper published an article under the heading “Gunns blames Greens for billionaire blow” reporting that Richard Chandler had withdrawn from a proposed equity investment of $150 million into the company. The article stated that Gunns had “staked its future on the value-adding pulp mill project” and quoted Greg L’Estrange, chief executive of Gunns, as stating “if the project doesn’t go ahead I’m not sure where the company will end up”. The article also stated that “[Gunns] shares have lost more than 70 per cent of their value [between March 2011 and March 2012], as investors fret over the future of the company”. During cross-examination, Mr Fildes denied ever having read this article and there was no indication in the evidence that Mr Howson or Mr Fildes read it.

72    By mid-March 2012, Edenborn was owed just over $2 million and in his liquidator’s examination, Mr Howson agreed that Edenborn’s cash flow by March 2012 would have been a “major concern” as a result of Gunns’ non-payment of invoices.

73    On 13 March 2012, Gunns again requested that the ASX suspend trading in its shares and noted the withdrawal of Richard Chandler Corporation from its proposed equity investment in the Gunns Group.

74    On the same day, The Sydney Morning Herald newspaper published an article under the heading “Gunns suspended from ASX quotation” stating that Gunns had suspended trading on the ASX in order to negotiate a capital raising. The article noted Richard Chandler Corporation’s decision not to proceed with an investment in Gunns and that its negotiation of a capital raising “will be material to the company’s financial position and strategy”.

75    On 14 March 2012, The Mercury newspaper published an article under the heading “Gunns reloads cash bid Shares suspended again as company plans new capital raising”, stating that Gunns shares were suspended on the ASX, following the withdrawal of the Richard Chandler Corporation, while it tried to attract a potential new investor. The article noted that “Gunns, which has a $580 million debt burden, urgently needs new equity to give it any chance of advancing the $2.3 billion Bell Bay pulp mill project”. The article also stated that “[b]efore the Chandler announcement, Gunns was aiming to raise $132 million … [i]t is now believed to be seeking more than $200 million in a pro-rate entitlements issue”.

76    On 19 March 2012, Gunns announced to the ASX that it was unable to provide a definitive timeframe for the finalisation of its equity offer and that it expected the trading halt to extend for at least five business days

77    Also on 19 March 2012, Mr Fildes sent an email to Mr Merry, copying in Mr Howson and others, stating that Edenborn had decreased production levels for the purposes of “maintaining debt levels below what we believe is reasonable in the current climate” and that production levels would only be increased again upon “further confirmation of further payments”. Mr Howson was aware that Mr Fildes sent this email.

78    In an email from Mr Merry to Mr Butt on 23 March 2012, Mr Merry advised that Edenborn had agreed to a payment of $224,000 on 26 March 2012. The email further noted that “[c]ontractors… have stressed the need for a clearer picture as to what is forecasted to be realised over the next 4-6 weeks… [t]hey are all trying to best manage fixed costs & have indicated from the start of next month they will be releasing employees unless their current $ exposures are resolved via significant progressive payments by Gunns”.

79    Also on 23 March 2012, Mr Butt of Gunns sent a letter to Mr Howson, advising that payment of $224,000 would be made to Edenborn on 26 March 2012 to “substantially reduce current outstanding payments”. The letter further noted that Gunns’ ability to process further payments would be advised in line with anticipated developments aligned to the company’s asset sale programme and it remained Gunns’ intention to be substantially back on payment terms by early April 2012. Although the 26 March 2012 payment was made, Gunns did not get back on track with payments by early April 2012. 

80    Mr Fildes agreed in cross-examination he was aware in March 2012 that Gunns was using the proceeds of its woodchip sales for purposes other than the payment of contractors and was instead paying contractors from the sale of assets.

81    On 26 March 2012, Gunns released a market update outlining the Gunns Group’s intention to undertake an equity raising of approximately $400 million, to reduce debt facilities and strengthen Gunns’ balance sheet. The market update also stated that the suspension of trade of Gunns’ securities would continue until the details of the proposed equity raising and associated preparation of documents had been finalised. The same day, Mr Howson’s wife, Sue Howson, sent a ninemsn article to Mr Howson by email with a subject line “Gunns may seek to raise $400 million”. The article stated that the amount of the proposed new capital raising was much larger than the $280 million capital raising previously proposed by Gunns, “which was derailed when New Zealand billionaire Richard Chandler pulled out”, and quoted an analyst who likened Gunns to a “very speculative mining company” and who described the proposed capital raising as Gunns’ “last throw of the dice… They (Gunns) get this away or they don’t”. Mr Howson admitted that he was aware of this article, but Mr Fildes said he did not recall reading this article.

82    On 27 March 2012, The Examiner newspaper published an article “Gunns plans to raise $400m” regarding the proposed $400 million equity raising. The article quoted an analyst who stated:

To raise that amount of money will mean that about 80 per cent will be new money and existing shareholders will have about 20 per cent… That’s much closer to a float than capital raising and will need shareholders’ approval… [y]ou believe it when money is in the bank… There’s a credibility issue with these announcements in itself considering the number that there have been.

83    On 2 April 2012, Gunns announced in an ASX market update that it had requested a further extension of its suspension from trade until it had finalised the details of its proposed equity raising and associated preparation of documents.

84    On 10 April 2012, Gunns made a further market announcement to the ASX recording that it “confirms it is proceeding to formulate an equity offer” as detailed in the announcement on 26 March 2012, and “requests that its suspension from trading continue until details of the proposed equity raising, and associated document preparation have been finalised”.

85    On 11 April 2012, Mr Fildes sent an email to Mr Howson advising that Gunns owed Edenborn $1.5 million. In a separate email to Mr Howson also sent the same day, Mr Fildes raised with Mr Howson and Brian Macomish that another principal, Australian Bluegum Plantations (ABP), had approached Edenborn to provide chipping services until 8 June 2012. Mr Fildes stated that:

If we actually believe there will be no more Gunns soon then ABP has to be the best option, but for how long with the above statement?

It may reasonably be inferred that Mr Fildes and Mr Howson had prior discussions regarding whether or not Gunns would continue to trade. However, Mr Howson denied that they had such discussions and Mr Fildes could not recall whether they did or did not. Whether they did or did not have prior discussions, they were both plainly on notice by that time that Gunns was in financial difficulty. Mr Howson acknowledged in his liquidator’s examination that he was aware at this stage that the problems with non-payment were happening to “everybody”.

86    On 15 April 2012, The Examiner newspaper published an article entitled “a scent of desperation, by any name: Should we read anything into how Enpax sounds suspiciously like a name one would give a laxative?” which referred to Gunns’ “seemingly all-or-nothing bid to build a pulp mill” and observed, in the context of a rumoured proposed company name change for Gunns, that “[f]air or not, at least in Tasmania and probably beyond the Gunns brand has been trashed. That is not helpful when your survival depends on attracting investment”.

87    On 24 April 2012, Mr Fildes sent an email to Mr Crook, copying Mr Merry, Mr Howson and Mr Macomish, advising that Edenborn was “quite concerned about [its] position with Gunns right now”. In his response to Mr Fildes, Mr Merry stated that he appreciated “Edenborn’s current level of concern over outstanding payment” and that Mr Howson had “indicated we need to catch up to discuss payment situation, exposure to Edenborn & discuss impact going forwards into next week”.

88    Throughout March and April 2012, there was a gradual increase in the outstanding invoiced amounts, notwithstanding a tranche of payments. On 14 May 2012, Mr Fildes chased up “this week’s payment (date of payment)) [sic] and how much it will be”. By return email later that day, Mr Merry told him that Gunns would pay $220,000 on 17 or 16 May 2012 and that Mr Merry was still awaiting feedback as to what could be offered to Edenborn for the week starting 21 May 2012. On 15 May 2012, Mr Butt of Gunns sent a letter to Mr Howson in the same terms as the letter sent on 23 March 2012, containing a proposed payment schedule and the statement:

Gunns’ ability to process further payments will be advised in line with anticipated developments aligned to the company’s capital raising program. It remains Gunns’ intention to be substantially back on payment terms during within [sic] the next month.

That did not occur.

89    On 16 May 2012, Gunns made a payment of $220,000 to Edenborn.

90    On 17 May 2012, Gunns gave Edenborn notice by letter of a force majeure event under Edenborn’s contract as a result of Elders Forestry Limited (Elders) implementing a “lock out” of Gunns from Elders’ plantation pulpwood terminal (Elders lock out notification). Edenborn was advised that as a consequence of the lock out “all Gunns Western Australian based harvesting / processing / haulage operations will need to be suspended until further notice”. At that time the debt to Edenborn had reached just over $1.81 million, although $519,934.39 of that amount was not yet due for payment.

91    Following the Elders lock out notification, Edenborn moved its systems to harvest and chip for its other principals and did not resume work for Gunns until around 8 August 2012.

92    On 30 May 2012, Mr Merry sent an email to Mr Hayes, copying Mr Butt, regarding payment schedules to contractors. Mr Merry noted that “[b]oth ATS & Edenborn have communicated that their cash flow positions are extremely low to the extent their businesses are most vulnerable”.

93    On 1 June 2012, Mr Crook emailed Mr Fildes regarding a proposed $9,369.66 adjustment to a recipient created tax invoice in Gunns’ favour. Mr Fildes responded stating:

Tensions are extremely high at the moment in the office and not even sure if we can make next week’s pay run so discussing amounts Edenborn owe Gunns is not a matter I am keen to discuss with anyone in our office at the moment.

How about we leave until we see some money coming through?

94    In cross-examination, Mr Fildes agreed there were “some tensions” in the office at Edenborn regarding the outstanding debt owed by Gunns in June 2012 and the fact that although the full debt was due, no payment was even suggested by Gunns. However, he stated that his statement in the email that he was concerned about making Edenborn’s next pay run was false. His evidence was that he “fired back” the email to Mr Crook in anger that Gunns was asking for money when it owed money to Edenborn. However, he agreed that he was unwilling to entertain the possibility of an adjustment due to the size and timing of Gunns’ liability to Edenborn.

95    On 5 June 2012, Mr Hayes sent a letter to Mr Howson advising him:

This letter is to formally advise the payment schedule and terms in respect to timber harvesting and woodchip haulage services provided by your Company to Gunns for achieving Mill Door Sales to APEC during the May 2012 period.

As agreed APEC will pay Edenborn direct for harvesting and haulage services. In recognition of Gunns and Edenborn’s current cash flow situation, APEC have agreed to process 7 day payment of proceeds for the Mill Door sales of Bluegum Chip.

APEC will pay Edenborn direct for the following amount:-

Payment date         Amount         Confirmation status

8/06/2012              $71,205.76         confirmed

                              $71,205.76

Gunns ability to process outstanding payments will be advised over the course of next week

We thank you for your co-operation and understanding, and look forward to a continuation of our relationship.

96    I infer that Mr Fildes must have had discussions with someone at Gunns concerning payment and the arrangement for a third party to pay Edenborn directly. The email contained no firm commitment to return payment to terms, contrary to Gunns’ earlier letters of 23 March and 15 May 2012.

97    Mr Fildes agreed in cross-examination that by mid-June 2012 he was aware that Gunns’ debt to Edenborn had reached over $1.9 million and this was a “substantial sum of money” for a company such as Edenborn.

98    An internal Gunns email sent on 17 June 2012 from Mr Merry to Mr Hayes recorded that Mr Merry had a meeting with Edenborn and another of Gunns’ Western Australian contractors on 15 June 2012 “to establish their ‘here & now’ expectations / preparedness / ability to resume providing services to Gunns”. Mr Merry wrote that the situation with Edenborn (and the other contractor) was “becoming increasingly desperate”. Gunns’ liability to Edenborn at that time was $1.93 million and Edenborn had “advised if Elders Forestry had not recommenced harvesting they would have been forced to cease trading”. The email stated:

[Edenborn] advised if Elders Forestry had not recommenced harvesting they would have been forced to cease trading, and are of the view they have not been given any assistance by Gunns since last payment date (15/5).

Cash flow is critical, compounded by 0.8% interest / month on outstanding payments, business is liable for GST on YTD RCTI’s, & standard end of financial year tax liabilities.

To recommence operations Edenborn have indicated they would a) require a significant payment (not prepared to put a $ figure on the table), and b) have advised they will issue a letter of demand to ensure there is an alignment between contract & actual trading terms going forwards (used the analogy of not prepared to keep offering Gunns an unsecured bank loan equivalent).

[Mr Howson] is frustrated with you not returning several calls recently...

99    On 22 June 2012, Mr Merry sent an email to Mr Butt asking whether there had been further progress that morning with the CFO “re approving programme to pass on $” to Edenborn and another contractor. Later that day Mr Merry sent a further email to Mr Butt stating:

I see it critical Gunns retains an effective working relationship with contractors to ensure Gunns a) minimises the likelihood of contractors pursuing legal action against Gunns, and b) contractor resources remain in plain to meet future requirements of Gunns H&M programme.

100    On 25 June 2012, Mr Merry advised Mr Hayes by email that another contractor, ATS, had threatened to issue a statutory demand. In a later email in the same email chain on 26 June 2012, Mr Merry wrote:

It’s critical we consider what can be offered to both ATS & Edenborn. Other contractors have deep concerns however are less likely to pursue legal action here & now ….

ATS & Edenborn have both indicated they have significant payroll tax/superannuation payments/GST liabilities to pay due 30/6/2012 – if this is recognised by Gunns via issuing timely payments this will go a long way in easing tensions.

Need to demonstrate [Gunns] has clear intent to actively reduce outstanding payment issues – pass on what we can – no more no less.

…

Edenborn offer suggestion:-

29/6 payment of $100,000

6/6 payment of $1000

schedule of further payments to be advised

101    Consistently with the proposal outlined by Mr Merry, a payment of $101,465.47 was paid by 29 June 2012 and another payment of $100,000 was made on 6 July 2012.

102    Mr Howson and Mr Fildes each gave evidence that they could not recall the meeting on 15 June 2012 referred to in the internal Gunns email sent on 17 June 2012 from Mr Merry to Mr Hayes. Both denied during cross-examination that they told anyone at Gunns that Edenborn required a significant payment to recommence operations and denied they intended to issue a letter of demand. They each also denied they told Mr Merry, or anyone at Gunns, that Edenborn had “significant payroll tax/ superannuation payments/ GST liabilities to pay due 30/06/2012” as Mr Merry reported to Mr Hayes in the email sent on 26 June 2012. I do not accept their denials as reliable or truthful evidence. First, Mr Howson’s denial was inconsistent with the answer he gave in his liquidator’s examination. When it was put to him that it was right that Edenborn would not continue work unless Gunns sorted out the outstanding payments, Mr Howson’s answer was that “well, as it says there, significant payment reduction would be required” and he agreed that Edenborn had been asking for “a year, or close to” for payment of outstanding amounts. Secondly, there is no reason to doubt the reliability of what Mr Merry reported to Mr Hayes in relation to Edenborn against the background of the increased indebtedness of Gunns to Edenborn, the lack of “firm” commitment to pay the outstanding invoices, and evidence that in fact, Edenborn had ceased providing some of its services to Gunns in January 2012 and threatened to suspend all services to Gunns because of payment issues at the time. Thirdly, there is a wealth of documentary evidence to show that Edenborn had been regularly pressing Gunns for a substantial payment of the outstanding invoices and had become increasingly concerned about Edenborn’s exposure.

103    On 2 July 2012, The Australian Financial Review newspaper published an article under the heading “Low prices cut value for Gunns”, which noted that Gunns shares had been suspended for more than three months during its attempted $400 million equity raising and that “the chances of raising such a large amount of equity amid terrible capital market conditions is getting harder by the day. This is further compounded by Gunns’ battered credibility”. The article further noted that Gunns’ review of its forestry assets in light of an estimated reduction in future stumpage values “reduced standing timber valuation buy [sic] nearly $40 million”, that the Tasmanian wood plant and equipment “was reduced by $25 million”, and that Gunns was in “cash preservation mode”. There is no indication in the evidence that Mr Howson or Mr Fildes read that article.

104    Also on 2 July 2012, Gunns announced to the ASX that it was reviewing the value of its forestry assets, including the impact of the substantial decline in stumpage prices in the woodchip market. The announcement noted that the analysis was “currently incomplete and indefinite” and Gunns expected to make a further announcement on completion of that analysis.

105    On 3 July 2012, Mr Howson forwarded to Mrs Howson and others an update from “Daily Timber News”, which included a headline “Gunns revalues assets”. The extract noted that Gunns had been forced to revalue its forestry assets because of the “ailing woodchip market”. The full article, which was not included in the email, also reported that Gunns shares had been suspended for 117 days at that point and that the “prolonged share trading halt has triggered fears it will never trade again”. Mr Howson could not recall whether he read the full article or not, but accepted that it was “probable” that he had “clicked through” to the full article before forwarding it on.

106    On 7 July 2012, Mr Merry sent an email to Mr Hayes advising him that:

Contractor payment situation:- payments made to ATS & Edenborn over past fortnight has successfully held off contractors pursuing legal action. Can you confirm outlook for next fortnight re: continuation of payments to ATS in line with written commitment & what can be offered to Edenborn?

107    On 10 July 2012, the Mercury newspaper published an article entitled “Tax bill blow for Gunns”, which noted that Gunns had received an amended income tax assessment of up to $42 million and quoted an analyst as stating that the tax dispute “was another negative hanging over the company’s head, which would make capital raising more difficult. The company almost certainly has to repay $340 million to an ANZ-led consortium by December 31”. An article describing the tax dispute was also published on Daily Timber News. In cross-examination Mr Howson’s evidence was that he could not recall seeing the article before.

108    On 12 July 2012, Daily Timber News published an article entitled “$60m lift on cards for Gunns”, which described the progress of the sale by Gunns of its Portland woodchip loading facility. The article noted that “a need to liquidate assets forced the Portland sale” and that the sale was “a rare bit of good news for Gunns since suffering a hammer blow with the withdrawal of a $150 million investment by the Richard Chandler Corporation” and the announcement of the $42 million tax reassessment. Mr Howson denied reading the article in July 2012.

109    On 15 July 2012, Mr Merry sent an email to Mr Hayes advising him that a start date of 1 August 2012 for the resumption of Gunns’ harvesting program was required to achieve a shipment date of 13 September 2012 and also:

recommended to minimise risk of increased demands presented to [Gunns] by contractors (if force majeure situation resolved .. prior to 31/7, SRT demand full payment of current outstanding $ prior to startup – Edenborn have indicated a similar requirement – they are both desperate for work.

Mr Fildes could not recall whether he told anyone at Gunns in July 2012 that Edenborn required full payment before recommencement and Mr Howson said that he did not tell Gunns this, stating that he was out of the country again in “late July”. There is no reason though to doubt the accuracy of what was said in the email.

110    On 16 July 2012, Mr Howson forwarded to Mr Fildes, Fran Leary (Edenborn’s Chief Financial Officer) and Mr Macomish an ASX Release from Gunns which announced the sale of the Portland woodchip export facility (the Portland sale).

111    In an email sent on 20 July 2012, Mr Merry informed Mr Hayes that he had met with WA harvesting and haulage contractors that week about the current return to work plan and reported that Edenborn required the liability to be below $800,000 and that they would need to cap net liability after services were resumed to between $1 million and $1.2 million. Mr Merry wrote that could be achieved by processing March/April 2012 outstanding payments. The evidence of Mr Howson in cross-examination was that he was overseas at that time and he could not recall any discussion with anyone at Edenborn regarding a proposed reduction of Edenborn’s credit limit with Gunns to $800,000. Mr Fildes was also asked in cross-examination whether he had any recollection of having discussions with anyone at Gunns about requiring the liability to be below $800,000. Mr Fildes could not recall such a meeting but there is no reason to doubt that it took place and that was the advice communicated to Gunns.

112    On 24 July 2012 Mr Crook informed Mr Hayes that “[c]ontractors [had] asked for further clarity with regards to timing of payments before 01/08/12 restart, so that they can hire necessary employees & arrange floats for machinery etc.”.

113    On 25 July 2012, Mr Crook advised Edenborn and other contractors that he had not received an update from “Corporate” as to whether a 1 August 2012 restart was likely.

114    On 26 July 2012, Daily Timber News published an article entitled “ANZ seeks review of Gunns balance sheet”. The article stated that:

Gunns’ move to recapitalisation has been slow and full of setbacks and there is no end in sight. It appears that lenders to the embattled timber company are becoming nervous about the $500 million they are owed by the end of the year.

The article noted that creditors had asked “insolvency specialists” KordaMentha to review Gunns’ balance sheet and that Gunns owed “$340 million to a banking syndicate led by ANZ”. Mr Howson’s evidence was that he could not recall reading the article in July 2012.

115    On 27 July 2012, Mr Crook sent an email to Mr Hayes, copying Mr Butt, stating that:

As [Mr Merry] communicated in 15/07 email, Edenborn require liability to be below $800,000 and for downward pressure to continue to control actual liability… Gunns will need to implement a revised payment schedule to keep Edenborn working.

116    On 1 August 2012, Mr Butt sent an email to Mr Hayes advising that Mr Crook had called him earlier that day and Edenborn had told Mr Crook it would not restart unless all amounts then owing were paid in full.

117    On 2 August 2012, Ms Leary sent an email to Mr Fildes and Mr Howson stating that the balance of the Gunns account was $1,733,630.26. The same day Mr Fildes sent an email to Mr Crook suggesting a payment plan that Gunns pay $1.34 million by 6 August 2012 with Edenborn to commence work on 8 August 2012, the balance of all outstanding amounts of $393,630.26 by 15 August 2012 and payment for work performed between 1 August and 15 August 2012 to be made by 31 August 2012. Later that day, Mr Crook sent an email to Mr Butt and Mr Hayes, copying Mr Merry, stating:

I have spoken to Edenborn again this morning about resuming harvesting at various intensities with progressive payment options, and they have communicated that they will not resume with [Gunns] unless the full outstanding payment ($1,729,000) is made. They have communicated that they are NOT prepared to come back to work even if [Gunns] offers a payment schedule that progressively reduces their liability. Murray Howson communicated that as a last resort they are looking at issuing [Gunns] a Statutory Demand, unless some payments are forth coming…

118    Mr Howson and Mr Fildes both gave evidence that they did not recall making such statements to Gunns, though Mr Howson said that to the best of his knowledge he “never said that”. However, there is no reason to doubt the accuracy of what was recorded in the email and tellingly, on 6 August 2012, Gunns paid the amount of $1.34 million to Edenborn, which Edenborn applied against the outstanding tax invoices from March to May 2012. The balance was paid on 15 August 2012 in discharge of the whole of Gunns’ debt to Edenborn.

119    On 3 August 2012, Mr Crook sent an email to Mr Fildes stating that corporate was waiting for the Portland sale to be confirmed and would then release a letter stating that “payment (100%) will be made Mon 06/08”. Later that day, Mr Crook sent an email to Mr Fildes, and two other contractors, advising that the Portland sale had gone through but letters outlining payment schedules would not be released that afternoon. He wrote that he was hopeful that payments would be made on 6 August 2012. Mr Fildes forwarded that email to Mr Howson, Mr Macomish, Ms Leary and Mrs Howson.

120    On 6 August 2012, Gunns released to the ASX a market update which reported that:

(a)    for the financial year ending 30 June 2012, the Gunns Group would record an impairment of its assets of between $700 million to $800 million and its net tangible asset position would fall to between negative $50 million and negative $150 million;

(b)    the impact of the decline in stumpage prices on Gunns and its asset position had raised material uncertainty regarding Gunns’ current financing strategy, including for the pulp mill development, and that Gunns’ board had been unable to reach a view for the purpose of its 30 June 2012 financial accounts that the pulp mill development was “probable to proceed”;

(c)    the net present value of Gunns’ interests in Tasmanian managed investment schemes was negative $100 million;

(d)    earnings for the financial year ending 30 June 2013 were likely to be materially less than the earnings for the financial year ending 30 June 2012 due to the state of the woodchip markets; and

(e)    the share trading suspension would continue until Gunns was in a position to provide more specific detail regarding the proposed capital raising, restructuring or alternative form of potential transaction, and it was “not feasible” at that stage to say when the suspension would be lifted.

121    Also on 6 August 2012, Mr Butt sent a letter to Mr Howson formally advising of a payment schedule in the terms proposed by Mr Fildes on 2 August 2012. The payments proposed, when made, would have the effect of reducing Gunns’ liability to Edenborn to zero. The letter also stated that Gunns undertook to forward payment for services provided during the period 1 August to 15 August 2012 by 31 August 2012.

122    Payment of $1.34 million was made later that day. Mr Howson was aware that the $1.34 million paid on 6 August 2012 had come from the proceeds of the Portland sale rather than out of the ordinary cash flow of Gunns.

123    It was only after agreement was reached for payment of the outstanding invoices in full and the first payment received that Edenborn recommenced work for Gunns on 8 August 2012.

124    On 7 August 2012, The Australian Financial Review newspaper published an article under the heading “Gunns faces huge write-down” stating that “[b]attered timber company Gunns is clinging to survival after flagging an impairment of up to $800 million for 2011-12 on lower commodity prices and conceded that its $2.3 billion pulp mill project may fail because of its weak financial position”. The article also quoted a “market watcher” as saying “The person who had the most access to the books was Richard Chandler and he walked, which tells you everything”. A similar article was also published on Daily Timber News, which noted that Gunns’ impairment was “at least five times its last available market capitalisation”. In cross-examination Mr Howson stated that he could not recall reading this article.

125    On 14 August 2012, Mr Crook sent Mr Fildes an email advising him that the Forest Harmony vessel was due to arrive early on 26 August 2012 and requested that Edenborn implement an increased tonnage program as quickly as possible.

126    On 16 August 2012, Mr Fildes responded to Mr Crook’s email of 14 August agreeing to offer additional tonnage but on restructured payment terms. Under the proposed payment terms, Edenborn was to be paid at five to ten day intervals.

127    On 17 August 2012, Mr Crook forwarded this email to Mr Butt, Mr Hayes and Mr Merry, noting that:

… Edenborn are concerned about their live exposure exceeding $700K, [sic] The following two options presented have scheduled payments being made (outside RCTI terms), so that their running liability does not exceed $700K… In order to meet the Daio vessel we need to implement Option 2...

128    On 19 August 2012, Mr Hayes sent an email to Mr Crook in response to the email of 17 August 2012 stating that he was concerned that the contractors were seeking seven day terms, which was contrary to Gunns’ objective of getting all contractors onto 30 day terms. Mr Hayes told Mr Crook that he needed to resist the contractors dictating terms and getting extremely favourable concessions.

129    On 20 August 2012, Mr Crook responded to Mr Hayes’ email stating that:

I agree they are very favourable terms, but contractors are extremely nervous about working for [Gunns] right now for obvious reasons… Edenborn have refused to start up a second chipping systems, unless [Gunns] can supply them with payment schedules going forward.

130    Also on 20 August 2012, Mr Fildes forwarded to Mr Howson, Mr Macomish, Ms Leary and Mrs Howson (and separately to Mr Crook) an email he had received from another contractor extracting an article from the Tasmanian Times entitled “The Second Coming is more likely” commencing with the following:

Is Gunns likely to be a takeover target?

Highly unlikely. A takeover implies assuming all the contingent liabilities as well, the ATO debts, class actions liabilities etc. A buyer would need to be extremely desperate or badly advised to venture into that spider’s web.

The article went on to observe:

Can Gunns just keep trading?

The ASX announcement on 6th August was a statement that its liabilities exceeded its assets. This doesn’t necessarily mean that Gunns will be unable to pay its debts as and when they fall due, because asset values may increase or trading in the future may produce enormous profits.

However this is unlikely to happen.

…

But whether suppliers are willing to keep dealing with Gunns is the question, or whether they will require payments in advance that will necessarily put Gunns at risk of breaching the aforementioned banking covenants.

Whether Gunns lasts until the formal solvency declaration in September is questionable.

The recent ASX announcement is very much akin to an announcement of appointment of a Voluntary Administrator, because the Directors have in effect told the market they are insolvent…

…

Will Gunns be handed over to a Voluntary Administrator, a Receiver or a Liquidator?

There’s not much left of the company.

…

With the MIS assets gone, the wind up becomes a more orthodox exercise. A Liquidator in other words for both Gunns and GPL.

131    Mr Howson admitted in cross-examination that he read this article in August 2012. During his liquidator’s examination, Mr Howson also admitted that he was aware at this time that Gunns had written down about $1.2 billion of assets. Mr Fildes stated that he only “read one or two lines of the article” but he agreed that he read enough to satisfy himself that it was an article worth sending to Mr Howson, Mr Macomish, Ms Leary and Mrs Howson.

132    On 21 August 2012, Mr Crook sent an email to Mr Fildes stating:

I’m feeling even more depressed now, after reading that article. Future for Gunns doesn’t look good. Sounds like New Forests will get the gig.

133    Mr Fildes’ evidence was that he could not recall receiving the email or his reaction to it.

134    On 24 August 2012, the Australian Financial Review newspaper published the following article:

Critical point for wobbly Gunns

After close to six months in suspension, it’s not looking good for Gunns as insolvency firm KordaMentha reports to the timber company’s lenders.

It is believed KordaMentha is poised to present a final report on the company’s vitals to its syndicate of 10 banks, led by ANZ.

It appears that some of Gunns’ Asian lenders, which include Mizuho, [CCB] … have had enough and are considering selling their loans.

Mizuho and CCB are the largest lenders after Australia and New Zealand Banking Group, which is not yet seeking to sell its position.

Sources said brokers at Merrill Lynch, Morgan Stanley and Macquarie have been trying to find buyers but it’s a tough sell to the point the banks might only get 20c on the dollar for their loans. Given Gunns’ cash flow problems, lenders may be worried the value of the company’s assets might not be enough to cover the senior loan, as well as a $65 million tax liability revealed last month.

135    Also on 24 August 2012, Mr Fildes sent an email to Mr Crook containing an extract of that article or a version of that article which stated:

It’s not looking good for timber company Gunns which hangs by a thread as insolvency firm KordaMentha reports to the company’s lenders….

Its [sic] appears some lenders have had enough and are looking to sell their positions in the lead syndicate. It is not known which banks are looking to exit but it is thought that ANZ, which has the largest exposure, is not seeking to sell its position yet….

Given Gunns’s [sic] cash flow problems, lenders may also be worried the value of the company’s assets might not be enough to cover the senior loan, as well as a $65 million tax liability revealed last month …

136    On 28 August 2012, Mr Fildes informed Mr Crook by email that:

As you are aware we need to regain some confidence with Gunns before stepping up another level and as I have already forwarded to you over the past few weeks there is still a lot of negative press out there that is still making us very nervous.

137    Mr Fildes gave evidence that he was “not sure” if the email accurately reflected his state of mind, and with regard to the “negative press” he referred to in the email, Mr Fildes stated that he could not confirm whether he read it or heard it. He also stated that he did not believe that the email expressed his personal concerns based on what he had read regarding whether or not Gunns was insolvent. I found Mr Fildes’ evidence evasive and self-serving. There is no reason to doubt the accuracy of what he wrote at the time.

138    On 31 August 2012, Mr Merry sent an email to Mr Hayes, copying Mr Crook and Mr Butt, stating that:

… Edenborn have communicated late today that they have plans in play to suspend their infield chipping operation … on the basis that they will not be paid on 31/8 as previously promised. They have provided assurances that providing payment does occur on 3/9 they will resume their operation on 4/9 and continue to work for the remainder of the 1-15/9 RCTI period. This reactive position taken by Edenborn demonstrates a deterioration in level of both confidence & exposure that they are prepared to accept. Previously they have been far more willing to accept risk to ensure continuity of work for their business.

139    Also on 31 August 2012, Gunns released to the ASX a preliminary final report of its financial position and performance for the financial year ended 30 June 2012, which recorded, relevantly:

(a)    a net loss after tax of $903.865 million;

(b)    a total comprehensive income of negative $1.02 billion;

(c)    retained earnings of negative $1.07 billion; and

(d)    total liabilities of $879.267 million, and total net assets of $24.251 million.

140    On the same date, ABC Online published an article under the heading “Gunns announces massive $900m loss”, stating that the Gunns annual financial report had recorded a “massive annual loss” of $904 million, that Gunns had “devalued its net tangible assets by more than $1 billion”, and that “Gunns’ creditors would have difficulty recovering more than $500m [of repayments owed to them]”.

141    On 1 September 2012, Mr Fildes sent an email to Mr Howson and others within Edenborn with hyperlinks to three articles concerning Gunns published that day. One of the articles was published on the website of The Australian and was entitled “Slash and burn: woodchipper clings to life as banks hover”. That article noted that Gunns was “teetering on the edge of collapse” and that “the company’s future is firmly in the hands of a syndicate of 10 lenders that is owed more than $300m”. The other linked articles were entitled “Gunns hit with $800m writedown”, published in The Sydney Morning Herald, and “ON THE BRINK: Gunns Limited Timber company announces $904 loss $904m loss [sic] has Gunns on brink”, published in The Mercury. The latter article noted that Gunns’ lenders were still owed $559 million despite major asset sales, and that other creditors were owed $200 million. Mr Howson admitted to reading “some or part of” the article entitled “Gunns hit with $800m writedown”. This article noted that Gunns lacked confidence that the pulp mill development would proceed and advisory firm KordaMentha had been engaged in July 2012 to examine Gunns’ solvency on behalf of its lenders. Mr Fildes admitted he would have been searching the internet to find news about Gunns in order to send this email, and he was possibly looking for information regarding Gunns’ financial position.

142    On 4 September 2012, Daily Timber News published an article entitled “Gunns solvent but profits slide”, which noted that “[a]ccording to the Sydney Morning Herald insolvency firms [were] circling” Gunns and that the ANZ-led banking syndicate was owed $560 million and was “considering appointing receivers last month”. The article further described Gunns’ recent $904 million 2011-12 loss and its lack of confidence that the pulp mill development would proceed. Mr Howson’s evidence in cross-examination was that he could not recall seeing this article in September 2012.

143    On 9 September 2012, Mr Merry sent an email to Mr Hayes informing him that as an alternative to fortnightly processing of invoices, “Edenborn [had] communicated they would be prepared to consider a ‘trust account’ approach to payment which would align payment to sales transactions”.

144    On 11 September 2012, Mr Fildes sent an email to Mr Merry requesting “any news on payment being made this Friday”. Mr Fildes accepted that this email represented an attempt by him to chase up payment notwithstanding that payment was not due for a further three days.

145    On 14 September 2012, Mr Hayes sent a letter to Mr Howson informing Mr Howson that Gunns proposed to pay its debt due on 14 September 2012 on 18 and 21 September 2012. The letter stated that:

Due to a delay in receiving payment for a recent woodchip shipment and the impact that this event has had on available cash flow, Gunns will attend to progressive payment of the following amount in line with the schedule below to process the RCTI that is due on 14/09/2012.

Payment date         Amount         Confirmation status

18/09/2012             $200,000.00           confirmed

21/09/2012             $185,629.00           confirmed

                              $395,629.00

146    Also on 14 September 2012, Mr Merry notified Mr Hayes by email that Edenborn had informed Mr Merry that:

[Edenborn] will suspend their chipping operation next Mon-Tues with the intention to re-commence on Wednesday following receipt of partial payment…. Providing the 30/9 RCTI payment is made by Gunns they will increase their daily production further…

147    Despite Gunns’ commitment to pay Edenborn $200,000 on 18 September 2012, only $43,000 was paid, and not until 19 September 2012. On 21 September 2012, Gunns paid the balance of $352,629.04, leaving the $255,870.16 remaining from the recipient created tax invoice issued on 15 September 2012 payable by 30 September 2012.

148    On 25 September 2012, the liquidators were appointed as joint and several administrators of Gunns and its subsidiaries by resolution of the directors of Gunns pursuant to s 436A of the Corporations Act.

CONTINUING BUSINESS RELATIONSHIP ISSUE

149    It is convenient to commence with this issue as Edenborn contended that Gunns and Edenborn had a continuing business relationship for the entirety of the relation back period and the seven payments in question were an integral part of that continuing business relationship. By s 588FA(3), transactions that are an integral part of a continuing business relationship between the company and a creditor, such as a running account, are treated as a single transaction for the purposes of s 588FA(1) in determining whether an unfair preference was given to the creditor. Thus, it was submitted, s 588FA(3) applies to treat all the transactions within the relation back period as a single transaction for the purposes of s 588FA(1).

150    The liquidators accepted that a continuing business relationship existed from the start of the relation back period until 17 May 2012 and again after 15 August 2012 until the appointment of administrators on 25 September 2012. However, the liquidators disputed a continuing business relationship existed between 17 May 2012 and 15 August 2012, alternatively between 2 August and 15 August 2012.

151    The relevance of the date of 17 May 2012 is that on that day, Gunns suspended the operation of the contracts by reason of a force majeure event and operations did not resume until around 8 August 2012. As at 17 May 2012, Gunns owed Edenborn a total of $1,811,612.25 on outstanding invoices, which were paid in full by three payments which Gunns made during the period in which Edenborn was not providing services to Gunns because of the suspension, namely –

    on 29 June 2012 in the amount of $101,465.47;

    on 6 July 2012 in the amount of $100,000; and

    on 6 August 2012 in the amount of $1,340,216.36 –

and by a fourth payment of $388,839.93 on 15 August 2012, just after Edenborn resumed operations. The liquidators’ case is that Edenborn required payment of its prior invoices in full as a condition of resuming the provision of services to Gunns and, thus, it was submitted, those four payments were not made in the context of a continuing business relationship within the meaning of s 588FA(3).

152    Edenborn’s case is that the contracts remained on foot during the period of suspension and the dominant purpose of the payments was the mutual purpose of inducing Edenborn to provide further services to Gunns. Thus, it was contended, although services were suspended by reason of the force majeure event, there was no break in the continuing business relationship.

153    Section 588FA(3), by its terms, embodies and gives statutory effect to the principal expressed in Richardson v Commercial Banking Co of Sydney Ltd [1952] HCA 8; 85 CLR 110 (Richardson) at 129 that where a payment “forms an integral, an inseparable, part of an entire transaction its effect as a preference involves a consideration of the whole transaction”: Airservices Australia v Ferrier [1996] HCA 54; 185 CLR 483 (Airservices Australia) at 488; VR Dye & Co (a firm) v Peninsula Hotels Pty Ltd (in liquidation) [1999] 3 VR 201 (VR Dye) at [27] per Ormiston JA, Winneke P and Tadgell JA agreeing; Cashflow Finance Pty Ltd (in liq.) v Westpac Banking Corp [1999] NSWSC 671 (Cashflow Finance) at [507]; Sydney Appliances Pty Ltd (in liq) v Eurolinx Pty Ltd [2001] NSWSC 230 (Sutherland v Eurolinx) at [137]–[138]. In that circumstance, pursuant to s 588FA(3)(c), the “transaction” for the purposes of s 588FA(1) comprises “all the transactions forming part of the relationship”. The paradigm of such a transaction is a running account. The rationale for treating running accounts as a single transaction for the purposes of determining whether a payment gave a preference to a creditor was explained in Richardson at 133:

A running account of any debtor who has reached insolvency must present difficulties under s. 95. A debtor who pays something off his grocer's account in order to induce the shop keeper to give him further supplies of groceries can hardly be held, as it seems to us, to give the grocer a preference, if that was the clear basis of the payment. If the grocer credited the money as a payment for the future deliveries instead of the past deliveries of groceries he would in the end be in exactly the same position and yet he could not be attacked as having received a preference. But without stating any principle with an application beyond the facts of this case, it is enough to decide that the payments into the office account possessed in point of fact a business purpose common to both parties which so connected them with the subsequent debits to the account as to make it impossible to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed and so to be adjudged a preference.

The principal was affirmed in Airservices Australia. The majority (Dawson, Gaudron and McHugh JJ) similarly observed at 501–3:

If a payment is part of a wider transaction or a “running account” between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired.

…

If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off. Thus, a debtor does not prefer a creditor to the other creditors if he or she pays a debt, or part of it, to induce the creditor to supply goods of equal or greater value than the amount of the payment. In that situation, it is of no relevance that the debt that is discharged happens to be a stale one. If the present value of the goods supplied is equal to or greater than the payment, the other creditors are no worse off. They are in the same position that they would have been in if the parties had so structured the transaction that the debtor paid for the new supply of goods instead of discharging the old debt.

…

If at the end of a series of dealings, the creditor has supplied goods to a greater value than the payments made to it during that period, the general body of creditors are not disadvantaged by the transaction — they may even be better off. The supplying creditor, therefore, has received no preference.

(footnotes omitted)

As noted, it is the relationship between the payments and the subsequent supply of services which is the rationale for the principle that a continuing business relationship is to be treated as a single transaction for the purposes of the preference provisions. If the purpose of a payment is to secure an asset or assets of equal or greater value the payee receives no advantage over other creditors, save to the extent that the payment exceeds the value of the services. The majority emphasised at 505 that “it is not the label ‘running account’ but the conclusion that the payments in the account were connected with the future supply of goods or services that is relevant” because, as the majority explained, it is that connection which indicates a continuing relationship of debtor and creditor. As the majority noted at 504–5, “the essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded”. Where the nexus between a payment and the subsequent provision of goods or services in that account is broken because the purpose of inducing further supply becomes subordinated to a predominant purpose of discharging past indebtedness, the payment is not part of the continuing business relationship, even if some services continue to be provided: Sutherland v Eurolinx at [148]–[151]. Airservices Australia is such an example.

154    In Airservices Australia, the High Court considered whether payments made to the appellant by Compass Airlines Pty Ltd (Compass) during the six month period before Compass went into provisional liquidation were preferential payments and void as against the liquidators of Compass. The issue was considered in the context of s 122 of the Bankruptcy Act 1966 (Cth) which, pursuant to s 565 of the Corporations Law, applied to corporations in liquidation. The majority held that the Full Federal Court had erred in holding that there was no running account: at 507. In the cross appeal of the liquidators, the liquidators claimed that the payment which Compass made to the appellant the day before Compass went into provisional liquidation did not form part of the running account because the appellant had, at the very least, a strong suspicion that Compass would “fold” the next day and was demanding that Compass pay it $3,081,102.63 supported by an irrevocable authority and direction to its bank. The majority held that the payment did not form part of the running account, notwithstanding the appellant did provide further services to Compass after the payment and, as the majority stated, it seemed certain that the appellant believed at the time of payment that it would continue to provide services to Compass after that date. The majority reasoned that the “better view on the evidence” was that in making a demand for payment of the outstanding debt the appellant was “looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services” and therefore the payment should be regarded as a preference notwithstanding the fact that subsequent services were provided: at 510.

155    As the cases make clear, it is an essential element of a continuing business relationship for s 588FA(3) to apply that payments are made in the mutual expectation that the creditor will continue to supply services to the debtor. Both parties must be looking to the ongoing provision of services in return for payment for a continuing business relationship to exist: see eg Sutherland v Eurolinx at [147]–[148]; Clifton (as liquidator of Adelaide Fibrous Plasterboard Linings Pty Ltd (in liq)) & Anor v CSR Building Products Pty Ltd [2011] SASC 103 (Clifton v CSR Building Products) at [73]. Applying that principle, a continuing business relationship may exist despite a suspicion on the part of the creditor of the debtor’s insolvency: Sutherland v Eurolinx at [163]; Clifton v CSR Building Products at [69]. However, s 588FA(3) will not apply to a payment when it may be inferred from the circumstances of the particular payment that it was made not as an integral part of a continuing supply of services but for the payment or partial repayment of a past debt: Sutherland v Eurolinx at [148]; Clifton v CSR Building Products at [73].

156    It was argued for Edenborn that the payments made on 28 (or 29) June 2012, 6 July 2012, 6 August 2012 and 15 August 2012 respectively were all made during the course of a continuing business relationship – also comprising the payments on 16 May 2012 and 19 and 21 September 2012 – and therefore form part of a “single transaction” for the purposes of s 588FA(1). It was submitted that the force majeure event giving rise to the suspension of operations in May 2012 was unconnected with Edenborn, arising from contractual issues between Gunns and other entities and, despite the suspension of operations, there was no break in the contractual relations between Gunns and Edenborn. It was further submitted that the evidence showed that Edenborn did not consider that the suspension was more than a temporary interruption, that Edenborn delivered woodchips for Gunns to a third party company, “APEC”, during the lock out, and Edenborn immediately commenced rendering services to Gunns under the same contracts when the lock out ended. It was submitted that there was nothing in the evidence to suggest that the four payments in issue were materially divorced in events and time from the corresponding services provided.

157    With respect to the first 2 payments, it was submitted that the evidence established that only the following occurred between 17 May 2012 and the payments made on 28 (or 29) June and 6 July 2012, namely, Edenborn harvested and delivered woodchips for Gunns to APEC during May 2012 and Mr Hayes, the then general manager of Gunns’ Forest Products Division, stated in a letter on 5 June 2012 to Mr Howson that Gunns “look forward to a continuation of our relationship”. That submission is simply incorrect, as the chronology of events detailed under the heading “Facts and Evidence” demonstrates. In particular, the submission disregards key pieces of evidence:

(a)    the email sent by Mr Merry to Mr Hayes on 17 June 2012 in which Mr Merry described a meeting that had taken place between representatives of Gunns and representatives of Edenborn on 15 June 2012, and wrote that:

To recommence operations Edenborn have indicated they would a) require a significant payment (not prepared to put a $ figure on the table), and b) have advised they will issue a letter of demand to ensure there is an alignment between contract & actual trading terms going forwards (used the analogy of not prepared to keep offering Gunns an unsecured bank loan equivalent).

(b)    the emails Mr Merry sent Mr Butt and Mr Hayes on 22 June 2012 and 26 June 2012 advising that it was “critical” to consider what could be offered to Edenborn and urging the “need to demonstrate [Gunns] has clear intent to actively reduce outstanding payment issues”; and

(c)    the email from Mr Merry to Mr Hayes on 7 July 2012 advising that the payments made to Edenborn (and another contractor) “over past fortnight has successfully held off contractors pursuing legal action”.

158    There is no warrant for disregarding this evidence, which I find both probative and relevant. For the reasons earlier given at [102], I have rejected Mr Howson’s and Mr Fildes’ evidence that they did not tell anyone at Gunns that Edenborn required a significant payment to recommence operations and I have also not accepted their evidence that they did not tell Gunns that Edenborn intended to issue a letter of demand. There is no reason to doubt the accuracy or reliability of the information that Mr Merry conveyed to Mr Hayes, including in his email of 17 June 2012. Further, as the email of 26 June 2012 evidences, it was in that context that Mr Merry suggested that Gunns make the payments to Edenborn that were made on 29 June and 6 July 2012.

159    I accordingly find that the two payments of 28 (or 29) June and 6 July 2012 were made in circumstances where Edenborn had told Gunns that it required a “significant payment” of past debts to recommence operations for Gunns. Further, the evidence showed that Gunns made the payments on 28 (or 29) June and 6 July 2012 in the context where it was thought it was more likely that Edenborn and ATS would take legal action than other contractors. The evidence, in my view, strongly supports the finding, which I make, that in requiring the outstanding debt to be reduced significantly both parties were “looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services”. The fact that the suspension of work in the first place was occasioned by a force majeure event which had nothing to do with Edenborn does not require any different answer in light of Edenborn’s requirement that it be paid a substantial portion of the outstanding invoices as a condition of recommencing operations once the suspension was lifted.

160    Further, I place no weight on the fact that Edenborn provided services to APEC following the suspension of operations, as the letter of 5 June 2012 from Gunns to Mr Howson evidences that Edenborn, by agreement, was paid directly by APEC directly for the harvesting and haulage services it provided to APEC.

161    For completeness, I also reject Edenborn’s submissions on the liquidators’ alternative case that the continuing business relationship ceased on 2 August 2012. Edenborn submitted that the dominant purpose of the payments in August 2012 was to continue to induce Edenborn to provide ongoing services to Gunns, noting that a resumption of work was referred to by Mr Fildes on behalf of Edenborn in the email of 2 August 2012, by Mr Crook on behalf of Gunns in an email of 3 August 2012 and by Mr Butt on behalf of Gunns on 6 August 2012. The provision of further services by Edenborn was said to be clearly at the forefront of the parties’ minds. It is undoubted on the evidence that Gunns, in making the payments on 6 August and 15 August 2012, was keen to ensure the continuation of Edenborn’s services. However, as the evidence showed, the payments were made in the context where Edenborn had insisted on Gunns making payment in full of the outstanding invoices before Edenborn would recommence operations after the suspension was lifted. That requirement was referred to in contemporaneous internal Gunns emails: see the emails of 15 July 2012, 1 August 2012 and 2 August 2012 detailed at [109] and [116]–[117] above. As stated earlier, there is no reason to doubt the accuracy and reliability of the content of those emails. The demand for full payment represented a shift in Edenborn’s position, as it had previously indicated during negotiations it would recommence work if Gunns’ liability was reduced to $800,000 and there was a future cap on liability between $1 million and $1.2 million: see contemporaneous internal Gunns emails of 20 July 2012 and 27 July 2012 at [111] and [115] above. Consistently, Mr Fildes sent an email to Gunns on 2 August 2012 setting out a payment plan which would have the amount owing to Edenborn substantially paid in full before resumption of operations by Edenborn on 8 August 2012 and the balance due by no later than 15 August 2012. It was submitted for Edenborn that it was “inherently unlikely” that the subject matter of the conversation reported by Mr Butt in his email to Mr Hayes on 1 August 2012, in which Mr Butt advised that Mr Crook had told him (that is, Mr Butt) that Edenborn had said it would not restart unless all amounts then owing were paid in full, would only be dealt with orally. It was further submitted that the alleged conversation was inconsistent with Mr Fildes’ email of 2 August 2012. I disagree. True it is that Mr Fildes’ payment plan did not have the whole debt paid before Edenborn resumed, but under that payment plan all but $393,630.26 of the total liability of $1,733.630.26 was required to be paid before Edenborn resumed work, with the balance within a week of Edenborn restarting. There is no manifest inconsistency. Further, for the reasons given at [118], I have rejected Mr Howson’s and Mr Fildes’ denials that they (or one of them) had the conversation referred to in Mr Butt’s email of 1 August 2012 and, contrary to Edenborn’s submissions, I do not consider that it is inherently unlikely that such a matter would have been dealt with only orally in circumstances where both Mr Howson and Mr Fildes had been in regular contact with Gunns.

162    The contemporaneous correspondence and fact of payment in full of the outstanding invoices all support the finding, which I make, that Edenborn had communicated to Gunns that it was not prepared to recommence operations without payment of the outstanding amounts. The payments had the effect and purpose of reducing Gunns’ debt to $0, as agreed. Gunns was also acting to avoid legal action by Edenborn, a prospect that it considered likely, and the threat of a statutory demand being issued. I am thus satisfied on the evidence that Edenborn, in seeking substantial payment of the outstanding debt, was “looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services” and the mutual purpose of inducing further supply was subordinated to a predominant purpose of recovering past indebtedness. The fact that a small quantity of services (relative to the debt that was repaid) was provided between 6 and 15 August 2012 does not negate a finding of a break in the continuing business relationship. As noted in Clifton v CSR Building Products at [75] and as found in Airservices Australia at 510, a cessation in a continuing business relationship may be found notwithstanding the continuing provision of services if the payments were “looking backwards rather than forwards, looking to the partial payment of the old debt rather than the provision of continuing services”. Similarly, the resumption of services does not necessarily mean that a new continuing business relationship has commenced if the context surrounding payments made after services resumed indicates that the mutual purpose of inducing further supply was subordinated to a predominant purpose of recovering past indebtedness. Here, the payment on 15 August 2012 was made as part of an agreement to pay all of Gunns’ outstanding debts to Edenborn in full. In the circumstances, notwithstanding the recent resumption in services, the payment of 15 August 2012 was plainly looking backwards rather than forwards.

163    I accordingly find that the continuing business relationship ceased on or after 17 May 2012 and before the payment on 29 June 2012. Albeit the final payment on 15 August 2012 was made after the resumption of services, the evidence showed that payment formed part of the arrangement agreed on with respect to payment of the balance owing in order for Edenborn to recommence operations. Thus, the four payments in question do not form part of a “single transaction” with the surrounding payments for the purposes of s 588FA. The liquidators concede that there was a continuing business relationship commencing after 15 August 2012 and terminating with the appointment of administrators on 25 September 2012.

ULTIMATE EFFECT ISSUE

164    Under the law as it was before the enactment of s 588FA, a payment made to a creditor within six months of the presentation of a petition against the debtor was void as against the debtor company’s liquidator if the payment had the effect of the giving the creditor a preference, priority or advantage over other creditors of the debtor at the time the payment was made. Where the payment was part of a running account between the debtor and creditor, whether the payment had the effect of the giving the creditor a preference, priority or advantage over other creditors of the debtor was determined by the “ultimate effect” of the course of dealings between the debtor and creditor, not by considering the immediate effect of the individual payment in isolation from the subsequent course of dealings: Airservices Australia at 501–2 per Dawson, Gaudron and McHugh JJ. This principle, known as the “ultimate effect doctrine”, emanated from the trilogy of cases of Richardson, Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 (Queensland Bacon) and Rees v Bank of New South Wales [1964] HCA 47; 111 CLR 210 (Rees): Airservices Australia at 488–94 (per Brennan CJ); 509 (per Dawson, Gaudron and McHugh JJ); 517–20 (per Toohey J). The doctrine was affirmed in Airservices Australia. In Airservices Australia the plurality at 509 observed that the ultimate effect doctrine emanating from those cases:

[was] designed to ensure that the effect of a payment that induces the further supply of goods and services is evaluated by the ultimate effect that it has on the financial relationship of the parties… [if] the payment was made to induce the further supplies, the creditor is entitled to have the ultimate effect of the transaction examined.

Thus, in the case of a running account, payments to induce further supplies were not preferences unless the “ultimate effect” was that the value of the payments exceeded the value of the goods or services provided. If the ultimate effect of the course of dealings was not a reduction or discharge of past debt, but rather that the debtor obtained goods or services to an equivalent or greater value than the payments made to the creditor to secure those goods or services (even if those payments were referrable to an earlier debt), then the payments did not have the effect of giving the creditor who received payment a preference, priority or advantage over other creditors, as the general body of creditors were not disadvantage – and indeed may have been advantaged – by the payments. If the ultimate effect of the payments was to reduce the initial indebtedness, only the amount of the reduction was regarded as a preferential payment: Airservices Australia at 502–4.

165    It was the common position of the parties that the doctrine of “ultimate effect” continues to apply under the present law in determining whether the creditor has received an unfair preference in a running account scenario: see [146]–[147] of the liquidators’ closing submissions and [83] and [85] of Edenborn’s closing submissions. The parties arrived at this conclusion differently, with the liquidators submitting that s 588FA(3) codifies and subsumes the doctrine such that there is no work for the earlier authorities to do, and Edenborn submitting that the cases preceding s 588FA(3) remain relevant to its interpretation. Despite the common position of the parties, it appears there is no binding authority on this Court on that question and both parties properly drew the Court’s attention to conflicting single judge and state court appellate authority which have considered the issue. Both parties also assisted the Court with comprehensive submissions in support of their common position. Ultimately, for reasons which are addressed below, it is unnecessary to form any concluded view, but if it were necessary to form a view in this case as to whether the doctrine of ultimate effect continues to have operation under s 588FA in order to determine whether the payments to Edenborn during the relation back period gave it an unfair preference, I would be disposed to hold that the doctrine still applied. First, it is undoubted that s 588FA(3) codifies the running account principle and for the purposes of determining whether there is an unfair preference under s 588FA(1), the course of dealings in the running account (ie the debits and credits) must be considered as a “single” transaction: s 588FA(3)(c). That is to say, the “transaction” for the purposes of the subsection is the totality of the dealings. Secondly, it seems to me as a matter of construction of s 588FA(1)(b), read with s 588FA(3), that the ultimate effect doctrine is codified in s 588FA(1)(b). By s 588FA(1)(b), the single transaction, to constitute a preference, must result in the creditor receiving more in respect of a debt that the company owes the creditor than the creditor would receive in respect of that debt if the transaction were set aside and the creditor were to prove for the debt in a winding up scenario. Where there is a running account, if the ultimate effect of the course of dealings was not a reduction or discharge of past debt, but the debtor obtained goods or services to an equivalent or greater value than the payments made to the creditor to secure those goods or services, s 588FA(1)(b) is not engaged. If the aggregate amount of the payments in the single transaction exceeds the aggregate value of the goods or services provided, the payments effect a reduction in the balance of the account, so that the transaction must result in the creditor receiving more than the creditor would receive if it had not received the payment and the creditor were to prove for the debt in a winding up scenario. As a matter of construction, it does not strain the language of s 588FA(1)(b) to conclude that the “ultimate effect doctrine” is encapsulated in that statutory formulation. Furthermore, such a construction gives coherence to the codification of the running account principle in s 588FA(3) and is supported by the extrinsic materials. The explanatory memorandum to the Corporate Law Reform Bill 1992 (Cth), which introduced s 588FA, stated at [1042] that sub-s (2) (which became sub-s (3)):