In the matter of Evolvebuilt Pty Limited

1. [1]

   The first and second plaintiffs Philip Raymond Hosking and David Anthony Hurst, who are the liquidators of the third plaintiff company Evolvebuilt Contracting Pty Ltd (“Evolvebuilt”), applied by originating process filed on 15 September 2016 to recover, as unfair preferences, from eight defendants, payments made to them by Built NSW Pty Limited (“Built”) in respect of liabilities owing to those defendants by Evolvebuilt. The proceedings as against the sixth and seventh defendants were settled before the hearing, and the remaining claims for adjudication are those against the first defendant Extend n Build Pty Ltd, the second defendant Build Projects Pty Ltd, the third defendant Consek Pty Ltd, the fourth defendant Mr Thehai Trinh, the fifth defendant Truthful Construction Pty Ltd, and the eighth defendant Kennico Interiors Pty Ltd (“the remaining defendants”).

2. [2]

   With the exception of Kennico, the defendants were among a number of “secondary subcontractors” who had been subcontracted by Evolvebuilt to perform, on its behalf, certain interior work on a project, called the ANZ Project, at levels 9-25, 242 Pitt Street, Sydney, which Evolvebuilt had in turn been subcontracted to perform by Built as head contractor. Under the secondary subcontracts, Evolvebuilt became liable to pay the secondary subcontractors. It failed to do so, and in circumstances which will be described in further detail, Built paid them.

3. [3]

   The contract dated 14 September 2012 between Built as main contractor and Evolvebuilt as subcontractor contained the following definition:

4. [4]

   The contract also contained the following relevant terms:

5. [5]

   In late November 2012, extensive flood damage arising from a burst water pipe had the consequence that Evolvebuilt was unable to perform any work on the ANZ Project until 8 January 2013. Built issued a revised construction program and variation order, and there was a dispute between Built and Evolvebuilt. Evolvebuilt was not paid by Built, and Evolvebuilt did not pay its secondary sub-contractors (including the defendants).

6. [6]

   On 12 March 2013:

   1. (1)

      the secondary subcontractors ceased work on the project, by reason of non-payment by Evolvebuilt of their invoices;

   2. (2)

      Evolvebuilt’s director Mr L’Estrange sent to Built a letter, expressed as a formal request pursuant to clause 38.2 of the subcontract “that the attached secondary subcontractors are paid directly by Built on Evolvebuilt’s behalf”. It is possible that an informal request to like effect had been made as early as February; and

   3. (3)

      the default in payment of the secondary subcontractors (and also of employees) was brought to the attention of the CFMEU, which notified Built that it was concerned that Evolvebuilt was not paying employees their full entitlements, and requested an urgent conference.

7. [7]

   On 14 March 2013, following negotiations with CFMEU, Built terminated its subcontract with Evolvebuilt, and sent a letter to CFMEU, relevantly as follows:

8. [8]

   The table at paragraph 3 of that letter included each of the defendants other than Kennico. The first tranche of payments referred to in it were made, on or about 15 March, and the second tranche (varied as a result of the verification process) were made between 28 March and early April 2013, by Built’s solicitors Gadens.

9. [9]

   On 15 May 2013, Evolvebuilt served on Built a payment claim under the Building and Construction Industry Security of Payment Act 1999 for $4,173,326. That claim was adjudicated and resulted in a nil liability to Built.

10. [10]

    On 19 September 2013, Evolvebuilt appointed Messrs Hocking and Hurst as voluntary administrators, pursuant to Corporations Act, s 436A. On 21 November 2013, a creditors’ meeting resolved that Evolvebuilt execute a DOCA, and on 18 December 2013 Messrs Hocking and Hurst became its deed administrators. However, on 2 September 2015, pursuant to Corporations Act s 446B and Corporations Regulations 2001 cl 5.3A.07, the creditors were deemed to have specially resolved that Evolvebuilt be wound up, and Messrs Hocking and Hurst became its liquidators. By operation of Corporations Act, ss 9 and 513C(b), the relation back day is 19 September 2013, and the six month relation back period commenced on 19 March 2013.

11. [11]

    After 19 March 2013, the defendants (other than Kennico) received payments from Built, via Gadens, as follows (“the impugned payments”). Extend received $19,560 on 28 March 2013. Build Projects received $138,777.75 on 4 April 2013. Consek received $50,634.50 on 28 March 2013. Mr Trinh received $27,217.12 on 28 March 2013. Truthful received $40,701.65 on 28 March 2013. In some cases, those payments were in addition to other payments made on 15 March. Having regard to the table in the letter from Built to CFMEU set out above, and the schedule of payments which was subsequently provided to the liquidators by Gadens, I am satisfied that the impugned payments substantially correspond with those in the fourth column of the table, revised after investigation and verification by Built, and formed part of the second tranche of payments contemplated by that letter.

12. [12]

    Kennico received $91,978 between 25 March and 20 May 2013, directly from Evolvebuilt.

13. [13]

    The liquidators claim that the payments so received by the defendants are unfair preferences under s 588FA, which are insolvent transactions under s 588FC and voidable under s 588FE(2).

14. [14]

    The issue of insolvency is not seriously in dispute, although I will touch on it below. A defence that relied on (NSW) Industrial Relations Act 1996, s 127, was ultimately not pressed. The real issues are:

    1. (1)

       in the case of the remaining defendants other than Kennico, whether for the purposes of s 588FA(1):

    2. (2)

       in the case of all the remaining defendants, whether (for the purposes of the statutory defence afforded by section 588FG(2)) they did not have reasonable grounds to believe that Evolvebuilt was insolvent when the payments were received (it being conceded that they were received in good faith and that valuable consideration was given).

Insolvency

1. [15]

   Under s 588FE(2), a transaction of a company is voidable if, relevantly, it is an insolvent transaction of the company and it was entered into, or an act was done for the purpose of giving effect to it, during the 6 months ending on the relation back day. Under s 588FC, an insolvent transaction is, relevantly, an unfair preference given by the company at a time when the company is insolvent, or the company becomes insolvent as a result:

2. [16]

   Thus the plaintiffs must establish that Evolvebuilt was insolvent when the impugned payments were made, or became insolvent as a result.

3. [17]

   In this respect, the evidence of the liquidator Mr Hosking was neither challenged nor contradicted. He considered both the cash flow test and the balance sheet test. Of most significance, there was a significant balance sheet shortfall ($698,127) as at 31 December 2012, negative cash flow from March to July 2013, taxation and superannuation arrears, and arrears in payments of the secondary subcontractors. Those matters point inexorably to a conclusion that Evolvebuilt was unable to pay its debts as and when they fell due. There was nothing to indicate access to capital or borrowings which might tell against that conclusion. I unhesitatingly agree with Mr Hosking’s conclusion that Evolvebuilt was insolvent as at 14 March 2013.

Unfair preferences

1. [18]

   Corporations Act, s 588FA(1), provides as follows:

2. [19]

   Thus an unfair preference involves: (1) a transaction to which the company and the creditor are both parties (s 588FA(1)(a)); whereby (2) the creditor receives from the company more than it would receive if the transaction were set aside and the creditor proved for the debt in the winding up (s 588FA(1)(b)).

3. [20]

   As it appears that the likely return to unsecured creditors in the liquidation of Evolvebuilt is nil, it follows that each of the defendants have received more than they would receive if the payments to them were set aside and they instead proved in the liquidation. However, the critical question is whether they received the impugned payments from the company (that is to say, Evolvebuilt).

4. [21]

   That the section is concerned with payments made by and received from the company is plain from those words, but is confirmed by the terms of s 588FF(1)(a), which 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, inter alia, make 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. It is also supported by the policy and purpose of provision for the recovery of unfair preferences, which is to ensure that unsecured creditors are not prejudiced by the disposition of assets in a period shortly before the commencement of a winding up which would have the effect of favouring certain creditors. A payment made by a third party which does not come out of the company’s assets does not offend that policy.

5. [22]

   The liquidators submit that, although the payments were actually made by Built, via its solicitors Gadens, to the defendants, Evolvebuilt was also a party to the transaction, and the payments were made on behalf of Evolvebuilt such that the payments were (for the purposes of s 588FA(1)(b)) received from, and (for the purposes of s 588FF(1)(a)) made by, Evolvebuilt. They submit that Built made the relevant payments on behalf of Evolvebuilt, and that that is all that is required. In aid of that submission they invoke decisions of a Full Court of the Federal Court of Australia in Re Emanuel (No 14) Pty Ltd; Macks v Blacklaw & Shadforth Pty Ltd; [1] of Gordon J in Burness, In the matter of Denward Lane Pty Ltd; [2] and of another Full Federal Court in Commissioner of Taxation v Kassem and Secatore. [3]

6. [23]

   In Re Emanuel, the company (Emanuel) had contracted with a third party (EFG), with which it was in dispute, that in full settlement of the matters between them, EFG would make a payment to the company and another payment, at the company’s direction, to its creditor Blacklaw. Emanuel’s liquidator sought to recover the payment made to Blacklaw as a preference. At first instance the claim failed, the primary judge holding that if the relevant transaction was the contract, then Blacklaw was not a party to it; and if it was the payment, then it was made by EFG and not by Emanuel. This was reversed on appeal, the Full Court (O’Loughlin, Branson and Finn JJ) holding that:

   1. (1)

      for the purposes of s 588FA, a transaction could be comprised of multiple dealings and it was not necessary that the company be a party to every one of them;

   2. (2)

      where a debtor initiates a course of dealing for the purpose and having the effect of extinguishing a debt, the relevant transaction is the totality of the dealings through which the debtor procures that result, regardless of whether one or more of the dealings in the sequence does not require or involve the participation of the debtor;

   3. (3)

      both Emanuel and Blacklaw were parties to a transaction, although neither was a party to every component element; and

   4. (4)

      although the payment was made by EFG to Blacklaw, Blacklaw could be said to have received the payment from the company Emanuel for the purposes of s 588FA(1)(b), because it received from Emanuel the benefit of a chose in action (the promise to pay contained in the deed) owned by Emanuel.

7. [24]

   Holdings (1), (2) and (3) as described above were referable to the question whether the company was a party to the relevant transaction, while holding (4) was referable to the question whether the payment was received from the company.

8. [25]

   In reaching those conclusions, the Court first considered and overruled Nilant v Plexipack Packaging Services Pty Ltd, [4] which the trial judge had followed. In so doing, the court said (emphasis added): [5]

9. [26]

   In that passage, the Court distinguishes between the two questions: (1) whether the debtor A is a party to the transaction, and (2) whether the payment can be said to have been made by the debtor. The sentence which I have emphasised makes clear that they are independent, and that the circumstance that the debtor A authorises or ratifies the third party B’s payment to C does not of itself provide reason for saying that A made the payment. Pertinent to the facts of Re Emanuel, the Court then expressed the view, without deciding, that where that payment constituted part of the consideration B furnished and A required in the contract between them, and where that consideration was in final settlement of the obligations between A and B, then it seemed open to conclude that A had made the payment to C, albeit by using B as its instrument for that purpose. This is further considered when the court comes to what I have identified as the second question.

10. [27]

    The court then stated its disagreement with the view expressed in Nilant that it was impermissible to have a composite “transaction”, to not all aspects of which the company was a party: [6]

11. [28]

    The Court continued: [7]

12. [29]

    It is important to observe that those observations were made in the course of holding that for the purposes of s 588FA(1)(a), there could be a compound transaction, to not all parts of which the company had to be party.

13. [30]

    Addressing the first question, which arises under s 588FA(1)(a), the Court then said: [8]

14. [31]

    That was a conclusion that Emanuel’s role in authorising the transaction was sufficient to make it, for relevant purposes, a party to it. It was not a conclusion that Emanuel made the payment – the second question, to which the Court next turned: [9]

15. [32]

    Thus – consistent with what had been said in the context of the discussion of Nilant – it was recognised that the circumstance that Blacklaw received a benefit from the transaction did not necessarily mean that that benefit was received “from the company”. The conclusion that the payment was received “from the company” depended on the circumstance that the creditor received the actual benefit of an asset of the company, namely the chose in action owned by Emanuel under the settlement deed, in circumstances where: (1) the payment was part of the consideration furnished by EFG to Emanuel under the deed of settlement between them; (2) that consideration was in final settlement of all obligations between EFG and Emanuel; and (3) the payment was made at the direction of Emanuel, and but for that direction, Emanuel would have been entitled to the benefit of the payment; moreover, (4) had EFG failed to make the payment, Emanuel could have recovered from it the sum agreed to be paid.

16. [33]

    The significance of the payment being by direction of the debtor, out of an asset to the benefit of which the debtor is otherwise entitled, is illustrated by two cases in which Re Emanuel was distinguished.

17. [34]

    The first is the decision of Barrett J, as he then was, in Woodgate v Network Associates International BV. [10] Mr Woodgate, the liquidator of two related companies Marketing and Quadtel, sought to recover from the defendant, as preferences, eight payments made to it, of which Marketing had made six payments, and Quadtel two. His Honour found that while Marketing was indebted to the defendant, Quadtel was not, so there was no creditor-debtor relationship between the defendant and Quadtel to which s 588FA could apply. Invoking Re Emanuel, the liquidator submitted that, in circumstances where the companies were related and payments were sometimes made from the account of one in discharge of the other’s debts, the payments made by Quadtel should be regarded as payments made by Marketing. That submission was rejected (emphasis added):

18. [35]

    This illustrates that the consideration between the debtor company and the third party for making the payment to the creditor is important to determining whether the payment can be said to have been made by the company. That is because, if the third party’s undertaking to make the payment is part of the consideration, then the company may have a legal right to require the payment to be made, and the payment is, as in Re Emanuel, the conferral on the creditor of the benefit of an asset of the company, namely the consideration received by the debtor company under its contract with the third party.

19. [36]

    The second is the decision of Fryberg J in Re Imobridge Pty Ltd (in liq), [11] which was an application by a liquidator for the Court’s approval under Corporations Act, s 477(2B), to enter into a litigation funding agreement. One of the relevant considerations was the company’s prospects of success in the proposed action, which was a preference claim to recover from Westpac a payment made to it by a former director, Mrs Ellis. His Honour said (emphasis added; footnotes omitted): [12]

20. [37]

    This reinforces two features of Re Emanuel: first, that the payment was made by direction of the debtor company, pursuant to a deed which conferred the right to give such a direction on the company; and secondly, that Emanuel was legally entitled to the benefit of the payment, so that the payment came out of an asset to the benefit of which the company was entitled. The third party EFG having, for valuable consideration, agreed to pay the money to the company or at its direction, it was money to the benefit of which the company (or the general body of its unsecured creditors) was legally entitled. The direction to pay Blacklaw had the effect that one unsecured creditor was preferred. Had the direction not been given, Emanuel would have been entitled to recover the same sum from EFG, in which case it would have been for the benefit of all its unsecured creditors.

21. [38]

    In Burness, In the Matter of Denward Lane Pty Ltd, [13] the defendant had received a payment, in reduction of its running account with Denward Lane, from a related company Pre Cast Panels. Gordon J held that the payment was an unfair preference given by Denward Lane, but upheld a defence under s 588FG and so dismissed the liquidator’s claim for its recovery.

22. [39]

    Her Honour posed the question, whether the payment made by Pre Cast Panels (and not by the debtor company Denward Lane) fell within s 588FA(1), [14] and referred to passages in Re Emanuel which are included in those set out above at [24]-[28], and to a submission made by the defendant, founded on Woodgate, that Emanuel did not avail the liquidator because there was no evidence of any arrangement between Denward Lane and Pre Cast Panels whereby at the direction of Denward Lane, Pre Cast Panels made a payment to the defendant in discharge of an obligation owed by Pre Cast Panels to Denward Lane – to which the liquidator’s response was that the third party would have a “restitutionary” claim which would operate in the “space” otherwise occupied by restitution.

23. [40]

    Her Honour then considered the consequences of payment of a debt by a third party, and explained that where a third party paid a debt with the authority of the debtor, then it fell within Re Emanuel as a “course of dealing initiated by a debtor that is intended to … extinguish a creditor’s debt”. That may be, but that part of Emanuel was concerned with identifying a relevant transaction, and not with identifying from whom a payment was received.

24. [41]

    Her Honour did not accept that Re Emanuel was authority for the proposition that, before a payment by a third party can be taken to be a payment “accepted” or “made” by the debtor, there must be evidence of an arrangement between the debtor and the third party whereby at the direction of the debtor the third party made a payment to the creditor in discharge of an obligation owed by the third party to the debtor; and said that, where a payment made by a third party to a creditor is authorised by the debtor, nothing more is required – the debt is discharged by the third party at the request of or with the acceptance of the debtor. With respect, that accurately states what is required for a third party payment to discharge a debt, but elides what is required for a third party payment to discharge a debt with whether it can be said that the payment is made by the debtor – a distinction explicitly recognised in Re Emanuel, stating that the circumstance that a third party payment is sufficiently authorised or acknowledged by a debtor to result in discharge of the debt does not of itself mean that it can be said that the debtor company, as distinct from the third party, has paid the debt.

25. [42]

    Her Honour added that where a debt is paid by a third party which is unauthorised by the debtor, the debt is not necessarily discharged; if the debtor accepts or ratifies the unauthorised payment the debtor will be liable on a restitutionary cause of action to the third party, but if the debtor does not ratify the payment, the original debt remains outstanding. Her Honour then concluded: [15]

26. [43]

    However, that does not answer the question whether the payment was received by the creditors from the company – a question which was distinctly posed and answered by the Full Court in Re Emanuel, but not by Gordon J in Denward Lane. In that respect, however, the decision can nonetheless be explained on the facts in a manner consistent with Emanuel: her Honour found that Denward Lane transferred its business to Pre Cast Panels, and that the debts of Denward Lane were somehow taken over by Pre Cast Panels. It can be inferred that the consideration for the transfer by Denward Lane to Pre Cast Panels of its business included an undertaking by Pre Cast Panels to pay Denward Lane’s business debts. On that analysis, Pre Cast Panels had, for valuable consideration, covenanted to discharge Denward Lane’s debts, and the payments to the creditor were of money to the benefit of which Denward Lane was legally entitled, so that the creditor could be said to have received it from Denward Lane.

27. [44]

    Because, ultimately, a defence under s 588FG succeeded, the liquidator’s claim failed. Accordingly, what her Honour said on the question of third party payments was strictly obiter. However, it was referred to by a Full Court (Jacobson, Siopis and Murphy JJ) in Commissioner of Taxation v Kassem & Secatore. [16] In that case, the liquidators of Mortlake successfully brought proceedings for the recovery from the Commissioner of two payments made in reduction of Mortlake’s tax debt by a related company Antqip, as unfair preferences, and the Commissioner (unsuccessfully) appealed. The Full Court adopted the findings of the primary judge that the payments were loans advanced by Antqip to Mortlake, paid to the Commissioner at Mortlake’s direction: [17]

28. [45]

    Later, the Full Court found it unnecessary to determine whether it was necessary, for there to be an unfair preference, that there be a diminution of the debtor’s assets: [18]

29. [46]

    Thus the relevant essential features of that case were that the payment was one by direction of the debtor, of funds which it borrowed from the third party and to the benefit of which it was therefore legally entitled. Reliance on the notion that the payment was “on behalf of” the debtor company was an unnecessary additional basis for the decision, and there does not appear to have been close consideration of Gordon J’s reasoning; it was merely said that there was no apparent reason for taking a different approach in the instant case. [19] In any event, the words “on behalf of” cannot replace the statutory requirement that the receipt be “from the company”. While the debtor company’s authority or acquiescence may suffice to have the effect that the third party’s payment will discharge the debt, it does not follow that the payment was made by or received from the debtor company. They are two different questions.

30. [47]

    If, in the present case, Evolvebuilt had directed Built to pay its creditors out of moneys otherwise payable by Built to Evolvebuilt, the position would be indistinguishable from Re Emanuel, and the payments would on that analysis for relevant purposes have been received by the relevant defendants “from the company”. But that is not what happened in this case.

31. [48]

    It is true, as the liquidators emphasise, that prior to the impugned payments being made, Evolvebuilt made a formal request, under cl 38.2 of the contract, that Built pay the secondary subcontractors. Although at first I doubted that the evidence established that the request covered the impugned payments – as distinct from other earlier payments – that was when the only evidence was a letter from Gadens to the liquidators which left open an inference that an earlier tranche of payments had been the subject of such a request, but the later tranche had not. Now, with the benefit of the annexure referred to in that letter, and the direct evidence of the request made by Evolvebuilt, it is clear that the request was general in its terms. It is also true that the letter from Built to CFMEU, set out above, stated “Built NSW will make direct payment for labour to those subcontractors engaged by Evolvebuilt on the ANZ Project on behalf of Evolvebuilt where that payment has not been made by Evolvebuilt”.

32. [49]

    However, although the request was made, Built did not act pursuant to that request, but acted pursuant to the agreement it made with CFMEU, to which Evolvebuilt was not a party, in response to the industrial pressure applied by CFMEU, in order to retain the labour force on the project. To that end, rather than acting pursuant to its contract with Evolvebuilt, it terminated that contract and indicated that the secondary subcontractors would henceforth be engaged through a new subcontractor. Evolvebuilt’s request, though made, was in fact irrelevant to what transpired. And although Built’s letter to CFMEU contained a reference to the payment being “on behalf of Evolvebuilt”, excessive significance should not be given to a phrase used in a letter written by a layperson, setting out an agreement to which Evolvebuilt was not a party; in my view it meant no more than that the payment was made in respect of the debt owed by Evolvebuilt, and perhaps to reserve Built’s consequential rights against Evolvebuilt, such as they might be. Similarly, the receipt issued by J Sekulic, while it uses the phrase “on behalf of Evolvebuilt”, does so in qualification of “work performed” rather than “payment made”; in any event, it cannot determine the true quality of the payment. On the other hand, the letter from Gadens to the recipients of the payments dated 28 March 2013, accompanying the impugned payments, described the payments as made “on behalf of Built”.

33. [50]

    The decisive considerations are not the terminology adopted by the parties in their correspondence, but the substance of the transaction. Relevantly:

    1. (1)

       while under cl 38.2 Evolvebuilt could request Built to pay secondary subcontractors, it had no legal right to require Built to do so – Built’s compliance was discretionary;

    2. (2)

       there is no evidence that there were any moneys owing by Built to Evolvebuilt out of which such a payment could have been directed; to the contrary, the evidence is that Evolvebuilt’s payment claim was assessed at nil; and

    3. (3)

       there was no property or right to the benefit of which Evolvebuilt was entitled, out of which the impugned payments were made. The liquidators submitted that the payments had the effect of diminishing Evolvebuilt’s claim against Built in respect of Evolvebuilt’s liabilities to its secondary subcontractors, on the theory that by discharging those subcontractors’ claims against Evolvebuilt, that somehow reduced Evolvebuilt’s claim which was said to be founded on them. But Evolvebuilt’s rights under its contract with Built depended upon assessment of the progress of the works, not on the claims made on Evolvebuilt by the secondary subcontractors.

34. [51]

    In those circumstances, although it may well be that the payments by Built had the effect of discharging Evolvebuilt’s indebtedness – either because Evolvebuilt assented to them, or because the liquidators subsequently did so – it does not follow that they were made by or received from Evolvebuilt. The payments were made out of Built’s assets, and not out of any asset to the benefit of which Evolvebuilt was otherwise entitled. Thus they were made by, and received by the defendants from, Built and not Evolvebuilt. This is so, even if making the payment gave Built some right to restitution against Evolvebuilt. If it were otherwise, then the satisfaction of a creditor’s debt by the debtor’s guarantor would constitute a payment on behalf of the debtor and be liable to be avoided as a preference.

35. [52]

    Such a result is entirely consistent with the policy and purpose of the preference provisions. The effect on Evolvebuilt’s position – and that of the general body of its unsecured creditors – is at worst neutral. While it is known that Built has lodged a proof in the liquidation, the evidence does not reveal whether it includes the amounts paid to the defendants. At the highest, Built may have acquired a restitutionary claim against Evolvebuilt for the amount it paid to discharge Evolvebuilt’s debts, but that claim would not exceed the debts which it discharged. If Built did not acquire a restitutionary claim, then the result is positive.

36. [53]

    To set aside the impugned payments and order their “repayment” to the company, which had never been entitled to them, would confer on the company and the general body of unsecured creditors a windfall which they would not have received had Built not chosen – unconstrained by any legal obligation to do so – to make them. This feature is not present in any of the cases on which the liquidators rely.

37. [54]

    In my view, therefore, it cannot be said in any sensible way that the impugned payments to the defendants (other than the eighth defendant) were received from, or made by, Evolvebuilt. They therefore do not fall within s 588FA(1), or s 588FF(1)(a).

38. [55]

    The position of the eighth defendant, however, is different. The impugned payments to Kennico were made directly by, and received directly from, Evolvebuilt. As, if those payments were set aside and the eighth defendant proved in the liquidation, it would receive nothing, they are unfair preferences within s 588FA. As they were made at a time when Evolvebuilt was insolvent, they are insolvent transactions. And as they were made during the six-month relation back period, they are voidable. Subject to the affirmative defence raised under s 588FG, the liquidators are entitled to an order against Kennico under s 588FF(1)(a) for their repayment.

The 588FG(2) defences

1. [56]

   All the remaining defendants other than the fourth defendant invoke the defence afforded by s 588FG(2), which relevantly provides:

2. [57]

   The defendants bear the onus in relation to each of the elements of the defence. [20] However, the liquidators accept that the defendants became party to the relevant transactions in good faith, and gave valuable consideration, but submit that they had reasonable grounds to suspect insolvency, or that a reasonable person in their position would have done so.

3. [58]

   Black J described the relevant tests in Re Alsafe Security Products Pty Ltd atf the Alsafe Trust (in liq): [21]

4. [59]

   In respect of the first, second, third and fifth defendants, this issue strictly does not need to be decided, although it would provide an alternative basis for dismissing the claims against them. However, in the case of the eighth defendant, it is dispositive.

5. [60]

   Dealing first with the first, second, third and fifth defendants, by 28 March 2013 it was known to each of them that:

   1. (1)

      Evolvebuilt was not paying their invoices as and when they fell due, and had not done so for some time (typically, since January). It was for that reason that on 12 March they had ceased work.

   2. (2)

      The CFMEU became involved because employees and subcontractors were not being paid by Evolvebuilt.

   3. (3)

      They ceased work on 12 March 2013 because they (and others) were and remained unpaid.

   4. (4)

      CFMEU negotiated directly with Built to procure payment, and Built had terminated the sub-contract with Evolvebuilt on 14 March 2013 and then paid the defendants directly.

6. [61]

   The situation that crystallised on 14 March 2013 was self-evidently caused by Evolvebuilt’s failure to make timely payments, including to the relevant defendants, for a protracted period – a failure which a reasonable person in the position of the defendants would at least suspect was attributable to an inability to do so. That suspicion would have been reinforced by the circumstance that the payments were made by Built, as a result of negotiations by CFMEU – the obvious inference being because Evolvebuilt could not itself pay. There were, therefore, reasonable grounds for a person in the position of the defendants to suspect that Evolvebuilt was unable to pay its debts as and when they fell due. If the relevant defendants did not subjectively entertain such a suspicion, a reasonable person in their position would have done so. Accordingly, the defences raised under s 588FG by the first, second, third, and fifth defendants would have failed.

7. [62]

   As to the eighth defendant Kennico, it was only marginally involved in the ANZ Project, and had provided labour mainly to other sites. Its director Mr Chang was not aware of the events concerning the ANZ Project. Kennico received the impugned payments directly from Evolvebuilt, not from Built. There is nothing to indicate that it remained unpaid for any significant period of time; Mr Chang deposes that it received payments “in due course”. Mr Chang says that he would not have provided labour if he had known that Evolvebuilt was in financial difficulty; however, it is his state of mind when the payments were received, not when the labour was provided, that is relevant.

8. [63]

   The liquidators sent letters of demand to Kennico on 17 March and 1 April 2016, in response to which Mr Chang contacted Mr Hosking and told him that he did not know that Evolvebuilt was insolvent; that Mr L’Estrange (the director of Evolvebuilt) had sought his help, as he was waiting on payment from Built and had no money to pay sub-contractors; and that he had informed Mr L’Estrange that if Kennico was not paid, he would go to the union.

9. [64]

   Thus the relevant circumstances known to Kennico included only that Evolvebuilt’s director wanted his help because the company had no money to pay subcontractors as it was waiting on payment from Built. The suggestion that a payment from Built was awaited would convey that this was a short term cashflow issue, rather than insolvency. There is no evidence that payments to Kennico were significantly in arrears. I do not think that what was known to Kennico was sufficient to found in a reasonable person an actual apprehension or fear that Evolvebuilt was unable to pay its debts as and when they fell due, [22] as distinct from a short term cash flow problem; and as Mr Chang told Mr Hosking when asked, he did not subjectively know that Evolvebuilt was insolvent. The eighth defendant’s defence under s 588FG therefore succeeds.

Conclusion

1. [65]

   My conclusions may be summarised as follows:

2. [66]

   Although it may well be that the payments by Built had the effect of discharging Evolvebuilt’s indebtedness – either because Evolvebuilt assented to them, or because the liquidators subsequently did so – it does not follow that they were made by or received from Evolvebuilt. The payments were made out of Built’s assets, and not out of any asset to the benefit of which Evolvebuilt was otherwise entitled. Thus they were made by, and received by the defendants from, Built and not Evolvebuilt. This is so, even if making the payment gave Built some right to restitution against Evolvebuilt. If it were otherwise, then the satisfaction of a creditor’s debt by the debtor’s guarantor would constitute a payment on behalf of the debtor and be liable to be avoided as a preference. To set aside those payments and order their “repayment” to the company which had never been entitled to them would confer on the company and the general body of unsecured creditors a windfall which they would not have received had Built not chosen – unconstrained by any legal obligation to do so – to make them. This feature was not present in any of the cases on which the liquidators rely. In this case it cannot be said in any sensible way that those were received from, or made by, Evolvebuilt. They therefore do not fall within s 588FA(1), or s 588FF(1)(a).

3. [67]

   The impugned payments to the eighth defendant were made directly by, and received directly from, Evolvebuilt. As if those payments were set aside and the eighth defendant proved in the liquidation it would receive nothing, they are unfair preferences within s 588FA. And as they were made at a time when Evolvebuilt was insolvent, and during the six-month relation back period, they are voidable. Subject to the affirmative defence raised under s 588FG, the liquidators are entitled to an order under s 588FF(1)(a) for their repayment.

4. [68]

   The situation that crystallised in respect of the ANZ Project on 14 March 2013 was self-evidently caused by Evolvebuilt’s failure to make timely payments, including to the relevant defendants, for a protracted period – a failure which a reasonable person in the position of the defendants other than the eighth defendant would at least suspect was attributable to an inability to do so. That suspicion would have been reinforced by the circumstance that the payments were made by Built, as a result of negotiations by CFMEU – the obvious inference being because Evolvebuilt could not itself pay. There were, therefore, reasonable grounds for a person in the position of those defendants to suspect that Evolvebuilt was unable to pay its debts as and when they fell due. If the relevant defendants did not subjectively entertain such a suspicion, a reasonable person in their position would have done so. Accordingly, the defences raised under s 588FG by the first, second, third, and fifth defendants would have failed.

5. [69]

   However, the eighth defendant Kennico was only marginally involved in the ANZ Project, and was paid directly by Evolvebuilt. I do not think that what was known to Kennico – which amounted to no more than that Evolvebuilt’s director wanted his help because the company had no money to pay subcontractors as it was waiting on payment from Built – was sufficient to found in a reasonable person an actual apprehension or fear that Evolvebuilt was unable to pay its debts as and when they fell due, as distinct from a short term cash flow problem; and as Mr Chang told Mr Hosking, he did not subjectively know that Evolvebuilt was insolvent. The eighth defendant’s defence under s 588FG therefore succeeds.

6. [70]

   The ultimate result is that:

   1. (1)

      The plaintiffs fail to establish that the impugned payments to the first, second, third, fourth, and fifth defendants were unfair preferences.

   2. (2)

      Although the plaintiffs have established that the impugned payments to the eighth defendant were unfair preferences, the eighth defendant’s defence under s 588FG succeeds.

7. [71]

   The court therefore orders that:

   1. (1)

      There be judgment for the first, second, third, fourth, fifth and eighth defendants on the plaintiffs’ claims against them.

   2. (2)

      The plaintiffs pay the costs of the first, second, third, fourth, fifth and eighth defendants.