Hosking v Extend N Build Pty Ltd

BATHURST CJ: This is an appeal from a decision of a judge of the Equity Division of the Supreme Court of New South Wales dismissing proceedings brought by the first and second appellants, Mr Philip Hosking and Mr David Hurst as liquidators of Evolvebuilt Contracting Pty Ltd (Evolvebuilt) under s 588FA, s 588FC, s 588FE and s 588FF of the Corporations Act 2001 (Cth) (the Act). The liquidators claimed that certain payments made to a number of entities, including the present respondents, were voidable under s 588FE(1)(a) because they were “unfair preferences” within the meaning of s 588FA(1).

The primary judge rejected the claim against the first to fifth respondents on the basis that the payments did not constitute “unfair preferences” within the meaning of s 588FA(1) of the Act. The primary judge found that the payments made to the sixth respondent, Kennico Interiors Pty Ltd (Kennico), were “unfair preferences” within the meaning of s 588FA(1) of the Act, but held that Kennico was entitled to rely on the defence contained in s 588FG(2) of the Act.

The relevant provisions of the Act for the purpose of this appeal are s 588FA(1) and s 588FG(2). These subsections are in the following terms:

Section 9 of the Act defines “transaction” as including “a conveyance, transfer or other disposition” by a company, a “payment made” by a company or a “loan to” a company. Section 588FF empowers a court to make certain orders in relation to “voidable transactions”, including 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”. Section 588FE(2) states that a transaction is voidable if it is an “insolvent transaction” made during a period of time prior to the relation-back day (the relation-back period). Section 588FC states that a transaction is an “insolvent transaction” if it is an “unfair preference” within the meaning of s 588FA(1) and was entered into while the company was insolvent.

Most of the factual material is not in dispute, although the evidence on a number of important issues is somewhat sparse.

On 14 September 2012, Evolvebuilt entered into a subcontract (the Subcontract) with Built NSW Pty Ltd (Built) in relation to work on Levels 9-25 of 242 Pitt Street, Sydney (the premises). Evolvebuilt engaged subcontractors (the secondary subcontractors), including the present respondents, to carry out some of the work.

In late November 2012, the premises suffered extensive flood damage arising from a burst water pipe on or near Level 39 of the premises, which caused Evolvebuilt to be unable to carry out work on Levels 19-25 of the premises until 8 January 2013.

Evolvebuilt ultimately failed to pay the secondary subcontractors, including the present respondents, and each of the respondents ceased work at the premises on 12 March 2013. It is not in dispute that, as a result of Evolvebuilt’s failure to pay the respondents, they became creditors of Evolvebuilt for the purpose of s 588FA(1).

The Subcontract between Built and Evolvebuilt contained the following provisions:

On 12 March 2013, Mr Zac L’Estrange, a director of Evolvebuilt, sent a letter attached to an email to Mr Matthew Hunter, a representative of Built, in the following terms:

On the same day, the New South Wales Branch of the Construction, Forestry, Mining, and Engineering Union (the CFMEU) sent a notice to Built demanding that Built pay to the CFMEU money due from Evolvebuilt to employees:

On 14 March 2013, discussions between Built and the CFMEU culminated in a letter from Built to the CFMEU in the following terms:

From paragraphs [3(i)] and [3(ii)] and this table, it can be seen that the arrangement with the CFMEU required Built to make two payments to each of the first to fifth respondents. The first payment, which I shall call the “initial” payment, was to be made on 15 March 2013. Following this payment, paragraph [4] required the CFMEU to cause the workers and subcontractors to return to work. The second payment was to be made after Built had investigated and assessed the remaining amount actually payable to each of the first to fifth respondents.

As may be discerned from its absence from the letter from Built to the CFMEU on 14 March 2013, Kennico is in a different position to the first to fifth respondents. No payments were made to Kennico by Built as a result of the letter. Rather, Evolvebuilt itself made seven payments totalling $92,978 to Kennico from 25 March 2013 to 20 May 2013.

On 14 March 2013, Built terminated the Subcontract with Evolvebuilt. Senior counsel for the appellants submitted that it should be inferred that the Subcontract was terminated for “convenience” pursuant to cl 40A. So far as it is relevant, that clause was in the following terms:

Although senior counsel for the appellants stated that it could only be inferred that the Subcontract was terminated under cl 40A, the solvency report prepared by the liquidators expressly states that this was the case. The significance of the fact that termination was pursuant to cl 40A was said to be that existing rights under the Subcontract up to the date of termination were preserved.

On 15 March 2013, Built made the “initial” payments to the first to fifth respondents. These payments were made four days before the commencement of the relation-back period for the liquidation and no claim has been made by the liquidators in respect of these payments.

On 28 March 2013, after further investigation and assessment by Built of the outstanding amounts which it was liable to pay to the secondary subcontractors, Built made the second payments to the first to fifth respondents. The amounts paid varied somewhat from the amounts noted as still outstanding in the table at paragraph 3(i) of its letter to the CFMEU, presumably as a result of the investigation and assessment of the outstanding amounts conducted by Built. The payments were made by Built’s solicitors, Gadens Lawyers, from funds supplied by Built. These payments were made within the relation-back period and are the subject of the present claim, and I shall refer to them simply as the “payments” or the “impugned payments”.

The primary judge found that Evolvebuilt was insolvent at the time that the payments were made, and there was no challenge to that finding in this appeal. In the solvency report prepared by the liquidators on 14 September 2016 (the Solvency Report), the position in relation to the first to fifth respondents was summarised as follows:

The Solvency Report annexed a schedule of creditor claims as at 19 September 2013. The schedule showed Built as a claimed creditor for an amount of $3,305,441.80, with this claim being supported by reference to a “payment claim” dated 29 May 2013 and a “liquidated damages claim” dated 8 July 2013.

Further background to the present dispute was provided in a letter from Gadens Lawyers, acting for Built, to the liquidators dated 23 October 2013. They summarised the position so far as their client was concerned in the following manner:

The schedule referred to in that letter is a document entitled “Schedule of Direct Payments – Paid by Built on behalf of [Evolvebuilt]”. Part of the schedule is headed “Payments by Gadens on behalf of Built to [Evolvebuilt’s] Subcontractors”. A section of the schedule includes the payments to the first to fifth respondents which are the subject of these proceedings. The payments are cross-referenced to what is described as the “29th May ‘13 Payment Schedule”, which would seem to correspond with the “payment claim” of 29 May 2013 referred to in the schedule to the Solvency Report as forming part of the basis of the proof of debt lodged by Built. There is no evidence to suggest that the liquidators have admitted Built to proof in respect of its claim at the time of the present appeal.

As the primary contention of the appellants was that the primary judge failed to properly apply three decisions of the Federal Court of Australia on the construction of s 588FA(1) of the Act, it is convenient to deal with these decisions prior to considering the reasoning of the primary judge.

The first is the decision of the Full Court of the Federal Court in Re Emanuel (No 14) Ltd (in liq) (1997) 147 ALR 281 (Re Emanuel). The facts were relatively straightforward. Emanuel Ltd (Emanuel) had entered into financing arrangements with a group of financiers known as the “EFG Group”, and in particular, ELFIC Ltd (ELFIC). Following default and litigation, Emanuel and ELFIC entered into a deed of covenant whereby certain properties were agreed to be transferred to other companies in the EFG Group.

Under the deed, ELFIC, for its part, agreed to pay the sum of $332,313.54 at the direction of Emanuel to Blacklaw & Shadforth Pty Ltd (Blacklaw), who was a creditor of Emanuel. On the date of the execution of the deed, Emanuel also executed an authority to ELFIC directing it to pay the sum of $332,313.54 to Blacklaw on its behalf. On the same day, Emanuel went into voluntary administration and was subsequently placed into liquidation. The liquidator sought to recover the payment from Blacklaw as an “unfair preference” under s 588FA(1) of the Corporations Law, which was in substantially the same terms as s 588FA(1) of the Act in the present case.

In resisting the liquidator’s claim to recover the payment, Blacklaw’s primary argument was that Emanuel was not a party to the “transaction” pursuant to which the payment was made for the purpose of s 588FA(1)(a) since the transaction was between Blacklaw and ELFIC with the payments being made out of ELFIC’s funds. The trial judge, in upholding that argument, relied on the earlier decision of a single judge of the Federal Court in Nilant v Plexipack Packaging Services Pty Ltd (1996) 21 ACSR 428 (Nilant).

The Full Court reversed the decision of the trial judge. In rejecting the argument accepted by the trial judge, the Court made the following remarks at 287-288:

In declining to follow Nilant, the Court made the following additional comments at 288-289:

The Court then made the following remarks at 289:

The Court also considered the question of whether the payment was received “from the company” for the purpose of s 588FA(1)(b) and analysed the position as follows at 290-291:

Re Emanuel is essentially authority for two unsurprising propositions. First, an agreement for consideration between a debtor company and a third party by which the third party is required to pay funds to a creditor of the debtor company and does so pursuant to a direction by the debtor company can constitute a “transaction” within the meaning of that expression under s 9 of the Act. Second, a payment to the creditor pursuant to a direction of the debtor company with which a third party is contractually bound to comply is a payment “from” the debtor company for the purpose of s 588FA(1)(b) of the Act.

The second decision is the decision in Burness v Supaproducts Pty Ltd (2009) 259 ALR 339; [2009] FCA 893 (Burness), which involved the question of whether two payments made by Pre Cast Panels Pty Ltd (Pre Cast Panels) in reduction of a running account between Denward Lane Pty Ltd (Denward Lane) and Supaproducts Pty Ltd constituted “unfair preferences” under s 588FA(1) of the Act. It appears that, some time prior to the impugned payments being made, Pre Cast Panels, which was a company related to Denward Lane, had taken over the business of Denward Lane and attended to the payment of some of the debts outstanding in respect of the business.

Gordon J stated that she assumed that the liquidator’s contention was that Pre Cast Panels had a claim against Denward Lane for the common money count of “money paid” in respect of the payments made by Pre Cast Panels. Her Honour referred to Lumbers v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635; [2008] HCA 27, noting that the High Court had stated at [80] that “the bare fact of conferral of the benefit does not suffice to establish an entitlement to recovery”. Her Honour’s conclusion at [42]-[47] was in the following terms:

In Burness, it was clear that, at the very least, Denward Lane had acquiesced in the payment of its debts as part of a transaction whereby Pre Cast Panels took over its business. Further, it must be noted that the payment was found to be part of a “course of dealing” that was intended to, and did, extinguish the creditor’s debt.

The third decision is the decision of the Full Court of the Federal Court in Federal Commissioner of Taxation v Kassem (2012) 205 FCR 156; [2012] FCAFC 124 (Kassem), in which a company called Antqip Pty Ltd (Antqip) made two payments to the Federal Commissioner of Taxation, who allocated the payments to an account relating to a primary tax liability for a related company, Mortlake Hire Pty Ltd (Mortlake). The primary judge found that the payments made by Antqip were made out of funds lent to Mortlake and that the payments were made at the direction of that company. After a successful winding-up application, the liquidators appointed to Mortlake sought to recover the payments made by Antqip to the Commissioner.

The Court, in upholding the liquidators’ claim, stated that the case was a “clear example of a lender paying moneys advanced to a creditor of the borrower in accordance with the borrower’s directions”, and that, even if it was not correct to describe the transaction as a loan, what was important was the finding that the payment was “a payment that was made by or on behalf of” Mortlake: see Kassem at [40]-[41]. Their Honours then made the following remarks at [42]-[43] on which some reliance was placed by the appellants in the present case:

The primary judge described the issues in the case at [14] as follows:

The primary judge stated that, for the purpose of s 588FA(1), an unfair preference involved “a transaction to which the company and the creditor are both parties”, whereby “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”.

The primary judge emphasised the importance of the phrase “from the company” in s 588FA(1)(b), noting that, if it is found that a transaction is voidable, the Court may make an order under s 588FF(1)(a) 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”.

After outlining the facts of Re Emanuel, the primary judge referred to the passage which I have extracted at [27] above. He stated that the Court in Re Emanuel distinguished between the question of whether the debtor company was a party to the transaction and whether the payment was received “from” the debtor company.

The primary judge then referred to the passages in the judgment which I have extracted at [28] above. He stated that it was important to note that the observations in Re Emanuel 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 a party”. He noted that, in the paragraph which I have cited at [29] above, the Court concluded that “Emanuel’s role in authorising the transaction was sufficient to make it, for relevant purposes, a party to it”. The primary judge also stated that this did not amount to “a conclusion that Emanuel made the payment”.

The primary judge noted that the Court dealt with the latter question in the passage from the judgment which I have extracted at [30] above. He stated at [32] that the conclusion that the creditor received a benefit from the transaction did not necessarily mean the benefit was received “from the company” for the purposes of s 588FA(1)(b). Rather, he stated that the Court’s conclusion in Re Emanuel depended on several facts, including that “the creditor received the actual benefit of an asset of the company”, which was “the chose in action owned by Emanuel under the settlement deed” between ELFIC and Emanuel, that the “consideration was in final settlement of all obligations between EFG and Emanuel”, that “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”, and that if the payment had not been made, “Emanuel could have recovered from it the sum agreed to be paid”.

The primary judge stated that the decision of Barrett J in Woodgate v National Associates International BV [2007] NSWSC 1260 (Woodgate) illustrated 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” because, if “the third party’s undertaking to make payment is part of the consideration, then the company may have a legal right to require the payment to be made”.

The primary judge also referred to the decision of Fryberg J in Re Imobridge Pty Ltd (in liq) [2000] 2 Qd R 280; [1999] QSC 342 (Re Imobridge), which he stated reinforced two features of Re Emanuel. First, the payment was made “by direction of the debtor company, pursuant to a deed which conferred the right to give such a direction” and second, 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 primary judge also referred to the decision in Burness. He noted that Gordon J, in considering the consequences of the payment of a debt by a third party, 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’” and it was a payment made “by the company”. However, he stated that the part of Re Emanuel to which her Honour was referring in that context was “concerned with identifying a relevant transaction, and not with identifying from whom a payment was received”.

The primary judge noted that, in Burness, Gordon J stated 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”. The primary judge accepted that her Honour accurately stated what would be required for a third party payment to discharge a debt, but said that her Honour’s reasoning “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”, which was a distinction which he stated was specifically recognised in Re Emanuel at 287-288.

The primary judge also referred to the statement by Gordon J 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”. In that context, the primary judge referred to the conclusion reached by Gordon J at [47], which I have extracted at [33] above, and stated that it did not answer the question of whether the payment was received “from the company”. However, he stated that Burness could be explained in a manner consistent with Re Emanuel, since it could be inferred from the facts of Burness that the consideration for the transfer by the debtor Denward Lane to Pre Cast Panels of its business included an undertaking by Pre Cast Panels to pay Denward Lane’s business debts” and, in these circumstances, the creditor could be said to have received funds from Denward Lane.

The primary judge also referred to Kassem. He said that the relevant feature of that case was 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”. He said that reliance by the Court on the fact that the payment was “on behalf of” the debtor company was “an unnecessary additional basis for the decision” and that there was “no close consideration” of the reasoning of Gordon J in Burness. He stated that, in any event, the phrase “on behalf of” could not replace the statutory requirement that the receipt be “from the company”. He stated that, while the debtor’s acquiescence may suffice to discharge the debt, “it does not follow that the payment was made by or received from the debtor company”.

The primary judge accepted that, if Evolvebuilt had directed Built to make a payment to the secondary subcontractors out of moneys otherwise payable by Built to Evolvebuilt, the position would be indistinguishable from Re Emanuel. However, he said that this was not what happened in the present case.

The primary judge accepted that, prior to the impugned payments to the secondary subcontractors being made, Evolvebuilt had made a formal request under cl 38.2 of the Subcontract that Built pay the secondary subcontractors. He also noted that the letter from Built to the CFMEU on 14 March 2013 stated that the payment was “on behalf of” Evolvebuilt in circumstances where the payments to the secondary subcontractors had not already been made by Evolvebuilt.

However, his Honour stated that “Built did not act pursuant to the Evolvebuilt request, but acted pursuant to the agreement it made with the CFMEU, to which Evolvebuilt was not a party”, with that arrangement being reached in response to “industrial pressure”. He said that Built, rather than acting pursuant to the Subcontract with Evolvebuilt, “terminated that contract and indicated that the secondary subcontractors would henceforth be engaged through a new subcontractor”. He stated that the use of the phrase “on behalf of” in Built’s letter to the CFMEU “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”.

The primary judge stated that, while Evolvebuilt “could request Built to pay secondary subcontractors, it had no legal right to require Built to do so”. He stated that there was “no evidence that there were any moneys owing by Built to Evolvebuilt out of which such a payment could have been directed”. He stated that, to the contrary, “Evolvebuilt’s payment claim was assessed at nil” and that “there was no property or right to the benefit of which Evolvebuilt was entitled”.

The primary judge stated that, in the circumstances referred to in the preceding paragraphs, “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”, the payments were made out of Built’s assets, so that it did not follow that they were “made by or received from Evolvebuilt”. He said that the payments were “made by, and received by the [respondents] from, Built and not Evolvebuilt”. This was so “even if making the payment gave Built some right to restitution against Evolvebuilt”. He stated that, if it were otherwise, “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”.

The primary judge stated that the conclusion he reached was entirely consistent with the policy and purpose of s 588FA(1) of the Act. He stated that the effect on Evolvebuilt was “at worst neutral”. He stated that the evidence did not indicate whether Built’s proof of debt included the amounts paid to the first to fifth respondents. He stated that, at its highest, Built may have acquired a “restitutionary” claim for the amount it paid to discharge the debts.

The primary judge stated that, in these circumstances, it could not be said that the impugned payments to the first to fifth respondents fell within s 588FA(1) and therefore s 588FF(1)(a). He noted that, by contrast, the payments to Kennico were made directly by Evolvebuilt and that, in those circumstances, subject to the defence in s 588FG(2), the liquidators were entitled to an order for repayment under s 588FF(1)(a).

The primary judge noted that all respondents other than the fourth respondent invoked the defence under s 588FG(2). In relation to the first, second, third and fifth respondents, the primary judge concluded that, had it been necessary for them to rely on s 588FG(2), they would have been unsuccessful. There was no challenge to this conclusion on appeal.

So far as Kennico was concerned, the primary judge noted that it was “only marginally involved in the ANZ Project and had provided labour mainly to other sites”. He referred to the evidence of Mr Chang, a director of Kennico, that he “was not aware of the events concerning the ANZ Project”, that Kennico had received payments from Evolvebuilt, and that there was “nothing to indicate” that any payments “remained unpaid for any significant period of time”. The primary judge noted the evidence of Mr Chang that he “would not have provided labour if he had known that Evolvebuilt was in financial difficulty”, but stated that what was relevant was his “state of mind when the payments were received”.

The primary judge referred to the evidence of Mr Hosking that, following the sending of letters of demand to Kennico, Mr Chang contacted him and said that “he did not know Evolvebuilt was insolvent”, that Mr L’Estrange of Evolvebuilt, had sought his help “as he was waiting on payment from Built and had no money to pay subcontractors”, and that he had informed Mr L’Estrange that “if Kennico was not paid, he would go to the union”.

The primary judge concluded that the relevant circumstances known to Kennico indicated that Mr L’Estrange wanted his help because “the company had no money to pay subcontractors as it was waiting on a payment from Built”. He said that this suggested a “short term cashflow issue, rather than insolvency”. He stated that there was “no evidence that payments to Kennico were significantly in arrears”.

The primary judge considered that what was known to Kennico was insufficient 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 that Mr Chang’s evidence showed that he did not know that Evolvebuilt was insolvent. In the circumstances, he concluded that Kennico had made out the defence under s 588FG(2) of the Act.

Accordingly, the primary judge dismissed the appellants’ claim against each of the present respondents.

The appellants relied upon an amended notice of appeal. The grounds of appeal asserted, first, that the primary judge erred in construing s 588FA(1) of the Act in finding that the payments made by Built to the first to fifth respondents on behalf of Evolvebuilt were not received “from the company” (ground 1). Second, in that context, the appellants contended that the primary judge erred in not following the Federal Court decisions in Burness and Kassem to which I have referred at [32]-[36] above (ground 2).

The third ground was essentially a challenge to a finding of fact made by the primary judge. It was contended that the primary judge erred in finding that the payments made by Built to the first to fifth respondents were not made pursuant to the request from Evolvebuilt to Built on 12 March 2013, that the request was “irrelevant to what transpired”, and that the payments were “not payments out of any asset to the benefit of which” Evolvebuilt was otherwise entitled (ground 2A).

So far as Kennico was concerned, it was contended that the primary judge erred in concluding that the defence in s 588FG(2) of the Act was available when Kennico was aware that Evolvebuilt “had no money to pay subcontractors” (ground 3).

It is convenient to deal first with the grounds in relation to the primary judge’s findings in favour of the first to fifth respondents before turning to the ground relating to Kennico.

The appellants first dealt with their factual challenge to the finding of the primary judge that the request from Evolvebuilt to Built on 12 March 2013 to make the payments to the secondary subcontractors was “irrelevant to what transpired”. The appellants submitted that the primary judge’s finding was erroneous and identified several “objective” matters which were said to support this submission.

First, the appellants submitted that the request had what was described in their written submissions as the “contractual consequences” arising from cl 37.3A and cl 38.2. The difficulty with this submission is that those clauses impose no obligation on Built to make any payments, and perhaps, more importantly, those clauses envisage that payments would be made out of moneys due from Built to Evolvebuilt.

The appellants also referred to the fact that the request covered payments “otherwise due” from Evolvebuilt to the respondents, which appears to be a reference to the finding of the primary judge that the request was “general in its terms”. The appellants also relied upon the terms of the letter from Built to the CFMEU on 14 March 2013, to which I have referred at [12] above, the fact that Built terminated the Subcontract with Evolvebuilt on 14 March 2013, and the fact that the “initial” payments were made by Built to the secondary subcontractors on 15 March 2013. The appellants submitted that these matters should have led to the conclusion that, while not the only cause of the payments, the request was part of the “chain of causation” that caused the payments to be made.

Elaborating on this submission, the appellants stated that the finding of the primary judge that “Built did not act pursuant to [Evolvebuilt’s] 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 the CFMEU” did not automatically follow. They submitted that there was “no reason in principle” that the payments by Built could not have been “a result of both the request and the agreement with the CFMEU”. They submitted that the payments had “specific contractual effects to the benefit of Built”. As I noted at [67] above, that proposition may be doubted unless Built was indebted to Evolvebuilt and unless the Subcontract was on foot at the time the payments were made.

The appellants submitted that, in the absence of any evidence from Evolvebuilt and its directors, the CFMEU or the respondents, any conclusion about Built’s intentions “could only be based on documents created at the time and inferences to be drawn from them”. In particular, the appellants submitted that the language of the letter from Built to the CFMEU on 14 March 2013 was “consistent with” Built acting on Evolvebuilt’s request. It was submitted that it was not a question of applying “excessive significance” to the use of the words in the letter. They stated that the fact that letter was expressed to record an “agreement” and that, on its face, it was written by a layperson did not detract from the fact that the phrase “on behalf of” was used “because that was what the parties understood to be occurring”.

Senior counsel for the appellants referred to the letter from the CFMEU to Built on 12 March 2013 and the covering email to the request from Evolvebuilt to Built on 12 March 2013. He submitted that reading these two documents together showed that there had been some discussion between Built and Evolvebuilt prior to Evolvebuilt making its request to Built. He submitted that it could be inferred that the letter from the CFMEU had been sent first, after which there was discussion between Mr Hunter of Built, and Mr L’Estrange of Evolvebuilt, and that the request from Evolvebuilt to Built was then made as a result of this discussion. Senior counsel for the appellants submitted that this was consistent with the letter from Built to the CFMEU on 14 March 2013 which stated that the payments would be made “on behalf of” Evolvebuilt.

The appellants further submitted that this was supported by the receipt issued by the first respondent for the “initial” payment made by Built on 15 March 2013, which stated “Cheque received on the 15/3/13 for $17,580.00 for works completed on the ANZ project on behalf of Evolvebuilt”. They submitted that this made it clear that it was Evolvebuilt’s obligation which was discharged by the payment. The appellants also submitted that, when Gadens Lawyers, the solicitors for Built, used the phrase “on behalf of Built” in making the payments, this merely reflected the fact that the payments were made out of moneys held by Gadens Lawyers at the direction of Built.

Further, in relation to the findings made by the primary judge to which I have referred at [52] above, the appellants did not dispute that Built’s accession to Evolvebuilt’s request was “discretionary” and they also accepted that there was no direct evidence that any money was owing by Built to Evolvebuilt. However, they submitted that, since the terms of cl 38.2 indicated that “direct payments” were to be made out of money payable to Evolvebuilt and Evolvebuilt’s payment claims had been assessed at nil, an inference could be drawn that the “direct payments were taken in to account” in assessing Evolvebuilt’s payment claim because, in substance, by making the payments to the secondary subcontractors, Built was paying for work for which it would otherwise have had to pay Evolvebuilt. In that context, senior counsel for the appellants submitted that at the time the payments were made, Evolvebuilt had accrued contractual rights against Built. He noted that, notwithstanding the termination of the Subcontract, cl 40A preserved “accrued rights”.

Senior counsel for the appellants also submitted that, if at the time the payments were made, Evolvebuilt owed more money to Built than Built owed to Evolvebuilt, then the payments made by Built would simply be added to the amount Evolvebuilt owed Built. However, he accepted that, if the payments were made by Built as a volunteer, then the appellants would not have a case. He submitted that Built would have a “right of recovery” against Evolvebuilt if the payment was made “with the assent of or at the request of” Evolvebuilt. He accepted that the evidence did not show whether Built’s asserted “right of recovery” had been accepted by Evolvebuilt or its liquidators. However, he referred to the proof of debt lodged by Built, which was summarised in paragraph [10(c)] of the Solvency Report to which I have referred at [19] above, and correctly noted that it included claims for the payments to the secondary subcontractors, as I have discussed at [22] above.

Senior counsel for the appellants submitted that there was no issue as to whether Evolvebuilt and the respondents were parties to a “transaction” for the purposes of s 588FA(1)(a). However, while it is correct that the primary judge decided the case on the basis that the impugned payments were not received “from the company” and did not expressly state that there was no “transaction” to which Evolvebuilt and the respondents were parties, it seems to me to be implicit in his reasoning which I have discussed at [50]-[53] above that Evolvebuilt was not a party to any relevant “transaction”. This is also implicit in findings of the primary judge which were the subject of challenge by the appellants in ground 2A of the amended notice of appeal.

So far as the failure to follow the Federal Court authorities was concerned, the appellants first noted that the decisions in Woodgate and Re Imobridge, predated the decision of Gordon J in Burness. They referred to her Honour’s consideration of these cases in Burness at [46], which I have extracted at [33] above, and pointed to the fact that the primary judge doubted whether her Honour’s analysis was correct, as I have noted at [46] above. They submitted that the primary judge was incorrect to say at [44] that her Honour’s conclusion on this point was obiter and they submitted that her Honour’s remarks were endorsed by the Full Court in Kassem. They submitted that, in these circumstances, the primary judge should have followed Burness.

The appellants also submitted that the primary judge was incorrect in concluding that the position of guarantors was a reason why their construction of s 588FA(1) could not be sustained. They submitted that a guarantor had a direct contractual relationship with a creditor and would only have rights against the debtor once it had satisfied its own obligations. They submitted that, by contrast, in the present case, Evolvebuilt had rights against Built being either a “chose in action in contract” or a “quantum meruit”. However, this ignores the evidence that Built terminated the Subcontract and that an adjudicator had determined that nothing was owed by Built to Evolvebuilt.

Senior counsel for the appellants submitted that Gordon J accepted in Burness at [42] that a payment made by a volunteer is not recoverable but, referring to Burness at [44], stated that her Honour concluded that, if a payment was authorised by a debtor company, then it fell within the principles of Re Emanuel. Senior counsel for the appellants submitted that her Honour did not accept that Re Emanuel was authority for the proposition that, before a payment could be taken to have been accepted or made by a debtor, there must have been 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”. He submitted that it followed from her Honour’s reasoning that there could be an “ex post facto authorisation”.

Senior counsel for the appellants also submitted that, contrary to what was said by the primary judge, it was no part of the reasoning of Gordon J in Burness that there was a relationship between the debtor Denward Lane and Pre Cast Panels to the effect that the latter would pay the debts of Denward Lane’s business.

The appellants finally submitted that, even if this Court did not accept that the effect of the decisions in Burness and Kassem was to “expand the circumstances in which payment may be seen to be made by the company”, the present case fell within the approach stated in Re Emanuel.

The first to fifth respondents (the respondents) submitted that the substance of the appellants’ submission was that, as a result of cl 37.3A and cl 38.2 of the Subcontract, each of the impugned payments made by Built was “recoverable as a debt” and that “those payments otherwise were to come from monies otherwise payable” to Evolvebuilt. It was submitted that this submission presupposed two matters: first, the ongoing existence of the Subcontract and the ability of Evolvebuilt to enforce their rights under the Subcontract; and second, that the payments were made pursuant to the Subcontract.

The respondents submitted that these propositions did not sit comfortably with the fact that the Subcontract had been terminated, that Built did not take any steps to make any payments until after termination and after it had reached its own arrangement with the CFMEU, and that there was an adjudication which had determined that there were no moneys owing from Built to Evolvebuilt.

The respondents submitted that the primary judge was correct in not placing “excessive significance” on the phrase “on behalf of” in the letter from Built to the CFMEU on 14 March 2013, stating that it was “difficult to imagine what other phrase may have been used” to express the reason for the arrangement with the CFMEU. They stated that the receipt relied upon by the appellants to which I have referred at [71] above did not advance the position, since it was merely a description of the work which had been done. They also pointed to the fact that the payments were not made out of any fund held on behalf of Evolvebuilt and that the appellants’ submission that they had a right to claim “quantum meruit” from Built could not be correct since it had been determined by an adjudicator that there were no moneys owing by Built to Evolvebuilt.

The respondents submitted that the “factual matrix” in the present case was different from that which was considered in Re Emanuel since Evolvebuilt was unable to compel Built to make the impugned payments and, once the Subcontract was terminated, any right which Evolvebuilt might have had to enforce the making of the payments was “destroyed”. This submission fails to take into account that, to the extent that Evolvebuilt had “accrued rights” prior to the termination of the Subcontract, they were preserved.

The respondents submitted that, in Burness, the “commonality of control” of the debtor Denward Lane and its successor Pre Cast Panels meant that the finding that the payments made by Pre Cast Panels were intended to, and did, discharge Denward Lane’s debts to its creditors was an easy one to which to come. They submitted that, in effect, Pre Cast Panels took “an assignment of the debt owing to the creditor with a view to discharging the original debtors’ obligations to the creditor”. They submitted that, in the alternative, Gordon J had concluded that Denward Lane had “acquiesced in the discharge of its indebtedness to the creditors with the result that the payment was made by the original debtor”.

In that context, the respondents submitted that the “mere fact of authorisation of a payment by a third party to a creditor” did not have “the effect of bringing the transaction within the meaning of” s 588FA(1) if the transaction was “not one for which the third party requires the consent [of the debtor]” or “where the payment by the third party does not arise on the debit side of [the debtor’s] balance sheet”.

Applying this analysis to the present case, the respondents submitted that an inference could be drawn that the arrangement between the CFMEU and Built was that, “in exchange for Built making the impugned payments, the respondents would return to the site and continue to work for Built”. On this view of the facts, the respondents submitted that Evolvebuilt was not a party to the relevant transaction and was thus not in a position to “authorise” it.

The respondents further submitted that, in Kassem, the payment was made by Antqip, a related entity of the debtor Mortlake, to a creditor in circumstances where Mortlake was in a position to direct that the payment to the creditor be made. They submitted that the Court had come to the view that “the fact that the payments had come out of the net assets of the company in liquidation was sufficient” to make the transaction one to which s 588FA(1) applied. They submitted that this was in contrast to the present case, where the payments did not and could not have come out of the assets of Evolvebuilt. The respondents also submitted that this was an appropriate case in which to consider whether a diminution in a debtor’s assets is necessary for a transaction to constitute an “unfair preference” for the purposes of s 588FA(1).

Counsel for the respondents submitted that the phrase “received from the company” meant that the company must “give something away”. He submitted that, for s 588FA(1) to apply, it was necessary that funds otherwise available for distribution in liquidation were applied in payment of a debt so that they were no longer so available. He submitted that the primary judge focused upon and made that distinction.

In the present case, counsel for the respondents submitted that the inability of Evolvebuilt to access the fund from which Built made the payments meant there was never an asset available to the creditors of Evolvebuilt which would have been distributable in liquidation and therefore, that the mischief which s 588FA(1) was enacted to address had not been offended.

As the primary judge correctly pointed out, there are two matters which must be established for a transaction to constitute an “unfair preference” within the meaning of s 588FA(1). First, “the company and the creditor must be parties to the transaction” and second, the transaction must result in “the creditor receiving from the company … more than the creditor would receive from the company” if the transaction were set aside. Each of these matters must be established by the appellants.

As was pointed out in Re Emanuel, a transaction can be made up of a series of interrelated dealings. Thus, in the present case, if it could be established that, as a result of an arrangement (whether express or inferred) between Evolvebuilt and Built, Built reached an arrangement with Evolvebuilt and its creditors, being the first to fifth respondents, pursuant to which those creditors were paid, that would constitute a relevant transaction for the purposes of s 588FA(1)(a).

This highlights the importance of identifying the “transaction” to which Evolvebuilt was said to be a party. In the present case, the appellants contended that the payments to the first to fifth respondents were as a result of both the request from Evolvebuilt to Built on 12 March 2013 as well as the request or demand by the CFMEU to Built on the same date, or as they put it, both requests were part of a “chain of causation” which resulted in the payments to the respondents by Built.

It does not seem to me to be helpful in this context to refer to a “chain of causation”. What is necessary for the purposes of s 588FA(1)(a) is to identify the “transaction” and determine whether Evolvebuilt was a party to it. If the transaction resulted from the contractual arrangements which existed between Built and Evolvebuilt, then I would accept, on the undisputed assumption that the first to fifth respondents would have been parties to such a transaction, that the transaction would fall within s 588FA(1)(a).

However, in the present case, I do not think that the appellants have established that Evolvebuilt was a party to the “transaction” as a result of which the payments were made by Built. It is first necessary to consider the circumstances in which the payments were made in light of the effect of the existing relationship between Evolvebuilt and Built.

The request from Evolvebuilt to Built on 12 March 2013 purported to be made under cl 38.2 of the Subcontract, which permitted Built to make payments to secondary subcontractors “out of moneys payable to” Evolvebuilt upon the request of Evolvebuilt. However, rather than making the payments pursuant to that contractual regime, Built terminated the Subcontract with Evolvebuilt. Although the appellants were correct in submitting that this did not affect “accrued rights”, cl 38.2 did not impose any obligation on Built to make the payments the subject of the request by Evolvebuilt. A fortiori, there was no obligation on Built to make the payments after the Subcontract had been terminated.

Further, it appears that Built contended that it did not owe any money to Evolvebuilt under the Subcontract, which was an assertion supported by the adjudicator’s determination referred to in paragraphs [5] and [10] of the letter from Gadens Lawyers to the liquidators on 23 October 2013 which I have set out at [21] above. Even if a request from Evolvebuilt under cl 38.2 were capable of imposing an obligation on Built to make a payment, it appears that Built had no “moneys payable to” Evolvebuilt out of which it could make such a payment.

It is against this background that the question of whether Evolvebuilt was a party to the “transaction” which resulted in the payments made by Built arises. Although, as the appellants pointed out, the covering email to the letter from Evolvebuilt to Built on 12 March 2013 requesting the payments to be made pursuant to cl 38.2 of the Subcontract referred to previous discussions between representatives of Evolvebuilt and Built, there is nothing in the letter from Built to the CFMEU on 14 March 2013 recording the arrangement between Built and the CFMEU which would indicate that it was an arrangement or “transaction” to which Evolvebuilt was a party. Indeed, there are several indications to the contrary.

First, the letter refers to a discussion between Mr Matthew Hunter of Built and a representative of the CFMEU, who appears from the letter to have been a Mr Rob Kera. There is no suggestion that Mr L’Estrange or any other officer of Evolvebuilt was a party to that discussion.

Second, the arrangement outlined in the letter is expressly said to be between the CFMEU and Built. There is no suggestion that Evolvebuilt was a party to the arrangement or involved in giving effect to its terms.

Third, although paragraph [1] of the letter refers to “direct payments” to employees of Evolvebuilt already having been made, they were in fact made the day after the letter on 15 March 2013. It can thus be inferred that these payments were made as a result of the arrangement outlined in the letter.

Fourth, paragraph [1] of the letter refers to Built making “direct payments” to employees of Evolvebuilt without making any suggestion in that part of the letter that those payments were made “on behalf of” or at the direction or authority of Evolvebuilt.

Fifth, paragraph [4] of the letter expressly states that, once all of the payments outlined in the letter are made, “the CFMEU will endorse that the workers and subcontractors will return to work on the project immediately”, with the subcontractors to be paid by “a partitioning subcontracting firm who will be engaged by” Built. There is no suggestion in this language that Evolvebuilt had any part in this arrangement.

It is true that, in relation to the payments to be made to the secondary subcontractors, paragraph [3] of the letter refers to those payments being made “on behalf of” Evolvebuilt. However, the payments are again referred to as “direct payments” to the secondary subcontractors by Built. There is nothing to suggest that any formal arrangements were made whereby Built would make the payments “on behalf of” Evolvebuilt, whether as agent or otherwise. Significantly, the part of the letter providing for the investigation and assessment by Built of the outstanding amounts after the “initial” payments had been made does not make any reference to participation by Evolvebuilt, as would be expected if it were a party to the arrangement.

The only other relevant document referred to by the appellants was a receipt from the first respondent in respect of the “initial” payments which had been made. The receipt stated that the payments were “for works completed on the ANZ project on behalf of Evolvebuilt”. In my opinion, that language accurately reflects the fact that the works were carried out “on behalf of” Evolvebuilt. However, it says nothing about the identity of the parties to the transaction pursuant to which the payment was made.

Moreover, as I indicated at [95] above, it cannot be ignored that Built asserted that it did not owe any money to Evolvebuilt and that the arrangement with the CFMEU was made separately from the pre-existing contractual arrangements between Built and Evolvebuilt, which were terminated on the same day.

The appellants submitted that, absent further evidence from Built, Evolvebuilt, the CFMEU or the respondents, any conclusion about Built’s motivation for the payments could only be inferred from the documents. That is true, but it must be borne in mind that the appellants bore the onus of showing that it should be inferred from the documents that Evolvebuilt was a party to the transaction. In my opinion, that onus has not been discharged. As I have indicated at [95] above, I would draw the contrary conclusion. It must be remembered that it would have been open to the appellants to call Mr L’Estrange or another representative from Evolvebuilt to elaborate on the events which occurred between 12 March 2013 and 14 March 2013.

Nothing I have written is in any way contrary to the Federal Court cases to which the primary judge and the parties referred. Re Emanuel made it clear that a “transaction” for the purpose of s 588FA(1) can be a “composite” transaction and that the debtor company and the creditor need not be a party to each part: see Re Emanuel at 288-289, to which I have referred at [28]-[29] above. In the present case, the evidence does not establish that the discussions between Built and Evolvebuilt on 12 March 2013 following the letter from the CFMEU to Built on the same day formed any part of a “composite” transaction by which the first to fifth respondents’ debts were paid.

The position is the same in both Burness and Kassem. In Burness, Gordon J described the payment as part of a “course of dealing” initiated by the debtor Denward Lane, referring to the evidence that a director of both Denward Lane and Pre Cast Panels, which made the payment to discharge Denward Lane’s debts, had indicated that the liability for the debts of Denward Lane’s business would be taken over by Pre Cast Panels: see Burness at [47], to which I have referred at [33] above. There is no evidence of an equivalent arrangement between Evolvebuilt and Built in the present case.

In Kassem, the Full Court stated that it was “a clear example of a lender paying moneys advanced to a creditor of the borrower in accordance with the borrower’s directions”, or that, even if it was not correct to describe the transaction as a “loan”, it involved a payment being “made by or on behalf of” the debtor Mortlake. It was not in contest that Mortlake was a party to the transaction: see Kassem at [40]-[43].

In these circumstances, it is not necessary to consider whether a creditor receives “from the company” a payment in respect of an unsecured debt for the purposes of s 588FA(1)(b) where, as part of a “transaction”, the payment is received from a third party and the debtor company authorised or acquiesced in the payment being made on its behalf so as to give rise to a “restitutionary” claim against it in favour of the third party. I am inclined to the view that, if the “restitutionary” claim resulted from a “transaction” to which the debtor company was a party, then the payment could be said to have been received “from the company”. This is consistent with the reasoning of Gordon J expressed in Burness at [46]-[47]. However, it is unnecessary to reach a final conclusion on this issue or on whether Built would have such a “restitutionary” claim in the present case. Nor is it necessary to determine the question left open by the Full Court in Kassem at [59] of whether it is necessary for there to be a diminution in the debtor company’s assets for a transaction to constitute an “unfair preference” under s 588FA(1).

It follows that the appeal against the dismissal of the claim against the first to fifth respondents should be dismissed.

The appellants submitted that the findings by the primary judge, to which I have referred at [57]-[59], should have been sufficient for him to conclude that a reasonable person would have had a suspicion that Evolvebuilt was insolvent such that the defence in s 588FG(2) of the Act was not made out. Senior counsel for the appellants submitted that Kennico had the onus of establishing the defence and that, absent a responsible officer of Kennico giving evidence as to their belief, the defence was not made out.

Kennico made no written submissions on this issue. Counsel for the respondents referred to Mr Chang’s statement that he did not think that Evolvebuilt was insolvent and noted that Mr Chang was not cross-examined.

Both parties accepted that the relevant principles were correctly set out by Black J in Re Alsafe Security Products Pty Ltd (in liq) [2016] NSWSC 428. As his Honour pointed out at [33]-[34], the test under s 588FG(2)(b)(i) is directed to whether “the particular creditor, with its perspicacity, the information available to it, and with any analysis of that information that it had made, had ‘no reasonable grounds’ for suspecting insolvency at the relevant time” and the test under s 588FG(2)(b)(ii) is “whether a reasonable person in the creditor’s circumstances, using the information reasonably available in those circumstances and making the analysis of that information which a reasonable person would make, would have had reasonable grounds to suspect the debtor’s insolvency”, with the matter being determined by reference to “a person who has the knowledge and experience of an average business person”. His Honour also pointed out at [36] that the word “suspect” for the purpose of s 588FG(2)(b) requires “more than wondering whether a matter exists or not, and involves a ‘positive feeling of actual apprehension or mistrust’ that the debtor will be able to pay its debts”.

The evidence is sparse. Mr Chang, a director of Kennico, gave evidence that Kennico only worked “over one or two” weekends on the works at the premises. He said that Kennico also provided labour to “other sites” prior to March 2013.

Mr Chang stated that Kennico received payment for the work at the premises in “due course” and that he was not aware that Evolvebuilt “had been terminated from the Pitt Street site”. He said that, had he been concerned that Evolvebuilt was in financial difficulty, he would not have continued to provide labour to Evolvebuilt.

The payments from Evolvebuilt to Kennico which were said to be unfair preferences comprised seven payments over a period from 25 March 2013 to 20 May 2013. Mr Hosking, one of the liquidators of Evolvebuilt, gave evidence that he had a telephone conversation with Mr Chang on 7 April 2016 in which Mr Chang stated that a director of Evolvebuilt “had sought his help as he had no money to pay subcontractors” and was “awaiting payment from Built”. Mr Chang said that he told the director of Evolvebuilt that “if he was not paid he would ‘go to the union’”.

On 16 June 2016, Mr Chang wrote a letter to the solicitor for the liquidators which, so far as it is relevant, is in the following terms:

It seems to me that this evidence leads to the conclusion that a reasonable person in the position of Mr Chang would have had “a positive feeling of apprehension or mistrust” that Evolvebuilt would be able to pay its debts at the time that the payments to Kennico were made. This conclusion follows from the fact that the work carried out by Kennico for Evolvebuilt was completed by 12 March 2013, that the payments were made over a subsequent period of two months, and that, more importantly, Mr Chang’s letter to the solicitor to the liquidators showed that he was aware that Evolvebuilt was “unable to pay everyone” and that payment had been arranged by the CFMEU.

It follows that Kennico has failed to establish the first limb of the defence in s 588FG(2)(b)(i). It also follows that the second limb of the defence in s 588FG(2)(b)(ii) has not been made out.

In the result, the following orders should be made:

BEAZLEY P: I have had the advantage of reading in draft the judgment of the Chief Justice. I agree with his Honour’s reasons and proposed orders.

GLEESON JA: I agree with Bathurst CJ.