Treloar Constructions Pty Limited v McMillan

THE COURT:

The appellant, Treloar Constructions Pty Ltd (Treloar), entered into a contract with McMillan Prestige Pty Ltd (McMillan Prestige) for the construction and project management of a motor vehicle showroom and service and repair facility. The contract was in writing, dated 21 December 2005, and required payment of invoiced amounts 30 days after the date of invoice.

McMillan Prestige was the holding company of what was conveniently described in these proceedings as the McMillan Group. It provided services to two wholly owned subsidiaries, McMillan NSW Pty Ltd, as trustee for the Bentley Sydney Unit Trust (Bentley NSW), and Autohaus Five Dock Pty Ltd, as trustee for Autohaus Five Dock Unit Trust (Autohaus Five Dock), for which it received management fees. Bentley NSW and Autohaus Five Dock were trading entities carrying on motor vehicle dealerships involving Bentley motor vehicles and Volkswagen motor vehicles respectively. McMillan Prestige was reliant on these two trading entities for financial support to meet its obligations.

A receiver was appointed to McMillan Prestige, Bentley NSW and Autohaus Five Dock on 2 February 2007. McMillan Prestige was wound up by order of the Supreme Court of New South Wales on 24 July 2007 on the application of Treloar.

By proceedings brought in the District Court of New South Wales, Treloar claimed the amount of $418,991.77, together with certain other costs and expenses, from the respondent Brian McMillan, the sole director of McMillan Prestige, pursuant to the Corporations Act 2001 (Cth), s 588M(3). The amount of $418,991.77 was the amount of invoices Treloar claimed remained unpaid by McMillan Prestige.

The trial judge rejected Treloar’s claim. Her Honour held that Treloar had not proved that the amount of the invoices remained unpaid and had not proved that McMillan Prestige was insolvent at the relevant times. In this regard her Honour considered that the inadequacies in the expert report relied on by Treloar were such that she was not in a position to determine, herself, the question of insolvency on the evidence before her.

Given the rejection of Treloar’s claim, her Honour found it unnecessary to consider Mr McMillan’s defence that he had reasonable grounds to expect that McMillan Prestige was solvent at the relevant times: see s 588H. Her Honour stated however, at 53, that had it been necessary to make a finding she would have accepted Mr McMillan’s evidence and upheld the defence. Accordingly, her Honour entered a verdict and judgment for Mr McMillan together with an order for costs.

Treloar appealed against her Honour’s dismissal of its claim for the moneys alleged to remain outstanding on the invoices. Treloar’s claim for other costs and expenses sought in the proceeding at first instance was not pursued on the appeal. Mr McMillan contended that if Treloar’s appeal were to be upheld, the Court should order that it be remitted for determination of Mr McMillan’s defence under s 588H.

The following issues were raised on the appeal:

The Corporations Act, Pt 5.7B provides for the recovery of property or compensation for the benefit of creditors of insolvent companies. Division 3 governs a director’s duty to prevent insolvent trading. Division 4 provides for the recovery of losses resulting from insolvent trading against a director. The provisions relevant to the present proceedings are as follows:

On or about 21 December 2005, Treloar and McMillan Prestige entered into a written contract. The contract was a simple one page document and was agreed to following negotiations as to its terms. Those negotiations included a letter dated 20 December 2005 sent by Race Treloar, on behalf of Treloar, to Mr McMillan, the principal of McMillan Prestige, in the following terms:

The attached document was as follows:

By way of notation on the document, Mr McMillan did not agree to cl 5 of the contract document, and he made an amendment to cl 6 by striking out the words “McMillan Prestige” and replacing it with “Treloar”. He added “McMillan will re-imburse Treloar’s”. He signed the document and dated it 21 December 2005. This document in its notated form constituted the contract between the parties (the contract). The deposit of $30,000 referred to in the letter of 20 December 2005 was paid on 25 December 2005.

Both at trial and on appeal, there was a dispute between the parties as to the proper construction of the contract and, in particular, the proper construction of cl 1.

The trial judge found, at 6, that there was no ambiguity in the contract and that its terms were plain and “entirely commercially realistic in their literal application”. Her Honour construed cl 1 to mean that Treloar would invoice McMillan Prestige after it had paid the suppliers and contractors that it had organised in accordance with cl 1. Her Honour found, at 20, that:

Treloar challenged this construction, contending that the word “paid” in cl 1 did not mean that Treloar was required to pay the suppliers and contractors that it had organised before it was entitled to render an invoice to McMillan Prestige. Treloar pointed out that the clause was silent as to the time at which the suppliers and contractors organised by Treloar were to be paid. It also pointed out that the term “paid” was also used in cl 2 and that, if the same meaning was given to the word “paid” in that clause as her Honour gave to it in cl 1, cl 2 would be a commercial nonsense.

Treloar submitted that the construction for which it contended was supported by the fact that in the anterior negotiations between the parties, evidenced in the letter of 20 December 2005 at para (4), Treloar noted that, with respect to deposits, it was “not prepared to extend this line of credit and it must remain your responsibility”.

Treloar also submitted that the construction of cl 1 for which it contended was supported by the express terms of cl 6 which, it argued, would be otiose if the construction advanced by Mr McMillan and as found by her Honour were correct. As Treloar pointed out, although cl 6 had been amended, “there was certainly no adjustment to provide that [Treloar] would effectively fund the construction for what potentially could be a significant period of time”.

The principles that govern the proper construction of a contract are well established. In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 the High Court stated at [35]:

Leaving aside her Honour’s finding, at 20, that payment of the underlying invoices of suppliers and contractors organised by Treloar was a condition precedent to its entitlement to invoice McMillan Prestige, her Honour correctly stated the principles to be applied in the construction of a contract, referring expressly to the above passage from Electricity Generation Corporation v Woodside Energy. However, we consider that her Honour was in error in the construction she gave to the contract and that its correct construction is as contended by Treloar, for the reasons which follow.

As we have said, the clause directly in contention is cl 1. That clause, together with cl 2, was directed to identifying the terms upon which McMillan Prestige was to be charged, according to whose responsibility it was to pay the relevant suppliers and contractors. In the case of suppliers and contractors whom Treloar engaged directly and in respect of whom Treloar was directly liable to pay for the goods and services provided, McMillan Prestige, in accordance with the terms of cl 1, was to be charged at cost plus a 12.5 per cent management fee.

Most expressions have a natural meaning, in the sense of their primary meaning in ordinary speech. However, there are occasions where direct recourse to such a meaning is and disputed words must be set in the landscape of the instrument as a whole. Once that is done, the purpose of the words may take on a different complexion. Thus, by way of example, use of the phrase “the sum actually paid” in a reinsurance contract does not necessarily impose a condition precedent in relation to the disbursement of funds but, rather, emphasises that it is the ultimate outcome of a calculation that determines final liability. In that context, the word “actually” is capable of meaning “in the event when finally ascertained” and the word “paid” is capable of meaning “exposed to liability as a result of the loss insured” (see Charter Reinsurance Co Ltd v Fagan [1997] AC 313 at 386).

Whilst we accept that “paid” is the past participle of “to pay”, we do not accept that, in the context in which it is used in cl 1, the word “paid” bears the meaning of “paid in fact” or “having been paid”. When construed in the context of the contract as a whole, and cl 2, in particular, we are of the opinion that it does not bear that meaning. Rather, cl 1, on its natural meaning and in context, does not require that the suppliers and contractors be paid before Treloar was entitled to raise an invoice in respect of the goods and services so provided. As a matter of construction of the contract, it is irrelevant that Treloar may not have paid the suppliers and contractors at the time it issued an invoice to McMillan Prestige. Should that occur, or have occurred, the suppliers and contractors would have their own contractual remedies as against Treloar.

The construction which we prefer, and consider is the correct construction of cl 1, is also supported by the terms of cl 6. That clause would have no work to do on the construction of cl 1 adopted by the primary judge. We are also of the opinion that in their negotiations in relation to the deposit, as evidenced by para (4) of the letter of 20 December and the amendment to cl 6 of the contract, Treloar and McMillan Prestige had turned their minds to the extent to which they were respectively to bear various costs as between themselves.

Given the construction which we give to cl 1, it is unnecessary to engage in any detailed analysis of her Honour’s finding that payment of the invoices by Treloar was a condition precedent to its entitlement to charge McMillan Prestige, except to state that, even on her Honour’s construction, we would not agree that cl 1 operated as a condition precedent.

The trial judge, at 26, held that if her construction of cl 1 were wrong, the contract would fail in its entirety for uncertainty as to the terms of payment. We do not agree that the contract was uncertain. Clause 1 of the contract contained a clear stipulation as to the terms upon which Treloar was entitled to charge McMillan Prestige and as to McMillan Prestige’s obligation to pay, both as to amount and as to time.

It may be that her Honour’s finding of uncertainty was based on her preferred view as to when a debt was incurred. This is discussed below. If that was the basis of her Honour’s view that the contract was uncertain, we would reject it in circumstances where the date each debt was incurred depended upon the proper construction of the contract. We have dealt with that in the preceding paragraph.

Treloar’s pleaded case was that McMillan Prestige “incurred a debt” within the meaning of s 588G(1)(a) each and every time at which it was issued with an invoice. There were 11 invoices in contention in the proceedings, being those issued on 28 April 2006, 5 May 2006, 14 May 2006, 26 May 2006, 9 June 2006, 22 June 2006, 30 June 2006, 11 July 2006, 27 July 2006, 28 August 2006 and 20 September 2006. (It should be noted the statement of claim and the primary judgment incorrectly identified the first invoice as dated 24 April 2006.)

The trial judge found, at 33, that there were three possible times at which McMillan Prestige incurred a debt: when it entered into the contract with Treloar; when Treloar issued a proper, valid and enforceable invoice under the contract; or when the contractual work was complete.

Her Honour preferred the first of these alternatives, albeit she considered it was problematic, in that the price would not be ascertainable until the work had been done and Treloar’s suppliers’ contractors had fixed their prices. That was not possible to ascertain as at the contract date, thus raising, in her Honour’s consideration, issues of contractual uncertainty. Her Honour concluded, at 34, on the basis of her view that the debt was incurred on the date of entry into the contract, that there was no basis for finding that McMillan Prestige was insolvent at that time.

As to the second alternative, her Honour, stated, at 33, that, having regard to the construction she gave to cl 1, Treloar had not issued proper, valid and enforceable invoices under the contract, as it had not issued invoices after it had attended to payment of its suppliers and contractors. Her Honour added that the second alternative led to some absurdity in that no debt would be incurred if Treloar had failed to issue an invoice or if invoices were issued without contractual justification as, on her view, had occurred.

Her Honour discounted the third possibility as it was not the basis of Treloar’s claim.

It is not necessary to engage in any analysis of the three possible times at which the debt was incurred to which her Honour gave consideration. Once it is accepted that, on the proper construction of the contract, Treloar was not required to pay its suppliers and contractors before it was entitled to render an invoice to McMillan Prestige, it is apparent that the debts were incurred on the date of issue of each invoice. This case is not one where, there being no concluded contract, the relevant “debts” are incurred by way of quantum meruit liability upon the value of the work performed becoming “ascertainable”: see Edwards v Australian Securities and Investments Commission (2009) 264 ALR 723; [2009] NSWCA 424.

Treloar’s claim for loss and damage, insofar as it was asserted on the appeal, was for the amount of the unpaid invoices in the sum of $418,991.77. The primary judge, at 36, found that Treloar had failed to prove that it had paid the underlying debts to its suppliers and contractors. Her Honour stated that it was not appropriate to assume or infer loss or damage where no attempt had been made to adduce evidence that the underlying indebtedness had been paid. Her Honour considered that the better inference was to the contrary, citing Manly Council v Byrne [2004] NSWCA 123 and the discussion in that case as to the inferences properly drawn pursuant to the principle in Jones v Dunkel (1959) 101 CLR 298.

Her Honour’s conclusions were reached having regard to her construction of the contract and after analysis of certain aspects of the evidence relating to the invoices. In that regard, her Honour observed that Treloar had produced a table of payments which demonstrated that McMillan Prestige had paid a total of $677,657.49 to Treloar. Her Honour continued, at 36:

Her Honour concluded that the evidence did not establish that Treloar had paid its suppliers and contractors more than was paid to Treloar by McMillan Prestige.

Treloar submitted that on the proper construction of the contract, payment to the underlying suppliers and contractors was irrelevant to the question of whether Treloar had suffered loss or damage in relation to the debts. Treloar further submitted that, contrary to the primary judge’s finding, and consistently with the proper construction of the contract, all that it was required to prove was that it had incurred a liability to the respective contractors and suppliers. Treloar submitted that it had done so by adducing, in evidence, the underlying invoices and that it was not necessary to prove that the underlying invoices had been paid, citing Powell v Fryer (2001) 37 ACSR 589; [2001] SASC 59.

Treloar further submitted that, in the ordinary case, the loss or damage in relation to a debt will be the amount of the unpaid debt, adjusted for any dividend from the liquidation: see Edenden v Bignall [2007] NSWSC 1122 per Barrett J (as his Honour then was) at [30]. In this case, as there had been no dividend from the liquidation, its loss was the amount of the unpaid invoices.

Mr McMillan acknowledged that Treloar had been invoiced by contractors and suppliers and that those invoices had been proved in evidence. However, he contended that proof that it had been invoiced by contractors and suppliers did not, on its face, represent Treloar’s loss or damage where Treloar had not proved that it had paid the contractors and suppliers.

In support of this submission, Mr McMillan drew a distinction between the position of a liquidator and that of a creditor. He submitted that where the action was being pursued against a director by a liquidator under s 588M(2), it may be sufficient to rely upon the face value of the invoices to establish loss. This was said to be appropriate because a liquidator could not reasonably be expected to look beyond the invoices issued to the company in liquidation. By contrast, where the claim was brought by a creditor pursuant to s 588M(3), proof of payment ought to be readily available, and that if payment is not proved it should not be accepted that loss or damage had been established.

In accordance with the terms of the statutory provision, Treloar’s claim against Mr McMillan required proof of the debt or debts owed by McMillan Prestige to Treloar, proof of loss or damage in relation to the debts and proof of a causal relationship between the loss and damage and McMillan Prestige’s insolvency. If each of those matters was proved, Treloar was entitled to recover as a debt due from Mr McMillan, an amount equal to the amount of the loss or damage.

Each of those matters, that is, the existence of a “debt” due by McMillan Prestige to Treloar; the suffering of loss or damage by Treloar; the causal link between the loss and damage and McMillan Prestige’s insolvency and the amount of the loss or damage, was in issue in the proceedings and remained in issue on the appeal.

“Debt” is not a defined term in the Corporations Act and is thus to be construed in accordance with the well-established principles of statutory construction: see Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27; [2009] HCA 41 at [47]; Certain Lloyd’s Underwriters v Cross (2012) 348 CLR 378; [2012] HCA 56 at [28].

In accordance with those principles, and as the case law discussed below demonstrates, the meaning of the term “debt” is well understood as a matter of ordinary language. There is also the question of the meaning of “loss or damage” and how the “amount equal to the amount of the loss or damage” is to be determined within the meaning of s 588M. This has also been the subject of case law which is discussed below.

In Powell v Fryer, Olsson J observed of the word “debt” in the predecessor Act to the Corporations Act:

In Hawkins v Bank of China, Gleeson CJ at 572 observed that this statutory conception of debt is “to be applied in a practical and commonsense fashion, consistent with the context and with the statutory purposes”: see also Edwards v Australian Securities and Investments Commission; Jelin Pty Ltd v Johnson (1987) 5 ACLC 463.

There was no suggestion in this case that the invoices were sham invoices or that they were otherwise inaccurate. Nor was the debt disputed other than by reference to the proper construction of the contract. Once it is accepted that, on the proper construction of the contract, it was not necessary for Treloar to have paid the subcontractors and suppliers before being entitled to invoice McMillan Prestige, there can be no dispute that a debt arose in accordance with the terms of the contract when Treloar issued invoices to McMillan Prestige. That the invoices rendered by Treloar were payable within 30 days of the date of issue did not alter the date on which a debt was incurred by McMillan Prestige.

The debt was a liquidated sum, the amount of the debt being the amount of the face value of each invoice rendered by Treloar to McMillan Prestige, or the difference between the face value of the invoice and any amount paid in respect of or in reduction of the invoiced amount, as the case many be: see Spain v Union Steamship Co of New Zealand (1923) 32 CLR 138 at 142, where Knox CJ and Starke J approved the observation in Odgers, Pleadings and Practice, 5th ed, that a liquidated debt exists “whenever the amount to which the plaintiff is entitled ... can be ascertained by calculation or fixed by any scale of charges, or other positive data”.

Notwithstanding that Treloar proved that McMillan Prestige had incurred a debt for the purposes of s 588M(1)(a), there is still a question whether Treloar suffered loss and damage, and if so the quantum of that damage. Mr McMillan submitted that in order for Treloar to prove that it had suffered loss or damage, Treloar was required to prove that it had paid the subcontractors and suppliers whose invoices underlay the invoices rendered by Treloar to McMillan Prestige.

There are a number of statements in the authorities to the effect that the non-payment of a debt by an insolvent company establishes that the creditor has suffered loss and damage. Thus in Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201; [1999] NSWSC 581, Austin J stated, at [78]:

A similar observation was made in Powell v Fryer by Olsson J at [88]:

His Honour concluded, at [89], that “the ‘loss or damage’ in question will normally be the quantum of relevant unpaid debts.”

As is apparent from the observations of Austin J and Olsson J respectively, the quantum of loss or damage to which the creditor is entitled under s 588M is usually the amount of the debt owed by the insolvent company to the creditor. However, it may not necessarily be so, as is apparent from the obiter observations of Barrett J in Edenden v Bignell at [30]:

However, as foreshadowed above, at [40], Mr McMillan submitted that although the observations in the authorities that the “face value” of invoices may be an appropriate basis for establishing loss or damage in the case of a liquidator bringing proceedings under s 588M(2), that was not so in the case of a creditor bringing a claim under s 588M(3). The distinction, on Mr McMillan’s submission, was that a liquidator can not be expected to look beyond the invoices issued to the company in liquidation.

As the submission related to Treloar, Mr McMillan submitted that its claim did not fall into the “ordinary case” to which Austin J referred in Tourprint and which Olsson J reiterated in Fryer v Powell. Mr McMillan submitted that Treloar ought to have been able to prove that it had paid the subcontractors and suppliers but that it had not done so. Accordingly, it had not proved that it had suffered loss or damage.

If, and to the extent that, Mr McMillan’s submission sought to propound a difference of meaning or statutory application of the phrase “loss or damage” as between a case brought by a liquidator and a case brought by a creditor, we do not consider it to be correct. A claim by a liquidator and a claim by a creditor are subject to the same requirement in s 588M(1)(b) that loss or damage has been suffered in relation to the debt because of the company’s insolvency. The chapeau to s 588M(1) makes it clear that the requirements of that subsection apply equally to proceedings brought under s 588M(2) and s 588M(3). Rather than there being any difference of meaning or statutory application as between the two subsections, it will be a question of fact in each case as to whether loss or damage has been suffered and the amount of that loss or damage.

Treloar acknowledged that it had not adduced evidence that it had paid the underlying invoices of the contractors and suppliers but contended it was not necessary that it do so. It submitted that, having regard to the proper construction of the contract, it was sufficient for it to have proved a liability to pay the subcontractors and suppliers and that it had done so.

On the construction we have given to the contract, Treloar’s entitlement to issue invoices was not dependent on Treloar having actually paid the underlying invoices issued by the contractors or suppliers. Treloar was entitled to payment of the amounts specified in the various invoices 30 days from the date of their issue.

Although McMillan Prestige complained to Treloar about “cost overruns”, it did not dispute that the works were carried out, and there was no allegation that Treloar’s invoices were not genuine. It follows that the various invoices issued by Treloar gave rise to an entitlement in Treloar to be paid the sums specified. Treloar thus suffered loss or damage when it was not paid in accordance with its contractual entitlement.

As is apparent from the observations of Barrett J in Edenden v Bignell, the debt owed and “loss or damage” recoverable under s 588M are distinct concepts. Nonetheless, the non-payment of a debt is an available means of establishing that a creditor suffered loss or damage in relation to the debt, for the purposes of s 588M(1)(b), unless there is some evidence to the contrary such as payment or part payment of the debt, by, for example, a distribution by a liquidator on the winding up.

In this case, Treloar contended that the non-payment of the relevant invoices established not only that it had suffered loss or damage for the purposes of s 588(1)(b), but that the amount of compensation to which it was entitled under s 588M(3) was the amount unpaid on those invoices. We have already dealt with the first part of this submission.

In our opinion, this case falls within the usual class of case where the amount of the loss or damage suffered was the amount of the debt owed, being the total of the unpaid invoiced amounts.

Treloar contended that McMillan Prestige was insolvent in the period from 4 April 2006 to 20 September 2006. In proof of insolvency in that period, Treloar relied upon the expert evidence of Christopher Palmer, an insolvency practitioner, who approached the question of insolvency on the basis of the ‘cash flow test’. The trial judge, at 39, accepted that this is the primary test for determining solvency and was the relevant test to apply in this case. That this was so had been conceded by Mr McMillan before her Honour.

However, her Honour, at 40, considered that Mr Palmer’s report was “seriously flawed”, in that some of the assumptions he had made were incorrect and “various of the tables and figures upon which he rested his analysis were either wrong or unreliable”. In coming to this conclusion, her Honour reproduced Mr McMillan’s submissions in criticism of Mr Palmer’s report. Those criticisms were, essentially, as follows:

Her Honour concluded that these matters highlighted that, by his own admission, very little or no weight could be given to Mr Palmer’s opinion as stated in his report.

Before the trial judge, Treloar advanced two principal responses to these criticisms. The first was that Mr McMillan’s criticisms did not affect the admissibility of Mr Palmer’s report but only raised a question as to the weight to be accorded to it. In making that response, Treloar pointed out that Mr Palmer had not been cross-examined as to how the qualifications or concessions to which he had agreed affected his ultimate conclusion as to insolvency. Secondly, Treloar submitted that the assertions or propositions that had led Mr Palmer to qualify parts of his report, or in respect of which he had made a concession, needed to be proved before the report could be rejected. This submission was directed principally to whether there had in fact been a $700,000 funding commitment from Volkswagen Group of Australia (Volkswagen Australia), or whether the arrangement merely had the status of a letter of intent. Her Honour, at 42, rejected the latter characterisation of the arrangement.

Her Honour made other criticisms of Mr Palmer’s report, some of which, in any event, had been signalled by Mr Palmer in his report and some aspects of which had been conceded in cross-examination. In summary, those shortcomings were: (i) the fact that the debtor information for Bentley NSW and Autohaus Five Dock for the relevant period was unavailable except in relation to the month of January 2006; (ii) that Mr Palmer’s report had no regard to the value of realisable assets of some value; (iii) that Mr Palmer had not had regard to another possible source of funding, namely, an ad hoc arrangement with the Commonwealth Bank (CBA) with an informal overdraft with a tolerance of up to $1 million; (iv) the use of figures in his analysis that were “effectively speculative”; (v) Mr Palmer’s concession that his analysis of creditors unpaid outside trade terms may not be reliable; (vi) the making of assumptions about liabilities to the Australian Taxation Office about which he knew little; and (vii) Mr Palmer’s analysis of the resources available to McMillan Prestige being “strikingly deficient”.

Her Honour concluded, at 48, that Mr Palmer had “failed to satisfy his own test of solvency” and had not in fact undertaken a cash flow analysis as he had purported to do in his report. Her Honour dismissed there being anything in the point that it had not been squarely put to Mr Palmer that he had not undertaken a cash flow test in circumstances where her Honour, at 49, considered that Mr McMillan’s counsel had “skilfully pulled every element apart, leaving little to be gained by an attack on the entirely dismembered whole”.

In the result, her Honour, at 49, did not accept Mr Palmer’s opinion, nor his report, both of which she described as “flawed”, despite Mr McMillan not having adduced any contrary evidence including by way of expert evidence. Her Honour also rejected Treloar’s submission that she should proceed to form her own view as to the question of insolvency. Her Honour at 50, considered that if Mr Palmer lacked sufficient information to form a view as to insolvency, she was in a worse position. Her Honour considered that the tables and analyses set out in Mr Palmer’s report were, on his own evidence, unreliable or wrong, such that they provided no foundation for the Court to carry out the insolvency enquiry for itself. Her Honour then summarised the deficiencies in the various tables and figures.

Notwithstanding the criticisms her Honour made of Mr Palmer’s evidence, she did not make an adverse credit finding against him. Rather, her Honour considered, at 41, that “[i]t is because of [Mr Palmer’s] frank concessions in the course of cross-examination that the deficiencies in and limitations of his report are manifest”.

It will be convenient to deal with the submissions of the parties by reference to their respective positions in relation to the primary judge’s criticisms of Mr Palmer’s report. Before doing so, this is an appropriate place to set out the various points in time at which insolvency was required to be proved, namely, the date of issue of each invoice (the relevant dates), as identified in the first column of the following schedule which was Exhibit A in the proceedings before her Honour. Exhibit A also set out the amount of each invoice, any amount paid thereon and the amount remaining outstanding as stated in the “Amount due” column.

Treloar submitted that the criticisms of and bases for rejection of Mr Palmer’s report were unjustified and that in any event the criticisms and such concessions as Mr Palmer made in his evidence were not material to the question whether at the relevant dates McMillan Prestige was insolvent. Treloar pointed out that Mr Palmer had not been questioned as to whether any of the concessions he made undermined his opinion as to insolvency.

Treloar also submitted that there were significant omissions in her Honour’s reasoning process including the absence of any reference to the fact that McMillan Prestige was a holding company. Treloar also drew attention to the following email, to which her Honour did not refer, from Mr McMillan to Treloar on 17 December 2005:

Treloar contended that this email was “a fairly candid assessment of Mr McMillan’s corporate position at the time of the contract”. It was submitted that the email relevantly undermined the primary judge’s reasons as to McMillan Prestige’s financial health. Treloar also relied upon the fact that Mr McMillan did not, in his evidence, contradict any aspect of Mr Palmer’s report. The attack that was made upon it was only in cross-examination of Mr Palmer and then only as to its shortcomings, as opposed to the accuracy of the matters otherwise contained in it.

Mr McMillan, for his part, reiterated that there was insufficient material to establish that McMillan Prestige was insolvent at any of the relevant dates. As indicated above, at [47], those dates were the dates on which the debts arose, being the “Invoice Dates” set out at [71] above.

The Corporations Act, s 95A provides:

The current version of s 95A was introduced into the Corporations Act in 2002. Previously, the section had referred to payment out of a debtor’s “own monies”. The significance of the omission of those words in the new s 95A was considered in Lewis v Doran (2004) 50 ACSR 175; [2004] NSWSC 608 where Palmer J said, at [111]-[113]:

This analysis was accepted as correct by Barrett J in Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148; [2005] NSWSC 831 at [99], namely, that where on a “realistic commercial assessment” funds were capable of being raised from an outside source, that source of funds was relevant to the question of whether a company was solvent. His Honour added, however:

Barrett J’s observation that funds available only for a very short term or repayable on demand did not enhance solvency was accepted and applied by this Court on the appeal from his Honour’s decision: Edwards v Australian Securities and Investments Commission at [163] per Macfarlan JA (Spigelman CJ and Campbell JA agreeing).

The test stated by Barrett J had been stated earlier in Southern Cross Interiors Pty Ltd (in liquidation) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621 at [54], where Palmer J had stated that insolvency:

That statement was approved by the Court of Appeal in Lewis v Doran (2005) 54 ACSR 410; [2005] NSWCA 243. In that case Giles JA stated, at [103]:

Giles JA, in his observation at [109] , which is of particular relevance in the present case, stated:

In Chan v First Strategic Development Corporation Limited (In liq) [2015] QCA 28, Morrison JA, having referred, at [42], to Giles JA’s observation that “the key concept is ability to pay the company’s debts as and when they become due”, stated, at [44]:

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

In his report, Mr Palmer recorded that McMillan Prestige had incurred a loss of $256,003 for the year ended 30 June 2005. Mr Palmer was also able to deduce profit and loss figures for McMillan Prestige for the period December 2005 to February 2006. In each of those periods, the company suffered a loss of $117,375, $108,635 and $112,661 respectively.

Mr Palmer also summarised the group accounts for this period in a table which revealed that in each of the months August 2005 to January 2006, the group had a net deficiency which ranged from $424,000 in September 2005 to $1,230,000 in January 2006 as follows: August 2005: a deficiency of $623,000; October 2005: a deficiency of $719,000; November 2005: a deficiency of $893,000; and December 2005: a deficiency of $1,056,000. Mr Palmer considered that a simple explanation for these figures was that the deficiency may be indicative of trading losses being incurred.

According to the last balance sheet prepared for the group as at January 2006, the group had an average net deficiency of $850,000 for the 6 months up to January 2006. This was not disputed.

Mr Palmer then carried out a current ratio and quick ratio analysis. The current ratio is a measure of the ability of the company to meet its current liabilities with the current assets available. A current ratio of more than 1.00 may indicate that a company may be solvent. The group current ratio was 1.01 in August 2005 and decreased slightly over the following months to 0.97 as at January 2006.

The quick ratio is a slightly different liquidity measure that filters the current ratio by measuring the most liquid current assets available to cover current liabilities. Mr Palmer stated that the quick ratio offers a more conservative view of a company’s ability to meet its short-term liabilities with its short-term assets as it does not include inventory and other current assets that are more difficult to convert into cash.

Mr Palmer expressed the view that the quick ratio was more useful in assessing McMillan Prestige’s solvency in the period August 2005-January 2006 as it compared the highly liquid assets available to meet current obligations. On Mr Palmer’s calculation, making certain assumptions favourable to the group, the quick ratio revealed a “relatively dramatic” decline from 1.40 in September 2005 to 0.67 in January 2006.

Although this part of Mr Palmer’s report did not extend beyond the period January/February 2006, his analysis of the accounts demonstrated that both the group’s position and McMillan Prestige’s position was, at best, marginal as at January and February 2006.

Between 28 March and 24 April 2006, Treloar issued invoices 150 to 156. Payment of those invoices was eventually made in full, but outside the 30 day term and by way of a number of payments. For example, invoice 150 in an amount of $46,768.19, issued on 28 March 2006, was paid in two amounts, the first of $10,000 on 5 May 2006 and the second in the sum of $36,768.19 on 17 May 2006. McMillan Prestige had also failed to pay invoice 157 dated 24 April 2006 in full. It made a part payment in the period 7-14 July 2006. McMillan Prestige failed to pay any of the invoices issued between May and September 2006. The total amount of the unpaid invoices was $418,991.77.

It was submitted on behalf of Mr McMillan that the company’s late payment of invoices in March and April 2006 could not found an inference that it was unable to pay its debts as and when they fell due in circumstances where it had complained to Treloar that there had been a costs overrun on the construction of the new premises. In this regard, there had been correspondence between Treloar and McMillan Prestige in July 2006. It appears from that correspondence, that there were discussions between Treloar and Mr McMillan as to McMillan Prestige making weekly payments so that the contractors and suppliers could continue to be paid. In this regard, it appears that in late May 2006, workers had walked off the site because they had not been paid. According to an email of 7 July 2006 at 1:43 pm, Mr McMillan had agreed at that time, that is, late May 2006, that all outstanding invoices would be paid by 9 June.

On 13 July 2006, Treloar demanded an urgent payment of $51,000 by McMillan Prestige so that Treloar could:

Mr McMillan replied by email on 14 July 2006, stating that McMillan Prestige was in the process of preparing a weekly payment schedule to provide to Treloar. Mr McMillan also pointed out in that email that McMillan Prestige had budgeted for a cost of about $700,000 but as at that date had spent nearly $1.4 million. In an email later that day, Mr McMillan wrote:

On 22 July 2006, McMillan Prestige emailed Treloar, explaining that it had had a problem in establishing a payment schedule, as it had “spent over [$1.5 million] to date that was not provided for”. The email went on to state that McMillan Prestige had been paying double rent as Treloar’s time frame for completion of the work had been extended by four months.

Treloar responded defending its costings and work progress. For example, it asserted that McMillan Prestige had expanded the scope of the works and that the refurbishment had been completed in the most cost effective way. Treloar also contended in that email that McMillan Prestige had occupied the workshops on 14 June, three months and three weeks after Treloar received the engineering plans on 20 February, that McMillan Prestige had organised the architectural plans but that they had been provided late, and that the engineering plans could not be prepared unto all the architectural plans were available. In the latter regard, Treloar pointed out in the email that structural construction works could not legally commence until the engineering plans were in hand.

McMillan Prestige emailed Treloar later the same day, stating “we are placing this payment problem with another party to see if it can be resolved”.

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

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

However, the fact that debts are paid outside the agreed terms for payment is not necessarily an indicator of insolvency. In Hussain v CSR Building Products Ltd [2016] FCA 392, liquidators sought to recover alleged unfair preferences under the Corporations Act, s 588FE. The company had consistently paid debts later than they were due, and in seeking to establish insolvency at the time of the alleged unfair preferences, reliance was placed on correspondence with creditors concerning the late payment of debts: [68].

Edelman J acknowledged the company’s late payment of debts and its failure to comply with its superannuation statutory obligations on a number of occasions, but nonetheless concluded, at [136], that an inference of insolvency was “extremely difficult, if not impossible, to draw” in that case. In reaching this conclusion, his Honour observed, at [131], that “although [the company] routinely paid its debts late … it almost invariably met the payment arrangements that it made”. His Honour also noted, at [135], that although the company was routinely late in its payments, this was common in the industry in which the company operated.

As set out above, at [92], various invoices issued by Treloar in early 2006 were paid by McMillan Prestige outside payment terms. Some of the debts arising from those invoices were paid by way of payment of amounts not directly referable to the invoiced amounts. The email correspondence referred to above reveals that there were assertions and counter assertions between the parties in relation to delays, costs overruns and responsibility therefor. However, as already observed, McMillan Prestige never contended, either during the course of the work or during the trial, that the invoices were shams, that incorrect invoices had been issued, or indeed, that the particular work underlying the relevant invoices had not carried out. The email correspondence also reveals that whilst McMillan Prestige might have been able to pay some small amounts during July, it was unable to pay any significant monies in reduction of the invoices and was also unable to comply with an agreed schedule of weekly payments.

In our opinion, McMillan Prestige’s late payment of its debts to Treloar was relevant to the question of McMillan Prestige’s solvency.

McMillan Prestige further contended that the non-payment of invoices was not evidence from which insolvency could be inferred in circumstances where it had available to it Volkswagen Australia’s letter of comfort and the opportunity to obtain an informal overdraft of up to $1 million. This is dealt with below. It should be noted at this juncture that Mr McMillan’s contention that Treloar had not proved insolvency was dependent upon factoring into the analysis of McMillan Prestige’s financial position the availability of the ad hoc CBA overdraft facility of $1 million and the availability of funding from Volkswagen Group Australia Pty Ltd (Volkswagen) in the sum of $700,000.

By letter dated 10 August 2005 entitled “[Volkswagen Australia] Intent to Assist Five Dock Volkswagen Relocation and Development”, Volkswagen Australia wrote to McMillan Prestige in the following terms:

This was the second letter relating to an offer of assistance by Volkswagen Australia in relation to the new showroom. The trial judge was critical of Mr Palmer in failing to refer to an earlier letter from Volkswagen Australia relating to its intention to fund McMillan Prestige. However, Mr McMillan agreed in his evidence that the earlier correspondence had been overtaken and that the relevant letter was that of 10 August 2005. Her Honour’s criticism of this omission may therefore be put to one side.

Treloar submitted that it was apparent from the terms of the 10 August letter that it was only ever a letter of intent, there being no evidence that the assistance indicated was ever provided, nor were the requirements specified in the offer by Volkswagen Australia ever put in place. In particular, there was no evidence that McMillan Prestige reported on its cash position on a monthly basis; no evidence that Volkswagen Australia had issued a formal Dealer Development Funding letter for the amount equivalent to the value of the improvements; and no evidence that Volkswagen Australia obtained an additional estimate of the cost of the works.

Treloar also pointed out that contrary to what was intended, namely, that Volkswagen Australia would pay the builder direct, McMillan Prestige in fact paid the invoices itself and never at any time disputed its liability to do so. In this regard, Mr McMillan gave evidence that there was no agreement with the builder for Volkswagen Australia to pay the invoices.

Mr McMillan submitted that the terms of the letter “were sufficient to reach the degree of assuredness for financial support” such that the offer should have been taken into account as an available resource. He accepted that no procedures had been put in place of the kind outlined in the letter, nor had McMillan Prestige asked Volkswagen Australia for any funding pursuant to the offer in the letter. Mr McMillan also acknowledged that construction work had commenced in December 2005 but, by way of further explanation as to why the funds had either not been requested from or advanced by Volkswagen Australia at any time thereafter, contended that, as at the end of September 2006, Volkswagen Australia had not signed off on the design specifications, colours and dealership branding of the showroom.

As mentioned above, the trial judge rejected the view that the letter was a mere letter of intent. In her Honour’s view, at 42:

Presumably her Honour’s last comment was a reference to the fact that a receiver was appointed to McMillan Prestige in February 2007. Her Honour considered that Mr Palmer had appropriately conceded that he should have taken this facility into account in assessment of McMillan Prestige’s solvency.

In our opinion, Treloar is correct in its characterisation of the letter as being no more than a letter of intent on the basis of the various submissions it advanced.

That then calls into play the relevance of any concession Mr Palmer made in respect of the availability of funding from Volkswagen Australia.

Mr McMillan submitted that, as a matter of commercial reality, the funding proposal should have been considered by Mr Palmer.

Treloar, for its part, submitted that the significance attached by her Honour to Mr Palmer‘s concession was misplaced. Mr Palmer accepted that he was not aware of the letter of 10 August 2005 and stated that he was “now aware of a possibility of 700k” and “would have to amend” the table in which he had analysed McMillan Prestige’s cash position: see p 33 of his report. He was asked by counsel for Mr McMillan:

No further questions were asked on this issue by counsel for Mr McMillan. In re-examination, the following exchange occurred between the trial judge and counsel for Treloar:

With respect to her Honour, re-examination should not have been restricted in the manner revealed by this exchange. However, whether the availability of funding for $700,000 should have been taken into account in assessing McMillan Prestige’s solvency can be resolved otherwise than on the basis by any unfairness to Treloar in what occurred in respect of re-examination.

The underlying assumption of the cross examination in respect of the letter of 10 August 2005 was that it was an available and continuing resource as at each of the dates at which insolvency had to be proved. However, the letter was never more than a letter of intent. It was not a promise of funding. Contrary to her Honour’s observations, subsequent events could not have, and did not, change this. Mr Palmer’s concession, as it was called by her Honour, was based upon a misapprehension on the part of the cross-examiner, and then by her Honour in her reasons, of the proper characterisation of the letter.

That concession therefore could have had no impact on the conclusions that Mr Palmer had otherwise drawn in his report. It should also be noted that Mr Palmer was never asked by Mr McMillan how he would amend his table, nor what effect that would have on his assessment of McMillan Prestige’s solvency. At the end of the day that was the question in issue.

Once that is understood, it is clear that the bare possibility of funding from Volkswagen Australia could not, as a matter of commercial reality, be considered an available resource to McMillan Prestige at the relevant times.

Mr McMillan gave evidence that he was a long-term customer of the CBA and that Bentley NSW and Autohaus Five Dock had an informal arrangement with the bank for an overdraft facility of up to $1 million. Her Honour, at 44, referred to Mr Palmer’s evidence in cross-examination where he conceded that the availability of such an ad hoc facility meant that McMillan Prestige would have ample funds to pay its outstanding debts, including the debt owed to the ATO.

Treloar’s argument at trial, maintained on the appeal, was that any such availability of overdraft funds merely swapped one debt for another: see Australian Securities and Investments Commission v Edwards at [99]. In this regard, Treloar referred to Mr McMillan’s acceptance in cross-examination that the CBA could have demanded the repayment of monies lent pursuant to any such facility at any moment.

Mr McMillan’s response to Treloar’s argument was that the availability of the ad hoc overdraft facility did not involve merely swapping one debt for another having regard to his long relationship with the bank. Mr McMillan contended that, as had been conceded by Mr Palmer in cross-examination, the overdraft was a resource to which Mr Palmer should have had regard in assessing McMillan Prestige’s solvency and that he had not done so.

In our opinion, the availability of an ad hoc overdraft facility repayable on demand was not required to be taken into account and should not have been taken into account in assessing McMillan Prestige’s solvency at any particular date. The concession obtained from Mr Palmer does not alter this. As Barrett J observed in Australian Securities and Investments Commission v Edwards at [99]:

It is convenient to record at this point the following matters. First, Mr Palmer’s concession that the availability of such an overdraft would have meant that there was probably ample funds available only related to the availability of such funds to pay the ATO debt of $879,000. Secondly, Mr McMillan accepted in argument on the appeal that the availability of the overdraft as at 29 May 2006 would not have eliminated McMillan Prestige’s deficiency of funds when regard is had to the deficiency of funds at the group level. That deficiency was in the order of $2,398,000 as at 29 May 2006, being the first date at which solvency was in issue. Thirdly, Mr McMillan also accepted that it was relevant to the assessment of McMillan Prestige’s solvency at the relevant dates that Bentley NSW and Autohaus Five Dock did not make the ad hoc overdraft facility available to McMillan Prestige.

The issues relating to the debt owing to the ATO may be disposed of relatively briefly. In the table in which Mr Palmer analysed McMillan Prestige’s cash position: see 33 of his report, Mr Palmer recorded a debt to the ATO of approximately $60,000 which was unpaid as between 14 December 2005 and 31 August 2006. Mr McMillan explained the non-payment of the debt as being due to McMillan Prestige having objected to the taxation assessments. However, that objection was disallowed in August 2006. Business Activity Statements for May, June, July, August and September 2006 were not lodged until 31 October 2006, at which time the ATO issued an assessment in the sum of $879,954. This aspect of the debt to the ATO was apparently never paid.

As to the ATO debt of approximately $60,000, it was emphasised in oral argument that this debt was paid immediately after the ATO had disallowed McMillan Prestige’s objection in August 2006. It does not necessarily follow, however, that this debt should be disregarded in considering McMillan Prestige’s insolvency at each of the relevant times. The following remarks of Palmer J in Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 at [91] as to the relevance in determining insolvency of a disputation as to tax liability:

Mr McMillan also contended that the availability of the ad hoc CBA overdraft of $1 million should have been taken into account as a resource for the payment of the ATO debts. In our opinion, Mr Palmer’s concession that the CBA overdraft could have provided the funds necessary to pay the ATO does not advance Mr McMillan’s case, for the reasons outlined at [125] above. Use of the overdraft facility to pay the ATO would have entailed the substitution of one form of immediate obligation for another. In any event, the larger part of the ATO debts was never paid and, as already stated, there was no evidence that the subsidiaries had ever made or offered to make the overdraft facility available to McMillan Prestige.

The existence of outstanding liabilities to the ATO during the relevant period in 2006 when McMillan Prestige was incurring other debts, including to Treloar, is relevant in considering McMillan Prestige’s position at the relevant points in time.

In section 12 of his report, Mr Palmer reviewed the liquid resources available to Bentley NSW and Autohaus Five Dock. Mr Palmer, at section 12.4 of his report, presented a table that was a comparison of the current liabilities of Bentley NSW and Autohaus Five Dock with their available cash resources for fortnightly periods from 14 December 2005 to 31 August 2006. That table contained one entry only for debtors, being in a sum of $1,232,869 as at 23 January 2006. Mr Palmer had earlier explained, at section 12.1, that in the ordinary course, he would take into account debtor balances as an available liquid resource for the reason that they were readily convertible to cash. He explained, however, that there was no information available to him other than that set out in the table for 23 January 2006, and for that reason he proceeded without it.

Mr Palmer accepted that the unavailability of this information meant that trade debtors could have been understated up to an amount of about $1.2 million in each of the other periods. He pointed out, however, that there was information as to trade debtors in earlier periods that he had included in his report in his summary of the group balance sheets under the item “Receivables”. That information revealed that the trade debtors of Bentley NSW and Autohaus Five Dock fluctuated between August 2005 and January 2006 as follows: August, $67,000; September $313,000; October $1,411,000; November $1,029,000 December $604,000; and January $1,233,000.

The trial judge, at 42, by reference to Mr Palmer’s evidence in cross-examination, considered the unavailability of information as to the trade debtors of the trading entities and its non-inclusion in his report in the table at section 12.4 to be significant and that this revealed errors in Mr Palmer’s analysis.

Treloar, whilst accepting that a “heavy qualification” to Mr Palmer’s report in respect of trade debtors had been obtained in cross-examination, nonetheless submitted that her Honour overlooked three essential matters. First, notwithstanding the unavailability of the trade debtor information, Mr Palmer had formed certain conclusions as to McMillan Prestige’s solvency at section 12.6 of his report. Her Honour did not refer to that and those opinions were not the subject of cross-examination. Secondly, her Honour overlooked the evidential onus that fell upon McMillan Prestige to adduce evidence to contradict or explain the information in Mr Palmer’s report. Thirdly, there was a need for some cogent evidence to show that there was a commitment on the part of the trading entities to support the holding company, if it was to be held that their financial position was relevant to McMillan Prestige’s solvency.

Treloar’s first criticism highlights the task that Mr Palmer was actually undertaking, namely the assessment of McMillan Prestige’s solvency at specified points and the relevance of the trade debtors of Bentley NSW and Autohaus Five Dock to that task.

At section 12.1 of his report, Mr Palmer acknowledged that in assessing the liquid resources of the trading entities, he would ordinarily take into account the debtor balances of Autohaus Five Dock and Bentley NSW. However, at section 12.6 of his report, Mr Palmer acknowledged that it had been difficult to draw any meaningful conclusions as to the liquid resources of Bentley NSW and Autohaus Five Dock. Nonetheless, he considered that three points could still be made.

The first was that the debtors of Bentley NSW and Autohaus Five Dock would need to have been substantial for those companies to have had any capacity from 29 May 2006 to provide financial support to McMillan Prestige from their liquid resources.

Mr Palmer’s second point was that as at 3 April 2006, the calculated deficiency of $582,782 in trading entity assets would probably have been eliminated if there were trade debtors. On that basis, Bentley NSW and Autohaus Five Dock could have been in a position to provide funding to McMillan Prestige. Mr Palmer pointed out, however, that it was not known whether the cash flow demands of the two subsidiaries would have permitted that to have happened. More significant was the fact that, even if there were a capacity in the two subsidiaries to make funding available, they had not done so in the period following 3 April 2006, as was evidenced by the fact that the debts due to Treloar subsequent to that date remained unpaid. It should also be added that the ATO and other creditors remained unpaid during this period.

Mr Palmer’s third point was that the total combined amount owed to aged creditors of the two subsidiaries steadily increased from 20 March 2006. Treloar placed particular emphasis on this point. As Mr Palmer’s table at section 12.4 recorded, the amount owed to combined aged creditors was $289,341 as at 20 March 2006, at which time the combined bank balances of the two subsidiaries was just over $1 million. Thereafter, the amount owed to the aged creditors in the fortnightly periods from 3 April 2006 to 29 May 2006 and as at 14 and 31 August 2006 (being the dates in the table) varied between $634,286.79 to $1,480,262.97. The only occasion on which there was a surplus of funds in that period was as at 3 May 2006, in an amount of $194,477.27. The deficiencies as at 29 May 2006, 14 August 2006 and 31 August 2006 were $2,398,235.12, $1,674,015.92 and $2,061,097.18 respectively. Treloar submitted that it was apparent from these figures that, even assuming there were trade debtors, they were insufficient to fund the increase in the amounts owed to aged creditors from March 2006 through to August 2006.

The importance of these matters is apparent from section 15 of Mr Palmer’s report, where he summarised his findings and reviewed the indicia of insolvency with respect to McMillan Prestige. As Mr Palmer reiterated at section 15.1.1, McMillan Prestige “was not trading in its own right but was acting as a service entity to other companies within the McMillan Group”. Section 15.2 of Mr Palmer’s report, and indeed the language of his conclusions in section 15.3, make it clear that his consideration of the trade debtors and liquid resources of Bentley NSW and Autohaus Five Dock was for the purpose of considering the capacity of those companies to provide financial support to McMillan Prestige. Once that context is appreciated, and the three points made by Mr Palmer set out at [137]-[139] above are borne in mind, it is difficult to see how Mr Palmer’s frank acknowledgement of the limited information as to the trade debtors of Bentley NSW and Autohaus Five Dock belies error or any shortcoming that undermined his analysis. Whatever the trade debtor position as a matter of precise dollar amounts, Mr Palmer gave a cogent account as to why that was not a resource available to McMillan Prestige.

Treloar contended that having regard to those aspects of Mr Palmer’s report that were not the subject of cross-examination, including the points made by Mr Palmer at section 12.6, there was an evidentiary onus on Mr McMillan to adduce evidence to contradict or at least bring it into contention those matters in respect of which he wished the Court to make findings contrary to Mr Palmer’s conclusions.

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

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

The primary judge criticised Mr Palmer’s report as having “had no regard to … realisable assets of some value”, in particular, as failing to taken into account the capacity for the McMillan Group’s Volkswagen franchise to be sold. However, as Treloar submitted, there was no evidence that the sale of the franchise was ever actually contemplated. More importantly, Volkswagen Finance held security over the whole franchise business for its provision of floor plan finance. As events transpired, the receivers appointed by Volkswagen eventually sold the franchise in circumstances leaving no surplus for the McMillan Group. These factors tend against any suggestion that the Volkswagen franchise was as a matter of commercial reality, a realisable asset available to McMillan Prestige.

The relevant dates on which insolvency was to be proved are the dates on which the invoices were issued identified above at [71]. The relevant dates therefore are: 28 April, 5 May, 14 May, 26 May, 9 June, 22 June, 30 June, 11 July, 27 July, 28 August and 20 September 2006. On the view to which we have come as to the amount of loss or damage, the amount that Treloar is able to recover as a debt pursuant to s 588M(3) is the invoiced amount in respect of each invoice, or in the case of invoice 157, the amount of $44,292.33 being the unpaid amount of that invoice.

The analysis above should make clear that the primary judge’s criticisms of Mr Palmer’s report were misplaced in a number of respects, and it is unnecessary to deal further with each and every one of the primary judge’s criticisms in detail. Properly understood, the position as to solvency was as follows:

These factors reveal that at no time during the period 28 April 2006 to 20 September 2006, being the period covering the relevant dates at which insolvency was required to be established, did McMillan Prestige have the ability to pay its debts as and when they fell due. Nor did it have recourse to assets or funding that might have provided a source from which any of the debts that fell due on the relevant dates could be paid.

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

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

Beyond the arguments that Treloar had no entitlement to issue the relevant invoices and that it had not established loss or damage because it had not adduced proof of payment to the underlying contractors and suppliers, there was no real suggestion that once insolvency was proved the cause of Treloar’s loss or damage was other than McMillan Prestige’s insolvency.

As Treloar’s claim for loss or damage has succeeded, the question arises as to the status of Mr McMillan’s defence under the Corporations Act, s 588H(2). As has already been indicated, her Honour acknowledged that she had not examined the defences “in detail” but stated that she had needed to consider the point she would have found that Mr McMillan had a defence under s 588H. Her Honour said that she “accepted the … submission that Mr McMillan had reasonable grounds to expect, and did expect that [McMillan Prestige] was solvent”.

Her Honour set out the following aspects of Mr McMillan’s submissions at first instance which were said to “fairly and accurately” describe the relevant evidence:

The primary judge gave some consideration to a submission by Treloar that in the absence of any evidence from the McMillan Group’s external accountant, no s 588H defence could be made out. Treloar had submitted that by a notice of motion filed on 16 November 2015, Mr McMillan had foreshadowed evidence from the accountant, Mr Vince, by a reference to an affidavit said to be sworn two days after the drafting of the notice of motion. No evidence from Mr Vince ever being adduced. Treloar submitted that the Court was entitled to assume that his evidence would not have assisted Mr McMillan. The primary judge was not satisfied that any affidavit ever came into existence or that Mr Vince was available to give evidence. Accordingly, her Honour declined to draw any Jones v Dunkel inference.

As we understand the position, Mr McMillan did not contend that her Honour had finally determined the defence.

Treloar submitted that this defence should not be remitted to the trial court for determination. It pointed out that Mr McMillan was granted leave below to read and rely on his affidavit and that he was cross-examined. In circumstances where Mr McMillan bore the onus of establishing any s 588H defence, Treloar contended that Mr McMillan “had every opportunity to bring forward evidence to support a defence … and properly engage the requirements of s 588H(2) and (3)”. Treloar submitted that the evidence brought forward by Mr McMillan failed to make out the defence and that “[f]or that reason there is neither a warrant nor an occasion to send the matter back for a retrial”.

Treloar submitted that her Honour’s acceptance of Mr McMillan’s evidence did not “go anywhere near satisfying the rigours of the defence” and that her Honour did not identify the existence of any reasonable grounds to support the expectation of solvency on the part of Mr McMillan that is an element of the defence.

Treloar submitted that her Honour’s acceptance of Mr McMillan’s submissions on the s 588H defence could not stand given the errors for which it had contended in relation to the insolvency ground of appeal. In particular, it contended, for the reasons it had submitted, Mr McMillan could not rely on the supposed funding from Volkswagen Australia or the informal overdraft facility as reasonable grounds for an expectation of solvency.

Treloar resisted the suggestion that in the past certain private lenders had provided finance to McMillan Prestige. Although the private lenders “had apparently supported the trading entities in the past there was nothing to demonstrate that their support was assured for the future”. Absent any such evidence, it was submitted that this could not provide reasonable grounds for an expectation of solvency. It was also noted by Treloar that the private lenders had previously provided finance on secured terms.

Treloar next submitted that reasonable grounds for an expectation of solvency could not be established by the suggestion that Mr McMillan “had the benefit of advice from experienced and qualified staff and an external accountant”. In this regard, it was emphasised that the financial controller had resigned prior to the debts to Treloar being incurred and that there was no evidence in Mr McMillan’s affidavits that he ever discussed the actual solvency position of McMillan Prestige with the external accountant. Treloar further submitted that although Mr Vince prepared tax returns and performed other accounting functions for the McMillan Group, there was no evidence to suggest that he was a person responsible for providing Mr McMillan adequate information about whether McMillan Prestige was solvent as contemplated by s 588H(3)(a). Treloar contended that there was “a powerful Jones v Dunkel inference … against his evidence being of any assistance whatsoever”.

In relation to whether the s 588H defence should be remitted to the Court below for determination, the crux of Mr McMillan’s submission was put as follows in oral argument:

Mr McMillan submitted that the primary judge correctly held the defence under s 588H had been made out. It was submitted that the submissions of Mr McMillan at first instance, set out above at [152] and accepted by the primary judge, “form the grounds by which Mr McMillan’s expectation of solvency was reasonable”. In this regard, it was emphasised that Mr McMillan “had been running a successful business for 20 years” and “had developed and enjoyed a strong relationship with the McMillan Group’s bank, CBA, and loyal customers” who had previously extended finance to the group. It was submitted that Mr McMillan “was expanding his business and incurring new debt, but was prudent and cautious in doing so” and that this was not a case where the company was failing and falling into greater indebtedness with no prospect of recovery. Mr McMillan was engaged in a new venture and based on results from trading at his temporary premises, he expected to be successful and profitable.

With respect to the latter point, at the conclusion of oral argument, counsel for Mr McMillan drew to the Court’s attention certain evidence as to performance reports for Volkswagen dealerships across Australia in the relevant period in order to demonstrate “a strongly performing business during the course of 2006”. The intention in so doing was explained by counsel for Mr McMillan as follows:

Section 588H(2) provides a defence in proceedings for a contravention of s 588G(2), including in proceedings for compensation under s 588M, if it is established that at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. There are thus two elements to be established before this defence was established by Mr McMillan. The first element is that Mr McMillan had reasonable grounds to expect that, at the relevant times, McMillan Prestige was solvent, and would remain solvent. The second concerns Mr McMillan’s actual expectation as to those matters.

Austin J explained the first requirement in the following terms in Tourprint International Pty Ltd (in liq) v Bott at [67]:

This approach was adopted by Palmer J in Hall v Poolman at [262] and by Goldberg J in McLellan v Carroll (2009) 76 ACSR 67; [2009] FCA 1415 at [170].

In relation to the second issue, Mr McMillan’s expectation that McMillan Prestige was solvent and would remain solvent when the relevant debts to Treloar were incurred, it would have been necessary for the primary judge to consider the credit of Mr McMillan had her Honour taken a different view on the anterior issues. The inability of this Court to make findings of credit in that regard is trite.

However, whatever the findings in that respect might have been, it is clear that Mr McMillan’s expectation of solvency is not enough. There must have been reasonable grounds for that expectation. A consideration of the submissions of Mr McMillan relied on by her Honour in adopting the view that Mr McMillan had reasonable grounds to expect that McMillan Prestige was solvent at the relevant times does not obviously attract the same difficulties as to the lack of credit findings by the primary judge.

What constitutes reasonable grounds for an expectation of solvency has been considered in a number of decided cases. The courts have been critical of reliance on the possibility or hope of future successful trading as the basis for such an expectation. As was explained in Hall v Poolman at [265]:

These remarks highlight the fundamental difficultly in the proposition that the possibility of future success or business profitably could provide reasonable grounds for a present expectation of solvency at the relevant time. It is these difficulties which seem to have occupied Goldberg J in McLellan v Carroll at [179]:

The same problems attend any reliance on the Volkswagen Australia performance tables. Performance in the league tables, although potentially indicative of present and future business success, does not establish an expectation of solvency on the part of Mr McMillan at the relevant times, unless there were other bases upon which that expectation could be based. An entity could be the first or second most successful car dealership and still be insolvent.

In line with our reasoning above, and Treloar’s submissions, the letter from Volkswagen Australia could not provide reasonable grounds for an expectation of solvency on Mr McMillan’s part. As outlined in [110] above, Mr McMillan was aware that the procedures contemplated in the letter of intent had not been put in place and that construction had commenced without Volkswagen Australia having signed off on the design specifications, colours and dealership branding of the showroom.

Similarly, the existence of the CBA overdraft facility could not provide reasonable grounds for an expectation of solvency. Mr McMillan acknowledged, at least in cross-examination, that the CBA could have demanded repayment of the overdraft facility at any time. Further, there is force in Treloar’s submission that previous finance from the private lenders could not provide reasonable grounds for an expectation of solvency by Mr McMillan in the absence of any evidence as to ongoing or future support.

The balance of the submissions accepted by the primary judge, and the submissions advanced by Mr McMillan on the appeal, go to detailing Mr McMillan’s history in running the business and his practice of obtaining and reviewing multiple quotations and of making arrangements for progress payments. As Treloar submitted, none of this material goes to establishing that Mr McMillan had reasonable grounds for expecting solvency at the relevant times. The bare proposition that “Mr McMillan was expanding his business and incurring new debt, but was prudent and cautious in doing so” does not of itself demonstrate that Mr McMillan had reasonable grounds for expecting that McMillan Prestige was solvent at the time it incurred the relevant debts to Treloar.

The evidence that was available indicated that the group was running a net deficiency in each of the months August 2005 to January 2006. Even prior to the correspondence referred to above concerning cost overruns, McMillan Prestige was late in paying its invoices, for example, in March and April 2006. Indeed, in the months immediately prior to the relevant debts to Treloar being incurred, Mr McMillan himself admitted in the 17 December 2005 letter that it was “a very very tough time” for McMillan Prestige and the McMillan Group and that “[o]ur company does not have any resources at present … We are really stretched”.

This material tends strongly against Mr McMillan having had reasonable grounds for expecting solvency at the relevant times. The onus was on him to establish otherwise. In that regard, and bearing in mind Mr McMillan’s onus, we would incline towards the view that the foreshadowing of evidence from the McMillan Group external accountant by the notice of motion was sufficient to establish Mr Vince’s availability, at least in circumstances where no reason was provided why evidence from Mr Vince was not adduced. If that is the case, the failure to adduce evidence from Mr Vince more readily enables the Court to draw a positive inference that Mr McMillan had no reasonable grounds for an expectation of solvency.

For these reasons, and notwithstanding the lack of detailed findings by the primary judge, we are of the view that any s 588H defence is bound to fail. We would therefore reject the defence.

The orders of the Court are: