In the matter of Shire Lind Developments (NSW) Pty Ltd (in liq)

1. [1]

   This proceeding concerns an insolvent trading claim, which is brought by the First Plaintiff, Mr Jason Porter, in his capacity as liquidator (Liquidator) of the Second Plaintiff, Shire Lind Developments (NSW) Pty Ltd (the Company).

2. [2]

   The First Defendant, Mr Peter Gribble, is the sole director of the Company. Mr Gribble is also the sole director of the Second Defendant, Quantum Management Pty Ltd, and the Third Defendant, Quantum Development Management Pty Ltd. Each of the Company, Quantum Management, and Quantum Development is a company within the “Quantum Group”.

3. [3]

   The Company is a special purpose vehicle, which was established in relation to a development of apartments on land situated at 134-146 Linden Street, Sutherland, New South Wales (the Land). This is referred to as the “Linden Development”.

4. [4]

   All of the shares in the Company were owned by Shire Lind Investments Pty Ltd (in liquidation) (SLI), which was a special purpose vehicle established for the purpose of acquiring and holding the Land. All of the shares in SLI were owned by Quantum Management. Mr Gribble was also sole director of SLI.

5. [5]

   SLI engaged the Company to manage the Linden Development, and the Company engaged a builder to construct the development.

6. [6]

   The Company did not have any employees. It entered into an agreement with Quantum Development to provide services for the Linden Development. The fees payable by the Company to Quantum Development were approximately equal to the fees payable by SLI to the Company.

7. [7]

   By Originating Process filed 16 March 2023, the Plaintiffs make the following claims:

   1. (1)

      insolvent trading claims against Mr Gribble and Quantum Management, seeking compensation pursuant to, respectively, s 588M and s 588W of the Corporations Act 2001 (Cth) (the Act); and

   2. (2)

      an unfair preference claim against Quantum Development, pursuant to s 588FF of the Act.

8. [8]

   It was common ground that the Company was insolvent before it went into administration. However, there was a substantial dispute regarding the date on which the Company became insolvent which was critical to the quantum of the Plaintiffs’ claims. Before turning to consider that issue, I address below the relevant factual background.

Factual background

1. [9]

   There were two lay witnesses, namely, the Liquidator and Mr Gribble.

2. [10]

   The Defendants did not challenge the Liquidator’s credit. His evidence was primarily document-based, although he did express some opinions on the adequacy of the Company’s books and records (which are addressed below).

3. [11]

   The Plaintiffs challenged Mr Gribble’s credit. They did not advance a submission that his evidence was dishonest, but instead contended that, given various discrepancies between his evidence and the contemporaneous documents, I should rely primarily on the documents in determining the relevant course of events.

4. [12]

   I deal with some of these discrepancies below. As a general observation, Mr Gribble indicated on a number of occasions that he had a limited recollection of documents which were in evidence. For example, he had difficulties recalling signing documents, or reviewing documents which he had signed, or whether documents had been sent to him (unless this was established by other objective evidence). That is not surprising, given that the events which were the focus of the proceeding occurred more than six years ago, and given that Mr Gribble has been involved in around twenty property developments in the past two decades.

5. [13]

   One example of the limits of Mr Gribble’s recollection is provided by his evidence in respect of the financial statements of the Company. In cross-examination, he was taken to the accounts for the financial year ending 30 June 2018, which bore his signature and the date 8 October 2018, and was asked when he signed them. Mr Gribble responded: “I don’t recall the actual date I signed it but that was the date the report looks like it was generated and possibly that was the date, I signed it on the same day”.

6. [14]

   However, in an examination in the Federal Court of Australia in August 2021, Mr Gribble said that the accounts in question were “prepared within a day; were not forwarded to ASIC; were not given to the shareholders and they were purposely done to give a copy to the liquidator as per his request under the forms he requested and they were done in haste”, adding “I signed them all within half an hour”. The Liquidator was appointed in April 2020, such that this evidence was to the effect that the FY2018 report was prepared some time after that date (and well after the date that it bears).

7. [15]

   After being confronted in the current proceeding with those prior statements, Mr Gribble indicated that the financial statements “were produced by [the Quantum Group finance team] and I signed them. That’s all I recall. And that is my signature on it. Whether I signed it on that date or that’s a date they produce the reports, I can’t recall”.

8. [16]

   It therefore appears that, by the time that Mr Gribble gave evidence in this proceeding in October 2024, he had forgotten the course of events leading to the creation of these financial statements some time after April 2020, which he had recalled at his examination in August 2021.

9. [17]

   Mr Gribble’s affidavit evidence largely consisted of a chronological account of events by reference to the contents of exhibited documents. Where Mr Gribble has given evidence of matters which are not recorded in documents, such as evidence of conversations or evidence of his state of mind at particular points in time, I have assessed such evidence in light of the contemporaneous documents and the inherent probabilities.

10. [18]

    The Quantum Group is a fund manager based in Sydney. Its business activities include financial advisory services, the provision of financial facilities, property funds management, and development projects.

11. [19]

    The Quantum Group has completed around twenty development projects since 2000. Those development projects have typically used the following structure:

    1. (1)

       a special purpose vehicle (the “Investment SPV”) is incorporated for the purpose of acquiring the relevant land; and

    2. (2)

       a second special purpose vehicle (the “Development SPV”), which is a wholly owned subsidiary of the “Investment SPV”, is incorporated for the purpose of undertaking the day-to-day management of the particular development project, arranging project finance, appointing a builder, arranging pre-sales and marketing, finalising the strata title, obtaining the occupation certificate, and organising the eventual settlement of the apartments at the conclusion of the project.

12. [20]

    On 28 August 2015, SLI was incorporated as the “Investment SPV” for the Linden Development. In October 2015, SLI entered into option agreements for the seven lots comprising the Land on which the Linden Development was to be constructed.

13. [21]

    On 13 January 2016, the Company was incorporated as the “Development SPV” for the Linden Development.

14. [22]

    In July 2016, SLI applied to Sutherland Shire Council for development consent for the Linden Development. Development consent was granted on 21 March 2017 for SLI (or the Company with the consent of SLI) to demolish existing structures on the Land, to construct two residential buildings comprising approximately sixty-two units, and to strata subdivide the Land.

15. [23]

    In May 2017, the Company engaged Colliers International (NSW) Pty Ltd as agent to sell apartments in the Linden Development, pursuant to a written agreement which was signed by Mr Gribble on behalf of the Company (the Agency Agreement). Twelve of the sixty-two apartments in the Linden Development were “Quantum Properties”, which were to be sold by the Quantum Group. The remaining fifty apartments were “Non-Quantum Properties”, which were to be marketed and sold “off-the-plan” by Colliers.

16. [24]

    Clause 4.6 of the Agency Agreement provided that Colliers must satisfy the “Sales Milestones” set out in Schedule 2, namely:

    1. (1)

       by 17 June 2017, Colliers was to sell twenty-three of the Non-Quantum Properties (45%); and

    2. (2)

       by 17 December 2017, Colliers was to sell fifty of the Non-Quantum Properties (100%).

17. [25]

    In cross-examination, Mr Gribble agreed that the speed with which contracts could be exchanged for pre-sales was important for the Company’s ability to obtain finance for the construction of the Linden Development. That was because construction finance “typically has some pre-sales hurdles”. Mr Gribble agreed that the terms of construction finance offered in the market generally were to the effect that the pre-sales number depended on the number of contracts that had been unconditionally exchanged.

18. [26]

    In June and July 2017, several finance brokers were engaged to source funding for the Linden Development.

19. [27]

    Mr Gribble received weekly reports from Colliers, setting out matters such as the number of units available for sale in the Linden Development, the number of contracts issued, the number of sales advices issued, and the number of contracts exchanged (including the number exchanged unconditionally).

20. [28]

    On 16 July 2017, one month after the date by which the first of the Sales Milestones was meant to have been achieved (namely, the sale of 45% of the Non-Quantum Properties), Colliers reported that contracts had not been exchanged on any of the units. In cross-examination, Mr Gribble explained that there had been a delay in Colliers gaining access to a display suite, which had affected Colliers’ ability to meet the Sales Milestones.

21. [29]

    On 26 October 2017, Mr Gribble received a Project Control Group Report in relation to the Linden Development, which was prepared by Quantum Development as “Project Manager”. It stated that a tender for the building contract had been issued on the date of the report (26 October 2017). It also set out a development program which stated that the “current forecast date” for the completion of pre-sales of apartments and for the obtaining of construction finance was 15 December 2017. The report recorded that, as at 26 October 2017, contracts had been exchanged on only seven of the units in the Linden Development.

22. [30]

    On 22 November 2017, Lords Property Group Pty Ltd provided a tender proposal for the Linden Development. In a covering email, the director of Lords, Mr Jad Maroun, stated that Lords was able “to offer a negotiated tender price based upon receiving a Letter of Intent by COB today if possible”.

23. [31]

    On 23 November 2017, Mr Gribble signed a letter of intent on behalf of the Company, which was accepted by Lords on the following day (the Letter of Intent). The Letter of Intent confirmed that the Company and Lords were “continuing to negotiate the terms of a design and construct contract” for the Linden Development, and that there remained “matters which are not agreed”. In that context, the letter set out the “basis on which the parties’ negotiations will proceed”, including that:

24. [32]

    By the Letter of Intent, the Company and Lords agreed to continue negotiating the terms of a construction agreement for the Linden Development, while acknowledging that there would be no such agreement in place unless and until a contract was subsequently executed.

25. [33]

    The Letter of Intent did not define, or otherwise identity, the “Financier” referred to in paragraph 2 of that letter. At this time, the Company had not received any offer of construction finance for the Linden Development.

26. [34]

    As set out above, paragraph 3 of the Letter of Intent referred to “Stage 1” of the Linden Development, by reference to a schedule entitled “Linden – Stage 1 & 2 Cost Break-up 171123”. The relevant schedule set out a proposed “Stage 1” of the construction (which included design, piling, capping, beam, shotcrete, anchoring, excavation and reinforcement to all footings) and “Stage 2” (which was from “underside of slab on ground to completion”). The payments falling within Stage 1 totalled $3,040,816.01 and within Stage 2 totalled $15,185,943.99, for a total cost excluding GST of $18,226,760.00.

27. [35]

    During late November and December 2017, Lords commenced design work for the Linden Development.

28. [36]

    As noted at paragraph [29] above, as at 26 October 2017, it was forecast that the pre-sales of the units in the Linden Development would be completed by 15 December 2017. This forecast was not met. On 17 December 2017, Colliers issued a weekly report stating that contracts had been exchanged for only nine of the units in the Linden Development (with a contract for one further unit having been exchanged conditionally).

29. [37]

    On 12 December 2017, SLI, the Company and Mr Gribble entered into a Loan Deed with Solcap Debt Management Pty Ltd (the Solcap Loan). By this agreement, Solcap agreed to provide a facility in the amount of $7,431,000 to the Company for a one-year term. Provided that there was no default, the interest rate was 11.25% per annum (and otherwise 15.25% per annum). Mr Gribble guaranteed the Company’s obligations under the Loan Deed.

30. [38]

    In consideration for the facility, Solcap was granted a first-ranking security interest over all of the present and after-acquired property of each of the Company, SLI and Mr Gribble, and a first-ranking real property mortgage over the seven lots comprising the Land.

31. [39]

    On 15 December 2017, the facility under the Solcap Loan was fully drawn down. The funds advanced by Solcap were used to fund the purchase of the Land by SLI, which was completed on that date.

32. [40]

    On 15 December 2017, the Company (as borrower) and Quantum Group Holdings Pty Ltd (as guarantor) entered into a loan agreement with The Trust Company (Australia) Limited as custodian for Quantum Funds Management Ltd as responsible entity for the Quantum Mortgage Trust (QM Trust) (the Quantum Loan).

33. [41]

    By clause 3.1 of the Quantum Loan, QM Trust agreed to lend the “Loan Amount” to the borrower. The Loan Amount was defined as “the amount that is not less than $1.5m and not more than $9.0m but which is otherwise determined by the amount which is no greater than 70% of the Gross Realisable Value of the [Linden Development] on its completion or 80% of the Land Value + the Additional Guarantee Amount”.

34. [42]

    Clause 6.1 provided that the Loan Amount would be used for the completion of the purchase of the Land as required, and that the balance would be used to complete the construction of the Linden Development.

35. [43]

    Clause 5.1 provided that the Company would pay QM Trust interest at a rate of 12% per annum (unless the interest is not paid on the due date, in which case the rate would be 16% per annum).

36. [44]

    Clause 4.1 of the Quantum Loan provided that the Company must repay the Loan Amount to QM Trust on the later of (a) two years after the first drawdown of any part of that amount; and (b) six months after notice of practical completion is given under the building contract.

37. [45]

    Clause 7.1 provided that the money advanced and the interest payable under the Quantum Loan would be secured by a mortgage over the Land; by a registered security interest against the present and future acquired property of the Company and SLI; and by the guarantee given under the loan deed by Quantum Group Holdings.

38. [46]

    Mr Gribble agreed in cross-examination that, although the Loan Amount was expressed to be in a range of $1.5m to $9.0m, the amount which was available to be advanced depended on the number of “SL class units” which were sold by the QM Trust to investors.

39. [47]

    A Product Disclosure Statement for the SL class units was issued by QM Trust on 8 December 2017 (Quantum PDS). Part 2 of the Quantum PDS stated that QM Trust would use the funds raised by the issue of SL class units to provide a loan to the Company for the purpose of the Linden Development. It further stated that: “A minimum of $1.5 million up to a maximum of $9 million ‘SL’ Class of Units will be issued by [QM Trust] to investors”. This matched the range of the loan amount specified in the Quantum Loan. However, importantly, the Quantum PDS stated as follows:

40. [48]

    The Quantum PDS stated that the “Purpose” of the loan was as follows:

41. [49]

    The Quantum PDS stated that:

42. [50]

    The Quantum PDS further stated that:

43. [51]

    It is plain from the reference to “additional funds of approximately $13m” that the Quantum PDS envisaged that total finance of more than $20m would need to be obtained for the Linden Development. (This is confirmed by statements later in the Quantum PDS, which are set out below, regarding the number of pre-sales required in order to secure the finance required.)

44. [52]

    Accordingly, even if the maximum amount of the SL class units were issued ($9m), with the result that the maximum amount of the Quantum Loan was advanced ($9m), those funds would be insufficient to fund these construction costs. In that regard, the Quantum PDS stated that the purpose of the Quantum Loan was “to partially fund the Project”.

45. [53]

    Part 2 of the Quantum PDS described the Linden Development as having two stages, as follows (emphasis added):

46. [54]

    As this passage indicates, it was planned that sufficient pre-sales of apartments would have to be completed in order to obtain construction finance, before a construction contract was entered and the construction of the Linden Development would commence.

47. [55]

    The Quantum PDS stated that the “marketing of the 62 apartments for sale has commenced”, and provided the following further information regarding the level of pre-sales required in order to achieve construction finance (emphasis added):

48. [56]

    The above passage indicates that the required level of senior debt for the Linden Development was some $22.7m. As at the date of the issue of the Quantum PDS, the pre-sales necessary to obtain this level of finance was nowhere near being achieved. The Quantum PDS reported that contracts had been exchanged on only eight units, with a total value of $5.635m.

49. [57]

    In December 2017 or January 2018, the Company entered into a contract with Lords for the design and construction of the Linden Development (the Construction Contract). This agreement was signed by Mr Gribble on behalf of the Company.

50. [58]

    The Construction Contract was dated 20 December 2017. Mr Gribble gave evidence that it was in fact executed on 31 January 2018. He did not refer to any document supporting this later date for the contract, and it is unlikely that, almost seven years after the event, he would have an unaided recollection of the precise date on which he signed this agreement. However, it is unnecessary to resolve this issue, as nothing turns on the date of execution.

51. [59]

    The Construction Contract comprised, inter alia, the Formal Instrument of Agreement and the General Conditions attached to that document.

52. [60]

    Clause 5.1 of the Formal Instrument of Agreement provided as follows:

53. [61]

    Accordingly, insofar as the Letter of Intent (which, as outlined above, specified a framework for ongoing negotiations) had any contractual effect, it was superseded by the parties’ entry into the Construction Contract.

54. [62]

    Clause 2.7 of the General Conditions provided as follows:

55. [63]

    The effect of this provision was, in broad terms, to give the Company the sole and absolute discretion as to whether and when the works would commence on the project (other than the early design development works). The evident purpose was to ensure that the Company was able to be satisfied that it had sufficient finance in place for the works before any substantial costs were incurred.

56. [64]

    The “tripartite deed” was defined as meaning “the deed or deeds required to be executed by [the Company], [Lords] and the Financier as a prerequisite to entering into this Contract, or which may be required by the Financier from time to time, including the deed at Annexure Part M” . The “Financier” was defined as meaning Westpac Banking Corporation.

57. [65]

    Clause 53 of the General Conditions was headed “Tripartite Deed” and provided, relevantly, as follows:

58. [66]

    The Construction Contract specified the contract sum to be $18,226,760.00 (excluding GST). This matched the sum which had been specified at the time of entry into the Letter of Intent. However, the Construction Contract did not divide the sum into “Stage 1” and “Stage 2”.

59. [67]

    Clause 2.2 of the Formal Instrument of Agreement provided that the Company must pay Lords the contract sum at the times and in the manner provided for in the Construction Contract.

60. [68]

    Clause 37.1 of the General Conditions provided that, if Lords complied with its obligation to deliver certain documentation to the Company, Lords was entitled to serve a progress claim on the Superintendent once every month up to the date of practical completion, together with supporting material.

61. [69]

    Clause 37.2 provided that the Superintendent must, within 10 business days after receiving a progress claim, issue to Lords a progress certificate “evidencing the Superintendent’s opinion of the moneys due from the [Company] to [Lords] pursuant to the progress claim and reasons for any difference”, taking into account, inter alia, “the cost to rectify work which is defective or does not comply with the requirements of the Contract”. The Superintendent was Mr Hazim Najar, who was employed by the Quantum Group.

62. [70]

    The Company was required, subject to certain conditions, to pay Lords “the amount certified by the Superintendent in a progress certificate under subclause 37.2 within 15 business days after the date a payment claim meeting the requirements of the Contract is validly received by the Superintendent”: cl 37.2A(b).

63. [71]

    Clause 39.7 of the General Conditions defined a substantial breach of the Construction Contract as being “a failure by the [Company] to make payment which is payable to [Lords] pursuant to the Contract”, and provided that if the Company commits a substantial breach, Lords may give the Company a written Show Cause Notice, requiring the Company to show cause why Lords should not exercise a right referred to in clause 39.9.

64. [72]

    Clause 39.9 of the General Conditions provided that:

    1. (1)

       if the Company fails to show reasonable cause by the stated date and time, Lords may, by written notice to the Company, “suspend the whole or any part of” the works; and

    2. (2)

       if the Company fails within 28 days of the date of any such suspension:

65. [73]

    Clause 39.9 further provided that:

66. [74]

    In addition, clause 33.4 of the General Conditions provided that, other than where Lords was required to bear the cost of a suspension (that is, other than where the suspension is due to an act or omission of Lords or its associates, agents or employees):

67. [75]

    Clause 34.9 of the General Conditions provided as follows:

68. [76]

    On 1 February 2018, the Company entered into two agreements with SLI, the first entitled a “Development Manager Agreement” and the second entitled a “Project Manager Agreement”. These agreements were executed by Mr Gribble on behalf of each of the Company and SLI.

69. [77]

    Clause 5.5 of the Development Manager Agreement relevantly provided as follows:

70. [78]

    Clause 5.3 of the Project Manager Agreement was in relevantly identical terms.

71. [79]

    The main distinction between the two agreements appears to be that the Development Manager Agreement was intended to cover the period up to the commencement of construction, while the Project Manager Agreement was to cover the period from commencement to completion of construction. For example, the Development Manager Agreement contained provisions relating to the obtaining of approvals for the works, and regarding any appeal to Land and Environment Court (which did not have any counterpart in the Project Manager Agreement).

72. [80]

    Clause 3.4 of the Development Manager Agreement provided as follows:

73. [81]

    The date of the exchange of the land option was around 7 June 2016. By reason of the cap on fees in clause 3.4, there were a total of eighteen monthly amounts payable under that clause, with the result that the last of those monthly amounts was payable in December 2017.

74. [82]

    From around that point in time, the amounts due under the Project Manager Agreement were payable. Clause 3.4 of the Project Manager Agreement provided as follows:

75. [83]

    Clause 4.2 of the Development Manager Agreement provided as follows:

76. [84]

    The Company did not have any employees. In order to perform its obligations under the Development Manager Agreement and the Project Manager Agreement, it engaged Quantum Development to provide those services to SLI.

77. [85]

    On 15 December 2017, a construction certificate was issued for the demolition of the existing structures on the Land. On 8 February 2018, a further construction certificate was issued for bulk excavation and shoring.

78. [86]

    As at February 2018, the sales of units in the Linden Development remained well below the targets specified in the Agency Agreement and in the Quantum PDS. A report from Colliers for the week ending 4 February 2018 stated that a total of ten contracts had been exchanged (with a further three contracts exchanged conditionally).

79. [87]

    As at February 2018, the Company had not received an indicative term sheet for any construction finance facility.

80. [88]

    Despite those matters, on 14 February 2018, the Company issued a “Commencement Notice” to Lords in respect of the Linden Development. This notice was copied to Mr Gribble and stated relevantly as follows:

81. [89]

    Mr Gribble gave evidence in his affidavit that, on or about 14 February 2018, he was informed by Mr Najar that:

82. [90]

    In circumstances where Mr Najar was not called as a witness in this proceeding, this evidence was admitted subject to an agreed ruling under s 136 of the Evidence Act 1995 (NSW) that it be limited to evidence of what was said to Mr Gribble, and not as the truth of the matters stated.

83. [91]

    There is no contemporaneous document which records the matters which Mr Najar is said to have told Mr Gribble.

84. [92]

    The Commencement Notice, which was issued by Mr Najar and was copied to Mr Gribble, did not refer to Stage 1 or Stage 2. It did not state that Lords was to commence only Stage 1 of the works, or that a separate notice would be issued in respect of Stage 2.

85. [93]

    The Construction Contract which was signed by Mr Gribble did not divide the works into Stage 1 and Stage 2, and did not provide for separate commencement notices to be issued for separate stages.

86. [94]

    The Commencement Notice did not contain any statement that any part of the works was “subject to final construction finance”. Clause 2.7 of the Construction Contract provided that the issue of a commencement notice was in the absolute discretion of the Company, and that the Company could, in deciding whether and when to issue a commencement notice, take into account whether it had obtaining finance for the Project on terms which it regarded as acceptable, and whether Lords had executed a tripartite deed with the Financier. However, this clause was for the sole benefit of the Company, and could be waived by the Company: subclause 2.7(k). As matters eventuated, the Company elected to issue the Commencement Notice before it had obtained construction finance, or had even obtained an indicative term sheet for such finance, and before it had reached the level of sales in the Linden Development which (according to the Quantum PDS) were required in order to obtain construction finance.

87. [95]

    Mr Gribble was aware of those matters. In particular, he was aware of the terms of the Commencement Notice (which was copied to him) and of the Construction Contract (which he signed); he was aware of the statements made in the Quantum PDS regarding the level of pre-sales required in order to obtain construction finance; and he was aware, as at 14 February 2018, of the level of pre-sales that had been achieved and the lack of any offer of construction finance.

88. [96]

    Significantly, in the correspondence which ensued with Lords over the coming months regarding payments due under the Construction Contract, Mr Gribble did not, on any occasion, state to Lords that any amounts claimed by Lords above the sum of $3.04m were not payable because they comprised a “Stage 2” of works which Lords was not authorised to undertake without the issue of a further notice under the contract.

89. [97]

    In those circumstances, I find that it is unlikely that Mr Najar said, or that Mr Gribble believed as at 14 February 2018, that the Commencement Notice was issued only in respect of “Stage 1” of the Linden Development; or that a separate commencement notice was going to be issued in respect of “Stage 2”; or that the issue of the Stage 2 commencement notice and the commencement of the Stage 2 works was subject to finance being obtained.

90. [98]

    On 28 February 2018, Lords sent the Company its first progress claim in relation to the Linden Development (Progress Claim No 1). In the covering email, Mr Maroun stated that:

91. [99]

    Lords plainly did not regard the Letter of Intent as a binding agreement to perform works, since it described the works done following the signing of the Letter of Intent and prior to the issue of the Commencement Notice, as having been performed “as a sign of good faith based on our working relationship”. As noted above, the Commencement Notice issued on 14 February 2018 had included authorisation for Lords to perform the works specified in clause 2.7(b) of the General Conditions, being the “early design development of the Works” (being work which Lords had already performed). Following the issue of the Commencement Notice, Lords raised Progress Claim No 1 for the cost of those early design works.

92. [100]

    Following the issue of Progress Claim No 1, the parties exchanged emails, in which Lords confirmed that it had submitted the documentation required by clause 37.2A of the General Conditions (which had to be supplied before the Company was obliged to make any payment to Lords).

93. [101]

    Progress Claim No 1 was for an amount of $1,023,156.07. Mr Najar, as Superintendent, issued a payment schedule in respect of Progress Claim No 1 in the amount of $694,752.49. Pursuant to the terms of the Construction Contract, the Company was obliged to pay the amount set out in the Superintendent’s payment schedule by 21 March 2018. Lords issued a tax invoice for this amount.

94. [102]

    On 21 March 2018, being the due date for payment, Mr Maroun sent an email to Mr Najar, asking: “Can you please also confirm when we can expect Linden St payment of Tax Invoice No. 1”. This was the commencement of a pattern which would continue throughout the dealings between the Company and Lords, whereby Lords was consistently enquiring after, and pressing for, payment by the due date.

95. [103]

    Later that day, Kim Jin, who was a Financial Controller at the Quantum Group, responded to Mr Maroun stating: “For our new project on Linden, we will talk to peter for further instruction”. Mr Gribble confirmed in cross-examination that he was the only “Peter” at the Quantum Group. It is apparent that, from the first request for payment by Lords, instructions were sought from Mr Gribble. Further, as set out below, he was subsequently copied into much of the correspondence between Lords and the Quantum Group regarding late payments.

96. [104]

    It appears that no response to Mr Maroun’s request was forthcoming, from Mr Gribble or otherwise. On 23 March 2018, Mr Maroun sent a further email in the same email chain, again seeking confirmation as to when Lords would receive payment for their first invoice.

97. [105]

    On 3 April 2018, the Company made a part payment of $400,000 to Lords in respect of Progress Claim No 1. Later that day, Mr Gribble sent an email to Mr Maroun in the same email chain, stating as follows: “Sorry Jad made part payment we’re still waiting for $300000 from the ATO we are chasing them daily now and then can pay the balance of your claim”. Mr Maroun replied to Mr Gribble shortly afterwards, again pressing for payment of the outstanding balance, stating as follows:

98. [106]

    On 9 April 2018, the Company paid the balance of the amount due in respect of Progress Claim No 1 (being $294,752.49).

99. [107]

    On 23 March 2018, Mr Maroun sent Mr Hajar a cash flow forecast for the Linden Project, noting that the figures were indicative, and would most likely fluctuate depending on progress on site. The monthly and total cash flow for the Linden Development was as follows:

100. [108]

     As this cash flow forecast showed, Lords expected that by the end of June 2018, it would have issued over $4.851m in progress claims. There was no reference in this cash flow forecast to Stage 1 and Stage 2, and no indication that any part of the works would not be performed unless a further commencement notice was issued or unless construction finance was obtained. As at March 2018 (when this cash flow forecast was prepared), Lords was plainly intending to perform substantial works on the Linden Development every month for the coming 18 months, in an average amount of around $1m per month.

101. [109]

     Mr Najar did not, in response to this email dated 23 March 2018 (or at any other time), state that no works should be performed by Lords beyond “Stage 1” or beyond an amount of $3.04m, unless a further commencement notice was issued or unless construction finance was obtained.

102. [110]

     As at the end of March 2018, the amount of funds being raised by the sale of SL class units, which was thereby available to be advanced to the Company pursuant to the Quantum Loan, was not keeping pace with the cost of the works being performed.

103. [111]

     Part 1 of the Quantum PDS stated that, upon receipt of application moneys by QM Trust, the moneys would be held in trust for the applicant in a bank account established by the QM Trust in the name of the SL class units. The Quantum PDS further stated that: “No contributions will be released from this account for any purpose, other than to refund cancelled applications, until the minimum subscription has been received”.

104. [112]

     Part 2 of the Quantum PDS stated that:

105. [113]

     As foreshadowed in the Quantum PDS, in December 2017 the QM Trust opened a bank account with Westpac in the name of the SL class units. The first deposit into that account was on 23 January 2018. In January 2018, there were two deposits into the account totalling $229,253.87. In February 2018, there were no deposits into the account. In March 2018, there was one deposit of $50,000.

106. [114]

     It follows that, by the end of the March 2018 (being around the time that the Company received the cash flow forecast from Lords set out above), QM Trust had raised a total of $279,253.87 in the three months since the issue of the Quantum PDS, which appears to have been raised from only three investors.

107. [115]

     Despite the statements in the Quantum PDS that no amount would be withdrawn from the SL class unit bank account “for any purpose, other than to refund cancelled applications, until the minimum subscription [of $1.5m] has been received”, an amount equal or approximately equal to the amount of each deposit into the bank account was, within a day or two of that deposit, withdrawn from that account.

108. [116]

     Those moneys were transferred to a bank account in the name of SLI, which in turn transferred them into a bank account in the name of the Company.

109. [117]

     According to a schedule which was prepared by QM Trust in support of a proof of debt lodged in the liquidation of the Company in respect of the amount owing by the Company under the Quantum Loan, the cumulative total of the amount transferred to the Company by QM Trust was $279,000 as at the end of March 2018; $1,079,000 as at the end of April 2018; $2,089,000 as at the end of May 2018; and $2,689,000 as at the end of June 2018.

110. [118]

     Those amounts were well short of the amounts which were certified as due to Lords in respect of the progress claims for those corresponding months. As set out below, the total amount certified as due to Lords in respect of Progress Claims No 1 to No 5, covering the period from February to June 2018, exceeded $5m.

111. [119]

     The fact that the moneys raised from the sale of SL class units were transferred from QM Trust to SLI, and then from SLI to the Company may explain why a document was prepared which was described as a “Loan Agreement” between SLI as Lender and the Company as Borrower. This agreement, which was dated 13 March 2018, was executed by Mr Gribble on behalf of each of the parties.

112. [120]

     Clause 2.1 of this document provided that SLI agreed to lend the “Loan Amount” to the Company. The “Loan Amount” was defined as “the total amount shown on the schedule attached to this agreement, and which is $1,200,000 or thereabouts as at the date of this agreement but in any case, that is not more than $8,000,000”. This was similar to, but lower than, the range of the Quantum Loan ($1,500,000 to $9,000,000).

113. [121]

     Clause 5.1 provided that the Loan Amount would be used to complete the works.

114. [122]

     Clause 8.1(e) gave, in effect, SLI a discretion as to whether or not to advance any amount to the Company. It provided that SLI was not required to make any advance of the Loan Amount “if [SLI] becomes aware of any information, or any event occurs (including, an event of default under this agreement and/or any Security) which in the reasonable opinion of [SLI], would render the advancing of the Loan Amount materially prejudicial to [SLI’s] interests”.

115. [123]

     Each of QM Trust and SLI lodged a proof of debt in the liquidation of the Company, in precisely the same amount ($4,889,037), which in each case was said to be a loan to the Company.

116. [124]

     The QM Trust proof of debt attached minutes of a meeting of QM Trust, which were dated 27 March 2020 and signed by Mr Gribble, recording that: “[QM Trust] has lent monies to [the Company], via SLI which has a loan account with [the Company].”

117. [125]

     Mr Gribble acknowledged in cross-examination that the separate proofs lodged by QM Trust and SLI related to the same loan, being the amount which QM Trust had advanced to the Company, and that the two proofs were a “double up”.

118. [126]

     The Plaintiffs submitted that the loan agreement between SLI and the Company was a “sham”, and noted that it was not referred to in the evidence of Mr Gribble.

119. [127]

     It is unnecessary to determine whether or not this document was a sham. It is sufficient for present purposes to note that, having regard to the evidence set out above regarding the proofs of debt, it appears that no amount was advanced to the Company by SLI which was separate from or additional to the amount which was advanced to the Company by QM Trust. Accordingly, the “Loan Agreement” between SLI and the Company did not represent a facility to which the Company could have access in the event that it was not possible to raise Construction Finance in respect of the Linden Development.

120. [128]

     On 12 April 2018, QM Trust issued a replacement Part 2 Product Disclosure Statement in relation to the SL class units (the Replacement PDS). The parties did not identify any substantive amendments between this version and the original version of the Quantum PDS (other than an update on the level of pre-sales), and Mr Gribble indicated in cross-examination that he could not recall why a replacement was issued. Relevantly, the statements made in the original Quantum PDS (which are quoted in paragraphs [47]-[53] above) appeared, in largely identical terms, in the Replacement PDS.

121. [129]

     The Replacement PDS provided an update on the pre-sales. It repeated the statement that the estimated number of pre-sales required to secure the additional funding needed to finance the construction of the Linden Development was approximately twenty-nine pre-sales with a gross sales value of approximately $22.7m. The Replacement PDS reported that, as at 12 April 2018, contracts had been exchanged on nineteen units.

122. [130]

     Around this time, Lords was aware that the Company had not yet obtained construction finance. On 19 April 2018, an assistant project manager at the Quantum Group sent an email to Mr Maroun, with the subject “Linden Requested Info”, asking him for a corporate profile for Lords and explaining that a “prospective financier of the project is asking for information on our Builders”. Mr Maroun responded that the prospective financier should be encouraged to undertake “a site visit which we can lead for you and we will show them how we operate, our attention to detail onsite and how well the project is positioned for success at the moment considering the progress of works onsite”.

123. [131]

     There was in evidence a document described in submissions as the “Linden Report”. It appears to have been a report which was automatically generated by a software system, with a footer “Run date: 16/4/2018 15:18:5”. None of the witnesses, including the expert witnesses, was familiar with the system which was used to produce the report.

124. [132]

     Mr Gribble gave evidence that the report was probably generated so that some of the data in the report could be used in the preparation of a “Project Control Group Report” for the Linden Development, which also appears to have been drafted on 16 April 2018.

125. [133]

     The Linden Report included a section headed “Unpaid Invoices”, which contained information relating to each of SLI and the Company. The information relating to the Company indicated that the Company had in excess of fifty outstanding invoices, with dates over the past two years, and that the total outstanding amount was $1,491,977.65. Of this sum, $294,752.49 was owed to Lords, $633,831.74 was owed to Sutherland Shire Council, $264,726.00 was owed to Quantum Development, with the remainder being split between various creditors.

126. [134]

     The significance of this report is addressed below when dealing with the issue of solvency.

127. [135]

     On 20 April 2018, only a few days after the date of the Linden Report, SLI transferred an amount of $264,726 to Quantum Funds Management Pty Ltd. This represented the total of the amount which was shown in the Linden Report as owing by the Company to Quantum Development, in respect of fourteen invoices stretching back to November 2016.

128. [136]

     On 8 May 2018, SLI transferred a further $28,457 to Quantum Development. This represented the total amount of two invoices dated 30 April 2018 which had been issued by Quantum Development to the Company.

129. [137]

     A letter sent from Quantum Development to the Liquidator on 2 September 2020 provided further information about this transfer of funds from SLI to Quantum Development, explaining that the “amounts … due” by the Company to Quantum Development “were … cleared through intercompany accounts”. This letter attached a reconciliation which showed, inter alia, payments in the amounts of $264,726 and $28,457 being made on 20 April and 8 May 2018, in respect of the amounts owing by the Company to Quantum Development.

130. [138]

     Accordingly, the payments which were made by SLI on 20 April 2018 and 8 May 2018 appear to have been treated as payments in respect of fees due by SLI to the Company, which were effected by being made to the Company’s nominee, Quantum Development, thereby discharging to the extent of those payments the Company’s liability for fees due to Quantum Development.

131. [139]

     I address below the Plaintiffs’ claim that these payments to Quantum Development were unfair preference payments.

132. [140]

     On 30 March 2018, Lords issued a second progress claim in the amount of $547,479.77 (including GST) (Progress Claim No 2). Mr Najar, as Superintendent, issued a payment schedule certifying that the amount claimed by Lords was payable.

133. [141]

     Pursuant to the terms of the Construction Contract, the Company was obliged to pay the amount set out in the Superintendent’s payment schedule by 18 April 2018.

134. [142]

     On 11 April 2018, Lords issued a tax invoice for this amount. In his covering email to Mr Najar, Mr Maroun requested that payment “be made on the due date”.

135. [143]

     On Friday 27 April 2018 at 5.51pm, Mr Maroun sent an email to Mr Gribble stating that Lords was still waiting for payment of this tax invoice of $547,479.77 for the Linden Development, and requested that Mr Gribble confirm that this payment could be made on Monday (being the following business day).

136. [144]

     On Monday 30 April 2018, Mr Maroun sent an email to Mr Najar, again requesting payment of the tax invoice in relation to Progress Claim No 2.

137. [145]

     On Friday 4 May 2018, Mr Gribble responded to Mr Maroun’s messages, stating that he “was hoping to transfer $200k today … then balance Mo-Tue … the funds are in transit … so wont be today but will clear the a/c we hope on M-W next week”. Shortly afterwards, Mr Maroun sent an email in response to Mr Gribble, stating: “I really am pushing it at the moment to assist for Linden by not claiming as much as I should be but I cannot afford to have payments delayed too long.”

138. [146]

     Mr Gribble’s reference to “funds in transit” was likely a reference to the moneys which had been raised by the sale of SL class units, and which were subsequently transferred by QM Trust to the Company via SLI. For example, the statements for the SL class units bank account show that an amount of $100,000 was deposited into the account on Friday, 4 May 2018, and the same amount was transferred out of the account on Monday, 7 May 2018.

139. [147]

     Two payments of $100,000 each were made to Lords by the Company on 7 and 9 May 2018.

140. [148]

     The full amount of those payments ($200,000) was not credited by Lords to Progress Claim No 2 in its reconciliation. The Defendants submitted that this indicated that the amounts paid by the Company to Lords had been understated, with the result that the Plaintiffs’ claim in respect of the outstanding value of the debts incurred to Lords during the period of alleged insolvent trading was overstated.

141. [149]

     However, there was evidence which appeared to explain the reason why the full amount of these two payments was not credited by Lords to Progress Claim No 2. In relation to the first of these payments, the following narrative is given on the Company’s bank statement “Pymt Lords Prop Inv104/Inv105(Bal)”. It therefore appears that this payment to Lords was in respect to two distinct invoices, numbered 104 and 105 (with the payment in respect of the latter being a payment for the outstanding balance). Invoice 104 was the invoice issued by Lords in relation to Progress Claim No 2. Invoice 105 was not an invoice which was issued by Lords in respect of the Linder Development. Instead, it appears to have been an invoice in respect of another development which Lords was constructing for the Quantum Group, namely, the Adelong Development. On the morning of 10 May 2018, the day after the second of the payments totalling $200,000 was received, Mr Maroun sent an email to Mr Gribble confirming that “Full payment” had been “received” for an outstanding invoice in respect of the Adelong Development and that, in addition, an amount of $144,715.79 had been received in respect of Progress Claim No 2 for the Linden Development.

142. [150]

     Having regard to the evidence set out above, I am satisfied that the Company received full credit from Lords for the payments totalling $200,000 which were made from the Company’s bank account on 7 and 9 May 2018, with part of that sum being attributed to payment of the outstanding balance of an invoice issued by Lords in respect of the Adelong Development, and the remainder being attributed to Progress Claim No 2 in respect of the Linden Development. It follows that there has not been, in this respect, any understatement of the amounts received by Lords.

143. [151]

     On 10 May 2018, at the same time as acknowledging receipt of the payments in respect of the invoices for the Adelong and Linden Developments, Mr Maroun informed Mr Gribble that a balance of $402,763.98 including GST remained outstanding in respect of Progress Claim No 2 for the Linden Development, and chased up payment of this amount, asking: “Can you please confirm if balance can be paid today?”

144. [152]

     The outstanding balance in respect of Progress Claim No 2 was not paid in full until 30 May 2018. This payment was made by a series of payments as follows: $100,000 on 18 May 2018; $150,000 on 23 May 2018; $100,000 on 25 May 2018; and the balance on 30 May 2018.

145. [153]

     It is likely that the timing of these payments was determined by the receipt of moneys by QM Trust in respect of SL Class Units, and the transfer of those moneys to the Company via SLI. In particular, in the period from 18 May 2018 to 31 May 2018, the only dates on which moneys were transferred by the QM Trust to SLI matched the only dates on which moneys were paid by the Company to Lords (namely, 18, 23, 25 and 30 May 2018).

146. [154]

     Throughout this period, Lords continued to push the Company – and, in particular, Mr Gribble – for payment of the outstanding balance of Progress Claim No 2. For example:

     1. (1)

        on 17 May 2018, Mr Maroun asked Mr Gribble to provide an update on payment for the balance of this claim;

     2. (2)

        on Sunday, 20 May 2018, Mr Gribble responded by saying that he was interstate on Monday (the following day), but that “balance is due I hope on Tuesday [22 May] as waiting on funds transfer from OS [overseas]”, and by thanking Mr Maroun for his patience;

     3. (3)

        on Monday, 21 May 2018, Mr Maroun asked Mr Gribble to “confirm the funds being received tomorrow [22 May] will close out” the outstanding balance of Progress Claim No 2; and

     4. (4)

        on Friday, 25 May 2018, Mr Maroun sent an email to Mr Gribble and others, asking when Lords could expect to receive the outstanding balance of $152,763.98 for Progress Claim No 2, “as I need certainty on these payments as soon as possible”. Mr Taylor of the Quantum Group responded later that evening, copied to Mr Gribble, that the Company had “transferred $100k tonight and will work through the remaining amounts next week”.

147. [155]

     The Defendants submitted that there was a further discrepancy regarding the final payment made in respect of Progress Claim No 2, which again meant that the total amount received by Lords had been understated. On 30 May 2018, an amount of $52,763.98 was paid from the Company’s bank account to Lords, with the narrative “Lords Prop 104 last install” (that is, final instalment in respect of Invoice 104 for Progress Claim No 2). However, Lords credited, in their reconciliation, an amount of only $46,814.36 to Progress Claim No 2.

148. [156]

     As set out above, on 25 May 2018, Mr Maroun stated that an amount of $152,763.98 including GST was outstanding in respect of Progress Claim No 2. Later that day, as foreshadowed by Mr Taylor, a further amount of $100,000 was paid to Lords and credited to Progress Claim No 2. However, on 30 May 2018, Mr Maroun stated that the balance remaining in respect of this claim was now $46,814.36 including GST. Mr Taylor responded by sending Mr Maroun confirmation of a payment of $52,763.98 in respect of Progress Claim No 2. (This matched the amount that was said to be owing several days earlier, less the payment of $100,000 that was subsequently made, but was higher than the amount stated by Mr Maroun as owing earlier that day.) In forwarding this payment notification, Mr Taylor commented as follows: “Small discrepancy with the $52k amount as looks like we may have overpaid a claim for Adelong that has been offset against the Linden St outstanding balance on your end. Our accounts term can work through the detail later”.

149. [157]

     It therefore appears that the discrepancy between the amount paid from the Company’s bank account in respect of the outstanding balance of Progress Claim No 2 ($52,763.98) and the amount credited by Lords to that claim ($46,814.36) was due to an adjustment, worked out by the accounting teams of Lords and the Company, as between amounts credited to, respectively, the Adelong and Linden Developments. In those circumstances, it has not been established that there is any understatement in the amount credited by Lords to the progress claims for the Linden Development.

150. [158]

     Meanwhile, on 30 April 2018, Lords had issued its third progress claim in respect of the Linden Development in an amount of $894,343.91 (Progress Claim No 3).

151. [159]

     On 14 May 2018, Mr Najar, as Superintendent, issued a payment schedule in respect of Progress Claim No 3. The payment schedule certified that the quantity surveyor, Mitchell Brandtman, had verified the completed works which were valued at $894,343.91 including GST; that the Quantum Group had reviewed the quantity surveyor’s report and approved this verification; and therefore that the full amount of Progress Claim No 3 was approved and should be processed to be paid to Lords by the due date of 21 May 2018.

152. [160]

     Lords issued Invoice No 108 in respect of Progress Claim No 3 in the amount of $894,343.91 including GST.

153. [161]

     Mr Maroun commenced chasing Mr Gribble for confirmation regarding payment of Progress Claim No 3 before it was due. On 17 May 2018, he sent an email to Mr Gribble asking him to “confirm when we can anticipate” receiving payment of the amount of $894,393.91 for this claim.

154. [162]

     On 21 May 2018, which was the date when payment of Progress Claim No 3 was due, Mr Maroun sent an email to Mr Gribble asking him to confirm that funds would be received on the following date to “close out” the amount of this claim.

155. [163]

     On 25 May 2018, Mr Maroun sent an email to Mr Gribble and others, stating that Lords required “certainty” on the payment of Progress Claim No 3 “as soon as possible”, adding:

156. [164]

     This email was sent in a context where, on 11 May 2018, a construction certificate was issued in respect of the Linden Development for “Construction of structure”, and the cash flow forecast which had been prepared by Lords and provided to the Company in April 2018 anticipated substantial costs in the near future of $1m in June, $1.45m in July and $1.4m in August (see paragraph [106] above).

157. [165]

     On 30 May 2018, Mr Maroun sent a further email to Mr Gribble regarding Progress Claim No 3. Mr Maroun noted that Mr Taylor had been unable to provide him with “a date for Linden invoice of $894,343.91”, and asked Mr Gribble to “advise when we can expect to receive this payment”, requesting a response “as soon as possible”.

158. [166]

     On the following day, 31 May 2018, Mr Maroun sent another email to Mr Gribble regarding this claim (emphasis added):

159. [167]

     Around the same time, the Company was being pressured by Colliers for payment of its outstanding invoices.

160. [168]

     On 24 May 2018, Mr Peter Kerras, who was Director of Project Marketing at Colliers, wrote to Mr Gribble, referring to a discussion between Mr Gribble and representatives of Colliers regarding “our outstanding invoices” in which Mr Gribble had “made a commitment to sort this out next week”. Mr Kerras stated that he had received “firm instructions from my National Managing Director to remove Andrew [the Colliers agent responsible for pre-sales] from The Linden next week if we don’t receive payment in full”.

161. [169]

     On the same day, Mr Gribble responded, confirming that the Company was “working to bring the outstanding Colliers debt up [to] date and aim to make a payment next week on Monday as requested”. In this email, he acknowledged that the level of pre-sales was hampering the Company’s ability to raise finance for the Linden Development:

162. [170]

     As at the end of May 2018, the Company did not have any construction finance in place, and had neither received any indicative term sheet in respect of such finance nor met the pre-sales targets which were specified in the Quantum PDS as necessary in order to obtain such finance.

163. [171]

     As at 30 May 2018, Lords had not yet received any payment in respect of Progress Claim No 3 (for April). The outstanding balance of Progress Claim No 2 (for March) had been paid on that day.

164. [172]

     On 30 May 2018, Lords issued a fourth progress claim in the amount of $2,450,838.39 including GST (Progress Claim No 4).

165. [173]

     On 8 June 2018, Mr Najar, as Superintendent, issued a payment schedule in respect of Progress Claim No 4. This payment schedule certified that the quantity surveyor, Mitchell Brandtman, had verified the completed works in May 2018 and valued them at $2,038,510.46 including GST; that the Quantum Group had reviewed the quantity surveyor’s report and had approved this verification; and therefore that the amount of $2,038,510.46 should be processed to be paid to Lords by the due date of 15 June 2018.

166. [174]

     On 11 June 2018, Lords issued invoice No 110 to the Company in respect of Progress Claim No 4, with a specified due date of 15 June 2018. (There was an unexplained, but trivial, difference between the amount specified in the payment schedule issued by the Superintendent, $2,038,510.46, and the amount of this invoice, $2,038,511.20.)

167. [175]

     On 12 June 2018, Mr Taylor sent an email to Mr Maroun, informing him that the Company had transferred $50,000 to Lords, and would “be in a position to send some more tomorrow once the funds have come through from the trust account”. A payment summary which was attached to the email indicated that this payment was described as for Invoice No 108, this being the invoice in the amount of $894,343.91 which had been issued in respect of Progress Claim No 3 (for April). Payment for Progress Claim No 3 had been due on 21 May 2018. This payment of $50,000, more than three weeks after the due date, was the first payment made in respect of that invoice. It was made on the same day as an amount of $100,000 was transferred by QM Trust to SLI from the SL class unit bank account.

168. [176]

     It is apparent from the text of Mr Taylor’s email that he had not met Mr Maroun face-to-face prior to 12 June 2018, stating as follows: “Great to meet you today and put a face to the name and voice on the phone”. As outlined above, Mr Maroun had been dealing predominantly with Mr Gribble in respect of the outstanding invoices.

169. [177]

     On 13 June 2018, Mr Maroun sent an email to Mr Gribble, setting out the “plan for payments” which they had “discussed”. This plan was as follows:

170. [178]

     After setting out this payment plan, Mr Maroun stated as follows (emphasis added):

171. [179]

     The Company could not meet the payment plan stipulated by Lords. This plan required the payment of an amount of $100,000 on 13 June 2018, and a payment of a further amount of $294,000 on 15 June 2018. The Company did not pay those amounts, or any amount, to Lords in the period 13 to 15 June 2018.

172. [180]

     On 15 June 2018, Mr Gribble sent an email to Mr Maroun in which he “confirm[ed] fund flows as follows”, namely, that payments would be made on 18 June 2018 ($50,000); on 20 June 2018 ($200,000); and on 22 June 2018 ($400,000). The total amount proposed to be paid on those dates ($650,000) was less than the outstanding amount due in respect of Progress Claim No 3 for April ($744,343.91).

173. [181]

     This was, in effect, a different payment plan, which was at odds with the payment plan which Lords had required. In any case, it was not met.

174. [182]

     On 19 June 2018, Mr Maroun sent an email to Mr Gribble and Mr Taylor, asking for an update on the payments which had been set out in Mr Gribble’s email, and noting that the payment of $50,000 which had been promised for 18 June 2018 had not been received. Later that day, Mr Taylor sent an email to Mr Maroun (copied to Mr Gribble) stating that the amount of $50,000 was being transferred “today”, and that he would provide an update on the other amounts referred to by Mr Gribble “but at this stage they are still scheduled to arrive per the dates below”; and Mr Najar sent an email to Mr Maroun (also copied to Mr Gribble) stating that the Company was now trying to push “harder to get the pending payments as promised by Peter at least 1M before the end of this month”.

175. [183]

     At the end of his email, Mr Najar added: “Hopefully by mid of next month we will have the finance approval in place”. This confirms that, as at 19 June 2018, the Company did not have any finance in place, and it remained a “hope” that finance would be in place by the middle of July.

176. [184]

     As at 25 June 2018, the Company had not made any of the payments specified in Mr Maroun’s payment plan of 13 June 2018 (which had required a total amount of $744,343.91, being the outstanding balance in respect of Progress Claim No 3, to be paid in full by 23 June 2018, on a “Worst case scenario”). Nor had the Company made the payments specified in Mr Gribble’s email of 15 June 2018 (which had promised a total of $650,000 to be paid by 22 June 2018).

177. [185]

     On 25 June 2018, Lords issued a “Show Cause Notice” to the Company pursuant to the terms of the Construction Contract. This Notice stated that the “contract has been breached as a result of failure of certified payments to be made in accordance with the contract”. The certified payments which had not been made were those in respect of Progress Claim No 3, which had been certified in an amount of $894,343.91, and Progress Claim No 4, which had been certified in an amount of $2,038,511.20. The Show Cause Notice stated that an amount of $744,343.91 remained outstanding in respect of Progress Claim No 3, and the full amount remained outstanding in respect of Progress Claim No 4, being a total outstanding amount of $2,782,855.11.

178. [186]

     On the same day, Mr Maroun sent an email to Mr Gribble, notifying him that all onsite works would cease as at close of business on 26 June 2018. This email stated as follows:

179. [187]

     Mr Maroun set out in his email to Mr Gribble the terms on which Lords would be prepared to recommence works onsite, namely:

180. [188]

     Finally, Mr Maroun warned that there would be delay costs incurred as a result of ceasing work:

181. [189]

     In a follow up email sent to Mr Gribble and Mr Najar shortly afterwards, Mr Maroun repeated that the issue of funding was “critical” (emphasis added):

182. [190]

     On 28 June 2018, Mr Gribble and Mr Maroun had a telephone conversation, with Mr Gribble “providing an update on where he is at with finance/payments”. There appears also to have been agreement about the conditions on which Lords would resume work on the Linden Development. On that day, Mr Maroun sent an email to Mr Najar, informing him of his meeting with Mr Gribble, and stating that “we would be happy to mobilise again back onto site as per the following which we agreed”:

183. [191]

     None of these conditions was met. The Company did not enter into any funding agreement; it paid two amounts to Lords of $200,000 on 29 June 2018 and 2 July 2018, but then no further payments until the end of August 2018; and the outstanding balance of the “April invoice” (Progress Claim No 3) was not paid in full until late November 2018.

184. [192]

     On 30 June 2018, Lords issued its fifth progress claim in relation to the Linden Development, for works performed in June, in the amount of $1,185,075.17 including GST (Progress Claim No 5).

185. [193]

     On 13 July 2018, Mr Najar, as Superintendent, issued a payment schedule in respect of Progress Claim No 5. This payment schedule certified that the quantity surveyor had verified the completed works in June 2018 and valued them at $833,913.24 including GST; that the Quantum Group had reviewed the quantity surveyor’s report and had approved this verification; and therefore that the amount of $833,913.24 should be processed to be paid to Lords by the due date of 23 July 2018.

186. [194]

     The debt in respect of Progress Claim No 5 is the first debt to Lords which forms part of the insolvent trading claim. An amount of $221,479.45 of this debt remains unpaid.

187. [195]

     As matters eventuated, Lords continued to perform some works on the site until 9 July 2018, at which time it ceased all work on the Linden Development. Lords did not recommence work on site at any time thereafter.

188. [196]

     On 3 July 2018, Mr Najar wrote to Mr Maroun, referring to the Show Cause Notice, and informing him that “the draft of agreement with the financier is being finalised and will be forward[ed] with in two business days”. Mr Najar also stated that the balance of the Progress Claim No 3 (for April) would be paid within seven business days, and that “$300,000 will be paid every week to finish off the balance” of Progress Claim No 4 (for May). Neither of those promises was subsequently met.

189. [197]

     Lords was not satisfied with a draft finance agreement. On 9 July 2018, Lords indicated to the Company that, as well as the payments which were promised by Mr Najar (and which were not made), it required:

190. [198]

     There was a Facility Indicative Term Sheet dated 11 July 2018, which was executed by Banner Capital Manager Limited as Lender, by the Company as Borrower, and by Mr Gribble as Guarantor (the Banner Indicative Term Sheet). This document stated that it contained “Indicative Terms of a proposed facility (‘Proposal’), subject to entry into of definitive documentation satisfactory to all parties”. No such documentation was subsequently entered.

191. [199]

     The Banner Indicative Term Sheet set out twenty-eight conditions precedent, and provided that all of these conditions must be completed to the satisfaction of Banner. There was no evidence to establish how many of these conditions precedent were met or were capable of being met.

192. [200]

     The first two of those conditions precedent were as follows:

193. [201]

     Neither of those conditions precedent was met.

194. [202]

     As regards the first condition, there was no agreement, let alone any drawdown, by 31 July 2018.

195. [203]

     As regards the second condition:

     1. (1)

        the term “Acceptable Sales Contracts” was defined as referring to “unconditional” and “executed contracts of sale”, which complied with nine specified requirements; and

     2. (2)

        the Facility Limit was $37,549,146, and was in two tranches, as follows:

196. [204]

     Mr Gribble said, in cross-examination, that the second condition precedent would have been met if the Company had achieved sales with a gross value of 80% of Tranche 1. Assuming that was so, it was necessary for there to be pre-sales of units to a value of $26,462,655, and it would have been necessary for all such pre-sales to be executed and unconditional contracts, which met each of the nine requirements for “Acceptable Sales Contracts”.

197. [205]

     As at 15 July 2018, contracts had been exchanged for twenty-seven units in the Linden Development, with a total value of $20,595,750. It is not known whether each of these contracts, or how many of them, met the nine requirements for Acceptable Sales Contracts set out in the Banner Indicative Term Sheet.

198. [206]

     Even if all of these contracts had met the specified requirements for “Acceptable Sales Contracts”, the level of pre-sales remained some $6m short of the amount required as a condition precedent for a drawdown of Tranche 1 (assuming Mr Gribble’s interpretation of the Banner Indicative Term Sheet was correct). Based on the average sale price to date ($20,595,750 / 27 = $762,805), there needed to be contracts exchanged, unconditionally, for a further eight units before any such trigger could be met (meaning it was necessary to have contracts exchanged on a total of thirty-five units). Further, as set out above, under the first condition precedent, this trigger had to be met, and the first drawdown had to occur, by 31 July 2018.

199. [207]

     However, pre-sales of units had effectively come to a halt with the cessation of works on site. Mr Gribble acknowledged in cross-examination that pre-sales had “stagnated” because “Lords had left the site in July and it was creating difficulties in generating sales”.

200. [208]

     According to the weekly status reports issued by Colliers, between 15 July 2018 and the termination of the Construction Contract on 25 January 2019, contracts were exchanged for only one unit in the Linden Development (bringing the total pre-sales to twenty-eight units).

201. [209]

     On 13 July 2018, Lords issued a Notice of Delay to the Company, which referred to the Company’s failure to pay the outstanding balance of Progress Claims No 3 (for April) and No 4 (for May), and required that: “All outstanding monies must be paid to enable Lords Group to mobilise back onsite.”

202. [210]

     On 17 July 2018, Mr Najar responded to this notice, raising various matters regarding the notices that had been issued by Lords, and adding the following statement:

203. [211]

     This appears to have been the first time that the Company asserted to Lords that the obligations under the Construction Contract were “subject to finance approval”. There was no reference in this notice to “Stage 1” or “Stage 2”, nor was there any statement that “Stage 2” was not to be commenced before the issue of some further notice, which had not been given.

204. [212]

     The suggestion by Mr Najar that obligations under the Construction Contract were “subject to finance approval” was swiftly rebuffed by Lords on the same day, with Mr Maroun responding as follows:

205. [213]

     There was no subsequent communication from Mr Gribble, Mr Najar or anyone else at the Quantum Group, in the period up to the termination of the Construction Contract, disputing this interpretation, or contending the Letter of Intent had any ongoing force, or asserting that the obligations in the Construction Contract were “subject to finance”.

206. [214]

     Instead, as outlined below, Mr Najar subsequently certified amounts as due and payable by the Company in respect of further progress claims which were issued by Lords. Such conduct was inconsistent with any belief on the part of Mr Najar or the Company that payments to Lords for any amounts under the Construction Contract were “subject to finance”.

207. [215]

     On 31 July 2018, Lords issued its sixth progress claim, in the amount of $872,098.04 including GST (Progress Claim No 6).

208. [216]

     On 10 August 2018, Mr Najar, as Superintendent, issued a payment schedule in respect of Progress Claim No 6. This payment schedule certified that the quantity surveyor, Mitchell Brandtman, had verified the completed works in July 2018 and valued them at $842,858.42; that the Quantum Group had reviewed the quantity surveyor’s report and had approved this verification; and therefore that the amount of $842,858.42 should be processed to be paid to Lords by the due date of 15 August 2018.

209. [217]

     The Company has not paid any amount to Lords in respect of Progress Claim No 6.

210. [218]

     On 13 August 2018, Mr Maroun sent an email to Mr Gribble, noting that the outstanding amount in respect of Progress Claims No 3 to No 6 was more than $4.059m, and stating as follows:

211. [219]

     It is apparent from this email that, although Lords had stopped work, it continued to incur costs in respect of the Linden Development, and that this was because Lords was maintaining material on site during this period, in which it was being informed by the Company that finance would be forthcoming. On 16 August 2018, Mr Maroun sent a follow up email to Mr Gribble, requesting an update on finance, and stating that: “Progressive payments is the only way I can avoid or hold contractors from removing items until the drawdown is in place”.

212. [220]

     On 24 August 2018, Mr Gribble wrote to Solcap, on behalf of the Company, seeking “a $2,000,000 additional cash advance from our existing facility in respect of [the Linden Development]”. Emails exchanged between Mr Gribble and the Company’s finance broker, Mr Watson, indicate that this additional advance, under the Solcap Loan, was made “against a higher land valuation, due to the works complete”. That is, the works performed by Lords had increased the value of the Land, and Solcap was advancing the additional $2m against this increased equity.

213. [221]

     On 27 August 2018, an amount of $1,955,984 was drawn down under the increase to the Solcap Loan, and was paid to Lords. This, in effect, exhausted the amount that was able to be borrowed on the security of the Land. Following this payment, an amount of more than $2.063m remained payable by the Company to Lords.

214. [222]

     This additional advance from Solcap was for a term of three month from the date of drawdown, such that it was repayable by 27 November 2018.

215. [223]

     On 31 August 2018, Lords issued its seventh progress claim in the amount of $130,323.70 including GST (Progress Claim No 7); and on 30 September 2018, it issued its eighth progress claim which was in the same amount (Progress Claim No 8). The reason that each of Progress Claim No 7 and No 8 was for the same amount was that in each case the claim was entirely comprised by a claim in respect of Preliminaries & Overheads.

216. [224]

     On 17 September 2018 and 18 October 2018, Mr Najar, as Superintendent, issued payment schedules in relation to, respectively, Progress Claim No 7 and Progress Claim No 8. Each payment schedule certified that the quantity surveyor, Mitchell Brandtman, had verified the amount claimed by Lords for the month in question; that the Quantum Group had reviewed the quantity surveyor’s report and had approved this verification; and that the amount of $130,323.70 should be processed to be paid to Lords in respect of each of Progress Claims No 7 and No 8 by the due date of, respectively, 20 September 2018 and 18 October 2018.

217. [225]

     The Company has not paid any amount to Lords in respect of either Progress Claim No 7 or Progress Claim No 8.

218. [226]

     On 1 November 2018, Lords sent a ninth progress claim to the Company (Progress Claim No 9). This was in the same amount as Progress Claims No 7 and No 8.

219. [227]

     Progress Claim No 9 was rejected in full by the Company. On 13 November 2018, an employee of the Quantum Group sent an email to Mr Maroun, attaching a payment schedule and stating that: “No amount could be certified for the month of October 2018 as no works are taking place at site”.

220. [228]

     Mr Maroun responded on the same day that the payment schedule issued by the Company was incorrect. He stated as follows:

221. [229]

     By early November 2018, Mr Gribble was frustrated with Banner, writing to Mr Maroun that “Banner has been extremely slow in interaction with us, so we have decided to proceed with another lender (as a backup, we are still dealing with Banner, so please keep this qui[et])”. The other lender was Martin Place Capital.

222. [230]

     An indicative term sheet was issued by Martin Place Capital. However, there was no evidence that matters progressed beyond this document.

223. [231]

     This indicative term sheet included the following requirement in respect of pre-sales:

224. [232]

     On 14 November 2018, Mr Gribble exchanged emails with a representative of Banner. In this exchange, Mr Gribble made the following request (emphasis in original): “Aim is to settle 26th November – please confirm that this is the date all lawyers etc are aiming for as we work thru settlement proce[s]s?” The Banner representative responded as follows: “Appreciate that you are aiming to settle on the 26th, however as noted previously, we will not be in a position to confirm settlement date until such time as all CP’s [conditions precedent] have been met and documentation has been executed.” One of those conditions precedent was a required level of pre-sales.

225. [233]

     In his response, Mr Gribble noted that the pre-sales target was $24.975m. (This was the same as the target in the indicative term sheet issued by Martin Place Capital, as set out above.) Mr Gribble told the Banner representative that the Company had “just crossed over the pre-sales hurdle”, and had now achieved $25,205,000 of pre-sales.

226. [234]

     This was incorrect. According to a weekly report issued by Colliers in respect of the Linden Development, as at 9 December 2018, contracts had been unconditionally exchanged on only 28 units, with an aggregate value of around $21.435m. Mr Gribble appears to have been including, in his calculation of pre-sales, units in respect of which steps had been taken by prospective purchasers, but no contracts had been exchanged. Each of the Banner Indicative Term Sheet and the indicative term sheet issued by Martin Place Capital only had regard to contracts which had been unconditionally exchanged in determining whether the condition precedent for pre-sales had been met.

227. [235]

     It follows that the Company did not meet the conditions precedent under the indicative term sheets issued by either Banner or Martin Place Capital. No facility documentation was executed with either financier.

228. [236]

     On 17 December 2018, Lords issued a Show Cause Notice to the Company under the Construction Contract, referring to an outstanding balance due of over $1.353m, which had not been paid in accordance with the terms of the contract. The Notice required the Company to show cause in writing why Lords should not exercise a right under subclause 39.9 of the Construction Contract (which gave Lords the right to terminate the contract if the breach was not remedied).

229. [237]

     On 25 January 2019, Lords issued a Notice of Termination, terminating the Construction Contract effective immediately as at that date.

230. [238]

     Also on 25 January 2019, Lords sent the Company a Delay Damages Claim, covering the period of 157 days up to 24 December 2018 (Delay Damages Claim No 1). This was a claim in the amount of $1,107,193.80 (calculated on the basis of costs of $7,052.19 per day) or alternatively in the amount of $800,700.00 (calculated on the basis of a contractual cap of $5,100 per day).

231. [239]

     On 31 January 2019, Lords sent the Company a second Delay Damages Claim, covering the period of 29 days up to the termination of the Construction Contract on 25 January 2019 (Delay Damages Claim No 2). This was a claim in the amount of $204,513.51 (calculated on the basis of costs of $7,052.19 per day) or alternatively in the amount of $147,900.00 (calculated on the basis of a contractual cap of $5,100 per day).

232. [240]

     On 31 January 2019, Lords issued the Company a final progress claim for costs incurred up to termination of the Construction Contract, in the amount of $2,122,025.10 including GST. The Company issued a payment schedule in response to this progress claim on 13 February 2019, by which the Company claimed that an amount of $1,482,737.20 including GST was payable by Lords to the Company as a result of “Non Compliant Works”, which were identified in a quantity surveyor’s report.

233. [241]

     On 11 February 2019, SLI gave a notice to the Company, terminating the Project Manager Agreement and the Development Manager Agreement.

234. [242]

     On 12 February 2019, Mr Gribble caused a new company to be registered, Linden Developments (NSW) Pty Limited, in order to take over the role of development manager for the Linden Development. SLI was the sole shareholder of this company, and Mr Gribble was its sole director.

235. [243]

     This new entity subsequently obtained construction finance from Alceon Finance Pty Ltd. The Alceon facility was drawn down and was used to repay the amount owing under the Solcap Loan (which was secured by a mortgage over the Land), and subsequently to fund the completion of the Linden Development by a new builder, Devakon Pty Ltd.

236. [244]

     In August 2019, Lords commenced a proceeding in this Court to recover unpaid amounts under the Construction Contract. The amounts claimed were the outstanding amounts due in respect of Progress Claims No 5 to No 8.

237. [245]

     On 11 December 2019, judgment was entered against the Company to pay Lords the sum of $1,511,244.06 and Lords’ costs of the proceedings (the Judgment Debt). In his reasons for judgment, Ball J relevantly held as follows (Lords Property Group Pty Ltd v Shire Lind Developments (NSW) Pty Ltd [2019] NSWSC 1818 at [8]-[10]):

238. [246]

     On 7 January 2020, Lords served a creditor’s statutory demand on the Company for the amount of the Judgment Debt.

239. [247]

     On 11 February 2020, the Company commenced a proceeding in this Court against Lords claiming damages of $1,739,830.42 for various defects and non-compliances in the works at the Linden Development.

240. [248]

     On 4 March 2020, Lords filed an application in this Court to wind up the Company. On 19 March 2020, the Company went into voluntary administration; and on 21 April 2020, the Company was wound up in insolvency by orders of this Court.

241. [249]

     On 16 March 2023, the Plaintiffs commenced these proceedings.

Date of Insolvency

1. [250]

   It is common ground that the Company was insolvent before it went into administration.

2. [251]

   The Defendants contended, based on a report of an insolvency practitioner, Mr Cavanagh, that the Company became insolvent on 11 December 2019, when judgment was entered against it for the amount of the Judgment Debt.

3. [252]

   The Plaintiffs advanced a number of alternatives, namely, that:

   1. (1)

      the Company is, by operation of s 588E(4) of the Act, presumed to have been insolvent at all times from 1 July 2017, by reason of its failure to keep or retain financial records as required by s 286 of the Act;

   2. (2)

      the Company was likely insolvent by 30 May 2018 and definitively insolvent by 13 June 2018 (for the reasons set out in the expert report of an insolvency practitioner called by the Plaintiffs, Mr Bailey); and

   3. (3)

      the Company was insolvent by 20 April 2018, having regard to further information which had come to light since the date of Mr Bailey’s report and, in particular, the information in the Linden Report (which was dated 16 April 2018).

4. [253]

   The relevant principles for determining solvency were not in dispute.

5. [254]

   Section 95A of the Act provides as follows:

6. [255]

   The definition in s 95A(2) adopts a “cash flow test” of insolvency, which turns upon the income sources available to the company and the expenditure obligations which it has to meet, rather than a balance sheet test which focuses upon the value of the company’s assets and liabilities as reflected in the company’s books. However, a balance sheet test can provide context for the application of the cash flow test: Re Custom Bus Australia Pty Ltd (in liq) [2021] NSWSC 1036 at [33] (Black J) and the cases there cited.

7. [256]

   Whether a company is able to pay its debts as and when they fall due and payable is a question of fact to be determined objectively and without hindsight in all the circumstances, including the nature of the company’s assets and business, and the Court will have regard to commercial realities in that regard: Re Custom Bus Australia at [34] and the cases there cited.

8. [257]

   In assessing a company’s capacity to pay its debts, the Court should have regard to all of the assets of the company as at the relevant time in order to determine the extent to which those assets were liquid or realisable within a timeframe that would allow each of the debts to be paid as and when they became due. Apart from an assessment of the company’s own assets, regard can also properly be had to funds which the company can borrow, on a secured or unsecured basis, or otherwise obtain from lenders or shareholders and which were, as a matter of commercial reality, available to the company to enable its debts to be paid. The case law recognises that, in determining a company’s solvency, the Court may have regard to the likelihood that it will have funds available to it from sources with which it has no formalised agreement or understanding, including loans from its directors or from third parties, at least if they are not repayable in the short term, and the company's ability to borrow funds can also be taken into account: Re Custom Bus Australia at [35] and the cases there cited.

9. [258]

   In order 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: Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72 at [142] (per Beazley P, Gleeson JA and Emmett AJA), citing the observations of Morrison JA in Chan v First Strategic Development Corporation Ltd (in liq) [2015] QCA 28 at [44] (which are quoted in Treloar at [83]).

10. [259]

    In Re Custom Bus Australia at [36], Black J noted that although each case is to be decided on its own facts, insolvent companies tend to share common symptoms of financial stress, which include those identified in Australian Securities and Investments Commission (ASIC) v Plymin (No 1) [2003] VSC 123 at [386] (Mandie J), namely:

11. [260]

    In Quick v Stoland Pty Ltd [1998] FCA 1200, Emmett J observed that:

12. [261]

    The test in s 95A “is directed to a present inability to pay all debts as and when they become due and payable, including debts that will become payable in the immediate future”: Anchorage Capital Master Offshore Ltd v Sparkes (2023) 111 NSWLR 304; [2023] NSWCA 88 at [235] (Ward P, Brereton JA, Griffiths AJA) (emphasis in original). The “correct question is whether, at the date of alleged insolvency, it can be said that the company is already in a state of inability to pay those debts when they fall due”: ibid at [245].

13. [262]

    While the question of solvency is to be determined by reference to the circumstances as they were known or ought to have been known at the date at which the question of solvency is assessed, and not in hindsight, the Court can have regard to what subsequently happened, to the extent that actual events shed light on what was likely at the time when the question of solvency falls to be assessed: Anchorage Capital at [256].

14. [263]

    Part of the exercise required by s 95A of the Act in assessing solvency is a consideration of the terms of each relevant debt and whether it is due and payable at the relevant time the subject of consideration. Part of that consideration includes ascertaining and reviewing the contractual terms relevant to any obligation that arises under contract, and a consideration of the relevant statutory terms where an obligation arises under statute: Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5 at [515] per curiam (Besanko, Markovic and Banks-Smith JJ).

15. [264]

    It is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade. However, this does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commission of Taxation (2001) 52 NSWLR 213; [2001] NSWSC 621 at [54] (Palmer J).

16. [265]

    In Anchorage Capital at [261], the Court of Appeal accepted the following principles:

    1. (1)

       that a debt is taken to be owing at the time stipulated in the contract, absent evidence proving that there has been an express or implied agreement between the company and the creditor for an extension of time, or that some estoppel applies, or that there is an imminent compromise between the creditor and the debtor;

    2. (2)

       that while the possibility of an alteration to the amount or due date of a debt is relevant, a mere theoretical possibility of a compromise would not preclude a finding of insolvency; and

    3. (3)

       that the party asserting that a company’s contract debts are not payable at the times contractually stipulated bears the burden of making good that assertion by satisfactory evidence.

17. [266]

    Mr Cavanagh expressed the opinion that the Company did not become insolvent until 11 December 2019, when the Judgment Debt was entered, as prior to that time there was no “debt” due.

18. [267]

    Mr Cavanagh further expressed the view that, if he was wrong in concluding that there was no debt due to Lords until that point in time, any debt to Lords in respect of the Progress Claims did not become due and payable until the Construction Contract was terminated because, prior to that time, Lords had extended the payment terms in respect of its invoices.

19. [268]

    The Plaintiffs submitted that Mr Cavanagh’s opinion regarding the date of insolvency was of no probative value and was therefore irrelevant and inadmissible, or alternatively should not be given any weight, primarily because his methodology did not address the statutory test and his opinions depended on an erroneous assumption that there was no debt to Lords prior to the Judgment Debt.

20. [269]

    When Mr Cavanagh was called on the final morning of the hearing, I indicated that I would deal with these objections in my reasons for judgment, following Mr Cavanagh’s cross-examination.

21. [270]

    For the reasons set out below, I consider that the Plaintiff’s criticisms of Mr Cavanagh’s report have been established.

22. [271]

    In his report, Mr Cavanagh described his “Methodology for determining timing of insolvency” as follows:

23. [272]

    In considering whether a company is insolvent at a particular point in time, it is necessary to have regard to all of the company’s debts as at that time in order to determine when those debts are due and payable, and whether the company is able to pay all of those debts as and when they become due and payable. This is a question of fact to be determined objectively and without hindsight in all the circumstances pertaining at the relevant time.

24. [273]

    Mr Cavanagh did not undertake any such enquiry. Instead, he commenced by focussing only on those “relevant or potential creditor claims” which the company “was ultimately unable to pay”; and then assessed whether those particular claims were “actual debts” prior to the appointment of an administrator and, if so, when they “may have first become due and payable”.

25. [274]

    This flaw in Mr Cavanagh’s methodology was compounded by his error in determining whether the debt to Lords became due and payable.

26. [275]

    Mr Cavanagh concluded that there was no debt to Lords prior to the entry of the Judgment Debt on the following basis:

27. [276]

    In expressing this opinion, Mr Cavanagh did not have regard to clause 37.2A(b) of the General Conditions of the Construction Contract, which provided that the Company was required to pay Lords “the amount certified by the Superintendent in a progress certificate under subclause 37.2 within 15 business days after the date a payment claim meeting the requirements of the Contract is validly received by the Superintendent”.

28. [277]

    Nor did Mr Cavanagh have regard to the terms of s 16 of the Building and Construction Industry Security of Payment Act 1999 (NSW) which provides that, where a claimant has served a payment claim and the respondent has provided a payment schedule in respect of that claim, the claimant may recover the unpaid portion of the scheduled amount from the respondent as a debt due to the claimant in any Court of competent jurisdiction. In the proceeding in this Court which led to the Judgment Debt, the Company admitted that each of the Progress Claims was a payment claim within the meaning of this provision: Lords Property Group v Shire Lind Developments (NSW) at [8]-[10].

29. [278]

    In respect of each of Progress Claims No 1 to No 8, the Company owed a debt to Lords, in the amount certified in the payment schedule corresponding to each such Progress Claim, which was due and payable within 15 business days after the receipt of each such Progress Claim.

30. [279]

    In reaching the view that the Company did not have any debt to Lords in advance of the Judgment Debt, Mr Cavanagh appears not to have applied the definition of the term “debt” which he himself adopted in his report, and which was taken from Keay’s Insolvency, Personal and Corporate Law and Practice 10th edition (2018, Thomson Reuters), as follows:

31. [280]

    Mr Cavanagh concluded that there was no “debt” to Lords in respect of any of Progress Claims No 1 to No 8 on the basis that, in February 2019, the Company raised an offsetting claim for defects. He concluded that, because there “was a genuine dispute between Lords Group and the Company over amounts both parties claimed were owed to them”, there was no “debt” to Lords in respect of the Progress Claims until the Judgment Debt was entered: “Until that point, the amount was merely an unliquidated claim and should not be taken into consideration when assessing the solvency of the Company prior to 11 December 2019”.

32. [281]

    On the definition of a “debt” set out above, which was adopted by Mr Cavanagh, there was a debt in respect of each of Progress Claims No 1 to No 8, since there was, on the issue of the payment schedule corresponding to each of those claims, a liquidated sum due from the Company to Lords. Pursuant to clause 37.2 of the Construction Contract, the Superintendent was entitled when determining the amount which was due from the Company to Lords in respect of a particular Progress Claim, to take into account, inter alia, “the cost to rectify work which is defective or does not comply with the requirements of the Contract”. To the extent this was done, such defects were taken into account in determining the precise (liquidated) sum that was due to Lords in respect of that Progress Claim. To the extent that this was not done, the fact that, many months later and following the termination of the Construction Contract, the Company raised an unliquidated claim for damages against Lords in respect of alleged defects in the Linden Development does not turn the previously incurred debts in respect of Progress Claims No 1 to No 8 into unliquidated claims for damages.

33. [282]

    The impact of these errors upon Mr Cavanagh’s opinion was profound. Mr Cavanagh expressed the view that the debts which were unpaid as at the date the Company went into administration, the amounts of those debts, and the dates on which each of those debts became payable, were as follows:

34. [283]

    On the basis of the above table, Mr Cavanagh opined that the timing of the insolvency of the Company was wholly dependent upon when the Lords debt became due and payable, because the “remaining debts are immaterial in value”. It necessarily followed that, in his view, the Company only became insolvent at the time of the Judgment Debt (on 11 December 2019). Consequently, Mr Cavanagh concluded that the Company incurred a single debt, in a trivial amount of $880, in the period when it was insolvent.

35. [284]

    For the reasons given above, this conclusion depended on a flawed methodology, coupled with an erroneous assumption about when the Lords debt became due and payable.

36. [285]

    Mr Cavanagh stated that, if he was wrong in concluding that there was no debt to Lords until the Judgment Debt, nonetheless he considered that there was no amount due and payable to Lords in respect of the Progress Claims until the date of termination of the Construction Contract “due to the implied extension of payment terms by Lords Group”. The key passage in his reasoning was as follows:

37. [286]

    The passage set out above does not involve any application of specialised knowledge, but is instead a series of inferences as to the views of Lords and the Company throughout the relevant period, based on statements made in their email correspondence.

38. [287]

    Having regard to the course of correspondence summarised at paragraphs [97]-[238] above, I do not draw that any such inferences. In particular, the correspondence does not establish that Lords was willing to extend payment terms, or that Lords regarded the outstanding amounts as not being due and payable. Instead, Lords consistently required payment by the due date specified in the payment schedule; Lords chased up late payments on or shortly after the due date; and Lords demanded that amounts which were not paid by the due date be paid forthwith. Further, the evidence does not establish that the Company “adequately managed payments to Lords Group”, or that Lords were “satisfied with the timeliness of payment”. Nor does the evidence establish that the relationship between the Company and Lords with respect to payment of invoices was “mutually acceptable” at all times up until termination of the Construction Contract on 25 January 2019. Lords consistently expressed dissatisfaction with the late payment of invoices and, after suspending works in June 2018, consistently made clear that it would not resume unless and until it was paid in full and received confirmation that there was finance in place to pay all remaining amounts due under the Construction Contract.

39. [288]

    For those reasons, I reject the Defendants’ submission that the Company was not insolvent until 11 December 2019, or alternatively was not insolvent until 25 January 2019.

40. [289]

    Section 588E of the Act relevantly provides as follows:

41. [290]

    Section 286(1) of the Act relevantly provides that:

42. [291]

    Section 9 of the Act defines “financial records” as including:

43. [292]

    Both parties relied on the following observations by Rees J in In the matter of ZH International Pty Ltd (in liq) [2022] NSWSC 2 at [152]:

44. [293]

    In support of their submission that the Company failed to comply with its obligation to maintain financial records in accordance with s 286 of the Act, and therefore is deemed insolvent throughout the relevant period pursuant to s 588E(4) of the Act, the Plaintiffs relied on opinions expressed by the Liquidator that the documents provided by the Company to the Liquidator – “being bank account statements, reconciliation and loan documents, some creditor records, some deeds, financial statements, loan documents, tax records and various correspondence” – “do not allow true and fair records of the Company to be created without intricate working knowledge of the operation”. The Liquidator further deposed that the documents which, in his experience, are “generated and required by a company so as to correctly record and explain the transactions and financial position of the company, including a company undertaking property development” include “[e]lectronic management accounts, company tax returns, invoices, receipts and contracts”. The Liquidator was not provided with any electronic management accounts or accounting data files for the Company. Nor was he provided with company tax returns, business activity statements, invoices “or other documents relating to the transactions detailed in the Company bank statements or the amounts stated in financial report extracts that Mr Gribble had provided”.

45. [294]

    The opinions set out above were expressed in the Liquidator’s affidavit of 15 March 2023. Subsequently, the Plaintiffs retained Mr Bailey, who is an insolvency practitioner, to prepare an expert report for use in this proceeding. His report was served in December 2023. The questions on which Mr Bailey was asked to express an opinion included “What written financial records ought the Company have kept and retained, having regard to its obligations with section 286 of the [Act]?” and “Did the Company uphold its obligations to keep and retain written financial records in accordance with section 286 of the Act?”

46. [295]

    Mr Bailey expressed the view that, although “certain essential books and records have either not been maintained or provided to me”, the Company “evidently had the capacity to generate special purpose financial statements when directed to do so”, and on that basis he concluded that “I think it more likely than not that the Company did adequately comply with its statutory obligation pursuant to section 286 of the Act”.

47. [296]

    There was no challenge to Mr Bailey’s expertise or to his opinions on these matters.

48. [297]

    I do not consider that there is any sufficient basis for the Court to prefer the opinions expressed by the Liquidator over the opinions of the independent expert called by the Liquidator. In closing address, Counsel for the Liquidator confirmed that she did not contend that I should reject Mr Bailey’s opinion on this issue.

49. [298]

    Having regard to Mr Bailey’s opinion that it was more likely than not that the Company did comply with its obligations pursuant to s 286 of the Act, the Plaintiffs’ contention regarding presumed insolvency has not been established.

50. [299]

    The Company had nominal cash at bank. The only other asset disclosed on its balance sheet, which was non-current, was capitalised construction expenditure (which was written off in FY19, following the termination of the Construction Contract). Mr Bailey considered (and Mr Cavanagh agreed) that, in the circumstances of the Company, the balance sheet test was not applicable.

51. [300]

    Mr Bailey focussed on the cash flow test as the primary test of insolvency. He considered, in turn, each of the indicia of insolvency referred to in ASIC v Plymin (No 1) (which are set out in paragraph [259] above), expressing an opinion as to whether each was, or was not, applicable, and the reasons for his view. In summary, Mr Bailey concluded that the key indicia of insolvency which were directly applicable to the Company, and the dates on which those indicia became applicable to the Company, were as follows:

52. [301]

    Mr Bailey’s analysis of those indicia was not challenged in cross-examination or submissions.

53. [302]

    Mr Bailey also conducted a month-to-month cash flow analysis, in which he compared the month-end cash balances of the Company against its equivalent month-end debt owing to Lords (as the largest creditor of the Company), as follows:

54. [303]

    As Mr Bailey observed, this analysis establishes that the Company was at no time, since the receipt of Progress Claim No 1, in a position to satisfy the debt of its largest creditor (Lords) and was wholly reliant upon drawing down loan facilities with Solcap and QM Trust / SLI to cause these debts to be repaid.

55. [304]

    As regards the Solcap Loan, this was fully drawn down when the Land was purchased in December 2017, and therefore the facility was unavailable to meet any Progress Claim issued by Lords from February 2018 onwards. I acknowledge that, in August 2018, a further $2m was advanced under the Solcap Loan. This additional advance was made based on the increased value of the Land, as a result of the works performed by Lords. It was wholly used to make a payment to Lords, in partial reduction of the Company’s debt (which remained in excess of $2.06m after that payment was made). Further, this additional advance was repayable within three months from the date of drawdown. As Barrett J observed in Australian Securities and Investments Commission (ASIC) v Edwards (2005) 220 ALR 148; [2005] NSWSC 831 at [99], “availability of loan funds for a very short term or payable on demand, as a source from which debts overdue may be paid, does not enhance solvency: it merely substitutes one form of immediate (or near immediate) obligation for another”. Those observations were accepted and applied by this Court on the appeal from his Honour’s decision, Edwards v Australian Securities and Investments Commission (2009) 264 ALR 723; [2009] NSWCA 424 at [163] per Macfarlan JA (Spigelman CJ and Campbell JA agreeing).

56. [305]

    Each of SLI and the QM Trust was a related entity of the Company. In Chan v First Strategic Development Corporation at [44], Morrison JA (with whom Gotterson and Boddice JJA agreed) observed that:

57. [306]

    As regards the SLI Loan, clause 8.1(e) gave, in effect, SLI a discretion whether or not to advance any amount to the Company in the event that SLI formed the view that the advancing of any further funds to the Company would be materially prejudicial to SLI’s interests (see paragraph [122] above). In those circumstances, there was not such a degree of commitment on the part of SLI to continue to provide the support that it could be said that at any point in time it was likely to be continued. In any case, I do not consider that the SLI Loan has any significance, separate from the Quantum Loan, for the reasons given at paragraphs [117]-[125] above.

58. [307]

    As regards the Quantum Loan, the funds available under that loan were tied, as Mr Gribble acknowledged, to the sales of SL class units. In the period up to the end of June 2018, a total amount of $2.689m was raised from the sale of SL class units and was advanced by QM Trust to the Company via SLI. In comparison, the amount due to Lords in respect of Progress Claims No 1 to No 4, the last of which was due and payable by 15 June 2018, was in excess of $4.175m. In the period from July to September 2018, a further $954,500 was advanced under the Quantum Loan, but a further $1.939m became due and payable to Lords in respect of Progress Claims No 5 to No 8.

59. [308]

    As these figures demonstrate, the amount being raised by the sale of SL class units, and therefore the amount available to be advanced under the Quantum Loan, was insufficient to keep pace with, and to cover, the amount which had become payable, and continued to become payable, to Lords under the Construction Contract.

60. [309]

    Mr Bailey prepared the following summary of the invoices issued by Lords and of the payments made in respect of those invoices by or on behalf of the Company.

61. [310]

    As Mr Bailey observed, the above table “demonstrates a gradual but clear deterioration of agreed terms of trade between the Company and [Lords]”. The first two invoices were settled, respectively, around two weeks and six weeks after their due dates. The next two invoices were settled, respectively, around three months and five months after their due dates. The final four invoices remain unpaid.

62. [311]

    Further, although the table demonstrates that, as Mr Bailey observed, the Company was able to contribute lump sum payments to Lords “on a sporadic basis” (either from the one-off additional amount advanced under the Solcap Loan or from the amounts advanced from time to time under the Quantum Loan, depending on the sale of SL class units), the Company was not in a position to pay any of the invoices issued by Lords as and when they fell due.

63. [312]

    Mr Bailey expressed the opinion that the debt to Lords became “unmanageable” when the Company became liable to pay some $2.038m in respect of Progress Claim No 4. As Mr Bailey observed, although the debt was later substantially reduced, the Company was never able, from that point in time, to bring the debt into line with Lords’ terms of trade.

64. [313]

    Mr Bailey identified that the first threat by Lords of direct consequences for the Company’s continued failure to pay outstanding invoices occurred on 13 June 2018, when Lords threatened to cease work on site (see paragraphs [176]-[178] above). Mr Bailey described the significance of this email, in the light of prior correspondence, as follows:

65. [314]

    Based on the summary of the parties’ correspondence set out at paragraphs [97]-[194], I agree with this view. The email of 13 June 2018 marked a significant change in the correspondence, in that Lords moved from insisting on the payment of invoices on time, and chasing up late payments, to informing the Company that there would be drastic consequences if the Company failed to pay the outstanding invoices by specific dates, namely, the cessation of works on site. The Company’s failure to make the payments required by Lords led to the issue of the Show Cause Notice less than two weeks later.

66. [315]

    Mr Bailey concluded that the Company was “very likely insolvent as at 30 May 2018”, when Progress Claim No 4 was issued, “based on a technical review of its financial statements, a cash flow analysis and its running balance debt with [Lords]”.

67. [316]

    Mr Bailey further concluded that that the Company was “definitively insolvent by 13 June 2018”, when Lords “began to aggressively pursue payment of its outstanding invoices”, “by raising the threat of cessation of works” and “by requiring formal repayment arrangement terms to be agreed by the Company”.

68. [317]

    Having regard to the matters advanced by Mr Bailey in support of his conclusions, which are summarised above, I accept Mr Bailey’s opinions regarding the date of insolvency. It is unnecessary to resolve whether the Company was insolvent by 30 May 2018 or by 13 June 2018, since there were no debts incurred in that period which are the subject of the insolvent trading claim, and no payments made in that period which are the subject of an unfair preference claim.

69. [318]

    Mr Bailey further expressed the opinion that the Company remained insolvent until it entered into external administration, on the basis that there was “no evidence that the Company had reasonable prospects of obtaining sufficient liquid capital to return to a position of solvency within any reasonable time frame”. Having regard to the findings set out in paragraphs [195]-[238] above, I also accept this opinion. The Company could not return to a position of solvency unless it obtained construction finance to cover not only the amounts owing to Lords, but also the monthly progress payments which would fall due to Lords if work on site resumed. The Company was not able to meet the conditions precedent for obtaining finance under the Banner Indicative Term Sheet in any reasonable time frame, in particular, because the cessation of works on site meant that the sale of units in the Linden Development had stalled.

70. [319]

    The Plaintiffs contended for an earlier date for insolvency, based on the contents of the Linden Report, which was generated on 16 April 2018. This report only came to light after Mr Bailey’s report was produced.

71. [320]

    In particular, the Plaintiffs referred to the list of “Unpaid Invoices” of the Company in the Linden Report, which indicated that there were multiple creditors owed amounts extending over the past two years.

72. [321]

    The Plaintiffs contended that this material established that the Company was insolvent by 20 April 2018 (being the date of the first of the payments to Quantum Development which was alleged to be an unfair preference payment).

73. [322]

    There are two main difficulties with this submission.

74. [323]

    First, there are some uncertainties regarding the source and accuracy of the data in the Linden Report. For example, as Mr Bailey acknowledged, it was not clear whether the dates specified for individual invoices were the dates shown on the invoices, the dates when the debts were entered in the Company’s system, or the dates when they were due and payable. Further, one of the largest of the “unpaid invoices” recorded in the Linden Report was an invoice for $694,752.49 issued by Lords in respect of Progress Claim No 1. This represented almost 33% of the total amount of the “unpaid invoices” ($2.137m) listed in that report. In fact, this invoice had been paid in full prior to the date of the Linden Report.

75. [324]

    Secondly, Mr Bailey did not produce any supplementary report after the Linden Report came to light. He was asked in examination in chief whether the contents of the Linden Report affected any of the opinions in his report, and gave the following evidence (emphasis added):

76. [325]

    Significantly, Mr Bailey regarded the contents of the report as confirming his views on the date of insolvency. He did not express any opinion, based on the contents of the Linden Report, that the Company was insolvent at any earlier point in time than 30 May 2018 or 13 June 2018. As outlined above, the crux of Mr Bailey’s conclusions is that the Company’s inability to pay its debts to Lords led to its insolvency. As at the date of the Linden Report, the only debt to Lords which had fallen due and payable was the debt in respect of Progress Claim No 1 (which had been paid in full, albeit two weeks late).

77. [326]

    Accordingly, I am not satisfied that the Linden Report provides a sufficient basis to conclude that the Company became insolvent by 20 April 2018.

78. [327]

    For the reasons set out above, I find that the Company was very likely insolvent by 30 May 2018, and definitively insolvent by 13 June 2018, and remained insolvent at all times thereafter until it went into administration.

Insolvent Trading Claims against Mr Gribble

1. [328]

   Section 588G of the Act relevantly provides as follows:

2. [329]

   Mr Gribble was the sole director of the Company at all relevant times. The issues which therefore arise for determination are:

   1. (1)

      whether the Company incurred debts when it was insolvent (that is, after 13 June 2018);

   2. (2)

      whether, at the time the Company incurred such debts, there were reasonable grounds for suspecting that the Company was insolvent; and

   3. (3)

      whether Mr Gribble was aware that there were such grounds for so suspecting, or alternatively whether a reasonable person in a like position in a company in the Company’s circumstances would be so aware.

3. [330]

   In determining whether those elements of a claim for insolvent trading have been established, I have taken into account the nature of the subject-matter of the proceeding and the gravity of the matters alleged: Re Swan Services Pty Ltd (in liq) [2016] NSWSC 1724 at [25] (Black J), referring to Evidence Act 1995 (NSW), s 140(2); Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362 per Dixon J; [1938] HCA 34; Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 at 449-450 per Mason CJ, Brennan, Deane and Gaudron JJ; [1992] HCA 66.

4. [331]

   The term “debt” is not defined in the Act. Its meaning is well understood as a matter of ordinary language, namely, “a liability or obligation to pay or render something; that which one person is bound to pay to or perform for another”: Treloar at [44]-[45]. This statutory conception of debt is “to be applied in a practical and commonsense fashion, consistent with the context and with the statutory purposes”: ibid at [46], referring to Hawkins v Bank of China (1992) 26 NSWLR 562 at 572 per Gleeson CJ.

5. [332]

   The “incurring” of a debt refers to “the act, omission or other circumstance which causes the company to owe the debt”: ASIC v Edwards at [81] (Barrett J).

6. [333]

   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”: Treloar at [48], referring to Spain v Union Steamship Co of New Zealand Ltd (1923) 32 CLR 138 at 142 per Knox CJ and Starke J.

7. [334]

   The Company incurred debts after 13 June 2018, and therefore incurred debts at a time when it was insolvent.

8. [335]

   In particular, in this period the Company incurred a debt to Lords in respect of each of Progress Claims No 5 to No 8, which were issued at, respectively, the end of June, July, August and September 2018. In each case, the Company incurred, pursuant to the terms of the Construction Contract, a debt in respect of the amount certified in the corresponding payment schedule.

9. [336]

   The amounts incurred in respect of each Progress Claim and the dates on which those amounts were due and payable were as follows:

   1. (1)

      Progress Claim No 5, issued 30 June 2018 – an amount of $833,913.24, due and payable on 23 July 2018;

   2. (2)

      Progress Claim No 6, issued 31 July 2018 – an amount of $842,858.42, due and payable on 15 August 2018;

   3. (3)

      Progress Claim No 7, issued 21 August 2018 – an amount of $130,323.70, due and payable on 20 September 2018; and

   4. (4)

      Progress Claim No 8, issued 30 September 2018 – an amount of $130,323.70, due and payable on 18 October 2018.

10. [337]

    It was common ground that, in the period following 13 June 2018, the Company also incurred debts in respect of invoices issued by the following entities:

    1. (1)

       on 31 August 2018, a debt to BT Project Marketing Pty Ltd (BTPM) in the amount of $3,667.73, in respect of an invoice issued for marketing expenses;

    2. (2)

       on 12 December 2018, a debt to Stornoway Capital Partners Pty Ltd in the amount of $22,000, in respect of an invoice issued for a service fee; and

    3. (3)

       on 23 January 2020, a debt to RUK Australia in the amount of $880, in respect of an invoice for project management fees.

11. [338]

    In addition, the Plaintiffs claimed that the Company incurred debts in respect of Delay Damages Claim No 1 and No 2. The Defendants contended that these were not debts, but claims for unliquidated damages. I deal with this issue when addressing the question of loss and damage below.

12. [339]

    In Quin (in his capacity as liquidator of Roderick Group Pty Ltd (in liq)) v Vlahos (2021) 64 VR 319; [2021] VSCA 205, the Victorian Court of Appeal (Kyrou, Kennedy and Walker JJA) made the following observations regarding the operation of s 588G(1)(c), which concerns whether there are reasonable grounds for suspecting that the company is insolvent at the time when a debt is incurred (at [216], footnotes omitted, emphasis original):

13. [340]

    I am satisfied that, as at 13 June 2018, there were reasonable grounds for suspecting that the Company was insolvent. In particular:

    1. (1)

       following the issue of a payment schedule in respect of Progress Claim No 4, the Company had a debt to Lords of around $2.8m;

    2. (2)

       the Company was aware that further costs were continuing to be incurred by Lords and would be the subject of future Progress Claims;

    3. (3)

       Lords were threatening to take action and cease work on site if its outstanding debt was not paid in accordance with a stipulated payment program;

    4. (4)

       the Company did not have any assets of its own to meet its debt to Lords;

    5. (5)

       the Company had entered into the Quantum Loan, but any advances under that facility were wholly dependent on the sale of SL class units, and there was no reasonable basis, given the sales to date and the advances to date, to conclude that the sale of further SL class units would occur within a period and in a volume sufficient to pay the outstanding debts to Lords, within the time required by Lords, or future invoices as and when they fell due;

    6. (6)

       SLI had agreed to procure that the Company pay amounts owing to Lords, but SLI did not have any assets other than the Land, which was already mortgaged (with the full amount of the Solcap facility having been drawn down in order to purchase the Land); and

    7. (7)

       the Company did not, as at June 2018, have any offer of construction finance, and its ability to obtain such finance depended on its ability to achieve pre-sales targets (which had not been met).

14. [341]

    I am also satisfied that, at all times following 13 June 2018, there were reasonable grounds for suspecting that the Company was insolvent. In this period, further progress claims were issued by Lords, and certified by the Superintendent. With the cessation of works on site, pre-sales came to a halt, well short of the level required in order to obtain construction finance. This remained the case through until the termination of the Construction Contract. Any further amounts raised from the sale of SL class units following June 2018, or advanced under the increase to the Solcap facility, were insufficient to meet the existing debts to Lords, with the Company being unable to pay any of Progress Claims No 5 to No 8 as and when they fell due.

15. [342]

    A director contravenes s 588G(2) of the Act by failing to prevent a company from incurring a debt, in the circumstances specified in s 588G(1), if the director is aware at the relevant time that there are reasonable grounds for suspecting that the company is insolvent, or would become insolvent by incurring the relevant debt, or if a reasonable person in a like position in a company in the company’s circumstances would be so aware.

16. [343]

    Mr Gribble had actual knowledge of each of the matters set out in paragraph [340] above.

17. [344]

    As regards subparagraphs (1)-(3), Mr Gribble was aware that monthly progress claims were being issued by Lords, pursuant to the terms of the Construction Contract; he received regular emails from Mr Maroun informing him of the amounts owing to Lords in respect of each such progress claim, the dates when they were due, and the outstanding balance; and he received emails from, and had discussions with, Mr Maroun in June 2018 regarding the action that Lords intended to take if the outstanding invoices were not paid (see paragraphs [176]-[189] above).

18. [345]

    As regards subparagraph (4), Mr Gribble was aware that the only assets of the Company were cash at bank and capitalised development costs. The cash at bank was minimal, and the capitalised development costs did not represent an asset which could be realised in order to pay current liabilities. .

19. [346]

    As regards subparagraph (5), one of the tasks for which Mr Gribble was personally responsible was raising money for the Linden Development, including via the sale of SL class units. The emails which Mr Gribble sent to Lords regarding when payments would be made, and in what amounts, indicate that he was monitoring, and aware of, the level of sales of SL class units and therefore the amount available to be advanced under the Quantum Loan (see, for example, paragraphs [144]-[145] above).

20. [347]

    As regards subparagraph (6), Mr Gribble agreed in cross-examination that he was aware that the Solcap Loan had been fully drawn down as at 15 December 2017 and applied to the purchase of the Land.

21. [348]

    As regards subparagraph (7), Mr Gribble was aware that no offer of construction finance for the Linden Development had been received as at June 2018, and that it was uncertain when (or if) the Company would have such finance in place. For example, he referred in his affidavit to an email from Mr Najar to Mr Maroun on 19 June 2018, which was copied to Mr Gribble and which stated that “hopefully by mid of next month we will have finance in place” (emphasis added). Mr Gribble was also aware of the terms of the Quantum PDS, which had set out the level of pre-sales required in order to obtain construction finance. In addition, he was responsible for overseeing the sale of units by Colliers and was aware of the level of pre-sales.

22. [349]

    As regards the position following 13 June 2018, Mr Gribble was aware of each of the further Progress Claims issued by Lords in this period and the amounts owing by the Company in respect of each; was aware that the additional moneys advanced by Solcap or QM Trust in this period were insufficient to meet the amounts owing to Lords; was aware of the conditions precedent regarding pre-sales stipulated in the indicative term sheets for construction finance; and was aware that pre-sales effectively “stagnated” when work stopped on site (see paragraph [206] above).

23. [350]

    Mr Gribble gave evidence that it was his understanding, based on a conversation with Mr Najar, that the works were to be performed in two stages, with Stage 1 having a budget of $3.04m, and Stage 2 having a budget of $15.18m; that Stage 1 would end on 29 May 2018; that Stage 2 was “subject to final construction finance”; and that work on Stage 2 would commence only when a further letter or notice was issued by the Company to Lords.

24. [351]

    I have found that the relevant conversation did not occur (see paragraphs [89]-[96] above). I have also found that Mr Gribble did not in fact have any such understanding in the period April to June 2018, noting the complete lack of any contemporaneous statement to this effect in his various communications with Mr Maroun about the Linden Development.

25. [352]

    If (contrary to my findings) Mr Gribble did have this understanding based on a discussion with Mr Najar, it was not reasonably based. It was at odds with the plain terms of the Construction Contract, which Mr Gribble signed. When taken to the terms of cl 2.7 of the General Conditions, Mr Gribble stated: “I find reading a building contract extremely complex and I don't understand them”. I do not consider that evidence to be credible, in circumstances where Mr Gribble has been involved in around twenty property developments.

26. [353]

    Significantly, the Defendants did not advance any submission, orally or in writing, that any understanding on Mr Gribble’s part that “Stage 2” works could not commence without finance being in place and without some further notice being given to Lord given was reasonably based, or that a reasonable director in Mr Gribble’s position would have held such a view.

27. [354]

    Having regard to those matters, I am satisfied that Mr Gribble had actual knowledge of matters which constitute reasonable grounds for suspecting insolvency. Further, I am satisfied that a reasonable person who was a sole director of a company in the Company’s circumstances, and who had knowledge of those matters, would have been aware that there were reasonable grounds for suspecting insolvency.

28. [355]

    It follows that Mr Gribble contravened s 588G(2) of the Act.

29. [356]

    Mr Gribble pleaded two defences.

30. [357]

    First, he pleaded that he had reasonable grounds to expect, and did expect, that the Company was solvent and would remain solvent despite incurring one or more of the debts referred to above, and therefore, by operation of s 588H(2) and/or (3) of the Act, is not liable to pay compensation pursuant to s 588M of the Act for any contraventions of s 588G(2).

31. [358]

    Secondly, he pleaded that, if he is found to have contravened s 588G(2) of the Act, he acted honestly for the purpose of ss 1317S or 1318 of the Act, and ought in all the circumstances of the case fairly be excused within the meaning of s 1318, wholly or in part, from any liability under that section.

32. [359]

    Section 588H of the Act relevantly provides as follows:

33. [360]

    The principles applicable to this provision were summarised by the Court of Appeal in Treloar at [163]-[168]. There are two elements which must be established in order to make out a defence under s 588H(2). The first element is that Mr Gribble had reasonable grounds to expect that, at the relevant times, the Company was solvent, and would remain solvent. The second concerns Mr Gribble’s actual expectation as to those matters.

34. [361]

    The first element was explained by Austin J in Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201; [1999] NSWSC 581 at [67] as follows:

35. [362]

    This approach was adopted by Palmer J in Hall v Poolman [2007] NSWSC 1330 at [262] and by Goldberg J in McLellan, in the matter of the Stake Man Pty Ltd v Carroll (2009) 76 ACSR 67; [2009] FCA 1415 at [170].

36. [363]

    As regards the second element, it is necessary not only to consider whether the evidence establishes that Mr Gribble had an actual expectation that the Company was, and would remain, solvent, but also whether Mr Gribble had reasonable grounds for that expectation. As noted in Treloar at [168], the courts have been critical of reliance on the possibility or hope of future successful trading as the basis for such an expectation. In Hall v Poolman at [265], Palmer J observed that:

37. [364]

    The only basis on which a defence pursuant to s 588H was advanced in written submissions was as follows:

38. [365]

    In his affidavit, Mr Gribble gave the following evidence of his reliance on Mr Taylor:

39. [366]

    In cross-examination, Mr Gribble acknowledged that the first of the documents referred to in the above passage was not in fact “created by Stephen”, but was instead created by Lords; and that the second of the documents was created for the purpose of discussions with potential financiers and was a document showing the amount of funding required (rather than a document showing the amount of funding that the Company currently had).

40. [367]

    In closing address, Counsel for the Defendants developed the s 588H defence as follows:

41. [368]

    As set out above, my finding that the Company was insolvent by 13 June 2018 and at all times thereafter, and that there were reasonable grounds for suspecting insolvency, largely turns on the Company’s inability to meet its indebtedness to Lords. Whatever responsibility Mr Taylor may have had for dealing with other creditors, the evidence clearly establishes that (to adopt the language of the submission set out above) Mr Gribble was in regular communication with Lords regarding “specific payments being made” by the Company to Lords, “what was outstanding to [Lords] at each point in time”, “the transfers that were going out to …. Lords”, “the figures that were owed to them”, “the actual numbers”. Mr Maroun was sending emails directly to Mr Gribble, and was receiving emails from Mr Gribble, about these matters throughout the relevant period. I therefore do not accept the submission that these matters “were within Mr Taylor’s purview and that of his team, and not Mr Gribble”.

42. [369]

    Similarly, Mr Gribble did not rely on Mr Taylor to provide him with information about the terms of the Construction Contract, the Quantum Loan or the Solcap Loan (each of which was signed by Mr Gribble on behalf of the Company, before Mr Taylor joined the Company), or to provide him with information about the sales of SL class units or the status of the attempts to obtain construction finance or any indicative term sheet provided by a financier or the level of pre-sales of units in the Linden Development.

43. [370]

    For those reasons, the s 588H defence has not been established.

44. [371]

    Section 1318(1) of the Act provides as follows:

45. [372]

    Counsel for the Defendants did not, in opening or closing address, specifically advance any submissions in support of the s 1318 defence.

46. [373]

    In Woodgate v Davis (2002) 55 NSWLR 222; [2002] NSWSC 616 at [36], Barrett J observed that:

47. [374]

    Mr Gribble was responsible for the issue of the Quantum PDS which stated that the Company needed to obtain construction finance in order to fund the costs of the Linden Development, and needed to achieve pre-sales of a gross value equivalent to a value of at least 100% of senior debt cover (or some $22.7m) in order to obtain such finance. Mr Gribble signed the Construction Contract, as sole director of the Company. He was aware that a Commencement Notice was provided to Lords at a time when the Company did not have in place the finance necessary to meet its obligations under that contract, and had not achieved pre-sales of the level required in order to obtain such finance. He was aware of the debts which had been incurred to Lords as at the end of May 2018, and the Company’s lack of any means as at that time to pay those debts. On 31 May 2018, Mr Maroun sent Mr Gribble an email which referred to the issue of Progress Claim No 4 on the previous day, and which stated:

48. [375]

    Mr Gribble did not, in response to this message, urgently contact Mr Maroun to inform him that the Company did not have finance in place to fund the works referred to in this email. Instead, he allowed Lords to continue to incur very substantial costs after the end of May 2018, which were the subject of subsequent progress claims that remain unpaid.

49. [376]

    Having regard to all the circumstances of this case and, in particular, the matters set out above, I am not satisfied that Mr Gribble ought fairly be excused for his breach of s 588G of the Act.

Insolvent Trading Claim against Quantum Management

1. [377]

   Section 588V(1) of the Act provides as follows:

2. [378]

   Quantum Management owned 100% of the shares in SLI, which in turn owned 100% of the shares in the Company. It follows that the Company was a “subsidiary” of Quantum Management within the meaning of s 46 of the Act, and therefore that Quantum Management was, at all relevant times, the “holding company” of the Company, within the meaning of s 9 of the Act.

3. [379]

   Mr Gribble was the sole director of Quantum Management. Quantum Management and Mr Gribble established the Company as a special purpose vehicle for the purpose of the Linden Development. The Company had no employees of its own, and relied on employees being supplied by the Quantum Group in order to perform its functions. In short, Quantum Management controlled the Company and was aware of all matters known to Mr Gribble about the Company’s operations.

4. [380]

   For the reasons set out above, I have determined that the Company incurred debts following 13 June 2018; that it was insolvent at the time that it incurred those debts; and that there were reasonable grounds for suspecting that it was insolvent at that time.

5. [381]

   I am satisfied that, having regard to the nature and extent of Quantum Management’s control over the Company’s affairs, and the circumstances of the Company set out at paragraph [340] above (those being matters known to Mr Gribble, and therefore to Quantum Management), it is reasonable to expect that a holding company in Quantum Management’s circumstances, or one of more of the directors of such a holding company’s directors, would have been aware, at the time those debts were incurred, that there were reasonable grounds for suspecting that the Company was insolvent.

6. [382]

   Accordingly, it has been established that Quantum Management contravened s 588V(1) of the Act.

Compensation under ss 588M and 588W

1. [383]

   Section 588M of the Act relevantly provides as follows:

2. [384]

   Section 588W(1) of the Act provides as follows:

3. [385]

   Since I have determined that Mr Gribble contravened s 588G(2) of the Act and Quantum Management contravened s 588V(1) of the Act, the requirements of each of s 588M(1)(a) and s 588W(1)(a) are satisfied. Further, because the Company is in liquidation, and each of the debts which is the subject of the insolvent trading claim was unsecured, the requirements of each of s 588M(1)(c)-(d) and s 588W(1)(c)-(d) are satisfied.

4. [386]

   In order to determine the Plaintiffs’ claim for compensation, it is necessary to determine the following matters:

   1. (1)

      what debts were incurred by the Company while it was insolvent;

   2. (2)

      whether the person to whom each such debt was owed has suffered loss or damage in relation to that debt because of the Company’s insolvency; and

   3. (3)

      what is the amount of such loss or damage.

5. [387]

   As regards the debts incurred to persons other than Lords, these issues are straightforward. The Defendants accepted, in their opening written submissions, that the Company incurred the following debts to other creditors:

   1. (1)

      a debt of $3,667 to BTPM on 31 August 2018;

   2. (2)

      a debt of $22,000 to Stornoway on 12 December 2018; and

   3. (3)

      a debt of $880 to RUK Australia on 23 January 2020.

6. [388]

   Further, the Defendants accepted that, if (as I have found) the Company was insolvent when each of these debts was incurred, the creditors have suffered loss and damage, with the amount of such loss and damage being equal to the amount of the debt outstanding in respect of each of them as at the date the Company entered into administration.

7. [389]

   It was common ground that an amount of $5,500 was paid by the Company to Stornoway, leaving an unpaid balance of $16,500, and that the other debts remain unpaid.

8. [390]

   It follows that the amount of loss and damage suffered by the creditors in respect of these debts is, in total, $21,047.

9. [391]

   As far as Lords is concerned, I have determined that the Company, while it was insolvent, incurred debts to Lords in respect of Progress Claims No 5 to No 8, and that those debts were in the following amounts:

   1. (1)

      Progress Claim No 5 – an amount of $833,913.24, due and payable on 23 July 2018;

   2. (2)

      Progress Claim No 6 – an amount of $842,858.42, due and payable on 15 August 2018;

   3. (3)

      Progress Claim No 7 – an amount of $130,323.70, due and payable on 20 September 2018; and

   4. (4)

      Progress Claim No 8 – an amount of $130,323.70, due and payable on 18 October 2018.

10. [392]

    No amount has been paid in respect of Progress Claims No 6 to No 8. There was a dispute regarding the total amount that has been paid in respect of Progress Claim No 5. In particular, the Defendants noted that, in respect of two particular payments made to Lords by the Company, there was a discrepancy between the amount shown on the Company’s bank statement as having been transferred to Lords and the amount recorded by Lords as having been received in respect of the invoices issued for the Linden Development. I have addressed this issue at paragraphs [147]-[149] and [154]-[156] above, and have determined that the apparent discrepancy is explained by communications between Lords and the Quantum Group as resulting from amounts paid to Lords being apportioned as between amounts due in respect of the Linden Development and amounts due in respect of the Adelong Development. Accordingly, I am satisfied that the information contained in the Lords reconciliation accurately reflects amounts received by Lords in respect of the Linden Development.

11. [393]

    It follows that the unpaid balance in respect of Progress Claim No 5 is $221,479.45, and the total amount which remains unpaid in respect of Progress Claims No 5 to No 8 is $1,324,985.27.

12. [394]

    On 11 December 2019, judgment was entered against the Company in favour of Lords in the amount of $1,511,244.06.

13. [395]

    The Judgment Debt comprised the outstanding balance due in respect of Progress Claims No 5 to 8 ($1,324,985.27), together with pre-judgment interest pursuant to section 11(2) of the Building and Construction Industry Security of Payment Act in an amount of $186,258.79.

14. [396]

    The Company incurred a debt for this amount of interest on the date that judgment was entered.

15. [397]

    The Plaintiffs argued that, in addition to these debts to Lords totalling $1,511,244.06, the Company incurred further debts to Lords in respect of Delay Damages Claim No 1 ($953,700) and Delay Damages Claim No 2 ($173,910). The Defendants disputed that these claims by Lords for damages constituted debts incurred by the Company on the date that those claims were issued.

16. [398]

    Mr Bailey expressed the opinion in his expert report that any claim for insolvent trading would reasonably consist of:

17. [399]

    Mr Bailey further expressed the view that any claim for insolvent trading must reasonably exclude “[u]nliquidated damages brought against the Company by a creditor that have not reasonably been assessed or scrutinised by a court”.

18. [400]

    The debts incurred by the Company to Lords in respect of Progress Claims No 5 to 8 fall within subparagraph (i) above. The debt incurred to the Company to Lords in respect of pre-judgment interest on the unpaid balance of those Progress Claims falls within subparagraph (ii) above.

19. [401]

    Delay Damages Claims No 1 and No 2 do not fall within either of those subparagraphs. The Plaintiffs contended that they fell within subparagraph (iii) above.

20. [402]

    Mr Bailey’s opinion in respect of Delay Damages Claims No 1 and No 2 was as follows:

21. [403]

    Mr Bailey described the Delay Damages Claims as “damages incurred as a consequence of the insolvency of the Company, as opposed to additional debts positively incurred by the Company after the date on which its insolvency was apparent, or ought to have been apparent, to the Director”.

22. [404]

    In cross-examination, Mr Bailey was taken to this part of his report and confirmed that he had treated the Delay Damages Claims separately from the Progress Claims. He gave the following evidence:

23. [405]

    Mr Bailey also confirmed that, in order for the Delay Damages Claims to fall within subparagraph (iii) above, there would need to be supporting documentation for those claims. He also agreed that, if costs caused by delay had already been claimed in respect of earlier Progress Claims, then it would be necessary to remove any such costs to avoid “double charging”.

24. [406]

    The Delay Damages Claims were expressed to be advanced pursuant to clause 39.9, or alternatively clause 34.9, of the General Conditions of the Construction Contract. Neither of those clauses gave rise to an entitlement to claim a liquidated sum.

25. [407]

    Clause 39.9 gave Lords the right to claim “damages suffered” by reason of a suspension of works, with such damages to “be assessed by the Superintendent, who shall certify them as moneys due and payable to [Lords]”. Clause 34.9 provided that, for every day which was the subject of an extension of time for a “compensable cause” and for which Lords gave the Superintendent a claim for delay damages pursuant to subclause 41.1, Lords was “entitled to be paid the cost actually incurred by [Lords] on that day by reason of the delay, subject to the limitation that the total amount of compensation payable under this subclause 34.9 and under subclause 33.4 for any one day will not exceed the amount stated in Item 31 [being $5,100 per calendar day]”. Clause 34.9 further stated as follows :

26. [408]

    Accordingly, in order to show any contractual entitlement to payment under clause 39.9 or clause 34.9, it was necessary for Lords to establish, respectively, that it had suffered damage as a result of a suspension of works, or that it had incurred costs as a result of a delay.

27. [409]

    In each of the Delay Damages Claims, Lords stated that it had “sustained” the “following costs and damages” during the period covered by the claim (which, as between the two claims, covered July 2018 to January 2019):

    1. (1)

       hire costs for a tower crane, site amenities, formwork, scaffolding, temporary fencing and crane radios, as well as daily costs for electricity bill and construction work zone;

    2. (2)

       costs of Contract Works & Public Liability Insurance and Professional Indemnity Insurance;

    3. (3)

       costs of the Lords Project Team, consisting of five individuals whose rates ranged from $375 to $1,000 per day; and

    4. (4)

       Lords Group overhead costs relating to the project accounts team, an estimator and a director (each allocated on the basis of 50% of their time), with the resultant rates being from $325 to $550 per day.

28. [410]

    The Construction Contract did not specify rates for any of these items, including for the members of Lords’ team.

29. [411]

    Lords did not provide, with either of the Delay Damages Claims, any rental agreements or invoices to establish the daily hire costs, or any documents to establish the daily cost of the insurance policies. Moreover, it did not provide any documents to substantiate the costs of the Lords project team or to establish that these persons were unable to be redeployed to other projects in the period from July 2018 to January 2019.

30. [412]

    In addition, Delay Damages Claim No 1 was expressed to be incomplete, in that Lords claimed that it had suffered other damage, and incurred other costs, which could not be quantified as at the date of that Claim. It stated as follows:

31. [413]

    Finally, it appears that there is a significant degree of overlap between Delay Damages Claim No 1 and Progress Claims No 6 to No 8.

32. [414]

    The period covered by Delay Damages Claim No 1 is a period of 157 days up to 24 December 2018. It therefore covers all of August and September 2018, and a significant portion of July 2018, presumably from around the time that work ceased on site. Costs incurred by Lords in July, August and September 2018 were the subject of, respectively, Progress Claims No 6, No 7 and No 8. In particular, each of Progress Claims No 7 and No 8 was for precisely the same amount, and each was a claim in respect of Preliminaries and Overheads.

33. [415]

    Having regard to the matters set out above, I am not satisfied that it has been demonstrated that Lords was contractually entitled to the amount of damages sought in Delay Damages Claims No 1 and No 2, or that Lords provided supporting documentation to verify the accuracy of the calculation. Instead, I consider that the claims for delay damages were claims for unliquidated damages which were brought by Lords against the Company and which have not reasonably been assessed or scrutinised by a court. In accordance with the views of Mr Bailey which I have set out above, it follows that the claim for insolvent trading must reasonably exclude such damages.

34. [416]

    The final issue for determination is what is the amount of loss or damage suffered by Lords in relation to the debts which were incurred while the Company was insolvent.

35. [417]

    Both parties relied on the following observations by Barrett J in Edenden v Bignell [2007] NSWSC 1122 at [30]:

36. [418]

    The Plaintiffs submitted, in reliance on this passage, that the amount of the compensation should be the unpaid amount of the relevant debts owing to Lords, totalling $1,511,244.06. 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”: Treloar at [53]. As noted above, the Defendants accepted that this approach should be applied in respect of the creditors other than Lords. The Plaintiffs noted that the evidence confirmed that no dividend had been paid, and that there were no funds available to pay a dividend to creditors of the Company.

37. [419]

    The Defendants submitted that the above passage from Edenden recognises that there may be exceptions to the usual approach of calculating compensation by reference to the face value of the unpaid debts. In particular, the Defendants referred to the following remarks made by Brereton J in Re Salfa Pty Ltd (in liq) [2014] NSWSC 1493 at [24], immediately after quoting (at [23]) the passage from Edenden set out above:

38. [420]

    The Defendants submitted that, just as it is necessary to take account of any dividend in a winding up, calculation of the loss or damage suffered by Lords in relation to the debts in question “must, as a matter of principle, take into account credits for payments made to Lords (to the extent that they have not been recovered as preferences, which they have not) following the date of insolvency so as to reduce the quantum of ‘loss or damage’ that can be claimed by the liquidator”.

39. [421]

    In that regard, the Defendants contended that “the ‘debt’ owed to Lords was ‘substantially reduced’ after the date of insolvency”.

40. [422]

    This submission was advanced on the basis of Mr Cavanagh’s report.

41. [423]

    Mr Cavanagh’s primary position on loss and damage was that the quantum of such loss was $880, by reason that the date of insolvency was 11 December 2019 and only one unpaid debt was incurred after that date (being the debt of $880 to RUK). For reasons given above, I have rejected Mr Cavanagh’s conclusion on the date of insolvency.

42. [424]

    Mr Cavanagh further expressed the view that, if he was wrong on the date of insolvency and the Company was (as Mr Bailey opined, and as I have found) definitively insolvent by 13 June 2018 and remained insolvent thereafter, then no loss or damage was suffered as a result of the insolvent trading. The basis for this opinion was that, as at 13 June 2018, the Company owed $2,782,855.11 to Lords, and as at the date the Company entered administration, the net asset deficiency was around $1.519m, “meaning that the Company did not incur a loss from continuing to trade after 13 June 2018”.

43. [425]

    There are two main flaws in this approach.

44. [426]

    First, the issue is not whether the Company incurred a loss from continuing to trade while insolvent. Instead, the issue is whether “the person … to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency”: s 588M(1)(b).

45. [427]

    Secondly, Mr Cavanagh considered the total indebtedness of the Company to Lords, and whether the level of that total indebtedness decreased between 13 June 2018 and the date that the Company entered into administration.

46. [428]

    In adopting this approach, Mr Cavanagh focussed on the requirement in s 588M to identify loss or damage “because of the company’s insolvency” and asked whether the overall level of indebtedness to the creditor decreased between the date that the company became insolvent and the date that it went into administration. He explained in his evidence in chief that “when you’re quantifying a loss that … happened because of an event, and in this case it’s the alleged insolvent trading”, then his “methodology for calculating that loss” was to ask “What position are you in now after that supposed event, and what position would you have been in if that event or thing didn’t happen?”

47. [429]

    However, s 588M does not ask whether the position of the creditor overall has worsened or improved “because of the insolvency”, but whether the creditor has suffered loss or damage “in relation to the debt [which was incurred while the company was insolvent] because of the company’s insolvency” (s 588M(1)(b), s 588W(1)(b)). The amount of compensation to which the liquidator is entitled is the amount of such loss or damage (s 588M(2), 588W(1)).

48. [430]

    The debts to Lords which were incurred when the Company was insolvent were those in respect of Progress Claims No 5 to No 8, as well as the interest subsequently awarded on those debts which was included in the Judgment Debt. It is therefore necessary to determine whether Lords suffered loss or damage in relation to those debts because of the Company’s insolvency, and the amount of such loss or damage.

49. [431]

    In Perrine v Carrello [2017] WASCA 151 at [40]-[41], the Western Australian Court of Appeal explained that this question will usually be answered along the following lines, “as at trial, the creditor of the insolvent company will get nothing; if the company were not insolvent, the creditor would be paid the amount of the debt; consequently, the loss is the amount of the debt”, adding (citations omitted):

50. [432]

    This passage was quoted with approval in Quin v Vlahos at [267].

51. [433]

    For those reasons, Mr Cavanagh’s report does not address the correct statutory test regarding compensation for an insolvent trading claim.

52. [434]

    I accept that, in assessing the loss or damage suffered by the creditor “in relation to the debt because of the company’s insolvency”, it is necessary to take into account any payments made by the company to the creditor in respect of the debt during the period that the company was insolvent. However, all such payments made by the Company to Lords after 13 June 2018 have been taken into account in determining the outstanding balance due to Lords in respect of Progress Claims No 5 to No 8.

53. [435]

    The ordinary rule with respect to appropriation of payments is that the debtor has a right when making a payment to appropriate the money to any of the debts owing to the creditor and, if the creditor takes the money, the creditor is bound to recognise this appropriation; and if the debtor does not make any such appropriation, the creditor is then entitled to make an appropriation: Visbord v Federal Commissioner of Taxation (1943) 68 CLR 354 at 371; 371 per Latham CJ; [1943] HCA 4. When making payments to Lords, the Company did not appropriate the payments to any particular debt. Instead, Lords informed the Company of the particular debts to which particular payments were appropriated, and the resultant outstanding balance of each particular debt.

54. [436]

    Lords generally chose to appropriate the payments received from the Company to the payment of the oldest outstanding debt, until that debt was paid in full. By this approach, the amounts due by the Company to Lords in respect of Progress Claims No 1 to 4 were paid in full, and the amount due by the Company to Lords in respect of Progress Claim No 5 was reduced from $833,913.24 to $221,479.45 (with the full amount due in respect of Progress Claims No 6 to 8 remaining outstanding).

55. [437]

    It follows that all amounts received by Lords in payment of the debts owing by the Company in respect of Progress Claims No 5 to 8 have been taken into account in determining the outstanding balance of those debts.

56. [438]

    For those reasons, I find that:

    1. (1)

       the amount of loss or damage suffered by Lords in respect of the debts incurred while the Company was insolvent is $1,511,244.06 (comprising the outstanding balance due in respect of Progress Claims No 5 to No 8, together with the award of interest made by the Court on 11 December 2019);

    2. (2)

       the amount of loss or damage suffered by other creditors in respect of debts incurred while the Company was insolvent is $21,047; and

    3. (3)

       the amount which the liquidator is therefore entitled to recover from Mr Gribble (pursuant to s 588M(2)) and from Quantum Management (pursuant to s 588W(1)) is $1,532,291.06, being an amount equal to the amount of such loss or damage.

Unfair Preference Claim

1. [439]

   The unfair preference claim can be dealt with briefly.

2. [440]

   There were four payments in issue, each of which was a payment made to Quantum Development. The date and amount of each payment were as follows:

   1. (1)

      20 April 2018, a payment of $264,726;

   2. (2)

      8 May 2018, a payment of $28,457;

   3. (3)

      18 September 2018, a payment of $16,500; and

   4. (4)

      20 September 2018, a payment of $66,000.

3. [441]

   It was common ground that Quantum Development was a related entity of the Company. It was also common ground that the relation-back day in respect of the Company is 19 March 2020, and that the relevant relation-back period runs from 19 March 2016 to 19 March 2020.

4. [442]

   Each of the four payments in issue was made to Quantum Development between April and September 2018. It follows that each was a payment made to a related entity during the relation-back period.

5. [443]

   Section 588FA(1) of the Act provides as follows:

6. [444]

   Quantum Development was a creditor of the Company, and the payments in issue were made in respect of amounts due to Quantum Development (see paragraphs [134]-[137] above). Each of the payments resulted in Quantum Development receiving from the Company in respect of its unsecured debt, more than Quantum Development would have received from the Company in respect of the debt if the transaction were set aside and Quantum Development were to prove for that debt in the winding up of the Company. When the Company went into administration, Quantum Development was not a creditor of the Company. In contrast, as noted above, no dividend has been paid to unsecured creditors and there are no funds to pay any such dividend.

7. [445]

   It follows that the payments were unfair preferences within the meaning of section 588FA.

8. [446]

   The Plaintiffs contended that each of these payments was an insolvent transaction within the meaning of section 588FC, which provides as follows:

9. [447]

   The first two payments to Quantum Development were made on 20 April 2018 and 8 May 2018, and the third and fourth payments were made on 18 and 20 September 2018.

10. [448]

    For reasons given above, I have accepted Mr Bailey’s opinion that the Company was likely insolvent by 30 May 2018, was definitely insolvent by 13 June 2018, and remained insolvent at all times thereafter until it entered into administration.

11. [449]

    It follows that the Plaintiffs have not established that the first two payments to Quantum Development were made, or that an act was done for the purpose of giving effect to the payments, at a time when the Company was insolvent. Nor have they established that the Company became insolvent as a result of those payments being made.

12. [450]

    However, the Plaintiffs have established that the third and fourth payments to Quantum Development were made at a time when the Company was insolvent. It follows that each of those payments was an insolvent transaction.

13. [451]

    It also follows that each of the third and fourth payments, being an insolvent transaction with a related party during the relation-back period, was a voidable transaction: s 588FE(4).

14. [452]

    Accordingly, the Liquidator is entitled to an order pursuant to s 588F(1) of the Act that Quantum Development pay to the Company an amount equal to the money that the Company paid pursuant to those transactions, being an amount of $82,500.

15. [453]

    For the reasons given above, I have determined that the insolvent trading claims against Mr Gribble and Quantum Management have been established, and that the amount of compensation which the Liquidator is entitled to recover against each of them pursuant to, respectively, s 588M and s 588W is $1,532,291.06.

16. [454]

    The Plaintiffs also sought pre-judgment interest under s 100 of the Civil Procedure Act 2005 (NSW). The making of a demand is not a pre-requisite to a cause of action for insolvent trading and, as a matter of convenience, the award of interest is usually taken to run from the date of the appointment of the liquidator: Powell v Fryer [2001] SASC 59 at [115] per Olsson J (Duggan and Williams JJ agreeing); Smith v Bone (No 2) (2015) 233 FCR 568; [2015] FCA 389 at [14]-[17] (Gleeson J). Accordingly, the Plaintiffs are entitled to interest on this sum from 21 April 2020 to the date of judgment.

17. [455]

    I have also determined that the payments made to Quantum Development in September 2018 were voidable transactions, and that the Liquidator is entitled to an order under s 588FF(1) that Quantum Development pay the Company the amount of $82,500.

18. [456]

    The Plaintiffs also sought an order for pre-judgment interest on this sum under s 100 of the Civil Procedure Act from the date that the demand for payment was made by the Liquidator (being 10 February 2023) to the date of judgment. I am satisfied that an award of pre-judgment interest for this period is appropriate in respect of the unfair preference claim: Woodgate as liquidator of Marketing Results Pty Ltd v Network Associates International BV [2007] NSWSC 1260 at [33] (Barrett J); Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83; [2007] FCAFC 185 at [150] per Gordon J (Heerey J agreeing).

19. [457]

    Finally, as the Plaintiffs have been successful in their claims against each of the Defendants, the Plaintiffs are entitled to an order for their costs.

20. [458]

    I will direct the parties to bring in short minutes of order to give effect to these reasons, including dealing with interest and costs. If there is any dispute about the form of those orders, including as to calculation of interest, or if any party seeks a different costs order, or a costs order other than on the ordinary basis, the parties will have an opportunity to be heard on these matters.

21. [459]

    Accordingly, I make the following orders.

    1. (1)

       The parties are to bring in short minutes of order, by 5pm on 3 December 2024, to give effect to these reasons for judgment, including orders that deal with interest and costs, insofar as those matters can be agreed; and

    2. (2)

       If orders to give effect to these reasons for judgment cannot be agreed, the parties are to exchange, by 5pm on 3 December 2024, the form of orders which each party proposes and submissions (limited to 5 pages) on those orders, indicating whether, and if so why, an oral hearing is requested to deal with the matters in dispute.