Cuthbertson & Richards Sawmills Pty Ltd v Gavin Frederick Creighton Thomas [1998] ACTSC 252 (7 July 1998)

  
  
  

  
   Downlaod RTF

  

   IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

   EINFELD J

  

  

   Corporations
Law - winding up - application for declaration that a floating
charge is valid - charge undertaken "for the benefit of the company"
-
presumption of insolvency - when debts become "due and payable"

  

   Words and Phrases - "solvency" - "become due and payable"

  

   Corporations Law 1989 (Cth) - sections 9, 95A, 513A, 588E, 588FJ

   Corporate Law Reform Act 1992 (Cth)

   Companies Code - section 452

   Evidence Act 1995 - section 64(2)(a)

   Companies (Consolidation) Act 1908 (UK)

  

   Bank of Australasia v Hall [1907] HCA 78;  [1907] 4 CLR 1514

   Sandell v Porter [1966] HCA 28;  [1966] 115 CLR 666

   Re New World Alliance Pty Limited (Rec & Mgr apptd); Sycotex Pty Ltd v
Baseler (No.2) [1994] 51 FCR
425

   M Hoffman Nominees Pty Ltd v Cosmas Fish Processors Pty Ltd [1982] 1 ACLC
528

   Pennywise Smart Shopping Australia Pty
Ltd v Somner & Co Pty Ltd [1993]
11 ACLC 31

   Leslie & Anor Holdings v Howship Holdings Pty Ltd [1997] 15 ACLC 459

  
Melbase Corporation Pty Ltd v Segenhoe Ltd [1995] FCA 1225;  [1995] 17 ACSR 187

   Metropolitan Fire Systems Pty Ltd v Miller & Ewins [1997] 23 ACSR 699

   3M Australia Pty Ltd v Kemish
[1986] 10 ACLR 371

   Taylor v Australian and New Zealand Banking Group Ltd [1988] 13 ACLR 780

   Hall v Press Plumbing, a Division
of Aust-Amec Pty Ltd (Federal Court of
Australia, Lindgren J, unreported, 20 September 1994)

   Calzaturficio Zenith Pty Ltd (In
Liquidation) v NSW Leather & Trading
Co. Pty Ltd. [1970] VR 605

   A.E. Ledge the Official Liquidator of Wright's Hardware Pty
Ltd (in
liquidation) -v- Euro- National Investment Corporation Ltd (Supreme Court of
Western Australia, Full Court, unreported 29
May 1989)

   Re Orleans Motor Company Limited [1911] 2 Ch 41

   Re Destone Fabrics Limited [1941] Ch 319

   Re Yeovil Glove Co
Ltd [1965] Ch 148 (CA)

  

  

   CANBERRA, 16 September and 3 October 1997 (hearing), 7 July 1998 (decision)

   #DATE 7:7:1998

  

   Appearances

  

   Counsel for the Plaintiff: Mr P Biscoe QC & Mr R. Lancaster

   Solicitor for the Plaintiff: Phillips
Fox

  

   Counsel for the Defendant: Mr A. Meagher SC

   Solicitor for the Defendant: J. S. O'Connor Harris

  

  

   THE COURT
ORDERS THAT:

  

  

   1. The summons be dismissed with costs

  

   EINFELD J

  

   INTRODUCTION

  

   1. By an originating
summons dated 28 March 1996, Cuthbertson &
Richards Sawmills Pty Limited (the plaintiff) sought declarations that a fixed
and
floating charge dated 10 November 1994 in its favour is a valid and
subsisting charge over the whole of the assets of Glenwood Cottages
Pty
Limited (in liquidation) ACN 064 629 018 (new Glenwood) and that the charge
secures repayment of the sum of $350,000 paid by
the plaintiff on behalf of
new Glenwood. The plaintiff also sought an order that the official liquidator
of new Glenwood, Gavin Frederick
Creighton Thomas (the defendant), account to
the plaintiff for all monies received on account of new Glenwood since the
liquidation.
The matter arises because the defendant adopted the position that
the charge is void under section 588FJ of the Corporations Law
1989 (Cth).

  

   FACTUAL BACKGROUND

  

   2. Since about the mid 1980s the plaintiff had a subsidiary company called
Glenwood
Cottages Pty Ltd ACN 003 004 055 (old Glenwood) which carried on a
home building business. The issued shares in old Glenwood (50,000)
were held
by Raymond Richards (21,000), John Cuthbertson (21,000), Michael Collins
(1,000), Paul Pino (1,000) and Allan Stewart (6,000)
on trust for the
plaintiff. The directors of old Glenwood prior to 1 December 1994 were Raymond
& Allan Richards, and John Cuthbertson.
On 6 May 1994 old Glenwood changed
its name to C & R Services Pty Ltd and from 1 December 1994 onwards the
directors of C &
R Services were Allan Richards and Peter Cuthbertson and
the secretary was John De Plater. The directors of the parent company, the
plaintiff, in 1994 were Raymond and Allan Richards, John and Peter
Cuthbertson, and Stewart.

  

   3. Throughout 1994 arrangements
were made to sell the business of old
Glenwood to Stewart, Pino and Collins, who on 9 May 1994 incorporated the new
company referred
to here as new Glenwood and became its directors. It took
some months for the sale to be formalised in writing but on an uncertain
date
between 30 August and 31 October 1994, a Business Sale Agreement (the Sale
Agreement) was executed which sold the business of
old Glenwood to new
Glenwood. The Sale Agreement was backdated to 10 May 1994.

  

   4. Recital G of the Sale Agreement stated
that new Glenwood had been
conducting the business since 1 May 1994 as if the Sale Agreement had been
completed on that date. The
plaintiffs submitted that this date may be a
typographical error for 10 May 1994 since new Glenwood was incorporated on 9
May 1994
but for a reason which follows, that may not be so. Recital F stated
that new Glenwood had agreed to assume responsibility for all
liabilities of
old Glenwood in relation to the business, other than $1.5 million of bank
debt. Clause 4.1.1 stated that new Glenwood
would assume sole responsibility
for the discharge of all liabilities and would indemnify old Glenwood in
respect of all liabilities
both before and after the "Effective Date" which
was defined as the close of business on 30 April 1994 (a date which gives
credibility
to the 1 May deemed commencing date). Clause 4.1.2 recorded the
understanding of the parties that all trade creditors of the business
as at
the Effective Date had now been paid in full by new Glenwood. By clause 4.3
new Glenwood undertook to notify in writing each
of the suppliers to the
business of its sale as soon as possible after the date of the Sale Agreement.
The notice was sent out in
a letter dated 31 October 1994.

  

   5. On 20 May 1994 new Glenwood opened a bank account with the National
Australia Bank and
on 14 June 1994 it was registered for tax instalment
deductions with the Australian Taxation Office. (From this point on I will
refer
to new Glenwood as simply "Glenwood" except when old Glenwood is also
being discussed.)

  

   6. In October and November 1994 a
funding arrangement was set up between
the plaintiff, the directors of Glenwood, and Glenwood itself that would have
resulted in
a loan from the National Australia Bank of $388,000 for one year
to Stewart, Collins and Pino, to be on-lent to Glenwood. At the
request of the
plaintiff, Westpac Bank executed an unconditional bank guarantee on 3 November
1994 (Westpac guarantee) in favour
of the National Australia Bank for a
maximum of $350,000 to be lent to Glenwood's directors. On the same day the
plaintiff executed
an indemnity in favour of Westpac in respect of any
liability that it had under the bank guarantee. On 10 November 1994, a Funding
Agreement between the plaintiff, Glenwood and its directors, and a Fixed and
Floating Charge between Glenwood and the plaintiff were
executed. On 11
November 1994, $350,000 was credited to Glenwood's account with the National
Australia Bank.

  

   THE FUNDING
AGREEMENT

  

   7. Under the Funding Agreement:

  

  

   (a) the plaintiff agreed to procure Westpac to provide the bank guarantee
to the National Australia Bank (clause 2) as security for the repayment by
Collins, Pino and Stewart of the advance by the National
Australia Bank
(clause 4.1.1)

  

   (b) Collins, Pino and Stewart undertook to on-lend the money to Glenwood on
substantially the
same terms (clause 4.1.3)

  

   (c) Glenwood agreed to repay the money to Collins, Pino and Stewart eight
months from the date
of the Funding Agreement (clause 4.3.1)

  

   (d) security for the bank guarantee was agreed to include:

  

   (i) an undertaking
by Glenwood and Collins, Pino and Stewart to indemnify
the plaintiff against any claim or demand made on it by Westpac as a
consequence
of Westpac at any time being required to honour its guarantee to
the National Australia Bank (clause 5(a));

  

   (ii) a fixed
and floating charge over all of the assets and undertakings of
Glenwood in favour of the plaintiff (clause 1.1.1 and clause 3.1);
and

  

   (iii) mortgages over the properties of Collins and Stewart in favour of the
plaintiff

  

   (e) the purpose of the
Westpac guarantee was recited as:

  

   to assist [Glenwood] in meeting its obligations under the Sale Agreement

  

   that agreement
being defined as:

  

   the agreement for the sale and purchase of the business between C & R
Services (as seller) and [Glenwood]
(as buyer) dated on or around the date of
this agreement

   THE FIXED AND FLOATING CHARGE

  

   8. The Fixed and Floating Charge
was created to fulfil Glenwood's
obligations under the Funding Agreement as outlined in 7(d)(ii). The Fixed and
Floating Charge secured
the repayment by Glenwood to the plaintiff of moneys
which it was liable to pay and may become liable to pay in the future, as well
as moneys which the plaintiff may become liable to pay to another person in
connection with a transaction entered into at the express
or implied request
of Glenwood.

  

   9. Under clause 2.3 the charge was fixed over certain mortgaged property.
Under clause 2.4
the charge was floating on any mortgaged property not
referred to in clause 2.3. Mortgaged Property was defined in clause 1.1.1 as:

  

  

   all the property, undertaking and rights presently or in the future held by
[Glenwood] ....

   10. Relevantly clause
2.7.1 provided that the floating charge will
automatically and immediately crystallise and take effect as a fixed charge
upon an
"Event of Default" described in clause 11.2(e). One such event was the
appointment of a liquidator to Glenwood (clause 11.2(e)(ii)).

  

   11. On 7 February 1995 the defendant was appointed provisional liquidator
of Glenwood. On 1 March 1995 the National Australia
Bank called on the Westpac
Bank guarantee for $350,000, which Westpac duly paid and then debited to the
plaintiff's account. The
plaintiff claimed that that amount was therefore owed
to it by Glenwood under the indemnity in clause 5(a) of the Funding Agreement
(see paragraph (d)(i) above).

  

   12. On 23 March 1995 the defendant was appointed official liquidator. The
plaintiff asserted
that the appointment of a liquidator was an event of
default under clause 11.2(e)(ii) of the Fixed and Floating Charge agreement,
which caused it, under clause 2.7.1, insofar as it was originally floating, to
crystallise and become fixed. In a letter from the
defendant's solicitors, the
defendant advised the plaintiff that he intended to treat the fixed and
floating charge as void. The
enforceability of this charge over the assets of
Glenwood is the subject of these proceedings.

  

   THE LEGISLATION

  

   13.
The issue raised by this case arises under section 588FJ(1)-(4) of the
Corporations Law:

  

  

   (1) This section applies if:

  

   (a) a company is being wound up in insolvency; and

  

   (b) the company created a floating charge on property of the company
at a
particular time that is at or after the commencement of this Part and:

  

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

  

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

  

   (2) The charge is void, as against
the company's liquidator, except so far
as it secures:

  

   (a) an advance paid to the company, or at its direction, at or after
that
time and as consideration for the charge; or

  

   (b) interest on such an advance; or

  

   (c) the amount of a liability
under a guarantee or other obligation
undertaken at or after that time on behalf of, or for the benefit of, the
company; or

  

   (d) an amount payable for property or services applied to the company at or
after that time; or

  

   (e) interest on an amount
so payable.

  

   (3) Subsection (2) does not apply if it is proved that the company was
solvent immediately after that time.

  

   (4) Paragraphs (2)(a) and (b) do not apply in relation to an advance so far
as it was applied to discharge, directly or indirectly,
an unsecured debt,
whether contingent or otherwise, that the company owed to:

  

   (a) the chargee; or

  

   (b) if the chargee
was a body corporate -- a related entity of the body.

   14. Section 588FJ is thus only concerned with floating charges. Insofar
as
the charge was originally fixed, it is valid and secures the $350,000.
Although the matter was not discussed at the hearing or
in submissions, I
presume that the originally floating charge covers Glenwood's only or major
realisable assets and that the fixed
charge, which appeared to attach to most
assets, is otherwise not of any or any substantial utility to the plaintiff at
this time.

  

   15. The plaintiff accepted that the conditions in subsection (1) are
satisfied. Consequently, the floating charge is void
as against the company's
liquidator unless either:

  

  

   (a) it comes within an exception in subsection (2), or

  

   (b)
subsection (3) applies, that is, it is proved that Glenwood was solvent
immediately after the charge was created.

   16. However,
the plaintiff submitted that the charge is not void as against
the liquidator because it comes within the exception in subsection
(2)(c). An
earlier additional submission that the case fell within subsection (2)(a) was
not pressed.

  

   EXCEPTION IN 588FJ
(2): "FOR THE BENEFIT OF THE COMPANY"

  

   17. Section 588FJ was introduced into the Corporations Law by the Corporate
Law Reform Act 1992 (Cth) in response to a Report of the Australian Law Reform
Commission (Report No. 45 "General Insolvency Inquiry") as part of a new
regime under which antecedent transactions could be challenged. The initial
recommendation of the Law Reform Commission (General
Insolvency Inquiry
Discussion Paper No. 32, August 1987 at 81) was for an exception covering:

  

  

   payment of the amount of
a liability under a guarantee or other obligation
undertaken by the company at the time of or after the creation of the charge.

   However, following submissions that there might be no actual material
benefit received by the company for the provision of such
a guarantee, the
proposed section was amended to its present form.

  

   18. The object of earlier statutory provisions similar
to section 588FJ in
both Australian and English legislation was to prevent insolvent companies
from creating floating charges to
secure past debts or debts for which they
did not receive any material benefit. A provision in similar terms to section
588FJ was
first introduced in England in the Companies (Consolidation) Act
1908 (UK). In Re Orleans Motor Company Limited [1911] 2 Ch 41 at
45, Parker J
stated that the English section was:

  

  

   designed apparently to prevent companies on their last legs from creating
floating charges to secure past debts or for moneys which do not go to swell
their assets and become available for creditors.

 
 19. The purpose of the provision is to separate bona fide honest
transactions carried out in the normal course of business from
charges and
guarantees designed to withdraw funds from the control of the liquidator in
the winding up and provide money or security
for the benefit of certain
creditors or shareholders: Re Yeovil Glove Co Ltd [1965] Ch 148 (CA) per
Willmer LJ at 184 and Re Destone
Fabrics Limited [1941] Ch 319 at 324. In
Australia, a Full Court of the Supreme Court of Western Australia in the
unreported decision
of A.E. Ledge the Official Liquidator of Wright's Hardware
Pty Ltd (in liquidation) -v- Euro-National Investment Corporation Ltd
(29 May
1989) considered section 452 of the Companies Code, the predecessor of section
588FJ. Brinsden J stated:

  

  

   Each
case is to be judged on its own facts....Money paid to a company will
not be deemed for the benefit of the company if it is insufficient
to prop up
or help to prop up the apparently insolvent company and the real purpose is to
benefit certain creditors.

   20. That
a company in fact gained no benefit from a charge, in that it was
unable to obtain or maintain solvency despite the injection of
funds that the
charge secured, may indicate that the financial situation of the company was
such that the purpose of the charge could
not realistically have been for the
benefit of the company. However, any such conclusion must be tempered by the
consideration that
unforeseen factors outside the control of the company may
have forced the company into liquidation so that without the influence
of
those factors the company may have been able to benefit from the charge.
Glenwood's relevant obligation was the indemnity in clause
5(a) of the Funding
Agreement. The burden is on the plaintiff to establish that that obligation
was undertaken for the benefit of
the company.

  

   21. Daily bank reconciliations annexed to the defendant's affidavit of 22
August 1995 detailed creditors of
the company before and after the injection
of the money, and statements of the National Australia Bank account listed the
deposits
and withdrawals made before and after the deposit. The bank
statements showed that on 11 November 1994 the deposit gave the account
a
balance of $353,830.37. From that day on, cheques were presented depleting
this balance and by 29 November 1994 the account was
again in debit. During
that period only $24,200.10 was credited to the account. It appears that
following the deposit of the $350,000,
cheques were issued to most of the
creditors from May, June, July, and August, for all seven day accounts, and
for the amounts owed
to subcontractors. When the $350,000 ran out, there was
still about $180,000 owing to creditors of more than thirty days and at least
$26,000 in outstanding tax.

  

   22. Yet the plaintiff submitted that in permitting Glenwood to borrow
$350,000 for eight months,
the charge benefited Glenwood because it enabled it
to pay virtually all its trade creditors from June to September 1994. The
plaintiff
said that trade creditors whose debts were several months old were
paid with longer-term funds and that Glenwood was thus able to
continue to
obtain credit from those suppliers. The plaintiff drew an analogy between the
charge and overdraft facilities, which
are commonly and beneficially used for
such a purpose. The defendant accepted this possible benefit.

  

   23. In support of this
conclusion the plaintiff submitted that at the time
the charge was granted Glenwood's prospects were good and they pointed to a
number
of supporting factors:

  

  

   23.1 Glenwood's directors' written funding proposal to the plaintiff in
October 1994 recorded
a good response to the opening of the plaintiff's first
exhibition home in mid-September 1994. The document noted that in the four
weeks following the opening of the exhibition home, a total of 27 enquiries
had been received to the value of $6,320,000. Five of
the inquiries had
progressed to the stage where a quote was being prepared, ten would lead to
the preparation of a quote when the
design, sketch and plans were completed,
ten encompassed sale inquiries where the clients had seen the salesman twice,
and there
were two quotes awaiting a decision. As against that situation,
there is often a considerable distance between sales inquiries and
sales.
Quotes also do not guarantee sales.

  

   23.2 Glenwood's management accounts as at 31 October 1994 showed a healthy
position,
that is, they showed net assets totalling $1,639,597, work done to
date on projects not yet completed to the value of $5,720,147,
and working
capital valued at $3,511,195. However, the strength of these figures is
brought into question by the very different financial
situation shown in the
Report as to Affairs by Stewart, Glenwood's finance director, as at 7 February
1995, only 3 months later.
This report showed the value of work in progress at
only $63,500, and recorded a total deficiency of $1,365,741. The plaintiff was
unable to explain how such different figures of only three months apart could
be reconciled. In the absence of any supporting evidence,
I am sceptical about
giving any weight to the figures in the October management accounts.

  

   23.3 Furthermore, the minutes of
the directors' meeting on 2 November 1994,
at which the loan to Pino, Stewart and Collins was approved, recorded that the
plaintiff
placed no value on Glenwood's work in progress for the purpose of
providing security. The National Australia Bank statement for Glenwood's
account issued on 1 November 1994 recorded an overdraft of $92,451.98 on 31
October 1994 whereas the Management Accounts recorded
an overdraft of
$226,007, lending further doubt to the correctness of the figures. Finally, it
is difficult to see how Glenwood's
goodwill could have been set at $719,852
when the company had a history of making losses.

  

   23.4 Eight cash flow projections
were tendered in evidence covering the
periods between October 1994 and January 1995, October 1994 and March 1995,
and October 1994
and September 1995. The plaintiff submitted that these
projections predicted that Glenwood would have a healthy cash surplus by the
end of January 1995 although an analysis of one of the cash flows at the
directors' meeting on 2 November 1994 indicated a need for
an injection of
$400,000 for six months.

  

   23.5 However, the cash flow statements appear to assume that from $450,000
to $1
million of loan or equity would be injected into the company to achieve
the predicted balance. No attempt was made to explain which
cash flow was
considered at the directors' meeting on 2 November 1994, how the conclusion
that $400,000 was needed was reached, or
on what different assumptions the
eight different sets of figures were based. Calling Stewart to answer these
and similar questions
would have been useful but he did not give evidence.

  

   23.6 A letter from Linda and Brian McElroy dated 3 November 1994 confirming
their intention to accept Glenwood's invitation to become an equity partner in
the company, stated that they were prepared to invest
up to $500,000 in the
company. The letter recorded that they anticipated the funds would become
available during the week commencing
11 November 1994, the same week that the
$350,000 was advanced to Glenwood. However, by 14 November these funds had not
been advanced.

  

   23.7 Two Glenwood directors, Collins and Stewart, were prepared to mortgage
their homes in favour of the plaintiff as security,
and did so. The inference
sought by the plaintiff was that the two directors believed that the company
could trade out of its difficulties.
Indeed the defendant, who met with the
directors after his appointment as provisional liquidator, conceded that
"perhaps Mr Stewart
thought the company could trade out".

  

   23.8 The business run by Glenwood had an excellent reputation in the
industry and an
established trading history. It had apparently won numerous
housing awards for the excellence and quality of its housing plans and
designs. However, none of this supposed goodwill or excellence in the field
had translated into profits.

   24. The financial statements
prepared by Price Waterhouse for old Glenwood
as at 30 June 1993 recorded accumulated losses of $2,307,790, and trading
losses for
that financial year of $298,099. The trading losses for the year
ended 30 June 1992 were $609,428. The minutes of the company for
previous
periods indicated that since 1987 old Glenwood had sustained consistent net
losses of between $102,650 (1986/87) and $601,472
(1989/90) each financial
year. To cover these losses, it was the practice of the plaintiff, the parent
company, to provide old Glenwood
with financial support, usually by way of
loan funds. In early 1994 between $400,000 and $500,000 was lent by the
plaintiff to old
Glenwood to assist it to meet its liabilities, and from the
contents of a personal guarantee dated 25 August 1989 and identified
as signed
by Raymond Richards, it appeared that the plaintiff's directors had also given
guarantees to support old Glenwood's liabilities.

  

   25. The Funding Agreement recorded that the charge and the loan it secured
were for the purpose of assisting new Glenwood
to meet its obligations under
the Sale Agreement. So far as I can see, the only relevant obligation of new
Glenwood outstanding as
at 10 November 1994 was its obligation under clause
4.1.1 to assume responsibility for and discharge debts or liabilities of old
Glenwood. The defendant thus submitted that the charge was undertaken not for
the benefit of new Glenwood but for the benefit of
its three directors. They
had invested in excess of $500,000 in Glenwood, and the defendant submitted
that it was in their interests
to obtain the advance to the company,
presumably to secure time to find another investor with the hope of saving
their own investments
which almost certainly would otherwise be lost.

  

   NOTICES OF CHANGE OF OWNERSHIP

  

   26. The defendant submitted that because
creditors were not advised, and
were probably not aware, of the change in the ownership of the business
carried on under the Glenwood
Cottages name until the letter advising the
change of ownership was sent to creditors on 31 October 1994, they continued
to supply
goods under the mistaken belief that the business remained under the
control of old Glenwood.

  

   27. This belief was perpetuated
by the presence of Stewart, Collins and
Pino as directors of the new company as they had been of the old. Both before
and after the
1 May 1994, the date on which the Sale Agreement is said to have
come into effect, Pino, Stewart and Collins were held out as the
people
authorised to make agreements on behalf of the business. In addition, new
Glenwood continued to use the letterheads and other
documents of old Glenwood
and issued receipts in the name of old Glenwood with its ACN number.

  

   28. The defendant relied on
the hearsay exception in section 64(2)(a) of
the Evidence Act 1995 to submit statements by creditors of the business as to
their notification that the business had changed owners. The defendant had
circulated a letter to creditors of new Glenwood asking among other things
when and if they had been notified of the change of ownership.
In the
twenty-four replies submitted by the defendant, all indicated that they
received notification by the 31 October letter or
were notified at a later
date. This situation, it was said, gave rise to an estoppel in their favour
against old Glenwood. Because
of the other conclusions I have reached, it is
not necessary to rule on this contention.

  

   29. It was a requirement of the
Sale Agreement that each supplier receives
notice as soon as possible after the date of the agreement of the change of
ownership,
and it can be concluded that the notice was the letter of 31
October 1994. The person who would have known if such a notice had been
sent
out earlier was identified by De Plater as Stewart but, as earlier noted, he
was not called to give evidence. The Court is thus
entitled to infer that had
Stewart given evidence as to when the change of ownership was communicated to
the creditors, this evidence
would not have assisted the plaintiff's case. De
Plater, who instructed Phillips Fox as to the drafting of the Sale Agreement,
admitted
in testimony that he was aware at the time that if the creditors were
not notified of a change of ownership, they could probably
make claims against
old Glenwood. The defendant thus submitted that the intended purpose of clause
4.3 and the resulting letter was
to protect old Glenwood from claims made by
suppliers or creditors of the business who were not notified of any change in
ownership.

  

   30. A copy of new Glenwood's trial balance as at 31 October 1994 revealed
that approximately $617,533 was owed to creditors
for bills that were from 30
to over 90 days overdue and a further $205,271 for current debts. It is
probable that, until receipt
of the letter of 31 October 1994, most if not all
of these creditors were under the mistaken belief that old Glenwood remained
the
owner of the business and thus could conceivably make claims against it, a
fact that was known to the secretary and probably the
directors of new
Glenwood.

  

   31. Thus, when new Glenwood used the loan money to discharge the debts to
the business' creditors,
it was discharging the liabilities of old Glenwood in
satisfaction of new Glenwood's obligations under the Sale Agreement. In
substance,
the defendant submitted, loan moneys from a holding company were
used to discharge unsecured debts owed by a subsidiary, whilst obtaining
a
charge from the subsidiary to protect itself in the event that the loan moneys
were not repaid by the borrowers who were the directors
and shareholders.

  

   INSOLVENCY: 588FJ (3)

  

   32. By subsection (3) of section 588FJ, a floating charge is not void if
it
is proved that the company was solvent immediately after the charge was
created. Section 588E(3) states:

  

  

   If:

  

   (a) the company is being wound up; and

  

   (b) it is proved, or because of subsection (4) or (8) it must be presumed,
that
the company was insolvent at a particular time during the 12 months
ending on the relation-back day;

  

   it must be presumed
that the company was insolvent throughout the period
beginning at that time and ending on that day.

   33. By section 9 of the Corporations Law "relation-back day",

  

  

   in relation to a winding up of a company or Part 5.7 body, means:

  

   (a) if, because of Division 1A of part 5.6, the winding up is taken to have
begun on the day when an order that the company or body be wound up was made -
the day on which
the application for the order was filed; or

  

   (b) otherwise - the day on which the winding up is taken because of
Division
1A of Part 5.6 to have begun;

   The defendant was appointed liquidator of Glenwood on 23 March 1995 in
proceedings commenced in the Federal Court
on 7 February 1995 when he had been
appointed provisional liquidator. By section 513A(e), which is in Division 1A
of Part 5.6, the winding up of Glenwood is taken to have begun on the day when
the order that the company be wound up was made, thus bringing
it within
subsection (a) of the definition of "relation-back day". The relation-back day
is thus the date on which the application
for the winding up order was filed,
being 7 February 1995. If it is established that Glenwood was insolvent at a
particular time
during the 12 months ending on that day, the presumed
insolvency under section 588E(3) only begins at that time and ends on the
relation-back
day. Contrary to the submission of the defendant, the fact that
Glenwood was insolvent on 7 February 1995 does not give rise to a
presumption
that it was insolvent throughout the previous twelve month period,
particularly on 10 November 1994.

  

   34. In my
opinion, a presumption of insolvency against Glenwood does not
arise under section 588E(3). However, by section 588FJ(3) the plaintiff
bears
the onus of proving that Glenwood was solvent immediately after the time at
which the floating charge was created.

  

  
SOLVENCY

  

   35. Solvency is defined in section 95A of the Corporations Law. Pursuant to
subsection (1):

  

  

   A [company]
is solvent if, and only if, the [company] is able to pay all
the [company's] debts, as and when they become due and payable.

  
36. As was observed by Justice Lindgren in Melbase Corporation Pty Ltd v
Segenhoe Ltd [1995] FCA 1225;  (1995) 17 ACSR 187 at 198, section 95A(1) adopts a "cash flow
test" rather than a "balance sheet test" of solvency. Thus, the fact
that a
company's liabilities exceed its assets does not alone establish insolvency.

  

   37. In Sandell v Porter [1966] HCA 28;  (1966) 115 CLR 666 at 670, Barwick CJ (with whom
McTiernan and Windeyer JJ agreed) explained the correct approach to be adopted
when applying the cast flow test:

  

  

   The conclusion of insolvency ought to be clear from a consideration of the
debtor's
financial position in its entirety and generally speaking ought not
to be drawn simply from evidence of a temporary lack of liquidity.
It is the
debtor's inability, utilizing such cash resources as he has or can command
through the use of his assets, to meet his debts
as they fall due which
indicates insolvency.

   38. In Metropolitan Fire Systems Pty Ltd v Miller & Ewins [1997] 23
ACSR 699
at 702, in line with preceding authorities, I expressed the view that
in determining the solvency of a company it is necessary to
consider the whole
of the company's resources, including its credit resources.

  

   39. The immediate or near future cannot be
ignored either, because the
phrase "debts as and when they become due and payable" refers not only to
debts due at the date on which
solvency is being assessed but also to debts
that will become due and payable at a predicted time: Bank of Australasia v
Hall [1907] HCA 78;  (1907) 4 CLR 1514 per Griffith CJ at 1527-1528, in reference to a similar
phrase in the Insolvency Act 1874 (Qld). Certain predicted
events about which
there is little uncertainty, such as the planned sale of a major asset or the
falling due of a substantial loan,
may influence whether the company is able
to pay its debts as they become due and payable: Leslie & Anor Holdings v
Howship Holdings
Pty Ltd (1997) 15 ACLC 459 at 466.

  

   40. It is a question of fact as to whether a company is able to pay its
debts as they
fall due, to be decided as a matter of commercial reality in the
light of all the circumstances: Taylor v Australian and New Zealand
Banking
Group Ltd (1988) 13 ACLR 780 at 784, per McGarvie J. In essence the issue of a
company's solvency should be viewed as it
would by someone operating in a
practical business environment. The plaintiff also contended that in
determining what debts are due
and payable, practical default in payment of
due debts is the relevant issue, not formal or technical default.

  

   41. Moreover,
the Court should consider what is reasonable to expect of the
company in the circumstances in which it trades and its usual trading
patterns: Re New World Alliance Pty Limited (Rec & Mgr apptd); Sycotex Pty
Ltd v Baseler (No.2) (1994) 51 FCR 425, per Justice
Gummow at 434, including
arrangements or courses of dealings between a company and its creditors that
have allowed for an extension
of time for the payment of debts: 3M Australia
Pty Ltd v Kemish (1986) 10 ACLR 371 at 378; Calzaturficio Zenith Pty Ltd (In
Liquidation)
v NSW Leather & Trading Co. Pty Ltd. [1970] VR 605 at 608-9.
Each of these cases concerned a future expectation about whether
a company
will be able to pay all of its debts as and when they became due and payable.
The present case requires an objective finding,
at the relevant time already
past, of the ability of the company to pay its debts as and when they became
due and payable.

  


  42. I respectfully agree with Justice Lindgren's view, first expressed in
Hall v Press Plumbing, a Division of Aust-Amec Pty Ltd
(unreported 20
September 1994), and again in Melbase, that the notion of "become due" is a
legal one, and that a debt is not rendered
"not yet due" by reason only that
the creditor has to date forborne from actively seeking to enforce the right
to be paid: Melbase
at 199, in which proceedings on the issue of the different
contexts in which insolvency has to be determined, his Honour went on
to
observe at 199-200:

  

  

   There are several reasons why a debt may not have "become due and
payable"....[O]n the facts of
individual debtor-creditor relationships, the
ordinary operation of legal and equitable principles may produce the result
that a
debt does not become "due and payable" (in the sense of entitling the
creditor to sue the debtor to judgment immediately and without
any intervening
act or event) until later than the original contractual terms would allow.

  

   Statutory provisions of the kind
with which this case is concerned require
an assessment to be made as to when all of a person's or company's debts
"become due and
payable", and they require that this assessment be made
collaterally, rather than in inter partes litigation between debtor and
creditor.
Where there is evidence of the existence and amounts of those debts
(this evidence will often be in the form of the debtor's business
records or
admissions to be found in reports and financial statements which it has
issued), it will ordinarily be appropriate to
infer that they have already
"become due and payable" unless there is evidence suggesting otherwise. But
where some such evidence
exists, the "collateral" nature of the assessment
called for as contemplated by the legislation may make it appropriate to be
liberal
in the drawing of inferences in support of a conclusion that
principles and doctrines of the kind [referred to in cases such as 3M
Australia] have been activated.

   43. It follows that inferences that creditors have extended the time for a
company to pay its
debts can only be drawn if there is some evidence that it
is likely or normal for creditors to grant such indulgences. Such an inference
will not arise merely because creditors have not pressed the company for
payment. This view is in line with the accepted approach
of considering the
debtor's position in the context of commercial realities and is not at odds
with cases that have found sufficient
evidence to infer that creditors had
extended the due date for payment beyond the invoiced date. I respectfully
agree with Justice
Gummow's statement in Sycotex that "any conflict between
the authorities may be more illusory than real and (more) factual than legal"
(at 434).

  

   44. To validate the charge, the plaintiff is required to prove on the
balance of probabilities that immediately
after the creation of the charge on
10 November 1994, Glenwood was solvent. The defendant accepted that the
$350,000 received on
11 November 1994, despite the time lag of 24 hours, may
be taken into account in determining its solvency.

  

   CONCLUSIONS


 

   45. The words "on behalf of" in section 588FJ(2)(c) must be read to mean
"in aid of" or "in the interest of" and as requiring
more than just that the
guarantee was undertaken by the company. When considering whether the
liability was undertaken on behalf
of or for the benefit of the company, it is
necessary to look at the substance, not merely the form, of the transactions,
and to
identify the purpose of the charge: M Hoffman Nominees Pty Ltd v Cosmas
Fish Processors Pty Ltd (1982) 1 ACLC 528 at 534; Pennywise
Smart Shopping
Australia Pty Ltd v Somner & Co Pty Ltd (1993) 11 ACLC 31 at 39-40.

  

   46. The exception in section 588FJ(2)(a)
requires that the charge in this
case secure the repayment to the plaintiff of an advance to Glenwood as
consideration for the charge.
In my opinion this requirement has not been
satisfied for four principal reasons:

  

  

   (1) No advance was made by the plaintiff
to Glenwood

  

   (2) The consideration for the charge was not the advance but the procuring
by the plaintiff of the Westpac guarantee
in favour of the National Australia
Bank

  

   (3) The charge secured the liability of Glenwood under its indemnity, not
the repayment
to the plaintiff of the advance

  

   (4) The Westpac guarantee enabled money to be advanced not to Glenwood but
to Collins, Stewart
& Pino, who then became the only beneficiaries.

   47. Even if Glenwood repaid the $350,000 to the three directors, but for
any reason the directors did not pay it back to the National Australia Bank,
that Bank could call on the Westpac guarantee thus triggering
the liability of
Glenwood under the indemnity. Far from benefiting Glenwood, Glenwood was
therefore potentially liable to pay the
moneys twice.

  

   48. New Glenwood needed money to enable it to meet its obligations under
the Sale Agreement, the only relevant
one for present purposes being to assume
responsibility for the discharge of the debts and liabilities of old Glenwood.
As the $350,000
was used to discharge or reduce those liabilities, the loan to
new Glenwood replaced an unsecured liability to old Glenwood with
a secured
liability to the plaintiff under the indemnity. If the plaintiff had advanced
$350,000 directly to new Glenwood and new
Glenwood had then used it to pay old
Glenwood's debts, the charge would have been invalidated by section 588FJ(4).
There is no difference
in principle between that situation and what actually
happened here.

  

   49. As the defendant submitted, the directors may have
believed that if the
National Australia Bank could be persuaded to advance funds to Glenwood so as
to keep it alive, there would
be time to find another investor to help save
the significant funds they had previously injected. It is not necessary to
decide this
question because the evidence did not establish that the $350,000
ensured that suppliers who were creditors would continue to supply
the company
or that it could continue to trade or that it was in its interests to try to
do so. The evidence did not establish that
the loan would even enable the
company to earn income, let alone to make or head in the direction of making a
profit. Indeed it ceased
to trade three weeks after receiving the money
because the $350,000 was not sufficient to enable new Glenwood to pay
outstanding
creditors and to have working capital. According to the evidence,
at least $500,000 would have been required for these purposes.

  

   50. In my view Glenwood was insolvent at the time the charge was created.
The business it acquired had a long history of
losses and there was no
evidence that actual sales were anywhere in prospect. The strong likelihood,
as actually occurred, was that
these losses would continue and that the unpaid
or partially paid suppliers would eventually stop supplying. On this evidence,
the
company's liquidation was inevitable as soon as the plaintiff ceased to
provide the support needed to pay Glenwood's trade creditors.
As with the
previous support, the loan transactions involved here merely postponed the day
of reckoning.

  

   51. In my opinion,
the charge over the assets of new Glenwood in favour of
the plaintiff dated 10 November 1994 is void as against the liquidator. The
summons must therefore be dismissed with costs.