The meaning of insolvency in Carna Group Pty Ltd v The Griffin Coal Mining Company (No 6)

Carna Group Pty Ltd v The Griffin Coal Mining Company (No 6) [2021] FCA 1214

In Carna Group Pty Ltd v The Griffin Coal Mining Company (No 6) [2021] FCA 1214, McKerracher J considered the meaning of “insolvent” within the context of a commercial contract and relevantly found that:

1. the question was whether Griffin had been unable to pay its debts when they fell due, which, in the context of this particular contract, was a different inquiry to insolvency under the Corporations Act 2001 (Cth); and
2. Griffin had been unable to pay its debts when they fell due and was insolvent for the purposes of the contract.

Background

In mid-March 2014 (following entry into an earlier contract in January 2014 which was substituted), Carna Group Pty Ltd and The Griffin Coal Mining Company entered into a contract pursuant to which Carna agreed to provide mining services to Griffin and Griffin agreed to pay Carna for those services. 

Throughout the contract, Griffin was under a chronic disability with respect to its capacity to pay its debts ([225]) as it was entirely dependent on:

1. funding from its parent company, over which it had absolutely no control and which consistently failed to arrive on time: [58], [228]; and
2. an invoice factoring facility it had set up in order to pay its creditors, which required repayment with a substantial interest rate: [68]-[69], [152]-[153].

Griffin was late in paying at least some portion of almost every invoice and owed Carna between $5 million and $11 million for at least May to September 2014: [156].  On 3 December 2014, Carna issued a notice of termination due to Griffin’s “Insolvency Default”: [147].  On this basis, Carna claimed, among other issues in dispute in the proceeding, that it was entitled to a payment for early termination: [23].  Griffin disputed that it was insolvent pursuant to the contract: [30].

Construction of contract

The contract relevantly provided that “Insolvent”, for the purposes of an “Insolvency Default” included that a party:

1. is (or states that it is) insolvent (as defined in the Corporations Act [2001 (Cth)]);

…

(g)   is otherwise unable to pay its debts when they fall due: [21].

Carna contended that while similar legal tests may be utilised for both subparagraphs (a) and (g), it was not necessary to satisfy subparagraph (a) in order to fall within subparagraph (g).  All that was required is a factual finding that Griffin was unable to pay its debts when they fell due at the relevant point in time: [33].  Griffin argued that subparagraph (g) should not be read more broadly than subparagraph (a), and it would still have work to do as it immortalised the current conception of insolvency pursuant to the Act in ordinary words: [35].  The Court found that Carna’s construction was to be preferred as there was no reason to confine and read down subparagraph (g) by reference to subparagraph (a): [37]. 

Was Griffin able to pay its debts when they fell due?

The Court found that simply being late with one or two payments would not fall within subparagraph (g) ([221]), however his Honour rejected Griffin’s argument that, because the contract provided for another mechanism to deal with late payments, late payments could never give rise to a right to terminate for an Insolvency Default: [227]. 

The fundamental question for determination was whether Griffin’s inability to meet the payments on time was temporary or whether this inability had sufficient consistency and duration to fall within the definition of insolvent in subparagraph (g): [179].    

Carna relied upon the indicia in Australian Securities and Investments Commission’s Information Sheet 42, such as ongoing losses, poor cash flow, the existence of demands, creditors being paid outside usual terms and overdue taxes as supporting a finding that Griffin was insolvent within the meaning of subparagraph (g): [181]-[220]. 

Griffin made the following arguments against this, which were rejected by the Court.

1. Creditors were paid eventually: Griffin argued that all creditors were ultimately paid, but the Court found that there was insufficient evidence and, in any event, that was no answer as to whether creditors were paid when debts fell due, or even a reasonable period thereafter: [197].  The Court found that it was fundamental that debts are able to be paid when due and that, at least in respect of some creditors, such as the Australian Tax Office which froze Griffin’s bank accounts twice in 2014, the reason why Griffin did not pay on time was because it was unable to do so: [216].
2. Parent company support: While a company can rely on financial support even from a source that cannot be compelled by legal arrangement and which is not absolutely certain, there does need to be a degree of assuredness: [168]-[169].  This was not present in this case and the support provided did not allow Griffin to pay its debts when they fell due: [228], [232].
3. Temporary liquidity issues: The Court accepted that temporary liquidity problems are neither uncommon nor conclusive indicia of whether a company can pay its debts when they fall due: [186].  However, the Court found that Griffin’s liquidity problems were far from temporary and its continued reliance on parent company support despite frequent disappointments was optimistic at best: [186].
4. Continued existence of Griffin: Griffin contended that, given that it continued to trade at the time of the hearing, some seven years later, its troubles at that time ought be characterised as a temporary liquidity problem: [150].  However, the Court found that the mere fact that some companies do trade out of trouble does not mean that this is either the norm or acceptable and the basis underpinning insolvent trading prohibitions is to prevent creditors being put at risk by insolvent companies continuing to trade in the hope of somehow turning the position around: [238].

The Court concluded that Griffin was insolvent at the relevant time, but made clear that this finding was in relation to the contractual term, and was not a finding of insolvency under the Act: [234], [239].