Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd

Summary of relevant evidence

1. There was little dispute between the parties about the substance of the evidence. The contest lay in the significance or characterisation of the matters and events proved by the evidence in the determination of the preference issue and the insolvency issue. I am grateful to counsel for both parties for the efficiency and candour with which they identified the matters not in dispute in their written and oral submissions. Much of the following summary draws heavily on those submissions.
2. As I have already mentioned, the Company was registered on 25 August 2017.
3. Mr Ioane Michael is a labourer working in the steel fixing industry. Since 2016, he has worked on building sites where the builder was MJCR Group Pty Ltd (MJCR). His boss or supervisor on those sites was a Mr Martin Gallagher.
4. In about August 2017, Mr Gallagher approached Mr Michael and paid him $20,000 in return for Mr Michael agreeing for Mr Gallagher to "put his name on" one of Mr Gallagher's companies. Mr Michael signed the documents presented to him by Mr Gallagher. That is how Mr Michael came to be the Company's sole shareholder and director. Mr Michael also attended a branch of the Commonwealth Bank with Mr Gallagher where he signed documents to open a bank account for the Company at Mr Gallagher's request.
5. After signing those documents, Mr Michael did not take any steps in relation to the management of the Company and did not receive bank statements for the Company's bank account or other documents.
6. In about 2018, Mr Michael received a telephone call from a representative of the Australian Taxation Office (the ATO) who asked about the Company and told him that about $2 million was owing to the ATO. Mr Michael then spoke to Mr Gallagher, who told him that he (Mr Gallagher) would "take care of it".
7. It is common ground between the plaintiffs and defendant that Mr Gallagher was the controlling mind of the Company.
8. The Company operated a labour hire business in the construction and steel fixing industry. MJCR, which carried on a construction business in the Sydney metropolitan area, was the Company's sole client. The Liquidator understands, based on his investigations, that the director of MJCR is related to Mr Gallagher and apprehends that Mr Gallagher may influence the management of MJCR.
9. During the period from 28 September 2017 to 26 November 2018, the Company issued invoices to MJCR for a total amount of approximately $11.75 million (including GST). The charges in the invoices are described as being for labour hire services plus a relatively small administration fee. The invoices were admitted into evidence subject to an order under s 136 of the Evidence Act 1995 (NSW) that they are not evidence of the truth of the amounts stated in them as owing to the Company by MJCR. However, the invoices are evidence of the fact that they were issued to MJCR in the amounts stated. The plaintiffs relied on the invoices as evidence of the existence of a creditor-debtor relationship between the Company and MJCR. The defendant did not dispute that such a relationship existed.
10. The Company operated a single bank account, being the Commonwealth Bank account that Mr Michael opened under Mr Gallagher's direction.
11. The Company's only assets revealed by the Liquidator's investigations are the funds standing to the credit of that bank account and receivables owed to the Company by MJCR, subject to the effect of a deed of settlement and release between the Company and MJCR. It will be necessary to return to the subject of these receivables and the deed between the Company and MJCR later in these reasons.
12. The Company did not initially lodge its business activity statements (BAS) on time and the Commissioner established a running balance account (RBA) for the Company pursuant to s 8AAZC of the Taxation Administration Act 1953 (Cth) (the 1953 Act).
13. Section 8AAZD of the 1953 Act provides that the Commissioner may allocate a primary tax debt to an RBA. If there is an RBA deficit debt at the end of a day, then general interest charge is payable by the tax debtor on that RBA deficit for that day and the balance of the RBA is altered in the Commissioner's favour by the amount of that general interest charge. [1]
14. Section 8AAZA of the 1953 Act defines "RBA deficit debt" as follows: "RBA deficit debt, in relation to an RBA of an entity, means a balance in favour of the Commissioner, based on: (a) primary tax debts that have been allocated to the RBA and that are currently payable; and (b) payments made in respect of current or anticipated primary tax debts of the entity, and credits to which the entity is entitled under a taxation law, that have been allocated to the RBA."
15. Section 8AAZH of the 1953 Act provides that an RBA deficit debt on an RBA at the end of a day is a debt due and payable by the tax debtor to the Commonwealth at the end of that day.
16. The first entry in the RBA established for the Company is dated 4 April 2018 and records an estimated tax debt of $70,876 as at 27 November 2017. There was an RBA deficit amount recorded on the Company's RBA at all times after 4 April 2018. In other words, the Company was continually in debt to the defendant for income tax withholding, GST withholding and general interest charges. The RBA shows that the amount of the deficit was adjusted frequently in accordance with payments made by the Company, general interest charges applied, amounts recovered by the Commissioner pursuant to a garnishee notice issued to the Company's bank, returns lodged by the Company estimating its taxation liabilities and the Commissioner's own assessment of the amount of tax payable by the Company.
17. The first of the tax payments within the relation back period was made on 30 July 2018. This first payment, together with other payments made by the Company up to 12 October 2018, were made on an ad hoc basis to reduce the Company's tax liabilities.
18. The tax payments during the period from 12 October 2018 until 7 December 2018 were made pursuant to an interim payment plan issued by the defendant to the Company on or about 12 October 2018. That plan required the Company to make weekly payments of $30,000.
19. With one exception, the Company made all of the payments required by the interim payment plan on time. However, it is common ground that the plan did not defer the date on which the Company's tax debts were due and payable. Pursuant to s 8AAZH of the 1953 Act, the debt owed by the Company to the defendant on any given day is the amount recorded in the RBA as at that date.
20. The payments are recorded in the RBA and also in the Company's bank account statements. A review of those statements reveals that MJCR paid money into the Company's account in order to put the Company in funds to make each of the payments to the defendant.
21. The last of the tax payments was made on 7 December 2018.
22. During the whole of the period from 30 July 2018 to 7 December 2018 in which the tax payments were made: 1. the credit balance of the Company's bank account fluctuated never exceeded $200,000 and seldom rose above $35,000; and 2. the balance standing to the credit of the Commissioner of Taxation in the Company's RBA varied between $2,193,951.62 and $1,507,272.09.
23. On 12 December 2018, the Company was wound up in insolvency and the Liquidator was appointed. The winding up order was made on the petition of Alexander James Advisory Pty Ltd, which was owed the sum of $16,500 for consulting fees under an invoice that was due and payable on 18 July 2018 (the petitioning creditor).
24. On the same date, the Company entered into a document entitled "Deed of Release" with MJCR (the Deed). The recitals to the Deed recorded: "A. On or around October 2017 MJCR and [the Company] entered into an agreement for the provision by [the Company] to MJCR of labour hire services. B. [The Company] alleges that MJCR owes it the Amount Owed by MJCR for labour hire services. C. MJCR denies that it owes [the Company] any money. D. [The Company] and MJCR are desirous of settling any Claims [the Company] may have against MJCR, in on [sic] a final basis pursuant to the terms set out in this Deed."
25. The Deed defines the "Amount Owed" referred to in Recital B as $4,635,020.14.
26. Clause 4(a) of the Deed requires MJCR to pay the Company the sum of $95,000 within six months after the date of the Deed. Clause 4(b) provides that, upon receipt of that payment, the Company agrees to release and indemnify MJCR against all present and future claims in connection with the matters recited.
27. In mid-December, the Liquidator: 1. notified ASIC of his appointment; 2. wrote to Australian financial institutions requesting details of any bank accounts held by the Company, which revealed the existence of the Commonwealth Bank account to which I have already referred above; 3. conducted searches of the Personal Property Securities Register, which revealed that no creditors had lodged security interests on the Register against the Company; and 4. caused one of his staff to telephone Wentworth Williams, an accounting firm, to request books and records of the Company.
28. On 14 January 2019, the Liquidator issued his first report to creditors of the Company, informing them of his appointment. The report stated that the Liquidator had issued letters of demand to the Company's director to complete a Report on Company Activities and Property (ROCAP) and to provide the Company's books and records. The Liquidator had not yet received any books and records of the Company, including the Deed.
29. The report also stated that the Liquidator estimated that there would be a deficiency of $614,979 on the basis that the Company had assets of $8,178 and liabilities of $614,979 comprising debts owing to unsecured creditors and the petitioning creditor's costs of the winding up application. The assets were described as "Deed of Settlement and Release" and cash at bank of $8,178. The estimated realisable value of the "Deed of Settlement of Release" was "To Be Confirmed".
30. The report described the work to be completed by the Liquidator as including reviewing the Deed and liaising with external parties regarding the Deed.
31. On 24 January 2019, the Liquidator received the ROCAP signed by Mr Michael. The ROCAP stated that "MJCR Group" owed the Company $95,000 under a Deed of Settlement. The ROCAP stated the Company did not have any other assets, but disclosed the Company's bank account.
32. In relation to the Company's books and records, the ROCAP stated that the Company had maintained paper records rather than electronic records, and named Wentworth Williams as the person who could provide the Liquidator with access to those paper records.
33. It appears from the steps taken by the Liquidator in mid-December 2018 as referred to at [40] above, that the Liquidator was aware before he received the ROCAP that Wentworth Williams were the Company's accountants. In the telephone conversation between the Liquidator's staff and a representative of Wentworth Williams in mid-December 2018, the Liquidator's staff had been told that Wentworth Williams' former client manager Mr Mohammed Mustapha had left the firm and that the Liquidator should contact Mr Mustapha to obtain the Company's books and records.
34. The ROCAP stated that the Company's financial statements could not be provided, as Mr Michael had never instructed the accountants to prepare financial statements for the Company.
35. The ROCAP stated that the business had failed and gave the following reason: "Poor cash flow and poor management of business, could not come to agreement with creditors, loss of contracts".
36. Mr Michael gave evidence that he had asked Mr Gallagher for help in completing the ROCAP, and that most of the document had in fact been completed by Mr Gallagher.
37. On 11 March 2019, the Liquidator wrote to Wentworth Williams requesting financial records for the Company, including management accounts, financial statements, tax returns and business activity statements and debtors records.
38. The Liquidator also sent a request to the ATO on 11 March 2019 for copies of its communications with the Company relating to outstanding taxation liabilities, including documents relating to any payment arrangements between the ATO and the Company. The Liquidator deposed that, at some stage, he or a member of his staff requested the ATO to issue a notice under s 353-10 of the 1953 Act, but there is no evidence identifying the particular documents or information that the Liquidator sought to obtain or that any such notice was in fact issued.
39. On 12 March 2019, the Liquidator issued his second report to creditors. The report described the Company's business as the provision of steel fixing labour services to MJCR. The report stated that the Company's director had advised that the Company had entered into a deed of settlement with MJCR prior to the Liquidator's appointment and that further investigations were to be conducted into the deed and its terms. The Liquidator had written to MJCR requesting all particulars of the Deed and payment of the balance of monies owing under the deed into the liquidation account. The Liquidator had not received a response to that letter as at the date of the second report and intended to issue a second demand to MJCR to provide all particulars and the balance of monies under the Deed.
40. There is no evidence of any second demand having been issued to MJCR until the Liquidator issued subpoenas to MJCR and Mr Gallagher just weeks before the final hearing of these proceedings. It was the issue of those subpoenas that resulted in the production of the Deed. I will return to this subject below.
41. The second report to creditors also stated that the Liquidator was investigating the relationship between the Company and MJCR to determine the commerciality of any contracts between them. The report referred to the possibility that any contracts the Company had with MJCR may be undervalued. The report asked creditors to note "that there may be significant legal costs to be incurred in pursuing uncommercial transaction which the Liquidator may require funds from creditors or assistance from a litigation funder", and stated that investigations into these transactions were ongoing.
42. In the second report to creditors, the Liquidator expressed the opinion that the Company may be insolvent based on the overdue Commonwealth taxes, the creditor's petition, the Company's inability to produce timely and accurate financial information and its failure to register for payroll tax. The Liquidator stated that further investigations would be required, but continued: "In any event, I am of the opinion that the Company has not maintained adequate records pursuant to Section 286 of the Act. As such, the presumption of insolvency applies pursuant to section 588E(4) of the Act and conclude the Company is deemed to be insolvent as of 25 August 2017."
43. I interpolate to note that, by reason of s 588E(7) of the Act, the presumption of insolvency in s 588E(4) is not available to the Liquidator in these proceedings to recover the tax payments from the defendant under s 588FF.
44. The second report also referred to the tax payments, and stated that further investigations were to be conducted to determine whether they were preferential in nature.
45. On 28 March 2019, the ATO responded to the Liquidator's request dated 11 March 2019 by providing a copy of the RBA, a business activity statement, correspondence and some case notes. The ATO advised that the Company had not lodged income tax returns.
46. Wentworth Williams did not respond to the Liquidator's request dated 11 March 2019.
47. The Liquidator wrote to Wentworth Williams' former employee, Mr Mustapha, on 1 April 2019 requesting books and records of the Company. Mr Mustapha replied on 2 April 2019, stating that he did not have any books and records of the Company and that "[t]he statement by Wentworth Williams that I took all books and records upon my departure is a lie".
48. The Liquidator considered Mr Mustapha's allegation that Wentworth Williams had misled the Liquidator's staff about the whereabouts of the Company's books and records to be an unusual situation. In cross-examination, the Liquidator said that he believed that his staff had issued a further demand to Wentworth Williams after receiving Mr Mustapha's correspondence of 2 April 2019. However, so such written demand was in evidence and the plaintiffs did not produce any such demand in response to a call for production made by the defendant. As referred to below, the Liquidator made further telephone inquiries with Wentworth Williams after receiving Mr Mustapha's correspondence, but did not issue any written request or demand to Wentworth Williams.
49. On 9 April 2019, MJCR paid $95,000 into the liquidation account. On 10 April 2019, the Liquidator's staff sent an email to MJCR's director acknowledging receipt of the payment and stating: "Payment of this sum does not operate to release you and/or your company from any liability to Pacific Steel Fixing Pty Ltd (in Liquidation) which has not already been expressly and irrevocably released. The Company continues to reserve its position. To assist with the Liquidator's investigations, could you please provide within (3) business days: A copy of the Deed of Settlement; and Any other documentation held in the name of the Company."
50. The Liquidator gave evidence in cross-examination that he wanted to know what rights the Company had released or given up under the Deed in exchange from the $95,000. However, there is no evidence of any response on behalf of MJCR to the Liquidator's request for a copy of the Deed, or any follow up request or demand made by the Liquidator.
51. The Liquidator did interview Mr Gallagher on 16 April 2019 and Mr Michael on 17 April 2019. However, the plaintiffs did not adduce evidence of the Liquidator's notes of these interviews or the substance of any information provided by Mr Gallagher or Mr Michael during the interviews. The Liquidator's recollection is that Mr Gallagher did not make any comment or response to questions about the Deed.
52. One of the Liquidator's staff made further inquiries about the Company's books and records in a telephone conversation with a director of Wentworth Williams, Ms Filomena Kyriacou, on 17 April 2019. Ms Kyriacou told the Liquidator's staff member that Wentworth Williams would deliver any documents it held in relation to the Company to the Liquidator's office.
53. Wentworth Williams then delivered to the Liquidator's office: 1. transaction statements for payments made by the Company from its bank account to the entity that managed the Company's payroll, for superannuation contributions for the Company's employees and for union dues paid on behalf of the Company's employees; 2. invoices and receipts corresponding to the payments referred to immediately above; 3. payroll reports for the Company's employees; and 4. invoices raised by the Company to MJCR. As referred to at [22] above, those invoices revealed that the Company issued invoices to MJCR for a total amount of approximately $11.75 million (including GST) for labour hire services during the period from 28 September 2017 to 26 November 2018. The Liquidator had already ascertained that MJCR was the Company's sole customer: see [52] above.
54. There is no evidence of the Liquidator making any further request or demand to Wentworth Williams in respect of the Company's books and records until a few weeks before the commencement of the final hearing in these proceedings, when the Liquidator issued subpoenas to Wentworth Williams, Ms Kyriacou and Mr Angelo Russo (another employee of Wentworth Williams). Those subpoenas did not result in the production of any documents.
55. On 15 May 2019, the Liquidator issued a notice to Mr Gallagher under s 530B(4) of the Act requiring Mr Gallagher to produce books and records of the Company to the Liquidator by 31 May 2019 pursuant to s 530A(1) of the Act. The books and records required to be produced included any contract or agreement concerning or relating to the Company's affairs. The letter enclosing the notice stated that Mr Gallagher had been identified as a possible shadow director of the Company due to the relationship between CBD Steel Fixers Pty Ltd (in liq) and the Company.
56. On 23 May 2019, solicitors for Mr Gallagher wrote to the Liquidator stating that the Company's books and records were not in the possession or control of Mr Gallagher and that: "As far as our client is aware from the information supplied to him by the accountants of the Company, all books and records were supplied to the Liquidator."
57. In cross-examination, the Liquidator acknowledged that he knew when he received this letter on or about 23 May 2019 that the statement quoted immediately above was untrue. He formed the opinion that Mr Gallagher was "stone-walling" his investigations, but did not take any further steps at that time. Public examinations were not undertaken, as I refer to below.
58. On 17 July 2019, the Liquidator received further information from the ATO in response to a freedom of information request made by the Liquidator on or about 10 May 2019.
59. None of the abovementioned inquiries identified financial statements for the Company.
60. The Liquidator's analysis of the RBA and the statements for the Company's bank account identified the 19 tax payments made by the Company to the defendant during the period 30 July 2018 to 7 December 2018, totalling $740,000. The Liquidator's analysis also revealed that, despite these payments to the defendant, the Company's debt owed to the defendant had increased from $947,159 at the commencement of the relation-back period to $2,208,365 as at 24 January 2019.
61. The Liquidator's investigations and the proofs of debt submitted by creditors identified the following unsecured creditor claims and no secured creditors: Unsecured creditor Amount Petitioning creditor $16,500.00 Defendant $2,208,365.61 Prime Services Qld $3,300.00 Office of State Revenue NSW $270,639.86 Workers Compensation Nominal Insurer $177,323.00 Total unsecured creditors $2,676,128.47

1. The Liquidator has not yet adjudicated on any of the unsecured creditor proofs of debt, but does not dispute the amount of the debt owing to the defendant. The amount of $2,208,365.61 in the table above is the amount that was owing as at 24 January 2019. According to the RBA, the amount owing as at the date of winding up on 12 December 2018 was $1,507,272.09.
2. The Liquidator commenced these proceedings on 22 November 2019, not having obtained a copy of the Deed.
3. The Liquidator did not undertake public examinations under ss 596A and 596B of the Act prior to commencing these proceedings. The Liquidator acknowledges that such examinations provide a means of obtaining documents, but decided after taking advice that it was not appropriate to undertake such examinations. He described this as a "commercial decision" that public examinations "were not required" in circumstances where he did not have funding to undertake those examinations. The Liquidator gave evidence that he had sought expressions of interest to fund examinations at a creditors' meeting in July 2019, but did not receive any funding offers. No records of that meeting were in evidence. The information provided to creditors in connection with that request for funding is not known, save that creditors could not have been provided with the Deed because the Liquidator had not yet obtained the Deed.
4. There is an obvious tension between: 1. the Liquidator's ability to fund these proceedings involving a three day hearing to recover an amount of $740,000 from the defendant in order to repay approximately 80 per cent of any such recovery to the defendant as the Company's largest unsecured creditor (see [74] above); and 2. the Liquidator's evidence that he lacked funding to conduct public examinations in order to investigate the terms of the Deed (noting that orders for production of the Deed could have been made under s 68 of the Civil Procedure Act 2005 (NSW) in aid of such examinations), potential claims for relief under s 588FF in respect of the Deed and potential action to recover any amounts invoiced by the Company for services provided to MJCR that had not been paid by MJCR. The Liquidator was in a position to estimate the unpaid amounts, as he had access to the invoices from May 2019 and also had access to the statements for the Company's only bank account: see [66] and [73] above. Although he did not have the Deed, the Liquidator was aware that only $95,000 had been paid to the Company under the Deed: see [44] and [62]-[63] above. On the face of it, there was significant potential upside for creditors in gathering information about these matters through public examinations and ancillary orders for production.
5. The evidence does not explain the Liquidator's decision to apply the available funding to these proceedings rather than to public examinations with significantly greater potential upside for creditors.
6. In his affidavit sworn on 12 March 2020, the Liquidator deposed: "Each of the [tax payments] resulted in the Defendant receiving more from the Company than the Defendant would have received from the Company if each of those [tax payments] were set aside and the Defendant proved for the amount of each of the [tax payments] in the Company's winding up for the following reasons: (a) the total value of assets realised by me in the Company's winding up as at the date of making this affidavit is $103,158.27; (b) as at the date of making this affidavit, I do not anticipate that any other assets are capable of being realising [sic] in the Company's winding up (other than in these proceedings); (c) the total value of the Company's creditors currently under consideration is $2,681,557.47; (d) to date, the sum of $87,993.20 has been paid from the Company on account of professional fees, disbursements and outlays; (e) subject to the outcome of these proceedings, I do not anticipate that a dividend will be payable to the creditors of the Company; (f) no dividend is likely to be declared in favour of the Company's creditors."
7. However, the landscape changed materially a short time before the final hearing of these proceedings.
8. As I have already mentioned, the Liquidator issued subpoenas to MJCR and to Mr Gallagher a few weeks before the commencement of the final hearing. Those subpoenas resulted in the production of the Deed by MJCR on 13 April 2021 and by Mr Gallagher on about 14 April 2021.
9. The Liquidator is now aware that the Deed was entered into on the same date as the winding up order. The Liquidator gave evidence that this timing, and the fact that the Deed purports to release the Company's rights in respect of receivables of $4.635 million in exchange for a payment of only $95,000, would ordinarily have caused him to seek advice as to whether the Deed was an uncommercial transaction and what steps might be available to him as liquidator to set aside the Deed. He would ordinarily take such steps as might be available to him to claw back the Company's rights released under the Deed. At this stage, the Liquidator has not obtained advice or taken recovery steps in relation to the Deed or the receivables that are the subject of the Deed because he has only obtained a copy of the Deed very recently. He agreed in cross-examination that there was nothing stopping him from seeking to recover the $4.635 million. He described the Deed as "classic phoenix behaviour" and gave evidence that he has formed the view that the Company was established as a phoenix entity. He said that it is possible that he will still take steps to set aside the Deed.
10. Thus, at the time of the hearing, the Liquidators' investigations concerning the Deed were incomplete and he had not yet made a decision whether to commence proceedings against MJCR to set aside the Deed as an uncommercial transaction and recover amounts invoiced by the Company to MJCR for labour hire services.

The preference issue

1. In order to prove that the tax payments are insolvent transactions that are voidable under s 588FE of the Act, the plaintiff must demonstrate that the tax payments are unfair preferences: see s 588FC.
2. Section 588FA(1) provides that a transaction is an unfair preference given by a company to a creditor: "… if, and only if: (a) the company and the creditor are parties to the transaction (even if someone else is also a party); and (b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; even if the transaction is entered into, or is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency."
3. As I have mentioned at the outset of these reasons, the plaintiffs accept that they bear the onus of proof in relation to these matters: see In the matter of Western Port Holdings Pty Ltd (receivers and managers apptd) (in liq) (2021) 150 ACSR 274; [2021] NSWSC 232 at [41]-[42] and the authorities there referred to.
4. It was not in dispute that the defendant received the tax payments from the Company: see [29]-[34] above.
5. The question is whether the defendant received more from those tax payments than it would receive if the payments were set aside and the defendant were to prove as an unsecured creditor in the winding up of the Company.
6. The plaintiffs submitted that this question "is to be determined by reference to the status quo of the winding up" because liquidators would otherwise "be barred from seeking to recover unfair preference payments in all instances where another claim might vest in the liquidator". It was submitted that the present "status quo" of the winding up is that creditors do not stand to receive a dividend and the Company is bound the Deed.
7. As I understand the submissions, the plaintiffs rely on this "status quo" as discharging their onus of proof. The plaintiffs further submitted that: "If a party is desirous of proving that the Deed is liable to be set-aside and that the Company would, on the balance of probabilities, recover payments from MJCR, then the party so asserting bears the onus of proof. There having been no evidence led in support of this proposition other than the Liquidator's evidence that it is possible that he might take steps to set-aside the Deed, the Court should not find that there is no evidence to make this finding."
8. I assume that, in the last sentence quoted above, the plaintiffs intended to submit that the Court should not find that the Company would recover payments from MJCR.
9. In my opinion, the plaintiffs' submission misstates the relevant question. The question is whether the elements of s 588FA(1)(b) are satisfied. As I have said above, s 588FA(1)(b), applied to the facts of this case, requires the Court to determine whether the defendant received more from the tax payments than it would receive if those payments were set aside and the defendant were to prove in the winding up of the Company. That is the question in respect of which the plaintiffs bear the onus of proof.
10. The plaintiffs have failed to discharge that onus because the Liquidator's investigations concerning potential actions under s 588FF in respect of the Deed and the potential recoverability of the receivables that were the subject of the Deed are incomplete. These are investigations that the Liquidator gave evidence that he would ordinarily undertake: see [83] above. They have not yet been undertaken in this case due to the Liquidator's failure to take sufficient steps to obtain the Deed until just weeks before the commencement of the final hearing in these proceedings, notwithstanding that the Liquidator recognised the importance of investigating the Deed and transactions between the Company and MJCR from at least March 2019. The importance of investigating those matters was obvious, given that the receivables and a small sum in one bank account were the only assets of the Company that the Liquidator identified. The failure to do so, either by conducting public examinations or by issuing a subpoena at an earlier stage in these proceedings, was not explained by the evidence. For the reasons discussed at [78]-[79] above, I do not regard as credible the Liquidator's assertion that he previously made a "commercial decision" not to take those steps. In any event, having belatedly obtained the Deed, the Liquidator says that he may now take action to set aside the Deed. Presumably, the nature of the action under consideration is an application for an order under s 588FF(1)(h) declaring the Deed void, followed by an action to recover the receivables from MJCR, or a claim under s 588FF(1)(c) for an order requiring MJCR to pay to the Company the value of the receivables released by the Deed.
11. If any such action were to succeed, there may be a surplus in the winding up. The Company's invoices issued to MJCR and the recitals to the Deed indicate that the amounts owing by MJCR would be likely to materially exceed the amounts owing by the Company to its creditors. There is no basis for assuming that the Company would be unable to enforce any judgment or order in its favour against MJCR. As the defendant pointed out, there is no evidence of MJCR's current financial position but bank statements for the two bank accounts operated by MJCR during the period July to December 2018 revealed significant cash at bank on any given day. The plaintiffs' analysis of the MJCR bank account balances on each of the dates of the tax payments revealed credit balances on those dates ranging between $7,822 and $1,583,958.
12. The extent of the Company's assets and funds available for distribution to creditors in the winding up is therefore uncertain, at least until the Liquidator either completes the next stage of the investigations concerning the Deed and the potential actions referred to above or makes a considered decision not to pursue those investigations. The plaintiff's description of the "status quo" of the winding up is wrong because it ignores this uncertainty that arises from the manner in which the Liquidator has carried out his role.
13. The consequence of the uncertainty is that the evidence before the Court is not an appropriate basis on which to reach a reasonable decision about whether the defendant received more from the tax payments than it would receive if the payments were set aside and the defendant were to prove in the winding up of the Company: Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 at [14]-[15].
14. For those reasons, the plaintiffs have failed to establish that the tax payments are voidable transactions and the proceedings must be dismissed.
15. I reject the plaintiffs' submission that this outcome means that a liquidator is "barred from seeking to recover unfair preference payments in all instances where another claim might vest in the liquidator". This case turns on its own very unusual facts. The Liquidator's claim against the defendant has failed because, on the Liquidator's own evidence, his investigations into a significant transaction of the Company are incomplete in that he has not yet taken the steps that he would "ordinarily" take and that he reported to creditors in March 2019 he intended to take. The incomplete investigations may, if completed, result in there being a surplus in the winding up of the Company, meaning that the Court lacks an appropriate basis to determine whether or not the defendant received more from the tax payments than it would receive in the winding up.

The insolvency issue

1. My conclusion on the preference issue means that it is not strictly necessary to determine the insolvency issue. If the plaintiffs had discharged their onus of proof in relation to the preference issue, I would have made the order sought by the plaintiffs under s 588FF(1)(a) of the Corporations Act because the evidence adduced by the plaintiffs demonstrates that the Company was insolvent during the whole of the period in which the tax payments were made. In case my decision in relation to the preference issue is found to be wrong in any appeal, I will explain my reasons in relation to the insolvency issue as briefly as possible.
2. The question whether the Company was solvent at the time the tax payments were made falls to be determined by reference to s 95A of the Corporations Act. That section provides that a company is solvent if, and only if, it is able to pay all of its dets as and when they become due and payable. A company that is not solvent is insolvent.
3. The applicable principles are well known, and were recently summarised by Black J In the matter of Humur Pty Limited [2020] NSWSC 1759 at [17]‑[18]. I gratefully adopt his Honour's summary. After referring to the provisions of s 95A, his Honour said: "17 … That definition adopts a 'cash flow test' of insolvency which turns upon the income sources available to the company and the expenditure obligations that it has to meet, although a balance sheet test can provide context for the application of the cash flow test: Southern Cross Interiors Pty Ltd (in liq) v Deputy Cmr of Taxation (2001) 39 ACSR 305; [2001] NSWSC 621 ; Australian Securities and Investments Commission v Plymin (No 1) (2003) 46 ACSR 126; [2003] VSC 123 at [370] ff, aff'd Elliott v Australian Securities and Investments Commission (2004) 10 VR 369; [2004] VSCA 54 ; and see Re Swan Services Pty Limited (in liq) [2016] NSWSC 1724 at [136] ff, on which I have drawn for this summary of the applicable principles. 18 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 its assets and business, and the Court will have regard to commercial realities in that regard: Southern Cross Interiors Pty Ltd (in liq) v Deputy Cmr of Taxation above at [54]; White Constructions (ACT) Pty Ltd (in liq) v White [2004] NSWSC 71; (2004) 49 ACSR 220 at [289] ; Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 at [103] ; Bentley Smythe Pty Ltd v Anton Fabrications (NSW) Pty Ltd (2011) 248 FLR 384; [2011] NSWSC 186 at [48] -[49] . Matters which may support a finding of insolvency include those referred to in Australian Securities and Investments Commission v Plymin (No 1) above at [386], where Mandie J identified several indicia of insolvency including: continuing losses; liquidity ratios below one; overdue Commonwealth and State taxes; a poor relationship with the lenders, including any inability to borrow further funds; no access to alternative finance; inability to raise further equity capital; suppliers placing a company on cash on delivery arrangements or otherwise demanding special payments before resuming supply; creditors unpaid outside trading terms; the issuing of postdated cheques; dishonoured cheques; special arrangements with selected creditors; solicitors' letters, summonses, judgments or warrants issued against a company; payments to creditors of rounded sums not reconcilable to specific invoices; and inability to produce timely and accurate financial information to display a company's trading performance and financial position, and make reliable forecasts; see also Morris v Danoz Directions Pty Ltd (in liq) (No 2) [2010] FCA 836 at [13] . In determining a company's solvency, the Court may also 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: Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran above at [109]-[112]; International Cat Manufacturing (in liq) v Rodrick [2013] QCA 372; (2013) 97 ACSR 200 ; First Strategic Development Corporation Ltd (in liq) v Chan [2014] QSC 060 at [67]-[69]."
4. The tax payments were made during the period from 30 July 2018 to 7 December 2018.
5. The plaintiffs' submissions in relation to insolvency emphasised that the Company's RBA deficit debt varied between $1,507,272.09 and $2,193,951.62 during that period. The amount of the RBA deficit debt on any given day during the relevant period was a debt due and payable by the Company to the Commonwealth at the end of that day: see s 8AAZH of the 1953 Act and [25]-[35] above. As Palmer J said in Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 at [91]: "If the legislature clearly says that a tax debt is payable at a certain time, neither the court nor a company director can disregard that statutory imperative by an appeal to commercial reality. Absent an agreement by the commissioner to defer payment, it is not commercial reality to treat a present liability, statutorily imposed, as if it does not exist."
6. The plaintiffs presented a comparison between the Company's cash at bank together with the cash in MJCR's accounts on the date of each of the tax payments, demonstrating that the aggregate cash was less than the Company's RBA deficit debt on each tax payment date. The plaintiffs submitted that this represented the high water mark of a liquidity analysis for the Company because it assumed (in the defendant's favour and contrary to the plaintiffs' submissions) that MJCR was providing financial support to the Company and that all cash of MJCR was available to pay the Company's tax debts. The plaintiffs submitted that the relationship between MJCR and the Company was a phoenixing arrangement rather than a relationship in which MJCR provided financial support to the Company.
7. The defendant correctly acknowledged that the RBA deficit debt must be taken into account in determining whether the Company was insolvent during the relevant period. The defendant also acknowledged that the long-term RBA deficit debt, together with the Company's failure to comply with some BAS lodgement obligations (as referred to at [25] above) prima facie point to insolvency. However, the defendant submitted that these matters were not conclusive on their own and that there was insufficient evidence to support a finding of insolvency for the following reasons: 1. although there were insufficient funds in the Company's only bank account on any given day during the relevant period to pay the RBA deficit debt, the bank account was rarely in deficit; 2. the statements for the Company's bank account revealed a pattern whereby the only material payments into that account were "deposited by MJCR into the [account] in amounts commensurate with liabilities payable from that account", demonstrating that "some care was taken to keep the account in credit" and supporting an inference that, in addition to the relationship between the Company and MJCR as creditor and debtor, "the Company was financially supported by, and reliant on, MJCR"; 3. the payments made by MJCR into the Company's account were made for the purpose of providing financial support to the Company rather than to pay amounts owing to the Company for labour hire services provided to MJCR. This should be inferred from the fact that Mr Gallagher "was at least involved in, if not controlled" both companies and from the fact that the amounts paid by MJCR closely matched the payments that the Company then made out of its account to third parties and did not resemble amounts invoiced by the Company to MJCR for labour hire services; 4. MJCR's bank account statements in evidence revealed substantial payments into its cheque account that appear to reflect payments for work from building contractors, and those payments indicated that MJCR conducted a lucrative trading enterprise; 5. MJCR's bank statements revealed that, on 11 December 2018 (the day before the Company went into liquidation), MJCR had sufficient cash at bank to pay the Company's RBA deficit debt in full, together with amounts owing by the Company to other creditors who have subsequently proved in the winding up; 6. although MJCR's bank statements did not reveal sufficient cash at bank to pay the whole of the Company's RBA deficit debt on any other given day during the relevant period, the Liquidator had failed to prove that MJCR had no other liquid assets available to it from which it could have discharged the Company's debts; 7. taken at its highest, the Company had assets of $4,635,020.14 as at the date of its winding up, being the amount referred to in the Deed that the Company alleged was owing by MJCR. There is no evidence "that would negative the inference that the receivable (or any part of it) existed throughout the Relevant Period and was payable at call" and the steps taken by Mr Gallagher to have the Company and MJCR enter into the Deed on the date of winding up "gives credence to the inference that [the receivables] were legitimate"; 8. the Court is unable to assess liquidity ratios because there is no balance sheet in evidence for the Company and no evidence of what formal or informal credit facilities were available to the Company; 9. the Liquidator has not adduced evidence of the Company's debtors or liquid assets beyond cash at bank, and evidence of liquid assets may be pivotal in an analysis of insolvency. In the absence of financial statements for the Company, the Liquidator could have called Mr Gallagher to give evidence and the Court should infer that Mr Gallagher's evidence would not have assisted the Liquidator's case; and 10. the Liquidators' opinions do not prove insolvency.
8. I reject the defendant's submission that there is insufficient evidence to support a finding of insolvency.
9. As I have referred to earlier in these reasons, the Company's only assets revealed by the Liquidator's investigations are the funds standing to the credit of one Commonwealth Bank account and receivables owed to the Company by MJCR. Sections 4.3 and 5.1 of the Liquidator's second report to creditors establish that the usual searches undertaken by the Liquidator on appointment did not reveal any other assets. The nature of the Company's business - the provision of labour hire services - does not suggest that the Company is likely to have owned any other assets of any material value. MJCR was the Company's sole customer and the Company's bank account statements do not record any transactions suggesting that it lent funds to any other person or entity. It is my opinion that these matters, taken together, strongly support an inference that the Company's assets were limited to the funds in its sole bank account and receivables owed to the Company by MJCR. The Liquidator's failure to call Mr Gallagher to give evidence does not negative this inference. Nor does it provide a proper basis to assume or speculate that Mr Gallagher's evidence might have revealed other assets of the Company, as the defendant's submissions appeared to suggest: Jagatramka v Wollongong Coal Ltd [2021] NSWCA 61 at [49], [88]; Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd (2017) 18 BPR 36,683; [2017] NSWCA 99 at [174].
10. As the defendant's submissions identified, the payments made by MJCR into the Company's only bank account bear no relationship to the amounts invoiced by the Company to MJCR. I accept the defendant's submission that the fact that the Company (under Mr Gallagher's control) and MJCR (under Mr Gallagher's influence) entered into the Deed on the date of winding up supports an inference that the Company was in fact owed an amount in the order of $4.365 million by MJCR at that time. It is unlikely that Mr Gallagher would otherwise have bothered to exercise his control or influence to cause the two companies to enter into the Deed. However, the existence of the Deed together with the fact that MJCR had not made any payments to the Company referable to the Company's invoices, despite MJCR's lucrative trading enterprise revealed by its bank statements, supports an inference that MJCR had no intention of paying those receivables, irrespective of whether they were payable at call. In other words, as a matter of commercial reality, the Company was not in a position to realise its receivables in order to discharge its RBA deficit debt and other debts. The Company's willingness to enter into the Deed, releasing for consideration of only $95,000 its rights in respect of those receivables claimed to be worth $4.365 million, demonstrates that there was no realistic prospect of the Company (under Mr Gallagher's control) suing MJCR (under Mr Gallagher's influence) to recover those receivables. Whether a liquidator of the Company may succeed in setting aside the Deed and recovering those receivables is an entirely different question.
11. The Company's only other asset was its bank account, with insufficient funds standing to its credit at all times during the relevant period to pay the Company's RBA deficit debt. It is simply not to the point that the Company's bank account was rarely in deficit.
12. In my opinion, MJCR did not provide financial support to the Company in any meaningful sense. Contrary to the defendant's submission, MJCR did not deposit into the Company's account "amounts commensurate with liabilities payable from the account". Rather, MJCR deposited amounts commensurate with liabilities that the Company then paid from that account, which were but a very small proportion of the debts then due and payable by the Company, even if one does not look beyond the RBA deficit debt. At the same time, MJCR did not pay the amounts invoiced by the Company, in respect of which the Company claimed to be owed $4.365 million. MJCR was thereby depriving the Company of the ability to pay its debts, or at least severely reducing its capacity to do so, by not paying the Company's invoices. It is therefore irrelevant to inquire into the funds or other assets available to MJCR from which it could have paid the Company's debts had it chosen to do so.
13. For those reasons, had it been necessary to do so, I would have found on the balance of probabilities that the Company was insolvent at the time of the tax payments having regard to the significant shortfall between the Company's funds and its RBA deficit debt, the absence of any evidence suggesting that the Company had other assets that could be realised to meet that debt and its other debts, and the commercial reality that the Company could not rely MJCR for financial support to meet its debts.

Conclusions and orders

1. For all of the reasons explained above, the plaintiffs' claim fails. The defendant indicated that they wished to be heard in relation to costs, irrespective of the outcome of the proceedings. I make the following orders: 1. The proceedings are dismissed, subject to orders 2 and 3 below. 2. By 4pm on 15 June 2021, the parties are to file and serve by written submissions of no more than two pages in length in relation to the costs of the proceedings. 3. Reserve the question of the costs of the proceedings for further consideration and determination on the papers.

Endnote

1. Section 8AAZF. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 June 2021