By Originating Process filed on 22 December 2020, the Plaintiffs, Messrs Cathro and Lucan in their capacity as joint and several liquidators of Custom Bus Australia Pty Ltd (in liq) ("Company") and the Company, bring claims against several defendants to seek to recover unfair preferences under ss 588FA, 588FC, 588FE and 588FF of the Corporations Act 2001 (Cth).
The Plaintiffs had settled their claim against several of the Defendants before the hearing of this separate question took place and the proceedings have been discontinued as between the Plaintiffs and the Second, Fourth and Fifth, Seventh, Ninth, Thirteenth and Fifteenth Defendants. Several other Defendants admit or do not contest the Company's insolvency over the relevant period. The First Defendant has not taken an active role in the proceedings and the Plaintiffs must therefore prove, at least against it, the Company's insolvency over the relevant period, although it did not attend the hearing or seek to lead evidence or make submissions in opposition to the Plaintiffs' position.
I have previously ordered that the proceedings be listed for hearing of the separate question of whether the Company was solvent or insolvent in the period from 18 July 2017 to 18 January 2018. This hearing and judgment concern that separate question.
[3]
The Plaintiffs' case as to insolvency and chronology
By way of background, the Company operated a business of manufacturing, maintaining and repairing bus bodies, and it operated in several corporate entities since 1955. Its business included purchasing bus chassis from original equipment manufacturers, then constructing bodies for the buses and fitting them to those chassis, using components sourced from numerous suppliers, including many of the Defendants. The Company would then sell the completed buses back to the bus manufacturers for on-sale to public and private bus operators and also undertook the maintenance, repair and service of buses in South Australia (Cathro 22.12.20 [15]-[16]).
The Company was a wholly owned subsidiary of Custom Bus Holdings Pty Ltd ("Holdings"), which was a holding company and the funding entity for the Company and did not conduct any business or own any assets other than the shares in the Company (Cathro 22.12.20 [17]). The principal shareholders of Holdings were MPC Investments Nominees Pty Ltd ("MPC") (a company of which the directors of Custom Bus, Mark Burgess and Paul Burgess each hold a one-third shareholding) and entities within the Allegro Funds group, being Allegro Fund II LP (acting through its general partner, Allegro Fund II General Partner LP, acting through its general partner, Allegro Funds General Partner Pty Ltd) and Allegro Services II C Pty Limited, as trustee of Allegro Fund II Trust C (together, "Allegro"). Allegro also held secured convertible loan notes issued by Holdings which, if converted, would have led to Allegro holding 92% of the shares in Holdings.
By paragraph 19 of the Plaintiffs' Points of Claim filed on 21 April 2021, they plead that the Company's winding up is taken to have begun on the date of the appointment of voluntary administrators on 18 January 2018 and, by paragraphs 20-22, that the Relation-Back Day for the purposes of ss 9 and 513C of the Act is 18 January 2018 and the six months ending on the Relation-Back Day is the period 18 July 2017 and 18 January 2018. By paragraph 23 of their Points of Claim, the Plaintiffs plead that the Company was insolvent within the meaning of s 95A(2) of the Act throughout the Relation-Back Period, and that allegation is extensively particularised as follows:
"Particulars
I. Custom Bus recorded total adjusted losses of $5,042,557 for the financial year ending on 30 June 2017 and $591,591 for the period from 1 July 2017 to 31 December 2017.
II. Custom Bus's liquidity ratio never met or exceeded 1 during the period from July 2016 and December 2017 and remained at or below 0.7 between February 2017 and December 2017.
III. Custom Bus's quick ratio was between 0.09 and 0.18 from February 2017 to December 2017.
IV. Custom Bus had insufficient assets to pay a tax assessment of $1,547,617 raised against it by the Australian Taxation Office (ATO) on 24 February 2017.
V. From at least 27 March 2017, Custom Bus was subject to instalment arrangements with the ATO in respect of a payment plan to meet outstanding Commonwealth tax liabilities. At no time did the ATO issue a notice deferring the time at which the tax instalments were due, or any variation, under sections 255-10 or 255-20 of the Taxation Administration Act (1953) (Cth).
VI. Custom Bus had insufficient assets to pay overdue payroll tax of $123,819.70 following receipt of a Payment Overdue Notice from the CCSR, and entered into a payment plan with the CCSR on 9 June 2017.
VII. From at least February 2017, Custom Bus was unable to generate sufficient cash flow from its operations to satisfy its obligations to its creditors when they fell due and payable.
VIII. Custom Bus failed to achieve its monthly forecast budget for net profit after tax for each month between March 2017 and December 2017.
IX. Custom Bus produced only 121 buses between March and December 2017 compared to a production forecast of 147 buses, in circumstances where it needed to produce a minimum average of 15 buses per month to break-even. Custom Bus's total liability to its creditors increased in February (11%), March (26%), June (23%), July (10%), August (less than 1%), September (8%), October (11%) and December (18%) 2017 and January 2018 (13%). Declines in April (-1%) to May (-5%) and November (-11%) 2017 were in each case followed by months in which the total liability increased by a greater amount. Custom Bus's total liability to its creditors increased from $2.929 million in January 2017 to $7.443 million in January 2018.
X. From at least January 2017, various suppliers and trade creditors of Custom Bus placed it on stop supply.
XI. From at least January 2017, Custom Bus received payment demands from various creditors who had outstanding unpaid invoices.
XII. From at least March 2017, Custom Bus made part payments and payments in round amounts, not referable to specific invoices, to various creditors and sought to enter into payment plans with suppliers and other trade creditors.
XIII. Custom Bus made consistent losses each month from July 2016 to December 2017 save for small profits in July, August and September 2017, each of which was insufficient to meet prior months' losses.
XIV. From at least February 2017, Custom Bus was unable to raise further equity capital from any source.
XV. From at least February 2017, Custom Bus was unable to borrow funds from any source in a sufficient amount or on acceptable terms to address its inability to satisfy its debts as and when they fell due.
XVI. From at least February 2017, Custom Bus received no form of financial support from its directors or shareholders.
XVII. Further particulars are contained in section 8.4 of the report to creditors dated 15 May 2018 pursuant to section 75-225(3) of the Insolvency Practice Rules (Corporations) 2016.
XVIII. Further particulars are contained in paragraphs 20 to 21 of the affidavit of Simon John Cathro affirmed 22 December 2020 (Cathro Affidavit). …"
[4]
Affidavit evidence
The Plaintiffs rely on the affidavit dated 22 December 2020 of Mr Cathro, who is one of the liquidators and has extensive experience in insolvency and corporate restructuring. Mr Cathro refers to the circumstances in which he and Mr Lucan were initially appointed as joint and several administrators to the Company and, following the second meeting of creditors of the Company held on 23 May 2018, were appointed as its joint and several liquidators. Mr Cathro also outlines investigations undertaken in the course of the voluntary administration and liquidation. Mr Cathro notes (Cathro 22.12.20 [18]) that the Company's main creditors comprised Allegro, 180 Capital, its suppliers and other trade creditors, its employees, the landlord of its principal operating premises in NSW and the landlord of its premises in South Australia, the Commissioner of Taxation and the Chief Commissioner of State Revenue in New South Wales; and the total debts in the winding up of the Company are estimated at between $20,144,536 and $21,599,229 and the gross assets recoverable were slightly more than $3 million, which were reduced after trading and trying to sell the business to $295,080.
Mr Cathro expresses the view (Cathro 22.12.20 [20]) that the Company was insolvent from at least 24 February 2017 up to the Relation-Back Day, and was therefore insolvent throughout the Relation-Back Period. Mr Cathro also indicates the liquidators' view that there will be no further recoveries in the winding up other than from insolvent trading and voidable transaction claims (Cathro 22.12.20 [25]) and that, irrespective of the outcome of recovery actions, there will be a deficiency in the winding up (Cathro 22.12.20 [27]). Mr Cathro also addresses the position of the several defendants, including a number of Defendants against whom the proceedings have now been discontinued.
The Plaintiffs also rely on Mr Cathro's report dated 28 May 2021 (Ex P1) as to the Company's solvency. Mr Cathro there outlines the extensive review of electronic and other records which underpins that report, including the review of the Company's management accounts from 1 July 2016 to 18 January 2018 and audited financial statements for the financial years ending 30 June 2015 through 30 June 2017, and contemporaneous documents prepared by the Company recording aged payables, aged receivables and forecast to budget. Mr Cathro's report also set out a schedule of demands for payments and notices withdrawing support received from the Company's creditors and the Plaintiffs tendered numerous examples of such demands and notices.
[5]
Applicable legal principles
The question whether the Company was insolvent, in fact, at the time the relevant debts were incurred, or became insolvent by incurring those debts, is to be determined by reference to s 95A(1) of the Corporations Act. That section provides that a company is solvent if, and only if, it is able to pay all its debts, as and when they become due and payable. Section 95A(2) of the Corporations Act has effect that a person who is not solvent is insolvent. 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 Commissioner of Taxation (2001) 53 NSWLR 213; (2001) 39 ACSR 305; [2001] NSWSC 621; Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124; (2003) 46 ACSR 126; [2003] VSC 123 at [370]ff, aff'd Elliott v Australian Securities and Investments Commission (2004) 10 VR 369; (2004) 48 ACSR 621; [2004] VSCA 54 and see Re Swan Services Pty Limited (in liq) [2016] NSWSC 1724 at [136]ff and SX Projects Pty Ltd (in liq) v V Battaglia [2018] NSWSC 1830 at [20]ff and Re Bias Boating Pty Limited (recs and mgrs apptd) (in liq) [2018] NSWSC 1977 at [4]ff, on which I have drawn for this summary of the applicable principles.
The case law indicates that 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 Commissioner of Taxation above at [54]; White Constructions (ACT) Pty Ltd (in liq) v White (2004) 49 ACSR 220 [2004] NSWSC 71 at [289]; Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran (2005) 219 ALR 555; (2005) 54 ACSR 410; [2005] NSWCA 243 at [103]; Bentley Smythe Pty Ltd v Anton Fabrications (NSW) Pty Ltd (2011) 248 FLR 384; [2011] NSWSC 186 at [48]-[49].
In assessing a company's capacity to pay its debts, the Court should have regard to all of the assets of the company as at the relevant time in order to determine the extent to which those assets were liquid or realisable within a timeframe that would allow each of the debts to be paid as and when they became due. Apart from an assessment of the company's own assets, regard can also properly be had to funds which the company can borrow, on a secured or unsecured basis, or otherwise obtain from lenders or shareholders and which were, as a matter of commercial reality, available to the company to enable its debts to be paid. The case law recognises that, in determining a company's solvency, the Court may have regard to the likelihood that it will have funds available to it from sources with which it has no formalised agreement or understanding, including loans from its directors or from third parties, at least if they are not repayable in the short term, and the company's ability to borrow funds can also be taken into account: Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran above at [109]-[112]; International Cat Manufacturing (in liq) v Rodrick (2013) 97 ACSR 200; [2013] QCA 372; First Strategic Development Corporation Ltd (in liq) v Chan [2014] QSC 60 at [67]-[69].
[6]
The Plaintiffs' submissions and determination
Mr Assaf refers to the case law as to insolvency, to which I have referred above, and to Mr Cathro's Solvency Report and submits that the conclusion that the Company was insolvent throughout the Relation-Back Period is established having regard to the Company's working capital and its assets and liabilities; that many if not most of the indicia of insolvency noted in Australian Securities and Investments Commission v Plymin (No 1) above were present through the Relation-Back Period; and that the Company sought (without success) to raise additional funding during the Relation-Back Period.
Mr Assaf points to Mr Cathro's analysis of the Company's working capital, being its cash and other liquid assets compared with the quantum of debts and other liabilities due and payable, in Section 8 of the Solvency Report (Ex P1). Mr Assaf notes that Mr Cathro there ascertained the timing of the Company's liabilities due to ordinary trade creditors, almost all of which were on 30 or 60 day terms, which Mr Cathro, adopting a "conservative view", treated as payable within 60 days in all cases (Solvency Report, Ex P1, [199]-[200]). Mr Cathro treated the liability to the DCT as immediately due and payable, notwithstanding the existence of a payment arrangement, because there was no formal deferral of the tax debt (Solvency Report, Ex P1, [202]). Mr Assaf submits and I accept that that approach is supported by the case law: Smith v Boné (2015) 104 ACSR 528; [2015] FCA 319; Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy (2020) 379 ALR 593; (2020) 143 ACSR 1; [2020] FCAFC 5 at [498]ff. Mr Cathro did not take into account liabilities to related entities, including the contingent indebtedness from the guarantee given by the Company in favour of Allegro of the $4.2 million worth of Loan Notes; and the liability to repay an advance of $500,000 by one of the directors, Mark Burgess (Solvency Report, Ex P1, [203]-[204], and that seems to me to be appropriate where they were arguably not then due and payable.
Mr Assaf points out that Mr Cathro also ascertained the readily available assets to meet liabilities (Solvency Report, Ex P1, [208]) including cash; the surplus after payment of fees and interest to 180 Capital under the Facility Agreement, on the basis that 180 Capital had security over the debtors and the receivables were required to be paid to it and only thereafter released to the Company after payment of the applicable fees and interest; all debts that were not the subject of the Factoring Facility, without discounting them for whether they could be recovered in a timely manner and in full; and other assets such as work in progress, finished goods, inventory, a bank guarantee with respect to rental obligations, and intangible assets being excluded because they could not be realised into cash to meet liabilities due and payable in the immediate future. As Mr Assaf points out, that analysis indicates a deficiency of working capital throughout 2017, which was more than $3 million in each month compared to the cash immediately available to the Company (other than May 2017, when it was $1.74 million) and became progressively worse through the Relation-Back Period (Solvency Report [211]; Table N). Mr Assaf also points to Mr Cathro's conclusion that, even if all accounts receivable were able to be collected in full, the Company could not meet its due and payable debts in any month from February 2017 onwards (Solvency Report, Ex P1, [219]; Table O).
[7]
Orders
For these reasons, I find that the Company was insolvent, within the meaning of s 95A of the Corporations Act, for the whole of the Relation-Back Period. The Plaintiffs do not seek an order as to costs against any of the Defendants, and I order that their costs of the separate question be costs in the winding up of the Company. I order the Plaintiffs to bring in short minutes of order to give effect to this judgment within 7 days.
[8]
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: 31 August 2021
Parties
Applicant/Plaintiff:
Australian Securities and Investments Commission (ASIC)
By paragraph 24 of their Points of Claim, the Plaintiffs contend that the Company was insolvent as at 18 July 2017 and, by virtue of s 588E(3) of the Act is presumed to have remained insolvent throughout the Relation-Back Period. That date in turn forms the basis of a common question to be determined by this judgment.
I now turn to a chronology of events, which I have largely drawn from the Plaintiffs' helpful chronology, which was supported by the documents to which I was taken in submissions by Mr Assaf, with whom Mr Krochmalik appears for the Plaintiffs. The Company was incorporated on 30 July 2014 and then known as Custom Coaches Australia Pty Ltd and its holding company, Custom Coaches Holdings Pty Ltd (later known as Custom Bus Holdings Pty Ltd (in liq)) ("Holdings") was incorporated on the same date. Allegro had the substantial economic interest in the Company at that time. In mid-August 2014, the Company purchased the business of Custom Coaches (Sales) Pty Limited from the external administrators of that company and changed its name to Custom Bus Australia Pty Ltd.
From 2014 or 2015, the Company was party to a receivables finance agreement described as a Partnership Factoring Agreement with 180 Capital Funding Pty Ltd ("180 Capital"), as later varied by a Deed of Variation executed on 13 February 2017 and assigned to Cashflow Finance Australia Pty Ltd ("Cashflow Finance"). Under that facility, 180 Capital advanced the Company 80% of the value of eligible debts payable to the Company, and the remaining balance (less interest and fees) was remitted to the Company after the customer paid the debt (Solvency Report, Ex P1, [131]). The limit of the Factoring Facility was $5.5 million and the Company's debts were subject to a security interest in favour of the financier (Solvency Report, Ex P1, [131]). The Company explored the option of increasing the facility limit from $5.5 million to $7 million and, in November 2017, draft documentation was prepared, which would have required that facility to be guaranteed by Messrs Burgess and Allegro but that documentation was not executed and the facility was not increased (Solvency Report, Ex P1, [106(e)]-[107]).
On 3 November 2015, the Company, Holdings and Allegro entered into a Convertible Loan Note Deed by which the Company raised debt finance and issued 7,200,000 loan notes with face value of $1.00 each ("Loan Notes") to Allegro. The Company's obligations to Allegro under the Convertible Loan Note Deed are secured by a General Security Agreement dated 23 September 2015.
On 4 November 2016, the Deputy Commissioner of Taxation ("DCT") issued a notice to Custom Bus in respect of an "overdue debt" of $105,775.14 which threatened that legal action would be brought if the debt remained unpaid.
Prior to 9 February 2017, Allegro was the principal financier and secured creditor of the Company, holding a security interest over the Company's assets and undertaking to secure obligations to repay the Loan Notes issued by Holdings and guaranteed by the Company. Allegro determined to exit its interest in the Company by that date. In a report dated 7 February 2017, prepared by Allegro to document the decision to sell down its investment in the Company to MPC, Allegro noted that improvements in the management of the Company's costs had not been enough to make the business cashflow positive, without increased volumes of bus production, and that the bus market was not providing enough volume growth to support an investment case for further funding of the Company by Allegro. Allegro also noted its view that a further investment of up to $3-5 million would provide 18 months of "runway", which I understand to be a period for the Company to return to viability, but observed that limited visibility in production beyond the next six months and ongoing uncertainty in market conditions did not give adequate certainty that that amount of capital would ensure the Company's turnaround was fully funded to recovery. That further funding was not provided, by reason of Allegro's exit from the business. That document also referred to Allegro's agreement to provide a loan for up to $900,000 if money was required to be paid in satisfaction of statutory liabilities incurred by Holdings or the Company prior to February 2017 on specified terms. However, that loan was required to be drawn down prior to 30 June 2017 and would have a term of six months. A loan of that duration, for an amount that was well short of the DCT's later assessment of outstanding PAYG tax, would not have restored the Company's solvency in any event.
The arrangements between the Company and Allegro were then restructured on 9 February 2017, and 3 million of the Loan Notes were cancelled, reducing the debt owed to Allegro from $7.2 million to $4.2 million (Solvency Report, Ex P1, [68]-[69]); Allegro sold 6,800,000 shares in Holdings (comprising more than half of its issued shares) to MPC for $1.00 (Solvency Report, Ex P1, [67]); and Allegro's representatives resigned as directors (Solvency Report, Ex P1, [70]). The Plaintiffs point out, and I accept, that transfer of the majority share in the Company for nominal consideration to MPC suggests that Allegro considers that the Company's equity then had no value. By the Side Letter dated 9 February 2017, by which Allegro's investment was restructured, Allegro offered the Company a $900,000 facility at the Company's request, repayable within 6 months, to assist the Company to meet that liability (Solvency Report, Ex P1, [75]; Ex P4, tab 6). These funds were ultimately not advanced by Allegro (Solvency Report, Ex P1, [83]).
On 24 February 2017, following an audit, the DCT reassessed tax liabilities arising from the Company's statutory lodgements between June 2016 and January 2017, raising a tax liability in the sum of $1,547,617 in respect of PAYG against the Company, and issued an amended assessment in that amount, a higher amount than had been anticipated by the Company's directors and management. The tax liability to the DCT was only repaid in part by four part-payments pursuant to a payment arrangement and the Company's net liability to the DCT was at least $1 million after February 2017 (Solvency Report, Ex P1, [153]; Ex P4, tab 10). On 27 February 2017, the Company engaged a firm of accountants, SCA Partners, to advise in relation to the PAYG liability and attempt to negotiate a payment plan with the DCT.
On 3 March 2017, 180 Capital assigned its interest in the factoring agreement to Cashflow Finance.
On 27 March 2017, SCA Partners made a submission to the DCT seeking a payment plan for the outstanding tax debt, pending agreement as to a final figure. An interim plan was agreed in around April 2017, requiring four interim payments of $50,000 for the period from April to July 2017.
On 2 June 2017, Revenue NSW issued a "Payment Overdue Notice" to the Company in relation to unpaid and overdue payroll tax of $107,591, plus interest. On 8 June 2017, SCA Partners sent an email to Revenue NSW proposing an 18 month payment plan for the outstanding payroll tax by instalments of $5,977 per month. On 15 June 2017, Revenue NSW agreed that Custom Bus could pay the payroll tax debt quantified as $129,460 by instalments, with the first payment due on 21 July 2017, and additional monthly instalments of $10,213 payable until 21 June 2018, with a final payment of $6,910 payable on 23 July 2018. Shortly afterwards, on 19 June 2017, Revenue NSW also sent a "Legal Notice: Payment Overdue" for $123,819 including interest and threatening court action, director penalty notices or the issue of a creditor's statutory demand.
The Company's financial statements for year ended 30 June 2017 record a net loss after income tax of $343,940 for FY17, a significant reduction to the Company's net loss after income tax of $10,320,707 for the previous financial year ending 30 June 2016.
On 21 July 2017, the DCT confirmed an agreed payment plan with the Company, which provided for payment of a total amount of $1,499,416 in monthly instalments of $90,347 starting on 1 August 2017 until 1 November 2018, with a final payment of $53,865 due on 1 December 2018. On 14 September 2017, the DCT approved a revised payment plan for the lesser amount of $1,486,553 in respect of unpaid or underpaid PAYG withholding tax, which provided for monthly instalments of $90,347 starting on 1 October 2017 until 1 January 2019, with a final payment of $41,001 payable on 1 February 2019 ("September 2017 DCT Payment Arrangement").
On 13 November 2017, the lessor of the Company's Villawood premises sought an explanation as to why the October rent for those premises had been short-paid by $42,500. On 16 November 2017, Mr Mark Burgess (a director of the Company), Mr Greg Shanley (its Chief Executive Officer) and an accountant from SCA Partners met with a registered liquidator, presumably to discuss its then financial position. An email dated 16 November 2017 from Mr Zhan to Mr Shanley attached an aged debtors statement for amounts due by the Company in respect of the Villawood premises, showing $253,575 in rent and associated liabilities due, of which $42,152 was overdue by 30+ days. Between 23 November and 13 December 2017, the lessor of the Villawood premises made further demands for payment of rent.
On 1 December 2017, the Company defaulted on the September 2017 DCT Payment Arrangement by failing to pay an instalment of $90,347, which remained unpaid when voluntary administrators were appointed to the Company. On 5 December 2017, the Company advised the DCT that it was unable to borrow funds to meet the debt due to it and sought to pay $10,000 per month for the first six months of a proposed payment plan, and then increase the monthly payments to $90,000. The DCT rejected that proposal, and SCA Partners then advised the DCT that the Company could make a maximum payment of $20,000 per month. On 21 December 2017, the Company also defaulted on the instalment payments due to Revenue NSW. On 1 January 2018, the Company failed to pay a further instalment due under the September 2017 DCT Payment Arrangement which also remained unpaid when voluntary administrators were appointed.
On 18 January 2018, the First Plaintiffs, Messrs Cathro and Lucan, were appointed as joint and several administrators of each of the Company and Holdings. On 23 May 2018, at the second meeting of creditors of each of the companies, the creditors resolved to wind up the Company and Messrs Cathro and Lucan were appointed joint and several liquidators of the Company and Holdings. Mr Lucan retired as a liquidator on 23 July 2021, leaving Mr Cathro the sole liquidator of the Company and Holdings.
Mr Cathro identified the matters which were relevant to a determination of solvency in orthodox terms. He expressed the view, which there is no reason to doubt, that the Company maintained proper books and records for the purposes of s 286 of the Act, although he identified adjustments he had made to those records in respect of the treatment of particular items for the purposes of his report. Mr Cathro expressed the view that the Company was insolvent from at least 24 February 2017 (although that proposition is not put by the Points of Claim and was not set down for determination at this hearing) and remained insolvent from that date until 18 January 2018. He identified indicators of insolvency including the Company's regular losses from July 2016, with the exception of small profits in three months in mid-2017; the fact that the Company's liquidity ratio (being the ability to pay current liabilities from current assets) and "quick ratio" (being the ratio of readily convertible assets to meet current liabilities) was below 1 from at least July 2016 until the administrators were appointed; a significant deterioration in the Company's liquidity during calendar year 2017; and the Company's consistent performance below budget, including that it generally produced less than the number of buses each month that were required, in its management's view, for it to break even.
Mr Cathro also referred to the multitude of threats by creditors and suppliers to cease supply, and to the many occasions on which suppliers ceased supply until further payments were made or supplied only on a cash on delivery basis, and to the fact that the number of creditors being paid beyond their payment terms appears to have increased through the 2017 calendar year. He also pointed to overdue commonwealth taxes from 24 February 2017 when the DCT issued an amended assessment in respect of the Company's statutory lodgements from June 2016 to January 2017, resulting in a tax liability of $1,547,617 against the Company, which had not been paid in full by the time the administrators were appointed nearly a year later, and expresses the view that the Company was insolvent at least from the point at which that tax liability arose. Mr Cathro also pointed to evidence the Company had sought but was unable to raise further equity or sell the business during the relevant period, and that it was also unable to obtain payment of an amount of $900,000 by way of a short term loan to which Allegro had agreed in February 2017, which would have been insufficient to cover the Company's liquidity needs in any event. Mr Cathro also expressed the view, and the evidence indicates, that the Company was unable to generate sufficient cashflow from operations from at least February 2017 to satisfy its obligations to creditors, including its tax debt to the DCT.
These conclusions are supported by a very detailed chronology of events and a review of the documents, which have been tendered and to which I have been taken in submissions, and a detailed review of the Company's financial position and financial performance, which evidences its inability to pay its debts as they arose on an ongoing basis. Mr Cathro also points to evidence, to which I have been taken in submissions, indicating that the Company's accounting staff were selectively paying suppliers and creditors from at least August 2017, and very likely earlier, and to the multiple demands for payment by creditors and suppliers received at an accelerating rate throughout the 2017 calendar year.
Mr Cathro concludes that, based on the evidence as a whole and adopting what he describes as a "conservative approach" the Company was insolvent from at least February 2017. It seems to me that that conclusion is established having regard to Mr Cathro's analysis of the Company's financial position and its aging debts over that period, the Company's inability to pay the debt due to the DCT throughout that period, and the multiple demands from suppliers and creditors, which indicate the Company's inability to pay the debts due to those suppliers and creditors within their ordinary trading terms.
The Plaintiffs also tendered (Ex P2) and I have had regard to the meeting packs for the Company's board meetings between January and October 2017. They also tendered (Ex P3) the documents relied upon in Mr Cathro's report, which include the detailed chronology of supplier demands prepared by Mr Cathro and his staff to which I have referred above, and a multitude of internal communications within the Company referring to the difficulties of paying suppliers and the steps which were taken to manage and prioritise supplier payments. That exhibit also includes contemporaneous documents recording the shortfall in the Company's bus production against its forecast production, throughout much of the period, which appears to have substantially contributed to the monthly losses over the period.
The Plaintiffs also tendered (Ex P4) extracts from Exhibit SJC-3 to Mr Cathro's affidavit, including financing documents between the Company and Allegro and Allegro's report dated 7 February 2017 to which I referred above. That exhibit also contains documentation relating to the Company's dealings with 180 Capital and Cashflow Finance, to unsuccessful attempts to increase the limit of its factoring facility or obtain lease finance from an alternative provider, and to the Company's dealings with the DCT in respect of the outstanding tax liability. That exhibit also contains internal documents of the Company which indicate that, from time to time, it was hoped that the Company could manage its financial position so as to continue its business, but it seems to me that those documents largely involve managing that business by extending the time for payment to creditors beyond their due dates and raising additional finance which was ultimately not available to the Company, and do not exclude the finding of insolvency which would otherwise arise from the matters to which I have referred above. The Plaintiffs also tendered (Ex P5) a selection of the many demands and notifications that supply to the Company had been stopped, issued by creditors and suppliers during the relevant period.
For completeness, I should note that the Plaintiffs also relied on the affidavit dated 18 January 2021 of Mr Michael Guest, which referred to service of the Originating Process, and the supporting evidence on the First Defendant, Ausmotor International Pty Ltd ("Ausmotor") which, as I noted above, has not appeared or taken an active role in the proceedings. The Plaintiffs also relied on the affidavit dated 9 August 2021 of their solicitor, Ms McCoy, which referred to correspondence with Ausmotor, which makes clear that Ausmotor is aware of the proceedings although it has chosen not to appear in them. That will, of course, not be sufficient for Ausmotor to avoid being bound by their outcome.
The case law has recognised that, although each case is to be decided on its own facts, insolvent companies tend to share common symptoms of financial stress, which include those identified in Australian Securities and Investments Commission v Plymin (No 1) above at [386]. Mandie J there 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 Quick v Stoland Pty Ltd (1998) 87 FLR 371; 157 ALR 615; (1998) 29 ACSR 130 at 138, Emmett J summarised the applicable principles as follows:
"In order to determine whether the company was solvent at a given time, it would be relevant to consider the following matters:
• All of the company's debts as at that time in order to determine when those debts were due and payable.
• All of the assets of the company as at that time in order to determine the extent to which those assets were liquid or were realisable within a timeframe that would allow each of the debts to be paid as and when it became payable.
• The company's business as at that time in order to determine its expected net cash flow from the business by deducting from projected future sales the cash expenses which would be necessary to generate those sales.
• Arrangements between the company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts."
Mr Assaf notes that the same result as to a deficiency in working capital follows on more favourable assumptions, including if "sundry creditors" as to which the trading terms are not identified are ignored (Solvency Report, Ex P1, [202]; Table L]) or by taking into account all debtors (irrespective of whether they were due and therefore immediately recoverable) and all creditors (irrespective of whether the amounts were currently due and payable (Solvency Report, Ex P1, [224]-[225]; Table Q).
Mr Assaf also points to the Company's ongoing losses (Solvency Report, Ex P1, [157]-[161]) which reduced the Company's remaining capital available to meet its debts and to the fact that the Company had a deficiency of net assets in the period prior to and during the Relation-Back Period (Solvency Report, EX P1, [123]-[132], [144]) and had a liquidity ratio (that is, current assets were less than current liabilities) of less than 1.00 at all times from July 2016 on (Solvency Report [135]-[138]) and had a current ratio of substantially less than 1.00 (that is, readily realisable assets were substantially less than current liabilities) from July 2016 on (Solvency Report [139]-[143]). Mr Assaf also points to the aging of debts due to creditors through 2017, and Mr Cathro's analysis indicates that the quantum of outstanding debts due to creditors doubled between February 2017 and December 2017 (Solvency Report, Ex P1, [149]) and, after June 2017, creditors whose debts were outstanding for 60 days or less decreased substantially while creditors whose debts were outstanding for more than 60 days increased substantially (Solvency Report, Ex P1, [144]; Table G). Creditors whose debts were unpaid or delayed included the company's landlord and critical suppliers such as the bus manufacturers (Ex P4, tabs 41A, 43A). Mr Assaf also points out that, as I noted above, debts due to statutory creditors including the DCT and Chief Commissioner of State Revenue in New South Wales were also not paid on time and various payment arrangements were in place and not met by the Company (Solvency Report, [152]-[156]; Ex P4, tabs 21, 22 and 24).
Mr Assaf points out that the Company was unable to raise further funding to improve its ability to pay debts that were due and payable and Allegro ultimately did not advance funds under the facility of $900,000 for statutory liabilities, to which I referred above, although it was asked to do so [Ex P4, tab 6; Solvency Report, Ex P1, [76]; Ex P4, tab 19]. Mr Assaf also submits, and I accept that, even if the terms of that loan had been agreed by the parties (which did not occur), and the loan had been drawn upon, the monies were repayable within six months under cl 8(a) of the Side Letter and that borrowing would not have improved the Company's solvency, since it would have replaced immediately payable debt with a debt repayable in the very near term. He also points out that facility was only available to be drawn upon until 30 June 2017 and had lapsed by the commencement of the Relation-Back Period. That funding would not have been sufficient in any event. An increase in the Factoring Facility did not proceed. Attempts to raise other debt finance (including by equipment finance) were also not successful (Solvency Report, Ex P1, [106].) Although a number of communications with directors in the second half of the calendar year referred to the possibility they would advance further funds (Solvency Report, Ex P1, [108]-[117], that also did not occur. Attempts to sell the business of Custom Bus also did not succeed (Solvency Report [84]-[105]).
Mr Assaf also points to multiple internal communications among the Company's directors and senior management which recognised the Company's cashflow difficulties of Custom Bus throughout 2017 (Ex P3). I have also referred above to the multiple suppliers making demands for payment on overdue payments, threatening to cease supply and actually ceasing supply of goods and services to the Company and its default in respect of rental on its leased premises.
Mr Assaf also points out that the recognised indicia of insolvency noted in Australian Securities and Investments Commission v Plymin were largely satisfied. The Company had incurred continuing losses since at least mid-2016 (Solvency Report, Ex P1, [169]-[173]); as I have noted above, it had a working capital deficiency since as early as January 2017 and a liquidity ratio below 1.00 since July 2016 (Solvency Report, Ex P1, [135]-[143], Sections 8 and 9); as noted above, it had substantial overdue taxes owing to both the DCT and the Chief Commissioner of State Revenue from February 2017 onwards (Solvency Report, Ex P1, [152]-[156]); it had filed to raise alternative finance of further capital or sell the business (Solvency Report, Ex P1, [84]-[117] and [120]); and I have referred above to suppliers placing the Company on cash on delivery or demanding payment before resuming supply; and creditors were increasingly unpaid outside trading terms throughout 2017 (Solvency Report Ex P1, [146]-[151]).
I am satisfied that the evidence to which Mr Assaf refers indicates that, during the whole of the Relation-Back Period, the Company could not meet debts then due to its creditors, and the Company was insolvent throughout the whole of the Relation-Back Period.