Australian Securities and Investments Commission v Plymin [2024] NSWSC 34 | Case summary

Applicable legal principles

The question whether the Company was insolvent in the relevant period is to be determined by reference to s 95A(1) of the 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 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 ("ASIC v Plymin"), 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; SX Projects Pty Ltd (in liq) 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 and Re Custom Bus Australia Pty Limited (in liq) [2021] NSWSC 1036 ("Custom Bus") at [33]ff, on which I have drawn for this summary of the applicable principles.
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 May also refers to the observations of Gleeson JA in Re BBY Ltd (Receivers and Managers Appointed) (in liq) and BBY Holdings Pty Ltd (Receivers and Managers Appointed) (in liq) (2022) 409 ALR 558; [2022] NSWSC 29 at [156] that: "A useful summary of principles for the determination of solvency for the purpose of s 95A was provided by Palmer J in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621 at [54]. Several matters deserve repeating. Solvency or insolvency is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole. An assessment of solvency requires regard to commercial realities when considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and whether such realisations are achievable. It is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade, but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency."
His Honour also there referred to the "indicia of insolvency" to which Mandie J referred in ASIC v Plymin and observed (at [162]-[164]) that: "The presence of one or more of the above indicia of insolvency is not necessarily conclusive of insolvency: Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 at 655 (Doyle CJ). Nor is the absence of one or more of the above indicia inconsistent with the conclusion that a company is insolvent: Re Ashington Bayswater Pty Ltd (in liq) [2013] NSWSC 1008 at [5] (Black J). Where a liquidator is seeking to recover an unfair preference, the issue of solvency as at a date prior to the winding up necessitates an inquiry into what actually happened. Palmer J described this as 'retrospective insolvency' in Lewis v Doran at [108] when remarking: "Where the question is retrospective insolvency, the court has the inestimable benefit of the wisdom of hindsight. One can see the whole picture, both before, as at and after the alleged date of insolvency. The court will be able to see whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due and whether it did, or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and common sense, had to be considered as at the date of insolvency. By reference to what actually happened, rather than to conflicting experts' opinions as to the implications of balance sheets, the court's task in assessing insolvency as at the alleged date should not be very difficult. The liquidator has the onus to prove that the company was insolvent at the relevant time(s): Welcome Homes Real Estate Pty Limited v Ziade Investments Pty Limited [2007] NSWCA 167 at [40], [46(2)] and [70] (Hodgson JA, Spigelman CJ and Santow JA agreeing); mere suspicion of insolvency cannot substitute for proof: M & R Jones Shopfitting Co Pty Ltd (in liq) v National Bank of Australasia Ltd (1983) 68 FLR 282 at 288-289; (1983) 7 ACLR 445 at 450-451 (Wootten J)."
I also summarised the applicable principles in Custom Bus (at [34]-[36]), to which Mr May also refers, as follows: "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]. 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]."
Mr May also refers to the recent judgment of Ball J in Re Harmony Homes Pty Ltd (in liq) (No 2) [2023] NSWSC 816 ("Harmony Homes") at [5], where his Honour referred to the judgment of Barrett J in Sutherland & Anor as joint liquidators of Australian Coal Technology v Hanson Construction Materials Pty Ltd [2009] NSWSC 232 at [8]-[9] and noted that s 95A of the Act calls attention principally to the cash flow test of insolvency, with subsidiary relevance to the balance sheet test. Ball J there identified several factual matters which established that company's insolvency, namely that company's liquidity ratio (that is, the ratio of its current assets over its current liabilities) was significantly less than one during the whole of the relevant period and was trending downwards; that company had no capacity to borrow money or to raise additional capital; that company suffered significant trading losses over the relevant period; that company had overdue Commonwealth and State taxes which had increased over the period and had defaulted on a number of occasions on payment arrangements it had reached with the Australian Taxation Office ("ATO"); suppliers had placed that company on cash delivery terms and a number of suppliers had demanded payment, threatened to commence proceedings or commenced proceedings, and substantial amounts owed to trade creditors were more than 3 months overdue; that company had made a substantial number of rounded payments to creditors that cannot be reconciled to the payment of specific debts; and that company was unable to produce timely and accurate information concerning its financial position.

Australian Securities and Investments Commission v Plymin

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