Accounting evidence
102 Mr Holmes, a chartered accountant, gave evidence on behalf of the applicants. Mr Muller who had qualifications in accountancy and management was called by Mr Atkins as part of his defence; effectively, however, Mr Muller's evidence was in aid of both respondents. Mr Holmes was of the opinion that Greenline became insolvent in February 1991, shortly after the termination of the Boral contract. With that termination its only source of income dried up but non-operating outgoings continued to be incurred. It was Mr Holmes' evidence that Greenline remained insolvent thereafter for the remainder of its corporate life.
103 Mr Muller was of a contrary opinion but in the confrontation of opinions I prefer that of the applicants' witness. Mr Muller was of the opinion that Greenline, up to 31 October 1991, would have had a reasonable expectation that it would be able to pay its debts as and when they became payable. He conceded under cross-examination that there were other factors pointing in the opposite direction, but he maintained that he had taken those factors into consideration when arriving at his final opinion. I believe that Mr Muller set about his task by using all means at his disposal to drag this company out of its insolvency; in doing this he allowed his judgment to be overborne by his objective. Two examples from Mr Muller's evidence point to a lack of objectivity. The first related to his treatment of the "Nillinghoo debt". Mr Atkins had used Greenline's funds to invest in a mining venture that was known as "Nillinghoo". He said in evidence that his partner in the venture, a Mr Scarfe, died a week before Easter 1991; he recognised that Mr Scarfe's death meant that he and Greenline had no hope of recovering any of the money that Greenline had invested in the mine. He said that he tried to dispose of the mine but found it impossible. The finance company took back the equipment after he had tried to sell it for six months or so. Based on this evidence I find that the value of $35,744 given to this asset in the balance sheet of Greenline as at 30 June 1991 (Ex A32) is inaccurate and, based on the events described above, it should have been recorded as having no value.
104 In the preparation of his original report, Mr Muller had removed the Nillinghoo debt of $35,744 as he considered that it was irrecoverable. In the preparation of some adjustments shortly prior to giving evidence he brought the debt back in at its full value. His note to his adjustment was: "Advised that circumstances such that it may have been too early to write off at this point." When asked to explain what "advice" he had been given, it transpired that Mr Muller acted on information that Mr Atkins had given him. Notwithstanding the nature of that information, the fact remains that Mr Atkins acknowledged that the death of Mr Scarfe at Easter 1991 meant that neither he nor Greenline had any hope of recovering any money out of the Nillinghoo venture. Mr Muller was at fault in simply relying on Mr Atkins' information; he should have made some independent inquiries. Those inquiries would have quickly revealed that the investment was worthless. This was an important issue. The exercise that Mr Muller was undertaking when he made his adjustments to his original report was directed towards ascertaining the likely value of the net assets of Greenline. His starting point was the company's accounts for the year ending 30 June 1991 which showed that the company had a deficiency of $57,665. Having made upward adjustments for debtors and plant, Mr Muller was able to convert that deficiency into a surplus, but only by retaining the Nillinghoo investment as an asset. That factor shows how important it was to be sure of its correct value. As it is, the excision of the figure of $35,744 wipes out the surplus that Mr Muller calculated and leaves a deficiency of $9,390 on his figures.
105 The second area in which I am critical of Mr Muller's approach related to his treatment of certain items of plant and equipment. Mr Muller capitalised $65,911 as the value of plant that Greenline had bought during the 1991 financial year. Amounts to that value had been written off as repairs and maintenance in the preparation of the company's accounts. In my opinion, Mr Muller was correct in principle to do this - many of the items were clearly items of a capital nature. However, I do not agree with him bringing all such assets to account at cost. As he acknowledged, the correct exercise is to bring them to account at the lower of cost or market value, but he made no attempt to assess the likely market value of any of the items that he brought to account as capital. Some of them must be highly suspect. For example, tyres to the value of $5,683 were purchased in mid-May; they were brought to account by Mr Muller in his adjustments as capital acquisitions at cost. There is no evidence, one way or the other, to suggest that these tyres were on hand as at 30 June 1991 as unused reserve stock. Bearing in mind that this company was establishing a new venture, substantially on borrowed funds and extended credit from suppliers, it is more probable than not that most, if not all, of the tyres would have been needed for immediate use. In addition, it is to be remembered that the wear and tear on tyres would have been very heavy. Greenline was operating on unsealed country roads hauling heavy loads of manganese ore. As a matter of pure accounting - and for income tax purposes - one can accept that the purchase of the tyres was part of the purchase by the company of the equipment that it needed for its new venture in Port Hedland. In that sense it is correct to treat the tyres as part of the capital cost of establishing a new business. However, I am quite sure that the inclusion of the tyres at cost would create an unreal situation. Some attempt should have been made to ascertain whether they were unused as stock in reserve (in which case, cost value might have been appropriate) or, as is more likely the case, whether they had been fitted to the vehicles and put into operation. In that latter case, the idea of treating them as having a value equal to cost would be quite wrong. What I have said about bringing tyres to account at cost, applies also to most, if not all of the items of plant that make up the figures of $65,911. Mr Muller did make an allowance of $1,000 which he described as depreciation but, in my opinion, such an amount would be quite inadequate in the circumstances of this case. The nature of the company's business and the roads over which its vehicles had to travel would have required a much greater allowance.
106 The exercise of examining items of expenditure (such as the costs of tyres, painting, sand blasting, replacement of worn springs and suspensions) to decide whether they should be treated as items of capital expenditure or on account of revenue was not, in the particular circumstances of this case, a useful exercise. If they were to be treated as items of capital as Mr Muller suggested, they would have increased the value of the company's assets in its books of account and, in addition, they would also have increased its profitability by having them removed as items of expenditure for repairs and maintenance. But that treatment would not have materially improved the company's ability to pay its debts as and when they fell due. The company could not, from a practical point of view, sell any of those assets for they represented an essential part of the company's only income earning asset. Mr Muller acknowledged that it would not be realistic to contemplate the company selling either of the road trains to raise funds to pay creditors; these assets were the source of the company's income and without them the source of income would be lost. However, he did advocate that one should allow for the possibility that the company could sell some or all of its assets on a "lease back" arrangement. In my opinion this was not a feasible proposition in the circumstances of this case. The State Bank of South Australia held a debenture charge over the whole of the assets of the company and was expressing serious concern about the state of its account; the second prime mover had been financed by Esanda Ltd; all in all, the prospect of a sale and lease back was not tenable. The only value that might be achieved by such an exercise would be an attempt to show that the readjusted accounts might have given the company the potential to borrow further monies based on the value of its assets and on its profitability. However, there was no evidence that any such exercise was examined and the correspondence from the State Bank in particular suggests that such an exercise would have been fruitless. Mr Keith submitted that Greenline could have leased the dolleys instead of purchasing them; this is not a helpful submission because the company did not lease them - it purchased them and, in so doing, incurred a debt.
107 In any event, such a hypothesis is of little use when considering Mr and Mrs Atkins' expectations at the times when various debts were incurred. Mr Muller's adjustments and theories would not have been known to the directors. What financial knowledge they would have had, would have been based on the information that Mr Birdseye had given to them - and the practical manifestation of that advice was, ultimately, the accounts of the company that he prepared as at 30 June 1991. In other words, the state of a company's accounts will never be the final determiner. In Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 at 435-6 Gummow J said:
"At the trial, a great deal of attention was focussed on the level of indebtedness of New World and whether its liabilities exceeded its assets. However, this in itself does not directly answer the issue raised in [par 592(1)(b).] The issue is not dealt with by analysing a hypothetical instantaneous liquidation."