Deputy Commissioner of Taxation, in the matter of Flowersfirst Pty Ltd v Flowersfirst Pty Ltd

1. The defendant be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth).
2. Liam Bailey of O'Brien Palmer be appointed as liquidator of the defendant.
3. The costs of the plaintiff fixed in the amount of $3,935.00 to be paid out of the assets of the defendant. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

GLEESON J: 1 On this winding up application, the sole issue was whether the defendant company (company) was solvent. 2 The company was presumed insolvent, having failed to comply with a statutory demand served under s 459E of the Corporations Act 2001 (Cth) (Act): s 459C(2)(a). 3 The company relied on the following evidence: (1) Affidavit of Hao (Justin) Yin, director of the company, affirmed 24 July 2019; and (2) Affidavits of Shuangchen (Frank) Li, chartered accountant, affirmed 10 July 2019 and 31 July 2019. 4 Mr Yin's affidavit was that he proposed to pay the company's debt to the plaintiff by four instalments commencing with a payment of $100,000 on the day of the hearing. The total of the proposed instalment payments was $352,018.24, substantially less than the total outstanding tax debt of $468,444.88 identified by Mr Li. Mr Yin also gave some evidence about expected revenue from a recently signed licence agreement and management fees payable under another recently signed agreement. 5 Despite Mr Yin's evidence, by the time that the matter came on for hearing, the payment of $100,000 had not been made and there was no indication that the payment was imminent. In those circumstances, there was no reason for confidence that Mr Yin's proposal would be given effect or that the company's resources included financial support from Mr Yin in accordance with the proposal. 6 Mr Li contended that the company is solvent. His evidence showed that he was engaged by the company on 9 July 2019. Mr Li's opinion, contained in his second affidavit, was evidently based on the assumed availability of $100,000 from Rose & Co Franchise Pty Ltd, and several other amounts that were expected to become available in the reasonably near future, including finance presently being sought in the amount of $150,000; a payment from a "new member to join the franchise"; and a "lease incentive" in the sum of $135,000 expected to be received in mid-late December 2019. The "new member" was said to have already paid a deposit of 50% of the total franchise fee of $250,000. Mr Li reiterated that: "Client is willing to commit to make payment toward outstanding balance as suggested above and we believe client is able and capable to sustain the payment plan." 7 A letter annexed to Mr Li's 10 July 2019 affidavit contained a similar statement, and also referred to an amount of $100,000 from Rose & Co Franchise Pty Ltd, said to be available for making an upfront payment against the outstanding tax debt. 8 Thus, the evidence was that the company had $100,000 available on about 10 July 2019, and on 31 July 2019, but the evidence was not supported by any payment in reduction of the company's tax debt. 9 There was no other evidence of the company's financial position. In particular, the evidence did not include financial statements and there is no evidence of whether the company has any liabilities apart from its tax debt. 10 Section 95A(1) of the Act provides that a person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. By s 95A(2), a person who is not solvent is insolvent. 11 Whether a company is able to pay its debts as and when they fall due is a question of fact to be determined in all the circumstances, including the nature of its assets and business, and the court will have regard to commercial realities in that regard: Deputy Commissioner of Taxation v Peter Sleiman Investments Pty Ltd as trustee for the Sleiman Family Trust [2016] NSWSC 1657 at [82]. 12 In In the matter of GHS Safety Products Pty Ltd [2019] NSWSC 668 at [34], Rees J said: [A] company must put forward "the fullest and best" evidence of its financial position in order to establish solvency: Commonwealth Bank of Australia v Begonia Pty Ltd (1993) 11 ACLC 1075 at 1081 per Hayne J; Deputy Commissioner of Taxation v De Simone Consulting Pty Limited [2007] FCA 548 at [14]. As Santow JA (with whom Meagher and Handley JJA agreed) explained in Expile Pty Limited v Jabb's Excavations Pty Limited (2003) 45 ACSR 711; [2003] NSWCA 163 at [16]: Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J. 13 Without more evidence, I was not satisfied that there was an adequate foundation for Mr Li's opinion as to the solvency of the company. Particularly in the light of the company's failure to make the first of the proposed instalment payments prior to the hearing, there was no reason for confidence that the company would pay its tax debt in the matter proposed by Mr Yin. This failure strongly indicates that the company does not have access to $100,000, contrary to what is implied by Mr Yin's affidavit and asserted by Mr Li. Otherwise, the evidence fell far short of supporting a conclusion that the company is able to pay its debts, as and when they become due and payable. 14 It followed that the company failed to prove that it was solvent, and must be presumed insolvent. 15 Accordingly, the company was ordered to be wound up and a liquidator was appointed. Costs were fixed in an amount which falls within the scale amount of $4,230: r 13.1 of Sch 3 of the Federal Court Rules 2011. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.