Deputy Commissioner of Taxation, in the matter of Tank Sales Sydney Pty Ltd v Tank Sales Sydney Pty Ltd

1. Tank Sales Sydney Pty Ltd be wound up in insolvency.
2. David Lombe of Deloitte Financial Advisory is appointed the liquidator of the defendant corporation.
3. The plaintiff's costs of these proceedings be fixed in the amount of $2,897.98. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

FARRELL J: 1 On 27 March 2018, the Court made orders winding up the defendant, Tank Sales Sydney Pty Ltd (the Company), appointing David Lombe of Deloitte Financial Advisory as its liquidator and fixing the costs of the Deputy Commissioner of Taxation (DCT) in an amount of $2,897.98. These are the reasons for making those orders. 2 The application to wind up the Company under ss 459A and 459P of the Corporations Act 2001 (Cth) was filed by the DCT on 25 August 2017. It relied on the Company's failure to comply with a statutory demand dated 16 June 2017. The demand was for an aggregate amount of $269,073.15 relating to a running balance account deficit debt as at 16 June 2017 under the BAS provisions as defined in s 995-1(1) of the Income Tax Assessment Act 1977 (Cth), administrative penalties due under Pt 4-25 of Sch 1 of the Taxation Administration Act 1953 (Cth) and general interest charge payable under s 8AAZF of that Act as well as the superannuation guarantee charge and additional superannuation guarantee charge for late payment. 3 On 13 November 2017, the Company filed a notice of appearance and its ground of opposition was that it is not insolvent. In submissions filed by the Company on 17 November 2017, the Company submitted that it was not insolvent, but suffering a short term cash flow issue. It submitted that its current assets outweighed its current liabilities. It said that its "main liability" - a debt of $1,312,647 - was owed to a creditor (Robin Glover) who had confirmed that she was not calling on that debt and did not expect to call on it in the foreseeable future. This latter assertion was supported by an affidavit sworn by Ms Glover on 10 November 2017. Ms Glover said that she lent the money to the Company so that it could continue its day to day operations while it conducted litigation which had commenced in the District Court of New South Wales in 2015 against White Logistics Pty Ltd. 4 The Company also relied on an affidavit sworn by Michael Crawford on 11 November 2017. Mr Crawford is the Company's sole director. Mr Crawford submitted that he expected to be successful in the litigation in a sum exceeding $390,000 together with costs and interest on the sum awarded. He said: (1) The Company is suffering a temporary cash flow issue as a direct result of legal costs associated with running litigation resulting in a three day trial; (2) He had lent money to the Company which is only payable upon demand which he does not intend to make in the foreseeable future; (3) Ten tanks owned by the Company were being held by White Logistics. Consequently, the Company could not sell them. However, as soon as the tanks were released by order of the District Court or damages awarded for their detention, the Company would be in a position to pay the debt to the DCT in full. 5 Annexed to the affidavit were tax returns lodged by the Company for the financial years 2016 and 2017 and unaudited financial statements for 2016 and 2017. 6 The application was adjourned on 17 November 2017 and subsequently on 29 September 2017, 27 October 2017, 20 December 2018 and 17 January 2018. On 12 February 2018, an order was made by consent under s 459R(2) of the Corporations Act. The order extend the time to determine the winding up application until 25 May 2018. On 18 February 2018, the District Registrar referred the application for determination by a Judge on the Company's request. At a case management hearing held on 9 March 2017, the application was adjourned to 27 March 2018 on the basis that the District Court would hand down its judgment on 23 March 2018. The parties were given leave to file updating evidence and submissions by midday on 26 March 2018. No new evidence was filed, but the DCT filed comprehensive written submissions in support of its application shortly before the hearing. 7 The legal representatives for both parties appeared at the hearing on 27 March 2018. The Company's legal representative, Mr Long appeared by telephone. 8 Mr Long advised the Court that the District Court had handed down judgment and awarded the Company damages in the amount of $267,000. He acknowledged that this would not be enough to satisfy the debt owed to the DCT. He also advised that there had been no offer to lend the Company further funds. The Company would otherwise rely on its submissions filed in November 2017. 9 The DCT relied on: (1) The affidavit of Nishant Smith (an employee of the Australian Taxation Office) affirmed on 16 June 2017 in relation to service of the statutory demand by post. A copy of the statutory demand and the affidavit of Nishant Smith affirmed on 16 June 2017 attesting to the fact that the debt remains outstanding are set out in annexure NS-1. Having regard to s 29 of the Acts Interpretation Act 1901 (Cth) and s 160 of the Evidence Act 1995 (Cth), the statutory demand is deemed served on the Company on 22 June 2017 at the address of the Company's registered office. That address is set out in the search of the register maintained by the Australian Securities and Investments Commission (ASIC) attached to Ms Bonsu's affidavit referred to below. The address is recorded as operative since 7 November 2012. (2) The affidavit of Gisele Bonsu (a public servant) affirmed on 22 August 2017 which supports the application for winding up. It verifies the matters set out in the application and, in particular, that the Company failed to comply with the requirements of the statutory demand and that as at the date of the affidavit, the amount of $269,073.15 remained due to the Commonwealth. (3) The affidavit of service of the application to wind up the Company and the supporting affidavit sworn on 4 September 2017 by Anita Chedid (an employee of the DCT's solicitors). These documents were sent by post to the Company's registered office on 28 August 2017. (4) The affidavit of publication and lodgement sworn on 20 September 2017 by Daniella Provera (an employee of the DCT's solicitors) in which she attests to lodging a "Form 519 - Notice of Court Action Relating to Winding Up" with ASIC on 25 August 2017 and lodging for publication on the "ASIC Insolvency" website on 19 September 2017 a "Notice of Application for Winding Up" and evidence of its publication on that date. 10 I note that the Company did not dispute, in either of its written or oral submissions, that it owes the DCT the debt claimed in the statutory demand. It also has not disputed that it was served with all relevant documents. Mr Long did not claim that there was any failure by the DCT to comply with the formal requirements of the Corporations Act or the Federal Court (Corporations) Rules 2000 (Cth) in relation to this application. 11 I accepted the DCT's submission that it had established its entitlement to a winding up order unless the Company could rebut the presumption of insolvency which arises under s 459C(2) by establishing that it is solvent. In its written submissions, the DCT relied on the often cited summary of the principles relevant to the determination of solvency by Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44]: • The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s459C(2) and (3); Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v Simionato Holdings Pty Ltd. (1997) 15 ACLC 477 per Mansfield J. • In order to discharge that onus the Court should ordinarily be presented with the "fullest and best" evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J. • 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. • There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company's assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (supra); Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (supra) at 465-466. • The adoption of a cash flow test for solvency does not mean that the extent of the company's assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (supra) at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J. • The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (supra) at 466-467. • It is no abuse of process for an applicant to seek to wind up a company presumed to be insolvent by reason of its failure to comply with a statutory demand merely because that company contends that it is solvent, or because there may be alternative means available to the applicant to vindicate its rights: Elite Motor Campers Australia v Leisureport Pty Ltd (supra). 12 Fairly, the DCT also drew attention to the dicta of Finkelstein J in Deputy Commissioner of Taxation v De Simone Consulting Pty Limited [2007] FCA 548 at [10]-[14] in which his Honour rejected the proposition that only audited financial statements would be probative of solvency. 13 The DCT opposed the Court admitting the Company's 2016 and 2017 tax returns and financial statements into evidence on the basis that they are hearsay evidence, relying on the decision of Brereton J in In the matter of JKAM Investments Pty Ltd [2016] NSWSC 1955 at [7]. There, Brereton J found that a "Current Statement of Assets and Liabilities" prepared by that company's accountant for the purposes of the proceedings was not admissible on the basis that it was not a business record. In this case, I formed the view that the tax returns and financial statements are business records and should be admitted into evidence. However, I do accept that they should be accorded little weight in the absence of direct evidence of the values attributed to significant assets of the company and current evidence of liabilities and access to funds. 14 In this case, the DCT correctly submits that: (1) The Company's 2017 tax return indicates that it traded at a loss of $171,953 for the period ended 30 June 2017. I note that it also reveals that the Company has traded at a loss each year since 2012-13 and it had accumulated losses at 2011-12 of $818,740. It also discloses that the Company had current assets of $1,114,644 and total assets of $1,135,696, while its current liabilities were $608,188 and its total liabilities were $2,078,953. (2) The Company's unaudited financial statements as at 30 June 2017 (which were drawn up on information from Mr Crawford) indicate that the trading loss of $171,953 in that year had increased from $99,528 in the previous financial year. The Company's cash at hand was $520, compared with $59,071 in the previous financial year, albeit that it had $8,800 in a CBA cheque account compared to an overdrawn amount of $447 in the previous financial year. The statements disclose that the Company's primary current assets are trade debtors of $256,545 and "stock in hand" of $823,930 but there is no evidence of the recoverability of the debt or the saleability of the stock within a reasonable period so that it can pay creditors. 15 I also accept the DCT's submission that this information is now approximately 9 months old and no updated information has been provided. Given the Company's trading history and having regard to the advice provided to the Court by its legal representative referred to at [8] above, the Company is plainly not able to pay its debts as they fall due without further advances by Mr Crawford, Ms Glover or some other person. There is no evidence that such support will be forthcoming even if Mr Crawford and Ms Glover are willing to forebear from making demand for payment of the Company's indebtedness to them. In those circumstances, the Company had not discharged its onus of proving its solvency. No other basis for the Court to exercise its discretion against making the winding up order was established. The orders were therefore made. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.