Deputy Commissioner of Taxation v Barblance Pty Ltd

Judgment (6 paragraphs)

[1]

REASONS FOR JUDGMENT 1 A Deputy Commissioner of Taxation (Commissioner) has made this application under s 459P of the Corporations Act 2001 (Cth) (the Act) for the winding-up of Barblance Pty Ltd ACN 101 828 924 (Barblance). 2 The application is made on the basis of an alleged failure by Barblance to comply with a statutory demand. There is no contest as between Barblance and the Commissioner that the ground as alleged is made out. In other words, it is established, on the evidence, that the company has failed to comply with a statutory demand. 3 The application for winding-up has been adjourned on two occasions after its initial filing. The case has been referred to me today from the registrar's list. 4 Before the registrar, Barblance was initially disposed to seek an adjournment of the winding-up application. Upon the case being called on before me though, Barblance was content for the application to be heard and determined today. Today is the date upon which, by adjournment, the application for winding-up falls for hearing. 5 The Commissioner was not disposed before the registrar to agree to an adjournment and before me sought to press for the hearing and determination of the winding-up application. In that endeavour, the Commissioner was not alone. An appearance was made on behalf of Coles Group Property Developments Ltd (Coles Group), which it was common ground was a trade creditor, to support the Commissioner's application for winding-up. 6 Regard to the application made by the Commissioner, and to the evidence led, discloses that the foundation for the demand which the Commissioner made of Barblance is an indebtedness to the Commonwealth, payable to the Commissioner, arising in respect of a multi-faceted (but, it must be said all too familiar faceted) debt. That debt comprises (a) a running balance account deficit debt, the composition of which includes amounts due under the Business Activity Statement provisions of the Income Tax Assessment Act 1997 (Cth), and PAYG instalment provisions of the Taxation Administration Act 1953 (Cth), together with related administrative penalties and general interest charge; and (b) a superannuation guarantee charge or charges, together with the general interest charge payable thereon. 7 At the time when the Commissioner's application was made on 7 July 2010 the total amount of the indebtedness to the Commonwealth was $119,004.29. According to the evidence read today on behalf of the Commissioner, the indebtedness of Barblance to the Commonwealth is a total of $98,677.58. The indebtedness is made up of two principal components: 1. running balance account debt of $55,225.59, and 2. superannuation guarantee charge debt of $43,451.99. 8 It is also worthy of note that the accounting system maintained by the Commissioner discloses, and I find as a fact, that Barblance has owed the Commonwealth a sum, payable to the Commissioner, in excess of $60,000 by way of a running balance account debt, since April 2008. Further, Barblance's "account" with the Commissioner has not been in credit since as long ago as 22 November 2004. Quite what the amount owed to Coles Group by Barblance is, is a matter of some conjecture, in the sense it did not lead evidence, as to the amount owed to it by Barblance. It is, though, common ground that that indebtedness forms part of the sum shown as owing to trade creditors on the balance sheets which were introduced into evidence on behalf of Barblance. 9 The Commissioner has the benefit of a statutory presumption which arises upon the failure by the company to comply with the statutory demand (see s 459C(2)(a) of the Act). 10 For its part Barblance has adopted the stance of seeking to prove that it is solvent. In other words, it seeks to prove that the company is able to pay its debts. For the purposes of the Act, s 95A provides that: (1) 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. (2) A person who is not solvent is insolvent. 11 It may be noted that a feature of s 95A, in contradistinction with predecessor provisions, is that it is not an element of the reference in that section to solvency that the person be able to pay all of that person's debts from that person's own money. That is a factor of some relevance in this case. The question as to whether Barblance meets the solvency test for which s 95A of the Act provides is par excellence one of fact. It is a question of fact which, trite though it is to say, must be determined having regard to all of the circumstances of the company. Over time, various touchstones in respect of particular circumstances of a company which tell, one way or another, in respect of solvency have been highlighted in case law. It is important, though, not to adopt a check list approach in relation to such touchstones, but rather to regard them, firstly, as non-exhaustive and, in any event, as but factors to be considered against a total position as revealed on the evidence in respect of the company's ability to meet the test as set out in s 95A of the Act. 12 Subject to that caveat, touchstones as set out in Australian Securities and Investment Commission v Plymin (No. 1) (2003) 175 FLR 124 by Mandie J (at [386]) have been regarded as helpful in forming a view as to solvency. They are: 1. Continuing losses. 2. Liquidity ratios below one. 3. Overdue Commonwealth and State taxes. 4. Poor relationship with present bankers, including inability to borrow further funds. 5. No access to alternative finance. 6. Inability to raise further equity capital. 7. Suppliers placing the company on cash on delivery terms or otherwise demanding special payments before resuming supply. 8. Creditors who are unpaid outside trading terms. 9. The issuing of post-dated cheques. 10. Dishonoured cheques. 11. The making of special arrangements with selective creditors. 12. Evidence of solicitors' letter, summonses, judgments or warrants issued against the company in respect of outstanding debts. 13. Payments to creditors or rounded sums which aren't reconcilable to particular invoices. 14. An inability to produce timely and accurate financial information to display the company's trading performance and financial position and make reliable forecasts. 13 Such of these factors as are present in a given case will carry different weight according to the circumstances of the particular case. Further, they interplay one with another. 14 Finally, and at the risk of repetition, it is not a checklist exercise in which one is engaged, but rather an overall assessment as against a statutory test of the circumstances revealed on the evidence in respect of the company. In that fashion, for example, and as has been observed by Emmett J in Quick v Stoland Pty Ltd (1998) 87 FCR 371 at 380, that there may exist an excess of current liabilities over current assets is not conclusive of a company's insolvency and "cannot be more than a rule of thumb" as to the same. In like fashion, a failure to pay a debt is not, without anything else, conclusive of insolvency: Truefor Service Pty Ltd v Jenkins (No 2) (2006) 232 ALR 532. 15 The evidence led on behalf of Barblance comprised, principally, two reports prepared by Mr Paul Green, a chartered accountant. Evidence was also led for Barblance from the company's sole director, Mr Lance Barrett. 16 Mr Barrett's evidence discloses that the company has two places of business, each at Coolum Beach. The company operates a newsagency, a related postage and stationery businesses and other agencies. 17 Neither Mr Green nor Mr Barrett was required for cross-examination. Neither, it must be said, was there objection taken to the admissibility of the two reports which Mr Green had furnished. 18 Mr Green is a well-qualified and experienced chartered accountant. He is presently the director in charge of the forensic accounting division of Vincent's Chartered Accountants. That particular firm is a well-known and respected accountancy firm. 19 The stance adopted by the Commissioner and, for that matter, by Coles Group, was to offer what one might term a critique of the opinions expressed in Mr Green's original report (as to the solvency of Barblance) and his supplementary report. 20 Barblance, I should add, is a company which acts as corporate trustee of the Barblance Family Trust. The position as disclosed in the accounts exhibited to Mr Green's reports is therefore that of that company in its corporate trustee capacity. This is not expressly adverted to in submissions. It seems accepted that what is revealed therefore is the ability of Barblance to exercise a right of indemnity in respect of funds that it holds strictly on trust. There is no suggestion in the evidence that Barblance has any separate assets other than the very nominal paid-up capital revealed in the ASIC search. It is unnecessary further to consider any ramifications flowing from Barblance's capacity as corporate trustee. 21 It is clear enough that Barblance owes the Commissioner the debt claimed and a further debt of some amount to Coles Group. 22 Mr Green's reports reveal, with respect, the experience to which I have earlier referred. I make that observation because it is patent on the face both of his initial report and his supplementary report that he is well aware indeed of the "touchstones" to which I have made reference. Indeed, he casts his report by particular reference to these touchstones. Further, he makes explicit on the face of each of his reports a consciousness on his part of an expert's duty to the court rather than to any particular party, particularly including a party which has retained him. 23 In his most recent report, Mr Green assesses the solvency of Barblance as at today's date. That report supplements a report of yesterday's date. The occasion for Mr Green's supplementary report is so as to provide an opinion about whether Barblance is solvent both as at 31 August and as at today's date. The results of Mr Green's examination of Barblance against what he terms "the identified insolvency indicators" and which I have termed touchstones as at each of those dates is summarised in a table which he sets out in his supplementary report: Insolvency Indicator Test Result Quality of Financial Records Passed Continuing Losses Test Passed Balance Sheet Test Passed Overdue Commonwealth and State Taxes Failed Relationship with Present Bank, including Inability to Borrow Further Funds Failed No Access to Alternative Funds Neither Dishonoured (and Withheld) Cheques Passed Special Arrangements with Selected Creditors Failed Solicitors' Letters, Summons(es), Judgments or Warrants issued Against the Company Failed Payments to Creditors of Rounded Sums which are Not Reconcilable to Specific Invoices Passed Inability to Product Timely and Accurate Financial Information to Display Trading Performance and Financial Position and Make Reliable Forecasts Passed Poor Cash Flow or No Cash Flow Forecasts Neither

Table 5 [sic] 9.26 The assessment of each asset and liability under each scenario is consistent with the assessment adopted in my original report. 9.21 Based upon my review of my discussions with Mr Lance Malcolm Barrett in relation to this matter, it is my opinion that this test is passed by Barblance Pty Ltd in it's capacity as trustee for the Barblance Family Trust. Relationship with Present Bank, Including inability to Borrow Further Funds 9.22 Consistent with my opinion outlined in my original report, based upon my review of my discussions with Mr Lance Malcolm Barrett in relation to this matter, it is my opinion that this test is failed by Barblance Pty Ltd in it's capacity as trustee for the Barblance Family Trust. [sic] No Access to Alternative Finance 9.23 The current position in relation to access to alternative funds is consistent with the position as outlined in my original report as at 30 June 2010. 9.24 Based upon my review of my discussions with Mr Lance Malcolm Barrett in relation to this matter, it is my opinion that this test is failed by Barblance Pty Ltd in it's capacity as trustee for the the Barblance Family Trust. [sic] Inability to Raise Further Equity Capital 9.25 The current equity funding of Barblance Pty Ltd is consistent with the position as outlined in my original report. 9.26 Based upon my review of my discussions with Mr Lance Malcolm Barrett in relation to this matter, it is my opinion that this test is neither passed or failed by Barblance Pty Ltd in it's capacity as trustee for the Barblance Family Trust. Dishonoured (and Withheld) Cheques 9.27 There has not been any change in opinion in relation to this insolvency test. 9.28 Based upon my review of my discussions with Mr Lance Malcolm Barrett in relation to this matter, and my review of documents, it is my opinion that this test is passed by Barblance Pty Ltd in it's capacity as trustee for the the Barblance Family Trust. Special Arrangements with Selected Creditors 9.29 There has not been any change in circumstances in relation to any specific or group of creditors since the date at which my original report assessed this specific test. 9.30 Based upon this information, it is my opinion that this test is failed by Barblance Pty Ltd in it's capacity as trustee for the Barblance Family Trust. Solicitors' Letters, Summons(es), Judgments or Warrants Issued Against Barblance Pty Ltd in it's capacity as trustee for the the Barblance Family Trust 9.31 There has not been any change in circumstances to the position outlined as at 30 June 2010, in my original report. 9.32 Based upon this information, it is my opinion that this test is failed by Barblance Pty Ltd in it's capacity as trustee for the Barblance Family Trust. Payments to Creditors of Rounded Sums which are not Reconcilable to Specific Invoices 9.33 There has not been any change in circumstances to the position outlined as at 30 June 2010, in my original report. 9.34 Barblance Pty Ltd in it's capacity as trustee for the the Barblance Family Trust appears to have passed this element of the solvency test. Inability to Produce Timely and Accurate Financial Information to Display the Company's Trading Performance and Financial Position and Make Reliable Forecasts 9.35 At short notice, Malcolm Lance Barrett was able to provide me with the financial statements regarding Barblance Pty Ltd in it's capacity as trustee for the the Barblance Family Trust addressing the results for the 2010, and 2009 financial years, and subsequently for the two months ended 31 August 2010. 9.36 It appears Barblance Pty Ltd in it's capacity as trustee for the the Barblance Family Trust has passed this element of the solvency test, Poor Cash Flow or No Cash Flow Forecasts 9.37 There has not been any change in circumstances to the position outlined as at 30 June 2010, in my original report. 9.38 In my opinion Barblance Pty Ltd in it's capacity as trustee for the the Barblance Family Trust has neither passed or failed this element of the solvency test. [sic] 25 Evident from the accounts annexed to Mr Green's supplementary report is that Barblance enjoys considerable support from third party creditors. The accounts are cast in a way which reflects the division of the company's arrangements between two businesses. The balance sheet as of August 2010 in respect of the Coolum Beach News business discloses a third-party loan from S and A Thompson to the company in the amount of $90,000. The balance sheet in respect of the Coolum Village News and Casket Agency business discloses a loan to the company from BS Barrett of $850,561.02. These particular unsecured creditors are far and away the largest creditors of the company. 26 It was common ground that each of these creditors might be described as related party creditors. Indeed, just such terminology is used by Mr Green in his reports. 27 On behalf of the Commissioner (and also adopted on behalf of Coles Group) attention was drawn to an observation which Weinberg J had made in Ace Contractors and Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 that to discharge the onus of proving solvency a company should ordinarily present the court with the "fullest and best" evidence of its financial position. His Honour further made reference in that case to unaudited accounts and unverified claims of ownership or valuation not ordinarily being regarded as probative of solvency as are not bald assertions of solvency arising from a general review of the accounts. 28 Mr Barrett has not, in terms, sworn to the accuracy of any of the accounts exhibited to Mr Green's reports, although it is apparent enough from the face of each of those reports that he has made just such a representation to Mr Green. Again, though, there is no challenge to these reports in terms of their admissibility. What I do have is something more, in my opinion, than just a review of the accounts. 29 As is evident from the table of indicators, there are factors which tell both for and against the question as to whether this company is solvent. 30 Insofar as the passage from Mr Green's report which I have quoted recites matters of fact, I find those facts to be proved and proved on the basis that there is no contest in relation to such facts. 31 As to the opinion in respect of solvency, it is evident from the affidavit of debt read today, compared with the position as at the time when the winding-up application was filed, that the company has been able to generate a cash flow sufficient to reduce the debt as it originally stood to the Commonwealth, even taking into account whatever increments there may have been since then by some $20,000. 32 It appears to me, as indeed it appeared to Mr Green, that the company is, having regard to its accounts and in particular its profit and loss statements for the period July 2009 through July 2010 and for the period ending August 2010, able to generate and is generating a positive cash flow. The reduction in indebtedness to the Commonwealth which has occurred would seem to be a manifestation of that. Were the company not to have the support of related creditors I doubt (and it is plain enough from Mr Green's reports that he doubted) that the company would have been able to continue to trade. 33 There was reference made in the course of submissions this morning to a position foreshadowed before the registrar whereby it was stated in open court that Mr Barrett was considering the appointment of an administrator. Even assuming that such a statement might be regarded as a declaration against interest and hence admissible, and even assuming the informality of the way in which reference was made to that can be regarded as evidencing it (although I note, with respect, it was not challenged) that a director might, in the circumstances revealed by Mr Green's reports, be turning his mind to the question of whether to appoint an administrator is not, with respect, surprising. 34 It is not necessary for the appointment of an administrator that a company presently be insolvent. This is a case where a responsible director might very well, particularly one taking appropriate advice, turn his mind to such a subject, even though a company is presently solvent. One of the options which is presented by the Act, and one purpose of the provisions in Part 5.3A of the Act in respect of the appointment of an administrator, is the rescuing of companies that have what are viable businesses after a proposal is put to a meeting of creditors with respect to whether a deed of company arrangement should be accepted. My point of mentioning this is that it does not follow, even assuming against the company that such a matter is or has been under contemplation, that it is unable to pay its debts in accordance with the test set out in s 95A. 35 Reference was further made on behalf of the Commissioner to a comparison between amounts shown in respect of trade creditors and trade debtors as between the reports. Mr Green was not cross-examined. Further, as was highlighted in submissions on behalf of the company, these reports present snapshots in time in respect of a company that continues to trade. There is, therefore, no particular reason to expect sums of this nature to remain static. 36 There are certainly factors (and Mr Green highlights them in his reports) which give rise to a concern about the solvency of this company. There are factors which tell the other way, also highlighted in Mr Green's report. 37 It is not the primary purpose of winding up a company just to enforce a judgment debt. Rather, there is a public interest in insolvent companies not being permitted to continue to trade. 38 I have already made reference to the absence of a verification on oath of the accounts. Whilst I take that into account, I also, though, take into account that an experienced forensic accountant regards the accounts concerned as satisfactory. I also take into account that Mr Barrett was able to provide Mr Green at short notice with financial statements for the company. That, to me, does not bespeak management of a company which is irresponsible in relation to the monitoring of the financial position of the company. 39 I have noted also that the company has made or reached an accommodation with Fairfax Newspapers in relation to a particular debt. That is a factor which can be indicative of insolvency. It is also a factor, though, which can be regarded as a position of support for the present by an arm's length creditor for a company continuing to trade, especially a newsagency business-conducting company. 40 In the end, as I observed at the beginning, there is an ultimate question of fact to determine in circumstances where I can well understand why it is that, at least prior to the reception of Mr Green's supplementary report, the Commissioner was disposed, as was Coles Group, to press for the winding up of the company. 41 What I am left with, though, in the end, is unchallenged evidence which, on balance, has led an appropriately qualified expert to regard the company as solvent. Even taking into account the failures noted in his supplementary report, as set out above, and particular factors highlighted for the Commissioner and the supporting creditor, I am not disposed to regard that opinion as one not to adopt. That means that the company has discharged, on the balance of probabilities, the onus of proving that it is, in terms of s 95A of the Act, able to pay its debts. 42 There remains, of course, a discretion, nonetheless, as to whether to wind up the company. There is no other factor, though, which would, in my opinion, in the face of a conclusion that the company is able to pay its debts, in terms of s 95A, warrant winding up. I therefore dismiss the application. 43 In respect of the costs of this application, there is of course, an unfettered discretion in respect of the awarding of costs. That being said, a guiding rule of thumb is that costs follow the event. Here though, there are very particular considerations which tell in relation to the exercise of the discretion. There was not, as the rules would require, a notice of opposition given to the Commissioner, although, in fairness it must be said that there was a signification when the matter was last before a registrar that there would be an endeavour on the part of the company to demonstrate solvency today. The fruit, though, of that particular exercise came to the Commissioner late. The Commissioner did not, in terms, take a point about an absence of the formal giving of notice but does raise now on the question as to costs whether, having regard to the lateness of service of material going to the question of solvency, there ought to be an order other than an order that costs follow the event. 44 That particular position is adopted further by Coles Group. 45 Mr Green's two affidavits were served respectively at 2:00pm yesterday and but this morning. His affidavit this morning exhibits a report which sets out his opinion as to the position of the company today. 46 In effect, each of the parties was always going to incur costs today in any event, given that today was an adjourned date for the hearing. All that has occurred is that the appearance today has been elongated by a formal hearing of the winding-up application. It is only on the strength of material served late that I have formed the view that the company has discharged the onus which falls on it to prove solvency. The Commissioner of course, could have adopted the stance of seeking the adjournment of the application on the basis of the late service of material. Had the Commissioner so done, it would, in my view, have been difficult indeed for the company to resist an order against it for the payment of the costs of the adjournment. 47 The late service of material of such an important nature in a matter such as this is not a practice to be encouraged. I make that observation even though the registrar did not fix formally times by which prior to today affidavits for or against the question of winding up were to be filed. There was always going to be a need for some supplementation of the evidentiary record by supplementary material; on the one hand going to whether or not the indebtedness concerned still existed and if so, and how much on the other hand by way of updating a position revealed as to solvency. Taking into account, in particular, the late service of material, it seems to me that the just outcome in respect of costs is to leave the costs where they fall, in other words, that each party should bear its own costs in respect of the winding-up application. 48 Making an order in that fashion in my opinion pays due recognition to a forensic success but a forensic success bought but late in the piece by a practice which, as I have observed, is not one to encourage. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.

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