Was Brilliant Homes solvent?
15 Brilliant Homes sought to argue that it was solvent for the purposes of opposing the making of a winding up order under s 459S of the Corporations Act. There was no objection to its evidence seeking to make out its solvency. Brilliant Homes' sole director, Boris Ganke, swore an affidavit on 3 November 2011 in which he recorded that the winding up application had been based on estimates made and penalties claimed by the Deputy Commissioner, which he asserted his company had not accepted as being correct or valid at the time.
16 He asserted that the company was solvent and explained that because of ongoing medical and other pressures that had been on him in recent times and the loss of the tax accountant whom he was accustomed to use to prepare outstanding accounts and returns, there had been delay by Brilliant Homes in filing returns. As at the time that his affidavit was sworn, Mr Ganke was confident that returns were being lodged electronically. That appears to have been confirmed in the RBA statement. It recorded that in the order of $650,000 in further liabilities of Brilliant Homes had been added from 4 November 2011 based on PAYG and BAS self-assessments, together with interest and administrative penalties, for various periods from 1 July 2004 onwards.
17 Mr Ganke asserted that there were some gaps in Brilliant Homes' records and that it had had some correspondence over the preceding two years with the Australian Taxation Office. He said that the amount due by Brilliant Homes could not be reliably estimated. He referred to his having been involved for many years in litigation with the FAI Insurance Group in respect of a number of companies that, he said, had caused his private business operations to have been severely affected. He said that he had had difficulty in finding other accountants and was prepared, personally, to guarantee the amount finally agreed between the Australian Taxation Office and Brilliant Homes in respect of the PAYG liabilities that were due.
18 Mr Ganke's personal offer of an undertaking was not extended to any other liabilities of Brilliant Homes due to the Deputy Commissioner. And, as I have explained, the undertaking was contingent. Before he was prepared to give a guarantee, he required that there be some agreement between Brilliant Homes and the Deputy Commissioner. That was hardly an unqualified guarantee that the Deputy Commissioner would be paid. The taxation laws require Brilliant Homes to make good its outstanding liabilities for tax.
19 Mr Ganke sought a further adjournment for six to eight weeks to enable the returns to be considered and assessments made, including agreements, if possible, on what penalties should be imposed. I infer that he was not able to secure such a lengthy adjournment, but in an affidavit of 13 December, Mr Ganke said that he had retained a new chartered accountant and tax agent, Martin Tosio, to prepare and lodge BAS returns and that Mr Tosio had done so for the years up to 30 June 2011. Additionally, Mr Ganke said that Brilliant Homes was attempting to secure additional contracts for services with two other corporations, its principal business being to provide management and administrative services to other corporate entities. He estimated that the new contracts, if secured, could result in Brilliant Homes earning further fees of up to $120,000 per annum. He said that there were no material external creditors apart from the Deputy Commissioner. He claimed that if the company were placed in liquidation, all creditors would receive a considerably lower return than if it continued to operate, taking into account the costs associated with the liquidations. But Mr Ganke gave no further explanation of those assertions.
20 Mr Tosio swore an affidavit on 15 December 2011 to which he attached a draft balance sheet for Brilliant Homes as at 31 October 2011. He said that he had worked on the balance sheet by reviewing the cash book, general ledger and other books and records of the company. He considered that the draft balance sheet correctly set out the financial position of the company as at 31 October 2011 to the best of his knowledge and belief and that he had been unable to prepare a balance sheet that was more recent. Mr Tosio did not think that a balance sheet prepared as at 15 December would be materially different to the one annexed to his affidavit. That balance sheet showed, together with the explanatory notes, items for:
trade creditors and pre-paid fees of $88,206 that included an estimated superannuation guarantee charge of $46,206;
provision for income tax of $65,572;
PAYG W/H clearing of $273,065;
GST clearing of $249,158; and
a bank overdraft of $10,008.
Brilliant Homes' total current liabilities were recorded as $686,008. On the other hand, Brilliant Homes' current assets were said to be $735,917 comprised of, among others, $100 of cash and an item called "other debtors and prepayments" for a total sum of $678,023. Mr Tosio explained that the item for "other debtors and prepayments" treated the word "prepayments" as a generic term and that there were no prepayments included in that sum. Rather, he said:
"The names of principal debtors will be disclosed to His/Her Honour in a sealed envelope when matter is heard."
21 Despite that suggestion, no attempt has been made to prove who those debtors are, the nature or value of their debts or when, apart from the inference of their inclusion as part of the current assets in the balance sheet, they are due or payable. The amounts for GST and PAYG in the balance sheet were recorded in the notes as being the amounts Mr Tosio calculated as the actual liability for those taxation debts exclusive of any charges for interest and penalties.
22 The picture painted by the accounts superficially suggests that there is an excess of current assets over current liabilities of about $50,000. But this is to be seen in the context that the liabilities for GST and PAYG total over $500,000 and at 31 October 2011 the company had no cash whatsoever to pay those debts that were then immediately due and payable. As Mr Tosio said in his notes, these were actual and current liabilities. However, the nature and the source of current assets from which those liabilities could be discharged were elliptical, to say the least. No detail was given of the debtors who owed the debts or when those debts were due and payable. Moreover, they had remained outstanding from no later than 31 October 2011 to today. As evidenced by the RBA statement, no credit entries reducing Brilliant Homes' current liabilities were made at any time in the period since 31 October 2011. The RBA statement appears to contain some double counting of estimated liabilities that, if the recently failed returns are accepted, will be discharged once Brilliant Homes pays its actual liabilities of those earlier estimates.
23 The Court will not ordinarily allow winding-up proceedings to be used as mere debt collection exercises. Solvent companies in the ordinary course ought not be wound up. But the question here is whether Brilliant Homes has established its solvency to justify the one ground of opposition currently suggested. To some degree the evidence on both sides is in an unsatisfactory state, having been served one and two days before this hearing today. Neither party attempted to do any calculations as to the amounts, which were earlier estimates of Brilliant Homes' liabilities, included in the RBA statement that could potentially be ignored if Brilliant Homes discharges in full its actual liabilities for the BAS and GST liabilities: see s 268-20(3) of the Taxation Administration Act.
24 I am far from persuaded that Mr Tosio's evidence establishes that Brilliant Homes was solvent on 31 October 2011 and I am certainly not satisfied that it is solvent today. A significant period of six weeks has elapsed since his calculations were made and some of the returns lodged, without Brilliant Homes having received any payment at all from "other debtors" of about $678,000. These facts suggest that those debts due to Brilliant Homes are not current. It is to be remembered that the company had not honoured its quarterly obligation to pay BAS and PAYG sums for a period commencing from at least the financial year ending 30 June 2005. Ordinarily, a solvent company, that had already incurred these considerable liabilities that were unpaid and had been due and accruing year after year since then, would have some cash in the bank or some other asset that could be realised to meet these debts. In Re United Medical Protection Limited (2003) 47 ACSR 705 at 718-719 [55] Austin J discussed authorities that dealt with the term "insolvent" in s 95A of the Corporations Act, and in particular s 95A(1) that 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."
25 His Honour referred to this as the cash-flow test of solvency rather than a balance-sheet test relying on, among others, the decision of Mandie J in Australian Securities and Investments Commission v Plymin (No 1) (2003) 46 ACSR 126 at 209-212 [370]-[380]. The commercial reality is, as I have said, that Brilliant Homes has $100 cash in the bank and a bank overdraft of $10,008. It has not tendered any evidence to disclose how the overdraft is maintained, why it has cash-on-hand of $100 or how and in what circumstances it will be able to collect what is due from any of what are said to be its significant "other debtors". Brilliant Homes' liabilities to the Deputy Commissioner have been outstanding for a very long time, although I appreciate that they have been accruing. Nonetheless, their principal totals over $500,000. But none of the company's "other debtors" have realised any cash available to pay immediately the debt due to the Commissioner even six weeks after Mr Tosio calculated the sum due before interest and penalties. I am not satisfied that there is any prospect of Brilliant Homes establishing that it is solvent; it is plainly not so on this evidence.
26 I have given some consideration as to whether it would, nonetheless, be in the public interest to exercise my discretion not to make an order that Brilliant Homes be wound up. Given that it has paid nothing, even after failing to meet the statutory demand, and has given no credible explanation of how and when it proposes to realise what it says is a very substantial amount owed by trade debtors, I am not satisfied that there is any reason in the public interest to refuse to make the order that it be wound up in insolvency. I accept that the RBA statement is likely to be altered by force of s 268-20(3) because there appear to be estimates of liability for BAS and PAYG in it for periods in respect of which, subsequently, Mr Tosio and Mr Ganke caused actual returns to be filed, so that if and when actual payments were made reflecting the discharge of the actual liabilities, together with whatever interest and penalties may be applicable to those, the estimates might be discharged so that not all of the total sum of about $920,000 may ultimately be the final amount due.
27 Nonetheless, under s 268-20 of the Taxation Administration Act, at the moment, both the estimates and the self-assessed sums are due, however incongruous that may sound. For these reasons, I am of opinion that Brilliant Homes should be wound up in insolvency.
28 The Deputy Commissioner has asked that I fix the costs in the scale amount of $3,580. He does not propose to seek the costs of previous adjournments. In the circumstances, I shall do so.
I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.