Deputy Commissioner of Taxation v Interactive Community Planning Pty Ltd

Is the defendant solvent? 9 "Solvency" is defined by s 95A of the Corporations Act, which provides: Solvency and insolvency (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. 10 Section 95A clearly adopts what has been referred to as the classic cash flow test of insolvency as contrasted with the "balance sheet" test (Gronow MGR, McPherson's Law of Company Liquidation (Thomson Lawbook Co) [11.540]). However the factors the Court ought take into account in determining solvency are more complex than the simple mathematical exercise of comparing, on any particular day, cash at hand with outgoing debts. As Palmer J observed (in my respectful view, correctly) in Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213: 54 (T)he following propositions may now be drawn from the authorities: i) whether or not a company is insolvent for the purposes of CA ss.95A, 459B, 588FC or 588G(1)(b) is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole: Sandell v Porter, Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 and Powell v Fryer; ii) in considering the company's financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable: Sandell v. Porter, Taylor v. ANZ, Newark and Sheahan v. Hertz. iii) in assessing whether a company's position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency: Bank of Australasia v. Hall [1907] HCA 78; (1907) 4 CLR 1514, at 1528; Norfolk Plumbing at 615; Taylor v ANZ at 784; Guthrie v. Radio Frequency Systems Pty Ltd [2000] WASC 152; (2000) 34 ACSR 572, at 575; iv) the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand: Antico at 331; Hall v Aust-Amec (supra); Melbase (supra) at 199; Carrier (supra) at 253; Cuthbertson & Richards Sawmills Pty Ltd v Thomas (supra) at 320; Lee Kong (supra) at 112; v) in assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the Court's satisfaction, that: • there has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment; or • there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or • there has been a well established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors' terms of trade or are payable only on demand: Newark at 260; Antico (supra) at 331; Melbase (supra); Cuthbertson & Richards Sawmills Pty Ltd v Thomas (supra); Powell v Fryer (supra) at 600; vi) it is for the party asserting that a company's contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence: Powell v Fryer (supra) at 600; Melbase (supra); Cuthbertson & Richards Sawmills Pty Ltd v Thomas (supra). 11 Similar principles were adopted by the Court of Appeal of New South Wales in Lewis v Doran (2005) 210 ALR 555 and also in this Court in cases including Lewis, in the matter of Damilock Pty Ltd (In Liquidation) v VI SA Australia Pty Ltd [2008] FCA 1801, McLellan, in the matter of The Stake Man Pty Ltd v Carroll [2009] FCA 1415, and Roufeil v Gliderol International Pty Limited [2011] FCA 847.

Is the defendant solvent? 12 In disputing the solvency of the defendant for the purposes of s 95A, the Commissioner submits, in summary: If the defendant were solvent it would have paid its superannuation contributions, Pay as You Go Withholdings, and Goods and Services Tax on their respective due dates for payment. Ms Bronwyn Condon, a partner of Marsh & Partners Qld Pty Ltd Chartered Accountants and the accountant for the defendant, gave evidence in her affidavit sworn 14 October 2011 as to the financial position of the defendant by reference to tests of solvency to which Logan J referred in Deputy Commissioner of Taxation v Barblance Pty Ltd [2010] FCA 1121. In her affidavit, Ms Condon opined that the defendant had satisfied aspects of a solvency test by reference to the quality of its financial records, continuing losses, dishonoured and withheld cheques, payments to creditors of rounded sums which were not reconcilable to specific invoices, and ability to produce timely and accurate financial information to display the company's trading performance and financial position and make reliable forecasts. However Ms Condon did not address issues relevant to overdue Commonwealth and State taxes identified as relevant in ASIC v Plymin (2003) 175 FLR 124. In this case as at 12 October 2011 the defendant is indebted to the Commonwealth in the sum of $883,462.54, and the defendant is further indebted to the State of Queensland in the order of $80,000 although this is under arrangement. The absence of material in Ms Condon's affidavit addressing Commonwealth and State taxation liabilities means that Ms Condon's affidavit does not present the "fullest and best" evidence of the defendant's financial position: Hayne J in Commonwealth Bank of Australia v Begonia (1993) 11 ACSR 609. In an affidavit sworn 14 October 2011 by Ms Charmaine Foley, the sole director and secretary of the defendant, Ms Foley deposes, inter alia, that she owns several real properties, she is endeavouring to raise loan funds using those properties as security and will inject loan funds into the defendant, and a financier has advised that it has sourced a lender interested in providing short term funds to assist the defendant's tax debt. However while the Court may have regard to Ms Foley's assets which are valued by her at approximately $1.9 million, unverified claims of ownership or valuation are not ordinarily probative of solvency. The defendant has made a further payment proposal to the Commissioner, however the Commissioner has rejected it. 13 In response, the defendant submits in summary: In her affidavit, Ms Condon points to the ability of the defendant to generate a positive cash flow based on the profit and loss statements for the year ended 2010 and to date. Ms Foley attests to the existence of contracts which have arisen since the date when the winding-up application was filed which will enable the defendant to generate a cash flow sufficient to clear the debts which have arisen since the date of the winding-up application. Ms Condon acknowledges that the defendant's liquidity ratio is below the industry standard but notes that external funding could rectify the situation. Ms Foley has sworn to her current attempts to raise funds against her properties and inject further funds into the defendant to clear the debt to the Commissioner. On 4 October 2011 the defendant secured the sum of $260,000 from a financier. Access to additional external funding is being hindered by the existence of the winding-up application.

Additional discretionary issues 14 Further, in respect of the exercise of the Court's discretion under s 459A, the defendant submits that: The evidence reveals an ongoing commitment by the defendant to meet its repayment obligations. The winding up of the defendant would have a deleterious effect on the employment opportunities of approximately 400 indigenous people and a consequent impact on the charitable activities of the company. There is some evidence that there will be a detriment to the indigenous community of Queensland if the defendant is wound up.

Findings 15 I am not persuaded that the defendant is solvent, or that I should exercise my discretion to refuse an order under s 459A to which the Commissioner is otherwise entitled in light of the statutory presumption of insolvency of the defendant. 16 The evidence before the Court supports the submission of the Commissioner that the defendant is not suffering from a temporary lack of liquidity, but rather has an endemic shortage of working capital and is insolvent. Indeed, the views of Ms Condon as to the solvency of the defendant are carefully qualified, and her endorsement of the solvency of the defendant best described as luke warm. So: The qualify of the financial records is, in my view, merely a reference to the skills of Ms Condon's firm in "cleaning up" the accounts of the defendant. While Ms Condon considers that the defendant has satisfied the "continuing losses test", this satisfaction was contingent on the discontinuance of the Commissioner's application. The defendant's satisfaction of the test concerning dishonoured and withheld cheques reflects an apparent commitment by Ms Foley and her discussions with Ms Condon. The payments to creditors of rounded sums is a relatively minor issue in the context of the overall liquidity of the defendant. The ability of the defendant to produce financial information related to Ms Foley's production of financial statements at short notice. 17 However balanced against these issues were, in my view, much more serious concerns bearing on the solvency of the defendant emerging from Ms Condon's affidavit, including: The fact that the defendant's balance sheet as at 31 August 2011 showed a shortfall of current assets to current liabilities of $1,818, 607.59. The fact that the liquidity ratio of the company is showing at 0.34, which is less than the industry standard of 1. The fact that the defendant failed all other tests of solvency identified by Ms Condon in her affidavit. The fact that Ms Condon, in her affidavit, did not appear to take into account amounts owing in respect of Commonwealth and State taxes, which are substantial. 18 Further, while there is some evidence before the Court that the defendant has managed to secure finance from a third party, there is nothing to demonstrate that, as a matter of commercial reality, any such injections of funds will be adequate to satisfy the Commissioner's debt. 19 Finally, while it appears that Ms Foley is supportive of the defendant, I agree with the Commissioner that unverified claims of ownership or valuation are not ordinarily probative of solvency: In the matter of Simionato Holdings Pty Ltd (1997) 15 ACLC 477, Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463, Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44]. I am also not persuaded, in light of the history of this matter and the apparent ongoing struggles of the defendant to satisfy the Commissioner's debts, that the support of Ms Foley will be adequate to address what appears to be an insurmountable endemic illiquidity even if the secured loans sought by Ms Foley to inject into the defendant are achievable. 20 In respect of the discretionary issues submitted by the defendant: While I accept that the defendant has endeavoured to make payments to the Commissioner, earnest but inadequate attempts to satisfy a creditor are not a factor which should influence the Court in respect of the exercise of its discretion under s 459A in the fact of apparent insolvency. Further, while I note Ms Foley's evidence that the defendant works solely with indigenous people and is one of the largest employers of indigenous people in Queensland - in itself a laudable endeavour - this is not reason to deny the Commissioner the order to which he is otherwise entitled under the Corporations Act. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier.