First Plaintiff v Defendant

1 By originating process dated 11 January 2019, Mr Philip Newman and Mr Stephen Michell as liquidators of Melbournehomes.com Pty Ltd (in liq) (collectively, 'the plaintiffs') brought an insolvent trading claim against the company's director, Mr Manvir Lidhar (Mr Lidhar or 'the defendant') pursuant to s 588G of the Corporations Act 2001 (Cth) ('Corporations Act'), seeking compensation of $103,293.41 under s 588M of the legislation.

2 Melbournehomes.com Pty Ltd (in liq) ('the Company') was incorporated on 28 May 2012.[1] Mr Lidhar was a director of the Company from its inception until 16 June 2016, and is also its sole shareholder.[2] The Company operated a rental agency business under a Stockdale & Leggo franchise trading under the business name Stockdale & Leggo, Thomastown. At all material times, it operated from 193 High Street, Thomastown in Victoria, which was also its registered office.[3] Immediately prior to going into liquidation, the Company managed the rental of approximately 68 properties for which it received management fees.[4] In addition, it was engaged to sell properties by way of private sale or public auction and received sales commissions accordingly. The Company had two employees who worked in the business.[5]

3 On 19 March 2015, AP Trading Group Pty Ltd (formerly known as Printco (Aust) Pty Ltd) ('Printco') issued a creditor's statutory demand addressed to the Company seeking payment of $6,839.76.[6] Following the Company's non-compliance with the statutory demand, Printco then commenced a winding up proceeding against the Company on 1 May 2015 in this Court.[7] On 5 June 2015, Efthim AsJ made orders that the Company be wound up in insolvency. His Honour appointed Mr Newman and Mr Michell as joint and several liquidators for the purposes of the winding up ('the liquidators').[8]

4 Following the filing of the proceeding, on 4 April 2019, Sifris J made an order referring the matter to an Associate Judge for hearing and determination pursuant to rule 77.05 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) and rule 16.1(3) of the Supreme Court (Corporations) Rules 2013 (Vic).

5 On 26 March 2020, after repeated and unsuccessful attempts by the plaintiff at serving the defendant, the Court made orders for substituted service of the originating process and the affidavit of Philip Newman affirmed on 7 January 2019 on the defendant by email and text message. The proceeding was next listed for a directions hearing on 1 May 2020. In compliance with those orders, on 27 March 2020, the plaintiffs' solicitors effected service of the originating process and associated documents in the manner required.[9] By virtue of the orders for substituted service, the documents were deemed to have been served on the plaintiff on 14 April 2020.

6 At the directions hearing listed on 15 May 2020, the Court made orders, among other things, listing the proceeding for trial on 9 July 2020. However, by orders dated 5 June 2020, the trial was adjourned to 20 July 2020.

7 Despite the extensive efforts by the plaintiffs to engage with the defendant about the conduct of the proceeding, including by serving the relevant orders via email and providing notification of hearing dates by text message, the defendant had not, at that stage, filed any appearance. Nor was there any indication to suggest that he sought to participate in the litigation. As a consequence, the trial on 20 July 2020 was set down on the basis that it would be undefended.

8 Due to the COVID-19 pandemic, the trial was arranged to be heard via videoconference. On 20 July 2020, when the matter was called on, Mr Lidhar announced his appearance and sought an adjournment on the basis that he wished to file responsive material in defence of the claim. He submitted that he had not yet considered the plaintiffs' material but, in any event, was not confident that he had been served with all of it. He also indicated that he wished to consult a lawyer about the matter. The Court ultimately vacated the trial with an order that Mr Lidhar pay the plaintiffs' costs thrown away and fixed in the gross sum of $3,950. Orders were also made requiring Mr Lidhar to file an appearance by 24 July 2020, to file and serve any affidavit material upon which he relied by 21 August 2020, and for the parties to file and serve outlines of submissions. The proceeding was refixed for trial on 16 September 2020.

9 Although the trial was adjourned on 20 July 2020, partly to allow Mr Lidhar to obtain legal advice and representation, the defendant has remained unrepresented throughout the proceeding. Accordingly, it is appropriate to briefly explain the Court's approach when a party is not represented by a lawyer. In Daher v Bell,[10] Derham AsJ summarised the following governing principles, which I gratefully adopt:

It is the duty of the Court in relation to represented and unrepresented litigants alike to ensure that a hearing or trial is conducted fairly and in accordance with law. Procedural fairness is 'an essential attribute of a court's procedure'. What a judge must do to assist a litigant in person depends on the litigant, the nature of the case, and the litigant's intelligence and understanding of the case. The judge cannot be the advocate of the self-represented litigant, for the role of the judge is fundamentally different to that of an advocate. The judge must maintain the reality and appearance of judicial neutrality at all times and to all parties. The assistance must be proportionate in the circumstances - it must ensure a fair trial and not afford an advantage to the self-represented litigant.

In the decision of the Court of Appeal in Roberts v Harkness [(2018) 57 VR 334 ('Roberts')], which was applied in Doughty-Cowell v Kyriazis [[2018] VSCA 216 [63]-[64]], the Court made it clear that a litigant must have a reasonable opportunity of presenting his case. What amounts to a reasonable opportunity of presenting a case depends on the circumstances of the case, including the nature of the decision to be made, the nature and complexity of the issues in dispute, the nature and complexity of the submissions which the party wishes to advance, the significance to that party of an adverse decision ('what is at stake') and the competing demands on the time and resources of the court or tribunal [Roberts (2018) 57 VR 334, 337-55 [8]-[49]].[11]

10 I have endeavoured to apply these principles in this case. In particular, at the vacated hearing on 20 July 2020, I went to some length to explain to the defendant the nature of the proceeding and the elements of the statutory provisions relied upon by the liquidators.[12] I also explored with the liquidators' counsel the appropriateness of certain debts being included in the insolvent trading claim[13] (discussed further below). When the trial recommenced on 16 September 2020, I again provided Mr Lidhar with an explanation of the operation of the relevant statutory provisions, including the statutory defence found in s 588H(2) of the Corporations Act (reasonable grounds to expect a company was solvent at the time it incurred a debt).[14]

11 In support of their claim, the plaintiffs rely upon the following substantive affidavits:

(a) affidavit of Philip Newman affirmed on 7 January 2019 and filed on 11 January 2019, together with exhibits, including an Insolvency Report dated 2 November 2018 ('the First Newman affidavit');

(b) affidavit of Philip Newman affirmed and filed on 22 June 2020, together with exhibits ('the Second Newman affidavit'); and

(c) affidavit of Philip Newman affirmed and filed on 31 August 2020, together with exhibits ('the Third Newman affidavit').

12 The plaintiffs also rely upon their written submissions dated 6 July 2020, 9 September 2020, 15 September 2020, email submissions dated 21 September 2020, and further written submissions dated 5 November 2020 and 12 November 2020.

13 The defendant relies upon his affidavit affirmed on 28 August 2020, which the Court has filed on his behalf. He did not ultimately file and serve written submissions before the trial but made extensive oral submissions at the trial. In addition, Mr Lidhar tendered a number of documents in his opening address which he referred to throughout the course of the hearing. He also relies on email submissions dated 23 September 2020 and further written submissions filed on 5 November 2020.

14 Following the hearing on 16 September 2020, and during the course of preparing these reasons, I became aware of a recent decision of Gardiner AsJ in the case of Re Overgold Pty Ltd[15] which deals with the question of when franchise fees are incurred by a franchisee company for the purpose of an insolvent trading claim. In that case, the Court held that the relevant franchise fees were incurred when the franchise agreement was made. Because the franchise agreement was made before the relevant company became insolvent, those franchise fees were excluded from the insolvent trading claim. Neither party made reference to Re Overgold in their written submissions or at the hearing. As a consequence, my Associate wrote to the parties on 22 October 2020, bringing the decision to their attention and requesting short supplementary submissions on its application to the facts of this case. The parties' supplementary submissions were received on 5 November 2020. I will deal with the application of Re Overgold later in these reasons.

Application by defendant to adduce new evidence and re-open case

15 On 18 September 2020, Mr Lidhar sent an email to my Associate, copied to the liquidators' lawyers, seeking to provide a further 17 documents in support of his defence. The liquidators objected to any tender or reliance upon those documents by the defendant on the basis that the trial had concluded, judgment was reserved, and the defendant was effectively seeking to re-open his case. In addition, instead of addressing the application of the decision in Re Overgold, Mr Lidhar's submissions of 5 November 2020 raised new allegations not previously made at trial which the plaintiffs have objected to in their submissions dated 12 November 2020.

16 In Apple and Pear Australia Ltd v Pink Lady America LLC,[16] the Court of Appeal (comprising Tate, Ferguson (as her Honour then was), and McLeish JJA) restated the principles pertaining to an application to re-open a case as follows:

A court will allow a case to be re-opened after judgment has been reserved only in exceptional circumstances, in accordance with the principle of the need for finality in litigation and to ensure that the issues before the court are clearly defined. In Spotlight Pty Ltd v NCON Australia Ltd [(2012) 46 VR 1 ('Spotlight')] this Court agreed with the remarks of Kenny J in Inspector-General in Bankruptcy v Bradshaw [[2006] FCA 22 [24]] in which her Honour recognised four classes of case in which a court might grant leave to re-open, namely:

(i) where fresh evidence, unavailable or not reasonably discoverable before, becomes known and available; (ii) where there has been inadvertent error; (iii) where there has been a mistaken apprehension of the facts; and (iv) where there has been a mistaken apprehension of the law [Spotlight [2012] VSCA 232; (2012) 46 VR 1, 7 [25]].

17 While these categories of cases are not closed, the overriding principle in determining whether to allow a party to re-open a case is whether the justice of the case favours the grant of leave.[17] There are a range of factors that may be relevant to the exercise of the Court's discretion. Some of those factors include:[18]

(a) the consideration of fairness to the opposing party who is entitled to know all the evidence that it has to meet in making forensic decisions about cross-examination and the nature and extent of the evidence which it will adduce on the matters in question;

(b) the degree of relevance and probative value of the further evidence sought to be adduced;

(c) the prejudice to the opposing party in terms of delay in the completion of the proceeding and the consequential costs;

(d) the public interest in the timely conclusion of litigation; and

(e) the explanation offered by the party seeking leave for not having called the evidence at the trial.

18 In exercising its discretion, the Court must also seek to give effect to the overarching purpose of the Civil Procedure Act 2010 (Vic) ('Civil Procedure Act') to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute.[19]

19 The liquidators contend that the justice of the case does not favour the granting of leave to Mr Lidhar to re-open his case.[20] They further submit that:

(a) Mr Lidhar has not provided a satisfactory explanation for the late tender of these documents;

(b) Mr Lidhar has not demonstrated any exceptional circumstances to support the granting of such leave;

(c) the documents themselves have only marginal relevance to the issues in dispute and do not appear to have the capacity to affect the outcome of the trial;

(d) the tender of additional evidence after the trial would be prejudicial to the plaintiffs who have not had an opportunity to properly test and respond to this new material or to cross-examine Mr Lidhar in relation to it. There would also be prejudice arising from the delay and costs associated with allowing the new evidence; and

(e) allowing fresh evidence at this late stage in the proceeding would be contrary to the overarching purpose contained in the Civil Procedure Act to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute.

20 Mr Lidhar sought to respond to those submissions by further emails dated 22 September 2020 and 23 September 2020. The email dated 23 September 2020, in particular, sought to specify the apparent relevance of the additional documents and made complaint about the process of sale by the liquidators of the Company's principal asset (its rent roll) and the alleged failure by the liquidators to 'probe and seek documents'. As previously mentioned, by his written submissions of 5 November 2020, Mr Lidhar sought to make new allegations not previously raised at trial.

21 After careful consideration, I ultimately accept the liquidators' submissions in opposing Mr Lidhar's application to re-open his case. There is no reason why the new documents could not have been exhibited to Mr Lidhar's 28 August 2020 affidavit or, at the very least, tendered at the commencement of the trial. Only some of the documents appear to be tangentially relevant to the critical issues in the proceeding. The defendant has already been afforded a reasonable opportunity to present his case. To allow him to introduce fresh evidence now would be neither proportionate nor fair. Nor would it be consistent with the overarching purpose of the Civil Procedure Act. Instead, it would cause additional delay and costs in a proceeding which has already experienced considerable delay. The defendant's application to tender the new documents and to re-open his defence is therefore formally refused. However, for the sake of completeness, to the extent that any of the new documents and allegations relied upon and raised by Mr Lidhar are notionally relevant to the issues in dispute, I will refer to them during the course of these reasons.

22 Turning to the legislative provisions that are relied upon, s 588G(1) of the Corporations Act relevantly provides:

(a) a person is a director of a company at the time when the company incurs a debt; and

(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and

(d) that time is at or after the commencement of this Act.

23 Section 588G(2) says:

(2) By failing to prevent the company from incurring the debt, the person contravenes this section if:

(a) the person is aware at that time that there are such grounds for so suspecting; or

(b) a reasonable person in a like position in a company in the company's circumstances would be so aware.

24 According to the authors of Voidable Transactions in Company Insolvency, once the threshold requirements of s 588G(1) are established, the question of contravention of the provision then arises under s 588G(2).[21] Further, whilst the test applied in s 588G(1)(c) is an objective one and is not concerned with the particular director who is the subject of the proceeding,[22] the test under s 588G(2) of whether there are grounds to suspect insolvency can be either subjective (as regards the individual defendant director) or objective (by reference to a reasonable person in a like position to the relevant director). In other words, it is not necessary for a liquidator to establish that an individual director was actually aware that there were grounds for suspecting insolvency at the time the company incurred a debt.[23]

25 In summary, a person may be liable for contravening s 588G(2) in the following circumstances:

(a) he/she was a director at the time the company incurred the relevant debt;

(b) the company was insolvent at the time the debt was incurred, or became insolvent as a result of the debt being incurred;

(c) there were reasonable grounds for suspecting that the company was insolvent, or would become insolvent as a result of the debt being incurred; and either

(d) the person is aware at the time the company incurred a debt that there were grounds for suspecting that the company was insolvent, or would become insolvent as a result of the debt being incurred; or

(e) a reasonable person in a like position in a company in similar circumstances would be aware of the company's insolvency.

26 As can be seen, the essence of a contravention of s 588G(2) is the failure to prevent a company from incurring a debt at the time that it was insolvent.[24] However, aside from some guidance in relation to specific transactions which are not applicable here,[25] the Corporations Act does not prescribe precisely when a debt is incurred for the purpose of s 588G. Instead, it will vary and depend on the nature of the transaction and the contractual context in which it occurs.[26]

27 Section 286(1) of the Corporations Act requires that a company must maintain certain financial records. The provision is in these terms:

(1) A company, registered scheme or disclosing entity must keep written financial records that:

(a) correctly record and explain its transactions and financial position and performance; and

(b) would enable true and fair financial statements to be prepared and audited.

The obligation to keep financial records of transactions extends to transactions undertaken as trustee.

28 Section 9, in turn, defines 'financial records' to include the following:

(a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers;

(b) documents of prime entry;

(c) working papers and other documents needed to explain:

(i) the methods by which financial statements are made up; and

(ii) adjustments to be made in preparing financial statements.

29 Section 588E(4) makes s 286(1) relevant to an insolvent trading claim in the following way:

(4) Subject to subsections (5) to (7), if it is proved that the company:

(a) has failed to keep financial records in relation to a period as required by subsection 286(1);

...

the company is to be presumed to have been insolvent throughout the period.

30 Sub-section 588E(5) provides that the presumption in s 588E(4)(a) does not apply in relation to a contravention of s 286(1) that is only minor or technical in nature. Sub-section 588E(6) is directed to situations where the contravention was due solely to someone destroying, concealing or removing financial records, and where the person was not in any way, by act or omission, directly or indirectly or knowingly or recklessly, concerned in, or party to, destroying, concealing or removing those financial records.

31 Section 588E(9) makes clear that the statutory presumption of insolvency created by s 588E(4) is rebuttable. In other words, it operates unless the contrary is proved.

32 A common statutory defence to insolvent trading can be found in s 588H(2) of the Corporations Act which provides:

Expectations and belief about company's solvency

(2) It is a defence if it is proved that, at the key time, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent despite all its debts incurred, and dispositions of its property made, at that time.

33 The defence requires an actual expectation that the Company was, and would continue to be, solvent and that the grounds for expecting its solvency are reasonable.[27] An expectation involves a higher degree of satisfaction or certainty than mere hope or suspicion.[28]

34 A breach of s 588G(2) may have both civil and criminal consequences for a director. Section 588G(2) is a civil penalty provision for the purposes of s 1317E which can give rise to a pecuniary penalty order. Further, where a contravention of s 588G(2) is dishonest, this may constitute an offence under s 588G(3) which is punishable by imprisonment. However, this case is not brought as a criminal proceeding.

35 The onus of establishing a contravention of s 588G rests with the plaintiffs. According to s 1322 of the Corporations Act, in a proceeding other than a proceeding for an offence, it is sufficient if the Court is satisfied that a contravention has occurred on the balance of probabilities.

36 Section 588M of the Corporations Act relevantly provides:

(a) a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and

(b) the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and

(c) the debt was wholly or partly unsecured when the loss or damage was suffered; and

(d) the company is being wound up;

...

(2) The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.

Overview of debts comprising insolvent trading claim

Initially, the plaintiffs claimed that during the period 1 November 2012 to 5 June 2015 ('the relevant period'), the Company incurred the following debts at a time when it was insolvent:

Deputy Commissioner of Taxation - Running Balance Account

Stockdale and Leggo Pty Ltd - Franchise fees payable on expiration of Franchise Agreement

Stockdale & Leggo (Corporate Advertising) Pty Ltd ACN 066 566 158 - Corporate marketing fees

Stockdale & Leggo (Corporate Advertising) Pty Ltd ACN 066 566 158 - Minimum fees due to expiration of the

37 Following an earlier exchange between the Court and counsel for the plaintiffs at the hearing on 20 July 2020,[30] the plaintiffs indicated at the trial that they no longer pressed their claim in respect of certain amounts claimed by Stockdale & Leggo Pty Ltd and Stockdale & Leggo (Corporate Advertising) Pty Ltd said to be payable upon the termination of the relevant franchise agreement ($28,000 for future franchise fees, $9,350 for future marketing fees, and $6,050 for legal fees). However, by their supplementary submissions of 5 November 2020, the plaintiffs contend that if the decision of Re Overgold is followed in this case, then the amounts in respect of future franchise fees and future marketing fees will again be pursued.

38 I will deal with the particulars of each of the debts the subject of the proceeding below.

39 On 25 August 2015, the Australian Taxation Office (ATO) lodged a formal proof of debt for the sum of $17,595.90.[31] The proof of debt comprises a running balance account amount of $7,595.00 and an income tax debt in the sum of $10,200.90.

40 The defendant submits that the relevant tax documentation was lodged with the ATO after the commencement of the liquidation of the Company and without his authority. He says that the documentation may have been submitted by the liquidators or the Company's accountant, but he is unsure. Further, the defendant argues that the ATO assessments are wrong in any event. In essence, he says that the ATO debts should not be included in the liquidators' insolvent trading claim. For the following reasons, I do not accept those submissions.

41 First, the applicable case law supports the conclusion that the relevant taxation debts were incurred on the date on which they arose by operation of the relevant taxation legislation.[32]

42 Secondly, as regards the running balance account amount of $7,595.00, it is clear from an ATO running balance account ledger[33] that this debt was incurred during the period 27 May 2013 to 25 August 2014. Whilst the ledger shows a process date of 17 June 2015 and a statement date of 2 July 2015, which together suggest the relevant documentation was processed by the ATO after the winding up on 5 June 2015, the critical dates referred to in the document are the '[e]ffective [d]ate[s]', which are between 27 May 2013 to 25 August 2014. In other words, regardless of when the tax documentation was processed by the ATO, it is clear from the material that the tax debts were incurred well prior to the liquidation of the Company.

43 Thirdly, I am satisfied that the income tax debt of $10,200 was incurred during the period 28 February 2014 to 1 December 2014, prior to the winding up of the Company. That can be ascertained from an ATO income tax statement extracted on 2 July 2015.[34] Again, the fact that the statement bears an extract date of 2 July 2015 and identifies process dates from 16 June 2015 to 2 July 2015 is not definitive. The '[e]ffective [d]ate' for each income tax debit set out in the statement falls between 28 February 2014 to 1 December 2014. It is plain that the income tax debt was incurred during that period and not after the winding up of the Company.

44 Finally, I accept the liquidators' submission that they were not responsible for lodgement of the relevant tax returns. There is no evidence before the Court to suggest that those documents were lodged irregularly or without authority or that they contain material errors. No such evidence is set out in the defendant's affidavit of 28 August 2020.

45 Under the relevant franchise agreement dated 24 November 2012[35] ('the Franchise Agreement'), Stockdale & Leggo Pty Ltd was the Franchisor ('Stockdale & Leggo' or 'the Franchisor') and the Company was the Franchisee ('the Franchisee'). Stockdale & Leggo (Corporate Advertising) Pty Ltd ('Stockdale & Leggo Corporate') is named as an associate of the Franchisor in clause 2.4 of the disclosure document which accompanies the Franchise Agreement.[36]

46 The Franchise Agreement and associated documentation is voluminous.[37] However, it is important to go through it in some detail, because the total value of the debts claimed by Stockdale & Leggo and its related entity represent a significant part of the insolvent trading claim against the defendant.

47 Under clause 2.1 of the Franchise Agreement, Stockdale & Leggo granted to the Company a franchise along with the right to establish and operate a Stockdale & Leggo business in a defined territory, using the Franchisor's marks, system, image, and other intellectual property ('franchise system and IP'). Clause 3.1 of the Franchise Agreement states that the franchise commences on the commencement date and continues for the relevant term unless it ends sooner in accordance with the terms of the Franchise Agreement.[38] The commencement date was 24 November 2012 (item 5 of the Schedule). The initial term was for five years and, accordingly, the Franchise would have expired on 24 November 2017 (item 13 of the Schedule) had the Company not gone into liquidation on 5 June 2015.

48 Clause 5.1 of the Franchise Agreement provides that in consideration for: (a) the ongoing right to use the franchise system and IP; and (b) the provision of ongoing advice, assistance, know-how and support by the Franchisor, the Franchisee must pay a franchise fee to the Franchisor. Clause 5.3(1) further provides that the Franchisee must pay to Stockdale & Leggo on the 15th day of each month:

(a) a franchise fee in respect of sales revenue for the prior month, or the sum of $1,500 plus GST, whichever is the greater amount. The franchise fee is set at 7% of sales revenue plus GST (item 9 of the Schedule);

(b) a marketing levy in respect of sales revenue for the previous month. The marketing levy is the greater of 1.25% of sales revenue plus GST or $500 plus GST (but not to exceed $1,250 per month plus GST) (item 10A of the Schedule); and

(c) an information technology levy in monthly instalments. The information technology levy is $1,980 per annum plus GST (item 10B of the Schedule).

49 By clause 5.4, the Franchisee must pay interest on outstanding amounts at the interest rate of 15% per annum. Clause 5.5 provides that the Franchisee must pay Stockdale & Leggo on demand for all of Stockdale & Leggo's costs (including legal costs) in connection with, or incidental to, any termination of the Franchise Agreement or default by the Franchisee in observing or performing any of its obligations under the Franchise Agreement.

50 Clause 27.3 provides that Stockdale & Leggo may terminate the Franchise Agreement if a default event occurs and written notice is given. A default event includes the making of an application to wind up the Franchisee (clause 27.4(1)(d)(i)) or the appointment of a liquidator (clause 27.4(1)(e)).

51 Clause 27.6 provides that Stockdale & Leggo may immediately terminate the Franchise Agreement upon giving written notice in the event that the Franchisee is placed into liquidation (clause 27.6(4)).

52 Clause 28 of the Franchise Agreement deals with the consequences of its termination or expiration.[39] Under clause 28.3, the Franchisee is required, within five business days after the end of the franchise, to pay all amounts owing to Stockdale & Leggo or any associate under the Franchise Agreement.[40]

53 Clause 34(1)(a) of the Franchise Agreement provides that the Franchisee indemnifies Stockdale & Leggo against all damages, losses, claims and costs including legal costs incurred by it in connection with a demand, action, arbitration or other proceeding arising directly or indirectly as a result or in connection with any default event.[41]

54 Stockdale and Leggo have lodged a proof of debt in the liquidation for the sum of $51,808.81 comprising:

(a) $17,758.81 for outstanding franchise fees under the Franchise Agreement ('unpaid franchise fees');

(b) $28,000 for franchise fees payable on expiration of the Franchise Agreement ('future franchise fees'); and

(c) $6,050 for legal fees.[42]

55 According to a statement issued by Stockdale & Leggo to the Company dated 9 June 2015,[43] the unpaid franchise fees fell due between September 2014 and May 2015. Under the proof of debt, the future franchise fees are calculated on the basis that they are payable for a period of 17 months from June 2015 (the time of the winding up of the Company), in accordance with the initial term of the Franchise Agreement.

56 Stockdale & Leggo Corporate have also lodged a proof of debt for the sum of $25,442.22, presumably as the nominated associate of Stockdale & Leggo as Franchisor. The proof of debt comprises:

(a) $16,092.22 for unpaid corporate marketing fees ('unpaid marketing fees'); and

(b) $9,350 being minimum corporate marketing fees said to be payable until the expiration of the Franchise Agreement ('future marketing fees').[44]

57 According to a statement issued by Stockdale & Leggo Corporate to the Company on 9 June 2015,[45] the unpaid marketing fees fell due between November 2012 and May 2015. As with the future franchise fees, the future marketing fees are calculated on the basis that they are payable for a period of 17 months from June 2015, under the initial term of the Franchise Agreement.

58 For ease of reference, and where appropriate, I will collectively refer to the unpaid franchise fees and the unpaid marketing fees as the 'unpaid franchise and marketing fees'. Similarly, I will collectively refer to the future franchise fees and the future marketing fees as the 'future franchise and marketing fees'.

When were unpaid franchise and marketing fees incurred?

59 In Hawkins v Bank of China,[46] a case concerning the legislative predecessor of s 588G, Kirby P held that a debt is incurred when a company 'renders itself liable to pay a sum of money in the future as a debt'.[47] As explained by the authors of Voidable Transactions in Company Insolvency, this may happen when the company takes on a contractual obligation to make a future payment of a sum of money;[48] or alternatively, when some act, omission, or other circumstance causes the company to owe the debt.[49]

60 In Re Overgold,[50] the Court considered the important question of when franchise fees were incurred by a franchisee company for the purpose of an insolvent trading claim. The relevant facts in Re Overgold can be briefly summarised as follows. Overgold Pty Ltd ('Overgold') had entered into a franchise agreement and accompanying license agreement with Nando's Australia Pty Ltd ('Nando's'). The underlying franchise agreement provided for payment of an initial franchise fee along with monthly franchise fees and marketing fees which were payable at a particular date during each calendar month. After operating the franchise business for more than two years, Overgold ceased trading and Nando's promptly terminated the franchise agreement. More than six months later, Overgold was wound up in insolvency by this Court. The appointed liquidator brought an insolvent trading claim against the director of Overgold alleging that various debts to creditors were incurred at a time the company was insolvent. The principal debt claimed was owed to Nando's in respect of franchise fees which accrued over a period of time until the termination of the franchise agreement. In assessing when the relevant franchise fees were incurred by Overgold, Gardiner AsJ reviewed a number of the leading authorities which dealt with the question of when a debt is incurred for the purpose of an insolvent claim under s 588G.

61 His Honour cited the following important passage from the decision of Mandie J in ASIC v Plymin (No 1):[51]

The weight of authority shows that a debt can be incurred when the contract giving rise to the debt is entered into, even if contingencies affect the debt or the debt is a future debt. In the case of a future debt, it may be incurred at the time of entering the contract if it is then an ascertained or ascertainable amount. By the same token, a debt may in appropriate circumstances be incurred within the meaning of the section at a time later than the entry of the contract under which the debt arises or may arise. Although it is necessary to consider the terms of the relevant contract, the question when the debt is incurred within the meaning of the section does not depend on strict legal analysis but turns on when, in substance and commercial reality, the company is exposed to the relevant liability. ...[52]

62 After noting the absence of authorities which deal directly with franchise agreement obligations in the context of an insolvent trading claim, his Honour observed that '[p]erhaps the most analogous transaction to that of a franchise agreement, where there is a contract which provides for a prospective liability for periodical payments, is that of the obligations incurred under a lease of land'.[53] His Honour went on to extract the following passage from the Full Court of the Supreme Court of Western Australia in Russell Halpern Nominees Pty Ltd v Martin:[54]

[T]he contention is that a debt was incurred from time to time as the rent became payable under the agreement. On that basis the appellant says that it can, under s 556(1) of the Code, recover all rent which became payable under the agreement for the period 1 July 1982 until 25 May 1983. That submission should be dealt with upon the basis that the lease was for a term which had not expired when on 25 May 1983 the appellant sold the premises. So understood, the proposition is that a tenant holding premises for a term 'incurs a debt' within the meaning of s 556(1) of the Code upon each and every rent day. I do not think that to be correct. Whatever the expression 'incurs a debt' might mean, it is clearly descriptive of an act which when done by the company in the stated circumstances exposes a director of the company and a person who took part in the management of the company when the debt was incurred, [sic] when the act was done, to a criminal liability ... In a case such as this, when the term of the lease has not expired and when the landlord is holding the tenant to the agreement so that the tenant, whether in occupation of the leased premises or not, becomes liable to pay rent on the agreed rent days, I do not think that any relevant act on the part of the tenant beyond his entering into the lease in the first instance can be identified. And that being so, I do not think it can be said that a tenant company 'incurs a debt' within the meaning of the subsection whenever a present liability to pay rent is created by the tenant's covenant in the lease operating upon the passage of time. To hold otherwise would be to say that if a company when in all respects financially sound were to enter into a lease for a term of years and at some time thereafter and for reasons which could not be anticipated it were to fall on bad times and be unable to pay its debts, the directors would thereafter and on every rent day within the remainder of the term be guilty of an offence for the reason that on that rent day the company 'incurs a debt'. I am unable to accept that.[55]

63 Associate Justice Gardiner observed that the Full Court's decision in Russell Halpern is authority for the following principle:

[T]he only act that satisfies the 'positive act' requirement in the context of a lease is the entry into the contract of lease; a company incurs a debt when it first enters into the lease, it does not incur a separate debt each and every time rent becomes payable under the lease because there is no positive act on the part of the company on those occasions.[56]

64 In applying these authorities by analogy, and in construing the terms of the underlying franchise agreement, his Honour determined that Overgold incurred a liability for franchise and marketing fees at the time it entered into the underlying franchise agreement with Nando's.[57] Notably, his Honour did not consider that the dates upon which franchise fees were invoiced were especially relevant because the liability to remit those charges was incurred at an earlier time when the franchise agreement was entered into.[58] Further, his Honour held that because the franchise agreement was made before Overgold became insolvent, the franchise fees claimed by Nando's were necessarily excluded from the liquidator's insolvent trading claim.[59]

65 Having regard to the terms of the Franchise Agreement in this case, I am of the view that the unpaid franchise and marketing fees are debts which, in substance and commercial reality, were incurred at the time that the Company entered into the Franchise Agreement on 24 November 2012. In arriving at this conclusion, I have necessarily rejected a number of submissions made by the plaintiffs about when the franchise fees and marketing fees were incurred.

66 In particular, I do not accept the plaintiffs' submission that the unpaid franchise and marketing fees were incurred on a monthly basis as set out in the statements which accompanied the proofs of debt submitted by Stockdale & Leggo and Stockdale & Leggo Corporate. Clause 5.3(1) of the Franchise Agreement simply records when franchise and marketing fees fell due; namely, on the 15th day of each month. But that is not when the underlying liability to pay for those charges arose. Pursuant to clause 5.1 of the Franchise Agreement, the liability to pay those prospective fees came about at the time the Franchise Agreement was signed by the parties and was an obligation the Company incurred in consideration for the ongoing use of the Stockdale & Leggo franchise systems and IP.

67 I also do not accept the plaintiffs' contention that the franchise fees and marketing fees were incapable of being ascertained when the company entered into the Franchise agreement because they were dependent upon sales revenue earned each month by the Company. Clause 5.3(1) is clear that franchise fees and marketing fees were charged as a percentage of revenue, or by reference to the minimum amounts of $1,500 plus GST and $500 plus GST, respectively. In other words, there was a minimum monthly liability capable of being ascertained at the commencement of the Franchise Agreement which was incurred regardless of actual sales revenue.

68 In my view, the relevant 'positive act' by which the Company incurred those fees was not, as contended by the plaintiffs, the generation of sales revenue each month. Instead, it was the execution of the Franchise Agreement which created the contractual obligation to pay those monthly fees. Unlike the position in ASIC v Plymin, the commercial arrangement between the parties here did not involve the drawing down of a commodity at regular intervals pursuant to an agreement, such that a debt was incurred when each draw down occurred.[60] The commercial arrangement between the Company and the Franchisor was more akin to the position in Russell Halpern where the act of committing a company to make periodic payments under a long-term lease was the entry into the lease itself.

69 Whilst I am not bound to follow Gardiner AsJ's decision in Re Overgold, I respectfully consider his Honour's analysis in that case to be sound. The case should not be distinguished simply because the facts set out there do not disclose the basis upon which the relevant franchise fees were calculated. The reasoning in Re Overgold has clear application to the facts in this case. However, the outcome in this case will not necessarily be the same as in Re Overgold. The result will depend on whether the Company incurred the obligation to pay franchise fees and marketing fees at a time when it was insolvent.

Arguments by the defendant disputing franchise fees and marketing fees

70 It is appropriate to now consider a number of arguments raised by Mr Lidhar to dispute the claim for unpaid franchise and marketing fees made by Stockdale & Leggo and Stockdale & Leggo Corporate.

71 Mr Lidhar submits that the Company was in a legal dispute with Stockdale & Leggo in relation to the payment of commissions for properties sold within the defined territory covered by the Franchise Agreement. One of the documents tendered by Mr Lidhar at trial is a letter dated 22 August 2013 sent by him to Stockdale & Leggo alleging breaches of the Franchise Agreement by Stockdale & Leggo as the Franchisor.[61] The letter is entitled 'Breach of Contract Notice' and alleges that the conduct of the Franchisor in failing to enforce territories under its franchise arrangements resulted in the Company incurring significant financial losses. An email dated 28 January 2016, sent to Stockdale & Leggo from the defendant's co-guarantor under the Franchise Agreement, estimates the Company's loss to 'be in the vicinity of $100,000 with unspecified damages to loss of earning [sic], opportunity and reputation'.[62] At the trial, the defendant estimated that the Company had lost up to 70% of its profits by being denied commissions that it ought to have received under the Franchise Agreement.

72 Mr Lidhar also submits that a few weeks after the 22 August 2013 letter was sent, the Company and the Franchisor reached an agreement to the effect that franchise fees would be suspended until the underlying dispute was resolved. He accepts that this agreement was not documented, but has reason to believe that the agreement was nevertheless implemented because the Company did not receive any invoices for payment of franchise fees or marketing fees until after its winding up.

73 Although I accept that there was an apparent dispute between the Company and the Franchisor, there is no evidence that the Franchise Agreement was ever terminated prior to the liquidation. In fact, a letter from Stockdale & Leggo's lawyers dated 10 June 2015[63] suggests that the Franchise Agreement was only terminated after the Company went into liquidation. In other words, franchise fees continued to fall due until the termination of the Franchise Agreement. The defendant has not properly explained how the alleged breach by the Franchisor would impact on the unpaid franchise and marketing fees due under the Franchise Agreement. Moreover, if the Company has a viable action against the Franchisor, the liquidators may, of course, choose to pursue that claim. But such a claim is not relevant to the present insolvent trading action against the defendant. It is possible that any such claim may operate as a set-off against the relevant proofs of debt submitted in the liquidation by Stockdale & Leggo and its associate, in accordance with s 553C of the Corporations Act. However, there is insufficient evidence of the nature of the claim and it is unclear whether the necessary element of mutuality between the debts claimed by Stockdale & Leggo and Stockdale & Leggo Corporate, on the one hand, and any claim by the Company, on the other. Despite Mr Lidhar's allegation that the Company's liability for payment of franchise and marketing fees was suspended by agreement with the Franchisor, there is simply no evidence before the Court to support the existence of any such agreement. The Court must act on the basis that a contract debt is payable at the time stipulated for payment in the contract, unless there is sufficient evidence to the contrary.[64]

74 In addition, there is no sworn evidence by Mr Lidhar to substantiate his submission that the Company did not receive any invoices from Stockdale & Leggo and Stockdale & Leggo Corporate following the alleged agreement to suspend fees. The statements supplied by Stockdale & Leggo and Stockdale & Leggo Corporate in respect of unpaid franchise and marketing fees, however, clearly set out the date, invoice number, description, and amount claimed in respect of each invoice relied upon to support the proofs of debt lodged by those entities in the liquidation.[65] Further, I have already held that the Company's liability to make monthly payments in respect of franchise and marketing fees came about at the time the Company entered into the Franchise Agreement on 24 November 2012. Any invoices sent by the Franchisor merely confirmed that the relevant amounts had fallen due for payment, but they did not give rise to the underlying liability itself.

75 Mr Lidhar asserts that Stockdale & Leggo agreed not to charge franchise or marketing fees for the first six months of the franchise.[66] However, there is no evidence of any such arrangement.

76 Lastly, the defendant claims that the copy of the Franchise Agreement relied upon by the plaintiffs contains special conditions (which concern franchise territories)[67] that were not part of the Franchise Agreement. The plaintiffs point out that the copy of the Franchise Agreement exhibited to the Second Newman Affidavit was provided to the liquidators as part of the books and records of the Company. However, more importantly, the special conditions referred to by Mr Lidhar are not relevant to the plaintiffs' insolvent trading claim.

77 I am ultimately satisfied that the unpaid franchise fees in the sum of $17,758.81, which fell due during the period September 2014 to May 2015, constitute a debt for the purpose of s 588G and this claim. I also accept that the unpaid marketing fees totalling $16,092.22, which fell due between November 2012 and May 2015, constitute a relevant debt. As previously explained, the contractual liability to make those payments was incurred by the Company when the Franchise agreement was executed on 24 November 2012.

78 Although the future franchise and marketing fees and the legal costs claimed by Stockdale & Leggo and Stockdale & Leggo Corporate initially formed part of the insolvent trading claim, as a consequence of reservations expressed by the Court at the hearing on 20 July 2020, and following further inquiries by the liquidators, the plaintiffs advised at the hearing on 16 September 2020 that they no longer wished to press those aspects of the claim. Accordingly, the original insolvent trading claim of $103,303.11 was reduced to $59,903.21. However, this concession was qualified by the plaintiffs' supplementary submissions of 5 November 2020. In essence, the plaintiffs now argue that if the Court applies Re Overgold and concludes that franchise fees and marketing fees were incurred by the Company when the Franchise Agreement was executed on 24 November 2012, then the plaintiffs would be entitled to claim franchise fees and marketing fees for the entire five year term as a 'contingent debt'. In my opinion, the future franchise and marketing fees and the legal costs ought not form part of the insolvent trading claim for the reasons set out below.

79 It is important to observe that the franchise and marketing fees claimed in Re Overgold comprised fees which had accrued over a period of time prior to the termination of the relevant franchise agreement. In contrast to the position here, there were no fees claimed in Re Overgold following the termination of the agreement and in respect of the balance of the term of the franchise agreement. The decision does not deal with the treatment of such future fees following termination of a franchise agreement. However, assuming the reasoning in Re Overgold applies to the future franchise and marketing fees claimed here, and that the Company is taken to have incurred a liability to pay those fees at the time that the Franchise Agreement was entered into, it does not necessarily follow that those fees are capable of being claimed as a 'debt' for the purpose of s 588G.

80 Although the term 'debt' is not defined in the Corporations Act, it should be construed in a practical and common sense manner, consistent with its context and the underlying statutory purpose.[68] In Rothwells Ltd v Nommack (No 100) Pty Ltd,[69] a case which involved an application to restrain a winding up proceeding, McPherson J succinctly described a debt as 'a liquidated sum in money presently due, owing and payable' by a debtor to a creditor.[70] The earlier High Court decision of Young v Queensland Trustees Ltd[71] also distinguishes a debt from a claim of damages for breach of contract or any other unliquidated claim.[72]

81 In the specific context of s 588G, a debt may be regarded as a liability or obligation to pay or render something, including a liability which is conditional or present and absolute.[73] There is also good authority for the proposition that a debt which is incurred for the purpose of s 588G must be for a liquidated amount capable of being ascertained, as distinct from an unascertained claim for damages.[74] Similarly, it has been firmly established that an obligation to pay unliquidated damages is not a debt capable of supporting a statutory demand.[75] This narrow construction of the term 'debt' can be contrasted with the expansive approach found in s 553(1) of the Corporations Act which provides that the debts and claims provable in a winding up include 'all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date' (that is, the date on which the winding up is taken to have begun).

82 In my view, the future franchise and marketing fees claimed in this case are unliquidated claims arising under the Franchise Agreement as opposed to debts within the contemplation of s 588G. Under the Franchise Agreement, the Company gave an enforceable obligation to pay amounts periodically over time. But that obligation did not create an existing or present indebtedness in respect of sums which had not yet fallen due. By contrast, the unpaid franchise and marketing fees had already fallen due throughout the relevant period and were payable under the Franchise Agreement prior to the Company's winding up. It is useful to consider the counterfactual of what would have happened if the Company had not gone into liquidation but the Franchise Agreement was instead terminated by the Franchisor for other reasons. Under that scenario, any claim by the Franchisor for future fees and charges would be subject to the usual considerations pertaining to a claim for damages arising from an unperformed obligation to pay money under a contract. These considerations would include the Franchisor's ability to mitigate its loss and the potential for a discount to be imposed in recognition of the accelerated payment to the Franchisor of sums that had not yet fallen due.[76] In addition, provision might be made to reflect the chance that factors unconnected with the termination of the franchise may have prevented the Company from conducting the business and remitting fees for the remainder of the term of the Franchise Agreement.[77] Any counterclaim that the Company might have against the Franchisor would also need to be assessed before the ultimate liability of the Company to the Franchisor could be determined.

83 Whilst a contingent debt may be properly regarded as a debt for the purpose of s 588G,[78] I do not accept the plaintiffs' submission that the future franchise and marketing fees represent a contingent debt. A contingent debt exists where a debtor has a legal obligation to pay a sum of money in the future that is contingent on certain events occurring.[79] A classic example of a contingent debt takes the form of a guarantee. In Hawkins,[80] the relevant company guaranteed the liabilities of other entities within a broader corporate group. It transpired that the principal debtors went into provisional liquidation and a demand was made against the guarantor company. Chief Justice Gleeson (with whom Kirby P and Sheller JA agreed) regarded the company's liability under the guarantee in question to be a contingent debt for a liquidated sum, rather than a contingent liability to pay damages.[81] Here, the events upon which the future franchise and marketing fees are said to be contingent are unclear . More importantly, the exposure of the Company to pay future franchise and marketing fees under the Franchise Agreement did not give rise to a contingent liability to pay a liquidated sum.[82] As I have already explained, the future franchise and marketing fees represent unliquidated claims in any event.

84 The exclusion of unliquidated claims from the concept of a 'debt', as it appears in s 588G, not only affords the term a practical and common sense meaning, it is also consistent with the underlying purpose of the insolvent trading regime. Plainly, s 588G is concerned with discouraging directors from allowing their respective companies to trade (and incur debts) whilst insolvent, to the detriment of creditors.[83] The prohibition of insolvent trading compels a director to place a company into administration as soon as a reasonable person would suspect insolvency (see s 588G(1)(c)). As previously explained, a contravention of s 588G(2) has both civil and criminal consequences for directors. Given the potentially serious consequences of insolvent trading, it is appropriate that unliquidated debts and unascertained claims for damages are excluded from the insolvent trading regime. Further, to include unliquidated claims within the scope of a 'debt' in s 588G could unnecessarily prompt directors to place companies into administration in circumstances when such claims are uncertain and the relevant company has the prospect of otherwise trading profitably.[84]

85 Even if I am wrong and the future franchise and marketing fees are capable of being characterised as debts, it is unclear how they were presently due and payable at the time of the termination of the Franchise Agreement or the date of the Company's liquidation on 5 June 2015. Usually, unless a contract contains provision for accelerating the time for payment, a party must wait until the payment or an instalment payment falls due before bringing a claim in debt.[85] I cannot locate any such clause in the Franchise Agreement. By letter from Stockdale & Leggo's lawyers to the liquidators dated 10 June 2015, the Franchisor purported to terminate the Franchise Agreement under clause 27.6(4) of that document, with effect on 5 June 2015 (the date of the Company's winding up).[86] Given that the relevant default event is the winding up of the Company and the notice of termination post-dates the commencement of the liquidation, by operation of clauses 28.3 and 34(1)(a) of the Franchise Agreement, the future franchise and marketing fees and the legal costs could not have been claimed any earlier than the date of the Company's winding up.

86 It follows that the future franchise and marketing fees should not form part of the insolvent trading claim and are disallowed.

87 Mr Lidhar submitted at trial that the remaining debts relied upon by the liquidator were not incurred prior to the Company's winding up. Further, he submitted that a number of the remaining liabilities were not due and payable until after the liquidation commenced.

88 I do not accept these arguments. Section 588G is principally concerned with the incurring of a debt by a company at the time it is insolvent.[87] As already explained, a debt is incurred when a company renders itself liable to pay a sum of money at a future time.[88] What is important at this stage of the inquiry is when the debt was incurred as opposed to when it is due and payable. The question of when certain liabilities fall due is, however, relevant to the Company's solvency, which will be considered later in these reasons.

89 For the purpose of this insolvent trading claim, it does not matter that certain invoices were not due until after the Company went into liquidation. Further, I am satisfied that each of the remaining debts were in fact incurred prior to the liquidation.

90 I accept that the debt to Property Data Solutions Pty Ltd of $203.50 was incurred on 2 June 2015, being the date on the invoice issued to the Company.[89]

91 I am satisfied that the debts to Open2view.com.au totalling $3,508 were incurred between 31 August 2013 and 29 April 2015, being the dates set out in a statement issued to the Company.[90] The statement refers to a number of invoices which were 90 days overdue. There is no evidence to support the defendant's submission that he had negotiated on the Company's behalf to defer payment of the relevant invoices until mid-June 2015. In any event, for the reasons already explained, what is important here is when the relevant debts were incurred and not when they were ultimately payable.

92 Macquarie Pacific Funding Pty Ltd lodged a proof of debt on 30 August 2015,[91] in respect of $2,640 advanced to the Company on 11 February 2015.[92] A balance of $448.71 remains outstanding. I find that this amount represents a debt incurred on 11 February 2015 when the advance was originally made.

93 I find that the debt of $30.57 to CityLink for tolls was incurred on 2 June 2015, being the date of the invoice from CityLink to the Company.[93] I do not accept the defendant's submission that the Company never had an account with CityLink. That is not supported by any evidence. The relevant invoice is clearly addressed to the Company.

94 I am prepared to infer on the evidence that the debt to Fairfax Media Pty Ltd in the sum of $660 was incurred on a date prior to the date of liquidation on 5 June 2015.[94]

95 I accept that the debt to Snap Media Group Pty Ltd in the sum of $147.50 was incurred on 30 April 2015, which was the date of an invoice issued by it to the Company.[95]

96 I find that the debt to realestate.com.au in the sum of $3,258 was incurred between 30 April 2015 and 31 May 2015. Charges totalling $2,973 were incurred on 30 April 2015 pursuant to an invoice issued by realestate.com.au to the Company on that date.[96] There were further charges of $285 for subscriptions incurred on 31 May 2015 in accordance with a statement issued on that date.[97]

97 Having determined that the debts relied upon by the plaintiffs were incurred prior to the liquidation of the Company on 5 June 2015 (but excluding the future franchise and marketing fees which have been disallowed),[98] it is necessary to now consider whether the debts were incurred at a time when the Company was insolvent.

98 The plaintiffs are required to prove that the Company was insolvent at the time that a particular debt was incurred or that it became insolvent as a result of the incurring of the debt.

99 The test for solvency found in s 95A(1) of the Corporations Act is whether a company can pay its debts as and when they become due and payable. Section 95A(2), in turn, provides that a company which is not solvent is insolvent.

100 In Crema Pty Ltd v Land Mark Property Developments Pty Ltd,[99] Dodds-Streeton J (as her Honour then was) cited with approval the decision of Weinberg J (as his Honour then was) in Ace Contractors & Staff v Westgarth Development Pty Ltd[100], and confirmed that s 95A of the Corporations Act enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business. Her Honour elaborated further, stating:

While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realisable so as to permit the payment of all debts as they fall due, the company will not be solvent. Conversely, it may be able to pay its debts as they fall due, despite a deficiency of assets.[101]

101 In Noxequin Pty Ltd v Deputy Commissioner of Taxation,[102] Barrett J explained the importance of the concept of liquidity in the cash flow test of insolvency as follows:

The emphasis must be upon the extent of cash and other liquid assets (by which I mean assets readily convertible into cash), compared with the quantum of debts due and payable and to become due and payable in the immediate future. A comparison between the two can be made only as at a particular point but a state of solvency requires that, at each such point, the cash and liquid assets be sufficient to cover the debts due and payable and to become due and payable in the immediate future. ...[103]

102 In the earlier case of Sandell v Porter,[104] Barwick CJ explained that while '[i]nsolvency is expressed ... as an inability to pay debts as they fall due out of the debtor's own money ... the debtor's own moneys are not limited to his cash resources immediately available [and] ... extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time'.[105]

103 In determining solvency, commercial realities will be relevant in assessing what resources are available to a company to source the income necessary to meet its liabilities.[106] Further, in C&O Voukidis Pty Ltd (in Liq) v Break Fast Investments Pty Ltd,[107] Davies J explained that: [108]

[T]he assessment as to whether a company is solvent involves an element of 'looking forward' and it is material to consider not only the company's capacity to pay debts currently due, but also its capacity to pay debts that will, or might, become due: Australian Beverage Distributors v The Redrock Co [2008] NSWSC 3; (2008) 26 ACLC 74 at [157].

104 This principle is also reflected in s 459D(1) of the Corporations Act, which provides that for the purposes of determining whether a company is solvent, 'the Court may take into account a contingent or prospective liability of the company'.

105 In Re Overgold, Gardiner AsJ stated that the cash flow test requires the Court to ascertain:

(a) the company's existing debts and the company's debts within the near future;

(b) the date each debt will fall due for payment; and

(c) the company's present and expected cash resources and the date each item will be received.[109]

106 In Australian Securities and Investments Commission v Plymin,[110] Mandie J set out a number of factors which may be indicative of insolvency. The indicia of insolvency set out in his Honour's list which are most relevant for present purposes are: overdue Commonwealth and State taxes; liquidity ratios below 1; creditors paid outside trading terms; solicitors' letters, summonses, judgments or warrants issued against the company (which I will take to include, by analogy, statutory demands); and an inability to produce timely and accurate financial information to display the company's trading performance and financial position, and make reliable forecasts.

107 The factors referred to in Plymin have been described as representing common sense indicators of insolvency.[111] But the indicia are not a proxy for the statutory test under s 95A. As Mansfield J observed in Lewis, Re Damilock Pty Ltd (in Liq) v VI SA Australia Pty Ltd,[112] one or more of these indicia may have particular significance in a matter, but the absence of one or more of them does not, of itself, establish solvency. The question of whether a company is able to pay its debts as and when they fall due is a question of fact.[113]

108 Further, under s 588E(4)(a) of the Corporations Act, if it is established that a company has failed to keep financial records in relation to a period as required by s 286(1), then the company is presumed to have been insolvent throughout the period. As previously noted, under s 286(1) of the Corporations Act, a company must keep written financial records that correctly record and explain its transactions and financial position and performance, and which would enable true and fair financial statements to be prepared and audited.

Presumption of insolvency under ss 286(1) and 588E(4) of the Corporations Act

109 The liquidators have gone to great lengths to obtain the Company's books and records from the defendant, from public authorities, and from other sources. In particular:

(a) despite a request made by the liquidators on 10 June 2015,[114] the defendant did not provide a Report as to Affairs in respect of the Company until sometime later;[115]

(b) following the winding up of the Company, until around 22 June 2015, the liquidators were able to collect some limited books and records from the Company's premises;

(c) since that time, the liquidators had made written requests on 5 November 2015[116] and 18 January 2016[117] to the defendant via his solicitor, and on 3 May 2018,[118] to the defendant's solicitor requesting the books and records of the Company in the defendant's possession. In the 3 May 2018 letter, the liquidators explained that the books and records in the liquidators' possession did not accurately record and explain the Company's transactions, financial position, and performance to enable true and fair financial statements to be prepared and audited. The letter also provided details of the debts which ultimately comprised the insolvent trading claim and enclosed much of the documentation referred to earlier in these reasons in relation to the existence of those claims;

(d) following correspondence from the liquidators' solicitors dated 14 June 2018, which set out the basis of the insolvent trading claim and again re-iterated the absence of books and records,[119] on 26 June 2018, the defendant's solicitor advised the liquidators that he had not received any instructions from the defendant;[120]

(e) on 26 June 2018, the liquidators' solicitors wrote to Mr Lidhar directly.[121] Among other things, the letter notes that the Company did not appear to have maintained basic financial information and records; and

(f) despite the liquidators' efforts, Mr Lidhar did not at any time provide the requested books and records. This has significantly hindered the liquidators' investigations into the Company. I do not accept Mr Lidhar's assertion that the liquidators could have requested documents from him but failed to do so.[122] That is simply not borne out by the above chronology.

110 Some additional books and records were eventually obtained by the liquidators as a result of their inquiries of the ATO, VicRoads, the Commonwealth Bank, and Stockdale & Leggo. The documentation includes: unsigned financial statements for the years ending 30 June 2013 and 30 June 2014; details of the Company's rent roll and rental property files; documents going to the Company's incorporation and registration of business name; franchise documentation; deposit slips from tenants and records of payments to landlords; trust ledger accounts; invoices for the years 2014 to 2015; and deposit and cheque books.[123]

111 However, there is ultimately no evidence that the Company maintained any of the usual records that a company would ordinarily maintain in order to comply with s 286(1) of the Corporations Act. Critically, the Company did not maintain: payroll records; a general ledger; a wages book and employee records; income tax returns; a sales journal; a debtor's ledger; a creditor's ledger; bank statements; and a complete set of financial statements, including balance sheets, profit and loss statements, and cash flow statements.[124] No evidence has been provided by Mr Lidhar to suggest otherwise.

112 In Re Lawrence Warehouse Pty Ltd (in liq) - Shaw v Minsden Pty Ltd,[125] Ward J considered the types of documents which are necessary to achieve compliance with s 286(1). Her Honour observed:

[235] It has been held that the records required to be kept under s 286 include a balance sheet, profit and loss statement and a cash flow statement (Australian Securities and Investments Commission v ABC Fund Managers Ltd [2001] VSC 383; (2001) 39 ACSR 443 at [44].)

[236] Austin & Black[126] note that the keeping of a general ledger appears to be one of the 'minimum requirements' of this section (referring to Van Reesema v Flavel (1992) 7 ACSR 225; 10 ACLC 291 at [295]; Love v ASC [2000] WASCA 404; (2000) 36 ACSR 363 at [59]) and that this requirement is not met by keeping the source material from which a set of books may be written up (again citing Van Reesema v Flavel and ABC Fund Managers Ltd). They note:

It appears that monthly management accounts of a company are not accounting records required to be kept under this section or its predecessors: Duke Group Pty Ltd (in liq) v Pilmer (1994) 63 SASR 364; 123 FLR 210; 15 ACSR 255; BC9400878 at 263. On the other hand, books, wage records and other documents prepared by an accountant were held to be accounting records required to be kept under a predecessor of this section in Caratti v R (2000) 22 WAR 527; 45 ATR 305; [2000] WASCA 279; BC200005748; see also Linfox Transport (Aust) Pty Ltd v Arthur Yates & Co Ltd (2003) 47 ACSR 261; [2003] NSWSC 876; BC200305676; Australian Securities and Investments Commission v Rich (2005) 216 ALR 320; 53 ACSR 752; [2005] NSWSC 417; BC200502844 at [284] ff. The concept of 'financial records' does not extend to underlying contracts and transaction documentation, although the effect of those contracts and transactions should be reflected in company's financial records so that they are appropriately accounted for: Boulos v Carter, Re Tarbs World TV Australia Pty Ltd (2005) 220 ALR 572; 54 ACSR 827; [2005] NSWSC 891; BC200506576.

[237] In Van Reesema v Flavel, where the company in question did not keep any accounting records until after commencement of its winding up, the court rejected the argument that it was unnecessary to keep a general ledger or journal because of the limited number of transactions entered into by the company (and that it was sufficient to keep the source materials which evidenced the transactions) holding that 'accounting records' include books of prime entry such as the cash book and journal, ledgers and also a range of source materials.

[238] Similarly, in Love v ASC failure to keep any adequate general journal was relevant to deciding whether a company has satisfied the relevant statutory requirement. There the court held that it was strongly arguable that failure to record loan transactions and to carry out proper account reconciliations provided, of themselves, sufficient evidence to establish contravention.[127]

113 The evidence suggests that from the date of its incorporation on 28 May 2012, until the commencement of the winding up on 5 June 2015, the Company did not, for the purpose of s 286(1) of the Corporations Act, maintain written financial records that correctly recorded and explained its transactions, financial position and performance, and that would have enabled true and fair financial statements to be prepared and audited. What little documentation was apparently retained by the Company was plainly deficient for these purposes. In particular, it is difficult to see how, in the absence of a general ledger, wage records, bank statements, and a complete set of balance sheets and profit and loss statements, it would have been possible to prepare true and fair financial statements for the Company or to clearly and correctly represent its transactions, financial position, and performance.

114 Further, I do not believe that the failure to keep records in accordance with s 286(1) of the Corporations Act can be described as minor or technical for the purposes of s 588E(5). Therefore, pursuant to s 588E(4)(a) of the Corporations Act, the Company is presumed to have been insolvent from its incorporation on 28 May 2012, until the commencement of the winding up on 5 June 2015.

115 The question then arises as to whether Mr Lidhar is able to rebut the s 588E(4)(a) presumption of insolvency. I will consider that question as part of a broader assessment of the evidence and arguments Mr Lidhar has put forward on the question of insolvency generally (see further below).

Insolvency under s 95A of the Corporations Act

116 In addition to the presumption arising under ss 286(1) and 588E(4)(a) of the Corporations Act, the evidence also establishes on the balance of probabilities that the Company was unable to pay its debts, as and when they fell due from late November 2012. This was following the execution of the Franchise Agreement on 24 November 2012 and at the time when marketing fees under the Franchise Agreement first fell due for payment, in respect of the balance of the month of November 2012 (a pro rata amount of $110).[128] The unpaid marketing fees continued to accrue at a rate of approximately $550 per month from November 2012 until May 2015. It appears that only one payment of $52.19 was made by the Company in respect of the unpaid marketing fees.[129] There is no satisfactory evidence before the Court that the Company ever had the capacity to pay those debts at any time.

117 Further, it is apparent from September 2014, that the Company was required to make payment to Stockdale & Leggo for franchise fees. Those franchise fees fell due at this time, although the underlying liability to make such payment arose at the earlier time when the Franchise Agreement was entered into on 24 November 2012. The unpaid franchise fees owing to Stockdale & Leggo continued to accrue at a rate of around $1,800 per month from September 2014 to May 2015. It seems that no payments were ever made in respect of those debts.[130] Again, there is no satisfactory evidence that the Company ever had the capacity to pay the unpaid franchise fees at any time.

118 As regards the claims made by the ATO, the Company incurred a running balance account debt of $7,595 during the period 27 May 2013 to 25 August 2014, with only one credit of $298 being applied during this time.[131] The Company's income tax liability of $10,200 was incurred during the period 28 February 2014 to 1 December 2014. The majority of this amount was incurred in respect of the financial year ending 30 June 2014,[132] with minimum credits being applied by way of remission of general interest charges, but not as actual payments.[133] The Company's taxation debts were therefore first incurred on 27 May 2013, continued to accrue from that date, and remained outstanding at the commencement of the winding up. There is no cogent evidence to suggest that the Company ever had the capacity to pay these tax liabilities at any time. In addition, the ATO's proof of debt reveals that no business activity statements were lodged for the quarters ending 30 September 2014, 31 December 2014, 31 March 2015, and 30 June 2015.[134] Nor was an income tax return lodged for the year ending 30 June 2015.[135] The actual liability to the ATO may therefore be more than the amount claimed in its proof of debt. As previously noted, outstanding taxes are a key indicator of insolvency.

119 In addition, the liquidators' Insolvency Report of 2 November 2018[136] reveals a pattern of historic failure by the Company to pay its debts as and when they fell due. Various creditors issued overdue invoices from December 2012 and letters of demand from May 2013. By way of example:

(a) on 17 May 2013, lawyers acting for Colonial Property Management sent the Company a letter of demand seeking payment of $1,462.45 within 14 days, failing which legal action would be taken;

(b) on 2 September 2013, Printco issued a complaint in the Magistrates' Court of Victoria with respect to a total outstanding debt in the amount of $5,885 plus costs of $1,025.50;

(c) on 31 May 2014, realestate.com.au issued a statement which recorded $3,224.66 in overdue charges;

(d) on 8 August 2014, EnergyAustralia Pty Ltd issued a statement marked 'Disconnection Warning', advising of a total outstanding debt of $1,044.07;

(e) on 20 November 2014, Open2view issued a statement seeking payment of $3,322, of which $2,632 was 90 days overdue;

(f) on 23 January 2015, Printco issued a statutory demand in the amount of $6,839.76;

(g) on 12 February 2015, the Magistrates' Court of Victoria issued a notice of intention to issue an infringement warrant for an amount of $3,055.20 which was overdue;

(h) on 19 March 2015, Printco issued a second statutory demand in the amount of $6,839.76;

(i) on 30 May 2015, the Sheriff's Office, Victoria, issued correspondence to the company advising of an outstanding warrant of $3,113.50 in relation to an unpaid fine; and

(j) on 12 June 2015, the defendant advised the liquidators that the bond amount of $7,000 plus GST, which was required to be paid pursuant to the Company's lease of its premises, had never been paid.[137]

120 The above catalogue of creditors who made demands upon the Company is not exhaustive. A full account of the various demands and overdue payment notices sent by creditors is set out in the liquidators' Insolvency Report.[138]

121 The Company had two employees at the date of liquidation who were ostensibly paid in cash at a rate of $10 per hour.[139] They appear to have been significantly underpaid. One employee has informed the liquidators that their entitlement was in fact $19.50 per hour. Moreover, the Company did not apparently make any contributions to superannuation and did not register for WorkCover insurance.[140] The failure to properly meet employee entitlements is also suggestive of the Company's insolvency.

122 The liquidators have also ascertained in their Insolvency Report that the Company had a deficiency of working capital (current assets to current liabilities) of around $13,612, leading to a working capital ratio of 0.51 for the financial year ending 30 June 2014.[141] There was also a quick asset ratio (a ratio of assets that can be readily realised to meet current liabilities) of 0.51 for the 2014 financial year.[142] Both of these ratios suggest that the Company had insufficient liquid assets to meet its liabilities and was cash flow insolvent from 30 June 2014 at the very latest. The Insolvency Report also discloses that as at 5 June 2015, the Company had no cash available to fund its operations.[143]

123 Against this evidence, Mr Lidhar made a number of submissions to suggest the Company was in fact solvent at all relevant times. He says the only creditors of the Company prior to the winding up were realestate.com.au and Open2view.com.au. For the reasons already set out, this is plainly incorrect, as there were numerous other creditors owed outstanding amounts by the Company at all material times. He asserts that the liquidators have not provided satisfactory evidence of the Company's creditors and debtors. However, the plaintiffs' affidavit material shows that the liquidators have undertaken extensive work to investigate the Company's affairs. In particular, the liquidators have identified, with precision, the creditors of the Company and the amounts claimed by those creditors for the relevant period.

124 Mr Lidhar objects to the debt claimed by Printco in the winding up proceeding. However, the plaintiffs do not seek to recover compensation from Mr Lidhar for that debt. The Printco debt is, however, relevant to the question of solvency and is relied upon in the plaintiffs' Insolvency Report as set out above. The fact that Mr Lidhar paid the Printco debt following the liquidation of the Company, and in anticipation of the application to set aside the relevant winding up order,[144] further reinforces that it was due and payable. Mr Lidhar also maintains that the Company never received any demands from creditors requiring payment of debts and that all employees were paid their entitlements on time. Each of these assertions is directly contradicted by the material set out in the liquidators' Insolvency Report discussed above. Accordingly, I do not accept these submissions.

125 Mr Lidhar places reliance upon unsigned and undated financial statements for the financial years ending 30 June 2013 and 30 June 2014 to support his submission that the Company was solvent at all relevant times.[145] The 2013 profit and loss statement shows a modest retained profit figure of $2,067.35 and the 2013 balance sheet discloses net assets of $2,167.35. For the 2014 year, the profit and loss statement identifies $23,802.47 in retained profits and the balance sheet suggests a surplus of $23,902.47. Mr Lidhar says that these figures are, in any event, incomplete in that they understate income received and do not make provision for the value of the Company's rent roll.

126 I do not give much weight to these unsigned financial statements. The evidence they contain is outweighed by the more compelling evidence assembled by the liquidators in preparing their Insolvency Report which is set out above. Further, the 2014 balance sheet incorrectly includes almost $11,000 as cash at bank which is actually money held on trust that does not belong to the Company. The financial statements also omit various debts which are the subject of this insolvent trading claim. When the liquidators adjusted these financial statements to account for the incorrectly attributed trust funds and a number of the missing creditors, there was a $692 deficiency of assets for the 2013 financial year and a far more modest surplus of assets of $2,604.52 for the 2014 financial year.[146]

127 Further, any net asset position does not translate to actual cash available to pay liabilities. The apparent surplus in the unadjusted balance sheet is largely comprised of non-current assets, including director loans of over $17,000. Even if the rent roll was not properly accounted for in the unsigned financial statements, it is also a non-current asset and cannot be readily sold and converted into cash. A report to creditors discloses that the rent roll and associated intellectual property was sold by the liquidators and yielded only $31,500 in proceeds.[147] As already noted, the liquidators' Insolvency Report shows that the Company had a working capital ratio of 0.51 and a quick asset ratio of 0.51 for the 2014 financial year.[148] These adverse ratios suggest that the Company was cash flow insolvent from 30 June 2014 because it could not realise sufficient assets to meet its debts. Further, according to the defendant's own submissions, the Company was embroiled in a franchise dispute which had resulted in it incurring a loss of around $100,000[149] or up to 70% of its profits by virtue of unpaid commissions. Assuming that this is correct, this would no doubt have dramatically impacted the Company's cash flow.

128 Notwithstanding Mr Lidhar's submission that a number of the debts relied upon by the liquidators in this claim were not due and payable until after the liquidation commenced, this does not change the fact that the Company was already insolvent at the time those same debts were incurred.

129 The defendant also submits that financial support could have been given to the Company either by himself or by two profitable businesses he was associated with, in order to fund the Company's operations. He points to an amount of $13,839.76 which he personally paid to Printco following the liquidation of the Company as part of a foreshadowed application to set aside the relevant winding up order.[150] However, the fact that the defendant paid one creditor after the Company was wound up does not establish that he had the capacity to assist the Company to pay all of its outstanding creditors during the relevant period or during the life of the Company. Importantly, there is no satisfactory evidence before the Court to substantiate the assertion that the defendant or his associated entities were willing to assist, were in a position to assist, or had historically assisted the Company during the relevant period or throughout the life of the Company.

130 Whilst I have not allowed the defendant to reopen his case by introducing additional documents after the conclusion of the trial, for the sake of completeness, I note that the documents sought to be filed do not tend to support the defendant's argument about the availability of financial assistance to the Company in any event. In particular:

(a) individual tax returns for the defendant suggest that he had a taxable income of between $50,000 and $52,000 and resulting tax liabilities of between $8,570 and $9,058 for the 2013 and 2014 financial years;

(b) tax return documents for two apparently related entities, Onhunt Transport Pty Ltd and HDL Corporation Pty Ltd, disclose only modest profits (after expenses) for those entities during the 2013 and 2014 financial years;[151]

(c) taken as a whole, the tax return documents now sought to be relied upon by Mr Lidhar do not suggest a capacity to provide the necessary financial support to the Company; and

(d) documents which are said by Mr Lidhar to identify money as having been paid by him into the Company's bank account, in the amounts of $18,155 in 2013 and almost $30,000 in 2014, are difficult to follow and unhelpful. The documents show cash deposits and non-descript electronic transfers without identifying the dates of the transactions or the names of the transferor or transferee accounts. There are also references to direct credit card charges concerning a 'Bendigo Bank Seascape Construct', the relevance of which is not apparent. It should also be remembered that there were outstanding director loans in the 2014 financial year of approximately $17,000. It is unclear whether the purported payments to the Company represented repayments of director loans as opposed to financial support for the Company.

131 Mr Lidhar also sought to contest the liquidators' evidence on insolvency by arguing that he did not know about the making of the winding up order. This is not a point which is especially relevant to the question of solvency. Nor is his complaint that the liquidators were unhelpful in clarifying which creditors needed to be paid in order for him to proceed with an application to set aside the winding up order. In the end, Mr Lidhar did not proceed with that application. This was despite the fact he was represented at the time and notwithstanding that the lawyers for Printco had provided consent to the setting aside of a winding up order following payment of that creditor's debt.[152] In his later email to the Court dated 23 September 2020, Mr Lidhar asserts that he did not make the application to terminate the winding up because he had already spent money paying out the debt to Printco, and because the liquidators had already sold the Company's main asset (its rent roll) which resulted in his confidence being broken and there being no reason to salvage the Company. Even if that explanation is accepted, it is ultimately not relevant to the question of whether the Company incurred liabilities at a time it was insolvent.

132 In the same email of 23 September 2020, Mr Lidhar asserts that the liquidators did not consult with him prior to selling the rent roll and then sold it below market value in circumstances where the Company was not the owner of that asset. These allegations are both new and unsubstantiated. The evidence clearly suggests that the Company was the owner of the rent roll. The liquidators' first report to creditors, dated 24 August 2015, notes that while Mr Lidhar said in a meeting on 9 June 2015 that the Company did not own the rent roll, he had failed to provide the liquidators with any evidence of that assertion.[153] Instead, the books of the Company included software containing details of the rent roll, together with associated documents such as deposit slips from tenants and trust ledger accounts.[154] On this basis, the liquidators proceeded to sell the rent roll to the Franchisor having regard to the Franchisor rights under the Franchise Agreement.[155] Further, in his affidavit of 28 August 2020, Mr Lidhar deposes to the fact that the Company managed properties for which it received management fees.[156] His evidence is consistent with the Company owning the rent roll. Further, at the trial, Mr Lidhar argued that the Company's financials were incomplete because they neglected to refer to the rent roll as an asset. Notwithstanding the inconsistencies in Mr Lidhar's evidence and submissions, it is ultimately unclear how any of his complaints about the sale of the rent roll are relevant to the insolvent trading claim brought by the plaintiffs. Finally, I reject Mr Lidhar's evidence that the liquidators' investigation into the Company's affairs are incomplete or insufficient. This complaint is vague and lacks any real substance.

133 Having regard to the evidence concerning the Company's solvency in totality, the Company is presumed to have been insolvent, under ss 286(1) and 588E(4)(a) of the Corporations Act, from its incorporation on 28 May 2012 until the commencement of the winding up on 5 June 2015. This is because it failed to keep and maintain sufficient written financial records that correctly recorded and explained its transactions, financial position and performance, and that would enable true and fair financial statements to be prepared and audited. What documents the Company did retain were deficient for these purposes. Mr Lidhar has not advanced any persuasive evidence to rebut the presumption of insolvency under s 588E(4)(a). Alternatively, the evidence demonstrates that the Company was actually cash flow insolvent from late November 2012, when marketing fees payable under the Franchise Agreement fell due but were not paid and continued to accrue. With the exception of the future franchise and marketing fees,[157] it follows that each of the debts relied upon by the plaintiffs were incurred at a time when the Company was insolvent.

134 As previously explained, there are a number of preconditions which must be satisfied in order for s 588G to apply. One such precondition is found in s 588G(1)(c), which requires that there are reasonable grounds for suspecting that a company is insolvent, or would so become insolvent, at the time the company incurs a debt. As I have already observed, this is an objective test. The inquiry is not one concerning the particular director whose conduct is under consideration. Instead, facts and matters must be shown to exist which would enable a director of reasonable competence and diligence to suspect insolvency.[158] Further, the Court must make its own judgment on the basis of facts as they existed at the relevant time and without the benefit of hindsight.[159]

135 Under s 588G(2)(a) of the Corporations Act, a person contravenes s 588G if he or she was aware at the time that there were grounds for suspecting insolvency. A suspicion of insolvency falls somewhere between a belief that the relevant company is insolvent and a mere wondering of whether that is the case.[160] Suspicion may be 'a positive feeling of actual apprehension ... amounting to "a slight opinion, but without sufficient evidence"'.[161]

136 Under s 588G(2)(b) of the Corporations Act, a person contravenes s 588G if a reasonable person in a like position would be aware that there were reasonable grounds for suspecting that the company was insolvent or would become insolvent as a result of the incurring of a debt. As the Full Court of the Supreme Court of South Australia noted in Powell v Fryer,[162] the Court should have regard to the facts and circumstances that the director ought to have known, as well as to the facts and circumstances that were actually known to the director.[163]

137 Having regard to the evidence previously set out, I accept the plaintiffs' contention that at all times during the period 28 May 2012 until 5 June 2015 (the period from which the defendant became a director until the winding up):

(a) there were reasonable grounds for suspecting that the Company was insolvent (or would become insolvent) when each of the relevant debts[164] was incurred; and

(b) the defendant was aware, or a reasonable person in the defendant's position as director of the Company would have been aware, that there were reasonable grounds for suspecting that the Company was insolvent (or would become insolvent) when each of the relevant debts was incurred.

138 In particular, there were reasonable grounds for suspecting insolvency because the Company had failed to maintain written financial records that correctly recorded and explained its transactions, financial position, and performance which would have enabled true and fair financial statements to be prepared and audited for the purpose of s 286(1) of the Corporations Act.

139 Further, a reasonable person in the defendant's position as director of the Company would no doubt have been aware that the Company had significant debts to a number of creditors, including the ATO, Stockdale & Leggo, and Stockdale & Leggo Corporate under the Franchise Agreement, which the Company could not afford to pay at any time. In addition, the sheer number of creditors who had demanded payment or had taken legal action would also have generated the necessary level of suspicion in a hypothetical director's mind that the Company was unable to pay its debts as and when they fell due and was insolvent. Such suspicion would undoubtedly have gone beyond mere wondering about whether the Company was insolvent.

140 In addition, having regard to the existence of the franchise dispute and Mr Lidhar's own submissions and evidence about the financial impact of the dispute on the financial performance of the Company,[165] not only would a reasonable person in a like position of Mr Lidhar have been aware that there were reasonable grounds to suspect the insolvency of the Company, but it is highly probable that Mr Lidhar himself would also have held such suspicion.

Defence under s 588H(2) of the Corporations Act

141 At the commencement of the trial, Mr Lidhar confirmed that he intended to rely upon the statutory defence set out in s 588H(2) of the Corporations Act. In order to successfully invoke that defence, Mr Lidhar needs to prove that at the time when a debt was incurred, he had reasonable grounds to expect, and did expect, that the Company was solvent and would remain solvent even if it incurred that debt. An expectation of solvency involves a higher degree of satisfaction or certainty than mere hope or suspicion.[166]

142 Having regard to the findings I have already made about the existence of reasonable grounds for suspecting the Company was insolvent, I do not accept that Mr Lidhar had an expectation of the Company's solvency which was reasonably based. In particular, he cannot have had an actual expectation of the Company's solvency given the existence of the franchise dispute and the apparent adverse impact of that dispute on the Company's profitability. Despite a lack of evidence, even if Mr Lidhar believed that he had negotiated the suspension of payments under the Franchise Agreement until the resolution of the franchise dispute and the deferral of payment of the debt owing to Open2view.com.au until mid-June 2015, it is not enough to base an expectation of solvency upon anticipated indulgences by a company's creditors.[167] Further, a reasonable director in Mr Lidhar's position, with full knowledge of the financial position of the Company, including the number of creditors who had made demands upon the Company, and its limited liquidity, could not have reasonably expected that the Company could pay its debts. A defence under s 588H(2) cannot succeed.

143 Although I have disallowed the future franchise and marketing fees as part of this claim[168], I have found that:

(a) there were reasonable grounds for suspecting that the Company was insolvent at the time when each of the remaining debts relied upon by the plaintiffs was incurred; and

(b) the defendant was aware, or a reasonable person in the defendant's position as director of the Company would have been aware, that there were reasonable grounds for suspecting that the Company was insolvent or would become insolvent when each of the remaining debts was incurred.

144 Despite those matters, the defendant failed to prevent the Company from incurring each of the debts the subject of this claim (excluding the future franchise and marketing fees)[169] in circumstances where the Company did not have the capacity to pay those debts. Each element of s 588G of the Corporations Act has therefore been established by the plaintiffs. The creditors owed the relevant debts have suffered loss and damage. It follows that the defendant has contravened s 588G(2) and is liable to compensate the Company in accordance with s 588M.

145 In light of the above findings, the plaintiffs are entitled to judgment in the sum of $59,903.21, which is a debt pursuant to s 588M of the Corporations Act, together with interest in the sum of $10,081.62.[170] I will hear the parties on the question of costs.

[1] Exhibit PN-1 to the affidavit of Philip Newman affirmed 7 January 2019 and filed on 11 January 2019 ('the First Newman affidavit').

[4] Exhibit PN-3 (Insolvency Report) to the First Newman affidavit, 2.

[7] Exhibit PN-2 to the First Newman affidavit.

[9] Affidavit of Service of Declan Daniel Canavan affirmed 8 April 2020 and filed on 9 April 2020.

[10] [2020] VSC 346.

[12] Transcript of hearing held 20 July 2020, 3-4, 7-8, 16-17.

[14] Transcript of hearing held 16 September 2020, 7-10.

[15] [2019] VSC 624 ('Re Overgold').

[16] [2016] VSCA 280; (2016) 343 ALR 112, 171 [203] ('Pink Lady').

[17] Spotlight Pty Ltd v NCON Australia Ltd [2012] VSCA 232; (2012) 46 VR 1, 7 [26]; Pink Lady [2016] VSCA 280; (2016) 343 ALR 112, 171 [204].

[18] See, for example, Australian Securities and Investments Commission v Rich [2006] NSWSC 826; (2006) 235 ALR 587, 593 (Austin J), referred to in Ezra Abrahams Pty Ltd v Milburn [2017] 355, [35] (Kyrou, Kayne and McLeish JJA) and Cargill Australia Ltd v Viterra Malt Ltd (No 25) [2020] VSC 172, [49] (Elliott J) ('Cargill No 25').

[19] Civil Procedure Act ss 7-9. See also Cargill No 25 [2020] VSC 172, [52] (Elliott J).

[20] Email sent to the Court from Williams Winter dated 21 September 2020.

[21] Farid Assaf, Brett Shields and Hilary Kincaid, Voidable Transactions in Company Insolvency (LexisNexis Butterworths, 2015) [10.49].

[22] Ibid [10.46], citing Powell v Fryer [2001] SASC 59; (2001) 159 FLR 433, 446 [76]-[77] (Olsson J, Duggan and Williams JJ); Hall v Poolman [2007] NSWSC 1330; (2007) 215 FLR 243, 298 [234] (Palmer J); Kenna & Brown Pty Ltd (in liq) v Kenna [1999] NSWSC 533; (1999) 32 ACSR 430, 444 [93]; Re McLellan; The Snake Man Pty Ltd v Carroll [2009] FCA 1415; (2009) 76 ACSR 67, 92 [144] (Goldberg J); and other cases.

[23] Elliott v Australian Securities and Investments Commission [2004] VSCA 54; (2004) 10 VR 369, 402 [117].

[24] Re Overgold [2019] VSC 624, [6] (Gardiner AsJ).

[25] See table at s 588G(1A) of the Corporations Act.

[26] Re Overgold [2019] VSC 624, [9] (Gardiner AsJ).

[27] Tourprint International Pty Ltd (in liq) v Bott [1999] NSWSC 581; (1999) 32 ACSR 201, 215 [67] (Austin J) ('Tourprint').

[29] The liquidators received and admitted proofs of debt in respect of each of these debts which are all unsecured. See the First Newman affidavit, [14].

[30] Transcript of hearing held 20 July 2020, 29-32.

[31] Paginated exhibit PN-12 to the Second Newman affidavit, 59-60.

[32] See Powell v Fryer [2001] SASC 59; (2001) 159 FLR 433, 443-4 [64]-[73] (Olsson J, Duggan and Williams JJ agreeing ); Sands & McDougall Wholesale Pty Ltd (in liq) v FCT [1998] VSCA 76; (1999) 1 VR 489, 504-5 [36]-[37] (Charles JA, Brooking and Kenny JJA agreeing); Rambaldi v Rice Bar Restaurant [2018] VSC 218, [32]-[33]; Hall v Poolman [2007] NSWSC 1330; (2007) 215 FLR 243.

[33] Paginated exhibit PN-12 to the Second Newman affidavit, 65-7.

[46] (1992) 26 NSWLR 562 ('Hawkins').

[48] Assaf, Shields and Kincaid, above n 21, [10.32], citing Hawkins (1992) 26 NSWLR 562, 576 (Kirby P).

[49] Assaf, Shields and Kincaid, above n 21, [10.32], citing Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 54 ACSR 583, 607 [81] (Barrett J).

[50] [2019] VSC 624.

[51] [2003] VSC 123; (2003) 46 ACSR 126 ('ASIC v Plymin').

[52] Ibid 247 [516], cited by Gardiner AsJ in Re Overgold [2019] VSC 624, [18].

[53] Re Overgold [2019] VSC 624, [20].

[54] (1986) 10 ACLR 539 ('Russell Halpern').

[55] Ibid 541-2 (Burt CJ, with whom Smith J agreed) (emphasis added), extracted in Re Overgold [2019] VSC 624, [21].

[56] Re Overgold [2019] VSC 624, [22].

[60] ASIC v Plymin [2003] VSC 123; (2003) 46 ACSR 126, 251-2.

[61] Defendant's tendered exhibit MFI-2.

[62] Defendant's tendered exhibit MFI-5.

[63] Exhibit PN-13 to the Third Newman affidavit.

[64] See Southern Cross Interiors Pty Ltd (in liq) v DCT [2001] NSWSC 621; (2001) 53 NSWLR 213, 224-5 [50]-[54]; Powell v Fryer [2001] SASC 59; (2001) 159 FLR 433, 444 [72]-[73]; Melbase Corporation Pty Ltd v Segenhoe Ltd [1995] FCA 1225; (1995) 17 ACSR 187, 199_; Cuthbertson & Richards Sawmills Pty Ltd v Thomas_ (1998) 28 ACSR 310, 320.

[65] Paginated exhibit PN-12 to the Second Newman affidavit, 54-5.

[66] Defendant's written submissions dated 5 November 2020.

[67] Paginated exhibit PN-12 to the Second Newman affidavit, 303.

[68] Hawkins (1992) 26 NSWLR 562, 572 (Gleeson CJ); Powell v Fryer [2001] SASC 59; (2001) 159 FLR 433, 443 [64] (Olsson J, with whom Duggan and Williams JJ agreed).

[69] [1990] 2 Qd R 85 ('Rothwells v Nommack').

[70] Ibid 86 (McPherson J). A liquidated sum was explained in Spain v Union Steamship Co of New Zealand Ltd [1923] HCA 21; (1923) 32 CLR 138, as being an 'amount to which the plaintiff is entitled ... [which] can be ascertained by calculation or fixed by any scale of charges, or other positive data': at 142 (Knox CJ and Starke J quoting the then current edition of Odgers on Pleading and Practice).

[71] [1956] HCA 51; (1956) 99 CLR 560.

[73] Hawkins (1992) 26 NSWLR 562, 572 (Gleeson CJ).

[74] Ibid 569; Box Valley Pty Ltd v Kidd [2006] NSWCA 26; (2006) 24 ACLC 471, [14]-[15] (Bryson JA), [60] (Basten JA), [69]-[74] (Gzell J) ('Box Valley v Kidd'). See also Assaf, Shields, and Kincaid, above n 21, [10.35] and the authorities referred to there.

[75] Re North Sunbury Developments Pty Ltd [1985] VicRp 67; [1985] VR 657; Rothwells v Nommack [1990] 2 Qd R 85, 88 (McPherson J); First Line Distribution Pty Ltd v Paul Whiley (1995) 18 ACSR 185, 188 (Cohen J); Reinsurance Australia Corporation Ltd v Odyssey Re (Bermuda) Ltd [2000] NSWSC 1118; (2000) 36 ACSR 348, 355 (Macready M).

[76] See Robophone Facilities Ltd v Blank [1966] 1 WLR 1428, 1439; W & J Investments Ltd v Bunting [1984] 1 NSWLR 331; Park Air Services PLC; Christopher Moran Holdings Ltd v Bairstow [1999] UKHL 2; [2000] 2 AC 172; JW Carter, Contract Law in Australia (LexisNexis Butterworths, 7th ed, 2018) [36-16]; Re Vitamin Co Pty Ltd [2019] VSC 540, [42] ('Re Vitamin Co').

[77] Otrava Pty Ltd v Mail Boxes Etc (Australia) Pty Ltd [2004] NSWSC 1066, [122] (Nicolas J); Re Vitamin Co [2019] VSC 540, [42].

[78] Hawkins (1992) 26 NSWLR 562, 572 (Gleeson CJ); Powell v Fryer [2001] SASC 59; (2001) 159 FLR 433, 442 [62] (Olsson J); ASIC v Plymin [2003] VSC 123; (2003) 46 ACSR 126, 247. See also Assaf, Shields, and Kincaid, above n 21, [10.34] and the additional authorities referred to there.

1. [79] Michael Murray and Jason Harris, Keay's Insolvency: Personal and Corporate Law and Practice (Thomson Reuters, 10th ed, 2018) 14 [1.165].

[80] (1992) 26 NSWLR 562.

[81] Hawkins (1992) 26 NSWLR 562, 569-70.

[82] See Box Valley v Kidd [2006] NSWCA 26; (2006) 24 ACLC 471, where Gzell J held (at [71]) that a company's liability under its futures trading in white cottonseed, which involved forward purchase contracts and forward sales contracts, did not give rise to a contingent liability to pay a liquidated sum. His Honour further held (at [72]) that a default by the company on its forward sales contracts because of an increase in the market price of cottonseed would instead render the company liable for damages for breach of its sales contracts.

[83] See Woodgate v Davis [2002] NSWSC 616; (2002) 42 ACSR 286, 294-5 [36] (Barratt J); Assaf, Shields, and Kincaid, above n 21, [10.6]; Murray and Harris, above n 79, [16.85].

[84] See Annita Stucken, 'A Blind Spot in the Test for Solvency? Reconsidering the Exclusion of Unliquidated Damages Claims from s 95A' (2018) 26 Insolvency Law Journal 73, 78-9 for a further discussion of this and associated issues.

[85] Workman Clark & Co Ltd v Lloyd Brazileno [1908] UKLawRpKQB 42; [1908] 1 KB 968; The C & J [1984] 2 Lloyd's Rep 601; Zea Star Shipping Co SA v Parley Augustsson (Invest) A/S [1984] 2 Lloyd's Rep 605; Carter, above n 76, [37-02].

[86] Exhibit PN-13 to the Third Newman affidavit.

[87] Hawkins (1992) 26 NSWLR 562, 567 (Gleeson CJ), in relation to the legislative predecessor, s 556(1)(a) of the former Companies Code 1961.

[89] Paginated exhibit PN-12 to the Second Newman affidavit, 47.

[94] Ibid 39. See also the liquidators' Insolvency Report at exhibit PN-3 to the First Newman affidavit, 3.

[95] Paginated exhibit PN-12 to the Second Newman affidavit, 50.

[98] The claim by the Franchisor for legal fees is also excluded because it was not pressed by the plaintiffs (see the plaintiffs' written submissions of 15 September 2020 and 5 November 2020) and, for the reasons set out above, cannot be claimed in any event.

[99] [2006] VSC 338; (2006) 58 ACSR 631, 651-2 [140] ('Crema v Land Mark Property').

[100] [1999] FCA 728.

[101] Crema v Land Mark Property [2006] VSC 338; (2006) 58 ACSR 631, 652 [141].

[102] [2007] NSWSC 87.

[104] (1966) 115 CLR 666.

[106] See Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 188 ALR 114; Australian Beverage Distributors v Redrock Co Pty Ltd [2008] NSWSC 3; (2008) 26 ACLC 74.

[107] [2014] FCA 1000 (Davies J).

[109] [2019] VSC 624, [26] citing the guidance given by the authors in Assaf, Shields, and Kincaid, above n 21, [2.16].

[110] ASIC v Plymin [2003] VSC 123; (2003) 46 ACSR 126, 214-15 [386].

[111] See decision of Perram J in Morris v Danoz Directions Pty Ltd (No 2) [2010] FCA 836.

[112] [2008] FCA 1801; (2008) 68 ACSR 493.

[113] Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385, 408-9 [108] (Palmer J), approved by the New South Wales Court of Appeal in Lewis v Doran [2005] NSWCA 243; (2005) 219 ALR 555. See also Stone v Melrose Cranes & Rigging Pty Ltd (in liq) (No 2) [2018] FCA 530, [146] (Marcovic J).

[114] Paginated exhibit PN-12 to the Second Newman affidavit, 9.

[115] A signed copy of the Report as to Affairs, dated 14 October 2015, was among the 17 documents which the defendant sought to adduce after the trial.

[116] Exhibit PN-5 to the First Newman affidavit.

[117] Exhibit PN-6 to the First Newman affidavit.

[118] Exhibit PN-7 to the First Newman affidavit.

[119] Exhibit PN-8 to the First Newman affidavit.

[120] Exhibit PN-9 to the First Newman affidavit.

[121] Exhibit PN-10 to the First Newman affidavit.

[122] Email from the defendant to the Court dated 23 September 2020.

[123] Exhibit PN-10 to the First Newman affidavit.

[124] Exhibit PN-3 (Insolvency Report) to the First Newman affidavit, 10.

[125] [2011] NSWSC 964.

[126] RP Austin and AJ Black, Austin & Black's Annotations to the Corporations Act, vol 1 (LexisNexis, 2010) [2M.286]

[128] Paginated exhibit PN-12 to the Second Newman affidavit, 55.

[132] The Company's tax return for the financial year ending 30 June 2014 shows a tax liability of $9,315 for this period.

[133] Paginated exhibit PN-12 to the Second Newman affidavit, 68.

[136] Exhibit PN-3 (Insolvency Report) to the First Newman affidavit.

[144] Defendant's tendered exhibit MFI-4.

[145] Paginated exhibit PN-12 to the Second Newman affidavit, 100-18.

[146] Exhibit PN-3 to the First Newman affidavit, 8.

[147] Paginated exhibit PN-12 to the Second Newman affidavit, 4.

[148] Exhibit PN-3 to the First Newman affidavit, 8-9.

[149] Defendant's tendered exhibit MFI-5.

[150] Defendant's tendered exhibit MFI-4.

[151] According to the documents sought to be tendered by the defendant after the trial, Onhunt Transport Pty Ltd had a net profit (total income less expenses) of around $1,750 for the 2013 financial year and just over $2,000 for the 2014 financial year, and HDL Corporation Pty Ltd had a net profit of approximately $2,840 for the 2013 financial year and $4,730 for the 2014 financial year.

[152] See defendant's tendered exhibits MFI-3 and MFI-4.

[153] Paginated exhibit PN-12 to the Second Newman affidavit, 1-5.

[154] Exhibit PN-3 (Insolvency Report) to the First Newman affidavit, 9.

[155] See clauses 26.4 and 28.6 of the Franchise Agreement at paginated exhibit PN-12 to the Second Newman affidavit, 277, 286.

[156] Affidavit of Manvir Lidhar affirmed 28 August 2020, para 1(f).

[157] The claim by the Franchisor for legal fees is also excluded because it was not pressed by the plaintiffs (see the plaintiffs' written submissions of 15 September 2020 and 5 November 2020) and, for the reasons set out above, cannot be claimed in any event.

[158] Re Overgold [2019] VSC 624, [30] (Gardiner AsJ), citing the authors in Assaf, Shields, and Kincaid, above n 21, [10.46].

[159] Powell v Fryer [2001] SASC 59; (2001) 159 FLR 433, 446 [76] (Olsson J, Duggan and Williams JJ agreeing).

[160] Hall v Poolman [2007] NSWSC 1330; (2007) 215 FLR 243, 298 [234] (Palmer J).

[161] Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266, 303 (Kitto J).

[162] [2001] SASC 59; (2001) 159 FLR 433, 446 [76].

[163] Ibid [77] (Olsson J, Duggan and Williams JJ agreeing).

[164] For the reasons set out above, I have disallowed the claim for the future franchise and marketing fees. The claim by the Franchisor for legal fees is also excluded because it was not pressed by the plaintiffs (see the plaintiffs' written submissions of 15 September 2020 and 5 November 2020) and, for the reasons set out above, cannot be claimed in any event.

[165] In the correspondence at the defendant's tendered exhibit MFI-5, the Company claimed to have incurred a loss of $100,000 and Mr Lidhar submitted it had suffered a loss of profit of up to 70%.

[166] Tourprint [1999] NSWSC 581; (1999) 32 ACSR 201, 215 [67] (Austin J).

[167] Assaf, Shields and Kincaid, above n 21, [10.75], citing Carrier Air Conditioning Pty Ltd v Kurda (1993) 11 ACSR 247, 254-5 (Debelle J with Cox and Duggan JJ concurring).

[168] The claim by the Franchisor for legal fees is also excluded because it was not pressed by the plaintiffs (see the plaintiffs' written submissions of 15 September 2020 and 5 November 2020) and, for the reasons set out above, cannot be claimed in any event.

[170] Interest is calculated at the penalty interest rate of 10% and in the amount of $16.39 per day on the basis of there being 615 days from the commencement of the proceeding on 11 January 2019 to the date of the trial on 16 September 2020 (inclusive).