The case of insolvency advanced by the liquidator
12Mr Allen contends that Divine Homes was insolvent when each of the payments by means of a cheque drawn in favour of Mr Harb or to "cash" was made and that that circumstance causes each payment to be an "insolvent transaction". That is one of the essential elements of the liquidator's claim based on s 588FE(4). There is accordingly a factual question as to whether Divine Homes was insolvent and, if so, when.
13Mr Allen seeks to rely, in that connection, on a presumption made available by s 588E(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); or
(b) has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2);
the company is to be presumed to have been insolvent throughout the period."
14Sections 286(1) and 286(2), referred to in s 588E(4), are in the following 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.
(2) The financial records must be retained for 7 years after the transactions covered by the records are completed."
15It is pertinent to quote also s 588E(6):
"Subsection (4) does not have effect, in so far as it would prejudice a right or interest of a person for the company to be presumed insolvent because of a contravention of subsection 286(2), if it is proved that:
(a) the contravention was due solely to someone destroying, concealing or removing financial records of the company; and
(b) none of those financial records was destroyed, concealed or removed by the first-mentioned person; and
(c) the person was not in any way, by act or omission, directly or indirectly, knowingly or recklessly, concerned in, or party to, destroying, concealing or removing any of those financial records."
16Mr Allen's reliance on the s 588E(4) presumption makes it necessary to review the evidence about financial documents of Divine Homes.
17It is not disputed that Mr Harb, the sole director of Divine Homes, was prosecuted and, on 11 March 2008, convicted of offences against s 475 and s 530A of the Corporations Act . The convictions arose, in part, from Mr Harb's failure to deliver books and records of Divine Homes to the liquidator. A fine was imposed. In response to a summons under s 596A dated 4 March 2009 requiring production of Divine Homes' books to the court, Mr Harb produced no more than several documents generated after the making of the winding up order and apparently received by him. These were notices and other documents from the Valuer-General, Holroyd Council and National Australia Bank, all addressed to Divine Homes, and invoices from the Sutherland Local Court addressed to Mr Harb himself.
18It is clear, however, that other potentially relevant documents exist or have existed. Mr Harb gave evidence before me (and also when examined before the Registrar on 21 April 2009) of having delivered documents to an accountant named "Shafeel" of a firm called "Stamford Accountants", apparently with a view to Shafeel's performing certain services in relation thereto. Mr Harb says that this action was taken by him to facilitate his performing his obligation to co-operate with the liquidator. The documents were said by Mr Harb to have been so delivered some time after the making of the winding up order. Mr Harb says that Shafeel then simply disappeared, leaving his office unoccupied and that the papers Mr Harb had given him were then lost, in the sense that Mr Harb did not know where they were and could not retrieve them.
19Mr Harb did not say precisely which documents were delivered by him to Shafeel. He described them as "all my files, all my receipts, everything so I can finalise it for the liquidator"; and "everything like invoices that I've paid, all my documents for my properties, all my loan documents"; and later "cheque books" - which, I infer, includes cheque butts. The context makes it clear that the possessive "my" was used by Mr Harb to indicate that the documents referred to were documents of Divine Homes.
20Mr Harb conceded, however, that Divine Homes had not prepared income tax returns, business activity statements, balance sheets or profit and loss accounts for any period since its incorporation. Nor had it ever made any lodgments with ASIC.
21With the evidence in this state, I am compelled to find that there existed, in relation to one or more relevant periods of Divine Homes, at least "invoices", "receipts", "loan documents" and "cheque books" (including cheque butts). The definition of "financial records" in s 9 is as follows:
" financial records includes:
(a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and
(b) documents of prime entry; and
(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."
22It has been held that invoices and loan agreements - documents within two of the categories expressly identified by Mr Harb as having been delivered to Shafeel - are within the "financial records" concept: see, respectively, Fox v Gadsden [2003] NSWSC 748; (2003) 46 ACSR 713 at [19] and Commonwealth Bank of Australia v Tabet [2008] VSC 161 at [7].
23The fact that no income tax return, business activity statement, balance sheet or profit and loss account was prepared for a period does not mean that "financial records" for that period were not kept.
24For a presumption of insolvency to arise under s 588E(4)(a) and to be relied on in relation to a particular period, it must be proved either that no document whatsoever within the "financial records" description was kept in relation to that period or that such documents within the definition as were kept in relation to the period were deficient as to content, in the sense that they either did not correctly record and explain the company's transactions and financial position and performance (for example, because they did not accurately record the matters purportedly recorded: Woodgate v Fawcett [2008] NSWSC 868; (2008) 67 ACSR 611) or would not enable true and fair financial statements to be prepared and audited. Separate and distinct proof is necessary in relation to each relevant period: Sims (as liquidator of SSET Construction Pty Ltd) v Khattar [2010] NSWSC 102.
25It follows that where, as here, there is evidence that "invoices", "receipts", "loan documents" and "cheque books" (including cheque butts) did exist in relation to the company's activities, the presumption will not be available in relation to a given period unless the person seeking to rely on the presumption shows that those documents were, in respect of the period in question, deficient in the sense just mentioned.
26In the present case, the liquidator has proved nothing about the content of the "invoices", "receipts", "loan documents" and "cheque books" (including cheque butts). The fact that no income tax return, business activity statement, balance sheet or profit and loss account of Divine Homes was ever prepared says nothing about conformity of the documents that did exist with the criteria in s 286(1). In the case of a company carrying on a simple cash business it is quite conceivable that a collection of invoices and cheque butts in "raw form" (supplemented by bank statements) will satisfy those criteria.
27The only available finding, on the evidence, is that, before the winding up order was made, the company "kept" some documents within the "financial records" concept and that each such document that was "kept" related to some period or other, even though it is not possible to identify the period. That finding does not allow, in relation to any period, either a conclusion that no documents were "kept" or a conclusion that any relating to the period that were "kept" were deficient as to content in a way I have mentioned. Since the content of the totality of the documents that were kept in relation to a particular period is simply not known (beyond such content as is suggested by the description of a document - "invoice", "receipt", "loan document" etc), it is not possible to find that that totality did not correctly record and explain the company's transactions and financial position and performance or would not enable true and fair financial statements to be prepared and audited.
28I therefore cannot find, in relation to any period, that the liquidator has proved the matter in s 588E(4)(a), that is, that Divine Homes failed to "keep" financial records as required by s 286(1). It is important to emphasise that it is for the liquidator to prove that the records kept were deficient, not for Mr Harb to prove that they were not.
29That leaves the question whether it has been proved, as contemplated by s 588E(4)(b), that Divine Homes failed to "retain" financial records for seven years as required by s 286(2).
30It has been proved, in that connection, that the sole director does not have such documents as may exist and does not know where they are; also that the sole director did not deliver to the liquidator any relevant documents that existed at the commencement of the winding up. Mr Harb says that he delivered documents to the accountant Shafeel some time after the making of the winding up order in April 2007 and that both Shafeel and the documents thereafter disappeared or, at least, that Shafeel's office was vacant when Mr Harb went back there and that he was thereafter unable to discover the whereabouts of Shafeel and the documents.
31It is pertinent to note, in that connection, that, on 10 March 2009, the liquidator wrote to ASIC and said:
(a) that he had, in the previous month, himself attempted to locate Shafeel, including by visiting the premises previously occupied by Stanford Accounting and speaking with the new tenants in an attempt to discover a forwarding address; also that he had made a business names search in an attempt to find the firm; and
(b) "At this stage, I am satisfied that Mr Harb may be genuine in his statement that he supplied the Company's books and records to an accountant who is now uncontactable."
32Mr Harb was closely cross examined about his evidence concerning delivery of the documents to Shafeel. Although it was submitted that adverse findings should be made on the matter of Mr Harb's credibility, I did not understand there to be any direct submission that he had fabricated his evidence about delivery to Shafeel. This is not surprising in view of the second aspect of the liquidator's 10 March 2009 letter just quoted (item (b) above).
33On this evidence, I find that, as at the commencement of the winding up on 16 April 2007, Mr Harb, the sole director, had in his possession certain documents that were "financial records" of Divine Homes and that, at some point thereafter, he delivered those documents to an accountant. It follows that, up until the point of such delivery, "financial records" of Divine Homes were in the possession of its sole director; and, after 16 April 2007, this was in circumstances where the director was under an obligation to surrender them to the liquidator, which obligation he did not perform. That, of itself, was productive of adverse legal consequences for him. He was prosecuted, convicted and fined. For present purposes, however, the question is whether, by virtue of Mr Harb's delivery to the accountant, Divine Homes failed to "retain" the documents.
34After 16 April 2007, Mr Harb's powers as a director of Divine Homes were no longer exercisable except as the liquidator or the court might specifically allow: s 471A. The act of delivering the documents to the accountant was therefore not an act of Divine Homes. It was an act of a person neither qualified nor entitled to act for Divine Homes. It is therefore, strictly speaking, not possible to identify any "failure" of Divine Homes in relation to retention of the documents, by reason of Mr Harb's delivery to the accountant.
35Finally, in relation to s 588E(4), however, I am of the opinion that, if, contrary to the conclusion just stated, there was any contravention of s 286(2), it has been proved that the contravention was, in terms of s 588E(6), "due solely to" Shafeel's concealing or removing the documents delivered to him by Mr Harb and that Mr Harb did not destroy, conceal or remove any of them and did not, in relation to the concealing or removing by Shafeel, play a role of the kind described in s 588E(6)(c). Any presumption of insolvency that might arise under s 588E(4) therefore cannot operate to the prejudice of Mr Harb in the way the liquidator seeks to have it operate in these proceedings. This is the effect of s 588E(6).