In the matter of Coffey EMS Pty Ltd (In liquidation) - WGE Pty Ltd v Morris - [2022] NSWSC 449 - NSWSC 2021 case summary

Summary of relevant evidence

The Company was incorporated on 18 February 2014 and operated a light manufacturing and fabrication business in Queensland. Mr Morris and Mr Vito Pennimpede were equal shareholders in the Company at all times. As I have already mentioned, Mr Morris was the sole director.
Mr Morris gave evidence that, from the time the Company was incorporated, he was pursuing a seven year business plan to secure work for the Company in new markets (water and mining) and promote the Company's construction and maintenance capabilities (including targeting the supply of maintenance and operations services on a long-term contract basis to clients in the health, rail and services markets) whilst retaining the Company's traditional fabrication services business.
WGE is in the business of engineering services, heavy metal fabrication, machining and construction.
On 8 January 2018, the Company purchased the following goods and services from WGE with a total value of $367,999.50 (including GST): "Design Validation & Design Drawings of Jacking System Supply & Fabrication of Jacking System & Handrails Installation of Jacking System Removal/Replacement of Bearings Commissioning Assistance Quality Assurance Documentation Mobilisation/Demobilisation Other - survey"
That description of the goods and services in purchase order 3581, and the total price stated in the purchase order, is the only evidence of the terms on which the Company agreed to purchase, and WGE agreed to supply, those goods and services.
During the period from 31 January 2018 to 3 August 2018, WGE issued invoices to the Company totalling $214,827.25 for the provision of the goods and serves under purchase order 3581. The Company paid those invoices.
On 10 September 2018, WGE issued a further invoice to the Company under purchase order 3581 for a total amount of $95,645 (including GST) for: "PROGRESS CLAIM NO. 5 Re Purchase Order 3581 ITEM 1 - 10% Claim - Design Validation & Design Dwgs of Jacking System ITEM 3 - 50% Claim (final) for Scope Ref 3.5 Removal/Replacement of Bearings ITEM 9 Variation 1 - 100% Claim - Pit Access Platform Repairs Drum 1 & 2"
The amount invoiced in respect of "ITEM 9 Variation 1" was $26,300 (excluding GST), which equates to a GST-inclusive amount of $28,930.
On 30 September 2018, WGE issued a further invoice to the Company under purchase order 3581 for a total amount of $86,457.26 (including GST) for: "Progress Claim No 6 Re Purchase Order No. 3581 Item 1 - 5% Claim - Design Validatoin [sic] & Design Dwgs of Jacking System. Item 4 - 50% (Final) Claim for Scope Ref 3.5 Removal/Replacement of Bearings Item 5 - 100% Claim for Commissioning Assistance Item 6 - 100% Claim for Quality Assurance Documentation Item 7 - 100% Claim for Mobilsation/Demobilisation Item 8 - 100% Claim for Other/Survey"
Mr Morris admits that, by the Company issuing purchase order 3581 and/or obtaining the goods and services that founded the invoices issued on 10 September 2018 and 30 September 2018, the Company incurred a debt or debts totalling $182,102.25.
Ultimately, WGE's primary submission was that the amount of each invoice was a debt incurred on the date of issue of the invoice. That is to say, the Company incurred a debt of $95,645 (including GST) on 10 September 2018 and a further debt of $86,457.26 (including GST) on 30 September 2018. Alternatively, WGE submitted that the debt was incurred when the Company raised the purchase order on 8 January 2018.
Neither party paid any meaningful attention to the date on which the admitted debts were incurred. For different reasons, each party approach the case on the basis that the precise date was of little consequence. WGE contended that the Company had been insolvent since 30 June 2017. Mr Morris contended that there was no material difference between the Company's cash flow position as at January 2018 and as at 30 September 2018, and denied that the Company was insolvent at any time during that period.
For the reasons explained at [71]-[75] below, the Company incurred a debt of $367,999.50 when it issued the purchase order on 8 January 2018 and incurred a further debt of $28,930.00 in respect of "variation 1" between 3 August 2018 and 10 September 2018. The portion of the debt incurred on 8 January 2018 that had not been paid by September 2018 ($153,172.25) plus the debt in respect of the variation claim ($28,930.00) comprise the loss of $182,102.25 that WGE seeks to recover from Mr Morris under s 588M of the Corporations Act.
There was no evidence to suggest that the debts were secured, and it was not submitted on behalf of Mr Morris that they were secured.
Whilst there was no dispute that the Company had incurred debts to WGE totalling $182,102.25, there was no evidence about when the amounts invoiced on 10 and 30 September 2018 were due and payable.
It was submitted on behalf of Mr Morris that there was also no "first-hand evidence" that the debts had not been paid prior to the Company going into external administration, and that the proof of debt submitted by WGE in the winding up was inadmissible hearsay. However, as will be referred to later in these reasons, Mr Morris was cross-examined about why he did not draw on the Company's overdraft facility to pay WGE's two invoices and he gave evidence defending his reasons for not doing so and questioned whether the amounts invoiced were in fact due and payable in the period after September 2018.Mr Morris' evidence implicitly accepted that the Company had not paid the invoices issued by WGE on 10 September and 30 September 2018.
I now turn to the evidence of the Company's financial position as at 8 January 2018 and during the period between 3 August and 10 September 2018.
WGE relied on an affidavit of Richard Brien affirmed on 25 August 2020.Mr Brien is a chartered accountant and a senior manager employed by the firm of Mr Steven Nichols, who was appointed as administrator of the Company on 15 November 2018 and as liquidator on 14 December 2018. Mr Brien's evidence purporting to recount the liquidator's opinion that the Company was insolvent from at least 30 June 2017 was ruled inadmissible. In fact, the liquidator had not expressed any such opinion in his report to creditors dated 12 March 2019 and had merely expressed the following qualified beliefs: "On the basis of my investigation, I believe, in technical terms, the company can be deemed to be insolvent from at least 1 July 2017. The matters raised by the director in terms of available finance and potential future trading, if able to be supported, may provide a counter to these claims. Ultimately, it would require further formal action and court ruling to fully determine the position. Whilst I have no direct information concerning aging of creditor claims I believe the great majority of current trade creditors will have been incurred subsequent to that [sic] the 30 June 2017, and more likely incurred in the months leading up to the liquidation of the company. The current trade creditors would likely form the quantum of any potential insolvent trading claims. Given the complexity of insolvent trading claims, further substantive investigation will be required to formally prepare relevant information to obtain legal advice on the prospects of any claims for insolvent trading."
There is no evidence that any further substantive investigation was undertaken by or on behalf of the liquidator.
The "investigation" that formed the basis of the belief expressed in the first paragraph extracted above included the liquidator relying on information provided in a report that had been prepared by KPMG in September 2018. That report was not in evidence in these proceedings.
The evidence ultimately relied on by WGE in support of its contention that the Company was insolvent as at January 2018 and September 2018 was limited to the following five matters identified by counsel for WGE in closing submissions.
First, the Company traded at a net loss from its first full financial year of operations (being the year ending 30 June 2015) up to the financial year ending 30 June 2018 and in the period from 1 July 2018 until the appointment of the administrator on 15 November 2018. The net losses incurred in each financial year and in the 2019 financial year up to 15 November 2018 were: 1. $1,317,081 for the financial year ending 30 June 2015; 2. $44,857 for the financial year ending 30 June 2016; 3. $504,569 for the financial year ending 30 June 2017; 4. $51,608 for the financial year ending 30 June 2018; and 5. $256,019 for the period ending 15 November 2018.
Each of the net losses referred to above is before tax. There is no evidence concerning the after tax profit or loss position.
Second, the Company had accumulated losses of $1,708,396.67 as at 30 June 2018, with no general reserve.
Third, the Company's financial statements record total assets and liabilities (current and non-current) that result in the following net asset deficiency at the end of each of the periods referred to above: 1. net assets of ($1,451,024) as at 30 June 2015; 2. net assets of ($1,495,881) as at 30 June 2016; 3. net assets of ($1,656,787) as at 30 June 2017; 4. net assets of ($1,708,395) as at 30 June 2018; and 5. net assets of ($1,963,878) as at 15 November 2018.
There was also a deficiency of current assets compared to current liabilities and a liquidity ratio of less than one. The Company's financial statements record that: 1. as at 30 June 2015, the Company had current assets of $192,396.00 and current liabilities of $962,556.52, resulting in a liquidity ratio of 0.1999; 2. as at 30 June 2016, the Company had current assets of $1,042,172.21 and current liabilities of $1,603,026.69, resulting in a liquidity ratio of 0.6501; 3. as at 30 June 2017, the Company had current assets of $3,500,773.23 and current liabilities of $4,236,290.58, resulting in a liquidity ratio of 0.8264; 4. as at 30 June 2018, the Company had current assets of $939,948.35 and current liabilities of $1,635,413.22, resulting in a liquidity ratio of 0.5747; and 5. as at 15 November 2018, the Company had current assets of $797,156 and current liabilities of $1,741,095, resulting in a liquidity ratio of 0.4578.
Fourth, the Company's current liabilities at the end of each financial year included liabilities in respect of superannuation and liabilities to the Australian Taxation Office (ATO). The position may be summarised as follows: 1. as at 30 June 2016: 1. current liabilities in respect of superannuation: $52,722.61; 2. current liabilities in respect of PAYG withheld: $13,070.00; 3. current liabilities in respect of ATO integrated client account balance: $26,344.00; 1. as at 30 June 2017: 1. current liabilities in respect of superannuation: $117,443.47; 2. current liabilities in respect of PAYG withheld: $17,697.00; 3. current liabilities in respect of ATO integrated client account balance: $78,871.10; 1. as at 30 June 2018: 1. current liabilities in respect of superannuation: $115,550.28; 2. current liabilities in respect of PAYG withheld: $27,920.00; 3. current liabilities in respect of ATO integrated client account balance: $26,264.00.
I note that the increase in liabilities in respect of superannuation and PAYG as at 30 June 2017 compared to 30 June 2016 coincided with the Company's salaries and wages costs more than doubling from $318,324 in the year ended 30 June 2016 to $661,338.22 in the year ended 30 June 2017. Those costs increased again to $979,556.45 in the year ended 30 June 2018, without any corresponding increase in the Company's liabilities for superannuation, only a modest increase in its PAYG liabilities and a material decrease in its ATO integrated client account balance as at 30 June 2018.
As counsel for WGE acknowledged, the fact that the Company had current liabilities for superannuation, for PAYG and in respect of its ATO integrated client account as at the end of each financial year does not, by itself, indicate that those liabilities were overdue for payment.
Fifth, WGE's invoices issued on 10 September and 30 September 2018 were not paid and, during October 2018, the Company did not have sufficient cash at bank to pay those invoices because the credit balance of its account exceeded the total amount of those two invoices only on 30 and 31 October 2018. As I have already mentioned, there was no evidence about when those invoices were due and payable. Counsel for WGE submitted that the Court should infer from the "pattern" of previous dealings between WGE and the Company that the invoices were payable within 30 days of the date of issue. However, the "pattern" revealed by the copies of those invoices in evidence, each bearing a "paid" stamp incorporating a handwritten date, was that the invoices had been paid between approximately five weeks and three months after they were issued. That evidence provides no basis for the inference for which WGE contended as to the due date for payment of the two invoices issued in September 2018.
Mr Morris contended that the evidence does not establish that the Company was insolvent, that there were reasonable grounds to suspect insolvency and that he was aware (or a reasonable person in his position would have been aware) of such grounds as at January 2018 or August - September 2018. Mr Morris emphasised the following evidence.
First, the Company was approximately four years into the implementation of its seven year business plan referred to at [10] above. By the time it was placed into administration in November 2018, the Company had grown its maintenance business from a standing start to 15 contracts (including through a 2016 acquisition of another service business that Mr Morris refers to as "UON"), had secured three packages of work from Queensland Rail, had entered into supplier agreements with other companies and entities including Brisbane City Council and was included on various panels through which it would have the opportunity to bid for work.
I note that there is no evidence as to precisely when each of these contracts and agreements were entered into. Nor is there any evidence about the amount or timing of revenue that the Company derived or expected to derive from the contracts as at January 2018 or August - September 2018. It was put to Mr Morris in cross-examination that, with one exception, the contracts had either expired or were month to month contracts by January 2018. Mr Morris agreed with that proposition and was not challenged further on this issue. WGE adduced no evidence as to the status of the contracts, notwithstanding that it had access to the Company's books and records through Mr Brien. I accept Mr Morris' evidence.
Second, the Company's revenue was growing, increasing from $2.359 million in the 2017 financial year to $5.408 million in the 2018 financial year. I note that the $2.359 million revenue in the 2017 financial year represented a significant decrease from the 2016 financial year revenue of $4.075 million. As counsel for Mr Morris submitted and as the liquidator's report dated 12 March 2019 identified, the 2017 financial statements record $2.743 million work in progress as a cost of goods sold. The Company appears to have done significant work for which it was not paid in the 2017 financial year and to have reaped the benefit of that work in the 2018 financial year with increased sales and revenue. The 2018 financial statements do not record any work in progress in the cost of goods sold.
Third, according to Mr Morris, the Company was in a "cashflow-positive position" due to revenue earned from its ongoing maintenance and construction contracts. The statements for the Company's bank account for the period from January to June 2018 show that the account was in credit for the whole of January 2018, with the balance varying between $417,387 and $647,228. For the period from February to June 2018, the account continued to be in credit with a balance of at least $200,000 at any given time. The balance was frequently greater than $200,000. There is no evidence of the Company's cash position during the period from July to September 2018. In addition to its cash at bank, the Company had access to a $30,000 overdraft facility that it was able to draw on if necessary to pay debts as and when they fell due.
As counsel for WGE submitted, the credit balance of the Company's bank account is "only half of the equation … when it comes to whether or not the company has sufficient cashflow." WGE, which bore the onus of proving insolvency and reasonable grounds to suspect insolvency at the relevant times, did not adduce any evidence of the amount of the Company's debts that were due and payable as at January 2018 or present any analysis comparing the amount of those debts to the amount of cash, or any forecast prepared at the time comparing cash inflows with debts falling due and payable. The same observations apply in relation to August - September 2018, in respect of which there was not even any evidence of the Company's cash position as I have noted above.
As counsel for Mr Morris submitted, there is no evidence of creditors being paid outside their trading terms. Nor is there any evidence (and the liquidator's report dated 12 March 2019 expressly states that no evidence was discovered) of creditors demanding cash on delivery for goods or services provided to the Company, special arrangements between the Company and creditors, or rounded payments by the Company to creditors during the period from January to September 2018. The Company paid amounts invoiced by WGE during the period from 31 January to 3 August 2018 totalling $214,827.25.
Mr Morris has given evidence that amounts owing by the Company to the ATO at the end of the 2017 and 2018 financial years were amounts for which the Company was liable but was not yet required to pay. Those amounts were subsequently paid by the Company. There was no challenge to this aspect of Mr Morris' evidence in cross-examination.
As counsel for Mr Morris submitted, there is no evidence that the Company issued post-dated cheques, or that cheques issued by the Company were dishonoured, during the period from January to September 2018. Nor is there any evidence that any writs, demands or legal actions were issued against the Company during that period. The liquidator's report dated 12 March 2019 expressly states that the liquidator had not discovered evidence of any of these things.
Fourth, the liquidators' report dated 12 March 2019 stated that there did not appear to have been any substantial issues as between the Company and its banks or financiers. The limit of the Company's overdraft facility referred to above had been reduced from $50,000 to $30,000, but this was done on Mr Morris' initiative and not at the instigation of the bank. Mr Morris' unchallenged evidence given in cross-examination was that he took that step because the overdraft facility was not being used and the Company was paying fees for the facility unnecessarily. The cross-examiner then asked Mr Morris why he didn't draw on the Company's overdraft facility to pay the two WGE invoices issued in September 2018. Mr Morris answered: "I don't recall if I considered that. Question would be whether the invoices were due and payable. There's matters outstanding on the project, or there was at the time. So whether they were accepted and whether they were actually payable in full, I don't recall at this stage. But certainly in terms of using the overdraft, I don't recall that's a consideration. I believe the cash in the bank anyway would probably be tapped into an overdraft."
As referred to at [23] and [38] above, WGE adduced no evidence about when the invoices were due and payable.
Fifth, a significant amount of the Company's non-current liabilities referred to at [33] above are described in the financial statements as directors' loans. According to Mr Morris' evidence, these sums were paid by him and by Mr Pennimpede into the Company to fund the commencement and growth of its business and were not intended to be repaid by the Company. That aspect of Mr Morris' evidence was not challenged and there is no evidence of any demand for repayment having been made.
The amount of the "loans" recorded in the financial statements as non-current financial liabilities was: 1. $1,052,837 as at 30 June 2015; 2. $1,241,900 as at 30 June 2016; 3. $1,351,900 as at 30 June 2017; 4. $1,332,900 as at 30 June 2018.
Mr Morris' unchallenged evidence is that he contributed approximately $802,999 of those "loans".
Sixth, Mr Morris gave evidence that he was willing to provide further financial support to the Company by way of additional "contributions or loans" had it been necessary to do so by calling on funds that he says that his wife (Ms Loreta Morris) and her mother (Ms Assunta Masi) had at their disposal and were willing to make available for that purpose.
Ms Morris was employed as the Company's Finance and Administration Manager from the incorporation of the Company in April 2014 until the appointment of the administrator in November 2018. Ms Morris gave evidence that she had made available to Mr Morris the funds totalling approximately $802,999 that he had injected into the Company by refinancing her home loan that was secured over an apartment in Wollongong. Ms Morris gave further evidence that, in September 2018, she was willing to assist Mr Morris by providing "whatever funds were needed to ensure that the Company continued to trade and meet its debts as and when they fell due." Ms Morris' unchallenged evidence is that she had approximately $57,000 funds in a Greater Bank savings account, a further $83,000 that she could draw on in a Greater Bank loan account and a further $31,000 that could be redrawn from her National Australia Bank home loan account as at September 2018. Ms Morris contended that she also had substantial equity in her Wollongong apartment and two investment properties that she could and would have drawn on, but there was no admissible evidence of the value of those properties and the amount of Ms Morris' equity in the properties.
Mr Morris' injections of funds into the Company, using money provided by Ms Morris, occurred in the period prior to January 2018. Neither Mr Morris nor Ms Morris provided any loans or other form of financial support for the Company in the period between after January 2018. It was put to Ms Morris in cross-examination that she didn't provide financial support during the period from January to September 2018 because she was not willing to do so. Ms Morris denied this. It was then put to Ms Morris that she did not advance funds to the Company for the purpose of paying WGE's invoices issued on 10 September and 30 September 2018. Ms Morris answered: "It wasn't required. No." The cross-examiner did not challenge that answer.
Mr Steven Nichols was appointed as administrator of the Company on 15 November 2018 pursuant to s 436A of the Corporations Act. Section 436A(1) provides: "A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that: (a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and (b) an administrator of the company should be appointed."
Mr Morris gave evidence of his reasons for deciding to appoint an administrator to the Company.
There had been an ongoing dispute between Mr Morris and Mr Pennimpede since 2017. Mr Morris had been in negotiations since mid-2018 to purchase Mr Pennimpede's share of the Company so as to bring that dispute to an end. Those negotiations had failed.
The Company had a contract with Seqwater worth "something in the range of about $700,000". There was a meeting between the Company and Seqwater on 2 November 2018 to discuss the Company's contention that the contract should be varied to provide for additional payments of more than $300,000 to the Company on account of what Mr Morris described as a "significant change event". The meeting did not result in Seqwater agreeing to the variation. Seqwater advised the Company at the meeting that events unrelated to the alleged change event constituted a breach of safety standards and that Seqwater would be issuing a suspension notice pending investigation. Mr Morris regarded the alleged safety breach as a matter of great concern and understood that it meant all on works on the Seqwater site would need to cease pending investigation.
Mr Morris gave evidence that: "It was during the period of the meeting on 2 November 2018 and returning to work on 5 November 2018 that I considered the future of the Company with me as a director. At the time, I also had some health scares after my surgery some 5 months earlier in relation to my Burkitts Lympohoma. At the time, my wellbeing and that of my wife who was trying to fall pregnant was very important. Given the on-going shareholder dispute with [Mr Pennimpede], the potential lengthy contract negotiations with Seqwater and my constant travel between Sydney and Brisbane, I decided to cease trading the Company and place into the hands of an Administrator on 15 November 2018."
In cross-examination, Mr Morris described the constant travelling in the context of his health issues as "overwhelming". Mr Morris also said that, although he considered that the Company had won valuable contracts and was "in a very healthy position" after five years of marketing: "I had many mental stresses with my wife's ill-health too and family members, and the back and forth with Sydney and Brisbane and the ongoing disputes with [Mr Pennimpede], made it that time, the mental health was not worth any dollars that were potentially to be had. So given the mental stresses, that - that brought a huge toll. So we would have continued if I didn't have the mental health issues and the - the [shareholder] dispute."
As I understand his evidence, Mr Morris' reference to the Company's "very healthy position" reflects his assessment of the Company's prospects under contracts and arrangements referred to at [40]-[41] above and certain other contracts under discussion in the latter part of 2018, including for work that would be performed for the Adani coal mine in Queensland which had not been approved at that time.
Mr Morris gave evidence in cross-examination that, before deciding to place the Company in administration, he did speak with the management team about the possibility of them "taking over". However, there were no potential buyers "given the dispute with the shareholder who wasn't able to - wasn't prepared to take a reasonable payment to buy-out".
At the second meeting of creditors on 14 December 2018, it was resolved that the Company be wound up.
Proofs of debt totalling $2,201,987 have been lodged by persons and entities claiming to be unsecured creditors of the Company in the winding up. The liquidator has not adjudicated those proofs of debt. Mr Morris disputes many of the creditors' claims. There was very limited cross-examination of Mr Morris about the grounds of dispute articulated in his affidavit. WGE has not adduced evidence that would provide any basis for a finding as to the amount in fact owing by the Company to creditors as at 15 November 2018, much less the time at which such debts were incurred or when they were due and payable, for the purpose of assessing whether the Company was insolvent when it incurred the debts to WGE on 8 January 2018 and between 3 August and 10 September 2018 or whether it became insolvent as a result of incurring those debts.
Although there is a dispute about the amount owing to the Company's creditors as at 15 November 2018, Mr Brien's evidence that there will be no dividend paid to unsecured creditors in the winding up was not challenged in cross-examination.
For completeness, I note that there is no suggestion that the Company failed to comply with s 286 of the Corporations Act. On the contrary, the liquidator's report dated 12 March 2019 stated that the Company had maintained an accounting system that recorded substantial information about the historical trading position of the company and had also maintained hard copy records. The liquidator stated that: "On face value, the books and records of the company have been well maintained".

Was the Company insolvent when the debt was incurred, or did it become so by incurring the debt?

The principles to be applied in determining whether or not the Company was solvent at the time that the debts were incurred, or became insolvent by reason of the debts being incurred, are well settled. I respectfully adopt Black J's summary of those principles in Re Custom Bus Australia Pty Ltd (in liq) [2021] NSWSC 1036 at [33]-[37]: "[33] The question whether the Company was insolvent, in fact, at the time the relevant debts were incurred, or became insolvent by incurring those debts, is to be determined by reference to s 95A(1) of the Corporations Act. That section provides that a company is solvent if, and only if, it is able to pay all its debts, as and when they become due and payable. Section 95A(2) of the Corporations Act has effect that a person who is not solvent is insolvent. That definition adopts a 'cash flow test' of insolvency which turns upon the income sources available to the company and the expenditure obligations that it has to meet, although a balance sheet test can provide context for the application of the cash flow test: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; (2001) 39 ACSR 305; [2001] NSWSC 621; Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124; (2003) 46 ACSR 126; [2003] VSC 123 at [370]ff, aff'd Elliott v Australian Securities and Investments Commission (2004) 10 VR 369; (2004) 48 ACSR 621; [2004] VSCA 54 and see Re Swan Services Pty Limited (in liq) [2016] NSWSC 1724 at [136]ff and SX Projects Pty Ltd (in liq) v Battaglia [2018] NSWSC 1830 at [20]ff and Re Bias Boating Pty Limited (recs and mgrs apptd) (in liq) [2018] NSWSC 1977 at [4]ff, on which I have drawn for this summary of the applicable principles. [34] The case law indicates that whether a company is able to pay its debts as and when they fall due and payable is a question of fact to be determined objectively and without hindsight in all the circumstances, including the nature of its assets and business, and the Court will have regard to commercial realities in that regard: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation above at [54]; White Constructions (ACT) Pty Ltd (in liq) v White (2004) 49 ACSR 220 [2004] NSWSC 71 at [289]; Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran (2005) 219 ALR 555; (2005) 54 ACSR 410; [2005] NSWCA 243 at [103]; Bentley Smythe Pty Ltd v Anton Fabrications (NSW) Pty Ltd (2011) 248 FLR 384; [2011] NSWSC 186 at [48]-[49]. [35] In assessing a company's capacity to pay its debts, the Court should have regard to all of the assets of the company as at the relevant time in order to determine the extent to which those assets were liquid or realisable within a timeframe that would allow each of the debts to be paid as and when they became due. Apart from an assessment of the company's own assets, regard can also properly be had to funds which the company can borrow, on a secured or unsecured basis, or otherwise obtain from lenders or shareholders and which were, as a matter of commercial reality, available to the company to enable its debts to be paid. The case law recognises that, in determining a company's solvency, the Court may have regard to the likelihood that it will have funds available to it from sources with which it has no formalised agreement or understanding, including loans from its directors or from third parties, at least if they are not repayable in the short term, and the company's ability to borrow funds can also be taken into account: Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran above at [109]-[112]; International Cat Manufacturing (in liq) v Rodrick (2013) 97 ACSR 200; [2013] QCA 372; First Strategic Development Corporation Ltd (in liq) v Chan [2014] QSC 60 at [67]-[69]. [36] The case law has recognised that, although each case is to be decided on its own facts, insolvent companies tend to share common symptoms of financial stress, which include those identified in Australian Securities and Investments Commission v Plymin (No 1) above at [386]. Mandie J there identified several indicia of insolvency including continuing losses; liquidity ratios below one; overdue Commonwealth and State taxes; a poor relationship with the lenders, including any inability to borrow further funds; no access to alternative finance; inability to raise further equity capital; suppliers placing a company on cash on delivery arrangements or otherwise demanding special payments before resuming supply; creditors unpaid outside trading terms; the issuing of postdated cheques; dishonoured cheques; special arrangements with selected creditors; solicitors' letters, summonses, judgments or warrants issued against a company; payments to creditors of rounded sums not reconcilable to specific invoices; and inability to produce timely and accurate financial information to display a company's trading performance and financial position, and make reliable forecasts; see also Morris v Danoz Directions Pty Ltd (in liq) (No 2) [2010] FCA 836 at [13]. [37] In Quick v Stoland Pty Ltd (1998) 87 FLR 371; 157 ALR 615; (1998) 29 ACSR 130 at 138, Emmett J summarised the applicable principles as follows: 'In order to determine whether the company was solvent at a given time, it would be relevant to consider the following matters: • All of the company's debts as at that time in order to determine when those debts were due and payable. • All of the assets of the company as at that time in order to determine the extent to which those assets were liquid or were realisable within a timeframe that would allow each of the debts to be paid as and when it became payable. • The company's business as at that time in order to determine its expected net cash flow from the business by deducting from projected future sales the cash expenses which would be necessary to generate those sales. • Arrangements between the company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts.'"
The onus of proving the Company's insolvency at the time of or as a result of incurring the debts rested with WGE: Treloar Constructions Pty Ltd v McMillan (2017) 318 FLR 58; (2017) 120 ACSR 130; [2017] NSWCA 72 at [142].
WGE called evidence from Mr Brien, a chartered accountant with experience in the insolvency industry, who occupies a senior management position within the liquidator's firm and who had access to the books and records of the Company in the liquidator's possession for the purpose of preparing his evidence. As referred to at [67] above, the liquidator considered that the Company's books and records were well maintained and included an accounting system that recorded substantial information about the historical trading position of the Company. WGE put Mr Brien forward as an expert witness.
Mr Morris gave evidence in cross-examination, which was not challenged, that Mr Brien had declined his request for access to books and records held by the liquidator for the purpose of Mr Morris preparing his evidence.
Despite its onus of proof, its access to the Company's books and records (through Mr Brien) and Mr Brien's expertise, WGE adduced no evidence of: 1. all of the Company's debts as at 8 January 2018 and between 3 August and 10 September 2018; 2. when those debts were due and payable; or 3. the projected net cash flow from the Company's business as at January 2018 and August - September 2018 (forecast revenue less the cash expenses which would be incurred in generating that revenue).
Rather, WGE's case relied heavily on the fact that the Company had failed to pay its invoices issued on 10 September and 30 September 2018. This approach was misconceived for two reasons. First, if it had been established that those invoices had not been paid when due, that fact by itself would not have been capable of demonstrating that the Company was insolvent as at 8 January 2018. Simply pointing to non-payment some nine months after the largest of the two debts was incurred invokes hindsight, contrary to the authorities referred to above. Second, there was no evidence as to when the two invoices were due and payable in any event.
Counsel for WGE referred to the Company's bank statements for the period from 23 October 2018 to 16 November 2018 and submitted that it illustrated that the Company's cashflow was poor because, for most of that period, it did not have sufficient cash standing to the credit of its account to pay WGE's two invoices. In my opinion, the Company's bank statements for a period of less than one month indicate no such thing. First, the balance did exceed the amount of the two WGE invoices at times during that period, and the Company also had the ability to draw on its overdraft facility. Second, as I have already mentioned, there is no evidence that WGE's invoices were due and payable during October or November 2018. Third, such a limited and superficial analysis is no substitute for evidence of the matters referred to at [80] above. WGE failed to adduce that evidence.
The Company's net asset deficiency referred to at [33] above is likely to have been relevant as context in which to assess evidence of cashflow, if there had been evidence of cashflow. There was no such evidence.
The high point of WGE's case is the losses reported by the Company in each year of its operations and the liquidity ratio of less than one, as referred to at [30]-[32] and [34] above.
The Company's significant losses in its first year of operation were almost eliminated in its second year. The loss increased to approximately $500,000 in the Company's third year of operation (2017). As referred to at [42] above, that coincided with the Company undertaking significant work which produced revenue in the 2018 year. The Company posted a small loss again in the 2018 year. This pattern of financial performance is not inconsistent with a new company weathering the costs of developing its business, as described by Mr Morris in his evidence and referred to at [40]-[41] above, with substantial financial support from its shareholders as referred to at [51]-[52] above. As referred to at [37] and [43]-[48] above, there is no evidence that the losses caused the Company to be unable to pay its debts when they fell due and payable at any time during the period from January 2018 to September 2018 (or, indeed, at any time).
The liquidity ratio of less than one is but one indicator of financial distress. In the absence of evidence of any of the other indicators identified in Australian Securities and Investments Commission v Plymin (No. 1), supra, at [386] and referred to by Black J in Re Custom Bus Australia Pty Ltd (in liq), supra, at [36], and in the absence of any evidence of the Company's debts as at January 2018 and August - September 2018 and its cashflow available to pay those debts when due and payable, the liquidity ratio does not establish on the balance of probabilities that the Company was insolvent at either of those times or that it became insolvent as a result of incurring the debts to WGE.
I accept Mr Morris' evidence that he decided that he could no longer continue with the Company as a result of the convergence in early November 2018 of his inability to resolve his dispute with Mr Pennimpede, the dispute with Seqwater about the Company's variation claim which Mr Morris considered may involve lengthy negotiations with Seqwater, the suspension of the Company's work on the Seqwater sites pending investigation of the alleged safety breach, the health problems of Mr Morris and his wife and the adverse impact on his health (particularly his mental health) of the constant travel between Sydney and Brisbane for the purpose of his work. As sole director, Mr Morris was the driving force behind the development of the Company's business. In circumstances where he felt unable to continue, and he was unable to sell his interest in the Company due to the ongoing shareholder dispute, the Company was likely to become insolvent at some future time. That state of affairs came about in about early November 2018, some time after the Company had incurred the debts to WGE in January 2018 and August - September 2018. There is no evidence from which it could be inferred that Mr Morris should have foreseen the combination of factors that led to his decision as early as January 2018 or even September 2018. The decision in November 2018 therefore does not support an inference of insolvency at those earlier times.
I do not find it necessary to consider whether, or in what amount, Mr Morris would and could have provided additional financial support to the Company (through Ms Morris) if necessary in the period after November 2018 if the Company had not been placed into administration. There is no evidence from which it could be inferred that, as at January 2018 or September 2018, the Company would require additional financial support at any particular time in the future over and above the support that had already provided.
For those reasons, I accept the submission made on behalf of Mr Morris that WGE has failed to establish that the Company was insolvent when the debts were incurred on 8 January 2018 and between 10 and 30 September 2018, or became insolvent by incurring those debts. For the same reasons, WGE has failed to establish that there were reasonable grounds at those times for suspecting that the Company was insolvent or would become insolvent by incurring the debts to WGE and that Mr Morris was aware (or a reasonable person in his position would have been aware) of such reasonable grounds. I am fortified in those conclusions by the fact that, in the circumstances described at [78] above, it was within the power of WGE to have adduced evidence of the relevant matters identified above: Ho v Powell (2001) 52 NSWLR 572; [2001] NSWCA 168 at [14]-[15]; Blatch v Archer (1774) 1 Cowp. 63 at 65; 98 ER 969 at 970.

In the matter of Coffey EMS Pty Ltd (In liquidation) - WGE Pty Ltd v Morris

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (7 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (23)