CORPORATIONS – WINDING UP – WINDING UP IN INSOLVENCY –
WHAT CONSTITUTES INSOLVENCY – EVIDENCE OF INSOLVENCY
– where the
applicants commenced proceedings against 29 respondents seeking declarations
Source
Original judgment source is linked above.
Catchwords
CORPORATIONS – WINDING UP – WINDING UP IN INSOLVENCY –WHAT CONSTITUTES INSOLVENCY – EVIDENCE OF INSOLVENCY– where theapplicants commenced proceedings against 29 respondents seeking declarationsthat certain payments made to themby the first applicant were unfairpreferences – where the court ordered that a preliminary question bedetermined before thetrial of the principal proceedings – whether thefirst applicant was insolvent on and from 23 June 2016 to 22 December 2016PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS –COSTS – ISSUES AND COUNTERCLAIMS – OTHER PARTICULARCASES –where a preliminary question was ordered – where the respondents were
given an opportunity to make an election
as to whether to admit the preliminary
question by 13 November 2020 – where the third and fifth respondents
admitted the preliminary
question within the allocated time – where the
liquidator changed his position a number of times regarding costs – where
the applicants seek an order that the third and fifth respondents pay the
applicants’ costs of determining the preliminary
question up until the
date on which the third and fifth respondents admitted the first
applicant’s insolvency – whether
costs, with respect to the third
and fifth respondents, should be the applicants’ costs in the cause
Corporations Act 2001 (Cth), s 95A, s 588FA, s 588FF
Australian Securities and Investments Commission v Plymin
(No 1) [2003] VSC 123
(2003) 46 ACSR 126, cited
Baulderstone Hornibrook Pty Ltd
v Qantas Airways Ltd [2003] FCA 325, cited
Emanuel Management Pty Ltd
v Foster’s Brewing Group [2003] QSC 205, cited
Re Bias Boating
Pty Ltd (in liq) (2019) 135 ACSR 27, distinguished
Rexel Electrical
Supplies Pty Ltd v Morton [2015] QCA 235
(2015) 110 ACSR 341, cited
Smith (in his
capacity as liquidator of ACN 002 864 002 Pty Ltd (in liq) (formerly known
as Petrolink Pty Ltd)) v Boné [2015] FCA 319
(2015) 104 ACSR 528,
cited
Williams (as liquidator of Scholz Motor Group Pty Ltd (in liq)) v
Scholz [2008] QCA 94, cited
Judgment (47 paragraphs)
[1]
CORPORATIONS - WINDING UP - WINDING UP IN INSOLVENCY - WHAT CONSTITUTES INSOLVENCY - EVIDENCE OF INSOLVENCY - where the applicants commenced proceedings against 29 respondents seeking declarations that certain payments made to them by the first applicant were unfair preferences - where the court ordered that a preliminary question be determined before the trial of the principal proceedings - whether the first applicant was insolvent on and from 23 June 2016 to 22 December 2016
[2]
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - COSTS - ISSUES AND COUNTERCLAIMS - OTHER PARTICULAR CASES - where a preliminary question was ordered - where the respondents were given an opportunity to make an election as to whether to admit the preliminary question by 13 November 2020 - where the third and fifth respondents admitted the preliminary question within the allocated time - where the liquidator changed his position a number of times regarding costs - where the applicants seek an order that the third and fifth respondents pay the applicants' costs of determining the preliminary question up until the date on which the third and fifth respondents admitted the first applicant's insolvency - whether costs, with respect to the third and fifth respondents, should be the applicants' costs in the cause
Smith (in his capacity as liquidator of ACN 002 864 002 Pty Ltd (in liq) (formerly known as Petrolink Pty Ltd)) v Boné[2015] FCA 319; (2015) 104 ACSR 528, cited
[10]
Williams (as liquidator of Scholz Motor Group Pty Ltd (in liq)) v Scholz[2008] QCA 94, cited
[11]
Taylor David Lawyers for the first and second applicants
[12]
[1] This is the trial of a question ordered to be determined before the trial of the principal proceedings, namely, whether the company, Cullen Group Australia Pty Ltd, was insolvent on and from 23 June 2016 to 22 December 2016.
[13]
[2] The applicants have commenced proceedings against 29 respondents asserting that certain payments made to them by the first applicant ("the company") were unfair preferences. The relevant relation back period is from 23 June 2016 to 22 December 2016. The applicants seek a declaration that the payments made by the company to the respondents are unfair preferences within the meaning of s 588FA of the Corporations Act2001 (Cth) ("the Corporations Act") and an order pursuant to s 588FF that the respondents pay to the second applicant the amount of such unfair preferences and interest.
[3] The company was incorporated on 4 June 2008. It was involved in the construction business - building, designing and managing commercial and large-scale residential developments throughout south-east Queensland and northern New South Wales.
[4] It was placed into liquidation on 22 December 2016.
[5] Each of the respondents is an unsecured creditor of the company.
[14]
[6] Proceedings have been discontinued against six respondents.
[7] Two respondents have admitted that the company was insolvent at the material times.
[8] Thirteen respondents have informed the applicants that they will not contest the preliminary question and will abide the order of the court.
[9] Eight respondents have not said what their position is with respect to the preliminary question.
"(1) A person is solvent if, and only if the person is able to pay all the person's debts, as and when they become due and payable.
[17]
[11] Whether or not a company is insolvent at a particular time is a question of fact. That involves a proper consideration of its financial position based on commercial reality. It is not merely an arithmetical exercise made with reference to the balance sheet, the profit and loss account, or both. Necessary enquiries might extent to matters such as whether or not the company had access to funds from directors, related companies or others.[1]
[12] A concise consideration of the relevant matters to be taken into account was given by Gleeson J in Smith (in his capacity as liquidator of ACN 002 864 002 Pty Ltd (in liq) (formerly known as Petrolink Pty Ltd)) v Boné.[2] Her Honour reviewed the authorities and made the following observations:[3]
[18]
(a) Section 95A adopts a 'cash flow' test of insolvency which is directed to income sources that are available to the company and expenditure obligations it has to meet, rather than a balance sheet test which focuses on the value of the company's assets and liabilities reflected in the company's books, although a balance sheet test can provide context for the application of the cash flow test.
[19]
(b) Whether or not a company is insolvent at a particular point in time is a question of fact to be ascertained from a consideration of the company's position taken as a whole. The court's task is to decide whether the company is suffering from an 'endemic shortage of working capital.
[20]
(c) A temporary lack of liquidity does not constitute insolvency.
[21]
(d) In considering a company's ability to pay debts 'as they become due', it is appropriate to consider the immediate future, precisely how far into the future being a matter that depends on circumstances including the nature of the company's business and, if known, the future liabilities.
[22]
(e) If the court is satisfied that, as a matter of commercial reality, the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party. The likelihood that directors will continue to support by a company by lending it money is relevant to the assessment of solvency.
[23]
[13] The concept of commercial reality and its use in considering whether or not a company is insolvent was described by Chesterman J in Emanuel Management Pty Ltd v Foster's Brewing Group[4] as being "designed to prevent over-hasty adjudications of insolvency in the case of companies suffering a temporary shortage of cash. It was not meant, in my view, to allow companies in a chronic state of illiquidity who evade, by one means or another, determined actioned by a creditor to wind them up, by that evasion, to be deemed solvent."[5]
[14] I was referred by the applicants to the decision of Mandie J in Australian Securities and Investments Commission v Plymin (No 1)[6] and a list of 14 factors relating to insolvency.
[15] The list set out by Mandie J in [386] of his Honour's reasons is not a complete set of indicia of insolvency. Rather, his Honour noted that the expert accountant who had been called for one of the defendants accepted that the list "brought to mind very common features in insolvency situations".[7] The list, which is a useful aide memoire, is just that. It is not a proxy for the test of insolvency expressed in s 95A of the Corporations Act.[8]
[24]
[16] The liquidator, Mr Caspaney, has compiled a detailed report relating to the circumstances of the company at the relevant times. Mr Caspaney has been a practising accountant for about 35 years and a registered liquidator for nearly five years. He has the relevant level of expertise to examine and comment upon the records and status of the company. Although Mr Caspaney, as a party, is not independent in the sense usually associated with expert witnesses, he is an officer of the court. He has duties to the court and is subject to the supervision by the court when carrying out those duties. I am satisfied that he is an expert and that his evidence was given on the basis of his expertise and his independence as an official liquidator[9]
[17] Mr Caspaney has concluded that the company was insolvent from at least 1 April 2016 and during the relation back period between 23 June 2016 and 22 December 2016. He arrived at this conclusion by considering a number of factors which are relevant to the solvency of the company:
[25]
(a) the value of the company's net assets, the working capital available to it, and the liquidity ratio of the company,
[26]
(d) the company's cash in hand available at the relevant time, and
[27]
(e) the company's capacity (or incapacity) to borrow extra material funds at the relevant time.
[28]
[18] He concluded that from 1 April 2016 the value of net assets was materially negative (approximately negative $7.6 million) and during the relation back period those net assets deteriorated consistently from negative $3.1 million to negative $12.6 million at the date of appointment of the first liquidators.
[19] The deficiency in working capital was negative $6.7 million in April, negative $4.4 million in June, negative $1.8 million in July and negative $10.7 million at 22 December 2016.
[20] The liquidity ratio (calculated by dividing the current assets by the current liabilities) was below 1 at all relevant times. It had deteriorated to 0.5 at the time of the appointment of the liquidator.
[21] The company suffered cumulative losses for each month between January to December 2016 and they were significant. For example, in April 2019 the figure was $10,001,000, in May $8,044,000, in October $9,169,000 and in each of November and December the figure exceeded $9 million.
[22] The unpaid creditors grew from $10,163,000 in June 2016 with 31.3% of them outside the terms of payment to $21,486,292 in December with 88.93% outside the terms of payment.
[23] Mr Caspaney analysed the projects that the company had been working on in 2016 and concluded that, while it was successful when completing smaller projects, when it embarked on the larger projects its systems and management could not sustain the level of work required. In his analysis of the contracts that had been secured, he concluded that, after work had commenced, the actual margin upon which the company was operating was negative. Of the 22 projects over $1 million in contract value, 12 made losses to the aggregate sum of $6,058,592.
[24] In a table created by Mr Caspaney, he demonstrates that the company did not make a margin on its projects and did not contribute any profit.
[25] In early 2016, the company sought funding of $10 million from Westpac. While it obtained some of that ($2.4 million), it was still more than $7 million less than had been sought. Finance was obtained between October and December 2016 but that was only an amount of approximately $1.1 million, which was much less than the approximately $8 million which would have been needed at that time. Mr Caspaney concludes that although the company was able to obtain some finance in 2016, it was nowhere near the amount necessary for it to continue.
[29]
"The number of demands is a fundamental indicator that the company was not paying its creditors when their debts were due and payable."
[30]
[27] From August 2015 to June 2016 the company's cash deteriorated from $5.95 million to zero while, in the same period, its overdraft went from zero to about $2 million. There was an approximate deterioration of $8 million in the primary resource of the company to pay due and payable debts.
[31]
[28] The issue of insolvency was not the subject of debate at the hearing of this application. The parties were content to rely upon material which had been filed. The contest arose with respect to the appropriate costs order to be made with respect to the third and fifth respondents.
[29] The applicants seek two costs orders. As against the third and fifth respondents, they seek an order that those respondents pay the applicants' costs of determining the preliminary question up until 13 November 2020. As against the remaining respondents, an order is sought that they pay the applicants' costs of determining the preliminary question.
[30] The third and fifth respondents argue that any costs order against them should only be that the applicants' costs of the determination of the preliminary question be costs in the proceeding.
[31] The ordinary rule is that, subject to the usual discretions available, costs should follow the event. That general rule is applicable to the determination of separate questions.[10]
[32] The applicants rely upon the decision of Black J in Re Bias Boating Pty Ltd (in liq) ("Bias Boating").[11] In that case, Bias Boating Pty Ltd was found to have been continuously insolvent for the relevant period. That determination was made in a separate hearing. A number of defendants were ordered to pay the costs of the application on the basis that they had not admitted the solvency of the company. Other defendants did not wish to participate in the separate hearing. Thus, the plaintiff was required to prove insolvency.
[33] Black J referred to the decisions concerning costs on the determination of separate questions. His Honour said that the consequence of the non-admission, in the face of the evidence led by the plaintiffs, required the plaintiff to go to proof. Some of the defendants argued that insolvency could only be proved by the plaintiffs. Black J did not accept that proposition. The liquidator's solvency report had been served and the relevant defendants did not take steps to amend their defence as a consequence of receiving that evidence. His Honour said that it should have been apparent to the remaining defendants, or their legal advisors, that the evidence served by the plaintiffs would establish the insolvency of the company in the relevant period.
[32]
[42] I am satisfied that the report of Mr Caspaney accurately and adequately sets out the financial position of the company at the relevant time. The company was not able to pay all of its debts, as and when they became due and payable, during the period from 23 June 2016 to 22 December 2016.
[43] The answer to the preliminary question is: Cullen Group Australia Pty Ltd was insolvent on and from 23 June 2016 to 22 December 2016.
[44] With respect to the third and fifth respondents, the costs of determining the preliminary question be the applicants' costs in the cause.
[45] The first, second, fourth, seventh, eighth, tenth, twelfth, fourteenth, sixteenth, seventeenth, eighteenth, nineteenth, twentieth, twenty-first, twenty-second, twenty-third, twenty-fourth, twenty-sixth, twenty-seventh, twenty-eighth and twenty-ninth respondents pay the applicants' costs of determining the preliminary question.
[33]
Bryan A Horstman & Sharyn L Obst t/a Blue Diamond Constructions
[34]
Michael Shale as Trustee of MPM Contracting Unit Trust
[35]
Paul William Davis as Trustee of MPM Contracting Unit Trust
[36]
Matthew Davis as Trustee of MPM Contracting Unit Trust
[37]
[1]Williams (as liquidator of Scholz Motor Group Pty Ltd (in liq)) v Scholz[2008] QCA 94.
[3]Smith (in his capacity as liquidator of ACN 002 864 002 Pty Ltd (in liq) (formerly known as Petrolink Pty Ltd)) v Boné[2015] FCA 319; (2015) 104 ACSR 528 at 533-535.
[26] Mr Caspaney created a table which demonstrates that the number of demands by creditors grew substantially over the 2016 calendar year. In January of that year, the cumulative demands amounted to 13, but by December the number of cumulative demands had risen to 933. As he comments at [9.31] of his report:
[34] The third and fifth respondents argue that the circumstances are different in this case. They resist the order for costs on the basis that they had been afforded an opportunity to make an election as to whether to admit the preliminary question. That election was to be made after they had received all of the liquidator's evidence as to the date of insolvency. The court had made a number of orders with respect to the date upon which such an election might be made. The most recent order allowed an election by 13 November 2020.
[35] The liquidator has changed his position over time with respect to the question of costs. Last year he advised the parties that he would seek costs against any respondent who did not admit the question, agreed to abide by the order of the court, or denied the question. The third and fifth respondents say they do not fit into any of those categories.
[36] The only substantive evidence is the liquidator's report on solvency. His first report was dated 6 July 2017. Amendments to that report were made in which areas were corrected but, it must be said, the substance of the report remained the same.
[37] The case for the applicants consisted of the liquidator's report. Unlike Bias Boating there were no pleadings with respect to either the separate question or the claim for declarations as to preferences. Thus, the respondents were put on notice only to the extent of the report.
[38] The third and fifth respondent's admitted the insolvency question within the regime laid down by the orders of this court. Those respondents argue that, having received the final version of the liquidator's report, they assessed the situation and admitted the question. They did so within the time allowed them under the order made in November this year.
[39] The circumstances of this case are distinguishable from those in Bias Boating. I am satisfied that the proper exercise of discretion, with respect to the third and fifth respondents, results in order that the costs of determining the preliminary question be the applicants' costs in the cause.
[40] The first respondent was the only other party who appeared at the hearing. On its behalf it was argued that any costs order against it should only concern steps taken after the last date for making an election. But, the first respondent made no election. It was content to abide the order of the court. Thus, it required that the applicants prove their case. There is no reason that costs should not follow the event.
[41] So far as all respondents (other than the third and fifth respondents) are concerned, they should pay the applicants' costs of determining the preliminary question.