Appellants' submissions on insolvency
23 The appellants necessarily challenged both limbs of her Honour's reasoning. However, the primary attack focused upon the conclusion on the insolvency issue.
24 It was submitted that the company was clearly insolvent at the relevant times, notwithstanding difficulties with determining the full extent of that insolvency due to the unsatisfactory nature of the accounting records upon which the liquidator relied in forming his stated opinion that the company was insolvent.
25 Counsel for the appellants, Mr Aitken advanced his primary submission in this manner: The letter of 14 May 1999, standing alone, is strong evidence of insolvency in that it acknowledged a long-standing inability to pay a substantial company indebtedness (ie for tax) as well as an underlying cause, namely "a number of large bad debts". The presumption of continuance carried that evidence through until at least 8 June 1999, with the consequence that s588E(3) cast upon ATO the burden of rebutting the statutory presumption of insolvency throughout the ensuing 12 month period down to the commencement of the creditors winding-up on 7 June 2000.
26 Next, it was submitted that the arrangement reached in early August 1999 for the progressive reduction of the tax debt by instalments did not displace the company's insolvent status because (a) it was never legally binding (Foakes v Beer (1884) 9 App Cas 605) and (b) in any event the arrangement broke down in November-December 1999.
27 Next, it was submitted that the discharge of the outstanding tax liabilities on 17 May 2000, using the greater part of the moneys realised from the sale of the book debts to Orix, was itself a transaction made when the company was insolvent or which had the effect of rendering the company insolvent.
28 It may be seen that these submissions seek to by-pass the trial judge's credit-based findings about the true state of the company's balance sheet throughout the relevant period. The appellants seek to concentrate on the debit side of the ledger, indeed primarily if not solely upon the tax liabilities on that side as distinct from other company indebtedness.
29 This however is the essential fallacy in the attempt to skirt around the findings made by the trial judge. A conclusion as to solvency or otherwise can only be made having regard to the total position at the relevant time (see generally Sandell v Porter (1966) 115 CLR 666 at 670-1). Whether or not a company has the capacity to pay a particular debt necessarily depends inter alia upon the pool of assets available to meet it and the existence and press of other company creditors. The assets available to the company depended upon the true relationship between the company and the partnership and this was not established, at least to the extent of proving the company's insolvency.
30 There are additional difficulties.
31 The first two transactions were the payments of $22,000 in January and February 2000. These were instalments pursuant to the arrangement for gradual reduction of outstanding indebtedness that had been made in August 1999.
32 As well as invoking the statutory presumption said to flow from proven insolvency as at 8 June 1999, the appellants submitted that these payments were made at times when the company was demonstrably insolvent. One branch of this argument sought to address the tax liability divorced from other company assets and liabilities at the relevant times and I have already addressed the deficiencies of that approach. But if one assumes that it were possible to look at tax liabilities in isolation, the question arises whether the appellants are correct in their submission that the Court should effectively disregard the arrangement entered into between the ATO and the company.
33 According to the appellants, it is necessary to focus exclusively upon the total tax debt due at any point of time and to disregard entirely the ATO's willingness to defer enforcement action subject to satisfactory arrangements for the gradual reduction in the debt. The appellants pointed to no authority supporting such an approach to the issue of solvency. Indeed there is much authority to the contrary, because it is clear law that the statutory test of solvency looks at matters on a "cash flow" basis rather than a simple "balance sheet" basis (Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 at 64. See generally Keny, "The Insolvency Factor in the Avoidance of Antecedent Transactions in Corporate Liquidations" (1995) 21 Mon L R 305). This does not mean that a company debt is not due and payable at the time stipulated by the creditor (see generally Southern Cross Interiors); but it does mean that, in assessing solvency, the Court will pay regard to an express or implied agreement between a company and its creditor for an extension of the time stipulated for payment (Southern Cross Interiors at 225 and authorities cited at 54, Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinx Pty Ltd (2001) 37 ACSR 477).
34 The evidence shows that the ATO was willing to hold its hand between August 1999 and March 2000 and that the arrangement for gradual reduction in the tax indebtedness was substantially adhered to during this period. In the chronology set out above I have highlighted the material indicating why the company's failure to adhere to the letter in November-December 1999 is not determinative. Insolvency was not established at the time of the first two payments sued for.
35 By March 2000 it was however clear that the company was in default in its arrangement with the ATO. However, the critical time for determining solvency with respect to the payment of $171,786.28 was 17 May 2000. That payment represented the realised value of most of the company's principal asset, namely its book debts. Those debts had been assigned to Orix under the factoring agreement.
36 The leading case of Sandell v Porter recognises, in the words of Barwick CJ (at 670):
Insolvency is expressed in s95 [of the Bankruptcy Act 1924 (Cth) ] as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.