McVeigh, in the matter of J.A.G. Plastering & Carpentry Pty Ltd (in liq) v Commissioner of Taxation

REASONS FOR JUDGMENT 1 J.A.G. Plastering & Carpentry Pty Ltd (in liquidation) was incorporated on 4 April 2002. In its short life, it carried on the business (as its name implies) of providing plastering and carpentry services. It had one principal client, JM Interiors Pty Ltd, which regularly performed work for a well known builder, L U Simon. The company was placed into liquidation on 10 June 2003, some fourteen months after its creation. By that time its liabilities were in excess of $1.2 million, and the company had few assets. The assets were confined to trade debts (JM Interiors being the main creditor) and some equipment which a director said was worth about $10,000. By June 2003, however, JM Interiors had been placed into administration and shortly thereafter was wound up. 2 In the six months preceding its winding up the company made several payments, in all totalling $211,230, to the Commissioner of Taxation. The liquidator of the company, the plaintiff in this action, seeks to set aside some of those payments and recover $180,000 from the Commissioner, the defendant, as unfair preferences under s 558FE(1) of the Corporations Act 2001 (Cth). He now applies for summary judgment on the claim. The Commissioner does not oppose the application. He has, however, brought cross proceedings against the former directors of the company for indemnity under s 588FGA. For this reason I have given the former directors (the cross-defendants) leave to oppose the liquidator's application. 3 It is not in dispute that in the six months before its liquidation the company made payments totalling $211,230 to the Commissioner and that at the time of those payments the Commissioner was a creditor. The remaining elements of the liquidator's cause of action are, however, disputed. First, the liquidator must show that at the time of the impugned payments the company was insolvent (s 588FE(2)). Secondly, the liquidator must establish that the payments where made when the company had other creditors and that those creditors received, or following the liquidation will receive, less than the Commissioner: that is, that the Commissioner received a preference (s 588FA(1)): Calzaturificio Zenith Pty. Ltd. (In Liquidation) v N.S.W Leather & Trading Co. Pty. Ltd. [1970] VR 605; Walsh v Natra Pty Ltd [2000] 1 VR 523. 4 To establish his case the liquidator has sworn several affidavits to which he has exhibited documents designed to prove that the company was insolvent when the payments were made to the Commissioner. This conclusion is said to flow by inference from the contents of several of the exhibited documents. The directors submit that the documents upon which the liquidator seeks to rely have not been proved to be the company's records and it is simply hearsay to suggest that they are. Accordingly, the directors say, in substance, that there is no admissible evidence which will establish insolvency. 5 The principles I will apply in considering the liquidator's case are as follows. First in relation to establishing insolvency I will apply the dictum of Barwick CJin Sandell v Porter (1966) 115 CLR 666, 670. There the former Chief Justice said, in relation to s 95 of the Bankruptcy Act 1924 (Cth), the section upon which the current preference provisions are based, that: "An essential step in making out that a payment is a preference within s. 95 is to establish by evidence to the satisfaction of the Court that the payer was at the time of the payment insolvent. Insolvency is expressed in s. 95 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, utilising 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." 6 Secondly, in relation to the liquidator's evidence, I will follow what was said by Tadgell J in Re Action Waste Collections Pty. Ltd. (In Liquidation); Crawford v O'Brien [1981] VR 691. In that case Tadgell J both considered and rejected an argument similar to that which was argued by the cross defendants. There the judge noted that upon the winding up of a company the liquidator: (1) assumes the functions of the directors; (2) becomes subject to a statutory duty to take custody and control of all the company's property and choses in action; (3) must comply with the winding up provisions of the legislation and (4) must discharge his duty of collecting the company's assets and applying them in discharge of its liabilities and distributing any surplus to those entitled to it. In order to carry out these duties, the liquidator is required to take possession of the company's accounting books and other records and papers and correspondingly has an obligation to examine them for evidence of liability incurred by the company. The judge said (at 700) that in those circumstances "it would be contrary to common sense not to presume now that [the liquidator] had complied with such of his obligations as required him to obtain the company's financial records and examine them. He should be presumed to have done so as a matter of duty." On this basis the judge said that where the liquidator has sworn that he has the company's records and indeed exhibited them, then until the contrary is shown "[h]e should be presumed to have done so as a matter of duty." Accordingly, the documents can be relied upon as proof of the facts recorded in them according to the documents provisions in Part 2.2 of the Evidence Act 1995 (Cth). 7 The books of the company show that from its inception the company was trading at a loss. A draft profit and loss statement for the period ended 30 June 2002 (during which the company could only have traded for about three months) records a trading loss of $23,727.89 on a turnover of $20,446.69. The company's draft balance sheet as at 30 June 2002 shows a deficiency of assets of $23,727.89. In the next financial year, that is to 11 June 2003 (a day after the company was placed in liquidation) the company suffered a further trading loss of $1,100,559.59 according to a draft profit and loss statement for that period. This loss was incurred on a turnover of almost $5 million. The company's draft balance sheet as at 11 June 2003 shows that it had assets of $120,316.04 and liabilities of $1,244,603.52. Two significant creditors were the State Revenue Office (Victoria) which was owed in excess of $98,660 and the Commissioner of Taxation who was owed about $686,410. The liquidator has also exhibited notices of demand from the Victorian Workcover Authority in respect of unpaid premiums. In addition there is evidence that the company had entered into an agreement with the Victorian Workcover Authority to discharge the debt due to it by a payment instalment plan. That arrangement was breached. All in all, the evidence suggests that the company was insolvent for all of its working life. 8 This conclusion is, however, denied. One of the cross-defendants, Mr Pruszak, has sworn an affidavit which disputes that the company was insolvent "at all times after it commenced providing services to JM Interiors". He explains that immediately before its liquidation the company had two projects on hand, one in connection with a development in Kensington and the other a development at Southbank. Mr Pruszak says that the Kensington contract "was worth approximately $680,000 plus GST" and that the Southbank project was "worth approximately $1.39 million plus GST." He asserts that having regard to the hourly rates the company was paying to its workers (namely $21.86 per hour) and the return which it was to receive from JM Interiors under the contract in relation to the two projects (namely $42 per hour), the company had "a workable margin within which to meet its on-going obligations." This, in effect, is the cross-defendants evidence on solvency. 9 An application for summary judgment will be successfully resisted if the defendant (or in this case some person who with leave is arguing the defendant's cause) can raise an arguable case entitling the defendant to leave to defend. Put another way, final judgment will not be entered "unless it is clear that there is no real question to be tried": Fancourt v Mercantile Credits Limited (1983) 154 CLR 87, 99. In this case, however, notwithstanding Mr Pruszak's protestations, I think it is beyond doubt that the company was insolvent when it made the payment to the Commissioner. Mr Pruszak's evidence suggest that the company had two projects in hand, but that is a far cry from establishing even an arguable case that these projects would have produced sufficient surplus income to discharge the company's large debts within a reasonable time. Indeed my impression is that Mr Pruszak's failure to provide additional information to explain how these two contracts could have produced a sufficiently high profit to pay out the debts, suggests that Mr Pruszak's evidence smacks of wishful thinking. 10 On the second ground of defence, Mr Greenberger, who appeared for the cross defendants, sensibly conceded that if the exhibits upon which the liquidator based his case were admissible and could be looked at to prove their contents, the liquidator would establish that the payments to the Commissioner had the effect of giving him a preference over other creditors of the company. 11 In light of the foregoing I will make the orders that were handed up in court.