Preiner & Anor v Shin & Anor

Hearing dates: 30 July and 1 August 2025, submissions to 7 August 2025

Date of orders: 29 August 2025

Decision date: 29 August 2025

Jurisdiction: Civil

Before: Gibson DCJ

Decision: See [82]

Catchwords: INSOLVENCY – application by liquidator of company against former director for breach of statutory directors’ duty to prevent insolvent trading pursuant to s 588G of the Corporations Act 2001 (Cth) - whether reasonable grounds to suspect insolvency – date of insolvency – whether date of insolvency gave rise to “safe harbour” protections under s 588GAAA

Legislation Cited: Corporations Act 2001 (Cth) ss 9, 286(1), 588E(4), 588G, 588H, 588V(1) and 588GAAA
Corporations Regulations 2001 (Cth) 5.7B.01

Cases Cited: A40 Construction and Maintenance Group Pty Ltd v Smith (No 2) [2022] VSC 72
ASIC v Plymin & Ors [2003] VSC 123
BCI Finances Pty Ltd (in liq) v Binetter (No 4) [2016] FCA 1351; 348 ALR 227
Commissioner of Taxation v Rawson Finances Pty Ltd [2023] FCA 617; 116 ATR 458
Copeland in his capacity as liquidator of Skyworkers Pty Limited (in Liquidation) v Murace (No 2) [2024] FCA 957
Fisher v Divine Homes Pty Ltd [2011] NSWSC 8; 85 ACSR 512
Fortcon Pty Ltd & Anor v Babicka & Ors (Security for Costs) [2025] VCC 616
Hall v Poolman [2007] NSWSC 1330
Jones v Dunkel (1959) 101 CLR 298
Juelle Pty Ltd v Buildev Properties Pty Ltd and Ors [2006] NSWSC 302
Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; 21 ACLC 700
Re Overgold Pty Ltd [2019] VSC 624
Re Swan Services Pty Ltd (in liq) [2016] NSWSC 1724; 12 BFRA 224
Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141
Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621; 53 NSWLR 213
Strategic Financial and Project Services Pty Ltd v Bank of China Limited [2009] FCA 604
Tourprint International Pty Ltd (in liq) v Bott [1999] NSWSC 581; (1992) 32 ACSR 201 at 215

Texts Cited: “Some recent case law and statutory developments in insolvency”, ARITA conference 12 November 2020, Justice Ashley Black of the Supreme Court of New South Wales

Category: Principal judgment

Parties: Plaintiffs:
First Plaintiff:
Adam Bernard Preiner in his Capacity as Liquidator of Sorenzo Pty Ltd ACN 139 768 826 (in Liquidation)
Second Plaintiff:
Sorenzo Pty Ltd (in Liquidation)
Defendants:
First Defendant:
Ms Yi Jeong Shin
Second Defendant:
Raphael Shin Enterprises Pty Ltd

Representation: Counsel:
Mr Narayan (Solicitor for the Plaintiff)
Mr J Baird (Defendant)
Solicitors:
Plaintiff:
Mils Oakley
Defendant:
Mathas Law

File Number(s): 2024/00226441

Publication restriction: Nil

Judgment

The plaintiff’s claims against the defendants

1. These proceedings are commenced by Adam Bernard Preiner in his capacity as a liquidator of Sorenzo Pty Ltd ACN 139 768 826 (in Liquidation) (“the company” or “Sorenzo”) and Sorenzo against Mrs Yi Jeong Shin, the director of the Company (“Mrs Shin”) and the second defendant, Raphael Shin Enterprises Pty Ltd (“RSE”). By their further amended statement of claim dated 20 December 2024, Mr Preiner and Sorenzo seek payment of the following amounts from each of the first and second defendants:

2. A claim against the first defendant, Mrs Shin, as director of the Company pursuant to section 588G(1) Corporations Act 2001 (Cth) (“the Act”) for $279,129.12 in respect of insolvent trading by the Company during the period 29 May 2018 to 14 November 2023 (the date of winding up), or alternatively for $125,291.97 for insolvent trading of the Company during the period 30 June 2019 to 14 November 2023.

3. A claim against the second defendant, RSE, for $89,562.73 pursuant to section 588V(1) of the Act as the holding company of the Company during the period 18 February 2020 to 14 November 2023.

4. Both claims are defended, but the defence for Mrs Shin, who withdrew her affidavit during the hearing and did not give evidence, is restricted to reasonable suspicion of insolvency.

Issues to be determined

3. The following issues were identified by the parties at the commencement of the proceedings:

Insolvency of Sorenzo

1. Since 14 November 2016, has Sorenzo been insolvent pursuant to the presumption in section 588E(4) of the Act?
2. In the alternative, since 30 June 2019 has Sorenzo been actually insolvent?

Debts

1. Were debts totalling $275,129.12 incurred by Sorenzo within the period 29 May 2018 to 14 November 2023?

Liability of Mrs Shin

1. At the time that the Debts totalling $275,129.12 were incurred:

(a) Was Sorenzo insolvent, or became insolvent, by incurring each of the Debts? (b) Were there reasonable grounds for suspecting that Sorenzo was insolvent or would become insolvent by incurring each of the Debts? (c) Did Mrs Shin fail to prevent Sorenzo from incurring the Debts? (d) Was Mrs Shin aware, or ought she to have been aware, that there were grounds for suspecting that Sorenzo was insolvent? (e) Alternatively, would a reasonable person in a like position to Mrs Shin in a company in Sorenzo’s circumstances have been aware that there were grounds for suspecting that Sorenzo was insolvent?

2. Did the creditors of Sorenzo suffer loss and damage in relation to the Debts because of Sorenzo’s insolvency?
3. Pursuant to section 588M of the Act, is the Liquidator entitled to recover from Mrs Shin, as a debt due to Sorenzo, the quantum of the Debts?
4. In the alternative, pursuant to section 588M of the Act, is the Liquidator only entitled to recover from Mrs Shin, as a debt due to Sorenzo, the portion of the Debts incurred between 30 June 2019 to 14 November 2023 – being $125,291.97?

Liability of RSE

1. At the time to RSE Debts totalling $89,562.73 were incurred:

(a) Was RSE the holding company of Sorenzo? (b) Was Sorenzo insolvent, or became insolvent, by incurring each of the RSE Debts? (c) Were there reasonable grounds for suspecting that Sorenzo was insolvent or would become insolvent by incurring each of the RSE Debts? (d) Did RSE fail to prevent Sorenzo from incurring each of the RSE Debts? (e) At the time the RSE Debts were incurred, was RSE and/or its directors aware, or ought to have been aware, that there were grounds for suspecting that Sorenzo was insolvent? (f) Alternatively, having regard to the nature of the control RSE had over Sorenzo’s affairs, is it reasonable to expect that a holding company in RSE’s circumstances, or its director(s)’ circumstances, would have been aware that there were grounds for suspecting that Sorenzo was insolvent?

2. Did the creditors of Sorenzo suffer loss and damage in relation to the RSE Debts because of Sorenzo’s insolvency?
3. Pursuant to section 588W of the Act, is the First Plaintiff entitled to recover from RSE, as a debt due to Sorenzo, the quantum of the RSE Debts?

Defences

1. Did Mrs Shin have good grounds to expect that Sorenzo was solvent during the period that she was its director?

2. In the period from May 2018 to 25 March 2020, did Mrs Shin have good grounds to expect that Sorenzo would be supported by other corporations of which she was a director who conducted business as “Sushi Bay restaurants”?

3. In the period from 25 March 2020 until 31 December 2020, did section 588G(2) of the Act not apply to her by virtue of the operation of s588GAAA of the Act and Corporations Regulations 2001 (Cth) 5.7B.01?

4. Mrs Shin later withdrew her affidavit at the commencement of her case and was not cross-examined. Accordingly, her defence is limited to reasonable suspicion of insolvency.

The evidence

5. The Court Book prepared by the plaintiff was tendered. The liquidator was called for cross examination.

6. The defendants called no witnesses.

Factual background

7. Mrs Shin has been a director and company secretary of Sorenzo from the time of its incorporation on 1 October 2009. Her husband, Raphael Shin, was a director from 19 March 2012 to 24 February 2020.

8. Sorenzo offered Japanese-style fine dining at restaurant locations in Sydney and Greater Sydney. There is very little information about the activities of this company’s restaurants, which formed part of a larger group of companies. Mrs Shin claimed, in a questionnaire answer she provided to the liquidator, that five other companies were placed in liquidation after the business was “destroyed by Covid 19”. However, she asserted that the cause of the failure of the Sorenzo restaurant business, on a different date, was for a different reason, namely because “landlord [sic] locked company out of tenancy due to rental disputes and potential claims of misleading/deceptive conduct by the landlord.” (CB 370). It is not in dispute that this lockout occurred on 11 June 2019, which was nine months before Covid 19.

9. RSE has been the sole shareholder of Sorenzo since 18 February 2020. Mrs Shin was a director of RSE from the time of its incorporation on 21 January 2003 until 17 February 2020. Her husband was also a director and the company secretary until 5 March 2024; he is now bankrupt.

10. Sorenzo’s financial position may be summarised as follows. The company had a liability on its activity statement account of $35,547.64 for the period ending 31 March 2018. At the same time, the company had only small amounts as bank accounts; for example, there was only the sum of $167.37 in its Commonwealth Bank of Australia account. The debts continued to increase in size; for example, the amount held by the Commonwealth Bank of Australia account as at 31 December 2018 was only $433. On 17 May 2019, the Deputy Commissioner of Taxation warned the company that $112,090.20 was now outstanding and that steps would be taken to start collection action if the amount was not paid.

11. By 21 June 2019, the balance on the company’s activity statement had reached $149,837.15(CB 518). At this stage, it had only $1,032.51 in its bank accounts and after a long-term non-payment of rent they had been locked out of the restaurant premises earlier that month, on 11 June 2019. The irregularity of the payment of rent in the financial statements for the year ended 30 June 2017, 30 June 2018 and 30 June 2019 demonstrates this gradually worsening position. The director’s questionnaire filled out by Mrs Shin, her sole contribution to this litigation in terms of what she was thinking and doing (CB 370), confirms the obvious: Sorenzo was not only in debt and unable to borrow, but unable to afford to recover its own chattels and fittings so as to trade at all.

12. By way of excursus, the plaintiffs ask me to draw inferences from Mrs Shin’s decision not to give evidence, despite her being in court for the duration of the proceedings. For the reasons set out in more detail below, I do so in relation to her failure to give evidence as to the nature of any dispute and how it would lead to so substantial a failure to pay rent as to result in the company being locked out of its place of business. It is appropriate to refer to those inferences here, because there are a few events more dramatic than the landlord locking in a tenant out of the business, thereby not only stopping them from trading at that site but withholding the very tools of their trade; there is a special page of advice for tenants in this situation maintained by the Small Business Commissioner. This lockout is significant because the court draws inferences from, inter alia, “commercial reality” (Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621; 53 NSWLR 213 at [45] – [51]), to the effect that the company’s financial problems are not temporary but have become “endemic”. Examples of such a “commercial reality” include not only landlord action of this kind, but the consequential ceasing to trade and, equally importantly, from the company’s failure to act (Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation at [51]). Failure to act (for example, to recover debts or, in this case, company property) is a basis for the drawing of such an inference, as where a company is locked out of the business, that itself can be actionable: Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 (I note the discussion of how the COVID legislation interacted with the tenants’ rights in that case, a claim which was put forward to me by the defendants in relation to other claims).

13. Returning to the chronology of events, the company’s financial position continued to disintegrate. On 1 May 2020, Sorenzo incurred a further liability with the Deputy Commissioner of Taxation for $15,760 (CB 526). The company never again had a nil balance on its Superannuation Guarantee Charges (“SGC”) account.

14. Sorenzo’s liability to the Deputy Commissioner of Taxation continued to increase; by 31 December 2020, it had reached a total of $196,291.18. This consisted of $186,082.57 on its activity statement account and $28,208.61 on its SGC account. By this stage, the company’s bank account had only very small sums in its bank accounts, namely $8.41 in its St George account and a further $533.81 in its CBA account, as the banking documents set out at pages 525, 616 and 751 of the Court Book attests. The Deputy Commissioner issued a letter to the company for the 31 December 2020 amount and the SGC debt of $29,089.20. It was unpaid and the debt continued to grow, reaching $222,633.49 on 30 June 2021. The company had added nothing to the very small balances in the bank accounts over this whole period (CB 757).

15. On 6 August 2021, 23 November 2021 and 31 December 2021, the Deputy Commissioner issued three further letters in relation to Sorenzo’s indebtedness. By 21 February 2022, the amount sought in the letter of demand sent by the Deputy Commissioner had reached $202,888.42 for its debt on its Activity Statement and $30,489.27 for its SGC debt.

16. There is total failure to respond from the company or from anyone on its behalf. On 26 April 2022 and again on 6 June 2022, representatives of the Deputy Commissioner of Taxation attempted to telephone first the company’s tax agent and then Mrs Shin about the outstanding debt. By 8 June 2022, the amounts sought had increased to $207,649 and $30,944.33 respectively (CB 469 – 470). By the end of the financial year the total outstanding for both was $238,593.33 while Sorenzo still had only the same small sum in its CBA account, namely $353.81 (CB 444).

17. On 2 September 2022, Sorenzo lodged a Form 485 with ASIC stating:

“The directors of the company have passed a solvency resolution under section 347A that, in their opinion, there are reasonable grounds to believe that the company WILL NOT be able to pay its debts as and when they become due and payable.”

18. The state of the company finances was illustrated by its inability, on 1 October 2022, to pay even a very small debt, namely the annual review fee for ASIC which was $290, with the result that a late payment fee of $275 was incurred, which the company similarly did not pay (CB 463 – 468).

19. On 15 November 2022 the Deputy Commissioner of Taxation issued a Creditor’s Statutory Demand for Payment of Debt to the company for the current amount outstanding, which was, once again, ignored.

20. Attempts by the Tax Office employees to contact Mrs Shin or Ms Jeong of Wisdom Biz Solutions in March 2023 failed (CB 483). By 30 June 2023, not only had the amount outstanding continued to rise, but even the small sums of money in its bank accounts were gone (CB 444).

21. On 24 August 20, 2023, The Deputy Commissioner’s staff again attempted unsuccessfully to contact Mrs Shin and the accountant. Meanwhile, another annual fee penalty from ASIC was not met.

22. On 9 October 2023, proceedings were commenced in the Federal Court of Australia seeking orders for the winding up of the company and on 14 November 2023, the Federal Court of Australia made orders appointing the first plaintiff as liquidator of the company.

23. After the liquidator’s investigations, he provided financial statements to the effect that for the period of time that Mrs Shin was director of the company, the company incurred two debts to the Australian Taxation Office ($238,607.62 for the Activity Statement and $35,466.50 for the SGC account) as well as a small amount for ASIC fees ($1,055.00). These total $275,129.12.

24. The RSE debts consist of $53,041.23 in the running balance account and $35,466.50 in the superannuation guarantee account. There is also the sum owing of $1,055.00 to ASIC.

25. The liquidator has not made recoveries in liquidation to date, nor has he declared a dividend or call for proofs of debt. It is his view that if recovery were to be made in these proceedings, there may then be a dividend to creditors (T 15 – 16).

Mr Preiner’s evidence

26. Mr Preiner, the liquidator, was cross-examined on his affidavit, which doubled as an expert report by reason of the company’s limited resources. The defendants submit that concessions were made by him in the course of his cross-examination in which he adopted or endorsed statements made by the defendants’ counsel. Those asserted concessions are discussed in the consideration of his evidence below.

The defendants’ evidence

27. The defendants failed to call any witnesses and withdrew the affidavit evidence of Mrs Shin but sought to tender unsigned, unaudited financial statements for the financial years 2016 and 2017. I rejected that tender for the reasons set out in paragraphs 28 – 31 below.

Unaudited and unsigned financial statements

28. The precise dates for the preparation of these reports are uncertain. They were never provided to the liquidator or to the plaintiffs; the first time Mr Preiner saw them was during his cross-examination. There is no evidence Mr or Mrs Shin ever saw them, let alone relied upon them.

29. The admissibility of unaudited financial statements has been successfully challenged in other proceedings where these were sought to be tendered, on the basis of the inherent unreliability of such statements: Strategic Financial and Project Services Pty Ltd v Bank of China Limited [2009] FCA 604. which concerned similar facts to the present matter. In those proceedings, the applicant’s solicitor sought to tender a document described as “a copy of the financial statement relating to the second applicant for the financial year ended 30 June 2008”. The tender was rejected by Moore J pursuant to s 135 of the Evidence Act 1995 (Cth) for two reasons. The first was the lateness of the document, which was produced in the course of the hearing in circumstances very similar to the present, as opposed to having been given to the liquidator sometime beforehand and the second was because the report was unaudited as well as unsigned by any of the directors. Moore J noted that, while a report of this kind had been admitted into evidence in Juelle Pty Ltd v Buildev Properties Pty Ltd and Ors [2006] NSWSC 302, the report in the case of Juelle had been signed by the directors.

30. I find myself in a similar position to that of Moore J, in that the financial statements provided are based on unaudited information provided by directors who have not adopted or signed the reports. The accountants have not been prepared to sign or otherwise endorse the contents of these reports. They could have been prepared by anyone. I note similar reservations were expressed by Kirton J in Fortcon Pty Ltd & Anor v Babicka & Ors (Security for Costs) [2025] VCC 616. Although these decisions related to an application for security for costs, the question for the court is the same, namely the reliability of documents tendered.

31. As to their admissibility, where a small company is not required to have audited financial statements, such evidence may be permitted (A40 Construction and Maintenance Group Pty Ltd v Smith (No 2) [2022] VSC 72 at [26] – [31]). This is an alternative that I considered. However, even if admitted, unsigned documents from unknown sources would have no weight, and offer nothing in relation to the “commercial reality” factors relevant when determining solvency issues,

Failure to call Mr and Mrs Shin

32. As to the failure of both Mr and Mrs Shin to give evidence, Mr Narayan refers to the inferences than can be drawn, as set out in BCI Finances Pty Ltd (in liq) v Binetter (No 4) [2016] FCA 1351; 348 ALR 227 at [122] – [135].

33. I accept that I should infer that any evidence called by Mrs Shin, the first defendant, and her husband (the director of RSE during the relevant period) would not have assisted their case, and draw the appropriate inference in accordance with the principle set out in Jones v Dunkel (1959) 101 CLR 298 at [320]. I take into account that the provisions of s588G and 588V of the Act entitles the court to consider the knowledge of both Mrs Shin and RSE as to the solvency of Sorenzo.

34. Mr Narayan also asked me to draw the inference that the failure of these two witnesses to give evidence included documentary evidence (such as MYOB records) in circumstances where their failure to produce that evidence demonstrates, inter alia, a consciousness by the defendants of their weak case. I draw that inference as well.

Evidence not in dispute

35. At paragraph 93 of his submissions, Mr Narayan sets out that Sorenzo incurred debts totalling $275,129.12 from 29 May 2018 to 14 November 1923. The evidence at paragraphs 93 – 95 is not in dispute.

36. At paragraph 95 of his submissions, Mr Narayan sets out the reliance on proofs of debt, which is also not in dispute. It is also not in dispute that the liquidator relies on proofs of debt from creditors.

37. No challenges are made to these. I am satisfied that Sorenzo owes the amount outstanding as set out in these tables.

Accuracy of the documentation

38. I am satisfied that the transactions set out in the Activity Statements Debts are correct and that Sorenzo incurred each of the debts on its Activity Statement on the dates recorded there.

39. I am satisfied that Sorenzo incurred each of the SGC debts on the dates set out (paragraph 14 of Mr Narayan’s submissions).

40. I am similarly satisfied that ASIC’s proofs of debt are prima facie sufficient to establish that Sorrento acted to expose itself to the obligation to make payments of the sum claimed by ASIC to be owing.

Applications by liquidators for contraventions

41. Although I was not addressed on this issue, applications by liquidators for orders of this kind pursuant to s 588(G) of the Act require evidence that can comfortably satisfy the court.

42. I set out below the relevant statutory provisions.

The relevant legislation

43. Subsection 588G(1) of the Act provides:

(1) This section applies if:

(a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and

(d) that time is at or after the commencement of this Act.

44. Subsection 588G(2) of the Act provides:

(2) By failing to prevent the company from incurring the debt, the person contravenes this section if:

(a) the person is aware at that time that there are such grounds for so suspecting; or

(b) a reasonable person in a like position in a company in the company's circumstances would be so aware.

45. Subsection 588V(1) of the Act provides:

(1) A corporation contravenes this section if:

(a) the corporation is the holding company of a company at the time when the company incurs a debt; and

(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and

(d) one or both of the following subparagraphs applies:

(i) the corporation, or one or more of its directors, is or are aware at that time that there are such grounds for so suspecting;

(ii) having regard to the nature and extent of the corporation's control over the company's affairs and to any other relevant circumstances, it is reasonable to expect that:

(A) a holding company in the corporation's circumstances would be so aware; or

(B) one or more of such a holding company's directors would be so aware; and

(e) that time is at or after the commencement of this Act.

46. Subsections 588H(2) and (3) of the Act provide:

(2) It is a defence if it is proved that, at the key time, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent despite all its debts incurred, and dispositions of its property made, at that time.

(3) Without limiting the generality of subsection (2), it is a defence if it is proved that, at the key time, the person:

(a) had reasonable grounds to believe, and did believe:

(i) that a competent and reliable person (the other person) was responsible for providing to the first - mentioned person adequate information about whether the company was solvent; and

(ii) that the other person was fulfilling that responsibility; and

(b) expected, on the basis of information provided to the first - mentioned person by the other person, that the company was solvent at that time and would remain solvent despite all its debts incurred, and dispositions of its property made, at that time.

47. Subsection 588E(4) of the Act provides:

(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.

48. Subsection 286(1) of the Act provides:

(1) A company, registered scheme, registrable superannuation entity 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.

Note 1: Section 9 defines financial records.

49. Section 9 of the Act defines “financial records” 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.

50. I also take this opportunity to set out the relevant provisions in the act in relation to the temporary relief afforded during the Covid-19 periods:

Covid-19 Temporary relief

51. Section 588GAAA of the Act provides:

“Safe harbour--temporary relief in response to the coronavirus

Safe harbour

(1) Subsection 588G(2) does not apply in relation to a person and a debt incurred by a company if the debt is incurred:

(a) in the ordinary course of the company's business; and

(b) during:

(i) the 6 - month period starting on the day this section commences; or

(ii) any longer period that starts on the day this section commences and that is prescribed by the regulations for the purposes of this subparagraph; and

(c) before any appointment during that period of an administrator, restructuring practitioner or liquidator of the company.

(2) A person who wishes to rely on subsection (1) in a proceeding for, or relating to, a contravention of subsection 588G(2) bears an evidential burden in relation to that matter.

When the safe harbour does not apply

(3) Subsection (1) is taken never to have applied in relation to a person and a debt in the circumstances prescribed by the regulations for the purposes of this subsection.

Definitions

(4) In this section:

"evidential burden", in relation to a matter, means the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist.”

Solvency

52. The plaintiffs rely upon the Solvency Report dated 20 December 2020 (CB 561) and on the opinion expressed (at CB 561) that the company has been insolvent from 30 June 2019 to 14 November 2023, by reason of its failure to maintain adequate books and records, notwithstanding the fact that financial statements were prepared for the financial years of 2018 and 2019, these reports having been prepared on 4 April 2020 (CB 373 – 383). Mr Preiner expresses his expert opinion that the company was at all times insolvent from 30 June 2019 onwards, namely from shortly after the company being locked out of its tenanted restaurant site.

53. The defendants refer to the company’s financial statements for the year 2018 showing a modest net profit of $40,302 and a surplus of current assets of $102,682 to current liabilities of $25,435 as at 30 June 2018 and submit that a reasonable director in the position of the first defendant, on receipt of the company’s financial statements for those two years would not, as at 4 April 2020, have suspected of the company was in fact insolvent. In the alternative, they submit that the plaintiff has failed to prove the insolvency of the company at any earlier point of time than a reasonable period after 4 April 2020, such as 18 April 2020.

54. The defendants also mounted an argument that, by reason of the Covid-19 provisions, the relevant date for the purposes of s 588G(2) would have been deferred until 1 January 2021 which would result in a reduction of the quantum of the plaintiff’s claims to $70,548.20 (defendants’ submissions, paragraph 28, 30 July 2025). This is set out in more detail at the end of this judgment.

55. What is the test for “the reasonable person”? In Copeland in his capacity as liquidator of Skyworkers Pty Limited (in Liquidation) v Murace (No 2) [2024] FCA 957 at [85], Halley J stated:

“The reasonable person in a “like position” to that of Mr Murace for the purposes of s 588G(2) of the Corporations Act is a person who has the same duties and responsibilities in a company in similar circumstances. They are a person who may have access to the same information but they are not a person who might make the same erroneous assumptions or have the same educational qualifications as Mr Murace”.

56. What must be proved for the presumption of insolvency to arise? This is an inference drawn from a number of aspects of the company’s behaviour, such as the failure to keep appropriate financial records: Fisher v Divine Homes Pty Ltd [2011] NSWSC 8; 85 ACSR 512 at [24]; there is a list of such matters in Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; 21 ACLC 700 at [386]. In particular, as to unaudited financial statements, the court should take into account that the obligation to keep financial records under section 286 of the Act is twofold. There is the obligation to keep records of the company’s transactions and financial performance sufficient to enable financial statements to be prepared and secondly those records must be retained for seven years. The records which must be retained are not simply the financial statements from which they are prepared the underlying financial records themselves. The presumption of solvency may accordingly be rebutted where such records are not available, and the company bears the onus of establishing that it was not insolvent.

57. In order to discharge this onus, the defendants submitted that there was evidence that the company was making tax lodgements and that the failure of the liquidator to seek further documents from the defendants was a significant omission. The fact that the 2018 financial statement recorded a profit and the assertion of the keeping of MYOB records was enough to discharge that onus, the defendants submitted.

58. There is no evidence of any MYOB document being in existence; the sole reference to it is a one-sentence claim by Mrs Shin on the director’s questionnaire, to the effect that such records had at some stage being kept. Those records were sought by the liquidator and were not provided by Sorenzo or its accountant, so a mere reference to such records by Mrs Shin in the questionnaire is insufficient to discharge the onus.

59. The defendants’ argument that the plaintiffs failed to establish when the debts of the company were incurred is similarly misconceived. I accept the list of debts contained in paragraph 6 of the plaintiffs’ submissions in reply correctly reflects these and I accept the calculations prepared by the liquidator on that basis.

60. I similarly reject the defendants’ submissions that Mrs Shin did not have any grounds to suspect that the company was insolvent until about two weeks after receiving the company’s financial statements on 4 April 2020, for the following reasons:

(a) These financial statements are certainly dated 4 April 2020, but there is no evidence to suggest that the defendants actually received them on that date, or read their contents. The liquidator had no evidence to suggest that this was the case. The defendants did not lead any evidence as to when those documents were actually received. Mrs Shin has demonstrated a failure to deny or explain facts when it was within her power to do so in order to discharge the onus. I note the observations of Gleeson J in BCI Finances Pty Ltd (in liq) v Binetter (No 4) at [124] that “[t]the silence of a party may have served to resolve a doubt or an ambiguity regarding the existence of the fact, especially where the facts are peculiarly within the knowledge of the silent party” (see also Commissioner of Taxation v Rawson Finances Pty Ltd [2023] FCA 617; 116 ATR 458 at [87]). (b) Reliance was placed on what were asserted to be concessions made by the liquidator in cross-examination. The questions did not address the commercial realities of the facts of this case and amounted to little more than asking the liquidator to endorse the defendants’ arguments. The relevant test should be applied objectively and the liquidator’s evidence, including any asserted concessions, is but one factor to take into account. Applying that objective test, and looking at the facts as a whole, I take into account failure to lodge statutory returns and maintain and produce proper records such as MYOB as a more accurate indicator than the impact of unaudited financial statements. The financial position of the company is not determined simply by reason of the financial statements it produces, particularly where the documentation going to the making up of those financial statements was very thin on the ground. (c) In paragraph 24 of his submissions in reply, Mr Narayan draws my attention to four particular events of importance, namely the activity statement showing that the company only had $6,376.59 in its bank accounts as that 29 May 2018, the continued accumulation of tax liabilities thereafter, the warning from the Deputy Commissioner of Taxation of 17 May 2019 that collection action would be started for the total debt which was then $112,090.20 and, most importantly, the lockout by the landlord on 11 June 2019.

61. Individually, the four matters in paragraph 60(c) above would have caused any reasonable director to ask himself or herself, and any other directors, what the situation was. As is explained by Palmer J in Hall v Poolman [2007] NSWSC 1330 at [269] – [275] (observations not disturbed on appeal and cited with approval since: Re Overgold Pty Ltd [2019] VSC 624 at [33]), a reasonable director needs to ask such questions as how to turn assets into cash to pay off debts and if this cannot be done or is more likely than not to be done, then the court will hold that the reasonable director would say that continuing to trade would not be justified and the administrators should be called in.

62. Each case must of course turn on its own facts, but the facts in this case are stark, to the point where the question is not one of whether the presumption of solvency cannot be made out but there is clear evidence of actual insolvency, namely the hopeless position in which the company found itself in the landlord locked them out and they were unable to afford the cost of recovery of everything from their tools of trade to their fittings.

Actual insolvency and the lockout

63. During closing submissions, I asked Mr Narayan and Mr Baird:

“HER HONOUR: Can I ask one of the things in relation to the reasonable director? One of the things the reasonable director would take into account is if the businesses had closed. It's the case, isn't it, these restaurants - do we know when they closed? We do, don't we?

NARAYAN: We do, I think. I think it's in the report as to affairs. She indicates a director's questionnaire, which I'm just going to find for you.

HER HONOUR: Thank you.

NARAYAN: Probably the most convenient place is starting at p 766. Your Honour will see Mrs Shin indicates the company commenced on 15 January 2010. The business is not still trading. When did it cease? 1 or 11 of June 2019. I think it might be the 11th.

…

HER HONOUR: No, it ceased trading on 11 June 2019. But that's the whole company. When did the actual restaurants shut down?

NARAYAN: I think we understand that the landlord shut down the premises in about June 2019. I think that's also in this document. Just give me a moment to find that.

HER HONOUR: The landlord shut it down because of non-payment of rent.

NARAYAN: That's exactly right.

BAIRD: No, there was more to it than that.

NARAYAN: There's a rental dispute. The answer is at para 49, which is p 772. According to Mrs Shin one of the causes of failure was the landlord locking the company out of its tenancy due to a rental dispute and potential claims of misleading and deceptive conduct by the landlord.

HER HONOUR: There was no action brought for misleading or deceptive conduct, was there?

NARAYAN: Certainly no

HER HONOUR: The thing is that the landlord locked the company out due to a rental dispute. That means that they weren't paying. I'm going to read the whole of that as meaning that basically the landlord locked them out because they weren't paying, so the ordinary reasonable director would know that rent was not being paid and the businesses has shut down.

BAIRD: Yes.”

(T 75 and 76)

64. I have set out this excerpt from the transcript because I have had no further information about what happened after the lockout. It was not suggested they went to other premises, and Mr Baird did not draw my attention to any other income-producing activity. Nor did Mr Narayan who, in his submissions in reply, specifically referred to the impact of a lockout on the presumption of solvency as well as the actuality of insolvency. This reliance on the end of the company’s trading was, however, not responded to by Mr Baird.

Conclusions: Sorenzo is not only presumed insolvent but actually insolvent

65. I am satisfied that there were grounds for a reasonable director to suspect that Sorenzo was insolvent as at the time the portion of the debts were incurred between 29 May 2018 to 4 April 2020 because, at that stage, the prospect of any payment of the liability to the Australian Tax Office could only be characterised by, in the language of Palmer J, being remote at best. A reasonable person in such a position being aware of the facts and matters listed above would have concluded that Sorenzo was not merely to be suspected of being insolvent but was in fact insolvent, and the receipt of financial statements, whenever they were seen, for 2018 and 2019 would not have displaced either those suspicions or the knowledge of the facts, particularly given the impact of the lockout.

66. Further, having regard to the nature and extent of RSE’s control over the company affairs, it would be reasonable to expect one or more of the holding companies is directors to be similarly unaware.

67. I make the following additional findings in relation to the alternative argument that the company was in fact insolvent. Having regard to the factual material before me, I am satisfied that Sorenzo had actually been insolvent since at least 30 June 2019, if not shortly beforehand, by reason of the circumstances in which the company was locked out of its tenanted premises on 11 June 2019, thereby losing all of its fittings, goodwill, staff and trade information in circumstances where it neither had the assets to recover these nor the ability to borrow funds to do so. This means that the larger sum claimed by the plaintiffs is the sum that Mrs Shin should be ordered to pay. Once the company was unable to trade, its ability to satisfy the cash flow test was lost, as this turns upon the income sources available to the company as well as the expenditure obligations it has to meet, as opposed to a balance sheet test which focuses on assets and liabilities as reflected in its bookkeeping: Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation. Looking at the checklist in ASIC v Plymin & Ors [2003] VSC 123 at [386], the position of Sorenzo was even worse, taking into account the factors identified in the liquidator’s expert report.

Liability of RSE

68. The plaintiffs submit that RSE contravened section 588V(1) of the Act. Sorenzo was, I have found, actually insolvent throughout the whole of the period when the RSE debts were incurred. There were reasonable grounds for suspicion in any event.

69. I adopt the list of factors set out by Mr Narayan at paragraph 148 of his written submissions. I have set out above the reasons for which I would draw an inference that Mr Shin’s evidence would not have assisted the defendants’ case.

70. I am satisfied that the sum claimed for the loss, namely $89,562.73, was thus incurred while RSE was the holding company.

Conclusions as to liability and quantum

71. I am comfortably satisfied that, subject to the additional findings concerning the “safe harbour” provisions set out below, the plaintiffs have established both the right of recovery and the quantum sought.

The Covid-19 argument

72. The defendants submit that, in the period from 25 March 2020 until 31 December 2020, s 588G(2) did not apply to Mrs Shin by virtue of the operation of s 588GAAA of the Corporations Act 2001 and Corporations Regulation r 5.7B.01. This is because s 588H(2) of that Act provides that it is a defence if the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent despite all its debts incurred, and dispositions of its property made, at that time. This is generally referred to as the “safe harbour” defence.

73. The explanatory memorandum for the Coronavirus Economic Response Package Omnibus Bill 2020 sets out, at paragraphs 12.18 – 12.20, that a director is taken to have incurred a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the period when the lockdown took place. For example, directors’ or company loans to fund the business, or the continued payment of employees, would be covered. However, any person wishing to rely on the new temporary safe harbour where unlawful insolvent trading was alleged to have occurred must satisfy the evidential burden of pointing not only to a reasonable possibility of solvency, but that the debt was incurred in the ordinary course of the company’s business for a debt incurred during the six-month period.

74. I restate my earlier observations concerning proof of insolvency at a particular time of a company’s history. In Re Swan Services Pty Ltd (in liq) [2016] NSWSC 1724; 12 BFRA 224 at [220], Black J explained that in order to establish an expectation that the company is solvent for the purposes of s588H(2), a director must establish a measure of confidence or actual expectation that the company is solvent, as opposed to a mere hope or possibility of solvency. The grounds upon which the director forms that view must be reasonable when considered objectively in the light of the relevant circumstances, and the director must have a reasonable basis for such expectation (citing Tourprint International Pty Ltd (in liq) v Bott [1999] NSWSC 581; (1992) 32 ACSR 201 at 215). In Tourprint International Pty Ltd (in liq) v Bott, Austin J stressed that the use of the word “expectation” requires an actual expectation of the company was and would continue to be solvent, and that the grounds for so expecting were reasonable. A director could not hide behind ignorance of the company’s affairs which was of their own making, or even if not entirely their own making, had been caused by or contributed to by their own failure to carry out enquiries. Such cases generally turn upon their own facts, as was noted by Palmer J in Hall v Poolman at [275], adding:

“These questions and answers merely serve to illustrate that when a company is struggling to pay its debts, the directors must face up to the issue of insolvent trading directly and with brutal honesty: they must not shirk from asking themselves the hard questions and from acting resolutely in accordance with the honest answers to those questions.”

75. Both parties submitted that this was the first occasion when the issue of Covid-19 measures to protect companies in financial difficulties needed to be factored into the case (plaintiff’s submissions, paragraph 180). Mr Baird submitted that the protection was so extensive that no company could be deemed insolvent during this “safe harbour” period. Certainly, the possibility of such a broad approach arising was clearly foreseen. In “Some recent case law and statutory developments in insolvency”, ARITA conference 12 November 2020, Justice Ashley Black of the Supreme Court of New South Wales commented:

“These provisions are likely preserving many companies which are under temporary financial pressure, as a result of the COVID-19 pandemic from the consequences of insolvency or near insolvency. There is obviously a risk that they are also preserving the operation of companies which would be insolvent irrespective of the COVID-19 pandemic and exposing creditors to continuing risk in dealing with those companies. Industry expectations for 2021 suggest a significant increase in winding up applications, many of which may be uncontested, with a flow on increase in preference and uncommercial transaction claims in windings up which may be seen in 2021-2022, subject to the impact of the Government’s proposed debt restructuring and liquidation reforms, which I also note below.”

76. However, I do not consider that this amounts to an acceptance that companies already insolvent for nine months before the “safe harbour” period commenced would be given a free ride for being insolvent before and after the period or, for that matter, have a “let off” for the period in between. These emergency provisions did not change the test for insolvency, nor should it impact on whether a court will find a company insolvent; it suspends the directors’ civil liability during the relief window. According to the regulation, this “safe harbour” window was for the period 25 March 2020 to 31 December 2020. Once a company becomes insolvent, it remains insolvent.

77. For the reasons set out above, I am satisfied that the company was already insolvent from at least 30 June 2019, nine months prior to this period. Sorenzo was a mere shell and incapable of carrying out any business yielding a profit.

78. In addition, I note that the evidential burden lies on the director (plaintiff’s submissions, paragraphs 178 and 179). I am merely asked to infer the legislative exemption applies from the simple existence of the dates in question. However, there is no correlation between those dates and the company’s insolvency.

79. I note that there appears to be some uncertainty as to whether the safe harbour is complementary to, or operates separately from, pre-existing safe harbour protections (plaintiff’s submissions, paragraph 183). This company was not trading for at least nine months prior to the lockdown as it had been locked out of its premises, so it is not necessary for me to resolve this inconsistency but if it were, I would accept the argument put forward by the plaintiffs at paragraphs 184 – 186 of their submissions, including any attempt to rely upon a safe harbour defence by the second defendant (although this was not put forward in the course of the hearing before me).

80. The defendants’ reliance on the safe harbour provision accordingly fails.

Conclusions and orders

81. Costs should follow the event. However, I was not addressed as to costs or interest, and have granted liberty to apply.

82. I make the following orders:

83. Judgment for the plaintiffs against the first defendant in the sum of $275,129.12.

84. Judgment for the plaintiffs against the second defendant in the sum of $89,562.30.

85. Defendants pay plaintiffs’ costs, with liberty to apply concerning interest and costs, such liberty to be exercised within 14 days.

86. Exhibits retained until further order.

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