Quin v Vlahos [2021] VSCA 205

INSOLVENCY - Principles for determining which accounts can be used by liquidator in support of contention that company is insolvent - Whether only 'reconciled' accounts can be used - Whether judge failed to apply correct principles - Stone v Melrose Cranes & Rigging Pty Ltd [No 2] (2018) 125 ACSR 406; [2018] FCA 530 considered - Appeal allowed.

INSOLVENCY - Principles for determining insolvency - Indicators of insolvency - Deemed insolvency where company fails to keep or retain financial records - Books of company prima facie evidence of contents - Whether judge erred in finding that liquidator failed to establish company insolvent as at 1 January 2014 or alternatively 10 April 2014 - Australian Securities and Investments Commission v Plymin (2003) 175 FLR 124; [2003] VSC 123 applied - Appeal allowed - Corporations Act 2001 (Cth) ss 95A, 286, 588E(4), 1305, 1306.

CORPORATIONS - Transactions entered into after company became insolvent - Goods supplied on 'sale or return' basis - Whether company had 'unavoidable obligation' to pay so as to constitute a debt - Whether director was not taking part in management of company due to illness - Director failed to discharge burden of proof - Whether debts relating to supply of goods subject to retention of title clause were 'wholly or partly unsecured' - Where goods not available to be recovered as security - Whether creditors had surrendered security by proving for debt as unsecured creditor - Smith v Bone (2015) 104 ACSR 528; [2015] FCA 319; Australian Securities and Investment Commission v Plymin [2003] VSC 123; (2003) 175 FLR 124; [2003] VSC 123; Fryer v Powell (2001) 159 FLR 433; [2001] SASC 59; Swan Services Pty Ltd (in liq) (2016) 12 BFRA 224; [2016] NSWSC 1724; Hussain v CSR Building Products Ltd (2016) 246 FCR 62; [2016] FCA 392 considered - Appeal allowed - Corporations Act 2001 (Cth) ss 554E, 588D, 588E, 588G, 588H, 588M.

CORPORATIONS - Insolvent transactions - Unfair preferences - Payments by company to director after company became insolvent - Payments partially discharged loan from director to company - Whether director received a 'preference, priority or advantage' over company's other creditors - Transactions caused diminution in value of company's assets available to other creditors and were thus unfair - Stone v Melrose Cranes & Rigging Pty Ltd [No 2] (2018) 125 ACSR 406; [2018] FCA 530 considered - Appeal allowed - Corporations Act 2001 (Cth) ss 588FA, 588FC, 588FE, 588FG.

PART A: WAS COMPANY INSOLVENT AS AT 1 JANUARY 2014?

Provisions of Act relevant to Company's solvency

Legal principles relating to Company's solvency

Indicators of insolvency relied upon by the Liquidator at trial

Associate judge's reasons concerning Company's solvency

Parties' submissions on Company's solvency as at 1 January 2014

Decision on Company's solvency as at 1 January 2014

Availability of funds in Landlord Offset Account and Ms Hoang's account

Company's balance sheet as an indicator of insolvency

Conclusion on the Company's solvency as at 1 January 2014

PART B: WAS COMPANY INSOLVENT AS AT 10 APRIL 2014?

Parties' submissions on Company's insolvency as at 10 April 2014

Decision on the Company's solvency as at 10 April 2014

Provisions of Act and legal principles relevant to grounds 3 and 4

Evidence and submissions at trial concerning remedies for insolvent trading

Associate judge's reasons concerning insolvent trading

Whether requirements of s 588G of the Act satisfied

Whether debts upon which Liquidator relied properly characterised as debts

Whether a defence under s 588H of the Act was made out

Relief to be granted to the Company under s 588M of the Act

Provisions of Act and legal principles relevant to grounds 5 and 6

Evidence at trial concerning unfair preferences and parties' contentions

Associate judge's reasons concerning remedies for unfair preferences

Conclusion on s 588FA of the Act: Unfair preferences

Conclusion on s 588FC of the Act: Insolvent Transactions

Conclusion on s 588FE(4) of the Act: Voidable transactions

Relief to be granted to the Company under s 588FF of the Act

1 The first applicant ('Liquidator') is the liquidator of the second applicant ('Company'). The respondent is the sole director and secretary of the Company.

2 On 12 July 2017, the applicants applied to the Trial Division for relief on the basis that the Company was insolvent as at 1 January 2014 or, alternatively, 10 April 2014.[1] They claimed that the respondent had engaged in insolvent trading contrary to s 588G of the Corporations Act 2001 (Cth) ('Act') and sought compensation orders pursuant to s 588M.[2] They also sought declarations that certain payments made by the Company to the respondent were voidable against the Liquidator pursuant to ss 588FA, 588FC, 588FDA, 588FE and 588FF of the Act because they were either unfair preferences (and thus insolvent transactions) or unreasonable director‑related transactions.

3 The Trial Division proceeding was heard by an associate judge. The respondent appeared for himself at trial.

4 On 27 March 2020, the associate judge dismissed the proceeding on the basis that the applicants had failed to establish that the Company was insolvent as at 1 January 2014 or any other date.[3] The key findings that informed the associate judge's conclusion included the following:

(a) The funds that were available to the Company to pay its debts included funds in an offset account in the name of the respondent and an account in the name of his wife, Lieu Hoang.

(b) The applicants' claims were based on unreconciled accounts.

5 On 8 May 2020, the applicants applied for leave to appeal against the associate judge's decision. Initially, they relied upon eight grounds of appeal.[4] However, at the hearing of the application, they abandoned grounds 7 and 8, which dealt with unreasonable director-related transactions. Grounds 1 to 6 may be summarised as follows:

(a) The associate judge should have found that the Company was insolvent as at either 1 January 2014 or 10 April 2014 and made consequential declarations and compensation orders relating to insolvent trading by the respondent pursuant to ss 588G and 588M of the Act (grounds 1 to 4).[5]

(b) The associate judge should have declared that certain payments were insolvent transactions under s 588FC of the Act - because they were unfair preferences under s 588FA - and therefore voidable against the Liquidator pursuant to s 588FE(4) (grounds 5 and 6).[6]

6 The respondent appeared for himself before us. Although he is not legally qualified, he was able to understand and address in an articulate manner the legal and factual issues in the case.

7 For the reasons that follow, the application for leave to appeal will be granted, the appeal will be allowed and the Company will be granted the relief set out at [336] below.

8 The Company was incorporated in 2007 and acted as trustee of the Roderick Trust ('Company Trust'). As trustee of the Company Trust, the Company operated a book‑selling business under the name of 'Encompass Books'. The business had a store in Melbourne and a store in Adelaide. The Company specialised in selling discounted books to students and its busiest period was at the commencement of each academic year.

9 The respondent had been a beneficiary of the Company Trust since its settlement in 2007.

10 The Melbourne store operated from a building owned by the Roderick Investment Trust ('Landlord Trust'). The respondent was the trustee of the Landlord Trust. The respondent, in his own capacity and as trustee for the Landlord Trust, held a business loan account (number 3685-61471) with the ANZ Bank. An ANZ Bank offset account (number 5728-41171) ('Landlord Offset Account'), which was associated with the business loan account, was held in the respondent's name.

11 The Company held three bank accounts with the ANZ Bank in its name: one for its Melbourne store numbered 4873-65684 ('Melbourne Bank Account'), one for its Adelaide store numbered 4873-65852 ('Adelaide Bank Account') and a 'business online' account numbered 2524-99362 ('Online Bank Account'). The Company also held a credit card (number 4564807003643010) with the ANZ Bank, which is described in the balance sheet at [91] below as 'ANZ Business One CC - #3010'.

12 In the course of 2013 and 2014, and possibly earlier, some of the Company's debts were paid from the Landlord Offset Account.

13 The Company kept its financial accounts using the MYOB software. The company was not required to have its accounts audited.

14 From 26 March until 15 or 17 April 2014, the respondent was an inpatient at the Alfred Hospital.[7] He claims that, due to his illness, he did not take part in the management of the Company from 18 February until 17 April 2014. In March and April 2014, some of the Company's debts were paid from the personal bank account of Ms Hoang held at the Commonwealth Bank.

16 On 10 April 2014, while the respondent was an inpatient at the Alfred Hospital, he visited the Port Melbourne branch of the ANZ Bank and withdrew $57,000 from the Company's Melbourne Bank Account and $81,000 from its Adelaide Bank Account. On the same day, he made two withdrawals totalling $515,549.32 ($40,000 and $475,549.32) from the Landlord Offset Account for purposes unconnected to the Company's business, leaving a balance of $858.94. One of the withdrawals from the Landlord Offset Account - in the amount of $475,549.32 - was used to pay out the respondent's business loan account which is referred to at [10] above.

17 On 13 May 2014, the respondent transferred the sum of $178,000 into the Melbourne Bank Account from an account in his own name.

18 On 15 May 2014, Macmillan Distribution Services Pty Ltd ('Macmillan') filed a complaint in the Magistrates' Court of Victoria against the Company. Macmillan claimed an amount of $31,624.71 for goods sold and delivered between 1 January 2014 and 31 March 2014.

19 On 22 May 2014, John Wiley & Sons Australia Ltd ('John Wiley') commenced a proceeding in the District Court of Queensland. By an amended statement of claim dated 14 August 2014, John Wiley claimed $133,357.63 against the Company for unpaid goods in respect of the period 17 February 2014 to 15 May 2014 and the same amount against the respondent pursuant to a deed of guarantee and indemnity.

20 On 17 June 2014, Macmillan obtained judgment against the Company in the amount of $33,564.98, inclusive of interest and costs. Macmillan served a statutory demand upon the Company on 19 June 2014 in respect of that judgment.

21 On 21 July 2014, Cambridge University Press obtained judgment against the Company in the Magistrates' Court of Victoria for goods sold and delivered in the amount of $4,333.30, comprising $3,470.39 for an invoice dated 14 April 2014,[8] $31.71 for interest and $831.20 for costs. On 22 July 2014, the lawyers for Cambridge University Press wrote to the Company demanding payment of the total amount within seven days.

22 On 21 July 2014, McGraw-Hill Education (Australia) Pty Ltd ('McGraw-Hill') commenced a proceeding in the County Court of Victoria against the Company. McGraw-Hill claimed $129,515.91 for unpaid books delivered between 17 December 2013 and 1 May 2014.

23 On 24 July 2014, Macmillan filed an application in the Trial Division to wind up the Company ('Winding Up Application').

24 On 22 August 2014, the respondent appointed Peter Gountzos and Michael Caraffa of SV Partners to be administrators of the Company ('Administrators'), pursuant to a resolution the respondent made as the sole director under s 436A of the Act.

25 On 27 August 2014, the Liquidator was appointed as liquidator of the Company pursuant to a court order in the Winding Up Application.[9] The relation‑back day for the purposes of ss 588E(3) and 588FE(4) of the Act, which are discussed below, is the date the Company's voluntary administration began, namely, 22 August 2014.[10] The Company's voluntary administration was terminated by an order dated 27 August 2014.

26 In the director's questionnaire dated 3 September 2014 ('Director's Questionnaire'), the respondent's answers to various questions - which he certified were 'true and complete to the best of [his] knowledge and belief' - included the following:

14 What were your duties?

• Day to day management of business as a whole.

...

1. Who was responsible for the day to day management of the company?

• David.

...

21 What books and records were kept by the company? ...

• Financial statements

• Income tax returns

• MYOB accounting system

• Invoices.

1. What steps did you take to ensure that the books and records were properly kept?

• Bookkeeper hired, external accountant, reconciliation done, separation of duties - segregation - David checked every month.

...

1. How often were balance sheets and profit and loss accounts prepared for the company and how long was it after the end of each relevant financial period before such [accounts] became available.

• Prepared yearly, statements every 3 months - just in time for lodgement with the ATO.

...

1. What steps did you take to satisfy yourself that the balance sheets and profit and loss accounts were correct?

• Segregation of duties, three levels of accounting.

...

1. (a) Is there any unremitted Goods & Services tax ('GST') owing to the Commissioner of Taxation?

Yes, but unsure of the quantum of debt.

(b) Was GST remitted regularly?

Yes, except for the last 12 months.

(c) If not, why?

• Cashflow problems

• Trouble of getting information from the system.

(d) When did delays first occur?

Late 2012.

...

1. When did you first realise that the company might have to go into liquidation?

1. What caused you to realise this? What did you do as a result?

• Pressure exerted by creditors.

• Manager didn't prepare accurate reports (falsified).

...

1. What do you consider were the causes of the failure of the company.

• Company was sabotaged - Perpetrators unknown.

• Manager of store resigned which caused internal problems.

27 In response to question 28 of the Director's Questionnaire, which asked about bank accounts, the respondent referred to 'ANZ - two accounts - business accounts' and stated that he was the sole signatory of the accounts. In response to question 31, which asked about whether the Company had 'alternative sources of finance available to it' apart from 'the company's financiers at the date of liquidation', the respondent answered 'No'.

28 On 10 March 2015, the applicants' solicitors, Thomson Geer, sent a letter to the respondent, requesting that he account for payments received by him from the Company in the amount of $1,167,000. The respondent's former solicitors, Barrett Walker Lawyers, sent a letter to Thomson Geer on 25 March 2015, denying all liability.

29 In an insolvency report dated 30 May 2017, the Liquidator stated that the Company was insolvent from 1 January 2014. That report was prepared after an investigation by the Liquidator, which included the following steps:

(a) reviewing an undated report as to affairs submitted by the respondent in the Company's voluntary administration;

(b) reviewing a report as to affairs submitted by the respondent dated 27 August 2014;

(e) obtaining and reviewing the Company's bank statements;

(f) reviewing the Company's MYOB accounting records;

(g) reviewing the books and records of the Company provided by the Administrators and the respondent;

(j) reviewing financial records provided by the Company's accountants, Carrington Myers; and

30 On 19 June 2017, Thomson Geer sent a letter of demand to the respondent. The letter asserted that the Company was insolvent as at 1 January 2014 and sought payment in the sum of $1,591,873.44 from the respondent. The respondent replied by email on 28 June 2017. He denied that the Company was insolvent from 1 January 2014 and refused to make payment.

31 As stated at [2] above, the applicants commenced a proceeding in the Trial Division against the respondent on 12 July 2017 seeking relief under the Act.

32 Following discovery of further financial records by the respondent at trial, the Liquidator prepared a supplementary insolvency report dated 23 November 2018 ('Insolvency Report'). In the Insolvency Report, the Liquidator confirmed his view that the Company was insolvent from at least 1 January 2014. The Insolvency Report is discussed in more detail below.

33 As stated at [4] above, on 27 March 2020, the associate judge dismissed the proceeding. His reasons are discussed in detail below.

34 The outcome of all the grounds of appeal upon which the applicants seek to impugn the associate judge's decision depends upon whether the Company was insolvent as at 1 January 2014 or as at 10 April 2014. Accordingly, the balance of this judgment is divided into the following parts:

Part A: Was the Company insolvent as at 1 January 2014?

Part B: Was the Company insolvent as at 10 April 2014?

Part C: Decision on grounds 1 and 2

Part D: Remedies for insolvent trading

35 Grounds 1 and 2 will be discussed in Parts A, B and C, grounds 3 and 4 will be discussed in Part D, and grounds 5 and 6 will be discussed in Part E.

PART A: WAS THE COMPANY INSOLVENT AS AT 1 JANUARY 2014?

Provisions of Act relevant to Company's solvency

36 Section 95A of the Act defines solvency and insolvency in the following terms:

95A Solvency and insolvency

(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.

(2) A person who is not solvent is insolvent.

37 Section 588E(4) of the Act provides that, for the purposes of certain proceedings - including proceedings by a liquidator against a director under ss 588FF and 588M - if a company has failed to keep or retain financial records in relation to a period as required by s 286, it is presumed to have been insolvent throughout that period. However, sub-ss 588E(5) and (9) provide that the presumption is rebuttable and does not apply where a contravention of s 286(1) 'is only minor or technical'. Section 588E(3) further provides that, if it is proved that a company was insolvent at a particular time during the 12 months ending on the relation-back day, it is presumed to have been insolvent throughout the period from that time until the relation-back day.

38 Section 286 of the Act relevantly provides as follows:

286 Obligation to keep financial records

(1) A company ... 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: Section 9 defines financial records.

Period for which records must be retained

(2) The financial records must be retained for 7 years after the transactions covered by the records are completed.

1305 Admissibility of books in evidence

(1) A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.

(2) A document purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).

40 Section 1306(5) of the Act further provides as follows:

If:

(a) because of this Act, a book that this Act requires to be kept or prepared is prima facie evidence of a matter; and

(b) the book, or a part of the book, is kept or prepared by recording or storing matters (including that matter) by means of a mechanical, electronic or other device;

a written reproduction of that matter as so recorded or stored is prima facie evidence of that matter.

41 Section 9 of the Act defines 'books' to include a register; any other record of information; financial reports or financial records, however compiled, recorded or stored; and a document.

Legal principles relating to Company's solvency

42 The legal onus of proving that a company is insolvent is on the person alleging insolvency.[11]

43 In Queensland Phosphate Pty Ltd v Korda [No 2], this Court summarised the principles for determining whether a company is insolvent as follows:

The applicable test as to insolvency was stated by Barwick CJ (with whom McTiernan and Windeyer JJ agreed) in Sandell v Porter as follows:

Insolvency is ... 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 realisation 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.

The above test has been applied by this Court. It has been said that s 95A of the [Act] adopts a cash flow test of insolvency which focusses on the liquidity and viability of the business. The test focusses upon whether a company is 'able' to pay its debts rather than whether it is 'willing and able' to do so.

Whether a company is insolvent for the purposes of s 95A of the [Act] is a 'question of fact to be ascertained from a consideration of the company's financial position taken as a whole'. In considering the company's financial position as a whole, the court must have regard to commercial realities, which will be relevant in considering the resources available to the company to meet its liabilities as and when they fall due. Commercial realities include the nature of the company's business, the character of the debt and all of the circumstances present at the relevant time.

...

The test of insolvency in s 95A of the [Act] is to be applied 'without intrusion of hindsight'.[12]

44 In Australian Securities and Investments Commission v Plymin, Mandie J referred to the following 14 general and non-exhaustive indicators of insolvency:

1 Continuing losses.

2 Liquidity ratios below 1.

3 Overdue Commonwealth and State taxes.

1. Poor relationship with present bank, including inability to borrow further funds.

5 No access to alternative finance.

6 Inability to raise further equity capital.

1. Suppliers placing [company] on [cash on delivery], or otherwise demanding special payments before resuming supply.

8 Creditors unpaid outside trading terms.

9 Issuing of post-dated cheques.

10 Dishonoured cheques.

11 Special arrangements with selected creditors.

1. Solicitors' letters, summons[es], judgments or warrants issued against the company.
2. Payments to creditors of rounded sums which are not reconcilable to specific invoices.
3. Inability to produce timely and accurate financial information to display the company's trading performance and financial position, and make reliable forecasts.[13]

45 Although s 95A of the Act adopts a cash flow test of insolvency rather than a balance sheet test, a deficiency of assets over liabilities in a company's balance sheet can be used as a non-conclusive indicator of insolvency.[14]

46 The question whether funds held by a third party may be treated as funds available to pay a company's debts as and when they become due and payable has been considered in a number of cases.

47 In Lewis v Doran,[15] Giles JA (with whom Hodgson and McColl JJA agreed) accepted that funds available to a company from third parties could be taken into account in assessing the company's solvency. He stated as follows:

[T]here is no compelling reason to exclude from consideration funds which can be gained from borrowings secured on assets of third parties, or even unsecured borrowings. If the company can borrow without security, it will have funds to pay its debts as they fall due and will be solvent, provided of course that the borrowing is on deferred payment terms or otherwise such that the lender itself is not a creditor whose debt can not be repaid as and when it becomes due and payable. It comes down to a question of fact, in which the key concept is ability to pay the company's debts as and when they become due and payable.

...

Provision of funds by a third party on the security of the company's assets is voluntary - the third party can decline. Voluntariness is material to whether the company is able to acquire funds, as part of ability to pay its debts as and when they become due and payable, but if the evidence establishes that the company is able to obtain funds, albeit they are voluntarily provided, that can suffice.[16]

48 In Lewis, a corporation that was related to the company advanced funds to it which were apparently repayable on demand. Giles JA stated that it was important that it was not suggested that those funds were to be regarded as immediately repayable, nor that their provision was in breach of the directors' duties owed to the related corporation.[17]

49 In Williams v Scholz, Muir JA held that, when determining whether third‑party funds were available to ensure a company's solvency, '[t]he most important consideration is the degree of commitment to the continuation of financial support'.[18]

50 In International Cat Manufacturing Pty Ltd (in liq) v Rodrick, in reference to loans from a director or related company, Morrison JA (with whom Holmes and Gotterson JJA agreed) stated that 'regard can be had to such financial support where the evidence establishes that the directors are likely to continue it'.[19]

51 As clarified in Chan v First Strategic Development Corporation Ltd (in liq), the provision of funds does not need to be free of any uncertainty or contingency in order to contribute to the solvency of a company.[20] Morrison JA (with whom Gotterson JA and Boddice J agreed) explained as follows:

[I]n cases where the financial support is from a source which cannot be compelled by legal arrangement, ... there [must] be a degree of assuredness that the financial support will be forthcoming and at such a level that one could say the company was able to pay its debts as and when they fall due, rather than being possibly able to do so. Just as a conclusion that the relevant financial support does not have to be absolutely certain in order to be sufficient to meet the test in Lewis v Doran, Scholz and International Cat, equally the financial support does not have to be absolutely uncertain in order to be insufficient to qualify. Between the two extremes the factual circumstances of each case will provide a variety of points at which one might conclude that the financial support was of such a degree of commitment that it was likely to continue, and with the result that the company was able to pay its debts, and therefore that it has sufficient financial support to draw the conclusion of solvency.

However, in my view there is no benefit in attempting to achieve some precise formula as to likelihood, by reference to which the financial support qualifies or does not. To say that the likelihood of it being provided is 'probable' or 'improbable' adds no more to what has been said in the authorities to which I have referred. Given that the resolution of this issue will almost always depend upon an assessment of facts, in my view it is better to proceed on the basis that, where the financial support is being provided by a director or related entity, and in circumstances where there is no formalised agreement or understanding, what is required is cogent evidence which enables the court to conclude that there is such a degree of commitment on the part of the provider of the financial support to continue it, such that it can be said that at any point of time it was likely to be continued, with the result that, at any of those times, the company was able to pay its debts as and when they fell due.[21]

52 In Chan, one of the directors of the company had the financial resources to assist it to meet its debts and gave evidence of his willingness to do so. He paid some of the company's debts but not others. The Queensland Court of Appeal upheld the primary judge's finding that the director's willingness to financially assist the company was qualified and that his actions did not match his stated intention to assist. Morrison JA agreed with the primary judge's conclusion that the director's preparedness to financially support the company had to be assessed objectively against what he did and did not do, rather than on the basis of what he said was in his mind. Morrison JA found that the director's 'degree of commitment was low, and insufficient to meet the tests in ... Scholz and International Cat'.[22]

53 In Miles v Editshare Asia Pacific Pty Ltd (in liq),[23] Fraser JA (with whom Henry and Bradley JJ agreed) applied the 'degree of commitment' test set out in Chan. He held that the test was not satisfied in that case because there was no evidence identifying the nature of the suggested financial support, its monetary value, any commitment or arrangement of any kind to provide such support or its terms, or the time when such support was to be supplied.[24]

54 In Featherstone v Ashala Model Agency Pty Ltd (in liq),[25] Mr Featherstone was the beneficial owner of the shares in, and effective controller of, Ashala Model Agency Pty Ltd ('Ashala'). Mr Featherstone and Ashala executed a deed by which he undertook to indemnify Ashala against 'all costs, claims and expenses'. The Queensland Court of Appeal upheld the primary judge's finding that the deed was insufficient to establish that Ashala had a sufficiently reliable source of funds from Mr Featherstone because he had no intention of honouring its terms.[26] McMurdo JA considered that the fact that Mr Featherstone controlled Ashala meant that Ashala could not compel him to provide financial assistance unless he chose to do so and, therefore, his resources did not enable Ashala to pay its debts unless he decided that he would support Ashala.[27]

55 In Treloar Constructions Pty Ltd v McMillan,[28] the New South Wales Court of Appeal found that 'the bare possibility of funding' raised in a letter of intent was not a promise of funding and could not be considered an available resource to the company.[29] In that case, the letter of intent specified that certain steps be taken, including a formal funding letter, which never eventuated.[30]

56 The availability of a loan will not contribute to solvency where it is for a very short term, such as 30 days, and on onerous terms because it merely substitutes one form of immediate obligation for another.[31] However, a loan which is technically repayable on demand will not be treated as immediately due and payable for the purposes of assessing solvency where there is evidence that the lender does not intend to demand repayment prior to a particular event occurring.[32]

57 Whilst the legal onus to prove insolvency rests with the party alleging insolvency, the party alleging that an inference that a company was insolvent should not be drawn because third‑party funds were available to it bears an evidentiary onus on this issue.[33] It is not sufficient to merely assert that a third party was willing and able to provide sufficient funds to enable the company to discharge its debts.[34] Rather, the third party's preparedness to fund the company is assessed by reference to the objective evidence.

58 In relation to the evidentiary status of a company's financial accounts under s 1305 of the Act, in Australian Securities and Investments Commission v Rich, Austin J stated as follows:

The statement in s 1305(1) that the company's books are prima facie evidence of a matter stated or recorded in them does more than merely to convey that they are the starting point to proof or a 'first view'. All other things being equal, the fact that a matter is stated in a book kept by a company is sufficient to prove that matter in civil proceedings. That does not reverse the onus of proof in the proceedings in any general way, but it means that the tendering of the book is evidence of the matter recorded in it, and that matter will be thereby proven unless other evidence convinces the tribunal of fact to the contrary, on the balance of probabilities.[35]

59 The authorities have not formulated a test for determining whether any particular accounts of a company may or may not be relied upon to determine its solvency at any particular time. Clearly, where a company has one set of accounts which are comprehensive, internally consistent, and prepared by an independent firm of accountants, one would have a greater degree of confidence in relying upon those accounts compared to a situation where a company has multiple sets of accounts which are incomplete, inconsistent and prepared by employees without any accounting qualifications.

60 In Stone v Melrose Cranes & Rigging Pty Ltd [No 2],[36] the liquidators of a company ('CPS') brought an unfair preference claim against one of CPS's suppliers ('Melrose Cranes'). Melrose Cranes submitted that the liquidators had not established that CPS was insolvent because their case rested upon MYOB records which were incomplete, inconsistent and otherwise manifestly defective. Markovic J found that CPS's MYOB records, including balance sheets and profit and loss statements the liquidators generated from them, were prima facie evidence of the matters they recorded pursuant to ss 1305 and 1306 of the Act. She held that, even with inaccuracies in CPS's financial records, the balance sheets and profit and loss statements could not be ignored in their entirety. That was because s 1305 operated in the liquidators' favour and there was evidence which corroborated aspects of CPS's financial records.[37]

61 There is no general principle that a liquidator cannot rely upon accounts to establish that a company was insolvent at a particular time unless those accounts are 'reconciled' with other available accounting information. The critical question is whether the accounts are, objectively, sufficiently reliable - when considered with the other evidence in the case - to enable the court to determine the company's solvency at the relevant time. If they are, the liquidator does not have to undertake an exhaustive process of comparing the accounts with all other available accounting information for the purpose of resolving all possible inconsistencies between them.

62 In Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd, when summarising the legal principles which apply where a company seeks to avoid a winding up order upon failing to comply with, or set aside, a statutory demand, Weinberg J relevantly stated as follows:

The [company] is presumed to be insolvent and as such bears the onus of proving its solvency.

In order to discharge that onus the Court should ordinarily be presented with the 'fullest and best' evidence of the financial position of the [company].

Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared.[38]

63 As these statements concern the evidence required to rebut a presumption of insolvency raised by a failure to comply with, or set aside, a statutory demand, they do not support a general proposition that unaudited or unreconciled accounts cannot be used for the purpose of drawing an inference of insolvency.

64 In the Insolvency Report, the Liquidator stated that he was provided with eight sets of accounts for the Company, namely:

(a) the original MYOB records provided to him on 5 September 2014 ('original MYOB accounts');

(b) electronic MYOB records forwarded to him by Carrington Myers on 12 January 2018;

(c) electronic MYOB records forwarded to him by Carrington Myers on 3 April 2018 ('CM April 2018 accounts');

(d) the hard-copy records exhibited as DV-5 to the respondent's affidavit dated 8 November 2017;

(e) the hard-copy records exhibited as DV-5 to the respondent's affidavit dated 6 February 2018;

(f) the hard-copy records exhibited as DV-7 to the respondent's affidavit dated 6 February 2018;

(g) the hard-copy records exhibited as DV-4 to the respondent's affidavit dated 26 February 2018; and

(h) electronic records supplied by Carrington Myers in response to a subpoena and received on 26 September 2018.

65 In the Insolvency Report, the Liquidator noted that items (c) and (h) above were substantially the same. He observed inconsistencies in items (c) to (g) above relating to the total debits and credits for 66 MYOB account codes. He said that, '[d]ue to the inconsistencies in the various sets of accounts, [he had] limited [his] analysis to the original MYOB [accounts], CM April 2018 MYOB [accounts] and historical accounts'.

66 In his closing submissions at trial, counsel for the applicants submitted that, due to the different permutations of the documents provided to the Court, the associate judge could not be sure as to which is the true set of accounts or the more accurate set of accounts. He contended that it was open to the Court to determine that the Company ought to be presumed insolvent under ss 286 and 588E(4) of the Act.[39] This submission was made despite the fact that, in the Insolvency Report, the Liquidator referred to s 286 of the Act and stated that 'the company maintained sufficient books and records to enable financial accounts to be prepared and audited'.

67 The Liquidator gave evidence that he relied primarily upon the original MYOB accounts and the CM April 2018 accounts in preparing the Insolvency Report because those accounts were provided to him by Carrington Myers. Counsel for the applicants also informed the associate judge that, as the CM April 2018 accounts effectively coincided with the accounts produced by Carrington Myers on subpoena, the applicants relied upon the CM April 2018 accounts as the correct accounts.

68 The respondent submitted at trial that the financial records upon which the Liquidator relied to establish the Company's insolvency - including the CM April 2018 accounts - could not be relied upon for that purpose because they were unreconciled.[40]

69 As will be seen below, notwithstanding the parties' criticisms of the CM April 2018 accounts, they both placed reliance upon them.

Indicators of insolvency relied upon by the Liquidator at trial

70 In the Insolvency Report, the Liquidator claimed that the Company was unable to meet its debts as and when they fell due as at 1 January 2014 for six reasons, which we summarise at [71]-[80] below.

71 First, the Company had a history of being unable to meet its statutory tax obligations as and when they fell due. The Australian Taxation Office ('ATO') lodged a formal proof of debt. That proof of debt detailed a total amount of $42,555.34 outstanding to the ATO at the date of liquidation. That amount comprised: $850 for a penalty for failure to lodge an income tax return for the 2013 financial year; $35,160.37 for the 'Running Balance Account deficit debt in respect of BAS amounts as at 26 August 2014'; and $6,544.97 for the superannuation guarantee charge (inclusive of interest and penalties).[41] The debt to the ATO may be substantially higher as the Company had not lodged 10 monthly activity statements (including for July, August, October and November 2013) and six quarterly activity statements (including for the June, September and December 2013 quarters) in the period June 2013 to September 2014, nor income tax returns for the 2008, 2013, 2014 and 2015 financial years.

72 In addition, the Company was unable to meet its statutory obligations to pay employees' superannuation entitlements as and when they fell due. Between 18 July 2013 and 17 April 2014, REST Industry Super issued three overdue contributions notices to the Company in relation to the June 2012, September 2012, December 2012, March 2013, June 2013, September 2013 and December 2013 periods. The CM April 2018 accounts list the Company's outstanding superannuation obligations as at 30 June 2013 as $56,162.91. The Company was obliged to pay a superannuation guarantee charge - as set out in the ATO's proof of debt - because it had failed to pay superannuation contributions to REST Industry Super by the due dates.

73 Secondly, 81 creditors (including the ATO and Macmillan) had debts which were incurred in 2013 or earlier and remained outstanding. The Liquidator stated that he identified those 81 creditors from documents discovered by the respondent and that he was unable to fully reconcile those aged payables to various other documents provided, nor to the creditors disclosed in the report as to affairs, as the material supplied to him by the respondent did not contain a copy of all the invoices.

74 Thirdly, the Company's books and records revealed that it had many debts that extended beyond the trading terms set by its trade and essential service suppliers. There was a steady decline in the Company's ability to repay creditors as and when debts fell due during the period from 30 June 2013 until 24 July 2014. According to the CM April 2018 accounts, as at 30 June 2013, debts remaining unpaid for more than 90 days totalled $97,914.14 (35.6 per cent) compared to $242,487.34 (87.2 per cent) as at 31 December 2013. As at 31 March 2014, debts unpaid in excess of 90 days totalled $146,789.98 (12.6 per cent). As at 31 December 2013, the original MYOB accounts showed total aged payables of $349,008.25 and the CM April 2018 accounts showed total aged payables of $278,028.75.

75 Fourthly, based upon the CM April 2018 accounts, the Company was technically insolvent - in that its liabilities exceeded its assets - as at 30 June 2014. The Company was also technically insolvent based upon financial statements prepared by Carrington Myers for the 2012 and 2013 financial years ('CM 2012 and 2013 Financial Statements'). The Liquidator produced the following table summarising the Company's financial position based on the CM April 2018 accounts, the original MYOB accounts and the CM 2012 and 2013 Financial Statements:

76 Fifthly, although the working capital ratio[42] suggested the Company may have had sufficient working capital, the quick asset ratio[43] indicated that the Company had insufficient liquid assets to cover its current debts as and when they fell due, as at 30 June 2012, 30 June 2013 and 30 June 2014. The Liquidator produced the following table summarising the Company's quick asset ratios:

77 The Liquidator produced the following table summarising the Company's working capital ratios:

78 The Liquidator stated in the Insolvency Report that he suspected that, based upon the estimated realisable value of inventory as at the date of liquidation, the inventory figure was overstated as at 30 June 2013 and 30 June 2014. This would worsen both the working capital ratio and the quick asset ratio.

79 Sixthly, the CM April 2018 accounts and the CM 2012 and 2013 Financial Statements indicated that the Company was trading at a loss. The original MYOB accounts suggested that the Company made a minimal profit for the year ended 30 June 2013. The Liquidator produced the following table summarising the Company's profit and loss statements:

80 However, the CM April 2018 accounts did not contain monthly closing stock figures. Without this, the profit and loss statements generated from those accounts do not reflect an accurate representation of the trading. Moreover, a closing stock figure of $309,937.94 was recorded on 12 May 2014 in a general journal entry, which is substantially higher than the net realisable value of stock. These matters would have the effect of increasing the loss incurred by the Company.

81 The Liquidator exhibited to his affidavit sworn on 23 November 2018 bank statements for the Melbourne Bank Account and the Adelaide Bank Account for the period from 24 December 2013 until 3 October 2014 and the Online Bank Account for the period from 5 June 2013 until 5 June 2014. Those statements show that the Company held a total amount of $40,065.49 in those accounts as at 1 January 2014, comprising $25,811.09 in the Melbourne Bank Account, $14,247.36 in the Adelaide Bank Account and $7.04 in the Online Bank Account.

82 The Liquidator also exhibited to his affidavit sworn on 23 November 2018 a running balance account with the ATO in the name of the trustee for the Company Trust dated 1 October 2014. That running balance account recorded a total balance of $9,292.32 effective as at 27 December 2013 and a total balance of $9,482.54 effective as at 3 January 2014.[44] As noted at [71] above, the Company failed to lodge several business activity statements in the period from June 2013 until September 2014. For this reason, the Liquidator stated during examination-in-chief that the running balance account would have understated the Company's tax liabilities - in particular, GST and PAYG withholding tax - as at 1 January 2014.

83 The Liquidator further exhibited to his affidavit sworn on 23 November 2018 a letter from the ATO to the Company dated 18 September 2013. The letter stated that the ATO had received advice that the Company may not have met its superannuation guarantee obligations for the period from 1 October 2011 until 31 March 2013.

84 The Liquidator deposed in his affidavit sworn on 23 November 2018 that he wrote to the Company's major suppliers and was advised that, as at 27 August 2014, the Company owed $22,805.90 to Lippincott Williams & Wilkins, $180,161.50 to Cengage Learning and $126,483.43 to McGraw-Hill.

85 In his affidavit sworn on 6 February 2018, the respondent stated that the Company at all times maintained adequate MYOB records and kept bank statements as required by s 286 of the Act. He said that the Company maintained multiple copies of each record, allowing detailed accounts to be reconstructed, reconciled and audited if required. He claimed that the Liquidator had failed to liaise with Carrington Myers to audit, reconcile, reconstruct or finalise the Company's 2014 financial accounts.

86 In his affidavit sworn on 10 July 2018, the respondent stated that the Liquidator 'at all times had in his possession all the information required to prepare the company's financial statements for the year ending 30 June 2014 and to conclude pursuant to section 588E(4) of the Act the company was solvent from 1 January 2014'.

87 In his affidavit sworn on 6 February 2018, the respondent deposed that the first time he became aware that the Company may not be able to meets it debts was in April 2014. He stated that, at this time, suppliers - despite being contractually obligated - would not process or accept returns from the Company, nor would they continue to supply the Company. It was around this time that the Company ceased to trade. Under cross‑examination, he stated that, in April 2014, prior to the 10th of that month, he was of 'the opinion', 'the understanding' or the 'suspicion' that 'the company was insolvent', but '[a]s it turns out, that is not the case'.

88 At trial, the respondent's key contention was that the accounts relied upon by the Liquidator were unreconciled. He submitted that unaudited accounts, unverified claims of a company's inability to meet its financial obligations, and bald assertions of insolvency arising from a general review of the company's unreconciled and superseded accounts, would not ordinarily be sufficient to establish insolvency. During cross-examination, the respondent elicited evidence from the Liquidator that the original MYOB accounts were neither reconciled nor audited and that he had not reconciled them. The Liquidator also stated that he could rely upon the unreconciled MYOB records and that he did not have further evidence supporting that the total amount outstanding as at 1 January 2014 was $349,000.[45] The respondent conceded that the CM 2013 Financial Statements had been reconciled.[46]

89 According to the respondent, although the original MYOB accounts are comparatively incomplete, the CM April 2018 accounts 'contain almost all the company's transactions'.

90 The respondent placed some reliance on the CM April 2018 accounts despite the fact that they were unreconciled. For example, he tendered a balance sheet generated from the CM April 2018 accounts as at 30 June 2013.

91 The respondent criticised the Liquidator for not providing to the Court any balance sheet as at 1 January 2014 and tendered a balance sheet as at that date, which was generated from the CM April 2018 accounts. The respondent tendered that balance sheet partly in support of his contention that the balance of his 'Loan from David' loan to the Company as at 1 January 2014 was $500,596.35, rather than the amount of $218,558.57 contended by the Liquidator.[47] According to the respondent, the Liquidator's figure was based upon the incomplete original MYOB accounts. The balance sheet was as follows:

92 The respondent relied upon a loan agreement dated 16 March 2012 between himself as lender and the Company as borrower ('Loan Agreement'). The Loan Agreement characterised any advance of monies or other assets by the respondent to the Company within the term of the agreement as loans. The term was defined as the period of 20 years from the first advance from the respondent, namely, 16 October 2009. The loans advanced under the Loan Agreement were secured pursuant to a general security deed dated 16 March 2012.

93 In his affidavit sworn on 6 February 2018, the respondent asserted that no overdue amounts were owed to trade creditors by the Company as at 1 January 2014 and that the Company was solvent as at that date. He set out the credit balances as at 1 January 2014 in four bank accounts as shown in the relevant bank statements, which he stated constituted 'cash on hand (held at bank)' available to the Company. Those accounts were the Melbourne Bank Account, the Adelaide Bank Account, the Landlord Offset Account and an '[i]nvoice account' held at the ANZ Bank in the respondent's own name.[49] The respondent stated that, on that date, the funds in those accounts totalled $104,404.21, made up of the following credit balances:

(a) Melbourne Bank Account: $25,811.09;[50]

94 In his affidavits sworn on 10 July 2018 and 18 March 2019, the respondent instead relied upon the Company having access to only three bank accounts as at 1 January 2014, with a combined total balance of $105,110.41. Those accounts were the Melbourne Bank Account[51] with a balance of $25,811.09, the Adelaide Bank Account with a balance of $14,247.36, and the Landlord Offset Account with a balance of $65,051.96.[52]

95 In his affidavit sworn on 18 March 2019, the respondent stated that the Landlord Offset Account was attached to a loan account in his name in his own capacity and as trustee for the Landlord Trust and that all moneys held in the Landlord Offset Account 'were at all times available to the company'. He deposed that the Landlord Offset Account was used as a trading account by the Company and that all transactions to and from that account were properly recorded at year end in the Company's accounts. He stated that all money saved on interest payments on the linked loan account was a benefit to the Company.

96 In his affidavit sworn on 18 March 2019, the respondent deposed that the additional creditors listed in the Insolvency Report - such as 7-Eleven, Australia Post, Bunnings Warehouse, Officeworks and Amazon - were not creditors at all, but were 'simply unreconciled accounting entries consisting primarily of pro-forma invoices and tax invoices provided for cash payments'. He stated that these additional creditors had not been verified by the Liquidator and did not form part of the applicants' claim.

97 The respondent submitted that the aged payables detail summary relied upon by the applicants was erroneous because it was based upon unreconciled accounting entries between 2009 and 2013. He contended that, when a MYOB file is rolled over each financial year, any unreconciled invoices remain unreconciled in perpetuity. He argued that the transactions listed in the aged payables detail summary relied upon by the Liquidator either recorded $0 balances or the suppliers - namely, LexisNexis, Lippincott Williams & Wilkins and Thomson Reuters - agreed that there were no outstanding amounts prior to 1 January 2014.

Associate judge's reasons concerning Company's solvency

98 The associate judge rejected the applicants' reliance upon the presumption of insolvency in ss 286 and 588E(4) of the Act. He stated that, even though there were inconsistencies between the records, 'the 2018 records produced by Carrington Myers do record and explain the Company's transactions'.[53] As this finding appears to be inconsistent with the associate judge's conclusion that the Liquidator had not discharged his onus of proving that the Company was insolvent because the Liquidator relied upon 'unreconciled' accounts, we set out the associate judge's reasons in full:

In my view, KMS Imports v Wang can be distinguished because records have been produced. Even though there are inconsistencies between the records, the 2018 records produced by Carrington Myers do record and explain the Company's transactions. Records had been prepared and there were many records that the [applicants] can rely on.

The [applicants] also refer to Fisher v Divine Homes Pty Ltd, in which a liquidator ... did not have any books or records of the company and the director did not provide a report as to affairs. ...

The [applicants] submit that the situation is different here as books and records were kept but there are many permutations and the Court cannot be satisfied that proper books were kept. I agree that there is inconsistency in these accounts, but after viewing the accounts I do not agree that the [applicants] can rely on s 286 of the Act to deem insolvency. The Liquidator has looked at two sets of accounts and he has prepared his Insolvency Report based on those accounts. If the accounts were kept properly, an analysis of these accounts should demonstrate whether the Company was insolvent. I note that no one from Carrington Myers was approached to give evidence as to the status of the accounts. Further, no evidence was provided to the Court that either set of accounts relied upon were defective. However, there does appear to be inconsistencies in the June sets of accounts that were relied upon by the Liquidator to prove that the Company was insolvent as at 1 January 2014. Regardless, accounts were kept and the Liquidator had ample opportunity to test the veracity of the accounts.[54]

99 The associate judge's reasons for concluding that the Liquidator could not rely upon the Company's MYOB accounts to establish insolvency because they were unreconciled were as follows:

I am concerned that the Liquidator has used unreconciled accounts to calculate the tax owed. On the evidence provided I cannot accept that the statutory liabilities relied on by the Liquidator are correctly stated.

In his affidavit of 18 March 2019, the [respondent] submits that the Insolvency Report prepared by the Liquidator has severe conceptual flaws and contains financial inaccuracies. He claims that the Liquidator has not used all available evidence including bank statements, proofs of claims and financial records dated 24 May 2014 held by the previous administrators of the Company to determine the actual financial position of the Company as at 1 January 2014.

The Liquidator in the Insolvency Report has referred to what he looked at to determine whether the Company was insolvent. He did not refer to the records held by the previous administrators, however he states that he did receive them and that they were the same as the records of April 2014. ...

The records held by the previous administrators appear to be important because the [respondent] alleges that these were the proper records at the time and were not considered by the Liquidator. The Liquidator denies this. I have been given no evidence other than what was said by the Liquidator in cross examination as to whether the records received from the administrators are the same as the April 2014 records. On the evidence available I cannot be sure that that is correct. It would have been simple to provide both sets of accounts to the Court, however this was not done.

The [respondent] submits that the [applicants] were unable to produce any overdue invoices as of 1 January 2014 and relies mostly on technical indicators of insolvency. I note, however, that the Liquidator during cross‑examination was given two statements, one from United Book Distributors and another from LexisNexis.

...

These two examples of overdue payments are not of great assistance as an indicator of insolvency. The two debts are disputed and the explanations given by the [respondent] regarding these overdue payments are credible. I would have expected more examples of overdue statements to have been put by the [applicants] or provided to the Court.[55]

100 The associate judge noted that the Company's balance sheets were an important source to determine whether the Company was insolvent.[56] He stated that the five balance sheets that were before him all demonstrated that the Company's liabilities exceeded its assets. He said that, although he was not sure on the evidence which was the appropriate balance sheet and all of them were based upon unreconciled accounts, they were a non-conclusive indicator of insolvency.[57]

101 The associate judge specifically referred to the Company's balance sheet as at 1 January 2014, which is set out at [91] above. He noted that the balance sheet formed part of the CM April 2018 accounts and that the respondent relied upon it to cross-examine the Liquidator. He stated that '[t]his balance sheet, if based on correct information, is an indicator of insolv[58]cy'.58

102 The associate judge decided that the funds in the Landlord Offset Account and Ms Hoang's account were funds available to the Company to pay its debts for the following reasons:

The [Landlord] Offset Account may not be an account of the Company, but that does not mean that the account was not used to pay the Company's debts. If it was a source where funds were available for the payment of the debts, then it needs to be taken into account on the question of solvency. On the evidence it appears that payments were made to creditors from that account and from the [respondent's] wife's account. They were funds available to the Company.[59]

103 The associate judge described the indicators of insolvency set out in ASIC v Plymin as 'useful' and reached the following conclusions in relation to them:

(i) Continuing losses - it appears that the Company was making losses as at 1 January 2014 but the accounts relied on to prove the continuing losses are unreconciled accounts.

(ii) Liquidity ratios - here the Liquidator says that the Company's working capital ratio may indicate the Company had sufficient capital that may be based on an erroneous estimate of realisable value on inventory. The quick asset ratio is below one, which is an indication of insolvency. But these ratios have been calculated using balance sheets based on unreconciled accounts.

(iii) Overdue Commonwealth and State tax as at January 2014 - it appears that there was only one debt due to the ATO and that was in the sum of $9,482.54 and not $167,923.28 as alleged by the Liquidator.

(iv) A poor relationship with present Bank, including inability to borrow further funds - there is no evidence of this.

(v) No access to alternative finance - on the evidence it appears that there was access to alterative finance, an example being the [Landlord] Offset Account.

(vi) Inability to raise further equity capital - it was not an issue before the Court.

(vii) Suppliers placing the Company on cash on delivery or otherwise demanding special payments before resuming supply - there was no evidence of that.

(viii) Creditors unpaid outside trading terms - there were two statements put before the Court which showed that they were unpaid outside trading terms, but that is all. There were no further statements provided and the [respondent] put a credible explanation regarding the two statements.

(ix) Issuing of post-dated cheques - none were produced to the Court.

(x) Dishonoured cheques - there was no evidence of any dishonoured cheques.

(xi) Special arrangements with selected creditors - there was no evidence of that before the Court.

(xii) Solicitors' letters, summonses, judgments or warrants issued against the company - I cannot recall any on the evidence.

(xiii) Payments to creditors of rounded sums which are not reconcilable to specific invoices - there was no evidence of this.

(xiv) Inability to produce timely and accurate financial information to display the Company's trading performance and financial position, and make reliable forecasts - this indicator may not be present here. There were many accounts produced but I am unable to say whether they are accurate as they have not been reconciled. Furthermore, the accounts produced by the administrators were not before the Court.[60]

104 The associate judge concluded that the Liquidator had failed to discharge his onus of proving that the Company was insolvent for the following reasons:

1. There is a clear onus on the Liquidator to demonstrate [insolvency]. The accounts that he relied upon should have been reconciled. On the evidence before me, the Liquidator has not met that onus. I do not know if the Company was insolvent at that time. I am concerned that the accounts were not reconciled and that the Liquidator did not take ... into account the [Landlord] Offset Account. The Aged Payables are also concerning. Only two examples of the Aged Payables were given to the Court and a credible explanation was provided by the [respondent]. As for the tax and superannuation payment, it appears that the Company may [not] have been paying them in full, but that is not enough to demonstrate insolvency. The amounts claimed to be owing by the Liquidator cannot be relied upon.
2. The five balance sheets produced to the Court are not enough to demonstrate insolvency. The test to apply is whether the Company has money to pay its debts as and when they fall due. There were funds available to the Company to pay [its] debts as of 1 January 2014. The Liquidator has not been able to demonstrate that those funds were not available. [61]

Parties' submissions on Company's solvency as at 1 January 2014

105 The applicants submitted that, whilst the associate judge correctly identified the applicable test for insolvency, he did not correctly apply the test by considering the Company's overall position in its entirety.

106 The applicants argued that the associate judge erred by effectively dismissing the Liquidator's evidence in his Insolvency Report because of a reliance upon unreconciled accounts. However, they submitted that all sets of accounts, including the CM April 2018 accounts, were to the same effect and showed that the Company's working capital ratios and quick asset ratios were under severe stress, especially after taking into account the true value of inventory.[62]

107 According to the applicants, the Liquidator was not required to reconcile all of the eight sets of books produced to him into one reconciled, audited account. They argued that the production of one set of reconciled, audited accounts would have been a substantial expense to the administration. The applicants submitted that, given the limited funds generally available in an insolvent administration and the valuable public duty performed by liquidators when considering insolvent trading claims, such an obligation should not be lightly imposed. Further, the applicants contended that the respondent's cross-examination and submissions relied upon the accuracy of the CM April 2018 accounts, including that trade creditors were owed $274,868.60 and that there was a credit card debt of $26,745.55 as at 1 January 2014.

108 The applicants argued that the associate judge was correct to observe that the balance sheets before him were an important source to determine insolvency and that they all demonstrated that the Company was technically insolvent. They submitted that the associate judge should have accepted that the balance sheets correctly recorded the assets and liabilities of the Company and should have held that the Liquidator was entitled to rely upon the CM April 2018 accounts.[63] They contended that this conclusion was supported by the associate judge's findings that the Company kept sufficient books for the purpose of s 286 of the Act and therefore the presumption of insolvency in s 588E(4) did not arise.

109 The applicants argued that, in addition to the balance sheet evidence, a careful analysis of the other factors the Liquidator relied upon in his Insolvency Report,[64] considered in their entirety, also showed that the Company was insolvent as at 1 January 2014.

110 The applicants submitted that the associate judge erred in not accepting that the statutory liabilities relied upon by the Liquidator were correctly stated and in finding that, whilst the Company may not have been paying tax and superannuation liabilities in full, that was not enough to demonstrate insolvency. They contended that the associate judge overlooked the following evidence:

(a) The Liquidator's evidence that the Company's accounts substantially understated its tax and superannuation obligations as at 1 January 2014 because the 2013 income tax return and business activity statements since July 2013 had not been lodged.

(b) The respondent's evidence that employee PAYG deductions had not been remitted to the ATO since 1 July 2013.

(c) REST Industry Super issued three overdue contributions notices to the Company in relation to the June 2012, September 2012, December 2012, March 2013, June 2013, September 2013 and December 2013 periods.

(d) The ATO wrote to the Company on 18 September 2013 advising that the Company may not have met its superannuation guarantee obligations for the period from 1 October 2011 until 31 March 2013.

(e) In the Director's Questionnaire, the respondent stated that GST was not remitted in the 'last 12 months' because of cash flow problems.[65]

111 The applicants argued that the associate judge was wrong to criticise them for only referring to two overdue payment statements.[66] It was said that this finding overlooked the Liquidator's evidence that he wrote to the Company's major suppliers and was advised that the Company owed $22,805.90 to Lippincott Williams & Wilkins, $180,161.50 to Cengage Learning and $126,483.43 to McGraw‑Hill. It was also said that the associate judge overlooked the Liquidator's evidence as to aged payables and the Company being unable to meet trading terms set by trade suppliers and essential services.[67]

112 The applicants contended that it was beyond doubt that the Company itself did not have sufficient cash at bank to pay its creditors as at 1 January 2014. They argued that the Company held cash at bank of $40,065.49 as at that date,[68] whereas the outstanding debts of the Company included understated taxation and superannuation liabilities, credit card debt of $26,745.55 and trade creditors of $274,686.60.[69]

113 According to the applicants, the associate judge erred in finding that the Company was not insolvent as at 1 January 2014 because the Landlord Offset Account was a source of alternative finance available to the Company. They contended that, although monies in the Landlord Offset Account were sometimes used to pay some creditors of the Company, the funds in that account were available on an ad hoc basis subject to the respondent's discretion. They argued that he choose not to pay some of the Company's debts, such as statutory creditors and superannuation obligations.

114 According to the applicants, the associate judge was wrong to find that the onus was upon the Liquidator to show that funds were unavailable to the Company.[70] They submitted that the evidentiary onus of proof should have been on the respondent as the party asserting that non-company funds were available to pay the debts of the Company as and when they fell due.[71] They contended that, because there was no formalised agreement or understanding as to the availability of the funds in the Landlord Offset Account, cogent evidence was required of the degree of the respondent's commitment to financially support the Company.[72] They argued that the evidence did not establish that the funds in the Landlord Offset Account were available to pay the Company's debts as and when they fell due.

115 In any event, the applicants submitted that, even if the funds in the Landlord Offset Account were available to pay the Company's creditors, the Company was still insolvent as at 1 January 2014. This was said to be because the amount of $61,051.96 in that account on that date did not alter the fact that the Company's current liabilities at that date greatly exceeded its current assets.

116 The applicants contended that the funds in Ms Hoang's personal bank account should not be taken into account as funds available to the Company because there was no evidence of how her account was conducted or if and when she determined to pay the Company's creditors.

117 The respondent submitted that the associate judge did not make any error in fact or law. He contended that the onus was on the applicants to prove that the Company was insolvent as at 1 January 2014, which they failed to do. According to him, the Court must be provided with the 'fullest and best' evidence of solvency or insolvency.[73] It was said that, instead of adducing the 'fullest and best' evidence, the applicants elected to adduce evidence from inconsistent, unreconciled, unaudited and incomplete accounts. He argued that, having made that choice, they could not complain that the Court identified fundamental deficiencies in that evidence or determined that no reliable inference of insolvency could be drawn from such unreliable evidence. He submitted that the associate judge was correct to find that the applicants were not able to demonstrate that the Company was insolvent as at 1 January 2014, or any other date, based upon inconsistent, unreliable and unreconciled accounts.

118 According to the respondent, the applicants conceded that the Company could not be deemed to be insolvent under s 588E(4) of the Act and that the alleged outstanding creditors as at 1 January 2014 totalling $349,000 were in fact unverified and unproven. The respondent contended that the Company's only verified outstanding debt as at 1 January 2014 was its running balance account with the ATO in the amount of $9,292.32.[74]

119 The respondent argued that, as a 'rule of thumb', the balance sheet test is a useful indicator of insolvency. However, he submitted that the balance sheets in the CM April 2018 accounts were unreliable because those accounts did not correctly record the assets and liabilities of the Company. He contended that the CM April 2018 accounts did not include credit notes from four suppliers for the period 5 February 2014 to 2 June 2014 totalling $121,897.18. He also contended that the Company's statutory liabilities were not due and payable as claimed by the applicants. He submitted that a financial reconciliation by the Liquidator would rectify the deficiency of assets over liabilities in the CM April 2018 accounts.

120 The respondent contended that the associate judge was correct to find that, as at 1 January 2014, the Company was able to pay its debts as and when they fell due. This was said to be because there was sufficient cash at bank, namely, $105,110.41.[75] The respondent argued that unverified claims of the Company's inability to meet its statutory obligations and bald assertions of insolvency arising from a general review of the Company's unaudited, unreconciled and incomplete accounts were not sufficient to establish insolvency.[76]

121 The respondent submitted that the Company's earliest proven outstanding trade creditor debt of $4,804.26 fell due and payable on 7 March 2014.[77] According to him, as at that date, the Company had funds at the bank totalling $489,116.81, including the balance in the Landlord Offset Account and cash sales deposited into Ms Hoang's account.[78]

Decision on the Company's solvency as at 1 January 2014

122 It is apparent from the summary of the associate judge's decision at [98]-[104] above that two key findings underpinned his decision that the Liquidator had not discharged his onus of establishing that the Company was insolvent. The first finding was that the accounts upon which the Liquidator relied to establish insolvency were 'unreconciled'. The second finding was that the funds in the Landlord Offset Account and Ms Hoang's account were available to pay the debts of the Company. Given the importance of these two findings, we will first discuss them and then consider the correctness of other findings of the associate judge concerning the Company's solvency.

123 It must be said that there were contradictions in the position adopted by the applicants and the respondent at trial - and the reasoning of the associate judge - on the reliability of the CM April 2018 accounts for the purpose of determining whether the Company was insolvent.

124 In his Insolvency Report, the Liquidator stated that '[l]ittle reliance can be placed on the information extracted from the original MYOB [accounts] and the CM April 2018 MYOB [accounts]'. However, as appears from [65] above, he also stated in the report that, '[d]ue to the inconsistencies in the various sets of accounts, [he had] limited [his] analysis to the original MYOB [accounts], CM April 2018 MYOB [accounts] and historical accounts'.

125 Further, counsel for the applicants contended that the Company should be deemed to be insolvent because it did not comply with s 286 of the Act. As appears from [38] above, that section requires a company to keep financial records that 'correctly record and explain its transactions and financial position and performance' and 'would enable true and fair financial statements to be prepared and audited'. Notwithstanding this contention, it is clear from the transcript of the hearing before the associate judge that the Liquidator in his evidence, and the applicants' counsel in submissions, relied upon the CM April 2018 accounts in support of the proposition that the Company was insolvent as at 1 January 2014 or, alternatively, as at 10[79]pril 2014.79

126 The respondent contended that the CM April 2018 accounts could not be relied upon to determine the Company's solvency because they were unreconciled. However, he submitted that those accounts 'contain[ed] almost all the company's transactions' and, together with the Company's other financial records, complied with s 286 of the Act.[80] The respondent also tendered some parts of the CM April 2018 accounts in support of particular aspects of his case. For example, he tendered the balance sheet as at 1 January 2014 set out at [91] above in support of his contention that the outstanding balance of his loans to the Company was $612,650.90 rather than the amount of $218,558.57 contended by the[81]iquidator.81

127 We also note that, in the Director's Questionnaire, the respondent stated that the Company's accounts were 'properly kept' and that there were 'three levels of accounting' which enabled him to satisfy himself that the Company's balance sheets and profit and loss accounts were correct.[82] In his answers to the Director's Questionnaire, the respondent did not assert that the Company's accounts were unreliable because they were 'unreconciled'.

128 As appears from [98] above, the associate judge found that, even though there were inconsistencies between the Company's records, the CM April 2018 accounts 'do record and explain the Company's transactions' in compliance with s 286 of the Act. However, notwithstanding this finding, the associate judge concluded that the Liquidator could not rely upon those accounts to discharge his onus of establishing that the Company was insolvent as at 1 January 2014 or any other date because they were 'unreconc[83]ed'.83 The associate judge did not refer to any authority in support of the proposition that 'unreconciled' accounts could not be relied upon to determine whether a company was insolvent at any particular time. Further, he did not consider s 1305 of the Act, even though counsel for the Liquidator referred to it.

129 In our opinion, the starting point for determining whether the CM April 2018 accounts could be relied upon to determine whether the Company was insolvent as at 1 January 2014 (or as at any other date) is s 1305 of the Act. As Austin J stated in Rich, that section has the effect that the tendering of a company's accounts is evidence of the matters recorded in them and those matters will be thereby proven unless other evidence convinces the court to the contrary, on the balance of probabilities.[84] Accordingly, prima facie, the CM April 2018 accounts are reliable.

130 The associate judge's finding that the CM April 2018 accounts complied with s 286 of the Act supports their prima facie reliability under s 1305 of the Act. That is because those accounts were found to 'correctly record and explain [the Company's] transactions and financial position and performance' and could 'enable true and fair financial statements to be prepared and audited'.

131 The prima facie reliability of the CM April 2018 accounts under s 1305 of the Act is also supported by the facts that those accounts were prepared by the Company's external accountants, Carrington Myers, and the Company was not obliged to have them audited. The accounts were provided to the Liquidator and substantially similar accounts were produced to the Court by Carrington Myers pursuant to subpoena. The associate judge was entitled to assume, in the absence of evidence to the contrary, that Carrington Myers had acted professionally in preparing the accounts. The associate judge apparently did so, as he stated that 'no evidence was provided to the Court that either set of accounts relied upon were defective'.[85]

132 We accept that there were inconsistencies between the CM April 2018 accounts and other accounting records of the Company, which the Liquidator had not reconciled. The respondent maintained that the CM April 2018 accounts were unreliable because of the absence of reconciliation. However, the respondent also maintained that those accounts 'contain almost all the Company's transactions'.[86] The respondent's complaints about the absence of reconciliation were of a vague and general nature. They were also highly selective. Closely analysed, the respondent's position seemed to be that the CM April 2018 accounts were reliable on issues that supported his case but unreliable on issues that did not support his case. In these circumstances, in the context of the matters to which we have referred that support the prima facie reliability of the CM April 2018 accounts, the errors or deficiencies identified by the respondent were not of a sufficient number or seriousness to displace the prima facie position under s 1305 of the Act.

133 In his affidavits sworn on 6 February 2018 and 18 March 2019, the respondent made broad-ranging allegations of impropriety on the part of the Liquidator and his staff. The allegations included that the respondent was instructed to destroy documents and stock and to sign a false report as to affairs, and that the Liquidator or his staff deliberately misplaced or removed relevant electronic or hard-copy records. The respondent relied upon those allegations in support of his contention that the financial records upon which the Liquidator relied to establish that the Company was insolvent are unreliable because, among other things, the Company's stock was undervalued and its debts were overstated. In his affidavit sworn on 23 November 2018, the Liquidator denied the respondent's allegations of impropriety.

134 In his principal reasons for judgment, the associate judge did not make any findings on the respondent's allegations. However, in his costs decision dated 1 May 2020, he stated that he 'did not find that the [applicants] and their solicitors acted dishonestly'. He also stated that the applicants and their solicitors 'acted appropriately during the trial and therefore have not breached their obligations under the [Civil Procedure Act 2010]'. We agree with these observations. The respondent's allegations are serious and could not be found proven unless the more stringent principles of proof in Briginshaw v Briginshaw[87] were satisfied. There was nothing in the evidence before us that suggested that those principles were satisfied.

135 For the above reasons, the Liquidator was entitled to rely upon the CM April 2018 accounts, together with the other evidence before the Court, in support of his contention that the Company was insolvent as at 1 January 2014 or, alternatively, as at 10 April 2014. The associate judge erred in concluding that the Liquidator could not rely upon those accounts because they were unreconciled.

Availability of funds in Landlord Offset Account and Ms Hoang's account

136 The funds in Ms Hoang's account are not relevant to the Company's insolvency as at 1 January 2014. That is because no funds in that account were used to pay the Company's debts until March 2014.[88] Accordingly, we will focus on the funds in the Landlord Offset Account.

137 Strictly speaking, it is not necessary for us to decide whether the funds in the Landlord Offset Account were available to pay the Company's debts. That is because the addition of those funds to the other funds available to the Company would not have enabled it to pay its debts that were due and payable as at 1 January 2014. According to the balance sheet set out at [91] above, as at 1 January 2014, the Company's debts included $274,686.60 payable to trade creditors, $56,162.91 owed in respect of superannuation liabilities and the amounts of $47,776.49, $19,528.18 and $44,456.10 payable to the ATO. As at that date, the credit balance in the Landlord Offset Account was $61,051.96. This amount, together with sums totalling $40,065.49 in the Company's ANZ Bank accounts (as set out in its bank s[89]tements),89 fell well short of enabling the Company to pay its debts.

138 Had it been necessary for us to decide the issue of the availability of the funds in the Landlord Offset Account to pay the Company's debts as and when they became due and payable, we would have held that the respondent had failed to discharge his evidentiary onus on this issue.[90]

139 As the principles summarised at [46]-[57] above indicate, the position must be considered objectively from the perspective of the relevant company rather than the putative third-party funder. The key question is what degree of assurance does the relevant company have that funds of that third party will be made available to pay existing debts of the company or debts that the company proposes to incur. In the present case, it is difficult to see how the Company had any such assurance. That is because the respondent controlled the Landlord Offset Account and exercised an unfettered discretion as to when and if any funds in that account were made available to pay any debts of the Company and, if so, which debts.

140 It is true that, in the period from April 2013 to May 2014, and possibly earlier, funds in the Landlord Offset Account were made available to pay some debts of the Company. However, as the respondent frankly conceded before us, he had control as to which debts would be paid from that account - and when - and which debts would not be paid from that account. He exercised that control by choosing not to access funds in that account to pay the Company's statutory liabilities in respect of tax and superannuation as and when they became due and payable, and left those liabilities unsatisfied over extended periods. The objective evidence indicates that, in the lead up to 1 January 2014, the respondent did not make the funds in the Landlord Offset Account generally available to pay the Company's debts as and when they became due and payable. On the contrary, during that period, those funds were not used to pay many of the Company's debts as and when they became due and payable.

141 In Chan, Morrison JA stated that 'what is required is cogent evidence which enables the court to conclude that there is such a degree of commitment on the part of the provider of the financial support to continue it, such that it can be said that at any point of time it was likely to be continued, with the result that, at any of those times, the company was able to pay its debts as and when they fell due'.[91] It is difficult to see how that test could be satisfied in the present case. That is because there is no cogent evidence that, at any given time, in respect of any existing or proposed debt, it was likely that the respondent would make available funds in the Landlord Offset Account to pay that debt. There was no formal or informal agreement between the Company and the respondent which established any objective criteria from which it could be determined at any given time whether any particular existing or proposed debt would be paid from funds in the Landlord Offset Account. Payment from that account was within the complete control of the respondent, and the Company was wholly dependent on a favourable exercise of the respondent's unfettered discretion.

142 The fact that, in the Director's Questionnaire, the respondent did not identify the Landlord Offset Account as an 'alternative [source] of finance available to [the Company]' is consistent with the above analysis.[92]

143 It follows from the above discussion that, had it been necessary for us to decide whether the associate judge erred in concluding that the funds in the Landlord Offset Account were available to pay the Company's debts, we would have held that he did so.

144 As the associate judge used the indicators of insolvency in ASIC v Plymin in his analysis of whether the Company was insolvent, we will consider the correctness of the associate judge's conclusions in relation to those indicators.[93] It is common ground that indicator 6 was irrelevant and that indicators 4, 9 and 10 do not support a finding that the Company was insolvent as at 1 January 2014 or at any other time. Accordingly, we will focus on the other indicators.

145 Indicator 1: Continuing losses. The table set out at [79] above shows that the Company made a loss as at 30 June 2012. According to the CM April 2018 accounts, the Company made a loss as at 30 June 2013. The associate judge concluded that 'it appears that the Company was making losses as at 1 January [94]14'.94 However, he disregarded the losses on the basis that the accounts upon which the Liquidator relied were unreconciled. We have concluded that the associate judge erred in relation to the issue of unreconciled accounts. It follows that, on a proper analysis, the Company made continuing losses in the period leading up to 1 January 2014 and that these losses support a finding that the Company was insolvent as at that date.

146 Indicator 2: Liquidity ratios. As appears from [76] above, the Company's quick asset ratio was consistently below 1 from 30 June 2012. The associate judge acknowledged that this is an indicator of insolvency, but he disregarded it because the balance sheets used to calculate the ratio were derived from unreconciled accounts. As we have concluded that the associate judge erred in relation to the issue of unreconciled accounts, it follows that the Company's quick asset ratio in the period leading up to 1 January 2014 supports a finding that the Company was insolvent as at that date. On the other hand, the Company's working capital ratio does not support such a finding.

147 Indicator 3: Overdue Commonwealth and State taxes. The associate judge concluded that there was only one debt due to the ATO, in the amount of $9,482.54, rather than an amount $167,923.28 as alleged by the Liquidator.[95] The associate judge based this conclusion on the ATO running balance account exhibited to the Liquidator's affidavit sworn on 23 November 2018.[96]

148 However, the Company's balance sheet as at 1 January 2014, which is set out at [91] above, shows that the Company owed the ATO $47,776.49 in GST which it had collected but not yet remitted, $19,528.18 in PAYG withholding tax payable and $44,456.10 in further GST liabilities. In addition, the balance sheet shows that the amount of $56,162.91 had not been paid in respect of supe[97]nnuation.97 The total of these amounts is $167,923.28, as contended by the Liquidator. As the Company had not lodged relevant returns with the ATO for many months prior to 1 January 2014, it and Carrington Myers, who prepared the CM April 2018 accounts, had more up‑to‑date information than the ATO and were in a better position than the ATO to determine the Company's taxation liabilities.

149 The existence of overdue taxation and superannuation liabilities as at 1 January 2014 supports a finding that the Company was insolvent as at that date.

150 Indicator 5: Availability of alternative finance. As appears from [137] above, even if it is assumed that the funds in the Landlord Offset Account were available to the Company, those funds - which totalled $61,051.96 as at 1 January 2014 - fell well short of enabling the Company to pa[98]its debts.98 Accordingly, indicator 5 supports a finding that the Company was insolvent as at that date.

151 Indicator 7: Suppliers demanding cash on delivery or special payment. As the associate judge noted, there was no evidence that suppliers had placed the Company on any special payment arrangements prior to 1 January 2014. Accordingly, indicator 7 does not support a finding that the Company was insolvent as at 1 January 2014.

152 Indicator 8: Creditors unpaid outside trading terms. The associate judge concluded that the evidence before him was that only two creditors were unpaid outside trading terms - United Book Distributors and LexisNexis - and that the respondent provided a credible explanation regarding these creditors.[99]

153 As set out at [73]-[74] above, the Liquidator stated in his Insolvency Report that documents discovered by the respondent indicated that debts to 81 creditors incurred in 2013 or earlier remained outstanding. According to the CM April 2018 accounts, debts unpaid for more than 90 days totalled $242,487.34 as at 31 December 2013. The Liquidator indicated that the CM April 2018 accounts suggested that, from 30 June 2013, there was a steady decline in the Company's ability to repay creditors as and when debts fell due.

154 The respondent's submissions that no suppliers' invoices were overdue as at 1 January 2014 and that they became overdue for the first time on 7 March 2014 lacks credibility in the light of his acknowledgement that Pearson Australia Group (which was also known as 'United Book Distributors') required cash payments from the Company from January 2014.[100] Pearson Australia Group would not have instituted this arrangement unless the Company's trading account was overdue.

155 In our opinion, indicator 8 supports a finding that the Company was insolvent as at 1 January 2014.

156 Indicator 11: Special arrangements with selected creditors. As the associate judge noted, there was no evidence that the Company had made special arrangements with any creditors prior to 1 January 2014. Accordingly, indicator 11 does not support a finding that the Company was insolvent as at 1 January 2014.

157 Indicator 12: Solicitors' letters, summonses, judgments or warrants. The Liquidator relied upon court proceedings brought against the Company by Macmillan, John Wiley, Cambridge University Press and McGraw-Hill.[101] One invoice the subject of the McGraw-Hill proceeding was issued on 17 December 2013 for the amount of $3,032.48 and some of the unpaid goods claimed by Macmillan were sold on 1 January 2014. The four proceedings otherwise wholly concerned matters after 1 January 2014.

158 In addition, the ATO issued demands for payment of the amounts of $24,187.26 and $11,933.06 on 13 November 2012 and 1 February 2013, respectively. On 27 February 2013, it warned that it intended debt collection action in respect of a debt of $12,098.21. REST Industry Super also issued overdue contributions notices on the following dates:

(a) 18 July 2013, in respect of the June 2012, September 2012, December 2012 and March 2013 periods; and

(b) 18 August 2013, in respect of the June 2012, September 2012, December 2012, March 2013 and June 2013 periods.

159 In our opinion, indicator 12 supports a finding that the Company was insolvent as at 1 January 2014.

160 Indicator 13: Payments to creditors of rounded sums. As the associate judge noted, there was no evidence that the Company made any payments to creditors of rounded sums. Accordingly, indicator 13 does not support a finding that the Company was insolvent as at 1 January 2014.

161 Indicator 14: Inability to produce timely and accurate financial information. The associate judge found that the CM April 2018 accounts complied with s 286 of the Act and both parties relied upon those accounts at trial in support of their respective cases. Accordingly, indicator 14 does not support a finding that the Company was insolvent as at 1 January 2014.

Company's balance sheet as an indicator of insolvency

162 The associate judge stated that the Company's balance sheet as at 1 January 2014, which showed a deficiency of net assets of $705,922.40, would be an indicator of insolvency if it was 'based on correct information'.[102] For the reasons set out at [123]-[135] above, that balance sheet could be relied upon by the Liquidator in support of his case that the Company was insolvent as at 1 January 2014. Accordingly, the balance sheet supports a finding that the Company was insolvent as at that date.

163 As appears from [26] above, in the Director's Questionnaire, the respondent stated that the Company had not remitted GST regularly for the previous 12 months and that one of the reasons for this was '[c]ashflow problems'. He also stated that the delays in remitting GST first occurred in late 2012. These admissions by the respondent support a finding that the Company was insolvent as at 1 January 2014.

Conclusion on the Company's solvency as at 1 January 2014

164 In our opinion, the indicators of insolvency discussed above overwhelmingly support a finding that the Company was insolvent as at 1 January 2014. In particular, we rely upon the following for this finding:

(a) The Company was trading at a loss as at 1 January 2014.[103]

(b) The Company had a substantial deficiency of assets over liabilities as at 1 January 2014 and it had insufficient cash and other liquid assets to cover its current debts.[104]

(c) As at 31 December 2013, debts remaining unpaid for more than 90 days totalled $242,487.34, representing 87.2 per cent of debts.[105]

(d) As at 1 January 2014, the Company was substantially in arrears in its payments of tax and superannuation and had received demands for payment from the ATO and REST Industry Super.[106]

PART B: WAS THE COMPANY INSOLVENT AS AT 10 APRIL 2014?

165 As we have concluded that the Company was insolvent as at 1 January 2014, it is not necessary for us to consider whether it was insolvent as at 10 April 2014. However, in case our conclusion is wrong, we will briefly consider the Company's solvency as at 10 April 2014.

166 In relation to the period after 1 January 2014, the Liquidator stated in the Insolvency Report that large sums of money were paid to the respondent, with little evidence that any payments were being made to suppliers. The Liquidator produced the following table containing various figures, some of which are estimates, for the months of January to June 2014:

167 The Liquidator noted that the payments to Ms Hoang in February 2014 totalling $130,000 were reimbursement for stock purchased on her credit card on behalf of the Company. He also noted that, in March 2014 when the respondent paid himself $634,000, the amount payable to the Company's trade creditors was $1,672,794.16 and the Company had $142,977.45 in cash to pay its debts.

168 The Liquidator stated that the respondent had made net payments to himself in the amount of $885,000 for the period from January until June 2014. He said that this caused detriment to the Company because it left it with insufficient funds to pay unsecured creditors. He asserted that the Company was insolvent or became insolvent by making the payments to the respondent. He said that the respondent had not provided any explanation as to why the payments had been made to him, instead of the Company's creditors.

169 The Liquidator stated that the documents discovered by the respondent and the CM April 2018 accounts supported the following observations:

• Large amounts of stock were purchased in February and March 2014;
• Significant sales were made in February and March 2014;
• The level of sales generated from February 2014 was barely sufficient to meet the purchase costs in relation to stock purchases in February 2014, March 2014 and April 2014. It was clearly insufficient after taking into account the significant payments made to [the respondent];
• The level of sales generated from February 2014 was insufficient to meet the increase in accounts payable in February 2014, March 2014 and April 2014. It was clearly insufficient after taking into account the significant payments made to [the respondent];
• The suppliers were not paid for the purchase of this stock; and
• The proceeds of the sale of the stock were predominately paid to [the respondent].

170 The Liquidator stated that the actual deficiency as at 30 June 2014 was substantially greater than $661,456 (as shown in the table set out at [75] above) for the following reasons:

(a) Trade debtors were recorded at $108,313.22. However, only $12,426.27 was recovered.

(b) Stock was recorded at $309,937.28. However, the stock at the Adelaide store had an estimated realisable value of approximately $16,000; and the stock at the Melbourne store had an estimated realisable value of $10,000.[107]

(c) A motor vehicle was recorded with a value of $58,371.28. This vehicle was sold for $10,000 prior to the Liquidator's appointment.

171 After the trial, the applicants tendered monthly balance sheets and profit and loss statements, and the complete general ledger, for the period from 1 July 2013 until 27 August 2014 derived from the CM April 2018 accounts. The balance sheet as at 31 March 2014 recorded a deficiency of net assets of $1,026,367.62, which included the following items:

(ii) withholding tax on interest received of $373.00; and

172 The balance sheet as at 30 April 2014 recorded a deficiency of net assets of $1,013,215.86, which included the following items:

(ii) withholding tax on interest received of $373.00; and

173 The respondent exhibited to his affidavit sworn on 18 March 2019 a table summarising outstanding invoices and the daily 'cash at bank' position of the Company from 7 March 2014. He deposed that 7 March 2014 was the date when the first overdue invoice fell due and, accordingly, this table demonstrated the Company's financial solvency. That table listed invoice details - including supplier, due date and amount - as well as cash in the Melbourne Bank Account, Adelaide Bank Account and Landlord Offset Account and cumulative cash deposits into Ms Hoang's account. The table also contained a column for the running total amount of outstanding invoices and the 'total cash at bank' as at each invoice due date. According to this table, 'total cash at bank' exceeded 'total outstanding invoice[s]' between 7 March 2014 and 9 April 2014 but the former was significantly less than the latter on and from 10 April 2014. As at 9 April 2014, 'total cash at bank' was $829,402.35 whereas 'total outstanding invoice[s]' was $523,980.40. As at 10 April 2014, 'total cash at bank' was $178,246.63 whereas 'total outstanding invoice[s]' was $539,786.21. The total sum deposited into Ms Hoang's account was $144,891.20 as at 9 and 10 April 2014.

174 In his affidavits sworn on 6 February 2018 and 18 March 2019, the respondent stated that the Company had access to the Adelaide Bank Account, Melbourne Bank Account and Landlord Offset Account on the following dates:

(a) 8 January 2014, with a balance of $72,770.68 in the Landlord Offset Account;

(b) 2 February 2014, with a balance of $56,925.15 in the Landlord Offset Account;

(c) 18 February 2014, with a balance of $72,215.54 in the Landlord Offset Account;

(d) 27 February 2014, with a balance of $134,358.02 in the Landlord Offset Account;

(e) 7 March 2014, with a balance of $130,412.55 in the Landlord Offset Account;

(f) 11 March 2014, with a balance of $317,912.55 in the Landlord Offset Account;

(g) 26 March 2014, with a balance of $522,483.34 in the Landlord Offset Account; and

(h) 1 April 2014, with a balance of $522,483.34 in the Landlord Offset Account.

175 In his affidavits sworn on 6 February 2018 and 18 March 2019, the respondent deposed that the funds available to the Company also included cash sales deposited into Ms Hoang's bank account. He stated that the following amounts were available to the Company in Ms Hoang's bank account on the following dates:

176 In his affidavit sworn on 18 March 2019, the respondent stated that, as at 7 March 2014, the Company had funds totalling $489,116.81 available to pay creditors. That amount comprised the sum of $130,412.55 in the Landlord Offset Account, a balance of $114,454.35 in the Adelaide Bank Account, a balance of $161,969.41 in the Melbourne Bank Account[108] and the cash sales deposited into Ms Hoang's account totalling $82,280.50.

177 In his affidavits sworn on 6 February 2018 and 18 March 2019, the respondent deposed that Ms Hoang was managing all payments from the Company to staff and creditors from 18 February 2014 because he was ill and unable to take part in the day‑to‑day management of the Company. He stated that Ms Hoang did not have access to the Company's bank accounts, so she paid the Company's expenses from her personal bank account and personal credit cards, and deposited company cash sales into her personal bank account, to ensure the Company could continue to trade in his absence.

178 The respondent produced one of Ms Hoang's bank statements for the period 1 February until 30 April 2014 to support the cash sales said to have been deposited into her account. That statement was redacted. The visible transactions cover the period from 24 February until 16 April 2014 and indicate that the balance as at 10 April 2014 was $1,206.14.

179 As is apparent from [98]-[104] above, the associate judge considered the Company's solvency in terms of whether the Liquidator had discharged his onus of proof and did not analyse its financial position as at 10 April 2014 relative to 1 January 2014. However, he did note that the respondent agreed that the Company was insolve[109]as at 14 April 2014.109

Parties' submissions on Company's solvency as at 10 April 2014

180 The applicants submitted that the Company was insolvent as at 10 April 2014. According to them, on any analysis, the Company was left with minimal cash to pay its debts on that date because the respondent withdrew sums totalling $138,000 from the Company's bank accounts.[110]

181 The applicants contended that, even if the funds in the Landlord Offset Account and Ms Hoang's bank account were available to the Company, the Company was still insolvent as at 10 April 2014. They argued that access to the Landlord Offset Account would not render the Company solvent because the respondent also withdrew sums totalling $515,549.32 from that account on that date, leaving a balance of $858.94.[111] They submitted that access to Ms Hoang's bank account would not render the Company solvent because the amount available in that account was the balance, not the cumulative amount of cash sales deposited into that account. Consequently, they contended that the amount available in that account was only $1,206.14,[112] not $144,891.20 as relied upon by the respondent at trial.[113]

182 According to the applicants, other indicators of insolvency had also deteriorated by 10 April 2014, including outstanding statutory liabilities, unpaid trade creditors and creditors refusing to accept returns.

183 The applicants submitted that, in stating that he was unable to recall any of the evidence regarding solicitors' letters, summonses, judgments or warrants issued against the Company, the associate judge overlooked the following evidence:

(a) The Magistrates' Court of Victoria complaint filed by Macmillan on 15 May 2014 for goods sold and delivered, the judgment in the amount of $33,564.98 obtained by Macmillan on 17 June 2014 and the subsequent statutory demand served upon the Company by Macmillan on 19 June 2014.[114]

(b) The District Court of Queensland proceeding commenced on 22 May 2014 by John Wiley for unpaid goods in the amount of $133,357.63.[115]

(c) The Magistrates' Court of Victoria judgment in favour of Cambridge University Press in the amount of $4,333.30 obtained on 21 July 2014 and the letter from its lawyers dated 22 July 2014 demanding payment of that amount.[116]

(d) The County Court proceeding commenced by McGraw-Hill on 21 July 2014, claiming the amount of $129,515.91.[117]

184 The applicants submitted that the table exhibited to the respondent's affidavit sworn on 18 March 2019, which he claimed demonstrated the Company's solvency,[118] was fundamentally flawed for three reasons. First, they objected to its receipt into evidence, which objection the associate judge did not address in his reasons.[119] Secondly, the table conflated 'cash at bank' with the balance of the Landlord Offset Account and the cumulative cash deposits paid into Ms Hoang's account. In any event, the daily balances for Ms Hoang's account did not match the cumulative deposits into her account. Thirdly, the table ignored the Company's outstanding debts prior to 7 March 2014, including taxation and superannuation liabilities, credit card debt and trade creditors.

185 The applicants also relied upon the respondent's evidence at trial that he suspected that the Company was insolvent prior to 10 April 2014. They argued that this amounted to an admission by the respondent that the Company was insolvent at that date.

186 The respondent submitted that he did not admit that the Company was insolvent as at 10 April 2014, or any other date. He contended that he merely stated that he had formed the 'thought' or 'opinion' that the Company 'may not' be able to meet its debts, which was in fact incorrect. He argued that, due to his illness and hospitalisation, he was not a person of ordinary competence and did not take part in the management of the Company between 26 March and 17 April 2014. He submitted that his opinion was poorly formed and not supported by fact, and therefore provided no ground for presuming the Company to be insolvent. Rather, he contended that insolvency was to be determined objectively.[120]

187 The respondent argued that, immediately prior to 10 April 2014, the Company had 'cash at bank' available totalling $829,402.35, whereas outstanding invoices at that time totalled $523,980.40.[121] It was said that the Company's cash position had therefore improved since 1 January 2014. The respondent submitted that he was of sufficient means and had 'demonstrable capacity to raise further funds if require[d]'. He contended that the Loan Agreement,[122] as well as the CM April 2018 accounts,[123] provided ample evidence that he was able and willing to support the company 'for as long as [he] elected to do so'. He argued that there was no evidence before the Court that he would not continue to make existing unsecured credit available to the Company.

188 According to the respondent, the withdrawals he made on 10 April 2014 constituted funds being transferred from one account in his name to another account in his name with the same bank. He submitted that the funds totalling $138,000 were mistakenly transferred on 10 April 2014 while he was heavily medicated and that he subsequently rectified the mistake by transferring funds totalling $178,000 back into the Company's accounts on 13 May 2014.[124] He contended that these transfers produced a 'temporary lack of liquidity' which was not a ground for a finding that the Company was insolvent.

Decision on the Company's solvency as at 10 April 2014

189 In determining whether the Company was insolvent as at 10 April 2014, we will consider the changes to the Company's position since 1 January 2014 by reference to the indicators of insolvency discussed at [145]-[162] above.

190 Indicator 1: Continuing losses. It appears that the Company made a small profit in February and March 2014 and a small loss in April 2014.[125] The position as at 10 April 2014 is unknown. Overall, in relation to this indicator, we will assume that the Company's profitability improved after 1 January 2014. On the basis of this assumption, indicator 1 does not support a finding that the Company was insolvent as at 10 April 2014.

191 Indicator 2: Liquidity ratios. As set out at [171]-[172] above, the CM April 2018 accounts record total assets of $300,951.71 and total liabilities of $1,327,319.33 as at 31 March 2014. They record total assets of $177,408.14 and total liabilities of $1,190,624.00 as at 30 April 2014. These figures give working capital ratios of 0.23 as at 31 March 2014 and 0.15 as at 30 April 2014. It can be inferred that the Company's working capital ratio as at 10 April 2014 was significantly less than 1. Accordingly, indicator 2 supports a finding that the Company was insolvent as at 10 April 2014.

192 Indicator 3: Overdue Commonwealth and State taxes. As appears from [171]-[172] above, the CM April 2018 accounts record that the Company owed to the ATO as at 31 March 2014: $27,900.12 in GST which it had collected but not yet remitted; $30,941.22 in PAYG withholding tax; and $44,456.10 in other GST liabilities. As at 30 April 2014, those accounts record that the Company owed to the ATO: $31,580.14 in GST which it had collected but not yet remitted; $32,258.22 in PAYG withholding tax; and $44,456.10 in other GST liabilities. In addition, the amount of $56,162.91 remained outstanding as at both 31 March and 30 April 2014 in respect of superannuation payable. These figures indicate that the Company's unpaid statutory liabilities totalled $159,460.35 as at 31 March 2014 and $164,457.37 as at 30 April 2014. It can be inferred that the Company owed statutory liabilities in the order of $160,000 as at 10 April 2014. It is likely that this figure is an underestimate because of the Company's failure to lodge relevant returns to the ATO for many months. Accordingly, indicator 3 supports a finding that the Company was insolvent as at 10 April 2014.

193 Indicator 5: Availability of alternative finance. The position remains that, even if it is assumed that the funds in the Landlord Offset Account were available to the Company, they were not sufficient to enable it to pay its debts as and when they became due and payable. As stated at [16] and [181] above, the balance in that account as at 10 April 2014 was $858.94.

194 The respondent also relied upon funds held in Ms Hoang's account in relation to indicator 5. That account was used to pay some debts of the Company in March and April 2014. However, the respondent's evidence was that those funds were used only to the extent to which the Company's sales revenue was deposited in that account during the period that he was hospitalised. He stated that Ms Hoang used her own account for the Company's trading activities during that period because she did not have access to the Company's accounts. This evidence indicates that the Company only had access to its own sources of funds, rather than an alternative and additional source of funds.

195 In any event, even if Ms Hoang's account is treated as an alternative source of funding for the Company, there was no evidence concerning the basis upon which Ms Hoang made available funds belonging to her to enable the Company to pay its debts. In particular, Ms Hoang did not give any evidence. Accordingly, the degree of her commitment to continue to provide financial support for the Company is not known. Thus, on the basis of the principles discussed in Chan, it could not be said that, at any point of time prior to 10 April 2014, Ms Hoang's support was likely to be continued.[126] Further, we note that, based on the redacted bank statements produced by the respondent at trial, the balances in Ms Hoang's account in the period from 24 February 2014 until 16 April 2014 ranged from $592.56 on 1 April 2014 to $39,088.31 on 27 February 2014. The balance as at 10 April 2014 was $1,206.14.

196 It follows from the above discussion that indicator 6 supports a finding that the Company was insolvent as at 10 April 2014.

197 Indicator 7: Suppliers demanding cash on delivery or special payment. The associate judge stated that there was no evidence of suppliers demanding cash on delivery. However, the respondent acknowledged that Pearson Australia Group required cash pre‑payments from the Company from January 2014. Accordingly, indicator 7 supports a finding that the Company was insolvent as at 10 April 2014.

198 Indicator 8: Creditors unpaid outside trading terms. The CM April 2018 accounts record debts unpaid in excess of 90 days totalling $146,789.98 as at 31 March 2014. The Liquidator relied upon advice from major suppliers that, at the commencement of the liquidation, the Company owed $22,805.90 to Lippincott Williams & Wilkins, $180,161.50 to Cengage Learning and $126,483.43 to McGraw-Hill. Although these outstanding amounts post-date 10 April 2014, as the Company ceased trading shortly after 10 April 2014, it is likely that most of these amounts were outstanding as at that date. Accordingly, indicator 8 supports a finding that the Company was insolvent as at 10 April 2014.

199 Indicator 11: Special arrangements with selected creditors. The position did not change between 1 January 2014 and 10 April 2014. Accordingly, indicator 11 does not support a finding that the Company was insolvent as at 10 April 2014.

200 Indicator 12: Solicitors' letters, summonses, judgments or warrants. The Liquidator relied upon court proceedings brought against the Company by Macmillan, John Wiley, Cambridge University Press and McGraw-Hill.[127] The proceedings brought by Macmillan, John Wiley and McGraw-Hill were each commenced after 10 April 2014 in respect of causes of action accrued wholly or predominantly before that date. The Cambridge University Press proceeding concerned an invoice issued after 10 April 2014.

201 In addition, on 7 March 2014, the ATO issued a garnishee notice to the Company's bank because an amount of $22,314.91 remained unpaid despite requests for payment.

202 Indicator 12 suggests that the Company's financial position deteriorated between 1 January 2014 and 10 April 2014 and supports a finding that it was insolvent as at 10 April 2014.

203 Indicator 13: Payments to creditors of rounded sums. The position did not change between 1 January 2014 and 10 April 2014. Accordingly, indicator 13 does not support a finding that the Company was insolvent as at 10 April 2014.

204 Indicator 14: Inability to produce timely and accurate financial information. The position did not change between 1 January 2014 and 10 April 2014. Accordingly, indicator 14 does not support a finding that the Company was insolvent as at 10 April 2014.

205 Company's balance sheet as at 10 April 2014. No balance sheet as at 10 April 2014 was in evidence. As stated at [191] above, according to the CM April 2018 accounts, the Company's total assets were $300,951.71 and its total liabilities were $1,327,319.33 as at 31 March 2014. According to the Company's bank statements, as at 10 April 2014, it had $15,968.67 in the Melbourne Bank Account (following a withdrawal of $57,000 by the respondent) and $16,527.82 in the Adelaide Bank Account (following a withdrawal of $81,000 by the respondent). Even if it is assumed that the Company also had access to the credit balance of $858.94 in the Landlord Offset Account and the credit balance of $1,206.14 in Ms Hoang's account as at 10 April 2014, and the cash deposits of $144,891.20 that had been made into Ms Hoang's account prior to 10 April 2014, and that the outstanding invoices totalled only $539,786.21 as claimed by the[128]spondent,128 the Company did not have sufficient cash resources to pa[129]ts debts.129 In these circumstances, it can be inferred that, if a balance sheet had been prepared as at 10 April 2014, it would have indicated that the Company was insolvent as at that date.

206 Other issues relevant to the Company's solvency. There are two other relevant issues for the period between 1 January 2014 and 10 April 2014.

207 The first issue was that the respondent gave evidence that Ms Hoang advised him in April 2014 that suppliers were not processing or accepting returns from the Company, or continuing to supply the Company.

208 The second issue was that the respondent made an admission that he believed that the Company was insolvent prior to 10 April 2014.[130] Although the respondent submitted that no reliance should be placed on his admission because it was made during a time when he was heavily medicated, it appears that he acted on his belief regarding the Company's insolvency. That is because, on 10 April 2014, he withdrew $57,000 from the Melbourne Bank Account and $81,000 from the Adelaide Bank Account. He also withdrew the amount of $515,549.32 from the Landlord Offset Account, $475,549.32 of which was used to pay out the respondent's business loan account which is referred to at [10] above.

209 Overall. The discussion at [190]-[208] above indicates that the Company's financial position deteriorated between 1 January 2014 and 10 April 2014 and that the indicators of insolvency overwhelmingly support a finding that the Company was insolvent as at the latter date. In these circumstances, although the respondent's admission of insolvency as at 10 April 2014 supports our finding based on the objective indicators, it is not necessary for us to place any weight upon it.

PART C: DECISION ON GROUNDS 1 AND 2

1. The learned trial judge erred as a matter of fact and law in failing to find (at [69]-[71]) that the Company was insolvent at 1 January 2014, alternatively, on the respondent's own admissions, that the Company was insolvent at 10 April 2014.
2. The learned trial judge should have found that the Company was insolvent at 1 January 2014; alternatively, on the respondent's own admissions, that the Company was insolvent at 10 April 2014.

211 For the reasons set out at [122]-[164] above, grounds 1 and 2 are made out insofar as they contend that the associate judge erred in failing to find that the Company was insolvent as at 1 January 2014 and that he should have made such a finding.

212 As we have concluded that the associate judge should have found that the Company was insolvent as at 1 January 2014, it is not necessary for us to consider the alternative date of 10 April 2014 in grounds 1 and 2. However, if our conclusion regarding insolvency as at 1 January 2014 is wrong, for the reasons set out at [189]-[209] above, we would have upheld grounds 1 and 2 in relation to that alternative date.

PART D: REMEDIES FOR INSOLVENT TRADING

213 Grounds 3 and 4 concern the associate judge's failure to grant relief in relation to insolvent trading. They are in the following terms:

1. The learned trial judge should have made the declarations, sought against the respondent under s 588G of the [Act], as set out in ... paragraphs 6 and 7 of the third further amended originating process.
2. The learned trial judge should have made the compensation orders, sought against the respondent under s 588M of the Act, as set out in ... paragraph 8 of the third further amended originating process.

214 Notwithstanding the terms of ground 3, the orders sought in the application for leave to appeal do not include the making of declarations; all that is sought are the orders for payment of money (relevant to ground 4).

Provisions of Act and legal principles relevant to grounds 3 and 4

215 Section 588G of the Act deals with a director's duty to prevent insolvent trading. It relevantly states as follows:

588G Director's duty to prevent insolvent trading by company

(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.

...

(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.

216 As is apparent, s 588G(1) of the Act sets out the circumstances when s 588G applies. Several aspects of s 588G(1) are straightforward and do not require elaboration. However, it is necessary to make three observations about the operation of s 588G(1)(c), which concerns whether there are reasonable grounds for suspecting that the company is insolvent at the time a debt is incurred.

(a) First, the requirement under sub-s (1)(c) is an objective one. The provision calls for an inquiry into the objectively formed state of mind of 'a director of reasonable competence and diligence, seeking properly to perform his or her duties as imposed by law ... and capable of reaching a reasonably informed opinion as to [the company's] financial capacity'.[131] The provision is not concerned with the particular director whose conduct is under scrutiny.[132]

(b) Secondly, the focus of the sub-section is on a specific state of mind, namely, 'suspicion'. This can be contrasted with earlier formulations of analogous provisions, such as that found in s 556 of the Companies (NSW) Code 1981, which required there to be reasonable grounds for expecting a company's insolvency. A suspicion is 'less developed and less well formulated than [an] expectation'.[133] A suspicion that something exists is 'more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to "a slight opinion, but without sufficient evidence"'.[134]

(c) Thirdly, where there is material before the court that is capable of proving actual insolvency, and where the material was available to the director at the time the debt was incurred, a court will generally find that a reasonable person in the position of the director would have concluded that the company was unable to pay its debts as they fell due.[135] However, the court must always ultimately make its own findings, based on all of the facts and circumstances that existed at the time, and without the benefit of hindsight.[136]

217 If s 588G(1) of the Act is satisfied, so that s 588G applies, then it is necessary to turn to s 588G(2). Under s 588G(2), a person will contravene s 588G by failing to prevent a company from incurring a debt if either:

(a) the person is aware of the existence of grounds for suspecting insolvency; or

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

218 The first limb of s 588G(2) of the Act focuses on the subjective knowledge of the person concerned. However, it does not require proof of an actual suspicion by that person; rather, it requires proof that the person was aware of the facts and matters that can be objectively characterised as reasonable grounds for suspecting insolvency.[137]

219 The second limb of s 588G(2) of the Act calls for an objective analysis. In relation to the second limb, we note the following.

(a) First, in one sense, s 588G(2)(b) provides an alternative to s 588G(2)(a). If it cannot be demonstrated that the relevant person was aware of the facts and matters that can be objectively characterised as reasonable grounds for suspecting insolvency, but a reasonable person in a like position would or ought to have ascertained those facts and matters, then s 588G(2)(b) may be relied upon.[138] But that is not to say that in each case it is necessary to decide whether the relevant person has the subjective knowledge required for the purposes of s 588G(2)(a), before considering s 588G(2)(b). It is permissible for the court to proceed immediately to consider s 588G(2)(b).

(b) Secondly, what a reasonable person in a like position in a company would be aware of will depend on the particular person's duties as a director or officer of the company.[139]

220 Section 588G(2) of the Act provides that a person contravenes s 588G by 'failing to prevent' the company incurring the debt. In ASIC v Plymin, Mandie J explained as follows:

[T]he essence of a failure by a director to prevent a company from incurring a debt is a failure by that director to take all reasonable steps within his power to prevent the company from incurring such debt. The effect of the provisions, shortly stated, is that if the requirements of s 588G(1) are proved in circumstances where either [para] (a) or [para] (b) of s 588G(2) is also proved, a director will be taken to have failed to prevent the company from incurring the debt unless it is proved that the director took all reasonable steps to prevent the company from incurring the debt.[140]

221 Finally, we note that some authorities have proceeded on the basis that an insolvent trading claim must be established having regard to the standard recognised in the general law in Briginshaw v Briginshaw.[141] We are content to proceed on that basis in this case without deciding whether that standard applies.

222 Section 588H of the Act provides for certain defences to a contravention of s 588G. It relevantly provides as follows:

588H Defences

(1) This section has effect for the purposes of proceedings for a contravention of subsection 588G(2) in relation to the incurring of a debt (including proceedings under section 588M in relation to the incurring of the debt).

...

(4) If the person was a director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company.

(5) It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt.

223 We will discuss the principles relevant to s 588H(4) of the Act below, when we consider whether the respondent has made out a defence under that sub-section.[142]

224 If a contravention of s 588G of the Act is made out, a remedy under s 588M may be available. Section 588M enables a liquidator of a company to recover compensation from a director who has engaged in insolvent trading in contravention of s 588G(2). It relevantly provides as follows:

588M Recovery of compensation for loss resulting from insolvent trading

(1) This section applies where:

(a) a person (in this section called the director) has contravened subsection 588G(2) ... in relation to the incurring of a debt by a company; and

(b) the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and

(c) the debt was wholly or partly unsecured when the loss or damage was suffered; and

(d) the company is being wound up;

...

(2) The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.

225 Section 588M(1) of the Act imposes four threshold requirements that must be met before the right of recovery in sub-s (2) is enlivened. We will deal with the content of those requirements below, when we consider whether s 588M(1) is satisfied in this case.

Evidence and submissions at trial concerning remedies for insolvent trading

226 In his affidavit sworn on 23 November 2018, the Liquidator deposed to debts incurred by the Company during the period from 1 January 2014 until 27 August 2014 (being the date of the appointment of the Liquidator) in the sum of $705,513.36. That sum was made up of an amount of $22,805.91 due to Lippincott Williams & Wilkins, and the following amounts due to various other creditors:

Australian Taxation Office (Running Balance Account)

Running Balance Account and Proof of Debt dated 10 November 2014

Letter from solicitor dated 22 July 2014 and email from Cambridge University Press dated 16 June 2017 attaching invoices

Creditor Account Statements dated 28 March 2014 and 25 August 2014 and Account Reconciliation

Creditor Account Transaction listing provided on 17 September 2015

Proof of Debt dated 3 October 2014 and enclosed tax invoices

Complaint dated 15 May 2014 and judgment dated 17 June 2014 and creditor's statutory demand dated 19 June 2014

Account Reconciliation and Creditor Account Statement August 2014

227 Of these creditors, all save the ATO and Direct Freight Express Pty Ltd are companies that supplied books to the Company for re-sale. We will refer to these companies as the 'Supplier Creditors'.

228 In relation to the ATO, the Liquidator exhibited to his affidavit the ATO running balance account for the Company, which demonstrates that debts totalling $4,734.54 were incurred by the Company between 3 January 2014 and 22 August 2014. In relation to Direct Freight Express Pty Ltd, the Liquidator exhibited a proof of debt in relation to debts incurred in May 2014.

229 In relation to the Supplier Creditors, the Liquidator exhibited to his affidavit various invoices from the Supplier Creditors to support the sum claimed. A copy of each of the invoices had also been annexed to a notice to admit dated 30 July 2018 or one dated 3 October 2018. The Liquidator also deposed to proofs of debt lodged by the ATO and by some, but not all, of the Supplier Creditors.

230 The respondent admitted some, but not all, of the invoices attached to the notices to admit. However, to the extent that he did not admit the invoices, he did not dispute the authenticity of the documents. Rather, in addition to the 'unreconciled accounts' argument that we have already discussed in Part A above, he contended that the amounts shown on the invoices were not debts. His reasons for that contention were, in summary, as follows:

(a) In order to be a debt, the Company had to be subjected to an 'unavoidable obligation to pay a sum of money at a future time'.[143]

(b) The contract provisions between the Company and its suppliers were on a 'full sale or return' basis, so that '[b]y definition accepting deliveries from suppliers' on that basis 'cannot be considered to be an "unavoidable obligation" on the Company to pay a sum of money at a future time'.

(c) Four suppliers supplied books to the Company on this basis, as follows:

(iv) Reed International Books Pty Ltd - $54,698.20.

(d) The Company had stock from the listed suppliers worth $309,328.59 that had not been recovered by the Liquidator. Had that stock been recovered and returned to the suppliers, the amounts estimated as due and payable by the Company would be reduced to $490,343.42.

231 The respondent also relied upon the defence in s 588H(4), which is set out at [222[144]] above.144

232 The respondent contended that he fell ill in February 2014, was hospitalised on 26 March 2014, and was discharged on 15 April 2014. He provided a discharge summary from the Alfred Hospital that verified the dates of his admission to and his discharge from hospital.[145] The parts of the discharge summary that stated the 'initial diagnosis' and the 'active problems' were redacted. The respondent did not call evidence from any treating practitioners in relation to his illness. The discharge summary does not reveal whether he left the hospital from time to time during the period of his admission.

233 The respondent deposed that, as a consequence of his illness, including but not limited to his stay in hospital, he did not take part in the management of the Company from 18 February 2014 until 17 April 2014.

234 In response, the Liquidator contended that the evidence the respondent provided did not demonstrate that his illness prevented him from taking part in the management of the Company in the period from 18 February 2014 until 17 April 2014. The Liquidator observed the following:

(a) The respondent undertook substantial transactions on behalf of the Company during this period, as set out in his affidavit sworn on 18 March 2019. That affidavit set out a series of payments made to creditors from the Landlord Offset Account, including in the relevant period. This account was in the respondent's name and there was no evidence that any other person was able to access it.

(b) The respondent gave evidence that he was able to leave the hospital on escorted family day leave. He also gave evidence that, on 10 April 2014, he attended the Port Melbourne branch of the ANZ Bank in person and made withdrawals from the Company's bank accounts.

(c) The respondent gave evidence that, during the relevant period, he spoke with Ms Hoang about the Company's business.

(d) The respondent deposed that he gave a statement to the Australian Federal Police in 2015 concerning illegal activities occurring at the Company's Melbourne bookstore. The Liquidator contended that that statement contradicted the respondent's later assertion that he was not managing the Company in the relevant period. That is because, in the statement, the respondent stated that he ran Encompass Books from 656 Swanston Street, Melbourne between January 2008 and April 2014 and was responsible for all the day-to-day activities and decisions in relation to the business.

Associate judge's reasons concerning insolvent trading

235 The associate judge concluded that the insolvent trading claim must fail because the Liquidator had 'not demonstrated what the date of insolvency was'.[146] He also held that he was 'not convinced that those payments were actually made as the accounts ... were unreconciled'.[147] However, the Liquidator's insolvent trading claim concerns debts incurred, rather than payments made, by the Company. It is thus unclear to what payments the associate judge was referring.

236 Given this conclusion, the associate judge did not address whether the respondent contravened s 588G of the Act; whether the Liquidator was entitled to recover under s 588M; whether the debts relied upon by the Liquidator were properly characterised as debts; or whether the respondent had made out his defence under s 588H(4).

237 The parties made limited submissions before this Court in relation to ss 588G and 588M of the Act. Given that, we have had regard to the parties' submissions to the associate judge on those issues, as well as to the evidence adduced at trial.

Whether requirements of s 588G of the Act satisfied

238 As discussed above, s 588G of the Act applies if certain matters set out in s 588G(1) are satisfied. We will consider each element of s 588G(1) in turn. We note at the outset that s 588G(1) refers to 'the time when the company incurs a debt', in the singular. There are of course multiple debts in issue in this case, incurred over a period commencing on 1 January 2014 and concluding on 22 August 2014.[148] We have had regard to each of those debts in our assessment of whether s 588G(1) is satisfied.

239 Section 588G(1)(a) of the Act requires us to consider whether the respondent was a director of the Company at the time it incurred the debts. It is clear that he was. Thus s 588G(1)(a) is plainly satisfied.

240 Section 588G(1)(b) of the Act requires us to consider whether the Company was insolvent at the date the debts were incurred. This sub-section is satisfied given that:

(a) we have concluded in Part A above that the Company was insolvent as at 1 January 2014;

(b) pursuant to s 588E(3), the Company was deemed to be insolvent in the period from 1 January 2014 until the relation-back day (namely, 22 August 2014);[149] and

(c) each of the relevant debts was incurred in that period.[150]

241 As to s 588G(1)(c) of the Act, in our opinion there were, on and from 1 January 2014, reasonable grounds for suspecting that the Company was insolvent, based on the discussion at [145]-[164] above in relation to grounds 1 and 2.

242 In our opinion, a director of reasonable competence and diligence, informed of the matters discussed at [145]-[164] above, would have at least suspected (and would arguably have actually formed the opinion) that the Company was insolvent as at 1 January 2014.

243 Section 588G(1)(d) of the Act requires that the debt was incurred at or after the commencement of the Act. There is no dispute that s 588G(1)(d) is satisfied in this case.

244 Given that each element of s 588G(1) of the Act is satisfied, it is necessary to turn to s 588G(2).

245 As noted above, s 588G(2) of the Act provides two pathways to a conclusion that a person has contravened s 588G: a subjective pathway under s 588G(2)(a) and an objective pathway under s 588G(2)(b). It is necessary in the present case only to consider the objective pathway.

246 Under s 588G(2)(b) of the Act, a person contravenes s 588G if the person fails to prevent a company from incurring a debt at a time when 'a reasonable person in a like position in a company in the company's circumstances' would be aware that there were reasonable grounds for suspecting that the company is insolvent.

247 In our opinion, s 588G(2)(b) of the Act is satisfied in this case.[151] A reasonable person in the position of director of a company in the circumstances of the Company in the present context would have been aware that there were reasonable grounds to suspect that the Company was insolvent on and from 1 January 2014. The following matters support that conclusion:

(a) The Company was a small company and the respondent was its sole director. He was involved in the day-to-day running of the Company.[152] A reasonable person in that position in such a company would have been aware of the matters indicating insolvency discussed at [145]-[164] above.

(b) Several of the matters discussed at [145]-[164] above were directly drawn to the Company's attention in correspondence. A sole director of a company in a like situation would have seen correspondence of that kind.

(c) The respondent was the sole signatory on the Company's bank accounts. A reasonable person who controlled a company's bank accounts would have been aware of the various transactions in and out of those accounts and the funds available in those accounts to pay the company's debts.

(d) A person who was aware of these matters would have had reasonable grounds to suspect that the company was insolvent.

248 There was no suggestion in the material before the Court that the respondent took any, let alone all reasonable, steps within his power to prevent the Company from incurring the debts the subject of the insolvent trading claim incurred after 1 January 2014. Nor did he rely upon a defence of that kind under s 588H(5).

Whether debts upon which Liquidator relied properly characterised as debts

249 The focus of s 588G of the Act is on the incurring of a debt. We note that the respondent contended at trial that the debts incurred to the Supplier Creditors upon which the Liquidator relied in his claims under ss 588G and 588M were not properly characterised as debts because they involved the supply of books on a 'sale or return' basis.

250 The term 'debt' is not defined in the Act. Rather, it falls to be construed in accordance with the ordinary principles of statutory construction, by reference to the context and purpose of the provision in which it appears. A useful starting point is the ordinary legal meaning of a debt, being 'a sum of money which is now payable or will become payable in future by reason of a present obligation'.[153] In Hawkins v Bank of China, upon which the respondent relied, Gleeson CJ stated:

The words 'incurs' and 'debt' are not words of precise and inflexible denotation. Where they appear in s 556 [of the Companies (NSW) Code] they are to be applied in a practical and commonsense fashion, consistent with the context and with the statutory purposes.

'Debt' is capable of including a contingent liability. The word was used in that sense in s 291 of the Companies Act 1961, which referred to 'debts payable on a contingency'. That expression did not involve a contradiction in terms. Dictionaries define 'debt' as a liability or obligation to pay or render something. Such a liability may be conditional as well as present and absolute. ...

Similarly, the word 'incurs' takes its meaning from its context and is apt to describe, in an appropriate case, the undertaking of an engagement to pay a sum of money at a future time, even if the engagement is conditional and the amount involved uncertain. Once it is accepted that 'debt' may include a contingent debt then there is no obstacle to the conclusion that, in the present context, a debt may be taken to have been incurred when a company entered a contract by which it subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future time.[154]

251 Those observations are equally applicable to s 588G of the Act.

252 In our opinion, and contrary to the respondent's contention, the amounts owing to the Supplier Creditors were properly characterised as debts. Although the contract provisions relating to the supply of books to the Company provided for the return of books to the supplier, in no case was the Company's ability to return books unqualified. There was no dispute that that was the case. In his affidavit sworn on 23 November 2018, the Liquidator deposed, in summary, as follows:

(a) John Wiley's terms and conditions provided for a credit for the return of books only after prior authorisation from Wiley's Customer Service Department; and not all books were able to be returned.

(b) McGraw-Hill's return policy stated that 'prior permission must be obtained before returning books', and not all books were able to be returned.

(c) LexisNexis' terms of trade required the Company to obtain a returns request authorisation from LexisNexis before returning any books for credit.

253 The respondent deposed to similar effect, explaining the process as follows in his affidavit sworn on 6 February 2018:

1. If the Company is seeking to return books to the supplier the Company is contractually required to seek a return authorisation from the supplier.
2. Only when return authorizations are approved by a supplier and a written authorization is received by the Company, the Company proceeds to process and dispatch said books from the Company back to the supplier.

1. When books are dispatched from the Company back to the supplier the inventory is removed from the Company's inventory management system, decreasing stock on hand.

1. The liability will remain with the Company until such time a return authorisation is accepted and processed by the supplier and a credit note is issued.

1. Technically, until such time as a Credit Note is issued by the supplier the Company remains liable for the debt. This process is outlined clearly in all terms of trade agreements for the suppliers.

254 In Cengage Learning's terms of supply, exhibited to the respondent's affidavit sworn on 18 March 2019, the return rights reflected his evidence, but in addition certain books were offered on a 'firm sale, no return' basis; and others were able to be returned only for a certain period of time.

255 In our opinion, consistent with the respondent's own evidence, the relevant contractual arrangements required that the Company pay for the books received unless the supplier resolved to agree to the return of the books.

256 As noted at [229] above, copies of the invoices were provided to the Court. There was no suggestion in this case that the invoices were sham invoices or that they were otherwise inaccurate. Nor was the debt disputed other than by reference to the 'unreconciled accounts' argument that we have rejected and the contractual terms providing for 'sale or return' of books supplied. The debts were liquidated sums, the amount of each debt being the amount of the face value of each invoice rendered by the suppliers to the Company.

257 In our opinion, the obligation the Company had to pay the suppliers for the books it received from them was 'unavoidable' in the sense that the Company could not unilaterally decide to return books rather than pay for them. As a matter of common sense, that obligation is properly characterised as a debt. As noted at [253] above, the respondent accepted that 'until such time as a Credit Note is issued by the supplier the Company remains liable for the debt'. He deposed that the procedure for processing returns was 'outlined clearly in all terms of trade agreements for the suppliers'. His evidence in this regard is inherently inconsistent with his submission that the amounts owing to the suppliers for books supplied are not properly characterised as debts.

258 Further, we note for completeness that, as the Liquidator submitted, there was no evidence that the stock the respondent asserted was available for return to creditors was in fact available. The respondent had deposed that the stock was 'missing'. Further, the majority of the stock was said by the respondent to have been from the Adelaide bookshop; however, there was evidence that that stock was the subject of a warrant to distrain for unpaid rent by the landlord of the Adelaide bookshop. In those circumstances, the debt was properly characterised as 'unavoidable'. Nor is it relevant to the existence of the debts that John Wiley registered a security interest against the books it supplied to the Company, or that other suppliers' terms and conditions included a retention of title clause, given that there was no evidence that there were any books presently available to return for credit that might then be set off against the amount owing.

259 On the basis of the above discussion and the evidence to which we have referred, we are satisfied in accordance with the principles in Briginshaw v Briginshaw[155] that the respondent contravened s 588G of the Act, unless he can successfully invoke a defence.

Whether a defence under s 588H of the Act was made out

260 As noted at [233] above, the respondent invoked a defence under s 588H(4) of the Act, namely, that he did not take part in the management of the Company from 18 February 2014 until 17 April 2014 due to illness. That defence was not relied upon for the period from 1 January 2014 until 17 February 2014 or for the period after 17 April 2014. Moreover, the respondent did not expressly raise any other defences under s 588H.

261 The respondent bears the onus of proof in relation to the defence available under s 588H(4) of the Act. In our opinion, he has not discharged that onus. Whilst we accept that he was in hospital from 26 March 2014 until either 15 or 17 April 2014, as demonstrated by the discharge summary, there is no independent evidence as to the nature or severity of his illness during that period, or during the extended period from 18 February 2014 until 17 April 2014.

262 Further, as outlined at [234] above, there is evidence that the respondent in fact continued to take part in the management of the Company:

(a) Payments were made from the Company's bank accounts during the period of the respondent's illness. The respondent gave evidence that Ms Hoang did not have access to those accounts and could not have authorised the payments; and there is no evidence that anyone else had access to those accounts. To the contrary, the respondent stated in the Director's Questionnaire that he was the only signatory to the accounts.[156] Thus we infer that the respondent authorised those payments.

(b) The respondent left the Alfred Hospital on 10 April 2014 and attended the Port Melbourne branch of the ANZ Bank in order to make transfers of $57,000 and $81,000 from two of the Company accounts.[157]

(c) The respondent gave evidence that while he was in hospital he spoke with Ms Hoang about the Company's business.

263 As Keane JA observed in Scholz, the defence under s 588H(4) of the Act is not engaged in circumstances where a director 'actually took part in the management of the company'.[158] The respondent did not stand down as a director of the Company during the period of his illness. In the light of the evidence about the activities he conducted in relation to the Company's business during that period, we do not consider he has demonstrated that, due to his illness, he 'did not take part at that time in the management of' the Company.

Relief to be granted to the Company under s 588M of the Act

264 Section 588M of the Act permits the Liquidator to recover moneys from the respondent, as a debt due to the Company, if the requirements of the section are made out. For the reasons that follow, we are satisfied that s 588M applies in this case. Again, we deal with each aspect of s 588M(1) in turn.

265 Section 588M(1)(a) of the Act requires that the person in question has contravened s 588G. This element is satisfied because the respondent contravened s 588G, as explained above.

266 Section 588M(1)(b) of the Act requires that the creditor has suffered loss or damage in relation to the debt by reason of the Company's insolvency. The term 'loss or damage' does not necessarily mean the original amount of debt owed to the creditor.[159] Although the amount of the debt will be the starting point, it is not necessarily the amount of the loss.[160] As Barrett J observed in Edenden v Bignell:

[Section 588M] does not allow recovery of the amount of the creditor's debt as such. Rather, it is a provision allowing recovery of compensation measured by reference to loss or damage suffered by the creditor in relation to the debt because of the debtor's insolvency. In some cases - perhaps most cases - this will be the equivalent of the amount of the debt. In others - for example where a proof of debt is admitted and a substantial payment is made to all creditors rateably - the relevant loss or damage may be less than the amount of the debt. There may perhaps be circumstances in which the amount of the loss or damage exceeds the amount of the debt.[161]

267 Similarly, the Western Australian Court of Appeal explained the approach to the quantification of the relevant loss in Perrine v Carrello as follows:

Section 588M refers to loss 'because of the company's insolvency'. That causal question directs attention to a comparison between the position of the creditors at the time of trial and the position if the company were not insolvent: how much worse off is the creditor? Often, that question is answered along the following lines: as at trial, the creditor of the insolvent company will get nothing; if the company were not insolvent, the creditor would be paid the amount of the debt; consequently, the loss is the amount of the debt.

That is why the cases state that, in ascertaining the creditor's loss or damage, the amount of the debt is the starting point and will often, if not normally, reflect the quantum of the loss. If the creditor has received or is receiving a dividend in the winding up, the loss suffered by the creditor is reduced accordingly.[162]

268 In a claim under s 588M(2) of the Act, it is ultimately for the liquidator to show that the creditor has suffered loss or damage because of the company's insolvency and establish the quantum of that loss or damage.[163]

269 In this case, we are satisfied that the creditors identified in the third further amended originating process have suffered loss or damage in relation to the debts incurred by the Company after 1 January 2014 by reason of the Company's insolvency. The Liquidator has given evidence that the Company lacks funds to pay its creditors. The respondent presented no evidence to contradict that proposition. Thus, as at trial, the creditors of the Company will get nothing. If the Company were not insolvent, the creditors would be paid the amounts of their debts. Consequently, the loss each creditor has suffered is the amount of its debt. This case is, like most cases, one where the creditors' loss or damage is the amount of the debts due to them. Section 588M(1)(b) is satisfied.

270 Section 588M(1)(c) of the Act requires that the debts in question be wholly or partly unsecured. It appears that at least two of the creditors' debts were unsecured, namely, the debts due to the ATO and Direct Freight Express Pty Ltd. However, some of the Supplier Creditors may be in a different position due to the existence of retention of title clauses[164] in their contracts with the Company. In addition, one Supplier Creditor, John Wiley, had registered a security interest against the Company on 30 July 2013, under the Personal Property Securities Act 2009 (Cth) ('PPSA'). It is thus necessary to consider the effect of a retention of title clause on the operation of s 588M.

271 The question is whether a retention of title clause in a contract for the supply of goods has the effect that the debt owed to the supplier of those goods is secured, rather than unsecured, so as to fall outside s 588M. The answer to that question is complicated by the operation of the PPSA, the effect of which is that, after 30 January 2012, a security interest, such as that conferred by a retention of title clause,[165] is enforceable only if the interest has been 'perfected'. Ordinarily, perfection of a security interest requires its registration on the register established by the PPSA.[166] Further, under ss 267 and 267A of the PPSA, certain unperfected security interests vest in the grantor upon winding up.

272 We note that there are diverging authorities as to whether the existence of a retention of title clause in a contract for the supply of goods will be sufficient to demonstrate that a debt under such a contract is wholly or partly secured.[167]

273 However, if the security is registered on the Personal Property Securities Register under the PPSA, then it is clear that the debt in question would be regarded as 'secured'.

274 Although he referred to the retention of title clauses and the registered security in his affidavit sworn on 18 March 2019, the respondent did not assert that the effect of those clauses and that security was to render the debts secured so that relief under s 588M was not available.

275 In any event, and assuming for present purposes that some of the creditors' debts were secured by a retention of title clause, and accepting that one creditor's security interest was registered under the PPSA, the short answer to any argument that s 588M is not available is that the bulk, if not all, of the books supplied by the Supplier Creditors - being the property over which the debts were secured by the retention of title clauses - are no longer in the possession of the Company. They are thus not available for the Supplier Creditors who had a retention of title clause to possess and sell to recoup their debts. In those circumstances, we consider that the debts of the Supplier Creditors who had a retention of title clause or a registered security were, at the time the s 588M claim falls to be resolved, wholly or partly unsecured within the meaning of s 588M(1)(c) of the Act.

276 For completeness we note that, if we are wrong in that conclusion, we consider that the Supplier Creditors have surrendered their security and elected to prove as unsecured creditors. Section 554E of the Act provides that a secured creditor may prove in a winding up in one of three ways, namely:

(a) by surrendering the security and proving for the whole debt;

(b) by realising the security and proving for the balance, subject to the liquidator being satisfied as to the circumstances of the realisation; or

(c) by estimating the value of the security and proving for the balance.

For the purposes of [pt 5.7B], a secured debt becomes an unsecured debt to the extent that the creditor proves for the debt as an unsecured creditor.

278 Section 588D of the Act is to be understood by reference back to s 554E(3), which requires consideration of whether a secured creditor has surrendered its security. It is not necessary for the creditor to expressly surrender its security; it is possible to infer an election to surrender in certain circumstances.[168]

279 The following Supplier Creditors had lodged a formal proof of debt in the liquidation in the prescribed form:

(f) United Book Distributors (Pearson Australia Group); and

280 In our opinion, the lodgement of a formal proof of debt by these Supplier Creditors is - in the circumstances of this case where the supplied books were sold or, for some reason, no longer in the hands of the Company - to be regarded as a surrender of the security to the Company under s 554E(3) of the Act. The consequence is that, pursuant to s 588D, the relevant debts are unsecured for the purpose of s 588M(1)(c).

281 Two Supplier Creditors - John Wiley and Macmillan - did not, it appears from the material before the Court, lodge a formal proof of debt in the liquidation. However, they notified the Liquidator of the debts due to them and thus made an informal proof or claim. As part of their claims, they notified the Liquidator of the steps they had taken to recover their debts, as follows.

(a) John Wiley had instituted proceedings in the District Court of Queensland to recover its unpaid debt and, so far as is apparent from the documents available, did not seek to rely on its retention of title clause, even though that clause was registered under the PPSA.[170]

(b) Macmillan had obtained a judgment in the Magistrates' Court of Victoria against the Company for $33,564.98, for goods sold and delivered. It also issued a statutory demand under the Act for that sum, based on the judgement debt.[171] So far as is apparent from the documents available, it did not seek to rely on its retention of title clause.

282 In our opinion, the claims presented to the Liquidator, together with the steps taken by these two companies to recover their debts as unsecured debts, permit us to infer that they have surrendered their security to the Company and proved their debts as unsecured creditors. They have acted in a manner which was clearly and unequivocally consistent only with surrender of the security.

283 For these reasons, we are satisfied that the debts due to the Supplier Creditors were wholly or partly unsecured. Section 588M(1)(c) of the Act is satisfied.

284 Section 588M(1)(d) of the Act requires that the company in question is being wound up. That element is plainly satisfied in the present case.

285 Thus s 588M(1) of the Act is satisfied and s 588M applies.

286 Section 588M(2) of the Act permits a liquidator to recover, as a debt due to the relevant company, certain amounts from a person who has contravened s 588G. Given that we have concluded that s 588M applies, it follows that the Liquidator may, pursuant to s 588M(2), recover from the respondent, as a debt due to the Company, an amount equal to the loss or damage suffered by the creditors.

287 As outlined at [226] above, the evidence at trial was that the amounts due to creditors by way of debts incurred after 1 January 2014 were, in total, $705,513.36. In relation to each debt due to the Supplier Creditors there is an invoice. As noted at [230] above, the authenticity of the invoices is not disputed. We are satisfied that the Company is entitled to recover that amount from the respondent under s 588M(2). However, in the third further amended originating process, the applicants claimed the lesser amount of $705,387.53 without explaining the discrepancy of $125.83. Having regard to the immaterial difference in the figures, we consider that the appropriate course is for us to rely on the lower figure.

288 It follows from the above discussion that ground 4 is made out.

289 On the basis of our conclusion that the Company was insolvent as at 1 January 2014, it is entitled to an order that the respondent pay to it the amount of $705,387.53.

290 If our conclusion that the Company was insolvent as at 1 January 2014 is wrong and the correct position is that it was insolvent as at 10 April 2014, the amount payable by the respondent to the Company would be $45,515.84. That amount is calculated by identifying and adding together those debts in the table in the third further amended originating process that were incurred on or after 10 April 2014.

1. The learned trial judge erred as a matter of law in failing to properly consider (at [72]-[74]) the applicants' claims in relation to unfair preferences and insolvent transactions under ss 588FA and 588FC of the Act.
2. The learned trial judge should have declared that one or other of the series of payments set out at paragraphs 1 and 2 of the third further amended originating process were insolvent transactions under s 588FC of the Act and were voidable against the [Liquidator] pursuant to ss 588FE(4) and 588FF of the Act in respect of one of the following periods: (a) 1 January 2014 and 12 March 2014 [$240,580.86]; alternatively (b) 1 January 2014 and 13 March 2014 [$273,077.65]; alternatively (c) 1 January 2014 and 10 April 2014 [$532,942.58]; alternatively (d) 1 January 2014 and 26 August 2014 [$553,996.06].

292 Notwithstanding the terms of ground 6, the orders sought in the application for leave to appeal do not include the making of declarations; all that is sought is an order for payment of money pursuant to s 588FF of the Act.

Provisions of Act and legal principles relevant to grounds 5 and 6

293 Section 588FE of the Act relevantly provides that, if a company is being wound up, the following kinds of transactions are voidable:

588FE Voidable transactions

...

(4) The transaction is voidable if:

(a) it is an insolvent transaction of the company; and

(b) a related entity of the company is a party to it; and

(c) it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation‑back day.

...

(6A) The transaction is voidable if:

(a) it is an unreasonable director‑related transaction of the company; and

(b) it was entered into, or an act was done for the purposes of giving effect to it:

(i) during the 4 years ending on the relation‑back day; or

(ii) after that day but on or before the day when the winding up began.

294 Section 588FF(1) of the Act sets out the types of orders a court may make, on an application of a company's liquidator, if it is satisfied that a transaction of the company is voidable because of s 588FE. They include an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction. It is an order of this kind that was sought by the applicants before the associate judge and is now sought before us.[172] In order for such an order to be available for a voidable transaction falling within s 588FE(4), it is necessary that there be an 'insolvent transaction'.

295 Section 588FC of the Act defines insolvent transactions as follows:

588FC Insolvent transactions

A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

(a) any of the following happens at a time when the company is insolvent:

(i) the transaction is entered into; or

(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b) the company becomes insolvent because of, or because of matters including:

(i) entering into the transaction; or

(ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction.

296 A transaction can be an insolvent transaction only if it is either an 'unfair preference' or an 'uncommercial transaction'. It is unnecessary for present purposes to consider uncommercial transactions.

297 Section 588FA of the Act defines unfair preferences as follows:

588FA Unfair preferences

(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

(2) For the purposes of subsection (1), a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security.

(3) Where:

(a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and

(b) in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

then:

(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

(d) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference.

298 Sub-section (1)(b) is the main component of s 588FA of the Act. It is concerned with whether a transaction has a preferential effect. This was recently explained by Markovic J in Stone. In summary, it requires the liquidator to demonstrate that a transaction results in a creditor receiving some sort of 'preference, priority or advantage' over the debtor's other creditors. [173] This, in turn, calls for a comparison between the amount that the creditor received as a result of the relevant transaction and the probable return the creditor would receive should the transaction be set aside and proved for in the winding up.[174] If it is revealed, upon examining the totality of the transaction and its 'ultimate effect',[175] that the creditor received more than the creditor otherwise would have, the section will be satisfied.

299 We note that there remain some unresolved aspects of s 588FA(1)(b). First, there are different views as to whether, in addition to preferential treatment, there must also be an element of unfairness to the transaction. Secondly, it is unclear whether, in order for there to be unfairness, there must necessarily be a 'diminution in the value of assets available to the general body of creditors'.[176] In Stone, reference was made to several cases on these points, including the Full Court of the Federal Court's decision in Commissioner of Taxation v Kassem.[177]

300 In Kassem, the Full Court, after canvassing the authorities on this issue, held that it was not necessary to determine whether there must be a diminution in the value of the debtor's assets, because in that case there was such a diminution.[178] Likewise, in Stone, Markovic J found it unnecessary to decide this point.[179] We too find it unnecessary to resolve this issue in the present case, given our conclusion (discussed below) that the payment of the respondent's debts reduced the assets available to pay the Company's creditors.

301 Section 588FG of the Act provides for certain good faith defences available to creditors. As the respondent did not rely upon them in relation to the unfair preference claim,[180] it is not necessary for us to discuss them.

Evidence at trial concerning unfair preferences and parties' contentions

302 There was considerable evidence at trial concerning various payments of money by the Company to the respondent in the period after 1 January 2014. The Liquidator adduced evidence of the payments to the respondent in that period, and the fact that those payments were made was not disputed. The total payments from the Company to the respondent after 1 January 2014 totalled $1,184,000.00.

303 However, there were two matters that the respondent disputed:

(a) First, he disputed the quantum of the loan amount(s) owed by the Company to him as at 1 January 2014. That was relevant because if, at the times the various payments were made to him, the Company owed him money, then the payments could not be 'unreasonable director-related transactions' falling within s 588FE(6A) of the Act. However, they could be 'unfair preferences' within s 588FA and hence voidable transactions under s 588FE(4).

(b) Secondly, he contended that the Liquidator's analysis of the payments made by the Company to him failed to take into account payments made by him to the Company's creditors at the direction of the Company.

Associate judge's reasons concerning remedies for unfair preferences

305 At paras 72 to 74 of his reasons, the associate judge stated as follows:

1. The [applicant] also claims that the [respondent] owes the [applicant] $553,966.06 pursuant to ss 588FE(4) (Insolvent transaction to which ... related entities are part[ies]) and [588FE(6A)] of the Act (Unreasonable director related transaction).
2. The [applicants] have, based on all the documents, financial statement balance sheets and investment trust loan offsets filed, drawn up the following table that takes into account the different permutations they say arise in the proceeding:

Amount of Vlahos loan per Company Ledgers at CB 5.2203

Company FY 2013 financial statements CB 7.2862 less $341,038 paid into MOA 6 months prior to 31.12.2013 [T117.12]

Trial Exhibits 4 and 5 Balance Sheets 31.12.2013 and 01.01.2014

Trial Exhibits 4 and 5 and Invest Trust Loan offset #41771

Balance on loan account crossover from credit to debit

Net movement in loan account to 1 January 2014 to crossover date

Balance on loan account cross over from credit to debit

Net movement from loan account crossover date to 27 June 2014

Net movement in loan account 1 January 2014 to 27 June 2014

1. The starting balance is taken as at 1 January 2014 on the above table. The [applicants] were not able to demonstrate that the Company was insolvent at that date based on the unreconciled accounts. I am also not convinced that these figures are correct. The Company was not insolvent as of 1 January 2014 and therefore I am unable to determine what amount was owed, if any.

306 As with the insolvent trading claim dealt with in Part D above, the principal reason for the associate judge's refusal to make the orders sought in relation to unfair preferences was that he was not satisfied that the Company was insolvent as at 1 January 2014. He thus did not go on to consider whether a case under one or both of s 588FE(4) or 588FE(6A) was made out.

307 Before us, the parties made submissions on grounds 5 and 6 directed to the two issues identified at [303] above, namely:

(a) what was the loan balance owing to the respondent as at 1 January 2014; and

(b) what was the sum recoverable under s 588FF of the Act, when the amounts paid by the respondent to the Company's creditors at the direction of the Company were taken into account?

308 As to the first issue, the respondent contended that as at 1 January 2014 he was owed a total of $585,905.35 (being $500,596.35 for the 'Loan from David' and $85,309.00 for the Landlord Offset Account in the balance sheet set out at [91] above). The Liquidator had initially alleged that as at 1 January 2014 the Company owed the respondent $218,558.57. However, before us the applicants accepted that, based on the 1 January 2014 balance sheet from the CM April 2018 accounts, the Company owed the respondent $585,905.35 (being the figure in the final column of the second row of the table at [305] above). Thus before us there was no dispute as to this figure.

309 The consequence of that concession by the applicants was that any claim for voidable transactions based on 'unreasonable director-related transactions' under s 588FE(6A) fell away, and the only issue was whether the payments from the Company to the respondent constituted 'unfair preferences' that were voidable under s 588FE(4) of the Act.

310 As to the second issue, the respondent contended that the Liquidator's evidence as to unfair preferences had failed to take into account various payments made from his accounts to the Company's creditors at the direction of the Company. We pause to note that at trial the Liquidator had initially contended that he was entitled to recover $701,316.23 by way of unfair preferences and/or unreasonable director-related transactions. However, in the applicants' closing submissions at trial, the Liquidator expressed the view that, after reviewing the evidence, payments totalling $147,350.14 were properly classified as payments made to the Company's creditors at the direction of the Company and should be credited against the voidable transactions.

311 That concession, which was based on evidence the respondent had given in his affidavit sworn on 18 March 2019, reduced the amount sought under s 588FE of the Act to a total of $553,966.06. That figure was pleaded in the third further amended originating motion as the amount recoverable from the respondent if all of the loan repayments that were made to him were properly characterised as unfair preferences. In addition, the applicants provided to the Court a table that set out each of the transactions from the Company to the respondent, together with each of the transactions from the Landlord Offset Account for the period from 1 January 2014 until 27 June 2014. That table had initially been provided to the associate judge as 'Annexure A' to the applicants' closing submissions. The version provided to us was identical save for the addition of references to the Application Book ('Annexure A Table'). The respondent did not object to us receiving the Annexure A Table in that updated form.

312 The respondent submitted before us, however, that even the figure of $553,966.06 was incorrect as it did not take into account numerous other payments to creditors from the Landlord Offset Account. He contended that amounts totalling $1.53 million were paid to creditors of the Company which were not taken into account and that, when those payments were taken into account, the result was that there was no unfair preference to him. In particular, he submitted that there were payments out of the Landlord Offset Account reflected in the Company's General Ledger in the CM April 2018 accounts that had not been taken into account, even in the revised figure pressed by the applicants.

313 In addition, the respondent asserted that there were payments out of Company credit cards and personal credit cards, including Ms Hoang's personal credit cards, that were not taken into account. However, it is plain that any payments from Company credit cards or Ms Hoang' credit cards are not relevant to whether the respondent received unfair preferences and in what amount. Nor was there any evidence put before us to demonstrate that the respondent's personal credit card had been used to pay Company creditors. That remained mere assertion.

314 The only evidence before us concerned payments out of the Landlord Offset Account at the Company's direction. When the respondent was asked to identify payments out of that account to Company creditors that were not reflected in the table of payments provided by the applicants, he was not able to do so.

315 We are satisfied that the payments made from the Landlord Offset Account at the direction of and for the benefit of the Company were accurately reflected in the Annexure A Table provided by the applicants. We are further satisfied that that table is an accurate reflection of the sums paid by the Company to the respondent after 1 January 2014. We are also satisfied that those payments reflected repayments of amounts referable to loans from the respondent to the Company and we refer to those sums as the 'Loan Repayments'. We have reached these conclusions on the basis of the bank statements and other evidence before us.

316 It is thus necessary to consider whether some or all of the Loan Repayments were unfair preferences that can be recovered from the respondent under s 588FF of the Act.

Conclusion on s 588FA of the Act: Unfair preferences

317 Under s 588FA(1) of the Act, a transaction is an unfair preference given by a company to a creditor if, and only if:

(a) the company and the creditor are parties to the transaction; and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt, more than the creditor would receive if the transaction were set aside and the creditor proved for the debt in the winding up.

318 Before considering the operation of s 588FA(1) of the Act, however, it is necessary to mention s 588FA(3). If that sub-section applies, it requires a series of transactions to be treated as a single transaction. Its effect is for the benefit of the creditor, by enabling goods or services provided by the creditor to the company to be taken into account in determining the amount of any unfair preference.

319 In the present case, the applicants sought a declaration that the transactions between the Company and the respondent between 1 January 2014 and 27 June 2014 were a single transaction pursuant to s 588FA(3). Thus the applicants have conceded the applicability of s 588FA(3). That concession is to the benefit of the respondent, because if s 588FA(3) did not apply then the unfair preference claim would be for the total of the amounts paid to the respondent that is shown on the Annexure A Table (namely, $1,184,000.00) rather than for the net amount of $533,966.06 that the applicants seek. Given that concession, it is not necessary for us to determine for ourselves whether s 588FFA(3) applies.

320 The consequence is that the series of transactions from 1 January 2014 until 27 June 2014, as set out in the Annexure A Table, are to be treated as a single transaction ('Single Transaction'). Section 588FA(1) then falls to be applied to the Single Transaction. That is, the Loan Repayments from the Company to the respondent will only be an unfair preference if the Single Transaction is an unfair preference.

321 In the present context, s 588FA(1)(a) of the Act is satisfied in relation to the Single Transaction and the individual Loan Repayments: the Company and the respondent (ie the creditor) were parties to each of the Loan Repayment transactions, and hence to the Single Transaction. The Single Transaction, so understood, is the payment of $533,966.06 from the Company to the respondent, as reflected in the Annexure A Table.

322 In addition, we have concluded that the loans from the respondent to the Company which were the subject of the Loan Repayments were unsecured, and thus the Single Transaction was unsecured, as required under s 588FA(1)(b) of the Act. We note that the respondent deposed that all money loaned to him by the Company was secured by the Loan Agreement and associated security deed between him and the Company.[182] That security interest was not registered on the Personal Property Securities Register as at the date of the winding up order. It appears that the respondent may have registered this security at some date after the winding up order was made, however no document evidencing that registration was before the Court.

323 If the security deed was not registered, then it is unenforceable against a third party, including the Liquidator, by reason of the PPSA.[183] If, on the other hand, it was registered, then two questions arise:

(a) Did the security interest vest in the Company as at the date of the winding up, as a consequence of ss 267 or 267A of the PPSA?

(b) If not, what was the effect of div 2A of pt 5.7B (ss 588FK-588FQ) of the Act on the security interest?

324 In our view, the answer to the first of those questions is 'yes'. Accepting that the respondent held a security interest, by way of the security deed, over the loans he made to the Company, nonetheless on his own evidence that interest was not registered under the PPSA until after the winding up order was made. That is, to use the language of the PPSA, it was unperfected at the time of the winding up order. As a consequence, the security interest vested in the Company from the date the winding up was taken to have commenced, pursuant to s 267(2) of the PPSA.[184] Given that conclusion, it is unnecessary to consider the operation of div 2A of pt 5.7B of the Act.

325 The remaining question is whether the Single Transaction resulted in the respondent receiving from the Company more than he would receive if the Single Transaction was set aside and he proved for the debt in the winding up.

326 As noted at [269] above, the Liquidator has given evidence that the Company has no funds available for it to pay its creditors. The total of the debts owing to creditors that have been proved or otherwise claimed in the liquidation is $705,513.36, being those debts incurred after 1 J[185]ary 2014.185 In those circumstances, if the Single Transaction in the sum of $553,966.06 were set aside, so as to be available to the Company, and the respondent proved for that amount in the winding up, there would be $533,966.06 available to pay all the creditors, including the respondent. Plainly, in those circumstances, the respondent would not receive the full $553,966.06 in relation to the loans he made to the Company. Rather, he would receive a lesser amount on a pro rata basis with the other creditors. It follows that s 588FA(1)(b) is satisfied: the Single Transaction resulted in the respondent receiving more than he would receive if the Single Transaction was set aside and he proved for the debts in the winding up.

327 Given the above, it is apparent that the respondent received a 'preference, priority or advantage' over the Company's other creditors, by having his loans repaid in part at a time when the Company still had some assets; whereas, in the winding up, as matters presently stand, the other creditors will receive nothing. As noted above, there is some debate in the authorities as to whether it is necessary to show unfairness and a diminution in the value of the assets available to the general body of creditors in order to satisfy s 588FA. As foreshadowed, we do not need to resolve that debate because, in our opinion, the Single Transaction caused a diminution in the value of the assets available to the general creditors by depleting the cash at bank available to the Company, and was thus unfair.

328 Accordingly, we are satisfied that the Single Transaction in the sum of $533,966.06 was an unfair preference under s 588FA of the Act.

Conclusion on s 588FC of the Act: Insolvent transactions

329 Under s 588FC of the Act, a transaction of a company is an 'insolvent transaction' if, relevantly, it is an 'unfair preference' and the transaction is entered into when the company is insolvent (s 588FC(a)(i)). In the present context, the Single Transaction was an insolvent transaction given that:

(a) the Single Transaction was an unfair preference (as we concluded above);

(b) the Company was insolvent on 1 January 2014 (as we concluded in Part A, above);

(c) by reason of s 588E(3), the Company is presumed to be insolvent from 1 January 2014 until 22 August 2014; and

(d) the Single Transaction (and each of the Loan Repayments) was made after 1 January 2014 and on or before 22 August 2014.

330 Thus s 588FC of the Act is satisfied and the Single Transaction was an insolvent transaction.

Conclusion on s 588FE(4) of the Act: Voidable transactions

331 As noted above, for present purposes, the only relevant sub-section within s 588FE of the Act is sub-s (4). Under that sub-section, a transaction will be a voidable transaction if, relevantly:

(b) a related entity of the Company is a party to it; and

(c) it was entered into during the four years ending on the relation-back day.

332 In the present case, each of those matters is satisfied:

(a) for the reasons given above, the Single Transaction was an insolvent transaction;

(b) the respondent is a related entity of the Company because he is its director;[186] and

(c) the Loan Repayments were made within four years of the relation-back day (namely, within four years of 22 August 2014).

Relief to be granted to the Company under s 588FF of the Act

333 Given that the Single Transaction was voidable under s 588FE(4) of the Act, the Company is entitled to an order under s 588FF(1)(a) that the respondent pay it the sum of $553,966.09.

334 If our conclusion that the Company was insolvent as at 1 January 2014 is wrong and the correct position is that it was insolvent as at 10 April 2014, the amount payable by the respondent to the Company is $159,023.51. That amount is calculated by identifying and adding together the payments made by the Company to the respondent on or after 10 April 2014, as set out in Annexure A1 and summarised in Annexure B1 (being documents that were provided to the Court by the applicants, without objection).

335 Most of these transactions occurred after 10 April 2014. However, this amount also includes two payments of $57,000 and $81,000 made by the Company to the respondent on 10 April 2014. These payments were 'insolvent transactions' under s 588FC(b) because the Company became insolvent on that day because of matters including the making of those payments from the Company to the respondent, which reduced the Company's cash at bank by $138,000.

336 For the reasons set out above, the application for leave to appeal will be granted and the appeal will be allowed. We will make orders that the respondent pay to the Company the amount of $705,387.53 pursuant to s 588M of the Act and the amount of $553,966.06 pursuant to s 588FF.[187]

[1] The alternative date of insolvency of 10 April 2014 was added by the Liquidator in response to the respondent's affidavit evidence.

[2] Unless the contrary is stated, all provisions of the Act which are referred to in these reasons are to the Act as in force on 1 January 2014. Whilst some of the provisions of the Act to which we refer below have been amended since 1 January 2014, it is convenient to refer to them in the present tense, not least because many of them have remained unchanged.

[3] Quin v Vlahos (Supreme Court of Victoria, Efthim AsJ, 27 March 2020) ('Reasons').

[4] References to grounds of appeal in these reasons are to proposed grounds of appeal.

[5] Grounds 1 and 2 are set out at [210] below. Grounds 3 and 4 are set out at [213] below.

[6] Grounds 5 and 6 are set out at [291] below.

[7] See n 145 below relating to the hospital discharge summary.

[8] The amount of $3,470.39 represented the invoiced sum less the value of a credit note issued on 15 May 2014.

[9] Clyde Peter White and the first applicant were initially appointed as joint and several liquidators of the Company. Mr White retired from practice and was removed as a liquidator by order dated 20 July 2018. For convenience, we will only refer to the first applicant as the liquidator of the Company.

[10] Act ss 9 (definition of 'relation-back day'), 513A(b), 513C(b).

[11] Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72; (2017) 318 FLR 58, 86 [142]; [2017] NSWCA 72 ('Treloar Constructions').

[12] [2019] VSCA 215, [97]-[99], [105] (citations omitted) ('Queensland Phosphate').

[13] [2003] VSC 123; (2003) 175 FLR 124, 213-14 [386]; [2003] VSC 123 ('ASIC v Plymin').

[14] Quick v Stoland Pty Ltd [1998] FCA 1200; (1998) 87 FCR 371, 380; [1998] FCA 1200 ('Quick').

[15] (2005) 219 ALR 555; [2005] NSWCA 243 ('Lewis').

[16] Lewis [2005] NSWCA 243; (2005) 219 ALR 555, 579 [109], 580 [111]; [2005] NSWCA 243 (emphasis in original).

[17] Lewis [2005] NSWCA 243; (2005) 219 ALR 555, 580 [113]; [2005] NSWCA 243.

[18] [2008] QCA 94, [110] (citations omitted) ('Scholz').

[19] [2013] QCA 372; (2013) 97 ACSR 200, 224 [105]; [2013] QCA 372 ('International Cat').

[20] [2015] QCA 28, [42]-[43] ('Chan').

[21] Chan [2015] QCA 28, [43]-[44] (emphasis in original) (citations omitted).

[22] Chan [2015] QCA 28, [114].

[23] [2020] QCA 78 ('Miles').

[24] Miles [2020] QCA 78, [17].

[25] [2018] 3 Qd R 147; [2017] QCA 260 ('Featherstone').

[26] Featherstone [2017] QCA 260; [2018] 3 Qd R 147, 156 [23]-[24], 176 [129(h)], 185 [177], 191 [200]; [2017] QCA 260.

[27] Featherstone [2017] QCA 260; [2018] 3 Qd R 147, 185 [177], 191 [200]; [2017] QCA 260. McMurdo JA dissented with regard to the outcome of the proceeding, but not as to the availability of Mr Featherstone's financial support.

[28] (2017) 318 FLR 58; [2017] NSWCA 72.

[29] Treloar Constructions [2017] NSWCA 72; (2017) 318 FLR 58, 82 [119]-[121]; [2017] NSWCA 72.

[30] Treloar Constructions [2017] NSWCA 72; (2017) 318 FLR 58, 79-80 [106], 80 [108]-[109], 81 [113]; [2017] NSWCA 72.

[31] Edwards v Australian Securities and Investments Commission [2009] NSWCA 424; (2009) 264 ALR 723, 753-4 [163]-[164]; [2009] NSWCA 424; Treloar Constructions [2017] NSWCA 72; (2017) 318 FLR 58, 82-3 [125]; [2017] NSWCA 72.

[32] International Cat [2013] QCA 372; (2013) 97 ACSR 200, 224 [108]; [2013] QCA 372.

[33] See Treloar Constructions [2017] NSWCA 72; (2017) 318 FLR 58, 86 [142]-[143]; [2017] NSWCA 72; Clifton v Kerry J Investment Pty Ltd [2020] FCAFC 5; (2020) 379 ALR 593, 717 [594]; [2020] FCAFC 5 ('Clifton').

[34] Scholz [2008] QCA 94, [41]-[45].

[35] [2009] NSWSC 1229; (2009) 236 FLR 1, 82 [396]; [2009] NSWSC 1229 ('Rich').

[36] (2018) 125 ACSR 406; [2018] FCA 530 ('Stone').

[37] Stone [2018] FCA 530; (2018) 125 ACSR 406, 455 [182], 459 [199], 463 [219]; [2018] FCA 530.

[38] [1999] FCA 728, [44] (emphasis added) (citations omitted) ('Ace Contractors'), approved in Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711, 718-19 [16]; [2003] NSWCA 163.

[39] See Reasons [19], [21]. Sections 286 and 588E(4) are set out at [37]-[38] above.

[40] See [88] below.

[41] 'BAS' means business activity statement.

[42] The working capital ratio is calculated by dividing current assets by current liabilities.

[43] The quick asset ratio is calculated by dividing current assets less inventories and work in progress, by current liabilities less bank overdraft. A ratio of 1 means that for every dollar of current debt there is a dollar available in liquid assets to cover it. A ratio of less than 1 indicates there are insufficient liquid assets to cover current debt, which is an indicator of insolvency.

[44] The running balance account records 'posting dates' for these total balances of 27 November 2013 and 4 January 2014, respectively.

[45] The reference to the sum of $349,000 was to the total aged payables of $349,008.25 as at 31 December 2013 recorded in the original MYOB accounts. See [74] above.

[46] Transcript of Proceedings (25 March 2019) 72.8-72.25, 73.6-73.29, 81.11-81.22, 91.7-91.18.

[47] The respondent submitted that his loans to the Company as at 1 January 2014 totalled $612,650.90, comprising the 'Loan from David' of $500,596.35, credit card debt of $26,745.55 and the 'Inv't Trust Loan Offset #41171' loan of $85,309.00 shown on the balance sheet.

[48] According to the ANZ bank statement number 75 for the Melbourne Bank Account, the credit balance as at 1 January 2014 was $25,811.09 rather than $9,887.86. The difference is not material to the overall financial position of the Company as shown in the balance sheet.

[49] This account appears to correspond to the entry described as 'ANZ - Wholesale #4174' in the balance sheet as at 1 January 2014 generated from the CM April 2018 accounts.

[51] The respondent referred to an ANZ account ending with the numbers '68684'. It is readily apparent that he intended to refer to the Melbourne Bank Account, which is an ANZ account ending with the numbers '65684'.

[52] The bank statements exhibited to the respondent's affidavits sworn on 6 February 2018 and 18 March 2019 record a balance of $61,051.96 in the Landlord Offset Account as at 1 January 2014. On the respondent's analysis, the total cash at bank available to the Company as at that date was in fact $101,110.41. See n 48 above in relation to the amount of $25,811.09.

[54] Reasons [23]-[25] (citations omitted).

[62] See [76]-[78] above.

[63] The applicants relied upon Clifton [2020] FCAFC 5; (2020) 379 ALR 593, 715 [586]; [2020] FCAFC 5; Act ss 1305, 1306(5); Evidence Act 2008 s 69. Section 69 of the Evidence Act provides an exception to the hearsay rule for business records.

[64] See [70]-[80] above.

[65] See [26] above.

[66] See [99], [104] above.

[67] See [73]-[74] above.

[68] See [81] above.

[69] See [91] above.

[70] See para 70 of the associate judge's reasons set out at [104] above.

[71] The applicants relied upon Treloar Constructions [2017] NSWCA 72; (2017) 318 FLR 58, 86 [141]-[143]; [2017] NSWCA 72.

[72] The applicants relied upon Chan [2015] QCA 28, [42]-[44]; Treloar Constructions [2017] NSWCA 72; (2017) 318 FLR 58, 74-6 [77]-[83]; [2017] NSWCA 72; Clifton (2020) 379 ALR 593; [2020] FCAFC 5; Scholz [2008] QCA 94, [43]-[45]; and International Cat [2013] QCA 372; (2013) 97 ACSR 200, 223-4 [104]; [2013] QCA 372.

[73] The respondent relied upon Commonwealth Bank of Australia v Begonia Pty Ltd (rec and mgr apptd) (1993) 11 ACSR 609, 617; and Ace Contractors [1999] FCA 728, [44].

[74] See [82] above.

[75] See [94] above. As noted at n 52 above, this amount is overstated by $4,000.

[76] The respondent relied upon Ace Contractors [1999] FCA 728, [44].

[77] See [173] below.

[78] See [176] below.

[79] See [67] above.

[80] See [85]-[86], [89] above.

[81] See [91] and n 47 above.

[82] See [26] above.

[83] Reasons [36], [46]-[50], [56]. See [99]-[101] above.

[84] See [58] above.

[85] Reasons [25]. See [98] above.

[86] See [89] above.

[87] [1938] HCA 34; (1938) 60 CLR 336, 361-2; [1938] HCA 34. See Evidence Act s 140.

[88] The availability of funds in Ms Hoang's account as at 10 April 2014 is discussed at [194]-[195] below.

[89] See [81] and n 48 above.

[90] We note in passing that the last sentence of para 70 of the associate judge's reasons (which is set out at [104] above) appears to suggest incorrectly that the onus was on the Liquidator to demonstrate that those funds were not available.

[91] [2015] QCA 28, [44]. See [51] above.

[92] See [27] above.

[93] The indicators are set out at [44] above.

[94] Reasons [68]. See [103] above.

[95] Reasons [68]. See [103] above.

[96] See [82] above. The balance of $9,482.54 was effective as at 3 January 2014. The balance effective as at 1 January 2014 was $9,292.32.

[97] A letter dated 17 April 2014 from REST Industry Super stated that the Company had not paid superannuation contributions for the June 2012, September 2012, December 2012, March 2013, June 2013, September 2013 and December 2013 periods.

[98] At [137]-[143] above, we stated that, had it been necessary to decide whether the funds in the Landlord Offset Account were available to the Company, we would have concluded that the funds were not available.

[99] Reasons [50]-[56], [68]. See [99], [103] above.

[100] See [197] below.

[101] See [183] below.

[102] Reasons [32]. See [101] above.

[103] See [145] above.

[104] See [76], [91], [146], [162] above.

[105] See [74], [153] above.

[106] See [148], [158] above.

[107] We also note that the stock in the Adelaide store was the subject of a warrant to distrain, enabling the landlord to seize it, and that the respondent had deposed that the stock was 'missing'.

[108] As noted at n 51 above, the respondent referred to an ANZ account ending with the numbers '68684', which was intended to be a reference to the Melbourne Bank Account.

[109] Reasons [41]. It is not clear whether the associate judge meant to refer to 10 April 2014.

[110] See [16] above.

[111] See [16] above.

[112] See [178] above.

[113] See [173] above.

[114] See [18], [20] above.

[115] See [19] above.

[116] See [21] above.

[117] See [22] above.

[118] See [173] above.

[119] We have not found it necessary to resolve that objection. That is because, even if the table is admissible, in the light of the evidence upon which we have relied to conclude that the Company was insolvent as at 1 January 2014, as well as 10 April 2014, the table could not affect the outcome of the appeal.

[120] The respondent relied upon Re Swan Services Pty Ltd (in liq) [2016] NSWSC 1724; (2016) 12 BFRA 224, 280 [179]-[180]; [2016] NSWSC 1724 ('Swan Services') and the cases cited in that case.

[121] See [173] above.

[122] See [92] above.

[123] The respondent relied upon the records of accounts described as 'Inv't Trust Loan Offset #41171' and 'Loan from David' in the general ledger generated from the CM April 2018 accounts.

[124] See [16]-[17] above.

[125] See [166] above.

[126] See [51] above.

[127] See [183] above.

[128] The respondent's submissions refer to the amount of $523,980.40, which was owing as at the end of 9 April 2014. The respondent claimed that the amount owing as at the end of 10 April 2014 was $539,786.21. See [173] above.

[129] See [16], [171], [173], [178] above.

[130] See [87] above.

[131] Smith v Bone [2015] FCA 319; (2015) 104 ACSR 528, 582 [367]; [2015] FCA 319; ASIC v Plymin [2003] VSC 123; (2003) 175 FLR 124, 223 [423]; [2003] VSC 123, and the cases there cited.

[132] Smith v Bone [2015] FCA 319; (2015) 104 ACSR 528, 581 [364]; [2015] FCA 319; ASIC v Plymin [2003] VSC 123; (2003) 175 FLR 124, 224-5 [426]; [2003] VSC 123.

[133] Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 220 ALR 148, 205 [250]; [2005] NSWSC 831.

[134] Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266, 303; [1966] HCA 21, quoted in Smith v Bone [2015] FCA 319; (2015) 104 ACSR 528, 581-2 [365]; [2015] FCA 319. See also Hall v Poolman [2007] NSWSC 1330; (2007) 215 FLR 243, 298 [234]; [2007] NSWSC 1330; Sands & McDougall Wholesale Pty Ltd (in liq) v Commissioner of Taxation [1998] VSCA 76; [1999] 1 VR 489, 510 [56]; [1998] VSCA 76; Hussain v CSR Building Products Ltd [2016] FCA 392; (2016) 246 FCR 62, 98 [194]; [2016] FCA 392 ('Hussain').

[135] Stoland Pty Ltd v Thurn (1997) 29 ACSR 280, 287; [1997] FCA 1587.

[136] Fryer v Powell [2001] SASC 59; (2001) 159 FLR 433, 446 [76]; [2001] SASC 59.

[137] ASIC v Plymin [2003] VSC 123; (2003) 175 FLR 124, 224-5 [426]; [2003] VSC 123.

[138] ASIC v Plymin [2003] VSC 123; (2003) 175 FLR 124, 224-5 [426]; [2003] VSC 123.

[139] Rema Industries and Services Pty Ltd v Coad (1992) 7 ACSR 251, 259; [1992] FCA 114.

[140] [2003] VSC 123; (2003) 175 FLR 124, 194 [325]; [2003] VSC 123.

[141] [1938] HCA 34; (1938) 60 CLR 336, 361-2; [1938] HCA 34. See Swan Services [2016] NSWSC 1724; (2016) 12 BFRA 224, 234 [25]; [2016] NSWSC 1724, citing Playspace Playground Pty Ltd v Osborn [2009] FCA 1486, [43].

[142] See [248] below in relation to s 588H(5).

[143] The respondent relied upon Hawkins v Bank of China (1992) 26 NSWLR 562.

[144] We note that the respondent also sought to rely upon s 588FG of the Act as a defence to the orders sought in relation to insolvent trading. However, those orders are sought pursuant to s 588M. Section 588FG does not operate to prevent the Court making an order pursuant to s 588M. Its operation is limited to orders pursuant to s 588FF.

[145] The discharge summary is somewhat unclear as to the date of the respondent's discharge. At one point it appears to state that the respondent was an inpatient from 26 March 2014 until 15 April 2014 (which is consistent with the respondent's evidence). At a different point, it specifies the discharge date as 17 April 2014. Ultimately, as will appear below, the precise discharge date does not matter for the purposes of this proceeding.

[148] Being those debts set out in proposed Order 7 of the third further amended originating process. See [226]-[229] above.

[149] See [25] above.

[150] See [226]-[229] above.

[151] It may also be that s 588G(2)(a) of the Act is satisfied, because it may be the case that the respondent was aware that there were reasonable grounds for suspecting that the Company was insolvent on and from 1 January 2014, in that he was aware of the facts that support the conclusion that there were reasonable grounds to suspect that the Company was insolvent as at 1 January 2014. However, given our conclusion on s 588G(2)(b), it is unnecessary for us to reach a concluded view on this issue.

[152] See the respondent's answers to questions 14 and 16 of the Director's Questionnaire at [26] above.

[153] Webb v Stenton [1883] UKLawRpKQB 72; (1883) 11 QBD 518, 527; R v Chief Registrar of Friendly Societies, Ex parte New Cross Building Society (1984) 1 QB 227, 258; Re Australia and New Zealand Savings Bank Ltd [1972] VicRp 79; [1972] VR 690, 692.

[154] (1992) 26 NSWLR 562, 572 (emphasis added).

[155] [1938] HCA 34; (1938) 60 CLR 336, 361-2; [1938] HCA 34. See [221] above.

[156] See [27] above.

[157] See [16] above.

[158] [2008] QCA 94, [36].

[159] There is some division in the authorities on this point: see, eg, Swan Services [2016] NSWSC 1724; (2016) 12 BFRA 224, 289-90 [208]-[211]; [2016] NSWSC 1724; Ball v Sinclair [2015] NSWSC 2103, [14].

[160] Ball v Sinclair [2015] NSWSC 2103, [14].

[161] [2007] NSWSC 1122, [30] (citations omitted) (emphasis added).

[162] [2017] WASCA 151, [40]-[41] (citations omitted) (emphasis added).

[163] Smith v Offermans [2015] QCA 55; (2015) 105 ACSR 230, 244 [62]; [2015] QCA 55.

[164] A retention of title clause is one that provides that property in the goods does not pass to the buyer until payment has been made for the goods. It is also known as a Romalpa clause: see Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 2 All ER 552.

[165] See PPSA s 12(2)(d).

[166] PPSA s 21. See Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92; (2015) 296 FLR 25, 26 [4]; [2015] VSCA 92 ('Central Cleaning').

[167] Contrast Smith v Bone [2015] FCA 319; (2015) 104 ACSR 528, 585 [392]; [2015] FCA 319 with Hussain [2016] FCA 392; (2016) 246 FCR 62, 92-3 [164]-[165]; [2016] FCA 392 and Swan Services [2016] NSWSC 1724; (2016) 12 BFRA 224, 284 [194]; [2016] NSWSC 1724.

[168] Porter v Computer Based Technology Pty Ltd [2004] NSWSC 476, [68], citing Moor v Anglo-Italian Bank [1879] UKLawRpCh 52; (1879) 10 Ch D 681, 689-90; Re Douglas Homes Qld Pty Ltd (in liq) [1980] Qd R 528; Seventeenth Canute Pty Ltd v Bradley Air Conditioning Pty Ltd (in liq) [1987] 1 Qd R 111; Kelso v McCulloch (Supreme Court of New South Wales, Young J, 24 October 1994); Re Ferguson; ex parte Elder's Trustee & Executor Co Ltd (1943) 13 ABC 1, 5; Surfers Paradise Investments Pty Ltd (in liq) v Davoren Nominees Pty Ltd [2003] QCA 458; (2003) 1 BFRA 56, [5]-[7], 62-3 [30]-[34]; [2003] QCA 458. See also Brown v Brown [2007] FCA 2073; (2007) 69 ATR 533, 540 [35]-[44]; [2007] FCA 2073.

[169] As stated at [21] above, Cambridge University Press had obtained a judgment in the Magistrates' Court of Victoria against the Company for $4,333.30 for goods sold and delivered.

[170] See [19] above. John Wiley also claimed against the respondent, as he had provided a personal guarantee of the Company's debts. Our conclusion that John Wiley surrendered its security and elected to prove its debt as an unsecured creditor means that it is not necessary for us to decide whether the personal guarantee rendered the debt 'secured'.

[171] See [20] above.

[172] At trial, the applicants relied upon both sub-ss (4) and (6A) of s 588FE of the Act. Before us, they relied only upon sub-s (4).

[173] Stone [2018] FCA 530; (2018) 125 ACSR 406, 465 [227], 467 [237]; [2018] FCA 530. See also Walsh v Natra Pty Ltd [2000] VSCA 60; (2000) 1 VR 523, 535, [38]; [2000] VSCA 60 ('Walsh').

[174] Walsh [2000] VSCA 60; (2000) 1 VR 523, 532-3 [31]; [2000] VSCA 60. The winding up for the purposes of this comparison is the actual winding up, not a hypothetical winding up as at the date of the relevant transaction: Stone [2018] FCA 530; (2018) 125 ACSR 406, 465 [228]; [2018] FCA 530, citing Walsh [2000] VSCA 60; (2000) 1 VR 523, 535 [38], 538 [47], 542-3 [63]; [2000] VSCA 60.

[175] Stone [2018] FCA 530; (2018) 125 ACSR 406, 468 [240]-[241]; [2018] FCA 530, quoting V R Dye & Co v Peninsula Hotels Pty Ltd (in liq) [1999] VSCA 60; [1999] 3 VR 201, 213-4 [36], 215-6 [39]; [1999] VSCA 60.

[176] Commissioner of Taxation v Kassem [2012] FCAFC 124; (2012) 205 FCR 156, 164 [58]-[60]; [2012] FCAFC 124 ('Kassem').

[177] (2012) 205 FCR 156; [2012] FCAFC 124.

[178] [2012] FCAFC 124; (2012) 205 FCR 156, [60]; [2012] FCAFC 124.

[179] [2018] FCA 530; (2018) 125 ACSR 406, 472 [254]; [2018] FCA 530.

[180] As noted at n 144 above, the respondent sought to rely on s 588FG of the Act as a 'defence' to the orders sought in relation to insolvent trading and the relief sought under s 588M (to which s 588FG has no application).

[181] The references to s 588FE(4A) in the table are erroneous. The correct provision is s 588FE(4).

[182] The Loan Agreement and the security deed are referred to at [92] above.

[183] PPSA ss 20, 21; see Central Cleaning [2015] VSCA 92; (2015) 296 FLR 25, 26 [4]; [2015] VSCA 92.

[184] By reason of ss 513A and 513C of the Act, that date was the date on which the Company went into administration, namely, 22 August 2014. There could be no suggestion that the respondent was a third party who acquired title to the security without knowledge, so as to fall within the exception in s 267(3) of the PPSA.

[185] See [287] above in relation to the figure of $705,513.36 and the figure of $705,387.53 claimed by the applicants.

[186] Act s 9 (definition of 'related entity').

[187] See [289] and [333] above, respectively.