Insolvency
19 The evidence of insolvency on which the plaintiffs relied included: - (i) a series of dishonoured cheques drawn by Austech on its Macarthur Credit Union account between 2 and 27 July 2007 for relatively substantial sums of money, (ii) the non-payment of Gliderol's invoices as and when due since 30 September 2006, the subsequent failure to pay Gliderol's statutory demand and the consequent institution of Gliderol's winding-up proceedings, and the agreement for Austech to pay its debt to Gliderol by instalments, (iii) the Australian Taxation Office's garnishee notice of 28 November 2007 in respect of a tax debt of $109,652.82, (iv) the winding-up proceedings commenced by the Workers Compensation Nominal Insurer on 6 May 2008, (v) arrangements with other creditors for part-payment of debts in March and April 2008, and (vi) Austech's failure to keep proper financial records as required.
20 The plaintiffs relied on the summary of principles set out in the headnote to the decision of Palmer J in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621, as reported in (2001) 39 ACSR 305. Although varied on appeal in respect of different issues in Deputy Commissioner of Taxation v Clark (2003) 57 NSWLR 113; [2003] NSWCA 91, the principles stated in respect of insolvency in the headnote remain. They include the following (case citations excluded):
(i) Whether a company is able to pay its debts as they become payable, under s 95A(1), is a question of fact to be ascertained from a consideration of the company's financial position as a whole.
(ii) Whether a company's position as a whole reveals surmountable temporarily illiquidity, or insurmountable endemic illiquidity resulting in insolvency, requires the court to have regard to the commercial reality that in normal circumstances creditors will not always insist on payment strictly in accordance with their terms of trade. But this indulgence does not always result in the company thereby having a cash or credit resource which can be taken into account in determining solvency.
(iii) The commercial reality that creditors will normally allow some latitude for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand.
(iv) In assessing solvency the court acts upon the basis that a contractual debt is payable at the time stipulated for payment in the contract, unless there is evidence to the court's satisfaction that:
(a) there has been an express or implied agreement between the company and the creditor for an extension of time for payment; or
(b) there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or
(c) there is a well-established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors' terms of trade.
(v) It is for the party asserting that a company's contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence.
[…]
21 Gliderol did not admit that Austech was insolvent when the disputed payments were made. According to Gliderol:
(1) Austech had multiple bank accounts and thus multiple sources of funds. For example, neither disputed payment was made from Austech's Macarthur Credit Union account. The payment of $17,000 was by way of bank cheque from St George Bank, and thus Austech must have had available to it sufficient funds to obtain that bank cheque on 1 February 2008.
(2) Given Austech's multiple sources of funds, the existence of dishonoured cheques on one or other account did not prove Austech's insolvency.
(3) The winding-up application made by Gliderol on 12 July 2007 on the basis of Austech's failure to meet the statutory demand created a presumption of insolvency only for the purpose of the winding-up application under s 459P of the Corporations Act but not otherwise. So much is clear from the words of s 459C(1) of the Corporations Act, which provides that the section has effect "for the purposes of" certain nominated provisions including s 459P.
(4) The payment by instalments agreed between Gliderol and Austech did not prove Austech's insolvency. Austech paid the agreed amounts as and when required.
22 I accept Gliderol's submissions about the limited purposes for which insolvency is presumed by reason of Gliderol's winding-up application.
23 Nevertheless, considering Austech's financial position as a whole, it is apparent that Austech was in financial difficulty from at least September 2006 when it ceased paying Gliderol's invoices. By early July 2007 there is further evidence of significant financial difficulty in the form of a series of dishonoured cheques for relatively large sums of money. Although I accept Gliderol's submission that these facts do not prove insolvency given the different bank accounts to which Austech had access and the lack of information about those accounts, those facts are not to be considered in isolation. According to Mr Roufeil (para 10 of his affidavit of 29 March 2011), Austech's books and records at the time he undertook his inspection were incomplete and in such a poor state that a proper set of financial statements could not be prepared without an extensive amount of reconstruction and forensic accounting skill and effort. Leaving aside the effect of s 588E(3) and (4) of the Corporations Act (the latter of which does not apply in this case due to s 588E(7)), this lack of proper financial records may be considered in assessing the weight to be given to Austech's potential other sources of money. Further, by 28 November 2007 the Australian Taxation Office had served a garnishee notice in respect of a tax debt of $109,652.82. As Mr Roufeil said, the tax debt must have accrued well before 28 November 2007 to have resulted in the service of the garnishee notice. When these facts are considered together with the series of dishonoured cheques and the amounts involved, as well as the failure to pay Gliderol's invoices since 30 September 2006 and the failure to satisfy Gliderol's statutory demand, I am satisfied that Austech, as at 12 July 2007 (the date on which Gliderol's winding up application was made), could not pay its debts as and when they fell due and was thus insolvent.
24 By s 588E(3) of the Corporations Act Austech is thus presumed to have been insolvent throughout the period between 6 May 2007 and 6 May 2008, including when it made the two payments to Gliderol on 1 February and 27 March 2008. Those payments were an "unfair preference" as defined in s 588FA(1) of the Corporations Act as Gliderol received more than it otherwise would have received in the winding-up of Austech. The payments were therefore "insolvent transactions" within the meaning of s 588FC, as they were unfair preferences given by Austech and were entered into at a time when Austech was (presumed to be) insolvent. Finally, each of the payments is also a voidable transaction as defined in s 588FE(2) of the Corporations Act as each was an insolvent transaction of the company and was entered into during the six months ending on the relation-back day.
25 For these reasons, unless Gliderol establishes its defence, an order may be made for Gliderol to repay an amount equal to the amount Austech paid under the voidable transactions (s 588FF(1)(a) of the Corporations Act).