actual insolvency
248 I now consider whether the company was actually insolvent at the time when the debts the subject of this application were incurred.
249 In support of the applicant's claim that the company was actually insolvent at the time that it incurred the debts in respect of which the claim was brought, the applicant relied upon the expert evidence of Mr George Lopez. Mr Lopez referred to the paucity of the company's records that had been provided to him, and the absence of records which comprised the financial records of the company. He said that the lack of records had hampered his investigations. Mr Lopez approached the question of insolvency from two perspectives, namely, an analysis of the financial statements and by assessing other indicia of insolvency.
250 Mr Lopez conducted an analysis of the financial statements of the company for each of the financial years from 1999 to 2004. He produced a summary of the information extracted from the financial statements as an annexure to his expert report. Mr Lopez noted that there were curiosities in the financial statements because there was no provision for trade creditors outstanding at the end of each financial year. He observed, however, that in relation to the years 2001 and 2002, the financial statements did show "creditors" which may have represented trade creditors, but did not necessarily do so. He observed that the financial statements for the other four years did not reveal any outstanding trade creditors. He observed that it was very unlikely that a company would have no trade creditors outstanding at any point in time, let alone on 30 June of four out of the six years. He went on to say:
The failure to reveal trade creditors may be consistent with the company not maintaining proper records of its creditors. It may also suggest that the financial statements were prepared a significant time after the end of the financial year which, together with lack of records, meant that outstanding trade creditors at the end of each reporting period may not have been known.
251 Mr Lopez also observed that the analysis of each of those financial years showed quite significant variations in costs of goods from a low of 19.4% in 2000 to a high of 69.1% in 2002. Mr Lopez said that the large variation could be explained in a number of ways including the failure to record properly sales income, changes to the sales mix and sales structure, lack of proper records of purchases, lack of records of raw material and work in progress stocks and failure to record outstanding creditors at the end of the period and failure properly to record costs of production.
252 Mr Lopez said that having regard to the foregoing matters, it was his view that the financial statements he analysed did not reflect the company's true financial position at any point in time.
253 However, notwithstanding that qualification, Mr Lopez observed that the company experienced gradually declining sales from 1999 to 2003. And in 2004, during which financial year the company ceased trading, the sales fell to $97,121.
254 Mr Lopez also observed that the financial statements reflected that the company suffered losses in each year since 1999, except in years 2001 and 2003. Mr Lopez observed that the financial statements in 2001 reflected a nett profit of $71,101, but he said the profit was only achieved as a consequence of selling the company's most significant assets, namely, two printing presses. Without that sale, said Mr Lopez, the company would have experienced a net loss of $57,425. Mr Lopez also observed that the financial statements in 2003 reflected a net profit of $13,629. However, Mr Lopez observed that the gross profit for that year was 79.62% of sales and observed that this percentage was anomalous when assessed by reference to other results. Mr Lopez's opinion was that the result reflected in the 2003 financial statements was an aberration as was the result in the 2002 financial statements because the gross profit percentage for that year is shown to be "far lower than at any other time in the company's history". Mr Lopez went on to say that it was more likely that some of the 2002 costs of goods sold should have been charged in 2003 hence reducing the loss in 2002 and reducing the reported profit in 2003 to a loss.
255 Mr Lopez also said that the company's net tangible assets showed a decline from 1999 to 2000, a recovery in 2001 and then a decline in trend from 2002 to 2004. In Mr Lopez's view the recovery in 2001 may be attributed to the sale of the fixed assets for a profit, whereas the declining assets position reflected the consistent losses being suffered by the company.
256 Mr Lopez also had regard to the working capital position of the company. Mr Lopez observed that the working capital position was marginal until 2000. In 2001, however, said Mr Lopez, the sale of the printing presses converted what were essentially fixed assets into a more liquid form, namely, debtors, and the working capital improved dramatically to the extent that at the end of the year the company had current assets of $287,794 and a working capital surplus of $199,182. Thereafter, however, the current assets depleted significantly so that the working capital deficiency in 2002 was $94,816. Mr Lopez said that that figure represented a decline within one year of $294,798. He said that some of that decline could be attributed to the operating loss, whereas the use of current assets (namely, debtors) to pay out non-current liabilities being bank loans, had depleted the company's working capital.
257 Mr Lopez went on to observe that in 2003 the company's position appeared to improve to the extent that it showed a working capital surplus of $31,015. However, Mr Lopez observed that, in his view, for the reasons previously given, the financial statements for that year were incorrect. Mr Lopez went on to observe that, in addition, a significant component of the current assets total of $170,508 comprised a debt of $165,992 owed by Mr Peter Forgione - a debt that subsequently proved incapable of being satisfied. Thus, said Mr Lopez, if one disregarded Mr Peter Forgione's debt the working capital deficiency for 2003 was $134,977.
258 Mr Lopez concluded that in summary his analysis of the financial statements in isolation suggested that the company may have been insolvent prior to the year ended 2001 but a sale of its major production assets at a profit provided temporary relief in that year. However, the situation deteriorated subsequently and the company never recovered from that position until it finally went into liquidation on 20 December 2004. Thus, from a financial statement perspective, Mr Lopez said that the company appeared to have been insolvent sometime between 30 June 2001 and 30 June 2002.
259 Mr Lopez then reported on his examination of other indicia of the company's insolvency. It was Mr Lopez's opinion that the company was insolvent from at least 28 July 2001. Mr Lopez reached that view by the following reasoning.
260 Mr Lopez first referred to an analysis of the dishonoured cheques on the NAB business cheque account - of which there were 122. Mr Lopez said it appeared that the company had experienced difficulties in paying its debts from at least 2 April 2002 when records show that the NAB began to dishonour cheques drawn by the company. Between 2 April 2002 and 13 May 2004, there were 122 instances of payments being dishonoured by the company's banker.
261 Mr Lopez went on to say that on 29 May 2002, the company borrowed $50,000 from the NAB. The funds were paid into the company's overdrawn business cheque account but that it was apparent that the borrowing did not increase the company's capacity to pay its debts. The loan documentation required that the company repay the loan by regular monthly payments of $1,040 with a monthly repayment of $20,000 by 30 July 2002. Mr Lopez said that records showed that the company was unable to make the first payment of $1,040 by 30 June 2002 and further that it was unable to make the lump sum payment of $20,000 on 30 July 2002. On that basis, Mr Lopez opined that it appeared that the company was unable to pay its debts as and when they fell due from 30 June 2002 onwards.
262 Mr Lopez then considered the evidence of the company's transactions with the ATO which showed that the company did not pay its debts due to the ATO as and when they fell due and the debt owed to the ATO continued to increase until the company finally went into liquidation. On the basis of the information provided by the ATO portal, Mr Lopez was of the view that the company was insolvent from at least 30 September 2001.
263 Mr Lopez then inferred that the company did not meet its obligations in respect of compulsory superannuation contributions from at least 28 July 2001 on the basis of the failure to meet those obligations that the company was unable to pay its debts as and when they fell due from at least 28 July 2001. Mr Lopez concluded by opining that the company was unable to pay its debts as and when they fell due from at least 28 July 2001 until 20 December 2001.
264 Mr Lopez was only cross-examined on one issue. This was whether, in reaching his conclusions as to the period during which the company was insolvent, he had considered whether the company had access to loan funding from one of its directors. Mr Lopez conceded that the question of whether funding was available to a company from a director who was ready, willing and able to provide funding to the company, was a relevant consideration in determining whether a company was insolvent. However, Mr Lopez said that he was asked not to have regard to whether the directors and, in particular, Mr Frank Forgione, were ready, willing and able to provide funding to the company for the purpose of discharging the company's debts as and when they fell due.
265 The respondents led no expert evidence which challenged Mr Lopez's analysis and conclusions. However, the respondents contended that only limited weight should be placed on Mr Lopez's evidence.
266 In my view, Mr Lopez's opinion was expressed by reference to his specialist knowledge and I have accepted his evidence. However, I have not placed significant weight on his evidence insofar as it is based on his examination of other indicia of insolvency, because this was a case where it was open to the Court to draw its own conclusions from the objective facts. As is apparent from what follows, my findings drawn from the objective facts, are consistent with the views expressed by Mr Lopez.
267 The Corporations Act provides that a company is insolvent, if and only if, it is not able to pay all of its debts as and when they become due and payable (s 9 and s 95A). However, the question of whether a company is insolvent is a question of fact which must be assessed by reference to commercial reality. In Lewis v Doran (2004) 208 ALR 385, Palmer J at [106], observed as follows:
I think that I must approach the application of s 95A of the CA with two considerations in mind. First, the words of s 95A must be construed as they stand, without addition or subtraction. Second, the law both before and after the enactment of s 95A is unequivocally and emphatically clear that insolvency is, first and last, 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. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable": Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213 at 224 (citations of authority omitted); 188 ALR 114; 164 FLR 430; 39 ACSR 305 at 316.
268 At [116], Palmer J went on to observe:
In my opinion, s 95A requires the court to decide whether the company is able, as at the alleged date of insolvency, to pay all its debts as they become payable by reference to the commercial realities. If the court is satisfied that as a matter of commercial reality the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party.
269 These observations are relevant to this case because, as I have mentioned, the respondents contended that the company was never insolvent during the period alleged by the applicant because at all material times, as a matter of commercial reality, Mr Frank Forgione was ready, willing and able to provide the company with such funding as it needed, on a deferred payment basis, to pay all of its debts as and when they fell due.
270 The fact that a court may have regard to the source of unsecured funding from a third party, including a director or shareholder, in assessing the sources of funding available to the company to pay all of the company's debts as and when they fall due, has been recognised in a number of authorities. These authorities are discussed by the Queensland Court of Appeal in International Cat Manufacturing Pty Ltd (in liq) v Roderick (2013) 97 ACSR 200, a case strongly relied upon by the respondents.
271 Also, relevant to the circumstances of the case are the following observations of Mansfield J in Lewis, Re Damilock Pty Ltd (in liq) v VI SA Australia Pty Ltd (2008) 252 ALR 533 (Lewis) at [16]:
It is generally, but not necessarily, the case that an inquiry into the insolvency or otherwise of a company at material times is assisted by considering various indicia of insolvency. In Australian Securities and Investments Commission v Plymin (No 1) (2003) 46 ACSR 126; [2003] VSC 123, Mandie J at [386] referred to a number of indicia of insolvency. It is convenient to list them. I propose to consider those which are particularly relevant to the present circumstances. The indicia referred to by Mandie J were:
• continuing losses;
• liquidity ratios below one;
• overdue Commonwealth and state taxes;
• poor relationship with bank, including inability to borrow further funds;
• no access to alternative finance;
• inability to raise further capital;
• suppliers placing company on cash on delivery or otherwise demanding special payments before resuming supply;
• creditors unpaid outside trading terms;
• issuing of post-dated cheques;
• dishonoured cheques;
• special arrangements with selected creditors;
• solicitors' demands, summonses and the like;
• payments to creditors of rounded amounts not reconcilable to specific invoices; and
• inability to produce timely and accurate financial information to indicate trading performance and financial position, and to make reliable forecasts.
In any particular case, one or more of those factors, or other factors, may have particular significance and one or more of them may not exist. The absence of one or more of those factors does not, of itself, establish solvency.
272 I will now examine the solvency position of the company. In this regard, it is to be observed that the first of the debts in respect of which compensation is claimed, was incurred by the company to the ATO with effect from 29 October 2001 as a consequence of the company lodging its BAS for the quarter ended 30 September 2001, on 20 November 2001. The question, therefore, is whether the company was insolvent at the time that this debt was incurred.
273 There was no real issue at the trial in relation to the question of whether and when the company incurred a debt to the ATO in respect of the debits which were recorded in the RBA. It was accepted that the debts were incurred on the effective date of the debt as recorded in the RBA. (See, Smith v Bone (2015) 104 ACSR 528 at [37], Powell v Fryer (2001) 37 ACSR 589 at [72].) Insofar as there was an issue as to when the debt or debts in respect of the company's failure to make the superannuation contributions in each of 2001, 2002 and 2003, the applicant was content not to challenge the respondents' contention that the debt of $17,756.30 was only incurred on the issue of the ATO assessment on 10 August 2004.
274 On 10 May 2001, the company filed a BAS for the quarter ended 31 March 2001, which self-assessed a GST liability of $4,177 and PAYG withholding tax liability of $1,722. The company did not pay the self-assessed tax due to the ATO.
275 In cross-examination, Mr Peter Forgione accepted that he received copies of the quarterly BAS statements from Ms Helen Hawley of Lincolns in 2001 and 2002.
276 When asked in cross-examination why the company did not pay the self-assessed liabilities of $5,899 on 10 May 2001, Mr Peter Forgione was not able to offer any explanation for not remitting the payment to the ATO at that time. Mr Peter Forgione was asked:
And on this occasion the company did not remit payment to the Tax Office; correct?---Yes.
Now, again, was there a particular reason why the company didn't pay the tax owing in that BAS statement at that time?---There was no reason, no.
277 Likewise, Mr Peter Forgione was unable to offer an explanation why the company's payments made to the ATO on 27 July 2001 and 27 November 2001 were in irregular amounts and less than then due to the ATO on the RBA were made.
278 On 28 July 2001, the company did not pay the compulsory superannuation contributions which it was required to pay and, at that time, the company's overdraft facility with BankWest was fully drawn.
279 During cross-examination, Mr Peter Forgione was asked to give a reason why the company did not pay the superannuation contributions for its employees in July 2001. The following exchange occurred:
There was no reason, was there, for her to have stopped paying the employees their full superannuation entitlements in 2001?---Not really, no.
Other than the company's inability to meet those payments?---No.
There's no other reason, was there?---No, there's - well, I'm not saying - I'm not saying that that's the case.
Well, what I'm doing is asking you whether there was any other reason consistent with the company having the ability to pay, why it wouldn't have paid its employees' superannuation entitlements?---I understand what you are asking.
I am really giving you the chance to tell his Honour whether there's another explanation for it?---Well, there's no explanation.
280 The company did not pay the self-assessed amount of $4,262 in its BAS for the period ended 30 June 2001 when it lodged its BAS on 11 November 2001, bringing the RBA deficit to $9,071.08. The effective date of that debt was 13 August 2001.
281 Further, the company did not pay the self-assessed amount of $22,515 in respect of its BAS for the period ended 30 September 2001, when it lodged its BAS on 20 November 2001. The incurring of that debt increased the RBA deficit to $31,711.32. The effective date of that debt was 29 October 2001. However, on 27 November 2001, the company made a payment of $4,754.30 in reduction of that deficit.
282 Mr Peter Forgione was cross-examined about the reason for the company not paying the self-assessed amount in respect of the BAS for the period ended 30 September 2001. The following exchange occurred:
And the PAYG tax withheld being $3537, bringing the company's debit balance with the Tax Office to $31,711.72. Do you see that?---Yes.
And then on 27 November there was a payment made of $4754.30. You see that?---Yes.
And, again, do you have any explanation as to why a payment was made in that irregular amount that did not discharge all of the debt?---No.
And this is as at late November - as at November 2001, at a time when you were in regular contact with Ms Hawley, wasn't it?---That's correct.
And you knew full well the amounts of the BAS statements that had been lodged?---I would have known some of it, yes.
And you knew full well the amount of the company's tax debt?---Not the exact amount, but, yes, I would have had an idea.
You had an idea. And the reason that the company didn't pay the debt was simply because it didn't have the ability to do so; correct?---Are you asking me?
Yes?---Yes. Not necessarily.
What other explanation is there?---I don't have an explanation.
283 By the effective date of the debt in respect of the company's BAS for the September 2001 quarter, the company had failed to meet its tax liabilities in relation to its BAS in respect of the periods ended 31 March 2001 and 30 June 2001, and it had failed to make its superannuation contributions which were due on 28 July 2001, and its facility with BankWest was fully drawn.
284 As is evident from the foregoing, during cross-examination, Mr Peter Forgione was asked for an explanation for not paying the superannuation contributions consistent with the company's ability to make those contributions, but was not able to give such an explanation. The same is true in relation to the company's failure to pay the debt incurred by the lodging in November 2001 of the BAS for September 2001. Of particular importance in relation to Mr Peter Forgione's answers is that Mr Peter Forgione did not suggest that there was any source of funding available to the company to pay its debts as and when they fell due, which in the circumstances he had not utilised. In my view, the failure by Mr Peter Forgione to refer to his father as being a source of funding available to the company to meet those debts when given the opportunity to do so during cross-examination, further undermines the respondents' contention that Mr Frank Forgione had previously said to Mr Peter Forgione that he would stand behind the company and provide the company with financial assistance for it to be able to meet its debts as and when they fell due.
285 I have, of course, already found that Mr Frank Forgione had not given such an assurance to Mr Peter Forgione and he was not then or at any time thereafter until late November 2004, ready, willing and able to provide such financial support to the company as would permit it to pay all of its debts as and when they fell due.
286 Accordingly, I find that the company was unable to pay its debts as and when they fell due, at the latest, by 29 October 2001, being the effective date of the debt to the ATO arising from its BAS statement for the quarter ended 30 September 2001.
287 Further, an examination of the deterioration of the company's financial position from November 2001 until Mr Lean's appointment as administrator on 1 November 2004, on an application of the criteria referred to in Lewis, shows that the company was insolvent throughout that period.
288 The company failed to make monthly repayments on 13 December 2001, 11 April 2002 and 14 May 2002 in respect of its BankWest loan account. In addition, on 3 April 2002, the NAB dishonoured cheques drawn on the company's NAB business cheque account.
289 Also, the company failed in February 2002, to meet its income tax liability of $6,573 in respect of its BAS for the period ended 31 December 2001. This increased the deficit on the RBA to $34,349.44.
290 The company failed to pay income tax in the sum of $7,631.64 which was due in May 2002.
291 In cross-examination, Mr Peter Forgione was unable to give an explanation consistent with the company's solvency for the failure to make this payment.
292 As mentioned, the company was able to obtain an instalment loan of $50,000 from the NAB on 29 May 2002. At that time, the company had an unpaid income tax debt of $7,631.64 and the RBA was in deficit to the extent of $34,971. The company was overdrawn on its NAB business cheque account by more than $46,000. The new loan was used to discharge the overdraft on the NAB business cheque account, and the new loan did not, therefore, improve the company's capacity to pay its debts as and when they fell due. Therefore, notwithstanding, the new loan from the NAB, the monies due to the ATO remained unpaid. By 30 June 2002, the company's RBA was in deficit to the extent of $39,107.17.
293 The company's financial statements show that as at 30 June 2002, the company had a working capital deficiency of $94,816.
294 During the financial year ended 30 June 2003, the deficit in the RBA grew from $39,107.78 on 29 June 2002 to $44,296.77 on 30 June 2003. However, during the financial year ended 30 June 2003, the company failed timeously to lodge its BAS for each of the periods ended 30 September 2002, 31 December 2002 and 31 March 2003. After the company had been penalised and belatedly lodged its BAS for September 2002 and December 2002, and an effective date was applied to the unpaid debt in respect of each quarter, the RBA deficit with the ATO was $67,157.11.
295 Also, in July 2002, the company failed to pay to the ATO superannuation contributions in respect of its employees for the year ended 30 June 2002.
296 During the financial year ended 30 June 2003, only one payment was made to the ATO. That was in the sum of $5,000 on 23 April 2003. A further cheque in the sum of $1,700 was sent to the ATO on 7 May 2003, but that cheque was dishonoured.
297 In addition, the company failed to pay the $20,000 lump sum payment due on 31 July 2002 to the NAB. Also, during the financial year ended 30 June 2003, a total of 53 cheques drawn on the NAB business cheque account, were dishonoured by the NAB.
298 The 2003 financial statements which were prepared by Lincolns, after Mr Lean was appointed as administrator, show a working capital surplus of $31,015. The reliability of these accounts has been challenged, on other grounds, by Mr Lopez. However, even accepting their reliability, on those grounds, as Mr Lopez observed, the surplus assumes a recoverability of a debt due by Mr Peter Forgione to the company of $165,992, which was unrecoverable. Accordingly, if one leaves out of the account the debt due by Mr Peter Forgione to the company, the company had a working capital deficiency of $134,977.
299 During the period 1 July 2003 to 29 October 2004, the deficit on the RBA grew to $124,156.94.
300 Further, in the period 1 July 2003 to 1 November 2004, a total of 50 cheques which were drawn on the NAB business cheque account were dishonoured. The two demands issued by the ATO on 8 January 2004 and 29 April 2004, referred to at [67] and [75] above, were not paid. The notice of default issued by the NAB calling upon the company to remedy defaults on its bank accounts was not met.
301 Also, the assessment of $17,756.30 issued on 10 August 2004 by the ATO in respect of the unpaid superannuation contributions was not paid. The amount of $39,262.85 demanded by the NAB in its writ of 6 August 2004 was not paid. Nor was the statutory demand for the sum of $131,667.09 issued by the ATO on 27 August 2004 paid. In addition, the statement of the company's financial position prepared by Mr Philpott and sent to Mr Bowman on 1 October 2004 shows a deficiency of assets over liabilities of $296,000.
302 Accordingly, in my view, on the application of the criteria referred to in Lewis, it is apparent that the company was insolvent from 29 October 2001, at the latest, until the company was wound up on 20 December 2004. This is because by 29 October 2001 (and even earlier) the company was unable to meet its tax obligations as and when they fell due. The consequence was that during the period 29 October 2001 to 20 December 2004, the deficit on the RBA grew from $9,196.72 to $129,680.76. Such attempts as were made to make payments in reduction of the RBA deficit were in generally round figures and made at intermittent periods.
303 Further, I have found that Mr Frank Forgione was not, as the respondents' contended, an available source of finance to the company to permit it to pay all of its debts as and when they fell due. Mr Peter Forgione did not give any evidence that the company was able to borrow monies from any source other than the two banks with which it had loan facilities. However, those facilities were fully drawn and proved inadequate to permit the company to meet its debts as and when they fell due. There were 122 occasions during the period 29 October 2001 to 24 November 2004 that the NAB dishonoured cheques on the business cheque account and the company defaulted regularly in relation to its repayment obligations on its NAB loan account.
304 Also, the company failed to submit its BAS timeously after September 2002 and had not by the time that Mr Lean was appointed as administrator on 1 November 2004, prepared the financial statements or the company's tax returns for the financial years ended 2003 and 2004.
305 The respondents made two contentions in answer to the applicant's contention that the company was actually insolvent from at least 1 July 2001.
306 The first contention is that the company was never insolvent, because Mr Frank Forgione was at all times until late November 2004, ready, willing and able to place the company in funds to permit the company to pay all of its debts as and when they fell due. I have already rejected that contention.
307 The second contention is that the company was not insolvent as at 1 July 2001, because the company during the first quarter of the financial year was "flush with funds". The respondents based this contention on the fact that the company had during the quarter ended 30 September 2001 received a taxable supply of $307,615.00. This contention was founded on the amount of the GST payable pursuant to its BAS statement for that quarter, which was lodged, but not accompanied by any remittance to the ATO.
308 In light of the revised way in which the case was put by the applicant in his closing submissions, it is unnecessary for me to find that the company was insolvent as at 1 July 2001. However, I do not accept the contention that the company was "flush with funds" and was, therefore, not insolvent as at 1 July 2001. Therefore, had it been necessary to do so, I would have found that the company was insolvent at that date. I say this for the following reasons.
309 First, it is common cause that the sale proceeds collected in the quarter until September 2001 included the proceeds from the sale of the Heidelberg printing presses which had occurred prior to 30 June 2001.
310 I find that the sale proceeds did not comprise available cash to the company but that the proceeds were used to pay out two equipment loans which totalled at least $227,316. This is because during cross-examination, Mr Peter Forgione acquiesced in counsel's proposition that the two equipment loans previously recorded in the company's accounts as owing to the ANZ and BankWest were paid out from the proceeds of the sale of the printing presses.
311 Further, the fact that the taxable supplies did not result in available cash to the company is evidenced by the fact that the company did not produce any bank statements which supported the availability of ready cash, and the fact that the company did not meet its tax liabilities in respect of the BAS for the quarter ended 30 September 2001. Further, Mr Peter Forgione, when asked during cross-examination about the reason for the company not paying its tax debts from May 2001, did not refer to the availability, or the anticipation of the availability of, this pool of cash as a source of funds.
312 It follows that I find that the company was actually insolvent from, at the latest, 29 October 2001 to 20 December 2004 when Mr Lean was appointed as liquidator.