Weston in his capacity as liquidator of Starcom Group Pty Ltd (in liq) v Rajan

Principles with regard to the adoption of the referee's report 8 In CPB Contractors Pty Ltd v Celsus Pty Ltd (No 2) [2018] FCA 2112; 364 ALR 129, Lee J (at [25]-[38]) surveyed the history of the use of referees that led to the express power for referees to be appointed by this Court by the insertion of s 54A into the FCA Act in 2009. His Honour (at [67]) adopted the summary by McDougall J in Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784 (at [7]) of the principles applicable to the adoption of a referee's report under s 54A(3) of the FCA Act. That summary is based on a survey of the relevant authorities and is slightly adapted from McDougall J's own earlier identification of the relevant principles in Seven Sydney v Fuji Xerox [2004] NSWSC 902 at [11] to [13]. 9 McDougall J's summary of the relevant principles in Chocolate Factory refers to Pt 72 r 13 (repealed) of the Supreme Court Rules 1970 (NSW) (replaced in NSW by r 20.24 of the Uniform Civil Procedure Rules 2005 (NSW) in similar wording) which, like s 54A(3) of the FCA Act, provided for the court to adopt, vary or reject a referee's report in whole or in part. Like Lee J, I consider that the principles identified and then summarised by McDougall J apply equally to the exercise of the court's power under s 54A(3). No contrary submission was made in this case. 10 From the above principles, I extract the following by way of limited and necessarily incomplete further summary as being most relevant to the resolution of the limited disputes about the referee's report in this case: Section 54A conveys a discretion on the court to adopt, vary or reject a referee's report. To the extent that a party's dissatisfaction with the report is a question of law, or the application of legal standards to established facts, that matter must be considered and determined afresh by the court. Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the court would have a disposition towards acceptance of the report. The court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions they did, particularly where the disputed questions are in a technical area in which the referee enjoys appropriate expertise.

The referee's method and approach to the reference 11 The referee recorded the approach that he took to the reference. He read, considered and independently analysed all the information provided to him by the plaintiffs and the defendants. He undertook his own tests and analyses of when the debts which remained unpaid at the liquidation date were due and payable. 12 The referee sought further information from the plaintiffs and the defendants about the timing of when unpaid superannuation debts were incurred and became due and payable. 13 The information provided by the parties included an expert report by Barry Taylor, for the plaintiffs, and an expert report by Philip Hosking, for the defendants. The referee obtained clarification from Mr Taylor and his staff in relation to some calculations and tables in his report. 14 The referee interviewed the directors of Starcom, who are the current defendants, in relation to the superannuation debts listed in the RATA that they had signed on the liquidation of Starcom, and their ability, capacity and attempts to raise finance and/or capital during the relevant period. 15 The referee recorded that his approach to assessing and testing for insolvency was to analyse relevant information and do accounting calculations and analyses, and investigate facts in order to give consideration to the well-known factors identified by Emmett J in Quick v Stoland Pty Ltd [1998] FCA 1200; 87 FCR 371 at 379D-F. 16 The referee explained that the accounting calculations, financial analyses and considerations he would usually undertake and include in an insolvency report were done by Mr Taylor and contained in his report. The referee expressed agreement with the approach and methods used in Mr Taylor's report. In his opinion, Mr Taylor's report addresses the considerations identified in Quick v Stoland. The referee did not consider it necessary or appropriate to duplicate the work done by Mr Taylor's report. Instead, he and his staff undertook checks and a critical analysis of Mr Taylor's report with the data and evidence that he used to assess whether or not the referee agreed with the calculations, assumptions and conclusions in it. 17 The referee also considered Mr Hosking's report and identified what he considered to be certain deficiencies in the analysis done by Mr Hosking. The referee did not agree with the approach or conclusions in Mr Hosking's report, although he also did not agree with aspects of Mr Taylor's report. 18 The referee explained that the separate testing and analysis that he did, in addition to analysing and checking Mr Taylor's and Mr Hosking's reports with all the other information he received, was a retrospective and detailed ageing analysis of the unpaid debts to see when they were due and payable and graphing that information so that the timing of the accumulation of unpaid debts could be visually assessed during the relevant period. He expressed his view that this is a true test of the timing of insolvency because if a debt owed by a company which goes into liquidation remains unpaid, then the time when the debt was due for payment is, in most cases, a very real indication of the timing of the company's insolvency. 19 The referee explained that graphing the timing of the accumulation of Starcom's debts which remain unpaid allowed him to consider, test and assess whether Starcom was insolvent during the whole of the relevant period. The usual accounting tests for insolvency (cash flow and balance sheet tests) using calculations of the current ratio, quick ratio and working capital amounts are normally done as at a particular date or particular dates. In considering the relevant question, the referee had to consider whether Starcom might have been insolvent, or not insolvent, at any particular time during a 22 month period. 20 The referee recorded that the statements made to him in the interview that he conducted with the directors' support what the financial records analyses and eventual liquidations of Starcom and Pisces Group Ltd (Deregistered) indicate: that it was a lack of profitability and the inability to raise capital and finance which caused the unpaid debts to accumulate and remain unpaid. It was not an unwillingness of the directors to pay the debts when they were due or any dispute of the majority debts which remained unpaid at the liquidation.

Summary of the report 21 As indicated, the referee concluded that Starcom was insolvent in the period from 1 October 2009 to 1 August 2011. By way of summary, the referee expressed his reasons for that conclusion as follows. 22 Starcom was in an insolvent position as at 1 October 2009. Although the accounting records available to the referee do not facilitate an insolvency calculation as at that date, the 2009 annual financial statements struck three months prior to that date showed insolvency on cash flow and balance sheet tests. The next year's financial statements struck nine months after that date showed that the financial position and performance had worsened by approximately $1 million. 23 The financial statements at 30 June 2009 showed that Starcom had current liabilities due and payable of $2,221,182 and current assets to pay them of only $835,155. The business had incurred trading losses of $285,026 for the 2009 financial year, taking total accumulated losses to $3,119,772. The balance sheet showed an excess of liabilities over assets of $2,978,663. 24 The financial position and performance deteriorated during the following year which ended on 30 June 2010. The financial statements for that year show that Starcom had current liabilities due and payable of $2,240,230 and current assets available to pay them of $641,274. It incurred a trading loss for the 2010 financial year of $935,487 taking total accumulated losses of the company to $4,054,259. The balance sheet showed an excess of liabilities over assets of $3,914,150. 25 Starcom was unable to raise sufficient finance during the relevant period, either internally from related parties or externally from financiers, to fund its trading losses and pay its debts as and when they were due. Historical financial information shows that Starcom relied on its parent holding company, Pisces Group, to provide cash and financial support to meet its debts. Pisces Group was experiencing its own financial difficulties and subject to a deed of company arrangement (DOCA) during the period 16 July 2009 to 16 December 2011. 26 There was continued financial support from Pisces Group on a loan basis, which was an additional and continual accrual of another debt which, even though it was internal debt which might not have been considered payable at the time, also remained unpaid at liquidation. This eventually meant that Pisces Group had an uncollectible debt receivable which was a large valueless asset on its balance sheet. Time showed that that was a major contributing factor to it being unable to pay its creditors when it was placed into voluntary administration and liquidation approximately seven months after Starcom was wound up. 27 The referee's analysis and graphs of the timing of unpaid debts show that the large debts which remained unpaid as at the date of the liquidation (mainly taxation debts) started accumulating as from 1 October 2000 and continued to accumulate through to 1 August 2011, the date of liquidation. The trend lines on the referee's graphs of the accumulation of unpaid debts that he was able to age are all upwards during the relevant period.

The defendants' points of dispute 28 The defendants have raised six points of dispute about the referee's report. It is convenient to consider each in turn.

Non-current liabilities 29 The defendants submitted that the referee treated long-term non-current debts owed to Pisces Group as "due and payable" whereas that debt was never called-in by Pisces Group either when it was under the DOCA, or even after it came out of the DOCA on 30 June 2011. The defendants therefore submitted that the debt at all times remained a "non-current long-term liability". They also point out that according to the referee the Pisces Group debt was 61% of Starcom's total debt. I infer from this that they say that the alleged error by the referee is material to his ultimate assessment as to the period in which Starcom was insolvent. 30 The defendants also submitted that the second defendant, Mr Rajan, was at all times the largest shareholder and creditor of Pisces Group and he was never going to call in the debt. Peter Williams, another director and related party, held 12% of Starcom's debt. The defendants submitted that this debt was also a "long-term non-current liability" and was not "due and payable" as it was not called-in. 31 In paragraph 6.2.3(d) of his report, the referee stated that in his opinion the Pisces Group debt should have been regarded as on-call and payable during the relevant period given the financial position of Pisces Group and the fact that it was trading under external administration. He stated that treating the Pisces Group loan as a non-current liability during the relevant period does not appear to be justified or commercially realistic when one considers that Pisces Group was also experiencing cash flow and financial difficulties during that time. He records that Pisces Group entered into voluntary administration on 29 May 2009 (for the first time) and was subject to a DOCA throughout the whole of the relevant period. 32 Although reasonable people may disagree on the correct conclusion, in my view the referee's conclusion on this point is justified for the reasons that he gave. Whilst the directors of Pisces Group may not have called-in the loan to Starcom because Pisces Group was Starcom's holding company, once Pisces Group went into administration and then became subject to a DOCA different considerations applied. At that stage, the interests of creditors rather than shareholders rose to the fore. Thus, Pisces Group should have regarded the debt as due and payable, and there is no reason to reject the referee's opinion that in Starcom's books it should have been regarded as due and payable. 33 I am also, of course, mindful that this point is one within the referee's technical expertise and he has given detailed reasons for it, such that in the ordinary course I would be inclined to accept it. 34 The defendants also submitted that the referee further erred in considering as owing sums far in excess of those pleaded in the amended statement of claim. For instance, the amended statement of claim dated 1 June 2018 states the plaintiff's claim as being for $1,072,949 as due and owing to Pisces Group as this was the amount incurred during the purported insolvency. Yet, the referee purports to treat the much higher figure of $3,068,502 as due and owing. 35 The problem with this submission, aside from the fact that the referee takes his figure from the RATA which the defendants themselves furnished, is that the two figures represent different things. The referee uses the figure of $3,068,502 (in the table at paragraph 6.2 and in paragraph 6.2.3(a) of his report) as reflecting Starcom's indebtedness to Pisces Group as at the date of liquidation, i.e. at the end of the relevant period. The plaintiffs use the figure of $1,072,949 (in item 11 of the table at paragraph 151 of the amended statement of claim dated 1 June 2018) as Starcom's indebtedness to the Pisces Group "incurred during the Insolvency Period" (i.e. the difference between the indebtedness at the commencement and the end of the relevant period). There is therefore no substance to the complaint.

Balance-sheet test 36 The defendants submitted that the test used by Mr Taylor in his report is the "balance sheet test", but that this is only an indicium of liquidity and is not to be considered in isolation. They submitted that the legal authorities (without identifying those authorities) consider that the "cash flow test" is the correct test to determine when debts are due and payable. They then rely on the report of Mr Hosking which employs the cash flow test. 37 In my view, the defendants' submission fails to identify any error by the referee in relation to his use of the balance sheet and cash flow tests. The referee states in his report that, with the assistance of his staff and under his instructions and supervision, he checked the accounting analysis and calculations done by Mr Taylor. He states that he agrees with the method and approach taken by Mr Taylor in assessing the insolvency of Starcom. Further, he says that after undertaking his own independent checks and analyses, he agrees with the conclusions and opinions expressed in that report. He also says that his additional tests in graphing the timing of the debts which remain unpaid confirmed the conclusions and opinions expressed in Mr Taylor's report. 38 In the circumstances, no relevant error has been identified in the referee's reliance on Mr Taylor's application of the balance sheet test. Moreover, the referee did not rely on that test in isolation, but checked it against other considerations.

No accounts receivable 39 The defendants point to the referee's statement in paragraph 5.2.3 of his report that, amongst other things, he had not received invoices to customers or details of account receivables for the period 1 July 2009 to 1 August 2011 which, he said, are directly relevant to his inquiry. They submitted that it is not possible to calculate the current ratio or the quick ratio without having the accounts receivable. 40 The referee stated in his report that if, amongst other things, the identified missing account receivables had been available they would have made his analysis more complete. He stated, however, that none of the items is of sufficient materiality so as to be critical to his analysis of the insolvency of Starcom. He refers to his graphical analysis of the timing of the accumulation of unpaid debts which shows that his analysis was undertaken on 77% of the known debts which remain unpaid. 41 Further, it is apparent from Mr Taylor's report (Table 2 at paragraph 4.3.1) that he had and referenced the total figures for trade and other receivables for the 2008, 2009 and 2010 financial years. These figures were extracted from Starcom's balance sheets, and are apparently the figures that the referee then used and which were subject to checks by his staff. So, as stated by him, the referee may not have had "invoices to customers or details of accounts receivables for the period 1 July 2009 to 1 August 2011", but he certainly had the total figure for trade and other receivables for all of that period except for the last month. Moreover, he was not concerned that what he lacked was material to his ultimate conclusion, and the defendants have not shown why I should be. 42 The defendants also submitted that any current debts owed by Starcom are much less than the sum stated by the referee, and could easily have been met from the Macquarie Generation contract earnings and other customer contracts. 43 There are a number of difficulties with the submission. First, the defendants failed to identify any evidence in support of it. Second, at paragraphs 3.1.6 and 3.1.7 of his report, the referee considered whether the continued trading of its business would result in earning sufficient profits to make up the deficit and restore solvency, and concluded that it would not. Third, the matter of the sum of the current debts is merely a duplication of what the defendants submitted in relation to the referee's assessment of current liabilities. 44 The short point is that whilst the defendants quibble with the referee's conclusion, they do not identify any relevant error in his methodology, calculations or reasoning.

Duration of the Pisces Group DOCA - 16 July 2009 to 30 June 2011 45 The defendants submitted that the referee incorrectly stated (in paragraphs 3.1.4 and 6.2.3(d) of his report) that Pisces Group was subject to a DOCA for the entire insolvency period of 1 October 2009 to 1 August 2011. They say that, in fact, Pisces Group was subject to a DOCA from 16 July 2009 to 30 June 2011 and that when Starcom was wound-up on 1 August 2011 Pisces Group had come out of the DOCA. There is thus a difference of one month, being the month of July 2011, at issue. 46 To make good their point at a factual level the defendants put up, with their submissions, a copy of the DOCA and then relied on its terms to submit that it would end on the fulfilment of the terms and conditions of clause 3. 47 The first difficulty with this is with regard to the fact of when the DOCA ended. I cannot tell from the terms of clause 3 alone whether its requirements were met or when they were met, or if the time limit mentioned there was not extended. Also, the Equifax Company Extract Current and Historical for Pisces Group that is in evidence records the DOCA to have ended on 16 December 2011, which is contrary to what the defendants submit. 48 The second difficulty is that it is not at all clear that the difference of one month, being the month of July 2011, between the defendants' date for the end of the Pisces Group DOCA and Starcom's liquidation is material. That is particularly so in the light of the defendants' acceptance that Starcom was insolvent from March 2011. Thus even on the defendants' version the Pisces Group DOCA ended many months after the onset of Starcom's insolvency. 49 In the circumstances there is no substance to this complaint.

Fundraising by Pisces Group 50 The defendants refer to paragraph 3.1.4 of the referee's report where it is stated that the Pisces Group raised capital of approximately $744,000 from its shareholders in October 2009 from a rights issue. The referee stated this in the context of his conclusion that Starcom was unable to raise sufficient finance during the relevant period, either internally from related parties or externally from financiers, to fund its trading losses and pay its debts as and when they fell due. 51 The defendants point to other funds raised by Pisces Group - approximately $700,000 as a loan from the second defendant on 22 April 2009 that was initially repayable on 30 July 2009 and subsequently extended to 31 December 2010, $700,000 raised by the directors and paid to the deed administrator to exit the DOCA and a further $1-2 million on 15 August 2011 from the sale of assets to Santapau Ltd. 52 The first problem with these submissions is that there is no evidence to support the factual basis for them, and it is not said that any evidence was submitted to the referee. 53 Second, in respect of the funds raised from the sale of assets, that is said to have occurred on 15 August 2011 which was after the date of liquidation of Starcom and outside the relevant period and is consequently irrelevant. 54 Third, it is difficult to see how the raising of capital from the directors to pay to the deed administrator would necessarily be relevant to Pisces Group's ability to further fund Starcom. In any event, the referee acknowledged in his paragraph 3.1.4 that Pisces Group was subject to a DOCA for much of the relevant period which restricted Pisces Group's ability to fund Starcom. 55 Finally, in respect of the loan from the second defendant, that was said to have been initially repayable on 30 July 2009, which was before the relevant period commenced. Thereafter, the repayment date is said to have been extended from time to time. That arrangement does not qualify as raising additional finance during the relevant period - it was finance that was already available to Starcom during the relevant period. 56 In all, the submissions in relation to fundraising by Pisces Group do not reveal any relevant error by the referee.

ATO debt 57 The defendants refer to the referee's statement at paragraph 6.2 of his report that Starcom's debt to the Australian Taxation Office (ATO) was 11% of the total Starcom debt. The defendants submit, in response, that the ATO had allowed for a payment plan and as such its debt was not due and payable whilst the payment plan was in place. They submit that the effect is that the ATO payment plan deferred the purported insolvency of Starcom. 58 The defendants then refer to correspondence with the ATO which rejected any further extension of the payment plan in June 2011, which was a long time after the purported insolvency start date of 1 October 2009. The submission is that the ATO debt thus only became due and payable in June 2011, which was towards the end of the relevant period. 59 In response, the plaintiff points to evidence showing that the ATO payment plan was entered into some 11 months after Starcom's date of insolvency of 1 October 2009, namely on 23 September 2010. On that basis, the plaintiff submits that it is incorrect to assert that the ATO payment plan deferred the insolvency of Starcom; Starcom was already insolvent which the payment plan merely extended. 60 The evidence is clear that by at least 22 August 2010, Starcom was overdue in its commitments to the ATO. A deferred payment arrangement was concluded with the ATO by letter dated 23 September 2010 which set out a schedule of monthly payments to be made running through to March 2014. By 16 May 2011, the ATO was complaining of a breach by Starcom of that arrangement. On 6 June 2011, Starcom sought an extension of the deferred payment arrangement, but that was rejected by the ATO by letter dated 15 June 2011. That letter records that Starcom remained in arrears on fringe benefit tax lodgements and payments due in the middle of 2008, 2009 and 2010 and a business activity statement due on 21 December 2010. 61 In the circumstances, it is not correct that the deferred payment arrangement had the result that Starcom's insolvency was deferred. If, as concluded by the referee, Starcom was insolvent before the deferred payment arrangement was concluded then that arrangement can have had no impact on when insolvency commenced.

Conclusion 62 In the circumstances, the defendants have failed to identify any proper basis for me not to adopt the referee's report. I am satisfied that the approach taken by the referee shows a thorough and analytical approach to the assessment of the subject matter of the reference. The defendants raise no question of law, or the application of legal standards to established facts, and I am satisfied that the referee asked himself the right question. 63 In those circumstances, I am satisfied that the whole of the referee's report should be adopted and I order accordingly. 64 As the parties have made no submissions on costs, I shall reserve the costs arising from the defendants' opposition to the adoption of the referee's report. In the event that no order is subsequently made in relation to these costs, then they will be costs in the cause. I certify that the preceding sixty-four (64) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stewart.