ARL2 Pty Ltd v Flex-Realty Pty Ltd
[2025] TASFC 1
•4 March 2025
[2025] TASFC 1
| COURT: | SUPREME COURT OF TASMANIA (FULL COURT) |
| CITATION: | ARL2 Pty Ltd v Flex-Realty Pty Ltd [2025] TASFC 1 |
| PARTIES: | ARL2 PTY LTD |
| v | |
| FLEX-REALTY PTY LTD | |
| FILE NO: | 737/2024 |
| DELIVERED ON: | 4 March 2025 |
| DELIVERED AT: | Hobart |
| HEARING DATE: | 29 August 2024 |
| JUDGMENT OF: | Wood J, Jago J, Martin AJ |
| CATCHWORDS: |
Corporations – Winding up – Applications for Winding Up By Court – Generally – Failure to respond to Statutory Demand – Presumption of Insolvency – Proof of Solvency – Ability to pay debts as and when they are due – No error by trial judge.
Aust Dig Corporations [1515]
Legislation:
Corporation Act 2001 (Cth) ss 95A(1), 459A(2)(a), 459C(3)
Case cited:
Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd [2007] FCA 548
REPRESENTATION:
Counsel:
Appellant: N Willing Respondent: J O'Farrell
Solicitors:
Appellant: LFS Lawyers Pty Ltd Respondent: Terracall & Associates
| Judgment Number: | [2025] TASFC 1 |
| Number of paragraphs: | 56 |
Serial No 1/2025
File No
737/2024
ARL2 PTY LTD v FLEX-REALTY PTY LTD
| REASONS FOR JUDGMENT | FULL COURT WOOD J JAGO J MARTIN AJ 4 March 2025 |
| Order of the Court (29 August 2024): | |
| Appeal dismissed. |
Serial No 1/2025
File No
737/2024
ARL2 PTY LTD v FLEX-REALTY PTY LTD
| REASONS FOR JUDGMENT | FULL COURT WOOD J JAGO J MARTIN AJ 4 March 2025 |
| Introduction |
1 The appellant applied for the winding-up of the respondent on the ground of insolvency. Blow CJ was satisfied on the balance of probabilities that the respondent was able to pay its debts as and when they became due and payable, and that it was likely to remain able to do so for the "indefinite" future. His Honour accordingly dismissed the appellant's application.
2 The appellant appealed against the decision of the learned trial judge on the following
grounds:
"1
Having correctly identified principles to be applied in the determination of the Respondent's solvency (at [10]-[12]), the learned trial judge erred in law (at [67]) by giving too much weight to the expert evidence of Mr Rands as to solvency in terms, rather than to the materials which were before His Honour that were relevant to the Respondent's financial position as a whole.
2
The learned trial judge erred in fact (at [65] and [67]) by finding that the Respondent:
(a) did not have ongoing losses; (b) did not have poor cashflow; (c) had assets that consistently exceeded liabilities; and
(d)
was able to pay its debts as and when they became due and was likely to remain able to do so for the indefinite future;
when His Honour had evidence before him to the contrary or, alternatively,
where such findings were not supported by the evidence before His Honour.3
The learned trial judge erred in law (at [24] and [67]) by taking into account bare promises of the Respondent's directors to provide financial assistance to the Respondent as a credit resource available to the Respondent for the purposes of assessing solvency, where the evidence did not support anything more than a chance that the directors would provide such assistance.
4
The learned trial judge erred in fact and/or in law (at [25] and [67]) by taking into account the overdraft facility agreement between the Respondent and ACN 601 158 507 Pty Ltd as a credit resource available to the Respondent for the purposes of assessing solvency, where the evidence did not establish that the overdraft facility could have been genuinely relied upon by the Respondent.
5
The learned trial judge erred in law at [64] by not regarding the non-payment of the debt owing to the Appellant as evidence of insolvency and on grounds unsupported by the evidence or which the Respondent was not permitted to rely upon."
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3 At the conclusion of oral submissions the Court ordered that the appeal be dismissed. We now set out our reasons for dismissing the appeal.
Background
4 By written contract dated 23 September 2022, the appellant agreed to sell a rent roll business to the respondent. The purchase price was $185,000 payable in nine instalments.
5 A dispute arose as to how much, if any, of the final instalment was payable, but the amount in dispute was not quantified. Although the contract provided that any dispute be referred to arbitration, neither party sought to arrange the appointment of an arbitrator, either pursuant to the terms of the contract or through application to the Supreme Court.
6 On 14 July 2023 the appellant served upon the respondent a statutory demand for payment of $59,000 said to be owing pursuant to the contract of sale. The respondent did not apply for the statutory demand to be set aside. On 12 September 2023 the appellant filed an originating process in the Supreme Court applying for the respondent to be wound up on the ground of insolvency.
7 It was common ground that as the respondent had failed to comply with the statutory demand, and had not applied to set it aside, pursuant to s 459A(2)(a) of the Corporations Act 2001 (Cth) there was a presumption that the respondent was insolvent. By reason of s 459C(3) of the Corporations Act, the respondent bore the onus of proving solvency.
8 There is no dispute that the learned trial judge correctly directed himself as to the law, including s 95A(1) of the Corporations Act which provides that the respondent is solvent "if, and only if, [it] is able to pay all [its] debts as and when they become due and payable". His Honour correctly noted that "the test of solvency is a cash flow test rather than a balance sheet test."
9 In addition, the trial judge correctly observed that the respondent was unable to rely on any contention that the alleged debt was not owing, and that for the purposes of assessing solvency, he was required to assume that the claimed debt of $59,000 plus interest was due and payable.
Trial judge's reasons
| 10 | The trial judge summarised the relevant factual background of the respondent: "The defendant company | |||||
|
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paid at a flat rate, with occasional variations. Mr Chamley gave evidence that the furthest the company would get behind in paying him was 'maybe $5,000'.
16 The company operates from rented premises in Wivenhoe. The landlord is Chamvers Pty Limited. It is the trustee of a self-managed superannuation fund of which Mr Chamley and Mr Grave are members. The company has been paying rent at the rate of $1,000 per month. By mistake, the company has been treating the rental payments as representing $909.09 per month plus GST, but in fact the landlord is not registered for GST. I will say more about this situation later.
17 The company owns an unencumbered piece of vacant land in Strahan. It purchased that land for $18,000, completing its purchase in June 2022. Mr Chamley estimated that that land is now worth $25,000 to $30,000. However the government valuation as at 1 July 2021 was $5,000.
18 The company has a possessory title to an unencumbered piece of vacant land in Waratah. By a contract dated 2 November 2021 it agreed to purchase the interest of a couple named Prothero in that land for $10,000 and to pay their legal costs. That contract was completed in June 2022. Because the company has only a possessory title to the land, which is not readily saleable, it concedes that that interest must be ignored when assessing solvency.
19 The company owns three vehicles – an MG, a Nissan Navara, and a Mercedes. The MG was purchased in November 2020 for $18,990 inclusive of GST and is unencumbered. The Nissan Navara was purchased in June 2021 for $57,000 inclusive of GST and is also unencumbered. The Mercedes was acquired in October 2020 and financed by a loan from Metro Finance. The company has punctually paid loan payments of $1,080.20 per month since January 2021."
11 As to the respondent's evidence concerning solvency, it is appropriate to set out the summary provided by the trial judge:
"The defendant's evidence as to solvency
20 Three witnesses gave evidence for the defendant – the two directors and a chartered accountant, Mr Rands. He has been practising for over 35 years. He opined that, on the basis of the documents and information provided to him by the directors, the company was solvent as at October 2023. The hearing was conducted as a trial by affidavit. Mr Rands gave oral evidence that, having read the affidavits of the plaintiff's witnesses, he had not changed his mind as to solvency of the company.
21 The directors each swore two affidavits – one in October 2023 and one shortly before the hearing. They produced various documents relating to the company's financial position. Those documents, and my comments in relation to them, can be summarised as follows:
•
They produced unaudited financial statements for the company for the years ending 30 June 2022 and 30 June 2023. The 2022 financial statements contained comparative figures apparently derived from those for 2021.
•
They produced the company's management accounts for the three months ending 30 September 2023. In his second affidavit, Mr Chamley produced the company's management accounts for the months of October, November and December 2023 and for the period from 1 January 2024 to 22 January 2024. The accounts for October, November and December showed an excess of expenses over income, but the figures for the January period showed a net profit of $8,609.02.
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•
They produced the company's bank statements for its general account, but not its trust account, for the period from 1 April 2023 to 28 September 2023. Throughout that period the general account was in credit. The lowest balance was $70,832.10 on 11 October 2023. The highest balance was $151,797.82.
•
In his second affidavit, Mr Chamley produced the bank statements for the company's general account for the period from 28 September 2023 to 20 January 2024. It showed a credit balance of $34,299.82 at the end of that period. The lowest credit balance during that period was $26,749.49 as at 18 January 2024.
•
Mr Chamley produced copies of pages from the company's 'contract book' showing particulars of real estate transactions from 12 May 2021 to 18 October 2023. That book contained handwritten details of contracts for the sale of real estate in respect of which the company received or hoped to receive commissions. The details recorded included the date of the contract, the address of the property, the names of the vendors and purchasers, the sale price, the commission inclusive of GST, the initials of the listing agent and the selling agent, notes as to whether particular contracts were subject to finance or otherwise conditional, the dates on which conditional contracts became unconditional, and the scheduled and actual settlement dates. In his second affidavit, Mr Chamley produced copies of the contract book entries for the period from 7 June 2023 to 8 January 2024.
•
Mr Chamley produced a photograph, taken on 23 October 2023, of a whiteboard on which details of pending contracts were recorded. The details on the whiteboard comprised the addresses of the properties, details of conditional contracts and the dates by which the conditions were to be satisfied, settlement dates, agents' initials, and expenses incurred by the company. I assume the expenses related to such things as advertising. In his second affidavit, Mr Chamley produced a second photo of the whiteboard, showing particulars of uncompleted contracts as at late January 2024.
•
Mr Chamley produced a payroll activity summary for the month of October 2023. It showed that the employees earned $32,052.80 that month, from which $6,050 PAYG tax was deducted, leaving net pays totalling $26,002.80. It showed that superannuation guarantee contributions of $3,519.36 were paid or payable.
•
Mr Chamley produced a report generated by the company's accounting system showing loan payments in respect of the Mercedes motor vehicle in the sum of $1,080.20 each month from 25 January 2021 to 25 September 2023 inclusive. He also produced a document showing that that vehicle was purchased by the company for $57,000 inclusive of GST on 2 June 2021.
•
He produced another document evidencing the purchase of the MG station wagon by the company on 19 November 2020 for $18,990 inclusive of GST, on road charges and stamp duty.
•
Mr Chamley produced a report generated by the Australian Taxation Office on 5 October 2023 showing the company's income tax transactions during the two years commencing 5 October 2021. This report showed that the company owed nothing to the ATO in respect of income tax. From that report it can be calculated that the company owed the ATO $29,622.58 in respect of income tax as at 5 October 2021. The report shows that the company's 2020 tax return was lodged late, that its income tax for that year was assessed in the sum of $3,252.85, and that a penalty of $1,110 was imposed for the late lodgement. It shows that the company's 2022 and 2023 returns were lodged at the same time and
5 No 1/2025
processed on 29 September 2023. It did not contain any reference to a 2021 income tax return for the company. Counsel for the plaintiff submitted that the company must therefore not have lodged a return for that year. I will say more about this issue later.
• Mr Chamley also produced an ATO activity statement for the period from 1 July 2022 to 11 October 2023. That statement related to both income tax and GST. It showed various transactions, including a payment of $37,156 received on 5 October 2023, and a credit balance of $15,702.21 as at 11 October 2023. In his second affidavit, Mr Chamley produced a further ATO activity statement dated 16 January 2024 showing a zero balance. • Mr Chamley produced a statement showing that the company's solicitors, Terracall and Associates, were holding $30,366.01 in their trust account for the company as at 25 October 2023. At the time of the hearing the firm held $45,366.01 in its trust account for the company. 22 In his second affidavit, Mr Chamley estimated that the company would receive property sales commissions in the order of $41,450 during January 2024, at least $29,740 during February 2024, and at least $36,875 during March 2024. He estimated its rental management income to be between about $16,000 and $19,000 per month.
23 In both of his affidavits Mr Chamley said that the company did not have any outstanding debts. No debts to trade creditors were shown in the annual accounts for 2022 or 2023. Those accounts were prepared by an external accountant. It would appear that the company paid all its creditors before the balance date in those two financial years. Similarly, none of the management accounts in respect of the current financial year show any debts owing to trade creditors at the end of the relevant periods.
24 In assessing solvency, the credit resources available to the company must be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671. On 19 January 2024 the company entered into a business overdraft facility agreement with a company named ACN 601 158 507 Pty Ltd, with the directors acting as guarantors. Pursuant to that agreement it has the capacity to borrow a maximum of $75,000. At the time of the hearing it had not drawn upon that facility.
25 Both directors gave evidence to the effect that they were willing to provide financial assistance to the company if necessary. Mr Chamley stated in his first affidavit that he loaned $15,000 to the company on 26 October 2022. That was at about the time when the company's second payment to the plaintiff, in the sum of $70,000, was payable. He said that the loan was repaid on 30 March 2023.
26 Each of the directors provided evidence of his assets. Mr Chamley is the sole owner of his home, which is in Heybridge. The government valuation of that property is $760,000. He estimated that it is worth about $850,000 to $900,000. It is mortgaged. The mortgage balance was $243,346.78 as at 25 October 2023.
27 Mr Chamley purchased a second property in Heybridge in May 2023. Its government valuation is $210,000. It is mortgaged. The mortgage balance was $275,672.63 as at 25 October 2023.
28 Mr Grave is the sole owner of his home, which is also in Heybridge. He purchased it in 2017. The government valuation is $146,250, but he estimated that it is worth $180,000. It is mortgaged to his bank. The mortgage debt was $27,058.36 as at October 2023. Mr Grave had a credit balance exceeding that amount in another account with his bank at that time.
6 No 1/2025
29 Mr Rands was asked by the defendant's solicitors to provide a report as to whether the company was solvent at the time of the expiry of the statutory demand, which was said to be in the period 4-9 August 2023. He responded by providing a report dated 13 October 2023 in which he said that, in his opinion, the company was solvent as at 4-9 August 2023, solvent at the time of his report, and likely to remain solvent 'in the near future'. He took into account a number of factors which, viewed in isolation, might have caused concern as to the financial soundness of the company:
• The company had failed or refused to pay four monthly instalments of $3,000 each to the plaintiff, as well as the final instalment of $47,000. • The company lodged its 2022 income tax return on 29 September 2023, rather than on the due date of 15 May 2023. • The company lodged its monthly BAS statements for February to August 2023 on 28 September 2023. All but the last of them were overdue. • The company did not have a written business plan. • The company did not have written cashflow forecasts or budgets. 30 However Mr Rands noted facts and circumstances favourable to the company in relation to each of these matters. Whilst the company may have owed $59,000 plus interest to the defendant, it had had over $70,000 in its general bank account at all material times prior to the date of Mr Rands' report, and therefore had the ability to pay the claimed debt in full. When the 2022 income tax return was lodged, it resulted in a refund of $23,034.50. As at 13 October 2023, the company had paid income tax of $7,523.25 in advance. An amount of $37,156 was due in respect of the activity statements for the months of February to August 2023, but the setting off of various amounts resulted in the company's account with the ATO being in credit as at 13 October 2023 in the sum of $15,702.21. Whilst the directors did not have a written business plan, they had a plan to keep sufficient money in the company's bank account, with the target of a minimum of $100,000. Mr Rands said that in his experience only a tiny minority of small businesses had a written business plan, and the absence of such a plan did not support an assessment of insolvency in his opinion. He noted that, whilst the directors did not have written budgets or cashflow forecasts, they monitored the company's bank account and its expected income and expenditure. He said that doing so without a written budget or forecast was the typical approach of most small businesses.
31 Mr Rands' report contained an executive summary in which, after expressing the view that the company was solvent and likely to remain so, he said the following:
'2.4
Of significance to my opinion is the cash held in the operating bank account of the company between 4 and 9 August 2023 and for the period after 9 August 2023 to 11 October 2023. The lowest balance of the operating bank account of the company since 4 August 2023 was $70,832.10 on 11 October 2023. That is, for the whole of the relevant period of time, it had sufficient funds to pay the alleged debt in full.
2.5
Of support to my opinion are the company resources of the kind referred to in section 5 of this report. These include the capacity and preparedness of a company director to provide loan funds to the company and the existence of company real estate investments which could be sold or used as security for company borrowings.
7 No 1/2025
2.6 Also of support to my opinion is the continuing company profitability and consequential positive cash flow which is enjoyed by the company. It is my opinion that the business conducted by the company provides more favourable positive cash flow for a given level of sales than many other businesses.'
32 Mr Rands had some positive things to say about the nature of the company's business. In his report at [4.11] to [4.14] he said the following:
'4.11
It is apparent that the receipt of income by the real estate agent is only contingent on the settlement of a property sale or the collection of rent. There is not an additional process as there is with many businesses where there is further effort required after the income earning activity to invoice a client or customer and then pursue them for payment. A tradesman undertaking small repairs, for example, would provide their service and then invoice the customer. They may have arrangements to facilitate payment, but there is not the low risk of missing out on income enjoyed by a real estate agent.
4.12
In my opinion, this capacity of a real estate agent to be virtually guaranteed payment if a property sale settles and if rent is collected for a landlord, is an attractive feature of the industry and something which assists the solvency of industry participants.
4.13
I was advised … that Ms Murchie maintains a whiteboard where details of pending settlements are recorded. This allows the directors to assess the amount and timing of future cash inflows from property sale commissions. I was further advised that the level of property management commissions was relatively stable from month to month, which also assists prediction of overall cash inflows. My review of the financial statements of the company for the 2022 and 2023 financial years attached as Appendix 3, indicate that the cost structure of the business is largely fixed costs. That is, they are relatively constant from month to month as they are not impacted by changes in activity or sales. This is a very helpful feature for the directors to predict overall cash flow requirements at any point in time.
4.14
Commissions paid to salespeople are not a fixed cost, as they increase or decrease in time with sales commissions earned by the business. In my experience however a share of the sales commission is only paid to the applicable salesperson after receipt by the business. That is, this additional cost is only payable to employees after it is received by the real estate agency. This is a further feature of this industry which assists participants solvency as large payments of commission to employees will only be made after receipt of the necessary funds by the business.'"
| 12 | The trial judge provided the following summary of the evidence led by the appellant: "The plaintiff's evidence | |
|
8 No 1/2025
34 Mr Bagnati is a certified practising accountant with over 43 years' experience. In his affidavit, which he affirmed on 10 November 2023, he concluded that there was no possibility that the defendant company was solvent, nor that it was likely to become solvent 'sometime in the immediate future'. He also expressed an opinion that Mr Rands, apparently unlike himself, was not in a position to form an opinion as to whether the company was solvent.
35 The material available to Mr Bagnati included Mr Rands' report and his affidavit, Mr Chamley's first affidavit, Mr Grave's first affidavit, Ms Luck's affidavit, and an affidavit of the plaintiff's solicitor/counsel, Mr Xenidis, which was not relied upon at the hearing.
36 Mr Bagnati noted that Mr Rands had been asked to consider whether the defendant company was solvent during a date range from 4 August 2023 to 9 August 2023. He went on, in paragraph 10(a) of his affidavit, to comment, apparently in relation to that date range, as follows:
'10 Based on the Bank Statements and ATO Portal, it is clear that: (a) There were numerous outstanding invoices outstanding …'.
37 Mr Bagnati had no basis for his assertion that there were 'numerous outstanding invoices outstanding'. He was not provided with any invoices. The bank statements revealed a number of payments from the company's bank account after 9 August 2023 but there was nothing in the bank statements to suggest that there had been any significant outstanding debts as at that date.
38 In paragraph 14 of his affidavit Mr Bagnati said that for the purpose of his affidavit he would rely on the various affidavits filed in the proceedings and their annexures to determine whether or not he could make a determination of solvency as at that time. He went on in paragraph 15 to say the following:
'15 The qualification to this is that: (a)
The company accounts, being no less than the General Trading Account(s) and the Trust Account(s), have not been audited. They ought to be audited no less than for the period 1 July 2021 and potentially 1 July 2020 to date.
Considering that the accounts for the period 1 July 2021 – 30 June 2023 were being prepared by the Flex Realty Pty Ltd's accountant, with the knowledge of an application for winding up a company, an accountant, instructed by the shareholders and directors of Flex, to prepare financial statements would not prepare accounts which evidence insolvency. [Original emphasis.]
Real Estate Trust Accounts are required by law to be audited for compliance with its licence. The audit I would require is more detailed to ensure that the transfers between accounts is in accordance with contractual terms. I raise this as one example where Chamley suggests a frequency of payments from the Trust Account, and as supported by the Bank Statements, being four transfers per month, Not on a weekly basis but a fortnightly basis.
• An assumption could be that there is either: •
Multiple Trust accounts being run on different cycles and or
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•
Multiple client book ledgers being run on different cycles and or
• Defalcation within the Trust Account.
(b) Rands decided not to produce the Trust account. This is a concern as:
• The dispute between the Plaintiff [sic] revolves around the Trust Account entries. • Had Rands considered the Affidavit of Chamley, he would have identified conflicting statements as to the money processed through the Trust Account. • The Trust Account ought to be relied upon to determine the receipt of funds into the General Trading Account, or other.'
39 It can be seen that in that paragraph Mr Bagnati jumped to a couple of unwarranted conclusions. First, he suggested that any external accountant knowing that a winding up application was pending would deliberately not prepare accounts that evidenced insolvency. When cross-examined about that suggestion, Mr Bagnati resiled from what he had said in his affidavit. He denied that he was suggesting that members of his profession might tend to create misleading financial statements in that situation. He asserted that what he meant was that an accountant who was in a hurry to prepare financial statements that were late might miss something, and that that might result in the accounts suggesting solvency. But that it not what he said in his affidavit.
40 He went on to suggest, without having any basis for doing so, that one could assume that there was some serious irregularity in relation to the company's trust account, such as a defalcation or the operation of multiple trust accounts. His comment appears to have been based on a comparison of the bank statements for the company's general account with Mr Chamley's first affidavit. The bank statements showed transfers to the general account, apparently from the trust account, on a fortnightly basis, as well as some one- off transfers. Mr Chamley did not say anything about such transfers in his first affidavit that was inconsistent with the bank statements. He did say that rent was collected from tenants 'mostly on a weekly basis', that the company then deducted its costs and fees monthly, and that the net balance was paid to landlords 'at regular intervals, usually monthly'. Nothing was said about the frequency of transfers of commissions relating to sales.
41 Mr Bagnati's criticisms of Mr Rands in his paragraph 15(b) appear to relate to the disputed claim for $59,000 plus interest. Mr Rands was not engaged to advise as to that dispute. He was engaged to provide an opinion as to solvency, first on the assumption that the claimed debt was due and payable, and also on the assumption that it was not. That is what he did. It was not part of his role to look for evidence relating to the disputed debt in the trust account records.
42 Mr Bagnati went on in his affidavit to make various criticisms and observations concerning the evidence provided by the defendant as to its financial position. In many respects he suggested that that evidence was unreliable and/or incomplete. In particular, his criticisms related to the title to the land at Waratah, Mr Rands not undertaking searches relating to registered charges, the extent of the information provided as to the entitlements of employees in respect of commissions, the possibility of GST liabilities in relation to commissions, the possibility that superannuation guarantee contributions were being underpaid, and the possibility that PAYG payment summaries needed to be amended. He somehow reached a conclusion that it was more likely than not that the company owed commissions to
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salespersons, and that the annual financial statements, PAYG payment summaries and tax returns all needed to be amended. He noted that a particular bank card was used for transactions that he thought 'may be personal expenses', assumed that the card was Mr Chamley's card, and concluded that Mr Chamley owed 'significant money' to the company. He expressed the view that various figures in the financial accounts appeared to be abnormal.
43 Despite his views as to the inadequacy and unreliability of the evidence available to him, he concluded that insolvency had been established. He said the following, at paragraph 36:
'36 Under the circumstances, there is no possibility to suggest that Flex is
solvent either at:
a the date between 4-9 August 2023; b the date of this Affidavit relying on the Affidavit of Chamley, Grave, Luck and Xenidis; c Now and sometime in the immediate future.'"
13 After dealing with a number of submissions advanced by the appellant, the trial judge correctly addressed the question whether solvency had been established:
"Has solvency been established?
62 I prefer the evidence of Mr Rands to that of Mr Bagnati, for a number of reasons:
• Unlike Mr Rands, Mr Bagnati appears to have ignored the fact that the defendant company's business was not a risky one. So long as people in and around Burnie continue to buy and sell real estate and the company more or less maintains its market share, it is likely to have a steady income from commissions on sales. So long as tenants continue to pay their rent, it is likely to have a steady income from commissions in relation to leases. There is very little risk of the company incurring bad debts, although the annual financial statements show that $1,567 was written off in 2021. • Mr Bangnati appears to have ignored the fact that, at least until it began to incur legal expenses in relation to these proceedings, the company usually maintained a credit bank balance exceeding $100,000. • Mr Bagnati appears to have reasoned that any financial records that he did not sight, if examined, were likely to reveal irregularities or worse. • Mr Bagnati in his affidavit made it clear that he did not consider the capacity of the directors to lend money to the company or to facilitate borrowing by the company to be relevant to its solvency. However, as a matter of principle, the credit resources available to the company must be taken into account: Sandell v Porter (above). • In his affidavit, Mr Bagnati expressed a number of opinions that appear to have been based on speculation rather than evidence. I need not repeat all that I have said about those opinions. Most significantly, having made observations about the available evidence being incomplete and unreliable, he jumped to the conclusion that the company was insolvent and likely to remain so, rather than venturing an opinion that solvency had not been established. 63 For the purpose of assessing solvency, I must assume that the claimed debt of $59,000 plus interest is due and payable. With interest, that now amounts to
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a little under $64,000. I also assume that a further $5,000 to $10,000 is payable by the company because of the mistake concerning GST and the premises it rents.
64 I do not regard the decision of the directors not to pay the claimed debt as evidence tending to indicate insolvency. The fact that they ceased making payments to the plaintiff appears to have been due to intransigence and/or bad advice from a previous solicitor. The dispute with the plaintiff company should have been referred to arbitration long ago.
65 I note that a lot of the usual symptoms of insolvency are absent in this case. There is no suggestion that the company has ever been late in paying any trade creditor. Only one creditor contacted the company about a payment when it learned of winding-up proceedings. It has not had ongoing losses. It does not have a poor cashflow. The directors have a practice of monitoring the cashflow using records kept in a contract book and on a whiteboard. The company's assets have consistently exceeded its liabilities. It does not have problems selling stock or collecting debts. It does not have problems in relation to unrecoverable loans. There is no suggestion that any suppliers have placed the company on cash-on-delivery terms. There are no disputes between the directors.
66 I do not consider that I need to see sworn evidence from independent valuers in relation to the directors' real estate assets. The directors' estimates of the values of their properties should be approached with caution, but a comparison of the government valuations and the mortgage balances indicates that each director has a substantial equity in his home and therefore a substantial borrowing capacity. The fact that a financier recently provided a $75,000 overdraft facility confirms that.
67 In my view I do not need to see sworn affidavits from valuers or audited financial statements in order to reach a conclusion as to the solvency of this company. I accept the evidence of Mr Rands as to its solvency. I am satisfied on the balance of probabilities that it operates a business that is profitable, that it has substantial cash and credit resources, that it is able to pay its debts as and when they become due and payable, and that it is likely to remain able to do so for the indefinite future."
Ground 1
14 At the outset, we should record that we agree with the finding of the trial judge that he preferred the evidence of Mr Rands to that of Mr Bagnati. For the reasons discussed by the trial judge very little, if any, weight could be attached to the evidence of Mr Bagnati. On the other hand, the trial judge was entitled to rely upon the evidence of Mr Rands.
15 Ground one of the appeal asserted that his Honour "erred in law" at par [67] of his Honour's reasons "by giving too much weight to the expert evidence of Mr Rands as to solvency in terms rather than to the materials which were before his Honour that were relevant to the respondent's financial position as a whole". In substance, the appellant's submission contended that his Honour relied upon the opinion of Mr Rands rather than making his own assessment of the evidence. We do not agree.
16 The trial judge made his own assessment of the evidence. He was assisted in that assessment by competing evidence from the experts Mr Rands and Mr Bagnati. His Honour correctly preferred the evidence of Mr Rands and, ultimately, having made his own assessment of the evidence, accepted the evidence of Mr Rands. This was a perfectly orthodox approach which did not involve any error of law or fact.
17 Although ground one relates only the approach of the trial judge to the evidence of Mr Rands concerning solvency, the appellant's written submissions contended that the trial judge erred in
12 No 1/2025
describing the approach to proof of solvency taken by Finkelstein J in Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd [2007] FCA 548 as "less rigorous" than the approach taken by other judges in authorities to which his Honour referred. Underlying this contention was the proposition that his Honour erred in his approach to proof of solvency, but this proposition is without merit.
18 In the passage to which the appellant refers, his Honour was comparing authorities which might be viewed as tending to support the view that proof of solvency required audited accounts and, ordinarily, the "fullest and best" evidence of the financial position of the respondent. His Honour preferred the more flexible approach taken by Finkelstein J in the following passages from the judgment of Finkelstein J:
"10 Let me say at once that I reject as unfounded the proposition that to discharge the onus established by s 459C(3) a company must produce audited accounts to prove solvency. The cases to which Weinberg J referred do not support the existence of such a rule. Nor does his decision. 11 The question whether a company is solvent involves both a question of law and a question of fact. The legal question, or what may be partly a legal question, is what is meant by the word 'insolvent' in s 459A for the purpose of determining what is meant by the opposite. The judge will provide that meaning. He or she may say that the word has a technical meaning and state what that meaning is. Or he or she may say that the word is used in its ordinary sense and go to a dictionary to discover that meaning. 12 A company that wishes to establish the fact of solvency in accordance with the meaning laid down by the judge must tender evidence for that purpose. Then the following steps will occur. First, the judge will decide whether the evidence is relevant. The judge will then determine whether the evidence is admissible, for not all relevant evidence finds its way into court. Next, the judge will assess the probative value of the evidence. That assessment is inductive. Finally the judge will decide whether the claimed solvency is probable or more probable than not. 13 It is contrary to basic rules of evidence to assert there is only one method of proving solvency, namely the production of audited accounts. … 14 The explanation to be given to the cases to which Weinberg J referred is this. There are many shaky companies in the marketplace. Applications are made to wind up some of them. Applications are also made to wind up solvent companies. In each case a representative can come along attempting to prove solvency to avoid a winding up. Judges will look with care at the evidence especially if the judge suspects the company is or may be in a weak financial position. Dependent upon the degree of doubt justified by the facts, a judge may say that the only evidence he will treat as probative is 'the fullest and best' evidence available - the kind that in Commonwealth Bank of Australia v Begonia (1983) 11 ACSR 609 Hayne J said was often necessary although interesting enough, not in that case. In some instances this may be the company's audited accounts together with verified proof of both the ownership and value of the company's assets. On the other hand there will be many instances where proof of that sort is not required. In such cases there is no good reason to put the company to the time, trouble and expense of producing audited accounts. In the end it will all depend upon each particular fact of a case."
19 The approach of Finkelstein J approved by the trial judge was perfectly orthodox and correct. It did not involve any point of principle. Rather than describe it as "less rigorous", it might be more appropriate to describe it as "less constricted" or "more flexible", but descriptions aside, the trial judge was not in error. His Honour did not misapprehend any matter of principle and applied the correct tests to the question of solvency. We reject the appellant's proposition that his Honour failed to
13 No 1/2025
determine the question of solvency by reference to the "overall financial position" of the respondent. It is plain from his Honour's reasons and analysis that his Honour made his own assessment of the respondent's financial position and, having made that assessment, was satisfied that the respondent had established it was able to pay its debts as and when they became due and payable.
Ground 2
20 Ground 2 complains that, in addition to erring in finding that the respondent was able to pay its debts as and when they became due and payable, his Honour erred by finding that the respondent: (a) did not have ongoing losses; (b) did not have poor cash flow; and (c) had assets that consistently exceeded liabilities;
(d) was able to pay its debts as and when they became due and was likely to remain able to do so for the indefinite future. 21 As to the question of "ongoing losses", the appellant submitted that the evidence demonstrated the respondent had "posted a net loss of $48,122.85 across the seven months" prior to the hearing. The written submissions acknowledge that, in his reasons, the trial judge identified a period when the accounts showed "an excess of expenses over income". However, his Honour also noted that although there existed an excess of expenses over income during the period October–December 2023, the figures for the January period showed a net profit of $8,609.02.
22 The trial judge was well aware of recent figures. The statement that the respondent "did not have ongoing losses" was a general statement made toward the end of the trial judge's reasons when his Honour was summarising the evidence which caused him to note that "a lot of the usual symptoms of insolvency are absent in this case". His Honour was not referring to a particular period. Rather his Honour was making a general statement concerning the financial position of the respondent over a significant period which satisfied his Honour that the respondent "has not had ongoing losses". Such a broad statement was justified by the evidence.
23 The second complaint asserts that the trial judge erred in fact by finding that "the respondent does not have a poor cash flow". Again, this was a broad statement in the context of the summary toward the end of the trial judge's reasons which was also justified by the evidence. In written submissions, while maintaining that the evidence demonstrated the respondent had "very poor cash flow", the appellant acknowledged that the poor cash flow was "softened by a combination of a healthy cash holding (in the beginning), coupled with not paying the debt owed to the appellant".
24 As to the final broad statement that the respondent's assets "have consistently exceeded its liabilities", the appellant challenged the use of the respondent's goodwill as an asset. The goodwill was recorded as $146,307.06, and the appellant submitted that "goodwill is an intangible asset that cannot be converted to cash or work in capital for the payment of liabilities".
25 As the respondent pointed out, the notes to the financial year 2023 balance sheet "explain that goodwill is the excess of the purchase price for a business acquired over the fair value of the net assets at the date of acquisition", and it appears that goodwill "represents the rent roll" which is a reliable asset.
26 The appellant's submission concerning the trial judge's reference to the respondent's assets consistently exceeding its liabilities included the contention that it was an error of law "to consider the respondent's asset position as evidence of it being solvent without also considering the true nature of the assets and liabilities, or that the respondent had not accounted for the debt owing to the appellant".
14 No 1/2025
Again, this proposition reads too much into the words of the trial judge. The paragraph in which his Honour referred to the respondent not having ongoing losses, not having a poor cash flow and the assets having consistently exceeded liabilities began with the following:
"I note that a lot of the usual symptoms of insolvency are absent in this case".
27 Plainly, his Honour was not using these factors as positive evidence of solvency. His Honour was merely noting that these and other "usual symptoms of insolvency" were absent.
28 As to the challenge to the finding by the trial judge that the respondent was able to pay its debts as and when they became due, and was likely to remain able to do so for the indefinite future, the appellant's written submissions were as follows:
"Ability to pay debts as and when they fall due
37 The trial judge found that the Respondent was 'able to pay its debts as and when they become due and payable, and that it is likely to remain able to do so for the indefinite future.'
38 This can be demonstrated as contrary to the evidence specifically with reference to the debt owing to the Appellant. That debt remained unpaid at hearing.
39 The submissions on cash flow above show that from September 2023, and with only a few exceptions, the Respondent did not have enough cash on hand to pay both the debt owing to the Appellant and a single month of operating expenses (combined approximately $109,000). This was certainly the case from October 2023 until trial.
40 In some contrast, Mr Rands suggested that the Respondent could have paid the debt owing to the Appellant out of its cash balances at any time.
41 Mr Rands did not consider whether, if the debt was actually paid, there would be sufficient funds remaining to allow the Respondent to continue operating (and if so, for how long). Nor did Mr Rands consider the trajectory of the Respondent's dwindling reserves as outlined above.
42 The core notion of a company being able to pay their debts as they become due 'looks to the future', at least the reasonably immediate future.
43 It was unfortunate that Mr Rands' report was dated 13 October 2023. Only one week later, the Respondent's cash balance dropped to below the value of the debt owing to the Appellant. Mr Rands' view about paying the debt from cash was rendered obsolete.
44 There were more recent financial records in evidence at hearing. Although the Appellant says those records do not assist the Respondent's case, it is the Respondent who declined an adjournment to obtain a further report from Mr Rands addressing them.
45 The evidence shows that by the time the matter reached hearing, the Respondent's cash balance had dropped to about $22,000. Its net current asset balance was in the negative. The debt owing to the Appellant was in the amount of $59,000 plus interest. There were simply not enough resources for the Respondent to pay this debt.
46 The only reason the Respondent continued to operate up to the date of trial was because it was not paying, and indeed was unable to pay, the debt owing to the Appellant as and when it fell due. The Appellant submits that this meets the required definition of insolvency.
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47 The evidence suggested that only 10 days prior to trial the Respondent entered into an overdraft facility agreement for $75,000. The relevance of that agreement is the subject of ground 4. However, the Appellant submits that the overdraft facility would not have improved the Respondent's financial position in any event.
48 Paying the Appellant's debt out of the overdraft facility would not have changed the Respondent's asset position. It would have only replaced one debt with another, and with a much higher interest rate of nearly 24%.
49 Had this occurred, the Respondent would have still had only about $22,000 in cash and with monthly expenses of approximately $61,000 plus the repayments and significant interest on the overdraft. The difficulty is apparent. The Respondent would have only been able to operate for a matter of weeks.
50 The evidence did not support a finding that the Respondent was able to pay its debts as and when they became due and payable. It had not been doing so for months prior to hearing. The evidence suggested that trend was likely to continue." (Footnotes omitted.)
29 In response, the written submissions of the respondent were as follows:
"18
In examining this ground, the Court must be careful not to confuse the cashflow test of insolvency with the 'indicia' of insolvency, identified in Part B, above. In that regard, the only dispositive aspect of this ground is that identified in ground 2(d).
19
The reality of the respondent's financial situation by the time of hearing was this:
(a)
the Company was incorporated on 19 August 2015. It has traded a modest real estate business on the North West Coast of Tasmania;
(b)
from at least the financial year ending 30 June 2021, it had traded profitably. In FY21, its net profit after tax was $109,888. In FY22, it was $16,337. In FY23, it was $22,569. The fluctuations from FY21 to FY22 and FY23 can for the most part be explained by a difference in trading income, which it largely earned from commissions on sales and rent management. Given that the real estate market experiences periods of fluctuation, the movement in income does not appear unusual;
(c)
during this period, the business was clearly solvent. It also had assets in the form of three motor vehicles, though one (a Mercedes) was encumbered. In FY22, it acquired vacant land at Ribble Street in Strahan for $18,000. Mr Chamley estimated it would be worth $25,000 to $30,000 on the open market;
(d)
in or around October 2022, the respondent also acquired the rent roll from the appellant. The appellant has said in submissions that the evidence did not explain how 'goodwill' was calculated on the respondent's balance sheets, though the notes to the FY23 balance sheet explain that goodwill is the excess of the purchase price for a business acquired over the fair value of the net assets at the date of acquisition. It appears that 'goodwill' represents the rent roll, given the jump in this line item from FY22 to FY23. The rent roll is evidently a realisable asset;
(e)
at around the time the statutory demand expired, the respondent had $100,680.55 in its trading account. This fluctuated with a peak of $160,444.47 on 15 September 2023 to a balance of $34,299.82 on 20
16 No 1/2025
January 2024. A balance sheet dated 22 January records the cash balance as $22,148.25. However, over this period, the respondent:
i transferred $50,750.01 to the trust account of Terracall & Associates as pre- payment for legal fees (including withdrawals, Terracall & Associates held $45,366.01 at the time of hearing); ii pre-paid insurance ($11,010); and iii paid an amount to the ATO of $37,156 on 4 October 2023 with the result that after payment of amounts owing, the respondent was $15,702.21 in credit on its activity statement. In the period immediately prior to hearing, its activity statement balance was $0.00;
iv experienced lower than average income in December 2023, which appears to be largely from a drop in sales commissions;
(f) prior to hearing, the respondent had obtained the benefit of the overdraft facility, discussed further in relation to ground 4.
20 Undoubtedly, if the debt was undisputed and was due and payable as at the end of January 2024, which was then a little under $64,000, the respondent could have met it, though it would have had to draw on the overdraft facility or procure funds from the respondent's directors. Legally, this was an available option without the respondent becoming insolvent.
21 If the respondent availed itself of either of these options, the respondent could have paid the overdraft back over time. There is no reason to think that it could not have, given that it had traded profitably in the three financial years prior. On a worst-case scenario, the respondent would have had to realise some assets, such as the Ribble Street property, or call on the directors to contribute funds, which they were willing to do.
22 His Honour did not err when he found that the respondent could pay all of its debts as and when they fell due."
30 We accept the respondent's submissions. The finding of the trial judge was open on the
evidence.
31 The respondent's submission concerning the respondent's capacity to meet its debts was hedged in par [20] with an acknowledgment that if it was required to pay the disputed debt at the end of January 2024, then a little under $64,000, to meet the debt the respondent "would have had to draw on the overdraft facility or procure funds from the respondent's directors". This leads into ground 3.
Ground 3
32 Ground 3 asserts that the trial judge "erred in law" by taking into account "bare promises" of the respondent's Directors to provide financial assistance as a "credit resource available to the respondent for the purposes of assessing solvency". Ground 3 also asserts that the evidence did not support "anything more than a chance that the Directors would provide such assistance".
33 The assessment of whether the Directors could be relied upon as a financial resource for the purposes of assessing solvency was a question of fact. We are unable to see any question of law in this issue.
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34 The written submissions of the appellant identified authorities which recognise that support by Directors can be relevant to determining solvency.[1] The appellant relied upon those authorities for the proposition that the evidence must establish the Directors are "likely" to provide financial support and that cogent evidence is required in that regard. The appellant pointed to the absence of a loan agreement between the respondent and the Directors and submitted that the evidence of the Directors that they were willing to make loans was insufficient to amount to a credit resource for the purposes of determining solvency.
[1] Williams (as liquidator of Scholz Moto Group Pty Ltd) v Scholz [2008] QCA 94; Chan v First Strategic Development
35 After referring to previous loans from the respondent to the Directors, the appellant submitted there was "no cogent evidence that either of the Directors had ever placed themselves at any degree of risk to prop up the respondent's finances, or that they were likely to continue any meaningful financial support". This proposition was followed by the contention that the trial judge "erred by considering their capacity to lend or facilitate borrowing as relevant to solvency".
36 It is readily apparent from the reasons of the trial judge that his Honour regarded the willingness of the Directors to provide financial assistance to the respondent if necessary as a credit resource to be taken into account in assessing solvency.[2] His Honour paid careful regard to the evidence of the Directors and to their primary assets and liabilities. In this assessment, his Honour recognised that the estimates by the Directors as to the values of their properties "should be approached with caution".
[2] See par [24] of trial judge's reasons.37 In response, the written submissions of the respondent were as follows:
"25 The directors both gave evidence on oath that they were willing to loan funds to the respondent if needed. These were not bare promises. They were backed up by evidence by each director of the considerable equity which each had in real property which would support such a loan. Moreover, both have previously loaned funds to the Company. His Honour observed both witnesses in Court. The learned Chief Justice would have gained an impression about their commitment to the respondent. Due weight should [be] given to those parts of his reasons where it is noted that the directors were willing to provide financial assistance to the respondent and that the respondent had available credit resources. 26 In a tightly held company such as the respondent, a commitment by a director to loan funds (or provide further capital) is compelling. Under the Act, directors are personally liable for debts incurred whilst a company is trading insolvent. Similarly, they are potentially liable for unpaid PAYG, superannuation guarantee charge and GST under the director penalty regime. That liability can be triggered by a failure to lodge tax returns and BAS. The corporate veil can be pierced with apparent ease. Given that personal liability can attach for debt anyway, there is no reason to think that the directors would not tip in their own money if the company needed it. The directors could hardly have expressed their commitment differently to how they did in their affidavits. 27 Finally, the assertion that the directors have made a 'bare promise' to provide financial assistance must be untenable when by the time of the hearing, the directors had personally guaranteed an overdraft facility in favour of the respondent. Ground 3 discloses no error of law – or fact, for that matter." (Footnotes omitted.)
38 The trial judge saw and heard the Directors. Neither Director was cross-examined to suggest that their "willingness" was unreliable or limited.
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39 In arriving at his view as to the relevance of the Directors as a credit resource, the trial judge was entitled not only to reach a view as to the credit and reliability of each Director, but his Honour was also entitled to have regard to the background and operation of the respondent which was a "two- man company", the Directors and shareholders being the two witnesses concerned whose shareholdings in the company were equal. More details appear in pars [13]-[19] of the reasons of the trial judge cited earlier in these reasons. We are unable to discern any error in the approach of the trial judge and the finding that the Directors amounted to a credit resource for the purposes of solvency was a finding open to his Honour on the evidence.
Ground 4
40 Ground 4 is a complaint that the trial judge erred "in fact and/or law" by taking into account the overdraft facility agreement obtained by the respondent as a credit resource for the purposes of assessing solvency. It is asserted in ground 4 that the evidence "did not establish that the overdraft facility could have been genuinely relied upon by the respondent".
| 41 | The appellant's written submissions identified the basis of ground 4: "Ground 4 | |||||||
|
(a)
There was no evidence about the lender, who is not widely known, or whether it could in fact service the overdraft.
(b)
The interest rate for the facility was an unusually high 23.95%, exposing the Respondent to considerable extra expense if the facility were to be drawn on and drawing into question the Respondent's ability to obtain loans on reasonably commercial terms.
(c)
Although the facility was to be amortised over 208 weeks (4 years), the lender was entitled to reduce the facility or require repayment in full at its sole discretion with only 30 days' notice.
(d)
The Respondent was in default of the facility agreement ab initio. Clause 6(d)(vi) defined one type of default as the Respondent being 'Insolvent'. The Respondent satisfied multiple contractual definitions of that term, including by being party to wind up proceedings on the date the agreement was signed.
(e)
The evidence did not include the application made to secure the facility or what representations the Respondent made about its financial position. With an inference that the Respondent was in default from the beginning, it is unlikely that the Respondent disclosed its true financial position to
19 No 1/2025
the lender. [This last assertion was withdrawn during oral submissions on
the appeal.]71 The Appellant submits that the trial judge erred in law by considering the overdraft facility as relevant to the determination of the Respondent's solvency where the evidence disclosed a doubt about:
(a) whether the Respondent could have relied on it; or
(b) if the Respondent did rely on it, whether the Respondent could facilitate repayments." (Footnotes omitted.)
42 In response, the written submissions of the respondent were as follows:
"29
As a matter of law, the overdraft facility can be taken into account as an available resource with which the respondent can satisfy its debts. That is established by Lewis v Doran and Chan v First Strategic Development Corporation (in liq), referred to above.
30
The appellant has made a number of submissions at [70] which it says call into question whether the facility could be relied upon by the respondent. To this the respondent says:
(a) none of the propositions put at [70] were put to either of the directors in cross- examination. In particular, by making the submissions at a, b, d, and e, the appellant is inviting the Court to draw adverse inferences against the respondent and its directors, which were not put to them at hearing; (b) the proposition at a. is irrelevant in any event, because the evidence does in fact establish an available credit facility; (c) the propositions at b and c, are irrelevant in circumstances where at trial, the only amount which had been drawn was the establishment fee of $495. Moreover, even if the facility was partly drawn upon to meet the alleged liability to the appellant, the evidence disclosed that the respondent and its directors had other available assets to meet repayments; (d) the proposition that the respondent was in default of the facility ab initio is of no practical consequence. Clause 7 of the facility agreement makes clear that the lender may exercise any of the rights set out in clause 7 if there is an event of default, but that is in its discretion; (e) any suggestion in d. and e. that the respondent had misrepresented its financial position is highly unlikely and the Court should not take up this suggestion. A simple search of the ASIC Insolvency Notices website would have disclosed the winding-up application to the lender. 31 The availability of the overdraft facility is a fact which his Honour could find. It is not open for the appellant to now ask this Court to draw adverse inferences to the effect that it might become unavailable or that it cannot be relied upon. The appellant's submissions also contend that there is doubt about whether the respondent could facilitate repayments. That is pure speculation, which was not tested on cross-examination."
43 Again, the Directors were not cross-examined as to the circumstances in which the overdraft was arranged. It was not suggested to the Directors that they failed to disclose the respondent's true financial position to the lender. Nor was it suggested that, at the outset, the appellant was in breach of the overdraft facility. Similarly, it was not suggested to the Directors that if the respondent drew on the facility, it would not be able to service the repayment. Calculations discussed during oral
20 No 1/2025
submissions demonstrated that if the respondent drew down various amounts to the maximum, it was highly likely that the repayments could have been met. The model cashflow analysis provided by the respondent during submissions was helpful in this regard.
44 The trial judge referred to the overdraft facility agreement, with the Directors acting as guarantors, as a credit resource providing the capacity to borrow a maximum of $75,000. His Honour then discussed the willingness of the Directors to provide financial assistance as a credit resource. In his conclusion, when his Honour referred to the respondent as possessing "substantial cash and credit resources", it is apparent that his Honour had in mind both the overdraft facility and the willingness of the Directors to provide financial assistance. No error has been demonstrated.
Ground 5
45 Ground 5 asserts that the trial judge "erred in law" by "not regarding the non-payment of the debt owing to the appellant as evidence of insolvency". The passage to which the appellant refers in the reasons of the trial judge is as follows:
"I do not regard the decision of the directors not to pay the claimed debt as evidence tending to indicate insolvency. The fact that they ceased making payments to the plaintiff appears to have been due to intransigence and/or bad advice from a previous solicitor. The dispute with the plaintiff company should have been referred to arbitration long ago."
46 The written submissions of the appellant contended that the trial judge suggested that reasons why the debt was not paid can be used as a factor tending against insolvency. This proposition misreads the remarks of the trial judge. As a matter of fact, his Honour addressed whether the failure to pay the debt to the appellant tended to indicate insolvency. Having regard to all the evidence, his Honour was not prepared to draw that inference. In his Honour's view, it was more likely that the payment was due to "intransigence and/or bad advice from a previous solicitor".
47 The trial judge proceeded correctly in assuming that the claimed debt was due and payable. His Honour was entitled to find as a matter of fact that the failure to pay the debt was not evidence tending to suggest insolvency. There was another more cogent reason and no error has been demonstrated in this regard.
Conclusion
48 In examining the analyses undertaken by counsel for the appellant, and the assessments made by the trial judge, it is appropriate to have regard to a number of features arising from the evidence which provide an appropriate context for consideration of the issues debated before the trial judge and on this appeal. An overall perspective is helpful.
49 The substance of this case concerns a single debt in the relatively modest amount of approximately $60,000. There is nothing in the evidence to suggest that the respondent had failed to pay any other creditor.
50 Secondly, rather than follow the contractual provisions and resort to arbitration, or to undertake the more orthodox approach of instituting debt recovery proceedings, the appellant chose the route of a statutory demand, followed by an application for the respondent to be wound up on the ground of insolvency.
51 Thirdly, the respondent is a small local business incorporated in 2015 and which, to use the words of the respondent's written submissions, "has traded a modest real estate business on the north- west coast of Tasmania". Over the years its assets have exceeded its liabilities and it has traded profitably with expected seasonal fluctuations in income.
21 No 1/2025
52 Fourthly, the hearing before the Chief Justice was notable for its lack of cross-examination of the Directors to challenge any of their evidence concerning material matters. The trial judge saw and heard the Directors and was entitled to reach the view that they were committed to the success of the respondent's business and would support it through periods of financial difficulty.
53 Next, although the nature of the business inevitably resulted in fluctuation in income, the expenses of the business were relatively stable and the prospect of increasing income as the real estate selling season approached could be assessed with a reasonable degree of confidence. Income from the rent management roll was stable. Evidence was led of a whiteboard demonstrating the existence of sales contracts to be settled in the future. Although the appellant sought to dismiss the significance of the whiteboard because conditions were attached to a number of the contracts noted on the whiteboard, there was no cross-examination of the Directors to suggest that the existence of such conditions made the prospect of future income uncertain.
54 Next, as mentioned, there was no cross-examination of the Directors to suggest that they would not be willing to support the business financially or to place their own assets at risk. There was no cross-examination of the Directors to suggest that the existence of the overdraft did not provide a legitimate source of funds, or that if the overdraft was utilised, the respondent would be unable to meet the repayment liability.
55 As the trial judge found, the usual indicia of insolvency were absent. The overall impression from the evidence was of a company which had been trading successfully for a number of years and which was in dispute with the appellant over a relatively small debt, a debt which the respondent could have paid if it had chosen to do so. While resort to the overdraft would have been necessary to pay the debt at the time of the hearing before the trial judge, the evidence justified confidence that repayment of the overdraft, and other debts, could readily have been achieved when such debts were due and payable.
56 For these reasons, in our view not only were the findings open to the trial judge on the evidence, his Honour's findings were correct and his Honour was correct in dismissing the application.
Corporation [2015] QCA 28.
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