ARL2 Pty Ltd v Flex Realty Pty Ltd

[2024] TASSC 5

[2024] TASSC 5

COURT:	SUPREME COURT OF TASMANIA
CITATION:	ARL2 Pty Ltd v Flex Realty Pty Ltd [2024] TASSC 5
PARTIES:	ARL2 PTY LTD
v
FLEX REALTY PTY LTD
FILE NO:	2391/2023
DELIVERED ON:	27 February 2024
DELIVERED AT:	Hobart
HEARING DATES:	29, 30 January 2024
JUDGMENT OF:	Blow CJ
CATCHWORDS:

Corporations – Winding-up – Winding-up in insolvency – What constitutes insolvency – Generally – Cashflow test – Proof of solvency – Proprietor of real estate agency business – Solvency established on balance of probabilities.

Aust Dig Corporations [1475]

Cases cited:
Ace Contractors & Staff Pty Ltd v Westgarth Developments Pty Ltd [1999] FCA 728.
Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd [2011] NSWSC 1279.
Commonwealth Bank of Australia v Begonia Pty Ltd (1993) 11 ACLC 1075.
Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd [2007] FCA 548.
Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163, 45 ACSR 711.
Melbase Corporation Pty Ltd v Segenhoe Limited (1995) 17 ACSR 187.

Sandell v Porter (1966) 115 CLR 666.

Legislation:

Corporations Act 2001 (Cth)

REPRESENTATION:

Counsel:

Plaintiff:	J Xenidis
Defendant:	N Terracall

Solicitors:

Plaintiff:	LFS Lawyers Pty Ltd
Defendant:	Terracall and Associates

Judgment Number:	[2024] TASSC 5
Number of paragraphs:	68

Serial No 5/2024

File No 2391/2023

ARL2 PTY LTD v FLEX REALTY PTY LTD

REASONS FOR JUDGMENT BLOW CJ
27 February 2024

1 The plaintiff ARL2 Pty Ltd, has applied for the winding-up of the defendant, Flex Realty Pty Ltd, on the ground of insolvency pursuant to s 459Q of the Corporations Act 2001 (Cth). The defendant has opposed that application, contending that it is solvent, and that, whether it is solvent or not, this is not an appropriate case for the making of a winding-up order.

Background

2             In the beginning the plaintiff carried on a rent roll business, based in Burnie, managing rental properties and collecting rents as the agent of various landlords. The business was known as Coast to Cradle Property. By a written contract dated 23 September 2022 it agreed to sell that business to the defendant. Subject to the terms of the contract, the purchase price was $185,000, payable in nine instalments as follows:

• $50,000 on the signing of the contract.

• A further $70,000 on completion, which was required to be 30 days after the date of the contract.

• Six monthly instalments of $3,000 each, commencing one month after completion.

• Subject to clause 10 of the contract, $47,000 payable seven months after completion.

3             The first four payments were made to the plaintiff, but no subsequent payments were made. That is to say, $59,000 of the purchase price has not been paid. The contract provided for interest to be payable if payments were not made on time. The plaintiff claims to be entitled to $59,000 plus interest.

4   Clause 10 of the agreement provided for a possible reduction of the final payment of $47,000.

It read as follows:

"On the date of final payment an accounting will be taken to determine whether all properties the subject of the sale are still managed by the Purchaser. If some properties are no longer managed by the Purchaser then, unless they have been replaced by other property of the same lessor or the Vendor brings in a new lessor, an adjustment of the final payment will be made to reflect the consequential reduction in the income to the Purchaser used to calculate the price. The adjustment must never exceed the final payment and must be calculated by deducting from the final payment the quantum of the reduction in income, less any income received by the Purchaser prior to loss of the management."

5             The defendant contends that about 43 properties that were the subject of the sale ceased to be managed by it before the date for the final payment, and that it is therefore entitled to a reduction of the final payment. However the defendant has not informed the plaintiff of the amount of the desired deduction, nor has it provided any calculations in relation to any such entitlement. There is a dispute between the parties as to how much, if any, of the final $47,000 is payable, but the amount in dispute has not been quantified.

6            Clause 15 of the contract required any dispute between the parties to be referred to arbitration. That clause read as follows:

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"Any dispute between the Vendor and the Purchaser must be referred to the proper officer of the Real Estate Institute of Tasmania who must appoint an arbitrator to make a determination and their determination is final and binding. The cost of the arbitrator shall be shared equally by the parties."

7 Although a dispute exists, the parties have not arranged for the appointment of an arbitrator. In a written outline of submissions, the solicitor for the plaintiff asserted that the Real Estate Institute of Tasmania "does not appoint arbitrators". If that is the case, either party could have requested this Court to appoint an arbitrator pursuant to s11(4)(c) of the Commercial Arbitration Act 2011, but that was not done.

8            At the hearing of this application, counsel for the defendant did not suggest any basis upon which his client might not be liable to pay the four outstanding monthly instalments of $3,000 each.

9            On 14 July 2023 a statutory demand by the plaintiff for payment of $59,000 was served on the defendant company. It did not apply for that statutory demand to be set aside. On 12 September 2023 the plaintiff filed originating process applying for the defendant company to be wound up on the ground of insolvency, relying on its non-compliance with the statutory demand.

The defendant's contentions

10           The defendant contends that it is solvent. Since it failed to comply with the statutory demand, there is a presumption that it is insolvent: Corporations Act, s 459A(2)(a). The defendant bears the onus of proving solvency: Corporations Act, s 459C(3).

11 Section 95A(1) of the Corporations Law provides that a person is solvent "if, and only if, the person is able to pay all the person's debts, as and when they become due and payable". Thus the test of solvency is a cashflow test rather than a balance sheet test: Melbase Corporation Pty Ltd v Segenhoe Limited (1995) 17 ACSR 187.

12 Section 459S of the Corporations Act prohibits a defendant to a winding-up application from opposing the application on a ground that could have been relied on for the purposes of an application for the statutory demand to be set aside. In these proceedings the defendant did not seek to rely on any contention that the alleged debt was not owing, any contention as to its quantum, or any contention as to a set-off. Counsel for the defendant conceded that, for the purpose of assessing solvency, I was therefore required to assume that the claimed debt of $59,000 plus interest was due and payable.

The defendant company

13           The defendant company is a two-man company. Its directors and shareholders are Dean Chamley and Justin Grave. They both gave evidence at the hearing of this application. Their shareholdings in the company are equal. The company and Mr Grave each hold real estate agent licences under the Property Agents and Land Transactions Act 2016. Mr Chamley holds a property representative licence under that Act.

14           The business of the company is neither complicated nor risky. It does two things. It acts as the agent of vendors in relation to the sale of real estate, and it acts as the agent of landlords in relation to the leasing of rental properties and the collection of rents. Its principal sources of income are commissions payable in relation to the sales of real estate and the collection of rents. Commissions on sales are payable when and if the sales proceed to settlement. Commissions in relation to rent payments are deducted from rent monies that are collected from tenants and paid to landlords.

15           The company has seven employees, including the two directors. Only two of the other employees are engaged in the selling of real estate. The remuneration of one of them, but not the other, depends on what commissions he earns. However, to provide him with a constant stream of

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income, he is 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.

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.

• 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.

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• 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 contacts 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 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.

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• 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.

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.

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• 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.
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 of 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.

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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."

The plaintiff's evidence

33           The plaintiff relied on the affidavits of two witnesses – a Melbourne accountant named Sandro Bagnati and a director of the plaintiff company, Rebecca Luck. I struck out most of Ms Luck's affidavit as a result of objections as to admissibility. The surviving parts of her affidavit consist mainly of commentary on the defendant's evidence and are of such a nature that I see little need to refer to them.

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.

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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



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

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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 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."

The plaintiff's minor arguments

The 2021 company tax return

44           As I have said, a report generated by the ATO showing the defendant company's income tax transactions for the two years commencing 5 October 2021 contained references to its tax returns for 2020, 2022 and 2023, but not 2021. Counsel for the plaintiff submitted that the company must not have lodged a 2021 return.

45           At the hearing, Mr Grave gave evidence before Mr Chamley. It was not put to him that the company had not lodged a 2021 return. When Mr Chamley gave evidence, Mr Xenidis did not put that to him either, but I asked whether the 2021 return had been lodged, and he said that he presumed so. In my view the proposition that the 2021 return was not lodged should have been put to Mr Grave.

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46          The evidence established that a 2021 return could have been lodged before 5 October 2021 without any reference to it appearing on the ATO report. According to the 2021 figures in the 2022 financial statements, the company's profit before taxation in 2021 was $139,510, and its tax liability for that year was $29,623. As I have said, it can be calculated from the report in question that the company owed the ATO $29,622.58 in respect of income tax as at 5 October 2021. That figure did not include income tax for the 2020 year. The annual financial statements and the ATO report are both consistent with the 2021 return having been lodged and processed prior to 5 October 2021. There was no evidence to the contrary. The 2022 balance sheet shows that the company had $168,084 in its bank account as at 30 June 2021, and $151,577 in that account as at 30 June 2022. I infer that the annual financial statements for 2021 and the 2021 tax return were prepared before 5 October 2021, and that the 2021 return was lodged and processed before that date, resulting in a tax liability of $29,622.58. I reject the submission that the company did not lodge a 2021 return.

Deposits by Kerrie Murchie

47           The plaintiff company has an account with the ANZ Bank. At least three of the instalments of purchase money that were paid to the plaintiff in respect of the contract between the parties were made into that account. Search result documents generated by the ANZ Bank in respect of three of those payments were produced by Ms Luck. Each shows a description, "PAYMENT FROM KERRIE MURCHIE". Ms Murchie is an employee of the defendant company. The search result documents relate to payments of $50,000 on 27 September 2022, $3,000 on 2 December 2022, and $3,000 on 12 January 2023.

48           The plaintiff contends that these payments must have been made by Ms Murchie from her own funds, that the defendant company must therefore owe her $56,000, and that that is a debt which the directors should have disclosed and failed to disclose in these proceedings.

49           No evidence was presented as to the record keeping systems of the ANZ Bank. I have no way of knowing whether the description on each of the three search result documents reproduces information supplied to the bank by its customer, or the name of the person who physically deposited a cheque, or the name of the account holder from whose account funds were transferred. The evidence does not establish that Ms Murchie paid any money out of her own pocket, nor that the company now owes her any money in respect of the payments said to have been received from her.

Rent and GST

50           As I have said, there was evidence that, by mistake, the company had been treating its rental payments to Chamvers Pty Limited of $1,000 per month as including a GST component when in fact the landlord was not registered for GST. The plaintiff contends that this must have resulted in a liability for GST on the part of the company that has accrued over some years and has not been reflected in its financial statements. If that is correct, the amount of any such liability would probably not make a significant difference to the solvency or insolvency of the company. The amounts shown as paid by way of rent in the annual financial statements were as follows:

2021      $14,273

2022      $12,818

2023      $11,127

51           If the result of the mistake concerning GST registration is that the company owes 10% of those amounts in respect of GST, the total amount is a little over $3,800. Even if there is a GST liability in respect of the rent of the company's premises going back more than three years, that would not make any significant difference to the solvency or insolvency of the company.

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The fullest and best evidence argument

52           Counsel for the plaintiff submitted that proof of solvency required the "fullest and best possible material", and that the defendant's evidence had been insufficient to prove solvency. In particular, it was asserted that the defendant's evidence was deficient because the following had not been provided:

• Sworn valuations from independent valuers of the real estate belonging to the company and its directors.

• The defendant's trust account records.

• Audited annual financial statements.

• Rent invoices from the defendant's landlord.

• Invoices issued by the defendant for commissions and expenses relating to sales.

• Invoices issued by the defendant for rents payable by tenants.

• Annual financial reports for the year ending 30 June 2021.

• Company income tax returns.

• Bank statements for the period prior to April 2023.

• BAS statements.

• The defendant's other accounting records, including loan statements and receipts.

• Management agreements between the defendant and its employees.

• Contracts of sale in respect of which the defendant earned commissions.

• An affidavit from the accountant who prepared the defendant's annual financial statements.

• Cashflow projections.

53           The proposition that a company seeking to prove its solvency in a winding-up case should provide "the fullest and best possible material in support of its case" was first stated in those terms by Hayne J, who was then a judge of the Supreme Court of Victoria, in Commonwealth Bank of Australia v Begonia Pty Ltd (1993) 11 ACLC 1075 at 1081. His Honour's comments were obiter. Begonia sought to prove solvency but his Honour concluded, at 1082, that it was insolvent and proceeded to make an order for it to be wound up. However, when commenting on the evidence presented by the company, his Honour said this at 1081:

"Ordinarily one would expect that on an application of this kind the company would
provide the fullest and best possible material in support of its case."

54           That comment related to the state of the evidence concerning agreements between two companies. Hayne J was dealing with applications for the winding-up of those two companies and a third one. He had been given affidavit evidence summarising the agreement between the two companies. He went on to say, at 1081:

"Thus one would ordinarily expect that the agreements between Texel and Redlock (for I would assume them to be written and not oral) would be produced in evidence.

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However, I proceed on the basis that Marriner [a director of Redlock] fairly describes the effect of those agreements."

55           In Ace Contractors & Staff Pty Ltd v Westgarth Developments Pty Ltd [1999] FCA 728 at [44], Weinberg J summarised the law relating to the winding-up of companies on the ground of insolvency in seven succinct propositions, citing relevant authorities. His Honour's first three propositions read as follows:

"	The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3); Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v Simionato Holdings Pty Ltd. (1997) 15 ACLC 477 per Mansfield J.
•	In order to discharge that onus the Court should ordinarily be presented with the 'fullest and best' evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J.
•	Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J."

56           His Honour's seven propositions were cited with approval by Santow JA, with whom Meagher and Handley JJA agreed, in Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163, 45 ACSR 711, at [16].

57           In Ace Contractors, the respondent company failed to satisfy Weinberg J that it was solvent, but his Honour decided to give the company an opportunity to pay the debt that was the subject of the relevant statutory demand. He adjourned the matter for 14 days and said, at [58], that he would entertain an application that he order forthwith that the company be wound up if the appropriate sum had not been paid within that time.

58           The respondent company in that case was involved in the development of 33 townhouses in a Melbourne suburb. It had entered into a contract with a building company, but the building company had stopped work on the project as a result of a dispute with a sub-contractor. Weinberg J accepted the evidence of a chartered accountant who opined that, on the basis of financial statements provided by the company, it was not possible to conclude that the company was solvent. There were deficiencies in the financial statements, and the company's profit projections were unreliable.

59           Expile was an appeal from a decision of a judge not to order the winding-up in insolvency of a company. At first instance, Barrett J held that the company had rebutted the presumption of insolvency. The Court of Appeal concluded that the company had failed to prove its solvency, but did not proceed to order its winding-up because an administrator had been appointed after the hearing of the appeal. The assessment of the company's solvency depended on its borrowing capacity, and that depended on the value of its plant and equipment and the extent of its equity in plant and equipment. The evidence presented as to the ownership of many items was deficient.

60           A less rigorous approach to proof of solvency was taken by Finkelstein J in Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd [2007] FCA 548. His Honour quoted the first three propositions of Weinberg J that I have set out above. He then went on to say the following at [10]–[14]:

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"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."

61           I agree with the comments of Finkelstein J. I note that the second and third propositions of Weinberg J in Ace Contractors both include the adverb "ordinarily". According to those propositions, it is only in an ordinary case that the fullest and best evidence of a company's financial position is required, and only in an ordinary case that audited accounts or evidence of ownership or valuation from independent sources is required.

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.

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• 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 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.

Conclusion

68   For these reasons I have decided to dismiss the plaintiff's application.