In the matters of University Co-Operative Bookshop Ltd (in liq) and Co Info Pty Ltd (in liq)

[2024] NSWSC 1034

Supreme Court

New South Wales

Medium Neutral Citation:

In the matters of University Co-Operative Bookshop Ltd (in liq) and Co Info Pty Ltd (in liq) [2024] NSWSC 1034

Hearing dates:

9 August 2024

Date of orders:

16 August 2024

Decision date:

16 August 2024

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Second and Third Plaintiffs found to have been insolvent for the whole of the period from 25 May 2019 to 24 November 2019.

Catchwords:

CORPORATIONS – Winding up – Voidable transactions – Separate question as to solvency of company – Whether entities were insolvent during the Relation-Back Period.

Legislation Cited:

- Co-operation Act 1932 (NSW)

- Co-Operatives (Adoption of National Law) Act 2012 (NSW)

- Corporations Act 2001 (Cth), ss 95A, 588FA, 588FC, 588FE and 588F

Cases Cited:

- Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124; (2003) 46 ACSR 126; [2003] VSC 123

- Elliott v Australian Securities and Investments Commission (2004) 10 VR 369; (2004) 48 ACSR 621; [2004] VSCA 54

- Quick v Stoland Pty Ltd (1998) 87 FLR 371; 157 ALR 615; (1998) 29 ACSR 130

- Re BBY Ltd (Receivers and Managers Appointed) (in liq) and BBY Holdings Pty Ltd (Receivers and Managers Appointed) (in liq) (2022) 409 ALR 558; [2022] NSWSC 29

- Re Bias Boating Pty Limited (recs and mgrsapptd) (in liq) [2018] NSWSC 1977

- Re Custom Bus Australia Pty Limited (in liq) [2021] NSWSC 1036

- Re Harmony Homes Pty Ltd (in liq) (No 2) [2023] NSWSC 816

- Re Pacific Plumbing Group Pty Ltd (in liq) [2024] NSWSC 34

- Re Swan Services Pty Limited (in liq) [2016] NSWSC 1724

- Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; (2001) 39 ACSR 305; [2001] NSWSC 621

- Sutherland & Anor as joint liquidators of Australian Coal Technology v Hanson Construction Materials Pty Ltd [2009] NSWSC 232

- SX Projects Pty Ltd (in liq) v Battaglia [2018] NSWSC 1830

Category:

Procedural rulings

Parties:

Philip Patrick Carter, Andrew John Scott and Daniel Austin Walley in their capacity as joint and several liquidators of University Co-operative Bookshop Ltd (in liq) and Co Info Pty Ltd (in liq) (First Plaintiffs)
University Co-operative Bookshop Ltd (in liq) Second Plaintiff)
Co Info Pty Ltd (in liq) (Third Plaintiff)
Cengage Learning Australia Pty Ltd (First Defendant)
and others

Representation:

Counsel:
D Krochmalik/P Kucharski (Plaintiffs)
E L Beechey (First Defendant)

Solicitors:
Ironbridge Legal (Plaintiffs)
Blue Rock Law (First Defendant)

File Number(s):

2022/333328

Judgment

Nature of the application

1. By Amended Statement of Claim filed on 14 August 2023, the Plaintiffs, Messrs Carter, Scott and Walley as liquidators of University Co-Operative Bookshop Ltd (in liq) (“Co-Op”) and Co Info Pty Ltd (in liq) (“Co Info”) and Co-Op and Co Info themselves, bring claims against several defendants to seek to recover unfair preferences under ss 588FA, 588FC, 588FE and 588FF of the Corporations Act 2001 (Cth) (“Act”).

2. By way of background, Co-Op is a co-operative incorporated and registered in New South Wales and is subject to the Co-Operatives National Law (NSW) as set out in the Appendix to the Co-Operatives (Adoption of National Law) Act 2012 (NSW). Co-Op was initially incorporated under the Co-operation Act 1932 (NSW) on 18 February 1958; and, at relevant times, operated bookstores largely on university campuses, primarily selling academic materials to retail customers and also operated a retail network of sixty-four (64) leased stores, and an online trading platform under the name “Australian Geographic” and then “Curious Planet”, selling science, technology and novelty products. Co Info is a wholly owned subsidiary of Co-Op which, since its incorporation on 22 August 2013, operated a business as a supplier of full-service academic libraries. Co Info’s business and assets were sold to a third party on 25 September 2019.

3. About two months later, Messrs Carter, Scott and Walley were appointed as voluntary administrators of Co-Op and Co Info on 24 November 2019 and they subsequently became the liquidators of each of Co-Op and Co Info when those entities were subsequently wound up (by resolution of creditors at the second meeting) on 13 March 2020 and 27 March 2020 respectively.

4. The Plaintiffs now seek to prove Co-Op’s and Co Info’s insolvency over the relation back period from 25 May 2019 to 24 November 2019 (“Relation-Back Period”). I ordered that the question of those entities’ insolvency be determined as a separate question and this judgment concerns that separate question. All but one of the remaining Defendants have admitted (either formally in Defences or informally in correspondence) that Co-Op and Co Info were insolvent throughout the whole of the Relation-Back Period. The Third Defendant, Lake Press Pty Ltd (“Lake Press”) has not filed a Notice of Appearance or Defence in the proceedings and has not taken an active role in them. Some “without prejudice” settlement discussions have taken place between the Plaintiffs and Lake Press, but these have not reached an agreement. Lake Press has, in effect, has put the Plaintiffs to proof of insolvency. I have drawn on the helpful submissions of Mr Krochmalik, with whom Mr Kucharski appears for the Plaintiffs, in this judgment.

Applicable legal principles

5. The question whether the Co-Op was insolvent in the Relation-Back Period is to be determined by reference to s 95A(1) of the Act. I summarised the applicable legal principles in Re Pacific Plumbing Group Pty Ltd (in liq) [2024] NSWSC 34 on which I have drawn for the summary which appears below. Section 95A(1) of the Act provides that a company is solvent if, and only if, it is able to pay all its debts, as and when they become due and payable. Section 95A(2) of the Act has the effect that a person who is not solvent is insolvent. That definition adopts a “cash flow test" of insolvency which turns upon the income sources available to the company and the expenditure obligations that it has to meet, although a balance sheet test can provide context for the application of the cash flow test: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; (2001) 39 ACSR 305; [2001] NSWSC 621; Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124; (2003) 46 ACSR 126; [2003] VSC 123 at [370]ff (“Plymin”), aff'd Elliott v Australian Securities and Investments Commission (2004) 10 VR 369; (2004) 48 ACSR 621; [2004] VSCA 54 and see Re Swan Services Pty Limited (in liq) [2016] NSWSC 1724 at [136]ff; SX Projects Pty Ltd (in liq) v Battaglia [2018] NSWSC 1830 at [20]ff and Re Bias Boating Pty Limited (recs and mgrs apptd) (in liq) [2018] NSWSC 1977 at [4]ff and Re Custom Bus Australia Pty Limited (in liq) [2021] NSWSC 1036 (“Custom Bus”) at [33]ff, on which I have drawn for this summary of the applicable principles.

6. In Quick v Stoland Pty Ltd (1998) 87 FLR 371; 157 ALR 615; (1998) 29 ACSR 130 at 138, Emmett J summarised the applicable principles as follows:

“In order to determine whether the company was solvent at a given time, it would be relevant to consider the following matters:

•   All of the company's debts as at that time in order to determine when those debts were due and payable.

•   All of the assets of the company as at that time in order to determine the extent to which those assets were liquid or were realisable within a timeframe that would allow each of the debts to be paid as and when it became payable.

•   The company's business as at that time in order to determine its expected net cash flow from the business by deducting from projected future sales the cash expenses which would be necessary to generate those sales.

•   Arrangements between the company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts.”

7. In Re BBY Ltd (Receivers and Managers Appointed) (in liq) and BBY Holdings Pty Ltd (Receivers and Managers Appointed) (in liq) (2022) 409 ALR 558; [2022] NSWSC 29 at [156], Gleeson JA observed that:

“A useful summary of principles for the determination of solvency for the purpose of s 95A was provided by Palmer J in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621 at [54]. Several matters deserve repeating. Solvency or insolvency is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole. An assessment of solvency requires regard to commercial realities when considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and whether such realisations are achievable. It is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade, but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency.”

8. His Honour also there referred to the “indicia of insolvency” to which Mandie J referred in Plymin and observed (at [162]-[164]) that:

“The presence of one or more of the above indicia of insolvency is not necessarily conclusive of insolvency: Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 at 655 (Doyle CJ). Nor is the absence of one or more of the above indicia inconsistent with the conclusion that a company is insolvent: Re Ashington Bayswater Pty Ltd (in liq) [2013] NSWSC 1008 at [5] (Black J).

Where a liquidator is seeking to recover an unfair preference, the issue of solvency as at a date prior to the winding up necessitates an inquiry into what actually happened. Palmer J described this as ‘retrospective insolvency’ in Lewis v Doran at [108] when remarking:

“Where the question is retrospective insolvency, the court has the inestimable benefit of the wisdom of hindsight. One can see the whole picture, both before, as at and after the alleged date of insolvency. The court will be able to see whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due and whether it did, or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and common sense, had to be considered as at the date of insolvency. By reference to what actually happened, rather than to conflicting experts’ opinions as to the implications of balance sheets, the court’s task in assessing insolvency as at the alleged date should not be very difficult.

The liquidator has the onus to prove that the company was insolvent at the relevant time(s): Welcome Homes Real Estate Pty Limited v Ziade Investments Pty Limited [2007] NSWCA 167 at [40], [46(2)] and [70] (Hodgson JA, Spigelman CJ and Santow JA agreeing); mere suspicion of insolvency cannot substitute for proof: M & R Jones Shopfitting Co Pty Ltd (in liq) v National Bank of Australasia Ltd (1983) 68 FLR 282 at 288-289; (1983) 7 ACLR 445 at 450-451 (Wootten J).”

9. I also summarised the applicable principles in Custom Bus (at [34]-[36]) as follows:

“The case law indicates that whether a company is able to pay its debts as and when they fall due and payable is a question of fact to be determined objectively and without hindsight in all the circumstances, including the nature of its assets and business, and the Court will have regard to commercial realities in that regard: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation above at [54]; White Constructions (ACT) Pty Ltd (in liq) v White (2004) 49 ACSR 220 [2004] NSWSC 71 at [289]; Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran (2005) 219 ALR 555; (2005) 54 ACSR 410; [2005] NSWCA 243 at [103]; Bentley Smythe Pty Ltd v Anton Fabrications (NSW) Pty Ltd (2011) 248 FLR 384; [2011] NSWSC 186 at [48]–[49].

In assessing a company’s capacity to pay its debts, the Court should have regard to all of the assets of the company as at the relevant time in order to determine the extent to which those assets were liquid or realisable within a timeframe that would allow each of the debts to be paid as and when they became due. Apart from an assessment of the company’s own assets, regard can also properly be had to funds which the company can borrow, on a secured or unsecured basis, or otherwise obtain from lenders or shareholders and which were, as a matter of commercial reality, available to the company to enable its debts to be paid. The case law recognises that, in determining a company’s solvency, the Court may have regard to the likelihood that it will have funds available to it from sources with which it has no formalised agreement or understanding, including loans from its directors or from third parties, at least if they are not repayable in the short term, and the company's ability to borrow funds can also be taken into account: Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran above at [109]–[112]; International Cat Manufacturing (in liq) v Rodrick (2013) 97 ACSR 200; [2013] QCA 372; First Strategic Development Corporation Ltd (in liq) v Chan [2014] QSC 60 at [67]–[69].

The case law has recognised that, although each case is to be decided on its own facts, insolvent companies tend to share common symptoms of financial stress, which include those identified in [Plymin] at [386]. Mandie J there identified several indicia of insolvency including continuing losses; liquidity ratios below one; overdue Commonwealth and State taxes; a poor relationship with the lenders, including any inability to borrow further funds; no access to alternative finance; inability to raise further equity capital; suppliers placing a company on cash on delivery arrangements or otherwise demanding special payments before resuming supply; creditors unpaid outside trading terms; the issuing of postdated cheques; dishonoured cheques; special arrangements with selected creditors; solicitors’ letters, summonses, judgments or warrants issued against a company; payments to creditors of rounded sums not reconcilable to specific invoices; and inability to produce timely and accurate financial information to display a company’s trading performance and financial position, and make reliable forecasts; see also Morris v Danoz Directions Pty Ltd (in liq) (No 2) [2010] FCA 836 at [13].”

10. In Re Harmony Homes Pty Ltd (in liq) (No 2) [2023] NSWSC 816 (“Harmony Homes”) at [5], Ball J referred to the judgment of Barrett J in Sutherland & Anor as joint liquidators of Australian Coal Technology v Hanson Construction Materials Pty Ltd [2009] NSWSC 232 at [8]-[9] and noted that s 95A of the Act calls attention principally to the cash flow test of insolvency, with subsidiary relevance to the balance sheet test. Ball J there identified several factual matters which established that company’s insolvency, namely that company’s liquidity ratio (that is, the ratio of its current assets over its current liabilities) was significantly less than one during the whole of the Relation-Back Period and was trending downwards; that company had no capacity to borrow money or to raise additional capital; that company suffered significant trading losses over the Relation-Back Period; that company had overdue Commonwealth and State taxes which had increased over the period and had defaulted on a number of occasions on payment arrangements it had reached with the Australian Taxation Office (“ATO”); suppliers had placed that company on cash delivery terms and a number of suppliers had demanded payment, threatened to commence proceedings or commenced proceedings, and substantial amounts owed to trade creditors were more than 3 months overdue; that company had made a substantial number of rounded payments to creditors that cannot be reconciled to the payment of specific debts; and that company was unable to produce timely and accurate information concerning its financial position.

Affidavit and other evidence

11. The Plaintiffs read the affidavit dated 8 March 2024 of Mr William Honner, who is a registered liquidator working with Messrs Carter, Walley and Scott in the liquidations of Co-Op and Co Info. Mr Honner there outlined his involvement in the investigations into the affairs of Co-Op and Co Info. Mr Honner outlined the history of Co-Op and Co info and noted that, as a non-distributing co-operative, Co-Op was prohibited from giving returns or distributions on any surplus or share capital to members, other than nominal value of any shares, and that prohibition made it impossible to obtain equity investment directly into Co-Op, as it would not be possible to provide investors with any return on that investment. He also noted that the liquidators had identified no evidence that Co-Op had sought or obtained any equity investment at any time. Plainly, that matter limited the fund raising options that were available to Co-Op.

12. Mr Honner also summarised the position in respect of the books and records of Co-Op and referred to difficulties with the accounting and inventory management systems used by Co-Op, which adversely affected the reliability of the financial information recorded in Co-Op’s records, and notes that issues as to the reliability of that information had previously been identified by the auditors of Co-Op. Mr Honner also addressed the position as to Co Info’s books and records, where less information was available to the liquidators as a result of the prior sale of Co Info’s business.

13. Mr Honner also addressed the provision of information to Mr Olde who had prepared an expert report on which the Plaintiffs rely to establish the insolvency of Co-Op and Co Info. He also referred to several secondary analyses prepared by the liquidators, which were provided to Mr Olde to assist with the preparation of his expert report. Mr Honner’s evidence (Honner, [68]) is that, in some instances, he and the liquidators formed the view that there are deficiencies in the information or data drawn from the primary documents; in other instances, they otherwise considered that further context or explanation was required, or that the information could be presented in a more convenient fashion; and that:

“In light of this, PwC prepared the following secondary documents. These are secondary documents in the sense that they have been created using data from primary documents, or they index or list primary documents or they have been produced to more conveniently collate or summarise voluminous data from primary documents…”

14. Mr Honner also addressed the payment terms in respect of creditors of Co-Op and Co Info and noted that Co-Op largely undertook retail sales and did not offer credit, with the exception of a small number of customers, and that Co Info primarily traded with two customers which comprised the very large part of its trade debtors throughout the Relation-Back Period. Mr Honner also outlined the facilities available to Co-Op from its secured lender, National Australia Bank (“NAB”), and his evidence was that Co Info also lent substantial funds to Co-Op during the Relation-Back Period and prior to that time. He referred to correspondence in respect of the sale of the assets of Co Info and referred to attempts to sell other assets of Co-Op in the relevant time, including attempts to sell its business previously trading under the name “Australian Geographic”, and then under the name “Curious Planet” after Co-Op lost the right to use the “Australian Geographic” name. Mr Honner noted three indicative offers received by Co-Op in respect of the potential sale of that business, two of which involved no or a nominal consideration and the third of which involved a suggested payment of $29.5 million. Mr Honner identifies matters which raise a real question as to whether that third offer was genuine, and it is plain that the potential purchaser who made that third indicative offer took no active steps to advance a purchase of the business and showed no interest in continuing with the purchase of that business after the companies were placed in voluntary administration. It is not necessary to reach a finding as to that matter in order to determine the question of Co Op’s and Co Info’s solvency in the Relation-Back Period.

14. Mr Honner also addressed the circumstances in which Co-Op lost the right to use the “Australian Geographic” trademark, by reason of its failure to pay amounts due under a licence agreement in respect of that trademark. He also referred to the audit of Co-Op for the year ended 30 June 2019, which had identified significant issues, and to asset realisations which had been achieved by the voluntary administrators and liquidators during the voluntary administration and liquidation.

15. Mr Honner exhibited a substantial volume of documents to his affidavit (Ex P1) and, in submissions, Mr Krochmalik took me to numerous documents which are consistent with a finding that both Co-Op and Co Infor were insolvent in the Relation-Back Period, and the Plaintiffs subsequently provided a chronological listing of that evidence. I focus here on the documents within the Relation-Back Period from 25 May 2019 onward.

16. Between 27 and 29 May 2019, email exchanges between SBG Pty Ltd (“SBG”) (a creditor of Co-Op) and Co-Op (Ex P6, 1-7) recorded debts owing to SBG of over $184,000 of which over $88,500 was over 90 days due and discussed a possible payment plan and Mr Chen, Co-Op’s Head of Finance, advised its Chief Executive Officer that more than 40 suppliers were wanting old invoices paid and suggested seeking a discount of 3-5% from suppliers if the amounts due were cleared by withdrawing $500,000 to $1 million from the NAB facility; the chief executive officer responded that he was reluctant to borrow more from NAB unless thew Co-Op had to since it would be a “struggle” to pay back existing borrowings. Between 27 May 2019 and 20 June 2019, email exchanges between United Book Distributors (a creditor) and Co-Op addressed amounts unpaid to that supplier (Ex P6,15-21).

17. By an email dated 5 June 2019 (Ex P1, CB 1517), Mr Chen sent the Co-Op and Co Info board the 2020 budget paper including a 2020 Budget & Strategy Report which recorded substantial declines in textbook sales in the 2019 financial year, representing up to $40 million in lost revenue, and forecasting a loss after tax in that year, and noting that 40% of Co-Op’s stores were projected to fall into loss in FY2020 creating urgency to consider “alternative futures”. The CEO report contained in that document also recorded declining sales revenue, with a 27% decrease over the previous year, reflecting reduced textbook sales and closed stores.

18. In early June 2019, Co-Op received a demand for payment (Ex P1, CB 5279) under the Trade Mark Licence Agreement which authorised it to use the “Australian Geographic” trade mark. It did not pay that amount resulting in the loss of its right to use that trade mark. About the same time, there was correspondence (Ex P6, 9-13) with McGraw-Hill, a creditor, about amounts due and unpaid to it. On 12 June 2019, Mr Chen advised Mr Lee, Co-Op’s former Head of Finance, of his having raised the risk of insolvency and issues of directors’ duties in that respect with the Chief Executive Officer (Ex P6, 8). In late June and the first half of July, there were further exchanges between Thomson Reuters, another creditor and Co-Op about unpaid trade debts (Ex P6, 24-41) and, between late June and late September, email exchanges between Cengage (a creditor, and the First Defendant) and Co-Op (Ex P1, CB 4739) and, in July 2019, email exchanges between Oxford University Press (also a creditor, and the Fourth Defendant) and Co-Op (Ex P6, 43-47). Email exchanges in mid-July 20129 (Ex P1, CB 4728) also referred to the transfer of funds from Co Info to Co-Op, with the amount transferred limited by Co Info’s need to meet short term payment obligations.

19. On 12 September 2019, NAB advised Co-Op (Ex P1, CB 3697) of breach of several obligations under its Finance Agreement, including Co-Op’s obligation to pay down part of the NAB debt on specified debts (“NAB Clean-Down obligation”) and advised that NAB did not waive its rights as to those breaches but would be taking no action at that time.

20. The Audit Completion Report as to the Co-Op for the year ended 30 June 2019 (Ex P1, CB 1632), issued in November 2019, noted that Co-Op’s net current asset position of $8.3 million was primarily attributable to the classification of assets for sale as current assets, including the Curious Planet business at $29.5 million by reference to a non-binding letter of offer, and I have noted an issue as to whether that offer was genuine above and, consequentially, whether that classification was genuine. That audit report noted cash balances were not appropriately reconciled resulting in an adjustment of $1.2 million and other reconciliation issues, and Co-Op’s balance sheet would have shown substantial negative assets but for the valuation attributed to the Curious Planet business. Other errors that had overstated Co-Op’s financial position were also corrected by a retrospective restatement. The Plaintiffs do not rely on these matters for any presumption of insolvency arising from a failure to keep adequate financial records, but rightly note that less weight can be given to the recorded assets position of Co-Op by reason of these matters.

21. Plainly, these documents tend to support a finding the each of Co-Op and Co Info were insolvent in the Relation-Back Period.

22. The Plaintiffs also read the affidavit dated 11 March 2024 of Mr Quentin Olde, who has extensive experience as an insolvency practitioner and has prepared an expert report (Ex P2) as to Co-Op’s and Co Info’s solvency in the Relation-Back Period and there confirmed his compliance with the Expert Witness Code of Conduct in respect of that report. I have drawn below on Mr Krochmalik’s detailed summary of this report. None of the Defendants to the proceedings contested the conclusions reached by Mr Olde, and Ms Beechey, who appeared for the First defendant at this hearing, did not seek to cross-examine Mr Olde or make submissions contrary to the conclusions which he had reached.

23. Mr Olde concluded that Co-Op was insolvent from at least 31 March 2019 onwards, and during the whole of the Relation-Back Period. First, Mr Olde tested whether Co-Op could pay its immediately due and payable debts on various test dates for which he had available information on three alternate scenarios. The first (“Scenario 1”) disregarded the NAB Clean-down obligation and debts labelled 90 days and greater within Co-Op’s accounts payable reports as immediately due and payable, where the trading terms of Co-Op’s top ten suppliers were on average 54 days; the second (“Scenario 2”) modified that approach to take the NAB Clean-down obligation into account; and the third (Scenario 3”) removed debts that were potentially subject to a payment plan at the relevant test date, although Mr Olde noted that that Co-Op regularly failed to adhere to payment plans it entered into in 2019. Mr Olde concludes and I accept that, under each of Scenarios 2 and 3, Co-Op had insufficient liquidity to pay its immediately due and payable debts on each test date from 31 March 2019 to November 2019 and, under Scenario 1, Co-Op had insufficient liquidity to pay its immediately due and payable debts on each test date from 6 May 2019 to November 2019. Mr Olde also notes that, in apparent breach of the terms of the NAB Facilities, Co-Op failed to meet the NAB Clean-down obligation as at 31 March 2019, with $6 million remaining drawn on the facility throughout April 2019, and again failed to meet the obligation as at 31 August 2019.

24. Second, Mr Olde calculated Co-Op’s liquidity ratios from the information available to him on an adjusted and unadjusted basis from September 2014 onwards. He noted that a “Current Ratio calculation”, being the ratio of Current Assets / Current Liabilities, enables an assessment of a company’s ability to discharge its current liabilities from its current assets, and a Current Ratio less than 1 shows the company has more current liabilities than current assets, indicating it would have difficulty paying its debts as and when they fall due. A “Quick Ratio calculation”, being the ratio of (Current Assets – Inventory) / Current Liabilities, is more short-term focused as it removes inventory from the calculation, and focusses on a company’s ability to pay its debts over a shorter time period, typically 90 days. Mr Olde expresses the view that, if a company’s Quick Ratio is less than 1, this indicates that a company does not have enough quick assets (such as cash and debtors) to meet all its short-term obligations and may have difficulty pay its debts as and when they fall due.

25. Mr Olde’s calculates that Co-Op had a Quick Ratio and Quick Ratio (accounts payable only) below 1 at all times between September 2014 and November 2019 when considering the unadjusted balance sheets and adjusted balance sheets; Co-Op had a Current Ratio below 1 at all times between July 2019 and November 2019 when considering the unadjusted balance sheets; and Co-Op had a Current Ratio below 1 at all times between August 2017 and November 2019 when considering the adjusted balance sheets, with that ratio decreasing from 0.91 at March 2019 to 0.71 at November 2019. On that basis, Mr Olde concludes that Co-Op would have difficulty paying its debts as and when they fell due at each month end date from September 2017 to November 2019; this view was reinforced from July 2019, when Co-Op’s Current Ratio (on an unadjusted balance sheet basis) fell below 1 and remained below that figure until November 2019; and Co-Op’s lack of liquidity to pay immediately due and payable debts as at each test date was permanent and persistent (rather than being temporary) from 31 March 2019.

26. Third, Mr Olde considered Co-Op’s trading performance in the context of the cash flow test, and noted that Co-Op had ongoing monthly losses from March 2019 to October 2019, with a cumulative loss of about. $14.1 million over this period, and a profit of $557,000 recorded in November 2019. Mr Olde expresses the view that Co-Op’s ongoing trading losses from March 2019 to October 2019, from a “Cash Flow Test” perspective, further inhibited its ability to pay its immediately due and payable debts (utilising cash flow from trading activities) as at each test date from 31 March 2019 and onwards. Fourth, Mr Olde considered whether Co-Op may have alternate or other sources of finance available to it and concluded that the primary and material sources of liquidity for Co-Op to pay immediately due and payable debts were the immediate sources he had already taken into account.

27. Fifth, Mr Olde observed that Co-Op experienced increasing evidence of the several indicators of insolvency noted in Plymin since at least March 2019, including that, from at least June 2019, some of Co-Op’s creditors placed Co-Op’s account on hold and/or demanded prepayment on new purchase orders prior to delivery; from October 2018, Co-Op entered into a payment arrangement with one creditor and, from at least April 2019, Co-Op regularly entered into such arrangements with significant creditors; Co-Op failed to satisfy the terms of some of these payment arrangements; and Co-Op had a poor relationship with its bank, NAB, from at least September 2019. These findings are consistent with the documentary evidence to which I referred above.

28. Mr Olde did not find that Co-Op was insolvent on a balance sheet test over the Relation-Back Period, but observed that he gave little to no weight to that matter where earlier audits and his review had identified deficiencies with respect to Co-Op’s financial records and a lack of controls and procedures with respect to balance sheet reconciliations (including cash account reconciliations) which in turn would impact the accuracy of those accounts; and the balance sheet test did not consider the timing of and ability to realise assets, recoverable values of assets and whether the balance sheet of a company considers all assets and all liabilities. Mr Olde noted that these factors were significant for Co-Op, where its net asset position was primarily supported by a substantial inventory and intangible asset (primarily goodwill) balance. I also give little weight to that finding for those reasons.

29. Mr Olde also concluded that Co Info was insolvent from at least 31 March 2019 and for the whole of the Relation-Back Period. Mr Olde again tested whether Co Info could pay its immediately due and payable debts on test dates for which he had available information on three alternate scenarios, as to when debts were considered immediately due and payable. Mr Olde here noted that the only source of liquidity potentially available to Co Info that could be utilised to pay immediately due and payable debts in the period from April 2018 to November 2019 was cash at bank, since its intercompany loan to Co-Op was plainly not recoverable and could not have been relied on as a source of liquidity to pay Co Info’s debts, where Co-Op had insufficient cash at bank to repay the intercompany loan in full (before considering any of Co-Op’s other payment obligations) at all month-end dates between April 2018 and November 2019, except July 2018.

30. Mr Olde concludes that, under the first and third of those scenarios, Co Info had insufficient liquidity to pay its immediately due and payable debts on each test date from 31 March 2019 to November 2019 and, under the second scenario, which he considers less relevant for reasons that he explains, Co Info had insufficient liquidity to pay its immediately due and payable debts on each test date from 30 April 2019 to November 2019 (with the exception of small surpluses at 30 June 2019 and 31 July 2019).

31. Mr Olde also calculated Co Info’s Quick Ratio and Current Ratio from April 2018 on and concludes that Co Info would have difficulty paying its debts as and when they fell due at each month-end date from April 2018 to August 2019 given that it had liquidity ratios below 1 on an adjusted balance sheet basis; from July 2019, its position became worse when its Current Ratio (on an unadjusted balance sheet basis) fell below 1; after the business of Co Info was sold in September 2019, Co Info had insufficient cash and debtors to repay its remaining liabilities in full; and that lack of liquidity to pay immediately due and payable debts as at each test date was permanent and persistent (rather than being temporary) from 31 March 2019.

32. Third, Mr Olde finds, and I accept, that, based on his review of Co-Op’s financial performance, Co Info was unable to raise equity from Co-op and could not rely on equity funding to pay immediately due and payable debts from at least January 2019. Fourth, Mr Olde notes that Co Info exhibited several of the indicators of insolvency noted in Plymin from March 2019. Mr Olde also noted that, although Co Info recorded ongoing monthly profits between April 2018 and November 2019 (except fin October 2019), the fact that Co Info’s cash was regularly diverted to Co-Op under the intercompany loan left it with limited cash to pay its own immediately due and payable debts, where the balance of the intercompany loan account could not be repaid by Co-Op. Mr Olde also addressed Co-Op’s balance sheet position.

33. In summary, Mr Olde’s report provides a detailed analysis of the application of the cashflow test to each of Co-Op and Co Info, giving primary weight to the position in respect of trade debts by Co-Op where the evidence does not indicate that its taxation and statutory obligations or employee obligations were overdue; his review of the liquidity position of Co-Op on the three alternative scenarios that I noted above establishes that, on any reasonable view, Co-Op was unable to pay its debts as and when they fell due; and Co Info was also unable to meet its debts when they fell due on the three scenarios that Mr Olde addressed, particularly where the amounts it had paid to Co-Op by way of loan were plainly not recoverable. These matters, combined with the documentary evidence to which I referred above, establish the insolvency of both Co-Op and Co Info during the Relation-Back Period.

34. The Plaintiffs read an affidavit dated 7 August 2024 of their solicitor, Mr Gallego, who referred to correspondence with Lake Press, which, as I noted above had not admitted the insolvency of Co-Op and Co Info and, in effect, put the Plaintiffs to proof of that matter, although there had been without prejudice discussions between the Plaintiffs and Lake Press as to the possibility of settlement of the proceedings. The relevant correspondence was contained in an exhibit to Mr Gallego’s affidavit (Ex P3). The Plaintiffs also tendered correspondence with other Defendants which admitted the insolvency of Co-Op and Co Info during the Relation-Back Period or, in one case, had at least made clear that they did not contest the fact of those entities’ insolvency (Ex P4 for the former; Ex P5 for the latter). The Plaintiffs also tendered correspondence by which executives of Co-Op had recognised financial difficulties facing the companies in the period prior to the appointment of voluntary administrators (Ex P6) and an extract from the transcript of the Chief Financial Officer of Co-Op, who had also recognised the prospect of insolvency in mid-2019 and had drawn that matter to the attention of the chief executive of Co-Op.

Determination

36. The evidence to which I have referred above is sufficient to establish both Co-Op’s and Co Info’s insolvency in the Relation-Back Period where Co-Op’s asset position deteriorated from before the Relation-Back Period to a significant deficiency in the Relation-Back Period; Co-Op’s and Co Info’s liquidity ratio (that is, the ratio of its current assets over its current liabilities) was significantly less than 1during the Relation-Back Period; Co-Op and Co Info were unable to pay their trade debts on a timely basis throughout the Relation-Back Period; Co-Op had defaulted on payment arrangements it had reached with several trade creditors in that period; and Co-Op and Co Info had no apparent capacity to borrow money or to raise additional capital. By reason of these matters, I am satisfied that, during the whole of the Relation-Back Period, each of Co-Op and Co Info could not meet debts then due to its creditors and each of Co-Op and Co Info was insolvent throughout the whole of the Relation-Back Period.

Orders

37. For these reasons, I find that each of Co-Op and Co Info was insolvent, within the meaning of s 95A of the Act, for the whole of the Relation-Back Period. I will reserve the costs of the application, which may best be determined after the determination of any remaining issues in the proceedings. I order the Plaintiffs to bring in short minutes of order to give effect to this judgment within 7 days.

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Decision last updated: 20 August 2024