Walsh Engineering Services Pty Ltd (in liq) v Walsh Group (Aust) Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

CORPORATIONS LIST

S ECI 2019 04868

IN THE MATTER of WALSH ENGINEERING SERVICES PTY LTD
(IN LIQUIDATION) (ACN 601 879 305)

WALSH ENGINEERING SERVICES PTY LTD (IN LIQUIDATION) (ACN 601 879 305) & ORS	Plaintiffs
(pursuant to the Schedule of Parties)
v
WALSH GROUP (AUST) PTY LTD (ACN 118 367 329) & ORS	Defendants
(pursuant to the Schedule of Parties)

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JUDGE:	Hetyey AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	14 December 2020
DATE OF JUDGMENT:	10 May 2021
CASE MAY BE CITED AS:	Walsh Engineering Services Pty Ltd (in liq) & Ors v Walsh Group (Aust) Pty Ltd & Ors
MEDIUM NEUTRAL CITATION:	[2021] VSC 206

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CORPORATIONS – Insolvency – Corporations Act 2001 (Cth) – s 588G – Insolvent trading – s 9(b)(i) – Directorship – Husband of director held to be de facto director and subject to insolvent trading provisions – s 588G(2) – Whether debt incurred when company was insolvent – Whether reasonable grounds to suspect insolvency – Whether directors aware of grounds to suspect insolvency – Whether reasonable person in like position would suspect insolvency – Statutory defences – s 588H(2) – Whether directors had reasonable grounds to expect solvency – s 588H(3) – Whether directors had reasonable grounds to believe competent and reliable person providing information about solvency – s 588H(4) – Whether because of illness or some other good reason director did not take part in management of company.

DEBT – Claim in debt by company in liquidation against related company – Inter-company transactions – Whether financial reports more reliable than general ledgers in identifying amount owing as between companies.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr A Silver	Madgwicks
For the First Defendant	Submissions by Third Defendant pursuant to dispensation under rule 1.17(1) of Supreme Court (General Civil Procedure) Rules 2015 (Vic)
For the Second and Third Defendants	Self-represented

TABLE OF CONTENTS

Introduction........................................................................................................................................ 1

Background......................................................................................................................................... 1

Legislative provisions....................................................................................................................... 2

Procedural history.............................................................................................................................. 6

Material relied upon by the parties............................................................................................ 8
Objections to defendants’ submissions of 11 December 2020................................................ 9

Status of Mr Walsh as director...................................................................................................... 10

Taxation liabilities represent incurring of a debt...................................................................... 13

Calculation of insolvent trading claim........................................................................................ 14

Insolvency.......................................................................................................................................... 16

Legal principles........................................................................................................................... 16
Evidence of insolvency............................................................................................................... 17
Conclusion on insolvency.......................................................................................................... 23

Reasonable grounds to suspect insolvency................................................................................ 23

Defences............................................................................................................................................. 26

Defence under s 588H(2)............................................................................................................ 26
Defence under s 588H(3)............................................................................................................ 27
Mrs Walsh’s defence under s 588H(4)..................................................................................... 28

Conclusion on contravention of s 588G....................................................................................... 32

Claim in debt against Walsh Group (Aust) Pty Ltd.................................................................. 33

Other matters.................................................................................................................................... 37

Conclusion......................................................................................................................................... 37

HIS HONOUR:

Introduction

In this proceeding, Walsh Engineering Services Pty Ltd (in liq) (‘the Company’) and its liquidators seek a declaration that the director of the Company, Mrs Alissa Walsh, and her husband, Mr Matthew Walsh (who is a former director of the Company), have engaged in insolvent trading pursuant to s 588G of the Corporations Act 2001 (Cth) (‘the Corporations Act’) and should compensate the Company accordingly under s 588M(2). The plaintiffs originally also sought declarations that certain transactions between the Company and a related entity, Walsh Group (Aust) Pty Ltd (‘Walsh Group’), constituted unfair preferences within the meaning of s 588FA of the Corporations Act. However, they no longer press the unfair preference claim and instead allege that Walsh Group is simply indebted to the Company in respect of inter‑company transactions.

Background

The Company was registered on 17 September 2014. Its business entailed providing industrial engineering services, including labour, design and fabrication of equipment, particularly for use in the construction and recycling industries.[1] Walsh Group provided intellectual property, management and administration services and vehicles to the Company and another entity within the broader corporate group.[2]
[1]See paragraph 5C of the defendants’ defence dated 31 January 2020 which was struck-out by order dated 19 June 2020 and later introduced into evidence as part of the exhibit bundle to the affidavit of Shane Deane affirmed and filed on 25 September 2020.
[2]Ibid.

The Company was placed into voluntary administration on 21 November 2017 and Mr Shane Leslie Deane and Mr Nicholas Giasoumi were appointed as administrators. The Company was later the subject of a Deed of Company Arrangement executed on 21 December 2017 (‘the DOCA’). Mr Deane and Mr Giasoumi were also appointed as deed administrators of the DOCA. However, the Company failed to comply with the terms of the DOCA and was placed into liquidation following a meeting of creditors held on 6 July 2018, pursuant to s 446A of the Corporations Act. Mr Deane and Mr Giasoumi were then appointed as joint and several liquidators of the Company on that day (‘the liquidators’).

Between 31 January 2017 and 21 November 2017 (‘the relevant period’), the Company incurred debts said to be in the sum of $542,978.54 (although this figure has been the subject of later revision as discussed further in these reasons). The plaintiffs contend that the Company was insolvent from at least 31 January 2017 onwards. The insolvency of the Company is a matter I will address in greater detail.

Whilst Mr Walsh was a director of the Company between 17 September 2014 and 24 August 2015, he was not formally appointed as a director during the relevant period. However, the plaintiffs maintain that he was nevertheless a ‘de facto director’ and is therefore subject to the insolvent trading provisions contained in the Corporations Act.

Legislative provisions

Section 588G(1) of the Corporations Act relevantly provides:

(1) This section applies if:
(a)a person is a director of a company at the time when the company incurs a debt; and
(b)the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
(c)at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and
(d)that time is at or after the commencement of this Act.

Section 588G(2) of the Corporations Act says:

(2)By failing to prevent the company from incurring the debt, the person contravenes this section if:
(a)the person is aware at that time that there are such grounds for so suspecting; or
(b)a reasonable person in a like position in a company in the company’s circumstances would be so aware.

Once the threshold requirements of s 588G(1) of the Corporations Act are established, the question of contravention of the provision then arises under s 588G(2).[3] Further, whilst the test applied in s 588G(1)(c) is an objective one and is not concerned with the particular director or directors who is/are the subject of the proceeding,[4] the test under s 588G(2) of whether there are grounds to suspect insolvency can be either subjective (as regards the individual defendant director(s)) or objective (by reference to a reasonable person in a like position to the relevant director(s)). It is therefore not necessary for a liquidator to establish that an individual director was actually aware there were grounds for suspecting insolvency at the time the company incurred a debt.[5]
[3]Farid Assaf, Brett Shields and Hilary Kincaid, Voidable Transactions in Company Insolvency (LexisNexis Butterworths, 2015) [10.49].
[4]Ibid [10.46], citing Powell v Fryer (2001) 159 FLR 433, 446 [76]–[77] (Olsson J); Hall v Poolman (2007) 215 FLR 243, 298 [234] (Palmer J) (‘Hall v Poolman’); Kenna & Brown Pty Ltd (in liq) v Kenna (1999) 32 ACSR 430, 444 [93] (Bergin J); Re McLellan; The Stake Man Pty Ltd v Carroll (2009) 76 ACSR 67, 96-7 [144] (Goldberg J); and other cases.
[5]Elliott v Australian Securities and Investments Commission (2004) 10 VR 369, 402 [117] (Warren CJ, Charles JA and O’Bryan AJA).

In summary, a person may be liable for contravening s 588G(2) of the Corporations Act in the following circumstances:

(a) he/she was a director at the time the company incurred the relevant debt;

(b) the company was insolvent at the time the debt was incurred, or became insolvent as a result of the debt being incurred;

(c) there were reasonable grounds for suspecting that the company was insolvent, or would become insolvent as a result of the debt being incurred; and either

(d) the person is aware at the time the company incurred a debt that there were grounds for suspecting that the company was insolvent, or would become insolvent as a result of the debt being incurred; or

(e) a reasonable person in a like position in a company in similar circumstances would be aware of the company’s insolvency.

The expression ‘director of a company’ in s 588G finds definition in s 9 of the Corporations Act. The definition makes provision for two types of persons: those persons who are formally appointed as directors or alternate directors (s 9(a)); and those who are not formally appointed as directors (s 9(b)). Section 9(b) provides that:

(b)unless the contrary intention appears, a person who is not validly appointed as a director if:
(i) they act in the position of a director; or
(ii)the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes.

Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person’s professional capacity, or the person’s business relationship with the directors or the company or body.

The onus of establishing a contravention of s 588G of the Corporations Act rests with the plaintiffs. According to s 1332 of the Corporations Act, in a proceeding other than a proceeding for an offence, it is sufficient if the Court is satisfied that a contravention has occurred on the balance of probabilities.

A common statutory defence to insolvent trading can be found in s 588H(2) of the Corporations Act which provides:

Expectations and belief about company’s solvency
(2)It is a defence if it is proved that, at the key time [the time a debt was incurred],[6] the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent despite all its debts incurred, and dispositions of its property made, at that time.

[6]See the meaning of ‘key time’ at s 588H(1)(a) of the Corporations Act.

The defence requires an actual expectation that the company was, and would continue to be, solvent and that the grounds for expecting its solvency are reasonable.[7]
[7]Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201, 215 [67] (Austin J) (‘Tourprint’).

Section 588H(3) of the Corporations Act provides:

(3)Without limiting the generality of subsection (2), it is a defence if it is proved that, at the key time [the time a debt was incurred], the person: (a) had reasonable grounds to believe, and did believe:
(i)that a competent and reliable person (the other person) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and
(ii) that the other person was fulfilling that responsibility; and

(b)expected, on the basis of information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent despite all its debts incurred, and dispositions of its property made, at that time.

It is also a defence under s 588H(4) of the Corporations Act if:

…the person was a director of the company at the key time [the time a debt is incurred] … [and] it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company.

Section 588M of the Corporations Act relevantly provides:

(1) This section applies where:
(a)a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and
(b)the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency; and
(c)the debt was wholly or partly unsecured when the loss or damage was suffered; and
(d) the company is being wound up;

…
(2)The company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.
…

Procedural history

The plaintiffs filed their originating process on 25 October 2019 and the proceeding was conducted by way of pleadings. Various procedural orders have been made, including the referral of the matter to mediation and the filing of affidavit material.[8]
[8] In addition, on 16 January 2020, Emerton JA made an order referring the matter to an Associate Judge for hearing and determination pursuant to rule 77.05 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) and rule 16.1(3) of the Supreme Court (Corporations) Rules 2013 (Vic).

On 17 April 2020, the Court made orders for, among other things, the discovery of documents between the parties. The defendants did not comply with those orders. As it happened, their solicitors filed notices of ceasing to act on 12 May 2020. On 19 June 2020, following the filing of a summons by the plaintiffs, the Court extended the date by which the defendants could comply with their discovery obligations and made a self-executing order that any non-compliance would result in their defence being struck out. The defendants also failed to comply with those orders. Consequently, the defendants’ defence was struck out by force of the Court’s orders of 19 June 2020 and pursuant to rule 24.02(1)(b) of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (‘the Rules’). As a result of the striking out, there is no defence before the Court and the defendants are taken to have admitted the allegations of fact in the statement of claim.[9]
[9]Yang v Finder Earth Pty Ltd [2019] VSCA 22 at [24] (Maxwell P, Tate and Emerton JJA).

The Court made further timetabling orders on 29 July 2020 permitting the plaintiffs to file an amended originating process to explicitly refer to the insolvent trading claim against Mr and Mrs Walsh, extending the dates by which the parties were to file affidavit material and submissions, and setting the matter down for trial on 22 October 2020. Those timetabling orders were varied by the Court on 18 September 2020, although the trial date was preserved. Again, the defendants did not comply with those orders within the time specified.

On the morning of 22 October 2020, Mr Walsh emailed the Court attaching submissions, along with affidavits sworn by himself and Mrs Walsh. At the hearing, Mr Walsh sought an order, on behalf of all defendants, for the reinstatement of the defence which had been struck out, along with the adjournment of the trial to enable the defendants to put on further affidavit material in opposition to the plaintiffs’ claims. The Court determined not to reinstate the defence because the defendants’ non-compliance with Court orders had not been properly explained or remedied. However, the trial was adjourned on the basis that the defendants pay the plaintiffs’ costs thrown away. The trial itself was re-fixed for 14 December 2020. In addition, Walsh Group was required to file and serve an affidavit in support of any application for dispensation of the requirement in rule 1.17(1) of the Rules that a corporation shall not take any step in the proceeding other than by a solicitor. An application for dispensation was necessary because Walsh Group sought to appear at the trial and defend the proceeding without a lawyer. The defendants were also required to file all substantive affidavit material in opposition to the plaintiffs’ claims by 19 November 2020, which was later extended to 23 November 2020.

On the basis of affidavit material relied upon by Walsh Group, I was satisfied that it was appropriate to permit Walsh Group to be represented other than by a lawyer at the trial and for Mr Walsh to make submissions and refer to evidence on the Company’s behalf. Orders to that effect were made on 8 December 2020. It follows that none of the defendants were legally represented at the trial on 14 December 2020.

Accordingly, it is appropriate to briefly explain the Court’s approach when a party is not represented by a lawyer. In Daher v Bell,[10] Derham AsJ summarised the following governing principles, which I gratefully adopt:

It is the duty of the Court in relation to represented and unrepresented litigants alike to ensure that a hearing or trial is conducted fairly and in accordance with law. Procedural fairness is ‘an essential attribute of a court’s procedure’. What a judge must do to assist a litigant in person depends on the litigant, the nature of the case, and the litigant’s intelligence and understanding of the case. The judge cannot be the advocate of the self-represented litigant, for the role of the judge is fundamentally different to that of an advocate. The judge must maintain the reality and appearance of judicial neutrality at all times and to all parties. The assistance must be proportionate in the circumstances - it must ensure a fair trial and not afford an advantage to the self-represented litigant.

In the decision of the Court of Appeal in Roberts v Harkness [(2018) 57 VR 334 (‘Roberts’)], which was applied in Doughty-Cowell v Kyriazis [[2018] VSCA 216 [63]–[64]], the Court made it clear that a litigant must have a reasonable opportunity of presenting his case. What amounts to a reasonable opportunity of presenting a case depends on the circumstances of the case, including the nature of the decision to be made, the nature and complexity of the issues in dispute, the nature and complexity of the submissions which the party wishes to advance, the significance to that party of an adverse decision (‘what is at stake’) and the competing demands on the time and resources of the court or tribunal [Roberts (2018) 57 VR 334, 337-55 [8]–[49]].[11]

[10][2020] VSC 346.

[11]Ibid [8]-[9].

I have endeavoured to apply these principles in this case. In particular, at the vacated trial on 22 October 2020, I went to some length to explain to the defendants the nature of the proceeding and the elements of the statutory provisions relied upon by the liquidators, together with the nature of the statutory defences which appeared to be contemplated by the defendants on the basis of the affidavit material filed at that time. When the trial recommenced on 14 December 2020, I explained the structure and process of the trial to the defendants.

Material relied upon by the parties

In support of their claim, the plaintiffs rely upon the following material:

(a) the affidavit of Shane Deane affirmed on 24 October 2019 and filed on 25 October 2019, together with exhibits;

(b) the affidavit of Shane Deane affirmed and filed on 25 September 2020, together with exhibits (‘the second Deane affidavit’);

(c) the affidavit of Shane Deane affirmed on 19 October 2020 and filed on 20 October 2020, together with exhibits (‘the third Deane affidavit’);

(d) the affidavit of Shane Deane affirmed on 4 December 2020 and filed on 7 December 2020, together with exhibits (‘the fourth Deane affidavit’); and

(e) written submissions dated 19 October 2020.

The defendants principally rely upon the following material in opposition to the claim:

(a) the affidavit of Matthew Walsh sworn 21 October 2020 and filed on 22 October 2020, together with exhibits;

(b) the unsworn affidavit of Alissa Walsh filed on 22 October 2020, together with exhibits;

(c) the unsworn affidavit of Matthew Walsh filed on 23 November 2020, together with exhibits (being exhibits WGA-5 to WGA-9 of the bundle of exhibits filed 23 November 2020) (‘the second Walsh affidavit’); and

(d) the unsworn affidavit of Matthew Walsh filed on 23 November 2020 in support of the Company’s application for dispensation from the requirement to be represented by a lawyer, together with exhibits (being exhibits WGA-1 to WGA-4 of the bundle of exhibits filed 23 November 2020) (‘the third Walsh affidavit’);

(e) written submissions dated 22 October 2020, 23 November 2020 and 11 December 2020.

Objections to defendants’ submissions of 11 December 2020

At the hearing on 14 December 2020, the plaintiffs took exception to the defendants’ submissions filed on 11 December 2020 on the basis that they contained new evidence and purported to exhibit new documents. The time for filing substantive affidavit material in opposition to the plaintiffs’ claims had already passed on 23 November 2020. There was extensive discussion of whether any new evidence should be allowed, whether an adjournment was necessary to allow the plaintiffs time to respond to any new evidence, or whether supplementary material could be filed by the plaintiffs after the trial. However, when I questioned the defendants about the 11 December 2020 submissions, they confirmed that it was not their intention to introduce new evidence but that they had simply misunderstood the nature and purpose of submissions. To deal with the problem posed by the 11 December 2020 submissions, I proposed that I would exclude any new evidence contained within the submissions and not accept any parts of the submissions referring to factual matters which were not supported by any prior evidence. All parties were ultimately content with that approach.

Status of Mr Walsh as director

As previously explained, the plaintiffs allege Mr Walsh is a director of the Company and subject to the insolvent trading regime, despite the fact he is not formally appointed as a director.

In Grimaldi v Chameleon Mining NL (No 2),[12] the Full Court of the Federal Court of Australia (comprising Finn, Stone and Perram JJ) identified a number of principles relevant to whether a person may be considered a director of a company for the purpose of s 9(b)(i) of the Corporations Act, despite not being formally appointed as such. Those principles can be distilled as follows (original citations omitted):[13]
[12](2012) 200 FCR 296, 321-326 [62]-[76].
[13]Ibid.

(a) a person may be a director even without being formally appointed as one. The definition of ‘director’ in s 9 of the Corporations Act applies as much to a person who is a usurper of the functions of a director as to a person who takes an active part in directing the affairs of the company with the acquiescence of legally appointed directors;[14]
[14]Ibid 321-2 [64].

(b) the expression ‘act in the position of a director’ in s 9(b)(i) of the Corporations Act contemplates that the person concerned has, to some degree, been doing the work of a director or performing functions one would reasonably expect to have been performed by a director of that company given its circumstances;[15]
[15]Ibid 322 [65].

(c) the roles and functions performed will vary with the commercial context, operations and governance structure of the particular company;[16]
[16]Ibid 322 [66].

(d) the relationship of a person with a company may evolve over time into that of de facto director. Alternatively, the person may only perform the role and function of director for a short period of time;[17]

(e) whether or not someone is a director is a question of substance, and not simply a matter of denomination, and will turn on the nature and extent of the functions performed and any constraints imposed.[18] By way of example, a person with the title of ‘consultant’ may nevertheless be regarded as a director depending on the nature and extent of his/her functions; and

(f) ultimately, the court must make a value judgment about the proper characterisation of what role the relevant person had been performing in the company.[19]

[17]Ibid 322 [67].

[18]Ibid 322 [68].

[19]Ibid 323 [70].

Relevant factors which may be examined in considering the role performed by a putative de facto director include: the size of the company; its internal practices and structure; the nature of the functions and powers which are exercised by the person, including any delegation or discretion given to the person; and the holding out of the person as a director to third parties.[20]
[20]Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565, 569-571 (Madgwick J). See also Natcomp Technology Australia Pty Ltd v Graiche [2001] NSWCA 120.

It is clear that a de facto director is capable of contravening s 588G of the Corporations Act.[21] In Williams v Bearing Traders,[22] a director purported to resign from a company on account of ill health but continued to act as a director of other companies within the same corporate group. However, there was sufficient documentary evidence to enable an inference to be drawn that he had in fact continued to act as a director of the relevant company during a period it had traded whilst insolvent.
[21]Deputy Commissioner of Taxation v Solomon (2003) 199 ALR 325; Williams v Bearing Traders Pty Ltd (2008) 69 ACSR 334 (‘Williams v Bearing Traders’).
[22]Ibid.

More recently, in Yeo, in the matter of Bradi Transport Pty Ltd (in liq) v Sklenovski[23] Anderson J determined that an employee of a concrete cartage company, who was the husband of the appointed director, effectively controlled the company’s operations whilst the actual director had little involvement in the day-to-day running of the company.[24] Both persons were ultimately held liable for insolvent trading.
[23][2020] FCA 1540.
[24]Ibid [17]–[19].

Because the defendants’ defence has been struck out, they are taken to have admitted the following facts which are pleaded by the plaintiffs in their statement of claim dated 25 November 2019:

(a) Mr Walsh was a director of the Company between 31 January 2017 and 21 November 2017;

(b) Mr Walsh was signatory of the Company’s bank account;

(c) Mrs Walsh was not a signatory of the Company’s bank account;

(d) Mr Walsh managed the Company’s financing activities with Scottish Pacific Finance Pty Ltd without the need for approval from, or reporting to, Mrs Walsh;

(e) Mr Walsh managed the Company’s day to day operating activities without the need for approval from, or reporting to, Mrs Walsh;

(f) the decision by the Company to appoint voluntary administrators was made by Mr Walsh;

(g) the Company traded as part of a group of companies which included Walsh Group and Walsh Equipment Services Pty Ltd (collectively, ‘the Walsh group of companies’);

(h) the Walsh group of companies maintained the same contact details;

(i) Mr Walsh was held out as the managing director of Walsh Group;

(j) Mrs Walsh maintained paid employment outside of the Walsh group of companies while Mr Walsh worked in and for the Walsh group of companies on a full-time basis.

More importantly, in the second Walsh affidavit, Mr Walsh confirms that he ran the Company, along with other related ‘Walsh companies’ and that Mrs Walsh had no involvement in its operations.[25] Further, at the trial, Mr Walsh accepted that at all material times he was acting as a director of the Company and was its decision-maker.[26]
[25]Second Walsh affidavit [4].
[26]Transcript of Proceedings, Walsh Engineering Services Pty Ltd v Walsh Group (Aust) Pty Ltd (Supreme Court of Victoria, [2021] VSC 206, Hetyey AsJ, 14 December 2020) 100-1 (‘Transcript of Trial).

It is clear from the above matters that Mr Walsh was the controlling mind of the Company and acted in the position of a director for the relevant period, notwithstanding he was not formally appointed as one. He was a de facto director within the scope of s 9(b)(i) of the Corporations Act and is therefore subject to the insolvent trading provisions in ss 588G and 588M.

Taxation liabilities represent incurring of a debt

The essence of a contravention of s 588G(2) of the Corporations Act is the failure to prevent a company from incurring a debt at the time it was insolvent.[27]
[27]Re Overgold [2019] VSC 624 [6] (Gardiner AsJ) (‘Re Overgold’).

At trial the plaintiffs claimed that the Company incurred a debt to the Australian Taxation Office (‘the ATO’) in the sum of $542,978.54 during the relevant period, at a time the Company was insolvent.[28] The liability relates to PAYG withholding, GST and associated general interest charges.
[28]Second Deane affidavit [22] and exhibit SLD-4, 270-3. See also the plaintiffs’ submissions dated 19 October 2020.

In Hawkins v Bank of China,[29] a case which concerned the legislative predecessor of s 588G of the Corporations Act, Kirby P held that a debt is incurred when a company ‘renders itself liable to pay a sum of money in the future as a debt’.[30] This may happen when the company takes on a contractual obligation to make a future payment of a sum of money;[31] or alternatively, when some act, omission, or other circumstance causes the company to owe the debt,[32] including a debt which is imposed by statute.[33]
[29](1992) 26 NSWLR 562 (‘Hawkins’).
[30]Ibid 576 (Kirby P).
[31]Ibid.
[32]Assaf, Shields and Kincaid, above n 3, [10.32], citing Australian Securities and Investments Commission v Edwards (2005) 54 ACSR 583, 607 [81] (Barrett J).
[33]Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 2) [2020] FCA 717 [137] (Middleton J).

The applicable case law makes clear that taxation liabilities are considered debts for the purpose of s 588G of the Corporations Act.[34] Even if there has not been a formal determination or assessment, a debt may arise where the taxpayer has performed transactions to generate a tax liability and when the tax in question is capable of calculation.[35] Further, taxation liabilities are incurred on the date on which they arose by operation of the relevant taxation legislation.[36]
[34]See Commissioner of State Taxation (WA) v Pollock (1993) 12 ACSR 217, 229-30 (Ipp J with Pidgeon and Wallwork JJ agreeing) (‘Pollock’); Sutherland v Liquor Administration Board (1997) 24 ACSR 176; Sands & McDougall Wholesale Pty Ltd (In liq) v Commissioner of Taxation (Cth) (1999) 1 VR 489, 504 [36] (Charles JA with Brooking and Kenny JJA agreeing) (‘Sands & McDougall Wholesale v Commissioner of Taxation (Cth)’); Powell v Fryer (2001) 159 FLR 433, 443 [64]-[66] (Olsson J) (‘Powell v Fryer’).
[35]Pollock 224 (Ipp J); Re Overgold [12]-[16] (Gardiner AsJ).
[36]See Powell v Fryer 443–4 [64]–[73] (Olsson J, Duggan and Williams JJ agreeing); Sands & McDougall Wholesale v Commissioner of Taxation (Cth) 504–5 [36]–[37] (Charles JA, Brooking and Kenny JJA agreeing); Rambaldi v Rice Bar Restaurant Pty Ltd [2018] VSC 218 [32]–[33] (Gardiner AsJ); Hall v Poolman.

Calculation of insolvent trading claim

Mr and Mrs Walsh did not put forward any evidence or submissions to dispute the existence or calculation of the liability to the ATO. They did, however, contest liability for the insolvent trading claim itself (on grounds referred to later in these reasons).

Following the trial, and in the course of preparing these reasons, I further reviewed an ATO Business Portal statement relied upon by the plaintiffs in identifying the debt said to be incurred to the ATO during the relevant period. My review of the ATO Business Portal statement suggested that the $542,978.54 figure relied upon by the plaintiffs at trial included certain amounts incurred after the Company went into voluntary administration on 21 November 2017. As a consequence, I requested my Associate to write to the parties on 12 April 2021, drawing their attention to this issue and specifically requesting the plaintiffs address the proper calculation of their insolvent trading claim. They did so by email dated 21 April 2021. In their email, the plaintiffs noted that the last transaction in the ATO Business Portal statement represented a PAYG withholding tax shortfall from 1 June 2018 to 30 June 2018 in the sum of $58,149. The plaintiffs conceded they had ‘not proven that the transaction relates to PAYG withholding obligations arising prior to 21 November 2017.’ However, they also submitted that an interest debit amount in the sum of $6,097.09 bearing the date of 25 November 2017 and an interest credit amount of $977.98 recorded on 29 November 2017 related to interest payable for amounts incurred prior to 21 November 2017.

After this response from the plaintiffs, Mr and Mrs Walsh were also invited to address the proper calculation of the insolvent trading claim. On 28 April 2021, they responded by email, stating that they had nothing to add in relation to this issue.

I accept the plaintiffs’ submission that it is appropriate to include the interest amounts recorded on 25 November 2017 and 29 November 2017 in the ATO Business Portal statement in calculating the quantum of the insolvent trading claim. I am prepared to infer that those interest amounts relate to principal liabilities incurred prior to 21 November 2017. However, as properly conceded by the plaintiffs, there is insufficient evidence that the PAYG withholding tax shortfall amount of $58,149 was incurred prior to 21 November 2017. Accordingly, it should not form part of the insolvent trading claim. On my reconciliation of the figures contained in the ATO Business Portal statement, the total liability incurred by the Company to the ATO during the relevant period (31 January 2017 to 21 November 2017) was in fact $484,829.54 (‘the ATO debt’).

The individual amounts which comprise the ATO debt are set out in the ATO Business Portal statement. The statement confirms that the ‘effective date’ each debit amount was incurred fell within the relevant period. It is also apparent that the ATO debt is an unsecured liability. Further, I am satisfied that the ATO has suffered loss or damage in relation to the debt because of the Company’s insolvency and that the debt remains unpaid in the liquidation of the Company.

Insolvency

As previously explained, the plaintiffs are required to prove that the Company was insolvent at the time the ATO debt was incurred or that it became insolvent as a result of the incurring of the debt.

Legal principles

The test for solvency found in s 95A(1) of the Corporations Act is whether a company can pay its debts as and when they become due and payable. Section 95A(2), in turn, provides that a company which is not solvent is insolvent.

In Crema Pty Ltd v Land Mark Property Developments Pty Ltd,[37] Dodds-Streeton J (as her Honour then was) cited with approval the decision of Weinberg J (as his Honour then was) in Ace Contractors & Staff v Westgarth Development Pty Ltd,[38] and confirmed that s 95A of the Corporations Act enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business. Her Honour elaborated further, stating:

While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realisable so as to permit the payment of all debts as they fall due, the company will not be solvent. Conversely, it may be able to pay its debts as they fall due, despite a deficiency of assets.[39]

[37](2006) 58 ACSR 631, 651–2 [140] (‘Crema v Land Mark Property’).

[38][1999] FCA 728.

[39]Crema v Land Mark Property 652 [141].

In the earlier case of Sandell v Porter,[40] Barwick CJ explained that while ‘[i]nsolvency is expressed … as an inability to pay debts as they fall due out of the debtor’s own money … the debtor’s own moneys are not limited to his cash resources immediately available [and] … extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time’.[41]
[40](1966) 115 CLR 666.
[41]Ibid 670.

In determining solvency, commercial realities will be relevant in assessing what resources are available to a company to source the income necessary to meet its liabilities.[42]
[42]See Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 188 ALR 114; Australian Beverage Distributors v Redrock Co Pty Ltd (2008) 26 ACLC 74.

In Australian Securities and Investments Commission v Plymin,[43] Mandie J set out a number of factors which may be indicative of insolvency. The indicia of insolvency most relevant for present purposes are: overdue Commonwealth and State taxes; liquidity ratios below 1; creditors unpaid outside trading terms; special arrangements with selected creditors; a lack of access to finance; and solicitors’ letters, summonses, judgments or warrants issued against the company (which I will take to include, by analogy, statutory demands).
[43]Australian Securities and Investments Commission v Plymin (2003) 46 ACSR 126, 214–15 [386].

The factors referred to in Plymin have been described as representing common sense indicators of insolvency.[44] As Mansfield J observed in Lewis,Re Damilock Pty Ltd (in liq) v VI SA Australia Pty Ltd,[45] one or more of these indicia may have particular significance in a matter, but the absence of one or more of them does not, of itself, establish solvency. The question of whether a company is able to pay its debts as and when they fall due is a question of fact.[46]
[44]See decision of Perram J in Morris v Danoz Directions Pty Ltd (in Liq) (No 2) [2010] FCA 836.
[45](2008) 68 ACSR 493.
[46]Lewis v Doran (2004) 208 ALR 385, 408–9 [108] (Palmer J), approved by the New South Wales Court of Appeal in Lewis (as liq of Doran Constructions Pty Ltd (in liq)) v Doran (2005) 219 ALR 555. See also Stone v Melrose Cranes & Rigging Pty Ltd (in liq) (No 2) [2018] FCA 530 [146] (Marcovic J).

Evidence of insolvency

The plaintiffs rely upon the following evidence to establish that the Company was insolvent during the relevant period:

(a) as at 30 June 2016, the Company owed the ATO $622,384. From 31 December 2016, the Company failed to remit tax from its employees’ salaries and consistently defaulted on at least five payment arrangements with the ATO between 15 January 2016 to 31 January 2017. I also note that as at 31 January 2017 (the start of the relevant period), the Company owed the ATO $540,556.91 and by 21 November 2017 (the end of the relevant period) the Company was indebted to the ATO in the sum of over $1.02 million;

(b) the Company’s superannuation guarantee charge account with the ATO discloses a liability for the quarters ending 30 September 2016 and 31 December 2016 which remained outstanding as at 21 November 2017. This indicates that the Company did not pay its employees’ superannuation entitlements;

(c) on 3 April 2017, the ATO issued a statutory demand for payment by the Company which expired and was not complied with;

(d) for the financial year ended 30 June 2017, the Company’s internal accounts disclosed an end of year loss of -$502,747 and a net asset deficiency of -$406,958;

(e) the liquidators calculated the Company’s quick asset ratio (the ratio of assets that can be readily realised to meet current liabilities) after adjusting the accounts to exclude ‘work in progress’ as a current asset given it had not been invoiced and was illiquid. For the 2017 financial year, the quick asset ratio was 0.26 according to the internal management accounts and 0.52 as suggested in the so-called ‘spotlight report’ prepared by the Company’s external chartered accountants, Blue Rock Australia Pty Ltd, trading as BlueRock (‘BlueRock’) (after removing work in progress); and

(f) Mr Walsh told the liquidators’ staff that the Company was profitable until early 2017 when a key employee left the Company to start a competing business, and after which time the Company lost two major customers. He also informed the liquidators’ staff that, from about January 2017, the Company had an immediate contraction of core business in the range of 40 per cent to 60 per cent. This has been partly verified by the liquidators having regard to the various invoices rendered by the Company around that time. Further, at the trial Mr Walsh conceded during the course of his submissions that the loss of two large customers and the departure of a key employee had an impact on the underlying business of the Company.[47]

[47]Transcript of Trial 124.

Against this evidence of insolvency, Mr and Mrs Walsh place particular reliance upon a ‘spotlight report’ prepared for the Company by BlueRock for 30 June 2017 (‘the spotlight report’). The document disclosed a profit of $404,453 and a net asset surplus of $683,671. It is apparent that these figures are vastly different to the figures contained in the Company’s internal accounts for 30 June 2017 (which show a net loss of -$502,747 and a net asset deficiency of -$406,958). It is the evidence of the liquidators that it is simply not possible to reconcile these materially different statements using the books available to the liquidators. I accept that conclusion. Mr and Mrs Walsh have offered no explanation for the inconsistency between the internal accounts and the spotlight report. The source documents underpinning the figures contained within the spotlight report are not in evidence. No one from BlueRock has been called by Mr and Mrs Walsh to explain the purpose of the spotlight report and its underlying accounting methodology. Further, under cross-examination, Mr Walsh made the following concessions in relation to the spotlight report:

(a) it is not a set of financial statements;[48]
[48]Ibid 53.

(b) it was not prepared as a set of finalised books settled by BlueRock but was instead part of a monthly review of management figures to show how the business of the Company was trending month-to-month;[49]
[49]Ibid.

(c) it did not contain any notes to identify how the totals were comprised;[50]

(d) he did not know the extent to which BlueRock actually investigated any of the figures contained in the spotlight report and acknowledged that his prior suggestion that the accountants had conducted an in-depth investigation into those figures was purely speculative;[51] and

(e) he did not have any involvement in the preparation of the spotlight report or any other monthly spotlight report.[52]

[50]Ibid 54.

[51]Ibid.

[52]Ibid 54-5.

Accordingly, I do not consider the spotlight report to be a reliable indicator of the financial position of the Company and its relative solvency, as at 30 June 2017. In my view, the Company’s internal accounts for the financial year ended 30 June 2017 are a more reliable representation of the true position of the Company at that time.

Mr Walsh has also given evidence that whilst he ‘knew things were tight from time to time it largely centred around working out a plan for the ATO’ and that the Company was ‘in deep negotiations with [s]everal [f]inanciers to refinance the Walsh Group Assets to free up working capital to pay out all the tax debt.’[53] At the trial, he further explained that because of those negotiations, there was no concern about the amount outstanding to the ATO. He also conceded that the negotiations with financiers were ultimately fruitless and that the ATO debt had in fact impeded the Company’s ability to obtain finance.[54] Whilst the defendants’ submissions of 11 December 2020 also make reference to particular dealings between the Company and various financiers at certain times, none of this detail has been presented to the Court in the form of admissible evidence. Further, in making reference to these matters, the 11 December 2020 submissions impermissibly go beyond the evidence already filed by the defendants. Ultimately, there is no evidence to suggest that the Company was able to access finance in order to pay down the ATO debt during the relevant period.
[53]Second Walsh affidavit [8].
[54]Transcript of Trial 104.

On the topic of cash flow, Mr Walsh submitted at trial that the Company, like other businesses he was associated with, was ‘very cashflow hungry’ as a consequence of being primarily concerned with the provision of labour.[55] In addition, whilst Mr Walsh conceded that January 2017 was an unprofitable month for the Company, he was fairly certain that the months of February through to June 2017 were all profitable and that this generated confidence in the ability of the Company to turn around its finances. Aside from the spotlight report, which has not been properly explained and which is consequentially less reliable than the Company’s internal accounts, I have been unable to identify any evidence to substantiate Mr Walsh’s assertion that the Company’s financial position actually improved from January 2017. To the contrary, the Company’s internal accounts for 30 June 2017 show a loss of $484,501 for the last quarter of the 2017 financial year. Further, the fact that the Company failed to comply with the statutory demand issued by the ATO on 3 April 2017 also contradicts the suggestion that the Company’s position had improved after January 2017.
[55]Ibid 105.

At the trial, both Mr Walsh and Mrs Walsh sought to develop a further argument that the solvency of the Company should be considered in light of the fact that it operated within a broader corporate group which remained viable and which provided support to individual companies within the group. When pressed by the Court to identify any particular evidence which demonstrated the ability of any other entities within the Walsh group of companies to help meet the tax liabilities of the Company, Mr Walsh referred to a general ledger for Walsh Group which purported to show inter-company transactions with the Company.[56] He referred, in particular, to a payment made on 27 March 2017 for $20,485.15 denoted as ‘Tax 16’ which he said evidenced a payment by Walsh Group to the ATO in respect of the tax liability owed by the Company for income tax. A general ledger for the Company, which ostensibly shows inter‑company transactions with Walsh Group, contains a corresponding transaction with the annotation ‘Income Tax Expense’.[57] However, neither the ATO Business Portal statement, nor any other statement obtained by the liquidators from the ATO in respect of the Company, record a payment in the sum of $20,485.15 as having been made.[58] Nor are any bank records produced to confirm this payment was actually made and is not simply a book entry recorded in a general ledger. Even assuming such a payment was made by Walsh Group on behalf of the Company in reduction of the ATO debt, this amount is insignificant in the context of the total ATO debt incurred during the relevant period, which was $484,829.54, and the total amount owing to the ATO in late March 2017 which was more than $783,000.
[56]Exhibit WGA-7 to the second Walsh affidavit.
[57]Exhibit WGA-8 to the second Walsh affidavit.
[58]The statement does, however, record of payment of $7,000 being made on 24 March 2017 and processed on 27 March 2017 (see Exhibit SLD-4, 270). In addition, the Client Activity Statement for the Company shows a payment being received on 24 March 2017 in the sum of $4,230 and processed on 29 March 2017. Neither statement records that the payment was made by Walsh Group (Exhibit, SLD-4, 30).

Similarly, Mr Walsh made reference to numerous payments recorded in the general ledgers and apparently made by Walsh Group to the State Revenue Office (‘the SRO’) for payroll tax throughout the relevant period, which he estimated totalled at least $90,000-$100,000. It was also suggested by Mr Walsh in his oral submissions that the entities within the broader Walsh group of companies were grouped by the SRO for payroll tax purposes and that Walsh Group paid this total liability to the SRO on behalf of the entire group. However, there is no evidence concerning the SRO’s determination of the amount owed by the Company and /or other entities within the broader Walsh group of companies for the purposes of payroll tax. Further, aside from the general ledgers relied upon by the defendants, there is no other documentation to substantiate the payments purportedly made by Walsh Group to the SRO.

Moreover, under cross-examination, Mr Walsh accepted that there were a number of inconsistencies within the general ledgers for the Company and Walsh Group which recorded inter-company transactions between the entities.[59] He accepted that inter-party transactions between the Company, Walsh Group and another entity were disorganised throughout 2017 and that there had been problems with software for a number of years.[60] He said ‘[t]here used to be money flying between all the companies at different stages, depending on the different company’s needs on particular days.’[61] He also admitted that he did not create the entries in the general ledgers and did not authorise the transactions between the entities.[62] Those transactions were carried out by an internal accounts team.[63] There were apparently people in charge of executing the inter-company transfers and using the money transferred, and different people responsible for recording the transactions in the general ledgers.[64] However, no one from the internal accounts team was called to give evidence to explain the use of the general ledgers or the entries supposedly showing payments by Walsh Group for the benefit of the Company.
[59]Transcript of Trial 50-51.
[60]Ibid 41.
[61]Ibid 41-42.
[62]Ibid 52.
[63]Ibid.
[64]Ibid 42.

In my view, there is insufficient evidence to suggest Walsh Group, or any other related entity, had financially assisted the Company, or was in a position to do so.

Conclusion on insolvency

Having regard to the evidence concerning the Company’s solvency in its totality, I am satisfied that the Company was cash flow insolvent from at least 31 January 2017 when the Company lost its key employee and two critical customers. At the same time, the Company was amassing an ever-growing liability to the ATO which it was seemingly unable to reduce, as evidenced by its repeated failure to comply with agreed payment arrangements. Its impaired financial performance was reflected in the 30 June 2017 internal accounts which disclosed a significant loss for that financial year. It follows that the ATO debt was incurred at a time when the Company was insolvent.

Reasonable grounds to suspect insolvency

One precondition for the application of s 588G is found in s 588G(1)(c) of the Corporations Act, which requires that there are reasonable grounds for suspecting that a company is insolvent, or would so become insolvent, at the time the company incurs a debt. As I have already noted, this is an objective test. The inquiry is not one concerning the particular director whose conduct is under consideration. Instead, facts and matters must be shown to exist which would enable a director of reasonable competence and diligence to suspect insolvency.[65] Further, the Court must make its own judgment on the basis of facts as they existed at the relevant time and without the benefit of hindsight.[66]
[65]Re Overgold [2019] VSC 624 [30] (Gardiner AsJ) citing the authors in Assaf, Shields, and Kincaid, above n 3, [10.46].
[66]Powell v Fryer 446 [76] (Olsson J, Duggan and Williams JJ agreeing).

Under s 588G(2)(a) of the Corporations Act, a person contravenes s 588G if he or she was aware at the time that there were grounds for suspecting insolvency. A suspicion of insolvency falls somewhere between a belief that the relevant company is insolvent and a mere wondering of whether that is the case.[67] Suspicion may be ‘a positive feeling of actual apprehension … amounting to “a slight opinion, but without sufficient evidence”’.[68]
[67]Hall v Poolman 298 [234] (Palmer J).
[68]Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, 303 (Kitto J).

Under s 588G(2)(b) of the Corporations Act, a person contravenes s 588G if a reasonable person in a like position would be aware that there were reasonable grounds for suspecting that the company was insolvent or would become insolvent as a result of the incurring of a debt. As the Full Court of the Supreme Court of South Australia noted in Powell v Fryer, the Court should have regard to the facts and circumstances that the director ought to have known, as well as to the facts and circumstances that were actually known to the director.[69]
[69]Powell v Fryer 446 [76]-[77] (Olsson J, Duggan and Williams JJ agreeing).

Having regard to the evidence previously set out, I accept the plaintiffs’ contention that at all times during the relevant period:

(a) there were reasonable grounds for suspecting that the Company was insolvent (or would become insolvent) when the ATO debt was incurred; and

(b) a reasonable person in the position as director of the Company would have been aware, that there were reasonable grounds for suspecting that the Company was insolvent (or would become insolvent) when the ATO debt was incurred.

In particular, there were reasonable grounds for suspecting insolvency because:

(a) over the course of the year prior to the relevant period, the Company had been unable to comply with five consecutive ATO payment arrangements whilst its taxation liability continued to exponentially increase;

(b) the Company did not comply with a statutory demand issued by the ATO on 3 April 2017; and

(c) there had been an immediate contraction of core business in January 2017, which was noticeable and significant.

Further, such a suspicion would undoubtedly have gone beyond mere wondering about whether the Company was insolvent.

The liquidators also contend that the Court should infer, not only from the Company’s dealings with the ATO, but also from Mr Walsh’s involvement in other corporate insolvencies, that Mr Walsh was actually aware there were grounds to suspect the Company was insolvent from 31 January 2017. The plaintiffs have identified three other companies that were placed into external administration between December 2014 and September 2018 in respect of which Mr Walsh was a director. These companies each owed on average almost $750,000 to the ATO as its primary creditor. Between them, these entities were indebted to the ATO in the sum of approximately $1.97 million, which was in addition to the $1.02 million owed by the Company itself. At the trial, counsel for the plaintiffs also put it to Mr Walsh that significant money had been moved out of the Company prior to its administration, through other entities, to avoid that money being accessed by a liquidator. Mr Walsh strongly denied that allegation. It is ultimately unnecessary for the Court to determine whether the facts suggest the existence of a phoenix scheme designed to avoid tax liabilities. I do, however, accept that given Mr Walsh’s historical association with failed companies owing large debts to the ATO, he was personally aware there were grounds to suspect the Company was insolvent at the time the ATO debt was incurred. Put simply, he would have seen the writing on the wall.

I also accept that a reasonable person in the position of director of the Company would have been aware there were reasonable grounds for suspecting the Company was insolvent because he/she would have been aware of the escalating taxation liability, the repeated inability of the Company to meet ATO payment arrangements and the failure of the Company to comply with the ATO’s statutory demand. A reasonable hypothetical director would also have identified the significant loss of business experienced by the Company in January 2017 as a basis to suspect its insolvency.

Despite those matters, Mr and Mrs Walsh failed to prevent the Company from incurring the ATO debt in circumstances where the Company did not have the capacity to pay that debt.

Defences

I turn now to whether Mr and Mrs Walsh have any defences to the insolvent trading claim.

Defence under s 588H(2)

It appears from the evidence relied upon and the submissions made by Mr and Mrs Walsh that they intend to rely on the defence contained in s 588H(2) of the Corporations Act. To establish that defence, Mr and Mrs Walsh need to prove that at the time when the ATO debt was incurred, they had reasonable grounds to expect, and did expect, that the Company was solvent and would remain solvent even if it incurred that debt. An expectation of solvency involves a higher degree of satisfaction or certainty than mere hope or suspicion.[70]
[70]Tourprint 215 [67] (Austin J).

In light of the findings I have already made about the existence of reasonable grounds for suspecting the Company was insolvent, I do not accept Mr and Mrs Walsh had an expectation of the Company’s solvency which was reasonably based. In addition, having regard to findings I have already made about the solvency of the Company:

(a) the spotlight report is not a reliable document and cannot reasonably give rise to an expectation that the Company was solvent as at 30 June 2017 (the relevant date in the spotlight report);

(b) there is insufficient evidence of the Company’s efforts to obtain finance in order to pay the ATO debt. References in the defendants’ 11 December 2020 submissions about dealings with certain financiers do not constitute evidence. In any event, it is unclear when the attempts to obtain finance were undertaken in the context of the relevant period. It may be that the directors of the Company were holding out hope of obtaining finance to pay the ATO debt. But that is not enough to ground an expectation of solvency; and

(c) the evidence fails to demonstrate that Walsh Group, or any other related entity, had financially assisted the Company, or was in a position to do so. I therefore do not accept that the directors of the Company had reasonable grounds to expect that such assistance would be forthcoming.

It follows that Mr and Mrs Walsh cannot make out a defence to insolvent trading under s 588H(2).

Defence under s 588H(3)

During the course of the trial, Mr Walsh stated that he had relied on monthly spotlight reports prepared by BlueRock. He said those external accountants had particular expertise in extracting information from the accounting system used by the Walsh group of companies to provide a monthly breakdown, in the form of a spotlight report, which took into account inter-company transactions and provided an accurate description of how each company was trading. It is unclear whether Mr and Mrs Walsh were seeking to establish a defence under s 588H(3) of the Corporations Act. For the sake of completeness, I will consider the availability of that defence.

The defence requires proof of the following three elements:

(a) a director had reasonable grounds to believe, and did believe, that a competent and reliable person (the other person) was responsible for providing to the director adequate information about whether the company was solvent;

(b) the director had reasonable grounds to believe, and did believe, that the other person was fulfilling that responsibility; and

(c) the director expected, on the basis of information provided to him or her by the other person, that the company was solvent at the time a debt was incurred and would remain solvent despite all its debts incurred at that time.

None of the evidence relied upon by Mr Walsh or Mrs Walsh addresses any of these matters. The defendants’ submissions of 11 December 2020 and Mr Walsh’s oral submissions on this topic do not count as evidence. There is no evidence of the scope of any retainer of BlueRock and whether it included the provision of adequate information about solvency. Aside from the spotlight report (for 30 June 2017), there are no other monthly spotlight reports, other documents or specific advice in evidence which are identified as conveying the necessary information supposedly relied upon by the Company’s directors. I have already explained why the spotlight report is unreliable. Further, in circumstances where Mr Walsh did not know how the spotlight report was compiled, and what information was relied upon in its preparation, it cannot be said that the spotlight report contains adequate information to satisfy the directors of the Company about its solvency.

Mrs Walsh’s defence under s 588H(4)

As previously stated, s 588H(4) of the Corporations Act essentially provides that if a person was a director of the company at the time when a debt was incurred, it is a defence if it is proved that because of illness or for some other good reason he or she did not take part at that time in the management of the company. On the basis of evidence given by Mrs Walsh and the submissions made by her and her husband, I understand that Mrs Walsh relies upon this defence.

In her affidavit of 21 October 2020, Mrs Walsh deposes that she was not involved in the Company’s business. She observes that she was not even a signatory to the Company’s bank account. She says that at no stage did she believe she was a director of the Company and was shocked when she was informed of this fact when she met with Mr Deane prior to the Company being placed into voluntary administration. She says she was routinely asked to sign documents which she did not look at in detail and simply trusted her husband.

In the second Walsh affidavit, Mr Walsh says he was the real decision maker in the Company. He says Mrs Walsh had no idea how the Company was trading, was not involved in any decision-making and did not have access to the Company’s bank account or emails.

At the trial, Mrs Walsh explained that she has a number of medical conditions which affect her cognitive function, her memory and her speech. She said because of her health conditions, she was unsure of what she had signed. She placed reliance upon a medical report dated 22 June 2020 prepared by Dr Demyana Ayoub.[71] Dr Ayoub sets out the following relevant matters in her report:
[71]Exhibit WGA-9 to the second Walsh affidavit.

(a) she has been consulting Mrs Walsh as her GP since 2011;

(b) over the years, Mrs Walsh has ‘struggled with stress, being emotional a lot, experienced tension headache[s], severe PMS, premenstrual tension, muscle aches and a diagnosis of fibromyalgia’, in addition to having post-traumatic stress disorder as a result of being a victim of crime. Dr Ayoub was also informed that Mrs Walsh may also have Lyme disease;

(c) Mrs Walsh requires ongoing care with her GP and specialists. She also requires ongoing counselling and support to assist her coping with stress, anxiety and ‘the confusing situation with her legal matters’. With the necessary support, many of her symptoms would be less but would never disappear, especially the tension headaches and fibromyalgia;

(d) as to whether Mrs Walsh’s medical conditions affect her cognitive capacity, Dr Ayoub observed that Mrs Walsh is usually emotional, teary and overwhelmed, which affects her judgement and confidence.

An Australian Securities and Investments Commission (‘ASIC’) historical extract for the Company confirms that Mrs Walsh was a director from 24 August 2015 until it went into external administration. Section 1274B of the Corporations Act creates an evidentiary presumption that what is set out in the ASIC database is accurate. The evidence put forward by Mrs Walsh does not displace this presumption. Nowhere in her evidence does she actually deny she was a director of the Company. In her submissions at trial, she said she could not deny being a director because she did not know what she had signed.[72]
[72]Transcript of Trial 131.

In addition, the defence which was struck out, but ultimately relied upon as evidence by the plaintiffs, contains an admission (at paragraph [4]) that Mrs Walsh was a director of the Company during the relevant period. An admission is an exception to the rule against hearsay.[73] Hearsay statements[74] are generally inadmissible because they are potentially unreliable and may contain assertions that are self-serving. By contrast, ‘what a party…admits to be true, may reasonably be presumed to be so’.[75] Because an admission tends to undermine a person’s own interests, it may be regarded as more reliable than a hearsay statement. I am satisfied that Mrs Walsh’s admission in the defence that she was a director satisfies the statutory definition of an admission contained in the dictionary to the Evidence Act 2008 (Vic) (‘the Evidence Act’). It is a ‘previous representation’ (made otherwise than in the course of giving evidence in the proceedings) by a person who is a party to the proceeding which is adverse to the person’s interest in the outcome of the proceeding. There is no reason to exclude the admission as evidence on the basis that it is unfairly prejudicial or misleading or confusing.[76] The plaintiffs are therefore permitted to rely upon this admission by Mrs Walsh.
[73]See the Evidence Act 2008 (Vic) s 81(1).
[74]A hearsay statement contains evidence of a previous representation made by a person which is adduced to prove the existence of a fact that can reasonably be supposed the person intended to assert by the representation (see the Evidence Act 2008 (Vic) s 59(1)).
[75]See Slatterie v Pooley (1840) 6 M & W 664, 669.
[76]See the Evidence Act 2008 (Vic) s 135.

Mrs Walsh has also conducted herself in a way which is consistent with her being a director and participating in the management of the Company. For example, she signed the Company’s financial statements for the year ended 30 June 2016. Upon apparently discovering that she was a director when meeting with Mr Deane, she did not resign as a director but instead appointed voluntary administrators over the Company on 21 November 2017. On the same day, she signed a Report as to Affairs on behalf of the Company (‘the RATA’). In the RATA, Mrs Walsh claimed to be a creditor of the Company who was owed various employment entitlements. On 29 November 2017, Mrs Walsh wrote to the creditors of the Company to notify them of an intention to propose a deed of company arrangement. The letter refers to Mrs Walsh exploring different avenues of funding, options for collecting monies owed by debtors of the Company and the reduction of overheads to improve cash flow. She concluded the letter with the statement:

I’m committed to getting the best result possible and submitting a proposal to creditors that will archive [sic] a much higher return then [sic] putting the company into Liquidation.

Furthermore, for the reasons set out below, I do not accept the medical evidence relied upon by Mrs Walsh is sufficient to establish that:

(a) she lacked the cognitive capacity to understand she had signed documentation to become a director of the Company; and/or

(b) her health conditions prevented her from taking part in the management of the Company during the relevant period in which the ATO debt was incurred.

I am prepared to proceed on the basis that fibromyalgia is a serious and potentially disabling medical condition, the symptoms of which can include musculoskeletal pain, fatigue and cognitive disturbances, such as problems with concentration and memory.[77] However, in her report, Dr Ayoub does not say: when Mrs Walsh was diagnosed with this condition and by whom; how the condition manifests in her everyday life; whether the condition prevented her from understanding the consequences of becoming a director of the Company in August 2015; whether she was particularly afflicted by the condition during the relevant period in which the ATO debt was incurred; and whether the condition has prevented her from taking part in the management of the Company and, if so, to what extent and for what duration. Whilst Dr Ayoub is a well-credentialed GP, her report is respectfully not equivalent to a report from a medical specialist with expertise in the diagnosis and treatment of fibromyalgia. I also note that Mrs Walsh has given evidence that she is a beauty therapist who runs her own company called Alissa Kate Enterprises Pty Ltd trading as Skintervention. I observe that her medical conditions have apparently not prevented her from undertaking the management of that business.
[77] See Guymer, Emma and Littlejohn, Geoffrey, ‘Fibromyalgia’, Australian Family Physician, Vol 42, No 10 (October 2013): and MSD Manual: (professional version).

It follows that Mrs Walsh is unable to invoke the defence set out in s 588H(4) of the Corporations Act. She has not established that because of illness, or for some other good reason, she did not take part in the management of the Company at the time the ATO debt was incurred.

Conclusion on contravention of s 588G

By reason of the foregoing, Mr and Mrs Walsh have each contravened s 588G of the Corporations Act by failing to prevent the Company from incurring the ATO debt at a time when the Company did not have the capacity to meet it. As each of the elements of s 588G of the Corporations Act have been established by the plaintiffs, and no statutory defences have been made out, Mr and Mrs Walsh have contravened the insolvent trading provision and are liable to compensate the Company in accordance with s 588M. The plaintiffs are entitled to judgment against each of Mr and Mrs Walsh in the sum of $484,829.54, which is a debt pursuant to s 588M of the Corporations Act, together with interest.

Claim in debt against Walsh Group (Aust) Pty Ltd

I turn now to the debt claim brought by the plaintiffs against Walsh Group. Since at least 30 June 2016, an inter-company loan account existed as between the Company and Walsh Group. The liquidators have reconciled that loan account on the basis of their review of the books of the Company, including the internal accounts, the formal accounts prepared for 30 June 2016[78] and various tax invoices and workpapers.
[78]Pursuant to s 1305(1) of the Corporations Act, the 30 June 2016 accounts are a book kept by the Company which is admissible as evidence in the proceeding and are prima facie evidence of any matters stated or recorded in it.

The Company initially claimed the sum of $246,880.09 from Walsh Group on the following bases:

(a) as at 30 June 2016, Walsh Group was indebted to the Company in the sum of $374,712;

(b) Walsh Group issued invoices to the Company in the sum of $1,731,774.02 from this time until the administration of the Company on 21 November 2017, which reduced its indebtedness to the Company;

(c) the Company made payments to Walsh Group in the sum of $1,941,333.01 (and Walsh Group also made a positive admission that this occurred at paragraph [11] of its struck-out defence, contrary to self‑interest);

(d) the Company issued invoices to Walsh Group in the sum of $15,348.77; and

(e) Walsh Group made payments to the Company in the sum of $360,999 (again, Walsh Group made a positive admission that this happened at paragraph [11] of its struck-out defence, contrary to self-interest).

I am satisfied that the plaintiffs are entitled to rely upon Walsh Group’s relevant admissions in the struck-out defence in accordance with s 81(1) of the Evidence Act and the definition of ‘admission’ found in the dictionary to that legislation.

At the trial, there was some confusion as to whether the underlying transactions resulted in the figure originally put forward by the plaintiffs and referred to above. On closer examination, the source of the confusion relates to the value of the invoices rendered by Walsh Group and the total sum of those invoices as expressed in the third Deane affidavit and the plaintiffs’ submissions of 19 October 2020. In any event, I accept the plaintiffs’ revised calculation of the claim given at the trial to be $238,604.16.

In response to this claim, Walsh Group contend that rather than it being indebted to the Company in the sum claimed by the plaintiffs, the Company is in fact indebted to Walsh Group in the sum of $48,253.46. Walsh Group places reliance upon the general ledgers for the Company and Walsh Group (found at exhibits WGA-7 and WGA-8 to the second Walsh affidavit), which purport to show inter-company transactions between the two entities.

At the trial, Mr Walsh was asked to explain, on behalf of Walsh Group, why there was said to be a net liability owed by the Company to Walsh Group. He said that this had come about as a result of payments by Walsh Group to the SRO and the ATO on behalf of the Company in respect of taxation liabilities, including payroll tax, which he said amounted to approximately $165,554.

For the following reasons, I do not accept Walsh Group’s contention about the reconciliation of inter-company indebtedness:

(a) aside from the general ledgers themselves, there are no bank records or other records produced by Walsh Group to confirm that payments were actually made by it for the benefit of the Company and are not simply book entries recorded in the general ledgers;

(b) further, in the case of amounts said to be paid by Walsh Group to the SRO for the benefit of the Company, there is no evidence to demonstrate how much was actually owed by the Company and/or other entities within the broader Walsh group of companies to the SRO for the purposes of payroll tax;

(c) the general ledgers themselves appear to be inherently unreliable. Under cross-examination, Mr Walsh conceded there were inconsistencies within the general ledgers[79] and that inter-party transactions between the Company, Walsh Group and another entity were disorganised throughout 2017.[80] For example, the general ledger of the Company records inter-company transactions on 31 October 2017 of $20,000, $7,000 and $700 between the Company and Walsh Group in both the debit and credit columns, but the ledger for Walsh Group only includes these amounts in the credit column for that date. There are also two credits in the sum of $25,000 in the Company’s general ledger of inter-company transactions on 31 October 2017 which do not appear in the Walsh Group general ledger at all. Further, the general ledgers include transactions not just between the Company and Walsh Group, but also transactions between those entities and other companies within the Walsh group of companies.[81] This is despite the fact the headings to those ledgers suggest the ledgers reflect loan accounts only between the Company and Walsh Group (for example, the Company’s general ledger is titled ‘Loan From Walsh Group To Loan From Walsh Group’). Because the ledgers do not exclusively record transactions between the Company and Walsh Group (despite what is suggested in the headings to those documents), I am not confident that they accurately record the inter-company indebtedness between those two entities;
[79]Ibid 50-1.
[80]Ibid 41.
[81]For example, the general ledger for Walsh Group at exhibit WGA-7 to the second Walsh affidavit includes transactions with the Company, in addition to numerous loans from entitles described as ‘New Engineering’, ‘New Equipment’ and ‘Vic Heavy Haulage’. The general ledger for the Company at exhibit WGA-8 to the second Walsh affidavit also records loans from ‘Vic Heavy Haulage’.

(d) Mr Walsh admitted under cross-examination that he did not create the entries in the general ledgers and did not authorise the transactions between the entities.[82] Instead, the transactions were apparently carried out by an internal accounts team,[83] none of whom were called to explain the use of the general ledgers or the entries purportedly showing payments by Walsh Group for the benefit of the Company;
[82]Transcript of Trial 51-2.
[83]Ibid 52.

(e) the general ledgers appear to have been printed only around the time that the second Walsh affidavit was completed. In making submissions on behalf of Walsh Group, Mr Walsh confirmed that he had ‘simply printed’ the general ledgers from the relevant systems but that he personally had no idea how to create a general ledger transaction;[84]

(f) the RATA, signed by Mrs Walsh, does not disclose Walsh Group as a creditor of the Company;

(g) even if Walsh Group was able to demonstrate at least $165,000 in payments of tax liabilities on behalf of the Company, this would not result in a balance in favour of Walsh Group, but would instead only reduce its liability to the Company to a sum of approximately $73,000.

[84]Ibid 139-140.

Given the above circumstances, I consider that a safer and more reliable record of inter-company indebtedness between the Company and Walsh Group can be found in the official financial statements of the Company for the financial year ended 30 June 2016 which were prepared by BlueRock and signed by Mrs Walsh on 16 May 2017. Those financial records show that Walsh Group owed the Company $374,712 at that time. It is then possible to track the fluctuating inter-company balances having regard to the payments and other transactions identified by the plaintiffs as set out above and the actual invoices which sit behind them.

It follows that the plaintiffs are entitled to recover from Walsh Group the sum of $238,604.16, together with interest, on account of its indebtedness to the Company.

Other matters

The defendants’ affidavit material and submissions make various complaints about Mr Deane and Mr Giasoumi concerning alleged representations made by them in connection with the voluntary administration of the Company and its later entry into the DOCA. The fourth Deane affidavit responds extensively to these allegations, which are denied. In my view, the concerns held by Mr and Mrs Walsh about alleged representations and conduct of Mr Deane and Mr Giasoumi prior to the Company’s liquidation are not relevant to this proceeding. There are other more appropriate legal processes for the ventilation of such concerns, including s 90-10 of the Insolvency Practice Schedule (Corporations) found at Schedule 2 of the Corporations Act, which facilitates an inquiry into the external administration of a particular company.

Conclusion

In light of the above findings, the plaintiffs are entitled to judgment against Mr and Mrs Walsh for contravention of s 588G of the Corporations Act in the sum of $484,829.54, which is a debt pursuant to s 588M, together with interest. The plaintiffs are also entitled to recover from Walsh Group the sum of $238,604.16, by way of a claim in debt, together with interest. I will ask the parties to address the Court on how interest should be calculated given the changes to the plaintiffs’ claim. I will also hear the parties on the question of costs.

SCHEDULE OF PARTIES

S ECI 2019 04868
BETWEEN:
WALSH ENGINEERING SERVICES PTY LTD (IN LIQUIDATION) (ACN 601 879 305)	First Plaintiff
SHANE LESLIE DEANE (as joint and several liquidator of WALSH ENGINEERING SERVICES PTY LTD) (IN LIQUIDATION) (ACN 601 879 305)	Second Plaintiff
NICHOLAS GIASOUMI (as joint and several liquidator of WALSH ENGINEERING SERVICES PTY LTD) (IN LIQUIDATION) (ACN 601 879 305)	Third Plaintiff
- v -
WALSH GROUP (AUST) PTY LTD (ACN 118 367 329)	First Defendant
ALISSA WALSH	Second Defendant
MATTHEW WALSH	Third Defendant

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Citations

Walsh Engineering Services Pty Ltd (in liq) v Walsh Group (Aust) Pty Ltd [2021] VSC 206

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[2021] VSC 206

10 May 2021