FEDERAL COURT OF AUSTRALIA Turco & Co Pty Ltd v Pendella Holdings Pty Ltd; In the matter of Pendella Holdings Pty Ltd [2010] FCA 213 Citation: Turco & Co Pty Ltd v Pendella Holdings Pty Ltd; In the matter of Pendella Holdings Pty Ltd [2010] FCA 213 Parties: IN THE MATTER OF PENDELLA HOLDINGS PTY LTD (ACN 113 204 470); TURCO & CO PTY LTD (ACN 009 390 130) v PENDELLA HOLDINGS PTY LTD (ACN 113 204 470) File number: WAD 81 of 2009 Judge: BARKER J Date of judgment: 31 March 2010 Catchwords: CORPORATIONS – insolvency – application to wind up company in insolvency – non-compliance with statutory demand – presumption of insolvency – whether company rebutted presumption Legislation: Corporations Act 2001 (Cth) s 95A, s 459C, s 459G, s 459P, s 459S, s 467(1) Federal Court (Corporations) Rules 2000 (Cth) Cases cited: Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 Bluechip Development Corporation (Cairns) Pty Ltd v PNP Realty Pty Ltd [2009] ACTSC 33 Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 Commonwealth Broadcasting Corporation Pty Ltd v Pacific Mobile Phones Pty Ltd (2008) 219 FLR 422; [2008] QSC 210 Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (2006) 58 ACSR 631; [2006] VSC 338 Lechmere Financial Corporation v Aspermont Ltd [2003] FCA 1138 Sandell v Porter (1966) 115 CLR 666; [1966] HCA 28 Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621 Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661; [2000] NSWCA 37 Date of hearing: 4 March 2010 Place: Perth Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 81 Counsel for the Plaintiff: Mr SCM Wong Solicitor for the Plaintiff: Curwood & Co Counsel for the Defendant: Mr LA Tsaknis Solicitor for the Defendant: Redding & Associates IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 81 of 2009 IN THE MATTER OF PENDELLA HOLDINGS PTY LTD (ACN 113 204 470) BETWEEN: TURCO & CO PTY LTD (ACN 009 390 130) Plaintiff AND: PENDELLA HOLDINGS PTY LTD (ACN 113 204 470) Defendant JUDGE: BARKER J DATE OF ORDER: 31 MARCH 2010 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The defendant be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth). 2. Kimberley Stuart Wallman of Second Floor, 15 Rheola Street, West Perth, be appointed as liquidator. 3. The plaintiff's costs of the application (including any reserved costs) be taxed and reimbursed in accordance with subsection 466(2) of the Corporations Act 2001 (Cth). Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 81 of 2009 IN THE MATTER OF PENDELLA HOLDINGS PTY LTD (ACN 113 204 470) BETWEEN: TURCO & CO PTY LTD (ACN 009 390 130) Plaintiff AND: PENDELLA HOLDINGS PTY LTD (ACN 113 204 470) Defendant JUDGE: BARKER J DATE: 31 MARCH 2010 PLACE: PERTH REASONS FOR JUDGMENT THE ISSUE 1 The issue in this proceeding is whether the defendant company, Pendella Holdings Pty Ltd (ACN 113 204 470) (company), should be wound up in insolvency. 2 The issue turns on the question whether the company has proved to the contrary that it is insolvent, that is to say, has rebutted the statutory presumption created by operation of s 459C of the Corporations Act 2001 (Cth) (CA) that it is insolvent. PRESUMPTION OF INSOLVENCY 3 On 16 February 2009, the plaintiff, which at all material times provided accounting services to the company, served a creditor's statutory demand for payment of debt, being outstanding fees for accountancy services in the amount of $38,004.40 as at 20 March 2008, on the company. 4 The company did not meet the demand or apply to set aside the demand as it may have chosen to do pursuant to s 459G of the CA. 5 By originating process for winding up order dated 21 May 2009, the plaintiff applied for the winding up of the company on the grounds of insolvency, citing non‑compliance with the requirements of the statutory demand within the 21 day period for compliance stipulated in it. 6 The proceeding came on for hearing in the Court on 4 March 2010. Counsel for the company acknowledged that the formal requirements of the CA and Federal Court (Corporations) Rules 2000 (Cth) (Rules) for a winding up order, as submitted on behalf of the plaintiff, had been complied with. Counsel also acknowledged that the company did not seek leave to set aside the statutory demand on the basis that the debt was disputed. Rather, the company, acknowledging that in the circumstances there is a presumed insolvency by operation of the CA, submits that it is able to rebut the presumption of insolvency by reference to the state of affairs of the company, that is to say, to prove to the contrary the presumption of insolvency, as provided for by s 459C(3) CA. PRIMARY EVIDENCE ADDUCED BY THE COMPANY 7 The affidavit evidence of David Frederick George Parish (Mr Parish), who is resident in the Northern Territory and a director of the company, which at material times has carried on and currently continues to carry on business in Perth, Western Australia, is relied upon by the company. Mr Parish's affidavits, sworn 26 August 2009, 19 September 2009, 3 November 2009 and 26 February 2010 were each formally read in Court. The affidavit of Lynn Jeffery (Mr Jeffery), registered company auditor and certified practising accountant, sworn 9 November 2009 was also read and relied upon by the company. Mr Jeffery was the only deponent required by the plaintiff for cross‑examination and his evidence is referred to separately below. 8 Mr Parish states that the company commenced operating as a flooring outlet as part of the Carpet Choice Flooring Group in Western Australia, it seems in about 2005. The initial operations were confined to the Carpet Choice store in Joondalup. However, in December 2005 the company became a member of the Newfurn Group. As a member of that group the company operated two independent Carpet Choice stores at Southgate and South City, in the Perth metropolitan region. As explained below, it seems the company presently operates only the Southgate store, which is managed by Mr Parish's son, Gavin. 9 Mr Parish indicates that the company operates the business as trustee of The Pendella Trust. 10 While in his affidavit Mr Parish makes reference to not agreeing with the plaintiff in respect of the provision of accounting services and advice, that is not a dispute that is currently the subject of this proceeding. As noted above the company did not take up the opportunity to dispute the debt in the period provided and has not sought leave under the CA now to do so. 11 It appears that in December 2007, Mr Parish's son, Gavin, who was operating a franchise of another flooring business with his wife, entered into bankruptcy. His son's wife apparently entered into bankruptcy soon after in early 2008. 12 Mr Parish says that in mid‑November 2007 he met with Mario Turco, the principal of the business of the plaintiff for the purpose of discussing the company's need for additional finance to keep its businesses trading. The question of obtaining an overdraft facility was raised. Mr Parish says that as of November 2007, the company had incurred a debt with the Australian Taxation Office (ATO) which was substantial. By January 2008 it was in the vicinity of $177,827.58. It appears that the company arranged an overdraft. 13 It also appears that there were further communications between Mr Parish and Mr Turco concerning fees claimed by the plaintiff from the company. Certain payments were made on behalf of the company to the plaintiff in respect of invoices that had been issued to that point. 14 As to solvency of the company, in his first affidavit sworn 26 August 2009, Mr Parish simply states that the company was able to and "will continue to be able to" pay its debts as and when they fall due. He says that at the end of the financial year ending 30 June 2009, the company was likely to have made a pre‑tax net profit of approximately $100,000. He produces a draft profit and loss statement for the period July 2008 to June 2009. That draft document was an MYOB/Excel product, seemingly prepared by the company itself. 15 In his second affidavit sworn 19 September 2009, Mr Parish explains that he and his wife each own 50% of the issued share capital of the company. As to the suggested $100,000 net profit before tax in the early draft profit and loss statement, Mr Parish says he had limited access to financial documentation regarding the company as, up to the end of 2007, it was held by the plaintiff. In the absence of that information, he could not compare the performance of the company over previous years to its present performance. 16 He then states that since the first affidavit he has had the opportunity to obtain financial information regarding the solvency of the company. He states that: · Pendella has one business interest only. That is the floor covering store that trades as Southgate Carpet Choice in Perth. · The MYOB records for the company (and Southgate Carpet Choice), now updated, indicate a gross profit of $399,127.09 for financial year ending 30 June 2009. · The net profit of the company for the same financial year has been derived by deducting identified business costs for the day to day operations of the business from the gross profit. · As a result of the updated information, he estimated the pre‑tax net profit to be approximately $95,000. · He instructed an independent bookkeeper to prepare "various pieces of financial information" concerning the company. As a result he produces various documents being a draft profit and loss statement to 30 June 2009, a draft balance sheet as of June 2009, a draft profit and loss statement through to June 2010 and a draft balance sheet through to 2010. 17 In relation to the draft balance sheets, Mr Parish makes a number of observations including that: · The trade creditors of the company are regular monthly accounts which relate to ordinary business operations. · The Newfurn clearing account is a floating sum. Product purchased from Newfurn by the Southgate Carpet Choice store is generally paid for two months after invoicing. The account with Newfurn is secured by a second mortgage taken out on the title of the property owned by Mr Parish himself. · The liabilities to the ATO are subject to a negotiated repayment schedule. · The securities provided by the company for the operation of Southgate Carpet Choice are a term deposit with Bankwest for $89,000, term deposit with ANZ of $50,000, second mortgage granted to ANZ of $100,000 and secured business loan of $40,000. 18 At that point of the proceeding, Mr Parish said he was unable to cause an accountant or auditor or other independent person to confirm the financial information or to audit it. 19 In relation to a work in progress schedule as of September 2009 that Mr Parish produces, he states that: · Southgate Carpet Choice essentially engages in two types of installation. The first is domestic installations, the second is commercial installations. For domestic installations the normal profit margin in between 28% and 31%. The sales value includes supply of floor covering and any underlay, with costed installation and any minor trims or other accessories required by the customer. The installation may be for carpet, vinyl planking or for timber planking. The value of the confirmed and invoiced work for the domestic installation work is $131,332. The gross profit is estimated to be $51,400 for this work. · The normal gross profit margin for commercial installations is between 19% and 23%. This includes supply of floor covering and any underlay, the cost of installation and any minor trims or other accessories required by the customer. The installation may be for carpet, vinyl planking or timber planking. The value of confirmed and invoiced work for the commercial work is $390,365. The gross profit is estimated to be approximately $82,000. · Given this information, the total value of work in progress for the present financial year (i.e. 2009/2010) is $561,697. The expected gross profit is in the order of $133,400. · The company will secure other work contracts in the next six months that will add to the overall gross profit. 20 Based on this information Mr Parish maintains that the company is able to pay and will continue to be able to pay all its debts as and when they fall due. EVIDENCE OF THE INDEPENDENT AUDITOR AND FURTHER EVIDENCE OF MR PARISH 21 Subsequently, Mr Parish engaged an independent auditor, Mr Lynn Jeffery of L Jeffery Accountants, to undertake an audit of the financial statements of the company. Mr Jeffery signed an auditor's report dated 23 October 2009. In the report, which Mr Jeffery produced under cover of his affidavit sworn 9 November 2009, Mr Jeffery stated that his firm had audited the financial report of The Pendella Trust for the year ended 30 June 2009. The company as trustee was responsible for the financial report. His firm conducted an independent audit of the financial report in order to express an opinion on it to The Pendella Trust. He stated in the report that procedures had been undertaken to form an opinion whether in all material respects the financial report was presented fairly in accordance with accounting standards and other mandatory professional reporting requirements so as to present a view which was consistent with his understanding of The Pendalla Trust financial position as a result of its operations. 22 In his report, Mr Jeffery set out a qualification that the financial statements have not been properly maintained over the period 1 July 2008 to 30 June 2009. He noted incorrect entries made in the financial statements. He said it was not practicable for his firm to determine if all transactions had been recorded and verification of The Pendella Trust income relating to these activities had been restricted to amounts recorded in the accounting records. He also noted there was a contingent liability of around $38,000 which was disputed by the Trust. He furthermore noted that there was a contract for the supply of floor coverings for $299,241 for the next two year period after 30 June 2009, commencing 21 September 2009. 23 In these circumstances Mr Jeffery provided a qualified audit opinion in these terms: In our opinion, because of the effect of the matters discussed in the qualification paragraph, the financial report, in accordance with applicable Accounting Standards and other mandatory professional reporting requirements does not present fairly the financial position of the Pendella Trust as at 30 June 2009 and its results from operations and cash flows from the year then ended. 24 In his November 2009 affidavit, Mr Jeffery says that the directors of the company instructed him that they had secured a contract for the supply of floor coverings for a total sum of $299,241. He was instructed that this was to commence on 21 September 2009. He stated that he had referred to this in his auditor's report as being a material event after the balance sheet date. The contractual sum had been included in the auditor's report. Mr Jeffery also states in [9] of his affidavit that he had checked the income, expenses, assets and liabilities of the company. He came across various entries that showed that income appeared to be understated by a sum of $472,250. The relevant entries were not properly entered into the accounting records. In [10] of his affidavit Mr Jeffery confirmed that the financial report did not present fairly the financial position of The Pendella Trust as at 30 June 2009 and the results of its operations ended at that date. This meant that the financial statements attached to the auditors report may not correctly reflect the financial position. He stated this is the case particularly because of the following: · The contingent liability of around $38,000 (being the 'disputed' debt due to the plaintiff) has been included in the accounting records but excluded in the financial statements attached to the report because it is in dispute. · The contract for the supply of floor coverings for $299,241 was mentioned as a material event occurring after the balance sheet date that may affect the performance of the company. · Poor record keeping by the company at the source (Southgate Carpet Choice) has led to the financial statements not reflecting fairly the financial position of the company as at 30 June 2009. The results from the operations for the year ended may be understated. · A deposit for the contract for the supply of floor coverings to be undertaken after 30 June 2009 was paid after 30 June 2009 and so is outside of the year audited and not included. 25 At [11] of his affidavit, Mr Jeffery states that: As an external auditor, I cannot underwrite the credibility of the Financial Report. I cannot assure readers that the Financial Report is exactly what it purports to be. I cannot assure readers that appropriate accounting standards have been adhered to. I cannot also assure readers that statutory professional rules have been complied with to give readers confidence that the report are a true and fair representation of the affairs of Pendella. 26 At [12], Mr Jeffery states that he does not ordinarily comment on the "viability of a business" conducted by an entity. If the financial statements are a true and fair representation then readers can make their own assessment of the viability of the business. The only requirement beyond the true and fair statement occurs if he believes that the business is insolvent or about to become insolvent. In that event, it is his obligation to indicate insolvency. He will not do this unless he is absolutely certain. Otherwise, merely making the statement that insolvency is imminent may be sufficient to ensure the insolvency becomes a reality. 27 Mr Jeffery at [13] of his affidavit, notes that the test of whether an entity is insolvent is essentially the "cash flow test", that is, whether the entity can pay its debts as and when they fall due. He states that, in this instance, the company for the year ended 30 June 2009 "appears to have met its debts as and when they fall due". This does not of course include the contingent liability of around $38,000 which remains in dispute. 28 Mr Jeffery offered the view that it appeared to him that the company is currently "not insolvent". For all intents and purposes it appears to be trading profitably. For that reason, he has not determined nor indicated insolvency in the auditor's report. 29 He also notes, and had been instructed by Mr Parish to this effect, that the long term liability of $167,500 due to Mr Parish has been included in the account of records of the company and included in the Financial Statements. He has been instructed however, that Mr Parish does not intend to call on that long term liability "at this time or any time in the near future". 30 Mr Parish in his subsequent affidavit dated 3 November 2009, in the light of the auditor's report of Mr Jeffery, made the following points: · He accepts that there have been deficiencies in the maintenance of the records of the company for the 2008/2009 financial year. · He accepts the contingent liability of $38,000 is the subject of dispute. · As to the contract for $299,241 (exclusive of GST), it is not actually for a two year period. The deposit was paid after 30 June 2009. The stock has been ordered and installation will commence in March 2010. The overall installation project will cover a period of approximately nine months. This is not a two calendar year period as suggested by Mr Jeffery but it is a period that covers two financial years. · He notes that the company's operating profit was $79,215. · He confirms that the company has a repayment schedule with the ATO to cover tax liabilities. 31 Mr Parish also states in [7] of this affidavit that the internal business MYOB records of the company for the period from 1 July 2009 to 28 October 2009 disclose better than expected results. In essence, the trading position for the Southgate Carpet Choice store is better than expected. 32 Mr Parish at [11] confirms that the deposit for the contract for the supply of floor coverings worth $299,241 was received after 30 June 2009. 33 He also confirmed that he does not intend to call on the $167,500 liability at any time in the foreseeable future. 34 By further affidavit sworn 26 February 2010, Mr Parish refers to the repayment schedule entered into with the ATO and produces a letter from the ATO to the trustee for the Pendella Trust, issued 7 November 2009. It provides for differing amounts ranging from $3,000 to $10,000 to be paid monthly from 25 November 2009 to 25 May 2011. 35 Mr Jeffery was cross‑examined on behalf of the plaintiff. His evidence indicated that he indeed had no association with the company and had provided an independent audit report. He was not aware of the winding up proceedings at the time of the report or that it would later be used to that end. 36 He confirmed that in conducting an audit he does not normally comment on the "viability" of a business and ordinarily would not state whether a business was "solvent" or "insolvent". In referring to "viability" he meant to refer to "solvency". 37 When pressed whether, in forming his views about the capacity of the company to pay its debts as and when they fell due, he took a "practical business environment" approach, he initially suggested that that was not part of his responsibility as an auditor, although he later indicated that he had considered this approach even though it was not stated in his affidavit in that way. His approach is that he applies what might be termed a "high threshold test" for insolvency. He accepted the proposition put to him in cross‑examination by counsel for the plaintiff that it followed that he applied a "low threshold test" for solvency. 38 When pressed about the state of the balance sheet and the negative equity disclosed of some $232,799, Mr Jeffery accepted in cross‑examination that at first glance this suggested that the company was in fact insolvent. But he emphasised that if one were to take into account the fact that $167,500 was a long term liability owed to a director of the company who was prepared not to claim it and if one also took into account the contract that fell after the balance sheet date, then that put a different gloss on the position. However, he did not read the contract itself and could not comment on its details. 39 When pressed further about the incomplete records he encountered when conducting the audit, Mr Jeffery emphasised that in the report he was not forming an opinion on solvency. 40 In cross‑examination Mr Jeffery also confirmed that the concept of net profit should not be confused with liquidity, they are not one and the same thing because some debts may not be recoverable. EVIDENCE ADDUCED BY THE PLAINTIFF 41 In the circumstances of this proceeding, it is only evidence going to the question of insolvency or solvency that is relevant. In that regard, the affidavits of Mario Turco, sworn 14 May 2009, 7 July 2009 and 16 October 2009 are relied upon by the plaintiff. Of these, Mr Turco's affidavit sworn 16 October 2009 goes most directly to the operation of the business of the company and so to the questions of insolvency or solvency. At [4] of his affidavit, Mr Turco expressed the understanding that Mr Parish's son at all relevant times managed the business of the plaintiff's carpet store and that Mr Parish has at all relevant times lived in the Northern Territory. FURTHER EVIDENCE AND SUBMISSIONS 42 Following the hearing of this proceeding and consideration of the evidence adduced and submissions made, the Court noted that the balance sheet audited by Mr Jeffery included a non‑current asset called "Receivables – G Parish". No evidence or submissions were made in respect of this item. The Court was concerned that it may constitute an asset of Mr Parish's son, Gavin, who, as the evidence above has narrated, has entered into bankruptcy. It raised a possible question concerning the substance of that listed non‑current asset. As a result the Court invited further evidence and submissions in relation to that item. 43 Mr Parish put on a further affidavit in relation to the matter and explained the item as follows: · The reference to G Parish in the item "Receivables – G Parish" in the sum of $160,562, is a reference to his son, Gavin, who is the manager of the Southgate Carpet Store. · Gavin Parish entered into bankruptcy on 24 December 2007. · The bankruptcy of Gavin Parish is not related or connected with the defendant company. The events leading up to the bankruptcy of Gavin Parish occurred before the defendant began operating the Southgate Carpet Choice. · The non‑current asset listed is an accumulation of debts (work in progress) due to the Southgate Carpet Choice that have arisen in the period prior to 30 June 2009 and to be received by Southgate Carpet Choice (the debts). · Gavin Parish has been listed as a convenient notation for the debts as he is in charge of receiving the debts as the manager of the store. · No part of the debts are due and owing from Gavin Parish. · The defendant could not and would not prove fuller debts in the bankruptcy of Gavin Parish. · The debts are not debts due from Gavin Parish as at the date of his bankruptcy or at any time thereafter. · The defendant expects to recover the debts in the ordinary course of its business. 44 The plaintiff does not object to the filing of Mr Parish's further affidavit, save that it objects to the statement that "the defendant expects to recover the debts in the ordinary course of its business". In relation to that paragraph, the plaintiff says that this an opinion concerning the expected realisable value of the non‑current asset and is inadmissible under s 76 of the Evidence Act 1995 (Cth) as Mr Parish has demonstrated neither specialised knowledge nor reasoning for his opinion. In particular, he makes no attempt to explain why a discount should not be applied to the expected realisable value for bad debts. 45 In all the circumstances, it appears to me that the objection is rightly made but that statement made by Mr Parish in his affidavit may be received as submission, rather than a qualified opinion, concerning the realisable value of the non‑current asset. 46 The plaintiff otherwise submits there is no verification of the non‑current asset listed, and even if there were, there is no probative evidence about the expected realisable value of it. In any event, even if the expected realisable value is the recorded value, the defendant still has a negative value on the balance sheet which the plaintiff estimates at -$232,799. The plaintiff says the defendant still has not demonstrated that it can pay its debts as and when they fall due. 47 In supplementary submissions the defendant submits the matters deposed to by Mr Parish do not affect the financial position of the company set out in the auditor's report or the evidence of Mr Jeffery. 48 In broad terms I accept the supplementary submissions made on behalf of the defendant . Mr Parish has clarified the nature of the non‑current asset. I do not think that anything more can be made of it. CONSIDERATION 49 I turn then to consideration of the evidence without material regard to the non‑current asset in the balance sheet described as "Receiveables – G Parish". 50 In this case, the plaintiff has served on the defendant company a statutory demand in respect of a debt claimed of $38,004.40. The defendant has not complied with the demand and did not make any application under s 459G CA for an order setting it aside. As a result, the Court must presume that the company is insolvent: see s 459C(2)(a) CA. By reason of s 459C(3) CA the presumption operates, except so far as the contrary is proved, for the purpose of a winding up application made under s 459P CA. The primary question in this proceeding is whether the company has proved the contrary so far as is this presumption of insolvency is concerned. 51 It is open to the company to call evidence going to its solvency to rebut the presumption of insolvency without the leave of the Court. Where a ground for resisting the winding up application could have been raised earlier, but was not, the leave of the Court is required under s 459S CA. However, an argument that the company is in fact solvent is not a ground the company can rely on in an application to set aside a statutory demand. Therefore, leave in this regard is not required under s 459S: see Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (2006) 58 ACSR 631; [2006] VSC 338 at [139]. 52 Section 95A CA provides that a person is solvent if, and only if, the person is able to pay all the person's debts as and when they become due and payable. Counsel for the parties to this proceeding acknowledge that in this regard, the CA focuses on the cash flow test rather than a balance sheet test in determining whether or not a company is insolvent. Counsel also accept that it is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole. The court must have regard to commercial realties. 53 Counsel for the company contends that commercial realities will be relevant in 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. The Court accepts that this is the case although in this case this approach appears to have little scope for application. 54 The Court also accepts that in assessing whether a company's position as a whole reveals a surmountable temporary liquidity or an insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality in that, in normal circumstances, creditors will not always insist on payment and that they will allow some latitude in time for payment of their debts, though that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency: see Southern Cross Interiors Pty Ltd (In Liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621, at [54]. 55 It is generally accepted that a company's financial statements and assets are not irrelevant to the inquiry that must be undertaken, although the question of insolvency is not to be answered merely by looking at these statements of assets: see Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 at 65. 56 Equally it is accepted that a company's capacity to raise funds from its resources or by way of unsecured borrowings can be taken into account when assessing insolvency on a cash flow basis: see Sandell v Porter (1966) 115 CLR 666; [1996] HCA 28, at 670. 57 Counsel for the company accepts that in order to rebut the presumption that it is insolvent, it needs to present the Court with the fullest and best evidence of the financial position of a defendant and that, ordinarily, unaudited accounts and unverified claims of ownership or valuation are not probative of solvency; nor are bald assertions of solvency arising from a general review of the accounts even if made by qualified accountants: Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd; Ex Pile Pty Ltd (ACN 093 403 135) v Jabb's Excavations Pty Ltd (ACN 066 676 926) [1999] FCA 728 at [44] (Jabb's Excavations). However it is also fair to comment, I think, that depending on the particular facts of a case presented, it may be inappropriate to impose too high a standard in some cases, for example, where to do so would be to require a small viable company with no creditors to expend significant sums employing external accountants to rebut the presumption of insolvency: see, in this regard, Commonwealth Broadcasting Corporation Pty Ltd v Pacific Mobile Phones Pty Ltd (2008) 219 FLR 422; [2008] QSC 210, at [29]. Here, Mr Jeffery is called as an independent auditor, although his investigations may be said to have been relatively limited, as explained below. 58 It is also accepted all round that the question of solvency must be assessed at the date of the hearing, though this does not mean that future events must necessarily be ignored: Jabb's Excavations. 59 Where, as here, the application for winding up in insolvency relies on a failure by the company to comply with a statutory demand, the company must make a decision whether or not the particular debt said to be owing is material to establishing its solvency: Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661; [2000] NSWCA 37, at 674. It is generally accepted that the concept of "material" in this context is not the same as "determinative of" and that a capacity to have some effect is all that is required: see Bluechip Development Corporation (Cairns) Pty Ltd (ACN 117 021 566) v PNP Realty Pty Ltd (ACN 092 364 633) [2009] ACTSC 33 at [28]. 60 It is also appropriate to note, as counsel for the company emphasises, that s 467(1) CA gives a court a discretion not to wind up a company in circumstances where the insolvency is not actual but presumed. See Jabb's Excavations; Lechmere Financial Corp v Aspermont Ltd [2003] FCA 1138 at [83] – [85]. Circumstances for the exercise of the discretion may be where the defendant is able and willing to pay the amount of the debt said to give rise to the presumption of the insolvency. That, of course, is not the case here. 61 The profit and loss statement audited by Mr Jeffery shows a gross profit for the year ended 30 June 2009 of $399,412 for the business of the company. This include sales of $1,324,641, from which purchases of $925,229 had been deducted. 62 The profit and loss statement for that same period lists various expenses totalling $329,778, including for employment, a levy to Newfurn and a range of other expenses that bespeak the continuing operation of a business. An operating profit of $79,215 is disclosed in the profit and loss statement. 63 The balance sheet for the year ended 30 June 2009 discloses total assets of $363,753. The current assets, including inventory of $50,000, total $62,673. The non‑current assets total $297,080. 64 The balance sheet also includes liabilities, including current liabilities to Bankwest, ANZ credit card, "Joondalup loan" and "trade creditors". The total of these liabilities is $252,812 with the trade creditors constituting $104,359. The total of the liabilities is calculated at $596,552 showing an excess of liabilities over assets of $232,799. Thus there is a negative equity disclosed in that sum. 65 Counsel for the company, by reference to the evidence of Mr Jeffery says that it may be considered instructive to notionally update the balance sheet to include the contract for the supply of floor coverings in the sum $299,241, which would increase the company's assets to $662,994. Further, if one accepts that Mr Parish will not call up the long term liability of $167,500 due to him at any time in the foreseeable future, then the company's liabilities may be reduced to $429,052, although one should reasonably add in the currently disputed debt claimed by the plaintiff of approximately $38,000 making total liabilities of approximately $460,000. In these circumstances the negative equity is turned around into a positive equity on the balance sheet of approximately $200,000 and so it may be said that the debt claimed by the plaintiff of $38,000 is not material to the question of solvency so far as the balance sheet is concerned. Counsel for the company accepts, however, that the balance sheet is not determinative of the question of solvency and that the CA focuses on the cash flow test. In this regard, so far as the trade creditors or other creditors referred to in the balance sheet are concerned, counsel for the company says that there is no evidence to suggest that debts cannot be and are not being met as and when they fall due. To the extent that there was an issue with the ATO, payment arrangements are now in place. There is nothing to suggest that arrangement is not being honoured. 66 Counsel for the plaintiff questions whether a notional updating of the balance sheet is permissible or an appropriate way to approach the question of solvency in this case and whether the onus to discharge the presumption of insolvency has been satisfied. So far as the contract for the supply of floor coverings is concerned, counsel points out that this is a contract into the future and, in any event, nothing is known as to what the profitability of the contract will be and when income from it will be received. To some extent this latter submission is correct, although the affidavit evidence of Mr Parish concerning this contract and such contracts is not challenged. It is a contract to be performed between March and December 2010. A deposit has apparently been paid. One may assume it involves a commercial installation. Mr Parish in his affidavit sworn 19 September 2009, says the normal gross profit margin for commercial installation is between 19% and 23%. If one assumes – even though there is no direct evidence concerning the profitability of this contract – that 20% were the profit margin on this particular contract, then the profit margin would be in the vicinity of $60,000. There is however nothing to suggest that this profit will be earned any sooner than the completion date in December 2010, aside from the deposit which has already been paid. The amount of the deposit has not been indicated but presumably it has been taken into account in the current cash flow context and financial statements produced to the Court. 67 So far as the disclosed liabilities and other creditors of the company are concerned, no creditors have come forward in relation to this application, or have been identified as problem liabilities as at the date of the hearing. The current liability to Bankwest has been identified by Mr Parish in his affidavit sworn 19 September 2009. At [7.7.7] he says the bank loan is secured by a term deposit held by Bankwest for $89,000. The ANZ credit card is in a small sum. Mr Parish at [7.7.10] of that same affidavit identifies the securities that the company has provided for the operation of the Southgate Carpet Choice store. These include the term deposit held by Bankwest, a term deposit held with ANZ of $50,000, a second mortgage granted to the ANZ of $100,000 and a secured business loan of $40,000. 68 I consider in all the circumstances that it is reasonable, so far as the balance sheet is concerned, to recognise that the liabilities currently shown as $596,552 should, in a more practical business environment, be considered without regard to the long term liability to Mr Parish of $167,500. That reduces the total liabilities to approximately $429,000. The balance sheet discloses total assets of $363,753. However, I am not inclined to accept the submission made on behalf of the company that this figure could notionally be increased by the value of the contract that is about to performed between March and December 2010 in a gross sum of $299,241. It is a prospective contract not currently earning income, although I accept it does represent some value to the company. The result on this approach is that liabilities exceed the assets by approximately $65,000, to which sum the amount of $38,000, the subject of the statutory demand of the plaintiff, should be added, suggesting a figure of approximately $105,000. This, of itself, having regard to Mr Jeffery's evidence, suggests the solvency/insolvency of the company is balancing on a knife's edge. 69 While it is useful to look at the company's balance sheet, the balance sheet approach is not a determinative guide to insolvency. Rather, it is the cash flow test applied in a practical business environment that requires close consideration. The practical business environment, on the evidence before the Court, is that the Southgate Carpet Choice store – the sole store now operated by the company – is apparently doing business as usual. It is managed by the son of Mr Parish. Various securities have been provided to Bankwest and the ANZ and other securities have also been provided. Arrangements have been put in place with the ATO so that regular monthly payments are to be made to the ATO in respect of the existing liabilities commencing November 2009. There is nothing in the material provided to the Court on this application to suggest that those liabilities are not being met according to the arrangements put in place with the ATO. Nor is there any other evidence to suggest that trade creditors of the business of the company are not currently being satisfied. No doubt this was a factor that led Mr Jeffery in his November 2009 affidavit to remark that it appeared the company was meeting its debts as and when they fell due. 70 However, it seems to me that a critical question is whether the $38,004.40 liability, the subject of the statutory demand, by reference to which insolvency is presumed, is material to the solvency issue. In this regard, it is difficult to see how the company could presently pay this liability if it is required to do so. If the company were obliged to pay that sum at the time of the hearing of this proceeding, having regard to the finely balanced position in relation to the range of other creditors – especially the ATO and trade creditors – it must be doubted the company would have the capacity to pay the debt. There is no evidence, for example, to suggest any surplus income or ready access to finance to which recourse can be had for such a purpose. The costs (presumably) incurred by the company in engaging the auditor and solicitors and counsel for this proceeding are not the subject of any evidence but presumably have been accounted for. The balance sheet position, as noted, is at best precarious. The contract to be completed in December 2010 is some way off. There is no suggestion that Mr Parish ordinarily rises to the occasion to pay such debts, although given the general state of affairs of the company disclosed by the evidence, such as deferment of the long term liability, perhaps he occasionally does. 71 In my view, the uncertain position as to the company's insolvency or solvency position is not resolved one way or the other by the evidence of Mr Jeffery. In a case like this the Court looks to independent evidence going to the solvency of the company to determine the issue. Mr Jeffery initially conducted an audit in late 2009 without regard to any insolvency proceedings in the Court and issued a qualified audit report. As noted earlier, he noted the poor record keeping of the company and the fact that it appeared that the accounts had been understated by a considerable sum of in excess of $417,000. For these reasons, he reasonably formed the view that the accounts could not be relied upon in the form presented. Nonetheless, the matters of concern to him were, in a sense, all on the "credit side" from the company's solvency point of view. If one were to: ignore the long term liability of the company to Mr Parish; assume the verification of the understatement of the accounts; and take into account as a subsequent material event the $299,241 contract incurred after the date of the balance sheet, then from his point of view the solvency of the company would in all probability be proved. 72 In his November 2009 affidavit, Mr Jeffery expressed the view in relation of the conduct of the business that it would appear that, at the date he made his affidavit the company was in a position to pay its debts as and when they fell due. However, when pressed both in cross‑examination (and again asked about in re‑examination), Mr Jeffery made it clear that the case for solvency would be strengthened only if it were proved beyond doubt that the $167,500 liability would not be claimed and investigations confirmed that the accounts had been understated. The evidence supports the view that the long term liability to Mr Parish will not be acted upon by Mr Parish in the present circumstances. That plainly is a positive in relation to the solvency issue. However, there is little before the Court to verify that the accounts have been understated. There is also an absence of any real evidence as to the trading position of the company as of the date of the hearing, although there is affidavit evidence from Mr Parish that the company has done better than expected in the months leading up to his November 2009 affidavit. 73 In the face of this, counsel for the company, in effect, asks the Court to infer that, in the present circumstances at the date of the hearing, the company is meeting its obligations to trade creditors and that nothing untoward has occurred that would affect the view to be taken of the solvency of the company. For example, there is nothing to suggest that the arrangements with the ATO are not being met. 74 So far as the contract soon to be performed is concerned, it is difficult to take into account the materiality of that contract in respect of which it would appear, in the absence of evidence to the contrary, that a profit will not be earned until December 2010 at the earliest. 75 The result is that it is difficult for the Court, just as it was difficult for the Mr Jeffery, to say that the solvency of the company has been plainly demonstrated. It is a possibility, but it is not clear that it is solvent. 76 The statutory presumption is that the company is insolvent. It is for the company to rebut the presumption of insolvency. The company has called evidence which demonstrates that there are a variety of factors that lend support to the view that the company might be solvent. However, in my view, that is as far as the evidence goes and solvency has not been satisfactorily proven. When additionally the question is asked what material effect the disputed debt of approximately $38,000 would have, if any, on the question of solvency, I consider the answer can only be that it would have a decidedly negative effect. If the company were called upon to pay that debt forthwith, the call for payment would certainly have a material effect upon the company's position. There is nothing to suggest that the company has the wherewithal to meet that payment at this juncture. It is known that the plaintiff requires that debt to be paid. It is not the case of a trade creditor who may be prepared to "give and take" a little in relation to the timely payment of an invoice. There is no evidence that any other creditor of the company has an outstanding demand for immediate payment. The only other relevant creditor in this regard is the ATO, which has been prepared to accept payment of a large debt on terms over some years. 77 In these circumstances, it seems to me that the debt the subject of the statutory demand which has produced the presumed insolvency of the company, is a material factor in assessing the extent to which the company has proved to the contrary the presumption that the company is insolvent. I am not satisfied, on all the evidence, that the company has rebutted the presumption of insolvency, that is to say, that it has proved to the contrary the presumption of insolvency. Evidence has been adduced which suggests that the solvency/insolvency position is on a knife's edge. While I acknowledge that it is a drastic step to wind up a company in insolvency and I should not make such an order lightly, I am simply not satisfied that the evidence adduced by the company proves to the contrary the presumption of insolvency. 78 In these circumstances, the company's opposition to the application for winding up must fail. CONCLUSION AND ORDERS 79 For the reasons given above, it is appropriate that there should be orders winding up the company in insolvency. 80 The necessary papers concerning the consent of the liquidator who the plaintiff proposes be appointed have been provided to the Court. 81 In these circumstances I would make the following orders: 1. The defendant be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth). 2. Kimberley Stuart Wallman of Second Floor, 15 Rheola Street, West Perth, be appointed as liquidator. 3. The plaintiff's costs of the application (including any reserved costs) be taxed and reimbursed in accordance with subsection 466(2) of the Corporations Act 2001 (Cth). I certify that the preceding eighty-one (81) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Barker. Associate: Dated: 31 March 2010