Supreme Court New South Wales Medium Neutral Citation: In the matter of ACN 108 153 251 Pty Limited (formerly JFTA Pty Limited) (in liquidation) [2014] NSWSC 1903 Hearing dates: 4 September 2014 Date of orders: 04 September 2014 Decision date: 04 September 2014 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: The company was insolvent on 30 April 2011 Catchwords: CORPORATIONS – external administration – winding up – insolvency – proof of insolvency Legislation Cited: (Cth) Corporations Act 2001, s 588FE(3), s 588FGA (NSW) Uniform Civil Procedure Rules, r 28.2, r 28.5 Category: Principal judgment Parties: Sule Arnautovic in his capacity as joint and several liquidator of ACN 108 153 251 Pty Limited (in liq) (first plaintiff) Roderick Mackay Sutherland in his capacity as joint and several liquidator of ACN 108 153 251 Pty Limited (in liq) (second plaintiff) ACN 108 153 251 Pty Limited (formerly JFTA Pty Limited) (third plaintiff) ARA Electrical Engineering Services Pty Ltd (first defendant) ADR Group Pty Limited (second defendant) Australian Foundation Drilling & Shoring Pty Limited (fourth defendant) CCAPL Pty Limited (sixth defendant) Coates Hire Operations Pty Limited (seventh defendant) Direct Skills Pty Limited (ninth defendant) GW & ND McDonald (fourteenth defendant) Pump Affinity Pty Limited (twentieth defendant) Convault Australia Pty Limited (twenty-second defendant) Limeville Pty Limited (twenty-third defendant) Luxton Plant Pty Limited (twenty-fourth defendant) Representation: Counsel: S J Gallant (solicitor) (plaintiffs) Solicitors: ERA Legal (plaintiffs) Ashurst Australia (first, twenty-second, twenty-third defendants) Goodman Law (second defendant) Steven Parrott (fourth defendant) Madgwicks Lawyers (sixth defendant) Ledlin Partners (seventh defendant) Oldham Naidoo Lawyers (ninth defendant) Macpherson + Kelly Lawyers (twenty-fourth defendant) File Number(s): 2013/281026 Judgment (ex tempore) 1. HIS HONOUR: The first and second plaintiffs are the joint and several liquidators of the third plaintiff ACN 108 153 251 Pty Ltd, formerly known as JFTA Pty Ltd, having been appointed its voluntary administrators on 8 November 2011 and having become its liquidators on 20 February 2012 when, at the second meeting of creditors, the creditors resolved that the company be wound up and that the administrators become liquidators. In those circumstances, the winding up is a deemed creditors' winding up. 2. On 17 September 2013, the plaintiffs filed an originating process naming ARA Electrical Engineering Services Pty Ltd as defendant and seeking declarations that certain payments made by the company to ARA in June, July and August 2011 were voidable transactions and an order that ARA repay the proceeds of those payments to the company. 3. Together with that originating process, the plaintiffs filed on the same date an interlocutory process seeking leave to join a number of additional defendants to the proceedings. That interlocutory process was amended on 29 October 2013 and, on 16 December 2013, Slattery J made orders granting leave to join the additional respondents, to amend the originating process accordingly, and to file and serve a statement of claim. Consequently, by their amended originating process filed on 14 January 2014, the plaintiffs sought orders against 27 named defendants to recover the proceeds of alleged voidable transactions said to have been entered into by the company during the period May to November 2011. 4. Since the amended originating process and statement of claim were filed and served, the proceedings against many of the defendants have been resolved and concluded, by notice of discontinuance or by consent order. There now remain only 11 defendants. On 24 April 2014, the plaintiffs filed a notice of motion seeking an order that pursuant to Uniform Civil Procedure Rules, r 28.2, the question of whether the third plaintiff was insolvent on 30 April 2011 be determined as a separate question in these proceedings. On 26 May 2014, Black J heard and determined that motion and made the order sought . His Honour further directed that any defendant intending to take issue with the alleged insolvency of the third plaintiff and who wished to file and serve evidence on that question do so by 23 June and adjourned the proceedings to 30 June. His Honour noted the undertaking of the plaintiffs' solicitors to advise the defendants of the orders. The affidavit of Simon Gallant of 28 August 2014 proves compliance with that direction. 5. Of the remaining defendants who have filed defences, while generally speaking they do not admit the allegation of insolvency, none affirmatively denies it. 6. No defendant has filed or served any evidence on the question of solvency. 7. When the matter returned before his Honour on 30 June 2014, his Honour set down the separate question for hearing on 4 September 2014 and directed the plaintiffs to serve upon all defendants their submissions as to the separate issue of solvency and all evidence on which it relies on any defendant that indicates it will appear on request. Such defendants as intended to appear were directed to serve their evidence and submissions by 28 August 2014. Again, the affidavit of Mr Gallant proves compliance with the requirements of those directions so far as concerns the plaintiffs' obligations. 8. No defendant has responded, nor served evidence, nor appeared when the matter was called outside the Court at the commencement of the hearing this morning, nor communicated to the plaintiffs' solicitors any intention to appear. 9. One of the former defendants against whom the proceedings have since been discontinued, the Commissioner of Taxation, by interlocutory process filed on 24 February 2014, claimed a declaration pursuant to (Cth) Corporations Act 2001, s 588FGA, that the directors of the company were liable to indemnify it in respect of any loss and damage resulting from any order made against the Commissioner in these proceedings and consequential relief for the recovery of an amount reflecting that indemnity. It is not apparent whether that interlocutory process has been served on the directors, but the Court has been informed that an inquiry of the directors' solicitors has elicited that the dispute between the Commissioner and the directors is close to settlement and is unlikely to trouble the Court. As, however, it does not appear that the directors are in any formal way on notice of the present hearing, the determination of the separate question would not, in my view, bind the directors in the event that there were any proceedings brought or continued against them. I make those observations because, on an earlier occasion, one of the directors, on an application to set aside an examination summons, made clear that he intended to contest the question of insolvency. 10. The liquidation having occurred in the way I have described, consequent upon the prior appointment of voluntary administrators, the relation back date is the date on which the company appointed administrators, namely 8 November 2011. The transactions impugned in the proceedings occurred during the period May to November 2011. 11. The plaintiffs contend that the company was insolvent on 30 April 2011 and, if they establish that matter, then propose to rely on the presumption provided by Corporations Act, s 588FE(3), to establish insolvency thereafter until the relation back date. 12. On the question of insolvency, the plaintiffs have read an affidavit of one of the liquidators, Mr Arnautovic, of 17 September 2013, and an affidavit of an insolvency practitioner, Quentin James Olde, of 11 July 2013 which attaches that witness' expert report on the question of the company's solvency on the date in question. 13. In circumstances where the present application is not the subject of active opposition, it is not necessary to descend in too much detail to the matters to which Mr Olde refers in support of his opinion that the company was insolvent, within the meaning of the Corporations Act, on 30 April 2011. To my mind, however, the telling matters are as follows: 14. First, so far as the cash flow test is concerned, the company had a deficiency of cash resources of in excess of $2.5 million. Even allowing it the benefit of the availability of an informal $500,000 overdraft from the National Australia Bank, its available cash resources amounted to $918,000. At the same time, it had trade creditors aged 90 days or more of $3.448 million, producing a deficiency in cash of, as I have said, in excess of $2.5 million. In that respect, it also needs to be borne in mind that only trade creditors aged 90 days or more have been taken into account when it seems likely that the applicable trading terms were 75 days at best and potentially less. 15. Secondly, so far as the balance sheet test is concerned, after certain adjustments which Mr Olde explains, the company had total assets of $19.749 million, total liabilities of $23.6 million and a deficiency of assets against liabilities of $3.9 million. More significantly, current assets were $11.9 million against current liabilities of $19.4 million. That was after certain adjustments proposed by Mr Olde, and reflects a liquidity ratio of 0.62; but even without those adjustments, there was still a deficiency of current assets against current liabilities, and a significant one, where the liquidity ratio would have been 0.68. 16. Thirdly, the company had significant outstanding creditors, even beyond 90 days and, during the period January to June 2011, the amount of those aged creditors continued to increase, both in absolute terms and in terms of the percentage that they represented of total creditors. 17. Fourthly, the company's finance reports in April, May and June 2011 identified that the company was making special payments to critical suppliers and that those suppliers were demanding payment before continuing to supply goods or services. 18. As early as January 2011, it was recorded: Payments have been directed to suppliers critical to the supply of goods and services for current orders and jobs. 1. Similar notations appeared in the February, March, April, May, June financial reports. In some cases, observations were added to the effect: Daily management of the cash position continues with payments directed to suppliers critical to the operations of the business. 1. The April 2011 finance report recorded: A number of suppliers critical to the business are now demanding payment before they continue to supply more working. 1. The May 2011 report added: Demands for payment from suppliers is increasing with some suppliers commencing legal action. 1. Next, while the company prioritised payment of debts to employees and statutory bodies, including the Tax Office, ahead of debts owed to trade creditors and while, generally speaking, it complied with its tax obligations, there were, between January and November 2011, three payment arrangements entered into with the Australian Tax Office to pay outstanding tax liabilities by instalments. That is a classic indication of inability to pay debts as and when they fall due. 2. Then, as is explained in schedule 16 to Mr Olde's report, the company received numerous demands from creditors in respect of unpaid debts. These included statements of claim, suspensions of account, stop credit letters, letters of demand, creditors' statutory demands and lawyers' letters. The number of these and the total amount involved of in excess of $5 million is, given the overall asset and liability position, significant evidence of inability to pay debts as and when they fall due. 3. Finally, in the company's internal finance report for April 2011 identified that it was in breach of several of its banking covenants with the National Australia Bank. The matters to which I have referred establish clearly enough that the company was insolvent on 30 April 2011 and amply justify Mr Olde's opinion to that effect. 4. Accordingly, I am satisfied that the company was insolvent on 30 April 2011. The Court orders that: 1. The separate question be determined by answering the question, the company was insolvent on 30 April 2011. 2. Costs of the separate question be costs in the proceedings. 3. The proceedings be adjourned to Monday 22 September 2014 at 10am in the Corporations Judge directions list. 4. The plaintiff's solicitors notify each remaining defendant of the orders made today and the date, time and place of the adjourned hearing and the directions that will be sought on that occasion. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 04 February 2015