MCG Quarries Pty Ltd v Offermans
[2015] QCA 103
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- MCG Quarries Pty Ltd v Offermans[2015] QCA 103
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MCG Quarries Pty Ltd v Offermans[2015] QCA 103
MCG Quarries Pty Ltd v Offermans[2015] QCA 103
CITATION: | MCG Quarries Pty Ltd v Offermans & Ors [2015] QCA 103 |
PARTIES: | MCG QUARRIES PTY LTDACN 119 739 758 |
FILE NO/S: | Appeal No 9729 of 2014 DC No 189 of 2014 |
DIVISION: | Court of Appeal |
PROCEEDING: | Application for Leave s 118 DCA (Civil) |
ORIGINATING COURT: | District Court at Townsville – Unreported, 16 September 2014 |
DELIVERED ON: | 16 June 2015 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 21 April 2015 |
JUDGES: | Margaret McMurdo P and Holmes and Gotterson JJA Separate reasons for judgment of each member of the Court, each concurring as to the orders made |
ORDERS: |
|
CATCHWORDS: | APPEAL AND NEW TRIAL – APPEAL – GENERAL PRINCIPLES – INTERFERENCE WITH JUDGE'S FINDINGS OF FACT – FUNCTIONS OF APPELLATE COURT – WHERE FINDINGS BASED ON DOCUMENTARY EVIDENCE – where Messrs Offermans and Brennan were appointed voluntary administrators of the second respondent on 24 March 2010 – where on the subsequent winding up of the second respondent Messrs Offermans and Brennan were appointed its joint and several liquidators by creditors – where proceedings were commenced in the Supreme Court of Townsville on 11 February 2013 against some four parties – where the liquidators were the first plaintiff and the second respondent was the second plaintiff – where the proceedings were to recover payments that the second respondent had made to each of the parties separately within the six month period prior to the relation-back day, 24 March 2010 – where the proceedings against three of the parties were settled – where the fourth defendant in the proceeding was MCG Quarries Pty Ltd, the applicant in this appeal – where the applicant defended the claim against it for $106,186.70 – where the claim against the applicant was tried over two days in September 2014 in the District Court at Townsville – where on 16 September 2014 judgment was given in favour of the respondents – where the court declared that the second respondent was insolvent for the whole of the period between 30 September 2009 and 24 March 2010 – where the court ordered the applicant pay the first respondents or alternatively the second respondent $106,186.70 – where on 28 October 2010 the learned primary judge ordered that the applicant pay interest of $32,020.38 to the respondents on the judgment amount and that the applicant pay the respondents’ costs of the proceedings (excluding those relating solely to the claims against the other three parties) on the indemnity basis – where by virtue of the provisions of s 118(3) of the District Court of Queensland Act 1967 the applicant might appeal against the judgment of the District Court by leave of this Court only – where on 14 October 2010 the applicant filed an application for leave to appeal the judgment given against it on 16 September 2014 – where the second respondent was a provider of earthworks services to the mining sector – where the applicant is a supplier of quarry materials – where the second respondent was a customer of the applicant – where between April and July 2009 the applicant supplied quarry materials to the second respondent for $156,186.70 – where $50,000 was paid to the applicant by the second respondent in April 2009 – where the first respondents sought an order under s 588FF(1)(a) of the Corporations Act 2001 (Cth) directing the applicant pay the amounts of $25,000 and $81,186.70 to them on the basis that those monies were amounts paid under a voidable transaction as defined in s 588FE – where the basis for the first respondents’ claim was that each payment was an insolvent transaction as they were unfair preferences for the purposes of s 588FA – where the liquidators’ case relied upon the presumption in s 588FE(3) – where by virtue of that provision, if the liquidators proved that the second respondent was insolvent at 30 September 2009 then it is to be presumed that it was insolvent throughout the period beginning on that date and ending on 24 March 2010, a period which included the two dates of payment in November 2009 – where the applicant argued that the second respondent was able to pay its debts when they became due and owing at the time when the two payments to the applicant were made – where the learned primary judge had to determine whether the second respondent was insolvent at the time when the two payments were made – where the second issue for determination arose from the applicant’s reliance, in the alternative, upon s 588FG(2) – where the applicant pleaded that it received the two payments in good faith and that at the times it received them, it did not know that the second respondent was insolvent; that it had no reasonable grounds to suspect and did not suspect that the second respondent was insolvent; and that a reasonable person in its circumstances would have had no grounds for so suspecting – where the liquidators denied that the applicant had no reasonable grounds to suspect that the second respondent was insolvent at the relevant times – where the two issues identified in the proposed Notice of Appeal were whether the second respondent was insolvent at 30 September 2009 and whether the trial judge erred in his findings that the applicant’s defence under s 588FG(2) was unsuccessful – whether the application for leave to appeal under s 118 of the District Court of Queensland Act 1967 (Qld) should be granted Corporations Act 2001 (Cth), s 588FA, s 588FC, s 588FC(a)(i), s 588FE, s 588FE(2), s 588FE(3), s 588FE(3)(b), s 588FF, s 588FF(1)(a), s 588FG(2) District Court of Queensland Act 1967 (Qld), s 118(3) Income Tax Assessment Act 1936 (Cth), s 204(1)(a), s 204(1A)(a) Smith v Offermans [2015] QCA 55, cited |
COUNSEL: | M D Martin QC for the applicant/appellant C C Heyworth-Smith QC, with A W Collins, for the respondents |
SOLICITORS: | Mills Oakley for the applicant/appellant Macrossan & Amiet Solicitors for the respondents |
[1] MARGARET McMURDO P: I agree with Gotterson JA’s reasons and proposed orders.
[2] HOLMES JA: I agree with the reasons of Gotterson JA and the orders he proposes.
[3] GOTTERSON JA: Mr Dennis Offermans and Mr Michael Brennan were appointed voluntary administrators of Lindley Mining Maintenance Pty Ltd (“Lindley Mining”) on 24 March 2010. On the subsequent winding up of that company on 4 May 2010, they were appointed its joint and several liquidators by the creditors.
[4] As liquidators, Messrs Offermans and Brennan commenced proceedings in the Supreme Court of Townsville on 11 February 2013 against some four parties. The liquidators were the first plaintiff and Lindley Mining was the second plaintiff. The proceedings were to recover payments that Lindley Mining had made to each of the parties separately within the six month period prior to the relation-back day, 24 March 2010. The proceedings against three of the parties were settled.
[5] The other party was MCG Quarries Pty Ltd (“MCG”) which was the fourth defendant in the proceedings. MCG defended the claim against it for $106,186.70. That amount was comprised of an amount of $25,000 paid to it by Lindley Mining on 7 November 2009 and an amount of $81,186.70 similarly paid on 17 November 2009. The claim against MCG was tried over two days in early September 2014 in the District Court at Townsville.
[6] On 16 September 2014, judgment was given in favour of the plaintiffs.[1] The court declared that Lindley Mining was insolvent for the whole of the period between 30 September 2009 and 24 March 2010, and ordered that MCG pay the first plaintiff, or alternatively, the second plaintiff, $106,186.70. Later, on 28 October 2010, the learned primary judge ordered that MCG pay interest of $32,020.38 to the plaintiffs on the judgment amount and that MCG pay the plaintiffs’ costs of the proceedings (excluding those relating solely to the claims against the other three parties) on the indemnity basis.
[7] By virtue of the provisions of s 118(3) of the District Court of Queensland Act 1967, MCG might appeal against the judgment of the District Court by leave of this Court only. On 14 October 2010, MCG filed an application for leave to appeal the judgment given against it on 16 September 2014.
The issues at first instance
[8] Lindley Mining was a provider of earthworks services to the mining sector, principally in the Bowen-basin region. MCG is a supplier of quarry materials. Lindley Mining was one of its valued customers. Between April and July 2009, MCG supplied quarry materials at a total price of $156,186.70 to Lindley Mining. Some $50,000 of the total price was paid by Lindley Mining in April 2009.
[9] In the proceedings, the liquidators sought an order under s 588FF(1)(a) of the Corporations Act 2001 (Cth) directing MCG to pay the amounts of $25,000 and $81,186.70 to them on the basis that each of the $25,000 and $81,186.70 paid by Lindley Mining to MCG was an amount paid under a voidable transaction as defined in s 588FE of the Corporations Act. The payment of each of amount was a voidable transaction, it was alleged, because it was an insolvent transaction as defined in s 588FC of the Corporations Act and was entered into during the six months ending on the relation-back date.[2] The basis of the liquidators’ claim that each payment was an insolvent transaction was that it was an unfair preference for the purposes of s 588FA of the Corporations Act and that Lindley Mining was insolvent when the transaction was entered into.[3]
[10] In paragraph 13 of their amended statement of claim,[4] the liquidators alleged that at the time the payments were made, Lindley Mining was insolvent and unable to pay all its debts when they became due and payable. The particulars of the state of insolvency pleaded were:
(a) a deficiency of assets over liabilities of $384,209 at 30 September 2009;
(b) cash flow insolvency at 30 September 2009 and at all times thereafter; and
(c) balance sheet insolvency from 30 June 2009 and at all times thereafter up to 24 March 2010.
The fourth particular alleged was that “further detailed particulars are contained in the Solvency Report of Michael Brennan dated 14 June 2012 previously provided to the Defendants”.
[11] These particulars are not specific to the state of solvency of Lindley Mining at 7 or 17 November 2009, the dates of payment. They are principally concerned with the state of solvency at 30 September 2009. That date was just within the six month period ending on the relation-back day. The liquidators’ case relied upon the presumption in s 588E(3) of the Corporations Act. By virtue of that provision, if the liquidators proved that Lindley Mining was insolvent at 30 September 2009,[5] then it is to be presumed that it was insolvent throughout the period beginning on that date and ending on 24 March 2010, a period which obviously included the two dates of payment in November 2009.
[12] By paragraph 7 of its defence,[6] MCG denied the allegations in paragraph 13 of the statement of claim on the basis that Lindley Mining was able to pay its debts when they became due and owing at the time when the two payments to it were made. MCG pleaded that Lindley Mining’s ability to do so could be inferred from its profit and loss statements for the quarters ending 30 September and 31 December 2009 and for the financial year ending 30 June 2009 as prepared by Lindley Mining’s external accountant and tax agent, The Karm Group and also from Mr Brennan’s Solvency Report dated 14 June 2012. Thus, these paragraphs in the pleadings defined one of the two principal issues to be determined by the learned primary judge. This was the issue whether Lindley Mining was insolvent at the time when the two payments were made.
[13] The second issue for determination arose from MCG’s reliance, in the alternative, upon s 588FG(2) of the Corporations Act. By paragraph 8 of its defence, MCG pleaded that it received the two payments in good faith[7] and that at the times it received them, it did not know that Lindley Mining was insolvent; that it had no reasonable grounds to suspect and did not suspect that Lindley Mining was insolvent; and that a reasonable person in its circumstances would have had no grounds for so suspecting.[8] If these pleaded facts were proved, even if the liquidators proved insolvency, s 588FG(2) would operate to constrain the court from making an order under s 588FF in their favour with respect to the two amounts.
[14] By their reply,[9] the liquidators denied that MCG had no reasonable grounds to suspect that Lindley Mining was insolvent at the relevant times.[10] In support of a positive allegation that MCG did have such grounds, the liquidators relied on the following particulars:
(a) that at those times, MCG’s invoices to Lindley Mining “were considerably outside” MCG’s normal terms of trade;
(b) MCG’s representatives, including its Chief Financial Officer, Matthew Kren, and its Quarry Manager, Bill McMillan, were in regular communication with Lindley Mining “chasing” payment of the outstanding debt; and
(c) Crystal Weaver advised MCG orally and by email dated 19 August 2009 that Lindley Mining was unable to pay MCG’s outstanding invoices.[11]
Resolution of the issues at first instance
[15] The liquidators relied on the Solvency Report dated 14 June 2012.[12] Mr Brennan, the author of it, testified. Chapter 7 of the report is headed: “Determination of Solvency: Ability to Meet Debts Due and Payable” and begins with the unexceptionable observation that “the test for solvency is essentially a cash flow test as to whether (Lindley Mining) was able to pay its debts as and when they fell due”.[13] Paragraph 7.2 in Chapter 7 concluded with a submission that as at 30 September 2009, Lindley Mining held insufficient resources to meet its debts due and payable.[14]
[16] The submission is based upon an immediately preceding Table 7 which recorded that at that date, Lindley Mining had a deficiency of assets available to meet debts due and payable of $384,209. This was the deficiency pleaded in paragraph 13(a) of the statement of claim. Table 7 is in the following form:
“
24/03/2010 | 31/12/2009 | 30/09/2009 | |
CURRENT ASSETS | $ | $ | $ |
Cash on Hand | 11,356 | 220,455 | 115,089 |
Trade Debtors | 454,563 | 73,627 | 410,717 |
Directors’ Loan (not recoverable) | 0 | 0 | 0 |
Livestock | 149,116 | 186,182 | 186,182 |
Current Assets Available to Meet Debts Due and Payable | 615,035 | 480,264 | 711,988 |
DEBTS DUE AND PAYABLE | |||
Trade Creditors (60 days plus) | 609,195 | 513,892 | 254,167 |
GST/PAYG Payable (ATO RBA Account) | 354,158 | 321,579 | 312,714 |
Income Tax Payable | 216,471 | 216,471 | 357,450 |
Employee Entitlements Liabilities (Superannuation) | 41,240 | 29,471 | 55,007 |
Payroll Tax | 73,275 | 70,661 | 45,637 |
Equipment Finance due in the following Month | 66,850 | 66,850 | 62,255 |
Equipment Finance due in the following Month | 8,967 | 8,967 | 8,967 |
Total Debts Due and Payable | 1,370,156 | 1,227,891 | 1,096,197 |
SURPLUS (DEFICIENCY) OF ASSETS AVAILABLE TO COVER DEBTS DUE AND PAYABLE | (755,121) | (747,627) | (384,209) |
”[15]
[17] Chapter 8 of the solvency report follows immediately upon Paragraph 7.2. In it, the author states that his assessment that Lindley Mining was insolvent from “at least 30 September 2009 and remained insolvent thereafter” could be tested and supported by reference to the presence of other indicia. It is clear from this statement that Table 7 is the basis of his conclusion of insolvency at 30 September 2009. It must be said that the other indicia which he thereafter mentions in Chapter 8, are, in themselves, inconclusive of insolvency at 30 September 2009. They consist of the fact that payments to the four defendants in the proceedings were paid outside terms of trade on their printed invoices and a practice on Lindley Mining’s part of paying creditors in “round amounts”, rather than discrete invoiced amounts.
[18] Counsel for MCG cross-examined Mr Brennan with respect to Table 7. As to the column for 30 September 2009, the topics of cross-examination included the non-recognition of any amount in Trade Debtors for a debt owned by Altius Mining Pty Ltd of about $1.1m[16] and the income tax payable debt of $357,450 which is considered later in these reasons. At a broader level, it was put to Mr Brennan that the accounts prepared by The Karm Group were not sufficiently reliable for use in an assessment of Lindley Mining’s solvency.
[19] Notwithstanding these challenges, the learned primary judge accepted Mr Brennan’s evidence. He did so for the following reasons:
“Mr Brennan's evidence is uncontradicted by any other expert evidence. He struck me as a careful person, who was ready to accept the limitations that were identified to him, but maintained that he was nonetheless able to reach a conclusion about the company based on the material that he did have. I accept his evidence, not only because of the careful and restrained way in which it was given, but also because it seems to me consistent with the email traffic, and with Ms Lemm’s experience in her employment. In addition, I note Mr Lindley’s view was that the unpaid debt dating from 2008 was what ultimately caused the demise of the second plaintiff.”[17]
[20] The unpaid debt of which his Honour spoke was that owed by Altius Mining Pty Ltd to which I have referred. Ms Lemm’s experience had been summarised earlier in the reasons in these terms:
“Krystelle Lemm was called in the plaintiff’s (sic) case. She was employed by the second plaintiff for about 12 months before the company went into administration. Her duties were of an accounting and administrative nature, and she recalled that the MYOB accounting system was introduced at about the time she started to work for the company. She said that she had regular conversations concerning outstanding accounts, and that there were creditors other than MCG Quarries who were chasing up the second plaintiff. She said, and I quote:
Basically it didn’t start out too bad. By the end of my appointment [indistinct] I was getting phone calls, like copious phone calls per day, looking for payments. Most I would shoot through to their home fax number or email, just so they knew about them because obviously I didn’t make payments or anything like that.
She was not cross-examined.”[18]
[21] Having accepted Mr Brennan’s evidence, the learned primary judge made the finding of insolvency at 30 September 2009 on which the declaration as to insolvency between that date and 24 March 2010 ultimately made was based.
[22] MCG also sought to displace the application of presumption of insolvency which underpinned the declaration by proving that at the dates on which it was paid in November 2009, Lindley Mining had a substantial cash-at-bank asset, having been paid a substantial amount by a customer, Arrow Energy Ltd. In his reasons, the learned primary judge noted that whilst he accepted that Lindley Mining did receive a large payment in November 2009 which enabled it to make many payments to its creditors, that fact alone could not be an indicator that insolvency had ceased “when taken with the evidence of Ms Lemm and the fact that the company progressed to voluntary administration in March of 2010”.[19] His Honour held that the statutory presumption of insolvency at the dates of payments was not displaced.[20]
[23] The learned primary judge then turned to MCG’s defence based on s 588FG(2). He observed that there was no suggestion that MCG did not become party to the transactions in good faith or that it had not provided valuable consideration under them. The issues for determination were whether it had reasonable grounds to suspect that Lindley Mining was insolvent at the times it received the payments or whether a reasonable person in its position would have had such grounds.[21]
[24] His Honour resolved those issues against MCG for the following reasons:
“The test is an objective one. An assessment must be made according (to) the standards of the ordinary reasonable person. The fact that an expert analyst, a barrister, a solicitor, or even a Judge might say there was good reason to think the company was insolvent, or to suspect that it was, is not enough.
The matters must be determined by viewing all of the facts and circumstances, and without the benefit of hindsight. Factors which tend to support the argument that the company had reasonable grounds to suspect that the second plaintiff was insolvent include the length of time that the debt had been outstanding, the lack of response made to reasonable requests made for payment, the fact that promises of payment were made and not kept, and the fact that the best assurance able to be offered on behalf of the second plaintiff was that payment would be made at some indefinite time in the future when funds were received by the second plaintiff in respect of other work. I also note that the email traffic in exhibit 15 is consistent with growing concern about the ability of the second plaintiff to keep its promises and make the payments.
By November the defendant had real concerns about whether it would be paid at all. It was discussing legal action. No payment at all had been received for some time when the defendant decided to threaten legal action. I infer from the emails that followed the making of the payments, that the defendant had suspended supply to the second plaintiff at some time prior to the 2nd of November 2009. I think it is also significant that Mr McDonald was not called, and if the email traffic is not to be taken as having its natural meaning, then he is the witness who might've explained why that is so. Absent any evidence from him, I conclude that the company cannot demonstrate that it did not have reasonable grounds to suspect that the second plaintiff was insolvent at the time it received each of the payments.
All of the matters that I have mentioned demonstrate that the company did have reasonable grounds to suspect that the company was insolvent, but I note that the onus of proof requires that the defendant should prove the negative. Further, all of the circumstances that I identify would've alerted a reasonable person in the position of the defendant to at least a suspicion, and - and perhaps more, that the company was insolvent, and so it cannot be said that a reasonable person would not have had grounds for suspecting that the company was insolvent. …”[22]
The defence failed accordingly.
The grounds of appeal
[25] The grounds of appeal on which MCG would rely if leave to appeal is given, are set out in a proposed notice of appeal exhibited to the affidavit of its solicitor sworn on 14 October 2010.[23] The grounds are these:
“(a)The learned trial judge erred in law and in fact in finding that the second respondent was insolvent on and from 30 September 2009 until the commencement of the winding up.
(b)The learned trial judge erred in fact and law (in finding) that the second respondent was indebted to the ATO in the sum of $357,450 as at 30 September 2009 when an agreement had been entered into to pay such debt by installments. (sic)
(d)The learned trial judge erred in law and in fact finding that the second respondent was insolvent as at 2 and 17 November 2009 when:-
(i)at the time the payments were made it had $114,000 and $700,000 in the bank respectively;
(ii)for the financial year ended 30 June 2009 it had operated at a profit of approximately $510,000;
(iii)for the periods ended 30 September and 31 December 2009 it operated at a profit of approximately $187,000 and $42,000 respectively;
(iv)there was no evidence of any creditor having commenced or threatened to commence legal proceedings to recover outstanding debts;
(v)no creditor had stopped supply to the company;
(vi)no statutory demands had been issued to the company; and
(vii)save for the ATO the company had not entered into any other payment arrangements with creditors.
(e)The learned trial judge erred in law and in fact (in) finding that the second respondent was insolvent when the unchallenged evidence of the liquidator, Mr Brennan was that there was insufficient financial records to form a concluded view about the financial position of the second respondent.
(f)The learned trial judge erred in law in holding that a company is insolvent when it cannot pay its debts as they become due from its own money.
(g)The learned trial judge erred in fact and law in failing to find that the appellant and a reasonable person in the position of the appellant had no grounds to suspect the second respondent was insolvent on 7 and 17 November 2009.
(h)The learned trial judge erred in law and in fact in finding that the appellant had suspended supply to the second respondent prior to 2 November 2009.
(i)The learned trial judge erred in law and in fact in drawing an adverse inference against the appellant at the trial for failing to call Mr William McDonald as a witness when the chief financial officer of the appellant, Mr Kren was called as a witness.
(j)The learned trial judge erred in law and in fact in finding that emails exchanges between officers and employees of the appellant supported the conclusion that the appellant or a reasonable person in the position of the appellant had grounds to suspect the second respondent was insolvent.”[24]
(There is no Ground (c).)
[26] Grounds (a) to (f) concerned the finding of insolvency at 30 September 2009 and the associated finding that the presumption of continuing insolvency thereafter had not been displaced. The other grounds relate to the unsuccessful s 588FG(2) defence. As it will be highly influential in deciding whether there should be a grant of leave to appeal, I propose to consider now the viability of these grounds of appeal. It is convenient to do so on an issues basis.
Appeal against the finding of insolvency at 30 September 2009
[27] In the course of argument of the appeal, attention focused upon Table 7 and, in particular, three items listed as debts due and payable at 30 September 2009.[25] They are:
$ | |
Income Tax Payable | 357,450 |
Equipment Finance due in the following month | 62,255 |
WorkCover Premium due in the following month | 8,967 |
In sum, these items total $428,672, an amount considerably in excess of deficiency of assets at 30 September 2009 shown in Table 7 ($384,209). If these items, or just the two larger ones of them, were not debts due and payable at 30 September 2009 and thus not properly included in the table, a surplus of assets over liabilities would be shown for that date.
[28] The two items described as “due in the following month” ($62,255 and $8,967) could not, by virtue of that description, have been due and payable at 30 September 2009. On that basis, it could not have been correct to include them in the table as due and payable at that date.
[29] The position with regard to the item “Income Tax Payable” is more complicated. In a note in the Solvency Report, Mr Brennan stated that he had sourced this item from the financial statements prepared by The Karm Group “and made relevant adjustments for the provisions for income tax calculated”.[26] This statement is apt to put in question whether at 30 September 2009, the amount of $357,450 was a provisional amount for an income tax liability or liabilities that might thereafter become due and payable or whether it was, in fact, an amount due and payable for income tax at that date. There are strong indications in the Solvency Report and its appendices that it was the former rather than the latter. They are as follows.
[30] Table 7 lists two federal tax-related items as debts due and payable. For 30 September 2009, they are “Income Tax Payable” and a separate amount of $312,714 described as “GST/PAYG Payable”. Appendix HI to the report is described as “ATO Running Balance Account from 16 May 2006 to 24 April 2010”.[27] This appendix shows a running balance for Lindley Mining at 26 September 2009 of $312,716.16.[28] No additional indebtedness for $357,450, or otherwise, is shown. Consistently with this appendix, Paragraph 8.12 in Chapter 8 of the Solvency Report lists overdue taxes at 30 September 2009 as being $358,351 comprised of the amount of $312,714 described as “ATO Running Balance Account” and the Table 7 item “Payroll Tax” of $45,637.[29]
[31] Next the financial accounts for Lindley Mining for the year ended 30 June 2009 prepared by The Karm Group[30] includes as a balance sheet current liability an amount for income tax of $213,411.[31] Note 3 to these accounts discloses that that amount is derived after adjustments to an amount of $226,493, there described as “prima facie income tax payable on operating profit at 30%”.[32] This description implies that neither the $226,493 nor the derivative $213,411, were due and payable at 30 June 2009.
[32] This implication is strengthened by reference to the income tax return for Lindley Mining for the year ended 30 June 2009 which is attached to the financial accounts for that year.[33] The tax return is dated 14 December 2009. It contains an estimate of the income tax payable as being $217,177.60. Income tax for the year ended 30 June 2009 would have become due and payable 21 days after a notice of assessment had been given to MCG.[34] That evidently could not have occurred before 14 December 2009.
[33] Further, the financial accounts for Lindley Mining for the period from 1 July 2009 to 30 September 2009 prepared by the The Karm Group[35] appear to continue the treatment as a current tax liability of income tax prima facie payable on operating profit earned during the accounts period, notwithstanding that the income tax was not then due and payable. In these financial accounts, the income tax liability is increased over the quarter by $27,519, an amount approximating 30 per cent of the operating profit for the quarter of $91,790.[36] The amount of $27,519 could not have been due and payable as assessed income tax at 30 September 2009.
[34] The evidence of Mr Brennan on this issue was inconclusive. In cross-examination, he gave the following evidence with respect to the item:-
“Okay. And then you’ve got an item of income tax payable on 30 September 2009 of $357,450; do you see that?---Yes.
For what period would that relate? Is that an end of financial year income tax liability, or is that just a pay as you go quarterly BAS payment?---That income tax – that income tax payable would be for outstanding income tax for the company. The PAYG withholding would be included in the RTA – in the amount above it, the 312,000. So that would have been based upon previously-declared profit.
All right. And we see, if we go back to the table at page 5.1 on page 6, that the profit associated with – sorry – the income tax associated with the profit for 30 June 2009 is $213,441; is that right? That’s what you’ve recorded. That’d be the income tax payable on a profit of 509,797; is that correct?---Yes.
All right. Now, that figure of 213,441: is that in any way incorporated or referable to the 357,450 we see on page 13 at paragraph 7.2?---I’ll just check the account. The – sorry. So the $213,441 is taken from the accountant’s report on page – that’s – and the annexure is to the report 44 of 203. Then look at the – that 213,000 should be in the 357,450, I would – I would suggest.
But why is that a greater figure as at 30 September 2009 then 213- - -?---It would reflect outstanding tax payable at the time.
But that figure of 357,450: is that not recorded in the books of account of the company?---I just have to look at the - - -
If we look at page 45 of 203, which is under tab B to your report, for 2009, there’s a - - -?---Sorry, what page was that?
45 - - -?---Yep.
- - - of 203, Mr Brennan? ---Yep.
Tab B, Current Tax Liabilities: 434,879. But is that a combination of outstanding GST, PAYG and income tax?---I don’t know. In terms of what the – what that figure represents, the $434,879 - - -
Well - - -?---Because I – I’m – I didn’t derive it, so in terms of - - -
Well, where did you get the figure of 357,450 from? ---I’d have to check my working papers, to be honest. Off the top of my head, I couldn’t tell you. It should be – it should represent the amount that was payable in taxation at the time as at the 30th of September 2009. The exact composition of it: I’d have to go back through my working notes.”[37]
[35] The matter was not clarified in re-examination. During the hearing of the appeal, the court was not taken to material in the record or otherwise provided with an explanation which could have justified a conclusion that the amount of $357,450 had fallen due and was payable at 30 September 2009.
[36] It remains to note that in Paragraph 8.6 of the Solvency Report, the author states that Lindley Mining entered into two payment arrangements with the Australian Taxation Office on or around 7 October 2009 and at 28 January 2010, and subsequently breached both of them.[38] Neither arrangement is detailed in the report. On the evidence, the arrangement entered into first must have been in respect of the then owing, but unpaid, $358,351, or one of its two components.[39] It could not have been in respect of assessed income tax then owing for the year ended 30 June 2009. It is possible that the later arrangement was in respect of income tax for that year on the footing that income tax had by then been assessed based on the income tax return dated 14 December 2009.[40]
[37] In summary, the inclusion of these three items in Table 7 as debts due and payable at 30 September 2009 was not justified as correct. After adjustment for them, there is a surplus of current assets over debts due and payable at that date. The surplus is at odds with the particular pleaded in paragraph 13(a) of the amended statement of claim of an asset deficiency. It also undermines the particular pleaded in paragraph 13(b) thereof of cash flow insolvency at that date, in so far as that is predicated upon an inability as to pay as debts, an amount which include those three items.
[38] In my view, upon an analysis of it that paid due regard to the appendices, Table 7 could not establish that a deficiency of current assets to meet debts due and payable existed at 30 September 2009. Nor could it support the statement in Paragraph 7.2 of the Solvency Report that at 30 September 2009, Lindley Mining held insufficient resources to meet its debts then due and payable. I have reached that view without having to resolve whether or not some amount should have been included in Table 7 as a current asset in respect of the debt owed by Altius Mining Pty Ltd for which $250,000 was ultimately recovered.
[39] Given this and the inconclusiveness of the other indicia referred to in Chapter 8 of the Solvency Report to which I have referred, in my view, it was not open to his Honour to have found on the evidence of the Solvency Report that Lindley Mining was insolvent at 30 September 2009. The declaration of insolvency from that date based on the statutory presumption ought not to have been made.
[40] During the hearing before this Court, an issue emerged as to whether the matters to which I have referred arose on the pleadings. The parties made written submissions on the issue after the hearing. As noted, the liquidators alleged that Lindley Mining was insolvent when each of the payments was made to MCG. However, none of the first three particulars of the allegation which evidently were drawn from the Solvency Report, was referenced specifically to Lindley Mining’s financial state at either of those dates. The same may be said of the fourth particular which, in effect, adopted the “further detailed particulars” in the Solvency Report. MCG denied the allegation but did not plead to each of the particulars one by one. However, it pleaded as a particular of its denial that Lindley Mining was able to pay its debts when they became due and owing and for that, relied on the Solvency Report and the accounts prepared by The Karm Group which were appendices to the report.
[41] It is clear from the pleadings that each party relied on the Solvency Report but for conflicting allegations with respect to insolvency. The pleadings put in issue whether or not the Solvency Report established insolvency of Lindley Mining. It was unnecessary, in my view, for MCG to have pleaded further in order to put that in issue. The liquidators could not have been taken by surprise at trial that the submission at Paragraph 7.2 of the Solvency Report was challenged.
[42] That this is so is reflected relevantly in the cross-examination of Mr Brennan as to the appropriateness of the inclusion of the $357,450 as a debt due and payable at 30 September 2009,[41] and the submission by counsel for MCG against inclusion of it,[42] to neither of which objection was taken. Moreover, the precise reason for the non-inclusion of that amount is one that is discerned by a studied consideration of the Solvency Report including its appendices, rather than one that is dependent upon factual matters known to MCG which it could have pleaded.
Other issues on appeal
[43] In light of the conclusion I have reached on the proof of insolvency issue, it is neither necessary nor appropriate to consider the displacement of the presumption of insolvency issue or the availability of the s 588FG(2) defence issue. Both of those issues have potential roles to play only if insolvency at the relevant date is proved.
Disposition
[44] The viability of the appeal against the finding of insolvency warrants the grant of leave to appeal. I would allow the appeal. I consider that the declaration made by the learned primary judge ought to be set aside. There is no basis in the evidence for making, nor was it suggested that this Court should make, a substitute declaration of insolvency at the dates of payment to MCG.
[45] For lack of proof that Lindley Mining was insolvent when the payments were made to MCG, the liquidators failed to establish that they were insolvent transactions and hence voidable transactions. The order for payment of the sum of $106,186.70 ought be set aside as also should be the orders for payment of interest and costs of the proceedings. I would invite the parties to make written submissions as to costs of the proceedings under appeal, the application for leave and the appeal after delivery of the reasons for judgment.
Orders
[46] I would propose the following orders:
1. Grant leave to appeal.
2. Allow the appeal.
3. Set aside the declaration and Order 2 made on 16 September 2014 and the orders made on 28 October 2014.
4. Order in lieu thereof, that the claim against the appellant be dismissed.
5. Direct that the parties file and serve written submissions as to costs of the proceedings under appeal, the application for leave to appeal and the appeal in accordance with Practice Direction No 3 of 2013 para 52(4) within seven days of the publication of these reasons.
Footnotes
[1] AB584-5.
[2] See s 588FE(2).
[3] See s 588FC(a)(i).
[4] AB618-622.
[5] A date within the 12 months ending on the relation-back day: s 588E(3)(b).
[6] AB567-571.
[7] Paragraph 8(a).
[8] Paragraph 8(d).
[9] AB572-573.
[10] Paragraph 2.
[11] Paragraph 2.
[12] Exhibit 1: AB127-338.
[13] AB138.
[14] AB139.
[15] AB139.
[16] Mr Brennan stated that nothing was allowed for it as it had been written-off as a bad debt for income tax purposes by 30 September 2009: AB28; Tr1-28 ll36-44. Some $250,000 was subsequently recovered in respect of this debt by the liquidators: AB29; Tr1-29 ll12-13.
[17] AB629; Tr6 ll41-48.
[18] AB627; Tr4 ll22-36.
[19] AB630; Tr7 ll11-12.
[20] AB630; Tr7 ll12-13.
[21] AB630; Tr7 ll15-20.
[22] AB630; Tr7 l22 – AB631; Tr8 l7.
[23] AB592-609.
[24] AB607-608.
[25] The other two columns in Table 7 stated the positions at 31 December 2009 and 24 March 2010, dates well after the dates of the payments to MCG.
[26] Note 10; AB136.
[27] AB144.
[28] AB277. The next entry is dated 18 November 2009.
[29] AB141.
[30] Appendix B; AB165-193.
[31] This is a component of an amount of $434,879 described in the accounts as “Current tax liabilities”: AB172.
[32] AB175.
[33] AB185-193.
[34] Income Tax Assessment Act 1936 (Cth) s 204(1)(a). If MCG had been a full self-assessment taxpayer, the income tax would have become payable no earlier than 1 December 2009: s 204(1A)(a).
[35] Appendix C; AB195-218.
[36] AB206, 200.
[37] AB32 Tr 1-32 l 16- AB 33 Tr 1-33 l 11.
[38] AB140.
[39] That amount was properly included as due and owing at 30 September 2009. The repayment arrangement was not entered into until after that date: compare Smith v Offermans [2015] QCA 55 at [51].
[40] Ground of appeal 2(b) appears to be premised on an understanding that the Table 7 item “Income Tax Payable” of $357,450 was the subject of an agreement to pay it by instalments. As explained in these reasons, it is apparent that Lindley Mining could not have entered any payment arrangement with the Australian Taxation Office on the footing that income tax in that amount was due and payable at 30 September 2009.
[41] AB32; Tr1-32 l16 – AB33; Tr1-33 l41.
[42] AB104; Tr2-47 ll34-39.