FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation v 24 x 7 Direct Pty Ltd (No 2) [2012] FCA 157

THE COURT ORDERS THAT:

1.    The application is dismissed.

2.    Devang Parikh is jointly and severally liable with 24 x 7 Direct Pty Ltd (ACN 117 975 185) (in liquidation) for the Deputy Commissioner of Taxation and Mr Peter Vince’s costs of and incidental to the application, such costs to be taxed in default of agreement.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    On 16 February 2012, Registrar Luxton ordered, inter alia, that 24 x 7 Direct Pty Ltd (in liquidation) (ACN 117 975 185) (the Company) be wound up (the Orders).

2    By an interlocutory process dated 22 February 2012, Devang Parikh, a director of the Company, applied to the Court (the Parikh Application) to set aside the Orders in circumstances where the debt owing to the petitioning creditor – the Deputy Commissioner of Taxation – remains unpaid and no compelling evidence demonstrating the Company’s solvency has been filed.

3    For the reasons that follow, I would dismiss the Parikh Application.

FACTS

4    The application to wind up was filed on 1 September 2011. The Deputy Commissioner of Taxation relied on the Company’s failure to comply with a statutory demand (s 459P) in bringing its application to wind up the Company: s 459P. The statutory demand served by the Deputy Commissioner of Taxation stated the debt owed to the Commissioner was $271,733.91. The debt was described as a running balance account deficit debt.

5    The application was listed for hearing on 20 October 2011. On that date, the application was adjourned until 5 December 2011. On 5 December 2011, Mr Sethi (the Company’s accountant) sought leave to appear on the Company’s behalf. The matter was then adjourned to 16 February 2012. On 16 February 2012, Mr Sethi again sought leave to appear on behalf of the Company notwithstanding that on 5 December 2011, Registrar Luxton had told Mr Sethi that a lawyer would need to appear at the next return date. On 16 February, the Orders were made.

6    The Company engaged its current solicitors on 18 February 2012. Two days later, the Company sought this review and a stay of the Orders. On the same day, 20 February 2012, Gray J dismissed the application for a stay as follows:

Peter Vince, the liquidator of 24 x 7 Direct Pty Ltd ACN 117 975 185 (“the company”), by his counsel undertakes to the Court that he will, until 4.15 pm on 28 February 2012 or further order:

a.    continue to conduct the business of the company as if the orders made on 16 February 2012 had not been made;

b.    for that purpose, permit Devang Parikh to have access to the company’s premises during normal business hours;

c.    save as required by law, refrain from informing the company’s creditors, customers and employees that the orders made on 16 February 2012 have been made, or that the company has been placed in liquidation; and

d.    to the extent that he does inform any person that the orders made on 16 February 2012 have been made, or that the company has been placed in liquidation, also inform each such person that there is pending an application to review the orders made on 16 February 2012, returnable on 28 February 2012.

Devang Parikh undertakes to the Court that he will not make any payment, or incur any liability, on behalf of the company without the consent in writing of the liquidator.

…

3.    The approval in paragraph 2 is conditional on Devang Parikh being personally responsible for the costs of the application that would otherwise be borne or ordered to be paid by 24 x 7 Direct Pty Ltd ACN 117 975 185.

4.    The application for review be filed and served on or before 22 February 2012 and be made returnable on 28 February 2012.

5.    The application for a stay of the orders made on 16 February be dismissed.

6.    On or before 24 February 2012, Devang Parikh provide to the liquidator a statement of the affairs of 24 x 7 Direct Pty Ltd ACN 117 975 185 in accordance with s 475 of the Corporations Act 2011 (Cth).

7    Consistent with the orders made by Gray J, a further application for review was filed on 22 February 2012. The application stated that it sought review under s 35 of the Federal Court of Australia Act 1976 (Cth) (FCA) and r 3.11 of the Federal Court Rules 2011. Those provisions are not the correct. The application should have referred to s 35A of the FCA and r 16.1 of the Federal Court (Corporations) Rules 2000.

8    One further fact should be noted. Mr Parikh filed an affidavit on 28 February 2012 in which he admitted that as of that date (28 February 2012), the Company’s debt to the Australian Taxation Office was approximately $452,597.08. Mr Parikh then stated in his affidavit that approximately only $398,115.78 was due and payable on 28 February 2012. It was common ground that the difference between the two amounts was the amount owing in relation to a Business Activity Statement (BAS) that the Company was due to lodge (and pay) on 28 February 2012. The Company did not adduce the BAS in evidence.

APPLICABLE LEGAL PRINCIPLES

9    Before turning to the applicable legal principles, a number of matters should be noted. First, the validity of the statutory demand served on the Company is not in dispute. The Company did not apply to set aside the statutory demand or otherwise satisfy the demand. Therefore, the Company is presumed insolvent: s 459C of the Corporations Act.

10    Second, it is open to the Company to prove solvency without obtaining leave under s 459S of the Corporations Act because solvency is not a ground on which it could have relied in an application to set aside the statutory demand: Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631 at [139] and Aust Yieh Stainless Pty Ltd v Horans Steel Pty Ltd [2000] NSWSC 244

11    What then are the applicable principles? Section 95 of the Corporations Act provides that:

A person is solvent if, and only if, a person is able to pay all the person’s debts, as and when they become due and payable.

12    In Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [43]-[44], Weinberg J stated:

In order to avoid an order that it be wound up in insolvency it must either rebut that presumption, and prove that it is solvent, or rely upon the exercise of the discretion of the Court pursuant to s 459A of the Corporations Law to decline to order that it be wound up.

The authorities which govern the operation of s 459G of the Corporations Law seem to me to establish the following propositions:

•    The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3); Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v Simionato Holdings Pty Ltd. (1997) 15 ACLC 477 per Mansfield J.

•    In order to discharge that onus the Court should ordinarily be presented with the “fullest and best” evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J.

•    Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J.

•    There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company’s assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (supra); Melbase Corporation Pty Ltd v Segenhoe Ltd [1995] FCA 1225; (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (supra) at 465-466.

•    The adoption of a cash flow test for solvency does not mean that the extent of the company’s assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (supra) at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J.

•    The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (supra) at 466-467.

…

See also Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2003) 45 ACSR 711 at [16]; Crema at [140]; Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd [2011] NSWSC 1279 at [57] and Point 2 Point Logistics Pty Ltd v Beingkool Transport Pty Ltd [2011] VSC 601 at [20].

13    Solvency is a question of fact to be ascertained from a consideration of the Company’s financial position taken as a whole. In doing so, the Court must have regard to commercial realities: Evans & Tate Premium Wines Pty Ltd v Australian Beverage Distributors Pty Ltd [2005] NSWSC 186 at [11] and the authorities cited.

ANALYSIS

14    The Company is presumed to be insolvent unless it proves, to the requisite civil standard, that it is able to pay all its debts as and when they become due and payable.

15    In my view, the Company has failed to demonstrate that it is solvent. The evidence adduced by the Company is not the “fullest and best” evidence of its solvency and the Company has failed to demonstrate that it will be able to pay its debts as and when they fall due.

16    First, the state of the evidence. The Company has had months to provide proper accounting records and evidence to support its claim to solvency. It has failed to do so. The accounts for the year ended 30 June 2011, 30 June 2010 and the period ending 16 February 2012 were only recently prepared by an accountant. None of the accounts were audited. The accounts were not only unaudited but qualified. The accounts were prepared using information provided by the director. There was no verification or validation of the information provided by the director. The accounts are little more than a collection of assertions: Ace Contractors at [44]; see [12] above.

17    A review of the accounts for the period ended 16 February 2012 raises more questions that it answers. The accounts list assets which did not appear in the accounts as at 30 June 2011 and which are unexplained. So, for example, under the heading “Trade and Other Receivables”, the notes to the financial accounts list two new items – “Other Loan & Advances” of $12,000 and “Shareholder’s & Director’s A/c” of $14,795. Neither item appeared in the 2011 accounts. Neither item was explained.

18    The principal asset of the Company was also listed under the heading “Trade and Other Receivables”. It was described as “One Touch Solution (India) Pvt Ltd – Advance. That asset was listed at $350,000. The evidence, at its highest, was that One Touch Solution (India) Pvt Ltd was an Indian company which provides call centres based overseas. Mr Parikh’s evidence was that:

In order for One Touch Solutions to provide services to the Company, One Touch Solutions required an ‘advance’ from the Company in the sum of AUD$350,000.

The loan has been made to One Touch Solutions between 2009 and 2011. Now shown to me at the time of swearing this Affidavit … is a true copy of a letter from One Touch Solutions and their accountant confirming this advance.

One Touch Solutions is not a related company of mine and I am not a director of it nor am I a shareholder of this company.

…

The debt owed by One Touch Solutions is due and payable upon request made by the Company.

The letter adduced in evidence was dated 21 February 2012.

19    During the course of the argument, it was noted that no contemporaneous record of the terms of the advance were adduced in evidence. Counsel for Mr Prikah then sought to hand up a copy of three agreements. The agreements collectively did not equate to $350,000. The stated repayment term was 120 days after written notice. I rejected their tender. This issue provides further evidence of the fact that the Company has failed to place before the Court the fullest and best evidence of solvency. Even the stated difference in repayment terms does not explain why the loan was not called in to enable the Company to meet its obligations to the Deputy Commissioner of Taxation. The statutory demand was served on the Company more than six months ago.

20    Cash flow statements or projections were only filed with the Court on 28 February 2012, the day of the hearing. They were stated to have been prepared on the following assumptions:

a)    The budget has been prepared exclusively for the benefit of the director. We do not accept responsibility to any other person for the contents of the Cash-Flow Budget.

b)    Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO). In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. …

c)    The director have lent (sic) interest free loan of A$300,000 in February 2012.

d)    The repayment will commence from July 2012 in 36 equated monthly instalments of A$8,333.00 each.

e)    Debtors are estimated for a week of services provided.

f)    Creditors are estimated for one month and paid in the following month.

g)    Salary include (sic) superannuation expenses and for convenience of preparing cash-flow assumed PAYG/Superannuation liability is paid along with payment of Salary.

The cash flow projections were unreliable.

21    There were significant deficiencies in the accounts. Moreover, no tax returns were adduced in evidence. The Commissioner adduced evidence that the Company’s BAS was due to be lodged and paid on 28 February 2012: see [8] above. The Company did not adduce the BAS in evidence. In other words, no evidence of the amount owing and the Company’s ability to meet that debt.

22    Next, the evidence disclosed that Mr Parikh proposed to seek to restore the liquidity of the Company by him borrowing funds from an unnamed third party and then on lending those funds to the Company. Mr Parikh described the proposed loan as “an interest free director’s loan to the Company, to be repaid within thirty-six months, repayable monthly”. The monthly repayments were $8,333 and were scheduled to commence in July 2012. Other than minor reductions in some expenses, no evidence has been adduced to demonstrate that the Company is capable (or how it could be capable) of meeting those monthly loan repayments. Moreover, Mr Parikh has adduced no evidence of the terms on which he was advanced the loan from the unnamed third party and the source or sources of income to make the repayments. Indeed, the Company has on seven prior occasions made payment arrangements with the Deputy Commissioner of Taxation and has on each occasion defaulted on those arrangements.

23    The evidence does not establish that the Company could pay all of its debts as and when they fell due. I do not believe that the Company has placed before the Court the fullest and best evidence of solvency. For those reasons, I do not accept that the Company has proved to the requisite standard that it is solvent.

ORDERS

24    The application will be dismissed with costs. Mr Parikh will be ordered to pay the Deputy Commissioner of Taxation and Mr Peter Vince’s costs of and incidental to the application. Counsel for the Liquidator also sought an order that if Mr Parikh is unable to satisfy the costs order, the Liquidator should not be forced to incur costs and the costs should be in the liquidation. In the circumstances, I consider that such an order is appropriate.

Associate:

Dated:    1 March 2012