In the matter of Pacific Plumbing Group Pty Ltd (in liq)

By Amended Originating Process filed on 26 October 2023, the Plaintiffs, Mr Hurst as liquidator of Pacific Plumbing Pty Ltd (in liq) (“Company”) and the Company, bring claims against several defendants to seek to recover unfair preferences under ss 588FA, 588FC, 588FE and 588FF of the Corporations Act 2001 (Cth) ( “Act”). While the proceedings were commenced against nine defendants, they have been discontinued against four defendants and five defendants remain, of which only the First Defendant, Leidan Excavations Pty Ltd, has filed an appearance.

The Plaintiffs now seek to prove the Company’s insolvency over the period from 31 March 2020 up to and including 7 September 2020 (“relevant period”). I ordered that that question be determined as a separate question and this judgment concerns that separate question. The First Defendant did not attend the hearing or seek to lead evidence or make submissions in opposition to the Plaintiffs’ position as to this question. I have drawn on the helpful submissions of Mr May, who appears for the Plaintiffs, in this judgment.

The question whether the Company was insolvent in the relevant period is to be determined by reference to s 95A(1) of the Act. That section provides that a company is solvent if, and only if, it is able to pay all its debts, as and when they become due and payable. Section 95A(2) of the Act has effect that a person who is not solvent is insolvent. That definition adopts a “cash flow test" of insolvency which turns upon the income sources available to the company and the expenditure obligations that it has to meet, although a balance sheet test can provide context for the application of the cash flow test: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; (2001) 39 ACSR 305; [2001] NSWSC 621; Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124; (2003) 46 ACSR 126; [2003] VSC 123 at [370]ff (“ASIC v Plymin”), aff'd Elliott v Australian Securities and Investments Commission (2004) 10 VR 369; (2004) 48 ACSR 621; [2004] VSCA 54 and see Re Swan Services Pty Limited (in liq) [2016] NSWSC 1724 at [136]ff; SX Projects Pty Ltd (in liq) v Battaglia [2018] NSWSC 1830 at [20]ff and Re Bias Boating Pty Limited (recs and mgrs apptd) (in liq) [2018] NSWSC 1977 at [4]ff and Re Custom Bus Australia Pty Limited (in liq) [2021] NSWSC 1036 (“Custom Bus”) at [33]ff, on which I have drawn for this summary of the applicable principles.

In Quick v Stoland Pty Ltd (1998) 87 FLR 371; 157 ALR 615; (1998) 29 ACSR 130 at 138, Emmett J summarised the applicable principles as follows:

Mr May also refers to the observations of Gleeson JA in Re BBY Ltd (Receivers and Managers Appointed) (in liq) and BBY Holdings Pty Ltd (Receivers and Managers Appointed) (in liq) (2022) 409 ALR 558; [2022] NSWSC 29 at [156] that:

His Honour also there referred to the “indicia of insolvency” to which Mandie J referred in ASIC v Plymin and observed (at [162]–[164]) that:

I also summarised the applicable principles in Custom Bus (at [34]–[36]), to which Mr May also refers, as follows:

Mr May also refers to the recent judgment of Ball J in Re Harmony Homes Pty Ltd (in liq) (No 2) [2023] NSWSC 816 (“Harmony Homes”) at [5], where his Honour referred to the judgment of Barrett J in Sutherland & Anor as joint liquidators of Australian Coal Technology v Hanson Construction Materials Pty Ltd [2009] NSWSC 232 at [8]-[9] and noted that s 95A of the Act calls attention principally to the cash flow test of insolvency, with subsidiary relevance to the balance sheet test. Ball J there identified several factual matters which established that company’s insolvency, namely that company’s liquidity ratio (that is, the ratio of its current assets over its current liabilities) was significantly less than one during the whole of the relevant period and was trending downwards; that company had no capacity to borrow money or to raise additional capital; that company suffered significant trading losses over the relevant period; that company had overdue Commonwealth and State taxes which had increased over the period and had defaulted on a number of occasions on payment arrangements it had reached with the Australian Taxation Office (“ATO”); suppliers had placed that company on cash delivery terms and a number of suppliers had demanded payment, threatened to commence proceedings or commenced proceedings, and substantial amounts owed to trade creditors were more than 3 months overdue; that company had made a substantial number of rounded payments to creditors that cannot be reconciled to the payment of specific debts; and that company was unable to produce timely and accurate information concerning its financial position.

By way of background, the Company operated a commercial plumbing and draining business, specialising in commercial, industrial, and domestic installations, as well as maintenance and repair, and it operated in the Northern Territory and in New South Wales. On 7 September 2020, Mr Hurst and Mr Sampson were appointed joint and several voluntary administrators of the Company pursuant to s 436A of the Act. On 10 November 2020, a meeting of the Company’s creditors resolved to wind up the Company and to appoint Mr Hurst and Mr Sampson as joint and several liquidators. On 29 July 2022, Mr Sampson resigned as liquidator and, on 6 September 2023, Mr Hurst commenced these proceedings. Mr Hurst has issued reports to creditors dated 8 September 2020, 2 October 2020, and 8 December 2021 which have been tendered. On 27 September 2022, Mr Hurst caused a first and final priority dividend to be paid to the Fair Entitlements Guarantee Branch of the Department of Employment and Workplace Relations in the amount of $21,723.08, representing a dividend rate of 100 cents in the dollar for priority employee creditors. The extent of any dividend to non-priority ordinary unsecured creditors of the Company will depend on the outcome of these proceedings.

The Plaintiffs rely on the affidavit of Mr Hurst dated 6 September 2023 and an exhibit to that affidavit (Ex P1); Mr Hurst’s second affidavit dated 20 November 2023; and his third affidavit dated 24 January 2024 and an exhibit to that affidavit (Ex P2). In his first affidavit, Mr Hurst gave evidence that he formed the view that the Company was insolvent from at least 1 April 2020, and remained insolvent throughout the relevant period and up to and including the date of the appointment of the voluntary administrators on 7 September 2020. In his second affidavit, Mr Hurst extended that view to the period from 31 March 2020. The Plaintiffs also tendered information provided by the ATO to Mr Hurst concerning the Company’s tax position (Ex P3).

Mr May draws attention to several matters which emerge from Mr Hurst’s affidavit evidence and the documents tendered by the Plaintiffs and submits that that evidence is sufficient to establish the Company’s insolvency in the relevant period.

First, the Company’s unaudited profit and loss statements for the financial years ending 30 June 2018, 30 June 2019, and 30 June 2020 and for the period up to 7 September 2020 disclose net losses in the two prior years, continuing in the period between 30 June 2020 and the appointment of the administrators (Hurst 6.9.23 [25]). Mr Hurst also addresses these losses and exhibits the Company’s profit and loss statements for the relevant periods in his third affidavit. Mr Hurst also observes that the Company incurred accumulated trading losses totalling $886,085.14 from 30 June 2019 until the date of his appointment (Hurst 6.9.23 [25]).

Second, Mr Hurst refers to a deficiency of the Company’s assets to its liabilities as disclosed by its balance sheets. Mr May rightly recognises that the question of insolvency is primarily determined by a cash flow test, although the authorities allow “subsidiary relevance” to the company’s balance sheets. Mr Hurst notes that the Company’s unaudited balance sheets for the financial years ending 30 June 2018, 30 June 2019, and 30 June 2020 together with the period up to 7 September 2020 disclose a significant net asset deficiency during those years (Hurst 6.9.23 [25]); and that deficiency significantly increased from 1 July 2019 onwards, and declined from a net asset position of $365,244.67 as at 30 June 2018 to $531,807.43 as at 7 September 2020 (Hurst 6.9.23 [25]). Mr May also refers to a summary of the Company’s working capital position and ratios in Mr Hurst’s third affidavit, which also exhibits the Company’s balance sheets for the relevant period.

Third, Mr Hurst’s evidence is that, while the Company’s debt ratio was above one as at 30 June 2019 (Hurst 6.9.23 [25]), it was less than one at all times after that date, suggesting that the Company did not have sufficient liquid assets available to pay its short term liabilities as and when they fell due, at least from 1 July 2019 on. Mr Hurst provides a further summary of the Company’s working capital position and ratios in his third affidavit. Mr Hurst also points to the fact that the Company consistently did not pay its taxation liabilities when they fell due, and his evidence indicates that the Company’s debt to the ATO had been accruing since 22 May 2017 (Hurst 6.9.23 [25]). In his second affidavit, Mr Hurst also points to the fact that the Company’s ATO Running Balance Account (“RBA") account balance exceeded the funds held in the Company’s bank account as at 31 March 2020, by an amount of $170,025.47, and the shortfall in funds held against the RBA balance and accounts payable was $1,338,610.41 (Hurst 20.11.23 [5]). Mr Hurst elaborates that matter in his third affidavit, and I have referred to the tender of information provided by the ATO as to the RBA account above.

Mr Hurst’s affidavit evidence also demonstrates a deterioration as to the age of amounts due by the Company from 31 March 2020, when 58.6% of payables were already in excess of 30 days and notes that, by the end of June 2020, the majority of the Company’s payables ledger were more than 60 days overdue (Hurst 6.9.23 [25]). This matter is also addressed in Mr Hurst’s third affidavit, which indicates that the Company entered payment plans with numerous trade creditors and defaulted on all of them, and also defaulted on several payment plans with the ATO. Mr Hurst’s evidence is that no overdraft facility was available to the Company in the relevant period, and there is no other evidence indicating any capacity to raise other funds in that period.

The evidence to which I have referred above is sufficient to establish the Company’s insolvency in the relevant period where (as was similarly the case in Harmony Homes) the Company suffered significant trading losses, commencing well before and continuing into the relevant period; its asset position deteriorated from before the relevant period to a significant deficiency in the relevant period; the Company’s liquidity ratio (that is, the ratio of its current assets over its current liabilities) was significantly less than one during the relevant period; the Company had overdue Commonwealth taxes and was unable to pay its trade debts on a timely basis throughout the relevant period; the Company had defaulted on payment arrangements it had reached with both the ATO and numerous trade creditors in that period; and the Company had no apparent capacity to borrow money or to raise additional capital. By reason of these matters, I am satisfied that, during the whole of the relevant period, namely 31 March 2020 up to and including 7 September 2020, the Company could not meet debts then due to its creditors and the Company was insolvent throughout the whole of the relevant period.

For these reasons, I find that the Company was insolvent, within the meaning of s 95A of the Act, for the whole of the relevant period. I will reserve the costs of this application. I order the Plaintiffs to bring in short minutes of order to give effect to this judgment within 7 days.