Case: Lewis v Doran [2004] NSWSC 608 ; (2004) 208 ALR 385
Outcome: referred to
Another matter relevant to insolvency is the prospect of funds likely to be available from a third party, such as from a capital injection or a subordinated loan. The Court will generally be sceptical of a mere assertion of a third party's willingness to provide such support. Such asserted willingness should be cogently demonstrated as a matter of commercial reality, even if the evidence falls short of establishing a legal obligation to advance funds: see the discussion in Lewis v Doran [2004] NSWSC 608 ; (2004) 208 ALR 385 per Palmer J at [112], [113]. That topic, too, was a matter upon which there was some difference between the parties, but for reasons which are discussed below, I do not think it is significant in this instance because there is so little evidence of any real prospect of any third party capital funding becoming available. In the end result, senior counsel for the creditor did not place much weight on the prospect of an externally sourced capital injection of funds to show whether Damilock was insolvent prior to about 12 February 2007. 22 As I indicated, Mr Lewis' conclusion was that Damilock was insolvent from at least early December 2006 and certainly by 26 December 2006 and remained insolvent until 26 June 2007. He expressed that view because, in the whole of that period, Damilock had a deficiency in its cash flow needed to pay its debts which had become due and payable, based upon hypothetical bank balance assessments which he had prepared. He recognised that conclusion was based upon an assumption that Damilock's creditors were paid on 30 day terms. On that basis, he concluded that Damilock would have required an increase in its overdraft facility in excess of $6m, increasing perhaps to $8m plus by 26 June 2007, to meet its debts as and when they fell due during that period. He did alternative calculations based upon creditor payment terms of 60 and 90 days. They did not alter his conclusion, albeit that the increased overdraft facility required would have been considerably less. He also concluded on his balance sheet analysis that Damilock had a material deficiency in its working capital of $528,000 as at 31 December 2006 increasing to $4,896,000 at 30 June 2007, and that those figures were conservative as they did not take account of non-current employee entitlements such as long service leave, and depreciation. 23 Mr Keith's view was that Damilock was not insolvent prior to 12 February 2007, and became insolvent some time between that date and 14 March 2007. He identified the reasons for his conclusion, differing from that of Mr Lewis, as being: 1. Damilock was in ongoing discussions with potential equity investors at least in the period up to 12 February 2007; 2. Damilock had achieved a large net profit of $530,000 in January 2007, so as to have given Damilock's directors reason to expect that, at that time, its profitability and cash flow was improving significantly; 3. Damilock had engaged Korda Mentha, "highly regarded reconstruction and insolvency experts"; and 4. a report prepared by Korda Mentha as at 13 February 2007 did not state or express the opinion that Damilock was then insolvent, but indicated that Korda Mentha were in discussions with Damilock's directors so that Damilock was pursuing strategies to preserve the integrity of the continuing business.