Case: Quick v Stoland Pty Ltd (1998) 157 ALR 615
Outcome: followed
It is beyond doubt that s 95A mandates a "cash flow" rather than "balance sheet" approach to determining solvency. Therefore, an excess of current liabilities over current assets is not conclusive of a company's insolvency and "cannot be more than a rule of thumb" as to the same: Quick v Stoland Pty Ltd (1998) 157 ALR 615 at 623 per Emmett J. Further, "[a] temporary lack of liquidity must be distinguished from an endemic shortage of working capital whereby liquidity can only be restored by a successful outcome of business ventures in which the existing working capital has been deployed": Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321 at 328 per Jacobs J. Finally, a failure to pay a debt is not, without anything else, conclusive of insolvency. For example, as Jacobs J pointed out in Hymix Concrete at 328, such a failure: "could be explained by a desire on the part of the company to extend its effective working capital at no cost to itself by obtaining as long terms of credit as its creditors would tolerate, a business manoeuvre not necessarily related to an inability to pay." (This observation needs to be read subject to the matters canvassed at [45] to [48].) 67 Mr Lamb's opinion in paragraph 18 that Chick Vic could not, as at the starting point, pay all its debts as and when they became due and payable is largely based on the matters canvassed in paragraphs 13 and 17. However, those matters cannot alone be the basis of a finding that Chick Vic was insolvent at the starting point. The trading loss and the net asset deficiency figures are balance sheet rather than cash flow measures of Chick Vic's position. As to the working capital deficiency figure, I refer to what I cited at [43] from Quick . Further, Mr Lamb has admitted that the work on hand figure is incorrect. In cross-examination, a work on hand figure of approximately $8,000,000.00 was put to him. However, notwithstanding his concession of error, the incorrect figure must be taken to have remained a basis for the opinion expressed in his report. 68 Under this heading I deal not only with Mr Lamb's evidence about the deliberate withholding of cheques but with a point that can be made about the plaintiffs' case generally. Chick Vic may have suffered from a substantial, though variable, working capital deficiency at the starting point and throughout the duration. But, on the other hand, Chick Vic did not in that period exhibit some of the classic characteristics of insolvent companies. I was taken to only one instance where a cheque it drew was dishonoured upon presentation. There is no evidence as to why the cheque was dishonoured. According to its book-keeper, it only exceeded its overdraft limit once and that was due to an oversight on her part. Its books were properly kept and they did not need to be reconstructed when it went into administration. Indeed, the administrator was able to account for all moneys. The staff's salaries, superannuation and other entitlements were paid on time. Taxes and charges (including workers' compensation premiums) were paid on time. There was no evidence that it frequently changed suppliers or was subjected to the indignity of only being able to procure supplies on a cash on delivery basis. Of course, it is by no means necessary or sufficient that a company display some or all of these characteristics before it can be found to have been insolvent. However, for a Court to be able to find as a fact that a company was insolvent in that it was not able to pay its debts as and when they became due and payable it must normally have some evidence apart from the company's accounts. 69 The plaintiffs have recognised the need for such evidence. Though it is not the only such evidence, the plaintiffs make much of a purported practice by Chick Vic of holding cheques "in the drawer". That is, they say that Chick Vic habitually drew cheques in favour of creditors thus reducing the relevant creditor's balance in its books and then retained those cheques until a point in time at which it could be confident that their presentation would not cause Chick Vic to exceed its overdraft limit. If it were proved that such a practice existed, it would be powerful evidence that Chick Vic was insolvent and not just because it would help explain why Chick Vic did not display some of the characteristics to which I referred earlier. 89 In any case, the argument over whether or not provisions should have been made is one that goes to the reliability of Chick Vic's accounts and illustrates the point made by Emmett J in Quick (see [43]). 90 As to the overdraft (see [85](c)), the following exchange took place: "And in the ordinary way of overdrafts, although it is expressed as being operative for a 12 month period, you know, don't you, from your business experience, that so long as the company was continuing to trade the overdraft would, as a matter of course, be rolled over?---Yes. Yes. You have a review, you have got to put in your financials as often as not, but as long as you are continuing to trade the overdraft will roll over. Now, let me suggest to you again, as I did before we turned to that document, that from the point of view of considering the solvency of a company as distinct from writing a balance sheet for it, it is quite it was quite wrong for you to take into account the outstanding bank overdraft limit?---I don't agree with that. Tell us the date on which the money due to the National Australia Bank by this company under its overdraft facility agreement was due and payable?---Well, it could be due and payable in 12 months. But the point of my assessment is that it is on the basis of the total current assets and the total current liabilities. You assumed, in forming your opinion that this company as you did, that this company was insolvent on 30 April 1999, that is what you did?---Yes. And you formed the view that it was insolvent on 30 June 1999?---Yes. And on 30 June 2000?---Yes. In forming each of those opinions you took into account the proposition that this company owed, was obliged to pay on that day, $1 or $1.5 million to the National Bank didn't you?---I took into account the existence of the debt in measuring the position of the company. When in fact, as you know, that money was not in fact due and payable on any of those dates or any other date in between was it?---Well, you have to measure the total position of the company, you can't just delete one liability and compare what is left. But it is not due, Mr Lamb. Let us say this company had borrowed this money not on overdraft but on a fixed 20 year mortgage with capitalised interest so that there were no interest payments payable year by year and the money wasn't repayable for 20 years. Would you take that into account in determining the question of solvency of this company in let us say 30 June 2000?---No, because it wouldn't be a current liability. So it is the difference between being a current liability and a non current liability that plays in your mind is it?---Yes. So if it might become due sometime in the next 12 months then you think it should be taken into account on the question of solvency?---Yes. If it might become due sometime in the next 12 months you proceed upon the assumption that it is due on the day you are considering solvency?---No, it is a matter to be considered no, it is considered the current assets and the current liabilities are measured to form your view about solvency." Again, that exchange illustrates the point made by Emmett J in Quick (see [43]). Much the same can be said of the point about Chick Vic's hire-purchase contracts and leases (see [85](d)) and depreciation (see [85](e)). Mr Lamb's position in respect of the hire-purchase contracts and leases was similar to that in respect of the overdraft. By contrast, he conceded that depreciation was irrelevant to his determination that Chick Vic was insolvent at the starting point and throughout the duration. Despite the limited nature of the concession, I accept as sound the propositions put by Mr Gunst to Mr Lamb in respect of the overdraft, hire-purchase contracts, leases and depreciation. Mr Lamb's answers to Mr Gunst's questions on all those issues of which the passage set out above is but one example showed that, though he purported to espouse the (correct) view that insolvency could not simply be divined from a company's accounts, he proceeded most likely unconsciously on the basis that Chick Vic's continuing working capital deficiency showed that it was insolvent at the starting point and through to 31 January 2000. It may be that Mr Lamb's treatment of those issues was correct from an accounting point of view. But that is not the basis upon which I must approach them. 91 Finally, the fact that statutory accounts are prepared on a going concern rather than liquidation basis is of scant probative value in determining whether the company that is the subject of those accounts was insolvent at the time they were prepared. 92 Mr Lamb's evidence cannot, on its own, support a finding that Chick Vic was insolvent in any of the periods. I have already explained: &#8226; that it cannot support a finding that Chick Vic had a practice of deliberately withholding cheques until they could be safely presented (see [73]); &#8226; why paragraph 35 of the report should be put aside (see [75]); and &#8226; the (incorrect) approach Mr Lamb took in determining that Chick Vic was insolvent at the starting point and through to 31 January 2000 (see [90]).