Case: Rees v Bank of New South Wales [1964] HCA 47 ; (1964) 111 CLR 210
Outcome: discussed
Counsel for the liquidators contended that Damilock's inventory or stock in trade was not an asset available to be realised (other than in the ordinary course of business) to meet its current debts. So much is self-evident. It does not follow that the inventory or stock in trade of what is in essence a retail trading company should not be taken into account at all in determining the solvency or otherwise of a retail trading entity. Much will depend upon the nature of the stock, the ability to realise its value, its turnaround time and the like. As Barwick CJ said in Rees v Bank of New South Wales [1964] HCA 47 ; (1964) 111 CLR 210 at 218: It is quite true that a trader, to remain solvent, does not need to have ready cash by him to cover his commitments as they fall for payment, and that in determining whether he can pay his debts as they become due regard must be had to his realizable assets. The extent to which their existence will prevent a conclusion of insolvency will depend on a number of surrounding circumstances, one of which must be the nature of the assets and in the case of a trader, the nature of his business. The treatment of inventory or stock in trade was a matter upon which the experts took a somewhat different view. 79 Those observations are also pertinent to the creditor's claims that Mr Lewis did not have sufficient regard to the fact that Damilock is in essence a retail trading company, so that its stock should have been given much more prominence in assessing its ability to pay its debts as and when they fell due. I accept that, depending on the evidence, trading stock may be relevant to assessing insolvency. Hence, I also accept the contention for the creditor that the decision in Rees v Bank of New South Wales [1964] HCA 47 ; (1964) 111 CLR 210 is to be understood in its particular circumstances. However, I consider the present circumstances are not dissimilar to those which were considered in Rees . 80 Clearly, by reason of its expansion interstate, Damilock had incurred very significant capital expense, and it had increased its trading stock. It had been unsuccessful in negotiating increased overdraft facilities with the ANZ to fund that expenditure. It did not have other sources of capital or deferred advances from its directors or (as I have found) externally. It appears to have funded those expenses by extending the period in which it paid its trade suppliers. It was keeping within its overdraft limits, but was not paying its trade suppliers in a timely manner. The evidence was that December and January in each year were its best trading period. That is reflected in Damilock's budget. The outcome of its trading in December 2006 and January 2007 is known. It achieved sales much less than it had budgeted in each month. There was, on its own budgeted projections, no reason to anticipate a windfall sales level in February or March 2007. Hindsight indicates that its budgeted sales in those months were also not achieved. Hence, in my view, there is no foundation to conclude that Damilock's trading stock beyond its actual sales in December 2006 and in January 2007 could have been realised in the reasonably foreseeable future to be available to meet its liabilities as and when they fell due. The short answer is that if the trading stock had that quality, it should and probably would have been realised to do so. The trading stock at cost held at 31 December 2006, excluding distribution costs, was in the order of $7.5m and by 31 January 2007 stock at cost was still of the order of $6.99m. The creditor says that at a gross profit margin of 58%, there were at December 2006 potential maximum sales of up to about $12.95m. A similar sum would be sold in November 2006. But the fact is that such sales were not made, and they were not made over the best trading period for the year. In my judgment, the commercial realities indicate that Damilock's trading stock, beyond that actually realised in December 2006 and in the latter months of 2006, and then in January 2007, was not in fact readily realisable to meet its ongoing liabilities as and when they fell due. 81 The creditor pointed out that Damilock always paid its trade creditors out of sales, rather than cash reserves, because it never had sufficient cash reserves for that purpose. That fortifies my understanding that its expansion in the latter months of 2006 was also largely to be financed out of sales, and that the increasing delay in paying its trade creditors illustrates that. If the sales levels were not achievable at a rate and at times sufficient to do so and when its debts fell due and became payable, then the point would be reached that Damilock was insolvent (in the absence of other resources being or becoming available). Its trade creditors had increased from $2.5m to $8.2m between June and December 2006. There was every reason why Damilock should, therefore, have made such sales as it could in December 2006 and in January 2007. There is also reason to conclude, as I did, that it did make such sales as it could over that period. The sales were not sufficient, as at December 2006 to meet its liabilities as and when they fell due. Nor were they in January 2007.