Federal Court: Asset Surplus Not Enough to Save Company from Insolvency

Deputy Commissioner of Taxation, in the matter of Tank Sales Sydney Pty Ltd v Tank Sales Sydney Pty Ltd [2018] FCA 449 (3 April 2018)

On 25 August 2017, the Deputy Commissioner of Taxation (DCT) filed an application to wind up Tank Sales Sydney Pty Ltd following the company’s failure to comply with a statutory demand issued in June 2017.

The demand related to an account deficit debt under the BAS provisions of the Income Tax Assessment Act 1977 (Cth) and amounted to $269,073.15 as at 16 June 2017. It included administrative penalties and general interest charges under the Taxation Administration Act 1953 (Cth) plus superannuation guarantee charges, and an additional charge for late payment.

Last November the company filed a notice of appearance, contending that it was not insolvent, but suffering a short term cash flow issue. Relevantly, the company argued that its assets outweighed its liabilities.

The matter was heard in the Federal Court on 27 March 2018, where the DCT relied on the judgement of Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 to establish its entitlement to a winding up order (unless the Company could rebut the presumption of insolvency.)

In seeking to prove their solvency, the company produced financials in support of their claim - including its 2016 and 2017 tax returns. However the DCT argued that such documents should not be allowed to be admitted to evidence because they were not audited and accordingly amounted to hearsay.

Farrell J accepted the financials, however concluded that little weight could be given to them in the absence of direct evidence to support the values indicated. Moreover, his Honour asserted that where assets cannot be converted into cash within a relatively short time, their disclosure will not prove effective in establishing solvency.

Ultimately, the court ordered that:

    1. Tank Sales Sydney Pty Ltd be wound up in insolvency;
    2. David Lombe of Deloitte Financial Advisory be appointed the liquidator of the defendant corporation; and
    3. The Deputy Commissioner of Taxation's costs of proceedings be fixed at $2,897.98.

by James Conomos Lawyers