, ,

Determining Insolvency and Unreasonable Director Related Transactions: Stone (Liquidator), in the matter of RIC Admin Pty Ltd (in liq)

, ,

Guidance has been provided to liquidators by the Federal Court of Australia in Stone (Liquidator), in the matter of RIC Admin Pty Ltd (in liq) v Mandalinic (No 2) regarding the analysis of financial records required to determine the solvency of a company and what conduct of a director will constitute an unreasonable director related transaction.

1. Background Events

Mr Mandalinic was the sole director of RIC Admin Pty Ltd (Company) from incorporation on 17 December 2014 until liquidation on 13 November 2019. Mr Stone was appointed as liquidator of the Company pursuant to an order of the Federal Court of Australia.

Prior to liquidation the Company received notices from the ATO regarding:

  • Failure to lodge Business Activity Statements for quarter ended 30 June 2017;

  • Overdue income tax return for financial year ended 30 June 2017;

  • Failure to lodge Business Activity Statements for quarter ended 30 September 2017; and

  • A statutory demand for payment.

Mr Mandalinic, for the period of 1 July 2016 to 29 March 2019, caused the company to pay him weekly amounts totalling $422,400.00.

2. Issue to be determined

Two issues were presented to the Court for determination:

  • Whether the Company was insolvent at all times between 25 August 2017 and winding up; and

  • Whether the conduct of Mr Mandalinic contravened s588FDA Corporations Act 2001 (Cth) and constituted unreasonable director related transactions.

3. Courts finding and reasoning

3.1. Insolvency of the Company

The Court found the Company to be insolvent from its date of incorporation to the date of appointment of Mr Stone as a liquidator. The reason for this determination included:

  • Mr Stone’s review of the Companies financial records found that documents detailing the business activity statements for the prior 18 months were missing, as well as income taxation returns and PAYGW summaries for the financial years of 2017, 2018 and 2019.

  • The Company also failed both a cashflow test and a balance sheet test conducted by Mr Stone.

  • The cashflow test involved a determination of the Company’s current ratio as a measure of working capital and liquidity. A current ratio of less than 1.0 indicates a working capital deficiency for a company.

  • Mr Stone conducted his examination using the figures of the 2018 financial year and a division of the current assets by the current liabilities resulted in a current ration of 0.02.

  • Mr Stone then reconducted the cashflow tests with the addition of the GST audit liabilities to the PAYGW liabilities consequently reducing the Company’s current ration to 0.0147. 

The Court also considered the following indicators to determine whether insolvency was present:

  • Overdue Commonwealth taxes;

  • No evidence of access to alternative finances from the Company;

  • No evidence from the Company of any ability to raise equity capital;

  • A statutory demand issued by the ATO;

  • No steps taken to contest PAYGW tax liability or the statutory demand; and

  • An inability to produce timely and accurate financial information to display the Company’s trading performance and financial position.

3.2.  Unreasonable Director-Related Transactions

It was found that Mr Mandalinic’s weekly payments constituted unreasonable director related transactions and were a breach of his obligations under the Corporations Act 2001 (Cth).

A transaction may be deemed as unreasonable if it is made to a director of a company and if a reasonable person in the Company’s circumstances would not have entered into the transaction having regard to the benefits and detriments of the transaction.

The Company would not have had the funds available to make Mr Mandalinic’s weekly payments if it had been complying with its PAYGW obligations.

The court determined that the financial records of the Company did not provide source documents to support the weekly transactions, and there was also no agreement between the Company and Mr Mandalinic to pay him director’s fees.

In considering these factors, Justice Halley reached the conclusion that a reasonable person in the circumstances of the Company would not have made these weekly payments due to the detriment they had on the Companies financial position. These payments were seen to be conduct by a director which amounted to stripping benefits from the Company to their own advantage.

4. Matters to consider for liquidators actions arising from the case

When analysing the solvency of a company, it is important for the liquidator to consider whether the companies financial records appropriately detail the below:

  • Source documents which support underlying amounts in financial reports, both internally and externally produced;

  • All transaction entries in financial reports, both internally and externally produced;

  • BAS for all relevant financial years, and individual periods;

  • PAYGW summaries for all financial years; and

  • Income taxation returns for all financial years, if relevant.

Maintenance of the above will ensure that a company has complied with its obligations under s286(2) Corporations Act 2001 (Cth).

Please contact the writer on the following contact details if you would like more information or would like to discuss any of the above:

Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au

Brigitte Fraser
Law Clerk
T: +61 3 9611 0196
E: bfraser@sladen.com.au

Alicia Hill