Rex Developments Pty Limited and the Companies Act 1981 [1992] ACTSC 73 (14 August 1992)

SUPREME COURT OF THE ACT

REX DEVELOPMENTS PTY LIMITED and THE COMPANIES ACT 1981
S.C. No. 532 of 1987
Corporations

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Master A Hogan(1)

CATCHWORDS

Corporations - Winding up - Preference - Insolvency - "Unable to pay its debts as they become due out of its own money" - Expert opinion of liquidator - No issue of principle.

Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666

Trevor as Liquidator of Cobenco Engineering (WA) Pty Ltd v William Adams and Co Ltd (1987) 5 ACLR 282 at p 283

HEARING

CANBERRA
14:8:1992

Counsel for the Applicant: Mr R. L. Crowe

Instructing Solicitors: Minter Ellison

Counsel for the Respondent: Mr M. Oakes

Instructing Solicitors: Gallens Crowley and

Chamberlain

ORDER

The Court finds that:
On 28 January 1987, on 17 February 1987, on 1 May 1987 and on each day

between 16 April 1987 and 8 May 1987, both inclusive, Rex Developments Pty Limited, ACN 008 597 153 was unable to pay its debts as they fell due out of its own money.

DECISION

This is the determination of the question whether on certain dates a company which is in liquidation was insolvent.

2. The winding up order was made on 27 May 1987 pursuant to a summons filed on 8 May 1987.

3. By proceedings in the winding up the liquidator has sought to set aside certain payments that had been made to five respondents. Those proceedings depend upon the liquidator being able to show that on each of the dateson which the payments were made the company was insolvent.

4. By a consent order made by me on 29 June 1992 it was ordered that the question, whether on the relevant dates the company was unable to pay its debts as they became due from its own money, be determined separately from other questions arising in those proceedings.

5. The relevant dates are 28 January 1987, 17 February 1987, 1 May 1987 and on each date between 16 April 1987 and 8 May 1987.

6. The evidence for the applicant consisted of affidavit material by the applicant liquidator, who is a chartered accountant, and oral evidence by an accountant employed by him relating to cheques of the company that had not been met on presentation. There were a number of objections to the admissibility of some of the matters deposed to, some of which objections I upheld, and some of which I overruled, but there was no cross-examination tending to cast doubt on the reliability of such material as was properly admitted, and no evidence tendered to contradict it.

7. There was also some affidavit material read on behalf of two of the respondents, but that material seemed to me to be directed at the issue whether payments that they received were preferential, or, if they were, whether they were received in good faith or in the ordinary course of business. It did not tend, in my mind, to show that the company was solvent.

8. The company was incorporated on 5 October 1984. There is no direct evidence about the entirety of its affairs, or whether it ever carried on any other business, but in February 1985 it purchased the Canberra Rex Hotel in Northbourne Avenue Canberra. I infer from the balance sheet reconstructions in evidence, and from the absence of any evidence of any other activity, that its principal business thereafter was that of owning and conducting the business of that hotel.

9. The hotel building was later converted into strata title, it seems into 10 strata units. Two of those units were sold on 7 September 1985 as a bus terminal, for $3.2 million. On the previous day the company entered into a loan agreement with one of the respondents, and mortgaged its interest in the hotel property to that respondent and an associated company.

10. Between September 1985 and July 1986 the company drew upon that loan facility to the extent of about $6.8 million. In July 1986 the facility was extended by a further $1.3 million.

11. On or about 19 January 1987 the company entered into a contract for the sale to Cudnole Pty. Ltd. of the remaining strata units in the building and of the business of the hotel.

12. The first of the relevant dates is 28 January 1987, so that it is useful to refer to such evidence as there is about the company's affairs during the period shortly before 19 January 1987.

13. Among the materials put in evidence by the liquidator was a balance sheet, reconstructed as at 31 October 1986, which had been prepared by a Mr Bates, chartered accountant. The accounts are stated on their face to be unaudited.

14. The profit and loss statement for the year ended 31 October 1986 shows that on sales of $605,701 the company made a gross trading profit of $357,115 and other income totalled $563,075. Expenditure of $1,157,568 gave a net loss of $237,377 for that year.

15. The profit and loss appropriation statement added to that operating loss accumulated losses at the beginning of the year of $692,287, to give a loss carried forward of $929,665.

16. The balance sheet at 31 October 1986 showed net assets of $7,130,574.

17. The liquidator, on the basis of the materials that had come into his possession, reconstructed that balance sheet to give a more true and fair view. The basis on which he did so was not attacked. In his view the accumulated losses were really $4,420,865, and the net assets only $505,117.

18. There is no direct evidence of the course of trading or movement in asset values between 31 October 1986 and 28 January 1987, or between that date and 8 May 1987.

19. The contract of sale to Cudnole Pty. Ltd. was settled on 16 April 1987. The real estate was sold at a price of $6,100,000, which after rate adjustments realised $6,108,829. A car park was sold for $400,000, which with adjustments realised $400,269. The business was sold for $4,000,000, and after rate adjustments and allowances for stock and equipment realised $4,450,000. Those sums totalled $10,959,098.

20. On the day before settlement the solicitors for the discharging mortgagee informed the solicitors for the vendor company that the amount required to discharge the mortgage was $10,112,246.

21. On the day of settlement the company's solicitors informed the mortgagee's solicitors that settlement could not proceed, because the balance of the sale proceeds would not be sufficient to pay out other creditors, who were in a position to prevent clear title passing to the purchaser and incoming mortgagee.

22. To permit settlement to take place the outgoing mortgagee advanced a further $100,000 to the company. The settlement proceeded. The total proceeds on sale were $11,945,249. They were disbursed in discharge of the mortgage and payments to various creditors. On settlement the company had divested itself of all its realisable assets, and of the only undertaking by which it had earned income.

23. By inspection of the books and records of the company the liquidator was able to estimate that on the date of the settlement, 16 April 1987, there were moneys due to 225 creditors other than those whose debts were paid out on settlement. Their claims totalled $3,038,370. Details of those debts and of their ageing are set out in exhibit WJH7. As at 31 October 1986 they had totalled $2,286,509.

24. In the following months they had increased as follows:

November 1986 $120,375
December 1986 $106,915
January 1987 $152,624
February 1987 $93,869
March 1987 $152,050
April 1987 $126,026

25. I agree that the question that I have to decide is not concluded by a mere balance sheet deficiency, especially when the balance date is not the relevant date for the particular inability to pay. As Barwick C.J. pointed out in Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 at p 670

"Insolvency is expressed in s.95 as an inability to
pay debts as they fall due out of the debtor's own
money. But the debtor's own moneys are not limited to
his cash resources immediately available. They extend
to moneys which he can procure by realization by sale
or by mortgage or pledge of his assets within a
relatively short time--relative to the nature and
amount of the debts and to the circumstances, including
the nature of the business, of the debtor. The
conclusion of insolvency ought to be clear from a
consideration of the debtor's financial position in its
entirety and generally speaking ought not to be drawn
simply from evidence of a temporary lack of liquidity.
It is the debtor's inability, utilizing such cash
resources as he has or can command through the use of
his assets, to meet his debts as they fall due which
indicates insolvency. Whether that state of his
affairs has arrived, is a question for the Court and
not one as to which expert evidence may be given in
terms though no doubt experts may speak as to the
likelihood of any of the debtor's assets or capacities
yielding ready cash in sufficient time to meet the
debts as they fall due."

26. This company was not merely suffering from a temporary lack of liquidity. When the sale was completed on 16 April 1987 it had sold, in any practical sense, all the assets that it had. The proceeds of that sale did not meet all the debts that were then due. The shortfall was over $3,000,000. The increase in the total amount of the debts falling due between October 1986 and April 1987 is of such magnitude as to demonstrate that at no time during that period was the company able to pay its debts either by using its cash resources or by sale or pledge of all of its assets. If the sale had taken place in October 1986 the proceeds would not have realised enough to pay the debts then due. The proceeds of the sale that took place in April 1987 were even more insufficient to pay the debts then due. The list of cheques that were dishonoured between December 1986 and April 1987 is consistent only with the same conclusion.

27. The liquidator deposed in paragraph 30 of his affidavit that in his expert opinion the company was unable to pay its debts as they fell due at each of the relevant dates. That evidence was objected to. In the light of later discussions regarding the comments made about such evidence by Barwick C.J. in the passage cited above, I admitted it, for what it is worth. See for example, Trevor as Liquidator of Cobenco Engineering (WA) Pty. Ltd v William Adams and Co Ltd (1987) 5 ACLR 282 at p 283.

28. It should be clear from what I have set out above that I have arrived at my conclusion independently of that particular item of expert opinion. It is however clear that in forming his opinion, the liquidator did so on the basis of facts, a sufficient number of which were in evidence to sustain it. But in the circumstances of this case, his expert opinion merely confirms me in such confidence as I have that my own inexpert conclusion, formed independently by me on the materials in evidence, is justified.

29. I find that on each of the relevant dates the company was unable to pay its debts as they fell due out of its own money.

30. I will hear the parties on the appropriate form of an order for costs.