Leslie & Anor v Howship Holdings Pty Ltd [1997] FCA 133 (28 February 1997)

CATCHWORDS

CORPORATIONS LAW - winding up - presumption of insolvency arising from failure to comply with statutory demand - whether corporation has discharged onus of demonstrating solvency - principles to be applied.

EVIDENCE - failure to call evidence from financier - rule in Jones v Dunkel - inferences to be drawn from failure.

Corporations Law, s 95A(1),(2); ss 459A, 459C, 459D, 459F(2)(b), 459G(2), 459P, 459S, 465C

Evidence Act 1995 (Cth), ss 76, 80(a)

Federal Court Rules, O 71, r 36(10)

Assignee of Meyer v Sefton [1816] EngR 8; (1817) 2 Stark 274; 171 ER 644

Bank of Australasia v Hall [1907] HCA 78; (1907) 4 CLR 1514

Community Development Pty Ltd v Engwirda Construction Company [1969] HCA 47; (1966) 120 CLR 455

David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265

Howship Holdings Pty Ltd v Leslie (1996) 14 ACLC 1549

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298

Melbase Corporation Pty Ltd v Legenhoe Pty Ltd [1995] FCA 1225; (1995) 17 ACSR 187

O'Donnell v Reichard [1975] VR 916

Paric v John Holland (Constructions) Pty Ltd [1985] HCA 58; (1985) 62 ALR 85

Payne v Parker [1976] 1 NSWLR 191

Potts v Miller [1940] HCA 43; (1940) 64 CLR 282

Re Bond Corporation Holdings Ltd (1990) 1 ACSR 350

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

Stonegate Securities Ltd v Gregory [1980] Ch 576

Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808

The Roy Morgan Research Centre v Wilson Market Research Pty Ltd (1996) 39 NSWLR 311

Trade Practices Commission v Arnotts Ltd (No.5) (1990) 21 FCR 324

LESLIE & ANOR v HOWSHIP HOLDINGS PTY LIMITED

NG 3449 of 1996

Sackville J.

Sydney

28 February, 1997

IN THE FEDERAL COURT OF AUSTRALIA )

NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3449 of 1996

GENERAL DIVISION )

IN THE MATTER OF

HOWSHIP HOLDINGS PTY LIMITED

BETWEEN:

JOHN ANTHONY LESLIE

LEONARDUS GERARDUS SMITS

Applicants

AND:

HOWSHIP HOLDINGS PTY LIMITED

Respondent

Coram: Sackville J.

Place: Sydney

Date: 28 February, 1997

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The respondent be granted leave, pursuant to s.465C of the Corporations Law, to oppose the application that the respondent be wound up.

2. The application that the respondent be wound up be dismissed.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )

NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3449 of 1996

GENERAL DIVISION )

IN THE MATTER OF

HOWSHIP HOLDINGS PTY LIMITED

BETWEEN:

JOHN ANTHONY LESLIE and

LEONARDUS GERARDUS SMITS

Applicants

AND:

HOWSHIP HOLDINGS PTY LIMITED Respondent

Coram: Sackville J.

Place: Sydney

Date: 28 February, 1997

REASONS FOR JUDGMENT

The Proceedings

The applicants are partners in a firm of solicitors, now known as Smits Leslie. By an application filed on 1 July 1996, they seek an order pursuant to s.459A of the Corporations Law that the respondent ("Howship") be wound up. The applicants claim to be creditors of Howship in relation to professional fees arising out of legal work performed for Howship in 1993. They rely on Howship's failure to comply with a statutory demand served on 6 June 1996, requiring payment of the sum of $25,295.88.

The circumstances on which Howship failed to comply with the statutory demand are unusual. Howship gave instructions to its then solicitor to file and serve a summons and affidavit seeking to set aside the statutory demand served on it. The summons and affidavit were served, but (as Young J of the Supreme Court of New South Wales held in other proceedings between the parties) not until 28 June 1996. An application to set aside a statutory demand must be made within 21 days after the demand is served (Corporations Law, s.459G(2)). Since Howship did not serve the application until 22 days after the demand was made, it is precluded from pursuing proceedings to set aside the statutory demand: David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265.

Two consequences flow from this state of affairs:

* the applicants are entitled in the winding up proceedings to rely on the presumption of insolvency created by s.459C of the Corporations Law; and

* in the winding up proceedings, Howship is precluded by s.459S of the Corporations Law from relying on any ground that could have been relied on for the purposes of an application to set aside the statutory demand, except with the leave of the Court in the circumstances specified in s.459S.

Because of s.459S of the Corporations Law, Howship applied, by an amended notice of motion filed on 22 October 1996, for leave to oppose the winding up application on the grounds that:

* Howship is solvent;

* there is a genuine dispute between it and the applicants as to the existence and quantum of the debt specified in the statutory demand; and

* the application to wind up Howship is an abuse of process.

Howship's motion also seeks an order that the time for it to file and serve a notice of grounds of opposition to the winding up application be extended. This motion was necessary because the notice of opposition was served outside the time limit provided for by s.465C of the Corporations Law.

The Legislation

Section 459P of the Corporations Law provides that a creditor (even if only a contingent or prospective creditor) may apply to the Court for a company to be wound up in insolvency. If a person is a creditor only because of a contingent or prospective debt, the leave of the Court is necessary: s.459P(2)(a). The Court may give leave if satisfied that there is a prima facie case that the company is insolvent, but not otherwise: s.459P(3). The application is to be determined within 6 months after it is made, unless extended by the Court: s.459R(1),(2).

On an application under s.459P, the Court may order that an insolvent company be wound up in insolvency: s.459A. A company is solvent if, and only if, it is able to pay all its debts, as and when they become due and payable: s.95A(1). A company which is not solvent is insolvent: s.95A(2). In determining, for the purposes of an application under s.459P, whether or not the company is solvent, the Court may take into account a "contingent or prospective liability of the company": s.459D(1). This provision does not, however, limit the matters that may be taken into account in determining, for a particular purpose, whether or not a company is solvent: s.459D(2).

On an application under s.459P the Court must presume that the company is insolvent if, during the three months ending on the date the application is made, the company failed to comply with a statutory demand served on the company under s.459E: s.459C(2)(a). This presumption operates except so far as the contrary is proved for the purposes of the application: s.459C(3). The period for compliance with a statutory demand is 21 days, unless the company applies under s.459G to set it aside: s.459F(2)(b). The effect of s.459G(2), as construed by the High Court in David Grant & Co Pty Ltd v Westpac Banking Corporation, is that the Court has no power to extend the 21 day period. Consequently, a company is taken to fail to comply with a statutory demand if, at the end of the 21 day period, it has neither complied with the terms of the demand nor instituted proceedings to set aside the demand.

Section 459S limits the grounds upon which a company may oppose an application for winding up based on a failure to comply with a statutory demand. The section provides as follows:

"459S(1) In so far as an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand, the company may not, without the leave of the Court, oppose the application on a ground:

(a) that the company relied on for the purposes of an application by it for the demand to be set aside; or

(b) that the company could have so relied on, but did not so rely on (whether it made such an application or not).

(2) The Court is not to grant leave under subsection (1) unless it is satisfied that the ground is material to proving that the company is solvent."

Section 465C of the Corporations Law provides that a person may not, without the leave of the Court, oppose the application unless, within the period prescribed by the rules, the person files and serves a notice of grounds of opposition and an affidavit verifying the matters stated in the defence. The Federal Court Rules, O.71, r.36(10), provide that the notice of grounds of opposition and the verifying affidavit must be served not later than two days before the day appointed for directions, or the day of the hearing, as the case may be.

The Evidence

As might be expected in the course of vigorously contested proceedings, a substantial volume of documentary evidence was tendered and a number of witnesses cross-examined. On the applicants' side, apart from evidence going to undisputed or formal matters, the principal witness was Mr Smits. For Howship, Mr Terence Baird and Mr Tony Fidler, both of whom were and are directors of Howship, gave evidence. After some hesitation on the respondent's part, affidavits sworn by Mr Morley, the company's accountant, were read by Mr Martin, who appeared for Howship. These affidavits annexed the company's financial statements, including a profit and loss statement and balance sheet prepared as at 31 December 1996. Howship also relied on reports prepared by Mr Ferrier, an experienced chartered accountant and an official registered liquidator and trustee in bankruptcy.

Mr Baird was cross-examined at some length by Mr Archer. I did not form a favourable impression of Mr Baird as a witness and I would be cautious about accepting his evidence on contested matters without corroboration. However, on the view I have taken of the case, the question of Mr Baird's credit does not loom large, since Howship's solvency depends largely on the inferences to be drawn from documentary or largely uncontentious evidence and on the significance of gaps in the evidence.

It was clear from Mr Morley's cross-examination that there were deficiencies in the way in which some of the company's financial statements were prepared. For example, the profit and loss statement for the year ended 30 June 1995 did not record any expenditure incurred by the company. Mr Morley's explanation was that the company had received a final notice from the Australian Taxation Office ("ATO") and the financial statements had to be prepared hurriedly. The expenditure omitted from the 1995 financial statements was simply included in the financial statements for the year ended 30 June 1996. Mr Morley justified this step on the ground that it made no difference to the ATO, since the company incurred losses in each year. Clearly, however, as Mr Morley ultimately accepted, both the 1995 and 1996 financial statements were inaccurate, by reason of the statement of expenditure.

Mr Morley also prepared the balance sheets as at 30 June 1996 and 31 December 1996, without making inquiries as to whether the company had outstanding trade creditors on those dates. This omission on Mr Morley's part must be taken into account in assessing Howship's solvency. Accordingly, I address the question of Howship's trade creditors later in this judgment.

Mr Archer, who appeared for the applicants, submitted that no reliance should be placed on the financial statements prepared by Mr Morley. However, Mr Ferrier gave evidence, which I accept, that the inclusion in the 1996 financial statements of expenditure attributable to the 1995 year, makes no difference to the question of Howship's solvency. That question has to be decided at the date of the hearing, in accordance with principles to which I refer later. As I have already indicated, appropriate consideration can be given to Mr Morley's failure to take account of potential trade creditors when preparing the balance sheets upon which Howship placed reliance. Other omissions by Mr Morley, such as his failure to ascertain when the debt secured by the first mortgage over the Fern Bay land was due for payment, have been shown to be immaterial.

While Mr Morley was clearly less than meticulous in some respects, he prepared the financial statements upon the basis of company records supplied to him. Although Mr Archer hinted that relevant information was not supplied to Mr Morley, I am not prepared to find that material was withheld from Mr Morley in order to distort the preparation of the financial statements. In my view, except for the deficiencies to which I have referred, and for other qualifications to which I refer elsewhere in this judgment, I think the financial statements prepared as at 30 June 1996 and 31 December 1996 record reasonably accurately the financial position of Howship at those dates. Therefore, they provide a useful starting point for assessing Howship's solvency although, as will become clear, they cannot of themselves resolve that issue.

Mr Ferrier gave evidence that, in his opinion, on the basis of certain assumptions specified in his reports, Howship was able to pay its debts as and when they became due. The second of his reports was prepared on 17 January 1997, shortly before the hearing. I admitted Mr Ferrier's reports, subject to being satisfied that there was admissible evidence to support the assumptions on which his opinion and analysis were based. His reports were not admitted as proof of the transactions and other matters (such as the values attributed to certain assets) recorded in those reports.

In my view, there is no insuperable barrier to a suitably qualified expert expressing an opinion, in the course of an application to wind up a company, as to whether that company is able to pay its debts as and when they fall due. An issue of this kind is likely to be one on which an accountant or other person with specialist knowledge is able to express an opinion based on his or her expertise or knowledge: compare Evidence Act 1995 (Cth) ("Evidence Act 1987 ") s.76. Nor is evidence of an opinion now inadmissible merely because it is about a fact in issue or an ultimate issue: Evidence Act, s.80(a). Of course, the value of such an opinion is another matter; the Court may or may not find the expression of opinion helpful, depending on the circumstances of the case. Moreover, under the general law, for an opinion expressed by an expert to be of any value, the facts upon which it is based must be proved by admissible evidence, although this does not mean that the facts so proved must precisely correspond to the proposition on which the opinion is based: Paric v John Holland (Constructions) Pty Ltd [1985] HCA 58; (1985) 62 ALR 85 (HC) at 87-88; Trade Practices Commission v Arnotts Ltd (No.5) (1990) 21 FCR 324 (FCA/Beaumont J), at 326-327.

Mr Ferrier's reports stated his assumptions clearly and carefully: see TPC v Arnotts, at 330. However, the evidence did not entirely support all of his assumptions. For example, he assumed that the company would incur operating expenditure at a rate of about $19,000 per month for the immediate future, rather than the figure of $26,000 per month I consider to be more likely. He also assumed that certain land would be sold earlier than I consider is justified by the evidence. In these circumstances, although the case is a borderline one, I think that the appropriate course is to disallow those portions of Mr Ferrier's reports which express the opinion that Howship is solvent. Of course, it follows that I have placed no reliance on Mr Ferrier's expression of opinion in reaching my own conclusion as to whether Howship is solvent.

Mr Ferrier's reports were not confined to an expression of opinion as to Howship's solvency. He prepared a cash flow chart, based on Howship's financial statements and on a number of assumptions clearly identified in his reports. In my view, Mr Ferrier's analysis of Howship's likely cash flow is admissible: see Assignee of Meyer v Sefton [1816] EngR 8; (1817) 2 Stark 274; 171 ER 644, cited in Potts v Miller [1940] HCA 43; (1940) 64 CLR 282, at 302-303, per Dixon J. While I consider that the evidence requires some of Mr Ferrier's assumptions to be modified, the chart provides a very useful framework within which to consider the question of Howship's solvency. I shall return to it later in the judgment.

Background Facts

On 29 September 1993, Howship executed a retainer agreement with the firm then known as Smits Leslie Barwick. The agreement was also executed by Mr Baird and Mr Fidler. At that time, Mr Baird was a close friend of Mr Smits, a partner in the firm, and had sought his advice from time to time.

The subject matter of the retainer agreement was said to be the "Fern Bay project". Howship at the time owned land near Newcastle known as the Fern Bay land. The retainer concerned advice in relation to a proposed joint venture agreement between Howship and a third party for the development of the Fern Bay land. The retainer agreement provided for Mr Smits to charge at an hourly rate of $350 and for the services of other partners to be charged at a rate of $280 per hour. Under the agreement, the clients waived the right to receive an itemised bill of costs, except by reference to hourly rates. The agreement also provided that the solicitor was not bound to make any adjustments in respect of an account unless the clients lodged full particulars of adjustments sought within 30 days of the issue of the invoice.

It was common ground that the firm performed work for Howship in connection with the proposed joint venture, although the venture ultimately did not proceed. The parties were, however, in dispute as to the extent of the work performed by the firm and the reasonableness of its charges. In any event, on 28 October 1993, Mr Shtein, a partner in the firm of Smits Leslie Barwick, forwarded two bills to Mr Baird of Howship. The first was for disbursements totalling $529.88 during the period from the commencement of the matter until 22 October 1993; the second was for professional fees over the same period, totalling $24,766. These accounts ultimately formed the basis of the statutory demand by the applicants on Howship.

Conflicting evidence was given by Mr Baird and Mr Smits as to whether the firm actively pursued payment of the accounts rendered in October 1993 and of other amounts said to be due by Howship and Mr Baird in respect of professional fees. Whether or not the firm did pursue payment from the outset, on 20 March 1995 Mr Smits forwarded a letter to Mr Baird requesting his agreement to pay interest at 10% per annum on amounts due by Howship and by him to the firm. The total due before interest was said to be $113,296, including the two accounts of 28 October 1993 amounting to $25,293.80.

On 27 March 1996, Mr Smits wrote to Mr Baird enclosing what were said to be time sheets maintained by Mr Shtein in respect of the Fern Bay project. These were sent, according to the letter

"to demonstrate that there has been compliance with the requirement to maintain such sheets, even if they have not been sent or shown previously to you."

The evidence did not make clear when these time sheets were prepared. The time sheets themselves suggest, somewhat surprisingly having regard to the relatively straightforward nature of the agreement, that Howship may have been charged in the order of 12 to 13 hours of a partner's time for drafting and settling the retainer agreement.

On 19 April 1996, Mr Fidler wrote to the firm disputing the costs charged in relation to the Fern Bay project. The letter asserted that both the time spent and costs charged were excessive. The letter also maintained that the documentation for the joint venture agreement had been settled prior to the retainer of the firm. This prompted a written response from Mr Smits rejecting Mr Fidler's assertions and endorsing what was described as a "further particularisation" of the work covered by the account for professional fees of 28 October 1993. Mr Smits demanded immediate payment of "the moneys overdue to us for nearly three years".

On 9 May 1996, Mr Smits wrote to the solicitors then representing Howship requiring payment of the sum of $25,295.88 in respect of the two accounts of 28 October 1993, plus interest of $5,753.06 on that sum. The letter stated that if those amounts were not paid within 14 days, appropriate legal proceedings would be instituted. The letter noted that legal advice had been obtained that the appropriate course to follow in relation to the two accounts was to issue a statutory demand against Howship. Mr Smits indicated that the firm would be prepared to consider an alternative dispute resolution process to finalise any dispute concerning the other accounts. These accounts were now said to total approximately $46,000, significantly less than the figures mentioned in the letter of 20 March 1995. The difference was explained by Mr Smits in his evidence as being the amount the firm would be able to substantiate on a taxation.

On 15 May 1996, Howship's solicitors disputed the firm's entitlement to commence legal proceedings to recover the amounts claimed in the accounts of 28 October 1993. The letter continued:

"In our opinion there was never a proper itemised account rendered and under the [Legal Profession Act (NSW)] our clients are entitled to receive such an account prior to any recovery proceedings".

On 4 June 1996, Messrs Smits and Leslie, partners in the firm, issued a statutory demand addressed to Howship requiring payment of the sum of $25,295.88 for work invoiced in respect of the proposed joint venture. There was a dispute between the parties as to when this statutory demand was served. However, in proceedings between the parties, determined by Young J in the Equity Division of the Supreme Court of New South Wales on 23 July 1996 and 1 August 1996, it was decided that the demand was served on 6 June 1996: Howship Holdings Pty Ltd v Leslie (1996) 14 ACLC 1549.

Howship gave instructions to its then solicitors to make an application under s.459G of the Corporations Law to apply for an order setting aside the statutory demand. A summons to set aside the statutory demand was filed on 21 June 1996. The summons and the supporting affidavit were dispatched by Howship's solicitors to Messrs Smits and Leslie, through the document exchange (so Young J found) on 26 June 1996. However, Young J also found that the documents were not received by the firm of Smits Leslie until 28 June 1996, 22 days after service of the statutory demand. Because of the decision in David Grant & Co Pty Ltd v Westpac Banking Corporation, Young J held (at 1555), that since the summons and supporting affidavit had not been served within 21 days of service of the statutory demand, it was not competent for the Court to entertain Howship's application to set aside the demand.

The applicants commenced the present proceedings to wind up Howship on 1 July 1996. Subsequently, orders were made by Einfeld J requiring Howship to pay into Court the amount in dispute. On 12 September 1996, Howship paid into Court the sum of $25,295.88, the amount claimed by the applicants in the statutory demand. The applicants filed, but ultimately did not proceed with a motion to appoint a provisional liquidator to Howship.

There are other proceedings on foot between the parties in the Supreme Court of New South Wales. These proceedings concern an application by Howship for the taxation of the accounts rendered by the firm. It is enough for present purposes to note that the proceedings have not been concluded.

The Issues

It was common ground between the parties that the Court is entitled to wind up a corporation under Part 5.4 of the Corporations Law only if the corporation is insolvent. It was also common ground in the present case that, by reason of Howship's failure to comply with the statutory demand, it is to be presumed, except so far as the contrary is proved, that Howship is insolvent: s.459C. Thus the onus of proof falls on Howship to demonstrate that it is solvent.

Howship, in addition to contending that it has discharged the onus on the question of insolvency, seeks to defend the winding up proceedings on the grounds that there is a genuine dispute as to the existence and quantum of the debt specified in the statutory demand and that the winding up proceedings constitute an abuse of process. As I have previously said, in order to rely on these grounds, Howship requires leave under s.459S of the Corporations Law. The applicants contend that such leave should not be granted since the Court could not be satisfied that either ground is material to proving the company's solvency: s.459C(2). In any event, they contend that there is no genuine dispute as to the existence and quantum of the debt and the proceedings are not an abuse of the Court's process.

On the view I have formed of this case, it is necessary only to address the question of Howship's solvency.

The Principles

As Lindgren J observed in Melbase Corporation Pty Ltd v Legenhoe Pty Ltd [1995] FCA 1225; (1995) 17 ACSR 187 (FCA/Lindgren J), at 198, s.95A(1) of the Corporations Law states a "cash flow test" rather than a "balance sheet test of insolvency". It follows that the mere fact that the company's assets exceed its liabilities does not establish solvency. In Re Bond Corporation Holdings Ltd (1990) 1 ACSR 350 (S Ct WA/Ipp J), at 358, Ipp J quoted the following passage from Buckley on the Companies Acts (13th ed, 1957), at 60 (cited by Plowman J in Re Tweeds Garages Ltd [1962] Ch 406, at 410), on the question of commercial insolvency:

"...that is, the company being unable to meet current demands upon it. In such a case it is useless to say that if its assets are realised there will be ample to pay 20 shillings in the pound; this is not the test. A company may be at the same time insolvent and wealthy. It may have wealth locked in investments not presently realisable; but although this be so, yet if it have not assets available to meet its current liabilities, it is commercially insolvent and may be wound up".

Professor Goode points out that the rationale for this approach is that creditors should not be expected to wait while the company realises assets, some of which may not be held in a form which can be readily liquidated: R M Goode, Principles of Corporate Insolvency Law (1990), at 26-27.

The adoption of a cash flow test does not mean that the extent of the company's assets are irrelevant to the inquiry. The approach to be taken was explained by Barwick CJ (with whom McTiernan and Windeyer JJ agreed) in Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666, at 671:

"Insolvency is expressed in s.95 [of the Bankruptcy Act 1924 (Cth)] 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 shot 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."

The question of fact, as to whether a company is unable to pay its debts as they fall due, is to be decided as a matter of commercial reality in all the circumstances: Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 (S Ct Vic/McGarvie J), at 811. Accordingly, the resources of the company requiring consideration include the credit resources in the sense of the terms of credit available to it: Taylor v ANZ Bank, at 812; Re Newark Pty Ltd [1993] 1 Qd R 409 (S Ct Qld/FC), at 413-414, per Thomas J.

The question of solvency must be assessed, as the parties agreed, at the date of the hearing. But this does not mean that future events are to be ignored. In Bank of Australasia v Hall [1907] HCA 78; (1907) 4 CLR 1514, a case arising under the Insolvency Act 1874 (Qld), Griffith CJ addressed (at 1527-1528) the meaning of the words "unable to pay his debts as they become due from his own moneys":

"It was argued that only debts then actually payable and the amounts of which were then actually ascertained should be taken into consideration. One answer to this argument is that the matter for determination is the ability of the debtor, which is a state or condition that cannot be determined without having regard to all the facts. Another answer is that the debts referred to are not his debts 'then' payable, but his debts 'as they become due' - a phrase which looks to the future. No doubt, only the reasonably immediate future is to be looked to, but the anticipated verdict was not beyond this limit. It is not seriously contended that the debtor was, or had any prospect of being, able to pay this debt when it became due, i.e. when the amount was definitely ascertained, from his own moneys.

But, even if Phillipson had not been a creditor in the strict sense of the term, and if the obligation to him had not been a debt strictly so called, it would still, in my opinion, be impossible to apply the tests prescribed by secs.107, 108 and 109 without taking it into consideration. The words 'as they become due' require, as already pointed out, that some consideration shall be given to the immediate future; and, if it appears that the debtor will not be able to pay a debt which will certainly become due in, say, a month (such as the wages payable by Robertson for the month of July) by reason of an obligation already existing, and which may before that day exhaust all his available resources, how can it be said that he is able to pay his debts as they become due', out of his own moneys?"

It follows that, as the remarks of Barwick CJ in Sandell v Porter imply, it may be relevant to a company's solvency that the company has decided to sell a property to enhance its working capital and that the sale is likely to take place within a short period: see also Re Newark. Similarly, it has been held that, in assessing the solvency of a company in April 1995, it was appropriate to take into account a then existing debt to a parent company of $33 million. Although the parent company had not pressed for payment, Lindgren J found that the debt would become definitely due and payable without demand no later than 30 June 1995: Melbase v Segenhoe, at 200; compare Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 (S Ct SA/Olsson J), at 65-66. On the other hand, as Ipp J said (at 358) in Re Bond Corporation Holdings Ltd, it is not part of the Court's task to determine whether, as a matter of probabilities, the company will not be in a position at some future time to meet the liabilities which it will then have incurred.

Howship's Financial Statements

Howship was incorporated in 1981. Until about 1991 Mr Baird was the sole beneficial owner of all shares in the company. That position changed at about the time Howship acquired a parcel of land apparently with a view to subsequent redevelopment. At that time, Mr Fidler acquired a beneficial shareholding in the company. At the date of the hearing, A J Baird & Sons Pty Ltd, a company controlled by Mr Baird, held one ordinary share and one class "A" (voting only) share. Limalig Pty Ltd, a company controlled by Mr Fidler, held one ordinary share and Mr Fidler himself held one A class share.

Howship can fairly be described as a company with substantial assets, but which has derived only modest revenues from land sales and which has been operating at a substantial trading loss. The unaudited financial accounts for the years ended 30 June 1994, 30 June 1995 and 30 June 1996 were in evidence. As I have noted, these accounts were prepared by Mr Morley. Mr Morley also prepared a profit and loss statement for the six month period ended 31 December 1996 and a balance sheet as at 31 December 1996. It is convenient to set those out here:

HOWSHIP HOLDINGS PTY LIMITED

TRADING, PROFIT AND LOSS STATEMENT

FOR THE PERIOD ENDED 31ST DECEMBER 1996

Last Year This Year

SALES

152879.87 Land Sales 39332.00

LESS: COST OF GOODS SOLD

32970.92 Purchases 8483.00

41930.23 Development Costs -

74901.15 8483.00

74901.15 8483.00

77978.72 GROSS PROFIT FROM TRADING 30849.00

EXPENDITURE

12603.50 Accountancy Fees 13899.50

477.90 Advertising -

2764.77 Bank Charges 700.64

2000.00 Commission Paid -

805.00 Conferences & Seminars 663.00

198.00 Depreciation 4311.00

- Fees & Permits 2071.20

- Filing Fees 510.00

- Fines 315.65

2822.97 Insurance 692.11

106987.11 Interest Paid 264399.87

- Legal Costs 199228.24

316.50 Motor Vehicle Expenses 1632.40

550.00 Petty Cash Expenditure 100.00

762.71 Printing, Stationery & Postage 3907.07

57981.58 Rates & Taxes 9409.98

- Replacements 562.00

Repairs & Maintenance - Plant

400.00 & Equipment 921.90

260.00 Repairs & Maintenance 75.00

2233.00 Subscriptions 4133.00

11060.00 Superannuation Contributions 14144.00

6909.74 Telephone 4807.35

1562.00 Travelling & Accommodation -

- Valuation Fees 6050.00

47019.00 Wages 90491.35

257713.78 623025.26

(179735.06) (592176.26)

OTHER INCOME

6132.52 Interest Received 6673.33

6132.52 6673.33

173602.54 NET OPERATING LOSS 585502.93

Accumulated Losses - Beginning

498564.67 of Year 672167.21

ACCUMULATED LOSS AT 31ST

672167.21 DECEMBER 1996 1257670.14

HOWSHIP HOLDINGS PTY LIMITED

BALANCE SHEET

AS AT 31ST DECEMBER 1996

Last Year This Year

AUTHORISED CAPITAL

90000.00 98900 Ordinary Shares of $1 98900.00

10000.00 100 A Class Shares of $1 100.00

1000 Redeemable Preference

- Shares of $1 100000.00

100000.00 100000.00

ISSUED CAPITAL

2.00 2 Ordinary Shares of $1 2.00

2.00 2 A Class Ordinary Shares of $1 2.00

100 Redeemable Preference

- Shares of $1 100.00

4.00 104.00

RESERVES

11177684.91 Asset Revaluation Reserve 11177684.91

220790.14 Capital Profits Reserve 220790.14

- Share Premium Reserve 499900.00

672167.21 Accumulated Loss 1257670.14

10726311.84 SHARE CAPITAL AND RESERVES 10640808.91

CURRENT ASSETS

4.00 Cash on Hand 4.00

Advance Bank Fixed Deposit

356400.00 (Note 3) 356400.00

National Australia Bank

- Deposit (Note 4) 368784.15

- Cash at Bank 27727.99

2178.30 National Bank Account -

358582.30 752916.14

39975.50 Plant & Equipment - at Cost 39975.50

770.00 Less: Accumulated Depreciation 5081.00

39205.50 34894.50

1555243.36 Development Studies 1646144.52

1555243.36 1646144.52

1594448.86 1681039.02

INVESTMENTS

Fern Bay Land at Independant[sic]

12000000.00 Valuation (Note 1) 12000000.00

67934.55 Freehold Land - Salamander 67934.55

1071829.40 Land Dutchies Estate at Cost 1063821.40

13139763.95 13131755.95

15092795.11 TOTAL ASSETS 15565711.11

CURRENT LIABILITIES

14257.40 Bank Overdraft

Bank Overdraft 38999.91

25.00 Unpresented Cheques 14233.90

840000.00 National Bank Bill 840000.00

854282.40 893233.81

NON-CURRENT LIABILITIES

3000000.00 1st Mortgage (Note 2) 3000000.00

2200000.00 2nd Mortgage (Note 2) 2200000.00

(1687799.13) Shareholders Loans (1168331.61)

3512200.87 4031668.39

4366483.27 TOTAL LIABILITIES 4924902.20

10726311.84 NET ASSETS 10640808.91

HOWSHIP HOLDINGS PTY LIMITED

FOR THE PERIOD ENDED 31ST DECEMBER 1996

NOTE 1

Independent Valuation of the Fern Bay Land.

The independant [sic] valuation of the Fern Bay Land of $12,000,000 (Twelve Million Dollars) was carried out by Mr R K Allan of Allan's Management Services of East Hills.

Mr Allan is the Chief Manager of the Commonwealth Bank Valuation Department. The valuation was dated the 7th February 1996. The valuation following a rezoning of the land in 1995 from rural to mostly urban.

NOTE 2

1ST & 2ND MORTGAGES

The 1st and 2nd mortgages are secured on the Fern Bay Land. These advances were made by a legal firm in Sydney on behalf of a number of lenders.

NOTE 3

ADVANCE BANK DEPOSIT

The Advance Bank Fixed Deposit is to be used to pay the interest for the 2nd mortgage when it becomes due.

NOTE 4

CONTINGENT LIABILITY

The National Bank Deposit will be used to pay any taxation liability for the company. The taxation department has issued assessments totalling $364,575.49, but objections have been lodged against these assessments and it is believed these objections will be successful.

The profit and loss statement shows expenditure of $619,014 (exclusive of depreciation) during the six month period from 1 July 1996 to 31 December 1996. Of this amount, $264,400 represented interest and $199,228 legal costs. The evidence did not clarify which proportion of the legal costs was attributable to the present litigation, which to proceedings in the Land and Environment Court relating to the compulsory acquisition of part of the "Dutchies Estate" land and which to other matters. In any event, the expenditure after allowing for interest and legal costs was $155,386, or $25,898 per month. The profit and loss statement shows a net operating loss of $585,503 for the period and accumulated losses at 31 December 1996 of $1,257,670.

The balance sheet suggests that, at 31 December 1996, the company had a surplus of assets over liabilities of $10,640,809. If shareholders' loans are ignored (the figure of $1,168,332 actually representing sums due by the shareholders to the company), the net assets according to the balance sheet total $9,472,478.

The evidence allows a number of findings to be made that are relevant to an assessment of whether Howship has discharged the onus of demonstrating that it is solvent, as that term is defined in s.95A of the Corporations Law.

1. The Fern Bay Land

The main asset of Howship is the so-called Fern Bay land. This land has an area of about 206 hectares and has a frontage on the main road running from Nelson Bay to Newcastle. The land was rezoned in March 1995 to permit part of it to be subdivided for residential development, subject to certain conditions including development consent from Port Stephens Shire Council ("the Council"). Howship lodged a development application in respect of the land in September 1996, but that application had not been determined by the Council at the date of the hearing.

The first stage of the proposed development involves 68 lots. However, those lots cannot be sold until development consent is granted. Mr Baird estimated that the first stage of the development would require 120 working days from the date the Council grants consent. He also estimated that the development would cost about $24,000 per lot, a total of about $1,600,000. He accepted that Howship does not at present have this sum of money.

The value of the Fern Bay land, according to an independent valuation carried out on 7 February 1996, was (at that time) $12 million. Although the valuation itself was not in evidence, the accounts for the year ended 30 June 1996 and for the period ended 31 December 1996 were in evidence and the notes to the accounts refer explicitly to the valuation. There is no reason not to accept the accuracy of the statement in the accounts on this issue. While nearly a year has passed, there is nothing in the evidence to suggest that the value of the land has declined substantially in the intervening period. The evidence does not enable a precise current value to be attributed to the land, but the probabilities are that it is worth very substantially more than the sums, totalling $5,200,000, due under the first and second mortgages over the property. There was, however, no evidence to suggest that the property could or would be sold in the short term. Nor was there evidence that further funds could be raised at short notice on the security of the property.

2. The Dutchies Estate Land

The other main non-current asset of Howship is the property known as the Dutchies Estate land, located at Nelsons Bay. The balance sheets as at 30 June 1996 and 31 December 1996 record the value of the land at its acquisition cost of $1,063,821. The title to this land is held by Mr Fidler in trust for Howship.

In December 1995, Mr Fidler served notices on the Council pursuant to the Port Stephens Local Environmental Plan 1987, requiring the Council to acquire two lots within the Dutchies Estate land. On 29 February 1996, the Council offered to acquire the lots for a total of $600,000. This offer was rejected by Mr Fidler, on behalf of Howship.

In May 1996, Mr Fidler commenced proceedings in the Land and Environment Court seeking a declaration that the Council was obliged to acquire the two lots by compulsory process under the Land Acquisition (Just Terms Compensation) Act 1991 (NSW). A declaration was made by that Court in September 1996. The Council has since filed an appeal to the Court of Appeal, which is expected to be heard by about October 1997. The Council has given notice that it will acquire the lots by compulsory process. However, it has not published the notice because the Land and Environment Court has granted a stay of the orders, insofar as they oblige the Council to publish the notice.

Mr Fidler obtained valuations of the various lots comprising Dutchies Estate land in May 1995, December 1995 and January 1996. These valuations, which were in evidence, totalled $3,075,000. The two lots the subject of the orders of the Land and Environment Court were valued at $1,750,000.

3. Cash Flow

As the profit and loss statements show, Howship has derived only very limited revenue from sales and interest on investments. Clearly it has been dependent on borrowed funds (or repayment of advances to shareholders) and infusions of capital to obtain the resources required to support its activities. The most significant developments in the five months preceding the hearing have been the following:

* On 12 September 1996, the company issued 100 redeemable preference shares to a company known as Holstac Pty Ltd, at a subscription price of $5,000 per share. The total of $500,000 was paid to the company the same month.

* On 18 October 1996, Mr Baird reduced his loan account with the company, by a payment of $330,000. This amount was used to acquire the deposit with the National Australia Bank ("NAB") identified in Howship's balance sheet. The deposit, which totalled $368,784 on 31 December 1996, was later augmented by transfers from Howship's current account. According to Mr Baird, the amount in this account has been earmarked to meet income tax and penalties due to the Australian Tax Office ("ATO"), should Howship's objections to the assessments not succeed. Further reference will be made shortly to the ATO assessments.

* On 16 January 1997, Howship issued a further 40 redeemable preference shares at a subscription price of $5,000 per share. The sum of $200,000 so raised was paid to the company on 23 January 1997.

4. The Mortgages

The first mortgage over the Fern Bay land was executed on about 23 August 1995. The principal sum advanced under the mortgage was $3,000,000. That sum was repayable on 22 August 1996. The term of the loan was subsequently extended until 22 February 1997, a date shortly after the hearing.

On 17 January 1997 the solicitors for the mortgagees confirmed that the mortgage had been extended for a term of six months, so that the principal is now repayable on 22 August 1997. The mortgage was extended on terms that the interest for the six month period and costs of the extension were paid in advance. Howship paid the amount due ($178,540) on 23 January 1997, the same date as the company received the sum of $200,000 in respect of the redeemable preference shares.

The second mortgage, which secures the sum of $2,200,000, is due for repayment on 14 February 1998. Interest is payable annually in advance. Funds were set aside within Howship to meet the interest payment due on 14 February 1997, shortly after the date of the hearing. The funds earmarked were those recorded in the balance sheet as held on fixed deposit with the Advance Bank.

5. The NAB Commercial Bill Facility

On 20 August 1995, the NAB offered Mr Fidler a bill acceptance facility subject to a limit of $840,000. Mr Fidler was a trustee of the Dutchies Estate land for Howship, and I am satisfied that he entered into this arrangement as trustee for Howship. The facility was initially expressed to operate from 1 September 1996 until 30 November 1996, but was subsequently extended until 29 January 1997. The facility is supported, inter alia, by registered first mortgages over specified properties, including the Dutchies Estate land. There has been no default in Mr Fidler's obligation to pay interest to the NAB in respect of the facility.

On 29 January 1997 the NAB extended the facility until 28 February 1997. The bills therefore mature on the latter date. Howship did not call evidence from the NAB as to whether the Bank would agree to extend the facility beyond 28 February 1997.

6. Bank Accounts

The interest and drawdown fee payable in respect of the NAB facility on 29 January 1997 was debited to an account with the NAB in the name of Mr Fidler. I infer that this account is maintained by Mr Fidler as trustee for Howship. The approved overdraft limit for the account is $35,000. On 23 January 1997, the account was in debit in the sum of $39,021. The letter from the NAB of 29 January 1997 advising of the extension of the bill facility noted that, after allowing for interest and fees and funds deposited to the account of $10,000, the debit balance would be $33,414.

Howship also maintains an account with the Advance Bank. At 31 December 1996, that account had a credit balance of $27,728, an amount recorded in the balance sheet as a current asset. On 30 January 1997, the balance in the account (after allowing, inter alia, for the payment in of $200,000 for the redeemable preference shares and the payment out of $178,540 in interest and expenses in respect of the first mortgage) was $21,430. A payment of $10,000 was made from this account on 29 January 1997. I infer that this payment was made to the NAB in order to keep Mr Fidler's account within the overdraft limit.

7. The Moneys Claimed by the Applicants

On 12 September 1996, Howship paid into Court the sum of $25,295.88 in respect of the disputed debt which was the subject of the statutory demand. This sum therefore covers the amount of Howship's disputed indebtedness to the applicants, as claimed in the statutory demand served on 6 June 1996.

The applicants claim further amounts totalling approximately $50,000 plus interest. However, Mr Archer, who appeared for the applicants, accepted that the applicants relied on the additional claim only to establish their status as a creditor of Howship and did not rely on the additional sums claimed on the issue of Howship's solvency.

8. Liability to the ATO

On 3 October 1996, the ATO issued notices of assessment to Howship in respect of the 1984-1990 financial years. On about 21 November 1996 Howship received a statutory demand from the Deputy Commissioner of Taxation requiring payment of $366,807 being the amount claimed in the assessments plus interest to 19 November 1996. On 27 November 1996, Howship lodged objections to the assessments and shortly thereafter commenced proceedings in the Supreme Court of New South Wales seeking orders setting aside the demands.

On 14 January 1997, the ATO agreed to the demand being set aside provided that 50 percent of the amount in dispute was paid by 17 January 1997. The ATO agreed that, if the payment were made, the balance of the company's debt would be held in abeyance pending the determination of the objections. Howship paid the amount required ($185,403) on 16 January 1997.

9. Deposits

The balance sheet prepared at 31 December 1996 shows the following moneys held on deposit by Howship:

* an Advance Bank fixed deposit of $356,400 (maturing on 14 February 1997); and

* a deposit with the NAB of $368,784.

The Advance Bank fixed deposit has been earmarked to meet the annual interest payment due under the second mortgage over the Fern Bay land on 14 February 1997. No further interest will be due under the second mortgage unless of course the term is renewed beyond the due date of 14 February 1998. Interest at the Advance Bank fixed deposit of approximately $30,000 is payable to Howship on maturity of the deposit.

The deposit with the NAB was set aside to meet Howship's disputed liability to the ATO. On 11 January 1997, $183,403, approximately half of the amount on deposit was paid to the ATO. The remainder of the amount invested with the NAB remains on deposit.

Mr Ferrier's Cash Flow Chart

Mr Ferrier constructed a cash flow chart which he said reflected Howship's financial position as at 17 January 1997. As I have already said, I consider that this chart is extremely helpful in assessing whether Howship has discharged the burden of establishing that it is solvent. The chart is reproduced below:

The chart as prepared by Mr Ferrier suggests that Howship will be able to meet all debts it will incur as and when they fall due, at least in the short term. In particular, the chart suggests that at the end of March 1997 Howship will have cash resources (including moneys on short term deposit) of $174,958. The comparable figure at the end of June 1997 is $281,178.

The figures in the column headed "Estimated Real Value January 97" reflect the evidence I have already outlined, with the following exceptions:

* taking account of the position on 29 January 1997, the NAB overdraft ($39,000) is overstated by about $6,000 and the balance in the Advance Bank cheque account is understated by about $8,000;

* the valuations of the Fern Bay and Dutchies Estate land require some modification, although the value of each substantially exceeds the respective amounts for which each land is security.

The predicted cash flow until the end of March 1997 is in my opinion reliable, subject to these qualifications:

* the sum available in the Advance Bank account is about $8,000 grater than predicted and a payment of $5,000 is not required to bring the NAB overdraft within the limit of $35,000 (a net benefit to the company of about $13,0000);

* based on the experience of the six months to 31 December 1996, the monthly expenditure, other than interest payments, is likely to be in the order of $26,000 rather than $19,166;

* if the ATO disallows Howship's objections to the assessments the balance of the assessments (plus interest since 19 November 1996) will become payable in accordance with the agreement reached with the ATO.

If it is assumed that operating expenditure will accrue at the rate of about $26,000 per month rather than about $19,000 and that the ATO will require payment of the balance of assessments plus interest before 31 March 1997, the cash flow chart would show a deficiency of about $15,500 ($174,958-$183,403 (ATO) - $6,000 (interest to ATO) - $14,000 (2 months of additional operating expenditure at $7,000 per month) + $13,000 (cash underestimated) = -$15,451).

The cashflow chart for April to June 1997 makes two specific assumptions of particular relevance:

* that the operating costs will continue at $19,166 per month (rather than $26,000 per month, which I think is more realistic); and

* that portion of the Dutchies Estate land will be sold by June 1997, yielding $1,200,000, thereby permitting Howship to repay the debt of $840,000 due to the NAB.

I do not think that the second assumption is supported by the evidence, having regard to the unresolved appeal from the decision of the Land and Environment Court. If the Dutchies Estate land were not sold by June, but the bill facility were extended beyond that date, the cashflow chart would show a deficit by 30 June 1997 of about $106,000 (allowing for operating expenditure of $26,000 per month). By December 1997, unless part or the whole of the Dutchies Estate land is sold, or the company derives revenue from some other source, the deficit rises to about $420,000.

Extension of the NAB Facility

Solvency of Howship

In my opinion, the most critical, although not the exclusive question, in relation to Howship's solvency is whether the company has established that the NAB will extend the bill facility of $840,000, beyond the due date of 28 February 1997. Mr Archer submitted that, in the absence of evidence from a responsible officer of the NAB to the effect that the Bank was prepared to extend the facility, the inevitable conclusion was that Howship would be obliged to pay the NAB the sum of $840,000 on 28 February 1997. Mr Ferrier accepted, as is obvious in any event, that unless Howship could obtain finance from some other source, the company would be insolvent if it had to repay $840,000 on 28 February 1997.

The fact that no evidence was called from a responsible officer of the NAB is a significant omission in Howship's case. Clearly, the most obvious and direct way of proving that the NAB would extend the bill facility beyond its due date was to call an officer of the Bank who is familiar with the affairs of Howship, as conducted on its behalf by Mr Fidler. No explanation was given as to the failure to lead evidence from such an officer that the NAB would be prepared to extend the facility.

In the absence of any such explanation, the failure to lead evidence from the NAB seems to me to attract the so-called rule in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298. While the NAB is not a party to the litigation, the officer responsible for dealing with the commercial bill facility is someone who, to use the language of Glass JA in Payne v Parker [1976] 1 NSWLR 191 (NSW CA), at 201, it would be natural for Howship to produce as a witness. Moreover, an officer from the Bank could be expected to elucidate the relevant facts (Payne v Parker at 202), even though the facts relate to likely future events.

In assessing the significance of the failure to call an officer of the Bank, it must be remembered that the principle applied in Jones v Dunkel is not that the trier of fact must draw an inference that will defeat the party failing to call the relevant witness. The trier of fact should take the failure into account in determining what inferences of fact to draw from the evidence, but in the end of totality of evidence must be considered. The principle was stated this way by Newton and Norris JJ in O'Donnell v Reichard [1975] VR 916 (S Ct Vic/FC), at 929:

"the law may be stated to be that where a party without explanation fails to call as a witness a person whom he might reasonably be expected to call, if that person's evidence would be favourable to him, then, although the jury may not treat as evidence what they may as a matter of speculation think that that person would have said if he had been called as a witness, nevertheless it is open to the jury to infer that that person's evidence would not have helped that party's case; if the jury draw that inference, then they may properly take it into account against the party in question for two purposes, namely:

(a) in deciding whether to accept any particular evidence, which has in fact been given, either for or against that party, and which relates to a matter with respect to which the person not called as a witness could have spoken; and

(b) in deciding whether to draw inferences of fact, which are open to them upon evidence which has been given, again in relation to matters with respect to which the person not called as a witness could have spoken."

See Jones v Dunkel, at 308, per Kitto J; at 312, per Menzies J.

The evidence in the present case establishes a number of factors which, in the absence of countervailing considerations, strongly supports an inference that the NAB will extend the commercial bill facility extended to Mr Fidler, at least until the conclusion of the appeal from the decision of the Land and Environment Court. These factors are the following:

* The NAB has extended the original facility beyond 30 November 1996, most recently on 29 January 1997. There is no suggestion in the documentation that the NAB has been pressing for repayment of the principal, or is concerned about the value of the securities supporting the facility.

* There has been no default in the payment of interest by Mr Fidler on behalf of Howship.

* The Council offered $600,000 to acquire portion of the Dutchies Estate land in February 1996. There is uncontradicted evidence that, at the time, the Council itself had obtained valuations assessing the value of the land subject to the offers as between $600,000 and $750,000.

* The remaining portion of the Dutchies Estate land had been independently valued at over $1,000,000.

* Howship has the benefit of an order from the Land and Environment Court requiring the Council to acquire the land in respect of which it made the offers in February 1996. While this order has been stayed on appeal, the present position is that the Council is required to purchase land which has been valued on behalf of Howship at $1,750,000.

If the Jones v Dunkel point is put to one side, I would have little hesitation in drawing an inference from the factors set out above that the NAB is likely to extend the commercial bill facility until the appeal by the Council is heard and determined. Those factors strongly suggest that the Bank is well secured; that there is a particular reason to continue the facility (namely, the appeal by the Council against the orders of the Land and Environment Court); that Howship has met its obligations under the facility; and that the position relating to the sale of the land to the Council is likely to be resolved before the end of 1997.

It is, of course, necessary to take into account Howship's failure to call as a witness the relevant officer of the NAB, who could have spoken as to the Bank's likely course of action. For the reasons I have explained, that failure is an important consideration in determining whether an inference should be drawn in favour of Howship, to the effect that the NAB will extend the facility. The absence of a witness from the NAB makes me less confident that the Bank will extend the facility until the date of the Land and Environment Court's determination. However, after giving appropriate weight to the failure to call a witness from the Bank, I think that the evidence as a whole justifies the inference that it is probable that the NAB will extend the facility until the conclusion of the Council's appeal.

Trade Creditors

Mr Archer relied on what he said was the failure of Howship to demonstrate the extent of its trade creditors. It is true that the evidence on this issue was less than satisfactory. Neither the balance sheet at 30 June 1996 nor the balance sheet at 31 December 1996 contained any provision for trade creditors, although in each case an entry appeared for unpresented cheques. Mr Morley gave evidence that it was not unusual for small businesses not to have trade creditors at a particular balance sheet date. He also said that he believed that there were no trade creditors as at 31 December 1996, but acknowledged that he could not recall making inquiries of Mr Baird or Fidler as to whether there were in fact trade creditors of Howship at that date. Similarly, he could not recall making inquiries concerning Howship's trade creditors at 30 June 1996. For his part, Mr Baird gave evidence that he could not say whether Howship had received accounts which had not been paid as at 30 June 1996. He was not directly asked whether, as at 31 December 1996 or at the date of the hearing, Howship had creditors who had not been paid.

There was affirmative evidence that there were unpaid trade creditors of Howship at 30 June 1996. For example, surveyors' fees of $11,615 were owed by Howship on 30 June 1996 but not paid until 2 October 1996. At least one account rendered by Coffey Partners International, in February 1996, for $928.69, was not paid until August 1996.

On the evidence, I could not be satisfied that at the date of the hearing Howship had no trade creditors. However, Mr Archer tendered a bundle of invoices produced by Howship under a notice to produce and which Mr Baird identified as accounts rendered to Howship. The invoices, with one exception, ranged in date from 28 June 1996 (presumably received by Howship after 30 June 1996) to 29 November 1996. There is nothing to suggest that this bundle of invoices is incomplete and that Howship received other invoices during that period. Neither party sought to assist by attempting to match the invoices to the payments recorded in the profit and loss statement for the period ended 31 December 1996 or to the company's bank statements. However, it can be inferred from the invoices themselves, the bank statements and the profit and loss statements that no substantial amount billed to Howship in these invoices remained unpaid at 31 December 1996. It is clear from the profit and loss statement for the period ended 31 December 1996 that many of the invoices had been paid. In other instances, recourse to the company's bank statements leads to the same conclusion. For example, a memorandum of fees from Coffey Partners dated 21 August 1996 for $7,863.50 bears a stamp dated 3 October 1996. That this reflects payment of the account on that date is supported by a debit entry in the company's bank statement of $7,863.50 on 5 October 1996. Similarly, a memorandum of fees from environmental consultants dated 28 October 1996, for $11,400, bears a stamp dated 29 November 1996, suggesting that the account was paid on that date. The company's bank statement contains a debit entry of $11,400 on 2 December 1996, from which I infer that the account was in fact paid by Howship.

In the light of all the evidence, I am satisfied that, if there were trade creditors not recorded in Howship's balance sheet at 31 December 1996, they would make no significant difference to the company's solvency at the date of the hearing.

Finding on Solvency

Howship is clearly a company with substantial assets which, on the evidence, exceed its liabilities. However, its principal assets are in the form of land holdings which the company's directors wish to develop for sale. There is no immediate prospect of the land being sold, although it is likely that the dispute between the Council and Howship relating to the acquisition of the Dutchies Estate land will be resolved before the end of 1997. It is clear that the company has survived to date by the injection of funds through loans and, more recently, through the issue of redeemable preference shares.

In view of the findings I have made about the NAB facility and trade creditors, the likelihood, as I have already explained, is that the company will need to find, approximately, an additional $15,000 by the end of March 1997 to meet its commitments. That amount may be slightly increased if there are trade creditors whose existence was not revealed in the December balance sheet. For reasons I have given, the deficiency in the cash flow for the period until the end of June 1997 is in the order of $106,000, assuming that the sale of the Dutchies Estate land is not finalised by then.

Having regard to the company's recent history in raising substantial funds to meet its commitments, and to the evidence that the value of its assets substantially exceed its liabilities, I think it probable that the company will be able to raise, either by way of loan or equity financing, the relatively modest sums required to ensure that the company pays all its expenses as they are incurred until at least the end of the current financial year.

This, of course, is not to say that the company's future is secure. The evidence suggests that its financial position is precarious and that further delays in developing the land that constitutes its principal asset may well result in the failure of the company. But the question is not whether the company will survive for the foreseeable future. It is whether the company has discharged the burden of showing that it can pay all of its debts as and when they become due and payable, having regard to the principles to which I have referred. In my view, the company has discharged that burden.

I should add that Mr Archer referred to the evidence suggesting that Howship will have to incur costs of about $1.5 million to complete the development of the land, once development consent is obtained. However, it will clearly be some time before these costs are incurred. Moreover, they will be incurred only after the relevant consents have been obtained, thereby presumably having a significant impact upon the value and saleability of the land. In my view, those development expenses do not constitute "contingent or prospective" liabilities within the meaning of s.459D of the Corporations Law: Community Development Pty Ltd v Engwirda Construction Company [1969] HCA 47; (1966) 120 CLR 455, at 459, per Kitto J; Stonegate Securities Ltd v Gregory [1980] Ch. 576 (CA), at 579, per Buckley LJ; The Roy Morgan Research Centre v Wilson Market Research Pty Ltd (1996) 39 NSWLR 311 (S Ct NSW/Santow J). In any event, to employ the phrase used by Griffith CJ in Bank of Australasia v Hall (at 1527), the development expenses will not be incurred in "the reasonably immediate future".

Extension of Time

I have referred to the fact that Howship sought leave under s.465C of the Corporations Law to oppose the application. Such leave is necessary because Howship failed to file, within the time prescribed by the rules, a notice of grounds of opposition and a supporting affidavit. Under Federal Court Rules, O.71, r.36(10), the notice and affidavit should have been filed and served not later than two days before the day appointed for directions. The date appointed for directions in the present case was 19 July 1996, so that the notice and supporting affidavit should have been filed on 17 July 1996. They were not filed until 8 August 1996.

Mr Archer conceded that the delay of three weeks occasioned no prejudice to the applicants. The evidence subsequently filed made it clear that there were substantial issues to be agitated at the hearing. While no explanation for the delay was provided by Howship, I think that it is appropriate to grant leave to the company pursuant to s.465C to oppose the application.

In the event, I have found it necessary only to deal with the issue of Howship's solvency. However, had it been necessary to do so, I would regard the leave granted to Howship as extending to the other grounds of opposition specified in the notice, ultimately filed by it.

Conclusion

Howship has discharged the burden of showing that it is able to pay its debts as and when they become due and payable. The application that Howship be wound up must be dismissed. I shall provide the parties with an opportunity to make submissions on costs.

I certify that this and the preceding 44 pages are a true copy of the Reasons for Judgment of the Honourable Justice Sackville.

Associate:

Dated: 28 February, 1997

Heard: 3, 4, 5 & 7 February, 1997

Place: Sydney

Decision: 28 February, 1997

Appearances: Mr S J Archer, instructed by Smits Leslie, Solicitors, appeared for the applicants.

Mr A.S. Martin, instructed by Clayton Utz, Solicitors, appeared for the respondent.