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[2011] NSWSC 1279
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Coates Hire Operations Pty Limited v D-Link Homes Pty Limited [2011] NSWSC 1279 (31 October 2011)
Last Updated: 13 December 2011
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Case Title:
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Coates Hire Operations Pty Limited v D-Link Homes
Pty Limited |
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Medium Neutral Citation:
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Hearing Date(s):
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Decision Date:
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Jurisdiction:
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Equity Division - Corporations
List |
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Before:
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Decision:
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Refer to paragraph [83] of judgment. |
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Catchwords:
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CORPORATIONS - insolvency - winding up in
insolvency - whether statutory demand served on the defendant - presumption
statutory demand
was delivered in ordinary course of post not rebutted -
presumption of insolvency arises CORPORATIONS - insolvency - application
for winding up in insolvency - where presumption of insolvency arises - whether
company has
adduced "fullest and best" evidence to rebut presumption of
insolvency - what "fullest and best" evidence requires CORPORATIONS -
insolvency - application for winding up in insolvency - where presumption of
insolvency arises - whether company is
insolvent because it would not be able to
pay debt owed to a director if he were to call for its payment where no
intention to make
such a call - company not insolvent as a matter of commercial
reality |
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Legislation Cited:
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Cases Cited:
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Texts Cited:
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Bullen & Leake, Precedents of Pleadings, 3rd ed
(1868) |
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Category:
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Parties:
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Coates Hire Operations Pty Limited
(Plaintiff) D-Link Homes Pty Ltd (Defendant) |
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Representation
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C P Locke (Plaintiff) C D Coulsen
(Defendant) |
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- Solicitors:
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Oliveri Lawyers (Plaintiff) Michael Cooper
Lawyers (Defendant) |
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File number(s):
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Publication Restriction:
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JUDGMENT
- HIS
HONOUR : This is an application that the defendant ("D-Link Homes") be wound
up in insolvency. The plaintiff relies on the presumption of
insolvency arising
from non-compliance with a statutory demand.
- D-Link
Homes denies that it was served with the statutory demand. It says there is no
presumption of insolvency. It says that in any
event it is solvent. It disputes
the debt claimed by the plaintiff. It has paid the amount of that debt into its
solicitor's trust
account.
- The
plaintiff contends that the evidence relied on by the defendant is not the "
fullest and best " evidence of solvency. It also says the defendant is
insolvent whether or not there is a presumption of insolvency.
- The
issues are:
1. Whether the statutory demand was served on the defendant;
2. If the presumption of insolvency has arisen, whether the defendant has
adduced the " fullest and best " evidence to rebut the presumption of
insolvency, and what that requires; and
3. Whether the defendant has displaced the presumption of insolvency and
proved it is solvent;
- I
have concluded that the statutory demand was served. I have concluded that by s
140 of the Evidence Act 1995 the defendant need establish that it is
solvent on the balance of probabilities and that the presumption of insolvency
is capable
of being rebutted if the evidence is sufficiently persuasive, even if
more or better evidence of solvency could be adduced. I have
concluded that the
presumption of insolvency has been rebutted, as the only debt the defendant
could not pay is a large debt owed
by it to its director, but he does not intend
to demand payment of the debt.
The plaintiff's claimed debt and service of the statutory demand
- The
defendant is a builder. The plaintiff claims that the defendant owes it the sum
of $43,916.58, being the total of seven invoices
said to have been delivered
between 31 August 2010 and 16 December 2010. The debt is said to have arisen
from the hire of equipment
supplied by the plaintiff to the defendant.
- The
plaintiff retained a mercantile agent, Oceanic Mercantile Pty Ltd ("Oceanic
Mercantile"), to recover the debt. The defendant's
director is Mr Linh Hoang. He
told Mr Justin Napiza from Oceanic Mercantile that one of the items of machinery
was defective, but
he was prepared to pay $28,000 if the plaintiff was prepared
to settle for that amount. There was a dispute between Mr Napiza and
Mr Hoang as
to whether Mr Hoang admitted the full amount of the debt and merely sought time
to pay. I prefer Mr Hoang's evidence.
Mr Napiza's file note of 8 February 2011
records that Mr Hoang had a dispute with the charge. On 17 February 2011 Mr
Napiza advised
Mr Hoang that the plaintiff was willing to accept $40,000 in
settlement of the matter if payment were made within 14 days. He advised
that if
the offer was not accepted Oceanic Mercantile may be instructed to commence
legal action by way of statement of claim. That
offer was not accepted. On 8
March 2011 Mr Hoang offered to pay $2,000 per month for 24 months. That was not
acceptable to the plaintiff.
In the course of these communications Mr Hoang
indicated that the defendant was suffering financial hardship. In his email of
11
February 2011 he said:
" ...we have been trouble with cash flow due to we did the job for the
client of 26-28 Gray Street, Southport QLD.
[T] he work we done worth $300,000.00 but [unfortunately] the
developer went broke so we did not get any payment that put
our company to financial hardship. ...
[C] urrently we own [sic] a huge amount of debt from
sub-contractors and suppliers
but we try so hard to solve out the problem. "
- On
8 March 2011 Mr Hoang wrote:
"[A] s you know my business are gonna take long time to recovery and it
can't be out positive in sort [sic] term due to problem with that job.
[O] n the other hand I have to solve out the problem with other party
[sic] such as: Boral, Bunning, Steel Company ...
[Y] ou can see I willing to deal with Coates Hire [plaintiff] and
other suppliers too " .
- On
9 March 2011 the plaintiff instructed Oceanic Mercantile to prepare a statutory
demand. On that day Mr Napiza telephoned Mr Hoang
and advised that the plaintiff
had instructed his company to proceed with legal action. Mr Hoang advised Mr
Napiza that he was suffering
severe financial hardship and was unable to commit
to any higher payment or to make a part-payment.
- Oceanic
Mercantile prepared the statutory demand. It was signed by Ms Penny Dobson, the
Credit Risk Manager of the plaintiff, on 11
March 2011. Notwithstanding Mr
Napiza's file note of 8 February 2011 referred to above, Ms Dobson swore an
affidavit verifying that
there was no dispute about the existence or amount of
the debt.
- Mr
Napiza placed the statutory demand in an envelope addressed to the defendant at
its registered office at 165 Inala Avenue, Inala,
Queensland. He affixed the
necessary postage stamp and placed it into an Australia Post post box at
Westfield Shopping Centre in
Bondi Junction.
- The
defendant denied that the statutory demand was received at its registered
office. The question is whether the presumption that
it was delivered to the
registered office in the due course of post has been rebutted.
- The
registered office of the defendant is the private residence of its sole
director, Mr Hoang. He deposed that he personally checked
all of the mail
delivered to the address, including that addressed to the company. He said that
whilst he received by post the originating
process and supporting documents, the
statutory demand was not ever delivered. He said that the letter box at the
house was secured
by a padlock to which he and his wife had a key.
- The
statutory demand was not returned to the sender.
- As
noted above, Mr Napiza also received instructions to prepare a statement of
claim for the debt. The statement of claim also joined
Mr Hoang as a defendant
as guarantor. The statement of claim was filed in the Local Court on 16 March
2011. Mr Napiza prepared a
file note that on 17 March 2011 the statement of
claim was sent to the defendant by post at its registered office in Inala. He
also
sent the document to a process server for personal service on Mr Hoang. Mr
Hoang admitted receiving the statement of claim by post.
He deposed that he was
personally served with a copy of it on 29 March 2011. Mr Hoang deposed that
immediately after he was served
with the statement of claim, he telephoned a
lawyer to obtain legal assistance. At the suggestion of an acquaintance who had
previously
acted for him in relation to conveyancing matters, he contacted
Slater & Gordon, solicitors, on or about 31 March 2011.
- It
might be inferred that because Mr Hoang sought legal assistance promptly after
being served with a copy of the statement of claim
that he would have sought
such assistance promptly after receiving a statutory demand, if the statutory
demand had been delivered
to his residence, which was the company's registered
office in Inala. This inference is weakened by the fact that it appears that
it
was only after Mr Hoang was personally served with a copy of the statement of
claim that he sought legal assistance in respect
of it, rather than seeking such
assistance immediately after having received a copy of the statement of claim in
the mail.
- Mr
Napiza deposed that on 22 March 2011 he telephoned Mr Hoang who told him " I
received the statutory demand. I will have my solicitor respond in due course. I
don't want to discuss the matter further with Oceanic
Mercantile ." Mr
Napiza made a file note of this conversation.
- Mr
Hoang denied this conversation. He said that Mr Napiza commenced the
conversation by saying words to the effect that Coates had
started legal action
and that he would be getting the papers in the next couple of days. According to
Mr Hoang he told Mr Napiza
that when he received the papers he would get his
lawyer involved.
- Counsel
for the defendant submitted that in making the telephone call of 22 March 2011
Mr Napiza was following a standard practice
of following up the service by post
of the statement of claim and that the absence of such a follow-up call a few
days after the
alleged postage of the statutory demand was some evidence that
contrary to Mr Napiza's evidence, the statutory demand was not posted.
- However,
Mr Napiza had a contemporaneous record of posting the statutory demand. I think
the timing of the telephone call on 22 March
2011 was consistent with his
following-up service of either or both of the statutory demand or the statement
of claim.
- In
my view the presumption that the statutory demand was delivered in the ordinary
course of post has not been rebutted. If, as he
deposed, Mr Hoang did not
receive the statutory demand, it would not mean that the statutory demand was
not served, provided it was
received in the letter box at the company's
registered office. No evidence was called from Mr Hoang's wife who also had a
key to
the letter box.
- In
any event, I consider that I ought to accept Mr Napiza's evidence that Mr Hoang
admitted receipt of the statutory demand, as that
evidence is corroborated by a
contemporaneous file note.
- For
these reasons I find that the statutory demand was served by being delivered by
post to the company's registered office. The presumption
of insolvency arose.
- The
defendant did not seek leave under s 459S of the Corporations Act 2001
(Cth) to oppose the winding-up application on a ground on which it could have
relied in an application to set aside the statutory
demand, namely, that there
was a genuine dispute about the plaintiff's debt. The defendant could not take
that course because it
was the defendant's position that it was solvent whether
or not it owed the debt claimed by the plaintiff ( Switz Pty Ltd v Glowbind
Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661).
Evidence of Solvency
- The
defendant led evidence from Ms Jane Nguyen, a certified practising accountant
specialising in taxation for small businesses. She
had formerly acted as a tax
auditor with the Australian Taxation Office. She was provided by Mr Hoang the
financial records of the
company. These were said to comprise books of account,
contracts, bank statements, loan statements and invoices. She examined the
records over a period of two days on 19 and 20 July 2011 and physically
inspected items of plant and equipment. As a result of her
examination of the
records with which she was provided and her discussions with Mr Hoang, she
prepared a balance sheet as at 20 July
2011, a profit and loss statement for the
12 months to 30 June 2011, and a cashflow forecast for 12 months from July 2011
to June
2012.
- Set
out below is the balance sheet as at 20 July 2011:
Balance
Sheet
- The
fixed asset building and improvements was included at cost. The property was
purchased on 22 June 2009 for $479,000. Cash at hand
was verified by bank
statements. Ms Nguyen was provided with invoices verifying the prices at which
the equipment and motor vehicles
were purchased. The amounts for which the
equipment was recorded at cost in the balance sheet included GST.
- Ms
Nguyen was provided with invoices for the trade debtors. There were four such
debtors. An invoice of $200,000 was issued to AQL
Capital Pty Ltd ("AQL
Capital") dated 10 January 2011. This was described as moneys due for building
work done described as " footing and basement garage " for a project at
26-28 Gray Street, Southport. The invoice was unpaid as at 20 July 2011. Mr
Hoang is a one-third shareholder and
a director of AQL Capital. He annexed a
copy of what he described as the " major works contract schedule "
between the defendant and AQL Capital for the defendant to construct the
development for a contract price of $1.95 million inclusive
of GST. The
documents supplied stated " DA & BA supplied by owner ". A progress
payment of $195,000 was due on completion of the basement stage. The document
also stated " Party responsible for extra excavations and foundations: allow
$50,000 ". That clause is obscure. The date for practical completion of the
entire development was 1 June 2011. In his email to Mr Napiza
of 11 February
2011 Mr Hoang said:
"[ We] have been trouble with cashflow due to we did the job for the
client at 26-28 Gray Street, Southport QLD.
[T] he work we done worth $300,000.00 but [unfortunately] the
developer went broke so we did not get any payment ... ".
- Mr
Duc An Nguyen is a director of AQL Capital. (It was not suggested that Ms Nguyen
was related to him.) He acknowledged that the
defendant had paid the fees to
obtain the development approval and building approval. These fees were payable
by AQL Capital. He
said that the defendant had also paid for excavation work and
had completed about 75 per cent of the basement stage. He said that
the
directors of AQL Capital had agreed to pay $100,000 to the defendant on account
of moneys owed to the defendant and that the
payment would be made in mid to
late August 2011.
- AQL
Capital paid $100,000 in August 2011. There must be a serious question as to its
ability to pay the remaining $100,000 said to
be due.
- A
debt of $50,000 was said to be due by a debtor described as " Steven and
Simpson ". An invoice dated 9 June 2011 for this debt described it as due as
a part-payment owed for the finishing of two slabs at a property
in Queensland.
The two remaining debts are said to arise from invoices issued to Tran and Thu
in February 2011 and Kawai and Chisako
in July 2011 for $26,000 and $6,650
respectively. The latter debt was reduced to $4,550.
- The
liabilities of the defendant shown in the balance sheet prepared by Ms Nguyen as
at 20 July 2011 consisted of credit card debt
of $24,606, trade creditors of
only $3,407, a debt due to the Australian Taxation Office of $8,936 ($3,011 for
income tax and $5,925
for GST) and long term liabilities under the bank loan for
the purchase of the property at Inala and for the purchase of a Toyota
Hilux
vehicle and a Bobcat of $79,675, and a director's loan of $458,621.
- The
credit card debt was confirmed by credit card statements. The debt owed to
Westpac for the purchase of the property at Inala was
also confirmed by bank
records. The liabilities to Esanda Finance in respect of the motor vehicle and
the Bobcat were also confirmed
by statements from the financier. Ms Nguyen
verified the tax debt through the ATO portal.
- The
figure for trade creditors of $3,407 seems low. It consisted of a sum of $2,000
payable to LHD Air Conditioning and Electrical
for the supply of the electrical
services at jobs at Wallace Street, Moorooka and Fortitude Valley, and $1,407 as
a debt for what
was called " onsite rental ".
- Ms
Nguyen's balance sheet for the company as at 20 July 2011 did not include an
amount for a liability of the defendant to the plaintiff
that was the subject of
the statutory demand. She explained the omission on the basis that the company
disputed the debt. However,
it is not open to the defendant on this application
to dispute the debt. It would be an additional liability owed to trade
creditors.
- A
critical question on the issue of the defendant's solvency is whether all of the
defendant's trade creditors were disclosed to Ms
Nguyen. In his email of 11
February 2011 to Mr Napiza, Mr Hoang had said that as at that date the company
owed " a huge amount of debt from sub-contractors and suppliers ". There
was no evidence as to what the debt owed to sub-contractors and suppliers was as
at 11 February 2011. Neither Ms Nguyen nor
Mr Hoang was asked any questions
about the statement he made about those debts in his email of 11 February 2011.
Mr Hoang deposed
that as at 30 August 2011 the company owed no money to trade
creditors. He was not cross-examined about that statement. Nor was he
cross-examined about how it was that the " huge amount " owed to trade
creditors as at 11 February 2011 had been reduced to nil by 30 August 2011. In
the absence of such questioning, I
would infer that the reason was that Mr Hoang
satisfied the trade creditors and this was reflected in the debt owed by the
defendant
to him. Ms Nguyen gave evidence that Mr Hoang showed her " a few
evidences " of when he paid debts on behalf of the company. She asked Mr
Hoang who were the company's major suppliers. He showed her statements
of
account with the two major suppliers, Bunnings and Boral Concrete, which showed
a balance of account of $0.
- Ms
Nguyen prepared a profit and loss statement for the period from July 2010
through to June 2011. It was prepared for the purposes
of her report as to
solvency. It omitted depreciation as an expense. The profit and loss statement
showed that the company made a
net profit of $59,679. This did not include an
allowance for depreciation, nor, presumably, the expense incurred to the
plaintiff.
The profit and loss statement prepared by Ms Nguyen stated that the
company's gross income was $1,056,924, the cost of sales was
$914,698, and other
expenses totalled $82,547.
- Ms
Nguyen also prepared a cash flow forecast. It was as follows:
Cash
Flow
- Ms
Nguyen was not questioned about her cash flow forecast. She clearly assumed the
continuance of the AQL project. But whilst there
must be serious doubt about AQL
Capital's ability to pay future project costs, if it is unable to do so there
would be corresponding
reductions in projected costs.
- There
were changes to the company's financial position after the preparation of the
balance sheet and the profit and loss statement
as at 20 July 2011. On 25 August
2011 Mr Hoang caused the tipper truck, loading ramps, Bobcat and excavator owned
by the company
to be auctioned. The truck and truck tray were sold for $32,690.
The loading ramps which were an attachment to the Bobcat and excavator
sold for
$1,157. The Bobcat was sold for $25,130. The trade creditors noted in the
balance sheet as at 20 July 2011 had been paid.
$1,000 had been paid on account
of the tax debt. This was in accordance with an arrangement made by the company
with the Australian
Taxation Office. The debt owed by AQL Capital was reduced to
$100,000. The $50,000 debt owed by " Steven and Simpson " had been
reduced to $20,000.
- As
at 30 August 2011 the company's bank account was in credit in the amount of
$50,998.42. $43,916.60 was held in the defendant's
solicitor's trust account in
respect of the debt claimed by the plaintiff. The net proceeds of sale of the
equipment referred to
above totalled $58,977 from which $25,130 was payable to
Esanda Finance. Following discharge of that debt the company would have
further
cash of $33,847. It would be liable for the GST on the sales.
- The
evidence adduced by the defendant is that the debts the company owes are a small
tax debt, the mortgage debt owed to Westpac,
credit card debt, the debt that is
to be taken to be owed to the plaintiff, and the debt owing to Mr Hoang. Moneys
are held in the
defendant's solicitor's trust account in respect of the debt
owed to the plaintiff. The mortgage debt owed to Westpac is payable
by regular
monthly instalments and has been regularly paid. Credit card debt as at 30
August 2011 totalled $24,047.32, but monthly
payments were up to date. The
company's cash reserves are more than adequate to meet that debt.
- However,
I doubt that the company could pay the debt owed to Mr Hoang if it were called
on. The company's balance sheet as at 20 July
2011 showed a surplus of assets
over liabilities of only $47,823. This did not take into account the debt that
is taken to be owed
to the plaintiff. The assets of the company if realised
would be insufficient to pay that debt unless at least the debts owed by
the
remaining trade debtors (brought to account in the sum of $140,000) were fully
realised. There is no evidence that the remaining
trade debts are fully
collectable. Even though $100,000 has apparently been paid by AQL Capital, there
is no evidence that it is
able to pay the further moneys said to be owing.
- An
accountant who gave evidence for the plaintiff, Mr John Sawley, gave evidence
that because Mr Hoang is an employee of the defendant,
and because he has not
paid rent to the defendant for the house in which he resides, the defendant will
be liable for fringe benefits
tax. He estimated that the amount payable would be
approximately $20,000 per year for each year in which Mr Hoang has been living
in the property plus interest and penalties.
- However,
Mr Hoang is the sole shareholder as well as the sole director of the defendant.
There is nothing to show that his living
rent-free in the property in which the
company owns is a benefit provided to Mr Hoang in the course of or as a term of
his employment.
Mr Sawley ultimately accepted that his opinion that the
defendant had a liability for fringe benefits tax was based on an assumption
that the accommodation was supplied to Mr Hoang as part of his employment, or
employment contract, or employment package. There is
no basis for that
assumption. Unless the fringe benefit is provided " in respect of " the
employment of an employee, no liability to fringe benefits tax arises (
Fringe Benefits Tax Assessment Act 1986 (Cth), s 136(1)). The mere fact
that Mr Hoang did not pay rent to the company that owned the house in which he
lived and that he received wages from
the company, does not mean that the
provision of accommodation was a benefit provided in respect of his employment.
- Mr
Sawley also raised a question as to whether the defendant had a contingent
liability for liquidated damages or damages to AQL Capital
for the delay in
practical completion of the development. That issue was not pursued. The
evidence is that the delays are due to
the proprietor, not to defendant as
builder.
- Solvency
is essentially a cash flow test. Whilst the whole of the company's financial
position is relevant to determining its solvency,
the company is not insolvent
merely because its liabilities may exceed its assets. The converse is also true.
If the defendant's
evidence is otherwise sufficient, the question is whether the
company is insolvent because if it were called on now to pay the debt
owed to Mr
Hoang, it could not do so. Mr Hoang does not intend to call up the debt.
" Fullest and best evidence " of solvency
- The
plaintiff submitted that the defendant had not led the " fullest and best
" evidence of solvency and on this ground alone had failed to displace the
presumption of insolvency. Mr Sawley was critical of the
adequacy of the
accounts prepared by Ms Nguyen, being the balance sheet of the company as at 20
July 2011 and a profit and loss statement
for the 12 months to 30 June 2011.
- First,
Mr Sawley said that the accounts did not balance when the current year's profit
from 30 June to 20 July 2011 ($6,045) was taken
into account. However, that
proposition is not established. Mr Sawley based that opinion on the fact that
the net profit of the company
for the 12 months to 30 June 2011 was shown as
$59,679 and said that that amount would normally be called " Current Year
earnings " in the balance sheet under " Equity ". He observed that
the " Equity " breakdown in current year earnings in the balance sheet
showed only $6,045. But the current year earnings in the balance sheet were
earnings for the period from 1 July to 20 July 2011 and not the earnings to 30
June 2011. The balance sheet as at 20 July 2011 showing
retained earnings of
$41,775. That does not mean that the profit and loss statement and the balance
sheet did not balance. It means
that in the years prior to 1 July 2010 there
were losses of $17,904.
- A
more significant criticism might have been the failure to produce prior year
accounts.
- Mr
Sawley said that it did not appear from the accounts whether they had been
prepared on a cash basis or on an accruals basis. Ms
Nguyen verified that they
had been prepared on the accruals basis.
- Mr
Sawley was critical of the work done by Ms Nguyen to verify the amounts owed to
creditors and the recoverability of the debts owed
to the company. He said that
a program that an auditor would be expected to undertake to verify creditors
would include but not be
limited to:
Obtaining a list of trade and other creditors;
Review delivery dockets and orders;
Review all usual creditor invoices and statements from regular suppliers such
as concrete suppliers, material suppliers, subcontractors,
wages, superannuation
etc;
Comparison to prior year amounts;
Investigating the creditor's ledger if one were kept;
Obtaining a positive confirmation of selected creditor balances.
- He
observed that Ms Nguyen made no allowance for the debt the subject of the
statutory demand and owed to the plaintiff. In relation
to verifying the value
of trade debtors, Mr Sawley said that it was insufficient for Ms Nguyen merely
to inspect invoices and that
there should be positive confirmation from the
debtors of the amount owing.
- Part
of the amounts shown as trade debtors in the balance sheet as at 20 July 2011
were later collected. I agree with the criticisms
of Mr Sawley in relation to
the assessment of the recoverability of the balance of the trade debtors.
- In
relation to the verification of trade creditors, Ms Nguyen said that she
ascertained the amount of outstanding trade creditors
from the invoices that had
not been paid as at 20 July 2011. She said that she ascertained who the
creditors were from the invoices.
She gave the following evidence:
"Q. How did you ascertain whether the invoices you were shown were all of
the invoices that had been issued?
A. I just have to ask him, interview him, do you owe, who are your major
suppliers, like Bunnings and Boral, "Are you owing them any
money?" They said
no. "Can you show me the letter saying you are not owing them money?" And they
showed me the balance of account
is zero. They are the two major suppliers;
Bunnings and Boral Concrete."
- On
30 August 2011 Mr Hoang swore that the trade creditors outstanding as at 22 July
2011 had been paid.
- Solvency
is a question of fact to be proved on the balance of probabilities ( Evidence
Act , s 140). The question is whether the presumption of insolvency having
been raised, the standard of the evidence is sufficient to rebut that
presumption so that it could be concluded on the balance of probabilities that
the defendant is solvent. In Expile Pty Ltd v Jabbs Excavations Pty Ltd
[2003] NSWCA 163; (2003) 21 ACLC 1354; (2003) 45 ACSR 711 the Court of
Appeal cited with approval (at [16]) the following passage from the judgment of
Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty
Ltd [1999] FCA 728:
"The authorities which govern the operation of s459G of the
Corporations Law seem to me to establish the following propositions:
*· The respondent is presumed to be insolvent and as such bears the
onus of proving its solvency: s459C(2) and s459C(3); Elite Motor Campers
Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J;
Commissioner of Taxation v Simionato Holdings Pty Ltd. [1997] FCA 125; (1997) 15 ACLC 477
per Mansfield J.
*· In order to discharge that onus the Court should ordinarily be
presented with the 'fullest and best' evidence of the financial
position of the
respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075
at 1081 per Hayne J.
*· Unaudited accounts and unverified claims of ownership or valuation
are not ordinarily probative of solvency. Nor are bald
assertions of solvency
arising from a general review of the accounts, even if made by qualified
accountants who have detailed knowledge
of how those accounts were prepared:
Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty
Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v
Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J. ... "
- The
plaintiff submits that the defendant has not adduced the " fullest and best
" evidence of its financial position and therefore the presumption of
insolvency has not been discharged.
- If
the requirement that the onus is only to be discharged if the company presents
the " fullest and best " evidence of its financial position is to be
taken literally then the plaintiff is undoubtedly correct. The defendant could
have
given better evidence of its financial position. Where the solvency of a
trading company is in issue there would be few if any cases
in which it could
not be said that some further piece of evidence in relation to the company's
financial position might not have
been available. In a large concern the
standard, if taken literally, would be practically impossible to meet.
- The
origin of the requirement for the " fullest and best " evidence of the
financial position is the statement of Hayne J in Commonwealth Bank of
Australia v Begonia (1993) 11 ACLC 1075 at 1081. Hayne J used the expression
in describing evidence relied upon by the company that the terms of a loan
between it and a
related company were that it was only liable to pay the related
company such sum as the related company was liable to pay the bank.
The only
evidence about the arrangement was from a director of the related company who
described the effect of the agreement. No
document was produced and no evidence
was given by the individuals of any conversations that might be said to give
rise to such a
term if the alleged term were part of an oral contract. Hayne J
admitted the evidence of the director and assumed that the effect
of the
agreement between the companies was as stated. His Honour held that as the
related company had no defence to the claim by
the bank, the company in question
was insolvent because it admitted in those circumstances that it owed the same
amount to the related
company. Hayne J said (at 1081):
" Ordinarily one would expect that on an application of this kind the
company would provide the fullest and best possible material in
support of its
case. Thus one would ordinarily expect that the agreements between Texel and
Redlock (for I would assume them to be
written and not oral) would be produced
in evidence. "
- Hayne
J was describing the nature of the evidence one would expect a company to lead
in opposition to the application that it be wound
up in insolvency. His Honour
did not say that only the fullest and best possible evidence of a company's
financial position would
be sufficient to displace a presumption of insolvency.
- Another
of the cases cited by Weinberg J in the passage set out above is Leslie v
Howship Holdings Pty Ltd (1997) 15 ACLC 459. In that case Sackville J found
that the company had displaced the presumption of insolvency arising from its
failure to comply with
or have set aside a statutory demand. The company had
substantial assets that exceeded its liabilities in the form of land holdings
held for the purposes of future development and sale. The company did not give
the " fullest and best " evidence of its solvency. An important question
was whether a bank facility would be extended. The company failed to call the
bank
officer responsible for the facility. Sackville J took into account the
principle in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 in relation to that
failure, but concluded nonetheless that it was probable that the facility would
be extended (at 474-475). His
Honour also observed that the evidence as to the
extent of trade creditors was " less than satisfactory " (at 475). But in
the light of all of the evidence, his Honour concluded that if there were trade
creditors not recorded in the balance
sheet that was tendered, they would not
make a significant difference to the company's solvency at the date of hearing
(at 476).
- In
Expile Pty Ltd v Jabbs Excavations Pty Ltd , the Court of Appeal stressed
the requirement for " proper verification " of the company's assets and
liabilities (at [16]). The court repeated with approval the observations of
Weinberg J set out above
and found that in the circumstances of that case there
had not been proper verification. In part, this was supported by findings
that
evidence adduced by the company was not " the fullest and best " evidence
(e.g. para [23]). However, it appears to me that this was a matter of emphasis.
The court's conclusion was (at [30]):
" Summing up: the respondent's failure to answer the Notice to Produce,
and to comply with the judge's direction for production, coupled
with the
constraints on Mr Billingham contacting third party creditors and leasing
companies, judged against the paucity of documentation
as to ownership of plant
and equipment, plus the deficiencies of the accounts and the lack of hard
evidence of realistic borrowing
capacity to fund repayment of the true
short-term liabilities, render entirely apposite the observation of Spigelman CJ
in Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661 at 674 [55]:
'The process of proving solvency is not some kind of forensic game. Solvency
is a matter peculiarly within the knowledge of the company.
The primary source
of information on the solvency of the company must be the company itself.'
The respondent company failed to provide and verify the information
necessary to prove its solvency. "
- In
the present case there was external verification of the company's assets and
liabilities. The verification of recoverable trade
debtors is inadequate. That
is reflected in my findings of the available assets to meet debts. The
verification of creditors other
than trade creditors was verified by Ms Nguyen
by the review of credit card statements, the search of the ATO portal (in
relation
to tax debts), the review of the loan statements from equipment
financiers, and the tender of bank statements showing the amount
of the loan and
the making of regular loan repayments. The absence of liabilities to the
principal suppliers was verified by Ms Nguyen
by review of the statements. The
real question is whether I should be satisfied that there were no outstanding
trade creditors. Ms
Nguyen was dependent on what she was told by Mr Hoang and
reviewed only the invoices she was shown. Mr Hoang deposed that by the
time of
the hearing all trade creditors had been paid. He was not cross-examined on that
evidence. There is nothing to contradict
it. Whilst the value of trade creditors
of $3,407 at 20 July 2011 is low, it is not surprisingly low given that Mr Hoang
had evidently
paid the company's debts himself which was reflected in the
company's liability to him. There is an outstanding trade creditor, namely
the
plaintiff. For the purposes of this winding-up application, the defendant cannot
dispute that debt. But I do not think that Mr
Hoang's credit on this issue is
significantly affected by his not including the debt that is to be taken to be
owed to the plaintiff
as a debt to " trade creditors " where the
defendant is defending the separate proceeding brought by the plaintiff to
recover that debt.
- Further
verification could have been attempted. Ms Nguyen could have got a list of all
prior trade creditors. She could have checked
the identity of prior trade
creditors by reviewing delivery dockets and orders and prior invoices. She could
have contacted them
to verify that they had all been paid either by the company
or by Mr Hoang. Does the failure to achieve that level of verification
mean that
the presumption of insolvency is not rebutted where Mr Hoang has given
unchallenged evidence that there are no outstanding
trade creditors?
- Ultimately
the question of solvency is to be decided on the balance of probabilities. Proof
is not required beyond reasonable doubt.
I believe Mr Hoang's evidence that all
trade creditors have been paid. Bearing in mind the need for proper verification
of a company's
financial position, I am nonetheless satisfied on the balance of
probabilities that the company is able to pay its debts as they
become due and
payable, except for the debt owing to Mr Hoang.
Solvency where debt owed to director could not be paid if called on
- Section
95A of the Corporations Act provides that a person who is not solvent is
insolvent and that a person is solvent if, and only if, the person is able to
pay all
the person's debts, as and when they become due and payable. The words "
due " and " payable " are synonymous. The question is whether the
company is insolvent because it would not be able to pay the debt owed to Mr
Hoang if
he were to call for its payment, notwithstanding that Mr Hoang does not
intend to make such a call. The debt is not the subject of
any formal loan
agreement. Nor has Mr Hoang in his personal capacity made an agreement with
himself in his capacity as sole director
of the company as to whether or when
the debt is to be paid. The debt has arisen, at least in part, by Mr Hoang
personally discharging
liabilities of the company. The liability is a debt for
the purposes of s 95A ( Edwards v Australian Securities and Investments
Commission [2009] NSWCA 424; (2009) 76 ACSR 369; (2009) 264 ALR 723).
- Section
95A primarily directs attention to a company's cashflow. The reason for this is
that while the words " as and when they become due and payable " in s
95A(1) require looking into the future beyond the particular day on which the
question of solvency or insolvency is to be determined, that
usually involves
looking only to the reasonably immediate future ( Bank of Australasia v Hall
[1907] HCA 78; (1907) 4 CLR 1514 at 1527; Lewis (as liquidator of Doran
Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243; (2005) 219 ALR
555; (2005) 54 ACSR 410; (2005) 23 ACLC 1666 at [103]; Brooks v Heritage
Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 at 65; Re Kolback Group Ltd
(1991) 4 ACSR 165 at 169).
- The
assessment of solvency must be made as a matter of " commercial reality "
having regard to the " practical business environment " (e.g. Lewis v
Doran [2004] NSWSC 608; (2004) 22 ACLC 1009 at [106]; Brooks v Heritage
Hotel Adelaide Pty Ltd at 64). The debt owed by the defendant to Mr Hoang is
treated by them as a loan payable on demand. No demand has been made and none
is
contemplated. If Mr Hoang were to require repayment of the debt from the company
I am satisfied that the company would not be
able to pay it. However, he has no
intention of doing so. The company is able to pay its other debts as they become
due and payable.
- The
question whether in such circumstances the defendant is presently solvent has
been considered in a number of cases. In Re Kerisbeck Pty Ltd (1992) 10
ACLC 619 the company did not dispute that it was unable to pay a substantial
debt owed to its director. The director gave evidence that was
accepted that he
would not in the immediate future ask for the debt to be discharged. Harper J
held that there was no good reason
why the director should seek to be repaid and
good reasons why he should not. His Honour concluded that it followed that as
the company
was not obliged to repay the debt then or in the immediate future
and could pay its other debts, it was not insolvent (at 621).
- In
Brooks v Heritage Hotel Adelaide Pty Ltd Olsson J held that where a debt
was payable only on demand, it did not become legally due and payable until
demand was made. In that
case the company owed its most substantial debt to
another company controlled by its director. The director deposed that the debt
was payable on demand and no demand had been made, and there was no present
intention to do so. Olsson J held that whilst the company
would be precipitated
into a condition of insolvency if the related party debt were called up, as that
debt was only payable on demand
and no demand had been made, and as there was no
intention to make a demand for the debt such that it would become due and
payable
in the near future, and as the other obligations of the company were
being met, the company was not insolvent (at 64-65).
- The
same approach was adopted by Scott J in Totterdell v Nicol-Bermeister
(1995) 13 ACLC 1521 at 1526.
- Similarly
in Lewis v Doran [2004] NSWSC 608, Palmer J at first instance held that
the company was not insolvent where it was able to pay its debts at the relevant
date and for
some years thereafter from moneys made available by other companies
in the group. The availability of funds from other companies
in the group was a
resource available to the company as a matter of commercial reality (at
[114]-[118]). This decision was upheld
on appeal ( Lewis v Doran [2005]
NSWCA 243). Giles JA (with whom Hodgson and McColl JJA agreed) referred to Re
Kerisbeck Pty Ltd with apparent approval (at [112]). His Honour said (at
[109]):
" ... there is no compelling reason to exclude from consideration funds
which can be gained from borrowings secured on assets of third
parties, or even
unsecured borrowings. If the company can borrow without security, it will have
funds to pay its debts as they fall
due and will be solvent, provided of course
that the borrowing is on deferred payment terms or otherwise such that the
lender itself
is not a creditor whose debt can not be repaid as and when it
becomes due and payable. It comes down to a question of fact, in which
the key
concept is ability to pay the company's debts as and when they become due and
payable ." (Emphasis in original.)
- The
Court of Appeal upheld Palmer J's finding that the company was solvent. Giles JA
noted that the funds made available by other
companies in the group to enable
the company to pay its debts as and when they fell due were themselves debts
repayable on demand
(at [113]). His Honour observed that it was not suggested
that such debts were to be regarded as immediately repayable so that the
holding
company itself was a creditor whose debt could not be repaid as and when it was
due and payable (at [113]). The Court of
Appeal did not suggest that there was
anything wrong with that approach.
- In
Australian Securities and Investments Commission v Edwards [2005] NSWSC
831; (2005) 54 ACSR 583, Barrett J said (at [99]):
" I accept that funds which, on a realistic commercial assessment, are
capable of being raised from outside sources are relevant to
the question
whether a company is solvent. But the availability of such funds in the form of
a loan will not enhance solvency (or
have the potential to avoid a finding of
insolvency) unless the loan terms are such as to exclude the loan liability from
consideration
in its own right as part of the debts due or near due. In other
words, availability of loan funds for a very short term or payable
on demand, as
a source from which debts overdue may be paid, does not enhance solvency: it
merely substitutes one form of immediate
(or near immediate) obligation for
another. "
- I
do not understand his Honour to be saying that it is always necessary to treat a
loan payable on demand as a debt that is due or
near due and to be taken into
account on a determination of solvency. It depends upon whether the court is
satisfied that demand
will not be made within the reasonably immediate future.
- I
accept Mr Hoang's evidence that he has no present intention of requiring the
company to repay what he calls the loans amounting
to $458,621.
- There
was no evidence that any particular terms were agreed upon between Mr Hoang and
the company as to when the debt would be payable.
Mr Hoang described the debt as
arising as a result of loans made by him to the company, and that is how it is
described in the balance
sheet. However, there was no evidence as to how the
company borrowed money from him. There was evidence that at least some part,
if
not all, of the debt owed to Mr Hoang arose as a result of his paying creditors
of the company. The liability that the company
thereby incurred to Mr Hoang
would not be a liability for money lent, unless there were an agreement for a
loan. The moneys would
be recoverable by Mr Hoang from the company on a cause of
action for money paid by Mr Hoang for the defendant at its request. I was
referred to no authority that such a cause of action would lie only after demand
was made for the debt that was unsatisfied. No such
requirement appears in
Bullen & Leake, Precedents of Pleadings, 3 rd ed (1868) at p 42
dealing with the indebitatus count for money paid.
- As
a matter of " commercial reality " it makes no difference whether the
debt owed by the company to Mr Hoang is payable on demand or without demand.
Section 95A has been construed as if it provided that a company is solvent if it
is able to pay all its debts as and when they become due and
payable as a matter
of commercial reality.
- Although
the defendant has not established that the debt owed to Mr Hoang is only payable
on demand, as a matter of " commercial reality " the position is the same
as if the debt were payable only on demand. Applying s 95A in the sense referred
to above, the defendant is solvent.
- If
this construction of s 95A is wrong, nonetheless winding up is a discretionary
remedy. If the position were that the defendant is insolvent because the debt
owed to Mr Hoang is payable without demand, even though he has no intention of
claiming payment, the question would be whether as
a matter of discretion a
winding-up order should be refused. The nature of a debt that is said to make a
company insolvent is a material
consideration in whether a winding-up order
should be made (see e.g. In the matter of the Redhead Coal Mining Company
Limited (1892) 3 BC (NSW) 50).
- As
Mr Hoang will not seek to enforce the debt owed to him by the company in the
reasonably immediate future, as a matter of substance,
the position would be the
same as if the debt were payable only on demand. I would incline to the view
that the appropriate exercise
of the discretion would not be to make a
winding-up order on the ground of insolvency, given that the finding of
insolvency would
turn upon a technicality of no commercial substance. However,
adopting a construction of s 95A that does not turn on such technicalities, the
question of discretion does not arise.
- For
these reasons I order that the originating process be dismissed. The exhibits
may be returned after 28 days. I will hear the parties
on costs.
**********
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