Bellaire Pty Ltd v Roselink Enterprises Pty Ltd as trustee for the Ice Nemesis Unit Trust - [2020] WASC 115

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   BELLAIRE PTY LTD -v- ROSELINK ENTERPRISES PTY LTD as trustee for THE ICE NEMESIS UNIT TRUST [2020] WASC 115
CORAM:   MASTER SANDERSON
HEARD:   11 DECEMBER 2019
DELIVERED          :   14 APRIL 2020
FILE NO/S:   COR 166 of 2019
BETWEEN:   BELLAIRE PTY LTD
Plaintiff

AND

ROSELINK ENTERPRISES PTY LTD as trustee for THE ICE NEMESIS UNIT TRUST
Defendant

Catchwords:

Corporations Act - Application to wind up corporation on grounds of insolvency - Turns on own facts

Legislation:

Corporations Act 2001 (Cth)

Result:

Corporation wound up

Category: B

Representation:

Counsel:

Plaintiff	:	L Christensen
Defendant	:	J Winton

Solicitors:

Plaintiff	:	CX Law
Defendant	:	Hager Grubb & Partners

Case(s) referred to in decision(s):

Nil

MASTER SANDERSON:

This is the plaintiff's application to wind up the defendant. It gives rise to three issues. The first issue relates to the evidence relied upon by the defendant in response to the plaintiff's application. A series of objections was raised by the plaintiff to parts of the defendant's evidence and I dealt with those objections at the commencement of the hearing. Having made rulings I indicated to the parties I would provide reasons for my rulings. So the first part of these reasons deal with matters of evidence.
Second the defendant raised the plaintiff's standing to bring this application. The plaintiff is a contributory and therefore required leave to bring the application under s 459P(2)(b) of the Corporations Act 2001 (Cth). Under the provisions of s 459P(3) leave is only to be given if the court is satisfied there is a prima facie case the company is insolvent. The plaintiff met that test. I will detail the evidence below but it is sufficient for present purposes if I say that a superficial reading of the defendant's accounts is sufficient to establish prima facie insolvency. The defendant did not argue otherwise. In effect I dealt with the application for leave as part of the winding up application. Given I have concluded the defendant is insolvent and should be wound up there is no issue as to the grant of leave.
Finally there was the main issue ‑ is the defendant insolvent. Both parties agreed question was to be determined under s 95A(1). Both parties also agreed that section embodied the so‑called 'cash flow test'. That is to say what is important is whether or not the corporation can pay its debts as and when they fall due. The fact a corporation has a balance sheet which shows an excess of assets over liabilities may not mean the company is solvent. If the corporation has to realise assets to meet its debts and that realisation is likely to take time then the company is not necessarily solvent. It may even be the case that a company is found to be insolvent but in the liquidation the assets exceed the liabilities, meaning all creditors are paid out. But it is necessary to focus on cash flow ‑ in particular the cash available to meet the corporation's debts.
In opposition to the application the defendant relied on three affidavits of Marie Elizabeth Lowick. The first sworn 12 November 2019 (First Lowick affidavit), the second sworn 19 November 2019 (Second Lowick affidavit) and the third sworn 6 December 2019 (Third Lowick affidavit). Ms Marie Lowick is a director of the defendant[1] and is largely responsible for its day‑to‑day operations. The defendant also relied upon an affidavit of Karen Marie Lowick sworn 6 December 2019. Ms Karen Lowick is the mother of Marie Elizabeth Lowick.[2] Ms Karen Lowick appears not to have any involvement in the day‑to‑day running of the defendant. However, by par 4 of her affidavit she says she has agreed with her daughter, 'to make immediate advances to the defendant as and when directed by her'. Her evidence is to the effect she has certain holdings in ASX listed companies to the value of $82,350.[3] She says if called upon to do so she will realise her shares and put the funds received into the defendant. She does not say in her affidavit whether she would subscribe for shares or loan the money to the defendant. Be that as it may, I am satisfied her evidence is admissible and can be relied upon to support the defendant's position.
[1] First Lowick affidavit, par 1; Second Lowick affidavit, par 1.
[2].Affidavit of Karen Marie Lowick sworn 16 December 2019, par 3.
[3] Affidavit of Karen Marie Lowick sworn 16 December 2019, par 5.
Objection was taken to par 4 of the Third Lowick affidavit. It was submitted the paragraph was conclusionary and the attachments referred to in the paragraph ought be excluded. While I accepted the paragraph itself was conclusionary and inadmissible, the letters attached to the affidavit are admissible. These letters effectively embody an 'agreement' by certain parties not to demand payment of money they are owed. I will have more to say about these letters later in these reasons. But for present purposes it is enough if I say that while par 4 of the affidavit is excluded the attachments remain in evidence.
Objection was also taken to par 6. This paragraph deals with a belief by Ms Lowick that 'the audit is in the process of being completed'. As a director of the defendant, Ms Lowick is in a position to give this evidence and the paragraph can stand. Paragraph 7 of the affidavit deals with the consequence of an increase in prices. She offers an opinion as to the correlative increase in revenue. While that is an opinion it is one Ms Lowick is in a position to offer. Its probative value is questionable but in terms of the mechanics ‑ the consequence of an increase in prices ‑ she is perfectly placed to offer an opinion. That paragraph can stand. Paragraph 9 really follows on from par 7. Ms Lowick offers an opinion as to the consequence of an increase in bookings. While she can give that evidence its probative value is open to question.
Objection is taken to attachment MEL‑9 to the Third Lowick affidavit. That attachment is an email from the defendant's solicitors to the plaintiff's solicitors attaching a copy of an appointment of auditor. The letter speaks for itself and it is admissible.
The defendant relied on a report of Mr Brenton Scott Siviour dated 12 November 2019.[4] Mr Siviour is an experienced accountant and in par 2.6 of his report he confirms he has read the Federal Court of Australia Expert Evidence General Practice Note and has prepared his report in conformity with those guidelines. Objection was taken to various paragraphs of Mr Siviour's report. For instance, par 4.14 which appears under the heading 'Expenses' is in the following terms:
Electricity ‑ Due to solar panels installed, the electricity cost has been reduced. The cost per unit used has reduced since July 2018. Based on the last 12 months the cost has been reducing. The panels were installed in December 2018 and therefore the full cost reduction benefit has not yet been received by Roselink.
[4] Affidavit of Brentin Siviour sworn 12 November 2019; Annexure BSS 1.
This paragraph was struck out. It offers an opinion but it does not offer a methodology to quantify the amount by which any electricity cost might be reduced. While objections of a similar nature were taken to other aspects of Mr Siviour's evidence I am not satisfied any other paragraphs ought be struck out. Mr Siviour is an expert and he is offering an opinion. His opinion is in large measure based upon the defendant's accounts. He has taken those accounts and he has predicted future cash flows and revenues. For reasons which I will develop I am not satisfied his assumptions are properly based. But that does not detract from his evidence. He is entitled to make assumptions which he believes are justified in the circumstances. The objections taken by counsel for the plaintiff really amount to objections about Mr Siviour making assumptions. As I have said he is entitled to do that and his evidence is in all respects admissible.
This is a slightly unusual case in as much as there is no affidavit which deals directly with the relevant facts ‑ that is to say there is no 'founding affidavit'. The reason for that seems to be that after the plaintiff filed the originating process and the consent of the liquidator, subpoenas were issued aimed at obtaining copies of the books and records of the defendant. This process took some time. The first affidavit of substance was an affidavit of Mark Anthony English filed 25 November 2019 ‑ some three months after the originating process was lodged. That affidavit was filed by the plaintiff. Mr English is an accountant and his evidence dealt with the alleged insolvency of the defendant. In the end the plaintiff did not rely upon that affidavit but was content to rely on what was contained in the evidence of Mr Siviour who was the defendant's witness. Really it is quite refreshing to have a case where there is no evidence that is extraneous and irrelevant, dealing with the relationship between directors, shareholders and the like and other matters which really have no bearing on the solvency of the company.
What is relevant in this case is that the defendant is the trustee of the Ice Nemesis Unit Trust. The defendant runs a business known as 'Extreme Ice Area'. The business provides an ice skating facility and an associated food and beverage outlet. The premises are located in the Perth suburb of Morley.
Turning to the report of Mr Siviour at par 4.2 of his report he deals with what he refers to as a 'Solvency Indicators'. The first of these solvency indicators is 'the entities past history of trading'. Under the heading 'Past' Mr Siviour says this:
Roselink had a profit in 2017 and then losses in 2018 and 2019.
Under the heading 'Comments' Mr Siviour says:
Management has made entered into (sic) a range of matters to turn the business around including expense cuts, raising additional revenue, increasing prices to customers.
Appendix 1 to Mr Siviour's report contains profit and loss comparisons. For the year ended 30 June 2017 the gross profit is shown as being $1,482,746. The total expenses are shown as $1,460,673. The net income is shown as $22,153. In other words, the defendant was indeed profitable.
Looking at these figures a little more closely the major income is described as 'Sales' and amounts to $1,616,461. That figure must include amounts paid by ice skaters plus the amount derived from goods sold at the café and what is described as the 'Pro Shop'. The total cost of goods sold is put at $148,309 which, when deducted from the total sales, leads to the gross profit figure. Turning to the expenses, an amount of $54,980 was spent on 'Coaching'. The rent was $454,268. Cleaning was $57,550 and payroll expenses were $425,053. That included an amount for 'Superannuation' which presumably was deductions to be paid to the Australian Tax Office for employees' superannuation. The other major expense was 'Utilities' ‑ particularly electricity. That expense is put at $164,172. That is hardly surprising as the defendant runs an ice rink and the ice has to be maintained and the venue itself has to be air‑conditioned so as not to occasion melting of the ice.
As Mr Siviour comments the years to 30 June 2018 and 30 June 2019 showed a loss. In the year ended 30 June 2018 the sales were $1,497,886 and in the year to 30 June 2019 the sales were $1,291,191. In other words there was a significant fall in the income from sales between 30 June 2017 and 30 June 2018 – over $200,000. Expenses from the year ended 30 June 2018 were $1,474,458 and for the year ended 30 June 2019 $1,394,094. That resulted in a loss for the financial year to 30 June 2019 of $91,694 and for the financial year ending 30 June 2019 of $157,971.
It is worth noting in passing that for the years ending 30 June 2014 2015 and 2016 a loss was incurred. The total of these losses was over $160,000.
Mr Siviour has also provided a profit and loss statement for the 2019/2020 financial year up to 31 October 2019. That shows a profit of $18,069. Based upon those figures Mr Siviour estimates a profit for the financial year up to 30 June 2020 as $138,714.
Returning to the solvency indicators Mr Siviour notes that certain Commonwealth taxes, including superannuation contributions, are overdue. He also notes that a 'superannuation repayment plan' has been approved, presumably with the Australian Tax Office. However, at the time of Mr Siviour's report a plan in relation to other taxes had not been agreed. Mr Siviour also notes there have been a number of demands for payment by suppliers and that repayment arrangements have been agreed. Mr Siviour also notes that the books and records of the company have not in the past been well maintained. He says that position has been rectified by appointment of a new accountant.[5]
[5] Affidavit of Mark Anthony English sworn 12 November 2019; Annexure BSS 1, par 4.2.
Mr Siviour then deals with income. He projects a rise in income between 30 June 2019 and 30 June 2020 up to an amount of $1,603,091. That is an increase of just over $270,000. That increase, he says, is based upon information provided by Ms Lowick. It seems two factors will lead to the increase in income – an increase in the cost to patrons of using the facility and increased use by persons who are members of a 'hockey academy'. It is clear Mr Siviour has taken an optimistic view of the increase in income based almost entirely on advice from Ms Lowick.
In relation to expenses, the landlord had agreed to reduce the annual rent to $465,250. At the time of preparing his report, Mr Siviour notes the defendant was behind in its rent in an amount of $221,732.
Mr Siviour anticipates a reduction in both the cost of electricity and in wages costs. In relation to the former, solar panels have been installed and Mr Siviour anticipates that will lead to somewhat lower electricity costs. In relation to the latter, the number of employees has been reduced with parties related to the defendant undertaking certain duties, presumably at no cost.
The Australia Taxation Officer is owed an amount of $315,621. This debt arose, it seems, from a failure to lodge business activity statements. The defendant has nine creditors with whom it currently has repayment arrangements. One of those is the landlord who is not presently demanding payment. Ms Lowick deals with these creditors in the Third Lowick affidavit. Appearing as attachment MEL‑8 to that affidavit are copies of written statements and documents obtained from the creditors in relation to individual debts. By way of example, the first document in annexure MEL‑8 is a letter from Enoch Cleaning Services to the defendant. Relevantly that letter reads as follows:
Please be advised that in respect of the debt I am owed by Roselink that I have agreed to a repayment plan, which requires Roselink to repay the amount outstanding in monthly instalments of $1,250.00 per month starting in January 2020.
The correspondence from the other creditors is to the same effect ‑ either a repayment plan is in place and no demand for immediate repayment will be made or an undertaking that no repayment would be demanded at present.
Whatever might be the arrangements with the various creditors it is clear these undertakings are not binding. If all or any one of these creditors had a change of heart they could demand repayment immediately and the defendant could not resist the claim. Really that is the key to this action. The defendant is unable to meet its debts as and when they fall due. It is not able to meet its commitments to the Australian Taxation Office, those commitments being due now. It is not able to meet its commitments to its creditors.
The thrust of the submissions put on behalf of the defendant was to the effect that if the various 'stand still' arrangements were accepted and the profit forecasts of Mr Siviour were taken as indicating a trading profit was likely, then the defendant was solvent. With respect, that takes too optimistic a view. There is no real evidentiary basis provided for assuming an increase in income. But even if that is accepted it is difficult to see how, with the defendant's trading history, it could reasonably expect to repay the large outstanding debts to the Australian Taxation Office and the landlord and still trade profitably. The conclusion that the defendant is insolvent is inescapable.
For these reasons I am satisfied the defendant is insolvent and ought be wound up.
Parties to confer as to a precise form of orders and as to costs. In the circumstances an agreement cannot be reached, parties are to file competing minute of proposed orders by 21 April 2020.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

CB
Associate to Master Sanderson

14 APRIL 2020