Cato Brand Partners Pty Ltd v Air India Limited
[2016] VSC 28
•5 February 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2015 02941
| CATO BRAND PARTNERS PTY LTD | Plaintiff |
| v | |
| AIR INDIA LIMITED | Defendant |
---
S CI 2015 02941
| JUDGE: | Efthim As J |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 9 September 2015 Final submissions on 9 December 2015 |
| DATE OF JUDGMENT: | 5 February 2016 |
| CASE MAY BE CITED AS: | Cato Brand Partners Pty Ltd v Air India Limited |
| MEDIUM NEUTRAL CITATION: | [2016] VSC 28 |
---
CORPORATIONS – Winding up – Statutory demand – Corporations Act2001 (Cth) s 583 –Whether a company under the Corporations Act2001 (Cth) Pt 5.7 can challenge a wind up even though it has complied with a statutory demand – Proper law of the contract – Statute barred – Extension of time – Acknowledgment of the debt in writing – Solvency – Estoppel – Application dismissed.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Dr P.T. Vout | Norton Rose Fulbright Australia |
| For the Defendant | Mr M.N.C. Harvey | Piper Alderman |
HIS HONOUR:
The plaintiff, Cato Brand Partners Pty Ltd (‘Cato’) applies to wind up the defendant, Air India Limited, on the grounds of insolvency pursuant to s 583 of the Corporations Act2001 (Cth) (‘the Act’).
Section 583(c)(i) of the Act provides:
…
(c) the circumstances in which a Part 5.7 body may be wound up are as follows:
(i)if the Part 5.7 body is unable to pay its debts, has been dissolved or deregistered, has ceased to carry on business in this jurisdiction or has a place of business in this jurisdiction only for the purpose of winding up its affairs;
…
Background
In late 2009, the plaintiff internally identified the defendant as a company that could benefit from the plaintiff’s brand development services. The plaintiff’s chairman, Kenneth Willis Cato, travelled to India in December 2009 and in February, April and June 2010 for meetings with representatives of the defendant. An agreement was entered into on 2 June 2010. It was signed on the second day of three days of meetings that took place in Mumbai and Delhi from 1 June 2010 to 3 June 2010. Pursuant to that agreement, the plaintiff claimed it was owed a debt totalling $1,048,287.50 by the defendant for professional services performed by the plaintiff in accordance with the agreement.
A demand for payment of the debt dated 12 May 2015 was served on the defendant on that date. The defendant failed to pay or to take any step to dispute the debt within three weeks after service of the demand.
Section 585 of the Act states:
For the purposes of this Part, a Part 5.7 body is taken to be unable to pay its debts if:
(a)a creditor, by assignment or otherwise, to whom the Part 5.7 body is indebted in a sum exceeding the statutory minimum then due has served on the Part 5.7 body, by leaving at its principal place of business in this jurisdiction or by delivering to the secretary or a director or senior manager of the Part 5.7 body or by otherwise serving in such manner as the Court approves or directs, a demand, signed by or on behalf of the creditor, requiring the body to pay the sum so due and the body has, for 3 weeks after the service of the demand, failed to pay the sum or to secure or compound for it to the satisfaction of the creditor; or
…
In accordance with s 585(a) of the Act, a company is taken to be unable to pay its debts because it has not complied with the creditor’s demand.
The defendant opposes the plaintiff’s application on two basis:
(a) The defendant is not indebted to the plaintiff because the contract on which the plaintiff relies is subject to the laws of India and therefore the claimed debt has been extinguished by s 27 of the Limitations Act 1963 (India); and
(b) The defendant is not insolvent.
The defendant is incorporated in India and is a foreign registered corporation in Australia. It is a Part 5.7 body and not a company under Part 5.4 of the Act. In Peninsular Group Limited v Kintsu Co Ltd,[1] the New South Wales Court of Appeal held that the provisions of Part 5.4 of the Corporations Law, which deal with statutory demands, do not apply to the winding up of a foreign company (Part 5.7 body).
[1](1998) 44 NSWLR 534.
The Operation of Part 5.7 of the Act
If a company does not comply with a statutory demand under Part 5.4 of the Act, it is presumed to be insolvent. A Part 5.7 body that does not comply with a demand pursuant to s 585 of the Act is ‘taken to be unable to pay its debts’.
The plaintiff submits that properly construed, s 585 of the Act requires the defendant to identify the basis upon which it challenged the debt within the stipulated three week period. Absent a reasonable explanation for that failure, the plaintiff says that the defendant cannot therefore rely on a limitation defence raised for the first time after the application to wind up the defendant was filed.
In support of its submission, the plaintiff relies on Re Pardoo Nominees Pty Ltd,[2] where Cosgrove J stated that pursuant to s 364(2) of the Companies (TAS) Code, the petitioner was required to prove:[3]
1. A due debt in excess of $1000.
2. A demand requiring payment of the debt.
3. A failure by the company over a period of 3 weeks or more to dispute the debt or to pay or secure or compound it.
4. The absence of any reasonable explanation for the company's failure.
[2](1987) 11 ACLR 573 (‘Re Pardoo’).
[3]Ibid 577.
Here the defendant has not given any explanation why it failed to comply with the demand. The defendant made three submissions to excuse its failure to challenge the demand. It contends that:
- It can be inferred that the defendant did not comply with the demand because it was not required to pay the debt ‘because it was old’;[4]
- There is no case which stands for the proposition that the failure to challenge the demand stops the defendant from challenging the debt at the hearing;[5] and
- There is no statutory reason why this must be done.[6]
[4]Transcript 99.
[5]Ibid.
[6]Transcript 98.
I cannot accept the defendant’s first submission that an inference can be drawn from the fact that the debt was old or that it is not due. The demand was clear regarding what was required. The appropriate time to challenge the demand was within the 21 day period and to not wait for the hearing of the wind up application. It is not a valid reason for a failure to comply with a demand to assert that a debt is old.
Neither the plaintiff nor the defendant have referred me to any cases where this issue has been dealt with. In Re Pardoo, Cosgrove J said it was for the petitioner (not the defendant) to prove the absence of any reasonable explanation for the company’s failure to dispute pay or to secure the debt.[7] That decision does not help me. Here it is submitted by the plaintiff that the defendant should provide an explanation. The fact that there are no cases which have been referred to me that deal with the issue does not mean that the defendant must explain its failure to comply with the demand.
[7]Re Pardoo Nominees Pty Ltd (1987) 11 ACLR 573 at 577.
In relation to the third submission, it is true that s 585 of the Act does not refer to any need to explain the failure to challenge the demand. In Part 5.4 of the Act, there is a procedure to challenge a wind up where a statutory demand was not opposed. Section 459S states:
(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.
In Chief Commissioner of Stamp Duties v Paliflex Pty Ltd,[8] Austin J said that one of the considerations the Court should take into account when exercising its discretion to grant leave under s 459S for a debtor to challenge the demand after the 21 day period was an examination of the reason why the issue of indebtedness was not raised in an application to set aside the demand.[9]
[8](1999) 17 ACLC 467 (‘Paliflex’).
[9]Ibid [49].
An equivalent provision to s 459S of the Act is not found in Part 5.7 of the Act. Under s 459S(1)(a) of the Act, in so far as the application for a company to be wound up in insolvency relies upon a failure by the company to comply with a statutory demand, the company cannot oppose the application without the leave of the Court. Under Part 5.7, no leave is required to challenge the demand as there is no equivalent provision to s 459S of the Act.
In my view, the requirement for the failure to challenge the demand does not need to be explained. If a demand is not complied with then the company is taken to be insolvent, but it has the right to oppose an application to wind up the company.
The plaintiff submits that the phrase ‘taken to be unable to pay its debts’ is not a rebuttable presumption, as is found in Part 5.4 of the Act, and therefore that leaves only the discretion of the Court for the defendant to rely upon. In other words, the defendant cannot argue solvency or that the debt is not owed.
The plaintiff relies on Paperlinx Ltd v Skidmore,[10] where Finkelstein J said:
Under the old procedure, a company was deemed to be unable to pay its debts when it failed to comply with a statutory demand even if it were in fact solvent. The rule, which may be traced back to the House of Lords decision in Bowes v Hope Life Insurance and Guarantee Co (1865) 11 HL Cas 389 at 402; 11 ER 1383 at 1389 was that a creditor was prima facie entitled to a winding-up order, even against a solvent company, if he could not get paid. The rule was not absolute. The court could, in its discretion, refuse to make the order but it usually exercised its discretion in favour of the unpaid petitioner.
The position changed with the introduction in 1993 of the new Pt 5.4 of the Corporations Act. Under s 459A a company may be wound up “in insolvency”. There will be a presumption that the company is insolvent if it fails to comply with a statutory demand: s 459C(2)(a). That presumption only operates until the contrary is proved: s 459C(3). If the contrary is proved, the court cannot make an order under s 459A.
[10](2004) 51 ACSR 614 at [5]–[6] (‘Paperlinx’).
In Mercantile Credits Ltd v Foster Clark (Aust) Ltd,[11] the High Court said:
The learned judge held that he had jurisdiction in the circumstances of the case to make a winding-up order, and indeed no argument to the contrary seems to have been addressed to him. Nor is his jurisdiction questioned in this appeal. It could hardly be questioned, in view of such cases as Re Commercial Bank of South Australia (1886) 33 Ch D 174 and Re Hibernian Merchants Ltd (1958) Ch 76. The contention to which the judge gave effect was that he had a discretion in the matter and ought to exercise it against the claim for a winding-up. That he had a discretion is undoubted: see s 197; Re Chapel House Colliery Co (1883) 24 Ch D 259. But it was a judicial discretion to be exercised in accordance with established principles. The leading principle is that as between himself and the company a creditor has a prima facie right to a winding-up order: Re James Millward & Co (1940) Ch 333; Re Home Remedies Ltd (1943) Ch 1; Re B Karsberg Ltd (1955) 3 All ER 854.
[11](1964) 112 CLR 169 at 173 (‘Mercantile Credits’).
It is clear from both Paperlinx and Mercantile Credits that the Court has a discretion regarding whether to wind up a Part 5.7 body.
In Re Pardoo, Cosgrove J had before him an application by the Deputy Commissioner of Taxation to wind up Pardoo Nominees Pty Ltd under s 364(1)(e) of the Companies (TAS) Code. Section 364(2) provides that if a company does not comply with the demand within 21 days, it is deemed to be unable to pay its debts. Here, pursuant to s 585 of the Act, the defendant - which has not complied with a demand - is taken to be unable to pay its debts. Cosgrove J said:[12]
A debtor company which disputes its indebtedness may appear on the hearing of the petition and dispute the allegation contained in both the notice of demand and the petition itself that “it is indebted in a sum exceeding $1000” to the petitioning creditor.
[12]Re Pardoo Nominees Pty Ltd (1987) 11 ACLR 573 at 577.
In Re Fabo Pty Ltd,[13] the Full Court of this Court referred to and accepted the above comments of Cosgrove J.
[13][1989] VR 432.
In my view, a company under Part 5.7 of the Act can challenge an order to wind up the company even though it has not challenged the demand. Solvency and the basis on which the debt is owed are able to be relied upon by a defendant company. These factors would also be relevant to the discretion to be exercised by the Court as to whether a company should be wound up.
Is the Debt Statute Barred?
The Application of Indian Law to the Contract
The defendant submits that the debt upon which the demand was based is not payable because the contract entered into by the parties is governed by the laws of India and is statute barred. The contract between the parties was terminated on 3 August 2010. According to Indian law, any action to recover the contractual debt must have commenced within a three year period. The defendant contends that the plaintiff is not a creditor and has no standing to bring an application to wind up the defendant. If the contract is governed by Australian law then there is a six year limitation period and the plaintiff can bring this application. There is no dispute before the Court as to whether the debt was due.
In OceanicSun Line Special Shipping Co Inc v Fay,[14] Wilson and Toohey JJ referred to the test to be applied to determine which system of law applies regarding a breach of contract. Their Honours said:[15]
The test for discovering the proper law of the contract – that is, in general terms, ‘the substantive law of the country which the parties have chosen as that by which their mutual legally enforceable rights are to be ascertained’… is well established. One looks for ‘the system of law by reference to which the contract was made or that with which the transaction has its closest and most real connexion’: Bonython v Commonwealth [1951] AC 201 at 219.
[14](1988) 79 ALR 9.
[15]Ibid 23.
The enquiry that is to be made by the Court is limited to the factual circumstances at the time the contract was formed and post-contractual conduct has been held to be irrelevant. In James Miller & Partners Ltdv Whitworth Street Estates (Manchester) Ltd,[16] Lord Wilberforce said:
In my opinion, once it was seen that the parties had made no express choice of law, the correct course was to ascertain from all relevant contemporary circumstances including, but not limited to what the parties said or did at the time, what intention ought to be imputed to them on the formation of the contract. Unless it were to be found an estoppel or subsequent agreement, I do not think that subsequent conduct can be relevant to this question.
[16][1970] 1 All ER 796 at 808.
The only evidence available that relates to the circumstances under which the contract was entered into is provided by Kenneth Willis Cato, the chairman and global creative director of the plaintiff. He deposes that he travelled to India in December 2009 and February, April and June 2010 for meetings with representatives of the defendant. The agreement was signed on the second day of three days of meetings that took place in Mumbai and Delhi from 1 June 2010 to 3 June 2010.
The plaintiff did not communicate by correspondence with the defendant about substantive matters before the execution of the agreement. The scope and operation of the relationship between the parties was discussed at the meetings that they had. Mr Cato did not take any notes of the meetings but recalls the following issues being discussed:
- The plaintiff did not have an office in India at which it could receive payment and payment was requested by the defendant’s representatives to be made under the agreement to the plaintiff’s office in Dubai, rather than its Melbourne office, because the defendant could more easily make payments in Dubai;
- The bulk of the work under the agreement would be performed in Melbourne;
- The work under the agreement needed to be performed in a very short time frame because of the proximity to the Delhi Commonwealth Games in October 2010; and
- Invoices for the first two stages of work under the agreement would be issued concurrently upon execution of the agreement to facilitate the expedition of the work under the agreement.
He deposed that the bulk of the work under the agreement was performed in Melbourne and that the work under the agreement performed in India was limited to meetings and site inspections.
Counsel for the plaintiff did not rely on post contractual conduct to demonstrate that the contract was formed in Australia.
The defendant submits, and I agree, that courts have considered the following factors in order to determine the proper law of a contract:
- the place of contracting;
- the place of performance;
- the language and form of the contract;
- the place of residence of the parties; and
- in the case of a contract concerning land, the place of the land.
Here the negotiations took place in India and the contract was signed in India. The place of performance was in India. The work may have been done in Australia, however the plaintiff delivered to the defendant in India its plans and designs. I note that the contract does not contain any reference to the payment of GST, nor does the contract have any connection with any Australian office of the defendant. The language and form of the contract is neutral. The place of residence of the parties is again a neutral factor. The plaintiff resides in Melbourne. The defendant has its principal place of residence in India. It is, however, registered in Australia. The contract requires payment in United States dollars. This is again another neutral factor.
The plaintiff, in order to demonstrate that the contract is governed by Australian law, relies on Charrington Co Ltd v Wooder,[17] where Lord Dunedin said:
In order to construe a contract the court is always entitled to be so far instructed by evidence as to be able to place itself in thought in the same position as the parties in the contract were placed, in fact, when they made it – or, as is sometimes phrased, to be informed as to the surrounding circumstances.
[17][1914] AC 71 at 82.
In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales,[18] Mason J also said that:
Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But insofar as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself…
[18](1982) 41 ALR 367 at 375.
The submissions put on behalf of the plaintiff were that at the time the contract was made, it was the intention of the parties that the law of Australia would govern the contract. One of the factors to be considered in determining the law governing the contract is where performance is to occur. The parties knew as part of the circumstances at the time of the formation of the contract that an Australian company was to do the design work in Australia and the bulk of the work would be done here. It is submitted that the agreement was to be performed in a short time and would require the plaintiff to dedicate significant costs and resources in a short space of time. There was no chance to establish a presence or an office or to shift staff to India.
The contract is governed by Indian law. While work may have been performed in Australia, the contract contemplates the performance of the work in India. Performance under this contract was to undertake a research and review process, followed by the delivery of a working brief and finally through making the brand strategy visible. It was in India that the plaintiff had to deliver its plans and designs to the defendant. The contract involved the upgrade of the international and domestic lounges at Delhi Airport Terminal 3, as well as the production of designs in India for the upgrade of those lounges. This also involved interviewing personnel in India. The only connection with Australia on the face of the contract is the fact that the plaintiff is based in Australia.
The contract had no allowance in it for charging GST, presumably because the performance was occurring overseas.
As the laws of India govern the contract, the defendant submits that the debt is statute barred and therefore the plaintiff is not a creditor and cannot bring an application to wind up the company.
Has there been an extension of time?
The Limitations Act 1963 (India) governs the circumstances in which ‘every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed although limitation has not been set up as a defence.’[19] The relevant provisions for the purposes of this application are s 18 of the Limitations Act and articles 18, 27 and 55 in Part II of the Schedule to the Limitations Act.
[19]Limitations Act 1963 (India) s 3 (‘Limitations Act’).
Section 18 of the Limitations Act provides:
(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.
…
The relevant extracts of Part II of the Schedule to the Limitations Act provide:
Description of Suit
Period of Limitation
Time from which period begins to run
Article 18
For the price of work done by the plaintiff for the defendant at his request, where no time has been fixed for payment.
Three years
When the work is done
Article 27
For compensation for breach of a promise to do anything at a specified time, or upon the happening of a specified contingency
Three years
When the time specified arrives or the contingency happens.
Article 55
For compensation for the breach of any contract, express or implied not herein specially provided for.
Three years
The time fixed for completing the sale, or (where the title is accepted after the time fixed for completion) the date of the acceptance.
The date fixed for the performance, or, if no such date is fixed, when the plaintiff has noticed that performance is refused.
When the contract is broken or (where there are successive breaches) when the breach in respect of which the suit is instituted occurs or (where the breach is continuing) when it ceases.
There is no dispute that the Limitations Act imposes a three year limitation period on the defendant’s indebtedness to the plaintiff. The plaintiff submits that even if Indian law applies to the agreement, it is not statute barred due to the operation of s 18 of the Limitations Act.
The plaintiff relies upon two expert reports to demonstrate that there has been an acknowledgement of the debt and therefore the limitation period has been extended beyond three years. It has a report from Mr Mac Bodhanwalla, senior solicitor at M.S. Bodhanwalla & Co and a report from Mr Darius Fraser of Kalyaniwalla & Mistry Chartered Accountants.
The defendant relies on two affidavits of Ravichandra Vasant Kini, the managing attorney of M.V. Kini & Co, to provide evidence regarding the effect of Indian law. There was no cross-examination of any expert before me.
The plaintiff submits that there has been an acknowledgement of the debt in writing and the limitation period has been extended by operation of s 18 of the Limitation Act.
It relies on the Bodhanwalla report to establish the following principles:
- The Supreme Court of India has interpreted the meaning of the term ‘acknowledgement of liability’ widely;
- A company’s balance sheet may constitute an effective acknowledgement of debt even though it was not provided to the creditor;[20]
[20]Bengal Silk Mills Co v Ismail Golam Hossain Ariff AIR 1962 Cal 115
- A lump sum in a balance sheet can be an effective acknowledgement of debt if extrinsic evidence shows that the lump sum more likely than not includes the debt;[21]
- Under Indian law, the natural inference to be drawn from a balance sheet is that the closing balance due to creditors at the end of one year is carried forward to the balance sheet of the next year. There is therefore in each new balance sheet an admission of a subsisting liability to continue the relationship of debtor and creditor unless it can be shown that the debt was lawfully determined by payment or otherwise;[22] and
- The limitation period restarts from the date the balance sheet is signed if there is an effective acknowledgement of debt in that balance sheet.[23]
[21]Lahore Enamelling and Stamping Co. Ltd v A.K. Bhalla AIR 1958 Punj. 341.
[22]Bengal Silk Mills Co v Ismail Golam Hossain Ariff AIR 1962 Cal 115.
[23]Vijaya Kumar Machinery & Electrical Stores v Alaparthi Lakhsmikanthamma (1969) 74 ITR 224(AP).
Mr Bodhanwalla has referred me to a number of cases where it has been held that a signed balance sheet containing the relevant debt amounts to acknowledgement of debt and in such circumstances the period of limitation can be extended. It is to be calculated from the date of such acknowledgement made by the debtor.[24]
[24]See Jones v Bellgrove Properties Ltd [1949] 2 KB 700; Darjeeling Commercial Co Ltd v Pandam Tea Co Ltd (1983) 54 Comp Cas 814 Cal; Vijaya Kumar Machinery & Electrical Stores v Alaparthi Lakhsmikanthamma (1969) 74 ITR 224(AP).
The issue before me is whether the balance sheets of Air India have acknowledged the debt. The plaintiff submits that it is for the plaintiff to produce the extrinsic evidence from which it ought to reasonably be inferred that the debt is included within the lump sum amounts for current liabilities in the balance sheets.
It further submits that the Court should infer from the following evidence that the debt is included in the lump sum liability amounts in the balance sheets:
- the defendant’s admissions that the debt was payable and within the Indian limitation period until July/August 2013. This admission was contained in an email sent by Kamaljeet Rattan, Chief Information Officer of the defendant, to Mr Cato on 20 June 2011;
- the conclusion by Mr Fraser that, assuming proper Indian accounting procedures were followed, the debt should have been included in the amount for “Sundry creditors” in the defendant’s 2010/2011 balance sheet, and in the amounts for ‘Trade Payables” or “Other liabilities” in the defendant’s 2011/2012 and 2012/2013 balance sheets;
- the absence of any reference to the debt in “Contingent Liabilities” not provided for;
- emails indicating that the debt received the attention of the defendant’s finance department and the attention of Mr Bharat Ashar, the defendant’s General Manager - Finance during the course of the 2010/2011 Indian financial year. It is submitted that it is highly unlikely that the defendant’s finance department and Mr Ashar would deal with the debt without considering whether it was recorded in the defendant’s financial records;
- the large sum of the debt, being USD$1,048,287.50;
- the fact that the debt is of sufficient quantum to affect the figures in the balance sheets;
- emails indicating that the debt was of sufficient importance that approval for payment was given by the defendant’s Chairman and Managing Director, Mr S Venkat of the defendant, who signed the defendant’s 2010/2011 balance sheet as Executive Director - Finance and Company Secretary and the defendant’s board.
Mr Bodhanwalla has concluded in his opinion the following:
In conclusion, in my considered opinion, from the understanding of the judgments cited hereinabove, it is seen that both the English law and the Indian law are at tandem and in both jurisdictions, the signing of a balance sheet amounts to an acknowledgement in writing of a subsisting debt. In my further opinion, in the facts of the present case, it is an admitted position that the amounts due and payable under the invoices are outstanding. The same can also be clearly gauged from the subsequent emails whereby only time was sought for payments without any denial of the said liability. In my firm opinion, therefore, an admission of this nature alongside a reflection of the said liability in the signed balance sheet of the Company clearly establishes that the limitation in the present case has not expired and that the right of the Plaintiff Cato Brand Partners Pty Ltd, to sue is still alive and subsisting.
Mr Fraser was engaged to provide an expert opinion whether the debt has been acknowledged. Mr Fraser concluded as follows:
… based on our review of the financial statements of Air India for the financial years 2010-2011, 2011-2012 and 2012-2013, our knowledge of Indian accounting practices and on the basis of the materials and assumptions set out in your engagement letter, our expert opinion is that assuming Air India followed proper accounting procedures, the liability should have been included in the respective Balance Sheets for the financial years ending March 31, 2011, March 31, 2012 and March 31, 2013. However, we cannot “specifically confirm” the inclusion of the liability in the respective Balance Sheets, because we do not have access to other relevant materials such as the detailed Sundry Creditors/Trade Payable listing and account groupings.
The defendant relies on the affidavits of Vinod Shankar Hejmadi, Director – Finance of the defendant. He deposes that he reviewed the annual reports of the defendant for the financial years ending 31 March 2011, 31 March 2012, 31 March 2013 and 31 March 2014 and confirms that the debt alleged by the plaintiff does not appear in the annual reports of the defendant as an acknowledged debt or at all.
The defendant submits that the critical issue is whether the debt was in the financial accounts and it is beside the point as to whether the debt should have been in the annual reports. It relies on Mr Hejmadi’s uncontradicted evidence that the debt was not contained in the defendant’s annual reports or any other financial accounts of the defendant and submits that the reliance upon the acknowledgement of debt does not assist the plaintiff.
The plaintiff submits that the assertion of Mr Hejmadi that the debt does not appear in any of the annual reports of the defendant or any other financial accounts is implausible in light of the matters set out in paragraph 48 above.
The plaintiff submits that Mr Hejmadi has made bare assertions. It says that there is no evidence of what searches, if any, Mr Hejmadi made of the defendant’s financial records and to what extent the financial records underlying the balance sheets are accessible or extant. The failure to produce the relevant financial records is said to be grounds for an inference that those documents do not assist the defendant, pursuant to the principles of Jones v Dunkel.[25] There is no direct evidence that the debt is included in the balance sheet of the defendant.
[25](1959) 101 CLR 298.
The plaintiff relied on Jones v Bellgrove Properties,[26] where Lord Goddard CJ was satisfied that a lump sum in a balance sheet included the debt in question. The balance sheets of the defendant contained the statement, “to sundry creditors £7,638 6s. 10d”. The defendant in that case owed the plaintiff £1,807, which was the balance of moneys that had been lent to him. This debt did not accrue within six years of an action brought by the plaintiff to recover the debt. The plaintiff argued that the defendants made an acknowledgement of the debt in its balance sheet. Evidence was given at the hearing that a firm of chartered accountants had signed the balance sheets for various years and that the debt of £1,807 owed by the defendant to the plaintiff was included in the sum of £7,638 6s. 10d. The Court held that there was an acknowledgement of the debt in the balance sheet.
[26][1949] 2 KB 700.
Here there is no direct evidence that the debt due is contained in the balance sheet. Mr Fraser could not specifically confirm the inclusion of the liability in the respective balance sheets because he did not have access to sufficient materials. Mr Hejmadi, on the other hand, has sworn on oath that the debt was not contained in the balance sheets, nor are there any financial records relating to that debt. It is surprising that there would be no financial records relating to this debt and it is not in the balance sheets. I have not received an explanation as to why it is not there. However, the onus is on the plaintiff to demonstrate that it is in the balance sheets. Unfortunately Mr Hejmadi is in India and has not been cross-examined. His evidence has not been contradicted and, I repeat, is under oath. The onus is on the plaintiff to demonstrate that the debt is included in the balance sheets. In my view, an inference, which has been contradicted by direct evidence, is not sufficient for the plaintiff to discharge that onus.
Solvency
A company is solvent if it is able to pay all of its debts as and when they become due and payable.[27]
[27]Corporations Act 2001 (Cth) s 95A.
In Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd,[28] Weinberg J (as he then was) referred to the following propositions established in relation to solvency:[29]
[28][1999] FCA 728.
[29]Ibid [44].
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 (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) 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.
There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company's assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (supra); Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (supra) at 465-466.
The adoption of a cash flow test for solvency does not mean that the extent of the company's assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (supra) at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J.
The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (supra) at 466-467.
It is no abuse of process for an applicant to seek to wind up a company presumed to be insolvent by reason of its failure to comply with a statutory demand merely because that company contends that it is solvent, or because there may be alternative means available to the applicant to vindicate its rights: Elite Motor Campers Australia v Leisureport Pty Ltd (supra).
The defendant relies on an affidavit of Mr Hejmadi to demonstrate that it is solvent. He deposes that the defendant is fully owned and controlled by the Government of India and its entire paid-up share capital is held by the President of India and his nominees. The defendant is a Government company as defined in s 617 of the Companies Act 1956 (India), now s 2(45) of the Companies Act 2013 (India).
As a company registered under the Companies Act 2013 (India), the defendant is not required to lodge its audited annual accounts in the financial year 2014/15 until 30 September 2015. The financial year in India starts from 1 April and ends on 31 March. The audited annual accounts are then placed before the Parliament of India and would be available the next year.
The plaintiff has therefore exhibited to the Court the annual report for the financial year 2013/14. It is the best evidence they have available to put before the Court.
Mr Hejmadi also deposes that the defendant is solvent based on the information set out in the annual report for the financial year 2013/14. He states that all of the liabilities of the defendant are regularly met. There is a Turn Around Plan in operation for the defendant and the Government of India has approved the infusion of fresh equity in the defendant as per the Turn Around Plan. The infusion of equity by the Government of India is based on the achievement of prescribed milestones by the defendant which are regularly reviewed by an oversight committee. To date the milestones have been met and the Government of India has infused INR 132 million up to 31 March 2014.
Mr Hejmadi further deposes that the books of accounts of the defendant have been prepared on a going concern basis. I note from the accounts that under the heading ‘Going Concern’ the report provides:
In order to improve its operational & financial performance, the Company has formulated a TAP which entails both operational & financial turnaround of the company. Based on the company’s assumption on TAP which has been independently vetted by Deloitte, a FRP has been prepared and implemented effective 1st October 2011 which envisages aligning of the debt repayments of the Company in line with the projected Cash Flows. GOI has also approved the infusion of equity in the form of Upfront Equity Infusion Rs. 67500 million, Equity for funding Cash Deficit Rs. 45520 million (up to 2018) & Equity for guaranteed aircraft loans of Rs.189290 million (up to FY 2020) thereby totalling to Rs.302310 million from FY 2012-2021. GOI has also issued an unconditional & irrevocable guarantee for Rs. 74000 million for issue of Non-Convertible Debentures (NCDs) the proceeds of which has been used for repaying the Short Term Loans (STLs) of the banks thereby reducing the interest burden. The NCDs have been subscribed by Life Insurance Corporation of India and Employment Provident Fund Organization (EPFO). These NCDs have been issued with a 19 year maturity and have been placed at an interest rate of 9.08%. GOI has also set up specific milestones for achievement in terms of PLF of 73% by 2015 and 75% by 2020, yield and utilization parameters as indicated in the TAP. The induction of the aircraft in future would be based only on Route Planning & Economics and would be reviewed after 2014-2015. The MRO & the GH activities have been hived-off as proposed in the TAP. The assets would be monetized and Cargo & Mail revenues will be enhanced as per the TAP.
…
As on 31st March 2014, GOI has infused Rs. 132000 million by way of equity into the company from the time the FRP was implemented. An amount of Rs. 65000 million is provided in Union Budget for the FY 2014-15 as equity to Air India as against Air India’s request of Rs. 71060 million (including Rs. 9260 million for Exchange rate adjustment and Rs. 1650 million towards Interest on Delayed Equity). The GOI has also been approached for the above short fall of Rs. 6060 million.
Due to the support of GOI as well as the various measures taken by the Company towards improving its operating and financial position, it is expected that the financial condition of the company would continue to improve in the future. The Accounts are therefore being prepared on the ‘Going Concern’ basis.
The defendant provides direct employment to about 23,258 employees globally.
- The gross total assets of the defendant for the financial year ending 31 March 2014 was INR 476,044 million;
- The defendant has a gross total revenue/turnover for the year ending 31 March 2014 of more than INR 190,935 million;
- The size of the defendant is reflected by its paid up share capital of INR 143,450 million as at 31 March 2014;
- The defendant transacts with over twenty banks in India and has obtained loans from some of the premier financial institutions of the world;
- With the exception of these proceedings, the defendant does not have any case pending against it in any court of law in any jurisdiction around the world disputing the solvency of the company;
- The defendant comfortably services total annual loan repayments towards aircraft of over INR 27,000 million; and
- The defendant, as at 31 March 2014, held INR 6,566 million in cash and bank balances. Mr Hejmadi states that the current position is the same or similar.
The plaintiff complains about the accounts being 18 months old. It is a just complaint, but there were no other accounts that could be relied upon. It also states that a large part of Mr Hejmadi’s evidence is hearsay.
I have read the annual report and have verified some of the comments made by Mr Hejmadi in his affidavit. There are problems in the accounts because it is clear that the company is suffering from large operating losses, but the fact remains that the Government of India is infusing funds into the defendant company and these funds are capable of paying the debt that was once owed to the defendant.
A complaint has been made by the plaintiff that the Turn Around Plan was not produced. The Turn Around Plan, while useful, would not have assisted me in my decision. The most important factor before the Court is that the Government of India is supporting this company.
I am concerned that the financial documents demonstrate that the financial performance of the defendant has not been good and that the company is making losses and that the defendant is relying on the Government of India to infuse funds.
In summary, I believe that the company is solvent solely because it is being supported by the Government of India. It has poured substantial sums of money into the defendant since 2011.
Estoppel
The plaintiff submits that even if Indian law applies and the debt is otherwise statute barred, there is an estoppel precluding reliance on the statute. It relies on an email from Mr Rattan to Mr Cato dated 20 June 2011 which states:
Thanks for your 15 June 2011 letter to our CMD, Mr Arvind Jadhav, wherein you have expressed concern about the delay by Air India in making payments due to your company. We appreciate your saying that you understand our difficulties in this humongous task of resurrecting the airline.
The ground reality is that we are confronted with a very serious financial difficulty and currently are in no position to clear off the payments of many of our associates. Without getting into the intricacies of the situation Air India is presently in, may we seek your patience and ask you to wait for some more time – by when our efforts to overcome the ongoing difficult situation is expected to bear positive results.
We must share with you that we are in constant dialogue with the Government, including Ministry of Civil Aviation.
That email was written on 20 June 2011 and the limitation period, if capable of being extended based on that email, would have been extended to 20 June 2014. The demand was made well after 20 June 2014 without any explanation why it was filed. The statute of limitations has expired. There is also nothing in that letter stating that the defendant would not rely on its rights.
Summary
The defendant has demonstrated to the Court that the debt upon which the demand is based is not due. That in itself is sufficient to dismiss the application. However, in my opinion the defendant is solvent. A wind up order will therefore not be made.
---
3
0