Commissioner of Taxation v Jiniess Pty Ltd No. Scgrg-99-337 Judgment No. S182

COMMISSIONER OF TAXATION V JINIESS PTY LTD
(EX TEMPORE)

[1999] SASC 182

JUDGE BURLEY. In my view the application to terminate the liquidation ought to be refused and my reasons for that conclusion are as follows.
On 20 April 1999, the plaintiff applied for the winding up of the defendant company on the ground of insolvency. The provisions in the Corporations Law relating to deemed insolvency were relied upon. The plaintiff had previously served upon the defendant a statutory demand claiming the sum of $47,162.11. There was no compliance with the demand and no subsequent application by the defendant to set it aside. When the matter was called on for hearing on 20 April 1999, the plaintiff was able to rely upon the deemed insolvency that arose as a result of non-compliance with the statutory demand.
Since the making of the winding up order, the contributories of the defendant company have applied for orders which are set out in minutes of order handed up to me this day. They are as follows:
“1....... That the winding up of the defendant be terminated to take effect as from the 20th day of April 1999.
2......... That the order appointing Hillary Elizabeth Orr to be liquidator of the defendant be set aside.”
At the hearing, Mr Stevens successfully applied to intervene on behalf of the parties Peter and Robyn Egan, William Davies and Unit Plan No 95/38 Pty Ltd. They are parties involved in litigation with the defendant in the Northern Territory. Cumulatively it is said that the total claims made by the interveners against the defendant amount to some $1.6 million.
S.482(1) of the Corporations Law is as follows:
“At any time during the winding of a company, the court may, on the application of the liquidator or of a creditor or contributory, make an order staying the winding up either indefinitely or for a limited period or terminating the winding up on a day specified in the order.”
The applicant contributories have sought a termination of the winding up rather than a stay. There has been affidavit material sworn by the applicants’ solicitor, one of the applicants, Mr John Glynatsis, by the liquidator and by a member of the firm of accountants who have acted for the defendant. I have read all of that material but I do not propose to traverse it in any detail in these brief reasons.
For reasons which will appear, I think that the most important evidence that has been put before me is that contained in a letter of report of the liquidator dated 5 May 1999 and in particular, an annexure to that letter which is a summary of unsecured creditors. I shall return to that document in a moment.
Mr Selley, counsel for the liquidator, referred me to a number of cases dealing with the question of making an order terminating a winding up. In particular, he referred to the decision of Hodgson J in George Ward Steel Pty Ltd v Kizkot Pty Ltd (1989) 15 ACLR 464 and to the decision of Northrop J in Remiliotis v Tenth Anemot Pty Ltd (1994) 13 ACSR 650. In the former case, Hodgson J said at p.465:
“In my view if an order winding up a company is made in the absence of the defendant company, and an application is brought promptly by the company, with notice being given to the liquidator, to the plaintiff and to any creditor who appeared at the hearing; and if the evidence shows an explanation for the non-appearance of the hearing and indicates solvency of the company; and if there is consent to setting aside, at least non-opposition; and if the liquidator indicates that nothing in his investigations to date shows a reason for the company to be stopped from trading, then the court will normally set aside the order.”
This passage is material to this case because it is the contention of the contributories that the defendant had no notice of the application for a winding up order. As against that it is clear that the winding up proceedings were served at the registered office of the defendant - the firm of accountants previously referred to - and that that firm, on the day of receipt of the documents, forwarded by pre-paid post the Court documents to the contributories. Somehow, it is said, that the company was thereby not aware of the proceedings and for the purposes of this application, I am willing to make that assumption.
The other point to be extracted from the passage cited from the judgment of Hodgson J is the requirement that there be evidence indicating solvency of the company. I shall return to that question in a moment.
Northrop J, in the second case referred to, dealt with an application for a stay of winding up proceedings in different circumstances from this case. However, at p262 of his judgment he referred to a number of cases as source of general principle. In particular reference was made to the decision of Street J (as he then was) in Re Denistone Real Estate Pty Ltd [1970] 3 NSWLR 327 where his Honour said:
“Speaking generally, the staying of proceedings in a winding up in a situation where a company is clearly insolvent is not consistent with the due preservation of the policy of the legislation and of the law, that in the public interest, an insolvent company ought to be wound up. It is not for the court to take the initiative of launching into the community - as the applicant would have me do in this case - an insolvent company in anticipation that it will in due course trade itself out of its insolvency.”
The applicants submitted by their counsel, Mr Luckhurst-Smith, that the evidence disclosed that the company was not insolvent, that it had an ability to pay all of its current liabilities and that accordingly there was no reason why the order terminating the winding up should not be made. In order to test that proposition I turn to the summary of unsecured creditors set out in the letter of the liquidator to which I have previously referred. This shows that there are funds available from Bank SA to complete a particular project on which the defendant is currently involved amounting to $173,000. It then shows that the estimated cost to complete the project is $55,985. There then follows a list of creditors for work completed and these total $145,355. The deficit, namely the difference between $173,000 and a total of $201,340 is $28,340. This happens to be the same as a deposit that was payable in respect of a subcontract that the defendant had with Otis for the installation of a lift. It is possible that that amount has been paid by the defendant without having recourse to its financier.
Be that as it may, there then follows additional creditors which are known by the liquidator to be payable now, some of whom have indicated that they are prepared to wait. As to that latter category, I regard those debts, on the evidence before me, as due now, but the creditors have indicated that they are prepared to wait further time before payment of their accounts.
The additional creditors fall into three categories: ordinary unsecured creditors; those unsecured creditors who are prepared to wait; the costs of the liquidation incurred by the liquidator to date amounting to nearly $33,000. I take the sum of $33,000 to be an approximation because, at the end of the day, if the winding up is terminated and the liquidator's claim for costs and expenses of liquidation is contested, the appropriate amount will in due course be determined by the Court. Nevertheless, nearly $213,000 is due and there is no indication as to how these payments are to be met.
Reference was made by Mr Luckhurst-Smith to a debt owed to CTM Refrigeration in the sum of $51,616. He informed me that this debt had been claimed for some three years but it was not owing because the defendant has a counterclaim against that particular creditor which, if it were successful, would have the effect of at least neutralising the debt. That may be an explanation for one of the substantial amounts owing, but it nevertheless leaves other substantial amounts to be dealt with. The largest of those is the claim by the plaintiff, the Australian Taxation Office.
It is shown in the summary of unsecured creditors as being just over $48,000. There is an undertaking included in the minutes of order handed up by the applicants’ counsel at the commencement of argument. The undertaking contained in the minutes was clarified during the course of hearing by Mr Luckhurst-Smith. The effect of the undertaking is as follows:
“The applicant contributories by their counsel undertake to make payment to the plaintiff in the sum of $48,074.20 forthwith upon the termination of the liquidation.”

I think that the undertaking by the contributories is something that I need to take into account on this application, although I do not have a sufficient knowledge of the assets of the contributories (other than their shareholding in the defendant company) to assess the ability of the contributories to make such a payment.

At the end of the day I think they probably have an ability to pay because there is at least an excess of assets over liabilities in the defendant company amounting to several hundred thousand dollars. They are the sole shareholders in the company and their shares may have significant value. In those circumstances I think that I can be assured that the plaintiff in these proceedings would be paid out if a termination order was made.
However, I cannot be satisfied that the defendant would be able to pay the other creditors and the liquidator her proper costs and expenses of the liquidation. In relation to those creditors who are prepared to wait, whilst I accept their forebearance as being a factor that I need to take into account, I think I also need to know that some time in the foreseeable future the company is going to have the funds to pay out these accounts which amount to just over $47,000. There is no indication in the evidence that the company will in the foreseeable future have that sum to pay those accounts. In addition, there is no specific proposal put to me with regard to meeting of the liquidator's costs and expenses amounting to nearly $33,000.
In all the circumstances I cannot be satisfied that the applicants have demonstrated on this application that the company is more than likely to be solvent. It seems to me that the material before me, such as it is, indicates that the company is insolvent even in circumstances where it has an excess of assets over liabilities. In that regard I think the appropriate legal principle is that, if the company is unable to pay its immediate debts without having to resort to assets which take time to realise, the company is insolvent even though, as in the circumstances of this case, there is an actual surplus of assets over liabilities.
Thus one of the matters which Hodgson J in George Ward Steel Pty Ltd thought was necessary to be disclosed to the Court, namely solvency, has not been established and therefore I think I would be in a position that Street J referred to in Re Denistone Real Estate Pty Ltd of allowing an insolvent company to continue to trade. I do not think that it is appropriate for me to do so in the circumstances of this case.
The application for a termination of the winding up is refused. I will hear the parties as to costs.

[1999] SASC 182

5 May 1999