Expile Pty Ltd v Jabb's Excavations Pty Ltd
[2003] NSWCA 163
•24 June 2003
Reported Decision:
(2003) 45 ACSR 711
(2003) 21 ACLC 1354
Court of Appeal
CITATION: Expile Pty Ltd v Jabb's Excavations Pty Limited [2003] NSWCA 163 HEARING DATE(S): 29th May 2003 JUDGMENT DATE:
24 June 2003JUDGMENT OF: Meagher JA at 1; Handley JA at 2; Santow JA at 3 DECISION: (1) Appeal allowed; (2) Orders below set aside; (3) Appellant's costs both at trial and on appeal be paid out of the assets of the respondent; (4) Listed for mention before Santow JA on 27 June 2003 at 9.30 am. CATCHWORDS: CORPORATIONS - Application to wind up company under s459P of the Corporations Act following statutory demand where no application to set aside on basis of genuine dispute as to claimed debt or offsetting claim - Resultant presumption of insolvency - Winding up - Insolvency - Rebuttal to presumption of insolvency - Onus - Borrowing capacity to meet current liabilities - Bank loans as non-current or current liabilities - Verification of assets - Independent accountants - Sufficiency of accounting records - Appointment of an Administrator LEGISLATION CITED: Corporations Act s95A; s440A; s459C; s459F; s459G; s459H; s459P; s459R; s459S CASES CITED: Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728
Sandell v Porter (1966) 115 CLR 666
Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661PARTIES :
EXPILE PTY LTD (ACN 093 403 135) (Appellant)
JABB'S EXCAVATIONS PTY LIMITED (ACN 066 676 926) (Respondent)FILE NUMBER(S): CA 40212/03; 40217/03 COUNSEL: S D Epstein, SC (Appellant)
D H Murr, SC/ R W Tregenza (Respondent)SOLICITORS: Baron & Associates (Appellant)
Cadmus Lawyers (Respondent)
LOWER COURTJURISDICTION: Supreme Court LOWER COURT FILE NUMBER(S): ED1887/02 LOWER COURT
JUDICIAL OFFICER :Barrett J
CA 40212/03
CA 40217/0324 JUNE 2003MEAGHER JA
HANDLEY JA
SANTOW JA
CORPORATIONS – Application to wind up company under s459P of the Corporations Act following statutory demand where no application to set aside on basis of genuine dispute as to claimed debt or offsetting claim – Resultant presumption of insolvency - Winding up – Insolvency - Rebuttal to presumption of insolvency – Onus - Borrowing capacity to meet current liabilities – Bank loans as non-current or current liabilities – Verification of assets – Independent accountants – Sufficiency of accounting records – Appointment of an Administrator
By an originating process the appellant claimed under s459P of the Corporations Act 2001 an order to secure the winding-up of the respondent in insolvency. The originating process was filed following non-compliance with a statutory demand served by the appellant on the respondent.
The statutory demand was not complied with. Nor was there any application to set it aside on the basis of genuine dispute as to the debt or offsetting claim pursuant to s459G of the Corporations Act.
As a result of the failure to comply with the statutory demand a presumption of insolvency arose that the respondent had the onus to rebut.
Held per Santow JA, with Meagher JA and Handley JA agreeingThe appellant challenged the trial judge’s findings that the respondent had rebutted this presumption and sought a winding-up order from the Court.
:
1. The debt was in truth unchallenged because the respondent had failed to seek to set aside the statutory demand when it earlier had the opportunity to show the underlying debt was genuinely disputed or subject to an offsetting claim. The fact that the accountant of the respondent had not recorded the debt may reflect a desire not to concede the debt. But it does not indicate that the debt is being genuinely disputed. The presumption of insolvency is therefore not capable of being weakened by the implausible proposition that the debt “cannot be regarded as unchallenged”.
2. The exclusion of the bank loan as a non-current liability by the trial judge was not justified. The onus clearly lay on the respondent to prove, as part of demonstrating solvency in order to rebut the presumption to the contrary, that this debt had not become due and payable.
3. The basis for concluding that there was sufficient borrowing capacity to meet current liabilities depends fundamentally on the reliability of any verification of liabilities and assets of the respondent. The verification in this case was based on a variety of more informal and in some cases self-interested sources. An independent accountant examined the accounts, however his examination was constrained by relying on the respondent’s principal Mr Kairouz. The independent accountant was also constrained from making any direct approach to the leasing companies or third party creditors. The verification of the assets and liabilities, a critical matter for rebutting the presumption of insolvency, fell well short of that required.
4. The inadequate response by the respondent to the Notice to Produce and to the direction of the trial judge for Production, in regard to equipment ownership, was of concern. When the trial judge calculated the borrowing capacity of the respondent, he attributed a large amount to equipment owned rather than leased. If the respondent owned a lesser proportion of the equipment then there would be a lower borrowing capacity. With a lower borrowing capacity there would be no means to repay the current liabilities.
5. The deficiency in production also casts doubt on whether there were ever proper records to produce. There was evidence of nine serious gaps concerning details of acquisition of significant items of equipment. The value for borrowing purposes attributed by the trial judge to these items cannot therefore be relied on. It was clearly not the subject of the “fullest and best” evidence pertaining to the ownership of that equipment. Nor, when “unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency” could one accept such a value when taking into account these gaps in evidence of ownership. The amount attributed to the borrowing capacity of the respondent was therefore substantially diminished.
6. The shortfall between the current assets and current liabilities could not be met by recourse to the trade debtors as an asset. It is unlikely that a lender would make such a loan to the respondent, taking, amongst other security, the trade debtors, and then allow the respondent unrestricted access to the receipts from trade debtors, on the security of which it is assumed to have lent a large proportion of the total loan. The respondent did not prove that a lender would have allowed this. That fact of itself pointed to such a loan being unlikely to be made in the first place.
7. Between argument concluding and judgment being handed down to-day, an administrator was appointed to the respondent. This meant that the orders that would have been made – winding up of the company in insolvency – were deferred to allow opportunity for an application to be made to allow the company to continue under administration rather than be wound up.
(1) Appeal allowed;
(2) Orders below set aside;
(3) Appellant’s costs both at trial and on appeal be paid out of the assets of the respondent.
IN THE SUPREME COURT(4) Listed for mention before Santow JA on 27 June 2003 at 9.30 am.
OF NEW SOUTH WALES
COURT OF APPEAL
CA 40212/03
CA 40217/03
24 JUNE 2003MEAGHER JA
HANDLEY JA
SANTOW JA
1 MEAGHER JA: I agree with Santow JA.
2 HANDLEY JA: I agree with Santow JA.
3 SANTOW JA:
- INTRODUCTION
On various bases, the appellant challenges the decision of Barrett J declining to order the winding-up in insolvency of the respondent company, Jabb’s Excavations Pty Limited. This followed that company’s failure either to set aside a statutory demand or meet the underlying debt, so giving rise to a presumption of insolvency, created by s459C(2)(a) of the Corporations Act . The trial judge was satisfied that the presumption of insolvency had been displaced by evidence sufficient to prove the respondent company able to pay its debts “ as and when they become due and payable ” (s95A). The trial judge’s conclusion of solvency was based on his being satisfied that the respondent company had demonstrated its capacity to borrow to meet all current liabilities (adjusted to include all liabilities to the respondent’s bank as these are secured). The borrowing shortfall of $207,223 to meet current liabilities was, in the trial judge’s view, able to be met by recoveries from trade debtors in the ordinary course. Insofar as such trade debts were used as security for such a borrowing exercise, the trial judge concluded that the company, operating as a going concern, would generate sufficient new trade debts. He concluded (Red, 9 at [19]) that:
- “there is no need to regard those [trade debts] existing at the time of any financing … as put beyond the company’s enjoyment by that [financing] transaction. In short the company will have the benefit of receipts from book debts as and when generated from time to time in the ordinary course as well as the benefit of being able to obtain credit on the security of those book debts”.
4 The principally relevant appeal ground 3 can be simply stated. It is essentially that the trial judge failed to insist upon the “fullest and best” evidence of the respondent’s financial position if it was to discharge its onus of establishing solvency. The trial judge should not have been satisfied as to solvency merely by “unaudited accounts, unverified claims of ownership or valuation and assertions of solvency arising from a general review of the accounts”.
5 Error was also said to follow from failure to order the winding-up, notwithstanding the appellant’s statutory demand remained unchallenged and unmet. There were also various matters pertaining to liabilities or assets, including insufficient evidence as to ownership of equipment, so that solvency was not established, on the appellant’s case. Finally, the respondent gave piecemeal and inadequate response to the appellant’s Notice to Produce calling for financial records, as I later explain. That failure, coupled with the constraint upon the respondent’s financial expert making proper independent enquiry, were on the appellant’s case, matters of such significance as to preclude solvency being established.
6 As emerged in argument, a further problem lay in absence of the “fullest and best” evidence for determining the status of the respondent’s liabilities to its bankers, Arab Bank Limited. In particular, it was not established whether the liability for a bank loan of $466,186 could correctly be described in the accounts, as it was, as a “non-current” liability when it would ordinarily accelerate following the presentation of the winding-up application. There was a consequent failure to consider the implications of such a current status, when it came to borrowing capacity to meet liabilities as they fell due. It was contended by the respondent that this did not matter, as the trial judge had assumed in any event that the whole bank debt was discharged by a fresh borrowing, including the $466,186. While this left a shortfall in borrowings to meet the $207,223 in still unpaid current liabilities, these according to the trial judge, could be met by recourse to trade debts; see earlier. That this was despite their being security for the substitute borrowing rendered that reasoning open to attack, as did also the critical calculations of borrowing capacity on which it depends.
SALIENT FACTS
7 Turning now to the salient facts, these can be stated as follows:
(a) By an originating process filed on 14 March 2002, the appellant claimed under s459P of the Corporations Act 2001 in order to secure the winding-up of the respondent in insolvency. The originating process was filed following non-compliance with the statutory demand served by the appellant on the respondent on 19 February 2002 in respect of a debt of $107,592.50. An order for extension of time under s459R was made by Hamilton J on 12 September 2002, with further such orders made by the trial judge, Barrett J, at later stages.
(b) Pursuant to s459F(2)(b) of the Corporations Act , the respondent had twenty-one days after the demand was served, that is to 12 March 2002.
(d) It was common ground that a presumption of insolvency had arisen in consequence, pursuant to s459C of the Corporations Act . Section 459C relevantly provides as follows:(c) It was common ground that the statutory demand was not complied with and that an application to set it aside was not made pursuant to s459G of the Corporations Act . It was thus not established that there was any genuine dispute between the respondent and appellant as to the existence or the amount of the debt, or that the respondent had an off-setting claim; see s459H of the Corporations Act .
- “(1) This section has effect for the purposes of:
- (a) an application under section 234, 459P, 462 or 464; or
(b) an application for leave to make an application under section 459P.
- (a) the company failed (as defined by section 459F) to comply with a statutory demand; or
….
RESOLUTION OF APPEAL
(e) At trial, the case for the respondent was presented on the assumed basis that the monies claimed by the appellant were due. The respondent relied upon the expert opinion of Mr Paul Billingham, Chartered Accountant, who considered the capacity of the respondent to meet the demand making that assumption.
8 The respondent undertook the task of proving solvency, as if the debt alleged by the appellant was due, being careful not to concede that it was in fact due. This was for the following stated reasons:
- “6. It was necessary to conduct the case on this basis because of the operation of section 459S. That section provides as follows --
(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 (i) unless it is satisfied that the ground is material to proving that the company is solvent.
7. An application under section 459S was not pursued by the respondent. In order to have done so the respondent would have had to have conceded that the assertion of solvency made by it was subject to the debt alleged by the appellant not being due (Switz Pty Limited –v- Glowbind Pty Ltd (2000) 48 NSWLR 661 at 674). The respondent was not prepared to and did not make this concession. It undertook the task of proving solvency as if the debt alleged by the appellant was due.”
9 At Red, 4 [6] the trial judge states that though the Plaintiff’s debt had been outstanding for some time
- “it cannot be regarded as unchallenged, despite the absence of moves to have the statutory demand set aside under s459G. This is made clear by the evidence of the Defendant’s external accountant, where reference is made to instructions not to record the debt as a liability because it is disputed. Frank evidence has also been given by the Defendant’s principal about another quite unrelated debt that became the subject of a judgment and a statutory demand in circumstances of dispute resulting in setting aside of the judgment and withdrawal of the statutory demand.”
10 For my part, I consider such an inference (that the debt cannot be regarded as unchallenged) is impossible to reconcile with the respondent’s failure to seek to set aside the statutory demand when it earlier had the opportunity to establish the genuineness of any dispute. An instruction not to record a debt may reflect a desire not to concede it. But that is very different from genuinely disputing it, more especially as there is no evidence of any separate proceedings disputing it. The time has now long passed to challenge the statutory demand. The presumption of insolvency that concededly exists is in my view in no way capable of being weakened by the implausible proposition that the debt “cannot be regarded as unchallenged”. This is when the only basis for that proposition is an apparently self-serving desire not to record it and the circumstances surrounding some unrelated debt. At the outset, this casts doubt on the reliability of the accounts, given that there is not even a note in the accounts of there being a disputed debt.
11 The appellant takes issue with the debt not being regarded as unchallenged, in Ground 2 of the appeal grounds. It contends that “His Honour erred in failing to regard the appellant’s debt as unchallenged, in accordance with the requirements of s459S of the Corporations Act”. What the trial judge did do was treat the debt of $107,592.50 as required to be added to the total of liabilities when determining what were “the amount of the debts presently due and payable and those that will become due and payable in the short term”. Accordingly, the aggregate of current liabilities, when so including the debt of $107,592.50, totalled $562,376.
12 The trial judge excluded from that total what he described as “a bank loan shown as a non-current liability” in the sum of $466,186; see [12] to [14] at Red, 17. As I elaborate later, that exclusion is not justified. The onus clearly lay on the respondent, as part of demonstrating solvency in order to rebut the presumption to the contrary, that this liability had not become due and payable. Yet the bank’s loan security document was never produced (Orange, 17, para 54). Nor was any evidence forthcoming from the respondent, on whom lay the onus, establishing that the bank debt had not accelerated, despite the winding-up petition.
13 The trial judge calculated there was sufficient borrowing capacity to meet short term liabilities, relying on the statement by Barwick CJ in Sandell v Porter (1966) 115 CLR 666 at 670-1:
- “Insolvency is expressed in s.95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time -relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.”
14 The trial judge explained his reasoning in the following paragraphs of his judgment (Red, 7):
- 12 The first step, therefore, is to determine the amount of the debts presently due and payable and those that will become due and payable in the short term. According to the defendant’s own evidence (including the accounts already mentioned), such items as at 30 September 2002 totalled $454,784:
- Bank overdraft (No 2 account) $128,634
Bank overdraft (No 3 account) 3,863
Loans to shareholders 21,205
Trade creditors 235,469
Provision for income tax 65,613
13 The plaintiff’s debt of $107,592.50 is not included in this total of $454,784. For the reason I have stated, the total should be increased by that sum. It then becomes $562,376.
14 A further item to be considered is a sum of $466,186, being a bank loan shown as a non-current liability. I infer from its description as a non-current liability that this debt is not payable for at least twelve months. I therefore do not regard it as a debt that needs to be considered in a direct sense in relation to the issue of solvency. However, as will be seen presently, it does have a direct effect on the quantum of the assets to which the defendant may resort for the purpose of obtaining funds to meet its immediate and short term liabilities.
15 According to the way in which the defendant presented its case, the central question is whether the defendant has the ready capability to raise, by borrowing and by getting trade receivables, sufficient funds to cover the total of $562,376 to which I have referred. The defendant’s contention is that it is able to raise in the short term $821,339, less a factor necessary to obtain discharge of bank security. This figure of $821,339 comes from calculations recorded in Mr Billingham’s affidavit of 18 November 2002 “on the basis of the financial accounts of the defendant as at 30 September 2002”. There are three elements to the total of $821,339. First, it is said that land and buildings independently valued at $310,000 will support borrowings of $263,500 (being 85% of valuation); second, plant and equipment owned (as distinct from leased) having a value of $650,000 is seen as the source of borrowing or other financing to 50% of its valuation to yield $325,000; and, third, trade debtors recorded in the accounts at $517,420 (but taken into account at $465,678, representing a discount of 10% to book value) are seen as being available as security for credit to the extent of $232,839 (or 50%). Mr Billingham deposes that the indicated financing to valuation ratios are achievable in the marketplace.
16 The total of these three components is the $821,339 to which I have referred, but it is recognised that because the defendants’ bankers have both a fixed mortgage of the land and buildings and a floating charge over assets generally, the $821,339 could not be raised without paying out the bank. The three separate items of bank debt already mentioned (being $128,634, $3,863 and $466,186 – total $598,683) must, in a notional sense, be deducted from the $831,339 to produce a net figure that might properly be regarded as achievable through a program of borrowing. And because that notional exercise of paying out the bank would take care of the bank components of the aggregate of $562,376 of immediate and short term liabilities in respect of which the funds raised would be used, those bank components (being $128,634 and $3,863 – total $132,497) should be deducted from that aggregate.
18 I accept that a net $222,656 could be raised by a borrowing program such as Mr Billingham describes. What, then, is the source of the remaining $207,223 required to cover the adjusted current liabilities? The answer, the defendant submits, is that recoveries from trade debtors in the ordinary course will more than take care of that balance. As I have said, the balance sheet at 30 September 2002 shows trade debtors of $517,420 and, for the purposes of the notional financing exercise I have just described, Mr Billingham discounted them by a factor of 10% to $465,678. Mr Billingham’s work in relation to debtors as at 31 March 2002 included checking the reliability of the then debtors figure of $200,000. He was satisfied as to the existence and quality of the debtors, the median age being less than 60 days. Mr Billingham does not testify to having conducted the same checking in relation to debtors as at 30 September 2002 but the general reliability of the defendant’s systems in that respect may be taken to be shown by Mr Billingham’s earlier work.”17 When these adjustments are made, the aggregate to be covered by the assumed financing program is $429,879 (i.e., $562,376 less $132,497) and that financing program itself is seen as capable of raising the $821,339 referred to by Mr Billingham, less the total bank debt of $598,683, that is, a net $222,656.
15 The basis for so concluding that there was sufficient borrowing capacity to meet current liabilities depends fundamentally on the reliability of any verification of liabilities and assets of the respondent. The liabilities and assets of the respondent, and its borrowing capacity for purposes of meeting debts payable in the short term, fell to be established, not from audited accounts, nor in the case of plant and equipment from properly established ownership, but from a variety of more informal and in some cases self-interested sources. There was, it is true, an independent accountant, Mr Billingham, who evaluated these accounts and records, by way of verification. While his independence was not itself in question, Mr Billingham was constrained from contacting direct external lessor creditors and relied on the respondent’s principal Mr Kairouz. His verification was therefore limited, and the significance of that limitation emerges from what follows:
(i) Evidence as to the respondent’s financial position was given by its principal, Mr Kairouz (he and his wife being the only directors and shareholders), Mr Michael (the external accountant who provided accounting services to the respondent) and Mr Billingham (an accountant specifically retained by the respondent to prepare a report on the respondent’s financial position for the purposes of the proceedings, supplemented by certain limited valuation evidence;
(ii) Balance sheets and accounts were described by the trial judge as never having been “ formally adopted or signed by the directors of the Defendant and … expressed to be no more than special purpose financial reports prepared merely for use by the members of the company ”. Of these it was said and accepted by the trial judge, “ that the statements had not been prepared or presented in a way that would give any external recipient the measure of comfort or assurance that would be derived from formally adopted and audited accounts ”; Judgment [8] at Red, 15. That is a significant deficiency when it comes to rebutting a presumption of insolvency.
(iii) As to the respondent’s book-keeping procedures, including matters as basic as the insertion of details on cheque butts, the trial judge accepted that “ the main determinant of the accounts is information provided by Mr Kairouz” (Judgment, [8] at Red, 15) .
(v) The relevant passages of cross-examination of Mr Michael, as cited by the trial judge at [24] and [25] were as follows:(iv) Nonetheless, the trial judge found that Mr Kairouz, “ was precise and definite in his evidence as to which items were owned, as distinct from leased, recalling the circumstances of acquisition ”; Judgment, [24] at Red, 22. Yet in a number of cases there was no evidence or documentary proof of ownership of assets consisting of vehicles, save the Roads and Traffic Authority certificates of registration. Such certificates, as the trial judge noted, do not establish ownership by the party registered though he was nonetheless satisfied with Mr Kairouz’s answers as to which items were owned as distinct from leased. He did so on the basis first that “ the Defendant’s book-keeping system, although not sophisticated, has on Mr Michael’s evidence [Mr Michael being the independent accountant employed by Mr Kairouz] a methodical quality in which a key part is played by an employee described by the external accountant as ‘very good with her computer system ’” .
“Q. Apart from the valuation what, if any, information is available to you relating to the figures shown in the statements for plant and equipment?
A. Sorry?
Q. Is there any information that you have been given, apart from the valuation, casting light on the balance sheet figures for plant and equipment?
A. Plant and equipment is just – under the history costs system, you record it at cost. That is just the accumulation of ten, fifteen years of equipment. The problem is, over the time, a lot of that would have been depreciated. The asset value still exists. The only way you can really judge the accuracy of that is to do an independent valuation.
Q. But are there records you have about costs, records you have seen about costs of the plant and equipment?
A. I would have; there will be over the years, yes.
Q. What are those?
A. Sorry?
Q. As recorded in the cheque butts and then written into the bank statements; is that the procedure?Q. What are those records?
A. Just payment the company makes towards purchase of them.
A. That’s right, yes. I understand up to a few years ago, all these were done on a yearly basis. It is only when GST came in that these computer systems were in place with quarterly reports and such things.” [Black, 14]
The earlier passage of cross-examination of Mr Michael is as follows:
“Q. I am suggesting when you prepare financial statements for Jabb’s Excavations you perform no verification or validation procedures?
A. Well, I do, actually, yes.
Q. Yes?Q. What are those?
A. What are those?
A. Okay. The way the company’s records are kept by a young girl in the office – she is very good with her computer system – I go along, go through and I will check the balances of bank reconciliations. If I know they are correct, I know all the deposits and expenses have been accounted for, I will go through and check her records, deposits and payments.
- Now what I don’t check is the invoice that matches the payment, if that is what you are talking about, but I will check every three months, on a quarterly basis, we do the Business Activity Statement, I check – that is basically what I check.
Q. No more than that?
A. If needs be. If I need to go to the invoice and see if there is any GST on the invoice, I will ask.
Q. Check the invoices for GST?Q. When would you be likely to do that?
A. On a quarterly basis, I do that.
A. No, sir. I said if there is an invoice I need to check for GST I will ask Bernadette to get the invoice out to see if there is any GST on the invoice.” [Black, 10-11]
(vi) The trial judge thus concluded that ownership of items of plant and equipment in cases where only Roads and Traffic Authority registration certificate has been produced, did rest on more than the say-so of Mr Kairouz. Yet Mr Billingham’s only enquiry was via Mr Kairouz; he was evidently constrained from making any direct approach to the leasing companies. The trial judge refers as follows to the limited verification carried out by Mr Billingham:
- “27 I also refer, on the question of ownership of plant and equipment, to the evidence of Mr Billingham. He devoted some effort to obtaining details of the lease commitments, although it must be said that such information as was given to him as having been obtained specially from the leasing companies came via Mr Kairouz who said he had obtained it from those sources. Nevertheless, I regard it as sufficiently reliable to confirm the split between leased equipment and owned equipment. And that, in turn, is sufficient to dispel the possibility that a mere certificate of registration in respect of a particular vehicle not placed by Mr Kairouz within the leased category relates to a leased vehicle rather than a vehicle that is owned.”
16 However, it must be emphasised that proper verification of assets and liabilities is critical to rebut the presumption of insolvency. What occurred fell well short of that, as I explain. The relevant principles requiring proper verification are not in question. The trial judge expressly adopted the statement of these from the judgment of Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728, which I repeat below. The first three propositions are of cardinal importance for the present case:
- “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).”
17 I have referred earlier to how the trial judge was satisfied as to the question of ownership of plant and equipment. It is, however, important to note that one critical matter was the fact that the appellant made a quite inadequate response to the Notice to Produce issued to the respondent. This was the means whereby the appellant properly sought to test the accuracy of what was shown as leased liabilities. It was also to test whether it could be verified that the respondent actually did acquire any title to the various items shown as assets, in particular plant and equipment, as well as inventory.
18 It is clear that the appellant complained about the lack of production; for example, Black, T, 67, 32, 423. Moreover, the trial judge made an order for production in relation to item 8 of the Notice to Produce, to facilitate an understanding of the lease ownership and payment position for each item of inventory; that was not complied with (Black, 423, and 76). Item 1 of the original Notice to Produce sought production of the corporation’s “accounting records” to support the figure shown for “leased liabilities” in relation to the affidavit of Mr Billingham. But no company records were produced save for a faxed schedule purporting to summarise lease liabilities (Blue, 272) plus a bundle of hire purchase documents (Blue, 258262). That faxed schedule was belatedly produced, not in answer to the Notice to Produce but in cross-examination of Mr Billingham (Black, T, 68.15) for comparison to the hire purchase documents. The latter are not all dated; for example Esanda (Blue, 264). Comparison between the faxed schedule of 26 April 2002 and the earlier documentation shows that the schedule is incomplete. For example, there is no figure shown against CBFC though CBFC is referred to in the fax. Then there is a Hire Purchase agreement with Esanda for a Mack prime mover but no apparent mention of it in the fax.
19 This deficiency of production, concerning equipment ownership, is of concern. This is because, when the trial judge calculated the borrowing capacity of the respondent to fund the payment of current liabilities, he attributed a value of $650,000 to equipment owned, as distinct from leased. This he then discounts to 50% of its valuation to yield $325,000 in borrowing capacity. If there were a lesser proportion owned, that borrowing capacity would be correspondingly reduced. And without that borrowing capacity, as his calculations show, there would not be the means to repay the current liabilities; see Judgment at [14] to [18] at Red, 17—21, earlier quoted in part.
20 Complaint was particularly made about lack of production in relation to item 8 in the Notice to Produce, as noted by the trial judge (Judgment, [23] at Red, 21). Item 8 sought “for each item of inventory (other than items for which the ‘Market Value’ is shown as less than $5,000) described in Annexure B to the affidavit of Ian Arthy [the valuer] sworn 30 April 2002, of the Corporation’s records showing its acquisition of and title to that item”. What in fact was produced by way of records is described as “Exhibit H”. These were the documents produced to Mr Kairouz in cross-examination (Black, 108) and appearing at Blue, 192 and following.
21 The deficiency in that production, casts doubt on whether there were ever proper records to produce. It also shows a lack of candour on the part of Mr Kairouz as evinced by the belated furnishing of the fax when Mr Billingham produced it only in his cross-examination. What becomes apparent from an equipment inventory analysis done by the appellant is there were nine serious gaps concerning details of acquisition of significant items of equipment, signified by the word “none” against that item. This appears as an attachment to the appellant’s written submissions (Orange, 27). I set it out below:
EQUIPMENT INVENTORY
ANALYSIS
| EQUIPMENT | STEERS PTY LIMITED VALUATION | ADVISED PAYOUT AMOUNT Exhibit “D” | MAXIMUM POSSIBLE EQUITY | DETAILS OF ACQUISITION Exhibit “H” |
| Samsung 28T | 152,000 | 77,542 | 74,458 | 31.10.07 $143,000 Esanda |
| Samsung 24T | 100,000 | 89,044 | 10,956 | 12.5.99 $176,000 (before trade in) State Bank |
| Caterpillar 22T | 87,000 | 87,000 | None | |
| Samsung 5T | 97,000 | 58,426 | 38,574 | 14.4.00 $80,000 Esanda |
| International 8W | 60,000 | 2,507 | 57,493 | none |
| Mercedes Semi | 60,000 | 60,000 | none | |
| Mercedes Bogie | 70,000 | 70,000 | 11.11.99 $49,000 | |
| Volvo | 75,000 | 75,000 | 16.9.99 $37,000 | |
| Isuzu | 6,000 | 6,000 | 16.9.99 $5,250 | |
| Landrover | 15,000 | 15,000 | 8.3.02 $13,500 | |
| Toyota 4 Runner | 15,000 | 15,000 | 28.7.01 $13,500 | |
| Lusty Alison | 80,000 | 74,284 | 5,716 | 4.12.01 $72,500 CBFC |
| Ketal Cote Trailer | 15,000 | 10,945 | 4,055 | 4.12.01 $10,500 CBFC |
| Mustang Bobcat | 40,000 | 40,000 | 21.6.01 $14,000 | |
| Holden Rodeo | 7,000 | 7,000 | none | |
| Kembla Superdog | 35,000 | 35,000 | none | |
| Super Dog | 20,000 | 20,000 | none | |
| Nissan Navara | 7,000 | 7,000 | none | |
| Toyota Hilux | 8,000 | 8,000 | none | |
| Mitsubishi | 55,000 | 55,000 | none | |
| Scissor Lift | 5,000 | 5,000 | 8.7.02 $15,000 | |
| Daewoo Pulveriser | 20,000 | 20,000 | Date illegible $26,000 | |
| Krupp Hammer | 30,000 | 30,000 | 12.9.00 $20,000 | |
| Other items on valuation | 57,200 | 57,200 | ||
| TOTAL | $1,116,200 | $312,748 | $803,452 | |
| Adjustments for items not now owned | ||||
| Range Rover JABBS | 55,000 | |||
| Nissan Pathfinder JABBS | 35,000 | |||
| TOTAL | $1,206,200 |
22 From the schedule above, it will be apparent that in nine items, there are no details of acquisition whatsoever. Accordingly, the maximum possible equity value attributable to these items of $336,493 cannot be relied upon. It is essentially based on Mr Kairouz’ say-so. This becomes even more concerning when it is appreciated Mr Billingham was prohibited by Mr Kairouz from making any independent check of his own of the company’s relations and dealings with the relevant outside parties (Billingham T, 49.50-50.10 in Black, 49—50). This was a matter which was noted by the trial judge (Judgment, [27] without however drawing any adverse conclusion about the reliability of Mr Billingham’s report. The respondent in argument on appeal attempted to justify this constraint as necessary to avoid calling into question the respondent’s financial viability. But that ignores the fact that auditors routinely carry out such checks without financial viability being thereby in question. If such enquiry did arouse concern, it says more about the financial parlousness of the respondent’s condition, at least as perceived. One may accept Mr Billingham performed his task in good faith. But a report so prepared, with no sufficient independent verification, affords no proper basis for rebutting the presumption of insolvency.
23 There was therefore insufficient basis for the trial judge accepting, as he did, the attributed value of $650,000 in equipment as a source of borrowing yielding $325,000 after a 50% discount. It was quite clearly not the subject of the “fullest and best” evidence pertaining to the ownership of that equipment, even accepting its valuation as accurate. Nor, when “unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency” could one accept such a value when there were these gaps in evidence of ownership.
24 The result is to remove any basis for attributing the full $325,000 of borrowing capacity to plant and equipment. That in turn removes a fundamental underpinning to the trial judge’s conclusion that there was sufficient borrowing capacity to satisfy the requirement of obtaining funds to meet immediate and short-term liabilities. That of itself must be fatal to any case for solvency. This is because the loss of $336,493 in maximum equity value attributed to plant and equipment whose ownership could not be verified, leaves a substantially reduced borrowing capacity, however that is calculated. The assumption made is that trade debtors would cover a shortfall of $207,223 required to cover the adjusted current liabilities. But even if that were so, trade debtors could hardly be expected to cover a larger shortfall from losing equipment borrowing capacity in that amount. Moreover, a new lender would hardly take on trust the ownership of the relevant equipment, without proper proof of ownership.
25 The appellant points out in its written submissions, correctly, that “the overall nature of the respondent’s banking arrangements was not revealed by it in its evidence”. The Bank’s lending documents do not appear to have been produced at all, despite para 1(b) of the Notice to Produce calling for their production. I would agree with the appellant’s written submissions that what was described by the trial judge (para 16 Reasons for Judgment; RB 18) as the “notional exercise of paying out the Bank” cannot properly be evaluated in the absence of this evidence; see Orange, 17.
26 The trial judge aggregated the so-called non-current bank loan of $466,186 to the current bank liabilities of $128,634 and $3,863 to give a total of $598,683. He then deducted that sum of $598,683 from the discounted value of assets available as security, namely $821,339, leaving $222,656 in remaining borrowing capacity. But after applying it in reduction of current liabilities there still remained $207,223 in adjusted current liabilities to be met; judgment at [18]. Moreover, the aggregate of $821,339 which the respondent was said to be able to secure and raise, included $325,000 derived from the discounted value of plant and equipment. The availability of the latter as security is put in question by the fact that ownership of one third of the plant and equipment was not able to be established.
27 If one assumes that all of the Bank debt is taken into account as a current liability, including the $466,186, the parlousness of the respondent’s position can be seen quite starkly. Let it be assumed that the total amount that could be borrowed immediately was $821,339, notwithstanding the questions about the ownership of plant and equipment. The total current liabilities when so increased by $466,186 become $1,028,562. The security cover is clearly deficient. There is an immediate shortfall of the $207,223, as would be seen by any prospective financier at the very outset.
28 That leads to the question would such re-financing be feasible at all. The trial judge assumes (at [18]) that all the existing bank debt is first repaid by recourse to available borrowing capacity ($821,339). He then assumes that the remaining borrowing capacity is used to reduce the respondent’s remaining unsecured debts. There is still a shortfall of $207,223 to be repaid. The trial judge assumes that this shortfall can be covered by recourse to the trade debtors which were (at 30 September 2002) $517,420, discounted to $465,678. It seems unlikely that a prudent potential lender, knowing of the shortfall of $207,223, would be willing to make the loan in the first place. This is when the only way the anticipated shortfall could be met would be for the lender to release from its already deficient security a figure of close to half the $465,678 upon which the security depended. But even if one assumed such a loan were feasible, no rational lender could be expected to allow the respondent unrestricted access to the receipts from trade debtors, on the security of which it is assumed to have lent $232,839 of the total loan (judgment at [15]). It is somewhat unreal to suppose that such a borrowing would be feasible. Certainly the respondent has not proved that it was, and has not proved that a lender would have allowed it to access the cash flow from its trade debtors to meet the shortfall of $207,223 between the loan and its (adjusted) current liabilities.
CONCLUSION
29 The appellant thus succeeds in its appeal. The appellant had a further argument for why it should succeed. It is that where a statutory demand has not been met and where there has been no application under s459G of the Act to set it aside, then winding-up of the respondent must follow automatically. However, concluding as I do that the presumption of insolvency has not been rebutted, I do not need to consider this alternative ground of appeal.
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) 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.
31 Since argument in this matter concluded, a letter was received from Mr P Ngan in the following terms:
- “Associate to Meagher JA
Court of Appeal
Queens Square
SYDNEY NSW 2000
Fax: 9230 8135 (12 Pages)
- Dear Sir/Madam
RE: JABB’S EXCAVATIONS PTY LIMITED (ADMINISTRATOR APPOINTED) ACN 066 676 926
I advise that on 7 June 2003 I was appointed Administrator of the above company pursuant to Section 436A of the Corporations Act.
Please find attached a copy of my circular to creditors dated 10 June 2003. Thank you.
Yours faithfully
(signed)
P NGAN
Administrator”
32 That entails that the orders which should be made are potentially capable of being affected by an application for adjournment under s440A(2) of the Corporations Act, “if the Court is satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up”. While therefore I would otherwise have ordered the winding up of the company in insolvency I would defer doing that until the parties have had a brief opportunity to be heard. It suffices that at this point, I would order that:
ORDERS
(1) Appeal allowed;
(2) Orders below set aside;
(4) Listed for mention before Santow JA on 27 June 2003 at 9.30 am.(3) Appellant’s costs both at trial and on appeal be paid out of the assets of the respondent.
Last Modified: 07/01/2003
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