In the matter of QSmart Securities Pty Ltd

[2021] NSWSC 1687

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of QSmart Securities Pty Ltd [2021] NSWSC 1687

Hearing dates:

16 December 2021

Date of orders:

16 December 2021

Decision date:

16 December 2021

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Company wound up in insolvency. Liquidator appointed. Defendant to pay the costs of the Plaintiff and supporting creditors.

Catchwords:

CORPORATIONS — Winding up — Statutory demand — Failure to comply with statutory demand — Where presumption of insolvency that arose from failure to comply with statutory demand not rebutted.

CORPORATIONS — Winding up — Statutory demand — Whether to exercise discretion to stay winding up — Where company submits it will recover funds in near future — Where that was not established on the evidence.

Legislation Cited:

- Corporations Act 2001 (Cth), ss 467

Cases Cited:

- Australian Securities and Investments Commissions v Lanepoint Enterprises Pty Ltd (recs and mgrs appointed) (2011) 244 CLR 1; [2011] HCA 18

- Lechmere Financial Corp v Aspermount Ltd [2003] FCA 1138

- TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410

Category:

Principal judgment

Parties:

G.W. Wulff Nominees Pty Ltd (as Trustee for Wulff Retirement Fund) (Plaintiff)
QSmart Securities Pty Ltd (Defendant)

Representation:

Counsel:
J Entwisle (Plaintiff)
N Li (Defendant)
J. Shandil (Supporting Creditor)

Solicitors:
Floyd Robichaux (Plaintiff)
Pagin + Mak Lawyers (Defendant)
Indus Lawyers (Supporting Creditor)

File Number(s):

2021/249894

Judgment – ex tempore (Revised 17 December 2021)

Nature of application

1. By Originating Process filed on 1 September 2021, the Plaintiff, G W Wulff Nominees Pty Ltd ("GWW") applied for an order winding up the Defendant, QSmart Securities Pty Ltd ("QSmart") on the ground of insolvency under the Corporations Act 2001 (Cth), relying on a creditor's statutory demand which was not satisfied within the requisite 21-day period. A supporting creditor appears, but it has not been necessary for that creditor to intervene where GWW has pursued the application to completion.

2. The creditor's statutory demand was dated 8 June 2021 and claimed the amount of $392,316.84 against QSmart, which was described in the schedule as comprising the amount ordered by way of compensation for direct loss by a determination of the Australian Financial Complaints Authority ("AFCA") made nearly 18 months ago, on 17 July 2020, and interest from 1 July 2017, to the date of the demand, 8 June 2021.

Affidavit and other evidence

3. GWW relies on the affidavit dated 1 September 2021 of its director, Mr Wulff, which refers to the determination made by AFCA and confirms that, as at the date of that affidavit, QSmart had not complied with the creditor's statutory demand and the amount demanded remained due and payable.

4. It is apparent that that is still the case today, because QSmart leads evidence, to which I will refer below, that foreshadows steps that it might take that might have the result, by March 2022, that it might be in a position to meet the debt.

5. GWW also reads the affidavit dated 3 September 2021 of Mr Robichaux, its solicitor, which refers to service of the Originating Process, affidavit in support and consent of liquidator upon QSmart, and there is no doubt that the proceedings have been served, because QSmart has appeared and made submissions, by counsel, in opposition to the application. Mr Robichaux also proves lodgement of a Form 519 notification of action relating to winding up with the Australian Securities and Investments Commission ("ASIC") and publication of a notice of application for the winding up order on ASIC's website. By further affidavit dated 1 December 2021, Mr Robichaux again addresses the subject of publication of the winding up application on the ASIC website. By a further affidavit dated 3 December 2021, Mr Robichaux addresses the procedural history of the matter, which led to the hearing today. It is not necessary to address that matter in order to determine the application today.

6. GWW also tenders the consent of a liquidator, Mr Silvia, dated 26 August 2021, and it tenders a letter dated 24 September 2020 from AIG, an insurer to QSmart, setting out AIG's position in substantially denying indemnity for claims made by QSmart for indemnity in respect of the claims made by, inter alia, GWW against QSmart, which were determined by the AFCA.

7. QSmart in turn relies on the affidavit of its director, Mr Gribble, dated 15 September 2021. Mr Gribble refers to QSmart's assets and liabilities, but little turns upon them, where the expert evidence led by QSmart itself establishes that, at present, QSmart does not have sufficient cash resources “immediately” (or, I interpolate, over the last 18 months) to pay its debts which are currently due and payable. I will return to Mr Gribble’s and the expert's evidence of the steps which are sought to be taken by QSmart to put itself in a position to pay those liabilities again noting that, in respect of GWW's claims, it has already had some 18 months or so to do so.

8. Mr Gribble notes that QSmart is a member of the Quantum Group of companies and refers to an assumption that Mr Cavanagh, the expert, was asked to make that Quantum Administration Services Pty Ltd ("QAS") had the capacity to immediately pay part of an amount of a loan from QSmart to it recorded on QSmart's balance sheet, which would put QSmart in further funds, although significantly less than the amount that is necessary to meet the debt owed to GWW, still less the debts owed to GWW and other creditors which are also still the subject of current determinations by the AFCA against QSmart.

9. Mr Gribble notes that QSmart does not currently trade and does not have material operational expenses and does not, for example, pay rent, but fairly acknowledges the existence of current creditors, including four major creditors arising from determinations adverse to QSmart made by the AFCA to which I referred above. Mr Gribble in turn acknowledges that a very substantial amount is owed to those creditors, including, relevantly, $382,928.27 to GWW and an even larger amount to two other creditors.

10. Mr Gribble refers to the background to the AFCA determinations against QSmart, although for present purposes the relevant matter is the existence of those determinations, and QSmart's capacity to meet them, as a debt that is currently due and payable. Mr Gribble relies on a policy with AIG in order to support its capacity to meet those claims, although he acknowledges the fact that AIG has declined to cover, at least in substantial part, for those claims. Mr Gribble indicates that QSmart contest AIG's reasons for declining cover, and outlines at some length the arguments that might be put to AIG to support a claim for indemnity against AIG for the determinations made against it.

11. The immediate difficulty with that evidence is, it seems to me, that AFCA’s determination in favour of GWW was made 18 months ago; AIG has in fact declined cover for it in large part and indemnity has not been provided, relevantly, for the outstanding part of the debt owed to GWW; and, taking Mr Gribble’s evidence at its highest, an argument to be put to AIG, which has already declined indemnity, is not the same as a right to indemnity, still less is it the same as an existing capacity to pay a debt, which would only be available if AIG in fact satisfied the claim to indemnity, which it has declined. Mr Gribble also outlined, in evidence that was largely inadmissible and not admitted, a number of other matters by way of bare assertion to establish QSmart's solvency, and to seek to make good assumptions made by its expert evidence as to solvency.

12. Mr Gribble noted that QSmart does not currently trade and he did not propose that QSmart would resume trading until the application was resolved. That is a matter that will, no doubt, give some modest comfort to future potential creditors of QSmart, unless Mr Gribble changed his mind, but it would give little comfort to those existing creditors of QSmart who have claims that are currently due and payable and have not been paid. He refers to a loss of value if QSmart were to be wound up, but that is an unfortunate consequence of the fact that a company may be insolvent and may be required to be wound up on that basis. He expresses confidence that, notwithstanding any dispute with AIG has not been resolved within the last 18 months, it will be resolved by March 2022, and he expresses his commitment to progressing QSmart’s claim on its policy for full recovery of the debts. Plainly, the creditors, or at least GWW and the supporting creditor, do not share Mr Gribble’s confidence in his capacity to recover the claims from AIG, within the next four months, since otherwise this winding up application would presumably not be brought. Mr Gribble in turn refers, in an exhibit to his affidavit, to correspondence with AIG, which includes an extended explanation of the basis on which AIG has declined to cover, although Mr Gribble does not accept the correctness of that decision.

13. QSmart in turn relies on the expert report dated 14 September 2021 of Mr Cavanagh. That expert report is admirable in its clarity, but largely if not entirely dependent on the assumptions which Mr Cavanagh has been instructed to make, which are many and which were largely unproved. He has been instructed to make, for example, assumptions as to the loan recoverability from a related party, the capacity to obtain further financial support or funding from other parties, the invalidity of the reasons given by AIG to decline the claim against it, and has formed an assessment, likely outside his area of expertise, as to the capacity to recover that claim if AIG continues to decline indemnity, as it appears it does. Mr Cavanagh’s report is largely relevant for present purposes because he fairly acknowledges that, as I noted above, it appears that QSmart does not have the cash resources available to immediately pay all of its debts which are currently due and payable, and to that extent, his report directs attention to the issues addressed in Mr Gribble’s evidence, namely the capacity to either realise assets by way of a long term or middle term loan from a related party or by obtaining indemnity from AIG in the future.

Applicable principles and submissions

14. Turning now to the applicable principles, and the parties’ submissions, the application to wind up QSmart is founded on a failure to comply with a creditor’s statutory demand, and a presumption of insolvency arises from a failure to comply with such a demand within the 21-day period specified in the Corporations Act. The effect of that assumption was summarised by a unanimous High Court in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (recs and mgrs apptd) (2011) 244 CLR 1; [2011] HCA 18 at 28 that, unless the demand was rendered ineffective, by an order setting it aside, the company was required to prove to the contrary of the presumption of the insolvency in a winding up application.

15. Here, Mr Entwisle, who appears for GWW, addresses the relevant principles, and the issues arising from Mr Cavanagh’s report, and I have had regard to his submissions. It seems to me that Mr Gribble’s evidence and Mr Cavanagh’s report do not come close to proving QSmart’s solvency, in the sense of its capacity to meet its debts as and when they fall due, where a presumption to the contrary arises; QSmart has not in fact met its debts to GWW and other creditors that are the subject of the AFCA determinations for some 18 months; and it does not presently have any established entitlement to payment, from any related party that has the capacity to meet that entitlement, or from AIG, but merely a hope that AIG may reverse a long held position, articulated in detailed correspondence, and accept QSmart’s submission that it should indemnify QSmart for a claim that it has previously declined in large part. That is not, in my view, a matter which is capable of establishing solvency.

16. I should, however, address the submissions put by Mr Li for QSmart at greater length. Mr Li refers to the relevant evidence and the basis for the expert evidence, and addresses the reasons why AIG has not paid out on the policy, in order to seek to establish an argument that, on the merits, AIG ought to have done what it has not done. It seems to me that it is not necessary to determine that submissions, because a claim against AIG, even a well-founded claim against AIG, which AIG has declined, is not sufficient to establish the ability of QSmart to pay its debts as and when they fall due. That claim cannot be converted into money in the immediate future, when debts have been outstanding for a long period, unless one takes the hopeful view made by Mr Gribble, which I do not accept, that AIG will readily reverse its long held position.

17. Mr Li in turn advances a submission under the optimistic heading, “Temporary illiquidity,” but that optimism plainly is not justified in circumstances that QSmart has not been able to meet these debts, now, for some 18 months. Mr Li refers to standard statements of the concept of solvency, and the corresponding concept of insolvency, but no subtle question as to those concepts arises here, where there is a presumption of insolvency which has not been displaced by evidence.

Discretion to defer winding up order

18. Mr Li also advances the submission that there is a basis for the Court to exercise its discretion not to wind up QSmart. Mr Li submits that the Court retains a residual discretion not to order a winding up of a company, and refers to s 467 of the Corporations Act which provides the current statutory statement of that relevant discretion. He notes the possibility that the Court may decline to order a winding up order, or defer a winding up order, where that will lead to a better result for creditors. He points to Mr Gribble’s evidence of his commitment to progressing QSmart’s claim, and submits that the Court should exercise its discretion not to wind up QSmart, for a period or until April 2022, because there is no risk to the public that QSmart would incur further debts and because QSmart expects to finalise the position with AIG on its claim under the policy by March 2022. The former proposition depends on Mr Gribble’s current intention that QSmart should not trade and the latter on his optimistic evidence anticipating a change in AIG’s position to which I referred above. Mr Li also refers to the advantage that Mr Gribble will deal with the matter without charging fees, whereas the liquidator will charge fees, but does not address the capacity of the liquidator to realise QSmart’s assets, such as they may be, in order to meet the claims against it.

19. Mr Entwisle also recognised the possibility that the Court may stay a winding up order, at least for a period, but submitted that that should be done for a shorter period than QSmart had sought, if it were to be done at all, to February 2022. There is an obvious difficulty with that course, in that there is little utility in staying a winding up until February 2022 if, even on Mr Gribble’s optimistic projection, no resolution with AIG would be reached until March 2022.

20. I reviewed the circumstances in which the Court may defer a winding up order in Re Gladstone Mortgagee No 1 Pty Ltd [2015] NSWSC 1551 at [66]ff, to which Mr Entwisle rightly refers. I there noted there do exist cases where the Court has done so, although a presumption of insolvency arising from services of a creditor statutory demand had not been rebutted, and referred to Lechmere Financial Corp v Aspermount Ltd [2003] FCA 1138, to which Mr Entwisle also referred. However, I noted that those cases generally involved short adjournments, where a company would shortly receive funds which would allow payment of the relevant debt, and I have noted above that there is little reason to expect, on the evidence as it stands, that there will be a rapid reversal of AIG’s position so as to bring about any receipt of funds by QSmart. I also there observed that, as Barrett J had noted in TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410 at [118] that, where insolvency is established, the discretion to dismiss a winding up application would only be exercised if some good reason was shown for doing so.

21. I am not persuaded that a basis to defer a winding up order has been established, where several creditors have claims against QSmart which have been unpaid for long periods, and the case put by QSmart as to any expectation that it will come into funds in the near future to pay those debts is weak. It seems to me that there is a real risk that doing so would not be consistent with the public interest that a company that cannot pay its debts as and when they fall due, should be wound up sooner rather than later.

22. If QSmart can later raise the necessary funds to pay its debts, or persuade AIG to meet its claim for indemnity, and can do so promptly, then there is no reason that it could not obtain a termination of the winding up order, on payment of the liquidators’ costs and payment of the debts which have brought about its insolvency, on application to the Court.

23. For these reasons, I make the following orders:

1. QSmart Securities Pty Ltd be wound up in insolvency.

2. Mr Brian Silvia be appointed as liquidator of QSmart Securities Pty Ltd.

3. The Defendant pay the Plaintiff’s costs and the costs of the supporting creditors, Dr and Mrs Singh, of these proceedings, as agreed or as assessed, with the appropriate statutory ranking in the winding up.

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Decision last updated: 29 December 2021