OSTGRO Australia Pty Ltd v SYARRUM Ostriches Was Pty Ltd - [2002] WASC 140

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: OSTGRO AUSTRALIA PTY LTD -v- SYARRUM OSTRICHES WAS PTY LTD [2002] WASC 140

CORAM: MASTER BREDMEYER

HEARD: 22 MAY 2002

DELIVERED : 29 MAY 2002

FILE NO/S: COR 74 of 2002

BETWEEN: OSTGRO AUSTRALIA PTY LTD (ACN 094 721 070)
Plaintiff
AND
SYARRUM OSTRICHES WAS PTY LTD (ABN 23 070 635 988)
Defendant

Catchwords:

Corporations - Application to wind up in insolvency - Admissibility of cash flow statement - Whether company insolvent

Legislation:

Corporations Act, s 9, s 285, s 292, s 293, s 294, s 295, s 459 C(2), s 459G, s 459H, s 459 J, s 459S, s 1305

Result:

Application allowed

Category: B

Representation:

Counsel:

Plaintiff: Mr N D C Dillon
Defendant: Mr M J Hawkins

Solicitors:

Plaintiff: Clayton Utz
Defendant: Naveen Pillay

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

Nil

Case(s) also cited:

Benalto Holdings Pty Ltd v Eastras (1995) 13 ACLC 601
BHP Steel (JLA) Pty Ltd v Eagle Steel Holdings Pty Ltd [1999] WASC 187
David Grant & Co v Westpac (1995) 184 CLR 265
Switz Pty Ltd v Glowbind Pty Ltd (2001) 21 ACLC 532

MASTER BREDMEYER: This is an application by the plaintiff to wind up the defendant, which I will call the company, in insolvency. The plaintiff sold 240 wet salted ostrich skins to the company for $36,720 on 16 November 2001. The company paid by cheque dated 26 November which bounced. The plaintiff issued a statutory demand for that sum on 9 January 2002. The demand was not met, nor was it challenged within the 21‑day period.
On 18 March, the plaintiff brought this winding‑up application. The return date for the application was 24 April. On 23 April, the company presented a cheque to the plaintiff's solicitor in payment of the debt. The cheque was returned. On 24 April, I granted an adjournment to 9 May. On 9 May, I granted an adjournment to 22 May on the condition that the company pay to the plaintiff $36,729, plus $1,800 costs within 7 days. That sum was not paid within that period, or, indeed, at all.
The company seeks leave under s 459S of the Corporations Act to oppose the application on the ground that the company is solvent. The company does not seek to raise matters that it could have raised under s 459G, for example, that the debt is genuinely disputed or that the company has an offsetting claim.
I propose to refuse leave to the company under s 459S. The company does not come within the ambit of that section. Subsections (1)(a) and (b) do not fit the company. Subsection (a) is not relevant because there was no such application by the company. Subsection (b) is not relevant because if the company had brought a s 459G application, it was not open to the company then to have led evidence on its solvency. That would not get a statutory demand set aside under s 459H or s 459J.
I think the company has a right, however, to lead evidence on solvency in an effort to defeat the winding‑up application without reference to s 459S. I say that because the presumption of insolvency based on non‑payment of the statutory demand, is a deemed insolvency. By s 459C(2), "the court must presume that the company is insolvent". By s 459C(3), the presumption "operates except so far as the contrary is proved … ".
To prove solvency, the company relies on a number of affidavits, especially that of Mr Gordon Murray of 21 May 2002 and especially the cash flow statement found at GM 3 of that affidavit. Objection is taken to that statement by the plaintiff. Mr Murray does not give the source of the document. He does not say who prepared it. Nor does he state what sources were used in the preparation of the document. Nor does he state his belief that it is true. He says, at par 5 of his affidavit:
"Annexed hereto and marked GM 3 is a copy of a cash flow statement covering the period 1 July 2001 to 22 May 2002."
An earlier cash flow statement is annexed to the affidavit of Mr Shane Murray at SM 1. That is for a different period, but states at the bottom:
"Prepared by K A Boyd T/as Cash Flow Services, 28 Bellbird Avenue, Huntingdale WA 6110 telephone 9490 5330. Information used to compile this report has been supplied and certified correct by: "
The statement is not signed.
Mr Hawkins, for the company, quoted me a number of sections of the Corporations Act to show that this statement is a financial record of the company and, as such, is admissible. Section 1305 provides that a book of a company kept under requirement of this Act is, prima facie, evidence of any matter stated in it. That raises two questions: Is this statement a book? Is it kept under a requirement of the Corporations Act? The answer to the first question is, "Yes". By s 9, a book includes a financial report, however compiled. Is the cash flow statement kept under a requirement of the Act? By s 285, the company must keep written financial records that correctly record and explain its transactions and financial position and would enable true and fair financial statements to be prepared and audited. The cash flow statement is not a financial record in that sense. The section is there referring to primary financial records - from which a financial statement can be prepared. The cash flow statement is a statement presumably prepared from financial records.
By s 292, certain companies must prepare an annual financial report. Those companies include all public companies and all large proprietary companies. That latter term is defined. This company is not a large proprietary company. This company is a small proprietary company. It only has to prepare financial reports if it is directed to do so under s 293 or s 294, or if it is controlled by a foreign company. I was referred to s 295 which defines financial statements to include a statement of cash flows. They are part of a financial report that certain companies, such as public companies and large proprietary companies, are required to keep. This company is not one of those. I conclude, therefore, that this company is not required by the Act to prepare a cash flow statement.
This cash flow statement is therefore not admissible as a financial record of the company kept under a requirement of the Corporations Act.
Looking at the cash flow statement, it is probably prepared by an unknown person from the primary records of the company. Most of the May figures are missing and that is understandable. The statement was prepared prior to 21 May and May had not finished. There are only three figures in the column for May, $205,000 for purchases, $255,000 for sales and $4,512 for superannuation. I assume those figures are estimates.
I rule the cash flow statement inadmissible. The person who prepared it needs to depose to it. If it was prepared by Mr Murray, he should state so. If it was prepared by an accountant (possibly Mr Boyd), he should depose to it. If it is based on figures supplied to him by Mr Murray, or from the books of the company, he should depose to that, too, as to the sources of information which he used to prepare the statement. Hearsay evidence is not normally allowed in the winding‑up jurisdiction, although it is often allowed in the statutory demand jurisdiction. However, even if I were to admit this statement as hearsay, Mr Murray would have to state that he has been told and verily believes that the report was prepared by so‑and‑so, etcetera.
In case I be wrong on my ruling on the cash flow statement, I will, nevertheless, consider it.
Turning now to the issue of solvency, the plaintiff's debt of $26,720 was incurred on or about 16 November 2001. The skins were delivered then. The debt was paid on 26 November by a cheque which bounced. It has not since been paid. It was not paid when the statutory demand issued on 9 January 2002. There was no application to set aside the demand. There was no letter disputing the debt. When I adjourned on 9 May to 22 May, I made it a condition of the adjournment that the sum be paid and it was not. With one brief exception - when a cheque for the sum was tendered, but rejected - for the whole of the period between November 2001 and May 2002, this debt could not be paid.
Mr Gordon Murray says in his affidavit of 21 May that skins purchased from another company, Wangana Nominees Pty Ltd, and other skins, were exported to USA in August 2001. They arrived about one month after the 11 September 2001 attack on the World Trade Center in New York. The price of skins dropped in the US from US$80 to US$50 - I assume per skin - hence, his purchaser could not on‑sell them and, hence, the company was not paid and was not able to pay this plaintiff. Be that as it may, the plaintiff's debt of $36,720 was an ordinary trading debt and the company has been unable to pay it for the past six months. That is powerful evidence of insolvency.
A second trade debt outstanding is that owed to Wangana Nominees Pty Ltd. Wangana sold 310 ostriches to the defendant in August 2001. I do not know the terms of payment, but I think it is safe to infer that payment was due at least prior to 21 December 2001. $60,000 was paid off this debt prior to 21 December, and on that date Wangana issued a writ against the company for the balance. The writ was issued in the Bendigo County Court. Wangana got a judgment against the company for $30,522 on 13 February 2002. That judgment was registered in the District Court, Perth, on 17 April. The company has promised to pay that debt by 31 May.
According to the cash flow statement, the company had an excess of income over expenditure in January 2002 of $44,621 and in February of $51,217. In each of those months, the company could have cleared the plaintiff's debt of approximately $37,000 and the Wangana debt of approximately $30,000, both being undisputed debts, but it did not do so. The non‑payment of these two undisputed debts when they fell due and for many months afterwards, is powerful evidence of insolvency.
Milne Feeds Pty Ltd claims a debt of $57,656 against the company for supply of ostrich feed in the period February to April 2001. Milne Feeds has sued for its claim. The company has filed a defence and counterclaim, claiming that the feed was defective and killed 2,500 birds. In view of that, I consider I should ignore this disputed claim in considering the company's solvency.
Allhide Pty Ltd, a South African company, claims a debt of $38,000 plus damages which would exceed $100,000in District Court action No 1639 of 2001. These claims are disputed by the company. The company has filed a defence and counterclaim and I propose to ignore this disputed debt for the purpose of determining solvency.
There are two other Local Court actions on foot against the company: one by ATA Environmental of 28 March 2002 for $14,974 and one dated 30 June 2001 by EGL, Eagle Global Logistics (Aust) Pty Ltd, for $9,089. These debts were revealed in an affidavit filed on behalf of the plaintiff sworn by Lara Lukich on 8 May. The company has said nothing about these claims, although it has had time to do so. Whether they are disputed or not, I do not know.
The figures for May in the latest cash flow statement are, as I have said, probably estimates. I know that the month had not ended when those figures were prepared, but clearly, the estimated expenses are, with two exceptions, omitted. If the normal expenses of the previous months were repeated, that would greatly reduce the projected profit. I am also suspicious of the figures for purchases and sales which, as I have said, I think are estimates. The figure for purchases is $205,000 and the figure for sales for the month is $255,000. Presumably, the company plans to purchase ostriches or skins to the value of $205,000 and sell them for $255,000. The average purchases of the company over the last nine months has been $9,000 a month. I ask, how can this suddenly jump to $205,000? Given the company's lack of cash and the number of writs out against it, how, I ask, is the company going to purchase $205,000 worth of birds or skins on credit? I consider this figure and the projected sales figure are both greatly exaggerated.
In summary, the company's failure to pay the statutory demand is presumed evidence of insolvency for a three‑month period prior to this winding‑up application of 18 March. The company has the onus of rebutting that presumption and has not done so. The plaintiff's debt of $36,720 incurred in November 2001 was, and is, uncontested. It was not paid in November 2001. In fact, it was paid on 26 November, but the cheque bounced. The debt was not paid after the issue of the statutory demand in January, nor up until the present time, although, I noted in my reasons above, there was a period when tender was made. This debt was one incurred in the ordinary trade of the company and, given the turnover of this company of $1.15 million in the financial year 2001, was not a huge debt. Yet, the company could not pay it within six months of incurring it. It was an ordinary trading debt. It was to purchase skins, part of the company's stock‑in‑trade. It was not to purchase a capital item which might well have been difficult to pay for out of current income.
Secondly, the company was not able to pay off the Wangana debt of $30,000 between 21 December 2001 and the present, a period of five months. That, too, was an ordinary trading debt incurred by the sale of skins to the company. That debt, too, was not disputed. It, too, was not an enormous debt, in view of the company's previous turnover. Based on these matters and the weakness of the company's evidence, I consider that the company has not been able to overcome the presumption of insolvency and the company will be wound up.