Owenlaw Mortgage Managers Limited v Shepparton Retail Investments Pty Ltd
[2011] VSC 544
•25 October 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
LIST E
S CI 2011 04992
| OWENLAW MORTGAGE MANAGERS LIMITED (ACN 005 408 766) | Plaintiff |
| v | |
| SHEPPARTON RETAIL INVESTMENTS PTY LTD (ACN 090 693 655) | Defendant |
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JUDGE: | GARDINER AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 19 October 2011 | |
DATE OF JUDGMENT: | 25 October 2011 | |
CASE MAY BE CITED AS: | Owenlaw Mortgage Managers Limited v Shepparton Retail Investments Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 544 | |
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CORPORATIONS – Application for winding up in insolvency under section 459P of the Corporations Act 2001(Cth) – defendant presumed to be insolvent by reason of non compliance with statutory demand – defendant sought an adjournment of three months in order to produce audited accounts and enable debt to be paid – debt of $24 million in respect of joint and several guarantee given by defendant for loan facility given to other member of corporate group which was now in liquidation - defendant contended that co‑guarantors would meet liability for payment from proceeds of sales of properties owned by them and that, “standing alone”, the defendant was solvent – defendant contended that court should exercise discretion not to make winding up order despite proof by plaintiff of matters required to be established – application for adjournment refused and winding up orders made.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr W. Starke | Frenkel Partners |
| For the Defendant | Ms C. Rome-Sievers | Champions Lawyers |
| Greater Shepparton City Council, a supporting creditor | Mr A. Dilges |
HIS HONOUR:
On 19 October 2011, I made orders that the defendant, Shepparton Retail Investments Pty Ltd (“Shepparton Retail”) be wound up in insolvency under the provisions of the Corporations Act2001 (“the Act”) and that David Raj Vasudevan and Andrew Reginald Yeo jointly and severally be appointed as liquidators for the purposes of the winding up. In addition I made orders for costs in favour of the plaintiff and the supporting creditor, Greater Shepparton City Council. The following are my reasons for making those orders.
On 19 September 2011, the plaintiff filed an originating motion seeking an order under s 459P of the Act for orders that Shepparton Retail be wound up in insolvency under the Act. The application relied on the presumed act of insolvency which arose by reason of non‑compliance with a statutory demand served on Shepparton Retail at its registered office by post on 5 August 2011. Shepparton Retail did not dispute that there had been service of the demand, contend that it had been complied with or that an application had been made to set the demand aside.
As such, Shepparton Retail is presumed to be insolvent by operation of s 459C of the Act except so far as the contrary is proved.
The schedule to the statutory demand describes the debt as being owing by Shepparton Retail to the plaintiff under a deed of guarantee dated 13 March 2008 in respect of the obligations of Townsville Commercial Pty Ltd (“Townsville Commercial”), a company related to Shepparton Retail. The demand is for the sum of $23,950,000. The demand was accompanied by an affidavit of a director of the plaintiff, David Ormond Owen, sworn 5 August 2011.
The originating process was served on Shepparton Retail on 20 September 2011 together with the affidavit in support of the originating process. I am satisfied that the plaintiff has complied with the requirements of the Act and the Supreme Court (Corporations) Rules 2003 in relation to applications for a winding up order.[1]
[1]See Rule 5.9 and Order 16 Part 3 of the Supreme Court (Corporations) Rules 2003.
A supporting creditor, Greater Shepparton City Council, gave notice of its intention to support the plaintiff’s application. It contends it is owed $782,900 in respect of unpaid rates for properties owned by Shepparton Retail.
Shepparton Retail did not file a notice of appearance or an affidavit as required by Rule 2.9 of the Rules and s 465C of the Act within the period prescribed by the Rules, i.e., three days. However, when the matter was called on for hearing, Ms Rome‑Sievers of Counsel announced her appearance for Shepparton Retail. She filed an affidavit of the director of the company, Warren Alfred Thompson, sworn 19 October 2011 and of Michael Champion, the solicitor for Shepparton Retail. Mr Champion stated that the reason for not filing the notice of appearance and affidavit material in response to the winding up application in compliance with the Act and Rules was because discussions had been conducted in respect of the matter directly with a director of the plaintiff, Mr Owen, who is a solicitor, with the knowledge of the plaintiff’s solicitors.
Ms Rome‑Sievers sought an adjournment of the application for three months. In her written outline of submissions she stated that more time was needed in order for the debt to be paid and for Shepparton Retail to obtain and put before the Court its audited accounts together with evidence from its accountants in relation to its current major project and its ongoing viability. The major project referred to is a development in the retail sector of Shepparton in Victoria.
Ms Rome‑Sievers stated that Shepparton Retail opposed the making of a winding-up order on the grounds that the debt the subject of the statutory demand will be paid by other entities in the Thompson Group and that, but for the debt her client company is solvent. She stated that even if it were established that her client was insolvent, the Court still has a discretion not to order a winding up and that discretion should be exercised in Shepparton Retail’s favour.
In his affidavit, Mr Thompson states that he is the sole director of Shepparton Retail. Shepparton Retail is part of a group of companies which he refers to as the Thompson Property Group. The members of the group own and lease out or develop a number of commercial and other properties in several states.
One member of the group is Townsville Commercial, which is the owner of a number of properties in Townsville, Queensland, which include the Grand Mercure Hotel and the Ibis Hotel (which is located next to the Grand Mecure Hotel in Palmer Street, Townsville).
Mr Thompson states that the plaintiff entered into a loan facility with Townsville Commercial in or about 2006. In 2008, further funds were advanced by the plaintiff under the facility and a first ranking security was taken over the Grand Mercure Hotel. In addition, in March 2008, 14 of the companies in the Thompson Property Group, including Shepparton Retail, together with Mr Thompson himself, entered into a guarantee of the obligations of Townsville Commercial.
The guarantee, which is exhibited to Mr Thompson’s affidavit, is a joint and several guarantee of the obligations of Townsville Commercial. Clause 2.2 provides that the guaranteed debt is payable immediately on demand. Clause 3 provides that the lender is not obliged to take any action against any person or under any security prior to claiming from a guarantor.
Townsville Commercial defaulted in its repayment obligations under the facility and on 28 April 2011 the plaintiff appointed receivers and managers to the Grand Mercure Hotel. On 6 May 2011, the mortgagee of the Ibis Hotel appointed receivers and managers to that hotel. On 1 August 2011, Townsville Commercial was wound up in insolvency on the application of the Deputy Commissioner of Taxation.
Immediately prior to this matter being called on for hearing on 19 October 2011, a co‑guarantor, Hurstville Retail Investments Pty Ltd, which is a member of the Thompson Property Group, was ordered by me to be wound up in insolvency by reason of failure to comply with a statutory demand served on it in respect of its liability under the guarantee the subject of the demand in this application. That application was not defended.
The hotels which are in receivership continue to operate under managers who have been appointed and they have been placed on the market for sale. Mr Thompson says that as the plaintiff is first ranking mortgagee in respect of the Grand Mercure Hotel, it stands to recoup a large proportion of the debt the subject of the guarantee. In addition, he says any shortfall or a proportion of it may also be recovered from the proceeds of sale of the Ibis Hotel. Mr Thompson says that although he has not been able to obtain much information about the sale of the Townsville hotels, he has been informed that neither hotel had yet been sold but the receiver and manager of the Grand Mercure Hotel expected a sale of that hotel in the next 12 months. Mr Thompson states that it had been indicated to him by the solicitors for the plaintiff that a valuation of the Grand Mercure Hotel of between $18 million and $18.8 million had been obtained. He asserts that this undervalues the hotel.
Mr Thompson states that the value of the hotels on the balance sheet of Townsville Commercial for the financial year ended 30 June 2010 was $55,262,000. He exhibits a valuation obtained from Jones Lang LaSalle Hotels, which values the property as at late August 2010 at $40 million. That valuation was obtained in order to negotiate an extension to Townsville Commercial’s loan facilities.
At paragraphs 17 and 18 of his affidavit, Mr Thompson states:
Even if it is true that the receivers have obtained a valuation for the Grand Mercure Hotel of between $18 and $18.8 million, and that is correct, it is clear that upon its sale, the plaintiff stands to recover the bulk of its Debt.
In case there is still any shortfall, property of other companies within the Group is being sold in order to clear the Debt to the plaintiff.
Mr Thompson also states that another member of the Group, Brunswick Retail Investment Pty Ltd, is in the process of selling or leasing its retail and commercial space in Sydney Road, Brunswick. He provides some details of such sales but there is no information as to that company’s financial position or what will become of the proceeds from such sales. He states his belief, having been informed by real estate agents who are not identified, that two further sales are expected of property owned by that company. He asserts certain values in respect of those properties but no actual valuations are provided and it is not said what the position is in regard to mortgages and other securities on those properties. He states that he anticipates that the balance available to assist in meeting any potential shortfall owing on the debt the subject of the statutory demand is approximately $3.246 million, but his basis for that anticipation is not elaborated upon.
Another member of the group, Marine Retail Investments Pty Ltd, has properties which are presently being sold under the control of the plaintiff, but Mr Thompson states that he has not had enough time to gather the information he needs to provide more detail on these sales.
Both Brunswick Retail Investment Pty Ltd and Marine Retail Investments Pty Ltd are co‑guarantors of the obligations of Townsville Commercial Pty Ltd.
In paragraph 24 of his affidavit Mr Thompson asserts that:
There is a good prospect that if properly marketed and sold the sales of hotels and properties would result in satisfaction of the debt. I cannot be more specific than that for several more months until the marketing and sale of the hotels and properties is completed, or at least further advanced.
Mr Thompson’s affidavit then moves on to a description of Shepparton Retail’s own commercial activities. Mr Thompson states that Shepparton Retail is in the advanced stages of planning and preparing to commence work upon a major retail and property development in Shepparton. Physical construction is yet to commence.
He exhibits accounts for Shepparton Retail for the year ended 30 June 2011. Mr Thompson states in regard to those accounts that as regards trade creditors, a significant proportion of the total, $403,286, are related party debts “which are not pressed within the group so that they are not properly described as current liabilities”. Further, he states that Shepparton Retail has access to credit provided on an “as needs basis” from other members of the group. Interest payments of $300,000 per month have been paid on its behalf by other members of the group.
I pause at this point to observe that two members of the group are now in liquidation, and liquidators appointed to those companies will no doubt soon be pressing for payment of any debts owing by Shepparton Retail. In addition, payment of Shepparton Retail’s interest obligations of $300,000 per month would presumably be reflected as accruing liabilities in the form of loan accounts owing by Shepparton Retail to the entities within the group who are advancing the funds to pay its interest obligations.
I also observe in regard to the accounts the following. In the profit and loss account, the rates said to be owing for the year 30 June 2011 are $159,282, whereas the Greater Shepparton Council contends that it is owed in the order of $783,000, which figure did not seem to be in dispute at the hearing of this matter. In addition, Shepparton Retail’s interests costs have increased dramatically, from $2.5 million in the year ended 30 June 2010 to $3.25 million for the year ended 30 June 2011. The company suffered a total operating loss of $460,570 as at 30 June 2010 and this had escalated to $1,444,435 as at 30 June 2011. Its income from rental had decreased from $2.5 million in the year ended 30 June 2010 to $1.75 million as at 30 June 2011. The company, which is trustee of the Watton Property Trust, presumably a unit trust, notes in its beneficiaries’ accounts, that the deficit in trust funds has increased from $710,266 to $2,154,701 as at 30 June 2011. The balance sheet states a figure for non‑current liabilities of $42,020,388 for the year ended 30 June 2011. The notes to the balance sheet identify such non‑current liabilities of being of the order of $9 million to related parties, a loan of $1.869 million to an entity described as Victorian Securities and a loan to Suncorp Metway of $31,105,746.
The liability under the guarantee to the plaintiff is not mentioned in the accounts. At this point, it could not be contended that it was a non‑current or contingent liability, as a demand has been made on the guarantee some time back and its terms provide that it is immediately due and payable.
The accounts are not in any event audited and the authorities indicate that if a court is to be persuaded about a company’s solvency, the fullest and best evidence in that regard would require audited accounts to be put into evidence.[2]
[2]See Ace Contractors and Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 per Weingberg J.
Mr Thompson asserts in paragraph 34 of his affidavit that
… Should the defendant be wound up and the contracts it has achieved and the property development it has embarked upon be curtailed and prevented from coming to fruition, this will not enhance the chances of the plaintiff’s recovery of the debt. Moreover, it will not only serve to visit an exceedingly onerous result upon just one of the many guarantors of the Townsville commercial debt. Significantly, it will also have a serious and detrimental flow-on effect upon a wide range of other businesses and companies which were to be involved with or benefit from the development, their employees and prospective employees, and their trading and potential trading partners. Indeed even the local economy in Shepparton and levels of employment in that region would be detrimentally affected by such an outcome.
Legal principles
In Crema Pty Ltd v Land Mark Property Developments Pty Ltd,[3] Dodds‑Streeton J surveyed the authorities on the issues I am required to decide in this application. At [141]-[145] her Honour stated:
[3](2006} 58 ACSR 631.
[141] Section 95A of the Act enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business. While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realisable so as to permit the payment of all debts as they fall due, the company will not be solvent. Conversely, it may be able to pay its debts as they fall due, despite a deficiency of assets.
[142] Section 95A evolved from the test of insolvency classically enunciated by Barwick CJ in Sandell v Porter,[4] where his Honour stated:
[4](1966) 115 CLR 666 at 670.
Insolvency is expressed in s95 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 entirely 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”.[5]
[5]At 670.
[143] Barwick CJ’s reference to payment from the debtor’s own moneys is not repeated in s.95A. In Lewis v Doran[6] the New South Wales Court of Appeal held that the omission of that terminology from the statutory definition did not represent a departure from pre‑existing case law, which recognised that a company’s capacity to raise funds from its resources or by way of unsecured borrowing (including from associated entities or otherwise), could properly be taken into account when assessing insolvency on a cash flow basis.[7]
[144] In Evans v Tate Premium Wines Pty Ltdand Australian Beverage Distributors Pty Ltd,[8] Palmer J stated:
The law is clear that solvency is first and last, a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole. In considering the company’s position, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are available by sale or borrowing upon security, and when such realisations are achievable: see Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 at 224.; Lewis v Doran (2004) 50 ASCR 175 at [106]..”
[145] In ASIC v Edwards,[9] Barrett J acknowledged that borrowed funds available on a realistic commercial assessment from outside sources were relevant to solvency, although short term loans or loans payable on demand would not enhance solvency.
[6]Lewis (as Liq of Doran Constructions) v Doran (2005) 54 ACSR 410.
[7]See RHD Power Services Pty Ltd (1991) 3 ACSR 261; Re Adnot Pty Ltd (1982) 7 ACLR 212.
[8][2005] NSWSC 186 at 187.
[9](2005) 54 ACSR 583.
Section 467(1) of the Act provides:
(1) Subject to subsection (2) and section 467A, on hearing a winding up application the Court may:
(a) dismiss the application with or without costs, even if a ground has been proved on which the Court may order the company to be wound up on the application; or
(b) adjourn the hearing conditionally or unconditionally; or
(c) make any interim or other order that it thinks fit.
As I have noted, Ms Rome-Sievers urged me not to make a winding up order by reason of the application of the discretion in the Court not to do so despite the plaintiff have established the requisite matters to obtain a winding up order.
Despite the general rule that a creditor will be entitled to a winding up order upon failure to comply with a statutory demand, the Court, even where insolvency is established, retains a discretion whether to make an order. The Court may, in the exercise of that discretion, adjourn the application when it is credibly asserted that the company has good prospects of recovery in order to allow time to elapse “for the aspirations of the company or its directors to be realised”.[10]
[10]Re Presha Engineering (Aust) Pty Ltd (1983) 1 ACLC 675 at 677.
It has been acknowledged that an adjournment may be justified “in exceptional circumstances where there would be better prospects existing for the creditors as a whole if the company were allowed to trade on than there would be if the company were wound up.[11]
[11]At 677.
In Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd,[12] Weinberg J exercised the discretion to decline to order winding up (notwithstanding the company’s failure to rebut the presumption of insolvency) in circumstances where:
“(a)The applicant did not contend that the evidence does demonstrate that the company was insolvent and it could in reality be solvent.
(b)The amount claimed under the statutory demand was not great when compared with the profit projected from the completion of the entire project.
(c)The winding up would put at risk a going concern which could adversely affect other unsecured creditors, involve the costs and delay associated with the appointment of a liquidator and could in all likelihood jeopardise the successful outcome of the entire townhouse development.”[13]
The situation before the Court in Ace Contractors is not this case.
[12] [1999] FCA 728.
[13]At [53].
In Fire & All Risks Insurance Co Ltd v Southern Cross Exploration NL,[14] Hodgson J granted an adjournment in circumstances where the company had substantial assets, the adjournment sought was short and particular problems which had contributed to its inability to pay its debts may have been due to the activities of another company and its controller.
[14](1986) 10 ACLR 683.
Ms Rome‑Sievers submitted that Shepparton Retail, standing alone as an enterprise, is viable and profitable and should not be wound up. I cannot accept that submission. It is artificial and defies reality to view Shepparton Retail’s financial position in such a way, given its liability under the guarantee, which is not disputed, and its liabilities to other members of the group, some of which have already been wound up (and whose liquidators will presumably call up any loans owing by Shepparton Retail).
The statement in paragraph 29 of Mr Thompson’s affidavit that “but for the debt, the defendant has been able and is able to pay its debts as and when they fall due, either from its own funds or from borrowings or credit it is able to access” is utterly unrealistic. It owes $24 million under the guarantee. While the debt is secured, the evidence would seem to be that it is probable that after the realisation of the securities it holds, the plaintiff will suffer a shortfall on the secured debt.
Mr Thompson’s optimistic assertions in regard to the prospects of the development at Shepparton are of no moment if it cannot meet all its debts including the debt the subject of the guarantee when they are due to be paid. No explanation is given as to why the amount owed to the Greater Shepparton Council has not been paid and why the amount stated in the accounts differs so greatly from what the Council contends it is owed.
The plaintiff and the supporting creditor oppose an adjournment of the application and seek a winding-up order. Shepparton Retail is presumed to be insolvent by reason of the non-compliance with the statutory demand. The company’s financial position as deposed to by Mr Thompson goes no way to discharging that presumption. In my view, Shepparton Retail is plainly cash-flow insolvent within the meaning of s 95A of the Act. It is said that the company standing alone is viable. Even if this be so, and I do not consider that the evidence establishes that it is, it together with the other members of its corporate group have contracted a very significant joint and several liability which is presently payable and which it has no ability to meet.
Mr Thompson’s predictions in regard to payment of the debt are in my view unrealistic and do not persuade me that an adjournment of the time period sought is justified or on the available evidence, whether there would be any point to it. I do not consider that the assertions by Mr Thompson result in a conclusion that the Court should exercise its discretion to adjourn this matter and I consider that a winding up order should be made.
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