Pharmadeal International Pty Ltd v Global New Health Pty Ltd
[2019] VSC 861
•25 September 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2018 02380
IN THE MATTER of GLOBAL NEW HEALTH PTY LTD (ACN 614 531 163)
| PHARMADEAL INTERNATIONAL PTY LTD (ACN 615 201 388) | Plaintiff |
| v | |
| GLOBAL NEW HEALTH PTY LTD (ACN 614 531 163) | Defendant |
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JUDGE: | Efthim AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 8 and 9 August 2019 |
DATE OF JUDGMENT: | 25 September 2019 |
CASE MAY BE CITED AS: | Pharmadeal International Pty Ltd V Global New Health Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2019] VSC 861 |
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CORPORATIONS – Winding up application pursuant to s 459P of the Corporations Act 2001 (Cth) – Whether the defendant is solvent – Whether the application is an abuse of process – Whether the plaintiff has standing as a creditor to bring the application.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr H de Kock | SGM Legal |
| For the Defendant | Ms A Kinda | Konfir Kabo |
HIS HONOUR:
The plaintiff, Pharmadeal International Pty Ltd (ACN 615 201 388) applies to wind up the defendant, Global New Health Pty Ltd (ACN 614 531 163) pursuant to s 459P of the Corporations Act 2001 (Cth) (‘the Act’). The application to wind up the defendant is based on the defendant’s failure to set aside a statutory demand dated 17 September 2018.
Background
The plaintiff is a wholesale pharmaceutical business which supplies products to the defendant. The defendant conducts a retail business whereby it purchases pharmaceutical products in bulk and exports them overseas.
The parties have been in business together for approximately four years. They have an ongoing business arrangement where the plaintiff will provide the defendant with a monthly statement and running account. This statement summarises the defendant’s orders and the plaintiff then invoices the defendant at a later date.
On 17 September 2018, the director of the plaintiff, Alex Puthenpurackal, emailed the director of the defendant, Jinlong Liu, a copy of a spreadsheet (‘the Demand Spreadsheet’) which was described as the ’finalised accounts which states the amount’ owed by the defendant to the plaintiff. The email also sought ‘remittance right away’ and stated that Mr Puthenpurackal ‘sincerely [needed] the money promptly which I am expecting latest by tomorrow 18/09/2018’. Mr Liu deposes that he responded to the email on the same day, advised Mr Puthenpurackal that he was in China attending his grandmother’s funeral, and stated that he would be in Melbourne on the coming Thursday. Mr Liu also deposes that he advised Mr Puthenpurackal that ‘the statement u (sic) sent me is incorrect’.
Mr Liu deposes that on 19 September 2018 he received an email from Stephen Dunn, the plaintiff’s former solicitor, attaching the statutory demand and the accompanying affidavit of Mr Puthenpurackal sworn that day. The statutory demand alleged that the amount of $152,218.97 was due and owing by the defendant. The email stated that the demand had ‘this day been served on the registered office.’
Mr Liu deposes that he immediately contacted Mr Puthenpurackal upon receiving the statutory demand. During the telephone conversation, Mr Liu deposes he disputed the debt was due and payable on the basis of the demand spreadsheet. Mr Liu deposes that Mr Putehnpurackal told him he would try to organise a time to discuss the matter in person upon Mr Liu’s return.
Mr Liu deposes that he attempted to arrange meetings with Mr Puthenpurackal on numerous occasions, but no meeting ever happened.
Mr Liu deposes that he did not receive the statutory demand in the post until 18 October 2018 and did not action the statutory demand attached to the email during this period.
On 16 October 2018 the plaintiff’s solicitors emailed Mr Liu advising that the time for complying with the demand had passed. Mr Liu deposes that he kept trying to contact Mr Puthenpurackal, however Mr Puthenpurackal did not answer or return his calls.
On 18 October 2018 the defendant received the statutory demand by post. The demand was in a yellow express envelope and contained a sticker which said ‘INCORRECTLY POSTED IN RED STREET POSTING BOX. Delivery guarantee void – delivery may be delayed.’
On 18 October 2018 the defendant’s solicitors wrote to the plaintiff’s solicitors seeking withdrawal of the statutory demand, advising that the non-compliance with the delivery process of Australia Post caused a delay of 28 days. The parties’ solicitors exchanged further correspondence over the delivery date, as Australia Post had provided two separate tracking dates for delivery, being 20 September 2018 and 18 October 2018. Mr Liu deposes that Australia Post confirmed with his solicitors that the letter was not received until 18 October 2019.
On 25 October 2018 the defendant’s solicitors sent the plaintiff’s solicitors a further email outlining all the reasons the defendant relies on to withdraw the statutory demand.
Mr Liu deposes in his first and second affidavits that the parties’ solicitors exchanged correspondence regarding the date of service of the demand and potential notifications between 25 October 2018 – 13 November 2018.
The plaintiff’s application to wind up the defendant was filed on 22 November 2018.
Abuse of Process
The defendant alleges that the plaintiff’s wind-up application is an abuse of process because it is not a creditor of the defendant and did not have standing to bring the application pursuant to s 459P(1)(b). The question of standing must be determined at the time of initiating the winding-up application.[1]
[1]Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 397, [15] per Barrett J – citing Re William Hockley Ltd [1962] 1 WLR 555.
The defendant submits that throughout the course of the proceeding, evidence has been filed which supports the claim that the plaintiff was not a creditor at the time of filing its application on 22 November 2018. The defendant relies on the following points:
-the debt of $152,218.97 relied on in the statutory demand had been calculated in the Demand Spreadsheet provided by Mr Puthenpurackal on 17 September 2018;
-on 25 October 2018, the defendant’s solicitors sent a letter to the plaintiff’s solicitors, which stated that the amount claimed in the statutory demand did not take into account three payments that the defendant had made totalling $336,543.60 (‘the Omitted Payments’). The letter enclosed copies of two transfer receipts and details of one cash payment;
-on 26 October 2018, the plaintiff’s solicitors asked the defendant’s solicitors for more time to receive instructions regarding withdrawal of the demand;
-on 5 November 2018, the plaintiff changed solicitors, and the second solicitors issued the proceeding on 22 November 2018;
-on 18 March 2019, the plaintiff’s third solicitors filed the affidavit of Mr Puthenpurackal (‘the Second Puthenpurackal Affidavit’), which contained revised accounts. The plaintiff conceded that it had received the Omitted Payments from the defendant, resulting in the debt claimed in the Demand Spreadsheet being wiped out (but a new debt was claimed by including transactions not in the Demand Spreadsheet);
-the trial of this proceeding was adjourned on 17 June 2019 to give the plaintiff an opportunity to put in further material to meet the defendant’s contention that it was not a creditor at the time this proceeding was issued. No evidence was adduced of any accounts provided to the plaintiff by Mr Mizael prior to the Mizael Reconciliation dated 18 March 2019. The plaintiff has not identified any accounts other than the Demand Spreadsheet on which Mr Puthenpurackal could have been relying on when the proceeding was issued to support its position that it was a creditor of the defendant; and
-the only explanation given by Mr Puthenpurackal in his affidavit sworn 10 July 2019 (‘the Third Puthenpurackal Affidavit’) was:
(i) he prepared the ‘schedule attached to the statutory demand … by looking at invoices rendered to the defendant and payments made by the defendant as reflected on the plaintiff’s bank statements’;
(ii) certain changes after July 2017 ‘made it more difficult for [him] to calculate the balance owing on the defendant’s running balance account,’ but he deposes that at the time of swearing the First Puthenpurackal Affidavit his ‘honest belief was that the amount of $152,218.97 was the outstanding balance on the defendant’s running account’, so his statement ‘was not false’ although it did ‘understate the debt owing to the plaintiff’; and
(iii) ‘at the time of filing the winding up application the plaintiff was a creditor of the defendant…’
The defendant submits that an abuse of process exists even though Mr Puthenpurackal may have believed the plaintiff was a creditor of the defendant. However he could not have maintained that belief after 25 October 2018 when he was alerted to the Omitted Payments. These Omitted Payments vastly exceed the demand debt and were not included in the Demand Spreadsheet. Accordingly, the defendant submits that there were no supporting accounts supporting the view that the defendant owed the plaintiff the sum of $152,218.97 when it issued the proceeding. Rather, Mr Puthenpurackal knowingly made a false affidavit which was an abuse of process.
The plaintiff submits that the winding-up proceeding cannot be challenged on the basis that it is not a creditor of the defendant. It relies on McGill v Minskie Holdings Pty Ltd,[2] where Windeyer J states that:[3]
It is open to a debtor to challenge the statutory demand upon the basis that the person who issued it was not a creditor in a s 459G application... The statements of the High Court and the NSW Court of Appeal in David Grant and Switz make it clear that issues of standing as a creditor must be dealt with within the strict time limits imposed by s 459G and, by operation of s 459S, cannot be raised at a hearing for winding up without leave.
[2] [2000] NSWSC 909.
[3] Ibid [16].
The plaintiff submits that the defendant, having not relied on this ground to set aside the statutory demand under s 459G of the Act, is barred from relying on the plaintiff’s standing in the present proceeding. It further submits that the debt the subject to the statutory demand has still not been paid since service of the demand. Accordingly, nothing affects the plaintiff’s standing as a creditor.
The plaintiff also submits that its filing of the application to wind up the defendant is not an abuse of process. It relies on the statutory regime of the Act and submits that it had standing to bring its application as the defendant had failed to bring an application under s 459G. The defendant failed to obtain leave to dispute the debt under s 459S and the plaintiff says it is legitimately able to rely on a presumption of insolvency created by s 459C(2)(a) of the Act. Accordingly, no argument that the application was an abuse of process can be sustained.
In support of its submissions, the plaintiff relies on ASIC v Lanepoint Enterprises Pty Ltd,[4] where the High Court held that a company would not ordinarily be wound up over a disputed debt. The High Court stated:
Under the present statutory scheme, where a demand has not been complied with, the statutory presumption of insolvency applies unless the demand is set aside in proceedings brought for that purpose prior to the hearing of the application for an order to wind up. Unless the demand is rendered ineffective, by an order setting it aside, the company is required to prove to the contrary of the presumption. This may be contrasted with the position which formerly pertained, where the presumption that a company was unable to pay its debts could not arise if the debt the subject of the demand was shown to be the subject of a genuine dispute of substance.
More relevant to the reasons of the majority in the Full Court is the principle applied by the court in winding up proceedings brought under the former legislation, where the statutory demand process was not invoked. It will be recalled that the principle was based upon the potential abuse, by creditors, of the winding up process to compel a solvent company to pay a genuinely disputed debt. On that basis alone it could have no application to ASIC, which did not claim the status of creditor and did not seek winding up on the basis of a debt owed. It brought its application under the statutory entitlement given by s 459P and in reliance upon the presumption of insolvency in s 459C(2)(c), which operates on the fact of the appointment of receivers and managers. More fundamentally, because the principle has no application in the case of an insolvent company, it cannot apply in the context of the current Pt 5.4, where the statutory presumption of insolvency operates.[5]
[4](2011) 277 ALR 243.
[5]Ibid [28]-[29].
In Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation,[6] McGarvie J referred to two branches of the principle under which the presentation of a creditor’s petition to wind up a company may be restrained as an abuse of process. The first branch applies to a petition to wind up a company which has no chance of success. Under the second branch, the presentation of the petition may be restrained where the existence of a genuine cross‑claim by the company based on substantial grounds makes it likely that the petition, if presented, would either be dismissed or adjourned to await the determination of a cross‑claim.
[6][1978] VR 83.
In AG Coombes Pty Ltd v M&V Consultants Pty Ltd (in liq),[7] Sloss J considered the second branch of the principle referred to by McGarvie J in Fortuna. After citing the High Court decision of ASIC v Lanepoint Enterprises Pty Ltd,[8] her Honour said:
It is clear that the regime established by Part 5.4 of the Corporations Act does not preclude allegations of an abuse of process where the abuse is alleged to be the institution of proceedings for an improper purpose. There is, however, some uncertainty as to the extent to which the abuse of process principles decided under the previous winding up regime continue to apply today, particularly in the context where a winding up application is brought based on non-compliance with a statutory demand. When the decision of the High Court in ASIC v Lanepoint is viewed against the background of the Court’s rejection of the approach taken by the majority in the Full Federal Court below, it seems unlikely that any scope remains for the continued application of the ‘second branch’ of Fortuna Holdings type of abuse of process, particularly in a case where an application for winding up is pursued on the basis of presumed insolvency.[9]
[7][2018] VSC 468.
[8](2011) 244 CLR 1.
[9]AG Coombes Pty Ltd v M&V Consultants Pty Ltd (in liq) [2018] VSC 468, [46].
Her Honour, in rejecting that there was an abuse of process, said:
Insofar as the debts the subject of the statutory demands are concerned, the defendant has embarked on the Part 5.4 process in a manner consistent with the statutory scheme. The liquidator has given sworn evidence that there was a proper basis for serving the statutory demands (in his earlier role as administrator), there was opportunity for the plaintiffs to dispute the debts, and upon their failure to do so, the statutory presumption of insolvency was enlivened. As the High Court observed in ASIC v Lanepoint, ‘[t]he evident policy of Pt 5.4 is that there be a speedy resolution of applications to wind up in insolvency’. In my view, it would be contrary to that policy to deviate from the statutory process so as to enable the plaintiffs to dispute the debts in satellite litigation, simply for the reason that they may well be solvent. In Australian Beverage Distributors, Beazley JA described the second branch of Fortuna Holdings as applying to cases where there is ‘a more suitable alternative means of resolving a disputed claim against the company sought to be wound up’. In the present case, if the solvency of the plaintiffs is as clear — cut as they contend, it will remain open to them to dispute the debts underlying the statutory demands at a later point. It is only if they are unable to demonstrate their solvency to the requisite standard that they will be foreclosed from disputing the debts any further, and while that outcome may seem harsh, it is one envisaged by the statutory regime. As such, I do not consider that the plaintiffs have established that there is a more suitable alternative means of resolving the dispute as to the debts pursued by the defendant by way of the statutory demands.
In circumstances where counsel for the defendant has indicated that the defendant will be relying upon the alleged additional indebtedness of $7.5 million when issues as to the plaintiffs’ solvency fall to be determined on s 459P applications, in my view it seems likely that this factor will be a material one in the assessment of the solvency of one or both of the plaintiff companies. I do not accept that it is an ‘ambit claim’, as the plaintiffs submitted. As the claim is one which the liquidator believes has a proper basis, having been identified with the assistance of a quantity surveyor, it is appropriate that it is tested and weighed in the balance on the assessment of issues as to solvency on any s 459P applications. On the limited and untested evidence as to the plaintiffs’ solvency before me, I am not prepared to conclude that the plaintiffs are so obviously solvent that the assessment exercise envisaged by the statutory regime should not be permitted to proceed.
Accordingly, even if the ‘second branch’ of Fortuna Holdings remains available, I am not satisfied that the plaintiffs have made out a prima facie case of abuse of process.[10]
[10]Ibid [83]-[85].
Here the plaintiff submits that AG Coombes should be followed and that the second limb of Fortuna Holdings should not be applied. AG Coombes deals with a disputed debt. The defendant submits that the issue raised here is that there was no debt when the originating process was filed. The Act requires that the plaintiff be a creditor. There is evidence before the Court that the plaintiff was not a creditor. Mr Puthenpurackal gave evidence that he believed that the plaintiff was a creditor at the time the originating process was filed. However, he had been given documents by the defendant which demonstrated that the payments had been made and he ignored them. AG Coombes can be distinguished on the basis that there is no dispute here as to whether there is a disputed debt.
I accept that the regime established by Part 5.4 of the Act is a harsh regime, but I note that it does not preclude allegations of an abuse of process when the abuse is alleged to be in the institution of proceedings for an improper purpose. Here, the plaintiff filed an application to wind up the defendant based on a debt which its director believed was due and payable. The director simply ignored information provided to him that the debt had been paid. There is no standing, and on this ground alone the plaintiff’s application can be dismissed.
Solvency
The defendant is presumed insolvent as it did not comply with the statutory demand. The defendant must overcome the presumption of insolvency. The definition of solvency is found in s 95A of the Act. It provides:
Solvency and insolvency
(1)A person is solvent if, and only if, the person is able to pay all the person‘s debts, as and when they become due and payable.
(2) A person who is not solvent is insolvent.
In Sandell v Porter,[11] Barwick CJ described what may constitute insolvency and stated:
… 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 amounts 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…[12]
[11](1966) 115 CLR 666.
[12]Ibid 670.
In Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd,[13] Weinberg J referred to evidence required to be put on behalf of the company to rebut the presumption of insolvency. His Honour stated:
[13][1999] FCA 728.
·The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(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 (above); 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 (above); Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (above) 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 (above) 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 (above) 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 (above).[14]
[14]Ibid [45].
The defendant has produced the following documents to support its submission that it is not insolvent:
(a) financial statements for the financial year 2017-2018, and for the half year to 31 December 2018;
(b) audited financial statements for the half year of 31 December 2018 which, while qualified in certain respects, verify the accounts and contain a view as to solvency;
(c) updated financial statements; and
(d) cashflow forecast, March 2019.
With regards to its stock, the defendant submits that:
-its end of year financial stocktake report discloses stock valued at cost at $986,712.43. Although higher than the value of stock previously held, it is consistent with Mr Liu’s evidence that it was stockpiling particular items in anticipation of a price increase in the 2019 financial year. All stock purchased has been paid for;
-level of stock disclosed is also consistent with other evidence verifying purchase of considerable stock ($1.19M in third quarter and $1.799M in fourth quarter of the financial year 2018/19), including invoices for stock purchases, summary of stock purchases, and bank statements and credit card statements showing payments; and
-its stock is being readily realised, and has been appropriately treated as a current asset, included at cost. This is consistent with evidence of sales contained in a summary of all sales and report of sales from one online store, bank statements showing income received, BAS lodged reporting sales of $1.8M in the last quarter, and freight expenses incurred.
In summary of its financial position, the defendant submits that it is more than solvent because:
-its current assets of over $1.3 million substantially exceed current liabilities of $180,284.59 (including the disputed statutory demand). Even if the Court substituted the debt claimed pursuant to the Revised Mizael Reconciliation ($312,317.51) for the demand debt, current liabilities would total only $340,383.13;
-its total assets of over $2 million exceed total liabilities of $1,419,029.38 (including the disputed statutory demand), or $1,579.126.92 (if the disputed Revised Mizael Reconciliation claim were to be accepted by the Court);
-it has sufficient cash at bank to pay all current debts, including the disputed statutory demand debt, and still have $130,000.00 left over;
-it has substantial historical income from trading, including per its audited accounts for the six months to 31 December 2018;
-its Cashflow Forecast (with the forecast cash receipts based on average monthly sales figures for the half-year to December 2018), indicates that its business model is sustainable and profitable, and that all liabilities should be easily able to be met;
-its online retail trading model means payment is received at the time of sale,so there are no retail debtors. Apart from basic operational expenses, its primary expenses are those occasioned by and funded by sales, being freight charges and tax liability in relation to income received. Purchasing replacement stock results in a current asset of equivalent value;
-Mr Liu’s evidence verifies that;
(iv) for the third quarter of the 2018/19 financial year substantial sales of approximately $1.3M were made and income of $1,328,240.87 (not including amounts drawn-down from the ANZ Business Loan facility or ATO refunds) was received into its bank account; and
(v) for the fourth quarter of the 2018/19 financial year substantial sales of over $1.8M were made and income of over $1.8M (not including amounts drawn-down from the ANZ Business Loan facility or ATO refunds) was received into its bank account.
-it has a contingent asset in its claim of $477,252.03 against the plaintiff (comprising of a claim of $451,446.45 based on the Liu Reconciliation as ‘amended’ and a claim of $25,805.58 for an unpaid invoice);
-none of the oft-quoted indicia of insolvency are present in relation to it; and
-it is up to date with all of its tax liabilities.
The plaintiff submits that the accounts produced by the defendant, including the audited accounts, cannot be relied upon to rebut the presumption of insolvency. The financial statements contain a compilation report by certified accountants, S Wang & Co Pty Ltd, which has the following disclaimers:
14.1The directors of Global New Health Pty Ltd are solely responsible for the information contained in the special purpose financial statements, the reliability, accuracy and completeness of the information and for the determination if the basis of accounting used is appropriate.
… and;
14.2wince the compilation engagement is not an assurance engagement, we are not required to verify the reliability, accuracy or completeness of the information provided to us by management to compile the financial statements. Accordingly we do not express an audit opinion or a review conclusion on these financial statements.
The plaintiff submitted that Mr Lui was not a credible witness and cannot be relied upon. In his second affidavit, Mr Lui deposes that except for the debt claimed in the statutory demand which is disputed, the defendant did not have any liabilities or creditors other than those disclosed in the audited accounts.
However, in cross‑examination, Mr Lui admitted that $40,000.00 was paid for monthly freight to Blue Sky Express. The plaintiff submits that this raises serious questions over his credibility as Blue Sky Express was not disclosed as a creditor when Mr Lui swore his affidavit.
In relation to this debt, Mr Lui gave the following evidence:
And then, paragraph 32, subparagraph c, of that affidavit, you depose to the fact that GNH has no other last debts immediately due and payable; do you see that?---Yes.
Well, I suggest to you, on 19 February, you paid 40,000 to Blue Sky Express?---Yes.
And you'd paid 97,000 to DG-Direct?---Yes.
I suggest to you that when you swore your affidavit, Blue Sky Express was a creditor of the defendant?---I have a, ah, running account, ah, with Blue Sky.
Yes, and you owed the money on that account, didn't you?
That's why you paid them 40,000?---But that's over a month.
No, but you owe - - -?---My – my monthly freight – it's almost like that.
What I suggest to you is, when you swore your affidavit, in February 2019, Blue Sky Express - - -?---M'mm.
- - - was a creditor of the defendant; you owed them money. And I suggest to you that DG-Direct was a creditor of the company?---Like I said before, DG-Direct, when it was big – a big amount, I pay straight away. Either with the stock or the stock were delivered to me on two days, but I have never take the goods with DG Direct with such a large – large amount and then – and then pay them later.[15]
[15]T24.22-T25.13.
Counsel for the defendant submitted that Mr Lui may not have realised that there was a debt and that he needed to pay the freight. There is no evidence of this. Counsel is surmising. This issue, however, in my view, does not cast doubts on the credibility of Mr Lui. I watched Mr Lui closely and regarded him as an honest witness who answered all questions put to him. He was not evasive.
In relation to the audited accounts, the plaintiff submitted that these accounts cannot be relied upon as they express no opinion that is directly related to the accuracy, reliability or completeness of the information recorded in the financial statement. That opinion is qualified as follows:
15.1We have been instructed to audit the half year accounts for the Entity and we have not been able to gauge sufficient appropriate audit evidence on the opening balance. As a result, we are unable to provide our audit opinion on the opening balances of the Entity; and
15.2We have audited the revenue of the Entity and have identified that there are a lack of sale invoices being kept by the Entity during the year. As a result, we are unable to verify material revenue items to source documents. We have also decided to qualify the revenue balance on the profit and loss statement.
The plaintiff submits that the inability of the defendant to provide source documents from its own auditor that might enable the auditor to verify the information in its financial reports is significant and casts serious doubt over the assertions made by Mr Lui about the defendant’s sales, purchases and income.
In relation to providing documents to the auditors, Mr Lui gave the following evidence:
But suggest to you, Mr Lu, that the auditor was not able to do what he was supposed to do because you couldn't provide him with the necessary information. You couldn't provide him with the necessary source documents. Do you agree with that?---Well, there's – what do you mean a source document? For which one?
Source document is like a sales – a invoice is a source document. A bank statement is a source document?---Yes, I did provide – all it says there's no invoice for sales. All our sales was selling on Taobao store in China and there's no – no invoice to customers. That's how – how Taobao works. That's why he could not obtain this invoice because there was no – never invoice to customers. But we did – we did leave in the document from Taobao store and our bank statement.
You said you gave him everything that he wanted; is that correct?---We did everything that's available, and we –if there's no invoice created in Taobao sales to every single individual customers, we can't give that because there's no such invoice. [16]
[16]T28.11-30.
Mr Lui did not give any invoices to the auditor because they did not exist because of the nature of his business. He appears to have given the auditors all the information that is available.
The auditors stated:
We have audited the company financial report being a special purpose financial report of Global New Health Pty Ltd HY audit 2018 (the Entity) which comprises the balance sheet as at 31 December 2018 and the profit and loss statement for the half year ended, notes of the financial statement and the director’s declaration.
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section in our report, the accompanying financial report of the Entity for the half year ended 31 December 2018 is prepared, in all material respects in accordance with the Australian Accounting Standards.
We confirm that the Entity has been operating as a going concern since 1 July 2018 and will be considered a going concern 12 months from the date of this signed report…
We believe that the audited evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.
The defendant submits that the Court can rely on these audited accounts as being provided by independent experts who looked at all the material put before the Court, reconciled the material to the bank statements, and then satisfied themselves that it was an appropriate basis on which to provide their opinion, qualified as it was.
I am prepared to accept that the audited accounts provide a snapshot of the financial position of the defendant as at 31 December 2018. They show cash at bank of $225,700.00, total current assets of $1,154,616.94, and non‑current assets of $642,446.76, making a total of current assets of $1,797.063.70. The total current liabilities are $33,292.04, and the total of non‑current liabilities are $1,331,553.09. Based on that audited report, the defendant has enough cash at bank to meet the debt claimed in the statutory demand and its assets exceed its liabilities. In particular, the current assets are way in excess of current liabilities.
Counsel for the defendant prepared a balance sheet based on the evidence given by the director and the accounts held by the defendant:
Global Health Pty Ltd Balance Sheet as at 30 June 2019
Note 2019
$Shareholders’ Fund
Issued Capital
Owners’ Drawing
Retained Profit
Total Shareholders’ Fund
3
100.00
(21,011.81)
656, 165.17
635,253.36
Represented By:
Current Assets
Cash at Bank
Inventory
Total Current Assets
273,340.40
983,473.03
1,256,813.43
Non-Current Assets
Borrowing Cost
Less Accumulated Depreciation
Intangible Assets – Softwares/Website
Less Accumulated Depreciation
Office Equipment
Less Accumulated Depreciation
Warehouse Equipment
Less Accumulated Depreciation
Property – 27/10 Mirra Court Bundoora
Total Non-Current Assets
3,641.78
(683.92)
9,461.18
(1,131.39)
3,634.00
(2,307.00)
13,587.91
(4,182.71)
618,977.05
640,996.90
Total Assets
1,897,810.33
Current Liabilities
Superannuation Payable
Current Tax Liabilities
Total Current Liabilities
11,447.77
12,552.91
24,000.68
Non-Current Liability
ANZ Loan Account
Shareholder’s Loan
Total Non-Current Liabilities
Total Liabilities
399,812.50
838,743.79
1,238,556.29
1,251,109.20
Net Assets
635,253.36
Counsel for the plaintiff made his own attempt at preparing a balance sheet. According to the plaintiff, the defendant’s financial position is as follows:
Note 2019
$Shareholders’ Fund
Issued Capital
Owners’ Drawing
Retained Profit
Total Shareholders’ Fund
3
100.00
(21,011.81)
656, 165.17
635,253.36
Represented By:
Current Assets
Cash at Bank
Inventory
Total Current Assets
273,340.40
449,655.00
722,995.40
Non-Current Assets
Borrowing Cost
Less Accumulated Depreciation
Intangible Assets – Softwares/Website
Less Accumulated Depreciation
Office Equipment
Less Accumulated Depreciation
Warehouse Equipment
Less Accumulated Depreciation
Property – 27/10 Mirra Court Bundoora
Total Non-Current Assets
3,641.78
(683.92)
9,461.18
(1,131.39)
3,634.00
(2,307.00)
13,587.91
(4,182.71)
618,977.05
640,996.90
Total Assets
1,363,992.33
Current Liabilities
Superannuation Payable
Current Tax Liabilities
Credit Card
Freight
Statutory Demand
Total Current Liabilities
11,447.77
12,552.91
21,795.00
70,000.00
152,218.00
268,013.68
Non-Current Liability
ANZ Loan Account
Shareholder’s Loan
Total Non-Current Liabilities
Total Liabilities
399,812.50
838,743.79
1,238,556.29
1,506,569.97
Net Assets 142,577.64
The plaintiff says the inventory should be $449,655.00 and the total current assets should be $722,995.40. The total assets would therefore be $1,363,992.30. In relation to current liabilities, counsel added on $70,000.00 for freight, $21,975.00 for credit card debts and $152,218.00 for the statutory demand, with a total of current liabilities being $268,013.68. The total liabilities would therefore be $1,506,569.97. The liabilities would exceed the assets of $142,577.64 approximately.
The plaintiff’s Counsel submitted that the liquidity ratio based on total assets and total liabilities would be less than one and submitted that this is an indicator that the defendant is insolvent. In Australian Securities and Investments Commission v Plymin,[17] Mandie J referred to common indicators of insolvency and one factor included a liquidity ratio below one. However, the liquidity ratio his Honour referred to was based on current assets to current liabilities, not the total assets and liabilities. The defendant’s liquidity ratio for net current assets and liabilities is 2.7, which indicates that it is solvent.
[17](2003) VSC 123.
The accounts as presented by the defendant demonstrate that current assets are well in excess of current liabilities. I also note that the defendant has cash at bank of $273,340.40. It clearly has assets and cash to pay its debts as they fall due.
The defendant provided a cash flow forecast, maintaining projected stock purchases of $449,655.00 per month upon projected sales of $549,030.00 per month. The plaintiff submits that cash at bank in view of the projected purchases cannot be used to keep the defendant going. That may be correct. However, the defendant has the ability to pay its debts now as they fall due. It may decide not to continue with the business, or it may decide to use some of its current assets to purchase more stock. It can pay this debt.
In Plymin, Mandie J referred to the following indicators of insolvency:
1. Continuing losses.
2. Liquidity ratios below 1.
3. Overdue Commonwealth and State taxes.
4. Poor relationship with present Bank, including inability to borrow further funds.
5. No access to alternative finance.
6. Inability to raise further equity capital.
7. Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply.
8. Creditors unpaid outside trading terms.
9. Issuing of post-dated cheques.
10. Dishonoured cheques.
11. Special arrangements with selected creditors.
12. Solicitors’ letters, summons[es], judgments or warrants issued against the company.
13. Payments to creditors of rounded sums which are not reconcilable to specific invoices.
14. Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.[18]
[18]Ibid [386].
There is no evidence of any of the above factors of the defendant other than the inability to provide some financial records. Other than this, none of the other indicators are present. On the material presented to the Court, the defendant is clearly solvent.
The plaintiff’s application to wind up the defendant will be dismissed.
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