Re MSB Capital Holdings Pty Ltd
[2020] VSC 775
•25 November 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2020 03480
IN THE MATTER of MSB CAPITAL HOLDINGS PTY LTD (ACN 630 039 646)
BETWEEN:
| HENCLO INVESTMENTS PTY LTD (ACN 100 550 650) | Plaintiff |
| v | |
| MSB CAPITAL HOLDINGS PTY LTD (ACN 630 039 646) | Defendant |
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JUDICIAL REGISTRAR: | Matthews JR |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 11 November 2020 |
DATE OF JUDGMENT: | 25 November 2020 |
CASE MAY BE CITED AS: | Re MSB Capital Holdings Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2020] VSC 775 |
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CORPORATIONS – Application to wind up in insolvency – Plaintiff not relying on an unmet statutory demand – Proof of actual insolvency required – Proceeding not defended – Corporations Act 2001 (Cth), ss 459A, 459P – Cornhill Insurance plc v Improvement Services Ltd [1986] 1WLR 114 – Re Taylor’s Industrial Flooring Ltd (1990) 8 ACLC 3081 – In the matter of Plutus Payroll Pty Limited & others [2017] NSWSC 1360 – FP Leonard Advertising Pty Ltd v KD Travel Service Pty Ltd (1993) 12 ACSR 136 – Actual insolvency not established – Application dismissed.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D J Williams QC | Piper Alderman |
| No appearance by or on behalf of the Defendant |
JUDICIAL REGISTRAR:
Introduction
By originating process filed 1 September 2020, the plaintiff seeks orders pursuant to ss 459A and 459P of the Corporations Act 2001 (Cth) (‘Act’) that the defendant be wound up in insolvency.[1] The application was heard on 11 November 2020 and the decision was reserved.
[1]By orders made on 8 October 2020 on the Court’s own motion, the proceeding was referred to me for hearing and determination, pursuant to r 84.04 of the Supreme Court (General Civil Procedure) Rules 2015 and r 16B.2 of the Supreme Court (Corporations) Rules 2013.
The plaintiff is a creditor of the defendant due to a judgment debt in its favour, which will be discussed below. The plaintiff relies on the following in support of its application:
(a) affidavit of Stephen Sedgman sworn 28 August 2020 (‘Sedgman Affidavit’). Mr Sedgman is a director of the plaintiff;
(b) liquidators’ consent to act and schedule of rates on behalf of Nicholas Giasoumi and Shane Leslie Deane dated 29 July 2020;
(c) affidavit of Jessica Minter sworn 17 September 2020 as to the publication of the notice of winding up application on the ASIC insolvency notices website (‘First Minter Affidavit’). Ms Minter is a solicitor employed by Piper Alderman, the plaintiff’s solicitors in this proceeding;
(d) affidavit of Ms Minter sworn 21 September 2020 as to the lodgement with ASIC of the notice of winding up (‘Second Minter Affidavit’);
(e) affidavit of Ms Minter sworn 29 September 2020 (‘Third Minter Affidavit’); and
(f) affidavit of Ms Minter sworn 30 September 2020 (‘Fourth Minter Affidavit’).
In addition, the plaintiff relies on a number of affidavits of service, which will be referred to when the need arises.
The defendant did not file an appearance in this proceeding. Although it was notified of all hearing dates and served with all of the material, it has not participated in the hearing in any way. It has not communicated with the plaintiff’s solicitors at all about this proceeding.[2]
[2]Third Minter Affidavit, [6].
Unusually for an application to wind up a company in insolvency, this application was not made on the basis of the defendant’s failure to comply with a statutory demand. Pursuant to s 459C(2)(a) of the Act, a company’s failure to comply with a statutory demand within the statutory period gives rise to a rebuttable presumption that the company is insolvent. In this instance, no statutory demand was served by the plaintiff, hence no presumption of insolvency arises. For the sake of completeness, I observe that none of the other circumstances potentially giving rise to the statutory presumption of insolvency are relied upon.
Accordingly, for the plaintiff to succeed on its application, it must establish, on the balance of probabilities, that the defendant is insolvent. In other words, it must establish actual, rather than presumed, insolvency.
As will be seen, the plaintiff has established all of the formal requirements for this application, in that it has established its standing to make the application, the service of the application on the defendant, and the occurrence of the relevant notices to ASIC and advertisements. The key issue in this proceeding is the question of whether the plaintiff has established that the defendant is insolvent such that it should be wound up. This issue is the focus of this decision.
For the reasons which follow, I am not satisfied that the plaintiff has proven the defendant’s insolvency and I will not make orders winding up the defendant.
Background
The defendant is wholly owned by Rolk Pty Ltd (ACN 629 899 609) (‘Rolk’), with which it has a common sole director in Mr Myles Smith.[3] In turn, the defendant wholly owns MSB Capital Pty Ltd (ACN 628 352 438) (‘Capital’).[4]
[3]Sedgman Affidavit, [7]; Exhibit SJS-3.
[4]Sedgman Affidavit, [7]; Exhibit SJS-2.
On 20 November 2014, Apollo Investment Management Pty Ltd (ACN 602 977 588) (‘AIM’) was incorporated and a director appointed with the agreement of Mr Smith and Mr Sedgman.[5] On 11 December 2017 the previous director resigned, and Mr Smith and Mr Sedgman were appointed as directors of AIM.[6]
[5]Sedgman Affidavit, [8]; Exhibit SJS-4.
[6]Sedgman Affidavit, [8]; Exhibit SJS-4.
In June 2019, the shareholding of AIM was as follows:[7]
(a) the plaintiff held 400 (100%) of the Class A shares and 900 (56.25%) of the ordinary shares issued; and
(b) Watusi Investments Pty Ltd (ACN 122 329 695) (‘Watusi’), of which Mr Smith is sole shareholder and director, held 700 (43.75%) of the ordinary shares issued.
[7]Sedgman Affidavit, [9]; Exhibit SJS-4.
Between 30 May 2019 and 21 May 2020, Capital held Australian Financial Services Licence No 514870 (‘AFSL’) with the intention of providing financial services including brokerage in support of AIM.[8] Capital’s AFSL was revoked by ASIC on 21 May 2020.[9]
[8]Sedgman Affidavit, [11].
[9]Sedgman Affidavit, [11].
A shareholders’ agreement was executed by the plaintiff, Watusi and another on 27 December 2018 (‘Shareholders’ Agreement’).[10] On 2 October 2019, pursuant to the Shareholders’ Agreement and in respect of conduct engaged in by Watusi through Mr Smith which constituted a breach of the Shareholders’ Agreement, Mr Smith was removed as a director of AIM. On 13 February 2020, the plaintiff acquired Watusi’s shares in AIM and became the sole shareholder of AIM.[11]
[10]Sedgman Affidavit, [10].
[11]Sedgman Affidavit, [10].
The Debt and assignment
Between August 2018 and March 2019, at the request of Capital, the plaintiff advanced funds to or for the benefit of Capital by way of loan. Funds were advanced by payments to Capital, and by payments to third parties to satisfy Capital’s indebtedness to third parties. The plaintiff received only partial repayment.[12]
[12]Sedgman Affidavit, [12].
The terms of these loans were recorded in a Loan Facility Agreement between the plaintiff and Capital in or about March 2019.[13]
[13]Sedgman Affidavit, [13].
On or about 27 May 2019, the plaintiff, defendant and Capital entered into a deed of assignment and share issue pursuant to which the sum of $100,010.00 then owed to the plaintiff by Capital (‘the Principal Debt’) was assigned by Capital to the defendant.[14]
[14]Sedgman Affidavit, [14].
The plaintiff made a written demand on the defendant and Capital for repayment of the Principal Debt on 25 September 2019.[15]
[15]Sedgman Affidavit, [39], referring to Exhibit SJS-16 as being a copy of the letter of demand. However, perusal of Exhibit SJS-16 reveals that it is dated 28 October 2019, not 25 September 2019. Nothing seems to turn on this difference, so far as I can ascertain, save that it then appears that the County Court proceeding (defined below), was commenced the day after the letter demanding repayment of the Principal Debt.
The County Court proceeding
On 29 October 2019, the plaintiff commenced a proceeding in the County Court of Victoria against the defendant and Capital, which was given the proceeding number CI-19-05110 by that Court (‘the County Court proceeding’). In the County Court proceeding, the plaintiff sought inter alia an order that the defendant (or alternatively, Capital) repay to the plaintiff the Principal Debt pursuant to the deed of assignment and share issue, and interest pursuant to the Loan Facility Agreement, and costs.[16]
[16]Sedgman Affidavit, [16];
On 24 December 2019, the defendant and Capital filed and served a defence and counterclaim, and on 29 January 2020 orders were made setting the proceeding down for trial on 28 July 2020 on an estimate of 3 days.[17] On 2 June 2020 the parties attended a mediation, however the matter did not resolve at the mediation.[18]
[17]Sedgman Affidavit, [17], [18].
[18]Sedgman Affidavit, [21].
On 26 June 2020, the County Court made orders giving leave to the solicitors for the defendant and Capital to file and serve a notice of ceasing to act, and that the proceeding be listed for pre-trial directions on 13 July 2020.[19]
[19]Sedgman Affidavit, [22]
On 7 July 2020, the plaintiff applied for final judgment against the defendant and Capital in the County Court.[20]
[20]Sedgman Affidavit, [24].
The defendant and Capital were twice ordered, on 30 June 2020 and 8 July 2020, to file and serve a notice of appointment of solicitor, or apply for leave to be otherwise represented, and failed to do so. [21] On the last occasion, the orders included orders that if the defendant and Capital failed to comply, their defence would be struck out and judgment entered for the plaintiff.[22]
[21]Sedgman Affidavit, [23], [25].
[22]Sedgman Affidavit, [25].
On 13 July 2020, the County Court made final orders dismissing the defendant’s and Capital’s defence and counterclaim, and entering judgment in favour of the plaintiff against both the defendant and Capital for $105,627, being the Principal Debt and interest (‘the Judgment Debt’) plus costs to be taxed in default of agreement.[23]
[23]Sedgman Affidavit, [26]; Exhibit SJS-5.
As relief against Capital was only in the alternative to the relief sought against the defendant, on 28 August 2020 the Court made orders correcting its judgment of 13 July 2020 so that it was against the defendant only.[24]
[24]Sedgman Affidavit, [27] – [28]; Exhibit SJS-6.
Neither the defendant nor Capital has applied to appeal or otherwise set aside the orders of the County Court.[25]
[25]Sedgman Affidavit, [29].
Demand and non-payment
By letter from the plaintiff to the defendant dated 15 July 2020, which enclosed a copy of the County Court’s orders of 13 July 2020, the plaintiff demanded payment of the Judgment Debt immediately (‘Letter of Demand’).[26] The Letter of Demand was served on the defendant’s registered office and Mr Smith’s residential address by pre-paid regular post and by courier, as well as by email to the last known email address of Mr Smith.[27]
[26]Sedgman Affidavit, [30]; Exhibit SJS-7.
[27]Sedgman Affidavit, [31]; Exhibits SJS-8, SJS-9; Affidavit of Service of Lidiane Ferreira dated 16 July 2020 and Exhibit thereto; Affidavit of Service of Rebecca Holland dated 21 July 2020.
On 28 August 2020, the order of the County Court of the same day was also served on the defendant by pre-paid regular post to the registered office of the defendant and by email to the last known email address of Mr Smith.[28]
[28]Sedgman Affidavit, [31.3]; Exhibit SJS-10; Affidavit of Service of Jessica Minter dated 1 September 2020 and Exhibit thereto; Affidavit of Service of Natalie Jane Molloy dated 1 September 2020 and Exhibit thereto.
No reply or payment has been received by the plaintiff from the defendant in respect of the Judgment Debt and Letter of Demand.[29]
[29]Sedgman Affidavit, [32]; Third Minter Affidavit, [5].
Establishment of formal matters
By reason of the Judgment Debt against the defendant in favour of the plaintiff, the plaintiff is a creditor who may apply to this Court for the defendant to be wound up in insolvency.[30]
[30]Section 459P(1)(b) Corporations Act 2001 (Cth).
On 1 September 2020, the plaintiff filed an originating process in this Court seeking that the defendant be wound up and a liquidator appointed to it pursuant to s 459A of the Act.
The originating process was served on the defendant and Mr Smith by email on 2 September 2020, and by pre-paid regular post sent on 3 September 2020, along with a copy of the Sedgman Affidavit and the Exhibits thereto, a copy of the liquidator’s consent in relation to prospective appointment to the defendant, a copy of the affidavits of service of Piper Alderman employees in relation to the County Court orders, and the proper form for service of originating processes of this Court outside of Victoria.[31] Service of these documents by post on the defendant was to its registered office and on Mr Smith to his residential address.
[31]Affidavit of Service of Jessica Minter dated 23 September 2020 and exhibit thereto; Affidavit of Service of Pauline Dolores Tiernan dated 8 September 2020 and Exhibit thereto; Affidavit of Service of Rebecca Jayne Holland dated 15 September 2020 and Exhibit thereto.
On 8 September 2020, the plaintiff lodged a Form 519 notification of court action relating to winding up with ASIC, which was subsequently updated on 10 September 2020.[32]
[32]Second Minter Affidavit and Exhibit thereto.
On 14 September 2020, the plaintiff lodged and caused to be published on the ASIC insolvency notices website a notice of application for winding up order pursuant to s 465A(1)(c) of the Act, in relation to the present proceeding.[33]
[33]First Minter Affidavit and Exhibit thereto.
Accordingly, the formal matters required for a winding up application have been established, save for the question of the defendant’s solvency/insolvency.
Is the defendant insolvent?
Meaning of insolvency
Section 9 of the Act defines the terms “solvent” and “insolvent” by reference to s 95A of the Act. Section 95A of the Act provides:
95A 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.
The definitions of solvency and insolvency have received much judicial attention over the years. There is no need for me to set this out in any detail. Rather, it is sufficient to mention the following principles.
What has come to be regarded as the classic statement on the test for insolvency was set out by Barwick CJ in Sandell v Porter:[34]
Insolvency is expressed in s 95 [of the Bankruptcy Act 1924-1960 (Cth)] as an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.
[34](1966) 115 CLR 666, 670. This statement applies to the current statutory environment: see Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation [2009] VSCA 319, [12] — [13] and cases cited therein.
In Crema Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd,[35] Dodds-Streeton J (as she then was) confirmed that s 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.’
[35](2006) 58 ACSR 631, 651-2.
The following principles were set out by Palmer J in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation[36] as being applicable to the determination of insolvency for the purposes of s 95A:
[36][2001] NSWSC 621, [54] (citations omitted). For a recent similar statement of principles by the Court of Appeal, see Queensland Phosphate Pty Ltd v Korda (No 2) [2019] VSCA 215, [97]-[105].
(i)whether or not a company is insolvent for the purposes of CA ss.95A, 459B, 588FC or 588G(1)(b) is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole;
(ii)in considering the company’s financial position as a whole, 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 realisable by sale or borrowing upon security, and when such realisations are achievable;
(iii)in assessing whether a company’s position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency;
(iv)the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand;
(v)in assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the Court’s satisfaction, that:
–there has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment; or
–there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or
–there has been a well established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors’ terms of trade or are payable only on demand;
(vi)it is for the party asserting that a company’s contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence.
Consequently, a company can be considered to be insolvent at a particular time if, as a matter of commercial reality, it is unable to meet its liabilities.
Matters relied upon by the plaintiff to establish the defendant’s insolvency
The plaintiff relies on seven matters (‘Factors’), described in Counsel’s written outline provided shortly before the hearing (‘Written Outline’) in the following terms.[37]
[37]Written Outline, [6].
First, the plaintiff’s status as an undisputed creditor by reason of the Judgment Debt, outstanding since 13 July 2020, without any payment having been made or any contact from the defendant, despite numerous demands for payment.[38]
[38]See paragraph 23, 25 — 28 above.
Second, the fact that the Judgment Debt has not been appealed against.[39]
[39]See paragraph 25 above.
Third, the circumstances in which the Judgment Debt was entered, namely that shortly prior to trial of the claim brought against the defendant by the plaintiff in respect of the Principal Debt, the defendant’s solicitors obtained leave to withdraw from the record, following which the defendant did not appoint a replacement solicitor, ceased taking any steps to defend the claim or to prosecute its cross-claim, and allowed default judgment to be entered against it.[40]
[40]See paragraph 20-23 above.
Fourth, the fact that the County Court Proceeding was preceded by a demand for payment of the underlying debt, ie the Principal Debt, on 25 September 2019.[41] In other words, the debt by which the plaintiff has standing as a creditor in this proceeding is a debt which has been outstanding for well over a year, and which is now reflected in a judgment obtained in what was in the end an undefended proceeding for recovery of that debt.
[41]See paragraph 17 above.
Fifth, the fact that the defendant’s [sic] 2019 balance sheet showed a substantial net deficiency in assets compared to liabilities.[42]
[42]For this proposition, the plaintiff relies on the Sedgman Affidavit, [33] and Exhibit SJS-11.
Sixth, the fact that the defendant’s [sic] actual and projected cash flows as at June 2019 showed that it had expenses for that month of $43,255 but had not received any income from February to June 2019, and had no projected inflows from July to October 2019.[43]
[43]For this proposition, the plaintiff relies on the Sedgman Affidavit, [34] and Exhibit SJS-12.
Seventh, the fact that the defendant has taken no step in this proceeding despite having had every opportunity to do so,[44] meaning that if it had any information available to it which would tend to negative the inference of its insolvency which otherwise naturally arises from the foregoing, it has for some unexplained reason chosen not to place such evidence before the Court. It is submitted that it is a logical inference from that failure that no such information exists.
[44]See paragraph 4 above.
In respect of the fifth and sixth Factors, the Written Outline is incorrect. The balance sheet and the actual and projected cash flows, both as at June 2019, referred to in and exhibited to the Sedgman Affidavit are not for the defendant, they are for Capital. This was not picked up at the hearing, and therefore Counsel’s oral submissions, as well as the Written Outline, proceeded on the basis that these were for the defendant.
Other matters were referred to in the affidavits filed by the plaintiff but were not relied upon at the hearing of the application or in the Written Outline.
The statutory demand procedure is facultive, not mandatory
Plaintiff’s submissions
The plaintiff submits that as to proof of the defendant’s insolvency, there is no requirement that this must be done via the statutory demand procedure. The plaintiff points to two matters, by way of example, which support this. Section 459Q commences with the words “If an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand, …” (emphasis added). Similarly, s 459S commences with the words “In so far as an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand …” (emphasis added). The plaintiff submits that plainly these sections contemplate than an application might properly be brought which does not rely on a statutory demand.
Consideration
I accept the plaintiff’s submission that the statutory demand procedure is facultive and not mandatory in respect of an application to wind up a company in insolvency. So much is apparent from the terms referred to by the plaintiff, and from s 459C of the Act, which sets out the circumstances in which a presumption of insolvency arise. Failure to comply with a statutory demand within the statutory period is but one of six circumstances giving rise to the statutory presumption of insolvency.
Further, a plaintiff does not have to rely on one or more of the statutory presumptions of insolvency but can, if it chooses, elect to proceed by proving actual insolvency. As mentioned earlier, that requires a plaintiff to prove, on the balance of probabilities, that the company is insolvent.
Do the Factors, particularly the failure to pay an undisputed debt, give rise to an inference that the defendant is insolvent?
Plaintiff’s submissions
The plaintiff submits that it is well open to the Court, on a winding up application, to infer insolvency from the failure to pay an undisputed debt.
The plaintiff refers to Cornhill Insurance plc v Improvement Services Ltd,[45] where the court accepted that it was open to the party applying to wind up an apparently substantial insurance company to make that application, despite not having issued a valid statutory demand, based on the proposition that insolvency could be inferred from failure to pay an undisputed debt claim. In that case, Harman J cited the following observations of Ungoed-Thomas J in Mann v Goldstein:[46]
When the creditor’s debt is clearly established it seems to me to follow that this court would not, in general at any rate, interfere even though the company would appear to be solvent, for the creditor would as such be entitled to present a petition and the debtor would have his own remedy in paying the undisputed debt which he should pay. So, to persist in non-payment of the debt in such circumstances would itself either suggest inability to pay or that the application was an application that the court should give the debtor relief which it itself could provide, but would not provide, by paying the debt.
[45][1986] 1 WLR 114, 117-118 (‘Cornhill’).
[46][1968] 1 WLR 1091, 1096 (‘Mann v Goldstein’).
The plaintiff submits that Cornhill was cited with approval by the Supreme Court of Western Australia in Re Worldwide Testing Services Pty Ltd[47] and by the Supreme Court of Queensland in Re Barrier Reef Finance & Land Pty Ltd,[48] although both cases turned on different points.
[47](1989) 1 ACSR 299, 305 (‘Worldwide Testing’).
[48][1989] 1 Qd R 252, 255 (‘Barrier Reef Finance’).
The plaintiff primarily relies upon Re Taylor’s Industrial Flooring Ltd.[49] In that case, the English Court of Appeal held, citing Cornhill, that if a debt was due and not disputed, notwithstanding that the statutory demand procedure had not been invoked, the company’s failure to pay was of itself evidence of its inability to pay.[50] Dillon LJ, with whom Staughton and Mann LJJ concurred, stated that:[51]
[49](1990) 8 ACLC 3081 (‘Taylor’s Flooring’).
[50]Taylor’s Flooring, 3086.
[51]Taylor’s Flooring, 3086-3087.
The first limb is that if a debt is due and an invoice sent and the debt is not disputed, then the failure of the debtor company to pay the debt is itself evidence of inability to pay. That appears from the judgment of Harman J in [Cornhill]. The WLR headnote states correctly that:
where a company was under an undisputed obligation to pay a specific sum and failed to do so, it could be inferred that it was unable to do so; that, accordingly, the defendants could properly swear to their belief in the plaintiff company’s insolvency and present a petition for its winding up
The [trial judge below] refers in passing to a statement by Vaisey in an earlier case (Re a Company (1950) 94 SJ 369):
Rich men and rich companies who did not pay their debts had only themselves to blame if it were thought that they could not pay them.
It is not right to say, as was submitted to us [by counsel for the company],
well, it may be just that they do not want to pay and so you cannot from non-payment of an undisputed debt deduce inability to pay.
The second point is that the reason for non-payment has to be substantial. It is not enough if a thoroughly bad reason is put forward honestly.
The plaintiff submits that there are two inferences which may be able to be drawn in respect of the defendant’s failure to pay the Judgment Debt (or the Principal Debt, for that matter): that the defendant cannot pay (‘Can’t Pay’); or the defendant will not pay (‘Won’t Pay’). The plaintiff says that here, the inference that should be drawn is that the defendant Can’t Pay the Judgment Debt. It says that the other Factors do not support an inference that the defendant Won’t Pay. In other words, the Court should draw the inference that the defendant is insolvent.
The plaintiff then submits that here there is not simply an extended failure to pay an undisputed debt, even though that would be sufficient. Rather, the Factors exist and taken together, they overwhelmingly support an inference of insolvency. It says that this is an unusual but clear case.
Finally, the plaintiff submits that the Court should find that the defendant is insolvent and that there being no reason offered as to why the Court in its discretion should nonetheless decline to make a winding up order, the order should be made.
Consideration
Analysis regarding the application of Taylor’s Flooring
A number of cases have referred to the statement in Taylor’s Flooring that the non-payment of an undisputed debt is itself evidence of an inability to pay. Several cases have also referred to Cornhill, including the two cases referred to by the plaintiff.
In the first of these, Worldwide Testing, the court referred to Cornhill and stated that:[52]
A winding up application is not to be used for the improper purpose of compelling a solvent company to pay a disputed debt which would certainly be discharged as soon as the company’s liability was clearly shown to exist. But where a debt is not disputed it is not improper for a creditor to present a petition with the object of forcing a company to pay.
[52]Worldwide Testing, 304-305.
In the second of these, Barrier Reef Finance, Cornhill was relied upon for the proposition that a company which may in fact be solvent ‘cannot complain if, having failed to comply with [a statutory demand], it is treated as insolvent.’[53]
[53]Barrier Reef Finance, 255.
In Just Juice Corp Pty Ltd v Murrayland Fruit Juice Pty Ltd,[54] Young J of the Supreme Court of New South Wales stated that the evidence on a summons to wind up on the ground of inability to pay debts:[55]
may involve not only the facts which can be presented as a result of looking at the company’s balance sheets and books of account, but also the way in which the plaintiff has conducted itself generally in and about its financial affairs including the way in which it has treated the [statutory] demand.
…
This case is distinguishable from other cases where the validity of a demand was in question, …, in that, although the defendant has not forsaken the demand, it also by its conduct in issuing the subpoena says that it intends to rely on other evidence as well. Recently the English Court of Appeal in [Taylor’s Flooring] has held that in the current economic climate the mere fact that a debt is due from a company and is not disputed and is not paid, is itself evidence of insolvency on which the court may make a winding up order. The court in NSW will have to consider, before too long, how far it will follow Taylor’s case.
[54](1990) 2 ACSR 541 (‘Just Juice’).
[55]Just Juice, 546 (emphasis added).
In FP Leonard Advertising Pty Ltd v KD Travel Service Pty Ltd,[56] although a statutory demand had been served on the debtor company and not complied with, for reasons which are not germane here, on the application for winding up the creditor proceeded on the basis of proving insolvency, rather than relying on the statutory presumption. Santow J of the Supreme Court of New South Wales referred to the evidence of insolvency as being the defendant’s judgment debt to the plaintiff having remained unpaid for over 18 months, the defendant’s failure to comply with a formal demand for payment of the debt, and to two other very long standing debts to other creditors. Santow J then went on to say:[57]
I therefore need not go so far as the English Court of Appeal went in [Taylor’s Flooring]. There the English Court of Appeal held that the fact that an undisputed debt had not been paid may be sufficient evidence of insolvency.
…
Here, as the plaintiff points out, the inference of inability to pay is stronger, because no reason at all is advanced for non-payment, not even a thoroughly bad one.
[56](1993) 12 ACSR 136 (‘FP Leonard’).
[57]FP Leonard, 140.
In Commissioner of State Revenue of Victoria v The Roy Morgan Research Centre Pty Ltd,[58] Mandie J of this Court, referring to Just Juice, said that the analysis of the question of insolvency[59]
involves an analysis of all of the company’s financial affairs, and relevant in that inquiry is the fact that a company has failed to pay a substantial debt.
[58](1997) 24 ACSR 73 (‘Roy Morgan’).
[59]Roy Morgan, 74-75.
In the matter of Plutus Payroll Pty Limited & others,[60] Brereton J of the Supreme Court of New South Wales stated that:[61]
failure to pay a particular debt which is not the subject of genuine dispute may of itself provide evidence of insolvency.
[60][2017] NSWSC 1360 (‘Plutus Payroll’).
[61]Plutus Payroll, [31]. In making this statement, Brereton J referred to FP Leonard, Taylor’s Flooring, Just Juice and Roy Morgan.
It is important to note that Taylor’s Flooring, and a number of the cases referring to it or Cornhill arose not in the context of the hearing and determination of the application to wind up the debtor company but in earlier applications:
(a) Taylor’s Flooring was an appeal from the decision of the judge in the court below to accede to an application by the debtor company to strike out the winding up petition. The English Court of Appeal upheld the appeal and reinstated the winding up petition, remitting it to the court below for hearing.
(b) Worldwide Testing was an application by the debtor company to stay the winding up proceeding, which proceeding was opposed on the grounds that the applicant for winding up was not a creditor or if it was, its claim was disputed on substantial grounds. The key issue in that case was whether a creditor whose debt was disputed should be permitted to bring a winding up application.
(c) Barrier Reef Finance was a case dealing with an application for a garnishee order against a debtor company in circumstances where the company was also subject to winding up proceedings in which a statutory demand had been served and not complied with, such that a presumption of insolvency arose.[62] It is of no assistance in the present case.
(d) Just Juice was a proceeding brought by the debtor company, which had been served with a statutory demand, seeking to prevent the creditor filing a winding up application solely on the ground of non-compliance with the statutory demand.
(e) Roy Morgan was an application brought by the debtor company to permanently stay the winding up application brought by the creditor on the grounds that it was vexatious or an abuse of process. The creditor had served a statutory demand which had not been complied with. The debtor company contended that it was so clear on the evidence then before the court that the winding up application was doomed to failure and was therefore an abuse of process. In that instance, Mandie J held that the presumption of insolvency, created by the failure to comply with the statutory demand, operates until the contrary is proved and he was not satisfied that it was so proved on the interlocutory application.[63]
[62]Barrier Reef Finance, 252-3.
[63]Roy Morgan, 76.
Thus the cases referred to in the preceding paragraph were in a different context to that of the instant case: they did not arise on the hearing of the winding up application. Rather, they concerned applications to either prevent a winding up application being made or to have the winding up application disposed of in some summary way. The courts in those instances were not required to make findings of solvency or insolvency. Rather, they had to determine whether there was sufficient evidence for the matters to proceed to a trial, which trial would ultimately determine the question of solvency.
Of the cases referred to in paragraphs 61 to 67 above, only FP Leonard and Plutus Payroll concerned the actual hearing and determination of the winding up applications. In both instances, the debtor companies either did not file notices of appearance or, having done so, subsequently did not attend the hearing of the winding up application.
In neither case did the Court rely solely on the unpaid debt(s) of the petitioning creditor when finding that the debtor companies were insolvent.
In FP Leonard, as noted in paragraph 65 above, there was evidence of long standing unpaid debts to creditors apart from the petitioning creditor.
Plutus Payroll was a proceeding commenced by the Deputy Commissioner of Taxation (‘DCT’) for the winding up of eleven companies on the just and equitable ground in s 461(1)(k) of the Act, on the footing that they were participants in a syndicate with the purpose of not paying, or understating, large taxation obligations to the Commonwealth. Provisional liquidators had been appointed by the court on 9 June 2017.[64] The DCT subsequently amended the originating process to add insolvency under s 459P as a ground for winding up. In relation to all but one of the debtor companies, no statutory demand had been served by the DCT. The question in respect of those debtor companies was whether actual, as distinct from presumed, insolvency was established.[65]
[64]Plutus Payroll, [1].
[65]Plutus Payroll, [3].
Of the ten debtor companies for whom it was necessary that the DCT establish actual insolvency, Brereton J expressly relied on the following matters when concluding that the companies were insolvent:
(a) the debts claimed by the DCT were substantial, and in relation to two of the companies, enormous. These debts were not disputed and had remained outstanding. In this context, ’the failure to pay large debts, while not disputing them, provides a firm foundation for an inference that the defendants cannot pay their debts from any source available to them.’;[66]
[66]Plutus Payroll, [31].
(b) there were other “significant indicia” of insolvency: eight of the companies appeared to have outstanding unpaid obligations to employees for wages and superannuation; and the other two companies appeared to have significant outstanding liabilities for payroll tax to the Commissioner of State Revenue;[67]
[67]Plutus Payroll, [32].
(c) in addition:
(i) the provisional liquidators had formed the opinion that the first defendant was insolvent. In addition, the sole director of the first defendant had appointed voluntary administrators to it, having resolved that the first defendant was insolvent or likely to become insolvent, which of itself was an admission of insolvency;[68]
[68]Plutus Payroll, [35].
(ii) the provisional liquidators had formed the opinion that the other nine defendants were likely to be insolvent;[69]
[69]Plutus Payroll, [37], [39], [41], [43], [45], [47], [49], [51], [53].
(iii) at the time at which the DCT filed the originating process, there were extant winding up in insolvency applications filed by other creditors in respect of the second to ninth defendants where the basis for the applications were failures to comply with statutory demands issued by those other creditors;[70]
(iv) in respect of the tenth defendant, there was an apparent absence of cash or property to meet outstanding tax liabilities;[71]
Analysis of the Factors relied upon by the plaintiff
[70]These extant winding up applications based on un-met statutory demands were filed by other creditors on 5 May 2017 in respect of the second and third defendants, on 12 May 2017 in respect of the fourth to eighth defendants, and on 13 April 2017 in respect of the ninth defendant: Plutus Payroll, [37], [39], [41], [43], [45], [47], [49], [51].
[71]Plutus Payroll, [53]-[54].
As was said by Brereton J in Plutus Payroll, a conclusion of insolvency is usually an inference drawn from multiple indicia.[72] In addition to the principles summarised in paragraphs 37 to 40 above, the authorities have examined various indicators of insolvency, including the following:[73]
[72]Plutus Payroll, [31].
[73]ASIC v Plymin (No 1) [2003] VSC 123, [386].
·continuing losses;
·liquidity ratios below one;
·overdue taxes, including the service of director penalty notices;
·a poor relationship with bankers, including the inability to borrow further funds;
·no access to alternative finance;
·inability to raise further equity capital;
·suppliers placing the company on ‘cash on delivery’, or otherwise demanding special payments before resuming supply;
·creditors unpaid outside trading terms;
·issuing of post-dated cheques;
·special arrangements with selected creditors;
·solicitors’ letters, summonses, judgments or warrants issued against the company;
·payments to creditors of rounded sums which are not reconcilable to specific invoices; and
·inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and to make reliable forecasts.
In this case, there is no evidence before the Court about the defendant’s financial position. The fifth and sixth Factors relied upon by the plaintiff, being a substantial net deficiency in assets compared to liabilities, cash outflows but no actual income for February to June 2019 and no projected inflows for July to October 2019, are financial documents as at June 2019 for Capital, not the defendant. These reveal nothing about the defendant’s financial position, other than, perhaps, that the shares it holds in Capital may have little or no value. But the shares in Capital are just one asset of the defendant – there is no evidence before the Court of any other assets it may have. There is so little information here that it is impossible to know whether any of the indicators referred to in the previous paragraph, apart from the Judgment Debt, are present.
All that is known, therefore, in respect of the defendant’s financial position is that it has not paid the plaintiff’s debt. The only other thing known is that Capital has a registered security interest in respect of the defendant, being a security interest in all prior and after-acquired property of the defendant.[74] What this secures, or whether anything is currently owing, is not known. It therefore tells us nothing about the defendant’s financial position.
[74]Sedgman Affidavit, [37]; Exhibit SJS-13.
The question was posited by the plaintiff in terms of Can’t Pay or Won’t Pay, and it was submitted that the Factors supported the inference that the answer was Can’t Pay.
I accept that Can’t Pay is an inference. But so is Won’t Pay. The question then is: do the Factors relied upon by the plaintiff satisfy me that the proper inference is Can’t Pay, and therefore that the defendant is insolvent.
The first, second and third Factors clearly evidence that the Judgment Debt is unpaid and undisputed (or, at the very least, no longer disputed). The fourth Factor evidences that the Principal Debt has remained unpaid since September (or possibly October) 2019.
In respect of the third Factor, the plaintiff submitted that the defendant had initially defended the County Court proceeding and brought a cross-claim against the plaintiff. It said it did not know why the defendant’s solicitors sought leave to come off the record in that case so close to trial, but that the failure to appoint a new solicitor and to take steps to avoid the default judgment meant that it was reasonable to infer that the defendant could not fund its defence let alone pay the debt itself.[75] I do not accept this submission, as it does not arise above speculation: I do not accept that such an inference is reasonable.
[75]Transcript, 4.24-5.6.
Heavy reliance on the seventh Factor represents a troubling approach. It cannot be right that a plaintiff can bring a case, which may be quite ‘thin’ in evidentiary terms, and then rely on the defendant’s failure to participate in the proceeding and to lead evidence to negative any inference of insolvency, to lead to the conclusion that the defendant must be insolvent. For the plaintiff’s proposition to be persuasive, there would first need to be an inference of insolvency before such conduct could then be used to bolster that inference.
Therefore, it seems to me that the only Factor which supports an inference of insolvency is the unpaid and undisputed debt to the plaintiff. As noted above, while the statement in Taylor’s Flooring has been referred to and applied, this has either been in different contexts or, in the cases of Plutus Payroll and FP Leonard, it has not been the sole matter relied upon. Indeed, in Plutus Payroll, there was a good deal of information about the companies’ financial position, as described above.
Taylor’s Flooring says that an unpaid and undisputed debt may itself be evidence of insolvency. In Just Juice, this is described as the English Court of Appeal saying that it is ’itself evidence of insolvency’[76] but it is specifically noted by Young J that the NSW court had not yet had to consider how far to follow that. FP Leonard describes Taylor’s Flooring as saying that it ’may be sufficient evidence of insolvency’[77], and in the only case to refer to FP Leonard on this point, Plutus Payroll, it is said that it ’may of itself provide evidence of insolvency’. These appear to be subtle variations on a theme, but it is tolerably clear that in none of the cases is it said that an unpaid and undisputed debt is evidence of insolvency. It is all, except for Just Juice (which is heavily qualified in any event), couched in terms of ’may be’.
[76]Just Juice, 546.
[77]FP Leonard, 140.
Further, the statements that an unpaid and undisputed debt may ‘of itself provide evidence of insolvency’ should not be taken to suggest that such a debt is by itself evidence of insolvency absent other matters going to insolvency. As noted, Santow J in FP Leonard characterises Taylor’s Flooring as holding that such a debt ‘may be sufficient evidence of insolvency.’[78] However, his Honour also said that he did not need to go so far, and certainly did not apply such a rule.[79]
[78]FP Leonard, 140.
[79]FP Leonard, 140.
In other words, an undisputed and unpaid debt owed by a company is a factor which may be taken into account when assessing evidence, whether that be direct or by inference, of insolvency of that company. That is the approach taken in FP Leonard, Plutus Payroll and Roy Morgan.[80]
[80]See paragraphs 65 — 67 above.
True it is that, as in FP Leonard, no reason has been advanced for non-payment. However, I do not regard this as particularly persuasive in this case, for similar reasons to those expressed in paragraph 82 above.
As Mandie J said in Roy Morgan, “if one asks the question, ‘Is the respondent company able to pay all of its debts as and when they fall due?’, the answer is, ‘I just do not know’”.[81] I am in the same position.
[81]Roy Morgan, 76.
I am not satisfied, on the balance of probabilities, that the proper inference to draw from the evidence is that the defendant is insolvent. While the plaintiff’s unpaid and undisputed Judgment Debt may support an inference that it cannot pay the plaintiff’s debt, there is insufficient evidence before me to lead me to infer that the defendant is insolvent.
Conclusion
Therefore, for all the reasons set out above, I will dismiss the plaintiff’s application to wind up the defendant.
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