Re Optimal Mining Ltd
[2021] VSC 635
•10 September 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2020 04570
IN THE MATTER of OPTIMAL MINING LTD (ACN 610 751 052)
| STEVE TAMBANIS | Plaintiff |
| v | |
| OPTIMAL MINING LTD (ACN 610 751 052) | Defendant |
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JUDGE: | Gardiner AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 10 September 2021 |
DATE OF JUDGMENT: | 10 September 2021 |
DATE OF REASONS: | 30 September 2021 |
CASE MAY BE CITED AS: | Re Optimal Mining Ltd |
MEDIUM NEUTRAL CITATION: | [2021] VSC 635 |
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CORPORATIONS – Application for winding up for non-compliance with a statutory demand pursuant to s 459P of the Corporations Act 2001 (Cth) – Judgment debt – Presumption of insolvency arising pursuant to s 459C of the Corporations Act 2001 (Cth) – Onus on the defendant to prove its solvency – Presumption of insolvency not rebutted – Contention that winding up application an abuse of process – Application not an abuse of process – Company wound up – Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (recs and mgrs apptd) (2011) 244 CLR 1 – Braams Group Pty Ltd v Miric (2002) 171 FLR 449 – Re Kornucopia Pty Ltd (No 4) [2020] VSC 7.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Ms N L Papaleo | Lander & Rogers |
| For the Defendant | Mr I Hristovski | JHK Legal |
HIS HONOUR:
By originating process filed 11 December 2020, the plaintiff, Steve Tambanis (“Mr Tambanis”), seeks an order for the winding up in insolvency of the defendant, Optimal Mining Ltd (“Optimal”), pursuant to s 459P of the Corporations Act 2001 (Cth) (“the Act”) relying on the presumption of insolvency arising from the failure by Optimal to comply with a statutory demand.
Mr Tambanis served the statutory demand dated 8 May 2020 on Optimal claiming a judgment debt of $213,922.90 obtained in the County Court of Victoria from Judge A Ryan on 15 April 2020 (“the Demand”). Judgment was entered after Optimal failed to comply with orders made earlier in the proceeding by Judicial Registrar Tran (as her Honour then was) of that court and its defence was struck out. There has been no application to set that judgment aside.
The Demand was served on Optimal by delivery to its registered office at Suite 903, 88 Phillip Street, Sydney NSW on 19 May 2020. By operation of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth), the period for compliance with the Demand which then applied was six months from the date of service of the demand.[1] There was no compliance with the Demand nor any application made to set it aside and Optimal was presumed to be insolvent by operation of s 459C of the Act on 19 November 2020. This application was filed approximately a month later.
[1]Coronavirus Economic Response Package Omnibus Act 2020 (Cth), s 26 which amended the Corporations Regulations 2001 (Cth) to insert reg 5.4.01AA which applied at the time the Demand was served. Reg 5.4.01AA temporarily increased the statutory minimum for the amount able to be claimed in a statutory demand to $20,000 and temporarily increased the statutory period for compliance with a statutory demand to six months.
Prior to the trial of this proceeding on 10 September 2021, the matter had been before this Court on seven occasions. By orders of Judicial Registrar Steffensen made 3 March 2021 at the third hearing of the proceeding, Optimal was given an opportunity to make any application for leave under s 459S of the Act and to adduce evidence as to solvency by 18 March 2021. In the course of that hearing before Judicial Registrar Steffensen it was indicated by Optimal that the debt that was the subject of the Demand was disputed. Despite the opportunity, Optimal did not file any application under s 459S.
The matter returned before Judicial Registrar Steffensen on 24 March 2021. On that occasion, orders were made adjourning the proceeding to 28 April 2021 and providing Mr Tambanis with an opportunity to file and serve any further affidavit on which he relied in support of his application by 23 April 2021.
On 28 April 2021, the matter again returned before Judicial Registrar Steffensen and orders were made fixing the proceeding for trial on 27 May 2021. Those orders also provided for the filing of further evidence by Optimal by 4 May 2021 and by Mr Tambanis by 14 May 2021.
On 27 May 2021, the proceeding came on for hearing before Randall AsJ who made orders which included the extension of the period by which the application must be determined under s 459R(2) of the Act to 15 July 2021. The trial was adjourned to 9 July 2021. The parties were again afforded an opportunity to file and serve further affidavit evidence, including an expert report as to solvency to be filed by Mr Tambanis.
On 9 July 2021, the proceeding came on for hearing before me and I made orders further extending the time for the determination of the application pursuant to s 459R(2) of the Act to 22 October 2021. I also extended the time for the steps provided for in Randall AsJ’s orders of 27 May 2021 and I set the matter down for hearing on 10 September 2021.
On 10 September 2021, the trial of the application proceeded. At the conclusion of the hearing I made orders winding up Optimal in insolvency and appointed Jason Stone as liquidator in the winding up. I provided brief oral reasons on that day and indicated that I would provide detailed reasons at a later date.
Before embarking on a summation and analysis of the evidence, it is appropriate to briefly review the relevant legal principles to be applied. By reason that there was a failure to comply with the statutory demand, a presumption of insolvency arises pursuant to s 459C(2)(a) of the Act. Optimal bears the onus of establishing that it is solvent or that the Court in its discretion should not make a winding up order, even if the company’s solvency has not been established.[2]
[2]Corporations Act 2001 (Cth), s 467(1).
In Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (recs and mgrs apptd), the High Court observed:
…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.[3]
[3]Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (recs and mgrs apptd) (2011) 244 CLR 1, 14 [28].
Optimal therefore bears the onus of establishing that is it solvent. The principles applicable for the determination of solvency are well established. The definition in solvency in s 95A of the Act adopts a cash flow test of insolvency, which involves a consideration of the income sources available to the company and the expenditure obligations that it has to meet.[4] The authorities indicate that a party seeking to displace a presumption of insolvency is required to lead the “fullest and best” evidence as to its financial position. Unaudited accounts and unverified claims of ownership or the value of assets will not ordinarily be sufficient for that purpose. Assertions of solvency made by an accountant from a general review of the company’s accounts will not be sufficient to establish solvency, even if that accountant has knowledge of how those accounts were prepared.[5]
[4]Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, 224 [54].
[5]Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459, 463; Ace Contractors & Staff Pty Ltd v Westgarth Developments Pty Ltd [1999] FCA 728, [44]; Expile Pty Ltd v Jabb’s Excavations Pty Limited (2003) 45 ACSR 711, 718 [16]; Re Gladstone Mortgagee No 1 Pty Ltd [2015] NSWSC 1551, [39].
Evidence in the proceeding
Mr Tambanis’ evidence
Mr Tambanis relied on a number of affidavits including his affidavit in support of the application sworn on 8 December 2021. In that affidavit he deposed to the formal matters required to be verified under Order 5 of the Supreme Court (Corporations) Rules 2013 (Vic) (“Corporations Rules”) including the description of the debt relied upon in the Demand, the failure to comply with the Demand, service of the Demand and deposing that the sum demanded remained due and payable at the time of filing of the affidavit.
Mr Tambanis also relied on the affidavit of service of Andrew Saad, a process server, sworn 20 May 2020, deposing as to service of the Demand, an affidavit of service of the originating process and accompanying documents of John Koopstra affirmed 18 December 2020, which by reason of the location of the registered office of Optimal in New South Wales included the required notice under the Service and Execution of Process Act 1992 (Cth). Evidence was also filed in respect of lodgement of the requisite notice of an application in Form 519 with the Australian Securities and Investments Commission (“ASIC”) as required by s 465A(a) of the Act together with proof of lodgement of notice of the proceeding on the ASIC website as required by s 465(c). A consent of Mr Stone to act as liquidator in the event a winding up order was made was also filed as required by s 532(9) of the Act and r 5.5 of the Corporations Rules.
I am satisfied that Mr Tambanis has completed the formal requirements specified by the Act and Corporations Rules. I now turn to the evidence relied upon by Optimal to oppose the application, including that which is relied upon to rebut the presumption of insolvency.
Optimal’s evidence
Optimal filed several affidavits in opposition to the application. The first of those was of Jurgen Behrens sworn 2 March 2021. This affidavit was apparently filed in support of an application to adjourn the proceeding in order that Optimal could file evidence in opposition to the application.
Mr Behrens is a member of the Institute of Public Accountants and Taxation Institute of Australia. Mr Behrens described himself as the “caretaker company secretary” of Optimal and deposed that he was engaged to prepare the unaudited internal financial reports (collectively “unaudited IFR”) of Optimal. Mr Behrens stated that he prepared the unaudited IFR for the period of 1 July 2020 to 28 February 2021 for the purpose of being considered and accepted by the board of Optimal. That document contains a statement of profit and loss and other comprehensive income, together with a statement of financial position and notes. Mr Behrens stated that he had sent the unaudited IFR to Optimal’s independent auditors, A D Danieli Audit Pty Ltd, apparently for the purpose of conducting an audit, as well as to the board.
Mr Behrens deposed that the unaudited IFR contained a Going Concern Statement which states that the IFR has been prepared on the basis that Optimal is solvent, all creditors and loans outstanding have been settled in full and on the understanding that Optimal would continue to operate its business activities, realise its assets and settle its liabilities in the ordinary course of business as a going concern for the foreseeable future. He stated that the Going Concern Statement would be confirmed by the directors of Optimal upon provision of the audited accounts by the independent auditors.
I observe at this point that the judgment debt owing to Mr Tambanis which is the subject of the statutory demand is not recorded as a liability in the statement of financial position contained in the unaudited IFR, nor is there any reference to it in the notes appended to it.
Mr Behrens deposed that Optimal had complied with all lodgement requirements with the Australian Taxation Office in respect of BAS and IAS. He indicated that Optimal had undertaken a capital raising in the week preceding the date of swearing his affidavit with what are described as sophisticated investors contributing $563,955 as of 1 March 2021. This is comprised of $131,500 in cash and $432,455 in respect of creditors who elected to accept what he described as “FPO” shares in Optimal as settlement of amounts owing to them. He stated that the capital raising was expected to close on 5 March 2021 or on a date to be determined by the board.
He also stated that Optimal had surplus available cash of $47,865.49 in its bank account as at 1 March 2021. He contended this balance should be recorded as $63,586.90 by reason of $15,721.41 of current liabilities having been paid and being included in the $47,865.49 balance. I sought clarification as to what was meant by this statement at the hearing of this matter because the balance of the account would have decreased rather than increased due to the discharge of the liabilities but counsel for Optimal, Mr Hristovski, was unable to assist me in this regard. Mr Behrens’ statement is at odds with his later evidence in that affidavit which noted that at the date of his affidavit, current liabilities were $21,971.40 but since preparing the unaudited IFR on 1 March 2021, $15,721.41 of those liabilities had been paid and this had been reflected in the reduced available cash bank balance. He stated the remaining $6,249.99 of current remaining liabilities were superannuation guarantee liabilities.
He concluded by contending that the only individuals employed by Optimal were three non-executive directors and no other staff. He requested the Court to grant Optimal an adjournment of eight weeks to prepare the necessary financial evidence to establish its solvency.
On 30 July 2021, Optimal filed an affidavit of Matthew Boysen, who is a director of Optimal.[6] Mr Boysen stated that Optimal is an Australian public unlisted mining exploration and development company. Its principal activity is the exploration and development of mining projects in Africa, either directly or through its subsidiaries. Mr Boysen stated that Optimal is involved in copper and cobalt projects which he said it was seeking to divest.
[6]In the practitioner details on the first page of the affidavit it notes it is dated 18 March 2021, but, according to the jurat, was sworn 30 July 2021.
Mr Boysen stated that Optimal is the parent entity controlling three subsidiaries being:
(a) Olympic Exploration Limited, a company incorporated in the United Republic of Tanzania;
(b) Olympic Exploration DRC SARL, a company incorporated in the Democratic Republic of Congo; and
(c) Kisankala Mining Company SARL, a company incorporated in the Democratic Republic of Congo.
He described all four entities collectively as the “Consolidated Entity”. At the hearing of this matter, I enquired of Mr Hristovski whether the members of the Consolidated Entity had lodged a deed of cross guarantee with ASIC and he indicated that they had not.
Mr Boysen stated that on 15 March 2021, Optimal’s auditors provided the directors with a copy of the annual report for the financial year ending 30 June 2020 and the audited IFR for the Consolidated Entity for the period ending 12 March 2021 for the purpose of review, acceptance and finalisation. He stated that the audited IFR was accepted and finalised by the board on 18 March 2021.
I observe at this point that the audited IFR differs from the unaudited IFR referred to by Mr Behrens. The audited IFR contained an audit report of A D Danieli Audit Pty Ltd dated 18 March 2021 and signed by Mr Sam Danieli. Under current liabilities it noted trade and other payables of $214,085 and at Note 8 described the current liabilities for other payables and accruals as $213,923, apparently reflecting the inclusion of the judgment debt the subject of the Demand which had not been included in the unaudited IFR.
Mr Boysen asserted that as at 12 March 2021, the Consolidated Entity had assets valued at $5,216,318 consisting of:
(a) Cash at bank $ 239,244
(b) Trade receivables $ 20,958
(c) Exploration and evaluation rights $ 5,216,318
He stated that the main assets of the Consolidated Entity were its four mining and exploration rights in Africa which he contended were valued in the following amounts:
(a) Luisha PR 14346 $ 83,417
(b) Manono PR 14345 $ 50,555
(c) Goma PE 4632 $ 2,642,820
(d) Goma PE 12714 $ 2,439,526.
At the hearing of the matter, Mr Hristovski indicated that these rights were not held by Optimal but by its African subsidiaries. The assertions as to the value of the mining and exploration rights were not supported by any evidence. As has been mentioned, these rights were located in the United Republic of Tanzania and the Democratic Republic of Congo and there was no evidence as to how readily realisable those rights were.
As against these assets, Mr Boysen asserted that the Consolidated Entity had liabilities as of 12 March 2021 of $4,492,980 and that there was a surplus of assets over liabilities as at that date of $723,338. He stated that the liabilities included a figure of $769,455 said to relate to “the value of unissued shares held by [Optimal]”. He deposed that “the shares are to be issued in the next week or two as part of capital raising which was concluded by [Optimal] approximately two weeks ago” as referred to by Mr Behrens in his affidavit detailed above. Mr Boysen concluded by asserting that when this was taken into account, Optimal’s surplus was actually $1,492,793.
Mr Boysen asserted that the company was solvent and could pay all of its debts as and when they fell due and payable. He repeated Mr Behrens’ statement that Optimal was in compliance with its taxation obligations, that the company did not employ anyone, had no ongoing liabilities to employees, acted merely as a holding company for the Consolidated Entity and did not trade.
Mr Boysen stated that on 18 March 2021, Optimal was issued with what was described as a convertible note for $300,000 by three lenders, which would provide the company with that amount as financial accommodation upon one business day’s notice being served on the lenders.
The convertible note was exhibited to Mr Boysen’s affidavit. The parties to the convertible note are Mr Boysen, together with Frank Poullas and Antonio Mazzotta. Mr Hristovski indicated at the hearing that there had been no drawdown on the convertible note by Optimal.
I note that cl 9.1 of the convertible note agreement specifies events of default, including cl 9.1(h) when a judgment in an amount exceeding $20,000 is obtained against Optimal and is not set aside or satisfied within seven days (as is the case here). Further events of default are found at cl 9.1(k) when Optimal is or becomes unable to pay its debts when they are due, including within the meaning of the Act or by reason of a presumption of insolvency arising under the Act (as is the case here), and cl 9.1(n) when an application is made for the winding up of Optimal (again, as is the case here). Clause 9.2(a) provides that in the event of a default, upon service of notice to Optimal, any monies advanced become immediately due and payable. Clause 2.2 of the agreement specifies that Optimal must use the funds “to assist [Optimal] going forward with running costs”.
There is no evidence that there has yet been any drawdown on the convertible note. In my view, the funds said to be available under the convertible note are not, in reality, available to Optimal. The funders would have a respectable argument in contending that by reason of the various events of default they could refuse to comply with any drawdown notice; even if such funds were advanced, they would be immediately due and payable on demand and give rise to a current liability.
Mr Boysen deposed that Optimal was in the process of selling down its interest in its main project (which is not identified), presumably a reference to a mining interest of one of its subsidiaries. He stated these discussions with the purchaser were well advanced and expected that Optimal could finalise arrangements “in the next few weeks”. He stated that the sale was expected to realise approximately USD$20,000,000 for a 50% stake in the project. Mr Hristovski indicated at the hearing that an offer had been made to purchase such interest but had not been accepted.
Mr Boysen concluded by stating that Optimal disputed the debt claimed by Mr Tambanis, by reason that it relied on a judgment obtained “in a summary way and with no trial”. Mr Boysen stated that:
The debt claimed by [Mr Tambanis] is alleged approximately [sic] 1 month of unpaid wages and entitlements owing to [Mr Tambanis], being a former employee of [Optimal], over an approximately 6 month period. [Optimal] disputes the quantum of the debt claimed by [Mr Tambanis] as there was no employment agreement ever executed, nor agreement reached, between [Optimal] and [Mr Tambanis] stipulating the salary which [Mr Tambanis] was entitled to.
Optimal filed a second affidavit of Mr Boysen sworn on 21 July 2021. Curiously, in the practitioner details on the first page of the affidavit, the document is dated 26 April 2021, but by reference to the jurat was sworn on 21 July 2021, yet was filed and sealed in the Court on 20 July 2021. In that affidavit, Mr Boysen exhibits the articles of association of two of Optimal’s subsidiaries identified above along with a copy of a share sale agreement between Optimal (formerly known as Uranium Africa Ltd) and one of Optimal’s subsidiaries, Olympic Exploration Limited, of 3 May 2016. As to the assets of Optimal, in reference to his affidavit of 18 March 2021, Mr Boysen exhibited a copy of a bank statement from National Australia Bank Ltd of 12 March 2021 which noted that Optimal had $239,244 cash at that date.
He repeated the evidence he gave in his 18 March 2021 affidavit as to the asserted value of the mining and exploration rights in Africa being of a value of $5,216,318. In this regard he stated as follows:
The [mining and exploration rights] were conservatively valued at 30 June 2019 based primarily on the deposit monies paid to GOMA in December 2017 of approximately USD$4.l million by the Company and Olympic Exploration Limited. The conservative value has been passed through by the Company to 12 March 2021.[7]
[7]Affidavit of Matthew Boysen sworn 21 July 2021, [9]. The meanings of “passed through” and “GOMA” are not explained.
In respect of Optimal’s liabilities, Mr Boysen stated that in addition to the capital raising referred to in his March affidavit of a value of $769,455, a further $20,000 of “capacity raising” has occurred. He asserted that as a result of this, Optimal’s balance sheet had been amended and Optimal’s total liabilities in its accounts had been reduced by $769,455 and that it therefore had a surplus of assets over liabilities of $1,512,793.
Mr Boysen concluded his affidavit by stating that Optimal filed a Form 484 with ASIC on 27 April 2021, noting the capital raising from the share issue of a value of $1,555,000.
Expert report of Mr Fettes
Mr Tambanis filed an expert report of Gary Fettes dated 13 July 2021 in respect of the solvency of Optimal which was exhibited to an affidavit of Mr Fettes affirmed 9 September 2021.
Mr Fettes stated that he had been provided with a copy of the Expert Witness Code of Conduct and agreed to be bound by it.[8] In his report, Mr Fettes observed that he prepared his report in accordance with the Accounting Professional & Ethical Standards Board’s standard, APES 215 – Forensic Accounting Services. In an appendix to his report Mr Fettes set out his curriculum vitae, stating that he has in excess of 35 years insolvency experience, including 10 years with the former corporate regulator, Corporate Affairs Victoria, and 25 years in private practice. He has conducted corporate liquidations and had what he describes as significant involvement in the insolvency administrations of large corporate failures including Pyramid Building Society Group. Mr Fettes is a registered liquidator and stated that he has undertaken many court and voluntary liquidations and several liquidations by appointment of the Registrar of Cooperatives. I consider Mr Fettes has demonstrated that he has expertise in the field of insolvency and so much was accepted by Mr Hristovski. I consider that the Court should have regard to his report.
[8]Expert Report of Gary Fettes dated 13 July 2021, 24.
In his report, Mr Fettes appends the instructions he received from the solicitors for Mr Tambanis for the production of the report and details the documents that he was provided with by Mr Tambanis’ solicitors.[9] These were:
[9]Ibid 11.
(a) Consolidated Entity Financial Accounts for FY2020;
(b) Unaudited Consolidated Entity interim accounts to 28 February 2021;
(c) Consolidated Entity Interim Accounts to 12 March 2021;
(d) Memorandum dated 4 March 2019, which is referred to as the “Kisinkali valuation”;
(e) Memo dated 12 March 2021 – Exploration and Evaluation Assets prepared by the Auditor;
(f) ASIC Company Search of Optimal;
(g) Mr Boysen’s affidavit of 18 March 2021 (which as noted above was sworn on 30 July 2021);
(h) Mr Behrens affidavit of 2 March 2021;
(i) Orders of Her Honour Judge A Ryan dated 15 April 2020; and
(j) Loan Agreement of 12 March 2021 (which is detailed above and referred to as the convertible note).
Mr Fettes observed, amongst other things, that:
(a) Optimal and the Consolidated Entity had not reached a stage of development through its investments where it was able to produce a revenue stream from the extraction and sale of the minerals in the areas it held mining rights and exploration permits;
(b) it appeared that the exploration permits will expire in May 2022 and it was not apparent whether these permits could be renewed and if they could be what the cost of renewal would be;
(c) in reference to Mr Behrens affidavit that there were no staff employed by Optimal and that the company, according to its unaudited financial report of 28 February 2021, had largely been kept “in care and maintenance since 30 June 2019” suggested that the revenue from mineral extraction was unlikely to occur in the short to medium term.
Mr Fettes had regard to various indicia of insolvency in support of his conclusion that Optimal was insolvent, both on a commercial solvency assessment (i.e. cash flow insolvent) and balance sheet insolvency assessment.[10] These included:
[10]Ibid, 16-23.
(a) a history of trading losses. In the period of 1 July 2018 to 12 March 2021, the Consolidated Entity had lost a total of $4,755,577 and recorded a total loss of $1,696,272;
(b) on the information provided to him, between June 2019 and March 2021 the Consolidated Entity only had current assets to cover between 5% and 26% of its current liabilities and Optimal itself only had current assets to cover between 1% and 24% of its current liabilities;
(c) the existence of Mr Tambanis’ judgment which was yet to be paid;
(d) it was not clear that the capital raising had been completed, but this indicated Optimal did not have sufficient funds to pay the creditors concerned without converting unsecured creditors’ debts to equity;
(e) Optimal did not appear to have any bank debt or facilities and its funding had been via capital raising from creditors;
(f) in respect of the convertible note observed, amongst other things, that:
(i) there was no evidence that the funds had been lent to Optimal;
(ii) cl 4.1 of the agreement contemplated that the advance would be converted into shares. There was no evidence that Optimal had taken any steps to meet the conditions of the convertible note such as seeking shareholder approval to issue shares; and
(iii) it was not clear that the conditions of cl 2.2, requiring the funds to be used for the future running costs of Optimal, would allow Optimal to use the funds to meet past due debts.
(g) the auditor of the audited IFR included an Emphasis of Matter statement regarding material uncertainty of going concern in both the accounts to 30 June 2020 and the accounts to 12 March 2021.[11]
[11]The Emphasis of Matter statement is a reference to page 31 of the audited IFR, where Mr Danieli stated “We draw your attention to Note 1 on going concern in the financial report, which indicates that the Group incurred a net loss of $585,099 and net cash outflows from operating activities of $104,574 during the year ended 30 June 2020. In addition, we note that as of that date, the Group had cash reserves of $8,591. At stated in Note 1, these events and conditions indicate that a material uncertainty exists that may cast significant doubt of the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.”
In his executive summary, Mr Fettes expressed the opinion that Optimal was insolvent from at least 19 November 2020, when the six month period for compliance with the Demand issued by Mr Tambanis expired. He considered that Optimal was insolvent rather than suffering from a temporary lack of liquidity for the following reasons:
(a) Optimal had been making losses since at least FY2019;
(b) Optimal appeared to have had a current asset deficiency from at least 30 June 2019;
(c) Optimal had not generated any income in FY2020 or in the period 1 July 2020 to 12 March 2021;
(d) the auditor of Optimal, Mr Danieli, included an Emphasis of Matter statement regarding Going Concern in both the FY2020 and 12 March 2021 accounts;
(e) Optimal had not provided any evidence to support the valuation of its major asset, being the exploration permits;
(f) even if the value of the exploration permits was in line with or higher than the value shown in Optimal’s accounts, Optimal had been unwilling or unable to borrow against or sell these assets to fund the repayment of creditors. Mr Tambanis’ debt, as significant creditor, remained outstanding at 12 March 2021 (the date of the most recent accounts supplied) and Mr Fettes was not aware of any sale since that date.
At the hearing on 10 September 2021, Ms Papaleo, counsel for Mr Tambanis, indicated that a notice to produce had been served on Optimal by her instructors seeking, amongst other things, the bank statements of Optimal from 1 May 2021 and documents and correspondence relating to the proposed sale of Optimal’s “main project” referred to above. In response to that notice, Optimal produced a bank statement of the National Australia Bank for Optimal’s account number ending 779 for the period 1 May to 31 May 2021.[12] That is the same account for which a screenshot dated 1 March 2021 recorded a balance of $47,865.49. On 12 March 2021, the account had a balance of $239,244.[13] The statement for the period of 1 May to 31 May 2021 records an opening balance of $180,453.15 but by 31 May 2021 the balance had decreased to $93,482.81. The position put in respect of the cash position of Optimal is against the background that, as the hearing proceeded, Optimal’s assertion that it was solvent relied heavily on a contention that it had adequate cash to pay the judgment debt of Mr Tambanis but chose not to do so. There is no evidence as to the balance of the account at the date of the hearing of this proceeding with the most recent evidence of the balance of Optimum’s account being nearly five months old.
[12]This document was received into evidence and marked Exhibit A.
[13]Exhibit MB-4 to the affidavit of Matthew Boysen sworn 21 July 2021 and Affidavit of Matthew Boysen sworn 30 July 2021, [9].
Submissions of the Mr Tambanis
In her written submissions, Ms Papaleo submitted that Optimal should be wound up as it was cash flow insolvent. Ms Papaleo placed emphasis on the matters referred to by Mr Fettes which are extracted above as being indicative of insolvency. Further, relying on the expert report of Mr Fettes, Ms Papaleo submitted that the Court should also find that Optimal is balance sheet insolvent.
Ms Papaleo also referred to the Directors Report for the period ended 30 June 2020,[14] in particular the following observations made by the directors that:
[14]Exhibit to the affidavit of Matthew Boysen sworn 30 July 2021, 32.
(a) information on likely developments in the operations of the Consolidated Entity and the expected results of operations were not included in the audited reports “because the directors believe it would be likely to result in unreasonable prejudice to the [Consolidated Entity]”;
(b) the Consolidated Entity’s cash reserves were considered insufficient to meet the expenditure budget for operating, administration and exploration care and maintenance activities for the next 12 months;
(c) in order to address this issue, the Consolidated Entity would need to raise additional funds by way of a capital raising, project funding and/or forming a JV partnership;
(d) those matters gave rise to material uncertainty which may cast significant doubt over the Consolidated Entity’s ability to continue as a going concern which principally was dependent upon the ability of the Consolidated Entity to secure funds from various sources; and
(e) the directors believed that the Consolidated Entity would continue to operate as a going concern for the foreseeable future, but they acknowledged that, in the event that the assumptions underpinning the basis of preparation did not occur as anticipated, there was significant uncertainty as to whether the Consolidated Entity would continue to operate as a going concern.
Ms Papaleo also drew attention to the terms of the Emphasis of Matter statement extracted above.[15]
[15]See (n 11).
It was contended that Optimal was clearly cash flow insolvent and had been for several years and, for the reasons set out by Mr Fettes, the Court should also conclude that it was balance sheet insolvent. The only real assets were the exploration permits (and they were held in the name of the subsidiaries) and the value that Optimal attributed to them had not been supported by any evidence. Rather, there was an assertion as to the value of the mineral deposits on the properties leased by the consolidated entity, not a valuation of the exploration permits themselves. Ms Papaleo submitted that considerable expenditure would need to be undertaken to extract the minerals and there was no evidence that Optimal had the wherewithal to do so.
Ms Papaleo observed that there had been no evidence filed in response to Mr Fettes’ report nor any evidence that:
(a) the convertible note agreement had been drawn down;
(b) the foreshadowed sale of the “main project”, which is not developed beyond assertion, had eventuated;
(c) Optimal had taken any steps to set aside the judgment obtained by Mr Tambanis in April 2020.
Ms Papaleo pointed to the absence of any evidence to suggest that Optimal’s financial position was capable of improving imminently, rather, the exploration permits expire in May 2022. If they could be renewed, there was no evidence of the costs required to obtain such a renewal or how it would be funded. She submitted that if the exploration permits were not renewed, the consolidated group would be without assets.
In her oral submissions, Ms Papaleo addressed the contention by Mr Hristovski that Optimal had sufficient funds in its accounts to satisfy the judgment debt such as to rebut the presumption of insolvency. She submitted that the evidence referred to above demonstrated that this was not so. Since the obtaining of the judgment, interest had accrued on the judgment debt. At the date of the hearing the amount owed including interest was of the order of $243,000 and the judgment debt continues to accrue interest at the current rate prevailing under the Penalty Interest Rate Act 1983 (Vic) of 10%. Ms Papaleo made reference to the position as to the balance in the National Australia Bank account to which I have referred. The presumption of insolvency is required to be rebutted by Optimal having regard to its position at the date of the hearing of the proceeding and the latest bank statement available discloses cash at bank of $93,482.81. Further, Ms Papaleo submitted that it is to be assumed that that balance has been depleted by reason that Optimal is not presently trading so there is no income while it must be incurring some expenses, such as legal expenses and similar ongoing costs.
As to the convertible note agreement, Ms Papaleo drew attention to the provisions of the agreement, more particularly that any financial accommodation provided must be applied towards meeting running costs and, she submitted, could not therefore be applied to meet past debts, including the judgment debt owing to Mr Tambanis.[16]
[16]See Affidavit of Matthew Boysen dated 18 March 2021, sworn 30 July 2021, [19].
Further, she observed that the mining exploration permits owned by the subsidiaries (and not Optimal) were located in Africa, and there was no evidence as to their realisability. Rather, Optimal’s position was that there was a sale foreshadowed six months ago but that had not eventuated. There was, in any event, no independent evidence as to their value and Optimal’s contentions consisted only as to an assertion of their book value.
Optimal’s submissions
In his written submissions, Mr Hristovski contended that Optimal was solvent, relying on the asserted value of the mining exploration rights as being $5,216,318. He placed reliance on the audited IFR, to which reference has been made above and contended that it demonstrated that Optimal had cash at bank of $239,244, a sum in excess of the amount claimed by Mr Tambanis in the statutory demand. Mr Hristovski noted the audited IFR recorded current liabilities as including the amount of Mr Tambanis’ debt, as well as what he described as a “paper liability” of $769,455 and that once this was adjusted for, the liquidity ratio of Optimal was 1.22.[17] Further, Optimal had no contingent liabilities to its subsidiaries.
[17]Calculated as $260,202 in current assets divided by $214,085 in current liabilities.
Mr Hristovski submitted that Optimal’s taxation obligations were up to date, it had no employees and that it had $300,000 on call from the convertible note described above. Further, Optimal was currently in the process of “selling down its exploration rights at the Goma site, which realisation is expected to net US$20 million”. He contended there was no evidence of creditors making demands for payment or dishonoured cheques, nor was Optimal incurring any other debts as it was not trading and Optimal had been able to produce timely audited financial information.
Mr Hristovski placed considerable significance on the fact that Optimal disputed the debt claimed by Mr Tambanis as the judgment relied on had not been adjudicated on its merits. As such, Mr Hristovski submitted that Mr Tambanis’ application was an abuse of process as he was using the winding up process as a debt collection and judgment enforcement mechanism rather than seeking the winding up of an insolvent company. It was contended that Optimal had the cash to pay Mr Tambanis but, notwithstanding that Mr Tambanis had a default judgment, had chosen not to do so by reason that it disputed the debt.
Mr Hristovski embarked on a critique of Mr Fettes’ report, stating that it relied in part on historical information and inappropriately placed emphasis on the fact that Optimal had not paid Mr Tambanis’ judgment debt. Mr Hristovski contended that the mere fact that Optimal had not paid the judgment debt did not mean that it was insolvent.
I pause at this juncture to observe that that contention pays no regard to the effect of the presumption of insolvency under s 459C of the Act and the shifting of the onus to establish solvency to Optimal. It is also to be remembered that the judgment debt is nearly 18 months old, no application has ever been made to set it aside or been foreshadowed despite being given ample opportunity to do so, and Optimal has not sought to agitate a dispute about the debt under s 459S of the Act.
Mr Hristovski also criticised the failure by Mr Fettes to make any adjustment said to arise from the capital raising. Mr Hristovski submitted that Mr Fettes had failed to acknowledge Optimal’s ability to raise capital and convert debt to equity which he contended demonstrated that it was solvent by reason that former creditors supported Optimal and that Optimal could raise further capital as required.
Mr Hristovski also criticised Mr Fettes’ report by reason that it made no mention of the fact that Optimal had enough cash at bank to pay all current liabilities, including that of Mr Tambanis’ judgment debt. It seems clear that that contention is untenable in light of the evidence in respect of Optimal’s cash at bank position to which reference has been made.
Mr Hristovski also contended that Mr Fettes’ report in fact demonstrated that Optimal was solvent by reason of his finding that the Consolidated Entity had sufficient assets to cover between 5% to 26% of its current liabilities and that Optimal had sufficient current assets to cover between 1% and 24% of its current liabilities. Following an exchange at the hearing of this application, Mr Hristovski accepted that his interpretation of Mr Fettes’ report in that regard was misconceived.
In his oral submissions, Mr Hristovski contended that the availability of the cash at bank meant that the realisable value of the mines should be of less significance.
Consideration
I consider that Optimal has not discharged the onus which it bears of establishing that it is solvent. Indeed, it seems clear that it is cash flow insolvent by reason alone that it does not have the readily realisable resources to pay the judgment debt owing to Mr Tambanis. Initially, Optimal placed predominant emphasis on the value to be attributed to the mining rights held by its subsidiaries in Africa. There is no independent evidence of the value of those interests; at its zenith the material consisted of an assertion in the accounts of the Consolidated Entity. Shortly after the commencement of this proceeding it was contended that a certain proportion of those interests were in the process of being sold but that has not come to pass. This is indicative that those interests are not readily realisable. It is also to be remembered that they are located in Africa, further complicating the sale process, particularly in the current environment, and they are the property of its subsidiaries, not that of Optimal. In this regard, in Hall v Poolman,[18] Palmer J observed:
An asset cannot be taken into account in assessing solvency at a particular time without reference to the time it would realistically take to effect realisation and produce cash. It is no indication of solvency — indeed, it is the opposite — to point to property as available to meet debts falling due next month when, even with the utmost expedition, that property cannot be turned into cash for six months. Realisable property can only be taken into account in assessing solvency “if that property is in such a position as to title and otherwise that it could be realised in time to meet the indebtedness as the claims mature”…[19]
[18](2007) 215 FLR 243.
[19]Ibid 285 (emphasis in original).
At the hearing of this proceeding, the emphasis of Optimal’s case shifted to what was said to be Optimal’s cash position demonstrating that it could pay its debts from its cash resources. Those cash resources resided in its National Australia Bank account. The evidence in that regard is detailed at paragraph 48 above. There is no evidence as to the balance of the account at the date of the hearing, but as of 31 May 2021, the account had a balance of only $93,482.81, clearly not sufficient to satisfy the debt to Mr Tambanis, which at the date of the hearing stood at approximately $243,000.
It was contended that the convertible note amounted to a cash resource of $300,000 but I consider that source of liquidity to be illusory. The terms of the agreement creating the convertible note arguably required any funds provided to be applied to the future running costs of Optimal, i.e. not to discharge past obligations. Moreover, even if funds had been drawn down on the convertible note, any monies advanced to Optimal would, under the terms of the agreement, be immediately due and payable on demand by operation of the default terms which are described at paragraph 34 above. Optimal is in no position to require the other parties to the convertible note to meet any request for a drawdown of those funds.
I cannot accept Optimal’s submission that Mr Tambanis is not entitled to seek a winding up of Optimal by reason of its failure to comply with the statutory demand but rather he should be required to enforce the judgment debt by the means provided for in the rules of court, including the issue of a warrant of seizure and sale, a garnishee notice or warrant of possession. Mr Hristovski contended that the deployment of the winding up procedure amounted to an abuse of process by reason that it improperly seeks to achieve an end other than which the winding up provisions are directed.
In my view, there is no evidence here that Mr Tambanis is pressing his winding up application to achieve anything other than a result which the Act is designed to provide.
In Braams Group Pty Ltd v Miric,[20] the New South Wales Court of Appeal considered a case in which a creditor served a statutory demand after obtaining a judgment debt. The company failed to satisfy the demand and did not seek to set it aside within the 21 day time limit prescribed by s 459G of the Act and the creditor initiated winding up proceedings based on failure to comply with the demand. The Court of Appeal observed that:
There was no evidence before the Court which could have led his Honour to conclude that [the plaintiff] was seeking to obtain something other than a result which the law provided. The fact that [the plaintiff] knew that the judgment debt he relied on in the statutory demand was disputed did not make it an abuse of process for him to proceed to seek the winding up of the company for non-compliance with the statutory demand... No application had been made to set aside the statutory demand. No application had been made to Foster A-J to extend the seven day stay and no application had been made to the Court of Appeal for a stay between the judgment on 23 April 2001 and the hearing on 20 August 2001, a period of almost four months. It is plain that, viewed as at the date of the hearing before his Honour, the evidence fell short of establishing an abuse of process.[21]
[20](2002) 171 FLR 449.
[21]Ibid 458.
The Court of Appeal considered that even though the creditor in that case knew that the judgment debt relied upon was disputed did not mean that it was an abuse of process for him to seek the winding up of the company for non-compliance with the statutory demand. Here, Optimal does not even articulate the grounds of any dispute, saying only that it has not been heard on its merits and that it chooses not to pay.
Similarly, in State Bank of New South Wales v Tela Pty Ltd (No 2)[22] Barrett J considered a winding up application in circumstances where the defendant, having been served with a statutory demand, did not make application to set it aside. The defendant opposed the winding up application on the grounds that the application was an abuse of process as there were “other unresolved issues between the defendant and the plaintiff”. Barrett J observed:
The essence of an abuse of process in a context such as the present is some improper purpose on the part of the applicant or plaintiff (here, the bank). There will be an abuse of process if the bank’s purpose in bringing the winding up proceedings “is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or some collateral advantage beyond what the law offers”: Williams v Spautz (1992) 174 CLR 509; 107 ALR 635 per Mason CJ, Dawson, Toohey and McHugh JJ; see also Carson v Legal Services Commissioner [2000] NSWCA 308; BC200006718.
The scheme of the legislation makes it clear that a creditor who has duly served a statutory demand which remains unsatisfied for the relevant period has a right to seek winding up. In former times, it was regarded as an abuse of process for such an application to be pursued in circumstances where the debt was disputed or an off-setting claim existed. The rationale was that winding up proceedings were not the appropriate occasion for those matters to be addressed and that the threat of such proceedings, with their serious commercial consequences, involved resort to the particular remedy for a purpose regarded by the law as improper. All that has been changed by Pt 5.4. It is now abundantly clear that, unless the Div 3 process is employed by the company concerned to ventilate in advance, by way of opposition to the statutory demand, any claim it has about the existence or amount of the debt or any off-setting claim, it is perfectly legitimate for the creditor to proceed with a winding up application even though such a dispute or off-setting claim may in fact exist.[23]
[22](2002) 188 ALR 702.
[23]Ibid 705.
More recently, Sifris J of this Court in Re Kornucopia Pty Ltd (No 4)[24] considered an application to wind up a company which had not complied with a statutory demand. The company made an application under s 459S of the Act claiming, amongst other things, that the creditor had commenced the application for an improper purpose which constituted an abuse of process. Sifris J observed:
The starting point under the present regime is that the company is presumed to be insolvent. It follows that the old practice and principle cannot be applied and the company must first displace that presumption. Mere assertions that the plaintiff lacks locus standi as a creditor, or that the debt is disputed and that this was the reason why the company did not satisfy the statutory demand, will not suffice.
…
Whenever a creditor seeks to raise a genuine dispute (as a ground of abuse of process) in relation to the debt upon which the winding application is based, in circumstances where a presumption of insolvency applies, the starting point is to adduce evidence of solvency. Only when faced with such evidence, will the Court entertain whether it is appropriate to stay or dismiss a winding application, and direct that any anterior dispute in relation to the debt be separately determined. It follows, that in a case where there is no evidence of solvency (such as the present case), the existence of a genuine dispute goes nowhere. The Court must presume the company is insolvent and is unable to determine how far removed that dispute is to the central question of solvency.[25]
[24][2020] VSC 7.
[25]Ibid [87] and [98], emphasis in original. See discussion of abuse of process generally, [86]-[107].
In the context of this application, I consider Optimal’s material in support of its contention that it is solvent to fall far short of establishing cash flow solvency. Further, as I have perhaps laboured, Optimal has made no application to set aside the Demand nor made any application to set aside the subject County Court judgment despite the passage of time. It has not sought to open up or identify the grounds of any dispute in respect of the debt the subject of the judgment by resort to s 459S of the Act. Instead, it contends that it is solvent and as regards Mr Tambanis’ judgment, it says through its counsel, that there is “bad blood” between the parties and that Optimal chooses not to pay the debt. Optimal asserts that Mr Tambanis is engaged in an abuse of process by making the present application but provides no evidentiary basis for contending this.
Conclusion
I consider that Mr Tambanis was entitled to commence this application relying on the presumption of insolvency by operation of s 459C of the Act, which arose on noncompliance with the statutory demand. For the reasons that I have explained, I do not consider that Optimal has displaced the presumption of insolvency. There is no evidence that in embarking on the winding up application Mr Tambanis engaged in an abuse of process. As a creditor, I consider he was entitled to the benefit of the presumption of insolvency and to have resort to the winding up provisions of the Act. I reject the submission that he was in some way obliged to deploy the provisions in the rules of the Court to enforce the judgment.
I consider that the evidence filed by Optimal falls far short of rebutting the presumption of insolvency and establishing that it is solvent. There is no evidence that the assets of its subsidiaries, even if they were available to it to satisfy its current liabilities including the judgment debt, are readily realisable in establishing its solvency. Further, there is no evidence that there are sufficient other readily realisable assets and cash available to meet such liabilities.
Further, I do not consider that there are any features of the matter which would warrant the exercise of the discretion under s 467(1)(a) of the Act to dismiss the application notwithstanding my finding that Optimal is insolvent. Certainly, as I have mentioned, Mr Tambanis has not, on the evidence, engaged in any abuse of process under the provisions of the Act.
For these reasons, on 10 September 2021, I ordered that Optimal be wound up in insolvency and that Mr Stone be appointed as liquidator in the winding up. I also ordered that Mr Tambanis’ costs of the application, including reserved costs, be costs in the winding up.
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