Re Wizard Systems Australasia Pty Ltd
[1998] QSC 157
•11 August 1998
IN THE SUPREME COURT
OF QUEENSLAND No. 5746 of 1998
Brisbane
[Re Wizard Systems Australasia Pty Ltd]
IN THE MATTER OF THE CORPORATIONS LAW
-and-
IN THE MATTER OF WIZARD SYSTEMS AUSTRALASIA PTY LTD (ACN 073 018 569)
CATCHWORDS: CORPORATIONS - winding up application - section 459C Corporations Law - whether presumption of insolvency rebutted
Counsel:Mr K B Varley for the applicant
Mr I R Perkins for the respondent
Solicitors:Barwicks Wisewoulds for the applicant
Oakley Thompson & Co for the respondent
Hearing Date: 27 and 31 July, 1998
REASONS FOR JUDGMENT - CHESTERMAN J
Judgment delivered 11 August, 1998
The respondent, Wizard Systems Australasia Pty Ltd, was served with a statutory demand pursuant to section 459E(1) of the Corporations Law on or about 18 May, 1998. The applicant is Peter McKinnon who is owed $2,002.00. The respondent did not within twenty-one days of service of the demand upon it pay the amount demanded. About eight weeks after service, on 21 July, 1998, the respondent sent the applicant's solicitors a cheque for the sum claimed. The applicant, by his solicitors, refused to accept the cheque giving as his reason the respondent's deemed insolvency by reason of its non-compliance with the statutory demand.
An application to wind up the respondent was served on or about 25 June, 1998. The respondent did not indicate an intention to resist the application until the day it was listed for hearing before the Registrar. It then appeared by counsel who sought to read affidavits establishing, it was submitted, that the respondent was solvent. The matter was then referred to the court for determination.
The respondent had not complied with rule 60 of the Corporations (Queensland) Rules in that it had not given at least seven clear days notice that it intended to oppose the winding up nor had it filed its affidavits in time. Although the applicant argues strenuously that the respondent is insolvent and should be wound up he did not oppose my giving leave to the respondent to oppose the application. Accordingly I give leave pursuant to rule 60.
The applicant relied upon section 459(C)(2) which provides that the court must presume that the company is insolvent if, during or after the three months ending on the day when the application was made, the company failed to comply with a statutory demand. The failure is made out and so it is submitted I must presume the respondent to be insolvent. Section 459(C)(3), however, provides that the presumption is rebuttable and may be overcome by proof that the company is solvent.
The applicant is not a trade creditor. He is a plaintiff in proceedings in the Magistrates Court at Southport in which he has sues the respondent, and others, for damages for breach of a contract and contraventions of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1989 (Qld). The respondent is defending the proceedings but apparently failed to comply with its obligation to make discovery. On 3 March, 1998 a Magistrate ordered it to make discovery within fourteen days and further ordered it to pay the costs of the application fixed at $154.00.
There are twelve other actions pending in the Magistrates Court against the respondent. The causes of action are identical, or very substantially similar, to the applicant's. Each of the other plaintiffs obtained an identical order for discovery and costs on the same day. The other twelve plaintiffs each assigned the judgment debt for costs to the applicant. The sum of those twelve debts plus his own made the applicant a creditor of the respondent for the amount just in excess of the statutory minimum ($154.00 x 13 = $2,002.00).
The respondent carries on business as the seller of a computer software package which is designed to enable profitable trading on financial markets. If sufficient accurate information concerning the prices at which particular stocks or financial market products have traded on the open market is loaded into the computer and updated assiduously, the program ought to, over time, provide signals to tell an investor when to buy and when to sell the particular stock. The applicant and the other plaintiffs bought the program but are dissatisfied with its performance. They claim its attributes were misstated by the respondent and each of them claims as damages the amount outlaid in purchasing the program together with costs and interest. The plaintiffs in those proceedings joined as defendants a number of officers of the respondent whom it is alleged were concerned in the respondent's contraventions. Judgments in default of appearance have been obtained against those officers. One of them is Mr Norman Smith who owns and controls the respondent and is its sole director.
An application to set aside the default judgments on the basis that they were irregularly entered was unsuccessful. It is intended to make another application based upon an explanation for the failure to appear and an assertion that there is a defence on the merits. That defence is based primarily on the ground that the sales literature which is said to constitute the misrepresentations contain the following statements:
"(i)"users are not intended by Wizard Systems Australasia Pty Ltd to treat information derived from the software as a source of investment advice (accordingly, if you do, you do so at your own risk)";
(ii)"that whilst the programme may assist a user in maintaining an investment portfolio it cannot necessarily guarantee success or profits or determine an investment strategy suited to the users specific needs";
(iii)"of course there can be no assurances that Market Wizard will be able to avoid any losses or generate profits";
(iv)"naturally it should be noted that there always exists the potential for loss as well as gain";
(v)"it should be noted that the past performance is no guarantee of future results and that there exists the potential for loss as well as gain";
(vi)"naturally this brochure cannot include all significant aspects and risks involved in trading in financial markets in general and options market in particular, you should therefore study these factors before risking capital in markets".
The respondent did appear and is defending the proceedings.
The default judgments have founded notices issued under the Bankruptcy Act 1996 against Mr Smith and some of the respondent's other officers. There seems credible evidence that those persons have evaded service of the notices.
The need to have the judgments set aside would appear to be urgent but the application is being treated with a surprising degree of casualness by the respondent's solicitors who act also for its officers.
The applicant asserts that the respondent is unlawfully carrying on a business as a securities advisor because it does not have the appropriate licence issued by the Australian Securities Commission ("ASC"). It further asserts that the ASC is investigating the respondent's activities and may decide to prosecute it.
I was therefore invited to infer that the respondent should be wound up in the public interest. The fact is, however, the application to wind the respondent up is based only upon its deemed insolvency because of its failure to comply with the statutory demand. The ASC, I was informed, had been notified of the application but did not appear to support it.
The respondent filed affidavits by Alan Simpson, its financial controller, designed to show that it was solvent. In his affidavit sworn 24 July, 1998, Mr Simpson produced a copy of the balance sheet and profit and loss account of the respondent as at 30 June, 1998. Mr Simpson said the figures were not audited "but would not be the subject of any material change upon audit". He summarised the financial statements as showing that the respondent has net assets in excess of $1,000,000.00 and made a trading profit for the year ended 30 June, 1998 of about $491,000.00.
Mr Varley, who appeared for the applicant, pointed out a curiosity in the balance sheet. Conventionally, to arrive at the net asset position of a company, one subtracts the amount of the liabilities from the value of the assets. Total assets were said to be $837,483.48 and total liabilities to be $218,268.05. These sums were aggregated to produce the asserted net asset position of $1,055,751.53. If one adopted the orthodox approach the respondent's net assets would be about $620,000.00.
Mr Varley quarrelled with the value of the two major assets. They were respectively:
Wizard Systems Trust Account $311,255.00
London Office Establishment $297,053.98
If these assets are excluded from the balance sheet then clearly its position is precarious. Mr Varley contended that, without more explanation, moneys held in a trust account could not confidently be treated as an asset. The value of the asset described as "London Office Establishment" was questioned on the basis that a related company of the respondent's in London had recently been wound up, casting doubt, it was said, upon the ability of that entity to provide value for the asset.
I acceded to a request by the respondent to adjourn the application for a few days to allow it to amplify its affidavit material to demonstrate solvency. The applicant sought interim protection and I ordered that the respondent not withdraw any funds from the trust account during the period of the adjournment. The parties were to co-operate in drafting an appropriate order identifying the particular account in which the trust moneys were held. It quickly emerged that there was no such trust account and no such moneys.
When the hearing of the application resumed on 31 July, 1998 Mr Simpson produced a
further balance sheet for the period ended 30 June, 1998. In this document the "Wizard Systems Trust Account" becomes an unsecured loan to the Wizard Systems Trust in the amount of $266,365.61. The "London Office Establishment" becomes an unsecured loan to Market Wizard Systems (UK) Ltd in the sum of $384,042.76.
Another notable change is that a new asset appears, a debt owed to the respondent by Mr Smith in the sum of $70,002.00. A liability, a debt owed by the respondent to Mr Smith in the sum of $224,019.17, disappears. The moneys lent to the Wizard Systems Trust was in fact lent to a company called Arecki Pty Ltd which is wholly owned and controlled by Mr Smith. It used the moneys to buy a home unit on the Gold Coast. The equity in the unit is less than the amount of the debt.
Mr Simpson did not explain how he came to make the errors which appeared in the balance sheet which, in his first affidavit, he swore accurately showed the respondent's affairs. The task would no doubt have been difficult and Mr Simpson may have thought reticence was to be prized above valour.
Searches conducted by the applicant could find no evidence that Mr Smith owns any assets within Queensland. He is, it seems, a resident of this state but presently resides in London where he is attempting to overturn the order for the winding up of Market Wizard Systems (UK) Ltd. The applicant therefore argues that the asset comprising the debt due from Mr Smith is worthless, as are the debts due from the Wizard Systems Trust and Market Wizard Systems (UK) Ltd. The applicant has prepared an amended balance sheet reflecting these adjustments. It shows:
APPLICANT'S REVISED BALANCE SHEET
WIZARD SYSTEMS AUSTRALASIA PTY LTD
INTERIM BALANCE SHEET
FOR THE PERIOD ENDING 30TH JUNE 1998
| SHARE CAPITAL AND RESERVES | ||
| Authorised Capital 1000000 Ordinary Shares of $1 | $1,000,000.00 | |
| Issued Capital 2 Ordinary Shares of $1 | 2.00 | |
| Unappropriated Profit | | ($324,180.89) |
| TOTAL SHARE CAPITAL AND RESERVES | $ | ($324,182.89) |
| Represented by: | ||
| CURRENT ASSETS | ||
| Deposits | 105.00 | |
| Petty Cash Imprest | 301.41 | |
| Trade Debtors | 8,323.00 | |
| Cash at Bank (as at today there are no cleared funds in the account) |
| |
| | ||
| |
| |
| |
| |
| Loans to Associates | 3,500.00 | |
| Prepayments | 2,000.00 | |
| | $14,229.41 | |
| FIXED ASSETS | ||
| Furniture & Fittings 6,058.00 | ||
| Less: Accumulated Depreciation 1,817.40 | ||
| 4,240.60 | ||
| Computer Equipment 74,881.43 | ||
| Less: Accumulated Depreciation 22,464.43 | ||
| 52,417.00 | ||
| 56,657.60 | ||
| TOTAL ASSETS | | $70,887.01 |
| CURRENT LIABILITIES | ||
| Trade Creditors | 92,739.90 | |
| Provision for Income Tax | 145,330.00 | |
| AMEX | 157,000.00 | |
| | $395,069.90 | |
| NET ASSETS | | ($324,182.89) |
The applicant deletes cash at bank as an asset because it claims that enquiries made of the respondent's bank show the account to have a nil balance. I am not sure this is a fair adjustment. The evidence concerning this account is confused but the bank statement for the month of June, 1998 issued by Westpac shows that the account was continuously in credit and the balance fluctuated between a maximum amount of $66,974.00 and a minimum amount of $49,530.00. Mr Simpson swore in his affidavit of 27 July, 1998 that an amount is kept in that account, which he controls on a day-to-day basis, for the payment of the respondent's operating expenses. He went on "this account is invariably kept in credit by the [respondent] in the range of $50,000.00 - $70,000.00 which I find is more than sufficient to meet the [respondent's] operating requirements."
One must be sceptical of Mr Simpson's statements but the bank records appear to support him on this point.
This asset is not critical to the respondent's solvency. If the applicant's reconstructed balance sheet is correct the respondent has a substantial deficiency of assets and has negative worth.
The respondent disputes this dismal view of its position. It points to a profit and loss statement for the year ended June 1998 which shows sales income of just over $3,500,000.00 and an operating profit (after expenses but before tax) of just under $490,000.00. The respondent has operated for three years. It is said to have been profitable in each year. It employs sixteen staff. Mr Perkins argues that if one adopts the "cashflow" test rather than the "balance sheet" test the respondent is not insolvent. Mr Perkins referred me to Brooks v. Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 at 64 in which Olsson J said:
"The issue of insolvency is a question of fact, which falls to be decided as a matter of commercial reality in the light of all the circumstances or, as Gummow J expressed it in New World, a situation must be viewed as it would be by someone operating in a practical business environment. Moreover, it is not to be forgotten that the statutory focus is on solvency and not liquidity ... So it is that it is appropriate to consider the terms of credit or financial support available to the respondent with which to defray debts owed to creditors. ... The question is not to be answered merely by looking at the financial statements, although these are, of course, not irrelevant."
Mr Perkins referred me also to Downey v. AIRA Pty Ltd (1996) 14 ACLC 1068 in which Ashley J said at 1071, quoting Young J in Hamilton v. BHP Steel (JLA) Ltd:
"... what has to be done is not a mere accounting exercise, but an appreciation of whether moneys can be readily mustered in order to pay creditors."
Mr Perkin's principal arguments in support of the contention that the respondent is solvent are that:
(a)the respondent has paid and pays its trade creditors on time. No trade creditor has appeared to support the application. The applicant is not such a creditor and nor is any other plaintiff in the Magistrates Court proceedings;
(b)the respondent has carried on business for three years generating substantial sales revenue and operating profit. It has not had to borrow from any financial institution to conduct its business; and
(c)the substantial profits earned have been applied in the acquisition of assets, more particularly the purchase of the home unit by Arecki Pty Ltd.
These points appear to me to be made out although something should be said about (a). When the application was first argued a solicitor appeared for American Express Inc, claiming to be a creditor of the respondent owed about $157,000.00. It appears the debt is in fact that of a related company for which, by the terms of the agreement with American Express Inc, the respondent may be collaterally liable. When the hearing resumed it emerged that the respondent had come to terms with that creditor and agreed to pay the debt by equal weekly instalments of $10,000.00.
Mr Varley submits that such a liability will, if nothing else does, bring about the respondent's insolvency. That liability will entirely devour the respondent's operating profit earned in the preceding financial year.
One other matter should be mentioned. The respondent has not submitted its tax return for the year ending June, 1997. It has not done so for the following year either but that, I think, can be overlooked. The most recent balance sheet produced by Mr Simpson does make provision for 1997 income tax, so the force of the criticism is largely blunted.
In my judgment the position comes down to this. The applicant relies upon presumed insolvency. The amount of the debt founding the statutory demand is small. Payment was offered but refused. The amount of the debt together with costs has been paid in to court pursuant to an order I made on 27 July, 1998. The applicant is a litigant who may or may not have a good cause of action against the company. He has not yet demonstrated that he has. I have a suspicion that these proceedings are being employed to gain immediately what would be hoped for as the end result of successful litigation. There is no compelling reason why the applicant should not have accepted payment of his debt.
I am reluctant to order that the respondent be wound up on the basis of such a small debt, payment of which has been offered and refused. I think the points urged by Mr Perkins have considerable force. The respondent pays its trade creditors and does appear to have substantial credit balances in the bank to do so. It employs sixteen people and generates very substantial revenues and not insignificant trading profits. This conclusion depends upon accepting, at face value, the profit and loss account produced by Mr Simpson. The balance sheets prepared by him are akin to the clock that struck thirteen: they cast doubt also on the profit and loss account. No particular point of criticism, though, has been leveled at those accounts.
The applicant points to the unsatisfactory nature of the respondent's affidavit material and submits that I cannot be satisfied that the respondent is solvent. It bears the onus of rebutting the presumption of insolvency. The unsatisfactory nature of the evidence means that it has not done so. It is submitted the court must order a winding up.
It is a matter of concern that the respondent had not been able to demonstrate its true financial position by acceptable evidence. It is not an exempt proprietary company but has never had its accounts audited. It has not prepared properly authenticated accounts for the year ended June, 1997 from which it could prepare a tax return. In the circumstances it should have been easy for the respondent to adduce evidence rebutting the presumption of insolvency. The demonstrated inaccuracy in the balance sheets prepared by Mr Simpson and the lack of externally verified accounts make it impossible for the court to be satisfied on the present material that the respondent is solvent. Despite deficiencies in its financial administration and account keeping it appears to me there is a fair prospect that it is solvent. If so it should not be wound up.
I do not think that the court's choices are as limited as Mr Varley submits. By section 467 of the Corporations Law the court may:
(a)dismiss the application with or without costs, even if grounds have been proved on which the court may order the company to be wound up; or
(b)adjourn the hearing conditionally or unconditionally, and give such directions for the conduct of the proceedings as it thinks fit, including directing a speedy trial.
In my opinion, if the applicant wishes to persist, the application should be adjourned to the callover list to allow a lengthier investigation of the respondent's solvency. The matter should proceed expeditiously though without pleadings and on a strict timetable as to the delivery of further affidavits. The respondent would, presumably, wish to engage the services of a reputable firm of chartered accountants to verify its financial position. Directions can be made for the delivery of such a report. There should be disclosure so the applicant can test the respondent's case.
It may be necessary pursuant to section 459R to extend the time within which the application is to be determined.
The respondent should pay the applicant's taxed costs of the hearings on 27 and 31 July, 1998, as they were occasioned by the respondent's late delivery of affidavits and the deficient nature of the material.
The applicant sought the appointment of a provisional liquidator pending the final determination of the application. I do not think that a basis has been made out for the appointment. There is no evidence that the respondent is dissipating its assets. The applicant's position is that it has no assets to dissipate. The appointment of a provisional liquidator would effectively terminate the respondent's business and jeopardise the employment of its staff.
The order of the court is that the application be adjourned to the callover list of matters awaiting trial and that it be tried speedily. I will hear submissions from the parties as to what directions should be made.
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