Reynolds v Neumedix Biotechnology Pty Ltd
[2006] QSC 302
•20 October 2006
SUPREME COURT OF QUEENSLAND
CITATION:
Reynolds & Ors v Neumedix Biotechnology Pty Ltd & Anor [2006] QSC 302
PARTIES:
Maxwell John Reynolds
(first applicant)
Maxwell John Reynolds and Bronwyn Reynolds as Trustees of the Reynolds Family Trust (No. 2)
(second applicant)
Estendart Ltd
(substituted applicant)
v
Neumedix Biotechnology Pty Ltd (ACN 106 620 348)
(first respondent)
Independent Investments (Australia) Pty Ltd (ACN 102 318 169)
(second respondent)FILE NO/S:
BS 4979/06
DIVISION:
Trial
PROCEEDING:
Application
ORIGINATING COURT:
Supreme Court
DELIVERED ON:
20 October 2006
DELIVERED AT:
Brisbane
HEARING DATE:
24 and 25 August 2006; further submissions in writing 30 August, 6 and 9 September and 19 October 2006 in response to affidavit filed 3 October 2006
JUDGE:
White J
ORDER:
Application dismissed
CATCHWORDS:
CORPORATIONS – WINDING UP – WINDING UP IN INSOLVENCY – first and second applicants applied to wind up first respondent company in insolvency – original applicants substituted for creditor company – first applicant, a former CEO of the first respondent, alleged the company owed numerous debts – company has since attempted to ascertain and pay all its debts – whether company insolvent
CORPORATIONS – WINDING UP – WINDING UP IN INSOLVENCY – WHAT CONSTITUTES INSOLVENCY – application to wind up first respondent company in insolvency – second respondent company undertook to discharge first respondent’s debts – second respondent further undertook to subordinate resulting debt should first respondent prove unable to repay – second respondent had history of financially supporting first respondent – whether this sufficient in fact and law to avoid conclusion of first respondent’s insolvency
Acts Interpretation Act 1901 (Cth) s 22(1)(a)
Corporations Act 2001 (Cth) ss 95A, 233(1)(a), 461(1)(f) & 467ACP Syme Magazines Pty Ltd v TRI Automotive Components Pty Limited (1997) 74 FCR 372, cited
Clayton Robard Management Ltd v Siu (1988) 6 ACLC 57, cited
General Welding and Construction Co (Qld) Pty Ltd v International Rigging (Aust) Pty Ltd (1983) 2 Qd R 568, cited
Hutton v West Cork Railway Co (1883) 23 Ch D 654, cited
Lewis v Doran [2005] NSWCA 243 (18 August 2005), cited
Lewis v Doran [2004] NSWSC 608 (9 July 2004), considered
Moller v Bruce-Sanders [1962] QWN 12, citedCOUNSEL:
D R Cooper SC and R Lawson for the applicant
R C Bain QC and M Hodge for the respondentSOLICITORS:
Porter Davies Lawyers for the applicant
MacDonnells for the respondent
On 16 June 2006 Maxwell John Reynolds (“Dr Reynolds”) and Maxwell John Reynolds and Bronwyn Reynolds as trustees of the Reynolds Family Trust (No. 2) (“the Reynolds Trustees”) filed an application pursuant to ss 233(1)(a), 461(1)(f) and 467 of the Corporations Act 2001 (Cth) for orders that Neumedix Biotechnology Pty Ltd (“Neumedix”) be wound up. Dr Reynolds had been the CEO of Neumedix from May 2004 to May 2006 responsible for its day to day operations. On 30 June 2006 Dr Reynolds caused a creditors statutory demand on behalf of himself and the Reynolds Trustees to be served on Neumedix for $180,000 for outstanding consultancy fees. Neumedix filed an application to have the demand set aside on grounds that were canvassed on this hearing. That application to set aside the statutory demand has been adjourned generally. Neumedix filed a notice of intention to appear and opposes the application to wind up.
On the return date of the winding up application Wilson J made orders by consent for disclosure in the following terms:
“Pursuant to Rule 233 of the Uniform Civil Procedure Rules 1999 (Qld), the Applicants will deliver to the Respondents copies of all documents in any format in the possession of or under the control of one or both of the Applicants relating to or concerning the financial affairs of the company, including but not limited to all bank records, tax invoices, balance sheets, contracts and letters setting out engagements of other persons to provide goods or services to the First Respondent or the First Respondent to perform services for other persons, to the Respondents by 30 June 2006.”
During the cross-examination of Dr Reynolds, Mr Bain QC for Neumedix challenged Dr Reynolds’ compliance with that order which will be discussed further. Other directions were made and the application listed for further directions on 25 July 2006. An amended application was filed on 24 July 2006 seeking to have the company wound up on the further ground that it would be just and equitable to do so.
On 25 July 2006 Philippides J further adjourned the application to wind up the company in insolvency to 14 August 2006 and adjourned generally the balance of the application. On 14 August 2006 Douglas J was persuaded that the matter ought to be heard on the civil list and adjourned the application to wind up on the ground of insolvency to 24 August 2006 when the application came on before me. At the commencement of the hearing and without opposition Estendart Limited, a creditor of Neumedix, who had filed a notice of intention to appear, was substituted for the original applicants. The reason given by Dr Reynolds for withdrawing was the more extended inquiry involved in a winding up based on oppression and/or the just and equitable grounds rather than on insolvency. It was clear from the affidavits filed on behalf of Neumedix that Dr Reynolds' conduct in so far as he was alleged to have charged personal expenses to Neumedix and drawn significant sums in cash from Neumedix’ account without acknowledgement would have undergone some close scrutiny as well as the quantum of the claim for outstanding fees. As it was, that occurred in any event in order to ascertain the extent to which those who now control Neumedix were aware of its indebtedness. Mr D Cooper SC and Mr R Lawson announced their appearances initially for the original applicants and then for the substituted creditor.
The issue for decision is whether Neumedix is insolvent. Since the position of the second respondent, Independent Investments (Australia) Pty Ltd (“IIA”), the funder of Neumedix, and its directors is that they have largely been kept uninformed by Dr Reynolds of the financial position of Neumedix it will be necessary to canvass the relations between them and the allegations against Dr Reynolds. IIA through its directors has determined to support Neumedix and to discharge its debts. The substituted creditor challenges their bona fides and capacity to do so.
Background
Dr Reynolds is a microbiologist who developed products with anti-bacterial and anti-viral properties from native flora to which he gave the name MegaBac. The effectiveness of the products needed to be tested and verified by external scientific testing. Neumedix was the corporate vehicle used by Dr Reynolds, the Reynolds Trustees and IIA to own the intellectual property in and to manufacture and develop commercially, MegaBac for human medical, animal veterinary and avian flu virus usages. IIA, a company of which Mr Michael Issakidis and Mr Anthony Dickson are directors, has contributed $1.25 million as equity funding to Neumedix ($250,000 of which went to Natures Ark Pty Ltd, a wholly owned subsidiary of Neumedix) between August 2004 and March 2005. In the second shareholders agreement of 23 November 2005 IIA undertook to contribute a further $1.75 million in funding to be drawn down in $250,000 tranches.
The position of IIA as expressed through Mr Issakidis and Mr Dickson is that it wishes to continue funding research and development of the products. IIA expects they will become valuable commercially. Dr Reynolds, who has fallen out with the funder, wishes to see Neumedix wound up and, no doubt, the intellectual property put on the market for sale by the liquidator. The Reynolds Trustees own 55 per cent of the shares in Neumedix and IIA 45 per cent. Dr Reynolds offered earlier this year to purchase IIA’s interest for $1.25 million – the amount contributed by IIA so far.
Dr Reynolds, Mr Dickson and Mr Issakidis are each directors of Neumedix although the correspondence suggests some dispute about Dr Reynolds’ present status. ASIC documents show him as a director and Mr Issakidis’s appointment is disputed by Dr Reynolds. For these proceedings that matter need not cause concern. Mr Campbell Corfe had been a director and company chairman appointed in October 2005 but resigned by notice dated 16 May 2006. There had been an earlier shareholders agreement dated 31 May 2004, but it was replaced by the November 2005 agreement between the Reynolds Trustees, described as the “Existing Shareholder”, IIA described as the “Investor Shareholder”, Neumedix and Dr Reynolds.
The material suggests that although Mr Corfe had long been an associate of Dr Reynolds his appointment was seen to be as an independent director with a casting vote as chairman. At the time of the second shareholders agreement the material suggests some lack of confidence in Dr Reynolds’ commitment to Neumedix and some discontent on Dr Reynolds’ part with the persons behind IIA. The minutes of the board meeting of 20 December 2005, which seems to have been the first following the execution of the second shareholders agreement, state that the second shareholders agreement:
“…was signed after protracted discussions and a lengthy period of commercial disputes between the parties. Both parties acknowledge that, during this period, various corporate governance principals have not received sufficient attention, including for example:
·Business planning processes
·Budgeting
·Reporting, both commercial, scientific and financial
·Transparency
·Board controls and oversight obligations.”
A number of resolutions were passed including that a new bank account would be opened with immediate effect at Suncorp and that all other accounts were to be closed with any two of the then directors (including Dr Reynolds) authorised to sign. All credit and debit cards associated with the company or those in its group were to be cancelled immediately.
Resolution 8 sought to regulate the engagement of outside entities:
“i. MJR [Dr Reynolds] will advise all professional bodies or entities with which the Company or MJR currently has dealings, now or in the future, advising
(a)that these bodies / entities are to be instructed that their reports are to be addressed to the Chairman of the Company and the Chief Executive Officer, the Chairman or a delegate nominated by the Chairman at the commencement of the provision of instructions or engagement of the professional body or entity and that those persons are to have full and direct access to the professional body or entity.
(b)that no contract shall be entered into or binding unless properly executed by the Directors or authorised representatives of the Board.
ii The Secretary is instructed to:
(a)notify all members of the Board and officers of the Company that there is to be no commission of any report or research unless approval is first obtained from the Board.
(b)write to bodies/entities with whom the company has commenced discussions and/or negotiations for the commissioning of such reports or research that there is to be no binding agreement between the Parties until agreements are executed by (one or two directors as the case may be) as required by our constitution.”
By their letter of 6 April 2006 (erroneously dated 2005) Mr Dickson and Mr Issakidis indicated that they did not accept that the minutes of that meeting as exhibited to Dr Reynolds’ affidavit were a true and correct record of the meeting although their letter does not say in what respect they dissent from them and in their subsequent affidavits refer to the content of resolution 8 as binding on Dr Reynolds.
Neumedix, through Mr Dickson and Mr Issakidis, terminated the consultancy agreement with Dr Reynolds by notice dated 28 May 2006 for a number of alleged material breaches of the agreement including failure to use all reasonable endeavours to provide suitable management and financial information and reports to allow IIA to monitor the efficient conduct of the business of Neumedix. Dr Reynolds denied that he was in breach. There are clearly disputes about the termination and mutual recriminations about breaches of the second shareholders agreement which it is unnecessary for this application to resolve or to elaborate further.
In correspondence emanating from Dr Reynolds during the months preceding the termination he alleged that the company was insolvent from the beginning of 2006. In his principal affidavit he lists what he describes in paragraph 67 as “a summary of all liabilities owed by the Company that I am personally aware of. I have verified these debts by reference to invoices, correspondence and other enquiries”. The list is set out at “MJR 44” of Dr Reynolds’ affidavit as follows:
“ Summary of accounts
CSIRO 106,132.09
Massey 47,641.51 NZ
Massey
Curtin University 10,184.42
Austin Brewin 28,000.00 USD
Hort Research 12,445.00 NZ
Aussi internet 562.10
Multitrode 21,030.58
ASIC 547.00
Optus 271.97
NAB 14,677.44
MJR Account 180,000.00Sub 333,405.60
+ US and NZ amounts 131587
(93750 AUD + 37837 = 131587)464,992
Dr Reynolds provided no invoices or statements of account to support these figures.
By letter dated 16 June 2006 Neumedix’ New South Wales solicitors sought via Dr Reynolds’ solicitors all relevant financial accounts as a matter of urgency.
Notes prepared by Mr Corfe as chairman dated 31 January 2006 after he had conducted an initial financial review of Neumedix indicated that there were then current creditors to be paid and “some of these creditors are pressing for payment and need to be addressed urgently”, exhibit 3. The material, it appears, was provided to Mr Corfe by Neumedix’ accountants, Universal Accounting Solutions (“UAS”) who were also Dr Reynolds’ personal accountants. There is no affidavit from Mr Corfe nor from the accountants. Mr Corfe noted current creditors of approximately $100,000. There were a number of items of expenditure which he noted required clarification/documentation/sign-off from “responsible parties”. For example, CSIRO had the figure of $94,762 against it but Mr Corfe noted that an additional amount of $32,000 had been paid directly by a Mr Andrew Robertson who was then a director of Neumedix. Also listed was the amount of $300,000 shown against Dr Reynolds’ initials as consultancy fees. Dr Reynolds subsequently wrote that the outstanding consultancy fees owing to him were $45,000. There are also consultancy fees of approximately $33,000 and $30,000 said to be owing to Dr Reynolds’ wife and daughter but said by Mr Dickson and Mr Issakidis not to be employees of Neumedix. In his email to Dr Reynolds dated 2 February 2006 Mr Corfe described the material received from UAS as “quite a wad of papers”.
Item 7 of Mr Corfe’s notes of 31 January 2006 state:
“MJR [Dr Reynolds] took various cash advances from the Company bank accounts during recent months; UAS treated these as MJR advances; MJR then submitted expenditure claims as;- to be approved”
The items which were disclosed were travel of $2,058 and $1,248, “land matters” of $1,302, entertainment of $972, the purchase of boardroom table and fridge $3,190 and a stainless steel tank $1,045 giving a total amount of $11,500. This is relevant because a forensic analysis of Neumedix’ accounts undertaken largely by Mr Dickson shows that Dr Reynolds had directed considerably more of Neumedix’ funds to his own purposes than revealed by or to Mr Corfe. Dr Reynolds used a National Business Access Visa Card in the name of Neumedix, the existence of which was not apparently known to the other members of the board at the December meeting or the January review. Its existence became known on or about 2 May 2006. The statements from the National Australia Bank indicate extensive use at restaurants and at a “spa and retreat” showing “treatments” for the Reynolds family. As Lord Bowen observed in Hutton v West Cork Railway Co (1883) 23 Ch D 654 at 673
“The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company.”
The benefit to the company was not explained or apparent.
Cash withdrawals from Neumedix’ accounts at venues not immediately identifiable as associated with the objects of Neumedix such as the Rochedale soccer club in regular (daily and occasionally twice daily) $500 amounts were not explained as being for company purposes. The total amount of cash drawings by Dr Reynolds on the available material including bank fees is approximately $78,000. These sums are not brought into account in the UAS materials.
Dr Reynolds’ wife, Bronwyn, is shown as having been paid from Neumedix’ and its subsidiaries’ accounts. The forensic analysis is incomplete and not all sums identified might have been paid to her. There are other company cheque butts not available. On Mr Issakidis’ analysis approximately $53,000 was paid to Mrs Reynolds between April 2005 and March 2006. Similarly payments to Dr Reynolds’ daughter, Alyson, for consultancy fees are said to be almost $19,000 between July 2005 and March 2006. Neither Mrs Reynolds nor Alyson Reynolds were understood by IIA to be employees of Neumedix.
Mr Issakidis identified payments to Mr Corfe’s company amounting to some $90,000 and although it seems likely that a substantial part, if not all of that sum, relates to Neumedix’ business, there is little to support that conclusion in the documents provided by UAS. A payment to Neuman and Turner, solicitors, of $22,000 is said by Mr Issakidis not to be for Neumedix’ business. That firm of solicitors acted for Dr Reynolds in a dispute between IIA and Dr Reynolds in 2005. They were not Neumedix’ solicitors but Dr Reynolds asserts that under the first shareholders agreement he was entitled to have his legal fees paid by Neumedix in the dispute with IIA. It appears that Dr Reynolds used company funds to pay his home Energex account amounting to about $1,600.
Dr Reynolds was extensively cross-examined by Mr Bain QC. Although the application was strictly confined to the solvency of the company much of the cross-examination related to the items of expenditure discussed above which had been analysed by Mr Dickson and Mr Issakidis. No findings can or should be made finally about these matters but Dr Reynolds’ failure to explain, particularly in the context of his assertion that he used the company credit card “on rare occasions” for personal expenses and always rendered a credit note to UAS, means that much of what he says about Neumedix and its solvency must be treated with caution. Dr Reynolds was an unsatisfactory witness. He tended to avoid answering questions responsively and purported to suggest a bewilderment and naivety about some matters of finance which were not convincing. Neither Mr Dickson nor Mr Issakidis were cross-examined.
Solvency
It is now necessary to consider the question of Neumedix’ solvency. Mr Issakidis found no unpaid invoices from CSIRO, Hort Research, Dr Austin Brewin, Curtin University, Estendant Limited, Optus, ASIC or Aussie Internet, all entities nominated by Dr Reynolds as creditors of Neumedix, in the documents initially provided by UAS. Each creditor identified by Dr Reynolds has been investigated by Mr Issakidis and Mr Dickson.
(i) CSIRO
In his affidavit of 20 July 2006 Mr Dickson swore that he believed that Neumedix had paid all debts due to CSIRO up to 20 December 2005 and any further debts had been incurred without the approval of the board referring to resolution 8 of the board meeting of 20 December 2005. Without full financial records he was then unable to take the matter further. In his subsequent affidavit of 18 August 2006 Mr Dickson deposed that he contacted Mr Morrissy, the relevant person at CSIRO about any outstanding amounts owed by Neumedix. It is convenient to set out that exchange in full because it gives a flavour of the state of the investigations which have had to been done to comprehend the extent of Neumedix’ indebtedness. Mr Dickson wrote by email dated 10 August 2006:
“I am a director of NeuMedix Biotechnology Pty Ltd, the company which owns MegaBac. Max Reynolds is no longer a director or consultant to Neumedix Biotechnology P/L or Natures Ark Pty Ltd. I am a Chartered Accountant and have the job of tidying up the company’s files, incl checking all the paperwork with researchers and making payments as required for all work done. (please forgive me if my understanding is wrong or if my questions are off the mark – I am on a steep learning curve re the company’s activities).
I know that you have been dealing with Max re MegaBac. From the company’s files I note that testing agreement 2005114069 with NeuMedix Biotechnology P/L for $68,750 incl GST was signed by Max, our CEO at the time on 11 November 2005. Our records show that the normal 50% was not paid so that you could commence work under the agreement. I also don’t have on our files an acceptance of the CSIRO of that agreement as we have for the other agreements with the CSIRO. So please confirm that work under this contract has not commenced and will not commence until we give authority and pay the normal 50%. I have a board meeting tomorrow, Friday this week, which is approving all outstanding invoices for the group. It would greatly assist me if you could respond to this email before the board meeting tomorrow.”
In response Mr Morrissy wrote:
“Thank you for arranging the ASIC extracts to be forwarded to us confirming your Directorship, you have appreciated our position given that since inception of our work with Neumedix Biotechnology Pty.Ltd. that all work and correspondence has been conducted [sic] Dr Reynolds.
That said information, we will be happy to provide them to yourselves relating to contracts and reports.
The current liability Neumedix has with CSIRO is $113,108.29, contained in the above Invoices.
All activities are covered by contracts.
We can confirm that 50% of the PK studies and Virus studies under electron microscope have been paid, prior to those 2 experiments.
I gather that with the changes of Directorate etc there is some issues, that is something for the Directorate to manage, however, as far as CSIRO is now concerned we have provided reports in terms of our contracts and still have an outstanding debt that needs attentions [sic].
Can you advise when you would expect that this debt be honoured, Invoice payments are well and truly outside of CSIRO’s acceptable terms.”
On 23 August 2006 Mr Dickson was informed by Mr Morrissy that all work had been completed and that work on a contract 4069 was started and finished by CSIRO without 50% of the fee being paid by Neumedix pursuant to their agreement. He arranged to send copies of the CSIRO reports to Mr Dickson. Mr Dickson deposed in his affidavit filed by leave on 24 August 2006 that he did not propose to authorise payment of CSIRO’s outstanding invoices until he had received copies of the reports and was able to discuss the circumstances relating to the work being completed on contract 4069.
(ii) Austin Brewin
In his affidavit of 20 July 2006 Mr Dickson deposed that he believed that the company had paid all debts owing to Austin Brewin up to the 20 December 2005. On 17 July 2006 Mr Dickson wrote to Dr Brewin requesting urgently copies of agreements between himself and either of Neumedix or Natures Ark Pty Ltd, statements of account, statements of amounts to be billed for future work, invoices from Dr Brewin to both companies, all reports and all correspondence. So far as can be ascertained from Dr Brewin’s email response to earlier queries from persons associated with Neumedix, possibly employees, endeavouring to ascertain current financial matters, Dr Brewin and his staff and subcontractors carried out work relating to applications for MegaBac. A flavour of continual non-payment by Dr Reynolds on behalf of Neumedix is apparent throughout. For example, in an email to one Lesley Powell in April 2006 Dr Brewin wrote:
“I have had several conversations with Max over the last several months – long on opportunities, short on paying the arrears.
He told me to expect to hear from your office for a while, then to expect to hear from Campbell [Corfe]. Campbell did, in fact send me a pleasant note, speaking of momentum.
Any words of wisdom?”
Finally, after contact with Mr Dickson, Dr Brewin wrote on 26 July 2006 enclosing the email correspondence between himself and “Leslie” in regard to some of the matters of finance, Dr Brewin attached a copy of the summary reports sent in December 2005. He wrote
“Most of the reports were in the form of conversations with Max, and a number of e-mails, as the focus shifted almost daily.
I hope the problems are resolved – there seems to be a lot of promise in a refined form of TTO, and time keeps marching on.
We obviously would be interested in pursuing this project to some logical end – a lot of interest on our part”
After an examination of the invoices Mr Dickson concluded that US$27,315.32 was owed by Neumedix to Dr Brewin. Dr Brewin referred to US$11,000 having been paid at the commencement of the engagement. Mr Dickson asked Dr Brewin for some further information about the invoices (raising issues which may relate to how to read the invoices). These were not unreasonable concerns, for example, invoices showing work done on dates after the date of the invoice or an apparent doubling up for periods covered by prior invoices. He concluded:
“Please be assured that I am asking these questions in good faith to determine how much the company owes Piedmont Consulting with the aim of paying all amounts owed.”
(iii) Hort Research
Initially in his affidavit of 18 July 2006 Mr Dickson had not seen any invoices issued by Hort Research and was unaware of the debts set out by Dr Reynolds. A tax invoice and account statement received from UAS was addressed to Natures Ark Pty Ltd for the amount of NZ$2,000. Written on the statement were the handwritten words “paid AUD$2,000”. The material does not reveal that there is any amount owing by Neumedix to Hort Research.
(iv) Curtin University of Technology
By letter dated 17 July 2006 Mr Dickson sought agreements, statements of account, invoices and reports drafted by the University and all correspondence between the University and Neumedix and Natures Ark. As at 18 August 2006 Mr Dickson had received no response. He sent an email to a relevant person at Curtin University following up a telephone call seeking assistance to ascertain if there was any amount currently owing to the University by Neumedix. No response was received to that email. In a subsequent affidavit by Dr Reynolds of 21 July 2006, filed on 24 July 2006, Dr Reynolds exhibited an invoice from Curtin University of Technology dated 6 June 2006 for $11,099.40. That work related to an agreement entered into prior to 20 December 2005 and related to work completed, according to Dr Reynolds, in November that year. By cheque dated 24 August 2006, signed by Mr Dickson, Neumedix paid the outstanding amount to Curtin University.
(v) Multitrode Pty Ltd
Multitrode Pty Ltd was the lessor of the company’s premises. When Mr Dickson swore his affidavit of 18 July 2006 Neumedix was negotiating with the landlord to pay the outstanding rent. Multitrode had issued proceedings out of the Magistrates Court in Brisbane for $21,030.58 for unpaid rent together with interest and costs. At a board meeting on 13 March 2006 there was a resolution on Mr Corfe’s recommendation that the company premises be vacated, the landlord notified and a settlement negotiated. Multitrode’s solicitors acknowledged receipt of Neumedix’ recent cheque in the amount of $37,047.68 representing “all outstanding arrears of rent, outgoings and other monies payable under the lease up to and including 31 August 2006.” The solicitors noted that upon clearance of the cheque there would be no arrears outstanding under the terms of the lease, exhibit 1.
(vi) Aussie Internet
Mr Dickson deposed that he had not seen any invoices issued by this entity in his affidavit of 18 July 2006. Dr Reynolds identified $562.10 as owing. Mr Dickson investigated further and found that the charges related to the domain name registration and web and mail hosting. Mr Dickson caused a cheque for $692.45 to be sent to Aussie Internet dated 22 August 2006 for the amount outstanding.
(vii) Optus
Mr Dickson had not seen any invoices related to the Optus debt. The amount owing was said by Dr Reynolds to be $271.97. Further enquiries caused Mr Dickson to sign a cheque to Optus on behalf of Neumedix for $590.35 believed to be the full amount owing.
(viii) ASIC
In his affidavit of 18 July 2006 Mr Dickson had no information about the debt said by Dr Reynolds to be owing to ASIC. There were no invoices relating to ASIC in the material provided by UAS. Mr Dickson exhibited a receipt issued by ASIC dated 23 August 2006 for the amount of $65 on behalf of Neumedix.
(ix) National Australia Bank
Dr Reynolds stated that an amount of $14,232.64 was owing to the National Australia Bank as at 28 June 2006. The debt was for a credit card account which was opened and used by Dr Reynolds, it seems without the approval of the board. Mr Dickson was unaware of the debt until he received correspondence from a debt collection agent dated 5 June 2006 exhibited to Dr Reynolds affidavit. Mr Dickson has negotiated a repayment plan with the National Australia Bank for $1,000 to be paid each month.
(x) Massey University (Estendart Limited)
Initially Mr Dickson and Mr Issakidis had difficulty locating any invoices from Massey University about indebtedness by Neumedix. There were no invoices in the material from UAS. Eventually Mr Dickson was put in contact with Ms Kara Eaton, a senior administrator employed by Estendart Limited (“Estendart”). It would appear to be a company which operates from Massey University and engages in research for other parties outside the University. Estendant had been requested by Dr Reynolds to provide services for sub-chronic toxicity repeat doses in rats in laboratory tests. The initial agreement was made between Estendart and Dr Reynolds for Neumedix on 13 July 2005. Estendart rendered invoices for services pursuant to the agreement between October 2005 and August 2006. No payments were made and Estendart maintains that Neumedix is currently indebted to it in the amount of NZ$148,328.07.
Ms Eaton was cross-examined by telephone during the hearing. She was questioned particularly about the content of the final invoice which she said involved collating data reporting by Gribbles who provided laboratory services. Mr Bain suggested that this work seemed to be covered by another invoice. Further investigation is being undertaken as to the nature of the work carried out by Gribbles.
In the course of the hearing Mr Bain sought to tender to Estendart a cheque payable to “Estendart Limited” for the full amount said to be owing in the amount of NZ$53,753.07 (AUS$44,861.47). The final invoice of NZ$94,575 was not then owing under the 30 day terms of payment. Mr Cooper SC on instructions from Estendant declined to accept the cheque and it was returned to the solicitors for the second respondent. By an affidavit filed on 3 October 2006, Mr Dickson deposed that he caused the cheque to be posted to Estendart at its New Zealand office about 6 September. It was honoured by Neumedix’ bank on or about 21 September. Ms Eaton acknowledged the payment by email dated 25 September and sought an indication as to when the balance, by then due, would be paid. Mr Cooper submitted (submissions 19 October 2006) that the failure to pay the $94,575 further demonstrated that Neumedix was unable to pay its debts. Mr Dickson makes no reference to this further payment but, consistently with the payment of outstanding accounts to creditors by IIA, I conclude that IIA will meet this debt.
(xi) Litigation
Spring Quest Pty Ltd has sued Neumedix in the Magistrates Court in Brisbane as has Constantine John Issakidis. Mr John O’Connor, their solicitor, has deposed that each plaintiff will discontinue its action on the basis that each party pays its own costs.
(xii) Ernst & Young
Ernst & Young, accountants, were not on Dr Reynolds’ initial list of creditors but maintain that the firm is owed $10,110.39 for services to Neumedix. Dr Reynolds contends that Ernst & Young is a creditor of Neumedix. Ernst & Young supports the winding up, but it is doubtful if Ernst & Young is a creditor of Neumedix.
Mr Grant Murdoch, a partner, was cross-examined about the alleged debt. Ernst & Young were retained by Paul Bolster of Bolster & Co Solicitors to value 45 of the 100 issued shares in Neumedix in August 2005. Mr Bolster was then Dr Reynolds’ solicitor. Dr Reynolds was seeking to acquire IIA’s shares for an alleged act of default. These were the shares owned by IIA pursuant to the first shareholders’ agreement of May 2004. Clause 14.3 of that agreement provided that the cost of the valuer’s determination was to be borne by the shareholders in their respective proportions when the shares were to be valued on a transfer of shares (which was the case).
Both the letter of retainer and Mr Murdoch’s oral evidence make clear that Bolster & Co was the client and responsible for the fees. By an email sent on behalf of Dr Reynolds by his daughter, Alyson Reynolds, on 5 October 2005 Ernst & Young were asked to cease work on the valuation because Dr Reynolds was negotiating with the directors of IIA. The initial fee note was directed to Mr Bolster on 14 October 2005. At Mr Bolster’s request it was reissued in the name of Neumedix on 9 November 2005.
On the evidence, Ernst & Young is not a creditor of Neumedix.
(xii) Outstanding fees to Dr Reynolds
Dr Reynolds was challenged about his claim to be owed $180,000 in consultancy fees which were earned at $15,000 per month. Dr Reynolds was cross-examined about inconsistencies in formatting and a possible doubling up of invoices. Both the cross-examination and responses by Dr Reynolds were unsatisfactory and since Dr Reynolds’ and the Reynolds Trustees’ claims are not to be determined on this application they can be left to another occasion.
Support for Neumedix by IIA
The applicant challenges the capacity of IIA to continue to fund Neumedix. Mr Dickson has exhibited the cheques which have most recently paid Neumedix’s creditors. They are from an account which at 8 August 2006 had funds of $99,982. Most of those funds will in likelihood have been expended in payment of these creditors. Mr Cooper SC for the applicant submitted that this deposit called for an explanation. It seems to be part of the continuing support the directors of IIA are prepared to give Neumedix.
IIA’s business cheque account shows a balance of $319,995. Two cheques for $50,000 were deposited into that account on 23 August 2006. Mr Cooper submitted that this required an explanation – that the money might easily be withdrawn again. IIA is not under solvency scrutiny except to ascertain if it is a bona fide funder to Neumedix. On an application which has changed focus very late in the day, the failure to supply those details, if thought necessary, which I doubt, is explicable.
IIA, through Mr Bain, offered its undertaking that it would lend Neumedix the funds necessary to meet any debt incurred by it for the purpose of pursuing its business in relation to the product Megabac and the technologies the subject of the shareholders agreement. In the event Neumedix should prove unable to repay IIA, IIA will subordinate that debt.
Mr Dickson exhibited a letter from Intrepid Finance International Limited dated 1 August 2006 with offices in Hong Kong and the United Kingdom addressed to Messrs Dickson and Issakidis as directors of IIA referring to their letter of 3 July 2006. It offered USD500,000 as a line of credit for four years for the purpose of funding ongoing investment in Neumedix Biotechnology Pty Ltd. That offer, subject to formal documentation, was accepted by IIA on 16 August 2006. Mr Cooper sought to criticize this provision of working capital on a number of bases – no guarantee that it would be devoted to Neumedix; that the formal documentation had not yet been executed; that the directors were required to give guarantees and there was no evidence that the guarantees were worthwhile; that the loan was in United States dollars with all the difficulties that that might entail. These are criticisms with little if any substance for this application. The worth of the guarantees is a matter for the lender, borrowing in US dollars is not necessarily a negative matter and anyway not for Estendart to be concerned about. Until the outcome of this application is known, IIA will not wish to commit to such a loan.
Conclusion on solvency
This material shows a capacity on the part of IIA to fund Neumedix’s ongoing research and development. The question is whether it is sufficient to avoid the conclusion that Neumedix is insolvent and, more importantly, ought to be wound up. Neumedix has never been in a position to self fund its research activities. It has always relied on its funder, IIA, to pay its debts.
Section 95A of the Corporations Act 2001 (Cth) provides that:
“(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.”
“Person” includes a corporation, s 22(1)(a), Acts Interpretation Act 1901 (Cth).
Previous insolvency legislation defined insolvency as an ability to pay the debtors’ debts from the debtor’s “own moneys”. With the exclusion of that phrase from s 95A a debate has ensued as to whether a debtor’s ability to obtain funds by means of unsecured loans was to be taken into account when assessing solvency. Palmer J in Lewis v Doran [2004] NSWSC 608 (9 July 2004) analysed this question in depth at paras 84-116 and concluded at para 116 that s 95A:
“… has changed the pre-existing law as to the definition of insolvency as stated in cases such as Sandell v Porter, and that it is no longer necessary in order to assess solvency to ascertain whether the company is able to pay all of its debts ‘from its own moneys’, in the sense discussed in those cases. In my opinion, s 95A requires the Court to decide whether the company is able, as at the alleged date of insolvency, to pay all its debts as they become payable by reference to the commercial realities. If the Court is satisfied that as a matter of commercial reality the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party.”
The New South Wales Court of Appeal affirmed the decision on appeal, particularly at para 109, [2005] NSWCA 243 (18 August 2005). As Palmer J observed at para 106, insolvency is “first and last, a question of fact”. With Palmer J’s analysis and conclusions I respectfully agree.
IIA has an established history of supporting Neumedix. Mr Cooper has asked, rhetorically, why the directors of IIA did not put more funds at the disposal of Neumedix when it was clear that there were pressing creditors in January 2006. Much of the problem relates to a steady erosion of confidence in the CEO who was responsible for the day to day administration of the company, and further necessary investigations referred to by Mr Corfe in his January 2006 notes and email of 2 February 2006 to Dr Reynolds. At a board meeting on 13 March 2006 attended by Messrs Corfe, Dickson and Dr Reynolds, the minutes record that Mr Corfe “advised that he has provided short term funding to the company (approximately $80,000) in the period since January 2006. Accordingly, creditors were reasonably up to date.” Mr Dickson is recorded being concerned that he received the accounting report prepared by Mr Corfe as at 31 January 2006 and that there were several items of expenditure requiring clarification. Mr Dickson’s and Mr Issakidis’ difficulties in identifying and evaluating the true nature of the indebtedness and the creditors of Neumedix is apparent from their affidavits which were not the subject of challenge.
Insofar as the court can make decisions about prospective solvency or insolvency for the purposes of s 95A it can look to the past and in doing so a history of support by IIA for Neumedix emerges. IIA’s directors have concluded that they wish to continue to support the further development of Megabac through Neumedix. There may be other battles ahead over the intellectual property but that is not an issue for this application. I conclude that Dr Reynolds’s conduct as CEO did not reveal the extent of Neumedix’s indebtedness and he did not, either himself or by instructions to UAS, keep IIA informed of the need for further working capital. In part this may have been due to Dr Reynolds’ undisclosed personal drawings from Neumedix’s funds about which I merely make findings for the purpose of the insolvency proceedings. Neumedix, on the material which I accept, is able to pay its debts as and when they fall due with the support of its funder, IIA.
After the hearing counsel made detailed submissions about tender insofar as the cheque to Estendart from Neumedix was returned. Neumedix demonstrated a continued readiness to pay the debt. There was evidence that the cheque would be honoured on presentation. Ms Easton from Estendart admitted in cross- examination that if the amount was paid to Estendart it would be accepted in satisfaction of the debt then due and payable to it. This is not a case about tender and satisfaction. The purpose of the offer of the cheque was to demonstrate solvency and now the cheque has been accepted, presented and honoured.
The other issue which exercised counsel related to the sufficiency of the evidence about insolvency/solvency and who of the applicant or Neumedix needed to adduce it. It is for the applicant to prove that Neumedix is relevantly insolvent. The court then considers “a mosaic of evidence” as Kirby P (as his Honour then was) described it in Clayton Robard Management Ltd v Siu (1988) 6 ACLC 57 at 59. There is no presumption of insolvency here. Neither is it a case for the application of the rule of proof compendiously described as the doctrine of “scintilla”, Clayton Robard at pp 64-5 and Moller v Bruce-Sanders [1962] QWN 12 per Hanger J at p 26 to which counsel addressed further submissions.
Having reached the conclusion that Neumedix is able to pay its debts, there is no need to discuss the exercise of the general discretion that a company can be wound up even if the court is not persuaded about the debt of the presenting creditor, General Welding and Construction Co (Qld) Pty Ltd v International Rigging (Aust) Pty Ltd (1983) 2 Qd R 568; ACP Syme Magazines Pty Ltd v TRI Automotive Components Pty Limited (1997) 74 FCR 372.
The application to wind up Neumedix on insolvency is dismissed.
I will hear submissions as to costs which may be in writing.
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