Rhodes v My Two Boys (Aust) Pty Ltd
[2022] WASC 175
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: RHODES -v- MY TWO BOYS (AUST) PTY LTD [2022] WASC 175
CORAM: MASTER SANDERSON
HEARD: 11 MAY 2022
DELIVERED : 18 MAY 2022
PUBLISHED : 18 MAY 2022
FILE NO/S: COR 5 of 2022
BETWEEN: DAMIEN TERENCE MICHAEL RHODES
First Plaintiff
ROSS EDWARD CARGEEG
Second Plaintiff
AND
MY TWO BOYS (AUST) PTY LTD
Defendant
FILE NO/S: COR 6 of 2022
BETWEEN: DAMIEN TERENCE MICHAEL RHODES
First Plaintiff
ROSS EDWARD CARGEEG
Second Plaintiff
AND
PMM GROUP PTY LTD
Defendant
Catchwords:
Corporations Law - Application to wind up two companies on presumption of insolvency - Turns on own facts
Legislation:
Corporations Act 2001 (Cth)
Supreme Court (Corporations) (WA) Rules 2004 (WA)
Result:
Both companies wound up
Category: B
Representation:
COR 5 of 2022
Counsel:
| First Plaintiff | : | CS Gough |
| Second Plaintiff | : | CS Gough |
| Defendant | : | CS Williams |
| Interested Party | : | L Christensen |
Solicitors:
| First Plaintiff | : | Mills Oakley |
| Second Plaintiff | : | Mills Oakley |
| Defendant | : | Solomon Brothers |
| Interested Party | : | CX Law |
COR 6 of 2022
Counsel:
| First Plaintiff | : | CS Gough |
| Second Plaintiff | : | CS Gough |
| Defendant | : | CS Williams |
Solicitors:
| First Plaintiff | : | Mills Oakley |
| Second Plaintiff | : | Mills Oakley |
| Defendant | : | Solomon Brothers |
Cases referred to in decision:
Coates Hire Operations Pty Ltd v D‑Link Homes Pty Ltd [2011] NSWSC 1279
Lion and Horn Pty Ltd v Slodyczka and Farren Pty Ltd [2022] VSC 19
MASTER SANDERSON:
This was the return of applications by each of the plaintiffs to wind up each of the defendants. The two defendants are closely related. In the case of both the defendants, the plaintiffs sought to wind up the company on the basis of a failure to comply with a statutory demand. In relation to each of the defendants, there was then a presumption of insolvency. In both cases the defendants maintained they were solvent. Further, in both cases the defendants sought leave under s 459S of the Corporations Act 2001 (Cth) to rely on matters which could have been raised on an application to set aside a statutory demand.
In each case the statutory demand was based on a judgment debt of $1,089,901.69. The two defendants were jointly and severally liable for that debt. That was not a matter in issue between the parties. Counsel for the defendants, in his submissions, maintained that if one or other of the defendants was solvent such that it could pay the debt then both companies could be regarded as solvent. He submitted commercial reality supported such a proposition. In fact, the submission was to the effect My Two Boys (Aust) Pty Ltd was solvent even when the judgment debt was included and that was sufficient. It was not necessary to look at the position of the PMM Group Pty Ltd independent of its stable mate. For the purposes of this hearing, I am prepared to accept that position.
In each case, the defendants relied upon three affidavits of Gui Jorge Da Costa Napoleao De Castro. At a directions hearing held 26 April 2022 I ordered that any of the parties could give notice they required a deponent of an affidavit to attend for cross‑examination. The plaintiffs duly gave notice to Mr De Castro. A day or two prior to the hearing, Mr De Castro tested positive for Covid‑19. Not only could he not attend for cross‑examination but his condition was such he could not attend by video link. Clearly the plaintiffs were entitled to an adjournment. Having considered their position, the plaintiffs elected to proceed without cross‑examining Mr De Castro. As I made plain during the course of the hearing, that meant Mr De Castro's evidence was unchallenged and had to be accepted on that basis. Counsel for the plaintiffs indicated he was content with that position.
For the sake of completeness I should also note that on 3 May 2022 I made an order that the Burtenshaw Superannuation Fund be given leave under O 2 r 13 of the Supreme Court (Corporations) (WA) Rules 2004 (WA) to be heard in matter COR 5 of 2022. The application for leave to be heard was supported by an affidavit of Kevin Lee Christensen sworn 29 April 2022. Mr Christensen's evidence was to the effect that Burtenshaw Super Pty Ltd as trustee of the Burtenshaw Superannuation Fund was a secured creditor over property owned by My Two Boys. As such I was satisfied Burtenshaw Super Pty Ltd had a sufficient interest to allow them to participate in the proceedings. It is worth noting Burtenshaw Super Pty Ltd did not apply to be given leave to appear in relation to the PPM Group Pty Ltd. They had no interest in those proceedings.
There was no dispute between the parties as to the applicable legal principles governing the two applications. The starting point is the rebuttable presumption of insolvency consequent upon the failure to comply with the statutory demand. It was common ground it was for the defendants to then establish they were solvent. In Lion and Horn Pty Ltd v Slodyczka and Farren Pty Ltd [2022] VSC 19, Hetyey AsJ summarised the position as follows:
29.In Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd, Weinberg J (as he then was) summarised the following principles governing the assessment of solvency of a debtor company:
·[In the event of non-compliance with a statutory demand], [t]he respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3); Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v Simionato Holdings Pty Ltd. (1997) 15 ACLC 477 per Mansfield J.
·In order to discharge that onus the Court should ordinarily be presented with the 'fullest and best' evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J.
·Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J.
·There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company’s assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (supra); Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (supra) at 465–466.
·The adoption of a cash flow test for solvency does not mean that the extent of the company’s assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (supra) at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J.
·The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (supra) at 466–467.
This case was cited by counsel for the defendants and was taken up by counsel for the plaintiff. Counsel for the defendants did seek to expand upon the second of the points raised by his Honour relating to the 'fullest and best' evidence. He did so by reference to the decision of White J in Coates Hire Operations Pty Ltd v D‑Link Homes Pty Ltd [2011] NSWSC 1279. In particular, counsel referred to [58] to [63]. These paragraphs read as follows:
58 The plaintiff submits that the defendant has not adduced the 'fullest and best' evidence of its financial position and therefore the presumption of insolvency has not been discharged.
59 If the requirement that the onus is only to be discharged if the company presents the 'fullest and best' evidence of its financial position is to be taken literally then the plaintiff is undoubtedly correct. The defendant could have given better evidence of its financial position. Where the solvency of a trading company is in issue there would be few if any cases in which it could not be said that some further piece of evidence in relation to the company's financial position might not have been available. In a large concern the standard, if taken literally, would be practically impossible to meet.
60 The origin of the requirement for the 'fullest and best' evidence of the financial position is the statement of Hayne J in Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081. Hayne J used the expression in describing evidence relied upon by the company that the terms of a loan between it and a related company were that it was only liable to pay the related company such sum as the related company was liable to pay the bank. The only evidence about the arrangement was from a director of the related company who described the effect of the agreement. No document was produced and no evidence was given by the individuals of any conversations that might be said to give rise to such a term if the alleged term were part of an oral contract. Hayne J admitted the evidence of the director and assumed that the effect of the agreement between the companies was as stated. His Honour held that as the related company had no defence to the claim by the bank, the company in question was insolvent because it admitted in those circumstances that it owed the same amount to the related company. Hayne J said (at 1081):
Ordinarily one would expect that on an application of this kind the company would provide the fullest and best possible material in support of its case. Thus one would ordinarily expect that the agreements between Texel and Redlock (for I would assume them to be written and not oral) would be produced in evidence.
61 Hayne J was describing the nature of the evidence one would expect a company to lead in opposition to the application that it be wound up in insolvency. His Honour did not say that only the fullest and best possible evidence of a company's financial position would be sufficient to displace a presumption of insolvency.
62 Another of the cases cited by Weinberg J in the passage set out above is Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459. In that case Sackville J found that the company had displaced the presumption of insolvency arising from its failure to comply with or have set aside a statutory demand. The company had substantial assets that exceeded its liabilities in the form of land holdings held for the purposes of future development and sale. The company did not give the 'fullest and best' evidence of its solvency. An important question was whether a bank facility would be extended. The company failed to call the bank officer responsible for the facility. Sackville J took into account the principle in Jones v Dunkel (1959) 101 CLR 298 in relation to that failure, but concluded nonetheless that it was probable that the facility would be extended (at 474‑475). His Honour also observed that the evidence as to the extent of trade creditors was 'less than satisfactory' (at 475). But in the light of all of the evidence, his Honour concluded that if there were trade creditors not recorded in the balance sheet that was tendered, they would not make a significant difference to the company's solvency at the date of hearing (at 476).
63 In Expile Pty Ltd v Jabbs Excavations Pty Ltd, the Court of Appeal stressed the requirement for 'proper verification' of the company's assets and liabilities (at [16]). The court repeated with approval the observations of Weinberg J set out above and found that in the circumstances of that case there had not been proper verification. In part, this was supported by findings that evidence adduced by the company was not 'the fullest and best' evidence (e.g. para [23]). However, it appears to me that this was a matter of emphasis. The court's conclusion was (at [30]):
Summing up: the respondent's failure to answer the Notice to Produce, and to comply with the judge's direction for production, coupled with the constraints on Mr Billingham contacting third party creditors and leasing companies, judged against the paucity of documentation as to ownership of plant and equipment, plus the deficiencies of the accounts and the lack of hard evidence of realistic borrowing capacity to fund repayment of the true shortterm liabilities, render entirely apposite the observation of Spigelman CJ in Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661 at 674 [55]:
'The process of proving solvency is not some kind of forensic game. Solvency is a matter peculiarly within the knowledge of the company. The primary source of information on the solvency of the company must be the company itself.'
The respondent company failed to provide and verify the information necessary to prove its solvency.
It is convenient to begin with the financial position of My Two Boys. Appearing as attachment GDC‑10 to Mr De Castro's affidavit of 5 May is a balance sheet for My Two Boys. Relevantly it reads as follows:
Date: 03 May 2022
Assets
Real Estate (Lot 104 or 1901, 63 Kishorn Road) 1,695,000
Marketable Securities (PYX Shares) 4,687,500
Investment 1 - in Rehawk Property Unit Trust 1,372,000
Investment 2 - in PMM Group Pty Ltd 1,377,000
Loans to related entity - PMM Group Pty Ltd 305,000
Contents & Jewelry 172,000
Total Assets 9,608,500Liabilities
Lot 104 or 1901, 63 Kishorn Road - La Trobe
Financial 920,267
Real Estate Loan - Burtenshaw
Super (Estimate) 210,000
Other Loan - Morgan Super (Subject to Litigation) 161,000
Other 37,000
Total Liabilities 1,328,267
________
Net Assets 8,280,233
=======A number of points can be made about this balance sheet. First, there is no reference in the liabilities to the debt owed by My Two Boys to the plaintiffs. Second, there are a number of assets included which counsel for the defendants conceded should not be taken into account when totalling up the assets of the company. In particular, the entry for 'marketable securities (PYX shares)', 'investment 2 - in PMM Group Pty Ltd' and 'loans to related entity - PMM Group Pty Ltd' should not be considered. It is unnecessary to detail why this concession was made. It is enough to note that it was made and was properly made. Further, counsel accepted the entry for 'contents and jewellery' was unsupported by any evidence and should be disregarded. That meant there were only two assets to be considered - the real estate at 63 Kishorn Road and 'investment 1 - in Rehawk Property Unit Trust'.
On that basis, the total assets shown on the balance sheet which could be considered for the purposes of solvency amounted to $3,067,000. Against that there was the loan owing to Latrobe Financial of $920,267 and the loan owing to Burtenshaw Super. Although the amount of that liability is shown in the balance sheet as $210,000, in fact a notice of demand attached to Mr Christensen's affidavit showed an outstanding debt of $482,826. Counsel for the defendants accepted that was indeed the amount outstanding. Counsel maintained there was a dispute as to the amount, if any, owing to Morgan Super. That alleged debt had been the subject of a statutory demand which was set aside. For present purposes, I am prepared to put that debt to one side. That means the balance sheet discloses liabilities of just under $1,603,000. It was the defendants' position it had an excess of assets over liabilities even taking into account the debt owed to the plaintiffs. On that basis it was submitted the company was solvent and ought not be wound up.
There is an obvious difficulty with that submission. Neither of the two assets relied upon by the defendants is readily realisable. The property at Kishorn Road is not on the market and there is no indication when it might be put on the market. In fact it is subject to a tenancy agreement, with Mr De Castro as the tenant, for a 12 month period ending in May 2023. Further, the tenancy agreement gives to Mr De Castro a first right of refusal of the property. In no way could it be said that the property is available for sale and the cash generated by the sale with sustain the company.
Sofar as the units in the Rehawk Property Unit Trust are concerned, these are the subject of a sale agreement. Attachment GDC‑26 to Mr De Castro's affidavit is a copy of the sale agreement. It shows KPT Watson Pty Ltd as the purchaser. The agreement shows the units are to be purchase in four tranches. The first tranche settles on 31 August 2022 and My Two Boys will receive $343,125. The second tranche settles on 30 November 2022 and My Two Boys receives $406,875. There are two further payments to be made on 28 February 2023 and 31 May 2023 totalling $622,500. Given there is no suggestion this agreement is not binding on the parties to the agreement, it cannot be said that My Two Boys at present can realise any value for the units. Put another way, it cannot be suggested the units can be sold to provide cash to My Two Boys as at today's date.
The plaintiffs disputed there was any evidence available to My Two Boys to establish the value of the Kishorn Road property. In his affidavit, Mr De Castro exhibited certain documents which he said justified the value put on the property in the balance sheet. Even allowing for some modification of the requirement to provide the 'fullest and best' evidence, what was relied upon by the company fell well short of what was reasonable. Taken at its highest, what was established was that there was a nearby property which Mr De Castro thought was comparable with the property owned by My Two Boys which was for sale at a price equivalent to that appearing in the balance sheet. If a value in the balance sheet was supported by a valuation from an appropriately qualified valuer then there could be no complaint by the plaintiffs. If the plaintiffs had sought to criticise the value on the basis of methodology employed by the valuer, that may well be an example of going too far. That, I think, is what White J had in mind. But by any measure the purported valuation here was inadequate.
That then leads to the question as to whether the defendants should be granted leave to rely on s 459S of the Corporations Act. That section reads as follows:
459SCompany may not oppose application on certain grounds
(1)In so far as an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand, the company may not, without the leave of the Court, oppose the application on a ground:
(a)that the company relied on for the purposes of an application by it for the demand to be set aside; or
(b)that the company could have so relied on, but did not so rely on (whether it made such an application or not).
(2)The Court is not to grant leave under subsection (1) unless it is satisfied that the ground is material to proving that the company is solvent.
Over time there has been some judicial disagreement as to precisely how s 459S is to operate. But there was no dispute for the purposes of this application. The position of the parties was that the defendants required leave to oppose the winding up application on the grounds the defendants had an off‑setting claim because it would have been open to the defendants to raise that off‑setting claim in an application to set aside the statutory demands. Counsel for the defendants went to some lengths to explain the application to set aside the demands was not made because of a failing on the part of the defendants' former solicitor. Without assigning any fault to those solicitors and for the purposes of this application, I am prepared to accept that is the case.
The position of the defendants can be summarised in this way. On 23 July 2021 the present plaintiffs issued proceedings in this court against Mr De Castro and the two present defendants. For present purposes the precise nature of that claim is not relevant. What is relevant is that on 27 July 2021 Hill J made freezing orders against Mr De Castro and related corporate entities in relation to assets up to $750,000. To obtain the freezing order, the plaintiffs provided the usual undertaking as to damages. The parties then entered into settlement negotiations and compromised the claim by way of a deed of settlement and release. When the defendants did not perform their obligations under the deed, the plaintiffs sought and were granted summary judgment by Hill J. That is how the debt, the subject of the statutory demand arose. The defendants now say as a consequence of the freezing order they suffered loss and damage which would give rise to an off‑setting claim as that expression is used in s 459G.
It must be open to doubt whether at law, an off‑setting claim could arise in these circumstances. Justice Hill found on an ex parte application there were grounds for making a freezing order. Subsequently, the parties settled their differences and entered into a deed of settlement. Summary judgment was obtained in relation to that deed. Any issue of set‑off or counterclaim the defendants may have had could have been ventilated in the summary judgment proceedings. Counsel for the plaintiffs raised this issue in his submissions and in my view it is unanswerable.
But even assuming in the circumstances an off‑setting claim could arise, the evidence provided by Mr De Castro falls well short of establishing such a claim. The evidence to be relied on is found in pars 23 through to 43 of an affidavit which Mr De Castro swore and which was intended to support an application to set aside the statutory demand. A copy of that affidavit is found as attachment GDC‑3 to the affidavit of Mr De Castro sworn 21 February 2022. It is true Mr De Castro sets out the way in which the freezing order impacted upon his business. But he gives no detail at all as to how any off‑setting claim would be calculated. All Mr De Castro says (at par 43 of the affidavit) is that the off‑setting claim would be more than $6,000,000. It is well‑established in setting up an off‑setting claim a party does not have to quantify any claim with precision. In the 21 days available to make an application that will generally not be possible. But some detail must be provided as to how the off‑setting claim is calculated. In this case, Mr De Castro could have provided further detail because he had plenty of time to do so. The scant information available is simply not sufficient to allow any potential off‑setting claim to be quantified.
In the circumstances, I would not grant leave to rely on matters which could have been raised by the defendants in any application to set aside a statutory demand and the application will be dismissed.
It is appropriate in conclusion to stand back and consider the position adopted by the defendants. They were sued by the plaintiffs in this court and Hill J was satisfied a freezing order was appropriate. The defendants then compromised the claim against them and failed to honour the settlement agreement. Summary judgment was entered. The defendants made no efforts at all to pay what was owing under the judgment. They were served with statutory demands and a presumption of insolvency arose. Still they made no effort to pay what they owed to the plaintiffs. Instead, they relied on a dubious balance sheet drawn on behalf of My Two Boys which did not even record the plaintiffs as creditors. They have no answer to the plaintiffs' claim and they are indebted to Burtenshaw Super Pty Ltd with, it seems, no prospect of paying that debt. Both companies are clearly insolvent. They should be wound up.
On publication of these reasons, the parties should confer as to the form of orders. Clearly, costs should follow the event. If no agreement can be reached within seven days the parties should each file a minute of proposed orders.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
MM
Associate
18 MAY 2022
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