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…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2022] WASC 175
Decision Date

CaseChat Overview and Summary

The case of Rhodes v My Two Boys (Aust) Pty Ltd involved a dispute where Rhodes, a creditor, sought to have the defendant company wound up on the grounds of insolvency. The defendant company, My Two Boys (Aust) Pty Ltd, contested the claim and presented evidence of its financial position in an attempt to prove solvency. The legal issues before the court included the burden of proof on the defendant to demonstrate solvency and the standard of evidence required to discharge this burden. Specifically, the court needed to determine whether the defendant had provided the 'fullest and best' evidence of its financial position as required by established case law.

In addressing these issues, the court considered the relevant legal principles, particularly focusing on the concept of the 'fullest and best' evidence of a company's financial position. The court examined the origin and application of this standard, referencing previous judgments such as Commonwealth Bank of Australia v Begonia and Leslie v Howship Holdings Pty Ltd. It noted that while Hayne J had suggested that the fullest and best evidence would ordinarily be expected, he did not require it as a strict necessity to displace the presumption of insolvency. The court also took into account the principle from Jones v Dunkel that the process of proving solvency is not a forensic game, and the primary source of information on the solvency of a company must be the company itself.

The court concluded that the defendant company had not provided the 'fullest and best' evidence of its financial position, and that its failure to do so, combined with other factors such as deficiencies in documentation and evidence, was sufficient to uphold the presumption of insolvency. The court found that the company had not met the necessary standard to prove solvency, and therefore upheld the winding-up order against the defendant company.

The final orders of the court were to wind up My Two Boys (Aust) Pty Ltd as insolvent, affirming the creditor's claim. The court emphasized the importance of the defendant company providing comprehensive and verified evidence to counter the presumption of insolvency, highlighting that the process of proving solvency is a serious and critical responsibility that must be met with due diligence.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

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Ratio Decidendi

Legal Principle Established

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.