Tranz Link Chinese Products

[2000] NSWSC 200

CITATION:	Tranz Link Chinese Products [2000] NSWSC 200
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 4704/1999
HEARING DATE(S):	06/03/2000
JUDGMENT DATE:	6 March 2000
PARTIES :	Tranz Link International Pty Limited, Chinese Products Exhibition & Marketing (Aust) Pty Limited
JUDGMENT OF:	Master Macready at 1

COUNSEL :	Mr A P. Coleman for plaintiff Mr L.Y.K. Ma for defendant
SOLICITORS:	Carbone Anderson for plaintiff Ma & Co for defendant
CATCHWORDS:	Corporations Law - Application to wind up in insolvency. - Application dismissed. - No matter of principle.
DECISION:	Paragraph 13

- 1 -

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

MASTER MACREADY

Monday 6 March 2000

4704/99 - TRANZ LINK INTERNATIONAL PTY LTD -V- CHINESE PRODUCTS EXHIBITION & MARKETING (AUSTRALIA) PTY LTD

JUDGMENT

1 MASTER: This is an application to wind up the defendant in insolvency. The company failed to comply with the statutory demand claiming the sum of $31,898.39. In those circumstances the usual statutory presumption of insolvency applies. 2 The defendant company seeks to prove from its accounts that it is solvent. The principles which relate to a matter such as the present and what is necessary were conveniently summarised with reference to authority in Leslie & Anor -v- Howship Holdings 15 ACLC 459. At 465 Sackville J referred to the authorities in these terms:

"As Lindgren J observed in Melbase Corporation Pty Limited v. Segenhoe Limited (1995) 13 ACLC 823; (1995) 17 ACSR 187 (FCA/Lindgren J), at ACLC 832;
ACSR 198, s 95A(1) of the Corporations Law states a 'cash flow test' rather than a 'balance sheet test of insolvency'. It follows that the mere fact that the company's assets exceeds its liabilities does not establish solvency. In Re Bond Corporation Holdings Ltd (1990) 8 ACLC 153; (1990) 1 ACSR 350 (S Ct WA/Ipp J), at ACLC 160; ACSR 358, Ipp J quoted the following passage from Buckley on the Companies Act (13th ed, 1957), at 60 (cited by Plowman J in Re Tweeds Garages Ltd [1962] Ch 406, at 410), on the question of commercial insolvency:

'... that is, the company being able to
meet current demands upon it. In such a
case it is useless to say that if its
assets are realised there will be ample
to pay 20 shillings in the pound; this
is not the test. A company may be at
the same time insolvent and wealthy. It
may have wealth locked in investments
not presently realisable; but although
this be so, yet if it have not assets
available to meet its current liabilities,
it is commercially insolvent and may be
wound up.'

Professor Goode points out that the rationale for this approach is that creditors should not be expected to wait while the company realises assets, some of which may not be held in a form which can be readily liquidated: R M Goode, Principles of Corporate Insolvency Law (1990), at 26-27.
The adoption of a cash flow test does not mean that the extent of the company's assets are irrelevant to the inquiry. The approach to be taken was explained by Barwick CJ (with whom McTiernan and Windeyer JJ agreed) in Sandell v. Porter (1966) 115 CLR 666, at 671:
'Insolvency is expressed in s 95 [of the
Bankruptcy Act 1924 (Cth)] as an inability
to pay debts as they fall due out of the
debtor's own money. But the debtor's own
moneys are not limited to his cash
resources immediately available. They
extend to moneys which he can procure by
realisation by sale or by mortgage or
pledge of his assets within a relatively
short time - relative to the nature and
amount of the debts and to the
circumstances, including the nature of
the business, of the debtors. The
conclusion of insolvency ought to be
clear from a consideration of the debtor's
financial position in its entirety and
generally speaking ought not be drawn
simply from evidence of a temporary lack
of liquidity. It is the debtor's
inability, utilising such cash resources
as he has or can demand through the use of
his assets, to meet his debts as they fall
due which indicates insolvency.'

The question of fact, as to whether a company is unable to pay its debts as they fall due, is to be decided as a matter of commercial reality in all the circumstances: Taylor v. Australia and New Zealand Banking Group Limited (1988) 6 ACLC 808
(S Ct Vic/McGarvie J), at 811. Accordingly, the resources of the company requiring consideration include the credit resources in the sense of the terms of the credit available to it: Taylor v. ANZ Bank, at 812; Re Newark Pty Ltd (in liq); Taylor v. Carroll (1991) 9 ACLC 1592; [1993] 1 QdR 409 (S Ct Qld/FC), at ACLC 1595-1596; Qd R 413-414, per Thomas J."

3   In the present case the company is a new one and first commenced trading during the year ended 30 June 1999. Its accounts for that year have been sworn to by an accountant and there have also been prepared a full set of accounts up to 30 November 1999. Those accounts have been audited by Mr Ford, a chartered accountant, who has substantial experience in auditing and he has attached to it his independent audit report which includes references to his procedure, including examination on a test basis, all evidence supporting the amounts and other disclosure in the financial report and the evaluation of significant accounting estimates. There was further evidence about the actual tests but I will come back to that. 4   If one looks firstly at the trading history of the company, it is clear that the first year's trading was at a loss. For the year ended 30 June 1999 the company made a trading loss of $156,576. In the period 1 July 1999 to 30 November 1999 there was a substantial turn around and the actual profit for that period was $240,767. Importantly, the turn around has been maintained as the director of the company has sworn to the company's management accounts dealing with the profit and loss statement for December 1999 and January 2000 resulting in a profit for December 1999 of $11,572.69 and profit for January 2000 of $40,823.54. 5   This seems to indicate that the company is continuing to trade profitably and now has got over what might be its start up problems in the first year. If one looks at this cash position there is evidence that as at 30 November 1999 it had cash of $2826 in the bank and there is no evidence of it having any access to sums to be borrowed. It is important to have a look at the balance sheet at least to understand what is the current asset situation and the non-current asset situation. 6   Dealing firstly with current assets and liabilities at 30 November 1999, there are total current assets of $345,614. This sum is represented by trading stock amounting to $221,282, investments $3115, receivables $118,289 and the cash I have referred to of $2826. 7   If one looks at current liabilities there are only two. The first is trade debtors $20,847 and the second is a provision for income tax liability $30,992. So far as the non-current assets are concerned, these are property, plant and equipment and some intangibles totalling $52,803. The non-current liabilities are $294,359 and comprises a loan to a director. In effect, it is the means whereby the company has been funded over its start-up period. 8   If one looks at the current liabilities it is obviously apparent that receivables are important. The evidence is that the auditor did do tests in respect of receivables, including checking the accuracy of them with the companies who owed the amounts. He also estimated that approximately seventy per cent of them would be paid in the ordinary current terms as a result of his sampling. The question is, of course, whether the company can meet its debts. 9   As far as the current debts are concerned, it is perfectly obvious that there is a substantial surplus of receivables over trade debtors, plus the amount of the present debt which I presume is not included in the accounts. There is also the evidence given by a director that he has been punctual in paying expenses incurred in the course of the business during December and January and also in February. The February accounts are not yet finalised. 10   As far as the non-current debts are concerned, they are a debt due to a shareholder or director and probably given their position as having been shown in the accounts as non-current, are not repayable for at least a year. 11   If one looks at what might happen in the event that the company were to cease trading, clearly there is substantial stock on hand and that could be realised to meet the shareholders' debt; but the probability more likely is that the company is now demonstrating a profitable trading history and it will continue on, therefore if an appropriate demand were made in due course it could be met either by the sale of remaining stock or from profits. 12   There is a substantial difference between the amount of current liabilities and the non-current liabilities and in my view, using a reasonably practical commercial test, it seems apparent at this stage, given its trading history and the evidence of actually paying its current debts, that the company is able to pay debts as they fall due. It is therefore solvent.

13   Accordingly, I dismiss the summons and order the plaintiff to pay the defendant's costs.

oOo

Last Modified: 09/25/2000