Visa Australia Pty Ltd v Austsong Trading Pty Ltd

[2007] NSWSC 494

CITATION:	Visa Australia Pty Ltd v Austsong Trading Pty Ltd [2007] NSWSC 494
HEARING DATE(S):	07/05/07
JUDGMENT DATE :	7 May 2007
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	White J
EX TEMPORE JUDGMENT DATE:	7 May 2007
DECISION:	Order that the interlocutory process filed on 24 April 2007 be dismissed with costs.
CATCHWORDS:	CORPORATIONS – Winding up – Application for stay or termination – Whether court should order stay or termination – Where company’s liabilities exceed its assets – Interests to be considered – Future creditors – Public interest – Application dismissed – (CTH) Corporations Act 2001 s 482
LEGISLATION CITED:	Corporations Act 2001 (Cth)
CASES CITED:	Re Nature Springs Pty Limited (in liq) (1994) 13 ACSR 50
PARTIES:	Visa Australia Pty Ltd v Austsong Trading Pty Ltd
FILE NUMBER(S):	SC 1644/07
COUNSEL:	Plaintiff: S F Hughes Defendant: J P Redmond
SOLICITORS:	Plaintiff: Legal Recovery Solutions Defendant: Sewell Lawyers

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

WHITE J

Monday, 7 May 2007

1644/07 Visa Australia Pty Ltd v Austsong Trading Pty Ltd

JUDGMENT

1 HIS HONOUR: This is an application under s 482 of the Corporations Act 2001 (Cth) for an order staying or terminating the winding-up of the defendant. The defendant was wound up on the application of Visa Australia Pty Limited on 30 March 2007. It was wound up in insolvency, having failed to satisfy a statutory demand claiming an amount of $4,114.60.

2 A director of the defendant, Mr Ze Song Ye, deposed that he received the creditor’s statutory demand for payment and the originating process for winding-up. He said that he had no idea that these documents could be used to wind up the company and that he thought he would have an opportunity to dispute the amount that the plaintiff claimed. It is clear from his affidavit that he considered that the plaintiff, Visa Australia Pty Limited, was entitled to claim $3,517.80. He deposed that he believed that the court would send him a letter to inform him of the hearing date.

3 It was plain from the face of the creditor’s statutory demand, that if the demand was not complied with, an application could be made to wind up the company in insolvency. No explanation was given as to why the company did not pay at least the admitted amount of the debt of $3,517.80.

4 It was plain from the face of the originating process that an application had been made to wind up the defendant in insolvency and that the matter was set down for hearing on 30 March 2007.

5 The evidence of the company's director in this regard gives the Court no confidence in the company's ability to deal properly with future creditors.

6 Mr Ye deposed that the company had made a profit for each year it had traded. Its financial statements for the financial years ended 2005 and 2006 show that it made a gross profit in those years of $64,181 and $122,008 respectively. However, after taking into account expenses, it made an operating loss before tax of $40,533 in 2005 and $9,658 in 2006. Again, the evidence of the director in his affidavit does not instil confidence in his understanding of the company's financial position.

7 The company's balance sheet as at 30 June 2006 showed that it had assets as at that date of $338,173, represented by current assets of $279,943 and non-current assets of $58,230. The current assets included stock on hand at cost of $220,000. Its balance sheet showed that it had current liabilities of $339,734, including loans from directors described as being “at call” in the amount of $319,240. It had other long-term liabilities pursuant to a lease commitment of $48,430, leaving a deficiency in net assets of $49,991.

8 The accountant for the defendants’ business, a Mr Neil Sprainger, deposed that he had made an error in listing the directors’ loan as a current liability because he said, "This can only be realised on the sale of the business and was not due and payable by the defendant”. He said he believed that it was a non-current liability. This contention is hardly consistent with the loan being at call, as described in the balance sheet.

9 The liquidator, Mr Condon, has annexed to his affidavit the directors’ report as to affairs prepared as at 5 April 2007. It discloses that the company's assets total merely $112,020, represented by $12,000 as cash at bank and $100,000 of stock. In his affidavit, Mr Condon said that the company appeared to have assets of $112,020 in the form of the bathroom product stock. It is clear from his affidavit that in saying this, he was extrapolating figures from the report as to affairs. Accordingly, the value of the company's stock would appear to have fallen from a figure at cost of $220,000 as at 30 June 2006 to $100,000 as at 5 April 2007.

10 The report as to affairs discloses no amount for debtors. The value for cash of $12,000 was some $9,445 less than the cash at bank disclosed in the balance sheet as at 30 June 2006. One can only wonder what has happened to the company’s stock between 30 June and 5 April.

11 The report as to affairs disclosed liabilities of only $10,000 compared with the balance sheet as at 30 June 2006 showing total liabilities of $388,164. Not only was the directors’ liability not included in the report as to affairs, nor was the liability described in the balance sheet as at 30 June 2006 of $48,430 for “lease commitment” and a current liability of $10,027 for "lease commitment".

12 Mr Ye deposes that since the liquidation of the company, he and the other director, Li E Chen, have ensured that the "owner of the shop has been paid all rent and outgoings". I take this to mean that further loans have been made by the directors to meet the company's liabilities under a lease.

13 There is no proposal before the Court for the loans from the directors to be capitalised. The directors have proffered an undertaking to personally pay the reasonable costs of the liquidator and to meet the company's debts. There is unsatisfactory evidence as to the amount required to be paid for the expenses of the liquidator. The liquidator deposed in his affidavit that $15,000 had been transferred into his trust account from the company's bank account and that he believed that that amount would be sufficient to meet all known non-related party liabilities currently due and payable, including his professional costs and disbursements.

14 There was some hearsay evidence that his costs would be $10,000 plus GST. The amount of cash presently held would be just sufficient to meet that amount of costs, together with the debt owed to the plaintiff. It would not be enough to meet the plaintiff's entitlement to costs of the winding-up application. The plaintiff's solicitors claim the sum of just under $8,500 for that application.

15 However, the principal concern is that if the winding-up is terminated, the company will be allowed to resume trading with a very large debt of well in excess of $300,000 owed by the company to its directors. Even if the debt is treated as a non-current liability, there is still a potential for prejudice to future creditors if the company is allowed to resume trading where the company's assets are insufficient to meet its existing liabilities. In other words, future creditors could be required to prove in competition with the debt owed to the directors.

16 In Re Nature Springs Pty Limited (in liq) (1994) 13 ACSR 50, McLelland CJ in Eq said (at 51-52):

“It is a long established principle that it is contrary to the public interest to terminate the winding up of a company if after the termination the company would remain insolvent in the sense that its liabilities will substantially exceed its assets even if there is a contractual subordination of all existing debts to future debts.”

17 In this case, there is no proposal for a subordination of existing debts to future debts. But even if there were, the cases make clear that such a proposal is generally insufficient to warrant the termination of a winding-up where the company's liabilities exceed its assets. In that sense, I am not satisfied that the company is solvent. It is not in the public interest that the winding-up be terminated.

18 I order that the interlocutory process filed on 24 April 2007 be dismissed with costs.

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