Reported Decision : (2000) 18 ACLC 343 New South Wales Supreme Court CITATION : Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWSC 222 revised - 4/04/2000 CURRENT JURISDICTION: Supreme Court FILE NUMBER(S) : SC 3407/99 HEARING DATE(S) : 17 March 2000 JUDGMENT DATE : 27 March 2000 PARTIES : Switz Pty Ltd v Glowbind Pty Ltd JUDGMENT OF : Hodgson CJinEq at 1 COUNSEL : P - Mr B Coles QC & Mr R Newlinds D - Mr M Walton SC SOLICITORS : P - Clayton Utz D - PricewaterhouseCooperLegal CATCHWORDS : Corporations - Winding up - Insolvency - Cash flow test - Whether can infer solvency from surplus of current assets over current liabilities - Whether is mere temporary illiquidity where debts could be paid by sale of assets. LEGISLATION CITED : Corporations Law ss 95A, 459A, 459C, 459P Leslie Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 466 Sandell v Porter (1966) 115 CLR 666 at 670-1 Hi Mix Concrete Pty Ltd v Garrethy (1977) 2 ACLR 559 at 566 Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 811 CASES CITED : Ogilvie v Adams (1981 VR 1041 ex parte Russell (1882) 19 CH D 588 at 601 re Timbatec Pty Ltd (1974) 24 FLR 30 at 36-7 Rees v Bank of NSW (1964) 111 CLR 210 at 218 Brimaud v Honeysett Instant Print Pty Ltd (McLelland J SC of NSW 19/9/88) DECISION : See pae 50 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORAM: HODGSON CJ IN EQ Monday, 27 March 2000 No 3407/99: SWITZ PTY LTD -V- GLOWBIND PTY LTD JUDGMENT 1 I am dealing with the final hearing of a summons brought by Switz Pty Ltd to wind up Glowbind Pty Ltd, filed on 2 August 1999. 2 The history of the matter is dealt with in judgments previously given in these proceedings by Austin J (24.12.99), myself (25.2.00 and 10.3.00) and the Court of Appeal (10.3.00). I will be brief in outlining facts relevant to the question before me. 3 On 25 May 1999, Switz served on Glowbind a statutory demand under s.459E of the Corporations Law, requiring the payment or securing or compounding of a debt of $1.3 million within 21 days. The Company did not comply with the requirements of that demand within 7 days after an application to set it aside was disposed of. 4 The formalities required for the winding up of Glowbind have been proved, so that the only issue before me is whether it is proved that the Company is not insolvent. 5 Section 95A(1) of the Corporations Law provides that "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." Section 95A(2) provides that "A person who is not solvent is insolvent." Section 459A provides that "On an application under s.459P, the Court may order that an insolvent company be wound up in insolvency." Section 459P provides that a creditor "may apply to the Court for a company to be wound up in insolvency". Section 459C (2)(a) provides that "The Court must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made..the company failed..to comply with a statutory demand". Section 459C(3) provides: A presumption for which this section provides operates except so far as the contrary is proved for the purposes of the application." 6 It is common ground between the parties that the relevant date at which the question of solvency should be determined is the date of the hearing: cf Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 466. EVIDENCE 7 The defendant's evidence included a report by an accountant, Mr de Vries, giving an opinion as to the Company's position as at 20 August 1999, and also a further report responding to the plaintiff's expert accountant, Mr Sherman. There was also in evidence the Company's accounts for the year ended 30 June 1999, and other financial documents on which the report was partly based which, according to a director Tony Takchi, were maintained by the Company in the course of its business. An external accountant, Mr Bartucciotto, gave evidence that the draft accounts for the 30 June 1999 provided a true and accurate account of the Company's financial circumstances. In his affidavit of 28 September 1999, Mr Bartucciotto also said that no proceedings, apart from the present, have been instituted or are pending against the Company. 8 There were a number of affidavits from family members and from directors of associated companies, stating willingness to provide loans to the Company, up to a total of $1.8 million. However, there was no evidence of the capacity of these persons or companies to provide the loans in question, other than the circumstance that some of them had provided loans in the past. 9 The defendant relied on a valuation of the Company's principal asset, namely a property at Erskineville, supporting a value of $2.8 million. One matter which the Company needs to attend to promptly, if it is to proceed with a proposed development of the land, is to have it decontaminated; and the Company relied on a quote for that decontamination of $62,800. There was also evidence that development of this property had commenced, and that contracts had been exchanged on some of the units which were to be constructed on the property. 10 Finally, in answer to a suggestion made by Mr Sherman that the Company must have a further liability of $684,000 from its purchase of the Erskineville property, there was evidence to the effect that the purchase had given rise to no more than the liabilities shown in the Company accounts. 11 For its part, apart from formalities, the plaintiff relied on valuation evidence and the evidence of an accounting expert Mr Sherman. 12 The plaintiff's valuer put a value on the property of $2.3 million to $2.4 million, with a number of qualifications. The plaintiff's valuer suggested that there now appeared to be a market softening, associated with rising interest rates and the prospect of the GST, which led him to suggest a reduced value of between $1.95 million and $2.175 million. He also considered the value of the property in the event of a forced sale. He expressed the opinion that on a forced sale, with development consent, the property was worth $1.7 million to $1.9 million, and without development consent, between $1.1 million and $1.35 million. 13 I turn now to look in a little more detail at the evidence from the accountants. 14 Mr de Vries' evidence was to the effect that, based on the draft accounts for the year ended 30 June 1999, the Company's current assets as at 20 August 1999 were $2,263,391. This figure included the Erskineville property at $1,561,668, and other properties held for sale at $641,403. The current liabilities were $1,094,392. However, Mr de Vries noted that the true value of the Erskineville property was about $2,700,000 and, on the basis of estimates of the value of a Lakemba property, the true value of the other properties held for sale by the Company was about $1,015,501. With those adjustments, the net current assets were $2,561,705. However, that figure was arrived at without regard to the $1.3 million which, by reason of s.459S of the Corporations Law, I must accept has been due and payable to the plaintiff since prior to the commencement of these proceedings. 15 Mr de Vries also provided a cash flow analysis. This analysis showed a balance of cash available to the Company right through from September 1999 to September 2000; but without taking account of the $1.3 million debt. If the $1.3 million debt was taken account of and treated as immediately payable, this cash flow would in fact show a substantial deficiency of cash until September 2000. 16 Mr de Vries' evidence in reply responded to evidence from Mr Sherman, to which I will come. In effect, this reply supported adjustments to a balance sheet prepared by Mr Sherman, in particular reducing current liabilities by removing an additional liability suggested by Mr Sherman of $684,000, and reducing by $468,000 the provision for taxation, and by $230,000 the provision for decontamination expenses. The result of those adjustments was to produce net current assets of about $1,000,000, after taking into account $1.3 million owing to the plaintiff. 17 Mr Sherman's initial report supported a deficiency of current assets of $257,143, after taking into account liabilities including a provision for taxation of $620,435, decontamination expenses of $300,000 and an additional liability of $684,000. It included as a current asset the Lakemba property, at a figure of $648,000; but did not include as a current liability an amount of $319,547 secured on that property to CBA. 18 This report also dealt with cash flow, supporting a cash flow deficiency for August and September 1999, which would be relieved only by a postulated receipt in October 1999 of $2.88 million in respect of the sale of the Erskineville property. The cash flow deficiency indicated in August and September 1999 was mainly due to the $1.3 million immediately payable to the plaintiff. 19 Mr Sherman put on a further report in reply to Mr de Vries' reply, in which he adjusted the current liabilities by leaving out the additional liability of $684,000 and the provision for taxation of $620,435, in which the liability for decontamination was reduced to $62,800. Mr Sherman then showed two balance sheets: one, as at 2 August 1999, gave a valuation of $2.925 million to the Erskineville property, and showed net current assets of $1,329,492; and the other balance sheet, as at 16 March 2000, adopted a valuation of $1,657,500 for the Erskineville property, and showed net current assets of $61,992. 20 This report also showed a cash flow, indicating a deficiency in March and April 2000, mainly due to the plaintiff's $1.3 million debt, but ending with a postulated receipt in May of $1,657,500 arising from the sale of the Erskineville property. SUBMISSIONS 21 Mr Walton SC for the defendant accepted that the onus lay on the Company to prove that it was able to pay its debts as they fell due. However, he submitted that an absence of cash resources was not conclusive on this point: if the Company was able to raise funds in a relatively short time to meet its short term liabilities, this would be sufficient: see Sandell v Porter (1966) 115 CLR 666 at 670-1. For example, if the Company had cash on 24 hour call, clearly it would not be insolvent merely because the debt covered by this cash was payable immediately. He referred me also to Hi Mix Concrete Pty Ltd v Garrethy (1977) 2 ACLR 559 at 566, for the proposition that temporary lack of liquidity was not insolvency. In general, he submitted that where a company was otherwise in a healthy condition, short term inability to pay a debt should not prevent a finding of solvency. 22 Mr Walton pointed to the surplus in current assets supported by Mr de Vries as at 30 August 1999 of $2.56 million. He submitted that Mr Sherman reached his very small surplus of just over $60,000 only by taking $1.7 million as the value of the Erskineville property, which was the lowest value conceivable. At worst, there was a short term cash deficiency, because it would take until about May to realise this property. 23 Mr Walton submitted that the various persons expressing willingness to lend money had not been cross examined. When this Company had to come up with $1.2 million in December 1998 to pay the purchase price of the Erskineville property, it did so readily by finding money from a number of sources. The Company has been trading very many years, apparently profitably. The people who stand behind the Company have done so over a number of years, and express themselves to be willing to do so again. Mr Walton submitted that those factors, plus the lack of evidence to the contrary, demonstrated access to cash resources of $1.8 million, which was required merely to overcome a short term cash flow deficiency. 24 Mr Coles QC for the plaintiff submitted that the statutory presumption of continuing insolvency had not been rebutted. He submitted that s.95A of the Law required a cash flow rather than a balance sheet approach to the problem: see Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 465-6; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 811. 25 He pointed out that the current liabilities of the Company included over $800,000 owing to associated companies and persons, and there was no evidence that this money was not immediately due and payable. As shown by Ogilvie v Adams (1981) VR 1041, prima facie such loans would be immediately payable, without demand. 26 There was no evidence from directors of the Company as to the current activities of the Company, or the current payment of debts by the Company. The only evidence supporting solvency, namely that of Mr de Vries, was in any event too old. Only one director had given evidence, and his evidence only related to the accounts for the year ended 30 June 1999. The Company was incurring debts (construction had commenced on the Erskineville property) yet there was no evidence about debts being incurred in this process. There was not even any evidence how the Company would pay for the remediation work dealt with in the evidence. 27 Whereas Sandell v Porter dealt with the situation where there was an onus to prove insolvency, in this case the onus was on the Company to prove solvency. That case was not assisted by any uncertainties concerning the valuation of the Erskineville property. 28 Next, Mr Coles submitted that, treating the real estate owned by the Company as its stock-in-trade, that stock-in-trade was not an asset available to be realised to meet current debts, except in the ordinary course of the Company's business: see ex parte Russell (1882) 19 Ch D 588 at 601; re Timbatec Pty Ltd (1974) 24 FLR 30 at 36-7; Rees v Bank of NSW (1964) 111 CLR 210 at 218. An immediate sale of the Erskineville property would not be a sale in the ordinary course of business: plainly, the ordinary course of business contemplated the completion of the development and the carrying out of contracts for the sale of units which had already been entered into. However, even if the immediate sale of the land were contemplated, the Court could not infer that the proceeds of such a sale would be received in anything less than about three months; and no case had ever suggested that three months to pay an immediate debt of $1.3 million is only a temporary illiquidity. 29 Finally, I should note two applications made by the Company. 30 First, at the beginning of the hearing, and also at the end, Mr Walton applied for me to entertain a further application under s.459S. Such an application had been brought before Austin J and dismissed. On 20 February 2000, I had made a decision which would have had the substantial effect of reversing that decision; and on the 10 March 2000, the Court of Appeal dismissed an appeal from Austin J's decision and allowed an appeal from my decision. However, Mr Walton submitted that there was a material change of circumstances since the Court of Appeal decision, namely the service of additional material from Mr Sherman and Mr Howes (the plaintiff's valuer) which would justify the Court hearing a further application under s.459S. 31 Second, some days after I had reserved my decision, Mr Walton applied to reopen the Company's case to read an affidavit by a Mr Fayad asserting willingness to lend the Company $1.3 million. 32 I propose to give reasons for my decision on the question of insolvency, and then I will deal with these applications. DECISION ON INSOLVENCY 33 There is force in Mr Coles' submissions that the absence of evidence concerning the current position in relation to the payment of accruing liabilities (wages, group tax, trade creditors, as well as liabilities arising from construction work on the Erskineville site) and concerning the debts owing to related companies and persons, is fatal to the defendant's case. 34 However, it may still be that inferences are open from what is proved about the current assets and current liabilities of the Company, which could nevertheless establish solvency. Accordingly, I will consider what has been proved about those matters. 35 A convenient starting point is the balance sheet suggested by Mr Sherman, in his evidence in reply, as at 16 March 2000. In my opinion, in putting the value of the Erskineville property at $1.7 million he has put it too low; and in my opinion, a reasonable value to put on this property is about $2.5 million. This would increase the current assets by about $800,000. However, I note that the Lakemba property is included in current assets as $648,000, yet the sum of $320,000 secured on that property is included in non-current liabilities rather than current liabilities. In my opinion, this Lakemba property should be in current assets at a net figure of $328,000, because that is the amount which will be realised when the property is sold. This means that the net current assets should be adjusted upwards by about $480,000, giving a net figure of around $540,000. 36 I note that much the same position is reached from Mr de Vries' final balance sheet, if one reduces the Lakemba property by around $320,000 and the Erskineville property by around $200,000. 37 Although s.95A does set a cash flow test, it is conceivable that solvency might be inferred from such a preponderance of current assets over current liabilities. 38 However, in my opinion an insuperable obstacle to this approach is the debt of $1.3 million to the plaintiff, which must be considered as payable immediately; and the circumstance that there are no assets from which this money can be paid except the Erskineville property. There is no evidence, or even suggestion, that $1.3 million could be borrowed on the security of this property. The willingness of family members and associated companies to lend $1.8 million is plainly insufficient, where there is no evidence that they have the means to do so. 39 Even if the Erskineville property were put on the market immediately, there is no evidence as to when it could be sold and when the proceeds of sale could be expected; and I could not use judicial notice to come to a conclusion that the proceeds of sale could be received any earlier than about three months from now. Furthermore, as submitted by Mr Coles, this is not in fact intended, and would be inconsistent with the course actually being undertaken of developing the site and selling units from the completed development. Plainly, that process will take much longer than three months: again there is no evidence, but I could not take judicial notice that the proceeds of that process would be available any earlier than about one year from now. Again, as submitted by Mr Coles, the immediate sale of the property would be akin to the realisation of stock-in-trade otherwise than in the ordinary course of business, as discussed in the cases of Russell, Timbatec and Reese. 40 In my opinion, that situation cannot be regarded as a mere temporary lack of liquidity. In my opinion, subject to Mr Walton's applications, the Company is unable to pay all its debts as and when they become due and payable: certainly, the Company has not proved the contrary. MR WALTON'S APPLICATIONS 41 In relation to his first application, Mr Walton contended that, whereas prior to the service of Mr Sherman's and Mr Howes' evidence in reply, the Company proceeded on the basis that there was no dispute that the Erskineville land was worth in the order of $2.7 or $2.8 million, that evidence for the first time raised the possibility that it was worth only about $1.7 million or perhaps even less. That was a change of circumstances justifying reconsidering the application under s.459S, consistently with the principles discussed in Brimaud v Honeysett Instant Print Pty Ltd (McLelland J Supreme Court of NSW 19.9.88). 42 On the approach I have taken to the question of solvency, it is conceivable that, if the $1.3 million claimed by the plaintiff were not considered a debt of the Company, solvency might be inferred. The effect of removing that debt from consideration would be to increase the net current assets from about $0.5 million to about $1.8 million, and to remove the one debt that is plainly currently payable in respect of which the Company has no assets to pay it. Despite Mr Coles' submissions about the lack of evidence as to how the Company is meeting its accruing liabilities, it might have been possible to infer from a positive net current asset position of $1.8 million and the absence of other supporting creditors that the Company is able to pay its debts as they fall due. I do not think that Ogilvie v Adams would preclude the Court taking the view that as a matter of commercial reality the $800,000 owing to associated persons and companies was unlikely to be due and payable without demand, and that it was unlikely that demand had been made. 43 However, the matter relied on by Mr Walton as a change of circumstances has absolutely nothing to do with that proposition. I have found that the Company is insolvent, even allowing a value of $2.5 million for Erskineville. Indeed, if I had allowed a value of $2.8 million for Erskineville, the result would have been the same. For that reason, the matter relied on by Mr Walton cannot be a material change of circumstances, which could justify the Court entertaining a further application under s.459S. Accordingly, it is unnecessary for me to consider whether there would be any other objection to permitting such an application to be brought. 44 In relation to Mr Walton's second application, the additional evidence sought to be introduced is an affidavit by the managing director of a building development company, expressing willingness to lend the Company $1.3 million, and not to make any demand for this sum for at least 10 weeks, and evidencing the ability to do this by annexing a copy of a bank cheque for $1.3 million which was delivered to the Company's solicitors at 6pm on 17 March, the date of the final hearing of the case. 45 Mr Walton for the Company submitted that this evidence would go to the heart of the question of insolvency: it would amount to a manifest injustice to the Company if this important evidence was not permitted to be led. It showed clear ability to have access to funds sufficient to pay the plaintiff's debt of $1.3 million on 17 March: the circumstance that the company might be required to repay this sum after 10 weeks did not detract from the force of this evidence. He further submitted that the circumstance that the admission of this evidence would require a further extension of time for the termination of the summons to wind up the Company should not count against its admission: the necessity for extensions in the past was not substantially the fault of the Company. 46 Plainly, in my opinion, it would not be appropriate to reopen the hearing of this case unless this evidence could make a difference to the result. As submitted by Mr Walton, this evidence would go some way towards meeting the main ground which I have so far relied on in my consideration of the Company's solvency. There is no requirement in the Corporations Law that ability to pay debts must be from the Company's own funds, as is the case with bankruptcy legislation discussed in some of the cases. Further, the fact that the lending of such an amount would make no difference to the current assets position would not necessarily mean that solvency would be unaffected. In effect, such a loan could be considered as putting off for at least 10 weeks a requirement to pay $1.3 million, and this could very substantially affect the Company's solvency. 47 However, the circumstance that the current asset position is unaffected would in fact be important in this case, because there is a real question whether net current assets in this case of about $540,000 would be sufficient to justify an inference of cash flow solvency. That figure was reached on the basis of a value of $2.5 million for the Erskineville land. The plaintiff's valuer, although in general terms he supported a value in that vicinity, also gave substantial reasons why the value could be less than $2 million, in which case the net current assets would be about zero or less. In those circumstances, whereas a current asset figure of $1.8 million may have been sufficient to support an inference which would overcome the lack of evidence about present debts and the means to pay them, I do not think a current asset figure of about $540,000 would be sufficient to do so. 48 Further, this evidence would at best delay the problem for 10 weeks. I have said that the Court may be able to take judicial notice that a sale of the Erskineville land would produce its value within about three months, but even that would be two weeks too late; and it also has the problem that it involves the immediate sale of an asset which the Company in fact intends to develop and would in the ordinary course of its business develop. For that reason also, I think this evidence falls short of showing that the problem is one of mere temporary lack of liquidity. 49 Accordingly, it is extremely doubtful that the new evidence could justify a different result. When one adds to this consideration the lateness of the application, the previous timetables for evidence, the legislative intent that these matters be disposed of promptly, and the necessity that would be involved for a further extension of time, in my opinion the application should be refused. CONCLUSION 50 It follows from these reasons that I should make an order winding up the defendant, and appointing a liquidator. Although these proceedings were commenced prior to the new Company Rules, the plaintiff has submitted the consent of a liquidator, namely Stephen James Parbery. Unless some objection is raised, I would propose to appoint him liquidator. At present, I see no reason why the ordinary result as to costs should not follow. ********** Last Modified: 09/25/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.