New South Wales Supreme Court CITATION : ASIC v Sydney Investment House Pty Ltd & Ors [2006] NSWSC 1431 HEARING DATE(S) : 04/12/06 JUDGMENT DATE : 4 December 2006 JURISDICTION : Equity Division Corporations List JUDGMENT OF : White J EX TEMPORE JUDGMENT DATE : 12/04/2006 DECISION : See paras 14-18 of judgment. CATCHWORDS : CORPORATIONS – Winding-up – Winding-up in insolvency – Application by Australian Securities and Investments Commission (ASIC) for orders that first, second, fifth, sixth, seventh, eighth and ninth defendants be wound up in insolvency – Whether corporate defendants should be wound up in insolvency – Where report of provisional liquidator discloses that corporate defendants insolvent – No question of principle – Application granted. LEGISLATION CITED : Corporations Act 2001 (Cth) Corporations Rules 2003 (NSW) PARTIES : Australian Securities & Investments Commission v Sydney Investment House Pty Ltd (ACN 104 131 991) & Ors FILE NUMBER(S) : SC 2941/06 Applicant: F Sinclair Plaintiff: A J McInerney COUNSEL : 1st-3rd, 5th-10th Defendants: E J Goulding – in person 4th Defendant: P King Liquidator: P Dowdy SOLICITORS : Plaintiff: ASIC - Melanie Baxter Defendants: Porter Davies Lawyers IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST WHITE J Monday, 4 December 2006 2941/06 Australian Securities & Investments Commission v Sydney Investment House Pty Ltd (ACN 104 131 991) & Ors JUDGMENT 1 HIS HONOUR: The Australian Securities and Investments Commission ("ASIC") applies for orders that the first, second, fifth, sixth, seventh, eighth and ninth defendants be wound up in insolvency, and for ancillary relief. I was informed that the tenth defendant has already been wound up. The directors of those companies, Messrs Goulding and Geagea, do not oppose the orders sought for the winding-up of those defendants, although Mr Goulding said that he did not consent to orders that they be wound up in insolvency. 2 The background to the application can be seen from my reasons of 27 October 2006 for appointing provisional liquidators to the corporate defendants, except for the sixth defendant, and from Gzell J's reasons of 28 November 2006 for appointing a provisional liquidator to the sixth defendant. 3 The provisional liquidator has now provided reports to the Court which have been tendered without objection on this application. Those reports disclose that each of the corporate defendants is insolvent and that proper financial records have not been kept in accordance with s 286 of the Corporations Act 2001 (Cth). 4 The first defendant has liabilities, including a liability to the second defendant ("Capital"), which total more than $2,700,000. Its only assets are loans apparently due to it from other companies in the group or from a property trust owned with Mr Goulding. Even if those loans were fully recoverable there would be a substantial shortfall. It is clearly insolvent. 5 Capital has current liabilities of some $375,000. Its only assets are loans owed to it by other companies in the group. According to the company's management accounts and the directors' Report as to Affairs, one such loan recorded in its balance sheet is a debt owed to it by the sixth defendant, Sydney Investment House (Newcastle) Pty Ltd ("Newcastle"), of approximately $1,500,000. That debt appears to be secured and the provisional liquidator, in his assessment of the financial position of Newcastle, assumes the recoverability of an amount of $3,000,000. The discrepancy is explained by the existence of a loan agreement between those two companies in the amount of $3,000,000, although it is not clear to me that that is the amount of the liability. 6 However, Capital will owe more than $8,000,000 to investors who have advanced moneys to it pursuant to the issue of redeemable preference shares. In 2008, Capital will be liable to pay the debts arising under that share issue, if it is not already so liable. The evidence on the application before me on 18 October 2006 suggested that there may already be substantial liabilities of Capital to investors which are not recorded in its books. In my view, an assessment of the solvency of Capital should reflect the liabilities which will fall due next year on the redeemable preference shares. I am satisfied that it is insolvent. 7 The provisional liquidator's report in relation to the fifth defendant, Sydney Investment House Pty Ltd, shows that it has liabilities in excess of $5,400,000, most of which are owed as related party loans to other companies in the group. It has no substantial assets other than loans owed to it by other companies in the group. The company's management accounts as at 30 June 2006 recorded an excess of liabilities over assets of some $341,000. I am satisfied that it is insolvent. 8 The provisional liquidator's report in relation to the sixth defendant, Newcastle, shows that the liquidator estimates a deficiency for unsecured creditors of between $1,480,000 and $6,800,000 following the realisation of the units in the Newcastle development. I am satisfied that it is insolvent. 9 The provisional liquidator's report in relation to the seventh defendant shows an estimated deficiency of over $1,000,000. Again, the management accounts as at 30 June 2006 record a deficiency of more than $700,000. 10 The provisional liquidator's report in relation to Melbourne Investment House Pty Ltd, the eighth defendant, estimates a deficiency of some $500,000. The management accounts as at 30 June 2006 disclose a small deficiency, but that was on the basis of the recoverability of assets which the provisional liquidator reports on as being unknown, as well as the recoverability of loans, including a loan owed by the tenth defendant, of $93,000. The tenth defendant is now in liquidation. I accept that the eighth defendant is insolvent. 11 The provisional liquidator's report in relation to the ninth defendant, Melbourne Investment House (Hawthorn) Pty Ltd, discloses a deficiency of approximately $750,000. The management accounts for that company also have disclosed a deficiency of assets to liabilities of in excess of $500,000. I am satisfied that it is insolvent. 12 In all of these cases, there are no or minimal assets in the form of cash or debts owed by unrelated parties which could be available to pay current debts. 13 ASIC has not pressed for winding-up orders on just and equitable grounds, possibly in deference to the observations which I made about that matter in my judgment of 27 October 2006. I am satisfied that it is entitled to the orders sought pursuant to ss 459A and 459P(1)(f) of the Corporations Act. 14 Leave is required for ASIC to make an application for an order that the companies be wound up in insolvency pursuant to s 459A. Such leave may be given if there is a prima facie case of insolvency. I am satisfied that not only is there a prima facie case of insolvency, but that the companies are insolvent. For these reasons, I order pursuant to subs 459P(2) of the Corporations Act that the plaintiff have leave to apply to the Court for an order that the first, second, fifth, sixth, seventh, eighth and ninth defendants be wound up in insolvency. 15 I order that compliance with r 5.6 of the Supreme Court (Corporations) Rules 1999 (NSW) relating to the requirement for publication of a notice of the plaintiff's application be dispensed with. 16 I order that the first, second, fifth, sixth, seventh, eighth and ninth defendants be wound up in insolvency. 17 I order that Mr Quentin Olde of Taylor Woodings, Level 14, Royal Exchange Building, 56 Pitt Street, Sydney, official liquidator, be appointed as liquidator of the first, second, fifth, sixth, seventh, eighth and ninth defendants. 18 I order that the plaintiff's costs of the application for winding-up be paid out of the assets of those defendants. 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