New South Wales Supreme Court CITATION : Leveraged Equities Ltd v Finance & Equity Pty Ltd [2007] NSWSC 1197 HEARING DATE(S) : 08/10/07 JUDGMENT DATE : 25 October 2007 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Winding up order; Order for appointment of liquidator CATCHWORDS : CORPORATIONS - winding up - application for winding up in insolvency - presumption of insolvency arising from failure to comply with statutory demand - unsuccessful application to have statutory demand set aside - holding summons for leave to appeal - grounds of appeal not reduced to writing - defendant in any event contends that it is solvent and leads evidence of solvency - solvency not proved LEGISLATION CITED : Corporations Act 2001 (Cth), ss.459C(2)(a), 459F(2), 459S Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd [2007] VSCA 121 CASES CITED : Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Pty Ltd [2007] HCATrans 335 Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 Finance & Equity Pty Ltd v Leveraged Equities Ltd; Aussie Products Pty Ltd v Leveraged Equities Ltd [2007] NSWSC 886 PARTIES : Leveraged Equities Ltd - Plaintiff Finance & Equity Pty Ltd - Defendant FILE NUMBER(S) : SC 3917/07 COUNSEL : Ms J.A. Soars - Plaintiff Mr M.D. Foley, Solicitor - Defendant SOLICITORS : Allens Arthur Robinson - Plaintiff Foleys - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J THURSDAY, 25 OCTOBER 2007 3917/07 LEVERAGED EQUITIES LTD v FINANCE & EQUITY PTY LTD JUDGMENT 1 The plaintiff applies for an order for the winding up of the defendant in insolvency and an order for the appointment of a liquidator. It does so on the basis of a presumption of insolvency arising under s.459C(2)(a) of the Corporations Act 2001 (Cth) in consequence of the defendant's failure to comply with a statutory demand relating to a debt of $613,785.86. 2 The defendant sought an order setting aside the statutory demand. That application was refused by Hammerschlag J on 25 July 2007: see Finance & Equity Pty Ltd v Leveraged Equities Ltd; Aussie Products Pty Ltd v Leveraged Equities Ltd [2007] NSWSC 886. 3 The defendant has filed a holding summons for leave to appeal in respect of the dismissal of the application for an order setting aside the statutory demand. The holding summons was filed on 22 August 2007. Grounds of appeal have not yet been reduced to writing. Mr Foley, the defendant's solicitor, outlined them briefly in the course of the hearing. They are in essence that, contrary to the finding of Hammerschlag J, the defendant has an arguable case of estoppel that would prevent the plaintiff relying on or enforcing the debt of $613,785.86. The proposed grounds of appeal are not really delineated with any greater specificity than this. 4 The defendant did not seek an order under s.459F(2) extending the time for compliance with the statutory demand. Even though a holding summons in respect of an application for leave to appeal has been filed, the non-compliance with the statutory demand is complete and the presumption of insolvency has arisen. The court must proceed accordingly. 5 The defendant resists the winding up application on two main grounds: first, that, with the holding summons in respect of an application for leave to appeal having been filed, it would be inequitable for a winding up order to be made on the basis of the presumption of insolvency flowing from failure to comply with the statutory demand; and, second, that the defendant is, in any event, solvent. 6 It is noteworthy that this second ground of defence is advanced. It is the contention of the defendant that, even allowing for the debt of $613,785.86, a state of solvency exists. The defendant thus maintains that, whether or not it is successful in its attempts to obtain leave to appeal and whatever might be the outcome of any appeal that eventuates, a winding up order should not be made because the insolvency ground is not made out. To be more precise, the contention is that the presumption of insolvency is displaced by evidence that proves solvency. 7 It is to the evidence concerning solvency that I now turn. Mr Huxley, a director of the defendant, has sworn an affidavit to which are exhibited the financial statements of what he calls "the ICA Group". The document in question is entitled "ICA Group Holdings Consolidated – Financial Statements (Management) for the Twelve Months ended 30 June 2007". A statement of financial position as at 30 June 2007 shows current assets of $1,681,047, non-current assets of $72,134,231, current liabilities of $2,942,852 and non-current liabilities of $52,287,238. Current liabilities thus exceed current assets, being some 175% of current assets. 8 A note to the accounts is in these terms: "These financial statements are a special purpose financial report prepared in order for [sic] use by directors and members of the company. The directors have determined that the company is not a reporting entity as defined in Statement of Accounting Concepts 1: Definition of the Reporting Entity, and therefore there is no requirement to apply accounting concepts or standards other than AASB1025 in the preparation and presentation of these financial statements." 9 The note goes on to refer to certain applicable accounting standards. Elsewhere in the document is a statement as follows: "The Directors of ICA Group Holdings and associated companies have determined that the Group is not a reporting entity and that this special purpose financial report should be prepared in accordance with the accounting policies described in Note 1 to the financial statements." 10 At the end of the document appears this statement: "The Directors of the Group declare that 1. The financial statements and notes presents [sic] fairly the company's financial position as at 30 June 2005 [sic] and of [sic] its performance for the year ended on that date in accordance with the accounting policies described in Note 1 to the financial statements; 2. In the directors' opinion there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable." 11 Finally, it is said that this declaration "is made in accordance with a resolution of the Board of Directors", following which there is a line under which Mr Huxley's name appears, denoting a space apparently intended for his signature as a director. There is no signature. 12 These financial statements do not, in my view, prove anything relevant to the question of the solvency of the defendant. Nowhere does the name of the defendant appear in the document. The document is unsigned. Although it refers to a "company" in the singular, it also contains numerous references to "the Group" and appears somehow to deal with the financial position of several companies together. The endemic confusion between "company" and "Group" is exemplified by the two statements about applicable accounting policies. And, according to the declaration by the "Directors of the Group", what are presented as financial statements of the "Group" present fairly "the company's financial position" – "as at 30 June 2005". 13 Mr Huxley's affidavit does nothing to prove solvency of the defendant (nor, I might say, does it prove the solvency of the entity, if any, which is the subject of the financial statements exhibited to it). 14 The defendant also relies on an affidavit of Mr Unicomb. He is a practising public accountant who describes himself in his affidavit as the accountant "for the ICA Group Holdings Group of Companies". 15 Annexed to that affidavit is what is described as a true copy of the latest financial statements for "the ICA Group Holdings Group of companies", which group is said to comprise "a number of companies involved in property investment and development". The annexure includes a balance sheet which is set out somewhat differently from the balance sheet exhibited to Mr Huxley's affidavit but appears to contain figures consistent with those in the document referred to by Mr Huxley. The balance sheet is headed "ICA Group Holdings Consolidated". There is, at the end of the financial statements, a directors' declaration which again has provision for Mr Huxley's signature but is not signed. The content of that declaration does not coincide in all respects with that in the declaration to which I have already referred (even allowing for the fact that a reference to the last day of the financial year should be 30 June 2007, not 30 June 2005). There is also a compilation report signed by Mr Unicomb referring to his compilation of "the special purpose financial report of the company for the period ended 30 June 2007". He does not identify the "company" thus mentioned and his compilation report concludes: "The special purpose financial report was prepared for the benefit of the members and director of ICA Group Holdings Consolidated …" 16 Again, there is nothing to suggest that the financial statements concerned depict the position of the defendant. As with the statements exhibited to Mr Huxley's affidavit, the very clear impression is that the content reflects the consolidated position of a group of companies and does not deal with the separate position of any individual company, whether the defendant or some other company. 17 Mr Unicomb expresses in his affidavit an opinion as follows: "Having regard to the financial statements of the Group, my opinion is that with the continued unqualified and unconditional support of the Group and its Directors, the Defendant is solvent and able to meet its obligations in the ordinary course of business and in accordance with proper commercial arrangements made." 18 Mr Unicomb's opinion is thus that solvency of the defendant depends on "continued and unqualified support of the Group and its Directors". Without that support, one infers, the defendant is, in Mr Unicomb's opinion, not solvent. The evidence does not disclose any basis on which the court could find that the defendant has secured the "support " to which Mr Unicomb refers. 19 The evidence does not refer to any contract, agreement or arrangement under which the defendant is entitled to financial support from other companies. Nor is there anything to indicate the form that any financial support might take. Even if it is accepted that the defendant is a member of a "group" of companies (a concept which, in the particular context, is not elaborated or explained), the court could not accept as relevant to an assessment of the defendant's solvency "support" by other members of the "group" unless it had evidence of what the support entailed and precisely what financial resources were available to the defendant as a result of the "support". 20 I refer, in this connection, to the decision of the Court of Appeal in Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 and, in particular, to the observation of Santow JA, with whom Meagher JA and Handley JA agreed, (at 716): "However, it must be emphasised that proper verification of assets and liabilities is critical to rebut the presumption of insolvency." 21 His Honour also re-affirmed the need for the "fullest and best" evidence in support of a contention of solvency, adding that, when questions of the availability of financial resources from external sources arise, it is necessary to have regard to evidence of what is actually available, rather than relying on assessments of what might be feasible. 22 The evidence in this case does not provide any basis at all for a finding that the defendant is solvent. The presumption of insolvency remains unrebutted. 23 I turn briefly, nevertheless, to the proposition that the court should not make a winding up order because of the steps that have been taken towards seeking leave to appeal in respect of the dismissal of the defendant's application for an order setting aside the statutory demand. 24 Because of the approach the defendant took with respect to proof of solvency, the matter just mentioned need not be addressed at any length. There was no application under s.459S for leave to rely on a ground that was relied on (or could have been relied on) upon the application to have the statutory demand set aside. The case before Hammerschlag J was that there existed a dispute as to the existence of the debt. In the absence of leave under s.459S, non-existence of that debt is not something upon which the defendant can now rely. 25 But the case presented on behalf of the defendant is really that, whether or not the debt the subject of the statutory demand exists, a state of solvency can be proved. In other words, the defendant did not take the stance that proof of non-existence of the debt was material to proof of solvency. Its position is that it is solvent in any event. It does not advance the proposition that, if the particular debt does not exist, it is solvent. 26 It follows that the existence of the proposed appeal against the order of Hammerschlag J is not something that need be taken into account in the present context. The implications of the recent decision of the Court of Appeal of Victoria in Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd [2007] VSCA 121 and the ex tempore judgment of Hayne J in Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Pty Ltd [2007] HCA Trans 335 do not arise for consideration. 27 I said at the beginning that solvency and the steps taken to seek leave to appeal are the main grounds on which the defendant seeks to defend the winding up proceedings. Other grounds were outlined in the notice of appearance and should be mentioned briefly. 28 Grounds to the effect that winding up is not just and equitable and that the statutory demand should be set aside are not meaningful. The latter, to the extent that it is an attempt to re-run the application for an order setting aside the statutory demand, is precluded by s.459S. The former, if understood as a contention that the court should, in its discretion, desist from making a winding up order, puts forward no reason except, perhaps, some perceived injustice about the rejection in the statutory demand proceedings of the case as to the existence of a dispute about the existence of the particular debt. That is also precluded by s.459S. 29 It is also said by the defendant that an order should not be made pending determination of a statement of claim yet to be filed by the defendant seeking damages as against the plaintiff. This is an assertion of some form of offsetting claim that could have been put forward in the statutory demands proceedings and is now ruled out by s.459S. In any event, the fact that an insolvent company has available to it a cause of action in damages, whether against the applicant for a winding up order or against anyone else, represents no reason why a winding up order should not be made. 30 The plaintiff has proved all the formal and procedural matters that need to be established, in addition to the matters raising the presumption of insolvency. 31 The plaintiff has made out its case that the defendant is insolvent. No reason has been shown why the court should not make the orders the plaintiff seeks. The consent of Mr Billingham to act as liquidator has been filed. There is no suggestion that he is not a suitable appointee. 32 The orders of the court are as follows: 1. Order that Finance & Equity Pty Ltd (ACN 122 534 678) be wound up in insolvency. 2. Order that Paul Andrew Billingham, an official liquidator, of Level 17, 383 Kent Street, Sydney be appointed liquidator of Finance & Equity Pty Ltd. 3. Order that the defendant pay the plaintiff's costs of the proceedings. ********** 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.