New South Wales Supreme Court CITATION : Leveraged Equities Limited v Hilldale Australia Pty Limited [2008] NSWSC 190 HEARING DATE(S) : 8, 12 & 21 February 2008 JUDGMENT DATE : 7 March 2008 JUDGMENT OF : Hammerschlag J DECISION : Defendant placed under winding up order. Liquidator appointed CATCHWORDS : CORPORATIONS – Winding up in insolvency – Failure to pay statutory demand – Presumption of insolvency – During hearing associated party and company enter into loan agreement and moneys advanced to place company in a position to meet debt subject of statutory demand but not intended to be paid over to creditor because company disputes liability – No application pursuant to s 459S of the Corporations Act 2001 (Cth) to rely on any matter other than proving solvency – Whether loan funds to be taken into account in assessment of company's solvency – Failure to provide "fullest and best" evidence of solvency – Failure to rebut presumption of insolvency LEGISLATION CITED : Corporations Act 2001 (Cth) Hilldale v Leveraged Equities [2007] NSWSC 867 Powell v Fryer (2001) 37 ACSR 589 Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87 Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 Sandell v Porter (1966) 115 CLR 666 Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 CASES CITED : QBE Workers' Compensation Pty Ltd v P Russell Enterprises Pty Ltd [2005] NSWSC 1128 Re RHD Power Services (1990) 3 ACSR 261 Taylor v Australia and New Zealand Banking Group (1988) 13 ACLR 780 Lewis v Doran (2004) 50 ACSR 175 Lewis (as Liquidator of Doran Constructions Pty Ltd) v Doran (2005) 54 ACSR 410 ASIC v Edwards (2005) 54 ACSR 583 Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd (2006) 60 ACSR 646 Vero Workers Compensation (NSW) Ltd v Ferretti Pty Ltd (in liq) (2006) 57 ACSR 103 Collins v G Collins & Sons (1984) 9 ACLR 58 Ts Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410 PARTIES : Leveraged Equities Limited ACN 051 629 282 Hilldale Australia Pty Limited ACN 112 467 964 FILE NUMBER(S) : SC 4137/2007 COUNSEL : N. Bearup (Plaintiff) J.C. Giles (Defendant) SOLICITORS : Allens Arthur Robinson (Plaintiff) Levitt Robinson Solicitors (Defendant) - 12 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST HAMMERSCHLAG J 7 MARCH 2008 4137/2007 LEVERAGED EQUITIES LIMITED -V- HILLDALE AUSTRALIA PTY LIMITED JUDGMENT 1 HIS HONOUR: This is an application by the plaintiff Leveraged Equities Limited to wind up the defendant Hilldale Australia Pty Ltd under s 459P of the Corporations Act 2001 (Cth) ("the Act") on the grounds of insolvency. History of the proceedings 2 On 25 July 2007 I gave judgment varying a statutory demand dated 13 April 2007 directed by the plaintiff to the defendant by reducing it from $621,465.49 to $240,244.29. I extended the period for compliance with it for 21 days from 25 July 2007: see Hilldale v Leveraged Equities [2007] NSWSC 867. 3 The defendant failed to make any payment in satisfaction of the demand and the plaintiff moved to wind it up by originating process issued on 21 August 2007. 4 There is no issue between the parties that the plaintiff has complied with the necessary formal steps for a winding up order. 5 By operation of s 459C(2) of the Act the Court must presume the defendant insolvent. 6 Under s 459S of the Act the defendant may not, without leave of the Court, oppose the application on a ground that it relied upon for the demand to be set aside or that it could have relied on but did not. 7 Under s 459S(2) of the Act the Court is not to grant leave unless it is satisfied that the ground is material to proving that the company is solvent. 8 Before me the defendant did not seek any such leave. 9 It took upon itself (as it had to) the task of proving its solvency as at the date of hearing, on the assumption that it is presently indebted to the plaintiff in the amount of $240,244.29 10 The hearing commenced on 8 February 2008. 11 The defendant has two directors, Mr Bruce Hilary Mackellar ("Mr Mackellar Snr") and his son Mr Brendon Dale Mackellar ("Mr Mackellar"). They are also its sole shareholders. 12 As at 31 January 2008 the defendant had cash at its disposal of around $85,000. 13 It had current debtors outstanding of $92,128 and creditors of $81,663 (excluding the plaintiff). 14 Including the plaintiff's claim, it had a deficiency of current assets (over current liabilities) of the order of $130,000. 15 It was clearly not in a position to pay its debt to the plaintiff and accordingly was insolvent. 16 The same position pertained as at September 2007 and December 2007. 17 In an affidavit sworn 15 November 2007 Mr Mackellar gave details of a loan facility available to him from the National Australia Bank. 18 As at 13 November 2007 the funds available to Mr Mackellar were $140,467.46. 19 In the affidavit he said: "I am prepared to draw down those available funds and lend those monies to the Defendant if it becomes necessary at any time to assist the Defendant to pay its debts as and when they fell due [sic]. I am prepared to lend the defendant those monies on the basis that the loan was repayable only when the defendant was able to meet all of its other liabilities as and when those liabilities fall due." 20 He swore a further affidavit on 25 January 2008 indicating further facilities available to him from the National Australia Bank with the available funds in his portfolio loan account then being $426,509.37. 21 In this affidavit he repeated his statement of preparedness, on the same basis, to lend the defendant funds. 22 During submissions on the first day of hearing, counsel for the defendant, Mr J Giles, conceded that both as at September 2007 and December 2007 the defendant was not in a position to pay its debt to the plaintiff without the assistance of Mr Mackellar. 23 During cross-examination Ms N Bearup of counsel for the plaintiff put it to Mr Mackellar that he did not intend to pay the amount owing by the defendant to the plaintiff reflected in the statutory demand. His response was "I intend to have my day in Court to argue why it shouldn't be paid." 24 Mr Mackellar clearly regarded himself as the governing mind of the defendant. 25 He undertook no contractual or equitable obligation to assist the defendant and a failure to assist would not have been a breach by him of any fiduciary duty. 26 The defendant was left in the position that it was completely at the mercy of Mr Mackellar in respect of its ability to pay the debt to the plaintiff and he had determined as at 8 February 2008 that it would not receive his beneficence. 27 The stance taken by Mr Mackellar accordingly entailed the inexorable conclusion that the defendant did not have the support which he professed. 28 Left in that position the defendant was clearly insolvent and entirely unable to pay its due debt to the plaintiff. 29 The hearing (which had been set down for one day) did not finish on 8 February 2008 and was adjourned to 12 February 2008. 30 On the adjourned date the defendant sought to re-open and to read an additional affidavit of Mr Mackellar, sworn the day before, no doubt in recognition of the difficulties which it faced. 31 That course was opposed by the plaintiff, but I permitted it on the basis that the plaintiff got an adjournment. The hearing was adjourned to 21 February 2008 and the parties were directed to file and serve brief written submissions in advance of that date. 32 According to the new affidavit, on 11 February 2008 there was entered into between Mr Mackellar and the defendant a deed of loan under which he agreed to make to the defendant a loan of $250,000 for three years from the date of the deed. The deed provides for interest of 8 per cent per annum compounding six monthly but payable only upon expiry of the term of the loan. 33 Documents attached to the affidavit indicate that $250,000 was paid into the defendant's bank account on 11 February 2008. 34 Mr Mackellar was further cross-examined on 21 February 2008. He accepted that he did not intend to use the loan funds to pay the defendant's debt to the plaintiff. 35 The defendant's principal submission was that the loan had made it solvent. 36 The plaintiff put that account should not be taken of the loan funds but that even if it was, the defendant had not discharged the onus upon it of establishing its solvency. The applicable general principles 37 Under s 95A(1) of the Act 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. 38 Under s 95A(2) of the Act a person who is not solvent is insolvent. 39 Whether a company is insolvent at a particular point in time is a question of fact, to be determined by a proper consideration of the company's financial position, in its entirety, based on commercial reality: Powell v Fryer (2001) 37 ACSR 589 at 600 [75]. 40 Regard should be had not only to the company's cash resources immediately available, but also to moneys which it can procure by realisation by sale, or borrowing against the security of its assets, or otherwise reasonably raise from those associated with, or supportive of, it: Powell v Fryer at 600 [75]. 41 The predominant test is a cash flow one, although the state of a company's balance sheet is still relevant: Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 at 198; Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87. 42 It is the inability, utilising such resources as are available through the use of assets or which may otherwise realistically be raised to meet debts as they fall due which indicates insolvency: Powell v Fryer at 600 [75]. 43 The question of solvency must be assessed at the date of the hearing. However this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 466-467; Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711. 44 Applying a cash flow test for solvency does not mean that the extent of the company's assets are irrelevant to the inquiry. The credit resources available must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671; Expile Pty Ltd v Jabb's Excavations Pty Ltd at 719. 45 There is a distinction between solvency and a surplus of assets. A company may at the same time be insolvent and wealthy: Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44]. 46 The defendant bears the onus of demonstrating its solvency by leading the "fullest and best" evidence of the company's financial position: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075. Proper verification of assets and liabilities is critical to rebut the presumption of insolvency. Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency: Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd at [44]; Expile Pty Ltd v Jabb's Excavations Pty Ltd at 719. 47 In QBE Workers' Compensation Pty Ltd v P Russell Enterprises Pty Ltd [2005] NSWSC 1128 at [26] White J said: ….the Court is unlikely to be persuaded to act on the evidence of a single director/shareholder without external confirmation. That confirmation is typically obtained either from the liquidator of the company, if he has carried out sufficient investigations so as to put himself in a position to express an informed opinion, or from the evidence of an external accountant. The loan 48 Without support in the form of the loan from Mr Mackellar the defendant is undoubtedly insolvent. 49 The first question which arises is whether the loan should properly be considered a resource available to the defendant to pay its debts as and when they fall due, in particular the debt due to the plaintiff. 50 If it is not, it is not necessary to consider whether the defendant has otherwise discharged the onus to prove its solvency. 51 It was urged upon the Court on behalf of the plaintiff that the defendant's reliance on the loan was evidence of its poor financial position and that in some cases reliance on loans from a director or parent company will indicate insolvency: see for example Re RHD Power Services (1990) 3 ACSR 261 at 264; Taylor v Australia and New Zealand Banking Group (1988) 13 ACLR 780. 52 It was also put on behalf of the plaintiff that it was significant that the support from Mr Mackellar had not taken the form of an injection of share capital, that the loan was susceptible to contractual variation or early repayment and that this eroded its efficacy. 53 It was put for the defendant that the funds had been advanced as a fact, albeit only because it was necessary in the present circumstances to stave off the presumption of insolvency. It was accepted, however, that without the injection of funds the defendant was insolvent in that, at the lowest, it could not pay its debt to the plaintiff. 54 Counsel went so far as to accept that the sole motivation for the loan transaction was to rebut the presumption of insolvency which applied against the defendant. He put that, the funds having been advanced, the defendant could meet its debt to the plaintiff (and more) and that vis a vis the plaintiff it was no more than a recalcitrant debtor. 55 In Re RHD Power Services and Taylor v Australia and New Zealand Banking Group the Court was concerned with a test under an enactment which defined insolvency by reference to the debtor's ability to pay debts "out of its own money". This requirement was construed to mean that unsecured borrowings were to be left out of account because the funds were not the debtor's own money. This, however, is not a requirement under s 95A of the Act. 56 The matter is to be approached on the basis that the Court must be satisfied by reference to the commercial realities that the defendant has a resource available to pay all its debts as they become payable, whether or not one of those resources is an unsecured borrowing: Lewis v Doran (2004) 50 ACSR 175 at [116]; Lewis (as Liquidator of Doran Constructions Pty Ltd) v Doran (2005) 54 ACSR 410. 57 An unsecured borrowing will not assist however, unless the terms are such as to exclude the loan liability from consideration in its own right as part of the debts due or near due. If a loan merely substitutes one form of immediate or near immediate obligation for another it will not assist the debtor: ASIC v Edwards (2005) 54 ACSR 583 at [99]; Lewis (as Liquidator of Doran Constructions Pty Ltd) v Doran at [111]. 58 The question whether a company is solvent or not arises in applications under s 482(1) of the Act which section empowers the Court to stay or terminate a winding up. In such applications the applicant (which may include the liquidator or a contributory of the company) bears an onus, as does the defendant here, to establish solvency. 59 It is not uncommon for a company which is the subject of such an application to have debt obligations to associated creditors which may be the difference between the company's solvency and insolvency, and for those associated creditors to proffer undertakings to the Court either not to seek payment or to subordinate their claims to other debts owed by the company. 60 In Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd (2006) 60 ACSR 646 Barrett J reviewed some of the authorities which have considered such undertakings. The undertaking which had been proffered there was one not to require the company to repay any money due to the associated creditors until all the other creditors in the company were paid in full. 61 His Honour's view, with which I respectfully agree, was that neither an undertaking by the associated creditor to the Court of the kind proposed, nor a contractual subordination designed to preclude payment to the associated creditor while other creditors are unpaid, represents a sound basis on which to order termination of the winding up of an insolvent company. 62 The principal reason why such contractual subordinations are unsatisfactory is that there is no barrier to their consensual rescission. 63 Moreover, there is no barrier to consensus where the same human brain will determine the actions of both the company and the associated creditor (lender). Also, no outside person beyond the company and its controller has any standing to enforce the terms of such a contractual arrangement. 64 Capitalisation of associated party debt has, for these reasons, been regarded by the Court as a far safer alternative: Vero Workers Compensation (NSW) Ltd v Ferretti Pty Ltd (in liq) (2006) 57 ACSR 103 at [44]; Collins v G Collins & Sons (1984) 9 ACLR 58; Ts Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410; Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd at [28]. 65 In the present case, however, the Court is not concerned with restoring a company already under a winding up order to the control of its directors and shareholders. 66 It is also not concerned with the efficacy of undertakings or contractual subordination. 67 It was not suggested on behalf of the plaintiff that the loan was a sham. 68 There is some force in the proposition that because the defendant is closely allied to, and probably controlled by, Mr Mackellar the loan might be rescinded and early repayment effected so as to make the company insolvent (if it is now solvent) once more. 69 However, sight should not be lost of the fact that both Mr Mackellar and Mr Mackellar Snr are directors of the defendant and have both equitable and statutory duties to the defendant to exercise their powers and discharge their duties in good faith in the best interests of the defendant and for proper purposes. They also have a duty not improperly to use their position to gain an advantage for themselves or someone else or to cause detriment to the defendant. 70 The defendant has funds which it may use as it sees fit. It has a binding agreement that it is only required to repay them in three years' time. Repayment is not due or near due. The lack of desire to use the funds to pay the plaintiff is an option open to the defendant given that the plaintiff has no judgment against it. 71 There is no basis to conclude that the defendant's directors will breach their duties by rescinding the loan or effecting early repayment to the defendant's detriment. 72 In my view, as a matter of commercial reality, the funds which have been advanced to the defendant by Mr Mackellar represent a resource available to it to pay its debts as and when they fall due, in particular the debt to the plaintiff, and account is to be taken of them accordingly. 73 Those loan funds, advanced under a binding agreement, are in an entirely different position to the non-binding expression by Mr Mackellar in his affidavits of 13 November 2007 and 25 January 2008 of preparedness to advance moneys if it becomes necessary at any time to assist the defendant "to pay its debts" as and when they fall due. As a matter of commercial reality, that statement of preparedness does not amount to a resource which I consider is to be taken into account in assessing the defendant's solvency. Apart from the non-binding nature of the expression, Mr Mackellar's own conduct compels that conclusion. Moneys were only lent when the forensic necessity for that to occur arose, and then only to put the defendant in funds to rebut the presumption of insolvency, not to enable it in fact to pay the debt which caused the funds to be advanced in the first place. 74 Because the assessment of the defendant's insolvency must be made on the assumption that the defendant has a debt of $240,244.29 due and payable to the plaintiff, it is necessary to consider whether, even taking account of the resource constituted by the loan funds, the defendant has rebutted the presumption of insolvency lying against it. Has the defendant shown its solvency? 75 The thrust of the plaintiff's submissions was that the defendant fell short of passing the cash flow test and did not establish an ability to meet its "existing and immediately upcoming liabilities". As to the balance sheet position, the plaintiff put that the defendant had not established the true net value of its plant and equipment which constituted a significant asset relied upon by it, and therefore had not satisfactorily established its net asset position. 76 The defendant carries on a civil construction business for mining, rail and road infrastructure using its own equipment as well as subcontractors and consultants. It operates excavators, graders and tip trucks. I will refer to this business as the earthmoving business. 77 As at November 2007 the defendant employed eight staff, four permanent and four casual. 78 It finances the acquisition of its equipment by means of equipment loans secured over the asset concerned. 79 From mid 2005 to August 2007 it was involved in share and option trading using margin lending. It is no longer involved in that activity. 80 The defendant's evidence consisted of affidavits of Mr Mackellar sworn 15 November 2007, 25 January 2008 and 11 February 2008; affidavits of Mr Mackellar Snr sworn 15 November 2007 and 5 February 2008; affidavits of Mr William Murray Moyes, an external chartered accountant, sworn 16 November 2007 and 5 February 2008 and an expert report as to solvency (dated 6 February 2008) of Mr David Anthony Hurst, a chartered accountant and registered liquidator. 81 As well as Mr Mackellar, Messrs Moyes and Hurst were cross-examined. 82 The defendant relied on a signed but unaudited special purpose financial report for the period ending 30 September 2007 compiled by Mr Moyes whose accompanying "Compilation Report" includes the following: "The directors are solely responsible for the information contained in the special purpose financial report and have determined that the accounting policies used are consistent with the financial reporting requirements of HILLDALE AUSTRALIA PTY LTD's constitution and are appropriate to meet the needs of the directors and members of the company. Our procedures use accounting expertise to collect, classify and summarise the financial information, which the directors provided, into a financial report. Our procedures do not include verification or validation procedures. No audit or review has been performed and accordingly no assurance is expressed. To the extent permitted by law, we do not accept liability for any loss or damage which any person, other than the company, may suffer arising from any negligence on our part. No person should rely on the special purpose financial report without having an audit or review conducted. The special purpose financial report was prepared for the benefit of the company and its members and the purpose identified above. We do not accept responsibility to any other person for the contents of the special purpose financial report." 83 The defendant also relied on a signed but unaudited special purpose financial report for the period ending 31 December 2007, accompanied by a Compilation Report in the same terms as that which accompanied the September report. 84 There was also material before the Court updating cash, trade debtors, unbilled work in progress and debtors to 31 January 2008. 85 The cash position as at 19 February 2008 (that is, taking account of the loan) was established at $274,398.48. 86 The unaudited financial reports included balance sheets as at 30 June 2007, 30 September 2007 and 31 December 2007 and profit and loss statements for the financial year to 30 June 2007 and for the periods 1 July to 30 September 2007 and 1 July to 31 December 2007. Comparative figures for the financial year to 30 June 2006 were included. 87 For the year ending 30 June 2007 the defendant earned a profit on share trading of $369,124 but a profit from all ordinary activities of $74,920. The difference is attributable to the fact that it made a loss on its earthmoving business. The accounts, however, do not distinguish between expenses attributable respectively to its share trading and earthmoving activities so that it is not possible to determine with precision the loss attributable to its earthmoving activities. The loss on its earthmoving activities (without adjusting by removing expenses attributable only to share trading) was of the order of $524,000. 88 According to its profit and loss statement for the six months to 31 December 2007 (and the evidence of Mr Moyes) the defendant's earthmoving business for that period made a profit of $78,820 derived from revenues of $875,006 and expenditure of $796,186. Mr Moyes had overlooked, however, that $90,000 of the income which he attributed to that business was a trust distribution from a trust associated with Mr Mackellar Snr. Leaving aside adjustments to expenditure for that period, which might have been attributable entirely to the share trading activities of the defendant (an exercise which was not performed), the earthmoving business did not make a profit but rather a loss of $11,180. After taking into account extraordinary items the defendant had accumulated losses as at 31 December 2007 of $106,899. 89 During the six months ended 31 December 2007 the defendant made a share trading loss of $165,714. It accordingly made a trading loss on both activities of $176,894. It received the trust distribution of $90,000 and also the benefit of an extraordinary item represented by a reduction of a loan owing to St George Bank of $104,988. With the trust distribution and treating the reduction of the St George loan as income, it made an overall profit of $18,094. Its loss for those six months from all ordinary activities before income tax and excluding extraordinary items was $86,894. 90 There was no suggestion of any future trust distributions or extraordinary items. 91 For the financial year to 30 June 2007 the defendant paid salaries and wages of $245,241 and for the six months to 31 December 2007 it paid $189,150 ($378,300 annualised). 92 Mr Hurst produced the following revised statement of the defendant's financial position as at 31 December 2007, the principal revision being the removal as a contingent liability of the affected portion of the statutory demand (reflected by Mr Hurst as $383,907 instead of $381,221): Revised Statement of Financial Position / Balance Sheet as at 31 December 2007 31/12/2007 31/12/2007 Current Assets ERV (Estimated recoverable value) Cash and cash equivalents 81,783 81,783 Trade and other receivables 151,800 151,800 Orica Project 10,410 10,410 Accrued Income_Unpresented deposits 2,556 - Prepayments 13,093 13,093 Total Current Assets 259,642 257,086 Non Current Assets Trade and other receivables 286,067 86,067 Property , plant and equipement (sic) 635,895 635,895 Intangible assets 800 - Total Non Current Assets 922,762 721,962 Total Assets 1,182,404 979,048 Current Liabilities Margin Lending / Leverage Equity A/c SGB ML A/c (52508) - - Leverage Equity A'c (462902) - - LE A/c (462913) 240,244 240,244 Lift Capital M/L (121112) - - 240,244 240,244 Sundry creditors 33,009 33,009 Trade creditors 57,769 57,769 American Express Credit Card 22,713 22,713 Amounts withheld PAYG Withholding tax payable 48,188 48,188 TFN withholding tax payable -408 -408 47,780 47,780 Contingent Liability 383,907 - GST Payable 24,950 24,950 Provision for Income Tax -39,530 -39,530 Total Current Liabilities 770,842 386,935 Non Current Liabilities Equipment loans 610,745 610,745 Less Unexpired Charges -92,484 -92,484 Total Non Current Liabilities 518,261 518,261 Total Liabilities 1,289,103 905,196 Net assets ( Liabilities) -106,699 73,852 Equity Issued capital 200 Ordinary shares each fully paid 200 200 Retained earnings -106,899 73,652 -106,699 73,852 The balance sheet 93 Although the predominant test for solvency is a cash flow one, the defendant's balance sheet position is relevant. 94 The plaintiff took issue with a number of line items in the reworked balance sheet. However, the principal thrust of its submissions was that the defendant had not established the true value of its plant and equipment, nor had it led evidence of its existing and immediately upcoming liabilities, including salary and equipment loan repayment liabilities. It pointed to the fact that the defendant made a trading loss not only on its share trading activities which had stopped, but also on the earthmoving business which it continued to run. 95 The balance sheet as at the date of hearing requires adjustment to reflect the cash injection of $250,000 (and corresponding obligation to repay with interest) and also the movement of debtors and creditors between 31 December 2007 and the date of hearing. 96 In its written and oral submissions the plaintiff attempted to recast the balance sheet to take into account the updated cash position, debtors and creditors, value of plant and equipment and the contingent liability to repay the loan with interest in three years' time. 97 According to the unchallenged evidence, creditors outstanding as at 31 January 2007 were $81,663 and debtors outstanding were $70,694. 98 The defendant has financed three items of equipment with a lender called Capital Finance and made a quarterly payment of $26,687 on 15 November 2007 for the period to 15 February 2008. As at 31 December 2007 50 per cent of the payment, namely $13,093, was a pre-payment and correctly reflected as an asset. The plaintiff made the point that as at the date of final submissions (21 February 2008) there was no longer any prepayment. Whilst this is strictly correct the bank statements in evidence reflect that the defendant paid Capital Finance $28,892 on 15 February 2008 so that as at 21 February 2008 there should be reflected as an asset in the defendant's hands a prepayment significantly in excess of that claimed. The plaintiff's point works for the defendant rather than against it, to the extent of 83/90 days being $26,644. 99 The plaintiff's next point was that the amount of $10,410 shown as a current asset in respect of the Orica Project was to be removed because no evidence was presented as to if and when the amount can be billed. The Orica Project is a project at the Whitehaven Coal Mine north of Gunnedah involving earthworks, pipelaying, concrete pads for tanks to sit on, surveying and access roads. 100 During the period to 31 December 2007 the amount of $267,970 was received from the Orica Project and $142,238 was expensed against it. 101 Mr Mackellar Snr in his affidavit of 15 November 2007 explained that the contract value was increased from $206,410 to $267,970 plus GST. There had been reflected in the defendant's financial statements for the period ended 30 September 2007 a current asset of $10,410 which, according to him, represented expenditure incurred but not yet invoiced. The profit and loss statement as at 31 December 2007 reflects as income from the Orica Project the amount of $267,970, that is the full amount (exclusive of GST). From this, it appears, the Orica Project has been completed and paid for. 102 It follows that the plaintiff's point is correct in this regard. The income from the Orica Project should, however, be reflected in the defendant's cash account. 103 The plaintiff took issue with the values of three items of equipment included in the line item of "Property, plant and equipment" under non-current assets totalling $32,358 on the basis that the supporting documentation did not support the line item figure of $635,895 to that extent. The defendant put no submissions to the contrary. 104 Finally, the plaintiff put that an amount of $15,372 being an unsecured loan to Mr Mackellar Snr, included in the line item "Trade and other receivables" should be disregarded as there was no evidence of its recoverability. The defendant led no evidence in this regard. 105 Taking into account the cash resources of the defendant, making the adjustments contended for by the plaintiff, except for the Capital Finance prepayment which is to be adjusted by increasing it to $26,644, and adjusting for the movement of debtors and creditors as at the date of the hearing the defendant had current assets of: Cash: $274,398 Trade and other receivables: $92,128 Prepayments: $26,644 $393,170 106 Mr Hurst's reworked balance sheet results in positive net assets of $73,852, but a deficiency in net current assets of ($129,849). 107 The defendant's current liabilities as at 31 December 2007 on the re-stated balance sheet of Mr Hurst were $386,935. However, assuming current assets of $393,170 the defendant had net current assets of $6,235 as at that date, rather than the deficiency arrived at by Mr Hurst. 108 On the figures contended for by the plaintiff (with its claim in at $240,244) current liabilities were $352,663. On the approach taken by the plaintiff (but giving the defendant the benefit of the most recent prepayment to Capital Finance) the net current assets were $40,507. 109 So far as the true net value of the defendant's plant and equipment is concerned, Mr Hurst was provided with invoices relating to the plant and equipment, his staff was able to verify the major fixed assets, and he was able to determine that they had been purchased over the past three years. In the absence of formal valuation he used their written down values to estimate their likely realisable value. 110 Mr Mackellar Snr's affidavit of 1 November 2007 attached certificates of currency of insurance in respect of the defendant's motor vehicles and plant and equipment together with invoices reflecting their purchase, as well as certificates of registration. 111 As was pointed out by counsel for the plaintiff, three of the amounts appeared not to be supportable by the documentation relied upon. No independent or verified valuation (or indeed any valuation) of these assets was proffered. 112 Accepting the defendant's starting point, the plaintiff's adjusted figure for vehicles, plant and equipment (correcting for what appear to be errors) was $603,537. 113 Equipment loans are reflected in the defendant's financial statements as at 31 December 2007 as $610,745. 114 Mr Hurst was unable to verify the total balance owing on equipment loans as he was only provided with a schedule showing the movement in loans during the period June 2007 to 31 December 2007. 115 Mr Moyes' affidavit of 5 February 2008 attached what he described as "a breakdown of the balance of the equipment loans and the unexpired charges". The document itself is headed "Equipment Loan Repayment Schedule". It commences with an opening balance at 1 July 2007 of $660,771 and concludes with the closing balance of $610,744 as at 31 December 2007. It gives no clue as how the opening balance is derived. 116 The defendant made no attempt to address these evidentiary deficiencies. The result is that the defendant has failed to produce the fullest and best evidence of these non-current assets and liabilities. 117 Leaving the evidentiary deficiencies aside, the net negative difference between the adjusted figure for equipment and the equipment loans is ($7,208). What can be said is that there appears to be no equity in the equipment. 118 Giving the defendant the benefit of the most recent prepayment to Capital Finance, making the line item adjustments dealt with above and adjusting for the loan transaction results (doing the best I can) in the defendant having net current assets of $40,507 and in overall assets (deficiency) of ($122,039) derived as follows: Assets Current assets (see paragraph 105 above) 393,170 Non-current assets - equipment 603,537 - receivables 70,694 674,231 1,067,401 Liabilities Current liabilities - plaintiff 240,244 - trade creditors 81,663 - other creditors as per Hurst 33,200 355,107 Non-current liabilities - equipment loans 610,745 - less unexpired charges - 92,482 518,003 Mackellar loan plus interest 316,330 1,189,440 Net assets/(deficiency) (122,039) 119 The outcome reflected in the immediately preceding figures is undoubtedly inexact. The defendant did not proffer any re-worked financial statements to take account of necessary adjustments. For example, having regard to movements in cash and debtors, an adjustment to taxation liabilities may well be required. Also, the Mackellar loan obligation has been reflected simply as the loan amount plus interest calculated to the end of the period, rather than capital plus interest accrued to date. 120 Moreover, for the reasons which appear below, I am not satisfied that its balance sheet, even as adjusted, reflects accurately the defendant's current assets, but more importantly, its current liabilities. 121 Even were I prepared – contrary to authorities which bind me – which I am not, to overlook the defendant's evidentiary deficiencies, on any view, the defendant has an overall negative asset position and at best a modest positive current asset position of which $26,664 is a pre-payment. On the conclusions of Mr Hurst, the outcome is perhaps worse for the defendant because his conclusion is that there is a significant deficiency in net current assets. 122 On a beneficial view, if the defendant paid the plaintiff, met the other current obligations it has disclosed and all of its debtors paid it immediately, it would presently have cash available of less than $15,000 and no further realistically available resources to which it could have resort. 123 A consideration of the defendant's balance sheet position falls significantly short of assisting it in rebutting the presumption that it is insolvent. 124 I turn now to the predominant test for insolvency, namely, a cash flow test. Cash flow test 125 The plaintiff's submission was that the defendant's evidence did not disclose its existing and immediately upcoming liabilities including salary and loan repayments. 126 Although the defendant apparently has ongoing work and employs eight people, neither the statement of its current liabilities as at 31 December 2007 nor the evidence as at 31 January 2008 reveals its monthly salary and wage commitments or any estimation of them. 127 During the period 30 June 2007 to 31 December 2007 the defendant paid salaries and wages of $189,150 compared to $245,241 for the entire previous financial year. 128 On its 2007 figures it would have a monthly salary and wages bill of over $20,000. If the figures to 31 December 2007 are analysed the bill would be over $31,525. If it maintained its 2007 rate for the rest of the 2008 financial year, the bill would be over $25,000 per month. 129 The entirety of the evidence with respect to the wages figures was a statement by Mr Mackellar Snr in par 19 of his affidavit to the following effect: "There was a significant increase in wages for the 3 months to 31 December due to a number of staff taking annual leave. As such it was necessary to employ a number of casual staff to perform their jobs." 130 As to its work in progress, the extent of the direct evidence proffered by the defendant was a paragraph in Mr Mackellar Snr's affidavit of 5 February 2008 to the following effect: "At page 69 of the bundle is a schedule setting my calculations of the unbilled work in progress to 31 January 2008. All of that work in progress relates to current jobs. December and January is a fairly quiet time of year in the earthmoving business. The busiest times of the year are the middle two quarters. I expect all of the work in progress to be billed in the short term. I am of the opinion that those resulting invoices will be paid in the ordinary course. The debtors have a very good payment history with no disputes." 131 The following is the schedule referred to: Project Approximate completion date Amount Kilmarnock Farming 15 Feb 2008 $15,000 Top Soil Farming 15 Feb 2008 $ 3,000 Tamworth Regional Council 31 Feb 2008(sic) $80,000 Whitehaven January Account ongoing every month for years $18,210 Malcolm Payne Farming 6 Feb 2008 $12,000 Bowditch-Rail Loop Willowtree Site no date given $50,000 $178,210 132 There was no verification or supporting documentation showing the existence, or the efficacy, of the assertions made in the schedule. The last of the projects mentioned has no completion date and nothing to indicate when any or all of the amount might be received. 133 As is apparent from the table, as at the date of the hearing the approximate completion date of all save for two of the finite projects had passed. The evidence was left at the hearing in the state that the Court could not determine whether or not the defendant has been paid for any completed projects. Accordingly, there is no basis to determine which completed projects are now reflected in the defendant's cash. 134 Entirely absent from the evidence is any material establishing the defendant's existing and immediately upcoming liabilities: a with respect to salaries and wages necessary to keep it in business and to carry out the projects it has on hand, particularly given the December and January slowdown; b it has or otherwise will incur to complete its projects, including for example, the cost of hire of plant (which for the six months to 31 December 2007 cost it $101,947). 135 A significant difficulty for the defendant is that it did not proffer a cash flow or projected cash flow statement. 136 To the contrary. In a letter from Mr Hurst to the defendant dated 2 November 2007 he asked for a cash flow statement and payments of the defendant for 12 months to June 2007. He informed the defendant that the cash flow of the company was important in terms of providing an opinion on the liquidity of the company. 137 Under cross-examination he accepted he would need to see where the defendant's cash was coming from and where it was going. He accepted (as he was bound to) that to ascertain whether a company can pay its debts as and when they fall due one needs to know what money is coming in and may come in in the near future and what expenses are being met on a regular basis and what debts have to be met. 138 Mr Hurst was not provided with any statement until January 2008 and then what he was provided with was not such a statement but rather a recording simply of the balance of cash which was recorded in the financial statements as at 1 July 2007 as opposed to the figure as at 31 December 2007. 139 Although scant reliance was placed by the defendant in submissions on Mr Hurst's opinion that the defendant was solvent (for example he made reference to various ratios which were not the subject of any submission), I should say that his opinion was undermined because it was formed without the benefit of adequate cash flow information or valuation information, and on the basis of unaudited and not externally verified financial statements accompanied by very heavily qualified Compilation Reports. 140 In his reworked financial statements as at 31 December 2007, Mr Hurst reached an equity figure of $73,852. He expressed the opinion that this equity might be available to secure an overdraft facility from the defendant's bankers. Under cross-examination however, it was put to him that a potential financier would take into account, in considering whether to make a loan to the defendant, the contingent liability to the plaintiff (the affected part of the statutory demand, shown in the financial statements as at 30 September 2007 as a contingent liability subject to dispute). Notwithstanding his expertise and lengthy experience in the insolvency industry, his response to the proposition was that he did not have any experience in relation to bankers' lending practices or procedures. Having expressed an opinion that a bank might lend funds, his reluctance, because of an asserted lack of knowledge of banking practice, to concede a self-evident obstacle to obtaining a loan, served further to undermine his opinion. 141 The defendant made losses in its ordinary operations to 31 December 2007 and there was nothing to suggest any imminent change. Its only present operation is the earthmoving business and that activity has lost money from 2006 to date. 142 The evidence does not establish in any satisfactory way: a the sources and extent of the defendant's present or prospective income; b the nature and extent of the defendant's due or near due or ongoing obligations. 143 The evidence falls significantly short of enabling the Court to be satisfied that the defendant is in a position to meet all of its debts as and when they fall due. 144 The conclusion I have reached is that the defendant has failed to discharge the onus of proving its solvency. 145 The order of the Court will be that the defendant is placed under a winding up order. Paul Andrew Billingham of Level 17, 383 Kent Street, Sydney, NSW 2000 is appointed liquidator. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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